Muni Credit News September 27, 2016

Joseph Krist

Municipal Credit Consultant


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Following an explosion in its Aguirre central power facility on Sept. 21, most of the 1.5 million people subscribed to the P.R. Electric Power Authority (PREPA) had no energy service, while approximately 400,000 PRASA clients were affected. As of this writing, those numbers were reduced to 300,000 clients without electricity, and 140,000 without water— figures that are still changing. The Electric Power Authority said it is investigating what caused the fire at the Aguirre power plant in the southern town of Salinas.

The fire knocked out two transmission lines that serve the broader grid, which tripped circuit breakers that automatically shut down the flow of power as a preventive measure, officials said. Executive director Javier Quintana said a preliminary investigation suggests that an apparent failure on one transmission line that might have been caused by lightning caused the switch to explode.

Garcia denied the blackout was caused by maintenance problems that have plagued the utility for years, largely a result of the island’s economic crisis. He said the switch where the fire happened had been properly maintained. It was not yet clear how much damage the fire caused. The utility is struggling with a $9 billion debt that it hopes to restructure as it faces numerous corruption allegations. Company officials have said they are seeking revenue to update outdated equipment.

This could not have come at a worse time for the Authority. Its effort to renegotiate its debt requires legislative support for a substantial rate increase. Now that there are additional questions about reliability and maintenance, that support will be harder to gather. The outage also comes in the midst of court proceedings involving corruption in P.R. agencies the Authority. All in all a more difficult environment in which to effect a  settlement of PREPA’s debts and avoid additional defaults.


The Puerto Rico Water and Sewer Authority, PRASA, was a major victim of the power outage as well. Approximately 400,000 customers were impacted as filtration and pumping equipment could not be operated. This damaged supply as well as deliveries. The costs of recovery have yet to be calculated and the event will obviously impact revenues. There will be demands for better backup and redundancy which will raise even greater financial challenges for the Authority as it fights to meet its debt service obligations. The greater repair and other capital requirements will increase both its needs for capital and the likelihood of interruptions in the payment of existing debt service.


Atlantic City has until Oct. 3 to correct its breach of a $73 million bridge loan from the state. the city is in default under its bridge loan agreement with the State as it failed to come up with a plan as required to divest itself of its municipal utilities authority. See the 9/15/16 MCN for more on this situation.

Even if the City comes up with a plan, the state must approve like it. This is far from assured. Should the City be unable to satisfy the State, the likelihood of a state takeover of the city’s finances increases substantially. The relatively short deadline for the City to come up with a cure for the default, makes such a takeover more imminent then we initially thought.

The city has drawn at least $13.5 million from the state, but most of the loan is dedicated to paying back the state for deferred employee health and pension payments and a city school-tax payment. City officials have said the city wouldn’t be able to repay the loan at this time. Liberty & Prosperity, an organization represented by a former City Councilman, has a pending lawsuit that aims, in part, to void the loan agreement. Grossman claims a July 28 council meeting when the loan was approved violated state Sunshine and Local Budget laws.

One thing has swung in the city’s favor. The businessmen leading a group  supporting a November ballot referendum to bring casinos to northern New Jersey all but conceded defeat last week when they announced an end to their advertising campaign. Polling shows the referendum is opposed by a 2-1 margin. If the referendum is rejected Nov. 8, state lawmakers would have to wait two years to attempt to put it on the ballot again.

As we go to press the City has unveiled a proposal for the Municipal Utilities Authority to buy the city’s airport, the former Bader Field, in an effort to satisfy  a key demand from state officials who are threatening to take over the City’s operations. The mayor said the land sale is the first of seven major debt reduction initiatives his administration will introduce over the coming weeks to fend off a state takeover and avoid the need for a bankruptcy filing.  Proceeds from a Bader Field sale are part of the collateral the city put up against its state loan, but Guardian said the city has one year to monetize its utilities authority before the state can intervene.

Bader Field was the first aviation facility anywhere in the world to be called an “airport.” The authority’s executive director said the authority will not dispose of the property without first getting an agreement from the city. The city has suggested that Stockton University, which is building a new campus next to the land, may eventually want some or all of it for athletic fields, an athletic building or dormitories. The city tried to sell Bader Field earlier this year, but did not get bids in excess of $50 million, or about half what the city feels it is worth.

We see this proposal as a part of an ongoing process whereby the City introduces any number of trial balloons in its effort to avoid state control. Should they amount to nothing, we see a state takeover as the more likely outcome than bankruptcy.


Over the years, one of the greatest hurdles to be overcome in the effort to balance the finances of the Chicago Public Schools and deal with its pension liabilities has been the consistent lack of cooperation from its teachers union. Long one of the most militant of the nation’s teachers unions, it has employed a number of hardball tactics essentially given up by other teacher representatives across the country.

In that tradition, the Chicago Teachers Union announced this week that its members have authorized its leaders to call a strike if contract talks break down. The union said just over 90 percent of its members voted in a petition distributed over three days last week, and about 95 percent of those who voted gave the go-ahead for a strike. State law requires at least 75 percent of total CTU membership to authorize a strike before one can occur. The move was not unexpected. The union has to give at least 10 days’ notice before a walkout can take place. A date could also be set for a later time. The first possible date for a teachers strike” would be Oct. 11.

A strike would harm the interests of both sides as state aid to the school district is tied to daily attendance over a prescribed number of days. No school, no aid. Union members also authorized a strike in a vote taken last December.  Should a strike occur this time, it would be the third one since Mayor Rahm Emanuel took office in 2011. In the end, the union’s ongoing resistance to reform is a major negative weight on the CPS credit.


The presidential debate has helped to focus much attention on Donald Trump and his use of tax abatements to enhance the profitability of his New York developments. One report estimated that he has benefitted to the tune of $889 million from such abatements over his four decade career. Those of us who have economics in our background know that these sorts of deals are also called tax expenditures. While there may not be a direct monetary expenditure to support a project, an abatement or tax expenditure serves the same purpose.

Earlier this year, one of New York City’s major development-related tax abatement programs, 421-a, expired, impacting the development of multi-family housing.  Just because the program was suspended does not mean the city is not still paying for previously granted tax breaks. In 2017, the current fiscal year, the city will forego $1.4 billion in property tax revenue due to exemptions granted in prior years. The last of the properties awarded 421-a benefits before the program’s expiry are not expected to fully return to the property tax roll until 2044. The abatement for the Hyatt Hotel project at Grand Central – the project that launched the Donald’s career in 1980 – will not expire until 2020.

This particular program has some troublesome characteristics. Since fiscal year 1998, only 16 percent of the total tax expenditure awarded each year on average is attributable to newly exempted properties. For the 2017 tax roll, $94.2 million in new 421-a tax expenditures were added, the largest volume increase since 2013 and $14.2 million greater than the 20-year average. Buildings that started construction after 2008 are subject to a cap on the amount of value exempted regardless of appreciation. However, for older buildings the value of the exemption can continue to grow as properties appreciate.

The takeaway is that these programs must be carefully targeted and designed. While many were granted during times of economic uncertainty, the long-term budget impact and current economy of the City argue against maintenance of the same design. There are many ways to address the City’s shortage of affordable housing without impacting the revenues available for services for the residents.


Yet another state capital is in the news for its poor financial condition, this time it is Hartford, CT. Days after Mayor Luke Bronin revealed that the city’s budget gap has grown to more than $22 million this year, Standard & Poor’s lowered Hartford’s G.O. bond rating to BBB from A+. The change ” reflects the city’s structural imbalance without a credible plan in place to return to balanced operations.”

The fiscal 2017 budget imbalance is blamed on the use of reserves and labor concessions that have not been realized.  The city is facing significant out-year budget gaps in excess of $30 million in 2018 and $50 million as well. The mayor has said what Hartford did for many years was to hide its true position. City projections show Hartford’s budget shortfall has widened to $22.6 million this year, up from $16.5 million. The deficit is linked to employee concessions that haven’t materialized, a sizable legal settlement and debt service on a baseball park.

The mayor has asked frequently in recent weeks for legislative reform that would give Hartford and other cities new ways of raising revenue. Connecticut’s municipalities have long relied primarily on property taxes to fund critical services. He renewed that view after the S&P downgrade saying “we can put Hartford and the capital region on a path to fiscal health and economic growth, but it’s going to take everyone coming together — in Hartford, the region and the state — to face the realities that we need to face.” His position is that the city of Hartford can’t cut or tax its way out of this challenge by itself.

Waterbury was the last Connecticut municipality to seek state oversight when the legislature established a financial review board in March of 2001. The specific goal in that case was balancing the city’s budget for five straight years. That review board maintained control of Waterbury’s finances until 2007. Bankruptcy has been mentioned but we see the likelihood of that as being quite small given the State’s history of intervention when the City of Bridgeport filed for Chapter 9 protection in 1991.

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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