Muni Credit News March 30, 2017

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

A DESERVED DOWNGRADE FOR NEW JERSEY

MORE BUDGET BLUES IN N.E. PENNSYLVANIA

ST. LOUIS TO CONSIDER PRIVATIZATION FOR LAMBERT AIRPORT

KANSAS LOOKING AT A GAS TAX INCREASE

NUCLEAR FINANCE MELTDOWN REVISITED

REGULATORY ISSUES AND MUNICIPALS

RAIDERS VEGAS MOVE APPROVED WITH STATE FINANCING

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A DESERVED DOWNGRADE FOR NEW JERSEY

Moody’s Investors Service has downgraded to A3 from A2 New Jersey’s general obligation rating. The ratings on the state’s appropriation-backed debt, other GO related debt, moral obligation debt, intercept programs and certain special tax bonds that require state appropriation have also been downgraded by one notch. The downgrade affects approximately $37 billion of rated debt. The downgrade reflects the continued negative impact of significant pension underfunding, including growth in the state’s large long-term liabilities, a persistent structural imbalance, and weak fund balances. Despite the state’s significant increases in pension contributions since fiscal 2012, contributions remain well below the actuarial recommended contribution and unfunded pension debt continues to grow.

It also reflects the expectation that the statutory pension contribution schedule will be increasingly difficult to meet given the lack of structural budget adjustments to incorporate General Fund tax reductions that took effect in January 2017 (Chapter 57) and the state’s reliance on optimistic revenue growth assumptions to balance the budget. Without balancing actions, the recent tax cuts will reduce revenues by $1.1 billion by fiscal 2021 and strain the state’s ability to resolve its large structural imbalance in the near term.

One might ask what took so long. It is clear that the Christie method of bullying and bluster has been long played out and that any serious efforts at budget and pension reform will await a new administration in 2018. We believe that the long term outlook remains negative given the lack of consensus and political will which continue to plague the State’s efforts to restore fiscal integrity on both the legislative and executive fronts.

MORE BUDGET BLUES IN N.E. PENNSYLVANIA

Hazelton is one of those smaller northeastern Pennsylvania cities based in manufacturing and mining that saw its economic heyday prior to World War II. Since then, slow steady declines in those sectors have reduced employment, population, and general economic conditions. As its population ages, its demand for services has maintained itself while available resources have become more constrained. this has increased the precariousness of its municipal financial position.

Refinancing two bond issues that the city of Hazleton secured in 2005 could free up funds and help plug a revenue shortfall in the city budget. A financial advisory has pitched plans for refinancing $2,855,000 in bond issues that the city secured in 2005 at a lower interest rate. The arrangement would give the city an option of reducing debt payments or accepting a lump-sum payment that represents savings from the reduced interest rate. The savings could plug a budget gap and potentially stave off a furlough of city workers.

The city secured the bond issues in 2005 at 4.22 percent interest for a term that extends through 2025. When the city refinanced a $5.6 million borrowing in 2015 a fixed interest rate of 2.85 percent. Using that figure as a benchmark, one city council member said refinancing of the $2.855 million bond issue would yield a “conservative” estimated savings of between $90,000 and $100,000.

Council members and the mayor disagree on reasons why the city faces a shortfall. The mayor cited $371,000 in “wage cuts” that he said council made to the budget and unrealistic revenue projections when announcing earlier this month that the city will have to furlough some of its employees beginning April 3. Council, however, contends the shortfall is due to the mayor’s refusal to finalize an arrangement that it approved for selling delinquent tax to Municipal Revenue Services for an advance payment. The mayor said unpaid property taxes totaled nearly $421,000 for 2016 but the city would’ve received about $387,000 from MRS after paying fees.

The city could avoid those costs if it were to receive the money in smaller increments over a longer period of time through Luzerne County’s contracted delinquent tax collection agency. The mayor claimed recently that the city would receive about $387,000 through MRS or about $227,000 this year by receiving delinquent taxes directly from the county’s collection agency. The mayor city could make up the $160,000 revenue shortfall through savings Hazleton will realize as the police chief and administration opted for lower-risk insurance policies that should yield a savings of between $160,000 and $180,000, the mayor said.

Council will consider the 2005 bond issue refinancing when it meets April 4.

ST. LOUIS TO CONSIDER PRIVATIZATION FOR LAMBERT AIRPORT

The city of St. Louis has submitted a preliminary application to the Federal Aviation Administration’s Airport Privatization Pilot Program, which could allow it to privatize operations of St. Louis Lambert International Airport. The application is being submitted under the terms of a 1997 federal law, which was reauthorized in 2012, allows up to 10 public airports to lease the facilities to private operators. Five airports are currently approved, and city officials said they did not know how many airports are competing for the remaining five slots.

The City hopes that the plan could generate millions of dollars more from the airport, perhaps helping the city invest in projects like a north-south MetroLink expansion. The city, which owns the airport, currently receives about $6 million from the facility per current law.  Grow Missouri Inc. is a nonprofit funded by billionaire investor Rex Sinquefield, a political activist pushing an end to the city’s earnings tax and a St. Louis city-county marriage.

The extra money would be generated for the city and for upgrades at the airport, would come from the private operator under a long-term lease agreement with the city. The city contends that the plan would allow the city to avoid restrictions on using airport funds for municipal purposes. In its view a deal could mean a large, upfront influx of cash for the city. The city would still own the airport under any agreement.

Lambert was at one time a major hub facility for TWA and then for American Airlines. No longer a hub facility, the airport has been pressed for funds to finance expansions after under taking a major runway expansion to support hubbing. The airport is a more likely facility than many others for a P3 . Lambert’s runways have long been used for test flights and deliveries of military aircraft by McDonnell Douglas, which built its world headquarters and principal assembly plant next to the airport; and now by Boeing, which bought McDonnell and now uses its St. Louis facilities as headquarters for its Boeing Defense, Space Security division. The plant currently builds the F-15 Strike Eagle, F/A-18 Super Hornet and Growler; and is home to Boeing Phantom Works.

KANSAS LOOKING AT A GAS TAX INCREASE

We have been following the ups and downs of Kansas’ ongoing budget crisis. The effort to balance the general fund has included the use of transfers from the State’s Highway Fund and we have been concerned that this would diminish the State Highway Fund credit. Now, House Bill 2382 has been proposed which calls for an increase in the state’s gas tax from 24 to 35 cents per gallon.

Most of the money would go the Highway Fund with the remainder being distributed to counties and cities. It is receiving support because the legislation would include constitutional provisions prohibiting transfers to the General fund. A driver driving 15,000 miles per year in a car getting 20 mph would see a tax increase of $82. The proposal joins a number of other more modest gas tax increase proposals as Kansas grapples with its ongoing deficit financing efforts.

NUCLEAR FINANCE MELTDOWN REVISITED

Westinghouse Electric Co., the nuclear engineering firm overseeing construction of new generating facilities in Georgia and South Carolina, filed for bankruptcy. The filing leaves questions about the fate of four reactors under construction in the United States. The filing results in a host of legal questions about whether Toshiba remains responsible for losses at Westinghouse and whether the utilities that own the reactors under construction will have to eat more of the cost of completing them. That could mean higher rates for consumers in those areas. In seeking protection under Chapter 11 of the bankruptcy act, Westinghouse could still finish building those plants.

Westinghouse said it has arranged $800 million in debtor-in-possession financing so that it can continue to serve customers while restructuring its business.  Scana Corp and Southern Co., the power utilities which hired Westinghouse to build the first nuclear power plants in the United States in more than 30 years, have also hired restructuring advisers. In a potential Westinghouse bankruptcy, Scana and Southern Co would be among Westinghouse’s largest creditors, owed the cost overruns on the projects, which tally in the billions of dollars, one of the people added. The utilities are hoping to recover these costs in a bankruptcy process for Westinghouse.

At Georgia’s Votgle plant, the latest completion deadlines of December 2019 and September 2020 for the two new reactors — already more than three years behind schedule — “do not appear to be achievable,” Oglethorpe Power Co. said in a filing to the U.S. Securities and Exchange Commission. Georgia Power will be cutting it close to get the new nuclear plants completed ahead of a deadline contained in a deal it reached last year with state regulators.

Under that settlement with the Georgia Public Service Commission, the Atlanta electric utility must have the plants in running condition by the end of 2020, or its profit margin allowed on the project will be cut by roughly a third.

It matters to municipal bond investors in debt issued by South Carolina Public Service Authority (debt rated A1 AA- A+, co-owner of Sumner) and the Municipal Electric Authority of Georgia (debt rated A2 A+ A+, co-owner at Votgle). They are owners of significant shares of the two plants currently under construction. The financing plans are different at the two facilities. The Votgle project is the beneficiary of Energy Department loan guarantees. The Sumner project does not have any such guarantees.

Santee Cooper said it will spend up to $250 million over a period of up to 90 days to keep V.C. Summer construction on track. The utility’s board of directors authorized the spending during a special meeting Monday but did not release details of the plan until the bankruptcy was official. It owns 45% of the plant. It is conducting a study to determine whether it will need to increase power prices to help pay for the two new reactors but that review is not related to any additional costs a Westinghouse bankruptcy could bring. Santee Cooper increased rates by 3.7 percent in both 2016 and 2017 to help pay for the new nuclear units. A two notch downgrade now would seem to be appropriate at present.

As for MEAG and the Votgle project, the chairman of the Georgia Public Service Commission said the utilities developing the Alvin W. Vogtle generating station in the state would have to evaluate whether it made sense to continue. “It’s a very serious issue for us and for the companies involved,” Mr. Wise said. “If, in fact, the company comes back to the commission asking for recertification, and at what cost, clearly the commission evaluates that versus natural gas or renewables.”  A termination would leave MEAG with significant sunk costs to be recovered from rates. MEAG owns 22.7% of Votgle.

REGULATORY ISSUES AND MUNICIPALS – SANCTUARY CITIES

State and local governments seeking Justice Department grants must certify they are not so-called sanctuary cities in order to receive the money, Attorney General Jeff Sessions announced. Sessions cited the Illegal Immigration Reform and Immigrant Responsibility Act, a law passed in 1996, which includes a section providing that no state or local entity can in any way restrict its law enforcement officials from communicating with federal immigration authorities about a person’s immigration status. Sessions said that compliance with federal immigration laws will be a prerequisite for states and localities that want to receive grants from the Department’s Office of Justice Programs. The office provides billions of dollars in grants and other funding to help criminal justice programs across the country. The Department of Justice will “also take all lawful steps to claw back any funds awarded to a jurisdiction that willfully violates 1373.” This would impact what he described as an expected $4.1 billion in federal grants.

The announcement followed a January 25 executive order from the President. It was timed to occur simultaneously with  a conference on sanctuary city policy hosted by ThinkProgress, an editorially independent project of the Center for American Progress Action Fund. Sanctuary cities are fighting back against the move led by the larger cities which are emphasizing the role of the funding to support anti-terror activities in major metropolitan areas. One representative has characterized the move as the federal government playing Russian roulette. Away from the emotional component of the issue, the dollars involved are significant but the concept of “clawing back” already disbursed funds is the most disturbing from a credit point of view.

REGULATORY ISSUES AND MUNICIPALS – COAL POWER REGULATIONS

Just last week, Robert Murray, the founder and CEO of Murray Energy, said Trump should “temper his expectations,” given the way market forces — rather than regulations — have hurt the coal industry and reduced employment. On August 3, 2015, President Obama and EPA announced the Clean Power Plan – a plan to reducing carbon pollution from power plants. When the Clean Power Plan was fully in place in 2030, carbon pollution from the power sector was to be 32 percent below 2005 levels and by 2030, emissions of sulfur dioxide from power plants would be 90 percent lower compared to 2005 levels, and emissions of nitrogen oxides would be 72 percent lower.

President Trump this week signed an executive order to direct the Environmental Protection Agency to undo the Clean Power Plan, a rule issued under Obama to cut electricity-sector carbon emissions. “My administration is putting an end to the war on coal,” Trump said. “Perhaps no single regulation threatens our miners, energy workers and companies more than this crushing attack on American industry.” The order is meant to encourage the use of clean coal technologies. These would go beyond existing scrubbing techniques. Leading among them are carbon capture and storage (CCS). Development of CCS for coal combustion has lost momentum in the last few years, partly due to uncertainty regarding carbon emission prices.

The Global CCS Institute established in 2009 and based in Australia aims “to accelerate the development, demonstration and deployment of carbon capture and storage (CCS). In mid-2016 the Global CCS Institute said that there were 15 large-scale CCS projects in operation, with a further seven under construction. No commercial-scale power plants are operating with this process yet. At the new 1300 MW Mountaineer power plant in West Virginia, less than 2% of the plant’s off-gas is being treated for CO2 recovery, using chilled amine technology. This has been successful. Subject to federal grants, there are plans to capture and sequester 20% of the plant’s CO2, some 1.8 million tons of CO2 per year. Capture of carbon dioxide from coal gasification is already achieved at low marginal cost in some plants. One (albeit where the high capital cost has been largely written off) is the Great Plains Synfuels Plant in North Dakota, where 6 million tons of lignite is gasified each year to produce clean synthetic natural gas.

About 2005 the DOE announced the $1.3 billion FutureGen project to design, build and operate a nearly emission-free coal-based electricity and hydrogen production plant. Some $250 million of the funding was to be provided by industry, from about eight companies. After identifying a suitable sequestration site in Morgan County, the design phase of the project was announced in February 2013. Construction was due be completed in 2015, with the project being on line mid-2016, but this was delayed as most members of the FGA dropped out, leaving only Peabody, Glencore and Anglo American. In February 2015 DOE cancelled further funding for the project, after having spent $202 million on it.

The Trump administration plans to ask federal courts to suspend lawsuits over the EPA climate regulations and send the rules back to the agency to be rewritten or withdrawn. But the D.C. Circuit Court of Appeals, which heard arguments on the Clean Power Plan six months ago, does not have to go along. The appeals court judges could rule any day on the Clean Power Plan, and a separate D.C. Circuit panel has scheduled oral arguments on the future plant rule for April 17.

Utilities have moved away from coal in favor of cheaper and cleaner fuels, such as prevalent and inexpensive natural gas. We think that economics will continue to govern the choices made by municipal utilities and that the near term impact on municipal credits of the Trump policy changes will be minimal if any. As for the economic impact on coal producing state economies, mining jobs have been in decline for decades as automated equipment increasingly unearths coal, doing the work that once required pick axes and mules. Coal producers have had little interest in adding new federal reserves to their portfolios, amid slumping domestic demand. Existing federal leases contain at least 20 years’ worth of coal, according to Interior Department estimates.

The near term impact on municipal electric utilities should be minimal.

RAIDERS VEGAS MOVE APPROVED WITH STATE FINANCING

The Raiders are the only NFL team to share a stadium with a Major League Baseball franchise. That will change in a couple of years after they received enough votes from NFL owners on  relocate to Southern Nevada. The Raiders will still play in Oakland in 2017, and possibly longer. With a 65,000-seat domed stadium that will cost $1.9 billion to be shared with UNLV not expected to open until 2020, Raiders owner Mark Davis has plans on staying in Oakland the next two seasons. The team holds a pair of one-year options at the Oakland Coliseum.

After the vote, Oakland’s mayor said “I am proud that we stood firm in refusing to use public money to subsidize stadium construction and that we did not capitulate to their unreasonable and unnecessary demand that we choose between our football and baseball franchises.” It had however, committed that the end of the 2024 season is the latest date by which the existing Coliseum would be vacated for demolition.  This demolition work cost is already included in the City’s infrastructure budget.

The Raiders have committed $500 million toward the project, with another $750 million coming in the form of a hotel tax passed by the Nevada Legislature in October. The move concludes an awkward dance which has been played out repeatedly over the last nearly three decades.

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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