Muni Credit News July 6, 2017

Joseph Krist

Senior Municipal Credit Consultant


This week saw at best an abbreviated new issue calendar due to the extended holiday weekend. In lieu of new issue reviews, we summarize the status of the major state budget issues which were left unresolved when we went to press with our last issue.


The new state budget for the biennium beginning July 1 totals $43.7 billion, a $5.2 billion revenue increase from existing and new taxes, including a hike in the state property tax. It raises spending by 13.5 percent over the state’s present two-year operating budget. That plan adds $7.3 billion to K-12 education over four years. Of that, $1.8 billion is spent in the 2017-19 budget.

The bulk of the new revenue comes from an increase in the state property-tax levy, which raises $1.6 billion through 2019. As that new levy is put in place, local property-tax levies used for school-worker salaries and other needs will be capped at a lower rate. Property owners who qualify for the senior citizen tax-exemption program would not be affected by the property-tax increase.

The greatest impact would be in the greater Seattle area where property values have risen the most. $464 million in new revenue is generated through the expansion of online sales-tax collections, and the elimination of tax breaks on bottled water and extracted fuels, the latter of which benefits oil refineries.


Finally, the legislature agreed on a balanced budget. The $36 billion spending plan would bring in an extra $5 billion in revenue, mostly by raising personal income taxes from 3.75 percent to 4.95 percent. It did not include provisions demanded by the governor – restrictions on the compensation program for injured workers and state-employee pensions [and] a four-year statewide property tax freeze – so the Governor vetoed the bill. The legislature has begun the process of overriding the Governor’s veto. The Senate has already done so and as we go to press, the House is expected to do the same. If enacted, the budget will at least stop the bleeding of the state’s credit rating for the short term.


There is an agreement on how much to spend for fiscal 2018 but there is no agreement on how to fund these expenditures. Closed-door negotiations are ongoing in the Capitol among the Legislature’s political bosses, their top aides and Gov. Tom Wolf’s staff. The legislators are not in Harrisburg. There is a hope that a deal can be reached and votes taken at the end of this week. Tax, bond borrowing, gambling expansion, financial transfers and other bills will have to be passed for a budget to be considered enacted. This method keeps the Commonwealth in operation despite the lack of a completed budget. A prior state Supreme Court decision precludes a governor from not paying state employees who show up to work during a budget impasse. In 2015-16 all state employees were paid, including in the Legislature. It is expected that the results will only address short-term concerns with the major structural issues negatively impacting the commonwealth’s finances left to another day. this bodes poorly for any improvement in Pennsylvania’s long-term credit outlook.


It took a state government shutdown and a now infamous photograph of the Governor lounging on an otherwise closed state beach but, the stalemate between the Governor and the Legislature has been overcome. A compromise was struck on the use of the “surplus” reserves of the state’s non-profit health insurer Horizon Blue cross Blue Shield to balance the state’s budget. In addition, the legislature approved a transfer of the state lottery assets to the state’s pension funds as a way of lowering the unfunded liability of the pension funds. As in the case of other states, the agreement addresses short term problems without fundamentally addressing the State’s long term financial issues.


It is no surprise that Connecticut was unable to enact a budget on time for fiscal 2018. The problems facing the State have been well chronicled as is the fact that from the legislature’s point of view there are no good answers. Fears of corporate departures based on high profile announcements from GE and Aetna have complicated tax policies. Pressures from Connecticut’s many credit challenged localities and weak pension funding situations have complicated the expense side. As always, politics matter as the Governor remains highly unpopular. Were it not for the state’s overall favorable wealth profile, we believe that ratings would be lower as well on a negative track.



Puerto Rico’s financial control board certified with some amendments the commonwealth’s next budget. The board also approved budgets—with certain conditions—for the Government Development Bank (GDB), the Highways & Transportation Authority (HTA), the Electric Power Authority (PREPA), and the Aqueduct & Sewer Authority (PRASA). The list of corrective actions required by the board included additional cuts of $119 million in budget allocations that would cover expenses related to the Legislature, sports, municipalities, payroll and non-profit organizations, among others.

It also asked the government to provide more evidence on how exactly it would implement cuts in government spending that, according to the fiscal plan, must total $440 million during the next fiscal year. Of the estimated amount, the board says that some $200 million still lack implementation plans that demonstrate how the Rosselló administration will hit the target.

In its bankruptcy proceedings, the Puerto Rico government and its Sales Tax Financing Corp. (Cofina) submitted late last week the initial list of creditors to whom they owe money—601,867 businesses and individuals. The commonwealth government delivered the information as part of its bankruptcy proceedings under Promesa’s Title III. Cofina, however, only listed five companies as creditors. These were Ambac Assurance Corp., Assured Guaranty Corp., Bank of New York Mellon, KPMG, Lehman Brothers Holdings Inc. and MBIA Insurance Corp.

So when the advocates for debt restructuring based on significant bond holder haircuts because only evil hedge funds would benefit from meeting debt obligations, keep that number in mind – 601,867.

Over the holiday weekend, the financial control board filed a Title III petition for PREPA in the commonwealth’s federal district court. PREPA’s unsecured creditors includes Scotiabank ($553.2 million), Solus ($146 million), Freepoint Commodities ($60 million), EcoEléctrica ($44.8 million), AES ($44.1 million), JPMorgan ($34.4 million), Puma Energy ($19.9 million), and other claims related to litigation that amount roughly $1.2 billion.

A group of PREPA bondholders stated that before the RSA expired Wednesday, they had offered an extension to the agreement, as well as additional liquidity to fully cover a $450 million debt payment due July 1, in a bid to keep negotiations alive.


S&P Global Ratings has affirmed its ‘AA+’ rating on the State of Minnesota’s general obligation debt, and its ratings on the state’s standing appropriation debt, moral obligation-backed debt, and school program guaranteed debt. At the same time, S&P Global Ratings removed the ratings from CreditWatch, where they had been placed with negative implications on June 15, 2017. The outlook is stable.

S&P placed the state on CreditWatch because of a lack of clarity about how the rental payments and debt service on the state’s $80.1 million certificates of participation series 2014 (Legislative Office Facility Project) would be paid when the governor defunded the legislature’s budget. However, on June 26, the Ramsey County Court issued an order based on an agreement between the Minnesota Legislature and Gov. Dayton. The court ordered continued funding for the House and Senate until Oct. 1, 2017, unless the legal dispute is resolved earlier. The order requires the Senate to make its June 2017 payment for the Senate Office Building, and to continue paying the lease payments during the appeal period. According to the state, the governor and legislature made the proposal in part to insulate the Senate Building lease payments from the legal dispute. The lease rental payments that will be made through the appeal period are more than enough to make the Dec. 1 debt service payment on the state’s certificates of participation, and the court further acknowledged that the Senate is permitted to use its reserve funds to make the lease payments after the order expires.


Maine ended  its government shutdown with the enactment and signing of a fiscal 2018 budget. In Maine, the process featured private negotiations between the Governor and legislative leaders – a practice often derided when practiced in New York. The end of a lodging tax and increased school funding clinched the deal.

Alaska ended its budget impasse when the legislature agreed to a $2.5 billion drawdown of the state’s constitutional budget reserve to balance the budget. That fund will not have enough money left to cover anticipated structural imbalances which will occur for Fiscal 2019.

An intraparty policy dispute has held up enactment of a budget in Rhode Island. Finances are not the issue. Rather the problem is disagreements on items like gun control, minimum wage increases, and labor contract policies. Nonetheless, they are enough to suspend legislative activity and prevent enactment of a budget. State law provides for operations to be funded without a budget so a shutdown is not part of the equation.

Minnesota started 2017 in the enviable position of deciding how to apply an apparent budget surplus. It ended the budget season with major disagreements between the Governor and the legislature which culminated in the Governor “defunding” the Legislature for the upcoming fiscal year. The problem is that this threw the payment of debt service on certain state certificates of participation. The Governor made some additional unhelpful comments regarding his preference for paying salaries over debt service. This put the state’s S&P rating on negative credit watch. Subsequent litigation produced opinions that the debt service should be paid and the credit watch placement has been resolved favorably.

The problems of its New England neighbors have diverted some attention away from the lack of a budget agreement in Massachusetts. The pressure is mitigated somewhat by the fact that in June, the legislature passed and the governor signed an interim budget totaling $5.5 billion, helping keep the state operating through the month of July.

Oregon also entered FY 2018 without a budget but progress was being made. An additional $400 million in anticipated revenue over the next two years based on two positive state revenue forecasts and passage of a plan to raise $550 million from higher taxes on hospitals and a new tax on insurance plans helped to close a budget gap. The health tax will keep intact Medicaid health insurance for hundreds of thousands of needy Oregonians.


The news that National Public Financial Guaranty was getting out of the new insurance business in the wake of its S&P ratings downgrade struck another blow to the municipal bond insurance sector. National’s lack of progress in developing new business reflected the lower value of the product in the aftermath of the financial crisis and the brutal competition in a market that puts a premium on low pricing in an environment of low absolute rates and compressed credit spreads. Outstanding debt insured by National should be fine as the business is effectively operated in a runoff mode. NPFG will still maintain a robust surveillance and information technology infrastructure but has dismantled the new business side of the firm.

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.