Muni Credit News November 1, 2016

Joseph Krist

Municipal Credit Consultant








—————————————————————————————————————–CALENDAR NEWS

This week’s large new issue calendar truly has something for everyone. The largest deals are for the Chicago O’Hare Airport Enterprise Revenue Bonds. These are secured by landing fees and gate rental charges levied against the airlines utilizing this major travel hub. Revenues from concessions located throughout the airport’s terminals also support the bonds. A high dependence on airline revenues at 64% of total operating revenues exposes the airport to more concentration risk than other large airports, though concession development has improved revenue per passenger.

This is offset to some extent by the fact that O’Hare serves as a major hub for both American and United Airlines versus the typical arrangement where one airline is the dominant hub carrier. It remains the second largest US airport in terms of passengers, economically strong and diverse O&D base with demonstrated high demand for air service. It has maintained a continued distance from the overall financial difficulties of Chicago and its other troubled issuers.

The Port Authority of New York and New Jersey will issue its general Consolidated Revenue Bonds (bridges, tunnels, airports, raid transit, bus station) many of which are undergoing expansion or renovation. The George Washington Bridge remains the nation’s busiest (regardless of the efforts to “manage” traffic) , JFK and Newark Liberty are among the airport’s with the heaviest demand, and LaGuardia is undergoing a separately financed rehabilitation. Other expansion projects are using P3 partnerships to achieve efficiencies and cost savings not usually associated with PANY/NJ projects.

A number of senior living facilities are scheduled in keeping with the market’s usual trend of heavy fourth quarter issuance of these types of facilities. Among other things  the expectation that the fed may raise rates in December is stimulating the demand for financing. See the September 13, 2016 issue of the Muni Credit News for our commentary on the risks of senior living facility credits. Another sector seeing heavy issuance in the face of a potential Fed increase is charter schools. Our extensive primer  on the risks associated with these credits appeared in our August 23, 2016 issue of the Muni Credit News. It will leave you quite prepared to assess the risks of these issues.

A number of hospital issues are on the docket as well. They include well known and highly rated Johns Hopkins in Maryland, Covenant Health in Tennessee, Benefis Health in Montana, and Swedish Covenant Health in Illinois. SCH is a 306-bed standalone facility on the northwest side of Chicago. Swedish saw its S&P rating lowered to BBB from BBB+. That change was based on SCH’s somewhat uneven recent financial performance trend with ongoing reliance on one-time funds to support overall cash flow and coverage.

The outlook was held at stable due to SCH’s very solid enterprise profile with good partnerships, physician integration, excellent advocacy efforts, and readiness for certain risk-based contracts that should allow SCH to maintain a solid business position. The hospital also benefits from healthy unrestricted reserves and consistent pro forma maximum annual debt service coverage of over 2.5 times. Investors should take note of one security change: with the upcoming sale, the mortgage pledged to the 2010 bonds is expected to be released and 2016 bondholders will instead have a security interest in the obligated group’s unrestricted receivables.


In the face of opposition to his administration’s plan to borrow up to $3.5 billion to cover Alaska’s pension shortfall, Gov. Bill Walker announced he will not go forward with the  offering. The decision to stop the transaction came after the governor and members of his administration met with members of the Senate Finance Committee about the idea this week. In a statement issued by Walker’s office, the meeting occurred at Walker’s request, and the response was negative.

“Given their lack of support, I have decided not to proceed with the issuance at this time,” Walker said. “Building a collaborative relationship with the Legislature will be necessary to reach our primary goal, which is a long-term fiscal plan for our state.” The finance committee’s co-chairwoman, Sen. Anna MacKinnon, supported Walker’s decision to suspend the sale. “I appreciate the governor listening to the concerns the Senate Finance Committee raised and we look forward to working together on solutions to close the fiscal gap and address the pension shortfall,” she said.

It is important to note that the administration has the ability to issue the pension obligation bonds without approval from lawmakers based on a 2008 bill passed by the Legislature. But the plan to issue the bonds has faced opposition. The bonds would have been used to raise investment money for the state’s public employee pension system, which, while solvent now, has more future obligations than its ability to pay. While interest rates to pay off the bonds are projected to be less than the income from investments, an investment market crash could leave pension funds in worse shape than they’re in now, having to pay both pensioners and bondholders.

“While we believe the financial benefits of issuing state pension obligation bonds significantly outweigh the financial risks, we recognize the need for legislative input,” said  the Governor.

We see the move as an important one given recent experiences with treatment of pension obligation credits needing annual appropriations in distressed credit situations. One of the primary risks of appropriation debt is the reliance on annual legislative action and the non-binding nature of the obligation upon future legislatures. It is so much easier to renege on such an obligation in the absence of strong political support at inception. There is also precedent for the opponents fears to come true. In the late 1990’s, New Jersey issued POB debt and invested in the stock market only to lose much of it during the dot com crash. The pension remained underfunded and monies which could have been used for pensions had to be applied to debt service on the POB debt.


This summer, it was claimed that over 70 businesses signed a petition declaring they would stop paying business taxes to the city of Scranton. The petition was circulated by Gary St. Fleur, a young local Libertarian who campaigned on social media and on his website against what he views as city government mismanagement. The item which has caused so much concern among some analysts says, “THEREFORE: the undersigned individuals do hereby declare and attest that each will no longer remit payment of Williams Fox, Collector of Taxes for the City of Scranton for the Business Privilege Tax.”

The local press conducted a spot check of some of the signatories and it suggests the petition is not the groundswell of civil disobedience Mr. St. Fleur portrayed it as when he declared to city council this summer, “If you don’t lower taxes then we will do it ourselves …and we won’t pay anything until this government does what is right.” The appeal to populist emotion in an area filled with such sentiment may not have resulted in informed consent. One signatory said Mr. St. Fleur never said signing the petition meant they would refuse to pay taxes. “I didn’t go over it, but he had a spiel about taxes,” “He seemed like a nice young guy, but sometimes, they hustle you.”

Some companies listed on the petition — national and regional businesses such as cellular service providers and some significant downtown law firms — appear unlikely to engage in a tax protest that could result in penalties or legal action. One local attorney said he was solicited with a one-sentence petition that he said was not a pledge to stop paying taxes. “I don’t recall that language being in there,” he said.  Another was  just an employee of and not able to sign on behalf of his company. However, he was told he could sign as an individual. He did and now regrets having his name and the company associated with the effort. “Live and learn, read the small print, never sign anything,” he said.

A copy of the petition also has an error, claiming the “business privilege and mercantile tax levies a three percent (3%) tax on the gross sales of all businesses.” The actual tax is much less, and much more complicated, based on whether the business is wholesale, retail or service. Also, a portion of the tax goes to the school district, which is unmentioned in the petition. Wholesale businesses are taxed at 0.001452 percent of gross receipts, retail businesses, 0.001679 percent, and service businesses pay 0.001513 percent. For a retail business, every million dollars of sales, for example, would generate a tax liability of $1,679. Of that, the city receives $1,000 and the Scranton Area School District $679.

St. Fleur, along with four other Scranton residents, have recently filed another petition for the city of Scranton to declare bankruptcy under Article 10, Section 1003 of the Scranton Home Rule Charter.  They are seeking to get an initiative on the ballot that would force Scranton to file for Chapter 9 Bankruptcy. The initiative, if it passed, would have the full weight of legislation, one voted on by the public.  In order for them to get the initiative on the ballot, they must collect signatures amounting to a number that is 15% of the voters in the last mayoral election.  The next step, should they get the allotted signatures, will be for the city council to vote on making the initiative a law.  If they fail to make it law, the initiative then goes on the ballot.

The city is working toward replacing the gross receipt taxes with a payroll tax, an effort that state law says must be revenue neutral. The city has retained a firm to increase compliance and collections before a proposed conversion. Whether any of this would result in bankruptcy is questionable. Scranton is operating under the Commonwealth’s Act 47 Distressed Cities legislation. Much of the expenditure that has pressured city coffers is related to legislatively mandated neutral arbitration awards to police and firefighters. These awards have tied the City’s hands to a large degree in its efforts to control expenses.

While the city deals with this distraction, The Scranton School Board has a Dec. 1 deadline to make a decision on a $40 million bond acquired last year to avoid default. Directors are expected to pass a resolution Monday to refund the 2015 bond, in an effort to save money. Through refinancing, the district could lock in a lower interest rate for the remaining nine years of the bond’s term, said the district’s financial consultant. In December, when the state budget impasse halted all state funding, the district was unable to repay two loans due by the end of 2015.

Just days before default, the district secured the $40.5 million bond, which consolidated the court-approved borrowing with a bond the district approved in September. Along with the bond, the Board created a district health care trust — which the district borrowed from to balance the budget and remarket the bond by Dec. 1. While the district still does not have an underlying credit rating, the financial adviser anticipates the district soon will receive a rating based on the state’s intercept program. The program, in which the district is enrolled, allows the state to withhold subsidy payments from a district that fails to make a debt payment.


At a conference we attended last week, we were amazed at how troubling the issue of disclosure remains for all market participants. The SEC Municipalities Continuing Disclosure Cooperation Initiative (the “MCDC Initiative”) is intended to address potentially widespread violations of the federal securities laws by municipal issuers and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents. That would certainly make sense in a market which has seen its share of distressed credits and inconsistent at best post-issuance disclosure.

It would seem that common sense would allow most participants to come to broad consensus on what constitute best practices in this area. But it was clear that this is not the case. Instead, we see a legalistically driven scramble to divide up responsibility among a significant number of players – investment bankers, advisers, issuers, government officials, all pointing at each other in a scene that resembles the circular standoff in Reservoir Dogs. The result is an extended process of debate and implementation which has yet to yield anything close to a final result and leaves the investor at the mercy of these competing interests.

In the meantime, the market continues to effectively let issuers skate as they continue to successfully issue debt despite questionable disclosure and continued bad financial practices. Just this year we have Puerto Rico, Illinois, Miami, Ramapo NY, all competing to see who can fall the shortest in relation to common sense disclosure practices. The small issuers continue to demand access to public markets without adequate information and large issuers continue to argue over whether all categories of their debt (direct bank loans) must be disclosed. All in all a distressing picture.


A brief word about the case for active financial oversight for troubled credits. In spite of the oversight of the Nassau County Interim Finance Authority, County Executive Edward Mangano managed to find himself charged with corruption. The fact that that the CE managed to wind up on the front pages of the regional press doing a “perp walk” is testament to the need for these oversight agencies to act as the adults in the room when governmental entities find themselves in trouble. They do not guarantee that each government’s effort to reform its finances will come to a happy resolution but they offer some assurance to investors, if not the local electorate, that continuation of some of the worst local financial practices will be subject to some limits. This case shows that it is up to the electorate to become responsible and support the real changes needed to fix the County’s financial troubles.


In January of this year, the City of Miami announced a plan to renovate its fairly unique marine stadium which has been unused for nearly a quarter century. In order to finance extensive renovations, the City planned a $45 million bond initiative for local legislators to consider. The Mayor of Miami wants commissioners to authorize the issuance of bonds leveraged by general revenues unrelated to property taxes, including money generated by a sprawling event space installed outside the stadium this year. The bond money would pay for the stadium’s restoration, as well as the construction of a 35,000-square-foot maritime center.

But a vote on the bond proposal to be pushed back. But the reason cited by Commissioner Frank Carollo — that the staff of the City Manager had failed to produce a requested breakdown of the expected costs and revenues associated with city facilities on Virginia Key was to say the least disappointing.  The events do fit into a historic pattern of less than stellar financial management by the City.

Two years ago, commissioners rejected a plan by the nonprofit Friends of Marine Stadium after details of their $120 million vision were questionable and late to materialize. A second effort this summer to restore the stadium as part of a $275 million general obligation bond issue was rejected by the commission over concerns about  a lack of detail and transparency. In blocking the latest proposal Thursday, Carollo invoked a rarely used  “5-day rule,” which requires that elected officials receive information on proposed items at least one week before the scheduled vote.

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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