Joseph Krist
Publisher
EXECUTION MATTERS
The state and city budgets have been adopted for FY 2027 and the big events in NYC (World Cup, Pride Parade, America 250) are over. Now people can focus on what is actually being done. Rents have been frozen, the buses are not free, school class sizes are not being reduced after all and the Mayor has stepped away from several of his campaign policy pledges. There is already a realization that this year’s budget was not a blue print for achieving structural balance.
Less than a month into FY 2027, the Mayor has already asked agencies to find expense reductions of 2.5%. At the same time efforts to achieve pay raises for school employees have raised budget questions with implications for other agency employees. These are the sort of issues which require some skill at governance. That is especially true when the ideology or policy being executed face significant opposition.
That is what makes the rollout of the pied a terre tax so disappointing. The Mayor sold the tax as something that would impact some 30,000 properties which were clearly not primary residences. You can understand the outcry that has occurred over the fact that the rollout includes the release of name and address information of the owners of some 1 million properties. You can support the policy of the tax but the clumsy rollout of the collection process and needless release of information does not generate the trust needed to support some of the Mayor’s other initiatives.
In the meantime, the mundane day to day details of city governance continue to get in the way. The efforts to convert office space to housing are being slowed by issues with repair inspections and structural soundness. The recent federal housing legislation did not provide any funding for new public housing. That will leave the City on its own to fund truly affordable housing. The bill for maintaining the current NYCHA stock is $40 billion and growing.
Amidst all of the debate, Moody’s reaffirmed its negative outlook on the City’s credit at mid-month. The negative outlook reflects New York City’s updated spending projections, which give rise to larger multi-year budget gaps than previously forecast. That the city projects large and persistent imbalances under still-favorable economic and revenue conditions highlights the extent of its underlying structural budget challenges. Over the next 12 months, the outlook will be influenced by the city’s ability to narrow projected gaps through recurring measures and demonstrate progress toward restoring structural balance.
BRIGHTLINE
Fitch Ratings has downgraded Brightline Trains Florida LLC’s (Brightline/OpCo) $2.219 billion senior secured private activity bonds (PABs) to ‘CC’ from ‘CCC’. Fitch has also affirmed Brightline East LLC’s (BLE) $1.119 billion senior secured taxable notes rated ‘CC’. Fitch has removed both the OpCo and BLE from Rating Watch Negative.
The rating reflects a very high probability that both issuers will be unable to fully fund the next debt service payments due on or before Jan. 1, 2027. The OpCo and BLE reserve accounts were both substantially depleted to meet the July 1, 2026, interest payments. Despite the upward ridership and revenue trends that continue through the first half of 2026, the ramp-up profile remains slow, and cashflows on a net income basis are at or near breakeven. Therefore, Fitch expects the OpCo to have insufficient funds to fully service its debt obligations.
CHESTER BANKRUPTCY
The U.S. Court of Appeals for the Third Circuit ruled that the bankrupt City of Chester, Pennsylvania can retain control of revenue streams tied to a local casino and a waste-to-energy plant, finding that creditor liens on those revenues did not survive the city’s 2022 Chapter 9 filing. The decision affirms a 2023 bankruptcy court ruling and hands Chester continued access to funds it says are essential to exiting bankruptcy, while also sending part of the dispute back for further review.
It determined that the liens were not “statutory liens,” and did not survive the bankruptcy filing. The creditors argued their liens arose automatically from two city ordinances authorizing the debt, and therefore counted as statutory liens, a category of lien that can survive a bankruptcy filing without further action. The Third Circuit disagreed, finding that the liens only took legal effect because of language in a separate contribution agreement and trust indenture, not the ordinances themselves. Because the liens depended on contract language rather than arising purely “by force of a statute,” they didn’t qualify for statutory-lien protection.
Casino revenue is a “fee,” not a tax, and doesn’t qualify as protected special revenue. The creditors also argued the gaming revenue pledged to their bonds counted as a “special excise tax,” a category of revenue that can remain pledged to bondholders even in municipal bankruptcy. The court rejected this too, holding that fees tied to a specific licensed activity (operating slot machines and table games) function differently than a broadly imposed tax, and therefore don’t carry the same protected status.
VIRGIN ISLANDS
HUD is suspending funding to the Virgin Islands Housing Finance Authority, claiming that the agency misused disaster relief funds that were supposed to be used to rebuild housing and other infrastructure damaged by two major hurricanes in 2017. HUD allocated $1.9 billion to VIHFA to help rebuild following Hurricanes Irma and Maria.
VIHFA was slated to bring 1,643 multifamily facilities online via rehabilitation and new construction as part of its direct recovery efforts using some of the disaster relief funds. However, only 319, or 19%, have been completed in that time, and none of the single-family and multifamily housing that was supposed to be built as part of its mitigation effort has been built.
As for the economy, “The Trump administration would like to see refineries across the country reopen, especially the St. Croix refinery as it is in a strategic location and was built particularly to refine Venezuelan crude,”. Before Venezuela under Hugo Chavez managed to ruin a perfectly good relationship with the US oil industry, Venezuelan crude was refined at St. Croix. Now, the Administration is seeking foreign investors to fund refurbishment and operation of the old refinery.
The St. Croix refinery operated from 1966 until 2012 and briefly again in 2021. In 2021, just months after the plant reopened, EPA under the Biden administration ordered it shut down after a series of flaring accidents rocked the plant, leading to sprays of oily mist on nearby residents and triggering large releases of hydrogen sulfide and sulfur dioxide.
UTILITY RATINGS
Two significant utility debt issuers received positive rating news this week.
Moody’s has affirmed Long Island Power Authority’s (NY) (LIPA) A2 senior lien revenue bonds rating. The rating outlook for LIPA has been revised to positive from stable. The revision of the outlook to positive from stable reflects expectations for continued improvements in LIPA’s key financial metrics driven in part by the company’s stated policy goal of achieving 70% debt ratio by 2030. The outlook, however, could be revised to stable should the utility encounter material operational difficulties, including reconnecting customers in a timely manner after a major storm-induced outage.
LIPA is the retail supplier of electric service in most of Nassau and Suffolk Counties and the Rockaway Peninsula of Queens. Its assets currently consist of a transmission and distribution system that is used to serve approximately 1.2 million customers in an approximately 1,230 square mile service territory. This provides a diverse and relatively wealthy base to support revenues.
Moody’s also affirmed South Carolina Public Service Authority’s (Santee Cooper) A3 rated revenue bonds. The outlook has been revised to positive from stable. The change in Santee Cooper’s outlook to positive considers the expected improvement to the utility’s liquidity post bond issuance and its proposed retail rate increases for 2027 and 2028.
Some of the credit’s sturdier supports remain. The affirmation of Santee Cooper’s A3 rating considers the return to traditional rate setting practices following the expiration of the rate freeze in January 2025, its broad service area directly or indirectly serving approximately 2 million people in South Carolina, ownership by the state of South Carolina (Aaa stable), and competitive rates.
The risks to the utility’s rating are those associated with the potential for political influence weighs on Santee Cooper’s operations including its rate setting, if new major disputes arise with Central, or if the utility undertakes any material risks associated with any resumption of construction at the partially completed Summer nuclear plants.
The A3 rating does not consider Santee Cooper’s memorandum of understanding (MOU) with Brookfield Asset Management (Brookfield) regarding the partially built Summer Nuclear Units 2 and 3. If this contemplated transaction were to be executed, it would likely be a substantial credit positive for the utility. That said, the transaction has material uncertainty around its likely execution.
LAUSD ON THE DECLINE
Moody’s has downgraded Los Angeles Unified School District, CA’s issuer rating to A1 from Aa3. The outlook is negative. The district has about $11 billion in long-term debt. Governance is a key rating driver, reflecting delays in reducing expenditures in response to declining enrollment and collective bargaining agreements that will drive significant cost growth.
The expectation is that reserves will decline materially beginning in fiscal 2026 and continue weakening absent meaningful expenditure reductions or additional recurring revenue. Fiscal 2026 projections (year-end June 30) show an operating deficit that will reduce available general fund balance to below 30%, down from 40% in fiscal 2025, largely because enrollment declines were nearly twice the budgeted level.
On July 2, 2026, the Los Angeles County Office of Education (LACOE) issued a “lack of going concern” determination for the district, noting that the district may be unable to meet its financial obligations in fiscals 2028 and 2029, resulting in an increased level of fiscal oversight. The designation automatically triggers a Fiscal Crisis and Management Assistance Teams (FCMAT) Fiscal Health Risk Analysis (FHRA) to determine the district’s risk level for fiscal insolvency.
TEXAS DATA CENTER COSTS
The Texas Senate Finance Committee held a hearing this week examining the state’s sales tax exemptions for qualifying data centers. Some incentives date back to 2013. In 2013, the Texas Legislature passed House Bill 1223, granting full sales tax exemptions to purchases by data center developers for electricity costs; cooling systems; emergency generators; various types of IT equipment. The demand wasn’t large. In the first two years, the legislature estimated a cost of about $14.6 million. Then in 2015, legislation expanded the program for large data centers. Those projects qualify for the same state sales tax exemptions, but receive them for a longer period and can also qualify for local sales tax exemptions.
Then development exploded. At the end of 2020, 10 data centers were receiving tax breaks in Texas. As of today, 138 data centers have been certified for the exemption, with five more applications pending. That has resulted in a lost revenue total associated with data center exemptions of some $3.3 billion. With the support of the Governor, Texas’ data center tax incentives will likely be a topic of debate when lawmakers return to Austin in 2027.
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