Muni Credit News May 25, 2017

Joseph Krist


The Dallas Police and Fire Pension System has signed off on a proposed bill to help fix the City’s ailing pension system. The agreement includes a reduction to benefits, and the creation of a new retirement plan. Additionally, it calls for contribution increases from participants, and decreases to Dallas’ contribution rates. It also restricts the city’s minimum payment for the first five years, while another minimum payment will take effect for the two years after. Beyond that, the city will have a contribution rate based on 34.5% of payroll, minus overtime.

Before the celebration can begin is must be noted that the current proposed bill incorporating these changes, still requires votes from the full Texas Senate and House. It  requires a $13 million lump sum payment from the city for each of the first five years. The contribution rates during the sixth and seventh years will be determined based on the Dallas’ hiring plan. And before July 1, 2024, the city must use a third-party actuary to determine the fund’s progress, which could lead to changes to the minimum contribution rates by the city and system members as well as the lump sum amounts.

As with any true compromise, both sides gave something. Pension participants will end up paying more while receiving less in benefits. Taxpayers will also pay more, but how much more is not yet known. And the state Senate granted the city six of the 11 members on a new Police and Fire Pension Board, and any major benefit changes proposed by the senate must now be agreed on by two-thirds of the pension trustees.

If enacted by the Legislature, pressure on the city’s ratings will be relieved and the talk of bankruptcy which swirled during the heat of the debate should disappear.


The Trump budget gave some hints about his infrastructure plans. One of the main features is an unsurprising proposal to lift restrictions on the ability of states to collect tolls on sections of the interstate highway system. For many of you in the Northeast and Midwest, the concept of tolls on interstates is already a reality. The fact is that many of those roads where tolls are a reality were built by states before their incorporation into the interstate system.

In those areas and states where interstates have been free, the politics are much more fraught. The most recent example was in Pennsylvania where an attempt was made to impose tolls on I-80. The road was surveyed and sites were selected for the installation of toll collection equipment.  A combination of organized lobbying by commercial transportation interests, especially the trucking industry which is a heavy user of the road, and individual voters who use I-80 as a regular route for relatively frequent short distance trips convinced the Legislature that tolling was a political non-starter.

As a result, tolls were not imposed and the subject has not come up for serious consideration again. We do see where the use of dedicated lanes designed to relieve congestion and reduce commute times have been growing as a compromise alternative. These dedicated lanes, characterized by demand-based dynamic pricing have been seen as a more politically attractive model. They also fit the mold of P3 projects with many of them being designed, built, and operated by private owner/operators who use the toll revenue collected to finance construction and maintenance.

Like many other aspects of the Trump budget, the tolling plan seems designed to stimulate debate rather than to result in actual widespread tolling of currently free roads. The same combination of commercial and locally oriented interests can be expected to marshal opposition to any such plan and we would be surprised to see it actually come to fruition.


Gov. Dannel P. Malloy and union leaders are reported to have agreed on a framework for concessions that would save the state more than $1.5 billion over the next two years and help close the state’s budget deficit The five-year deal calls for a “hard” wage freeze in the first two years and a one-time $2,000 bonus for some employees in the third year. The employees would receive raises of 3.5 percent in the fourth and fifth years. Increases in employee contributions for pensions and health benefits are said to be part of the framework.

The unions are expected to vote on the plan by June 23 providing enough time for inclusion into a budget to be enacted by June 30 for FY 2018. The agreement would save about $710 million in the first year, but other savings would be necessary to close a projected deficit of more than $2 billion for the fiscal year that starts on July 1.

Among the changes is an increase in the cost of hospital emergency room visits and the creation of a new pension level, known as Tier 4, which will be a hybrid plan for new employees that is similar to a 401(k) plan.


With a week to go before the May 31 adjournment, Senate Democrats went ahead and  voted 32-26 to pass tax legislation, which would bring in roughly $5.4 billion in new revenue. This despite the fact that there is no prospect that the Governor would sign such a bill. The personal income tax rate would increase from 3.75 percent to 4.95 percent, just below the 5 percent rate in place before Gov. Rauner took office. The corporate income tax rate would be hiked from 5.25 percent to 7 percent. The higher rates would be retroactive to Jan. 1, meaning if they became law the effect on take-home pay would be far larger.

The state’s share of the 6.25 percent sales tax would be extended to a handful of services not currently covered, such as tattoos and piercings. The bill also calls for a new 5 percent tax on satellite television and an extra 1 percent entertainment tax on streaming services such as Netflix. The proposal would close various corporate loopholes and expand tax credits for low-income families.

The increases are part of a budget proposal designed to backfill budgets for universities and social services that have gone without funding since January. The plan does not include a way to pay down the state’s $14 billion backlog of bills, though it would create a $200 million rainy day fund that could be used for that purpose. Nonetheless, most state agencies would see a 5 percent cut in spending, while universities would face a 10 percent cut.

Without an agreement by the adjournment date, Illinois faces the real prospect of becoming the nation’s first state to be rated below investment grade. We would not be surprised if that happens. The bar to approve legislation with an immediate effective date rises to three-fifths after May 31.


Atlantic City is in the process of coming to market with $73,065,000 of insured, state enhanced General Obligation bonds. Proceeds will finance payments under the settlement of property tax refunds to the Borgota casino. The financing is part of the overall plan being undertaken under state oversight to stabilize the City’s very weak finances. The Moody’s rating for the issue of a Baa1 enhanced rating reflects the enhancement provided by the MQBA state aid intercept program and is notched once off the State of New Jersey’s (A3 stable) rating.

The city’s underlying ratings remain a very weak Caa3 reflecting the continued, albeit reduced, likelihood of default within the next year and the ongoing possibility of significant bondholder impairment despite the passage of rescue legislation. The rating also incorporates the recent takeover by the state. The city’s rating outlook was revised  to positive to reflect the material progress made by city in collaboration with the state, most notably the Borgata settlement and the balanced introduced 2017 budget.

While an important step in the City’s recovery, the credit remains significantly distressed. While Moody’s maintains a stable outlook for the State, we are much less sanguine about its prospects in light of the very difficult political backdrop to the State’s finances and the likelihood of little concrete action until 2018 after the fall gubernatorial election.

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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