Muni Credit News October 20, 2016

Joseph Krist

Municipal Credit Consultant









The Securities and Exchange Commission today announced that, in fiscal year 2016, it filed 868 enforcement actions exposing financial reporting-related misconduct by companies and their executives and misconduct by registrants and gatekeepers, as the agency continued to enhance its use of data to detect illegal conduct and expedite investigations. It was a new single year high for SEC enforcement actions for the fiscal year that ended September 30.

The agency also brought impactful first-of-their-kind actions in fiscal year 2016, including some involving the municipal bond market:  municipal advisors for violating the municipal advisor antifraud provisions of the Dodd-Frank Act; a private individual for acting as an unregistered broker.  In addition, fiscal year 2016 included a first-of-its-kind trial victory: the first federal jury trial by the SEC against a municipality and one of its officers for violations of the federal securities laws.

Public finance market actions included enforcement actions against 14 municipal underwriting firms and 71 municipal issuers and other obligated persons for violations in municipal bond offerings as part of the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative. Charges against State Street Bank and Trust Company, a former State Street senior vice president, and a lobbyist with conducting a pay-to-play scheme to win contracts to service Ohio pension funds.

It charged Ramapo, N.Y., its local development corporation, and four town officials who allegedly hid a deteriorating financial situation from their municipal bond investors; charged California’s largest agricultural water district, its general manager and former assistant general manager with misleading investors about its financial condition as it issued a $77 million bond offering; and charged a municipal advisor, its CEO, and two employees for breaching their fiduciary duty.


With investors looking for yield and diversity, territorial issuers have some interest. So we look at the Guam Power Authority. It shares many characteristics which have proven problematic in Puerto Rico but also has its own characteristics to offset those negatives. Guam Power Authority is rated Baa2 with a stable outlook.

GPA’s outstanding senior lien bond rating reflects GPA’s monopoly position as the sole provider of electricity services to the Guam customer base.  That base includes residential, commercial, and Guam’s governmental customers, in addition to the US Navy, the authority’s largest customer. The rating recognizes the authority’s financial and operational resilience since an August 31, 2015 fire idled two of the authority’s most efficient generating plants. Contrast that with the impact on PR of a fire-related incident. The rating also reflects GPA’s improving debt service coverage and liquidity levels relative to GPA’s Baa-rated peer group. This has occurred  in spite of a declining sales environment.

The local economy remains highly dependent on tourism and US military spending. Fuel oil remains the virtually exclusive fuel source, but GPA is working toward increasing fuel diversity through a mix of renewables, battery storage and construction of a combined cycle plant with dual-fuel capabilities. This plan is motivated by increasingly stringent Environmental Protection Agency (EPA) requirements, which the authority is currently negotiating. The rating also considers the dependence of the island’s economy on historically volatile international tourism. Economic conditions in Japan tend to have a significant effect on tourism levels.  The lack of transfer payments to the general fund of the government of Guam is another positive factor.


Chicago will use surplus TIF revenues to help Chicago Public Schools pay for a new teachers’ contract. Mayor Rahm Emanuel unveiled a proposed 2017 budget that declares a $175 million TIF surplus. Based on the distribution formula, the city will receive about $40.5 million while about $88 million will flow to the financially distressed school district. CPS had included $32 million of TIF money into its fiscal 2017 budget, expecting the city to declare a more modest $60 million surplus.CPS received $103 million in fiscal 2016.

The budget follows CPS and the Chicago Teachers’ Union reaching a tentative agreement on a new four-year contract that averted a strike set to begin October11. The city has annually freed up surplus TIF revenue but limited the amount with the annual releases varying in size. The action — promoted and endorsed by some city council members and union officials and initially resisted by Emanuel — has prompted debate.

These issues include what is the appropriate use of TIF revenues, which are supposed to be set aside for development purposes, whether even more should be freed, and whether the funds provided too easy a political escape for the district, which was seeking deeper concessions from the Chicago Teachers’ Union. Other issues include whether or not the revenue represents a non-recurring revenue stream that can’t be counted annually to cover an annual operating expense, a position Emanuel seemed to previously back in statements.

The city budget director now says “I don’t see TIF surplus at this stage as a one-time revenue. ” “I see it as an ongoing revenue.” Much of the surplus funding being freed up comes from frozen, canceled, and expiring TIFs as well as the “declared” amount. The budget director projects that surpluses will be available for well over a decade, and therefore should not be considered a so-called one-shot. The majority of this year’s surplus comes from the seven downtown TIF districts that were frozen last year and will be retired when existing projects are paid off.

Those districts will generate about $250 million in surplus revenue over the next five years, according to the city’s annual financial analysis.

The district’s historic use of one-shots, from debt restructurings to a three-year partial pension holiday to cover past deficits, have driven the school district’s structural deficit up to $1 billion. One of Emanuel’ top council allies acknowledged TIF funding is only a temporary patch. ” Mayor Emanuel’s floor leader, Alderman Patrick O’Connor, acknowledged TIF funding is a one- or two-year fix.  “We’ve done it this year so we can keep the schools open…but what we need to do is find a permanent solution.”

TIF has long been used to support school capital projects — the city committed funds to bond issues in 2007 and 2010 under former Mayor Richard Daley’s school modernization program — so it’s not improper to now use to help with an operating expense, O’Connor added. Chicago’s 146 TIF districts are expected to generate $475 million next year. The program began in 1984.  Once designated a TIF district, the amount of property taxes that flows to general government coffers is frozen and revenue growth goes to fund qualified work in the district to support development for 23 to 24 years. The city has also issued bonds backed by the revenue.

Emanuel implemented reforms after taking office in 2011 and signed an executive order in 2013 that required the city to declare a surplus from TIF districts annually of at least 25 % of the available cash balance after accounting for current and future projects or commitments. Emanuel froze the downtown TIFs last year. Since 2011, a total of $853 million of surplus revenue has been distributed but the amount has varied significantly on an annual basis from $97 million to $276 million.

The state committed $215 million to help fund teachers pensions’ but it is dependent upon passage of a state budget and agreement on state pension reforms. An additional $130 million of state aid is also uncertain beyond fiscal 2017. CPS has failed to provide a price tag for the new teachers contract.

The district’s $5.4 billion fiscal 2017 budget was based on figures from a January offer that was rejected by union delegates. It assumed $30 million in savings this year from the phase out of the $130 million annual expense of covering 7% of teachers’ 9% pension contribution. The tentative agreement leaves intact that benefit for existing teachers. It phases the cost out for teachers hired after Jan. 1 but gives them a 7% base pay raise. Cost-of-living raises proposed in January were scaled back and occur in only year three and year four. Teachers also agreed to healthcare concessions. An early retirement offer for some teachers adds to the unknown costs of the deal. The contract would be retroactive to last year, when the previous pact expired.


The Nevada Legislature approved a plan that would use $750 million in public money to build an NFL stadium in Las Vegas, despite opposition to a project partly funded by billionaire casino mogul Sheldon Adelson. Oakland Raiders owner Mark Davis pledged $500 million toward the building of the stadium. NFL owners would still need to vote by a three-fourths majority to allow the Raiders to move from Oakland to Las Vegas. The matter is expected to be addressed at next week’s fall owners meetings, but there will not be any votes. The Raiders cannot apply for relocation until Jan. 15.

Lobbyists for the project worked hard to meet the necessary two-thirds threshold. It scraped by with the minimum amount of support, when lawmakers called for a quick vote without the customary speeches. Republican Gov. Brian Sandoval, signed  the deal Monday in Las Vegas. The Nevada Senate gave final approval to some minor changes after the Assembly voted 28-13 and the Senate voted 16-5 in favor of the bill. The measure would raise hotel taxes by up to 1.4 percentage points in the Las Vegas area to fund a convention center expansion and build a 65,000-seat domed stadium. Nine Democrats and four Republicans in the Assembly opposed the bill, which united members on the far left and far right of the political spectrum.

The project was nearly derailed by a state report that said the Nevada Department of Transportation wants to accelerate nearly $900 million in planned road work to accommodate stadium-related traffic. Lawmakers said they felt blindsided after the project estimate did not arise during routine discussions on the project. Transportation officials clarified that the projects were already planned and wouldn’t require raising additional revenue. Unsurprisingly, critics also decried the rushed deal, which is happening in an abbreviated special session rather than the four-month regular session next spring. They complained that the legislature was applying new tax revenue to a stadium instead of reserving it to alleviate an anticipated state budget shortfall.

The public contribution will be larger in raw dollars than for any other NFL stadium, although the public’s share of the costs — 39 percent — is smaller than for stadiums in cities of a similar size, such as Indianapolis, Cleveland and Cincinnati. Defenders of the stadium say Las Vegas’ outsized tourism economy, with 150,000 hotel rooms and 42 million visitors each year, is different than other markets that are more dependent on locals and where stadiums are more likely to cannibalize other businesses. The economist who helped develop the deal admitted that,. “I do not disagree with the analyses that have been done. … If we take the visitor component out of our economic impact model, it is negative . He justified it by saying that a traditional analysis is inappropriately applied here.”

Proponents project 451,000 new visitors will come to Las Vegas as a result of the stadium, producing $620 million in economic impact. That assumes the stadium hosting 46 events, including 10 NFL games, six UNLV football games and a variety of concerts, sports and other events. Laborers and veterans said they needed the estimated 25,000 construction jobs the project to revive an industry which was devastated in the recession. The stadium is estimated by proponents  to bring 14,000 permanent jobs to the Las Vegas area. The total deal also sends $420 million for convention center improvements aimed at keeping Las Vegas’ lucrative convention industry competitive. The hotel bill for an average-price night at a Las Vegas Strip hotel would go up about $1.50 as a result.


Loyalton, Calif.,  is  a fading town of just over 700 that had not made much news since the gold rush of 1849. Its sawmill closed in 2001, wiping out jobs, paychecks and just about any reason an outsider might have had for giving Loyalton a second glance. The town however is at the forefront of looming pension problems facing cities large and small.  Recently, the California Public Employees’ Retirement System, or Calpers, said Loyalton had 30 days to hand over $1.6 million, more than its entire annual budget, to fund the pensions of its four retirees. Otherwise, Loyalton stood to become the first place in California  where a powerful state retirement system cut retirees’ pensions because their town was a deadbeat.

One employee retired in 2004 with an annual pension of about $48,000, but because of Loyalton’s troubles, Calpers is threatening to cut that to about $19,000. Employees often think of public pensions as bulletproof, because cities seldom go bankrupt, and states never do. Of all the states, California is thought to have the most protective pension laws and legal precedents. Once public workers join Calpers, state courts have ruled, their employers must fund their pensions for the rest of their careers, even if the cost was severely underestimated at the outset — something that has happened in California and elsewhere.

Those municipalities contemplating leaving the state system find that Calpers is strict, telling its 3,007 participating governments and agencies how much they must contribute each year and going after them if they fail to do so. Even municipal bankruptcy is not an excuse.  “The State of California is not responsible for a public agency’s unfunded liabilities,” said Calpers’s chief of public affairs. Nor is Calpers willing to take more from wealthy communities to help poorer communities. And if it gave a break to one, other struggling communities would surely ask for the same thing, setting up a domino effect.

When Stockton, Calif., was in bankruptcy, the presiding judge,  said the city had the right to break with Calpers — but it could not switch to a cheaper pension plan without first abrogating its labor contracts. Stockton chose to stay with Calpers and keep its existing pension plans, cutting other obligations and pushing through the biggest sales tax increase allowed by law. Loyalton severed ties with Calpers three years ago. It has no labor contracts to break. Though the town is not bankrupt, its finances are in disarray: It recovered more than $400,000 after a municipal employee caught embezzling was fired. But a recent audit found yet another shortfall of more than $80,000.

Calpers has total assets of $290 billion, so an unpaid bill of $1.6 million seems minute. But if Calpers gave one struggling city a free ride, others might try the same thing, causing political problems. Palo Alto may have lots of money, but its taxpayers still do not want to pay retirees who once plowed the snow or picked up the trash in far-off Loyalton. In September, Calpers sent “final demand” letters to Loyalton and two other entities, the Niland Sanitary District and the California Fairs Financing Authority. The Niland Sanitary District has struggled with bill collections, and the fairs financing authority was disbanded several years ago when the state cut its funding. Both entities stopped sending their required contributions to Calpers in 2013 but have continued to allow Calpers to administer their pension plans.

Loyalton, hoped to save $30,000 a year or more that the town had paid. Loyalton did not plan to offer pensions to new workers. And it had been paying its required yearly contributions to Calpers, so officials thought its pension plan must be close to fully funded. But Calpers calculates the cost of pensions differently when a local government wants to leave the system — a practice that has caught many by surprise. If a city stays, Calpers assumes that the pensions won’t cost very much, which keeps annual contributions low — but also passes hidden costs into the future, critics say. If a city wants to leave, Calpers calculates a cost that doesn’t rely on any new money and requires the city to pay the whole amount on its way out the door.

Loyalton’s expenditures for all of 2012 were only $1.2 million, and much of that money came from outside sources, like the federal and county governments. Local tax collections yielded just $163,000 that year, according to a public finance website maintained by the Stanford Institute for Economic Policy Research. The bill was due immediately, but Loyalton did not pay it. It has been accruing 7.5 percent annual interest ever since.

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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