Muni Credit News June 4, 2015

Joseph Krist

Municipal Credit Consultant


Under a 2010 state law, the city’s contribution to its police and fire fighter funds next year increases by $550 million to about $839 million. A bill to restructure contributions in the near term won final legislative approval on Sunday from the Illinois Senate. The bill now awaits the Governor’s signature but earlier in May the Governor said  “For Chicago to get what it wants, Illinois must get what it needs.” As we go to press, the bill is unsigned.

The bill would reduce that amount by about $220 million, to $619 million. Chicago’s payments would increase every year between 2017 and 2020, but not as much as under the 2010 law. After 2020, the city’s contributions would be calculated at amounts that would enable the two pension systems to become 90 percent funded by 2055, which is 15 years longer than in the 2010 law.

If Chicago fails to make required pension payments, the bill allows for an intercept of state funds due the city and for the retirement funds to go to court to force payments. The bill also requires proceeds from a Chicago casino in the future to be allocated to the public safety retirement funds. Emanuel has been asking state lawmakers for a bill authorizing a city-owned casino, but that legislation did not advance.

We have previously documented the Governor’s demands for the enactment of a package of tax changes and regulatory changes considered to be “business friendly”. They are unrelated to the pension problems of either the State or to the City of Chicago. The debate over pensions and the budget have had a decidedly partisan edge with the Governor saying after the end of the legislative session he called “stunningly disappointing, “we’re going to have a rough summer.”


The NBA Finals begin on June 4 and they will command the most attention from pro basketball fans. Many owners however, will also have an eye on developments surrounding the financing for a new arena in Milwaukee for the NBA Bucks. Gov. Scott Walker has finally taken a public stand in support for the major aspects of a plan to publicly fund such an arena.

As currently conceived, taxpayers would be responsible for half the initial cost of a new arena. The initial public investment would be $250 million, but taxes would ultimately pay for principal and interest on a bond issue for that amount, issued by the Wisconsin Center District. The rest of the arena — another $250 million — would be funded by the Bucks owners and former U.S. Sen. Herb Kohl, who used to own the team.

To support the planned municipal debt, lawmakers would have to change state law to extend taxes the district levies that are set to expire in coming years as it pays off the debt. It would extend for years taxes that are set to expire and could result in a boost in the tax on hotel rooms in Milwaukee County. Walker, who is preparing a run for the presidency, argued that potential hike would not be a tax increase because the Wisconsin Center Board already has the ability to raise it. “It’s already within their means, so that’s not a new tax,” Walker told reporters after a groundbreaking for a plant expansion in Portage.

The district operates the Wisconsin Center convention center, Milwaukee Theatre and UW-Milwaukee Panther Arena. In Milwaukee County, it levies three taxes: 3% on car rentals, 2.5% on hotel rooms, and 0.5% on restaurant food and beverage sales. Under current law, the district has the ability to raise the tax on hotel rooms to 3%. (The district also has the ability to raise the rental car tax to 4%, but only if it needs help from the state because its collections of that tax are falling short of the amount needed to pay its debt.)

Like the debate in many other venues over sports arena financing, this one has strong opinions on both sides. Walker claims that a deal for the Bucks is essential because the team will leave if it doesn’t have plans in place for a new arena by 2017. This would have a significant impact on the state budget. Backers hope to insert the plan into the state budget. The Joint Finance Committee is expected to complete its work on the budget by next week and forward it to the Assembly and Senate for final votes. Both houses are controlled by Republicans. Many conservative commentators object to the use of state money for such a project. Having the district raise the tax on hotel rooms to the maximum amount to help pay for a new arena would not constitute a new tax, Walker contended.

Under the plan, the state would be responsible for bonds worth more than $55 million. The state would commit $4 million a year over 20 years, or $80 million total, to cover its shares of principal and interest costs. The Wisconsin Center District would issue $93 million in zero-coupon bonds that could be paid off years from now. Officials have not detailed how much it would cost to pay back those bonds when accounting for interest.

The city would spend $35 million on a new 1,240-vehicle parking structure and provide $12 million in tax incremental financing. In the most unusual feature of the deal, Milwaukee County would “certify” tens of millions of dollars in uncollected county debt. The county, in effect, would then count on the state to recover at least $4 million of that debt a year for 20 years, a total of another $80 million that would then be funneled to the arena project. The state would also pay off the final $20 million owed on the Bradley Center, where the Bucks have played since 1989. That would bring the state’s total commitment to $100 million.


IFM Investors has announced the completion of IFM Global Infrastructure Fund’s previously announced acquisition of 100 percent of the equity in the Indiana Toll Road Concession Company, LLC (ITRCC), which operates the Indiana Toll Road. The final purchase price for the ITRCC was US$5.725 billion, consistent with the purchase price and transaction structure outlined when the planned acquisition was announced.

The ITRCC is required to operate the toll road under a lease agreement that was executed in 2006, giving it the exclusive right to collect toll revenues through the term of the agreement, which has a remaining life of 66 years. The transaction is being financed using a capital structure that includes debt with maturities as long as forty years.

IFM inherits the remaining 66 years of a Concession Lease Agreement between ITRCC and the State of Indiana implemented in 2006 for a 75-year period. ITRCC on Sept. 22, 2014, announced that it had filed Chapter 11 bankruptcy. Nearly all of the $5.72 billion garnered in the toll road’s lease sale will be used to pay off bondholders who owned bonds backing up ITR Concession’s $6 billion debt. Financing for the acquisition came from some 70 U.S. pension funds and represents their first foray into the toll road market.

The jury is still out in terms of the viability of privately operated toll roads. There are numerous examples of such failed financings in the municipal market and many municipal investors remain wary of bonds in that space. A lot of the risk is based on the level of local opposition to these sorts of projects. In North Carolina, anti-toll group wants a judge to proceed with its lawsuit in an attempt to stop the state’s Interstate 77 toll project for which the P3 contract was finalized May 20. A state senator has developed a draft of a bill that would address opposition concerns. The long-shot bill would use money from an upcoming bond package to expand I-77 north of uptown without toll revenue, breaking a that contract between the N.C. Department of Transportation and a private developer to build express toll lanes.

In another sign of problems with P3 transportation projects, the VA DOT has determined in its discretion to terminate the Comprehensive Agreement with U.S. Mobility Partners, LLC (the “Design-Build Contractor”) for the construction of a 55 mile toll facility in southern VA. Boosters said it would spur development, connect military facilities, provide an alternative hurricane escape route and smooth freight shipments to and from the Port of Virginia. Instead, the project ran into environmental hurdles threatening to delay it and substantially raise its costs.

The termination of the Agreement subjects the Bonds to extraordinary redemption from funds derived from termination compensation amounts to be paid by VDOT.  VDOT will determine the portion of the termination compensation amount necessary to redeem the Bonds by or about the June 15, 2015, termination date and that the Bonds could be called for redemption as early as on or about August 1, 2015. There is no certainty that the Bonds will be called for redemption on such date and VDOT’s Notice of Termination could be rescinded, although the Corporation does not believe that rescission is likely based on discussions with VDOT and public statements made by Virginia’s Secretary of Transportation and representatives of the Governor’s Office. $114.87 million of current interest bonds and $116.73 million of capital appreciation bonds were issued for the project in 2012.


We’ve been following fiscal events for the State of Kansas for some time as the Governor undertakes a significant experiment with supply side economic theory, using the state budget as his test case. Legislation in 2012 and 2013 phased in rate reductions on personal income taxes — to 3.9 percent from 6.45 percent on the high end and 2.3 percent from 3.5 percent on the low end — by 2018. The reductions were expected to cost a total of about $7 billion through 2019. They were based on the premise that they would stimulate economic growth. But that growth did not appear, and after repeatedly trimming spending to close shortfalls, legislators find themselves facing a $400 million budget hole for the coming fiscal year.

The situation has become so serious that many of those legislators are considering whether to reverse field by raising taxes. Both houses of the Republican-controlled Legislature are proposing tax increases. The primary driver is negative public reaction to the idea of cutting more expenditures without significantly hurting popular programs, including education.

The debate  now focuses on which taxes to raise. Some believe that income taxes are off limits instead supporting a rise in sales taxes. Others advocate a mixed approach with income taxes on the table. Democrats argue that increasing sales taxes would be another blow to low-income Kansans to the benefit of the business class. Business owners were seen to be beneficiaries of the plan’s signature piece of the law passed in 2012: the elimination of taxes on certain types of small businesses.

To avoid repeal there is a proposal for removing the exemption on nonwage income for small businesses, instead giving them a 1 percent payroll tax credit. This would be accompanied by an increase in the sales tax to 6.5 percent from 6.15 percent on everything except food, which would be taxed at 6 percent. A competing plan would tax the nonwage income on small businesses at 2.7 percent and increase the sales tax to 6.45 percent, but reduce it to 5.9 percent for food.

The debate has been particularly prolonged. The legislative session reached  the 100-day mark over the weekend for just the sixth time in state history. (Sessions are typically limited to 90 days, and each additional day costs around $40,000.) Supporters of the tax cuts are not necessarily willing to concede that the cuts were the reason for the state’s fiscal problems. To meet revenue shortfalls, Gov. Sam Brownback and lawmakers have found themselves repeatedly tinkering with the budget to fill hundreds of millions of dollars in shortfalls. The governor has cut some state agency budgets by 4 percent, reduced contributions to the state pension system and shifted money between state accounts. Lawmakers have rolled back funding for poorer school districts and changed the way they allocate money to schools. They have slowed funding increases for entitlement programs.

One leading legislative proponent said “We hoped they would just be a magic lantern and everybody would react to it,” he said. “But, eh, it’s hard to get a company to uproot their business when they’re established and move to another place just because of this difference in tax policy.” He unwittingly articulated what many studies have shown. Namely that tax policy is but one of many factors that go into a relocation decision and that taxes are often not the major driver. Initial estimates were that the small business tax exemption would affect about 191,000 entities and cost about $160 million. Instead, for the 2013 tax year, 333,000 filers took advantage of the exemption at a cost of $206.8 million, according to the Revenue Department.

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