Municipal Credit Consultant
ARIZONA WASTE DEFAULT
The waste to energy sector of the municipal market has long been plagued with financial difficulties due to political, economic, and/or operating failures. The municipal landscape is littered with failed projects and interrupted or failed payment streams.
The latest example is a financing under taken through the Industrial Development Authority of the City of Phoenix, Solid Waste Disposal Facilities Revenue Bonds (Vieste SPE, LLC – Glendale, Arizona Project). The original project, which was negotiated in 2012, was a two-phase relationship between Vieste and the City of Glendale with phase 1 being the construction of the waste facilities to sort recyclable materials from a stream of acceptable waste to be supplied by the city. Phase 2 of the project would have built an energy facility for the conversion of solid waste into renewable energy.
Phase 1 was completed in 2014 and opened Feb. 20. Immediately, the operator – Vieste SPE – contended that the project was not required to accept yard waste and the issue was submitted to arbitration. An arbitrator’s ruling dated March 31 ruled against the city, stating, “the arbitrator finds that yard waste is not an acceptable waste type under the waste supply agreement before the date on which the phase 2 energy facilities are commissioned.” Due to the disputes with the City of Glendale, the Solid Waste Disposal Facility is not operating and is not generating any revenue to make any payments on the bonds.
In the interim, the Debt Service Reserve for the Bonds has been depleted and the limited funds remaining in the Debt Service Reserve Fund are insufficient to make payments to bondholders. Further, as a practical matter, the Vieste SPE, LLC acknowledges its obligations, but it has no ability to make payment. No further payments will be made to bondholders until a resolution of litigation can be achieved, or circumstances otherwise change.
The issue in question would seem to be one of a somewhat cut and dried nature. That will apparently be determined through an arbitration and litigation process as Vieste LLC has filed a notice of claim against the City of Glendale for $200 million for breach of contract. Vieste claims that it is willing to begin construction on phase two, which would separate all the trash, including yard waste, if the city would accept less payout per year to cover the cost of the construction. The reduced payout would finance a portion of construction costs. The City position is that the project should result in no cost to the City.
This is not the first contract to be subject to dispute as the result of upheaval in the Glendale government resulting in part from questions over the terms of contracts negotiated by previous local administrations. The much better known dispute between the City and the NHL Arizona Coyotes is the most prominent example.
Regardless of the result, the sector should set off alarm bells when these sorts of public/private projects come to the municipal market for financing. It is clear that unless the investor has a high level of knowledge and confidence in the details and strength of the underlying contracts and operation agreements, than these sorts of issues might be best left to the high yield professionals or speculative investors.
FLORIDA BOND VALIDATION RULING
An October 1 ruling validating $700 million of clean energy bonds by the Florida Supreme Court overturned 60 years of case law and made it harder to challenge future bond validations. The Florida justices overturned a 1955 precedent set in the case Meyers v. City of St. Cloud. The Meyers case held that a party that does not appear in a bond validation proceeding in circuit court, where the cases are initiated, still had the right to appeal from the trial court’s decision directly to the state Supreme Court. From now on, litigants must appear in the initial circuit court validation case to preserve their right to appeal.
Since Meyers, the court had stated on three other occasions that citizens and taxpayers who failed to appear in the circuit court bond validation proceeding nevertheless had standing to appeal the final judgment. In this case, the Court relied upon the plain terms of the statute, which specify that “any person wishing to participate in bond validation proceedings must appear in the circuit court. In connection with the filing of a bond validation complaint, section 75.05(1), Florida Statutes, requires that “[t]he court shall issue an order directed against the state and the several property owners, taxpayers, citizens and others having or claiming any right, title or interest in property to be affected by the issuance of bonds or certificates, or to be affected thereby, requiring all persons, in general terms and without naming them and the state through its state attorney or attorneys of the circuits where the county, municipality or district lies, to appear at a designated time and place within the circuit where the complaint is filed and show why the complaint should not be granted and the proceedings and bonds or certificates validated.” Section 75.07, Florida Statutes, goes on to provide that “[a]ny property owner, taxpayer, citizen or person interested may become a party to the action by moving against or pleading to the complaint at or before the time set for hearing.”
Under these provisions, full party status is granted only to those who appear and plead in the circuit court proceedings.
LIPA TO RESTRUCTURE MORE DEBT
This week the Long Island Power Authority (LIPA) could see a second tranche of securitized debt issued that would be applied to the early retirement of some $1 billion of its outstanding debt. The issue comes after amended legislation permitting the securitization which would add to some $2 billion of similar debt authorized by the State in 2013. Proceeds would be applied to the purchase, maturity, or redemption of some of LIPA’s outstanding revenue bond debt. The securitization would be secured by a discrete charge on customer bills which are required to be segregated for the benefit of the securitized bondholders.
This refinancing method creates a more highly rated and lower cost financing vehicle for restructuring the LIPA debt and takes advantage of the current low interest rate environment. The impact of the scheme is a net credit positive for the LIPA revenue bond credit.
MIXED SIGNALS FROM DeBLASIO ON CITY FINANCES
The announcement over the weekend that New York City and the Metropolitan Transportation Authority had reached an agreement on the MTA’s capital funding plan raises some interesting questions about the City’s fiscal policies under the DeBlasio administration. The agreement settles, for the meantime a dispute over what the appropriate level of funding on the part of the City should be for this state agency’s capital needs. Under the agreement, the state pledged $8.3 billion in state funds to the authority, while the city would contribute $2.5 billion. The city had initially agreed to provide $657 million. Where the additional City money will come from is not specified.
The dispute is long running. A recent report by the City’s Independent budget Office reviewed the history of City funding over the period since 1982. The city makes an annual payment to the Metropolitan Transportation Authority (MTA) to support the authority’s capital program. According to the IBO, if the City contribution had remained constant in inflation-adjusted terms since the 1982-1986 Plan, Annual Aid would have exceeded $360 Million in 2014. The city’s contribution to the MTA’s first five-year capital plan (1982-1986) averaged $136 million a year. In nominal terms, the city’s contribution was highest during the 1987-1991 and 1992-1999 plans and has remained fairly constant at around $100 million per year since 2000. The city’s contribution to the MTA’s 1982-1986 capital plan averaged 1.2 percent of total city-funded expenses over the five-year period. Over time the city’s contribution as a share of total city-funded expenses has declined dramatically. The city’s contribution to the MTA capital plan in 2010-2014 averaged just 0.2 percent of total city-funded expenses a year.
$1.9 billion of its funding will come from the city budget and $600 million will come from alternative revenue sources that were still being negotiated with the authority. City officials said one option being considered was a method called value capture, which pays for upgrades by collecting taxes and fees from new development spurred by transit access.
The agreement continues a worrying pattern of inconsistency on the part of the DeBlasio administration. At first, the City takes a position that its finances are stretched and that further increases would damage fiscal stability. This tactic has been used in its general labor negotiations, police staff level debates, and in the ongoing MTA funding dispute. Each time, the issues have been resolved with the City eventually agreeing to higher funding levels than it says it can afford or, in the case of police force staffing, an agreement to a level in excess of that requested. This sends an extremely foggy message about the true state of the City’s budget as well as the outlook for the years ahead.
As for the MTA, any agreement that increases intergovernmental funding should be viewed as a positive for the credit to the extent it slows the growth in its massive current and future debt burden. The agreement as proposed still leaves the Authority some $700 million short of its own estimate of its needs. This in a system that is becoming increasingly expensive for its working class riders while retaining a seemingly insatiable appetite for capital. This in an environment that sees increasing regional competition for potential additional funding sources throughout the region.
NASSAU COUNTY DREAMS ON
One example of regional competition for revenues is Nassau County, NY. The financially troubled and management challenged county, recently released a 2016-2019 Multi Year Financial Plan. The plan relies on several heroic assumptions. The redevelopment of Nassau Veterans Memorial Coliseum is projected to generate a minimum of $334 million in rental income over 49 years to the County, or a minimum of 8% of gross income, whichever is greater. Additional revenues are expected to be derived from projected sales and related economic activity including entertainment, sales and hotel taxes, parking, arena revenues (ticket fees, merchandising, rental/leasing, concessions), and plaza rental revenues.
The MYP reflects the possible sales tax shortfall of $37 million for 2015 and has budgeted 2% growth in 2016 from this reduced base. As the economy expands, sales tax is projected to grow by 2.5% in 2017, 3.0% in 2018, and 3.0% in 2019. The sales tax is where regional competition comes in. The MTA would love additional sales tax revenues to reduce pressure on fares and to derive it from a regional base. At the same time, Nassau County proposes that if the New York State Legislature would allow for the regionalization of the downstate sales tax rate the affected counties would receive significant recurring revenues. Currently, the New York City sales tax rate is 8⅞%, whereas the Nassau and Suffolk sales tax rate is 8⅝%.
At the same time, the County will seek State approval to amend current State law that requires the County to contribute annually to the cost of MTA-LIRR station maintenance. The County is seeking for the State to take over the cost of station maintenance or allow County personnel to perform the maintenance at lower cost. The result would be to potentially reduce revenue to the MTA while increasing Authority expenses.
We see this as the sort of thinking that has continually hindered resolution of the County’s financial decline. Along with this kind of thought, the County continues to place great faith in privatization – the County is currently exploring a potential public-private partnership that could result in the sale, lease, or private operation of the County’s district energy facility. The plant consists of a combined heat and power facility and central utility plant that provides thermal and electrical energy to the marketplace. A request for proposals is expected to be issued by end of 2015. Also to be revived is a plan advisor to explore a P3 to improve sewer service to County residents and strengthen its infrastructure assets. This follows on a previously failed effort to accomplish the same goal.
Overall we see questions about the long-term for New York City, continuation of the constant grind for funding by the MTA in the face of greater limitations, and a continued long unrealistic path to recovery for Nassau County.
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