Muni Credit News May 7, 2015

Joseph Krist

Municipal Credit Consultant


Gov. Rick Snyder announced plans last week  to create a new debt-free Detroit public school district and pay off the old district’s debt with an additional state contribution of between $53 million and $72 million annually for up to 10 years. Snyder’s plan for overhauling education in Detroit calls for establishing a “brand-new school district, not a charter” school system that would be governed by a new seven-member board initially appointed by the governor and the mayor.

Snyder would get four appointments to the board of the new district, to be known as the City of Detroit Education District, while Detroit Mayor Mike Duggan would get three. The new education district would include operations, teachers and buildings that would transfer to them. The new DPS would inherit the district’s pensions, union contracts and employees. The old DPS district would continue to collect the 18-mill non-homestead property tax and use the money to pay down the district’s debts. The tax generates approximately $72 million annually, while the district faces debt service payments of $53 million each year, diverting $1,100 per student away from classroom instruction, according to the Citizens Research Council of Michigan.

Under the proposal, there would be a six-year “pathway” for returning to a locally elected Detroit school board by staggering out elections for two seats in November 2017, two seats in November 2019 and the remaining three seats in November 202. Detroit’s elected school board has been effectively sidelined for six years while the district has been under the control of four state-appointed emergency managers. The governor said he hoped to get legislation moving soon but added, “From a practical matter, it probably won’t be done until fall. The proposed financial assistance for DPS could be three times the $195 million lawmakers committed last year toward funding the city of Detroit’s pension funds.

The governor said the district has accumulated $483 million in debt.  Under the proposal the state would need to commit an extra $53 million to $72 million annually for 8-10 years from the School Aid Fund toward operating funding for the new DPS According to the proposal by isolating the debt  the annual cost to the state could be lowered if about $300 million in outstanding bond debt can be refinanced.

Previously, the Coalition for the Future of Detroit Schoolchildren, a 36-member group issued a report in late March with recommendations for overhauling the city’s school system. They included returning DPS to local control, putting Education Achievement Authority schools (Charter schools)  back in the district and having the state pay off the district’s debt.

While the District has not issued debt under its own property tax based credit for many years, the plan offers relief to insurers of that debt who have already been battered by the City’s bankruptcy. It also offers the potential for an upgraded entity should it eventually issue its own traditional GO debt.


Infrastructure is a much lamented topic especially as it pertains to roads. Drivers nearly everywhere lament the condition of their area’s roads, especially after a difficult winter. So it was a bit of a surprise that Michigan voters resoundingly defeated tax changes this week that would have produced more than $1 billion a year for roads. The vote is considered a setback for Gov. Rick Snyder. A one-cent increase in the sales tax was the cornerstone of the ballot measure, which also would have created more money for education, local governments and public transit as well as fully restoring a tax break for lower-income workers.

The proposed constitutional amendment was placed on the ballot by the Republican-led Legislature and was supported by the Republican governor, Democrats, and a coalition of business, labor and government groups. It would have eliminated an existing sales tax on fuel so all taxes on motor fuels could go to transportation. It also would have restructured and doubled existing fuel taxes, and raised vehicle registration fees, to increase Michigan’s $3.7 billion transportation budget to $5 billion.


Puerto Rico Rico Electric Power Authority (PREPA) bondholders granted the utility a 35-day extension on its forbearance agreement, which will now expire June 4, with PREPA delivering its restructuring plan by June 1. “During the new forbearance period, PREPA will have the opportunity to provide information to its creditors and meet on a timely basis to discuss all the elements of a plan that will improve PREPA,” according to the utility. This is the third extension conceded to the troubled utility after the original March 31 deadline.

“Under the agreement, PREPA has agreed to provide an informative session between the authority’s rate consultants and creditors’ advisors by May 11 and deliver a proposal for a comprehensive recovery plan to the bondholders’ advisors by June 1,” the PREPA statement said. On April 15, creditors agreed to grant PREPA a second 15-day extension “to allow all parties to continue their dialogue to develop a consensual solution to transform PREPA that will benefit all stakeholders,” Lisa Donahue, the utility’s chief restructuring officer, said.


Senators Ron Wyden (D-OR) and John Hoeven (R-ND) have proposed The Move America Act of 2015. The Act is designed to leverage additional private investment in public infrastructure. The program creates Move America Bonds, to expand tax exempt financing for public/private partnerships, and Move America Credits, to leverage additional private equity investment at a lower cost for States. Move America provides up to $180 billion in tax-exempt bond authority for States over the next 10 years and  up to $45 billion in infrastructure tax credits for States over the next 10 years.

Move America Bonds would generally be treated as exempt facility bonds under current law, with several exceptions. So long as facilities are generally available for public use, the government ownership requirements for exempt facility bonds do not apply to Move America Bonds. This retains the restriction to public-use infrastructure, while allowing more flexible ownership and management arrangements. It also allows private partners to benefit from depreciation deductions, should they take ownership of the facility either directly or through a long term leasing arrangement. The interest income on Move America Bonds is excluded from the alternative minimum tax. This eliminates the interest rate penalty placed on states for public projects with private partners.

Qualified facilities for Move America Bonds are limited to publicly-available transportation infrastructure, including airports, docks and wharves, mass commuting facilities, freight and passenger rail, highways and freight transfer facilities, flood diversion projects, and inland and coastal waterway improvements. The qualifying projects for docks and wharves is expanded to include waterborne mooring infrastructure and landside road and rail improvements that integrate modes of transportation. Move America Bonds are subject to a uniform volume cap, set equal to 50 percent of a State’s current private activity bond volume cap. As some projects have long lead times or may require more bond volume than a State receives in a single year, States would be permitted to carry forward volume cap for up to three years. Any carried over volume cap not used after three years would be reallocated to States that have fully utilized their cap, ensuring that the program is fully utilized. States would be required to report to the U.S. Treasury Department the amount of unused volume cap that is being carried forward each year.


The New York Mets better than expected start has garnered them some favorable attention some 30 games into the 2015 season. Mostly it is baseball fans who are interested but the bonds which financed  the Mets’ home park are also of interest to investors. NYC IDA debt for the Queens Ballpark LLC is widely held by New York investors both individually and institutionally.  The standings are reminders of the financial importance of good on the field performance as reflected in the recently released operating results for the Queens Ballpark entity that supports the outstanding debt which financed Citi Field.

The Corporation reported a 1.8% decrease in total revenue. The primary sources of decrease were ticket sales and advertising revenue. On the plus side, parking and concession revenues were up. Since only a portion of attendance-based revenues are pledged whereas all of the parking and concession revenues are pledged, lower attendance as the result of a losing season is mitigated. The means that the ultimate impact on current coverage is fairly minimal.

We feel that the bonds are appropriately rated at the BB range. The steadily increasing annual debt service requirements and inconsistent performance of the team and its impact on attendance are enough to constrain the quality of the credit over the foreseeable term.


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