Muni Credit News May 23, 2017

Joseph Krist

Senior Municipal Credit Consultant




Taxable Bonds

Moody’s: “A3” (Stable outlook)  S&P: “A-” (Stable outlook)  Fitch: “A-” (Stable outlook)

The wave of taxable hospital debt continues. Bond proceeds will be used for general corporate purposes including the repayment of bank lines and refinancing of certain outstanding debt obligations. NYUHC is the sole Member of the Obligated Group under the Master Indenture. Bonds are jointly secured by a pledge of gross receipts and a mortgage of certain health care facilities of NYUHC. NYU Winthrop is not a member of the Obligated Group. NYUHC is a tertiary care teaching hospital with campuses located in midtown Manhattan and Brooklyn. NYUHC owns three inpatient acute care facilities in Manhattan and Brooklyn: (1) Tisch Hospital, located in Manhattan on the campus shared with NYU School of Medicine; (2) NYU Hospital for Joint Diseases Orthopaedic Institute, an orthopaedic, neurologic and rheumatologic specialty hospital located in Manhattan, which also houses the Rusk Institute of Rehabilitation Medicine; and (3) NYU Lutheran, located in Brooklyn. NYUHC also operates over thirty ambulatory facilities in Manhattan, Brooklyn, Queens and Long Island.

NYUHC has a strong and increasingly visible brand supported by academic alignment with NYU. It has established solid operating momentum especially in light of its need to significantly recover from the physical impacts of Superstorm Sandy in 2012. It has shown clear strategic planning, careful fiscal oversight that has translated into successful execution of strategy, and healthy demand garnered by a growing clinical footprint. NYUHC does have a high debt burden, still modest balance sheet resources, still significant capital plans, execution risk of several growth strategies simultaneously, in what is a very highly competitive market.





While the budget debate plays out in Washington and there are serious indications of a desire on the part of the Trump Administration to reduce aid to transportation, states like Oregon continue to move forward with capital development of transportation assets. The Oregon Department of Transportation administers and oversees the state’s highway, public transit, rail, and traffic safety programs, and implements motor vehicle and motor carrier laws throughout the state. These functions include planning, engineering, construction, maintenance, operation, regulation and enforcement. The department collects various taxes, fees and grants to fund these functions.

Proceeds from the $250 million Series 2017A bonds will finance certain transportation projects authorized in the state’s Jobs and Transportation Act (JTA). Other proceeds of the Series 2017B bonds will refund outstanding bonds for net present value savings with no extension of maturity. Combined pledged revenues, net of certain expense deductions and statutory transfers, provide security for the bonds. Deductions include various administrative expenses and costs of collection. In addition, the state is statutorily required to make certain apportionments to cities and counties to fund highway improvements prior to paying debt service.

Ratings reflect the constitutional dedication of stable pledged revenues that provide solid debt service coverage and legal provisions are highlighted by a three times senior lien additional bonds test. The rating also incorporates the net nature of the pledged revenues, wherein certain operating expenses and revenue sharing with local governments are paid prior to debt service.



Retirement Facility Revenue Bonds

(Buckner Senior Living – Ventana Project)

Buckner Senior Living, was incorporated to develop a new CCRC. BSL has already acquired land to construct the new CCRC in north Dallas, to be known as Ventana. Current plans include 189 ILUs, 38 ALUs, 26 memory support units, 72 skilled nursing beds, and various shared spaces and amenities. Total cost of the project is estimated at $200 million, to be funded with bond proceeds in 2017 (outside the OG). Management anticipates a limited level of liquidity support and equity contribution from Buckner Foundation (BF) for this project. Proceeds will fund the cost of construction and capitalization of a portion of interest.

The structure of the financing is typical for that of a standalone CCRC credit. The credit features the typical sources of risk – construction, marketing, and timely fill up of the units. The success of the project depends on the successful execution by management in each of the primary risk areas. This requires the use of realistic and achievable assumptions as to demand for units, pricing, and the level of penetration of the local real estate market required to achieve marketing goals. In turn, these depend on the ability of the local housing market to support demand and timely and adequate funding of entrance fees.

Typical difficulties in the achievement of success for these type of project structures in the sector are delays in construction and/or unanticipated cost increases, shortfalls and resulting delays in occupancy which negatively impact available cash flows to support debt repayment. Shortfalls can reflect lower demand than expected or an unfavorable mix in demand versus the mix of units available.



In spite of the fact that he is expected to have a major role in any negotiation between the Legislature and the Governor, House Speaker Mike Turzai recently wrote Republican voters that he plans a gubernatorial run. In that May 10 letter, Turzai claimed he “sidelined” Governor Wolf’s agenda by “leading the charge” against the governor’s 2015-16 plan, and against a later bipartisan compromise that would have ended the stalemate months earlier.

If he runs, Turzai would be the first legislative leader to challenge an incumbent executive since the state constitution was changed in 1968 to allow a governor to seek two consecutive terms. Even if Turzai doesn’t go through with it, his letter signaled an adversarial relationship. Now the speaker and the Governor will be at the center of a potentially awkward and fraught negotiation that will attempt to reconcile two very different approaches to the budget.

In February, Wolf presented a $32.3 billion spending plan that would downsize state government, raise the hourly minimum wage and enact targeted business tax increases. In April, the House passed a $31.5 billion plan. It had no new taxes and no minimum wage bump. It estimated new revenue from Turzai’s long-running plan to privatize the state-owned wholesale and retail wine and liquor systems.

Since then, the state’s financial outlook has worsened. The Senate, which now has the House budget, opposes Turzai’s liquor bill in part because it actually would cost the state money, worsening the deficit. On top of that, the state police need money. Last year, the Legislature passed a bill calling on the administration to reduce the amount of gasoline and diesel fuel tax money that flows to the state police from PennDOT’s road and bridge repair fund. The reductions start July 1. To fill the first-year hole, Wolf has proposed a $25 per capita fee for municipalities that rely on full-time trooper coverage.

Without the fee or other new revenue, state police leadership estimates that 800 troopers could be laid off and cadet classes could be canceled. Trends are not good as Pennsylvania experienced an 8.9% shortfall in expected revenues for the key month of April.

The concern is that these political considerations could seriously complicate the budget process as they did in prior fiscal years. Those delays resulted in damage to not only the Commonwealth’s ratings but those of underlying municipalities. Many entities, both municipalities as well as non-profit service providers were forced to either curtail services or finance operations through costly and previously unnecessary short-term borrowing.

Yet another delayed budget would further highlight the Commonwealth’s difficult financial plight and highlight its continuing need to deal with its pension funding difficulties. The commonwealth is likely to struggle to balance its budget annually as its pension contributions ramp up and expenditures grow more quickly than revenues.


The Civic Committee of the Commercial Club of Chicago on Thursday released a detailed report that has a slew of budget ideas. The big picture suggestion from the private, not-for-profit group of senior executives is that the state must identify $10 billion in expenditure reductions and revenue increases for each year from 2018 until 2022 in order to return the state to fiscal sustainability. It notes revenue increases of “at least” $8 billion will be necessary to get the state back on its feet.

The report doesn’t include specific spending or revenue proposals — that responsibility, the report says, lies with legislative leaders and Gov. Bruce Rauner. The report notes problems with the state’s reliance on property taxes but, there is no suggestion to freeze them. A property tax freeze tied to an income tax hike remains at the heart of negotiations among senators and the governor’s office with just 13 days before the end of the legislative session.

The civic group estimates that raising the personal income tax to 5 percent from 3.75 percent would bring in $4.1 billion in revenue for fiscal year 2018; taxing all federally taxable retirement income would bring in $2.5 billion; eliminating exemptions, property tax credits and education expense credits from those who make more than $50,000 a year would bring in $1.3 billion; and expanding the sales tax to include consumer services based on Iowa as a model would bring in $1.2 billion. Coupled with increasing the corporate income tax to 9.5 percent and other measures, the revenue package could bring in $9.7 billion, the group says.


As we go to press, Puerto Rico faces a deadline to present its fiscal 2018 budget to the fiscal control board for review. “Yes, it will definitely be ready [by then],” said the governor when asked by whether the administration will meet the Tuesday deadline to deliver its version of the next fiscal year’s budget. It is still unclear if the document will be made public that day. On May 8 the fiscal board granted the Puerto Rican government an additional 14 days to improve the draft budget delivered on April 30 before the entity approves it or notifies violations. Since the delivery of its “draft” spending plan to the board, the administration has yet to disclose budget-related documents, calling them a confidential “working document.”

Puerto Rico’s fiscal control board commenced Monday bankruptcy proceedings under Promesa’s Title III for the Highways & Transportation Authority (HTA) and the central government’s Employees Retirement System (ERS). According to the court filings, the board says both entities meet Promesa’s requirements to initiate debt-restructuring processes under Title III, including good faith negotiations with creditors, efforts to make available updated financial information and a certified fiscal plan. For ERS, the governor pointed out the “precarious situation” of the public retirement system, its “eventual insolvency in the coming months” and not being able to reach agreements with its creditors as reasons to ask the oversight body to authorize the restructuring process provided by the third chapter of Promesa. Payments of retiree benefits will be made directly from the general fund on a “pay-as-you-go” basis,  once ERS liquidity is depleted–as early as next fiscal year, which begins in July. According to the commonwealth’s 10-year fiscal plan, the government estimates this will cost about $1.1 billion annually.

The Infrastructure Financing Authority (PRIFA) and the Convention Center District Authority still await a move to Title III. The opaque nature of the Government’s approach to all of these issues grows tiresome. We believe that despite statements to the contrary, that Title III filings were all but assured for HTA and the other public corporations. This reflects our belief that the ability to significantly haircut outstanding debt is the Government’s real strategy behind all of its dealings with its financial problems.


We know that the recent trends in state fiscal performance have been troubling to say the least. This is probably the weakest performance for state revenues versus where we are in the economic recovery cycle in some time. April’s performance was disappointing by any measure which is alarming because it is typically one of the largest collection months. Nine states reported underperformance versus projections with five showing double digit shortfalls.

This year’s results did differ from the historical pattern which makes future projection more difficult. In states’ revenue reports for the month the weakness is mostly not in taxes withheld from wages, but taxes on estimated payments. Estimated payments, which taxpayers make quarterly based on declared nonwage income such as capital gains, are generally 20%-30% of total income taxes. In several states, April income taxes actually declined from April 2016, despite the fact that 2016 was a much better year for the stock market than 2015.

The lack of legislative achievement by the Trump administration is likely playing a role. Like healthcare and infrastructure, a policy vacuum is forcing the states to face the brunt of inaction. The declines in estimated payments despite the strong year for stocks in 2016 suggests that at least part of this weakness may be attributable to taxpayers deferring recognition of investment income in anticipation of lower tax rates.


The Census Bureau’s 2015 Annual Survey of State Government Finances published last week indicates that federal aid made up nearly a third of all states’ general fund revenues in fiscal year 2015. The single largest line items in states’ budgets include federal funding for transportation, Medicaid and other social assistance programs. The findings show revenues, expenditures, debt, and cash and security holdings for each state, as well as a national summary of state government finances. The major source of these public finance statistics are the states’ own accounting systems or through intermediate reporting systems.

Louisiana and Mississippi are the top recipients in federal aid in 2015.  Federal intergovernmental revenues accounted for about 42 percent of their general fund revenues, the top shares nationally. Other states whose budgets are most dependent on the feds include Arizona (40 percent), Kentucky (40 percent), New Mexico (39 percent), Montana (39 percent) and Oregon (39 percent). The least-reliant state budgets, which include North Dakota (18 percent) and Virginia (22 percent).

The Census Bureau’s classification of public welfare funding includes Medicaid, Temporary Assistance for Needy Families (TANF), child welfare services and a range of other assistance programs mostly for low-income individuals. It excludes school nutrition programs and the Special Supplemental Nutrition Program for Women, Infants and Children (WIC).

The federal share was highest — more than 90 percent — in New Mexico and Ohio. By comparison, federal revenues accounted for slightly less than half of public welfare spending in Colorado, Massachusetts, Rhode Island and Virginia.


After months of private squabbling and public threats of a legislative overtime session, the Texas House and Senate finally compromised to unveil a joint budget past weekend. Budget documents indicated around $1 billion would come from the state’s Rainy Day Fund, a $10 billion savings account available to shore up the budget in difficult years. That money would pay for priorities such as repairs to the state’s aging mental health hospitals and bulletproof vests for police officers.

Nearly $2 billion more would come from an accounting maneuver related to transportation funding approved in 2015. The proposed budget would delay a payment to the state highway fund in order to free up that funding for other needs in the current two-year budget. The House had previously been critical of the possibility. Medicaid, the federal-state health insurance program for the poor and disabled, were not fully funded. The Senate had pushed for the elimination of a budgeting tactic known as a special item, through which universities and colleges get dollars for specific projects allocated outside the standard funding formulas. The House opposed the elimination, saying it was too drastic of a move to take without further study.

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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