Muni Credit News March 12, 2015

Joseph Krist

Municipal Credit Consultant


The issue of municipal issuers’ disclosures of financial and operating data is back in the spotlight. Speaking at the National Municipal Bond Summit last week, Municipal Securities Rulemaking Board executive director Lynnette Kelly said there was a 40% increase in the financial and operating documents issuers filed to EMMA between June 2013 and June 2014. That is greater than the 7% increase the MSRB normally sees year over year, she said. At the same disclosures of bank loans have been disappointing.

Ms. Kelly attributed some of this increase to the Securities and Exchange Commission’s Municipalities Continuing Disclosure Cooperation initiative. The MCDC, announced last March, allowed both issuers and underwriters to voluntarily report, for any bonds issued in the last five years, any time they misled investors about their compliance with their continuing disclosure obligations. Underwriters had to report by Sept. 10 and issuers by Dec. 1 last year.

The SEC was focused on issuers who maintained in offering documents that they were fully in compliance with their self-imposed obligations to file annual financial and operating information by certain dates, when they had actually filed the documents late or not at all. SEC offered lenient settlement terms in exchange for the voluntary reporting under the MCDC program.

The MSRB began urging muni bond issuers to voluntarily post information about their bank loans on EMMA in 2012. Since then it has only received 88 such filings. Kelly said,  “That is far too low.” Concerns regarding such loans have grown as issuers have increasingly turned to bank loans to meeting their financing needs, typically because of lower interest and transaction costs, a simpler execution process, the lack of need for a rating, greater structuring flexibility, or the desire to deal to interact with a bank rather than multiple bondholders. Bank loans is a term used broadly to mean a bank’s direct loan to an issuer or the private placement of an issuer’s bonds to a bank. But there are no requirements that these be disclosed.

The MSRB, rating agencies, and some market groups have all said it’s important for issuers to disclose such loans, because they could affect an issuer’s financial condition, its credit or liquidity profile, as well as its outstanding bonds and the holders of those bonds. Ms. Kelly’s comments coincided with the National Federation of Municipal Analysts release of a paper detailing what disclosure practices it thinks should be adopted for bank loans.

In January, the MSRB made its most recent call for disclosure of bank loans well as other alternative debt such as direct loans from hedge fund investors. “Where we’ve not seen an increase in disclosures and would like to is … bank loans,” Kelly said. Kelly told those attending the conference that the MSRB has urged the SEC to revisit its Rule 15c2-12 on disclosure and that bank loan disclosure is one of the areas the MSRB wants the SEC to address.


University Hospitals in Cleveland and Ashland’s Samaritan Regional Health System (SRHS), a small system anchored by a 55-bed hospital in Ashland OH, last week signed a letter of intent to merge. Should the merger close, SRHS will become part of the UH system like Parma Community General Hospital and Elyria’s EMH Healthcare did in 2013. Samaritan, which employs 35 physicians, would be UH’s southernmost outpost in the state. This is yet another sign of the changes wrought by the ACA. Those changes reward efficiency and scale, two things which are not characteristic of smaller stand alone facilities. UH has been pursuing other mergers with smaller institutions with various degrees of success. We expect that the trend of mergers in the industry will be long-term regardless of the outcome of current legal challenges to the ACA.


Connecticut’s governor released his proposal for a budget for the biennium beginning in July. The budget reflects General Fund expenditures of $18.0 billion for FY 2016, cutting $590 million from current law spending levels.  In addition, it cuts more than $753 million in FY 2017. The budget is $6.3 million below the spending cap for FY 2016 and $135.8 million below for FY 2017.  Payments on the state’s long term obligations and debt service will not be deferred, whether contributions to the state’s pension system or paying off Economic Recovery Notes.  The budget includes a proposal to lower the state sales tax rate albeit by widening the base.

The budget maintains funding for statutory formula grants at the FY 2015 level, including Education Cost Sharing (ECS) and Payment in Lieu of Taxes (PILOT).  Additionally, funding is increased for Municipal Projects by $3.6 million per year to provide $60 million annually to support local infrastructure. It establishes a new $20 million grant for green infrastructure, level funds Small Town Economic Assistance Program (STEAP) and the Local Capital Improvement Program (LoCIP), and maintains funding of $60 million annually for Town Aid Road (TAR). It maintains support for education, by keeping the commitment to local school construction (with nearly $600 million pledged annually) and continues funding for the teachers retirement system.

Health costs are a prime target for spending reductions. The majority of the reductions in DSS impact reimbursements to Medicaid providers.  The state’s share of Medicaid expenditures is reduced by: $43.0 million in FY 2016 and $47.0 million in FY 2017 by reducing provider rates ($107.5 million in FY 2016 and $117.5 million in FY 2017 after factoring in the federal share of Medicaid expenditures); $10.0 million in each year of the biennium by restructuring rates to achieve the savings assumed in the enacted budget for medication administration ($20.0 million in each year of the biennium after factoring in the federal share); $6.2 million in FY 2016 and $6.8 million in FY 2017 from changes to the pharmacy dispensing fee and reimbursement for brand name drugs ($18.9 million in FY 2016 and $20.6 million in FY 2017 after factoring in the federal share); $5.1 million in each year of the biennium from the elimination of the supplemental pool for low‐cost hospitals ($15.1 million in each year of the biennium after factoring in the federal share); $4.3 million in FY 2016 and $5.1 million in FY 2017 from ensuring that ambulance providers do not receive a combined Medicare and Medicaid payment that is higher than the maximum allowable under the Medicaid fee schedule ($8.6 million in FY 2016 and $10.2 million in FY 2017 after factoring in the federal share).

The budget also devotes significant resources to highways and mass transit, particularly the state’s commuter railroads. Known as  Let’s Go CT!  the plan will include expanded rail service on existing Metro‐North and Shore Line East lines, and expanded service on the New Haven‐Hartford‐Springfield line.  Additional station construction will also be complemented by Transit‐Oriented Development (TOD) and responsible growth programs which will enable the impacted communities to add more economic and housing options for their residents and visitors, while preventing sprawl. An additional $2.78 billion in transportation bond authorizations is recommended over the next five years to begin to implement Let’s Go CT!


Last week in Kansas, the state Senate passed a bill, by a vote of 21-17, that would authorize the sale of $1 billion in POBs, the proceeds of which would be provided to the Kansas Public Employees’ Retirement System pension fund, which is roughly 60 percent funded, with a projected $9.8 billion shortfall. The $1 billion in new bonds is less than the $1.5 billion that Republican Gov. Sam Brownback’s administration had lobbied for.

Proponents are relying on a study by KPERS in which its actuaries concluded the House bill would save the state $2.8 billion in contribution obligations to the plan. Gov. Brownback has already reduced the state’s statutory contribution rate for fiscal year 2015. Supporters argue that the current historically low level of interest rates means that POBs are a relatively safe bet for state taxpayers. The cash raised would return a higher rate than the cost to service the debt, so long as the pension investments return their historical averages over the term of the bond, which can be as long as 30 years. Servicing the bonds is expected to cost Kansas $90.3 million annually, according to a blog post by Republican state Rep. Troy Waymaster.

The bill will now move to the Kansas House, where, last week, the Pensions and Benefits House committee passed its own version of the bill, authorizing $1.5 billion in POB sales, and capping the maximum interest rate on the notes at 5 percent.

An opposite approach is being taken in Kentucky. After that state’s House voted to authorize $3.3 billion in POBs for the state’s stressed teachers’ pension, the Senate strongly rejected the proposal, killing it by a 28-8 margin. The Kentucky Teachers Retirement System is funded at just over 50 percent, with nearly $14 billion in unfunded liabilities. Republican Robert Stivers, the Kentucky Senate president, said the POBs would create debt obligations that would tie up future governors and legislatures in issuing debt for other necessary projects.

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