Muni Credit News Week of January 1, 2018

Joseph Krist





New Jersey Economic Development Authority

State Lease Revenue Bonds

Fitch: A

It will only be the first week of a new administration in Trenton after the end of the Chris Christie era but the State will see its first test of investor perceptions of its credit outlook through this issue of state lease revenue bonds. The bonds are secured by the authority’s payments is derived from separate lease-sublease arrangements for each project under each series of bonds between NJEDA and the Department of the Treasury’s Division of Property Management and Construction (DPMC). A trustee has been assigned all of NJEDA’s rights to receive DPMC’s rental payments, funded via annual legislative appropriation, under the subleases related to these bonds for the benefit of bondholders.

New Jersey uses annual appropriation debt to finance over 95% of its direct capital needs as the result of a cumbersome electoral approval requirement for the issuance of general obligation debt. The State has a very mixed history of success in seeking voter approval. This builds in a pretty strong incentive for the state legislature to annually appropriate monies for its lease revenue debt. Unsurprisingly, a lawsuit has been filed challenging the legality of this bond issue under the debt limitation clause of the state constitution; however, bond counsel strongly believes NJEDA’s ability to issue debt authorized by its enabling act is not subject to the limitations of the clause. Bond counsel will render a clean legal opinion concurrent with the sale of the bonds.

The change in administrations has not changed the basic challenges facing the state. Pension contributions of $1.9 billion approximated 5.4% of fiscal 2017 adjusted appropriations, but were only four-tenths of the $4.7 billion actuarially-determined contribution (ADC). A contribution at the ADC would have resulted in pensions consuming 13.5% of fiscal 2017 adjusted appropriations. The state has appropriated $2.5 billion for its fiscal 2018 contribution, 50% of the ADC, consistent with its stated plan to incrementally add one-tenth each year until full funding of the ADC is reached, in fiscal 2023. Under the 2017 Lottery Enterprise Contribution Act (LECA) the state’s payment is offset by anticipated net lottery receipts, resulting in a net $1.5 billion payment from operating funds.  Pressure to aid education to limit growth in local taxes continues as does the need to fund health expenses. Like any state with significant health expenses, it would be vulnerable to decrease which the Congress will likely try to impose on Medicaid funding and possible other healthcare funding.




Pennsylvania will see a tenth consecutive annual rise in tolls on its Pennsylvania Turnpike. The toll hike will raise the most common toll, a trip between two interchanges, from $1.95 to $2.10 for cash customers, about 7.7 percent, and the E-Z Pass toll from $1.23 to $1.30, about 5.7 percent. Tolls have been rising annually ever since the Commonwealth enacted its now infamous plan to use turnpike revenues to fund non-Turnpike transit projects throughout the State.  The associated state transportation law that requires turning over $450 million of turnpike revenues to regular state coffers for mass transit through fiscal year 2022. After that, the law says the amount drops to $50 million.

By Ii2nmd at English Wikipedia, CC BY-SA 4.0,

Originally the plan was to be part of an overall scheme in 2007 that included tolling Interstate 80. I-80 tolls would have ended the turnpike payment. When the federal government rejected tolling I-80, the state’s main east-west highway, the turnpike had to keep paying $800 million a year to the state for mass transit and non-turnpike road and bridge improvements. Since 2007, the turnpike has turned over about $5.65 billion — about $2.25 billion to the state motor license fund for road and bridge projects and $3.4 billion to the public transportation trust fund for mass transit systems. The turnpike has generally met projections of 4 percent annual growth in costs set out in a 2007 management plan while also selling $1 billion in bonds annually to pay for turnpike repairs and upgrades.

Before the 10-year streak of hikes, the turnpike only raise tolls five times since opening in 1940.


Congestion pricing is likely to get its biggest test yet as it looks like New York City may get some form of it in 2018. A combination of available tested technology on other City roads, greater political support, and a recent study supporting the notion that vehicles for hire (Uber et al) are choking the City’s streets to the point of perpetual gridlock. So it is believed that at least a fee on user of vehicles will be proposed with the proceeds going to fund improvements to MTA systems – primarily the subway – in the City.

The well funded car services which the City estimates account for some 103,000 vehicles a day are expected to object vociferously with extensive media efforts. The situation is complicated by the Mayor’s opposition to congestion pricing which is seen by many as the result of pressure and financial support from the industry. A fee on vehicles for hire would address some of the long standing concerns that “outer borough” state legislators have used as a basis for refusing to support the needed state legislation enabling the City to impose such a plan.

The San Francisco County Transportation Authority is considering turning existing car pool lanes on Highway 101, as well as Interstate Highway 280 to toll lanes in an effort to ease congestion on those roads. The transportation authority must get approval from its board, which is made up of members of the Board of Supervisors, before any carpool or paid lanes are created. So far the Board has expressed skepticism about the plan citing increased costs for their constituents.


The healthcare sector will continue to be challenged as the result of changes to the individual mandate and an expected campaign to significantly alter the federal Medicaid and even Medicare plans. The sector will continue to consolidate. In addition to the normal risks associated with implementation of a merger, the merging institutions will  often be expanding their footprint into what for them are non-traditional markets. They include essentially urban entities absorbing more rurally based facilities in an effort to expand their revenue base. These efforts carry with them however, the risks associated with poorer rural patient bases whose access to primary care may already be limited as well as their access to affordable insurance.

This will require these facilities, as well as those whose base is primarily the underinsured less economically well off inner city populations to be especially innovative as they meet the challenges of these poorer cohorts. This will require hospitals to use technology not only  not only in their medical procedures but also apply it to coordination of services in and out of their facilities. These efforts, which have been applied at some large urban facilities, have been shown to have a positive impact on cost trends as well as patient outcomes.

These steps will become more of a necessity as hospitals face an increasingly challenging funding environment as well as an evolving competitive landscape. While it has always been important factor for investors and analysts, a solid understanding of all of the market forces impacting a hospital credit will take on even greater importance in this rapidly changing industry.



Connecticut, Louisiana, and Oklahoma are already facing significant current year budget gaps. We expect contentious processes to resolve these issues to be front and center in 2018. We also expect that the overall state budget process will be more difficult than usual with much confusion emanating from  the extended rollout of IRS regulations resulting from the new tax laws. The lack of guidance as to details of the implementation of a law whose provisions go into effect January1. The timing of these events will complicate revenue estimates for the states, likely require changes to state tax procedures since so many are linked to federal policies, and will face pressures on both the expense and revenue sides due to the loss of the SALT deduction above $10,000 and expected expenditure requirements related to an infrastructure program.


The IRS did finally provide some clarity to the effort on the part of many taxpayers to prepay 2018 local property taxes in an effort to fully deduct them under existing regulations which ended on December 31. Taxpayers will be able to take advantage of the maneuver — but only under limited circumstances. The IRS said that taxpayers can claim an additional property tax deduction when paying their 2017 taxes if they pay the tax in 2017 and if the local tax authority has notified homeowners prior to 2018 of how much they owe in property taxes, known as a tax assessment. State and local laws vary as to when this occurs.


The Atlanta Braves were not the most successful franchise in Major League Baseball with the year ending in significant scandal involving the team’s front office. On top of this, it appears that the stadium is not turning into the economic windfall that was promised by government supporters of Cobb County’s role in financing the project. Those supporters had predicted positive revenue effects for the County from the County directly but also from its “halo effect” on economic activity indirectly linked with the project.

By Thomson200 – Own work, CC0,

Former Cobb County Chairman Tim Lee predicted “a 60 percent annual return on investment from the SunTrust Park partnership. “In fact, it will be the first private public partnership of its kind to result in a return on investment to taxpayers in the very first year.”  The County then undertook an increase in spending including employee compensation increases. Now the new County Finance Director Bill Volckmann said even though income from the stadium is on track to meet or even exceed expectations, “It’s not going to be a windfall.”

As a result of the activity disappointment and increased spending, Cobb is facing a $30 to $55 million budget shortfall after raiding $21 million in rainy-day funds to plug a gaping hole in the 2018 budget. The public debt obligation on the stadium amounts to $16.4 million a year. Of that, $6.4 million is paid by Cobb residents out of the county’s general fund, while the remaining $10 million is funded through taxes and fees, including a countywide hotel/motel tax, a countywide rental car tax, a localized Cumberland hotel/motel tax, and localized Cumberland commercial property taxes. Cobb pays another $1.2 million for stadium operation and maintenance and about $1 million for police overtime and traffic management at games and events.

In total, Cobb County is paying a minimum of $8.6 million out of its general fund just for debt service, stadium operations and public safety. The Cumberland Community Improvement District is 50% developed and the commercial project around the stadium has generated about $460,000 in property taxes for the county’s general fund and $1.3 million for schools. The Braves pay $6.1 million toward the debt service.


While many have expounded on the potential for financially disruptive effects on municipal credit from technological change in the future – near and far -, a different threat emerged in the early summer of 2017. The threat involved the use of security software from a Russian vendor – Kaspersky Labs – whose ownership had links to the Kremlin. It was feared that the software might actually be making those systems which used the software more vulnerable to malevolent hackers and it was recommended by the Federal Government that that civilian agencies remove Kaspersky Lab software within 90 days. that civilian agencies remove Kaspersky Lab software within 90 days.

Investigative reporting by NBC News and the Washington Post revealed that the use of Kaspersky software was rather widespread among U.S. municipalities. After various hacking of operating systems at some municipal utilities and ransomware efforts to extort funds from some municipalities, pressure grew to force these entities to find some other source of security for their various computer systems.

Much of the resistance to changing to different software seemed to be based on the cost of replacements. After all, the success of the software was in many ways tied to its relatively inexpensive cost and widespread availability through distributors like Best Buy. A smaller municipality could literally walk into Best Buy and purchase the software and install it relatively cheaply so it was attractive to many.

Since that time, the publicity surrounding the background of Kaspersky’s ownership has led to public pressure to replace the software. Some municipalities admit that this rather than the occurrence of any actual hacking event led to changes. Now the effort has been reinforced by President Donald Trump signing into law legislation that bans the use of Kaspersky Lab within the U.S. government. This will likely embolden users as well as constituents in the effort to replace the software.

We view the action as positive as an increasing number of efforts to access and impede municipal operating systems increase. In addition to the risk to major utility and public safety entities, the potential for financial mischief and potential financial damages should create momentum to insure that security for municipal operating systems is subject to the fewest risks. This will mitigate any potential negative financial impacts resulting from technological change on municipal credit.

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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