Muni Credit News November 15, 2016

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

NEW PENSION DATA

SODA TAXES PASS

PUERTO RICO POSTURING UNDERWAY

ARENA DEAL IN ATLANTA

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PENSION UPDATES

A number of states are or have been coming to market which means that relatively fresh data (as much as that means in the land of municipals) on pension funding has been available. So we take this opportunity to review that data.

West Virginia – Data is through FY 2015. It has paid 100% of its ARC for its Public Employee and Teacher Pension Funds in each of the last two fiscal years. Its contributions as a percentage of employee payroll are 14% and 2% respectively. The State reports the Public Employees Fund to be 93% funded while the Teachers Fund is only 65% funded. The State is still using a 7.5% assumed investment return to determine its unfunded liability.

New Hampshire – The Granite State enacted a series of reforms in 2012. these included increases in the retirement ages for teachers (60 to 65) and police and fire (45 with 20 years service to 50 with 25 years service). It has met 100% of its ARC requirements since fiscal 2010. The State also reduced is investment return assumption from 7.75% to 7.25%. The funding ratio however is a low 59%. That is a decrease from 67% over eight years.

Mississippi – The State still uses a generous 7.75% assumed rate of return on investment. The funding ratio is at 60% for the primary public employee fund. This despite steady increases in the employer contribution rate and a 2011 increase in the employee contribution rate. The goal is for the State to reach a funding level of 90% by 2042. For the public safety employee fund, the funding ratio is lower at 58%. Ironically, the State Legislators fund has the best funding ratio at 78%.

Illinois – We start with the fact that pension bond debt service currently at $574 million and steadily increases annually to a 2033 level of $1.156 billion. In addition the State issued pension bonds in 2010 and 2011. The use of pension bonds allowed the State to significantly reduce current contributions to the funds. However, the State continued to make less than the actuarially required contribution in each of the last ten years. As the result of inadequate payments and below assumption investment returns, the State estimates that its unfunded pension liability increased in fiscal 2016 from $111 billion to $129 billion. That results in a funding ratio of 37% down from 41%.

SWEET TAX NOTHINGS

Voters in Boulder, Colorado and three cities in California — San Francisco, Oakland, and Albany — approved controversial new soda taxes on Novemer 8. Sugar-sweetened beverages have been linked to obesity and diabetes, and these new laws are intended to fight back  the world. At least that is the pitch that made to voters to get these initiatives approved.

In the Bay area the new laws will levy a one cent-per-ounce tax on beverages that contain an added-calorie sweetener and more than 25 calories in 12 ounces of liquid. This includes sodas, energy drinks, sweetened tea, and sports drinks. In Boulder, the tax is even steeper: two cents per ounce for beverages with at least five grams of an added-calorie sweetener in 12 fluid ounces.

Shoppers won’t be paying these taxes at the checkout registers — at least, not directly. Instead, the taxes are directed at beverage distributors, who are anticipated to increase prices for retailers and shoppers. If they do, it “could result in a price increase of 67 cents on a two-liter bottle, or $1.44 for a 12-pack,The New York Times estimates. But it’s possible that less than half of that price increase will be passed on to shoppers, according to at least one recent analysis. That means that soda taxes might actually need to be higher than a penny per ounce before we start seeing large changes in consumers’ behavior.

The reality is that this not a major credit issue given the amounts of money which will be generated. The taxes are projected to raise $15 million for San Francisco in the 2017–2018 financial year, $6 million per year in Oakland, and $223,000 annually in Albany. Nonetheless, this has been an expensive fight for those on both sides, and one with especially high stakes for the soda industry, which is facing a 30-year low in soft drink consumption in the US. Although unsuccessful with his own effort during his administration, New York’s Michael Bloomberg poured millions into the pro-tax campaigns, and the American Beverage Association spent millions against them.

Berkeley was the first in the US to pass a soda tax in 2014, the same year that a similar measure failed in San Francisco. Philadelphia followed earlier this year. The American Beverage Association is suing to stop that measure from taking effect It is currently planned for January 1st, 2017.

We do not see these first successful efforts to begin these taxes as credit significant in that they are not meant to raise significant revenues or if they do are tied to new classes of expense. If they have credit impact it will be long term by changing health-related public conduct that could slow growth in health-related expenses.

NOT SURE IT MATTERS ANYMORE

Gov. Alejandro García Padilla said Wednesday he has been in communication with the fiscal board created by the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) while the entity evaluates the draft fiscal plan he and his economic team presented more than two weeks ago. Regarding the process, he said it could be slow due to how “voluminous and technical” the document is, whose numbers “require a lot of analysis.” However, he indicated he hopes that the Board conducts its analysis, it will conclude Puerto Rico’s debt, estimated at $70 billion, is unpayable and thus requires restructuring.

What seems to be the case is that the outgoing Governor seems to be intent on doing what he can to undermine the restructuring process. The governor recommended the seven board members to watch out for their “credibility and legitimacy” when carrying out designations or awarding contracts to consulting companies, in cases where these are associated to any local politician.The governor was reacting to the contract the board granted Forculus Strategic Communications, owned by Francisco Cimadevilla, who worked with former Gov. Luis Fortuño 20 years ago at the Economic Development & Commerce Department and obtained contracts with La Fortaleza and the Government Development Bank (GDB) during Fortuño’s administration, between 2009-2012.

Two board members, its president, José Carrión, and former GDB President Carlos García, also worked close to Fortuño during his administration, which has raised questions among some about the former governor’s influence on the entity that will rule Puerto Rico’s finances for the following five years, minimum. Carrión is also brother-in-law of Resident Commissioner Pedro Pierluisi.

HAWKS WILL UPGRADE THEIR NEST

The Atlanta Hawks announced a $192.5 million renovation of Philips Arena, with the city providing the bulk of the funding. The Hawks agreed to an 18-year lease extension to remain at the city-owned arena through 2046. The city will contribute $142.5 million toward the project, which will most noticeably alter the look of the luxury boxes stacked on one side of the arena. There will be new amenities, a variety of different-size suites, improved sightlines for basketball, a state-of-the-art video system, and connected concourses throughout the 17-year-old facility.

Philips Arena originally was built to host both the NBA’s Hawks and the NHL’s Atlanta Thrashers. The hockey team moved to Winnipeg in 2011.

Mayor Kasim Reed had pledged to contribute to an arena renovation when the Hawks were in the process of being sold by former controlling owner Bruce Levenson, who gave up the team after revealing that he sent a racially insensitive email. Tony Ressler lead a group that purchased the Hawks and operating rights to the arena. He said all along that he preferred to remain downtown rather than pursue a new facility, as long as Philips Arena was upgraded.

The Hawks argued that a key part of producing a winning team, providing a superior fan experience and being a civic asset to the city of Atlanta required a renovation of the arena and a meaningful improvement to the downtown area of this city.

Reed said the renovation was part of a long-range plan to transform an unsightly tract of downtown adjacent to the arena and the new $1.4 billion Mercedes-Benz Stadium, a retractable-roof facility set to open next year as home to the NFL Falcons and a Major League Soccer expansion team, Atlanta United.

There have been talks about turning the area, known as “the gulch,” into a mixed-used development much like the highly successful LA Live complex next to Staples Center in Los Angeles. Reed said it’s part of a plan to connect the sports venues to popular tourist attractions around Centennial Olympic Park, as well as to one of the city’s biggest development flops, Underground Atlanta.

“This is the first stake in the ground in transforming the critical corridor,” Reed said. It’s another huge commitment by the city to a sports venue, though Reed stressed that no money from the city’s general fund will be used and no new taxes will be needed.

About $110 million will come from extension of car-rental tax and the city will contribute $12.5 million from the sale of Turner Field to Georgia State University and a development company, a deal expected to close by the end of the year. The remaining $20 million from the city will come from a series of expected future land sales, the mayor added during a City Hall announcement.

The renovation of Philips Arena comes on the heels of the city agreeing to spend at least $200 million — and perhaps much more, some critics have argued — for the Falcons’ new stadium, which will replace the 24-year-old Georgia Dome.

The renovations on Philips Arena will begin next summer and should be completed by the start of the 2018-19 season. The Hawks will continue to play at the arena during the overhaul, with much of the work being done over the next two offseasons.

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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