Muni Credit News September 15, 2016

Joseph Krist

Municipal Credit Consultant

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CHICAGO PENSION VOTE

The City Council by a vote of 40 to 10 approved the mayor’s plan to put a 29.5 percent tax on water and sewer bills to fund a Municipal Employees Pension Fund with $18.6 billion in unfunded liabilities that’s estimated to run out of money in 2025. The tax will be phased in over a four-year period to minimize the burden on homeowners and businesses already facing an $838 million in property tax increases for police, fire and teacher pensions and school construction.

The average homeowner will pay $53.16 more next year; $115.20 in 2018; $180.96 in 2019 and $225.96 in 2020 and 2012. During the four-year phase-in, the city’s annual take will rise — from $56.4 million next year to $240.1 million in 2020. The plan was “sold” as the most “reasonable” alternative given the relatively lower water and sewer rates that Chicagoans pay for Lake Michigan Water.

It is acknowledged that the tax is not a total answer for the city’s $30 billion pension crisis but many argue that the influx of $240 million in annual revenue by 2020 will go a long way toward helping Chicago meet the challenge. The largest of four city employee pension funds would still be left with a hole in 2023 — even after the utility tax is fully phased in. That hole will require “more revenue” to honor the city’s ironclad commitment to reach 90 percent funding over a 40-year period. Cost-cutting and future benefit reductions could fill at least part of the gap.

After the vote, Emanuel acknowledge that the aldermen may well pay a political price for saving the “fourth and final” city employee pension fund. The mayor’s City Council floor leader said, “I don’t think anybody who is living in Chicago thinks this is the last tax increase that any City Council member is gonna vote on in this body for the next 10 or 15 years. There will be more.” “But this is going to put us into a situation where our pension funds will be ramped up to an actuarial funding. And it will allow us to, at the state level, begin to work on some answers that help us long-term. And that’s really where we want to be.”

The Council insisted on last-minute language that would prohibit the city from spending utility tax proceeds on anything but the Municipal Employees Pension Fund. The Mayor accused the Illinois Supreme Court of putting a “straight-jacket” on Chicago by overturning his plan to save the city’s largest and smallest pension funds. The vote creates a way out of those legal constraints, albeit at a heavy price for Chicago taxpayers and a potential political price for himself and the aldermen who supported it. The Illinois General Assembly needs to sign off on the employee concessions tied to the mayor’s plan to save the Municipal Employees and Laborers pension funds.

ATLANTIC CITY TO MISS LOAN DEADLINE

Atlantic City Mayor Don Guardian said his troubled resort town will miss the Sept. 15 deadline to pass a resolution dissolving the water authority, one condition for a $73 million state loan. The mayor said, “Although the September 15th deadline will pass tomorrow without a City Council resolution dissolving the MUA or designating it as collateral in case of default, we have asked the state for a reprieve on this, because we believe that the MUA will actually be a better part of the overall financial solution if it is kept whole,” Guardian said in a statement.  “In the end, we think this will be the best plan to move Atlantic City forward while at the same time maintaining our sovereignty and decision making rights now held by locally elected leaders.”

Under the terms of the agreement, the state can demand immediate repayment if the city fails to disband the Municipal Utilities Authority. As we went to press Governor Chris Christie, had not issued a response to Guardian’s statement. The city has until November to develop a five-year plan to restore fiscal stability and avoid a state takeover. The state could sell its assets and void or change labor contracts through he stated that the “150-day plan is moving forward quickly.  We just need the time to finish the plan and to present it publicly.”

Should the State move to take control of the City, there is likely to be litigation seeking to delay or stop the effort. The powers that be in Atlantic City may not be the best managers or leaders but they will fight as long as possible to maintain home rule for the City. The governor’s role in the Trump campaign may be enough of a distraction to preempt action at this time but once the election passes and the deadline for a financial plan has arrived state action is more likely.

EAST CLEVELAND, OHIO

East Cleveland is located only minutes from University Circle, the cultural hub of Cleveland. Cultural institutions located here include the Cleveland Museum of Art, which is celebrating its centennial year after completion of a $350 million renovation and expansion. Other institutions located here include the dynamic new Museum of Contemporary Art, the Cleveland Institute of Music, Severance Hall, home of the world renowned Cleveland Orchestra, the Cleveland Botanical Garden, the Museum of Natural History and Case Western Reserve University.

John D. Rockefeller purchased Forest Hill Park in 1873 and built his summer home there. His plan was to develop an upscale residential and commercial development featuring French Norman-style homes. After a fire which destroyed the Rockefeller home in 1917, the Rockefeller family donated the property to the cities of East Cleveland and Cleveland Heights, with the stipulation that it be developed as a park and recreational area. The Rockefeller homes are listed on the National Registry of Historic Places as the “Forest Hill Historic District.”

Rockefeller also donated the land for Huron Hospital in 1931 which was the city’s largest employer when it closed in 2011. East Cleveland is also notable as the home of General Electric Corporation’s Lighting Division at NELA Park, established in 1911, the first industrial research park in the world, following General Electric’s acquisition of the National Electric Lamp Company in East Cleveland.

Much has changed over the years as the industries which fuelled the City’s development changed and moved on and little was done to replace them. Now, the City is essentially  insolvent facing bankruptcy and trying to negotiate a merger with Cleveland. Over 40 percent of the population lives in poverty, streets are dotted with abandoned homes and unemployment remains at double digit levels.

In the midst of those negotiations which have been contentious to say the least, the Cuyahoga County Board of Elections and East Cleveland City Council Clerk’s office have certified more than 600 petition signatures to force a recall vote of Mayor Gary Norton and City Council President Tom Wheeler. The board’s executive director said he expects to set the election for Dec. 6.

The special election, which could cost the city between $25,000 and $30,000, will come just 10 months before the next mayoral primary election. The residents needed 560 valid signatures to force a special recall election. More than 1,200 signatures were submitted to the board. Under the East Cleveland charter, if the mayor did not resign by yesterday, he will face a recall election within 60-90 days. Norton does not plan to resign. Norton said the money the election will cost will have to be cut from other city services. He pointed to possible cuts in police and fire.

The City Council has already faced recall efforts twice since December, and an effort to recall the mayor last spring failed. An amendment to the city’s charter meant to curtail the ease with which residents can trigger a recall is currently being reviewed by the board of elections and has not been finalized for the November ballot. Eventually, the annexation question will be put to a vote of East Cleveland residents. East Cleveland’s proximity to University Circle means that in a merger with Cleveland, land could be ceded for potential luxury developments drawing wealthy residents desirous of living near the cultural heart of the city.

CA. DISCLOSURE BILL SIGNED INTO LAW

Gov. Jerry Brown signed into law Senate Bill 1029. This bill would require that the report of proposed debt include a certification by the issuer that it has adopted local debt policies, which include specified provisions concerning the use of debt and that the contemplated debt issuance is consistent with those local debt policies.

This bill would also require a state or local public agency to submit an annual report for any issue of debt for which it has submitted a report of final sale on or after January 21, 2017. The bill would require the annual report to cover a reporting period of July 1 to June 30, inclusive, and to include specified information about debt issued and outstanding and the use of proceeds from debt during the reporting period. The bill would require that the report be submitted within 7 months after the end of the reporting period by any method approved by the commission. The bill would require the commission to consult with appropriate state and local debt issuers and organizations representing debt issuers prior to approving any annual method of reporting pursuant to these provisions, as provided.

California’s 4,200 units of local government have issued $1.5 trillion in debt since 1984. The California Debt and Investment Advisory Commission (CDIAC) was created in 1982 to provide information, education, and technical assistance on debt issuance and investments to local public agencies and other public finance professionals. Existing law requires the issuer of debt of state or local government to submit reports to the commission, within specified timeframes, of the proposed issuance of debt and of final sale, as provided.

It is the intent of the Legislature that all debt issuance of state and of local governments be published in a single, transparent online database that allows the citizens of California to analyze, interpret, and understand how debt authorized by the public is utilized to finance facilities and services at the state and local level. The issuer of any proposed debt issue of state or local government shall, no later than 30 days prior to the sale of any debt issue, submit a report of the proposed issuance to the commission by any method approved by the commission.

This subdivision shall also apply to any nonprofit public benefit corporation incorporated for the purpose of acquiring student loans. The commission may require information to be submitted in the report of proposed debt issuance that it considers appropriate. Failure to submit the report shall not affect the validity of the sale. The report of proposed debt issuance shall include a certification by the issuer that it has adopted local debt policies concerning the use of debt and that the contemplated debt issuance is consistent with those local debt policies.

OPA LOCKA FLORIDA INVESTIGATION

Earlier this year (MCN, 6/7/16) we noted that Governor Rick Scott issued an executive order declaring that the City of Opa-Locka in Dade County needed  state assistance to resolve the state of financial emergency that currently exists through the implementation of measures authorized  by Part  V, Chapter  218, Florida Statutes. We also noted that the FBI was undertaking an investigation targeting city leaders, including the Mayor, the City Manager and a City Commissioner.

So we are not surprised by this week’s report that David Chiverton, the Opa-locka manager pleaded guilty in federal court on Monday to using his office to pocket thousands in cash bribes from local business owners. Opa-locka government leaders were caught shaking down businesses in exchange for permits and water connections. An indictment is expected to be returned by a grand jury in Miami that will likely name other known figures, including City Commissioner Luis Santiago, according to sources. Public Works Supervisor Gregory Harris pleaded guilty two weeks ago to a bribery charge. Four years ago, Chiverton was hired as assistant city manager and was named city manager November, 2015 after the commission fired his predecessor, following his public disclosures that Opa-locka was almost broke.

It remains a depressingly common thread in these instances that small suburban local governments in areas with very poor socio economic conditions continue to feature corruption along with financial difficulties. In this case, the indicted City Manager is charged with being involved in the crimes he plead to over at least a two year period.

UNIVERSITY OF ILLINOIS

The state university system in Illinois has been a well documented victim of the state’s ongoing budget mess. It is still a more highly rated entity (Aa3/A+) than the State itself despite its long reliance on the State for substantial funding of its public mission as an educational and research resource. So it is with interest that we review the financial information presented in association with its planned sale of some $116 million of revenue bonds.

As is often the case, the most recent audited financials are over one year old covering fiscal 2015. State operating support declined 2.3% or $15 million. Tuition revenues are now over $1 billion or 19% of revenues. Total state funding still totals $1.825 billion, some 31% of revenue. As one could imagine, compensation and benefits account for two thirds of expenses. When a student enrolls, their level of tuition is guaranteed for four years. While even for FY 2016, the University anticipates increases going forward as new students enroll.

The University has done a good job of maintaining its cash position in the face of the State’s budget delays and reductions. Cash and investments were essentially unchanged to slightly increased on a year over year basis. This does the reflect the deferral of funding of certain obligations including pensions. The greatest ongoing pressure facing the Board’s credit is the potential for declines or interruptions in cash flows from the State as it continues to battle over annual state budgets.

Until the State is able to make meaningful lasting progress on its annual budgeting process and funding of pension liabilities, the University’s credit will continue to be under pressure. As it is, the ratings are effectively capped at their current levels. So long as the University relies on a substantial portion of its revenues for its operating budget, this will continue to be the case.

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 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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