Joseph Krist

joseph.krist@municreditnews.com

Editor’s Note: The Muni Credit News will not publish net week as we attend the annual meeting of the National Federation of Municipal Analysts in Washington, DC. The MCN will be back on Tuesday May, 23.

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LOS ANGELES UNIFIED SCHOOL DISTRICT

$1,089,815,000 General Obligation Refunding Bonds

Moody’s: “Aa2”   Fitch: “AAA”

The nation’s second largest school district comes to market with strong ratings. The bonds are being issued to refund outstanding debt. The district encompasses approximately 710 square miles in the western section of Los Angeles County. The district is located in and includes virtually all of the City of Los Angeles and all or significant portions of the cities of Bell, Carson, Commerce, Cudahy, Gardena, Hawthorne, Huntington Park, Lomita, Maywood, Rancho Palos Verdes, San Fernando, South Gate, Vernon, and West Hollywood, in addition to considerable unincorporated territories devoted to homes and industry. Estimated enrollment for fiscal 2017 equals 625,434.

The general obligation bonds are secured by an unlimited property tax pledge of all taxable property within the district boundaries. Debt service on the rated debt is secured by the district’s voter-approved unlimited property tax pledge. The county rather than the district will levy, collect, and disburse the district’s property taxes, including the portion constitutionally restricted to pay debt service on general obligation bonds. These are strong legal and operating provisions for the collections of pledged revenues. The district has $10 billion in outstanding GO bonds and $235.5 million in outstanding lease-backed securities.

The district has an exceptionally large and diverse tax base with moderate growth expected over the near term, coupled with district residents’ below-average socioeconomic profile. Improved state funding, including one-time revenues, has helped bolster the district’s general fund reserves and liquidity to healthy levels for a district of this size. Fiscal challenges remain, however, including expenditure pressures for salary and benefit increases, rising pension costs, and an oversized, unfunded OPEB liability. Ongoing declines in enrollment and a recent decision letter on special ed spending requirements create additional, long-term challenges. The district has an elevated debt burden and a substantial remaining amount of authorized, but unissued, GO debt. The district’s pension burden is average relative to other California school districts.
DISTRICT OF COLUMBIA

(Washington, D.C.)

$576,415,000 General Obligation Refunding Bonds

Moody’s: “Aa1”  S&P: “AA”  Fitch: “AA”

Bond proceeds will refund outstanding debt. District general obligation bonds are secured by a special real property tax unlimited as to rate or base and separate from the operating levy. All property taxes are collected by a third party collection agent and the amount allocable to the special real property tax are deposited into an account held by a separate third party custodian. Weekly, the custodian makes transfers to an escrow agent in amounts sufficient to pay debt service on the bonds.

District general obligation bonds are secured by a special real property tax unlimited as to rate or base and separate from the operating levy. All property taxes are collected by a third party collection agent and the amount allocable to the special real property tax are deposited into an account held by a separate third party custodian. Weekly, the custodian makes transfers to an escrow agent in amounts sufficient to pay debt service on the bonds.

The District also has some $4 billion of debt outstanding secured by income taxes alone. Those revenues are held by the trustee outside of the District’s general fund. In each April, May and June (the period when historically most of the pledged revenues are collected), the trustee is required to transfer to the debt service fund one-third of the amount needed for the next fiscal year’s payments of principal and interest on outstanding bonds. If the set-asides in those three months are insufficient to meet debt service requirements, amounts collected in each succeeding month are required to be transferred to the debt service fund until sufficient amounts are on deposit. This feature provides five months to cure any debt service deficiency before the first debt service payment in each fiscal year is due on December 1. Only after the set-aside requirements are met are pledged revenues released to the District for deposit in its general fund.

The District economy has become increasingly diverse over the last two decades. As the economy has diversified its has led to increased development, incomes, and tax base growth. Much of this has been private sector growth which is that much more positive for the District. District management has become much more sophisticated and professional which improves the relationship between Congress and city management. District financial operations and controls are strong and the District has been able to maintain balanced operations and generate strong fund balances.

CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY

(CHILDREN’S HOSPITAL LOS ANGELES)

$281,715,000 REVENUE BONDS

Moody’s: Baa2  S&P: BBB+

CHOLA has been in the news for its role in providing surgery to a celebrity’s baby that has become a part of the national healthcare debate. But the focus for investors is on the credit behind the bond issue. CHLA is nationally recognized pediatric hospital, providing high acuity care across a range of specialties, and conducting significant research. It is affiliated with University of Southern California’s Keck School of Medicine and operates numerous residency and training programs.

Bond proceeds will refinance three series of outstanding debt and reimburse the hospital for $35 million of capital expenses. Bonds are secured by a gross revenue pledge. There is also a mortgage on CHLA’s primary acute care facilities that will remain in place so long as the Series 2010A or 2012A bonds are outstanding. Once the Series 2010A and 2012A bonds have been defeased, the mortgage pledge will be removed. There is a debt service coverage test of 1.1x (a consultant must be called in); 1.0x (below that is an event of default).

The rating reflects fundamental strengths of the organization, including a very strong reputation for clinical and research excellence, strong brand name and long track-record of fundraising. These strengths are offset by greater competition than is typical for children’s hospitals, very high exposure to Medicaid, and financial performance that lags peer children’s hospitals with high reliance on supplemental funding. The ability to fund raise is crucial to the credit of children’s hospitals since they tend to have a high proportion of low income and indigent patients given their orientation towards sick children. This ability to raise cash through fundraising is key to allowing these institutions to ride out the uncertainties of government funding at both the state and federal levels.

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PUERTO RICO

Some headlines emphasized recent comments from Moody’s Investors Service regarding Puerto Rico’s invocation of Title III under PROMESA. There was emphasis on particular language  that the action was positive – because it should provide an orderly framework to address competing creditor claims, leading to higher overall bondholder recoveries. It is true that they indeed said that. At the same time, we notice that the context of that statement was somewhat different for different categories of bondholders.

That view received more reinforcement in terms of the impact on bond insurers. The Title III proceeding is likely to eventually incorporate other securities issued by Puerto Rico’s debt-issuing entities, resulting in what will be a lengthy and extremely complex restructuring process. However, we view this as preferable to a potentially disorderly and chaotic process involving proliferating lawsuits among competing creditors and, by extension, lower loss claims on insured exposures of the financial guarantors.

As or individual bondholders without insurance the process is still seen in a positive light but Moody’s highlights that “Even if the Title III process is more orderly than the alternative, it is unlikely to be quick or easy. Puerto Rico’s restructuring will unfold in the untested legal context of PROMESA and pose legal issues that may take even more time to resolve than a large city restructuring under Chapter 9 of the US Bankruptcy Code. Congress did not authorize pension restructurings” in PROMESA’s Title VI provisions for out-of-court debt restructurings. Puerto Rico’s three primary government pension plans are projected to run out of assets between July and December, leaving the government to provide benefits from general revenue.”

The financial guarantors are in a much better position to ride out the ups and downs of a protracted legal fight and are not as concerned with day-to-day valuation issues as an individual might be. That is why we see a real difference in context in terms of the meaning of Moody’s comments for individual vs. institutional creditor interests.

THEY MISSED THIS ONE

Standard & Poor’s (“S&P”) on March 23, 2017, downgraded the County of Grant’s General Obligation Issuer rating from “AA-“ to “BBB+” with a “negative outlook”. The notice from this Kentucky county is innocuous enough and it is not the first time that a rating has been dropped by multiple notches. But it is another example of where smaller infrequent issuers may not get the scrutiny they deserve from the big rating agencies. In 2015, the AA- rating was assigned to the county’s general obligation bonds issued to refinance debt that funded a county owned and operated jail. The original financing dates back to the late 1990’s when the County’s sleepy 28 unit jail was expanded to a 300 unit facility.

The County had counted on the jail as a source of employment and hoped that a significant number of state inmates would be assigned to the facility. States use county facilities to house inmates with shorter sentences or to house inmates who are approaching the end of their sentences as part of an effort to transition to a post incarceration life. In addition, the County is the home of the Ark Encounter theme park. This facility includes a full size replica of Noah’s ark which was controversially financed through tax exempt industrial development bonds. The County hoped that the park would generate jobs and additional economic development and thereby generate revenues to support the County budget. While the park is estimated to have attracted some 600,000 visitors to its attractions, they apparently come and go without spending much money outside of the park.

That has become a problem for the County as the Commonwealth of Kentucky, like many other states, has  reduced the number of inmates is sends to local facilities for incarceration. This has provided less revenue from operating the facility over a period of time when the County would not raise taxes. Now the jail has become an operating albatross and a drain on the County’s finances.

While this trend has been evident for some time, S&P took no rating action until the County Fiscal Court (the County’s financial management and taxing entity) openly discussed the potential bankruptcy of the County. It is a matter of public record that the County may run out of cash by June 1. So much for being guided  by the rating agencies.

PRIVATE DOES NOT ALWAYS INSURE A SMOOTH ROAD

The issue of private sector involvement in public sector projects took a strange turn in South Texas recently. A Texas engineering firm, Dannenbaum Engineering, is involved in an FBI investigation which resulted in raids on multiple offices of the firm in late April. Dannenbaum has been involved in work involving entities in the City of Laredo and Webb County. Progress on these public projects involving both roads and buildings could be held up as the investigation unfolds.

Dannenbaum is one of the bidders on a traffic signal synchronization study contract which could ultimately alleviate traffic congestion on Laredo roads by synchronizing traffic lights around town. The city says the project is expected to improve travel time by reducing constant stopping and starting of traffic and increasing the number of cars that can use the road at one time.

A road project – The Hachar Loop – that Dannenbaum received a $1 million contract for in 2014, is designed to be a “six-lane freeway with two-lane frontage roads from Mines Road through the Hachar Trust Tract, ultimately extending north through the Reuthinger Tract and connecting to IH-35 in northern Webb County. The corridor’s primary effect is to provide for expedited routing of international truck cargo to newly developed warehousing centers and access to I-35.

In the FBI’s warrant to search City Hall, agents were told to collect records relating to Dannenbaum Engineering’s attempts to secure projects, including Hachar Loop, Loop 20 extension and a traffic signal synchronization study. Dannenbaum is one of the bidders on the traffic signal synchronization study contract. The study offers the opportunity to alleviate traffic congestion on Laredo roads by synchronizing traffic lights around town. The city says the project is expected to improve travel time by reducing constant stopping and starting of traffic and increasing the number of cars that can use the road at one time.

The Hachar Loop, a project that Dannenbaum received a $1 million contract for in 2014, is designed to be a “six-lane freeway with two-lane frontage roads from Mines Road through the Hachar Trust Tract, ultimately extending north through the Reuthinger Tract and connecting to IH-35 in northern Webb County. The corridor’s primary effect is to provide for expedited routing of international truck cargo to newly developed warehousing centers and access to I-35.

On May 1, City Council voted to withhold negotiating and entering into contracts with Dannenbaum pending the outcome of the FBI’s investigation, excluding the traffic light synchronization project. Dannenbaum is one of three bidders currently being looked into as part of a special procurement process by TxDOT for the light synchronization project.

As for the road, the city has funded and submitted schematic design and environmental documents to TxDOT for a portion of the proposed roadway. Webb County has started the process of acquiring consultants for the remaining section of the roadway for schematic design and environmental, according to the city. The total project is estimated to cost $31,635,324. The city will contribute $4,919,144. The total federal and state funds available for reimbursement of the project is $25,242,681.

Some are concerned that the suspension of Dannenbaum from the projects could be seen as limiting or circumventing state grant requirements which call for an open bidding process in the selection of outside contractors. It is feared that this could lead to a loss of grant monies which would threaten the financial liability of these projects.

FLORIDA BUDGET COULD TURN INTO A STANDOFF

It arrived three days beyond the required schedule but, the Florida Legislature did voted out an $82.4 billion budget. In terms of whether it will be enacted, that is a different story. The budget approved does not satisfy three of the Governor’s priorities biggest priorities, has just a fraction of the tax cuts he sought and is almost guaranteed to incur a veto.

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.
Lawmakers approved some of the governor’s education priorities, such as funding Bright Futures scholarships and increasing access to charter schools. In both chambers the budget passed by more than two-thirds, the number needed to override Scott if he opted to veto the entire budget. The House voted 98-14 for the budget. The Senate voted 34-3. Scott has the authority to veto the entire budget and force the Legislature to return to Tallahassee for a special session, it’s more likely that he will veto dozens of hometown projects packed into the spending plan
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.
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.

Joseph Krist

joseph.krist@municreditnews.com

City of Los Angeles

$228,580,000 and $111,410,000 Wastewater System Subordinate Revenue Bonds (Tax exempt) $117,045,000 (Taxable)

Fitch: “AA”  S&P: “AA”

Subordinate lien bonds are secured by net revenues of the system after payment of O&M expenses and all senior lien requirements pursuant to the senior lien general resolution. DSC averaged a healthy 1.8x in the three years ended fiscal year (FY) 2016.  Sewer flows declined in recent years occurred as Los Angeles and the state of California weathered one of their worst modern droughts between 2013 and 2016. An increase in the pace of the city’s rate increases more than offset usage declines and improved free cash to depreciation up from just 45% in fiscal 2012 to 116% in fiscal 2016.  The system had $141.5 million of unrestricted cash and investments at the end of fiscal 2016 and $45.9 million of restricted operating and maintenance and other reserves. The system provides wastewater collection, treatment, and disposal services for an area of about 600 square miles, including most of the city and certain neighboring municipalities. Customer levels have remained virtually flat over the last five fiscal years and currently number around 685,368 accounts. The existing rate plan calls for 6.5% yearly adjustments through fiscal 2015-2021.

LOUISIANA PUBLIC FACILITIES AUTHORITY

$412,020,000 Revenue and Refunding Revenue Bonds

(Ochsner Clinic Foundation Project)

Moody’s: A3  Fitch: A-

Newly upgraded Ochsner Clinic in New Orleans comes to market for new money and a refinancing. Ochsner is a nationally recognized tertiary and quaternary referral center with multiple access points across the state of Louisiana and parts of Mississippi. The system is known for its clinical excellence in key service lines such as cancer, neurology, cardiology, transplants, women’s and children’s services. This debt along with all outstanding Master Trust Indenture secured debt, is secured by a joint and several obligation of the Obligated Group with a gross revenue pledge as described in the bond documents. The outstanding and proposed bonds are further secured by a mortgage lien on certain properties of OCF, including OMC, certain medical office buildings and parking structures.

Moody’s upgrade to A3 reflects Ochsner’s multi-year improvement in operating performance and balance sheet metrics while delivering on key integration and synergy-producing strategies. Additionally, Moody’s cited the system’s continued investment in several strategies that has enabled Ochsner to expand its footprint across Louisiana and into Mississippi while continuing to focus on key service lines while growing the brand equity. These attributes are offset by liquidity and leverage measures that are subpar compared to similar-size peers, and the system’s location in a highly competitive area with exposure to both the energy sector and natural disasters.

CALIFORNIA POLLUTION CONTROL FINANCING AUTHORITY

$220,000,000 SOLID WASTE DISPOSAL REVENUE BONDS

(CALPLANT I PROJECT)

Non-rated

Medium density fiberboard makes its return to the high yield municipal market with this issue. Previous issues to finance the conversion of wooden pallet waste into a marketable medium density fiberboard product in California and upstate New York came to inglorious ends when those facilities failed to meet revenue projections. These efforts led to significant losses for the high yield fund investors at the turn of the century.

This latest effort involves the conversion of rice stalk waste into MDF. MDF is a composite panel product created by combining cellulosic fibers with a resin binder and wax under heat and pressure. The resulting product is used for furniture, flooring, molding, and decorative plywood. Traditionally, MDF is made from wood waste and byproducts. This plant will be located in Willows, CA north of Sacramento in the north end of rice country in CA. It will be the first facility to use rice straw as the basic feedstock for MDF.

The ownership entity for the plant representing the single asset relied on to produce product and revenues to repay the bonds is a subsidiary of the State Teachers Retirement System. The plant will have its own well-based water supply and will require less than one-third of the available rice straw supply from the region. The plant is designed to address the need for alternatives to the burning of rice straw stemming from requirements dating back as far as 1991.

The deal has all of the characteristics that have troubled us about these sorts of high yield municipal bond transactions. The plant is initially driven by regulatory factors rather than economics, it comes to the municipal market driven by the need to obtain the lowest possible borrowing rate to make the economics more feasible, and it introduces a level of new technology risk to a market which has shown in the past an insufficient understanding of those risks.

So to say that we would have issues with this financing is an understatement. We’ve just seen too many of these transactions involving new technology that would more properly be financed in the taxable markets if their feasibility were more clear. So muni investors, caveat emptor!

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STATE BUDGET ROUNDUP

Connecticut The Office of Fiscal Analysis downgraded anticipated revenues for the next two fiscal years by $1.46 billion — nearly $600 million next fiscal year and $865 million in 2018-19 — largely because of declining income tax receipts. Projected revenues now fall $2.2 billion, or 11.3 percent, short of the funding needed to maintain current services in 2017-18. With the potential deficit increased to $2.7 billion, or 13.6 percent, in 2018-19, the biennial shortfall approaches $5 billion.

In the short term, revenues for the current fiscal year are $413 million below anticipated levels. This pushes state finances more than $380 million into deficit and could result in the depletion of the state’s $236 million in the emergency budget reserve with less than nine weeks remaining before June 30.

Income tax receipts this fiscal year now are expected to total just under $9 billion. Not only is that well below the $9.44 billion analysts were anticipating just four months ago, but it falls short of the $9.2 billion collected last fiscal year. Income tax erosion was tied not to paycheck withholding but to quarterly filings, most of which involves capital gains, dividends and other investment-related earnings. The state’s 100 largest-income taxpayers paid 45 percent less this year than last. State analysts project next fiscal year’s sales tax receipts at $3.84 billion, downgrading their 2017-18 estimate by a fraction of 1 percent.

Pennsylvania The state Department of Revenue reported this week that it has a shortfall in excess of $1 billion 10 months into the fiscal year. That’s more than 4 percent, a bigger margin at this point than in any fiscal year since 2010. April’s tax collections came in at $537 million, or 13 percent, below expectations. In January, the Legislature’s nonpartisan Independent Fiscal Office projected a shortfall of nearly $3 billion for the two fiscal years ending June 30, 2018, including the cost to maintain the state’s current programs. April’s results would push that shortfall to more than $3 billion.

How to deal with the shortfall? Proposals from the various parties include a production tax on Marcellus Shale natural gas drilling, the privatization of Pennsylvania’s wine and liquor-store system, a massive expansion of casino-style gambling, and cuts to administrative agency budgets, prisons, school busing aid, child-care subsidies, and health care for the poor.

Kansas The state now faces projected budget shortfalls totaling $889 million through June 2019, and legislators expect to increase taxes. The state constitution prohibits a deficit. A new budget would authorize spending starting July 1, but state payroll rules require that a budget be in place by mid-June to keep employees on the job. Legislative analysts have told the House and Senate budget committees that they need to raise between $303 million and $355 million over two years, based on spending recommendations they’ve pursued. But those figures assume lawmakers divert $581 million from highway projects to education, social services and other government programs.

Michigan legislative leaders are gearing up for another push to close Michigan’s teacher pension system to new hires and move them to 401(k)-style retirement plans and then use the savings to help school districts pay down liabilities or cover up-front transition costs for the state. Leaders entered the new budget cycle with a $330 million surplus.

House and Senate budget bills up for floor votes this week would trim at least $270 million in state spending proposed by GOP Gov. Rick Snyder for next fiscal year, an amount legislative leaders have said could be used for tax cuts, infrastructure investments or debt relief. They could also look to redirect $175 million currently planned as a deposit into the state’s “rainy day” savings fund. Michigan shifted new state government employees to 401(k) plans in 1997. Michigan ended its traditional teacher pension system in 2010, moving newly hired school employees into hybrid retirement plans that include both a defined pension component and contribution component similar to a 401(k) savings plan. The new system is fully funded.

Reforms enacted in 2012 targeted unfunded liabilities. The law required retirees to pay more for their health care and capped school district contributions for unfunded liabilities at 24.46 percent of payroll. The state covers additional costs, which totaled more than $980 million this year.  Teacher retiree health care liabilities have dropped since 2012 but, unfunded pension liabilities have continued to climb. The total is now over $29.1 billion, according to an annual actuarial valuation prepared for the state at the end of fiscal year 2016.

The Senate Fiscal Agency projected last year’s legislation would have cost roughly $600 million in first-year costs, $3.8 billion over five years and $28 billion over 30 years if the state chose to wind down the system through accelerated payments, which it recommended as a best practice.

The debate comes amid the backdrop of automakers reporting the fourth straight monthly retreat in sales of new cars and light trucks, the longest stretch of declines since 2009, when the industry was embroiled in crisis and bankruptcies. The top six automakers in the American market all reported declines from their April sales a year ago, and in every case the falloff exceeded analysts’ forecasts. In April, automakers sold 1.43 million cars and trucks, down from 1.5 million a year ago.

CPS LEGAL SETBACK

An effort by Chicago Public Schools to save millions in future expenses by offering teachers and other staff members a financial incentive to retire has fallen short because not enough employees volunteered to leave by this summer. Veteran teachers and paraprofessionals had until March 31 to tell the district they intended to retire or resign at the end of the school year in June. An incentive written into the Chicago Teachers Union’s latest contract provided for workers to receive cash bonuses if enough of them accepted the deal. CPS has told teachers that an insufficient number of staff signed up for the program, and have asked the teachers that did say they intend to retire to decide if that is still the case by April 28.

On April 28, a Cook County judge denied CPS’ request for an injunction to block any state aid for pensions for any school district until CPS’ need is satisfied. He effectively dismiss CPS’ underlying complaint, saying it had not filed a sufficient argument under law, but would have an additional 28 days to file an amended complaint. The judge said he is sympathetic to the needs of a district like CPS that represents hundreds of thousands of poor and minority children, and termed the state’s defense of the current situation “startlingly out of touch.” However, he added CPS’ lawsuit “is not the vehicle to challenge that reality.”

Retirement-eligible teachers would have received a one-time bonus by December that paid $1,500 for each year of service. Paraprofessionals would have been paid $750 for each year of work. Those contract provisions would not kick in, however, unless a minimum of 1,500 teachers and 600 paraprofessionals participated.

CPS said about 840 teachers had submitted retirement notices. A district spokeswoman said roughly 300 paraprofessionals had planned to resign. CTU members who were already part of the system when the union and district settled a contract and averted a strike in October will continue to have 7 percentage points of their required pension contributions paid for by the district. CTU members who were already part of the system when the union and district settled a contract and averted a strike in October will continue to have 7 percentage points of their required pension contributions paid for by the district. Teachers hired Jan. 1 do not receive the “pickup” of their pension contributions but will get pay boosts that even out the loss of the pension pickup. Union members will also see pay hikes of 2 percent and 2.5 percent in the contract’s final two years.

SANCTUARY CITIES

There have been headlines highlighting the fact that sanctuary cities are expressing concerns in their budget messages about uncertainties regarding federal funding in light of the ongoing legal dispute with the Federal Government over the issue. The fact that cities are referencing the issue is simply the responsible thing to do as well as the politically savvy thing to do. The issue, while serious, is likely more of a political policy issue than it is a financial issue.

The Justice Department recently sent letters to eight cities – New York City, Chicago, Miami, Philadelphia, New Orleans, Las Vegas, Milwaukee and Sacramento, as well as Cook County, Illinois. DOJ asked these local governments to provide documentation that they’re complying with a federal law that requires information-sharing by local, state and federal authorities on citizenship and immigration status.

If the nine jurisdictions don’t present documentation of compliance by June 30, DOJ said it may withhold or terminate funds under the Edward Byrne Memorial Justice Assistance Grant program, which funds state and local criminal justice programs.  The scope of the threat to cities has likely been overstated in public  utterances by AG Jeff Sessions.

Justice Department and Department of Homeland Security officials who met with a mayors delegation in Washington recently indicated the only federal law at issue in the Trump administration’s effort to crack down on so-called sanctuary cities was one federal code section barring localities from interfering with communications with federal officials. A legal brief filed by the Justice Department last week in one of at least five filed lawsuits challenging President Donald Trump’s executive order threatening to take federal funds from cities, counties and states with sanctuary policies indicates that the only law Trump is seeking to enforce compliance with is 8 U.S.C. 1373, a three-decade old provision that appears to prohibit localities from issuing policies that preclude local police from communicating with federal immigration officials.

In that case, San Francisco-based U.S. District Court Judge William Orrick issued a preliminary injunction Tuesday barring federal officials nationwide from carrying out the portion of a Jan. 25 Trump executive order aimed at cutting off grants to local governments that won’t provide assistance to federal authorities in locating and detaining undocumented immigrants. Orrick cited public comments from Trump and Attorney General Jeff Sessions in concluding that the order appeared intended to sweep more broadly than allowed by federal law. The judge, an Obama appointee, called “not legally plausible” the Justice Department’s arguments that Trump was simply trying to secure compliance with current law.

“If there was doubt about the scope of the Order, the President and Attorney General have erased it with their public comments,” Orrick wrote. “The Constitution vests the spending power in Congress, not the President, so the Order cannot constitutionally place new conditions on federal funds.”

Joseph Krist

municreditnews.com

PUERTO RICO TAKES THE BANKRUPTCY PLUNGE

Puerto Rico is “unable to provide its citizens effective services” because of the crushing weight of its debt, according to a filing on Wednesday by the federal board that has supervised the island’s financial affairs since last year. Or so it says. So it has chosen the path of action under Title III granted to it by the PROMESA act.

There is no existing body of court precedent for Promesa. The step is an extraordinarily antagonistic one on the part of the Government who has been as intransigent in its insistence on huge haircuts while accusing creditors of being just as intransigent. It has been hard to be sympathetic to the government which has resisted efforts at disclosure and transparency and has been slow to embrace operating efficiencies at all levels of government.

The court proceedings will not be formally called a bankruptcy, since Puerto Rico remains legally barred from using Chapter 9, the bankruptcy route reserved for insolvent local governments. Instead, Mr. Rosselló petitioned for relief under Title III of the Promesa law, which contains certain Chapter 9 bankruptcy provisions but also recognizes that, unlike the cities and counties that use Chapter 9, Puerto Rico is not part of any state and must in some ways be treated as a sovereign.

Our own view is that Puerto Rico will be dealt with less harshly than it deserves. The municipal market has not seen this kind of willful inefficiency and refusal to take responsibility on this level before. Worse, the security that enticed investors was a constitutional rather than a legal pledge making the abrogation of the pledge even more egregious.

GUAM LOOKS AT INCREASING SHORT TERM DEBT RISK

Years ago, the government of Guam borrowed hundreds of millions of dollars from the bond market to pay years of unpaid tax refunds. Three subsequent administrations did the same and at the time, it saved the local government the high cost of interest payments on refunds that were years overdue. Bonding however has become more problematic at investors have begun to look at territorial debt with a more jaded eye since Puerto Rico’s implosion.

As a result, GovGuam has decided to look for other borrowing options away from the bond market. Recently, Gov. Eddie Calvo proposed legislation that seeks to borrow from a financial institution, payable through tax and revenue anticipation notes, similar to borrowing through a line of credit. The idea is for GovGuam to borrow $75 million worth of tax refund payments from a financial institution, and then pay this off through

Under this concept, when the amount is paid off in six months or so, or by the fiscal year’s end in September, GovGuam would borrow again, at the beginning of the next year. This would allow it to issue $75 million in tax refund payments in one shot, as opposed to the current slow releases of $1 million to $3 million in tax refunds a week.

However, the governor’s proposed borrowing, using subsequent months’ revenue collections as a repayment source, might mask a larger problem: There isn’t enough cash coming into government coffers at this time, for all the bills to get paid when they’re due. Borrowing $75 million doesn’t pay off the total tax refund obligation for the year, which is estimated to cost at least $125 million. In past years, tax refund payments even topped $140 million in a year. Sen. San Nicolas has questioned this bill, and offered an alternative to GovGuam’s cash-flow struggles. Instead of borrowing, San Nicolas offered to spread out some of GovGuam’s once-a-year debt payments into smaller, more manageable monthly installments, to free up some cash flow.

Tax-refund obligations have doubled over the past decade as more federal tax credits allow more Guam residents to qualify for more tax refunds. The proposed bill from the Governor says if other sources of revenue payments won’t suffice, then the financial institution’s notes are secured through an automatic lien on Section 30 funds. Section 30 funds are remitted by the federal government to GovGuam from the collection of income tax payments from military personnel who are stationed here. The Section 30 funding, however, has fluctuated, depending on how many military personnel are stationed here, and the type of pay classifications they bring.

The situation speaks to weakness in Guam’s non-military economics. The reliance on low wage manufacturing jobs and fickle Japanese tourist demand, has made Guam’s fiscal condition vulnerable to factors largely beyond its control. That has made it hard to solidify gains from an increasing military presence  and translate those gains into a more sustainable credit in support of its financing needs.

PRESSURE CONTINUES FOR ILLINOIS PUBLIC UNIVERSITIES

Moody’s announced that it  has placed six Illinois public universities on review for downgrade, impacting a total of approximately $2.2 billion of public university debt. The review is prompted by failure of the State of Illinois to enact a budget providing full operating funding to the universities for the current fiscal year (FY) 2017 and resulting operational and liquidity strains on the universities.  The pressures reflected in this action have been ongoing and obvious. The liquidity crunch facing these institutions is unprecedented and the outlook for a resolution to the State’s ongoing budget standoff is poor.

The affected universities are University of Illinois (Aa3 for Auxiliary Facilities System Revenue Bonds and Certificates of Participation, A1 for South Campus Development Bonds, and A3 for Health Services Facilities System Revenue Bonds); Illinois State University (Baa1 for the Auxiliary Facilities System Revenue Bonds and Baa2 for the Certificates of Participation); Southern Illinois University (Baa2 for the Housing & Auxiliary Facilities System Revenue Bonds and Baa3 for the Certificates of Participation); Northern Illinois University (Baa3 for the Auxiliary Facilities System Revenue Bonds and Ba1 for the Certificates of Participation); Governors State University (Ba1 for the University Facilities System Revenue Bonds and Ba2 for the Certificates of Participation); and Eastern Illinois University (B1 for the Auxiliary Facilities System Revenue Bonds and Caa1 for the Certificates of Participation).

Northeastern Illinois University’s Certificates of Participation were downgraded to B1 from Ba2 and placed the rating on review for downgrade. Northeastern Illinois University is in a unique position relative to that of the other state universities in Illinois. NEIU is a regional comprehensive public university with multiple campuses in the Chicago metropolitan area. It is designated by the US Department of Education as a Hispanic-Serving Institution. The COPs are payable from NEIU’s broad budget and the obligation to pay can be terminated in the event that it does not receive sufficient state appropriations and the board determines the university does not have other legally available funds.

The idea that the State would put its universities in the position of having below investment grade debt outstanding is frankly astounding. It speaks to the intransigence of both sides in the budget dispute and the lack of political leadership in the State.

MILAGE TAX WILL BE FOR ANOTHER DAY IN CONNECTICUT

Another topic we have discussed earlier this year, is the number of state’s considering the use of mileage based taxes to fund highways as a replacement for taxes on fuel. The move towards such a technique reflects anticipated improvements in gasoline fueled engines and the potential expanded use of electric cars.

The concept of a mileage-based tax on motorists — apparently is no longer even a subject of research at the Connecticut Department of Transportation. The tax has been the subject of debate between Republicans and Democrats at the Capitol since word first broke two years ago that the DOT was researching this revenue-raising option.  Transportation Commissioner James Redeker wrote last week in a letter to a regional transportation coalition that was coordinating research into this tax that his agency was halting its involvement because of budgetary issues. The Connecticut Department of Transportation is now facing large budget cuts that prevent us from providing any state matching funds.

Connecticut has no long-range plan to fund its transportation infrastructure needs. To cover the first five years of the governor’s 30-year rebuilding program — 2016 through 2020 — Malloy proposed and secured approval to replace an older system of sharing General Fund resources with the Special Transportation Fund with a more generous plan to shift sales tax receipts into transportation.

Nonpartisan analysts warned last year that the Special Transportation Fund was projected to run $46 million in deficit beginning with the 2018-19 fiscal year — Year 4 of the 30-year program. In response, legislators decided last May to cut this fiscal year’s sales tax transfer by $50 million to help close a major deficit in the General Fund. The governor’s budget staff estimated last month that the Special Transportation Fund would finish this fiscal year $17.3 million in deficit.

So yet another aspect of Connecticut’s financial outlook is negative and the State’s credit direction is problematic at best.

OKLAHOMA – ENERGY STATE OR OIL/GAS STATE

Oklahoma has unsurprisingly seen its economy and revenue base negatively impacted by lower prices for oil and natural gas. The December 2016 revenue estimate for fiscal 2018 was $739.3 million, or 12.2 percent, less than the appropriated amount for fiscal 2017. Earlier this year, Governor Mary Fallin proposed a fiscal 2018 budget that recommends total appropriations of $7.8 billion, a 5.9 percent spending increase over fiscal 2017 that includes several revenue enhancements and counts $790 million in transportation funding for the first time.

The governor’s budget recommends reforms for recurring revenues and begins repairing the structural deficit, by proposing $1.5 billion in recurring revenue sources, including sales tax modernization ($839.7 million), transportation funding reform ($219.7 million) that includes increasing the gasoline and diesel excise taxes, an electric vehicle road fee ($1.4 million), and raising the cigarette tax ($257.8 million). On the spending side the budget makes $317.8 million in targeted expenditure increases across eight agencies while maintaining level funding for most other agencies.

The Department of Education would receive $60 million for teacher pay raises and $30 million for additional classroom resources; the Health Care Authority would receive $41.4 for a FMAP increase, $16.7 million for Medicaid growth and $52.9 million for a managed care implementation; the Department of Mental Health and Substance Abuse Services would receive $25 million for the state’s justice reform initiatives; and the Department of Corrections would receive $11.1 million for offender management technology and justice reform initiatives. The governor also proposes a $350 million infrastructure package that includes correctional treatment facilities and housing units, substance abuse treatment facilities and state building projects.

One other revenue enhancement showed the continuing power of the oil and gas industry in the state’s political sphere. Gov. Fallin signed legislation this week to end the state’s tax credit for wind power this year. Wind farms that start producing energy after July 1 this year will not be able to claim the credit under the new law. The credit was originally set to expire in 2021.

In a statement, Fallin welcomed the growth in wind power that the credit brought on, but said the state’s tight budget necessitated rescinding it early. Oklahoma ranks No. 3 in the country in installed wind capacity, with almost 7,000 megawatts. It provide more industry’s growth increased its use to $113 million in 2014.

As the process unfolds, signs of distress continue. Citing state budgeting uncertainties, Oklahoma transportation officials announced Monday that they have suspended construction on about a dozen highway projects, including the next phase of the I-240/I-35 interchange project in south Oklahoma City. “That’s going to give us a black eye,” Oklahoma Transportation Commission Chairman J. David Burrage said, describing the situation as “bad.” Contractors already have bought materials for projects that are being suspended and those that suffer financial losses because of work suspensions likely will file claims with the agency.

A dozen or so suspended contracts may be just the beginning of construction disruptions throughout the state as The Oklahoma Transportation Commission voted to defer action on the award of nine new highway construction projects. In addition, Commission engineers were asked to come up with a plan by May 17 “to responsibly suspend construction activities at a date to be determined later once we know the full effects of the current budget process.”

A joint Legislative appropriations committee passed a bill out of committee last week that calls for cutting the amount of income tax revenue the transportation department is scheduled to receive from $571 million to $320 million.

NIH CUTS AVERTED BY SPENDING DEAL

The spending deal reached  between Congress and the Trump administration did have some good news for municipal credits about which we had expressed some prior concern. First, the Trump administration had proposed cutting the National Institutes of Health (NIH) budget by $1.2 billion for the rest of the current fiscal year. Instead, both parties effectively ignored the White House and gave the NIH a $2 billion increase. That’s in addition to a similar budget hike the NIH secured last year, which was the largest funding boost it had received in more than a decade. Puerto Rico will receive $295 million in emergency Medicaid funding.  The agreement also does not include a rider blocking so-called sanctuary cities from getting new grant funding.

The maintenance of NIH spending takes pressure off those institutions which rely on such funding for their operations. in those cases where grant revenues are specifically pledged to bond security, the compromise is good credit news for those bondholders.

NEW JERSEY HOSPITAL MERGER

Hackensack Meridian Health and JFK Health signed a definitive agreement to merge Tuesday, creating a combined entity with 15 hospitals throughout New Jersey. The combined entity would employ more than 33,000 team members and more than 7,000 physicians on staff.

The deal, pending government and regulatory review, would combine the Hackensack Meridian system and JFK Health’s single hospital in an effort to expand patient access and deliver better outcomes by focusing on population health, the companies said. Financial terms of the deal were not disclosed. Both organizations are based in Edison, N.J.

Hackensack Meridian Health was formed after a recent merger of Hackensack University Health Network and Meridian Health, including its 28,000 employees. The health system, which is a partner with the Memorial Sloan Kettering Cancer Center, plans to launch a Seton Hall University-affiliated medical school in 2018.
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.

Editors Note: Now that we are back from vacation, we hope that you notice the change in format to the municreditnews.com. We will continue our normal editorial focus but will add information on the three largest pending deals on the calendar each week in each Tuesday’s edition. On Thursday’s we will retain our historic practice of commentary on current credit events and trends.

We also feel that we have established the value of our information and insights in the marketplace. As such, over the next month, we will be converting from an unlimited access model to a subscription model. Stay tuned for more information on this change so that you may continue to benefit from our efforts.

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THE REGENTS OF THE UNIVERSITY OF CALIFORNIA

GENERAL REVENUE BONDS

$447,830,000* Tax exempt Bonds, $186,225,000* and

$500,000,000* Taxable Bonds and Notes

Moody’s: “Aa2”  S&P: “AA”  Fitch: “AA”

The General Revenue Bonds are the broadest pledge of the university secured by a pledge and lien on gross student tuition and fees, indirect cost recovery from grants and contracts, net sales and service revenue, net auxiliary revenue, and unrestricted investment income. In addition, recently enacted legislation allows the Regents to pledge its annual General Fund support appropriation, less the amount required to fund general obligation debt service payments for the portion of state general obligation bonds funded for university projects.

Currently, the General Revenue Bonds are the senior most outstanding obligations of the university, but the Indenture permits the Regents to incur additional indebtedness secured by a pledge and lien on General Revenues senior in priority to the General Revenue Bonds. Certain other financial obligations, including $1.1 billion revolving credit facilities, are on parity with the General Revenue Bonds.

Other bonds rated on par with the General Revenue Bonds include: The California Statewide Communities Development Authority’s Recovery Zone Economic Development Bonds (parity pledge); The California Infrastructure and Economic Development Revenue Bonds Sanford Consortium Project (university guaranty).

The reaffirmed ratings and bond sale come at a time when the University’s oversight of the system has been questioned. A new state audit that the office of the University’s CEO accumulated tens of millions of dollars in secret reserves and inappropriately interfered with the audit. The audit comes at a time when the Legislature is debating a proposal by UC to raise tuition this fall. The audit has bolstered opposition to such an increase. The debate has not been cited as a factor in the ratings.

$495,345,000*

KENTUCKY ECONOMIC DEVELOPMENT FINANCE AUTHORITY

(Owensboro Health, Inc.)

Fitch: BBB/Stable  Moody’s: Baa3/Stable

OHI is a two hospital system with the flagship hospital located in Davies County in Western Kentucky. The hospital is designated as both a sole community provider and a rural referral center. Additionally, the system offers a variety of inpatient and outpatient services that range from minor outpatient surgery to open heart surgery and complex micro vascular surgery. The bonds are secured by an interest in Pledged Revenues of the obligated group as defined in the bond documents, and a mortgage lien on certain real estate owned by OHI or Owensboro Health Medical Group. The obligated group includes OHI, which owns the hospital, and its subsidiary Cooperative Health Services and constitutes 98% of system revenues and total assets. A debt service reserve fund is in place.

As a sole community provider and rural referral center, OHI benefitted from the expansion of Medicaid under Obamacare in Kentucky. With  a leading market position in a growing primary service area, the impacts of Obamacare on revenue growth have led to  consistent operating performance, and continued absolute liquidity growth. The rating also favorably incorporates the system’s conservative debt structure and frozen pension plan.

The hospital does remain vulnerable to proposals to repeal and replace Obamacare. So the ongoing debate creates some uncertainty for the longer term outlook for the credit. This is a concern as the next step down in rating would be to below investment grade which would raise valuation and liquidity issues for bondholders.

$403,015,000

STATE OF WISCONSIN

GENERAL FUND ANNUAL APPROPRIATION REFUNDING BONDS OF 2017, SERIES C (TAXABLE)

Moody’s: Aa2 positive

The bonds are general obligation bonds, secured by the full faith and credit of the state of Wisconsin. Wisconsin is the twentieth largest state, with a population of 5.7 million. Its GDP ranks twentieth among states. While there is limited executive authority to reduce mid-year appropriations which can be a problem during times of downturn, this is offset by a fully funded pension system and limited OPEB liability. This pension position puts Wisconsin in a leading position among the states in this important credit consideration.  The value of this cannot be understated.

Moody’s assigns a positive outlook to its rating based on revenue performance which has been positive, liquidity which has improved, and conservative management of retiree benefits limits future budgetary pressures, all of which, if continued, would allow the state to improve its reserves and balance sheet.

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AN INTERESTING WAY TO LOOK AT GOVERNMENT FINANCES

Steve Ballmer, the former CEO of Microsoft, has announced the creation of a new website designed to look at government operations and finances from a businessman’s perspective. USAfacts.org is the product of a research project funded by Mr. Ballmer  that seeks to mine data from federal, state, and local governments and to present it in a corporate form. In fact, its primary result is what is calls a 10K for governments.

It is an interesting effort. Its format effectively copies that of a 10K for a business. It is an effort to make government operations and finances more understandable to a “layman” and to generate an appreciation and understanding of exactly what government does and why and make government look less like a faceless bureaucracy. Whether it succeeds or not is debatable given that the resulting document is 170 pages long and as exciting to read for the average person as a corporate 10K might be. Mr. Ballmer insists that he has no political agenda but it is fairly clear that he is not ideologically opposed to big government.

As a municipal analyst, I find the most useful result of the effort to be the complexity of the resulting product. The report relies on many diverse sources of data which it acknowledges do not necessarily present information in ways which comport with governmental accounting standards, varying state legal requirements, or simply the realities of reporting requirements in the municipal bond market. As such, it makes clear to those who criticize the municipal market or who devalue the usefulness of the municipal analyst community that their perceptions are likely quite off the mark.

Selfishly, we hope that the effort helps to increase the value of efforts such as ours to illuminate the world of municipal bonds and credit.

KANSAS

Kansas collected $424.8 million in total revenue for the month of March and $4.2 billion for the current fiscal year. The total puts all revenue collections $57.5 million more than estimates for the fiscal year to date. Total tax collections were $11.6 million below expectations for the month. State sales tax receipts were $2.3 million more than anticipated while individual income tax receipts were $11.1 million below expectations for March. “Although withholding receipts grew $7.6 million compared to the prior year, that was offset by $12.3 million more in refunds paid out this month compared to March 2016, pulling individual income tax receipts below estimates,” said Revenue Secretary Sam Williams. “The March revenue receipts continue the trends we have seen over the last few months – withholding and state sales tax collections continue to improve, reflecting an encouraging job and consumer environment for Kansans.” Earlier this year, the Internal Revenue Service announced it was holding all refunds for taxpayers claiming Earned Income Tax Credits and Additional Child Tax Credits until mid-February for extra scrutiny as a fraud prevention measure. The delay also pushed back when Kansas received many of those returns, so refunds typically paid in late-January or February are being paid out in March.

NUCLEAR UPDATE

Southern Company had previously reported Georgia Power’s entry into an Interim Assessment Agreement (the “Interim Assessment Agreement”), on behalf of itself and as agent for the other Vogtle Owners, with the Contractor, the bankrupt entity Westinghouse. The term of the Interim Assessment Agreement was originally scheduled to expire on April 28, 2017. On April 28, 2017, Georgia Power (for itself and as agent for the other Vogtle Owners), the Contractor, and WECTEC Staffing entered into an amendment to the Interim Assessment Agreement solely to extend the term of the Interim Assessment Agreement through the earlier of (i) May 12, 2017 and (ii) termination of the Interim Assessment Agreement by any party upon five business days’ notice. The other terms of the Interim Assessment Agreement remain unchanged.

Georgia Power, for itself and as agent for the other Vogtle Owners, is also negotiating a new service agreement which would, if necessary, engage the Contractor to provide design, engineering, and procurement services to Southern Nuclear Operating Company, Inc. (“SNC”), in the event SNC assumes control over management of construction of Plant Vogtle Units 3 and 4.

Georgia Power and the other Vogtle Owners are continuing to conduct a comprehensive schedule and cost-to-complete assessment, as well as a cancellation cost assessment, to determine the impact of the Contractor’s bankruptcy filing on the construction of Plant Vogtle Units 3 and 4 and to work with the Georgia Public Service Commission to determine future actions related to Plant Vogtle Units 3 and 4.

SCANA Corporation (SCANA) and Santee Cooper announced that the Interim Assessment Agreement with Westinghouse Electric Company, LLC concerning the nuclear construction project at the V.C. Summer Nuclear Station has been amended. The primary amendment is the extension of the term of the agreement through June 26, 2017, subject to bankruptcy procedures. The agreement allows for a transition and evaluation period, during which South Carolina Electric & Gas Company (SCE&G), principal subsidiary of SCANA, and V.C. Summer Nuclear Station project co-owner, Santee Cooper, can continue to make progress on the site.

During this period, Fluor will remain in its current role, and the project’s co-owners will continue to make weekly payments for work performed during the interim period. The agreement extension allows the co-owners additional time to maintain all of their options by continuing construction on the project, while examining all of the relevant information for a thorough and accurate assessment to determine the most prudent path forward.

So both of the municipal entities (MEAG and Santee Cooper) are giving themselves additional time to review their options which include a potential cancellation. They have however, established different timelines for their respective processes. economics will likely determine the final outcome but other matters may intervene. A recent example involves the essential technology, which is considered the “intellectual property” .The “debtor-in-possession” financing being sought by Westinghouse to pay bills while reorganizing during the Chapter 11 case could threaten the ownership of the AP1000 technology, according to an objection to the DIP financing filed last week by the Georgia plant’s owners. “The owners object to the DIP financing motion to the extent it proposes to grant the DIP lenders liens on the intellectual property,” which is the technology needed to complete the project at Vogtle, the filing said. A similar objection has not yet been filed by SCANA (SCG) or Santee Cooper.  Ongoing construction is being funded by the lead investor-owned utilities.

STADIUM DEBT IS NOT JUST A MAJOR LEAGUE ISSUE

The Oakland A’s may have huge stadium issues at the major league level having seen numerous proposals come and go to replace its outmoded home originally built for the departing Oakland Raiders football team. That has not been the case for its teams at the lower levels of its minor league system. A’s affiliate, the Midland Rockhounds, has been playing in a modern minor league ballpark which was municipally financed in 2000 and 2001. Unlike many other such ventures, this one may actually have worked out for the sponsoring municipality, Midland TX.

The Midland City Council is anticipated  to approve a recommendation to pay off the debt related to the construction of the Scharbauer Sports Complex. The bonded debt for the stadium is payable from the city’s sales tax.  Should the council vote to pay off the debt it would also end the tax. It would stop being collected later this spring. Unless voters approve an extension, the city’s sales tax would return to 8 percent from 8.25 percent. The bonds related to the sports complex totaled $15.698 million, including $2.078 million in interest. The city expects to save approximately $1.323 million in interest payments versus paying off the debt in 2022.

If voters approve the 4B extension, the city’s sales tax would remain at 8.25 percent. Even after paying off the debt related to the construction of the complex and using 4B revenue for maintenance, operations and capital expenditures, there will be $27.939 million left over, according to City Finance Director Pam Simecka.

That revenue stream is attractive for city and community leaders with eyes on improvements. Expectations are a new 4B could raise as much as $10 million or $11 million a year. Over the 15-year life of the tax, that could be $150 million, plus the leftover $27.9 million.

WASHINGTON STATE BUDGET AT RISK

On December 13, Washington State Governor Jay Inslee delivered a budget proposal covering fiscal 2018 and fiscal 2019, calling for $95 billion in spending from all fund sources over the next two years on operating expenses plus transportation capital costs. This includes $46.4 billion in general fund spending (including several other accounts including the Education Legacy Trust Account, Opportunity Pathways Account, and Budget Stabilization Account), compared to the $38.45 billion enacted budget for the current biennium. The budget assumes a 6.7 percent general fund revenue increase (before policy changes proposed by the governor).

The first priority of the governor’s budget is to fully fund K-12 education; the state must develop a detailed plan to comply with a 2012 state Supreme Court order over school funding. The governor’s proposed K-12 package would send $2.7 billion in additional dollars to local school districts for employee compensation, as well as $1.1 billion to continue reducing class sizes, address opportunity gaps and other strategic priorities, and $1 billion for new school construction.

To help finance this package and other initiatives, the governor proposes net new revenues totaling $4.4 billion over the biennium, including increasing the business and occupation tax rate ($2.3 billion), a new tax on carbon pollution ($1.1 billion), and a new tax on capital gains ($821 million). The budget also prioritizes several initiatives to overhaul the state’s mental health system and expand community-based services, directs $56 million to higher education institutions to freeze tuition for two years, and funds a modest pay increase for most government employees.

The problem is that one of the State’s sources of high wage industrial employment, Boeing, has been pursuing a fairly relentless series of job cuts at its Everett site. The company told staff in a memo Monday that “hundreds of Engineering employees” in Washington state will receive layoff notices on April 21. This follows a round of voluntary buyouts Boeing offered in January. That proposal was accepted by more than 300 engineering staff and 1,500 members of the Machinists union. About 1,000 machinists who accepted that buyout offer will leave permanently on the 21st as well. In late March, Boeing issued an earlier round of 245 involuntary layoffs, including 62 engineering staff and 111 machinists, that will take effect in mid-May.  Boeing cut almost 7,400 jobs in the state last year. The actions followed on the heels of a decision to cut 777 production in Everett from seven planes per month to five per month beginning in August.

So we will see how this budget plan actually looks like after the legislative process given the changing job outlook in the State.

INDIANA GAS TAX

Gov. Eric Holcomb signed into law Thursday afternoon effective starting July 1, that will require Hoosiers to pay an extra 10 cents per gallon gas tax to help pay for roads plan. The tax at the pump will rise to 28 cents a gallon. Hoosiers also will pay more fees at the Bureau of Motor Vehicles, starting in January. Under the roads plan approved by state lawmakers this past week, registration fees for most vehicles will rise by $15. The new law also imposes a $50 on hybrids and a $150 fee on electric cars. In addition to taxes and fees, the roads plan also helps to clear the way for tolls on interstates, though that option may be several years away.

Holcomb said he plans to have a draft of a toll road plan by the end of 2018. Indiana’s gas tax rate will now be higher than all its neighboring states, according to numbers from Tax Foundation.org.

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.

Joseph Krist

Municipal Credit Consultant

TO OUR READERS

Hopefully you’ve noticed a change in our format. We plan to highlight new issues that feature some unique component or represent sectors or issuers of interest.

Next week we are taking our first vacation in nearly two years. We hope that the change of scenery and the new format keep the Muni Credit News fresh and on point. So look for our next edition on Tuesday May 2.

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STATE OF CALIFORNIA

$1,248,070,000 FEDERALLY TAXABLE GENERAL OBLIGATION

HIGH-SPEED PASSENGER TRAIN BONDS

Moody’s: Aa3; S&P: AA-; Fitch: AA-

California is marketing these taxable bonds to investors both domestic and international.

The State is taking advantage of its size (its economy is bigger than that of most countries), name recognition, and the world’s familiarity with the concept of high speed rail. With rates still low, especially in Europe, the bonds are likely to have appeal to large institutional investors overseas. The issue will include traditional fixed rate bonds, mandatory put bonds, and index rate floaters.

The general obligation bonds benefit from the State’s recent sequence of more successful budget operations after the effects of the financial crisis. The State of California has a population of 39.4 million and a gross state product of $2.5 trillion. It has a large and diverse economy, and relatively high wealth. Relative to recent years, the state has a relatively stable financial position, high but declining debt metrics, adjusted net pension liability ratios that are close to the 50-state median, and strong liquidity.

Geisinger Health System

$850,000,000 Fixed Rate and Indexed Floating Rate Bonds

Moody’s: Aa2  Standard and Poor’s : AA

The bonds are secured by a general unsecured obligation of Geisinger Health System Foundation (GHSF) as the only legal obligor. The inpatient operating divisions and the Geisinger Health Plan (the Health Plan) are not members of the obligated group, but designated affiliates. The designated affiliates, which are required to upstream funds to GHSF for debt service obligations, can be de-designated at any time. Under the designated affiliate structure, the potential for future subordination of the bonds is possible.

Geisinger Health System is a vertically integrated, physician-led health system which has as its main components: a range of health services providers, including seven acute care hospitals with multiple campuses; a multi-specialty physician group practice of approximately 1,653 physicians practicing at 216 primary and specialty clinics; and Geisinger Health Plans (‘GHPs’), comprised of Geisinger Health Plan (‘GHP’), Geisinger Indemnity Insurance Company (‘GIIC’) and Geisinger Quality Options, Inc. (‘GQO’). Geisinger operates in 45 of Pennsylvania’s 67 counties, with a significant presence in central, south-central and northeastern Pennsylvania, and in 7 counties in southern New Jersey.

In spite of an excellent reputation and strong service area position, Moody’s has assigned a negative outlook to its rating. The negative rating outlook reflects several financial and strategic challenges including material operating losses related to the health plan’s exchange product, underperformance of a clinical provider and our expectation of still weak consolidated financial performance through FY 2017, relative to peer group medians. As the System digests and continues to pursue acquisitive growth, failure to demonstrate meaningful margin improvement in FY 2018 will result in a downgrade.

Moody’s states that the Aa2 rating acknowledges multiple key strengths including the organization’s large size and leading market position in Central Pennsylvania, its exceptional clinical and research reputation, management’s historic ability to execute strategy, very strong balance sheet resources, moderate leverage and effective management of debt structure risks. Credit concerns include multiple years of very modest consolidated financial performance compared to national Aa2 medians and peer organizations, challenges at the health plan which represents a sizable portion of the enterprise, underperformance of a clinical provider, an increasingly fluid and consolidating competitive landscape and the execution of multiple growth strategies simultaneously.

NYU Hospitals Center

$600,000,000 Taxable Bonds

Moody’s : A3

Yet another significant hospital provider is taking advantage of a favorable rate environment to issue taxable municipal debt to refinance existing debt and bank borrowings. 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.

After recovering from damage due to Hurricane Sandy, NYUHC has embarked on an extensive program of affiliations with a number of NY metropolitan area providers. This has created some risk related to executing the new affiliation strategies and absorbing incremental debt, which challenge NYUHC to meaningfully reduce balance sheet leverage in the near term. These pressures constrain the rating.

The rating was accompanied by a change in the outlook to positive. The outlook  assumes no further affiliations or additional leverage at this time. Growth of unrestricted cash and investments translating to evidence of sustained reduction of leverage, maintenance of strong operating performance, smooth absorption of newly affiliated entities, and continued progress in completing campus redevelopment on time and on budget would be the grounds for an upgrade.

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ANOTHER SPIN FOR MASS TRANSIT IN LAS VEGAS

For some two decades, Las Vegas has pursued a dream of a mass transit option which would link McCarran Airport to the Las Vegas Strip. The well documented failure of the Las Vegas Monorail was the latest ill fated attempt at such a plan. Consistent with the city’s ethos and history of constant reinvention, efforts are underway to try again. This week, Nevada senators took the first step to move a bill that would provide the permission necessary to build high-capacity systems of transportation in Las Vegas. “High-capacity transit” means a system of  transportation services which uses and occupies a separate right-  of-way or rails exclusively for public transportation that may  provide a substantially higher level of passenger capacity by  increasing, without limitation, the number of vehicles utilized by  the system, the size of the vehicles, the frequency of vehicle rides, travel speed or any combination thereof. The term includes, without limitation, rapid bus transit, fixed guideway, light rail  transit, community rail, streetcar and heavy rail.

Senate Bill 149 would lay the groundwork to implement a multi-billion-dollar light rail plan being considered to link McCarran International Airport with the Las Vegas Strip.

For two years, members of the Regional Transportation Commission of Southern Nevada have been drawing blueprints for the light rail as well as makeovers for pedestrian walkways. They’re also considering transit options to connect residential neighborhoods, college campuses, Sunrise Hospital and shopping hubs.

The bill authorizes a regional transportation commission to  construct, develop and operate a high-capacity transit system, as well as enter into  contracts with other local governments to share the costs related to transportation  projects. If a regional transportation commission enters into such a cost-sharing  agreement, the bill requires appropriated by the commission or a local  government in accordance with the cost-sharing agreement. The bill  authorizes a regional transportation commission to use a turnkey procurement process or competitive negotiation process in connection with a high capacity  transit project. The bill would give local officials new authority to seek tax hikes or federal grants to finance developments and explore the use of self-driving cars.

If a majority of the voters approve  the imposition of an additional property tax, the additional rate is exempt from the  partial abatement of property taxes on certain property and the requirement that  taxes ad valorem not exceed $3.64 on each $100 of assessed valuation.

GAS TAXES AT CENTER IN MANY BUDGET DEBATES

California raised its gas tax, Louisiana has proposed an increase, and debates continue in the Southeast over fuel taxes. A bill that includes a plan to raise the gas tax for the first time in 30 years is headed to the South Carolina Senate this week. The latest bill passed the House with a 97-18 vote last month. The bill calls for a $.02 increase on the gas tax each year for the next five years. Only oil-producing Alaska has a lower gas tax than the Palmetto State.

In Tennessee, the governor’s proposal, known as the IMPROVE Act, seeks to raise the tax on gasoline and diesel fuel by 6 and 10 cents, respectively, while also calling for a variety of tax cuts. One state legislator is proposing a substitute in the form of a tax collected from the sale of new and used vehicles. The proposal would use 90 percent of the taxes collected through vehicle sales in Tennessee and distribute the money between the state’s highway fund and local governments. Sixty-four percent of the revenue collected would be distributed to the state’s highway fund, while 24 and 12 percent would be provided to counties and local municipalities, respectively. That would generate $215 million for the state, $80 million for counties and $40 million for cities to be used for transportation needs.

In Massachusetts, a proposed bill would allow cities and towns to establish their own payroll, sales, property or vehicle taxes to fund transportation projects. Under the proposal, these local taxes would expire after 30 years. Voters in the city or town would need to approve them. The bill would also establish a maximum amount that new taxes could be raised and mandate that the revenue from them be only spent on transportation. According to polls, between 70% and 80% of Massachusetts residents supported this idea.

TAMPA AIRPORT EXPANSION TO BE BOND FUNDED

The Hillsborough County Aviation Authority is the owner, operator, and financier of the Tampa International Airport. This week, the Authority unveiled the $543 million second phase of its massive expansion project that includes express curbside drop-off for passengers without checked bags and the commercial development of 17 acres of airport property. It is all part of roughly a $2.3 billion, long-term renovation and expansion that will transform the passenger experience over the next decade and allow the airport to eventually double its passenger traffic to 34 million. This will be the first major renovation to the airport since the terminal was built in 1971. The first phase of the project includes a new 2.6 million-square-foot rental car facility and a new people mover train, which will connect passengers from the rental car area and economy parking garage to the main terminal.

That part of the expansion is expected to be completed next year. Of import to existing bondholders of the Authority’s airport revenue bonds is the fact that the authority hopes to issue bonds in late 2018 to finance the project. A favorable interest rate environment for a refinance of existing bonds plus the authority’s efforts to improve its financial bottom line in recent years in anticipation of this project are relied upon to support financing for the project.

The per-passenger cost charged to the airlines, in the form of landing fees, will increase from the current $5.37, climbing steadily until reaching $8.24 in 2025. A $798 million Phase III is tentatively scheduled to begin in 2023 and includes a new airside D with 16 gates capable of handling both domestic and international flights. That phase would finish in 2026.

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.

joseph krist

joseph.krist@municreditnews.com

UAB Medicine Finance Authority

Moody’s: A1

The Authority will sell $52,880,000 of revenue bonds on April 18.

The bonds are joint and several obligations of the obligated group members secured by the Pledged Revenues, as defined in the bond documents. Pledged Revenues in general means the gross revenues derived from the operation of the Obligated Group’s facilities. It does not include State appropriations, or donor directed gifts. Members of the UAB Medicine obligated group are the University of Alabama Hospital at Birmingham, University of Alabama Health Services Foundation, P.C., Callahan Eye Hospital Health Care Authority, and UAB Health System.

UAB Medicine Finance Authority is a public corporation organized by the University of Alabama System to serve as the bond issuer for the obligated group. UA Hospital is a 1,157-bed facility located in Birmingham, AL and owned by the Board of Trustees of the University of Alabama. The hospital is the primary teaching site of the University of Alabama School of Medicine. University of Alabama Health Services Foundation, P.C. is the faculty physician plan. Callahan Eye Hospital provides specialty ophthalmology services and UAB Health System is a coordinating body for the other entities.

The A1 rating is based on multiple factors including UAB Medicine’s good market share in Birmingham and throughout the state for high acuity services, UAB Medicine’s affiliations and strong strategic ties with the University of Alabama School of Medicine, the University of Alabama at Birmingham, and the University of Alabama System, as well as UAB Medicine’s own strong core financial performance. These strengths are balanced against the need to make large annual transfers to the school of medicine to support research and teaching that have significantly reduced margins in recent years. Organizational and operational changes implemented over the last two years have significantly increased cash flow, net of transfers to the university.

The rating is based on multiple factors including UAB Medicine’s good market share in Birmingham and throughout the state for high acuity services, UAB Medicine’s affiliations and strong strategic ties with the University of Alabama School of Medicine, the University of Alabama at Birmingham, and the University of Alabama System, as well as UAB Medicine’s own strong core financial performance. These strengths are balanced against the need to make large annual transfers to the school of medicine to support research and teaching that have significantly reduced margins in recent years. Organizational and operational changes implemented over the last two years have significantly increased cash flow, net of transfers to the university.

The rating is also supported by a positive outlook. The outlook  reflects expectations that UAB Medicine will maintain stronger cash flow over the next several years.

SCHOOL DISTRICT OF MIAMI-DADE COUNTY, FLORIDA

The District will sell $250,000,000 of general obligation bonds.

Moody’s: “Aa3”

The bonds present one of the stronger tax backed credits funded from an economic area that has seen its share of well documented weak credits and shady credit, accounting, and management practices among other jurisdictions.

The G.O. bonds are secured by the district’s general obligation, unlimited taxing authority. The district, which is coterminous with Miami-Dade County is the fourth largest in the nation by enrollment. At the close of fiscal 2016, there were 467 schools, approximately 356,480 students, and 38,324 full and part time employees (including 20,016 full-time instructional staff). The district’s credit reflects a substantial property tax base that continues to strengthen, narrowed financial position with modest contingency reserves and cash, and an ongoing substantial capital program, funded in part with a sizable $1.2 billion voter-approved general obligation bond authorization.

The credit has been assigned a stable outlook based on the likelihood that the district will maintain its narrow reserve position in the near- to mid-term. The outlook also reflects the improving local economy and property values that are seen as ultimately  helping the district improve its reserve position.

KAISER PERMANENTE

The California Health Facilities Financing Authority is planning the sale of five series of tax exempt bonds and one series of taxable debt.

Fitch: “A+” (stable outlook)  Standard & Poor’s: “AA-” (stable outlook)

Bond proceeds will be used to reimburse Kaiser for approximately $760 million of prior capital projects; provide $2.2 million of liquidity for general corporate purposes including capital projects; refund $517 million of FRN, fixed rate, and put bonds; and refinance $900 million of existing CP debt.

Debt service is an unsecured general obligation of Kaiser Foundation Hospitals (KFH). KFH’s obligations under the loan agreement are guaranteed by Kaiser Foundation Health Plan, Inc. (KFHP), Kaiser Hospital Asset Management, Inc., and Kaiser Health Plan Asset Management, Inc., which along with KFH comprise the Credit Group. Kaiser Permanente is a unique, vertically integrated, closed health maintenance organization (HMO). Based on revenue, Kaiser is by far the largest nonprofit healthcare system in the U.S. Kaiser’s total adjusted revenues in fiscal 2016 (Dec. 31 year end; audited) were $64.1 billion.

Kaiser is diversified and operates in multiple regions across the country, including the west coast (California, Hawaii, Oregon, and Washington), central mountains (Colorado), southeast (Georgia), and mid-Atlantic (Maryland, Virginia, and D.C.). With the February 2017 acquisition of Group Health Cooperative in Washington State, Kaiser is up to 11.7 million members and growing, however, over 70% of Kaiser’s members are located in California.

In fiscal 2016, Kaiser’s adjusted operating margin measured 2.7% and operating EBITDA margin measured 6.5%. Total pro forma debt outstanding is $10.4 billion. Actual MADS is $2.2 billion, but this includes a bullet payment due in 2047. MADS coverage is 8.6x after adjustment for this bullet payment. At fiscal year-end 2016, pensions were 63% funded relative to a PBO of $18.6 billion. This $6.8 billion underfunded status is 30% greater than the value of Kaiser’s pro forma total direct debt outstanding. This the primary negative factor weighing on this credit.

LOCAL INITIATIVES SUPPORT CORPORATION

$100,000,000 Taxable Bonds, Series 2017A (Sustainability Bonds)

Standard & Poor’s “AA”

Today’s modern investors are often looking not only for opportunities to earn a return of their investments but to also “do good” with their investments. There have been “socially” responsible mutual funds available for some time. Opportunities to apply the same value driven approach to fixed income investing has often been more limited. Recently, the municipal market has been more of an incubator for these investments through the advent of “green bonds” and their increased acceptance by not only investors but participants like rating agencies.

This month another opportunity to achieve social investment goals is scheduled to come to market. In a first-ever move of its kind, the Local Initiatives Support Corporation (LISC) is issuing $100 million in general obligation bonds to help accelerate its work around economic opportunity and drive investment capital into distressed urban and rural communities across the country. LISC is a national nonprofit and one of the nation’s largest community development intermediaries, having invested more than $17 billion to build up the economic infrastructure of disinvested places.

The offering represents the first time a Community Development Financial Institution (CDFI)—a designation for specialized lenders focused on the needs of low-income people and places—has tapped the bond market for growth capital. LISC is headquartered in New York but is locally focused, operating through 31 urban programs and a rural development effort that touches more than 2,000 counties. It combines corporate, government and philanthropic resources. Since 1980, LISC has invested $17.3 billion to build or rehab 366,000 affordable homes and apartments and develop 61 million square feet of retail, community and educational space. S&P Global Ratings has assigned a ‘AA’ credit rating to the bonds. LISC has posted record results in the last two years, including investing more than $1.3 billion in grants, loans and equity in 2016 to support economic development, affordable housing, health care, community safety, education, family financial stability and employment. It was assigned a stable outlook reflecting LISC’s growing assets base and consistent profitability as well as its high-performing loans.  S&P  cited the organization’s proven capacity to weather economic and real estate crises. S&P said LISC’s loan loss exposure is minimal, finding that it “has more than sufficient equity to cover potential losses.”

CHICAGO PUBLIC SCHOOLS LITIGATION DECISION LOOMS

A Cook County judge is expected to rule this week on a pair of motions in the district’s ongoing suit against Gov. Bruce Rauner. CPS is seeking injunctive relief to order the state to help fund its existing budget shortfall, while Rauner’s attorneys have sought to dismiss the case entirely. If the district’s motion fails, it could mean nearly three weeks will be trimmed from the end of the current school year – forcing classes to end as early as June 1 instead of the scheduled date of June 20.

The judge will decide whether CPS will be “irreparably harmed” if its motion is not granted and whether pension funding is included in the state’s education funding requirements. CPS contends that despite carrying nearly 20 percent of the state’s student population, CPS receives just 15 percent of its education funding. The state argues that a shortened school year is not yet a certainty and claim CPS can borrow more money to prevent that outcome. On the pension question, CPS is the only school district in Illinois required to help cover its teacher pension cost. This year, its portion of that payment will exceed $720 million.

More debt for operations would clearly be a credit negative option for CPS. As is the case with the State budget, the Governor continues to use the fiscal process in an attempt to achieve policy goals which often do not have popular support. Rauner previously vetoed $215 million in state funding that CPS had counted on in its fiscal year 2017 budget, saying that money was tied to sweeping pension reforms at the state level that haven’t been achieved.

So CPS finds itself in the middle of an ideological and political battle over which it has limited influence. So long as this remains the case it is difficult to see how CPS’ already weak credit standing can be improved.

BUDGET PROCESS IN NEW HAMPSHIRE UNRAVELS

For the first time in modern memory the New Hampshire House failed to pass a state budget, effectively removing the 400 legislators from the process for now and erasing the work of their Finance Committee over the past several months. The budget developed by Gov. Chris Sununu will now go directly for consideration by the Senate, with none of the House changes on the table when the House and Senate meet in conference in June.

This is the first time since records started being kept in the 1960s that the House failed to adopt the budget proposed by its Finance Committee. As in the U.S. Congress, a 32 member Freedom Caucus is credited with blocking House action. Members of the Freedom Caucus wanted growth in state spending held closer to the rate of inflation, somewhere between 3 and 4.5 percent. The budget will eventually come back to the House after the Senate version of a revenue and spending bill clears a Senate-House committee of conference in June.  Other stumbling blocks included the views of  the majority of Democrats, unhappy with the level of funding for drug and alcohol abuse, the absence of full-day kindergarten and changes in benefits for retired state employees (among other things), voted “no.”

Freedom Caucus leaders wanted up to $200 million in additional cuts but offered no specific recommendations except to eliminate a plan to send $50 million to cities and towns over the next two years for property-tax relief.

CITIZENS PROPERTY INSURANCE REPORTS A LOSS; BLAMES CONTRACTORS

Citizens Property Insurance Corporation it announced recently that will post a net loss for 2016, its first loss in more than a decade, as water loss claims, assignment of benefit (AOB) abuse and litigation costs increasingly impact the company’s bottom line. The Citizens Board of Governors was told Wednesday the state’s insurer of last resort will post a $27.1 million net loss for 2016, its first since 2005. The loss comes despite minimal damage from Hurricane Matthew, the first major hurricane to impact Florida in 11 years. Without significant statutory reforms, Citizens will be forced to pass those higher costs on to its customers in the form of higher rates for the foreseeable future, said Citizens Board of Governors Chairman Chris Gardner.

“Every year, we rely on standardized, accepted actuarial principles to set our rates,” Gardner said “Last year, the same principles that provided rate decreases to our customers in recent years translated into hikes for 84 percent of our policyholders. Without legislative changes, that trend will continue.” The percentage of non weather-related water claims – burst pipes, sudden dishwasher leaks, etc. – that move to litigation has skyrocketed. Each litigated claim raises the average claim cost by $20,000 or more. These costs must be passed on to Citizens policyholders.

Another factor driving rate increases is assignment of benefits, in which policyholders sign over policy rights to a third party, such as a repair company, who then controls their claim and deals directly with Citizens. These contractors assume all the benefits afforded the policyholders but bear few of the responsibilities, including cooperating with Citizens adjusters and reporting losses before repairs are made. The Office of Insurance Regulation has indicated that private insurance companies are facing similar trends.

Citizens is supporting bills which the Florida Legislature currently is considering that address the AOB issue as part of the 2017 Legislative Session. These include SB 1038 and HB 1421, which would bolster consumer protections and clarify attorney fee provisions. The 2017 Legislative Session ends May 5, 2017.

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.

Joseph Krist

joseph.krist@municreditnews.com

State of California

Moody’s: Aa3  S&P: AA-  Fitch: AA-

California will sell $635,590,000 of General Obligation Bonds this week.

California revenues of $7.63 billion for March beat projections in the governor’s proposed 2017‑18 budget by $1.73 billion, or 29.2 percent, State Controller Betty T. Yee reported.  March revenues were just $56.5 million above estimates in the 2016-17 Budget Act signed last summer. For the first nine months of the 2016-17 fiscal year that began in July, total revenues of $80.91 billion are $607.3 million below last summer’s budget estimates, but $837.1 million ahead of January’s revised fiscal year-to-date predictions.

March personal income tax (PIT) receipts of $3.93 billion topped projections in the governor’s proposed budget by nearly $1.09 billion, or 38.2 percent.  In the current fiscal year, California has collected total PIT receipts of $54.90 billion, or 1.1 percent more than January’s revised estimate. Corporation tax receipts of $1.37 billion for March were 29.1 percent higher than assumptions in the proposed 2017-18 budget.  Fiscal year-to-date corporation tax receipts of $5.19 billion are 9.0 percent above projections in the proposed budget.

March sales tax receipts of almost $2.00 billion exceeded expectations in the governor’s proposed 2017-18 budget by $266.8 million, or 15.4 percent.  For the fiscal year to date, sales tax receipts of $18.29 billion are $346.7 million below the revised estimates released in January—the only one of the “big three” General Fund revenue sources to miss the mark.

SSM Health Care Corporation

Fitch: AA-  S&P: A+

The Corporation will negotiate $500,000,00 of taxable revenue bonds.

SSM comes to market with a negative rating outlook from Fitch. The Negative Rating Outlook reflects SSM’s compressed operating profitability in the second half of 2016, with operating EBITDA margin decreasing to 6.3% at year end from 7.9% during the first half of the year. The bonds are general, unsecured obligations of SSM. Proceeds will be used for the pay down of approximately $200 million of outstanding commercial paper as part of the Corporation’s effort to reduce its interest rate exposure. The remaining proceeds will bolster the Corporation’s liquidity. Ongoing capital spending has resulted in a decline in pro forma liquidity metrics including 159.3 days cash on hand, 19.5x cushion ratio and 108.5 cash to debt at Dec. 31, 2016.

The SSM system consists of  20 owned hospitals, a large multi-specialty physician practice, a managed care organization and a pharmacy benefits management company. It is headquartered in St. Louis, MO, with operations in Missouri, Illinois, Wisconsin and Oklahoma. SSM acquired Saint Louis University Hospital (SLUH) in September 2015. SSM and University of Oklahoma Medicine announced their intent to affiliate in October 2016, but the two entities subsequently announced their mutual decision not to affiliate in March 2017.

Total operating revenue increased 123% from $2.7 billion in fiscal 2009 to $6.1 billion in fiscal 2016. Operating EBITDA margin decreased to 6.3% in fiscal 2016 primarily due to increased labor and supplies expenses. Management is in the process of implementing over $200 million of operating improvement initiatives, including both revenue enhancement and cost management initiatives. Pro forma MADS coverage by EBITDA decreased to 3.5x in fiscal 2016 from 5.3x in fiscal 2015.

Metropolitan Atlanta Rapid Transit Authority (Georgia)

Standard & Poor’s “AA+”  Moody’s Investors Service, Inc. “Aa2”

MARTA will sell $99,165,000 of Sales Tax Revenue Bonds (Third Indenture Series). MARTA’s sales tax revenue bonds are secured by various liens on sales taxes levied in three Georgia counties and the City of Atlanta. The voter-approved sales taxes are collected by the State of Georgia and remitted directly to the trustee for the bonds. MARTA provides mass transit services in the Atlanta metropolitan area. The authority operates 338 rail cars with 38 train stations, and 565 buses operating running on 101 routes. Average weekday ridership is 424,000 trips.

The authority funds its roughly $580 million operating budget (operating and maintenance expenditures plus debt service) primarily from two sources: fare revenues (24% of 2016 O&M plus debt service) and the pledged sales taxes (70% of 2016 O&M plus debt service). Following several years of improving financial operations and sales tax growth, MARTA is in a surplus position. As a result of these surpluses, MARTA’s reserve balance has accumulated to $246 million in 2016.

The liens of the first and second resolution bonds are closed. Those liens benefit from  abundant coverage of debt service by pledged tax revenues which are generated by a growing regional economy.

____________________________________________________________________________________________

SUNY Free Tuition Agreement

The 2018 New York State Budget agreement approved last week provides for SUNY and CUNY colleges to be tuition free for qualifying families. The program provides free tuition to families making up to $125,000 per year, and nearly 940,000 New York families are eligible for the program. The new initiative will be phased in over three years, beginning for New Yorkers making up to $100,000 annually in the fall of 2017, increasing to $110,000 in 2018, and reaching $125,000 in 2019.

To qualify, New Yorkers must be enrolled in college full-time, averaging 30 credits per year and completing their degree on-time. The program includes built in flexibility, allowing students to pause and restart the program, due to a hardship, or take fewer credits one semester than another. Students must also maintain a grade point average necessary for the successful completion of their coursework.

The agreement requires those who receive free tuition to live and work in the state for the same number of years that they receive the awards. If they do not, the scholarships would convert to student loans. The requirement may be deferred if recipients leave the state to complete their undergraduate education, to enroll in graduate school or because of “extreme hardship.”

The agreement was not universally praised. Unsurprisingly, opposition was centered primarily in the private college sector. A new grant program will be created for students who attend private colleges in the state, with a maximum award of $3,000. However, private colleges would be required to match the grants, and to freeze tuition for the duration of a student’s grant. The president of the Commission on Independent Colleges and Universities in New York. said she wasn’t sure that many institutions would find the program viable. She said the requirement that colleges freeze tuition for students when they first receive the aid would appear to mean colleges would end up with different tuition rates for students in different classes, and would have to track the students. “This would be bureaucratically difficult,” she said. “Colleges would have to ask if it was worth it.”

The budget also provides an increase in Education Aid of $1.1 billion, bringing the new Education Aid total to $25.8 billion. It also allows ride sharing services to operate in upstate New York. These items, along with changes to the juvenile justice system in the state, were the primary items which had to be worked out in order to facilitate  the agreement to provide for the free tuition program.

NYC Capital Borrowing Takes Shape

The announcement by New York City of a planned issuance of $1 billion of Transitional Financing Authority bonds focuses attention on the City’s ambitious borrowing plans. The Mayor’s Office of Management and Budget (OMB) projects that the city will issue $5.5 billion in new debt in 2017, a 50 percent. increase over the $3.7 billion issued in 2016. New debt issuance is planned to grow in each of the subsequent years peaking in 2020 at $8.7 billion. In previous years, the city assigned state building aid revenue to the TFA, which is authorized to issue Building Aid Revenue Bonds (BARBs) to finance a portion of the city’s school construction needs. Because the TFA is nearing the limit of $9.2 billion in BARBs that can be outstanding, the city will use GO bonds for some projects that would have been financed using BARBs if the limit on outstanding BARB debt had not come into play. From 2013 through 2016, the city issued an average of $775 million in BARBs annually. Over the next four years, however, the city projects it will only issue an average of $248 million a year in BARBs in order to stay under the $9.2 billion cap.

The January plan includes $6.5 billion for debt service costs adjusted for prepayments and defeasances—the use of current surplus funds to prepay future interest and principal on existing debt—in 2017. After adjusting, this is a 7.6 percent increase over the debt service the city paid in 2016. The $6.5 billion in debt service forecast for 2017 in the January plan is 1.3 percent ($85 million) less than forecast in the November 2016 Financial Plan and a total of 3.5 percent ($235 million) less than forecast in the adopted budget released last June. While some debt service savings were recognized in the January financial plan for 2018 and subsequent years, OMB still projects that annual debt service costs (adjusted for prepayments) will rise over the next few years, from $6.5 billion in 2017 to nearly $8.4 billion in 2021. While variable interest rate assumptions for 2017 have been lowered, they still remain at 4.25 percent for tax-exempt debt and 6.0 percent for taxable debt in 2018 through 2021.

Debt service as a percent of tax revenue is projected to total 11.9 percent in 2017, up from 11.3 percent in 2016. Debt service as a share of city-funded expenditures is forecast to total 10.6 percent, slightly higher than 10.2 percent last year. These ratios are both projected to grow through 2021, to 12.8 percent and 11.6 percent, respectively.

Houston Pension Legislation

The Texas Senate State Affairs Committee voted to send the Houston Pension Solution to the full senate for approval.  With one exception, the measure passed out of committee is the same reform package supported by a 16-1 vote of City Council and forwarded to Austin by the City of Houston.

“This is a historic day,” said Houston Mayor Turner.  “With today’s vote, the state affairs committee joins the growing list of supporters for the Houston Pension Solution.   Our plan eliminates $8.1 billion in unfunded liability, caps future costs, does not require a tax increase and is budget neutral.  There is no other plan that achieves these goals and has the same consensus of support.” Mayor Sylvester Turner’s proposal recalculates the city’s pension payments, using lower investment return assumptions and aiming to retire the debt in 30 years, both of which would increase the city’s annual costs. To bring that cost back down, the plan would cut workers’ benefits, and includes a mechanism to cap the city’s future costs even if the market tanks.

The state affairs committee measure includes a provision requiring a vote by the citizens of Houston for the issuance of Pension Obligation Bonds (POBs).  The agreement between the City and the Houston Police Officers Pension System (HPOPS) as well as the Houston Municipal Employees Pension System (HMEPS) includes the issuance of $1 billion in pension bonds to replace existing debt the city already owes HPOPS and HMEPS.  They will not, it is believed under state law result in pension bonds being considered a new borrowing.

“We oppose the inclusion of this provision and will continue to fight for its removal,” said Turner.  “As my father taught me, a deal is a deal.  We have kept our word to the police and municipal employee pension systems.  Now I am asking the Texas Legislature to do the same.” Conservatives contend the only path to true reform would be to move new hires into defined contribution plans similar to 401(k)s, which the bill does not do.

The mayor is again calling on the Houston Firefighter Relief and Retirement Fund (HFRRF) to provide data on the true costs of providing firefighter pension benefits.  He was joined in that call by Texas Senator Joan Huffman who is sponsoring the Houston Pension Solution in the Texas Senate.  Both the mayor and Huffman indicated willingness to revisit the proposed changes in firefighter pension benefits if HFRRF will provide the cost analysis it has, so far, refused to release.  Fire leaders say an ongoing lawsuit prevents them from complying.

Mayor Turner will again testify before the Texas House Committee on Pensions.  The house version of the bill does not include the requirement of a vote for POBs.

San Diego Moves On From The Chargers

San Diego City Council is being asked to consider a special election in November for a hotel-room tax increase measure to fund an expansion of the convention center, homeless services and roads. The increase to the hotel-room tax would be 1 percent for the City of San Diego, another 1 percent for hotels south of state Route 56 and north of state Route 54 and another 1 percent for hotels downtown. That increase would be on top of the city`s 10.5 percent hotel-room tax and the 2 percent tourism marketing levy.

According to the Mayor, the proposed Phase III Contiguous Convention Center Expansion will:  add another 400,000 square feet of rentable exhibit, ballroom and meeting space to the existing facility (the total current space is 816,091 square feet);  allow the Convention Center to retain large conventions – the Center’s top five largest conventions have a regional economic impact of approximately $397 million annually;  allow the Convention Center to attract approximately 50 more annual events and 334,000 attendees, bringing the average total attendance to over 1.1.

It is estimated to generate $509 million in direct spending at local businesses, and have a regional impact of $860 million; generate over 380,000 new hotel room nights annually for the San Diego market from convention attendees, providing approximately $15 million annually in additional TOT to the City’s General Fund for critical public benefits and core city services like public safety, parks and libraries;  generate thousands of construction jobs and nearly 7,000 permanent jobs; and provide numerous public benefit features including a sustainably designed 5-acre rooftop public park with views of the City and Bay, increased public access to the waterfront, and the rerouting of truck traffic away from pedestrians and visitor vehicles along the waterfront.

If the ballot measure (a special tax) is approved by two-thirds of the voters in November of 2017, the TOT increase would be levied and funds would be collected for homelessness, road repair and the Convention Center project beginning in the second half of FY 2018. Based on this preliminary timeline, short term notes would be issued in FY 2019 to begin project work for the Phase III Expansion, and bonds would be issued in FY 2020. Construction is anticipated to begin in July of 2019 and last approximately 44 months.

California Drought Emergency Ends

Good news for California water credits came when Gov. Jerry Brown declared an end to the drought emergency in the State. This will allow water agencies to replenish supplies and be able to see revenues grow through increased usage rather than through higher pricing associated with conservation procedures.

Precipitation in water year 2017 has filled the majority of California’s major reservoirs to above-historic average levels. Likewise, as the USGS streamgage network shows, flows in the majority of the streams have been at or above average for most of the last 4 months. This indicates that most of California’s rivers, creeks, lakes and reservoirs are in good condition. On average, the Sierra Nevada snowpack supplies about 30 percent of California’s water needs as it melts in the spring and summer. A series of back-to-back atmospheric river storms blanketed the Sierra Nevada in January and February 2017. As of April 1, 2017, statewide snow accumulation data indicate that snowpack in the Northern, Central, and Southern Sierra is 164 percent of normal for this date.

Recovery of supplies will be uneven depending upon whether a suppliers water supply is groundwater based. Groundwater aquifers recover much more slowly than surface water and are limited, among other things, by how much and how fast water can recharge. Unlike surface water, which can recover during a few days of heavy precipitation, groundwater aquifer recovery often takes years or decades. Groundwater systems are also relied upon more heavily during times of drought.

In addition, in many areas of the state, groundwater systems have been depleted for long periods – even between droughts – that they have not recovered from. Excessive, long-term groundwater over-use resulting in groundwater depletion can cause subsidence and permanent loss of groundwater storage as well as water quality degradation and seawater intrusion. These long-term impacts on groundwater have not been remedied by the recent weather. If recovery is possible, it will likely take several to many years to accomplish.

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.

Joseph Krist

joseph.krist@municreditnews.com

THE HEADLINES…

NEW YORK STATE BUDGET

STATE TAX OUTLOOK

CALIFORNIA REVENUE TRENDS

PUERTO RICO NEGOTIATIONS

NYC CAPITAL BORROWING TAKES SHAPE

ANOTHER BAD STADIUM DEAL

SAN DIEGO MOVES ON FROM THE CHARGERS

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NEW YORK STATE BUDGET

New York State began operating in fiscal 2018 under  emergency legislation to keep the state government in operation after efforts to pass a state budget for the 2017-18 fiscal year faltered during weekend-long talks. The fiscal year began at midnight on Friday with no deal in place. The irony is that the dispute is not over monetary issues but rather about policy issues.

The extender would have a punitive side effect for the legislators, who would not be paid during its duration. And the governor’s submitting an extender that would last until the end of May — when the federal budget would come into focus — could mean a prolonged stretch without paychecks for lawmakers.

As we go to press, the Senate passed four budget bills — with more legislative action expected after midnight. The Democrat-led New York State Assembly came to terms on a bill that would raise the age of criminal responsibility in the state to 18, an issue that had been a major stumbling block in the state budget negotiations.

New York is one of two states, along with North Carolina, that treat 16- and 17-year-old defendants as adults. According to a summary of the legislation, all misdemeanor charges faced by 16- and 17-year-olds would be dealt with in Family Court. Nonviolent felony charges would be dealt with in a new youth section of Criminal Court, with many of those cases eventually being sent to Family Court, excluding cases in which a district attorney can prove “extraordinary circumstances.” Beginning in late 2018, juveniles would not be kept with adults in county jails.

Violent felony cases would remain in Criminal Court but would be subject to a three-part test: whether a “deadly weapon” was used, whether the victim sustained “significant physical injury,” and whether the perpetrator engaged in criminal sexual conduct. Barring one of those factors, violent felony cases could also be moved to Family Court.

Other issues include including a renewal for 421-a, a lapsed tax-cut program for developers that was meant to produce low income housing; support for charter schools; changes to the workers’ compensation system; and education aid. The extender did include infrastructure funds, such as a major clean water initiative, and some lesser policy proposals, like a plan to cap and manage the cost of prescription drugs under Medicaid. But many of the deals that seemingly had been settled — such as allowing ride-hailing apps to be used upstate — were not included. Lawmakers have already passed a portion of the budget approving debt payments.

STATE TAX OUTLOOK

Now that the initial effort to repeal and replace the ACA has failed, the next focus for the municipal bond market is the potential impact of tax reform. Three potential impacts on state credits are apparent: the impact on the economy; the direct impact of tax reform on state government tax bases in cases where states conform to federal tax law; and  indirect impacts on state tax revenue as taxpayers change their behavior in anticipation of, and in response to, federal tax reform. Two of these are forward concerns but it appears that the third may already be having a dampening impact on tax revenues.

The likelihood of lower tax rates in 2017 likely created a large incentive for high income taxpayers to push income from wages, interest, and other sources out of 2016 into 2017, and to accelerate deductions into 2016, depressing taxable income in 2016. A proposed increase in the standard deduction created a modest incentive for middle-income taxpayers to accelerate itemized deductions into 2016. Initial data suggests a slowing of state revenue growth. Fourteen states reported declines in total tax revenue for the third quarter of 2016, with two states reporting double-digit declines. Total state government tax revenue grew 1.2 percent in the third quarter of 2016 relative to the prior year. All major tax revenue sources grew, except the corporate income tax, which declined 10.4 percent. Individual income tax collections grew 2.7 percent, while sales tax and motor fuel tax collections grew 2.0 and 1.1 percent.

It is difficult to make a blanket statement about states given the importance of energy based revenues and economic activity. The steep oil price declines throughout 2015 and early 2016 led to declines in severance tax collections and depressed economic activity. Total tax collections also declined in the other oil and mineral-dependent states, including New Mexico, Oklahoma, Texas, West Virginia, North Dakota and Wyoming. Fourteen states reported declines in personal income tax collections, with three reporting double-digit declines. Some of that was related to a depressed energy sector.

We have always used sales taxes as a good proxy for near term trends. Among individual states, thirty-three states reported growth in sales tax collections in the third quarter of 2016, with twelve states reporting declines. Six of those are oil- and mineral dependent states. For analysts such as ourselves, the usefulness of sales tax as an indicator has been diminished in recent years by the demise of brick and mortar retailing. This trend has only been partially mitigated In calendar year 2017 in that eleven states have joined other states that already collect taxes on sales by Amazon.com LLC or its subsidiaries, raising the number to forty-two out of forty-five states that impose a general sales tax. The problem is that while the dominant online retailer, state efforts alone have had limited effectiveness. Federal legislation may be the only way to fully capture retail sales activity into state tax bases.

Unfortunately, the state budget process will likely outpace the speed at which final federal tax reform can be undertaken. Thus the states will be operating in a somewhat opaque environment as they attempt to estimate revenues for the upcoming fiscal year.

CALIFORNIA REVENUE TRENDS

California revenues of $6.52 billion for February fell short of projections in the governor’s proposed 2017-18 budget by $772.7 million, or 10.6 percent. Personal income taxes (PIT), corporation taxes, and retail sales and use taxes all fell short of January’s revised budget estimates for February, and only corporation taxes—the smallest of the three—topped fiscal year-to-date projections in the governor’s proposed 2017-2018 budget. For the 2016-17 fiscal year that began in July, total revenues of $73.28 billion are $663.9 million below last summer’s budget estimates, and $888.1 million short of January’s revised fiscal year-to date predictions.

In the current fiscal year, California has collected total PIT receipts of $50.97 billion, or 0.9 percent less than January’s revised estimate. Corporation tax receipts of $168.2 million for February were 35.0 percent short of assumptions in the proposed 2017-18 budget. Fiscal year-to-date corporation tax receipts of $3.82 billion are 3.3 percent above projections in the proposed budget. February sales tax receipts of $3.06 billion missed expectations in the governor’s proposed 2017-18 budget by $710.2 million, or 18.8 percent. For the fiscal year to date, sales tax receipts of $16.29 billion are $613.5 million below the revised estimates released in January, or 3.6 percent.

PUERTO RICO NEGOTIATIONS

The Puerto Rico government and some of its creditor groups have signed confidentiality agreements—a first step toward negotiations that could begin as soon as or this week—the island’s Financial Advisory & Fiscal Agency Authority (FAFAA) confirmed Monday. The identity of creditor groups was not revealed. Advisers for the commonwealth government and Promesa’s fiscal control board hope to kick off mediation talks as soon as next week in New York City. The goal is to solve the controversy between general obligation (GOs) and Sales Tax Financing Corp. (COFINA) bondholders. A letter states that the private mediation process will not prevent “other mediations/negotiations between the same parties or others regarding these or other disputes.”

The letter outlines other details of the framework for the negotiations, which include making public any government offer made to creditors during mediation 48 hours after it ends, or April 21—whichever occurs first. Subsequent proposals from the government would need to be disclosed no later than each Friday after April 21.

Former judge Allan Gropper is listed as mediator in the process. Several creditor groups opposed the board’s plans for mediation, arguing there should be initial talks before a mediation process, which would take a long time to kick off. The group included the GO ad hoc group; OppenheimerFunds, Franklin, Goldman Sachs, UBS and Santander; and monoline insurers  Assured, FGIC, Syncora and National. The government and the board are said to be open to receive restructuring proposals from creditor groups that refuse to enter the mediation process. Yet any such offer would be subject to Gropper’s input and be shared and discussed with creditors participating in the mediation.

In the meantime, the U.S. First Circuit Court of Appeals reversed a ruling by U.S. District Court Judge Francisco Besosa that has the effect of staying the entire Lex Claims case, in which general obligation (GO) bondholders challenged the constitutionality of the Sales Tax Financing Corp.’s (Cofina) structure. “The district court’s holding that the PROMESA stay did not apply to the plaintiffs’ first, second, third, and 12th causes of action is reversed, and the matter is COFINA bondholders’ motion to intervene solely for the purposes of addressing the issue is therefore moot,” the Appeals Court ruled.

NYC CAPITAL BORROWING TAKES SHAPE

The announcement by New York City of a planned issuance of $1 billion of Transitional Financing Authority bonds focuses attention on the City’s ambitious borrowing plans. The Mayor’s Office of Management and Budget (OMB) projects that the city will issue $5.5 billion in new debt in 2017, a 50 percent. increase over the $3.7 billion issued in 2016. New debt issuance is planned to grow in each of the subsequent years peaking in 2020 at $8.7 billion. In previous years, the city assigned state building aid revenue to the TFA, which is authorized to issue Building Aid Revenue Bonds (BARBs) to finance a portion of the city’s school construction needs. Because the TFA is nearing the limit of $9.2 billion in BARBs that can be outstanding, the city will use GO bonds for some projects that would have been financed using BARBs if the limit on outstanding BARB debt had not come into play. From 2013 through 2016, the city issued an average of $775 million in BARBs annually. Over the next four years, however, the city projects it will only issue an average of $248 million a year in BARBs in order to stay under the $9.2 billion cap.

The January plan includes $6.5 billion for debt service costs adjusted for prepayments and defeasances—the use of current surplus funds to prepay future interest and principal on existing debt—in 2017. After adjusting, this is a 7.6 percent increase over the debt service the city paid in 2016. The $6.5 billion in debt service forecast for 2017 in the January plan is 1.3 percent ($85 million) less than forecast in the November 2016 Financial Plan and a total of 3.5 percent ($235 million) less than forecast in the adopted budget released last June. While some debt service savings were recognized in the January financial plan for 2018 and subsequent years, OMB still projects that annual debt service costs (adjusted for prepayments) will rise over the next few years, from $6.5 billion in 2017 to nearly $8.4 billion in 2021. While variable interest rate assumptions for 2017 have been lowered, they still remain at 4.25 percent for tax-exempt debt and 6.0 percent for taxable debt in 2018 through 2021.

Debt service as a percent of tax revenue is projected to total 11.9 percent in 2017, up from 11.3 percent in 2016. Debt service as a share of city-funded expenditures is forecast to total 10.6 percent, slightly higher than 10.2 percent last year. These ratios are both projected to grow through 2021, to 12.8 percent and 11.6 percent, respectively.

ANOTHER BAD STADIUM DEAL

In 2005,  the Village of Bridgeview, IL issued $135 million of general obligation (GO) bonds for a stadium that it owns and manages. The stadium serves as the home field for the Chicago Fire of Major League Soccer. Like many of the league’s franchises, it chose to pursue its own facility with a smaller capacity rather than play in an existing football stadium located in the center of a metropolitan area. The idea was to produce a venue with the atmosphere of a European ” “football” venue and take advantage of what is seen as a high level of interest among suburban residents who are seen as primary customers for the sport in the US.

With seating for as many as 28,000, Toyota Park, which opened in 2006, hosts soccer games, concerts and other events. The motivation for the Village was to create a facility which would act as a catalyst for economic activity around the games trying to capture the pre and postgame atmosphere that one often finds with European venues. Alas, the level of economic activity generated by the existence of the stadium has, not surprisingly, fallen short of expectations.

The Village has persistent weak liquidity and weak management conditions. Multiple debt restructurings as a result of management’s decision to construct and finance an underperforming stadium and declines in the tax base have led to a high debt burden. For an entity of its size its $234 million general obligation tax burden is significant. The Village has attempted to manage this debt through tax increases, asset sales, refinancing, and the use of variable rate debt. Bridgeview, which has used restructurings in the past to ease debt service payments and minimize property tax hikes, to continue the practice, possibly pushing bond maturities out to years beyond the useful life of the stadium. The most recent proposal the Village was considering to restructure $24.5 million of variable-rate bonds to a fixed-rate mode with a 2047 maturity.

The whole stadium saga has now culminated in the Village’s bond rating being lowered to BB- by S&P. S&P is concerned that the Village faces reduced market access and weakened liquidity  as well as acute business, financial, and economic uncertainties related to its debt burden, particularly the debt issued for its Toyota Park stadium.

So add Bridgeview, IL to the list of cautionary tales regarding public financing for professional sports facilities. And sadly, it was an “own goal” on the part of the Village.

SAN DIEGO MOVES ON FROM THE CHARGERS

San Diego City Council is being asked to consider a special election in November for a hotel-room tax increase measure to fund an expansion of the convention center, homeless services and roads. The increase to the hotel-room tax would be 1 percent for the City of San Diego, another 1 percent for hotels south of state Route 56 and north of state Route 54 and another 1 percent for hotels downtown. That increase would be on top of the city`s 10.5 percent hotel-room tax and the 2 percent tourism marketing levy.

According to the Mayor, the proposed Phase III Contiguous Convention Center Expansion will:  add another 400,000 square feet of rentable exhibit, ballroom and meeting space to the existing facility (the total current space is 816,091 square feet);  allow the Convention Center to retain large conventions – the Center’s top five largest conventions have a regional economic impact of approximately $397 million annually;  allow the Convention Center to attract approximately 50 more annual events and 334,000 attendees, bringing the average total attendance to over 1.1 million;  generate $509 million in direct spending at local businesses, and have a regional impact of $860 million; generate over 380,000 new hotel room nights annually for the San Diego market from convention attendees, providing approximately $15 million annually in additional TOT to the City’s General Fund for critical public benefits and core city services like public safety, parks and libraries;  generate thousands of construction jobs and nearly 7,000 permanent jobs; and provide numerous public benefit features including a sustainably designed 5-acre rooftop public park with views of the City and Bay, increased public access to the waterfront, and the rerouting of truck traffic away from pedestrians and visitor vehicles along the waterfront.

If the ballot measure (a special tax) is approved by two-thirds of the voters in November of 2017, the TOT increase would be levied and funds would be collected for homelessness, road repair and the Convention Center project beginning in the second half of FY 2018. Based on this preliminary timeline, short term notes would be issued in FY 2019 to begin project work for the Phase III Expansion, and bonds would be issued in FY 2020. Construction is anticipated to begin in July of 2019 and last approximately 44 months.

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.

Joseph Krist

Municipal Credit Consultant

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THE HEADLINES…

HOUSTON PENSION LEGISLATION

WEST VIRGINIA PARKWAYS

BRIGHTLINER CONTINUES TO EVOLVE

MEDICAID DSH PAYMENT CLARIFICATION DISMAYS HOSPITALS

HOW A GUTTED EPA WOULD IMPACT SMALL CREDIT FINANCES

JEA COMES FULL CIRCLE

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HOUSTON PENSION LEGISLATION

After hearing testimony from Mayor Sylvester Turner among many others last week, the Texas Senate State Affairs Committee voted to send the Houston Pension Solution to the full senate for approval.  With one exception, the measure passed out of committee is the same reform package supported by a 16-1 vote of City Council and forwarded to Austin by the City of Houston.

“This is a historic day,” said Mayor Turner.  “With today’s vote, the state affairs committee joins the growing list of supporters for the Houston Pension Solution.   Our plan eliminates $8.1 billion in unfunded liability, caps future costs, does not require a tax increase and is budget neutral.  There is no other plan that achieves these goals and has the same consensus of support.” Mayor Sylvester Turner’s proposal recalculates the city’s pension payments, using lower investment return assumptions and aiming to retire the debt in 30 years, both of which would increase the city’s annual costs. To bring that cost back down, the plan would cut workers’ benefits, and includes a mechanism to cap the city’s future costs even if the market tanks.

The state affairs committee measure includes a provision requiring a vote by the citizens of Houston for the issuance of Pension Obligation Bonds (POBs).  The agreement between the City and the Houston Police Officers Pension System (HPOPS) as well as the Houston Municipal Employees Pension System (HMEPS) includes the issuance of $1 billion in pension bonds to replace existing debt the city already owes HPOPS and HMEPS.  They will not, it is believed under state law result in pension bonds being considered a new borrowing.

“We oppose the inclusion of this provision and will continue to fight for its removal,” said Turner.  “As my father taught me, a deal is a deal.  We have kept our word to the police and municipal employee pension systems.  Now I am asking the Texas Legislature to do the same.” Conservatives contend the only path to true reform would be to move new hires into defined contribution plans similar to 401(k)s, which the bill does not do.

The mayor is again calling on the Houston Firefighter Relief and Retirement Fund (HFRRF) to provide data on the true costs of providing firefighter pension benefits.  He was joined in that call by Texas Senator Joan Huffman who is sponsoring the Houston Pension Solution in the Texas Senate.  Both the mayor and Huffman indicated willingness to revisit the proposed changes in firefighter pension benefits if HFRRF will provide the cost analysis it has, so far, refused to release.  Fire leaders say an ongoing lawsuit prevents them from complying.

Mayor Turner will again testify before the Texas House Committee on Pensions.  The house version of the bill does not include the requirement of a vote for POBs.

WEST VIRGINIA PARKWAYS

West Virginia has taken one of the legislative steps needed to help to implement its own infrastructure expansion as articulated by its Governor earlier this year. A bill giving give the West Virginia Parkways Authority new financing  abilities is moving to the House after it passed the Senate. Senate Bill 482 would give the agency the authority to study, investigate, evaluate and, if feasible, develop a single fee program and impose a flat fee in connection with motor vehicle registration and renewal by the Department of Motor Vehicles.

The bill allows the authority to establish a program where drivers would pay a flat fee to travel the authority’s roads rather than pay individual toll fees. It also authorizes the agency to have reciprocal tolling with other states and would allow it issue revenue bonds. To aid the process, another provision of the bill would allow people to get an EZPass from the DMV instead of only from Parkways.

The bill creates and designs a special revenue account within the State Road Fund known as the State Road Construction Account and would expand the authority of the Parkways Authority to issue revenue bonds or refunding revenue bonds for parkways’ projects and for the West Virginia . It would define a  “Parkway project” as any expressway, turnpike, bridge, tunnel, trunkline, feeder road, state local service road or park and forest road, or any portion or portions of any expressway, turnpike, trunkline, feeder road, state local service road or park and forest road, whether contiguous or noncontiguous to the West Virginia Turnpike which the Parkways Authority or the Department of Transportation may acquire, construct, reconstruct, maintain, operate, improve, repair or finance . It specifically provides for the Authority to issue parkway revenue bonds of the State of West Virginia, payable solely from toll revenues, for the purpose of paying all or any part of the cost of any one or more parkway projects.

BRIGHTLINER CONTINUES TO EVOLVE

For a project that has not been able to access the municipal bond market, we admit that we have spent a lot of time on it. It remains of interest as one of the more interesting transportation stories we have seen in some time. The latest turn in the saga was the announcement that Grupo Mexico Transportes — which owns Mexico’s largest railroad network and rail in Texas — is to acquire 100 percent of Florida East Coast Railway’s shares and assume its debt, pending approval of the deal by regulatory authorities. All Aboard Florida has based its business model on using the existing Florida East Coast Railway tracks. The company has said that taking advantage of existing infrastructure — All Aboard is improving existing track between Miami and Cocoa and building new track between Cocoa and Orlando — will help make the $3.1 billion railroad profitable.

Fortress — parent company of both Brightline and Florida East Coast Railway — was itself purchased in February by Japanese conglomerate SoftBank. Brightline contends it will be unaffected by the sale, that Brightline is a “separate company” that has “the right to operate passenger service,”. “We have all shared operations-related agreements in place with the Florida East Coast Railway for us to fully build out and implement our passenger rail system.”

At the same time, a controversial proposal intended to slow the planned Brightline service might have been derailed in the Florida House. The Transportation & Infrastructure Subcommittee on Tuesday declined to hear the proposal (HB 269), which in part sought to give the Florida Department of Transportation oversight of issues not preempted by federal law. The measure also sought to require private passenger-rail operations to cover the costs of installing and maintaining safety technology at crossings unless contracts are reached with local governments.

It was seen as aiding the efforts of Martin and Indian Counties in opposition to the project. Among key requirements of the Florida High Speed Passenger Rail Safety bill, were ones to build fencing around Brightline’s tracks.

MEDICAID DSH PAYMENT CLARIFICATION DISMAYS HOSPITALS

Earlier this year we discussed the appointment of Seema Verma as Administrator for Centers for Medicare & Medicaid Services. At the time we highlighted her background as an advocate for reducing Medicaid spending especially during her tenure in Indiana under governor Mike Pence. It did not take long for Ms. Verma to place her stamp on Medicaid funding practices. On March 30, the Centers for Medicare & Medicaid Services (CMS), issued a  final rule addressing the hospital-specific limitation on Medicaid disproportionate share hospital (DSH) payments under section 1923(g)(1)(A) of the Social Security Act (Act. It clarified that the hospital-specific DSH limit is based only on uncompensated care costs. Specifically, this rule makes explicit in the text of the regulation, an existing interpretation that uncompensated care costs include only those costs for Medicaid eligible individuals that remain after accounting for payments made to hospitals by or on behalf of Medicaid eligible individuals, including Medicare and other third party payments that compensate the hospitals for care furnished to such individuals.

As a result, the hospital specific limit calculation will reflect only the costs for Medicaid eligible individuals for which the hospital has not received payment from any source. These regulations are effective on June 2, 2017. Hospitals had previously been able to claim reimbursement of full costs of Medicaid patient services even if a portion of those costs had been payable by private insurance which those patients might have had. One can qualify for Medicaid and still have some level of private insurance.

Many commenters suggested that the regulation will impose a great burden on all involved, which outweighs any incremental benefit in transparency and accountability, and diverts scarce financial and human resources away from providing and paying for care to beneficiaries. The CMS position is that this policy ensures that limited DSH resources are allocated to hospitals that have a net financial shortfall in serving Medicaid patients. Either way it represents a decline in the amount of revenues available to hospitals which provide significant levels of services to Medicaid populations.

HOW A GUTTED EPA WOULD IMPACT SMALL CREDIT FINANCES

When most people think of the EPA they think in terms of big concepts and big projects. Scrubbers on large power generators, huge wastewater and water treatment projects in support of large metropolitan service areas, air and water quality standards. They tend not to think of the many smaller components that comprise the effort to achieve clean air, water, and waste disposal practices. But it is at this micro level, that the greatest impact of the proposed reductions to the EPA budget on tap from the Trump administration might be to projects in medium to small size communities.

EPA funding often provides the financing catalyst for expansions or upgrades to small town water systems through replacement or expansion of piping for water delivery. EPA funding supports upgrades or retrofits of local treatment facilities. It stimulate spending for rural water reclamation projects which support agriculture reducing competition for new water supplies. EPA’s diesel emissions reduction program has covered costs for replacement or retrofitting of school buses. These programs usually benefit rural areas where lower property values impact local revenue raising activities. What local rural school district would want to bear the costs of more efficient school bus systems solely out of their own budgets?

In those areas where the manufacturing industry has passed them by where old plant sites need help to remediate the impacts of mining, metal, and chemical production, EPA brownfield programs help recovering communities. These programs provide funding and expertise to small communities looking to repurpose old industrial sites in support of new local economic development efforts.

At least in the areas of water and wastewater project finance, state revolving funds are an established source of lower cost funding for smaller municipalities. These funds will be forced to fill in more and more of the gap, as regardless of politics, water and wastewater infrastructure has come to be a necessity in the toolkit of smaller town and rural economic development.

JEA COMES FULL CIRCLE

JEA is a municipal utility based in Jacksonville, Florida, and its service territory covers Jacksonville, and parts of three adjacent counties. In the late 1970’s, the utility came under pressure due to its reliance on oil as its primary fuel used at its electric generating plants. The rises in prices and interruptions in supplies that were characteristic of the time led the Authority to embark on an effort to replace oil with more economic and stable sources of fuel for a new generation of plants using coal. The result was the construction of the St. Johns River Power Park (SJRPP), a 1,252-megawatt, coal fired electric plant jointly owned by JEA (80%) and FPL (20%).

On 17 March, JEA (Aa2 stable) announced that it had reached an agreement with Florida Power & Light Company (FPL, A1 stable) to decommission the 30-year old SJRPP . The decision reflects the changing economic and environmental realities facing large users of coal as a generating fuel. The decision is seen as credit positive because it is likely to produce material net cost savings for JEA to adequately address any remaining debt associated with SJRPP. Additionally, the agreement mitigates the potential for future costs to comply with environmental regulations relating to carbon emitting resources and helps keep customers’ rates stable and competitive versus peers in Florida.

Decommissioning SJRPP will further increase JEA’s reliance on natural gas, exposing the utility and its customers to sudden shifts in fuel prices. However, we believe that natural gas prices will remain at levels that approximate recent historically low prices for the next several years. Since JEA currently has excess capacity of about 15% and projects modest demand growth of 0.7%, replacing the estimated lost capacity from decommissioning SJRPP is not pressing and will moderate JEA’s current excess capacity position.

Subject to JEA and FPL signing definitive agreements and obtaining requisite regulatory approvals relating to plant closure, decommissioning SJRPP would commence in early 2018 and FPL would pay JEA for the costs to terminate the power purchase agreement, including employee-related expenses. In addition, FPL would share proportionately in shutdown costs and environmental remediation. As of fiscal 2016 (which ended 30 September 2016), there was approximately $494 million of long-term debt associated with the SJRPP assets, split between $210 million of Issue Two debt under the first bond resolution. Terms of the agreement between JEA and FPL appear to enable the utilizing of available funds in the debt service reserve fund for the Issue Two debt together with additional cash payments to be provided by both utilities to defease the full amount of the Issue Two debt at closing (principal amount expected to be $128 million).

Cash flow erosion associated with continuing to pay debt service on the estimated $281 million of Issue Three debt that will remain outstanding with no hard assets will be addressed through annual operations and maintenance, fuel and other cost savings. We project those savings will more than offset the $24 million of annual debt service requirements, including amortization, on the Issue Three debt, which has a final maturity of 2039. Moody’s is on record as projecting that JEA will maintain its debt service coverage metrics in line with historic levels of 2.0x or better for its electric system, without needing a further increase to its base rate beyond the 4.4% increase that became effective on 1 December 2016.

SJRPP’s capacity factors have steadily declined since 2014 owing to low natural gas prices. Decommissioning SJRPP will further increase JEA’s reliance on natural gas, exposing the utility and its customers to sudden shifts in fuel prices. However, we believe that natural gas prices will remain at levels that approximate recent historically low prices for the next several years. Since JEA currently has excess capacity of about 15% and projects modest demand growth of 0.7%, replacing the estimated lost capacity from decommissioning SJRPP is not pressing and will moderate JEA’s current excess capacity position.

In the end it is yet another example of a market driven decision against coal that ideology and political policy cannot overcome.

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.

Joseph Krist

Municipal Credit Consultant

THE HEADLINES…

A DESERVED DOWNGRADE FOR NEW JERSEY

MORE BUDGET BLUES IN N.E. PENNSYLVANIA

ST. LOUIS TO CONSIDER PRIVATIZATION FOR LAMBERT AIRPORT

KANSAS LOOKING AT A GAS TAX INCREASE

NUCLEAR FINANCE MELTDOWN REVISITED

REGULATORY ISSUES AND MUNICIPALS

RAIDERS VEGAS MOVE APPROVED WITH STATE FINANCING

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A DESERVED DOWNGRADE FOR NEW JERSEY

Moody’s Investors Service has downgraded to A3 from A2 New Jersey’s general obligation rating. The ratings on the state’s appropriation-backed debt, other GO related debt, moral obligation debt, intercept programs and certain special tax bonds that require state appropriation have also been downgraded by one notch. The downgrade affects approximately $37 billion of rated debt. The downgrade reflects the continued negative impact of significant pension underfunding, including growth in the state’s large long-term liabilities, a persistent structural imbalance, and weak fund balances. Despite the state’s significant increases in pension contributions since fiscal 2012, contributions remain well below the actuarial recommended contribution and unfunded pension debt continues to grow.

It also reflects the expectation that the statutory pension contribution schedule will be increasingly difficult to meet given the lack of structural budget adjustments to incorporate General Fund tax reductions that took effect in January 2017 (Chapter 57) and the state’s reliance on optimistic revenue growth assumptions to balance the budget. Without balancing actions, the recent tax cuts will reduce revenues by $1.1 billion by fiscal 2021 and strain the state’s ability to resolve its large structural imbalance in the near term.

One might ask what took so long. It is clear that the Christie method of bullying and bluster has been long played out and that any serious efforts at budget and pension reform will await a new administration in 2018. We believe that the long term outlook remains negative given the lack of consensus and political will which continue to plague the State’s efforts to restore fiscal integrity on both the legislative and executive fronts.

MORE BUDGET BLUES IN N.E. PENNSYLVANIA

Hazelton is one of those smaller northeastern Pennsylvania cities based in manufacturing and mining that saw its economic heyday prior to World War II. Since then, slow steady declines in those sectors have reduced employment, population, and general economic conditions. As its population ages, its demand for services has maintained itself while available resources have become more constrained. this has increased the precariousness of its municipal financial position.

Refinancing two bond issues that the city of Hazleton secured in 2005 could free up funds and help plug a revenue shortfall in the city budget. A financial advisory has pitched plans for refinancing $2,855,000 in bond issues that the city secured in 2005 at a lower interest rate. The arrangement would give the city an option of reducing debt payments or accepting a lump-sum payment that represents savings from the reduced interest rate. The savings could plug a budget gap and potentially stave off a furlough of city workers.

The city secured the bond issues in 2005 at 4.22 percent interest for a term that extends through 2025. When the city refinanced a $5.6 million borrowing in 2015 a fixed interest rate of 2.85 percent. Using that figure as a benchmark, one city council member said refinancing of the $2.855 million bond issue would yield a “conservative” estimated savings of between $90,000 and $100,000.

Council members and the mayor disagree on reasons why the city faces a shortfall. The mayor cited $371,000 in “wage cuts” that he said council made to the budget and unrealistic revenue projections when announcing earlier this month that the city will have to furlough some of its employees beginning April 3. Council, however, contends the shortfall is due to the mayor’s refusal to finalize an arrangement that it approved for selling delinquent tax to Municipal Revenue Services for an advance payment. The mayor said unpaid property taxes totaled nearly $421,000 for 2016 but the city would’ve received about $387,000 from MRS after paying fees.

The city could avoid those costs if it were to receive the money in smaller increments over a longer period of time through Luzerne County’s contracted delinquent tax collection agency. The mayor claimed recently that the city would receive about $387,000 through MRS or about $227,000 this year by receiving delinquent taxes directly from the county’s collection agency. The mayor city could make up the $160,000 revenue shortfall through savings Hazleton will realize as the police chief and administration opted for lower-risk insurance policies that should yield a savings of between $160,000 and $180,000, the mayor said.

Council will consider the 2005 bond issue refinancing when it meets April 4.

ST. LOUIS TO CONSIDER PRIVATIZATION FOR LAMBERT AIRPORT

The city of St. Louis has submitted a preliminary application to the Federal Aviation Administration’s Airport Privatization Pilot Program, which could allow it to privatize operations of St. Louis Lambert International Airport. The application is being submitted under the terms of a 1997 federal law, which was reauthorized in 2012, allows up to 10 public airports to lease the facilities to private operators. Five airports are currently approved, and city officials said they did not know how many airports are competing for the remaining five slots.

The City hopes that the plan could generate millions of dollars more from the airport, perhaps helping the city invest in projects like a north-south MetroLink expansion. The city, which owns the airport, currently receives about $6 million from the facility per current law.  Grow Missouri Inc. is a nonprofit funded by billionaire investor Rex Sinquefield, a political activist pushing an end to the city’s earnings tax and a St. Louis city-county marriage.

The extra money would be generated for the city and for upgrades at the airport, would come from the private operator under a long-term lease agreement with the city. The city contends that the plan would allow the city to avoid restrictions on using airport funds for municipal purposes. In its view a deal could mean a large, upfront influx of cash for the city. The city would still own the airport under any agreement.

Lambert was at one time a major hub facility for TWA and then for American Airlines. No longer a hub facility, the airport has been pressed for funds to finance expansions after under taking a major runway expansion to support hubbing. The airport is a more likely facility than many others for a P3 . Lambert’s runways have long been used for test flights and deliveries of military aircraft by McDonnell Douglas, which built its world headquarters and principal assembly plant next to the airport; and now by Boeing, which bought McDonnell and now uses its St. Louis facilities as headquarters for its Boeing Defense, Space Security division. The plant currently builds the F-15 Strike Eagle, F/A-18 Super Hornet and Growler; and is home to Boeing Phantom Works.

KANSAS LOOKING AT A GAS TAX INCREASE

We have been following the ups and downs of Kansas’ ongoing budget crisis. The effort to balance the general fund has included the use of transfers from the State’s Highway Fund and we have been concerned that this would diminish the State Highway Fund credit. Now, House Bill 2382 has been proposed which calls for an increase in the state’s gas tax from 24 to 35 cents per gallon.

Most of the money would go the Highway Fund with the remainder being distributed to counties and cities. It is receiving support because the legislation would include constitutional provisions prohibiting transfers to the General fund. A driver driving 15,000 miles per year in a car getting 20 mph would see a tax increase of $82. The proposal joins a number of other more modest gas tax increase proposals as Kansas grapples with its ongoing deficit financing efforts.

NUCLEAR FINANCE MELTDOWN REVISITED

Westinghouse Electric Co., the nuclear engineering firm overseeing construction of new generating facilities in Georgia and South Carolina, filed for bankruptcy. The filing leaves questions about the fate of four reactors under construction in the United States. The filing results in a host of legal questions about whether Toshiba remains responsible for losses at Westinghouse and whether the utilities that own the reactors under construction will have to eat more of the cost of completing them. That could mean higher rates for consumers in those areas. In seeking protection under Chapter 11 of the bankruptcy act, Westinghouse could still finish building those plants.

Westinghouse said it has arranged $800 million in debtor-in-possession financing so that it can continue to serve customers while restructuring its business.  Scana Corp and Southern Co., the power utilities which hired Westinghouse to build the first nuclear power plants in the United States in more than 30 years, have also hired restructuring advisers. In a potential Westinghouse bankruptcy, Scana and Southern Co would be among Westinghouse’s largest creditors, owed the cost overruns on the projects, which tally in the billions of dollars, one of the people added. The utilities are hoping to recover these costs in a bankruptcy process for Westinghouse.

At Georgia’s Votgle plant, the latest completion deadlines of December 2019 and September 2020 for the two new reactors — already more than three years behind schedule — “do not appear to be achievable,” Oglethorpe Power Co. said in a filing to the U.S. Securities and Exchange Commission. Georgia Power will be cutting it close to get the new nuclear plants completed ahead of a deadline contained in a deal it reached last year with state regulators.

Under that settlement with the Georgia Public Service Commission, the Atlanta electric utility must have the plants in running condition by the end of 2020, or its profit margin allowed on the project will be cut by roughly a third.

It matters to municipal bond investors in debt issued by South Carolina Public Service Authority (debt rated A1 AA- A+, co-owner of Sumner) and the Municipal Electric Authority of Georgia (debt rated A2 A+ A+, co-owner at Votgle). They are owners of significant shares of the two plants currently under construction. The financing plans are different at the two facilities. The Votgle project is the beneficiary of Energy Department loan guarantees. The Sumner project does not have any such guarantees.

Santee Cooper said it will spend up to $250 million over a period of up to 90 days to keep V.C. Summer construction on track. The utility’s board of directors authorized the spending during a special meeting Monday but did not release details of the plan until the bankruptcy was official. It owns 45% of the plant. It is conducting a study to determine whether it will need to increase power prices to help pay for the two new reactors but that review is not related to any additional costs a Westinghouse bankruptcy could bring. Santee Cooper increased rates by 3.7 percent in both 2016 and 2017 to help pay for the new nuclear units. A two notch downgrade now would seem to be appropriate at present.

As for MEAG and the Votgle project, the chairman of the Georgia Public Service Commission said the utilities developing the Alvin W. Vogtle generating station in the state would have to evaluate whether it made sense to continue. “It’s a very serious issue for us and for the companies involved,” Mr. Wise said. “If, in fact, the company comes back to the commission asking for recertification, and at what cost, clearly the commission evaluates that versus natural gas or renewables.”  A termination would leave MEAG with significant sunk costs to be recovered from rates. MEAG owns 22.7% of Votgle.

REGULATORY ISSUES AND MUNICIPALS – SANCTUARY CITIES

State and local governments seeking Justice Department grants must certify they are not so-called sanctuary cities in order to receive the money, Attorney General Jeff Sessions announced. Sessions cited the Illegal Immigration Reform and Immigrant Responsibility Act, a law passed in 1996, which includes a section providing that no state or local entity can in any way restrict its law enforcement officials from communicating with federal immigration authorities about a person’s immigration status. Sessions said that compliance with federal immigration laws will be a prerequisite for states and localities that want to receive grants from the Department’s Office of Justice Programs. The office provides billions of dollars in grants and other funding to help criminal justice programs across the country. The Department of Justice will “also take all lawful steps to claw back any funds awarded to a jurisdiction that willfully violates 1373.” This would impact what he described as an expected $4.1 billion in federal grants.

The announcement followed a January 25 executive order from the President. It was timed to occur simultaneously with  a conference on sanctuary city policy hosted by ThinkProgress, an editorially independent project of the Center for American Progress Action Fund. Sanctuary cities are fighting back against the move led by the larger cities which are emphasizing the role of the funding to support anti-terror activities in major metropolitan areas. One representative has characterized the move as the federal government playing Russian roulette. Away from the emotional component of the issue, the dollars involved are significant but the concept of “clawing back” already disbursed funds is the most disturbing from a credit point of view.

REGULATORY ISSUES AND MUNICIPALS – COAL POWER REGULATIONS

Just last week, Robert Murray, the founder and CEO of Murray Energy, said Trump should “temper his expectations,” given the way market forces — rather than regulations — have hurt the coal industry and reduced employment. On August 3, 2015, President Obama and EPA announced the Clean Power Plan – a plan to reducing carbon pollution from power plants. When the Clean Power Plan was fully in place in 2030, carbon pollution from the power sector was to be 32 percent below 2005 levels and by 2030, emissions of sulfur dioxide from power plants would be 90 percent lower compared to 2005 levels, and emissions of nitrogen oxides would be 72 percent lower.

President Trump this week signed an executive order to direct the Environmental Protection Agency to undo the Clean Power Plan, a rule issued under Obama to cut electricity-sector carbon emissions. “My administration is putting an end to the war on coal,” Trump said. “Perhaps no single regulation threatens our miners, energy workers and companies more than this crushing attack on American industry.” The order is meant to encourage the use of clean coal technologies. These would go beyond existing scrubbing techniques. Leading among them are carbon capture and storage (CCS). Development of CCS for coal combustion has lost momentum in the last few years, partly due to uncertainty regarding carbon emission prices.

The Global CCS Institute established in 2009 and based in Australia aims “to accelerate the development, demonstration and deployment of carbon capture and storage (CCS). In mid-2016 the Global CCS Institute said that there were 15 large-scale CCS projects in operation, with a further seven under construction. No commercial-scale power plants are operating with this process yet. At the new 1300 MW Mountaineer power plant in West Virginia, less than 2% of the plant’s off-gas is being treated for CO₂ recovery, using chilled amine technology. This has been successful. Subject to federal grants, there are plans to capture and sequester 20% of the plant’s CO₂, some 1.8 million tons of CO2 per year. Capture of carbon dioxide from coal gasification is already achieved at low marginal cost in some plants. One (albeit where the high capital cost has been largely written off) is the Great Plains Synfuels Plant in North Dakota, where 6 million tons of lignite is gasified each year to produce clean synthetic natural gas.

About 2005 the DOE announced the $1.3 billion FutureGen project to design, build and operate a nearly emission-free coal-based electricity and hydrogen production plant. Some $250 million of the funding was to be provided by industry, from about eight companies. After identifying a suitable sequestration site in Morgan County, the design phase of the project was announced in February 2013. Construction was due be completed in 2015, with the project being on line mid-2016, but this was delayed as most members of the FGA dropped out, leaving only Peabody, Glencore and Anglo American. In February 2015 DOE cancelled further funding for the project, after having spent $202 million on it.

The Trump administration plans to ask federal courts to suspend lawsuits over the EPA climate regulations and send the rules back to the agency to be rewritten or withdrawn. But the D.C. Circuit Court of Appeals, which heard arguments on the Clean Power Plan six months ago, does not have to go along. The appeals court judges could rule any day on the Clean Power Plan, and a separate D.C. Circuit panel has scheduled oral arguments on the future plant rule for April 17.

Utilities have moved away from coal in favor of cheaper and cleaner fuels, such as prevalent and inexpensive natural gas. We think that economics will continue to govern the choices made by municipal utilities and that the near term impact on municipal credits of the Trump policy changes will be minimal if any. As for the economic impact on coal producing state economies, mining jobs have been in decline for decades as automated equipment increasingly unearths coal, doing the work that once required pick axes and mules. Coal producers have had little interest in adding new federal reserves to their portfolios, amid slumping domestic demand. Existing federal leases contain at least 20 years’ worth of coal, according to Interior Department estimates.

The near term impact on municipal electric utilities should be minimal.

RAIDERS VEGAS MOVE APPROVED WITH STATE FINANCING

The Raiders are the only NFL team to share a stadium with a Major League Baseball franchise. That will change in a couple of years after they received enough votes from NFL owners on  relocate to Southern Nevada. The Raiders will still play in Oakland in 2017, and possibly longer. With a 65,000-seat domed stadium that will cost $1.9 billion to be shared with UNLV not expected to open until 2020, Raiders owner Mark Davis has plans on staying in Oakland the next two seasons. The team holds a pair of one-year options at the Oakland Coliseum.

After the vote, Oakland’s mayor said “I am proud that we stood firm in refusing to use public money to subsidize stadium construction and that we did not capitulate to their unreasonable and unnecessary demand that we choose between our football and baseball franchises.” It had however, committed that the end of the 2024 season is the latest date by which the existing Coliseum would be vacated for demolition.  This demolition work cost is already included in the City’s infrastructure budget.

The Raiders have committed $500 million toward the project, with another $750 million coming in the form of a hotel tax passed by the Nevada Legislature in October. The move concludes an awkward dance which has been played out repeatedly over the last nearly three decades.

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