Muni Credit News Week of September 18, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$247,330,000

Philadelphia Hospital and Higher Education Facilities Authority, PA

Temple University Health System (TUHS)

Hospital Revenue Bonds, Series 2017

Moody’s: Ba1

The Commonwealth’s largest provider of Medicaid services is coming to market with debt which will be used to current refund all of the Series 2007A and 2007B bonds as well as a portion of the Series 2012B bonds. Proceeds will also be used to fund a deposit to the debt service reserve fund. Temple University Health System (TUHS) is a $1.7 billion academic health system anchored in northern Philadelphia. The Health System consists of Temple University Hospital (TUH); TUH-Episcopal Campus; TUH-Northeastern Campus; Fox Chase Cancer Center, an NCI designated comprehensive cancer center; and Jeanes Hospital a community-based hospital offering medical, surgical and emergency services. TUHS also has a network of community-based specialty and primary-care physician practices. TUHS is affiliated with the Lewis Katz School of Medicine at Temple University.

The obligated group consists of Temple University Hospital, Inc., Temple University Health System, Inc. (TUHS), Jeanes Hospital, the Fox Chase Entities, Temple Health System Transport Team, Inc. and Temple Physicians, Inc. Each member of the obligated group is jointly and severally liable for all obligations issued under or secured by the Loan and Trust Agreement. The Bonds are secured on parity basis with the obligations currently outstanding issued under the Loan and Trust Agreement. As security for the obligated group’s obligations under the Loan and Trust Agreement, each member of the obligated group has pledged its respective gross receipts. The Bonds are also secured by mortgages on certain real property of certain members of the obligated group. With the issuance of the Series 2012 bonds, a liquidity covenant was set at 60 days.

The Moody’s rating reflects “the health systems large size, clinical diversification, its role as a safety net provider for the City of Philadelphia, as substantiated by historically sizable funding from the Commonwealth, and close working relationship with Temple University (TU). The rating acknowledges the System’s operating vulnerabilities as evidenced by FY 2017’s unexpectedly weaker performance with higher than anticipated expenditures related to an electronic health record implementation and limited balance sheet flexibility due to slim unrestricted reserves. TUHS’ weak unrestricted cash and investments, which we do not expect to grow in the near term, and heavy reliance on governmental payers and special funding constrain the rating.”

The rating was assigned a stable outlook.

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CALIFORNIA REVENUES CONTINUE POSITIVE TREND

The state brought in $8.90 billion in August, exceeding projections in the state budget by $343.7 million, or 4.0 percent. After July revenues exceeded expectations, the positive August numbers put total fiscal year-to-date revenues at $14.99 billion, $532.5 million higher than projections in the state budget enacted in June. Revenues for the first two months of the fiscal year were $1.01 billion higher than they were one year ago.

Led by personal income taxes (PIT), each of the “big three” revenue sources beat expectations. PIT receipts of $5.22 billion in August were $135.7 million higher than 2017-18 Budget Act estimates. For the current fiscal year, California collected total PIT receipts of $9.96 billion, $212.9 million more than anticipated in the 2017-18 Budget Act.

August corporation tax receipts of $95.2 million were $70.0 million – or a whopping 277.8 percent – more than anticipated in the budget. Fiscal year-to-date corporation tax receipts of $458.7 million are $88.9 million above 2017-18 Budget Act projections.

Retail sales and use tax receipts of $3.12 billion for August were $67.3 million, or 2.2 percent, above budget estimates. For the fiscal year to date, sales tax receipts of $4.02 billion are $151.9 million higher than expected.

Outstanding loans of $8.66 billion in August were $1.26 billion less than budget estimates. This loan balance consists of borrowing from the state’s internal special funds. Available borrowable resources in August exceeded projections by $3.82 billion. Compared to 2017-18 Budget Act forecasts, total disbursements were $890.7 million lower than expected.

MASSACHUSETTS REVENUE REPORT

Preliminary revenue collections for August 2017 totaled $1.712 billion, which is $25 million or 1.5% less than August 2016 actual state tax collections. August 2017 preliminary collections are $16 million, or 0.9%, below the monthly benchmark. Over the first two months of Fiscal Year 2018, total actual tax collections are up $66 million, or 1.9%, over the same period last year, and $11 million below the year-to-date benchmark. The small shortfall in August collections reflects mostly lower than expected income withholding payments, partially offset by slightly better than expected performance in regular sales tax and estate tax.

August is a small tax collection month with no quarterly estimated payments due for most individuals and businesses. Income tax collections for August were $927 million, which is $54 million or 5.5% less than a year ago and $33 million below the monthly benchmark. Withholding collections for August totaled $913 million, down $53 million or 5.5% from last August and $30 million below the monthly benchmark. Income tax payments with returns or tax bills for August totaled $41 million, up $3 million or 9.1% over last August and $3 million above the monthly benchmark. Income tax estimated payments totaled $29 million for August, $5 million or 19.7% more than a year ago and $5 million above the monthly benchmark.

Income cash refunds in August totaled $56 million in outflows, which are $9 million greater than last August and $9 million above the monthly benchmark. Corporate and business tax collections for the month totaled $41 million, up $2 million or 6.0% from last August and $2 million above the monthly benchmark. Sales and use tax collections for August totaled $541 million, an increase of $20 million or 3.9% from last August and $8 million above the monthly benchmark. Other tax collections for August totaled $203 million, up $7 million or 3.4% from last August and $6 million above the monthly benchmark.

HARTFORD DOWNGRADE

With the state struggling to finalize its budget and its cities waiting to see what aid might be forthcoming, the city with the most dire situation -Hartford – saw its rating downgraded by Moody’s. The multi-notch move from B2 to Caa1 comes amidst a growing market consensus that the City will file for Chapter 9 protection imminently. Recent statements by the mayor that the city will run out of funds in 60 days in the absence of a state budget providing adequate funding to the city. He reiterated the city’s commitment to restructuring its debt regardless of the state budget outcome and level of support (if any) from the state.

The city has a $5.9 million debt service payment due on October 1st and $21 million in tax anticipation notes payable on October 31st. Additionally, the city has debt service payments in every month of the fiscal year. The rating from Moody’s remains under review pending the outcome of the State budget negotiations and their impact on the city.

PR LITIGATION

Federal Judge Laura Taylor Swain denied a request by several creditor groups of the Puerto Rico Electric Power Authority (PREPA) that sought relief from the bankruptcy stay to commence a lawsuit against the public corporation to put it under receivership. The Ad Hoc Group of PREPA Bondholders and insurers National Public Finance Guarantee Corp., Assured Guaranty Corp. and Syncora Guarantee Inc., which together hold $5.3 billion, or 65%, of the utility’s debt, intended to put PREPA under receivership in order to ensure rates could be raised so the public corporation could pay its debt.

creditors argued that PREPA bonds were secured by “a lien” on the utility’s revenues, “a covenant” that rates would be sufficient to cover its debt service obligations and “a right” to seek the appointment of a receives upon a default event. PREPA and the fiscal board argue that a near-term rate increase will harm Puerto Rico’s prospects for economic recovery. The board further stated that an increase in electricity prices beyond 21.4 cents per kilowatt-hour will result in Puerto Rico not becoming fiscally sustainable.

the official committee of unsecured creditors, which represents the commonwealth government, sued Bettina Whyte, who stands for the interests of the Sales Tax Financing Corp. (Cofina)—a lockbox entity that has more than $17 billion in bonds under its belt and receives a portion of sales tax collections to pay for its debt service. According to the complaint, the commonwealth seeks to stop these transfers and tap into this money by arguing the Cofina structure is “unconstitutional and void,” and as such, the contested sales tax revenues belong exclusively to the government.

Judge Swain is expected to rule on the commonwealth vs. Cofina issue by Dec. 15. The government argues that the legislation that created the entity, Act 91 of 2006, evaded or violated the Puerto Rico Constitution, particularly the commonwealth’s constitutional debt limit.

GAS TAX OPPONENTS FILE FOR A REPEAL INITIATIVE

Reform California, headed by a former San Diego City Councilman, filed papers with the state attorney general’s office Thursday to start the process to collect 587,407 signatures to qualify the measure aimed at repealing a gas tax and vehicle fee increases and require future tax hikes be approved by voters for the November 2018 ballot. Enacted legislation will raise $5.2 billion annually for road and bridge repairs and expanded mass transit. The hikes — raising the gas tax from 18 cents to 30 cents per gallon — start Nov. 1.

A second initiative proposed to repeal the gas tax filed paperwork to get a ballot measure going, but that’s tied up in a court dispute.

FOXCONN TAX BREAKS MOVE FORWARD

The Wisconsin Assembly sent Scott Walker a multibillion-dollar subsidy package for a Taiwanese company, putting within reach the governor’s bid to site a massive flat-screen plant in Racine County.  Walker and GOP lawmakers have promised that the Foxconn Technology Group plant will bring thousands of jobs to Wisconsin and transform the state’s economy. The electronics-maker could receive up to $2.85 billion in cash from state taxpayers under the deal, which would make it the largest incentive package for a foreign company in U.S. history.

The legislation would exempt the Foxconn project from some state rules to protect wetlands and waterways — provisions that environmental groups have threatened to challenge in court. Foxconn would not need to write a state environmental impact statement or procure state permits to build in bodies of water but would have to comply with federal environmental laws. The bill would expedite appeals of litigation over the project, creating a path that would likely get any case to the state Supreme Court more quickly. Any trial court rulings in that litigation would be automatically suspended until a higher court rules.

Foxconn has yet to specify a proposed location and that announcement is the subject of ongoing negotiations with local entities. So even if the Governor signs the bill into law, the plant is still not a “done deal”.

NEW SCHOOL YEAR BRINGS CHALLENGES FOR NY COLLEGES

The start of a new school year is always a time of excitement and apprehension for students and schools alike. One area in which this is especially true is the private college space in New York State. This September marks the beginning of New York State’s Excelsior Scholarship Program which will provide students in New York from families under specific income levels with free tuition at state public colleges. At the same time, the Enhanced Tuition Awards Program, which provides up to $6,000 for students who choose to attend private colleges instead of one of the state’s SUNY or CUNY colleges begins as well.

Enhanced TAP recipients must reside in New York State for up to four years after completing their degrees, or else the grants will convert into loans. Students also must complete 30 credits per year, earn passing grades and graduate within four years (for four-year programs) to receive the aid. Under both programs, if you receive a regular TAP award from the state, this will be subtracted and reduce the amount of your Enhanced TAP grant. However, unlike with the Excelsior Scholarship, if you receive a Pell Grant or outside scholarships to go toward your tuition, these will not reduce the amount of your grant.

The Enhanced Program is designed to lessen the impact on the state’s 95 private colleges which might result from reduced demand which would likely tax private college resources who felt the need to offer additional aid in the form of tuition reductions to eligible students. These institutions were among the main opponents to the program when it was debated in the state legislature prior to enactment.

So it is initially surprising to see that two-thirds of colleges in the state (66 out of 95) have not enrolled in the program. The reasons vary. Private colleges who have not enrolled say they found the program too expensive since they already provide generous financial aid for students. They also cite the timing of the program (since most students received their financial aid packages earlier this spring) as well as the restrictions placed on students who receive the scholarship as reasons for not participating. Some object to requirements that recipients had to stay in the state after they graduated or that they had to have a full load every semester or that they had to maintain a particular grade point average.

So those schools have chosen to roll the dice that there are a sufficient number of students who wish more limited class loads or who are looking to go to school near home but do not intend to live in the state after graduation. It will take some time to see if those beliefs are wisely held or if the decision turns out to have significant financial implications. It does however, introduce an additional level of uncertainty and risk into the analysis of small private colleges. It is a space that has been under significant pressure for some time and this does nothing to mitigate that pressure.

 

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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