Muni Credit News May 4, 2017

Joseph Krist


Puerto Rico is “unable to provide its citizens effective services” because of the crushing weight of its debt, according to a filing on Wednesday by the federal board that has supervised the island’s financial affairs since last year. Or so it says. So it has chosen the path of action under Title III granted to it by the PROMESA act.

There is no existing body of court precedent for Promesa. The step is an extraordinarily antagonistic one on the part of the Government who has been as intransigent in its insistence on huge haircuts while accusing creditors of being just as intransigent. It has been hard to be sympathetic to the government which has resisted efforts at disclosure and transparency and has been slow to embrace operating efficiencies at all levels of government.

The court proceedings will not be formally called a bankruptcy, since Puerto Rico remains legally barred from using Chapter 9, the bankruptcy route reserved for insolvent local governments. Instead, Mr. Rosselló petitioned for relief under Title III of the Promesa law, which contains certain Chapter 9 bankruptcy provisions but also recognizes that, unlike the cities and counties that use Chapter 9, Puerto Rico is not part of any state and must in some ways be treated as a sovereign.

Our own view is that Puerto Rico will be dealt with less harshly than it deserves. The municipal market has not seen this kind of willful inefficiency and refusal to take responsibility on this level before. Worse, the security that enticed investors was a constitutional rather than a legal pledge making the abrogation of the pledge even more egregious.


Years ago, the government of Guam borrowed hundreds of millions of dollars from the bond market to pay years of unpaid tax refunds. Three subsequent administrations did the same and at the time, it saved the local government the high cost of interest payments on refunds that were years overdue. Bonding however has become more problematic at investors have begun to look at territorial debt with a more jaded eye since Puerto Rico’s implosion.

As a result, GovGuam has decided to look for other borrowing options away from the bond market. Recently, Gov. Eddie Calvo proposed legislation that seeks to borrow from a financial institution, payable through tax and revenue anticipation notes, similar to borrowing through a line of credit. The idea is for GovGuam to borrow $75 million worth of tax refund payments from a financial institution, and then pay this off through

Under this concept, when the amount is paid off in six months or so, or by the fiscal year’s end in September, GovGuam would borrow again, at the beginning of the next year. This would allow it to issue $75 million in tax refund payments in one shot, as opposed to the current slow releases of $1 million to $3 million in tax refunds a week.

However, the governor’s proposed borrowing, using subsequent months’ revenue collections as a repayment source, might mask a larger problem: There isn’t enough cash coming into government coffers at this time, for all the bills to get paid when they’re due. Borrowing $75 million doesn’t pay off the total tax refund obligation for the year, which is estimated to cost at least $125 million. In past years, tax refund payments even topped $140 million in a year. Sen. San Nicolas has questioned this bill, and offered an alternative to GovGuam’s cash-flow struggles. Instead of borrowing, San Nicolas offered to spread out some of GovGuam’s once-a-year debt payments into smaller, more manageable monthly installments, to free up some cash flow.

Tax-refund obligations have doubled over the past decade as more federal tax credits allow more Guam residents to qualify for more tax refunds. The proposed bill from the Governor says if other sources of revenue payments won’t suffice, then the financial institution’s notes are secured through an automatic lien on Section 30 funds. Section 30 funds are remitted by the federal government to GovGuam from the collection of income tax payments from military personnel who are stationed here. The Section 30 funding, however, has fluctuated, depending on how many military personnel are stationed here, and the type of pay classifications they bring.

The situation speaks to weakness in Guam’s non-military economics. The reliance on low wage manufacturing jobs and fickle Japanese tourist demand, has made Guam’s fiscal condition vulnerable to factors largely beyond its control. That has made it hard to solidify gains from an increasing military presence  and translate those gains into a more sustainable credit in support of its financing needs.


Moody’s announced that it  has placed six Illinois public universities on review for downgrade, impacting a total of approximately $2.2 billion of public university debt. The review is prompted by failure of the State of Illinois to enact a budget providing full operating funding to the universities for the current fiscal year (FY) 2017 and resulting operational and liquidity strains on the universities.  The pressures reflected in this action have been ongoing and obvious. The liquidity crunch facing these institutions is unprecedented and the outlook for a resolution to the State’s ongoing budget standoff is poor.

The affected universities are University of Illinois (Aa3 for Auxiliary Facilities System Revenue Bonds and Certificates of Participation, A1 for South Campus Development Bonds, and A3 for Health Services Facilities System Revenue Bonds); Illinois State University (Baa1 for the Auxiliary Facilities System Revenue Bonds and Baa2 for the Certificates of Participation); Southern Illinois University (Baa2 for the Housing & Auxiliary Facilities System Revenue Bonds and Baa3 for the Certificates of Participation); Northern Illinois University (Baa3 for the Auxiliary Facilities System Revenue Bonds and Ba1 for the Certificates of Participation); Governors State University (Ba1 for the University Facilities System Revenue Bonds and Ba2 for the Certificates of Participation); and Eastern Illinois University (B1 for the Auxiliary Facilities System Revenue Bonds and Caa1 for the Certificates of Participation).

Northeastern Illinois University’s Certificates of Participation were downgraded to B1 from Ba2 and placed the rating on review for downgrade. Northeastern Illinois University is in a unique position relative to that of the other state universities in Illinois. NEIU is a regional comprehensive public university with multiple campuses in the Chicago metropolitan area. It is designated by the US Department of Education as a Hispanic-Serving Institution. The COPs are payable from NEIU’s broad budget and the obligation to pay can be terminated in the event that it does not receive sufficient state appropriations and the board determines the university does not have other legally available funds.

The idea that the State would put its universities in the position of having below investment grade debt outstanding is frankly astounding. It speaks to the intransigence of both sides in the budget dispute and the lack of political leadership in the State.


Another topic we have discussed earlier this year, is the number of state’s considering the use of mileage based taxes to fund highways as a replacement for taxes on fuel. The move towards such a technique reflects anticipated improvements in gasoline fueled engines and the potential expanded use of electric cars.

The concept of a mileage-based tax on motorists — apparently is no longer even a subject of research at the Connecticut Department of Transportation. The tax has been the subject of debate between Republicans and Democrats at the Capitol since word first broke two years ago that the DOT was researching this revenue-raising option.  Transportation Commissioner James Redeker wrote last week in a letter to a regional transportation coalition that was coordinating research into this tax that his agency was halting its involvement because of budgetary issues. The Connecticut Department of Transportation is now facing large budget cuts that prevent us from providing any state matching funds.

Connecticut has no long-range plan to fund its transportation infrastructure needs. To cover the first five years of the governor’s 30-year rebuilding program — 2016 through 2020 — Malloy proposed and secured approval to replace an older system of sharing General Fund resources with the Special Transportation Fund with a more generous plan to shift sales tax receipts into transportation.

Nonpartisan analysts warned last year that the Special Transportation Fund was projected to run $46 million in deficit beginning with the 2018-19 fiscal year — Year 4 of the 30-year program. In response, legislators decided last May to cut this fiscal year’s sales tax transfer by $50 million to help close a major deficit in the General Fund. The governor’s budget staff estimated last month that the Special Transportation Fund would finish this fiscal year $17.3 million in deficit.

So yet another aspect of Connecticut’s financial outlook is negative and the State’s credit direction is problematic at best.


Oklahoma has unsurprisingly seen its economy and revenue base negatively impacted by lower prices for oil and natural gas. The December 2016 revenue estimate for fiscal 2018 was $739.3 million, or 12.2 percent, less than the appropriated amount for fiscal 2017. Earlier this year, Governor Mary Fallin proposed a fiscal 2018 budget that recommends total appropriations of $7.8 billion, a 5.9 percent spending increase over fiscal 2017 that includes several revenue enhancements and counts $790 million in transportation funding for the first time.

The governor’s budget recommends reforms for recurring revenues and begins repairing the structural deficit, by proposing $1.5 billion in recurring revenue sources, including sales tax modernization ($839.7 million), transportation funding reform ($219.7 million) that includes increasing the gasoline and diesel excise taxes, an electric vehicle road fee ($1.4 million), and raising the cigarette tax ($257.8 million). On the spending side the budget makes $317.8 million in targeted expenditure increases across eight agencies while maintaining level funding for most other agencies.

The Department of Education would receive $60 million for teacher pay raises and $30 million for additional classroom resources; the Health Care Authority would receive $41.4 for a FMAP increase, $16.7 million for Medicaid growth and $52.9 million for a managed care implementation; the Department of Mental Health and Substance Abuse Services would receive $25 million for the state’s justice reform initiatives; and the Department of Corrections would receive $11.1 million for offender management technology and justice reform initiatives. The governor also proposes a $350 million infrastructure package that includes correctional treatment facilities and housing units, substance abuse treatment facilities and state building projects.

One other revenue enhancement showed the continuing power of the oil and gas industry in the state’s political sphere. Gov. Fallin signed legislation this week to end the state’s tax credit for wind power this year. Wind farms that start producing energy after July 1 this year will not be able to claim the credit under the new law. The credit was originally set to expire in 2021.

In a statement, Fallin welcomed the growth in wind power that the credit brought on, but said the state’s tight budget necessitated rescinding it early. Oklahoma ranks No. 3 in the country in installed wind capacity, with almost 7,000 megawatts. It provide more industry’s growth increased its use to $113 million in 2014.

As the process unfolds, signs of distress continue. Citing state budgeting uncertainties, Oklahoma transportation officials announced Monday that they have suspended construction on about a dozen highway projects, including the next phase of the I-240/I-35 interchange project in south Oklahoma City. “That’s going to give us a black eye,” Oklahoma Transportation Commission Chairman J. David Burrage said, describing the situation as “bad.” Contractors already have bought materials for projects that are being suspended and those that suffer financial losses because of work suspensions likely will file claims with the agency.

A dozen or so suspended contracts may be just the beginning of construction disruptions throughout the state as The Oklahoma Transportation Commission voted to defer action on the award of nine new highway construction projects. In addition, Commission engineers were asked to come up with a plan by May 17 “to responsibly suspend construction activities at a date to be determined later once we know the full effects of the current budget process.”

A joint Legislative appropriations committee passed a bill out of committee last week that calls for cutting the amount of income tax revenue the transportation department is scheduled to receive from $571 million to $320 million.


The spending deal reached  between Congress and the Trump administration did have some good news for municipal credits about which we had expressed some prior concern. First, the Trump administration had proposed cutting the National Institutes of Health (NIH) budget by $1.2 billion for the rest of the current fiscal year. Instead, both parties effectively ignored the White House and gave the NIH a $2 billion increase. That’s in addition to a similar budget hike the NIH secured last year, which was the largest funding boost it had received in more than a decade. Puerto Rico will receive $295 million in emergency Medicaid funding.  The agreement also does not include a rider blocking so-called sanctuary cities from getting new grant funding.

The maintenance of NIH spending takes pressure off those institutions which rely on such funding for their operations. in those cases where grant revenues are specifically pledged to bond security, the compromise is good credit news for those bondholders.


Hackensack Meridian Health and JFK Health signed a definitive agreement to merge Tuesday, creating a combined entity with 15 hospitals throughout New Jersey. The combined entity would employ more than 33,000 team members and more than 7,000 physicians on staff.

The deal, pending government and regulatory review, would combine the Hackensack Meridian system and JFK Health’s single hospital in an effort to expand patient access and deliver better outcomes by focusing on population health, the companies said. Financial terms of the deal were not disclosed. Both organizations are based in Edison, N.J.

Hackensack Meridian Health was formed after a recent merger of Hackensack University Health Network and Meridian Health, including its 28,000 employees. The health system, which is a partner with the Memorial Sloan Kettering Cancer Center, plans to launch a Seton Hall University-affiliated medical school in 2018.
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