Joseph Krist
Senior Municipal Credit Consultant
joseph.krist@municreditnews.com
73 years ago today, more than 160,000 Allied troops — about half of them Americans — invaded Western Europe. In the military, D–Day is the day on which a combat attack or operation is to be initiated. While fewer and fewer of the young men who participated are still around to remind us, we take this opportunity to do it for them.
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Metropolitan Washington Airports Authority
$598,000,000
Airport System Revenue and Refunding Bonds
Moody’s upgrade recipient MWAA comes to market with this issue this week. The upgrade to Aa3 and stable outlook reflect Moody’s view of MWAA’s system wide improving financial and operating performance at its two airports, Reagan National (National or DCA) and Dulles International Airport (Dulles or IAD) supported by strong growth in concession revenues and non-aeronautical revenues, steady enplanement growth driven by a diverse and growing service area economy that we expect will grow at an above-average pace.
The upgrade also considers expected continued growth in air service, a new airline use and lease agreement through 2024 that supports projects for both airports, continued conservative and well-executed operational, financial and capital management, very small exposure to pension liabilities and expected continued growth in air service, particularly for international passengers at Dulles, satisfactory forecasted debt service coverage ratios (DSCRs) and liquidity.
According to Moody’s, the authority is carefully managing and mitigating construction risks on a large capital improvement project at DCA; however, it expects execution and delivery of this project on schedule and budget and the authority expects moderate capital needs going forward.
The credit was assigned a stable outlook on the basis of Moody’s that increased MSA economic activity will contribute to growth in enplanements, which will continue to stabilize costs. The outlook assumes the authority will continue to conservatively manage its financial operations to achieve forecasted metrics and support higher capital project expense (CPE) and maintain DSCRs over the next five years as it undertakes significant debt-financed capital projects at DCA, and also that no additional large capital projects are being planned.
East Bay Municipal Utility District CA
$218,000,000 Water System Revenue Bonds (Green Bonds)
$264,000,000 Water System Revenue/Refunding Bonds
This traditionally strong water revenue credit is rated Aa1. According to Moody’s, the rating reflects the largely built-out nature of the district’s large and economically diverse service area with customer wealth and income levels significantly above national medians. It also incorporates an ample supply of high quality water with good reliability, a large degree of independence from Bay Delta quality and supply issues, strengthening of the system’s water supply and storage and improved financial position despite the challenges associated with the severe multi-year drought. The rating additionally factors a manageable long term capital plan, which the district intends on funding with greater reliance on cash versus debt and an improved debt position marked by a more conservative debt structure and the significant decline in amount of variable rate debt outstanding.
The rating incorporates Moody’s view of a stable history of sound financial operations with timely rate increases resulting in ample liquidity. Debt service coverage levels while significantly below the median for similarly rated systems, have remained very stable in the midst of period of financial uncertainty associated with the drought. Also reflected in the rating is the proven expertise of management, which has a long history of success in meeting the immense challenges inherent to the water system, including upgrading its seismic reliability, while maintaining affordability for its customers, and the successfully tested program which has significantly enhanced dry weather water supply.
Texas A&M University System
$500,000,000 (approx.) Revenue Financing System Bonds
Some 75% of the bonds to be issued will be taxable municipals. Revenue Financing System debt is a general obligation of the Board of Regents of The Texas A&M University System, secured by a lien on and pledge of a broad pledge of system-wide revenues. Pledged revenues exclude state appropriations, in addition to the system’s interest in the AUF, which consists of annual distributions from the PUF, and amounts appropriated to system participants from the Higher Education Fund (HEF). Fiscal year 2016 pledged revenues totaled $3.1 billion, providing 12 times coverage of the RFS pro-forma debt maximum annual debt service.
Permanent University Fund bonds are secured by a first lien and pledge of The Texas A&M University System’s one-third interest in distributions from the PUF, with ultimate access to the value of the Permanent University Fund for debt repayment. There is an additional bonds test limiting TAMUS’ debt issuance to no more than 10% of the value of the PUF, excluding the value of PUF Lands. TAMUS had $915 million in outstanding PUF bonds at FYE 2016 compared to its $7.7 billion share of the PUF.
Proceeds will be used to provide construction funds for projects on various system campuses (the tax exempt bonds) and (the taxable bonds) to refund certain outstanding long-term parity RFS obligations.
The Moody’s Aaa rating reflects robust financial resources relative to operations, strong capital and operating support from the Aaa-rated State of Texas, and the system’s large scale, with 11 campuses serving an estimated 150,000 headcount students throughout the state in fall 2016. Tempering factors include rising, though still manageable, leverage relative to revenue and cash flow, with ongoing infrastructure needs across the system, and the complexity of a rapidly increasing number of third party partnerships.
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PUERTO RICO
The decision by US bankruptcy Judge Laura Swain to freeze assets held by the trustee for some of COFINA’s Sales Tax debt effectively insured a payment default on June 1. The assets will be held until both sides in the dispute over the right of the Commonwealth to apply sales tax revenues to the payment of general obligation debt can be decided upon. The question comes down to whether the constitutionally established “clawback” provisions apply to the COFINA revenues or if those provisions were overridden by statutory actions by the Puerto Rican legislature when the COFINA credit was established.
The public corporation is one of the entities that had filed for bankruptcy under Title III of Promesa. BNYM lawyers said at a hearing May 17 in Puerto Rico that since the commonwealth had taken actions that call into question its commitment to pay the bonds, it faces claims in the New York court that it breached its duties. BNYM lawyers said that because of the commonwealth’s actions, it had been subjected to competing demands by bondholders with respect to a default, whether to accelerate the bonds and whether to make payments on the bonds.
The default occurred effectively simultaneously with the release of the proposed budget for fiscal year 2018 by the Governor. That budget includes more than $2 billion in pension benefits spending as a result of the transition to a pay-as-you-go system but initially provides no funding for the payment of debt service. None of this is a surprise given many of the statements and actions by the Puerto Rican government throughout the days and weeks leading up to the delayed budget release. The budget must be approved by the PROMESA oversight board. The fiscal control board has to date shown no real inclination to support the interests of Puerto Rico’s outstanding debt holders.
ILLINOIS DEBACLE CONTINUES
The deadline for enacting a budget for the State of Illinois by a simple majority vote in the Legislature came and went on June 1 without enactment of a budget. The action resulted in multiple downgrades of the State’s general obligation debt by the rating agencies and poised the State to be rated below investment grade if a budget is not enacted by July 1.
Moral obligation or annual appropriation debt is already in non-investment grade territory as the result of the ongoing feud between the legislature and the equally stubborn Governor. The fact that the operations of all sorts of governmental and non-governmental service providers throughout the State are being negatively impacted seems to be of no consequence. One can hope that a potential downgrade below investment grade might motivate more adult behavior by all parties to the deadlock but we are in the camp of “see it to believe it”.
We do not believe that an actual payment default is in the cards but that does not prevent additional downside valuation risk as this bizarre circus act continues.
FLORIDA BUDGET STANDOFF TO END
It arrived three days beyond the required schedule but, the Florida Legislature did vote out an $82.4 billion budget. It then took weeks for the Governor to decide to sign it but sign it he did after extended negotiations over vetoed items and the terms of a special legislative session to take place this week. Those negotiations reflected a number of items over which there was real disagreement between the Governor and the Legislature.
For example, the Governor requested $100 million for tourism marketing; they gave him $25 million. $85 million in job incentives to lure businesses to Florida; they gave him zero. $200 million to speed up work on rebuilding the leaking dike around Lake Okeechobee; they gave him nothing.
During the special session, an extra $215 million for schools will be added to the original $24 billion budget, increasing the amount of funding by $125 per student over the current year, instead of just $25 in the original budget. Lawmakers will also put $76 million into Visit Florida, the state’s tourism marketing agency, maintaining its current year funding. The original budget included $25 million for the group. A new program will also set aside $85 million to be spent on workforce training as well as infrastructure such as roads to encourage economic development.
The Legislature agreed to decrease property-tax rates to offset a rise in home values that would have caused many homeowners to pay more in taxes. That will save homeowners in Florida a combined $510 million in increased property taxes.
NYC REACHES BUDGET ACCORD
NYC has announced that an agreement has been reached on a budget for FY 2018. The $85.2 billion budget provides for increases in a number of categories designed to appeal to voters. It includes increased capital spending, increases for a variety of anti-poverty programs, education initiatives, and budget reserves. The agreement represents the earliest agreement on a budget in a quarter century and takes major points of contention off the table prior to the start of the City’s election season. Primaries are in September and the general election for the mayoralty and the entire City Council is in November.
The budget does represent a positive view of the City’s near term economic outlook. It also occurs in an atmosphere of federal uncertainty regarding funding for programs which would be considered to be a priority for any incoming administration. The one potential weak spot for the City could be the Health and Hospitals Corporation which runs the nation’s largest municipal hospital system. New York City Health & Hospitals reported a $776 million operating loss for the first half of fiscal 2017, according to unaudited financial statements.
The public health system’s operating loss widened by 84.5% over 2015, when the system lost $420.4 million. After investment losses and interest expenses, the system lost $842.6 million.
The city paid the health system $78.8 million in capital contributions, resulting in a $763 million net loss. Enrollment in MetroPlus, its insurance arm, showed modest gains. But the system’s goal of increasing the number of patients it serves is in jeopardy following declines in utilization at its hospitals and outpatient clinics. The potential for cutbacks in federal dollars through Medicaid restrictions included in possible healthcare reform legislation would bode ill for HHC. The City increased support for H&H by 10.9%, to $766.8 million, for fiscal 2018, which begins July 1. That total represents cash support but does not include spending to cover the health system’s debt service, medical malpractice claims and employee health insurance costs. When accounting for those expenses, as well as the city’s share of supplemental Medicaid payments, the city’s support for H&H could reach $1.9 billion next fiscal year, according to an Independent Budget Office report.
DEFAULT IN TEXAS
In light of an anticipated cash-flow shortfall, the Dallas County Schools District pursued the issuance of refunding bonds to restructure certain outstanding debt and a tax anticipation note to provide operating liquidity. On May 26, 2017, the District received notification from the Texas Attorney General that his office would not approve these transactions. On June 1, 2017, the District failed to make payments on six series of outstanding Public Property Finance Contractual Obligations issued in the years 2012 through 2014.
On May 27, 2017, the Texas Legislature approved legislation allowing for the dissolution of the District effective November 15, 2017, unless the continuation of the District is approved by a majority of voters in the District at an election to be held on November 7, 2017. As of the date of this Notice, the Governor has yet to sign or veto this legislation. The Governor must sign or take no action on the bill by June 18, 2017, for the legislation to take effect September 1, 2017.
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.