Muni Credit News May 5, 2016

Joseph Krist

Municipal Credit Consultant

WHEN POLITICIANS RUN AMOK

We observe two recent credit events that show how politicians’ lack of knowledge about municipal bonds can cause headaches for bondholders. Sometimes silence is golden. The first is the circus going on in Harvey, IL where a relatively poor, small municipality has seen its credit driven off a cliff by irresponsible local government officials. (See our most recent posting for the mechanics of what happened.) The resulting impact on bondholders could have been foreseen if the City had complied with municipal market disclosure standards. The lack of audits for the last two fiscal years and a failure to post required disclosures of material events left both investors and citizens in the dark as to the City’s real fiscal position. This is yet another incident where the lack of knowledge on the part of responsible officials actually results in the interests of bondholders and the citizenry being aligned in regard to the need for available, current, and accurate information.

The second case is the current effort to deflect blame away from responsible officials by mainland proxies for the Government of Puerto Rico. in this case, the somewhat financially ill-informed Speaker of the New York City Council Melissa Mark-Viverito has asked the Securities and Exchange Commission to investigate OppenheimerFunds Inc., saying the asset-management company has played a role in worsening Puerto Rico’s fiscal crisis by increasing its investments in the island’s debt. Mark-Viverito has blamed the island’s financial crisis on hedge funds, banks and other investors in Puerto Rican general-obligation bonds and utility debt. She has described the companies as “vultures” feeding off the instruments’ high yields and claimed they have lobbied against legislation that would reduce its payments to bondholders.

The comments reflect her lack of knowledge as to the difference between mutual funds which act as proxies for individual investors and large institutional investors who represent more speculative investors. Their interests are often not in alignment in terms of goals and expectations. The level of naiveté reflected by her comments are disappointing given that they come from one of the major elected officials from New York City, one of the largest annual issuers of municipal bonds.

Situations like this are why the pressure for timely disclosure and outside oversight continues to come from the municipal analytic community.

ATLANTIC CITY

The political brinksmanship over Atlantic City’s financial woes continues. Assembly Speaker Vincent Prieto cancelled a vote on his Atlantic City rescue bill, saying three lawmakers needed to pass it missed the voting session. Another session will take place Wednesday, Prieto said, adding that it could be for a new compromise bill. Gov. Chris Christie and Senate President Stephen Sweeney support a bill that would let the state sell city assets and terminate union contracts.

In his usual blustery way, Christie said the city is out of cash in 10 days. Then came the disappointing comment. “If they come up with something, great,” Christie said of the Legislature. “If they don’t, then bankruptcy will be the only option.” New Jersey investors have traditionally been able to rely on the State’s history on intervention and oversight for troubled local credits. The embrace of Chapter 9 by the state’s highest ranking official should be a concern for investors going forward.

CHARGERS STADIUM INITIATIVE

The Chargers last weekend began their attempt to gather the 66,447 signatures of registered San Diego city voters required to qualify for the Nov. 8 ballot. Last week, the team unveiled what executives described as a design concept for a joint-use stadium, convention center and two-acre park adjacent to Petco Park in downtown San Diego’s East Village neighborhood. The Chargers emphasized that the actual design and cost would be determined by a public stadium authority or other city-controlled entity under the ballot initiative’s advisory provisions.

The initiative is silent on the project’s estimated costs and financing details, but it does call for a professional football team to contribute $650 million from private sources toward stadium construction, as well as cover stadium-specific cost overruns and help fund future upgrades and maintenance if a public capital reserve falls short.

Chargers financial advisers said the initiative could raise enough revenue to sell at least $1.15 billion in bonds to help pay for construction, operations and maintenance, with $350 million going toward the stadium, $600 million for the convention center and $200 million for land acquisition and moving a public bus yard at the site.

An increase in hotel taxes to 16.5 percent from 10.5 percent would fund the public’s share, with 5 percent of hotel bills in the city reserved for bond repayment. The city’s 2 percent tourism fee would be eliminated, but 1 percent of the tax would be allocated to tourism marketing, increasing to 2 percent once debt service was sufficient.

The terms of bond financing, final construction costs, size of the convention center and its operations, and a host of other details raised by the mayor would be controlled by the authority, and not the team. The initiative requires the stadium’s football team to sign a 30-year lease and agree to not relocate for 30 years, but the mayor pointed out that it also allows bond financing for up to 40 years, potentially leaving the authority repaying bonds without a team for some period.

RAIDERS LOOK TO LAS VEGAS

Oakland Raiders owner Mark Davis told the Southern Nevada Tourism Infrastructure Committee, an advisory panel appointed by Gov. Brian Sandoval, that he would provide $500 million toward the construction of the 65,000-seat stadium if a public-private financing plan is approved by the Legislature. Davis wants the Raiders playing in Las Vegas by 2020. Public funds would cover $750 million of the project’s construction costs, according to a proposal from the Las Vegas Sands casino company and Majestic Realty, which are partnering to develop and operate the stadium. Those costs would be financed over 30 years through $50 million annual payments, likely from a hotel room tax.  Funding for the stadium construction could come by increasing the tax, perhaps by a fraction of 1 percentage point. Lawmakers would need to sign off on any increase to the hotel room tax or the creation of the tax increment area.

They would need also to act to create the proposed Clark County Stadium Authority — an umbrella entity that would coordinate the project and issue and secure bonds. Majestic and Sands might front the remaining $150 million, but they are also proposing a “tax increment area” that could help them recoup that cost and fund ongoing stadium maintenance.

Legal bookmaking in Las Vegas has always been looked upon as a serious hurdle to location of a “big four” major league franchise in the city. Two factors may mitigate that. One is the likelihood that an NHL expansion franchise could begin operating in 2018. The other is the fact that NFL games are played twice a year in London, where betting is legal on a much more extensive basis than would likely be the case in Las Vegas.

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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