Muni Credit News Week of September 11, 2017

Joseph Krist

Publisher

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ISSUES OF THE WEEK

A number of established issuers are scheduled to come to market this week with significant issues.

The largest issue is for NYC GO debt ($855,560,000). The issue comes as the city’s electorate selects in candidates in party primaries. The mayor is expected to cruise to victory in both the primary and general election, implying no changes in fiscal policy.

The MN Board of Regents plans some $424,775,000 of new 424,775 money and refunding revenue bonds which unconditional, direct and general obligations of the university.

The TN State School Bond Authority will issue $239 million of new money bonds and $154,170,000 of refunding bonds. The bonds are secured under provisions whereby State appropriations for each institution are available to bondholders for debt service if the institution does not make debt service payments to the bond trustee on a timely basis. Student fees and charges for the institutions are pledged to bond  holders.

Reedy Creek Improvement District is a public corporation, created by a Special Act of the Florida Legislature in 1967 to provide municipal services within its boundaries, primarily for one customer, Walt Disney World. The Walt Disney World Resort Complex – its theme parks, recreational facilities, hotels and film studio – dominates the 40-square-mile district and comprises 85.2% of fiscal 2017 taxable value. It plans to issue $195,195,000 of tax backed bonds.

Idaho Energy Resources Authority (IERA) will issue $200 million of revenue bonds backed by lease payments from the Bonneville Power Administration made unconditionally directly to the bond trustee. this security structure offsets some longer term concerns about the BPA credit which reflect the fact that hydrology and wholesale market prices are the greatest volatility drivers of BPA’s financial performance and have been the main driver of BPA’s declining internal liquidity over the last ten years.

These factors are likely to persist owing to the volatility associated with hydro resources along with the weak wholesale power that exists in the Pacific Northwest. Additionally, BPA’s accelerated repayment of federal appropriations debt and declining availability under the US Treasury line are continuing factors that diminish the US government’s explicit support features over time and weakens BPA’s positioning within its rating. After the FY 2018-2019 rate period, the combination of declining US Treasury line availability, declining internal reserves for risk, sustained weak wholesale power market and a reduction in the degree of federal debt subordination could lead to a negative rating action.

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CHICAGOLAND CREDIT ROUNDUP

The unending tide of rating pressure on the Chicago public Schools credit may have abated for now. When the state failed to pass an on time budget, the rating was put on review for downgrade by Moody’s. After a tumultuous state legislative process and override of a gubernatorial veto, Moody’s has reviewed its position. It announced that it confirms Chicago Board of Education, IL’s B3 GO rating. The outlook was revised to stable .

Moody’s cited its view that the district’s financial distress that will likely persist but not materially worsen in the coming year given new state and local revenues. The additional revenue should balance the district’s operations in fiscal 2018, but will leave little margin to rebuild liquidity from its currently extremely weak position. The district will remain heavily reliant on cash flow borrowing and likely face budget gaps in future years without further budgetary adjustments. The outlook also incorporates the district’s covered abatement structure on its GOULT debt, which reduces the likelihood of default outside of bankruptcy. The outlook is also supported by the close governance ties to the City of Chicago.

All of the district’s rated debt is secured by its GO unlimited tax pledge. The majority of the district’s rated debt is GO alternate revenue debt, which is additionally secured primarily by pledged state aid revenues. An unlimited tax levy is filed with the county at the time of issuance. The property tax is abated only after sufficient revenues have deposited with the trustee into a debt service fund. If the deposit is not made with the trustee, the levy is extended.

The district funded 670 schools including district run traditional schools and 134 charter schools. With an enrollment of 381,349 in fiscal 2017, the district is the third largest in the nation.

The Chicago Water and Sewer Revenue Bonds saw Moody’s confirm their Baa1 and Baa2 ratings (senior and subordinate liens). The ratings apply to $26 million of senior lien water revenue bonds, $1.8 billion of second lien water revenue bonds, $35 million of senior lien sewer revenue bonds, and $1.3 billion of second lien sewer revenue bonds. The outlook however, remains negative for the ratings.

The overlap in the service area with the City remains a concerning element in the ratings. The ratings also consider City Council’s authority to adjust rates and the expectation that growing revenue needs of the city government and overlapping units of government could limit the capacity, both practical and political, to implement considerable adjustments if needed.  Moody’s view is that the credit profiles of the water and sewer systems, as business enterprises of Chicago, are connected to the city’s general obligation credit profile, which also carries a negative outlook due to very high tax base leverage and a very close governance relationship with a fiscally distressed school district.

As for the City itself, its Moody’s rating was confirmed at Ba1 with a still negative outlook. Moody’s noted that the city recently applied its broad taxing authority to raise new local revenue and accelerate pension funding, but new taxes remain far from sufficient to arrest growth in unfunded pension liabilities. The city’s new taxes also coincide with increases enacted by overlapping governments, such as Cook County and Chicago Public, the latter of which just received expanded taxing authority from the state. The rating considers long-term operating risks associated with rising costs and potential limited capacity to further raise local taxes, as well as the city’s very close governance and political ties to the fiscally weak CPS.

PUERTO RICO SPARED THE WORST

It says something when a storm causes 70% of the population to lose power but the impact of Hurricane Irma could have been much worse. Power outages initially  left about 17 percent of the territory without running water. Roughly 40 percent of the territory’s hospitals were functioning and were even accepting transfers of about 40 patients from the United States Virgin Islands.

The Virgin Islands fared much worse with substantial structural damage on St. Thomas. Even worse, The U.S. Virgin Islands has redirected money intended to help pay insurance claims after large disasters for other needs. Since 2007, nearly $200 million was transferred from the V.I. Insurance Guaranty Fund, including $45 million in fiscal 2011.

REGULATION NOT THE ONLY HURDLE FOR INFRASTRUCTURE

So far the Trump administration has focused on regulatory relief in its limited comments on infrastructure plan details. Litigation however is an additional hurdle even when funding for a project has secured voter approval. Santa Clara County voters last year overwhelmingly approved Measure B,  a half-cent sales tax to invest more than $6 billion in transportation infrastructure. The measure won more support than any transit tax in county history and was planned to fund bringing BART to downtown San Jose, upgrading Caltrain and highways, and expand the region’s network of bicycle and pedestrian paths.

The single plaintiff filed Litigation earlier this year. She is a retired urban planner from Saratoga who once sued Santa Clara County over its mosquito fogging and is holding Measure B hostage. $40 million has been collected to date.  The suit questions that the measure’s language was too broad.

The real issue behind her suit is her belief that an “ancient aquifer” beneath the site of the planned BART station downtown could collapse once construction commences. A judge dismissed her claim earlier this summer but, she appealed to a higher court. That review could extend the process for another year or more.

All Measure B tax revenue will remain in escrow until the court releases the funds. The suit is much like litigation which has held up Maryland’s Purple Line P3 as a small group of litigants pursues numerous appeals against the project through the federal courts.

It’s just another example of how tough it is to execute infrastructure whether public, private, or P3 in the current environment.

HARTFORD THREATENS BANKRUPTCY TO JUMP START STATE BUDGET

The city has been talking about it for so long that the latest threat to file for Chapter 9 could just be an effort to jumpstart the state budget debacle. In its latest pronouncement, Mayor Luke Bronin said Hartford would seek permission to file for bankruptcy if the city didn’t get the state aid it needs by early November. Specifically he said, “If the state fails to enact a budget and continues to operate under the governor’s current executive order, the city of Hartford will be unable to meet its financial obligations in approximately 60 days.”

Projections show the city faces a $65 million deficit this year and will run into cash-flow issues in November and December, including a $39.2 million end-of-year shortage. In 2016, the mayor laid off 40 workers and cut millions from city departments. He also used most of Hartford’s rainy-day fund to help offset deficits.

Still, Hartford had to borrow millions in June to help pay its bills.

He has asked for at least $40 million more this year from the state. As he has hinted before, “A well-planned bankruptcy is a tool that can be used to address long-term liabilities like debt and pension obligations.”

OKLAHOMA

Gov. Mary Fallin intends to call for a special session on Sept. 25 to make adjustments to the current fiscal year’s budget. The session results from the Oklahoma Supreme Court decision rejecting a proposed cigarette tax that resulted in a $215 million budget shortfall. The $1.50 fee on every pack of cigarettes was earmarked for four agencies: The Oklahoma Health Care Authority, the Alcoholic Beverage Laws Enforcement Commission, the Department of Human Services and Department of Mental Health and Substance Abuse Services. With federal funds that are tied to state appropriations, those agencies stand to lose an estimated $500 million.

Without a new source of revenue, and if lawmakers spread the cuts across all state spending, all appropriated agencies could lose more than 3 percent of their spending authority. Some support a cigarette tax but want to see other revenue measures alongside it. Those legislators seek to raise the tax rate on oil and gas production.

If there is not a legislative fix, a cigarette tax proposal will be put to a statewide vote.

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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