Muni Credit News Week of October 16, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$104,500,000

THE INDUSTRIAL DEVELOPMENT AUTHORITY OF THE CITY OF ST. LOUIS, MISSOURI

DEVELOPMENT FINANCING REVENUE BONDS

(BALLPARK VILLAGE DEVELOPMENT PROJECT)

This non-rated bond issue will provide the financing for the expansion of the Ballpark Village mixed use retail, entertainment, and residential project that has been being developed across the street from Busch Stadium, the home of Major League Baseball’s Saint Louis Cardinals. The Cardinals have long been one of the most regionally supported baseball teams due to their pre-1958 status as the western most located major league baseball franchise and the broadcast of their games to some 40 states over legendary radio station KMOX. This has created a large and loyal fan base which is known to travel significant distances to see the team play.

The development seeks to capitalize on the team’s role as the City’s leading sports attraction as well as the unique attendance characteristics of its disperse fan base. This is seen as generating a higher than usual demand for retail and entertainment product as a part of the overall fan experience. This is supported by the changing nature of demand for an experience which extends beyond the game itself.

The facilities are expected to produce revenue to support infrastructure needed for development through the collection of sales taxes generated within the area. Two entities – a Community Improvement District authorized to collect a sales and use tax of 1% on activities within its boundaries and a Transportation Development District also authorized to collect its own 1% sales tax – are designed to generate the revenues pledged to the repayment of the Bonds.

Also pledged to the payment of the Bonds are all payments from the District paid in the form of payments in lieu of taxes or PILOTs. There are also pledged 50% of so-called economic activity taxes or EATs. Additional pledged revenues include 25% of revenues collected by the City of St. Louis (e.g. city sales taxes) excluding hotel taxes. These revenues are subject to appropriation. The State of Missouri has also pledged a portion of State sales and Income Tax collected from activities within the Districts.

Clearly, the complex security structure as well as the underlying project concept stand out within the municipal bond space. While many stadium projects are advertised as engines of economic development, this may be one of the clearest and most developed concepts to result from stadium development to date.

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KANSAS COURT MAINTAINS PRESSURE ON THE STATE

The Brownback era may be over in Kansas but trail of wreckage to the State’s fiscal position remains. The Kansas Supreme Court has given a thumbs down to the $488 million of school funding added by Senate Bill 19 for the current biennium. The court gave the state until April 30 to present an adequate funding plan. Under the ruling the state can review and make necessary adjustments to its current budget to address the court decision.

The unanimous ruling was based on a number of factors. The spending plan included funding to some districts to cover the costs of absorbing lower income children into their schools yet some of those districts received funds to serve more children from low-income families than those districts actually enroll. The state argued that districts with a low percentage of children from low-income backgrounds still have their share of kids who are struggling academically. Hence, they should get a cushion of extra funding to serve those academically struggling kids.

The Court disagreed with the selective provision of that funding instead taking the view that all districts in the state should receive funding on that basis. Revisions to school finance laws, allowed some districts to enlarge one part of their budgets that comes primarily from local taxpayers — without approval from those taxpayers. The Legislature later closed this window and grandfathered in those districts.

The Court found that this denies the rest of the state’s schools equal access to funding. This spring lawmakers wanted school districts to start paying their utilities and some of their insurance bills with a specific local property tax fund that is otherwise meant for things like building construction and computer purchases. A key feature of this fund is that the amount of money poorer and richer school districts have in it varies. The Court disagreed.

Another change in state law caused the State to change how it calculates some of the money it gives to poorer districts. Instead of taking into account current data from local school budgets, it decided to start using data from a year earlier. The state argued this offers budget stability and predictability. Those changes cut an estimated $16 million from the state’s aid to schools in 2017-18 — savings that come from reducing payments to districts with weaker tax bases.

The concept underlying all of these issues is equality of treatment for all school districts. The Court wants the Legislature to put effort into figuring out what amount is needed and then show the court how it came up with it. And the court wants reasoning and calculations that make sense. The court calls this “showing your work.” The Legislature offered up a four-page statistical analysis of how much money schools need in order to be successful. The justices devoted some 14 pages to criticizing weak documentation, methodology and reasoning.

Two prior school finance studies the Legislature commissioned in  took analysts at least half a year to complete. One resulted in more than 340 pages of analysis and supporting documentation. The other had more than 160 pages.

The ruling was anticipated when the budget was adopted and was seen by outside observers as a huge risk to the State’s budget and credit. Nevertheless, the legislature went ahead and challenged the Court to find in favor of the plaintiffs. Now that the legal process has effectively been fully tested, the Legislature must address the issues raised by the Court while also addressing the State’s weakened budget position and outlook.

SANCTUARY CITIES CHALLENGED BY DOJ

Attorney General Jeff Sessions announced Chicago, New Orleans, New York and Philadelphia were all determined to have “laws, policies or practices” that violated a federal statute that requires jurisdictions to comply with federal immigration officials and help to deport suspected undocumented immigrants held in local jails. The department sent the letters on Wednesday to the four cities as well as Cook County, Illinois, which includes Chicago and its sprawling suburbs.

Each jurisdiction has until Oct. 27 to demonstrate they do not have policies in place that restrict law enforcement officers and city employees from fully cooperating with federal immigration officers.  The department cleared four other jurisdictions –  Milwaukee County, Wisconsin, Clark County, Nevada, the State of Connecticut, and Miami-Dade County, Florida .stating that they did not violate the federal statute.

DOJ would seek to withhold Edward Byrne Memorial Justice Assistance (JAG) Grant Program funding from the cited jurisdictions. The program is the primary provider of federal criminal justice funding to state and local jurisdictions.  The Byrne JAG Program is administered by the U.S. Department of Justice, Office of Justice Programs and was created in 2005 by merging the Edward Byrne Memorial Grant Program (Byrne) with the Local Law Enforcement Block Grant Program (LLEBG). Byrne JAG funding can be used to support a broad range of state and local government projects, including those designed to prevent and control crime and to improve the criminal justice system.

According to the National Criminal Justice Association, under current law, Congress is authorized to spend up to $1.095 billion per year for the Byrne JAG grant program. In practice, however, annual funding has not reached that level in over a decade. In FY02 and FY03, Byrne and LLEBG funding (see Byrne JAG History above) together totaled $900 million. In FY05, the first year of the combined Byrne JAG program, funding dropped to $536 million (after subtracting unrelated carve-outs). In FY06, funding dipped further to $322 million and then rose again to $520 million in FY07. In FY08, although both the House and Senate Appropriations Committees had recommended significantly increased funding in their committee-passed bills, funding in the final conference report was cut by two-thirds to $170 million.

In FY13, the justice assistance grant programs and all other projects and programs funded by the defense and non-defense discretionary portions of the budget were subject to automatic across the board cuts, called sequestration, as required by the Budget Control Act of 2011. The final FY13 appropriations bill increased funding for the Byrne JAG formula program by 5 percent, from $352 million to $371 million, which was then reduced by the sequester to $352 million. Therefore, final FY13 funding for Byrne JAG was funded at the FY12 level. Funding dropped again in FY14 to $344 million and in FY15 to $333 million. In FY16, funding was bumped up to $347 million.

HOSPITALS TAKE ANOTHER HIT

With two executive decisions, President Donald Trump launched two more missles at the finances of healthcare providers. The first was the decision to eliminate cost sharing reduction (CSR) payments, on a monthly basis to compensate insurance companies who offer subsidies to low income purchasers of health insurance through the ACA marketplaces. The federal cost is estimated at $7 billion annually. While courts have determined that the payments are not supported by statute, there has been a clear consensus among insurers, providers, and politicians that the payments had a key role in stabilizing state marketplaces. The CBO also said halting the payments would increase the federal deficit by $194 billion through 2026.

The second was the decision to allow the purchase of insurance by allowing small businesses to band together and buy insurance through entities known as association health plans, which could be created by business and professional groups. Historically, the plans were not subject to state regulations that required insurers to have adequate financial resources, some became insolvent, leaving people with unpaid medical bills. Some insurers were accused of fraud, telling customers that the plans were more comprehensive than they were. They will be permitted to cover a far less extensive range of conditions and will not be required to cover preexisting conditions.

The changes are being made under a broader interpretation of federal law — the Employee Retirement Income Security Act of 1974 — “could potentially allow employers in the same line of business anywhere in the country to join together to offer health care coverage to their employees.” So said the White House. The Congressional Budget Office (CBO) said in August that about 1 million people would be uninsured in 2018 and insurance companies would raise premium prices by about 20 percent for ACA plans if the payments were cut off.

The executive order largely does not make changes itself; rather it directs agencies to issue new regulations or guidance. Those new rules will go through a notice and comment period that could take months. New York and California have already said that they will challenge the order in the courts. This could mitigate the impact on rates in 2018 but the outlook for 2019 is highly uncertain absent Congressional action.

BUT SOME SURVIVE THE ASSAULT

In the midst of the failure to renew the CHIP program and the action to undermine the ACA, some hospital credits withstand the pressure. Last Thursday, S&P announced that it had raised its long-term rating to ‘A+’ from ‘A-‘ on the California Health Facilities Financing Authority’s for Children’s Hospital of Orange County (CHOC). The outlook is stable.

S&P cited the “view of CHOC’s growing volumes and sharply improved balance sheet, coupled with increased operating income and cash flow over the past year generating over 4x maximum annual debt service (MADS) coverage.”

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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