Muni Credit News May 9, 2017

Joseph Krist

City of Los Angeles

$228,580,000 and $111,410,000 Wastewater System Subordinate Revenue Bonds (Tax exempt) $117,045,000 (Taxable)

Fitch: “AA”  S&P: “AA”

Subordinate lien bonds are secured by net revenues of the system after payment of O&M expenses and all senior lien requirements pursuant to the senior lien general resolution. DSC averaged a healthy 1.8x in the three years ended fiscal year (FY) 2016.  Sewer flows declined in recent years occurred as Los Angeles and the state of California weathered one of their worst modern droughts between 2013 and 2016. An increase in the pace of the city’s rate increases more than offset usage declines and improved free cash to depreciation up from just 45% in fiscal 2012 to 116% in fiscal 2016.  The system had $141.5 million of unrestricted cash and investments at the end of fiscal 2016 and $45.9 million of restricted operating and maintenance and other reserves. The system provides wastewater collection, treatment, and disposal services for an area of about 600 square miles, including most of the city and certain neighboring municipalities. Customer levels have remained virtually flat over the last five fiscal years and currently number around 685,368 accounts. The existing rate plan calls for 6.5% yearly adjustments through fiscal 2015-2021.


$412,020,000 Revenue and Refunding Revenue Bonds

(Ochsner Clinic Foundation Project)

Moody’s: A3  Fitch: A-

Newly upgraded Ochsner Clinic in New Orleans comes to market for new money and a refinancing. Ochsner is a nationally recognized tertiary and quaternary referral center with multiple access points across the state of Louisiana and parts of Mississippi. The system is known for its clinical excellence in key service lines such as cancer, neurology, cardiology, transplants, women’s and children’s services. This debt along with all outstanding Master Trust Indenture secured debt, is secured by a joint and several obligation of the Obligated Group with a gross revenue pledge as described in the bond documents. The outstanding and proposed bonds are further secured by a mortgage lien on certain properties of OCF, including OMC, certain medical office buildings and parking structures.

Moody’s upgrade to A3 reflects Ochsner’s multi-year improvement in operating performance and balance sheet metrics while delivering on key integration and synergy-producing strategies. Additionally, Moody’s cited the system’s continued investment in several strategies that has enabled Ochsner to expand its footprint across Louisiana and into Mississippi while continuing to focus on key service lines while growing the brand equity. These attributes are offset by liquidity and leverage measures that are subpar compared to similar-size peers, and the system’s location in a highly competitive area with exposure to both the energy sector and natural disasters.





Medium density fiberboard makes its return to the high yield municipal market with this issue. Previous issues to finance the conversion of wooden pallet waste into a marketable medium density fiberboard product in California and upstate New York came to inglorious ends when those facilities failed to meet revenue projections. These efforts led to significant losses for the high yield fund investors at the turn of the century.

This latest effort involves the conversion of rice stalk waste into MDF. MDF is a composite panel product created by combining cellulosic fibers with a resin binder and wax under heat and pressure. The resulting product is used for furniture, flooring, molding, and decorative plywood. Traditionally, MDF is made from wood waste and byproducts. This plant will be located in Willows, CA north of Sacramento in the north end of rice country in CA. It will be the first facility to use rice straw as the basic feedstock for MDF.

The ownership entity for the plant representing the single asset relied on to produce product and revenues to repay the bonds is a subsidiary of the State Teachers Retirement System. The plant will have its own well-based water supply and will require less than one-third of the available rice straw supply from the region. The plant is designed to address the need for alternatives to the burning of rice straw stemming from requirements dating back as far as 1991.

The deal has all of the characteristics that have troubled us about these sorts of high yield municipal bond transactions. The plant is initially driven by regulatory factors rather than economics, it comes to the municipal market driven by the need to obtain the lowest possible borrowing rate to make the economics more feasible, and it introduces a level of new technology risk to a market which has shown in the past an insufficient understanding of those risks.

So to say that we would have issues with this financing is an understatement. We’ve just seen too many of these transactions involving new technology that would more properly be financed in the taxable markets if their feasibility were more clear. So muni investors, caveat emptor!



Connecticut The Office of Fiscal Analysis downgraded anticipated revenues for the next two fiscal years by $1.46 billion — nearly $600 million next fiscal year and $865 million in 2018-19 — largely because of declining income tax receipts. Projected revenues now fall $2.2 billion, or 11.3 percent, short of the funding needed to maintain current services in 2017-18. With the potential deficit increased to $2.7 billion, or 13.6 percent, in 2018-19, the biennial shortfall approaches $5 billion.

In the short term, revenues for the current fiscal year are $413 million below anticipated levels. This pushes state finances more than $380 million into deficit and could result in the depletion of the state’s $236 million in the emergency budget reserve with less than nine weeks remaining before June 30.

Income tax receipts this fiscal year now are expected to total just under $9 billion. Not only is that well below the $9.44 billion analysts were anticipating just four months ago, but it falls short of the $9.2 billion collected last fiscal year. Income tax erosion was tied not to paycheck withholding but to quarterly filings, most of which involves capital gains, dividends and other investment-related earnings. The state’s 100 largest-income taxpayers paid 45 percent less this year than last. State analysts project next fiscal year’s sales tax receipts at $3.84 billion, downgrading their 2017-18 estimate by a fraction of 1 percent.

Pennsylvania The state Department of Revenue reported this week that it has a shortfall in excess of $1 billion 10 months into the fiscal year. That’s more than 4 percent, a bigger margin at this point than in any fiscal year since 2010. April’s tax collections came in at $537 million, or 13 percent, below expectations. In January, the Legislature’s nonpartisan Independent Fiscal Office projected a shortfall of nearly $3 billion for the two fiscal years ending June 30, 2018, including the cost to maintain the state’s current programs. April’s results would push that shortfall to more than $3 billion.

How to deal with the shortfall? Proposals from the various parties include a production tax on Marcellus Shale natural gas drilling, the privatization of Pennsylvania’s wine and liquor-store system, a massive expansion of casino-style gambling, and cuts to administrative agency budgets, prisons, school busing aid, child-care subsidies, and health care for the poor.

Kansas The state now faces projected budget shortfalls totaling $889 million through June 2019, and legislators expect to increase taxes. The state constitution prohibits a deficit. A new budget would authorize spending starting July 1, but state payroll rules require that a budget be in place by mid-June to keep employees on the job. Legislative analysts have told the House and Senate budget committees that they need to raise between $303 million and $355 million over two years, based on spending recommendations they’ve pursued. But those figures assume lawmakers divert $581 million from highway projects to education, social services and other government programs.

Michigan legislative leaders are gearing up for another push to close Michigan’s teacher pension system to new hires and move them to 401(k)-style retirement plans and then use the savings to help school districts pay down liabilities or cover up-front transition costs for the state. Leaders entered the new budget cycle with a $330 million surplus.

House and Senate budget bills up for floor votes this week would trim at least $270 million in state spending proposed by GOP Gov. Rick Snyder for next fiscal year, an amount legislative leaders have said could be used for tax cuts, infrastructure investments or debt relief. They could also look to redirect $175 million currently planned as a deposit into the state’s “rainy day” savings fund. Michigan shifted new state government employees to 401(k) plans in 1997. Michigan ended its traditional teacher pension system in 2010, moving newly hired school employees into hybrid retirement plans that include both a defined pension component and contribution component similar to a 401(k) savings plan. The new system is fully funded.

Reforms enacted in 2012 targeted unfunded liabilities. The law required retirees to pay more for their health care and capped school district contributions for unfunded liabilities at 24.46 percent of payroll. The state covers additional costs, which totaled more than $980 million this year.  Teacher retiree health care liabilities have dropped since 2012 but, unfunded pension liabilities have continued to climb. The total is now over $29.1 billion, according to an annual actuarial valuation prepared for the state at the end of fiscal year 2016.

The Senate Fiscal Agency projected last year’s legislation would have cost roughly $600 million in first-year costs, $3.8 billion over five years and $28 billion over 30 years if the state chose to wind down the system through accelerated payments, which it recommended as a best practice.

The debate comes amid the backdrop of automakers reporting the fourth straight monthly retreat in sales of new cars and light trucks, the longest stretch of declines since 2009, when the industry was embroiled in crisis and bankruptcies. The top six automakers in the American market all reported declines from their April sales a year ago, and in every case the falloff exceeded analysts’ forecasts. In April, automakers sold 1.43 million cars and trucks, down from 1.5 million a year ago.


An effort by Chicago Public Schools to save millions in future expenses by offering teachers and other staff members a financial incentive to retire has fallen short because not enough employees volunteered to leave by this summer. Veteran teachers and paraprofessionals had until March 31 to tell the district they intended to retire or resign at the end of the school year in June. An incentive written into the Chicago Teachers Union’s latest contract provided for workers to receive cash bonuses if enough of them accepted the deal. CPS has told teachers that an insufficient number of staff signed up for the program, and have asked the teachers that did say they intend to retire to decide if that is still the case by April 28.

On April 28, a Cook County judge denied CPS’ request for an injunction to block any state aid for pensions for any school district until CPS’ need is satisfied. He effectively dismiss CPS’ underlying complaint, saying it had not filed a sufficient argument under law, but would have an additional 28 days to file an amended complaint. The judge said he is sympathetic to the needs of a district like CPS that represents hundreds of thousands of poor and minority children, and termed the state’s defense of the current situation “startlingly out of touch.” However, he added CPS’ lawsuit “is not the vehicle to challenge that reality.”

Retirement-eligible teachers would have received a one-time bonus by December that paid $1,500 for each year of service. Paraprofessionals would have been paid $750 for each year of work. Those contract provisions would not kick in, however, unless a minimum of 1,500 teachers and 600 paraprofessionals participated.

CPS said about 840 teachers had submitted retirement notices. A district spokeswoman said roughly 300 paraprofessionals had planned to resign. CTU members who were already part of the system when the union and district settled a contract and averted a strike in October will continue to have 7 percentage points of their required pension contributions paid for by the district. CTU members who were already part of the system when the union and district settled a contract and averted a strike in October will continue to have 7 percentage points of their required pension contributions paid for by the district. Teachers hired Jan. 1 do not receive the “pickup” of their pension contributions but will get pay boosts that even out the loss of the pension pickup. Union members will also see pay hikes of 2 percent and 2.5 percent in the contract’s final two years.


There have been headlines highlighting the fact that sanctuary cities are expressing concerns in their budget messages about uncertainties regarding federal funding in light of the ongoing legal dispute with the Federal Government over the issue. The fact that cities are referencing the issue is simply the responsible thing to do as well as the politically savvy thing to do. The issue, while serious, is likely more of a political policy issue than it is a financial issue.

The Justice Department recently sent letters to eight cities – New York City, Chicago, Miami, Philadelphia, New Orleans, Las Vegas, Milwaukee and Sacramento, as well as Cook County, Illinois. DOJ asked these local governments to provide documentation that they’re complying with a federal law that requires information-sharing by local, state and federal authorities on citizenship and immigration status.

If the nine jurisdictions don’t present documentation of compliance by June 30, DOJ said it may withhold or terminate funds under the Edward Byrne Memorial Justice Assistance Grant program, which funds state and local criminal justice programs.  The scope of the threat to cities has likely been overstated in public  utterances by AG Jeff Sessions.

Justice Department and Department of Homeland Security officials who met with a mayors delegation in Washington recently indicated the only federal law at issue in the Trump administration’s effort to crack down on so-called sanctuary cities was one federal code section barring localities from interfering with communications with federal officials. A legal brief filed by the Justice Department last week in one of at least five filed lawsuits challenging President Donald Trump’s executive order threatening to take federal funds from cities, counties and states with sanctuary policies indicates that the only law Trump is seeking to enforce compliance with is 8 U.S.C. 1373, a three-decade old provision that appears to prohibit localities from issuing policies that preclude local police from communicating with federal immigration officials.

In that case, San Francisco-based U.S. District Court Judge William Orrick issued a preliminary injunction Tuesday barring federal officials nationwide from carrying out the portion of a Jan. 25 Trump executive order aimed at cutting off grants to local governments that won’t provide assistance to federal authorities in locating and detaining undocumented immigrants. Orrick cited public comments from Trump and Attorney General Jeff Sessions in concluding that the order appeared intended to sweep more broadly than allowed by federal law. The judge, an Obama appointee, called “not legally plausible” the Justice Department’s arguments that Trump was simply trying to secure compliance with current law.

“If there was doubt about the scope of the Order, the President and Attorney General have erased it with their public comments,” Orrick wrote. “The Constitution vests the spending power in Congress, not the President, so the Order cannot constitutionally place new conditions on federal funds.”

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