Muni Credit News Week of September 5, 2017

Joseph Krist






General Obligation Refunding Bonds

Moody’s: B3

The Board is trying to take advantage of the generally favorable rate environment and a halt in the long term trend of credit decline to refund a significant amount of outstanding GO debt. In September, Moody’s reviewed its rating in the light of the State’s first budget agreement in three years. It sustained the B3 rating and revised the outlook to stable from negative.

The City’s general economic health is reflected in the tax base which the Board and the City share. In combination with  the state budget accord, combined property taxes and state aid are estimated to increase by approximately $500 million for fiscal 2018. For fiscal 2018, CPS revenues and expenditures will nearly be in balance after several years of very large shortfalls.

Over the long run, a 2% growth in annual expenses would translate to increased spending of some $120 million annually. This will be hard to achieve given the likelihood of increasing pension contributions and debt service costs. This does not take into account the potential for higher wage costs as the result of its contentious relationship with its employee unions. In fiscal 2018, the district will receive more than $300 million in increased state aid owing to a gain from a new funding formula and state payment of the district’s normal pension cost. However, Illinois continues to have ongoing financial and governance challenges, and the state’s willingness and ability to meet future funding targets is uncertain.

The Board could try to raise taxes but this would coincide with other local entities such as Chicago and Cook County also raising property and sales taxes. There are practical limitations on continually raising taxes on the same group of taxpayers.

Clearly this is a credit that on its own is not for the faint of heart. More than most of the other credits sharing the Chicago tax base, it relies on a more difficult management and pension situation and is the most prominent target for those in Springfield who have a negative bias against the City. As a result, it will have the hardest time recovering its credit position over an extended time period.



Puerto Rico’s financial control board published the first report on the investigation underway into the commonwealth’s debt. The report states that 84 notifications of document preservation have already been sent in relation to public debt issuance made in the past 20 years. Issuing entities, advisers, credit rating companies and underwriting institutions, among others, have received them. On Oct. 18, the board turned the probe into a formal procedure, as defined by its investigation protocol, given the need to use subpoenas to carry out the effort.

Kobre & Kim, a firm specializing in disputes and investigations,  was retained on Sept. 1 to investigate all the factors that triggered the fiscal crisis in Puerto Rico, as well as all public debt transactions the government has made, as requested by the board. This includes the practices employed in the purchase and sale of Puerto Rico and its public corporations’ bonds, and the associated disclosures to market participants. To date, the firm has examined documentation related to public debt issuance since 1990, the government’s certified fiscal plan and a government liquidity analysis conducted by accounting firm and board adviser Ernst & Young. Documents have also been requested of Puerto Rico’s Fiscal Agency and Financial Advisory Authority.

The firm said it does not expect to have a final report until the end of March, and warned it may be delayed due to the complications that could arise in the aftermath of Hurricane Maria. The report also indicates that priority in the investigation has focused on those aspects that affect electricity and water services and other critical infrastructure affected by the major hurricane.

As for PREPA, the government of the Commonwealth is moving forward with steps to void its controversial contract with Whitefish Energy to repair the power grid. The Commonwealth will instead avail itself of the mutual aid program which will allow it to employ crews from utilities in Florida and New York to do the work. A U.S. Congress committee, the Office of the Inspector General (OIG), and FEMA are all investigating the contract. The FBI is conducting its own investigation.

On the economic front, a report by Hunter College’s Center for Puerto Rican Studies projects that outmigration from the island as a result of Hurricane Maria could be as high as 14% of the local population in the next two years. Researchers project that the majority of local residents will move to Florida, followed by Pennsylvania, Texas, New York and New Jersey. Florida alone could face an influx of as many as 164,000 new residents from Puerto Rico in the next two years. The island’s United Retailers Association says ten percent, or about 5,000 of Puerto Rico’s 50,000 small and midsize businesses will not operate again after the devastation left by Hurricane Maria. A survey conducted by the organization revealed, more than a month after Hurricane Maria’s passage, that about 35% of small and midsize businesses have not resumed operations because they do not have electricity.

The news this past week that the Federal government was implementing a new form of its Transitional Sheltering Assistance  which has been historically used to temporarily relocate displaced residents to neighboring states. In the iteration being applied to Puerto Rico, the agency is arranging charter flights for residents, beginning with those still in shelters. Destinations are as far away as New York. While FEMA does provide reimbursement for costs of return, the real impact will be to facilitate more emigration from the island and reduce the pressure to reconstruct and restore housing destroyed in the hurricane.

These grim projections have obvious negative connotations for the Commonwealth’s finances over the short and long term. Creditors are clearly taking this into account. At an investor forum in which we participated last week, investors noted selling by heretofore patient mutual fund owners of PR debt and cited prices on the Commonwealth’s benchmark 8% of 2035 general obligation bonds at dollar prices in the $25-30 range.


The Mississippi Supreme Court recently upheld a lower court ruling that the state legislature does not have to fully fund the Mississippi Adequate Education Program (MAEP). In August 2014, 21 school districts sued the state for $236 million of state aid shortfalls between 2010 and 2015. A Hinds County judge ruled in July 2015 that the state school funding formula did not constitute a mandate and therefore the legislature was not required to fully fund the formula. The Supreme Court supported that view.

The MAEP codifies the funding formula which has been in use since 1997 to determine state aid for local school districts, including average daily attendance, district growth, and local contributions. Mississippi’s 2018 budget allocates $2.2 billion in education funding for local school districts, roughly $214 million less than the fully funded MAEP amount. For 2009-17, the state underfunded MAEP by $1.9 billion. The number of districts which have been underfunded by at least 5% is in double digits. Mississippi school districts typically receive 40%-50% of their revenue from state aid, with the balance from local property taxes.

The support for continued declines in state support is credit negative Mississippi school districts typically receive 40%-50% of their revenue from state aid, with the balance from local property taxes. for the impacted districts. Their real ability to raise sufficient revenue from property taxes is constrained by the State’s chronically weak economy. Mississippi is the poorest state in the US. On a more general basis, the declines in school funding will make the State less economically competitive and make it more reliant on incentives and low labor costs to attract jobs, thereby making the state’s less competitive a more entrenched feature of its economy and credit.


The Sooner State continues to struggle to balance its budget after the Oklahoma Supreme Court ruled that a tax on cigarettes was unconstitutional on August 10. That removed $215 million from the revenue side of the budget ledger and the legislature has since struggled to find ways to fill the resulting gap. The budget gap at 4.0% of estimated general fund spending is not huge. The tax did not pass judicial muster because it failed to garner a 75% supermajority in both legislative houses for new revenue. It also was prohibited by constitutional provisions which prohibit raising new revenue in the last five days of a session.

There is currently not sufficient legislative support to enact a revenue bill. A house budget committee passed a series of stopgap measures but these must be passed by the full houses. That is not a sure thing. So the State continues to limp along without any signs of structural balance being achieved. The difficulties are a result of its energy dependent economy and lower fossil fuel prices. The state has reduced appropriations by 5.3% ($387 million) in the three years since the peak in fiscal 2015 but there is no appetite for additional cuts. The state needs approximately $405 million of onetime fixes to balance the fiscal 2018 budget plan. The governor projects a $500 million shortfall next year. The rainy day fund currently is set to fall to just $70 million, or 1.0% of fiscal 2018 appropriations.


After failing to approve  similar bills over two years, the Connecticut House of Representatives voted 75 to 66 for final passage of a measure to permit, not require, state energy officials to change the rules for how Dominion Energy sells electricity from its nuclear plant, Millstone. The plant has been less profitable as competing generating sources have become cheaper. Dominion has broadly hinted that without the changes it would prematurely retire the two reactors at the plant, which is the largest power plant in New England. Its output, which is the equivalent of about half the state’s needs, is sold throughout the region.

Environmental justifications reference the fact that Millstone produces nearly all of Connecticut’s zero-carbon energy, and its loss would jeopardize the state’s ability to meet its long-term goals for reducing carbon emissions. Job related arguments in favor reference the 1,500 women and men working at Millstone power station. It has been difficult to judge exactly what the plant’s economics are as Dominion has refused to provide the state with copies of proprietary documents supporting its claim of a need for financial relief, saying it was not confident a promise of confidentiality would survive a challenge under the Freedom of Information Act.

The plan continues a trend of nuclear operators seeking “subsidies” to support nuclear generating facilities which are facing increased pressure from solar and wind based generation as states seek to expand reliance on renewable energy sources.


In Section 1202 of the tax bill is a provision that would significantly alter the terms of  something called a Coverdell account, which families have used for years to save for both private school and college. Elementary and high school expenses of up to $10,000 per year would become “qualified” expenses for 529 plans.  An individual could use $10,000 each year out of their 529 account for private school and avoid paying taxes on any previous growth. There are no income limits on who can use 529 plans, and one would be able to continue saving for college as well.

Paul Coverdell, a senator (hence the name)  in the 1990s wanted to create tax breaks for parents whose children do not attend public schools. In 2001, President George W. Bush signed a bill allowing holders of the accounts to use any earnings in them for tuition in kindergarten through 12th grade as well as college. The current proposal, initially an idea from the conservative Heritage Foundation, would end contributions to Coverdell accounts while offsetting the impact with the change to the 529 provisions.

Coverdell contributions had previously had an annual contribution cap of $2,000. The benefit was therefore somewhat limited. 529 plans have few contribution restrictions and very high limits on balances.

The chief beneficiaries would be those in the highest marginal brackets. The New York Times estimated a potential tax savings of $34,000 over 15 years of savings based on $10,000 of annual withdrawls. Effectively, that would benefit the many households who use private schools to avoid their children being exposed to the diversity of the public school system. This hurts public schools as so many states use average daily attendance as the basis for distributions of state aid and provides a competing subsdy to religiously based schools.

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