Muni Credit News November 5, 2015

Joseph Krist

Municipal Credit Consultant


The Arizona legislature approved a package of bills last week that could provide $3.5 billion to K-12 schools over 10 years to settle a five-year-old lawsuit that had been filed by several school districts after the state refused to make inflation-adjusted payments during the worst years of the recession. The package passed with limited support from Democrats. Only one part of the deal, which increases base-level funding per student by $173, was unanimously endorsed by both parties. Democratic lawmakers, as well as educators, argued that the package failed to address how, or if, the state will seek to add more funding to the schools later on. The bill was supported by direct lobbying by Republican Gov. Doug Ducey. “With this permanent infusion of dollars into our schools that schools can spend as they see fit on their needs, educators will finally have the resources they have been asking for and our students will have greater opportunities to succeed,” Mr. Ducey said.

Legislative passage is the first step – the bills will require voter approval in a special election, scheduled for May 17 in a state that has the lowest rate of spending per student in the country. An analysis by the Joint Legislative Budget Committee, released in August, showed the state’s current budget for K-12 schools at $3,437 per student — still 19.2 percent lower than it was in 2005, when adjusted for inflation. The plan to add the additional $3.5 billion relies on increasing the percentage of money taken from a trust fund that holds proceeds from the sale of state land. If voters approve the plan, the state’s 238 school districts will share in a $249 million payment by June 30, or an additional $226 per student — still not enough to lift Arizona from the bottom of rankings on student funding and teacher pay.

Despite recent infusions of cash, many school districts are still struggling to pay for their most basic needs, like new textbooks. Some schools also need additional teachers to handle a surge in enrollment driven primarily by a rise in the number of Latino students, who at 44 percent are already the largest ethnic group in the state’s public education system. The superintendent of the Peoria Unified School District, said the money “will not replace the $218 million we have reduced from our budget over the last nine years, but it is a welcome bandage to slow the hemorrhaging.” The timing of the bill’s passage is problematic for 50 of the state’s 238 school districts that are asking voters to approve property tax increases to provide additional money for local schools, a mechanism known here as overrides.

The upcoming vote will highlight a classic problem in terms of local school funding where there are high proportions of older residents. One example is Apache Junction Unified School District, 35 miles east of Phoenix, a lower-middle-class suburb filled with retirees and voters who have repeatedly rejected requests to increase property taxes to pay for local schools. Last year, 91 percent of all ballots were cast by voters at least 50 years old, and the district’s override request, its fifth in eight years, lost by 1,881 votes. The odds seemed stacked against it once again this year: More than 90 percent of voters who had mailed in early ballots by Oct. 23 were at least 50 years old, according to official statistics. Opposition is summed up by the reaction of one 85 year old resident who said “I voted no, hell no.”  The override would be in effect for seven years and, he said: “I don’t know how they can guarantee it’s not going to pad the superintendent’s salary. We’re all struggling. When is enough enough?”


Another test of the use of Chapter 9 bankruptcy versus judgment bonds or other mechanisms will be given a hearing in December. The Sixth Circuit U.S. Bankruptcy Court held a preliminary hearing on October 6, 2015 on the Memorandum of Facts and Authorities in Support of Statement of Qualifications  filed by the City of Hillview and the Objection of Truck America Training, LLC to the Chapter 9 Petition Filed By the City of Hillview, Kentucky filed by Creditor, Truck America Training, LLC. It determined that an evidentiary hearing should be conducted at 9:00 a.m. on December 9, 2015 and at 9:00 a.m. on December 10, 2015 in the United States Bankruptcy Court, Louisville, Kentucky. The City filed after Truck America won a $14.5 million judgment against the City which has some $1 million of outstanding debt.


The U.S. Supreme Court will decide by December whether it will take up the case of Puerto Rico’s local bankruptcy law, which federal district and appeals courts have overturned as unconstitutional. Puerto Rico enacted Act 71 of 2014, or the Puerto Rico Public Corporation Debt Compliance & Recovery Act, in the summer of 2014, which is applicable to some $20 billion of public corporation debt, to address the fact that P.R. is specifically barred from accessing U.S. municipal bankruptcy protection. Officials said they needed the law to bring Puerto Rico Electric Power Authority (PREPA) creditors to the table because the electric utility was running out of cash to keep operating.

Two of the largest PREPA investors immediately challenged the constitutionality of the law, and it was subsequently declared unconstitutional. Since then, the government has been waging additional court battles to try to enable the law to take effect while lobbying Congress to extend chapter 9 protections to its public corporations and municipalities. The Puerto Rico government appealed in July to the U.S. Supreme Court, arguing that it has the power to legislate on bankruptcy matters related to its public corporations after the U.S. Congress, for unclear reasons, excluded the island in 1984 from the protections afforded by Chapter 9 of the Federal Bankruptcy Code. Prior to that, Puerto Rico enjoyed access to Chapter 9 since 1938.

A three-judge panel of the First Circuit Court of Appeals in Boston in July upheld a ruling by a federal district court in which the recovery act was declared unconstitutional. Two PREPA bondholders, Blue Mountain and Franklin Advisors, filed opposition briefs to the petition last week. The companies reportedly allege that there are no debatable constitutional issues and that PREPA and its creditors are about to reach a deal to restructure the utility’s $9 billion debt. In fact, PREPA announced late Friday that the ad hoc group of bondholders and fuel line lenders have extended their forbearance agreements until Nov. 3.

PREPA will use the extension to finalize its agreements with the forbearing creditors and continue discussions with its monoline bond insurers. “As we continue our efforts to transform PREPA, this extension affords us additional time to continue constructive negotiations with our key creditors,” said Harry Rodríguez, chairman of PREPA’s governing board. “Working with our creditors to restructure PREPA’s debt is an important component of our comprehensive plan that shares the burden of addressing PREPA’s finances among all stakeholders. We look forward to continuing to make progress towards this transformation which will create a better future for PREPA and provide Puerto Ricans the economical, safe and reliable utility they are asking for.”

Some $128 million of short-term bridge bonds, which carry a yield-to-maturity rate of 12%, are scheduled to be paid in full by Dec. 15.


The changes in the healthcare landscape have brought additional pressure and scrutiny to certain hospital sectors. One of the most vulnerable is the facility serving a smaller rural population characterized by vulnerable and less stable underlying economics. One of those entities was the Sierra Kings Hospital District. California hospital districts have long been under pressure and several have availed themselves of Chapter 9 protection. In 2009, Sierra Kings was one of those. In the fourth quarter of 2011, it closed on the sale of its hospital which it had directly operated since 1965 to Adventist Health. As a part of the bankruptcy proceedings, the statutory lien of the District’s ad valorem taxes which are pledged to debt service was affirmed. All claims which were affirmed in the proceedings were finally paid in full by September 30 of this year.

Now that the bankruptcy has been fully dealt with and an operating track record under the new structure established, the District has obtained a newly upgraded investment grade rating from Moody’s and plans to return to the market. The upgrade reflects 100% repayment to its creditors as per its plan of adjustment and the relief of the district of any of the day to day responsibilities of managing the hospital or attendant employees. The District plans to issue $27,040,000 of general obligation bonds secured by a pledge of the statutorily secured tax revenues of the District. For the District, the timing is favorable with rates remaining low and new issue volume remaining constrained.


The continuing budget standoff has resulted in additional pressure on the ratings of the various units of the state’s public university system. While the ratings of the main campus in Champaign-Urbana and at Illinois State were maintained, the other five units saw their ratings downgraded by Moody’s. The reduced cash flow that results from the lack of a budget has kept the ratings of the universities on a negative outlook. For two campuses, the next move is to below investment grade. Unfortunately this negative trend has not induced the governor and the legislature to settle their differences.


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