Muni Credit News June 29, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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As we go to press, many budget situations remain in negotiation. Thus, they may be resolved tomorrow (the end of the fiscal year) or after. With the Tuesday July 4 holiday we will not publish again until July 6. Please enjoy the holiday safely. leave the fireworks to the professionals (and I don’t mean the legislators negotiating budgets). Happy 241st Birthday America!!

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NEW JERSEY BUDGET DOWN TO THE WIRE

Governor Chris Christie has the option to order a state shutdown if a budget doesn’t get passed by both houses of the Legislature and signed by the governor by midnight on Friday. He is attempting to broker a deal with legislative leaders that would allow an extra $125 million into state education funding in exchange for legislation that would allow the governor to take $300 million from Horizon Blue Cross Blue Shield of New Jersey’s reserves to expand access to addiction treatment. In addition, he seeks legislation to shift the State Lottery into the state pension fund as an asset.

The lottery shift would be just that in accounting terms. It would take an existing asset and its associated cash flows and allow them to be applied to the unfunded pension liability without actually spending any money to do so. It would be yet another in a series of gimmicks employed by the Christie administration to avoid having tax revenues applied to pensions. This has been a chronic shortcoming of the Christie administration financial management plan that has led to multiple rating downgrades on his watch.

PUERTO RICO

The Financial Oversight and Management Board refused to certify the Puerto Rico Electric Power Authority’s (PREPA) financial agreement to restructure its $8.9 billion debt under Title VI of the federal Promesa law. The creditors and the government agreed in April to modify the existing RSA reached in 2015. The modified RSA maintained a 15% haircut but extended the maturities of the new bonds to 2047. The new agreement saves $2.2 billion in debt service costs for the next five years.

The board said “negotiations with creditors of [PREPA] concerning a possible transaction have taken place between the Oversight Board’s representatives and the PREPA creditors. Those negotiations are continuing.” The board said “the most likely course of action under the circumstances would be a debt restructuring process under Title III instead,”

The board said it would have approved the RSA as a valid consensual agreement under Title VI of the federal law, if creditors were willing to introduce certain amendments. For instance, it sought to cap the utility’s transition charge—which would pay for PREPA’s new bonds as part of the exchange transaction—in an escalating manner. Specifically, the board sought to cap the transition charge at 2.7 cents per kilowatt-hour (kWh) by 2018, 3.6 cents per kWh by 2023 and 3.95 cents per kWh by 2026. The board said it was concerned about the current RSA’s treatment of this special charge, which would spike amid a declining electricity demand on the island.

MAINE

A two-year, $7.1 billion budget proposal offered by Senate Republicans would scrap a voter-approved surtax for schools while still boosting education spending by $146 million. the state’s tax on lodging would be increased from 9 percent to 10 percent in October to help pay for the additional education funding and property tax relief. Their biggest concerns remain overall spending, funding to eliminate waitlists for the disabled and education initiatives like a pilot program for a statewide teachers’ contract.

A budget must be in place by July 1 to avert a government shutdown over the Fourth of July weekend. Any budget deal would need two-thirds support in the House and Senate to be enacted on time and withstand a governor’s veto. Governor LePage in the past has taken 10 days to act on the budget, as the state Constitution allows. If a budget isn’t in place by the end of the day Friday, all non-emergency state services will end temporarily. State officials would declare which positions are “emergency” by Friday’s end.

Local communities predict challenges for vehicle registrations, marriage licenses and birth or death certificates. Maine government last shut down in 1991.

WEST VIRGINIA ROAD PLAN

West Virginians will have the opportunity to decide whether they want to support a $1.6 billion measure to support upgrades to the state’s roads and bridges in a special election on October 7. Governor Justice also signed Senate Bill 1003, giving more power to the West Virginia Parkways Authority to continue charging tolls beyond the previous deadline of 2019 and to establish other tolls for supporting specific projects. That legislation, which when combined with the bond measure and the provisions of Senate Bill 1006 to increase the gas tax and Division of Motor Vehicles fees, is estimated to provide a $3 billion.

The Governor estimates there are nearly 500 shovel-ready projects throughout the state and that they will generate 48,000 jobs in the state. The legislation increases the state’s gas tax, some Division of Motor Vehicles fees, and the privilege tax on buying a car from 5 percent to 6 percent.

CYBERATTACK HITS US PORT

A cyberattack that infected originated in Europe and then spread into the United States halted operations at the Port of Los Angeles’ largest terminal this week. APM Terminals — where Danish shipping carrier A.P. Moller-Maersk operates — turned truckers away all day, as did their terminals in Rotterdam, New York and New Jersey. The carrier is the world’s largest — accounting for about 16 percent of the world’s shipping fleet.

Earlier this year, APM Terminals, Maersk and Mediterranean Shipping Company launched a pilot program to track cargo and share information with their clients. Major retailers such as The Home Depot and Lowe’s were among others, are participating in the project.

TEMPORARY REPRIEVE FOR HOSPITALS AND STATES

The decision to delay a vote on the BCRA only extends the uncertainty for states and hospitals at an important point in the calendar for both sectors. Now states face increased uncertainty as they begin their fiscal years with many still battling over budget adoptions. For hospitals, the uncertainty over the reimbursement and utilization environment continues heightening the risk associated with this sector.

That reflects the fact that the only legislation out there as we go to press is the Senate bill would increase the number of people who are uninsured by 22 million in 2026 relative to the number under current law. By 2026, an estimated 49 million people would be uninsured, compared with 28 million who would lack insurance that year under current law. As expected, the largest savings would come from reductions in outlays for Medicaid—spending on the program would decline in 2026 by 26 percent in comparison with what CBO projects under current law—and from changes to the Affordable Care Act’s (ACA’s) subsidies for nongroup health insurance.

ACCOUNTING TREATMENT OF LEASES

The Governmental Accounting Standards Board (GASB) issued guidance that establishes a single approach to accounting for and reporting leases by state and local governments. This single approach is based on the principle that leases are financings of the right to use an underlying asset.  a lessee government is required to recognize (1) a lease liability and (2) an intangible asset representing the lessee’s right to use the leased asset. A lessor government is required to recognize (1) a lease receivable and (2) a deferred inflow of resources. A lessor will continue to report the leased asset in its financial statements.

A lessee also will report the following in its financial statements: Amortization expense for using the lease asset (similar to depreciation) over the shorter of the term of the lease or the useful life of the underlying asset; Interest expense on the lease liability; Note disclosures about the lease, including a general description of the leasing arrangement, the amount of lease assets recognized, and a schedule of future lease payments to be made.

A lessor also will report the following in its financial statements: Lease revenue, systematically recognized over the term of the lease, corresponding with the reduction of the deferred inflow; Interest revenue on the receivable; Note disclosures about the lease, including a general description of the leasing arrangement and the total amount of inflows of resources recognized from leases.

Limited exceptions to the single-approach guidance are provided for: Short-term leases, defined as lasting a maximum of 12 months at inception, including any options to extend; Financed purchases; Leases of assets that are investments; and certain regulated leases, such as between municipal airports and air carriers.

MID YEAR REVIEW

At mid-year we look at the major federal topics that would likely have impact on municipalities versus where we were at the beginning of the year relative to the President’s stated goals and points of emphasis.

Infrastructure – So far we have an effort underway to upgrade the federal air traffic control system through a program of privatization. House Transportation Chairman Bill Shuster‘s FAA bill has now made it as far as it did last year, with the committee again approving the bill (H.R. 2997) almost entirely along party lines. Shuster has said that House leadership could bring the bill to the floor for debate in July. It has failed in its previous attempts. Otherwise, all of the real debate on infrastructure continues on the state and local level with a variety of plans and funding mechanisms being debated and/or adopted. It is at this level that the real leadership is occurring.

Tax reform – The effort remains stalled at the one page concepts stage with no legislation currently on offer. Debates about the viability of a border adjustment tax championed by Speaker Ryan continue.

Healthcare reform – As we enter the weekend, the House and Senate efforts appear unsuccessful and the Administration’s concerted effort to undermine the state insurance exchanges continues. The threat of budget destroying Medicaid reform continues to overhang state budget deliberations.

Cybersecurity – In spite of the President’s extensive tweeting activities, that would appear to be the extent of his efforts in this space. just this week, the nation’s largest port saw its largest operator unable to process freight through the port after it was the victim of a hacking effort initially directed at the Ukraine.

Energy – While states are either moving forward with renewables which have generated 10 times as many jobs as the coal mining industry, they face requests from nuclear operators for direct operating subsidies from states like New York, Illinois, and Pennsylvania. So with one industry being pummeled by market forces (coal) and another admitting that it can’t be profitable (nuclear) it still comes as no surprise the the US DOE is expected to soon release a survey favoring those two sectors going forward.

What we see here is either a lack of effort or a persistent reliance upon politically less viable policies from the White House which have the effect of increasing financial uncertainty and pressure on state and local budgets.

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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