Muni Credit News July 25, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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$608,000, 000

PORT OF SEATTLE

Intermediate Lien Revenue Bonds

Moody’s Rating: “A1”
S&P’s Rating: “A+”
Fitch’s Rating: “AA-”

The Port of Seattle is a municipal corporation of the state of Washington and owns the port’s marine facilities at the Seattle Harbor, the Seattle-Tacoma International Airport, and various industrial and commercial properties. The port operates Seattle-Tacoma International Airport (Sea-TAC), the primary regional air passenger service provider with a virtual monopoly in the Seattle area (69.4% origination and destination for FY 2016). The port has large and diverse revenue streams between and within its airport, seaport, and other divisions, including tax levy revenues that are assessed over the Port District that is co-terminus with King County.

The airport division contributed roughly 78% of 2016 total operating revenues while other businesses generated 22% of revenues. The port’s debt service coverage ratios (DSCRs) for senior, intermediate, and all-in coverage were 5.9x, 1.8x, and 1.7x respectively in 2016.

$152,855,000*

CITY OF PHILADELPHIA, PENNSYLVANIA

Water and Wastewater Revenue Refunding Bonds

Fitch: “A+”
Moody’s: “A1”
S&P: “A+”

Proceeds will be used to current-refund all or a portion of the city’s outstanding series 2007B and advance-refund all or a portion of the outstanding series 2010C and 2012 bonds for savings and pay issuance costs. The majority of the savings, which will be taken annually, are expected to occur at the end of the scheduled amortization through 2032.

The bonds are secured by a senior lien on sewer combined net revenues of the Philadelphia Water Department’s (PWD) water and system. Philadelphia has historically had a problem with revenue collections for its municipally owned utilities.  Recently, Philadelphia announced a first-of-its-kind program to address the fact that some more than 40 percent of the city’s water utility customers are delinquent in paying their water bills, to the tune of about $242 million in uncollected revenue.

The city is attempting to take an approach which will charge lower water rates for households with incomes at or below 150 percent of the federal poverty line (which is roughly $3,075 a month for a family of four). Participating households will pay between 2 and 4 percent of their monthly income, which could mean bills as low as $12 a month. In 2016, a Philadelphia resident paid an average of about $71 a month in combined water, sewer and storm water charges. The city estimates that as many as 60,000 households are eligible for the income-based program.

The Philadelphia Gas Works operates a similar billing scheme. On the basis of that experience in part, legislation for a program for the water system was approved by the Philadelphia City Council in 2015. Research has shown that when gas and electric utilities charge affordable rates, customers tend to keep current with their bills. The Gas Works credit has seen pressure on it reduced as it has reformed its operations.

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BLUEGRASS STATE DOWNGRADE

Moody’s announced that it had assigned a Aa3 rating Kentucky Turnpike Authority’s Economic Development Road Revenue Bonds. In reviewing that credit, Moody’s also took the opportunity to downgrade Kentucky’s general fund appropriation lease-revenue bonds to A1 from Aa3, Kentucky’s agency fund appropriation lease-revenue bonds to A2 from A1, the Kentucky Public University Intercept Program programmatic rating to A1 from Aa3 and the Kentucky School District Enhancement Program programmatic rating to A1 from Aa3.

The wide ranging action reflects “revenue underperformance that will challenge the commonwealth’s ability to increase its very low pension funding levels. The commonwealth has one of the heaviest unfunded pension burden of all states. The commonwealth high fixed costs will also restrict fiscal flexibility.” Kentucky’s pension funding position has been among the weakest of all the states. While some recent steps have been taken by the Legislature to address the underfunding, the market has long perceived them to be inadequate and now the rating agencies are following that view.

Kentucky does not issue general obligation bonds itself but relies on lease-revenue bonds which are secured  by a state appropriation of rental payments either out of the general fund or agency funds. The downgrade of the lease-revenue bonds reflects their subject-to-appropriation nature, as well as relatively strong legal structure and essentially. The downgrade of the state aid intercept programmatic ratings reflects the one-notch differential between them and that of the commonwealth. The one-notch differential reflects generally average to strong state commitment, program history and program mechanics.

The downgrade impacts not only the Commonwealth’s cost of borrowing but also impacts those costs for its university systems, school districts, and localities which rely on state support for their borrowings.

ANOTHER AGRICULTURE WASTE PROJECT COMES TO HIGH YIELD LAND

Columbia Pulp, LLC is planning to develop and build a 140,000 ton per year pulp mill on a 449 acre site near the Lyons Ferry Bridge in Columbia County, Washington. The site is located in the heart of one of the densest wheat farming regions in North America. Farmers in eastern Washington pay millions of dollars annually for the right to burn straw, an excess by-product from wheat farming, resulting in thousands of tons of greenhouse gas emissions. An obvious, low-cost raw material, wheat straw has eluded commercialization by the North American paper industry due to limitations of existing pulping technologies.

Columbia Pulp will build and operate a facility in eastern Washington using a proprietary process to profitably convert straw into three product streams – pulp, sugars,  and lignin. The effort to finance the project has taken a number of twists and turns. It was the original plan to market bonds issued by the Washington Economic Development Finance Authority before the end of 2016. The company had received indications that an investor was going to buy at least half of the bonds,” according to the company. “It hadn’t even gone to market yet, but then the equity supplier couldn’t come up with the money.

The company then had to wait until the state reallocates bonds for 2017.  Now that it has done so the bonds can be issued but rates have risen. The company had designed its business plan around a 6-percent rate for the bond, now they’re looking at 8.5 or 9 percent. Once financing is secured, construction will begin immediately.

So once again the municipal high yield market will be tested with one of our least favorite credit mixes. The plant uses an unproven technology to produce a product for which there is no established market. The credit is non-recourse to any revenues or assets outside of the project. Throw in the inherent construction and startup risk that exists with any large scale industrial equipment construction and you have a formula for a very high risk speculative credit. Wood waste to fiberboard, manure to methane, rice straw just to name a few make one ask will the municipal market never learn?

CHANGES IN ILLINOIS FLOW DOWNSTREAM TO WISCONSIN

The director of the Wisconsin Legislative Fiscal Bureau has opined that the recently passed Illinois budget would negatively affect Wisconsin state revenues. Wisconsin has had an income tax reciprocity agreement with Illinois since 1973, where residents of each state who earn personal service income in the other state file a tax return and pay taxes on that income only in their state of residence. The reciprocity agreement  with  Illinois requires a compensatory payment when the net foregone revenues of one state exceed those of the other state based on a benchmark study of 1998 tax returns filed in the two states. Because the number of Wisconsin residents earning personal service income in Illinois exceeds the number of Illinois residents earning personal service income in Wisconsin, taxes foregone by Illinois exceed taxes foregone by Wisconsin,  and Wisconsin makes a reciprocity payment to Illinois each year based on the estimated difference. The payment is made each December from a sum sufficient GPR appropriation.

In the Governor’s budget, Wisconsin’s income tax reciprocity payment to Illinois is estimated at $66 million in 2017-18 and $67.6 million in 2018-19. The Bureau and the Department Of Revenue have re-examined the reciprocity payment estimates in light of the provisions in Illinois P.A. 100-0022 increasing Illinois’ individual income tax collections in 2017-18 and arrived at similar results. The recently enacted Illinois tax provisions are expected to increase Wisconsin’s 2018-19 reciprocity payment by an estimated $22.8 million to $90.5 million. However, based on income tax collections for both states through June, Wisconsin’s 2017-18 reciprocity payment is now estimated to be $64 million, or $2 million, lower than the amount  in the Governor’s budget. Combined, the re-estimates for the two years are $20.7 million higher than the amounts in the Governor’s budget.

The Illinois tax changes will also result in Wisconsin residents claiming larger credits for taxes paid to other states. Higher credit amounts will first occur in tax year 2017, and higher credit amounts in subsequent years will affect estimated tax payments. As a result, Wisconsin individual income tax collections are estimated to be lower by $12.9 million in 2017-18 and $17.2 million in 2018-19. When combined, the reciprocity and tax credit changes  are estimated to adversely affect the general fund’s position by $50.8 million in the 2017-19 biennium.

KEYSTONE STATE STILL CAN’T FUND A BUDGET

With its ratings under threat, the Pennsylvania legislature continues to debate how to fund the spending part of the budget which Gov. Wolf let take effect nearly two weeks ago without his signature. House members had rejected “in significant fashion” a plan to leverage annual payments from a 1998 multi-state settlement with tobacco companies to borrow enough money to cover a massive deficit in state finances. Alternative proposals have been floated to raise taxes on electric and natural gas utility bills, telephone services and cable bills.

The budget stalemate has also stalled nearly $600 million in state support for the University of Pittsburgh and Penn State, Temple and Lincoln universities, as well as the University of Pennsylvania’s veterinary school. If this all sounds familiar, it should as the Commonwealth is beginning to act along the lines of Illinois in terms of letting its budget problems bleed down to its educational institutions and non-profit service providers. We know how that turned out.

WESTCHESTER COUNTY MEDICAL CENTER OUTLOOK TO NEGATIVE

The Westchester County Health Care Corporation (dba Westchester Medical Center). Its main campus is leased from Westchester County. The Medical Center consists of four major facilities with 895 total beds. The major facilities comprising the Medical Center are: the main hospital in Valhalla, the Behavioral Health Center at Westchester, the Maria Fareri Children’s Hospital on the Valhalla Campus and the MidHudson Regional Hospital in Poughkeepsie, NY. Effective March 30, 2016 WCHCC entered into an affiliation agreement with HealthAlliance and WMC-Ulster, in which WMC-Ulster became the sole member of HealthAlliance.

Debt is rated Baa2 by Moody’s. The change in the outlook to negative reflects weak and lower than expected liquidity and significant challenges to restoring liquidity, increasing capital spending and likely leverage, and modest margins. Liquidity at FYE 2016 was notably weaker than expected, primarily due to a delayed large Medicaid supplemental payment. Although WMC received the payment in the first quarter of 2017, liquidity declined further due to the timing of a pension contribution and a NYSNA settlement, highlighting material quarterly variability. Challenges to restoring and sustaining liquidity include unpredictability of Medicaid payments, increasing capital spending which may require equity and spending in advance of state grant reimbursement, and the potential impact of installing a new IT platform.

WMC guarantees annual debt service for CHS. CHS is comprised of Good Samaritan Hospital of Suffern, N.Y., Bon Secours Community Hospital in Port Jervis, and St. Anthony Community Hospital in Warwick. CHS’s bonds are secured by gross receivables of the obligated group, which includes the hospitals only and excludes physician-related entities.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

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