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Muni Credit News June 22, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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AMERICAN DREAM DEAL MODIFIED

We profiled the Public Finance Authority (WI) bond issue for the American Dream retail project in the New Jersey Meadowlands last week. Since then, we note that the deal was “improved” in response to investor feedback. The PILOT rate has been increased to 90% of the regular property tax rate. A reserve fund and a schedule for funding it has also been established. The disclosure requirements have also been enhanced to call for monthly construction updates. More frequent leasing information on the project has also been added to the supporting documents.

It is good to see that the investment community was not willing to roll over for the deal as presented. At the same time, the enhancements are not a replacement for underlying economic viability. Nonetheless, it is a positive development for potential investors.

PUERTO RICO

The recently announced deal between the Government Development Bank (GDB) and a group of its creditors has been approved by a majority of its creditors. The transaction as laid out in the RSA must still be approved by the Financial Oversight and Management Board for Puerto Rico and the U.S. District Court. FAFAA and the GDB have said that support for the transaction to date increases the likelihood of a successful reorganization of the bank.

Acceptance and execution of the agreement should result in a better result for the creditors versus what would have been achievable in a bankruptcy proceeding.

TEXAS DEFAULT UPDATE

Dallas County Schools, the entity which provides transportation for public school students in the city defaulted on six series of outstanding bonds on June 1. As of June 16, 2017, the District has made all outstanding interest payments due June 1, 2017 on all six series. In addition, as of June 16, 2017, the District has paid in full all amounts due on their lease obligations.

MSRB ANNOUNCES 2017 GOALS

The self regulating body for the municipal bond industry, the MSRB announced its strategic goals for 2017. They include expanding the utility of its Electronic Municipal Market Access (EMMA®) website, which is available free to all holders of municipal bonds to provide widespread access to municipal market data and tools that support fair transactions and facilitate decision-making, and maximizing the use of data to support market transparency and regulation. Additionally, the MSRB will conduct a comprehensive analysis of relevant market data to maximize its availability, utility and quality for the benefit of all market stakeholders and the public.

The MSRB’s updated strategic goals are: Facilitate industry understanding of and compliance with MSRB rules through rule guidance, clarification and education in support of market efficiency; Further evolve the EMMA website into a comprehensive transparency platform that meets the needs of municipal market participants and the public; Optimize the use and dissemination of municipal market data to further support market transparency and inform regulation; Leverage the MSRB’s unique perspective and expertise as an independent self-regulatory organization; and Promote financial sustainability by assessing fair and equitable fees, diversifying funding sources and spending responsibly.

NEW MEXICO TURNS TO FINANCING TRICKS TO BALANCE BUDGET

New Mexico had a contentious budget process this year but even after that concluded, the state will still rely on the use of short term financing to balance its FY 2018 budget. New Mexico plans to sell $120.4 million in supplemental notes and $38.2 million in senior notes this month. The note proceeds will be used to reimburse the general fund for capital expenditures. This will “release cash” in the Severance Tax Bonding Fund and boost the state’s general fund reserves. The state will sell long-term severance tax bonds in July to finance the school capital program, instead of applying that moneyto statecapital projects.

A major component of the FY 2018 financial plan involves the “sweep” of non-General Fund balances into the General Fund in order to achieve General fund balance. All of these techniques along with the note issuance and bond proceeds swap plan are one-time actions that only put off the day of reckoning for the State in terms of spending and taxation. For bondholders, they point to a more vulnerable fiscal position for the State and a weaker ratings outlook for the State’s debt.

ALASKA RATING MELTING AWAY

S&P Global Ratings has placed its ‘AA+’ general obligation (GO) rating, ‘AA’ appropriation rating, and ‘A+’ moral obligation rating on the state of Alaska’s debt on CreditWatch with negative implications.

S&P said “The CreditWatch action reflects our view that the state could remain structurally imbalanced for fiscal 2018 based on the impasse for budget negotiations regarding adopting fiscal reforms,” said S&P Global Ratings. As noted in our prior reports, without structural fiscal reform in the 2017 legislative session, we would likely lower the state debt ratings. Over the next 90 days, we expect the state will enact a fiscal 2018 budget. “If Alaska uses a significant amount of its reserves again and remains structurally imbalanced, we would likely lower the rating, “but should it adopt a balanced budget with fiscal reforms that does not significantly rely on reserves, we may remove the state’s ratings from CreditWatch without downward rating action.” The state legislature failed to adopt a budget during its regular session and first special session. On June 16, 2017, the governor called for a second special session specifically to address the operating budget before the end of the fiscal year (June 30). In our opinion, given the limited scope of the second special session and an ongoing political impasse over adopting the governor’s proposed fiscal reforms, it is unlikely significant fiscal reforms will be implemented as part of the 2018 budget, resulting in yet another year of structural imbalance.”

CHARTER SCHOOL CREDIT IMPROVEMENT

While charter schools are often in the news for financial difficulties and debt defaults, it is refreshing to see a charter school program show positive credit trends. S&P announced that it has raised its rating to ‘BBB’ from ‘BBB-‘ on the California School Finance Authority’s educational facilities series 2014 and 2015 fixed-rate charter school revenue bonds, issued on behalf of KIPP LA Schools which as $106 million of outstanding debt. KIPP has 14 schools currently operating throughout the greater Los Angeles area. S&P cites “its very healthy financial profile, which includes growth in unrestricted liquidity and excellent revenue over expenses that is commensurate with the higher rating.” S&P assessed KIPP’s financial profile as strong, with exceptional positive operating margins, a sound cash position, a moderate maximum annual debt service (MADS) position, and a large operating base. It assessed KIPP’s enterprise profile as adequate, characterized by healthy demand with exceptional enrollment growth, a moderate waiting list, solid academics, and a stable management team. A higher rating is precluded “by KIPP LA’s significant growth plans for the next three to five years and the construction risk associated with its current and planned projects that might pressure the school’s financial profile.

KIPP operates 80 elementary, 94 middle and 26 high schools in 31 locations across the country. KIPP schools are tuition-free, which are primarily funded through public federal, state, and local dollars, along with supplemental funding through charitable donations from foundations and individuals.

SENATE HEALTH PLAN TARGETS MEDICAID

In what would be a blow to state finances, the Senate has released its draft legislative proposal to repeal the ACA. The major source of savings are to be found in the proposed changes to Medicaid. They include limiting how much the federal government would pay for each person enrolled in the program (the per capita approach vs. the block grant approach). The bill is rolls back Obamacare’s enhanced Medicaid spending — states would be left deciding whether to raise more money to make up the difference, or to cut back on medical coverage for people using the program which is likely to force governors to cut coverage — over four years beginning in 2020. Earlier Senate conversations called for a three-year phase out.

Americans who get tax credits to buy insurance based on their age, as the House bill does, the Senate would offer them based on “financial need”—which is more or less how Obamacare works. But under the GOP’s proposal, fewer Americans would qualify for help. Under the Affordable Care Act, households can receive insurance subsidies if they earn up to 400 percent of the poverty line. Senate Republicans would lower that threshold to 350 percent. Subsidies will also be smaller for those who still qualify.

The bottom line is that the plan as is cuts revenues to the states, increases the ranks of the uninsured and the need for more indigent care, and makes it more likely that the oldest Americans will see lesser care. So the bill is negative for state credits, hospital credits, and continuing care retirement communities.

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.

Muni Credit News June 20, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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NYC TRANSITIONAL FINANCE AUTHORITY

$850,000,000

Future Tax Secured Tax-Exempt Subordinate Bonds

Moody’s: Aa1

The state legislature established TFA as a separate and distinct legal entity from the city. Further, the state did not grant TFA itself the right to file for bankruptcy. While bondholders are protected from bankruptcy, city or state fiscal stress still could pose risks because both the city and the state retain the right to alter the statutory structure that secures TFA’s bonds. The city has covenanted not to exercise those rights if debt service coverage were to fall below 1.5 times MADS on outstanding bonds. Since enactment of the TFA, policy actions have both increased and decreased the pledged revenues. Those actions have included the abolition of the city’s income tax on commuters, and establishment of various sales tax exemptions.

The pledged taxes are collected by the New York State Department of Taxation and Finance and held by the state comptroller, who makes daily transfers to the trustee (net of refunds and the costs of collection). The trustee makes quarterly set-asides of amounts required for debt service due in the following quarter on the outstanding bonds, as well as TFA’s operational costs (with the collection quarters beginning each August, November, February and May). Half of each quarterly set-aside is made beginning on the first day of the first month of each collection quarter and the second half is made beginning on the first day of the second month of each collection quarter. If sufficient amounts for debt service are not on deposit after those two months, the trustee continues to set aside funds in the third month, on a daily basis, until the deficiency is cured. Functionally, personal income tax revenues are expected to provide sufficient amounts for debt service; if they do not provide at least 1.5 times coverage of maximum annual debt service (MADS), sales tax revenues are available to make up the difference. Additionally, the TFA’s future tax secured bonds issued before November 2006 have a first lien on appropriations of state building aid to the city if necessary to meet debt service requirements.

The TFA was created by the state legislature in 1997 to provide a method of financing New York City’s vital capital construction program but outside the constraints of the debt limit imposed on the city by the state constitution (the city’s general obligation bonds are rated Aa2 with a stable outlook). TFA’s original statutory authorization was $7.5 billion. In 2000, it was increased by $4.0 billion and following the 2001 World Trade Center attacks, that amount was increased to permit $2.5 billion of subordinate “Recovery Bonds” used partly as deficit financing to bolster the city’s general fund in fiscal 2003. Authorized issuance was increased again by an additional $2.0 billion in 2006, to an aggregate of $13.5 billion (the Recovery Bonds were excluded from that cap) for senior and subordinate lien bonds.

CHICAGO AIRPORT ENTERPRISE
$825 million new money and refunding senior lien general airport revenue bonds (GARB)

Moody’s: A2 Fitch: A

The ratings reflect the strong local market, the strategic location of Chicago, IL as a hub and the demonstrated importance of the airport to both United Airlines and American Airlines. The rating also reflects continued favorable progression of the airport capital programs with overall costs remaining in line within existing budgets, while airport traffic is trending in a positive direction. Leverage is elevated at nearly 12x but should evolve to a lower level over the next five years.

The passenger base ranks among the nation’s largest for both origination and destination (O&D) traffic as well as international services. Nearly 60 domestic and foreign-flag carriers operate out of O’Hare to 168 domestic and 65 international non-stop destinations. In 2016, the airport handled 38.9 million enplaned passengers with slightly over half being origination/destination traffic. O’Hare has experienced a healthy rate of traffic growth over the past three years, up 16.7% since 2013. Early traffic data for fiscal 2017 indicate marginally positive traffic increases. Both domestic and international segments realized increases over the past three years, as well as ongoing increases in service from low-cost carriers.

Three of four new runways have been completed along with one of the two planned runway extensions. Remaining costs will cover additional airfield projects such as another new runway and runway extension project, are also anticipated to be close to $1.6 billion. Other projects include a nine-gate expansion at terminal 5, a facility used for international and domestic flights. Airport management is also exploring future terminal projects to increase capacity. The timing and costs are unclear but will likely take many years to fully complete.

CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY

(SUTTER HEALTH)

$442,135,000 REVENUE BONDS

Moody’s: Aa3 S&P: AA- Fitch: AA-

Sutter Health is issuing bonds to refinance outstanding debt. Sutter’s ratings reflect its strong presence in northern California, its large size, its history of generally stable cash flow production, and its conservative asset-liability structure, including a well-funded pension plan. Challenges include relatively high leverage, more modest operating performance in recent years, cash balances that are modest compared to other Aa rated credits, and a $4.5 billion capital plan over the next five years. The system operates 28 acute care facilities, manages four medical foundations that contract with medical groups organized as professional corporations that account for the services of over 2500 physicians, recently started a small health plan, and operates a large number of out-patient facilities.

Bonds are secured by a gross revenue pledge pursuant to Sutter’s 1985 Master Trust Indenture (MTI), with payments made by Sutter’s Obligated Group (approximately 96% of the System’s total revenues). All members of the Obligated Group are jointly and severally liable with respect to the payment of each obligation secured under the MTI. Operating EBITDA margins have consistently been around 10% since 2014 (Dec. 31 fiscal year end). Operating performance has weakened in the first quarter of 2017 due to lower than expected patient volume. However, management has implemented necessary expense reduction initiatives and the full year operating EBITDA margin budget of 8.4% should be met or exceeded based on management’s historical track record.

This issuance is expected to reduce pro forma MADS to $239.7 million from the current $242.7 million, which was also a reduction from prior levels due to refinancings in 2016. Debt service coverage is adequate at 4.8x in 2016, 4.3x in 2015 and 5.3x in 2014 compared to the ‘AA’ category median of 6x. The capital plan for 2017-2021 totals $4 billion with a significant reduction in 2020 after the San Francisco facilities are complete. Sutter typically finances capital expenditures from cash flow and issues debt for reimbursement based on a balancing of cash and leverage metrics. An additional $500 million debt financing is expected in the next two to three years to fund or reimburse capital expenditures.

Moody’s assigns a stable outlook to its rating based on an assumption that operating measures will continue to improve over time, and that balance sheet measures will generally improve, despite the very large capital plan.

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PUERTO RICO

The U.S. House Natural Resources Committee demanded that the board approve the agreement to restructure PREPA’s $9 billion debt. It also follows various groups’ call, including the Puerto Rico Manufacturers Association and the Coalition for the Private Sector, which urged stopping the RSA, whose terms were renegotiated earlier this year. PREPA extended a deadline to June 28 to finalize the required documentation and begin the creditor voting process over the “qualifying modification,” as defined by Promesa’s Title VI. The extensions followed a Wall Street Journal report that the deal was on the verge of collapsing because fiscal board members could not reach a consensus over the RSA’s terms.

PREPA’s executive director, Ricardo Ramos, said he had expected the RSA to go through the process of court approval in July. He had previously said PREPA is receiving a lot of pressure from Congress to move the RSA forward.

On another front, The recently announced deal between the Government Development Bank (GDB) and a group of its creditors does not exclude the possibility that the bank could end up in a Title III bankruptcy process to restructure its debt. While the proposed deal calls for using most of the deposits and assets left in the GDB as collateral for payment of the new bonds to be issued by a special-purpose vehicle (SPV), there are no guarantees either. According to the RSA, if there is not enough money to pay in full all interest on the new bonds, any unpaid balance shall be paid in kind, which means it would be accumulated until the next payment.

The proposed transaction seeks a bond exchange mechanism for the bank’s $3.76 billion debt, in which three different tranches would be issued by an SPV. Haircuts would hover from 25% to 45%, depending on the tranche, while GDB assets, particularly the municipal loan portfolio, would pay for these bonds. The process under the federal Promesa law calls for Financial Oversight & Management Board approval of the RSA as a “qualifying modification,” after which the GDB will need more than 66.6% of its voting creditors to be in favor of the deal. The agreement would then have to be certified by a judge.

INDIANA P3 CRASH

The State of Indiana announced an agreement to take control of construction of the 21-mile stretch of I-69 from Bloomington to Martinsville, an admission that its touted public-private partnership failed. The agreement terminates a contract with I-69 Development Partners, the private company responsible for designing and building I-69 Section 5 and maintaining it for 35 years.

The agreement would settle all disputes and allow the Indiana Finance Authority to assume direct control of the project, which is about 60 percent finished. The project was supposed to be completed by October 2016, but has been delayed four times since construction started. The new estimated completion date is August 2018, nearly two years late.

In a news conference, state officials insisted that the state made no mistakes concerning the project. They also did not discount the possibility of using a public-private partnership for I-69 Section 6 from Martinsville to Indianapolis. The state however, now assumes the risk of costs increasing beyond projections to operate and maintain the road for 35 years. The contract that was terminated called for the state to make annual $22 million “availability payments” to I-69 Development Partners for 35 years. That company was to have operated and maintained the road during that time.

State officials said Friday that — in today’s dollars — the entire project, including maintenance costs, would cost $560 million. They say it would have cost $590 million with its now-former private partner. The emphasis on savings to taxpayers over 35 years, represents a real change in how the state sold the project to the public in 2014.

When the agreement was signed, the state emphasized the $325 million winning bid by I-69 Development Partners. That was the cost of construction. The state will have to pay off bondholders and cover about $115 million in increased construction costs, Huge said. The state says it will get the money from a bond issue, at a lower interest rate than the bonds for the public-private partnership. It also negotiated a $50 million settlement payment from the company. As part of the termination agreement, I-69 Development Partners also will pay $12 million to the bondholders.

LOUISIANA BUDGET PASSES

A $28 billion-plus Louisiana operating budget won final legislative passage, a week after a stalemate in the spending negotiations forced lawmakers into a special session. The spending plan for the fiscal year that begins July 1 would keep most agencies free of cuts and fully funds TOPS. More than 38,000 state government workers would get 2% pay raises, and dollars would be allocated to open a vacant new juvenile prison in Acadiana. Prisons, state police, public colleges and the child welfare agency would be among those areas shielded from reductions. It would be the first time college campuses would be spared cuts to their state financing in nearly a decade.

Some programs would see cuts. Mental health services would get less money, as would a program for “medically fragile” children and the private operators of Louisiana’s safety-net hospitals and clinics. A gas tax increase failed. Another special session is planned over the next eight months (an exact date hasn’t been set) for lawmakers to consider raising taxes before Louisiana hits what is called the “fiscal cliff.” That’s when temporary sales taxes expire June 30, 2018 and leave a budget hole estimated to be as much as $1.3 billion or more.

Muni Credit News June 13, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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PUERTO RICO

We see the effort by the Governor of Puerto Rico and his supporters to achieve statehood for the Commonwealth of Puerto Rico as being not constructive for the Commonwealth’s near term financial situation. We believe that there are a number of hurdles to be overcome that can only be addressed by the Commonwealth before statehood could begin to be seriously considered by Congress. The recent plebiscite on the question of status we see as being far less decisive than the results would indicate.

The Soviet-style result (97% in favor of statehood) is as much the result of a highly successful boycott effort by opposition parties. We see the meager 23% voter turnout as being a more relevant indicator. In addition, we see the decision by the US Department of Justice to disapprove the plebiscite and any funding for it to be relevant concerns. DOJ noted that the ballot omits Puerto Rico’s current territorial status. “This omission,” the letter says, “appears to be based on a determination that the people of Puerto Rico definitively rejected Puerto Rico’s current status in the plebiscite held on November 6,2012.” The 2012 vote, however, has been “a subject of controversy” according to the Department, and “significant political, economic, and demographic changes have occurred in Puerto Rico and the United States” since that vote.

“As a result,” the letter concludes, “it is uncertain that it is the present will of the people to reject Puerto Rico’s current status.”“Accordingly, any plebiscite that now seeks to ‘resolve Puerto Rico’s future political status’ should include the current territorial status as an option,” the letter states, “[o]otherwise, there would be ‘real questions about the vote’s legitimacy’ and its ability to reflect accurately the will of the people.” DOJ had other issues with technical aspects of the ballot’s wording that it felt would be prejudicial.

Meanwhile, The Puerto Rico Electric Power Authority (PREPA) and its creditors have agreed once more to extend several deadlines under their restructuring support agreement (RSA), the commonwealth’s Fiscal Agency & Financial Advisory Authority (FAFAA) announced. Once the RSA is approved by the fiscal board under Title VI of the federal Promesa law, PREPA will now have until June 28 to finalize the required documentation and begin the voting process by all creditors over the “qualifying modification,” as defined by the out-of-court restructuring process provided by Title VI. June 28 is also the deadline for an agreement with certain creditors to fund Prep’s short-term liquidity needs, as well as to retaining a claims agent as established under the RSA.

Concerns have been expressed that the seven-member panel does not have the votes to finally restructure PREPA’s $8.9 billion debt load, as well as the utility’s operations. All the creditors to the RSA and the commonwealth have agreed the deal should be implemented through Title VI of Promesa, which allows for voluntary agreements for debt restructuring among stakeholders but, it is reported, there may be some portions of the deal that may have to go through Title III or the court-brokered bankruptcy process.

SUFFOLK COUNTY NY DOWNGRADE

Standard & Poor’s (“S&P”), downgraded the County of Suffolk, NY General Obligation Issuer rating to A- from A. “The downgrade reflects our view of the county’s available reserve levels, which have been negative for the past seven years, and our opinion that while the county’s continued efforts to narrow its operating gaps are improving, these efforts are unlikely to allow for the accumulation of reserves to positive levels over the next four to five years,” said S&P Global Ratings.

“Despite improvements in recurring revenue and expenditures, we believe the county is unlikely to generate an operating surplus without the continued use of one-shot revenue and expenditure items over the next two years, which we view as a credit weakness. It is our opinion that while the county’s operating performance has stabilized, the county will experience continued difficulty in generating surpluses over the near term, which would allow it to significantly improve fund balance over the near to medium term to levels in line with higher rated peers. We believe that current reserve levels are more comparable with those of lower rated peers, and despite the county’s very strong economy, result in a weakened ability to meet financial obligations if a period of substantial economic distress were to occur.”

ILLINOIS PUTS OFF ONE DAY OF RECKONING

In one piece of good news for Illinois, the State Comptroller has confirmed that the state has renegotiated the termination terms of some of its outstanding swap agreements. The new terms provide that the swaps cannot be terminated until the state’s general obligation bond rating is lowered below BB+ and Ba1. The increases the state’s ratings margin by one notch in terms of the agreement. With the perceived increasing likelihood of the state’s ratings being lowered as soon as July 1, this change does provide some cushion against increasing demands on the state’s cash. It is estimated that the cost of terminating the swap agreement would have been an immediately payable $70 million.

MORE BAD NEWS FOR THE HOUSE HEALTHCARE BILL

We know that it will not be adopted but the ongoing efforts in the Senate will have to take heed of the recent report by the Centers for Medicare and Medicaid Services’ Office of the Actuary. That report estimates that repeal bill would leave 13 million more Americans uninsured over the next decade and reduce federal spending by $328 billion. Both of those numbers, based on differing assumptions, are respectively lower and higher than the CBO estimates.

In 2018, the number of uninsured is estimated to be about 4 million higher under the AHCA than under current law, mainly due to the impact of repealing the individual to 31 million in 2018 and to 32 million in 2019. By 2026, the number of uninsured is estimated to be roughly 13 million higher under the AHCA. Most of the longer term coverage losses stem from the anticipated rollback of Medicaid expansion. CMS estimates that 6 million fewer individuals would be shut out because of the House bill’s tighter eligibility criteria, and that an additional 2 million will cycle out of the program because of new requirements.

There will be 35 million uninsured in 2020 under the AHCA, a figure that is about 8 million higher than under current law. For those Medicaid enrollees who would lose coverage under the AHCA, most are assumed to ultimately be uninsured, though a small fraction would choose to purchase individual insurance. All States are assumed to choose to operate within the per capita caps. So even with the more “favorable” assumptions, cuts along these lines remain credit negative for the states. The reduction in available federal revenues as well as the increased pool of potential charity care patients would be damaging to State financial positions.

STADIUM FINANCING UNDER FIRE AGAIN

Cory Booker, D-N.J., and James Lankford, R-Okla., are sponsoring a bill that would prohibit teams from using municipal bonds, whose interest is exempt from federal taxes, to help finance stadium construction. The two senators could not be farther apart on the political spectrum but they have joined forces in this latest legislative effort against municipal bonds for stadiums.

A similar bill was introduced by Congressman Steve Russell, R-Okla., into the House of Representatives in March 2016. Municipal bonds have been used to fund 36 newly built or renovated sports stadiums since 2000. The bill would end federal subsidies for stadium financing, but would not prevent localities and states from bidding and offering economic incentives to teams.

This is the next of many efforts to eliminate bonds for stadium projects. While the evidence against the productivity of such financings is questionable at best, we see the likelihood of success to be low based on past history. So keep your eye out for Las Vegas Sports Authority bonds soon.

TREASURY RECOGNIZES MUNICIPAL BOND CREDIT QUALITY

It is buried pretty in a report on bank regulatory reform but the US Treasury has joined a growing chorus in recognizing the credit quality on an overall basis of municipal bonds. Executive Order 13772 instructs the Treasury Secretary to report to the President the extent to which the existing financial regulatory system promote the Administration’s “Core Principles” of financial regulation, which include empowering Americans to make independent financial decisions, save for retirement, build wealth and prevent taxpayer-funded bailouts. In its section on Improving Regulatory Coherence to Improve the Functioning of Capital Markets, Treasury recommends expanded treatment of certain qualifying instruments as HQLA. This would include categorizing high-grade municipal bonds as Level 2B liquid assets (rather than generally not being counted as HQLA currently). This the latest iteration of what has been a changing position as to whether or not municipal bonds fit the bill.

The Federal Reserve has supported this position. Bipartisan legislation to this effect was introduced in the last session. Inclusion in the category of HQLA can be nothing but good for the market and support the generally favorable credit standing of municipal bonds among the public.

Muni Credit News June 13, 2017

Joseph Krist

Senior Municipal credit Consultant

joseph.krist@municreditnews.com

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PUBLIC FINANCE AUTHORITY

$800,000,000

Limited Obligation PILOT Revenue Bonds

$300,000,000

Grant Revenue Bonds

The long awaited bond issues for infrastructure supporting the massive American Dream shopping mall and entertainment center in New Jersey is finally coming to market. The bonds should prove to be a real test for the high yield market’s appetite for debt essentially backed by the bricks and mortar retail sector. The project has been some phase of development since 2003. It was first proposed by the Mills Corporation as the Meadowlands Xanadu. After the bankruptcy of that company in 2007, the project was taken over by Colony Capital.

In May 2009, construction stalled due to the bankruptcy of Lehman Brothers. The Triple Five Group announced the intent to take over the mall in May 2011, and on July 31, 2013, officially gained control of the mall and the surrounding site. Anyone who has traveled by bus or automobile to New York through the Lincoln Tunnel has undoubtedly seen the project located along New Jersey Route 3.

The effort to bring the project to fruition has been bedeviled by construction delays, environmental issues, unstable ownership, and financial difficulties. Ground was broken on the complex on September 29, 2004, and, at the time, was expected to open two years later. The project is now scheduled for a 2018 opening. It is slated for some 500 retail stores and a variety of amusements including an indoor ski slope. It most resembles conceptually the two other mega retail/entertainment facilities in North America – the West Edmonton Mall and Mall of America. Both of these are operated by Triple Five.

To say that the PILOT credit is speculative is an understatement. The sector itself is among the market’s riskiest – debt secured by payments from a developer derived from the revenues obtained from the operation of the mall. Tenants will rent space from the developer who will then be required to make quarterly payments to the Borough of East Rutherford, NJ which will then make payments to the New Jersey Economic Development Authority (NJEDA).

Proceeds from the Public Finance Authority bonds – the PFA a subdivision of the State of Wisconsin – will be applied to the purchase of bonds from NJEDA. The payments by East Rutherford made to the NJEDA will be used to make payments on the NJEDA debt which will then be applied to the payment of the debt service on the PFA debt. The PILOT payments by the Developer are set at 86.25% of the regular property tax assessment that would normally be leveled on property of this category by East Rutherford.

The risk lies primarily in the fact that over the period of time from original conception to actual opening of the mall, the retail sector has undergone an overwhelming level of change which have not been in its favor. If the demand for the malls stores and the entertainment facilities are below the assumed levels driving the project, the developer will not have enough revenue to make the required payments to support debt service. There is no other source of funds pledged to the bonds.

It is always a clue when a development project relies on the low cost financing of the tax exempt market, especially to the extent that this one has. The fact that construction had been at a halt for significant periods of time while all of the legal and logistical obstacles to this transaction were dealt with – which reflected the lack of available sufficient private sector financing for this project – is an indication that the risk reward ratio is not compelling.

Where the demand will come from is uncertain. Other regional competitors have been under severe pressure and many of the expected anchor tenants or prominent tenants have scaled back their national brisk and mortar footprints. When asked, proponents have pointed to the above average incomes of the immediate region but also tourism to New York City as a source of significant demand. We find that concerning. A recession would negatively impact domestic demand and current Administration policies are already negatively impacting foreign tourism levels in the New York market. So we question the major underpinning assumptions of the project.

The Grant Revenue Bonds are payable from grants to the project to be annually appropriated by the State of New Jersey. The grants are to be made to the developer to facilitate the project. They have been the subject of great controversy as residents have questioned the wisdom of these large payments to the developer of a highly questionable project during a prolonged period of fiscal distress for the State. In a time of huge infrastructure needs and declining funding for things like mass transit, healthcare, and the State’s well documented pension liability funding difficulties, these annual payments will compete for scarce state revenues.

Should the project not succeed, bondholders could find themselves in the middle of a political crossfire as underfunded service demands would be competing with subsidies for a failed private sector real estate project owned by a non-US corporation. That is not a place I would want to be in.

$449,860,000

State of Mississippi

General Obligation Bonds

Moody’s: “Aa2 (negative outlook)” S&P: “AA (negative outlook)” Fitch: “AA (stable outlook)”

Actions in the state’s fiscal 2016 expenditure of financial reserves to address revenue shortfalls, as well as its suspension of a statutory cap (at 98% of projected revenue) on annual appropriations have led to a negative ratings outlook. The state’s economy will likely continue to underperform the US, potentially leading to further fiscal pressure. The credit is characterized by an above-average debt burden and low per-capita income.

$342,000,000

State of Wisconsin

General Obligation Refunding Bonds

Moody’s: Aa2 S&P: AA

Moody’s rates the State of Wisconsin at Aa2 reflecting its view of a very well funded pension system and limited OPEB liability, moderate economic growth, as well as governance constraints evidenced by limited executive authority to reduce mid-year appropriations. The rating also acknowledges recent revenue volatility and a fund balance position that remains below average.

The rating is also assigned a positive outlook based on recent improvements in liquidity, conservative management of retiree benefits that limits future budgetary pressures, and reductions in the state’s long standing negative GAAP fund balance, if continued, would allow the state to improve its reserves and balance sheet.

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BUDGET TIME IN FULL SWING

June is the time when all of the rhetoric comes to a relative halt and the time comes for state legislatures to fish or cut bait when it comes to annual budget adoption. Here are the states where the outcome is far from certain as we enter the home stretch of the budget crunch and where we are paying special attention.

Washington – 26,000 employees are facing the potential to be laid off if the legislature cannot come to agreement. The sticking points are the desire to reduce property taxes throughout the State which has faced court orders governing education spending. One side wishes to use higher capital gains taxes and carbon taxes to support aid to local schools while the other resists. Observers are betting on a resolution but the state employees are already pawns in this game.

Pennsylvania – The annual budget has become a more and more political game through each year of the Wolf administration. With the legislature in control of Republicans and the Governor being a Democrat, intransigence has characterized the proceedings. Some progress has been made on pension reform but other issues like property tax reform, potential sale of the state liquor system, and a questionable reliance on gambling based revenues. Some in the Commonwealth have raised the issue of a severance tax on natural gas extraction. Pennsylvania is one of the leading shale gas producers in the nation. Based on recent experience, a delayed budget adoption is not out of the question.

Illinois – the problems are well known and increasingly publicized but the level of political brinksmanship and intransigence is unprecedented. We will believe a budget when we see it.

Alaska – Alaska continues to grapple with the realities of lower oil prices and the political hurdles involved in developing a more diversified revenue base. The legislature is in a special session to consider a variety of proposals. It is likely that they will decide to raid the oil funded Permanent Fund and put off the hard decisions necessary to address long-term fossil fuel pricing trends.

Ohio – Through April, the tenth month of Ohio’s fiscal year, state tax receipts year-to-date ($17.7 billion) were 4.2 percent less than expected, according to the state Budget Office. A key component of total tax receipts, state income tax collections ($6.3 billion), lagged its estimate by 8.1 percent (that is, by about $554 million). This is creating pressure to rescind tax cuts for smaller businesses but that faces substantial legislative opposition. That change lets a taxpayer “deduct up to 100 percent of [his or her] business investor income, the deduction not to exceed $125,000 for each spouse if spouses file separate returns or $250,000 for all other taxpayers.”The standoff has delayed final budget consideration for over one month.

Louisiana – The Bayou State’s legislature is in a special session to try to reach a balanced budget consensus. Various spending cuts and tax increases have been proposed to no avail. Spending cuts center on proposed reforms to the State prison system (Louisiana has the nation’s highest incarceration rate). Tax increases proposed on income have been non-starters and the Governor’s proposal for establishment of a gross receipts tax on corporations has been weakly received.

Connecticut – were it not for Illinois, Connecticut would likely be the state of most concern. The problems facing the state and it’s localities are legion but there are no easy answers. The recent announcement by Aetna that it planned to move its headquarters out of state complicated matters significantly. With lagging revenues on the state and local level, the state is under enormous pressure to balance its own budget without offloading its own problems onto its struggling localities.

MASSACHUSETTS DOWNGRADE

S&P announced that it has downgraded the rating on the Bay State’s general obligation bonds to AA from AA+. The difficulties of many other states had moved Massachusetts off the center of many credit radar screens. “The downgrade reflects what we view as the commonwealth’s failure to follow through on rebuilding its reserves as stipulated through its own fiscal policies aimed at mitigating the state’s propensity for revenue volatility,” said S&P Global Ratings. S&P said it believed that the state’s “strong economic growth and proactive management” will allow it to navigate through mid-year revenue shortfalls with “some continued use of one-time measures to balance the budget.

Despite above-national average economic growth through a prolonged period of economic expansion, the state has not demonstrated a commitment to its adopted budget reserve policies, upon which our 2011 upgrade to ‘AA+’ was predicated, in part. We therefore view it as a missed opportunity that the state has opted against building its reserve according to its policies and leaves it on a course to experience greater fiscal stress in the event of an economic downturn or if federal funding were capped or trimmed in a material way.”

Moody’s and Fitch recently reaffirmed Massachusetts’ ratings at AA 1 and AA+, respectively, with a stable outlook. According to the administration of Governor Baker, the stabilization fund has grown 20 percent since the governor took office, including the reversal of a $140 million withdrawal authorized in fiscal 2015 by the previous administration. The governor has proposed a $98 million deposit into the “rainy day” at the start of fiscal 2018, and a new process for building the reserves that would include a second deposit at the end of the fiscal year equal to 50 percent of all tax revenue exceeding projections.

CALIFORNIA BUDGET MOVES FORWARD

The CA Legislature’s budget-writing committee approved a spending plan late last week that expands a tax credit for the poor and imposes direct budget control on the University of California’s office of the president. The plan also includes a controversial plan to borrow up to $6 billion from a state investment account to make an extra payment to CalPERS to reduce the state’s pension obligations.

While the borrowing plan does reduce the unfunded liability portion of CalPERS’ accounts is does create an amount to be repaid to the state investment account which will further pressure the pension fund manager’s to achieve outsized performance results. Recent years have seen just the opposite at CalPERS so it seems a bit questionable as to how the whole scheme will work out.

Muni Credit News June 8, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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PUERTO RICO

The proceedings in Puerto Rico’s Title III have raised concerns among some that the established treatment of special revenues under Chapter 9 could be altered by decisions in this case. the concern rises from Federal bankruptcy Judge Laura Taylor Swain decision to hold a hearing in August when she will entertain arguments on an action to stop the retention, or clawback, of toll revenues that back the Highways & Transportation Authority (HTA) debt obligations . Creditor groups contend that they have a lien over those. HTA bondholders sued on May 31 seeking an injunction to stop the HTA from diverting pledged toll revenues. Last week, three municipal bond insurers followed suit.

The Commonwealth and the financial control board—which represents the Puerto Rico government as debtor—insist that taking toll revenues from the HTA could force it to shut down its operations, including that of the Urban Train. The commonwealth contends that the lien is not a statutory one. They said the opposite last year to a U.S. District Court Judge as well as the U.S. First Circuit Court of Appeals. The Commonwealth contends that the liens were in place before the Puerto Rico Oversight, Management & Economic Stability Act, or Promesa, was enacted in 2016.

Its position is that the lien can’t be destroyed because the retroactive invalidation of a statute-covered lien is unconstitutional. Under the terms of that lien, the HTA must first deposit sufficient funds into the 1968 Resolution bondholders’ collateral account to meet debt service obligations before it can spend the funds elsewhere. Expropriating the “gross” lien to pay for “necessary operating expenses” at the HTA would effectively convert it into a “net” lien, which would constitute an illegal taking according to the plaintiffs.

They cite the fact that that the fiscal plan shows $530 million in toll revenues and other fees being transferred to the commonwealth’s general fund. The fiscal board argues that creditors have only “an unsecured lien unless they have other secured interest.”

Investor concerns center on the idea that a decision in favor of the Commonwealth could have wider implications for the treatment of special revenues generally. The issues in this case however, seem to turn on the unique aspects of the clawback provision which is not typical in many special revenue secured bonds. Here, the nature of the constitutional versus statutory dispute lies at the heart of the argument in this restructuring. We note that this issue has not arisen with regard to the electric or water utility credits where the issue of the clawback does not exist.

BOND INSURERS UNDER FIRE

Standard & Poor’s (“S&P”) announced that it had placed the ratings of Build America Mutual and National Public Financial Guarantee on a “negative outlook”. The move reverses a generally positive trend in the perception of the creditworthiness of the insurers.

In response, National said, “We are disappointed by S&P’s announcement and do not believe that a rating downgrade of National is warranted. National’s financial strength is evidenced by $1.7 billion of excess capital above our estimate of S&P’s AAA requirement. National has also, in a relatively short period of time, significantly increased its new business activity, as measured both by insured par amount and transaction count, as well as the number of intermediaries who have recommended purchase of National’s guarantees. This market acceptance has been growing despite an environment where S&P’s rating on National has been one notch lower than its competitors. The strong trading value of National’s wrap further attests to the success of National’s disciplined re-entry into the municipal bond market.” Mr. Fallon added, “We will continue to work with S&P during its ongoing review to do everything in our power to maintain National’s AA- credit rating.”

BAM took a similar tack. ” S&P Global Ratings’ decision to place BAM’s rating on CreditWatch Negative represents a departure from their stated criteria and previous communications to the market. BAM’s managing directors said they intend to engage with S&P during the CreditWatch period to demonstrate that BAM’s financial strength and low-risk, low-volatility strategy of insuring only U.S. municipal bonds from essential public purpose issuers supports BAM’s current rating. Our portfolio strategy does not limit BAM’s competitive position: Only 3% or less of the U.S. insured municipal market is sold in sectors that BAM does not insure, and diversification outside the municipal market has historically exposed bond insurers to excessive risk of loss. According to municipal market default studies by Moody’s and S&P, 70% of the defaults by credits that were rated investment grade at issuance were from the sectors BAM has chosen not to insure. In contrast to the industry’s past, we will not change our risk tolerance in response to rating agency pressure.”

If S&P’s problem is the municipal only risk profile of the insurers than that position is confusing. In the aftermath of the 2008 financial meltdown and the damage it did to the bond insurers, the multi-sector model was clearly not viable from a ratings standpoint. If that has changed, does it represent a paradigm shift in the thinking of the rating agencies? If so, they should make that change clear. Otherwise, the monoline municipal bond insurers are in an untenable position as are holders of the bonds they insure.

PRIVATE DOES NOT ALWAYS INSURE A SMOOTH ROAD YET AGAIN

The latest blow to the P3 concept for highway bonds occurs yet again in Indiana. This week it was announced that the state of Indiana intends to take control of the troubled I-69 project from Bloomington to Martinsville as the public-private partnership used to finance and build the highway crumbles. The project’s completion date will again be delayed from May 2018 to August 31, 2018. This is the fourth such delay. The original completion date was October 2016. This is the fourth opening delay as the state’s design-build contractor struggles to pay subcontractors and meet deadlines.

I-69 Development Partners originally bid $325 million to win the project, begun in 2014. The state notified bondholders last week about its plans. It stated that it would take nearly $237 million to complete the project versus the $72 million that is available. That means $164 million is needed to “complete construction and resolve claims.” State officials declined to confirm whether taxpayers would have to foot the bill for the $164 million that is needed.

The Indiana Finance Authority (IFA) has sought to negotiate a settlement with the holders of the Bonds under which IFA would redeem the Bonds by paying termination compensation under the PPA. The funding of such termination compensation amount would be provided from the proceeds of bonds that would be expected to be issued by IFA by September 1, 2017. IFA’s most recent offer was an amount equal to the sum of: the principal amount of all Bonds, plus accrued interest to the redemption date, plus release of the debt service reserve amount (approximately $6.2 million), less all other unspent Bond proceeds (approximately $30 million), subject to agreement on other terms. As of the expiration of a Non Disclosure Agreement, negotiations have not resulted in an agreement.

I-69 Development Partners won a bid to design, construct and maintain the highway for decades after completion. In March the Spanish company Isolux Corsan — which initially comprised more than 80 percent of I-69 Development Partners — entered insolvency proceedings in Spain. It had four months to reach an agreement with creditors and avoid potential bankruptcy. In the interim, the IFA says it’s offering to buy out private activity bonds issued for the project (rated CCC by Fitch and S&P) and take it over, but the bond holders haven’t accepted the offer.

The announcement has implications for the Trump Administration’s plan to finance highway improvements through P3s. The failed initial Indiana Toll Road privatization and this failing project contain many of the concepts expected to be featured in the upcoming trump infrastructure plan. It represents another failure in Indiana’s (and Governor Mike Pence’s) P3 schemes for road development in the State. It cannot bode well that the results from the Vice President’s P3 incubator have turned out so poorly.

KANSAS GIVES UP ON SUPPLY SIDE EXPERIMENT

The Kansas Senate and House have overridden Governor Sam Brownback’s veto of Senate Bill 30. Income taxes will increase across the board but most tax rates will still be below where they were before the 2012 tax cuts. The increases are projected to generate more than $1.2 billion for the state over the next two years. The bill replaces the state’s two-bracket income tax system with three brackets. Income up to $30,000 for married couples would be taxed at 3.1 percent, income between $30,000 and $60,000 would be taxed at 5.25 percent, and income above $60,000 would be taxed at 5.7 percent.

The bill also would repeal an exemption on certain business income that Brownback has championed. That provision was pushed by the Governor as the key to the job creation which was supposed to arise from a “supply side” stimulus. Lawmakers who supported the bill and the override said the 2012 policy was a mistake that had drained the state of revenue. Revenue shortfalls lead to multiple budget cuts and reduced investments in roads and support for local school districts. Those tax changes led to significant and ongoing decreases in state revenues which created ongoing current and structural imbalance. This led to downgrades in the State’s credit rating and a negative outlook for those ratings.

The tax plan was the first to pass the Legislature since February, when lawmakers passed a similar plan. Brownback also vetoed that bill, but the override effort fell three votes short in the Senate. It had become evident to many observers that Brownback would reject whatever tax plan lawmakers approved. The change reflects the political implications of state elections in 2016 and are an effective repudiation of the Governor’s experiment. Once again, an ideological approach to state finances has failed to achieve its goals.

Muni Credit News June 6, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

73 years ago today, more than 160,000 Allied troops — about half of them Americans — invaded Western Europe. In the military, D–Day is the day on which a combat attack or operation is to be initiated. While fewer and fewer of the young men who participated are still around to remind us, we take this opportunity to do it for them.

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Metropolitan Washington Airports Authority

$598,000,000

Airport System Revenue and Refunding Bonds

Moody’s upgrade recipient MWAA comes to market with this issue this week. The upgrade to Aa3 and stable outlook reflect Moody’s view of MWAA’s system wide improving financial and operating performance at its two airports, Reagan National (National or DCA) and Dulles International Airport (Dulles or IAD) supported by strong growth in concession revenues and non-aeronautical revenues, steady enplanement growth driven by a diverse and growing service area economy that we expect will grow at an above-average pace.

The upgrade also considers expected continued growth in air service, a new airline use and lease agreement through 2024 that supports projects for both airports, continued conservative and well-executed operational, financial and capital management, very small exposure to pension liabilities and expected continued growth in air service, particularly for international passengers at Dulles, satisfactory forecasted debt service coverage ratios (DSCRs) and liquidity.

According to Moody’s, the authority is carefully managing and mitigating construction risks on a large capital improvement project at DCA; however, it expects execution and delivery of this project on schedule and budget and the authority expects moderate capital needs going forward.

The credit was assigned a stable outlook on the basis of Moody’s that increased MSA economic activity will contribute to growth in enplanements, which will continue to stabilize costs. The outlook assumes the authority will continue to conservatively manage its financial operations to achieve forecasted metrics and support higher capital project expense (CPE) and maintain DSCRs over the next five years as it undertakes significant debt-financed capital projects at DCA, and also that no additional large capital projects are being planned.

East Bay Municipal Utility District CA

$218,000,000 Water System Revenue Bonds (Green Bonds)

$264,000,000 Water System Revenue/Refunding Bonds

This traditionally strong water revenue credit is rated Aa1. According to Moody’s, the rating reflects the largely built-out nature of the district’s large and economically diverse service area with customer wealth and income levels significantly above national medians. It also incorporates an ample supply of high quality water with good reliability, a large degree of independence from Bay Delta quality and supply issues, strengthening of the system’s water supply and storage and improved financial position despite the challenges associated with the severe multi-year drought. The rating additionally factors a manageable long term capital plan, which the district intends on funding with greater reliance on cash versus debt and an improved debt position marked by a more conservative debt structure and the significant decline in amount of variable rate debt outstanding.

The rating incorporates Moody’s view of a stable history of sound financial operations with timely rate increases resulting in ample liquidity. Debt service coverage levels while significantly below the median for similarly rated systems, have remained very stable in the midst of period of financial uncertainty associated with the drought. Also reflected in the rating is the proven expertise of management, which has a long history of success in meeting the immense challenges inherent to the water system, including upgrading its seismic reliability, while maintaining affordability for its customers, and the successfully tested program which has significantly enhanced dry weather water supply.

Texas A&M University System

$500,000,000 (approx.) Revenue Financing System Bonds

Some 75% of the bonds to be issued will be taxable municipals. Revenue Financing System debt is a general obligation of the Board of Regents of The Texas A&M University System, secured by a lien on and pledge of a broad pledge of system-wide revenues. Pledged revenues exclude state appropriations, in addition to the system’s interest in the AUF, which consists of annual distributions from the PUF, and amounts appropriated to system participants from the Higher Education Fund (HEF). Fiscal year 2016 pledged revenues totaled $3.1 billion, providing 12 times coverage of the RFS pro-forma debt maximum annual debt service.

Permanent University Fund bonds are secured by a first lien and pledge of The Texas A&M University System’s one-third interest in distributions from the PUF, with ultimate access to the value of the Permanent University Fund for debt repayment. There is an additional bonds test limiting TAMUS’ debt issuance to no more than 10% of the value of the PUF, excluding the value of PUF Lands. TAMUS had $915 million in outstanding PUF bonds at FYE 2016 compared to its $7.7 billion share of the PUF.

Proceeds will be used to provide construction funds for projects on various system campuses (the tax exempt bonds) and (the taxable bonds) to refund certain outstanding long-term parity RFS obligations.

The Moody’s Aaa rating reflects robust financial resources relative to operations, strong capital and operating support from the Aaa-rated State of Texas, and the system’s large scale, with 11 campuses serving an estimated 150,000 headcount students throughout the state in fall 2016. Tempering factors include rising, though still manageable, leverage relative to revenue and cash flow, with ongoing infrastructure needs across the system, and the complexity of a rapidly increasing number of third party partnerships.

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PUERTO RICO

The decision by US bankruptcy Judge Laura Swain to freeze assets held by the trustee for some of COFINA’s Sales Tax debt effectively insured a payment default on June 1. The assets will be held until both sides in the dispute over the right of the Commonwealth to apply sales tax revenues to the payment of general obligation debt can be decided upon. The question comes down to whether the constitutionally established “clawback” provisions apply to the COFINA revenues or if those provisions were overridden by statutory actions by the Puerto Rican legislature when the COFINA credit was established.

The public corporation is one of the entities that had filed for bankruptcy under Title III of Promesa. BNYM lawyers said at a hearing May 17 in Puerto Rico that since the commonwealth had taken actions that call into question its commitment to pay the bonds, it faces claims in the New York court that it breached its duties. BNYM lawyers said that because of the commonwealth’s actions, it had been subjected to competing demands by bondholders with respect to a default, whether to accelerate the bonds and whether to make payments on the bonds.

The default occurred effectively simultaneously with the release of the proposed budget for fiscal year 2018 by the Governor. That budget includes more than $2 billion in pension benefits spending as a result of the transition to a pay-as-you-go system but initially provides no funding for the payment of debt service. None of this is a surprise given many of the statements and actions by the Puerto Rican government throughout the days and weeks leading up to the delayed budget release. The budget must be approved by the PROMESA oversight board. The fiscal control board has to date shown no real inclination to support the interests of Puerto Rico’s outstanding debt holders.

ILLINOIS DEBACLE CONTINUES

The deadline for enacting a budget for the State of Illinois by a simple majority vote in the Legislature came and went on June 1 without enactment of a budget. The action resulted in multiple downgrades of the State’s general obligation debt by the rating agencies and poised the State to be rated below investment grade if a budget is not enacted by July 1.

Moral obligation or annual appropriation debt is already in non-investment grade territory as the result of the ongoing feud between the legislature and the equally stubborn Governor. The fact that the operations of all sorts of governmental and non-governmental service providers throughout the State are being negatively impacted seems to be of no consequence. One can hope that a potential downgrade below investment grade might motivate more adult behavior by all parties to the deadlock but we are in the camp of “see it to believe it”.

We do not believe that an actual payment default is in the cards but that does not prevent additional downside valuation risk as this bizarre circus act continues.

FLORIDA BUDGET STANDOFF TO END

It arrived three days beyond the required schedule but, the Florida Legislature did vote out an $82.4 billion budget. It then took weeks for the Governor to decide to sign it but sign it he did after extended negotiations over vetoed items and the terms of a special legislative session to take place this week. Those negotiations reflected a number of items over which there was real disagreement between the Governor and the Legislature.

For example, the Governor requested $100 million for tourism marketing; they gave him $25 million. $85 million in job incentives to lure businesses to Florida; they gave him zero. $200 million to speed up work on rebuilding the leaking dike around Lake Okeechobee; they gave him nothing.

During the special session, an extra $215 million for schools will be added to the original $24 billion budget, increasing the amount of funding by $125 per student over the current year, instead of just $25 in the original budget. Lawmakers will also put $76 million into Visit Florida, the state’s tourism marketing agency, maintaining its current year funding. The original budget included $25 million for the group. A new program will also set aside $85 million to be spent on workforce training as well as infrastructure such as roads to encourage economic development.

The Legislature agreed to decrease property-tax rates to offset a rise in home values that would have caused many homeowners to pay more in taxes. That will save homeowners in Florida a combined $510 million in increased property taxes.

NYC REACHES BUDGET ACCORD

NYC has announced that an agreement has been reached on a budget for FY 2018. The $85.2 billion budget provides for increases in a number of categories designed to appeal to voters. It includes increased capital spending, increases for a variety of anti-poverty programs, education initiatives, and budget reserves. The agreement represents the earliest agreement on a budget in a quarter century and takes major points of contention off the table prior to the start of the City’s election season. Primaries are in September and the general election for the mayoralty and the entire City Council is in November.

The budget does represent a positive view of the City’s near term economic outlook. It also occurs in an atmosphere of federal uncertainty regarding funding for programs which would be considered to be a priority for any incoming administration. The one potential weak spot for the City could be the Health and Hospitals Corporation which runs the nation’s largest municipal hospital system. New York City Health & Hospitals reported a $776 million operating loss for the first half of fiscal 2017, according to unaudited financial statements.

The public health system’s operating loss widened by 84.5% over 2015, when the system lost $420.4 million. After investment losses and interest expenses, the system lost $842.6 million.

The city paid the health system $78.8 million in capital contributions, resulting in a $763 million net loss. Enrollment in MetroPlus, its insurance arm, showed modest gains. But the system’s goal of increasing the number of patients it serves is in jeopardy following declines in utilization at its hospitals and outpatient clinics. The potential for cutbacks in federal dollars through Medicaid restrictions included in possible healthcare reform legislation would bode ill for HHC. The City increased support for H&H by 10.9%, to $766.8 million, for fiscal 2018, which begins July 1. That total represents cash support but does not include spending to cover the health system’s debt service, medical malpractice claims and employee health insurance costs. When accounting for those expenses, as well as the city’s share of supplemental Medicaid payments, the city’s support for H&H could reach $1.9 billion next fiscal year, according to an Independent Budget Office report.

DEFAULT IN TEXAS

In light of an anticipated cash-flow shortfall, the Dallas County Schools District pursued the issuance of refunding bonds to restructure certain outstanding debt and a tax anticipation note to provide operating liquidity. On May 26, 2017, the District received notification from the Texas Attorney General that his office would not approve these transactions. On June 1, 2017, the District failed to make payments on six series of outstanding Public Property Finance Contractual Obligations issued in the years 2012 through 2014.

On May 27, 2017, the Texas Legislature approved legislation allowing for the dissolution of the District effective November 15, 2017, unless the continuation of the District is approved by a majority of voters in the District at an election to be held on November 7, 2017. As of the date of this Notice, the Governor has yet to sign or veto this legislation. The Governor must sign or take no action on the bill by June 18, 2017, for the legislation to take effect September 1, 2017.

Muni Credit News June 1, 2017

Joseph Krist

Senior Municipal credit Consultant

joseph.krist@municreditnews.com

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PUERTO RICO

COFINA bondholders will find out today whether or not the interest due on some of their bonds will be paid on time. As it stands, U.S. District Judge Laura Taylor Swain said The $16 million payment on the bonds, known as Cofinas, and subsequent payments will be halted until several disputes over who owns the money — and who should get it — can be resolved. As we have previously discussed, the issue comes down to whether or not the Commonwealth’s obligation to “clawback” the money from COFINA under the PR Constitution is trumped by the legislation authorizing the issuance of the COFINA bonds.

While the issue is litigated, the judge wishes to “keep the money safe and intact” while the broader disputes are resolved. She made her decision at the request of the bondholder trustee, Bank of New York Mellon Corp. If the decision and subsequent failure to pay is considered to be an act of default, ultimate remedies could include acceleration of the COFINA debt.

DETROIT REPORTS A SURPLUS

Detroit has a balanced budget and a near $63 million surplus.

Figures were released Wednesday from Detroit’s Comprehensive Annual Financial Report for the fiscal year that ended June 30, 2016. It’s the city’s second consecutive balanced budget. There was a 45 percent reduction in audit findings. Mayor Mike Duggan’s office says a $51 million surplus is projected for the current fiscal year which ends June 30. It will use the surplus funds for blight remediation, capital improvements and other projects that improve the city in the long-term.

For the first time in more than a decade, the city didn’t have any costs scrutinized for its federal grant use. The fiscal surplus for 2016 was about $22 million higher than the city projected, which was attributed to improved financial controls, stronger-than-anticipated revenues and lower costs due to unfilled vacancies. The city must have three consecutive years of deficit-free budgets to exit oversight by the Financial Review Commission under terms of Detroit’s exit from municipal bankruptcy protection in 2014.

NEW JERSEY GETS MORE NEGATIVE CREDIT ATTENTION

The State of New Jersey (A3 stable) plans to close its large structural budget gap through a combination of higher revenue and economic growth and increasing pension contributions, but the state’s expectations are at odds with its historic revenue trends and likely pension investment returns, Moody’s Investors Service says in a new report. “If New Jersey’s revenue growth continues at the five-year average pace of 2.8%, pension investment returns do not meet actuarial assumptions, and the state does not implement structural budget changes, rising pension contributions would increase annual operating deficits to $3.6 billion by 2023.”

The report goes on to note that New Jersey plans to improve pension funding by raising contributions each year until 2023. However, the rapid rise in these contributions will pressure the budget and make it increasingly difficult to afford other operating costs. While the state projects to balance rising pension contributions with faster revenue growth, revenues will be hampered by recent tax cuts adopted last October that will result in a loss of $1.1 billion by FY 2021.

Outside of structural budget changes, New Jersey has few options for balancing future gaps, particularly as operating reserves are projected to decline to 1.3% of revenues in fiscal 2017. The projected 2023 deficit’s size will also make it politically difficult to close the gap solely with budget cuts and expense reduction. Should the rising pension contribution schedule prove unaffordable in the future, New Jersey could cut or eliminate part or all of its scheduled pension payments. However, any drop in pension cash inflows would lower the assets available to pay benefits, which would exacerbate the state’s pension problems. New Jersey’s adjusted net pension liabilities stood at $90.2 billion in FY 2015, which was fifth highest among states as a percent of revenues.

Should all of this come to pass, we would expect ratings to decline throughout the foreseeable future.

THE PENSION BOND CROWD TAKES ANOTHER SHOT

It is the equivalent of junk science but a recent paper sponsored by the NCPERS (National Conference on Public Employee Retirement Systems), takes another stab at supporting the issuance of pension obligation bonds. It is included as part of a thesis that the current pension “crisis” is overblown and that the need to fund existing pension systems at levels anywhere near actuarial soundness are unnecessary. It postulates that efforts to rein in pension costs through plans other than taxpayer funded defined benefit plans are damaging to the economy and promote economic injustice.

The one significant element of the paper we discuss here is the effort by the author’s to promote the efficacy of the issuance of pension obligation debt in place of honest and responsible efforts to absorb the costs of actuarially sound funding in annual budgets by all levels of government. The paper argues that full funding is not required because of the inability of states to go bankrupt unlike private entities. They use this as the justification for using unattainable investment return assumptions to determine unfunded liability levels.

Ironically, the organization which ostensibly supports public employees advocates among other things the privatization and outright sale of public assets. The same constituency has habitually fought the concept of privatization for decades. So there is a disconnect there. They also advocate the use of the proceeds to fund pensions, ignoring the fact that these are usually assets owned by the public at large and not the employees. The local water system is a public good, not an ESOP.

Finally, the paper advocates the issuance of pension obligation bonds – long maturity, bullet maturity pension bonds – in lieu of current funding on an annual basis. It acknowledges that interest on the bonds should be paid annually – at least they are not using zero coupon bonds. They also advocate the use of derivatives to protect against losses on the invested proceeds. It is as if the last two decades or so of experience by municipal issuers with this kind of strategy had never existed. It is as if Detroit, Orange County, New Jersey, and Illinois were planets in another solar system.

WHILE PENSIONS STILL BEDEVIL STATE BUDGETS

No matter which side of the pension debate one stands on, one clear truth emerges. At least on the state level, those names which have been consistently in the news for having difficulties coming up with balanced budgets either currently or structurally all have underfunded pension systems. Ask your self – what do Illinois, New Jersey, Kansas, and Pennsylvania all have in common? Structurally unbalanced budgets, current budget deficits, and underfunded pensions. So the idea that the issue is somehow overblown or just part of a vast anti-worker conspiracy just does not hold up on closer analysis.

MORE HOSPITALS UNDER PRESSURE

CareAlliance Health Services’ (d/b/a Roper St. Francis Healthcare, RSFH) is a South Carolina system with approximately $100 million of revenue bonds outstanding rated A3 by Moody’s. The rating outlook was just revised to negative reflecting weaker than expected performance in FY 2016 and through three months FY 2017. Moody’s believes RSFH will be pressured to return operating cash flow to historical levels over the near term given recent challenges in labor expense and ongoing Medicaid DSH settlements with the state that have reduced cash flow in recent periods (RSFH is suing the state over the revised DSH payment methodology).

The rating reflects RSFH’s good market position in the growing market of Charleston and the surrounding areas. The rating further reflects the organization’s ownership model and Liquidity Replenishment Agreement with its Founding Members that provides a floor to key balance sheet ratios. Primary credit challenges include lower than budgeted operating cash flow and revenue during a period of expansion and growth as the organization builds a new hospital and related services, and higher than planned debt resulting from lower cash flow in FY 2016.

RSFH is a three hospital system in Charleston, SC. The organization operates over 650 beds. It has a unique and complex ownership and operating structure which underpins its debt. The bonds are secured by a gross receivables pledge by the obligated group based on the Amended and Restated Master Trust Indenture (MTI) dated January 1, 1999. The obligated group members consist of the parent company, CareAlliance Health Services (d/b/a Roper St. Francis Healthcare, Roper Hospital, Inc., Bon Secours-St. Francis Xavier Hospital, Inc., Roper St. Francis Mount Pleasant Hospital, Roper St. Francis Physicians Network, and Roper St. Francis Hospital-Berkeley, Inc.). Under the MTI, the obligated group is required to maintain financial covenants including 1.1 times (1.25 times under bond insurance agreement) debt service coverage ratio (if falls below would be required to hire an independent consultant with an event of default occurring if falls below 1.0 times).

Under its bank agreements, it is an event of default if debt service coverage ratio falls below 1.25 times. The bank agreements permit maximum total debt to capitalization of 65% at fiscal year end and the bond insurance agreement requires the hiring of an independent consultant if such ratio exceeds 65%. In addition, an event of default would occur under the amended and restated MTI if the Founding Members (collectively the Medical Society of South Carolina, Bon Secours Health System, and The Charlotte Mecklenburg Hospital Authority d/b/a the Carolinas HealthCare System) fail to make a contribution of unrestricted cash and investments to the obligated group in an amount equal to the contribution amount, which is the difference between 85 and days cash on hand reported on the testing date of June 30 and December 31, pursuant to the Liquidity Replenishment Agreement executed on January 2014 (except that no such contribution will be required if CareAlliance Health Services has at least 75 days cash on hand as of the testing date and increases days cash on hand such that it is at least 85 days cash on hand three months after the testing date).

MORE BAD NEWS FOR HARTFORD, CONNECTICUT

Moody’s Investors Service has placed the City of Hartford, Connecticut’s Ba2 general obligation debt rating under review for possible downgrade, affecting approximately $550 million of outstanding debt. On October 7, 2016, Moody’s downgraded the city’s GOs to Ba2 and maintained the negative outlook. The review for downgrade will be concluded within 90 days. The review will focus on the city’s prospects for sustainably balancing its financial operations and it will also consider state funding to be provided to the city over the next two fiscal years that may be incorporated in the biennial state budget to be adopted over the next several weeks.

LAW SCHOOLS UNDER PRESSURE

The April announcement that Whittier Law School in CA would close at the end of this academic year drew attention to the increasingly difficult financial plight of smaller law schools in a time of diminished demand. The law school will be the first with full American Bar Association accreditation to close in recent memory. Its accreditation dates to 1985, and it was founded in 1966, so it does not fit the profile of a new, unestablished institution that might be expected to shutter under normal circumstances. Just 22 percent of its students taking the California bar examination for the first time in July 2016 passed. That was almost 40 percentage points below the passage rate across all of the state’s ABA-accredited institutions.

In light of that action we note that this week Moody’s reaffirmed its A2 rating on debt issued by Hastings College of the Law in California. In spite of its affiliation with the University of California, growing state support, and healthy liquidity its rating outlook was maintained at negative. Like many in the fundamentally challenged niche law school market it has a small scope of operations, expectations for flat net tuition revenue through fiscal year, and deficit operations going forward. University of California Hastings College of the Law is a small stand-alone public law school, located in San Francisco. The college has approximately 965 full-time equivalent students, with approximately $56 million of operating revenue.

We expect that this sector will experience a shakeout unless there is a significant turnaround in financial and demand trends. Smaller, specialized law schools without significant geographic reach are especially vulnerable in the current environment. Law schools also face new accreditation pressure. The American Bar Association has taken action against four law schools in the last year over issues including loose admissions policies and low bar-examination passage rates. The pressures could push less prestigious law schools into a death spiral. Their applicant pools are declining, and their top students often transfer to better-known institutions. As a result, they can lose the students they admit who are most likely to pass the bar. That can make it harder for them to increase their bar-passage rates over time, which in turn cuts down on their applicant pools and drives their best students to transfer — continuing the spiral.

William Mitchell College of Law and Hamline University School of Law, in St. Paul, Minn., decided to merge in 2015. Indiana Tech Law School in Fort Wayne this fall announced plans to close in June 2017. Administrators at that law school, which opened its doors in 2013 and had provisional ABA accreditation, said it had incurred an operating loss of nearly $20 million in its brief existence. A fall 2016 survey from Kaplan Test Prep of officers at 111 of the 205 ABA-accredited law schools in the country found 65 percent agreed with the statement that “it would be a good idea if at least a few law schools closed.”

Muni Credit News May 30, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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Louisiana Local Government Environmental Facilities and Community Development Authority

$231,045,000 Refunding Revenue Bonds and $19,840,000 Taxable Hospital Refunding Revenue Bonds

Moody’s: A2 (Stable) Standard & Poor’s: A (Stable)

The bonds are being issued with the benefit of a recent upgrade of its rating on the credit to A2 from A3. Moody’s credits the system’s strong statewide presence as a leading provider of women’s and infant services and strong brand equity, resulting in a high market capture of newborn deliveries in the Baton Rouge service area. It also cites the system’s multiyear improvement in liquidity and leverage metrics, conservative asset allocation, and a debt structure which includes the absence of a defined benefit pension plan and debt derivatives, maintenance of strong operating performance, and savings related to this refunding.

Woman’s Hospital Foundation is an 168 adult licensed bed, 122 bassinet, and 84 bed NICU facility that specializes in obstetric, gynecological, breast, newborn and neonatal services for women and infants in Baton Rouge and the surrounding areas. WHF is the only independent, non-profit women’s hospital in the country with the 17th largest obstetric service in the nation. The system operates one of nine level three regional neonatal intensive care units within the state of Louisiana. The bonds are secured, subject to certain limitations, by a grant of security interest in the receipts of the Woman’s Hospital Foundation. With the revision of the Master Trust Indenture the system is expecting to remove the security provision of a mortgage lien on certain properties of the WHF which includes the hospital and land upon which it is situated. The revision of the MTI will also remove the debt service reserve fund.

COLORADO HIGH PERFORMANCE TRANSPORTATION ENTERPRISE

$165,500,000 C-470 Express Lanes Senior Revenue Bonds

Fitch: “BBB”

Construction phase for the express toll lanes (ETLs) is relatively straight-forward with a 38-month construction timeframe. Permit risk is low with construction occurring within the existing operating highway footprint. The project is the development of a variable toll rate express lane on the southern portion of the 470 highway project which surrounds Denver. It is designed as a congestion reliever and does not have competition from HOV lanes on the main road. The Enterprise is authorized the set and collect tolls which will be determined by congestion levels on the adjacent lanes.

The project represents the expansion to a growing concept of variable time of day congestion based lanes being established on existing major highways. These facilities exist within established free and toll based facilities. Like the others, this project will be built using a P3 model for design, construction, and operation. It employs a fixed-price, date-certain contract with an experienced contractor group backed by robust parent guarantees sufficient liquidity and schedule flexibility.

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PR BANKRUPTCY UPDATE

The U.S. Trustee filed a motion last week supporting the appointment of an Official Retiree Committee to represent the interests of pensioners in the bankruptcy petitions filed on behalf of the commonwealth and the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym), but objected a request by the Ad Hoc Retiree Committee to have the court appoint the group as its members.

The Trustee was answering a motion filed by a group called the Ad Hoc Retiree Committee, which comprises 17 organizations and individual retirees who on May 5 asked federal Judge Laura Taylor Swain to appoint an official committee representing retirees and them as its members. With a $46 billion liability, the commonwealth’s employee retirement system is expected to suffer cuts. There are more than 200,000 government retirees.

Assistant U.S. Trustee Monsita Lecaroz Arribas said the Trustee agrees that retirees should have an official committee and, therefore, does not oppose the appointment of a retiree committee. “This case clearly needs a retiree committee and sooner rather than later. Given this situation and the comments of the Court and the various constituencies at the first day hearing, the United States Trustee intends to solicit for and to appoint a retiree committee. The United States Trustee expects to complete the committee solicitation process no later than June 16 and will hold one or more formation meetings as soon as possible after the solicitation is complete,” she said.

The Trustee, however, objected the motion to the extent it asked the court to appoint or direct the appointment of the alleged Ad Hoc Retiree Committee as an Official Retiree Committee because courts do not have that authority, she said. Under the U.S. Bankruptcy Code, she said, appointing members of an official committee is a responsibility entrusted exclusively to the Trustee. “The Bankruptcy Code does not authorize a Court to direct the United States Trustee to appoint a pre-petition committee as the official committee or to appoint specific members to an official committee.

“Accordingly, that portion of the Motion must be denied. In filing this response, the United States Trustee does not suggest that members of the Ad Hoc Retiree Committee could not serve on an Official Retiree Committee (or any other official committee). But the law on committee formation must be followed,” Lecaroz Arribas said. It added that if the U.S. Trustee were to appoint the Ad Hoc Retiree Committee as members of the official retiree committee, it could be prone to challenges that the committee was unfairly chosen or does not adequately represent the group.

Other highlights of the initial bankruptcy hearing include that the judge approved most of the motions for case management, but with amendments requested by the creditors. Despite the complaints of Cofina bondholders, she agreed to consolidate all claims under the lead claim of the commonwealth for administrative purposes only, allowing claims to continue to be filed on other dockets. Attorney Martin Bienenstock anticipates that the fiscal oversight board is preparing to file Title III for the Highways and Transportation Authority (HTA), and officials said other entities will follow.

Judge Taylor Swain did not rule on a motion by Bank of New York Mellon, Cofina’s trustee, on how to proceed with the payment of $16.3 million to be paid June 1 despite the lawyer’s insistence. The judge also did not rule on a request for an order to compel suppliers of utilities to continue to provide service. Lawyers representing Cofina raised the issue that their interests are not protected because the fiscal board as well as the Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA) are also representing the interests of general obligation bondholders. The GOs are disputing the legality of Cofina and want sales and use tax revenue to be used to pay them.

This week, a letter written on behalf of Fafaa on May 16 states that funds held at the Bank of New York Mellon (BNYM), the trustee of sales-tax revenue bonds issued by Cofina, are the property of Cofina. The assertion appears to support the corporation’s legality. Senior beneficial bondholders and an insurer of certain senior Cofina bonds claim that because the Fiscal Plan Compliance Law will allow the commonwealth to take Cofina revenues to pay for various government services, a default should be declared. A group of subordinate beneficial holders of Cofina bonds argues that there is no default and they should be paid as usual. Cofina, on the other hand, contends that no default has occurred and that if any pledged sales-tax revenues were to be diverted, it would still have 30 days to “cure” any default.

CHI TAKES STEPS TO STABILIZE FINANCES

Catholic Health Initiatives, the nation’s third-largest nonprofit health system has seen its ratings under continuing pressure as it struggles with a high debt load. It has had a difficult time bringing a number of acquisitions together as it undertook a plan of consolidation in order to achieve scale as it deals with a shifting healthcare environment. While we have endorsed consolidation across states as a strategy for withstanding the current uncertainty in the healthcare space, the strategy is not without risks.

Englewood, Colorado-based CHI operates in 17 states and comprises 104 hospitals, including four academic health centers and major teaching hospitals as well as 30 critical-access facilities; community health-services organizations; accredited nursing colleges; home-health agencies; living communities; and other facilities and services that span the inpatient and outpatient continuum of care. In fiscal year 2016, CHI provided more than $1.1 billion in financial assistance and community benefit – a 13% increase over the previous year — for programs and services for the poor, free clinics, education and research. Financial assistance and community benefit totaled more than $2 billion with the inclusion of the unpaid costs of Medicare. The health system, which generated operating revenues of $15.9 billion in fiscal year 2016, has total assets of approximately $22.7 billion.

Some of the operating problems which can exist in the currently turbulent healthcare space have become evident for CHI in Kentucky. KentuckyOne Health, the largest and most comprehensive health system in the Commonwealth is a part of CHI. KentuckyOne Health was formed when two major Kentucky health care organizations-Jewish Hospital & St. Mary’s HealthCare and Saint Joseph Health System were merged. In late 2012, the organization formed a partnership with the University of Louisville Hospital | James Graham Brown Cancer Center. It has more than 200 locations including hospitals, physician groups, clinics, primary care centers, specialty institutes and home health agencies in Kentucky and southern Indiana.

In December, the University of Louisville Hospital agreed with KentuckyOne to end KentuckyOne’s management of the academic medical center. The university hospital will begin managing itself in July after the university accused KentuckyOne of failing to make about $17 million in promised program improvements and falling $29 million behind in making capital improvements to the facilities.

Now, as it continues talks with Catholic healthcare system – Dignity Health – about a combination, KentuckyOne has announced that it wants to sell its hospitals in the competitive Louisville market and focus on its healthier markets in Lexington and eastern Kentucky. This would involve the sale of Jewish Hospital, Frazier Rehab Institute, Sts. Mary & Elizabeth Hospital, Medical Centers Jewish East, South, Southwest and Northeast, Jewish Hospital Shelbyville, Saint Joseph Martin and KentuckyOne Health Medical Group provider practices in Louisville and Martin.

Catholic Health Initiatives reported an operating loss of $483 million from its fiscal 2016. The operating loss in fiscal 2016, which ended June 30, compared with an operating surplus of $24 million in fiscal 2015. In its fiscal second-quarter financial report ended Dec. 31, CHI disclosed that in Kentucky its operating earnings before interest, depreciation and amortization had fallen to $17.1 million in the quarter compared with $30.5 million in the year-earlier quarter. CHI cited unfavorable shifts in payer mix plus labor costs that had risen as a percentage of net patient services revenue to 49.4% compared to 44.8% in the same period of the prior fiscal year. That represented $26.2 million more in labor costs for the quarter vs. the year-earlier.

Currently, CHI’s debt is rated Baa1 and BBB+ after its most recent downgrades this Spring.

CA HOSPITAL MERGER PLAN DEEMED ANTICOMPETITIVE

Santa Barbara, Calif.-based Cottage Health and Sansum Clinic, also in Santa Barbara announced a proposed merger in June 2013. It would have combined Cottage Health’s three hospitals and various enterprises with roughly 24 Sansum-owned outpatient clinics across Santa Barbara County. Cottage Health reportedly agreed to divest its interest in its outpatient centers and would become a primarily inpatient entity. Nonetheless, the Federal Trade Commission rejected the organizations’ merger proposal on grounds that the merger would prove anticompetitive.

In January of this year, Cottage saw Fitch downgrade its ratings on its outstanding debt from AA- to A+. Total long-term debt at Nov. 30, 2016 was $417 million. Fitch cited weakened operating performance in 2015 and 2016 combined with an increase in debt issued in 2016. Operating margin is projected to be negative 0.2% for 2016 compared to a budget of 2.9% reflecting increased benefits expense, an erosion in payor mix, higher than budgeted electronic medical record (Epic) implementation expenses, and lower than expected provider-fee funding.

The reduced operating margins are projected despite Cottage’s strong market share in its service area at around 90% and its position as the only provider of inpatient services on the south coast of Santa Barbara County. The proposed merger reflects the pressure even dominant service providers in wealthy service areas feel when the reimbursement environment is uncertain and under pressure.

OBAMACARE SUBSIDIES LEGAL UPDATE

The nation’s state insurance commissioners urged the Trump administration last week to ensure continued funding for payments to health insurers to cover cost-sharing reductions for low-income exchange plan members.

The National Association of Insurance Commissioners, most of whose members come from Republican-led states, told Office of Management and Budget director Mick Mulvaney in a letter that continuing the cost-sharing reduction payments “is critical to the viability and stability of the individual health insurance markets in a significant number of states across the country.” It goes on to say “there is increasing concern that more carriers will pull out of this market and rates will continue to rise, leaving consumers with fewer and more expensive options, if they have any options at all. This is not a theoretical argument – carriers have already left the individual market in several states, and too many counties have only one carrier remaining. The one concern carriers consistently raise as they consider whether to participate and how much to charge in 2018 is the uncertainty surrounding the federal cost-sharing reduction payments.”

The NAIC also wrote to Senate leaders urging them to take swift action to stabilize the individual insurance markets, including funding the CSR payments and providing sufficient money for reinsurance programs or high-risk pools. Specifically, it urges the Senate to: 1) ensure the cost-sharing reduction (CSR) payments are fully funded in 2017 and 2018; and, 2) provide sufficient and sustained market stabilization funding to states for the establishment of reinsurance programs or high risk pool programs. These two actions alone would go a long way toward stabilizing the individual markets in our states while legislative replacement and reform options are debated.

The commissioners warned Mulvaney, a fierce opponent of the Affordable Care Act and critic of the law’s CSR payments, that more insurers will exit the markets in 2018 and premiums will spike if carriers don’t receive assurance soon that they will receive the approximately $7 billion in federal payments.

Immediate action is needed, they said, because carriers are making decisions now whether to offer plans on the exchanges in 2018 and where to set premiums.

Citing uncertainty over the CSR payments as one big factor, insurers say they’ll have to charge much higher rates for next year. Plans in Connecticut have requested increases ranging from 15% to 34%. Maryland rate hikes range from 18% to nearly 60%. Most of Virginia’s insurers have requested double-digit jumps and it is expected that the same will occur in the New York State market.

House Republicans successfully sued to block the ACA-required CSR payments on the grounds that the Obama administration funded them without the money being appropriated by Congress, whose Republican majority refused to approve it. The Obama administration appealed the district court’s ruling, but the Trump administration hasn’t declared whether it will continue the appeal. In the meantime, a federal appeals court granted the Trump administration a 90-day delay on its decision to appeal a case brought by House Republicans against ObamaCare subsidies paid to insurers.
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.

Muni Credit News May 25, 2017

Joseph Krist

joseph.krist@municreditnews.com

DALLAS PENSION RESOLUTION IN SIGHT

The Dallas Police and Fire Pension System has signed off on a proposed bill to help fix the City’s ailing pension system. The agreement includes a reduction to benefits, and the creation of a new retirement plan. Additionally, it calls for contribution increases from participants, and decreases to Dallas’ contribution rates. It also restricts the city’s minimum payment for the first five years, while another minimum payment will take effect for the two years after. Beyond that, the city will have a contribution rate based on 34.5% of payroll, minus overtime.

Before the celebration can begin is must be noted that the current proposed bill incorporating these changes, still requires votes from the full Texas Senate and House. It requires a $13 million lump sum payment from the city for each of the first five years. The contribution rates during the sixth and seventh years will be determined based on the Dallas’ hiring plan. And before July 1, 2024, the city must use a third-party actuary to determine the fund’s progress, which could lead to changes to the minimum contribution rates by the city and system members as well as the lump sum amounts.

As with any true compromise, both sides gave something. Pension participants will end up paying more while receiving less in benefits. Taxpayers will also pay more, but how much more is not yet known. And the state Senate granted the city six of the 11 members on a new Police and Fire Pension Board, and any major benefit changes proposed by the senate must now be agreed on by two-thirds of the pension trustees.

If enacted by the Legislature, pressure on the city’s ratings will be relieved and the talk of bankruptcy which swirled during the heat of the debate should disappear.

TOLLING THE INTERSTATES

The Trump budget gave some hints about his infrastructure plans. One of the main features is an unsurprising proposal to lift restrictions on the ability of states to collect tolls on sections of the interstate highway system. For many of you in the Northeast and Midwest, the concept of tolls on interstates is already a reality. The fact is that many of those roads where tolls are a reality were built by states before their incorporation into the interstate system.

In those areas and states where interstates have been free, the politics are much more fraught. The most recent example was in Pennsylvania where an attempt was made to impose tolls on I-80. The road was surveyed and sites were selected for the installation of toll collection equipment. A combination of organized lobbying by commercial transportation interests, especially the trucking industry which is a heavy user of the road, and individual voters who use I-80 as a regular route for relatively frequent short distance trips convinced the Legislature that tolling was a political non-starter.

As a result, tolls were not imposed and the subject has not come up for serious consideration again. We do see where the use of dedicated lanes designed to relieve congestion and reduce commute times have been growing as a compromise alternative. These dedicated lanes, characterized by demand-based dynamic pricing have been seen as a more politically attractive model. They also fit the mold of P3 projects with many of them being designed, built, and operated by private owner/operators who use the toll revenue collected to finance construction and maintenance.

Like many other aspects of the Trump budget, the tolling plan seems designed to stimulate debate rather than to result in actual widespread tolling of currently free roads. The same combination of commercial and locally oriented interests can be expected to marshal opposition to any such plan and we would be surprised to see it actually come to fruition.

CONNECTICUT LABOR SETTLEMENT?

Gov. Dannel P. Malloy and union leaders are reported to have agreed on a framework for concessions that would save the state more than $1.5 billion over the next two years and help close the state’s budget deficit The five-year deal calls for a “hard” wage freeze in the first two years and a one-time $2,000 bonus for some employees in the third year. The employees would receive raises of 3.5 percent in the fourth and fifth years. Increases in employee contributions for pensions and health benefits are said to be part of the framework.

The unions are expected to vote on the plan by June 23 providing enough time for inclusion into a budget to be enacted by June 30 for FY 2018. The agreement would save about $710 million in the first year, but other savings would be necessary to close a projected deficit of more than $2 billion for the fiscal year that starts on July 1.

Among the changes is an increase in the cost of hospital emergency room visits and the creation of a new pension level, known as Tier 4, which will be a hybrid plan for new employees that is similar to a 401(k) plan.

NEXT STEP IN ILLINOIS BUDGET DANCE

With a week to go before the May 31 adjournment, Senate Democrats went ahead and voted 32-26 to pass tax legislation, which would bring in roughly $5.4 billion in new revenue. This despite the fact that there is no prospect that the Governor would sign such a bill. The personal income tax rate would increase from 3.75 percent to 4.95 percent, just below the 5 percent rate in place before Gov. Rauner took office. The corporate income tax rate would be hiked from 5.25 percent to 7 percent. The higher rates would be retroactive to Jan. 1, meaning if they became law the effect on take-home pay would be far larger.

The state’s share of the 6.25 percent sales tax would be extended to a handful of services not currently covered, such as tattoos and piercings. The bill also calls for a new 5 percent tax on satellite television and an extra 1 percent entertainment tax on streaming services such as Netflix. The proposal would close various corporate loopholes and expand tax credits for low-income families.

The increases are part of a budget proposal designed to backfill budgets for universities and social services that have gone without funding since January. The plan does not include a way to pay down the state’s $14 billion backlog of bills, though it would create a $200 million rainy day fund that could be used for that purpose. Nonetheless, most state agencies would see a 5 percent cut in spending, while universities would face a 10 percent cut.

Without an agreement by the adjournment date, Illinois faces the real prospect of becoming the nation’s first state to be rated below investment grade. We would not be surprised if that happens. The bar to approve legislation with an immediate effective date rises to three-fifths after May 31.

ATLANTIC CITY TO FUND BORGATA SETTLEMENT

Atlantic City is in the process of coming to market with $73,065,000 of insured, state enhanced General Obligation bonds. Proceeds will finance payments under the settlement of property tax refunds to the Borgota casino. The financing is part of the overall plan being undertaken under state oversight to stabilize the City’s very weak finances. The Moody’s rating for the issue of a Baa1 enhanced rating reflects the enhancement provided by the MQBA state aid intercept program and is notched once off the State of New Jersey’s (A3 stable) rating.

The city’s underlying ratings remain a very weak Caa3 reflecting the continued, albeit reduced, likelihood of default within the next year and the ongoing possibility of significant bondholder impairment despite the passage of rescue legislation. The rating also incorporates the recent takeover by the state. The city’s rating outlook was revised to positive to reflect the material progress made by city in collaboration with the state, most notably the Borgata settlement and the balanced introduced 2017 budget.

While an important step in the City’s recovery, the credit remains significantly distressed. While Moody’s maintains a stable outlook for the State, we are much less sanguine about its prospects in light of the very difficult political backdrop to the State’s finances and the likelihood of little concrete action until 2018 after the fall gubernatorial election.

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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.

Muni Credit News May 23, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnewws.com

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$600,000,000*

NYU HOSPITALS CENTER

Taxable Bonds

Moody’s: “A3” (Stable outlook) S&P: “A-” (Stable outlook) Fitch: “A-” (Stable outlook)

The wave of taxable hospital debt continues. Bond proceeds will be used for general corporate purposes including the repayment of bank lines and refinancing of certain outstanding debt obligations. NYUHC is the sole Member of the Obligated Group under the Master Indenture. Bonds are jointly secured by a pledge of gross receipts and a mortgage of certain health care facilities of NYUHC. NYU Winthrop is not a member of the Obligated Group. NYUHC is a tertiary care teaching hospital with campuses located in midtown Manhattan and Brooklyn. NYUHC owns three inpatient acute care facilities in Manhattan and Brooklyn: (1) Tisch Hospital, located in Manhattan on the campus shared with NYU School of Medicine; (2) NYU Hospital for Joint Diseases Orthopaedic Institute, an orthopaedic, neurologic and rheumatologic specialty hospital located in Manhattan, which also houses the Rusk Institute of Rehabilitation Medicine; and (3) NYU Lutheran, located in Brooklyn. NYUHC also operates over thirty ambulatory facilities in Manhattan, Brooklyn, Queens and Long Island.

NYUHC has a strong and increasingly visible brand supported by academic alignment with NYU. It has established solid operating momentum especially in light of its need to significantly recover from the physical impacts of Superstorm Sandy in 2012. It has shown clear strategic planning, careful fiscal oversight that has translated into successful execution of strategy, and healthy demand garnered by a growing clinical footprint. NYUHC does have a high debt burden, still modest balance sheet resources, still significant capital plans, execution risk of several growth strategies simultaneously, in what is a very highly competitive market.

$337,135,000

STATE OF OREGON

DEPARTMENT OF TRANSPORTATION

HIGHWAY USER TAX REVENUE BONDS

While the budget debate plays out in Washington and there are serious indications of a desire on the part of the Trump Administration to reduce aid to transportation, states like Oregon continue to move forward with capital development of transportation assets. The Oregon Department of Transportation administers and oversees the state’s highway, public transit, rail, and traffic safety programs, and implements motor vehicle and motor carrier laws throughout the state. These functions include planning, engineering, construction, maintenance, operation, regulation and enforcement. The department collects various taxes, fees and grants to fund these functions.

Proceeds from the $250 million Series 2017A bonds will finance certain transportation projects authorized in the state’s Jobs and Transportation Act (JTA). Other proceeds of the Series 2017B bonds will refund outstanding bonds for net present value savings with no extension of maturity. Combined pledged revenues, net of certain expense deductions and statutory transfers, provide security for the bonds. Deductions include various administrative expenses and costs of collection. In addition, the state is statutorily required to make certain apportionments to cities and counties to fund highway improvements prior to paying debt service.

Ratings reflect the constitutional dedication of stable pledged revenues that provide solid debt service coverage and legal provisions are highlighted by a three times senior lien additional bonds test. The rating also incorporates the net nature of the pledged revenues, wherein certain operating expenses and revenue sharing with local governments are paid prior to debt service.

$238,380,000*

TARRANT COUNTY CULTURAL EDUCATION FACILITIES FINANCE CORPORATION

Retirement Facility Revenue Bonds

(Buckner Senior Living – Ventana Project)

Buckner Senior Living, was incorporated to develop a new CCRC. BSL has already acquired land to construct the new CCRC in north Dallas, to be known as Ventana. Current plans include 189 ILUs, 38 ALUs, 26 memory support units, 72 skilled nursing beds, and various shared spaces and amenities. Total cost of the project is estimated at $200 million, to be funded with bond proceeds in 2017 (outside the OG). Management anticipates a limited level of liquidity support and equity contribution from Buckner Foundation (BF) for this project. Proceeds will fund the cost of construction and capitalization of a portion of interest.

The structure of the financing is typical for that of a standalone CCRC credit. The credit features the typical sources of risk – construction, marketing, and timely fill up of the units. The success of the project depends on the successful execution by management in each of the primary risk areas. This requires the use of realistic and achievable assumptions as to demand for units, pricing, and the level of penetration of the local real estate market required to achieve marketing goals. In turn, these depend on the ability of the local housing market to support demand and timely and adequate funding of entrance fees.

Typical difficulties in the achievement of success for these type of project structures in the sector are delays in construction and/or unanticipated cost increases, shortfalls and resulting delays in occupancy which negatively impact available cash flows to support debt repayment. Shortfalls can reflect lower demand than expected or an unfavorable mix in demand versus the mix of units available.

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PENNSYLVANIA BUDGET DEBATE LIKELY TO BE BRUTAL AGAIN

In spite of the fact that he is expected to have a major role in any negotiation between the Legislature and the Governor, House Speaker Mike Turzai recently wrote Republican voters that he plans a gubernatorial run. In that May 10 letter, Turzai claimed he “sidelined” Governor Wolf’s agenda by “leading the charge” against the governor’s 2015-16 plan, and against a later bipartisan compromise that would have ended the stalemate months earlier.

If he runs, Turzai would be the first legislative leader to challenge an incumbent executive since the state constitution was changed in 1968 to allow a governor to seek two consecutive terms. Even if Turzai doesn’t go through with it, his letter signaled an adversarial relationship. Now the speaker and the Governor will be at the center of a potentially awkward and fraught negotiation that will attempt to reconcile two very different approaches to the budget.

In February, Wolf presented a $32.3 billion spending plan that would downsize state government, raise the hourly minimum wage and enact targeted business tax increases. In April, the House passed a $31.5 billion plan. It had no new taxes and no minimum wage bump. It estimated new revenue from Turzai’s long-running plan to privatize the state-owned wholesale and retail wine and liquor systems.

Since then, the state’s financial outlook has worsened. The Senate, which now has the House budget, opposes Turzai’s liquor bill in part because it actually would cost the state money, worsening the deficit. On top of that, the state police need money. Last year, the Legislature passed a bill calling on the administration to reduce the amount of gasoline and diesel fuel tax money that flows to the state police from PennDOT’s road and bridge repair fund. The reductions start July 1. To fill the first-year hole, Wolf has proposed a $25 per capita fee for municipalities that rely on full-time trooper coverage.

Without the fee or other new revenue, state police leadership estimates that 800 troopers could be laid off and cadet classes could be canceled. Trends are not good as Pennsylvania experienced an 8.9% shortfall in expected revenues for the key month of April.

The concern is that these political considerations could seriously complicate the budget process as they did in prior fiscal years. Those delays resulted in damage to not only the Commonwealth’s ratings but those of underlying municipalities. Many entities, both municipalities as well as non-profit service providers were forced to either curtail services or finance operations through costly and previously unnecessary short-term borrowing.

Yet another delayed budget would further highlight the Commonwealth’s difficult financial plight and highlight its continuing need to deal with its pension funding difficulties. The commonwealth is likely to struggle to balance its budget annually as its pension contributions ramp up and expenditures grow more quickly than revenues.

ILLINOIS BUSINESS LEADERS OFFER BUDGET PLAN

The Civic Committee of the Commercial Club of Chicago on Thursday released a detailed report that has a slew of budget ideas. The big picture suggestion from the private, not-for-profit group of senior executives is that the state must identify $10 billion in expenditure reductions and revenue increases for each year from 2018 until 2022 in order to return the state to fiscal sustainability. It notes revenue increases of “at least” $8 billion will be necessary to get the state back on its feet.

The report doesn’t include specific spending or revenue proposals — that responsibility, the report says, lies with legislative leaders and Gov. Bruce Rauner. The report notes problems with the state’s reliance on property taxes but, there is no suggestion to freeze them. A property tax freeze tied to an income tax hike remains at the heart of negotiations among senators and the governor’s office with just 13 days before the end of the legislative session.

The civic group estimates that raising the personal income tax to 5 percent from 3.75 percent would bring in $4.1 billion in revenue for fiscal year 2018; taxing all federally taxable retirement income would bring in $2.5 billion; eliminating exemptions, property tax credits and education expense credits from those who make more than $50,000 a year would bring in $1.3 billion; and expanding the sales tax to include consumer services based on Iowa as a model would bring in $1.2 billion. Coupled with increasing the corporate income tax to 9.5 percent and other measures, the revenue package could bring in $9.7 billion, the group says.

PR BUDGET DUE

As we go to press, Puerto Rico faces a deadline to present its fiscal 2018 budget to the fiscal control board for review. “Yes, it will definitely be ready [by then],” said the governor when asked by whether the administration will meet the Tuesday deadline to deliver its version of the next fiscal year’s budget. It is still unclear if the document will be made public that day. On May 8 the fiscal board granted the Puerto Rican government an additional 14 days to improve the draft budget delivered on April 30 before the entity approves it or notifies violations. Since the delivery of its “draft” spending plan to the board, the administration has yet to disclose budget-related documents, calling them a confidential “working document.”

Puerto Rico’s fiscal control board commenced Monday bankruptcy proceedings under Promesa’s Title III for the Highways & Transportation Authority (HTA) and the central government’s Employees Retirement System (ERS). According to the court filings, the board says both entities meet Promesa’s requirements to initiate debt-restructuring processes under Title III, including good faith negotiations with creditors, efforts to make available updated financial information and a certified fiscal plan. For ERS, the governor pointed out the “precarious situation” of the public retirement system, its “eventual insolvency in the coming months” and not being able to reach agreements with its creditors as reasons to ask the oversight body to authorize the restructuring process provided by the third chapter of Promesa. Payments of retiree benefits will be made directly from the general fund on a “pay-as-you-go” basis, once ERS liquidity is depleted–as early as next fiscal year, which begins in July. According to the commonwealth’s 10-year fiscal plan, the government estimates this will cost about $1.1 billion annually.

The Infrastructure Financing Authority (PRIFA) and the Convention Center District Authority still await a move to Title III. The opaque nature of the Government’s approach to all of these issues grows tiresome. We believe that despite statements to the contrary, that Title III filings were all but assured for HTA and the other public corporations. This reflects our belief that the ability to significantly haircut outstanding debt is the Government’s real strategy behind all of its dealings with its financial problems.

STATE REVENUE ISSUES IN APRIL

We know that the recent trends in state fiscal performance have been troubling to say the least. This is probably the weakest performance for state revenues versus where we are in the economic recovery cycle in some time. April’s performance was disappointing by any measure which is alarming because it is typically one of the largest collection months. Nine states reported underperformance versus projections with five showing double digit shortfalls.

This year’s results did differ from the historical pattern which makes future projection more difficult. In states’ revenue reports for the month the weakness is mostly not in taxes withheld from wages, but taxes on estimated payments. Estimated payments, which taxpayers make quarterly based on declared nonwage income such as capital gains, are generally 20%-30% of total income taxes. In several states, April income taxes actually declined from April 2016, despite the fact that 2016 was a much better year for the stock market than 2015.

The lack of legislative achievement by the Trump administration is likely playing a role. Like healthcare and infrastructure, a policy vacuum is forcing the states to face the brunt of inaction. The declines in estimated payments despite the strong year for stocks in 2016 suggests that at least part of this weakness may be attributable to taxpayers deferring recognition of investment income in anticipation of lower tax rates.

STATE DEPENDENCE ON FEDERAL REVENUES

The Census Bureau’s 2015 Annual Survey of State Government Finances published last week indicates that federal aid made up nearly a third of all states’ general fund revenues in fiscal year 2015. The single largest line items in states’ budgets include federal funding for transportation, Medicaid and other social assistance programs. The findings show revenues, expenditures, debt, and cash and security holdings for each state, as well as a national summary of state government finances. The major source of these public finance statistics are the states’ own accounting systems or through intermediate reporting systems.

Louisiana and Mississippi are the top recipients in federal aid in 2015. Federal intergovernmental revenues accounted for about 42 percent of their general fund revenues, the top shares nationally. Other states whose budgets are most dependent on the feds include Arizona (40 percent), Kentucky (40 percent), New Mexico (39 percent), Montana (39 percent) and Oregon (39 percent). The least-reliant state budgets, which include North Dakota (18 percent) and Virginia (22 percent).

The Census Bureau’s classification of public welfare funding includes Medicaid, Temporary Assistance for Needy Families (TANF), child welfare services and a range of other assistance programs mostly for low-income individuals. It excludes school nutrition programs and the Special Supplemental Nutrition Program for Women, Infants and Children (WIC).

The federal share was highest — more than 90 percent — in New Mexico and Ohio. By comparison, federal revenues accounted for slightly less than half of public welfare spending in Colorado, Massachusetts, Rhode Island and Virginia.

TEXAS BUDGET AGREEMENT

After months of private squabbling and public threats of a legislative overtime session, the Texas House and Senate finally compromised to unveil a joint budget past weekend. Budget documents indicated around $1 billion would come from the state’s Rainy Day Fund, a $10 billion savings account available to shore up the budget in difficult years. That money would pay for priorities such as repairs to the state’s aging mental health hospitals and bulletproof vests for police officers.

Nearly $2 billion more would come from an accounting maneuver related to transportation funding approved in 2015. The proposed budget would delay a payment to the state highway fund in order to free up that funding for other needs in the current two-year budget. The House had previously been critical of the possibility. Medicaid, the federal-state health insurance program for the poor and disabled, were not fully funded. The Senate had pushed for the elimination of a budgeting tactic known as a special item, through which universities and colleges get dollars for specific projects allocated outside the standard funding formulas. The House opposed the elimination, saying it was too drastic of a move to take without further study.