Muni Credit News November 10, 2016

Joseph Krist

Municipal Credit Consultant











Much of President elect Trump’s program for funding infrastructure mentions using tax credits as an incentive to generate funding. In the municipal bond universe prior attempts to generate demand for these issues had limited appeal. To refresh, tax credit bonds are taxable debt instruments that are issued by state and local governments as well as governmental entities for a broad range of financing needs.

Unlike tax exempt bonds, tax credit bonds allow investors to receive a tax credit at a rate set by the U.S. Department of Treasury on their federal tax return. The issuer of the tax credit bond retains the responsibility to pay the principal on the bonds. Congress generally allocates specific amounts of funds to be used for each tax credit bond program. The formula for these allocations is generally set by the U.S. Department of Treasury.

In 2008, the Congress amended the tax credit bond rules to permit tax credits to be sold separately from the referenced bond (or “stripping” the tax credit) in an effort to attract more investors to these bonds. In 2009 and 2010, the Congress substantially increased the size of many of these programs to aid in economic recovery. those changes reflected the fact that the market which emerged for these bonds was limited.

Should the Trump proposed changes in income tax rates be adopted, municipal bonds would become much less attractive to own. So Muni Credit News approaches the reality of a Trump administration with some trepidation as it applies to municipal bonds.

One immediate area of credit concern would be the impact of a withdrawal from NAFTA on transportation projects which have been undertaken to satisfy commercial traffic needs which are or have been assumed to occur through increased trade with Mexico. These include bridges at the border as well as expansions of existing north-south interstates as well as new road construction often financed by tolls.


In Illinois, Amendment 1 required all state money derived from transportation be spent only on other transportation related projects. It passed with 79% of the vote.

Washington – Measure 732 to impose a carbon emission tax on fossil fuels, reduce sales taxes 1% and increase a low-income exemption, and reduces certain manufacturing taxes was defeated with 59% of the vote.

Metropolitan Seattle (Sound Transit 3) – (see October 27 MCN) is expected to pass.

Austin – $720 million in General Obligation bonds to fund transportation and mobility improvements passed with 59% of the vote.

Los Angeles – Measure M, which would fund the most ambitious transit expansion in Los Angeles County history, amassed support from 69.82% of voters, with all precincts reporting. That’s more than the 66.67% requirement to approve the sales tax increase to fund $120 billion in transit improvements over the next four decades, which would in part fund a large expansion of the system’s rail network.

California – Voters defeated Proposition 53 which would have required statewide voter approval for bond issues over $2 billion. It was a close vote at 51-49% against. While general, the proposition was really targeted at only one or two water projects opposed by agricultural interests. Proposition 55 extending the income tax on earnings over $250,000 to fund schools and healthcare passed with 62%. Proposition 56 to increase taxes on tobacco and e-cigarettes to increase funding for health care for low-income Californians was approved with 63%.

Colorado – Amendment 69 to create the “ColoradoCare” system to provide universal healthcare to Colorado residents via increased taxes was overwhelmingly defeated. Amendment 72 increasing tobacco taxes, with money going to various health programs was also defeated.

Florida – Amendment 3 providing a tax exemption for totally and partially disabled first-responders and Amendment 5 providing a tax exemption for low-income, senior, and long-term residents were both overwhelmingly approved.

Hawaii – Amendment 2 allowing the legislature to use excess general funds to either service general obligation bond debt or post-employment benefits for state employees was approved.

Louisiana – Amendment 3 making federal income taxes no longer deductible from state corporate income taxes was defeated. This is credit negative for the state.

Missouri – Voters defeated two cigarette tax increases and approved Amendment 4 to prohibit new sales/use taxes on any service or transaction that was not subject to a similar tax as of Jan 1, 2015.

Oklahoma – Voters defeated Question 779 to increases the state sales and use tax by 1% per dollar to increase funds for public education.

The main takeaway: anti-tax sentiment remains strong in general but detailed transportation projects funded by dedicated protected revenues can and did attract fairly widespread support.


We address the results of Tuesday’s election in New Jersey separately from those in the other states because of our particular concern about the state’s fiscal outlook. New Jersey voters refused a plan to build two new casinos in northern New Jersey so there won’t be any revenue going to the state from there. Not that they would have been necessarily successful. Gaming seems to have become a zero sum game. They approved an initiative to limit the use of the newly raised gasoline tax (the 23 cent increase) to transportation uses only. Good for a state whose overall transportation system has become quite problematic.

The problem is that the increase was part of a package that reduced the general retail sales tax rate in the State so now the General Fund will have less revenue to fund things like rising pension expenses. All in all a negative day for the State’s credit.


Voters in San Diego County defeated a referendum that would have provided hundreds of millions of tax dollars toward a stadium the team wanted to build in downtown San Diego. The Chargers must now choose between  whether to pay for the stadium themselves, look for an alternative site elsewhere in the city for a stadium, or move to Los Angeles, where they have an option to move into a stadium being built by  the owner of the Rams. The Chargers have several years left on their lease at Qualcomm Stadium and have until the second week of January to exercise that last option.

If the team’s owner, Dean A. Spanos, decides not to move the Chargers to Los Angeles, the Oakland Raiders will then be given the option to join hands with the Rams. In the meantime, the Oakland Raiders  may apply to move to Las Vegas. Lawmakers in Nevada last month agreed to increase a hotel bed tax in Clark County to raise $750 million for a stadium the team and the casino magnate Sheldon Adelson want to build. (See MCN 9/20/2016)

Charger ownership said it will diligently explore and weigh its options, and do what is needed to maintain its options, but no decision will be announced until after the football season concludes, and no decision will be made in haste. The Rams had no comment on the result of the vote in San Diego.

The Chargers have tried for a long time to get the public to share the cost of a new stadium to replace Qualcomm Stadium. It opened in 1967 and is one of the oldest in the N.F.L. Last year, the team rejected a plan championed by the mayor and a committee that included building a new stadium on the property where Qualcomm Stadium sits in the Mission Valley neighborhood. Instead, the Chargers focused on moving to Carson, Calif., south of Los Angeles, and building a privately funded stadium with the Raiders. In January, the N.F.L. owners voted instead to let the Rams move to Los Angeles, and gave the Chargers the option to join them.

The Chargers then came up with a proposal to build a downtown stadium on a tight plot near the city’s convention center. The team wanted voters to raise the county’s hotel bed tax, which it portrayed as a levy on tourists. Many of the city’s hoteliers opposed the increase because they said it would drive up room rates, making San Diego a less affordable city to visit.

The mayor eventually backed the team’s proposal. The Chargers faced a  threshold for approval of such increases is a supermajority of two-thirds of the vote. The Chargers contended that only a simple majority was needed, but a lower court judge rejected that interpretation.


Voters in Arlington, Tex., approved, by 60 percent to 40 percent, a proposal providing up to $500 million in public financing for a new stadium with a retractable roof.


Moody’s reiterated its negative outlook and S&P assigned a new negative outlook for the City of Philadelphia’s GO credit in connection with an upcoming sale  next week of  $282,905,000. The negative outlook reflects the city’s inability to achieve structural balance resulting in a continued weakening of reserve levels. While the city conservatively budgets and revenues have been on an upward trend, expenditures continue to outpace revenue growth. As a result, additional reserve declines are projected through fiscal 2018, ending with a General Fund balance of just over 1% of revenues, well below that of like-rated peers. Going forward, any additional declines in reserves beyond current projections, will result in negative credit pressure.


New Jersey’s Local Finance Board voted 5-0 Wednesday to grant its director, Timothy Cunningham, far-reaching governing powers over the city. The vote, a by-product of the state’s Municipal Stabilization and Recovery Act, was the worst-case scenario for the city’s mayor, Don Guardian, who called the decision “devastating.” Cunningham recused himself for the vote because of the powers the takeover gives him to handle day-to-day operations. Cunningham is also the director of Division of Local Government Services, part of the state’s Department of Community Affairs.

He declined to give specifics of how he would proceed, or how far he would exercise the powers the state board had just granted him. The law gives the state up to five years to oversee Atlantic City, giving Trenton the power to hire and fire, sell off assets, veto council minutes, eliminate departments and nullify union contracts. The Local Finance Board specifically excluded the power to declare bankruptcy from their resolution placing power into the state’s hands.

Prior to voting on the takeover, the Board approved Atlantic City’s 2016 budget, first increasing the tax rate, which Cunningham paradoxically said would result in a decrease of about $13 per typical household. He did not explain how an increase in the tax rate would lead to a decrease in actual taxes paid. City Solicitor Anthony Swan said the vote was “historic in nature” and cautioned against consolidating powers of the legislative and executive branch in one person, thereby disenfranchising the city’s residents. He said city residents and employees are “frightened to death” of the state coming in and doing things like nullifying union contracts.

After meeting privately with Cunningham, Mayor Guardian said the city was told to continue operating “business as usual.” He said it still was not clear how far the state intended to go in usurping their control of day to day operations. Guardian and City Council President Marty Small said they would defer any decision on whether to appeal the takeover to court to see how it first played out. Cunningham said his preference would be to work with council before figuring out other methods of  “operationalizaing” the state’s powers. He declined to say whether the state had a plan of action ready to go, but said, “We’ll be prepared to take the mission that’s assigned to us.”

Earlier this month, the state of New Jersey rejected Atlantic City’s recovery plan, saying it was not likely to achieve financial stability for the resort city, triggering an imminent state takeover. The city has promised to fight any takeover in court, which the state law allows them to do. They have also said that they would fight a takeover on civil rights grounds, and said they had the support of groups such as the ACLU, the NAACP, and the U.S. Conference of Mayors.


The Education Achievement Authority has agreed to return to the Detroit Public Schools Community District some 14 schools in June, authorities announced, along with a plan to repay millions the authority owes the district. There are about 5,500 students attending the 11 schools and another 1,000 enrolled in three charter schools, If most of the students at the EAA schools return to the Detroit public schools, it could mean millions more in state funding for a district that has been hemorrhaging money and thousands of students for years.

The EAA will pay the Detroit district $2.25 million in debt, according to Emergency Manager Steven Rhodes making the payments in monthly installments from its budget, which began in July and will end in August. EAA will pay nearly $1.4 million in rent on buildings for this school year, plus $831,000 for services such as security and information technology. The first payment was for $200,000 and the final payment will be just over $346,000.

EAA has made $9 million in improvements to the buildings and facilities it inherited from DPS when the EAA was formed four years ago as a way to turn around failing schools. Rhodes said the debt owed the district includes rentals of buildings — which will return to the Detroit school district — that have received “extraordinary improvements” from the EAA including infrastructure and technology upgrades.

The agreement comes after the Detroit school district was given a fresh start by the state when the Legislature passed a package of bills that created a new, virtually debt-free district. As a result, the per-pupil allowance of $7,552 is being used for resources the district says directly impact classroom instruction. The accumulated hundreds of millions in debt from the old Detroit Public Schools district to be paid off using state aid and property tax.

Together, the DPSCD and EAA serve more than 50,000 students, and deliver instruction in more than 100 facilities. The Detroit district expects its enrollment to be just over 45,500 students this school year. The EAA began operating in the fall of 2012 with 15 former Detroit public schools. It has been characterized by financial scandal, poor academic performance and even worse public perception — will try to conduct business as usual in a lame-duck school year.

Governor Rick Snyder had hoped to expand the state-run district beyond Detroit, but he faced resistance from legislators, teachers’ unions and faculty at Eastern Michigan University. The EMU Board of Regents voted in February this year to end its interlocal agreement with the EAA, effective June 30, 2017.

See the 8/23/2016 MCN for a full discussion of charter school risk.


“In the renegotiation, everything is on the table…. Let’s sit with [creditors] under Puerto Rico’s real situation and present them with a plan that will benefit the people of Puerto Rico and, of course, guarantee them some return on their investment. Yes, we have said there is a potential of deferring [debt] payments, of cuts to principal; these are things that are going to be renegotiated, but only with transparency and clarity.”

And so the long slog begins in Puerto Rico. Promises of haircuts while at the same time pursuing statehood, the mind reels. Governor-elect Ricardo Rosselló Nevares committed himself to fight for Puerto Rico’s admission as a state of the United States, as well as taking the island out of the economic crisis it is currently going through, after a decade in recession.

Rosselló said he will negotiate transparently with the island’s creditors, adding that he will meet them at a conference on the island during his administration’s first 100 days. So it could be almost five months more before the real work begins to address the debt.

As for statehood, Rossello wants to follow what is known historically as the Tennessee Plan. In 1796, residents in the territory which became Tennessee held a vote and 73% of the people voted for immediate statehood. The Governor and the local legislature held a convention to establish a constitutional government — not as a territorial government but for government as a State of the Union. The convention approved a state constitution, declared the end of territorial government on March 28, 1796, and said Tennessee would become a State on that same day.

The legislature also established two Congressional districts, authorized four presidential electors, sponsored elections for two members of the U.S. House, and elected two Senators. The U.S. Senate opposed admission The Tennessee Senators went to the Senate and demanded their seats, but the Senate refused.

The House supported admission, though. On June 1, 1796, Congress yielded and passed an admission act allowing Tennessee one seat in the House until the next census. They also insisted on new elections, since the citizens of a territory did not have the  power to elect members of Congress.  Only citizens of a state can do that. Tennessee had declared itself a state, but only Congress can do that.

Tennessee accepted the compromise and became a state just a few months after they said they would. Until that time, territories had asked for statehood and then waited for Congress to declare them states. Tennessee’s bold move essentially meant that they decided they were a state, declared themselves a state, and persuaded Congress to agree. This approach has been called “the Tennessee Plan.”

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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