Muni Credit News March 14, 2017

Joseph Krist

joseph.krist@municreditnews.com

THE HEADLINES…

PUERTO RICO’S PLAN GETS PROMESA APPROVAL

FLORIDA HIGH SPEED RAIL ANNOUNCES DELAY

TECH HELPING CREDIT

CIVIL ENGINEERS GRADE INFRASTRUCTURE

REGULATORS GET A PLEA BUT IS IT A ONE OFF?

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PUERTO RICO’S PLAN GETS PROMESA APPROVAL

After a week of vigorous back and forth debate between the Government of Puerto Rico and the Promesa fiscal control board it was announced that the fiscal control board approved its plan for Puerto Rico: a “progressive” 10% cut to pensions, a $450 million reduction to the University of Puerto Rico (UPR) budget and the approval of measures presented by Gov. Ricardo Rosselló in his revised fiscal plan, which was delivered over the weekend.

The board approved a partial reduction to the workweek of public employees and teachers— not including public safety personnel—along with the elimination of the Christmas bonus for these employees. The board argued that without this measure it could not be possible to guarantee the government would have enough money for the provision of essential services.

To avoid the furlough, the government will have to identify, by summer, on its next budget to be delivered April 30 along with a liquidity plan, about $200 million in contingency funds. If not, the board will reevaluate the situation in September, when it will determine whether to modify or eliminate the workweek reduction and the Christmas bonus. For his part, the governor’s representative to the board said he is “confident” this will not happen and that it represents a “precautionary measure” in case the government does not achieve having the expected cash flow.

During its fifth public meeting, which was held in New York, the financial control board announced what it called amendments to the latest version of the fiscal plan presented by the governor. The board said it reached agreements with the administration regarding economic projections and in identifying greater government resources, mainly through an increase to the tax on tobacco products.

The cuts to pensions and the UPR must be carried out on or before fiscal year 2020. In the case of pensions, the board said it had differences with the Rosselló administration and will therefore work side by side during the next 30 days on a plan to establish a simple paygo, or pay-as-you-go, system; liquidate assets to finance the benefits due in the previous plan; and place all pensioners and public employees in defined-contribution plans, segregating their contributions in individual accounts that ensure the payment of their benefits in the future.

Another measure was included that seeks to provide Social Security benefits for all new teachers and police officers. Although not discussed at the public meeting, the certified plan keeps a $450 million cut over three years for the UPR that was recently required by the board, government officials publicly confirmed later.

Prior to the approval, The Financial Oversight and Management Board had said that, in its view, the Government of Puerto Rico’s cash position is “so critically low that unless emergency actions are taken immediately, in a matter of months it will run out of money to pay for essential services such as education, healthcare and public safety.” A report by auditing firm Ernst & Young on the government’s bridge between the 2014 audited financial statements and the 2017 baseline numbers the government used in its originally proposed fiscal plan,  the government’s fiscal year 2017 expenditures could be understated by $360 million to $810 million, “based on historical expenditure trends.”

The board had recommended: Immediate implementation of a furlough program to achieve $35 million to $40 million in monthly savings, through the equivalent to four days per month for most executive branch government personnel and two days per month for teachers and frontline personnel at 24-hour institutions. Frontline law enforcement personnel should be exempted from the furlough program. Reductions comparable to the executive branch furlough savings described above for other entities across the government, including public corporations and instrumentalities and the legislative and judicial branches. Reductions in professional service contract expenditures of up to 50 percent and significant reductions in all government contract expenditures. Reductions in healthcare costs, by negotiating drug pricing and reductions of rates to health plans and providers.

The board did say that it understands the difficulty in implementing a $300 million cut to the UPR for fiscal year 2019, and says the magnitude of the deficit requires the number raised to $450 million by fiscal year 2021. As for pensions, it insisted that the adjustment should be of at least 10% to prevent other sectors from assuming a greater burden as a result of the insolvency of pension plans. If the retirement system runs out of money at the end of the year, general fund money would have to compensate for the shortfall, which would mean fewer resources available to cover other essential services such as education and the healthcare system. The board calls for further cuts to pension benefits and for the government to demonstrate that it is segregating the contributions of public employees so as to ensure the money is not misused. The governing body also proposes that government payroll be cut more, to $1.3 billion by 2021.

The government adjusted some of its proposed measures and baseline numbers in the revised document delivered to the board on Saturday morning, in a bid to keep alive its chances to have its plan—and not the board’s—be certified. Now that it is approved by the board, the government must move toward the preparation and certification of a budget by April 30. Likewise, any law approved by the Legislature must be consistent with the fiscal blueprint. Failure to do so, as the board determines in its sole discretion, would invalidate the legislation. The plan also lays down the groundwork for negotiations with Puerto Rico’s different creditor groups, as both the government and the board would know how much money is available to pay for debt service each year.

FLORIDA HIGH SPEED RAIL ANNOUNCES DELAY

A former executive with the New York Mets and the Madison Square Garden Co., Dave Howard has been named CEO of the high speed rail line sponsor. The announcement was accompanied by the news that the West Palm Beach-to-Orlando portion of the train project, referred to as Phase II, needs additional permits. A concrete financing plan is not yet in place either. Service between South Florida and Orlando International Airport was slated to begin by year-end.

The delay is due to ongoing litigation that has tangled financing plans for the project since 2015, when two Treasure Coast counties sued Brightline and the U.S. Department of Transportation. As we have previously documented, Martin and Indian River County allege the DOT skirted protocol pertaining to environmental impact studies, giving Brightline improper access to over $1 billion worth of tax-exempt government bonds to build the train project through their cities.

We do not see anything in the current news which improves the credit profile of the project or enhances the likelihood of a near-term financing for the project in the municipal bond market.

TECH HELPING CREDIT

As an older city with structural financial difficulties, an emphasis on technology in Philadelphia’s financial management might not be expected. The Mayor’s proposed FY 2018 budget message offers comments which suggest otherwise. The comments detail how applying the right enforcement tool at the right time on the right account is essential for the efficient collection of delinquent revenue, and data analysis allows the City’s Department of Revenue to better understand the characteristics of an account and identify the best course of action. In FY17, the City launched a Data Warehouse and Case Management system. When fully implemented, the system will pull information about the individuals and businesses that have debts to the City into a single location, allowing a comprehensive picture to emerge and providing the tools to turn information into revenue.

In partnership with researchers from the University of Pennsylvania, the City tested various messages in letters to delinquent account holders to determine the most effective communications to produce payment. By the end of FY17, the Department of Revenue will begin using predictive analytics to score delinquent accounts to see how much money will likely be collected and what type of enforcement will be the most efficient. Without this data-driven approach, resources and time would be used less efficiently either pursuing cases that would resolve on their own or are unlikely to respond to a particular approach. Revenue has already made progress toward collecting every dollar that is owed. For example, the percent of real estate taxes owed that are paid within the first year has increased from 86.6% in Calendar Year 2011 to 94.2% in Calendar Year 2015.

CIVIL ENGINEERS GRADE INFRASTRUCTURE

Every four years, America’s civil engineers provide a comprehensive assessment of the nation’s 16 major infrastructure categories in the American Society of Civil Engineers’s Infrastructure Report Card. Using a simple A to F school report card format, the Report Card examines current infrastructure conditions and needs, assigning grades and making recommendations to raise them. The latest report was released last week and the results were not good. The overall grade assigned was a D+.  A D+, according to the report, means the infrastructure is in poor to fair condition and mostly below standard, with many elements approaching the end of their service life. It also indicates that a large portion of the system exhibits significant deterioration. Condition and capacity are of serious concern with strong risk of failure.

A grade reflects a wide variety of criteria. Does the infrastructure’s capacity meet current and future demands? What is the infrastructure’s existing and near-future physical condition? What is the current level of funding from all levels of government for the infrastructure category as compared to the estimated funding need? What is the cost to improve the infrastructure? Will future funding prospects address the need? What is the owners’ ability to operate and maintain the infrastructure properly? Is the infrastructure in compliance with government regulations?

To what extent is the public’s safety jeopardized by the condition of the infrastructure and what could be the consequences of failure? What is the infrastructure system’s capability to prevent or protect against significant multi-hazard threats and incidents? How able is it to quickly recover and reconstitute critical services with minimum consequences for public safety and health, the economy, and national security? What new and innovative techniques, materials, technologies, and delivery methods are being implemented to improve the infrastructure?

The findings are not a surprise to those of us who follow these events. California has extensive needs in a number of areas as does Pennsylvania and Texas. Drinking water and wastewater needs are greatest in the northern rural states. Bridges are a particular issue in California, Oklahoma, Pennsylvania, and Iowa. Road costs are highest on the West Coast and in the northeast. School needs are the greatest in poorer rural areas. Rail is an issue in the northeast and the Rust Belt as well as in Texas.

Depending on the category, the needs are not all based on age. In a category like schools for instance, much of the need is based on the use of short-term measures to meet greater demand which has now become permanent. As knowledge has increased, much of the need is based on the requirement for more environmental resilience for facilities new and old.

Specific sectors are detailed. U.S. airports serve more than two million passengers every day.  Congestion at airports is growing; it is expected that 24 of the top 30 major airports may soon experience “Thanksgiving-peak traffic volume” at least one day every week. With a federally mandated cap on how much airports can charge passengers for facility expansion and renovation, airports investment needs face a $42 billion funding gap between 2016 and 2025.

American transit systems carried 10.5 billion passenger trips in 2015. This is a 33% increase from 20 years ago, when transit carried 7.9 billion trips, but is 250 million trips less than in 2014 (the Uber effect). 11% of American adults reported taking public transportation on a daily or weekly basis in 2015. Buses are the most common form of public transportation, accounting for approximately half of passenger trips in 2015. The 15 heavy rail (subway/metro) systems comprise the majority of non-bus trips, accounting for over a third of total passenger trips. While transit has higher ridership in urban areas, there are nearly 1,400 public transit systems in rural areas, providing paratransit, bus, commuter bus, and vanpool service.

In 2016 alone, U.S. roads carried people and goods over three trillion miles—or more than 300 round trips between Earth and Pluto. After a slight dip during the 2008 recession, Americans are driving more and vehicle miles travelled is at its second highest-ever level, second only to 2007. More than two out of every five miles of the nation’s urban interstates are congested. Of the country’s 100 largest metro areas, all but five saw increased traffic congestion from 2013 to 2014. In 2014, Americans spent 6.9 billion hours delayed in traffic—42 hours per driver. All of that sitting in traffic wasted 3.1 billion gallons of fuel. The lost time and wasted fuel combine for a total economic impact in 2014 of $160 billion.

Nearly 240 million Americans – 76% of the population – rely on the nation’s 14,748 treatment plants for wastewater sanitation. By 2032 it is expected that 56 million more people will connect to centralized treatment plants, rather than private septic systems – a 23% increase in demand. In the U.S., there are over 800,000 miles of public sewers and 500,000 miles of private lateral sewers connecting private property to public sewer lines. Each of these conveyance systems is susceptible to structural failure, blockages, and overflows.

The U.S. has 614,387 bridges, almost four in 10 of which are 50 years or older. 56,007 — 9.1% — of the nation’s bridges were structurally deficient in 2016, and on average there were 188 million trips across a structurally deficient bridge each day. While the number of bridges that are in such poor condition as to be considered structurally deficient is decreasing, the average age of America’s bridges keeps going up and many of the nation’s bridges are approaching the end of their design life. The most recent estimate puts the nation’s backlog of bridge rehabilitation needs at $123 billion.

REGULATORS GET A PLEA BUT IS IT A ONE OFF?

Aaron Troodler, the former executive director of the Ramapo (NY) Local Development Corp. has pleaded guilty to securities fraud — the first conviction for criminal federal securities fraud in connection with municipal bond issuances, according to a U.S. attorney. The U.S. alleges that Troodler and Ramapo’s supervisor and director of finance lied to investors in the town’s and RLDC’s bonds, some of which were used to finance a minor league baseball stadium, in order to conceal the deteriorating state of Ramapo’s finances and the inability of the RLDC to make scheduled payments of principal and interest to holders of its bonds from its own money.

The fraudulent activity, which included information provided in the preliminary official statement for the bonds, was designed to conceal the town’s deteriorating general fund Ramapo’s primary operating fund. The general fund was estimated to have faced deficits ranging between $250,000 and $14 million between the town’s fiscal years 2009 and 2014. As of August 2015, the town had more than $128 million in outstanding bonds that had been issued for various municipal purposes while the RLDC, which is owned by the town, had issued $25 million in bonds to pay for the minor league baseball stadium.

The fraud preceded the construction of the baseball stadium. Ramapo paid more than half the cost even after the town’s citizens had voted to reject paying for the stadium through bonds in a 2010 referendum.  The finance director had publicly stated that no public money would be used. It is charged that the finance director also lied to agencies which rated the RLDC’s bonds in 2013 when he said the 2012 general fund balance would remain unchanged from the 2011 balance.

The plea is an important step in support of ongoing efforts to improve disclosure and to discourage fraudulent activities by those who issue bonds in the public markets. While it may have required a fairly egregious act of fraud to spur criminal prosecution, municipal investors should take heart that there will finally be real consequences for perpetrators. At the same time our optimism is tempered by the recent moves to replace U.S. prosecutors who have been active in working against municipal securities fraud.

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