Muni Credit News March 5, 2015

Joseph Krist

Municipal Credit Consultant


Once again the market finds itself disappointed by the lack of timely follow through by the government of PR. The pattern of failed promises and lack of decisive timely action has become more than tiresome but unfortunately it is the basic m.o. in regard to its ongoing debt crisis. The latest example is the announcement on February 27 that PREPA continues in talks with creditors on the possibility of extending leniency agreements, which expire by its mandate on March 31, 2015.

PREPA said the Authority continues in productive talks with creditors on extending existing forbearance agreements,” through Lisa Donahue who leads the  official restructuring of the public corporation. “We have been working diligently with the Authority and all stakeholders in the operational transformation of the company.   To date, we have progressed significantly, but much remains to be done and as a result, we have not finalized the plan to present to creditors. Some time ago, we informed creditors would not reach the agreed date. Creditors are aware of the situation and have not taken any adverse action, “said Donahue.

“While most of the media coverage has focused on restructuring the debt of the Authority and talks with creditors, it is important that all employees, suppliers and customers understand that the restructuring of the Authority includes an operational transformation complete to ensure the reliability of service. We continue to work on efforts to create the infrastructure and financial resources needed to overcome the energy challenges of Puerto Rico and transform the Authority in a self-sustaining corporation, “said John F. Alicea Flores, executive director of the public corporation.

At some point the government of PR must realize that the juxtaposition of events such as that which occurred last week – the House hearings on Chapter 9 authorization followed by the PREPA announcement the next day – simply reinforce the image of disarray and frankly ineptitude in the handling of the restructuring needed for much if not all of Puerto Rico’s debt. The longer it takes the government to act decisively and competently, the more difficult it will be for the island to recover and move on. The trail of broken promises and deadlines must come to an end.


Favorable relative trends in yield movements benefitted issuance last month. Long-term municipal bond issuance in February increased 78.5% to $29.46 billion from a year earlier, the seventh monthly gain in a row, as refundings more than doubled to $14.53 billion from $5.11 billion in February of 2014, according to Thomson Reuters. Advanced refundings were the catalyst for issuance as long and intermediate tax exempt yields declined whie shorter dated treasury yields increased. AA 10 year yields are about 50 basis points lower this year relative to last year, while the 30 year yields are about 90 basis points lower in yield from this time last year.

Some estimate that if volume continues at the pace through February, yearly issuance could total $440 billion. Volume for the two months adds up to $56.54 billion, the most since 2010’s $59.714. January volume alone annualized to $450 billion.  New-money issuance increased 8.7% to $10.48 billion from $9.64 billion in February 2014. Negotiated issues rose to $21.85 billion (635 deals) from $10.82 billion (423 deals) for February of last year. Competitive deals increased to $7.46 billion (357 deals) from $3.78 billion (237 deals) while private placements dropped to $151.6 million from $1.90 billion.

Education, utilities and general purpose led the way. Education rose to $11.80 billion (501 deals) from $5.57 billion (257 deals), while general purpose rose to $6.78 billion (258 deals) from $3.77 billion (148 deals) in February 2014. State agencies increased issuance to $6.81 billion from $2.69 billion. Cities and towns lifted issuance to $3.60 billion from $2.06 billion while district bond sales rose to $8.63 billion from $4.37 billion. Bond insurers increased their footprint increasing par value insured to $1.93 billion in 166 deals compared to $1.16 billion in 93 deals in 2014.

The top five state issuers this past month were Texas, California, New York, Pennsylvania and Washington. Texas remained first, with $6.65 billion, up from $5.54 billion. California and New York switched positions, with California in second, at $5.43 billion from $3.84 billion. New York was third, at $4.15 billion versus $4.50 billion in 2014. Pennsylvania was fourth up from 12th, rising to $3.66 billion from $903.6 million. Washington state was fifth at $3.16 billion, up from $1.06 billion in 2014.


Gov. Bobby Jindal of Louisiana introduced an FY 2016 budget proposal last Friday with deep cuts designed  to deal with a $1.6 billion shortfall and an entrenched structural deficit. The proposed cuts are substantial, even after years of moderate and severe reductions. They would potentially result in the closures of community health care clinics and historic sites. Hospitals partly privatized by Mr. Jindal would get $142 million less than they had sought. Spending on higher education would be lower by $141 million, a further 6 percent reduction after years of cuts.

The plan attempts to avoid some of the worst-case situations by reworking certain tax credits ways that would make an additional $526 million available to meet current expenses. Previously, Gov. Jindal has been firm in his opposition to new taxes. Even the renewal of existing taxes has been off limits. Officials insisted that the proposed changes did not constitute a tax increase, because they would simply take some refundable tax credits and turn them into nonrefundable tax credits. The change would not raise taxes as far as the state is concerned but, it could result in a net higher tax burden for businesses when certain local taxes are included. The plan also includes a complicated arrangement to raise cigarette taxes to pay for a tax credit that families could use to offset a new cost, called “an excellence fee” for students attending colleges and universities.

A fight is expected in the Louisiana Legislature as many believe that greater changes are needed in the state’s generous and expensive distribution of tax credits and exemptions. At the same time, significant pressure is expected from business groups against the proposed tax credit changes. The president and chancellor of Louisiana State University  called the current proposal “a bad budget for higher education,” but also said the situation would be devastating if the Legislature were to turn down the tax credit changes and fix the deficit on cuts alone. In that case, Mr. Alexander said, thousands of classes would have to be canceled, the state’s sole dentistry school and as many as half of the agriculture centers would have to close.


Gov. Tom Wolf issued his first budget proposal as the new chief executive. The budget reduces the Corporate Net Income Tax (CNIT) from 9.99 percent to 5.99 percent – improving the commonwealth’s ranking from second highest to fourteenth-lowest and bringing Pennsylvania’s tax rate below the national average and below all of its neighboring states. It ends the often delayed phase out of the Capital Stock and Franchise Tax by eliminating it effective January 1, 2016. The personal income tax would rise to 3.7 percent – the third lowest of all states with an income tax and significantly lower than all of Pennsylvania’s surrounding states. In addition, a family of four earning up to 150 percent of the poverty level (approximately $36,000) would pay no state income taxes.

Funds reserved for property tax and rent relief will be transferred from personal income tax revenues into a restricted account. Beginning in October 2016, $3.6 billion will be transferred to the Property Tax Relief Fund and distributed to homeowners and renters. The sales tax is proposed to be expanded to be more consistent with the modern economy and the rest of the nation. The sales tax rate would increase by 0.6 percentage points, and exemptions for food, clothing and prescription drugs would remain in place. Over the next two years, the budget provides an $80.9 million increase to Penn State University, the University of Pittsburgh, Temple University and Lincoln University.

Holders of local school district credits will look favorably on proposed increases in education funding. Proposed is a $400 million (7.0 percent) increase in the Basic Education Subsidy. This increase – the largest in Pennsylvania history – will fully restore the Accountability Block Grant and Educational Assistance Program funds that were previously cut. In addition, as part of the Basic Education Subsidy, school districts will receive a reimbursement for approximately 10 percent of their mandatory charter school tuition payments. This would have a positive impact on the Philadelphia School District. Additional resources will be provided to help close the funding gap based on Basic Education Subsidy cuts instituted since the 2010-11 school year.

A $100 million (9.6 percent) increase in the Special Education Subsidy is also proposed by the Governor. This increase will continue Pennsylvania’s transition to the formula enacted in 2014 reflecting the work of the bipartisan legislative Special Education Funding Commission. The budget incorporates that formula as a permanent component of the state’s education law, known as the Public School Code. Another item is a $120 million (87.9 percent) increase in high-quality early childhood education to enroll more than 14,000 additional children in Pennsylvania Pre-K Counts and the Head Start Supplemental Assistance Program.

We expect that the final budget will be substantially different. There is however, support for local property tax relief and the expansion of the sales tax base as well as increased education  funding.


Sweet Briar College, a 700 student women’s school in VA announced that it would close at the end of the 2014-2015 school year. Continuing declines in demand created operating pressures including tuition and fees covering less than  one-third of expenses. A 10% operating loss and a 10% spend rate on its endowment reflected unsustainable trends. The school’s $25mm of debt outstanding (B- by S&P) can be paid off from remaining endowment funds which will also be applied to severance costs and the cost of assistance to students who need to transfer. The demand for single sex, rural liberal arts colleges has continued to decline and one should not be surprised to see additional instances where institutions close when they can no longer effectively compete in a changing marketplace.

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