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.

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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.

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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.

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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

SAN JUAN, Puerto Rico — A majority of federal control board members approved new austerity measures for Puerto Rico on Thursday, saying they would help revitalize the economy and create more jobs amid the U.S. territory’s 11-year recession, while the island’s governor fired off a flurry of tweets promising to defy them.

The measures contained within several fiscal plans that will serve as the island’s economic blueprint for the next five years include a 10 percent average cut to a pension system facing nearly $50 billion in liabilities.

Other measures include the closure of prisons, consolidation of dozens of state agencies and significant reductions in government subsidies to Puerto Rico’s 78 municipalities and its largest public university. The board also said Puerto Rico’s government should cut sick leave and vacation pay by half and eliminate a Christmas bonus.

“No one should believe these reforms are being implemented without clear and direct benefit to the people of Puerto Rico,” said Natalie Jaresko, executive director of the board that was set up by Congress. “This will require tough choices and disciplined execution, but the payback is clearly worth it.”

One board member, Ana Matosantos, voted against the plans, saying they cut too deeply and do not provide a realistic path to a turnaround for Puerto Rico’s government.

“I cannot support too much pain for too little promise,” she said. “There is simply too much risk, too much downside for the people of Puerto Rico and its future under these plans.”

Gov. Ricardo Rossello disagreed via Twitter while Jaresko was still talking, saying the board doesn’t have the power to implement any austerity measures.

“Our position has always been clear: issues that are not in line with my government’s public policy will not be carried out. Period,” Rossello tweeted.

The board could go to court seeking to force Rossello to enforce the measures. Just a month before Hurricane Maria struck last year, the board sued Rossello for refusing to implement proposed furloughs and pension cuts.

Board chairman Jose Carrion said he trusts the government will comply and that if it doesn’t, the board will revisit the issue. “That would include legal action,” he said.

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The board put together seven fiscal plans for Puerto Rico’s government and public agencies. The three main plans were approved Thursday, nearly a year after the U.S. territory filed for what is the largest municipal bankruptcy ever in the U.S. Four more plans remained to be voted on Friday.

Hours before the meeting began Thursday, Puerto Rico’s government announced it would try to trim its workforce by offering some workers, including in police and education departments, inducements to leave.

Gerardo Portela, executive director of the island’s financial authority, said such workers can keep receiving their salary for a certain period as they transition to the private or nonprofit sector.

The board said the government needs to consolidate its 114 agencies into 22 groups as well as consolidate police stations and replace officers performing civilian duties with “less expensive” civilian personnel.

During Thursday’s meeting, some government officials said they might consider labor reforms and other measures in the future if needed, an idea that was rejected by board members.

“At some point it has to be today that we act. It can’t always be tomorrow,” said board member Andrew Biggs.

On broader economic matters, the board wants Puerto Rico’s government to make a Christmas bonus voluntary for private employers and allow businesses to dismiss workers without first having to prove just cause. It also is calling for the minimum wage for workers 25 and older to increase by 25 cents an hour under certain conditions, and says the government should increase a labor force participation rate that stands at 42 percent, the seventh lowest in the world.

These and other labor changes would to generate some $460 million in savings over the next five years, the board says.

By THE ASSOCIATED PRESS

APRIL 19, 2018

Fitch Ratings-San Francisco-17 April 2018: Capital spending at California water and sewer utilities is likely to increase to address water supply reliability and regulatory requirements, according to a new special report from Fitch Ratings. Capital investment is needed for infrastructure maintenance, water supply reliability, and new supply development. In response to recent drought and state mandated conservation efforts, many utilities raised rates which have pushed some utilities close to or above Fitch’s affordability threshold.

“Water utilities may face increasing pushback and decreasing rate flexibility going forward, which could impact how well utilities are able to manage their finances,” said Shannon Groff, Director, Fitch Ratings.

Fitch-rated California water and sewer agencies maintain strong credit profiles overall with an average rating of ‘AA’, consistent with Fitch’s average rating across the sector. While utilities in the state face increasing business pressures, Fitch believes that most utilities have sufficient capacity to manage through these risks and maintain credit quality. Like other water and sewer utilities across the country, California utilities benefit from a 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.

Credit quality could come under pressure for individual utilities where there is an unwillingness to raise rates to support current and projected financial metrics, particularly in instances surrounding increased cost pressures or declining consumption. However, Fitch expects these instances to be rare given the historical willingness of California utilities to preserve their financial results despite operating challenges.

“Southern California needs the most water utility investment as it is the most exposed to supply volatility. However, utilities state-wide have demonstrated strong comprehensive long-term capital and financing planning to manage risks,” added Groff.

The report, ‘California Water: Strong Credits but Operating Risks Abound,’ is available at www.fitchratings.com.

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

• Bonds gain as plan projects bigger surplus before debt bills
• Governor rejects panel’s plan for cutting retirement benefits

The federal board that oversees Puerto Rico’s finances approved a multi-year fiscal plan that aims to pull the commonwealth out of a decade-long recession by cutting spending, improving tax collections and taking steps to encourage businesses to expand on the hurricane-ravaged island.

The vote for the austerity plan sets up a clash with Governor Ricardo Rossello, who opposes proposed cuts to retirees’ pensions and said the board has no authority to impose them over his objections. The chairman of the U.S.-appointed panel, Jose Carrion, said it’s willing to challenge Puerto Rico in court if the plan isn’t implemented by the legislature and the governor.

The panel projects that the recommendations would result in a $6.7 billion surplus over the next six years, before debt-service payments, the highest estimate since the outlook was redrawn several times to reflect the impact of Hurricane Maria.

“The new fiscal plan provides a blueprint for structural reforms and fiscal measures that if implemented in full and on a timely basis will give Puerto Ricans what they need and deserve: a growing economy with more and better jobs, a 21st century electricity grid, resilient infrastructure and an effective and efficient public sector,” Natalie Jaresko, the board’s executive director, said during the meeting in San Juan.

The vote comes a day after the board released the latest forecast, buttressing the optimism among investors that they stand to recover more on the bankrupt island’s debt than they previously expected, despite uncertainty about how closely Rossello will implement the policies it assumes. General obligations maturing in 2035 traded Thursday at an average of 42.5 cents on the dollar, up from 41.7 cents on Wednesday, data compiled by Bloomberg show. The bonds have rebounded from a record-low of 20.75 cents on Dec. 5.

The plan, which will serve as a blueprint as the board negotiates with creditors in bankruptcy over how to restructure Puerto Rico’s $74 billion debt, drew criticism from Rossello over its calls for cutting pension benefits by an average 10 percent beginning in 2020 for some retirees. Some board members approved the plan despite their stated reservations, while one, Ana Matosantos, dissented, saying it will fall too heavily on already impoverished residents.

“I am simply not willing to support massive cuts to the safety net,” she said. “I cannot support too much pain with too little promise.”

But Jaresko said the step is necessary to ensure that the pension checks can be paid, given that the government retirement system is depleted.

“The board’s intention is to ensure retirees get a pension despite the fact that there are no funds in the pension plan to do so while ensuring that current government employees can have more confidence in their future pensions and will have more control over them,” Jaresko said.

Rossello has resisted taking such a step and on Thursday criticized the board for including measures he said it can’t implement, saying it casts doubt on the financial projections. A member of his administration reiterated his views at the panel’s hearing.

“It would be inhumane to impose any further freeze or reduction in benefits upon them,” said Gerardo Portela, the executive director of Rossello’s fiscal agency. “The board’s proposed cuts arbitrarily would place the greatest burden on those retirees least able to afford it.”

The plan would reduce allocations to municipalities, the University of Puerto Rico and public schools and consolidate government departments and agencies. Labor reforms include continuing the central government’s pay freeze through fiscal 2023 and eliminating Christmas bonuses for all public employees. To help spur business growth, the plan seeks to ease some regulations and speed up the island’s permitting process.

“The government believes that through meaningful and significant fiscal and economic measures set forth in its new fiscal plan, Puerto Rico will be in position to achieve a sustainable level of debt and long-term economic growth and recovery without impairing pensions and Puerto Rico jobs,” Portela told the board.

The board also approved multi-year fiscal plans for the Puerto Rico Electric Power Authority and the Puerto Rico Aqueduct and Sewer Authority.

Bloomberg Markets

By Michelle Kaske, Yalixa Rivera, and Jonathan Levin

April 19, 2018

• Estimates $6.7 billion six-year surplus before debt payments
• Projection suggests more money may be free to pay creditors

On Wednesday, the second blackout in a week hit Puerto Rico as the decrepit power system went out again. Hours later, the territory’s federal oversight board said that if all goes as planned, the government should soon start seeing budget surpluses big enough to pay a sliver of its debt.

But residents like Marie Rivera were doubtful — and a little angry, too.

Blackout in Old San Juan on April 18.Photographer: Jose Jimenez/Getty Images
“It’s not fair to pay the bondholders, when the Puerto Rican people are still suffering the consequences of what Hurricane Maria left us,” said Rivera, a 38-year-old single mother and hotel sales manager in San Juan. “This is the type of situation that leaves you wondering if it’s worth making all these sacrifices, or if it’s better to just go and move to the States.”

The federal board, created by the U.S. Congress, is trying to chart Puerto Rico’s resurrection from a financial crisis that built over years, only to be temporarily worsened by the September storm that left its electricity system in tatters and caused thousands of residents to leave.

By cutting spending, improving tax collections and taking steps to encourage businesses, the board is projecting that Puerto Rico’s central government can swing to a $6.7 billion surplus over the next six years before accounting for debt payments. That’s about $400 million more than a previous estimate from Governor Ricardo Rossello, whose steadily more sanguine forecasts caused bond prices to rally this year, even though how much will be repaid will be hashed out in bankruptcy court.

But the numbers are based on the notion that Puerto Rico’s growth prospects have actually improved since Hurricane Maria slammed into the island as a powerful Category 4, battering infrastructure and hobbling its already feeble economy. Not long before the plan was released, the island lost power yet again, the latest in a series of episodes that show it’s still a volatile place to live and do business, even seven months after the storm.

The power utility said some 75 percent of customers had power back by Thursday morning, but it remained intermittent in many areas and the incident had already caused island-wide chaos.

On Wednesday, hospitals and the main international airport temporarily ran on emergency power. A generator fire filled the streets of a trendy San Juan neighborhood with smoke, and hundreds of businesses were forced to close.

The outage was attributed to an excavator incident involving a company subcontracted to help in power restoration efforts. Another blackout that occurred last week, affecting more than 800,000 clients, was caused by a fallen tree.

The new fiscal projection marks the latest boost to the estimates for the financial recovery of the territory, which is set to receive about $62 billion of federal aid and insurance money to help rebuild. Earlier increases in surplus estimates have sparked rallies in Puerto Rico securities, causing some prices to double since December.

General obligations with an 8 percent coupon and maturing in 2035, the island’s most actively traded security, changed hands Thursday for an average 42.4 cents on the dollar, up from a record-low 20.75 cents Dec. 5, data compiled by Bloomberg show.

Desmond Lachman, a resident fellow at the American Enterprise Institute and former deputy director of the International Monetary Fund, said he’s concerned that some of the billions in U.S. taxpayer aid destined for the disaster recovery may ultimately end up in the hands of bondholders.

“My concern is that they’re just going to use U.S. taxpayer money to bail out the creditors, but meantime the island is going to languish,” Lachman said.

The federal board plans to certify the fiscal plan Thursday in San Juan. Among other things, the plan calls for austerity measures, including cutting pension benefits by an average of 10 percent beginning in 2020 to curb spending and repair a retirement system that’s out of money. Rossello has balked at reducing pensions, saying it would place an undue burden on public workers and retirees. The board maintains that there needs to be shared sacrifice, and any cuts require legislative approval.

The turnaround plan, which has the stated purpose of fixing the island’s finances and reviving an economy stuck in a decade-long recession, will cut spending for schools and municipalities and try to boost growth through labor reforms and relaxing regulations. Congress created the federal board in 2016 to address Puerto Rico’s debt crisis, as part of legislation that also gave the island a path to filing a form of bankruptcy.

Lachman, the former IMF official, said he questioned the logic of any plan that paints a rosy economic picture when the island is facing accelerating emigration. The island has lost about 2 percent of its population every year for the past four, without counting the massive but largely unaccounted-for exodus after Maria.

“What kind of credibility can they have if they make one projection before the island gets hit by a once in a lifetime hurricane, and then suddenly it improves the situation?” said Lachman. “It just makes no sense at all.”

Bloomberg

By Michelle Kaske, Yalixa Rivera, and Jonathan Levin

April 19, 2018

• Panel projects $6.7 billion through 2023 before debt is paid
• Rising forecasts have fueled a rally in the island’s bonds

The turnaround plan from Puerto Rico’s federal overseers projects the island will have a surplus of $6.7 billion over the next six years before debt payments after it takes steps to cut spending and revive the economy, about $400 million more than Governor Ricardo Rossello estimated earlier this month.

The projections mark the latest boost to the estimates for the financial recovery of the territory, which is receiving an influx of federal aid and insurance money to help rebuild from Hurricane Maria. Rossello previously raised his forecasts three times in as many months, triggering a rally in the island’s debt that’s caused some prices to double since December.

The panel, which was given power by Congress to impose measures on the territory’s government, is set Thursday to approve the multi-year turnaround plan for the bankrupt island, Jose Carrion, the board’s chairman, said in a statement. It includes an average 10 percent cut in pension benefits for certain retirees, reduces spending for schools and municipalities and takes steps to foster faster economic growth.

“We now urge the government to move decisively on implementation of these necessary reforms upon certification of the proposed new fiscal plans,” Carrion said. “Only with bold structural reforms, reinvestment in the people of Puerto Rico, and necessary fiscal measures can Puerto Rico avoid ongoing deterioration of its economy and ensure the fiscal ability to provide services to the residents and businesses of the island.”

The board’s pension changes require legislative approval. Rossello has said reducing pension payments places an undue burden on public workers and retirees. The board maintains that there needs to be shared sacrifice, given that Puerto Rico’s largest retirement system has run out of cash and relies on the government’s operating budget to pay retirees.

The fiscal plan projects a surplus, before debt payments, every year through fiscal 2023 as some $62 billion of federal aid and insurance money from Hurricane Maria help lift an economy that’s shrunk in the past decade. Rossello has revised the fiscal plan four times this year to include the affects of Hurricane Maria, which struck in September, and to incorporate the board’s recommendations.

Puerto Rico’s estimated surplus is still short of what it needs to make payments on its $74 billion debt. Annual shortfalls total $8.8 billion over the next six years if the commonwealth paid principal and interest to bondholders, according to the plan. Puerto Rico hasn’t been making those payments as it goes through its bankruptcy process.

But the latest figures are far more optimistic than those made soon after Hurricane Maria, when Rossello was still anticipating large shortfalls even after turnaround efforts were made. General obligations with an 8 percent coupon and maturing in 2035 traded Wednesday for an average of 41.6 cents on the dollar, up from a record-low 20.75 cents on Dec. 5, data compiled by Bloomberg show.

The board plans to meet in San Juan on Thursday to certify fiscal plans for Puerto Rico and the island’s public electricity and water utilities. Another meeting is set for Friday to approve fiscal plans for the University of Puerto Rico and other government agencies.

Congress created the federal board in 2016 to address Puerto Rico’s debt crisis and help the island end a history of borrowing to cover budget gaps.

Bloomberg Markets

By Michelle Kaske

April 18, 2018

Read the Study.

Urban Institute | Apr. 19

For anyone who missed it this week, the Kentucky Transportation Cabinet outlined its plan to repair and rebuild roads and bridges throughout the Commonwealth over the next six years. The plan details investments totaling more than $8.5 billion for 1,400 projects throughout the state. It’s a great start but far short of the state’s needs.

Here’s a notable excerpt from KYTC’s news release:

This expanded list of projects, in addition to the state’s recommended priority list of unfunded projects, speaks to the need for additional state-generated revenue.

“We can’t count on Washington to provide more money to address these transportation challenges,” (Kentucky Transportation Secretary Greg) Thomas said. “As we move into the summer construction season, we have to closely monitor our cash balance due to a significant number of projects in the pipeline, as well as substantial debt payments the Cabinet owes beginning in June. Our top priorities will be limited to projects that improve safety, repair bridges and pavement and support job growth.”

Continue reading.

P3 Kentucky

By Ed Green
P3 Kentucky Editor

Since selling marijuana for recreational use became legal in Colorado in 2014, the industry has recorded more than $4.7 billion in revenues, including $1.5 billion in 2017 and another $230 million in the first two months of 2018 alone. Those revenues are taxed at the state and local levels, and soon, if Denver has its way, some of those dollars will be going directly to fund affordable housing in the fast growing city.

On Monday, the Denver Post reported, Denver Mayor Michael Hancock’s office presented a proposal to city council that included hiking the city’s local tax on marijuana sales from its current 3.5 percent to 5.5 percent, bringing the total state and local taxes on marijuana purchases in Denver to 25.25 percent. The move would generate an estimated $8 million dollars a year that the city would dedicate to its affordable housing development programs.

“To me, it is a total game-changer, in how we’re thinking about affordable housing, to have these new resources in play,” Brad Segal, the president of Progressive Urban Management Associates, told the Post.

Continue reading.

NEXT CITY

BY OSCAR PERRY ABELLO | APRIL 17, 2018

On its surface, a city loan for new school administration offices seems straightforward.

Akron Public Schools agreed to borrow $10 million from the city to buy the SummaCare building at 10 N. Main St. The new administrative building would replace the 102-year-old Sylvester Small Building (the former Bowen School) on North Broadway, where central administrators work, and the 88-year-old Conrad C. Ott Building (the former Miller School) on Steiner Avenue, used to support and train teachers and staff.

The $10 million debt — school bonds bought by the city — would be repaid over 10 years at a 2.62 percent interest rate, or nearly a percentage point less than any bank had offered the schools. The city expects to get $11,683,425.

The financing is a “win-win,” according to city and school administrators. Superintendent David James gets a cheap loan with no closing fees for newer, more efficient office space. Mayor Dan Horrigan, facing a budget pinch this year, gets a $1.7 million return on a pretty safe investment.

“This is another testament to the strong partnership between APS and the city and our shared commitment to making decisions that not only make financial sense but also have the greatest community benefit,” said Ellen Lander-Nischt, the mayor’s spokesperson.

But the financing is only half the deal.

What wasn’t explained last month when the deal was announced is that the mayor’s financial team is using the $10 million loan to settle a $6.6 million “dispute” with the school district that began under the Don Plusquellic administration.

This disputed amount, which has been settled at $5.3 million, involves annual payments the city owed the school district. The settlement will be applied to the bond repayments, effectively wiping out the district’s need to make the first five annual installments.

The dispute

City Council has no obligation to review or approve any part of the complex deal. And it didn’t have to sign off on the dispute settlement, which has a clause that says the agreement would “avoid the cost of prolonged litigation.”

“I have not been brought into these conversations,” said Mike Freeman, chair of City Council’s budget and finance committee, unaware of any dispute.

The settlement requires the city to pay $164,000 in interest on back payments owed to the school under a deal meant to compensate the district for money it initially loses when the city offers tax incentives to businesses.

The dispute stems from the city not making scheduled payments of about $3 million annually in 2014 and 2016 to the school district. City officials declined to discuss details about the disputed payments.

Jack Pierson, who was treasurer of Akron Public Schools until 2014, had been getting the annual payments — sometimes in March and sometimes in May — since the school and city struck a “compensation agreement” in 1996. Pierson’s successor, Ryan Pendleton, said he was never given a satisfactory, detailed explanation on why the city paid the schools $1.1 million one year and $4 million in another.

Pendleton also noticed little, if anything, coming in 2014 and 2016. So, he took a second look at the 1996 compensation agreement.

Time for review

The compensation agreement, which took effect in 1997 and expires Dec. 31, 2093, allows for some businesses that move into the city school district to avoid paying property taxes in exchange for promising jobs or economic growth.

Per the agreement, the businesses instead make direct payments to county tax collectors. The county then sends the proceeds to the city. The city, in turn, keeps what it’s entitled to under the compensation agreement. That includes what are called offsets, or the cost of any public works projects that the city completes to accommodate some businesses as they set up shop in or near Akron.

Whatever is left goes to the school district. It’s a standard agreement that many cities and schools have entered since the late 1990s. Schools, which share in the initial loss of property tax revenue, assume economic development will ultimately result in more families (and students) and a healthier tax base (which is felt gradually business tax breaks lasting up to 30 years expire on a rotating basis).

Pendleton and some school board members are advocating for more clarity and consistency in the payments the school district receives under the compensation agreement with the city in the future. They’re open to renegotiating the 1996 agreement, which doesn’t expire for another 65 years.

“I don’t know if those [2014 and 2016] payments fell through the cracks, but we never got them,” said Tim Miller, who serves on the school board’s subcommittee on finance.

Speaking about the broader issues raised by the “missed payments,” Miller said his “interpretation of the compensation agreement is that we [the school district] don’t have a seat of the table when it comes to getting details about where the money is coming from.”

Future payments from the 1996 agreement will pay off the last half of the district’s loan from the city.

The settlement wrapped in the bond sale also illustrates how city administrators can move money around in the budget and make multimillion-dollar transactions without notifying City Council.

The city will purchase the $10 million in school bonds through what is referred to as the “investment fund.” The mayor is allowed to use the fund, which isn’t listed in budget documents, without council’s approval per the city charter. The fund has assets that climbed from $138 million to $148 million in the first two months of this year. It’s fed by other city funds and used for low-risk investments, like municipal bonds and a state-managed investment fund.

The next two-month investment report provided to City Council will likely reflect another $10 million in bonds but no detailed accounting of whether that purchase was made by cashing in other investments or moving money into the investment fund from elsewhere in the city’s budget. Lander-Nischt said that after the city makes the school district whole, basically forgiving the first five years of repayment until the city has repaid $5.3 million for the 2014 and 2016 payments, the plan is to replenish the investment fund by the end of the 10-year loan repayment period.

By Doug Livingston

Beacon Journal/Ohio.com

April 17, 2018

Reach Doug Livingston at 330-996-3792 or dlivingston@thebeaconjournal.com. Follow him @ABJDoug on Twitter or http://www.facebook.com/doug.livingston.92 on Facebook.

NEW YORK (Reuters) – Financially beleaguered Illinois will come back to the U.S. municipal bond market with an offering rated one or two notches above “junk” grade in the most notable of more than $8 billion in debt offerings scheduled for next week.

The two-part competitive general obligation debt sale slated for Wednesday consists of $450 million of bonds with serial maturities in 2019 through 2043 and $50 million of bonds due in 2019 through 2028.

As the lowest-rated state, Illinois has had to pay a hefty penalty to sell debt to investors worried about its ongoing financial and political problems.

The state’s so-called credit spread over Municipal Market Data’s benchmark triple-A yield scale for 10-year bonds has widened from 177 basis points in January to 210 basis points on Thursday.

“Judging by the way the bonds are trading recently, the market is once again concerned about the state’s ability to pass a budget,” said Triet Nguyen, head of municipal credit at Triangle Park Capital Markets Data.

An impasse between Illinois’ Republican governor and Democrats who control the legislature left the state without complete budgets for an unprecedented two fiscal years. Lawmakers enacted a fiscal 2018 budget and income tax rate hikes over Governor Bruce Rauner’s vetoes in July.

Legislators have since begun work on a budget for the fiscal year that begins July 1.

The state was the fourth-biggest issuer of debt in the muni market last year, according to Thomson Reuters data. It sold $6 billion of GO bonds in October to pay overdue bills and $750 million of GO bonds in November to fund capital projects.

Including Illinois, there is a total of $7.78 billion of bonds and $262.3 million of notes scheduled to hit the market next week.

In the week’s largest deal, the New York Transportation Development Corporation is set to issue $1.4 billion in negotiated special facility revenue bonds to help finance renovations at LaGuardia Airport. The redesign project is being led by Delta Air Lines (DAL.N).

New York’s bonds were given a Baa3 rating by Moody’s Investors Service and a BBB rating by Fitch Ratings.

Citi Group is scheduled to price the deal on Tuesday.

U.S. municipal bond funds reported $515.2 million of net outflows in the week ended April 18, marking a third-straight week of negative flows, according to Thomson Reuters’ Lipper division.

April outflows are typically attributed to investors cashing in muni investments to pay their taxes.

Reporting by Laila Kearney in New York and Karen Pierog in Chicago; Editing by Daniel Bases and Dan Grebler

APRIL 20, 2018

Minibonds will allow residents the chance to earn tax-exempt interest while investing directly in Somerville’s future

Proceeds from the sale of minibonds will support projects like Lincoln Park renovation, West Branch Library design, street and sidewalk improvements, and more

The City of Somerville will soon offer residents the opportunity to invest in Somerville’s future by purchasing minibonds. Minibonds not only allow purchasers to directly support the community’s collective goals by investing in the financing of some of Somerville’s capital projects, they also enable residents to earn tax-exempt interest.

A minibond is similar to a traditional municipal bond in which investors loan money to a city or public agency for an agreed period of time, receive interest on the investment, and get their loan paid back when the bond matures. The City will use minibond proceeds to support some capital projects, which are projects related to city facilities and property. Examples of capital projects include City building upgrades such as sustainability and accessibility improvements, park and library renovations, fire station updates, and street and sidewalk improvements.

“Everyone who lives in Somerville has a vested interest in the range of capital projects on the City’s docket, whether it’s their neighborhood park or library or the streets and sidewalks that run through the city,” said Mayor Joseph Curtatone. “Minibonds open up investment opportunities to a wider range of investors, providing more Somerville residents with an authentic opportunity to invest directly in their communities and support projects that will improve their neighborhoods.”

The City, through broker-dealer Neighborly Securities, expects to sell up to $500,000 in minibonds in its first ever minibond sale, which will take place during the purchase period from May 18 to May 25, 2018. Minibonds will be available for purchase by Somerville residents and will be sold in $1,000 denominations. This is one-fifth of the lowest denomination that municipal bonds are otherwise typically sold for ($5,000). The lower denomination is designed to allow broader participation by community member investors. Minibonds will first be allotted and filled on a first-come, first-served basis on orders of up to $20,000. The minimum order size is $1,000 and there is no maximum. However, for orders over $20,000, the amount of the order above $20,000 is subject to pro-rata allocation if the issue is oversubscribed. Pro rata allocations may be adjusted to ensure that no bonds are issued in an amount that is not divisible by the minimum denomination of $1,000.

Residents who are interested in buying Somerville minibonds will need to create an account through Neighborly’s website at www.neighborly.com.

Neighborly representatives, along with City staff, will hold two Minibond Information Sessions to answer questions about the minibonds and the ordering process. They will be held:

· Tuesday, May 15, from 6:30 to 8 p.m. in the Argenizano School Cafeteria, 290 Washington St.

· Wednesday, May 23, from 6:30 to 8 p.m. in the West Somerville Neighborhood School Cafeteria, 177 Powder House Blvd.

For questions about Somerville minibonds or setting up an account with Neighborly to purchase minibonds, please contact Neighborly atsupport@neighborly.com, or visit www.neighborly.com/somerville.

Minibonds will only be ordered through Neighborly Securities, member FINRA, SIPC & registered with MSRB, pursuant to a preliminary official statement to be made available during the ordering period. This information does not constitute an offer to sell or the solicitation of an offer to buy any securities. You will be responsible for making your own independent investigation and appraisal of the risks, benefits, and suitability of any securities to be ordered and neither the City of Somerville nor Neighborly Securities is making any recommendation or giving any investment advice.

Individuals with disabilities who need auxiliary aids and services for effective communication, written materials in alternative formats, or reasonable modifications in policies and procedures, in order to access the programs and activities of the City of Somerville or to attend meetings, should contact the City’s ADA Coordinator, Nency Salamoun, at NSalamoun@somervillema.gov or 617-625-6600 ext. 2323.

.~City of Somerville

On April 21, 2018, in Latest News, by The Somerville Times

After six weeks of high-intensity meetings with generous high-fiving for the delivery of a comprehensive stadium development deal for the Raiders and UNLV football, the Las Vegas Stadium Authority got down to more mundane work Thursday.

In less than a half hour, authority board members approved establishing a debt service, authorized issuing a request for qualifications for a construction monitor on the stadium and laid the groundwork to approve the agency’s annual budget — a process every government entity undertakes this time of the year.

Jeremy Aguero, principal for Las Vegas-based Applied Analysis, which serves as the staff for the Stadium Authority, also gave a comprehensive review of Wednesday’s successful bond sale that will help finance the 65,000-seat, $1.8 billion indoor football stadium at Interstate 15 and Russell Road.

Construction crews have been conducting preliminary work on the stadium site since November. With access to the $750 million public contribution to the project in the weeks ahead, Mortenson Construction and McCarthy Building crews will begin to pour foundations and prepare work on the massive tray for the natural-grass field that will slide in and out of the stadium.

Construction is due to be completed by the summer of 2020 in time for that year’s NFL season.

The authority is preparing its budget for the 2019 fiscal year and has a projected ending balance of $44.8 million for the current year. Hotel room tax collections are running 0.8 percent below projections, with collections at $31.4 million as of February. Aguero said collections generally are in line with projections, considering the unexpected dip in visitation following the Oct. 1 shooting.

The board will meet May 23 and consider the budget in accordance with state procedures. Stadium Authority Chairman Steve Hill said he hopes to develop a schedule of meeting every other month after May unless deadline decisions have to be made on stadium work.

In another matter, board member Ken Evans said the first meeting of the committee overseeing the Raiders’ community benefits agreement would occur in late April or early May.

Bond sale details

Clark County financial leaders said the bond sale, conducted Wednesday by a consortium of seven banks, was completed in 90 minutes, a routine timeframe for such a sale, with par value of $641.5 million at an interest rate of 3.94 percent and premium certificates of $98.8 million sold at a 5 percent interest rate.

The tax also is financing a “pay-go” fund of an amount estimated at $56.2 million — revenue that is expected to be collected in the months of March and April after the bond transaction closes. It counts towards the public’s $750 million contribution to the project and helps reduce the total amount committed to bond payments.

In all, Applied Analysis’ Jeremy Aguero said stadium funds total $800.2 million. That’s from $750 million going to the project, $45.1 million going to a capital reserve fund and $5 million for the issuance cost and capitalized interest. If the capital reserve fund is never used during the twice annual payment of bond debt, it would go toward paying down debt early, probably around 27 years into the 30-year bond retirement.

Las Vegas Review-Journal

By Richard N. Velotta

April 12, 2018

Fitch Ratings-New York-10 April 2018: A commonwealth budget dispute regarding appropriations and additional bonding authority for the Kentucky Wired public private partnership (PPP) project puts the ratings of related project debt and the commonwealth itself at risk, and also raises questions about the viability of PPP projects in Kentucky, says Fitch Ratings. 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.

Political dispute around the larger budget bill, and a related tax measure, are further complicating issues. The Kentucky Wired project represents only a small portion of the roughly $25 billion general fund budget for the commonwealth’s upcoming biennium, beginning July 1, 2018. Fitch rates the Kentucky Wired project bonds ‘BBB+’/Rating Watch Negative, and the commonwealth’s counterparty obligation for the project ‘A’/Outlook Stable. The counterparty obligation rating is notched off the commonwealth’s ‘AA-‘/Outlook Stable Issuer Default Rating. The state undertook the PPP to build out state wide broadband access, the first such state wide effort in the country.

The funding issues come amidst a challenging overall commonwealth budget situation with the governor’s executive budget recommending sizable cuts across a broad range of government agencies. On April 2, Kentucky’s legislature passed a budget bill (HB 200) for the upcoming biennium (beginning July 1) that classified essentially all of the governor’s proposed appropriation for availability payments for the Kentucky Wired PPP (as made to the Kentucky Communication Network Authority [KCNA]) as necessary government expenses (NGE) to be paid upon direction from the governor. NGEs are a regular budget management tool used by the commonwealth to fund items without a line-item appropriation and require certification from the commonwealth’s secretary of finance, appointed by the governor. The NGE designation for KCNA in HB 200 includes the specific dollar amounts originally requested in the governor’s executive budget.

On Monday, April 9, the governor announced his intention to veto both HB 200, and the related tax bill (HB 366) for various reasons including unhappiness with the tax measures in HB 366 and what he considered continued budgetary imbalance in HB 200. In his address, the governor specifically cited Kentucky Wired as a project the commonwealth was fully committed to and he criticized the legislature for designating the requested funding as NGEs, rather than providing a line item appropriation. Fitch considers the NGE designation a solid financial commitment from the commonwealth, but recognizes that this designation does require the governor to potentially find offsetting budget actions to ensure funding is provided for KCNA. In Kentucky, veto overrides require only a majority vote of each chamber to override and both HB 200 and HB 366 had sufficient votes at passage last week to override any vetoes.

TENTATIVE SETTLEMENT AGREEMENT AT RISK

In a related but distinct project funding issue, KCNA is also seeking legislative authorization for bonding authority to support a tentative settlement agreement that could resolve outstanding project issues. Kentucky Wired has faced multiple delays since it began in 2015 and the commonwealth is currently engaged in negotiations over a settlement with the project company and construction subcontractor. The tentative settlement agreement requires $88 million in additional funding from the commonwealth, beyond the appropriations request for availability payments. KCNA has requested $110 million in bonding authority to cover costs for the tentative settlement agreement and to provide contingency for potential future project costs. The bill (SB 223) has not advanced beyond committee, but the legislature will reconvene on April 13 and 14 (Friday and Saturday) for the last days of its 2018 regular session to consider the governor’s vetoes, and could pass legislation at that point.

Failure of the legislature to authorize funding for the settlement agreement through KCNA’s proposed legislation or another mechanism, threatens the viability of the settlement agreement 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, and Kentucky’s IDR. 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.

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. Failure by Kentucky to provide for funding necessary to sustain the project and meet its counterparty commitments would raise concerns about the commonwealth’s willingness to pay other long-term financial obligations and may be reflected in a lower IDR for the commonwealth. All of Kentucky’s approximately $8 billion in outstanding debt is appropriation-supported, and the ratings on those bonds are linked to the commonwealth’s IDR.

A default by the commonwealth would also signal to Fitch that PPP commitments entered into by Kentucky are subject to a higher level of political risk than previously understood. Kentucky’s prior governor, a Democrat, entered into the project agreement in 2015.The current Republican governor expressed concerns about the project when he took office but his administration has since affirmed its support, including through the appropriations request for the upcoming biennium, and advocacy for the additional bonding authority. Rejection of the governor’s requests by the legislature could indicate that the commonwealth’s own fiscal challenges in a difficult budgetary environment take political precedence over PPP project obligations.

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

Fitch Ratings-New York-11 April 2018: The City of Chicago and the leading carriers serving O’Hare International Airport will begin to operate under a new airline use and lease agreement (AUL) starting in May 2018, which Fitch Ratings views as an essential step to allow the airport to address both the modernization and the expansion of the airport to serve long-term growth for domestic and international service, as well as hub activities for United Airlines and American Airlines.

The underlying long-term capital plan working in tandem with this airline agreement is substantial in size at $8.5 billion and will take nearly a decade to complete. Given the limitations of external funding resources, O’Hare will likely assume a considerable addition of future borrowings, resulting in elevated leverage and airline costs for many years. Further, a capital program of this size will carry considerable cost and execution risks as the budget could evolve upward. Still, the leading domestic and foreign-flag carriers have approved the new lease, including the associated capital plan, and therefore recognize both the value and the cost implications to maintain service in a strong Chicago market.

The new AUL, which replaces a legacy 35-year agreement, will extend through December 2033 and will continue to utilize credit supportive residual rate setting mechanisms. Airport costs will be recovered primarily through the landing fees and terminal rents at a sufficient level to meet all bond indenture requirements. At this time, Fitch has not reviewed any new financial or cost forecasts associated with the new AUL and the approved capital plan. Excluding the newly approved capital plan, O’Hare’s airline cost per enplanement (CPE) was already forecast to rise from the current $15 level to over $25 in approximately five years under Fitch’s rating case scenario. The new capital plan will only exacerbate the degree of cost increases and likely place O’Hare as one of highest cost airports in the U.S. and a much higher cost level versus the city’s Midway Airport. Fitch notes that a number of other international gateway airports, including those serving the New York, Los Angeles, and San Francisco regions, are facing steep increases to airport costs but have not experienced adverse demand shifts as a result given the market strength.

Key financial-related modifications covered under the new AUL include gradual increases to the minimum annual debt service coverage levels from 1.10x to 1.25x by 2021. Further, the airport will add a supplemental operating and maintenance reserve fund reaching a funding level of 25% of annual operating costs by 2025. As O’Hare’s cost base rises in conjunction with potential service growth and the capital spending under the approved plan, Fitch views these revisions as a prudent development since they collectively provide additional financial cushion in case of adverse operating developments.

Leverage related risks have been a key consideration in the ‘A’ rating of O’Hare airport. Even ahead of the new capital expansion plan, O’Hare already had an elevated leverage position of nearly 10x net debt to cashflow available for debt service, reflecting the approximately $7.3 billion of existing debt. Airport debt has increased sizably over the past decade to defray the capital costs for the reconfiguration of the airfield with new and extended runways. Additional debt to fund this capital plan will likely keep overall airport leverage above the current 10x level for many years. The ‘A’ rating could be pressured to the extent there is a sustained upward shift in leverage.

The upcoming transition to a capital program focused on the airport terminals is a logical next step for the overall airport infrastructure. Terminal-related capacity constraints exist at O’Hare given the lack of meaningful gate expansion for some time coupled with the limitations of exclusive-use gate leasing under the prior agreement. The approved terminal area plan, with a current estimate of $6.1 billion, will ultimately result in a dramatically reconfigured layout of the terminals, including new concourses and approximately 25% more gate capacity. The new airline agreement will lease gates to the carriers under preferential and common use terms, a more common practice at many of the other U.S. large-hub airports, which provides more control to the city to ensure higher utilization as well as to support service opportunities for new entrants.

In Fitch’s view, the new terms under the updated airline agreement are fundamental to the airport’s modernization plans while operating under a partnership approach with the airlines. The overall financial integrity of the airport should remain sound given the provisions to boost coverage levels and operating reserves. Effective implementation and successful delivery of a capital program of this size will be among the greatest challenges while airport leverage will be sustained at relatively high levels.

Contact:

Seth Lehman
Senior Director
+1-212-908-0755
Fitch Ratings, Inc.
33 Whitehall St
New York , NY 10004

Jeffrey Lack
Director
+1-312-368-3171

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 proposal follows the lead of other cities, like Berkeley, Calif., where officials have discussed the potential for virtual currency in the public sector.

Lafayette Mayor-President Joel Robideaux on Thursday proposed the city-parish government create its own cryptocurrency, something only a handful of local governments around the world have contemplated or tried.

Doing so would position conservative Lafayette to follow the lead of Berkeley, California, the U.S. city that has garnered the most press for doing what Robideaux wants to do.

The virtual currency proposal was the biggest reveal in Robideaux’s annual address at the Heymann Center, in which he portrayed Lafayette as a technological hub, one that needs to use this advantage to diversify the local economy and improve government services.

Cryptocurrency, which uses encryption techniques and operates independently of a central bank, could potentially be a new way of financing public works, one that invites local residents to participate.

Robideaux was vague, however, in explaining why Lafayette should consider a cryptocurrency, other than the potential to “develop solutions targeting government inefficiencies, and, more importantly, alternatives for financing public infrastructure.”

Cryptocurrency was pioneered by Bitcoin and has exploded as a global industry over the last year. The total market capitalization for cryptocurrencies on April 12, 2017, was $24.4 billion, according to www.coinmarketcap.com. On Thursday it was $300.5 billion, but that mark has followed a staggering drop over the last three months from the peak market capitalization of $813.9 billion market on Jan. 7.

“It’s not just a bunch of global libertarians that want unregulated, untraceable and secure digital currency transactions,” Robideaux said, referring to concerns that cryptocurrency can be used for money laundering or other nefarious purposes. “It’s the recognition of global stakeholders that the world of banking, finance and payment systems is forever changed, that the world of healthcare, government and possibly every other industry is about to be disrupted.”

Robideaux didn’t elaborate in his speech how, exactly, his proposal for a municipal cryptocurrency might work, or what might motivate investors to sink money into Lafayette’s version. Berkeley is backing its currency with municipal bonds, and the city plans to sell “crypto enabled microbonds” to raise money for affordable housing and other initiatives to help the homeless, according to Forbes.

Robideaux said he wants to use the proceeds from an “initial coin offering” to “build a living lab of blockchain researchers and developers,” without explaining what such a lab might consist of, how much it would cost or where it might be located.

Robideaux challenged residents to consider what technological concepts such as augmented reality, artificial intelligence and machine learning systems could mean for local government. These terms, Robideaux said, are “just phrases and acronyms” that translate to better stormwater management, traffic lights that adjust in real time, and improved government transparency.

Coming this year, Robideaux said, is LUS Fiber’s offering of 10-gigabyte internet service and continued expansion beyond Lafayette city limits, a “hub of Lafayette” mobile app to provide real-time information, 311 dial service and 911 texting.

As he often does, Robideaux said Lafayette needs to look to its culture to diversify its economy, noting steep job losses since the 2014 oil crash. To that end, he highlighted his “CREATE” initiative to brand the city-parish and to develop a way to quantify returns on investments in the cultural economy.

“Our cultural economy is the low-hanging fruit. It already exists and it can only get bigger,” Robideaux said. “It will become the stabilizing force in our budget.”

Turning to other matters, Robideaux used his annual speech to stump for four property tax renewals on the April 28 ballot, two of which are confined to the city of Lafayette. The city-only taxes are for recreation as well as roads and bridges, and the parishwide taxes are for libraries and juvenile detention.

Robideaux faced a crisis last year when voters initially rejected 10-year renewals for the courthouse and jail, stirring the mayor-president and other city leaders to plead with voters to approve them on the November ballot, which they did.

Robideaux took personal responsibility for failing to explain the importance of the property taxes prior to the first vote last year.

“I’m guilty of not talking about them,” Robideaux said, explaining why he dedicated a portion of his speech to the upcoming renewals. “I’m not taking anything for granted.”

The parish budget remains a crisis, with the general fund basically wiped out. The mayor-president did not touch on the increasing likelihood the City-Parish Council would look to a tax measure on the November ballot to raise revenue, although that’s not certain and it’s unclear if the measure would be a new tax or a rededication.

The council on Tuesday held a special meeting to announce it will consider such measures at its regular meeting on May 15, the latest date by which it must approve any measures for the Nov. 6 ballot. Voters will have final say over any tax measure.

Council Chairman Kevin Naquin said after Tuesday’s meeting that existing property taxes are inadequate. Naquin wouldn’t speculate as to what the council will consider next month, but he said some type of tax increase, along with rededications, are likely.

“I’m not going to hide around it,” Naquin said. “You could probably see a combination of everything.”

BY BEN MYERS, THE ADVOCATE / APRIL 13, 2018

NEW YORK (Reuters) – S&P Global Ratings on Friday lowered Connecticut’s roughly $18.5 billion of general obligation debt outstanding to A from A-plus, citing concerns about the state’s increased debt ratio.

The New England state is one of the wealthiest in the country, but its credit rating is among the lowest due to budget problems, underfunded pensions, high debt levels and a dim economic outlook.

“Under our state rating criteria, when a majority of our debt ratios exceeds certain thresholds, our criteria adds an extra one-notch downward adjustment to our overall indicative state rating score,” S&P said in a statement.

The downgrade should serve to motivate the state’s general assembly to swiftly bring the current-year’s budget, which is in a deficit, into balance, Connecticut Office of Policy and Management spokeswoman Meg Green said in an email.

“Governor (Dannel Malloy) proposed specific ways to do exactly this in December and February, while avoiding raids on the rainy day fund, and we hope to see swift action by the legislature to avoid further harm to our credit rating,” Green said.

“It’s important to note that Connecticut’s budget situation and historic underfunding of long term liabilities, not this recent action, are driving the state’s rating,” she added.

The office of Governor Dannel Malloy was not immediately available for comment.

The so-called credit spread for 10-year Connecticut general obligation bonds over Municipal Market Data’s benchmark triple-A yield scale has widened since the beginning of the year from 73 basis points to 88 basis points as of Thursday.

On the same day of the downgrade, S&P said it was upgrading the general obligation debt of Hartford, Connecticut’s financially struggling capital city, several notches to A from CCC based on the municipality’s recently struck deal with the state.

Hartford’s city council last month approved a program to have the state pay its $540 million of general obligation debt as part of a broader oversight plan that helped the city avoid bankruptcy.

“While we know Hartford’s problems can’t be solved overnight, and there is still much more work to be done to stabilize the city and state’s financial futures, this is a positive sign for our capital city,” Green said.

S&P also said it was assigning a BB-plus issuer rating to Hartford.

by Laila Kearney

Additional reporting by Karen Pierog in Chicago; Editing by Richard Chang

APRIL 13, 2018

On March 31, 2018, New York State (GO debt rating: AA+/Stable) adopted an on-time 2019 budget that includes new funding for the Metropolitan Transportation Authority (MTA; issuer credit rating A+/Negative) in the form of a 75-cent, $2.50, and $2.75 surcharge on, respectively, pooled-, taxi-, and ride-hailing car services…

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Apr. 10, 2018

In a February 27 2018 order, the US District Court for the Northern District of California denied a motion by Oakland and San Francisco to remand their climate change nuisance suit back to state court.

Background

In 2017 the two municipalities had filed a suit in the California Superior Court against a group of multinational oil and gas producers. They claimed that the defendants’ products caused a public nuisance, as their use would allegedly contribute to climate change and therefore result in loss of life and damage to public and private property, due to storm surge and sea level rises. The defendants removed the case to federal court and the court upheld removal, finding that the suit was “necessarily governed by federal common law”.

Decision

According to the court, based on the allegations, “the scope of the worldwide predicament demands the most comprehensive view available, which in our American court system means our federal courts” as opposed to a “patchwork” of state court rulings. The court allowed the cities to appeal the decision immediately. The judge also invited lawyers for both sides to conduct a four-hour tutorial on climate change science, covering the “history of scientific study of climate change”, as well as the “best science now available on global warming” and other climate change effects.

For further information on this topic please contact Samuel B Boxerman or Jim Wedeking at Sidley Austin LLP by telephone (+1 202 736 8000) or email (sboxerman@sidley.com or jwedeking@sidley.com). The Sidley Austin LLP website can be accessed at www.sidley.com.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

Sidley Austin LLP

USA April 16 2018

Lost in the standard issue political histrionics of the Illinois governor’s race is serious talk of how to resolve a $130 billion public pension shortfall that has a stranglehold over much of what can be accomplished by any state leader.

Rivals Bruce Rauner and J.B. Pritzker agree on little, yet they so far have found common purpose in tiptoeing around the pension minefield that likely will dictate the success or failure of whichever of them is sworn in next year.

And that avoidance by Republican incumbent Rauner and Democratic challenger Pritzker is in keeping with a long tradition that fed the crisis in the first place.

Dating back to the days of Prohibition, Illinois governors and lawmakers from both parties have mostly abstained from the sort of voter displeasing fiscal fortitude needed to balance retirement obligations with other financial needs.

Now, that chronic political instinct to put off tough decisions until after the next election has ballooned the cost and narrowed pension-fixing options to either expensively painful or pie-in-the-sky.

The latest crop of ideas come not from political leaders but from think tanks and activists. They range from amending the state constitution to dialing back ironclad pension protections embedded in the state charter, to refinancing pension debt like a mortgage, to paying most of the debt off quickly by essentially taking out the mother-of-all-loans.

Each idea faces daunting obstacles, be they political, legal, financial — or all three. Layered on top of it all is deep public suspicion of the leaders in charge of fixing things.

One idea apparently not on the table may be the most straightforward though is the most politically fraught — a major tax increase that raises revenue to pay down the debt.

“It’s hard to see a solution that isn’t really dramatic,” said J. P. Aubry, director of state and local research at Boston College’s Center for Retirement Research. “This is a political thing and not a pension mechanics thing.”

The pension crisis, which has saddled Illinois with the lowest credit rating among the 50 states, is a trick box because it grew over generations of neglect. Yet to solve it requires a long-term commitment to financial discipline, and history has shown that is not part of Illinois’ political DNA.

Further complicating any solution is the pension clause inserted in the state constitution of 1970 that forbids benefits from being “diminished or impaired.” Three years ago, the Illinois Supreme Court unanimously declared those words to be a sacred trust.

In the court’s bluntly worded opinion, which struck down a 2013 law reducing benefits promised most veteran public workers, the justices also blamed pension problems on the timidity of state leaders.

“It is a crisis for which the General Assembly is largely responsible,” justices wrote.

Changing the law

So if the Constitution is an obstacle to change, why not just change the Constitution? That, in essence, is the argument underpinning a recent recommendation from the Civic Federation, a budget watchdog, for an Illinois Constitutional amendment aimed at modifying the pension clause to allow “reasonable, moderate changes” to retiree benefits.

Changing the Illinois Constitution, though, is no slam-dunk, and not just because of procedural hurdles requiring extraordinary votes of first the General Assembly and then voters at large.

It is far from clear whether courts would allow the state to reduce payments to current retirees or pension promises to long-time employees whose benefits have been constitutionally protected for almost a half-century.

“You can’t retroactively change substantive rights,” said Ann Lousin, a professor of constitutional law at John Marshall Law School who was a research assistant at the 1970 constitutional convention.

“This is another one of those kick-the-can things. We basically are unable to fund the pensions properly, even though lawmakers know what they could do to fix things,” said Lousin, referring to tax increases that could be enacted.

Neither Pritzker nor Rauner make mention of pension reform plans on their campaign websites. As the sitting governor, however, Rauner reaffirmed his support in early April for a constitutionally questionable bill that would give employees the choice between keeping annual cost-of-living increases or having future pay increases factored into their pensions, but not both.

The governor has also proposed shifting some of the cost of funding pensions for teachers and college educators away from the state and on to local schools and state universities. Both ideas have met stiff resistance from Democrats and Republicans.

Refinancing the debt

History convinces Ralph Martire, executive director of the Center for Tax and Budget Accountability, a nonpartisan think tank, that raising taxes to meet the obligations will never happen. As he sees it, the only way out of the crisis is to refinance the outstanding debt.

“It’s like refinancing your home mortgage if you’ve got a big balloon payment coming. Do you get rid of your home? No,” said Martire.

The catch to that idea, however, is that refinancing isn’t free. Martire estimates such a scheme would require the state to float an additional $11.25 billion in bonds that would add to pension costs in the short-run but over future decades would save $67 billion.

“There’s not a downside, compared to what we have. We already have a credit rating that’s in the tank,” Martire said.

Experts in the credit markets doubt Martire’s plan will be greeted with enthusiasm. That’s partly because the folks with the purse-strings have memories of being fooled by previous Illinois efforts to retool the pension debt.

“This has to be tied to some ironclad protections that things will get better,” said Richard Cicarrone, president and CEO of Merritt Research Services LLC, which focuses on credit information related to municipal bonds. “There have been a lot of empty promises and games before.”

Indeed, the Chicago-based Government Finance Officers Association argues against state and local governments issuing bonds to cover pension obligations.

Each of those variables raises even bigger questions about yet a different pension-related borrowing plan that makes the scope of Martire’s proposal look like chump change. The State Universities Annuitants Association, an advocacy group for college workers and retirees, is asking the General Assembly to authorize a whopping $109 billion bond sale to get the pension funds in solid financial condition by 2045 and save the state $100 billion in the interim.

A tough sell

When Detroit, Stockton, California and other municipalities got into financial trouble, a bankruptcy judge handled outstanding pension debts by ordering benefit cuts among other savings. States like Illinois are barred from seeking bankruptcy protection, so there could be no supervisory oversight on the horizon.

The state has the power to get itself out of this mess by raising taxes or trying to convince unions to agree to money-saving concessions. But lawmakers are politically loath to do it, let alone talk about it with any specificity.

Illinois’ financial crisis isn’t confined to pensions. The backlog of unpaid bills in 2017 at one point soared to nearly $16.7 billion, though it has since been halved. The stiffing of vendors has helped further a credibility crisis that hinders whatever the state decides to do with pensions.

“The people of Illinois are so unhappy with government that they don’t trust them,” said David Yepsen, the former director of the Paul Simon Public Policy Institute at Southern Illinois University.

Even if there were some grand and lasting bargain to stabilize state finances, the pension funds would effectively stand in line with all the other interests with their hands out, looking for their share and hoping for a long-awaited fix.

“There’s no other solution to right the ship with cuts around the edges,” Aubry said. “There’s going to have to be a moment when everyone sits down at the table and says, ‘Obviously the status quo can’t persist.’ The question is when and how that comes.”

Better Government Association

By Tim Jones

Apr 13, 2018

Fitch Ratings-New York-11 April 2018: The City of Chicago and the leading carriers serving O’Hare International Airport will begin to operate under a new airline use and lease agreement (AUL) starting in May 2018, which Fitch Ratings views as an essential step to allow the airport to address both the modernization and the expansion of the airport to serve long-term growth for domestic and international service, as well as hub activities for United Airlines and American Airlines.

The underlying long-term capital plan working in tandem with this airline agreement is substantial in size at $8.5 billion and will take nearly a decade to complete. Given the limitations of external funding resources, O’Hare will likely assume a considerable addition of future borrowings, resulting in elevated leverage and airline costs for many years. Further, a capital program of this size will carry considerable cost and execution risks as the budget could evolve upward. Still, the leading domestic and foreign-flag carriers have approved the new lease, including the associated capital plan, and therefore recognize both the value and the cost implications to maintain service in a strong Chicago market.

The new AUL, which replaces a legacy 35-year agreement, will extend through December 2033 and will continue to utilize credit supportive residual rate setting mechanisms. Airport costs will be recovered primarily through the landing fees and terminal rents at a sufficient level to meet all bond indenture requirements. At this time, Fitch has not reviewed any new financial or cost forecasts associated with the new AUL and the approved capital plan. Excluding the newly approved capital plan, O’Hare’s airline cost per enplanement (CPE) was already forecast to rise from the current $15 level to over $25 in approximately five years under Fitch’s rating case scenario. The new capital plan will only exacerbate the degree of cost increases and likely place O’Hare as one of highest cost airports in the U.S. and a much higher cost level versus the city’s Midway Airport. Fitch notes that a number of other international gateway airports, including those serving the New York, Los Angeles, and San Francisco regions, are facing steep increases to airport costs but have not experienced adverse demand shifts as a result given the market strength.

Key financial-related modifications covered under the new AUL include gradual increases to the minimum annual debt service coverage levels from 1.10x to 1.25x by 2021. Further, the airport will add a supplemental operating and maintenance reserve fund reaching a funding level of 25% of annual operating costs by 2025. As O’Hare’s cost base rises in conjunction with potential service growth and the capital spending under the approved plan, Fitch views these revisions as a prudent development since they collectively provide additional financial cushion in case of adverse operating developments.

Leverage related risks have been a key consideration in the ‘A’ rating of O’Hare airport. Even ahead of the new capital expansion plan, O’Hare already had an elevated leverage position of nearly 10x net debt to cashflow available for debt service, reflecting the approximately $7.3 billion of existing debt. Airport debt has increased sizably over the past decade to defray the capital costs for the reconfiguration of the airfield with new and extended runways. Additional debt to fund this capital plan will likely keep overall airport leverage above the current 10x level for many years. The ‘A’ rating could be pressured to the extent there is a sustained upward shift in leverage.

The upcoming transition to a capital program focused on the airport terminals is a logical next step for the overall airport infrastructure. Terminal-related capacity constraints exist at O’Hare given the lack of meaningful gate expansion for some time coupled with the limitations of exclusive-use gate leasing under the prior agreement. The approved terminal area plan, with a current estimate of $6.1 billion, will ultimately result in a dramatically reconfigured layout of the terminals, including new concourses and approximately 25% more gate capacity. The new airline agreement will lease gates to the carriers under preferential and common use terms, a more common practice at many of the other U.S. large-hub airports, which provides more control to the city to ensure higher utilization as well as to support service opportunities for new entrants.

In Fitch’s view, the new terms under the updated airline agreement are fundamental to the airport’s modernization plans while operating under a partnership approach with the airlines. The overall financial integrity of the airport should remain sound given the provisions to boost coverage levels and operating reserves. Effective implementation and successful delivery of a capital program of this size will be among the greatest challenges while airport leverage will be sustained at relatively high levels.

Contact:

Seth Lehman
Senior Director
+1-212-908-0755
Fitch Ratings, Inc.
33 Whitehall St
New York , NY 10004

Jeffrey Lack
Director
+1-312-368-3171

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-04 April 2018: Following the April 3rd release of Fitch Ratings’ updated U.S. Public Finance Tax-Supported Rating Criteria, Fitch has placed the ratings on the following bonds issued by the Colorado Educational and Cultural Facilities Authority on Rating Watch Positive:

–Approximately $6.8 million series 2009 charter school revenue bonds issued on behalf of Crown Pointe Academy (CPA) rated ‘BBB’;
–Approximately $11.3 million series 2010 bonds (Pinnacle Charter School, Inc. High School Project) issued on behalf of Pinnacle Charter School rated ‘BBB-‘.

SECURITY

Each series of bonds is payable from annual lease payments made by the respective school, subject to annual appropriation, and secured by a first mortgage over its financed facilities. Cash-funded debt service reserve funds (DSRF) equal to transaction maximum annual debt service for each series provide additional bondholder protection. Both schools are included in the state of Colorado’s charter school moral obligation program (the program), which provides a mechanism for the state to restore draws on the DSRF.

KEY RATING DRIVERS

Change in Criteria: Under the revised U.S. Public Finance Tax-Supported Rating Criteria, all moral obligation ratings will be notched down from the credit quality of the moral obligation provider. Formerly, the moral obligation enhancement was recognized based either on this top-down approach or by notching up from the underlying security rating, depending on the nature of the transaction. The ratings on the bonds issued on behalf of CPA and Pinnacle were previously notched up from the credit quality of the individual schools.

State Credit Quality: The state features a diverse and robust economy, with some concentration in natural resources, an above-average socioeconomic profile, and a modest liability position. Additionally, state financial operations are well maintained, though the state constitution’s Taxpayers Bill of Rights requirements and an active voter initiative process impede flexibility.

Notching to be Evaluated: Most moral obligation debt will be rated three notches below the general credit quality of the provider, in this case the state of Colorado. Ratings can be two notches below the provider’s credit quality under certain circumstances, as outlined in the criteria. Further analysis is required to make this determination for these ratings. Fitch expects to resolve the Rating Watch within the next 60 days.

RATING SENSITIVITIES

Program Evaluation: Fitch expects to evaluate the provisions of Colorado’s charter school moral obligation program in light of the revised criteria the near term to determine the appropriate level of notching from Colorado’s general credit quality for the two charter school ratings.

OTHER MORAL OBLIGATION RATINGS

Fitch rates several other moral obligation bonds whose ratings are not expected to change, so are not on Rating Watch. These are either already rated using a top down approach or are rated using a bottom-up approach that results in a rating no more than three notches below the provider’s IDR.

Contact:

Primary Analyst
Amy Laskey
Managing Director
+1 212 908-0568
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Laura Porter
Managing Director
+1-212-908-0575

Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239

Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com

Additional information is available on www.fitchratings.com

• Facility scheduled to open in time for 2020 football season
• Tax-exemption for stadium finance barely survived tax reform

Remember how Congress was going to outlaw using tax-exempt finance for professional sports stadiums last year?

It didn’t happen. And now welcome what will undoubtedly be the new emblem of the genre, Clark County, Nevada’s $647.95 million general obligation stadium improvement bonds.

The debt is being sold to help pay for the county’s share of the new $1.8 billion, 65,000-seat football stadium being built south of the Las Vegas Strip for the National Football League’s Raiders, who current play in Oakland, California. The Raiders and the NFL are kicking in the rest. The team agreed to a 30-year lease.

The stadium, now piles of dirt being pushed around by big equipment, is scheduled to open in time for the 2020 season.

Sale of the bonds was approved by the county on Tuesday, and the preliminary official statement was posted shortly thereafter.

Many stadium deals represent a big roll of the dice by municipalities on a single, somewhat speculative project designed to boost economic development with the help of their taxpayers. There’s usually a pathetically optimistic feasibility study attached outlining hopeful game-day attendance and ticket prices. This is not that.

For one thing, these bonds, while technically general obligations, are also secured by hotel-room taxes. So you are paying for this stadium if you visit Las Vegas. And many, many people do.

Las Vegas is basically the King Kong of municipalities in the tourism and entertainment business. Almost every page of the bond-offering document is a testament to the city’s awesome financial puissance.

Let’s take just one example. On page 29, there’s a table showing hotel room inventory: 148,896, which is sort of insane. Occupancy rate: 88.6 percent in 2017. Nationally, in 2017, that rate was 65.9 percent.

So, in other words, don’t expect fancy yields on these stadium bonds. They are rated Aa1 by Moody’s and AA+ by S&P Global Ratings, both of whose reports prominently mention words like “solid,” “strong” and “very strong.”

And that these are tax-exempt is going to drive the people in Congress who hate the municipal market into a frenzy.

Bloomberg

By Joe Mysak

April 5, 2018, 6:18 AM PDT

• American Dream yields only slightly above worst-rated state
• State remains a better buy than the mall: AllianceBernstein

Illinois’s finances are so troubled that investors can make nearly as much money betting on the worst-rated U.S. state as they can on the American Dream mall project, perhaps the most despised structure in New Jersey.

An unfinished, multicolored hulk in the Meadowlands beside the Turnpike, former Governor Chris Christie called it “the ugliest damn building in New Jersey, and maybe America.” Yet bondholders are asking to get paid nearly as much to own Illinois’s debt as they are demanding in return for holding the long-delayed mall’s unrated revenue bonds — a consequence of the state’s perennial budget distress that’s left it teetering near junk grade.

The yield on Illinois general-obligation bonds that mature in 2028 averaged 4.5 percent in March, compared to an average of 4.99 percent on unrated bonds due in 2050 sold for the American Dream mall project, the shopping and entertainment center that’s years behind schedule, according to data compiled by Bloomberg.

Despite the close yields, the state’s debt is still the better bet, according to AllianceBernstein LP, which oversees about $41 billion of municipal fixed income securities. No state has defaulted since the Great Depression, after all, while the shopping mall industry is being challenged by the growth of Internet retailing.

“Fundamentally, when you look longer-term, you would take a state over any single project,” said Guy Davidson, director of municipal investments at AllianceBernstein. “The hard part is the noise in between. Right now, a single project could be on budget and has the money set aside to pay debt service along the way, you don’t expect any noise, and right now given the politics in Illinois, you’re going to have noise.”

Illinois has $8 billion of unpaid bills, chronic budget deficits and $129 billion of unfunded retirement liabilities. Little progress has been made on its pension crisis amid fighting between Republican Governor Bruce Rauner, who is up for re-election this year, and the Democrat-led legislature.

Partisan gridlock led to an unprecedented budget impasse last year. In July, Illinois narrowly avoided becoming the first junk-rated state after lawmakers overrode Rauner’s veto of an income tax-hike to enact a spending plan.

Still, investors should have room to buy if Illinois yields rise further, relative to top-rated debt, especially since it doesn’t seem like the news will improve, according to Davidson. Illinois holdings make up about 2 percent of AllianceBernstein’s municipal bond portfolio.

The gap between Illinois’s yields and the benchmark has widened this year as the sixth-most populous state faces uncertainty around its deteriorating finances, and spreads will likely widen further, said Neene Jenkins, a vice president and municipal credit analyst at AllianceBernstein. Illinois is already rated Baa3 by Moody’s Investors Service, with a negative outlook, and BBB- by S&P Global Ratings with a stable outlook. For both companies, that’s the lowest level of investment-grade.

“If we don’t have a budget that’s been passed on time, there’s a good chance one of the rating agencies could lose patience,” Jenkins said.

Bloomberg

By Elizabeth Campbell

April 3, 2018, 11:26 AM PDT

• Debt once worth 21 cents on the dollar now trades for 41 cents
• Some have doubts: ‘The numbers are still pretty ugly.’

Of all the wild, head-scratching moves in financial markets this year, there are few that have surprised investors quite as much as the rally in defaulted Puerto Rico bonds. “It just blows my mind,” says Matt Dalton, chief executive officer of Belle Haven Investments.

Since sinking to a mere 20.8 cents on the dollar in December, prices on the island’s most frequently traded securities have climbed steadily and reached a high of 45 cents last week before paring gains during the past few days. Not only are Puerto Rico’s bonds the top performer in the $3.9 trillion municipal market, they’ve gained more than any other dollar-denominated debt in the world, according to data compiled by Bloomberg.

The rally started inconspicuously enough back in late December, with a penny gain here and there that analysts chalked up to bottom fishing after prices collapsed in the aftermath of Hurricane Maria.

But then the increases started coming in bigger chunks as word spread that the island may emerge from the devastation with more money on hand than anticipated, a development that creditors bet would translate into better debt-restructuring terms.

The bonds soared by more than 8 cents over two days late last month after Governor Ricardo Rossello released a revised fiscal plan that projects a $6 billion surplus before debt payment through 2023, the second upward revision in as many months.

Many investors question the rally’s staying power. Puerto Rico has a long history of botching its projections, they point out. And the federal oversight board that was empowered by Congress to enforce fiscal discipline on the territory and chart a financial turnaround doesn’t appear to be nearly as sanguine as the bond market. On March 28, it demanded additional austerity measures that Rossello is resisting.

“We’re miles away from having a resolution and concrete determination on where we’re going to be,” said Dalton, whose firm invests some of the $7 billion it manages in insured Puerto Rico debt.

Municipal bankruptcies are so rare that trying to forecast how much investors will recover is little more than a guessing game. And there’s never been a workout as big or as complicated as the one under way for Puerto Rico, which has sold some $74 billion of debt with varying — and sometimes rival — claims to the government’s tax revenue.

The outlook for investors looked even bleaker after the September storm when President Donald Trump suggested that Puerto Rico’s debt would need to be erased to help it recover. But an influx of $70 billion of federal funds and insurance money to rebuild is expected to give it a needed boost. Rossello’s plan forecasts that the island’s long-sputtering economy will grow by 7.3 percent next year and continue to expand — albeit at a slower pace — for the next four years.

That would mark a sharp break for the island, whose debt crisis arose from years of borrowing to paper over budget shortfalls as the economy contracted year after year and residents continued to leave for jobs on the U.S. mainland. Puerto Rico is now counting on them largely sticking around: the plan relies on the population loss holding around one percent a year starting in fiscal 2019.

“I’m surprised by the amount that the bonds have rallied because there’s still a lot of questions to be asked,” said Mark Paris, senior portfolio manager at Invesco Advisers Inc. which oversees $27.2 billion in municipal assets. “They need to do a lot for the people on the island before they start really worrying about bondholders. So I don’t know how you calculate the recovery.”

Rossello’s fiscal plan calculates the island could pay as much as $19.1 billion of principal over 30 years if the debt were restructured with an interest rate of 4.5 percent — enough to cover about half the outstanding principal the central government owes. But that’s only a projection. The recoveries will ultimately be determined in bankruptcy court as the federal board and creditors negotiate on a deal.

“Many of the recoveries will be determined through negotiation essentially and it’s unclear to me that the current fiscal plan that’s been put on the table will have a great deal of influence on this process,” said Ted Hampton, an analyst at Moody’s Investors Service in New York.

Even with federal funds for rebuilding after the storm, Puerto Rico’s faces challenges. More than 45 percent of residents live in poverty, workforce participation is about 40 percent and the fiscal plan projects the population will still shrink.

“The numbers are still pretty ugly,” said Joe Rosenblum, director of municipal credit at AllianceBernstein LP, which oversees $41 billion of municipal debt. “For now, I think the optimism has played out.”

Bloomberg Markets

By Michelle Kaske

April 3, 2018, 5:07 AM PDT

— With assistance by Ye Xie

CHICAGO (CN) – The Chicago suburb of Harvey claims it will be unable to make payroll or fund essential city services by mid-April unless the Illinois comptroller releases $1 million currently being held to satisfy the debt the city owes to its police pension fund.

In 2015, a Cook County judge found that the city of Harvey, a south Chicago suburb, owes more than $7.3 million to its police pension fund after failing to make payments for nearly a decade.

To satisfy this judgment, Illinois Comptroller Susana Mendoza is currently withholding more than $1 million in revenues due to the city.

Harvey sued to recoup the withheld funds in lawsuit filed Thursday afternoon in Cook County Circuit Court, claiming it will be unable to pay for essential government services unless the comptroller immediately releases the money.

“Unless the city is granted its relief, the city will not be able to pay for approximately 200 employees, including but not limited to, police and fire protection, water and sanitation, and its governmental employees,” the complaint states.

The city, represented by Ken Hurst with Roth Fioretti, owes payroll of $400,000 due on April 13 as well as an additional $300,000 for its employees’ health insurance, but currently holds less than $200,000 in its general fund, according to the suit.

Harvey argues Mendoza is illegally withholding the city’s revenues when the city has complied with the requirements of the Illinois Police Pension Code.

“The Illinois Police Pension Code requires the city to levy an annual requirement and to transmit those amounts to the police pension fund,” the lawsuit states. “The city has levied the annual actual requirement under the Pension Code and has transmitted those amounts to the police pension fund. Therefore, there are no delinquent funds that the Illinois Comptroller may legally withhold from the city.”

Harvey is currently in serious debt, with a deficit of $5.9 million, and its collection rate on real estate taxes is just 58 percent.

After reviewing the city’s finances, the Civic Federation told Fox News in 2016 that the city is “worse than broke,” and key records to determine where the money went are missing.

The court ruling creating the city’s current fiscal crisis is just one in a series of scandals over Harvey’s misuse of public funds.

In 2015, Harvey reached an $18.5 million settlement with Chicago to pay back the money it owes for water taken from the city without paying and resold to other suburbs.

The year before, the Securities and Exchange Commission obtained an emergency court order after claiming the city issued a fraudulent bond offering related to a scheme that tricked investors into lending millions for a hotel development deal that diverted $800,000 to then-top mayoral aide Joseph Letke.

Mayor Eric Kellogg paid a $10,000 fine, admitting no wrongdoing, and was barred from ever participating in the issuance of municipal bonds. Letke was found dead in September 2016 in an apparent suicide.

Kellogg, who has been mayor of Harvey since 2003, has been accused by city aldermen of rampant corruption. In 2016, Illinois stepped in to block his attempt to unilaterally remove four aldermen who opposed him.

Harvey seeks an injunction prohibiting the comptroller from withholding city funds in the future and an order compelling her to release the $1 million currently in her possession.

The comptroller’s office declined to comment.

COURTHOUSE NEWS SERVICE

by LORRAINE BAILEY

April 5, 2018

Bond insurers have urged the judge overseeing Puerto Rico’s restructuring to review a recent ruling from a local court they believe could help them get an order allowing them to investigate what was discussed during talks that led to plans for the island’s finances, including any cuts to debt service payments.

Assured Guaranty Corp, Assured Guaranty Municipal Corp and National Public Finance Guarantee Corporation in court papers filed on Monday pressed U.S. District Court Judge Laura Taylor Swain to look at the March 16 decision by Judge Lauracelis Roques-Arroyo of Puerto Rico’s Court of First Instance in a lawsuit over a draft of the territory’s budget.

To read the full story on Westlaw Practitioner Insights, click here.

WESTLAW NEWS

MARCH 27, 2018

NEW YORK (Reuters) – Puerto Rico’s benchmark bond surged to a 25-week high on Monday, its busiest trading day since October, after the bankrupt U.S. territory nearly doubled its projected five-year surplus to $6 billion as it recovers from Hurricane Maria.

While the price rise is being taken as a sign the market is beginning to see a recovery path for the storm-ravaged island, analysts remained wary, taking the spike with a grain of salt.

General obligation bonds maturing in 2035 changed hands more than 100 times on Monday and traded as high as 45 cents on the dollar, the bond’s highest level since Oct. 3. 74514LE86=MSRB

While still down sharply from the 60-cent range the bonds had occupied before Maria struck on Sept. 20, prices are continuing a steady, month-long climb as the island’s recovery prospects improve.

Senior bonds backed by sales tax revenue, so-called COFINA debt, have fared even better, reaching 63.51 cents in light trading on Monday, higher than they were in the weeks before the storm. 74529JAR6=MSRB Bonds issued by the bankrupt Puerto Rico Electric Power Authority (PREPA) also gained ground.

The latest bounce came on the heels of a revised financial outlook – released without fanfare by Puerto Rico’s government on Friday – that projected the U.S. territory to accumulate a $6 billion surplus over the next five years.

An earlier version of the so-called fiscal turnaround plan, released in February, had forecast the surplus at $3.4 billion.

“Puerto Rico GO bond prices have more than doubled since their lows earlier in the year and other issues, including COFINAs, PREPAs and even National- and AMBAC-insured bonds, have all participated in this broad rally,” Daniel DiBono, manager of municipal high yield evaluations at Thomson Reuters Pricing Service (TRPS), said, noting the revised surplus projections.

Share prices for insurers of Puerto Rican bonds also rose. MBIA (MBI.N), the parent company of National Public Finance Guarantee Corp, was up 4.4 percent on Monday, while shares of AMBAC Financial Group (AMBC.O) gained 6.56 percent.

The fiscal turnaround plan will serve as a basis for creditor restructuring talks in Puerto Rico’s bankruptcy, which, with $120 billion of combined bond and pension debt, was already the largest in U.S. government history before Maria trashed the island’s infrastructure and killed dozens.

The plan needs approval by a federal board tasked with managing the island’s finances. The board was expected to approve the February version of the plan at a meeting on Monday, but postponed the meeting after Friday’s revision.

Observers cast a skeptical eye on the rosier projections, unsure the board would go along with them. Puerto Rico Governor Ricardo Rossello and the board have butted heads for months over what the plan should include.

The new plan creates $3 billion more in cost savings than the February version, including an extra $1.34 billion in tax measures like changing minimum tax rates and reducing incentives.

“While these headlines appear positive, we continue to think there will be a lot of noise before there is any significant resolution in Puerto Rico,” analysts at KBW Research said in a Monday note.

Chris Ryon, a portfolio manager at Thornburg Investment Management in Santa Fe, which does not own Puerto Rican bonds, said he was scratching his head over the spike.

“I guess hope springs eternal,” Ryon said. “I don’t see the numbers working out in that way, that favorably. You have been losing population, saying the recovery is going to really juice their economy. I don’t see that happening.”

Such reservations underscore an ongoing credibility gap for Puerto Rico in the eyes of creditors and lawmakers, spanning multiple gubernatorial administrations.

The island has not published audited financial statements in three fiscal years, and absorbed routine accusations from stakeholders and legislators that it is overstating its crisis.

by Nick Brown

Reporting by Nick Brown; Additional reporting by Daniel Bases; Editing by Daniel Bases and James Dalgleish

MARCH 26, 2018

NEW YORK (Reuters) – Connecticut, one of the lowest rated U.S. states, cut the size of its general obligation bond deal this week by 15 percent to $526.4 million, according to final pricing information on Thursday.

The Connecticut Treasurer’s office did not immediately reply to a request for comment on why the deal shrank from $620 million.

Typically, a deal can be reduced because investors wanted more yield than the issuer could pay, or because demand for the bonds was lower than expected.

Final prices on the deal did not change from preliminary levels. The state’s spread over top-rated municipal bonds widened since it last issued similar debt a year ago.

That means that the state, which has budget problems and high debt levels despite being one of the wealthiest in the country, had to pay more to borrow in part because of its credit woes.

by Hilary Russ

Reporting by Hilary Russ; editing by Diane Craft

MARCH 29, 2018

Fitch Ratings-New York-22 March 2018: The New Jersey governor’s executive budget delivers on policy goals outlined during his campaign; however, numerous new program and tax credit initiatives, combined with proposed extensive tax policy actions, cannot in the near term materially change the persistent underfunding of retiree liabilities and the elevated long-term liability burden that are the key drivers of the state’s below-average ‘A’ Issuer Default Rating (IDR), according to Fitch Ratings.

The $2 billion, or 5.7%, proposed revenue growth from fiscal 2018 includes $1.5 billion from tax increases, supporting 4.2% growth in state appropriations. These increased revenues would go to new spending and leave the state with still slim reserves and reduced flexibility to respond to future economic downturns through revenue raising. Fitch notes that the state has significant spending pressures not only due to the demands of underfunded retiree benefit liabilities but also because natural revenue increases resulting from modest economic growth in recent years have gone primarily towards the phased-in growth in annual pension contributions. This dynamic has led to underfunding of other state needs.

GRADUAL PENSION RAMP UP CONTINUES

If implemented, the budget would continue the state on the path of a gradual 1/10th annual phase-in to the full actuarially determined contribution (ADC) for pensions in fiscal 2023. Despite the $691 million increase to the pension contribution, Fitch would expect further deterioration in the funded condition of the plans over the near term as the contribution remains well below the ADC. The $3.2 billion total pension contribution (9% of the budget) is a 28% increase from fiscal 2018 that accounts for 39% of proposed budget growth and funds 60% of the ADC. The contribution meets Fitch’s rating expectations given the state’s policies in recent years and hews the governor to the same path as his predecessor.

Employee and retiree medical expenses also continue to loom large, representing $3.4 billion (9%) of the governor’s budget. As in most states, OPEB contributions remain well below actuarial recommendations, growing the accrued liability. Escalating pension and OPEB liabilities are expected to remain negative rating factors absent further policy action that reduces the liabilities, forestalling improvement in the state’s IDR.

FISCALLY PRUDENT PROPOSALS

The governor’s proposals for increased funding to New Jersey Transit (NJT), greater adherence to full education formula funding, reduced one-time budget balancing actions and an addition to state cash balances to provide greater financial cushion would either address critical state needs or support more sustainable financial operations, in Fitch’s view. Further, the suggested return of the state sales tax rate to 7%, lowered as part of the transportation funding agreement in 2016, would provide $581 million in additional revenue. This is a positive step. At the time of that agreement, which lowered the sales tax rate in exchange for an increase in the gas tax, Fitch noted that the state had replaced a growing revenue source with one with more limited growth prospects and added to the pressure on operating funds.

NEW PROGRAM INITIATIVES

Excluding the operating budget’s increased pension contribution, recommended program expense grows by a net $918 million. Significant increases include $933 million in additional K-12 education funding, including $283 million in added formula aid, $242 million in additional state subsidies for NJT, $120 million for state and teacher employee and retiree health benefits, $100 million for opioid addiction programs and $50 million for assistance to community college students. Medicaid grows by $244 million, boosting this program’s draw on the operating budget to 12% of proposed expenditures although remaining far below the 46% of the budget dedicated to education (including higher education). Offsetting these increases are reductions to various line items, $46 million in expected state-wide salary and operational savings, and reductions in certain state aid categories and capital construction. In addition to programmatic adjustments, the governor has proposed tax policy changes that reduce revenue to the state, including increases in the earned-income tax credit ($27 million) and the state property tax deduction cap ($80 million).

EXTENSIVE NEW REVENUE MEASURES

To fund these initiatives, the governor has proposed a milestone 10.75% personal income tax (PIT) rate for taxpayers earning more than $1 million, which would provide an estimated $765 million in fiscal 2019, as well as numerous business tax changes for an additional $110 million; both in addition to the proposed sales tax changes. The governor’s budget also includes the legalization and taxation of marijuana which is estimated to deliver $80 million in tax revenue. Fitch believes there is uncertain legislative interest in the PIT proposal, particularly given recent passage of federal tax changes in December 2017 that capped the deduction for state and local taxes (SALT) and is expected to increase residents’ effective state tax burden. Should the measures fail to be approved, other revenue solutions or expenditure reductions will need to be identified to balance the fiscal 2019 budget.

The state’s revenue forecast is premised on 2.4% growth in the sales tax base; 4% and 4.2% growth in personal income in 2018 and 2019, respectively; 4% growth in gross state product in both 2018 and 2019; and 1% and 0.8% growth in nonfarm employment in 2018 and 2019, respectively. Fitch believes these forecasts to be reasonable based on recent quarterly experience but somewhat robust when considering the state’s recent annualized growth, while noting that future economic growth is expected to remain below that of the nation.

BALANCED FISCAL 2018 OPERATIONS

Updates to the state’s fiscal 2018 financial operations are included in the executive budget and point to anticipated budgetary balance this fiscal year. Current forecast revenue is a 2.2% improvement over the forecast used to enact the budget; however, the improvement largely incorporates a shift of sales tax revenue from non-operating funds to operating funds in addition to expected PIT revenue that is above forecast, offset by shortfalls in other revenue sources. Over 40% of the increase in the PIT is attributable to $253 million in one-time revenue related to the repatriation of overseas hedge fund profits, a direct effect of Section 457A of the federal Internal Revenue Code passed in 2008. Unexpected growth in the PIT excludes $200 million collected in December from taxpayers seeking to take advantage of the higher SALT deduction as the state believes this revenue would have been collected in April 2018.

Final, estimated appropriations increase by $1.2 billion (3.6%) from the enacted budget, partly incorporating appropriations linked to the moved sales tax revenue. The state’s estimated year-end budgetary fund balance, which the state views as its budgetary cushion, is projected to be $738 million (2% of operating fund appropriations) largely incorporating a larger beginning fund balance than anticipated when the budget was enacted.

Contact:

Marcy Block
Senior Director
+1-212-908-0239
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Douglas Offerman
Senior Director
+1-212-908-0889

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 plan sees six-year surplus of $6 billion before debt
• Most-traded bond jumps by more than 20 percent Monday

Puerto Rico and its creditors finally caught a break, at least for one day.

Bonds of the bankrupt U.S. territory soared more than 20 percent Monday after the government surprised investors by projecting that a flood of disaster-relief funds will do what officials for years couldn’t: revive the moribund economy enough to replace chronic deficits with increasing surpluses, before any debt payments are made.

There’s still a big question mark over whether Puerto Rico can actually deliver, given its history of fiscal folly and an exodus of residents. But the bond rally signals optimism that investors may not lose quite as much as initially feared from what has been the largest municipal bankruptcy in U.S. history, even as residents brace for a new era of fiscal austerity.

The government’s latest financial turnaround plan marks the second time in as many months that it’s offered a more sanguine outlook for its recovery. It projects that Puerto Rico will have a surplus, excluding bond payments, of $6 billion over the next six years after implementing plans to steady its finances. That’s up from $3.4 billion projected last month. In January, while still gauging the toll of the storm, it estimated that it would have essentially no money for debts because of the devastation.

“The move is bigger than expected, but it is in reaction to the fiscal plan which has come out more positively than previous ones,” said Daniel Solender, head of municipal investments at Lord Abbett & Co., which holds Puerto Rico securities among its $20 billion of state and local debt. “There still is a long way to go, but there is growing optimism that things have moved better than worst-case scenarios.”

Puerto Rico general obligations were the most actively traded municipal bonds Monday. The price of those due in 2035 rose by 7 cents on the dollar to an average 43.8 cents, the highest since early October, after climbing to as much as 45 cents, according to data compiled by Bloomberg. The prices of the territory’s sales-tax, electric-company and building-authority bonds also jumped in heavy volume.

The rally wiped out much of the losses that Puerto Rico bondholders suffered after the September hurricane. The bonds due in 2035 — which were sold to hedge funds and other investors for 93 cents on the dollar four years ago — had slipped to around 58 cents before the storm. They then tumbled to as little as 21 cents in December.

Governor Ricardo Rossello’s administration’s latest plan still needs approval from the federal board that’s been installed to oversee the turnaround and requires him to implement steps to wrest savings from the government and increase revenue. The question of how much investors will recover will also be determined in court, where creditors with sometimes competing claims are fighting over the the island’s cash — making the outcome highly uncertain.

The improved outlook in the latest road map reflects the federal aid and insurance claims that are coming into the island, promising to boost an economy that had been mired in a recession for years as residents left for jobs on the U.S. mainland. The stagnation culminated in Puerto Rico’s fiscal collapse.

As a result of the storm, Puerto Rico is counting on $21 billion of insurance money and about $49.1 billion of federal aid, enough to have a major impact on growth. While the economy is projected to shrink about 10.6 percent in the current fiscal year, the government anticipates it will expand 7.3 percent next year and grow for the following four years. A year ago, the island was projecting continued contraction.

The latest plan was set to be considered by Puerto Rico’s federal oversight board Monday until the meeting was delayed. If approved, it will be a blueprint for the board, Rossello’s administration and creditors during negotiations over how much of the island’s $74 billion of debt it can repay.

Bloomberg Markets

By Danielle Moran

March 26, 2018, 12:47 PM PDT

— With assistance by Jonathan Levin, and Tatiana Darie

NEW YORK (Reuters) – New Jersey will sell $3.2 billion of tobacco refunding bonds on April 4 in a deal that effectively strips the debt of its junk rating and elevates it to investment grade.

The deal, the largest of next week’s $8 billion of U.S. municipal bond and note sales, will refinance what remains of $3.6 billion of bonds issued in 2007 by the state’s Tobacco Settlement Financing Corporation.

S&P Global Ratings currently rates those bonds a B, in speculative territory. But the credit agency expects to assign various investment-grade ratings to the new bonds – from BBB to A depending on the seniority and maturity, according to bond documents.

In 1998, big tobacco companies agreed to make annual payments to most U.S. states to cover medical costs for sick smokers.

Many states opted to securitize that stream of money by selling municipal bonds backed by the expected payments from tobacco companies.

However, the payments are tied to smoking rates. Fewer shipments of cigarettes means less money to back the bonds, and smoking rates have been falling.

The New Jersey deal is part of a new generation of refinanced tobacco bonds and takes into account that more smokers are quitting, according to Alan Schankel, managing director at Janney Montgomery Scott.

Like most other tobacco bonds of an earlier era, New Jersey’s 2007 bonds “were based on assumptions that cigarette smoking declines would not exceed 4 percent annually.”

The new bonds being issued next week are designed around different expectations – that consumption will continue to decline as much as 8.72 percent by the time the 2046 senior term bonds mature.

The deal is “reflective of lower smoking rates and more realistic assumptions,” Schankel said.

The state expects to save $250 million immediately on the refinancing.

Ahead of New Jersey’s offering, debt from Ohio’s Buckeye Tobacco Settlement Financing Authority traded higher at $98.75, according to analyzed price data from Markit.

There were more than $30 million of trades this week in the 2046 maturity of Ohio’s 2007 tobacco bonds with a 5.875 percent coupon, according to trade data from the Municipal Securities Rulemaking Board.

Also in New Jersey next week, the fiscally stressed seaside resort Atlantic City plans to price $49.37 million of taxable bonds rated ‘BBB+’ through sole manager Morgan Stanley & Co. Inc.

Proceeds from the bonds, which are backed by a state program, will be used to pay pension and healthcare contribution with interest that the city deferred in 2015.

Reporting by Hilary Russ; Editing by James Dalgleish

MARCH 29, 2018

New York’s Metropolitan Transportation Authority (MTA) is the largest public transport authority in the United States, but its budget deficit and lack of liquidity have become a growing crisis for the organization, state and local government and the city’s residents.

High leverage and poor operating results have translated to projections that MTA is $38 billion in debt and may be at risk of further downgrades – thus, bondholders should think twice before buying.

In this article, we will look at the MTA’s current situation, what happened to its credit rating and what these factors mean for municipal bond investors.

Continue reading.

municipalbonds.com

by Justin Kuepper

Mar 29, 2018

NEW YORK (Reuters) – Connecticut paid a price for its credit woes on Wednesday as it borrowed $620 million at wider spreads than when it last issued similar debt a year ago, despite strong overall demand in the U.S. municipal bond market.

Connecticut’s 10-year bonds priced at 3.39 percent – a spread of 93 basis points over top-rated paper, according to a preliminary pricing sheet.

The New England state is one of the wealthiest in the country. But its credit rating is among the very lowest because of budget problems, underfunded pensions, high debt levels and a dim economic outlook.

When the state last sold similar general obligation debt on March 29, 2017, its 10-year bonds with 5 percent coupons priced at 3.00 percent.

At the time, that level was 77 basis points above general market bonds carrying the highest rating of triple-A, according to Municipal Market Data, a Thomson Reuters company.

Since then, however, state lawmakers and Governor Dannel Malloy hit a budget impasse amid a huge revenue slump that led all three major credit rating agencies to downgrade Connecticut in May.

S&P Global Ratings rates the state A-plus with a negative outlook, leaving Connecticut tied with Kentucky as the third-worst rated state.

Connecticut’s spread widened by 16 basis points in the last year, indicating that buyers demanded more yield to take on a slightly riskier investment.

The negotiated deal, led by Loop Capital Markets, consisted of $250 million in new money bonds with serial maturities from 2019 through 2038, and $367 million in refunding bonds maturing from 2019 through 2028.

Home to hedge fund billionaires alongside cities mired in poverty, Connecticut’s debt load is the highest in the nation by several different measures.

It also has about $37 billion of unfunded liabilities spread across its teacher and state employee pension funds, with funded ratios of just 52 percent and 32 percent respectively, according to bond documents.

Connecticut has actually borrowed more recently but did so via a private placement. That deal, with just days left in its last fiscal year, came amid a budget stalemate that dragged on for nearly four months.

In late June, the state borrowed $300 million of new money variable-rate 7-year bonds through a direct placement with Barclays Capital Inc, with another $135 million of refunding bonds sold privately to JP Morgan Chase & Co.

by Hilary Russ, Reade Levinson

Reporting by Reade Levinson an Hilary Russ; Editing by Daniel Bases and Cynthia Osterman

MARCH 28, 2018

• New plan sees six-year surplus of $6 billion before debt
• Most-traded bond jumps by more than 20 percent Monday

Puerto Rico and its creditors finally caught a break, at least for one day.

Bonds of the bankrupt U.S. territory soared more than 20 percent Monday after the government surprised investors by projecting that a flood of disaster-relief funds will do what officials for years couldn’t: revive the moribund economy enough to replace chronic deficits with increasing surpluses, before any debt payments are made.

There’s still a big question mark over whether Puerto Rico can actually deliver, given its history of fiscal folly and an exodus of residents. But the bond rally signals optimism that investors may not lose quite as much as initially feared from what has been the largest municipal bankruptcy in U.S. history, even as residents brace for a new era of fiscal austerity.

The government’s latest financial turnaround plan marks the second time in as many months that it’s offered a more sanguine outlook for its recovery. It projects that Puerto Rico will have a surplus, excluding bond payments, of $6 billion over the next six years after implementing plans to steady its finances. That’s up from $3.4 billion projected last month. In January, while still gauging the toll of the storm, it estimated that it would have essentially no money for debts because of the devastation.

“The move is bigger than expected, but it is in reaction to the fiscal plan which has come out more positively than previous ones,” said Daniel Solender, head of municipal investments at Lord Abbett & Co., which holds Puerto Rico securities among its $20 billion of state and local debt. “There still is a long way to go, but there is growing optimism that things have moved better than worst-case scenarios.”

Puerto Rico general obligations were the most actively traded municipal bonds Monday. The price of those due in 2035 rose by 7 cents on the dollar to an average 43.8 cents, the highest since early October, after climbing to as much as 45 cents, according to data compiled by Bloomberg. The prices of the territory’s sales-tax, electric-company and building-authority bonds also jumped in heavy volume.

The rally wiped out much of the losses that Puerto Rico bondholders suffered after the September hurricane. The bonds due in 2035 — which were sold to hedge funds and other investors for 93 cents on the dollar four years ago — had slipped to around 58 cents before the storm. They then tumbled to as little as 21 cents in December.

Governor Ricardo Rossello’s administration’s latest plan still needs approval from the federal board that’s been installed to oversee the turnaround and requires him to implement steps to wrest savings from the government and increase revenue. The question of how much investors will recover will also be determined in court, where creditors with sometimes competing claims are fighting over the the island’s cash — making the outcome highly uncertain.

The improved outlook in the latest road map reflects the federal aid and insurance claims that are coming into the island, promising to boost an economy that had been mired in a recession for years as residents left for jobs on the U.S. mainland. The stagnation culminated in Puerto Rico’s fiscal collapse.

As a result of the storm, Puerto Rico is counting on $21 billion of insurance money and about $49.1 billion of federal aid, enough to have a major impact on growth. While the economy is projected to shrink about 10.6 percent in the current fiscal year, the government anticipates it will expand 7.3 percent next year and grow for the following four years. A year ago, the island was projecting continued contraction.

The latest plan was set to be considered by Puerto Rico’s federal oversight board Monday until the meeting was delayed. If approved, it will be a blueprint for the board, Rossello’s administration and creditors during negotiations over how much of the island’s $74 billion of debt it can repay.

Bloomberg Markets

By Danielle Moran

March 26, 2018, 12:47 PM PDT

— With assistance by Jonathan Levin, and Tatiana Darie

• Gubernatorial primary comes amid budget deficit, unpaid bills
• Investors want winner to resolve growing pension crisis

Up for grabs in Illinois’s gubernatorial primary on Tuesday: A chance to compete in a general election that will decide who will lead the worst-rated state — one whose massive financial problems aren’t going away anytime soon.

Illinois is contending with $9 billion of unpaid bills, chronic budget deficits and $129 billion of unfunded pension liabilities. Its credit rating is only one level above junk, making its borrowing costs the highest of any U.S. state as bond buyers punish Illinois for its fiscal woes. Plus the Land of Lincoln is losing population, dropping to the sixth-most-populous state last year from number 5, U.S. Census data show.

“This is a pivotal election for Illinois, which has been struggling for almost a decade to stabilize its finances,” said Laurence Msall, president of the non-partisan Civic Federation, which tracks the state’s finances. “With only one notch separating Illinois from non-investment grade credit, the stakes are enormously high for whoever wins the primary and election to identify the financial path forward for the state.”

Republican Governor Bruce Rauner, who has repeatedly clashed with the Democrat-controlled legislature during his first term, is seeking re-election, though he’s facing a primary challenger, conservative Illinois House Representative Jeanne Ives.

Billionaire J.B. Pritzker, an heir to the Hyatt hotel empire, has invested at least $69.5 million of his own money so far to take a lead in the Democratic race. State Senator Daniel Biss and Chris Kennedy, son of late liberal icon Robert F. Kennedy, are also vying for the chance to defeat Rauner in November.

If Rauner, a former private-equity executive who’s already put $50 million of his own fortune into his campaign, and Pritzker win their respective primaries as expected, the Illinois general election could be the most expensive governor’s race in the nation’s history.

Bondholders are closely watching the race. The yields on the state’s 30-year general-obligation bonds have widened to the most over benchmark debt since July. Illinois yields are the highest among all 20 states tracked by Bloomberg. The spread is widening amid concerns that the financial problems facing Illinois, especially the growth in unfunded pension liabilities, won’t go away, no matter who is elected, according to Richard Ciccarone, president of Chicago-based Merritt Research Services.

“There’s anxiety that we’re not going to accomplish much by just having an election here,” said Ciccarone of Merritt, which analyzes muni finance. “The market really wants to see action and they want to see progress.”

Little headway has been made in addressing what investors agree is the state’s biggest challenge: unfunded pension liabilities. After years of skipping payments or not putting enough into the funds, the retirement system is only about 40 percent funded even as more and more of the state’s dollars get eaten up by this expense. Pension costs are expected to make up about 22.9 percent of all general-fund spending in the current fiscal year, up from 6.8 percent a decade ago, according to the Civic Federation.

The election comes eight months after the end of an unprecedented two-year budget impasse that drove the state’s rating to the edge of junk because of a showdown between Rauner, the first Republican to lead the state since 2003, and the Democrat-controlled legislature. Illinois avoided becoming the first U.S. state to lose its investment-grade rating after lawmakers on both sides overrode Rauner’s veto of an income-tax hike in July, enacting a budget and easing the immediate financial threat.

Despite the end of the standoff, whoever wins the governorship will still have to contend with a precarious credit rating. All three rating companies consider Illinois to be in the lowest tier of investment-grade ratings. Moody’s Investors Service and Fitch Ratings have a negative outlook on the state, signaling another downgrade is possible, while S&P has a stable view because of the budget passed in July.

“Any drop in their rating would have a big impact on their financing costs,” said Dan Solender, head of municipal investments at Lord Abbett & Co., which manages $20 billion of state and local debt, including Illinois. He pointed out that the state’s yields are already trading at a lower rating. “Already the number of buyers is more limited but it would shrink further.”

No matter the outcome, municipal investors will be monitoring the election results Tuesday.

“The municipal investor increasingly needs to watch elections because there are ramifications as an investor,” said Gabe Diederich, portfolio manager for Wells Fargo Asset Management, which oversees about $40 billion of state and local debt. “Politics, not necessarily whether a person votes Republican or Democrat, but how different parties working together and those policies are going to impact finances.”

By Elizabeth Campbell

March 20, 2018, 8:14 AM PDT

Bloomberg Politics

— With assistance by John McCormick

Baltimore officials will announce a plan Monday to use a new form of financing to help pay for $10 million in green infrastructure projects designed to reduce water pollution from stormwater runoff.

The Department of Public Works plans to take out $6 million in environmental impact bonds to pay for the projects, which use trees, plants and other forms of greenery to absorb rainwater so it doesn’t flow into streams and eventually into the Chesapeake Bay, collecting pollutants along the way.

The rest of the money will come from state funds and fees the city charges on water bills.

The public works department already promotes green infrastructure projects, such as rain gardens and green roofs, but was seeking ways to pay for more to meet federal guidelines to decrease stormwater runoff.

“We are always looking for funding options, but also wanted to get a social and economic benefit for it,” said Troy Brogden, the department’s chief financial officer. “We like to think outside of the box and go with nontraditional funding mechanisms, and this is one that is good for the city of Baltimore and our citizens.”

The bonds are different from typical municipal bonds because investors will pay money back to the city if the infrastructure projects do not meet certain metrics. For instance, they could measure if the Chesapeake Bay water is cleaner because of the projects.

Environmental bonds are meant to give cities more incentive to try new innovations by putting some of the risk on investors.

These types of bonds were issued for the first time for green infrastructure projects last year in the District of Columbia. Under the five-year agreement there, stormwater runoff reduction will be measured twice. If runoff flow is reduced, the city will pay full principal to investors at maturity. If runoff is reduced more than expected, DC Water will pay investors a bonus, and if reduction is less than expected, investors will give the city a risk-sharing payment.

Baltimore public works officials have gotten approval from the city finance department to use the funding mechanism, Brogden said, but will still have to get individual contracts approved by the finance board.

The city is working with the Chesapeake Bay Foundation, which has hired the investment firm Quantified Ventures to structure the deals and help find investors for the projects. Quantified Ventures also worked on the financing on the environmental impact bonds in Washington.

“There are investors who care about environmental and social issues,” said Eric Letsinger, CEO of Quantified Ventures. “They want to make money. But they want to invest in things that make us better.”

Municipalities are looking at ways to curb stormwater and sewage runoff to meet federal standards. The old methods of water drainage, including concrete gutters and drains, have led to more pollutants pouring into the water systems. Green infrastructure absorbs the water, but municipalities have been reluctant to invest because it is new and some perceive the results as uncertain.

“They have to do this stormwater work and it is expensive to do,” said Lee Epstein, lands program director and special counsel for the Chesapeake Bay Foundation. “You have to lift up pavement and the nature projects have to engineered. Now along comes this new idea, this new financing mechanism, that might be beneficial to these local governments.”

Epstein believes the financing could be used in other areas of the Chesapeake Bay region as well.

Bethesda-based Calvert Impact Capital was one of the investors in the Washington project. Beth Bafford, the company’s vice president of syndications and strategy, said they would be interested in investing in environmental impact bonds in Baltimore, but they don’t know details about how the city plans to have its bonds structured.

“All the investments we make have some kind of social-environmental impact as well as a financial incentive,” Bafford said. “We are hardwired to like this kind of investment.”

Bafford said the company will know in 2021 if the Washington investment pays a good return, but said it seems to be on the right track.

The city plans green infrastructure initiatives in neighborhoods throughout the city, including Sandtown-Winchester, Dickeyville, Pigtown, Belair-Edison, Cedonia, Westport and Mt. Winans. Workers are scheduled to plant greenery in the 1200 block of Edmondson Ave. Monday.

by Andrea K. McDaniels

The Baltimore Sun

Fitch Ratings-New York-19 March 2018: A bill which would have authorized the Florida Department of Transportation (FDOT) to acquire Garcon Point Bridge (the bridge) did not pass the Florida senate, says Fitch Ratings. The bill would have provided the FDOT with the authorization to purchase the bridge, repay itself for operations and maintenance (O&M) and capital costs previously expended and to purchase the authority’s $135 million in defaulted bonds at a discounted price. Such proposed reimbursement of O&M and capital costs would have been inconsistent with the terms of the original transaction. The lease purchase agreement (LPA) between FDOT and the authority along with the bond resolution had structurally subordinated reimbursements of these costs to payments to senior bondholders, prior to and following any payment default.

The legislature’s failure to advance the proposed bill indicates continued institutional support for the arrangement, which is a material rating factor for projects which have LPAs with FDOT (including Mid-Bay Bridge Authority and Florida Turnpike Enterprise, described in detail below).

The authority’s revenue bonds, series 1996 (the bonds) are supported by a gross pledge of system toll revenues, entitling bondholders to be paid full principal and interest prior to satisfaction of any other claims on revenues. Pursuant to the LPA with the authority, FDOT is obligated to and has paid bridge O&M and major maintenance costs since inception. To date, FDOT has always stood by its commitment to fund O&M and capital costs, and such support along with the toll facilities’ revolving trust fund loans have served as a significant credit enhancement for debt issued by a number of tolling authorities in the state.

While the LPA calls for annual reimbursement of such costs on a subordinated basis to senior debt service, in the case of the Santa Rosa Bay Bridge Authority toll revenues have been insufficient to pay debt service on the bonds, resulting in payment defaults since July 2011. Consequently, there also have been no funds available to reimburse FDOT for O&M expenses paid. The authority’s liability to FDOT has accumulated to approximately $25 million since opening in 1999 for operating and maintaining the bridge. The authority also owes the state nearly $8 million from non-interest-bearing subordinate toll facility revolving trust fund loans for initial bridge design costs. The proposed legislation would have authorized the state to deduct from the discounted purchase price the sum of all subordinate loans ($33 million) effectively making the state obligations senior to bondholders. The net payment to bondholders would have been 50% of $102 million, or $51 million. The bill was inconsistent with the feasibility report produced by FDOT and Division of Bond Finance suggesting a solution for the defaulted bonds through the issuance of Florida turnpike revenue bonds to acquire the bridge at a negotiated price.

A point to note is that while the proposed legislation sought to provide authority to FDOT, it would have been up to bondholders to agree to the terms put forward. It is Fitch’s view that law strictly limits the ability of a state to amend the legal structure and related contracts legislatively and extinguish bondholder claims without consent of each bondholder. If the bill is reintroduced, ultimately, Fitch expects the purchase price would have to be agreed upon through a negotiation with the bondholders. A non-consensual outcome would raise substantial questions about bondholder rights more generally and would need to be considered even in the context of performing transactions.

Practically, this would be most relevant to Fitch-rated projects with similar lease purchase agreements such as the Mid-Bay Bridge Authority (senior/junior liens rated BBB+/BBB/Stable). The current ratings of other facilities with a gross revenue pledge, like Florida Turnpike Enterprise (rated AA/Stable), which is a division of FDOT and a large and mature enterprise with considerable positive cash flow available for reinvestment, are less driven by the state support. However, in a crisis that support will remain a material credit factor boosting credit quality.

FDOT’s commitment over many decades has helped toll agencies achieve and maintain investment-grade ratings, as the gross revenue pledge provides for an additional level or protection particularly during early operating periods, economic downturns and heavy investment cycles.

Contact:

Tanya Langman
Director
+1-212-908-0716
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Anne Tricerri
Associate Director
+1-646-582-4676

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 March 2018: The New Jersey governor’s executive budget delivers on policy goals outlined during his campaign; however, numerous new program and tax credit initiatives, combined with proposed extensive tax policy actions, cannot in the near term materially change the persistent underfunding of retiree liabilities and the elevated long-term liability burden that are the key drivers of the state’s below-average ‘A’ Issuer Default Rating (IDR), according to Fitch Ratings.

The $2 billion, or 5.7%, proposed revenue growth from fiscal 2018 includes $1.5 billion from tax increases, supporting 4.2% growth in state appropriations. These increased revenues would go to new spending and leave the state with still slim reserves and reduced flexibility to respond to future economic downturns through revenue raising. Fitch notes that the state has significant spending pressures not only due to the demands of underfunded retiree benefit liabilities but also because natural revenue increases resulting from modest economic growth in recent years have gone primarily towards the phased-in growth in annual pension contributions. This dynamic has led to underfunding of other state needs.

GRADUAL PENSION RAMP UP CONTINUES

If implemented, the budget would continue the state on the path of a gradual 1/10th annual phase-in to the full actuarially determined contribution (ADC) for pensions in fiscal 2023. Despite the $691 million increase to the pension contribution, Fitch would expect further deterioration in the funded condition of the plans over the near term as the contribution remains well below the ADC. The $3.2 billion total pension contribution (9% of the budget) is a 28% increase from fiscal 2018 that accounts for 39% of proposed budget growth and funds 60% of the ADC. The contribution meets Fitch’s rating expectations given the state’s policies in recent years and hews the governor to the same path as his predecessor.

Employee and retiree medical expenses also continue to loom large, representing $3.4 billion (9%) of the governor’s budget. As in most states, OPEB contributions remain well below actuarial recommendations, growing the accrued liability. Escalating pension and OPEB liabilities are expected to remain negative rating factors absent further policy action that reduces the liabilities, forestalling improvement in the state’s IDR.

FISCALLY PRUDENT PROPOSALS

The governor’s proposals for increased funding to New Jersey Transit (NJT), greater adherence to full education formula funding, reduced one-time budget balancing actions and an addition to state cash balances to provide greater financial cushion would either address critical state needs or support more sustainable financial operations, in Fitch’s view. Further, the suggested return of the state sales tax rate to 7%, lowered as part of the transportation funding agreement in 2016, would provide $581 million in additional revenue. This is a positive step. At the time of that agreement, which lowered the sales tax rate in exchange for an increase in the gas tax, Fitch noted that the state had replaced a growing revenue source with one with more limited growth prospects and added to the pressure on operating funds.

NEW PROGRAM INITIATIVES

Excluding the operating budget’s increased pension contribution, recommended program expense grows by a net $918 million. Significant increases include $933 million in additional K-12 education funding, including $283 million in added formula aid, $242 million in additional state subsidies for NJT, $120 million for state and teacher employee and retiree health benefits, $100 million for opioid addiction programs and $50 million for assistance to community college students. Medicaid grows by $244 million, boosting this program’s draw on the operating budget to 12% of proposed expenditures although remaining far below the 46% of the budget dedicated to education (including higher education). Offsetting these increases are reductions to various line items, $46 million in expected state-wide salary and operational savings, and reductions in certain state aid categories and capital construction. In addition to programmatic adjustments, the governor has proposed tax policy changes that reduce revenue to the state, including increases in the earned-income tax credit ($27 million) and the state property tax deduction cap ($80 million).

EXTENSIVE NEW REVENUE MEASURES

To fund these initiatives, the governor has proposed a milestone 10.75% personal income tax (PIT) rate for taxpayers earning more than $1 million, which would provide an estimated $765 million in fiscal 2019, as well as numerous business tax changes for an additional $110 million; both in addition to the proposed sales tax changes. The governor’s budget also includes the legalization and taxation of marijuana which is estimated to deliver $80 million in tax revenue. Fitch believes there is uncertain legislative interest in the PIT proposal, particularly given recent passage of federal tax changes in December 2017 that capped the deduction for state and local taxes (SALT) and is expected to increase residents’ effective state tax burden. Should the measures fail to be approved, other revenue solutions or expenditure reductions will need to be identified to balance the fiscal 2019 budget.

The state’s revenue forecast is premised on 2.4% growth in the sales tax base; 4% and 4.2% growth in personal income in 2018 and 2019, respectively; 4% growth in gross state product in both 2018 and 2019; and 1% and 0.8% growth in nonfarm employment in 2018 and 2019, respectively. Fitch believes these forecasts to be reasonable based on recent quarterly experience but somewhat robust when considering the state’s recent annualized growth, while noting that future economic growth is expected to remain below that of the nation.

BALANCED FISCAL 2018 OPERATIONS

Updates to the state’s fiscal 2018 financial operations are included in the executive budget and point to anticipated budgetary balance this fiscal year. Current forecast revenue is a 2.2% improvement over the forecast used to enact the budget; however, the improvement largely incorporates a shift of sales tax revenue from non-operating funds to operating funds in addition to expected PIT revenue that is above forecast, offset by shortfalls in other revenue sources. Over 40% of the increase in the PIT is attributable to $253 million in one-time revenue related to the repatriation of overseas hedge fund profits, a direct effect of Section 457A of the federal Internal Revenue Code passed in 2008. Unexpected growth in the PIT excludes $200 million collected in December from taxpayers seeking to take advantage of the higher SALT deduction as the state believes this revenue would have been collected in April 2018.

Final, estimated appropriations increase by $1.2 billion (3.6%) from the enacted budget, partly incorporating appropriations linked to the moved sales tax revenue. The state’s estimated year-end budgetary fund balance, which the state views as its budgetary cushion, is projected to be $738 million (2% of operating fund appropriations) largely incorporating a larger beginning fund balance than anticipated when the budget was enacted.

Contact:

Marcy Block
Senior Director
+1-212-908-0239
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Douglas Offerman
Senior Director
+1-212-908-0889

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 Manitoba government will not build a new school in Brandon using the public-private partnership model and will instead use public funds to see the long-awaited project come to fruition.

During its 2018 budget announcement on Monday, the government announced it would set aside more than $100 million to see five schools built —one more than was previously announced — through the Public Schools Finance Board.

By combining certain phases from each project, such as their design and build, the province says it will be able to build multiple schools at once, reduce duplication, accelerate the process and save at least $18 million.

“At the end of the day, we’re taking an evidence-based approach and we’re saying we care about the evidence,” Finance Minister Cameron Friesen told reporters via teleconference.

“In this case, the evidence points us to a conventional build.”

Last year, the government said it would explore the possibility of building four new schools, including one in Brandon, using the P3 model, a system where the private sector works with government to build and manage projects.

KPMG was commissioned back in August to develop a business case and Friesen said the firm recommended that government pursue other opportunities.

“We did a study on the P3 methodology, we learned valuable lessons from that investment, we took away new thinking about how to approach the projects, but I assure you, the decision to proceed with this enhanced conventional school construction model is our own,” Friesen said.

While the P3 model is still a “good option,” Friesen said the approach taken by government was thought to be the best in this case.

With tendering set to begin by the end of the year, he said the schools could take form within a year.

“What we told Manitobans is were not ideological about the methodology, what we were is interested to know if savings could be gotten at.”

The announcement was well received by Brandon School Division chair Linda Ross, who, while against the idea of a P3 school, said she gave the government “kudos” for looking at the data and listening to what people had to say.

“This is a very, very welcome announcement today, so we’re just thrilled by it.”

The BSD was not consulted by KPMG and Ross said she hopes the board will get to see a copy of the report.

A provincial spokesperson said the KPMG report will be released at the conclusion of the tendering process in order to avoid any potential effect on competitive bids.

Ross applauded the government for not being stuck in an “ideological mode” and said if the school can be built more efficiently, that is a good thing.

“We’ve got 400 kids who would like to go to school in their own neighbourhood,” she said.

The P3 model was heavily criticized by CUPE Local 737, which pointed to cost overruns and poor planning in other provinces that have used the approach for their schools.

The union even put up a billboard on 18th Street to express its opposition to the idea.

“I think the taxpayers of Brandon are lucky the government has changed their mind and going in the right direction,” said CUPE Local 737 president Jamie Rose.

Brandon Teachers’ Association president Peter Buehler said all things considered, the government’s approach looks like a better one than a P3 school.

“Well our first thought is that P3 projects elsewhere have been fraught with difficulty and unexpected expense, or unreported expense,” he said, “and if the government hasn’t come up with a P3 proposal yet that anybody can look at, then this looks like a better decision.”

The school in Brandon will be a K-8 building, located in the southeast corner of the city at Ninth Street and Maryland Avenue, with a capacity for 450 students — 675 upon future expansion — and 74 child-care spaces.

The other projects include a K-5 school in Precinct E of the Seven Oaks School Division, a K-8 school in Waterford Green within the Winnipeg School Division, and both a K-8 and 9-12 school in Waverley West in the Pembina Trails School Division.

Brandon has been in need of a new school for years due to its growing student population as a result of more families moving to the city for work at Maple Leaf Foods.

The former NDP government promised to build a new school in November 2015, but little was heard about the project following the provincial election in 2016.

The Brandon Sun

By: Michael Lee

Posted: 03/13/2018 3:00 AM

Fitch Ratings-New York-16 March 2018: A proposed amendment to the Florida Constitution that would raise legislative voting requirements to increase state taxes and fees could reduce the state’s flexibility to address future economic volatility, says Fitch Ratings. The amendment, which has been approved by both the state Senate and House in joint resolution HJR 7001, would require future legislatures to reach a two-thirds vote to increase state taxes and fees. There is currently a simple majority requirement for such increases. The amendment would apply to broad based taxes such as the sales tax as well as to the various fees and charges by the state for services, including highway user fees and university tuition and fees. Voters will decide the question on Nov. 6, 2018, with a 60% vote necessary to amend the state constitution.

This amendment would not have an immediate impact on state credit quality (Florida’s Issuer Default Rating [IDR] is AAA), although over time, the more stringent requirement for raising revenues could lead to erosion in the state’s financial resilience. Fitch assesses the state’s revenue framework at the ‘aa’ level, reflecting in part the economic sensitivity of its largest revenue source, the sales tax. Fitch expects Florida’s revenues to grow on a real basis with continued economic expansion, but notes that revenues are likely to exhibit greater weakness during economic downturns. The rating also incorporates the virtually unlimited legal ability the state maintains to raise revenues, despite constitutional restrictions on levying a personal income tax or a state-wide property tax.

The addition of a super-majority requirement to raise taxes would not in and of itself imply a weakened legal ability to raise taxes since the power to do so would remain within the legislature. However, the higher bar for raising taxes would make it more difficult to utilize one of the key tools that states have to manage financial operations during periods of economic and revenue weakness, potentially lowering the state’s resiliency through the economic cycle. Fitch’s expectations related to financial resilience through a moderate downturn is a key rating driver, one that has been a credit strength for Florida. While the state has typically first turned to expenditure reductions when faced with budget gaps, it did ultimately raise various fees during the Great Recession when other measures proved insufficient to maintain fiscal balance.

Other states have seen financial operations narrow and credit quality decline at least in part because super-majority voting requirements limited the practical use of revenue-raising as a budget balancing tool. For example, the state of Oklahoma, which has a 75% voting requirement, has struggled to close recent structural budget gaps, relying on deep spending cuts, one-time actions and reserve draws. While it is Fitch’s expectation that Florida will continue to exhibit the strong financial management that is one of the underpinnings of its ‘AAA’ IDR, we will assess the extent to which obstacles to revenue raising affect longer term fiscal balance for the state and the various entities that rely on legislative control over revenues to support credit quality. This would include, for example, transportation infrastructure projects that are supported by gas taxes and tuition and fees charged by public universities. Any impact on fiscal operations would likely only become apparent over time, potentially as the state addresses a future downturn.

The language of the amendment indicates that the super-majority voting requirement would apply to new taxes and fees, as well as to raising existing taxes and fees, but only when there is a requirement for a vote of the legislature. Increases that are incorporated into existing legislation would not be subject to further vote. For example, emergency assessments that can be levied by the Florida Hurricane Catastrophe Fund and Florida Citizens Property Insurance Corp. are incorporated in existing legislation and would not require an additional vote. Further, the amendment specifically does not apply to any tax or fee imposed by a county, municipality, school board or special district.

Contact:

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

Michael Rinaldi
Senior Director
+1-212-908-0833

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-09 March 2018: Fitch Ratings believes the recent wage dispute in West Virginia, which ended with approved salary increases for the state’s teachers, service personnel and state employees, is further evidence of the fiscal pressures that underpin our Negative Outlook on the state’s ‘AA’ Issuer Default Rating (IDR).

The state’s financial challenges, which have increased with the need to fund the higher salaries, are likely to continue despite recent revenue improvement. The multi-year weakness in the state’s key state revenue sources has reflected its struggle with a long-term decline in coal production and related economic turmoil, despite some improvement in fiscal 2018.

The salary increases provide for a fixed-dollar-amount, average 5% raise for all employees effective July 1, 2018. The increases have a $100 million impact on the $4.8 billion (General Revenue, Lottery and Excess Lottery) executive budget for fiscal 2019; $80 million above the 1% average salary increase initially proposed by the governor. The state expects to adjust the governor’s recommended budget and apply cash balances in its Medicaid program in fiscal 2019 to accommodate the increases. Fitch believes this additional cost may prove challenging to accommodate in future budgets given vacillating severance, income and sales taxes; prior use of reserves to fund operations; and the cuts the state has already made through a period of revenue weakness. As in most states, education and health and human services spending are the state’s largest operating expenses, and the strong employee push for wage increases and health care plan improvement speak to the challenges of cost control efforts in these areas.

Revenues in fiscal 2018 are meeting expectations through February 2018, and the governor has identified an additional $58 million in resources to fund the fiscal 2019 budget beyond what was incorporated into his budget proposal. The legislative budget that is currently moving through both the House and the Senate does not apply the additional forecast revenue to funding the fiscal 2019 budget.

Revenue growth is forecast in personal income and sales taxes as the state anticipates economic momentum from road construction projects, increased consumer spending related to federal tax cuts and stability in the energy sector. Given fiscal performance prior to 2018, Fitch remains cautious that the state will achieve these targets. Additional resources do not include any direct windfall revenue from the federal Tax Cuts and Jobs Act as the state subsequently decoupled its personal income tax exemption policies from those of the federal government, relinquishing $140 million in estimated potential tax benefit in fiscal 2019.

The state’s ‘AA’ IDR incorporates the state’s economic concentration in natural resource development, strong ability to control revenue and spending policy, and commitment to addressing its liability profile. The rating is supported by a still sizable level of reserves at the state’s disposal, and the governor’s budget proposal does not appropriate from the rainy day fund for operations. The Negative Outlook reflects the risks associated with the state’s cyclical natural resource markets, particularly the longer term decline in coal production, and Fitch’s concern that the state will be challenged in providing a durable response to its long-term economic and financial challenges.

For more information on the state, see “Fitch Rates West Virginia’s $44MM School Building Bonds ‘AA-‘; Outlook Remains Negative” dated Sept. 7, 2017 and available at www.fitchratings.com.

Contact:

Marcy Block
Senior Director
Fitch Ratings, Inc.
+1-212-908-0239
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

• Over 110 of the 490 reporting so far have underfunded plans
• Reports required by new state law aimed at bolstering pensions

Five years after Detroit became the biggest U.S. city to go bankrupt, leading to cuts in the pension benefits of its retirees, Michigan is learning that the retirement promises made by dozens of other municipalities are far from secure.

Under a new state law, cities, towns and authorities were required this year to submit financial details on the status of their pension and health care plans. The results, so far, are grim: the Michigan Treasury Department found that over 110 — or more than one fifth — have underfunded pension or retiree health-care plans.

The figures underscore the financial pressures facing governments in Michigan, a labor union stronghold that was hit hard by the loss of manufacturing jobs.

A pension was deemed underfunded if it had less than 60 percent of what’s needed to cover the benefits that have been promised and the government’s annual required contribution consumed more than 10 percent of its revenues. Collectively, the nearly 500 local governments that have reported so far had a $6.4 billion shortfall in their pensions, the data show.

Flint, a financially distressed city known for cost-cutting decisions that left residents without access to safe drinking water, reported a $345.7 million unfunded liability and said required payments totaled 20 percent of revenue. Highland Park, a Wayne County city, reported that the retirement benefits of its general employees were just 2.1 percent funded.

Those with pensions or health care plans identified as underfunded can apply for a waiver that shows the problem has been addressed, state Treasury spokesman Ron Leix said in an email. If the locality isn’t given a waiver, it must complete a “corrective action plan” with ideas for addressing the debt. Those plans — which could include changes like reducing benefits granted in the future — will be reviewed by a newly-created state board.

Jordan Stanchina, city manager of Iron Mountain, Michigan, said it’s hard to trace the pension shortfall to just one cause, but cited under-performing investments as a factor.

The city owes $7.7 million to the Municipal Employees’ Retirement System of Michigan, making its liability just 38 percent funded, according to the treasury department data. He said it is hard for the city to devote more revenue to pensions thanks to state restrictions on property tax hikes.

“There’s not any excess funds to do anything with,” he said.

Bloomberg

By Amanda Albright

March 14, 2018, 6:31 AM PDT

• Treasurer warned governor’s plan would cause technical default
• Governor’s aide says he won’t back plan that would affect debt

Connecticut bondholders, rest easy.

Whatever plan Governor Dannel P. Malloy proposes to avoid skyrocketing payments to the state’s teachers pension, it won’t trigger a technical default on Connecticut’s pension bonds, his budget director said in an interview.

“We’re looking at a whole series of options right now, but none that we pick, unless they carry me out feet first, are going to involve the state defaulting or not honoring its bond covenants,” said Benjamin Barnes, Secretary of the Office of Policy and Management.

Connecticut Treasurer Denise Nappier warned that Malloy’s proposal to stretch out payments on the teachers’ pension’s unfunded liability beyond 2032 to sidestep a potential $5 billion payment increase would trigger a technical default. Municipal Market Analytics, an independent research firm, said last week that such a breach would be a “clear credit negative” and investors should demand higher yields on Connecticut bonds to compensate for the risk.

A covenant in a $2.1 billion pension bond issue from 2008 requires the state to appropriate the full annual contribution to the pension and amortize its unfunded liability through 2032, the year the bonds mature.

The governor’s office has said the legislature can authorize the board overseeing the teachers’ pension to change the assumed rate of return and extend the amortization period, meaning the state would continue to make full annual contributions, just over a longer period. But he’s also considering alternative proposals.

“We would be better off with a longer amortization period and lower investment return assumption,” Barnes said. “We would like to get there, if there’s a way to do so, without defaulting on the covenant.”

A series of proposals to shore up the teachers’ pensions could be released as soon as Wednesday. “I’m certain bondholders won’t be harmed by what we’re proposing,” Barnes said.

The governor, who is set to leave office in 2019 and isn’t seeking re-election, is acting because Connecticut’s annual contribution to the teachers’ pension is estimated to rise to $6 billion in 2032 from $1 billion in 2014 if investments return an annualized 5.5 percent, according to a Nov. 2015 study by the Center for Retirement Research at Boston College commissioned by the state. The teachers’ pension had 10-year annualized returns of 5.3 percent as of June 30, 2016.

To make the required payments to the pension, Connecticut’s governor has said residents would have to choose between deep cuts to local aid or large tax increases if investment returns didn’t meet their benchmark.

Nappier argues that Malloy’s “doomsday scenario” won’t happen because it was calculated using “inconsistent and inflammatory assumptions.”

Last year, the state extended the amortization period for the state employee pension to 2046. The deal, which also reduced the assumed return on the pensions’ investments to 6.9 percent from 8 percent, avoided an increase of annual payments to the pension ranging from $4 billion to $6 billion annually. Connecticut’s general fund budget is currently about $19 billion.

The move reduced the risk that the pension would consume a growing share of the budget, Barnes said.

“We would like to do the same thing for the teachers’ system,” he said. “Nobody had done any of this work for 30 to 40 years before us. We’re trying to finish this up and put theses funds in good order during our tenure.”

Bloomberg Markets

By Martin Z Braun

March 13, 2018, 10:50 AM PDT

Kansas lawmakers, increasingly skeptical that tax breaks deliver economic wins, looked closely this week at economic incentive programs.

Senators on the Commerce Committee spent several days discussing bills that would add new requirements to sales tax revenue bonds, known as STAR bonds.

STAR bonds allow local governments to borrow money for a building project, and tax collections created by the development are diverted to pay off the loans.

The Topeka Capital-Journal reported last year that more than $500 million in tax revenue had been used to pay back the bonds since 2001.

One bill would create a panel to study the proposals, including the state’s return on the investment, before approving the projects.

The secretary of commerce currently approves STAR bonds. Republican Sen. Julia Lynn, who heads the Senate Commerce Committee, wants more oversight.

“To make a decision on whether to use millions of dollars in taxpayer funds to go to a development project,” Lynn said, “there’s just nothing in place.”

Another bill before senators would restrict the types of projects eligible for STAR bonds. It would allow tourist attractions but put new restrictions on retail developments. Some lawmakers have said shopping centers should be financed by private developers, not state incentives.

Olathe City Manager Michael Wilkes urged lawmakers not to block retail developments.

“From a practical application, (that) really kills your project,” he said. “Those kind of things are the only things that generate enough revenue that really make the project worthwhile.”

He said large stores such as Cabela’s or Nebraska Furniture Mart in Wyandotte County can be critical to an overall development package that works.

Johnson County resident Clint Anderson is a financial advisor with experience in commercial banking and real estate. He told senators that he’s opposed to projects, including a soccer stadium and training facility in Kansas City, Kansas, being subsidized with public bonds.

He said there’s no shortage of private funding available.

“If there’s a good idea that’s operationally and economically feasible, there’s capital for it,” Anderson said. “It shouldn’t be paid for by the taxpayers.”

Trey Cocking, deputy director of the Kansas League of Municipalities, said that won’t always be the case. He used the example of a project being developed in Atchison that would include an aviation museum and updates to the city farmer’s market.

“These aren’t projects that the private market’s going to do, because there are public components to these projects,” he said. “There are public goods to these projects.”

Amanda Stanley, general counsel for the municipal league, said it’s easy to look back at successful STAR bond projects and assume they would have attracted private investment. Bu she said that’s not a guarantee.

“At what point would it have developed? How long is the state willing to wait?” she asked. “There are sometimes projects that just need that push start.”

House members also dove into the issue of state tax incentives, advancing a bill Thursday that would make more information publicly available on local and state incentives, including STAR bonds.

It would require state officials to compile and publish information about tax incentives and whether each of the incentive programs is producing a positive return on investment.

Democratic Rep. John Carmichael said the bill will help lawmakers next session as they evaluate whether incentive programs need to be modified.

“We need to know how much these tax benefits are costing the state of Kansas,” he said. “Our constituents not only need to know it, they want to know it.”

KCUR.ORG

By STEPHEN KORANDA • MAR 8, 2018

Stephen Koranda is Statehouse reporter for Kansas Public Radio, a partner in the Kansas News Service. Follow him on Twitter @kprkoranda. Kansas News Service stories and photos may be republished at no cost with proper attribution and a link back to the original post.

On March 8, Judge Mary Jacobson issued her long-awaited affordable housing decision in Mercer County on the methodology for calculating statewide and municipal affordable housing obligations. The decision also set the numbers for the Mercer County towns that did not settle their litigation, Princeton and West Windsor (Municipalities). The 217-page decision meticulously went through the various (approximately two dozen) components of calculating affordable housing need and the expert testimony on each component on behalf of the Municipalities, Fair Share Housing Center (FSHC), the New Jersey Builders Association (NJBA) and the court-appointed special master, Richard Reading. In general, the decision is a positive result for developers that are intervenor-defendants or interested parties in other affordable housing litigation throughout the state. However, it will take some time to analyze this decision and its application to other towns in calculating municipal affordable housing obligations.

If nothing else, the decision is positive, as it should shake loose the affordable housing litigation in other counties that have stalled while towns, special masters and the courts waited for the Mercer County decision. With respect to the substance of the decision, the court determined that the overall statewide affordable housing need is 159,630 units. That is more than double the number the Municipalities projected (63,070 units) and about half of what FSHC projected (339,673 units). The court’s statewide need projection is also higher than the approximately 115,000 units projected by Reading, the special master. As anticipated on this polarizing issue, neither side “won,” and the court found a happy medium. As for Princeton and West Windsor, the court determined their new-construction affordable housing obligation to be 753 units and 1,500 units, respectively. This includes the obligation from the “gap period” (1999 to 2015) and prospective need obligation. Though not referenced in the decision, the below chart compares the court’s municipal projection with the projections made by the Municipalities and FSHC in prior reports submitted to the court.

Continue reading.

by Craig M. Gianetti

March 13, 2018

Day Pitney, LLP

Whether it was political scandals like ‘Bridgegate’ under Gov. Chris Christie or the near financial insolvency of Atlantic City due to sharp decline in revenues, New Jersey has had its fair share of financial and political turmoil in recent years.

The newly elected Democratic 56th Governor of New Jersey, Phil Murphy, has had a long career with Goldman Sachs before bringing himself into government and eventually running for governor. During his campaign, Mr. Murphy had made some great promises to the citizens of New Jersey to fix the balance sheet and take the financial strain off with newly revived revenues by introducing new income tax measures for the wealthiest. Retrospectively, under the previous administration of Chris Christie, the state faced over ten credit downgrades, and pension costs have been at higher than normal levels. It is projected that in the next five years the state’s pension liabilities will almost double.

In this article, we will take a closer look at the state of New Jersey’s financial picture and whether Phil Murphy’s guidance and policies will help create a brighter financial outlook for the state.

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by Jayden Sangha

Mar 15, 2018

municipalbonds.com

When Santa Cruz, a picturesque and funky coastal city, first started to feel the pinch of rising retirement costs for city workers, it took several steps to limit the fiscal pain.

As recommended by the League of Cities and other authorities, Santa Cruz issued a bond to pay down its rising pension liabilities, set aside funds to cover increasing demands from the California Public Employees Retirement System (CalPERS), shifted some employees into lower-benefit pension plans and made sure that its workers paid significant portions of pension costs.

Nevertheless, the impact on the small city’s budget continued to grow, leading City Manager Martin Bernal to tell the city council in his 2016 budget message that “our biggest challenge is the skyrocketing increases in health and retirement costs. These costs have gone from 28 percent of general fund salary in 2004 to 43 percent of salary in 2015, to an anticipated 58 percent of salary in 2020.”

With operating costs, particularly for pensions, continuing to outpace revenues, even during a generally upbeat economy, city officials projected budget deficits growing to more than $20 million a year by 2021.

Santa Cruz is not alone. Throughout California, city governments are facing budget shortfalls as CalPERS cranks up mandatory contributions in a somewhat desperate effort to make the gigantic trust fund healthy enough to cover pension promises to millions of state and local government workers.

It has only about 70 percent of the money it says is needed to cover pension obligations – and that assumes that its investments will return profits that many experts believe are unrealistic. CalPERS lost about $100 billion during the Great Recession a decade ago and has not fully recovered, while payouts to retirees grow due to demographic factors.

City officials have repeatedly appeared before the CalPERS board to seek relief, contending that some cities will be driven to insolvency. But for the most part, CalPERS officials have taken the attitude that making the fund actuarially healthy is their highest priority.

In February, the Santa Cruz City Council unanimously declared a fiscal emergency, preparatory to placing a quarter-cent sales tax increase on the June ballot.

Santa Cruz isn’t alone on that approach either. Throughout California, cities have taken, or are planning, sales tax increases.

However, cities rarely cite pension costs as the specific reason for the tax increases, because doing so might generate more opposition. Typically, they just say the money is needed for “police and fire services,” which is a half-truth since police and fire pensions are the biggest drivers of rising retirement costs.

Also, a general sales tax increase ballot measure requires only a simple majority vote, while one dedicated to a specific purpose, such as pension costs, would require a two-thirds vote.

“We’re in a brave new world of public finance and our community values its municipal services and we do want to be able to fulfill those expectations,” Santa Cruz Councilwoman Cynthia Mathews said as the state of fiscal emergency was declared.

Whether those expectations can, in fact, be fulfilled is questionable even if Santa Cruz’s voters endorse the sales tax hike.

The $3 million a year it would generate is just a fraction of the extra $9-11 million that the city calculates it’s paying to cover CalPERS shortfalls and even a smaller slice of the $20 million annual deficit city officials are projecting.

California’s municipal finance crisis is likely to get worse before it gets better – if it ever does.

calmatters.org

By Dan Walters | March 18, 2018

In February, the Santa Cruz City Council unanimously declared a fiscal emergency, preparatory to placing a quarter-cent sales tax increase on the June ballot.

When Santa Cruz, a picturesque and funky coastal city, first started to feel the pinch of rising retirement costs for city workers, it took several steps to limit the fiscal pain.

As recommended by the League of Cities and other authorities, Santa Cruz issued a bond to pay down its rising pension liabilities, set aside funds to cover increasing demands from the California Public Employees Retirement System (CalPERS), shifted some employees into lower-benefit pension plans and made sure that its workers paid significant portions of pension costs.

Nevertheless, the impact on the small city’s budget continued to grow, leading City Manager Martin Bernal to tell the city council in his 2016 budget message that “our biggest challenge is the skyrocketing increases in health and retirement costs. These costs have gone from 28 percent of general fund salary in 2004 to 43 percent of salary in 2015, to an anticipated 58 percent of salary in 2020.”

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• Democratic lawmakers who would be allies stick to own script
• Eagerness to undo Christie agenda, and little money to do so

Governor Phil Murphy’s campaign pledges are about to collide with New Jersey politics, Wall Street skeptics and a massive budget deficit.

Since his term started in January, Murphy has pleased his progressive base with moves on women’s wages, health care, climate change, immigration and offshore drilling. On tough fiscal matters, though, he and fellow Democrats who control the legislature — all eager to undo Republican Chris Christie’s policies — are following their own agendas.

Murphy’s first state spending plan, which he’ll introduce Tuesday, will include a millionaire’s tax to help generate $1.3 billion for New Jersey’s underfunded schools, transportation and pension systems. That initiative lacks support from Senate President Stephen Sweeney, who says residents are being penalized enough by President Donald Trump’s U.S. tax changes, which limit deductions for individuals’ state and local taxes.

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by Elise Young and Michelle Kaske

March 12, 2018

Bloomberg Politics

NEW YORK (S&P Global Ratings) March 5, 2018–S&P Global Ratings today said that it believes a delay in implementing changes to pension return assumptions, recently announced by New Jersey’s acting treasurer, should allow the state more near-term budget flexibility, but does not address the state’s long-term pension problems.

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• Federal oversight board to consider governor’s ideas March 30
• A hurricane, a recession and then a regimen of deep cuts

Puerto Rico’s hard times are about to get harder.

Almost six months after Hurricane Maria, Governor Ricardo Rossello is proposing what, for many, might seem unthinkable after a decade of recession: austerity.

His plan to consolidate government departments and reduce municipal and university aid underscores just how bad things have gotten since the September storm. The sober reality: The government was kept afloat by borrowed money for years, and now the spigot is shut off. The U.S. territory is bankrupt, running a deficit and creditors are fighting in bankruptcy court for the $74 billion they’re owed.

If the federal panel that oversees Puerto Rico’s finances approves the governor’s plan by March 30, self-imposed discipline is bound to increase the pain, much as it did in Greece. For bondholders and the 3.3 million residents, the question is whether the move will do more harm than good, or help Puerto Rico overhaul its economic engine and repay more of its debt.

“It’s not like things will magically get better,” said Jason Bram, a New York Fed research economist. “Hard decisions are made. People are upset.”

Enfeebled Island

Investors, bond-insurance companies, the oversight board and island officials have been discussing how to write down the burden through mediation that’s part of the island’s bankruptcy. Rossello’s fiscal plan estimates the central government may be able to repay almost half the $41 billion of principal it owes, an amount that has left creditors unsatisfied.

But Puerto Rico’s economy has been feeble for years despite the rich diet of debt that, absent vigorous private investment, maintained the island in a recessionary torpor. The bankruptcy and storm brought it to a crisis, but Rossello’s cure is no sure thing.

Greece’s economy shrank by a quarter after the government slashed spending in 2010, reformed pensions and hiked taxes after the financial crisis. That wasn’t enough to prevent the biggest sovereign debt restructuring in history in 2012 — as well as two further bailouts. The last came after Prime Minister Alexis Tsipras swept to power on an anti-austerity wave in 2015, only to agree to more cuts.

Civic Unrest

There were protests and riots as unemployment rose as high as 27 percent in 2013, and more than one in five workers remain jobless. In Puerto Rico, unemployment in January was 10.9 percent, but about a quarter of the commonwealth’s workers are employed by governments and agencies that stand to be slashed.

Rossello believes his plan will inspire businesses to invest. It aims to cut and simplify tax rates and structure, and speed sluggish permitting and registration. The governor also wants to lower electricity costs and build a more reliable power grid through private investment.

“It’s transformational, based on structural reforms that we’re proposing,” Rossello said in an interview.

Unspeakable Word

Rossello may not like to call it austerity — “Austerity will never get us out of this situation,” he said — but his plan also imposes deep spending cuts.

The goal is to whittle 118 executive-branch departments to 35 and 35 school districts to seven. The central government plans to reduce allocations to municipalities and the University of Puerto Rico by $1.4 billion through 2023. In all, there would be $3.4 billion of savings by fiscal 2023, according to the plan.

“It would make sense if they could get back on their feet in the wake of the hurricane and then engage in the necessary steps to address their fiscal problems,” said Mark Zandi, chief economist at Moody’s Analytics Inc.

Rossello’s proposed savings are more than 3 percent of the projected gross national product, which could create an economic drag of more than 4 percent, according to Brad Setser, a former Treasury Department official who worked on a Puerto Rico rescue law enacted in 2016.

“The fiscal plan doesn’t just assume a near-term rebound, it assumes a sort of almost permanent change in Puerto Rico’s growth trajectory, which seems overly optimistic,” said Setser, a senior fellow at the Council on Foreign Relations.

Driven Away

Puerto Rico stopped repaying bondholders in 2016 to free cash for other operating expenses. Rossello’s plan doesn’t include principal and interest payments until 2020. In the past few years, the commonwealth has consolidated schools, boosted the retirement age, increased workers’ pension contributions and raised taxes.

“There have been cuts in health care and education, in all kinds of social services,” said Mark Weisbrot, co-director of the liberal Center for Economic and Policy Research in Washington, and an austerity opponent. “They lost a lot, and that’s why so many people have left the island as well.”

“The recession and the hurricane together have destroyed a great deal of the economy’s productive capacity, so the priority has to be actually returning to growth first,” Weisbrot said.

The commonwealth’s economy has been a shambles for years. It fell into recession in 2007 after federal tax breaks for pharmaceutical and other manufacturers ended, prompting companies to leave or reduce operations. It’s posted only one year of growth since. More than 400,000 residents left even before Hurricane Maria struck on Sept. 20, and the exodus has only grown.

While Puerto Rico needs to stop spending money it doesn’t have, reducing that sharply now will hurt, Zandi said. “It will be a negative for the economy, at least when the cuts are taking effect,” he said.

Half Measure

But Rossello’s plans may not go far enough, said Natalie Jaresko, executive director of the federal oversight board. The board will seek a 10 percent cut in pension costs by reducing payments in the face of a $49 billion unfunded liability, she said. The panel also wants Puerto Rico to transfer teachers and judicial workers into a 401(k)-like retirement plan.

The system, she said, must be “affordable, but predictable and transparent.” It also could mean less support for the economy at large.

Puerto Rico has requested $94.4 billion of federal assistance that would restore homes, rebuild infrastructure, provide services — and help offset Rossello’s cuts. Washington has approved about $50 billion, although Congress doles out the relief in portions and the U.S. Treasury has yet to extend disaster loans.

“Without help, it’s hard to see Puerto Rico finding a bottom at least anytime soon without just tremendous pain and without the island’s population being hollowed out,” Zandi said.

Jaresko said pain strengthens. With the right plan, the commonwealth will emerge “with a different ground for businesses to operate in, with a different set of conditions. If we do not do the structure reforms, you can’t come out of this.”

Bloomberg

By Michelle Kaske

March 15, 2018, 5:00 AM PDT

— With assistance by Marcus Bensasson, and Yalixa Rivera

Rally prompted by data showing earlier estimates of hurricane’s financial impact were too pessimistic

Debt from Puerto Rico is the top-performing bond investment of 2018, reflecting an unexpected improvement in the island’s economy and budding hopes for a settlement with creditors to resolve its continuing bankruptcy.

Most U.S. bonds have lost value this year because of rising interest rates, but an index of Puerto Rico municipal bonds has returned 14% year to date, the top performer out of 323 bond indexes maintained by S&P Dow Jones Indices. Prices of certain Puerto Rico bonds have more than doubled since the end of December.

The rally began in January, when Puerto Rico’s government revealed economic data showing previous estimates of the financial impact of Hurricane Maria were overly pessimistic. More recently, investors have been buying bonds in anticipation of substantive talks with bondholders to reach a consensual restructuring, bondholders and people involved in the negotiations said.

Despite signs of progress, living conditions remain difficult in Puerto Rico. The U.S. territory was contending with economic decay, government mismanagement and excessive debt even before two hurricanes struck the island last year. About 60% of children on the island lived below the poverty line in 2015, according to data from the Pew Research Center.

The bond rebound this year rewards fund managers who stuck with Puerto Rico even when prices fell as much as 60% after the September storms damaged much of the island’s infrastructure and real estate.

With roughly $70 billion of debt outstanding, Puerto Rico is one of only a few large trades available to hedge funds seeking investments that don’t move in lockstep with the broader markets.

GoldenTree Asset Management owns nearly $600 million in face amount of Puerto Rico’s subordinated bonds backed by sales-tax receipts, some of which jumped about 133% in value this year, according to data from the Municipal Securities Rulemaking Board.

That windfall comes as Treasury bonds have lost 1.8% since Jan. 1 and the below-investment-grade loans GoldenTree specializes in have returned about 1.3%, according to S&P Dow Jones Indices.

Not all Puerto Rico bondholders benefited equally from the reversal. Some bond prices rose more than others as traders bet that the island’s various debt categories would recover different amounts in the restructuring. Senior bonds backed by Puerto Rico’s sales-tax collections rose by about 63% this year to 57 cents on the dollar, while bonds issued through the commonwealth’s general account climbed about 40% to around 31 cents on the dollar.

Hedge funds Baupost Group LLC, GoldenTree and Tilden Park Capital Management LP own about $3 billion in face value of the sales-tax bonds and are arguing in bankruptcy court that their bond documents give them repayment priority in the restructuring. Hedge funds Autonomy Capital, Aurelius Capital Management LP and Fundamental Advisors own about $2 billion of the general obligation debt combined and are suing to establish their own primacy. A crucial hearing in these factions’ legal battle is scheduled for April 10.

The recovery in Puerto Rico bonds contrasts with an even sharper decline last fall, when Hurricane Maria struck and President Donald Trump suggested the island’s debts should be wiped out to help it rebuild. Baupost’s owner, Seth Klarman, publicly opposed Mr. Trump’s idea, drawing criticism from nonprofit groups that support debt forgiveness for Puerto Rico and have pushed Baupost clients to divest from the firm.

Investor sentiment started to improve in late December, when Puerto Rico announced $6.8 billion in previously undisclosed government bank accounts. Sentiment strengthened further as economic activity recovered more quickly than expected and Congress in February approved $12.8 billion in federal rescue funds. In February, the island’s government revised its maximum debt capacity forecast to $27 billion from about $14.5 billion.

“The construction boom after the hurricane is fueling an increase in bond prices, but that’s going to be short lived,” said Eric LeCompte, executive director of Jubilee USA Network, one of the activist groups seeking debt forgiveness for Puerto Rico. “We should be focused on long-term economic growth for Puerto Rico and that includes debt relief.”

Bondholders say Puerto Rico is still being too conservative in its economic forecasts in order to maximize debt forgiveness in upcoming restructuring talks.

“The reality diverged greatly from the cataclysmic economic contraction that was being projected by the commonwealth,” said Hector Negroni, co-founder of Fundamental Advisors.

A spokesperson for the Puerto Rico Fiscal Agency and Financial Advisory Authority didn’t immediately return a call seeking comment.

Puerto Rico and the federal oversight board supervising it held mediation talks with creditors in New York this month, people involved in the process said. Formal restructuring negotiations are expected to start in April after the board certifies the Commonwealth’s long-awaited fiscal plan for the next five years, the people said. A crucial hearing is also scheduled to start April 10 in the lawsuit between general obligation bondholders and sales-tax bondholders, possibly spurring the parties toward settlement. The oversight board hopes to reach a restructuring plan in less than a year, one of the people said.

Some remain pessimistic about the likelihood of a rapidly negotiated resolution, in part because of the many different types of bonds Puerto Rico must reach deals on, ranging from highway and electric utility-related debt to the sales-tax and general obligation bonds.

“We think the litigation will go on and on,” says Joe Rosenblum, head of municipal bond research at AllianceBernstein Holding LP.

The Wall Street Journal

By Matt Wirz

March 15, 2018 8:00 a.m. ET

Write to Matt Wirz at matthieu.wirz@wsj.com

• Treasury Dept. will ‘make sure they have the necessary funds’
• Puerto Rico governor has criticized disaster loan delays

The U.S. Treasury Secretary Steven Mnuchin said the federal government is prepared to extend Puerto Rico the loans approved by Congress to help it recover from Hurricane Maria, disputing assertions from island officials that the funds have been needlessly delayed.

“We have a team that stands ready to help them,” Mnuchin told lawmakers during a hearing convened by a House of Representatives subcommittee. “We are ready to lend and we are monitoring their cash flows to make sure they have the necessary funds.”

The comments came after Puerto Rico Governor Ricardo Rossello said the Treasury was acting “recklessly” by delaying the territory’s access to a share of a $4.9 billion loan package that Congress passed in October. The storm exaggerated the financial crisis that had already tipped the territory into a record-setting bankruptcy after a decade of economic decline, population loss and years of borrowing to keep the government afloat.

Puerto Rico, an island of 3.4 million American citizens without a vote in Congress, in November said it will need $94.4 billion from the federal government to deal with the storm damage.

The community disaster loans are aimed at covering only a small share of the toll by helping Puerto Rico make up for tax and utility revenue lost since the storm. Treasury has estimated that amount at about $2 billion for the 180 days after the hurricane.

In January, the Treasury told Puerto Rico it has too much cash to qualify for a loan, given the amounts that the island government had in various bank accounts. The Treasury has said that a loan will be quickly available if Puerto Rico’s cash balance drops below $800 million. Puerto Rico had $1.7 billion of available funds in mid February and has since extended a loan to the Puerto Rico electric company to keep it running.

Mnuchin has said little about Puerto Rico, except when prodded during Congressional testimony. Treasury and the White House’s budget office declined to name who in the respective agencies is in charge of the Puerto Rico issue, and the January letter to Puerto Rico was signed by deputy assistant secretary for public finance Gary Grippo, a career staffer, instead of one of the top political appointees.

Mnuchin said there’s been no decision on whether Puerto Rico’s loans will be forgiven, as is common for those extended after natural disasters.

“We’re not making any decisions today on whether they will be forgiven or not,” Mnuchin said.

Bloomberg Politics

By Saleha Mohsin and Michelle Kaske

March 6, 2018, 8:51 AM PST

— With assistance by Yalixa Rivera

Fitch Ratings-New York-09 March 2018: Fitch Ratings believes the recent wage dispute in West Virginia, which ended with approved salary increases for the state’s teachers, service personnel and state employees, is further evidence of the fiscal pressures that underpin our Negative Outlook on the state’s ‘AA’ Issuer Default Rating (IDR).

The state’s financial challenges, which have increased with the need to fund the higher salaries, are likely to continue despite recent revenue improvement. The multi-year weakness in the state’s key state revenue sources has reflected its struggle with a long-term decline in coal production and related economic turmoil, despite some improvement in fiscal 2018.

The salary increases provide for a fixed-dollar-amount, average 5% raise for all employees effective July 1, 2018. The increases have a $100 million impact on the $4.8 billion (General Revenue, Lottery and Excess Lottery) executive budget for fiscal 2019; $80 million above the 1% average salary increase initially proposed by the governor. The state expects to adjust the governor’s recommended budget and apply cash balances in its Medicaid program in fiscal 2019 to accommodate the increases. Fitch believes this additional cost may prove challenging to accommodate in future budgets given vacillating severance, income and sales taxes; prior use of reserves to fund operations; and the cuts the state has already made through a period of revenue weakness. As in most states, education and health and human services spending are the state’s largest operating expenses, and the strong employee push for wage increases and health care plan improvement speak to the challenges of cost control efforts in these areas.

Revenues in fiscal 2018 are meeting expectations through February 2018, and the governor has identified an additional $58 million in resources to fund the fiscal 2019 budget beyond what was incorporated into his budget proposal. The legislative budget that is currently moving through both the House and the Senate does not apply the additional forecast revenue to funding the fiscal 2019 budget.

Revenue growth is forecast in personal income and sales taxes as the state anticipates economic momentum from road construction projects, increased consumer spending related to federal tax cuts and stability in the energy sector. Given fiscal performance prior to 2018, Fitch remains cautious that the state will achieve these targets. Additional resources do not include any direct windfall revenue from the federal Tax Cuts and Jobs Act as the state subsequently decoupled its personal income tax exemption policies from those of the federal government, relinquishing $140 million in estimated potential tax benefit in fiscal 2019.

The state’s ‘AA’ IDR incorporates the state’s economic concentration in natural resource development, strong ability to control revenue and spending policy, and commitment to addressing its liability profile. The rating is supported by a still sizable level of reserves at the state’s disposal, and the governor’s budget proposal does not appropriate from the rainy day fund for operations. The Negative Outlook reflects the risks associated with the state’s cyclical natural resource markets, particularly the longer term decline in coal production, and Fitch’s concern that the state will be challenged in providing a durable response to its long-term economic and financial challenges.

For more information on the state, see “Fitch Rates West Virginia’s $44MM School Building Bonds ‘AA-‘; Outlook Remains Negative” dated Sept. 7, 2017 and available at www.fitchratings.com.

Contact:

Marcy Block
Senior Director
Fitch Ratings, Inc.
+1-212-908-0239
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

Fitch Ratings-San Francisco-09 March 2018: Los Angeles (Issuer Default Rating AA-/Stable) recently issued its midyear financial status report for fiscal 2018, highlighting the city’s ongoing operational deficit. Based on recent years’ experience, Fitch Ratings expects that the majority of the small projected general fund shortfall of $35 million (less than 1% of fiscal 2018’s budgeted $5.83 billion in revenues) will likely be solved during the course of the year. Despite numerous past projected deficits that have varied widely in size, the city added to its unrestricted general fund balance every year between fiscal years 2011 and 2016. This was achieved in the face of increasing expenditures. However, ongoing expenditure pressures did result in an unrestricted general fund balance drawdown in fiscal 2017.

The city’s recently released fiscal 2017 audit results show that general fund expenditures increased by almost 6% year-over-year, largely driven by increased employee remuneration and contractual service costs. Such ongoing expenditure pressures are anticipated by Fitch’s ‘a’ expenditure framework assessment. By contrast, general fund revenues increased by just over 2%, largely due to increased receipts for most taxes given ongoing economic growth. Fitch’s ‘aa’ revenue framework assessment incorporates the city’s ability to capture revenues from across its wide range of economic activity.

In fiscal 2017, large transfers out of the general fund to support debt service obligations, capital costs, and non-general fund departmental operations, as well as a decrease in the reserve for inventories, resulted in a $142 million total general fund balance drawdown. Nevertheless, fiscal 2017 ended with a still strong total general fund balance of $886 million (16% of spending), down from $1.03 billion (20%) the prior year. The unrestricted general fund balance declined to a still healthy $841 million (15%) in fiscal 2017, from $903 million (19%) in fiscal 2016.

The city lists various revenue and expenditure concerns for fiscal 2018, most of which had previously been cited in fiscal 2017. These include local and federal funding uncertainties, a HUD settlement payment, and potential unbudgeted expenditures for liability claims. The city’s multiyear projections (last published in June 2017 and due to be updated in April) indicate that structural balance could be achieved by fiscal 2022. However, this assumes that the city will solve each year’s deficit with ongoing solutions, rather than general fund reserve drawdowns. This will likely be challenging given rising employee costs (particularly related to retirement benefits) and service expansion pressures.

The city measures reserves in terms of its emergency, contingency, and budget stabilization reserves, plus its unappropriated general fund balance. Currently, the city estimates these cumulative reserves at just under 8%, a slight drop since the last financial status report due to recommended expenditures from the unappropriated general fund balance to offset citywide shortfalls, unbudgeted expenses, and proposed loans. Cumulative reserves remain below the fiscal 2016 peak of 10%. Fitch measures reserves in terms of unrestricted general fund balance, which remain healthy at 15% of spending in fiscal 2017. Fitch would be concerned if the city continued to draw down its reserves to meet operational expenses, particularly during this period when the city’s economy is performing well. Lower reserves could constrain the city’s financial flexibility when it needs it most during a future economic downturn.

Contact:

Alan Gibson
Director
+1-415-732-7577
Fitch Ratings, Inc.
650 California Street, Suite 2250
San Francisco, CA 94108

Amy Laskey
Managing Director
+1-212-908-0568

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-05 March 2018: The ongoing work stoppage by teachers in West Virginia indicates that local governments may not gain much expenditure flexibility should the U.S. Supreme Court make a decision that would loosen collective bargaining requirements in the case of Janus v. American Federation of State, County and Municipal Employees, Fitch Ratings says. At issue in the Janus case is whether public-sector workers should be able to opt out of required fees related to negotiating and enforcing union contracts, effectively conferring right-to-work status on all states.

Salaries and benefits comprise the majority of spending for most local governments, making the ability to adjust these costs, if needed, an important element of Fitch’s evaluation of expenditure flexibility. We include a workforce evaluation in all local government rating analyses that considers both the formal bargaining relationship between labor and management and the practical ability to adjust spending. The inflexibility of pension contributions, which can be a sizable component of labor spending, makes the ability to adjust headcount, salaries and current benefits the primary focus of the analysis.

Currently, 28 states have right-to-work laws, which prohibit compulsory union dues by non-union members. Federal law prohibits compulsory union membership. Right-to-work laws do not control union membership or union negotiation and enforcement of labor contracts.

West Virginia adopted a right-to-work law in 2016 but it was stalled by litigation and did not go into effect until late 2017. A work stoppage by teachers and other West Virginia school employees is in its second week. Governor Jim Justice’s proposal for a 5% pay raise beginning in July, instead of the previously-proposed 2%, was passed by the House of Delegates on Feb. 28. The senate approved a smaller 4% increase on March 3 that was not adopted by the House. Even if the raise were approved, issues regarding health care insurance costs remain unresolved. News reports indicate that teachers in Oklahoma, another right-to-work state, are considering a work stoppage.

The West Virginia state Attorney General has asserted that the work stoppage was unlawful, but did not indicate that any action will be taken against striking employees. This demonstrates that the legal framework governing the labor-management relationship is not the only indicator of labor-related spending pressure. An outcome of the Janus case that loosens collective bargaining requirements would therefore not yield an automatic improvement in local governments’ levels of expenditure flexibility, a key consideration in Fitch’s rating criteria.

Contact:

Amy Laskey
Managing Director, U.S. Public Finance
+1 212 908-0568
Fitch Ratings, Inc.
33 Whitehall Street, New York

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

NEW YORK (S&P Global Ratings) March 5, 2018–S&P Global Ratings today said that it believes a delay in implementing changes to pension return assumptions, recently announced by New Jersey’s acting treasurer, should allow the state more near-term budget flexibility, but does not address the state’s long-term pension problems.

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(Reuters) – Michigan’s list of financially distressed cities subject to state oversight shrank on Friday with the release of Hamtramck, which is surrounded by Detroit, from receivership.

The move leaves just Detroit and Flint on the list, with Detroit aiming to end active supervision of its finances as soon as this spring.

Michigan Treasurer Nick Khouri dissolved Hamtramck’s Receivership Transition Advisory Board, giving city officials full control of operations and finances.

Khouri cited improved financial management, policies and practices that allowed Hamtramck to produce an on-time fiscal 2017 audit that showed a budget balance of $6.5 million.

The city of 21,750 was declared to be in a financial emergency by Governor Rick Snyder in 2013 and was run by a state-appointed emergency manager from July 2013 to December 2014. With the fiscal emergency resolved, the advisory board was created to transition the city back to local control.

Michigan ended oversight of eight cities, one township and Wayne County in recent years. Four school districts continue to have some form of state supervision, according to the Michigan Treasury Department website.

With Detroit ending three straight fiscal years with balanced budgets, Mayor Mike Duggan has said the city’s financial review commission should soon be able to go dormant. The state commission was created as part of Detroit’s court-approved plan to exit in 2014 what was then the biggest U.S. municipal bankruptcy.

Michigan’s largest city was able to shed about $7 billion of its $18 billion of debt and obligations in federal bankruptcy court.

In January, Michigan’s treasurer diminished the role of Flint’s oversight board, giving the mayor and city council more responsibility for operations and finances.

Flint’s financial emergency, which began in 2011, became controversial when its state-appointed emergency manager in 2014 changed the city’s water source, which caused lead to leach from pipes. The water crisis prompted dozens of lawsuits and criminal charges against former government officials.

By REUTERS

MARCH 2, 2018, 1:06 P.M. E.S.T.

(Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis)

Fitch Ratings-New York-28 February 2018: Fitch Ratings has affirmed the following Chicago, Illinois ratings:

–Approximately $8.8 billion outstanding unlimited tax general obligation bonds at ‘BBB-‘;
–Long-term Issuer Default Rating (IDR) at ‘BBB-‘.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from the city’s full faith and credit and its ad valorem tax, without limitation as to rate or amount.

ANALYTICAL CONCLUSION

The ‘BBB-‘ IDR and GO ratings and Stable Outlook recognize the city’s role as an economic hub for the Midwestern region of the United States, supporting solid revenue growth prospects, as well as the city’s unlimited independent legal authority to raise revenues. The ratings also consider the city’s high and growing long-term liability burden, constrained expenditure flexibility and improving financial profile. The city’s reserve cushion provides solid capacity to address cyclical downturns, given expected revenue volatility.

Economic Resource Base
Chicago serves as the economic and cultural center for the Midwestern region of the United States. The city’s population totaled 2.7 million in 2016 up 0.3% from the 2010 census, and accounts for 21% of the state’s population. Socioeconomic indicators are mixed with elevated individual poverty rates but above average per capita income levels and strong educational attainment levels.

KEY RATING DRIVERS

Revenue Framework: ‘aa’
Fitch expects slow, steady economic recovery to lead to continued solid revenue growth, excluding the effect of new or raised taxes and fees. The city’s home rule status affords it access to a wide variety of revenue-raising options, many of which are legally unlimited.

Expenditure Framework: ‘bb’
Carrying costs for debt service and retiree benefits equal a substantial portion of operating resources. Public safety, which is fairly inflexible as a practical matter, comprises a majority of general fund spending, further constraining expenditure flexibility. Rising pension costs will continue to drive expenditures to grow at a much faster natural pace than revenues, likely necessitating ongoing revenue-raising measures and careful expenditure control.

Long-Term Liability Burden: ‘bbb’
The long-term liability burden is high relative to the resource base at 41% of personal income, and expected to rise as the city phases into actuarial funding of pension contributions.

Operating Performance: ‘a’
The city’s ability to close recessionary revenue gaps is strong. This is a function of the city’s strong revenue raising flexibility and long-term reserves available to offset the expected level of revenue volatility in a downturn.

RATING SENSITIVITIES
Continued Pension Pressure: The ‘BBB-‘ rating recognizes the improved pension funding framework the city recently implemented as well as the continued challenges associated with stabilizing or decreasing adjusted net pension liabilities. Upward rating momentum is unlikely until annual contributions are sufficient to accomplish this stabilization, but failure to show progress according to the city’s plan could put negative pressure on the rating.

Structural Balance: The Stable Outlook incorporates Fitch’s expectation that the city will continue to make progress toward structural balance according to its announced plan and maintain reserves commensurate with the rating throughout the economic cycle. A reversal of this trend could lead to negative rating action.

CREDIT PROFILE

Chicago acts as the economic engine for the Midwestern region of the United States and offers abundant and diverse employment opportunities. The city also benefits from an extensive infrastructure network, including a vast rail system, which supports continued economic growth. The employment base is represented by all major sectors including wholesale trade, professional and business services and financial sectors, with no one sector dominating. Socioeconomic indicators are mixed as is typical for an urbanized area, with above-average per capita income and educational levels but also elevated individual poverty rates.

Revenue Framework
Operating revenues are diverse, with the largest source, state and local sales tax, comprising 18% of general fund revenues. Other large sources include the transaction tax, utility tax, and income tax which account for 13%, 12%, and 11% respectively. Notably, property taxes do not fund general fund operations, but are directed to other funds in support of debt service, pensions and a small amount of library contributions.

Growth prospects for revenue are solid. Fitch believes that natural revenue growth, without taking into account planned rate increases, will continue to exceed the rate of inflation, but fall short of national GDP. After a long period without major revenue-raising policy action, the city has raised a variety of taxes and fees to provide funding for dramatically increased pension funding.

The city is a home-rule unit of government, and as such, enjoys the ability to raise or impose a wide variety of taxes and fees, many of which are legally unlimited.

Expenditure Framework
The city devotes 63% of the general fund budget to public safety and 29% for general government.

Fitch expects the natural pace of spending growth to be well above that of revenues, requiring careful budget management. The fastest growing expenditure item will be pension contributions as the city ramps up from statutory to actuarially-based contributions over the next several years. The city has identified revenue sources for much of these in the near-term, and intends to continue raising revenues to offset these rising costs in the out years.

Expenditure flexibility is constrained, given the large proportion of the budget devoted to public safety, which may be difficult to cut as a practical matter, and very high fixed carrying costs. The carrying costs for debt service, actuarially-required pension contributions and other post-employment benefit (OPEB) actual payments, account for 46% of governmental fund spending, or approximately 43% when taking into account enterprise fund support. That percentage may decline somewhat in the near term, as overall spending rises due to ramped up pension payments that are closer to the actuarially determined contribution, but will still comprise an outsized proportion of the budget for the foreseeable future.

The city contributes to four single employee plans covering municipal employees, laborers, police and firefighters. Annual funding contributions had reflected calculations pursuant to state statute, leading to severe underfunding and further raising the actuarial contributions necessary to prefund the plans. Contribution levels have been rising given recent policy changes that are devoting various new revenue streams toward contributions for each of the four plans. As of 2016 the city paid only $590 million in pension contributions, compared to $2.2 billion in actuarially-determined contributions (ADC). Even if the city meets its target contributions for all four plans, which is expected in 2022, they will still fall short of the ADC, reaching an amount sufficient to provide a 90% funding ratio, rather than full prefunding. This ratio is expected to be achieved in 2055 for the police and fire plans and 2057 for the municipal and labor plans.

Actuarial assumptions include a 30-year open amortization, among other factors that are likely to produce little funding progress absent the plans’ consistently exceeding their 7.25% to 7.5% investment return targets, which Fitch views as unlikely. Fitch calculates that the annual cost to amortize the Fitch-adjusted NPLs over 20 years with a 5% interest rate would equal $3.7 billion, or 1.7x the ADC.

Long-Term Liability Burden
The long-term liability burden for total debt (direct and overlapping) and adjusted net pension liability (NPL) is high, at 41% of personal income. Sixty-three percent of the liability relates to net pension liability; Fitch leaves the NPL of three of the city’s four single-employer plans unadjusted given their use of blended discount rates below Fitch’s 6% target for measuring liabilities; all four plans report depletion dates. The 2016 total adjusted NPL measures $38 billion, and assets covered a scant 20% of adjusted liabilities, which had raised the real risk of plan depletion before the recent contribution increases.
For the city’s public safety plans, a 2016 state law requires a five-year ramp up to an actuarial contribution, by 2020. The city council passed a multi-year property tax increase to accommodate the resulting steep increase in contributions. For the laborers’ plan, a 911 cell phone fee will support increased contributions, while the municipal employees’ plan will receive revenue from a tax on water and sewer charges. Together, pension contributions for the four plans are slated to increase from approximately $1.2 billion in 2018 to $2.2 billion in 2022.
Amortization of GO, motor fuel and Sales Tax Securitization Corporation (STSC) debt is slow with about 30% scheduled for retirement in 10 years. STSC, a separate legal entity, has issued bonds to refund the city’s outstanding sales tax bonds as well as some city GO debt. While these refundings extend maturities in some cases, the overall amortization rate is relatively unchanged.

Operating Performance
Reserve levels have stabilized over the last several years, standing at 24% of spending in fiscal 2016. The city relies on a variety of revenue sources to fund operations, some of which are economically sensitive. During a normal downturn Fitch estimates revenues are at risk of a slightly elevated rate of decline, leaving the city with a fairly substantial shortfall to address. This would present a challenge to the city’s financial operations in a downturn but financial flexibility would likely be recovered as conditions improve. Recent extensive revenue-raising measures make it unlikely the city would rely solely on its revenue-raising authority to close such a recessionary gap. Similarly, the constrained expenditure flexibility makes it unlikely that the city could make meaningful spending cuts to address the gap. As such, Fitch believes that while the city may take some revenue- or expenditure-side policy action to address a revenue decline, reserve levels would bear the brunt of the shortfall but would remain at levels consistent with the rating throughout the economic cycle.

Chicago’s budget management at times of economic recovery has improved markedly in recent years, although full structural balance remains a challenge even well into the economic recovery. Management has made significant progress toward matching ongoing revenues with annual expenditures. Fitch considers sustainable, affordable, actuarially-based pension funding a critical component of structural balance. Successful execution of the city’s plan toward financially sustainable practices would be considered a positive rating factor over time. Remaining plan elements include the elimination of scoop-and-toss refundings by 2019, elimination of the use of current funds to pay routine legal settlements or judgments, and growth of the ‘rainy day fund.’

The 2017 general fund budget was balanced with a reduced but still significant amount of one-time measures, including scoop-and-toss refunding and a small amount of appropriated reserves ($53 million) and also included funding for 1,000 new police officers. The $3.6 billion general fund budget closed the previously identified budget gap of $137.6 million through a variety of recurring and one-time measures and no appropriation of general fund balance. The year ended with a $54.4 million net general fund operating surplus (1.5%).

The 2018 general fund budget is balanced with reliance upon approximately $120 million of tax increment surplus and debt service savings from refunding (including principal deferrals), $50 million in expected growth in revenues, $39 million in revenue adjustments, $20 million in spending cuts, $11 million in improved enforcement and debt collection, and $37 million (less than 1% of spending) of appropriated unassigned general fund balance. As it has in recent years, the budget includes a $5 million deposit into its rainy day fund.

Contact:

Primary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Shannon McCue
Director
+1-212-908-0593

Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568

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: 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-27 February 2018: Fitch Ratings expects that Governor Cuomo’s proposed changes to New York State’s personal income tax (PIT) are unlikely to affect the credit quality of the state’s PIT revenue bonds, the state’s largest source of bond financing for capital projects.

Fitch currently rates New York State’s PIT revenue bonds ‘AA+’/Stable, on par with the state’s Issuer Default Rating (IDR) based on bond provisions that link them to the general credit quality of the state. As a result, any rating impact from the tax law changes would be to the state’s ‘AA+’ IDR. Assuming that any enacted state tax code changes succeed in their goal of leaving state revenue collections near current baseline expectations, the changes would have little impact on the state’s revenue growth prospects or overall credit quality.

The proposed changes, which were released as part of the 30-day amendments to the fiscal 2019 executive budget, are intended to mitigate the expected negative impact on New York State taxpayers of the federal Tax Cut and Jobs Act (TCJA), passed in December 2017. Among multiple provisions, the state legislation would decouple the state tax code from the federal code to preserve individual and business filers’ state deductions and prevent a state revenue windfall in the absence of offsetting changes in state law. This windfall is estimated by the state’s comptroller to total a net $1.1 billion.

Additionally, the legislation would establish an optional, phased-in payroll tax (the employer compensation expense tax, or ECET) on taxable income over $40,000 for employers that choose to participate, which would be accompanied by an offsetting tax credit for their employees’ wages. The ECET would be intended to leave unchanged both individual filers’ take home pay and state tax revenues, while taking advantage of the continued federal deductibility of payroll taxes paid by businesses. The legislation also would establish two charitable public funds to receive taxpayer donations on behalf of state education and healthcare-related services, with such donations offset by a partial tax credit on individual filers’ New York State taxable income.

The legislation appears to be crafted to address any potential negative impact on PIT bondholders. It would raise the set aside of estimated available PIT receipts to 50%, from 25%, and supplement the pledge with 50% of future ECET receipts. Combined PIT and ECET tax receipts are intended to match collections under the existing PIT, and the higher set aside is also intended to address the potential impact of charitable contributions on PIT receipts.

New York State has $34.8 billion in outstanding PIT revenue bonds as of January 2018, issued by five state agencies. Although PIT bonds benefit from the dedication of a portion of the state’s largest tax revenue source, Fitch limits the credit quality of the PIT bonds to the state’s ‘AA+’ IDR because an appropriation is required for debt service. The PIT bonds are rated on par with the state’s IDR, rather than one notch below as is standard for appropriation-supported debt, because the incentive for appropriation is significantly enhanced by requirements under the bond indenture that trap pledged receipts in the revenue bond tax fund (RBTF) in the event of non-appropriation. The bond documents also require the state comptroller to transfer resources to the RBTF from the general fund without appropriation if pledged receipts are insufficient.

Beyond the implications of the proposal on New York State’s PIT bonds, Fitch cautions that implementing tax law changes to a major state revenue source like the PIT always carries the risk of unforeseen consequences. With the exception of the decoupling provisions, the governor’s proposal seeks to leave total state revenues largely unchanged. Other provisions, such as the optional nature of the ECET and its three-year phase-in, are intended to minimize disruptions to employers, such as those with multiyear labor contracts.

Nonetheless, other important unknowns must be considered by the legislature, such as how any change would affect cross-border commuters, whether the changes would extend to the local PIT levied by New York City and Yonkers, and how any changes to New York City’s PIT would affect the future tax secured bonds issued by the New York City Transitional Finance Authority (TFA). The TFA’s future tax secured bonds are payable from revenues derived from city PIT and sales and use taxes, as authorized by New York State, and are rated ‘AAA’/Stable by Fitch. Fitch will monitor the legislature’s actions on the governor’s proposal and any other tax law changes that emerge over the coming months.

Outside of the tax proposal, the governor’s executive budget for fiscal 2019 (which begins on April 1) hews closely to the state’s policy direction in recent years. Consistent with the recent experience of many states, revenues in New York State are forecast to rise, albeit at a slower pace than in recent prior forecasts. State actions to absorb slower revenue growth and the resulting forecast budget gaps have included holding budgeted state operating funds spending growth at no higher than 2% annually, curbing Medicaid spending growth at the current 3.2% statutory growth cap, and making targeted fund and timing shifts. As with last year’s budget, the executive budget proposes a mechanism to adjust state spending in the event that federal budget cuts exceed $850 million for either state Medicaid or other program areas.

New York State’s ‘AA+’ IDR reflects its considerable economic resources, solid economic performance and growth prospects, strong ability to control its budget and responsive budget management. Due to budget management improvements in the last decade, the state is in a materially improved position to address future economic and revenue cyclicality relative to past experience, in Fitch’s view. Liabilities and related carrying costs are just below the median for states and remain a manageable burden on resources.

Contact:

Douglas Offerman
Senior Director
+1-212-908-0889
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

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

CHICAGO, Feb 23 (Reuters) – Debt sales for airports in Houston and Los Angeles are part of $5.43 billion in bonds and notes set to hit the U.S. municipal market next week, according to Thomson Reuters estimates on Friday.

Houston’s new and refunding subordinate lien deal includes about $135 million of bonds subject to the alternative minimum tax (AMT) with serial maturities from 2019 through 2041 and a term bond due in 2043, according to the preliminary official statement. Another $300 million of non-AMT bonds carry serial maturities from 2019 through 2038 and term maturities in 2043 and 2048.

Bank of America Merrill Lynch is scheduled to price the bonds on Thursday.

Los Angeles will sell nearly $376 million of subordinate revenue bonds subject to the AMT for its international airport through Barclays Capital on Wednesday.

The airport is “one of the stronger U.S. airport credits with solid enplanement growth and diversified airline exposure,” Janney Investment Strategy Group said in a Friday report. It added that the airport has a high debt burden at $5 billion and a $4.4 billion capital funding plan through 2023.

Goldman Sachs & Co will price about $650 million of gas prepayment revenue bonds for Alabama-based Black Belt Energy.

The New York State Thruway Authority has a $600 million general revenue refunding bond issue structured with serial maturities from 2019 through 2037. RBC Capital Markets will hold a retail order period for the bonds on Wednesday ahead of formal pricing on Thursday.

Topping the week’s calendar of competitively bid deals is a nearly $287 million Wisconsin general obligation bond issue selling on Wednesday.

The bonds have maturities from 2019 through 2036.

Municipal bond fund flows reversed course and turned positive in the latest week, according to Lipper. Net inflows totaled $347.4 million for the week ended Feb. 21 versus $443.4 million of net outflows in the previous week. (Reporting by Karen Pierog; Editing by Jeffrey Benkoe)

CAMBRIDGE (CBS) — Looking to invest in your city and your bank account? One way to do that if you live in Cambridge is to buy the city’s mini-bonds.

Lawrence Ferrara lives in Cambridge. He says, “I think it’s a good idea to offer them. A lot of people in the city that maybe would like to invest.”

Many already have. Since the City of Cambridge started offering mini-bonds Tuesday, they’ve sold more than $800,000.

Last year during the pilot program, the city raised $2 million in less than a week.

Budget Director for the City of Cambridge Sarah Stanton says, “It’s allowing community members to see what the city is investing in and invest in it themselves.”

Invested money is spread across the city from solar panels at the public library to a new roof at Fletcher-Maynard Academy, and general construction at King Open School.

A mini-bond is like a municipal bond, just more affordable.

Stanton explains, “The smallest increment you can buy a bond is 1,000 dollars, whereas usually, it’s a 5,000 increment.”

A single investor can buy as much as $25,000 worth of bonds.

The bonds interest rate is fixed at 2% and will be paid out in five years.

The last day to invest is Monday, February 26th or when the city raises $2,500,000.

One of the same banks that drove the Puerto Rico Electric Power Authority, or PREPA, into the red will now be paid to help auction it off to the highest bidder.

Citigroup Global Markets Inc., or Citi, will be the main investment bank consultant in the restructuring and privatization of PREPA, the Washington-appointed Fiscal Control Board — the body now overseeing Puerto Rico’s finances — announced recently. Puerto Rico Gov. Ricardo Rosselló first announced the move toward privatization last month.

“Citi will advise the Board on PREPA’s privatization,” the Fiscal Control Board wrote in a statement, “as well as the restructuring of PREPA’s debt pursuant to Title III proceedings in federal bankruptcy court. Citi will take the lead in identifying private sector solutions that fulfill the vision laid out by Governor Rosselló.”

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The Intercept

by Kate Aronoff

February 21 2018

OLDWICK, N.J.–(BUSINESS WIRE)–The proposed restructuring of the bankrupt Puerto Rico Electric Power Authority (PREPA) would not significantly impact A.M. Best-rated insurers as the vast majority have minimal exposure to their capital and surplus from PREPA bonds, according to a new A.M. Best briefing.

The Best’s Briefing, “PREPA: Worst-Case Scenario May Still Be Within Insurers’ Risk Appetite,” states that the insurance industry has reported a fairly dramatic decline in PREPA holdings’ book adjusted/carrying value over the last five years, dropping 62% since 2012 to $147.1 billion. The decline has been a combination of devaluation as well as unloading the bonds, as the number of holdings has dropped by half among insurers since 2012 to roughly 750 in 2016. PREPA bonds have fared a little better than Puerto Rico municipal bonds, which declined 68% since 2012.

The plan to privatize parts of the bankrupt PREPA over the next 18 months comes after Puerto Rico’s legislature passed an emergency funding measure in late January 2018 to ensure the struggling utility can maintain operations. The insurance industry holds just 2% of PREPA’s $8.2 billion in public debt outstanding.

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(Reuters) – Detroit Mayor Mike Duggan unveiled a $2 billion fiscal 2019 budget on Friday that he said could mark the last spending plan while the city’s finances are controlled by a state oversight board.

Michigan’s largest city is expecting its post-bankruptcy financial review commission to go dormant this spring after audits showed balanced budgets in fiscal years 2015, 2016 and 2017.

“Once we get this budget passed we have the opportunity to get out from active state oversight,” the mayor told the city council.

He added that while the commission would continue to review Detroit’s finances, the city’s budget, contracts, and other matters would not be subject to the board’s approval as long as spending plans remain balanced.

Detroit ended what was then the biggest-ever U.S. municipal bankruptcy in December 2014 after shedding about $7 billion of its $18 billion of debt and obligations. One element of the city’s federal court-approved bankruptcy exit plan was the creation of a state oversight board.

The budget for the fiscal year that begins on July 1 is projected to end with a $62.3 million balance, while money is being set aside to deal with higher-than-expected pension payments starting in 2024, city officials told council members, who are scheduled to vote on the spending plan in March.

“The general fund budget continues to do well largely because our income tax revenues continue to grow ahead of what anyone would have projected in the bankruptcy,” Duggan said.

Detroit Chief Financial Officer John Hill said a plan approved this week by the oversight commission to use up to $55 million in surplus cash to retire some debt issued in 2014 could result in $9 million in annual debt service savings. He added that with unlimited tax general obligation bonds maturing in the next decade, Detroit could start selling new debt in the U.S. municipal market to fund capital projects.

Detroit’s credit ratings, while still junk, were upgraded last year. Moody’s Investors Service in October raised the rating to B1 with a positive outlook from B2. S&P Global Ratings boosted Detroit to B-plus from B in December.

The ratings fell deep into junk after the city defaulted on some of its debt and filed for Chapter 9 municipal bankruptcy in July 2013.

By REUTERS

FEB. 23, 2018

(Reporting by Karen Pierog in Chicago. Editing by Matthew Lewis)

A hospital district in Pilot Knob, Missouri, filed for protection from its creditors Wednesday, marking the second municipal bankruptcy of the year.

The Iron County Hospital District, which owns a local hospital, listed liabilities between $10 and $50 million and assets between $1 million and $10 million.

The district has about $6.5 million in bonds outstanding, said Daniel Doyle, a lawyer at Lashly & Baer who is representing the district.

The district marks the second municipal bankruptcy filing this year after the Surprise Valley Health Care District in Cedarville, California.

Bloomberg Markets

By Amanda Albright

February 21, 2018, 2:06 PM PST

While there’s been a lot of attention nationally on the unfunded pension liabilities of the state of Illinois and city of Chicago, many downstate Illinois and suburban Chicago municipalities face formidable funding gaps of their own in their public safety pension plans.

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Feb. 22, 2018

Facing a homelessness crisis and funding gaps from recent tax cuts, the city of Berkeley is considering something revolutionary: making its own bitcoin-like cryptocurrency.

“Acts of resistance require creating resources,” said Councilman Ben Bartlett, one of the people behind the plan. He’s working with Mayor Jesse Arreguín, and teaming up with the startup Neighborly and UC Berkeley’s Blockchain Lab on proposals to turn municipal bonds into digital currency, with the goal of raising additional funds for specific projects.

Bartlett and Arreguín came up with the idea over dinner when they were brainstorming about the affordable housing crisis with constituents, some of whom work with digital currencies.

“This is largely driven by Berkeley residents,” Bartlett said. “Their nickname for Berkeley is Crypto City.”

Some of cryptocurrency’s harshest critics have characterized them as Ponzi schemes, even as others anticipate that they will revolutionize payment systems. A few early backers of cryptocurrencies are now billionaires on paper, thanks to the run-up in prices. Startups have sought to use the issuance of new digital currencies, called inital coin offerings, to fund development of software tools and marketplaces instead of raising venture capital.

Berkeley has no plan to buy bitcoin, ether or other similar currencies with city funds. Instead, the idea is to break up municipal bonds, allowing people to buy them in smaller quantities as digital tokens, similar to how other cryptocurrencies are traded. The currency will use blockchain technology, as most cryptocurrencies do, that creates a decentralized ledger of transactions designed to increase people’s trust in cyber money. But the micro-bonds recorded on the blockchain will be tied to an asset — the underlying bond. Bartlett argues that this makes it less risky than other cryptocurrencies, which have seen wide price swings in the past year.

The councilman said he expects the plan to be embraced by residents and regulators. But John Reed Stark, a lawyer and professor who was formerly head of the Securities and Exchange Commission’s Office of Internet Enforcement, is dubious.

“I truly cannot believe this,” he said of Berkeley’s plan. He says cryptocurrency offerings resemble “the drivers-ed film of securities violations. They trigger every single kind of security violation.”

“The notion that a municipality is somehow encouraging the use of pseudo-anonymous currency strikes me as incredibly irresponsible,” Stark said. “There are tremendous security ramifications, and they should expect an unbelievable amount of regulatory scrutiny. Whatever they do will be under the microscope of the SEC.”

More than a dozen companies have shelved plans to raise money from investors after SEC officials called them up, Robert Cohen, head of the SEC’s cyber enforcement unit, said Friday. The SEC scrutiny prompted firms to realize that their offerings may have violated federal securities laws, he said at a conference in Washington.

Lynnette Kelly, president and executive director of the Municipal Securities Rulemaking Board said it’s too early to say whether there would be concerns about security or stability in Berkeley’s case.

“There are rules in place and all of those rules need to be followed,” she said. “I think having a currency backed by a municipal bond is different, and I know the SEC and the (Commodity Futures Trading Commission) have talked at length about cryptocurrencies and issues surrounding these coins.”

“We’ll continue to investigate and monitor, and get smarter about this and any other new technique in the market, but that doesn’t mean it necessarily raises red flags,” Kelly said.

A spokesman for the SEC declined to comment.

Marc Lifsher, a spokesman for the State Treasurer’s Office, said the office has no position and views it as a local issue.

“The State Treasurer’s Office has not talked to Neighborly or Berkeley about cryptocurrency,” he said.

Jase Wilson, CEO of San Francisco’s Neighborly, shrugged off questions about instability.

“The volatility looks more like a municipal bond,” Wilson said. “Berkeley is an extremely strong and fiscally disciplined borrower.”

The downside of a relatively stable security is that it’s unlikely to attract the get-rich-quick speculators and arbitrageurs who have caused gyrations in the prices of cryptocurrencies but also created relatively liquid markets in them.

The Berkeley project’s goal is to streamline the process for buying and selling municipal bonds, cut transaction costs and allow people to invest in projects of their choosing at low levels.

“For a normal person to invest in a bond is like $5,000, but under a micro-bond enabled by the blockchain it could be like $25 or $50,” Bartlett said. Someone could theoretically invest in the creation of a new park — or even just the purchase of a swing set.

While Bartlett’s long-term goal is to fund big projects like affordable housing, he wants to start small. Some ideas so far, which Bartlett said came from residents: planting a row of trees, buying another ambulance for a fire station and engaging a group of artists to create a series of rotating public art pieces.

The city and its partners are planning what backers like to call “an initial community offering” for May.

Bartlett said that either the City Council would have to approve the plan, or its backers could pursue it with a private company without the council’s OK.

They want to move quickly, he said: The technology promises “direct community engagement, and the need is more pressing than ever.”

San Francisco Chronicle

By Sophie Haigney

February 23, 2018

Bloomberg News contributed to this report.

SAN FRANCISCO (S&P Global Ratings) Feb. 15, 2018–On Feb. 14, 2018, Illinois Governor Bruce Rauner presented his fiscal 2019 budget proposal to the General Assembly. The budget foresees a small general funds surplus materializing in fiscal year 2019. S&P Global Ratings views the modest projected surplus (0.9% of spending) and the concurrent stemming of growth in the state’s backlog of unpaid bills

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Municipalities in danger of bankruptcy can be resurrected. Pittsburgh turned deficits to surpluses, cut costs and created standards for best financial practices to get released from state oversight.

While companies with a Pittsburgh presence, like Westinghouse and Bon-Ton, file for bankruptcy, Steel City itself is back from the deep red.

Pennsylvania Governor Tom Wolf joined Pittsburgh Mayor Bill Peduto recently to formally announce the city’s release from the state’s financially distressed municipality’s act, known as Act 47, according to the Pittsburgh Post Gazette.

The city has been building its financial solvency for 14 years, turning deficits to surpluses, cutting costs and creating standards for best financial practices, which included setting realistic revenue projections.

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by Andrea Fox

February 16, 2018

EFFICIENTGOV.COM

• Calpers to review shortening amortization to 20 years
• “Death knell” for some cities in down markets, official says

California cities may see their annual pension costs rise under a new policy from the state’s retirement system, threatening to foist added financial pressure on those already struggling to pay for promises to public employees.

The California Public Employees’ Retirement System is advancing a staff recommendation that would shorten the amortization period for new pension liabilities from 30 years to 20. That would boost the system’s funded ratio, require localities to pay off the debt sooner and allow the pension to recover faster from market downturns, according to a staff report. Approved by a Calpers committee Tuesday, the full board is set to vote on the changes Wednesday.

The ramped up schedule, while positive for the solvency of the pension system by letting it book gains faster, would make market losses felt more swiftly by local governments and require them to pay more into the retirement fund in at least the first few years.

The shorter period reduces the possibility that the system, which currently has about 68 cents for every dollar in liabilities, falls below 50 percent funding, board member Bill Slaton said during the meeting.

“That is not a great position to be in,” said Slaton. “All it takes is another movement or two, and we could find ourselves in a position where we cannot recover.”

The shorter amortization period would be effective in June 2019 and would affect contributions by local governments in fiscal 2022.

While many cities would welcome paying off the debt more quickly to rack up less interest, others that are already struggling with high fixed costs would find it difficult to meet the stepped-up pace, said Dane Hutchings, lobbyist for the League of California Cities. And in the event of poor market performance, municipal contributions to make up the difference would be even higher than projected, compounding the burden.

Such an outcome, when combined with other pressure facing cities, could push a few into bankruptcy, Hutchings said. “It would be their death knell” for some, he said.

California municipalities are already absorbing the effect of the board’s decision in December 2016 to lower the assumed rate of return to 7 percent from 7.50 percent by fiscal 2020, which will also require them to increase their contributions to cover the gap.

The system’s 3,000 cities, counties, school districts and other public agencies have also seen costs rise from several factors, including investment losses and perks granted in boom times. A report this month by the League of California Cities found that under current assumptions, cities in fiscal 2025 would pay Calpers more than 50 percent the amount expected to pay in fiscal 2019.

“Cities are struggling to keep up,” Mike Futrell, city manager for South San Francisco, told the committee before the vote Tuesday in a request to delay changes. The municipality had already been considering whether to ask voters in November to approve a tax increase to help pay its obligations, he said.

Calpers’s review comes as the system is likely to experience more market volatility in 2018 than it had over the past couple of years, Chief Investment Officer Ted Eliopoulos told the board Monday. Meanwhile, the fund’s 20-year return is lagging at 6.7 percent, according to a Calpers’s estimate.

A survey of 164 public pensions by the National Conference on Public Employee Retirement Systems, a trade association, showed that the average amortization period in 2017 was 23.8 years.

Bloomberg

By Romy Varghese

February 13, 2018, 8:03 AM PST Updated on February 13, 2018, 3:49 PM PST

— With assistance by John Gittelsohn

Fitch Ratings-New York-16 February 2018: Governor Rauner’s fiscal year 2019 budget proposal for Illinois – which utilizes measures including a pension cost shift to school districts and changes to state employee health insurance to generate a modest surplus – is likely to face significant legislative opposition and Illinois will remain challenged in achieving fiscal balance, Fitch Ratings says. A re-emergence of political stalemate that negatively affects fiscal operations, including a material increase in accounts payable, could trigger a downgrade.

If implemented, the governor’s proposed pension cost shifting could pressure budgets for school districts, and would reverse a change implemented just six months ago that increased funding for Chicago Public Schools (CPS). Illinois’ accounts payables would remain very high under the governor’s budget, but could gradually be reduced over multiple years if some of his most significant proposals were implemented. The $37.6 billion general funds budget does not incorporate any rollback of recent tax increases. But the governor proposes that the legislature consider pension benefit changes to generate $900 million in savings in support of a partial individual income tax rollback. Fitch believes that this proposal too will face significant legislative opposition, and, if enacted, would likely be subject to legal challenge.

ACCOUNTS PAYABLE REMAINS A KEY CHALLENGE

By the end of fiscal year 2019, the governor’s budget office estimates unpaid bills will be $7.4 billion, slightly higher than the $7.1 billion average between December 2010 and June 2015, but more than double what the administration considers a long-term target of 30 days. This is down considerably from a peak of $16.2 billion in October 2017, reflecting a $6 billion November 2017 bond sale, receipt of significant federal Medicaid matching funds following the enactment of a state budget after a two-year delay, and interfund borrowing. But the still extraordinary overhang of budgetary liabilities, nearly nine years into the national economic expansion, reflects the depth of fiscal and policymaking challenges Illinois faces.

Material progress in reducing accounts payable appears unlikely over the next several years, absent unexpectedly robust economic and revenue growth. The governor’s budget includes the first year of a proposed four year plan to shift pension costs to school districts and public colleges and universities, with $1.4 billion in annual budgetary savings estimated upon full implementation in fiscal year 2022. The administration anticipates dedicating these savings, along with future operating surpluses, to reducing accounts payable over time. At that rate, it could still be many years before accounts payable approaches a level the state considers normal.

CURRENT YEAR GAP

For the current year, the governor estimates a $590 million operating deficit, despite the large tax increase passed in July 2017 and the resulting 20% increase in revenues, and balancing actions taken by the governor earlier this year. Delays in both implementation of budgeted pension changes and the sale of the Thompson Center state office building in Chicago (now forecast in the fiscal 2019 budget) are key factors behind the projected deficit. Additionally, the governor anticipates $1.1 billion in supplemental needs to address unappropriated spending from fiscal year 2017. On a budgetary, or cash, basis, the gaps are addressed mainly through proceeds from last November’s GO sale and matching federal Medicaid funds, and the state ends with a $2 billion surplus in the executive budget projection.

FISCAL 2019 BUDGET DEPENDENT ON SIGNIFICANT COST SAVINGS

For fiscal year 2019, the governor projects a $2 billion general revenue funds structural budget gap, or approximately 5% of projected operating sources. To address the gap the governor proposes several steps including shifting the normal costs for pensions to school districts ($490 million) and public colleges and universities ($101 million). Twenty five percent of the normal costs, or $262 million, would shift to most school districts in fiscal year 2019, the first of a four-year transition envisioned by the governor. But CPS (Issuer Default Rating of BB-/Stable), would see an immediate 100% shift costing $228 million. Just last summer, CPS won legislative and gubernatorial approval for the state to cover the normal cost for pensions, in line with other school districts in the state, which this budget proposal would immediately reverse. Fitch believes it is unlikely that the legislature would revisit this change for CPS so quickly, or push higher pension costs onto other school districts. The executive budget calls for increased evidence based funding formula aid of $350 million, or 5%, for school districts.

The governor also proposes removing health insurance from collective bargaining with state employees, and instead giving the administration the ability to impose terms that would yield an estimated $470 million in savings for fiscal year 2019. Other proposed changes to group health insurance include shifting costs to public universities ($105 million) and ending subsidies for retired teachers and community college employees ($129 million).

For fiscal 2019, the governor proposes offsetting the higher pension and group health costs for public colleges and universities with higher operating appropriations. But the pension cost shift would ramp up over three additional years, without any commitment for additional state support in those years. Public colleges and universities could be challenged to absorb these cost shifts, particularly following several years of severely delayed state appropriations that weakened their liquidity positions.

The governor proposes closing the remainder of the $2 billion gap primarily through $600 million in interfund borrowing and $150 million from Medicaid provider rate reductions. Interfund borrowing could become outright transfers without a repayment requirement if the legislature approves a related gubernatorial proposal. And the Medicaid rate cuts would require federal approval, which the budget anticipates would take up to six months to secure.

TAX ROLLBACK NOT BUILT INTO BUDGET PLAN

For fiscal 2018, the legislature’s budget (enacted over the governor’s veto) included $4.5 billion in new revenue from increases in the individual income tax (4.95% from 3.75%) and corporate income tax rates (7% from 5.25%), and the fiscal 2019 executive budget retains those increases. But the governor proposes the legislature enact pension benefit changes to generate $900 million in savings that the governor would use to fund a rollback of 0.25% of the individual income tax rate to 4.7%. Pension changes, even the considerations model the governor suggests, are likely to face legal challenges given the strong constitutional protections for pension benefits in Illinois. Fitch notes that the fiscal 2019 executive budget does not assume savings from the proposed pension benefit changes.

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

Fitch Ratings-San Francisco-16 February 2018: A recent change to the California Public Employees’ Retirement System’s (CalPERS) pension funding rules could heighten budgetary pressure on some of the state’s local governments, according to Fitch Ratings.

The action by CalPERS (the nation’s largest public employee pension plan) would shorten the amortization period for unfunded liabilities from 30 years to 20 years and raise employer contributions beginning in 2021. It follows previous CalPERS steps that phase in lower assumed earnings on pension assets and revise mortality assumptions for plan members, which have likewise led to earlier contribution increases for participating governmental employers. These actions together are intended to accelerate funding progress and improve CalPERS’ long-term sustainability.

That said, the changes are likely to precipitate short-term pressure to some governmental budgets. Potential cost pressures will vary by locality and may depend on legal decisions going forward, but local governments in California will be especially challenged given their limited ability to raise revenues and a history of judicial decisions protecting existing pension arrangements.

California’s Supreme Court is expected to soon review several recent appellate decisions that have questioned the “California Rule,” a 1955 precedent that established pension benefits, once granted, as a vested contractual right that cannot be subsequently impaired unless offset by a comparable new benefit. This principle has been cited as an impediment to pension benefit reductions in 12 states in addition to California. Some clarity on this point may be forthcoming from California’s Supreme Court, but Fitch expects that legal challenges will continue to slow governmental efforts to reduce pension liabilities.

CalPERS changes are emblematic of a larger trend throughout the country of public pensions accounting for an increasing share of many local governments’ expenses, not just in California. A recent report by the League of California Cities found that pension contributions will double as a share of governmental budgets in the next seven years. These pending increases follow a steady expansion in pension costs for local governments over the past decade.

Contact:

Shannon Groff
Director
+1-415-732-5628
Fitch Ratings, Inc., 650 California Street, San Francisco

Karen Ribble
Senior Director & Regional Head
+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

NEW YORK, Feb. 14, 2018 /PRNewswire/ — A group of creditors (the “Creditors” or “we”), which collectively holds a substantial portion of Puerto Rico’s outstanding debt, released the below statement today in response to the most recent version of the Commonwealth’s Fiscal and Economic Growth Plan (the “Plan” or “FEGP”):

Although Puerto Rico’s creditors have differing perspectives on a number of issues related to the ongoing restructuring, we share a unified view that a pragmatic, transparent and growth-focused policy agenda is critical to the island’s recovery. This view has only strengthened since the devastation caused by Hurricanes Irma and Maria exacerbated the already difficult economic situation on the island. Unfortunately, we believe the Commonwealth’s recently proposed FEGP represents a major step backward on the road to recovery. The Plan fails to provide a credible basis on which to restructure the island’s debt, while completely lacking a foundation for revitalizing the local economy and restoring access to the capital markets.

Perhaps the most troubling issue with the FEGP is that it was developed in an opaque manner, essentially relying on outputs from underlying analyses that have never been made public. This flies in the face of the Commonwealth’s commitment to transparency and undermines recent guidance from House Natural Resources Committee Chairman Rob Bishop, who stated “[i]t is imperative the Oversight Board and Governor fully integrate those who hold the debt into the development of these [fiscal] plans, thereby guaranteeing accuracy and transparency in the underlying assumptions.”

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NEW YORK (Reuters) – A large group of Puerto Rico’s creditors united on Wednesday in condemning the U.S. commonwealth’s revised fiscal plan, calling it a step backwards in rebuilding from years of mismanagement and the devastation caused by Hurricanes Irma and Maria.

Puerto Rico Governor Ricardo Rossello speaks during a Facebook live broadcast in the library of the governor’s mansion, in San Juan, Puerto Rico January 24, 2018. REUTERS/Alvin Baez
Unveiled by Governor Ricardo Rossello on Tuesday, the plan highlighted the use of $18 billion in additional money from the U.S. federal budget to turn a deficit into a surplus of $3.4 billion within six years.

“The Plan fails to provide a credible basis on which to restructure the island’s debt, while completely lacking a foundation for revitalizing the local economy and restoring access to the capital markets,” the creditors said in a joint news release.

Before the storms, the recovery plan had projected a nearly $4 billion surplus through 2021. But after the hurricanes, the government forecast a $3.4 billion gap for the same period that would not allow any repayment of the island’s debt.

Puerto Rico was already in crisis when Maria smashed into it. The bankrupt U.S. territory, whose finances the U.S. Congress placed under federal oversight, owed $120 billion in combined bond and pension debt. It had near-insolvent public health and retirement systems, and was suffering from a shrinking population.

The creditors say the new plan remains opaque on issues such defining essential services versus what the government wants to pay; not fully accounting for cash held in accounts that might be available to meet fiscal plan needs; not sharing 2015 audited financial statements; using an outdated migration forecast; and using healthcare cost and plan participation assumptions that contradict the government’s own outmigration forecast.

Puerto Rico’s financial oversight board is expected to evaluate Rossello’s revised plan in the coming weeks and, after a public hearing, determine whether to certify it.

The benchmark GO bond, trading in default without a yield, traded just under 60 U.S. cents on the dollar before Maria hit. On Wednesday it traded at 29.25 cents, up from an all-time low of 21.1820 cents on Dec. 14 74514LE86=MSRB, according to Thomson Reuters. COFINA senior bonds last traded at 50.90 cents 74529JAR6=MSRB from 59.11 cents the day before Maria hit.

This group of debt holders, some of whom are fighting one another over who should be paid first out of any available debt servicing funds, are: bond insurers Ambac, Assured Guaranty, National Public Finance Guarantee Corp; holders of so-called COFINA senior debt which is backed by sales tax receipts; a group of mutual fund creditors that includes Franklin Advisers and OppenheimerFunds; Syncora; The Puerto Rico Funds; and individual investors.

by Daniel Bases

FEBRUARY 14, 2018

• Most active securities jump by 11% on new recovery forecasts
• With federal aid coming in, government now expects a surplus

Puerto Rico bonds rallied the most since the island collapsed into a financial crisis, with prices jumping almost 11 percent after the territory projected budget surpluses that may allow it to resume bond payments in as little as two years.

General obligations with an 8 percent coupon and maturing in 2035, the territory’s most active securities, rose Wednesday to an average price of 29 cents on the dollar, the highest since Nov. 1 and up from 26.2 cents Tuesday. It was the biggest one-day gain since the bonds were first issued in March 2014.

The increase reflects a more optimistic view by investors, who dumped the island’s debt after it was battered by Hurricane Maria in September amid speculation they faced even deeper losses once the government emerges from bankruptcy.

But the influx of federal aid has left Puerto Rico anticipating a more rapid financial recovery than it did just last month. The updated fiscal plan released Tuesday projects that it will have a $2.8 billion surplus through fiscal 2023, after accounting for bankruptcy costs and other expenses. That’s a stark shift from its forecast in January that it would have a large deficit over the next five years.

“The dearth of good news, when there is some, gets a quick positive reaction,” said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which manages $6.8 billion of municipal bonds, including insured Puerto Rico debt. “Surplus buy, deficit sell.”

The rally extended to other commonwealth debt. Senior sales-tax bonds maturing in 2040 traded at an average 51.1 cents on the dollar Wednesday, the highest since Sept. 27, according to data compiled by Bloomberg. Securities issued by the public buildings authority that are due in 2039 rose to 26.9 cents from 24.2 cents.

Puerto Rico has been defaulting on bond payments since 2015 and last year filed for bankruptcy protection from creditors, as allowed under a law signed by then-President Barack Obama to help the island arrest its debt crisis.

The projected surplus could allow Puerto Rico to pay about 14 percent of the $20 billion of debt service due from fiscal 2018 through 2023, according to the plans, though whether any bonds are ultimately paid will be hashed out in bankruptcy court. The surpluses are projected to begin in 2020.

“It seems like the governor is getting what he wants, which is federal help,” said David Tawil, president and co-founder of Maglan Capital LP, which bought Puerto Rico general obligations in the past few weeks after spurning the debt since 2014. “And on the basis of that federal help he is at least willing to play ball at some level with the bondholders.”

Puerto Rico also provided the first public estimate of how much of the central government’s approximately $41 billion of debt it may be able to repay, saying it could cover as much as $19.1 billion of principal if the debt can be restructured with an interest rate of 4.5 percent. The analysis doesn’t spell out how that may be divided among varying classes of bondholders who are fighting in court, nor does it apply to debt sold by other arms of the government, such as the electric and water companies.

Even with Wednesday’s gain, Puerto Rico bonds are still selling for roughly half what they were before the September hurricane, when they traded for about 56.7 cents.

Creditors are still at odds with the government over its efforts to plot a recovery. A group of bond-insurance companies and investors Wednesday said the commonwealth’s federal oversight board and island lawmakers should reconsider the “flawed” turnaround plan and that the debt sustainability analysis relies on sparse data and “outright mischaracterizations.”

Bloomberg Markets

By Michelle Kaske and Danielle Moran

February 14, 2018

Proposed legislation would help residents make up for $10 billion in lost federal tax deductions under recent overhaul

Gov. Dannel Malloy on Monday proposed legislation to help Connecticut residents make up for $10 billion in lost federal tax deductions under the recent tax overhaul.

His plan aims to assist Connecticut homeowners who face higher federal tax bills because the new law caps state and local tax deductions at $10,000 a year. To get around that cap, Mr. Malloy’s proposal would give towns authority to form charitable organizations that residents can contribute to in exchange for property tax credits.

Charitable contributions kept their full deductibility under the tax overhaul.

“It would be unreasonable for us as a state to not propose ways to assist our taxpayers,” said Mr. Malloy, a Democrat. His plan requires approval by the state legislature.

The governor included the strategy among his recommended revisions to the state budget for the fiscal year that begins in July. The revisions in his $20.73 billion proposal are applied to the two-year budget lawmakers approved last year.

Other high-tax states such as New York and New Jersey have been searching for ways to ease the impact of the federal tax changes. Some New Jersey towns also have expressed interest in developing a plan similar to the one proposed by Mr. Malloy.

New Jersey Gov. Phil Murphy, a Democrat, supports those efforts. New York Gov. Andrew Cuomo has proposed changing some of the state income tax into a payroll tax on employers.

The Internal Revenue Service didn’t respond to a request for comment.

The governors of New York, New Jersey and Connecticut also said in January they would sue the federal government to overturn the new tax law, saying it intentionally discriminates against Democratic-leaning states.

New York tax filers claimed about $22,000 on average in state and local tax deductions in 2015, the highest figure in the U.S., according to the Government Finance Officers Association. Connecticut tax filers claimed more than $19,000 on average and New Jersey nearly $18,000 on average.

Instead of funding municipal services through property taxes, cities and towns would tap a mix of property taxes and money raised from the charitable organizations, under Mr. Malloy’s proposal. Details of the plan haven’t been fully established.

“The specifics of how that will work will have to be worked out at a local level,” said Ben Barnes, the budget chief for the Malloy administration.

Some towns have expressed interest in exploring whether using charities is a viable option, said Elizabeth Gara, executive director of the Connecticut Council of Small Towns.

“But there is a lot of uncertainty as to how the IRS will treat those contributions,” Ms. Gara said. She said her group hasn’t taken a position on the proposal and would continue to study it.

Mr. Malloy said his administration has determined that his plan would be allowed under the current federal law.

The Wall Street Journal

By Joseph De Avila

Feb. 5, 2018 5:35 p.m. ET

Fitch Ratings-New York-08 February 2018: Governor Wolf’s fiscal year 2019 executive budget for Pennsylvania – which utilizes a severance tax, solid revenue growth and targeted savings efforts to support a roughly 3% increase in the general fund budget – will likely face headwinds in the legislature, Fitch Ratings says. The governor has advanced a severance tax proposal since his election campaign four years ago but has not won sufficient legislative support to date. This budget plan comes at the start of an election year for the governor, all members of the commonwealth’s house and half of the senate. Fitch’s focus during the commonwealth’s budget process will be on whether Pennsylvania is able to continue making progress in addressing its still sizable structural budget gap. Fitch’s ‘AA-‘ Issuer Default Rating and Negative Outlook reflect concerns that the commonwealth may be challenged in continuing its current path of slow progress in reducing the imbalance. A pattern of weakening fiscal practices, including growth in the structural deficit, could trigger a downgrade.

PROGRESS IN REDUCING STRUCTURAL GAP

Based on analysis from the commonwealth’s Independent Fiscal Office (IFO), Fitch estimates the current year (fiscal 2018) budget includes approximately $600 million in non-recurring revenues on a $32 billion general fund spending plan (2%). This is lower than prior years, reflecting recurring revenue increases and savings measures. In January 2016, the IFO estimated a $2.5 billion general fund structural gap for fiscal 2019 – by this past November, the IFO reported that gap had narrowed to $1.1 billion, or 3% of projected spending.

UNCERTAIN BUDGET PLAN PROSPECTS

While the budget proposal from the Democratic governor does not appear to include material non-recurring revenues, Fitch anticipates the Republican-led legislature will develop its own set of budget measures, leading to a final budget that could vary considerably from the original. Three previous budgets under the current governor, and the last one under the prior governor, were enacted after the start of the fiscal year due to policy and fiscal disagreements. This November’s election adds additional uncertainty to the budget process – the speaker of the house is vying for the Republican nomination to replace the current governor, which could make for a particularly complicated political dynamic during budget negotiations.

LIMITED REVENUE MEASURES

The key revenue measure is a natural gas severance tax estimated to generate $250 million annually. The governor’s three prior executive budgets unsuccessfully proposed a different version of the proposed severance tax. Last summer, the senate did approve a severance tax as part of a revenue package. While the measure did not pass the house, last year’s senate passage could lead to additional momentum behind the measure this year. Notably, in contrast to prior years, the governor did not include any personal income or sales and use tax changes in his proposal. Instead, the executive budget forecasts steady organic growth in both sources this year and next. The IFO’s revenue forecasts also anticipate continued growth, though at a somewhat more modest pace. Through January, the Department of Revenue reports general fund collections for fiscal 2018 are tracking $90 million (1%) ahead of the official estimate. Of the key tax revenues, sales and use taxes are essentially in line with the estimate while personal income tax revenues were 2% above estimate. An outsized increase in collections for non-withholding personal income taxes in December could be a one-time behavioral shift in reaction to the recent federal tax changes.

EDUCATION AND PENSION SPENDING DRIVE INCREASES

On the spending side, proposed general fund spending of $32.9 billion is up 3%, or just under $1 billion, over the enacted fiscal 2018 budget. The executive budget includes a $100 million increase in basic education aid funding (approximately 2%) for K-12 public schools. If approved, approximately 7% ($400 million) of $6.1 billion in basic education aid would be distributed using a new funding formula adopted in 2016. The governor also proposes increased funding for the Pennsylvania State System of Higher Education (PASSHE, revenue bonds rated AA-/Negative) for the fourth consecutive year.

For pensions, the executive budget proposes full funding of actuarially determined contributions for both the state employees retirement system (SERS) and the public school employees retirement system (PSERS) for the first time since fiscal 2004. The SERS contribution of $685 million is funded directly by the commonwealth, while the more significant PSERS contribution of $2.5 billion flows through school districts via commonwealth appropriations.

As in prior years, savings measures are a key focus of this executive plan. “Complement” (the commonwealth’s term for its total workforce), continues trending downward and the administration reports the proposed level would be the lowest in over four decades.

MEDICAID SPENDING DOMINATES

Medicaid remains a major driver of the budget, with the fiscal 2019 budget proposing $7 billion in general fund spending, or more than one-fifth of the total general fund budget. Commonwealth Medicaid spending would increase less than 2% from the enacted fiscal 2018 amount under the executive budget, well below the rate of national medical inflation. The budget includes continued shifting of Medicaid services to a managed care model, including for long-term care which is a likely driver of future Medicaid spending.

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

BOSTON, Feb. 8, 2018 /PRNewswire/ — BondLink today announced that the State of California has launched a new, dedicated investor platform to provide additional transparency to bond investors. The new website, which can be found at www.BuyCaliforniaBonds.com, is part of the state’s enhanced disclosure efforts.

“I am on a mission to make California government more transparent, accountable and responsive to the needs of the public through technological innovation,” said Treasurer John Chiang. “By making the ‘what, when and whys’ about the state’s finances, debt, and economic outlook available with a simple mouse click, I hope to entice more investors to finance projects of critical importance to our state, from transportation and clean water to schools and affordable housing.

“More data that is easy to access and slice-and-dice will translate into more investor interest. More investors mean more competition and – ultimately – better deals for California taxpayers,” said Chiang.

The new website is powered by BondLink, a Boston-based financial technology company that provides investor outreach solutions to issuers in the municipal bond market. The company was co-founded by Colin MacNaught, a former issuer for the Commonwealth of Massachusetts.

“The new investor website validates the importance of disclosure, and the belief in the effectiveness of technology to improve disclosure. For an issuer the size and prominence of California to be using BondLink truly illustrates the State’s commitment to expanding its investor base through enhanced transparency,” said MacNaught, BondLink CEO. “We’re proud to partner with Treasurer Chiang to improve the efficiency of the state’s bond financings.”

With more than 13,000 pages of data and documents, the corporate-style investor platform provides insight into the credit fundamentals behind California’s outstanding bond ratings. This new tool is a free and open resource that provides a seamless online experience for both large institutional investors as well as smaller local bond investors including California residents.

The website consolidates the state’s credit data and documents that are important to bond investors and rating agencies, providing quick and easy access to extensive financial information. The long-term goal of an investor platform like www.BuyCaliforniaBonds.com is to attract more investors to the state’s bond program in order to increase demand for its bonds and diversify its investor base – ultimately to lower the cost of borrowing for public infrastructure and lowering the burden on taxpayers. Using a dedicated investor website for disclosure also follows best practices from government finance organizations such as the Government Finance Officers of America.

Reaction from Market Experts

“I think California’s focus on enhanced disclosure is exactly what issuers should be doing,” said Colleen Woodell, former Chief Credit Officer for S&P Global Ratings and past chair of the Municipal Securities Rulemaking Board. “Investors need more current disclosure and they need it through better technology. When an issuer shares more financial data, it enhances the investors’ ability to make more accurate credit judgments and may improve the liquidity of the issuer’s bonds.”

“Research shows that better, more accessible disclosure can lead to lower bond yields for issuers and lower trading costs for investors,” said Christine Cuny, Assistant Professor of Accounting at New York University Stern School of Business. “California’s taxpayers and investors can benefit from easier access to the state’s financial information.”

About BondLink

Led by founders Colin MacNaught, CEO, and Carl Query, CTO, BondLink helps issuers in the $4 trillion municipal bond market attract more investors through better disclosure and enhanced technology. BondLink enables institutional investors to automate their credit surveillance of an issuer, and makes it easier for smaller investors, including individuals, to participate in public bond sales.

Since going live in 2016, BondLink’s investor platform has helped states, counties, cities, school districts, universities, hospitals, public utilities and ports across the country improve their transparency to the bond market.

Headquartered in Boston, BondLink is backed by top investors, including Franklin Templeton Investments, one of the largest municipal bond fund managers in the country, Coatue and Accomplice.

For more information about the State of California’s investor website or BondLink, please contact Colin MacNaught at 617-797-3632 or email colin@bondlink.com.

Shortly before resigning last month, former Kansas Governor Samuel Brownback submitted his executive budget proposal for the 2018-2019 biennium. Despite projected higher revenues from recent tax increases adopted by the state legislature in 2017–over the governor’s veto—S&P Global Ratings…

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Feb. 8, 2018

For the vast majority of local Texas issuers, pension pressures will remain manageable compared with those of peers across the country. Although Texas issuers typically have very weak debt and contingent liability profiles, this is often attributable to local governments having high overall net debt as a percent of market value…

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Feb. 9, 2018

With its resilient and broad-based economy, favorable financial management practices, and low debt burden, Texas (AAA/Stable) is well positioned to weather potential budgetary headwinds related to growing Medicaid expenditures and a reduction in operating revenue as constitutionally required sales tax transfers to the State Highway Fund begin in fiscal 2018.

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Feb. 8, 2018

Illinois has a bond problem, and it’s not just at the state level. While many Illinoisans know the state’s financial troubles have led to the worst state bond rating in the country, what they may not know is that those problems are amplified on the local level. When the state sells municipal bonds, it has to pay investors more interest to take on increased risk—and the same thing happens at the local level, thanks to the state’s problems. In the bond world, it’s called a “contagion.”

For counties, cities, schools, hospitals, airports and nonprofits across the state that sell municipal bonds to construct buildings or repair infrastructure, the Illinois contagion means they’re all stuck paying investors more interest, too. They may not be able to afford to raise as much money, and will be burdened with higher debt payments in the future. One bond expert estimates that the “Illinois effect” results in the state’s local issuers shouldering an additional billion dollars in annual debt payments.

The negative impact shows in Illinois issuers’ average bond yield, which is higher than the national average. Even when their bond ratings are comparable to those of peers in other states, they pay a penalty.

Find out what the worst credit ratings in the country means for cities, suburbs and counties all over Illinois. Read more here.

CRAIN’S CHICAGO BUSINESS

By LYNNE MAREK

February 09, 2018

(Reuters) – Detroit will tap up to $55 million in surplus cash to retire some of the debt the city issued in 2014 as part of its exit from bankruptcy, under a plan approved on Tuesday by the city council.

With debt service on outstanding bonds expected to substantially increase in 2025 with the commencement of principal payments on various bonds, the city is taking steps to lower costs by allocating some of the $169 million unassigned budget surplus it has accumulated for debt repurchases.

John Naglick, Detroit’s finance director, told the city council that pending final approval by a state oversight board, the money will be used to obtain financial recovery series B bonds, which carry a 4 percent coupon, at a discount, or series C bonds, which have a 5 percent coupon.

“By retiring them now, it’s like paying off your mortgage early. You’re going to save all that interest,” he said.

The city ended what was then the biggest-ever U.S. municipal bankruptcy in December 2014 after shedding about $7 billion of its $18 billion of debt and obligations.

Michigan’s biggest city is on track to end state supervision of its finances this spring after an audit released last week showed it completed a third-straight fiscal year with a balanced budget. One element of the city’s federal court-approved bankruptcy exit plan was Michigan’s creation of an oversight board.

The city reported another positive development on Monday — residential property values had a net increase for the first time in at least 17 years. Higher assessed values, which rose to $3 billion from $2.8 billion last year, could lead to more property tax revenue for Detroit.

By REUTERS

FEB. 6, 2018, 1:39 P.M. E.S.T.

(Reporting by Karen Pierog in Chicago. Editing by Matthew Lewis)

A big, bold plan to save the state’s debt-strapped public pension funds is being floated this week in Springfield. But don’t get your hopes up.

It’s not the cure to Illinois’ festering financial crisis.

An influential state employee advocacy group, the State Universities Annuitants Association, is urging Illinois to issue $107 billion in bonds to pay off shortfalls in the state’s five leading pension funds.

Yep, that’s a whopping $107 billion — backed by taxpayers who will be on the hook, especially if this deal goes bad. And the odds of that occurring look pretty good.

“It’s a big gamble,” says Howard Cure, director of municipal bond credit research for Evercore Wealth Management in New York.

While full details of this plan are expected to be unveiled Tuesday before a state panel, bond and public finance experts are already highly skeptical. They’re concerned it will add to Illinois’ pension burdens — now estimated at $130 billion in unfunded liabilities and growing — and further hinder the state’s sorry overall financial health.

Let’s start with the bond market.

At $107 billion in 27-year fixed-rate bonds, it would be the largest amount of debt the state ever sought from investors. Bond experts wonder if Illinois — with its record of political dysfunction, inability to pay its bills in a timely way and $25 billion in general obligation debt — will attract enough hungry investors.

One way to lure wary backers is to spice up the bonds and sell them at above-market interest rates. Such a premium would likely attract risk-taking investors, probably from overseas funds, or deep-pocketed individuals hoping to make a killing.

But higher rates are tougher to pay off and investors’ bond payments must be paid on time, says Evercore’s Cure. Missing a debt payment means riling angry bondholders, who could quickly sue the state or take other legal actions to recoup their investments, he adds.

Laurence Msall, president of the Civic Federation — a nonpartisan government research group — says his organization has “serious concerns and reservations” about the proposed bond effort too.

On top of the gargantuan amount, the bond is limited to pensions and not linked to any comprehensive financial plan for improving state finances, Msall asserts. The bond’s size could also impede the state’s ability to seek borrowing or bond financing for infrastructure or other basic needs, he says.

Despite these somber concerns, no one should be beating up on the State Universities Annuitants Association, which represents more than 200,000 current and retired employees, for leading this charge.

The group believes many initial concerns will be addressed when it reveals the details of its plan to the General Assembly committee exploring public pension matters. It will argue that its refinancing proposal will lop $103 billion off state pension costs through 2045 while increasing the pensions’ funding levels to 90 percent.

Rep. Robert Martwick, the Chicago Democrat who heads the House pension committee, has no position on the bond plan but wants it to become part of a larger pension reform debate. In the coming weeks, the $107 billion initiative will be fully discussed by finance experts, labor and taxpayer advocates, he stresses.

Of course, when it comes to Illinois’ public pension crisis, there’s no shortage of issues to chew over.

Government leaders have been doing that for way too many years with few results, mainly because of state underfunding of pensions, feisty union opposition and a provision in the state constitution that prohibits any structural changes to the funds or benefits.

Those who want to totally dump public pension plans haven’t had any better luck getting around that provision.

It’s a nasty trick bag because, in the meantime, the amount of public pension liabilities keeps stacking up and strapped taxpayers are increasingly responsible for paying more.

It’s a mess.

But this big, bold but flawed bond plan isn’t the solution to the public pension crisis.

We can’t be that desperate.

Chicago Tribune

by Robert Reed

January 31, 2017

Close your eyes, issue 27-year bonds and watch liabilities disappear.

Democratic politicians in left-leaning states have been brainstorming ideas to avoid serious pension and tax reforms. The creative financial geniuses in Illinois have come up with a doozy: a magic bond that would save the state as much as it borrows.

Democrats in the state House have proposed issuing $107 billion in bonds to backfill the state’s pension funds, which are short $129 billion. Annual state pension payments are projected to increase to $20 billion in 2045 from $8.5 billion—not including interest on $17 billion in debt the state previously issued to pay for pensions.

At the request of state retirees, a University of Illinois math professor performed a crack analysis showing how the state could use interest-rate arbitrage to shave its pension costs. Under the professor’s math, the state could sell 27-year, fixed-rate taxable bonds and invest the proceeds into its pension funds. This would supposedly stabilize the state’s pension payments at $8.5 billion annually, save taxpayers $103 billion over three decades and increase the state retirement system’s funding level to 90% from 40%. Can the mathemagician make House Speaker Michael Madigan disappear too?

The professor based his analysis on pension obligation bonds issued under former Gov. Rod Blagojevich in 2003 with a 5.05% coupon that have earned on average 7.62% in the pension system. But that period included two bull equity markets, and even the state pension funds project only a 7% long-term return.

Illinois’s borrowing costs have also increased as its credit rating has slipped to a notch above junk from double-A. Last year the state’s taxable bonds due in 2035 traded at yields up to 7.2%. Investors may demand even higher rates because of the substantial interest-rate and credit risk given rising rates and the length of the 27-year bonds.

These magic bonds wouldn’t carry the state’s “full faith and credit” protection, for whatever that’s worth nowadays in Springfield. In effect, public workers’ pensions would be the bond security.

Two relevant precedents are the cities of Detroit and Stockton, California. Both borrowed to finance pensions and then later defaulted. Creditors had no recourse when the cities went bankrupt. States can’t file for bankruptcy under federal law, but Illinois lawmakers could seek to extend maturities or reduce interest payments on the bonds. Good luck to creditors in court.

The real goal with these bonds is to shift the pension-liability risk from public workers and retirees to investors and taxpayers. This would liberate politicians to spend more and remove any incentive unions have to reform pensions. After borrowing for pensions in 2003, state lawmakers skipped payments, increased spending and scrapped retirement reforms for new workers.

Republican Gov. Bruce Rauner won’t fall for this ruse. But if a Democrat defeats him this fall, unions may pull this magic bond out of their bag of political tricks.

The Wall Street Journal

By The Editorial Board

Feb. 4, 2018

BOSTON — U.S. mayors increasingly view climate change as a pressing urban issue, so much so that many advocate policies that could inconvenience residents or even hurt their cities financially.

The annual survey of big-city executives, released Tuesday by the Boston University Initiative on Cities, also reflected the nation’s sharp political divide. Ninety-five percent of Democratic mayors who responded believed climate change was caused by human activities, a view shared by only half of Republican mayors.

A clear majority of mayors were prepared to confront President Donald Trump’s administration over climate change and felt their cities could be influential in counteracting the policies of the Republican president, who at times has called global warming a hoax and last year withdrew the U.S. from the Paris climate accord.

“A striking 68 percent of mayors agree that cities should play a strong role in reducing the e?ects of climate change, even if it means sacrificing revenues or increasing expenditures,” a report accompanying the survey stated.

In all, 115 mayors of cities with at least 75,000 residents answered the fourth annual survey named for Thomas Menino, a longtime Democratic mayor of Boston who founded the university program before his death in 2014. The survey was sponsored in part by The Rockefeller Foundation and Citigroup.

Organizers of the survey declined to release a list of the 115 mayors who responded, citing confidentially agreements. According to the report, nearly two-thirds of the mayors were Democrats and the cities had an average population of 233,000.

The survey cited the availability and affordability of housing as the single most pressing concern of mayors, followed closely by climate change and municipal budget pressures caused in part by federal and state cuts.

A foreword to the report, signed by Democratic Los Angeles Mayor Eric Garcetti and Betsy Price, the Republican mayor of Fort Worth, Texas, argued that cities can exert formidable influence over U.S. and global policies.

“At a time when the national conversation is divisive, cities offer a sense of hope and shared identity,” the mayors said.

Sixty-eight percent of mayors said they would be willing to expend additional resources or sacrifice revenue to combat climate change.

Democrats were more than twice as likely as Republicans to promote environmental policies that might inconvenience motorists in their cities, and almost three times as likely to support entering into regional climate pacts or networks. Yet only 26 percent of Democrats and 5 percent of Republican mayors were eager to slap any costly new regulations on the private sector.

The survey found that attitudes about climate change differed geographically as well as politically. For example, 90 percent of all Eastern mayors and 97 percent from the Midwest blamed human activities for climate change, compared to 70 percent from Southern cities.

By THE ASSOCIATED PRESS

JAN. 23, 2018, 1:00 P.M. E.S.T.

Fitch Ratings-New York-25 January 2018: The fiscal 2019 California state budget proposed by Governor Brown appears prudent, in Fitch Ratings’ view, and an enacted budget with similar priorities would bode well for continued fiscal stability in light of the state’s volatile tax structure and the inevitability of a future economic downturn. While the budget would invest in many of the governor’s priorities, it also continues his policy of restraining growth in ongoing spending while paying down long-term liabilities and funding the rainy day fund. This approach has contributed to improved fiscal stability and resilience and has led Fitch to upgrade the state’s Issuer Default Rating three times since 2013, most recently to ‘AA-‘/Stable.

Fitch’s assessment of the state’s credit quality assumes a continuation of the strong budget management the state has demonstrated through this extended period of economic recovery and expansion; the governor’s proposed budget is consistent with this assumption. The ‘AA-‘ rating also recognizes California’s large and diverse economy, solid ability to manage expenses through the economic cycle and moderate level of liabilities, although California’s flexibility is somewhat more restricted than is true for most states due to its constitutional requirement for funding education and voter initiatives that limit policymakers’ discretion. Going forward, Fitch will continue to assess the extent to which these strong management practices have become institutionalized and not limited to a particular governor’s approach.

The governor’s budget proposal, which fully funds both the rainy-day reserve and the school funding formula ahead of schedule, is based on a revenue forecast of modest growth that reflects the continued expansion of the California economy tempered by the risk that the current economic expansion has passed its peak and that federal tax reform (not included in the revenue forecast due to timing) could have a negative impact on state revenues.

Rainy Day Reserve Fully Funded
The governor is proposing to set aside $5 billion from fiscal 2019 revenues in the state’s rainy day fund (the Budget Stabilization Account), $3.5 billion above what would be required by law. This would bring the balance to $13.5 billion, reaching 100% of the target of 10% of tax revenues detailed in Proposition 2, which established the fund. A fully funded rainy day fund provides the state with strong gap-closing capacity and would help it to weather a downturn in the economy while maintaining adequate financial flexibility, in contrast to prior economic downturns. Pursuant to Proposition 2, once the rainy day fund is fully funded, “excess revenues” will be set aside to address the state’s considerable infrastructure needs.

In addition to the rainy day fund, the budget maintains approximately $2.3 billion in the state’s Fund for Economic Uncertainty, which can be tapped for unexpected events such as natural disasters. The state used $43 million from this fund for costs related to the recent wildfires. The governor’s budget proposal would backfill approximately $48 million in local property taxes in affected areas from the general fund. Budgetary borrowing, which peaked at approximately $35 billion in fiscal 2011, will be further reduced to $1.1 billion from $2.2 billion by the end of fiscal 2019 as the state repays special funds, uses one-time funds to “settle-up” prior year Proposition 98 obligations, and repays transportation loans.

Reasonable Assumptions for Revenue Growth
The proposed general fund budget assumes 4.5% growth in revenues over the current fiscal year to $135 billion and estimates that current year revenues will exceed budget by $1.4 billion (1%) and total $127.3 billion, driven by strong wage withholding and capital gains. The 4.5% growth rate is below the average growth rate experienced by the state since emerging from the recession, taking into account various changes in tax law related to personal income and sales taxes. Much of the increase in revenue will be automatically allocated to K-14 education under Proposition 98 but will also support increased spending for Medi-Cal (California’s Medicaid program), higher education, programs that counteract poverty and climate change, and infrastructure.

Medicaid Spending Stable
Medi-Cal is the state’s single-largest all-funds expenditure and the second-largest general fund expenditure after education. The state expects to spend $101.5 billion on Medi-Cal, including state and federal funds. The budget does not propose significant programmatic changes although increasing state revenues have allowed the restoration of program reductions taken during the great recession and increases in the state’s portion of the cost for optional Medicaid expansion under the Affordable Care Act. The Proposition 56 increase in cigarette taxes is expected to generate $1.3 billion in fiscal 2019, which, after mandated transfers, will support supplemental payments and provider rate increases as well as partially covering costs of caseload growth.

Big Boost to School Funding/Future Funding More Modest
The proposed budget boosts Proposition 98 (school funding formula) K-12 funding by $3.8 billion (5.1%) compared to the fiscal 2018 budget, including full implementation of the Local Control Funding Formula (LCFF; enacted in 2013) two years earlier than originally projected. Proposition 98 funding includes $1.8 billion in discretionary one-time funding to settle up prior-year obligations. If districts use these funds one time rather than for funding ongoing programs, the downside risk of recession could be partially mitigated. The boost in funding for fiscal 2019 may alleviate some of the budget pressure being felt by school districts, many of which may need to make budget cuts in fiscal 2019 in order to maintain fiscal balance.

The proposed budget is consistent with Fitch’s expectations that once the LCFF target funding level has been reached, annual increases to K-12 funding will generally be for cost of living adjustments (COLA). Individual district’s revenues will depend on the COLA and relative increases/decreases in average daily attendance.

Community College Proposal
The governor is proposing a shift in incentives for community colleges (CCD) that will focus funding on outcomes (such as for certificates and degrees) and serving low-income students, rather than solely on the number of full time equivalent students (FTES). Base grants (approximately 50% of funding) would be based on FTES, with supplemental grants (25%) for low-income students and incentive grants (25%) for the number of degrees and certificates granted. For fiscal 2019, districts would receive at least the funding received in fiscal 2018 with adjustments made thereafter. If a new funding formula alters Fitch’s expectations for revenue growth, there could be a positive or negative credit impact. If implemented in the final budget, Fitch will analyze its impact on its CCD portfolio.

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

As if investors didn’t have enough to worry about when buying municipal bonds, Hawaii has added the threat of widespread pandemonium to the list.

The state has included a mention of a false alert of an incoming ballistic missile that panicked the island-state this month in disclosure documents provided to potential investors in Hawaii’s upcoming $775 million bond sale. It’s listed under “Recent Events” and below the dangers of computer hackers and climate change.

The bond disclosure note says the governor has taken steps to avert future incidents and has appointed a brigadier general from the Hawaii Army National Guard to review the alert system and recommend fixes.

The state plans to borrow $648 million of tax-exempt general obligation bonds and $127 million of taxable bonds next week.

Bloomberg Markets

By Michael B Marois

January 25, 2018, 7:25 AM PST

• Political uncertainty spooks investors in run up to election
• Governor wants to roll back tax hike that ended impasse

Six months after Illinois resolved a budget stalemate that pushed its bonds close to a junk rating, investors are concerned that another political fight may be on the horizon.

In a sign that bondholders are bracing for election-year dysfunction from the worst-rated U.S. state, the extra yield that investors demand to hold Illinois’s 10-year general-obligation bonds instead of benchmark debt rose to about 1.9 percentage points, according to data compiled by Bloomberg. That’s the most since July 20.

Illinois avoided becoming the first state to be downgraded below investment grade after it ended a record, two-year budget impasse in July, when the Democrat-led legislature approved an income-tax hike over Republican Governor Bruce Rauner’s veto. But on Monday, Rauner reiterated plans to roll back that increase, telling reporters he will lay out a process to do so during his budget address next month, fueling speculation of another standoff with Democrats.

“The market doesn’t know what to expect from the political perspective,” said Guy Davidson, director of municipal investments at AllianceBernstein LP, which oversees about $40 billion of municipal fixed income securities.

Another impasse could again threaten the state’s rating and leave the government reckoning with unpaid bills. Last year, Illinois spent $1 billion on fees for not paying its bills on time, according to the comptroller’s office.

“This is like putting $1 billion in the street and lighting it on fire,” said Laurence Msall, president of the Civic Federation, a nonprofit that monitors the state’s finances. “It’s a penalty of our own creation from our own financial recklessness.”

Concerns about another impasse may be “providing a degree of caution” for investors, said Neene Jenkins, vice president and municipal credit analyst at AllianceBernstein. Rauner, a Republican, is up for re-election on Nov. 6, 2018, assuming he survives a primary challenge in March.

A potentially contentious budget and election season could mean extra yield for Illinois bondholders.

“You’re going to be paid by the state,” said Davidson who doesn’t think Illinois is a default risk. “It could be a volatile period ahead due to politics.”

Bloomberg Markets

By Elizabeth Campbell and Zachary Hansen

January 24, 2018, 5:45 AM PST

SAN JUAN, Puerto Rico — One of the largest public utilities in the U.S. might soon be up for sale, but many wonder who would want to buy a power company that is worth roughly half of the $9 billion debt it holds and has an infrastructure nearly three times older than the industry average.

Concerns also are growing about whether plans to privatize Puerto Rico’s Electric Power Authority will translate into more affordable electric bills and better service. People in the U.S. territory say they cannot afford another financial blow amid an 11-year-old recession and many complain about receiving high power bills after Hurricane Maria when they didn’t even have electricity.

“Some people have faith that privatization will improve everything, but it’s not a guarantee,” said Puerto Rico economist Jose Caraballo. “If a good deal isn’t hammered out, Puerto Rico can end up worse than it is.”

The power company once known as the government’s crown jewel has seen a reduction in employees and a drop in the demand for energy amid a deep economic crisis and recent austerity measures. The agency now has some 5,800 employees and serves nearly 1.5 million customers with infrastructure that is roughly 45 years old, which officials say caused frequent power outages before the hurricane and an island-wide blackout in September 2016 that lasted a couple of days.

The company also has long been criticized for political patronage and inefficiency, and recently faced accusations of corruption. In June 2016, the owner of the U.S. territory’s biggest oil supplier was arrested after being charged with misappropriating $11 million in public funds. Jose Gonzalez Amador and his company, PetroWest, are accused of charging the power company a 0.5 percent municipal tax even though some municipalities granted them a lower rate or waived the tax altogether. Authorities say the charge was then passed on to consumers.

Given that situation, can the U.S. territory attract any takers?

Industry analysts say it’s a bit too early to tell, noting that it all depends on the type of measure the governor expects to submit in upcoming days to start the privatization process.

“It’s a complicated arrangement: What’s going to happen to the workers? Where is the debt going to land? What are the contracts going to look like? There are a lot of details here that have very real implications on how much electricity is going to cost for Puerto Rican customers,” said Cathy Kunkel, an energy analyst with the Ohio-based Institute for Energy Economics and Financial Analysis.

She said her main concern is that privatization could occur without a regulatory body, which is needed in part to look after consumers’ interests on an island where power bills have been double the average of those on the U.S. mainland, in part because imported fuel supplies three-fourths of the energy consumed in Puerto Rico, according to the U.S. Energy Information Administration.

The terms of the contract will determine the interest, Kunkel said, noting that the cost of any new investment in the electrical system will be paid by consumers.

“Private investors will want to make a profit,” she said. “But you have to contrast that with the waste and mismanagement that the (power company) has shown over the years.”

Any sale would have to be approved by a federal judge because the power company entered a bankruptcy-like process last year, and approval is first needed from legislators, which is unclear will happen.

Puerto Rico Senate President Thomas Rivera Schatz said Tuesday that he will study the upcoming measure to ensure it’s in the best interest of Puerto Rico and no one else.

“Privatization can be a great tool, but it is not a magic wand,” he said, noting that Puerto Rico once privatized its water and sewer company only to have the government take it back in the early 2000s after problems with service, billing and quality requirements set by the U.S. Environmental Protection Agency.

If legislators approve the governor’s measure, then Gov. Ricardo Rossello said his administration will monitor the market and start accepting offers from those interested in buying the power company’s assets. He said privatization would both improve service and lower power bills to about 20 cents per kilowatt hour, compared with the U.S. average of 10 cents per kilowatt hour. He also predicted it would lead to more investment in renewable energy projects.

Rossello said the electrical grid is not designed for Puerto Rico’s current needs, noting that the greatest demand exists in the north part of the island while the main generation plants are in the south. In addition to its aging infrastructure, the company known by its initials PREPA has lost 30 percent of its employees in the last five years, 86 percent of whom worked in maintenance, he added.

The company also has faced internal turmoil. Its director was forced out in November after the utility failed to immediately call for help from its mainland counterparts after Hurricane Maria. Instead, PREPA granted a power-restoration contract to a little-known company that the utility later scrapped. Most recently, PREPA was blamed for the failure to distribute badly needed parts found in one of its warehouses even as repairs to the storm-damaged power system went undone for lack of supplies.

Monday’s announcement by Rossello comes as more than 30 percent of customers remain without electricity more than four months after Hurricane Maria, and critics say he took advantage of that situation to rally support for his plan.

Union leader Angel Figueroa said Tuesday that workers oppose the governor’s plan but will not go on strike, noting that nearly half a million Puerto Ricans are still without power. However, he said the union will take other undisclosed measures, noting they have the support of unions that represent other types of workers including teachers.

“It’s not every man for himself,” he said. “Everyone here will be affected.”

Figueroa warned that power bills would only increase given the drop in demand for electricity in recent years as roughly half a million Puerto Ricans have fled for the U.S. mainland, and especially if a private company decides to invest in new infrastructure.

Rossello has said the privatization process could take 18 months, a timeframe that Moody’s on Tuesday called “quite aggressive.” The agency said it supports privatization because it would bring in more capital, but noted that challenges remain, including “negotiating a price in an environment of declining Puerto Rico population, investing in rebuilding aging infrastructure, and how PREPA’s pension liability will be handled.”

By THE ASSOCIATED PRESS

JAN. 23, 2018, 4:39 P.M. E.S.T.

• Debt gains after island says virtually no money for bonds
• With deep losses anticipated, bankruptcy rulings seen as key

Puerto Rico bondholders got some unwelcome, if widely expected, news from the insolvent island: For the next five years, there’s basically no money for repaying debt. So now, they’re left waiting to see how the fight over the territory’s scarce funds plays out in bankruptcy court.

The prices of most Puerto Rico securities, which tumbled after Hurricane Maria ravaged the island in September, edged up Thursday, despite the government’s forecast that it will have a $3.4 billion deficit over the next five years, even if it doesn’t pay any of the $17 billion it owes over that time.

While it’s disappointing that Puerto Rico didn’t include principal and interest payments, investors are more interested in how the government’s proposals fare in court, said Daniel Solender, head of municipals at Lord Abbett & Co.

“Everyone’s waiting for the court to go through their process,” said Solender, whose firm holds $20 billion of municipal bonds, including those issued by Puerto Rico. “That’s more important than this fiscal plan.”

Puerto Rico, which fell into bankruptcy in May, revised its proposal to take account of the impact of the storm, which devastated the electrical grid, sent residents fleeing to the U.S. mainland and pushed the economy into a deep contraction this year. A lawyer for the federal board in November said in court that Puerto Rico may need a five-year moratorium. The island’s federal oversight board, which must approve the plan, is evaluating it and intends to weigh in by Feb. 23.

But the developments this week haven’t been entirely negative for investors. The Puerto Rico Aqueduct and Sewer Authority’s revised fiscal plan, also released late Wednesday, showed the water utility will have about $854 million less than it needs to cover $1.6 billion of debt service due in the next five years, down from a $916 million shortfall in its prior plan. That agency’s most actively traded bonds Thursday, those due in 2037, rose to an average of about 70 cents on the dollar, the highest since Sept. 26 and up from 68.3 cents on Wednesday, according to data compiled by Bloomberg.

General obligations with an 8 percent coupon and maturing in 2035 traded Thursday at an average price of 26.8 cents on the dollar, up from 26 cents Wednesday, according to data compiled by Bloomberg. Those securities, the island’s most actively traded, were first issued for 93 cents four years ago.

“It’s hard to picture investors who are still holding these bonds selling based on this news because this is what they expected to happen,” said Matt Fabian, a partner at Municipal Market Analytics.

Bloomberg Markets

By Michelle Kaske

January 25, 2018, 10:50 AM PST

• Puerto Rico governor’s plan to sell Prepa faces many hurdles
• ‘We just have no idea what kind of price we’re talking about’

Bondholders are wondering what their payouts would be. Residents are wondering when the lights will come on.

And Puerto Rico Governor Ricardo Rossello is wondering whether his plan to privatize the U.S. territory’s bankrupt and storm-ravaged Electric Power Authority can navigate the legislature, the courts and a federal control board.

Prepa, as the utility is known, is so short of cash it shut down production Tuesday because it couldn’t afford fuel, and more than four months after Hurricane Maria it’s still trying to repair the damage. Reviving the moribund agency is key to rejuvenating bankrupt Puerto Rico, which has lost tens of thousands of residents since the storm.

On the one hand the governor’s push to privatize the utility, which has more customers than any other U.S. public power utility, could attract buyers looking to profit by serving a massive customer base with little competition. But its ancient generation plants are falling apart, the storm destroyed the electrical grid and it owes $9 billion to creditors who are already facing off in court over who has rightful claim to the utility’s cash.

“Prepa needs to make an enormous amount of capital investments and Prepa doesn’t have the money for it,” said Sergio Marxuach, policy director at the Center for a New Economy, which researches the island’s finances. “And the government of Puerto Rico doesn’t have it, so it has to come from the private sector.”

Bond Optimism

Prices on most Puerto Rico bonds increased Tuesday after Rossello announced the plan late the previous day, with some trading at the highest price in more than two months. Still, the optimism was tempered by concerns that even the cash from a sale wouldn’t provide a significant recovery on securities now trading at about a third of face value, even if Rossello successfully runs the legal gantlet needed to complete it.

“It would be good to get a capital infusion, but we just have no idea what kind of price we’re talking about for bondholders, and what the courts will say about this and what the board will say,” said Daniel Solender, head of municipals at Lord Abbett & Co., which manages $20 billion of state and local government securities, including commonwealth bonds.

Last Ditch

Prepa will run out of cash at the beginning of February without loans, Rossello said in a Tuesday evening statement announcing it would mothball two units. He said lawmakers and the oversight board have committed to prevent “operational collapse.”

In the long term, residents would be better served by a privately run utility with a proven record, an investor group holding Prepa debt said. The bondholder group warned that any plan must acknowledge creditors who have a lien on Prepa’s revenue.

“The only path for any proposal to deliver low cost and reliable power will be if it respects property rights, since failure to do so will result in years of litigation,” the group said in a statement.

Essential Need

Angel Figueroa, a Prepa union leader, spoke out Tuesday against privatizing the utility, saying it would increase rates for impoverished residents. Senate President Thomas Rivera Schatz, who is from Rossello’s New Progressive Party, said he would try to protect the jobs of employees, presumably obligating bidders to make a commitment to them.

Repairing Puerto Rico’s grid — and providing jobs for residents — are vital to restoring its economy, which has been in decline for more than a decade. The commonwealth is negotiating a bankruptcy process to reduce $74 billion of debt and a pension liability of almost $50 billion. The population drain means fewer people are left to repay the island’s obligations.

Prepa on Wednesday announced it had restored power to more than 1 million customers, or two-thirds of its clients. The system was generating about 83 percent of its capacity. Years of mismanagement, lack of infrastructure investment, theft and a high dependence on fuel to generate electricity pushed Prepa into insolvency.

Eileen Cruz, a retired teacher, has been without power in her home in Palmas Altas for four months and three days. Though she has a generator, she turns it on only a few hours at night for sake of her mother, 87, and father, 93.

“I have already gone through the period of being depressed and having courage. I am resigned to having to live in darkness, and that the lack of energy dictates the routine of all my days,” Cruz said.

Prepa’s privatization would end “a monopoly of incompetence,” she said.

‘Continual Bleed’

A buyer would need to weigh Prepa’s obligations against its size and role as a essential-service provider. It has more than $10 billion in liabilities that it must restructure “to operate as a viable business entity,” according to its bankruptcy petition. Along with its bonded debt, Prepa has an unfunded pension liability of as much as $2.2 billion, $384 million in retirement health-care costs and another $465 million in unpaid bills to vendors and suppliers.

Reworking those obligations would be a central part of discussions between Puerto Rico and prospective buyers, said John Donahue, a privatization expert at the Harvard Kennedy School.

“I would be very surprised if you’d find a private company that’s willing to take on all the burdens of the existing public utility,” Donahue said.

Most Puerto Rico bonds traded up following Rossello’s announcement. Prepa bonds maturing in 2042 changed hands Tuesday at an average 33.3 cents on the dollar, the highest since Nov. 10, according to data compiled by Bloomberg. General obligations with an 8 percent coupon and maturing in 2035 traded at an average of 26.2 cents on the dollar, the highest since Nov. 14, Bloomberg data show.

While it’s unclear how a privatization would affect bondholder recoveries, the better Prepa’s financial health, the better suited it is to repay what it owes, said Rick Donner, an analyst at Moody’s Investors Service.

“If Prepa’s able to survive and stabilize its financial situation with a buyer coming in, that’s got to be better for bondholders than the current situation, which is a continual bleed,” Donner said.

Bloomberg Markets

By Michelle Kaske

January 24, 2018, 6:00 AM PST

— With assistance by Yalixa Rivera

NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) affirmed its insurance financial strength rating of AA+, with a Stable Outlook, for Assured Guaranty Municipal Corp. (AGM), a financial guaranty subsidiary of Assured Guaranty Ltd. (together with its subsidiaries, Assured Guaranty)(NYSE:AGO).

In the report, KBRA noted the following key strengths supporting AGM’s AA+ rating:

• AGM demonstrated the ability to withstand KBRA’s conservative stress case loss assumptions across the breadth of its insured portfolio.
• AGM has strong governance, credit and risk management protocols and a well-developed governance framework.
• AGM’s tested management team is well positioned to address future portfolio risk issues should they develop given their experience through the credit crisis.
• AGM’s substantial and continuing runoff in the structured finance components of its insured portfolio, down nearly 95% since the end of 2009, continues to moderate risk.

“Once again, KBRA has affirmed AGM’s strong AA+ rating, reflecting the high level of protection available to investors in AGM-insured bonds,” said Dominic Frederico, President and CEO of Assured Guaranty. “KBRA subjected AGM’s insured portfolio to rigorous statistical modeling with elevated levels of assumed economic stress, including case-by case-stress analysis of our Puerto Rico credits. They found that, even in this highly unlikely scenario, AGM satisfied all claims in full and on time with a comfortable balance remaining.”

This most recent affirmation follows KBRA’s affirmations last year of Municipal Assurance Corp. at AA+ in July and of Assured Guaranty Corp. at AA in December, both with stable outlooks.

January 24, 2018

With rent exceeding $4,500 a month for a two-bedroom apartment in San Francisco, housing is unaffordable for 73 percent of the city’s residents. We are losing teachers, artists, bus drivers, police officers, nonprofit workers and families every single day. The high cost of housing affects the very fabric of our neighborhoods and character of our iconic city, and impacts households across the income spectrum, directly connecting to many of the city’s challenges, from homelessness, to health, to education. Now more than ever we must apply our collective brainpower and resources — private and public — to housing.

Affordable housing in a high-cost city like San Francisco — and the Bay Area as a whole — can’t be built without the substantial investment of the public sector. But accessing government money is, by nature, a bureaucratic process that can be too slow to be competitive. Financing bottlenecks are one of several reasons that housing development is both costly and slow. The San Francisco Housing Accelerator Fund, where I’m executive director, is an example of a solution that coordinates public, private and philanthropic capital to remedy this particular contributor to our affordability crisis. The public-private model can be scaled up and is replicable — and just became even more relevant in California.

In September, the state legislature passed several bills that could generate billions for affordable housing, and more local governments are passing bond measures to support similar development. Cities around California that are concerned about affordability, and how to enable mission-driven developers to compete to secure sites for preservation or new affordable housing, can look to the San Francisco Housing Accelerator Fund while considering how to best leverage this money.

Two types of capital are critical for housing development. Acquisition capital buys land or buildings, and needs to be nimble, efficient and tolerant of the higher risk of early-stage development. Permanent capital, which subsidizes the most significant long-term costs of the housing, ensures affordability into the future.

The city of San Francisco has put a significant amount, over $100 million annually, toward dedicated funding for affordable housing, and the new state measures and local efforts in other counties will add more to the pot of permanent capital available across localities. These dollars are essential to support the creation and preservation of housing for lower-income individuals, but it is hard for government capital to be nimble and flexible. A flexible financing vehicle, like the Fund, can bridge the gap between what’s required in our real estate market — fast capital with an appetite for risk — and the government’s long-term funds.

Public-private coordinated funds can take advantage of the efficiency of the private sector, while also ensuring the absolutely necessary collaboration with the public sector. Our fund was incubated within the Mayor’s Office of Housing and Community Development, and we continue to closely coordinate with the city, following its policy leadership — but we can move with the agility of a startup.

The SF Housing Accelerator Fund is a nonprofit and acts as a financial intermediary that creates efficiencies by combining capital from a variety of sources — public, private and philanthropic — into a single independent capital pool. We closed on our first round of capital in April, $37 million in total led by investments of $20 million from Citibank, $10 million from the city of San Francisco, and $6.5 million philanthropic capital from Dignity Health, the San Francisco Foundation, and the Hewlett Foundation. Our startup year was supported with seed funding led by Citi Community Development, but our business model is structured to be self-sustaining without additional fundraising.

We aim to accelerate the production and preservation of over 1,500 homes in our first five years of operations, and to grow our balance sheet, partnerships and products, to create more housing opportunities in San Francisco’s future. Ten months in from our first capital raise, we are working on our sixth loan, and with the first five we’ve preserved or accelerated over 200 units of affordable housing.

This is urgent. We are losing affordable units at a concerning pace in the city, due to both evictions — with eviction notices increasing 87 percent between 2010 and 2016 — and drastically rising rents in rent-controlled buildings where prices reset with new tenants.

Our first transactions have included a large land purchase and the preservation of four multifamily buildings. Our land acquisition and predevelopment loan to real estate developer Bridge Housing allowed them to lock up a key site for 175 units of new affordable housing before their purchase option expired. The Fund’s loans to the Mission Economic Development Agency (“MEDA”), a nonprofit that supports low-income and immigrant Latinos, provided the capital to save four six to sixteen-unit buildings from the speculative market, protecting existing tenants and ensuring the permanent affordability of the households, in addition to covering the cost of the rehabilitation of the units and the buildings’ foundation. For two of the buildings, our loans are also financing the construction of new additional dwelling units in the buildings’ existing garages, together representing loan sizes and risk tolerance that is only possible due to our unique mix of public, private and philanthropic capital. We have since raised an additional $3 million from First Republic Bank, $3 million from Beneficial State Bank, and are working towards closing on another $3 million from another local financial institution this month. We are working through a pipeline of over $25 million in additional building acquisitions, which will immediately prevent displacement and create permanent affordability for dozens of additional households.

Statewide, even with the promise of new funding and increasing interest among private investors, the housing shortage is so acute that the effect of the bills passed in September will not be felt immediately. Developers need to build about 100,000 new homes each year beyond what’s already planned, simply to keep pace with California’s population growth. The new legislation is expected to add 14,000 new homes each year. Unfortunately, years of policy restricting development can’t be undone quickly. And despite this show of urgency in Sacramento, there continues to be vocal opposition to robust affordable housing development.

Financing affordable housing is already complicated. So why add a new approach to the mix with a model like the SF Housing Accelerator Fund? Public-private partnerships are inherently hard work and often messy, and require bringing many different backgrounds, priorities and assumptions to the table. Could the private sector get affordable housing built faster without any government funding? Could San Francisco deploy its pipeline of affordable subsidy dollars without the Fund? The answer to both of these questions is yes, probably. But does the private sector have the capacity to build affordable housing at scale without the government? Unlikely. And are our best and brightest public servants in local government content with doing things the way they have always been done, especially as they sit at the front lines of an affordability crisis? Absolutely not. The Housing Accelerator Fund was created to stretch private sector and philanthropic dollars to achieve more impact, more quickly. Ultimately, the goal is to leverage the public sector’s dollars to achieve innovation in housing delivery. Building and growing this public-private partnership is exactly the messy, hard work we should be challenging ourselves to do.

And we must keep at it. The need remains for all types of capital to support housing, from “fast-acting” philanthropic and private dollars to our public sector’s permanent subsidy dollars. We need to continue to innovate and collaborate to add to the resource pot and to leverage more dollars to put them to their highest and best use. We need more housing, faster, and we need to protect our current tenants.

The opportunity for impact — in our neighborhoods, in our schools, at our workplaces — as we all step up together to meet our housing challenges together, is huge.

MARKET WATCH

BY REBECCA FOSTER | OP-ED | JANUARY 18, 2018

Rebecca Foster is the executive director of the San Francisco Housing Accelerator Fund. Prior to leading the SFHAF, Rebecca was director of social impact investment for San Francisco Mayor Ed Lee, where she led the city’s exploration of results-driven contracting and social impact finance, and developed capital tools to address the city’s housing shortage. Prior to her work for Mayor Lee, Rebecca was an associate and vice president in public sector and infrastructure investment banking at Goldman Sachs for eight years, where she raised capital for local governments, universities, nonprofits and utilities around the U.S.

Fitch Ratings-New York-18 January 2018: A recent California judicial ruling underscores Fitch Ratings’ view that reducing public pension liabilities will be politically challenging for most state and local governments and that some will depend on favorable judicial outcomes.

The January 8 ruling by California’s First Appellate District of the Court of Appeal is one example. It affects a narrow class of plaintiffs in three counties and follows several previous legal challenges to state pension reforms adopted in 2012. The state Supreme Court has agreed to review the earlier cases but has not yet indicated a timeframe for such consideration.

The new ruling confirmed prior courts’ conclusions that future pension benefits for existing public employees may be reduced, but the circumstances under which such changes are permissible are limited. The appellate court directed the trial court to consider the financial impacts of eliminating several provisions that allowed some public workers to boost retirement pay in its assessment of whether such modifications were reasonable. In addition, the appellate court rejected the argument that pension benefit reductions were warranted by the challenged financial circumstances of public pension plans and directed the trial court to assess how such plans would be specifically impaired by the continuation of the disputed benefits.

Much of the recent California pension litigation has centered on interpretation of the “California Rule,” a state Supreme Court precedent from 1955 that established pension benefits, once granted, as a vested contractual right that cannot be subsequently impaired unless offset by a comparable new benefit. This principle has been cited as an impediment to pension benefit reductions in twelve states in addition to California. Some clarity on this point may be forthcoming from California’s Supreme Court, but we expect that legal challenges will continue to slow governmental efforts to reduce pension liabilities.

Public pensions account for an increasing share of long-term governmental liabilities across the U.S. Fitch Ratings’ median long-term liability burden for states in fiscal 2016 represents 6.0% of U.S. 2016 personal income, up from 5.6% in fiscal 2015. However, long-term liabilities vary widely across states, ranging from 1.4% of personal income for Nebraska to 28.5% for Illinois. Thus, potential credit pressures due to long-term liabilities vary significantly as well. We expect many efforts to reduce pension liabilities to depend on legal decisions going forward.

Contact:

Stephen Walsh
Director, U.S. Public Finance
+1 415 732-7573
Fitch Ratings, Inc.
650 California Street, San Francisco, CA

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.

On Jan 10, 2018, California Governor Edmund G. Brown, Jr. unveiled his $131.7 billion general fund ($190 billion all-funds) budget proposal for fiscal 2019. The proposal is the final of the governor’s tenure and, despite a recent revenue surge, arrives amid signs of a slowing state economy.

Continue Reading

Jan. 16, 2018

* Chicago plans $661 mln bond sale, down from $898 mln

* Muni market should see little impact from any govt shutdown

Jan 19 (Reuters) – Chicago will hit the U.S. municipal market next week with a downsized version of a bond issue that originally had been slated to sell this week.

Chicago’s Sales Tax Securitization Corp plans to sell $661 million of tax-exempt and taxable bonds, according to a market source familiar with the deal. The bonds will refinance some of the city’s outstanding general obligation debt.

The city had initially planned to lead this week’s sales with an $898 million tax-exempt bond issue. But it postponed the sale, citing weaker market conditions and the possibility of restructuring to include taxable debt.

The biggest market story going into next week is whether the U.S. Senate will avert a government shutdown on Friday ahead of a midnight deadline.

The effect of a shutdown, if it occurs, should be marginal on the U.S. municipal market, Barclays reported on Friday. During previous government shutdowns, municipal yields have tended to underperform U.S. Treasuries, but the underperformance was relatively small.

The municipal market will see an increase in new sales next week as $7.15 billion of bonds and notes are expected to come to market, according to preliminary Thomson Reuters data.

The surge is nearly triple the amount of issuance from this week and an uptick from the slow start to the new year after record-breaking municipal sales in December.

Other large deals on the calendar for next week are $832 million of Port Authority of New York and New Jersey bonds pricing through Bank of America Merrill Lynch on Tuesday and $800 million of Connecticut special tax obligation bonds pricing through Goldman Sachs & Co on Wednesday.

Municipal funds had a second consecutive week of over $1 billion of net inflows in the week that ended Jan. 17.

By Robin Respaut and Karen Pierog

A variety of factors have led Hartford down the path of financial hardship, but it is a route not likely to be followed by other cities in the state, according to a report by Fitch Ratings.

The report, titled “Connecticut City Review: Hartford Weaknesses Not Common,” outlines the capital city’s financial state and compares it to that of other cities in the state of similar size and demographics: Bridgeport, New Haven, Waterbury and New Britain.

The comparable cities maintain stable ratings with New Haven and New Britain having A- grades, Bridgeport an A and Waterbury a AA-. The other Fairfield County cities — Danbury, Stamford, Norwalk and Greenwich — all have a AAA grade from Fitch Ratings.

Meanwhile, Hartford teetered on the brink of bankruptcy last year before being bailed out by the state budget that was finally passed in late October.

Fitch does not rate Hartford, but the other two major credit rating agencies — Moody’s and Standard & Poor’s — rate the state’s capital city in the junk range.

A city or town’s credit rating is an indicator to potential investors about the quality of bonds or other debt securities offered by the municipality.

“The surprise (of the report) was the extent of the deterioration of Hartford’s financial position,” said Kevin Dolan, director in Fitch’s U.S. Public Finance group. “The level of debt ramped up quickly and there wasn’t the revenue to support it. You don’t typically see that in other Connecticut towns — at least not to that magnitude.”

The other cities analyzed stand apart from Hartford because of their financial flexibility, deeper reserves, ability to obtain employee labor concessions and other factors.

“Fitch does not believe that the Connecticut cities that Fitch rates are on the path that led Hartford to its recent crisis,” the report reads.

How Hartford got there

There are many reasons Hartford is in financial dire straits.

Because it is the state’s capital city and has a number of state buildings in its downtown, Hartford has an inordinate number of properties that are tax-exempt. In fact, Hartford does not collect taxes on nearly half the properties in the city.

Property taxes are a main source of revenue for municipalities and, indeed, for Hartford it is the second-largest source of revenue. The city has argued it should be reimbursed more for its tax-exempt situation because the city provides services to those properties.

To combat that loss of revenue, Hartford has raised taxes to the point it has the highest property tax rate in the state for fiscal 2017. It nearly doubled the rate between 2001 and 2005, and continued to slowly increase property taxes through 2013.

Hartford has squeezed about as much as it can out of its taxable properties, the report reads.

“Hartford has little practical ability to raise rates given steep increases since 2001 and the challenged economic base,” according to the report, which also notes that one-third of the population has a wealth level below the poverty line.

Dolan added the high tax rate “makes it less desirable to live there or start a business there and causes property values to drop.”

Hartford has also seen its population decline over the last several decades and its median household income is 44 percent of state levels.

While the other cities in the report negotiated employee benefit concessions following the recession, Hartford had only limited success.

“Annual pension expenses are expected to continue to rise due to aggressive investment return assumptions,” the report reads. The Fitch analysis shows annual carrying costs for debt services, pension contributions and other employee benefits to be about 15 percent of total city spending in 2016, compared to 7 percent in 2010.

Long-term liabilities for city and school projects contributed to Hartford’s financial decline, as well, with outstanding debt up nearly 66 percent since 2012.

Throughout much of 2017, it looked as though Hartford was headed toward declaring bankruptcy. It turned to the state for help, but the state budget had its own financial difficulties. When the state finally passed a budget in late October, it included an additional $40 million for Hartford.

The funding may have held off bankruptcy, but the financial challenges persist.

“Enactment of the state budget improves near-term clarity of municipal revenue and expenditure assumptions; however, the reprieve for local governments may prove temporary,” the Fitch report reads. “The state’s finances continue to be stressed, and local aid cuts are sure to continue to be part of budget balancing discussions.”

Other cities stable

While potential investors see Hartford surrounded in red flags, New Haven, Waterbury, New Britain and Bridgeport all received stable outlooks from Fitch Ratings.

New Haven feels pressure from growing pension and debt service costs, but the city has increased its tax base through new development and associated construction fees. New Haven’s tax rate of 38.7 mills is significantly lower than Hartford’s 74.3.

Waterbury, which has seen financial hardships in the past, is on stable footing due to solid reserves, strong financial policies and consistent revenue, the report said. New Britain has “relatively stable revenue” and “adequate expenditure flexibility,” as well as strong reserve levels.

The Fitch report said Bridgeport, while dealing with spending pressures, mitigated budget imbalances by cutting costs, refunding debt, increasing the tax rate and receiving state aid.

“Such actions helped restore balanced operations and management is making efforts to increase fund balance,” reads the report. “Fitch expects economic development underway and planned to lead to gradual growth in the tax base over the next several years.”

High-functioning schools, location, housing stock, quality of life, commercial development and high incomes are among the factors that contribute to other Fairfield County cities receiving AAA ratings.

“There has been a considerable amount of new development in the last few years (in Fairfield County) and we expect moderate development to continue,” Dolan said.

newstimes

By Chris Bosak

January 21, 2018

cbosak@hearstmediact.com; 203-731-3338

Ratings firm cites development projects, better financial management; it maintains Baa3 rating for New Jersey’s largest city

Moody’s Investors Service has raised its rating outlook for Newark to positive from negative, citing ongoing development projects and improving financial management in New Jersey’s largest city.

Newark Mayor Ras Baraka said the change marked the first time in eight years that the city received a positive credit-rating outlook.

Newark’s credit rating for its general-obligation bonds remains unchanged at Baa3, Moody’s lowest investment grade rating, although the positive outlook indicates an upgrade is possible in one to two years.

The city has been downgraded four notches by Moody’s since June 2010, when its credit-rating was A2 with a negative outlook.

The city’s finances and economy are still in a “challenged state” with poverty, crime and budget strains continuing to pose problems, Moody’s said in a report published Thursday.

Newark, the state’s largest city with a population of more than 280,000, has long relied on state aid to stay afloat. But recent interest by developers seeking to capitalize on ample vacant land and easy access to New York City has helped the city’s tax base, which expanded for two consecutive years for the first time since the recession and reached $16 billion in 2017, according to Moody’s.

“That was key to us, seeing the economic growth translate into tax base growth,” said Orlie Prince, vice president and senior credit officer at Moody’s. “There was no need to rely on short-term borrowing to get through the fiscal year, which for us was a telling sign that things were on the mend.”

Newark’s Mr. Baraka said in a statement that Moody’s outlook represented “confirmation of our progress in restoring the city’s financial health” through efforts such as recruiting new businesses, hiring more police officers, expanding affordable housing and improving the city’s roads.

Newark’s liquidity has improved from 2014, when it had a cash deficit by Moody’s calculations. The city ended 2016 with $64.8 million in operating cash, representing 9.8% of revenues, Moody’s said. The ratings firm said it will watch for continued improvements in budget management and sustained economic development in considering whether to upgrade the city’s credit rating.

Also on Thursday, New Jersey Gov. Chris Christie signed legislation authorizing a multi-billion dollar tax-incentive package for Amazon if it builds its second headquarters in New Jersey. Mr. Christie has proposed Newark as the ideal location, and the city has offered up to $2 billion in tax abatements and wage-tax waivers to lure the online retailer. The state, through its Economic Development Authority, has offered up to $5 billion in tax incentives over 20 years if Amazon creates 50,000 new jobs.

Mr. Christie, a Republican, will leave office Tuesday after eight years in Trenton. He will be replaced by Gov.-elect Phil Murphy, a Democrat.

THE WALL STREET JOURNAL

by KATE KING

Jan. 11, 2018 5:22 p.m. ET

Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of AA with a Stable Outlook to the Triborough Bridge and Tunnel Authority (TBTA), General Revenue Bonds, Series 2018A. KBRA has affirmed the long-term rating of AA with a Stable Outlook on the TBTA’s outstanding general revenue bonds and the long-term rating of AA- with a Stable Outlook on TBTA’s outstanding subordinate revenue bonds. KBRA has also affirmed the short-term rating of K1+ on the TBTA’s General Revenue Bond Anticipation Notes, Series 2017A.

To access the full report, please click on the link below:

TBTA’s General Revenue Bonds, Series 2018A

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has assigned a AA+ with a Stable Outlook to the State of Connecticut’s Special Tax Obligation Bonds Transportation Infrastructure Purposes, 2018 Series A. Additionally, KBRA has assigned a AA+ with a Stable Outlook to the State of Connecticut’s outstanding Special Tax Obligation Bonds Transportation Infrastructure Purposes; and has assigned a AA+ with a Stable Outlook to the State of Connecticut’s outstanding Second Lien Special Tax Obligation Bonds Transportation Infrastructure Purposes.

The long-term rating assignment is based on KBRA’s U.S. Special Tax Revenue Bond Rating Methodology.

To access the full report, please click on the link below:

State of CT’s Special Tax Obligation Bonds Transportation Infrastructure Purposes

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Ratings firm cites development projects, better financial management; it maintains Baa3 rating for New Jersey’s largest city

Moody’s Investors Service has raised its rating outlook for Newark to positive from negative, citing ongoing development projects and improving financial management in New Jersey’s largest city.

Newark Mayor Ras Baraka said the change marked the first time in eight years that the city received a positive credit-rating outlook.

Newark’s credit rating for its general-obligation bonds remains unchanged at Baa3, Moody’s lowest investment grade rating, although the positive outlook indicates an upgrade is possible in one to two years.

The city has been downgraded four notches by Moody’s since June 2010, when its credit-rating was A2 with a negative outlook.

The city’s finances and economy are still in a “challenged state” with poverty, crime and budget strains continuing to pose problems, Moody’s said in a report published Thursday.

Newark, the state’s largest city with a population of more than 280,000, has long relied on state aid to stay afloat. But recent interest by developers seeking to capitalize on ample vacant land and easy access to New York City has helped the city’s tax base, which expanded for two consecutive years for the first time since the recession and reached $16 billion in 2017, according to Moody’s.

“That was key to us, seeing the economic growth translate into tax base growth,” said Orlie Prince, vice president and senior credit officer at Moody’s. “There was no need to rely on short-term borrowing to get through the fiscal year, which for us was a telling sign that things were on the mend.”

Newark’s Mr. Baraka said in a statement that Moody’s outlook represented “confirmation of our progress in restoring the city’s financial health” through efforts such as recruiting new businesses, hiring more police officers, expanding affordable housing and improving the city’s roads.

Newark’s liquidity has improved from 2014, when it had a cash deficit by Moody’s calculations. The city ended 2016 with $64.8 million in operating cash, representing 9.8% of revenues, Moody’s said. The ratings firm said it will watch for continued improvements in budget management and sustained economic development in considering whether to upgrade the city’s credit rating.

Also on Thursday, New Jersey Gov. Chris Christie signed legislation authorizing a multi-billion dollar tax-incentive package for Amazon if it builds its second headquarters in New Jersey. Mr. Christie has proposed Newark as the ideal location, and the city has offered up to $2 billion in tax abatements and wage-tax waivers to lure the online retailer. The state, through its Economic Development Authority, has offered up to $5 billion in tax incentives over 20 years if Amazon creates 50,000 new jobs.

Mr. Christie, a Republican, will leave office Tuesday after eight years in Trenton. He will be replaced by Gov.-elect Phil Murphy, a Democrat.

The Wall Street Journal

By Kate King

Jan. 11, 2018 5:22 p.m. ET

Fitch Ratings-San Francisco-11 January 2018: Washington’s economic epicenter will continue to benefit from key local governments’ robust revenue growth and strong operating performance, according to Fitch Ratings in a new report.

More people are finding favor with this cluster of counties and cities by Puget Sound as seen by a spike in population growth and a strong post-recession economic bounce-back. Market participants point to the Puget Sound region’s increasingly diverse economy as a key driver of the region’s rising appeal.

“While heavy manufacturing is still important, the Puget Sound region’s ongoing diversification into information technology has been a big driver of growth, particularly for Seattle,” said Alan Gibson. “Even a city like Tacoma that has had a tougher time transitioning away from heavy industry is benefiting from a diversifying economy and a competitively priced housing market.” As a result, Seattle and Tacoma’s revenue growth is far exceeding the pace throughout the rest of the country.

Fitch expects that overall debt and retiree benefits will remain low to moderate relative to local economic resource bases. This coupled with exceptionally strong gap-closing capacity and solid budget flexibility means ample reserve safety margins that King County, Seattle, and Tacoma can sustain throughout economic cycles.

As a result, Fitch-rated Puget Sound local government ratings, which range from ‘AAA’ to ‘AA’ along with Stable Rating Outlooks, are likely to remain strong over the next couple of years. ‘Credit Strengths of Puget Sound Local Governments’ is available at ‘www.fitchratings.com’ or by clicking on the above link.

Contact:

Alan Gibson
Director
+1-415-732-7577
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108

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

Additional information is available on www.fitchratings.com

• Sunshine State may gain 6 million more residents by 2040
• Land-backed debt returned 8% in 2017, most in three years

Florida’s population boom and a shortage of housing are fueling demand for local municipal debt sold for neighborhood developments.

Community development district bonds, or CDDs, are sold in Florida to help finance home building projects. The debt, called dirt bonds, tends to offer higher yields as investors take on the risk that demand for housing may wane. That threat may be decreasing in Florida as its population is expected to swell nearly 30 percent by 2040 following a 9 percent increase since 2010.

“The housing construction has been really ratcheted down post 2008 so now you have a situation where household formation exceeds home construction, which means the demand profile is good for what they’re building,” said John Miller, co-head of fixed income at Nuveen Asset Management, which hold $1.5 billion of Florida CDD bonds sold for 220 different communities, with $1.7 million of that debt in default.

Jobs are luring people to Florida. The state’s 3.6 percent unemployment rate is the lowest in a decade and below the 4.1 percent national average. Homes in the state are selling at the fasting pace in three years. The median time it took to sell a house in the third quarter of last year was 82 days, the lowest for any three months since at least 2014, according to FloridaRealtors, a trade association that collects housing data.

“We are seeing recoveries across numerous areas of Florida that were previously under a lot of financial pressure,” Miller said.

Such land-backed debt is repaid with assessment fees that homeowners pay. Many of the developments fell into default during the housing crisis that began in 2008 and have been refinanced. Dirt bonds overall have gained in value, returning nearly 8 percent in 2017, the most since 2014, according to S&P Dow Jones Indices.

“They have done quite well in terms of the recoveries and the resuscitation of the project,” said Richard Lehmann, publisher of the Distressed Debt Securities newsletter in Miami Lakes, Florida.

Corkscrew Farms, a district in Fort Myers, Florida, sold $28 million of CDD bonds last month to help finance the construction of 696 single-family homes, part of a larger plan to build 1,325 houses on nearly 1,000 acres, according to the deal’s offering documents. The debt doesn’t carry credit ratings. Bonds maturing in 2050 sold at par with a yield of 5.124 percent and last traded Jan. 9 with a 4.924 percent yield, according to data compiled by Bloomberg.

While the bonds are benefiting from a stronger housing market, land-backed debt accounts for 25 percent of payment failures in the $3.8 trillion municipal market. Of the $9.3 billion of municipal debt in default — excluding Puerto Rico — $2.3 billion, the largest portion, are dirt bonds, according to Municipal Market Analytics.

Florida’s population is expected to reach 26.4 million by 2040, up from an estimated 20.5 million in 2017, for a gain of 5.9 million new residents, according to the Bureau of Economic and Business Research at the University of Florida.

Bloomberg Markets

By Michelle Kaske

January 11, 2018, 12:11 PM PST

• With reserves swelling, state eyes potential risks ahead
• Backed by financial turnaround, bonds trade near AAA yields

California is raking in cash from surging stocks and is sitting on billions in reserves. Governor Jerry Brown is resisting the urge to spend it all, keeping with the fiscal restraint that’s won applause from Wall Street.

The Democrat’s proposed budget for the next fiscal year, released Wednesday, holds spending in line with the pace of revenue growth for the biggest U.S. state as the stock market hovers at record highs and its economy faces potential fallout from the federal tax overhaul enacted last month. It boosts the rainy day fund to $13.5 billion with a supplemental transfer of $3.5 billion.

“We’ve had 10 recessions since World War II and we have to get ready for the 11th,” Brown said in a briefing in Sacramento. “The whole point is to think ahead and minimize the pain that is coming because of the way our business cycle works.”

Brown, who took office in 2011 while the state was still reeling from the effects of the recession, has strove to keep more of a cushion for future downturns, a theme he kept in his last proposed budget as governor. He boosted reserves by 27 percent to $8.5 billion in this year’s $126 billion plan.

The additional deposit in the coming year would make the rainy day fund fully meet the constitutional goal of saving 10 percent of tax revenue. His budget indicated that California also plans to slow the pace of general-obligation bond sales to about $2.5 billion over next six months, down from $3.4 billion estimated under the current budget. He proposed $1.6 billion of sales in the second half of the year.

Obstacles ahead include possible federal setbacks ranging from the effects of the recently enacted tax overhaul — which will fall heavily on some residents by capping state and local tax deductions — to the potential loss of funding for children’s health insurance, the state said in budget documents released Wednesday.

Bond buyers have rewarded the fiscal turnaround in California, which has been boosted to the fourth-highest rank by the three major rating companies, its best standing since the turn of the century. The extra interest, or spread, investors demand to hold California 10-year bonds instead of top-rated debt is 0.09 percentage point and hit as little as 0.06 percentage point last month, the lowest since at least 2013. The spread was as high as 0.67 percentage point in June 2013, data compiled by Bloomberg show.

Investors have welcomed the government’s restraint, given the state’s vulnerability to booms and busts. California draws a large share of taxes from wealthy residents whose incomes are tied closely to the stock market, which saddled the state with huge budget deficits after the Internet and real estate bubbles burst. The top 1 percent of earners accounted for nearly half of the state’s personal income-tax collections in 2015.

Bloomberg Markets

By Romy Varghese

January 10, 2018, 6:00 AM PST Updated on January 10, 2018, 11:34 AM PST

• Supreme Court is set to consider if benefit cuts permissible
• Ruling could provide relief to cash-strapped localities

California Governor Jerry Brown said legal rulings may clear the way for making cuts to public pension benefits, which would go against long-standing assumptions and potentially provide financial relief to the state and its local governments.

Brown said he has a “hunch” the courts would “modify” the so-called California rule, which holds that benefits promised to public employees can’t be rolled back. The state’s Supreme Court is set to hear a case in which lower courts ruled that reductions to pensions are permissible if the payments remain “reasonable” for workers.

“There is more flexibility than there is currently assumed by those who discuss the California rule,” Brown said during a briefing on the budget in Sacramento. He said that in the next recession, the governor “will have the option of considering pension cutbacks for the first time.”

That would be a major shift in California, where municipal officials have long believed they couldn’t adjust the benefits even as they struggle to cover the cost. They have raised taxes and dipped into reserves to meet rising contributions. The California Public Employees’ Retirement System, the nation’s largest public pension, has about 68 percent of assets needed to cover its liabilities. For the fiscal year beginning in July, the state’s contribution to Calpers is double what it was in fiscal 2009.

Across the country, states and local governments have about $1.7 trillion less than what they need to cover retirement benefits — the result of investment losses, the failure by governments to make adequate contributions and perks granted in boom times.

“In the next downturn, when things look pretty dire, that would be one of the items on the chopping block,” Brown said.

Bloomberg Politics

By Romy Varghese

January 10, 2018, 1:28 PM PST

— With assistance by John Gittelsohn

CHICAGO (S&P Global Ratings) Jan. 8, 2018–S&P Global Ratings has withdrawn its ratings on various Indiana, New York, and Virginia local government issues that were based on state aid intercept programs following our determination that we misapplied our State Credit Enhancement Programs criteria.

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On Jan. 8, 2018, S&P Global Ratings withdrew its ratings on various Indiana, New York, and Virginia local government issues that were based on state aid intercept programs following our determination that we misapplied our State Credit Enhancement Programs criteria.

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Since 2011, some New York local governments have used the state’s Contribution Stabilization Program (CSP) to amortize a portion of current year pension expenses. S&P Global Ratings considers this amortization a deferral of annual operating expenses.

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Jan. 11, 2018

NEW YORK (S&P Global Ratings) Jan. 9, 2018–S&P Global Ratings today said that the State of New Jersey (A-/Stable) and its local governments face several challenges in 2018 given recent events.

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Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of A+ with a Stable Outlook on the Township of Bethel Sewer Authority (“the Authority”), Township of Bethel (“the Township”) Pennsylvania’s Guaranteed Revenue Notes and General Obligation Debt. This rating applies to all of the Township’s general obligation and guaranteed debt, except for bonds backed by a letter of credit or liquidity facility.

To access the full report, please click on the link below:

Township of Bethel Sewer Authority, Township of Bethel, PA

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has assigned a AA+ with a Stable Outlook to the State of Connecticut’s Special Tax Obligation Bonds Transportation Infrastructure Purposes, 2018 Series A. Additionally, KBRA has assigned a AA+ with a Stable Outlook to the State of Connecticut’s outstanding Special Tax Obligation Bonds Transportation Infrastructure Purposes; and has assigned a AA+ with a Stable Outlook to the State of Connecticut’s outstanding Second Lien Special Tax Obligation Bonds Transportation Infrastructure Purposes.

The long-term rating assignment is based on KBRA’s U.S. Special Tax Revenue Bond Rating Methodology.

To access the full report, please click on the link below:

State of CT’s Special Tax Obligation Bonds Transportation Infrastructure Purposes

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of AA+ with a Stable Outlook to the Metropolitan Transportation Authority’s (MTA) Transportation Revenue Bonds (TRBs), Series 2018A-1 and 2018A-2 (Mandatory Tender Bonds). KBRA has also assigned a short-term rating of K1+ to the MTA’s Transportation Revenue Bond Anticipation Notes (BANs), Series 2018A.

KBRA has affirmed the long-term rating of AA+ with a Stable Outlook on the MTA’s outstanding Transportation Revenue Bonds. KBRA has also affirmed the short-term rating of K1+ on the following outstanding MTA’s BANs: Series 2015A-2F, Series 2017B, and Series 2017C.

To access the full report, please click on the link below:

MTA TRBs Series 2018A-1 & 2018A-2

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has revised the long-term rating to AA- from A+ with a Stable Outlook and the short-term rating to K1+ from K1 on the New York State Housing Finance Agency 160 Madison Avenue Housing Revenue Bonds, 2013 Series A & B and 2014 Series A. The Bonds were issued as variable rate demand obligations with credit and liquidity support provided by an irrevocable Direct Pay Letter of Credit (DPLC) issued by PNC Bank, National Association. The DPLC was issued for a period of five years and will expire on December 5, 2018, unless extended for an additional one-year period. The rating action reflects KBRA’s upgrade of PNC’s long-term and short-term ratings to AA- and K1+, from A+ and K1, respectively, on January 4, 2018.

To access the full report, please click on the link below:

NYSHFA 160 Madison Housing Revenue Bonds

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Rhoads & Sinon’s public finance group has found a new home one floor down.

The public finance group at rapidly-disintegrating Rhoads & Sinon has found a landing place in the Harrisburg office of Eckert Seamans Cherin & Mellott.

The four partners, an associate and two administrative assistants are set to join Pittsburgh-based Eckert Seamans on Jan. 8, the firm announced Wednesday.

Rhoads & Sinon’s office was one floor above Eckert Seamans’ office in the M&T Bank Building in Harrisburg, and the two firms’ municipal finance practices have worked together often over the years, said Harold Balk, Eckert Seamans’ chief development officer. With Rhoads & Sinon in the process of dissolving, Eckert Seamans saw an opportunity for them to combine.

“We’ve been interested in that group for quite some time,” Balk said. “They bring different relationships to the firm, and they bring a local presence that adds to what we already have in Harrisburg.”

The partners are Jens Damgaard, Jonathan Cox, Benjamin Ried and David Twaddell. Damgaard and Ried work with school districts and municipalities on tax-free bonds and other financing arrangements. Cox and Twaddell both serve as bond counsel and bank counsel for clients including school districts, hospitals and nonprofit entities.

The group ranks among the top municipal finance practices in Harrisburg, Balk said, and the new lawyers are expected to bring all of their clients with them.

“There were very few deals that Rhoads & Sinon wasn’t involved in,” he said.

Balk said the new lawyers will also be complementary to the employment practice in the Harrisburg office, which has more than 30 lawyers, as well as the office’s work with public sector clients. As a whole, Eckert Seamans has more than 355 lawyers in 15 offices.

Others from Rhoads & Sinon have landed at Barley Snyder, where a group of 10 lawyers is starting a Harrisburg office for that firm in Rhoads & Sinon’s former office space, and Stevens & Lee, which hired the firm’s three-lawyer banking practice.

LAW.COM

By Lizzy McLellan | Jan 03, 2018

S&P Global Ratings maintains revenue debt ratings on 98 public water and wastewater utilities in Colorado, Montana, Utah, and Wyoming. This number includes multiple security types and issues but the same obligor (e.g., the city of Fort Collins, Colo. issues both water and wastewater revenue bonds that are separately secured by dedicated revenue streams).

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Overall, Texas’ municipal utility districts (MUDs) have demonstrated favorable credit quality during the past eight years due to robust growth in the state’s economy and a surging state population.

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Fitch Ratings-New York-18 December 2017: The city of Hartford’s prolonged financial troubles have drawn questions from some investors as to whether other Connecticut cities with comparable demographics could experience a similar fate, though a new Fitch Ratings report sees that scenario as unlikely.

Once viewed as a challenged but relatively stable credit, Hartford’s financial standing has become more precarious in recent years to the point where bankruptcy was once considered a serious possibility. Many of Connecticut’s local governments do not have the same practical revenue constraints as Hartford due to their stronger demographics, less reliance on state assistance, and lower property tax rates. That said, Fitch recently conducted an analysis of the Connecticut cities it rates that share some similar weaknesses with Hartford, namely New Haven (A-), New Britain (A-), Bridgeport (A), and Waterbury (AA-).

One major differentiating factor revolves around employee benefit concessions, according to Director Kevin Dolan: “Unlike Hartford, the ability of these other cities to secure employee benefit concessions has helped curb costs for both pensions and health insurance,” said Dolan. “While debt levels are generally high for these other cities, their future debt service structure is not as burdensome as it is for Hartford and they all rely on an above-average level of state assistance similar to Hartford.”

Like Hartford, the level of available reserves for cities such as New Haven and Bridgeport to withstand future economic downturns is low. A notable difference, however, is that both New Haven and Bridgeport have seen revenue growth associated with new development. Additionally, New Haven and Bridgeport both have flexibility to further increase revenues and make expenditure cuts if necessary. Sound reserve levels also distinguish such cities as Waterbury and New Britain from Hartford along with an adequate ability to manage expenditures.

‘Hartford Weaknesses Not Common versus Fitch-Rated Cities in Connecticut’ is available at ‘www.fitchratings.com’

Fitch Ratings-New York-20 December 2017: A New Jersey law that establishes a 2% cap on the base salary arbitration award for affected police and fire labor organizations is set to expire on Dec. 31 and could pressure N.J. local government finances, according to Fitch Ratings.

The public safety arbitration cap has been in effect since Jan. 1, 2011 (it was extended for a subsequent three-year period in 2014). The arbitration cap will likely expire on Dec. 31, at least temporarily, as the state legislature, the governor, and the governor-elect await a final report (also due on Dec. 31) of the Police and Fire Public Interest Arbitration Impact Task Force (the task force), which was charged with studying the impact of the arbitration cap on property taxes, government spending, collective negotiation agreements, personnel, and crime.

Fitch believes the arbitration cap is beneficial to local government credit quality as it helps to align revenue and spending measures and supports structural balance in the context of statutory caps on property tax growth. Property taxes, which are the dominant source of funding for local governments, are subject to a permanent 2% cap on annual growth enacted in 2010, albeit with exemptions for debt service and certain increases in pension and health care costs. Without the cap arbitration awards would remain subject to a reasonable determination of the issues, including the financial impact on the local government and taxpayers, and the ability of the local government to maintain or expand its programs or services.

However, bargaining groups may become more emboldened to pursue arbitration as opposed to voluntary settlement if the arbitration cap expires. Arbitration awards were significantly higher prior to the cap, ranging from 2.50% to 5.65% from 1993-2010, according to a report of the New Jersey Public Employment Relations Commission (PERC). Voluntary settlements, which are not subject to the arbitration cap, were also higher in years preceding the arbitration cap according to data reported by the task force in a preliminary report released in September.

The majority of Fitch-rated New Jersey local governments exhibit a high level of fundamental financial flexibility. As such we do not expect immediate degradation of credit quality if the arbitration cap is not extended. However, elimination of the arbitration cap could force local governments to reduce governmental services and/or rely on one-time resources to accommodate higher wage expenses. Furthermore, elimination of the arbitration cap could also have an impact on pension liabilities and contribution levels, as plan benefits are based on employee wages, among other factors. Over time these risk factors may weaken some of the long-term credit fundamentals that underpin Fitch’s Issuer Default Ratings assigned to New Jersey local governments. Fitch will continue to monitor the situation and comment as information warrants.

Contact:

Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Kevin Dolan
Director
+1-212-908-0538

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

Additional information is available on www.fitchratings.com

• Investors wait for benchmark G.O. bond to fall below 20 cents
• Lower price could bring back tax-exempt mutual funds who sold

How low will it go? That’s what investors are wondering as they contemplate at what price Puerto Rico’s most actively-traded security becomes a buy.

The price of the 8 percent general obligation bond due 2035 dropped nearly 60 percent since Hurricane Maria struck the island. It traded Thursday at an average price of 23 cents, down from 56.7 cents before the storm hit. Some investors are waiting for a price in the teens before buying.

While that may seem cheap, the commonwealth has yet to restructure its $74 billion of debt and faces continued economic decline and persistent population loss. The bonds were sold in March 2014, the government’s last long-term debt sale, and hedge funds bought most of the $3.5 billion issue at 93 cents on the dollar.

A lower price on the G.O. bonds would help offset the island’s financial challenges, said David Tawil, president and co-founder of Maglan Capital LP, who bought commonwealth bonds in 2013 and has since sold them. If the debt drops below 20 cents, he’s back in, Tawil said.

“Once it goes below 20, I think people will see that as a threshold for capitulation,” Tawil said. “And at that point it becomes investible.”

A lower price could bring back tax-exempt mutual funds after most of those investors reduced their exposure over the past few years as the island inched closer to bankruptcy. Pacific Investment Management Co. last month said the commonwealth’s general obligations were looking more favorable as prices declined. The lower the price, the more the municipal market is eyeing the debt, said Peter Hayes, head of municipal bonds at BlackRock Inc.

“As they continue to fall, it certainly gets more interesting and you have less downside,” said Hayes, who helps manage $124 billion of municipals. “The risk, reward — that changes the lower the prices go and I think it’s certainly getting toward that point even for muni bondholders.”

Puerto Rico has defaulted on most of its debt. The value of its securities has fallen since former Governor Alejandro Garcia Padilla in 2015 said the commonwealth was unable to repay all of its obligations. The island’s bankruptcy filing in May and Hurricane Maria pushed prices down even more.

The storm’s devastation has changed anticipated bondholder recoveries. Before Maria, Puerto Rico said it could direct $8 billion for principal and interest payments through 2026, far short of the $33.4 billion of debt service owed during that time. Island officials have said the commonwealth can no longer afford to pay even the $8 billion amount. Puerto Rico may need to suspend debt payments for five years, a lawyer for Puerto Rico’s federal oversight board said in court last month.

That has left investors wondering how much they’ll get repaid and when. It’s difficult for mutual funds to wait years for repayment while they allocate investment income to their clients. “It means you have a bond that doesn’t accrue,” Hayes said. “It’s not additive to the income to your shareholders.”

Puerto Rico Governor Ricardo Rossello is set to submit to Puerto Rico’s federal oversight board a revised fiscal plan by Jan. 10 that will include how much the commonwealth estimates it can repay. Investors are eager to see how much lower those numbers are and which type of security will get more money for repayment, general obligations or debt backed by sales-tax receipts. Bad news for general obligation debt could push prices lower.

“If the prices get low enough, it might look attractive for the portfolios that can accept that type of risk,” said Rob Amodeo, who manages $25 billion as head of municipals at Western Asset Management.

While other Puerto Rico securities, including general obligations, trade below 20 cents, investors focus on the 8 percent G.O. because it’s the most actively traded. It’s easier to get in and out of that bond compared with the island’s other securities.

Some general obligations have been trading in the teens for the past month, data compiled by Bloomberg show. Junior sales-tax bonds, which get repaid after senior bondholders, have been trading below 10 cents on the dollar in the past few weeks.

It’s not just an additional potential price drop on the 8 percent G.O. that keeps investors poised for a possible opening on Puerto Rico’s debt. At some point the island’s economy and finances will improve, Tawil said.

“There will be some turning of the corner in terms of the fundamental story,” Tawil said.

Bloomberg Markets

By Michelle Kaske

December 21, 2017, 9:00 AM PST

President Trump signed a bill last week that bans Kaspersky Lab software on federal computers. Local governments were initially hesitant to stop using it, but most are now following the feds’ lead.

Last week, due to fears about potential cyberespionage, President Donald Trump signed a bill banning the federal government’s use of a Russia-based antivirus software.

The legislation comes three months after a federal directive advised civilian agencies to remove Kaspersky Lab within 90 days and nearly six months after the federal government revoked Kaspersky Lab from its list of approved vendors.

Neither last week’s bill nor the September directive apply to state and local governments, several of which were still using Kaspersky software in July. The Washington Post revealed that month that Portland, Ore.; Fayetteville, Ga.; San Marcos, Texas; Picayune, Miss.; and the Connecticut Division of Public Defender Services were all using the software despite federal concerns about cyberespionage.

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GOVERNING

BY NATALIE DELGADILLO | DECEMBER 18, 2017

Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of A- with a Stable Outlook to Upland Borough, PA’s general obligation debt.

This affirmation is based on KBRA’s U.S. Local General Obligation Rating Methodology.

KBRA’s rating of the long-term credit quality of the obligations focuses on four rating determinants. The rating determinants as well as KBRA’s corresponding rating determinant ratings are listed below:

• Governance and Management Structure and Policies: A-
• Municipal Resource or Economic Base: BBB+
• Debt and Additional Continuing Obligations: A-
• Financial Performance and Liquidity: A-

To access the full report, please click on the link below:

Borough of Upland, PA G.O. Debt

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has upgraded the long-term rating to A+ from A and revised the outlook to Stable from Positive on the Borough of Lansdowne, PA’s general obligation debt.

KBRA’s rating action reflects a trend of improved operating results which has reduced the reliance on cash flow notes to offset the seasonality of tax receipts. In addition, this rating reflects the Borough’s continued willingness to increase its operating millage when needed which has helped improve its financial strength over the years.

To access the full report, please click on the link below:

Borough of Lansdowne, PA

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of A and Stable Outlook on the State of New Jersey’s General Obligation Bonds. Additionally, KBRA has affirmed the long-term rating of A- and Stable Outlook on the New Jersey Educational Facilities Authority’s (NJEFA) Revenue Bonds, Higher Education Capital Improvement Fund Issue and New Jersey Economic Development Authority’s (NJEDA) State Lease Revenue Refunding Bonds (Liberty State Park Project), 2015 Series. KBRA’s long-term ratings do not apply to bonds backed by a letter of credit or liquidity facility, unless otherwise noted.

To access the full reports, please click on the links below:

• State of New Jersey General Obligation Bonds
• New Jersey Educational Facilities Authority Revenue Bonds

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of AA+ with a stable outlook to the State of Wisconsin General Obligation Refunding Bonds of 2017, Series 3. KBRA’s long-term ratings do not apply to bonds backed by a letter of credit or liquidity facility, unless otherwise noted.

KBRA has also affirmed the long-term rating of AA+ with a stable outlook on the State’s outstanding general obligation bonds. KBRA has also affirmed the long-term rating of AA with a Stable Outlook on the State’s Master Lease Certificates of Participation (COPs). In addition, KBRA affirmed the short-term rating of K1+ on the State’s GO Commercial Paper (CP) Program and GO Extendible Municipal Commercial Paper (EMCP) Program.

The long-term rating on the State’s general obligation bonds is based on KBRA’s U.S. State General Obligation Rating Methodology.

The short-term ratings on the State’s CP and EMCP programs are derived from the State’s long-term general obligation rating and also reflects the State’s strong liquidity, history of market access, and prior authorization to retire all CP and EMCP Notes with long term bonds. For mapping of the long-term rating to the short-term rating, please refer to the short-term KBRA Rating Scale.

To access the full report, please click on the link below:

State of Wisconsin’s G.O. Refunding Bonds of 2017, Series 3

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Unions, city face off over wages; sworn police and fire workers are on the job

About 3,000 city workers in Oakland, Calif. went on strike Tuesday, shutting down most nonemergency services such as street cleaning, libraries and senior centers in California’s eighth-largest city.

Walking off the job were members of the city’s two largest unions—the Service Employees International Union, Local 1021 and the International Federation of Professional and Technical Engineers, Local 21.

Sworn police and fire personnel, which are represented separately, aren’t striking.

The strike is the latest setback for the working-class city across the bay from San Francisco, as it struggles with rising costs and economic shifts brought on by the regional tech boom.

In recent years Oakland has seen its violent-crime rate fall and its arts and dining scene flourish as property values rise.

But there have been setbacks: Last year, a sex scandal year shook the police department, and a warehouse fire that killed 36 people highlighted the city’s rising rents and poor building-code enforcement.

Earlier this year, the city’s NFL team, the Raiders, said it would decamp for Las Vegas. And ride-sharing giant Uber Technologies Inc. canceled plans for an extension of its downtown headquarters this year.

Rob Szykowny, chief negotiator for the service employees union, said the city was to blame after it rejected two temporary proposals put forward by his union to avoid a strike.

One of those proposals would have accepted the city’s terms for a one-year period, Mr. Szykowny said, and the other would have brought on a former San Francisco mayor to serve as a mediator.

“The city blew it up,” he said. “We gave the city two different proposals…they did not agree to either of them.”

The city called the strike unlawful, saying it hadn’t reached an impasse with the labor unions and that the city hadn’t had a chance to present the union offers to the City Council, which is scheduled to meet Wednesday.

“The City cannot unilaterally implement concessions and the unions cannot strike until the completion of those processes, including fact-finding,” the city administrator’s office said in a statement.

Oakland Mayor Libby Schaaf said the city values city workers but the city “cannot spend more than we can afford.”

“The union’s decision to strike Tuesday will impact all Oakland residents, and particularly the most vulnerable populations—our families who use libraries, our elders who rely on senior centers, our youth who play at rec centers, and our working mothers and youngest learners who rely on Head Start programs,” she said.

Workers represented by the two unions have been without a contract since June. Both unions said the strike was legal.

In November, the service employees union held a one-day strike.

The city says that it has raised wages for city workers as the local economy has improved, but rising costs, including for employee health care and pensions, have outpaced revenue growth.

The city is offering the unions a wage increase of up to 6%, including a retroactive 4% wage increase, to July 1. The service employees union, which has received a last and best final offer from the city, is seeking a wage increase of 8% over two years.

The professional workers union, which hasn’t received a final offer from the city, had opened negotiations with a 16% increase over a two-year period. That union hadn’t had a chance to respond to the city’s latest offer, said spokeswoman Jessica Bowker, but would conduct a sympathy strike to support service employees.

“As city workers we don’t want to strike,” said Wali Dieu, a member of that union’s bargaining team. “But we are paid less than our counterparts in other jurisdictions and the current proposed wage increase will make us fall even further behind the cost of living.”

The service employees union is also pushing for changes to what the SEIU local describes as unsafe working conditions for city workers handling the city’s homeless population.

The SEIU local also says the city is requiring mandatory overtime for emergency dispatchers and is relying too much on temporary, part-time workers.

The Wall Street Journal

By Alejandro Lazo

Dec. 5, 2017 12:03 p.m. ET

Write to Alejandro Lazo at alejandro.lazo@wsj.com

Fitch Ratings-New York-06 December 2017: As Fitch Ratings expected, last Friday Minnesota made the $1.9 million interest-only debt payment on certificates of participation (COPs) that were issued in 2014 to fund a legislative office facility. Debt service on the 2014 COPs has become embroiled in a dispute between Governor Dayton and the Minnesota legislature as a result of the governor’s line-item veto of the legislature’s biennial budget appropriation in May 2017 following the legislature’s adjournment. The state has the option to fund debt service on the 2014 COPs from either the department of administration’s or the state senate’s budget but, as a practical matter, since issuance it has funded debt service through the senate budget.

Although Fitch is confident of the state’s ability and willingness to ensure full and timely payment of debt service on June 1, 2018 — the next scheduled payment date for the COPs — a failure to resolve the impasse in the upcoming legislative session would suggest a level of political dysfunction that is inconsistent with Fitch’s current ratings on the state. The dispute comes at a time of strong economic and revenue performance for Minnesota and, in fact, centers on a disagreement over the use of surplus funds related to the size of adopted tax cuts.

Budget negotiations during periods of divided government in Minnesota have often been marked by brinksmanship. As Fitch rates to fundamental credit quality rather than political posturing, this has not kept the state from being rated ‘AAA’ with a Stable Rating Outlook.

What makes the current impasse unusual is that it has the potential, albeit remote, to affect a debt service payment, and resulted in the legislature bringing suit against the governor following his line-item veto. Members of the legislature have also stated publicly that they will not prioritize debt service over operations if the carryover funds they are currently relying on to fund operations near depletion. The Minnesota Supreme Court ordered the parties into mediation in September and ultimately declared the governor’s line-item veto of the legislature’s biennial budget appropriation constitutional on Nov. 16, 2017. While the question of the veto’s constitutionality has been resolved, the two sides have so far failed to come to a political solution.

The legislature has sufficient carryover funds to support operations through Feb. 2018, and is scheduled to reconvene for a regular session on Feb. 20. Fitch expects one of its first acts will be to pass a supplemental appropriation to fund its operations, including COPs debt service, through the 2018-19 biennium. The governor could potentially veto that supplemental appropriation; however, the legislature would then have the option of overriding his veto by a two-thirds majority vote. Whatever twists and turns the disagreement between Governor Dayton and the legislature takes, Fitch expects the two sides to arrive at a resolution via the normal political process before the 2018 legislative session ends.

The next payment on the 2014 COPs on June 1, 2018 totals just $4.1 million. Fitch believes ample time and resources exist for the situation to be resolved ahead of that date. However, if the dispute persists into the spring and the parties are unable to reach a political resolution, Fitch would see this as a sign that Minnesota’s political discord has risen to the point where it is becoming inconsistent with the profile of a ‘AAA’ rated U.S. state credit.

Fitch would take the failure to achieve sustainable funding of the legislature in the regular session as a sign of significant dysfunction. An event of this kind, particularly if coupled with further statements by members of the legislature to the effect they do not regard payment of debt service as a priority, would likely result in Fitch downgrading the ratings of not only the series 2014 COPs directly affected by the conflict but also Minnesota’s Issuer Default Rating (IDR) and the ratings on all of the state’s general obligation (GO) and related debt.

Fitch’s ‘AAA’ IDR on the State of Minnesota is based on the state’s solid and broad-based economy, a revenue structure well designed to capture economic growth, a low long-term liability burden, and strong control over revenues and spending. In conjunction with a sophisticated approach to reserve funding, these features leave the state exceptionally well-positioned to manage through economic cycles while maintaining a high level of financial flexibility. The ‘AA+’ rating on appropriation-supported debt, one notch below the state’s IDR, reflects the slightly higher degree of optionality associated with payments that are subject to appropriation.

The 2014 COPs are secured by biennially-appropriated payments made under a lease-purchase agreement between the state’s commissioner of management & budget and the state’s commissioner of administration. The department of administration’s appropriation for fiscal 2018, which was enacted in May, totals $24 million; it was not sized with the expectation of funding debt service on the COPs. If the department of administration does not have sufficient funds available to cover the June 1, 2018 debt service payment (in the absence of legislative action), the state could take other administrative actions to ensure the payment is made. Alternatively, a court could be asked to find that the lease payment for the COPs is a core spending item that should be funded even in the absence of an appropriation.

Ultimately, however, Fitch’s expectation for a U.S. state rated at Minnesota’s level is that it will act in a way that ensures full and timely payment of all its debt. Prolonged political brinksmanship is inconsistent with that expectation.

Contact:

Michael D’Arcy
Director
+1-212-908-0662
Fitch Ratings Inc.
33 Whitehall Street
New York, NY 10004

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

City of Georgetown electric customers will likely see a small increase in their utility bills starting next year now that the city has settled on how to split the savings from its peak-shaving program in order to repay revenue bonds.

The increase should amount to a few dollars more a month for the average residential customer, according to city officials.

Customers have been seeing lower bills for the past couple of years as a result of the electric department’s initiative to reduce the amount of power the city buys from Santee Cooper.

In 2015, the city begin leasing two large, diesel generators to produce energy during times of peak usage as part of an agreement with Santee Cooper — the city saved money by producing its own electricity. The city has been passing on 100 percent of those savings to customers in the form of cheaper utility bills. The average monthly savings for residential customers has been around $6.50 while total annual savings average around $700,000.

Now, after years of delay and cost increases, the city is finally in the process of building a facility at the wastewater plant to house its own generators. City Council this fall approved $6 million in revenue bonds to finance the facility, the purchase of generators and improvements to the electrical infrastructure along Front Street.

The plan is to use most of the savings from peak shaving over the next 10 years to repay the bonds. Council agreed Nov. 30 to have 75 percent of the savings go toward annual debt payments — the first payment of $670,000 is due next June. The other 25 percent will continue to be passed on to customers. Money from the electric department’s reserves — $126,000 a year — will cover the remaining balance of the debt service.

Debra Bivens, the city’s finance director, said the cost increase for the average residential customer (1,200 kWh) will be about $4 a month. The 75/25 ratio will start with the new fiscal year in July.

City staff planned to use savings from the peak shaving in the current fiscal year, which ends June 30, toward the first debt payment, but since half the year went by before a final decision was made on how to split the savings, no money was being allocated toward the payment. As a consequence, Bivens asked council to allow the city to put 100 percent of the savings for the rest of the fiscal year (starting with December) toward the first debt payment.

“We’re halfway through the fiscal year and we have no portion of the (purchase-power cost adjustment) that we’ve allocated toward the debt-service payment,” Bivens told council, “What we should have done was come to (council) earlier and ask for the allocation … and we haven’t so now we are are at this point and we still have been passing all of that allocation on to the customers.”

Council did not formally vote on the issue, but a consensus was reached.

Alan Loveless, head of the electric department, said several thousand feet of conduit has been installed at the site where the generators — scheduled for delivery in January — will be housed. Once the generators are installed, the building will be constructed, Loveless said.

“We’re pretty much on schedule,” he said.

Once complete, the facility will also serve as a backup-power source for the wastewater plant.

South Strand News

By David Purtell dpurtell@southstrandnews.com

Dec 5, 2017

• Promised loans haven’t arrived as island’s cash dwindles
• Rossello administration in talks with Washington over funds

Over two months after Hurricane Maria devastated Puerto Rico, the island’s government still hasn’t received any of the $4.9 billion of short-term loans promised in the storm aid package Congress passed at the end of October.

Christian Sobrino, the governor’s representative on the island’s federal oversight board, confirmed Friday that no Puerto Rican entity has received any portion of the funds, which were requested for basic functions like making payroll. This week, the Puerto Rican government told the fiscal control board that the electric company, Prepa, and water utility, Prasa, would run out of money in December.

Sobrino said Friday that the island’s fiscal agency was in talks with the U.S. Treasury and Department of Homeland Security about the money and how it would be disbursed.

A spokesperson for the Treasury Department wasn’t immediately available to comment.

Puerto Rico’s government has requested $94 billion in federal aid, only a portion of which has been granted. Members of Congress have raised concerns over how the island’s government will steward billions in federal money. In what appeared to be an attempt to reassure Washington, Governor Ricardo Rossello said last month that he was giving Federal Emergency Management Agency unprecedented power to pre-approve relief spending.

Rafael “Tatito” Hernandez, a member of the island’s House of Representatives, asked U.S. Treasury Secretary Steven Mnuchin about the status of the loan package in a Wednesday letter. He said in a telephone interview Friday that he has received no response.

Members of Congress still need reassurance that the funds will be well spent, Hernandez said. “A lot of them have some issues,” he said.

“We’re committed to the recovery in Puerto Rico, and the administration is doing all that it can,” said White House spokesman Raj Shah, who declined to say why the funds haven’t been disbursed.

Hurricane Maria caused as much as $100 billion of damage to the island, which was already embroiled in the largest municipal bankruptcy in U.S. history. The commonwealth’s government and the federal board overseeing its finances said it would have to redraw plans for economic reforms on the island, where years of borrowing to meet expenses left it with $74 billion of debt.

The administration and the panel have clashed over how to impose cuts. The board even sued the governor this year to force its recommendation to furlough public employees, though they abandoned the challenge in the wake of Maria.

“There is a risk that Puerto Rico will use the operating loans and rebuilding dollars as short-term financing to avoid making hard choices in terms of making economic reforms,” said Matt Fabian, a partner with Municipal Market Analytics, a Concord, Massachusetts-based firm. “The federal government has to be aware that is a risk.”

The price of Puerto Rico’s benchmark general-obligation bonds due in 2035 has declined about 60 percent since Hurricane Maria struck, changing hands at a record low average price of 21.8 cents on the dollar Tuesday.

The bond’s value recovered slightly Friday, trading at an average price of 22.3 cents. On Friday, the island was generating only 68 percent of the power needed and 7 percent of customers still lacked access to clean water.

Bloomberg Politics

By Rebecca Spalding

December 8, 2017, 7:42 AM PST Updated on December 8, 2017, 7:25 PM PST

— With assistance by Saleha Mohsin

Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of AA and Stable Outlook to the City of Chicago Second Lien Water Revenue Refunding Bonds, Series 2017-2. In addition, KBRA has affirmed the long-term rating of AA with a Stable Outlook on the City’s outstanding Second Lien Water Revenue Bonds. KBRA’s long-term ratings do not apply to bonds backed by a letter of credit or liquidity facility, unless otherwise noted.

This rating action is based on KBRA’s U.S. Municipal Water and Sewer Revenue Bond Methodology. KBRA’s rating evaluation focuses on the following key rating determinants:

• Management
• Legal Mechanics and Security Provisions
• Service Area & Economy
• System Characteristics
• Financial Metrics
• Debt Structure & Capital Plan Requirements

To access the full report, please click on the link below:

City of Chicago Second Lien Water Revenue Refunding Bonds, Series 2017-2

CHICAGO, Nov 29 (Reuters) – Bank of America Merrill Lynch won $750 million of Illinois bonds in competitive bidding on Wednesday as the state faced a lingering market penalty for its fiscal and political woes.

Spreads for the general obligation bonds over Municipal Market Data’s benchmark triple-A yield scale tightened by about 2 to 5 basis points for 10-year and longer bonds in the deal, but widened by 4 to 10 basis points for some shorter-dated bonds, according to Randy Smolik, MMD’s chief market analyst.

That indicated good performance for Illinois bonds mainly in the 10-year range compared with where they had been trading in the secondary market, he added.

Market conditions were tough for the two-part bond deal from Illinois, the lowest-rated U.S. state, as the muni market was hit with a sixth-straight session of falling prices and higher yields.

For Illinois bonds due in 2042 with a 5 percent coupon and priced with a 4.42 percent yield, the spread was 165 basis points over the benchmark scale’s 2.77 percent yield for top-rated bonds, according to MMD, a unit of Thomson Reuters.

“It’s the widest spread for a state GO bond by far,” Smolik said.

An impasse between Illinois’ Republican governor and Democrats who control the legislature left the state without a complete budget for an unprecedented two fiscal years. Lawmakers enacted a fiscal 2018 budget and income tax rate hikes in July over Governor Bruce Rauner’s vetoes.

The stalemate ballooned the state’s backlog of bills from vendors and service providers to an all-time high of nearly $16.4 billion, which was deflated to $9.1 billion as of Wednesday with the help of proceeds from Illinois’ $6 billion GO bond sale in October.

BofA was the winning bidder on Wednesday with an overall 4.33 percent interest cost for $655 million of bonds with maturities from 2018 through 2042 to fund capital projects. The bank also won $95 million of bonds due in 2018 through 2027 to finance information technology with a 3.71 percent interest cost.

Bank of America Merrill Lynch is the corporate and investment banking division of Bank of America Corp.

(Reporting by Karen Pierog; Editing by Matthew Lewis)

Washington, D.C.’s Council has approved a new $10 million affordable housing preservation fund, and The Washington Post reports that whoever is hired to manage it will play a role in shaping the effort to preserve, acquire and rehabilitate the city’s existing affordable housing stock.

“The fund is an important step toward saving D.C.’s disappearing low-cost housing,” Claire Zippel, a housing policy analyst at the DC Fiscal Policy Institute, told the Post.

According to the city’s Department of Housing and Community Development (DHCD), the city lost at least 1,000 units of subsidized housing between 2006 and 2014. A further 13,700 units have subsidies that will expire in 2020 and are at risk of loss.

Continue reading.

NEXT CITY

BY OSCAR PERRY ABELLO | NOVEMBER 27, 2017

The D.C. Department of Housing and Community Development has a newly established $10 million public-private fund dedicated to preserving affordable housing and is seeking a fund manager to manage the money.

The preservation fund, approved by the D.C. Council for the 2018 fiscal year, is in addition to the $100 million in taxpayer money dedicated to the District’s Housing Production Trust Fund, the city’s biggest pot of money to encourage development of affordable housing.

“We know the needs are great . . . we know where properties are at risk,” said Polly Donaldson, the director of DHCD. “We are working to identify those in need immediately and have the [fund] manager be able to start up immediately on that.”

The goal of the preservation fund, Donaldson explained, is to preserve, acquire and rehabilitate the city’s existing affordable housing stock.

According to the DHCD, the city lost at least 1,000 units of subsidized housing between 2006 and 2014. Another 1,750 units are at risk of being lost, according to the D.C. Preservation Network, a group of government agencies and community-based organizations working to preserve affordable housing in the city. A further 13,700 units have subsidies that will expire in 2020 and are at risk of loss.

“The fund is an important step toward saving D.C.’s disappearing low-cost housing,” said Claire Zippel, a housing policy analyst at the D.C. Fiscal Policy Institute.

The new fund will help to increase the amount of public funds available, which has been the biggest constraint in the city’s push to preserve affordable housing, she added.

“In recent years, there’s been a lot of pressure on D.C.’s Housing Production Trust Fund to meet the full spectrum of affordable housing needs that the city has . . . so it’s great news that there’s now another tool in the city’s affordable housing toolbox,” Zippel said.

Creating the preservation fund is one of six recommendations made by the Housing Preservation Strike Force created by Mayor Muriel E. Bowser in 2015. The strike force set the goal of preserving 100 percent of the District’s existing federally- and city-assisted affordable rental homes. Establishing the preservation fund is part of a multipronged approach to that objective.

Also included in the recommendations was creating a preservation unit tasked to identify affordable housing at risk of being lost and to deploy resources to preserve them. The preservation unit would have preferential access to money from the fund, according to the strike force’s final report. The DHCD is currently in the process of hiring someone to head the unit.

In researching similar funds across the country, the strike force looked at successful examples in New York City, Los Angeles, Denver, Seattle and the San Francisco area. They found the funds all started with an initial government investment, which was used to leverage private investment.

San Francisco, for example, launched a public-private fund in February to preserve and produce affordable housing in one of the most expensive real estate markets in the United States. Like the District’s preservation fund, San Francisco’s Housing Accelerator Fund aims to use initial city funding to leverage private investment.

The goal in the District is to use the initial $10 million to leverage an additional $30 million in private or philanthropic resources.

But the D.C. government has been faulted for mismanagement of the Housing Production Trust Fund, the city’s biggest affordable housing program. In a report in March, the Office of the D.C. Auditor found that millions of dollars in loan repayments had likely gone uncollected from developers, and that many low-cost apartments in the program are occupied by tenants who may not be income-eligible. The auditor also criticized the DHCD, which oversees the fund, for “unreliable” records related to the fund.

The DHCD has laid out general guidelines regarding the new preservation fund’s structure and the types of projects it will finance, but details on the fund’s design will emerge from the competitive application process.

“We want the fund manager to have strong knowledge of the District and to develop the fund in relation to some of the unique characteristics of the District,” including the city’s geographic limitations, its high cost of living, its growing population, and the overlapping of state, local and county functions, said Donaldson.

Donaldson said the department expects to finalize arrangements with one or more of the selected fund managers and to have the first project funded by the first quarter of 2018. The fund manager will report quarterly to DHCD.

An advantage of this kind of public-private fund is its flexibility, said Danilo Pelletiere, a senior policy adviser at DHCD.

“A fund like this can move more quickly,” making it an apt tool to preserve affordable housing in a fast-changing real estate market, he said.

The Washington Post

By Mary Hui

November 26, 2017

Kroll Bond Rating Agency (KBRA) has assigned a AA- long-term rating and Stable Outlook to the Pennsylvania Turnpike Commission Motor License Fund-Enhanced Turnpike Subordinate Special Revenue Refunding Bonds, Third Series of 2017. In addition, KBRA has affirmed the long-term rating of AA- with a Stable Outlook to all of the Commission’s outstanding Motor License Fund-Enhanced Turnpike Subordinate Special Revenue Bonds, with the exception of those backed by a letter of credit or liquidity facility.

This rating is based on the below key rating determinants including the five determinants of KBRA’s U.S. Public Toll Roads, Bridges, & Tunnels Bond Rating Methodology as well as the two below italicized elements of KBRA’s Special Tax Revenue Bond Rating Methodology which were utilized to evaluate aspects of support from the Commonwealth’s Motor License Fund:

• Size and Scope of Operations
• Demand Assessment
• Management/Regulatory Framework
• Financial Profile
• Nature of Special Tax Revenues
• Revenue Analysis
• Security Provisions

To access the full report, please click on the link below:

PA Turnpike Commission’s MLF-Enhanced Turnpike Sub Sp. Rev Refunding Bonds, Third Series of 2017

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of A+ with a Stable Outlook to the Pennsylvania Turnpike Commission’s Turnpike Subordinate Revenue Refunding Bonds, Third Series of 2017. At the same time, KBRA has affirmed the long-term rating of A+ with a Stable Outlook on the Commission’s outstanding Turnpike Subordinate Revenue Bonds. Lastly, KBRA has affirmed the long-term rating of AA- with a Stable Outlook on the Commission’s outstanding Turnpike Revenue Bonds. KBRA’s long-term rating excludes bonds backed by a letter of credit or liquidity facility, unless otherwise noted.

This rating is based on the KBRA’s U.S. Public Toll Roads, Bridges, & Tunnels Rating Methodology. KBRA’s rating evaluation focuses on the following key rating determinants:

• Size and Scope of Operations
• Demand Assessment
• Management/Regulatory Framework
• Security Provisions

To access the full report, please click on the link below:

Pennsylvania Turnpike Commission’s Turnpike Sub Rev Refunding Bonds, Third Series of 2017

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of AA- with a Stable Outlook on the Columbus Regional Airport Authority’s (“CRAA”) Airport Revenue Bonds. This rating applies to all of the Authority’s outstanding Airport Revenue debt, except for bonds backed by a letter of credit or liquidity facility. As of September 26, 2017, the Authority had approximately $84.2 million of airport revenue bonds outstanding.

This affirmation is based on KBRA’s U.S. General Airport Revenue Bond Methodology.

To access the full report, please click on the link below:

Columbus Regional Airport Authority’s Airport Revenue Bonds

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Since Hurricane Harvey made landfall in Texas, S&P Global Ratings has been evaluating the effect of the storm to our rated universe. In our view, many cities and counties–even those in the direct line of the storm–often do not sustain damage that we consider detrimental to long-term credit quality.

Continue Reading

Nov. 20, 2017

Warrensburg – Because Warrensburg moves faster than Washington, refunding the city’s 2009 and 2010 certificates of appreciation is expected to save money.

Refunding, much like refinancing a house, will save nearly $648,000, city bond counsel Jack Dillingham of Piper Jaffray told the City Council on Monday. Taken together, the certificates are worth more than $8 million.

“We’ll refund them to get a lower interest rate,” Finance Director Matthew Lue said.

Based on Lue’s advice, the council decided to move quickly to lock in savings rather than risk losing the refunding opportunity.

The tax-cut plan being discussed in Congress this year, if passed into law would take effect in 2018. The plan may restrict refunding bonds and the resulting savings the city expects, Lue said.

The concern about Washington’s tax-cut plan caused the council to accept the recommendation to advance the time line for the refunding process.

“We’re going to move it from January to December,” Lue said.

A Nov. 2 Wall Street Journal report states, “A separate provision in the Republican tax proposal would end governments’ ability to refinance their debt before the 10-year mark, when municipal bonds typically become eligible for refinancing. Though less useful in an era of persistently low and less volatile interest rates, that ability has in the past allowed governments to take advantage of drops in borrowing costs.”

The 2009 bond, issued for $5,185,000, and the 2010 bond, issued for $2,820,000, paid for building the police station, the public works building and expanding Nassif Pool into an aquatic center that includes the lazy river and other features.

WARRENSBURG DAILY STAR JOURNAL

JACK “MILES” VENTIMIGLIA Editor

Nov 16, 2017

Dive Brief:

• The Atlanta City Council unanimously passed infrastructure regulations to boost the spread of electric vehicles (EV), according to the Atlanta Business Chronicle.
• Under the new regulations, builders must install electrical infrastructure that will support EV chargers in each new residential and commercial structure.
• Additionally, each new commercial parking structure must make sure that at least 20% of the spaces are EV-ready.

Dive Insight:

Atlanta has been passing various environmentally friendly initiatives lately — such as offering property owners funding for clean energy projects — despite spotty support at the state level. Georgia had been the top state for EV sales in 2014 thanks in a large part to its $5,000 tax credit for zero-emission vehicles, but it experienced an 80% drop in EV sales statewide shortly after discontinuing the tax credit in 2015 and imposing a $200 annual fee on EVs.

Some use the state as an example of what could happen to nationwide EV sales if the $7,500 federal tax credit on EVs is repealed, as is proposed in the House tax bill. However, others point out that the tax credit is only good for 200,000 of each auto maker’s electric vehicles registered in the United States, and some manufacturers — like Tesla — are approaching the tax credit cutoff point.

Georgia Power offers rebates to builders who install 240-volt chargers with a dedicated circuit. Atlanta’s new ordinance instead makes the charger installation mandatory on new construction. Although some builders and building managers initially complained about the cost of installing the chargers, few voiced opposition as the city council vote neared.

The new ordinance addresses one of the main holdbacks of consumers purchasing electric vehicles, which is a lack of charging infrastructure when EV owners leave their homes. To further ensure that chargers are available to those who need them, drivers who park gas-powered vehicles in an EV-only spot can receive a $35 citation on the first offense and a get booted or towed after that.

The regulations could help further boost interest in EVs in Atlanta, a city known for its congestion due to residents being car-dependent. The ordinance comes at a time when EV sales are up nationwide and there’s greater interest in investing in charging infrastructure. The timing is also beneficial in that it coincides with falling electric battery prices, which will bring down manufacturer costs and should lower consumers’ cost-per-mile.

Construction Dive

by Katie Pyzyk

Nov. 22, 2017

LOS ANGELES — The California Debt Limit Allocation Committee is holding emergency meetings in the hope of allocating $900 million in remaining private activity bond capacity for affordable housing by the end of the year.

The remaining bond capacity typically could be carried forward for three years, but with the looming Congressional threat of PABs being eliminated on Dec. 31, the state could lose the bond capacity it receives for affordable housing.

“The goal is to award all of the available money allocated for PABs,” said Laura Whittall-Scherfee, who was named CDLAC’s executive director in June. “So, if a tax reform bill passes that says PABs can’t be issued after Dec. 31, we have done everything we can.”

The full House of Representatives voted last week to enact a Tax Cuts and Jobs Act that eliminates PABs as of Dec. 31. The House bill would have to be reconciled with a Senate bill, which is still in the works, but so far preserves PABs.

CDLAC added meetings to its calendar to adopt emergency regulations to streamline the approval process and get the money out the door.

Proposed changes fall under three categories: to clean up typos and add clarity, to streamline the application process with CDLAC and the California Tax Credit Allocation Committee, and a process to fast-track applications in response to the proposed tax bills.

CDLAC and CTCAC are the two California treasurer’s office agencies that finance affordable housing. CDLAC oversees bond financing for affordable housing developments and administers the federal and state Low-Income Housing Tax Credit Program.

Under the new guidelines, applicants could file a joint application to be reviewed by the two agencies, said Jeree Glasser-Hedrick, deputy treasurer for retirement security and housing policy.

CDLAC will vote Tuesday on whether to approve asking the Office of Administrative Law to review streamlined regulations. If the committee votes in favor, it starts a five-day period of public comment on the matter and a 10-day review period by OAL.

After that, CDLAC would meet again on Dec. 1 to vote on whether to approve the emergency regulations. Issuers would then have until Dec. 5 to submit applications for affordable housing projects to CDLAC. At the Dec. 20 meeting, CDLAC would approve what could become a long-list of applications.

The agency and treasurer’s office have created an email service to keep issuers that frequently tap the program aware of the changes and deadlines for this year’s allocation, Whittall-Scherfee said.

Applicants would have to agree to issue bonds no later than midnight Dec. 31, Whittall-Scherfee said.

CDLAC’s role is to be a benefactor of private activity bond volume that is capped by the federal government, Glasser-Hedrick said. If PABs go away, so does CDLAC’s primary mission, she said.
The state doesn’t have a replacement funding source, Glasser-Hendrick said.

“Given what has happened, we are just in wait-and-see mode,” she said. “We are hoping for the best and planning for the worst.”

CDLAC is proceeding on dual tracks, Whittall-Scherfee said.

“We want to get all the allocations out by the end of the year with the expectation that the bonds have to be issued or the bond capacity expires,” Westall-Scherfee said. “But, we are also proceeding as if we will be doing next year what we have been doing for the last 20 years, which is why we are working on creating the joint applications with CTCAC to award bond allocations.”

The $900 million in private activity bonds are tied to the 4% tax credit program. Under that program, issuers have to issue 50% of the cost of a project in PABs in order to qualify to receive money under the 4% tax credit program.

The Senate tax plan includes an increase in the separate 9% tax credit program that benefits affordable housing, but there is concern that corporations, who typically buy the tax credits, will not be as interested – or in need of the tax break – because both the House and Senate tax bills propose lowering corporate taxes from 35% to 20%.

The uncertainty currently surrounding the future of PABs is expected to drive issuance for the rest of the year.

Some issuers are planning to pull forward certain 2018 advance refundings and PAB issues into 2017 in order to beat the Dec. 31 deadline, according to the Ramirez & Co. Municipal Market Weekly.

The broker-dealer said in the report that it is anticipating $29 billion in unanticipated gross supply could result from the accelerated issuance by year-end, which could bring its revised projection for total 2017 gross supply to about $397 billion. The shift could lower the amount expected in 2018.

By Keeley Webster

BY SOURCEMEDIA | MUNICIPAL | 11/21/17 07:16 PM EST

Banking issue likely to be discussed next month, mayor says

Boulder is holding off, for now, on renewing a contract with JP Morgan Chase, the city’s longtime banking provider and a funder of controversial oil pipelines.

Meanwhile, environmental advocates are urging Boulder to ditch JP Morgan Chase and create a public bank — an idea that will at least be discussed in concept, according to the mayor.

About a year ago, the City Council passed a resolution in support of the Standing Rock Sioux and allies who protested the Dakota Access Pipeline, and in doing so also asked city finance staff to explore possibly severing ties with JP Morgan Chase, Boulder’s bank since 2004.

After issuing a request for proposals from banks and doing several months of exploration, staff returned in October to report to the council, via a memo, that it did not appear there were any banks both capable of handling the city’s significant banking needs and up to the city’s ethical standards on fossil fuels and other matters.

The recommendation from staff was that Boulder extend the city’s relationship with JP Morgan Chase.

But the memo containing that recommendation arrived at an awkward time, Mayor Suzanne Jones said, since an election was around the corner.

“I imagined that few had had time to read (the memo) and respond,” Jones said this week, in an email.

“And I had heard from at least one Council member that they were disappointed that a better banking entity option that was less involved in fossil fuel investing had not presented itself.”

So, rather than authorize staff to negotiate an extension of the city contract with JP Morgan Chase, the council will discuss this as a group, likely on Dec. 19.

Said Jones, of her approach to that upcoming conversation, “I do think that, while council obviously needs to make sure that the city has reliable, secure, efficient and cost-effective banking services, we are also obligated to work with an institution that most aligns with our City’s social and environmental values and goals.

“I was disappointed that the RFP process did not reveal an institution that maximizes both of those objectives.”

A coalition of 23 different groups — among them: Earth Guardians, Elephant Journal, 350 Colorado, Kids Against Fracking and Rainforest Action Network — co-signed a letter to the council that argues there is, in fact, an option to maximize both objectives.

“We call on the city of Boulder to continue its climate leadership by moving our city’s funds out of JP Morgan Chase as rapidly as feasible,” the letter reads.

“Additionally, we urge you to find a suitable banking alternative that aligns with out city’s values, using public funds for local renewable energy and community development projects instead of extreme energy extraction, beginning with authorizing a full feasibility analysis of creating a Boulder Public Bank.”

The 23 groups condemned JP Morgan Chase not only for its relationship to the Dakota Access Pipeline, but also for its association with fracking projects in Colorado, and for its status as “the No. 1 funder of tar sands oil.”

There’s no evidence, for now, that the idea of a public bank will be of interest to the council, but, at a minimum, city staff will respond to the concept, Jones said.

“We have … periodically had local citizens raise with us the idea of establishing a public bank here in Boulder, along the lines of North Dakota’s public bank,” Jones said.

“Similarly, in the past council members indicated interest in finding a mechanism to allow Boulder residents to invest their money in Boulder civic projects, including affordable housing as well as” a municipal electric utility.

” If Council was interested, we could also discuss the idea of negotiating an interim (rather than a long-term) agreement with our current bank while we took a deeper look at these other ideas.”

The Boulder Daily Camera

By Alex Burness

Alex Burness: 303-473-1389, burnessa@dailycamera.com or twitter.com/alex_burness

11/25/2017

Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of AA- with a Stable Outlook on the Municipal Improvement Corporation of Los Angeles (MICLA) Taxable Lease Revenue Refunding Bonds, Series 2015-A (Los Angeles Convention Center). This rating is based on the City’s long-term general obligation rating and evaluation of the factors discussed in KBRA’s U.S. State and Local Government Abatement Lease Methodology. Generally, ratings assigned to the majority of U.S. state and local government abatement lease obligations by KBRA will be one to two notches below the government lessee’s general obligation rating.

KBRA has also affirmed the long-term rating AA with a Stable Outlook on the general obligation debt of the City of Los Angeles, California. This rating applies to the City’s outstanding general obligation bonds except for bonds backed by a letter of credit or liquidity facility. This rating report is based on KBRA’s U.S. Local Government General Obligation Rating Methodology.

To access the full report, please click on the link below:

MICLA Taxable Lease Revenue Refunding Bonds, Series 2015-A

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of AAA with a Stable Outlook on the State of Wisconsin Transportation Revenue Refunding Bonds, 2017 Series 2. KBRA has also affirmed the AAA rating with a Stable Outlook on the State’s outstanding Transportation Revenue Bonds. The bonds are secured by a first lien pledge of Program Income which is defined as motor vehicle registration fees collected Statewide and certain other vehicle registration-related fees, such as personalized license plates charges, title transaction fees, and counter service fees.

To access the full report, please click on the link below:

State of Wisconsin Transportation Revenue Refunding Bonds, 2017 Series 2

If you have any difficulties accessing the report, please contact info@kbra.com or visit www.kbra.com.

Fitch Ratings-San Francisco-14 November 2017: Hawaii’s tax-supported local governments maintain strong Issuer Default Ratings (IDR), bolstered by the resilient state economy, according to new research from Fitch Ratings.

Statewide, credit characteristics support IDRs from Fitch in the ‘AA’ rating.

“The state has benefited from strong revenue growth, thanks in part to steady tourism growth in recent years and a substantial ongoing military presence,” said Alan Gibson, Director of U.S. Public Finance. “Within that context, Hawaii local governments’ operating performance has been strong.”

Key local government credit strengths are their robust revenue frameworks and moderate debt and retiree benefit burdens. Cumulatively, these credit strengths offset some constraints on Hawaii local governments’ ability to control their costs.

Fitch expects these positive characteristics to continue, and Stable Outlooks indicate Fitch does not expect significant rating changes over the next one to two years.

For more information, a special report titled “Strengths and Challenges of Hawaiian Local Governments” is available on the Fitch Ratings web site at www.fitchratings.com or by clicking on the link.

Contact:

Alan Gibson
Director
+1-415-732-7577
Fitch Ratings, Inc.
650 California Street, Suite 2250
San Francisco, CA 94108

Shannon Groff
Director
+1-415-732-5628

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

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

• Securities changing hands at fastest pace in three years
• Those buying at record lows may be willing to settle for less

Since Hurricane Maria struck Puerto Rico almost two months ago, investors have unloaded the island’s bonds at the fastest pace in three years, pushing prices to one new low after another.

The selloff caused at least a fifth of the government’s $12 billion of general-obligation bonds to change hands, a shift that could help hasten Puerto Rico’s emergence from its record-setting bankruptcy. That’s because those who bought near now record lows may be willing to settle for far less than hedge funds and others that rushed in before the financial collapse.

“The market’s resetting for the potential for a resolution,” said Rob Amodeo, who manages $25 billion as head of municipals at Western Asset Management. “That’s where the trade is headed and you needed to get there because there’s not enough capital to repay bondholders.”

The bankruptcy in May initiated a court battle that’s expected to last for months as Puerto Rico faces off against owners of $74 billion of debt backed by various legal protections and sometimes competing claims to the government’s cash. The outcome was made even more uncertain by the devastation caused by the hurricane, which has left much of the island still without power, crippled the economy and caused an estimated 100,000 residents to leave. Governor Ricardo Rossello has asked for $94 billion of federal aid.

On Wednesday, Puerto Rico’s most actively traded bonds dropped to as little as 24 cents on the dollar after the lawyer for the government’s financial oversight board said that the island may need to suspend debt payments for five years. That price is the lowest since the securities were issued in 2014 and less than half what it was in mid-September.

Speculation that bondholders face an even deeper hit has pushed Puerto Rico debt trading to a three-year high. The trailing 30-day daily average of debt traded was $455 million on Wednesday, the most since at least September 2014, according to data compiled by Bloomberg.

The rout has pushed bond prices closer to what the territory can afford to repay, said Brad Setser, a Treasury Department official under President Barack Obama who helped with the Puerto Rico rescue law enacted last year. Some securities, such as those issued by the highway and infrastructure agencies, are trading for pennies on the dollar.

“It is certainly helpful that market prices now reflect more realistic expectations about Puerto Rico’s capacity to pay,” said Setser, who is now a senior fellow at the Council on Foreign Relations.

Even so, an investor buying at record lows may still fight for as much as they can get, he said. “Just because you buy at a low price doesn’t necessarily mean that you’re willing to settle for a low recovery.”

Bondholders’ expectations will play an important role in how long Puerto Rico’s various agencies must remain under court protection. To end the bankruptcy, the federal oversight board in charge of the case must convince a judge to approve a debt-cutting plan for each agency, including the central government. Creditors will get to vote on those plans, and U.S. Judge Laura Taylor Swain will take the result into account when deciding whether to approve Puerto Rico’s proposals.

Before Maria, Puerto Rico said it could allocate $8 billion for debt service payments through 2026, far short of the $33.4 billion that’s owed. The government plans to revise those plans by the end of next month to account for the storm, which Puerto Rico’s federal oversight board estimates may leave a budget shortfall of as much as $21 billion over the next two years.

Bondholders have sold about $2.5 billion of commonwealth general obligations to securities dealers since Maria made landfall in Puerto Rico, according to data compiled by Bloomberg. Those maturing in 2035, the most heavily traded security, changed hands Wednesday at an average of 25 cents on the dollar, down from 56.7 cents before the storm, Bloomberg data show. Many of those bonds were initial sold to hedge funds for 93 cents in March 2014, with the firms wagering that the government wouldn’t be allowed to go broke.

“Now they’re capitulating and selling to the distressed traders,” said Western Asset’s Amodeo, whose firm doesn’t hold any Puerto Rico debt and has sat on the sidelines despite the recent price drop.

Bloomberg Markets

By Michelle Kaske

November 16, 2017, 8:04 AM PST

— With assistance by Steven Church

• Lead lawyer tells federal court island may need a moratorium
• Prices of most actively traded bonds fall to a record low

Puerto Rico is considering suspending debt-service payments for five years, a lead lawyer for the territory’s federal oversight board said, in the first indication of how the devastation caused by Hurricane Maria will affect the restructuring of the island’s debt.

A moratorium may be included as part of Puerto Rico’s plan to reduce what it owes through bankruptcy, Martin Bienenstock, a partner at Proskauer Rose LLP who represents the panel, said at a court hearing Wednesday in Manhattan. It wasn’t immediately clear whether such a step would apply to all of government’s $74 billion of debt.

The government’s most actively traded bonds fell Wednesday to an average of 25 cents on the dollar, the lowest since they were issued in 2014 and less than half what they were worth before the storm. The September hurricane worsened the financial pressure that had already pushed the Caribbean island of 3.4 million residents into a record-setting bankruptcy.

“It stands to be seen whether in five years they can stand back on their own feet,” said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which manages $6.5 billion of municipal bonds, including insured Puerto Rico debt. “If it takes them three months to get power back on in the island, saying that they can make debt payments in five years seems aggressive.”

The damage so badly crippled the electricity system that much of the island is still without power and an estimated 100,000 Puerto Ricans have since left, extending the long-running exodus that’s kept the economy mired in a recession.

Reeling from its economic contraction and reeling from years of borrowing to keep the government afloat, Puerto Rico began defaulting on its bonds in 2015. It filed for bankruptcy in May after the U.S. enacted an emergency rescue law that gave it power to do so and installed the federal board to help the commonwealth’s government chart a financial turnaround.

Puerto Rico this year initially said it could allocate $8 billion for debt payments through 2026, far less than the $33.4 billion that’s owed. Those plans have since been upended by the fallout from the hurricane, which Puerto Rico’s federal oversight board estimates may leave a budget shortfall of as much as $21 billion over the next two years. Puerto Rico is currently revising the fiscal plan.

Much of the recovery will depend on the U.S. government. Governor Ricardo Rossello this week asked President Donald Trump to push for $94 billion in aid for the territory to rebuild its electricity system, homes and other leveled infrastructure.

Puerto Rico’s financial recovery plans have yet to detail how any losses would be distributed among various classes of bonds backed by different legal pledges and with sometimes competing claims to the government’s cash. Groups of creditors are currently fighting over that issue in court.

Jose Luis Cedeno and Edward Zayas, spokesmen for the federal oversight board, and Monica Fierres and Elliot Rivera, spokespeople for Puerto Rico’s fiscal agency, didn’t immediately respond to phone calls and emails seeking comment. Nor did Yennifer Alvarez, a spokeswoman for the governor.

Prices on most commonwealth securities have tumbled over the past two months. General obligations with an 8 percent coupon and maturing in 2035 fell Wednesday to 25 cents on the dollar from an average of 26.2 cents Tuesday. Some bonds trade for even less, with those issued by the infrastructure and highway agencies being exchanged for pennies on the dollar.

Bloomberg Markets

By Steven Church and Michelle Kaske

November 15, 2017, 7:43 AM PST Updated on November 15, 2017, 10:04 AM PST

— With assistance by Rebecca Spalding

(S&P Global Ratings) Nov. 14, 2017–The Minnesota Senate announced on Nov. 10, 2017 that it intends to lay off all 205 of its legislative staff members and possibly shut down on Jan. 12, 2018, if there is no solution to the standoff between the legislature and administration.

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