Muni Credit News November 17, 2016

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

ATLANTIC CITY OVERSIGHT APPOINTMENT

COLORADO ROAD FUNDING EXPERIMENT

PUERTO RICO DEBATE CONTINUES

NEXT MOVE IN MIAMI

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ATLANTIC CITY

Jeffrey Chiesa, a former state attorney general, U.S. senator and close ally of Gov. Chris Christie, will be the man to lead the Atlantic City state takeover. The state named Chiesa as the Local Government Service director’s designee in Atlantic City, where he will have vast powers to fix the city’s dire finances. That authority includes the powers to sell city assets, hire or fire workers and break union contracts, among other powers, for up to five years.

“I am committed to improving essential government and community services for the people of the Atlantic City,” Chiesa said in a statement. “I will listen to the people and work hand in hand with local stakeholders to create solutions that will prevent waste and relieve generations of taxpayers from the burden of long-term debt. We will put Atlantic City back on a path to fiscal stability.” A Department of Community Affairs statement said the state’s immediate steps include entering into agreements with casinos over payments in lieu of property taxes and ensuring debt, school and county tax payments are made on time. Chiesa also will explore right-sizing the city’s work force and pursue financing to reduce the city’s debt, the statement said.

Frankly we would have been disappointed if anything else had occurred. Chisea said what had to be said to the local populace but to believe that this will be a hugely collaborative process would naive. The populace and the political establishment had their chance and the city must now move forward.

The city has a roughly $100 million annual budget deficit and about $500 million in total debt. The city’s ratable base plummeted from $20 billion in 2010 to $6 billion today as the casino town faced more competition in neighboring states. Five Atlantic City casinos have closed since 2014.

The city has fought the state since January to maintain local control. Mayor Don Guardian said, “Although we fought very hard to keep our sovereignty and we will continue to review all of our legal options, Sen. Chiesa has a reputation of being fair and a man of integrity. He has served the state of New Jersey honorably and we will continue to work with him and the state to resolve our fiscal challenges.” The DCA statement said the city’s mayor and City Council will maintain “day-to-day municipal functions,” while Chiesa and state officials will implement fiscal-recovery efforts. Earlier Monday, Guardian said the city would go to court if the state takes actions “we see as unconstitutional.”

Christie appointed Chiesa to the U.S. Senate in June 2013 after the death of U.S. Sen. Frank Lautenberg. Chiesa served four months in the Senate and declined to run for re-election. Chiesa was New Jersey’s attorney general from January 2012 to June 2013, and was Christie’s chief counsel prior to that appointment. Chiesa also oversaw Christie’s transition team when he was first elected governor. Chiesa rejoined the firm Chiesa Shahinian & Giantomasi PC, formerly Wolff & Samson, in November 2013 after serving in the Senate.

The appointment follows the state Local Finance Board vote to take major decision-making powers away from city officials last week and grant them to Local Government Services Director Timothy Cunningham. “The simple fact is Atlantic City cannot afford to function the way it has in the past,” Chiesa said. “I look forward to meeting with Mayor Guardian and members of the City Council and starting the process of bringing this great city back to financial stability. It is my hope to work together with firm conviction and not disrupt the democratic process.”

The board’s vote for the takeover came after Community Affairs Commissioner Charles Richman rejected the city’s fiscal-recovery plan last week. The plan included cutting 100 workers, selling Bader Field to the Municipal Utilities Authority, settling with Borgata Hotel Casino & Spa over tax refunds and bonding to pay for tax-appeal debt.

But Richman said the plan failed to balance the city’s 2017 budget, ran a five-year shortfall of $106 million and didn’t accurately estimate cost and revenue projections. Richman also raised concerns over the Bader Field sale, calling the water authority’s plan to issue $126 million in low-interest, long-term bonds to pay for the land “dubious at best.” The city sent the state supplemental information after the plan’s rejection, but the extra details didn’t change Richman’s mind. The plan still had an “over-reliance on state aid,” Richman said. Chisea’s appointment is the culmination of a long signaled and none too subtle process begun by Governor Christie.

COLORADO MOVES TO TEST MILEAGE FEES

The Colorado Department of Transportation announced a new pilot study Thursday that will look into idea of replacing the state’s gas tax with a pay-by-mile charge. It’s called the Colorado’s Road Usage Charge Pilot Research Study. The 4-month study will launch in December, and will look at an approach where drivers would pay a fee for how many miles are traveled per month instead of paying the state’s $.22 per gallon gas tax at the pump.

By the year 2040, Colorado’s population is expected to nearly double to 7.8 million residents, which will result in higher demands for mobility and on the state’s transportation infrastructure, according to CDOT. “We are facing a nearly one billion dollar annual funding gap over the next 25 years,” said CDOT. “And over the past two decades, Colorado’s current gas tax has become less reliable with the spike in more fuel efficient vehicles and hybrids.”

The department said the pilot is just the first step in an extensive process of evaluating the concept alongside other funding alternatives. “What folks at home need to know is if you have a car that gets about 20-25 miles per gallon, you’re probably not going to be paying more– or if you are, it will be about a dollar more– or a dollar less, depending on your driving,” Castle said. “For people with less gas mileage than that, they’re probably going to see money coming back. and then for the cars that are very fuel efficient—hybrids, or electrics cars– they are going to be paying.”

Some of the research topics in this study include mileage reporting technologies as well as a manual reporting option; how these technologies work in Colorado’s environment and the difference in driving habits between urban and rural drivers.

“A healthy transportation system is the backbone of our state’s economy and way of life.” CDOT Executive Director Shailen Bhatt said. “As the state’s transportation funding gap under the current gas tax grows, we need to explore possible funding opportunities, such as road using charging, to ensure Coloradans the mobility they need to live, work, and play. The pilot study will begin in December and will end in spring 2017.

NEXT STEP IN MIAMI SEC CASE

Through a settlement, attorneys for the SEC secured an injunction and a $1 million civil penalty against the city government last month after a federal jury ruled that Miami officials illegally hid huge budget imbalances from bond investors in the late 2000s. Now, the SEC is seeking an injunction and a $450,000 fine against Michael Boudreaux, the city’s former finance director whom the agency accused of masterminding Miami’s financial “shell games.”

In a filing dated Oct. 28, attorneys for the SEC argued that the court ought to issue its most severe, “third-tier” penalty against Boudreaux by fining him $150,000 for each of the three 2009 bond issues at question in the civil case. In making the plea to the U.S. District Court, the SEC attorney stated that court testimony shows Boudreaux’s current salary as a business manager for the Lafon Nursing Facility of the Holy Family in New Orleans is somewhere around $150,000. “Imposing a third-tier penalty for each of the three bond offerings, for a total penalty of $450,000, would serve the need to both punish Boudreaux and others,” she wrote.

Boudreaux’s attorney, countered that his client is a “man of modest means,” and the proposed fine as “egregious.” “The City of Miami’s nearly $1 billion budget is scarcely impacted by its settlement. Yet for Mr. Boudreaux, the SEC’s requested penalty exceeds the bounds of fairness and justice.” “Mr. Boudreaux calls upon the SEC to abandon its efforts to bring him to personal ruin for City decisions that did not enrich him, did not result in any actual loss to any person or institution, and did not create a significant risk of substantial losses to anyone.”

Boudreaux “will continue to fight for his vindication.” The jury found Boudreaux liable on one count of violating the Securities Act and two counts of the Exchange Act. The jury found him not liable on a fourth count.

PADILLA FIGHTS TO THE END

The Padilla administration will not go quietly into the good night regarding the island’s debt. Puerto Rico’s government warned in a liquidity report made public on Wednesday that it will run out of money in less than three months as part of the push to obtain permission to restructure nearly $70 billion in public debt. The report highlights that the island faces a $1.3 billion debt payment in February, when a temporary debt moratorium imposed this year by the U.S. government expires. Another $934 million in bond payments is due from March through June.

That would add to what Puerto Rico has already defaulted on (nearly $1.4 billion worth of bond payments since August 2015), angering creditors who have filed multiple lawsuits and accuse the government of exaggerating its situation. Padilla administration officials warned that if the moratorium is not extended, the island will run out of cash to provide essential services. The report also warned that the island’s pension system, which is underfunded by more than $40 billion, will run out of cash in 2018 unless the government takes steps such as increasing contributions.

Clearly intending to influence events, the government released the report two days before a federal control board charged with overseeing the island’s finances meets in Puerto Rico for the first time. Additional details released state that the local government is creating a registry of all those who own Puerto Rico bonds, identifying so far 350,000 owners that hold 68 percent of the island’s debt. At least $6 billion of that debt is held by Puerto Rico residents.

Gov. Alejandro Garcia Padilla has been urging the board to authorize a debt restructuring so Puerto Rico can re-enter the markets and pull itself out from a decade-long economic crisis that is only deepening. His administration has declared a state of emergency at several government agencies and implemented austerity measures including deferring payments to the island’s police and agriculture departments, among others.

The report was released on the same day that Ricardo Rossello, Puerto Rico’s governor-elect, met with bondholders and credit rating agencies in New York. Puerto Rico bonds rallied after voters last week chose Rossello as their new governor. He has said his main priority is to make Puerto Rico the 51st state.

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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