Editors Note: Now that we are back from vacation, we hope that you notice the change in format to the municreditnews.com. We will continue our normal editorial focus but will add information on the three largest pending deals on the calendar each week in each Tuesday’s edition. On Thursday’s we will retain our historic practice of commentary on current credit events and trends.
We also feel that we have established the value of our information and insights in the marketplace. As such, over the next month, we will be converting from an unlimited access model to a subscription model. Stay tuned for more information on this change so that you may continue to benefit from our efforts.
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
GENERAL REVENUE BONDS
$447,830,000* Tax exempt Bonds, $186,225,000* and
$500,000,000* Taxable Bonds and Notes
Moody’s: “Aa2” S&P: “AA” Fitch: “AA”
The General Revenue Bonds are the broadest pledge of the university secured by a pledge and lien on gross student tuition and fees, indirect cost recovery from grants and contracts, net sales and service revenue, net auxiliary revenue, and unrestricted investment income. In addition, recently enacted legislation allows the Regents to pledge its annual General Fund support appropriation, less the amount required to fund general obligation debt service payments for the portion of state general obligation bonds funded for university projects.
Currently, the General Revenue Bonds are the senior most outstanding obligations of the university, but the Indenture permits the Regents to incur additional indebtedness secured by a pledge and lien on General Revenues senior in priority to the General Revenue Bonds. Certain other financial obligations, including $1.1 billion revolving credit facilities, are on parity with the General Revenue Bonds.
Other bonds rated on par with the General Revenue Bonds include: The California Statewide Communities Development Authority’s Recovery Zone Economic Development Bonds (parity pledge); The California Infrastructure and Economic Development Revenue Bonds Sanford Consortium Project (university guaranty).
The reaffirmed ratings and bond sale come at a time when the University’s oversight of the system has been questioned. A new state audit that the office of the University’s CEO accumulated tens of millions of dollars in secret reserves and inappropriately interfered with the audit. The audit comes at a time when the Legislature is debating a proposal by UC to raise tuition this fall. The audit has bolstered opposition to such an increase. The debate has not been cited as a factor in the ratings.
KENTUCKY ECONOMIC DEVELOPMENT FINANCE AUTHORITY
(Owensboro Health, Inc.)
Fitch: BBB/Stable Moody’s: Baa3/Stable
OHI is a two hospital system with the flagship hospital located in Davies County in Western Kentucky. The hospital is designated as both a sole community provider and a rural referral center. Additionally, the system offers a variety of inpatient and outpatient services that range from minor outpatient surgery to open heart surgery and complex micro vascular surgery. The bonds are secured by an interest in Pledged Revenues of the obligated group as defined in the bond documents, and a mortgage lien on certain real estate owned by OHI or Owensboro Health Medical Group. The obligated group includes OHI, which owns the hospital, and its subsidiary Cooperative Health Services and constitutes 98% of system revenues and total assets. A debt service reserve fund is in place.
As a sole community provider and rural referral center, OHI benefitted from the expansion of Medicaid under Obamacare in Kentucky. With a leading market position in a growing primary service area, the impacts of Obamacare on revenue growth have led to consistent operating performance, and continued absolute liquidity growth. The rating also favorably incorporates the system’s conservative debt structure and frozen pension plan.
The hospital does remain vulnerable to proposals to repeal and replace Obamacare. So the ongoing debate creates some uncertainty for the longer term outlook for the credit. This is a concern as the next step down in rating would be to below investment grade which would raise valuation and liquidity issues for bondholders.
STATE OF WISCONSIN
GENERAL FUND ANNUAL APPROPRIATION REFUNDING BONDS OF 2017, SERIES C (TAXABLE)
Moody’s: Aa2 positive
The bonds are general obligation bonds, secured by the full faith and credit of the state of Wisconsin. Wisconsin is the twentieth largest state, with a population of 5.7 million. Its GDP ranks twentieth among states. While there is limited executive authority to reduce mid-year appropriations which can be a problem during times of downturn, this is offset by a fully funded pension system and limited OPEB liability. This pension position puts Wisconsin in a leading position among the states in this important credit consideration. The value of this cannot be understated.
Moody’s assigns a positive outlook to its rating based on revenue performance which has been positive, liquidity which has improved, and conservative management of retiree benefits limits future budgetary pressures, all of which, if continued, would allow the state to improve its reserves and balance sheet.
AN INTERESTING WAY TO LOOK AT GOVERNMENT FINANCES
Steve Ballmer, the former CEO of Microsoft, has announced the creation of a new website designed to look at government operations and finances from a businessman’s perspective. USAfacts.org is the product of a research project funded by Mr. Ballmer that seeks to mine data from federal, state, and local governments and to present it in a corporate form. In fact, its primary result is what is calls a 10K for governments.
It is an interesting effort. Its format effectively copies that of a 10K for a business. It is an effort to make government operations and finances more understandable to a “layman” and to generate an appreciation and understanding of exactly what government does and why and make government look less like a faceless bureaucracy. Whether it succeeds or not is debatable given that the resulting document is 170 pages long and as exciting to read for the average person as a corporate 10K might be. Mr. Ballmer insists that he has no political agenda but it is fairly clear that he is not ideologically opposed to big government.
As a municipal analyst, I find the most useful result of the effort to be the complexity of the resulting product. The report relies on many diverse sources of data which it acknowledges do not necessarily present information in ways which comport with governmental accounting standards, varying state legal requirements, or simply the realities of reporting requirements in the municipal bond market. As such, it makes clear to those who criticize the municipal market or who devalue the usefulness of the municipal analyst community that their perceptions are likely quite off the mark.
Selfishly, we hope that the effort helps to increase the value of efforts such as ours to illuminate the world of municipal bonds and credit.
Kansas collected $424.8 million in total revenue for the month of March and $4.2 billion for the current fiscal year. The total puts all revenue collections $57.5 million more than estimates for the fiscal year to date. Total tax collections were $11.6 million below expectations for the month. State sales tax receipts were $2.3 million more than anticipated while individual income tax receipts were $11.1 million below expectations for March. “Although withholding receipts grew $7.6 million compared to the prior year, that was offset by $12.3 million more in refunds paid out this month compared to March 2016, pulling individual income tax receipts below estimates,” said Revenue Secretary Sam Williams. “The March revenue receipts continue the trends we have seen over the last few months – withholding and state sales tax collections continue to improve, reflecting an encouraging job and consumer environment for Kansans.” Earlier this year, the Internal Revenue Service announced it was holding all refunds for taxpayers claiming Earned Income Tax Credits and Additional Child Tax Credits until mid-February for extra scrutiny as a fraud prevention measure. The delay also pushed back when Kansas received many of those returns, so refunds typically paid in late-January or February are being paid out in March.
Southern Company had previously reported Georgia Power’s entry into an Interim Assessment Agreement (the “Interim Assessment Agreement”), on behalf of itself and as agent for the other Vogtle Owners, with the Contractor, the bankrupt entity Westinghouse. The term of the Interim Assessment Agreement was originally scheduled to expire on April 28, 2017. On April 28, 2017, Georgia Power (for itself and as agent for the other Vogtle Owners), the Contractor, and WECTEC Staffing entered into an amendment to the Interim Assessment Agreement solely to extend the term of the Interim Assessment Agreement through the earlier of (i) May 12, 2017 and (ii) termination of the Interim Assessment Agreement by any party upon five business days’ notice. The other terms of the Interim Assessment Agreement remain unchanged.
Georgia Power, for itself and as agent for the other Vogtle Owners, is also negotiating a new service agreement which would, if necessary, engage the Contractor to provide design, engineering, and procurement services to Southern Nuclear Operating Company, Inc. (“SNC”), in the event SNC assumes control over management of construction of Plant Vogtle Units 3 and 4.
Georgia Power and the other Vogtle Owners are continuing to conduct a comprehensive schedule and cost-to-complete assessment, as well as a cancellation cost assessment, to determine the impact of the Contractor’s bankruptcy filing on the construction of Plant Vogtle Units 3 and 4 and to work with the Georgia Public Service Commission to determine future actions related to Plant Vogtle Units 3 and 4.
SCANA Corporation (SCANA) and Santee Cooper announced that the Interim Assessment Agreement with Westinghouse Electric Company, LLC concerning the nuclear construction project at the V.C. Summer Nuclear Station has been amended. The primary amendment is the extension of the term of the agreement through June 26, 2017, subject to bankruptcy procedures. The agreement allows for a transition and evaluation period, during which South Carolina Electric & Gas Company (SCE&G), principal subsidiary of SCANA, and V.C. Summer Nuclear Station project co-owner, Santee Cooper, can continue to make progress on the site.
During this period, Fluor will remain in its current role, and the project’s co-owners will continue to make weekly payments for work performed during the interim period. The agreement extension allows the co-owners additional time to maintain all of their options by continuing construction on the project, while examining all of the relevant information for a thorough and accurate assessment to determine the most prudent path forward.
So both of the municipal entities (MEAG and Santee Cooper) are giving themselves additional time to review their options which include a potential cancellation. They have however, established different timelines for their respective processes. economics will likely determine the final outcome but other matters may intervene. A recent example involves the essential technology, which is considered the “intellectual property” .The “debtor-in-possession” financing being sought by Westinghouse to pay bills while reorganizing during the Chapter 11 case could threaten the ownership of the AP1000 technology, according to an objection to the DIP financing filed last week by the Georgia plant’s owners. “The owners object to the DIP financing motion to the extent it proposes to grant the DIP lenders liens on the intellectual property,” which is the technology needed to complete the project at Vogtle, the filing said. A similar objection has not yet been filed by SCANA (SCG) or Santee Cooper. Ongoing construction is being funded by the lead investor-owned utilities.
STADIUM DEBT IS NOT JUST A MAJOR LEAGUE ISSUE
The Oakland A’s may have huge stadium issues at the major league level having seen numerous proposals come and go to replace its outmoded home originally built for the departing Oakland Raiders football team. That has not been the case for its teams at the lower levels of its minor league system. A’s affiliate, the Midland Rockhounds, has been playing in a modern minor league ballpark which was municipally financed in 2000 and 2001. Unlike many other such ventures, this one may actually have worked out for the sponsoring municipality, Midland TX.
The Midland City Council is anticipated to approve a recommendation to pay off the debt related to the construction of the Scharbauer Sports Complex. The bonded debt for the stadium is payable from the city’s sales tax. Should the council vote to pay off the debt it would also end the tax. It would stop being collected later this spring. Unless voters approve an extension, the city’s sales tax would return to 8 percent from 8.25 percent. The bonds related to the sports complex totaled $15.698 million, including $2.078 million in interest. The city expects to save approximately $1.323 million in interest payments versus paying off the debt in 2022.
If voters approve the 4B extension, the city’s sales tax would remain at 8.25 percent. Even after paying off the debt related to the construction of the complex and using 4B revenue for maintenance, operations and capital expenditures, there will be $27.939 million left over, according to City Finance Director Pam Simecka.
That revenue stream is attractive for city and community leaders with eyes on improvements. Expectations are a new 4B could raise as much as $10 million or $11 million a year. Over the 15-year life of the tax, that could be $150 million, plus the leftover $27.9 million.
WASHINGTON STATE BUDGET AT RISK
On December 13, Washington State Governor Jay Inslee delivered a budget proposal covering fiscal 2018 and fiscal 2019, calling for $95 billion in spending from all fund sources over the next two years on operating expenses plus transportation capital costs. This includes $46.4 billion in general fund spending (including several other accounts including the Education Legacy Trust Account, Opportunity Pathways Account, and Budget Stabilization Account), compared to the $38.45 billion enacted budget for the current biennium. The budget assumes a 6.7 percent general fund revenue increase (before policy changes proposed by the governor).
The first priority of the governor’s budget is to fully fund K-12 education; the state must develop a detailed plan to comply with a 2012 state Supreme Court order over school funding. The governor’s proposed K-12 package would send $2.7 billion in additional dollars to local school districts for employee compensation, as well as $1.1 billion to continue reducing class sizes, address opportunity gaps and other strategic priorities, and $1 billion for new school construction.
To help finance this package and other initiatives, the governor proposes net new revenues totaling $4.4 billion over the biennium, including increasing the business and occupation tax rate ($2.3 billion), a new tax on carbon pollution ($1.1 billion), and a new tax on capital gains ($821 million). The budget also prioritizes several initiatives to overhaul the state’s mental health system and expand community-based services, directs $56 million to higher education institutions to freeze tuition for two years, and funds a modest pay increase for most government employees.
The problem is that one of the State’s sources of high wage industrial employment, Boeing, has been pursuing a fairly relentless series of job cuts at its Everett site. The company told staff in a memo Monday that “hundreds of Engineering employees” in Washington state will receive layoff notices on April 21. This follows a round of voluntary buyouts Boeing offered in January. That proposal was accepted by more than 300 engineering staff and 1,500 members of the Machinists union. About 1,000 machinists who accepted that buyout offer will leave permanently on the 21st as well. In late March, Boeing issued an earlier round of 245 involuntary layoffs, including 62 engineering staff and 111 machinists, that will take effect in mid-May. Boeing cut almost 7,400 jobs in the state last year. The actions followed on the heels of a decision to cut 777 production in Everett from seven planes per month to five per month beginning in August.
So we will see how this budget plan actually looks like after the legislative process given the changing job outlook in the State.
INDIANA GAS TAX
Gov. Eric Holcomb signed into law Thursday afternoon effective starting July 1, that will require Hoosiers to pay an extra 10 cents per gallon gas tax to help pay for roads plan. The tax at the pump will rise to 28 cents a gallon. Hoosiers also will pay more fees at the Bureau of Motor Vehicles, starting in January. Under the roads plan approved by state lawmakers this past week, registration fees for most vehicles will rise by $15. The new law also imposes a $50 on hybrids and a $150 fee on electric cars. In addition to taxes and fees, the roads plan also helps to clear the way for tolls on interstates, though that option may be several years away.
Holcomb said he plans to have a draft of a toll road plan by the end of 2018. Indiana’s gas tax rate will now be higher than all its neighboring states, according to numbers from Tax Foundation.org.
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.