Muni Credit News September 20, 2016

Joseph Krist

Municipal Credit Consultant


We are excited to announce that the Muni Credit News is partnering with Court Street Group Research. CSGR is the publisher of The Weekly Perspective, a review of current market issues and credit issues reflecting those events. Through this partnership, investors will have access to some of the best data, thought, information and opinion available today. Make CSGR and the Muni Credit News your most important tool as you navigate the increasingly diverse municipal bond marketplace.

To inquire about becoming a CSG client, email us directly at

Check out The Weekly Perspective at  h


A story about pension funding in California in the New York Times this weekend has focused attention on the different ways of accounting for pension liabilities. The story was about a small six employee municipal district which wanted to shift out of the state retirement system – Calpers – and convert their employees to a 401 k system. That switch would have required it to pay Calpers an amount of money to fund a termination pool it maintains to make sure that funds are available for remaining fund participants. In the case of this small district, it thought that its pension liability was overfunded. When it went to terminate, Calpers charged it a much higher amount.

The difference has to do with which method is used to determine a given entity’s liability – the actuarial approach (which is geared toward helping employers plan stable annual budgets, as opposed to measuring assets and liabilities), and the market approach. Fortunately for investors, in California, both the market values and the actuarial pension values for many places are available on a website run by the Stanford Institute for Economic Policy Research. But for the 49 other states, the market numbers remain unknown.

We decided to look at the data assembled by Stanford to see how California’s cities and districts rank. Stanford uses market valuation of fund assets and determines a per capita liability for each jurisdiction. The entity in the worst position is the southern California suburb of Irwindale, at $134,000 per capita. San Francisco is fifth worst at $47,288 per capita. Beverly Hills was seventh worst at $42,056. The City of L.A. was 13th at $26,847. San Jose was 29th at $19,908. San Bernardino, still waiting to emerge from bankruptcy, was 55th at $17,027. Stockton was 90th at $14,355. Sacramento was 110th at $13,458.

A total of 1,068 units of government has data available to be examined. There are a number of prominent entities for which market value data was not available. These include Los Angeles County, the cities of Bakersfield and Oakland, and a number of the larger school districts in the state. While imperfect, the survey is clearly a good starting point and the data does serve to focus attention on the whole question of what the appropriate method of measurement for pension liabilities is.  It is an issue that won’t go away whether you are an employee, investor, local financial official or taxpayer.


In a case that had its origins in actions taken by Miami, FL financial officials in 2007, a Miami jury found that Miami and its former budget director, Michael Boudreaux, were guilty of securities fraud for faulty disclosures in connection with three 2009 municipal bond offerings. The jury decision is considered to be the first of its kind. The trial was held in the U.S. District Court for the Southern District of Florida in Miami. It took just over two weeks.

Andrew Ceresney, the SEC’s enforcement director, said the commission is very pleased by the ruling. “This was the first federal jury trial by the SEC against a municipality or one of its officers for violations of the federal securities laws. We will continue to hold municipalities and their officers accountable, including through trials, if they engage in financial fraud or other conduct that violates the federal securities laws.”

The verdict is expected to be appealed. The next step for the SEC will be  to file a motion seeking remedies from the case, including an injunction barring Miami and Boudreaux from future securities law violations and financial penalties. The SEC previously obtained an order that commanded Miami to comply with a prior cease-and-desist order from 2003 that resulted from an earlier securities fraud case. “Based on the jury’s findings, the SEC anticipates that the federal district court judge will also enter a finding that the city of Miami violated [the] prior SEC order, imposed after a fully litigated administrative trial, prohibiting it from engaging in fraudulent conduct,” according to the enforcement director.

The jury found that Miami was guilty on all four counts that the SEC sought, which were based in fraud provisions contained in Section 17(a) of the Securities Exchange Act of 1933 and Section 10b-5 of the Securities and Exchange Act of 1934. Finance Director Boudreaux was found guilty on all counts except for the first, which was based in Section 17(a)(1) and would have required the jury to find that Boudreaux “used a device, scheme, or artifice to defraud in connection with the offer to sell or sale of any securities.”

The defense was based reliance on auditors in connection with the alleged fraud and misrepresentations. The jury found that neither defendant completely disclosed the facts about the conduct at issue to the auditors, sought advice from the auditors about their specific course of action, received advice from the auditors about that course of action, or relied on and followed the advice in good faith.

The alleged omissions and misrepresentations were made in: bond offering documents for the three offerings in 2009 that totaled $153.5 million; presentations to bond rating agencies; and the city’s comprehensive annual financial reports (CAFRs) for fiscal years 2007 and 2008, according to the SEC. The city disclosed the inter-fund transfers in each of their CAFRs and official statements, but, according to the SEC, the defendants said the transfers contained money that was not expended and was being returned to the general fund. The SEC contended that money had already been pledged to several ongoing capital projects and some of it was restricted by city law for designated purposes and not the general fund. The assertion to the contrary was considered to be securities fraud.

Defense lawyers argued that the commission could not base its claims on the city’s 2007 CAFR because it was not incorporated into any of the three 2009 bond offerings cited in the complaint. They also argued that the 2008 CAFR did not have any misrepresentations. Additional arguments asserted that the SEC was trying to hold their clients, who they say followed Governmental Accounting Standards Board and other recognized requirements, to a higher standard that does not exist. They also argued that they could not be held responsible for the use of the information by rating agencies.

They claimed that that the fact misstatements were only part of the rating analysis was not tantamount to fraud. Their view was that this was because their analysis encompassed more about  Miami’s finances than just the fund transfers. The fact that certain data would have skewed some of the quantitative ratio formulae used at the rating agencies in the City’s favor is something the City and its finance director either did not understand or overlooked. Neither explanation speaks well for them.


A privately operated Mississippi prison that a federal judge found that was run by gang related inmates was closed last week. The closing is the second by the State of Mississippi of a private facility. The 1400 inmate facility, the Walnut Grove Correctional Facility, was originally financed by a county authority. The original financing was refunded by that issuer and then subsequently refunded twice by the State. Those transactions made the debt an annual appropriation obligation of the State. The most recent refinancing was in July when the decision to close the facility was already public knowledge. The MDOC has said the state simply no longer needed the private prison beds in Walnut Grove.

Due to the impact on the local economy, local authorities have been overstating the debt impact on the State. Walnut Grove is losing 215 jobs in a town of less than 500 and $180,000 in tax revenue than isn’t likely to be replaced to pay for city services. The total annual impact to the city is estimated at $618,500. In reaction, city workers were furloughed and the Town police took a $2-per-hour pay cut.  Approximately $33 million of debt is outstanding for the project maturing through 2027. Like the debt for the first closed facility which was paid through maturity, the State has pledged to appropriate monies for full payment of these bonds. Should that occur, it will mean that all $93 million of the original project cost will have been repaid.

Investors who own locally issued bonds for private prisons will take solace from this outcome. They will hope that it serves as a template  for the resolution of any issues which might arise as the result of similar actions across the country.


The State of Connecticut said on Thursday that it would appeal a ruling in a schools funding case that found that Connecticut was “defaulting on its constitutional duty” to give all children an adequate education because the state was allowing students in poor districts to lag behind while those in wealthy districts excelled.

The state said in its appeal that the judge demanded changes to educational policies that could be enacted only by the Connecticut General Assembly. The judge gave the state 180 days to revamp teacher evaluations and compensation, school funding policies, special education services and graduation requirements.

The Governor accepted the attorney general’s decision to appeal and hoped systemic education problems could be addressed in the coming session of the General Assembly, calling a legislative approach “always preferable to a judicial decision.”


The 11-member Southern Nevada Tourism Infrastructure Committee sent a proposal that could bring the NFL to Las Vegas to Gov. Brian Sandoval for his consideration. The stadium developers’ preferred funding option requires a $750 million public investment, eliminates a 39 percent public contribution cap and allows the private partners to reap all stadium profits during the lifetime of the Raiders’ lease. The deal requires the family of Las Vegas Sands Corp. Chairman Sheldon Adelson, Majestic Realty and the NFL’s Oakland Raiders to pay the remainder of the construction costs for the 65,000-seat stadium, along with any cost overruns. Adelson has pledged to contribute at least $650 million, while the Raiders would pay $500 million.

A special session of the state Legislature to approve the financing plan would have to be called. The plan hinges on a Clark County hotel room tax increase. If lawmakers approve the plan, the Oakland Raiders have promised to pursue relocation to Las Vegas. Stadium supporters said that if the state Legislature doesn’t hold a special session before the Nov. 8 election, then it could make it more difficult for a Raiders relocation package to be approved by the NFL in January. They acknowledge that the final call must come from Sandoval.

“I would like to extend my sincere gratitude to the members of the Southern Nevada Tourism Infrastructure Committee and its Technical Advisory Council for their tireless efforts and dedication to completing the recently approved recommendations… I will begin my review of the Committee’s recommendations and will also begin discussions with legislative leadership, local stakeholders, and my cabinet to clarify any outstanding questions. I will not move forward until all questions have been resolved,” said Governor Brian Sandoval.

“More than one year ago, I signed an Executive Order bringing together many of the brightest minds in gaming and hospitality as well as community leaders in an effort to identify the untapped potential and unfulfilled demands in the Southern Nevada tourism industry. Nevada has served as the standard bearer for global tourism, gaming, and conventions for decades. In order to remain the top destination, we must explore potential opportunities and push forward to lead this international  committee will serve as a roadmap to Southern Nevada’s unrivaled and continued success.”

It sounds like he is a fan.


Last month, Hanjin, the South Korean shipping giant filed for bankruptcy, leaving dozens of ships literally stranded at sea around the world. Of these, 14 were bound for U.S. ports. Some of the stranded ships have been turned away by ports that are fearful their dockworkers won’t get paid. Others have been seized by authorities, with crews prevented from disembarking. But there are a couple of reasons that this should not be an issue for U.S. ports and their revenue bonds.

A U.S. judge has issued a court order allowing some vessels to dock at U.S. ports without the risk of being seized by creditors. The company received authority to spend money needed to dock at U.S. ports and begin unloading four vessels that have been stranded at sea by the company’s failure last week, a company lawyer told a U.S. court on Friday. “We have the money,” an attorney for Hanjin, told a U.S. Bankruptcy Court hearing in Newark, New Jersey on Friday. “We want to call these ports and say, please accept our ships and we want to pay for the services to work the ships.” The attorney said at least $10 million was authorized by a Korean court to begin servicing the four ships.

How, one might ask, can a U.S. judge be involved? We asked and found out about Chapter 15 of the U.S. Bankruptcy Code. Chapter 15 was added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It is the U.S. domestic adoption of the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law (“UNCITRAL”) in 1997, and it replaces section 304 of the Bankruptcy Code. Because of the UNCITRAL source for chapter 15, the U.S. interpretation must be coordinated with the interpretation given by other countries that have adopted it as internal law to promote a uniform and coordinated legal regime for cross-border insolvency cases.

The purpose of Chapter 15, and the Model Law on which it is based, is to provide effective mechanisms for dealing with insolvency cases involving debtors, assets, claimants, and other parties of interest involving more than one country. This general purpose is realized through five objectives specified in the statute: (1) to promote cooperation between the United States courts and parties of interest and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases; (2) to establish greater legal certainty for trade and investment; (3) to provide for the fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested entities, including the debtor; (4) to afford protection and maximization of the value of the debtor’s assets; and (5) to facilitate the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

When I was just staring out in this business, a great mentor of mine told me that what was fascinating about municipal bond analysis is that eventually everything comes through the municipal bond market. This is just the latest example of why that advice was so true.

Disclaimer:  The opinions and statements expressed in this column are solely those  of the author.  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.

Leave a Reply

Your email address will not be published. Required fields are marked *