Muni Credit News June 13, 2017

Joseph Krist

Senior Municipal credit Consultant




Limited Obligation PILOT Revenue Bonds


Grant Revenue Bonds

The long awaited bond issues for infrastructure supporting the massive American Dream shopping mall and entertainment center in New Jersey is finally coming to market. The bonds should prove to be a real test for the high yield market’s appetite for debt essentially backed by the bricks and mortar retail sector. The project has been some phase of development since 2003. It was first proposed by the Mills Corporation as the Meadowlands Xanadu. After the bankruptcy of that company in 2007, the project was taken over by Colony Capital.

In May 2009, construction stalled due to the bankruptcy of Lehman Brothers. The Triple Five Group announced the intent to take over the mall in May 2011, and on July 31, 2013, officially gained control of the mall and the surrounding site. Anyone who has traveled by bus or automobile to New York through the Lincoln Tunnel has undoubtedly seen the project located along New Jersey Route 3.

The effort to bring the project to fruition has been  bedeviled by construction delays, environmental issues, unstable ownership, and financial difficulties. Ground was broken on the complex on September 29, 2004, and, at the time, was expected to open two years later. The project is now scheduled for a 2018 opening. It is slated for some 500 retail stores and a variety of amusements including an indoor ski slope. It most resembles conceptually the two other mega retail/entertainment facilities in North America – the West Edmonton Mall and Mall of America. Both of these are operated by Triple Five.

To say that the PILOT credit is speculative is an understatement. The sector itself is among the market’s riskiest – debt secured by payments from a developer derived from the revenues obtained from the operation of the mall. Tenants will rent space from the developer who will then be required to make quarterly payments to the Borough of East Rutherford, NJ which will then make payments to the New Jersey Economic Development Authority (NJEDA).

Proceeds from the Public Finance Authority bonds – the PFA a subdivision of the State of Wisconsin – will be applied to the purchase of bonds from NJEDA. The payments by East Rutherford made to the NJEDA will be used to make payments on the NJEDA debt which will then be applied to the payment of the debt service on the PFA debt. The PILOT payments by the Developer are set at 86.25% of the regular property tax assessment that would normally be leveled on property of this category by East Rutherford.

The risk lies primarily in the fact that over the period of time from original conception to actual opening of the mall, the retail sector has undergone an overwhelming level of change which have not been in its favor. If the demand for the malls stores and the entertainment facilities are below the assumed levels driving the project, the developer will not have enough revenue to make the required payments to support debt service. There is no other source of funds pledged to the bonds.

It is always a clue when a development project relies on the low cost financing of the tax exempt market, especially to the extent that this one has. The fact that construction had been at a halt for significant periods of time while all of the legal and logistical obstacles to this transaction were dealt with – which reflected the lack of available sufficient private sector financing for this project – is an indication that the risk reward ratio is not compelling.

Where the demand will come from is uncertain. Other regional competitors have been under severe pressure and many of the expected anchor tenants or prominent tenants have scaled back their national brisk and mortar footprints.  When asked, proponents have pointed to the above average incomes of the immediate region but also tourism to New York City as a source of significant demand. We find that concerning. A recession would negatively impact domestic demand and current Administration policies are already negatively impacting foreign tourism levels in the New York market. So we question the major underpinning assumptions of the project.

The Grant Revenue Bonds are payable from grants to the project to be annually appropriated by the State of New Jersey. The grants are to be made to the developer to facilitate the project. They have been the subject of great controversy as residents have questioned the wisdom of these large payments to the developer of a highly questionable project during a prolonged period of fiscal distress for the State. In a time of huge infrastructure needs and declining funding for things like mass transit, healthcare, and the State’s well documented pension liability funding difficulties, these annual payments will compete for scarce state revenues.

Should the project not succeed, bondholders could find themselves in the middle of a political crossfire as underfunded service demands would be competing with subsidies for a failed private sector real estate project owned by a non-US corporation. That is not a place I would want to be in.


State of Mississippi

General Obligation Bonds

Moody’s: “Aa2 (negative outlook)” S&P: “AA (negative outlook)” Fitch: “AA (stable outlook)”

Actions in the state’s fiscal 2016 expenditure of financial reserves to address revenue shortfalls, as well as its suspension of a statutory cap (at 98% of projected revenue) on annual appropriations have led to a negative ratings outlook. The state’s economy will likely continue to underperform the US, potentially leading to further fiscal pressure. The credit is characterized by an above-average debt burden and low per-capita income.



State of Wisconsin

General Obligation Refunding Bonds

Moody’s: Aa2  S&P: AA

Moody’s rates the State of Wisconsin at Aa2 reflecting its view of a very well funded pension system and limited OPEB liability, moderate economic growth, as well as governance constraints evidenced by limited executive authority to reduce mid-year appropriations. The rating also acknowledges recent revenue volatility and a fund balance position that remains below average.

The rating is also assigned a positive outlook based on recent improvements in liquidity, conservative management of retiree benefits that limits future budgetary pressures, and reductions in the state’s long standing negative GAAP fund balance, if continued, would allow the state to improve its reserves and balance sheet.



June is the time when all of the rhetoric comes to a relative halt and the time comes for state legislatures to fish or cut bait when it comes to annual budget adoption. Here are the states where the outcome is far from certain as we enter the home stretch of the budget crunch and where we are paying special attention.

Washington – 26,000 employees are facing the potential to be laid off if the legislature cannot come to agreement. The sticking points are the desire to reduce property taxes throughout the State which has faced court orders governing education spending. One side wishes to use higher capital gains taxes and carbon taxes to support aid to local schools while the other resists. Observers are betting on a resolution but the state employees are already pawns in this game.

Pennsylvania – The annual budget has become a more and more political game through each year of the Wolf administration. With the legislature in control of Republicans and the Governor being a Democrat, intransigence has characterized the proceedings. Some progress has been made on pension reform but other issues like property tax reform, potential sale of the state liquor system, and a questionable reliance on gambling based revenues. Some in the Commonwealth have raised the issue of a severance tax on natural gas extraction. Pennsylvania is one of the leading shale gas producers in the nation. Based on recent experience, a delayed budget adoption is not out of the question.

Illinois – the problems are well known and increasingly publicized but the level of political brinksmanship and intransigence is unprecedented. We will believe a budget when we see it.

Alaska – Alaska continues to grapple with the realities of lower oil prices and the political hurdles involved in developing a more diversified revenue base. The legislature is in a special session to consider a variety of proposals. It is likely that they will decide to raid the oil funded Permanent Fund and put off the hard decisions necessary to address long-term fossil fuel pricing trends.

Ohio – Through April, the tenth month of Ohio’s fiscal year, state tax receipts year-to-date ($17.7 billion) were 4.2 percent less than expected, according to the state Budget Office. A key component of total tax receipts, state income tax collections ($6.3 billion), lagged its estimate by 8.1 percent (that is, by about $554 million). This is creating pressure to rescind tax cuts for smaller businesses but that faces substantial legislative opposition. That change lets a taxpayer “deduct up to 100 percent of [his or her] business investor income, the deduction not to exceed $125,000 for each spouse if spouses file separate returns or $250,000 for all other taxpayers.”The standoff has delayed final budget consideration for over one month.

Louisiana – The Bayou State’s legislature is in a special session to try to reach a balanced budget consensus. Various spending cuts and tax increases have been proposed to no avail. Spending cuts center on proposed reforms to the State prison system (Louisiana has the nation’s highest incarceration rate). Tax increases proposed on income have been non-starters and the Governor’s proposal for establishment of a gross receipts tax on corporations has been weakly received.

Connecticut – were it not for Illinois, Connecticut would likely be the state of most concern. The problems facing the state and it’s localities are legion but there are no easy answers. The recent announcement by Aetna that it planned to move its headquarters out of state complicated matters significantly. With lagging revenues on the state and local level, the state is under enormous pressure to balance its own budget without offloading its own problems onto its struggling localities.


S&P announced that it has downgraded the rating on the Bay State’s general obligation bonds to AA from AA+. The difficulties of many other states had moved Massachusetts off the center of many credit radar screens. “The downgrade reflects what we view as the commonwealth’s failure to follow through on rebuilding its reserves as stipulated through its own fiscal policies aimed at mitigating the state’s propensity for revenue volatility,” said S&P Global Ratings. S&P said it believed that the state’s “strong economic growth and proactive management” will allow it to navigate through mid-year revenue shortfalls with “some continued use of one-time measures to balance the budget.

Despite above-national average economic growth through a prolonged period of economic expansion, the state has not demonstrated a commitment to its adopted budget reserve policies, upon which our 2011 upgrade to ‘AA+’ was predicated, in part. We therefore view it as a missed opportunity that the state has opted against building its reserve according to its policies and leaves it on a course to experience greater fiscal stress in the event of an economic downturn or if federal funding were capped or trimmed in a material way.”

Moody’s and Fitch recently reaffirmed Massachusetts’ ratings at AA 1 and AA+, respectively, with a stable outlook.  According to the administration of Governor Baker, the stabilization fund has grown 20 percent since the governor took office, including the reversal of a $140 million withdrawal authorized in fiscal 2015 by the previous administration. The governor has proposed a $98 million deposit into the “rainy day” at the start of fiscal 2018, and a new process for building the reserves that would include a second deposit at the end of the fiscal year equal to 50 percent of all tax revenue exceeding projections.


The CA Legislature’s budget-writing committee approved a spending plan late last week that expands a tax credit for the poor and imposes direct budget control on the University of California’s office of the president. The plan also includes a controversial plan to borrow up to $6 billion from a state investment account to make an extra payment to CalPERS to reduce the state’s pension obligations.

While the borrowing plan does reduce the unfunded liability portion of CalPERS’ accounts is does create an amount to be repaid to the state investment account which will further pressure the pension fund manager’s to achieve outsized performance results. Recent years have seen just the opposite at CalPERS so it seems a bit questionable as to how the whole scheme will work out.

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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