Muni Credit News June 2, 2016

Joseph Krist

Municipal Credit Consultant


The ongoing saga of the Kansas fiscal experiment took another turn when the Kansas Supreme Court rejected the state legislature’s education funding formula on the grounds that it does not distribute equitably more than $4 billion in state aid among its school districts. The legislature, which ended its session earlier this month, will have until June 30 to figure out a new funding formula or the state supreme court will deem the entire formula null and essentially shut the state’s public school system down.

The decision was the second this year to find that a proposed Kansas state education funding plan was not legal. The legislature, late in its session, pushed through a bill known as the Classroom Learning Assuring Student Success Act. The law would have placed $2 million more into the state’s funding formula so that wealthy and politically powerful school districts wouldn’t financially suffer.

The unanimous decision said “Simply put, the legislature’s unconstitutional enactment is void; it has not performed its duty.” The legislature will have to reconvene, devise a new funding formula, get the governor to sign it and send it to the courts. The state’s legislators have in recent months campaigned to have the state’s appointed justices be removed from office this fall.

The education funding issue has lingered as part of the larger policy experiment undertaken by the state’s Governor. In order to finance tax cuts and resulting recurring revenue shortfalls, huge expenditure cuts have been enacted to balance the budget each year. Education is a primary expense item for the state so it has borne the brunt of the expense actions. Since 2011, state aid per pupil dropped to $3,800 from $4,400, according to the Kansas branch of the National Education Association.

Our interest is primarily academic as the state issues no GO debt. It has been a more than interesting real time test when an openly doctrinaire approach to state budget management has been undertaken. Kansas is the clearest example of the belief in supply side economics as it pertains to budgets and economic growth. So far, it is difficult to argue that the experiment has been a success. Three years remain in the Governor’s second term and, under term-limit laws, he cannot run again. Schools in Kansas are generally finished for this academic year and Wednesday was set to be the Legislature’s last day, though it could return for a special session.


In an unanticipated action, the Illinois legislature overrode the veto of Governor Bruce Rauner of Senate Bill 777, allowing Chicago to re-amortize the funding schedule for its public safety pensions for short-term budget relief. The pension bill trims $220 million from the city’s required contribution this year to its police and fire retirement funds, and more than $800 million over the next four years as it phases in a shift to an actuarially required contribution and stretches out to 2055 the time allowed to reach a 90% funded ratio.

The 2010 state funding mandate originally required an ARC payment this year with the goal of reaching a 90% funded ratio by 2040.


While there has been so much emphasis on the cost of college and the so-called arms race between and among colleges to attract students, the pressures on small liberal arts institutions continues. The latest casualty is Dowling College, a 4,000 student liberal arts college with facilities on two campuses on Long Island in Suffolk County NY. Dowling was founded in 1955 by a financier and arts patron of the same name. For some years, it had increasing trouble competing in its chosen marketplace and struggled to maintain enrollments and revenues.

The college’s financial position had been steadily deteriorating as reflected by its continuingly declining debt ratings on its $50-odd million of outstanding debt. There are three issues of debt currently outstanding issued by the Suffolk County and Town of Brookhaven IDAs. The most recent issue was in 2006. Before its ratings were withdrawn, debt was rated B-.

In July, 2015 the College missed principal and interest payments. At that time the college entered into forebearance agreements with its bondholders covering the three series of revenue bonds that are obligations of the College and collectively account for a substantial majority of the College’s existing long term debt. During the term of the Forbearance Agreements, it was anticipated that the College will defer making any payments that relate to the Bonds. In accordance with the indenture relating to the Series 2006 Bonds, the indenture trustee for such bonds applied amounts on deposit in the debt service reserve fund to make the payment required on the Series 2006 Bonds on June 1, 2015. As a result, there now exists a deficiency in the debt service reserve fund in the amount of $437,085.73.

The College retained CohnReznik Advisory Group as special advisor to the College and adopted a budget with input from the Special Advisor. With limited exceptions the College shall limit operating expenses to types and amounts reflected in the budget. The College agreed to remit excess cash flow to the indenture trustees for the Bonds personal property that is not already pledged as collateral for those Bonds, subject to existing liens.

So what happens to debt that has a final maturity of 2032? The Trustee will ultimately look to accelerate the bonds and likely rely on the disposal of the College’s remaining real assets. The Oakdale campus is on waterfront adjacent to Long Island’s south shore and the Brookhaven campus abuts Brookhaven airport. So there is value in the College’s real estate. Whether it is enough to make the bondholders whole is questionable.


The Hudson Yards Infrastructure Corporation (HYIC) collected higher than anticipated revenues from development this year— although still well-below initial forecasts—allowing the city to eliminate its $58.1 million interest support payment planned for 2018 and reduce an $89.8 million payment budgeted for 2019 to $26.8 million. Interest support payments made by the city to HYIC, however, have already exceeded amounts originally projected—and because the current savings result largely from one-time revenues, an $89.8 million interest support payment remains in the city’s financial plan for 2020. (All years refer to fiscal years.) The first of the new buildings in Hudson Yards is slated to open this week.

When the city created HYIC in 2005 to issue $3 billion in bonds to pay for the 7-line extension and other infrastructure improvements on Manhattan’s Far West Side to seed the private development expected to follow, the Mayor and City Council pledged that they would redirect both recurring tax revenue and one-time fees and bonus payments generated by new projects located in the area to repay the corporation’s bonds. Understanding that it would take time before development revenue could cover the financing costs, the city also agreed to subsidize the corporation’s interest payments until project revenue could fully support the costs.

Based on a planning study prepared by Cushman and Wakefield in 2006, the project was expected to generate from $986.6 million to $1.3 billion in HYIC development revenues through 2016—considerably above what it has actually generated. However, since 2006 HYIC has also collected $266.1 million in other revenues— mainly interest earned on investments of its unused bond proceeds—which were not included in the initial forecasts. When included with the development revenue, this brings the actual revenue received by HYIC through 2016 to a total of $1.0 billion, roughly equal to the low end of the Cushman and Wakefield forecast. Despite these unexpected interest earnings, the city has still provided more in interest subsidies than originally forecast.

While revenues from development in Hudson Yards are picking up, they still fall short of initial projections and are largely in the form of one-time payments. As interest earnings on investments of unused bond proceeds have petered out, the city’s interest support payments—although reduced through 2019—are likely to continue in future years. The majority of the corporation’s development revenue received through 2016 results from the nonrecurring sources: $487.1 million. Recurring tax revenues in the form of tax equivalency payments (TEPs) and payments in lieu of taxes (PILOTs) have accounted for only $268.3 million of HYIC’s development revenue since 2006. Initial projections forecast these tax revenues to range from $345.1 million to $500.0 million through 2016. Most of the tax revenue received thus far has come from TEPs, which—like the city’s interest support payments—are paid out of the city’s general fund.

The general fund support and maintenance of the City’s rating and financial strength have contributed to the outstanding debt retaining its mid A ratings. The three notch difference from the city’s general obligation rating reflects the need for annual appropriation of the city’s interest subsidy, the nature of the economic development projects being financed, and volatility in New York City’s real estate markets that could delay development.

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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