Muni Credit News June 22, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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AMERICAN DREAM DEAL MODIFIED

We profiled the Public Finance Authority (WI) bond issue for the American Dream retail project in the New Jersey Meadowlands last week. Since then, we note that the deal was “improved” in response to investor feedback. The PILOT rate has been increased to 90% of the regular property tax rate. A reserve fund and a schedule for funding it has also been established. The disclosure requirements have also been enhanced to call for monthly construction updates. More frequent leasing information on the project has also been added to the supporting documents.

It is good to see that the investment community was not willing to roll over for the deal as presented. At the same time, the enhancements are not a replacement for underlying economic viability. Nonetheless, it is a positive development for potential investors.

PUERTO RICO

The recently announced deal between the Government Development Bank (GDB) and a group of its creditors has been approved by a majority of its creditors. The transaction as laid out in the RSA must still be approved by the Financial Oversight and Management Board for Puerto Rico and the U.S. District Court. FAFAA and the GDB have said that support for the transaction to date increases the likelihood of a successful reorganization of the bank.

Acceptance and execution of the agreement should result in a better result for the creditors versus what would have been achievable in a bankruptcy proceeding.

TEXAS DEFAULT UPDATE

Dallas County Schools, the entity which provides transportation for public school students in the city defaulted on six series of outstanding bonds on June 1. As of June 16, 2017, the District has made all outstanding interest payments due June 1, 2017 on all six series. In addition, as of June 16, 2017, the District has paid in full all amounts due on their lease obligations.

MSRB ANNOUNCES 2017 GOALS

The self regulating body for the municipal bond industry,  the MSRB announced its strategic goals for 2017. They include expanding the utility of its Electronic Municipal Market Access (EMMA®) website, which is available free to all holders of municipal bonds to provide widespread access to municipal market data and tools that support fair transactions and facilitate decision-making, and maximizing the use of data to support market transparency and regulation. Additionally, the MSRB will conduct a comprehensive analysis of relevant market data to maximize its availability, utility and quality for the benefit of all market stakeholders and the public.

The MSRB’s updated strategic goals are: Facilitate industry understanding of and compliance with MSRB rules through rule guidance, clarification and education in support of market efficiency; Further evolve the EMMA website into a comprehensive transparency platform that meets the needs of municipal market participants and the public; Optimize the use and dissemination of municipal market data to further support market transparency and inform regulation; Leverage the MSRB’s unique perspective and expertise as an independent self-regulatory organization; and Promote financial sustainability by assessing fair and equitable fees, diversifying funding sources and spending responsibly.

NEW MEXICO TURNS TO FINANCING TRICKS TO BALANCE BUDGET

New  Mexico had a contentious budget process this year but even after that concluded, the state will still rely on the use of short term financing to balance its FY 2018 budget. New Mexico plans to sell $120.4 million in supplemental notes and $38.2 million in senior notes this month.  The note proceeds will be used to reimburse the general fund for capital expenditures. This will “release cash” in the Severance Tax Bonding Fund and boost the state’s general fund reserves. The state will sell long-term severance tax bonds in July to finance the school capital program, instead of applying that money to  state capital projects.

A major component of the FY 2018 financial plan involves the “sweep” of non-General Fund balances into the General Fund in order to achieve General fund balance. All of these techniques along with the note issuance and bond proceeds swap plan are one-time actions that only put off the day of reckoning for the State in terms of spending and taxation. For bondholders, they point to a more vulnerable fiscal position for the State and a weaker ratings outlook for the State’s debt.

ALASKA RATING MELTING AWAY

S&P Global Ratings has placed its ‘AA+’ general obligation (GO) rating, ‘AA’ appropriation rating, and ‘A+’ moral obligation rating on the state of Alaska’s debt on CreditWatch with negative implications.

S&P said “The CreditWatch action reflects our view that the state could remain structurally imbalanced for fiscal 2018 based on the impasse for budget negotiations regarding adopting fiscal reforms,” said S&P Global Ratings. As noted in our prior reports, without structural fiscal reform in the 2017 legislative session, we would likely lower the state debt ratings. Over the next 90 days, we expect the state will enact a fiscal 2018 budget.  “If Alaska uses a significant amount of its reserves again and remains structurally imbalanced, we would likely lower the rating, “but should it adopt a balanced budget with fiscal reforms that does not significantly rely on reserves, we may remove the state’s ratings from CreditWatch without downward rating action.” The state legislature failed to adopt a budget during its regular session and first special session. On June 16, 2017, the governor called for a second special session specifically to address the operating budget before the end of the fiscal year (June 30). In our opinion, given the limited scope of the second special session and an ongoing political impasse over adopting the governor’s proposed fiscal reforms, it is unlikely significant fiscal reforms will be implemented as part of the 2018 budget, resulting in yet another year of structural imbalance.”

CHARTER SCHOOL CREDIT IMPROVEMENT

While charter schools are often in the news for financial difficulties and debt defaults, it is refreshing to see a charter school program show positive credit trends. S&P announced that it has raised its rating to ‘BBB’ from ‘BBB-‘ on the California School Finance Authority’s educational facilities series 2014 and 2015 fixed-rate charter school revenue bonds, issued on behalf of KIPP LA Schools which as $106 million of outstanding debt.  KIPP has 14 schools currently operating throughout the greater Los Angeles area. S&P cites “its very healthy financial profile, which includes growth in unrestricted liquidity and excellent revenue over expenses that is commensurate with the higher rating.” S&P assessed KIPP’s financial profile as strong, with exceptional positive operating margins, a sound cash position, a moderate maximum annual debt service (MADS) position, and a large operating base. It assessed KIPP’s enterprise profile as adequate, characterized by healthy demand with exceptional enrollment growth, a moderate waiting list, solid academics, and a stable management team. A higher rating is precluded “by KIPP LA’s significant growth plans for the next three to five years and the construction risk associated with its current and planned projects that might pressure the school’s financial profile.

KIPP operates 80 elementary, 94 middle and 26 high schools in 31 locations across the country. KIPP schools are tuition-free, which are primarily funded through public federal, state, and local dollars, along with supplemental funding through charitable donations from foundations and individuals. 

SENATE HEALTH PLAN TARGETS MEDICAID 

In what would be a blow to state finances, the Senate has released its draft legislative proposal to repeal the ACA. The major source of savings are to be found in the proposed changes to Medicaid. They include limiting how much the federal government would pay for each person enrolled in the program (the per capita approach vs. the block grant approach). The bill is rolls back Obamacare’s enhanced Medicaid spending — states would be left deciding whether to raise more money to make up the difference, or to cut back on medical coverage for people using the program which is likely to force governors to cut coverage — over four years beginning in 2020. Earlier Senate conversations called for a three-year phase out.

Americans who get tax credits to buy insurance based on their age, as the House bill does, the Senate would offer them based on “financial need”—which is more or less how Obamacare works. But under the GOP’s proposal, fewer Americans would qualify for help. Under the Affordable Care Act, households can receive insurance subsidies if they earn up to 400 percent of the poverty line. Senate Republicans would lower that threshold to 350 percent. Subsidies will also be smaller for those who still qualify.

The bottom line is that the plan as is cuts revenues to the states, increases the ranks of the uninsured and the need for more indigent care, and makes it more likely that the oldest Americans will see lesser care. So the bill is negative for state credits, hospital credits, and continuing care retirement communities.

 

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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