Muni Credit News Week of October 23, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

RECREATION BONDS LIVE

Forty years after his death, the life and legacy of Elvis Presley still maintain a hold on a substantial number of Americans. While many different images of Elvis live on in the collective memory of Americans, it isn’t likely that many of those memories involve municipal bonds. That may be about to change.

The Economic Growth Engine Industrial development Board of Shelby County, Tennessee is circulating a Limited Offering Memorandum in support of a proposed issue of $39,610,000 of unrated tax increment revenue bonds to support the expansion of “attraction” space at Graceland, the world famous former home of Elvis Presley.

The bonds would be paid from three sources: 50% of all incremental real and personal property taxes collected from the project area through January 1, 2034; a portion of all state and local sales taxes generated in the project area through June 30, 2045; and proceeds of a 5% sales tax surcharge generated from the project area through April 30, 2045.

The entire “Graceland Campus” as it is now known covers 120 acres and includes not only the home but a variety of entertainment, retail, and hospitality facilities. This project would develop some 220,000 square feet of additional retail, entertainment, and support space which are being undertaken in association with plans to run tours from a regional area defined as a five hour driving radius from Memphis.

There is nothing particularly new or innovative about the security or financing structure of the deal. The risks associated with it are the standard risks of development and operation of the project and the risk that demand will not be commensurate with the levels projected in sizing the bond issue. We do not pretend to make any judgments about the viability of the projections of visitors and/or spending. We realize that the attraction and the personality and image on which it is based are unique and arguably have worldwide appeal.

What is of interest here is the fact that the deal is being undertaken despite years of political attack on the need for and usefulness of tax exempt financing for municipalities even if they involve basic infrastructure facilities of unquestioned public value. We just question whether the proposed use of the tax-exemption to finance clearly (except to die hard Elvis acolytes) non-essential private facilities meets the test of best and highest use of the tax exempt financing exception. At a time of unquestioned shortfalls in infrastructure financing nationwide, we find the proposed transaction extremely difficult to justify under most flexible interpretation.

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SEC INVESTIGATING SUMNER NUCLEAR PLANT

SCANA Corporation (SCANA) (NYSE:SCG) announced that SCANA and its subsidiaries have been served with a document subpoena issued by the staff of the Securities and Exchange Commission in connection with an investigation they are conducting relating to the new nuclear project at V. C. Summer Nuclear Station. The Company intends to fully cooperate with the investigation. SCANA was the investor owned utility partner of the South Carolina Public Service Company (Santee Cooper) in the recently cancelled project. It is not clear what the focus of the Commission’s request is and there is no indication as of yet that Santee Cooper is under investigation.

STARBUCKS’ MUNI BOND JOLT

Starbucks Corp. will create 100 new jobs and invest $120 million in expanding the company’s coffee roasting facility in Augusta. The new roasting operation will add 140,000 square feet onto the existing facility in the Augusta Corporate Park in Richmond County. The expansion is expected to be completed by the end of 2018 and is part of the company’s plan to create more than 68,000 new jobs in the U.S. by 2021.

Starbucks opened its Augusta plant in 2012, making it the company’s fifth manufacturing facility in the U.S. and the company’s first owned and operated facility in the world to produce soluble products. The facility prepares and packages ingredients and finished products for most of the company’s soluble-based beverages for all of North America and parts of Europe.

The Augusta Georgia Economic Development Authority has just approved a $130 million industrial development bond issue. It has already set aside property in the city to accommodate the proposed facility expansion.

MOODY’S EXPECTS HARTFORD DEFAULT

On Friday, October 19, Moody’s announced that the City of Hartford (Caa3 negative) is likely to default on its debt as early as November without additional concessions from the State of Connecticut (A1 stable), bondholders and labor unions. Its analysis projects operating deficits of $60 million to $80 million per year through 2036, the final maturity of its general obligation debt. Moody’s estimates that fixed costs — including pension contributions, benefits and insurance, and debt service — are driving large projected operating deficits of approximately 11% of revenues.

Moody’s asserted that “one option is the state fully funding the existing payments in lieu of taxes formula, which has been underfunded for years; fully funding the payments in lieu of taxes (PILOT) formula would provide the city with $52.3 million of additional revenue each year.”

DETROIT ON THE ROAD BACK

Three weeks before election day, Moody’s Investors Service has upgraded the City of Detroit, MI’s issuer rating to B1 from B2. According to Moody’s, ” t he upgrade to B1 reflects improved fund balance and liquidity coupled with adoption of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions. The rating also considers the very conservative fiscal approach of Detroit’s current administration as well as the city’s current economic performance, which is strong considering its historic contraction. The rating still weighs these credit strengths against long-term risks arising from high unfunded pensions and economic vulnerabilities tied to a weak socioeconomic profile and low industrial diversity. The rating further acknowledges that maintenance of healthy reserves and budgetary capacity to fund rising fixed cost demands is highly dependent on continued revenue growth.”

As for its positive outlook assignment, Moody’s said ” the positive outlook reflects the possibility of further upward movement in Detroit’s rating in the event current economic and financial trends persist. Sustained growth in revenue that enhances the city’s capacity to fund its long-term obligations will positively impact the city’s credit profile.”

TOLLING IN INDIANA TAKES STEP FORWARD

The Indiana Department of Transportation is taking the next step toward instituting tolling on interstate highways by requesting proposals from firms interested in developing a strategic plan and doing other preparatory planning. INDOT posted a request for proposals, or RFP, to do the work on Tuesday. The agency expects to select a firm by Jan. 26.

Five corridors are under consideration by the State for tolling: I-94 from Illinois to Michigan; I-65 from I-90 south to I-465 and then south from I-465 to the Ohio River; and I-70 from the Illinois state line to I-465, then from I-465 to the Ohio state line. It is also considering tolling in Indianapolis.

The RFP requires the selected firm to determine what environmental studies will be necessary to comply with the National Environmental Policy Act, and to develop the methodologies to accomplish them. It also must perform traffic, environmental justice and other studies associated with NEPA studies.

MORE BAD NEWS FOR NY METRO RAIL INFRASTRUCTURE

Construction work on a critical project to repair damage from Superstorm Sandy in East River tunnels used mostly by the Long Island Rail Road may not begin until 2025. The work, once expected to begin by 2019, now will cost more than $1 billion — three times original estimates, according to Amtrak. It will also require the LIRR to operate without one of four East River tunnels linking Long Island to Penn Station for up to four years.

Amtrak has opted for a “full reconstruction” of the tunnels — a complex project that requires years of design work and other preparations. That includes fortifying the other two East River tunnels not damaged by Sandy so they can be as reliable as possible while the other two tubes are offline. It intends to wait until the railroad begins running some trains to Grand Central Terminal as part of the Metropolitan Transportation Authority’s East Side Access project. That project, which has been besieged by delays since it was proposed in the 1990s, is scheduled to be completed by late 2022. But it has fallen further behind in recent months, and the MTA has blamed Amtrak for not scheduling construction at the Harold Interlocking, just east of the tunnels, used by both railroads.

CHICAGO BUDGET WOULD RAISE TAXES AGAIN

The financial pain continues for Chicago’s strained finances. The budget proposed for 2018 by Chicago Mayor Rahm Emmanuel includes a rise in taxes for the sixth time in seven years. The budget would raise the city’s 911 phone tax for the second time in four years to balance the budget, raise taxes on ride-sharing services like Uber and Lyft to pay for CTA upgrades and increase the amusement tax for concerts at larger venues while eliminating them at smaller theaters. Chicago property owners next year already face a previously approved water and sewer tax increase and a $63 million city property tax increase, the fourth and final consecutive annual hike in that levy approved in 2015 to dramatically increase pension contributions. That doesn’t include a separate Chicago Public Schools property tax increase of $224.5 million.

The $8.6 billion plan would spend about $289 million more than this year. The 911 tax would go up $1.10 a month, while fees would rise 15 cents on Uber and Lyft rides. The previously approved CPS and city property tax increases are expected to cost the owner of a $250,000 home an additional $230 per year.  It is offset in part, by a newly increased homeowners exemption from state lawmakers in August that city officials estimate would lower the bill on a $250,000 home by about $148 next year.

The phone tax increase would add $30 million to the city’s revenues, and city officials have said $11 million of it would go toward a required modernization of the 911 system, allowing it to receive text messages and photos that can be relayed to emergency responders. Police overtime continues to increase. The city budgeted for $78 million this year, but by the end of July it already had topped $95 million.

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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