Indiana Finance Authority approves a new deal with the vendor operating the Indiana Toll Road allowing 35 percent fee increases for large trucks as part of Gov. Eric Holcomb’s plan to pump an additional $1 billion into infrastructure.

INDIANAPOLIS (AP) — The board of the Indiana Finance Authority unanimously approved a new deal Thursday with the vendor operating the Indiana Toll Road, allowing 35-percent fee increases for large trucks as part of Republican Gov. Eric Holcomb’s plan to pump an additional $1 billion into infrastructure projects around the state.

The rate hike takes effect Oct. 5 and the state would receive $400 million that same day from the Indiana Toll Road Concession Co. The rate increase applies to vehicles with three or more axles.

Indiana would receive a total of $1 billion over three years. Indiana Public Finance Director Dan Huge told the board the new deal comes with a letter of credit, meaning banks have guaranteed Indiana will receive its future payments.

Holcomb did not attend the meeting. He was on a trade mission to Italy on Thursday.

The infrastructure plan Holcomb announced earlier this month would earmark $600 million to speed up completion of the Interstate 69 extension in southern Indiana; $190 million for projects on U.S. Routes 20, 30 and 31; $100 million to boost rural broadband access; $90 million for improving hiking and biking trails; and $20 million to lure new direct flight routes to the state’s airports.

Democrats say the new Toll Road rates amount to a tax increase for the trucking industry, but Holcomb has stressed that the new fees won’t apply to passenger cars and would bring Indiana in line with what nearby states charge.

The trucking industry also has criticized the rate increases. Gary Langston, president of the Indiana Motor Truck Association, told the South Bend Tribune that they follow a large increase in state fuel taxes that went into effect last year. The combination of higher tolls and fuel taxes on truckers will ultimately hurt consumers and businesses since nearly all products travel to Indiana via trucks, Langston said.

Langston also predicted trucks will bypass the Toll Road, resulting in more congestion on toll-free highways and the possibility of more accidents.

U.S. News & World Report

Sept. 20, 2018, at 8:06 p.m.

When nearly the entire power grid of Puerto Rico was knocked out by a pair of ferocious hurricanes last year, utility companies from across the United States sent crews and equipment to help.

It was a power emergency on a scale rarely seen before, and companies spent tens of millions of dollars to mobilize. The utility in Sacramento, Calif., sent 30 workers and a dozen trucks. Ameren, which serves over two million customers in Missouri and Illinois, sent 225 workers. New York dispatched workers on at least five deployments to repair power lines and assess damaged substations. Florida Power & Light sent more than 100 trucks, several tons of equipment and 800 employees, many of whom spent Thanksgiving and the winter holidays working 16-hour days.

Though their costs are expected to be reimbursed by the federal government, the companies were not earning a profit. So it was with astonishment that, over the summer, some of the utility companies that had sent aid crews opened letters from the towns where they had worked in Puerto Rico: bills demanding millions of dollars in license and construction taxes.

Continue reading.

The New York Times

By James Glanz and Alejandra Rosa

Sept. 26, 2018

Sept 21 (Reuters) – Two major holders of Puerto Rico bonds that opposed a restructuring deal for the bankrupt U.S. commonwealth’s Sales Tax Financing Corporation (COFINA) revenue bonds are now part of the agreement, the island’s federally appointed oversight board announced on Friday.

The board said Aurelius Capital Master Ltd and Six PRC Investments LLC, an affiliate of Monarch Alternative Capital, have opted to support the deal. Both own significant amounts of COFINA senior and junior bonds, but mostly own Puerto Rico general obligation (GO) bonds.

The move ends opposition from the island’s Ad Hoc Group of GO Bondholders to a COFINA debt restructuring plan, according to the board. The three-member group, which includes Aurelius and Monarch, objected to a COFINA settlement framework in bankruptcy court in June, calling parts of it unlawful. GO and COFINA bondholders have long debated the ownership of Puerto Rico’s future sales tax revenue.

Claims by Aurelius and Monarch in a lawsuit filed in federal court in 2016 challenging COFINA’s constitutionality will also be dropped, under terms of the agreement.

“The Amended and Restated Plan Support Agreement represents the restructuring of nearly 24 percent of Puerto Rico’s crushing debt, and provides the Commonwealth of Puerto Rico a 32 percent reduction in COFINA debt and more than $17 billion in debt service savings,” the oversight board said in a statement.

The deal is expected to be presented to a U.S. judge overseeing Puerto Rico’s bankruptcy case next month, the statement added.

Puerto Rico has been in bankruptcy court since May 2017 trying to restructure about $120 billion of debt and pension obligations.

Other parties to the COFINA deal, which would be Puerto Rico’s first debt adjustment plan under the bankruptcy to seek court approval, include bond insurance companies, municipal bond funds, and holders of bonds sold exclusively to island residents.

Outside of the bankruptcy case, Puerto Rico has secured overwhelming creditor approval for a plan to restructure its Government Development Bank debt.

Reporting by Karen Pierog in Chicago and Luis Valentin Ortiz in San Juan Editing by Matthew Lewis

SEPTEMBER 21, 2018

Fitch Ratings-New York-24 September 2018: An initiative on the California ballot in November highlights the extent to which voter initiatives can limit the state of California’s operating flexibility, according to Fitch Ratings.

Proposition 6 would repeal legislatively authorized tax increases dedicated to transportation improvement projects and make it more difficult for the state to increase transportation related fees and taxes in the future. The initiative uses the ballot to counter revenue raising decisions made by the legislature to support significant spending actions, illustrating the ways in which California voters can directly affect state operations. Adding a requirement to seek voter approval of transportation fee and tax increases could also increase the likelihood that infrastructure spending demands, often funded through use of dedicated funds, may to a greater extent compete with general operating needs.

Proposition 6 would repeal the tax increases incorporated in the “Road Repair and Accountability Act of 2017” and require voter approval for increases in gas and vehicle taxes going forward. Voter approval would be in addition to the legislative two-thirds vote that is already required to increase taxes and fees. The Road Repair and Accountability Act, passed as Senate Bill 1 (SB1), increased transportation-related taxes and fees and dedicated the increased revenue to improving the state’s transportation infrastructure. Voters further protected the revenues by passing Proposition 69 in June 2018 to constitutionally limit spending of SB1 revenues to transportation. The state estimates SB 1 will generate over $5 billion annually, allowing the state to direct an estimated $54 billion to transportation improvement projects over the next ten years. Approximately two-thirds of the money is to be directed toward highway and road repairs, with the balance applied to other programs, including mass transit.

Proposition 6, which is contentious but has received support in a high-profile election year, highlights the impact of voter initiatives on California’s operating flexibility. Passage of SB1, albeit along partisan lines in the Democratically- controlled legislature, represented a breakthrough in funding for backlogged infrastructure projects that had accumulated through a period of budget shortfalls and a deadlocked legislature. Repeal of the SB1 tax increases would likely cause delays or cancellation of projects, even as supporters of Prop 6 indicate that funding for state transportation projects can be found elsewhere in the budget. The fiscal 2019 budget includes approximately $35 billion in transportation funding, of which approximately $12 billion comes from the state, an amount which has increased by approximately 75% over the last two years with the additional SB1 funds.

A requirement for voter approval of future tax increases may factor into Fitch’s assessment of the state’s operating resiliency related to its ability to raise revenues. As with all states, California has an unlimited legal ability to raise revenues, even with a requirement for a two-thirds vote in the legislature. If Proposition 6 passes, the state would continue to have extensive control over its revenues, but the voter approval requirement of future transportation tax increases would create a limit on at least a portion of that revenue raising ability. Additional extensions of voter approval requirements for state revenue increases could erode the state’s revenue framework and ultimately its ability to manage its budget in response to changes in the economy.

Contact:

Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Karen Ribble
Senior Director
+1-415-732-5611

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com

Study concludes that California needs to raise overall school spending by 32 percent.

A team of researchers managed by Stanford University and Policy Analysis for California Education (PACE) recently released a massive study of California schools’ successes and shortcomings.

It concluded that for California’s elementary and secondary schools to reach academic performance goals, the state should expand education into early childhood, prior to kindergarten, and raise overall school spending by 32 percent.

The report said that “while public schools in California spent about $69.7 billion on school operations in 2016-17, an additional $22.1 billion — 32 percent above actual spending — would have been necessary for all students to have had the opportunity to meet the goals set by the state Board of Education.”

One could question the premise that spending more — a lot more — would have the desired effect. Nationwide school finance and academic data reveal almost no correlation between the level of per-pupil spending and outcomes as measured by the federal government’s nationwide testing.

States that spend less than California often do better on those tests. Those that spend more — even much more — don’t appear to be doing any better than California, indicating that money is not a panacea for this state’s low performance. More money would make a difference only if it reaches the classroom in the form of better instruction.

Getting such an increase, moreover, would be a very heavy political lift.

A $22.1 billion increase in annual school support would require a 100 percent increase in state sales taxes, a 25 percent increase in income taxes or a more than one-third increase in property taxes.

If anything, the financial future of the state’s school districts is headed the other way, as a new report from Moody’s Investors Service, which charts trends in public and private finance and rates debt-worthiness, catalogs.

Moody’s sees California schools facing “a confluence of financial complications over the next decade,” to wit:

Schools have seen sharp increases in state and local revenue — averaging 13.8 percent a year for the last half-decade — thanks largely to a booming economy, rising taxable-property values and a state income-tax increase. Going forward, however, Moody’s sees school spending rising by less than 3 percent a year, just about the rate of inflation.

· Enrollment has dropped slightly over the past decade, even as the state’s population increased, thanks to declining birth and immigration rates. Over the next decade, state officials expect a steeper decline, which will impact district financing largely based on enrollment.

· School-district pension costs are escalating rapidly as both the California Public Employees Retirement System and the California State Teachers Retirement System seek more money to attack their large “unfunded liabilities.” The rising pension bills will largely consume the lower level of state aid also being projected.

We’re already seeing real-world examples of the trends in Moody’s report. Despite the large increases in school revenue over the last half-decade, many districts, especially those with declining enrollments, are struggling to balance their books.

Sacramento Unified, for example, just saw its budget rejected by the county superintendent of schools because it dipped into reserves meant to cover pension costs to finance a hefty raise for its teachers.

Los Angeles Unified faces immense deficits, in part because it is seeing a steep decline in enrollment due to both demographic factors and a strong shift of students into charter schools.

The next governor and the Legislature will have to stabilize current school finances before giving any thought to the 32 percent increase advocated in the Stanford/PACE report.

SAN JOSE MERCURY NEWS

by DAN WALTERS, CALMATTERS

PUBLISHED: September 30, 2018

California’s school district credit quality remains strong, in S&P Global Ratings’ view, supported by a dynamic economy that has been one of the nation’s top performers for the past several years. S&P Global Ratings maintains public ratings on 650 school districts (roughly 70% of the statewide total).

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Sep. 18, 2018

Judge bars investor class action over closed-end fund losses

Investors who lost money on UBS Group AG mutual funds stuffed with Puerto Rico government bonds can’t sue as a group, a federal judge said Monday, a setback in their efforts to collect from the Swiss financial services giant.

The ruling by Judge Sidney H. Stein of the U.S. District Court in New York means that investors in closed-end mutual funds managed by UBS Financial Services of Puerto Rico Inc. must pursue their claims individually through arbitration, a more difficult path to recouping damages, rather than proceeding as a single, certified class.

Investors have claimed that UBS brokers told them their mutual funds were safe when in fact their assets were heavily concentrated in just a few Puerto Rican municipal bonds and the funds had used leverage to improve returns.

Judge Stein said the plaintiffs’ circumstances and their decisions to buy and sell were so dissimilar that their claims needed to be adjudicated case-by-case. Attorneys for the plaintiffs didn’t respond to a request for comment.

A decline in Puerto Rico bond prices starting in 2013, when the U.S. territory’s fiscal crisis came into focus, drained value from the mutual funds and sparked hundreds of claims against UBS. Prices on some securities have declined further since Puerto Rico embarked on a court-supervised restructuring of its $73 billion debt load last year.

UBS said in its second-quarter report that mutual-fund customers had claimed $2.6 billion in damages through arbitration complaints arising from the downturn in Puerto Rican bonds. Of those complaints, $1.6 billion worth have been resolved through settlements, some of which were for millions of dollars, according to the regulatory filing.

Investors said UBS failed to structure the mutual funds to preserve capital as advertised and reaped millions of dollars in fees by selling and trading mutual-fund shares. UBS largely controlled the market for those shares, making them illiquid and prone to outsize price swings, according to investor complaints.

UBS has said investors received excellent returns for years that often exceeded the broader bond market.

UBS paid roughly $34 million in 2015 to settle accusations of failing to supervise a former broker who had customers invest borrowed money into the bond funds. The U.S. Securities and Exchange Commission separately sued the former broker, Jose Ramirez Jr., in federal court. He was fired by UBS in early 2014.

The Wall Street Journal

By Andrew Scurria

Sept. 18, 2018 3:40 p.m. ET

The State of Delaware and a subsidiary of Gulftainer Company Limited (“Gulftainer”) have finalized a concession agreement for the operation and further development of the 100-year-old Port of Wilmington (“Port”).

While the concession agreement signed on September 18, 2018 is not publicly available, it is expected, based on deal terms described in Port documents submitted in support of approval of the P3 transaction,[1] that the agreement grants Gulftainer exclusive rights to manage the Port for a 50-year term. In return, Gulftainer agrees to invest up to $584M in the Port in the first 10 years to improve the Port’s cargo terminal facilities, $411M of which will be used to develop a new 1.2 million TEU (twenty-foot equivalent units) container terminal. Gulftainer will pay concession fees to the State based on cargo volume along with periodic adjustments for inflation. These fees could reach $13M by the tenth year of the concession.[2] At the end of the concession, Gulftainer must hand the Port facilities back with the capacity to handle specified minimum service and tonnage volume requirements.

In May 2017, Diamond State Port Corporation (“DSPC”), the state entity that owns and operates the Port, issued an RFQ seeking private partners to develop, finance and/or operate port-related infrastructure.[3] After evaluating submissions, DSPC signed a non-binding letter of intent with Gulftainer in December 2017.

Continue reading.

By Andrée Blais and Racquel Muindi on September 27, 2018

Infra Insight Blog

Nossaman LLP

States are putting taxpayers on the hook for more and more debt, with Illinois among the state’s with highest tax burden per taxpayer in the nation, according to the latest report from public finance watchdog Truth In Accounting.

Despite the improving national economy, some states are in worse shape now than they were shortly after the end of the Great Recession. Truth In Accounting’s ninth Fiscal State of the States report reviews states’ comprehensive annual financial reports (CAFR) for the overall financial condition for all 50 states. From there, TIA offers up a letter grade for each state, from “A” to “F,” where Illinois lands.

“Based on our grading methodology, three states received A’s, seven received B’s, 12 received C’s, 18 received D’s, and 10 states received failing grades,” The report said.

Illinois was the third-worst state in debt per taxpayer at $50,800. That’s $400 more than the previous year’s report. Only Connecticut, at $53,400 debt per taxpayer, and New Jersey with $61,400 debt per taxpayer, were worse than Illinois.

Truth In Accounting considers Illinois one of five Sinkhole States that don’t have enough assets to cover their debt.

“Illinois only has $28.8 billion of assets available to pay bills totaling $244.9 billion,” according to the report.

The other four Sinkhole States were Massachusetts, Kentucky, Connecticut and New Jersey.

At the other end of the spectrum were the five Sunshine States, with Alaska leading the country with a per-taxpayer surplus of $56,500. The other were North Dakota ($24,900 surplus per taxpayer), Wyoming ($19,600), Utah ($4,400) and South Dakota ($3,100).

TIA Research Director Bill Bergman said some states – like Illinois – are in worse shape than they were shortly after the Great Recession.

“Given that we’ve had a recovery since then, and a significant one in the stock market, the fact that Illinois’ financial condition has worsened since 2009 is even more of a concern,” he said.

Illinois keeps getting worse, Bergman said, with a per taxpayer debt liability of $29,000 in 2009 ballooning to $50,800 in TIA’s most recent report.

Bergman said states that are running surpluses have something in common.

“The good states have a record of funding their pensions and funding their [other post-employment benefits] in a timely way that doesn’t kick the can down the road,” he said.

While credit rating agency reports are for bond holders, TIA’s rating is designed to show taxpayers what’s going on, Bergman said.

“Our review is something that’s guided by the concern for the common citizen and the average taxpayers, whereas credit ratings focus on bond holders,” Bergman said.

Moody’s has Illinois’ general obligation bonds rated at Baa3 with a stable outlook, S&P at BBB- with a stable outlook and Fitch at BBB with a negative outlook, all just above junk status.

Some ratings reports acknowledge Illinois’ unfunded liabilities and structural debt, but they change the outlook from negative to stable because of things like tax increases. In the summer of 2017, Illinois’ ended a more than two-year budget impasse by increasing income taxes by $5 billion over the governor’s veto. Credit ratings agencies hinted at a junk status rating if there wasn’t a budget.

“[Governments] have the power to tax and that’s definitely something worth respecting, but from the point of view of the average taxpaying Joe or Jane, that’s not necessarily the source of financial strength,” Bergman said. “In fact, they’re relying on the average taxpayer to make the bonds whole with the power of tax and the power of force.”

The TIA report also shows that because of new financial reporting rules requiring all unfunded post-employment benefits to be reported, Illinois’ hidden debt was among the worst in the country at $36.1 billion, for a total of $52.5 billion in promised benefits.

Another area Illinois failed at were filing comprehensive annual financial reports within 180 days. Illinois was 258 days tardy from the end of its fiscal year, the report said. Illinois was tied for fifth worst in the nation there.

Bergman said he wants to bring awareness to taxpayers about the true cost of their government’s structural debt.

“This is hard stuff,” Bergman said. “A lot of people, their eyes just fog over. We’re trying to help them understand it.”

While Illinois is among the worst states, the report notes that the entire country is in financial trouble.

“States in general do not have enough money to pay all of their bills,” the report said. “Based on our latest analysis, the total unfunded debt among the 50 states increased by $53.4 billion to more than $1.5 trillion in fiscal 2017. Most of this debt comes from unfunded retiree benefit promises, such as pension and retiree healthcare debt. This year, pension debt accounts for $837.5 billion, and other post-employment benefits – mainly retiree healthcare liabilities – totaled $663.1 billion.”

The Fiscal State of the States report can be found at StateDataLab.org.

WBGZ Radio

By Greg Bishop – Illinois Radio Network

9/27/2018

(Copyright WBGZ Radio / www.AltonDailyNews.com)

Fitch Ratings-Austin-13 September 2018: California has ratcheted up its statewide environmental goals with the passage of the California 100% Clean Energy Act. The legislation, signed by the Governor earlier this week, is the latest step in the state’s ambitious transformation of its energy supply through the implementation of additional constraints on utility power supplies.

Fitch Ratings expects the credit quality of Fitch-rated public power utilities in California to remain strong over the medium term, although compliance with the legislation will require careful resource planning and heighten the importance of meaningful industry developments in areas that extend beyond individual publicly owned utility (POU) control. Advances in generation and storage technologies, the pace of electrification in the transportation sector, and potential regional market expansion and design changes will be crucial to the state’s success in reaching its targets.

California’s 100% Clean Energy Act requires utilities to achieve 60% of their energy supply from renewable sources by 2030, which is an increase from the 50% renewable by 2030 mandate set by legislation passed as recently as 2015. Significantly, the legislation also requires 100% of a retail utility’s energy supply to be provided by renewable or carbon-free energy by 2045, the same goal as the state of Hawaii, which previously held the most ambitious renewable standard.

POUs must make long-term resource decisions while factoring in the requirements of the new legislation, the limitations of existing storage technologies and carbon-free generation resources, and near-term system needs. Decisions regarding the development of additional natural gas-fired resources must now be evaluated under the legislatively imposed deadline of 2045, which shortens the timeframe over which to recover the investment.

MOUNTING REGULATIONS ADD TO LONG-TERM INVESTMENT UNCERTAINTY

The 100% Clean Energy Act was proposed during the 2017 legislative session so the industry was prepared for it or a similar bill to be enacted. The act’s requirements are in line with the trajectory established by previous mandates. However, this legislation further heightens investment uncertainty for natural gas-fired generation. The rapid decline in energy that can occur from both wind and solar requires a corresponding generation resource that can ramp-up energy production in minutes to provide grid stability and service reliability. One such option is natural-gas generation given its flexibility and fast start capabilities. Several utilities have delayed or changed planned or expected investment in natural gas resources given the uncertainty regarding the state’s unfolding environmental mandates.

Los Angeles Department of Water and Power (LADWP; power revenue bonds rated ‘AA’/Stable Outlook) placed its multi-decade local generation investment plan on hold in 2017. Since 2011, LADWP has been investing capital to reconstruct three of its local gas-fired generation facilities. In order to comply with state regulations, the plants must be rebuilt to cease using ocean water for once-through power plant cooling purposes by 2029 with a total estimated cost of over $2.0 billion. The three power plants account for 70% of the 4,736MW net generating plant capacity owned by LADWP. LADWP’s pause in the long-term investment is intended to provide time to analyze the need for the continued investment in local gas-fired generation in light of other alternatives, including the increased availability of renewables in the state and the greenhouse gas emissions of various alternatives.

Glendale Water and Power (electric revenue bonds rated ‘A+’/Stable Outlook) has also been planning the replacement of its older gas-fired generation unit, the Grayson Power Plant. The city’s integrated resource plan identified the rebuild of the Grayson power plant on the existing site with approximately 200 MW of new, efficient natural gas-fired capacity as the city’s best option at an estimated cost of just under $500 million. However, earlier in 2018, Glendale decided to place the repowering decision on hold while it solicited alternative proposals. Similar to LADWP’s reasoning, Glendale wanted to explore renewable and non-carbon emitting alternatives.

In both cities, the alternative exploration process was initiated by community requests and City Council direction ahead of the passage of the 100% Clean Energy Act but both actions reflect the climate of uncertainty in which utilities are attempting to make long-term investment decisions. While it appears that natural gas-fired generation will need to continue to play a significant role in the state’s power supply until other technology developments occur, the 2045 deadline now puts a hard limit on the potential useful life of this investment, with the ongoing risk that subsequent state legislation moves the target date forward in the future.

THE FATE OF THE INTERMOUNTAIN POWER PROJECT REPOWERING

Certain POUs in California are involved in a multi-year process to implement a repowering of the Intermountain Power Project (IPP), a 1,800 MW coal-fired generation plant located in Utah with a 490 million 500 kV direct current transmission line into California. California utilities are contracted to purchase the output of the IPP coal plant through 2027. IPP represents one of the last sources of coal-fired generation for California’s POUs following the recent divesture of the San Juan power project in New Mexico and the Navajo Generating Station in Arizona. The repowering was designed to allow the California participants to comply with state legislation enacted in 2006 that limits the use of coal-fired resources in the future by repowering the resource as a combined cycle natural gas-fired plant. Project participants have worked through a multi-year process towards this goal. The repowered IPP may still provide valuable capacity and reliability benefits prior to 2045 and the IPP transmission line into California provides valuable import capability for out-of-state renewable energy.

STRONG CREDIT QUALITY BUT WITH COMPLIANCE COST RISKS

California’s POUs have managed the challenge of mandated energy targets thus far and have exhibited strong credit quality due largely to the timeliness of cost recovery and the preservation of margins. Fitch expects this success to continue over the medium term. It is noteworthy, however, that the rate impact to consumers during the initial years of regulatory compliance was materially dampened by the corresponding decline in the cost of renewable energy and natural gas commodity prices during the same period of time. Future compliance costs may not experience the same buffer.

Future compliance costs could also be significantly higher than recently observed. While the 100% Clean Energy Act is just one in a succession of mandates levied on the state’s POUs that began over a decade ago, the legislation further constrains future resource options. The confluence of the 2045 deadline and reliance on still emerging technologies raises the concern that utilities will be hampered by sizable cost increases while simultaneously challenged to maintain the high reliability levels that ratepayers have come to expect. Over the longer term, the preservation of credit quality will continue to depend upon the timely recovery of those costs and maintenance of strong financial margins during any potential operational challenges.

Contact:

Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701

Matthew Reilly, CFA
Director
+1-415-732-7572

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com

AT&T and the City of Los Angeles are in talks regarding a public-private partnership to make LA one of the smartest cities in America. AT&T’s role in the partnership is the provision of IT technology and support for the deployment of small cell technology to address the problems that matter most to the people that live, work, and visit there.

To help the city solve issues related to road traffic, natural disaster preparedness, and public safety, AT&T said it’s exploring the deployment of a variety of smart city products ranging from digital kiosks to structural monitoring to digital infrastructure. The deployment of these technologies will benefit all neighbourhoods in Los Angeles, helping to provide better connectivity to neighbourhoods that have been traditionally left behind in the digital divide, the company said in a press release.

To enhance existing voice and data capacity in LA, the company said it will be looking to deploy a greater number of small cells more rapidly to expand its existing network and begin deployment of a 5G network.

Small cell technology also helps bring increased capacity to first responders. This is in addition to the increased coverage and capacity that FirstNet is providing to the LA public safety community through the network’s Band 14 spectrum build and integration of assets from the Los Angeles Regional Interoperable Communications System.

Thursday 13 September 2018 | 13:12 CET | News

LA WATCHDOG–Charter Amendment B: Shall the City Charter be amended to allow the City to establish a municipal financial institution or bank?

Over the next two months, we will be experiencing a full court press by the well-financed proponents of Charter Amendment B, the pet project of City Council President Herb Wesson, promising billions in savings and benefits to the City.

But these pie-in-the-sky claims have not been documented, substantiated, or made available to the public because the City does not have a business plan for the proposed City owned Bank of Los Angeles.

Rather, the fiscally irresponsible politicians who occupy City Hall want us to give them a blank check to form a bank that will eventually require a cash investment of $1 billion from the City to capitalize the bank, to establish the required loan loss reserves, and to pay for the new bank’s “exorbitant” start-up costs.

Again, there is no plan to raise the $1 billion in capital, especially since the City’s two underfunded pension plans would be prohibited from making such a risky, related party investment, contrary to comments made by several Councilmen.

The proponents claim that the City paid $170 million in banking fees last year, implying that the Bank of Los Angeles will eventually save the City tens of millions. But this will require the Bank to develop and manage sophisticated data processing systems, a highly unlikely prospect given the City’s poor record of developing and operating management information systems.

For example, we certainly experienced the pain associated with the disastrous rollout of the DWP billing system.

Furthermore, it is unlikely that the Bank of Los Angeles will be as efficient as Bank of America or JP Morgan who have some of the most sophisticated, secure systems in the world staffed by experienced personnel and programmers.

The proponents claim that the “big banks receive billions in City deposits virtually interest free.” But according to reports from the Office of Finance, banks deposits are only about 1% of the City’s $9 billion investment portfolio.

The proponents claim that the City paid $1.1 billion in interest to “big banks” and investors. But there is no evidence to support this claim, especially given that the City is budgeting only $28 million in interest expense on its outstanding General Obligation Bonds. Of course, the City’s three proprietary departments (DWP, the Port of Los Angeles, and LAX), the Sewer Department, and other special revenue departments have outstanding bonds which require interest payments. But $1.1 billion in interest expense appears to be a vast overstatement.

The supporters of the Bank of Los Angeles anticipate that the bank will invest in City debt, resulting in huge savings for the City. While the savings are probably overstated given the need for the proposed Bank of Los Angeles to charge high interest rates to cover its anticipated City mandated payroll and overhead, the bulk of the savings will go to the proprietary departments or the capital-intensive Bank, not to the City’s treasury.

There is also the risk that the proposed Bank will be financing its investment in long term bonds with short term deposits, a recipe for disaster if interest rates should happen to increase. In that case, the Bank, its capital, and its deposits would be exposed to significant losses.

The Mayor and the City Council will tell us that the proposed Bank of Los Angeles is the answer to our prayers, overlooking the risks of bad loans and investments and swings in interest rates. Maybe that is why they have not developed a plan, unlike the Bay Area governments who are considering a public bank.

It is no wonder that the City Legislative Analyst recommended against establishing the Bank of Los Angeles.

The same City Hall politicians that gave us unbalanced budgets, a Structural Deficit of $1 billion a year, unfunded pension liabilities of $15 billion, and lunar cratered streets want us to give them a blank check that will allow them to raid the cash reserves of the City and its proprietary and special revenue departments.

We would be crazy to give a blank check for a City owned bank that would be controlled by the Mayor, the City Council, and their cronies.

Vote NO on Charter Amendment B.

JACK HUMPHREVILLE 10 SEPTEMBER 2018

The City of Highland Park is joining with the villages of Buffalo Grove, Elk Grove Village and Hoffman Estates to form a Suburban Liability Insurance Pool that is expected to save the city between 13 and 37 percent over current insurance costs.

Buffalo Grove proposed forming a pool among similar communities with similar loss histories in 2017. Municipal administrators have been meeting for more than a year with the chosen broker, A.J. Gallagher, to define the structure for a possible cooperative — a first step toward estimating coverage costs and quantifying potential savings.

The Highland Park City Council Sept. 12 approved membership for a three-year term starting Jan. 1. The Buffalo Grove Village Board is scheduled to consider the matter Sept. 17.

According to the city, the Suburban Liability Insurance Pool (SLIP) will maintain a self-insurance loss fund to cover that portion of any claim that exceeds the municipality’s deductible but is not yet covered by the pool’s insurance carrier.

Funds in the pool’s own loss fund will be invested and can earn interest income. Surplus funds can be returned to member municipalities in proportion to their contributions once an actuary has determined the funds are no longer needed to pay claims.

“Right now, if you cut a $100,000 check to your insurance company and they only pay out $10,000, they’re not giving any of the money back,” said Tia Incapreo, a Gallagher representative, during an Aug. 27 presentation to Highland Park city council members. “Being part of a cooperative like this allows you to have more control over your insurance program.

City Finance Director Julie Logan said insurance premiums have tended to go up each year regardless of claims experience.

“Currently, we go to market by ourselves basically and they just kick us up by five percent every year,” Logan said.

She said some of the pools managed by Gallagher have gone for five and 10 years without increases.

Highland Park’s fixed annual liability insurance costs are expected to drop from about $407,000 this year to about $222,000. In addition, the city would make a contribution to the pool’s loss fund that could be as high as $132,000 but is expected to be around $33,000.

The Chicago Tribune

by Karen Berkowitz

September 14, 2018

Facing down critics from all sides, Natalie Jaresko has broad powers to revamp the island’s economy; ‘something has to change’

Natalie Jaresko has faced almost constant criticism since taking the helm of Puerto Rico’s federal oversight board 18 months ago. Investors and politicians on the mainland attack her for pushing reforms too slowly, while those on the island blast her austerity measures and criticize her $625,000 annual salary. Lawyers and bankers involved in the restructuring—all men—call her blunt and brusque.

“I’m getting used to it,” said Ms. Jaresko, 53, who restructured Ukraine’s finances in 2016 as that country’s finance minister and now is looking to do the same in Puerto Rico. “With all due respect, the challenges in this situation are as great, or greater than, in Ukraine, which is much larger and has been attacked and occupied by Russia.”

The project to revamp Puerto Rico’s economy is at a critical juncture as the board shifts from fact finding and economic forecasting to actually enacting the debt restructurings and structural reforms needed to stabilize the island’s financial health. Ms. Jaresko aims to install policies she hopes will reverse more than a decade of economic stagnation on the island, but such measures are politically unpopular, especially after the devastation caused by Hurricane Maria last year.

Continue reading.

The Wall Street Journal

By Matt Wirz

Sept. 14, 2018 9:00 a.m. ET

Financial advisers who are putting together an agreement allowing Gary city government to sell its Public Safety Building, then lease it back tried Wednesday to reassure Common Council members that the deal would not change anything about the way the city operates.

Brandon Coleman and Jimmy Shanahan, municipal advisers working to put together the deal that Common Council members will be asked later this year to approve, said the intent is to allow city government to raise up to $40 million, which would be used in upcoming years to pay municipal government bills.

Council members last month approved a broad outline for a sale and lease-back of the Public Safety Building at 555 Polk St. Specific details of the transaction have yet to be put together, which is why Coleman and Shanahan were before the council’s finance committee to explain how things are progressing.

Coleman said the city followed up last month’s council vote of approval by sending out Requests for Proposals to some 20 financial institutions to gauge interest in the concept. Nine of those institutions expressed interest, and now talks are taking place between a three-member committee of city officials chosen by Mayor Karen Freeman-Wilson and those banks that could wind up buying the bonds that would produce money for Gary.

“It won’t matter that we say we want to raise $40 million if no one out there wants to do this,” Coleman said.

Selling bonds would create debt for Gary government in future years and Coleman said the plan originally was to devote the city’s share of proceeds from the Majestic Star Casino to guarantee the debt. Coleman said city officials are now confident that local income tax proceeds will provide enough – allowing them to use casino monies for other future projects.

Shanahan said the terms of the deal being put together likely would state that upon the full repayment of the fundraising bonds, ownership of the Public Safety Building would revert back to Gary municipal government.

Even during the years that debt existed, the title to the property would indicate the structure being owned by the Gary Building Corp., an entity to be created for whomever winds up buying the bonds.

Police Department will not be at risk at any point in the future of being evicted from their longtime headquarters, officials said.

“If the Building Corporation defaults on the bonds, the city will not lose use of the facility,” according to a memorandum Shanahan presented to council members. “The facility is not being mortgaged or pledged as security to the repayment of the bonds.”

Shanahan’s memo also stated, “no property taxes will be raised to make lease payments and debt service on the bonds.”

Councilwoman Rebecca Wyatt, D-1st, said she is skeptical that taking on additional debt to repay bonds will somehow help Gary municipal government get out of debt over the long-term.

“I don’t have a lot of confidence we can do this,” Wyatt said. Councilwoman LaVetta Sparks-Wade, D-6th, agreed, saying she fears what could happen if the city can’t pay the lease.

Mayoral Chief of Staff Dayna Bennett said the sale-and-lease back transaction is part of an overall play by which the city will be engaging in cost-cutting measures meant to reduce government expenses while also increasing the amount of money available to the city.

Some of those changes will become evident as soon as October, which Bennett said will be when the full Common Council will be asked to consider a series of fees the Fire Department would charge to increase the amount of income it can produce for the city.

“We’re going to see the gap shrink in the amount of money we’re short of paying our bills” Bennett said.

Coleman said this is all part of a long-range plan to bolster Gary’s financial status. “The adage of ‘you can’t borrow your way out of a financial problem’ is true,” he said. “But if we don’t develop a plan that brings more revenue into Gary, then we might as well all go home and just give up.”

The Chicago Tribune

by Gregory Tejeda

September 14, 2018

Gregory Tejeda is a freelance reporter for the Post-Tribune.

Wells Fargo Securities, the investment banking and capital markets business of Wells Fargo & Company (NYSE: WFC), has made two additions to its Public Finance team: Tom Wynne has joined the company and will lead a new housing financing initiative in the West, and Michael Colton has joined the company to support the municipal finance business in New York.

Based in Los Angeles, Wynne joins Wells Fargo as a director in the Public Finance Housing group. His focus includes multifamily housing deals, land-secured financing, and general government transactions in the company’s Western region. He previously led business development with municipal bond issuers in the Western Region at Morgan Stanley in Los Angeles. Wynne earned an MBA from Oxford University Business School and a Bachelor of Science degree from the University of Colorado at Boulder.

“As one of the largest commercial real estate leaders in the U.S., we’re in a strong position to leverage our balance sheet, bringing greater focus on capital market financing for both governmental and developer clientele,” said Wynne. “I look forward to increasing multifamily housing financing in the West to match what we have in the East.”

Colton brings 30 years of municipal finance experience to Wells Fargo. His industry tenure includes 20 years in Morgan Stanley’s municipal securities group, serving most recently as managing director at Lamont Financial Services. As managing director for Wells Fargo Public Finance, Colton focuses on both New York City and New York state issuers. He has specialized in municipal infrastructure, transportation, utilities, and sports facilities at the local and state levels. Colton holds a master’s degree in industrial engineering and operation research from Columbia University and a bachelor’s degree in computer science from Yeshiva University.

“Whether our clients are city or state issuers, our service sets our team at Wells Fargo Securities apart,” said Colton. “I’m proud to join some of the industry’s best talent, and I look forward to expanding our business in the Northeast.”

Wynne and Colton are the seventh and eighth industry veterans to join Wells Fargo Securities’ Public Finance division under Stratford Shields, head of Public Finance, who assumed his role in late 2017. Eight junior level associates have also joined the firm during his tenure.

September 13, 2018, 07:18 AM

A local government watchdog is raising new questions about the financial and practical assumptions behind the Ernest N. Morial Convention Center’s proposed 1,200-room high-rise hotel.

The nonpartisan Bureau of Governmental Research says the view of a consultant hired by the Convention Center “appears to substantially underestimate the value of the proposed public contributions.”

BGR and that firm, HVS Convention, Sports and Entertainment Facilities Consulting, are at odds over the size of the public contributions being sought by the hotel’s would-be developers. BGR says the total is close to $330 million, but HVS puts it at about half as much under a formula that the authority that governs the giant facility has endorsed.

Continue reading.

BY RICHARD THOMPSON | THEADVOCATE.COM SEP 13, 2018

• Poster child of bust offers first bond deal since 2011
• Upgrade from junk status permitted refinancing chance

North Las Vegas, once considered the poster child of the housing bust, is betting the municipal-bond market will validate its rebound from the brink of insolvency.

The city is selling $99 million of general-obligation bonds on Sept. 11, its first such sale since 2011. The refinancing was made possible after it was upgraded back to investment-grade status in June last year by Moody’s Investors Service and then this April by S&P Global Ratings.

The community of 243,000 bordering Las Vegas has benefited from the growth in the national and local economies and from diversifying its tax base. Amazon.com Inc. in April said it was building the state’s fourth facility there, and Sephora, a cosmetics company under Paris-based conglomerate LVMH, broke ground on a distribution center in July.

“We really had no place but up to go,” the city’s chief financial officer, Darren Adair, said in an interview. “This recognizes the hard work that the city has done to restore structural balance.”

The bond sale from North Las Vegas, which just four years ago faced the prospects of a state takeover and forcing concessions on bondholders, comes as money flows into funds and sales of new issues remain subdued. Wall Street memories can be short when demand for yield runs high, said Jason Ware, head of trading at brokerage 280 CapMarkets.

“That deal would have no problem getting done,” he said.

North Las Vegas was the nation’s third fastest-growing municipality from 2000 to 2009, until property values went into free fall from the recession and ensuing aftermath. Moody’s cut its rating 10 notches from June 2011 through January 2014, according to spokesman David Jacobson. The city will have about $431 million in municipal debt outstanding after the refinancing, bond documents show.

Officials in Nevada, which doesn’t permit municipal bankruptcy filings, discussed taking over the city’s finances and possible legal changes that would force concessions on bondholders. Ultimately, the city didn’t fall under the state’s control and embarked on cutting costs and expanding its appeal to warehouse developers and logistics centers.

In June 2017, Moody’s, which put the city in junk in 2013, returned it to investment-grade status by upgrading it to Baa3. Last month, the company bumped it up two notches to Baa1 with a positive outlook because of the continuing financial improvement.

S&P Global Ratings, which cut North Las Vegas to junk in 2014, moved it back to investment-grade in April with a BBB rating with a stable outlook.

Bloomberg Markets

By Romy Varghese

September 6, 2018, 7:57 AM PDT

• City of Harvey owes bondholders more than $2.5 million: suit
• Oppenheimer, Susquehanna seek payment from struggling city

A financially struggling Chicago suburb was sued by investment firms for defaulting on $32 million of debt, claiming the town violated its contract with bondholders.

The Oppenheimer Rochester High Yield Municipal Fund, Oppenheimer Rochester AMT-free Municipal Fund and Susquehanna Government Products sued Harvey, Illinois, its mayor and Cook County officials for the city’s failure to make more than $2.5 million of payments on bonds sold in 2007, according to a copy of the lawsuit filed in Cook County court.

The Sept. 4 suit alleges that the Cook County tax collector hasn’t been depositing property-tax revenue collected for the city into a separate account to pay principal and interest on the bonds, as the city had guaranteed. Instead, the revenue has been distributed to the city first, in violation of the bond contract, according to the suit. The funds are supposed to be transferred to the city only after the debt is paid, the suit says.

Tom Corfman, a spokesman for Cook County Treasurer Maria Pappas, didn’t immediately respond to a request for comment, nor did spokespeople for the companies that filed the suit.

Harvey, about 20 miles south of Chicago, has long been wracked by poverty and crime and was sued by the Securities and Exchange Commission four years ago for misusing money raised by selling bonds for an ill-fated hotel project.

The city missed six bond payments in fiscal year 2017, according to Moody’s Investors Service, which described the municipality as “structurally insolvent” in a May report. Its available fund balance was negative $56 million at the end of April 2017, according to Moody’s.

By Aug. 1, Harvey was more than $2.5 million in arrears on principal and interest payments due on the bonds sold in 2007. That includes more than $1.2 million owed to the plaintiffs, according to the suit.

Harvey Mayor Eric Kellogg didn’t immediately respond to an email seeking comment on the suit, and his voicemail box was full. In 2016, Kellogg agreed to never participate in another municipal bond-offering in order to settle the SEC’s charges of defrauding investors in connection with the hotel project.

Bloomberg Markets

By Elizabeth Campbell and Martin Z Braun

September 6, 2018, 10:20 AM PDT

• Former Obama chief of staff has led the city since 2011
• He was facing an expanding field of challengers in 2019

President Donald Trump won’t have Rahm Emanuel to kick around anymore, but corporate leaders in Chicago may not be as happy with the mayor’s decision not to seek a third term.

In a move that promises to trigger a political free-for-all and could rattle investors in bonds tied to the nation’s third-most-populated city, Emanuel, 58, announced Tuesday that he won’t run for re-election next year.

Rahm EmanuelPhotographer: Scott Olson/Getty Images
The news comes as Chicago’s population growth has stalled, the city faces massive pension liabilities, and it’s routinely used by Trump as a synonym for urban decay and crime. Emanuel’s announced departure also creates uncertainty just as he has helped stabilize the city’s finances and led its bid to attract Amazon.com Inc.’s second headquarters, with its 50,000 jobs. Chicago is one of 20 finalists in the competition.

“This is a big moment for Chicago, which is now at a crossroads,” said Jack Lavin, president and chief executive officer of the Chicagoland Chamber of Commerce. “Mayor Emanuel has been good for the growth and development of the city, and the business community needs stability to continue creating jobs and opportunities for people.”

Wooing Corporations

Emanuel has had success wooing corporations: more than 50 companies have relocated their headquarters to Chicago during his tenure. And others like Chicago-based United Continental Holdings Inc., one of the city’s largest private employers, have added jobs to the city.

“We are proud of the productive partnership we’ve built with the mayor and his team, working together toward a common goal of creating greater economic opportunity for all Chicagoans,” United CEO Oscar Munoz said in a statement. “Particularly, the mayor’s focus on building 21st century infrastructure, especially forging a landmark agreement to modernize O’Hare, will support Chicago’s economic competitiveness and success long into the future.”

The city’s fiscal challenges remain daunting, with pensions still only 27 percent funded. Chicago plans to contribute $1.18 billion to the retirement funds in fiscal year 2019 with payments ramping up in the coming years, according to an annual financial analysis. Chief Financial Officer Carole Brown has also been considering issuing pension-obligation bonds to further stabilize the massive debt.

“They have before them one of the most serious fiscal problems in America right now, and that is the huge liabilities,” said Richard Ciccarone, president of Merritt Research Services LLC, which analyzes municipal finance. “They’re going to have to be paid for by taxes and new revenues without disturbing economic stability in the city of Chicago.”

Chicago’s fiscal picture improved under Emanuel, said Laurence Msall, president of the non-partisan Civic Federation, which tracks the city’s finances. He cited Emanuel’s move to end the borrowing for operations and selling bonds to pay off maturing debt.

Who’s Next?

“It will remain to be seen whether the next mayor will continue to embrace these practices or slip into such financial lapses,” Msall said. “It’s difficult to know who the next mayor will be or whether they will be able to match Mayor Emanuel’s persona and dedication to economic development. But many of the structural improvements that Mayor Emanuel can rightfully take credit for will continue beyond his administration.”

An adviser close to Emanuel said he thinks the announcement was made now so that candidates more to the mayor’s liking still had enough time to enter the race and that the decision to leave the job was more personal than political.

His decision came on the eve of a murder trial where a white Chicago police officer is accused of repeatedly shooting a black teenager — a case that encapsulated Emanuel’s struggle to both improve public safety and community relations with police in a city Trump has ridiculed for its crime problems.

“Chicago Police have every right to legally protest against the mayor and an administration that just won’t let them do their job,” Trump tweeted in May. “The killings are at a record pace and tough police work, which Chicago will not allow, would bring things back to order fast…the killings must stop!”

In fact, Chicago’s murder rate is down this year. But the city still suffered nearly twice as many homicides as New York City, which has more than three times the population. Chicago recorded 375 murders this year through Sept. 2, down 19 percent from last year, according to police department data. New York has recorded 188 murders as of Aug. 26.

The city’s bloodshed has drawn national attention. After a single weekend saw about 70 wounded last month, Rudy Giuliani, Trump’s lawyer and the former mayor of New York, tweeted about the crisis, blaming the city’s Democratic rule and expressing support for one of Emanuel’s challengers: Garry McCarthy, a former New York City police official who the mayor hired to lead Chicago’s force.

Police Shooting

McCarthy was fired by Emanuel in 2015 in the wake of the release of a video showing the fatal police shooting of 17-year-old Laquan McDonald. The incident brought calls for Emanuel’s resignation. The murder trial of the police officer accused of killing McDonald, Jason Van Dyke, is scheduled to start this week.

Emanuel’s departure also raises uncertainty for investors who have praised his work to right the junk-rated city’s finances. For years, Chicago hadn’t paid enough into its four retirement funds, and the strain had been weighing on the city’s ability to provide services to residents.

As mayor, Emanuel enacted higher property taxes and utility levies as part of a series of steps to shore up Chicago’s retirement funds. Moody’s Investors Service, which had cut Chicago’s rating to below investment grade in 2015, raised the city’s outlook to stable in July, citing some of the work of Emanuel’s administration. S&P Global Ratings and Fitch Ratings consider the city’s bonds investment-grade.

Daley Successor

Emanuel’s tenure was relatively brief, at least by Chicago standards. Before his election, a Daley had run Chicago for 43 of the previous 55 years.

“This has been the job of a lifetime, but it is not a job for a lifetime,” Emanuel told reporters during a City Hall news conference on Tuesday, flanked by his wife, Amy Rule.

In his 2011 win, Emanuel beat a field that included five other candidates to became Chicago’s first Jewish chief executive. While in office, he generally remained composed in public, not showing what he has acknowledged to be a sometimes expletive-laced, explosive personal style.

The mayoral election is scheduled for Feb. 26. If a single candidate doesn’t receive more than 50 percent of the vote, the two contenders with the most votes will compete in a run-off on April 2, according to the city’s Board of Election Commissioners.

Emanuel, former President Barack Obama’s first chief of staff and a former Chicago congressman, had been raising money ahead of next year’s election. In the second quarter alone, his campaign took in more than $6 million, according campaign finance disclosures.

Emanuel had $7.5 million in his campaign account at the start of July, disclosure reports show. While he’s not obligated to do so, Illinois law would allow him to give any amount of that total to a political party committee or even a mayoral candidate.

Among the dozen challengers he was facing were McCarthy and former Chicago Public Schools chief Paul Vallas. There’s no clear frontrunner now.

Emanuel’s departure has left the city with a “political free for all” where candidates will be forced to address issues rather than attack the incumbent, said Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago.

“They’re going to have to start proposing solutions,” Pagano said. “It really has to be based on who has the proposal that can appear to move us away from those two major issues: financial issues and gun violence.”

Bloomberg Markets

By Elizabeth Campbell and John McCormick

September 5, 2018, 2:00 AM PDT

A previously deferred proposal to create a revenue forecasting commission designed to give additional financial analysis to the Cook County Board is slated to formally be presented for a vote on Wednesday, Sept. 12 in the Board’s finance committee.

So far, the idea has support from several commissioners and at least one notable detractor.

Supporting the proposal is its sponsor, 7th District Commissioner Jesus “Chuy” Garcia (Pilsen), and co-sponsors 1st District Commissioner Richard Boykin (West Side), 14th District Commissioner Gregg Goslin (Glenview), and 17th District Commissioner Larry Suffredin (Evanston).

Board President Toni Preckwinkle came out against the idea earlier this summer, resulting in Garcia deferring the presentation until this month.

Making the case

Those on each side of the issue have stated their case going into the September meeting.

Garcia has been reframing the proposal, meeting with his co-sponsoring supporters as well as Michael D. Belsky, executive director of the Center for Municipal Finance at the University of Chicago Harris School of Public Policy. He aims to present to fellow commissioners a vote-friendly proposal.

The initial proposal included establishing a seven-member panel of financial experts, selected by the board president and approved by the board.

Garcia said, “This independent body would specialize in conducting five-year revenue forecasting and would serve as a much needed fiscal resource and research arm to the board and would not pose a burden to the County as has been previously characterized.”

Boykin said an independent commission would help because the board president “currently has all the information” regarding revenue and that “we basically rely on her in good faith though the budget office.”

He referred to last year’s soda tax, which the board later rescinded, as an example of needing a better method to forecast revenue needs.

“Just like Congress has the budget office independent of the president, we need something that will provide transparency,” Boykin said.

Preckwinkle opposition

Becky Schlikerman, spokesperson for Preckwinkle, said, “We do not believe creating this commission at this time is an appropriate use of tax dollars. Incurring additional expenses at a time when we continue to face financial challenges and have to make difficult decisions on how to balance our budget would be irresponsible.”

Schlikerman pointed to other concerns, including adding a new layer of government. She also said revenue projections over the past three years have come within 2% of home rule taxes and that commissioners already are well informed about revenues and have the option to meet with the president’s finance team. She drew a further difference with revenue commission proponents in noting the effectiveness of the 2017 beverage tax projections and needed collections.

“The projection was spot on,” Schlikerman said.

“I don’t recall any of our revenue projections being that far off,” agreed 11th District Commissioner John Daley, noting that the board members all have an equal opportunity to discuss revenue matters. He said the revenue commission may be worth considering, though he also expressed concern over costs that may increase over time.

Other commission proponents and opponents have focused on anticipated costs of creating a revenue commission as well. A June 26 letter from Ammar M. Rizki, chief financial officer of the County’s Bureau of Finance, to the Board of Commissioners noted that first-year costs could amount to at least $600,000. The Better Government Association (BGA) in Chicago, which offered a July 19 letter to commissioners supporting the revenue commission creation, outlined a $400,000 cost based on one part-time and two full-time staff members. The letter uses a comparative example of the Office of Economic and Financial Analysis in Washington State’s King County.

Rachel Leven, policy manager and co-author of the BGA letter, said her organization recommends a three-person staff, including one economist, that ideally would forecast five years and assess whether the County’s proposed budget is balanced. The proposal also suggests the commission could offer education and assessment to other Cook County governments, including small municipalities and townships.

“I imagine there is an element of control,” Leven said. “Revenue forecasting is understandably political because it may be hard to trust someone else to do that.”

Academic views

Local academic experts said they see value in creating a revenue commission, with added suggestions.

Michael Pagano, dean of the University of Illinois at Chicago (UIC) College of Urban Planning and Public Affairs, favors having an extra set of eyes. He noted the Congressional Budget Office has operated along with the U.S. President’s Office of Management and Budget since 1974. While that move resulted from Congressional mistrust toward the Richard Nixon administration, Pagano said better revenue forecasting is likely with a commission.

He also said the BGA’s estimated $400,000 price tag may not be enough.

“That’s hardly enough for the kind of staff that is truly independent,” Pagano said. “What it might be able to do is provide research in certain cases.”

Pagano also suggested obtaining research through resources at a university level. UIC has a Government Finance Research Center.

At Roosevelt University, Ralph Martire, Arthur Rubloff Endowed Professor and executive director of Chicago-based think tank Center for Tax and Budget Accountability, said there are two ways to look at the proposed revenue commission.

“This is one of those interesting situations where they [Preckwinkle and Garcia] both make good points,” Martire said. “When you struggle with a shortfall, you wouldn’t want to take away from services to fund a good government initiative. But you do want to put a policy in place for a long-term benefit. Preckwinkle won’t always be in office. Cook County government is larger than most state governments, and it has unique challenges. It’s a balancing act.”

For the BGA, log on to https://www.bettergov.org/. For the Cook County Board, log on to https://www.cookcountyil.gov/board-of-commissioners. For CUPPA, log on to https://cuppa.uic.edu/. To contact Martire, email rmartire@roosevelt.edu.

Gazette Chicago

By Rick Romano

September 7, 2018

The Act –

School district board members, administrators and employees are required to abide by the Michigan Campaign Finance Act. The Act prohibits the contribution of public funds or resources to a campaign for a candidate or ballot proposal while permitting the dissemination of objective factual information and permitting employees to volunteer services or express their views on their own time. Board members and policy-making administrators (at least the superintendent) may engage in advocacy at any time as long as no district resources are used to disseminate those views.

Please see full Article for more information.

Miller Canfield

September 6, 2018

We have previously blogged about the many recent legislative developments in Florida and the Miami area, with a focus on legislation that is designed to facilitate public/private development projects (P3). Although an increasing number of P3 projects are now in various stages of development, the success of Florida’s legislative effort can also be seen in the positive reaction by other jurisdictions.

Earlier this month, the State of New Jersey adopted comprehensive P3 legislative that largely mirrors Florida’s recent P3 law, including the broad authorization to units of local governments to deliver public facilities and services using the P3 model. Like Florida’s P3 law, the New Jersey law also permits governments to accept unsolicited proposals from the private sector. (Unsolicited Proposals have been used to jumpstart several P3 projects throughout Florida, including the Seminole County government center and the recently proposed extension of Brightline from Tampa to Orlando.)

We have also mentioned the recent expansion of Miami-Dade County’s Rapid Transit Zone, or RTZ, which facilitates the development of mass-transit infrastructure and adjacent private or public/private transit-oriented development by granting zoning jurisdiction to the County, even for property located in cities, and permitting more development near transit stations than would often otherwise be the case. This month, the California Senate adopted a bill that would similarly grant zoning jurisdiction to the Bay Area Rapid Transit Authority (BART), with the goal of increasing housing density near stations. The bill previously passed the California State Assembly, but the Senate made amendments that will need to be adopted by the Assembly before the bill becomes law.

Imitation is the sincerest form of flattery, as the saying goes, and the recent legislative activity in New Jersey and California should give state and local leaders in Florida and Miami some additional comfort that they are on the right path.

Bilzin Sumberg

September 4, 2018

The schedule for review of the investment strategies of the Public Employees’ Retirement System and School Employees’ Retirement System just became accelerated.

At its hearing on July 30, 2018, Pennsylvania’s Commission—tasked with looking into the costs and benefits of actively managed investment strategies—noted that it expects to deliver its findings on the topic to the governor and the state legislature “prior to November 30th.” We previously discussed this subject in our Alerts, “PSERS Takes Action to Reduce Fees Paid to External Investment Managers” and “PA Commission Scrutinizes Active Management of Public Pension Assets.”

Pennsylvania’s Auditor General Eugene DePasquale decided not to wait until November 30 to chart his path forward. On August 23, 2018, he announced that he will conduct a review to assess whether PSERS and SERS have done enough to implement his recommendations from his 2017 audits, which focused generally on reducing fees and increasing transparency. This work, which is part of DePasquale’s much broader review, will “begin in 2020.”

Increased litigation seems to be a possibility as well. At its recent hearing, the Commission’s chairman recognized the lurking possibility of litigation:

One of the things that I notice in the marketplace and our practice is that you have got participants that are suing people in fiduciary capacities of 401k plans. It’s not uncommon today. And I kind of always look, you know, when is the day going to occur when defined benefit participants start going back after, or taxpayers start going back after the fiduciaries of defined benefit plans?

We will continue to monitor the proceedings and provide updates as warranted.

Jones Day

September 5, 2018

• Lawmakers passed legislation that helps corporate utilities
• Municipal-owned utilities didn’t get the help they wanted

As California’s lawmakers debated late Friday night under the statehouse capitol dome in Sacramento, the city’s utility district kept the lights on for them. But the legislators fell short for the electricity provider.

Officials at the Sacramento Municipal Utility District had wanted legislators to support Governor Jerry Brown’s proposal to give all utilities relief from strict liability rules. That didn’t happen. Instead, they passed a bill on the last day of session that benefits publicly-traded competitors such as PG&E Co. by allowing new customer fees to help pay fire damages.

California Approves Bill to Help PG&E Pay for Wildfire Costs

Under California law, a utility can be held liable if its equipment caused a fire — even if the company followed safety rules. So if a tree limb outside the Sacramento Municipal Utility District’s right of way blows into its power line and sparks a fire, the agency, which has about $2 billion in municipal bonds outstanding, could be on the hook.

Utilities are pressing the issue with increasing urgency after deadly fires last October destroyed large swaths of California wine country, including thousands of homes, and killed 44 people. California investigators have already named PG&E power lines and other equipment as the source of 16 fires last year.

Subject to Damages

“We’re subject to damages that we have no control over,”said chief legal officer Laura Lewis in an interview Friday before the vote. “This legislation does nothing to help mitigate that potential risk, which we don’t feel is equitable.”

Unlike PG&E, the district, which earns 48 percent of its revenue from residences, has no shareholders. “We have no other recourse than to pass along costs to our customers,” Lewis said.

The utility estimates that if saddled with $1.5 billion in damages, it would increase rates by 25 percent. That would hurt those with limited budgets — already, the district offers a low-income discount to 15 percent of its residential customers, bond documents show.

Lewis said the utility, along with its peers, will continue to raise the issue with lawmakers next year. It’s becoming more significant as the climate changes. The average area burned by fires statewide would increase by 77 percent by 2100 if greenhouse gas emissions rise unchecked, according to California’s Fourth Climate Change Assessment released in August.

“Extreme weather is going to continue,” Lewis said. “That’s going to fuel more wildfires down the road.”

Bloomberg Business

By Romy Varghese

September 4, 2018, 8:37 AM PDT

— With assistance by Mark Chediak

California municipalities’ credit quality remains very strong, in S&P Global Ratings’ view, supported by a dynamic economy that has been one of the nation’s top performing for the last several years, generally strong budgetary performance facilitated by steady revenue growth, and financial management often supported by formal policies and regular budget monitoring.

Continue Reading

Sep. 6, 2018

The City of Los Angeles sends the nation-wrecking finance industry more than $100MM/year in the form of fees and penalties for its banking business, supporting the institutions whose racist lending practices, financial engineering and mortgage fraud have wreaked untold harm on the city’s residents.

This November, Angelenos will get to vote on a proposition to create a public bank that will back LA’s smaller community banks and do the city’s business without lining finance’s pockets. This bank will be able to fund community projects from housing to transit to health-care, and will be able to take deposits from the city’s burgeoning cannabis industry, which is presently shut out of the federally guaranteed bank system and relies on safes in entrepreneurs’ homes or businesses to stash millions in cash.

The finance industry hates and fears this proposal and is spreading FUD about how a bank that is under democratically elected political control will inevitably become corrupt — while the discipline of the market will supposedly keep banks on the straight and narrow. Tell that to the millions of Americans whose suffered from Wells Fargo’s corruption.

And those are not the only benefits of a public bank, backers claim. A public bank would enable the city to loan money for badly needed affordable housing development. They believe a city-owned bank could extend the credit lines of community banks and credit unions to offer loans to low-income residents and help bankroll affordable housing.

Another benefit touted by bank promoters: badly needed investment in infrastructure. They hold out the example of Costa Rica’s public bank, Banco Popular. Advocates claim that this bank has been the financial linchpin behind the financing of water supply systems, residential solar panels, and hydroelectric generators.

“A public bank could make some investments that in the long-term would be profitable for LA… [investments that] no bank focused on short-term profit would dare to invest in,” Baradaran asserted.

A public bank is also seen by many as a means to local self-determination and bypassing high Wall Street interest rates. For example, LA public bank advocates estimate Los Angeles pays $3.14 billion in debt service, the cost to borrow money, from Wall Street. They argue a municipal bank would allow the city to recapture that money and give Los Angelenos a say in redirecting this funding toward local projects.

boingboing.net

Dive Brief:

• New Jersey Gov. Phil Murphy has signed into law a new bill that expands the use of public-private partnerships in the state to buildings and highway infrastructure projects. State and county colleges, under the Higher Education Institution Public-Private Partnerships Program, were already allowed to enter into such agreements as long as the private party provided 100% financing and the public entity retained ownership of the land.
• Projects under the new law can be wholly or partially financed by a private partner but the public entity still will have rights to certain financial and land-use controls. If the private partner seeks to lease any publicly-owned asset as part of the P3, the lease period cannot exceed 30 years if it’s in exchange for financing. In addition, workers on these projects must be paid a prevailing wage, the P3 must incorporate a project labor agreement and all private participants — including contractors and subcontractors — must be registered with the state.
• The state treasurer will provide oversight and must approve all P3 agreements under the new measure. The treasurer’s office will also post the status of each new P3 agreement — proposed, under review or active — on its website. Murphy said the new regulation was a bipartisan effort by lawmakers to “give state, county, and local officials the much-needed flexibility they need to improve their communities while creating good-paying new jobs — and, in most cases, good union jobs — while leveraging private capital to invest in public infrastructure.”

Dive Insight:

Contractors are just one piece of a P3 construction project, which also see some combination of design, financing, maintenance and operation components as well.

While P3s can be used for most any project, there is a growing demand for transportation-related P3s, according to a report earlier this year from law firm Husch Blackwell. This is because public agency budgets are such that these entities have started to explore other ways to get their projects done. Husch said that the agencies taking on P3s are not just using the full-on version in which the private partner takes on design, build, finance, operations and maintenance duties — but various permutations of that model.

As far as opportunities in P3s, public respondents to Husch’s annual survey of registrants of the annual Public-Private Partnership Conference and Expo said that they were most likely to pursue public-facility (62.5%), government-facility (57.5%) and transportation (52.5%) P3s during the next three years. Those in the private-sector responded that they would most likely pursue those projects in the transportation (69%) sector.

Construction Dive

by Kim Slowey

Aug. 27, 2018

All Aboard Florida got the go-ahead Wednesday from a state board to issue $1.75 billion in federal tax-exempt bonds for its Brightline passenger-rail system, as officials and residents from the Treasure Coast and Central Florida fought over a planned northern extension.

The Florida Development Finance Corp. Board of Directors backed issuing what are known as “private activity” bonds needed to extend Brightline north from West Palm Beach.

The approval came after board members asked Brightline officials for assurances that the Treasure Coast region wouldn’t be hurt economically. Many residents and officials in Treasure Coast areas such as Martin and Indian River counties have long objected to the rail service.

But Central Florida officials, with the backing of the Florida Chamber of Commerce and other business-lobbying groups, view the passenger trains as an alternate link from South Florida that would complement the existing SunRail system in the Orlando area.

Florida Development Finance Corp Chairman Daniel Davis, whose agency has the authority to approve the federal bonds, said after the vote he hoped outstanding issues between Treasure Coast leaders and All Aboard Florida could be worked out.

The board approved a new series of $1.15 billion in bonds and the refinancing of $600 million in previously approved bonds, which helped set up the existing southern portion of the service.

Brightline, which started running between West Palm Beach and Miami this year, is looking to extend north to Orlando in 2021. Brightline has also started to work with the state on pursing an Orlando-to-Tampa route.

Officials representing Martin and Indian River counties, which have brought lawsuits against the service, raised questions about safety and potential economic and quality-of-life impacts of higher-speed trains running through their communities.

Brightline officials said they have approached Treasure Coast communities to consider stops and have taken similar steps for Cocoa in Brevard County.

Indian River County Attorney Dylan Reingold was among critics pointing to low ridership numbers — 74,780 people collectively paid $663,667 for tickets in the first three months of this year — for the service running between Miami and West Palm Beach, as he forecast little chance of the service becoming a financial success.

Brightline Chief Executive Patrick Goddard responded that the service was running between West Palm Beach and Fort Lauderdale in the first quarter.

Reingold also joined opponents — including state Sen. Debbie Mayfield, R-Rockledge, and state Rep. MaryLynn Magar, R-Tequesta — in requesting the bond decision be delayed, as federal litigation in pending about environmental impacts and as members of Congress have been looking into the proposal.

Reingold also said if the bonds were approved, conditions should have been added to limit the fiscal impact on what taxpayers must cover to maintain rail crossings that will have to be upgraded from freight service.

“It’s a private company owned by a Japanese hedge fund,” Reingold said. “It expects Indian River County taxpayers to pay for the maintenance of their (rail crossing) improvements for eternity.”

All Aboard Florida is owned by Fortress Investment Group LLC, a global investment management firm acquired last year by Toyko-based SoftBank Group Corp.

Ruth Holmes, a Martin County attorney, said Brightline should also be required to use an alternative route or to double-track the single-rail drawbridge north of downtown Stuart over the St. Lucie River. Otherwise, Holmes said, the constant opening and closing of the spans — from existing freight traffic and Brightline planning 16 daily round trips between Miami and Orlando — would hinder maritime traffic and business in the downtown area.

“That draw closure and opening is going to happen about 52 times a day,” Holmes said. “That effectively shuts down that bridge.”

Indian River County Commission Chairman Peter O’Bryan noted a number of deaths that have occurred in the past year with the new rail service in South Florida and warned that approving the issuance of the bonds would equate to giving “a license to kill for All Aboard Florida.”

Countering those arguments, Central Florida lawmakers urged support for the bonds as they envision Brightline bringing economic growth to the state by removing cars from the highways and giving tourists more travel options.

Rep Jason Brodeur, R-Sanford, said Brightline is seen as a link to South Florida for the SunRail service, and he joined others in pointing out that most of the rails for Brightline have been in place since the late 1890s, when industrialist Henry Flagler brought passenger trains south.

“I have 500,000 people who are really looking forward to this,” Brodeur said of the people he represents in Seminole County, north of Orlando.

Rep. Mike Miller, R-Winter Park, said the expansion of the service means jobs at both ends of the line.

“One of our jobs as legislators is to create an environment where there are jobs,” Miller said. “This not only creates 2,000 jobs, and $2.4 billion worth of economic impact, directly because of Brightline, but it creates billions of dollars in jobs and job opportunities in Miami, West Palm, Orlando and throughout our state.”

Rep. Tom Goodson, R-Rockledge, said residents in Brevard County are “enthused” at the prospect of a station in Cocoa that could serve the space industry and Port Canaveral.

Dennis Grady, President and CEO of the Chamber of Commerce of the Palm Beaches, said since being introduced in January, Brightline has made the Miami-Dade, Broward and Palm Beach region a “smaller, more manageable place to live and work.”

But he added, for the state goal of a viable inner-city rail system, Brightline must be able to expand to Orlando.

News Service of Florida

by Jim Turner

August 29, 2018

WASHINGTON, D.C.—Congresswoman Eleanor Holmes Norton (D-DC) today announced that she will introduce a bill that clarifies the District of Columbia’s authority to enter into public-private partnerships (P3s). The District recently began the procurement process for its first-ever P3s: rehabilitating the Metropolitan Police Department headquarters (Daily Building) and modernizing streetlights. The bill makes it clear that the federal Anti-Deficiency Act (ADA), which uniquely applies to D.C., does not prohibit the District from entering into P3s. The bill provides legal certainty that D.C. may enter into multi-year contracts to design, construct, improve, maintain, operate, manage and/or finance projects procured pursuant to a local D.C. law, the Public-Private Partnership Act of 2014.

“Federal law potentially limits the authority of only one jurisdiction, the District of Columbia, to enter into public-private partnerships,” Norton said. “The federal government, many states and other countries have used P3s. There is no reason that the District should not be able to take advantage of this option. Among other benefits, P3s will free up District funds that would otherwise be spent on infrastructure for other pressing needs, such as education and health care.”

The federal ADA prohibits the federal and D.C. governments from obligating or expending funds in advance or in excess of an appropriation. A critical benefit bestowed by P3s is that the District would not have to appropriate all the funds upfront, freeing up funds for the District to spend on other matters. An ADA violation may occur if the District terminates a P3 contract. Under P3 contracts, the District would make payments on an annual basis over the life of a contract, and the District would appropriate the funds for such payments annually. However, upon termination, the District would have to pay all costs incurred up to that point, but would not yet have appropriated all the funds for such payments, potentially causing an ADA violation.

Under D.C. law, “a ‘public-private partnership’ means the method in the District for delivering a qualified project using a long-term, performance-based agreement between a public entity and a private entity or entities where appropriate risks and benefits can be allocated in a cost-effective manner between the public and private entities in which:

(A) A private entity performs functions normally undertaken by the government, but the public entity remains ultimately accountable for the qualified project and its public function; and

(B) The District may retain ownership or control in the project asset and the private entity may be given additional decision-making rights in determining how the asset is financed, developed, constructed, operated, and maintained over its life cycle.”

August 29, 2018

Downtowns across the country are seeing an increase in population and North Carolina is no exception.

From 2016-2018, 45% of North Carolina’s population growth occurred in its seven largest municipalities. During that same time, rural areas in the state saw their populations decrease.

This “urbanization,” or flow of people from small towns and counties into North Carolina’s cities, is increasing the need for development projects and opportunities for developers. In an already competitive development environment, public-private partnerships (“PPP’s”) can offer developers opportunities that would not otherwise exist, including the chance to collaborate with municipalities on large-scale projects that can result in cost savings and a competitive advantage.

Continue reading.

Ward and Smith, P.A.

August 30, 2018

Advances Resolution of COFINA Title III Proceedings

NEW YORK, Aug. 30, 2018 (GLOBE NEWSWIRE) — Ambac Financial Group, Inc. (Nasdaq:AMBC) (“Ambac”), a holding company whose subsidiaries, including Ambac Assurance Corporation (“AAC”), provide financial guarantees, announced today that AAC, the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”), the Puerto Rico Sales Tax Financing Corporation (“COFINA”), Puerto Rico Fiscal Agency and Financial Advisory Authority, Bonistas Del Patio, Inc., other bond insurers, and certain holders of senior and junior COFINA bond claims have executed a Plan Support Agreement (the “COFINA Plan Support Agreement”) for the restructuring of all senior and junior COFINA bonds.

AAC insures $808.5 million of the initial principal amount of Senior COFINA Capital Appreciation Bonds (approximately $1,325.4 million of accreted value as of, but not including, the May 5, 2017 petition date (the “Petition Date”) in the COFINA Title III proceeding). AAC also owns approximately 58% of AAC-insured senior COFINA bonds.

The COFINA Plan Support Agreement furthers the agreement-in-principle announced by the Oversight Board on August 8, 2018. Under the COFINA Plan Support Agreement, the creditor parties agree, among other things, to support the filing of a plan of adjustment with respect to COFINA that provides for a distribution of Plan consideration comprised of new COFINA bonds and cash, with a face amount in the aggregate equal to approximately 93% (plus accrual, as of August 2018) of senior COFINA bond holders’ Petition Date claim amounts, without taking into account AAC’s insurance policy for the AAC-insured bonds, and a face amount of approximately 56% (plus accrual, as of August 2018 ) of junior COFINA bond holders’ Petition Date claim amounts. The contemplated Plan of Adjustment, once confirmed by the court overseeing COFINA’s Title III proceeding, will also finally resolve all COFINA-related litigation and validate the COFINA structure.

Under the COFINA Term Sheet (attached as an exhibit to the COFINA Plan Support Agreement), holders of AAC-insured senior COFINA bonds would have the option to elect to either (i) commute their rights in respect of the AAC insurance policy associated with the existing senior COFINA bonds, which bonds will be cancelled, in exchange for new COFINA bonds, cash amounts to be paid by COFINA, plus additional consideration provided by AAC, or (ii) exchange their senior COFINA bonds for trust certificates issued by a custodial trust, which trust would receive distributions from COFINA under the new COFINA bonds, plus payments under the existing AAC insurance policy in respect of any shortfalls. Payments on the new COFINA bonds deposited in the custodial trust would reduce AAC’s obligations on its insurance policy.

The terms of the COFINA Plan of Adjustment and related documentation which will effectuate the contemplated transactions remain subject to negotiation and court approval.

Claude LeBlanc, President and Chief Executive Officer of Ambac commented “While there is a lot of work left to be done, the execution of the COFINA Plan Support Agreement is a definitive step towards a final resolution of Puerto Rico’s debt restructuring and we are pleased to be a party to the COFINA Plan Support Agreement. The negotiated settlement of the Commonwealth-COFINA litigations also provides significant value to the Commonwealth through a sharing of the sales tax revenues, and resolution of the COFINA Title III proceedings will provide clarity regarding one of Ambac’s key adversely classified credits.”

The COFINA Plan Support Agreement, and related term sheet can be found on Ambac’s website under the heading “Information for Investors Regarding COFINA Plan Support Agreement.”

About Ambac

Ambac Financial Group, Inc. (“Ambac” or “AFG”), headquartered in New York City, is a holding company whose subsidiaries, including its principal operating subsidiaries, Ambac Assurance Corporation (“AAC”), Everspan Financial Guarantee Corp. and Ambac Assurance UK Limited (“Ambac UK”), provide financial guarantees of obligations in both the public and private sectors globally. AAC is a guarantor of public finance and structured finance obligations. Ambac’s common stock trades on the NASDAQ Global Select Market under the symbol “AMBC”. The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock or a holder of 5% or more of Ambac’s common stock increases its ownership interest. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information, and the posting of updates to the status of certain residential mortgage backed securities litigations. For more information, please go to www.ambac.com.

Contact

Lisa A. Kampf

Managing Director, Investor Relations

(212) 208-3177

lkampf@ambac.com

Source: Ambac Financial Group, Inc.

Funds holding about $1.9 billion in general obligation bonds split from a rival group in a bid to further broader restructuring efforts

Investment funds owning about $1.9 billion of Puerto Rico’s general obligation bonds have formed a committee to negotiate a consensual restructuring with the commonwealth and the federal oversight board that manages its finances, people familiar with the matter said.

Members of the committee are seeking to differentiate themselves from a pre-existing group of general obligation bondholders that includes Aurelius Capital Management LP, which is fighting the board and the island’s government in ongoing litigation, the people said

The new group organized in August after the oversight board reached important deals with Puerto Rico’s two other largest classes of debt—bonds issued by its power utility and its sales-tax authority—raising hopes that general obligation creditors might also broker a settlement. The committee includes hedge funds Fir Tree Partners and Mason Capital Management LLC and mutual-fund manager First Pacific Advisors LLC, according to a bankruptcy-court filing.

The formation of the new group increases the likelihood that Puerto Rico will settle with its last large group of bond investors, potentially paving the way for a global restructuring of its finances.

Prices of Puerto Rico’s $3.5 billion general obligation bond due in 2035 have risen about 33% this month to 53 cents on the dollar, according to data from the Municipal Securities Rulemaking Board.

Brokering restructurings with investment funds that own much of its $70 billion of bonds is critical for Puerto Rico because it needs to regain access to capital markets as a precondition for the removal of the oversight board. Litigation with creditors also has grown expensive for the island since it entered bankruptcy court in May 2017. Legal fees are expected to exceed $1.1 billion over six years.

Relations between Puerto Rico and general obligation creditors have been frosty for much of the past two years. Fiscal plans published by the government and oversight board last year left little to repay its $13 billion of general obligation bonds. Aurelius is suing the board, contending its appointment was unconstitutional. The committee Aurelius is part of also has argued that general obligation bondholders should have first claim on tax revenues before holders of about $18 billion of bonds issued by the island’s sales-tax authority known as Cofina.

“We have participated in constructive negotiation with the [Oversight] Board, and we hope that will continue,” a spokesman for the committee that includes Aurelius said. “We’ve submitted proposals that would have achieved a consensual outcome, and we would welcome the Board’s engagement and commitment to a solution.”

The oversight board reached an agreement in early August with a committee of Cofina bondholders granting them claim on a portion of sales-tax revenues and average recoveries of 74.5% of face value.

The recent deals with other creditor groups opened the door to a possible detente for general obligation bondholders, the people familiar with the new group said. Fir Tree and the other funds in the group already had been negotiating a deal with Puerto Rico to restructure bonds they own issued by its Public Buildings Authority and saw an opening to do the same for their general obligation bond investments.

A key negotiating point will be how the oversight board and Puerto Rico calculate revenue in future fiscal plans, the people familiar said. The larger the revenue assumptions, the more cash will be left over for debt servicing, they said.

The Wall Street Journal

By Matt Wirz

Aug. 29, 2018

Fitch Ratings-New York-30 August 2018: Fitch Ratings has assigned a ‘AA-‘ rating to the Chicago Housing Authority’s (CHA) 2018 A & B general obligation (GO) bonds. The Rating Outlook is Stable.

CHA expects to issue its series 2018 A&B bonds in the amount $325 million during the week of Sept. 4, 2018. Proceeds of the series 2018 A&B bonds will be used to finance certain capital costs of the authority and related projects within its portfolio. In addition, the proceeds will be used to fund the debt service reserve fund and pay the cost of issuance.

SECURITY
The series 2018 AB bonds are secured by the general obligation pledge of CHA.

ANALYTICAL CONCLUSION

CHA’s rating reflects continuing demand for public and affordable housing within the city of Chicago. In addition, CHA exhibits stable and predictable revenue and cash flow derived from its rented properties, as well as public housing grants. It further exhibits strong and prudent management of operations evidenced by its management of finances and its good standing with the federal oversight provided by the Housing and Urban Development (HUD).

KEY RATING DRIVERS

Revenue Defensibility: Midrange
Fitch assesses CHAs revenue defensibility as midrange given the authority’s pricing characteristics. Although, Fitch expects demand to remain strong within the city of Chicago, CHA has limited flexibility to raise rates on its existing portfolio given income and rental rate limits for public housing. CHA shows healthy occupancy (95%) and turnover within its housing properties. Demand is evidenced by the authority’s current waiting list of 108,922 Chicago residents in need of low income housing. In addition, CHA operates with a collection rate of 99% of tenant rent. It also manages a housing choice voucher (HCV) program, which allows the authority to house an additional 47,000 tenants. This program permits residents to take their affordability voucher to units outside of the CHA portfolio, fulfilling its mission of providing affordable housing to the city.

Operating Risk: Stronger
CHA’s ‘stronger’ operating risk is supported by its designation as one of 39 Moving-To-Work (MTW) PHAs, which allows for flexibility and fungibility in the use of its intergovernmental grants from HUD for cost efficiency. Participation in the rental assistance demonstration (RAD) further provides greater funding certainty for potential lenders and increased operational flexibility for the authority. Strong resource management is also reflected in CHA’s year-over-year funding from HUD and its recently renewed MTW status through 2028; both indicate the oversight agency’s view of the authority’s overall management capabilities.

Financial Profile: Stronger
Low debt levels, healthy cash balances and net annual surpluses over the last five years support CHA’s ‘stronger’ financial profile. The authority’s business plan forecasts positive funds available for debt service (FADS) as they continue to transform nearly 44% of its public housing portfolio units to Section 8 and mixed-income properties through the RAD conversion program, where rent rates may become more flexible. Despite anticipated debt issuance, Fitch expects CHA’s net leverage to remain consistent with the assessment over the next five years.

Asymmetric Additive Risk Factors
Asymmetric risk factors are neutral to the rating. Debt characteristics are manageable with level debt service payments. In addition, the governing body is solid with sound extensive experience and stability.

RATING SENSITIVITIES
Lower Grants and Transfers: CHA could be subject to negative rating pressure if a consistent decline in grants and transfers were to weaken funds available for debt service and increase the authority’s leverage ratio.

CREDIT PROFILE

CHA was created in 1937 to own and operate housing built by the federal government under President Franklin Roosevelt’s Public Works Administration. CHA is one of the largest PHA’s in the United States with 21,359 housing units in 117 properties. The first three housing projects, built in the late 1930s, included Jane Addams, Julia C. Lathrop and Trumbull Park Homes. They were all part of Roosevelt’s New Deal programs to provide affordable housing for low-income families and combat blight.

CHA provides homes to more than 50,000 families and individuals, while supporting healthy communities in neighborhoods throughout the city. It has utilized the flexibility of the MTW agreement to test innovative, locally-designed strategies that use federal dollars to more efficiently help residents become self-sufficient and to increase housing choices for low-income families. In 2000, 15% of work-eligible heads-of-household were employed. Now more than 58% are employed. CHA is a municipal not-for-profit corporation, governed by a Board of Commissioners consisting of 10 members. The commissioners are appointed by the Mayor.

The authority is one of 40 (out of 3,300) public housing agencies participating in HUD’s MTW Demonstration Program. The authority’s original MTW Demonstration Agreement was executed with HUD in February 2000 and was amended and restated in 2008. Congress extended the authority’s agreement through 2028. The MTW Agreement gives the authority latitude in implementing its transformation plan via the exemptions from many existing HUD related public housing and voucher rules, and allows for more flexibility with how they use federal funds. In addition, it incorporates numerous waivers and modifications of HUD administrative, regulatory and/or legal requirements which further support the authority’s transformation plan.

Revenue Defensibility
Demand for public housing remains strong within the city of Chicago and any changes in the rents that PHA’s are able to charge would be unlikely to materially affect demand. CHA recently completed their five-year strategic plan along with a five-year capital and operating program. This plan expands from 2018-2022. The authority has delivered a diverse range of housing assets that are high quality and in high demand. As of June 30, 2018, the authority has delivered approximately 24,000 units towards its goal. The overall portfolio is comprised of approximately 11,000 family units, 11,000 senior/elderly units, and 2,000 supportive housing units. The authority plans to deliver an additional 1,000 units in 2018 for an overall total of 25,000 housing units. Average occupancy for the units over the past three has been at 96.7%.

CHA administers 47,000 housing choice vouchers, which accounts for 92% utilization rate of the program. Based on the Institute for Housing Studies at DePaul University in Chicago report, “2018 State of Rental Housing in Cook County,” the growth in renters is leveling off, but there are still about 182,000 more people who need low-cost housing than there are affordable apartments in Cook County. The report explains that since 2012, the number of affordable rental units in Chicago has declined by more than 10% while demand for affordable housing has declined by less than 5% over the same period. CHA had a total of 108,922 households on their waitlists at the beginning of FY 2018.

Given the core mission and industry standard for rental rates for PHAs, CHA’s pricing characteristics coupled with the makeup of its current portfolio drive the authority’s midrange revenue defensibility. Like all PHAs within the U.S. with public housing or Section 8 units, rental rates are set using residents income levels to create affordability. This limits flexibility in raising revenue through rental income.

Currently, rental income is roughly 5% of CHAs total revenue, which is in line with industry standards. CHA sets its rental rates using HUD guidelines. HUD sets the lower income limits at 60% and very low income limits at 30% (for public housing) of the area median income (AMI) for the county or metropolitan area in which residents reside. CHAs current portfolio consists of 23,810 public housing units.

The authority applied for, and HUD accepted, applications for CHA to participate in the RAD program allowing the conversion of over 10,000 of its public housing units to project based Section 8 with 20-year housing assistance payment (HAP) agreements, or to mixed-income properties utilizing HCVs. To date CHA has converted 2,815 units to RAD. Upon transformation of the portfolio Fitch expects that CHA will have more flexibility in the pricing characteristics as revenue from the properties, via partnerships with private developers as an equity member, show a return on the units from either mixed-income properties or fees associated with administering the PBV or HCV programs that will maintain affordability in the converted units.

The income levels for those units converted must adhere to other HUD regulated programs such as section 8 and low income housing tax credit (LIHTC). Those projects are likely to have eligible income limits of 60% of AMI for units deemed affordable. CHA’s overall conversion of public housing units to RAD will become realized within the next two to five years as projects are converted.

Operating Risk

CHA, like all public housing authorities in the U.S., receives an operating grant deposited into the authority’s operating fund. The operating fund is available by formula distribution to PHAs to cover operating and management costs. Funding eligibility is offset by the amount of expected tenant rental revenue. In FY 2017 CHA received a total of $178 million for operations. CHA has received a five-year average operating grant in the amount of $170 million. The cost to operate the units and the grant provided fluctuates based on the number public housing units in the portfolio along with the overall budget allocations to HUD programs from the appropriations committee within congress. While the HUD grant is not anticipated to cover the entire operating cost for the authority, it covers a very significant portion, on average 85% operating expenses from 2013-2016.

CHA can use operating funds for operating and management costs, including administration, routine maintenance, anti-crime and anti-drug activities, resident participation in management, insurance costs, energy costs, and costs, as appropriate, related to the operation and management of mixed finance projects, as well as repayment of debt service to finance rehabilitation and development of public housing units. CHA has full discretion in how it allocates this grant in its operating fund. CHA may leverage operating funds to make capital improvements through the operating fund financing program by pledging a portion of their operating reserves to make future debt service payments. CHA may also leverage operating funds to enter into energy performance contracts, by pledging, in accordance with section 30 of the U.S. Housing Act of 1937 and, with HUD’s approval, to use energy savings for debt service payments.

Resource Management Risk

CHA manages its resources via its MTW plan approved by HUD along with its five-year strategic plan. To obtain MTW status CHA had to demonstrate solid and robust financial management, allowing them the flexibility to expend the federal revenue stream that makes up 91% of the CHA’s balance sheet, as they see fit. CHA has no supply constraints for labor or resources in terms of amount and cost. The authority’s average number of employees was 651 in FY 2017 and is set to stay at this level. Wages and salaries are assumed to increase by 3% each year while fringe benefit rates are expected to remain unchanged. Total personnel costs were estimated at$61.2 million in FY 2017. With increases CHA budgeted for FY 2018 a 4.7% increase over FY 2017. The authority’s pension contribution is over 100% funded and has been at least 100% of the actuarially determined contribution for the past three years.

The preparation of the authority’s Annual Budget is the culmination of a seven-month budget process, which begins in May and ends in November of each calendar year. CHA’s budget is organized into 12 divisions: Executive Offices, Internal Audit, Legal Services, and Office of the Inspector General, Finance, Investment Management, Administration, Procurement, Property Office, Capital Construction & Development, Housing Choice Voucher and Resident Services.

CHA has demonstrated a history of successful capital planning and execution. The authority has adequate mechanisms for capital planning and funding, and has demonstrated generally effective management. Capex benefits from documented assessment and aligns to plan in a reasonable way. Capital expenses are primarily covered by a variety of funding mechanisms including the capital fund grant provided to the authority by HUD for capital projects. As CHA develops newer units the expense for capital repairs are expected to decline.

Financial Profile
CHA’s available funds, defined as cash and investments not permanently restricted, have declined in recent years, but remained robust at $224 million at year end 2017. CHA’s liquidity cushion has remained well above 1.0x over the past five years.

Lower grant funding from HUD in FY 2017, as a result of prior overfunding, contributed to the decline in liquidity, as well as to lower Fitch-calculated FADS. Income generated from public housing activities has been relatively consistent year over year, with rental income from public housing being at or slightly above $51M over the past five fiscal years. During the same period, the proportion of revenue from public housing rents has been between 5%-7% of total revenue. CHA, like most PHA-MTW authorities, receives more than 90% of their revenue from HUD subsidies in the form of various grants. Whereas CHA’s FADS averaged approximately $130 million over the period 2013-2016 reflecting consistently strong grant funding, lower funding in 2017 resulted in FADS of only $59 million.

CHAs leverage profile has remained low in recent years as available funds have exceeded total debt obligations. Fitch’s five-year forward scenario analysis indicates that the authority’s leverage and financial profile should remain strong, even after considering the proposed issuance of the 2018AB general obligation bonds. Fitch expects FADS to migrate higher toward historical levels beginning in 2018, based on year to date results, which should support of ratio of net debt to FADS of between 3.0x and 4.1x through 2022 even through a temporary stress in CHA’s revenue base.

Asymmetric Additive Risk Factors
Debt Profile

CHA issued $25 million in taxable Build America Bonds (BABS) in FY 2010 that were special obligations of the authority. The bonds are fully amortizing and debt service is level at around $1.80 million a year. The debt was backed by the full faith and credit of the CHA, consisting of all revenues and funds pledged for the payment of debt service. The bonds were issued to take advantage of HUDS energy use and cost reduction incentives. The proceeds were used for the removal of 50 year old boilers/controls domestic hot water heaters, asbestos abatement and disposal and demolition of existing equipment, such facilitates to be replaced by 85% efficiency boilers/controls and hot water heaters. This resulted in the installation of remote monitoring devices at 22 of the authority’s developments affecting 4, 8111 residential units.

The authority maintains a $20 million line of credit from Federal Home Loan Bank of Chicago at an interest rate not to exceed 2.5% for a period not to exceed 36 months from the time of lending. The line of credit is collateralized by cash and investments held by CHA. Proceeds from the line of credit are designated for the authority’s unit acquisition program. In 2016, the Board approved a resolution to expand the use of funds borrowed under this line. There was an outstanding balance of $3.0 million and $3.35 million at Dec. 31, 2017 and 2016, respectively.

The authority also maintains an unsecured, $20 million line of credit, from BMO Harris Bank N.A. at an interest rate not to exceed 2.0% for a period of 12 months. Proceeds from the line of credit are designated for the authority’s acquisition of the former Presbyterian Homes senior housing units. There was an outstanding balance of $20.0 million and $19.0 million at Dec. 31, 2017 and 2016, respectively.

Governance and Management

CHA is governed by a 10 member board of commissioners including a board chairperson. Members are appointed by the Mayor and confirmed by City Council. At least two commissioners are CHA residents. In the last few years, numerous board members have been appointed in order to strengthen the board as well as due to members stepping down after reaching the maximum five-year term. Board members bring a broad range of experience and are deeply rooted in public service.

Day-to day operations are managed by an executive team that includes the chief executive, chief operating officer, chief financial officer, chief investment officer, chief administrator, chief legal officer, chief development officer and chief property officer. Most of the executive staff joined CHA or have taken on their respective role since 2015. This is the result of a review to refocus the team on strategic change and to help drive their mission and build new partnerships involving people, process data and systems and to create a more efficient and effective structure. Each team member brings extensive experience reaching all facets of the sector and maintains a strong relationship with HUD and key stakeholders. The chief executive has over 35 years’ experience in the industry and has recently renewed his contract with CHA for the next two years.

Contact:

Primary Analyst
Mikiyon Alexander
Director
+1-646-582-4796
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Teresa Galicia
Associate Director
+1-312-368-2083

Committee Chairperson
Ronald McGovern
Senior Director
+1-212-908-0513

In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis.

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com

Why is Chicago pursuing issuing $10 billion in bonds to remedy its pension funds’ woeful underfunding? The answer, we’re told, is that the city hopes to earn money with an investment return greater than the interest rates they’ll be paying to investors for these bonds. But the real reason — or a significant contributor to their motivation — may be entirely different: due to the nature of pension accounting for government benefits, their real objective may be to keep the plans’ valuation interest rates high by avoiding a poorly-funded-plan “penalty” interest rate.

Here’s the background:

Continue reading.

Forbes

by Elizabeth Bauer

Aug 28, 2018

Mayor Rahm Emanuel on Wednesday offered a spirited defense of his controversial plan to sell more than $10 billion in pension obligation bonds to minimize the need for another punishing round of post-election tax increases, even as he insisted that a final decision has not yet been made.

Mayoral challenger Paul Vallas has urged the City Council to stop that train from leaving the station to avoid putting Chicago taxpayers in what he called a “financial straightjacket.”

Former Police Board President Lori Lightfoot, who’s also running for mayor, has likewise demanded that Emanuel “slow down the process and open it to public scrutiny.” She wants a detailed plan subject to an independent analysis, followed by “multiple public hearings” and “substantive debate.”

On Wednesday, Emanuel made his first public comment about the massive borrowing that has municipal finance experts waving red flags.

“I’ve asked my staff to explore all options to achieve the goals of retirement security without overburdening our taxpayers. It would be equally reckless not to explore options … to avoid a significant tax increase when you can minimize that and shore up peoples’ pensions. If we didn’t do that, we wouldn’t be doing our jobs,” Emanuel said.

“So I’ve asked everybody to explore all available options and think creatively out of the box. One of the things I won’t do is kick the can down the road.”

Vallas has argued that kicking the can is precisely what Emanuel is doing.

It allows the mayor to wait until after the election to spell out which taxes he intends to raise when the five-year ramp to actuarial funding will end and taxpayers will be on the hook to keep city employee pension funds on the road to 90 percent funding.

By 2023, the city’s contribution to all four funds will nearly double — from $1.2 billion this year to $2.1 billion, according to the city’s annual financial analysis.

Asked Wednesday about Vallas’ claim, Emanuel fell back on the same argument that prompted the long-simmering tensions between Emanuel and Mayor Richard M. Daley to boil over last spring. At the time, William Daley demanded that Emanuel “put on his big-boy pants” and stop blaming his older brother for the $2 billion avalanche of tax increases imposed, just to begin to solve Chicago’s $28 billion pension crisis.

“I didn’t create this problem. That’s all I’ve got to say. I’m here in asking the public and trying to figure out, how do you ensure people’s retirement, which was not done before. And how do we ensure that we don’t let the cost explode to taxpayers,” the mayor said.

“I think it’s a responsible thing because we’ve had a lot of irresponsible decisions made. The responsible thing is to explore options that achieve both goals.”

After joining the mayor at a ribbon-cutting ceremony for the new Chicago Architecture Center, Ald. Brendan Reilly (42nd), vice-chairman of the City Council’s Budget Committee, said he, too, has “reservations” about the pension borrowing that would dwarf the city budget.

“Versions of this idea have not gone well in other municipalities. That’s why the details of this proposal are so important,” Reilly said.

“If this is truly a different type of deal than other cities have done, then we need to see that on paper and understand the numbers and how those work. The last thing we want to do is saddle taxpayers with even more liabilities on the back end of this deal.”

Emanuel points with pride to having identified dedicated funding sources for all four city employee pension funds. But Chicago taxpayers have paid a heavy price.

They have already endured a parade of property tax increases for police, fire and teacher pensions; two increases in the monthly tax tacked on to telephone bills; and a 29.5 percent surcharge on water and sewer bills.

If Emanuel decides to forge ahead, the city would take a portion of its $28 billion in pension debt and finance it at an interest rate considerably lower than the 7-to-7.5 percent annual rate of return assumed by the four city employee pension funds.

Last week, Chief Financial Officer Carole Brown told aldermen the city may sell even more than $10 billion in pension obligation bonds if there’s enough available city revenue to support it. Brown has not explained what the city’s fallback would be if the market tanks.

She promised a final decision on whether to proceed by early September.

The Chicago Sun-Times

By Fran Spielman

08/29/2018

Fiscally-strapped Chicago may issue $10 billion of pension obligation bonds to help pay down a $28 billion gap

As Chicago considers a multibillion sale of pension obligation bonds, analysts say such bonds have rarely succeeded at topping up unfunded public pensions, and are historically linked to fiscal stress and municipal debt defaults.

“Generally, most muni analytics folks don’t look upon pension bonds favorably,” said Alan Schankel, municipal strategist for Janney Montgomery Scott.

Pension obligation bonds, or POBs, have been connected with high-profile municipal defaults in California’s San Bernadino and Stockton, as well as Detroit. At the state level, issuers of POBs including New Jersey and Connecticut, and the territory of Puerto Rico, have seen a decline in their pension funding ratios and suffered downgrades to their credit rating as a result, noted analysts at Municipal Market Analytics. Illinois, in fact, issued pension bonds in 2003 that only temporarily brought up funded ratios.

Continue reading.

MarketWatch

by Sunny Oh

Aug 22, 2018

Concrete is finally rising from an enormous pit at the site of Nashville’s former convention center, but the developers still have a $25 million hole in their financing plan.

The team led by longtime Nashville developer Pat Emery has asked the Metropolitan Development and Housing Agency to issue tax-exempt bonds to finance a portion of the project.

It would be an unprecedented arrangement for a Nashville redevelopment project, and may be a sign of trouble for the delayed high-profile development, now five years in the making. Nashville taxpayers have a large stake in the success of the $450 million office, retail and residential development at the corner of Fifth Avenue and Broadway, considered the city’s most prime commercial real estate. City leaders targeted the site for development after the 2013 opening of Music City Center.

Continue reading.

Nashville Tennessean

by Mike Reicher

Aug. 19, 2018

• Preliminary yields are about 30bps lower than April deal
• Illinois’s 30-year bonds over AAA are near tightest since 2015

Illinois is poised to reap lower borrowing costs as it returns to the municipal-bond market for the first time since pulling back from the brink of becoming the first junk-rated U.S. state.

Illinois is offering $920 million of general-obligation refunding bonds for yields ranging from 3.05 percent to 4.41 percent, according to three people familiar with the terms who declined to be named as the pricing isn’t final. The preliminary yields are about 30 basis points lower than the state’s deal in April, according to data compiled by Bloomberg. Proceeds from the negotiated offering will also pay termination payments to banks to cancel interest-rate swap agreements and eliminate Illinois’s derivative exposure, bond documents show.

Bondholders and rating companies have praised Illinois’s progress. Spreads on the worst-rated state’s 30-year bonds over benchmark debt tightened to the lowest since March 2015 after Moody’s Investors Service lifted its outlook to stable from negative last month. It’s the first time Illinois has been at that level since December 2012, according to Moody’s.

The so-called Illinois penalty, or extra yield that investors have long demanded to own the state’s debt, has receded from the high of nearly 3 percentage points in June 2017. The premium was 1.4 percentage points on Monday.

“They’ve shown some progress with a successful budget,” said Gabe Diederich, portfolio manager for Wells Fargo Asset Management, which oversees $39 billion of state and local bonds, including Illinois debt. “At the same time, I think the yield penalty is certainly not going to evaporate with this deal given some of the continued work that lies ahead for the state.”

Illinois’s fiscal woes are far from over. The budget, while enacted before the July 1 start of the 2019 fiscal year, has a $1.2 billion structural gap, and the state is struggling with $137 billion of unfunded pension liabilities, according to bond documents.

Debt Swaps

The deal will “de-risk” Illinois’s portfolio by refinancing $600 million of variable-rate debt from 2003 into fixed-rate, according to S&P Global Ratings, which rates the deal BBB-. Proceeds will also terminate interest rate swaps that Illinois originally entered into to hedge risk associated with the variable-rate bonds, S&P said.

The variable-rate debt was backed by six letters of credit that were going to expire in November 2016, and Illinois refunded that with proceeds from bonds sold to four banks under direct purchase agreements. Those agreement are set to expire in November, according to S&P. As of Aug. 1, the termination payments were estimated at $74 million, bond documents show.

There’s “clear market recognition” of the budget progress, said Neene Jenkins, a vice president and municipal analyst at AllianceBernstein, which oversees $42 billion of state and local bonds, including Illinois debt.

“I recognize both the tremendous amount of progress the state has made relative to last year and the challenges that still face the state moving forward,” said Jenkins, who is looking at the deal. “They have a lot of work to do.”

The effects of the record two-year impasse that wrecked havoc on Illinois’s finances haven’t disappeared. That political stalemate drove unpaid bills to a record $16.7 billion. That backlog is now about $7.8 billion, reduced because the state borrowed $6 billion in November to pay it down.

“We are optimistic because the state is in a better fiscal position today with enactment of a full-year budget,” Elizabeth Tomev, a spokeswoman for the governor’s office, said in an email. “The ratings agencies have acknowledged our efforts to address our pension burden and are encouraged by the budget’s passage into law.”

Slim Calendar

Wednesday’s bond sale comes amid a much smaller issuance calendar compared to last week. U.S. state and local governments are scheduled to sell about $4 billion of debt this week, compared with about $12 billion last week. Illinois’s offering is the largest long-term deal this week, according to data compiled by Bloomberg. Texas is scheduled to sell $7.2 billion in short-term notes on Wednesday.

The offering comes amid ongoing demand for high-yield paper in a low-rate environment. Investors added $244.2 million to high-yield municipal funds in the week ended Aug. 15, according to Lipper US Fund Flows data. Those funds have seen inflows in nine of the past 10 weeks.

“They still pay a penalty because of their history and because of the uncertainty going forward,” said Daniel Solender, head of municipal investments at Lord Abbett & Co., which manages $20 billion of state and local debt, including Illinois bonds. “They’re definitely headed in a better direction, but there’s still a lot of things that need to happen for the situation to materially improve.”

Bloomberg Business

By Elizabeth Campbell

August 21, 2018, 10:30 AM PDT

• Measure would provide $2.5 billion to flood mitigation efforts
• Effort to place referendum on ballot got bipartisan support

A year to the day after Hurricane Harvey ravaged the Gulf Coast of Texas, residents there head to the polls to decide a $2.5 billion bond referendum for critical flood control projects in an area that the Category 4 storm plunged underwater.

Harris County officials purposely chose Saturday’s anniversary for the election, seeking to bring out voters and quickly cash in on matching federal funds. Proceeds from the bond, if approved, would finance about 237 projects, including repairs to flood-damaged drainage infrastructure, buyouts of flood-prone properties and channel modifications to improve the flow of storm water. It’s the largest bond measure in the county’s history.

The vote comes as coastal cities around the country are facing the threat of catastrophic infrastructure damage from storms exasperated by climate change. Last year, the U.S. was hit by three major storms that virtually destroyed Puerto Rico’s electric grid, flooded Texas with record rains and ripped into Florida, sending the sea into the streets of Miami. The number of deaths is still uncertain and the storms racked up losses totaling more than $200 billion, the most ever.

For Houston Mayor Sylvester Turner, the vote is one of the most important decisions residents there will make. “We can’t afford to wait any longer. We cannot afford to get this one wrong,” he said during a press conference earlier this month.

A poll by the University of Houston found that 55 percent of residents support the bond referendum even though it would result in a 1.4 percent property-tax increase for the average homeowner in Harris County, the nation’s third most populous. Just 10 percent of those surveyed said they would vote against it, while a third were undecided.

Before Harvey, the Houston area had never experienced flooding of the magnitude caused by the storm as it lingered over land for four days, dropping record rainfall. Even experts were unprepared. The National Weather Service had to add two colors to its graphics when mapping the storm movement because of the unprecedented amount of rain.

The National Oceanic and Atmospheric Administration estimates Harvey caused $125 billion in damages, making it the second costliest storm in recorded U.S. history behind the $161 billion in damages inflicted by 2005’s Hurricane Katrina, according to Moody’s Investors Service.

“It will not accomplish everything we need to accomplish. We need to recognize that,” Judge Ed Emmett, head of the county commissioners court, the governing board for Harris County, said during a meeting in June prior to placing the measure on the ballot.

The storm was too much for the Harris County Flood Control District and its $120 million annual budget. “We just have a lot of ground to cover, a lot of infrastructure to maintain and a lot of problems to solve and $120 million doesn’t go that far,” said the district’s director of operations Matthew Zeve.

Taking Action

Harris County isn’t alone in asking voters to back bond sales to cope with climate change.

In 2012, Seattle voters overwhelmingly approved a $290 million debt measure to rebuild the Elliott Bay seawall that protects the downtown waterfront. In the San Francisco Bay area, residents approved a tax to fund a $500 million restoration of tidal marshes, which act as a buffer against storm surges. Following Hurricane Irma last year, Miami voters approved $400 million in bonds to finance projects to protect the city against the impact of global warming.

The Union of Concerned Scientists found that sea level rise, driven primarily by climate change, puts hundreds of thousands of homes and commercial properties in the U.S. at risk of being flooded at least 26 times per year by 2030. The incessant deluges would depreciate property values, erode infrastructure and eventually diminish tax revenue, causing local credit ratings to sour and making it more difficult to finance projects needed to contend with rising sea levels.

“The more that we wait the worse the effects of climate change will be,” said AllianceBernstein LP’s Eric Glass, who manages the firm’s $365 million municipal-impact portfolio. “And the bigger investment in climate change we will have to make.”

Bloomberg Markets

By Danielle Moran

August 24, 2018, 6:30 AM PDT

— With assistance by Sophie Alexander, Brian K Sullivan, and Joe Carroll

• Good intentions, binge borrowing created muni debt debacle
• No one thing doomed Puerto Rico; it was everything combined

The 608-page investigative report prepared for Puerto Rico’s Financial Oversight & Management Board isn’t exactly a whodunit.

Who was responsible for Puerto Rico borrowing its way to bankruptcy? How was it even possible for the island to build up $74 billion in bonded debt and $49 billion of unfunded pension liabilities, a burden that is described as “catastrophic”?

Well, nobody, really. Or everybody. Puerto Rico’s debt debacle, as recounted here in almost excruciating detail, was, so to speak, a crime without criminals. It was committed over more than a decade, very slowly and for the most part in plain sight.

For years, until that summer day in 2015 when Governor Alejandro Garcia Padilla declared on the front page of the New York Times that the debt was not payable, analysts and observers had to keep two conflicting premises in their heads.

The first was that Puerto Rico would repay its bonded debt, no matter what the financial or humanitarian cost, because that’s what municipalities do. The second was that the territory’s debt per capita, a multiple of that carried by the most indebted mainland states, was absurd and unsustainable. Now we know that only the second was valid.

The report, prepared by independent investigator Kobre & Kim LLP, is critical of the island’s leadership and lawmakers and processes, but only up to a point. It’s the same with the bond lawyers and bankers, advisers and analysts. Everything, it seems, was done with the best of intentions.

Consider, for example, the credit-rating companies. Couldn’t the analysts involved been more aggressive in shutting down Puerto Rico’s borrowing binge? “We have not seen any evidence to establish that the credit rating agencies did not genuinely believe that contemporaneous circumstances justified their assigned ratings,” the report says.

Or take the Government Development Bank, which enabled so much of the borrowing to go on. “The evidence we examined does not support the conclusion that current or former GDB officials violated any applicable ethics restriction in connection with relevant Puerto Rico-related transactions.”

Didn’t the island violate its own constitutional debt limits? “The evidence we reviewed supports the conclusion that Puerto Rico employed a reasonably robust process for these Debt Limit Calculations,” the report says. “We did not find any evidence that Puerto Rico’s government personnel believed that Puerto Rico’s interpretation of the Constitutional Debt Limit was wrong or that Puerto Rico performed the Debt Limit Calculation incorrectly.”

And so on. The chapter on Puerto Rico’s use of interest-rate swaps is the usual catalog of horrors, and there is a banker who does not recall a lot, but Puerto Rico wasn’t alone in its enthusiasm for the things.

The enormity of the Puerto Rico blowup seems to demand conspiracy theories to explain it. You won’t find them in the Final Investigative Report.

Bloomberg Business

By Joe Mysak

August 21, 2018, 12:26 PM PDT

(Joe Mysak is a municipal market columnist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.)

New Jersey has enacted legislation that greatly expands the pool of public agencies authorized to enter into public-private partnerships (P3s) for capital projects in the state, in order to address growing infrastructure needs.

Only public colleges and universities were authorized to use P3s in New Jersey prior to Governor Phil Murphy signing Senate Bill No. 865 on August 14.

SB 865 authorizes local governments, school districts, public authorities, and state and county colleges to enter into P3s for capital projects. The new law also allows for statewide road or highway P3 projects, as long as a project includes an expenditure of at least $10 million in public funds or any expenditure of solely private funds.

With billions in upgrades needed throughout the state, the new law is expected to generate a significant number of new projects. New Jersey has 21 counties, 565 municipalities, and nearly 600 school districts in addition to hundreds of public authorities. The state recently ranked as one of the country’s 10 worst for infrastructure.

Projects proposed under SB 865 must be submitted to the New Jersey Economic Development Authority (NJEDA) for review and approval, and are also subject to review and approval by the State Treasurer. NJEDA and the State Treasurer’s Office will oversee New Jersey P3 projects. In accordance with the new law, NJEDA will post on its website the status of each P3 project.

SB 865 requires local public input and finance controls for any project proposed under the legislation, as well as land use and financial approvals. The process begins when a public agency issues a Request for Proposals (RFP).

Solicitation, Procurement, and Criteria

Under SB 865, a public entity, which may include a local government unit, school district, state government entity, and state or county college, will issue a request for proposals (RFP) with no more than a 45-day response period. The public entity must have qualifying proposals from at least at least two private entities in order to select one.

NJEDA will review all completed project applications and request additional information as needed. The application must include, among other things, a long-range maintenance plan and a long-range maintenance bond, and must specify the expenditures that qualify as an appropriate investment in maintenance.

The criteria for assessing the projects described in the application include:

feasibility and design of the project;
experience and qualifications of the private entity;
soundness of the financial plan;
adequacy of the required exhibits;
adequacy of the long-range maintenance plan;
evidence of a clear public benefit; and
a resolution by the applicable public entity of its intent to enter into P3 agreement for the project.

The procurement process cannot begin until NJEDA approves the application.

After the proposals have been received, and any public notification period has expired, the applicable public entity will rank the proposals in order of preference. The public entity will consider professional qualifications, innovative engineering, architectural services, cost-reduction terms, finance plans, and the need for public funds to deliver the project.

Following the procurement process, but before the public entity enters into a P3 agreement, the project and the resultant short list of private entities is submitted to NJEDA for final approval. NJEDA shall retain the right to revoke approval if it determines that the project has “substantially deviated” from the plan submitted, and retains the right to cancel a procurement after a short list of private entities is developed if deemed in the public interest to do so.

P3 Agreements

SB 865 establishes specific requirements for P3 agreements, including provisions that building construction projects contain a project labor agreement and affirming that the agreement and any work performed under it is subject to the provisions of the Construction Industry Independent Contractor Act. Each worker employed for the construction, rehabilitation, or building maintenance service of facilities by a private entity under a P3 agreement must be paid not less than the prevailing wage rate for such worker’s craft or service in accordance with the New Jersey Prevailing Wage Act.

A project with an expenditure of under $50 million developed under a P3 agreement includes a requirement that precludes contractors from engaging in the project if the contractor has contributed to the private entity’s financing of the project in an amount of more than 10 percent of the project’s financing costs. If the agreement includes the lease of a new project in exchange for upfront or structured financing by the private entity, the term of the lease may not be for a period greater than 30 years.

Tax-Exemption

SB 865 provides that as long as a P3 project used in furtherance of the purposes of the applicable public entity is owned by or leased to a public entity, foreign or domestic nonprofit business entity, or a business entity wholly owned by the nonprofit business entity, then P3 projects under SB 865 are exempt from property taxes. The law further states that, notwithstanding any section of law to the contrary, P3 projects are not required to make payments in lieu of taxes. The project and land where it’s located are not subject to the applicable provisions of law regarding the tax liability of private parties conducting for-profit activities on tax-exempt land, or the applicable provisions of law regarding the taxation of leasehold interests in exempt property that are held by nonexempt parties.

Costs

SB 865 requires that prior to the commencement of work on a project, the private entity establish a project-specific construction account that includes the funding and/or financial instruments that will be used to fully capitalize and fund the project. The legislation requires that the private entity appoint a third-party financial institution to act as a collateral agent, manage the construction account, and maintain a full accounting of the funds and instruments in the account. The funds and instruments in the construction account must be held in trust for the benefit of the contractor, construction manager, and design-build team involved in the project, and will not be the property of the private entity unless all amounts due to the construction account beneficiaries are paid in full.

The legislation states that, if required by the applicable public entity, the private entity shall assume responsibility for all costs incurred by the applicable public entity before execution of the P3 agreement, including costs of retaining independent experts to review, analyze, and advise the applicable public entity on the RFP.

SB 865 provides that, when there is a substantial opportunity for innovation for a particular P3 project and the costs for developing a proposal are significant, stipends may be used. The public entity may elect to pay unsuccessful proposers for the work product they submit in response to an RFP. The public entity’s use of any design element contained in an unsuccessful proposal will be at the sole risk and discretion of the public entity unit and shall not confer liability on the recipient of the stipulated stipend amount.

After payment of the stipulated stipend amount, the applicable public entity and the unsuccessful proposer shall jointly own the rights to, and may make use of any work product contained in the proposal, including the technologies, techniques, methods, processes, ideas, and information contained in the proposal, project design, and project financial plan. The use by the unsuccessful proposer of any part of the work product contained in the proposal shall be at the sole risk of the unsuccessful proposer and shall not confer liability on the applicable public entity.

Ballard Spahr’s P3/Infrastructure Group is a leader in representing government and private sector developers, investors, and lenders in innovative public-private projects that range from transportation systems and energy facilities to military and public housing.

Copyright © 2018 by Ballard Spahr LLP.

www.ballardspahr.com

August 20, 2018

On August 25, the anniversary of Hurricane Harvey’s landfall, Harris County will vote on a $2.5 billion flood-control bond package that one disaster expert calls “a first step.”

August 25, 2017, is a date certain to be remembered as one of the worst in Houston’s history. But officials are hoping that August 25, 2018, will stand out as the day the city took a giant step toward securing its long-term future.

On Saturday, one year on from Hurricane Harvey’s landfall on the Texas coast, Harris County residents will decide whether to approve a $2.5 billion bond package that proponents say will deliver funds for crucial flood mitigation and prevention projects.

“This vote is one of the most important votes that the people of the City of Houston will cast,” Houston Mayor Sylvester Turner said at a press conference. (Houston is the seat of Harris County.)

Continue reading.

CITY LAB

TOM DART

AUG 23, 2018

(TRENTON) – Legislation sponsored by Assembly Democrats Eliana Pintor Marin, Cleopatra Tucker and Wayne DeAngelo authorizing municipalities to levy special assessments, and issue bonds, to replace certain lead-contaminated water service lines, has been signed into law.

“This law will put us one step closer to ensuring that our drinking water is safer to drink and lead free,” said Pintor Marin (D-Essex). “In Newark alone, there are approximately 15,000 homes in which the water service lines connecting the property to the city’s main water line are lead. This can lead to contaminated home drinking water.”

“The impact of lead in plumbing systems can have adverse effects on public health,” said Tucker (D-Essex). “This law will move us in the right direction by improving these plumbing systems, providing cleaner drinking water and producing better health outcomes.”

“Clean drinking water is essential,” said DeAngelo (D-Mercer/Middlesex). “This will help municipalities finance projects that will help replace lead-contaminated pipes to ensure the quality and safety of our drinking water.”

Under current law (R.S.40:56-1), if a municipality engages in a project that is categorized as a “local improvement,” the municipality may assess the cost of the project on local property owners in the vicinity who benefit from the project. The law (A-4120) signed today by Gov. Murphy adjusts language in R.S.40:56-1 to ensure that the replacement of certain lead-contaminated home service connections fall within this category, allowing those projects to be assessed as local improvements.

The law also amends a section of the local bond law to allow municipalities and counties to issue 30-year bonds to fund the replacement of lead-contaminated house connections to publicly-owned water systems. Specifically, these bonds will fund replacement of lead-contaminated house connections from the distribution main onto privately-owned real property, and into the privately-owned structure.

The law also amends the County and Municipal Water Supply Act, and the municipal and county utilities authorities law to provide that the public entities operating under those laws are not prevented from undertaking projects to replace lead-contaminated service connections, regardless of possible private service connection ownership.

The provisions of this law will only apply to service line replacement projects that are: (1) undertaken as environmental infrastructure projects; and (2) funded either by loans from the New Jersey Infrastructure Bank, or by loans issued through the Department of Environmental Protection.

By NJ ASSEMBLY DEMOCRATS

August 24, 2018 at 10:25 PM

Lawyers for the city of Stockbridge, Georgia, claim in a federal lawsuit that a plan to carve off parts of the city to form a new, wealthier, whiter city impairs its citizens’ right to vote and harms the city’s ability to pay municipal bond obligations.

The lawsuit was filed Monday against the state of Georgia, Gov. Nathan Deal and other state officials. It comes just days after Capital One Public Funding—one of the nation’s largest issuers of municipal bonds—filed a similar lawsuit seeking to stop the referendum to create the new city of Eagles Landing from moving forward as planned in November.

Deal signed legislation in May allowing for the creation of Eagle’s Landing, in part from land currently in Stockbridge. The new city’s formation must first be approved by local voters, and a referendum is planned for November’s midterm elections. Stockbridge residents outside the proposed new city won’t get a vote.

If created, Eagle’s Landing would take approximately one-third of Stockbridge’s residents and about half of its tax revenue.

Christopher Anulewicz, an attorney representing Stockbridge, said the city’s lawsuit centers on three claims. “Two of them deal with voting rights, one of them deals with the right to have integrity in our contracts,” he said.

Anulewicz said the creation of Eagle’s Landing would bring African-American voters from a majority voting bloc in Stockbridge to a minority position in the new city and would hurt the city’s obligation to pay bond debts taken out in 2005 and 2006, thereby harming an existing contract between the city and its lenders.

A Henry County Superior Court judge in July declined to issue an injunction stopping the vote from proceeding. The city is appealing the ruling.

Vikki Consiglio, chairman of the committee for the city of Eagle’s Landing, dismissed the lawsuits and said that proponents were pushing forward to the vote in November.

“Anybody can file a lawsuit for anything,” Consiglio said. “A lawsuit has already been filed, and the courts have ruled in our favor.”

“This is all about the vote and them trying to do everything they can to stop the vote,” she said. The lawsuit filed by Capital One Public Funding, says the company currently holds $11.75 million of bonds from Stockbridge, which mature in 2031. It says that the creation of Eagle’s Landing will shrink Stockbridge’s tax revenue by half, thereby “severely reducing” the “collateral that was contractually promised and pledged to (Capital One Public Funding).”

It follows a report issued by Moody’s Investor Service in May that said the creation of Eagle’s Landing would be “credit negative for local governments in Georgia generally because they establish a precedent that the state can act to divide local tax bases, potentially lowering the credit quality of one city for the benefit of another.”

Residents pushing for the new city say they are driven by a desire to secure better city services, increase property values and attract high-end businesses. But opponents of Eagle’s Landing, including several elected officials from the area, say race is a factor.

Stockbridge, about 20 miles southeast of Atlanta, is predominantly black, while the proposed city of Eagle’s Landing would have a higher proportion of white residents.

By BEN NADLER | Associated Press | August 22, 2018 at 01:58 PM

The city may try to paper over its pension woes with new debt.

If Chicago politicians applied as much cunning to solving their fiscal problems as financially engineering their way out of them, the city would be a triple-A credit.

Last year we wrote about Chicago’s scheme to reduce its borrowing costs by floating low-interest-rate bonds securitized by sales tax revenue. Investors snapped up the bonds, which fetched a triple-A rating from Fitch and yields as low as 2.22%. By comparison, Chicago’s junk-rated general obligation bonds landed above a 6% yield.

But junk by any other name is still junk, and Chicago’s finances have continued to erode even as property taxes soar to pay for pensions that remain woefully underfunded. Last year the city smacked homeowners with a 10% increase and this year they will have to pay 2.75% more. Mayor Rahm Emanuel is preparing to run for re-election next year, and he’d rather not raise taxes again.

So he’s now considering a plan by Michael Sacks, CEO of asset management firm GCM Grosvenor, to issue $10 billion in bonds to backfill the city’s pension funds. The details will have to be worked out, but the idea is to transfer the investment risk from workers and retirees to creditors while exploiting interest-rate arbitrage.

Chicago would presumably issue the bonds at a lower rate than the 7% expected return on its pension fund assets. Over time this would supposedly add to pension fund assets. In the short term, dumping $10 billion into the pension funds would also reduce the city’s annual pension payments since liabilities would appear to be smaller.

Caveat, creditors. The cities of Detroit and Stockton and San Bernardino in California defaulted on their pension obligation bonds in Chapter 9 bankruptcy. Stockton’s bond insurers got 50 cents on the dollar. Puerto Rico in 2008 issued $3 billion in pension bonds. But Congress in 2016 passed legislation allowing the commonwealth to wriggle out of those obligations. Hedge funds have sued the federal government and are demanding that U.S. taxpayers bail them out.

Like those other pension bonds, Chicago’s version would also have to be financed every year out of city revenues. A chunk of sales tax revenue is already earmarked for other bonds. If revenues shrink in the next recession, pension bondholders would compete with city services for payment priority. Who do you think wins if the city has to start laying off police officers to pay bondholders who have been getting 5% or 6% a year?

Investors might be willing to take these political risks if they can snatch a hefty enough interest-rate premium. And if they haven’t learned from the experience of Detroit and Puerto Rico, they will deserve whatever political haircut they eventually get.

THE WALL STREET JOURNAL

By The Editorial Board

Aug. 17, 2018

S&P Global Ratings believes about 5% of the New Jersey school districts it rates are left with aid awards significantly lower than amounts included in districts’ adopted budgets due to changes to state aid allocations in the adopted fiscal 2019 state budget, and this could pressure ratings.

Continue Reading

Aug. 10, 2018

Environmental impact bonds can help restore Louisiana’s coast more efficiently than previous methods of funding, according to a report released Tuesday by the Environmental Defense Fund.

The bonds are a financing tool in which repayment to investors is linked to the achievement of a desired environmental outcome. In this case, the outcome is sustained wetlands that help curb land loss and provide risk reduction for coastal residents and businesses. The bonds can be scaled and replicated to support efforts across Louisiana and beyond to help areas coping with sea level rise, land loss and damaging storms.

In the study, the EDF and Quantified Ventures will pilot the program on restoration efforts near the Belle Pass-Golden Meadow Marsh Creation project adjacent to Port Fourchon.

The organization said the bonds will allow coastal projects to be constructed more quickly than waiting on other money sources. The bond would be repaid through future BP oil spill settlement payments.

“Using environmental impact bonds provides Louisiana the opportunity to put more capital to work now and to find new sources of capital,” said Steve Cochran, associate vice president for coastal resilience at EDF. “Those are great outcomes for Louisiana’s coastal communities and can provide a model for other coastal areas around the world.”

The state will lose 4,000 square miles of land in the next 50 years if nothing is done, according the EDF. That would add to the 2,000 square miles of land loss that has occurred since the 1930s. The state has a vision for restoring and protecting its coast through its $50 billion Coastal Master Plan, but it has identified only $9 billion to $12 billion of the money needed to fully implement the plan.

The director of coastal resilience at EDF, Shannon Cunniff, said that the bonds work like other bonds but come with a bonus.

“These bonds are a new form of pay-for-success debt financing,” said Cunniff. “The big difference is that the repayment of the bond depends on the extent to which the desired environmental benefits are achieved.”

The director said a third-party will be used to help define exactly what would qualify as meeting the desired benefits. The investors will get a bonus if the project exceeds the defined goals.

“Environmental impact bonds can be a big-time game changer for Louisiana’s disappearing coastline. This (bond) will have major implications for coastal restoration efforts around the world,” said Eric Lestinger, founder and CEO of Quantified Ventures.

To help assess the feasibility of using the bonds for Louisiana’s coastal restoration efforts, EDF brought in Quantified Ventures. The firm was instrumental in designing the nation’s first environmental impact bond, which financed the restructuring of the Washing, D.C., Water and Sewage Authority.

“We looked at 31 coastal restoration projects across the coast at their potential economic benefit,” said Cunniff.

The EDF representatives said they picked the Port Fourchon area because of the site’s role in the offshore oil industry.

“It’s a great port in terms of the local, regional and national economy,” said Cunniff. “All of these factors made it an ideal location for facilitating the piloting of the partner payer transaction.”

The bonds would allow the state to use its money more efficiently by building wetland restoration projects sooner, involve local owners who benefit from restoration and reward high-performing wetland projects and the contractors who build them, according to the EDF.

“Environmental impact bonds provide the state of Louisiana with another outcome-based performance tool that can help us speed up coastal restoration while lowering costs and involving local partners in financing those efforts,” said Johnny Bradberry, the Louisiana Governor’s Executive Assistant for Coastal Activities. “This approach to bonding shows that (the state) is looking to innovate on all sides of our business: the projects, the procurement and the financing.”

The report outlines the next steps the state has to take to test the bonds, noting that many steps – including establishing credit rating, resolving any issues with Gulf oil spill money and determining the bonds’ tax-exempt status – are the same as those necessary to pursue a more traditional bond.

By Scott McLendon

Aug 14, 2018

A bill signed into law by Governor Murphy expands the use of public-private partnerships to develop essential projects and grow the state’s economy.

Senate President Steve Sweeney says those partnerships helped colleges get private capital to build new facilities, and the bill he sponsored will give the state, county, and local governments more flexibility to advance critical infrastructure projects.

“Public-private partnerships are the most important thing we could be doing in the state. As the governor calls for a stronger fairer economy, this is one the pieces that will actually build that. With private sector ingenuity, technology they can do it better.”

Jack Kocsis is CEO of the Associated Construction Contractors of New Jersey. He says the law has the potential to spur development of much needed public works projects and create additional work opportunities.

“It really has the ability to advance New Jersey’s economy. It really demonstrates that New Jersey is serious about working with private entities to actually attract capital to improve our infrastructure.”

Governor Murphy expects the new law will enable vital projects to replace water lines and upgrade the transportation infrastructure without putting a burden on taxpayers.

“Many of them would stretch government entities far beyond the ability of taxpayers to pay, but this newfound ability and flexibility will go a long way to allowing us to get vital statewide and community-focused improvements off the drawing boards and into reality.”

The legislation provides for financial oversight and approval of the partnership agreements by the State Treasurer.

WBGO.COM

By PHIL GREGORY • AUG 14, 2018

On August 10, Governor Murphy signed into law S1247/A2779, which amends the sewer and water connection fee law in several ways to address existing inequities regarding connection fees (or tapping fees) (the Law). Then-Governor Christie previously pocket-vetoed a substantially similar bill earlier this year, but the bill made it back through the legislature and onto Governor Murphy’s desk. The Law establishes certain credits and reductions for sewer and water connection fees, including for all affordable housing.

New Jersey sewer and water laws have frustrated developers for many years because they are outdated and charge connection fees based on math that is not transparent. Sewer and water connection fees are typically an important line item in a developer’s pro forma. This Law will be welcomed by both residential and commercial developers.

Most notably, under the prior statute, public housing authorities and non-profit organizations building affordable housing projects (but not for-profit developers) were entitled to a 50 percent reduction in sewer and water connection fees for new affordable unit connections to the sewer and water system. The Law amended this section of the statute to expand to all affordable housing (including for-profit developers) the 50 percent reduction in new connection fees for affordable units and the credit against the connection fee for affordable units previously connected to the sewer and water system that were demolished or refurbished.

Additionally, the Law generally allows for credits to be applied to connection fees for a reconnection of certain disconnected properties that were previously connected to the sewer or water system for at least 20 years and have not been disconnected for more than five years. The credit is calculated based on several factors, including but not limited to, whether the reconnection does not require any new physical connection or increase the nature or size of service or expand the use of the system, or whether a connection fee was previously paid for the existing use.

For properties already connected to the sewer and water system, the Law allows local or regional authorities to charge a new connection fee for an addition, alteration or change in use that “materially increases” (as defined in the Law) the level of use and imposes a greater demand on the utility system, but does not involve a new physical connection of the property to the system. The connection fees for any new or additional connections are still imposed.

This Law is a first step in addressing some of the shortcomings of the existing sewer and water laws. This alert serves only as a summary of the Law. For more information or questions, please contact the authors or any member of the Day Pitney real estate team.

Day Pitney Alert

August 14, 2018

Day Pitney Author(s) Craig M. Gianetti Nicole M. Magdziak

The deeply indebted city, with bonds already rated as junk, considers borrowing billions to cover its pension costs.

When Chicago issued half a billion dollars in new bonds late last year, some investors balked, though the offering was designed to protect them by guaranteeing that they would be paid with tax revenues that Illinois sends to its biggest city. “It’s an untested model,” the research head at Gurtin, a municipal bond firm, said of the offering—Chicago’s first under a new state law. Ominously, he worried that if Chicago defaults, it was unclear how much protection holders of the new debt would really get.

Even as Chicago grapples with nightmarish violent crime, the city faces imposing fiscal challenges. The city, which says that it will collect about $8.5 billion in local revenues this year, is burdened by an astounding $28 billion in unfunded pension liabilities and another $9 billion or so in money that it owes to general-obligation bondholders, as well as billions more in other debts. Chicago’s bonds, graded as “junk” by analysts, are among the lowest-rated of any major municipality. That forces the city to stretch the limits of municipal finance, seeking innovative techniques that might get new borrowers on board, but at the potential expense of taxpayers and holders of Chicago’s other debts. It’s becoming increasingly difficult to see how this ends well in the Windy City.

Chicago’s latest fiscal scheme is already making headlines at home and in municipal-finance circles. Late last week, Chicago’s chief financial officer and a financier close to Mayor Rahm Emanuel proposed the idea that the city would borrow $10 billion through a bond offering to shore up its pension system, using a dedicated revenue stream in order to persuade investors to come on board. The plan would seek to offset the pressure that the city faces from accelerating pension payments that it must make in coming years. Chicago’s pension costs have doubled in the last decade—from $416 million in 2008 to $1 billion last year—and that’s just 42 percent of what it should be paying to fund new retirement credits that workers are earning, and to wipe out its debt. Under a long-term plan, the city must double its pension payments again over the next five years, and then keep increasing payments steadily every year for the next 30 years. Even then, the plan would get the system back to only 80 percent funded, if everything else about the system’s projections stays on course.

Chicago’s bond offering would raise money for the pension system, where the money can then be deposited in financial markets to earn returns. The idea sounds simple. Chicago could borrow the cash, officials predict, by issuing bonds that pay between 5 percent and 5.5 percent annually. The city’s pension system, meanwhile, projects that it will earn between 7 percent and 7.5 percent annually in the market over the long term. By simple math, earning 7 percent on money that costs you just 5 percent is a winner. “It would be irresponsible for me not to look at it,” Chicago CFO Carole Brown told the press last week.

The problem is that those kinds of returns are far from a sure thing. That’s why pension bonds have been behind some of the biggest fiscal meltdowns in recent years. Stockton, California, for instance, borrowed $125 million in 2007 to bolster its underfunded retirement plans and gave the money to California’s public-pension system to invest. The system’s investment professionals promptly lost more than a quarter of the principal, exacerbating an already-emerging crisis, which provoked city officials to file for bankruptcy. Detroit, eyeing the same kind of sharp increases in pension payments that Chicago faces, created a complex pension-financing scheme in 2005 to raise money by circumventing Michigan’s limits on municipal debt. After the market crashed in 2008, the deal blew up. A financial manager brought in to clean up the mess took one look at Detroit’s retirement obligations and hauled the city into federal bankruptcy court.

Brown justified considering the maneuver because the city can’t reasonably dig its way out of its pension mess with taxpayer dollars. She’s right: Chicago has already raised taxes by more than $800 million in the last few years to bolster pension payments. Even so, the system’s funded ratio keeps dropping. If the $28 billion that Chicago is missing from its pension system existed, and was earning 7 percent in the market, the city would be garnering nearly $2 billion a year in new capital. That’s money that—based on the design of the pension system—it’s supposed to be earning. The missing investment returns, however, amount to far more than taxpayers can make up, so despite Chicago’s best efforts, its pension situation keeps deteriorating. Brown said that the city needs to replace some of that missing money; if it can’t, then Chicago’s pension-funding status will fall even lower when the next market downturn occurs. But the Detroit and Stockton examples illustrate how things can get even worse with a big loan and a bad market bet.

The big losers in all this may be taxpayers and borrowers of previous Chicago debt, who should be looking with panic at the city’s maneuvering. Chicago is now guaranteeing the debt of its newest bondholders by dedicating specific tax dollars to repay them. Detroit did the same thing, pledging revenues from casino taxes to reimburse some lenders. Those lenders did get paid in full during the bankruptcy, but other Detroit bondholders, including some who held Detroit’s general-obligation debt, previously thought to be among the most secure forms of municipal debt, took a big loss, or “haircut,” when the city went bust. With every new, secured deal that Chicago engineers, the risks for holders of the city’s older debt grows.

Taxpayers face their own risks. Loans secured by dedicated revenue streams tie up tax proceeds. The more a municipality borrows in these kinds of transactions, locking up future revenues, the more it reduces its fiscal flexibility. Detroit eventually wound up in what fiscal experts call “service insolvency,” that is, it didn’t have enough money left over to spend on basic municipal services. Chicago has a far more vibrant economy than Detroit’s, but it also has more pension debt, and Illinois judges have granted public workers extraordinary pension protections. The city isn’t even allowed to reduce the rate at which workers earn benefits for work that they haven’t done yet, so the pension system just keeps racking up new debt at alarming rates.

There’s little precedent for what’s happening in Chicago, and no clear path out. Illinois doesn’t let cities file for federal bankruptcy protection, and that’s unlikely to change because the municipal unions that have so much political power in the Land of Lincoln hate bankruptcy, where contracts can be busted and pension debt cancelled. Still, as economist Herb Stein famously observed, “If something cannot go on forever, it will stop.” But when, and how?

City Journal

by Steven Malanga

August 9, 2018

Voters will decide in November whether to take city money out of the hands of big banks.

Trinity Tran is a powerful speaker. Addressing a rally in downtown Los Angeles for New York congressional nominee Alexandria Ocasio-Cortez, the 33-year-old activist and organizer thundered, “We are witnessing the emergence of a solution, from profit and greed to collective prosperity. We can empower our community from the ground up. It’s time to take our power back.”

Tran’s organization, Public Bank LA, is leading the revival of an idea that had largely been discarded until the financial crisis. In November, Los Angeles voters will have the opportunity to approve a public bank for the city. If the measure passes, it would become the first government-owned bank developed in the United States since 1919.

The term “public bank” may confuse some into thinking that Los Angeles is about to create a bunch of branch offices where residents can open a free checking account. The idea is much more ambitious. Public bank enthusiasts want to finance local improvements in housing, infrastructure, and community development by employing the money citizens already pay to state and local governments for services. To them, it’s about democratizing the financial system.

Continue reading.

The Huffington Post

By David Dayen

8/10/18

Huntington Bancshares is buying Chicago-based Hutchinson, Shockey, Erley & Co., a public-finance investment bank and broker-dealer with a focus on municipal securities.

The purchase price was not disclosed. The deal is expected to close before the end of the year.

Founded in 1957, the company serves state and local government and nonprofits. It underwrites and structures debt that funds school construction, infrastructure development and other capital projects.

The company has 11 offices in nine states with 51 employees.

The current management team will continue to be led by CEO Ton Dannenberg. The company will continue to operate under the same name and remain in Chicago.

The Columbus Dispatch

by Mark Williams

Wells Fargo Securities, the investment banking and capital markets business of Wells Fargo, has hired two former Morgan Stanley investment banking leaders: Randy Campbell heads the Public-Private-Partnership (P3) and Sports Financing group, and Jim Perry leads the Southern regional group.

Edward Boyles will continue to serve as head of the Atlantic region. Kevin Carney, managing director, and Julie Burger, director, will continue to work on transportation-related P3 financings.

“As we continue to invest in our public finance business, hiring Randy and Jim — both leaders in the industry — will bring additional experience and increased capabilities that we can offer to our clients,” said Stratford Shields, head of Public Finance. “Wells Fargo offers full-service financial capabilities, including underwriting and balance sheet solutions through an integrated Government and Institutional Banking platform, which few other firms offer.” All report to Shields.

Campbell has 30 years of public and corporate finance experience, working on sports-related, general infrastructure and P3 advisory and financing transactions. He previously headed the sports finance investment banking practice at Societe Generale. As head of Public-Private-Partnership and Sports Financing, Campbell will work on buy- and sell-side advisory and financing opportunities in the P3 business, covering municipal entities, infrastructure firms and other sponsors. He also will oversee the firm’s investment banking efforts related to both sports team and stadium financing and will be based in New York.

Perry, a 10-year veteran of public finance, worked as deputy chief of staff and policy director to Mississippi Governor Haley Barbour prior to becoming an investment banker. Perry oversees the seven-state Southern Region, with a focus on complex financing structures for a variety of state and local government entities. He will also be a part of the P3 investment banking team. His territory includes Alabama, Mississippi, Louisiana, Texas, Oklahoma, Kansas and New Mexico and he will be based in Jackson, MS.

Wells Fargo Government & Institutional Banking supports more than 4,000 government, education, nonprofit and healthcare clients across the U.S. The firm organizes specialized commercial banking and capital markets teams under one business, offering an integrated approach to provide the most value for its clients. Government Banking serves federal, state, county and city governments, government agencies and authorities, municipal utilities, school districts and specialty public sectors such as public power, housing, finance and transportation. The Education and Nonprofit group serves colleges, universities, 501(c) organizations, foundations, endowments and national nonprofits. Healthcare Financial Services serves nonprofit hospitals systems, nonprofit healthcare insurers and academic medical centers.

AUG 7, 2018

SACRAMENTO – California’s treasurer has signed on to a document committing to to fight climate change through a strategy using green financing.

“President Trump may dial up his efforts to mislead the American people into believing climate change is a hoax created by the Chinese, but we Californians laugh at such lunacy because we know – without doubt or reservation – that the fate of the planet is at stake. Building critical public infrastructure and a future that does not depend on fossil fuels is now deadly serious business,” California Treasurer John Chiang said to a gathering of policymakers and top-level executives at the Milken Institute California Policy Summit in Sacramento on Tuesday.

While speaking with attendees, Chiang signed the “Green Bond Pledge.” A declaration with broad and far-reaching impact, states and cities across the nation are being urged to take the pledge that would commit them to a strategy that will finance infrastructure and capital projects that meet the challenges of climate change with “green bonds,” or green financing.

“Treasurer Chiang is taking smart action to strengthen the market for climate-friendly bonds,” said California Governor Edmund G. Brown Jr., who is hosting the Global Climate Action Summit in San Francisco in mid-September. The summit will showcase actions – including the Green Bond Pledge – states and regions, cities, companies, investors, and individual citizens are taking to realize the goals of the historic 2015 Paris Agreement.

Those signing the green bond pledge agree that climate change poses an existential threat and that the rapid growth of a green bonds market will not only meet the unique challenges the world faces, but will do so while making communities more economically competitive, prosperous, and productive.

“As the world’s fifth largest economy, California will lead the way and help finance as much new clean infrastructure as we possibly can,” said Chiang. “While Washington continues to deny the irrefutable science that proves climate change, the Golden State has embarked on an unstoppable path to reduce the dangerous effects of greenhouse gases and build a future that is climate resilient.”

Next, the governor and treasurer are establishing a working group to develop and implement a green bonds strategy to fulfill the commitments outlined in the Green Bond Pledge.

Green bonds may be sold by governments, as well as by private entities, to finance projects that have positive environmental or climate attributes. The projects can range from clean transportation to renewable energy.

The American Society of Civil Engineers estimates the U.S. currently has a multi-trillion dollar shortfall in funding its infrastructure needs in the coming decades. In California alone, independent reports estimate the shortfall will exceed $400 billion over the next 10 years.

The green bond market started in 2007 with bonds issued by the World Bank and the European Investment Bank. By 2017, both California and New York had issued more than $4 billion in bonds to finance such things as clean water projects, green schools, mass transit, land preservation, and green housing. The state is now looking to build on that start and help grow a much more robust market for green bond financing.

The Green Bond Pledge aims to help establish the market and accelerate its growth. The pledge was developed and designed by international climate finance and environmental groups.

Treasurer Chiang has devoted considerable energy and time to unlocking the potential of the green bond market. His office has handled more than $2.2 billion in green bonds for mass transit, clean water, and pollution control projects, as well as for Kaiser Hospital green buildings, and a rice-straw fiberboard plant. The treasurer’s senior team will also be discussing green bonds with Chinese provincial government officials in the fall.

In 2016, Treasurer Chiang conducted a five-city, national listening tour, meeting with market experts and investors to identify barriers and challenges to growing the green finance market. In February 2018, he convened a green bond symposium with the Milken Institute and tasked its blue-ribbon Financial Innovations Lab® with developing actionable paths to creating a more robust green bonds market. The result was two ground-breaking studies. The first, issued in 2017, identified the barriers and challenges to growing the green bond market. The second was unveiled today.

Chiang added, “Today’s report provides strategies and solutions aimed at turbocharging a new and growing financial market that can help provide more affordable capital to not only meet California’s growing infrastructure needs, but also steel ourselves against wildfires, rising sea levels, and extreme weather.”

The report issued today includes, among its suggestions, improving market standardization, defining what is green, and streamlining pricing. It concludes that, “Because California is widely recognized as a leader in environmental sustainability, pioneering efforts to streamline the green bond market can serve as a model for other states and countries.Building public infrastructure with future generations in mind is a must, not just in California, but everywhere on the planet.”

A copy of the Green Bonds Pledge can be found here.

CALIFORNIA TREASURER’S OFFICE | POSTED ON WEDNESDAY, 08 AUGUST 2018 02:15

South Dakota boasts a structurally balanced budget, diverse economy, and growing population. Thanks to strong financial and budgetary management through the recession, the state continues to fund its reserves according to its policy to maintain 10% of budgeted expenses.

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Aug. 3, 2018

(Reuters) – Puerto Rico submitted a recovery plan to the U.S. Congress on Wednesday that carries an estimated price tag of $139 billion, which is 47 percent more than the bankrupt U.S. commonwealth requested in November.

The economic and disaster recovery plan allocates the money to housing, water and energy systems, education, transportation, public buildings, communications, planning, municipalities, as well as to the economy and environment, according to Governor Ricardo Rossello’s office.

Puerto Rico’s severe financial problems, which led to bankruptcy court in May 2017 to restructure about $120 billion of debt and pension obligations, were compounded by destructive hurricanes that hit the island in September.

“Puerto Rico has a unique opportunity to innovate and rebuild in order to become that Puerto Rico we all want,” Rossello said in a statement.

He added that the initiatives were aimed at “making us stronger and resilient, while guaranteeing a long-term economic recovery.”

Last November, Rossello requested $94.4 billion from Congress to rebuild the island’s infrastructure, housing, schools and hospitals devastated by Hurricanes Maria and Irma.

That so-called Build Back Better plan contained a preliminary assessment of damages and an initial estimate of money the island needs to rebuild, according to the statement.

The final plan, which was submitted on the deadline day set in the 2018 U.S. budget act, expanded the scope of the November request and was developed with input from federal agencies, the governor’s office said. It was also posted on the internet and subjected to public hearings prior to its submission.

Near-term priorities for the money include restoring Puerto Rico’s ailing electrical system, which was devastated by Hurricane Maria, improving emergency preparedness, and repairing public facilities. Long-term objectives include stopping emigration and boosting economic growth.

By Reuters

Aug. 8, 2018

(Reporting By Karen Pierog in Chicago; Editing by Daniel Bases and Alistair Bell)

• Island has reached two crucial agreements with bondholders
• Recession, power grid failures continue to plague the island

Slowly and painfully, Puerto Rico is inching toward what passes for a financial recovery on the bankrupt and devastated island.

Eleven months after Hurricane Maria, Puerto Rico has reached two crucial agreements with some creditors — key steps toward emerging from what was, even before the storm, the largest municipal bankruptcy in U.S. history. A tentative agreement announced Wednesday sent the price of certain Puerto Rico bonds soaring as much as 30 percent, a boon for anyone who’d bought them at rock-bottom prices only months ago.

Yet for many thousands of ordinary people on the island, recovery — financial and otherwise — remains elusive. Just this week, key stretches of its rickety power grid failed once again; the U.S. Army had to send 13 soldiers to help deal with a backlog of corpses at the island’s morgue. And the economy remains mired in a decade-old recession that’s sent hundreds of thousands fleeing to the mainland, including many young and educated workers.

“The future of Puerto Rico looks sad and depressing,” said Flor de Oro Quinones, a Puerto Rican retiree from the nearby municipality of Trujillo Alto, who was walking through San Juan’s business district Thursday. “This is going to be an island of the old and poor.”

She’s worried regular Puerto Ricans will shoulder the cost of the settlement with bondholders, and that the ongoing debt burden — reduced as it may be — will ultimately accelerate the brain drain.

Painful Austerity

What’s more, a court ruling Monday had the island bracing for painful new austerity measures that some economists argue could accelerate a mass exodus to the U.S. mainland. U.S. District Court Judge Laura Taylor Swain sided with a federal oversight board installed by Congress to look after the island’s spending, affirming its right to give binding recommendations about the budget. Governor Ricardo Rossello portrayed the decision as an attack on democracy, saying it gave the board the power to unilaterally overrule elected representatives.

The latest preliminary debt-restructuring deal announced late Wednesday involved bonds backed by revenue from sales-tax collections. It was a feature that was supposed to have made them more secure investments than other bonds, and it ultimately made them easier to sell when they went to market over the past decade or so.

Now, with the island short of cash, owners of the debt with top claim to the revenue would recoup 93 percent of their investments under the latest agreement, while subordinated bondholders would get 56 percent. While the securities surged on the news, they still hovered below the proposed deal prices, suggesting the market didn’t see the transaction as a done deal.

Late last month, Puerto Rico’s beleaguered electric utility struck a deal with its bondholders to reduce its $9 billion of debt.

Just about everyone — including bondholders, who would get new Puerto Rican securities in the latest restructuring agreement — has a stake in seeing Puerto Rico emerge from its decade-old recession. But opinions differ drastically on the most effective path, and whether it’s even possible to return to growth amid an austerity campaign.

Steeper Discount

“I’m a little skeptical of sort of the long-term economy and ability to pay debt service,” said Craig Brandon, co-director of municipal investments at Eaton Vance Management, which owns some insured Puerto Rico sales-tax bonds, which are known as Cofinas. “I don’t think economically things have gotten any better on the island.”

Many islanders think the government should have negotiated a steeper discount, and some had held out hope that Puerto Rico’s debt could be wiped out completely.

“The more money that goes to debt payment, the less there is for operations and investment here,” said Gustavo Velez, a Guaynabo, Puerto Rico based economist and head of consulting firm Inteligencia Economica. “By the looks of it, that agreement is quite generous with the Cofina bondholders, based on the money available and the sustainability of economic growth.”

But the deals aren’t all about Wall Street profiting at residents’ expense. For starters, the sales-tax bonds had been popular among residents themselves, including many working-class retirees who stood to take sharp losses under a less favorable accord.

Rossello held the pact out as good for all parties. He touted it as an example of his commitment to consensual dealmaking — as opposed to pricey and divisive litigation — and said it moved Puerto Rico one step closer toward accessing capital markets again, a key goal for full economic recovery.

“The public policy of my administration has always been to reach consensual agreements with our creditors that do not affect the services that the government provides to the most vulnerable,” Rossello said.

Bloomberg Business

By Jonathan Levin and Yalixa Rivera

August 10, 2018, 3:00 AM PDT

— With assistance by Amanda Albright

It’s still unknown how much the island’s full-faith-and-credit pledge is worth.

Puerto Rico has been gradually moving along with its debt-restructuring efforts for months. On Wednesday, the beleaguered commonwealth took a big leap forward, announcing a deal with its sales-tax bondholders.

Make no mistake: This is a significant step. Investors in the bonds, known by the Spanish acronym Cofina, have more money at stake than any of the other groups of creditors that have come to an agreement with Puerto Rico. According to Governor Ricardo Rossello, the deal would save the commonwealth $17.5 billion in interest payments over the life of the securities. While that sounds like a victory, bondholders come out quite nicely, too. Owners of senior Cofinas, with the highest claim on sales taxes, would recoup 93 percent of their investment, while subordinated securities get a 56 percent recovery.

That’s way better than what the market was indicating (the bonds soared in price Thursday). And for the senior Cofinas, which traded at less than 40 cents on the dollar at the start of the year, it’s an even bigger windfall than what Moody’s Investors Service thought way back in July 2015. The credit rater set the expected recovery rate at 65 percent to 80 percent.

Nothing is easy when it comes to Puerto Rico. By all accounts, this was a hard-fought compromise. It’s the second significant deal for the island in as many weeks, following an agreement with its power company’s bondholders in late July.

But the most-scrutinized deal for the commonwealth — and the $3.8 trillion municipal market as a whole — is still to come.

The fate of Puerto Rico’s roughly $18 billion general-obligation bonds, backed by the island’s full faith and credit, remains firmly in limbo. In theory, because Cofina securities will now have the first right to 53.65 percent of collected sales taxes, that should free up cash for G.O. debt. Court documents filed in June essentially said as much, adding that the extra funds could also cover essential services.

It’s telling, though, that Puerto Rico’s benchmark general-obligation bond is still trading at 50 cents. On the one hand, that’s the highest price since Hurricane Maria devastated the island more than 10 months ago. But for debt that’s perceived to have at least equal standing to senior Cofinas, it has an awfully long way to go to catch up to the announced recovery rate.

It speaks to the uncertainty around what a general-obligation pledge means in times of deep distress. In Detroit, holders of “unlimited-tax” G.O. debt received 74 cents, while “limited-tax” G.O. bonds recovered 34 percent. There really isn’t a robust playbook.

Many investors in Puerto Rico counted on two things. First, the commonwealth’s constitution, which guaranteed G.O. payments before all else. But in reality, elected officials were always going to provide essential services to its citizens before accommodating Wall Street. Second, that the territory couldn’t file for bankruptcy protection and potentially cram down a debt deal. That didn’t last, either.

The past year of ultra-depressed prices gives Puerto Rico an advantage. My Bloomberg Opinion colleague Joe Nocera wrote recently about Aurelius Capital Management LLP, which owns $558 million of Puerto Rico’s general obligation bonds and wants to get paid in full. But would Mark Brodsky — or any investor, for that matter — really quibble with a 93 percent recovery, like the senior Cofinas? Remember, the benchmark debt was issued in March 2014 at precisely 93 cents on the dollar.

General obligations have always had one chief flaw: there’s no clear revenue steam for investors to point to and claim as their own. By contrast, Cofina investors will have a senior lien on the agreed upon portion of sales taxes. A term sheet from Citigroup Inc. projects that revenue will cover debt service more than 2.6 times over, placing the bonds in a similar tier as double-A rated issuers like the Massachusetts School Building Authority and Utah Transit Authority.

The G.O. investors are going to want a similar deal, with all the legally enforceable structures they can get. Because for all the talk of recovery rates, Puerto Rico has a massive recovery of its own ahead. The commonwealth just now conceded that Hurricane Maria killed more than 1,400 people on the island last year, far greater than the 64 in the official death toll. Add that to the mass population exodus that was already taking place, and there’s no guarantee that projections about the commonwealth’s future will pan out.

In that sense, it seems comparatively easy to dole out various revenue streams. But judging how much Puerto Rico’s full faith and credit is worth, after the constitutional guarantee was all but eviscerated? That will be the biggest challenge yet.

Bloomberg Opinion

By Brian Chappatta

August 9, 2018, 8:54 AM PDT

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

The passage of Alaska’s 2019 operating budget marks an important shift in fiscal reform for the state. For the first time, the state approved a $2.7 billion transfer from the Permanent Fund Earnings Reserve Account (ERA) to the unrestricted general fund (UGF) for the year.

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Aug. 3, 2018

The Massachusetts Department of Environmental Protection has issued a first-of-its kind “watershed” permit. Instead of issuing individual permits, the Cape Cod towns of Brewster, Chatham, Harwich and Orleans were issued a joint permit that addresses water quality concerns. None of the towns has a municipal public sewer system, and most homes rely on septic systems. The towns have grown, and the additional septic systems installed have leaked excess nitrogen to the point where fish and their habitats are being harmed.

The 20-year permit, issued after consultation with the Environmental Protection Agency (EPA), allows the towns to reduce nitrogen pollution through efforts like fertilizer reduction and improved aquaculture. Each town has its own nitrogen removal target, and the towns must meet and show progress through reports every five years.

Sidley Austin LLP

by David F. Asmus, Samuel B. Boxerman, Terence T. Healey, Kenneth W. Irvin, Michael L. Lisak and Judah Prero

August 13, 2108

On August 3, 2018, the Pennsylvania Supreme Court vacated another municipal zoning decision favorable to oil and gas development. In its per curium order of Delaware Riverkeeper Network v. Middlesex Township (N0. 270 WAL 2017), the Supreme Court directed the Commonwealth Court to reconsider its previous decision upholding a local zoning ordinance that permitted oil and gas development in agricultural and some residential areas. This order, accompanied by the Supreme Court’s recent decisions in Gorsline v. Fairfield Township and Environmental Defense Foundation v. Commonwealth, indicates a willingness by the Supreme Court, including four of its newly elected justices, to limit (or perhaps prohibit) drilling in agricultural and residential zoning districts premised upon the Environmental Rights Amendment to the Pennsylvania Constitution.

Here, the Commonwealth Court had upheld the zoning ordinance based upon a three-part balancing test, which was subsequently revoked by the Supreme Court. As such, the Commonwealth Court must now decide the case based upon different criteria. [Interestingly, several unconventional wells have already been drilled pursuant to the challenged ordinance.]

The challengers, like those in the other cases noted above, are strong anti-fracking advocates, who seek to limit unconventional drilling to industrial zoning districts. However, such districts are oftentimes not available for leasing or applicable parcels are too small for the construction of well pads. Further, such restrictions limit the extraction of natural gas from a miniscule portion of the subsurface area within the municipality. On a favorable note to exploration and production companies, the Supreme Court specifically claimed that its recent decisions “should not be misconstrued as an indication that oil and gas development is never permitted in residential/agricultural districts or that it is fundamentally incompatible with residential or agricultural use.”

Vorys Sater Seymour and Pease LLP

by Michael K. Vennum

August 8, 2018

Governments use a practice known as “scoop and toss” when they’re desperate for cash. It brought Hartford to near-bankruptcy.

Now, financial analysts say, New Haven is resorting to the practice — while the mayor promises she has a plan to guard against fiscal blowback.

New Haven takes that step this week, as it refinances its debt for the seventh time in nine years, partly in order to plug a left-over $11.5 million debt from the fiscal year that just ended. Worth $160 million, this refinancing will be the largest in the city’s history.

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NEW HAVEN INDEPENDENT

by CHRISTOPHER PEAK | Jul 31, 2018

ELK GROVE VILLAGE, Ill. — A Chicago suburb is spending $300,000 to be the title sponsor for a nationally televised college football bowl game in the Bahamas.

Elk Grove Village and ESPN on Tuesday announced the bowl sponsorship for the Makers Wanted Bahamas Bowl. They said the Dec. 21 game in Nassau will mark the first time a non-tourist municipality has sponsored a bowl game.

The game, which was previously sponsored by fast-food chain Popeyes, is one of 14 owned and operated by ESPN Event. The bowl features teams from the Mid-American Conference and Conference USA.

The move is the village’s latest marketing push to expand the reach of its “Makers Wanted” campaign to promote a local industrial park, which officials say has more than 5,600 businesses. The campaign was launched in 2015, and has included a website, billboards, TV and radio commercials, and print ads.

Mayor Craig Johnson said the sponsorship will be “a perfect opportunity to use college football to share our message with the entire country.” Richard Giannini, the bowl game’s executive director, said the unique sponsorship will allow the village to promote its message to a national audience.

Elk Grove Village is just northwest of Chicago and borders O’Hare International Airport. Village officials said they plan to host a watch party the day of the game for local businesses.

By The Associated Press

Aug. 1, 2018

Funds would allow Harris County to complete delayed flood-prevention projects

HOUSTON—A year to the day since Hurricane Harvey slammed into Texas, Houston area residents are set to vote on whether to overhaul the region’s beleaguered flood-protection system, an election that local officials have cast as critical to the area’s future.

On the ballot in Harris County is a $2.5 billion bond backed by property taxes that could more than quadruple the annual funding available to help shield Houston and the surrounding cities from flooding. The proposal, set for a special election on Aug. 25, is the largest bond measure ever offered in Texas’ most populous county. If approved, proceeds from the bond would help fund a range of projects aimed at significantly bolstering the area’s aging network of bayous, which serve as a drainage system for the flood-prone county.

At stake, public officials say, is whether Harris County can ever realistically hope to protect itself from another storm of Harvey’s might.

“It is the most important local vote in my lifetime,” said Judge Ed Emmett, the county’s chief executive and one of the architects of the measure. “If Harvey came next week, we’d be in a world of hurt.”

The storm caused 36 flood-related deaths in Harris County and flooded more than 159,000 homes, apartments and other dwellings, while also damaging thousands of commercial structures and businesses. But even before Harvey hit, some officials and experts had warned that flooding was going to worsen in the Houston area and that upgrading an antiquated drainage system would be costly.

When disaster strikes, having a safety net like flood insurance, a stable income, or savings can mean the difference between getting back on your feet, and living every day among the wreckage. We profile two families in Houston still recovering from Hurricane Harvey six months after the storm.
Local officials said increased funding would allow the county to finally complete flood-prevention projects that have been slowed because of a lack of money, as well as take additional measures it otherwise couldn’t afford. More than 200 potential projects have been identified including the widening of bayous, repairing flood-damaged infrastructure and buying out more than 1,000 flood-risk homes.

Matt Zeve, director of operations for the Harris County Flood Control District, said some of the projects the county could finish could have helped thousands of homes flooded during Harvey. If the proposal is approved by voters, the flood control district’s annual budget could rise to more than $500 million from $120 million, he said.

There is also the possibility of getting matching federal funds for projects the county can pursue if the bond measure passes, Mr. Zeve said.

According to county estimates, the bond proposal would increase the total property tax by no more than 1.4% for most homeowners in Harris County.

Since June, county officials have fanned out across the Houston area to hold community meetings on the proposal. At those meetings, Mr. Zeve said he saw the lasting effects the days of flooding had on residents.

“There is literally a case of countywide PTSD to this day over Harvey,” he said. “I will talk to someone after a meeting, and they will be visibly emotional, crying in front of me. This is very emotional topic for people here.”

The measure has largely generated bipartisan support. Judge Emmett is a Republican, while Sylvester Turner, Houston’s Democratic mayor, also backs the bond. Gov. Greg Abbott, a conservative Republican who has called for reducing property taxes, approved the county’s request to hold the emergency special bond election, a requirement of state law.

Kaaren Cambio, whose home flooded during Harvey, said she at first had concerns that the public wouldn’t be given enough of a say on how the money was spent. But after attending a community meeting, Ms. Cambio, who heads a flooding task force for the Harris County GOP, said those concerns were allayed.

“I am never for higher taxes but in this case, this bond is necessary,” she said.

Roger Gingell, general counsel, for Residents Against Flooding, a Houston group that advocates for flood prevention measures, said that while he planned to vote for the bond, he had concerns about what projects the money would be used for. Mr. Gingell said he wanted the county to take a more nuanced approach to flood prevention in areas that it had not previously focused on, in addition to emphasizing some of the same bayou widening projects it had in years’ past.

“It’s pretty clear that we need the money to fund flood prevention infrastructure, but the government at both the city and county level has never articulated a big picture strategy for flooding in the region,” he said.

Charles Goforth, president of the Brays Bayou Association, a residential group that works on flood prevention issues and represents 30,000 homes in an area of Houston hit hard by Harvey, said most people he has spoken to are supportive of the proposal.

While some are uneasy with letting local government lead the flood prevention effort, Mr. Goforth said those fears have been eclipsed by an acknowledgment that since Harvey, there’s no longer much of a choice.

“We live here and this is a situation we’re going to have to keep dealing with. So we have to bite the bullet,” he said.

The Wall Street Journal

By Dan Frosch

Aug. 5, 2018 8:00 a.m. ET

BlueMountain Capital, Franklin Advisers and other bondholders agree to restructuring part of utility’s $9 billion debt

Investors in Puerto Rico’s bankrupt electricity monopoly have struck a debt-restructuring deal, inching the largest public U.S. power utility closer to privatization.

The bondholder settlement announced on Monday would pare down the $9 billion debt owed by the public power utility known as Prepa and mark the most significant restructuring deal negotiated under Puerto Rico Gov. Ricardo Rosselló.

The federal board overseeing Puerto Rico’s finances also supports the agreement, which requires court approval to become effective. The deal gives a bondholder group including Franklin Advisers Inc., BlueMountain Capital Management LLC and Knighthead Capital Management LLC a chance to exit from a roughly $3 billion combined investment that has tumbled in value since the oversight board’s 2016 arrival. A frequently traded Prepa bond maturing in 2040 was trading at 44.25 cents on the dollar on Monday, according to Electronic Municipal Market Access.

Bond insurers and top-ranking lenders owed billions of dollars more by Prepa aren’t on board with the proposed terms, a person familiar with the matter said. Discussions are expected to continue on the rest of the utility’s debt. The partial settlement is a step toward the oversight board’s goal of breaking up Prepa’s monopoly structure and coaxing new investors to take over its power generation and distribution businesses.

Bondholders would surrender their claims at a discount under the deal and receive two classes of new long-dated bonds in exchange, representing 67.5 cents on the dollar and 10 cents on the dollar. Cutting legacy debt obligations helps Mr. Rosselló ameliorate politically unpopular rate hikes without further imperiling Prepa’s finances.

“The restructuring of Prepa’s debt and obligations is critical to completing our vision for a consumer-centric energy sector with financially viable rates that promote economic development,” the governor said in a statement.

Prepa’s financial problems, decades in the making, are at the center of the U.S. territory’s financial crisis. High electricity bills, driven by Prepa’s legacy obligations and inefficient power plants, have depressed family incomes and economic growth.

Blackouts were frequent while residents went to extreme lengths to curtail their power use. Puerto Rico’s decadelong recession worsened the utility’s finances as business and residential power demand declined.

The oversight board placed Puerto Rico’s central government into bankruptcy last year and later voted to move Prepa under court protection as well. Ending its monopoly structure is a priority for many Republicans in Congress who have urged the oversight board and the governor to negotiate with bondholders to avoid lengthy lawsuits over debt repayment.

But creditors had struggled to come up with acceptable terms to tame Prepa’s $9 billion debt load as Gov. Rosselló adopted an increasingly populist tone since taking office. The oversight board vetoed a restructuring settlement last year that would have cut bond obligations by 15%, opting instead for a bankruptcy process aimed at wringing more concessions from creditors.

The exodus of Puerto Ricans in the wake of last year’s devastating hurricane season further depleted Prepa’s customer base while the power grid is being repaired.

The revised agreement saves Prepa 30% more in debt payments compared with the previous version while tying bondholder payments to electricity demand, heightening creditor recoveries if Puerto Rico residents stay on the grid rather than migrate to the mainland U.S.

The deal comes weeks after a purge of Prepa’s independent directors and incoming chief executive that left it leaderless at a critical moment. A majority of Prepa’s board of directors resigned en masse after Gov. Rosselló demanded they scale back a $750,000 CEO compensation package.

The outgoing directors accused the governor of interfering in their decisions, fanning longstanding concerns in Congress about political meddling in Prepa. An Energy Department official last week urged Congress to depoliticize Prepa by taking board appointments out of the governor’s hands.

House Republicans have discussed potential legislation installing federal oversight at Prepa, according to people familiar with the matter, though no such bill has been filed.

The Wall Street Journal

By Andrew Scurria

July 30, 2018 10:25 p.m. ET

• Pension bills will more than double over next 20 years
• Pension debt shrank to $28 billion after stepped up payments

Chicago next year will see its smallest budget deficit since 2007, a boost for the nation’s third-largest city as it prepares to confront escalating pension bills.

The city is projecting a 2019 shortfall of $97.9 million, according to an annual financial analysis released Tuesday. That marks the eighth straight year of narrowing deficits. Chicago will pay $1.18 billion to its four retirement funds in fiscal year 2019, which is up from $1 billion last year, according to the report. Those payments will more than double over the next 20 years, reaching an estimated $2.9 billion in 2039, the report shows.

“The City of Chicago is on firmer financial footing today because of the progress we have made together to eliminate the risky financial practices of the past, address our pension challenges, and reduce our structural budget deficit,” Mayor Rahm Emanuel said in a letter at the start of the report. “This low structural budget deficit is expected and manageable in a government with a nearly $4 billion operating budget.”

Chicago’s progress comes as municipal-credit quality overall seems to be improving. State and local governments are reaping the benefits of the second-longest economic expansion on record. Minnesota and Michigan recently won rating upgrades, and Illinois and Chicago had their outlooks lifted to stable from negative this month.

Emanuel has made progress, pushing through higher property taxes and utility levies to shore up the city’s retirement funds that were on track to run out of money. His plan has the public safety pensions on track to be 90 percent funded by the end of fiscal year 2055, and the municipal and laborers pensions at that level by the end of 2058. As of Dec. 31, the four funds were only about 27 percent funded, after years of inadequate contributions.

Moody’s Investors Service, which still considers Chicago junk, cited the city’s tax hikes in its revised outlook. Given the levies, Chicago won’t face “significant budgetary obstacles” in the next two to three years to cover its rising pension payments, according to Moody’s.

The four pension funds were short $28 billion as of Dec. 31, according to the city’s 2017 comprehensive annual financial report. That shortfall eased from the previous year when they were short more than $35 billion. The city’s move to require higher contributions to the funds led to an increase in the discount rate. That change and other assumptions helped lower the net pension liability, the report noted.

“All in all, the city of Chicago is in a better structural position than prior years,” said Laurence Msall, president of the Civic Federation, which monitors state and local finances, “but it will continue to face revenue and expenditure pressures resulting in projected growth in future deficits.”

Bloomberg Markets

By Elizabeth Campbell

July 31, 2018, 3:07 PM PDT

• Debt swap deal with bondholder group backed by U.S. board
• Oversight board chief hails deal as ‘important milestone’

The Puerto Rico electric company’s bonds surged after it struck a preliminary agreement with bondholders to restructure its crippling debts, marking a major advance in the government-owned utility’s efforts to emerge from bankruptcy.

The pact — reached by the island’s government, the territory’s federal oversight board and a key group of investors — would slash the debt service bills of the Puerto Rico Electric Power Authority more deeply than an agreement the board rejected a year ago. The board said in a statement Monday that it’s working to finalize the deal for the power company known as Prepa.

The company’s bonds were the most actively traded municipal securities Tuesday, when investors pushed up the price of some of them by nearly 40 percent. Debt due in 2040 jumped to an average of 60.2 cents on the dollar from 43.4 cents Monday, according to data compiled by Bloomberg.

Reducing the utility’s $9 billion of debt may push the utility closer to privatization because investors would be cautious about lending needed money to the company if it continues to be run entirely by a government that steered it into collapse, said Matt Fabian, partner at Municipal Market Analytics. Puerto Rico is seeking to sell some of the utility’s assets or enter into long-term concession agreements with private operators.

“The board likes this deal because it’s going to force the issue of privatizing Prepa,” Fabian said. “Investors will always be more careful in lending a Prepa successor money.”

The step marks a major stride toward resolving years of negotiations with creditors of the territory’s electric company, which was heavily battered by Hurricane Maria last year and has been struggling with management turmoil. While the company had previously struck a deal with creditors, it was rejected over a year ago by the oversight board because of concerns it failed to do enough to modernize the utility and lower residents’ costs.

The agreement “is an important milestone and a big step forward towards Prepa’s debt restructuring process, which will support the privatization and transformation of Prepa into a modern, world-class utility,” Jose Carrion, the chairman of the oversight board said in the statement. “We are hopeful that the terms and financial concessions agreed to with this group of Prepa bondholders can lead to a fair consensual transaction that adjusts their ultimate level of recoveries with the success of the utility.”

The latest agreement would require bondholders to exchange their debt for two new classes of securities at a rate of 77.5 cents on the dollar, well above where the securities had been trading.

They would receive one type, which matures in about 40 years and pays 5.25 percent interest, at an exchange rate of 67.5 cents on the dollar. The second — so-called growth bonds that are due in 45 years and whose payments are pegged to the island’s turnaround — would be exchanged at 10 cents on the dollar. The deal that was rejected by the board would have given investors 85 cents.

Prepa is still negotiating with other creditors, including bond insurers. The agreement announced Monday included Knighthead Capital Management, Franklin Advisers, BlueMountain Capital Management, OppenheimerFunds, Silver Point Capital, Angelo, Gordon & Co. and Marathon Asset Management, according to a filing with the Municipal Securities Rulemaking Board. The bankruptcy court would also weigh in on any restructuring deal.

The utility still needs to persuade other parties to agree to the plan and it continues to face the challenge of rebuilding an electrical grid that was destroyed by Hurricane Maria. That led to some skepticism about the degree of Tuesday’s rally, which followed a run up in the price of the securities this year amid optimism about Puerto Rico’s recovery from the hurricane and progress in the island government’s own bankruptcy process.

“There doesn’t seem to be a long-term solution of addressing how to provide a stable and reliable electrical grid to the island and who is going to pay for that,” said Dora Lee, an analyst at Belle Haven Investments, which manages $7.4 billion of municipal debt, including insured Puerto Rico securities.

Prepa’s tentative deal has also boosted prices on some Puerto Rico bonds. General obligation debt that’s due in 2035 traded Tuesday at an average price of 39.8 cents on the dollar, up from 38.4 cents on Monday.

“Prepa has always been seen as the credit to reach the finish line first in the bankruptcy puzzle,” Lee said. “The closer that Prepa is perceived at reaching its conclusion, the other investors also see their own finish lines coming closer.”

Bloomberg Markets

By Michelle Kaske

July 31, 2018, 6:13 AM PDT Updated on July 31, 2018, 7:59 AM PDT

Philadelphia’s fiscal 2019 budget discussions highlight what S&P Global Ratings expects will be the ongoing balancing act the city will face over the next several years. City officials will have to address ongoing operational demands, pension costs, and a desire to support the School District of Philadelphia (SDP) with what we view as potential revenue-raising pressure.

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Jul. 26, 2018

WASHINGTON, DC, AND CALIFORNIA, AUG 3, 2018 — The WIFIA program has issued its third and fourth loans to Orange County Water District (OCWD) and San Francisco Public Utilities Commission (SFPUC). The San Francisco Public Utilities Commission received a $699 million loan to help finance its innovative Southeast Treatment Plant Biosolids Digester Facilities Project. This is the largest loan issued under EPA’s Water Infrastructure Finance and Innovation Act (WIFIA) program to date.

“Today’s nearly $700 million WIFIA water infrastructure loan reflects a core Administration priority: accelerating investment in America’s water infrastructure in a way that delivers a cleaner, healthier environment and supports a thriving economy,” said EPA Acting Administrator Andrew Wheeler. “This WIFIA loan will enable San Francisco to modernize its wastewater treatment facilities while creating valuable jobs in the community.”

The San Francisco Public Utilities Commission will replace its outdated biosolids digester facilities with modern, efficient technology. The new facilities will transform wastewater solids into high-quality biosolids and biogas. Additionally, the new digesters will be located farther away from existing residences, feature advanced odor control, and will be built to be more resilient to earthquakes.

“Rebuilding our biosolids digester facilities is crucial to realizing our vision to transform San Francisco’s largest wastewater treatment plant into a modern resource recovery facility. With the federal government’s low-cost loan program, we can realize significant savings for our ratepayers and create high quality employment and contracting opportunities in parts of the City that need it most,” said SFPUC General Manager Harlan L. Kelly, Jr.

The project is estimated to cost $1.43 billion and EPA’s WIFIA loan will help finance nearly half that amount—up to $699 million. According to the San Francisco Public Utilities Commission’s estimates, EPA’s loan is expected to save the commission up to $398 million through the WIFIA program’s low interest rates. Project construction is expected to begin in late 2018 and be completed in 2025.

Additionally, an innovative groundwater replenishment project expansion in Orange County received a $135 million loan to help finance its Groundwater Replenishment System final expansion.

The announcement was made by EPA’s Regional Administrator for the Pacific Southwest Mike Stoker at the project’s future site on Ward Street in Fountain Valley. Stoker was joined by U.S. Congressman Dana Rohrabacher, Orange County Water District Board President Denis Bilodeau, and Orange County Sanitation District General Manager James Herberg.

“This advanced water recycling and groundwater replenishment project will provide Orange County residents and businesses with an additional local drinking water supply,” said Stoker. “Not only will this project protect local water resources, it will make Orange County more resilient to future droughts.”

With EPA’s WIFIA loan, the Orange County Water District (OCWD) will purify treated wastewater from the Orange County Sanitation District to produce an additional 30 million gallons per day of drinking water, which will be stored in the Orange County Groundwater Basin. This additional drought-proof drinking water supply reduces the region’s need to import water, benefits the environment through reduced discharges into the ocean, and increases replenishment of the local groundwater source.

“WIFIA borrowing enhances the Groundwater Replenishment System’s viability,” stated Bilodeau. “The WIFIA loan program creates another tool in the proverbial toolbox to finance critical water infrastructure projects like ours. The cost of borrowing is less than the private market would have been, which helps make the cost of the final expansion feasible to ratepayers. OCWD is trying to reduce reliance on imported water from the Colorado River and become self-sufficient, but OCWD won’t make water at any cost.”

The Orange County Water District estimates the project will cost $282 million. EPA’s WIFIA loan will help finance nearly half that amount—up to $135 million. Because the WIFIA program offers loans with low interest rates, the Orange County Water District is expected to save up to $16 million compared to municipal bonds. Project construction is expected to create 700 jobs and is scheduled to begin in 2019 and be completed in 2023.

In addition to significant cost savings, a WIFIA loan permits extended repayment terms of up to 35 years, the ability to repay at any time without penalty, subordination in payment priority to other debt, flexibility when the loan is drawn with no interest accrual until funds are disbursed, and the opportunity to use the loan with other assistance like the State Revolving Fund for the remaining 51 percent of a project’s cost.

“Having been a proponent of the OCWD’s Ground Water Replenishment System project since its inception, I am pleased that the OCWD has received a $135 million Water Infrastructure Finance and Innovation Act loan. This loan will help finance the final expansion of the GWRS, which will increase our drought-proof water supply and provide for the water needs of future generations of Orange County residents,” said Congressman Dana Rohrabacher (CA-48).

“Today marks a major milestone for EPA’s WIFIA program,” said EPA Office of Water Assistant Administrator David Ross. “With our loan to the Orange County Water District, EPA has issued over $1 billion in WIFIA credit assistance this year, thanks to the hard work and dedication of the professionals within EPA’s Office of Water.”

WaterWorld

August 3, 2018

Orrick represented the Enterprise Development Authority (the “Authority”), a wholly owned, unincorporated governmental instrumentality of the Estom Yumeka Tribe of the Enterprise Rancheria (the “Tribe”) in connection with its Rule 144A/Regulation S offering of $450 million aggregate principal amount of 12.000% senior secured notes due 2024 (the “Notes”). Wells Fargo Securities acted as book-running manager for the offering. Orrick also advised the Authority on its entry into a $10 million revolving credit facility (the “Credit Facility”).

The Tribe is a federally recognized Indian tribe listed in the Federal Register as the Enterprise Rancheria of Maidu Indians of California. The Authority expects to use the net proceeds from the offering of the Notes to fund the costs associated with designing, developing, constructing, equipping and opening a Hard Rock branded hotel casino outside of Sacramento, to repay certain existing indebtedness and for general corporate purposes, while the Credit Facility will be used for working capital and other general corporate purposes. Hard Rock Sacramento FM, LLC will develop and manage the hotel casino, as well as license to the Authority various trademarks, service marks and commercial symbols associated with Hard Rock hotels, casinos, cafes and music venues.

The Orrick team that advised the Tribe on this transaction was led by public finance partner Townsend Hyatt and capital markets partner Stephen Ashley. Other members of the Orrick team included Lynne Hirata, Noel Pacheco, Maria Bergenhem, Grady Bolding, Thomas Mitchell and Rosalee Mahoney.

July.30.2018

On July 24, 2018, Standard & Poor’s raised its credit rating for the State of Michigan’s general obligation bonds from AA- to AA. This upgrade will affect bonds issued by local governments that benefit from State credit enhancement or intercept programs, including programs such as the State School Bond Loan Fund Program and the Michigan Finance Authority’s Local Government Loan Program. For local borrowers participating in one of these programs, including school districts and municipalities, such rating change will trigger a material event filing pursuant to your continuing disclosure undertaking. Financial advisors retained by local borrowers to file continuing disclosure updates on their behalf will likely file material event notices for their clients with outstanding debt issued through one of these programs, advising the Electronic Municipal Market Access system of the rating change. If you are unsure whether you have an obligation to file an update or have not retained your financial advisor to make disclosure filings on your behalf and would like assistance with such a filing.

Miller Canfield PLC – Thomas D. Colis, James Crowley, Ian F. Koffler, Donovan Cheff McCarty, Alan D. Szuma and Amanda Van Dusen

July 30, 2018

MADISON, WI (Wisconsin Radio Network) – Madison residents can buy in to a special mini bond issuance later this year.

A new program is lowering the price of city bonds to just $500 this fall, and Madison finance director Dave Schmiedicke says that’s a good way for residents to get involved directly with city finances. “Which hopefully allow more of our residents to invest in the specific project, a renovation and expansion of the Olbrich Botanical Gardens.”

Schmiedicke says that’s a price that even smaller investors and city residents can take advantage of. “Here in Madison, I think we value civic action, and this is one way to express that civic action and get a return on that investment.”

In all other respects, other than the price, the bonds will be the same as they normally are with a 10 year maturity. Schmiedicke says $2.1 million worth of bonds will be issued.

Interest rates will be determined this fall ahead of the sale in October.

Wednesday, August 01, 2018 10:50 a.m. CDT

As officials study the idea’s feasibility, activist ire against Wells Fargo fuels proponents of a public bank

Could business owners and others in DC soon benefit from a new bank owned and operated by the DC government? With $200,000 put in the city’s 2018 budget by the DC Council, officials at the Department of Insurance, Securities and Banking are studying the feasibility of a publicly chartered bank.

What’s a public bank?

A public bank is a deposit-holding and loan-making institution created and run by a government — a city, county or state. Leaders of public banks are held to more direct accountability standards than private banks. Important decisions on lending and other bank operations must serve a public mission. Private banks have broadly defined regulatory requirements, such as lending to local communities, as mandated by the federal Community Reinvestment Act. Public banks have been set up to serve more specific, locally determined goals. In DC, this might take the form of loans to small businesses owned by people of color in wards 7 and 8. In California, officials say public banking can support marijuana businesses that have been denied private banking services because of the complex legal environment around the substance.

Financial assistance is already a part of economic development programs in DC, but a public bank would increase the number and complexity of services offered to stakeholders, according to a Department of Insurance, Securities and Banking overview of the feasibility study. A public bank in DC would manage all of the city’s financial accounts. This wholesale banking requires the capacity to manage the multi-billion-dollar accounts of corporations and other, smaller banks. Also, a public bank in DC could provide retail products to residents such as checking accounts and auto loans. So, a public bank in DC may be deposit-taking and loan-making.

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The DC Line

By Gordon Chaffin | Aug 1, 2018

WASHINGTON — A group of U.S. Senate liberals on Wednesday introduced legislation providing debt relief to Puerto Rico as the island territory struggles to recover from a devastating 2017 hurricane that worsened conditions in an already-suffering economy.

Independent Senator Bernie Sanders and Democratic Senator Elizabeth Warren have joined up with three other liberal Democratic senators in seeking broad debt relief for Puerto Rico and other U.S. territories.

The U.S. commonwealth declared the largest municipal bankruptcy in 2017 under the so-called federal PROMESA law, and is seeking to restructure in court more than $70 billion in debt. It also has another $45 billion or so in unfunded pension liabilities.

“Greedy Wall Street vulture funds must not be allowed to reap huge profits off the suffering and misery of the Puerto Rican people for a second longer,” Sanders said in a statement.

Their initiative is not expected to gain traction in the Republican-controlled Congress, but it could provide hints about what Democrats might pursue if they manage to win majorities in either the Senate or House of Representatives in November’s congressional elections.

The bill surfaced on the same day a federal judge took up but did not immediately rule on litigation by the Puerto Rican government challenging the ability of its federally appointed oversight board to enforce certain measures through the budget and fiscal plan. A U.S. House committee also held a hearing on management turmoil at the island’s bankrupt electric utility.

The Senate bill would give U.S. territories the option to terminate non-pension debt obligations under certain conditions.

It would provide $7.5 billion for Puerto Rican creditors whose debt is terminated, including Puerto Rican residents, banks and credit unions that did business solely in Puerto Rico.

Another $7.5 billion would be set aside for mainland creditors whose debt was terminated, including individual investors.

Backers of the legislation said the $15 billion in Washington funding would not be made available to hedge funds and their investors, bond insurers or financial firms with consolidated assets greater than $2 billion.

Spokesmen for a bondholders group that includes hedge funds and for bond insurer MBIA Inc declined to comment on the legislation on Wednesday.

Congress passed the PROMESA legislation in 2016, which created a seven-member board to manage Puerto Rico’s finances.

In U.S. District Court in Puerto Rico on Wednesday, Judge Laura Taylor Swain, who is overseeing the territory’s bankruptcy case, also received an update on privatizing the Puerto Rico Electric Power Authority (PREPA). Attorneys for the island’s oversight panel said the private market had “significant amount of interest” in taking over PREPA assets and operations.

Meanwhile, the U.S. House Committee on Natural Resources heard from energy, finance and restructuring experts on ways to depoliticize PREPA and make it a regulated and fully functioning utility in order to attract private investment.

“This has been an ongoing problem we need to break this time,” said Committee Chairman Rob Bishop, who rejected the idea of federalizing the utility.

Since mid-July, there have been three executive directors either in place or named to oversee the utility’s restructuring and the restoration and upgrading of the U.S. territory’s electric grid, which was decimated by Hurricane Maria last year.

Although invited, Puerto Rico Governor Ricardo Rossello declined to attend. In written testimony, Rossello disputed allegations of political interference sparking turnover of the utility’s executive directors and board members. He said current PREPA head Jose Ortiz has unassailable credentials and has demonstrated in his previous government roles the ability “to put politics aside.”

By Reuters

July 25, 2018

(Reporting by Richard Cowan in Washington; Additional reporting by Karen Pierog in Chicago and Luis Valentin Ortiz in San Juan; Editing by Daniel Bases, Susan Thomas and Matthew Lewis)

• Borrowing is part of $1 billion sale, including expansion
• It could boost state’s general-obligation debt by 50 percent

New Jersey voters in November may decide to raise $1 billion in the bond market, about half of which would be used to protect schools against shootings.

The borrowing initiative — which will also fund expansion programs at vocational institutions — has received widespread support in the legislature, which earlier this month approved putting it on the ballot by a nearly unanimous vote, with just one senator dissenting. Governor Phil Murphy is reviewing the bill and his office declined to say whether he would sign it.

If approved, the borrowing would allow New Jersey to increase its outstanding general-obligation debt by 50 percent to $3 billion, according to the state’s latest debt report. Historically, New Jersey has relied on appropriation-backed debt sold through various agencies, with about $33 billion outstanding.

The voter-approved bonds would probably draw strong interest from investors because such securities are scarce and debt service doesn’t rely on annual legislative appropriations, said Daniel Solender, head of municipal investments at Lord Abbett & Co., which manages $20 billion of state and local debt, including some issued by New Jersey.

“For people looking for higher quality, looking for not having to worry about the appropriation, they’d probably get good reception,” Solender said.

Student Safety

About $450 million would finance school facility security grants to improve entryways and security systems to defend public schools from mass shootings or attacks.

More than 215,000 students have experienced gun violence at a school since 1999, according to a database of such shootings compiled by The Washington Post. The issue attracted renewed attention after several deadly incidents this year, including one in Parkland, Florida, in February that left 17 dead and another in Santa Fe, Texas, that killed 10 people.

“The safety of the students is paramount,” Republican state Senator Steve Oroho, a co-sponsor of the bond bill, said in an interview.

Another $400 million would help vocational institutions expand their facilities and buy equipment to accommodate more students. County vocational school districts had to turn away about 17,000 students in 2017 because of a lack of facilities, according to the legislation.

Employers in the state are seeking more skilled workers, Oroho said. Fulfilling the needs of people who want to pursue a skill and providing employers with more qualified employees will benefit New Jersey in the long run, Oroho said.

“Not all debt is bad debt as long as you get the proper rate of return,” Oroho said. “And education will always have a high rate of return.”

Increasing the debt means the state will need to pay more principal and interest every year. About 7.5 percent of New Jersey’s fiscal 2019 budget, or $2.8 billion, will go toward debt service, not including payments on school-construction bonds, according to state budget documents. Adding another $1 billion of general-obligation debt will increase principal and interest payments by as much as $72.3 million per year, according to a fiscal analysis of the bond bill.

Pension Predicament

While the borrowing initiative would add to New Jersey’s debt load, the bigger credit concern for the state is its retirement obligations, said Baye Larsen, an analyst at Moody’s Investors Service. New Jersey has about 56 percent of the funds needed to pay current and future retirees enrolled in its state pension plans, as of July 1, 2017. It has an unfunded pension liability of nearly $41 billion.

“The growth in their adjusted net pension liability is going to significantly outweigh the growth in their bonded debt and that is really going to continue to be more of a credit driver for the state,” Larsen said.

New Jersey general obligations maturing in 2028 traded Wednesday at an average yield of 2.7 percent, or about 74 basis points more than top-rate municipals, according to data compiled by Bloomberg.

Debt sold in the state gained 0.9 percent this year through Wednesday, beating the 0.05 percent advance in the broader municipal-bond market, according to Bloomberg Barclays indexes.

Bloomberg Markets

By Michelle Kaske

July 26, 2018, 7:08 AM PDT Updated on July 26, 2018, 7:54 AM PDT

In 2010, the Long Island Power Authority (LIPA) filed property tax grievances with numerous local governments on Long Island, asserting that the property taxes embedded in the payments it makes to National Grid in connection with the power purchase agreements it has with that generation supplier reflect substantial tax overvaluations by local taxing jurisdictions for four power plants.

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Jul. 26, 2018

California’s two immense public employee pension funds this month reported investment earnings higher than their assumed rate for the second straight year.

The California Public Employees Retirement System (CalPERS) said its investment portfolio earned 8.6 percent during the year that ended June 30, while the California State Teachers Retirement System (CalSTRS) topped that with an 8.96 percent gain.

That’s certainly better than the minuscule earnings the two funds had seen earlier in the decade, but despite public crowing by union advocates, the earnings reports merely underscore the wide gaps between pension promises and assets to pay for them.

For one thing, making money on investments in the past year has been a no-brainer and relative to the stock market and other indices, the performance of both funds was modest.

That’s because both were burned badly in the recession a decade ago when their speculative investments tanked and since then, both have adopted safer and more stable investment strategies that have limited upside potential.

Safer may be better in the long run, but modest earnings, by themselves, cannot cover the funds’ asset shortages, called “unfunded liabilities.” Both have scarcely two-thirds of the assets they would need to cover pension commitments, even assuming they meet their earnings projections of 7 to 7.5 percent a year.

CalSTRS’ chief investment officer, Christopher Ailman, put it this way in a statement that accompanied its earnings report:

“We will rank high compared to similar funds, but it is only one year. We need to repeat that performance year in and year out, on average, over the next 30 years.”

As they lower investment expectations, CalPERS and CalSTRS have turned to the state and other public employers to close their asset gaps, requiring them to raise their “contributions” by billions of dollars.

CalPERS is increasing its bite on employers on its own, as it is empowered to do, while the Legislature and Gov. Jerry Brown adopted a plan to prevent CalSTRS from slipping into insolvency by increasing payments from the state and teachers modestly while hitting school districts hard, more than doubling their mandatory payments into the fund.

Making the increased payments has caused financial turmoil in local governments, especially cities, and in school districts.

As CalSTRS was reporting its 2017-18 earnings, CALmatters published a deep dive into how pension payments are clobbering the state’s school systems, focusing on those in Los Angeles, Fremont and Sacramento.

“Over the next three years, schools may need to use well over half of all the new money they’re projected to receive to cover their growing pension obligations,” CALmatters’ Jessica Calefati wrote, “ leaving little extra for classrooms, state Department of Finance and Legislative Analyst’s Office estimates show.”

“Some districts are predicting deficits and many districts are bracing for what’s to come by cutting programs, reducing staff or drawing down their reserves – even though per-pupil funding is at its highest level in three decades and voters recently extended a tax hike on the rich to help pay for schools,” she continued.

Schools and local governments are feeling immense stress from ever-rising pension payments even though California’s economy has been booming and tax revenues have been surpassing projections.

That’s why we’ll see dozens of cities and other local governments asking their voters for tax increases in November, and why school officials are pleading with Brown and legislators for more money.

By Dan Walters | July 25, 2018

The Federal Aviation Administration (FAA) recently issued a press release clarifying the abilities of municipalities to regulate drone operations in the navigable airspace. State and local governments “are not permitted to have their own rules or regulations governing the operation of aircraft,” as it would conflict with superseding federal law, according to the release. The FAA reiterated that “[s]tate and local governments are not permitted to regulate any type of aircraft operations, such as flight paths or altitudes, or the navigable airspace.”

However, state and local governments may utilize laws traditionally related to state and local police powers in order to regulate land use, zoning, privacy, and law enforcement operations. Hence, state and local governments may generally regulate the locations of aircraft takeoff and landing sites through their land use powers, which includes where drones can take off or land.

The FAA and the federal government’s approaches on drone operations continue to evolve. Other issues we’re monitoring include counter-drone technology, real-time flight waivers applications, and identification sensor systems.

Harris Beach PLLC

July 30, 2018

The U.S. Conference of Mayors and the Ohio Mayors Alliance today released a report on July 19, 2018 on the importance of Ohio city metro areas to the future growth of the Ohio economy. The report highlights that in 2017, 83.5% of the State’s jobs and 86.1% of its wages were generated in Ohio’s 14 metro areas. 85.1% of the State’s economic output in 2017 occurred in its metro regions. All three economic indicators have risen over the last two decades.

Since 2000 Ohio’s city metros accounted for all of the State’s job gains and 87% of its economic output gains. During the same period the metro proportion of state jobs is 1.3% higher.

By the end of 2018, the report projects that the unemployment rate in five Ohio metros will be at or below 4.0% (Columbus 3.3%; Cincinnati 3.5%; Dayton 3.7%; Springfield 3.7%; and Lima 4.0%). All but three Ohio metros will have unemployment rates of 5.0% or below.

The report also forecasts that over the two year period (2019-2020) Columbus will lead Ohio job employment growth with an average annual gain of 1.60%. But in the 2021-2022 period, Columbus will be the only Ohio metro with employment gains.

The report concludes that Ohio cannot grow unless its city metro areas do, and that Ohio’s regional economies will best be served by aggressively transitioning to new and emerging industries while preserving their manufacturing base.

The report was released in conjunction with the Ohio Mayors Alliance and was prepared by IHS Markit.

• Metro put $653 million affordable housing bond on ballot
• As people flock to area, home prices are rising out of reach

The Oregon agency that runs Portland’s zoo is behind the biggest bond measure in the state’s history to build homes. For humans.

Metro, a municipal entity known for running the Oregon Zoo and natural areas around Portland, is asking voters in November whether they want to borrow $653 million to build and renovate housing for people priced out of the booming local real estate market. The move would expand the purview of Metro, which was created in 1978 to oversee the zoo, as well as land use, transportation and waste management in three counties.

Over the years, Metro, which is the only directly elected regional U.S. government, has expanded its responsibilities. It’s a “natural evolution” of the agency to take on affordable housing as an influx of high-income earners puts homes out of reach for many residents, said Nick Fish, an elected Portland commissioner who’s helping to lead the bond campaign.

“Working-class families are being priced out of every part of the region,” Fish said in an interview. “We’re seeing a one strike and you’re out economy, where people are one job loss, one medical emergency, one unforeseen crisis away from being on the street.”

Up and down the West Coast, cities are grappling with the downside of a nearly decade-long economic boom that’s brought skyrocketing residential real estate prices and an increase in homelessness. In November, California voters will consider $6 billion in housing-related bonds on the state ballot, and San Franciscans may tax large businesses to provide services to the large homeless population in the technology-industry hub.

While high housing prices typically boost municipal tax collections, they can also limit economic growth, said Chris Morgan, director at S&P Global Ratings. Amid constrained supply of homes and labor shortages in the construction industry, growth in economic output in the far west — which includes Alaska, California, Hawaii, Oregon and Washington — fell to the third fastest in the U.S. last year from first in 2016, according to an April report from the company.

“We’re seeing the cost of housing as potentially representing more of an economic challenge in the near term,” Morgan said in an interview.

About 80 people a day are moving to the Portland area, according to a Metro analysis of last year’s Census data. The median sale price of a home has risen by 56 percent over the last five years, faster than the 31 percent growth nationally, figures from real estate brokerage Redfin show.

The Metro bond measure aims to create homes for 7,500 people. It can serve up to 12,000 if voters also approve a state constitutional amendment that would allow the proceeds to go to affordable housing developers that work with local governments. Currently, funds from general-obligation bonds can’t flow to private entities. Homeowners would pay an average of $5 a month, or 24 cents per $1,000 of assessed property value, to cover the cost of the added debt.

Metro would distribute the funds to its three counties — Multnomah, Washington and Clackamas — based on assessed value. The local governments would decide on projects that best fit their needs, such as easing homelessness in Portland or building senior facilities in Lake Oswego, an affluent suburb, Fish said.

Support is so broad for the initiative that the historically tax-skeptical Portland Business Alliance endorsed it, Fish said.

“The time is right for this,” he said.

Bloomberg Markets

By Romy Varghese

July 20, 2018, 9:30 AM PDT

Fitch Ratings-New York-19 July 2018: Recent news that Nacogdoches County Hospital District, Texas (NCHD) has retained attorneys to consider debt restructuring has sparked commentary that this is an example of uncertain bondholder protections in bankruptcy. Fitch Ratings believes this case demonstrates the importance of making a cautious and accurate assessment of the legal protections afforded to bondholders.

BONDS DO NOT MEET HIGH FITCH BAR FOR RATING DISTINCT FROM IDR
The sales tax bonds benefit from an ordinary pledge and security structure for municipal debt and are in our view at risk of automatic stay under Chapter 9 of the U.S. bankruptcy code (the code) and an interruption of payment during the proceedings. There is a plausible argument for special revenue treatment, but we set a high bar for considering debt as supported by special revenues under section 902(2)(E) of the code. (For more information, see “Fitch Rates Marin Healthcare District, CA’s Series 2017 GO Bonds ‘AAA’, dated Aug. 23, 2017.) Even in the event of a stay, an issuer can choose to continue to pay debt obligations while in bankruptcy, and NCHD has that option with respect to the sales tax bonds. Nevertheless, Fitch has rated the debt below investment grade since April 2017, with a current rating of ‘CC’, indicating that default of some kind appears probable.

RATING MIGRATION REFLECTS WEAK FUNDAMENTALS
In April 2017 we concluded a review that resulted in a downgrade of NCHD’s sales tax revenues bonds to ‘B’/Rating Watch Negative due to weakness in its revenues and operations, as well as its unwillingness to tap unused property tax capacity to support its operating solvency. We also concluded that the bonds did not meet our high bar for special revenue analysis and had not been issued under a specific state securitization law. In September 2017 we downgraded the rating to ‘CC’ based on continued deterioration of operations and severely weak liquidity.

In April 2016 Fitch revised its criteria for rating tax supported debt. In that revision we introduced the Issuer Default Rating (IDR) as a measure of an issuer’s operating solvency, and we clarified and provided strict limitations on when we felt there was a reasonable basis to rate a dedicated tax supported security distinct from and higher than an issuer’s IDR. Ratings could be distinct from an IDR under three legal structures that have clear protection in a Chapter 9 bankruptcy proceeding: “special revenue” obligations under section 902(2) of the bankruptcy code, securities issued through a securitization structure and intercept structures under state law. We also considered in the review whether the untapped taxing capacity of a hospital district or hospital authority should be incorporated into an IDR. In August 2016, we placed ratings related to NCHD and 24 other hospital districts and authorities on Rating Watch Evolving as we evaluated the underlying legal structures.

FITCH REVIEW OF PRIOR LEGAL OPINION
At the time of the initial downgrade and assignment of a ‘B’ IDR in April 2017, Fitch reviewed a legal opinion provided by outside counsel that concluded that the transaction is essentially a sale of the tax revenues to the bond trustee acting for the benefit of bondholders and not a borrowing by NCHD. Counsel further concluded on that basis that the tax revenues are not property of NCHD and would not be within its bankruptcy estate.

Fitch had two concerns with the analysis that leads to this legal conclusion. One, Fitch does not believe that there is sufficient legal precedent for us to adopt the true sale analysis in our rating based on the Texas statute cited. Further, as the opinion itself indicated, there is no common law precedent that addresses the proper characterization of the transfer of assets by a municipality in this type of situation. Two, as a factual matter, the transaction is described in all offering materials as a borrowing and is reported in the accounting statements of the municipality as a borrowing. There is no indication that the parties intended to treat the transaction as a true sale.

As a result, it is Fitch’s assessment that there is not a reasonable basis to support a rating above the issuer’s IDR. Fitch will only rate a transaction as a true sale in the context of a specific state statutory scheme authorizing the sale as a part of a comprehensive securitization law such as those adopted in New York and Illinois for tax revenues and other revenue sources in various states. For more information see “What Investors Want to Know: Chicago Sales Tax Securitization” dated Nov. 28, 2017.

ELEMENTS OF SPECIAL REVENUE ANALYSIS
Legal opinions serve as the basis for Fitch’s consideration of whether bonds are secured by pledged special revenues. In addition, the following elements must be present that make clear the pledged revenues are not general operating revenues for general purposes of the debtor, sufficiently reducing the incentive to challenge special revenue status in a bankruptcy:

–A statutory scheme limiting the authority to levy a specific tax to the financing of capital projects.

–An express statutory prohibition on use of any revenues from the taxes for operations of the municipality, unless Fitch has a reasonable legal basis by which to determine that the pledged revenues would not be subordinated to operating expenses in a bankruptcy. If any residual revenues can be used for the entity’s operations and are at risk of being subject to netting, Fitch will consider them to be general revenues and rate the issue as unsecured debt.

–An identification of specific capital projects in a ballot initiative or in a resolution limiting the use of proceeds of the debt to those capital projects; for refunding bonds, it should be clear that the bonds being refunded meet this criterion.

–A structure in which bondholders do not have a claim on general revenues of the municipality, where the bonds are solely secured by a dedicated tax (general obligation bonds supported by the entity’s full faith and credit will typically not meet this criterion).

–A statutory requirement that a governmental official outside the municipality (e.g. the county) collects and remits the tax revenues to the paying agent, placing the funds outside the control and direction of the municipality. A statutory lien on the pledged revenues reduces the incentive to challenge special revenue status sufficiently to substitute for this requirement.
Clarity that the pledged taxes are property of the municipality and would not be considered at any point the property of the entity collecting and remitting the tax revenues; absent this, the rating would be capped at the collector’s rating.

Since NCHD’s pledged revenues are a general sales tax available for operations as well as debt service, Fitch had no basis to consider the bonds to be secured by pledged special revenues.

Contact:

Thomas McCormick
Analytical Consultant
+1-212-908-0235
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004

Amy Laskey
Managing Director
+1-212-908-0568

Kevin Holloran
Senior Director
+1-512-813-5700

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com

Electric utilities in California are facing operational and financial risks from natural disasters that could potentially weaken their credit quality. In particular, the recent heightened risk associated with potential wildfire-related liabilities is a growing concern and presents an immediate threat to California’s regulated electric utilities.

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Jun. 18, 2018

Finra panel says firm and broker are liable for damages, interest, fees and costs

A Financial Industry Regulatory Authority Inc. arbitration panel has awarded clients of Wells Fargo almost $8.7 million over the firm’s handling of sales of Puerto Rican municipal bonds.

The panel found that Wells Fargo and Marc Rogers, one of its brokers, are jointly liable for paying Sylvia and Sammy Kaye Duncan and the couple’s revocable trust approximately $4.18 million in compensatory damages, $832,000 in interest, $2.7 million in attorney’s fees, $500,000 in punitive damages, $206,000 in costs and $102,000 in monetary sanctions.

Finra said that Wells Fargo and Mr. Rogers would be responsible for paying interest on the total of $8,575,767.43 owed to the claimants at the rate of 9% per year from July 19, 2018 until paid in full.

The Duncans claimed that in their sales of the Puerto Rican bonds, Wells Fargo and Mr. Rogers breached their fiduciary duties, recommended unsuitable securities and investment strategies, were negligent, engaged in unauthorized trading and made negligent misrepresentations and omissions, as well as engaged in manipulative and deceptive practices.

InvestmentNews

Jul 20, 2018

Green bond issuer San Francisco Public Utilities Commission (SFPUC) is seeking both domestic and international interest for its new tranches of Climate Bonds Certified green municipal bonds, of approximately $402 million USD. Proceeds will be used to fund selected projects as part of the SFPUC Sewer System Improvement Project (SSIP), including stormwater, flood resilience, sewage treatment, wastewater, and associated control system infrastructure upgrades and is intended to address aging infrastructure, seismic reliability, combined sewer discharges, rising sea levels and localized flooding. Both the Series A and Series C bonds have been certified by Climate Bonds Initiative (CBI) under the Water Infrastructure Criteria.

18 Jul 2018

• Second-biggest competitive sale of municipal debt in history
• Banks won’t have problem clearing the deal, says Fiera’s Laing

New York State met eager demand for its debt as it auctioned $1.8 billion of sales-tax bonds Wednesday, the second-biggest competitive sale in municipal market history, according to data compiled by Bloomberg.

Despite its size, the deal was easily digested because of a healthy demand for New York state sales tax bonds in a market starved for paper. Almost $5 billion in debt issued by New York state and local governments is set to be called or mature over the next 30 days, $1.4 billion more than the fixed-rated debt they plan to sell in that period, according to data compiled by Bloomberg.

“New York is picking a good time to bring this deal,” said Guy Davidson, director of municipal investments at AllianceBernstein. “It’s a sellers market.”

Wednesday’s sale was second in size only to a $1.84 billion offering by the New York State Urban Development Corporation last year.

League Tables

JPMorgan won $372.4 million of bonds maturing 2019 through 2023 issued through the Dormitory Authority of the State of New York. Bank of America won $854 million of debt maturing 2024 through 2036. Morgan Stanley won $492.4 million of debt maturing 2037 through 2048. New York also sold a $74 million tranche of taxable debt.

Bonds maturing in March 2028 were priced to yield 0.08 percentage points, or 8 basis points more than top-rated debt of the same maturity, according to data compiled by Bloomberg. A New York sales-tax bond with the same maturity traded at 11 basis points over AAA rated debt on June 14.

Banks, looking to get a strong start in the second-half of the year in rankings for competitive underwriting, bid aggressively, said Bryan Laing, vice president of credit research at Fiera Capital Inc.

Banks “are looking forward to those league tables, particularly in a year when the supply outlook is less certain than other years,” Laing said. “They’re not going to have a problem clearing the deal with investors either, because the demand is there.”

Proceeds of the sales tax bond sale, rated Aa1 by Moody’s Investors Service, the second-highest investment grade, will finance capital projects for highways, bridges, rail and educational facilities.

Bond Backing

The bonds are backed by a dedication of 1 percent of New York’s 4 percent state sales tax, which is expected to yield $14.1 billion in fiscal 2019, according to Moody’s. The state budget office projects the tax dedication will provide coverage of 3.6 times debt service in fiscal 2018 based on $3.42 billion of dedicated receipts and maximum annual debt service, including parity debt, of about $942 million, Moody’s said.

Sales tax receipts have grown at a 4.0 percent compound annual growth rate since 2010 and the state budget office projects growth of 3.9 percent from fiscal 2019 to 2022. The projections will “likely prove optimistic,” because the estimate doesn’t provide for an economic downturn during the period, according to Moody’s.

Last month’s U.S. Supreme Court decision which expanded the ability of state and local governments to collect billions of dollars in sales taxes from online retailers, will boost revenue, Laing said.

Bloomberg Markets

By Martin Z Braun

July 11, 2018, 10:40 AM PDT

• California treasurer hopeful wants to help cities on the brink
• State has laissez-faire attitude to municipal bankruptcies

California is notorious for its hands-off approach to distressed cities. Fiona Ma wants to fundamentally change that if she becomes state treasurer.

Ma, a Democrat who’s running against Republican Greg Conlon in November, said she would establish a website that would list credit ratings and key financial metrics for local governments. As part of that effort, municipal officials seeing fiscal straits ahead could ask for assistance from the treasurer’s office, she said in an interview in San Francisco.

“Local governments have to balance every year. They are very limited in what they can do,” said Ma, a certified public accountant who currently serves on the state’s board of equalization, which administers some taxes. “We should be looking out for them.”

That would mark a shift for California, home to four of the six biggest bankruptcies filed by municipalities in the past quarter century. While the state, through legislation or voter initiatives, has foisted limits on local governments such as on their taxing power and mandated spending, it has no system for monitoring cities that fall in distress.

Providing a central portal for local financial information could spur more investment in lesser-known cities by making it easier for bond buyers to assess conditions and risk, said Ma, who has also served in the state Assembly and on the San Francisco board of supervisors.

Bondholders “don’t want to invest in some of the smaller cities because they’re not sure whether in the next recession, they’re actually going to be paid back,” she said.

Ma would also ensure that she knows the impact on municipal governments before making decisions at the California Public Employees’ Retirement System and California State Teachers’ Retirement System, she said. As treasurer, she would have seats on the boards of both systems, the two largest U.S. pensions.

If Calpers, for instance, is considering a cut to the assumed investment target, which would spur higher contributions from localities to make up the difference, she wants to know if that could leave some scrambling to pay their bills, she said.

“We need to be sensitive that whatever the state does that affects local governments, that you do not surprise them,” Ma said. “Because that’s where they’re going to get in trouble.”

Ma is vying to replace Democrat John Chiang, who is leaving his post after an unsuccessful primary run for governor. She’s favored to win, as Democrats outnumber Republicans in California by almost 2 to 1.

Bloomberg Markets

By Romy Varghese

July 12, 2018, 7:27 AM PDT

Read the RFP.

New Hampshire Business Finance Authority | Jul. 9

As Alaska seeks to improve its financial standing it is turning to bonds to pay off $1 billion of tax credits it owes to oil and gas producers.

But the state – which faced controversy for using the subject-to-appropriation clause to walk away from a lease obligation for a state office building – faces a constitutional challenge before it can go to the market.

State officials are seeking dismissal of a lawsuit claiming that the plan violates the Alaska constitution’s limits on new debt.

Gov. Bill Walker, who signed a bill approving the program last month, says it will reduce the state’s deficit while encouraging oil producers to invest in the state.

“The policy change will save state government money in the long run, immediately provides small, independent oil and gas companies cash to invest, and keeps good on the state’s past promise to incentivize industry investment in Alaska and exploration for new oil,” according to a press release from his office.

Under the plan, producers who hold state tax credits for oil and gas exploration will get paid early in exchange for a 10% discount that the Walker administration says will pay for the bonding costs.

The bonds will be sold through a newly created Alaska Tax Credit Certificate Bond Corp. The bonds are subject to appropriation – relying on the legislature budgeting money every year to pay the debt service.

This isn’t Alaska’s first use of subject-to-appropriation bonds.

The state currently has $237 million in outstanding subject-to-appropriation bonds that are paying off a state prison in Goose Creek and a residential housing facility for Alaskan native tribes, according to an April memo to the legislature.

Alaska has used such bonds for almost 70 years for projects such as acquiring public buildings for lease to the state government, Deven Mitchell, the state’s debt manager, stated in the memo.

He said such bonds are typically rated a notch below the state’s bond rating but said any concern about their marketability is “misplaced.”

“In short, Subject to Appropriation bonds carry specific ratings in the Municipal bond market, are a well understood and commonly used financing tool, and will be highly rated based on the state of Alaska’s credit,” Mitchell said.

The state would face the same negative impacts for failing to appropriate funds to pay off the bonds as it would for not paying off general budget obligations for public safety, pensions and other programs, he said.

Two years ago, the Alaska legislature cited the subject-to-appropriation clause when it broke its lease for a Legislative Information Office in downtown Anchorage.

The six-story building was renovated to meet the specifications of the state agency, which occupied it in 2014. Amid finger-pointing over the cost of the 10-year, $33 million lease, state officials walked away from the lease and the building two years later, leaving the developers empty-handed after remodeling the building.

The building developers sued the state but a court found that the legislature acted within its rights not to appropriate funds for the rent.

The state’s decision to break its contract worried the Alaska Bankers Association at the time; it wrote to the legislature that doing so could impact the state’s creditworthiness and cost of borrowing.

“Using the subject-to-appropriation clause, given the circumstances the state was in at the time, for us it had negative implications,” said Mike Martin, secretary-treasurer of the association and chief operating officer of Northrim Bank.

The association’s view was that “once the state makes a promise it has an obligation it should honor,” Martin said.

Martin sees the issue of the legislative building, which he described as a “political football,” as a unique situation and doesn’t believe the state would do the same with bonds issued for the oil and gas tax credit program.

The group supports the oil and gas tax credit program as one of two major steps taken by the legislature this year to create a sustainable budget going forward. The other was a bill in which the state will annually draw 5.25% from the Permanent Fund – a pool of oil and gas tax revenues invested over the years – to reduce its deficit.

“I think it just creates a whole lot more stable environment,” Martin said.

Opponents of the plan question whether it will result in savings and say it violates the Alaska constitution, which only allows for state debt to be incurred for capital improvement project or housing loans for veterans programs following voter approval.

Eric Forrer, a former University of Alaska regent and a retired contractor, filed the lawsuit on those grounds.

“We’re now converting a very soft obligation into a hard-edged debt,” said his attorney, Joe Geldhof.

An April legal opinion by the legislature’s attorneys found a “substantial risk” that the plan to bond could be unconstitutional.

“They’re converting it from something that’s purely discretionary to something if we don’t pay it impacts our credit rating,” said Alaska state Sen. Bill Wielechowski, D-Anchorage, who asked for the legal review. “I would argue it puts the state into a much more detrimental position and could limit our ability to bond for future things.”

Attorney General Jahna Lindemuth wrote a May 2 legal opinion stating that “financing tools like those proposed in this bill are not prohibited by the Alaska Constitution.”

The proposed bonds would not be considered debt because they would be “subject entirely to the legislature’s discretion to appropriate funds for that purpose, and the bonds give bondholders no recourse against the state,” the opinion states.

Wielechowski said there’s no question – even among those who oppose the plan like himself – that if the state issues bonds the legislature will appropriate money to pay them off.

“We have to pay our debt,” he said.

According to the state Department of Revenue, a bond issue of between $683 million to $738 million would be sold in August followed by an deal from $130 million to $180 million sometime between August 2019 and August 2021.

Under that plan, the state will only pay interest on the debt for the first two years followed by increased debt service that would eventually decline to flat payments in the final five years of the 10-year schedule.

That plan reduces the cost of oil and gas tax credits from 8.1% of the general fund budget to 1.1% and results in more predictable and level annual payments, the agency stated.

Timothy Little, an analyst with S&P Global Ratings, said the rating agency doesn’t see the oil and tax credit bond as a significant credit factor although “it does provide certainty going forward of how those liabilities would be funded.”

In June, the rating agency moved Alaska’s outlook to stable from negative and raised its ratings for general obligation bonds from the Alaska Energy Authority from A to A-plus following the passage of the state budget. S&P rates Alaska GOs AA.

Most appropriation bonds are ranked a notch below the agency’s general obligation ratings, Little said.

“In general, when there is a requirement for the legislative body to make an appropriation we do factor into our assessment the willingness” to fund it, Little said.

But that willingness is “not always easy to quantify up front,” he said.

The Bond Buyer

By Imran Ghori

July 05 2018, 3:16pm EDT

• Upheaval comes amid furor over new CEO’s $750,000 base salary
• Public employees, residents face government austerity policies

Most board members of Puerto Rico’s power utility resigned Thursday after a chorus of outrage over pay for its new chief executive officer, who then pulled out of the job. The tumult leaves the troubled agency leaderless at a critical time in its bankruptcy and sale of its assets.

In a letter to Governor Ricardo Rossello, five members of the panel said they were dismayed by “petty political interests.” Earlier, Rossello joined politicians and residents in decrying the $750,000 salary pledged to incoming chief executive Rafael Diaz-Granados, which they said was exorbitant in light of the island’s financial crisis and the possibility that public employees may soon face reduced benefits.

“We no longer believe that we have the support to perform the politically unpopular tasks necessary to drive the change from within PREPA,” the board members wrote in the resignation letter, which was confirmed by a person with direct knowledge of the matter. “When the petty political interests of politicians are put ahead of the needs of the people, the process of transforming the Puerto Rican electricity sector is put at risk.”

Diaz-Granados, himself a board member, quit that position and won’t take the chief executive job, according to the person, who asked not to be named because it wasn’t yet official.

Rossello will name board replacements before he leaves for a personal trip to attend the FIFA World Cup final in Moscow between France and Croatia, according to Public Affairs Secretary Ramon Rosario.

Rich and Poor

Executive pay has turned into a sensitive topic for the U.S. commonwealth. As the entire island wades through bankruptcy proceedings, many regular Puerto Ricans, including low-level public employees, face the prospect of seeing pension payouts, Christmas bonuses and even sick and vacation days slashed. Also under scrutiny is the paycheck for the executive director of the island’s fiscal control board, which the U.S. Congress installed to right the island’s fiscal accounts.

Diaz-Granados was named CEO on Wednesday, just hours after the surprise resignation of Walter Higgins. Higgins quit after the legislature had sought to prevent him from receiving a bonus on top of his $450,000 salary. Diaz-Granados’s higher base salary, which the utility said was in line with industry standards, appeared intended to circumvent the legislature’s anti-bonus measure.

Daunting Task

The Prepa crisis comes at a critical time. It’s navigating bankruptcy court and working with investment bankers to sell generation assets, potentially putting the transmission and distribution business under a private concessionaire. The new leadership also faces the daunting task of addressing decades of ingrained corruption, inefficiency and poorly maintained infrastructure.

In a press release Wednesday, the utility said Diaz-Granados’s pay was in line with industry standards, citing an American Public Power Association formula based on utilities’ revenue.

Diaz-Granados defended his salary in local radio interviews Thursday. He said he was “sacrificing” to take the job, and said his previous position at General Electric Co. paid more than $2 million a year.

Indeed, Constance Lau, the CEO of Hawaiian Electric Industries, a utility that had comparable annual revenue, made $893,533 in base salary in 2017. CEO Patricia Kampling of Alliant Energy Corp., which also posted similar sales, earned $980,000. But those utilities are investor-owned, and the similarities with Prepa’s financial situation essentially end there.

By comparison, Gil Quiniones, CEO of the state-owned New York Power Authority, makes $235,000 in base annualized salary. And before Higgins and Diaz-Granados, top Prepa executive Ricardo Ramos had a salary of just $142,000.

Livid Residents

Diaz-Granados, a multilingual Harvard University graduate who is originally from Colombia, spent 15 years at GE, including as president and chief executive officer of GE Spain and Portugal and GE Mexico. Higgins arrived on the island from Nevada in March without much Spanish, but brought 40 years of management experience.

Coraly Ortiz, a 43-year-old bank employee in San Juan, said she was furious about Diaz-Granados’s salary.

“It’s completely disproportionate and ridiculous, above all with the situation in Puerto Rico,” she said. “They’re creating an elite of overpaid government officials taking advantage of the crisis.”

Bloomberg Markets

By Michelle Kaske, Yalixa Rivera, and Jonathan Levin

July 12, 2018, 9:24 AM PDT Updated on July 12, 2018, 1:46 PM PDT

— With assistance by Mark Chediak, and Lynn Doan

(Reuters) – A federal judge on Friday rejected an attempt by a major Puerto Rico bondholder to throw out the U.S. territory’s historic municipal bankruptcy case.

U.S. District Judge Laura Taylor Swain ruled that the creation by the U.S. Congress of a financial oversight board for Puerto Rico under a law known as PROMESA and the appointment of the board’s members did not violate the U.S. Constitution.

“The oversight board’s statutory objectives and scope of authority thus mark its character as territorial rather than federal,” Swain’s ruling said.

Aurelius Capital Management, an investment firm with a specialty in distressed debt, filed a motion last year arguing that the board’s creation violated the U.S. Constitution’s Appointments Clause. The hedge fund sought to dismiss the board’s May 2017 federal court case to restructure the territory’s roughly $120 billion in debt and pension liabilities.

An Aurelius spokesman said the hedge fund declined to comment on the ruling.

Under the 2016 federal PROMESA law, Congress appointed six members to a board tasked with managing the territory’s finances, with then-President Barack Obama adding a seventh. PROMESA gave the board authority to push fiscally struggling Puerto Rico into a court-supervised restructuring akin to U.S. bankruptcy.

“As stated in Judge Swain’s opinion, PROMESA empowers the Oversight Board to ‘approve the fiscal plans and budgets of the Commonwealth and its instrumentalities’ and ‘override Commonwealth executive and legislative actions that are inconsistent with approved fiscal plans and budgets,’” the oversight board said in a statement on Friday.

Swain, who is overseeing Puerto Rico’s case, previously dismissed a lawsuit by Aurelius and other investors over the territory’s default on its general obligation bonds.

(Reporting by Karen Pierog in Chicago; Editing by Daniel Bases and Leslie Adler)

July 13, 2018

Most of the Puerto Rican power monopoly’s board resigns after the governor demands a CEO salary cut

The independent directors of Puerto Rico’s bankrupt public power monopoly resigned Thursday, alleging political interference after top lawmakers and the U.S. territory’s governor demanded cuts to a chief executive compensation package.

Five board members at the public power monopoly known as Prepa said in a resignation letter that “political forces in Puerto Rico” had been meddling in their decisions and “want to continue to control Prepa.” The incoming CEO was among the board resignations, leaving Prepa leaderless a day after the current CEO, Walter Higgins, said he was departing.

The seven-member board came under fire after offering Mr. Higgins’s successor a $750,000 salary, which top Puerto Rican politicians criticized as excessive for a bankrupt utility. Gov. Ricardo Rosselló said the compensation was “not proportional” to Prepa’s financial condition and called on the utility’s board members to cut the CEO salary or resign.

“When the petty political interests of politicians are put ahead of the needs of the people, the process of transforming the Puerto Rican electricity sector is put at risk,” the resignation letter said.

The departures threw Prepa’s leadership into disarray as the utility vies with bondholders in court to drive down a $9 billion debt load and solicits new investments for a dilapidated power system.

The resignations also marked an unusual rebuke to political meddling for a public authority often accused of being politicized. Prepa has long been plagued by frequent turnover at the top, with politically connected officials cycling in and out depending on the party in power. Board Chairman Ernesto Sgroi, one of the directors who resigned Thursday, was Mr. Rosselló’s 2016 campaign treasurer.

“I strongly reject the allegations of political interference by outgoing members of the governing board,” the governor said in a statement.

Wall Street creditors supported the installation of independent board members under a 2016 governance overhaul. The turmoil in Prepa’s leadership further clouds the strategy for repairing the damage from last year’s hurricane season and improving service for consumers.

“There is a total meltdown of the Puerto Rico Electric Power Authority right now,” said Puerto Rico Senate Minority Leader Eduardo Bhatia. He said the resignations could prompt a takeover by the U.S. territory’s federal financial supervisors or by Congress.

A spokesman for the House Natural Resources Committee, which has jurisdiction over U.S. territories, said the political influence on Prepa proved it wasn’t truly independent.

Since last year’s devastating hurricane season, U.S. lawmakers and the Energy Department have discussed a temporary federal takeover of Prepa, but the idea didn’t gain broad traction, according to people familiar with the matter. Puerto Rico’s federal oversight board tried to take over Prepa last year but was blocked in the courts.

Prepa tapped board member Rafael Díaz-Granados as its new CEO on Wednesday after Mr. Higgins abruptly resigned from the position, saying he believed he wouldn’t be paid what he was owed by Prepa. Mr. Higgins, a high-profile hire with decades of industry experience, was on the job less than four months.

Lawmakers maneuvered in recent weeks to cut nearly half a million dollars in bonuses from his compensation and likewise criticized the pay package offered to Mr. Díaz-Granados, a former General Electric Co. executive who led that company’s operations in Spain, Portugal and Mexico. Prepa said the compensation was comparable to CEO pay at other utilities of Prepa’s size and complexity.

Prepa, one of the largest U.S. utilities, entered a court-supervised bankruptcy last year after a long financial decline. Mr. Rosselló and the oversight board want an end to the utility’s monopoly structure with its various assets privatized.

Union employees worry the strategy will cost them their jobs, while bondholders argue they must be compensated as assets are spun off. The oversight board wants electrical rates slashed to effectively boost family incomes and spur economic growth.

The power grid was destroyed when Hurricane Irma and Hurricane Maria hit Puerto Rico back-to-back last September, and hundreds of customers in central mountainous regions still haven’t had service restored with another hurricane season under way. With Prepa’s system severely damaged, bonds backed by electricity revenue have tumbled in value. A frequently traded bond due in 2040 sold for less than 45 cents on the dollar Thursday, according to Electronic Municipal Market Access.

Prepa has spent hundreds of millions of dollars repairing transmission and distribution lines, unnerving creditors who worried the money wasn’t being well spent. Prepa also has been dogged by allegations of corruption and mismanagement that remain under investigation in Congress.

Costly and unreliable power service is a drain on family incomes and the quality of life in Puerto Rico, which owes roughly $70 billion in debt and another $50 billion in unfunded pension liabilities.

Prepa’s problems have been decades in the making. It earned praise for powering Puerto Rico’s industrialization efforts in the 1940s and 1950s but became more inefficient over time as generating plants, which largely rely on fossil fuels, required major upgrades that were never made or left uncompleted.

When the island sank into recession, Prepa’s finances worsened as business and residential demand for power declined. The exodus of Puerto Ricans to the continental U.S. in the wake of Hurricane Maria is shrinking the island’s population, depleting Prepa’s customer base and leaving creditors fewer avenues to get repaid.

The Wall Street Journal

By Andrew Scurria

July 12, 2018

Write to Andrew Scurria at Andrew.Scurria@wsj.com

SAN JUAN – Credit rating company S&P Global Ratings has withdrawn its “long-term and unenhanced ratings” on the Puerto Rico Municipal Finance Agency’s $413,115,000 2005 series A bonds, $59,075,000 2005 series B refunding bonds, and $258,645,000 2005 series C refunding bonds.

“The ratings were withdrawn due to lack of timely information sufficient to maintain the ratings,” S&P said in a report Thursday to the markets.

It also withdrew its ratings for Puerto Rico Municipal Finance Agency’s $510,615,000 2002 series A bonds; Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority’s $13,215,000 1998 series A industrial revenue bonds; and Puerto Rico Public Building Authority’s $128,895,000 1993 series L, revenue refunding bonds.

A rating suspension does not imply that the entity is not servicing its debt obligations or that its financial position has deteriorated, but rather that it failed to provide certain information such as its finances, liquidity or operations.

Caribbean Business

By Eva Lloréns Vélez on July 6, 2018

• Record $3.2 billion pension payment first step, governor says
• Budget in place, he looks to oversee progressive initiatives

Governor Phil Murphy’s record $3.2 billion pension payment was an easy sell to New Jersey lawmakers who had fought him on other budget initiatives. Still, he said, it was bittersweet to sign a spending plan that won’t impress Wall Street enough for an upgrade.

Credit-rating analysts want to see other elements of what the state was lacking under his predecessor, Republican Chris Christie, including recurring revenue, fulfilled obligations and a sizable surplus. Until then, Murphy said Monday in an interview, New Jersey’s once top grade will remain second-worst among U.S. states, behind Illinois.

Christie, who insisted that smaller government and lower taxes would boost New Jersey’s economy, oversaw a record 11 downgrades by the three major rating firms during his two terms. In many ways, Murphy is his antithesis — a union-backed progressive who believes the solution to New Jersey’s recovery is raising taxes to support increased spending on schools, education and infrastructure.

The 2019 budget brings New Jersey “one step back from the abyss,” said Murphy, a retired Goldman Sachs Group Inc. senior director and former ambassador to Germany, who took office in January.

Soccer Fan

“This is a major step, but it’s one step,” the Democrat said as he sipped iced tea at a Red Bank restaurant near his riverfront mansion, in his first media interview since signing a $37.4 billion spending plan for the fiscal year that began July 1.

Dressed in jeans, his trademark Allbirds woolen sneakers and a taco-patterned shirt in recognition of Mexico’s World Cup match with Brazil, the 60-year-old governor gave a glimpse of weeklong negotiations with Democratic legislative leaders who had objected to his plan to raise more than $1.5 billion in revenue with a millionaire’s tax and a higher sales tax. Without an agreement by July 1, he risked a government shutdown.

On Sunday night, Murphy signed a budget that contained most of what he wanted, though in slightly different form, he said. After negotiations, he agreed on a higher income tax for those who make at least $5 million, no sales-tax increase and a surcharge on the corporate business tax that he had initially resisted.

Budget Deal

Murphy went along despite initial reservations that companies would head for lower-cost states.

“Having a sensible solution on some of these tax policies was, I think, all that they were asking for,” Murphy said of unnamed corporate chief executives with whom he said he had spoken during budget talks. A state will lose businesses no matter what, he said, but the goal was “to keep more than your fair share.”

Republicans fear the state will lose more of its residents and businesses. Democrats are “taxing with impunity,” Doug Steinhardt, chairman of the New Jersey Republican Party, wrote Tuesday in a northjersey.com column.

“Democratic leaders brand their budget compromise a stronger and fairer New Jersey,” Steinhardt wrote in his column. “It isn’t. We are weaker and poorer because of it.”

On Monday, Murphy said he was a few moments late to the interview because he was having a phone conversation with a chief executive of a publicly traded company, which he declined to identify, that already was planning to add 800 employees to its New Jersey workforce of 100. Companies consider more than taxes when deciding where to locate, he said.

“If all you care about, literally all you care about, is the tax rate, and you don’t care about infrastructure, location, public education, higher ed, what are you doing with incubators, what are you doing to develop talent, keep talent — New Jersey will have a hard time in that fight, right?” he said. “It’s like a single-issue voter.”

Demand for New Jersey bonds has increased this year. Debt sold in the state has gained 0.17 percent, beating the overall municipal-bond market’s 0.25 percent loss, according to Bloomberg Barclays Municipal Bond Index.

In the weeks heading to the spending deadline, Murphy had public appearances and news conferences alongside members of groups backing a $15 minimum wage and environmental causes as well as unions representing public employees. Christie had alienated the government workforce by failing to make promised pension payments after they agreed to pay more toward retirement and health benefits — and then calling for more concessions.

Murphy said he intended to keep employees in his corner, even as he examines how to reduce their costs to taxpayers.

“I’m committed to earning that trust back,” he said. “It isn’t just to have a nice relationship. It’s the right thing to do, to again be a state that people say, ‘You know, I trust this place.’ Rating agencies, God willing, will trust us again.”

Bloomberg Politics

By Elise Young

July 3, 2018

— With assistance by Michelle Kaske

Fitch Ratings-New York-02 July 2018: There is a strong likelihood California’s next governor will encounter recession, though a new Fitch Ratings report says that the state is fundamentally better positioned to withstand the next inevitable economic downturn.

With Governor Jerry Brown’s final budget now official and his second term nearing an end, California continues to benefit from strong economic growth in the midst of the second-longest national economic expansion. Whether the state’s choice for next governor is Democrat Gavin Newsom or Republican John Cox, the state is likely to experience a “what goes up, must come down” scenario with a stiff economic test likely for California’s economy.

‘Governor Brown’s popularity among voters helped him to successfully raise taxes, establish a rainy day reserve and budget conservatively, advantages the next Governor may not have,’ said Senior Director Karen Krop. ‘However, the next governor will benefit from structural changes made over the last decade that will heavily affect how the state’s budget performs through the next inevitable recession.’

Among the post-recession changes made that underpin Fitch’s ‘AA-‘ rating for the state are lower voting requirements to approve state budgets, improved access to internal liquidity, transference of some state responsibilities to local governments, and a new funding mechanism for the rainy day fund. While the structural enhancements are in place, the next governor will face the same pressure to address issues such as healthcare, homelessness, infrastructure and access to higher education, among other quality of life challenges that will be magnified in a broader economic downturn. This makes the response when the next recession comes very integral to California’s future ratings and Outlook.

‘California after Governor Jerry Brown’ is available at ‘www.fitchratings.com’

Contact:

Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.,
33 Whitehall Street
New York, NY 10004

Karen Ribble
Senior Director
+1-415-732-5611
One Post Street, Suite 900
San Francisco, CA 94104

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com

Fitch Ratings-New York-06 July 2018: In a recent US Supreme Court (SCOTUS) decision, the justices sided with Florida in an ongoing dispute over water allocations between Florida and Georgia from the Chattahoochee and Flint River basin. The eventual outcome of this lawsuit could have credit implications for water utilities as it would raise the need for borrowing to create additional supply, Fitch Ratings says.

The special master appointed to hear the dispute between Florida and Georgia decided there was insufficient evidence to prove that limiting Georgia’s water use would benefit Florida. However, SCOTUS reviewed that decision and ruled the special master should reconsider Florida’s argument that a cap in Georgia’s water consumption could benefit Florida’s Apalachicola Bay.

As urban populations grow, competing demands for water and supply stability are making decisions like this one more important for water utilities and increasing the frequency of disputes. A court decision that leads to a reduction in, or ultimately limits, supplies could raise a water utilities’ borrowing to finance additional supply development. That would force utilities to strike a careful balance between charging higher water rates and/or assuming lower financial margins. The added costs of water replacement supply development could also divert funding from ongoing renewal and replacement of existing infrastructure, escalating future expenses.

Raising water rates is becoming more difficult as, for decades, water and sewer rate increases exceeded CPI and median household income (MHI). While CPI slightly more than doubled from 1988-2014, typical residential water bills more than tripled and wastewater rates more than quadrupled, according to The American Water Works Association. User charges have steadily climbed toward Fitch’s 2% of MHI affordability benchmark, although Fitch-rated credits by and large still have sufficient affordability cushion.

Declining water use in the US overall has meant that cross border disputes will occur within fast growing regions that share water resources. Water use in the United States in 2015 was estimated at 9% less than in 2010, making withdrawals the lowest level since before 1970, according to the U.S. Geologic Survey.

Contact:

Julie Garcia Seebach
Director, U.S. Public Finance
+1 512 215-3743
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701

Doug Scott
Managing Director, U.S. Public Finance
+1 512 215-3725

Robert Rowan
Senior Analyst, Fitch Wire
+1 212 908-9159

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Fitch Ratings-New York-03 July 2018: Fitch Ratings has upgraded the District of Columbia’s (the District) Issuer Default Rating and the ratings on approximately $4.8 billion of general obligation (GO) bonds to ‘AA+’ from ‘AA’.

Fitch has also assigned an ‘AA+’ rating to the following District GO bonds:

–$172.9 million series 2018A general obligation bonds;
–$303.4 million series 2018B general obligation refunding bonds.

The series 2018A and B bonds are scheduled to be sold through negotiated sale on or about July 18.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the District, with its full faith and credit pledged. Also pledged is revenue from a special real property tax, unlimited as to rate or amount and levied in an amount to pay debt service on GO and parity bonds.

ANALYTICAL CONCLUSION

The upgrade of the District’s IDR and GO rating to ‘AA+’ from ‘AA’ reflects ongoing strong economic and fiscal performance despite federal contraction and the District’s repeatedly demonstrated ability to manage its budget to meet identified needs, most recently by increasing revenues to provide enhanced funding for the Washington Metropolitan Area Transit Authority (WMATA, the local public transit operator). Fitch has raised the assessments of the District’s revenue framework and long-term liability burden key rating drivers. A more than 40-year history without Congressional intervention in revenue policy substantially mitigates concerns about the theoretical limit to the District’s independent revenue control implicit in the federal relationship while the improvement in the long-term liability burden assessment incorporates the strong growth prospects for the District’s resource base and recognition of the notable share of its liability burden that is exported to non-residents.

The ratings continue to reflect the District’s exceptionally strong budget control by an independent chief financial officer (CFO), prudent financial management throughout the business cycle and strong growth prospects. The federal government plays a key role in the District’s credit profile given its economic importance to the District and direct fiscal support for retiree liabilities as well as Medicaid. A statutory cap on debt service, strong commitment to long-term capital planning with sizable pay-go commitments and steady economic growth should keep the long-term liability burden relatively stable.

Economic Resource Base
Government employees and spending comprise a significant portion of the District’s economy and provide an important source of stability. The District’s economic base has proven resilient to federal volatility, including sequestration and a federal government shutdown. Continued private sector expansion, supported by robust population growth and favorable demographic trends, offsets the exposure to federal spending.

KEY RATING DRIVERS

Revenue Framework: ‘aa’
The District’s revenue growth will likely be in line with or above the level of U.S. economic growth, driven by overall economic expansion. The District has unique limitations in its independent legal ability to raise revenues given the level of congressional oversight; however, a long record of District revenue actions without Congressional interference substantially reduces the risk presented by this factor.

Expenditure Framework: ‘aa’
The District has solid flexibility to manage primary expenditure demands, with workforce challenges common to many highly unionized localities, offset by low carrying costs. Material federal support assists the District in managing key spending needs, including Medicaid and pensions. Federally mandated reforms also established structural budget management tools that impose spending discipline and limit the natural spending growth rate.

Long-Term Liability Burden: ‘aa’
While pension and OPEB funded positions are very favorable, the District bears a substantial burden commensurate with its responsibility for services that are normally provided by a combination of state and various local levels of government. Statutory policies establish clear caps, but extensive capital needs indicate long-term liability burden metrics will remain around current levels for the foreseeable future. The liabilities as a percentage of market value metric, which incorporates the benefit of the strong tourism presence in the District’s economy and other non-resident economic activity, indicates a lower burden than suggested by the resident personal income-based metric alone.

Operating Performance: ‘aaa’
The District is well positioned to address cyclical downturns with robust reserve balances and related statutory funding requirements, midrange inherent budgetary flexibility and relatively strong expected general fund revenue growth. The CFO’s office provides extensive budget monitoring and control, supporting the District’s operating profile.

RATING SENSITIVITIES

FISCAL MANAGEMENT: The District’s ‘AA+’ IDR is sensitive to shifts in fundamental credit characteristics, including continued strength in the District’s concentrated economic profile , proactive and conservative financial management including solid reserve funding and continued careful management of a sizable long-term liability burden with debt issuance matched to economic and fiscal capacity.

FEDERAL OVERSIGHT AND SUPPORT: The federal government’s role is a critical factor in the District’s rating. Direct fiscal contributions support the District’s strong expenditure framework and temper the long-term liability burden. Material changes in the federal government’s relationship with the District could trigger rating movement. Congressional intervention in the District’s revenue policy would lower the revenue framework assessment.

CREDIT PROFILE

The District’s income levels are very high, but an income equity gap remains. The 2017 per-capita personal income was by far the strongest in the nation (relative to U.S. states) at approximately $77 thousand, or more than 150% of the national level. However, the poverty rate is also high at 19% versus a national rate of 13%. Population growth has been triple the national rate since 2010, reaching nearly 700,000 in 2017. The District is responsible for funding its public schools, including charter schools, and overall enrollment has grown steadily at roughly 3% annually between 2014 and 2017, with additional growth anticipated in coming years, commensurate with the overall population trends.

Revenue Framework
The District has diverse tax revenues with real and personal property taxes, personal and corporate income taxes and a sales and use tax. Combined, these sources account for approximately three-fourths of its general fund revenues.

Stability in property taxes offsets volatility in the income and sales taxes, while the growth potential of the latter two taxes supports Fitch’s assessment of strong revenue growth going forward. Strong revenue growth over the past decade, well above the rate of national GDP, indicates fundamental resilience despite federal government contraction. Fitch’s assessment recognizes that the actual historical growth rate that is somewhat overstated given revenue policy actions the District implemented during this period.

The District’s independent legal revenue-raising capability is theoretically limited by federal oversight, but not fundamentally so given a long historical record without any Congressional interventions on District revenue measures. The federal Home Rule Act established the District as essentially a federal agency for budgeting purposes, requiring explicit congressional approval as part of federal appropriations bills before local budget bills become effective. Local budget bills are the only way for the District to authorize spending of revenues, including tax or fee increases implemented under separate local legislation.

Under a local Budget Autonomy Act enacted by the District council in 2012 and a local court decision upholding it, the District believes its local funds budget is now only subject to a 30-legislative days congressional review period. Some members of Congress have challenged this assertion and, in Fitch’s view, the final outcome remains somewhat unclear.

Since a 2016 decision in the District’s Superior Court, the District has followed the budgeting process outlined in the Budget Autonomy Act. After council and mayoral approval, the District submits the local funds budget bills to Congress and considers them fully enacted after a 30-legislative days congressional review period. However, Congress has continued to follow Home Rule Act provisions and included the District’s local funds budget in its federal appropriation bills.

Historically, the federal appropriations bills have included all provisions, including revenue changes, in the local funds budget approved at the District’s level. They have also usually included additional policy riders inserted by Congress that modestly restrict the District’s expenditure authority. For fiscal 2018, Congress inserted provisions prohibiting any expenditure of local funds to legalize marijuana and tightly limiting expenditures for abortions. As it traditionally has, the District intends to comply with these provisions included in the federal appropriations bills.

The Home Rule Act also subjects all non-budget enacted local legislation, including revenue raising measures, to a 30- (for civil matters) or 60-(for criminal matters) legislative days congressional review period. Congress can void the legislation during the review period with a joint resolution of both houses, signed by the president. This represents a significant political hurdle, as locally approved legislation has been voided only three times and not since 1990. None of the voided legislation related to fiscal policy or revenue changes.

Beyond the federal provisions noted above, the District has no other legal limitations on its ability to raise revenues through tax or fee increases, or base broadenings. Since the 1973 enactment of the Home Rule Act, Congress has never voided or otherwise overturned revenue-raising measures approved by the District’s council and mayor.

Expenditure Framework
The District’s responsibilities are very broad, as it provides city, county and education services to its population. In addition, the District also functions as a state government sharing the most significant expenditure challenge facing most state governments, Medicaid. An enhanced Federal Medical Assistance Percentage (FMAP) match provides the District with a level of federal support exceeding that provided to most states, offsetting some of the burden.

Overall spending should continue to grow in line with revenues. The District faces a wide range of expenditure pressures but benefits from a resilient revenue stream primed for continued growth.

Federal action to revise Medicaid’s programmatic and financial structure, including a basic restructuring of federal Medicaid funding to a capped amount, remains a possibility. Whether a change in Medicaid funding has consequences for Fitch’s assessment of the District’s credit quality would depend on the District’s fiscal response to those changes. Responses that create long-term structural deficits or increased liability burdens could negatively affect both the expenditure framework assessment and the IDR.

Carrying costs (debt service, pension actuarially determined contribution [ADC] and OPEB actual contribution) are low at about 8% of spending and should be fairly stable (if actuarial assumptions for the pensions are achieved as noted below) as the District consistently pays full actuarial amounts for both pensions and OPEB. Debt amortization is relatively slow, reflecting statutory caps that limit annual debt service. Federal support also plays a key role in minimizing carrying costs. District employees except police, firefighters, and teachers participate in either the federal Civil Service Retirement System (for those hired before Oct. 1, 1987), with the District making percentage of payroll contributions as a participating employer or a District-managed defined contribution system.

Police, firefighters and teachers participate in single employer defined benefit plans managed by the District of Columbia Retirement Board (DCRB). Under the federal National Capital Revitalization and Self-Government Act of 1997, the federal government took on the liabilities and annual contribution requirements for police, firefighters and teachers accrued through June 30, 1997. District funding of actuarial liabilities accrued since then has been in line with actuarially determined amounts. Fitch anticipates annual pension spending will remain relatively stable given the DCRB’s adoption of more conservative actuarial assumptions including a closed 20-year amortization, level dollar (as opposed to the more common level percent of payroll) amortization and 6.5% investment return assumption.

The District’s workforce is highly unionized with approximately 75% of the workforce subject to collective bargaining, and Fitch views the workforce environment as a neutral to weaker factor in the District’s overall expenditure flexibility assessment. Employees are not permitted to strike but all collective bargaining units are eligible for binding arbitration to resolve contract negotiations.

The District reports it has settled contracts with essentially all bargaining units, except for the police officers’ union. While Fitch has not fully evaluated terms of other labor settlements, the District’s CFO reviewed them for fiscal sustainability the costs and are incorporated into the fiscal 2019 budget and multi-year financial plan The budget and fiscal plan also includes estimates for settlement of the police contract, on terms consistent with what the contract for fire and emergency medical services personnel. Given the anticipated strong growth in revenues, Fitch does not believe the new contracts will materially affect its expenditure framework assessment.

Recent action by the District, Maryland, Virginia (collectively the contributing jurisdictions), and the Washington Metropolitan Area Transit Authority (WMATA, the local public transit operator) addresses the authority’s key capital needs without materially affecting the District’s expenditure and long-term liability demands. In 2018 legislative sessions, the contributing jurisdictions all implemented measures to provide a combined approximately $500 million annually in new and permanent capital funding. This level of dedicated funding meets WMATA’s recent request from the jurisdictions to allow it to fully fund an ongoing capital plan to improve safety and reliability. As the District’s only public transit operator, WMATA’s sustainability and success is an important factor in the District’s economic growth prospects.

For the District, the increased contributions will be supported with a mix of recurring revenue increases and dedication of pay-go capital funding. The recurring revenue will derive first from a dedicated share of sales tax revenues. That dedication will be ultimately supported by several tax policy changes including rate increases in the sales tax to 6% from 5.75% (matching Maryland and Northern Virginia) and in the ride-sharing tax to 6% from 1%, as well as 3-cent of a 4-cent increase in the commercial property tax rate to $1.89 per $100 from $1.85.

Importantly, this newly dedicated funding is on top of other capital and operating support the contributing jurisdictions have historically provided to WMATA, and Fitch anticipates that the other support will continue. The District’s operating contributions have consumed between 4% and 5% of its general fund operating expenditures in recent years, while the District’s annual share of WMATA’s capital budget has been approximately $130 million, or 10% of the District’s capital spending.

Long-Term Liability Burden
Pensions and OPEB liabilities are very low with both obligations essentially fully funded, setting the District apart from the vast majority of U.S. governments. Federal support described earlier plays a key role in this extremely strong funded position. However, the debt burden reflects the District’s responsibilities for functions that would normally be shared between state and local governments. Pro-forma combined debt and pension liabilities are approximately $11.5 billion, or 22% of the District’s 2017 personal income (debt represents 21%).

Given the District’s position as one of the nation’s premier tourist destinations and other significant economic activity generated by non-residents including commuters, Fitch also considers a total liabilities-to-market value metric. Relative to fiscal 2017 taxable assessed value of just over $200 billion, the ratio is approximately 6%. As the nation’s capital and home to many not-for-profit groups, one-third of the District’s tax base is tax-exempt, somewhat overstating this ratio.

Fitch’s analysis includes outstanding debt as of March 31, 2018 and an estimated $550 million in new money issued since then or anticipated later this year. This includes recent GO bond anticipation notes, the new money portion of the bonds rated here and an additional new money issuance anticipated for later this year.

Fitch expects the District’s long-term liability burden to remain relatively stable driven by a steady flow of capital needs, offset by likely steady and strong economic growth. The District’s annual long-range capital financial plan report provides an extensive assessment of foreseeable capital needs over a multi-decade timeframe and its ability to fund them. This type of explicit very long-term capital planning is uncommon for state and local governments. Fitch anticipates the District will remain committed to addressing what it considers a long-term capital needs gap identified in its report by regularly issuing new debt but also by increasing other financing sources including pay-go.

Operating Performance
The District’s resilient revenue base, solid spending flexibility and sizable reserves leave it very well positioned to manage through a moderate economic downturn. Available general fund balance was approximately 24% of spending at almost $2 billion at the end of fiscal year 2017 (ended Sept. 30), aided by a roughly $300 million operating surplus. The revised budget for fiscal 2018 forecasts a roughly $100 million surplus, which should allow the District to further boost its sizable reserves.

Available general fund balance includes all unrestricted fund balance (including the cash flow reserve and fiscal stabilization reserve), and two components of the restricted general fund balance (the contingency cash reserve fund and emergency reserve fund). The latter two funds were established under federal statute to provide fiscal flexibility and both are available for intra-year cash flow needs, supporting Fitch’s view that they are part of the District’s available financial cushion.

Fitch views the extensive powers and responsibilities of the independent CFO and other federally established mechanisms as key strengths of the District’s operating environment. Fiscal discipline instilled following the District’s financial crisis in the 1990s is institutionalized, largely in the form of the CFO’s office. The CFO establishes the official binding revenue forecast used for budgeting and regularly updates it; monitors annual revenue and expenditure trends to ensure budget compliance and to flag any unanticipated shortfalls; scores all local legislation with potential fiscal consequences and can essentially block legislation that leads to a projected budget deficit; and develops annual multi-year revenue estimates.

Under the Federal Home Rule Act, the District’s annual budget also includes a detailed multi-year outlook for operating and capital revenues and spending. Revenues in particular (presented by the CFO) tend to be based on conservative assumptions. While the federal financial control board is dormant, federal law establishes clear guidelines for its automatic reinstatement (namely, signs of significant District fiscal distress).

During the current economic expansion, the District made rapid progress in restoring fiscal flexibility with measures like steady rebuilding of its general fund balance (including establishing the cash flow reserve and fiscal stabilization reserve accounts in fiscal 2011) and rolling back temporary personal income tax increases implemented to address effects of the great recession.

CURRENT DEVELOPMENTS

In the June 2018 quarterly revenue estimate, the CFO projected modest growth in local sources, general fund revenue growth of 2.4% in fiscal 2018, and then approximately 3% growth in the outyears through 2022. The fiscal 2018 projection is particularly affected by short-term stimulus effects of the recent federal tax changes enacted in December 2017. The CFO’s overall revenue outlook derives from an expectation of continued economic growth, but at a slightly reduced pace. Fitch considers the revenue estimates prudent and achievable, assuming continued national economic stability.

The District’s council-approved fiscal 2019 budget includes modest increases in local funds spending of less than 2%, supported by revenue growth and use of between $100 million to $200 million of the prior year’s ending balance specifically designated for fiscal 2019 spending. Given the District’s historical practice of conservative revenue and expenditure budgeting, Fitch anticipates actual performance could exceed the forecast leading to another operating surplus.

Contact:

Primary Analyst
Eric Kim
Director
+1-212-908–0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Amy Laskey
Managing Director
+1-212-908-0568

Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com.

New York City’s fiscal 2019 budget process concluded on June 14 with the adoption of an $89.15 billion budget. The budget incorporates recently settled state and federal questions while managing for future risks, addressing new spending requests, and increasing reserve set-asides.

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Jun. 25, 2018

On May 18, Connecticut Governor Dannel Malloy announced that the U.S. Department of the Treasury approved all 72 “Qualified Opportunity Zones” that had been nominated by his administration, 29 of which are located in Hartford, New Haven, Stamford and Bridgeport.

Qualified Opportunity Zones are a creation of the Tax Cuts and Jobs Act (the Act), enacted on December 22, 2017, and serve as part of a new tax incentive mechanism to spur long-term investment in economically distressed communities throughout the United States. Pursuant to the Act, U.S. states and certain territories can nominate communities to be designated as Qualified Opportunity Zones, with such nominations subject to approval by the Secretary of the Treasury.

A taxpayer who invests in a designated Qualified Opportunity Zone through a Qualified Opportunity Fund (an Opportunity Fund) is eligible for preferential tax treatment. For these purposes, an Opportunity Fund is an investment vehicle that (i) is organized as a corporation or partnership formed for the purpose of investing in Qualified Opportunity Zone property and (ii) holds at least 90 percent of its assets in Qualified Opportunity Zone property. Notably, there are some significant tax benefits that Opportunity Fund investors may be eligible to receive:

1. Tax Deferral: If an investor sells an asset and reinvests the resulting capital gain in a an entity constituting an Opportunity Fund within 180 days from the date of such sale, the investor can defer tax on the reinvested capital gain (the Deferred Gain) until the earlier of (i) the investor’s disposition of its investment in the Opportunity Fund or (ii) December 31, 2026 (the Taxation Date). To defer the associated tax on the Deferred Gain, the investor must so elect when filing its U.S. federal income tax return for the year in which the Deferred Gain arose.
2. Reduction of Tax on Capital Gains: If an investor holds an Opportunity Fund investment for at least five years, such investor’s basis in the Opportunity Fund (initially $0) will be increased by 10 percent of the Deferred Gain. This “step-up” in basis will be increased by an additional 5 percent of the Deferred Gain if the Opportunity Fund investment is held for at least seven years. In any event, on the Taxation Date, the taxpayer will be subject to capital gains tax on the lesser of (i) the Deferred Gain over the taxpayer’s adjusted basis in the Opportunity Fund or (ii) the fair market value of the taxpayer’s investment in the Opportunity Fund over the taxpayer’s adjusted basis in the Opportunity Fund. In a best-case scenario (i.e., if the taxpayer holds its Opportunity Fund investment for at least seven years and the taxpayer’s investment in the Opportunity Fund has appreciated), the taxpayer will generally be subject to capital gains tax on only 85 percent of its initial Deferred Gain and will have deferred the associated tax on 85 percent of the Deferred Gain for at least seven years.
3. Elimination of Tax on Realized Appreciation: If an investor holds an Opportunity Fund investment for ten or more years, the investor’s basis in the Opportunity Fund will be stepped up to the fair market value of its investment on the date the investment is sold or exchanged. As a result, following 85 percent of the Deferred Gain being subject to tax at capital gains rates on the Taxation Date (item 2 above), any future appreciation of the taxpayer’s interest in the Opportunity Fund subsequent to the Taxation Date will generally be tax-free to the investor if the investor holds the Opportunity Fund investment for more than ten years.

Importantly, a taxpayer must self-certify its investment in an Opportunity Fund. No approval or action is required by the Internal Revenue Service; rather, the taxpayer must complete the appropriate form and attach it to the taxpayer’s federal income tax return. Such form is not yet available, but is expected to be released by the IRS this summer.

Day Pitney Advisory

June 29, 2018

Day Pitney Author(s) Von E. Sanborn Aaron T. Kriss Jeffrey M. Kole

The biggest news in economic development in the past year has been the bidding war among cities and counties in response to Amazon’s announcement that it is seeking a location for a second headquarters (dubbed HQ2) which would employ up to 50,000 workers with an average annual compensation over $100,000. The company received more than 200 bids, and in January announced a short list of 20 finalists, including Washington D.C. and two areas in suburban Maryland and Northern Virginia.

As the countdown to a final decision continues, it’s worth thinking about the impact—both positive and negative—if Amazon were to select the District proper, which is enjoying a renaissance that nonetheless leaves some residents and neighborhoods behind. A newspaper columnist in Seattle, the home of HQ1, coined the term “prosperity bomb” when reflecting on the upsides and downsides of the company’s presence.

Washington, D.C. is a city with significant assets, enough to make us a serious contender for Amazon: an educated workforce, good schools (if you can afford to buy a house in the right neighborhood or know how navigate the system), renowned colleges and universities, and extensive public transportation and walkable communities. The addition of up to 50,000 new jobs, most of them high-paying, would further strengthen and diversify the city’s economy, which has long relied on federal employment and associated industries.

Continue reading.

The Brookings Institute

by Martha Ross

Friday, June 29, 2018

In response to Ohio House Bill 478, new right of way (ROW) ordinances are currently being considered by a number of Ohio municipalities. Ohio House Bill 478 amends Ohio’s existing laws governing use and occupancy of the public ROW to further accommodate small cell facilities in support of 5G cell phone technology. The new legislation will go into effect on August 1, 2018. (See Ohio House Bill 478)

As a result of the forthcoming changes to [1]ORC Chapter 4939 by Ohio House Bill 478, a flurry of Public Way Notices (PWN) have recently been filed with the Public Utilities Commission of Ohio (PUCO) by municipalities considering the enactment of new or revised ROW ordinances. Since May 1, 2018, 27 PWNs have been filed with PUCO.

Although it seems likely that many of the newly proposed ROW ordinances being considered by municipalities are intended to apply to small cell facilities in the ROW, ambiguous language in certain sections of the new proposed ordinances could allow municipalities to impose their new requirements upon energy companies with existing facilities in the public ROW. Such application may cause permitting delays and increased costs for an energy company attempting to repair, replace, or maintain its infrastructure.

For instance, on May 4, 2018, an Ohio village filed a PWN for a proposed ordinance entitled “Small Cell Facilities for Wireless Support Structures.” The title reflects that the proposed ordinance is intended to govern only wireless communication facilities in the ROW, but inexact drafting within the Village’s new proposed ordinance could put energy companies at risk of falling under the new ROW rules for the Village. Examples include:

• The term facilities is undefined and used throughout the proposed ordinance, whereas the terms “Micro Wireless Facility” “Small Cell Facility”, “Eligible Facilities” and “Wireless Facility” are all defined. One could argue that when facilities is used alone, it means something other than those specifically defined terms. Thus, facilities could be read to include underground or aboveground transmission and distribution lines.
• The term “Work Permit” is defined broadly as “A permit issued by the Village that must be obtained in order to perform any work in… any part of the public ROW…” This requirement could apply to any work by a utility on infrastructure located within the ROW, as it is not limited to ROW work involving small cell facilities and wireless support structures.

Similar problems from imprecise drafting may continue in other forthcoming ROW ordinances from municipalities that have recently filed PWNs.

Drafts of the proposed ordinances are not yet available from the majority municipalities that have recently filed. This is because of a new tactic employed by these municipalities – to file notice with PUCO of their consideration and proposed enactment of a public way ordinance, pursuant to ORC § 4939.04(E), without attaching the proposed ordinance supposedly under consideration. Many municipalities responded that the ordinance supposedly under consideration had not yet been drafted following written request of the proposed ordinances by the author. It seems these municipalities are taking the position that notice to PUCO of their consideration of an undrafted PWO somehow starts the 45-day notice period under ORC § 4939.04(E).

Application of new municipal ROW ordinances to energy service providers is not limited to the situation of imprecise drafting within an ordinance geared towards small cell facilities. Some of the PWNs filed with PUCO are for newly proposed municipal public way ordinances with broad and sweeping changes regarding a City’s governance of the public way, intended to impact energy service providers.

For example, Akron’s new proposed ordinance requires initial and annual registration with the City, and mandates registration fees, annual maintenance fees, new construction permit fees, and bonds for registration, construction, restoration, and removal, among other costly and burdensome requirements.

It is important for energy companies to be aware of the upcoming changes to municipal ROW ordinances in Ohio due to amendment of ORC 4939 from House Bill 478.

[1] Ohio Revised Code Chapter 4939 governs use of municipal public ways and generally grants authority to municipalities to manage the rights of way in their jurisdiction. House Bill 478 will amend Chapter 4939 to provide, among other things, that municipalities must permit wireless service providers, cable providers, and video service providers, to attach small cell wireless facilities to municipally owned support structures located in the right of way, including on utility poles, traffic signals, and street lights and to construct, maintain, operate, or replace a wireless support structure in the right-of-way.

Benesch

July 9, 2018

James Iselin, head of municipal finance for Neuberger Berman, discusses online tax collection and owning debt from Illinois and Connecticut. He speaks in this week’s “Muni Moment” with Bloomberg’s Taylor Riggs on “Bloomberg Markets.”

Watch video.

Bloomberg Markets

June 29th, 2018, 7:33 AM PDT

• Apartment complex opening in August is only 28 percent leased
• Competitors have slashed rents as much as $100 per month

The University of Oklahoma may aid a struggling municipal-bond financed luxury dorm by offering housing “scholarships” to help students afford rental payments, university administrators and the non-profit owner of the project said on a conference call with investors.

The university, which has about 27,000 students on its main campus in Norman, is also weighing whether to allow first year students to live in the 1,230-bed complex or reduce occupancy in other dorms. The new apartment building, known as Cross, opens in August and is just 28 percent leased. It features a “blow dry bar and salon,” cycling studio, cafe and a Lululemon store.

“We are keenly aware of the challenges that Cross is facing,” Steve Hicks, chief executive of Baton Rouge, Louisiana-based Provident Resources Group, a non-profit that financed the student housing with $250 million of municipal bonds, said on the call late Tuesday. “We have complete confidence that we have the right team to address these issues, these challenges and to effectively address them in the coming months.”

The Oklahoma project and another municipal-bond financed complex at Texas A&M, which had to slash rents to fill beds, underscore the risk to investors of overbuilding luxury accommodations as students become more cost-conscious. While many universities have tapped outsiders to finance and build dorms to conserve money for academics, the University of Oklahoma project shows that developers will turn to the universities for assistance if projects falter.

In late May, S&P Global Ratings downgraded the dormitory bonds to BB, two steps into junk, and left a negative outlook on the securities, signaling they may be cut deeper. Some of the taxable securities due in 2037 last traded for an average of 88 cents on the dollar, down from about 109 cents in October.

Cross is opening in a housing market in Norman that “is very different,” than originally anticipated, said Marty McBurney, an assistant vice president at a unit of Balfour Beatty Plc, which built and manages Cross Village. The average occupancy for off-campus student housing is 74 percent and competitors have cut rents by as much as $100 a month.

“Competitors lowering their rates definitely had an impact on our rates,” McBurney said.

Cross was too slow to cut rents and had trouble attracting students earlier this year because it was still under construction and prospective residents couldn’t tour it, said Provident and Balfour executives.

Provident has hired a consultant to review and improve advertising and the university is marketing the complex to prospective transfer students, executives said. But there is a limit to the university’s assistance: Oklahoma won’t require sophomores to live on campus or return a $20 million lease payment, officials said.

There’s no danger of imminent default on the bonds. Cross has enough money to pay debt service in 2018 and 2019. Provident is forecasting 60 percent occupancy in 2019.

The university must analyze the impact of opening Cross to first year students on the revenue that supports existing dorms and the debt that financed them, said Chris Kuwitzky, the university’s chief financial officer.

“We can’t do anything that would harm the debt service coverage ratio on that debt,” Kuwitzky said, adding he expected to report back to investors in 30 to 60 days.

Provident and its banker Royal Bank of Canada are also studying the feasibility of buying some of the university’s existing dorms to crate a “housing system.” Provident would finance the purchase by selling new debt backed by revenue of the portfolio, allowing it to “cross-collateralize” the assets and revenue stream for the new bondholders.

Bloomberg

By Martin Z Braun

June 27, 2018, 7:17 AM PDT

The Los Angeles City Council is moving forward with a proposed ballot measure that would ask voters this fall whether they want to create a publicly owned bank.

In a unanimous vote, council members on Tuesday, June 26, gave the go-ahead to begin the process of adding a measure on the November 2018 ballot that would amend city charter in order to create a city-owned bank. The city’s code currently prohibits it from entering into a “purely commercial venture,” unless it’s approved by voters.

To advocates, this move is a historic one that can set the tone for other public banking movements happening across the nation.

“The outcome will reflect the pulse of the national movement,” says Trinity Tran with the Public Bank LA campaign.

Continue reading.

NEXT CITY

BY ALEJANDRA MOLINA | JUNE 29, 2018

The Los Angeles County Metropolitan Transportation Authority (Metro) is the agency that operates public transportation for all of Los Angeles County. With the passage of Measure M by voters in 2016, Metro has signaled their intent to improve and expand public transit in L.A. County. Just this year, Metro adopted “Twenty-Eight by ’28,” an initiative spearheaded by Mayor Eric Garcetti. The initiative aims to complete 28 major transportation projects by the 2028 Summer Olympic Games, set to be hosted in Los Angeles. This is an ambitious goal. Of the projects listed, 17 are already scheduled to be completed by 2028; however, eight have schedules that would need to be advanced, and three would need new funding resources.

In order to secure accelerated funding, Metro has been publicly exploring the option of using Public-Private Partnerships (P3). In this type of partnership, a public agency trades some sort of long-term return, such as fares or tolls collected, in return for a private investment. P3s, while becoming increasingly common in the United States, have never been used on the scale of a multi-billion dollar rail line through one of the most densely populated corridors in the country. Given the uptick in interest by local governments to utilizing P3s to fund infrastructure projects, an understanding of the P3 laws in California will be extremely important for companies hoping to take advantage of such opportunities.

The California Infrastructure Financing Act (IFA; Cal. Gov’t Code § 5956 et seq.) is broadly applicable to California public agencies below the state level, including cities, counties, joint powers authorities, local transportation commissions or authorities, or “any other public or municipal corporation.”

The IFA states, “a governmental agency may use private infrastructure financing pursuant to this chapter as the exclusive revenue source or as a supplemental revenue source with federal or local funds” (Cal. Gov’t Code § 5956.9). The statute does prohibit the use of the act for “state projects” though, including “state-financed projects” (Cal. Gov’t Code § 5956.10).

One of the main advantages of the IFA for both the public and private partner are the broad exemptions granted from many standard contracting limitation in the Government and Public Contract Codes. This flexibility was intentional—giving local agencies broad latitude to “utilize private investment capital” to meet their needs (Cal. Gov’t Code § 5956.1). Instead of the traditional public bidding process, the statute requires “competitive negotiation” and also affirmatively allows agencies to consider unsolicited proposals. Competitive negotiation is something different, and less stringent, than competitive bidding. Local government agencies have the authority to develop projects proposed by a private entity and then competitively negotiate exclusively with that single entity (Cal. Gov’t Code § 5956.5). This competitive negotiation process works like an arms-length transaction in the private sector and is based on a best value methodology.

Other than competitive negotiation, the only other constraints on the selection process written into the IFA are three general requirements:

1. The primary selection criteria must be demonstrated competence and qualifications of the private entity for the relevant tasks;
2. The selection criteria shall ensure that the facility be operated at fair and reasonable prices to users; and
3. The competitive negotiation process must prohibit illegal practices such as kickbacks and participation in the selection process by government employees who have a relationship with a private entity.

Nevertheless, the IFA does limit an agency’s authority to pursue P3s to “fee-producing infrastructure project[s] or fee-producing infrastructure facilit[ies],” meaning the “project or facility will be paid for by the persons or entities benefited by or utilizing the project or facility” (Cal. Gov’t Code § 5956.3). Examples of fee-producing infrastructure facilities or projects include airports and runways, tunnels, highways or bridges, commuter and light rail, and municipal improvements, among others (Cal. Gov’t Code § 5956.4). It should also be noted that revenues cannot be diverted by the local governmental agency for other purposes (Cal. Gov’t Code § 5956.6). Additionally, any agreement for the government entity to lease the facilities to the private entity is limited to a maximum of 35 years, at the end of which, ownership and possession must revert to the agency at no charge.

Though the positives and negatives of public-private partnerships differ from project to project, it’s easy to see the appeal of P3 in situations where time is of the essence. Traditional contracts without any private financing typically require a cumbersome competition process. P3s, on the other hand, can be awarded on a sole-source basis as long as the finalized contract followed a “competitive negotiation” process.

by Kevin Massoudi

USA June 29 2018

Pillsbury Winthrop Shaw Pittman LLP

The U.S. territory’s financial supervisors cut bondholder payments by more than half over 30 years

Puerto Rico’s federal supervisors said they would cut government spending and scale back economic growth projections after the U.S. territory’s legislature declined to overhaul labor laws.

The federal board overseeing Puerto Rico’s finances voted to cut bondholder payments, university scholarships, municipal subsidies and public employee bonuses after lawmakers didn’t adopt at-will employment laws designed to spark hiring and economic growth.

The revised fiscal framework also leaves less money for infrastructure investments and for Puerto Rico’s legislature and judiciary. The pot of money available for bondholders was slashed to $14 billion over 30 years from $39 billion, according to the oversight board’s executive director Natalie Jaresko.

Revising labor laws has been a top priority for the oversight board. Puerto Rico’s 40% labor participation rate is the lowest in the U.S., while youth unemployment on the island is 24%, more than double the overall U.S. rate, according to World Bank data.

Puerto Rico owes roughly $70 billion to bondholders and $50 billion in unfunded pension obligations and is restructuring those debts under a court-supervised bankruptcy proceeding. The oversight board was counting on bringing more residents into the workforce to increase tax collections.

But lawmakers balked at repealing labor protections that impose strict liability on employers for discharging workers.

The reduction in debt payments could complicate Puerto Rico’s exit from court protection—the larger the losses that need to be imposed on bondholders, the harder it will be to negotiate settlements with them.

“When reforms to increase economic growth are not implemented, unfortunately, more cuts and more controls are needed,” oversight board member Ana Matosantos said at a Friday news conference.

The oversight board is also clashing with Puerto Rico Gov. Ricardo Rosselló over pension cuts and other austerity measures as bondholders and retirees compete for top status in the restructuring.

Puerto Rico is struggling to rebuild following a devastating hurricane season last year that destroyed the power grid, killed an unknown number of residents and drove hundreds of thousands more to the mainland U.S.

The electric power authority known as Prepa is $9 billion in debt and under bankruptcy protection as well. Harvard University researchers last month estimated the death toll from Hurricane Maria at more than 4,600, far exceeding previous official figures.

Puerto Rico bonds have nonetheless rallied in recent months as government revenue rebounded stronger than expected and insurance payments rolled in for property damage and lost business.

The Wall Street Journal

By Andrew Scurria

June 29, 2018 6:58 p.m. ET

Sacramento is flush, but cities and school districts can’t keep up with rising public pension costs.

Nine years into a bull market, housing prices in California have reached record highs. Investors are enjoying soaring capital gains, which in turn has created a windfall for the state budget. California is now sitting on $16 billion in budget reserves while many states struggle to balance their budgets. But beneath this patina of prosperity, many cities are careening toward bankruptcy. Schools are laying off employees and slashing programs. Some districts complain they are having trouble retaining teachers. What gives?

California property taxes, which fund local governments, are capped by the state constitution’s Proposition 13 at 1% of a home’s value and can’t rise by more than 2% annually. So although housing costs have soared since the recession—the median home price in San Francisco is $1.6 million—cities and school districts aren’t rolling in the dough.

At the same time, municipalities are getting socked with big bills from the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, known as Calpers and Calstrs. For years the two funds overestimated their investment returns while underestimating their expected payouts. This helped keep local-government and worker pension costs low for a while, but now the state, cities and school districts are having to play catch-up.

Continue reading.

The Wall Street Journal

By Allysia Finley

June 29, 2018 7:23 p.m. ET

For the first time in 18 years, no city or school district is under the control of an emergency manager

It wasn’t just Detroit and Flint. Dearborn, Pontiac, Benton Harbor—all were run by state-appointed emergency financial managers in recent years.

For the first time since 2000, no city or school district in Michigan is under such control, a sign the state has put the auto industry’s downturn and other financial woes in the rearview mirror.

Gov. Rick Snyder, who appointed 22 emergency managers—more than all his predecessors combined—credits his use of emergency managers with controlling costs and resolving issues like unfunded liabilities of cities. Last week, he released the Highland Park School District from receivership, the most-recent case in which the state has handed control back to elected officials.

“The fact that the state now has no emergency managers in place for the first time in 18 years shows how well that commitment has worked,” Mr. Snyder said.

Michigan has been more aggressive in its use of emergency managers compared with other states. The state law authorizing the governor to appoint emergency managers has existed since 1988 but became controversial after Mr. Snyder expanded their authority in 2011. After voters overturned the law in 2012, the governor signed another version that couldn’t be challenged by referendum.

At the time, the state was still reeling from the 2007 financial crisis and the downturn of the auto industry, including the bankruptcy of Detroit-based General Motors in 2009. Most states allow for some fiscal oversight of municipalities, but Michigan grants managers the most authority, experts say.

Many credit the appointment of emergency manager Kevyn Orr with helping Detroit work through its fiscal emergency and bankruptcy. But Flint, which had four different managers between late 2011 and early 2015, also shows why some voters object to the use of emergency managers.

The state attorney general has charged two former emergency managers in Flint for their role in changing the city’s water source, which caused lead to leach from aging pipes, making water unsafe to drink for nearly 100,000 residents and catapulting drinking-water contamination to a national issue.

A task force appointed by Mr. Snyder to investigate Flint’s water crisis recommended revising the emergency-manager law, but no changes have been made.

The governor appointed an emergency manager in Highland Park in 2012 after annual budget deficits ballooned from lower revenues tied to declining school enrollment. A recovery plan will enable the district to pay off its debt, state officials said.

In many cases, the financial problems of cities and school districts stemmed from unsustainable pension liabilities, financial mismanagement and troubles in the auto industry, which caused regional declines in jobs, population and revenue.

Michigan’s unemployment rate, which now stands at 4.6%, hit 13.7% in 2009, its highest level since the early 1980s. Wayne County, where Detroit is located, lost 286,000 residents, or nearly 14% of its population between 2000 and 2013, the year the city filed for bankruptcy.

More recently, the auto sector’s rebound, including the proliferation of high-tech companies that support the industry, has boosted jobs and tax revenue in and around Detroit.

“Like most policies, there’s good and bad. In a lot of those communities, there still remain a lot of long-term challenges,” said Eric Scorsone, a Michigan State University economics professor who recently served as the state’s interim deputy treasurer overseeing the emergency-management program.

The Wall Street Journal

By Kris Maher

July 1, 2018 8:00 a.m. ET

Write to Kris Maher at kris.maher@wsj.com

CHICAGO (Reuters) – A U.S. Supreme Court ruling on Wednesday that dealt a blow to public sector labor unions will not be a fix, at least in the short term, for massive financial problems in Illinois, where the case was filed, public finance and economic experts said.

Illinois Republican Governor Bruce Rauner, who backed the lawsuit against the state government’s biggest union, hailed the court’s decision as a major victory for taxpayers, “who must bear the high cost of government.”

The 5-4 ruling in the case brought by state worker Mark Janus found that forcing workers who opt out of unions to pay so-called fair-share dues to labor organizations violated free speech rights. But the opinion also noted that nationally, the “ascendance of public-sector unions has been marked by a parallel increase in public spending.”

The opinion cited Illinois’ “severe budget problems,” including a nearly $160 billion unfunded liability for pensions and retiree healthcare in 2013, a huge pile of unpaid bills, and near-junk level credit ratings.

NEGATIVE ECONOMIC IMPACT

“We think the Janus decision does little to nothing to solve the state’s financial situation,” said Frank Manzo, policy director at the Illinois Economic Policy Institute.

The ruling would negatively impact Illinois’ tax collections, he said, as the institute projects the number of state and local government union members to drop by 49,000 to 268,000 and average annual government worker wages to fall by $1,767 given the impact right-to-work laws have had on lowering incomes.

It could take years before union membership and revenue are diminished to a point where labor organizations are rendered irrelevant to politicians who control the purse strings. In the short term, the court’s decision could fuel labor discontent in Illinois and stymie fiscal progress.

“To the extent that this decision gets government workers agitated and undercuts their trust in their employer, they might resist reform efforts and that could make it harder to control costs or restructure,” said David Merriman, director of the Fiscal Futures Project at the University of Illinois’ Institute of Government & Public Affairs.

The Rauner Administration and American Federation of State, County and Municipal Employees Council 31, the defendant in the Janus case, are already embroiled in battles over $400 million in back pay owed to state workers, and a new contract.

S&P Global Ratings analyst Gabriel Petek said the ruling will have no immediate effect on Illinois’ BBB-minus rating.

“We will be watching with an eye toward how, following the Supreme Court’s ruling, the state might be able to better manage its baseline cost trajectory related to employee compensation,” Petek said.

He added that the ruling does not help the state alter pension benefits. Past efforts to reduce costly benefits have been halted by the Illinois Supreme Court on state constitutional grounds.

In the U.S. municipal bond market where the state pays a big yield penalty, Illinois’ so-called credit spread for 10-year bonds narrowed by 2 basis points on Wednesday to 170 basis points over Municipal Market Data’s benchmark triple-A yield scale.

Richard Ciccarone, who heads Merritt Research Services, a muni bond data and research provider, said the ruling has potential over the long run to impact Illinois’ political culture and possibly move the state towards some fiscal balance.

“The idea that we’re going to cure all of our financial problems immediately is probably more of a dream than it is a reality,” he said.

By Karen Pierog

Thursday, June 28, 2018 5:17 p.m. CDT

(Reporting By Karen Pierog; Editing by Daniel Bases and Frances Kerry)

Board also votes to retain interim President John Engler, despite recent calls for his resignation
.
Michigan State University will fund its unprecedented $500 million settlement with survivors of Larry Nassar’s sex abuse through proceeds from a bond offering, after the board of trustees unanimously approved the settlement and bond amount at a raucous meeting Friday morning.

The board also voted to retain interim President John Engler, despite recent calls for his resignation by two trustees and multiple state officials.

The school, a Midwest powerhouse with an enrollment of 50,000 students, said it won’t tap any state appropriations or use tuition funds for the settlement payout. It is in talks with its insurers, and has said it expects to recover at least some funds through them.

Any recovered funds will go directly toward paying down the debt, the board said at a packed meeting marked by shouts of “Shame on you, MSU” and calls for the interim president, Mr. Engler, to resign.

Melanie Foster, who chairs the finance committee on the board of trustees, said the money to repay the bond will come from income from the school’s investments. Last year the school generated about $391 million of which a little less than half is nonrestricted.

The money the school has invested comes from any annual surplus in the general fund, which includes tuition, money from housing and athletics among other sources.

“The truth is the money is fungible, it all goes into a general revenue pot and it’s collectively invested and it’s collectively spent,” said Mark Haas, the school’s vice president for finance and treasurer.

Service on the bond will be roughly $35 million a year. The school is also instituting a 1% across the board cut on its $2.6 billion operating budget, which will generate roughly $26 million a year. In addition, the future pace of new construction will likely be slowed, Ms. Foster said.

“We’re tightening our belts,” she said.

Nassar pleaded guilty last year to state sexual-abuse charges in Michigan and to federal child-pornography charges, for which he is serving an effective life sentence. He was accused of sexual abuse by hundreds of women, while working as a team physician at MSU and for the U.S. Olympics gymnastics team.

Michigan State agreed in principle to the settlement last month, but at the time it wasn’t clear how the school would cover the costs.

Before any payout begins, the plaintiffs and Michigan State still need to sign off on a final agreement, and the settlement must be approved by the federal judge handling the case.

MSU General Counsel Robert Young said Friday that the parties are in “the final stages” of drafting the final agreement.

In a court filing Wednesday, lawyers for the plaintiffs and Michigan State agreed to appoint a former California superior court judge to administer payments from the settlement fund.

The board voted 6 to 2 at the start of the meeting to retain Mr. Engler. Earlier this month the Chronicle of Higher Education reported that he had suggested in emails with other administrators that one of the lead plaintiffs would get a kickback for rounding up other survivors.

The first speaker in the public comment portion of Friday’s meeting was Kaylee Lorincz, a woman who alleged in April that Mr. Engler had offered her a $250,000 settlement without her lawyer present.

Approaching the microphone to cheers from the audience, she reiterated the earlier claim. Mr. Engler has said that he and Ms. Lorincz have different “memories and interpretations” of the meeting at which the offer was allegedly made.

“Everything I said in that statement and the statements that followed is the complete and honest truth,” she said Friday.

Grace French, who was abused by Nassar, said during the comment period that it was “incredibly dangerous” for Mr. Engler to remain in his leadership role after accusing survivors of being manipulative and of lying, as it could deter others from coming forward and reporting their abuse, she said.

In an emotional appeal to the board, Bryant Tarrant, whose daughter Jessica was a patient of Nassar, said, “You have failed my daughter and you continue to fail.”

“There’s been a serious lack of leadership from this board and from this current interim president,” he said, adding that the board has “no business selecting the next university president.”

Despite the vote at the start of the meeting in favor of keeping Mr. Engler at the helm, people in the crowd continued to yell for him—and, in some cases, trustees—to resign. Trustee Mitch Lyons addressed those complaints, saying the best course was to keep Mr. Engler on and find a permanent president instead of pausing to find another interim president and potentially scaring off candidates for the permanent job.

“Nobody wants to walk into this hot mess right now,” Mr. Lyons said. “John said some really stupid things, and I’ve told John that, but John has moved the ball forward in terms of making this campus safer.”

Michigan State’s bond offering is likely to find an audience in the municipal bond market because the supply of high-quality debt has been scarce this year, depressed by changes in the 2017 tax-cut law.

“I would think it’s going to be well received, even though the purpose is kind of tainted,” said Gary Pollack, head of fixed-income trading at Deutsche Bank Private Wealth Management. While municipalities have sold bonds to fund legal settlements in the past, “normally they’re not as high profile as this one,” he said.

The Wall Street Journal

By Melissa Korn and Douglas Belkin

Updated June 22, 2018 4:14 p.m. ET

—Daniel Kruger contributed to this article.

Write to Melissa Korn at melissa.korn@wsj.com and Douglas Belkin at doug.belkin@wsj.com

Fitch Ratings-New York-22 June 2018: A decision last week by the Illinois Labor Relations Board (ILRB) could open up a $400 million hole in Illinois’ fiscal 2019 budget, highlighting the implementation risks in a budget reliant on one-time items and policy measures with uncertain fiscal benefits, according to Fitch Ratings. While the state avoided immediate political stalemate, the on-time budget fails to make material progress in addressing the state’s sizable accounts payable backlog. Given the potential that budget performance will fall short of expectations, Fitch anticipates the governor and legislature may need to revisit the 2019 plan as soon as this fall.

For the first time in four years, Illinois enacted an on-time budget for the coming fiscal year when the governor signed the $38.5 billion (general funds) budget and accompanying legislation into law on June 4th. Despite the implementation risks, enacting an on-time budget with bipartisan support allowed the state to enter the new year with a clear fiscal plan, and provided clarity for the state’s key fiscal partners, including municipal governments, school districts, and public higher education institutions.

Illinois’ ‘BBB’ Issuer Default Rating (IDR) reflects many years of weak operating performance and fiscal decision making. The state continues to benefit from a solid economic base and still substantial independent legal ability to control its budget. The Negative Outlook reflects Fitch’s assessment that fiscal pressures may accelerate in the near term. The state avoided a budget impasse, but the enacted budget entails significant implementation risk. Fitch’s rating on the state will be lowered if the state returns to a pattern of deferring payments for near-term budget balancing and materially increases the accounts payable balance; while stabilization of the rating is contingent on the state’s ability to maintain budgetary balance over multiple years, indicating more sustainable fiscal management. Upward rating momentum is unlikely until the state more comprehensively addresses its accumulated liabilities.

STEP PAY DECISION ADDS TO BUDGETARY UNCERTAINTY

The state could face an unbudgeted spending increase of roughly 1% in fiscal 2019 due to the recent litigation and ILRB’s resulting actions. In 2015, the governor halted step pay increases under an expired labor contract. The AFSCME union challenged the suspension on the grounds that state law required current work conditions to continue in the event of contract expiration. Illinois’ Supreme Court ruled in March 2018 in favour of AFSCME. Last week, the ILRB rejected the governor’s request to send the issue to an administrative law judge for a hearing. Fitch anticipates a final remedy to be determined as soon as early this fall by the ILRB. Based on the Supreme Court ruling, it will likely require the state to provide for unpaid step-pay increases going back to 2015. Based on estimates provided by the administration to the ILRB, the state could face an additional $412 million in expenses in fiscal 2019 if AFSCME’s recommended ‘make-whole’ remedy is implemented immediately.

ONE-TIME MEASURES AND UNADDRESSED ISSUES

The fiscal 2019 budget relies on $800 million in interfund borrowings, which under current law must eventually be repaid. This is more than, and in addition to, the approximately $400 million in interfund borrowings included in the budget for the current fiscal year (ending June 30) that are still outstanding.

Illinois also did not make material progress in addressing its sizable accounts payable backlog with the enacted fiscal 2019 budget. As of April 30, the state comptroller reported a general funds bill backlog of $7.2 billion, or nearly 20% of the fiscal 2019 enacted general funds budget. With only a very narrow budgeted $14 million general funds surplus for fiscal 2019, Fitch anticipates no material progress in reducing the backlog, absent robust and unanticipated revenue growth. The recent favourable decision in Wayfair v. South Dakota provides some potential upside for state revenues in Illinois and elsewhere. But the state reports that its enacted budget already assumes benefits from a favorable Wayfair decision.

The bills backlog and interfund borrowings could total between $8 billion to $9 billion by the end of fiscal 2019. These liabilities are in addition to the state’s approximately $200 billion long-term liability burden for debt and unfunded pension obligations as estimated by Fitch (roughly 30% of state personal income).

BUDGET ASSUMPTIONS CREATE RISK

Fitch remains concerned that several elements of the enacted fiscal 2019 budget may be delayed beyond the fiscal year or could fall short of estimates. For the second year in a row, the budget assumes approximately $300 million in one-time revenues from the sale of the Thompson Center office building in downtown Chicago – the governor also included the sale as part of his fiscal 2017 executive budget. The facility sits atop several lines of the Chicago Transit Authority’s subway system and a final sale requires close negotiation and coordination with the city of Chicago. The administration notes that the timing of a sale is also somewhat contingent on legislative approval of a change in the state’s procedures around surplus property sales; absent that approval the sale process would likely extend beyond the fiscal year.

Uncertain pension savings are also a key component of the enacted budget, accounting for approximately $400 million in expenditure reductions or 1% of the enacted general funds budget. The budget includes three pension proposals; two to buy out some portion of current members’ future benefits at a reduced long-term cost, and one to shift a limited amount of costs to school districts and public universities. The buyout proposals account for the bulk of the savings.

The two buyout proposals will require significant administrative work by the pension systems. Based on initial reports from the state and the systems, the buyouts may not be fully implemented for several months and potentially well into the new fiscal year which could limit the savings the state is able to accrue. The savings estimates also rely on assumptions of the portion of eligible members that will opt into the buyouts which adds to the unpredictability of actual savings. While the state intends to use general obligation bonds to fund the buyouts, Fitch does not consider that a material concern as the new debt will essentially replace reduced net pension liabilities.

The third pension change will require employers in the state university retirement system and teachers retirement system (public universities and school districts, respectively) to assume a portion of the pension contribution for retiring employees if they grant salary increases in excess of 3% during the period used to determine the employee’s final average salary in pension benefit calculations. This anti-spiking measure is expected to generate a modest $20 million in savings in fiscal 2019.

IMPROVEMENTS IN STATE AID

State aid for school districts will increase roughly 5% year-over-year, with a $350 million increase tied to the state’s evidence-based funding formula that was first implemented last year. K-12 spending overall is up nearly 6% with a sizable $300 million increase in state pension payments to the Teachers Retirement System. For municipal governments, the enacted budget rolls back a portion of cuts to various shared tax revenues that were first implemented in fiscal 2018. The budget reduces the state’s withholding of the local share of income and sales tax revenues to 5% from 10%, providing an additional $66 million and $31 million respectively for municipalities. The state also reduced its administrative fee for collections to 1.5% from 2% on various local taxes, providing an additional $15 million for local governments.

Higher education appropriations increase as well, by 2%, or roughly $60 million in fiscal 2019. The pension cost shift noted above will somewhat reduce the benefits of these aid increases for school districts and public universities. The estimated $20 million in savings are well short of the nearly $600 million in pension cost shifts that were proposed in the governor’s executive budget.

Contact:

Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Karen Krop
Senior Director
+1-212-908-0661

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com

• Governor says it makes island a ‘more competitive destination’
• Public power company followed government into bankruptcy

Puerto Rico Governor Ricardo Rossello signed into law Wednesday a bill that clears the way for the partial privatization of the island’s bankrupt electric company, which has been plagued by aging infrastructure and mismanagement that left millions in the dark after Hurricane Maria.

In addition to heralding a more storm-resistant energy grid, Rossello promised that the move would also lower above-mainland electricity prices for homes and business. It allows the government to move forward with a plan that could sell off power generation assets and put the transmission and distribution business under a private concessionaire.

“Today, we begin to see Puerto Rico as a more competitive destination, where quality of life will improve because the cost of energy will drop and the environmental impact will be reduced,” Rossello said Wednesday at the signing ceremony in the northwest municipality of Isabela.

Puerto Rico has defaulted on its debt, and is drastically restructuring its government portfolio. The partial privatization of the eight-decade-old monopoly, known as Prepa, has long been advocated by the fiscal oversight board installed by federal lawmakers. But it may have a political cost on the island, where many are wary of mainland profiteers and question whether electricity prices will actually come down.

Prices on Puerto Rico bonds have rebounded this year from the record lows they hit after Maria. Prepa bonds maturing in 2042 traded Wednesday at an average price of 42.5 cents on the dollar, up from nearly 30 cents at the start of 2018, data compiled by Bloomberg show.

Bloomberg Business

By Yalixa Rivera

June 20, 2018, 10:22 AM PDT

— With assistance by Michelle Kaske

• Southampton, New York has high property tax value at risk
• New Jersey and Florida are the most susceptible states

Almost no city stands to lose as much money from climate change as Southampton, New York.

The affluent Long Island suburb — where the median price of a home for sale is almost $2 million — has the second highest level of its property-tax revenue at risk among municipalities with a high likelihood of chronic flooding in the next twelve years, according to data gathered by the Union of Concerned Scientists. Only Central Coast, California had more.

The group found that sea level rise, driven primarily by climate change, puts hundreds of thousands of homes and commercial properties in the U.S. at risk of being flooded at least 26 times per year by 2030. The incessant deluges would depreciate property values, erode infrastructure and eventually diminish tax revenue, causing local credit ratings to sour and making it more difficult to finance projects needed to contend with rising sea levels.

Continue reading.

Bloomberg

By Danielle Moran

June 19, 2018, 9:37 AM PDT

Maryland local governments’ credit quality remains strong, in S&P Global Ratings’ view, supported by continued economic momentum, low unemployment, and above-average wealth and income metrics. Furthermore, the management teams in Maryland generally adhere to formalized policies and procedures leading to strong budgetary performance.

Continue Reading

Jun. 20, 2018

Officials have outlined an ambitious set of P3 projects supporting electrical and water resilience, as well as economic development.

OXON HILL, Md. — With power almost completely restored along Puerto Rico’s still-fragile electrical grid nine months after Hurricane Maria, island officials have turned their attention toward securing investment in resilient infrastructure.

The fiscal plan recently certified by the Puerto Rico Financial Oversight and Management Board forecasts about $60 billion in federal funds flowing through the U.S. territory over the next eight to 10 years.

Funding like that hasn’t been seen on the island since the 1990s, and Puerto Rican officials at the 2018 SelectUSA Investment Summit just outside Washington, D.C. said Thursday they hoped it would entice other investors.

“I think that Puerto Rico can be a great case study for the Trump administration in how you can use investment in infrastructure to support economic development and also rebuild and modernize aging infrastructure,” Omar Marrero, Puerto Rico Public-Private Partnerships Authority executive director, told Route Fifty.

Gov. Ricardo Roselló on Wednesday announced $1.5 billion in projected investments across six public-private partnership, or P3, projects that officials hope will help the government transfer finance, production and maintenance risks. For comparison, the U.S. P3 market was valued at $2.6 billion in 2016.

Roselló’s administration has moved to overhaul its highly subsidized maritime transportation system—providing ferry service between metro areas and outlying islands—by making it part of the Federal Transit Administration’s pilot program for private investment. The territory is also eying a $50 million to $150 million procurement for on-campus student housing at the University of Puerto Rico Mayagüez Campus.

A third P3 project, costing between $150 million and $400 million, would see the Puerto Rico Aqueduct and Sewer Authority, or PRASA, replace all water metering and externalize non-revenue water—the water lost before reaching the customer. Residents currently pay PRASA’s non-revenue water operational loss, close to 60 percent, but smart metering is expected to help residents identify leaks.

The three other P3 projects have been proposed by the private sector, after Puerto Rico amended its laws to allow for that.

Tesla pitched a high-capacity energy storage system at critical substations, an environmentally friendly alternative to the diesel-fired “peaker” units currently in use. Should another hurricane cause an electrical collapse, the energy stored in giant batteries could be used for power.

Route Fifty

By Dave Nyczepir,
News Editor

JUNE 21, 2018

On June 15, the U.S. District Court for the Northern District of California granted in part and denied in part a national bank’s motion to dismiss an action brought by the City of Oakland, alleging violations of the Fair Housing Act (FHA) and California Fair Employment and Housing Act. In its September 2015 complaint, Oakland alleged that the bank violated the FHA and the California Fair Employment and Housing Act by providing minority borrowers mortgage loans with less favorable terms than similarly situated non-minority borrowers, leading to disproportionate defaults and foreclosures causing reduced property tax revenue for the city. After the 2017 Supreme Court decision in Bank of America v. City of Miami (previously covered by a Buckley Sandler Special Alert), which held that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the FHA against lenders for injuries allegedly flowing from discriminatory lending practices, Oakland filed an amended complaint. The amended complaint expanded Oakland’s alleged injuries to include (i) decreased property tax revenue; (ii) increases in the city’s expenditures; and (iii) neutralized spending in Oakland’s fair-housing programs. The bank moved to dismiss all of Oakland’s claims on the basis that the city had failed to sufficiently allege proximate cause. The court granted the bank’s motion without prejudice as to claims based on the second alleged injury to the extent it sought monetary relief and claims based on the third alleged injury entirely. The court allowed the matter to proceed with respect to claims based on the first injury and, to the extent it seeks injunctive and declaratory relief, the second injury.

Buckley Sandler LLP

USA June 20 2018

Delving deeply into the history of the charitable exemption from taxes under Section 170 of the Kentucky Constitution as well as the use tax, the Kentucky Supreme Court recently held that the exemption applies only to property taxes. Dep’t of Revenue v. Interstate Gas Supply, Inc., 2016-SC000281-DG (March 22, 2018). Section 170 exempts from taxation all institutions of “purely public charity.”

Interstate Gas Supply, Inc. (“IGS”) applied for a refund of certain use taxes it collected and remitted on behalf of Tri-State Healthcare Laundry, Inc. (“Tri-State”), an entity which serves the laundry needs of three charitable hospitals. Tri-State is not a 501(c)(3) tax exempt organization, so it does not qualify for the charitable exemption from sales and use taxes afforded to those entities under KRS 139.495. Tri-State is, however, recognized by the Kentucky Department of Revenue (“Department”) as an institution of purely public charity, entitled to the Section 170 exemption.

Tri-State purchased natural gas from IGS during the relevant periods. IGS requested a refund of Kentucky use tax, arguing that Tri-State’s status as a purely public charity exempted it from all revenue-raising taxes pursuant to Section 170 and that as stated in Commonwealth ex. rel. Luckett v. City of Elizabethtown, 435 S.W.2d 78 (Ky. 1968) the use tax was in effect a property tax, thus bringing it within the scope of Section 170, even if that section was deemed to apply only to property tax. The Kentucky Board of Tax Appeals and the Franklin Circuit Court both found that Section 170 applied only to property taxes, but the Court of Appeals agreed with IGS and the City of Elizabethtown decision and held that the use tax operated like a property tax so that Section 170 applied to its imposition as well. The Department appealed to the Kentucky Supreme Court, which granted discretionary review.

The Kentucky Supreme Court first analyzed the scope of Section 170 and held that the exemption was intended only to apply to Kentucky property tax. Undertaking a review of both the plain language of Section 170 and its many references to property as well as a number of cases that had taken up the issue, the Court held that the Section 170 exemption for institutions of purely public charity applied only to ad valorem taxation.

As to IGS’s argument that the use tax operated so similarly to a property tax that it should fall within the scope of Section 170, the Court analyzed City of Elizabethtown as well as a number of other cases, and also undertook a review of the sales and use tax regime in Kentucky. While noting some similarities between the use tax’s imposition of tax on the storage and use of items within Kentucky, the Court ultimately held that the use tax was intended as a complement to the sales tax and arose out of a transaction, not the ownership or valuation of such property. The Court also noted the criticism City of Elizabethtown had drawn over the years. The Court stated that nowhere else in the country had a use tax been treated as akin to a property tax, and in the Court’s words, such a conclusion “is simply wrong.” Accordingly, the Court overturned City of Elizabethtown and declined to extend the scope of Section 170 beyond property taxes.

This decision, combined with House Bill 487, which implanted a number of new tax policies in Kentucky, has resulted in a perfect storm of uncertainty in the nonprofit world as to whether these organizations must register for and/or collect and remit certain taxes. Without the assurances in City of Elizabethtown and the new policies found in H.B. 487, many nonprofits may be responsible for collecting and remitting sales tax on items such as admissions to special fundraising events, silent auction items, and certain types of memberships or programs (for example, summer camps or little league memberships). The Department has promised to issue more guidance and is working with organizations such as the Kentucky Nonprofit Network to disseminate information in an efficient and effective manner given the number of nonprofits that may not be aware of the changes. So, it’s often best to consult with a tax professional who can provide your organization with advice tailored to your specific circumstances.

Bingham Greenebaum Doll LLP

USA June 25 2018

The metro area has been divided into ever smaller pieces segregated by race and class. If Stockbridge splits up, the poorer parts will be left with $15.5 million of debt.

As Vikki Consiglio tells it, a new Georgia law that has alarmed Wall Street had its genesis two years ago, with a birthday dinner for her husband in Atlanta’s Buckhead neighborhood, at a steakhouse in a graceful, brick-paved complex of high-end furniture stores and designer boutiques. “A light just went off,” she says.

Her own neighborhood in the suburbs—a cluster of gated communities surrounding a country club—lacked the same exclusive feel along its main drag. “I want those things, those amenities,” Consiglio says. “I wanted to be part of a gated community in a high-end area. Instead, when I come out of the gate, I see a Waffle House and dollar stores.”

Consiglio’s home is part of Stockbridge, a predominantly black city in Henry County, some 20 miles south of Atlanta. She says her section can’t attract businesses like Buckhead’s because of the lower income of the rest of Stockbridge. Her idea: The whole neighborhood could break away. Consiglio is the spokeswoman for the movement that pushed for and won a state law to allow a “de-annexation.”

Continue reading.

Bloomberg Businessweek

By Margaret Newkirk

June 21, 2018

The city of Harvey remained locked in a court fight with state officials and its own public worker pension funds over its ability to use sales tax dollars to pay its bills. But it likely is just one of dozens of cities and other governments across Illinois poised to land on the wrong side of a state law mandating pension fund payments.

“Harvey may be somewhat of an extreme case given all the factors, among which is its history of corruption,” Kass, assistant director for the Center for Municipal Finance at the University of Chicago Harris School of Public Policy, told the Cook County Record. “But I wouldn’t be surprised to see more pension funds across the state file similar paperwork with the comptroller’s office the same way Harvey has. There might not be a ton of Harveys, but many other places have the same issue of pension system underfunding.”

After the Harvey pension fund for retired police officers moved to intercept and lay claim to millions earmarked for the city, ultimately setting off a legal quagmire, Illinois Comptroller Susana Mendoza justified diverting the funds as requested by pointing to a 2011 enacted state law that requires her office to do just that when municipalities are accused of failing to make their obligated pension payments.

The case in Harvey is being closely monitored across the state and other parts of the country given the gravity and widespread nature of the problem. In addition, bondholders have also taken note of the proceedings, as such claims by pension funds could also leave them cut out of the municipal revenue they would otherwise be owed, as the Cook County Record previously reported.

However, in a related opinion letter, Mendoza allowed the city to pay a group of investors holding city bonds, as those particular bonds were funded from a special Harvey city sales tax, and that tax should not be considered state funds. Thus, those funds cannot be withheld and diverted to pensions.

Harvey city officials say the legal entanglement has deepened the city’s problems, recently forcing city officials to lay off dozens of government workers, among them as many as 40 police and fire department officials.

“A big part of this is so many of these pension funds have been so grossly underfunded for so long and that’s why you’re seeing so many of them experiencing the same troubles,” Kass added. “Look at North Chicago; they’re one of the other places pretty much in the same predicament. While the initial law may have required pension contributions, it lacked an enforcement mechanism.”

In all, Kass estimates that there are at least 53 other municipalities that have seen police and fire pension funds underfunded on par with the figures that have caused much of the destruction in Harvey. Across the state, police and fire pensions are reported to have only been funded on an average of just 60-67 percent over the last decade.

“Harvey may be the first, but it certainly won’t be the last where you see something like this happen,” Kass said. “And as far as the law goes, it’s clearly written about what can be intercepted by the comptroller’s office whenever the situation occurs.”

Kass said it remains to be seen what the controversy could truly come to mean for Harvey’s already frustrated taxpayers.

“In theory, you can raise taxes as high as you want, but that doesn’t mean the people can afford to pay them,” she said. “Harvey already has a high tax rate that’s only matched by its high delinquency rate. There’s a real need to evaluate the dynamics and demographics of these places and the question of whether or not they can handle much more of the same thing. Some places may already have a cap of their own, while for places like Harvey the solution may have to come from a higher level of government involvement.”

Kass said she’s heard some potentially good ideas offered concerning possible long-term solutions, but she she thinks what’s happening in Harvey is the wrong way to go in terms of handling things.

“Right now, Harvey is laying off police and firemen and I know that can never be a good idea,” she said. “Just firing people, especially essential people to making a society work, is not the answer anyone needs.”

Cook County Record

By Glenn Minnis | Jun 21, 2018

In rare move in municipal debt world, state pledges to curb spending, cap future borrowing and funnel excess revenues into reserve fund

Connecticut is making a new promise to bondholders in exchange for $500 million: self-discipline.

The cash-strapped U.S. state is preparing to issue new debt that requires Connecticut to limit its spending, cap future borrowing and funnel excess revenues into a reserve fund. The $500 million bond issue priced Tuesday and will be delivered to investors June 20.

It is a rare step in the world of municipal debt. No other state has attached such fiscal austerity measures to an outstanding bond issue, according to analysts at S&P Global Ratings. The restrictions will stay in place for the next five years.

The unusual offer has the potential to lower borrowing costs for Connecticut in the near term and enforce fiscal discipline following a bitter state budget battle in 2017. The covenants helped win enough support to end the stalemate.

But the restrictions could also hamstring the state in the event of a future crisis. The only way to suspend certain covenants is with a three-fifths vote of the legislature and a declaration of fiscal emergency from the governor. The current governor, Dannel Malloy, is scheduled to leave office in January.

“If it goes badly the cost might be really high,” said Kim Rueben, senior fellow at the Urban Institute

Connecticut’s idea reinforces the predicament facing many U.S. states as they struggle to pay for core services like education and infrastructure at a time of soaring costs for debt, retirements and health care.

Pensions, retiree health insurance and Medicaid together consume about one out of every five tax dollars collected by state and local governments. Estimates of how much money they still need to pay for all future pension obligations vary from $1.6 trillion to $4 trillion. In Connecticut that shortfall is $34.8 billion, according to S&P.

A legislative standoff over how to balance pensions, debt and other liabilities with day-to-day operating costs delayed Connecticut’s budget last summer and froze aid to municipalities. The mayor of Hartford, the state’s capital, warned that he would seek bankruptcy protection if the city didn’t receive additional aid from the state.

Lawmakers and Mr. Malloy reached a deal in October that helped Hartford avoid bankruptcy. It included the new series of commitments attached to any bond offering over the next two years.

Spending has to be limited to 98% to 100% of revenues depending on the year and it can’t grow faster than inflation. The state also has to limit new borrowing to no more than $2 billion a year and put excess revenues into a reserve fund. More reserves could improve the state’s bond rating, ratings firm S&P Global said in a statement.

Connecticut has repeatedly overshot revenue predictions, leading to several contentious budget fights. But in April, state budget officials projected a $1.34 billion income-tax revenue surge above what was originally expected. About half of the windfall came from one-time payments from hedge-fund managers racing to beat a federal tax deadline on some past offshore earnings, according to the state budget office. The numbers also could have been boosted by residents cashing in stock in late 2017 to pay taxes on capital gains to take full advantage of the state and local tax deduction, which the new federal tax law capped.

The state used that excess revenue to fill a $717.5 million budget hole and add $556.4 million to its reserve fund.

The limits on borrowing and spending helped win support for the budget compromise at the final hour, said Connecticut House Speaker Joe Aresimowicz.

“We have faced now six or some could argue eight consecutive years of a very difficult budget,” Mr. Aresimowicz said. “We want to take bold steps forward to ensure that if it’s all of us back in the same room next year or whoever it may be, they’re not facing the same situation that has allowed legislators to punt year after year on the difficult decisions.”

Enshrining the rule in bond documents was quicker and easier than a constitutional amendment that requires a popular vote, said Democratic Sen. John Fonfara. Mr. Fonfara championed a provision of the covenant limiting the budget’s reliance on certain income-tax collections.

“How do you bind future legislatures? The covenant was the means by which we intend to do this,” Mr. Fonfara said.

But violating any of these covenants would amount to a default on the bonds and could prompt investor lawsuits. The new restrictions could also make it more difficult to act quickly if a new emergency arises. Lawmakers later reduced the length of the fiscal austerity covenants to five years from 10 years as a way of adding more flexibility.

Other states are watching Connecticut to see how its experiment fares and whether borrowing costs drop, analysts and government finance officers said. Price data late Tuesday showed the state paying less to borrow, relative to market rates, than it had in March, according to the Connecticut State Treasurer’s Office.

“It’s sort of putting your money where your mouth is by embedding it in the bond documents,” said Florida bond director Ben Watkins. “It’s a firmer commitment than just talk.”

The Wall Street Journal

By Heather Gillers

Updated June 5, 2018 6:32 p.m. ET

—Joseph De Avila contributed to this article.

• California has $74 billion of long-term debt outstanding
• California’s debt would be distributed among the three states

If California voters decide to split the state in three — as billionaire Tim Draper has proposed — it would roil the $3.8 trillion municipal-bond market.

The venture capitalist’s initiative to break California into three states qualified for the November ballot, election officials announced late Tuesday. Such a crack-up has long been a fantasy for some wealthy coastal Democrats politically out of sync with inland Republicans.

If approved by the voters and the U.S. Congress, the arrangement would hit the municipal market hard. That’s because California, which has $74 billion of long-term debt outstanding, is the largest U.S. seller of bonds financing state and local government operations.

Under Draper’s measure, California’s debt would be distributed among the three states based on the population. But investors won’t get a say in that.

Bloomberg Markets

By Romy Varghese

June 13, 2018, 10:46 AM PDT

• After Maria, investors get blank slate to rebuild and profit
• Almost 10,000 customers still lack electricity months later

Now that Puerto Rico’s massive and moribund public power utility is almost back from the dead, Wall Street is weighing what its parts might be worth.

The bankrupt U.S. commonwealth’s investment bankers last week started sounding out suitors for the eight-decade-old monopoly known as Prepa, whose rickety infrastructure was almost erased by Hurricane Maria in 2017. The halting efforts to repair the damage and improve the antiquated grid have been the central obstacle in recovery. Now, the government is so eager to find a solution that it is even asking companies that might privatize the system how they would prefer it to be regulated.

But it wasn’t immediately clear who would want a utility business on a broke island whose population has been increasingly fleeing to the mainland. Meanwhile, residents — some still in the dark — worried that a deal would enrich mainland profiteers at their expense.

“We are tired of people coming here to get rich and take advantage of us,” said Melissa Diaz, 48, a homemaker and mother of one who lives in San Juan.

Nowhere But Up

Proponents, including Governor Ricardo Rossello, say service and pricing can only improve if a company takes the utility off its hands. The authority for decades has been a honey pot for politicians of all parties and a font of patronage. Its dated infrastructure relies on shipped-in oil, a notoriously expensive fuel. But the commonwealth, which owes creditors and pensioners around $120 billion, is in no position to shoulder upgrades on its own. Just Friday, the parties in the painful bankruptcy appeared to have a tentative deal on the central question of who can claim sales-tax revenue. But dozens of other matters remain pending, and no one knows how much Puerto Rico will owe, much less when it will be able to raise money again in the bond market.

So while the power system’s status quo appears untenable, even with hurricane aid pouring in, nobody knows what the energy future will look like in private hands — or exactly what oversight new owners would face. Indeed, the government is portraying the market as a blank slate. It has said that its base scenario would include selling generation assets and retaining transmission and distribution holdings, while transferring those operations to a private concessionaire.

Divide and Profit

AES Corp. Chief Executive Andres Gluski said in an interview last week in San Juan that he’s considering a proposal. He declined to give details, but said he’s already floated ideas to the government. He said the commonwealth should divide its system into eight microgrids that are more resistant to a whole-island collapse like the one after Maria.

“We want to continue contributing to the future of Puerto Rico,” said Gluski, whose company already runs a coal-fired plant and a solar plant on the island.

The commonwealth is also open to alternatives it hasn’t yet considered. In a June 4 letter, its bankers from Citigroup Inc. and Rothschild & Co. asked interested parties to submit in writing a description of the circumstances in which they would be most willing to bid.

Your Call

One section of the questionnaire asked about companies’ preferred regulatory environment and the role they envisioned for the power authority, the Puerto Rico Energy Commission, a four-year-old oversight body whose role is likely to evolve as private capital arrives. For instance:

“Please present your views regarding the structure and authority of the Puerto Rico Energy Commission (‘PREC’). Please be as specific as possible including naming the features you consider important.”

And later:

“What, in addition to standard items … should the regulator have authority to approve? Please provide an explanation for your answer.”

While the elected government and its partners will have the ultimate say, the documentation suggests a rare opportunity for companies to influence every aspect of their work environment — for better or for worse.

“I don’t know that asking the firms how they’d like to be regulated is the recipe for good regulation,” said Manuel Teodoro, a professor of political science at Texas A&M University who has studied water-utility privatization in the U.S. He said there’s nothing inherently wrong with seeking out different points of view, as long as the private sector isn’t the only one that gets heard.

Solid Partner
Of course, the answers to the questionnaire might vary with the assumptions about the eventual structure of the deal. Under the base scenario — in which Puerto Rico would retain ownership of the transmission and distribution business — the question would really be about how to regulate the government entity.

Under such arrangements, privately run generation companies would have contracts with the commonwealth, as would the operator of the state-owned transmission division.

“You’d want to make sure that, if I’m going to have a contract to operate this utility, that the utility can live up to its obligations,” said Paul Patterson, who covers utilities, not including Prepa, as an analyst for Glenrock Associates.

Pricey Power

Teodoro said privatization is typically associated with improvements in service, while public utilities generally have the edge on lower prices. But because Puerto Rico’s infrastructure is so inefficient and its bureaucracy so unwieldy, its electricity prices are already well above private mainland rates — a burden on the 44 percent of island residents who can’t afford basic necessities. (Puerto Rico’s residents are U.S. citizens, but their poverty rate is twice as a high as Mississippi, the poorest state.)

“The important thing is to create a strong regulatory commission to ensure the energy rates will not increase, further aggravating Puerto Ricans’ economic situation,” said Jose Caraballo Cueto, a professor at the University of Puerto Rico and president of the island’s economists’ association.

The Prepa workers’ union known as Utier opposes privatization. Angel Figueroa, its president, said the island’s consumption rates are relatively low and its needs massive, so he’s suspicious of why anyone would invest. He said the only explanation is that buyers see a benefit in the billions of federal dollars allocated to mend the grid after Maria.

Prepa employees fix power lines following Hurricane Maria.Photographer: Xavier Garcia/Bloomberg
But for all the apprehension, many Puerto Ricans wonder what other alternatives they have. A full week into the 2018 Atlantic hurricane season, close to 10,000 power customers are still without electricity.

“After living more than four months without electricity after Maria, for me they can sell everything,” said Carlos Vega, a 32-year waiter who lives in the Bayamon municipality outside San Juan. “Surely, whoever comes will do a better job than all the governments that have passed through.”

Bloomberg

By Yalixa Rivera and Jonathan Levin

June 11, 2018, 4:00 AM PDT

Invoking a statute designed to compel Illinois municipalities to fund their public safety pension plans according to statutory minimum levels, pension boards in the cities of Harvey (not rated) and North Chicago (A/Stable) recently petitioned the state comptroller to intercept state revenues due to the municipalities.

Continue Reading

May 14, 2018

The Arkansas Court of Appeals addressed in a May 23rd opinion a dispute between an Arkansas municipality and public water authority in regards to the sale and purchase of water. See Northeast Public Water Authority of the State of Arkansas v. City of Mountain Home, Arkansas, 2018 Ark. App. 323.

Mountain Home, Arkansas (“Mountain Home”) and Northeast Public Water Authority of the State of Arkansas (“Northeast”) disagreed as to the meaning of certain terms in a wholesale water purchase contract (“Contract”).

Mountain Home and Northeast entered into the Contract in 2012. The Contract replaced one that had been in place since 1982.

Continue reading.

Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C.

June 14, 2018

More than half a billion dollars has been wagered by local and state government officials in Kansas on taxpayer-financed economic development projects under a program that relies upon adherence to the state’s motto — to the stars through difficulties.

The sale of State Tax Revenue bonds — also known as STAR bonds — grant municipal governments an opportunity to finance major commercial, entertainment and tourism areas and repay the debt with state and local sales tax revenue generated by the developments. There have been failures and successes since implemented two decades ago.

For scope of achievement on the STAR bond landscape, look no further than the Kansas Speedway and the Village West shopping complex outside Kansas City, Kan. It’s a flashy show-me example of the inducement as a platform for business growth and job development.

Bonds used to finance Village West were paid off in 2016 — five years early. The retail and entertainment hub created 5,700 jobs at more than 100 businesses.

“It was a very successful tool,” said Pat Pettey, who has watched evolution of the state’s No. 1 tourist attraction as a member of state and municipal government. “For us, at the beginning, given where we were at that time, it was great for attracting businesses.”

Just as easily, the promise of a STAR bond development can burn out prematurely. In Overland Park, the Museum at Prairiefire, part of a retail development, gobbled up one-third of $65 million in STAR bond investment capital. The museum, which has a dinosaur as the star attraction, operated at a $2 million loss in 2015 and 2016 — and floundered in red ink during 2017.

Another bump on the STAR bond highway was the Heartland Park Topeka motorsports complex that was foreclosed in 2015, unsuccessfully sought new STAR bond financing and has reopened under new management.

The tragic death in 2016 of a 10-year-old boy on a giant water slide at the Schlitterbahn park in Kansas City, Kan., cast doubt about future of that STAR bond investment. Closure of the slide generated uncertainty as to whether Schlitterbahn could survive. STAR bond tax revenue was expected to repay bond debt.

Mike Taylor, spokesman for the Unified Government of Wyandotte County, said it was possible STAR bonds could be issued to support new attractions at the Schlitterbahn.

Undeterred, communities across the state are optimistically plowing ahead with plans for developments crafted to revitalize downtown areas and create destination-scale projects that attract one-third of visitors from more than 100 miles away.

“STAR bonds are proven to be an effective economic development tool beneficial to the state of Kansas,” said state Rep. J.R. Claeys, a Salina Republican.

Salina officials are digging into the STAR bond portfolio to bring about a hotel, car museum and rehabilitation of an historic theater in the downtown.

Knocking on the door is the $165 million complex in Wyandotte County for the American Royal agricultural events center. It will be transferred from Kansas City, Mo., with about $80 million from STAR bonds.

“This is about creating a bright future for the American Royal … and hanging a sign in the state of Kansas that Kansas is open to agriculture,” said Korb Maxwell, an attorney with the American Royal.

In Derby, state and local officials applied STAR bond financing to an $18 million dinosaur park. Garden City is developing the Sports of the World Complex for soccer, skating, rugby and hockey on the east side of the city. It will pull down $24 million in STAR bonds.

“This is a great project for our region and will go a long way toward meeting some of our community enhancement goals,” said Lona DuVall, president of the Finney County economic development corporation.

A STAR bond development in Dodge City will invest $13 million in Boot Hill Museum and Heritage Center and the Long Branch Lagoon Water Park.

Atchison set out to work with STAR bonds for an aviation museum and to update the city’s farmers market.

“These aren’t projects that the private market is going to do,” said Trey Cocking, deputy director of the Kansas League of Municipalities.

Looking back, the Kansas Department of Commerce authorized $165 million in STAR bonds for the Kansas City Wizards stadium, $150 million for a Cerner Corp. office campus and $65 million for a U.S. soccer training facility.

In 2006 to 2009, the city of Manhattan received $50 million in STAR bonds to develop the Flint Hills Discovery Center, which brings to life the culture, heritage and natural surroundings of the tall grass prairie in Kansas. Other projects tied to the incentive were the Salt Mine Museum in Hutchinson and the Waterwalk in Wichita.

In 2017, the Legislature and Gov. Sam Brownback agreed to extend availability of the bond mechanism through 2022.

The Topeka Capital-Journal

By Tim Carpenter

Jun 17, 2018

An Allegheny County Common Pleas Court judge approved the Steel Valley School District’s request to use a bond issue debt to finance gender-related pay gaps related to a recent court settlement.

During a brief court hearing Wednesday morning, the school district’s attorney, Jerri Ryan, told Common Pleas Judge Michael Della Vecchia that the money from the bond issue would fund salary adjustments across the district to avoid more litigation in the future.

Steel Valley asked the court to allow it to issue $1.75 million in bonds, rather than raise property taxes in the short term, according to a May 21 petition.

Municipal finance experts contacted recently by the Pittsburgh Post-Gazette said that debt issuances are typically used for big capital projects, not costs related to legal settlements.

Naomi Richman, senior vice president at Moody’s Public Finance Group, said last week the ratings agency is “not aware at this time of any cases involving Pennsylvania municipalities, including school districts.”

Steel Valley in April reached a settlement with five female teachers who claimed in a lawsuit in U.S. District Court that they had been unfairly hired at lower salaries than male coworkers.

The teachers, who were hired between 1997 and 2008, began at the lowest step on the pay scale despite prior work experience. The district cited “policy” while paying some male teachers with similar experience more, according to the lawsuit.

As a result of the federal court settlement — for an undisclosed amount — Steel Valley reviewed three years of records to address pay gaps throughout the district and it will make a lump sum payment to the affected teachers, according to the petition. It is unclear how many employees are affected.

Steel Valley, a 1,400-student district that serves Munhall, Homestead and West Homestead, employs about 200 people, including nearly 130 teachers.

In his ruling, Judge Della Vecchia said he was not taking a stance on the substance of the case, only that the district followed proper procedure in requesting the bond issue.

Pittsburgh Post-Gazette

by Matt McKinney

June 13, 2018

Matt McKinney: mmckinney@post-gazette.com, 412-263-1944, or on Twitter @mmckinne17

Atlanta expects to save about $500,000 by refinancing a loan taken out in 2008 to help pay for upgrading the city’s water and wastewater system, a city finance official said Wednesday. The transaction is of note because the city secured a beneficial rate as municipal bonds face a swirl of headwinds.

Atlanta awarded $51.2 million in bonds in transactions dated Wednesday. The closing is set for June 21.

The Atlanta City Council approved the issuance Wednesday in a special call meeting. The council immediately sent the paper to Mayor Keisha Lance Bottoms for her signature, which enables the transaction to move forward quickly.

Atlanta did not extend the pay-off date of the debt in order to receive a lower interest rate. The $51.2 million is structured as three separate entities, each with a different retirement date and still set to terminate in 2041, according to terms outlined by EMMA/MSRB. The dates for final payoff of the amount of bonds issued include:

Nov. 1, 2039 – $8.5 million;
Nov. 1, 2040 – $16.9 million;
Nov. 1, 2041 – $25.8 million.

There’s nothing new or novel about governments issuing new debt to pay off older debt that carried a higher interest rate.

The 2008 bonds carried a variable rate that was changing every week, according to Jerraé Williams, Atlanta’s treasurer/chief of debt and investment. The all-in, true fixed rate of the $51.2 million bond issue is 4.15, according to John Gaffney, Atlanta’s deputy chief financial officer.

“In lieu of interest rates that are going to continue to increase, we need to fix out the cost,” Williams said. “We converted the variable rate to fixed rate. We are saving money, about $500,000.”

However, these sorts of transactions that once were routine are entering a new era. The tax overhaul bill President Trump signed into law in December 2017 made debt issued by state and local governments less attractive to one of their major buyers – banks.

During the first quarter of 2018, more than six of the nation’s largest banks reduced by $7.8 billion their holding of debt issued by state and local governments, according to a May 31 report by bloomberg.com. The report was based on a review of the banks’ first-quarter filings with the U.S. Securities and Exchange Commission.

The report observed:

“The figures show a significant pullback from buyers that had been steadily expanding their ownership of state and local government securities since the end of the recession, helping bolster demand. If the large banks are a guide, the quarter will mark the first time the industry has retreated from the $3.9 trillion market since 2009.”

In addition, the Fed indicated Wednesday it may approve two more rate hikes this year, according to a report by businessinsider.com.

Against this backdrop, Atlanta’s incoming chief financial officer, Roosevelt Council, observed that the timing of the transaction was ideal.

“Our timing couldn’t have been better, because the [Federal Reserve] board chairman talked about increasing rates, basically today,” Council said. “We were able to lock in a pretty good price as it pertains to that.”

The mayor has nominated Council as CFO and his appointment is pending the council’s approval.

Saporta Report

By David Pendered

June 13, 2018,

• Boring Co. lands bid to build multibillion high-speed train
• Musk’s investment shows “faith” in city economy, analyst says

Chicago, slammed by rating agencies for its fiscal woes, President Donald Trump for its violence and even its own governor for the school system’s debts, is getting a boost from visionary Elon Musk.

Mayor Rahm Emanuel and Musk, the billionaire chief executive officer of electric carmaker Tesla Inc., Thursday officially unveiled the plans for a high-speed train service that will make the approximately 15-mile (24-kilometer) trip from downtown Chicago to O’Hare International Airport in 12 minutes, a fraction of the current commute.

That Musk’s Boring Co. emerged as the winning bidder is a coup for the 18-month-old company, whose futuristic ideas have yet to be proven. But Chicago bondholders are also voicing cautious optimism that the project — which will use electric vehicles to transport passengers through new underground tunnels — is an economic win for the nation’s third-largest city. Chicago said it won’t require any public funds.

“It’s very good news that a company like the Boring Co. would be considering a major investment in Chicago-area infrastructure,” said Paul Mansour, head of municipal research at Conning, which oversees about $9 billion of state and local debt, including Chicago bonds. “It shows faith in the future of the Chicago-area economy.”

Chicago’s public transit has long been a talking point for Emanuel when touting the city’s virtues. Musk’s investment also coincides with Emanuel’s courtship of Amazon.com Inc., which placed Chicago on the list of 20 cities that may be home to its second headquarters. Chicago is also embarking on the largest terminal expansion plan in O’Hare’s history, a long overdue revamp of what once was the world’s busiest airport.

“Bringing Chicago’s economic engines closer together will keep the city on the cutting edge of progress, create thousands of good-paying jobs and strengthen our great city for future generations,” Emanuel said in an emailed statement. “This transformative project will help Chicago write the next chapter in our legacy of innovation and invention.”

More than 50 companies have relocated their headquarters to Chicago under Emanuel’s tenure, according to World Business Chicago. Emanuel took office in 2011 and is up for re-election next year.

“Chicago’s competitive edge is unbelievable,’’ Emanuel said during a press conference on Thursday with Musk, touting the city’s transportation system, universities, and workforce. “This will add to it and give us a cutting edge and helps us maintain and build the commanding world-class economy we have.’’

The investment is also significant given the fiscal strains facing Chicago and Illinois. The city had $35.8 billion of unfunded pension liabilities by the end of 2016, and the state’s retirement systems were short $137 billion, as of June 30, raising the risk of tax increases down the road. Those pension liabilities caused Moody’s Investors Service to cut Chicago’s rating to junk in 2015, making it the only major city outside of Detroit without an investment-grade rating.

Speaking to reporters, Emanuel praised the tremendous opportunity the investment will bring to the city, emphasizing that Boring is bearing all of the cost.

“He’s bearing the cost,” Emanuel told reporters. “We get the upside with no financial risk at all.”

Even if it wanted to, Chicago couldn’t afford to be too big of a contributor to the kind of project envisioned by Musk, according to Richard Ciccarone, president of Merritt Research Services LLC, which analyzes municipal finance. Emanuel has already hiked property, sewer and water taxes to cover rising pension payments.

“We’ve used up so much of our taxing and debt capabilities,” Ciccarone said in a telephone interview. “For us, we’ve got to do whatever we can to extract help from the private sector.”

Chicago will start one-on-one contract negotiations with Boring, according to the city. Once an agreement is reached, the city council would need to approve it.

“it’s very preliminary,” said Dennis Derby, a portfolio manager at Wells Fargo Asset Management, which holds $39 billion of municipal debt, including Chicago bonds, “but it should help the economic and transportation infrastructure of the city.”

Bloomberg

By Elizabeth Campbell

June 14, 2018, 10:24 AM PDT Updated on June 14, 2018, 2:32 PM PDT

— With assistance by Sarah McBride

Communities in the Golden State are using a loophole and citing financial distress so they can put new taxes on the ballot. Pasadena is exploiting it to tax pot.

The phrase may trigger images of desolate streetscapes and fiscal pain, or evoke a new risk for investors who buy municipal bond funds in search of tax-exempt income. But for many Golden State cities, the words signal opportunity. Because of rules designed to limit tax increases, cities can get proposed tax hikes on Tuesday’s primary ballot only by declaring a crisis. At least two have done so this year, following at least 50 since 2008. Muni bond investors and analysts are in on the ruse—in many cases giving it the equivalent of a shrug. To get a tax question before voters this week, Santa Cruz has issued such a declaration for the third time in 13 years. Over that time, the Monterey Bay beach town’s bond rating has improved.

Unlike other states, which lay out a process for a town to be deemed in distress, California leaves it to municipalities themselves to determine. There’s no checklist or external agency deciding whether a situation meets the layman’s understanding of the words “fiscal” and “emergency.” And there are few consequences. Pasadena, the triple-A-rated home of the Rose Bowl, declared a fiscal emergency so it can ask voters on Tuesday to approve a cannabis tax. Otherwise the palmy town north of Los Angeles, where tourists stroll past Victorian estates and historic landmarks, would have to wait for the 2020 election.

“They’re nowhere close to being insolvent or threatening to file for bankruptcy,” says Eric Friedland, director of municipal research for Lord Abbett, which manages about $20 billion in municipal bonds, including for a mutual fund that specializes in California debt. “This is more of brinkmanship.”

In California, government needs often run up against strong anti-tax rules that began with Proposition 13, a landmark decision by voters in 1978 to limit property tax hikes. Then, as cities turned to fees and other levies, voters 18 years later passed Proposition 218 to ensure those were subject to their approval as well. Now a town that wants a new general tax or a targeted increase can ask voters only during an election in which the members of the governing body are running. The exception: when there’s a unanimous vote by a governing body declaring an emergency.

No agency tracks the declarations, but after the last recession there was a spate from Colusa County to Los Angeles, according to Moody’s Investors Service. Eric Hoffmann, senior vice president at Moody’s, calls such moves a “pinkish flag.” A fiscal emergency may actually show that a city is heading off a crisis, he says.

That’s partly the case for Santa Cruz officials, who anticipate a gap of as much as 11 percent of the general fund in fiscal 2022 as revenue slows and costs such as pensions rise. They’re asking voters to approve a sales tax increase to 9.25 percent from 9 percent. The referendum normally would have gone before voters in November, says Marcus Pimentel, the city’s finance director. But because the county may float a tax to address housing at that time, the City Council declared an emergency to get its ask considered in June. “They didn’t want to put anything that risked voter fatigue on tax measures for November,” says Pimentel. Even though it’s the third time the city has pulled the maneuver, its bond rating remains a strong AA. “It really doesn’t impact our rating like somebody defaulting on their home on a credit report,” he says.

A consultant eased Pasadena’s concerns that its first emergency would hurt its AAA rating from S&P, says Finance Director Matt Hawkesworth. With recreational marijuana legal in California as of January, the city has to pay to regulate the industry. “We don’t have the financial resources to support the work that we’re required to do,” he says.

Cities are abusing the system, says Jon Coupal, president of the Howard Jarvis Taxpayers Association, which pushed for the restrictions on tax increases. “Patently inappropriate,” he says of Pasadena’s move in particular. “Very rarely is there a true emergency.”

In other states, a municipal fiscal emergency is a grave event. Michigan can install emergency managers with sweeping power to overhaul finances and services. Their decisions can be momentous, for better or worse. The state-appointed viceroy in Detroit pushed a plan to leave a once-record bankruptcy that cut pensions and payments to bondholders. But cost-cutting decisions by an emergency manager in Flint led to the city’s drinking-water crisis in 2014. New Jersey took over the finances of the seaside resort town of Atlantic City in 2016, yet it remains at risk of bankruptcy.

In California, an emergency declaration can also allow a municipality to skip an outside evaluation of its finances and file immediately for court protection. San Bernardino did just that in 2012. But cities that aren’t intent on filing for bankruptcy with their declarations must contend with reputational risk and local ire. At a recent meeting in Moraga, a quiet San Francisco suburb where the typical home sells for $1.3 million according to Zillow, council members discussed fury from their residents. Last year they declared a fiscal emergency when the costs of a sinkhole and a bridge failure drew down their savings. Even as they rescinded the action, most of the members continued to insist it was the right move.

“We had everything but the locusts attacking us at that moment,” said Vice Mayor Teresa Onoda during the meeting.

Bloomberg Businessweek

By Romy Varghese

June 4, 2018

— With assistance by Steven Church

CHICAGO, June 4 (Reuters) – Illinois Governor Bruce Rauner signed into law on Monday a $38.5 billion, fiscal 2019 budget that he called balanced but not perfect.

The spending plan for the fiscal year that begins July 1 breezed through the state legislature last week with strong bipartisan support in marked contrast to previous years. It was the first full-year budget approved by Rauner since he took office in 2015.

An impasse between the Republican governor and Democrats who control the legislature left Illinois without complete budgets for an unprecedented two straight fiscal years. The stalemate finally ended when lawmakers enacted a fiscal 2018 budget and hiked income tax rates over Rauner’s vetoes last July.

Revenue from the tax increase is incorporated in the new budget. Rauner, who is running for reelection in November, has vowed to roll back the tax increase.

“This budget is a compromise. It’s not perfect,” Rauner told reporters. He complained that the spending plan does not go as far as he would like to cut unfunded pension liablities, and does little to address the state’s unpaid bill backlog that stood at $7 billion on Monday.

The budget adds $350 million to a new K-12 school funding formula enacted last year, increases higher education spending by 2 percent, reduces cuts in state aid to local governments, and appropriates $1.3 billion to pay previously incurred expenses. About $270 million from the sale of the state’s main office building in Chicago is once again counted on in the budget even though a transaction remains unrealized.

The spending plan relies on a voluntary, bond-financed buyout of certain pension benefits that could save the state about $423 million.

Illinois, which is struggling with a $129 billion unfunded liability, has been unable to reduce retirement benefits for workers in its five pension funds due to a constitutional prohibition enforced by state courts.

The on-time budget was welcome news for the U.S. municipal bond market, where Illinois general obligation bonds fetch higher yields than any state.

Illinois’ credit spread over Municipal Market Data’s benchmark triple-A yield scale for 10-year bonds dropped 24 basis points to 165 basis points late last week.

The enacted budget faces scrutiny by credit rating agencies, which rate Illinois a notch or two above the junk level.

“Our focus is on the state’s ability to maintain budgetary balance over multiple years, and whether this budget makes progress in the state’s long-term fiscal sustainability,” Fitch Ratings analyst Eric Kim said on Friday.

(Reporting By Karen Pierog; Editing by David Gregorio)

Timely enactment of a fiscal 2019 budget in Illinois is consistent with the stable outlook S&P Global Ratings currently maintains on the state’s credit rating. At ‘BBB-‘, however, the general obligation rating incorporates our view of the state’s longer-term vulnerabilities and remains the lowest possible rating within the investment grade categories.

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Jun. 5, 2018

Unlikely, sure. But it never pays to be overconfident.

When it comes to Connecticut connotations on Wall Street, the first thing that comes to mind is surely Greenwich, the world’s hedge-fund mecca. Home to AQR Capital Management, Viking Global Investors LP and Lone Pine Capital, among others, the town’s name is synonymous with money. A 500-foot stretch along U.S. Route 1 has dealerships for Alfa Romeo, McLaren and Rolls-Royce automobiles.

Take one of those cars for a spin up to Hartford, and you’ll find a much different scene. Connecticut’s capital approved a plan earlier this year allowing the state to pay off the city’s general-obligation debt — in other words, a bailout. Without the maneuver, bankruptcy and bond defaults seemed unavoidable for a municipality where the population is declining and a third of those who remain live in poverty.

But by assuming the struggling city’s debt burden, Connecticut only complicated its own problems. It has been downgraded three times in as many years by S&P Global Ratings, had a fiscal 2017 net pension liability of $37.2 billion (up almost $10 billion from a year ago) and easily has the most tax-supported debt per resident among U.S. states. On top of all that, it has the fewest jobs in finance, insurance and real estate since 1996.

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Bloomberg Opinion

By Brian Chappatta

June 8, 2018, 5:00 AM PDT

• Deal may allow senior bondholders to receive what they’re owed
• Some money could also been steered to general-obligation debt

Puerto Rico sales-tax-backed bonds rallied after a tentative agreement struck in the island’s bankruptcy promised to steer a large share of that revenue to owners of the securities, leaving them facing smaller losses than investors previously anticipated.

The details of the pact between two court-appointed agents, disclosed in a filing late Thursday, show that owners of the bonds would get just over half of the future sales-tax revenue they’re currently entitled to each year. They would also get all of the $1.2 billion of revenue that’s been frozen in a reserve account until the bankruptcy court decides who has a right to the money.

The deal, if ultimately approved, would resolve a key dispute in the island’s record-setting bankruptcy, where creditors have been fighting over who has the highest claim on the government’s tax collections. The arrangement could leave owners of the most senior sales-tax bonds, known as Cofinas, paid in full. That’s a better settlement than one floated a few weeks ago, according to a person familiar with the matter.

“Seniors are in good shape because they get the money first,” said Daniel Solender, head of municipal investments at Lord Abbett & Co., which manages $20 billion of state and local debt, including Puerto Rico securities. “With more than half the money going to the Cofina side, the seniors may be fully covered.”

Governor Ricardo Rossello declined to comment because he said a final agreement hasn’t been reached and talks are ongoing. “We want the government to continue being part of that negotiation,” he told reporters in San Juan. “For the benefit of the people of Puerto Rico, I prefer not to comment on the details of the negotiation.”

Spokespeople for a group of general-obligation bondholders and a pool of senior sales-tax investors declined to comment on the details of the tentative settlement.

The bonds climbed on the details, pushing up the price of senior sales-tax securities due in 2040 by nearly 10 percent to an average of 83 cents on the dollar. Subordinated debt maturing in 2041 climbed 13 percent to 41.8 cents. The prices of the island’s general-obligation bonds were little changed.

Puerto Rico’s debt payments have been on hold as it works through bankruptcy. There’s about $780 million that’s originally earmarked to repay Cofinas in fiscal 2019. The potential settlement would give Cofina more than half of that amount, with the government receiving the rest to repay commonwealth creditors and cover essential services, according to the court documents.

“On the commonwealth side, it’s not clear what goes to bondholders and what goes to everything else,” Solender said. “Nothing specifically has changed for bondholders on the G.O. side, at this point.”

The agents for Puerto Rico and Cofina, the Puerto Rico government-owned corporation that issued the bonds, have asked U.S. District Court Judge Laura Taylor Swain to hold off on ruling on the issue for 60 days as they work out the final details.

The rally since the tentative agreement was announced Wednesday has delivered large gains to investors who’ve held on to their bonds even as they plummeted in the wake of Hurricane Maria. The price of the subordinate Cofinas Friday is more than five times what they traded for in November, when they touched a record low of 8.2 cents on the dollar.

“It’s better than Internet stocks,” Solender, whose firm holds senior and subordinate Cofinas, general obligations and debt sold by the island’s bankrupt public power utility.

Major Hurdle

Resolving the issue of the sales-tax revenue is a major hurdle in Puerto Rico’s bankruptcy because it’s essential to determining how much Cofina and general-obligation bondholders will recover. Those two classes of securities account for about $35 billion of the more than $70 billion that the commonwealth owes. Swain called the deal announcement “an enormously significant development” during a hearing Wednesday in San Juan.

As part of the settlement, Cofina would receive all of the money held by Bank of New York Mellon Corp., its trustee, as of June 30, 2018. There was nearly $1.2 billion in that account as of May 1, according to disclosure filings posted on Municipal Securities Rulemaking Board’s website.

Starting July 1, Cofina would also get 53.7 percent of the sales-tax receipts that are dedicated to repaying the bonds, growing by 4 percent annually to a maximum of $1.85 billion by 2041. The dedicated revenue totals $783.2 million for fiscal 2019, which starts July 1.

Overdue Payments

While Puerto Rico continues to direct sales-tax revenue to the trustee, Cofina bondholders stopped receiving payments in June 2017. They’re owed about $550 million of principal and interest in fiscal 2018, which ends June 30, according to disclosure filings.

Once Cofina receives its full 53.7 percent allocation of the revenue, Puerto Rico will get the rest. Those monies will be placed in escrow and used to resolve claims against the commonwealth, though the island has the ability to use the cash for essential services after its liquidity is exhausted, according to the court filing. A federal board that oversees Puerto Rico’s finances will determine which services are essential.

Bloomberg Markets

By Michelle Kaske

June 8, 2018, 5:46 AM PDT Updated on June 8, 2018, 1:00 PM PDT

— With assistance by Steven Church

• That may rekindle clash between board and Governor Rossello
• Bonds rally as investors cheer tentative pact to end dispute

The deal to steer some of Puerto Rico’s future sales taxes to a key group of bondholders puts a U.S. oversight board in charge of whether the rest should keep crucial services running if the government runs into financial trouble again.

If the tentative pact between the court-appointed agents is enacted, the federal Financial Oversight and Management Board for Puerto Rico — and not the island’s elected officials — will decide if the remaining sales-tax revenue is needed to fund “essential” services, according to terms of the proposed agreement filed in federal bankruptcy court. That will be the case even after the territory’s bankruptcy ends.

Bypassing government officials may renew a court struggle between the board and Governor Ricardo Rossello, who succeeded last year in blocking the board from taking control of the island’s bankrupt electric utility. To some residents, many of whom favor becoming a state, the board’s power smacks of colonialism by weakening their say over Puerto Rico’s fate.

On Friday, the governor said there’s no final agreement and declined to comment on the details because talks are continuing. His administration wasn’t part of the agreement and is still evaluating it.

“We want the government to continue being part of that negotiation,” he told reporters in San Juan. “For the benefit of the people of Puerto Rico, I prefer not to comment on the details of the negotiation.”

Either the board or Puerto Rico needs to outline what exactly are the island’s most necessary expenditures, said Daniel Solender, head of municipal investments at Lord Abbett & Co., which manages $20 billion of state and local debt, including Puerto Rico securities.

“The concern is that there’s just no clear definition out there,” Solender said. “There needs to be some agreement on what’s essential and what shouldn’t be.”

Investors have questioned the amount of money that Puerto Rico actually has, partly because they suspect that some of what the government describes as spending for essential services may be discretionary. The island has also made dire predictions that it was poised to run out of cash, only to later find the funds needed to avert a shutdown.

Under Promesa, the law passed by the U.S. Congress that allowed Puerto Rico’s insolvent government entities to file bankruptcy, the federal board is responsible for developing debt adjustment plans for each agency that seeks court protection, including the commonwealth itself and the government owned utility, known as Prepa.

In November, U.S. District Court Judge Laura Taylor Swain ruled that the federal overseers must share control with local officials. She said Promesa allowed the board to put public agencies into bankruptcy, but doesn’t allow it to run them.

But now the two court appointed agents, representing the central government and the agency that sold Puerto Rico’s sales-tax bonds, have proposed giving the board, not local officials, control of the revenue.

Investors cheered. On Friday, Puerto Rico’s sales-tax debt with the highest legal claim to the money rallied 10 percent to 83 cents on the dollar.

The case is The Official Committee of Unsecured Creditors v. Bettina Whyte, as agent of, the Puerto Rico Sales Tax Corp., 17-257, U.S. District Court, District of Puerto Rico (San Juan)

Bloomberg Markets

By Steven Church and Michelle Kaske

June 8, 2018, 2:36 PM PDT

Post-Hurricane Maria’s devastation, Puerto Rico’s financial struggles have worsened with parts of the commonwealth still without power and many people struggling to meet their basic needs. In his efforts to prioritize the continuation of public essential services over making debt service payments, Puerto Rico’s Gov. Ricardo Rossello has recently proposed his fiscal year 2019 General Fund budget that has $0 allocation toward the island’s central government debt service.

If this proposed budget passes, it will be contrary to Puerto Rico’s debt oversight board’s decision that contractually obligated the central government to pay $2.54 billion in debt service in the fiscal year 2019.

In this article, we will take a closer look at Puerto Rico’s debt restructuring plan, adherence to the oversight board’s fiscal plan and what $0 budget allocation means for Puerto Rico’s bondholders.

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municipalbonds.com

by Jayden Sangha

Jun 07, 2018

The Tax Cuts and Jobs Act of 2017 and its extensive changes to the federal internal revenue code have significantly affected New York State tax burdens and tax receipts in S&P Global Ratings’ view. As a result, the state’s fiscal 2019 enacted budget decouples the state’s income tax from the federal tax law.

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Jun. 6, 2018

Tennessee municipalities and counties (or local governments [LGs]) have demonstrated stable credit quality in recent years, and S&P Global Ratings expects credit quality for Tennessee LGs to remain stable in the near term.

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May 23, 2018

With the passage of Georgia Senate Bills (SB) 262 and 263, which propose revised boundaries for the City of Stockbridge (unrated) and the incorporation of Eagle’s Landing without apportionment of Stockbridge’s debt, S&P Global Ratings notes that the Georgia local government ratings portfolio faces potential negative impacts if this trend continues.

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May 30, 2018

Minnesota’s new pension bill is a positive step toward improving funding of the state’s pension plans, but because contributions remained fixed in state statute, there could eventually be a regression in plan funded status, in S&P Global Ratings’ view.

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Jun. 7, 2018

Houston’s Third Ward residents are turning to community land trusts as a push against the effects of rising home prices.

The Third Ward, a historically black community, was established in the late 19th century. Now, more than a century and a half later, the community finds itself threatened by gentrification — in particular, displacement of longtime residents by soaring house prices and property taxes. In response, residents are considering action to help preserve affordability in the face of encroaching gentrification and hold on to the rich culture of the Third Ward. The city’s response, reports the Houston Chronicle, is a city-funded community land trust.

A community land trust is a nonprofit entity that aims to make housing permanently affordable through the purchase of land that it can make available for rent or for homeownership to low-income residents at affordable rates in long-term agreements. Community land trusts are on an upswing in cities throughout the country, in response to gentrification and the displacement of low-income, longtime residents and tightly knit communities.

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NEXT CITY

BY BRIANNA WILLIAMS | JUNE 8, 2018

Houston officials have released the first action plan for how to spend $1.15 billion in federal housing aid, part of a $5 billion package allocated to the state, the Houston Chronicle reports. The split is about 60/40 single-family homes and apartments.

“Even though a billion dollars is a lot of money, we know it isn’t enough to meet all of the housing needs in Houston,” Tom McCasland, director of Houston’s Housing and Community Development department, told the Chronicle. “But the opportunity here is one we’ve never had before. It’s a big step toward a city where everyone has a safe, affordable home, in a thriving neighborhood.”

Texas officials planned to publish one statewide plan in March, but Houston Mayor Sylvester Turner accused the state land office of “hogging the $5 billion” and cutting the city out of talks. Now, instead, Houston gets to allocate about $1 billion; surrounding Harris County will publish a similar plan for its $1 billion, and both plans will be attached as amendments to the statewide plan that will address the rest of the Gulf Coast.

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NEXT CITY

BY RACHEL KAUFMAN | JUNE 11, 2018

California is considering the first-in-the-nation general industrial stormwater permit incorporating Total Maximum Daily Load (TMDL)-related numeric action levels (TNALs) and numeric effluent limitations (NELs). These new standards have the potential to further ramp up federal Clean Water Act (CWA) citizen suit litigation. Under the State Water Resources Control Board’s (State Board) proposed amendment to its stormwater general industrial permit (IGP), a “Responsible Discharger” whose stormwater discharge exceeds an applicable NEL automatically will be in violation of the IGP. Unless it complies with the permit’s existing exceedance response action process, it also will be in non‑compliance if its discharge exceeds an applicable TNAL.

Recognizing these consequences, and the difficulties some dischargers have complying with existing IGP requirements, the State Board is proposing two alternative compliance options. Touted as an effort to promote green infrastructure and water reuse, these options could revamp how industry manages stormwater. Both alternatives involve capture and reuse of the runoff from the 85th percentile 24-hour storm event, with the difference being the stormwater retention location. Under the “on-site” option, retention occurs at the facility. Under the “off-site” option, retention occurs at the local publicly owned treatment works (POTW).

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Hunton Andrews Kurth LLP

June 5, 2018

Fitch Ratings-San Francisco-05 June 2018: Legislation establishing state-wide water conservation standards is not likely to affect ratings for California water utilities, according to Fitch Ratings. That said, rate affordability could become an issue over time.

The regulations, signed into law last week by Governor Brown with implementation beginning in 2022, establish goals for indoor per person water usage, require utilities to set annual water budgets, and institute incentives for recycled water. They follow California’s recent five-year drought during which the Governor declared a state of emergency and imposed a state-wide mandatory 25 percent cutback on water use and individual cutbacks for urban utilities of up to 36 percent.

In response to the drought and state mandated conservation efforts, many utilities have already adapted to new normal levels of water demand and raised rates or adjusted rate structures. As such, the legislation codifies changes already underway which, along with increasing capital investments, have pushed some utilities’ rates close to or above Fitch’s affordability threshold.

Water utilities have largely incorporated increased long-term water conservation and lower demand levels into their planning efforts and rate plans. Although the planning efforts are positive, rate affordability remains a long-term concern.

With an average rating of ‘AA’, Fitch-rated California water and sewer agencies maintain strong credit profiles overall. While increasing business pressures are likely, Fitch believes that most utilities have sufficient capacity to manage changes in water demand levels and maintain credit quality. Like other water and sewer utilities across the country, California utilities benefit from sound fundamentals rooted in their essential services, monopolistic business nature and generally local rate-setting authority that help to insulate these utilities through changing business and economic cycles.

Longer term, however, credit quality could come under pressure for individual utilities where there is an unwillingness to raise rates to accommodate potentially lower demand levels and support current and projected financial metrics. However, Fitch expects these instances to be rare given the historical willingness of California utilities to preserve their financial results despite operating challenges.

Contact:

Shannon Groff
Director, U.S. Public Finance
+1-415-732-5628
Fitch Ratings, Inc.
650 California Street, Suite 2250
San Francisco, CA 94108

Doug Scott
Managing Director
+1-512-215-3725

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com

The world’s fifth largest economy could keep the money in a state-owned bank to fund local infrastructure.

California needs to spend more than $700 billion on infrastructure over the next decade. Where will this money come from? The $1.5 trillion infrastructure initiative unveiled by President Trump in February includes only $200 billion in federal funding for infrastructure projects across the U.S., and less than that after factoring in the billions in tax cuts in infrastructure-related projects.

The rest is to come from cities, states, private investors, and public-private partnerships. And since city and state coffers are depleted, that chiefly means private investors and PPPs, which have a shady history at best.

At the same time, California has over $700 billion parked in private banks earning minimal interest, private equity funds that contributed to the affordable housing crisis, and “shadow banks”—unregulated financial institutions of the sort that caused the banking collapse of 2008. If California had a public infrastructure bank chartered to take deposits, some of these funds could be used to generate credit for the state while remaining safely on deposit in the bank.

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Yes! Magazine

by Ellen Brown

Jun 06, 2018

Fitch Ratings-New York-30 May 2018: Based on Fitch Ratings’ review of initial reports and damage assessments, rating changes are unlikely for Hawaii’s U.S. public finance, port and airport credits following ongoing volcanic activity on Hawaii Island. Fitch does expect the state’s tourism-driven economy to feel some adverse peripheral effects from the volcanic activity in the short term, but ultimately the fiscal impact of the eruption on rated entities in Hawaii will be largely mitigated by Hawaii’s financial flexibility, support from federal and state governments, and private insurance policies.

Kilauea, one of four active volcanoes on Hawaii Island, has been erupting continuously since 1983. The island’s major tourist attraction, Hawaii Volcanoes National Park, has closed during the recent increase in eruptive activity but reflects the positive role of volcanoes in Hawaii County’s economy. Volcanic events during the most recent activity include localized lava flows, ash and gas eruptions affecting air quality and visibility, and related seismic activity.

The local government most affected by the eruption to date, Hawaii County, is likely to use a combination of federal relief funds, state support and insurance claims to pay for most volcano-related damage. The May 11 federal disaster declaration for Hawaii County enables individuals and local governments to seek individual assistance from the federal government.

Fitch maintains an ‘AA+’ Issuer Default Rating (IDR) on Hawaii County (population of nearly 200,000), which incorporates an ‘aaa’ operating performance assessment based in part on its available liquidity. While the ultimate impact of the Kilauea eruption to Hawaii County’s economy is not yet known, property damage has been modest to date, destroying 100 to 200 homes in a relatively remote region of the island. Several thousand residents have been displaced, and short-term impacts on tourism, a key industry, appear likely. However, property taxes supporting most local government services are not expected to be materially affected. Lava flows have also threatened Puna Geothermal Venture, which provided one-quarter of the island’s electrical supply prior to its recent shutdown, but local utility managers report sufficient reserve capacity to offset this loss.

On the transportation side, management for Hawaii’s harbors division (a division of the Hawaii Department of Transportation [HDOT] with harbor system revenue bonds rated ‘AA-‘ with a Stable Outlook) has confirmed to Fitch analysts that commercial ports on Hawaii Island, including facilities at Hilo Harbor and Kawaaihae Harbor, are fully operational with no restrictions resulting from volcanic activity. The harbors division consists of 10 commercial harbors on six islands. Honolulu serves as the state’s principal port and trans-shipment station for cargo that is bound for the other islands.

Cargo and passenger operations remain unimpeded, with vessels continuing to safely enter the harbors and dock. Cargo continues to be discharged without impediment with passengers disembarking and embarking from cruise vessels. Furthermore, management for the harbors division commented that seismic events related to the volcanic activity have not affected the structural integrity of HDOT port facilities to date; HDOT personnel continue to conduct ongoing assessments to monitor potential structural damage to harbor facilities as seismic activity continues.

Similarly, management of Hawaii’s airports division (another division of HDOT, airport system revenue bonds rated ‘A+’ and subordinate COPs ‘A’ with a Stable Outlook) has confirmed to Fitch that, to date, there has been no disruption to air service at either of the airports on Hawaii Island (Ellison Onizuka International Airport at Keahole and Hilo International Airport), and that there has been no structural damage to either facility. The airports division manages airports across the Hawaiian archipelago.

While port and airport facilities are unscathed by the eruption, follow-on effects to the broader tourism-driven economy are likely in the short term. The closure of Volcanos National Park is likely to affect overall visitor numbers, and certain airlines have waived change fees for travel to Hawaii Island. Harbor division management further acknowledged that certain cruise lines have chosen to reroute ships to avoid Hawaii Island due to the volcanic events.

Airport division management indicated to Fitch that they continue to monitor the tourism industry as it relates to the Kilauea eruptions. For May, they noted that air traffic is at or above levels seen a year prior, indicating limited effects from the volcano on overall results thus far. Management noted that most travellers diverting from Hawaii Island are choosing to travel to other Hawaiian islands rather than forgoing Hawaiian travel altogether. Fitch will continue to monitor activity levels for both airport and harbors divisions to evaluate any longer-term effects on financial results.

Contact:

Emma Griffith
Senior Director, Global Infrastructure & Project Finance
+1-212-908-9124
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Stephen Walsh
Director, U.S. Public Finance
+1-415-732-7573

Seth Lehman
Senior Director, Global Infrastructure & Project Finance
+1-212-908-0755

Alan Gibson
Director, U.S. Public Finance
+1-415-732-7577

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com

Gun violence costs lives — and money. The financial burden can overwhelm governments, especially when they’re small or struggling.

After every mass shooting, more calls come in: from private companies, from large stadiums, and — increasingly — from government agencies and public schools. They all want to talk about the same thing. “We probably have seen a tenfold increase in inquiries since Parkland,” says Paul Marshall, an insurance broker for McGowan Program Administrators, an underwriter based in Ohio. “People just feel vulnerable when [a shooting] happens. And that’s when we get phone calls, because it feels inevitable and very difficult to manage.”

Since the February attack on Marjory Stoneman Douglas High School in Parkland, Fla., which killed 17 and launched a nationwide push for additional gun control measures, at least seven South Florida school districts have purchased about $3 million worth of “active shooter” coverage from McGowan. This kind of coverage, which the insurance broker first began offering in 2016, is a small but rapidly growing slice of the company’s portfolio. There’s no database that tracks which school districts carry this type of coverage, but Marshall says his company is consistently seeing 20 percent increases in the number of inquiries month over month. Other insurance companies are also seeing an increase in inquiries and purchases of this type of insurance. Over the course of one week shortly after Parkland, Hugh Nelson, senior vice president at Southern Insurance Underwriters Inc., says he received half a dozen inquiries. According to Reuters, while some insurance companies have offered these policies since 2011, many more have sprung up since 2016.

It’s one trend following another, deeply troubling one: The incidence of active shooter events is going up. According to FBI data, the average number of shootings per year jumped from 6.4 between 2000 and 2006 to 16.4 in the period from 2007 to 2013. (Overall, active shooter incidents, which the FBI defines as events in which an individual is actively engaged in attempting to kill people in a populated area, claimed 1,043 lives between 2000 and 2013.) In 2014 and 2015, that number rose again, to 20 shootings per year. About 10 percent of those occurred on government property, while an additional 24 percent occurred in schools. In fact, according to data recently compiled by The Washington Post, since the 1999 massacre at Columbine High School in Littleton, Colo., some 208,000 children at 212 schools have experienced gun violence on campus.

Some of the deadliest of these incidents have happened in just the past six years. In addition to the Parkland shooting in February, there’s been a mass-casualty shooting at a concert in Las Vegas, which killed 58; in the Pulse night club in Orlando, which killed 49; in a San Bernardino, Calif., city center, which killed 14; and at Sandy Hook Elementary in Connecticut, which killed 26. In May, the latest attack took place: A student shot and killed 10 of his classmates at Santa Fe High School in Texas.

Aside from the loss of life and the pain these events inflict on a community, deadly shootings also have financial costs that can be difficult for governments, especially small or struggling municipalities, to bear. San Bernardino had already filed for bankruptcy when it had to pay $4 million for the response to the terrorist attack at the Inland Regional Center. Connecticut gave the city of Newtown $50 million just for the costs of rebuilding Sandy Hook Elementary School. The total costs from the 1999 shooting at Columbine High School also came to roughly $50 million. In Parkland, the Florida Attorney General’s Office paid for funeral costs, and the school district plans to tear down and rebuild the part of the school where the shootings occurred.

The tangible costs alone can overwhelm a government: litigation, compensating victims, paying for funerals, providing trauma counseling, reconstructing or refurbishing buildings, and investing in new security measures to prevent another attack, to name a few. The impact of intangible costs to a community — reputational damage, loss of tourism revenue and high turnover among workers — is impossible to measure, according to experts. “These events are very expensive in so many ways. People are so traumatized by responding to the event that they leave the field. I’ve talked to people who’ve left education because of this,” says Mike Dorn, a school security expert at Safe Havens International who is currently working on his 13th active shooter case. Dorn was also a school district police chief at Bibb County Public Schools in Georgia for 13 years.

In the face of these potentially huge costs, there is debate about whether and to what extent general liability policies will cover active shooter events. Marshall, the McGowan insurer, says that general liability policies typically have what’s called a “duty to defend” clause, meaning that they require a lawsuit to be filed in order to activate coverage. That’s a process that can take months or even years. And general policies will not provide victims with the kind of compensation that’s likelier to stave off litigation.

In contrast, active shooter policies tend to go into effect as soon as a person walks onto the organization’s property and commits a targeted attack, and they generally cover attacks with any weapon, such as guns, knives, bombs or vehicles. Coverage pays for a host of expenses associated with these events as well, including victim expenses, particularly medical bills; agency costs, like extra security and business income losses; and traditional liability costs for lawsuits.

Some insurance companies that offer this kind of coverage also offer risk assessment and mitigation strategies to organizations trying to prevent an active shooter attack, says Nelson of Southern Insurance Underwriters. “Many governments are already doing this type of [risk mitigation and preparation] thing, but they want to see what more can be done,” Nelson says.

McGowan’s risk mitigation policies also make up a substantial part of its coverage, though Marshall says some governments and agencies already feel like they’re doing enough to secure their properties. Marshall says one prominent city parade hired risk-mitigation services from McGowan this year, which included social media monitoring and coordination with local police. According to him, it was the first year the parade didn’t have to deal with a violent attack threat.

That aspect of the coverage was one of the main reasons that Palm Beach County School District, the fifth largest district in Florida and the 10th largest in the country, decided to purchase active shooter insurance last summer. Dianne Howard, the district’s director of risk and benefits management, says Palm Beach was one of the first jurisdictions to adopt this kind of insurance in her state. “We wanted the risk assessment and training service” that came with the coverage, Howard says. “Sometimes, departments tell you that they’re doing everything they need to do, but when you look at other places where [attacks] have happened, you see there was actually a problem. So I wanted an outside perspective to see what else we could do.”

Howard purchased the district’s insurance from McGowan, and she said the company found some “areas where we could improve” in terms of mitigating risk. She purchased $1 million in coverage, which she said she hopes to increase. (According to Marshall, many others have done so since the Parkland shooting.)

Some risk mitigation techniques, however, can actually interfere with their insurance policies. Arming teachers — an idea that has received support mainly among Republicans in Congress and in statehouses — is one such security strategy. When some Kansas school districts considered letting teachers and campus administrators carry concealed weapons after the Sandy Hook massacre, their insurance companies pushed back. “Concealed handguns on school premises pose a heightened liability risk. We have chosen not to insure schools that allow employees to carry concealed handguns,” EMC Insurance Companies wrote to Kansas districts. Several districts abandoned their plans to arm teachers as a result.

“We don’t recommend arming teachers in the United States,” Dorn, the school security expert, says. “Trying to teach people to [use a gun against] an active shooter is even harder than just teaching them how to use a firearm.” Dorn says that even police officers sometimes don’t respond appropriately in emergency situations. In Parkland, a campus police officer notoriously stayed outside of the building even as he heard gunshots inside.

Dorn also cautions against similar solutions, like the Pennsylvania superintendent who suggested students were protected from active shooter situations thanks to a bucket of river rocks in the classroom, or the other Pennsylvania school district that issued mini baseball bats to teachers. “Great idea. Now some kid gets mad and gets ahold of the bat and beats up another kid and we have a $4 million lawsuit on our hands,” Dorn says.

He says behavioral interventions — like identifying potentially violent students and intervening before anything takes place — are by far the most effective strategy for stopping violence on school property. They’re also less expensive than physical solutions such as bulletproof glass and metal detectors. “If you’re a school without strong behavioral approaches [to preventing violence], you’re extremely vulnerable to litigation, because this is so well established. It’s like a standard of care,” Dorn says. “You can spend $5 million [on extensive security measures] and still have a shooting because you didn’t spend a tiny fraction of that on good behavioral approaches.”

As the difficulty of preventing violence becomes clearer to the public, and if violent incidents like Parkland continue to become more common, Marshall and Nelson both say they expect that this portion of their insurance practice will continue to grow. Just recently, Marshall says, a large municipality flew him out for an informational presentation and decided immediately to buy coverage.

And insurance companies keep updating the coverage they offer in response to tragic events. A year ago, McGowan did not offer coverage for vehicle attacks. Now it does. The sorts of coverage that insurance companies provide will continue to evolve, says Marshall. “At this point, [people feel that] everyone is kind of a target.” Attackers today, he says, have become more likely “to handle disputes in a violent manner, with guns, knives, vehicles, bombs. It’s very concerning to people.”

GOVERNING.COM

BY NATALIE DELGADILLO | JUNE 2018

New research provides a formula to help cities and counties know what to expect, financially, when drug deaths spike.

As governments grapple with the rising cost of the opioid crisis, one group may have found a way to predict how high those costs will go.

For every three fatal overdoses, a local government’s public safety costs can increase by an average of 1 percent, or $150,000, according to research from the data platform OpenGov. What’s more, once deaths start spiking, government costs tend to steadily increase at that rate for about three years until they begin to plateau.

The findings give local governments an idea of what to expect financially as they respond to rising overdose deaths. The data were gathered from 20 cities and counties across five states considered to be on the front lines of the crisis — Kentucky, Maryland, Massachusetts, Ohio and Pennsylvania — and released exclusively to Governing.

Continue reading.

GOVERNING.COM

BY LIZ FARMER | JUNE 4, 2018

The nature of sea-level rise is such that it threatens whole regions at once, with no respect for municipal boundaries. But in most cases, local communities are left to develop their own strategies for addressing the threat. And the decisions they make, based on local concerns about environmental conditions and property rights, have ramifications that spread out to neighboring cities and towns.

The coastal city of Del Mar, California, in San Diego County, is currently facing that challenge. Last week, the Del Mar city council, which represents about 4,300 residents, voted against including the strategy of “managed retreat” in its long-term Sea-Level Rise Adaptation Plan.

Managed retreat refers to a simple concept that can be very complicated in practice: abandoning land and sometimes developed property in coastal areas as the sea rises. It’s considered a last resort for sea-level rise adaptation. While the city had initially included the strategy in its plan last month, the city council ultimately decided to strike it from the documents after residents objected that it would sink the values of their properties overnight.

Continue reading.

NEXT CITY

BY JARED BREY | MAY 29, 2018

Lucy Cruz has lived all of her 58 years in Caño Martín Peña, an informal community centrally located in the Puerto Rico capital of San Juan. Eight distinct neighborhoods make up the community, clustered around a stream, a caño, that gives the area its name and identity.

Some 1,200 homes in Caño Martín Peña lost their roofs during Hurricane Maria, according to Cruz, who says that the community has worked collectively to gather supplies and rebuild those roofs. They have managed to rebuild 75 completely, but in many places, blue tarps keep out the elements, according to Cruz. Access to federal funds can make a substantial difference.

For working class areas of Puerto Rico, like Caño Martín Peña, it’s been a tough go of accessing those funds. FEMA, the Federal Emergency Management Agency, has strict requirements for emergency funding recipients to prove homeownership. Proving that in the aftermath of a Hurricane can be difficult.

Continue reading.

NEXT CITY

BY ZOE SULLIVAN | JUNE 1, 2018

• House approves spending plan that Senate passed late Wednesday
• Budget now goes to Governor Rauner’s desk for signature

Illinois lawmakers approved a bipartisan spending plan, leaving the state poised for its first on-time budget in four years and avoid a repeat of the record impasse that pushed its credit rating to the brink of junk.

The state House of Representatives voted Thursday to approve the $38.5 billion spending plan for the year that starts July 1, after the Senate approved the measure late Wednesday. Governor Bruce Rauner said he will sign the package of bills, which will mark the first time since the Republican took office in 2015 that the state has enacted a full-year budget on time.

“We’ve had to come a long way to get to this point,” said Representative Greg Harris, a Democrat, who thanked his colleagues on both sides of the aisle. “It is a balanced budget.”

Both Harris and Representative Tom Demmer, a Republican, presented parts of the appropriations bill on the House floor to demonstrate the plan’s bipartisan nature. Harris pointed out that Hans Zigmund, Rauner’s budget director, was sitting in the gallery and had helped advise lawmakers.

This “reflects a true sense of bipartisan negotiation to find a budget that’s balanced, a budget that’s workable, and something that can give us stability and predictability over course of the upcoming year,” Demmer said on the floor before the vote.

Illinois’s bonds, which had already rallied this month amid optimism a budget would be approved on time, moved higher on Thursday, when the debt was among the most-frequently traded in the municipal market. Taxable debt due in 2033, the most active, climbed 1.7 percent to 96.3 cents on the dollar, pushing the yield down 16 basis points to 5.46 percent, according to data compiled by Bloomberg.

Both legislative chambers approved the spending plan with broad support from Republicans and Democrats, a stark contrast to previous years of contentious debate. Last year’s partisan fighting over the budget nearly turned Illinois into the first U.S. state to lose its investment-grade status. The failure of the Democrat-led legislature and Rauner to reach an agreement led to a record two-year stalemate that wrecked havoc on the state’s finances.

That impasse ended last July after lawmakers overrode Rauner’s veto to enact a tax-hike. The money from that levy made this year’s budget negotiations easier as the gap between spending and revenue had narrowed.

“There’s still a lot that needs to be done, but it’s a big positive sign,” said Dan Solender, head of municipal investments at Lord Abbett & Co., which holds $20 billion of state and local debt, including Illinois bonds. “Given the optimism now, it could bring in more buyers,” he said, adding that “the trends are turning positive instead of further down.”

Starting June 1, a three-fifths majority of each legislative chamber is required to pass any bill, making approval of a spending plan more difficult. The state’s unpaid bill backlog stands at $6.6 billion, according to the comptroller’s office, which is less than half of what it was last July, after they piled up because of the stalemate.

The 2019 budget spends more on education and includes cuts to the department of corrections and other operating areas, as well as some pension savings through buyouts and other changes, according to lawmakers. The state’s unfunded pension liability across its five retirement systems climbed to $137 billion as of last June, bond documents show.

On Thursday, Moody’s Investors Service, which rates Illinois Baa3, one step above junk, warned that the state is facing an “inflection point” as its pension costs are poised to climb in the coming years, eating up more of the budget. Without changes, like foisting more pension costs on lower levels of government, state spending on pensions, debt and other retirement benefits will climb $1.3 billion, eating up about 30 percent of revenue next year, Moody’s said in an emailed report.

“I don’t think just getting a budget passed by the end of the regular session is any sort of accomplishment that’s positive for the state’s credit,” Ted Hampton, Moody’s lead analyst on Illinois, said in a telephone interview. “A key point of consideration for us will be whether the enacted budget helps manage or exacerbates the state’s long-term fixed cost challenge.”

Bloomberg

By Elizabeth Campbell

May 31, 2018

It has been nearly two decades since the state of Illinois had a balanced budget.

Faced with a mounting debt crisis and growing social unrest, the state is grappling with the very real possibility of being downgraded to junk status. Yet, Illinois’ most recent budget deficit ran much smaller than many had expected, raising fresh suspicion over the state’s accounting practices.

A study conducted by the Illinois Policy Institute found that state lawmakers employed “cash-based” accounting as a way to mask the true extent of the budget shortfall. The Policy Institute determined that the reported deficit of just under $8 billion for fiscal 2017 was really $14.6 billion when factoring in spending incurred in the actual year.

Against this backdrop, investors must be reminded that Illinois’ perilous financial situation cannot be concealed or distorted through unethical accounting practices. This is important to bear in mind when weighing the decision to invest in the state’s municipal bonds.

Continue reading.

municipalbonds.com

Sam Bourgi

May 31, 2018

CHICAGO (Reuters) – Illinois might not be able to bank on all of the $423 million in much-needed pension savings from a buyout plan included in a fiscal 2019 budget that received final approval in the state legislature on Thursday, government finance experts said.

The budget for the fiscal year that begins on July 1 calls for bond-financed buyouts of pension benefits after past attempts to cut retirement benefits were tossed out by courts on constitutional grounds.

The fact that buyouts would be voluntary raised concerns about the feasibility of the projected savings.

Illinois is struggling with an unfunded pension liability that has climbed to $129 billion after years of skipped or actuarially inadequate annual state contributions to its five retirement systems. Those contributions are projected to grow from $8.43 billion in fiscal 2019 to just over $10 billion by fiscal 2023, according to a state legislative commission report.

Under the buyout plan, current workers could cash in the 3 percent compounded cost of living adjustment (COLA) owed them in retirement for 70 percent of the value and a reduced 1.5 percent COLA. The state would also offer vested former workers 60 percent of the value of their pensions if they choose to end them.

Steve Malanga, George M. Yeager Fellow at the Manhattan Institute, a conservative think tank, called the savings from the buyouts “speculative.”

“Often these buyouts don’t attract as many participants in the public sector as they might in the private sector because of how good the benefits are for government employees,” he said in an interview.

He added that given the “especially generous” compounded 3 percent COLA, only workers urgently in need of money may opt for a buyout of that benefit.

But Republican State Representative Mark Batinick, who has worked on pension buyout legislation for three years, said the plan is based on reasonable assumptions.

“I don’t think the issue with any of this is going to be the (buyout) takers,” he said.

Laurence Msall, president of the Civic Federation, a Chicago-based government finance watchdog, said it was difficult to determine the effectiveness of the plan without an actuarial analysis. He also took issue with the up to $1 billion of general obligation bonds the state would sell over three years to fund the buyouts.

“The state has had an expensive practice that will continue this year to rely on borrowing to fund the pension buyout,” he said.

MISSOURI PENSION BUYOUTS

So far Missouri is the only state to offer pension buyouts to former workers, according to Keith Brainard, research director at the National Association of State Retirement Administrators. He added he is unaware of any states buying out COLAs.

Of the 17,005 former workers in the Missouri State Employees Retirement System, 3,740 applied for a lump sum payment, resulting in a first-year saving of about $2.5 million and a projected long-term reduction in state contributions of nearly $90 million, the pension fund reported in January.

Ted Hampton, a Moody’s Investors Service analyst, said the pension buyout and other aspects of the enacted state budget will be evaluated to see if they “really advance the capacity to deal with retiree benefits and debt service long-term, or whether they are primarily a way to provide near-term fiscal relief.”

Pensions, along with retiree healthcare and debt service on bonds, will consume 30 percent or more of state revenue in fiscal 2019, Moody’s said in a report released on Thursday.

While that is about triple the median level for U.S. states, Moody’s warned that reducing statutory pension funding requirements would weaken Illinois’ credit rating, which at Baa3 with a negative outlook is just a notch above junk.

Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis

MAY 31, 2018

On p. 32 of its new Credit Outlook this week, Moody’s notes last week’s decision by the Illinois comptroller partially denying the City of Harvey’s request for relief from revenue withholding under a state law requiring minimum pension contributions is the latest in a series of events involving Harvey that reinforce strong protections for pensions to the detriment of bondholders, and is thus credit negative for Illinois’ local governments. The comptroller’s response has important implications for other municipalities in the State of Illinois (rated Baa3/negative outlook) struggling to provide services and pay pensions because it clearly prioritizes underfunded pensions over municipal services.

Harvey is structurally insolvent, with an available fund balance of negative $56 million, or negative 199% of revenue, as of the fiscal year that ended April 30, 2017. The city has already racked up numerous general obligation bond defaults, missing two debt service payments in fiscal 2016, six in fiscal 2017 and as of February had missed four in fiscal 2018. Harvey historically has underfunded actuarially determined contributions (ADCs) for its public safety pension plans, contributing very little to its firefighter pension fund from 2009-2013, and even its far higher 2017 contribution fell far below the ADC.

Local pension plans in Illinois can request that the state withhold revenue from a sponsoring municipality if that municipality does not make minimum contributions. Harvey’s public safety pension funds have made such requests, and the state has withheld more than $2 million to date. In protest, Harvey warned that it cannot afford to provide essential public services. The city asserts that it will soon be unable to meet payroll, and last month announced layoffs. The state comptroller’s office has responded that it has no discretion under state law to consider Harvey’s hardship.

Now facing solvency challenges, Harvey’s pension funds have won legal judgments that mandate city funding. Following a host of judicial rulings and appeals over the state’s revenue withholding, including at the Illinois Supreme Court, the state comptroller’s office announced its intention to send $2.3 million of withheld revenue to Harvey’s police pension fund to begin satisfying that judgment.

We estimate that at least 25%, or roughly $5.4 million, of the city’s $21.9 million of budgeted general fund revenue in fiscal 2017 was eligible for withholding under the comptroller’s announced framework. Since the city’s two pension judgments amount to nearly $20 million, it will likely take several years of revenue withholding to retire the obligations unless a court intervenes, a settlement is reached or state law is changed.

Moody’s declaration of “credit positive” or “credit negative” does not connote a rating or outlook change. It is indicative of the impact of a distinct event or development as one of many credit factors affecting the issuer.

Capitol Fax

Tuesday, May 29, 2018

CHICAGO — The heat is on for Illinois lawmakers to address the state’s financial problems in a fiscal 2019 budget that faces a May 31 deadline for passage with a simple-majority vote, credit rating analysts said on Friday.

Illinois’ general obligation (GO) bond ratings, the lowest among the 50 states, are just a notch or two above the junk level, reflecting a huge unfunded pension liability, escalating pension contributions and a chronic budget deficit.

“The question is what progress will the state make, if any, in breaking out of those long-running challenges?” Moody’s Investors Service analyst Ted Hampton said in a phone interview. He added that the outcome of the budget process will be more significant than when the process ends.

An impasse between Republican Governor Bruce Rauner and Democrats who control the legislature left the nation’s fifth-largest state without complete budgets for an unprecedented two-straight fiscal years. Lawmakers enacted a fiscal 2018 budget and income tax rate hikes over Rauner’s vetoes in July, sparing Illinois from becoming the first state with a junk rating.

“Nobody sees the advantage of creating another impasse,” said Steve Brown, spokesman for House Speaker Michael Madigan.

Rauner, who proposed a $37.6 billion general fund budget in February, has been meeting with legislative leaders to try to reach a deal on a spending plan for the fiscal year that begins July 1.

But details are scarce.

“Rank and file members have no idea what the budget is going to look like,” State Representative Jeanne Ives, who narrowly lost the March Republican primary for governor against Rauner, said during Friday’s House session.

Prospects for tackling the state’s $129 billion unfunded pension liability appear to be slim given bipartisan opposition in the House to Rauner’s proposal to shift some pension costs onto school districts.

Constitutional concerns are also clouding chances for legislation Rauner wants to reduce pension costs by giving workers a choice of counting future raises they may receive toward their pensions or receiving retirement payments that include a 3 percent annual cost-of-living increase.

Fitch Ratings analyst Eric Kim said a return to political gridlock that fuels fiscal pressures could trigger a negative rating action for Illinois’ GO debt.

Using recently revised criteria, Fitch on Friday downgraded by five notches the rating on $2.5 billion of Build Illinois sales tax revenue bonds to A-minus. The firm cited too big a spread between the debt’s previous AA-plus rating and the state’s GO rating of BBB with a negative outlook.

Meanwhile, Illinois’ so-called credit spread for 10-year bonds over Municipal Market Data’s benchmark triple-A yield scale narrowed in recent days to 190 basis points, signaling easing concerns by investors over the state’s debt.

(Graphic: Illinois credit spread January-May 24 – https://reut.rs/2KVG25c)

(Reporting by Karen Pierog in Chicago; Editing by Daniel Bases and Matthew Lewis)

By Reuters

May 25, 2018

Fitch Ratings-New York-25 May 2018: Fitch Ratings has downgraded and removed from rating watch negative the ratings on the following Build Illinois sales tax revenue bonds of the state of Illinois to ‘A-‘ from ‘AA+’:

–$1.41 billion senior obligation bonds;
–$1.08 billion junior obligation bonds.

Fitch placed the bonds on Rating Watch Negative on April 4 following release of its revised criteria for rating U.S. state dedicated tax bonds. With the annual update to its “U.S. Public Finance Tax-Supported Rating Criteria”, Fitch specified more limited situations in which a state dedicated tax security can be rated without regard to the state’s general credit quality. Additionally, the revised criteria include detail on circumstances in which a state dedicated tax security, while not considered distinct from the state’s Issuer Default Rating (IDR), can nonetheless be treated as stronger than but still linked to the state’s general credit risk. In these cases, Fitch limits the rating to no more than three notches above the state’s IDR.

Under the revised criteria, the degree of allowable notching above the state’s IDR, for those credits that do not meet Fitch’s requirements for rating without regard to the state’s IDR, is informed by: the breadth of the dedicated revenues (the narrower the better); the nature of the borrowing program (the more specific the better); and the use of residual revenues (the more segregated the better).

This downgrade is based on a review of the Build Illinois bonds under the revised criteria.

The Rating Outlook is Negative, reflecting the Negative Outlook on the state’s IDR, to which the Build Illinois bond ratings are now linked.

SECURITY
Build Illinois bonds have a first and prior claim on the state share of the 6.25% unified sales tax and a first lien on revenues deposited into the Build Illinois Bond Retirement and Interest Fund (BIBRI). Debt service payments on the junior obligation bonds are subordinate to outstanding senior lien debt service; the senior lien is not closed.

KEY RATING DRIVERS

RATING LINKED TO STATE IDR: Dedicated revenues for the Build Illinois bonds are structurally protected from the state of Illinois’ general operations through statutory and bond document provisions, warranting a rating above the state’s IDR of ‘BBB’, Outlook Negative. However, because the bond security includes a statutory pledge of the state share of sales tax revenues, and those revenues flow to state general operations after debt service set-asides, the bonds cannot be rated without regard to the state IDR under Fitch’s revised criteria.

TWO-NOTCH DISTINCTION: The narrowness of the pledged revenue stream, based on the additional bonds test leverage limitations for the senior and junior liens, and the statutorily defined nature of the borrowing program support a rating two notches above the Illinois IDR.

ROBUST COVERAGE AND RESILIENCE: Debt service coverage on both the senior and junior lien bonds from the state share of sales tax revenues (pledged revenues) is very high. Given the legal leverage limitations, pledged revenues can sustain a significant level of decline and still maintain ample debt service coverage on both the senior and junior liens. This is consistent with a ‘aaa’ assessment of resilience through economic declines.

MODEST GROWTH ANTICIPATED: Illinois’ economic performance, while positive, has lagged that of the U.S. as a whole and Fitch anticipates pledged revenues will grow essentially in line with inflation. This is consistent with a ‘a’ assessment for pledged revenue growth prospects.

RATING SENSITIVITIES
STATE IDR LINKAGE: The ratings on the Build Illinois bonds are sensitive to changes in the state of Illinois’ IDR, to which they are linked.

PLEDGED REVENUE TRENDS: The ratings are also sensitive to the performance of sales tax revenues and resulting debt service coverage, although the state IDR linkage currently limits the rating to well below what an analysis of the pledged revenue stream alone would support. Limits on additional debt issuance that require very high historical coverage provide significant cushion against revenue declines.

CREDIT PROFILE

Illinois is a large, wealthy state at the center of the Great Lakes region. It benefits from a diverse economy centered on the Chicago metropolitan area. Illinois’ economy has gradually shifted, similarly to the rest of the U.S., away from manufacturing to professional and business services. The remaining manufacturing sector is less concentrated in the auto sector than surrounding states but remains vulnerable to cyclical downturn. By most measures the economy has grown slower than the nation for many years, and population levels have been stagnant.

Build Illinois bonds are secured by a first priority pledge of the state share of sales tax revenues (80% of total state sales tax revenues) up to the amounts needed annually to meet debt service requirements, as well as a lien on the moneys in the fund (BIBRI) that receives monthly transfers of the state share of sales tax revenues. The state sales tax rate has been 6.25% since 1990 and the state share is defined statutorily as 80%, or 5% out of the 6.25% levy. The state share was $8.5 billion in fiscal 2017 (essentially flat with 2016), providing 26x coverage of annual debt service on aggregate debt, including the junior obligations. Debt service declines steadily each year.

Certain of the Build Illinois bonds authorized by legislation enacted in July 2009 also benefit from revenues deposited in the state’s Capital Projects Fund. These revenues include sales taxes levied on candy and grooming products, and on certain beverages. Ultimate security for these bonds is the same as all other Build Illinois bonds and Fitch’s analysis focuses on the pledge of the more significant state share of sales tax revenues.

LINKED TO STATE IDR
To rate a state dedicated tax security above the state’s IDR, dedicated revenues must be structurally insulated from the state’s general financial operations. Strong legal provisions for the Build Illinois bonds establish a flow of funds where the state share of sales tax revenues (pledged revenues) is segregated from Illinois’ general operations to first meet requirements under the Build Illinois bonds’ master indenture, including for debt service. This structure enhances the prospects for full and timely payment, allowing for a rating above the state’s IDR, but does not meet Fitch’s criteria for rating without regard to the IDR.

As there is no bankruptcy framework available to U.S. states, evaluation of the prospects for varying security structures at a time of fiscal distress is by necessity somewhat judgemental. Absent a bankruptcy framework, the primary limit on state action and source of protection for state bondholders is the contract clause of the U.S. constitution and equivalent clauses in state constitutions. Although contract clause protections under federal and state constitutions restrict the ability of a state government to impair its obligation to pay bondholders from dedicated tax revenue, the judicial interpretations of the contract clause indicate that it does not impose an absolute constraint. One of the key legal tests of whether a contract can be impaired is whether the impairment is necessary and reasonable.

Given this legal backdrop, under the revised criteria, the only cases in which Fitch can rate a state dedicated tax bond distinct from and without regard to the state IDR are rare situations where Fitch believes that the nature of the dedicated revenue stream or the legal structure render remote the possibility of a successful impairment argument. The security must be very clearly segregated from state operations and have no nexus with general state functions. Examples include bonds issued to fund state unemployment compensation and worker’s compensation systems.

STRONG LEGAL PROVISIONS
In the Build Illinois Bond Act and the 1985 master indenture for the Build Illinois bonds, the state pledges and establishes a first and prior claim on the state share of pledged revenues for payment of the bonds. The pledge is limited to the greater of the amount necessary to meet annual debt service requirements, or 3.8% of the state share – the indenture defines this amount as the Required Bond Transfer and this has been the 3.8% of pledged revenues since fiscal 2013. The Act and the indenture require the State Treasurer and Comptroller to make monthly payments of the greater of 1/12th of 150% of the certified annual debt service or 3.8% of the state’s share of sales tax revenues to the trustee.

The Act serves as an irrevocable and continuing appropriation and provides irrevocable and continuing authority for the Comptroller and Treasurer to make these monthly payments, as directed by the Governor. Under the Act and Indenture, the state also covenants not to impair the rights of bondholders, and specifically not to limit or alter the basis of the pledged revenues.

TWO-NOTCH DISTINCTION
The Build Illinois bond structure warrants a rating two notches higher than the state’s IDR given the narrowing of the dedicated revenues through the additional bonds tests (ABT) and the specific nature of the borrowing program. The open-ended use of residual revenues for general state operations keeps the rating below the maximum three notches above the state’s IDR allowable under Fitch’s criteria.

While the state share of the sales tax revenues is a broad revenue source, the leverage limitations imposed by the senior and junior liens’ ABTs’ significantly narrow the scope of the dedicated (pledged) revenues. At full leverage under the ABTs, 9.8% of the state share of sales tax revenues would be used for debt service.

Specific uses for Build Illinois bond proceeds are defined in the Act. While the four defined uses are broad, the Act also explicitly lists specific projects or types of projects to be funded with Build Illinois bond proceeds. The state has targeted its use of the Build Illinois program with bond proceeds primarily used by three agencies (Department of Commerce and Economic Opportunity, Department of Natural Resources, and the Environmental Protection Agency) and for smaller economic development projects. The state has not used the program for general capital borrowing.

The state share of sales tax revenues in excess of the annual Required Bond Transfer is available for general operations. Sales tax revenues are a key revenue source for Illinois’ general operations, comprising between 25%-30% of annual general fund revenues in most years. The recent increase in income tax rates will reduce the portion of general fund revenues derived from sales tax revenues, but they will remain significant. Also the indenture permits the state to transfer excess pledged revenues at the end of each fiscal year to its general fund. The state reports that $2.5 million is typically kept within the indenture with any amounts above this transferred to the general fund. Between fiscal 2015 and 2017, the state transferred an average of approximately $125 million of excess pledged revenues to its general fund.

EXCEPTIONAL RESILIENCE OF PLEDGED REVENUES

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers the results of the Fitch Analytical Sensitivity Tool (FAST), using a 1% decline in national GDP scenario, as well as assessing the largest decline in revenues over the period covered by the revenue sensitivity analysis.

Based on a 15-year pledged revenue history, FAST generates a 3% scenario decline for the state share of sales tax revenues in the first year of a moderate economic downturn. The largest peak-to-trough historical decline was 12% between fiscal 2008 and 2010.

Additional bonds tests require debt service be no more than 5% of the state’s prior year sales tax receipts to issue senior lien bonds and 9.8% to issue junior obligation bonds; this effectively requires 20x coverage to issue senior lien bonds and 10.2x coverage to issue junior obligation bonds. With issuance up to the 10.2x ABT for junior lien bonds (the maximum legal leverage on the pledged revenues), the state share of sales tax revenues could withstand a 90% decline – equivalent to 31x the projected decline in Fitch’s scenario of a moderate economic downturn and 7.5x the largest historical peak-to-trough decline – and still cover maximum annual debt service . This is an exceptional level of resiliency.

MODEST GROWTH IN REVENUES

With a relatively slowly growing state economy, Fitch expects pledged revenues will grow essentially in line with inflation. Sales tax revenues are economically sensitive, as illustrated by the cumulative 12% decline during the Great Recession. Revenue performance was more robust after the end of the Great Recession. But growth has tailed off recently and fiscal 2017 collections were roughly equal to fiscal 2015. The state reports that the current softness is caused in part by lower gasoline prices. The state levies its sales tax on gasoline as a percentage of the per-gallon price. Over the past decade and including the Great Recession, average annual growth in pledged revenues has been 1.4%, just below inflation. Fitch anticipates pledged revenues will grow modestly on a real basis over the long term.

Contact:

Primary Analyst
Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Karen Krop
Senior Director
+1-212-908-0661

Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575

In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com

Additional information is available on www.fitchratings.com

Another courtroom battle is shaping up between holders of the Puerto Rico Sales Tax Corp (COFINA) bonds and Puerto Rico general obligation bonds. At stake are who has the first claim on the sales tax revenue, one of the few reliable revenue sources dedicated to bond service. The issue arises because the government has not guaranteed the COFINA bonds in a way that puts them on par with GO obligations. The issue is particularly critical to the bond insurers who differ on their exposure to the two issuers. AMBAC has insured some $7.3 billion and MBIA some $4.2 billion of COFINA bonds representing 75% of AMBAC’s and 49% of MBIA’s total exposure in Puerto Rico. Hence, a ruling that favors the GO bondholders could be devastating to AMBAC and windfall to Assured Guaranty (AGO) which has greater GO bond exposure. Some $26.3 billion of Puerto Rico’s $73 billion in bonds carry monoline bond insurance, so all the carriers face serious write offs no matter who wins, however, the AMBAC exposure appears the most crippling. The total exposures are $8.5 billion for AGO, $9.7 for AMBAC and $8.5 billion for MBIA. While this battle takes shape COFINA has also gone into court to obtain relief from its $17 billion bond obligation through a mandatory reduction of the principal amount.

On another front, Governor Ricardo Rossello has thrown out a projection of a 70% to 90% recovery for island GO bondholders if all goes well over the next decade. This projection is more motivated by his power struggle with the oversight board, which wants deeper cuts in the Governor’s budget, than by economic realities. The facts in support of any such projections would lead one to a different conclusion. The islands debt burden from bonds and pension obligations total some $123 billion. Divide this by a population of 5.3 million and you get an average debt burden per person of $35,142. Consider this in the light of a population where almost half live in poverty and the average income is $19,350 making the average debt burden 181%. Compare this to the USA where we worry about a 20 trillion national debt which works out to about $55,500 per citizen. Compared to an average income of $53,800 means we have a much lower average debt burden of only 103%. Oh, but I forgot to include our unfunded social security and Medicare obligations of at least another, say, $10 trillion? That would kick our average person debt burden up to 155%. Is that scary or what? Maybe those worrying about our unsustainable debt growth aren’t so far off.

The economic hard facts are that, while a few select bondholders with better collateral may possibly achieve a 70% recovery, the average for the rest will likely achieve no more than 15%. This will be done in stages as agreements are reached which are unachievable but have to be dealt with by other than the current participants. A few years later the next generation gets to redo the agreements, blaming the incompetence of their predecessors and the inability to see into the future or anticipate the next hurricane. Isn’t a Puerto Rico moment what politicians of all stripe are facing? Isn’t that what’s going on with those tobacco bonds or unfunded state and municipal pension promises? Yet the market must go on and we all play musical chairs without recognizing that high coupons on bonds mean a lower chance of getting your principal back. Want proof? Our Distressed Municipal Debt database, which contains over 4,000 defaults shows an average coupon rate since 1983 of 8.03%. So when you see yields of 8%, recognize that when they default, the average recovery was 8.7 cents on the dollar.

Forbes

Richard Lehmann, Contributor

MAY 26, 2018

Fitch Ratings-New York-24 May 2018: The potential budgetary impact of legalizing marijuana for recreational use in New York State would be modest for New York City with no impact on credit quality, according to Fitch Ratings. Fitch expects the decision to legalize in New York State, which as a whole would also see modest revenue gains, will be based on political and public policy considerations rather than budgetary ones.

A recent report by New York City’s Comptroller estimates the legal adult-use marijuana market at $3.1 billion in New York State, including $1.1 billion in New York City. The $336 million in annual tax revenue to New York City estimated by the comptroller represents 0.3% of fiscal 2019 budgeted revenues of $89 billion. The budget, which does not assume legalization for recreational use, includes $100 million in excise taxes from medical marijuana, which has been legal since 2014. Fitch expects any increased receipts would take time to become fully realized. If legalization is approved by the state, many details would remain to be worked out, including which elements to tax and at what rate.

The comptroller also estimates a $36 million savings from reduced misdemeanor arrests if legalization is approved, although the mayor has already announced an order for the New York Police Department to stop making marijuana-related arrests and the Manhattan district attorney announced that his office would no longer prosecute most marijuana-related cases.

As Fitch noted in “U.S. States Experiment with Cannabis Legalization,” (August 2017) states have taken a variety of approaches to cannabis legalization (Fitch uses the broader term cannabis to refer to both marijuana, which typically connotes the dried form of the plant used for smoking, as well as oils and other formulations derived from the same plant). Eight states and the District of Columbia have legalized cannabis use for adults for nonmedical purposes, and another 22 have legalized it for medical purposes only. Taxes on nonmedical cannabis vary greatly, reflecting a range of both tax rates and the elements that are taxed. Some states tax based on price, with others based on weight, and taxes can be levied on producers, retailers and/or customers.

The New York City comptroller report’s estimate of $336 million in annual taxes, which is based on surveys of marijuana use and sales per user in states that have already legalized recreational marijuana, equates to a tax rate of 30%, which is sizable but in line with the effective tax rates estimated by Fitch in its review of states that already have legalization for recreational use. States with high effective tax rates may see legal sales shift back to black markets over time, especially if neighboring states legalize with lower effective rates. Price declines over time could also result in reduced tax revenues if the tax is tied to price.

Neighboring states New Jersey and Connecticut are also considering legalization for recreational purposes. Legislators in all three states have proposed bills, and the new governor of NJ made legalization a campaign promise.

In our earlier report, Fitch noted the need for flexibility in implementing new laws, as they may not achieve the expected goals within the anticipated timeframe. Obstacles to successful legalization include state restrictions on cultivation, distribution and sales, which may conflict with other policy goals.

Contact:

Amy Laskey
Managing Director
+1-212-908-0568
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Stephen Walsh
Director
+1-415-732-7573

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com

Fitch Ratings-New York-22 May 2018: California’s potential building requirement for many types of new residential construction to include solar panels will have a limited credit effect on public power issuers, homebuilders and the housing markets in the state, Fitch Ratings says. If the requirement is implemented, it will be an incremental component of a broader regulatory trend for which Fitch-rated issuers have prepared. California building code already requires all new residential construction to be zero net energy (ZNE) by 2020 and all commercial buildings to be ZNE by 2030. The lack of new construction in California will lower the impact on house prices.

We do not expect the building requirement to have a material effect on public power issuer ratings. The requirements are consistent with the ongoing trend toward greater energy efficiency and reduced per capita electricity consumption in the state. Public power utilities have been planning for, and adapting their long-term supply strategies to, responding to this trend.

Furthermore, many Fitch-rated public power issuers are in built-out communities with modest levels of new home growth. Those in higher growth areas, such as Roseville, already factored the much greater energy efficiency of new homes into their load forecasts.

We do not expect the mandate to install solar panels to meaningfully affect prices of existing homes in the state. Sales of new homes account for a smaller portion of homes sold in California. The incremental cost of installing solar panels is relatively marginal to the buyers of homes in the state, where home prices are already high to begin with. However, higher interest rates and increasing home prices in recent years, combined with the additional cost of installing solar panels, will likely continue to erode affordability for new homes in the state, particularly for entry level/first-time homebuyers. Nevertheless, the total cost of homeownership is likely to go down with lower monthly energy costs. California is one of the largest states, in terms of new home construction, with new home permits in the state accounting for about 9% of the U.S. total in 2017.

Homebuilders in the state have already begun marketing roof top solar features and changed practices to comply with ZNE codes, although adoption has been relatively limited, as most homebuyers have not been willing to pay for the added cost. The requirement to install solar panels could exacerbate the already tight construction labor market. Thus, the large public homebuilders rated by Fitch are well-positioned for the change, as these builders generally have better access to labor and materials due to scale. We expect homebuilders not marketing solar features to have ample time to do so, as the rule would not go into effect for two years. There is a small risk solar panel installations rise quickly, creating supply pressures that raise prices and slow down construction. This risk would be higher if states such as Nevada, Texas and Florida adopt similar building standards.

On May 9 the California Energy Commission voted to adopt the building standards beginning in 2020. The standards still need approval from the California Building Standards Commission. In addition to solar panels, the standard includes requiring residential and commercial buildings to have updated attic insulation and commercial buildings to conform to more energy efficient lighting standards. The standards would apply to apartment buildings of 1-, 2- and 3-stories and single-family homes.

Contact:

Kathy Masterson
Senior Director, U.S. Public Finance
+1 512 215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701

Robert Rulla
Director, U.S. Corporate Ratings
+1 312 606-2311
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602

Robert Rowan
Senior Analyst, Fitch Wire
+1 212 908-9159

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com
Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

• Miami Beach most exposed city in the U.S to climate change
• Four Twenty Seven developed new climate change risk index

The picturesque Florida cities of Miami Beach and Sarasota carry high investment-grade credit ratings and are popular travel destinations. They’re also two of the most exposed U.S cities to climate change in the country, according to a new analysis by advisory firm Four Twenty Seven.

The Berkeley, California-based firm has developed an index surveying 761 cities’ and 3,143 counties’ exposure to sea level rise, water stress, heat stress, cyclones and extreme rainfall based on analysis of changes between current and future conditions. It found that communities in Florida are the most susceptible to climate change risks, with Miami Beach being the most exposed city and Manatee County being the most-exposed county.

The data will help investors, ratings companies and local governments better evaluate the issue, said Frank Freitas, chief development officer at Four Twenty Seven. “We’re hoping that municipalities and investors can engage in conversations that see market support for initiatives that foster resilience going forward, just like we’ve seen investors engage with companies in equity markets on ESG and climate risk,” Freitas said.

The $3.9 trillion municipal-bond market has been slow to take climate change risks seriously, said Nicholas Erickson, assistant vice president of portfolio management at Sage Advisory Services. But the hurricanes that battered Florida, Texas and Puerto Rico last year show how significant weather-related events could be for local economies, he said.

“It could have a huge impact,” he said.

Investors have pushed credit-ratings companies to give them more of a warning about environmental risks. Moody’s Investors Service and S&P Global Ratings say they incorporate environmental risks in their ratings through their analysis of factors such as leaders’ preparedness for weather events. Even so, rating methodologies for states, local governments and utilities don’t “explicitly” address climate change as a credit risk, Moody’s said in a report last year.

For Florida cities and counties, home values could suffer as a result of the risks of cyclones and flooding, which could in turn hurt property-tax revenue that governments rely on, the Four Twenty Seven report said. In order to address water shortages or droughts, water utilities may have to spend more on infrastructure or their customers may have to pay more in fees, it added.

Charleston, South Carolina, and Virginia Beach, Virginia, topped the ranking for cities susceptible to severe hurricanes and typhoons in the future. Heat stress, which measures the frequency and severity of hot days and average temperature, was found to predominantly affect the Southeast and Midwest.

Freitas said he hopes the firm’s findings don’t cause investors to avoid investing in projects out of the most exposed places to climate change. “Understanding risk is the first step toward helping people invest in resilience as well,” he said.

Bloomberg

By Amanda Albright and Danielle Moran

May 22, 2018, 4:00 AM PDT

DALLAS (S&P Global Ratings) May 21, 2018 – On May 9, Colorado’s legislature passed Senate Bill 18-200, which outlines adopted changes to the state’s pension system to restore to full funding within 30 years. The governor has not yet signed the law.

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Local government (LG) ratings in the Commonwealth of Virginia remain strong and stable characterized by low unemployment, high income and wealth levels, and strong budgetary performance, often supported by formal financial policies and regular budget monitoring.

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May 23, 2018

The Los Angeles County Metropolitan Transportation Authority launched a new investor relations website Thursday.

The site is powered by BondLink, a Boston-based firm that has been rolling out new municipal bond investor websites regularly since Colin MacNaught, a former Massachusetts deputy treasurer, created the company in 2016 with Chief Technology Officer Carl Query.

The new website comes just months after Metro unveiled a $5 billion capital plan with a long list of projects it wants to complete before the city hosts the 2028 Summer Olympics and Paralympics. The Twenty-Eight by 28 plan is aimed at completing 28 major road, transit and bicycle projects before the event.

“We are excited to work with them; they have a robust capital program, good management and they are an active credit and issuer,” said Colin MacNaught, BondLink’s co-founder and chief executive officer.

The company has created investor websites for issuers across the country. In California, it created websites for the state government, the Port of Los Angeles and West Basin Water District and hopes to launch two more California websites next week.

The websites provide a portal for issuers to share status updates on projects funded by bonds or quarterly cash reports, and allows investors to sign up for custom alerts. The Metro website will provide access to more than 10,000 documents including information on bond sales, credit ratings and investor resources.

BondLink’s websites enable issuers to provide more frequent disclosure to investors, which besides accomplishing the Government Finance Officers Association’s best practices goals, also attracts a broader swath of investors, MacNaught said.

“Academic research shows that more timely disclosure can lower borrowing costs for issuers,” MacNaught said.

Metro remains committed to minimizing borrowing costs in its capital finance program, Metro Treasurer Donna Mills said in a statement.

“This new website will enhance our investor outreach and improve our disclosure and transparency in the capital markets,” Mills said.

Given the size of its capital program, even a small increase in demand for the bonds would lower borrowing costs significantly, MacNaught said.

“California is such a big market and retail plays such a big part of that bond market,” MacNaught said. “Providing a really convenient investor platform for issuers like Metro and the Port of Los Angeles is a big benefit for bond investors including retail.”

BY SOURCEMEDIA | MUNICIPAL | 05/24/18 07:05 PM EDT

By Keeley Webster

In 2018, S&P Global Ratings expects California’s tax increment bond quality to remain stable to positive, supported by assessed valuation (AV) that is on the upswing, limitations on additional debt, and a stable legislative landscape.

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May 16, 2018

• Board of Education sold $561 million of G.O. refunding bonds
• Demand for yield, rate hike outlook seen as reason for change

The Chicago Board of Education doubled the size of its bond sale Thursday to $561 million amid signs of strong demand for the junk-rated district’s high-yielding securities.

The offering, which was initially planned for next week until officials moved it up, is the first this year for the nation’s third-largest school district and was increased from the $260 million initially scheduled. Because of its chronic fiscal strains, the system’s uninsured bonds carried yields that were 1.93 percentage point to 2.24 percentage points more than top-rated securities, with debt backed by Assured Guaranty Municipal Corp. offered for as much as 1.35 percentage point over the benchmark, according to a repricing note sent to an investor.

The acceleration of the district’s bond sale came after yields rose this week amid concern that the Federal Reserve may raise interest rates more aggressively than previously anticipated.

“There’s a consensus that on the horizon there’s not a lot of yield coming, and so buyers are certainly putting their money to work,” Adam Buchanan, senior vice president of municipal sales and trading at Ziegler Capital Markets Group in Chicago, said in a telephone interview. “For an institution that needs capital in a rising interest rate environment, you want to raise as many dollars as you can at this cost of capital — it could be more expensive down the road.”

High-yield bonds have been one of the few bright spots in the municipal market this year, delivering returns of 1.9 percent despite the losses posted by most securities, according to Bloomberg Barclays indexes. Prices on the Chicago district’s debt have rallied over the last year, reflecting the significant step-up in state aid for a system that had long been in fiscal crisis largely due to its escalating pension bills.

This month, the most-actively traded Chicago Board of Education debt traded at an average price of $1 at a 4.96 percent yield, compared to 79.6 cents at a 7.3 percent yield in May 2017, according to data compiled by Bloomberg.

In August, lawmakers and Governor Bruce Rauner overhauled Illinois’s school funding formula, making the state pick up the normal cost of Chicago’s teacher pensions, a major expense for the cash-strapped district. That change, along with a hike in other state aid and property taxes, means Chicago schools have an additional $444 million of revenues, according to bond documents.

The state now covers $221 million of normal pension costs for Chicago schools and provides an additional $93 million in other state funding, according to bond documents. The district also enacted a $130 million property-tax levy for pensions, according to an online presentation to investors.

“CPS is on the hook for a lot less of their pension burden than they have in the past, and there’s a number of other funding sources that are offsetting that risk,” said Dennis Derby, a portfolio manager at Wells Fargo Asset Management, which holds $39 billion of municipal debt, including Chicago school bonds. His firm is considering buying Thursday’s deal. “The market reception is significantly better than it was two years ago because there’s less uncertainty tied to funding going forward.”

It’s a more positive story than a year ago, but still there’s a lot of pension debt to fund, said Dan Solender, head of municipal investments at Lord Abbett & Co., which holds $20 billion of state and local debt, including some issued by district. The Chicago teachers’ pension fund is about 50 percent funded, leaving an unfunded liability of about $10.9 billion, according to bond documents.

“They’re telling an improving story,” Solender said in a telephone interview. “They still have a lot to do to really improve themselves to get out of the below investment grade category.”

Another risk is the board’s reliance on the fiscally-stressed state of Illinois that faces ongoing political squabbles over its budget. Rauner, a Republican who is facing re-election this year, proposed a spending plan in February that ends the state’s pension pickup of CPS’s normal pension costs. Democrats have resisted Rauner’s plan, and it remains to be seen what budget, if any, Illinois leaders will approve for the year that starts July 1.

In April, S&P Global Ratings revised its outlook on the board to positive from stable, citing the jump in state aid, but the board is still rated B, five steps below investment grade, partly due to its “extremely weak liquidity,” according to S&P.

There’s no question that this year is different for the board. Ending the school year early, canceling summer school and slashing school spending were all floated as options for the district in 2017 as it struggled to make its June 30 pension payment.

“A large part of it is the credit outlook for CPS is substantially better than it was even just a year ago,” Derby of Wells said. “And management has done a commendable job in getting their message across to investors.”

Bloomberg

By Elizabeth Campbell

May 17, 2018

Invoking a statute designed to compel Illinois municipalities to fund their public safety pension plans according to statutory minimum levels, pension boards in the cities of Harvey (not rated) and North Chicago (A/Stable) recently petitioned the state comptroller to intercept state revenues due to the municipalities.

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May 14, 2018

CHICAGO, May 17 (Reuters) – The junk-rated Chicago Public Schools (CPS) on Thursday more than doubled a planned bond refinancing issue to $561 million and accelerated its pricing amid rising rates in the U.S. municipal market.

The district had initially sized the issue at $260 million and set a tentative pricing date for next Tuesday through senior underwriter Loop Capital Markets.

“I guess they are taking advantage of the market while rates are increasing,” said Daniel Berger, Municipal Market Data’s (MMD) senior market strategist.

The 10-year bond yield on MMD’s benchmark triple-A scale has climbed 10 basis points since Monday.

There was no immediate comment from CPS on the bond pricing.

Yields in the deal topped out at 4.95 percent for general obligation bonds due in 2035 with a 5 percent coupon, according to a repricing released by underwriters. Insurance by Assured Guaranty Municipal Corp on an additional 2035 maturity produced a lower yield of 4.05 percent.

Spreads over MMD’s scale ranged from 193 basis points to 224 basis points for uninsured bonds and were as high as 135 basis points for insured bonds.

Escalating pension payments have led to junk credit ratings, drained reserves and debt dependency for CPS, the country’s third-largest public school system.

School officials have touted an improved financial outlook under a new Illinois school funding formula enacted last year that boosted the flow of state funding to CPS by $450 million.

The district still has an “extremely weak cash position,” according to S&P Global Markets, which last week rated the bonds at ‘B’ with a positive outlook.

The sale came a day after the Illinois State Board of Education placed the district’s special education services under supervision after finding some CPS policies and practices violated a federal law protecting disabled children’s’ right to a free and appropriate public education.

(Reporting by Karen Pierog, editing by G Crosse)

Charleston — As the state prepares to put up for sale about $800 million in general obligation bonds for larger projects of the Roads to Prosperity program, Gov. Jim Justice announced the creation of a bond sale and an investor relations site.

Found at investorrelations.wv.gov, the governor said the bonds carry a strong rating by Moody’s S&P Global Ratings and Fitch Ratings and have maturities ranging from one to 25 years.

Among the information housed on the site is a list of West Virginia bond offerings, the state’s credit ratings and a step-by-step process to purchasing West Virginia bonds.

A frequently asked questions (FAQ) on the site answers such questions as:

What is a State of West Virginia General Obligation bond (“GO bond”)?Do GO bonds require voter approval?What is a Revenue Bond?What is a Lease Revenue Bond?What are key factors in pricing municipal securities?What are Credit Ratings?What does it mean when a bond or note is taxable?What is a preliminary official statement (POS)?What is the pricing/sale date?What is the difference between a competitive and negotiated sale?A news release said West Virginia residents can purchase tax-exempt bonds by contacting one of 15 firms in the underwriting syndicate and selling group led by Bank of America Merrill Lynch. Bonds may only be offered through a preliminary official statement and be purchased through a registered broker.

“These bonds are part of a program that will finance over $2 billion in road infrastructure improvements,” Justice said in the release. “The projects will rebuild and reconstruct West Virginia’s aging roads and bridges as well as starting up several new highways projects. This is your chance as a West Virginian to invest directly in the Mountain State’s future, and help move our state forward for generations to come.”

By Andrea Lannom

Register-Herald

A complaint is filed in Yellowstone County District court claiming franchise fees collected by the City of Billings on water and garbage utility bills are illegal.

The contention comes after the state Supreme Court struck down similar fees in the past.

The 15 page complaint is filed in Yellowstone County Court on the behalf of six Billings Public Works utility customers.

The complaint is seeking class action status which would up the number of plaintiffs from six to over 30,000.

“Billings residents sue the city of over utility franchise fees.”

That’s the headline in today’s edition of the Yellowstone County news.

A copy of the complaint shared with KULR-8 argues that these franchise fees are actually an illegal sales tax.

The franchise fee is listed under current charges standard utility bill.

The City of Billings outlined what the “franchise fees” are for and where they go in the “rules and regulation governing water and waste water services” published in February of 2009

Section 1611 states that the utility shall pay all money collected from franchise fees to the city of billings for use of its rights-of-way to install water/waste water lines. such money shall be deposited in the general fund.

This is where the complaint takes issue.

The plaintiffs argue the city’s “franchise fees” are not reasonably related to the city’s cost of providing water, sewer, and garbage disposal services.

This is because the general fund is used to support the general administrative costs of the city and other services provided by the city, including but not limited to public safety, municipal court, parks, recreation and public lands, and city finance costs.

The complaint asks the court to prevent the city from collecting future franchise fees and repay customers who have paid the fee over the last eight years.

That could be a hefty fee for the city in the neighborhood of $15 million.

Breaking that number down, the average customer could see roughly $30 returned to them after court costs are assessed.

Now again all that is only comes if a judge grants class action status in this case.

We did reach out to the city for comment.

City Administrator Bruce McCandless couldn’t comment on the complaint as he has not been served with it yet.

However, he did say that this past march council members did request the franchise fee be removed from utility bills during the next fiscal year.

By Mary Jane Belleza

May 17, 2018

KULR

A recent report concludes that the factors that contributed to Puerto Rico’s debt crisis were inadequate management and oversight practices by the government. This included poor policy decisions by government leaders with regards to public debt financing and public pension funding, and a prolonged economic contraction, which has cut across all economic sectors in the island. Puerto Rico has an estimated $70 billion in public debt and close to 50 billion in unfunded liabilities.

In summary, General Accountability Office (GAO) report recommendations released May 9 include:

• modifying the federal tax exempt status for Puerto Rico municipal debt
• applying federal investor protection laws to Puerto Rico
• modifying the Securities and Exchange Commission’s (SEC) authority over municipal bond disclosure requirements

From a practical point of view these recommendations may seem untimely. The government of Puerto Rico is currently under the jurisdiction of a congressionally mandated oversight board and in bankruptcy-like proceedings in the Federal District Court. The government also will not have access to the municipal bond markets for the foreseeable future,.

It should be noted that Rep. Nydia Velázquez (D-N.Y.) recently presented H.R. 1366 to amend the Investment Company Act of 1940 to protect mutual fund investors in Puerto Rico as other American citizens in the mainland. The House approved the bill with bipartisan support. In the previous Congress, the bill had also been approved by the House, but was blocked by the Senate.

This report comes on the heels of a series of pronouncements made in the last few weeks by various congressional members on Puerto Rico’s financial crisis and political future.

Just last week Rep. Rob Bishop (R-Utah) as chairman of the House Energy and Natural Resources Committee, declared that he favored statehood for Puerto Rico. Sen. Bill Nelson (D-Fla.), who is up for reelection in the 2018 midterm elections, declared he would favor statehood if Puerto Ricans asked for it, apparently ignoring that in the last two local plebiscites the statehood alternative won.

Florida’s Republican Gov. Rick Scott, who is running against Nelson for the Senate seat, also declared that he favors statehood for Puerto Rico. As a political commentator ironically noted, it would appear that the next elected Florida senator will also represent Puerto Rico.

On the other hand, both Sens. Marco Rubio (R-Fla.) and Lisa Murkowski (R-Alaska) have argued that statehood for Puerto Rico is not currently on the discussion table, and that economic and financial recovery are the main concerns. Of course, statehood and economic and financial recovery are not mutually exclusive, and it is possible to address both simultaneously.

In fact, GAO’S recommendations on modifying the federal tax exemption enjoyed by Puerto Rico municipal bonds silently underlines the status question. It is precisely because Puerto Rico is an unincorporated territory — belonging to, but not a part of the United States.

As a matter of constitutional law, any other stateside municipal bond which hypothetically enjoyed a federal tax exemption would run afoul of the Uniformity Clause. This is the same issue that was raised by the December 2017 amendments to the Federal Tax Code, which classified Puerto Rico as a foreign jurisdiction for purposes of imposing a 20 percent taxation rate on American Controlled Foreign Corporations earnings at the time of entering the United States.

The GAO report is correct in pointing out that Puerto Rico’s current fiscal and economic woes are due to the mismanagement by elected officials in Puerto Rico throughout the years.

Puerto Rico’s government addiction to public debt financing, concurrent with a private sector dependent on federal and territorial tax incentives, has until recently benefited the financial goals of investors, manufacturers, and certain political sectors in Puerto Rico at the expense of long-term stability and growth.

As to be expected, the GAO report studiously avoids making any political or constitutional recommendation. Historically speaking Congress shoulders some of the responsibility by statutorily facilitating this state of affairs. In this context, PROMESA is a belated recognition by Congress that the unincorporated territorial model for Puerto Rico is spent.

Only when the political underpinnings of the current relationship between Puerto Rico and the United States are addressed can real progress be achieved on the social and economic fronts. Congress should act on GAO’s recommendation as a step in the right direction, formally incorporating the territory of Puerto Rico, and treating in all matters it as any other state jurisdiction.

THE HILL

BY ANDRÉS L. CÓRDOVA, OPINION CONTRIBUTOR — 05/14/18

Andrés L. Córdova is a law professor at Inter American University of Puerto Rico,. where he teaches contracts and property courses. He is also an occasional columnist on legal and political issues at the Spanish daily El Vocero de Puerto Rico.

Breaking up is hard — especially if you’re a city trying to break up with a bank.

Especially if the other banks aren’t all that interested in dating you.

That’s more or less why Seattle just signed a three year extension to keep banking with Wells Fargo, even though officials voted a year ago to cut ties with the bank because of its role in funding the Dakota Access Pipeline.

The city council resolved to find a new financial institution before ending the Wells Fargo contract at the end of 2018. But this week, City Finance Director Glen Lee gave them an update on the search for a bank.

“The reality is, none wanted to participate and bid for our services, and given the time it takes to shift to a new service, we felt it was prudent for the city to move forward,” Lee said.

Lee said some banks offered to run certain services, but none applied to handle the city’s lending and deposits. Wells Fargo provides lending and deposit services for the city, processing about five-billion dollars a year in city finances.

Since no other bank applied, Seattle will bank with Wells Fargo for three more years.

In the meantime, city staff are studying the idea of a municipal bank, which Lee said Mayor Jenny Durkan supports. That idea was proposed at the state level in the past, but never gathered steam. City staff want to hire a consultant, possibly in conjunction with other Washington cities, to set up a public bank.

Cities such as San Francisco and L.A. have also considered municipal banking, but only North Dakota and Native American tribes currently have their own banks.

Environmental activists and Native American leaders in the region celebrated last year’s decision by the Seattle City Council. Under the ordinance approved last year, the city of Seattle will not work with any business that engages in unethical business practices.

The council voted to stop banking with Wells Fargo because it’s a lender for the Dakota Access Pipeline — and because of a scandal last year in which accounts were set up for clients without their knowledge. More than a dozen banks are connected to the pipeline, including CitiBank, I-N-G, Chase and Bank of America.

KUOW

By PAIGE BROWNING | MAY 14, 2018

Proposed sales-tax agreement rejected by Puerto Rico’s federal overseers

Major Puerto Rico creditors agreed how to split up sales-tax collections and cut $10 billion in public debt but were rebuffed by the U.S. territory’s federal financial supervisors.

The settlement framework unveiled Monday concerns future sales-tax revenue collections that Puerto Rico transferred to a public corporation to raise $18 billion in securitization bonds known as Cofinas. Competing creditors have tried to free up that money in Puerto Rico’s court-supervised bankruptcy proceeding to pay down other government debts.

The federal board overseeing Puerto Rico’s finances would need to approve any settlement for it to take effect. An oversight board spokesman said the proposed terms were crafted without its input “and are completely unaffordable.”

The proposed deal swings the pledged taxes to a new lockbox which would distribute securities to participating debtholders at a discount to their claims, providing Cofina bondholders 64.5 cents on the dollar.

Creditors holding general obligation debt backed by Puerto Rico’s full faith and credit would receive 58.6 cents on the dollar, according to settlement documents.

The oversight board approved a fiscal plan that includes a $6.7 billion surplus over six years from which creditors could be repaid, provided a host of other fiscal and structural reforms are enacted.

An agent for Cofina bondholder interests appointed by the oversight board supports the proposed division of sales-tax monies, settlement papers said. The agent appointed to attack the Cofina structure on behalf of unsecured creditors “did not support any portion.”

The judge presiding over Puerto Rico’s bankruptcy heard arguments last month on ownership of the sales tax collections, a dispute that has dominated the proceedings since they began more than a year ago. She hasn’t yet issued a ruling or decided whether to punt the matter to Puerto Rico’s highest local court.

Mutual funds with large holdings of subordinated Cofina debt including OppenheimerFunds Inc. weren’t signatories to the proposal.

How the dispute is resolved will reverberate throughout the U.S. municipal marketplace as investors gauge the safety of Cofina-like investments backed by specific revenue streams. Discussions around an alternative settlement proposal with Puerto Rico’s public pensioners are ongoing, according to a spokesman for hedge funds holding Cofina debt.

The Wall Street Journal

By Andrew Scurria

May 14, 2018

Write to Andrew Scurria at Andrew.Scurria@wsj.com

• Senior sales-tax bonds soar to 71 cents on the dollar
• While plan rejected, it moves toward settling major conflict

Puerto Rico bonds rallied after a group of investment firms and insurers reached agreement on a restructuring plan that would allow them to receive larger-than-expected recoveries on their defaulted debt, marking a first step toward resolving a key clash between creditors who have been fighting in bankruptcy court.

The gains, which pushed some securities up by as much as 22 percent Monday, came despite the plan’s rejection by Puerto Rico’s federal financial overseers, who said it would leave the government facing budget shortfalls for years and was put together without their input.

But the framework hashed out by the owners of sales-tax-backed debt and general-obligation bonds shows progress toward resolving their disagreement over who has the highest claim to Puerto Rico’s cash — an issue at the heart of the government’s record bankruptcy. It also offers a baseline that investors could use to estimate what they stand to recover, which has been difficult given the divergent outcomes of previous bankruptcies and the toll on the island caused by Hurricane Maria in September.

“The big argument that everyone is waiting for is who gets the sales-tax money — who has control of that money,” said Dan Solender, head of municipal investments at Lord Abbett & Co., which holds $20 billion of state and local debt, including some Puerto Rico debt.

“That a good number of the bondholders have reached an agreement is pushing this forward,” he said. “It’s the first positive movement in that direction in a long time.”

The plan received support from those who insure or hold about $11 billion of Puerto Rico bonds, including Aurelius Capital Management, Monarch Alternative Capital, Fir Tree Partners and GoldenTree Asset Management. It also includes a group that represents residents who hold sales-tax debt.

The proposal calls for owners of sales-tax bonds, known as Cofinas, with the most senior claim on the revenue to recoup as much as 95 percent of their investments. Owners of subordinate Cofinas would get up to 43 percent, while general-obligation bondholders would receive almost 59 percent, according to a summary circulated by the group.

The rally was led by Puerto Rico’s senior sales-tax debt, which was the most actively traded municipal security Monday, though general-obligations also gained. Senior sales-tax bonds due in 2040 climbed to as much as 72.5 cents on the dollar from 59.5 cents Friday, only to pare those gains by dropping to an average of 68.7 cents later in the day. General obligations due in 2035 rose to an average of 44.5 cents from 41.4 cents Friday.

Some investors expressed skepticism about the run up given that the plan was dismissed by the oversight board set up to oversee Puerto Rico’s fiscal recovery. In a statement Monday, the panel said that the restructuring proposal was “completely unaffordable” and out of step with the government’s latest fiscal plan because it would still leave Puerto Rico spending more than it brings in. The creditors said it would reduce the government’s debt by $10 billion.

Dora Lee, vice president at Belle Haven Investments, which holds insured Puerto Rico bonds among its $7 billion of municipal-debt holdings, said the creditor proposal isn’t a viable one for the island.

“It wasn’t a sustainable recovery plan,” she said. “It neglected the fact that the revenue has to come from a viable economic base. That core issue hasn’t been addressed.”

“Whenever there’s a glimmer of good news, the bonds trade up, reality sets in and people realize that again, we’re back at square one,” she said. “Whenever there’s good news out of Puerto Rico you need to take a deep breath and remind yourself you’re dealing with Puerto Rico.”

The rally pushed the price of the general-obligation bonds to the highest since early October. The bonds traded for as little as 21 cents in December, before Governor Ricardo Rossello began offering more optimistic assessments of the island’s recovery from the hurricane.

The island’s government and general-obligation bondholders have been allied against Cofina bondholders, who say sales-tax revenue should be used to repay them before it’s spent for other purposes. The commonwealth and the general-obligation owners want U.S. District Court Judge Laura Taylor Swain to throw out a law that transfers the sales taxes to a governmental agency, known as Cofina, whose only responsibility is to use the cash to pay its bondholders.

“Any kind of progress toward resolutions should translate into prices in some way,” said Matt Fabian, a partner at Municipal Market Analytics Inc. “It at least gives a theoretical anchor at which bond prices can trade.”

Bloomberg Markets

By William Selway and Danielle Moran

May 14, 2018

— With assistance by Martin Z Braun, and Steven Church

DALLAS (S&P Global Ratings) May 16, 2018—S&P Global Ratings believes a proposed settlement announced by a group of Puerto Rico bondholders on Monday could, if executed, lay to rest the conflict over the allocation of pledged general obligation (GO) and Puerto Rico Sales Tax Financing Corp.

Continue Reading

May 16, 2018

The bond market for affordable multifamily housing in California took a step back in 2017.

A year after the California Debt Limit Allocation Committee (CDLAC), which is responsible for administering the state’s tax-exempt private activity bond program, issued $4.8 billion in 2016 to help fund rental housing developments, the amount dropped to $3.4 billion in 2017 – a 30 percent decrease. The result was 114 properties funded in 2017, a drop from 179 funded in 2016.

The decrease included significantly fewer apartments. In 2016, there was funding for 20,671 apartments, but that dropped to 12,185 in 2017 – a stunning decrease of 41 percent in apartments created.

The decrease is a reason for concern in the Golden State and reflects a nationwide drop in bond deals in the wake of the 2016 election and tax reform.

Continue reading.

Novogradac & Company LLP

Published by James R. Kroger on Thursday, May 10, 2018 – 12:00am

• Top gubernatorial candidates lack specifics on fiscal plans
• Angst mounting about what happens when boom turns to bust

Saying goodbye to Jerry Brown is tough for the bond market. A progressive with a frugal bent, the Democratic governor won fans on Wall Street. As analyst Ben Woo put it, “He is the one who saved California.”

So far, his potential successors aren’t making the farewell any easier.

The Democratic frontrunners vying to replace him, Gavin Newsom and Antonio Villaraigosa, have been long on policy promises but, according to bond managers, short on specifics about how they would keep the budget balanced in a state with a $2.75 trillion economy. That’s worrisome to investors eager to avoid a return to deficits, especially given that California’s current boom will inevitably cool.

“The state is pretty well prepared right now. Is the next governor going to squander that?” said Jennifer Johnston, a research analyst in San Mateo, California, for Franklin Templeton Investments, which manages more than $65 billion in municipal debt.

Brown, in his second stint as governor, can be viewed as a tough act to follow from more than just an investor perspective. The 80-year-old has over the last 16 months become the outspoken chief of blue states’ resistance to President Donald Trump’s policies on everything from immigration to climate change. California has challenged the U.S. government at the pace of two lawsuits per month since Trump’s inauguration.

But on Wall Street, Brown is best known for whittling away the $27 billion budget deficit he faced as he took office in 2011 — a time when pundits were comparing California to debt-ridden Greece — and turning around state finances with spending cuts and voter-approved tax hikes. California’s credit rating, once the lowest in the nation, rose to AA-, its best showing since 1999, according to S&P Global Ratings. Officials are estimating a $6 billion surplus in the year that starts in July. Meanwhile, the state’s economy has become the world’s fifth-largest.

Woo, a senior analyst at Columbia Threadneedle Investments in Minneapolis, said his firm bought more California bonds in 2012 thanks to Brown’s handling of the financial crisis. Now that the economy is in vastly better shape, he said it’s a “tall order” to expect the next governor to share Brown’s fiscal discipline.

Voters will pick the candidates in a June 5 primary. As of 2012, the two top vote-getters advance to the general election regardless of party, which could result in an unprecedented match-up of two Democrats for governor. With 27 candidates and many undecided voters, polls have suggested a variety of outcomes.

‘Dodging Questions’

The one consistency has Newsom, a former mayor of San Francisco and the current lieutenant governor, holding a comfortable lead for a spot in the general election. Villaraigosa, mayor of Los Angeles for two terms, ranks second in several surveys, with state Treasurer John Chiang next in the running for Democrats. Among Republicans, the leader is John Cox, a businessman who has never held political office.

The Democratic leaders have talked about easing the state’s dire housing shortage, alleviating the homeless crisis and boosting the education system. Bond managers’ complaint is that they haven’t said enough about how they would pay for such initiatives, nor what they would do in a recession, which Brown himself has repeatedly warned is due to come.

“They’re all dodging hard questions,” said Ksenia Koban, a municipal-credit analyst at Payden & Rygel Investment Management in Los Angeles.

Single Payer

When asked about the criticism, Newsom said his focus on implementing single-payer health care — a goal favored by the most liberal wing of the Democratic party — proves that he’s concerned about the bottom line. While municipal bond analysts see such a move as inherently risky to the state’s finances, if even possible under a Trump administration, Newsom said it wouldn’t be as expensive as the current system that he deems unsustainable.

“If you care about fiscal discipline, if you care about unfunded liabilities and if you care about the growth of government and costs, this issue has to be tamed,” Newsom, 50, said in an interview.

Villaraigosa and Chiang have criticized Newsom’s push as irresponsible without a detailed funding plan, portraying themselves as the best to carry on Brown’s legacy of fiscal conservatism.

Villaraigosa, 65, pointed to his tenure as mayor of Los Angeles from 2005 to 2013, saying he negotiated higher pension contributions from city employees, laid off workers and reduced deficits to avoid bankruptcy. “I have been a strong fiscal steward of taxpayer dollars,” he said. (Michael Bloomberg, founder of Bloomberg News parent Bloomberg LP, has donated $1.5 million to an independent campaign supporting Villaraigosa.)

Chiang, 55, said he’s a “progressive who can handle a checkbook.” He cited his moves as controller to withhold the pay of lawmakers for failing to settle on a balanced budget on deadline, and issuing IOUs as the state faced a cash crunch during the last recession.

Spending Criticism

The wild card is Cox, who placed second behind Newsom in two recent polls. He has railed against current fiscal policies, saying in an interview that only compared to the “spendthrifts” in the Democrat-led legislature can Brown be considered frugal.

“Spending in California is out of control,” said Cox, 62. “The tax burden has gone up tremendously. That’s hardly fiscal responsibility.”

Should Cox advance, he’d likely face a serious challenge going against Newsom or Villaraigosa in the general election, considering that 45 percent of California’s voters are registered Democrats and only 25 percent are Republicans. The other likely pairing is Newsom versus Villaraigosa, and both have yet to show the same level of fiscal discipline as Brown, said Matt Fabian, a partner with research firm Municipal Market Analytics.

“Investors in California have to assume that credit quality could erode,” he said.

Payden’s Koban said the main issues the next governor will face, and that the candidates aren’t addressing, are rising pension costs, an aging population and a tax structure that limits the financial flexibility of cities during a downturn. But residents, much less politicians, aren’t focused on them.

“The problems coming down the pipeline are severe,” she said. “We’re not quite there psychologically as Californians because things are looking rosy and the economy is booming.”

Bloomberg

By Romy Varghese

May 7, 2018, 4:00 AM PDT

— With assistance by Kartikay Mehrotra

The $102 million in state and federal emergency disaster funds given to Long Beach after superstorm Sandy masked financial problems that, with the relief money now drying up, led the city into a fiscal crisis, officials and analysts say.

Long Beach faces a $2.1 million shortfall after making retirement and management separation payments, potential layoffs of city staff, police and firefighters, and a budget that proposes a 12.3 percent tax hike to bridge a $4.5 million revenue deficit next year.

Taxpayers — and state Comptroller Thomas DiNapoli — are asking: How did it come to this?

Long Beach officials in 2017 touted a financial swing from the brink of bankruptcy to being $9 million in the black — a $24.2 million turnaround — but current and former city leaders say the previous collapse was never addressed and stayed hidden because of the disaster relief funds after superstorm Sandy.

“We’re almost where we were before Sandy,” Long Beach City Council President Anthony Eramo said of the current crisis. He also said problems the city faced before Sandy have not gone away. “We knew this would be a tough year and hard decisions would have to be made. . . . I knew the lack of Sandy money would make this a tough year.”

Eramo, DiNapoli, and municipal finance analysts say city officials should have made more difficult decisions such as cutting services and making incremental tax increases in previous years to avoid the larger tax increase proposed this year. The City Council passed a 1 percent tax boost last year — an election year.

The proposed $95 million budget for the fiscal year starting July 1 will mean an average $400 increase for homeowners.

DiNapoli announced last week that his office would audit the city’s finances.

“It is imperative that officials address the city’s declining financial condition during the current budget cycle,” his office said in the annual budget review.

The Wall Street bond rating agency Moody’s Investors Service this month maintained the city’s Baa1 rating — considered a moderate credit risk, but issued a negative outlook, citing cash flow challenges “following years of operating deficits and the City Council’s failure to approve budgeted borrowing to pay for operating expenses.”

Lower ratings can mean higher interest rates and costs of borrowing.

“Any time a local government borrows for operating expenses, we view that as a negative,” Moody’s vice president and senior analyst Rob Weber said.

Long Beach has borrowed to cover retirements and other payments for years.

“It’s identical to putting your budget on a credit card,” said Matt Fabian, a partner with Municipal Market Analysts, a municipal research and consulting firm specializing in the bond market. “It’s not a sustainable practice.”

Newsday

By John Asbury

May 10, 2018 5:16 PM

Unlike wine, serious municipal financial problems, such as underfunded pensions, do not improve with age.

That was a major lessons learned from the 2013 bankruptcy of the city of Detroit, said Eugene Driker, a mediator during the bankruptcy process, who spoke at a municipal finance session at the 2018 ULI Spring Meeting in Detroit.

“The city failed to grasp the seriousness of the situation,” said Driker, of the Detroit-based law firm Barris, Sott, Denn & Driker. “Every day was Christmas in the eyes of some people who had some kind of unrealistic outlook and failure to grasp problems. They were hoping some savior would come in and save them.” Other U.S. cities have pension shortfalls and retiree health care obligations that dwarf those that were faced by Detroit, he noted.

Driker and other panelists noted that the period of bankruptcy was a major time of upheaval for the city, but Detroit has emerged fiscally stronger and now is poised for greater growth. Detroit filed a voluntary petition for relief under Chapter 9 of the U.S. Bankruptcy Code in July 2013.

“I was one of five mediators who helped mediate the creditor claims in bankruptcy,” Driker said. “When we started, none of us thought it would end in five years, and no one thought it would end in 16 months. Since the end of bankruptcy in November 2014, there’s been a remarkable transformation of the city. You see it every day in the neighborhood I live in—and all other places. Many of you are amazed that what you see doesn’t match the dystopian image the city has had for years.”

In bankruptcy, the city shed some $7 billion in debt, restructured another $3 billion in debt, and put an estimated $1.7 billion into improved services. In the bankruptcy, the city cut $7.8 billion from payments to its retired workers and $4.3 billion in retirement health care benefits.

Under the deal dubbed the “grand bargain,” state money was used to support Detroit’s pension funds, and donations from private foundations and the Detroit Institute of Arts were used to protect city-owned art masterpieces from being sold to raise money to pay creditors.

Detroit’s bankruptcy marked a turn in the city’s fate. Along with the city’s economic downfall, however, came rare opportunities for investment, creation, and collaboration. Shortly after filing for bankruptcy, the city began to see major changes in its downtown and Midtown neighborhoods, but more recently Detroit’s resurgence is gaining traction in areas that have been disinvested for decades.

Detroit was insolvent when it filed for bankruptcy protection, said John Naglick, chief deputy chief financial officer and finance director for the city. “The city’s operating strategy had been to issue debt, but the deficit would have been worse,” he explained. “Detroit had gone from 1.8 million residents in 1950 to 700,000 residents at the time of the filing. Legacy costs were consuming 40 percent of the budget and were projected to could climb to 60 percent by 2016. We had three times as many pensioners as workers.”

When the city eliminated $7 billion in debt and unfunded liabilities, “pensioners and retirees took the biggest hit—$3.8 billion,” he said. “It was harsh on retirees, but it allowed the city to restore basic service to residents.”

Bankruptcy allowed the city to have another life, said Jed Howbert, group executive for planning, housing, and development for the city. “I joined the city in May of 2014, and my concern was less about how bankruptcy affected the city but more about where do we go from here?” he said. “There was a feeling of confidence in the future of the city. With the finances on a firm footing, it was a huge bonus in attracting business to the city.”

Following the bankruptcy, there was accelerated growth downtown, which in turn created a stronger real estate market and has led to growth now moving beyond downtown.

“The most important thing that has changed is the narrative of the city—how Detroiters are talking about themselves,” Driker said. “People have a bounce in their step now. There’s a buzz about the city worldwide that has changed the outlook of the city.”

The period during bankruptcy was not a fun time to be in the city, said Sonya S. Mays, president and chief executive officer of Develop Detroit, which builds vibrant, resilient communities and expands opportunities for residents. She was working on Wall Street at the time and decided to come home to help.

“It was deeply personal for me because there were some people in my family who were retirees,” she said. “It was a pretty tough environment, but I never lost sight of the human toll. I got focused on the future of Detroit.”

Once Detroit emerged from bankruptcy, Mays decided to stay rather than return to Wall Street. “It was clear that downtown was doing better, but what about the other areas of Detroit?” she said. “We are trying to create development in parts of the city that haven’t seen development in some time.”

Urban Land Magazine

By Mike Sheridan

May 7, 2018

• Three years after court threw out reform, no progress made
• State’s five retirement funds are short $137 billion

Three years ago today, the Illinois Supreme Court struck down the state’s attempt to cut its employees’ pension benefits to chip away at a retirement-system debt that’s swelled to almost $11,000 for every man, woman and child.

Since then, Illinois’s credit rating was downgraded to the verge of junk, its bonds have tumbled and its largest city — Chicago — was stripped of its investment-grade status by Moody’s Investors Service. And Republican Governor Bruce Rauner and the Democrat-led legislature have made no real progress toward a new plan that doesn’t violate the state constitution’s ban on reducing benefits.

“Illinois failure to address its pension crisis has resulted in further deterioration of the state and cities’ financial condition, exorbitantly high borrowing costs, and an inability to address other critical needs at the state and local level,” said Laurence Msall, president of the Civic Federation, a Chicago nonprofit that tracks state and municipal finances. “Time is not your friend when your liabilities are compounding and your revenues are not.”

The funding shortfall across Illinois’s five retirement systems climbed to $137 billion by last June, a jump of about $17.8 billion since 2015, after the government for years failed to made adequate contributions. That pension deficit — more than four times larger that its debt to general-obligation bondholders — is adding hundreds of millions of dollars in costs to Illinois’s budget each year as the government plows more money in to catch up.

Illinois has been contending with the issue for decades. In 1994, Illinois passed a law that was supposed to ensure that the state had enough assets to cover 90 percent of its liabilities by 2045, though it went on to skip annual payments or fail to contribute enough. At the same time, investment returns were hammered by last decade’s stock-market busts.

“There hasn’t been any progress made,” Dick Ingram, executive director of the Illinois Teachers’ Retirement System, the state’s largest pension. “It’s a case of the numbers have gotten so big that nobody honestly really knows what to do.”

Even as the state is set to pay $8.5 billion to the five retirement systems in 2019, it’s still not enough. Unfunded liabilities keep growing. And the 2019 contribution is more than three times the state’s payment a decade earlier: Illinois paid $2.8 billion to pensions in 2009. By 2045, the projected contribution will be $19.6 billion, according to a March report, based on actuarial valuations.

Illinois has actually made the problem worse since its highest court’s ruling in 2015. In the past, if a pension fund’s assumed rate of investment return got lowered, the state would step up its contribution. But last year lawmakers approved so-called smoothing, allowing the state to phase in hundreds of millions of dollars of those increased contributions. It helped the state ease its budget shortfall temporarily but will be costly over the longer term.

The longer the state doesn’t address the pension crisis, the closer Illinois gets to taxes that are overly burdensome, to credit downgrades, to not paying pensions or even bond defaults, said Richard Ciccarone, president of Merritt Research Services.

Everyone wants to find a “silver bullet,” said Illinois Representative Robert Martwick, chair of the personnel and pensions committee. But he’s exploring any way to save money. He’s held hearings on everything from reducing the debt by selling more than $100 billion of pension-obligation bonds to consolidating downstate police and fire pension funds to save money. The state cannot grow its way out of this problem, Martwick said.

“We’re in some really, really difficult financial times here,” Martwick said in a phone interview. “We’re still digging a hole for ourselves.”

Rauner supports the so-called “consideration model,” which in part allows state employees to choose lower, delayed cost-of-living adjustments in return for ensuring their future raises count toward pensions. Opponents argue this still violates the ban on lowering benefits. “We need more pressure on the General Assembly,” Rachel Bold, a spokeswoman for Rauner, said in an email.

In 2013, lawmakers tried to enact a solution, approving cuts to cost-of living adjustments and a higher retirement age for some workers. The measure was estimated to save more than $100 billion over 30 years. But the court struck down the law unanimously, saying it violated the state constitution’s ban on reducing retirement benefits.

In the wake of the court ruling, unions have been emboldened, according to Jeff Johnson, president of the Municipal Employees’ Annuity and Benefit Fund of Chicago. He says members even quote the court decision to him, noting their benefits are protected. Johnson’s own Twitter page includes a screenshot of one of the most famous lines.

“Crisis is not an excuse to abandon the rule of law,” the May 8, 2015 state supreme court decision reads.

Apparently crisis isn’t enough reason for the government to take action either. At least not in Illinois.

Bloomberg

By Elizabeth Campbell

May 8, 2018, 5:57 AM PDT

SANTA FE, N.M. — Santa Fe is not ready for a public bank, but the city should work with the Legislature and state officials to look into creating a public bank at the state level that Santa Fe and other cities could utilize.
That’s one of the recommendations of the city’s Public Bank Task Force’s final report that was presented to the City Council on Wednesday.

The report concludes that “current legal and regulatory requirements are not conducive to the creation of a State-chartered Public Bank,” and would require legislation to change existing laws. If that were to happen, then state officials could consider forming a public bank.

“We believe this more appropriate statewide scale would justify work needed to amend the current legal and regulatory restrictions,” the report says. “We also think incurring business planning costs and examining capitalization requirements would be justified.”

Several people who spoke during a public hearing on the matter said they were disappointed that the task force determined a public bank wasn’t feasible for the city at this time. But they were encouraged by the prospect of a public bank owned by the state.

Glenn Schiffbauer, executive director of the Santa Fe Green Chamber of Commerce, said 95 percent of businesses in the state are small businesses, which often have trouble obtaining loans. He said a state-owned public bank could help rectify that.

“I think it’s a great start and since we do a lot of lobbying (at the state Legislature) we are willing to help in any way we can,” he said.

City Councilor Renee Villareal, who helped lead the effort to study the possibility of forming a public bank, said she remained encouraged by the report. She promised to introduce resolutions consistent with the task force’s recommendations.

“I’m not forgetting about the public bank effort,” she said. “We’re not done yet.”

Mayor Alan Webber said he supported a state-owned public bank when he ran for governor in 2014.

“I still think it’s worthy of consideration,” he said.

The nine-member task force was appointed by former Mayor Javier Gonzales a year ago to provide information to the City Council about public banking so it could make an informed decision about whether it should take steps to apply for a New Mexico bank charter.

According to the task force’s report, the purpose of a public bank is to “maximize the financial and human potential of the community.”

“Local investing of economic resources can address critical, locally identified priorities in ways current financial entities are not able to accomplish,” the report says.

Benefits of a public bank include keeping public money invested locally, lowering costs for borrowing and lending, and using internal money to finance infrastructure, according to the report.

Albuquerque Journal

By T. S. Last / Journal Staff Writer

May 9th, 2018

Oversight board prepares disclosure requests targeting legal and financial advisers

Puerto Rico’s federal supervisors are preparing to scrutinize the U.S. territory’s bankruptcy advisers, reflecting broader concerns about potential overcharging and conflicts of interest in public contracting, according to people familiar with the matter.

The federal board overseeing Puerto Rico’s finances is considering making new disclosure requests to the law firms and financial experts hired to navigate the largest-ever U.S. municipal debt restructuring, people familiar with the matter said.

U.S. and local lawmakers have criticized the amounts being spent on attorneys and bankers, including the oversight board’s own advisers, at a time when pensioners and creditors are facing cuts. Its initiative is aimed at uncovering any undisclosed side deals or subcontracts and whether any third parties act as pay-to-play gatekeepers for public contracts, the people said.

An oversight board spokesman declined to comment.

Going bankrupt has been an expensive affair for Puerto Rico as it struggles against creditors fighting to maximize their claims and secure top priority in a restructuring. Professional fees in Puerto Rico’s court-supervised bankruptcy are projected to consume $1.1 billion over six years, or 1.65% of the amount of government debt being restructured.

Funding the oversight board itself is expected to cost island taxpayers another $430 million through 2023.

The disclosure requests are expected to cover the oversight board’s legal and financial advisers in addition to the island government’s, people familiar with the matter said. While the scope of the requests hasn’t been finalized, they would go beyond disclosure rules put in place last year after a controversial contract award to power grid construction company Whitefish Energy Holdings LLC.

A federal rescue package approved in 2016 empowers the oversight board to review contracts and to issue subpoenas for documents “relating to any matter under investigation.” Its current policy flags contracts over $10 million for review.

The oversight board has previously addressed potential conflicts of interest in its work, requiring its seven volunteer members to submit financial disclosures to an ethics examiner detailing their sources of income and business interests.

Disclosures were also required of Gov. Ricardo Rosselló’s former oversight board liaison, Elías Sánchez Sifonte, who was criticized by opposition lawmakers for working for law and government relations firms while serving on the board. Mr. Sánchez, who resigned the position last July, said he did nothing wrong and made all required disclosures of his business ties.

A few of Puerto Rico’s bankruptcy attorneys from Greenberg Traurig LLP and O’Melveny & Myers LLP charge fees of more than $1,000 an hour, though the average hourly rate for the firms’ restructuring professionals has hovered around $700, according to court documents.

A Greenberg Traurig spokeswoman said the firm’s contracts require it to disclose any subcontractors it uses to the contracting agency. A spokesman for Puerto Rico’s financial adviser, Rothschild & Co., declined to comment.

In a response three days after this article was published, a spokesman for O’Melveny & Myers said “we do not pay any referral fee or engage in any fee-splitting arrangements with any third-parties for any services provided.”

Rep. Rob Bishop, R-Utah, who chairs a congressional committee with jurisdiction over U.S. territories, has questioned why Puerto Rico needs its own professional teams when the oversight board was designed to represent the island government’s interests in court. The dual representation is partly a function of the rescue law, which hands some policy powers to the board and keeps others with local elected officials.

The bankruptcy at times has pitted the oversight board against Gov. Rosselló, who is defying its mandates to cut pension benefits and eliminate employee protections. Separate legal teams argued over who could control Puerto Rico’s electric monopoly, the board or the governor. His advisers are negotiating repayment terms with bondholders, yet any settlement requires the board’s approval.

Oversight board chairman Jose Carrion told Rep. Bishop in a March letter he would collaborate with the governor to minimize legal fees while suggesting that some duplicative spending was unavoidable “as long as this structure remains in place.”

On a call with reporters last week, oversight board executive director Natalie Jaresko said the best way to cut down on fees was to end the bankruptcy quickly. But she acknowledged that a debt adjustment plan may not be up for court approval for a year or longer.

Creditor appeals could further prolong the legal process if they don’t reach negotiated settlements. The oversight board’s financial framework projects a $6.7 billion surplus over six years for repaying creditors, assuming other labor, pension and tax reforms are enacted.

The Wall Street Journal

by Andrew Scurria

May 9, 2018 12:06 p.m.

Write to Andrew Scurria at Andrew.Scurria@wsj.com

• Senior sales-tax bonds soar to 71 cents on the dollar
• While plan rejected, it moves toward settling major conflict

Puerto Rico bonds rallied after a group of investment firms and insurers reached agreement on a restructuring plan that would allow them to receive larger-than-expected recoveries on their defaulted debt, marking a first step toward resolving a key clash between creditors who have been fighting in bankruptcy court.

The gains, which pushed some securities up by as much as 22 percent Monday, came despite the plan’s rejection by Puerto Rico’s federal financial overseers, who said it would leave the government facing budget shortfalls for years and was put together without their input.

But the framework hashed out by the owners of sales-tax-backed debt and general-obligation bonds shows progress toward resolving their disagreement over who has the highest claim to Puerto Rico’s cash — an issue at the heart of the government’s record bankruptcy. It also offers a baseline that investors could use to estimate what they stand to recover, which has been difficult given the divergent outcomes of previous bankruptcies and the toll on the island caused by Hurricane Maria in September.

“The big argument that everyone is waiting for is who gets the sales-tax money — who has control of that money,” said Dan Solender, head of municipal investments at Lord Abbett & Co., which holds $20 billion of state and local debt, including some Puerto Rico debt.

“That a good number of the bondholders have reached an agreement is pushing this forward,” he said. “It’s the first positive movement in that direction in a long time.”

The plan received support from those who insure or hold about $11 billion of Puerto Rico bonds, including Aurelius Capital Management, Monarch Alternative Capital, Fir Tree Partners and GoldenTree Asset Management. It also includes a group that represents residents who hold sales-tax debt.

The proposal calls for owners of sales-tax bonds, known as Cofinas, with the most senior claim on the revenue to recoup as much as 95 percent of their investments. Owners of subordinate Cofinas would get up to 43 percent, while general-obligation bondholders would receive almost 59 percent, according to a summary circulated by the group.

The rally was led by Puerto Rico’s senior sales-tax debt, which was the most actively traded municipal security Monday, though general-obligations also gained. Senior sales-tax bonds due in 2040 climbed to as much as 72.5 cents on the dollar from 59.5 cents Friday, only to pare those gains by dropping to an average of 68.7 cents later in the day. General obligations due in 2035 rose to an average of 44.5 cents from 41.4 cents Friday.

Some investors expressed skepticism about the run up given that the plan was dismissed by the oversight board set up to oversee Puerto Rico’s fiscal recovery. In a statement Monday, the panel said that the restructuring proposal was “completely unaffordable” and out of step with the government’s latest fiscal plan because it would still leave Puerto Rico spending more than it brings in. The creditors said it would reduce the government’s debt by $10 billion.

Dora Lee, vice president at Belle Haven Investments, which holds insured Puerto Rico bonds among its $7 billion of municipal-debt holdings, said the creditor proposal isn’t a viable one for the island.

“It wasn’t a sustainable recovery plan,” she said. “It neglected the fact that the revenue has to come from a viable economic base. That core issue hasn’t been addressed.”

“Whenever there’s a glimmer of good news, the bonds trade up, reality sets in and people realize that again, we’re back at square one,” she said. “Whenever there’s good news out of Puerto Rico you need to take a deep breath and remind yourself you’re dealing with Puerto Rico.”

The rally pushed the price of the general-obligation bonds to the highest since early October. The bonds traded for as little as 21 cents in December, before Governor Ricardo Rossello began offering more optimistic assessments of the island’s recovery from the hurricane.

The island’s government and general-obligation bondholders have been allied against Cofina bondholders, who say sales-tax revenue should be used to repay them before it’s spent for other purposes. The commonwealth and the general-obligation owners want U.S. District Court Judge Laura Taylor Swain to throw out a law that transfers the sales taxes to a governmental agency, known as Cofina, whose only responsibility is to use the cash to pay its bondholders.

“Any kind of progress toward resolutions should translate into prices in some way,” said Matt Fabian, a partner at Municipal Market Analytics Inc. “It at least gives a theoretical anchor at which bond prices can trade.”

Bloomberg

By William Selway and Danielle Moran

May 14, 2018

— With assistance by Martin Z Braun, and Steven Church

Fitch Ratings-New York-25 April 2018: The escalating trade dispute between the US and China could lower some state and local tax revenues if China’s proposed tariffs on $50 billion of US goods are implemented, Fitch Ratings says. Several states with substantial agriculture and aircraft exports would likely see localized declines in economic activity and tax revenues.

The relative likelihood of the tariffs actually being enacted is uncertain. Early this month China published a list of 120 US products, amounting to $3 billion in exports to China, which will be tariffed. China followed its initial announcement with a second published list of 230 US products ($50 billion worth of exports) that it also threatened with tariffs. President Trump responded by proposing a further $100 billion in tariffs on imported Chinese goods on top of $50 billion of Chinese imports the administration already targeted for near-term tariffs. China reportedly intends to respond to the president’s proposals in the coming weeks. Whether China’s response will take the form of additional retaliatory tariffs, protectionist measures, or some other set of actions, remain to be seen.

Iowa has the highest exposure to losses from agricultural exports to China. Iowa’s 2016 soybean global exports were $3.1 billion, according to the United States Department of Agriculture. Iowa was also the largest exporter of pork and pork products at nearly $2.0 billion and corn at $1.7 billion in export value in 2016. This totaled 3% of Iowa’s 2016 gross state product (GSP), according to the Federal Reserve Bank of St. Louis.

Other US states are also major exporters of soybeans. Illinois exported the greatest quantity of soybeans in 2016 at $3.2 billion, while Minnesota exported $2.1 billion worth of soybeans. However, these state economies are large and diverse and agriculture exports account for a smaller portion of GSP than is true for Iowa.

A broad array of vehicles and vehicle parts would be tariffed if US-China trade disputes accelerate and the tariffs are put in place. Just over half of the state of Washington’s global exports is in the US Census Bureau’s category, “civilian aircraft, engines and parts.” The $46.4 billion of this category the state exported in 2016 equaled 9.8% of Washington’s GSP.

We do not anticipate a loss of imports from China would significantly affect the state economies. US importers have sufficient ability to replace Chinese imports with alternately-sourced products, albeit at a slightly higher expense.

If the tariffs are enacted and are sustained into the medium term, we believe the tariffs could also lower business activity and sales and income taxes derived from both business activity and employment in some places. These negative revenue impacts could coincide with a softening of revenues if this trend continues.

Contact:

Michael D’Arcy
Director, US Public Finance
+1 212 908-0662
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Robert Rowan
Senior Analyst, Fitch Wire
+1 212 908-9159

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Fitch Ratings-New York-30 April 2018: The location of Amazon’s second headquarters (HQ2) will not have a near-term impact on local government ratings or the housing market around the eventual winner, says Fitch Ratings.

The jobs brought by HQ2 will only affect the local governments that can capture the attendant property, sales and income taxes. The projected 50,000 jobs the regions will gain varies from a minimal impact on the New York-Newark-Jersey City MSA, which has a labor force of more than 10 million, to a more significant 7.4% of the labor force in Raleigh, North Carolina. The increase in salaries paying more than $100,000 per year varies as well.

We do not anticipate a change in the local housing markets as the market has enough supply to absorb the increased housing need. The average home price index for the regions rose by 5.9% between first-quarter 2017 and first-quarter 2018. Rents grew more slowly over the period.

Fitch reviewed MSA-level data from the U.S. Bureau of Labor Statistics and the U.S. Bureau of Economic Analysis for the 20 finalist locations from which there are 17 MSAs, as Newark, New Jersey and New York City are in the same MSA, as are Montgomery County, Virginia, and Washington, D.C. Data for Toronto, Canada may not be directly comparable to U.S. data. Fitch believes the MSA is the best measure of overall economic impact, as workers will not necessarily choose to live within the geographic boundaries of the location chosen.

Amazon has narrowed the pool of potential HQ2 locations to 20, and is expected to announce its decision sometime in 2018. There may be a further narrowing of the field before the final announcement.

Contact:

Amy Laskey
Managing Director, U.S. Public Finance
+1 212 908-0568
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Grant Bailey
Managing Director, U.S. Structured Finance
+1 212 908-0544

Robert Rowan
Senior Analyst, Fitch Wire
+1 212 908-9159

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Fitch Ratings-New York-01 May 2018: Although the Kentucky Wired PPP project has won legislative and gubernatorial support for appropriations and bonding authority, securing funding for an $88 million commonwealth commitment to resolve outstanding project issues remains a key financial hurdle, according to Fitch Ratings.

On April 14, Kentucky’s legislature passed SB 200, legislation that authorizes the Kentucky Communications Network Authority (KCNA, a state agency) to borrow up to $110 million by “leveraging future revenues.” The governor signed the bill into law on April 26. The borrowing authorization in SB 200 provides a mechanism for the commonwealth to pay $88 million owed under a memorandum of understanding (MOU) reached between the commonwealth and various project parties to address outstanding supervening events under the project agreement. However, the specifics of how the commonwealth will use the borrowing authority under SB 200 to raise the necessary funding is not established yet, posing an ongoing risk to the project. The Kentucky Wired project remains on Rating Watch Negative due to the uncertainty regarding the future borrowing. Fitch will continue to monitor the situation and will re-evaluate the transaction upon further details of the plan of finance.

To date, Kentucky has abided by all terms of the project agreement and Fitch anticipates the commonwealth will fulfill its MOU obligations, including the $88 million funding commitment. A failure to do so could put the ratings of related project debt and the commonwealth itself at risk, according to Fitch. A failure by Kentucky to meet its obligations under the PPP contracts will also create some uncertainty among market participants, including contractors, infrastructure investors and lenders regarding the vitality of PPP finance for infrastructure more generally.

SB 200 authorizes KCNA to borrow up to $110 million by leveraging future revenues, and KCNA intends to use $88 million of this to fund the commonwealth’s commitment under the MOU. However, the commonwealth has not determined exactly how to raise the necessary funding. Under SB 200, the revenues that could be leveraged are from “provision of government-to-government services and sale or lease of excess capacity.” After discussions with the commonwealth and KY Wired, Fitch interprets that to include various options such as higher availability payments from Kentucky reflecting public sector use of KY Wired’s infrastructure, or leasing of some of KY Wired’s broadband capacity to private vendors. Fitch anticipates the commonwealth, through KCNA, will determine a funding approach within the next several weeks given funding deadlines laid out in the MOU.

Under the MOU, the commonwealth has already paid $2 million of the $88 million settlement using available project liquidity. The next payment of $13 million is due on July 6, with the balance due over the course of a new construction period as outlined in the MOU (ending October 13, 2020 with a longstop date of October 13, 2021).

With SB 200 the legislature also modified the funding for ongoing availability payments for the project over the next biennium. In the separate budget bill, the legislature had designated the availability payments as Necessary Government Expenses (NGEs) without line item appropriations. SB 200 revises that to instead establish specific line item general fund appropriations for the availability payments, as originally requested by the governor.

Failure of the commonwealth to fund the settlement agreement would imperil the MOU and the project itself as Fitch noted in a recent rating action commentary on the project debt (“Fitch Maintains Rating Watch Negative on Kentucky Wired Infrastructure Company’s Senior Revs” dated April 10, 2018). It would also raise concerns for Fitch about Kentucky’s willingness to abide by terms of the project agreement and could lead to negative rating action on the project debt, the commonwealth’s counterparty obligation rating, Kentucky’s IDR, and ratings on approximately $8 billion in appropriation-supported debt. Fitch rated the commonwealth’s counterparty obligation for the Kentucky Wired PPP project using our “Public-Sector Counterparty Obligations in PPP Transactions Rating Criteria” and notched it from Kentucky’s IDR given the strength of the commonwealth’s legal commitments under the project agreement. In Fitch’s view, counterparty obligations under PPP project agreements extend beyond simply making availability and milestone payments to also include adherence to all terms of the agreements as well as related commitments such as those in the proposed settlement agreement.

Contact:

Eric Kim (Commonwealth Analyst)
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Sean Su (Kentucky Wired Project Analyst)
Associate Director
+1-415-732-7576

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com

• Council votes to direct city manager to evaluate venture
• California city could be first to apply technology to munis

Berkeley, California, is inching closer to possibly becoming the first municipality to apply blockchain technology to public finance to raise funds for community projects.

In a unanimous vote Tuesday night, the City Council asked the city manager to evaluate the benefits of a pilot venture that may result in the city selling an undetermined amount of municipal bonds with the technology that underpins cryptocurrencies.

The initiative led by vice mayor Ben Bartlett aims to boost the community’s participation by offering the municipal debt in minibond securities for less than the typical minimum denomination of $5,000. Blockchain, which is a platform that uses so-called distributed ledgers to allow digital assets to be traded securely, would record the bonds and subsequent transactions as soon as they’re issued.

Coupling minibonds with blockchain is “meant to get around Wall Street,” Bartlett said during the meeting before the vote.

A couple members of the council said they needed to know more about the idea. Councilwoman Susan Wengraf questioned the need for using blockchain. “If we’re doing mini muni bonds, which I think is a great idea, isn’t blockchain overkill?” she said.

Bloomberg

By Romy Varghese

May 2, 2018, 7:30 AM PDT

• Once corrupt Bell plans to sell general-obligation bonds
• Seven city leaders were found guilty after the 2010 scandal

Bell, California, is returning to the municipal-bond market for the first time since a graft and corruption scandal that reverberated nationally for the breadth of the venality.

The small city just south of Los Angeles plans to sell about $25 million in general-obligation bonds to refund older securities, according to S&P Global Ratings. The company ranks the debt BBB+, three steps above speculative grade. Bell last sold general obligations in 2007, according to data compiled by Bloomberg. While backed by bond insurance, that debt was also rated BBB+ by S&P.

The bond sale, underwritten by Stifel, is “definitely a good sign” for Bell, said city Finance Director Tineke Norrdin. The offering is expected the week of May 21, said David Brodsly, a managing director at KNN Public Finance, the city’s financial adviser.

In 2010, the Los Angeles Times exposed that politicians and top administrators of the city of about 37,000 people were among the highest paid in the nation even as its residents were among the poorest. The city manager earned nearly $800,000 a year while part-time city council members received about $100,000 annually. Criminal investigations ensued. Seven officials were found guilty of multiple charges, S&P said.

After the arrest of the city administrative officer in 2010, Bell defaulted on a $35 million principal payment on lease-revenue bonds that were privately placed with Dexia Credit Local. The city has since resolved the litigation over the default and has even garnered one-time funds from various settlements related to the bond issue, according to S&P.

Bell’s rating outlook is stable, an indication that the city has “sufficiently reformed its practices and policies and has rehabilitated its finances” since then, S&P said. “The stable outlook also reflects our expectation that, over time, the city’s staff retention will improve and the city’s political culture will continue becoming more transparent and responsive.”

Bloomberg

By Romy Varghese

May 2, 2018

— With assistance by Sophia Sung

New Jersey’s pension-funded ratios have slightly improved from last year, which S&P Global Ratings anticipated when it revised its state general obligation (GO) rating outlook to stable from negative Aug. 25, 2017. Nevertheless, S&P Global Ratings believes state pension liabilities will remain large and a key credit weakness for the foreseeable future.

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Apr. 30, 2018

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Illinois will add to its more than $30 billion debt load with a bond sale on Wednesday, testing yield-hungry investors’ desire to lend to the state as it grapples with continuing political and financial issues.

Illinois is the worst-rated state in the municipal market. The Prairie State’s credit quality has crumbled in recent years as expenses have far outpaced revenues.

Since the 2008 financial crisis, fiscal woes have also afflicted some other states and cities, which, like Illinois, face potentially debilitating pension liabilities. Investors have given most others a pass, though, because states are still generally thought of as safe credits.

That’s because of their ability to raise revenues through taxes and slash expenses, as well as their inability to file for bankruptcy. No state has defaulted on its general obligation bonds since Arkansas in 1933.

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The Wall Street Journal

By Gunjan Banerji

April 24, 2018

• State is selling $500 million of general-obligation bonds
• Yields on its bonds are nearly twice as much as benchmark

When Illinois returns to the bond market this week, its legacy of protracted fights over the budget will cast a costly shadow.

The lowest-rated state’s $500 million sale Wednesday comes as investors demand steadily higher payouts to compensate them for the government’s financial strife. While the difference between the yields on Illinois bonds and top-rated securities narrowed sharply after the state boosted taxes and ended its budget impasse in July, the gap has been steadily rising again amid the uncertainty caused by election-year politics.

Yields on Illinois bonds that mature in 2028 have jumped 0.85 percentage point since they were first sold in October, almost twice as much as those on benchmark debt, according to data compiled by Bloomberg.

“The yields will be more than they should be paying given their rating,” said Dan Solender, head of municipal investments at Lord Abbett & Co., which holds $20 billion of state and local debt, including some issued by Illinois. “They have a lot of headline risk. The budget is going to be not a simple thing to get through.”

Illinois’s finances are still recovering from the record budget impasse that ended in July after the Democrat-led legislature overrode Republican Governor Bruce Rauner’s veto to enact an income-tax hike to help close the deficit. The gridlock drove unpaid bills to a record $16.7 billion, and that backlog is still nearly $9 billion. The red ink reflects its “strained operating fund liquidity and a history of insufficient revenue,” Moody’s Investors Service said in a report this month.

Illinois’s yields have increased modestly compared with those on other bonds in anticipation of the deal, which follows two large offerings at the end of last year, according to Peter Hayes, head of the municipal bond group for BlackRock Inc., which oversees about $129 billion of state and local debt. Those sales, totaling about $6.75 billion, could curb demand because some investors have diversification rules that limit how much debt they can hold from one issuer, Hayes said.

“There are several elements that are definitely a headwind to Illinois here that investors are aware of,” said Hayes, whose firm’s municipal holdings include about $484 million of Illinois general-obligation bonds. “That probably will require premium for them to get market.”

The state has six weeks to approve a spending plan by a simple majority. After May 31, a higher threshold — three-fifths majority vote in each legislative chamber — is required to pass anything. In February, Rauner, a Republican who is seeking a second term in November, presented his budget for the year that starts July 1. The plan relies on $500 million in savings from shifting pension costs to local school districts and universities, which Democrats have said would be a shock to localities.

Moody’s Investors Service and S&P Global Ratings rank Illinois one level above junk. Investors want to be compensated for the state’s risks, said Dennis Derby, a portfolio manager at Wells Fargo Asset Management, which holds $41 billion of municipal debt, including Illinois bonds. His firm is considering buying the deal, he said.

“We don’t view Illinois as a default risk,” Derby said. “However, there’s obviously very strong headline risk and very strong political risk going into an election year with a budget that feels uncertain at this point in time.”

The budget for the year that ends June 30 still has an estimated deficit of $1.5 billion, according to bond documents. Rauner and lawmakers need to cut costs and or adjust revenue, and there’s no guarantee that might be addressed, according to the documents.

“This is a competitive sale and the market will dictate the levels,” Rachel Bold, a spokeswoman for Rauner, said in an email.

But overall, the financial outlook for the state has improved since last summer, said Neene Jenkins, a vice president and municipal credit analyst at AllianceBernstein, which oversees $41 billion of municipals. That’s reflected in the yield penalty the state pays, which jumped to as much as 3.4 percentage points in June. It’s now just about 2 percentage points.

“We saw some progress last summer,” which the market recognizes, Jenkins said. “There’s still work to be done.”

Bloomberg

By Elizabeth Campbell

April 23, 2018, 6:44 AM PDT

Everyone knows the state is a mess. It wasn’t always that way.

However bad you think government might be,” Bruce Rauner tells an audience, “it’s worse.” Rauner, a Republican governor seeking reelection, has plenty of reasons to portray his state as fundamentally broken. It’s a way to explain why he hasn’t been able to make the big changes in Illinois he promised when he ran four years ago. But it’s also a great line for a knowing audience, and the crowd of call center workers in Moline, on the Mississippi River, laughs appreciatively.

Illinois voters have endured a lot from their state government. It hasn’t been just one recession or one administration that’s done the damage, either. It’s been nearly a generation of political upheaval and dysfunction at the state Capitol. “Springfield has not been working for them, and I think voters, residents of Illinois are frustrated and angry. They should be,” Rauner tells me after his Moline event. “Always unbalanced budgets. Not paying pensions. Not growing the economy and creating good-paying jobs. Massive corruption, cronyism and patronage. And four of my nine predecessors have gone to prison. It’s a broken system.”

Nearly everyone agrees with Rauner that the system is broken, but there’s no consensus about why the system is failing. Pick your favorite culprit — legislators, unions, pensions — and you may have a case. But the one thing that current and former elected officials, academics and Springfield insiders cite most is perhaps the most painfully obvious: “Illinois government did work,” says former Gov. Jim Edgar, a Republican who presided over what now looks to be the state’s heyday in the 1990s. “But then we had bad luck with a couple of governors.”

Illinois governors are powerful. They have many executive tools at their disposal that their counterparts in other states don’t possess. As chief executives, they have the biggest say on the state’s financial situation and the biggest platform to tend to the state’s economy. But over the last two decades, public confidence, financial stability and economic growth in Illinois have all suffered.

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GOVERNING.COM

BY DANIEL C. VOCK | MAY 2018

Fitch Ratings-New York-03 May 2018: Tax revenues sold to corporations such as Chicago’s Sales Tax Securitization Corp. (STSC) are not at risk of diversion under the Illinois Pension Code, according to Fitch Ratings. Under a 2017 revision to the Illinois Municipal Code, home rule municipalities can sell revenues or taxes received from the state to not-for-profit corporations that serve as financing vehicles.

These entities, which include STSC (sales tax bonds rated AAA/Stable) and The Bridgeview Finance Corp. (sales tax securitized bonds rated BBB+/Stable) have no pension obligations and therefore there is no legal basis by which their revenues would be diverted by the state comptroller. In fact, under the municipal code the state pledges not to limit or alter the rights and powers vested in the state comptroller, treasurer or department of revenue that would impair any contract made by the transferring unit with the issuing entity, including contracts executed in connection with the issuance of debt. The state also pledges not to alter the basis on which the transferring unit’s share or percentage of receipts transferred to the issuing entity is derived.

Recent changes to the Illinois Pension Code, made prior to the revision of the municipal code, require payments to municipal pension plans to be based on actuarial formulas. Previously, the annual required contributions were based on a percentage of payroll, unrelated to pension funding status. Provisions of the revised pension code require the state comptroller to deduct any portion of the required contribution not paid by the municipality from its allocation of state funds. The proportion that could be deducted ramped up from one-third of the amount received from the state in fiscal 2016 to 100% beginning in fiscal 2018, up to the amount of the delinquent payment. This legislation has recently become a topic of discussion, as the state comptroller diverted $7 million in funding for the city of Harvey to the police pension fund, resulting in significant layoffs. The diversion is being litigated. Harvey has dedicated tax bonds outstanding but the city continues to own the pledged revenues.

Revenues sold through securitizations are not subject to diversion in the event the transferring unit underfunds public safety pension contributions. However, transferring units are still at risk of having other funds diverted in this case. For example, if the city of Chicago (Issuer Default Rating of BBB-/Stable) were to fail to fully fund required contributions to its police and fire pensions, the sales taxes that were sold to the STSC would not be available but the comptroller could divert funds for pension contributions from certain sources otherwise due to the city as designated in the pension code. Fitch expects the city will adhere to its plan to fully fund the pension contributions required by state law.

Contact:

Amy Laskey
Managing Director
+1-212-908-0568
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Arlene Bohner
Senior Director
+1-212-908-0554

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com

• Detroit Financial Review Commission votes unanimously
• Move ends six years of state emergency intervention
• Panel served as check on mayor and City Council after bankruptcy

As David Nicholson left his family-owned PVS Chemicals Inc. headquarters Monday to head to a meeting where the City of Detroit would be released from direct state financial oversight, he saw something out of the ordinary on Detroit’s east side: a street sweeper.

“I don’t think I’ve ever seen a street sweeper,” said Nicholson, CEO of PVS Chemicals’ manufacturing group.

For Nicholson, it was a fitting sight on the day a state commission he serves on voted unanimously to end active oversight of Detroit’s finances, less than four years after the state’s largest city emerged from bankruptcy.

Mayor Mike Duggan’s administration purchased eight street sweepers last year for about $1.7 million, restoring a neighborhood-level service that had been axed in 2010 amid the city’s years-long budget crises.

“I think it comes down to what every business executive looks for, and it’s execution. Detroit was never short on planning. Detroit was short on execution,” Nicholson told Crain’s after the vote. “Over the past three years, whether it was budget process or IT or getting the police on the street or streetsweepers, (Mayor Mike Duggan’s) administration has shown it can execute — and that will give businesses a lot of faith. It gives me a lot of faith.”

The Detroit Financial Review Commission’s vote Monday marks the end of six years of state oversight of Detroit’s finances and management that began with the 2012 consent agreement then-Mayor Dave Bing and City Council agreed to, followed by Gov. Rick Snyder’s appointment of an emergency manager in March 2013 and the city’s bankruptcy declaration in July of that year.

“This is an important day in the history of the city of Detroit,” said State Treasurer Nick Khouri, chair of the Financial Review Commission. “… I’m pleased to say this financial emergency is resolved and I look forward to the city’s continued success.”

For more than three years, the financial review commission has had veto power over city budgets and certain contracts, serving as a check on Mayor Mike Duggan and City Council after their powers were restored at the end of the bankruptcy when state-appointed Emergency Manager Kevyn Orr left town.

Detroit is expected to end the 2018 fiscal year with a $38 million surplus following three fiscal years where surpluses were deposited into a trust fund to pay for future employee pension obligations.

Under the 2014 law that created the commission, the panel will go into a period of dormancy for 10 years.

At any time during those 10 years, the commission could be reactivated should the city’s municipal finances sink back into the years of deficits that prompted Gov. Rick Snyder’s declaration of a financial emergency in 2012.

“I appreciate what you’ve done. I know you’ll be at arm’s length away,” said City Councilwoman Janee Ayers, who chairs the council’s budget and finance committee. “And I hope to not see you within that arm’s length.”

Duggan and City Council members endorsed the Legislature’s creation of the financial commission after lawmakers agreed to give them the ability to shed state oversight if they could get auditors to certify Detroit had three consecutive balanced budgets.

The mayor and City Council President Brenda Jones also were able to get seats on the nine-member commission appointed by the governor and majority party leaders of the Legislature.

“We said clearly and unequivocally to the state Legislature: ‘We support this bill if we’ve got a voice on the commission and we can objectively earn our way out,'” Duggan said. “And all I heard over and over was, “We’ve never seen this before, this kind of unity.'”

Nicholson, who was appointed by Snyder to the commission a year ago, credits the mayor and City Council with working together collaboratively after Emergency Manager Kevyn Orr ran City Hall during the bankruptcy.

“Over the past three or four years under Mayor Duggan and this City Council, there’s been a huge turnaround, and there’s a real faith that you’re going to be heard as a business and city services are there,” Nicholson said.

CRAIN’S CHICAGO BUSINESS

By CHAD LIVENGOOD

April 30, 2018

April 30 (Reuters) – Detroit emerged from post-bankruptcy oversight of its once-shaky finances on Monday after a state of Michigan board decided to end its active supervisory role.

The unanimous vote by the financial review commission, which was created as part of the city’s federal court-approved bankruptcy exit plan, enables Detroit’s elected officials to enact budgets and enter into contracts without first obtaining the board’s approval.

“Today we really do return self-determination to the people, the city of Detroit, and to everybody who made it possible I just want to say congratulations,” Detroit Mayor Mike Duggan told a news conference.

Michigan’s largest city is now free of any state or federal oversight of its finances, police, water, housing and other departments for the first time since 1977, according to Duggan’s office.

In December 2014, the city ended what was then the biggest-ever U.S. municipal bankruptcy after shedding about $7 billion of its $18 billion of debt and obligations.

Last year, city and state officials started predicting the commission would transition in 2018 to a 10-year period of passive oversight as Detroit ended consecutive fiscal years with balanced budgets.

An audit released in February showed a $53.8 million operating surplus in the fiscal 2017 $1.3 billion general fund budget, bringing Detroit to the required three-straight balanced budgets for active oversight to end.

James Spiotto, a municipal bankruptcy expert and managing director of Chapman Strategic Advisors, said while the city’s finances have stabilized somewhat, more work needs to be done.

“It’s like a diet. If you don’t stay on it and if you don’t do the right things to be financially sustainable, you can fall right back to where you were,” he said.

He added that Detroit still faces the task of increasing its revenue base by attracting businesses and residents.

The city’s population, which dropped by 25 percent to 713,777 in the decade ending in 2010, fell to 672,795 in 2016, according to the U.S. Census.

John Hill, Detroit’s chief financial officer, said the city is projecting balanced budgets over the next several years as income and property tax collections have increased since the bankruptcy.

He added that city has begun to set aside money to cover higher-than-expected pension payments starting in fiscal 2024. Detroit is also taking steps to deal with an increase in bond payments beginning in fiscal 2025 with the hope of being able to one day issue general obligation bonds again to finance capital projects, according to Hill.

Some investors are cautious as Detroit’s credit ratings remain solidly in the junk level.

“This is the first step in many that they will have to take to regain the confidence of investors,” said Robert Amodeo, head of municipal investments at Western Asset.

Detroit’s finances came under state scrutiny in 2011, eventually leading to a declaration of a fiscal emergency and the subsequent appointment of Kevyn Orr, a bankruptcy and restructuring lawyer, as the city’s emergency manager in 2013.

Steven Rhodes, the now-retired U.S. judge who presided over the bankruptcy, called Monday’s vote “another extraordinary milestone,” while urging city officials to maintain their focus on neighborhoods, schools and pensions.

Detroit’s bankruptcy, which Orr filed in July 2013, was eclipsed by last year’s Puerto Rico case dealing with the U.S. territory’s $120 billion of debt.

By Karen Pierog

(Reporting by Karen Pierog in Chicago, additional reporting by Suzannah Gonzales in Chicago Editing by Matthew Lewis)

APRIL 30, 2018

• Financial Review Commission votes to end Michigan’s oversight
• Once-bankrupt city achieved three straight years of surpluses

Detroit exited years of state financial oversight Monday, showing the city has made strides toward reversing the long economic and fiscal decline that pushed it into a record-setting bankruptcy.

Michigan’s Financial Review Commission, set up in 2014 to monitor Detroit, voted unanimously to end its oversight of a city that officials said has been under some form of outside supervision since 1975. The vote, which came after Detroit ran three years of budget surpluses, drew applause from residents and activists who attended the meeting in the city’s downtown.

No one expected Detroit to move out of state supervision within three budget years, the soonest time available, according to Mayor Mike Duggan.

“I don’t think anybody expected us to work together so well,” Duggan said Monday before the commission’s vote. “This has been a great collaborative effort.”

Detroit has slowly been on the mend since it eliminated $7 billion of debt in bankruptcy, allowing it to arrest a downward spiral that resulted from decades of population loss, declining tax revenue and the disappearance of automobile-industry jobs. With the economy improving, Detroit’s income-tax collections rose 8 percent in 2017, while rising home prices this year lifted the assessed value of property for the first time in at least 17 years.

“There’s much to do, but much has been accomplished over the last three and a half years,” Michigan Treasurer Nick Khouri said after the commission’s vote. “The progress has been nothing but amazing.”

To keep the recovery going, Detroit needs to continue revitalizing neighborhoods left blighted by vacant homes after residents moved out for decades. The population fell to 673,000 in 2016, down about 6 percent from 2010, according to data from the U.S. Census bureau, and more than a third of its residents live below the poverty line.

Detroit Chief Financial Officer John Hill said in an interview ahead of the vote that the panel will still continue reviewing the city’s financials because it will be required to formally waive its oversight annually for the next decade. Moreover, he has said Detroit may not return to the bond market to issue general-obligation bonds — which cities routinely sell to fund public works — until two to three years from now.

Given the losses that investors took in bankruptcy, even that may be optimistic, said Gabe Diederich, portfolio manager for Wells Fargo Asset Management, which oversees about $40 billion of state and local bonds, including what was formerly Detroit water and sewer debt.

“The city continuing on a step ladder toward improvement, that is a very good thing for their citizens and I think investors,” Diederich said.

“But the economic conditions in Detroit, while improved, still don’t convey material strength,” he said. “While the core has gotten better, you still are surrounded by a ring of pretty distressed areas.”

A full recovery for a municipality the size of Detroit may take more than a decade, said James Spiotto, managing director at Chapman Strategic Advisors, which advises on financial restructuring. The city needs to reinvest, focus on economic development and attracting businesses and residents, he said.

“You’ve got to stay the course,” Spiotto said. “You’ve got to keep fiscal responsibility as a key issue.”

Sandy Baruah, president and chief executive officer of the Detroit Regional Chamber, a business group, is optimistic. He said investment has increased because the private sector is “voting with their feet” and checkbooks.

“When I moved here in 2010, downtown was pretty much dead all the time,” Baruah said. “Now it’s pretty much vibrant all the time. It’s a pretty significant change.”

While parts of Detroit are thriving, others are still economically-depressed and crime-ridden, said Luther Keith, executive director of Arise Detroit, a neighborhood community group. There’s still a “significant number” of residents who feel the progress hasn’t come to their block because the improvements aren’t as widespread as they should be, he said.

“We have not recovered,’’ Keith said. “We have not completed the comeback. We are coming back. There are signs of that, but we still have huge, huge issues that we are confronting, but we are moving the needle in the right direction.’’

Bloomberg

By Elizabeth Campbell and Jeff Green

April 30, 2018

CHICAGO (S&P Global Ratings) May 2, 2018–Following recent approval of Detroit’
s (B+/Stable ICR) latest four-year plan, the state-appointed Financial Review
Commission (FRC) voted on April 30 to waive significant portions of its
oversight powers. This action marks a major achievement for the city and
serves as a good measuring stick for how far it has come on its long road to
stability.

We consider the waiver a positive step for Detroit, although the reduced
oversight in and of itself is unlikely to have a major effect on day-to-day
operations, or a direct effect on the city’s long-term financial trajectory.
This is based on our opinion that the city’s return to balanced operations is
more a result of improved management and cost controls, along with reduced
fixed costs coming out of bankruptcy, as opposed to direct oversight from the
FRC. Given the city’s recent financial performance and the terms under which a
waiver could occur, we anticipated the FRC’s action. In our view, the course
Detroit takes going forward will continue to depend on effective city
management and disciplined spending, and likely ongoing economic growth.

The FRC’s decision to scale back oversight was triggered by three consecutive
years of balanced budgets along with three years of projected balanced
operations (as found in the latest four-year plan), among other areas. Despite
the waiver, the FRC will remain in place for at least another 10 years, though
in an effectively dormant state. Should Detroit revert to deficit spending,
fail to meet outlined pension contributions, or show signs of fiscal distress
(among other things), the FRC would have the authority to rescind its waiver.
We believe the FRC’s continued presence (albeit dormant) and its ability to
return to full oversight will encourage continued balanced budgets and ongoing
improvement to management practices.

We note that much of Detroit’s improved budgetary performance was made
possible by shedding some fixed costs during bankruptcy, including debt
service and retiree costs for pensions and other postemployment benefits
(OPEBs). While some of those costs are gone forever, the upward slope of debt
service and pension contributions could pressure operations. From now on, the
city’s challenge will be to manage these rising costs in relation to economic
growth, and the costs the city incurs to support growth. Post-waiver, the city
reports its focus will remain on its long-term plan to prepare for increasing
debt and pension obligations. It also plans to improve and update policies for
budget reporting and monitoring, as well as those for debt, investment, and
pension funding.

FINANCIAL PROGRESS REMAINS ON TRACK; PROJECTIONS REMAIN CONSERVATIVE

As dictated by the Home Rule City Act, Detroit is required to conduct biannual
revenue estimating conferences and to annually adopt a four-year financial
plan, the first year serving as the adopted budget (these requirements remain
in place, regardless of the FRC). The fiscal 2019 general fund operating
budget is balanced and totals $1.071 billion, a 4.6% increase from the $1.024
billion fiscal 2018 budget. Projections for fiscal 2020 through 2022 are
balanced, with appropriations increasing to $1.114 billion.

Detroit’s revenue forecasts remain conservative, without assuming increases
from economic expansions which have been announced or are already in progress.
Major components of fiscal 2019 general fund revenues include income taxes
(28%), state-shared revenues (generated from Detroit’s proportionate share of
a statewide sales tax (19%); wagering taxes (generated from three local
casinos (17%); and property taxes (12%).

The city forecasts income taxes to grow 2.5% annually through fiscal 2022,
which is conservative when compared to the 3.5% average annual growth the past
five years. Projections take into account modest increases in salary and wages
along with improved collection methods, as the state completes its transition
to processing the income tax on behalf of the city. With the ongoing
employment growth in Detroit, these revenues should continue to increase.

Compared to fiscal 2018 estimates, the city budgeted each of the next three
largest sources of general fund revenue to grow by only 1% or less. The
projections show 0.5% annual growth in state-shared revenues. These
projections are based on the state Treasury Department’s most recent
estimates. Growth in statewide sales taxes and moderation in the city’s
population decline should support steady state-shared revenues. Wagering
taxes, which declined by 1.7% in fiscal 2017 before recovering for an
estimated 1% increase in fiscal 2018, are projected to grow 1% annually. The
city monitors gross receipts at the three casinos as part of its forecasting.
Lastly, the budget includes a return to growth in property taxes, as the
taxable values for fiscal 2019 collections increased for the first time in
years. This is a significant indication of the ongoing development and
stabilization of the tax base. It also follows the city’s significant efforts
to reassess properties to more accurately reflect true value.

The budget funds all debt service requirements and continues to fund the
Retiree Protection Fund (RPF) as scheduled, which includes a voluntary
contribution of $20 million, up $5 million from fiscal 2018. The RPF currently
totals $105 million, and the city estimates it will grow to $125 million (plus
interest) by the end of fiscal 2019. The city expects to continue funding the
RPF at an incrementally increasing level throughout the four-year plan and
thereafter, effectively setting aside dollars that will assist in phasing in a
return to actuarially driven pension contributions beginning in fiscal 2024.
Salaries and wages are the largest general fund cost, and are budgeted for a
6.7% increase, which reflects scheduled wage increases and additions to staff.
Citywide, the total staff headcount is budgeted to increase 5% as the city
works to fill vacant positions.

RESERVES REMAIN VERY STRONG, AMID FOCUS ON CAPITAL

The city’s available reserves increased significantly in recent years
following operating surpluses, and while the city anticipates balanced results
to continue, these reserves are likely to decline due to targeted spending on
rebuilding and revitalizing the tax base, particularly through blight removal,
capital spending, and public safety.

The city projects a general fund operating surplus of $35.8 million in fiscal
2018, and balanced operating results for fiscal 2019. These results will be
offset by one-time spending, however, and likely lead to declines in the
available fund balance. The city estimates spending $50 million in accumulated
general fund surplus dollars on one-time blight removal and capital spending
in fiscal 2018, and another $100 million in fiscal 2019. This follows $68
million of one-time spending on these purposes in fiscal 2017. Additionally,
in fiscal 2018, Detroit used $54 million of fund balance for early debt
redemption on a portion of its Financial Recovery Bonds issued in 2014. One of
the pending budget pressures is increasing annual debt service costs, and by
using fund balance to pay off this debt, the city freed up about $10 million
in annual spending. Currently, combined debt service and pension expenditures
paid from the general fund account for about 10% of its expenditures, and
these costs are projected to increase by $24 million in fiscal 2020 and by
another $10 million in fiscal 2021. This amount remains manageable within the
current plan, but the increases will continue to present future challenges.
Aside from using accumulated fund balance, the city’s remaining capital budget
is almost entirely funded through annual operating revenues. Subsequently, as
annual surpluses lessen, Detroit’s ability to fund one-time capital spending
with these dollars may lessen.

In our view, continued maintenance of very strong reserves will be a
significant credit factor for the city. We also view Detroit’s reinvestment in
the tax base as an important generator of its economic recovery. Continued
revenue growth will be important so that the city can address looming
increases in debt and pension expenditures, along with routine capital needs.
A very strong reserve position will provide the city additional cushion, if
needed, as costs escalate, and if there is economic stagnation.

Detroit ended fiscal 2017 with a general fund available balance of $389
million, or about 44% of general fund operating expenditures. This balance
includes $169 million in unassigned reserves, $62 million in the (required 5%)
budget reserve, and $158 million in other assigned reserves. Comparatively,
the fiscal 2016 available balance was $356 million (40%). Neither of these
amounts include the city’s RPF, which grew to $90 million in fiscal 2017, from
$30 million in 2016. The RPF will be used solely for future pension
contributions.

FINANCIAL REVIEW COMMISSION AND OVERSIGHT

Created in 2014, the FRC was tasked with providing oversight for the city,
including review and approval of budgets and the long-term financial plan;
review of revenue estimates; approval of contracts and collective bargaining
agreements; monitoring the issuance and payment of debt; and ensuring
adherence to the POA, statutory requirements, and overall sound fiscal
practices.

On April 30, 2018, the FRC commission voted to scale back most of its
oversight by eliminating the requirement for it to approve the budget,
long-term plan, contracts, and collective bargaining agreements, in addition
to other requirements. This follows the city meeting certain conditions,
including three years of deficit-free budgets, a balanced four-year plan,
adherence to all statutes and provisions of the POA, and timely servicing of
debt.

Under the terms of the waiver, the FRC will continue to meet monthly to review
city reports, and it will annually have to vote on the oversight waiver.
Ongoing reporting requirements to the FRC will include budget-to-actuals, cash
flows, and debt and pension status updates. The city will need to continue to
meet the requirements that led to the waiver for 10 consecutive years before
the FRC can completely dissolve. We understand that an added requirement for
the continued oversight waiver is that the city adhere to its planned RPF
funding strategy, specifically the voluntary contributions.

The FRC may rescind the waiver at any time if any of these requirements are
not met, or if it determines the city is returning to fiscal distress; if the
waiver is rescinded, the FRC will resume full oversight. Should that happen,
the city would need to meet these conditions again for at least three
consecutive years, after which the reduced oversight would return for 10 more
years. We view the addition of the RPF funding plan to the waiver
determination as a positive development, as even though the RPF funding is
still not legally required, failure to adhere to the plan could trigger a
return to full oversight.

Only a rating committee may determine a rating action and this report does not
constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world’s
leading provider of independent credit risk research. We publish more than a
million credit ratings on debt issued by sovereign, municipal, corporate and
financial sector entities. With over 1,400 credit analysts in 26 countries,
and more than 150 years’ experience of assessing credit risk, we offer a
unique combination of global coverage and local insight. Our research and
opinions about relative credit risk provide market participants with
information that helps to support the growth of transparent, liquid debt
markets worldwide.

Primary Credit Analyst: John Sauter, Chicago (1) 312-233-7027;
john.sauter@spglobal.com

Secondary Contact: Jane H Ridley, Centennial (1) 303-721-4487;
jane.ridley@spglobal.com

CHICAGO, April 25 (Reuters) – Investors seeking hefty yields helped Illinois’ $500 million bond sale on Wednesday result in narrower spreads over the municipal market’s benchmark scale.

Yields topped out at 4.88 percent for bonds due in 2043 in the two-part general obligation bond competitive sale won by Bank of America Merrill Lynch.

“It’s just a lot of money looking for yield,” said John Mousseau, fixed-income director at Cumberland Advisors.

As the lowest-rated U.S. state, Illinois has had to pay a substantial penalty to sell debt to investors worried about its ongoing political and financial problems, which include a huge unfunded pension liability and chronic budget deficits.

Spreads over Municipal Market Data’s benchmark triple-A yield scale narrowed roughly 3 to 15 basis points from where the state’s bonds had been trading in the secondary market, according to MMD, a unit of Thomson Reuters.

Still, the 4.55 percent yield on the deal’s 10-year bonds was much higher than 3.38 percent yield in the same maturity for similarly rated LaGuardia Airport bonds that were priced on Tuesday.

“It is difficult to understand why investors would be more comfortable with the 3.38 percent 10-year yield of a bond (subject to the Alternative Minimum Tax) secured by Delta Airlines over a 4.55 percent 10-year yield for Illinois general obligation bond, despite the state’s significant fiscal challenges,” said Alan Schankel, municipal strategist at Janney Montgomery Scott.

Nicholos Venditti, a portfolio manager at Thornburg Investment Management, said the Illinois bond yields should have been even higher given uncertainty over whether the nation’s sixth-largest state will pass a budget for the fiscal year that begins July 1.

An impasse between the state’s Republican governor and Democrats who control the legislature left Illinois without complete budgets for an unprecedented two fiscal years and widened the spread for 10-year bonds to 335 basis points last June. The enactment of a fiscal 2018 budget and income tax rate hikes over Governor Bruce Rauner’s vetoes in July saved the state’s credit ratings from falling into junk.

Illinois said it sold its latest debt at an overall borrowing cost of 4.72 percent.

“We are very pleased with the strong response that the state received on today’s competitive bids, particularly given the recent volatility in the municipal bond market,” Kelly Hutchinson, Illinois’ capital markets director, said in a statement.

Tax-exempt bond prices dropped on Wednesday, boosting yields 2 to 8 basis points on MMD’s scale.

Reporting by Karen Pierog in Chicago Editing by Matthew Lewis and Dan Grebler

RBC Capital Markets expands relationship with Bloomberg Terminal services

NEW YORK, April 26, 2018 /PRNewswire/ — Bloomberg announced today that RBC Capital Markets has added Bloomberg’s evaluated pricing service (BVAL) to its list of vendors that will independently verify prices on its municipal bond holdings. This announcement marks the growth of Bloomberg’s relationship with RBC Capital Markets, whose parent company, Royal Bank of Canada, already uses a number of Bloomberg products across its enterprise.

RBC Capital Markets is a premier global investment bank providing expertise in banking, finance and capital markets to corporations, institutional investors, asset managers and governments around the world. They are one of the largest municipal markets and finance operations in the U.S., achieving and maintaining a top five national ranking as a senior manager of negotiated municipal issues. RBC Capital Markets will now use Bloomberg’s evaluated pricing, BVAL, for independent price verification. In addition, Bloomberg provides broad coverage of U.S. fixed income securities, access to in-house evaluator teams and transparency into its pricing models through Bloomberg Terminal screens.

“As a top five firm in negotiated underwritings in the U.S., RBC Capital Markets places great emphasis on accuracy and transparency in pricing,” said Keith Solomon, Managing Director and Deputy Head, Municipal Products at RBC Capital Markets. “Bloomberg’s reputation for data quality and transparency were key factors in making our decision.”

BVAL draws on real-time access to market observations from a variety of contributed sources, such as reporting facilities, trading venues and market-makers. Traders, portfolio managers and pricing professionals gain transparency into how prices were derived by accessing BVAL through the Bloomberg Terminal service. Today, BVAL prices 2.5 million fixed income securities, including nearly 1 million municipal bonds. Prices are recalibrated three times a day using the most current and relevant trade data available.

“Bloomberg is offering innovative solutions for the municipal market that provide increased transparency and workflow efficiencies. We have integrated BVAL with the Bloomberg Barclays indices, released AAA as a market standard Muni curve and integrated yield spread analytics into sales and trading workflows,” said Varun Pawar, global head of Bloomberg’s evaluated pricing service.

BVAL prices are the result of data-driven approach and are closely monitored by a team of municipal market experts to help ensure reliability and relevance of data that reflects the market objectively. Evaluators on Bloomberg’s municipal bond valuations team have an average of 15 years of industry expertise.

BVAL is the primary pricing source for the Bloomberg Barclays bond indices which are widely recognized benchmarks for fixed income investors.

To learn more about Bloomberg’s evaluated pricing service for fixed income please visit www.bloomberg.com/professional/product/pricing-data/

About RBC Capital Markets
RBC Capital Markets is a premier global investment bank providing expertise in banking, finance and capital markets to corporations, institutional investors, asset managers and governments around the world. We serve clients from 70 offices in 15 countries across North America, the UK, Europe and the Asia-Pacific region. Our more than 7,400 professionals deliver the experience and insights required to raise capital, access markets, mitigate risk and acquire or dispose of assets for clients worldwide. We are consistently ranked, by third-party sources, among the 10 largest and most significant investment banks globally.

About Bloomberg
Bloomberg, the global business and financial information and news leader, gives influential decision makers a critical edge by connecting them to a dynamic network of information, people and ideas. The company’s strength – delivering data, news and analytics through innovative technology, quickly and accurately – is at the core of the Bloomberg Terminal service. Bloomberg’s enterprise solutions build on the company’s core strength: leveraging technology to allow customers to access, integrate, distribute and manage data and information across organizations more efficiently and effectively. For more information, visit www.bloomberg.com or request a demo.

The data included in these materials are for illustrative purposes only. The BLOOMBERG TERMINAL service and Bloomberg data products (the “Services”) are owned and distributed by Bloomberg Finance L.P. (“BFLP”) except that (1) Bloomberg L.P. and its subsidiaries (“BLP”) distribute these products in Argentina, Australia and certain jurisdictions in the Pacific islands, Bermuda, China, India, Japan, Korea and New Zealand and (2) Bloomberg Index Services Limited is the administrator of the Bloomberg Barclays indices. BLP provides BFLP with global marketing and operational support. The following are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries: BLOOMBERG, BLOOMBERG ANYWHERE, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG PROFESSIONAL, BLOOMBERG TERMINAL and BLOOMBERG.COM. Absence of any trademark or service mark from this list does not waive Bloomberg’s intellectual property rights in that name, mark or logo. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. All rights reserved. © 2018 Bloomberg.

There is close to $20 million earmarked for affordable housing development in the next five years, but a proposed ordinance for a new land bank corporation that could leverage those funds is the subject of a disagreement between housing justice advocates and city officials.

Over the weekend, ahead of the Charlottesville City Council meeting on Monday, organizers with the Public Housing Association of Residents called for the council to “Keep the Land Bank Clean.”

Though city officials say they want the land bank’s primary goal to be the development of affordable housing, housing justice activists are concerned that city staff wants several high-level city officials to serve as the initial members of the governing board and create bylaws, policies and procedures after the ordinance is approved.

Initially endorsed by the council last fall, the proposed ordinance would enable the creation of a corporation that could acquire and remit property for the development of affordable housing or certain public uses.

A staff report on the proposed ordinance shows city staff and members of the Housing Advisory Committee, which was tasked with working with staff to obtain community input on the proposal, came up with slightly divergent recommendations for the proposal.

In a post shared on PHAR’s Facebook page Saturday, the group asked that there be community control and transparency for the proposed land bank corporation.

Brandon Collins, an organizer with the resident association, echoed other concerns mentioned in the post.

He said he is concerned city officials could bypass the Charlottesville Redevelopment and Housing Authority and make “sweetheart deals” with private developers that will result in the creation of housing that is still unaffordable for extremely low-income households making less than 30 percent of the area median income, which is approximately $75,000.

“The bylaws will determine the mission of the land bank,” Collins said Monday afternoon. “There’s a potential for good here, but that can be bypassed. We need more low-income representation and community control.”

The staff report for the proposed ordinance says staff thinks a city councilor, the city manager, the city finance director and the director of the office of economic development should serve as the initial members of the governing board.

Otherwise, per each recommendation, the proposed governing board would be almost identical and include a member of the Housing Advisory Committee and two people who are “participants in an assisted housing program.”

Collins said several activists and the housing advisory committee wanted several operating procedures to be established as part of the ordinance. For example, per the committee’s recommendation, the corporation will only retain property in partnership with the housing authority and solicit proposals from housing nonprofits before seeking to sell the land to another entity. The committee also recommended the land bank corporation have a contractual right to first refusal whenever the city seeks to sell off any real estate it owns.

The staff report explains why city officials declined to endorse the advisory committee’s recommendations and did not want to limit the use of land acquired by the land bank corporation to affordable housing development.

“Once the Land Bank is created and set-up, it becomes a separate legal entity, Staff strongly recommends that no limitations be put on the City as to acquisition and disposition of property as this may limit the City’s ability to conduct its necessary business.” the report says. “Likewise, the City should not put limitations on the operating policies and procedures of the Land Bank.”

Stacy Pethia, the city’s housing development specialist, said city officials want to establish initial control of the board and include a private finance expert to make sure public funds are being used wisely and transparently.

According to the report, the ordinance says half of all real estate property tax collected on land conveyed from corporation shall be remitted to it.

“Because that’s public money,” Pethia said, “we really should have people who are accountable in city government and who can make sure that money is appropriated in the most appropriate way.”

She also said the city does not want to limit what the land is used for, as some parcels may not be suitable for the affordable development of low-cost housing. She said the ordinance will require that the land have some kind of public use.

“If the parcel is located in a floodplain, it would be too expensive to fix in order to build affordable housing,” Pethia said. “It would just make the provision of affordable housing financially unfeasible, but it could be used as a community park.”

The agenda for Monday’s council meeting included a presentation of an annual report on housing in the city.

The a scheduled discussion about the proposed land bank ordinance, the presentation of the housing report and other agenda items, such as a public hearing on a proposed renaming of Justice and Emancipation parks, an annual review of the Office of Human Rights and a $11.7 million bond issue, had yet to begin by print deadline Monday.

According to city finance officials, the $11.7 million bond issue would pay for several Capital Improvement Program projects from the 2017 and 2018 fiscal years.

The funds would be used to complete the track renovations at Charlottesville High School, for street and sidewalk improvements, for renovations to the Charlottesville Circuit Courthouse, for a new spray park at Tonsler Park and for improvements to the city’s water, sewer and stormwater systems.

THE DAILY PROGRESS

BY CHRIS SUAREZ

Apr 16, 2018

Chris Suarez is a reporter for The Daily Progress. Contact him at (434) 978-7274, csuarez@dailyprogress.com or @Suarez_CM on Twitter.

The city of Harvey last week made huge cuts to its police and fire departments after the state diverted more than a million dollars directly into its underfunded pension systems.

Under a law passed several years ago, the Illinois comptroller is required to divert state money directly to pension funds that have been shorted by municipal leaders, should the funds request it.

While the consequences in Harvey are dire, a new report finds that city is hardly alone. Around the state, police and fire pensions have had an average funding ratio of 60 to 67 percent for the last decade.

Continue reading.

Chicago Tonight

Nick Blumberg | April 16, 2018 4:32 pm