Transportation and land-use agencies often don’t work with the same data as economic development offices. A new tool aims to bridge that gap.

Planning and development director of Metro, the regional government of greater Portland, Ore.
In an age of data and disruption, cities and regions need modern tools to visualize how their economies operate across their landscapes. That reality was made quite clear during the recent Amazon HQ2 sweepstakes, in which the company defined a region’s competiveness not just by its traditional economic assets, such as tech talent, but also by how well transit connectivity and neighborhood livability created a platform for long-run economic growth.

The problem is that most transportation and land-use agencies struggle to frame their decisions through an economic lens. The de facto standard is that those agencies measure such items as travel volumes and acres of developable land, while leaving questions such as where income inequality may be growing or where high-tech firms have begun to cluster to economic development offices. This narrow approach creates a major weakness: If transportation and land-use staff don’t have a way to translate economic values into their operational DNA, how can we ever expect to build the kind of places we all want to live in?

One way to bridge this data gap is to build new tools that create a common language. Call it a Rosetta Stone between economic development professionals and their peers in land use and infrastructure.

Over the past 18 months, the Brookings Institution’s Metropolitan Policy Program and Metro, the regional government and planning organization serving greater Portland, Ore., set out to build such a translational tool. The result is the country’s first Economic Value Atlas (EVA), which uses mapping technology to simultaneously evaluate economic, social and land-use conditions at the neighborhood scale and relate them to metropolitan trends. It’s a solution that could scale to any metropolitan area.

It’s not hard to see how land-use and transportation decisions impact economic competiveness. Domestic and global trade connections are essential to allow industries to grow. Commuting choices and local walkability help attract new talent to a region. A range of housing types is essential to hedge against displacement and discrimination. Sustainable urban design better positions a region to withstand threats from climate change. And history tells us that getting these decisions wrong can have detrimental effects, from promoting decay in the urban core to spatial mismatch on the periphery.

Not only are our policy frameworks not designed for that kind of multidisciplinary thinking, but they also fail to leverage impressive new data capabilities. The country has never had a better feel for how metropolitan economic performance compares across places. Economic data at the neighborhood scale is also richer than ever, whether through federal sources such as the Census Bureau or private providers such as real-estate firms.

By providing a common mapping platform that is available to the public and can make calculations in seconds, the EVA creates a common economic language to inform local conversations. And we’re just now beginning to see what’s possible.

For example, the EVA can manage questions around the rise of e-commerce and where to put all those new warehouses. By stacking three critical variables at once — freight market connectivity, labor access and developable industrial land — the EVA map of Portland revealed hotspots especially attuned to warehousing’s needs. What amazed us is that the EVA pinpointed the exact neighborhood where Amazon ended up building its Portland facility: a logistics- and land-rich area with easy access for entry-level workers.

Or let’s consider gentrification, which is a major issue in Portland’s central-city neighborhoods. We decided to stack five variables: rental housing affordability, housing construction, walkability, median income growth and high non-white populations. Not only did the map reveal where gentrification may have already occurred but it also revealed diverse, livable places that, due to housing construction and rising incomes, could soon price certain groups out.

These maps are intriguing, but what’s most exciting is how the tool’s outputs can impact local decision-making. Consider, for example, the landmark affordable-housing bond measure approved by the Portland region’s voters last year. A tool like the EVA can help Metro target funding by geographies, populations and community needs. Similarly, as the region evaluates where a future transportation funding measure should invest its precious capital, the EVA can help policymakers better understand and communicate which investments provide which benefits. That kind of economic accountability can help build public trust.

We can no longer afford the outdated model of making decisions in silos and behind closed doors. Fortunately, we have new data and planning capabilities to meet not only today’s challenges but also those of the coming decades. Tools like the EVA are just the beginning.

governing.com

By Adie Tomer & Elissa Gertler

JUNE 19, 2019 AT 4:00 AM

Ground was broken this month on an anxiously awaited highway project outside of Washington, D.C., one of the latest examples of the public and private sector acting as partners to advance critical state and local infrastructure projects.

The June 6 launch of the Fredericksburg Extension Project – a 10-mile extension of express toll lanes on the Interstate 95 corridor in Northern Virginia nicknamed the “FredEx” – featured the leadership of a public-private partnership (P3) that will get the $565 million job done by the end of 2022. The state’s governor and its transportation secretary launched the project as the public side of the P3, and executives from toll-road operator Transurban would be the private side of the partnership.

“Not only will this project reduce congestion and provide important corridor improvements, but as a result of this joint commitment from our public and private sector partners, this project is also estimated to create 9,100 jobs and generate $1.1 billion in economic activity for this fast-growing region,” Gov. Ralph Northam said during the ceremony, summing up the basic premise of P3s, which are increasingly being formed to push through road projects designed to ease traffic congestion in the high-growth areas where new jobs and taxpayers are clustering.

Transurban’s role in the project is to ride to the rescue of cash-strapped states and other governments by financing increasingly costly and urgently needed traffic projects in exchange for operational control and the ability to collect tolls from thousands of annoyed drivers every day. The Australia-based corporation has toll roads around the world and said in its most-recent annual report that its toll revenues had increased 8 percent to more than $2.2 billion for the year.

And the FredEx is not the last the Beltway region is going to see of Transurban. The company earlier this year announced its official handshake with Virginia on another P3, the 495 Extension Project, which will add about two miles of express lanes toward the Maryland state line and will include what the state’s news release termed “an extension of current dynamic tolling and traffic-management systems,” and also “an investment of approximately US$1 billion by Transurban in the Greater Washington area for these projects.”

A toll road is considered the classic model of a P3 because it features a visible revenue stream that will pay the private partner back for their initial investment without tapping into public funds. Tolls, however, may not be appropriate for a road that doesn’t have enough daily traffic. In fact, new highway construction is not necessarily the crux of the ongoing U.S. infrastructure crisis. A greater issue is maintenance of existing highways, local streets, bridges, and ramps.

Washington and many state governments have come around in seeing the P3 model as a not only convenient means of financing, but also in many cases, the only option. There is no official tally of P3 projects underway in the United States, but it is growing into the preferred method of financing highway improvements and other daunting infrastructure projects.

A 2018 report issued by the economic consulting firm The Brattle Group noted that the 2008 recession knocked many state and local governments back on their financial heels, which led to a surge in deferred maintenance that only caused roads and bridges to deteriorate further, which adds greatly to the cost of the eventual repairs. In addition, it is not permitted to use federal highway funds to pay for routine or even preventable maintenance. The third head of this highway hydra was a clause in the Trump administration’s tax-reform bill that hamstrung the ability of local governments to refinance their highway bonds at lower rates, a practice known as advanced refunding that is similar to refinancing a home loan.

Brattle said the situation has left local governments with little choice besides joining up with the private sector in a joint effort to fix up roads and bridges that won’t necessarily generate enough toll revenue to pay the tab. “Although the stereotypical P3 is a toll road, P3s need not involve user fees,” Brattle report said. “They can be funded instead with government revenue, just like a conventionally procured, municipal bond financed project.”

That funding is basically a contracted payment schedule in which the private-sector partner bankrolls construction and is also responsible for the maintenance and upkeep in exchange for a regular payment by the public side of the P3. For example, Pennsylvania’s Rapid Bridge Replacement P3 teamed the state up with a private consortium of investment and construction firms to replace a whopping 558 bridges located along rural roads throughout the state. The $899 million project will have the consortium design, build, and finance the new pre-fabricated bridges in exchange for a 28-year payment schedule from the state.

The Southern Ohio Veterans Memorial Highway in the Appalachian region of southern Ohio was built toll-free by the Portsmouth Gateway Group, which will be paid by the state to maintain the 16-mile project for the next 35 years. A similar team led by the international heavyweight Fluor Corp. was selected in May to design and build the I-635 LBJ East Project in Dallas, which includes widening 11 miles of the highway connecting Dallas with neighboring Fort Worth and then collecting maintenance fees from the state.

Proponents of P3s say the concept’s ability to unleash the private sector helps speed up road construction while keeping costs down.

But Brattle’s report cautioned: “Projects that enter P3 procurement must be carefully selected and contracted with a payment mechanism that allocates risks appropriately for the
project and the procuring government’s needs. Avoiding financial failures and political backlash will be essential to encouraging state and local governments to bring more projects for P3 procurement.”

TRANSPORTATION TODAY

BY HIL ANDERSON | JUNE 17, 2019

While the intricacies of public-private partnerships can be tough to navigate, they have been successful in helping cities build the kind of digital infrastructure that’s necessary for today’s urban economy and society.

Reinventing a city is a challenge and a feat of such immense proportion that it can rival building a new city from the ground up. It requires no less than rethinking and rearchitecting everything that worked decades or centuries ago, for both present and future needs.

That’s why public-private partnerships, or P3s, are enjoying a renaissance. They provide a real, practical solution to cities’ most pressing problems. P3s are nothing new: Two of the most successful and most celebrated developments in U.S. history — the Erie Canal and the Transcontinental Railroad — date back to pioneering P3s of the 19th century. In one assessment, the Erie Canal was said to provide “a model of public-private partnerships that endure to this day.”

Today’s model for P3s is much the same as it was back then, but now is the engine behind the development and emergence of smart cities. At its heart, it’s a simple alliance between government and private entities to achieve a common purpose, and a purpose that neither entity could be expected to achieve alone. In fact, P3s are being tested for their resilience as cities address their toughest challenges.

Continue reading.

GOVTECH.COM

BY ITAI DADON, DAN PFEIFFER / JUNE 17, 2019

We recently provided an update on the status of higher-education and social-infrastructure projects being delivered under the P3 model. This update focuses on water and sewer projects—although water and sewer infrastructure is rarely given much attention, its proper operation is obviously critical to our well being. Unfortunately, many of our nation’s water and sewer systems are the victims of deferred maintenance (a problem that P3s can address), and the current situation is dire. As discussed at last week’s USP3 conference in New York, public water systems in the United States require $335 billion in upgrades over the next 20 years, and the public sewer systems require another $298 billion in upgrades. Fortunately, several jurisdictions are considering P3s to address these needed projects. Water-and-sewer P3s currently in the procurement pipeline include:

Miami-Dade County, Florida, Biosolids Processing Facility
The biosolids facility remains in the County’s P3 pipeline. An RFQ has not yet been issued. Estimated construction costs are approximately $140 million.

Ascension Parish, Louisiana, Consolidated Sewer System
Ascension Parish selected a preferred proponent last month for the development of a new regional sewer system under a 30-year DBFOM P3 agreement. Estimated construction costs for the first phase of the system are $225 million. The preferred proponent is led by Bernhard Capital Partners.

Lake Oswego, Oregon, Wastewater Treatment Plant
Lake Oswego shortlisted three teams last month for this project with an estimated construction cost of $130 million. The shortlisted proponents are EPCOR Foothills Water Partners, Foothills Water LLC, and NW Natural Holding Company.

Edison, New Jersey, Water and Sewer Concession
The Township of Edison has negotiated a 40-year concession agreement, which includes $481 million in infrastructure improvements, with Edison Environmental Partners, which is led by KKR Global Infrastructure Investors and Suez. The agreement is pending approval by the Township.

Fargo-Moorhead, North Dakota, Diversion Project
After a delay due to litigation, the Fargo-Moorhead Flood Diversion Authority is going to move forward with the procurement for this $2.75 billion project this summer. The shortlisted teams are Lake Agassiz Partners (AECOM, Meridiam, and Walsh), Red River Valley Partners (Plenary, Fluor, Ames, and Bernard), and Red River Valley Alliance (Acciona, InfraRed, Shikun & Binui, and North American Construction Group).

June 19, 2019

Bilzin Sumberg

With falling ridership and scrapped expansion projects, urban transit faces an uncertain future.

Writing in this space last June, I made a confident prediction about the trajectory of urbanism in two Southern cities. Nashville had just decisively rejected a $5 billion plan aimed at remaking its entire transportation system, one that would have added enough new light rail lines and bus routes to change metro Nashville from a car-dependent mishmash of sprawl into a 21st-century metropolis where many people would find cars unnecessary.

Meanwhile, metro Atlanta was making plans to try something similar, with its big suburban counties preparing to vote to extend rail service to those hugely populous but transit-deprived population centers. The implication was obvious. Atlanta’s suburbs, after casting decades of anti-transit votes, were ready for change. Nashville was lagging years, if not decades, behind.

I got it wrong. This spring, voters in Gwinnett County, the nearly 1-million-resident behemoth thought to be central to the entire Atlanta project, turned down transit expansion and the extra sales tax it would have required. So much for the region’s 21st-century turn toward urbanism. It wasn’t that different from Nashville after all.

It’s still possible that Gwinnett will reverse itself, or that the other metro counties will tilt the other way and keep the transit vision intact. But at this point, I doubt it.

This spring was a really bad time for transit activists and advocates almost everywhere. In April, the board of directors of the Regional Transit Commission of Southern Nevada rejected a light rail project that appeared to have public support. That was a few weeks after the city council in Phoenix, a beacon of transit success in the past few years, voted against a major expansion out into the western desert suburbs. In August, a popular referendum will decide whether the system needs to have any real expansion at all. At this point, it’s looking like the anti-transit side could prevail.

In what may be the most discouraging decision of all, transit promoters in Durham, N.C., had to pull the plug, after nearly a decade of planning, on a transit project that would have run through Durham and adjoining Orange County. Duke University, a major sponsor, abruptly pulled its money out, invoking safety concerns.

But it’s not just this bad project news that’s turned 2019 into a season of national transit anxiety. It’s the overall ridership numbers coming in from practically every part of the country. Data for the first three quarters of 2018 shows that total U.S. transit ridership was down 2.36 percent over those nine months. Heavy rail was down 2.86 percent; light rail, 3.97 percent. Bus trips were down 2.32 percent. The only category that came in higher was commuter rail.

The numbers from Los Angeles are perhaps the most alarming. Through the first three quarters of 2018, L.A.’s heavy rail subway lost 4.45 percent of its riders; the light rail system lost an even worse 5.21 percent — in a region that has perhaps staked more of its future on transit than any growing metro in the United States.

There are some intriguing anomalies in this largely bleak picture. The places in the South and the West that had seemed to be most bullish about transit expansion over the past decade — L.A., Phoenix, the North Carolina Research Triangle, and even Dallas and Las Vegas — have seen their prospects decline. But at the same time, and without much national attention, older cities with legacy transit systems long plagued by physical decay and poor maintenance have begun sprucing them up in hopes of generating a revival.

In the current decade, for example, Chicago has rebuilt more than a third of its subway and elevated tracks and redone 40 aging stations, at a cost of $7.2 billion. Boston, after a decade of haggling over the future of its Green Line, is hard at work spending more than $2 billion on a 4.7-mile extension and the rebuilding of 67 stations. Philadelphia’s SEPTA has been spending $750 million a year since 2011 on a comprehensive modernization process. These cities know how bad the national ridership numbers look. They are gambling that all this expense and effort will make a difference. And Philadelphia’s heavy rail system did post a gain in the second half of 2018.

Then, of course, there is New York. In March, the state legislature agreed to let the city begin imposing a congestion tax that could reach $15 on private vehicles that enter Manhattan below 60th Street during peak travel hours. Part of the rationale, obviously, is to reduce automobile congestion. But an equally crucial component is the money that congestion pricing will deliver to the debt-ridden Metropolitan Transit Authority — as much as a billion dollars a year, in addition to $15 billion in revenue projected to come in through new bonding authority.

So just as the Phoenixes of America are losing interest in building their modern lives on the pedestal of transit, the cities with creaky trains and rusty platforms are chasing the state of the art as a way to keep themselves healthy. There is a disconnect here, though. When it comes to transit, renewal and ridership are two very different things. The money that allows older cities to rebuild tracks and debut shiny new trains doesn’t guarantee that people are going to come back and ride them. To complete that difficult transformation, cities will need to do a better job of figuring out just what has driven the riders away in the first place.

There isn’t one answer. Transit’s troubles stem from a whole complex of factors. But it’s worth looking at them one by one.

The explanation behind falling transit numbers that gets tossed out most frequently is the rise of ride-hailing. People who used to commute to work by train or bus are taking Uber or Lyft instead. Obviously, that’s a contributing factor to ridership declines. But it’s happening mostly in a few big cities, and the ones with the biggest Uber and Lyft penetration are not necessarily the ones with the biggest transit declines. Besides, the cost of an Uber ride from a suburb into the city — $25 or more at peak hours in a crowded metropolis — suggests a ceiling on just how ubiquitous ride-sharing is actually going to be.

Telecommuting is another commonly suggested culprit, and there may be more to this one. The number of pure telecommuters is still relatively small — the latest data show that only about 3 percent of employees work from home most of the time. But the number of one-day-a-week telecommuters is huge and growing very fast. Taking transit to work four days a week instead of five represents a 20 percent falloff in ridership. So this obviously matters.

What may matter more, however, is the price of gas and the rising level of car ownership. In the summer of 2008, a gallon of gas sold in much of the United States for more than $4; in the summer of 2018, the price was down below $2.75. A decade ago, I thought the effect of declining gas prices wouldn’t be that elastic: Once people started

driving less to save money, they’d keep doing that. But they haven’t. A spike in gas prices still cuts our driving significantly; a plunge in those prices puts millions of people back on the road quickly.

Just as important, there’s evidence that once the 2008 recession ended, Americans started buying more cars. A study last year by researchers at the University of California, Los Angeles, found that in the years from 2000 to 2015, but especially from 2010 to 2015, the number of household vehicles in metropolitan L.A. grew by 2.1 million — a higher rate than in previous decades. Most interesting of all: The growth was greatest among immigrant families.

When you think about it, you can see the reason for that. Immigrants, and poorer families in general, have been settling in less expensive inner suburbs rather than in the central cities where they used to cluster. As they do that, they move farther from the transit lines — especially bus lines — that carried them to work. They buy cars, and their bus-riding numbers go down. As the transportation scholar Yonah Freemark told me recently, “Poorer people are living in increasingly transit-hostile environments.”

One might expect this trend to be counteracted by the number of single millennials who have chosen to live near city centers and aren’t buying cars at all. That may be happening to an extent. But many of those millennials are settling so close to their jobs that they don’t need transportation of any sort — except for their feet and maybe a scooter or bicycle. As Freemark puts it, “They are not a natural transit constituency.”

None of this is to suggest that big-city transit systems are on the brink of imminent collapse. They remain indispensable civic institutions, and the older ones are doing exactly the right thing by restoring their capital investment, their level of service, their reliability and their reputations. In the long run, though, they need to worry about one other important thing: finding ways to get their service out to where their riders have gone.

GOVERNING.COM

By Alan Ehrenhalt | Senior Editor

JUNE 2019

Norwalk, CT, June 13, 2019 — The Governmental Accounting Standards Board (GASB) has proposed new guidance to improve accounting and financial reporting for public-private and public-public partnership arrangements (both referred to as PPPs) and availability payment arrangements (APAs).

The Exposure Draft, Public-Private and Public-Public Partnerships and Availability Payment Arrangements, provides proposed guidance for PPP arrangements that are outside of the scope of its existing literature for these transactions, namely Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, and Statement No. 87, Leases. The proposed Statement also would make certain improvements to the guidance currently included in Statement 60 and provide accounting and financial reporting guidance for APAs.

PPPs

The proposal defines a PPP as an arrangement in which a government transferor contracts with a governmental or nongovernmental operator to provide public services by conveying control of the right to operate or use an infrastructure or other nonfinancial asset—the underlying PPP asset—for a period of time in an exchange or exchange-like transaction. Some PPPs meet the definition of a service concession arrangement (SCA). The proposed Statement includes the following definition of an SCA:

• The transferor conveys to the operator the right and related obligation to provide public services through the use and operation of the underlying PPP asset
• The operator collects and is compensated by fees from third parties
• The transferor determines or has the ability to modify or approve which services the operator is required to provide, to whom the operator is required to provide the services, and the prices or rates that can be charged for the services, and
• The transferor is entitled to significant residual interest in the service utility of the underlying PPP asset at the end of the arrangement.

The proposed Statement carries forward the financial reporting requirements for SCAs that currently are included in Statement 60. For PPPs that meet the definition of a lease, but not the definition of an SCA, the proposed Statement would require governments to apply the requirements of Statement 87. For all other PPPs that are not SCAs and are not leases, the proposed Statement generally would require a transferor to recognize an asset for the underlying PPP asset and a deferred inflow of resources for consideration received or to be received as part of the PPP.

The proposed Statement would require a governmental operator to report an intangible right-to-use asset related to the underlying PPP asset that either is owned by the transferor or is the underlying asset of an SCA.

APAs

Under the proposal, an APA would be defined as an arrangement in which a government compensates an operator for services that may include designing, constructing, financing, maintaining, or operating an underlying infrastructure or other nonfinancial asset for a period of time in an exchange or exchange-like transaction.

The proposed Statement would require governments to account for APAs related to those activities and in which ownership of the asset transfers by the end of the contract as a financed purchase of the underlying infrastructure or other nonfinancial asset.

A government would be required to report an APA that is related to operating or maintaining an infrastructure or other nonfinancial asset as an outflow of resources in the period to which payments relate.

The proposed Statement would be effective for fiscal years beginning after June 15, 2021, and all reporting periods thereafter. Earlier application would be encouraged.

The Exposure Draft is available on the GASB website, www.gasb.org. The GASB invites stakeholders to review the proposal and provide comments by September 13, 2019.

For one thing, the technology may save enough money so that city projects will be able to pay for themselves

Cities and transit systems across the U.S. have borrowed hundreds of millions of dollars in recent years to finance investments in systems that produce streams of data on traffic, trains, ports, streetlights and more.

But future city projects with new technologies that generate real-time data may change how cities finance such projects.

Citigroup Inc., C 0.60% which advises cities on municipal fundraising and provides a bevy of other banking services to governments, has been working with a handful of cities and experts to study the outcomes of “smart” investments, in part to gauge how they change a municipality’s financial picture. Such studies may help inform continuing debates about how cities can harness new technology while also managing the costs and privacy concerns that often accompany it.

Proponents say that if the benefits from new technologies prove substantial and become sufficiently predictable, this could produce cost savings for city services, create new financial flexibility in budgets and lead to lower financing costs. It could cut cities’ need for long-term borrowing, for instance, boost their creditworthiness, and open new paths for generating revenue. So-called smart cities, for example, might be able to turn to cash generated or saved by these kinds of projects to pay for them without new borrowing, according to some financial advisers.

“With better data, smart cities will actually budget things completely differently, from bus usage and road maintenance to parking revenue and emergency-responder needs,” says Jay Collins, vice chairman of the banking, capital markets and advisory group at Citigroup. “The smarter cities get, the more investment they will attract, the more they will drive legacy costs down, and the easier they will be to finance.”

For example, a city that collects real-time data about transit can reroute buses at less-busy times to minimize wear-and-tear expenses, freeing up cash. The data could also be a lure to tech companies that want to form partnerships with the city on private forms of transit.

Cash for U.S. cities isn’t scarce at the moment. Investors have poured money into municipal-bond funds, even for riskier bonds, as they seek higher-yielding investments.

But many cities are facing some long-term financial headaches from technology that will require creative thinking, says Scott Corwin, a managing director at Deloitte LLP who leads a practice on the future of mobility in cities.

For instance, cities may see reduced revenue from cars if more people use ride-sharing or if they drive more fuel-efficient vehicles that generate smaller gas-tax receipts.

Mr. Corwin, along with urban planners and banks like Citigroup, is studying how cities can replace lost tax receipts in that area by again leaning on data and technology. For example, a city that is able to track the use of shared-scooter services can charge the companies for use of city bike lanes.

“Cities have limited investment capital to keep pace, so there’s a greater emphasis on how you self-fund,” Mr. Corwin says.

To get to that point, however, cities will have to consider a number of nonfinancial variables.

Most notably, data collection raises privacy concerns. In one recent instance, a government-sponsored “smart” project in Toronto has faced local resistance over questions about how personal data will be used.

Eva Blum-Dumontet, a researcher for Privacy International, a privacy-rights advocacy group, says that unlike with websites that ask permission to track your browsing, many people may not even realize they live in a city using smart technologies—or understand how it might benefit them.

“The question that cities and companies helping them really need to be asking themselves is, ‘How do we engage the citizens?’ ” says Ms. Blum-Dumontet. “The protection of people in public spaces is still very much unexplored.”

Cities will “need to make sure they have addressed both citizen-data-privacy concerns, and ultimately have citizen support for their data usage model,” says Citigroup’s Mr. Collins.

Mechanisms for that could include linking tax cuts to the budgetary success of a “smart” investment, or giving micro credits to citizens for discounted or free city services.

Beyond privacy, cities may also face challenges administering new technologies, something financial analysts would have to consider, says Thomas Doe, president of Municipal Market Analytics Inc., which provides research for municipal-bond investments.

That includes making sure cities can hire people able to manage and analyze all of the data being collected. Cities may end up relying on outside vendors, which could cause disputes over who owns the data generated, or lead vendors to ask for deregulation in exchange for their help.

“There are a lot of old brick-and-mortar factors inhibiting the efficiencies of a smart city,” says Mr. Doe.

The Wall Street Journal

By Telis Demos

June 10, 2019 10:03 p.m. ET

Mr. Demos is a reporter for The Wall Street Journal in New York. He can be reached at telis.demos@wsj.com.

Fitch Ratings-New York-11 June 2019: Performance is exceeding projections for eight managed lanes that are currently up and running, according to Fitch Ratings in its latest peer review for U.S. managed lane projects.

Strong performance led to Fitch upgrading two SR-91 express lane projects in Southern California, owned by Orange County Transportation Authority (OCTA) and Riverside County Transportation Commission (RCTC). “The opening of the RCTC SR-91 project in 2017 was very successful in its own right and also led to lasting revenue gains for the connecting OCTA project,” said Director Scott Monroe.

The sector’s better-than-expected performance reflects a combination of strong traffic and revenue trends in a sound overarching economic environment, solid demonstrated pricing power as an asset class, and a degree of conservatism in the development of Fitch’s cash flow cases.

Fitch changed its Managed Lanes characteristics assessment for four facilities to Midrange from Weaker. Three of them, 95 Express Lanes, LBJ Infrastructure Group, and NTE 1 & 2 are exiting ramp-up with an adequately long history of strong demand and revenue generation, solid pricing power and adequate protections against exempt vehicles. The remaining facility, RCTC, has a short operating history but is performing far in excess of Fitch’s projections and represents an extension of a long-lived facility with a good track record.

Fitch also rates five managed lane projects under construction, which are broadly on their way to being completed on time and within budget, according to Fitch Ratings in its latest annual peer review for U.S. managed lanes.

Fitch’s “Peer Review of U.S. Managed Lanes” is available at www.fitchratings.com.

Contact:

Scott Monroe
Director
+1-415-732-5618
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108

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

Additional information is available on www.fitchratings.com

• Nebraska has the highest number of municipal bankruptcies
• California has second-most failures, followed by Arkansas

Municipal bankruptcies are so rare that bondholders scour each for potential precedents. But they’re far more common in some states than others, according to data from Municipal Market Analytics Inc.

Of the 94 filed since 2007, California saw 16, the second most, MMA figures show. That’s understandable given the most populous U.S. state’s dominance among bond issuers in the $3.8 trillion market and its permissive attitude to such filings, which included the cities of Vallejo, Stockton and San Bernardino.

Continue reading.

Bloomberg Markets

By Romy Varghese

June 12, 2019, 9:00 AM PDT

• Reserve balances rise to record high, budget group says
• Bond market is demanding smaller yield penalties from states

If a recession comes soon, America’s state governments are better prepared than ever.

With most states seeing tax collections rise at a faster-than-expected pace, governments have been setting aside more money to help them avert deep spending cuts the next time the economy contracts. Those so-called rainy-day funds have swelled to about $68.2 billion, with the median state having enough to cover about 7.5% of its annual budget, the most on record, according to a report released Thursday by the National Association of State Budget Officers. Next year, those reserves are expected to grow to $74.7 billion.

Continue reading.

Bloomberg Markets

By Elizabeth Campbell

June 13, 2019, 10:39 AM PDT

• While corporations step up borrowing, governments cut back
• States and cities owe $143 billion less than they did in 2010

Asheville, North Carolina, has a growing population, a burgeoning beer industry and a big slice of the billions of dollars tourists spend each year visiting the Blue Ridge Mountains. It also has $390 million of work it wants to do on its infrastructure.

What the city hasn’t been doing is running up debt to pay for it, with its 92,500 residents on the hook for only about $78 each for bonds backed by the general government budget. “We have a lot of people politely asking, ‘You’re a AAA city and your roads are terrible,’” said Vijay Kapoor, a city councilman. “What gives?”

That’s the paradox of America’s states and cities. The decade-long economic expansion has left surpluses where there were once deficits, interest rates are veering back toward more than half-century lows and there’s hundreds of billions of dollars of spending needed to refurbish roads, sewers and public transportation systems. Yet around the country, governments are showing little interest in borrowing money, cautious that a recession that by some measures seems overdue could resurrect the years of austerity that followed the last one.

Continue reading.

Bloomberg Markets

By Amanda Albright

June 14, 2019, 3:00 AM PDT

State debt levels remain moderate despite many states experiencing increasing revenues following the last recession and the 2017 Tax Cuts and Jobs Act. However, S&P Global Ratings has observed a renewed focus on transportation projects as states consider taking on new debt, reform transportation-related revenues, and increasingly consider public-private partnerships (P3s) or other alternative deli…

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Jun. 11, 2019

Building a new school can benefit a community in more ways than one. Sure, there’s the value of a new educational institution where students can take classes and graduate with their diplomas, but why wait years for that spanking new building to pay off?

Schools matter, but so does having a job. There is a high correlation between educational attainment and family income. Families in which parents are part of the workforce are more likely to send their children to college than families in which parents are unemployed. Instead of celebrating construction of a new school only for what it will offer students over the long term, we should also see it as an opportunity for underemployed family members to improve their children’s schooling through the result of their own employment.

Some construction jobs pay above local averages, presenting opportunities to uplift an entire community. For example, in New Orleans, the median hourly wage is $16.36 per hour; some construction jobs pay more than $20 per hour. Instead of waiting for years for a new construction to pay off, it’s time urban planners and education officials focus on investing in the community from the moment the first brick is laid.

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The Brookings Institute

by Andre M. Perry

Thursday, June 13, 2019

NEW YORK, NY, JUNE 13, 2019 – CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for May 2019. The report, which tracks the issuance of new security identifiers as an early indicator of debt and capital markets activity over the next quarter, found a noteworthy increase in requests for new North American corporate and municipal debt identifiers in May.

Read Report

“Corporate and municipal issuers have been busy over the past few months, clearly taking advantage of the sustained low rate environment to raise new debt,” said Gerard Faulkner, Director of Operations for CUSIP Global Services. “While year-to-date CUSIP request volumes are still in negative territory for several asset classes due to a slower pace in Q1, the recent trend has been toward a significant increase in pre-market activity among North American issuers.”

Read Press Release

For many, summer means days at the beach and, ideally, nights at the ice cream parlor. Picking a flavor of ice cream is never an easy decision. The same can be said for bonds. Like ice cream, bonds come in 31 flavors (or so). U.S. government bonds are really different flavors of vanilla, from just plain vanilla to French to New York. Interest rates are the driver of the prices of government bonds; a rise in rates pressures prices down and vice-versa. A risk of default is virtually nil so credit risk does not influence the price.

Default risk becomes more important to investors considering buying the bonds of corporations, emerging markets or municipalities. With ice cream still on my mind, high-yield corporate bonds, or “junk,” are the equivalent of the Ben & Jerry’s flavor “Everything but the Ice Cream”; there is a good chance you don’t care for something in the scoop, but it can still be a great choice. In addition to interest rates, junk bonds come with other risk considerations such as management quality, industry position or total debt service. For these reasons, junk bond prices are influenced not just by interest rate movements, but anything that could influence the ability of the issuer to pay back its debt.

Interestingly, the entire spectrum of bonds has participated in a stealth bull market for the past year. Over the 12 months ended May 31, 2019, the S&P 500 eked out a 3.8 percent gain. Any flavor of bonds earned better than that. The Bloomberg Barclays U.S. Aggregate Bond was up nearly 7 percent over the same time period. Municipal bonds, high-yield corporate bonds and emerging markets debt all outpaced the broad U.S. stock market too and, even better, did so with less drawdown. The S&P 500 shed just over 6 percent in May and nearly 20 percent in late 2018. No bond asset class suffered those kinds of losses. Bottom line: all flavors of bonds have provided better return with less risk than U.S. stocks over the past year.

This bull market in bonds, though, has hardly been noticed. It could be due to the difficulties and challenges that come with choosing between such different flavors of bonds and then participating in uptrends while stepping aside during declines. We use a rules-based approach. Rather than trying to predict the outcomes of tariff negotiations, of Federal Reserve meetings, of the shape of the yield curve or the weather next month, we study what the market is telling us and react with a truly tactical discipline.

Last month, a few of our holdings in high-yield corporate bond funds fell enough to reach sell signals. Those monies were redeployed into long-term government bond funds, which have been in a strong upward trend. Our rules are currently guiding us to a preference for municipal bond, preferred stock and long-duration Treasury fund where the trends are strong. Now, if only choosing an ice cream flavor were this easy.

FINANCIAL ADVISOR

JUNE 14, 2019 • TERRI SPATH

Terri Spath is chief investment officer at Sierra Investment Management.

Summary

• The municipal bond market is off to its hottest start in five years, led by the lower-rated segments of the muni market.
• Year-to-date, the municipal market has returned 4.9% due to a combination of favorable supply-and-demand dynamics and falling Treasury yields.
• While the pace of fund flows may slow, we expect demand for municipal bonds to remain strong over the rest of the year.

The municipal bond market is off to its hottest start in five years, led by the lower-rated segments of the muni market. It may be tempting to chase returns, but we suggest that investors instead take a cautious approach and focus on higher-rated issuers during the second half of the year. We see heightened risks on the horizon, with the possibility of a prolonged trade war, uncertainty about Federal Reserve policy, and the possibility of a decline in tax revenues caused by a slowdown in the economy.

Continue reading.

Seeking Alpha

By Cooper J Howard

Jun. 14, 2019

• Florida real estate district files for bankruptcy protection
• Sets fight with bondholder over legacy of subprime collapse

Donald Dwyer left statehouse politics for retirement in Clearwater, Florida, at the Grand Venezia, a 336-unit condominium complex with a pool, tennis courts and ill-fated ambitions to bring a touch of Italian luxury to the Gulf Coast.

But the former Maryland lawmaker is now leading an unusual community tax revolt against OppenheimerFunds Inc., which oversees $230 billion in assets, that may echo far beyond his tiny patch of Florida’s western shore.

During the height of the real estate bubble, the Clearwater Cay Community Development District sold notes and bonds for a development that was supposed to include a water park and a gondola-lined canal with Venice-style bridges that would turn the Grand Venezia into a destination resort. But those amenities were never constructed, and the developer is serving a 40-year prison sentence for running a Ponzi scheme. So on June 4, Dwyer and the district’s board of supervisors opted to push it into bankruptcy, seeking to reduce the debt and the approximately $1,500 they each pay every year for it.

The district had $13.9 million in bonds outstanding as of September 2017, according to its financial report, though Dwyer said he has doubts about the accuracy of that figure. OppenheimerFunds owns all of it.

“I have no option other than filing bankruptcy,” said Dwyer, 61. “We’re going to let somebody else intervene on our behalf because this has gotten insane.”

The step marks a rare, if quixotic, challenge to a major corner of the tax-exempt bond market where companies routinely raise money to build roads, sewers and other infrastructure for new real estate developments. When the properties are sold, fees charged to homeowners by their land districts cover the debt. There is about $7.3 billion of such securities outstanding in Florida alone, with billions more in fast-growing states such as California, Texas and Colorado.

Uphill Battle

James Spiotto, managing director of Chapman Strategic Advisors LLC and an expert of municipal bankruptcies, said the district faces an uphill fight. He said he’s not aware of any other community-development district that has gone bankrupt in Florida, and it will need the approval of the governor. Moreover, the revenue securing the bonds — the assessments — is a very secure type of debt that is “not supposed to be impaired,” he said.

“I don’t really know if they can avoid the debt obligation,” Spiotto said.

An OppenheimerFunds spokesman declined to comment. In August, a state judge sided with the firm by striking down residents’ earlier effort to dissolve the Clearwater Cay district and claw back debt payments. At a meeting with residents that month, Brian Crumbaker, a Tallahassee-based lawyer for OppenheimerFunds, said there would be widespread defaults in Florida if such districts were allowed to repudiate their debts.

The Clearwater Cay district was created in 2005, during the height of the housing mania, to bring the look of Venice, Italy, to a stretch of coastal property about 22 miles (35 kilometers) from Tampa. It issued debt backed by a tax levy on a 49-acre area that developer Dave Clark promised to transform into a “luxury, regional resort destination” with apartments, shopping, and a water park, according to 2005 debt offering documents.

But Clark’s business ventures unraveled. According to the U.S. Justice Department, his company, Cay Clubs, defrauded investors by raising $300 million to redevelop dilapidated vacation-rental properties in Florida, Las Vegas and the Caribbean. Regulators said it was a Ponzi scheme that relied on fraudulent purchases to artificially inflate the property’s values, including those in Clearwater. In 2016, he was sentenced to 40 years in prison.

Suing Over Fallout

Bruce Barnes, a lawyer based in Safety Harbor, Florida, who has represented those who sued Clark, says he has been dealing with the fallout from the Clearwater development for 12 years. Barnes said that in 2014 he began to look into residents’ concerns over why they were still paying assessment charges associated with the district’s debt.

That money was going to OppenheimerFunds, which purchased the debt in 2006 and 2007 for two of its mutual funds, including its high-yield municipal fund, according to court filings. That fund, the fourth-biggest of its kind with $7 billion in assets, has been known to make risky bets, includingon debt sold by real estate development districts roiled by the subprime crash.

In 2016, Barnes sued the district and the mutual funds on behalf of a condo association at the Venezia, saying the annual fees between $1,400 and $1,500 were going to debt issued for a district that wasn’t legitimate. The lawsuit asked for OppenheimerFunds to refund the assessments, claiming the debt wasn’t used to benefit the community. Last year, the judge ruled against the homeowners while ordering the size of the fees to be reassessed, according to court records.

In a lengthy district board meeting with residents in August, Crumbaker, the OppenheimerFunds lawyer, said the bond proceeds did provide a benefit by funding land purchases and water and sewer services. He said the only risk that the firm took on was that the debt payments would fall short if individuals stopped paying their tax bills, not that the district would repudiate its obligations. “Otherwise, every city, county, school board, 600 community development districts in Florida, et cetera, would be doing the same thing,” he said.

After the judge sided with the investment firm, Dwyer mounted a takeover of the district board in November. He said OppenheimerFunds hasn’t provided details about how the assessment money is being used or how much debt is still owed. The 2017 financial report notes that the district couldn’t provide “evidential matter” on the trustee’s expenditures from the debt service fund.

“I’m not going to assess my community for a debt I can’t justify,” he said.

OppenheimerFunds is no stranger to such legal fights. Its funds were big owners of bonds issued by Puerto Rico, which is now working through a record bankruptcy. In September, it sued Harvey, Illinois, after it defaulted on bonds issued in 2007.

The district decided to file for bankruptcy in the hopes of getting the investment firm to the bargaining table, Dwyer said. “It might mean that the bondholders take a haircut,” he said. “They’re going to have to write down some of their debt, or walk away from all of it.”

Bloomberg Markets

By Amanda Albright

June 10, 2019, 4:30 AM PDT

The most recent incident in a series of ransomware attacks on American cities and municipalities happened in May in Baltimore. The hackers locked multiple systems such as emails, voicemail, and the parking fines database. The debacle delayed the sales of about 1500 homes in the city. Hackers have demanded over $100,000 in bitcoins in order to release these files, which has been declined by Baltimore’s mayor.

Ransomware attacks have quickly become a preferred method of hacking with the emergence of bitcoins and other cryptocurrencies that enable hackers to receive their ransom without being tracked and identified. The popularity of cryptocurrency has soared in the recent years with fluctuations in their value. As these currencies become more mainstream, so does the incentive of hackers to make a quick buck through ransomware attacks. As I had warned before, we should expect ransomware attacks to become more frequent as cryptocurrency becomes more popular.

The bad news is that once a computer system is hacked with ransomware the options are very limited. The first option is to pay the ransom. While this is the quickest way to release the files, law enforcement officials strictly advise against it, simply because paying the ransom invites future attacks. Once the hackers know that an organization pays the ransom, they will repeat their attacks for more money. The other option is to refuse the payment. While this solution reduces the chances of future attacks, it will impose significant costs on the organization as it may take weeks or even months to remove all the malicious software from the computer systems.

The good news is, although there is not much to do once a system is attacked with ransomware, it is very easy to significantly reduce the chances of being attacked. While even the most secure computer systems could be hacked as there is no security technology that guarantees 100% protection against threats, implementing the most basic security solutions could significantly reduce the chances of experiencing a ransomware attack.

Most such attacks are not targeted, but opportunistic. Hackers look for organizations and businesses that seem more vulnerable than others. The ones that have neglected to set basic security standards in place are more likely to be targeted for ransomware attacks. The process is very similar to burglaries in which the criminals do not target a specific home, but rather cruise neighborhoods to find houses that do not seem to have security systems.

The best defense against ransomware attacks is putting basic security safeguards in place. It will most likely dissuade hackers that are after a quick buck and are not motivated to spend time hacking into a secure system while there are easier targets out there.

The critical services provided by government agencies make them attractive targets for ransomware attacks. In the case of Baltimore, the attack halted home sales and water bill payments. Due to the sensitivity and urgency of services that government agencies provide to the public, cities cannot afford to leave their computer systems suspended for prolonged periods. Hackers are more likely to attack city governments, assuming that cities will be desperate to release their files and pay the demanded ransom.

As I have discussed earlier, compared to private organizations, government agencies usually have less resources to invest in information security technologies. Old and fragmented computer systems exacerbate this problem, since older systems are much more difficult and expensive to maintain than newer ones. Despite these difficulties, all levels of government should invest in upgrading security technologies to reasonable levels, or else many more agencies will soon become victims of ransomware attacks in the future.

The Brookings Institute

by Niam Yaraghi

Tuesday, June 11, 2019

State and local governments rely on municipal securities to raise money to finance projects for their citizens.

The process of issuing these securities involves working with municipal advisors to negotiate the structure, pricing, timing and distribution of bonds with the underwriters. Like a fee-only personal financial advisor, municipal advisors work to ensure deals are made in the best interest of their client.

Let’s take a look at the role that municipal advisors play in the process and how to select the right advisor.

Who Are Municipal Advisors?

Municipal advisors assist state and local governments with issuing municipal securities. Unlike underwriters, they have a federal fiduciary duty to their government clients and are required to act in their best interests. They are regulated by the Municipal Securities Rulemaking Board, or MSRB.

Municipal advisors offer a wide range of different services and have various compensation structures. When selecting an advisor, it’s important to consider skill gaps in the municipal staff, the expertise of the municipal advisor, and how that expertise applies to the specific project.

Many state and local governments use municipal advisors to ensure that deals with underwriters are fairly structured, as well as to ensure that their documents are up to par. After all, any accidental or intentional omissions in regulatory disclosures can lead to costly lawsuits and fines.

What Services They Provide

The process of issuing municipal securities begins with the preparation of an official statement that explains the bond’s features and characteristics. In addition, state and local governments must provide continuing disclosures and may want to present them to rating agencies for coverage.

Municipal advisors can help with each of these steps by:

• Developing a financing plan
• Evaluating and selecting an underwriter
• Preparing rating agency presentations
• Preparing offering documents
• Evaluating market conditions

It’s worth noting that underwriters have different financial interests than issuers – their goal is to profit from the bond offering by buying low and selling high. Municipal advisors can help negotiate the structure, pricing, timing and distribution of the bond offering with underwriters to ensure a fair deal.

How to Select the Right Advisor

Municipal advisors offer a wide range of services with many different compensation structures, which means that it’s important to find the right advisor for your needs.

The first step is finding the right match for your requirements. For example, issuers that don’t plan on rating their bonds do not require a municipal advisor that specializes in presenting to rating agencies. The best advisors close any skill gaps with specific expertise.

The second step is determining the right compensation structure, which might include:

• Fixed fees
• Hourly fees
• Contingent fees
• Retainer fees
• Transaction fees

A fixed fee structure is a great option since it caps the total expenditure to a known amount, whereas hourly fees could quickly add up and go over budget without oversight. Contingent or transaction fees may be preferable to some issuers that want to ensure a transaction closure before spending money.

The final step is documenting the agreed upon services and fees. In order to avoid any confusion, both parties should agree on a detailed scope of services and their fees, including services that are NOT provided and any maximum compensation amounts or other conditions that may exist.

For more information, see the MSRB’s Financial Considerations for Hiring Municipal Advisors here.

The Bottom Line

Municipal advisors are instrumental for state or local governments that are issuing bonds. Like a fee-based personal financial advisor, they work in the issuer’s best interest to ensure a fairly structured deal with underwriters that includes all of the necessary disclosures for investors.

municipalbonds.com

by Justin Kuepper

Jun 12, 2019

• Counties, cities seek to negotiate settlement collectively
• Suits already consolidated by judge for pre-trial discovery

More than 1,500 U.S. municipalities are seeking to negotiate as a group with Johnson & Johnson, Purdue Pharma LP and other drug makers over the opioid epidemic, hoping that will spur the companies to pay billions of dollars to settle lawsuits.

The cities and counties, which blame the drug makers and distributors for creating a national public-health crisis by illegally promoting addictive painkillers, asked U.S. District Judge Dan Polster in Cleveland Friday to let them create a negotiation class. The suits were already consolidated for pre-trial exchanges of information in the so-called multidistrict litigation, or MDL.

“This is not a litigation class,” the group wrote. “It does not affect the prosecution of existing actions filed against opioid manufacturers, opioid distributors or pharmacies.”

Settlement talks between J&J and Purdue, along with drug distributors such as McKesson Corp. and Cardinal Health Inc., and states and local governments who have their cases before Polster, have been dragging, as it appears the companies are prepared to take their chances in court.

Under the proposal presented to Polster, the municipalities would have a supermajority voting process that can approve any proposed settlement, with three-quarters being required to vote in favor.

“It has long been recognized that a coordinated group is best able to secure better returns by offering the prospect of complete resolution of a dispute,” the municipalities said.

Purdue said it’s committed to working with everyone toward a resolution that benefits communities and states.

“We continue to work collaboratively within the MDL process outlined by Judge Polster,” Bob Josephson, a Purdue spokesman, said in an email.

J&J didn’t immediately respond to a request for comment on the proposal.

J&J is currently trying to fend off Oklahoma’s $13 billion lawsuit before a judge in Norman. It’s the first trial in which a state seeks to force a drug maker to cover the cost of the fall-out from opioid-related overdoses and addictions.

New Brunswick, New Jersey-based J&J is alone fighting the Oklahoma lawsuit. Purdue, the top marketer in the state, settled in March for $270 million. Teva Pharmaceutical Industries Ltd. agreed to pay $85 million, days before the trial started on May 28.

In Cleveland, the judge has pushed both sides hard to settle.

“It is no secret that there have been settlement discussions right from the onset,’’ Rice and other plaintiffs’ lawyers said in court filings. The talks are ongoing, according to the filing.

Allowing the plaintiffs to come together for negotiation purposes offers “the perfect mechanism for allowing the affected cities and counties to negotiate credibly and effectively as a group,’’ the lawyers said.

The case is In Re National Prescription Opioid Litigation, 17-md-2804, U.S. District Court, Northern District of Ohio (Cleveland).

Bloomberg Business

By Jef Feeley and Andrew M Harris

June 14, 2019, 8:41 AM PDT Updated on June 14, 2019, 10:16 AM PDT

COLUMBUS, Ohio — Lawyers suing over the toll of opioids asked a judge Friday to allow a structure for all 25,000 municipal and county governments in the U.S. to be paid — if a settlement can be reached with companies that make and distribute powerful prescription painkillers.

The approach, if approved, would create dueling negotiating systems as state governments are also in collective settlement negotiations with the drug industry.

The unified approach on behalf of municipalities would also help the manufacturers and distributors by defining a finalized group of entities benefiting from a settlement, said Joseph Rice, a South Carolina-based attorney representing local governments in the complaint.

“If you’re a corporation trying to address this problem, you need to get closure, you need to put it behind you,” Rice said in an interview Friday. “If you’re going to put significant resources into the resolution, you’ve got to know it’s behind you. The only way to do that is to get releases from everybody that’s got a potential claim.”

The action would also help address a problem that is widespread and reaches across city and county lines, Rice said. Providing assistance from a settlement to one county doesn’t help the people in a neighboring town, he said.

“These pills have wheels, they move around,” Rice said, citing the documented cases of pain pills obtained in Florida being taken to West Virginia.

The motion filed Friday requests the creation of a negotiating class “for the specific purpose of creating a unified body to enter into further negotiations with defendants,” according to the filing. “It is neither aimed at being the vehicle for litigation or settlement.”

Hundreds of local governments and other entities, such as hospitals, have accused pharmaceutical companies of downplaying the addictive nature of opioids and prescription painkillers largely blamed for one of the deadliest drug crises in U.S. history. Opioids include prescription and illicit drugs.

The complaints are being overseen by Cleveland-based U.S. District Judge Dan Polster. He previously ruled that lawsuits filed by the Ohio counties of Cuyahoga, which includes Cleveland, and Summit County, which includes Akron, will be heard first this October.

A trial on claims made by West Virginia’s Huntington and Cabell counties will be next, followed by Cleveland and Akron’s claims.

The Centers for Disease Control and Prevention says opioids are the main driver of drug overdose deaths. Opioids were involved in 47,600 overdose deaths in the U.S. in 2017, according to the agency.

Attorneys general fighting for compensation in separate legal actions are likely to have mixed reactions to the filing, said Paul Nolette, a Marquette University political scientist.

With the lone exception of Nebraska, every state has sued, filed administrative charges or promised to sue the companies blamed for the national crisis, which played a role in the deaths of more than 390,000 Americans from 2000 through 2017.

On one hand, the move could complicate things for the states, which see themselves as negotiating both on their behalf and communities within the state, said Nolette, who studies attorneys general. On the other, some may welcome the pressure that a giant class of communities puts on drug makers and distributors to settle.

Many municipalities felt left out of states’ 1998 $200 billion-plus settlement with tobacco companies, Nolette said, especially after some states diverted their share to fill budget holes instead of paying for anti-smoking programs.

“At least in this litigation, the municipalities are saying, ‘No, that’s not good enough.’ We want our own voice,” Nolette said.

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In Ohio, the state has sued drug makers and distributors in separate court actions. Attorney General David Yost on Friday called communities’ request for their own negotiating class “an extraordinary process and a novel approach.”

“We’re examining it very closely to make sure it is fair and appropriate for Ohioans and complies with the law,” Yost said in a statement.

By The Associated Press

June 14, 2019

Associated Press writer Geoff Mulvihill in New Jersey contributed to this report.

By Rob Whiteman, CEO, Chartered Institute of Public Finance and Accountancy

A career in public finance is a fantastic way to make a real difference to people’s lives. The careful management of public money is always essential but particularly in the current political and economic climate. Working in the public sector allows finance professionals to have a long-lasting and meaningful impact on local communities on a local, national and global level.

There are many different facets to working in the public sector. It could mean working to preserve vital services that are desperately needed by people who are vulnerable and disadvantaged, immeasurably improving their quality of life. It could mean working on measures to alleviate inequality, rethinking how social issues can be addressed through new initiatives at all levels of society. It could also mean advocating for prudent and transparent financial management practices at the very highest levels of government. This includes acting in accordance with stringent ethical standards in order to preserve and enhance public trust in civil institutions. Acting in the best interests of the general population is at the heart of public service, even when it means making the difficult choices.

Working in public finance demands high levels of creativity, finding innovative ways to use limited resources in order to best serve communities. In a continually evolving environment, there are rewarding opportunities to exercise ingenuity in the pursuit of new solutions where old strategies are no longer fit for purpose. Sustainability is also a key priority, with the best public finance initiatives building long-term thinking into the planning stage to ensure quality services are delivered to taxpayers in the years to come, as well as in the immediate future.

In an increasingly connected world, the international dimension of a public finance career is becoming ever more prominent. The profession as a whole is recognizing the importance of working and learning together. As we face up to global challenges such as a rapidly changing climate, the public sector has a unique role to play in exchanging ideas and sharing what works. The ability and willingness to operate internationally opens up the chance to collaborate and learn new ways of doing things, which in turn will drive improvements and transformation across the public sector around the world.

Flexibility and adaptability are vital qualities for the 21st Century public finance professional. Such qualities are key to working internationally. Those who are willing to reach across borders and cultural boundaries are best placed to question inherited practices in their own contexts and introduce new ideas, thereby ensuring the most effective stewardship of public resources.

The pathway offered by the Chartered Institute of Public Finance and Accountancy to a globally-recognized public finance qualification supports a modern public finance career. Developed with Rutgers to expand on their Master of Accountancy in Governmental Accounting Program, this pathway adds an additional dimension to the Rutgers education. It draws on CIPFA’s unique expertise as the international leader on public sector finance, upholding professional standards and supporting individuals as they pursue excellence in financial management at all levels of government around the world. This new pathway will unlock opportunities to work internationally and develop skills that are urgently needed in the public sector.

CIPFA’s training and resources have equipped generations of public sector finance professionals and will continue to support the next generation, leading us into a financially sustainable future for the greatest public good across the globe.

Rutgers

Wed, June 5, 2019

The Environmental Protection Agency awarded 149 communities with Brownfields Program grants to clean up hazardous substances, and some municipalities are pairing those grants with municipal bonds.

A brownfield is a property that has been polluted by a hazardous substance, or contaminant. EPA estimated that there are 450,000 brownfields in the U.S. EPA’s Brownfields Program started in 1995 and this year about 40% of the selected recipients received the grants for the first time, Andrew Wheeler, EPA administrator said in a press release.

The public safety center in Beaverton, Oregon was awarded $300,000 to assess sites in its downtown area.

Finance Director Patrick O’Claire said Beaverton is looking to eventually add more affordable housing and space for companies wanting to move in, adding that the grants will help achieve those goals.

Last year, Beaverton used $400,000 in brownfields grants to address a petroleum contamination that imposed health risks to groundwater and local streams from a nearby gas station. That site was designated for a future public safety center, an earthquake resistant police and emergency management building.

In 2016, Beaverton residents passed a $35 million bond resolution to fund the new center.

In the past, other projects have also used a combination of bond financing with brownfield grants. Riverfront Park in Spokane, Washington was in need of an upgrade and in 2014 it issued $64 million in bonds to fund improvements. The total cost of the project is expected to exceed $70 million and is located in a federal Opportunity Zone.

Opportunity Zones were authorized under the Tax Cuts and Jobs Act enacted by Congress in December 2017 to encourage investment and job creation in low-income urban and rural communities. OZs allow investors to defer and reduce capital gains and for investments held at five or seven years, and in the case of investments held at least 10 years, avert tax on any appreciation.

In 2014, Spokane was awarded $400,000 by EPA to assess vacant, underutilized and abandoned properties. In 2017, the city was awarded $600,000 in additional EPA brownfield funding to clean up and revitalize the 100-acre park.

“These grants fulfill several of President Trump?s top priorities simultaneously: helping communities in need transform contaminated sites into community assets that not only create jobs and jump start economic development but also improve public health and the environment,” Wheeler said.

Maine received more brownfields grant funding than any other state for the assessment and cleanup of 14 sites, with $6 million in EPA funding, according to a press release.

“The Brownfields Program has proven to be a major benefit to the overall health and vitality of Maine communities,” Maine Senators Susan Collins, a Republican and Angus King, an independent said in a joint statement. “In addition to cleaning up hazardous substances and improving our environment, this investment will help communities create new economic development opportunities to attract businesses that create good jobs for Mainers, particularly in rural areas.”

In 2016, both Collins and King called for the Department of Commerce to take immediate action to help Maine?s economy after several mill closures left it in an economic crisis.

In January 2017 an assessment from the U.S. Economic Development Assessment team highlighted the importance of EPA?s brownfields program and its potential to leverage federal resources to redevelop former industrial sites, support mill communities and grow Maine?s rural economy.

In fiscal year 2018, the EPA selected 144 communities for brownfields environmental assessments, and in 2017, 172 communities received the brownfields grants.

Clean up of brownfield properties led to residential property value increases of 5% to 15.2% within 1.29 miles of the sites, according to a 2017 study. The EPA also noted that near 48 of those brownfield sites, another study found an estimated $29 to $97 million in additional tax revenue for local governments in a single year after cleanup.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 06/06/19 02:51 PM EDT

Summary

• The U.S. municipal market is hitting on all cylinders – modest growth, reasonable inflation and solid fundamentals are all drivers.
• Congestion pricing is becoming a major force.
• New limitations on state and local tax deductions increase the value of tax-exempt income.

The U.S. municipal fixed income market is hitting on all cylinders. Modest domestic economic growth, reasonable inflation, lackluster new issue supply and sound fundamentals continue to drive investors into the tax-exempt bond market.

This performance further stems from new limitations on state and local tax deductions (SALT), which increases the value of tax-exempt income. Also, tax-adjusted municipal yields are attractive for maturities beyond 10 years.

The muni market has distinct seasonal trends which can make investing timing important. Demand for tax-exempt income overwhelmed the usual selling in the secondary market during tax season, specifically in April, when flows into municipal bond funds and separately managed accounts surged.

Continue reading.

Seeking Alpha

By Rob Amodeo, Portfolio Manager, Western Asset

Jun. 3, 2019

PRIMARY CRITERIA CHANGES

• Introduction of individual assessments of three new key rating factors: revenue defensibility, operating risk and financial profile
• Explicit alignment of financial profile with business profile in rating assessment
• Introduction of the Fitch Analytical Stress Test (FAST), an issuer specific scenario analysis tool measuring the effect of demand stress on revenue, operating expenses, cash flow and rates
• New metrics to enhance our analysis, including cash flow margin, adjusted debt and price sensitivity

CHANGES BASED ON MARKET FEEDBACK

• Clarification of how FAST is constructed and used, and Fitch’s decision to not publish specific out-year scenarios that could be misinterpreted as projections
• Revised nomenclature for our new ‘cash flow margin and cash flow margin – adjusted’ metrics
• Added clarity on Fitch’s approach to FASB pension plans and other post-employment benefit (OPEB) liabilities

Read the Updated Criteria.

Link to Fitch Ratings’ Report(s): Availability-Based Rating Criteria

Fitch Ratings-London-07 June 2019: Fitch Ratings has completed the annual update of its “Availability-Based Project Rating Criteria”. The update included refining the Debt Structure key rating driver and removing the reference to counterparty ratings in the assessment of Revenue Risk. This may result in Revenue Risk assessment migrating from ‘Midrange’ to ‘Stronger’ in some projects, but will not have any rating impact as revenue counterparty credit quality is still considered as part of counterparty risk.

We do not anticipate any changes to ratings of availability-based transactions as a result of the new criteria.

The report ‘Availability-Based Project Rating Criteria’ replaces the previous version of the same name published on 23 August 2018 and is available at www.fitchratings.com or by clicking the link above.

Contact:
Christiane Kuti
Director
+ 44 20 3530 1396
Fitch Ratings Limited
30 North Colonnade
London E14 5GN

Scott Zuchorski
Senior Director
+1-212-908-0659

Media Relations: Athos Larkou, London, Tel: +44 20 3530 1549, Email: athos.larkou@thefitchgroup.com

Additional information is available on www.fitchratings.com

• Calendar of new offerings jumps to highest since October
• Surge expected to come before market slowdown in July

A week after Memorial Day and with the Fourth of July on the horizon, a summer haze is in full swing in New York as the temperature creeps up and city dwellers flock to the Hampton’s on Friday afternoons. But municipal-bond traders shouldn’t pack their bags just yet.

State and local governments are so far scheduled to issue about $14 billion in municipal bonds over the next 30-days, a metric that usually captures less than half of what is actually issued because many deals are scheduled with less than a month’s notice. It’s the busiest calendar since October.

Muni-bond issuance poised for busiest month since October
One reason for the uptick could be that its easier and cheaper for local governments to issue bonds around the end of the fiscal year, after they’ve wrapped up their new budgets, suggested Patrick Luby, a municipal strategist at CreditSights. June is typically among the busiest months for new debt sales, according to data compiled by Bloomberg.

“Issuers tend to get clumpy when they come to market at the end of the fiscal year or the end of the quarter when they’re preparing their financial disclosures, it makes it less expensive to bring a new issue,” he said.

This year, they can also seize on lower borrowing costs, which have tumbled among rising speculation that the Federal Reserve will cut interest rates this year. And over the summer months, the debt payments investors receive typically far exceed the volume of new securities sales, helping support the market as bondholders seek to reinvest the cash. Citigroup Inc.’s analysts estimate that investors will receive over $90 billion more than they’ll be able to reinvest, which they said is a “bullish signal” for a market that’s already rallied this year.

While June tends to be a busy time for new debt issues, the pace typically slows considerably in July.

“Even if we get a nice little pick in June, it’s not going to last in July,” Luby said. “There’s definitely the underwriting slowdown as people pack up and head to the beach after the Fourth.”

Bloomberg Markets

By Danielle Moran

June 4, 2019, 8:14 AM PDT

Funerals have become a luxury that many Americans can’t afford. Local governments are paying the price.

Jimmy Pollard knew his state had a serious problem surrounding death. As the coroner for Henry County and a consultant for the Kentucky Coroners Association, Pollard had seen lots of instances in which family members couldn’t afford to bury or cremate a loved one. But the problem of “funeral poverty” was getting worse.

Pollard realized just how bad things had gotten when, a few years ago, the county judge approached him and said, “I’m out of money for indigent burials this year, and I’ve got six months left to go.”

Despite pleas from the judge and from Pollard, neither the state nor the county has invested more money for burials. “I tried to talk to the state judges’ association,” says Pollard, “but I could tell it didn’t really soak in. More money would help, but right now is a bad time to ask for more money in Kentucky for anything, because it’s just not there.”

Continue reading.

GOVERNING.COM

BY LIZ FARMER, MATTIE QUINN | JUNE 2019

June 6, 2019

Congressional legislation that would expand the use of private activity bonds to include so-called green bonds has been introduced by two House Democrats from Washington state as lawmakers continue to offer proposals for infrastructure investment.

The Preventing Pollution through Partnerships Act or the P3 Act introduced by Rep. Derek Kilmer, D-Wash., and original cosponsor Rep. Denny Heck, earlier this month is the same bill Kilmer proposed in the last Congress with Heck and Rep. Marcy Kaptur, D-Ohio.

The legislation would allow state and local governments to issue tax-exempt PABs not subject to state volume caps if at least 95% or more of the net proceeds are used to develop, carry out, or certify approved green infrastructure projects.

Eligible projects would be certified by the state to construct, rehabilitate, maintain, or repair infrastructure that effectively addresses nonpoint source pollution by preserving, enhancing or mimics natural infiltration, evapotranspiration, or capture of storm water.

According to an infrastructure issue brief by the nonpartisan Congressional Research Service, “Green infrastructure encompasses a range of facilities that some consider environmentally friendly, such as wind and solar energy production. As applied to stormwater management, the term refers to facilities that deal with urban runoff at the source, such as rain gardens, bioswales, and permeable pavements.”

Kilmer’s office said the P3 Act would allow governments to use PABs to finance private-sector development projects that build green infrastructure.

“For example, under this bill, municipal governments could finance a project built with private sector money to retrofit an old strip mall parking lot with permeable pavement that absorbs water rather than letting it flow into the sewer system and ultimately Puget Sound,” Kilmer’s office said.

Kilmer, who represent the Puget Sound area, said at the time of the introduction of his earlier bill that stormwater is the biggest source of pollution in Puget Sound. “That’s why we need to make it easier for communities to invest in green infrastructure for the benefit of all Washingtonians who call Puget Sound home,” he said in a press statement.

Kimler linked the economic health of his state and its identity to the future of the orca population and salmon and shellfish industries.

A CRS report published in 2016 about urban stormwater said, “Municipal bonds are the most frequently used tool for water infrastructure financing at least 70% of U.S. water utilities rely on municipal bonds and other debt to some degree to finance capital investments.”

The CRS report also said, “The growing interest in green infrastructure practices is driven to a great extent by arguments that it is a cost-effective way to manage urban stormwater problems, particularly compared with costs of gray infrastructure _ cities with combined sewer systems have documented that the use of green infrastructure practices to reduce runoff volume is cost-competitive with conventional stormwater and CSO controls.”

“In general, recent examples indicate that properly scaled and sited green infrastructure can deliver equivalent hydrological management of runoff as conventional stormwater infrastructure at comparable or lower costs. It has been estimated that green infrastructure is 5%-30% less costly to construct and about 25% less costly over its life cycle than traditional infrastructure.”

The 2016 CRS report also described examples involving New York City, Cincinnati, Louisville, Chicago, Seattle, Milwaukee and Lancaster, Pennsylvania.

CRS said green infrastructure includes green roofs, downspout disconnection, trees and tree boxes, rain gardens, vegetated swales, pocket wetlands, infiltration planters, vegetated median strips, curb extensions, permeable pavements, reforestation, and protection and enhancement of riparian buffers and floodplains.

By Brian Tumulty

BY SOURCEMEDIA | MUNICIPAL | 05/30/19 03:10 PM EDT

This week hear Lisa Schroeer talk with state analyst experts David Hitchcock and Sussan Corson about how “U.S. States Take Advantage Of A Prolonged Economic Expansion”.

Listen to audio.

Jun. 3, 2019

S&P Global Ratings maintains 280 bond ratings in the U.S. charter school space as of May 10, 2019. Given the proliferation of school networks in the sector, these ratings are affiliated with over 1,000 charter schools. Despite a minor uptick in the proportion of speculative-grade credits, most key financial performance and unrestricted cash median metrics improved modestly from fiscal 2017, reflect….

Continue Reading

Jun. 6, 2019

Earlier this month, we introduced the concept of socially responsible investing (“SRI”), discussing both its genesis and modern-day appeal to investors and financial institutions. As a reminder, SRI usually falls into two categories: use-based, socially responsible investing and the more forward-thinking “environmental, social and governance” incorporated investing (“ESG”). Use-based, socially responsible investing is easy to visualize—just think of the investor who refuses to invest in a company that supports tobacco production. ESG, on the other hand, considers environmental, community, other societal and corporate governance criteria in investment analysis and underwriting decisions. Put another way, ESG looks beyond lending and investment standards by considering both the impact of environmental and social risk on the financial system, as well as the financial system’s impact on environmental and social risks.

There is no doubt that our capital markets are going green. While the majority of ESG activity in this space has been on the equities side, debt markets have seen their share of growth in green and sustainable products. Annual reports and marketing materials published by some of the world’s largest banks now include talking points about “green finance” and “green lending.” Investors, customers, and communities are focusing their discussions on the availability of “green financing” and “green financial products”, to the point where green finance now has its own vernacular. “Green bonds”, “green loans”, and “sustainability-linked loans”, among others, have emerged as viable financing tools offered by lenders to companies focused on both the cost of capital and on social impact. “Greening the financial system” is a popular phrase used by professionals in this space.

While it is easy to throw around monikers and acronyms, generally speaking, there is a lack of understanding of green finance and green financing products. Ask someone to explain the difference between a green loan and a sustainability-linked loan and chances are you will get one of two reactions: a blank stare and corresponding lull in the conversation or a race to see whether Siri or Wikipedia provides the best answer in the shortest amount of time. In any case, the likelihood of you receiving a helpful answer from a reliable source is relatively small.

The purpose of this blog post is to clear up some of the more obvious confusion regarding green finance and green financing products. As an added bonus, we will introduce you to some of the more popular products emerging in this space. Thereafter, more detailed blog posts on these products will follow in the coming months.

Keeping in mind that no “green” dictionary currently exists and people often use terms interchangeably, sometimes with slightly different meanings, let us begin our walk through green lexicon:

“Green finance” refers to the financing (or refinancing) of new and existing public and private investments with sustainability objectives, as well as the related institutional and market arrangements that contribute to the achievement of these goals. Examples of sustainability objectives include renewable energy, conservation, and sustainable agriculture. Green finance can take many different forms, including green bonds and green loans which are discussed below. The terms “green lending” and “sustainable finance” are often synonymous with “green finance.”

“Green bonds” (also referred to as “climate bonds“) are bonds created to fund projects that have positive environmental and/or climate benefits. The majority of green bonds are “use of proceeds” bonds that earmark the proceeds of the bonds for specific projects that are designed to achieve these benefits, but are financially backed by the bond issuer’s entire balance sheet. There are several types of green bonds available, including revenue bonds and securitized bonds.

“Green Bond Principles” refer to a voluntary, high-level framework/methodology of market standards and guidelines promulgated by the International Capital Market Association that address the eligibility criteria for green projects and the monitoring and use of financing proceeds. The Green Bond Principles (“GBP”) do not require issuers to consider ESG generally or specify what constitutes a “green” project. Rather, the GBP leave the final determination as to what is “green” up to the market. A future blog post will discuss the main components of the GBP, as well as GLP and SLLP (which are discussed below).

“Green loans” are term loans that can be used to fund a range of environmental and sustainability projects, spanning areas including energy efficiency, waste and water management, green transport, sustainable farming and greenhouse gas emission reduction. Green loans may be structured as bilateral loans or syndicated loans. The hallmark of a green loan is that its proceeds are used solely to finance a pre-approved environmental or sustainability project. “Green project finance loans”(which are discussed below) fall within the ambit of green loans.

“Green Loan Principles” build off and refer to the GBP, but focus on bringing consistency to the green loan market (as opposed to the green bond market). Promulgated by the Loan Market Association and the Asia Pacific Loan Market Association, the Green Loan Principles (“GLP”) create a high-level framework of market standards and guidelines intended to provide a consistent methodology for originating, servicing and tracking green loans. The goal of the GLP is to preserve the integrity of the green loan market as it develops, while at the same time, allow the Green Loan product to retain its flexibility.

“Sustainability-linked loans” are loans designed to incentivize companies to meet their ESG targets. Unlike green loans, sustainability-linked loans do not require proceeds to be earmarked for specific purposes. In fact, the typical sustainability-linked loan is structured as a revolver for general working capital purposes. The attractiveness of sustainability-linked loans is their linkage between pricing (i.e., interest rate) and a borrower’s ESG performance. These loans are structured to offer a pricing discount (up to 5%) when a borrower meets or outperforms its ESG targets.

“Sustainability-Linked Loan Principles” build on and refer to the GBP and GLP. The first set of Sustainability-Linked Loan Principles (“SLLP”) was published earlier this year by the Loan Market Association, Loan Syndicated and Trading Association and the Asia Pacific Loan Market Association. The SLLP share the same goals as the GBP and GLP, but focus on the proliferation of sustainability-linked loans rather than green bonds or green loans. As mentioned above, a blog post regarding the SLLP (as well as the GBP and GLP) is forthcoming.

“Green banks” are banks, at both the community and national level, which specialize in financing sustainable or green projects. These banks have committed to promoting and supporting green initiatives by seeking out green projects and offering financial incentives to borrowers, including PACE loans, credit enhancement, co-investment opportunities and on-bill financing.

“Green asset finance” is a subset of asset financing that supports the financing of a variety of green assets through lease purchase, finance and operating leases. Qualifying green assets cover multiple thematic areas, such as energy efficiency, renewable energy, green transport, waste management and sustainable forestry. Green asset finance is more prevalent in Europe and Asia at this time.

“Green financial products” are financial products offered to consumers and businesses that either provide environmental benefits or reduce negative environmental impacts. Examples include green car loans, energy efficiency mortgages, green credit cards, and eco-savings deposits. Green financial products are provided by a variety of institutional lenders, including banks, credit unions and mortgage loan originators. They are available on a worldwide basis.

As you might imagine, the breadth of “green” vernacular is staggering. It would be fairly easy to put together an entire book on how to speak green as it relates to our financial system. Unfortunately, that would take more time and space than a series of blog post. Hopefully, though, this article has provided a sufficient basis for you to begin speaking green insofar as our debt markets are concerned, while at the same time given you a preview of some of the more popular green loan products that we will be highlighting in future posts. Stay tuned…

In case you missed the previous part of this series:
Part 1: An Introduction to Sustainable Lending

by Stacia Wells

Tuesday, June 4, 2019

Bilzin Sumberg

Congress passed a long-delayed bill to help places recover from past (and future) natural disasters. President Trump is expected to sign it.

After months of delay, Congress passed a $19 billion aid bill on Monday to help places recover from natural disasters that have struck over the last two years — and to help cover costs of the ones yet to come.

As the political infighting wore on this year, more natural disasters — such as flooding in the Midwest and tornadoes in the South — bumped up the price of the legislation by roughly $5 billion. It’s now one of the most sweeping disaster aid packages ever passed and heads to President Trump for his expected signature.

Communities in California, Florida and Texas — which have been ravaged by wildfires, hurricanes and floods — will likely be among the biggest beneficiaries. U.S. Sen. Dianne Feinstein says her state of California is eligible for more than $12 billion. The Texas Tribune reports that the legislation includes a provision to force the federal government to release more than $4 billion to Texas that Congress already allocated to the state a year ago.

Continue reading.

GOVERNING.COM

BY LIZ FARMER | JUNE 4, 2019 AT 1:10 PM

American Society of Civil Engineers’ Casey Dinges predicts the U.S. economy could take a major hit if lawmakers do not pass new infrastructure legislation.

“There is a hidden tax being placed on the U.S. economy right now by our current under-investment in infrastructure, so our Failure to Act economic reports showed that by the year 2025, we’re putting at risk $4 trillion in U.S. GDP, 2.5 million jobs, and $7 trillion in business sales,” Dinges told FOX Business’ Neil Cavuto on Thursday.

Dinges added that he doesn’t see infrastructure as a partisan issue, but rather “an American issue.”

“If you’re a high-tech business and you’re looking to invest in America, you’re going to be looking at the infrastructure of the community or the region you’re going to be investing in. So it’s very important, if the U.S. is going to stay competitive with the rest of the world, that we make these infrastructure investments. And if the leaders in Congress and the President are looking for a legacy issue to put their arms around, this would be a good one for the nation,” he said.

Dinges, a senior managing director, said there will be greater use of the traditional public model going forward to address infrastructure concerns, which would could equate to higher taxes on gasoline and other highway fees, as well as more public-private partnerships.

“Currently through public and private investment streams, we’re already investing $2.5 trillion. With an economy over $21 trillion a year and given how critical these investments are to the quality of life, to business, to public safety, it’s just going to become more of a challenge the longer we wait,” he said.

Last month, President Trump said he is considering an infrastructure plan that would cost between $1 and $2 trillion. The Trump administration has also said the federal government would fund 20 percent of any infrastructure plan, and give private sectors incentives to fund 80 percent of it.

Fox Business

Elise Oggioni

June 6, 2019

Parks make places nicer. Communities with parks have healthier environments for residents, with better air quality, more opportunities for active living and positive social engagement. They benefit the regional economy as well. Parks and open spaces improve real estate values to nearby residents as well as attract visitors, in turn helping local businesses.

The county and city of San Francisco understands both the social and economic benefits of parks. Using its gilt-edged general obligation pledge (the city is rated Aaa/AAA/AA+), San Francisco issued $629.06 million in bonds through five series since 2010 for its Clean and Safe Neighborhood Parks program. San Francisco Recreation and Parks Department (SFRPD) applied the proceeds to acquire, expand, and improve the parks, playgrounds and other open spaces in the city.

Continue reading.

Forbes

by Barnet Sherman

Jun 8, 2019

The U.S. municipal water landscape is undergoing a transformation as critical infrastructure services — water, gas, and electricity — converge under single investor-owned utility banners. This trend is highlighted by the growing roster of diversified infrastructure service providers owning water and wastewater utilities in the U.S., according to a new report from Bluefield Research.

The recent report, “U.S. Private Water Utilities: Drivers, Competitive Landscape and Acquisition Trends, 2019,” provides in-depth analysis of investor-owned water utility strategies and of 517 water and wastewater system acquisitions from 2015 through 2018, including Eversource Energy’s $1.68 million (USD) for Aquarion Water, NW Natural’s roll-up of smaller systems in the Pacific Northwest, and Aqua America’s $4.3 billion (USD) acquisition of People Gas.

Of the 517 transactions identified by Bluefield from 2015 to 2018, 366 of them were executed by private buyers. While ushering in new market entrants and reshaping the competitive landscape, regionally, these deals also reflect growing interest in private investment in the U.S. municipal water sector from water industry outsiders.

“The consolidation of critical infrastructure services is not a new phenomenon, and current market conditions are re-reinforcing this trend,” said Reese Tisdale, president of Bluefield Research. “It wasn’t all that long ago, in 2001, that German electric power company RWE acquired American Water for US$7.6 billion, only to spin it out in 2008. This most recent wave of M&A feels different in that municipalities and system owners are being forced to weigh the benefits of outsourcing against owning and operating a portfolio of aging assets.”

These diversified service providers now active in water are poised to gain from their proven experience with utility commissions, rate cases, customer management, and infrastructure finance. They are also going head-to-head with well-established IOUs, demonstrated by Eversource’s competing bid–against SJW Group–for northeast regional IOU, Connecticut Water. Given the mounting financial, regulatory, and environmental pressures on municipal water and wastewater systems–particularly for smaller, private system owners–the steady flow of M&A is expected to continue and open the door further to new entrants.

While the municipal market, as a whole, is highly fragmented, the private share of the market is more structured. The IOU landscape is segmented among well-established frontrunners (e.g. American Water, California Water Services, Suez), regional firms (e.g. Artesian Water, Central States Water), diversified service providers (e.g. Eversource Energy, American States), and a circling group of financial investors (e.g. PGGM, Ridgewood Infrastructure, Pacolet Milliken). Private ownership of U.S. municipal water systems currently stands at 15 percent, of which approximately half is held by these IOUs, according to Bluefield’s analysis.

“The market is increasingly dynamic, particularly when considering new market entrants and a broader need for rehabilitation of U.S. infrastructure,” says Tisdale. “Annual capital and operating expenditures for public systems are already approaching US$60 billion and US$90 billion by the end of the decade, respectively. What is more concerning is that this does not fully account for the looming external pressures on system operators, including larger, more frequent stormwater events, algae blooms, and PFAs remediation that will heighten needs for capital, operating experience, and advanced technologies.”

Underpinning this scaling interest in municipal water infrastructure investments from outsiders and insiders is a more favorable policy environment enabling acquisitions of community water and wastewater systems. Fair Market Value (FMV) policies in nine states–and pending legislation in others–are incentivizing municipalities to sell utilities based on appraised value rather than book value. Still, more than 60 percent of acquisitions are for private systems, rather than those owned by municipalities.

“There is no one answer to addressing aging water infrastructure in the U.S., including ownership, private or public,” adds Tisdale. “What we are seeing through M&A and evolving ownership structures, is an indication that municipalities, utility leaders, and regulators are beginning to change their thinking.”

BY WFM STAFF

JUNE 10, 2019

Link to Fitch Ratings’ Report(s): U.S. Public Power Rating Criteria

Fitch Ratings-New York-03 April 2019: Fitch Ratings has published the final, revised version of its sector-specific criteria report titled “U.S. Public Power Rating Criteria”. This follows Fitch’s June 14, 2018 exposure draft outlining various proposed changes to the criteria for which Fitch sought market feedback. Fitch’s previous criteria report from May 18, 2015 and the noted exposure draft have both been retired.

Fitch has also published a special report titled “Feedback Report: U.S. Public Power Rating Criteria” that reviews the market feedback received on the noted exposure draft and Fitch’s responses. Fitch made no substantive changes to its exposure draft as a result of market feedback. However, Fitch did include select changes to key rating drivers and the scenario analysis tool in the final criteria report. Primary changes to the rating criteria incorporated in the exposure draft and retained in the final revision are described below.

PRIMARY CRITERIA CHANGES

–Introduction of three key rating factors: revenue defensibility, operating risk, and financial profile;
–Individual assessments for each key rating factor;
–Financial profile alignment with business profile in rating assessment;
–Forward looking consideration of the impact of existing or needed capital investments that may increase financial leverage;
–Introduction of FAST, an issuer specific scenario analysis tool measuring the effect of demand stress on revenue, operating expenses, cash flow and rates.

RATINGS IMPACT

Fitch does not expect the proposed criteria revisions to trigger widespread rating changes, nor will the implementation curtail or influence normal rating migration. Within the next week, Fitch plans to publish rating action commentary to designate various ratings that could potentially be affected by the changes in the criteria as Under Criteria Observation (UCO). However, not all of the ratings designated as UCO will necessarily experience rating changes.

Rating changes will most likely reflect the criteria’s heightened emphasis on leverage through the cycle, with upgrades reflecting relatively low leverage, and downgrades resulting from the recognition of higher leverage and/or elevated operating risk. In addition, Fitch also expects that debt ratings of issuers may be designated as UCO, where additional new information required under the revised criteria is currently unavailable and further analysis is necessary to assess the effect of the criteria on the rating. Overall, Fitch estimates fewer than 10% of the ratings covered by the criteria will be affected over time, with a roughly equal mix of upgrades and downgrades.

Fitch will review all of the ratings designated as UCO as soon as practical, but designation must be resolved within six months.

For more information, the full reports titled “U.S. Public Power Rating Criteria”, “Feedback Report: U.S. Public Power Rating Criteria”, “FAST Public Power – Fitch Analytical Stress Test V 1.1.1 and “FAST Public Power – Fitch Analytical Stress Test, Description and Model Foundation” are available at www.fitchratings.com.

Contact:

Dennis Pidherny
Managing Director
Fitch Ratings, Inc.
+1-212-908-0738
33 Whitehall Street
New York, NY 10004

Kathy Masterson
Senior Director
+1-512-215-3730

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

Additional information is available on www.fitchratings.com

Link to Fitch Ratings’ Report(s): U.S. Public Finance Tender Option Bond Rating Criteria

Fitch Ratings-New York-31 May 2019: Fitch Ratings has published the following updated report: “U.S. Public Finance Tender Option Bond Rating Criteria.” This report updates the prior report published on March 22, 2019. The key elements of Fitch’s tender option bond rating criteria remain consistent with those of its prior criteria report.

Contact:

Joseph Staffa
Senior Director
+1-212-908-0829
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Dennis Pidherny
Managing Director
+1-212-908-0738

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

Additional information is available on www.fitchratings.com

What can help local governments finance critical new infrastructure, help cities better-weather a recession and save local taxpayer money? It’s not a miracle, nor is it a novel concept. Up until the passage of the Tax Cuts and Jobs Act in 2017, municipalities were able to use a tool known as advance refunding bonds to lower interest rates and achieve cost savings to spend on other local priorities.

Similar to a home mortgage refinancing, advance refunding bonds allowed a city, town or village to refinance outstanding bonds to take advantage of lower interest rates. Over the years, the tool helped save communities substantial amounts of local dollars. The Government Finance Officers Association (GFOA) estimates that advance refunding bonds saved state and local governments a minimum of $14.3 billion between 2012 and 2017.

In Houston, we used tax-exempt advance refunding bonds to save the city $186.6 million between 2016 and 2017 alone—the last two years the tool existed. These were useful savings — particularly in the wake of one of Houston’s most devastating natural disasters — Hurricane Harvey. Not to mention unrealized savings could otherwise be used to fix deteriorating infrastructure, hire police officers or build a neighborhood park. Restoring the tax exempt status enables us to better prepare for the next disaster while meeting the growing demand for essential services in a growing city.

Advance refunding bonds also provided communities like Houston with a tool to better endure recessions. Interest rates tend to fall during economic downturns; at the same time, local property and sales tax revenues plummet for cities. These bonds would allow us to change an otherwise fixed cost when our residents and cities hit hard times.

And while we may be the fourth largest city in America, communities of all sizes—big and small—have used the tool to reach savings of at least three to five percent on their bonds. That’s real savings for any community. And, that’s real money for new bridges, better schools, safer communities, cleaner water and lower property taxes.

So, as Chair of NLC’s Finance, Administration and Intergovernmental Relations (FAIR) Committee, I welcomed the introduction of the Investing in Our Communities Act (H.R. 2772), which would restore tax-exempt advance refunding bonds. I also applaud the Chairs of the House Municipal Finance Caucus—Congressmen Ruppersberger (D-MD-2) and Stivers (R-OH-15)—who introduced the bill earlier this month. More than ever, our communities need bipartisan, commonsense policy.

Now as local leaders, it’s on us to build both awareness for this critical tool and support for H.R. 2772. Call on your members of Congress and make sure federal leaders in Washington know what bonds have built in your community.

National League of Cities

By NLC Staff

May 30, 2019

Summary

• With the proportion of retired pensioners and lifespans increasing across the globe, many governments face a challenging dilemma: how to raise enough tax revenues from the young to pay for the pensions promised to the retired?
• Pension liabilities didn’t rattle US municipal bond markets much before the financial crisis a decade ago.
• Illinois bond ratings are already skating just one notch above “junk” status. If Illinois gets downgraded, the pain could be sharp.

Once upon a time, US municipal bonds were generally considered less risky than corporate bonds. Backed by the full faith and credit of state governments, investors had confidence they would receive their principal plus interest without fail. Times have changed. For some states and local governments, decades of financial mismanagement and massive pension liabilities are threatening to upend the full faith and credit pledge. In this article, Franklin Templeton Fixed Income takes a look at the situation, with Illinois being an example of a particularly dire case.

As municipal bond analysts, assessing pension risks hinges partly on the willingness of elected officials to implement tangible pension reforms. Absent that, large pension obligations can significantly degrade budgets, credit quality, and eventually impair bondholders.

Continue reading.

Franklin Templeton Fixed Income Group

By Sheila Amoroso, Senior Vice President, Director, Municipal Bond Department; Daniel Workman, CFA, Vice President, Portfolio Manager; Jennifer Johnston, Vice President, Research Analyst; and John W. Wiley, Senior Vice President, Portfolio Manager, Franklin Templeton Fixed Income Group

May 30, 2019

Investors are hungry for yield, and they appear to be satisfying that hunger with risky, high-yield municipal bond funds.

In fact, investors have poured $8 billion into funds that deal in high-yield muni bonds – or junk munis – this year, according to Refinitiv data. That’s the most in nearly three decades.

“I would be worried about this,” Scott Clemons, chief investment strategist at Brown Brothers Harriman, said on Yahoo Finance’s “The First Trade.”

“We’re advising our clients to not chase yield. The trade-off of risk and return is just unappealing,” Clemons said.

Even the largest Wall Street firms are hedging their bets. Goldman Sachs’ $7.3 billion High Yield Municipal Fund, had about 62% of its assets in investment-grade securities by the end of April.

Falling Treasury yields, coupled with expectations for a possible interest rate cut from the Federal Reserve, have investors chasing higher returns in the lowest-rated and riskiest muni-bonds.

Liquidity, stability, income

So far, that bet has been paying off. According to FactSet data, high-yield munis are up 5.5% this year after outperforming stocks,Treasuries and corporate bonds in 2018.

Municipal bonds are also historically attractive to investors because they are one of the few remaining tax-shelters left.

The downside, though, is that if enough of these risky municipal projects default, those attractive yields will quickly reverse.

About 2.5% of non-investment-grade munis are currently in default, according to Municipal Market Analytics.

Clemons points out that fixed-income markets offer three main benefits to an investor’s portfolio: liquidity, stability, and income.

“In this kind of interest-rate environment,” Clemons said, “those benefits are fragmented. So you, as an investor, have to decide. If it’s all about yield, you’re going to have to give up some stability, maybe some liquidity. But if it’s all about stability and liquidity, there’s not a lot of yield attached to that.”

Yahoo Finance

by Alexis Christoforous

May 28, 2019

Alexis Christoforous is co-anchor of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.

Abstract

Seeking ways to maximize the social and economic returns of their place-based impact investments, foundations, CDFIs, private investors, and others are turning to collaboration. To support these efforts and facilitate lesson sharing, the Urban Institute and Mission Investors Exchange have produced a set of three practitioner briefs designed to focus on elements of place-based impact investing that research and conversations with practitioners have identified as opportunities for knowledge exchange. Each brief presents a concept, highlights practitioner examples, and elevates lessons from the field.

The briefs are:

• Mapping and Assessing Local Capacities and Opportunities for Place-Based Impact Investing
• Place-Based Impact Investing Ecosystems: Building a Collaboration to Boost Your Effectiveness
• Collaborative Place-Based Impact Investing Models: Deploying Capital on the Ground Together

The Urban Institute

by Erika C. Poethig, Matt Onek, John Balbach, Nhadine Leung, Shena Ashley, Melanie Audette, Brett Theodos & Matthew Eldridge

May 30, 2019

MUNIS IN FOCUS: Joe Mysak, Editor Bloomberg Brief: Municipal Market, discusses how the bond rally and trade tensions are impacting the muni market. Hosted by Lisa Abramowicz and Paul Sweeney.

Running time 05:58

Play Episode

May 31, 2019

Eric Glass, portfolio manager at AllianceBernstein, discusses the factors behind the flattening of the municipal bond yield curve and looking for infrastructure and climate change investments. He speaks with Bloomberg’s Taylor Riggs in this week’s “Muni Moment” on “Bloomberg Markets.”

Watch video.

Bloomberg Markets – Muni MomentTV Shows

May 29th, 2019, 9:20 AM PDT

Fourth place is still way behind S&P, Moody’s and Fitch.

Quick — name the world’s fourth-largest credit ratings company.

Most fixed-income investors can easily rattle off the so-called Big Three — S&P Global Ratings, Moody’s Investors Service and Fitch Ratings, which combined represented 95.8% of all outstanding U.S. ratings at the end of 2017, according to a Securities and Exchange Commission report. But after that, the remaining sliver of the market is something of a free-for-all, with firms like A.M. Best Co., DBRS Ltd., Kroll Bond Rating Agency and Morningstar Credit Ratings carving out niches where they can serve as alternatives to the top three.

But back to fourth place. Congratulations to those who knew DBRS, formerly known as the Dominion Bond Rating Service. The Toronto-based company, created in 1976 and acquired in 2014 by the Carlyle Group and Warburg Pincus, has a sizable footprint in Canada and, to a somewhat lesser extent, the European Union.

Continue reading.

Bloomberg Markets

By Brian Chappatta

May 31, 2019, 4:30 AM PDT

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

The lesson for cities from the experiences of the past decade: Even revenue sources long considered reliable can be volatile.

One of the most significant managerial challenges for state and local budget officers is to accurately forecast revenues and expenditures in coming years. Errors are inevitable, of course, and yet many elected officials continue to live in the hazy delusion that once they’ve balanced a budget based on seemingly solid forecasts, it’s going to stay balanced. This, as we know all too well in hindsight, is often not the case; forecasting is as much art as science, and predicting upcoming revenues precisely can be as much attributable to luck as to intellect.

Consider the National League of Cities’ annual survey conducted at the start of the Great Recession. It asked a sample of city chief financial officers: “Overall, would you say that your city is better or less able to meet financial needs in the current fiscal year than last year? In the next fiscal year compared to this fiscal year?”

The response to the survey suggested that, overall, most CFOs and their staffs were blind to an upcoming fiscal disaster despite warning signs such as the unfolding subprime mortgage crash. Over half (55 percent) responded that they expected their city would be in a better position in 2008 to meet their financial needs than in 2007. When asked the question in 2008 about their fiscal position in 2009, that percentage plummeted to just over 20 percent. No great surprise there. It’s much easier for fiscal managers to make an accurate prediction of hard fiscal times when they’re already dealing with them.

One element of overoptimistic thinking among budget managers as the recession began was the notion that sales taxes would continue to provide a steady flow of revenues. Nearly one in four (24 percent) of cities that collected sales taxes were confident in 2008 that 2009 would be a healthy year for their economies. In fact, state and local general tax receipts fell by $16 billion in 2009 from their 2008 levels, a decline of 3.5 percent as the recession hiked unemployment and diminished consumer spending.

But although the recession’s negative impact on sales taxes should not have been the surprise it was, it’s perhaps easier to understand why the decline in property values and the tax revenues based on them was so largely unforeseen, given the traditional management wisdom among the men and women responsible for keeping programs intact without the need to raise taxes.

The widely held belief is that the property tax is reliable. That’ s part of the reason why many cities have long been happy to depend so heavily on their property taxes, despite the fact that citizens tend not to like them very much for understandable reasons: For one thing, in most communities the bill arrives once a year, so its size is opulently evident. Additionally, it can be painful to accept the idea that an ostensibly good thing — rising property values — only pays off when the property is sold. Up until then it’s increasingly difficult to pay ever-rising levies.

Still, the benefits of property taxes to cities have long made them an attractive source of revenue. For one thing, when property values drop, tax receipts don’t immediately plummet –they take some time to find a new equilibrium point. Further, property is immovable. When taxes on your home go up, you can’t loft it into the air and move it to a lower-tax community. Unlike the volatile sales and wage taxes, the traditional thinking among budget forecasters is that the property tax can be counted on to moderate the ups and downs of other government revenues.

But logic to the contrary, it turns out that property taxes aren’t necessarily and always an immutable source of revenue on which forecasters can count. Consider Albuquerque, a city that witnessed solid year-over-year increases in its property tax receipts between 2002 and 2010, from $72 million to $133.3 million — an average annual growth rate of 10 percent. Then the effects of the Great Recession on property values hit in 2011, and the year-over-year growth rate between fiscal years 2011 and 2018 didn’t even keep up with inflation, averaging 1.3 percent per year.

Although the impact on Albuquerque’s total budget was modest due to the city’s heavier reliance on other taxes, the less-than-robust growth in the real-estate market contributed to the city’s forecasts of drawing down reserves in the near term and projecting deficits for next year. As painful as that may be, Albuquerque has fared better than some cities with its property taxes: Miami also expected a typical bump in property tax revenues in 2010, but instead experienced a nearly $20 million downturn from the previous year, followed by a $37 million decline in 2011.

The lesson in all this is that elected officials and financial managers must be prepared for the notion that traditional wisdom is not immutable and that counter-cyclical devices — a robust rainy day fund remains a terrific tool — are critical parts of a well managed city.

governing.com

By Michael A. Pagano | Contributor

Dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago and director of UIC’s Government Finance Research Center

MAY 29, 2019 AT 4:00 AM

• Baltimore ransomware attacks underscore threat: Breckinridge
• More than 20 ransonware attacks on municipalities this year

Huge pension debt. Crumbling infrastructure. Climate change. Now add cyberattacks to the list of things that municipal bond investors should worry about.

The recent ransomware attack that shut down some of Baltimore’s computers, the second in 15 months, underscores the growing credit risk that cyberattacks pose to states and cities, according to Breckinridge Capital Advisors. The May 7 attack on Baltimore has hobbled the city’s ability to collect water bills, property taxes, and parking revenue. It also shut down the city’s system to process home sales. Baltimore’s general obligation bonds, like much local debt, is payable by property taxes, which makes up about half of the city’s revenue.

Cyberattacks also threaten to erode public confidence in government and can suggest weak governance, wrote Alriona Costigan, a vice president at Breckinridge and Jesse Starks, the firm’s chief technology officer.

“Cyberattacks can hurt issuers’ reputations, evidenced by the fact that many cities and states avoid reporting them,” they wrote. “However, the lack of consistent reporting of cyberattacks could leave many issuers complacent about the risks or unaware of some of their own vulnerabilities.”

This month’s cyberattack in Baltimore follows last year’s high profile ransomware attack in Atlanta, which cost the city an estimated $17 million to fix, about 2.6% of the city’s budget, according to Boston-based Breckinridge, which oversees more than $37 billion in high-grade fixed income assets. There have been at least 24 reported ransomware attacks on municipalities this year, including Greenville, North Carolina, and 46 last year, according to Moody’s Investors Service.

Smaller Targets

A study by the Massachusetts legislature reported 26 million attempts to access the state’s computers in a one-hour period between 1 a.m. and 2 a.m. on Sept. 13, Breckinridge said.

In a ransomware attack, hackers infiltrate a computer system and deploy malicious software that locks a victim’s data until the owner pays a ransom. Baltimore has refused to pay a ransom of around $100,000 worth of Bitcoins. The event is unlikely to have a material effect on the city’s finances and Baltimore hasn’t missed a debt service payment, Moody’s said May 27.

Cyberattacks could have even more harmful affects on smaller state and local governments, which have less funding for cybersecurity and may see themselves as less of a target that big cities or states.

“Ransomware criminals may see smaller school districts or towns as easier targets, as their focus on cybersecurity is less than that of larger cities such as Los Angeles, which has a cybersecurity working group in place,” Costigan and Starks wrote.

Investors need to determine whether states and local governments take cybersecurity seriously as a risk and issuers need to assess and share information about the defenses in place against cyberattacks, according to Breckinridge. Investors should also evaluate a municipality’s preparedness for a cyberattack by evaluating whether they have a written response plan, the size of the cybersecurity budget and the presence of cyberinsurance.

“Even the most ironclad technological and physical defenses can be breached, so preparedness for cyberattacks is important to assess as a credit issue,” Costigan and Starks wrote.

Bloomberg Cybersecurity

By Martin Z Braun

May 29, 2019, 10:29 AM PDT

Ransomware attacks are becoming more sophisticated and taking longer for governments to recover from. Some of Baltimore’s services have been down for nearly a month.

SPEED READ:

• Baltimore suffered a ransomware attack nearly a month ago and has yet to restore critical networks.
• The city refuses to pay the hackers and is asking the federal government for financial aid.
• Ransomware attacks on governments are on the rise — and becoming more sophisticated.

Cyberattacks on local governments are on the rise — and they’re becoming more sophisticated. The latest case in Baltimore, where the city is still struggling to restore critical networks more than three weeks after being hacked, could be a harbinger of things to come.

Continue reading.

GOVERNING.COM

BY LIZ FARMER | MAY 30, 2019 AT 5:21 PM

We have written about how the public-private partnership (P3) project delivery model can and should be used to meet infrastructure needs. Because P3s are constantly being considered and tested all over the country, we wanted to provide an update on the status of these projects so that interested stakeholders can easily keep an eye on the market overall. Our first installment of the National P3 Update will focus on higher education and social infrastructure P3s. We will issue more updates on these projects, as well as updates on projects in other industry sectors.

Travis County Civil and Family Courts Facility P3: The Travis County Courthouse P3 reached financial close on May 9, 2019. The facility, located in Austin, Texas, is a 430,000 square foot civil and family court facility that is set to be complete in 2022.

Santa Rosa Junior College Student Housing P3: Santa Rosa Junior College selected Servitas as its preferred bidder for its student housing P3. The project is to design, build, finance, operate, and maintain a 360-student housing facility. The other shortlisted developers were Greystar and the Michaels Organization.

Vanderbilt University Student Housing: Vanderbilt selected Lendlease as its preferred bidder to design, built, operate, and maintain a graduate and professional student housing village.

Miami-Dade County Courthouse P3: Miami-Dade County shortlisted three respondents for its Civil and Probate Courthouse P3—teams led by Meridiam/EllisDon, Plenary, and Sacyr. The County will issue a RFP in the coming weeks, with responses due by the end of July.

California State University, Fresno Central Heating and Cooling Plant Modernization P3: Fresno State shortlisted four respondents for its Central Heating and Cooling Plant Modernization P3 in April 2019. The shortlisted teams include Bulldog Energy Alliance, Bulldog Infrastructure Group, Plenary Utilities Fresno, and Victor E. Energy Partners. The project is for the design, build, finance, and maintenance of a central utility plant, ancillary infrastructure, and implementation of energy efficiency upgrades all over campus. A RFP is to be issued this fall.

Alabama Department of Corrections P3: The Alabama Department of Corrections is analyzing five responses to its Request for Expressions of Interest for the construction of three new prison facilities. The respondents were tasked with identifying the scope of the agreement. A RFQ will be issued this quarter, with a RFP to be issued in the fall.

Dartmouth Heating P3: Dartmouth College received responses to the Request for Qualifications for its Heating Plant and Distribution System project in late April. Three of the teams that submitted were Fengate/Ameresco/WorleyParsons, Kiewit/Enwave, and Merdiiam/ENGIE North America. The project is to design, build, finance, operate and maintain a thermal generation facility that will be powered by a renewable fuel source, as well as a new hot water distribution system. The shortlist is expected to come out in June, with issuance of a RFP in September and selection in 2020.

City of Los Angeles Civic Center P3: The City of Los Angeles issued a Request for Qualifications for the Los Angeles Civic Center P3 on April 2, 2019. Responses are due on May 28, 2019. The project is a design, build, finance, operate, and maintain that will include a government office facility, childcare center, and conference center. The city expects to issue a RFP at the end of 2019, with responses due in the beginning of 2020 and award and execution of a project agreement at the end of 2020.

by Elise Holtzman

Friday, May 24, 2019

© 2019 Bilzin Sumberg Baena Price & Axelrod LLP

In the last twelve months, four national public-private partnerships (“P3s”) have been financed in the U.S. private placement market, accounting for over $800 million in project cost financing. While there has been a shift towards private placement investors as a P3 financing source, the market activity in the last year has confirmed investor appetite in P3s, particularly those with availability payment-based compensation structures.

Private placements are securities offerings to limited numbers of sophisticated investors. These offerings are exempt from registration under the U.S. Securities Act of 1933. Conservative, long-term investors, such as insurance companies and pension funds, tend to dominate the U.S. market. While private activity bonds and TIFIA loans present cheaper financing options, they are not available as financing sources across certain asset classes, including social infrastructure and smart city initiatives. Many features of the traditional private placement market align with financing features of the P3 market. For example, private placement investors favor long-term debt, with tenors of 30 years or more depending on the project, far exceeding the short tenors available in the bank finance market. In addition, as private placements in the P3 context are typically closed with a small number of investors, the project benefits from more flexibility in financing terms and, if needed, a simplified process for amendments and waivers over the life of the project, as compared to similarly-tenored bond financings. Finally, because of their long tenors and fixed credit spreads, private placements minimize project refinancing risk.

In addition, private placements offer significant benefits during the proposal phase for both the public and the private sectors. With credit spreads typically fixed at the time of the financial proposal, private placement financings are beneficial from a grantor’s perspective as credit spread risk protection between the time of proposal and financial close is not necessary. In addition, bid costs, particularly as compared to bond financing solutions, tend to be lower with private placement financing solutions, and there are no public rating requirements (even though a least one public rating is customary.)

The rise in P3 private placement offerings is a particularly strong trend when considered in the context activity in the U.S. private placement market. In the first quarter of 2019, the dollar volume of private placements has fallen by 30% as compared to the same period last year. With more infrastructure projects on the horizon that do not benefit from federal financing alternatives, such as Dartmouth’s proposed biomass energy heating facility and student housing project, as well as Fresno State’s proposed heating and cooling plant.

by Andrej Micovic & Albert E. Dotson, Jr.

Thursday, May 30, 2019

© 2019 Bilzin Sumberg Baena Price & Axelrod LLP

Shrinking cities can have their drinking water sit in pipes longer than desired, leading to high levels of metals, bacterial growth, and other problems.

The geographic locations where Americans live are shifting in ways that can negatively affect the quality of their drinking water.

Cities that experience long-term, persistent population decline are called shrinking cities. Although shrinking cities exist across the United States, they are concentrated in the American Rust Belt and Northeast. Urban shrinkage can be bad for drinking water in two ways: through aging infrastructure and reduced water demand.

Continue reading.

CITY LAB

MAY 31, 2019

Another Infrastructure Week (the real one) just wrapped up, and after seven years many of the core themes remain the same. Crumbling roads and bridges. Desperate calls for new investment. A high national price tag for repair and revitalization. Little progress.

What makes this year different is a $2 trillion announcement and the continued drama of White House and Congressional meetings to motivate action. But are major media announcements what the country needs to reform how we invest in infrastructure?

The answer is no. Federal leaders need to recognize and reward places that take the initiative on infrastructure investment. Otherwise, there will be a continued lack of action. Instead of big dollar announcements, setting expectations that proactive state and local investments will be rewarded—for example, with matching funds—can have far more immediate value.

Continue reading.

The Brookings Institute

by Shalini Vajjhala

Tuesday, May 28, 2019

More than half of mayors discussed it during their annual State of the City addresses this year — double the number four years ago.

SPEED READ:

• Infrastructure was the second-most popular topic in mayors’ annual addresses this year.
• Twice as many talked about infrastructure than in 2016.
• On the federal level, prospects for an infrastructure package have dimmed.

As the prospects for a federal infrastructure package this year become vanishingly thin, mayors are becoming more concerned about infrastructure in their own cities.

More than half of mayors (57 percent) discussed infrastructure at length during their annual State of the City addresses this year, according to a new report by the National League of Cities (NLC). That made it the second-most popular topic for the second year in a row, trailing only economic development.

It’s no surprise that infrastructure ranks high among mayors’ concerns. After all, there aren’t many problems more commonly associated with local government than potholes and leaky pipes. But mayors are talking about it more often than in recent years. Only 31 percent of mayors discussed infrastructure in their annual speeches in 2016, climbing to 48 percent in 2017 and reaching roughly 60 percent in the last two years, the NLC noted.
“Infrastructure improvements are often not all that visible to the general public. They don’t typically garner a great deal of attention — though their failure certainly does,” Mayor Patrick Madden of Troy, N.Y., told residents. “Nonetheless, they are essential to preserve our assets and ensure the continued reliability of services and quality of life to our residents.”

More Than Roads

The most popular infrastructure topics in the mayoral addresses were roads, streets and signs. But mayors also highlighted their work in other areas.

Roughly a third of them mentioned water infrastructure, pedestrian facilities or infrastructure spending. Nearly a quarter mentioned public transit.

Topics that are closely related to infrastructure were popular, too: 63 percent of mayors mentioned parks and recreation, while 41 percent discussed energy and the environment, according to the report.

In Niagara Falls, N.Y., for example, Mayor Paul Dyster pushed for streetscapes that accommodate all kinds of users — not just auto traffic.

“Having a Complete Streets plan recognizes that our streets belong to everyone — pedestrians and cyclists as well as motorists — and so [it] enhances safety and improves aesthetic appeal and the quality of life in our neighborhoods,” he said in his annual address.

Infrastructure Problems

Mayors gathered in Washington, D.C., last week to discuss the report and how they’re handling infrastructure in their cities.

Mayor Lily Mei of Fremont, Calif., said her town is trying to prepare for the arrival of a new Facebook campus and the strain it will put on local roads. At the same time, the city is working with the school district to encourage students to walk and take alternative modes of transportation to school.

“If you want the students to be able to take public transportation, it requires conscientious programs, such as giving them bus passes [and] teaching them how to ride,” she said.

For Mayor Karen Freeman-Wilson of Gary, Ind., one of the biggest infrastructure challenges is the “transformation of public housing.” The housing authority there tore down 500 units in the last six months, as demand for them waned and the apartments fell into disrepair. But the condition of the remaining units is still a concern, she says. When she gets complaints, she not only visits the units herself, she insists that the director of the housing authority join her.

“I want him to see — I want his managers to understand — that it’s important that people not only have a roof over their heads, but they have a place that they can call home,” she said.

In the suburban Florida community of Miramar, near Miami, Mayor Wayne Messam said he is concerned about the impacts of climate change and sea level rise.

“Many South Florida communities have to elevate the streets. We have to fortify our utility systems. Currently right now in Miramar, we’re spending over a hundred million dollars in our infrastructure to improve our water distribution systems,” he said.

That White House Meeting

The mayors shared their infrastructure concerns a day after a White House meeting on infrastructure ended abruptly. President Donald Trump left the room after just a few minutes of meeting with House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer, both Democrats.

The trio had planned to talk about how to pay for a $2 trillion infrastructure plan, but the prospects of that happening during Trump’s first term have now all but evaporated.

The mayors said their work would have to continue, despite the federal inaction.

“While some people are taking a pause,” said Mei, the Fremont mayor, “we can’t just sit there and wait for the action to happen.”

GOVERNING.COM

BY DANIEL C. VOCK | MAY 28, 2019 AT 9:46 AM

This study investigates whether investors are willing to trade-off wealth for societal benefits. We take advantage of unique institutional features of the municipal securities market to provide insight into this question. Since 2013, over $23 billion Green Bonds have been issued to fund eco-friendly projects. Comparing Green securities to nearly identical securities issued for non-Green purposes by the same issuers on the same day, we observe economically identical pricing for Green and non-Green issues. In contrast to a number of recent theoretical and experimental studies, we find that in real market settings investors appear entirely unwilling to forgo wealth to invest in environmentally sustainable projects. When risk and payoffs are held constant, municipal investors view Green and non-Green securities by the same issuer as almost exact substitutes. Thus, the “greenium” is essentially zero.

Download the Study.

Stanford Graduate School of Business

By David F. Larcker, Edward M. Watts

February 22,2019

Working Paper No. 3766

Fitch Ratings-New York-23 May 2019: US states’ revenue data through the key tax collection month of April indicate generally positive results for widely varying reasons, but continued revenue volatility brings into question the sustainability of the positive trend, says Fitch Ratings. The December 2017 federal Tax Cuts and Jobs Act (TCJA) contributed to observed volatility, but other federal actions, namely the US Supreme Court’s Wayfair decision, likely played a role as well. Revenue volatility will not generally affect ratings in the short term but it does make revenue forecasting more complex and challenges states’ ability to manage their budgets.

April 15 is the tax filing deadline for nearly all states. Of the 32 states reporting monthly revenues through April and reviewed by Fitch, 31 indicate yoy growth. The median growth rate is 6.3%, consistent with last year’s trend. Personal income tax (PIT) results remain a key driver. State PIT collections rebounded in April from January’s weakness. The median change in PIT revenue accelerated from a 1% yoy decline through January, with 34 states reporting, to 5.7% growth through April, with 28 states reporting.

While very few states reported details, Fitch believes non-withholding PIT collections are a key driver in the stronger April performance. Connecticut, Massachusetts, Montana and Virginia reported withholding versus non-withholding results and, in all four, trends in withholding collections were relatively consistent between January and April but the pace for non-withholding collections improved sharply in April.

Continue reading.

23 MAY 2019 02:04 PM ET

Now Available On-Demand

Fitch’s webinar discusses our recent report on U.S. state and local pension investment portfolios. We discuss the trend of public pension plans increasing their investment allocations in riskier asset classes over the past two economic cycles, raising their potential volatility and exposing participating governments to higher funding risks, including potentially higher contributions.

Register for the Webinar.

The metamorphosis of U.S. not-for-profit healthcare into a more consumer-driven and population-health focused model will continue. No one knows for sure what change or challenges lie ahead, but as Heraclitus said around 500 BC, ‘Change is the Only Constant’.

Non-Traditional Entrants

Non-traditional competitive entrants aiming to design healthcare around the consumer began in earnest two decades with the arrival of WebMD, though it has reached a crescendo of late with Amazon, Apple and Haven now leaving their mark. “Consumerism” is no longer a new buzzword for not-for-profit healthcare but rather a concept that will radically overhaul healthcare delivery over the longer term.

The inexorable rise of consumerism will result in a more competitive operating environment across the acuity spectrum, particularly on the front-end where non-traditional competitors will get between more traditional providers and their patient at the earliest possible stage. A successful response to this will either require significant rethinking of the entire patient experience and care re-design around the consumer versus “the system”, or at the very least, some level of partnership that might reduce capital and technological spending, but which has the impact of resulting in a “half a loaf is better than none” strategy.

Legislative Changes

The legislative environment has also changed immeasurably for not-for-profit healthcare. The political debate that led to the passage of the Affordable Care Act (ACA) a few years ago has come full circle, with many prominent Democratic presidential hopefuls now espousing a “Medicare-for-All” approach. While “Medicare-for-All” has a very low likelihood of happening, it would be a significant net negative for rated not-for-profit hospitals. Realistically, ‘a “repair and replace” of the ACA is more likely with public option really dictating how it is ultimately designed.

If constructed as an independent quasi-governmental authority where hospitals could negotiate rates and terms, this could expand coverage considerably to many patients who would then have insurance that pays at something close to commercial rates. Conversely, if public option prefers an add-on to Medicare, this could have the possibility of being a “back door” to Medicare-for-all.

Conclusion

Change and challenge lie ahead for not-for-profit hospitals and health systems. Despite recent heavy headwinds, the non-profit healthcare sector has historically been successful over an extended period of time — through ups, downs, and through constant change. Here’s to the next twenty years!

whyforum.com

by Kevin Holloran

May 21, 2019

• Nuveen is among the biggest investors in high-yield muni bonds
• Closed-end fund prospectus registered Thursday with the SEC

Nuveen, a perennial bull on risky municipal debt, is planning a new fund to invest in state and local government bonds in distress, default or in bankruptcy, according to a securities filing.

Nuveen’s Municipal High Yield & Special Situations Fund, a closed-end fund, will also invest in securities with complex structures that would render them unsuitable for certain investors, according to a preliminary prospectus filed Thursday with the U.S. Securities and Exchange Commission.

“Special situations municipal securities, in particular, offer complexity risk premiums (stemming from the work-out expertise required to negotiate security improvements, including rate covenants, reserve funds and other security structure enhancements), which in turn may create significant investment opportunity for the Fund,” Nuveen said in the filing.

Nuveen’s move comes as investors including Goldman Sachs Group Inc. and Knighthead Capital Management are wagering there’s a coming wave of defaults in the municipal-bond market as the economic cycle turns and distressed cities and speculative projects have trouble paying back loans.

Nuveen has led a charge of investors into riskier municipal bonds to finance shopping malls, refineries, charter schools, assisted living centers and waste-to-energy facilities. Nuveen, which runs a $19.5 billion high-yield municipal bond fund, is the largest investor in Virgin Trains USA — a new privately-operated railroad that runs from Miami to West Palm Beach and is expanding to Orlando. It also owns debt sold for the American Dream shopping mall and indoor amusement park in New Jersey’s Meadowlands.

Demand for high-yield muni debt, coupled with a lack of new supply, has driven the sector to a 5.5% return this year, according to the Bloomberg Barclays index.

Nuveen spokeswoman Kristyna Munoz declined to comment, citing a quiet period between the filing of the registration and the initial public offering of the shares.

The fund will invest 65% of assets in unrated bonds or those with grades of BBB or lower and will use borrowed money to buy bonds. The fund will be operated as an “interval fund,” a type of investment company that periodically offers to repurchase its shares from shareholders rather than trading in the secondary market.

Still, it may be hard for the fund to put money to work as default rates are much lower than the corporate or sovereign bond markets. From 2007 through 2016, a key default rate on municipal bonds graded by Moody’s Investors Service was 0.15%, compared with 6.92% for corporate debt.

Bloomberg

By Martin Z Braun

May 24, 2019, 9:53 AM PDT

— With assistance by Amanda Albright

John Carney, head of municipal strategy at BlackRock, discusses the factors behind the strength of the high-yield municipal bond market. He speaks with Bloomberg’s Taylor Riggs in this week’s “Muni Moment” on “Bloomberg Markets.”

Watch video.

Bloomberg Markets – Muni MomentTV Shows

May 22nd, 2019, 9:43 AM PDT

• Dallas Fort Worth is latest to unveil big expansion plan
• Airport revenue bond sales total $3.8 billion this year so far

Flyers aren’t the only ones benefiting from efforts at U.S. airports to make themselves bigger and better. The $3.8 trillion municipal-bond market, desperate for new bond deals, is reaping gains from the billion-dollar revamps.

The Dallas Fort Worth International Airport, the nation’s fourth busiest, is the latest to announce an expansion, saying it intends to spend as much as $3.5 billion for a new terminal and other projects. Kansas City International and Chicago O’Hare International Airports have also kicked off big construction plans to keep up with the growing volume of passengers.

Continue reading.

Bloomberg Markets

By Amanda Albright

May 21, 2019, 10:37 AM PDT

• Oversubscribed sales help lower issuers’ borrowing costs
• Muni market has seen just $7 billion in health-care bonds

Tom Casey, senior portfolio manager at Mellon Investments Corp., likes health-care bonds. The problem is that everyone else in the $3.8 trillion municipal-bond market does too.

That’s because the hospital and health-care sector often features mid- to lower-rated deals that can offer investors some additional yield — something that is in high demand amid an era of low interest rates. The billions of dollars that have flooded the state and local debt market in 2019 have only heightened that craving.

“The inability to access deals which are, in theory, attractive is extraordinarily difficult,” said Casey, who helps manage $25 billion in municipals at Mellon. “That’s a trend that has been frustrating as an investor.”

While the dynamic may irk buyers, health-care and hospital borrowers have scored lower costs thanks to the strong demand for their debt. Atrius Health, a nonprofit medical group in Massachusetts, borrowed $137 million in tax-exempt municipal bonds for the first time this month and didn’t have to make any concessions on the deal, said Brian Wynne, head of public finance at Morgan Stanley, the underwriter on the deal.

Wynne said bankers met with more than 40 investors to discuss the offering. It ended up “significantly” oversubscribed, helping to lower yields by about 25 basis points by the time it priced, he said.

The securities also gained in the secondary market, a signal of strong demand. Debt maturing in 2049 traded at 104 cents on the dollar on May 16, higher than its initial price of 101.2 cents on the dollar.

Also adding to the “food fight” for health-care bonds is the changing capital needs of the industry, said Karleen Strayer, head of municipal research at Wilmington Trust. Health-care companies have become more focused on providing outpatient care and are reluctant to sell debt to build inpatient facilities. That’s made new securities even more scarce, she said.

Hospital revenue bond issuance of about $7 billion this year is on pace to fall short of last year’s $20.7 billion of total sales, according to data compiled by Bloomberg.

“Because the supply is so tight, every time a health-care deal comes to market, there seems to be a whole lot of interest in it,” Strayer said.

The “feeding frenzy” for health-care debt isn’t likely to ease anytime soon, given the amount of cash pouring into municipal-bond mutual funds, especially those focused on high-yield debt, Casey said. Such funds notched their 19th straight week of inflows last week, according to Refinitiv’s Lipper US Fund Flows data.

“It doesn’t appear, based on what we’ve seen, that those flows will abate anytime in the near future,” he said.

Bloomberg Markets

By Amanda Albright

May 20, 2019, 10:30 AM PDT

— With assistance by Sowjana Sivaloganathan

• Nuveen’s fund held $824 million of island debt in April
• Firm buys Puerto Rico debt as island bonds gain 9% this year

The biggest buyer of muni junk bonds is big on Puerto Rico.

Nuveen’s $19.5 billion High Yield Municipal Bond Fund, the largest focused on riskier state and local government securities, boosted its stake in debt sold by the bankrupt U.S. territory to $824 million as of April 30, up from $456 million at the end of March and zero in July, according to data compiled by Bloomberg. The company’s Short Duration High Yield Municipal Bond Fund also increased its holdings.

Continue reading.

Bloomberg Markets

By Michelle Kaske

May 22, 2019, 6:41 AM PDT

SPEED READ:

• Moody’s Investors Service concludes that Illinois and New Jersey are least-prepared to weather the next recession.
• The report is based on savings, pension risks and state revenues.
• Illinois has enough savings to cover a few months; New Jersey even less.

The chronic budget-balancing struggles of Illinois and New Jersey since the Great Recession have earned them a dubious distinction this week: They are the only two states not prepared to weather the next recession.

That was the assessment from Moody’s Investors Service, which measured how drastically each state’s revenue was likely to drop during a mild recession and whether the state had budget reserves or other funds available to help cover the gap. The analysis also evaluated what would happen to public pension funds if a recession leads to a loss of the investment assets that pay benefits.

When it comes to pension debt, Illinois has more than six times the size of its annual revenue, while New Jersey’s is more than triple, according to Moody’s. Illinois has enough savings to cover a few months of revenue declines, but New Jersey’s would cover even less. (Louisiana, New York and Pennsylvania also have slim-to-no reserves.)

Illinois Gov. J.B. Pritzker is under pressure to close a billion-dollar budget gap and address $133.5 billion in unfunded pension liabilities. While his plan to eliminate the state’s flat income tax in favor of a progressive structure is aimed at addressing these two problems, it would also make the state’s tax revenue more volatile and susceptible to declines during a recession.

New Jersey Gov. Phil Murphy is advocating a so-called millionaire’s tax to help his state’s chronic budget woes. But legislative leaders say it won’t pass. State Treasurer Elizabeth Maher Muoio, who has advocated for the millionaire’s tax, issued a statement in response to the Moody’s report and called on the legislature to stop “punting on its responsibilities” to bolster budget reserves.

“While our projected surplus is certainly better than the far-too-risky position New Jersey had become accustomed to in recent years,” she said, “we are still far behind most states when it comes to being adequately positioned to weather a future economic downturn.”

The findings are an update from the first report of this kind that Moody’s conducted three years ago. That report, which did not include pension risk and only studied the 20 most populous states, found that California and Illinois were the least-prepared.

California has since added to its savings and is now rated by Moody’s as moderately prepared, meaning it has enough in reserves and other financial flexibility to weather a recession with mild adjustments, such as spending cuts.

GOVERNING.COM

BY LIZ FARMER | MAY 24, 2019 AT 4:00 AM

More institutions are looking to these deals for projects central to academics, raising new questions for their oversight and objectives.

Public-private partnerships (P3s), or the practice of sharing responsibility for providing a good or service with a for-profit company, are not new to higher education. Colleges have long outsourced elements such as food and laundry services, bookstores, custodial work and building construction.

In recent years, however, those partnerships have expanded to include academics and other pieces of the student experience that traditionally have been closely held, including online education, recruitment and even immersive learning experiences.

Such partnerships, however, involve more risk and “a level of skill set and competency to be able to both negotiate and to start up and manage that many universities are not set up or haven’t built themselves up to be able to address,” said Michelle Marks, vice president for academic innovation and new ventures at George Mason University, during a conference on the topic hosted there last week. “The reality today is that we can’t do it alone.”

Colleges are looking to P3s to help them quickly and nimbly respond to the range of headwinds reshaping the sector, among them: employers demanding more and different types of skills from graduates, the need to offer a wider range of credentials, and growing financial pressures.

In a survey of 249 college executives by The Chronicle of Higher Education in conjunction with the conference, the majority of respondents (83%) said their institutions are partnering more with private firms. While more than half (53%) are doing so on campus infrastructure projects, others are using them to outsource online programs (42%), student housing (39%) and predictive analytics (31%). Colleges are drawn to these companies primarily for their specialized skills, access to investment capital and the ability to quickly bring a project to market, respondents said.

“We have seen a change in the appetite of the governing boards to go into these public-private partnerships,” said Michael Amiridis, chancellor of the University of Illinois at Chicago (UIC). “That was not necessarily the case 20 years ago.”

But colleges considering a P3 should be mindful that the arrangement is not one size fits all, panelists said during one session. They shared lessons learned from their P3s and advised institutions on what to consider before striking the deal.

Do you need a private partner?

Some P3s are sought after from the start and others are borne from necessity. The latter was the case for Metropolitan State University of Denver, which went over budget on its Aerospace and Engineering Science Building and needed help fitting out one floor. The solution, said Janine Davidson, the university’s president, was to lease the space out to companies in the aerospace and engineering fields, requiring them to offer internships and other hands-on learning for students.

“It’s not just renting out space, like a coffee shop,” she said, adding that the situation must be “a win-win” for the university and the partner.

Additionally, institutions should be able to clearly articulate the P3’s value proposition. “Why are we better off having a partner than doing what we are doing on our own?” Amiridis asked. Beyond financial support, he added, the arrangement must safeguard or enhance a college’s core values, including affordability and access, academic freedom and the integrity and quality of its processes.

It should not, however, be redundant with its core competencies. He noted that The Ohio State University, which has an energy-management P3, has done a “fantastic job” explaining how that service is not a core offering of a university and thus a good candidate for such a deal.

Are core values preserved?

The university must also ensure the P3 enhances the student experience, panelists said. For instance, a P3 allowed Georgia State University to build a student housing project with about 300 more beds than it would have otherwise, and more quickly, said its President Mark Becker. The university, where 59% of undergraduates are Pell Grant-eligible, wanted to ensure the housing remained affordable to students and that they couldn’t tell another entity owned the building.

“We fill these up, we market it, it’s our reputation,” Becker said. “It would be of no use to us to have a 1,100-bed facility that our students couldn’t afford to live in.”

Another of Metropolitan State’s P3s, a commercial hotel connected with its academic hospitality program but run by a third-party company, was designed to direct a portion of its profits to the university’s foundation to fund scholarships and other student support. The program raised $2 million in the first three years, Davidson said, well above the $500,000 initially expected from the first five to 10 years.

“The fact that we had a partner that was interested in doing something philanthropic was a total win,” she said.

Concerns over who has control of what in a P3 are particularly relevant for universities, which historically have had a longer lifespan than the companies with which they partner.

That was true for perhaps the best-known P3 discussed on the panel, Georgia State’s purchase of the 68-acre Turner Field site with Atlanta-based developer Carter to build private student housing, market-rate multifamily units and retail in addition to refitting the stadium.

“We said, ‘Look, in 100 years you’re probably not going to be here,'” whether they go under, get bought out or merge, Becker said. “We’re going to be here in 100 years.”

The same is true for deals with education technology companies given the trend of consolidation among them. “Many of the contracts don’t work for us,” he said, because the university doesn’t want to give up control of its content. Plus, he added, “We don’t know whether (they’re) going to be in business in five years, 10 years or not.”

What is going to change?

Avoiding duplication or redundancy is important, the panelists advised. “What process are you going to change, what are you going to stop doing that you’ve been doing for a long time because it’s no longer necessary on this new platform?” Becker said, in the case of a technology partnership.

Davidson encouraged institutions to use pilots to ease in risk-averse stakeholders. Learning from efforts by peer institutions can also be helpful.

“One of my first questions to everybody is, ‘What’s the norm?'” she said. “Not that I want to jump on the norm, but if I’m going to deviate I’ll do it out of conviction and not out of ignorance.”

Ultimately, permission to think beyond rules, laws and conventions needs to come from the top, Davidson said.

The right legal support can also help. “You want a lawyer who sees her or his job as ‘You tell me what you want to get done and I’ll figure out a way to do it legally,'” Becker said, whether that’s changing the law, obtaining a waiver or enduring a long wait to carry out some or all of the project.

“Once you start having those successes,” he continued, “other people who have historically been risk-averse and lived in their lanes want to be part of the next big thing.”

Who will be the point person?

P3s run the risk of consuming small institutions and slowing down operations at larger ones, Amiridis said. For that reason, placing someone in a role akin to a project manager is important. At UIC, a vice chancellor for innovation manages the P3 relationship and engages the rest of the university, he said.

Georgia State, meanwhile, spreads that responsibility across its vice presidents, Becker said; for instance, a partnership for online program management would fall under the purview of the senior vice president for academic affairs. The university’s chief legal counsel works across the board to engage stakeholders and negotiate contracts.

George Mason created a separate position and office to run point on partnerships. That person became Marks, who shifted from her role as vice provost for academic affairs to lead the Office of Academic Innovation and New Ventures, which sits within the provost’s office.

How will you engage the partner?

The outside partner in a P3 is, understandably, looking to profit from the venture. In that way, Becker said, it helped the Turner Field deal that two members of the foundation’s board were experts in such projects and could “have a conversation of equals in the real estate business” with the partner. “What we got for free would have cost us $3 million to $5 million in consulting fees,” he said.

Evaluating potential partners’ track records and whether they are interested in a long-term relationship is also important, Amiridis said. For him, that means meeting face-to-face with that firm’s leaders to learn more about why they are interested in such an arrangement and to ensure their missions are aligned.

In a P3, he said, “we change our role from being owners and managers of projects to managing relationships and managing contracts,” he said. “It’s two different sets of skills.”

And while the shape and language of a P3 contract is critical to establishing purview and accountability, it can only protect against so much. “The glue in the system is the relationships,” Davidson said. “We have tight relationships with these folks and where we didn’t have a tight relationship, we had to tighten it up.”

Education Dive

by Hallie Busta

May 7, 2019

This week on Extra Credit Lisa Schroeer talks to Jane Ridley and Chris Morgan about our anticipated U.S. growth and what regional variations we can expect. Hear from Jane on broader U.S. and regional trends and then deep dive with Chris on what’s behind the faster growing regions.

Listen to Audio

May 20, 2019

Social factors are prevalent considerations in our analysis of health care companies because they often play a crucial role for the communities they serve and derive a portion of their revenue from the government.

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May 21, 2019

Everything is bigger in Texas—including a school endowment.

The Texas Permanent School Fund, a 165-year-old state agency, is one of the jewels of the $3.9 trillion municipal bond market. The fund backs $79.1 billion of debt from more than 800 school districts statewide, making it a sizable presence in the muni market.

With triple-A ratings from Moody’s Investors Service and Standard & Poor’s, the school fund is one the most secure credits in munis—or in any debt market—thanks to a large asset base that totaled $44 billion in August 2018.

While most of its assets now consist of financial investments like stocks, bonds, hedge funds, and private equity, its wealth largely originated from mineral rights, including what turned out to be valuable offshore oil fields in the Gulf of Mexico.

Continue reading.

Barron’s

By Andrew Bary

May 24, 2019 9:06 p.m. ET

It might come as a surprise that about 10% of the Chicago Board of Education’s long-term debt is rated investment grade, just two years after a budget shortfall threatened to close schools early.

Yet the school district has three series of bonds that are rated ‘A’ by Fitch—for now, at least. That is 7 notches above its other debt, which is solidly junk-rated at BB-. The investment-grade debt was issued in the form of special-revenue bonds, which are structured to provide bondholders with more security and higher recoveries in case of a bankruptcy.

Now those bonds’ ratings are being reviewed for a potential downgrade, after a recent appellate court decision raised questions about the special status of special-revenue bonds. And at least two credit-ratings firms are considering downgrading billions of dollars in debt because of the court ruling, which is the first time an appellate court has addressed the issue.

Continue reading.

Barron’s

By Alexandra Scaggs

Updated May 23, 2019 9:48 a.m. ET

This past week marked yet another “Infrastructure Week,” per the White House, yet a $2 trillion concept between the Trump administration and House Democrats foundered due to contention between the president and Democratic leaders. Meanwhile, Brookings experts continue to research and provide analysis on a variety of issues related to infrastructure, including roads, water, and broadband. Here is a sample of recent material focused on transportation.

US INFRASTRUCTURE SPENDING IS DECLINING

Joseph Kane and Adie Tomer from the Metropolitan Policy Program at Brookings observe that “real infrastructure spending nationally has fallen over the past decade, from $450.4 billion in 2007 to $440.5 billion in 2017,” and represents about 2.5 percent of GDP. Read their piece for more findings on changes in spending on infrastructure in the U.S.

Continue reading.

The Brookings Institute

by Fred Dews

Friday, May 24, 2019

Perhaps you recall how President Trump campaigned on behalf of “Big Luther” Strange in Alabama. Strange had been appointed by Alabama’s Governor to fill the Alabama United States Senate seat vacated by Jeff Sessions when Sessions became U.S Attorney General. Trump supported Strange’s effort to win election to the seat in his own right for the term to commence after the interim appointment expired. Big Luther is, indeed, big. At six feet, nine inches, he is the tallest U.S. Senator ever. But Strange lost the Republican primary to Judge Roy Moore, and then Moore went on to lose to Doug Jones.

Sometimes we forget that state attorneys general also – at least usually – had careers as working attorneys who handled the same sorts of discovery and motion issues that fill up the days of most of us. Strange was a lawyer for an important energy company (full disclosure: we represented that same company many years ago), and was once a partner at one of Alabama’s preeminent law firms.

And it turns out that Strange is also an impressive legal scholar. He is the author of “A Prescription for Disaster: How Local Governments’ Abuse of Public Nuisance Claims Wrongly Elevates Courts and Litigants into a Policy-making Role and Subverts the Equitable Administration of Justice,” 70 South Carolina L. Rev. 517 (Spring 2019). It is a useful and good read, and it is not our aim to steal Strange’s thunder. Consider our little summary an invitation to go to the article, study its citations, and follow its argument.

Strange makes the point that nuisance actions originated in criminal law, with the prosecution of such claims reserved for state or government officials seeking injunctive relief or criminal conviction for harms to the public. Strange then traces the evolution and expansion of the theory, with specific allusion to municipal suits against the gun industry for violent crimes, against the oil industry for climate change, and against banks and lenders for subprime lending practices. The last episode outlined in the historical section of the article is the opioids litigation. Strange distinguishes a state AG’s parens patriae authority from local governments, which have authority to recover only for injuries suffered by the municipality/county/whatever itself. It is the latter species of action that troubles Strange.

Strange’s fundamental criticism of local government actions against alleged public nuisance is that they inject litigants and courts into democratic policy-making decisions. He does not favor regulation by litigation, and warns that it implicates separation of powers concerns. Regulatory lawsuits invade legislative powers, and courts are not particularly good at such regulation. Moreover, the subject of the proposed judicial regulation will often be a nonjusticiable political question, which was committed to a coordinate government branch, eludes judicial standards, reeks of policy determinations, and creates the possibility of multifarious pronouncements by different organs of government. Legislatures and regulators possess technical expertise that courts (and juries) lack, and are also peculiarly capable of balancing cross-cutting policy interests.

There are, of course, legal doctrines that should step in and halt lawsuits that infringe upon regulatory regimes. Any reader of this blog will have bumped into dozens of posts about preemption and primary jurisdiction. Strange takes those doctrines seriously – certainly more seriously than the many rogue courts that seem to view them as inconveniences. Wyeth v. Levine is appropriately cabinned by the article. Primary jurisdiction gets the respect it deserves in this article, as does the dormant commerce clause. Strange also sets out how public nuisance suits allege damages that are not traceable to and proximately caused by the defendants’ conduct – with such conduct usually being lawful under the applicable regulatory regime.

The article also makes the point that local government actions disrupt the ability of state attorneys general to bring and manage litigation arising from the same alleged conduct. The actions might be beyond the scope of local governmental authority. Even if within scope, the local government actions raise the specter of double recovery.

Aside from doctrinal barriers and practical dangers, local government suits adversely affect the administration of justice in other ways. Strange describes how the various layers of redundant suits can multiply discovery requests, enable outlier verdicts to distort the overall litigation process, and penalize defendants for conduct occurring outside the relevant jurisdiction.

Anyone who has played a role in local government nuisance litigation will recognize the force of Strange’s insights. The system is messy and sometimes yields unfair results. As is always the case, there are winners and losers. Predatory plaintiff lawyers and policy-making judges seem to think the system is just fine. But Strange makes a compelling case that judicial administration is a loser, as is the regulatory function that weighs costs and benefits for society as a whole.

by Stephen J. McConnell

May 22 2019

Reed Smith LLP

“It’s no longer a question of if—but when—LIBOR will become unusable, yet most contracts referencing it don’t adequately account for this eventuality.”

The above statement by Tom Wipf, chair of the Alternative Reference Rates Committee (the “ARRC”), summarizes the driving force behind the ARRC’s release of its final recommended contractual fallback language for U.S. dollar LIBOR denominated floating rate notes (“FRN”)[1] and syndicated business loans (“syndicated loans”)[2] in anticipation of the phasing-out of LIBOR and the transition to a benchmark rate based on the Secured Overnight Financing Rate (“SOFR”).

In making this recommendation, the ARRC intends to set forth robust fallback provisions that provide clarity and specificity upon a LIBOR cessation while also preserving the flexibility needed for any unforeseen circumstances. As this recommendation follows the publication by the International Swaps and Derivatives Association (“ISDA”) for different types of derivatives contracts, the ARRC noted that it strived to align its fallback provisions with the ISDA approach as much as possible.

The recommended fallback language generally addresses the following key terms:

1. 1. Benchmark Transition Events: trigger events that represent a significant shift away from LIBOR;
   2. Benchmark Replacement: successor adjusted rate that replaces LIBOR; and
   3. Benchmark Replacement Adjustment: the spread adjustment applied to the successor rate to preserve the economic terms of the relevant contract.

Floating Rate Notes

The ARRC’s recommended FRN fallback language can be used in a variety of floating rate securities issued in the capital markets, such as municipal bonds, convertible debt, and other debt issuances in connection with a cessation of LIBOR. It is meant to provide a more robust waterfall for a conversion to SOFR-based rates than the historic waterfall provisions included in FRN documentation. In general, the recommended FRN fallback language provides specificity on the triggers, successor rates, and spread adjustments in an effort to eliminate ambiguity and limit the exercise of discretion by any party. The ARRC’s language includes the following key terms:

• Triggers: Two permanent cessation triggers cover public statements from the benchmark administrator or the administrator’s regulator or the central bank for the relevant currency announcing that the benchmark administrator has ceased or will cease to provide the benchmark and one pre-cessation trigger covers when the benchmark administrator’s regulatory supervisor announces that the benchmark is no longer representative.
• Benchmark Replacement: Once a trigger event occurs, if only some tenors of LIBOR have been affected, then the interpolated value based on the nearest available benchmark tenor will be the benchmark replacement. If it is not possible to determine such an interpolated benchmark, the fallback language establishes a waterfall to determine the successor rate to be used. The waterfall for FRNs has several additional steps as compared to some of the other cash products, to account for long maturities and difficulty in amending the applicable contracts. In order to maintain consistency across asset classes, each step in the waterfall is assessed when a trigger event first occurs, without reversion back to an earlier step. The waterfall runs as follows:

– Step 1: Term SOFR + Adjustment

– Step 2: Compounded SOFR (compounded average for tenor in arrears) + Adjustment

– Alternative Step 2: Simple Average SOFR (uncompounded simpler calculation) + Adjustment

– Step 3: Relevant Governmental Body Selected Rate + Adjustment (if SOFR-based rate is discontinued)

– Step 4: ISDA Fallback Rate (the fallback rate embedded in the ISDA standard definitions) + Adjustment

– Step 5: Issuer or its Designee Selected Rate + Adjustment

“Term SOFR” will be a forward-looking term SOFR rate with various tenors, which currently does not exist.

• Benchmark Replacement Adjustment: To account for the difference between LIBOR, which is an unsecured term rate, and SOFR, which is a secured overnight rate, the fallback language provides for an adjustment to be included in the determination of any benchmark replacement. Correlating to the benchmark replacement waterfall outlined above, the benchmark replacement adjustment waterfall runs as follows:

Step 1: ARRC Selected Adjustment (as selected or recommended by the ARRC or other Relevant Government Body)

Step 2: ISDA Fallback Adjustment (to be used with the ISDA Fallback Rate)

Step 3: Issuer or its Designee Selected Adjustment

Syndicated Business Loans

The ARRC recommended two sets of fallback language for new originations of LIBOR-referenced U.S. dollar-denominated syndicated loans: the “hardwired approach” and the “amendment approach,” further described below. Whereas the hardwired approach provides more clarity and certainty upfront as the specific fallbacks are built into the contract, the amendment approach, by providing a framework for negotiating a replacement rate in the future, maximizes flexibility and does not reference any rates or adjustment methodologies not yet existent. Although market participants initially may favor the amendment approach for its flexibility during the transition phase, they eventually may move to the hardwired approach to overcome operational difficulties in amending contracts in volume and the possibility of being subject to manipulation depending on the economic environment at the time of transition, as also noted by the LSTA.[3]

• Triggers: The same two permanent cessation triggers and the pre-cessation trigger applicable to FRNs apply to syndicated loans, but syndicated loans also have an additional “early opt-in election” trigger, which takes advantage of a syndicated loan’s flexibility for parties to agree to switch to an alternative rate before LIBOR is discontinued or becomes unrepresentative.
• Hardwired Approach: As with FRNs, the fallback language for syndicated loans is included in the original contract so that upon a trigger event, the waterfalls for the benchmark replacements and the benchmark replacement adjustments will apply.

Benchmark Replacements:

– Step 1a: Term SOFR + Adjustment

– Step 1b: Next Available Term SOFR (SOFR for longest tenor that can be determined that is shorter than the applicable tenor) + Adjustment

– Step 2: Compounded SOFR +Adjustment

– Alternative Step 2: Simple Average SOFR + Adjustment

– Step 3: Borrower and Administrative Agent Selected Rate + Adjustment

Benchmark Replacement Adjustments:

– Step 1: ARRC Selected Adjustment

– Step 2: ISDA Fallback Adjustment

– Step 3: Borrower and Administrative Agent Selected Adjustment

• Amendment Approach: Instead of the predetermined waterfalls, the amendment approach provides the process and procedures for parties to agree on a benchmark replacement for LIBOR and the adjustments that should apply. Upon a trigger event, the borrower and the administrative agent may agree to select a successor rate and a spread adjustment, in each case giving due consideration to any selection or recommendation by the Federal Reserve Board, the ARRC, or any evolving or then-prevailing market convention for determining such successor rate or spread adjustment. Similar to the “early opt-in election” trigger, the amendment approach is a specific feature for loans due to the relative ease in modifying applicable agreements.

Differences from ISDA Fallback Language

While the two permanent cessation triggers included in the ARRC fallback language align with the fallback triggers included in ISDA’s 2018 consultation,[4] the pre-cessation trigger (which permits market participants to transition to an alternative rate when the quality of the benchmark has deteriorated such that it no longer is representative of the underlying market or economic reality) does not align and could create a potential area where the ARRC’s language and ISDA’s language may diverge. On May 16, 2019, ISDA published a consultation[5] on the pre-cessation issue for LIBOR and certain other IBORs seeking market feedback on this pre-cessation trigger and other related issues, but it remains to be seen whether ISDA ultimately will include a similar pre-cessation trigger with the FRN and syndicated loan fallback.

Another area where the ARRC fallback diverges from the proposed ISDA fallback is the primary fallback rate. Whereas the ARRC recommended fallback language references a forward-looking term SOFR rate (which currently does not exist) as the primary fallback rate, the primary fallback rate proposed by the ISDA 2018 consultation is based on the average of SOFRs for the relevant term and compounded in arrears. Market participants should be on the lookout for ISDA’s final fallback language, and to the extent it diverges from the ARRC’s fallback language, market participants should consider whether to adjust the ARRC’s fallback language to eliminate mismatch with any interest rate derivatives they have entered into in order to offset or hedge the floating rate exposure of the FRN or syndicated loan.

Conclusion and Next Steps

The ARRC recommendations offer a helpful framework for market participants to consider adopting into their agreements with appropriate modifications catered to their specific needs. Regardless of what fallback regime is followed, it is critical that market participants inventory existing agreements that could be affected by the cessation of LIBOR, understand their LIBOR exposure across relevant contracts, and develop a timeframe for amendments. Also, determining a robust fallback regime that will be used going forward will help ensure a smooth transition away from LIBOR.

As the next step, the ARRC will be releasing recommended fallback language for bilateral business loans and securitizations soon. The ARRC also expects to consult with a broad range of stakeholders on proposals for fallback language in consumer products in the future.

*****

Paul Hastings lawyers are actively counseling our clients on the cessation of LIBOR as well as the benefits and consequences of each fallback regime for the various products.

[1] The Alternative Reference Rates Committee, ARRC Recommendations Regarding More Robust Fallback Language for New Issuances of LIBOR Floating Rate Notes (2019), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/FRN_Fallback_Language.pdf.

[2] The Alternative Reference Rates Committee, ARRC Recommendations Regarding More Robust Fallback Language for New Originations of LIBOR Syndicated Loans (2019), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/Syndicated_Loan_Fallback_Language.pdf.

[3] The Loan Syndications and Trading Association, LIBOR: Free Fallbacking (2019),
https://www.lsta.org/news-and-resources/news/libor-free-fallbacking.

[4] International Swaps and Derivatives Association, Inc., Interbank Offered Rate (IBOR) Fallbacks for 2006 ISA Definitions – Consultation on Certain Aspects of Fallbacks for Derivatives Referencing GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW (2018), http://assets.isda.org/media/f253b540-193/42c13663-pdf.

[5] International Swaps and Derivatives Association, Inc., Consultation on Pre-Cessation Issues for LIBOR and Certain Other Interbank Offered Rates (IBORs) (2019), https://www.isda.org/a/t6tME/Pre-cessation-issues-Consultation.pdf.

By Joyce Sophia Xu, Diona Park, Michael Baker, Scott Faga, Eugene Ferrer, Michael Spafford, Lawrence Kaplan & Daren Stanaway

May 23, 2019

Paul Hastings LLP

Funds dealing in high-yield munis have drawn $8 billion as investors search further afield for returns

Investors seeking yield are piling into the riskiest corner of the municipal bond market at a pace not seen in decades.

They have poured $8 billion into funds that deal in high-yield muni bonds—or junk munis—this year, the most through May since at least 1992, according to Refinitiv data. Muni-bond funds overall have attracted $37 billion during that same period, the most in almost three decades.

There is “more demand than at any time in recent memory,” said Jeff Burger, a portfolio manager at Mellon Investments Corp., which oversees $25 billion in municipal investments.

Continue reading.

The Wall Street Journal

By Gunjan Banerji

May 27, 2019

MUNIS IN FOCUS: Amanda Albright, Bloomberg Muni reporter, discusses money flowing into muni bond funds, stretched muni prices, dead infrastructure, and Illinois. Hosted by Lisa Abramowicz and Paul Sweeney.

Running time 05:16

Play Episode

Bloomberg Radio

May 24, 2019 — 8:57 AM PDT

Washington, D.C., May 22, 2019 – SIFMA today issued the following statement from President and CEO Kenneth E. Bentsen, Jr. on infrastructure financing:

“The challenges of our nation’s extraordinary infrastructure deficit are so complex that a single solution is not enough. Among other initiatives, SIFMA strongly believes restoring advance refunding is an essential component of funding infrastructure investment. By allowing state and local governments to reduce their debt service expenses and free up their borrowing capacity for new investments in infrastructure, this financial management tool offers a meaningful way to boost investment in and maintenance of critical public projects. The U.S. is continuing the troubling trend of underinvestment in this area and risks substantially adding to the financial burdens of state and local governments unless bi-partisan solutions are reached. We appreciate the commitment by the Administration and the Congress to infrastructure investment which will help spur job creation and economic growth.”

-30-

SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

DATE:
May 22, 2019

CONTACT:
Katrina Cavalli
212.313.1181
kcavalli@sifma.org

NEW YORK, NY, MAY 14, 2019 – CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for April 2019. The report, which tracks the issuance of new security identifiers as an early indicator of debt and capital markets activity over the next quarter, found a noteworthy increase in requests for new North American corporate and municipal debt identifiers in April.

Read Report.

“The combination of historical low interest rates with a relatively strong economy is supporting a steady volume of new security issuance activity by both corporate and municipal issuers,” said Gerard Faulkner, Director of Operations for CUSIP Global Services. “We are still seeing a good amount of month-to-month volatility in our CUSIP indicator, however, which suggests that sentiment could shift quickly in response to geopolitical and economic trends.”

Read Press Report.

The key is to care about the technology—but not too much

The hottest trend in cities across the U.S. today is to become a “smart city,” where apps, algorithms and artificial intelligence promise to create new efficiencies and improve urban life.

It makes sense. What city wouldn’t want to be called “smart”? And what city wouldn’t want to be seen as being on the cutting edge of technology?

No wonder cities are aggressively courting technology companies to use their cities as testing grounds for smart-city technology.

But as some cities are starting to realize, getting technology is the easy part. The real challenge is figuring out how best to use it. When implemented thoughtfully, technology can be an incredibly potent tool to advance social progress. When implemented carelessly or inappropriately, however, technology can be ineffective and can even exacerbate the problems it is meant to address.

Counterintuitively, the key to leveraging technology to improve urban life is to abandon the dream of being “smart”—which prompts a narrow focus on technology that can lead cities astray—and instead strive to be “smart enough” to advance established goals

To do this, cities need to avoid three common mistakes when it comes to chasing the smart-city dream.

Technology as the solution

The first mistake that many cities make is to be consumed by the possibilities of technology, regardless of whether those enhanced capabilities actually dovetail with their long-term vision.

Consider autonomous vehicles, whose allure has led many cities to focus their transportation investments and policies on accommodating self-driving cars. Technologists have proposed visions of autonomous vehicles zooming through downtown without congestion—coordinating their own movements without the need even for traffic lights—leading cities to consider reducing investments in public transit, expecting that self-driving cars will make such systems obsolete.

What many cities don’t realize is that the focus on self-driving cars has the potential to obstruct their efforts to overturn decades of automobile-focused development. A narrow emphasis on autonomous vehicles would come at the expense of efforts to foster walkable and bikeable neighborhoods.

If cars can travel at faster speeds and transit is neglected, people will likely respond by moving farther away from downtowns, increasing sprawl—exactly what many city planners are trying to avoid. Moreover, allowing high speeds on city streets would diminish safety, walkability and vitality. Main Streets would turn into high-speed corridors. Imagine how unpleasant it would be to eat lunch or go shopping along the side of the freeway.

Instead, cities should be driven by clear policy goals and long-term planning efforts that are independent of technology. By all means, use technology in service of those bigger goals. But don’t let the excitement about self-driving cars lead to cities that are optimized for self-driving cars but unwelcoming to pedestrians, transit and vibrant public space.

A smart-enough city might instead expand public transit through self-driving shuttles that connect people to transit hubs and provide transportation to those without the ability to drive. And by calming traffic on city streets, it could create shared streets where pedestrians and cyclists are kept safe and feel comfortable.

The goal would be to use smart-city technology not to speed the adoption of autonomous vehicles, but to speed the realization of existing planning and transportation goals. Self-driving cars would be a means to that end, but not the end in itself.

Technology as a quick fix

The next mistake that many cities fall prey to is expecting technology to provide a quick fix to a much bigger urban problem. This is the danger of conceiving of an issue as a technology problem: It can make that problem appear artificially simple and suggest “solutions” that fail to address the right issues.

A perfect example is the effort to increase civic engagement. City governments and technologists have proposed countless platforms, social networks and apps to make politics and governance simpler and more efficient. Most notably, 311 apps allow residents to notify the government about issues like potholes or damaged street signs straight from a smartphone.

Such efforts may make some parts of government more efficient. The problem, though, is when they become a stand-in for a city’s civic-engagement efforts. Politics isn’t an optimization problem—being “smart” won’t solve democracy.

These apps have several fundamental problems.

First, they typically lead to reports that are disproportionately from white and wealthy residents.

Second, emphasizing efficient service delivery through 311 apps diminishes people’s concern for the public good by suggesting that government exists to address personal needs, as if it was a customer-service agency. Promising to quickly repair every pothole elides the reality that government has limited resources that often must be allocated to other issues and other people.

And three, the desire for efficiency leads 311 apps to prioritize relatively simple needs like street repairs over more complex (and therefore inefficient) needs like improved schools. One neighborhood official that I spoke with, for example, focused his efforts entirely around telling people to submit 311 reports and making sure those requests were responded to, with little focus on fostering deeper forms of engagement.

Rather than expect technology to completely solve civic engagement, cities must figure out which aspects of democracy and engagement can appropriately be characterized as technology problems.

For example, by designing technologies to facilitate deliberation rather than simple interactions, cities can develop online platforms that foster dialogue and community. Meanwhile, by disseminating information online and allowing online voting, cities can trim the fat from burdensome civic processes like participatory budgeting, allowing more people to participate in civic life without diminishing the value of that participation.

Smart tech, stupid implementation

The final mistake that cities make is to focus more on the technology itself rather than on integrating that technology into institutional practices and processes. Smart-city rhetoric prescribes newer and more advanced technology as the way for governments to quickly solve every problem, leading cities to acquire new technology without clear plans for how to use it.

Yet the real work of making technology valuable in cities involves reducing institutional barriers and developing the infrastructure and practices to make all that data actionable.

Let’s take a basic example: firefighting. Suppose a city wants to develop an algorithm aimed at reducing fires by predicting which buildings are most susceptible.

Creating the algorithm itself is a breeze compared with eliminating the operational roadblocks to developing and using it. The fire department might have incomplete data that is missing all of the fires from a recent year. Another department might have a full inventory of buildings in the city, but identify locations using a different format than the fire department does, making it difficult to merge the two sets of information.

Meanwhile, the fire department staff might not understand or trust the predictions made by the algorithm, especially if the predictions provide information that can’t easily be integrated into existing or new operations. For example, predictions of every building that pose a high fire risk may not be useful if the city only has the ability to intervene on buildings that face fire hazards due to outdated electrical systems.

Instead, municipal leaders must focus on the painstaking work of developing the infrastructure and processes that make the data useful in practice.

To help prevent fires, this means ensuring data is accurate, unifying data formats across different departments, making sure those departments share information, and training fire-department staff in how to use and interpret the data. And they need to study whether interventions based on that data actually had the desired effect.

Too smart for their own good?
Cities today are at a crossroads: As the opportunities for using technology grow, so do the risks.

When cities focus too narrowly on technology, they risk creating places that are superficially smart but where human needs are ignored. When they avoid these mistakes—when cities have well-defined goals that guide their use of technology, embrace the complexity of urban challenges to identify the most effective interventions, and focus on integrating technology into institutional processes—cities can achieve various forms of innovation that range from improving social services with algorithms, studying environmental conditions with sensors, and protecting community health by predicting unsafe restaurants.

Technology can help us attain these benefits—but only once we recognize its limits and the challenges to wielding it.

The Wall Street Journal

By Ben Green

May 17, 2019 2:55 p.m. ET

Mr. Green is the author of “The Smart Enough City: Putting Technology in Its Place to Reclaim Our Urban Future.” Email him at reports@wsj.com.

On May 9th, the BDA held its annual Fixed Income Retail Roundtable in St. Louis, Missouri. The event included a networking reception and dinner at Vin de Set sponsored by DPC Data on the evening of Wednesday, May 8th.

The roundtable was hosted by Wells Fargo Advisors and was attended by over 35 retail fixed-income leaders from middle-market dealers, platforms, and technology vendors. The event was sponsored by Bondwave, Tradeweb Direct, Edward Jones and Build America Mutual.

The key issues discussed during the roundtable included: a global economic forecast, muni market trends, retail fixed income regulations, and the evolving landscape of fixed income market structure issues. A full recap of the issues discussed can be found below, and the agenda can be viewed here.

Roundtable Recap:

Thursday, May 9th
Wells Fargo Advisors
St. Louis, MO

General Forecast and Outlook
Featured Speaker: Paul Christopher, Head of Global Market Strategy, Wells Fargo Investment Institute
The roundtable was kicked off with a discussion on the overall health and direction of the U.S. and global economies. Included in the discussion were potential roadblocks for continued economic growth which included political pressures, tariffs, change in interest rates and Brexit.

Municipal Market Update and Outlook
Featured Speaker: Dorian Jamison, Municipal Analyst ,Wells Fargo Advisors, Advice and Research
This discussion covered the municipal market performace for Q2 of 2019. Since the post tax-reform slump in 2018, the market has increased marginally in the first quarters of the year. Mr. Jamison also discussed tax reform and the removal of advance refundings. The group also discussed the muni bond considerations in Puerto Rico, and other considerations the bond market is looking ahead to – such as the impacts of climate change on municipalities.

Fixed Income Market Issues
Discussion Leader: John Reilly, Wells Fargo Advisors
Mr. Reilly engaged members in a broad overview of marketplace issues. This included the end of LIBOR, new market participants and platforms, changing technologies, and the activities of the SEC’s FIMSAC and BDA’s own Fixed Income Market Structure Working Group.

Fixed Income Regulatory Issues
Discussion Leader: Don Winton, Crews & Associates
Mr. Winton engaged members in a discussion of the ongoing regulatory priorities influencing member firms. These included FINRA exam issues, FINRA report cards, Rule 4210, retail confirmation mark-up disclosures, and the upcoming SEC rule “Reg BI.”

BDA Legislative and Regulatory Update
Discussion Leaders: Kelli McMorrow and Brett Bolton, BDA
BDA staff discussed key regulatory and legislative items that are directly affecting fixed income market and business practices. These included:

• FINRA Rule 4210
• MUMD compliance
• FINRA’s TRACE pilot program
• MSRB Rule G-23
• Last Look/”Pennying”
• BDA’s Fixed Income Market Structure Working Group
• Capitol Hill update on advance refundings, infrastructure, and GSE reform efforts

Bond Dealers of America

May 13, 2019

Ben Barber, Goldman Sachs Asset Management head of municipal asset management, discusses the rally in municipal bonds on “Bloomberg: The Open.”

Watch video.

Bloomberg Markets: The Open

May 15th, 2019, 9:46 AM PDT

• High-yield fund boosts investment-grade holdings to record
• Flood of cash chasing yields has pushed up junk-bond prices

Goldman Sachs Group Inc. has shifted money to the sidelines of the municipal junk-bond market, waiting for it to crack.

The company’s $7.3 billion High Yield Municipal Fund, the third biggest focused on the riskiest state and local government debt, had about 62 percent of its assets in investment-grade securities by the end of April. It marks the fund’s biggest move ever away from the lowest-rated bonds and a wager that the run-up in prices will reverse as speculative projects start to run into distress, said Ben Barber, head of municipal bonds at Goldman Sachs’s asset management arm, which oversees $62 billion of the securities.

“What we’re hoping for is there’s a new round of opportunities in the muni market over the course of 2019 or 2020,” he said in an interview. Goldman’s high-yield muni fund beat more than 90 percent of its peers over the last five years.

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Bloomberg Markets

By Amanda Albright

May 16, 2019, 10:34 AM PDT

Van Eck’s new fund MAAX brings momentum trading to a traditional buy-and-hold market.

No matter the iffy track record of quantitative investing, it appears there’s no stopping its push into every corner of the financial markets.

Case in point: Van Eck Securities Corp. on Thursday launched the VanEck Vectors Municipal Allocation exchange-traded fund, with the ticker MAAX. That name correctly states that it invests in the $3.8 trillion market for state and local government debt — but that’s very much only part of the story.

MAAX is an “ETF of ETFs,” which for the most part will be divvying up money among five other Van Eck muni funds. The portfolio weights are determined by — you guessed it — a quant model “that uses momentum, along with both duration and credit risk indicators, to tactically allocate,” according to a statement. “For investors looking for both tax-exempt income and enhanced risk-adjusted total returns, MAAX could be a compelling way to approach the municipal bond market.”

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Bloomberg Markets

By Brian Chappatta

May 17, 2019, 4:00 AM PDT

• Judge finds Nuveen’s speech rights don’t require tossing suit
• Texas-based bond fund says Nuveen seeking to organize boycott

Preston Hollow Capital LLC can proceed with a defamation lawsuit against municipal bond giant Nuveen LLC, which is accused of running an intimidation campaign designed to decimate its smaller rival.

Preston Hollow presented sufficient allegations to move the case forward, Delaware Chancery Court Judge Sam Glasscock III said Tuesday. The judge rejected Nuveen’s claim that its constitutional rights to freedom of speech allowed it to denigrate Preston Hollow’s business practices, saying that argument needed more examination.

Preston Hollow claims Nuveen and its head of municipal-bond investments, John Miller, interfered with the Dallas-based firm’s business contacts and disparaged its operations in an effort to pressure other bond players to stop working with it. Nuveen, which oversees more than $140 billion of municipal bonds and manages the biggest U.S. high-yield muni bond fund, generates millions of dollars in revenue for Wall Street trading desks.

Glasscock’s ruling clears the way for Preston Hollow officials to gather information from bond-market players such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. about recordings of telephone calls between Miller and other Nuveen officials. The company hopes to uncover new evidence of Nuveen’s efforts to damage it.

Miller and his team allegedly called Deutsche Bank AG in December, demanding it unwind more than $400 million in financing deals with Preston Hollow and pressured the bank not to provide future loans.

“Today’s ruling was based on the allegations in the complaint, and not on the evaluation of any evidence,” Stewart Lewack, a spokesman for Chicago-based Nuveen, said in an email. “We continue to believe the claims are without merit and will vigorously defend ourselves.”

Jonathan Morgan, a spokesman for Preston Hollow, declined to comment.

Glasscock didn’t rule on Preston Hollow’s request that he order Miller and other Nuveen officials to stop denigrating the fund or doing anything to scare off financial institutions — such as Deutsche Bank — from doing business with it.

The judge said he wants further submissions from lawyers to determine whether Nuveen’s comments that Preston Hollow charged “excessive rates” on some bond transactions and engaged in “corrupt deals” in others met the test for defamation or amounted to puffery. That will help Glasscock decide whether to order Nuveen to stop what Preston Hollow calls “trash talking.”

The case is Preston Hollow Capital LLC v. Nuveen LLC, 2019-0169, Delaware Court of Chancery (Georgetown).

Bloomberg Markets

By Jef Feeley and Martin Z Braun

May 14, 2019, 10:30 AM PDT Updated on May 14, 2019, 1:04 PM PDT

• Munis under increasing scrutiny as cities heat up, seas rise
• ‘It’s fine to rent in Florida, but it’s insane to own or lend’

Hurricane Michael killed seven people and caused more than $6 billion in damage in Florida in October, a toll compounded by warmer, higher seas and wetter air, the signs of climate change scientists have long warned about.

But investors have yet to pay any kind of meaningful attention, buying up long-dated debt and financing real estate decades into the future. That kind of market neglect means the Florida economy can be expected to “go to hell,” warned Spencer Glendon, a senior fellow at the Woods Hole Research Center and a former partner and director of investment research at Wellington Management.

“No one should be lending for 30 years in most of Florida,” he said at an investment conference in New York last week. “During that time frame, insurance will disappear and terminal values” — future resale income — “will shrink. I tell my parents that it’s fine to rent in Florida, but it’s insane to own or to lend.”

Florida’s economic crash could begin with banks or home-buyers worrying that annual insurance policies in some places will become prohibitively expensive, or disappear completely, Glendon said. That would shake the housing market and hurt property tax revenue, leaving Florida without an obvious way to pay for infrastructure to replace what’s literally or figuratively under water.

Inability to replenish infrastructure in a slow-growth economy evokes community decay and economic decline reminiscent of Detroit or Puerto Rico, Glendon said. “I hope this is clear,” he said in New York. “Civilization is built on climate stability. We are now accelerating into instability. Do your models reflect that?”

Trends in local municipal-bond and mortgage markets suggest they may not. The risks of climate change have begun to pop up in prospectuses and credit-analysis, to little effect. Ahead of a new debt offering last month, Miami Beach told potential investors that officials are “keenly aware of the risk from hurricanes and sea-level rise.”

Miami Beach successfully raised its $162 million, with a 20-year maturity pricing at the same yield as a similar April offering by Charlotte, North Carolina, an inland city with much less climate risk. Both issues had the same call provisions, coupons and ratings from Moody’s and S&P.

Comparisons are difficult, but if markets were acknowledging the scale of Florida-specific climate risk, Florida’s bonds should sell at a discount, relative to similarly structured bonds sold elsewhere.

“I don’t know whether the right price is half-price or 60% or 20%, but if it’s at 100%, I know it’s the wrong price,” Glendon said in an interview.

At the same time, climate risk may be subsumed by other incentives. People who buy property in Florida may value the tax-free income more than they worry about climate risk. When it comes to mortgages, the ultimate buyers of securitized loans are far removed from local officials and residents who know what’s happening on the ground.

Similar warnings are starting to reverberate among other financial institutions. BlackRock Inc. last month published a 20-page explanation of how climate-risk has become a necessary assessment in understanding shifting levels of risk and value.

The report concludes that 58% of U.S. metropolitan areas will face climate-related damages amounting to 1% or more of GDP by 2060-2080, and that “a rising share of muni bond issuance over time will likely come from regions facing economic losses from rising average temperatures and related events.”

Bloomberg

By Danielle Moran, Katia Porzecanski, and Eric Roston

May 13, 2019, 9:44 AM PDT

S&P Global Ratings’ approach to pensions and other postemployment benefits (OPEBs) focuses on affordability–both current and on a cost trajectory. We analyze funding discipline through assumptions and contribution methods to determine if pension/OPEB costs will lead to budgetary stress. We consider pension/OPEB expenses fixed costs, akin to debt and tailor our analysis to the specific risk factor

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May 13, 2019

Most investors are familiar with interest rates, but it’s important to look beyond the headline rate. By looking at yield curves, investors gain better insights into market sentiment. Normal yield curves suggest a healthy market, but steep yield curves indicate the start of economic expansion and inverted yield curves can be a sign of trouble.

Treasury yield curves are often referred to as the “benchmark curve” since they are backed by the U.S. government. Investors often compare other debt instruments to these benchmarks and calculate “spreads” between them. The spread is an important indicator of market sentiment on its own. Although municipal bonds should theoretically have no spread, that’s not always the case.

Let’s look at the difference between Treasury and municipal bond yield curves, and what investors need to know.

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municipalbonds.com

by Justin Kuepper

May 15, 2019

You often hear it said that the first step is the hardest. But for investors and financial advisors looking to step onto the path to ESG and Impact investing, the first step can be an easy one—municipal bonds. Municipal bonds serve as a low-risk, tax efficient asset class that can dampen overall portfolio volatility and provide income. In addition to these favorable investment characteristics, when evaluating ESG and Impact opportunities, municipal bonds should be one of the first sectors that springs to mind.

Asset Class Characteristics

Most sectors of the municipal bond market, including tax-backed general obligation (think states, cities and counties) and various revenue-backed sectors (think utilities, hospitals, etc.), are amenable to ESG and value alignment investment approaches. Sectors such as education, healthcare, housing and utilities all have positive impacts, which investors pursuing such strategies will find attractive. The ability to invest directly in communities, in school systems, in renewable energy products, in clean water and in scores of other initiatives financed through the municipal bond market is a strong motivator for those seeking to achieve positive social and environmental outcomes with their investments.

That said, not all municipal bonds are impactful or ESG positive. Bonds financing prisons, detainment centers, fossil fuel power generation, hotels, shopping complexes and the like are also included in the municipal bond market. Even in sectors where a positive impact is possible, it takes a robust data collection and analytical effort to select bonds that achieve exceptional outcomes for the communities they serve. It takes an experienced team to evaluate the opportunities available and find those that are best suited for an ESG and Impact investing strategy. ESG factors that are material and relevant to the credit profile of an investment opportunity are integrated into any strong credit analysis; beyond this, identifying opportunities where financed projects can have a demonstrable positive effect on the surrounding community takes experience.

Investment Performance

One common question we receive around ESG and Impact investing pertains to the amount of performance sacrifice for incorporation. Based on our experience, when managed properly, the answer is none.

ETF TRENDS

by IRIS.XYZ

MAY 18, 2019

To more clearly communicate credit opinions and facilitate a more forward-looking, predictable approach to ratings, Fitch Ratings has revised its U.S. Water and Sewer Rating Criteria. These revisions will facilitate a more forward-looking, predictable approach to ratings and better highlight differences among credits in the same category.

Anticipated Rating Impact is Limited
Assuming current credit characteristics are maintained, Fitch estimates approximately 10% of the ratings covered by the criteria will be affected, with slightly more upgrades than downgrades anticipated. Criteria-driven rating changes will be dependent on the finalization of criteria after assessing comments received during the exposure draft period.

Experienced Analytical Judgment
Fitch’s ratings will continue to be based on the judgment of a team of experienced analysts, rather than on weighted assessments or model-based outcomes.

Subfactor Assessments More Focused
The subfactor assessments relating to the three key rating drivers have been refined to provide an enhanced focus on elements most important in determining credit quality.

Clearer Communication of Credit Opinions
The goal of the revised criteria is to communicate Fitch’s credit analysis more clearly, presenting both high-level categorical assessments of key rating drivers along with well-defined opinions about both rating conclusions and the underlying fundamentals.

Rating Changes More Predictable
The revised criteria more clearly define and communicate Fitch’s expectations of the range of performance.

New Through-the-Cycle Tool
Known as FAST, this tool highlights how cycles affect utilities differently, and will be publicly available with a select group of issuer data during the criteria comment period.

America faces an extraordinary infrastructure deficit. With existing federal infrastructure programs failing to meet current demand, the U.S. is continuing the troubling trend of under-investment in this area and risks substantially adding to the financial burdens of state and local governments.

This will only lead to further delays of investment in and maintenance of critical public projects, including highways, bridges, hospitals, airports, schools, water and sewer systems.

Prior to 2018, one way to help fund capital improvement and infrastructure projects was using tax-exempt advance refunding bonds (or advance refundings). This important financial-management program allowed state and local governments to save billions in interest costs by using proceeds from one bond issuance to essentially pay off another outstanding bond in advance of its call date. Savings were achieved because the new bond was issued at a lower interest rate than the original obligation.

By reducing their debt service expenses through advance refundings, states and localities were able to free up their borrowing capacity for new investments in infrastructure and other important public projects, in turn boosting their local economies with the creation of new jobs and making public services more affordable. This is much like homeowners refinancing mortgages to a lower interest rate.

State and local governments can no longer access cost savings through this valuable financial tool. As most in the industry know, the Tax Cuts and Jobs Act of 2017 eliminated advance refundings. We estimate state and local issuers are currently forgoing about $4 billion of present-value savings annually.

At SIFMA, we believe it is critical to close the infrastructure financing gap and it is imperative to restore and create additional vehicles to assist in resolving this need.

Preserving the tax-exemption, which is the financing mechanism for the clear majority of infrastructure projects that state and local governments undertake, is crucial. Further, as described above, we strongly support restoring the ability of state and local governments to advance refund their securities, which will help them efficiently manage their financial obligations.

But we need to do more.

The challenges of our national infrastructure are so complex that a single solution is not enough.

A comprehensive expansion of federal investment in infrastructure should include the authorization of a new direct-payment bond program and an increase in the volume cap for private activity bonds. An expansion of “bank qualified” tax-exempt bonds would support infrastructure investment in small and rural communities that may have difficulty accessing the capital markets.

Meaningful public-private partnerships (P3) can also be a potential important component, leveraging our capital markets for creative financing options through municipal bonds.

Initiatives for infrastructure finance should recognize the need for a partnership among federal, state and local governments as well as private investors and developers. Tax credits for equity investors and availability of tax-exempt financing for P3 projects as exists for traditional municipal bond-financed initiatives are other useful options.

Simultaneously, we are exploring how we can make existing investment dollars go further. Innovative approaches like design-build enable us to do just that.

The municipal bond market has long been a key component of successful infrastructure project financing. The recent dialogue between Administration and Congress around this issue represents an important step toward bringing our infrastructure into the 21st century.

With the current infrastructure crisis, restoring advance refundings and implementing other tools identified above, we can begin to close the financing gap and restore our nation’s infrastructure.

This week, May 13-20, is the seventh annual Infrastructure Week – an opportunity to highlight and continue the important national conversation on the need to revitalize, modernize, and invest in infrastructure. Let’s #BuildForTomorrow. Starting now.

BY: Leslie Norwood

DATE: May 17, 2019

Leslie Norwood is a Managing Director & Associate General Counsel and Head of Municipal Securities at SIFMA

ESG factors generally have a low level of direct impact on public finance and infrastructure credit ratings. However, governance is the most influential ESG risk factor across the overall ratings portfolio. This was driven by public finance issuers, which is not surprising given that factors such as political stability, creditor rights, financial transparency, governance structure, government independence and control of corruption are important considerations in our credit rating process.

Download: Our ESG Relevance Scores

Watch Video: Introducing ESG Relevance Scores – An Update for Public Finance and Infrastructure

Fitch Ratings-New York-15 May 2019: Any U.S. federal government plan for renewing infrastructure will need to provide for consistent, continued federal funding and more diverse funding sources to fully address the infrastructure deficit, says Fitch Ratings. The April meeting between the President and Democratic Congressional leaders in which they agreed to work toward a $2 trillion infrastructure plan was a first step in addressing infrastructure needs; however, the difficulty of hammering out the details may keep the plan from advancing. The second meeting between these parties, tentatively planned for the week of May 20, may provide more information regarding what level of federal funding the White House would back but ultimately Congress will need to get behind proposed legislation.

Federal funding will be an important factor in any plan’s viability, as will private participation. The nation’s significant infrastructure needs, encompassing not only transportation but also utilities, housing, and other social infrastructure, will require ongoing funding from various parties. Relying only on states and local governments will not be enough.

That said, with no federal plan currently in place, states have become increasingly proactive in raising necessary infrastructure money for themselves and local governments, primarily for transportation. Since 2013, 31 states raised gas taxes according to the National Conference of State Legislatures, including four in 2019 alone. Highway tolls were also used to pay for infrastructure not directly related to tolled roads and Fitch notes challenges to such policies have been rejected by the courts so far.

However, state and local governments are unable to raise adequate funds to fully address infrastructure needs on their own. State revenue growth since the end of the Great Recession has generally been slow, and coupled with rising costs for items such as pensions, Medicaid, and public education, states’ budgets have limited headroom for additional spending on infrastructure. Local governments are similarly constrained with modest revenue growth and rising costs for pensions and other employee benefits, public safety and a varying tolerance for additional debt.

As an additional tool, a number of states, and increasingly municipalities, have turned to public-private partnerships (PPP) to procure a wide variety of projects, including roads and bridges, civic centers, courthouses and even public schools. While PPPs can impose long-term cost burdens for governments similar to traditional public procurements, in certain situations the PPP model can accelerate projects and has the potential to yield long-term savings if risks are appropriately managed. Given broad infrastructure demands, we anticipate continued growth in PPPs using private financing such as private activity bonds.

With details to be worked out, it may be hard to get any plan off the ground if Congress is unable to agree on the source of federal funding. Split control of Congress makes passage of such a large infrastructure bill tenuous. Disagreements exist over gas tax increases, reducing federal tax cuts and increasing the federal deficit. A plan proposed last year by the White House did not result in legislation.

Any infrastructure plan should provide for the renewal and replenishment of the federal highway transportation fund (HTF), which is the primary source of existing federal infrastructure funding and is supported primarily by federal gasoline taxes. The HTF provides around $40 billion in highway spending and $10 billion in transit spending to states annually. Since 2008 the HTF required transfers from the Treasury’s general fund to close its revenue gap. The Congressional Budget Office forecasts the HTF will be depleted in 2022 without another infusion of general fund dollars. Putting the HTF on a sustainable fiscal path would serve as a strong indicator of the federal government’s commitment to long-term infrastructure investment.

Accessing federal funds for infrastructure projects is much too difficult, county leaders say. With reauthorization of the FAST Act on the table, they want a bigger say in how money can be spent.

Counties own 38% of bridges and 45% of roads across the country, totaling more than 3.1 million miles of pavement that require regular upkeep. That’s a big responsibility for local governments that often lack the necessary funding to complete all the projects in their backlog.

“From the moment we leave our front doors, we rely on safe infrastructure to get us to our destinations, and that usually starts with local roads,” said Corina Lopez, the vice mayor of San Leandro, California at a Wednesday event hosted by the National Association of Counties and the National League of Cities.

“There’s no way we can do this alone at the local level,” Lopez continued. “We need the federal government to round out the picture and create more robust infrastructure spending.”

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Route Fifty

by Emma Coleman

May 16, 2019

MUNIS IN FOCUS: Joe Mysak, Editor Bloomberg Brief:   Municipal Market, discusses falling muni bond yields, and Puerto Rico cofina bonds. Hosted by Lisa Abramowicz and Paul Sweeney.

Running time 04:24

Play Episode

May 10, 2019 — 9:02 AM PDT

• Citigroup says newly approved device could stanch sales drop
• ‘This is going to cannibalize Juul,’ says analyst Rai

One of the most volatile corners of the municipal-bond market is being whipsawed by Washington.

Securities backed by the payments states receive from the 1998 legal settlement with tobacco companies tumbled at the end of April after legislation was introduced in Congress to raise the age for buying cigarettes, a step that threatened to accelerate the steeper-than-anticipated drop in consumption that’s weighed on the prices of the bonds.

But there may be a reversal-of-fortune for the $85 billion sector, thanks to the federal government. The U.S. Food and Drug Administration’s April 30 approval of a tobacco-heating device could win back consumers that have switched to e-cigarettes, like Juul, and help stanch the decline in annual settlement payouts that finance the securities, according to Citigroup Inc. analysts led by Vikram Rai.

The Philip Morris International device heats a stick of tobacco in a way that produces a traditional cigarette taste without as many toxins. Citigroup’s analysts anticipate that the sales from the device — unlike e-cigarettes such as Juul — will be included in the tally of annual cigarette shipments that determine the settlement payments.

“Juul is cannibalizing conventional cigarette sales,” said Rai. “This is going to cannibalize Juul.”

Tobacco bonds are a volatile part of the $3.8 trillion municipal market because they’re heavily traded, making them easy for fund managers to sell whenever customers pull out their cash.

Regulatory decisions in Washington have also played a role in price swings. In November, junk-rated tobacco bonds dropped following reports the FDA was considering restricting menthol in cigarettes, and some of the riskiest securities plummeted 22 percent in 2010 after a 62-cents-a-pack federal tax increase dented sales.

Since states started selling bonds to get an advance on their settlement money, the traditional cigarette business has been in steady decline because of stricter regulation, tax increases and public health campaigns. E-cigarettes that deliver nicotine less harmfully have also cut into sales.

Altria Group Inc., the parent of Philip Morris USA, revised its estimate for the 2019 domestic cigarette industry volume to a decline of 4 to 5 percent, primarily because of increased gas prices and “other factors” it didn’t specify.

Such declines helped push junk-rated tobacco bonds to a 0.6 percent decline in April, the sector’s worst return since November. They were the only category of high-yield municipal bonds to suffer losses, according to the Bloomberg Barclays Muni High Yield Index. This month, they’ve pared that drop, returning 0.75 percent, compared with a 0.48 percent for the high-yield index.

Sales of HeatSticks, a heated tobacco unit used with the IQOS device, will contribute to the settlement agreement payments through Altria’s Philip Morris USA, which is marketing both of the Philip Morris International products domestically. How much money that could add is hard to calculate, since Altria and the international unit haven’t disclosed the terms of their licensing agreement.

The potential success of the device may hinge on the the ability of Philip Morris to convince smokers that the e-vapor system are less risky than cigarettes but more satisfying than rival products, according to Bloomberg Intelligence analysts Kenneth Shea and Gopal Srinivasan. And it will need to comply with the same marketing restrictions imposed on traditional cigarettes, which include bans on television and radio advertising.

Citigroup expects tobacco bonds will perform well even before the product gains ground, in part because of a supply crunch that is affecting the broader municipal market. Those that\ were issued in the early to mid-2000s and have higher coupons and could produce 11 to 12 percent returns this year, Rai said.

“As long as the market doesn’t go into a tailspin, as long as inflows continue, by virtue of the high coupon, the returns are pretty good,” Rai said.

Bloomberg Business

By Martin Z Braun and Danielle Moran

May 8, 2019, 10:35 AM PDT Updated on May 8, 2019, 1:02 PM PDT

— With assistance by Tiffany Kary

• Less than 20 percent of trades done by top three, MSRB says
• Drop in concentration seen as sign of liquidity, competition

In the business of trading municipal bonds, the little guys are chipping away at Wall Street’s behemoths.

The three biggest securities dealers handled fewer than 20 percent of the trades executed in the state and local debt market in 2018, down from about 24 percent the year before and over 29 percent in 2011, according to a report released Wednesday by the Municipal Securities Rulemaking Board, which didn’t identify firms by name.

It found the concentration of trades among the top five and top 10 dealers also declined “significantly,” even if the dollar volume of their share increased — reflecting work in handling bigger transactions. The biggest loss of business came from trades of $100,000 or less, the type done on behalf of individual investors instead of customers like mutual funds or insurance companies.

The regulator said it’s hard to identify why trading activity has become less consolidated among the biggest dealers, but said the rise of computer-driven trading may have played a role.

“The decrease in concentration in the top five dealers and a greater number of dealers participating in both large and small trades could be a sign of greater overall market liquidity, increased competition for customer business and a sign that customers are not as reliant on a few dealers as before,” the regulator wrote in the report.

The shift stands in contrast to the underwriting business, which has become heavily concentrated among the leading banks. Last year, nearly half of all new municipal-bond deals were handled by just three firms — Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co., according to data compiled by Bloomberg.

Bloomberg Markets

By Martin Z Braun

May 8, 2019, 12:34 PM PDT

The U.S. Court of Appeals for the First Circuit decision affirming a lower court’s decision that payment of Puerto Rico Highways and Transportation Authority’s special revenue secured debt is voluntary, and not required, during bankruptcy, has generated significant market attention. While the decision is technically only binding precedent for cases arising in the First Circuit, its impact is broad…

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May 1, 2019

Having practiced in Puerto Rico for nearly a decade, including being involved heavily in the ongoing Title III PROMESA proceedings, the recent ruling handed down by the First Circuit could prove to be the most impactful for the Island’s long term restructuring prospects and its access to the Bond markets. The controversial ruling, which pertains to the treatment of municipal revenue debt, has left investors with questions about the value and significance of a revenue pledge in a municipal bankruptcy. This blog provides some background and potential ramifications.

Background

The original U.S. District Court decision affected the municipal markets in January 2018, when the court ruled that municipal debtors were permitted, but not required, to apply special revenues to pay related bonds. The ruling reversed long-held practice as to the mandatory application of special revenues following municipal bankruptcy.

The controversy involved several series of bonds (the Bonds) issued by the Puerto Rico Highway and Transportation Authority (PRHTA). By statute, the Bonds were secured by a gross lien on revenues derived from certain highway tolls and excise taxes (collectively, the Pledged Special Revenues). The Bonds were also insured by a number of financial insurers (the Insurers), who were subrogated to the bondholders’ rights upon payment of a covered default of the Bonds.

In March and April 2017, both the Commonwealth and PRHTA adopted fiscal plans purporting to modify the application of the Pledged Special Revenues. Under the Commonwealth’s fiscal plan, certain of the Pledged Special Revenues would be diverted to the Commonwealth for its general revenue purposes, and under the PRHTA fiscal plan, PRHTA would be authorized to apply Pledged Special Revenues to pay operating expenses ahead of debt payments, in contravention of the gross lien granted to holders of the Bonds.

On May 21, 2017, the Financial Oversight and Management Board for Puerto Rico (the Board) began debt adjustment proceedings for the PRHTA under Title III of PROMESA. Shortly thereafter, the trustee for the Bonds was instructed by the Puerto Rico Fiscal Agency and Financial Advisory Authority, on behalf of PRHTA, to cease making scheduled payments, based on the rationale that such payments violated the Bankruptcy Automatic Stay. On July 3, 2017, PRHTA defaulted on a scheduled payment of $219 million.

The Insurers filed suit against the Commonwealth, the PRHTA and the Board, seeking declaratory and injunctive relief. The Insurers asked the court to declare that the Bonds were secured by special revenues exempt from the automatic stay and to grant an injunction requiring PRHTA to resume remittance of the Pledged Special Revenues. The Insurers’ arguments hinged on the interpretation of Sections 922(d) and 928 of Chapter 9 of the U.S. Bankruptcy Code, which address the treatment of special revenues in municipal bankruptcy.

The court dismissed the Insurers’ claims, holding, in effect, that while Section 928 extended the Bonds’ statutory lien to cover post-filing special revenues and Section 922(d) indeed permitted the municipality to apply those special revenues to make the secured payments, neither provision affirmatively required such payments.

The First Circuit heard the Insurers’ appeal and, on March 26, 2019, affirmed the lower court ruling, dismissing the Insurers’ claims. The First Circuit reasoned that:

“In sum, Sections 928(a) and 922(d) permit, but do not require, continued payment during the pendency of the bankruptcy proceedings. The two provisions stand for the premise that any consensual prepetition lien secured by special revenues will survive the period of municipal bankruptcy, and, accordingly, municipalities can elect to voluntary [sic] continue payment on these debts during the course of the bankruptcy proceedings so as to not fall behind and thus be at risk of being unable to secure financing in the future.”

Adverse Effects and Future Outlook

Strong industry concerns have emerged that the ruling will have a broader impact on holders of municipal revenue debt, particularly given the lack of jurisprudence interpreting issues of municipal bankruptcy. The ruling raises concerns about the value of a municipal revenue pledge and creditors’ ability to enforce any lien on such revenues post-bankruptcy, or to otherwise protect the revenue stream. This is very pertinent as the market has been closely monitoring the PROMESA proceedings and its potential impact on how future municipality bankruptcies could play out.

It appears that, at least in the short-term, investors may turn to requiring heightened disclosures and modified structures to provide greater protection in future debt issues. Concerns also linger as to the Island’s short and long term access to the market, which has provided strong financial backing in the past. There still exists the possibility that this issue will be taken to the United States Supreme Court. In the meanwhile, expect the ramifications to be felt.

by Paul Hammer

May 2 2019

Kane Russell Coleman Logan PC

Summary

The municipal securities market continues to generate steam, as funds attract further inflows amid light new issuance.

US$1.72bn flowed into municipal bond funds and US$416m into ETFs, according to ICI, while municipal relative value ratios sunk to their lowest level in about a decade.

Holders of some major muni-fueled ETFs have also been enjoying a recent surge in value.

Meanwhile, the University of Pittsburgh Medical Center (UPMC) is set to offer around US$738m worth of revenue bonds through Pennsylvania’s Allegheny County Hospital Development Authority.

Other deals on the radar for the week ahead include US$1.5m worth of general revenue bonds from New York’s Triborough Bridge and Tunnel Authority, as well as almost US$486m of school district revenue bonds from the Dormitory Authority of the State of New York (DASNY).

The municipal securities market continues to generate steam, as funds attract further inflows amid light new issuance.

Flows into muni bond mutual funds and exchange-traded funds (ETFs) remained positive in the week ending May 1.

According to the Investment Company Institute (ICI), investors in the latest week added US$1.72bn to municipal bond funds and US$416m to ETFs, contributing to a tally of roughly US$35bn to date in 2019.

Holders of some major muni-fueled ETFs have also been enjoying a recent surge in value.

Prices of the iShares National Muni Bond fund (NYSEARCA: MUB) and the Vanguard Tax-Exempt Bond fund (NYSEARCA: VTEB), for example, have soared around 5% to 5.3% since their latest 52-week lows set in early November 2018 of US$106.575 and US$49.855, respectively, according to the IBKR Trader Workstation. MUB and VTEB were last up just north of 0.2% intraday Thursday, each setting new 52-week highs.

Janney Montgomery municipal strategist Alan Schankel recently highlighted that the muni bond market is “on one of the strongest performance streaks we’ve seen in a while, as light supply and continuing strong demand push relative value indicators, such as municipal-to-Treasury ratios, to cyclical lows.” In fact, municipal relative value ratios have sunk to their lowest level in about a decade.

Schankel added that muni ‘AAA’ benchmark yields finished lower again Wednesday, despite a “poor” U.S. Treasury auction-fueled selloff.

Bloomberg data shows that 10-year state and local debt yields a little more than 72% of Treasuries, compared with just north of 73.5% in the previous session. They had yielded nearly 77.25% a month ago.

UPMC Graces the Fixed-Rate Calendar

Against this backdrop, a handful of issuers have potential new offerings on the fixed-rate calendar in the week ahead, including nearly US$738m worth of University of Pittsburgh Medical Center (UPMC) revenue bonds through Pennsylvania’s Allegheny County Hospital Development Authority.

UPMC said it intends to apply the proceeds from the sale towards refunding certain existing outstanding indebtedness, as well as certain debt-related expenses.

The deal, which has serial maturities from July 15, 2020 through 2039, has been rated ‘A1’ by Moody’s Investors Service, and ‘A+’ by both S&P and Fitch Ratings.

Fitch earlier in May had cut the revenue bond rating one notch to ‘A+’ from ‘AA-‘ on UPMC’s outstanding parity debt issued by UPMC and via other authorities, including the Pennsylvania Higher Educational Facilities Authority, Allegheny County Hospital Development Authority, and the Pennsylvania Economic Development Financing Authority.

Fitch analysts Olga Beck and Eva Thein noted that the credit rating downgrade was mainly due to UPMC’s “lower liquidity position, which has historically lagged the ‘AA’ category and does not compare favorably to the system’s higher leverage position.”

At fiscal year-end 2018, UPMC’s cash to adjusted debt fell to 90%, with investment losses incurred as of December 31, 2018.

Beck and Thein continued that while investment valuations have recovered in the first-quarter of fiscal 2019, the year-end results “highlight the vulnerability of a low cash position in times of market volatility for a system with a higher debt load and historically low cash flow generation.”

Fitch added that while it expects UPMC’s integrated delivery model, including its “aligned physician base, extensive health plan, and sizeable delivery network,” to continue to “significantly shift the market in Western Pennsylvania in UPMC’s favor,” it also anticipates “no significant changes” in either its profitability or balance sheet metrics in the near to intermediate-term.

UPMC’s debt service coverage ratio fell to 2.37x in the trailing twelve-month (TTM) period ended March 31, 2019 from 2.49x in the TTM ended December 31, 2018. Over the same period, its revenues available to service debt shrunk to US$930.5m from US$975.1m, while its debt rose to US$392.7m from US$391m.

Meanwhile, Moody’s said its ‘A1’ reflects its expectations that UPMC will continue to benefit in large part from its “notable scale,” with a consolidated revenue base of nearly US$19bn, as well as its leading market share in most of the markets it serves.

However, Moody’s analyst Beth Wexler said she expects UPMC’s financial profile to “remain stressed” over the intermediate-term. Furthermore, Moody’s also attributed its negative outlook on the latest series 2019A deal to “modest” operating cash flow and balance sheet measures, which are likely to provide limited flexibility as UPMC’s growth is digested.

In mid-August 2018, UPMC had also sold more than US$943m of tax-exempt muni bonds in four parts, with maturities ranging from 2023 to 2047. Its 10-year tranche had priced to yield 3.18%, a spread of nearly 73.5 basis points more than matched-maturity U.S. government debt.

Its proposed series 2019A debt is expected to be issued as fixed-rate, tax-exempt bonds and sold via negotiation the week of May 13, 2019.

In the meantime, other deals on the radar for the week ahead include US$1.5m worth of general revenue bonds from New York’s Triborough Bridge and Tunnel Authority, as well as almost US$486m of school district revenue bonds from the Dormitory Authority of the State of New York (DASNY).

Seeking Alpha

May 12, 2019

One of the most common questions we get at ETF.com is, what’s the difference between an ETF and a mutual fund?

Usually, our answer is some combination of “better tradability + more transparency + lower costs.” ETFs trade intraday on exchanges like stocks, they regularly disclose their holdings, and they rely on authorized participants (APs) to create and redeem shares and keep prices in line. That last characteristic helps to lower fund expenses and reduce ETFs’ tax burden, and as such, attracts the lion’s share of attention from investors.

However, it’s easy to overlook how much tradability can matter—especially in the fixed income space, where ETFs have had a profound impact on the way people invest. Bond ETFs have created, quite literally, a fairer and more liquid underlying market—something that benefits everybody, regardless of their preferred investment vehicle.

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ETF.COM

by LARA CRIGGER

May 13, 2019

Helps financial advisors build hypothetical bond ladders tailored to help meet client needs

NEW YORK, May 8, 2019 /PRNewswire/ — J.P. Morgan Asset Management today announced the launch of Bond Ladder Illustrator, a new tool for financial advisors to create hypothetical municipal bond ladders based on customizable inputs such as tax rates, credit quality, maturity ranges and interest rate views.

Powered by an engine built in partnership with Asset and Wealth Management’s Intelligent Digital Solutions group, the tool provides advisors with the unique opportunity to create hypothetical bond ladders based on actual municipal bonds that have gone through J.P. Morgan’s extensive credit review process, rather than generic benchmark interest rate curves.

“Using actual municipal bonds that have made it into J.P. Morgan’s portfolios enables the tool’s output to be more indicative of what a client would actually get if they choose to build a laddered portfolio with us,” said Rick Taormina, Head of Tax Aware Strategies at J.P. Morgan Asset Management.

Some of the tool’s key features include a tax rate calculator, customizable portfolio assumptions based on client preferences, and a personalized, end-client ready report that includes key portfolio characteristics, estimated investment returns, income, cash flow and total return metrics.

Bond Ladder Illustrator is the latest addition to J.P. Morgan’s suite of digital portfolio construction tools as the firm continues to deliver sophisticated digital capabilities to financial advisors, said Andrea Lisher, Head of the Americas for J.P. Morgan’s Global Funds business.

“This is another great example of how we’re investing in leading-edge tools to help financial advisors build stronger portfolios for their clients,” Lisher said.

“Like our digital Portfolio Analysis and Investment Comparison tools, Bond Ladder Illustrator combines the ‘power under the hood’ of J.P. Morgan’s insight and expertise with 24/7 convenience and an easy-to-use interface that gives advisors what they need in just a few, simple clicks.”

Advisors can access the Bond Ladder Illustrator at jpmorgan.com/bondladder.

About J.P. Morgan’s Municipal Bond Investing Team

With over $69 billion in municipal bond assets, J.P. Morgan’s dedicated investment team and seasoned credit analysts have managed municipal bonds through a range of credit and market cycles for more than 35 years. The firm offers a broad range of municipal bond solutions across the duration and quality spectrums designed to meet an individual’s unique circumstances including risk tolerance, cash flow needs, tax status and investment horizon.

About J.P. Morgan Asset Management

J.P. Morgan Asset Management, with assets under management of $1.7 trillion (as of March 31, 2019), is a global leader in investment management. J.P. Morgan Asset Management’s clients include institutions, retail investors and high net worth individuals in every major market throughout the world. J.P. Morgan Asset Management offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. (NYSE: JPM), and its affiliates worldwide.

Any forecasts, opinions, statements of financial market trends or investment techniques and strategies expressed are those of J.P. Morgan Asset Management, unless otherwise stated, as of the date of the release. They are considered to be reliable at the time of this release, and may be subject to change without notice. Investing in Alternatives investments involves risks.

J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated, J.P. Morgan Alternative Asset Management, Inc., and J.P. Morgan Asset Management (Canada), Inc.

J.P. Morgan Distribution Services, Inc., member of FINRA

Copyright 2019 JPMorgan Chase & Co. All rights reserved.

SOURCE J.P. Morgan Asset Management

May 08, 2019, 13:00 ET

Fitch Ratings-New York-07 May 2019: States and local governments are taking legal action to recoup costs related to the opioid crisis but potential litigation awards may not fully account for the budgetary outlays, says Fitch Ratings. Lawsuits may be able to recoup some governmental expenditure for treating addiction and the social fallout of addiction but redress as a result of court decisions or legal settlements is not likely to significantly affect government budgets. Compensation will not be as much as provided for in the 1998 tobacco master settlement agreement (MSA), proceeds of which were not sufficient to affect state and local government credit quality.

Direct and indirect economic loss to governments from opioid abuse results from decreased productivity, lost wages, healthcare, substance abuse treatment, social services, and court and correctional expenses. These costs affect state and local governments in two ways: by diverting resources from other expenditures and by depriving governments of economic growth. A study in the journal Medical Care by researchers at Pennsylvania State University (PSU) estimated opioid misuse reduced state tax revenue by $11.8 billion between 2000 and 2016.

In recent court cases, governments alleged drug manufacturers, distributors and pharmacies misled the public on the dangers of opioids, which contributed to opioid overdose deaths, arguing these parties are responsible for abetting the crisis and related fallout. Oklahoma recently settled a lawsuit against Purdue Pharma for $270 million in which the state alleged the company aggressively and deceptively marketed OxyContin. The settlement includes $20 million for treatment drugs and $12 million to Oklahoma cities and towns. The settlement is carved out of any potential bankruptcy filing by Purdue.

Thirty-five other states have sued manufacturers in state courts, in addition to approximately 1,600 independent cases brought by states, counties, cities, tribes and other entities, such as unions and hospitals that have been consolidated in a multidistrict lawsuit in a US district court in Ohio, expected to be heard in October. Lawsuits were also brought by New York, Vermont, and Washington against drug distributers Rochester Drug Cooperative, Cardinal Health (BBB/Stable), McKesson (BBB+/Stable) and AmerisourceBergen (A-/Stable).

Fitch has indicated the outcome of the federal case may be a tobacco-style MSA. However, we expect any settlement would result in a smaller award than the tobacco litigation, which was $200 billion, as opioids are FDA approved prescription medications, and the sale of opioids are a small fraction of tobacco product sales. State costs related to the crisis are believed to be significantly less than the decades of health care expenses incurred by states tied to tobacco usage.

It is unknown how proceeds from any successful litigation will be allocated. Previous opioid settlement awards have been spent in various ways and not always directly for the benefit of those struggling with addiction. This outcome is similar to the MSA, in which the agreement with states did not specify how proceeds should be spent, and indeed, tobacco MSA proceeds have been used for many different purposes.

The US Council of Economic Advisers estimates the economic cost of the opioid crisis was $504 billion in 2015, including fatalities from opioid overdoses. However, the effect on individual states and counties varies widely. The PSU study underscored that estimates of lost tax revenues by state is dependent upon each state’s tax rates and population size. The disparate effect on various parties will mean the allocation of any settlement proceeds will be adjudicated based on related effects to the many plaintiffs.

Contact:

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

Amy Laskey
Managing Director, US Public Finance
+1 212 908-0568

Sarah Repucci
Senior Director, Fitch Wire
+1 212 908-0726

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

Link to Fitch Ratings’ Report(s): U.S. State and Local Pension Investments (Concerns Grow with Riskier Allocations, Lower Returns)

Fitch Ratings-New York-06 May 2019: U.S. state and local pensions have taken on riskier asset allocations in recent years, though the rate of return is paling compared with the higher risk according to Fitch Ratings in a new report.

State and local pension plans have steadily increased their allocations to equities and alternatives such as real estate, private equity, hedge funds and commodities over the last several years. Asset allocation to both equities and alternative investments rose to 77% in 2017 from 67% in 2001. In contrast, asset allocation to fixed income investments and cash fell to 23% in 2017 from 33% in 2001. However, median average returns for major state and local systems were 6.2% between 2008 and 2017 compared with 6.4% between 2001 and 2017.

The falling rate of return is particularly notable for seven states (New Hampshire, Arizona, Rhode Island, Connecticut, Maryland, Hawaii and New Jersey), which showed average underperformance of 2% and higher. This is a performance gap that over time could have a material impact on how some pension plans are funded according to Olu Sonola, Group Credit Officer of U.S. Public Finance at Fitch. ‘Persistent shortfalls in investment performance eventually necessitate future increases in employer contributions, which could be especially problematic for states with already elevated pension liabilities,’ said Sonola.

Arizona’s 86% allocation to equities and alternatives is the highest among U.S. states. Conversely, states like South Dakota (66% allocation to equities and alternatives as of 2017) and Indiana (48% allocation to alternative investments) are clearly making a hard turn away from riskier assets.

These developments will be critical in determining the overall picture of unfunded pension liabilities, which eclipsed $1 trillion two years ago. The increase in unfunded liabilities largely reflects lower than expected investment returns, shortfalls in actuarially determined contributions and steady increases in projected future benefits.

‘U.S. State and Local Pensions – The Changing Risk-Return Landscape’ is available at ‘www.fitchratings.com’ or by clicking on the above link.

Contact:

Olu Sonola
Group Credit Officer, U.S. Public Finance
+1-212-908-0583
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

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

Cory Fitzsimmons
Senior Analyst
+1-212-908-0302

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

Additional information is available on www.fitchratings.com

A growing body of evidence shows that “alternative investments” may be lowering returns and costing state and local governments more.

Public pensions are more invested than ever before in high-risk and expensive assets like real estate and hedge funds. Yet research continues to show that this tactic is unlikely to improve their earnings.

According to Fitch Ratings, in the span of a decade, pensions tripled their average investment in these so-called alternative investments. In 2007, they averaged 9 percent of state and local public pension investment portfolios. By 2017, that number had risen to 27 percent.

During that period, median average returns on overall investments were 6.2 percent, according to Fitch. But during the longer period between 2001 and 2017, reflecting a time of less reliance on alternative investments, they were actually slightly better: 6.4 percent.

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GOVERNING.COM

BY LIZ FARMER | MAY 8, 2019 AT 4:00 AM

See which states, metro areas and counties have the most.

It’s not uncommon for one metropolitan area to be home to dozens of local governments. In lots of those places, mayors and other local officials often lament the difficulties of having to coordinate with so many cities, towns and counties.

There’s no agreed-upon definition for this local government “fragmentation,” but most researchers measure it by the number of governments per capita. We used that measurement, along with the number of governments per square mile, to see which metro areas and counties are the most fragmented.

Our calculations are based on the latest Census of Governments survey, which is conducted every five years and counted 38,779 cities, counties, towns and other general-purpose local governments (excluding special districts).

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GOVERNING.COM

BY MIKE MACIAG | MAY 7, 2019 AT 4:00 AM

President Trump and Democrats are in a crunch as they try to pursue a $2 trillion infrastructure package amid rising concerns in some quarters about the deficit and national debt.

While many support the concept of an infrastructure push, members of Congress and outside groups are worried about how to pay for such a massive haul with national debt topping $22 trillion.

“It’s $200 billion a year, so that’s not an easy pay-for. I don’t know how you’d do it without raising taxes,” said Rep. John Yarmuth (D-Ky.), who chairs the House Budget Committee.

“If we can find a way to pay for it, or pay for a substantial portion of it, I think it’s a great goal to have,” he added.

Trump and congressional Democrats have both frequently named infrastructure as one of their priorities and view the issue as an opportunity for bipartisan legislation in a divided government. Democratic leaders said that in a meeting on Tuesday, they and Trump agreed to pursue a $2 trillion bill. Lawmakers and the White House are expected to meet again in the coming weeks to discuss funding options.

But finding the money is a problem, and Democrats have left it to Trump to suggest a plan for their next meeting.

“We know we can spend the money. People will be delighted to spend the money on roads and bridges and inland waterways and ports and rural broadband, no problem. But the part of the discussion that’s lacking is, how are you going to pay for it?” said Rep. Tom Cole (R-Okla.), an appropriator.

The government will be forced to borrow money for any part of the plan it can’t offset with new revenues or other cuts, and that could spell trouble for the debt.

Even before infrastructure is considered, the country’s debt burden will reach 105 percent of gross domestic product by 2029 if current tax and spending policies are left in place, just a point below the record debt level at the end of World War II, according to a Thursday report from the Congressional Budget Office.

Budget watchers say that the debt path is unsustainable and will eat into the country’s economic well-being if it is not addressed.

“Rebuilding infrastructure can be critical and productive for our economy, but that also means it’s important enough to be paid for. If we can agree it’s necessary, we can agree we should pay for it,” Michael Peterson, CEO of the Peter G. Peterson Foundation, which focuses on addressing fiscal issues, said in a statement to The Hill.

While debt levels are currently high, interest rates are currently low, which could give lawmakers some breathing room to phase in offsets to infrastructure spending over the course of several years.

“Interest rates are still pretty low, so it doesn’t need to be paid for in year one,” said Marc Goldwein, senior vice president and senior policy director of the Committee for a Responsible Federal Budget (CRFB).

But Goldwein said that it’s important for an infrastructure package to eventually be fully paid for. He said that there isn’t evidence that an infrastructure bill would pay for itself and that after the GOP tax law and government spending legislation added to deficits, “we can’t just keep adding $2 trillion at a time.”

The CRFB projected that just the interest costs of the debt are on track to surpass defense spending by 2024.

Kent Smetters, a professor at the University of Pennsylvania’s Wharton School, said that infrastructure is the most pro-growth when it’s not deficit financed and public investments are made without private capital being shifted to public capital.

“That’s where you get the biggest bang for your buck,” he said.

Senate Minority Leader Charles Schumer (D-N.Y.) has expressed interest in rolling back the GOP tax law to pay for an infrastructure package, but that’s a non-starter for Republicans and business groups. Some lawmakers are supportive of gas-tax increases, and Trump has expressed an openness to that idea in the past, but other lawmakers view gas tax hikes as regressive or oppose increasing taxes altogether.

“I’m certainly not in favor of any type of tax increase, no gas tax increase. That would be a bad idea, and $2 trillion is an unbelievable amount of money, particularly when we’ve got a $20 trillion debt,” said Rep. Jim Jordan (R-Ohio), a conservative who often has Trump’s ear.

Anti-tax crusader Grover Norquist, president of Americans for Tax Reform, suggested that the federal government’s contribution to an infrastructure package could come from selling off loans, and that amount could be supplemented by contributions from state and local governments and the private sector. He pointed to bipartisan legislation that has been introduced in the past to require the Agriculture Department to sell distressed assets.

“We have bipartisan, left-right agreement on using the sale of loans to create the capital to rebuild and fix the various roads and bridges,” he said.

Most Democrats want an infrastructure package to mostly consist of direct federal investment, and they said that Trump has criticized his own past proposals that rely heavily on public-private partnerships.

Progressives say that there are plenty of revenue options to cover costs.

“There are so many ways to pay for infrastructure,” said Rep. Pramila Jayapal (D-Wash.), co-chair of the Congressional Progressive Caucus (CPC), which included a $2 trillion infrastructure plan in its proposed budget last year.

“From a wealth tax to a financial transactions tax, there’s all kinds of specific, documented ways in our CPC budget that we propose paying for that,” she said.

The CPC budget outlines a tax code overhaul that would cut a slew of corporate deductions, change capital gains taxes, raise top-level income taxes, including a new bracket for income above $1 million, and broaden estate taxes.

Some progressives, such as Rep. Dan Kildee (D-Mich.), argued that Washington should borrow money and take on more debt to help fund the multitrillion-dollar package.

“I want us to have an honest conversation about what it’s going to take to pay for it and not start with the idea that we take debt off the table,” said Kildee, who has pushed for a bigger federal response to the Flint water crisis.

“We borrow money to buy a house, but we have the asset of the house so we don’t really fret with the amount of debt associated with it. We have to look at infrastructure as an asset.”

But the idea of borrowing money to help fund an infrastructure package won’t sit well with fiscal hawks in either party.

“I think it should be fully offset,” said Rep. Dan Lipinski (D-Ill.), a member of the Blue Dog Coalition of centrist Democrats. “Transportation and infrastructure has always been done by user fees, and I continue to support doing that.”

If Trump, who in a recent Gallup poll had a 91 percent approval rating among Republicans, puts his full-throated support behind a tax hike to pay for infrastructure, he may yet be able to win over some members of his party.

“I think enough Republicans could support something like that if the president were for it,” said Cole, the appropriator.

But, he added, “I don’t know what the president is for. He hasn’t told us.”

THE HILL

BY NAOMI JAGODA AND NIV ELIS – 05/06/19

Scott Wong contributed.

As of April 30, 2019, S&P Global Ratings maintained 62 public ratings on privatized student housing projects in the U.S. While the majority of these projects are secured by a non-recourse pledge of net housing project revenues, a small number benefit from additional financial support from their related underlying institution, whether in the form of a first fill agreement, vacancy guaranty, or univ…

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May 8, 2019

The county could forego $6.4 million in savings on the Talen Energy refinancing if it can’t resolve a conflict with its financial advisor.

MEDIA — Delaware County Council failed to move on a $22.8 million refinancing on Talen Energy stadium construction funds after concerns about the financial advisor’s “classic conflict of interest” arose, potentially relinquishing $6.4 million in savings.

By a 2-2 vote along party lines with Republican county council Chairman John McBlain abstaining, the motion to refund the 2009 bonds through an issuance of general obligation notes with the Delaware Valley Regional Finance Authority was deadlocked. Republican council members Colleen Morrone and Michael Culp voted in favor of the motion, while Democratic members Kevin Madden and Brian Zidek opposed it.

“Two to two, the motion fails, the savings are not realized,” McBlain said immediately after the vote, followed by Madden’s surprise at the comment, then his inquiry of county Solicitor Michael Maddren to review options for the county to receive counsel from another financial advisor than the one Delaware County uses — Calhoun Baker Inc.

“From my perspective, I’m concerned that this deal is rife with conflict of interest,” Zidek said as he also expressed concern about the county’s potential responsibility for termination rates.

With any refinancing, Delaware County is required to have two readings prior to a vote. The first reading of this occurred in March, when Zidek raised his concern that there was a conflict in Lucien B. Calhoun, president of Calhoun Baker Inc. serving as Delaware County’s financial advisor and also serving as the program administrator for the Delaware Valley Regional Finance Authority, a position Calhoun has held since 1989.

To address this, Maddren was directed to hire outside counsel from Cozen O’Connor for $7,500 to do a memorandum regarding the situation.

Zidek read from that memo, stating, “Calhoun Baker’s dual role as financial advisor to the county and program administrator for the Del Val loan program presents a classic conflict of interest. Calhoun Baker stands to benefit financially by advising the county to participate in the Del Val loan program.”

Calhoun Baker is paid about 6.25 points for the gross process of a loan but if one is taken with the Delaware Valley Regional Finance Authority, it gets paid 20 basis points while waiving its 6.25 point fee.

“In terms of conflicts, I think the whole issue has been muddled,” Calhoun said at the county council meeting. “Del Val is the conduit issuer. There’s not a diversity of interests between Del Val and any participant in the loan program.”

He added that the authority has 124 local governments from 12 counties with outstanding loans.

He also quoted an interpretive guidance issued by the Municipal Securities Rulemaking Board, stating, “It was not necessarily a conflict of interest for a municipal advisor to have dual representation of a conduit, an issuer such as Del Val and … the county of Delaware … And the reason for that is there is no diversity.”

Madden asked about having a third-party financial advisor look at the figures for the refinancing.

“I think that would be problematic for any other firm to come in and do that,” Calhoun said, adding that that advisor would have an inherent conflict of interest because of the potential incentive of getting Delaware County as a client with finding wrongdoing on Calhoun Baker’s part.

“This is in no way a personal matter,” Madden said. “I trust you as a person but structurally, I don’t trust the structure we have here.”

Calhoun then said, “I would resign. I would resign.”

In addition, Zidek said the Cozen O’Connor memo stated that the advisor would be required by federal securities laws to disclose their conflict to their client in such a situation, as Zidek said he hadn’t seen any disclosure.

McBlain said the relationship was apparent in Calhoun Baker’s 2014 agreement with the county “They disclose in that agreement that they are the program administrator for Del Val,” he said, adding that council had met with Calhoun last year to talk about various financings.

The chairman also noted that obtaining a Delaware Valley authority loan would have approximately $1.5 million in savings due to lower administrative costs, Calhoun Baker’s not taking a fee from the county if it goes with the authority and other fees such as bond issuer’s.

He added that the authority was specifically created by Chester, Delaware, Montgomery and Bucks counties to assist municipalities to do these types of financings at a lower rate for less cost.

Culp referenced this in his vote for the refinancing.

“I’m not going to risk a $6.4 million savings,” he said. “I don’t want Mr. (Calhoun) to have to resign … and we lose $6.4 million in savings and we’re back up here at square one again … I think my vote is with Mr. Calhoun. He’s been nothing but upfront with everything. He’s answered every question I’ve ever had. We’ve had great business dealings with him in the past. I know he works well with our staff. I don’t know how much longer we’re going to drag this out and not get the savings for our county residents.”

Zidek said, “One method of refinancing would be by doing the Del Val loan … and other ways would be to refinance by taking out bonds … It’s not zero or $6.5 million … The face of the matter is there is a structural conflict that exists here that I don’t feel comfortable waiving.”

By Kathleen E. Carey kcarey@21st-centurymedia.com @dtbusiness on Twitter May 8, 2019

WASHINGTON — The U.S. Environmental Protection Agency (EPA) announced the availability of $2.6 billion in new funds to assist states, tribes and territories with improving drinking water and wastewater infrastructure across the country. This funding advances President Trump’s efforts to rebuild the country’s aging water infrastructure, create local jobs, and ensure all Americans have safe and clean water.

“EPA is delivering on President Trump’s commitment to modernize our nation’s water infrastructure and improve public health and environmental protections,” said EPA Administrator Andrew Wheeler. “EPA’s $2.6 billion contribution to the State Revolving Funds will enable more communities to make the investments needed to ensure Americans have safe water for drinking and recreation. These funds can also be combined with EPA’s WIFIA loans to create a powerful, innovative financing solution for major infrastructure projects nationwide.”

The State Revolving Funds (SRFs) require state match, loan repayments, and interest that flows back to the funds. With more than 30 years of federal capitalization grants and state contributions, approximately $80 billion has been invested into these programs. According to the agency’s estimate of national drinking water and wastewater needs, over $743 billion is needed for water infrastructure improvements. Through loan repayments and investment earnings, the SRFs have leveraged these contributions to provide more than $170 billion in financial assistance to over 39,900 water quality infrastructure projects and 14,500 drinking water projects across the country.

This year, EPA is making available more than $1 billion in new federal grant funding for the Drinking Water State Revolving Fund (DWSRF). This funding can be used for loans that help drinking water systems install controls to treat contaminants such as PFAS and improve distribution systems by removing lead service lines. In addition, more than $50 million in DWSRF grant funding is available to tribes, U.S. territories, and the District of Columbia to use for drinking water system upgrades.

EPA is also providing approximately $1.6 billion in new federal grant funding for the Clean Water State Revolving Fund (CWSRF). This funding is available for a wide range of water infrastructure projects, including modernizing aging wastewater infrastructure, implementing water reuse and recycling, and addressing stormwater. More than $64 million in CWSRF grant funding is available to tribes, certain U.S. territories, and the District of Columbia for infrastructure projects.

Background:

Under the Clean Water and Drinking Water State Revolving Fund programs, EPA provides funding to all 50 states and Puerto Rico to capitalize SRF loan programs. The states and Puerto Rico contribute an additional 20% to match the federal grants. The 51 SRF programs function like infrastructure banks by providing low-interest loans to eligible recipients for drinking water and clean water infrastructure projects. As the loan principal and interest are repaid over time, it allows the state’s DWSRF or CWSRF to be recycled or “revolve.” As money is returned to the state’s revolving loan fund, the state makes new loans to other eligible recipients.

In 2018, the SRFs committed $9.6 billion in drinking water and clean water infrastructure loans and refinancing and disbursed $8.8 billion for drinking water and clean water infrastructure.

For more information, visit https://www.epa.gov/drinkingwatersrf and https://www.epa.gov/cwsrf.

05/08/2019

WASHINGTON – Congressional proposals to expand the use of private activity bonds keep growing, with the latest coming from a bipartisan group of House lawmakers who want to raise the federal cap on private activity bonds for surface transportation and freight improvement projects by $5.8 billion.

The current volume cap on PABs issued for highways and freight improvement has just over $2.5 billion remaining that can be authorized by the U.S. Department of Transportation.

A total of $12.45 billion has either been issued or allocated of the $15 billion currently authorized by Congress.

The proposed Building United States Infrastructure and Leveraging Development (BUILD) Act introduced in the House this week is identical to a bipartisan Senate bill introduced in February by Sens. John Cornyn, R-Texas, and Mark Warner, D-Va.

Two House Democrats – Reps. Earl Blumenauer of Oregon and Terri Sewell of Alabama – have teamed up with Republican Reps. Mike Kelly of Pennsylvania and Rodney Davis of Illinois as lead cosponsors.

“Public-Private partnerships are one of a myriad of tools the nation needs to bridge the $2 trillion infrastructure investment gap,” Blumenauer said in a press statement announcing the introduction of the bill.

“I am hopeful that this bipartisan legislation will be part of any upcoming effort to rebuild and renew America,” he said.

The current $15 billion cap was established in 2005 under the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), which authorized a new type of tax-exempt private activity bonds that could be issued by state or local governments to finance qualified highway or surface freight transfer facilities.

The 2005 legislation designated DOT as the key agency for allocating these transportation PABs.

The transportation and freight PABs are among 22 eligible PABs that are subject to varying federal rules, according to the nonpartisan Congressional Research Service.

Thirteen of the 22 activities are subject to annual state volume caps. Among them are multifamily housing bonds, single-family mortgage revenue bonds and qualified student loan bonds. Others include small issue bonds, redevelopment bonds, exempt facility bonds such as water and sewage facilities, hazardous waste facilities and other utility facilities.

Among the PABs not subject to volume caps are those financing airports, docks, wharves and projects for 501(c)(3) organizations.

The transportation and freight PABs have been used for 35 projects in a wide range of states from Colorado to Illinois, Indiana and Ohio with another five allocated and not yet issued.

The projects include $460.9 million in PABs used for construction of a new Goethels Bridge between Staten Island in New York City and northern New Jersey, $737 million used for the so-called “Transform 66 Project” to widen Interstate 66 in the Virginia suburbs of Washington and two projects of $400 million and $274 million involving the North Tarrant Expressway in Tarrant County, Texas. Another $750 million for the North Tarrant Expressway has been allocated but not yet issued.

Another notable example of how these PABs have been used is through the Florida Development Finance Corp. to help private investors finance a high speed rail project between Miami and Orlando formerly known as Brightline and recently renamed Virgin Trains USA.

Other bills to expand the use of PABs include the Move America Bonds Act, which would leverage $8 billion in federal investment into $226 billion worth of bond authority over the next 10 years or up to $56 billion over 10 years in tax credits, according to an estimate by the nonpartisan congressional Joint Committee on Taxation.

Move America Bonds could be used for a wide variety of projects, including airports, ports, transit, freight and passenger rail, roads, bridges, flood projects, inland and coastal waterway improvements, wastewater and sewage facilities, and broadband infrastructure.

Another PABs bill is the bipartisan Public Buildings Renewal Act that would authorize $5 billion in private activity bonds for the construction or rehabilitation government-owned buildings.

That bill, which had the support of leading state and local elected officials in the last Congress, would provide an economic boost of more than $8 billion in the first year, according to a 2017 study by the Beacon Hill Institute.

By Brian Tumulty

BY SOURCEMEDIA | MUNICIPAL | 05/08/19 02:29 PM EDT

Shelly Sigo contributed to this report.

In State of California vs. U.S. EPA, Case No. 18-cv-03237-HSG, California U.S. District Judge Haywood S. Gilliam Jr. held that the U.S. EPA failed to comply with a “nondiscretionary obligation” under the federal Clean Air Act to implement regulations aimed at reducing air pollutants, including greenhouse-gas emissions, from municipal solid waste landfills. EPA promulgated Landfill Emission Guidelines during the Obama Administration that became effective October 28, 2016. States were to submit implementation plans by May 30, 2017. EPA was to approve or disapprove plans by September 30, 2017, and EPA was to issue federal plans for states that either did not submit plans or for non-conforming state plans by November 30, 2017. California, New Mexico, Arizona, Delaware, and West Virginia submitted state plans. EPA has not approved or disapproved any state plans, nor has it promulgated a federal plan. Plaintiffs sued to force EPA to take action.

EPA admitted that it failed to take action on the plans. However, EPA claimed that Plaintiffs lacked standing and that Plaintiffs’ deadlines were not feasible. The Court found Plaintiffs had standing under the “special solicitude” standard of Massachusetts v. EPA, 549 U.S. 497 (2007). The Court found that states are not normal litigants for purposes of federal jurisdiction and that Congress by statute had granted State Plaintiffs the right to challenge EPA’s alleged failure to perform a nondiscretionary duty (finding a procedural right under 42 U.S.C. 7607(b)(1)/7604(a)(2)). EPA alleged that State Plaintiffs lacked standing because they had failed to plead causation, and relatedly, redressability. Thus, EPA alleged that there was an insufficient causal connection between EPA’s inaction and the alleged injuries to the States or the requested relief. The Court rejected this argument pointing to indications that solid waste landfills contribute emissions that “contain numerous harmful pollutants.” Also, the Court notes that the parties did not dispute that landfills “’are the third-largest source of [domestic] human-related methane emissions’ and that methane is the leading greenhouse gas behind carbon dioxide.” The Court also pointed to the fact that the EPA Landfill Emission Guidelines themselves detail what it deemed to be a “meaningful contribution of landfill emissions to harmful pollution.” The Court similarly rejected the redressability challenge, finding that EPA’s challenge on this point was “entirely derivative of its [EPA’s] causation challenge.”

EPA and the States offered different proposed schedules for further action on the implementation plans. The Court found insufficient justification for the delays requested by EPA. The Court ordered EPA to: (1) approve or disapprove existing state plans no later than September 6, 2019; (2) promulgate regulations setting forth a federal plan non later than November 6, 2019; and (3) file status reports with the Court every 90 days.

by Bernard F. Hawkins, Jr.

May 9 2019

Nelson Mullins Riley & Scarborough LLP

GFOA established the Certificate of Achievement for Excellence in Financial Reporting Program (CAFR Program) in 1945 to encourage and assist…

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This article is the third in a series of four describing the positive effects of the rise of technology as both an infrastructure sector and credit factor in the municipal bond market (the introductory article is The Rise Of The Technology Infrastructure Sector In The Municipal Bond Market).

Those states, cities, counties and towns applying technology to assess and deliver services more efficiently and effectively are positioning themselves to be future-ready. Internet connectivity is both future-now and future-ready. The second article is From Megabits to Basis Points: Connecting Fiber Optic Broadband and Municipal Credit. This third article delves into the technologies changing highway transportation and the effect on credit in that sector.

Driving Into Traffic

Running late this morning, I missed my commuter train into Boston, and decided (foolishly) to drive instead to “save time.” Why I persist in this delusion in the face of abundant abject experience to the contrary was something I was contemplating while sitting at a dead stop on Interstate 93 North. Part of the “Big Dig” here in Boston about two decades ago, I-93 improvements, including adding lanes, were a solution for a number of transportation ills, not the least of which was to be clearing traffic congestion on this very roadway.

The “adding lanes to solve traffic” solution failed miserably for Robert Moses in New York back in the 1950s and 1960s and isn’t faring much better here in Boston these many years later. Expensive to build and maintain, roads don’t solve transportation problems—they complicate and compound them. More roads only encourages more people to drive, exactly the thing causing the problem in the first place.

Road Technology

Ohio has another approach. With 1,573 miles of highways crossing the state, it is the fourth largest interstate system in the country. Forward-looking as to how technology might address the issues of managing that system, the Governor of Ohio formed DriveOhio in 2018. A collaboration of dozens of public and private entities dedicated to finding tech solutions, Ohio is positioning itself to be a leader in smart mobility.

The long-term goal is nothing short of creating a fully technologically integrated highway system. From DriveOhio’s perspective, transportation infrastructure has to be able to constantly transmit, receive, monitor and respond to signals about road conditions, traffic flow, accidents, bad weather and other driving hazards. That means sensors to capture data, high speed broadband connectivity to transmit the data, and statistical analytics, machine learning and artificial intelligence to develop evidence-based solutions both in real time and over time.

Part of that infrastructure are vehicles and actually driving on the roads. A large component of smart mobility is technologically connected vehicles. This type of vehicle-to-vehicle (V2V) and vehicle-to-infrastructure (V2I) data sharing helps drivers avoid dangerous situations and allows traffic monitors to make better decisions about traffic management.

Sounds very future-techy, but what how does this help drivers behind the wheel in real life? It means, in real time, a driver can be notified when there is an accident, heavy traffic or bad weather with a suggested (or required) alternative route. With this advance notice filling the transportation-information vacuum, drivers can be safer, have less stress, use less gas, lower carbon emissions and make better time.

It also means first-responders can get help in the event of an accident. Accidents are a big issue in Ohio. On those main roads and local ones, there were over 300,000 car accidents in 2018. The overwhelming majority were driver error. Research showed that fully 80 percent of those crashes could have been avoided or mitigated with connected vehicle technologies.

The Case of the Ohio Turnpike and Infrastructure Commission

Stretching across the state, from the Pennsylvania border in the East to Indiana in the West, the 241 miles of the Ohio Turnpike and Infrastructure Commission (Aa2/AA-/AA) has more than 56 million commercial and individual vehicles drive on its six lanes through the state during the year. It is widely acknowledged as a critical corridor in the national highway system. Getting prepared to be future-ready with internet connectivity for whatever the internet of things may bring, it is “fibered” end to end—the full length of the turnpike is run with fiber optic cable.

Corresponding, the Ohio Turnpike is one of the nation’s leaders in testing and applying transportation technology. For example, to assure this critical corridor stays open in winter storm conditions—the average snowfall along the Turnpike was about 45 inches last year—it needs a fast response from snow-plows and deicers. So the Ohio Turnpike turned their snow-plows into data-gathering test vehicles. With sensors installed, in addition to vehicle speed, direction and location, there is data on when plows are up or down, when the salt spreaders are on and the rate of salt spread, and ambient temperature. The next step is capturing vehicle traction. That’s more than just seeing if the snowplow operator is enjoying a comfortable ride. Lack of traction is an indicator of black ice, suggesting there is water pooling on the road—a physical problem with the highway that will require a civil engineering fix to avoid adding to the accident count.

Bumpers to Basis Points

Traditionally, municipal bond analysts and investors focus on fundamental analysis, looking at income statements and balance sheets that show year-old numbers. In transportation, a “deep-dive” analysis usually means linking those dollars on the page to vehicle counts, tolls collected and fuel tax rates assessed, perhaps even doing some debt service stress-test modeling using these revenue components.

The problem is that this only shows the trend after it happened, meaning any subsequent investment decision occurs after the fact. It’s like buying a used car with 500,000 miles on the odometer because that proves the car works. Not to push the vehicle analogy too hard here, but trying to drive forward while looking in the rear view mirror doesn’t usually work too well.

That traditional, numbers-focused analysis misses opportunities in municipal borrowers getting future-ready. The indicators here are easy to identify. They are those municipalities and authorities building out technological infrastructure and creating public-private collaborations to test new technologies. These borrowers are more likely to have stable-to-improving financial performance and, by extension, their bonds potentially generating better investment performance.

Municipal bond investors holding debt of communities and agencies not building and applying technology to get future-ready are going to find themselves in the breakdown lane, the performance of others passing them by.

(Sorry. Couldn’t resist that last one.)

Forbes

by Barnet Sherman

May 3, 2019

Next In The Series

As advances in technology make delivering municipal services more effective and efficient, public administrators, appointed officials, and elected representatives are getting trained in these new tools. The fourth and final article in this series shows not only how these “next-gen” government leaders are going to use technology, but also how “next-gen” technology is restructuring government overall.

Barnet Sherman is the Director of Municipal Impact Credit Research, Neighborly Investments, an Adjunct Professor of Public Finance at Boston University, and is published in his field.

WASHINGTON — Municipal bond issuer officials are welcoming recommendations released last week for contractual fallback language for Libor-denominated floating-rate notes and syndicated loans.

Emily Brock, director of the federal liaison center for the Government Finance Officers Association, said GFOA 100% supports the effort and was among the 60 organizations that submitted comments to the Alternative Reference Rates Committee. The ARRC released the recommended language on Thursday.

“It very clearly defines cessation triggers and the fallbacks,” said Brock.

These two fallback recommendations are the first in a series of fallbacks that the ARRC is expected to issue in the coming weeks and months. Future ARRC fallback recommendations will address legacy contracts with Libor, new contracts and consumer product contracts.

ARRC said the recommendations are part of its mandate to address risks in contracts that refer to Libor as part of the larger shift to the Secured Overnight Financing Rate (SOFR).

The phase out of Libor, also known as the London Interbank Offered Rate, will affect municipal finance in not just the bond market but also in some legacy contracts with suppliers where Libor language is used, according to experts.

“It’s no longer a question of if “but when” Libor will become unusable, yet most contracts referencing it don?t adequately account for this eventuality,” Tom Wipf, chair of the ARRC and vice chairman of institutional securities at Morgan Stanley (MS), said in a statement. “With Libor’s possible 2021 expiration date looming, that obviously poses a massive risk to financial stability and market participants.”

Wipf described the fallback language as “a critical step.”

“We encourage market participants to incorporate this language into new contracts, and when possible, to begin writing contracts using SOFR instead of U.S. dollar Libor,” he said.

Floating rate debt is only a small fraction of the municipal bond market.

The Securities Industry and Financial Markets Association listed $76.9 billion in publicly issued municipal bonds from 872 issuances that used FRNs as of Dec. 18, 2018. That’s only 2% of the $3.8 trillion municipal bond market and includes debt that uses the SIFMA index but doesn’t include swaps.

Libor-based municipal debt was an even smaller amount at $47.6 billion or about 1.3% of the overall muni market.

In the bigger picture, the Federal Reserve estimated last year there were roughly $200 trillion of financial securities referencing U.S. dollar Libor.

ARRC said the recommended language for FRNs and syndicates is for voluntary use in new contracts that reference Libor with the goal of reducing the risk of serious market disruption in the event that Libor is no longer usable.

The fallback language may be used in a broad range of floating rate securities issued in the capital markets, including municipal bonds, pass-through securities, convertible debt and other debt issuances.

Municipal issuers rarely participate in syndicates, in which the risk of a large private placement issuance is shared by banks.

Brock said the recommended language is “well organized” with what she described as “clear definitions.”

“For FRNs, it is language that is usable,? Brock said. “It could be used right away by issuers. Of course, GFOA has urged issuers to have a discussion with their municipal advisors and their deal team.”

Historically, most FRNs provided for a fallback waterfall that would, upon Libor not being available, first revert to the average of quotes in the London interbank market obtained by polling banks and then would ultimately fall back to the last published value of Libor if such quotes cannot be obtained, ARRC said.

“Because most observers now believe that banks would be unable or unwilling to provide the quotes implementing the first stage of this waterfall, it would appear that most FRNs would effectively convert to fixed rate instruments paying the last published value of Libor upon a cessation of Libor,” ARRC said.

The ARRC said its recommended language is meant to provide a more robust waterfall that would allow for a conversion to SOFR-based rates in the initial stages of the waterfall

The fallback language for FRNs defines the trigger events that start the transition away from Libor and outline a “waterfall” approach to determine the SOFR-based successor rate and the spread adjustment that would apply to the successor rate.

For syndicated loans, there are two separate approaches to fallback language. One is a hardwired approach that clearly specifies the SOFR-based successor rate and the spread adjustment. The other is an amendment approach that offers a streamlined amendment mechanism for negotiating a benchmark replacement and standard language.

According to AARC, “Some market participants may be initially more comfortable with the amendment approach because it does not make references to rates or spread adjustments that do not yet exist.”

By Brian Tumulty

BY SOURCEMEDIA | ECONOMIC | 04/30/19 01:48 PM EDT

Whether it’s the draughts in California or hurricanes in the southeast parts of the United States, natural disasters can cost hundreds of lives and billions of dollars in damage to the economy. According to the National Center for Environmental Information (NOAA), the past few years have had the record-setting “Billion-Dollar Disaster Events,” both in frequency and the total financial detriments to the American economy.

Given the increasing frequency, these events can create an enormous financial and resource burden on both the local and state governments. Most of the financial burden is often shared by local, state and federal governments in their relief and reestablishment programs.

These natural disasters can also severely impact the revenue streams for cities and counties around the United States. In this article, we will take a closer look at how natural disasters can potentially create an unbearable burden on financial operations for local government, ultimately impacting your holding of municipal debt instruments.

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municipalbonds.com

by Jayden Sangha

May 01, 2019

The funds buying municipal bonds have done well. All but two of the 133 that have been around for at least a decade delivered portfolio returns better than the 5.3% earned by the Vanguard Long-Term Tax-Exempt Fund (Admiral class shares).

Did the closed-ends accomplish this feat with brilliant bond selection? Perhaps a few did. But the explanation for the category’s success lies elsewhere. Almost all of these funds use leverage.

Typical leverage in a closed-end muni fund is 35%. The fund buys $1,000 of long-term bonds, using $350 of borrowed money alongside $650 of money from the common shares whose performance is reported here. Funds borrow by issuing floating-rate preferred stock or its equivalent in some more complicated derivative. The preferred pays interest in the form of a tax-exempt dividend.

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Forbes

by William Baldwin
Senior Contributor

May 2, 2019

Summary

• The Black Belt Energy Gas District has surfaced in the municipal bond pipeline with US$735m worth of gas prepay revenue notes, amid increasing demand for longer-dated debt.
• For the week ended April 24, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of roughly US$1.28bn into municipal bond funds – contributing to 16 straight weeks of inflows.
• The Bond Buyer’s 30-day visible supply – at US$8.8bn – is the highest in a month.

Black Belt Energy Eyes US$735m 30-year Gas Prepay Revenue Bonds

The Black Belt Energy Gas District (BBE) has surfaced in the municipal bond pipeline with US$735m worth of gas prepay revenue notes, amid increasing demand for longer-dated debt.

The Alabama state-based public corporation serves as the natural gas supply arm of the Clarke-Mobile Counties Gas District, and was formed in 2008 for acquiring, managing and funding natural gas supplies for consumers, among other purposes. It is comprised of three municipal members: The City of Jackson, AL, the City of Thomasville, AL and the Town of Grovehill, AL.

The issuer said it aims to peg the proceeds from the sale of the bonds to prepay the acquisition costs of a fixed quantity of natural gas to be delivered over a 30-year period by Morgan Stanley Energy Structuring (MSES), pursuant to a Prepaid Natural Gas Sales Agreement (GSA).

Among the details of the transaction, BBE aims to enter into a commodity swap with BP Energy Co – guaranteed by BP Corporation North America – to mitigate any difference between the fixed payments owed to bondholders and the variable gas sales revenues received from its project participants.

BBE will also enter into an interest swap arrangement with MSES for the fixed payments it receives, with Morgan Stanley guarantying MSES’s payments.

The issuance’s series 2019A-1 bonds will be sold with a fixed interest rate, while the 2019A-2, 2019A-3, and 2019A-4 notes will be issued with variable rates.

The deal, rated ‘A3’ by Moody’s Investors Service and ‘A’ by Fitch Ratings, is being lead-managed by Morgan Stanley, which is also serving as guarantor for payment obligations under the GSA.

Analysts at Fitch highlighted that by “virtue of the sales, hedging and investment agreements,” the project is structured to “ensure that monthly net payments to BBE are sufficient to pay scheduled debt service, regardless of changes in natural gas prices, the physical delivery of gas, or the acceptanceof delivered gas.”

Both Moody’s and Fitch base their credit ratings, in large part, on the credit quality of Morgan Stanley.

BBE’s bonds are expected to price in May 2019. If successful, it would mark the issuer’s fourth debt transaction.

At the start to March 2018, BBE had issued close to US$687m worth of gas supply revenue bonds to finance an upfront prepayment for the 30-year supply of natural gas under an agreement with commodities broker J. Aron.

Alabama’s Natural Gas Profile

According to the U.S. Energy Information Administration, Alabama’s natural gas production meets about one-fourth of the state’s demand.

The EIA notes that the state’s consumers receive the commodity via interstate pipelines, mainly from Mississippi and the Gulf Coast, but a growing share of supplies is also shipped south through Tennessee from Pennsylvania natural gas fields in the Marcellus and Utica shales. More than four-fifths of the natural gas entering Alabama continues through the state, mainly on to markets in Georgia, Florida, and Mississippi.

In terms of BBE’s proposed bond issuance, the district will enter into Gas Supply Contracts with one public gas system; the City of Greenwood; as well as two gas and electric joint action agencies, Florida Gas Utility and the Public Energy Authority of Kentucky, which will resell its gas to Philadelphia Gas Works.

The EIA continued that an increasing amount of the natural gas delivered to Alabama customers goes to the electric power sector to fuel electricity generation, and since 2007, that sector has been “the largest natural gas-consuming sector” in the state.

The energy agency added that while the industrial sector consumes the second-largest amount, about 3 out of every 10 households use natural gas for heating. The residential sector typically uses only about 5% of the natural gas delivered to customers, mainly due to the state’s mild winters.

In fact, Alabama, which produces natural gas both onshore and offshore in state waters, has seen its annual natural gas production steadily decline from its height in 1996, and currently contributes less than 1% of the nation’s total natural gas output.

Rising Muni Demand Continues

Meanwhile, BBE’s pipeline bond deal comes amid a surge of investor demand in longer-dated municipal debt.

At 90.9% of comparable U.S. Treasuries Friday, the 30-year AAA municipal bond yield rose to its most expensive in nearly three years, according to data compiled by Bloomberg. The ratio – a key level of relative value – fell to its lowest since late June 2016.

Also, for the week ended April 24, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of roughly US$1.28bn into municipal bond funds – not including ETFs such as the iShares National Muni Bond fund (NYSEARCA: MUB) and the Vanguard Tax-Exempt Bond fund (NYSEARCA: VTEB).

The most recent positive flows contributed to 16 consecutive weeks of inflows, with long-term municipal funds having received more than US$2bn.

Analysts at Janney Montgomery noted that as “inflation worries recede, longer maturity bonds are attracting increased investor interest.”

They also said that while the Bond Buyer 30-day visible supply – at US$8.8bn – is the highest in a month, this week’s primary calendar of US$5bn is “quite manageable, especially in the high demand environment we’ve occupied this year with record inflows to municipal mutual funds fueling municipal sector outperformance.”

Other deals on the radar for the week ahead include issuance from the cities of Philadelphia, Dallas, and Milwaukee.

In the meantime, prices of MUB and VTEB have soared more than 4.5% to 4.8% since their latest 52-week lows set in early November 2018 of US$106.575 and US$49.855, respectively, according to the IBKR Trader Workstation.

Seeking Alpha

May 1, 2019

Summary

• Demand for municipal bonds appears to have recently exceeded the pace of new supply, amid consistently positive fund flows.
• Holdings of muni bonds have notched up by more than US$17.5bn year-over-year in the fourth quarter of 2018 to a total of nearly US$3.7trn, according to SIFMA/Thomson Reuters.
• Against this backdrop, and among the deals in the pipeline, the Commonwealth of Massachusetts is poised to offer US$400m worth of Government Obligation Bonds.
• The proposed GO bond issuance is slated to be sold through competitive, electronic bidding via PARITY on May 7.

US$400m of Long-dated Mass GO Bonds Hit Radar

Issuance in the primary U.S. municipal debt market has generally resided at low levels, while increased interest from mutual funds and insurance companies has helped the asset class to outperform.

Demand for municipal bonds appears to have recently exceeded the pace of new supply, amid consistently positive fund flows.

For the week ended April 24, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of roughly US$1.28bn into municipal bond funds – not including ETFs such as the iShares National Muni Bond fund (NYSEARCA: MUB) and the Vanguard Tax-Exempt Bond fund (NYSEARCA: VTEB).

Holdings of muni bonds have notched up by more than US$17.5bn year-over-year in the fourth quarter of 2018 to a total of nearly US$3.7trn, according to SIFMA researchers and data sourced by Thomson Reuters.

Accounting for most of the uptick, mutual funds and insurance companies have upped their take by 2.42% and 3.67%, respectively, while banking institutions shed close to 13.1% from the prior year to almost US$526bn.

The most recent fund flows data marked the 16th straight week of inflows, with long-term municipal funds having received more than US$2bn.

Analysts at Janney Montgomery noted that recent muni outperformance has been “especially evident on the long end of the curve,” with the 30-year Muni-Treasury ratio falling to 90%, the lowest in more than six years.

They observed that weak supply and strong demand underlies the strength in the municipal market, and the trend seems “likely to continue as investors continue to pour cash into municipal funds and ETFs (US$32.bn in 2019),” while new issue issuance languishes.

April’s supply volume is expected to come in at around US$22.5bn, the lowest level to date in 2019.

Janney Montgomery added that while the Bond Buyer 30-day visible supply – at US$8.8bn – is the highest in a month, this week’s primary calendar of US$5bn is “quite manageable, especially in the high demand environment we’ve occupied this year.”

MASS GO

Against this backdrop, and among the deals in the pipeline, the Commonwealth of Massachusetts is poised to offer US$400m worth of GOs (Consolidated Loan of 2019, Series C) alongside three additional US$100m GO tranches (Series D, E and F).

Most of the Series C issuance comprises longer-dated notes, with serial maturities beginning in 2039 and extending to 2049, with proceeds to be applied towards the financing of certain capital projects aligned with the state’s 2019 investment plan.

The proposed GO bond issuance is slated to be sold through competitive, electronic bidding via PARITY on May 7, with Public Financial Management (NASDAQ:PFM) serving as the municipal advisor on the ‘AA’-rated deal.

Moody’s Investors Service attributed its investment-grade ‘Aa1’ credit rating on the transaction to Massachusetts’ “continually growing economy, anchored by education, healthcare and technology sectors.”

Moody’s analyst Genevieve Nolan noted that the commonwealth’s “strong economy, combined with close monitoring of revenues and ample executive authority to make mid-year cuts, have resulted in balanced budgets.

“Strong year-over-year tax revenue growth, along with prudent planning, have afforded the commonwealth the opportunity to build up reserves.”

She added that while debt and pension liabilities are among the highest in the country, “these figures include borrowing and benefits for local governments.”

As of June 30, 2018, Massachusetts’ net pension liability in governmental activities totaled a little more than US$31.3bn, with total long-term debt obligations up nearly US$162m year-over-year to roughly US$6bn.

Indeed, concerns about public pensions continue to plague muni market participants.

According to the 2019 Smith’s Research & Gradings Annual Municipal Bond Analyst Survey, conducted by Tom Kozlik, public pensions remains the number one issue/trend facing the municipal bond market. This finding was derived from 85% of the 155 analysts who responded.

At 55%, issuers’ level of fiscal preparedness for the next recession was the second most concerning, which Smith’s Research & Gradings highlighted as “notable because this topic was not even included in our 2108 survey.”

Mass revenue collection beat the March benchmark

Meanwhile, Massachusetts Department of Revenue Commissioner Christopher Harding said earlier in April that preliminary revenue collections for March totaled US$2.67bn, US$316m, or 13.4%, above the revised monthly benchmark, and US$427m, or 19.0%, more than the actual collections in the same year-ago month.

The original benchmark for fiscal year 2019 was around US$28.4bn, however as part of the fiscal year 2020 Consensus Revenue process, it was adjusted to almost US$28.6bn on December 31, 2018.

Harding continued that corporate and business revenue, as well as the non-withholding income tax, which are “generally volatile, were the primary contributors to the above-benchmark performance for the month.”

He added that withholding and sales and use tax, the two largest revenue categories – also associated with overall economic conditions in the state – showed continued growth over the prior year.

While Massachusetts’ economy remains diversified, the state’s government touts its knowledge–based technology and service industries as its strongest components, which compels it to rely heavily on a highly educated workforce.

Overall, the state’s economy, with its concentration of higher education institutions, life sciences and medical industries and high technology companies has outperformed the broader national economy during and immediately following the most recent recession. It also maintains an unemployment rate about average for the New England region and below the nation’s 3.8% March 2019 pace.

Seeking Alpha

May 1, 2019

MUNIS IN FOCUS: Joe Mysak, Editor Bloomberg Brief: Municipal Market, discusses Puerto Rico’s oversight board suing banks and bondholders to claw back more than $1 billion in fees and interest payments. Hosted by Lisa Abramowicz and Paul Sweeney.

Running time 05:35

Play Episode

May 3, 2019

• Market set to contract as more bonds are paid off than sold
• Scarcity has helped propel best start to a year since 2014

A cash tidal wave is about to wash over the muni-bond market.

State and local governments are set to pay off $117 billion of debt from June through August, promising to add tailwinds to a market that’s already off to its strongest start since 2014 as billions of dollars flows into mutual funds, according to data compiled by Bloomberg. The amount of bonds that will be paid off each month over the summer — when the lion’s share of municipal debt matures — will far exceed the average $26 billion of new securities that have been issued each month so far this year.

The scarcity of new municipal-bond issues comes just as some investors are seeking out the securities as a way to drive down tax bills that were increased by the cap on state and local tax deductions. Mutual funds focused on municipal bonds have seen cash flow in every week since early January, leaving them picking up more in the first four months of 2019 than they usually do in a year, according to the Investment Company Institute’s figures.

At the same time, the market has been contracting. Governments paid off debt last year at a faster pace than they sold it for the first time since 2014, according to Federal Reserve Board figures. The phenomena has continued this year, when about $111 billion of debt matured or was paid off early. Only $104 billion of new bonds have been sold.

“I don’t believe that is going to turn around in the next couple of quarters,” said Debra Crovicz, a managing director at Chilton Trust Co. who handles municipal-bond investments. “You have a lot of summer calls and coupon reinvestment and money going back into funds from maturities.”

Bloomberg Markets

By Danielle Moran

May 1, 2019, 10:32 AM PDT

— With assistance by Sowjana Sivaloganathan

• Preston Hollow claims Nuveen pressured lender over business
• Delaware judge says courts are reluctant to restrain speech

Deutsche Bank AG was the primary lender to Preston Hollow Capital, the Dallas-based public finance company that’s suing the head of state and local debt investments at Nuveen LLC for allegedly engaging in “a campaign of intimidation” aimed at blocking banks from doing business with its smaller competitor.

The German bank’s ties to the upstart company, which extends loans for speculative projects that may otherwise borrow in the public market, was disclosed Tuesday at a Delaware Chancery Court hearing over whether Preston Hollow’s defamation lawsuit should be thrown out.

Preston Hollow accuses Nuveen’s John Miller of “trash talking” it and using hardball tactics to land low-rated bond deals for his Chicago-based company — one of the biggest investors in junk-grade municipal securities. Such bonds are frequently in short supply, making Preston Hollow’s lending business a potential rival for debt issues.

Miller and his team allegedly called Deutsche Bank in December, demanding that it unwind more than $400 million in financing deals with Preston Hollow and pressuring the bank not to provide future loans, according to the initial complaint, which didn’t identify the lender.

Miller made good on the threat by moving $500 million of tender-option bond financing and the revenues associated with it to another bank, according to the complaint. Such programs finance the purchase of higher-yielding long-term municipal bonds by selling tax-exempt floating-rate securities to money-market funds.

Preston Hollow claims Miller and his subordinates targeted its ability to compete with Nuveen, a financial powerhouse that oversees more than $140 billion of municipal assets and is one of the largest investors in the $3.8 trillion U.S. state and local debt market. Preston Hollow has extended about $2 billion in loans.

Nuveen is urging Judge Sam Glasscock III to throw out the case, arguing that it’s allowed to push its bank partners to share investment opportunities and not support rivals.

There’s nothing improper about a larger competitor exercising its free-speech rights about a smaller rival’s operations, Peter Walsh, a lawyer for Nuveen, told the judge. “We are all competitors in the municipal bond market,” he said.

But Preston Hollow contends Miller is leaning on bankers and broker-dealers to “boycott” the bond firm, hoping to drive it out of business.

The case amounts to “a life and death struggle” for Preston Hollow, David Wollmuth, one of the company’s lawyers, told Glasscock. Financing from institutions such as Deutsche Bank is the firm’s “oxygen” and Nuveen is trying to smother it, the attorney said.

Wollmuth asked Glasscock to let the suit proceed so Preston Hollow can get access to tapes of Miller’s calls to enlist broker-dealers in the boycott. The details of Miller’s “trash talking” may open up new claims in the suit, the lawyer said.

Preston Hollow has subpoenaed tapes of Miller’s calls with traders at Goldman Sachs Group Inc. and JPMorgan Chase & Co., along with those of Deutsche Bank officials, according to court filings. Troy Gravitt, a Deutsche Bank spokesman, declined to comment.

Glasscock said he’d decide by next week whether Preston Hollow’s suit will move forward, but warned Wollmuth he couldn’t envision issuing an order stopping Nuveen’s criticism of the bond fund’s operations that would stand up on appeal. Delaware courts are loathe to put a “prior restraint on speech,” the judge said.

The case is Preston Hollow Capital LLC v. Nuveen LLC, 2019-0169, Delaware Court of Chancery (Georgetown).

Bloomberg Markets

By Jef Feeley and Martin Z Braun

April 30, 2019, 10:31 AM PDT Updated on April 30, 2019, 12:10 PM PDT

Health care is a defensive industry. Still. Demand for health care products and services is largely inelastic. However, we believe issuer credit ratings in the for-profit health care sector are more vulnerable to a cyclical downturn than in previous recessions. Credit quality markedly declined in the decade since the last recession.

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Apr. 29, 2019

Electronic trading has surged in municipal-bond trading, leveling the playing field for small investors

Every morning, money manager Brian Dixon puts 75 to 100 municipal bonds up for sale to about 80 Wall Street brokers. But his biggest buyer is TMC Bonds, one of the electronic-trading systems that is transforming the municipal-bond market and leveling the playing field for individual investors.

The share of municipal-bond trading on electronic “alternative-trading systems” like TMC, which connects hundreds of buyers and sellers anonymously in the $4 trillion municipal-bond market, has jumped to 9% this year from about 6% in 2017, according to data from exchange operator Intercontinental Exchange Inc . , or ICE. Total electronic trading, which includes anonymous and disclosed transactions, account for 12% to 15% of the market, according to research by Greenwich Associates Inc.

That means more trading partners and faster trade execution for portfolio managers like the Naples, Fla.-based Mr. Dixon, who invests mostly on behalf of individuals. For individual investors, who are big buyers of municipal bonds due to the tax-exempt income they offer, this increases the chances they will get a higher price on sales and a lower price on purchases.

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The Wall Street Journal

By Matt Wirz

May 6, 2019 8:00 a.m. ET

And just like that, federal infrastructure policy is back in the news.

Democratic Party leadership were all smiles after a White House meeting yesterday to discuss future infrastructure policy. President Trump appeared to agree to their high-level terms: $2 trillion in new federal spending that would cover transportation, water, broadband, and energy grid investments. President Trump even pledged the administration would take responsibility—three weeks from now—to present ideas for new funding sources.

But crafting and passing major infrastructure legislation has been challenging for a reason, and there’s little reason to believe this time will be different. I see three distinct challenges that could quickly turn optimism into disillusionment.

Continue reading.

The Brookings Institute

by Adie Tomer

May 1, 2019

The top two Democratic leaders on Monday told President Trump that any bipartisan infrastructure package needs to take into consideration climate change and include “substantial, new and real revenue” — a preview of the coming fight over tax hikes.

Trump will host Speaker Nancy Pelosi (D-Calif.) and Senate Minority Leader Charles Schumer (D-N.Y.) at the White House on Tuesday for discussions on a major infrastructure bill, one of the few policy areas that could see action amid divided government and as the 2020 race heats up.

Democrats want the measure for roads, bridges, waterways and other projects to be paid for with tax increases, and with a final price tag of at least $1 trillion over 10 years. Trump’s fiscal 2020 budget calls for $200 billion in federal spending on infrastructure, which White House officials say will leverage an additional $800 billion in investment through public-private partnerships over the next decade.

“America’s unmet infrastructure needs are massive, and a bipartisan infrastructure package must meet those needs with substantial, new and real revenue,” Pelosi and Schumer wrote in a letter to Trump on Monday. “We look forward to hearing your ideas on how to pay for this package to ensure that it is big and bold enough to meet our country’s needs.”

The leaders laid out other Democratic priorities: Any deal must extend beyond traditional infrastructure projects, take into account climate change, include “Buy America” provisions and provide jobs for a broad swath of workers.

“A big and bold infrastructure package must be comprehensive and include clean energy and resiliency priorities,” Pelosi and Schumer wrote. “To truly be a gamechanger for the American people, we should go beyond transportation and into broadband, water, energy, schools, housing and other initiatives. We must also invest in resiliency and risk mitigation of our current infrastructure to deal with climate change.”

“A big and bold infrastructure plan must have strong Buy America, labor, and women, veteran and minority-owned business protections in any package,” they added. “This bill can and should be a major jobs and ownership boost for the American people – manufacturers, labor contractors, and women, veteran and minority-owned businesses.”

Pelosi told reporters earlier this month that an infrastructure package “has to be at least $1 trillion. I’d like it to be closer to $2 trillion.”

Trump last year reportedly told lawmakers and senior White House officials that he was in favor of a 25-cent gas tax hike to help pay for an infrastructure overhaul. The gas tax, which supports the Highway Trust Fund and pays for road projects, has not been raised in more than two decades.

But on Monday, a source familiar with Schumer’s thinking said the senator would not entertain any gas-tax proposal unless Trump also rolled back some tax cuts from his 2017 landmark tax law.

“Unless President Trump considers undoing some of the 2017 tax cuts for the wealthy, Schumer won’t even consider a proposal from the president to raise the gas tax, of which the poor and working people would bear the brunt,” the Democratic source said.

Tuesday’s gathering marks the first meeting between Trump and the top Democratic leaders since the report from special counsel Robert Mueller was made public. It comes as multiple Democratic-led committees in the House have launched investigations into Trump, his administration, his business dealings and whether he obstructed justice.

A handful of other House Democrats will be attending Tuesday’s meeting: Majority Leader Steny Hoyer (Md.), Majority Whip Jim Clyburn (S.C.), Assistant Speaker Ben Ray Luján (N.M.), Ways and Means Committee Chairman Richard Neal (Mass.) and Transportation and Infrastructure Committee Chairman Peter DeFazio (Ore.).

On the Senate side, Democratic attendees will include Minority Whip Dick Durbin (Ill.), Assistant Democratic Leader Patty Murray (Wash.), Democratic Policy Committee Chairwoman Debbie Stabenow (Mich.), and Sens. Ron Wyden (Ore.) and Tom Carper (Del.), the ranking members of the Finance and Environment and Public Works committees, respectively.

THE HILL

BY SCOTT WONG – 04/29/19

Districts can fall prey to financial firms that put their own interests first

The state audit of the Fox C-6 School District in the small town of Arnold, Missouri, was brutal.

It revealed a slew of financial missteps: The superintendent and administrators had been giving themselves raises and using school district credit cards to purchase personal items such as shampoo, engraved watches, gift cards and wedding favors. But most costly of all, it argued, were mistakes the school district had made with bonds.

From 2007 to 2013 the district’s taxpayers had approved several bonds, totaling more than $46.6 million, to help the district afford new technology, renovations to school buildings and new school buses. The audit alleged that the school district got a bad deal — one that may ultimately cost it $5.6 million in unnecessary interest payments.

“What happened in our district should not have happened, but it did,” said John Brazeal, who joined the district as its chief financial officer in 2014. “It’s not going to happen again on my watch.”

John Brazeal, chief financial officer, Fox C-6 School District, Arnold, Missouri

In order to finance large projects, such as the construction of new school buildings or major renovations, school districts generally issue bonds and pay them back, with interest, over several years or decades. To help structure these deals, district administrators and school boards typically turn to outside financial advisers, lawyers and bond underwriters. But that can put school districts in a vulnerable position: They can easily be taken advantage of — urged to issue needless or poorly structured bonds, pushed to accept high interest rates or duped into paying hundreds of thousands in unreasonable fees. State officials and financial experts across the country warn that taxpayers ultimately end up paying millions more each year than necessary, which can lead to new tax hikes or result in less money for classrooms.

Because most bonds are so large, districts face big financial consequences if they don’t get the best deal possible, said Mark Robbins, a professor of public policy at the University of Connecticut who has studied municipal bonds. “When you’re talking about borrowing tens, even hundreds, of millions of dollars, even a one-hundredth of an interest rate point can be the equivalent of a teacher’s salary.”

A student is assisted down a staircase at Fox Middle School in Arnold, Missouri. The building is not completely ADA accessible. Whitney Curtis for The Hechinger Report

Most school districts don’t have a municipal bond expert on staff or on their board, leaving them at the mercy of financial companies to guide them through the bond issuance process. Federal regulations require that these companies treat municipalities fairly, but the incentives built into the bond issuance process can sometimes pit school districts’ interests against those of their financial team.

The advisers are typically paid a fee for their services related to the size of the bond or contingent on it being issued — and that can incentivize them to counsel districts to issue larger or more frequent bonds. Districts also work with underwriters, who purchase the bonds from the district and sell them to investors. The higher the interest rate on a bond, the easier it is for underwriters to sell.

Lori Raineri, president of the Sacramento-based independent public consulting company Government Financial Strategies, says she frequently hears from school district leaders who relied on relationships, referrals or marketing to choose their financial team but lack the quantitative expertise to evaluate the advice they get. (To avoid potential conflict of interests, her firm charges districts a fee based on the work it performs, regardless of whether bonds are sold.)

Raineri says it breaks her heart to see school districts in fiscal distress. She said it begs the question: “Who’s benefiting here?”

When they get a bad deal, school districts can find themselves on the hook for unnecessarily high payments in a variety of ways. Some districts, like Missouri’s Fox C-6, are stuck paying interest rates that are well above market rate. In one extreme case, a California district agreed to pay 12 percent interest on a $16.7 million bond issued in 2005. By the time all the debt is paid off, the district will have spent $34.3 million — almost a million more on interest than on the principal.

The fees that districts pay to financial firms also sometimes reach eyebrow-raising amounts. A study by the Haas Institute for a Fair and Inclusive Society (University of California, Berkeley), identified six California districts that paid more than 8.5 percent of their bond principal in fees, significantly greater than the 1 percent average costs the study found. In a separate case, Kansas City-based George K. Baum & Company, the same financial firm that underwrote the Fox C-6 bonds, was sanctioned by the Financial Industry Regulatory Authority for overcharging a school district in 2011. The company charged $43 per $1,000 bonds issued — far above the typical $7 to $9 for such an offering — for a total fee of $416,173, according to the regulatory authority.

In a memo to the district superintendent, George K. Baum said the fee it charged was appropriate because it had originally anticipated underwriting a larger bond, which failed at the ballot box. The regulator disagreed, noting that the firm “failed to deal fairly with the school district.”

George K. Baum accepted the findings without admitting or denying them, and consented to a censure and fine of $100,000. Jon Baum, the company’s CEO, did not respond to a request for comment.

Lack of competition

Researchers and financial experts, meanwhile, say that school districts also bear some of the responsibility for bad bond deals. Too often, districts don’t shop around for the most favorable deal even though opening the process to competitive bidding can help drive down costs. When schools buy supplies like paper, for instance, they typically request bids and take the best offer they receive. But when it comes to bonds, noncompetitive sales — in which an issuer such as a school district unilaterally chooses an underwriter without comparing multiple options — are common. These negotiated sales make up the bulk of money in municipal bond sales, according to data from the Securities Industry and Financial Markets Association, a trade group for broker-dealers and investment bankers.

There are some circumstances in which a noncompetitive sale is the better option: when a district has a low credit rating and is unlikely to attract any bidders, for example, or when the bond deal is complex. Yet experts say those cases are exceptions.

Mike Parnell, an associate executive director at the Missouri School Board Association, said that noncompetitive sales often make sense because they allow school districts to retain local control of the bond-issuing process rather than leaving it up to the market. “If you’re able to negotiate a more favorable rate for the district, that’s going to be a good thing,” he said. “If you just have to take whatever is out there that day, that may not be in the district’s best interest.”

But Robbins, the University of Connecticut professor, takes a different view: It’s a matter of convenience for school districts that don’t want to put in the time and effort to seek out comparisons. Among researchers who study competitive bidding, there’s widespread agreement that a bidding process yields the best deal, he said: “It is not controversial.”

Some states require that school districts go through a competitive bidding process under at least some circumstances when issuing a bond. But at least 25 states do not.

School districts that forgo competitive bids often make their decisions based on relationships — which financial firms will go to great lengths to forge. The firms will sponsor school board or leadership conferences and take school leaders out to dinner.

Some firms have gotten in trouble for going even further. In 2013, the Financial Industry Regulatory Authority fined a Missouri-based underwriting firm $200,000 for “improperly gifting” more than 2,000 tickets to sporting events. About half the tickets went to school superintendents and one-third to school board members who stopped by its booth at the annual Missouri School Boards’ Association conference and filled out a piece of paper with their contact information.

The association said it was unaware of that incident. “The only giveaways we sanction at our conference are random drawings,” the association said in an email. “We expect vendors in our exhibit hall to comply with all laws and industry standards.”

Community outrage

In the Fox C-6 School district, which serves over 11,000 students in a tight-knit community near the Mississippi River, the state audit led to an outcry against school leaders. In the 109-page report, the school board was singled out for special scorn for allegations that it failed in its duty to vet the district’s spending. After the audit and the resulting public backlash, top administrators left the district. The superintendent took a buyout but admitted no wrongdoing.

In the report, the state also faulted the school district for failing to solicit competitive bids for its bonds, as recommended by state auditors. Brazeal, the Fox C-6 chief financial officer, said he doesn’t agree completely with the auditors’ recommendations on competitive bidding. He sees some downsides to a competitive bid process, and he believes the district owed most of its financial troubles to a different culprit: the terms of the debt.

The bond deal had an interest rate of 4 to 5 percent, at a time when the market rate was closer to 3 percent, according to the audit. Also, the debt was structured so that the district was making interest-only payments until 2026, increasing the overall cost of the loan.

Why the district made these decisions is unclear — curiously, no documentation of the advice that led to these actions could be located by state auditors. The auditors noted that the district failed to seek advice from someone who didn’t stand to make money from the transaction.

“The lack of independent financial advice could result in the Board not being adequately informed of debt issuance options or being unable to adequately evaluate debt proposals,” the state auditors wrote. “The underwriter does not have a fiduciary responsibility to the district.” (The state auditor did not respond to requests for comment for this story.)

A 2013 report from the Missouri state auditor found that the vast majority of the state’s districts and municipalities did not use an independent financial adviser and, therefore received all their financial advice from their underwriting firm. The report estimated that school districts and local governments could have saved up to $43 million between 2008 and 2011 had they gotten more favorable interest rates.

A bill introduced in the Missouri House of Representatives in 2017 and backed by the state auditing agency would have required school districts and other municipal agencies to use an independent financial adviser or go through a competitive bid process when issuing bonds. But the bill died in committee after push back from financial firms and from groups that represent municipal agencies.

The groups said that a competitive bidding process would add bureaucracy and time and wouldn’t end up saving taxpayers money. “We didn’t see any upside to that at all,” said Dirk Burke, executive director of the Missouri Association of Counties, an advocacy group that represents county governments.

But a narrower bill introduced in the state Senate did pass later that year. Under the legislation, Missouri school districts with good credit ratings must hire an independent adviser or sell their bonds competitively when issuing bonds worth more than $12 million.

Parnell, of the state school board association, says that most Missouri school districts still prefer to use negotiated sales for their bonds.

Bad financial decisions can breed distrust in communities, forcing district leaders to spend time and money repairing their reputations and making it more difficult for them to raise money for new projects. This year, for example, the Fox C-6 School District asked voters to approve a $70 million bond to upgrade aging school buildings.

Ahead of the vote, the district’s top administrators — none of whom worked in the district during the previous bond deal — distributed a question-and-answer sheet to residents designed to head off concerns. It addressed comments such as: “How do we know they are going to do what they say with the $70 million?” and “I am not supporting the district because they did not prosecute the former superintendent.”

Brazeal said he felt that the school district had done everything it could to repair the community’s trust.

“It’s sad when money is not benefiting students” he said. “For those of us that are here to carry on, we do what we can to keep it from happening again.”

But the efforts at rebuilding trust seem to have fallen flat. On April 2, voters rejected the district’s plan to issue $70 million in new bonds for building renovation and upkeep. Meanwhile, district staff continue to grapple with buildings in disrepair: Pipes leak sewage, basement classrooms have broken floor tiles and schools are not fully accessible to people with disabilities.

THE HECHINGER REPORT

by SARAH BUTRYMOWICZ and NICHOLE DOBO

April 22, 2019

S&P Global Ratings derives the general obligation (GO) county medians from rating reviews completed under its GO criteria (“Local Government GO Ratings Methodology And Assumptions,” published Sept. 12, 2013). We derive the county medians from the 1,054 counties we rated as of April 3, 2019.

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Apr. 25, 2019

S&P Global Ratings derives the general obligation (GO) municipal medians from rating reviews completed under its GO criteria (Local Government GO Ratings Methodology And Assumptions, published Sept. 12, 2013). S&P Global Ratings derives the municipal medians from the 3,877 municipalities it rated as of April 3, 2019.

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Apr. 25, 2019

The following table summarizes S&P Global Ratings’ quarterly bond rating actions for its U.S. non-profit colleges and universities. All credit rating actions are based on our Methodology: Not-For-Profit Public And Private Colleges and Universities.

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Apr. 23, 2019

Annually Truth In Accounting releases a Comprehensive Annual Financial Report which is a set of U.S, government financial statements comprising the financial report of a state, municipal or other governmental entity that complies with accounting requirements promulgated by the Governmental Accounting Standards Board.

Read the full article on: Committee to Promote Private Infrastructure Investment

April 26, 2019

Municipal bond issuers have been in the news in recent years for all the wrong reasons, starting with places like Jefferson County, Ala., and Stockton, Calif., defaulting on their municipal bonds. Then Detroit filed for bankruptcy, with $18 billion in debt on its books.

And there’s Puerto Rico, which is struggling to make its bond payments — or decide which of its $72 billion in municipal bonds to default on.

Still, money has continued to flow into municipal bonds, a market dominated by individual investors. There have been 27 straight weeks of inflows into municipal bond funds, according to Dan Heckman, senior fixed income strategist with U.S. Bank wealth management.

The main reason for municipal bonds’ continued strength is that the interest paid on municipal bonds is free of federal and state taxes, which can exceed 50 percent for top earners in states like New York and California. Those savings give the bonds a substantial advantage over Treasury bonds with similar yields and even higher-yielding corporate bonds.

Still, selecting municipal bonds is not as simple as it was before the spate of defaults changed what was generally a stodgy asset class.

“The municipal bond market has transformed from what used to be a rates market like Treasuries to a true credit market like the corporate world,” said John Bonnell, a portfolio manager at USAA.

“It used to be a given that if the issuers had the ability to pay their debt, they would,” he said. “Now, it’s their willingness to pay that’s become more of a focus. Some of these issuers end up with budget situations where they have to pick and choose who’s going to get paid what.”

Before the financial crisis of 2008 and several high-profile defaults, municipal bond investors relied more on the rating of the bonds, something that an issuer could improve by buying insurance on them.

“What mattered was underlying credit quality and the issuer, but it got obscured for a long time by municipal bond insurance,” said John Bussel, chief investment officer of Hewins Financial Advisors, which manages $4 billion for wealthy investors.

“Shakier issuers would buy municipal bond insurance to get them a AAA rating,” Mr. Bussel said. “When people were buying muni bonds from a broker, he would say they’re AAA insured.”

When the crisis came, the solvency of municipal bond insurers was tested, since they had also branched out into insuring the bonds created out of mortgages. While about 55 percent of municipal bonds had insurance in 2008, that number is around 6 percent today. And the number of insurers has dwindled to three from seven.

Mr. Bonnell at USAA said he would rather have no bond insurance, “because we’re doing the work,” adding, “I’d prefer the issuers didn’t pay for the insurance and I’d have the extra yield.”

At the moment, shorter-duration municipal bonds are more in favor than longer-duration bonds, even when they pay a quarter of what the longer ones do, because interest rates are expected to rise and the shorter term all but guarantees investors will be paid back.

“Six months to one-year munis have become a bigger part of the market,” said Kimberly Foss, founder of Empyrion Wealth Management. “Today, it’s about high-quality municipalities that will be able to pay the duration of the bond and give people the income they need. What’s left in their pocket after taxes is the most important thing for them.”

With longer-duration municipal bonds, the concern is that an increase in interest rates will erode the value of the investment.

“The biggest risk is with long bonds,” said Todd M. Morgan, chairman of Bel Air Investment Advisors, which manages $3 billion in municipal bonds. “Interest rates are unpredictable. They go up 100 basis points,” or 1 percentage point, “and you could lose 20 to 30 percent of your investment.”

As to determining which municipalities will not be able to make their payments for longer-dated bonds, investors can look to the recent past for a lesson — few of the problems cropped up overnight.

“You may get into fiscal difficulties like a Detroit or a Puerto Rico, but those things had a long tail and were running out,” Mr. Heckman of U.S. Bank said. “It shouldn’t have come as any surprise that Detroit ran into financial problems.”

Mr. Bonnell said that investors also needed to bear in mind political changes in the municipalities themselves.

“When it comes to the willingness to pay part, the officials you bought that bond from might be totally different 10 years from now,” he said. “It’s hard to predict with a 30-year bond.”

He added, “If it looks like things are deteriorating and they’re going to have to prioritize, hopefully if you’ve done your work correctly, you’ll be out of it by then.”

The long time horizon shows the value of having someone watch the municipalities, which is something that bond managers do but is also a role played by municipal bond insurers for individual investors.

Natalie R. Cohen, the head of municipal research at Wells Fargo, said that even though the remaining insurers are writing policies on a small number of new bonds, they play a role in negotiations for existing issues “with high-powered legal help in distressed situations, such as Detroit, helping to battle for bondholder recoveries.”

Bill Fallon, chief executive of National Public Finance Guarantee Corporation, a municipal bond insurer, said his firm was doing just that on general obligation bonds from Detroit. He said the holders of the city’s bonds continued to receive interest and principal payments.

While these insurers still have a marketing problem from the financial crisis, Mr. Fallon said that their coverage continued to be needed by smaller municipalities or those that do not regularly sell municipal bonds.

“If a large A-rated municipality is issuing $300 million, institutional buyers will know the issuer and put the resources toward it,” Mr. Fallon said. “Put that against an Iowa school issuance and it’s for $17 million, it’s unlikely you’ll have a large institutional manager putting the staff behind it.”

Brenda Wenning, who manages $22 million in fixed income for 30 clients, said that if her clients bought municipal bonds with insurance, it was generally for longer-dated bonds and for municipalities where they lacked the time or knowledge to do the analysis.

“Buying insured bonds removes having to understand each bond’s creditworthiness and allows the client to sleep at night,” she said.

For people buying municipal bonds on the secondary market, the more general risk comes from the lack of transparency on what the dealers paid for a bond and what they are selling it for.

“Most of the transactions in the secondary market are conducted through a broker or a discount broker, and the individual investor doesn’t have the horsepower or tools for price discovery,” Mr. Heckman said.

The Municipal Securities Rulemaking Board has started a website, called Electronic Municipal Market Access, to help investors track the buy and sell prices on municipal bonds.

But in the end, what matters now is understanding the bond issuers more deeply. “Credit analysis is important,” said Mr. Bussel at Hewins Financial Advisors, “and it’s hard to do credit analysis on muni bonds.”

The New York Times

By Paul Sullivan

April 22, 2016

• Barclays, Wells Fargo among those Philadelphia sued in Feb.
• City alleges industry-wide conspiracy to push up yields

Philadelphia alleges that Barclays Plc is one of seven banks that fleeced taxpayers by conspiring to inflate the yields on floating-rate municipal bonds. But the city hired the company to work on a new bond deal, anyway.

The London-based bank will serve as senior manager on Philadelphia’s upcoming $190 million bond offering — a job that requires the bank to gauge demand and price the securities accordingly. Giving the bank that role seems at odds with Philadelphia’s assertions in a lawsuit it filed against Barclays and six competitors, alleging that they worked together to set the yields on floating-rate bonds artificially high to make it easier to sell them, potentially costing governments billions of dollars.

Also named in the suit was Wells Fargo & Co., which will be a co-manager on Philadelphia’s upcoming bond sale, according to the city.

Barclays spokesman Andrew Smith and AnnMarie McDonald, a spokeswoman for Wells Fargo, declined to comment. Mike Dunn, a spokesman for the city, said in February that it didn’t plan to cut business ties with the banks it’s suing. A selection committee felt the companies provided “thoughtful credit and marketing ideas” for the general-obligation bond sale, Dunn said in an email Friday.

The lawsuit centers around so-called remarketing agents that set the interest-rates and line up buyers for variable-rate bonds, which investors have the option to sell back to those banks frequently. If the banks can’t find buyers, they hold the securities in their own inventory, giving them an incentive to raise the rates if they don’t want their money tied up. Both Barclays and Wells Fargo worked as remarketing agents for Philadelphia.

The city’s lawsuit follows others filed in state court by a financial adviser whose analysis of publicly available data led him to believe that the rates were being manipulated. Banks have disputed that assertion.

Bloomberg Markets

By Amanda Albright

April 26, 2019

The following tables summarize S&P Global Ratings’ quarterly bond rating actions, outlook revisions, and affirmations for its U.S. charter schools. All credit rating actions, outlook revisions, and affirmations are based on our criteria, U.S. Public finance Charter Schools: Methodology and Assumptions.

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Apr. 18, 2019

MUNIS IN FOCUS: Joe Mysak, Editor Bloomberg Brief: Municipal Market, discusses the continued flow of money into munis. flows Hosted by Lisa Abramowicz and Paul Sweeney.

Running time 05:59

Play Episode

Bloomberg Radio

April 26, 2019 — 10:04 AM PDT

Bloomberg’s Eric Balchunas and Taylor Riggs break down the XTrackers Municipal Infrastructure Revenue Bond ETF (ticker: RVNU) with Fiona Bassett, global co-head of passive asset management and global co-head of product at DWS Group. They discuss how ‘RVNU’ stacks up against its bigger competitor, and the leaders in the ESG ETFs sector.

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Bloomberg ETF IQTV Shows

April 24th, 2019, 4:16 PM PDT

• Funds have already seen $30 billion inflow, analyst says
• Bid to drive down tax bills pushes munis to pricey levels

It’s only four months into 2019, and already mutual funds that invest in state and local-government debt have raked in more cash than they usually do in a year.

Investors added $1.1 billion to such funds in the week ended April 17, the fifteenth straight weekly influx, the Investment Company Institute reported Wednesday. That bumped the total to about $30 billion since January, more than they’ve drawn during any full year since 2012, according to an analysis of the data by CreditSights.

“It is just really, really impressive,” said Patrick Luby, a municipal strategist at CreditSights. “It’s not unusual to see the year start out with inflows as people rebalance their portfolios. But it’s been consistent. You see a dip one week, think it may start to slow down, but then boom, another billion.”

Analysts say the cash flood has been driven by individuals in high-cost states such as California and New York who saw their tax bills rise as a result of the $10,000 limit on state and local tax deductions, which was first felt when they filed their returns this year. That has enhanced interest in tax-free bonds as a way to drive down what they’ll owe.

The demand has helped drive municipal bonds to a 2.8 percent gain this year, twice the return on Treasuries, even before the tax breaks are factored in, according to Bloomberg Barclays indexes. And the yields on 10-year municipal bonds have dropped to around 76 percent of those on federal government debt, the lowest since at least 2001, indicating that the state and local securities have grown historically pricey in comparison.

Matthew Gastall, executive director at Morgan Stanley Wealth Management, said the market is gradually accepting the possibility that the deduction cap won’t be changed anytime soon, if at all. As a result, he said munis have “rarely traded as strongly,” he wrote.

Bloomberg Markets

By Danielle Moran

April 24, 2019, 10:30 AM PDT

Eco-friendly fixed-income funds can help create a stronger market for securities that back environmental projects.

Green bonds could be a key tool to finance the fight against climate change. But good luck getting your hands on one, or figuring out exactly what it’s worth.

The securities are just like regular bonds, except their proceeds are earmarked to fund projects that have positive benefits for the environment or climate. Countries including Poland and France have issued them to support renewable energy. Companies may use bond proceeds on projects that reduce emissions or enable funding for electric vehicles. Municipalities are also big issuers of green bonds. More than $600 billion in green bonds have been issued worldwide in the past decade, according to BloombergNEF.

The bonds have something of a built-in customer base of socially conscious investors including pensions and nonprofits. These investors tend to snap them up—most new green bond issues are oversubscribed—and hold them until they come due. This has put the market in a somewhat awkward spot: The bonds are clearly popular, but since they don’t trade much, it’s hard to get a precise view of their market value at any given moment. That could be keeping companies from issuing more of them.

Green bond issuance might grow faster if companies could see environmentally friendly bonds commanding a premium price on the secondary market, according to Daniel Shurey, head of green finance at BNEF. Since higher bond prices imply lower financing costs for issuers, that could “incentivize reluctant first-time issuers,” Shurey says. Selling a green bond typically brings higher costs because issuers have to certify their projects are green, but that could be offset if issuers get to pay a lower rate. In other words, green bonds might be an even bigger deal if they traded more often—but to do that, they’ll need to find a bigger audience.

They may be about to get one. Big asset management firms have been introducing green bond funds aimed at making the market more accessible to average investors. About 20 mutual funds and exchange-traded funds currently say they focus on green bonds, representing about $2.8 billion in assets combined, according to data compiled by Bloomberg. Roughly half of those have come on line in the past two years.

“Green bonds are something retail investors wouldn’t necessarily have access to by themselves,” says Stephen Liberatore, co-manager of the TIAA-CREF Green Bond Fund, which launched late last year. Mutual funds have to buy and sell green bonds more frequently than, say, a pension fund would to meet inflows and outflows from investors, he says, “though that should be manageable as long as we keep seeing continued expansion of the investable universe.” BlackRock Inc., the world’s largest asset manager, also started a green bond ETF in November.

Trading will also be helped as companies and governments sell more green bonds. The average size of a green bond deal has more than doubled, from about $120 million in 2015 to $261 billion in 2018, and there are more billion-dollar green bonds on the market. “More deals that are green bonds are larger and index-eligible, so they’ll trade more frequently,” Liberatore says.

Still, the market is far from mature. Most green bond funds have to buy additional bonds that meet sustainability criteria—but aren’t specifically green—because those are easier to trade and use to meet redemption requests. Green bonds represent just a little more than 1 percent of the $53 trillion global bond market. But to meet the goal of limiting global warming to 2C (3.6F), about $90 trillion of investment is needed by 2030, according to the Climate Bonds Initiative. That leaves plenty of room for green bonds to grow.

Bloomberg BusinessWeek

By Emily Chasan

April 23, 2019, 3:00 AM PDT

U.S. retail investors have long dominated the U.S. municipal bond market, but over the last decade, institutional interest in the sector has soared, particularly outside the U.S. and specifically in taxable municipal bonds.

So far, these non-traditional investors, including pension funds, insurance companies and family offices, have been rewarded. Over the last 10 years, taxable U.S. municipal bond returns have topped all but one major bond sector, U.S. high yield.

For example, the sector’s 6.9% annualized total return for the period handily outperformed the 4.6% return on U.S. corporate investment-grade bonds, a staple in most institutional portfolios.

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PENSIONS & INVESTMENTS

BY SCOTT SPRAUER AND ROBERT BURKE · APRIL 23, 2019 12:00 PM

In Silicon Valley, cash-strapped schools are selling bonds to buy student laptops

SAN JOSE, Calif. — At James Lick High School the slate-gray Chromebooks are ubiquitous. Rolling cabinets stocked with dozens of the laptops sit in classrooms where teachers assign them to students for everything from researching hereditary DNA to writing essays. In this majority-Latino school of 1,100 students, 84 percent of whom qualify for free or reduced-price lunch, a federal measure of poverty, school principal David Porter says making the devices readily available is a significant part of an effort to develop digital literacy for students who might otherwise be left behind.

Nationwide, one out of four teenagers from low-income households lacks access to a home computer and, overall, Latino students have less access than their black and white peers, according to a 2018 survey by the Pew Research Center. “We’re doing a disservice if we’re not teaching the next generation how to use technology. Students being able to access it is critical,” Porter says.

Using computers and online resources in the classroom is part of a growing trend in education. What’s unusual about James Lick’s Chromebook program isn’t the laptops themselves, but how they were paid for. In this school on the eastern edge of Silicon Valley, just a 20-minute drive from Google’s Mountain View headquarters, the district has put these laptops into students’ hands by going into debt, authorizing a $16.2 million sale of general-obligation bonds intended almost exclusively for the laptop purchases.

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THE HECHINGER REPORT

by AMADOU DIALLO

April 22, 2019

About one in five Americans now lack regular access to local media coverage. Studies show this is bad for politics, municipal debt — and even the environment.

Last month, after years of layoffs, the Cleveland Plain Dealer announced it was cutting even more jobs. A newspaper that had a unionized staff of 340 at the dawn of the century will drop down to 33.

What happened at the Plain Dealer isn’t unusual.

Around the country, major regional newspapers — including the Charlotte Observer, The Wichita Eagle, The Denver Post and The San Jose Mercury News — have shed 80 to 90 percent of their reporting and editing staffs. Between 2008 and 2017, newsroom employment dropped by 23 percent, according to the Pew Research Center. Already this year, more than 2,000 media jobs have been lost.

That’s bad news for journalists. It’s also bad for politics, government — and even the environment.

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GOVERNING.COM

BY ALAN GREENBLATT | APRIL 24, 2019 AT 4:00 AM

State and local officials are striking long-term deals with private companies to upgrade airports, college campuses and prisons.

The biggest news in the world of public-private partnerships (P3s) last year had nothing to do with toll roads — the most visible way governments team up companies. Instead, the most expensive infrastructure deals were projects to build a car-rental facility and a small tram at Los Angeles International Airport.

Other significant P3s struck last year centered around student housing at Purdue University, a courthouse in Maryland and a replacement for a 155-year-old prison in Kansas, according to Inframation, a news and analysis service.

The only highway P3 in the mix last year, in fact, did not involve toll roads. The Michigan transportation department turned to a private consortium to design, build, finance and maintain a 5.5-mile stretch of Interstate 75 just outside of Detroit. As a result of the P3 and other innovations, the improved highway will be ready a decade earlier than previously planned.

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GOVERNING.COM

BY DANIEL C. VOCK | APRIL 23, 2019 AT 4:00 AM

The federal government’s role in rehabilitating water utility infrastructure in the U.S. is taking on even greater importance as municipalities are challenged to keep pace with the aging of more than 70,000 water & wastewater treatment systems and three million miles of underground pipe networks, nationwide.

With overall public spending — local, state, and federal — on water utilities declining year-over-year in five of the last ten years, core federal programs are proving to be more critical in addressing investment needs in urban and rural treatment systems and networks, according to Bluefield Research, a market research firm focused exclusively on water.

The nation’s infrastructure investment needs are evident in Bluefield’s ongoing analysis of municipal utility capital improvement plans (CIP) and annual State Revolving Funding (SRF) requests. In 2018, analysis of utility planning documents resulted in as much as $68B in capital needs for water & wastewater infrastructure, annually, over the next decade. At the same time, $82B was requested from state administered SRF programs for clean (wastewater) and drinking water projects, up from $64B in the prior year. With only $15.2B awarded though SRF, the gap between utilities’ investment needs and available spend is clearly widening.

“SRF loans and grants, which make up 60% of government allocations this past year, are more important than ever as the financial burden falls increasingly on local communities”, says Erin Bonney Casey, Research Director for Bluefield. “Some states like Ohio are more proactive in supporting requests, while surprisingly, other state funds in Arizona and Tennessee, for example, are underutilized. Navigating these processes can be a challenge and, in fact, technology and equipment vendors are now recognizing the opportunity to support utilities in the application process to make a sale.”

Bluefield Research’s new report, Funding U.S. Water & Wastewater Infrastructure: Analyzing Government Sources for Project Development, examines $25.3B of loans and grants distributed in 2018 through four federal programs: EPA State Revolving Funds (SRF): USDA Loan & Grant Programs, Water Infrastructure Finance and Innovation Act (WIFIA), and U.S. Bureau of Reclamation programs.

Overview of Government Funding for Water Infrastructure

These funding sources, which address varying geographic needs and project sizes, typically receive bipartisan support and are expected to remain as water infrastructure mainstays in the absence of a more wide sweeping infrastructure act. In fact, 2018 saw a spike in the amount made available by these programs, with WIFIA expanding to over $4.8B in its second year, and the USDA dedicating over $5B to its water and waste program in a push to invest in rural communities.

Select cities and states are also becoming more creative and using innovative mechanisms to fund their water infrastructure improvements. Traditionally, rate increases have been a way to pay for improvements, which is not sustainable, particularly with water & wastewater rates increasing by as much as 30% since 2012, outpacing inflation and median household income growth. Because of its own affordability struggles, Philadelphia has moved to implement a new water pricing model to address the 40% of customers falling behind on bill payments at any given time.

Atlanta and Washington D.C. are leveraging environmental impact bonds as an alternative means of financing infrastructure improvements. At the core of this approach, also known as “pay for success”, are project-specific performance metrics that can be measured at baseline and monitored thereafter across the life-cycle of the bond.

“There is no one-stop shop for water infrastructure funding. Therefore, utilities and municipalities are being forced to find alternative ways to leverage existing funding sources and financing tools,” according to Bonney Casey.

About Bluefield Research
Bluefield Research provides data, analysis and insights on global water markets. Executives rely on our water experts to validate their assumptions, address critical questions, and strengthen strategic planning processes. Bluefield works with key decision-makers at municipal utilities, engineering, procurement, & construction firms, technology and equipment suppliers, and investment firms. For more information, visit www.bluefieldresearch.com.

Water Online

April 24, 2019

Investors must rethink their assessment of climate-risk vulnerabilities

Asset manager behemoth BlackRock warns that investors are underpricing the impact of climate-related risks and need to rethink their assessment of asset vulnerabilities.

The group, in a major piece of on-going analysis, asserts that while the physical manifestations of climate change are clear, including rising sea levels, and more intense hurricanes, wildfires and droughts, how investors incorporate these risks into their analysis is not.

The research indicates many US markets – particularly electricity utilities, commercial real estate, and municipal bonds – are consistently underpricing physical climate change risks to their business.

‘Our early findings suggest investors must rethink their assessment of vulnerabilities,’ the BlackRock report states. ‘Weather events such as hurricanes and wildfires are underpriced in financial assets, including US utility equities.

‘A rising share of municipal bond issuance is set to come from regions facing climate-related economic losses. And many high-risk commercial properties are outside official flood zones.’

Highlighting recent extreme weather events such as wildfires and hurricanes in the US and heatwaves in Europe, as well as rapid technological, social and regulatory change, BlackRock warns climate change poses ‘tangible risks to investment portfolios today, not just years in the future’.

‘The trend of rising average temperatures is boosting the frequency at which extreme weather events occur, as well as their intensity. These changes are affecting our economy today,’ states the report. ‘Investors who are not thinking about climate-related risks, or who view them as issues far off in the future, may need to recalibrate their expectations.’

BlackRock says recent beneficial developments in climate and data science have made it easier to analyze climate data effectively.

Brian Deese, global head of sustainable investing at BlackRock says: ‘The combination of advances in data sciences, including geolocation data and climate modeling, have allowed us to more precisely assess the investment implications of climate-related risks.

‘Many of our clients are long-term investors and, as a fiduciary, we are working to help them integrate ESG factors across an entire portfolio to enhance long-term risk adjusted returns with built-in resilience.’

And climate-related risks pose a threat to the economies – and creditworthiness – of many US state and local issuers, warns BlackRock.

Within a decade, more than 15 percent of the current S&P National Municipal Bond Index by market value would come from metropolitan statistical areas (MSAs) suffering likely average annualized economic losses from climate change of up to 0.5 percent to 1 percent of GDP.

Furthermore, 58 percent of US MSAs will likely suffer annualized GDP losses of 1 percent or more by 2060-2080 under a ‘no climate action’ scenario.

Florida would be hardest hit, with several towns and cities potentially incurring annual losses of more than 15 percent driven by coastal storms, BlackRock notes. Miami’s current annual GDP losses due to extreme weather already account for more than 1 percent.

The report also warns that hurricanes and flooding are key risks to commercial real estate, with nearly 80 percent of commercial properties in Miami and Houston tied to mortgages outside official flood zones, which means they lack insurance.

Other organizations have also been highlighting the issue: The World Economic Forum has cited extreme weather as the most pressing threat facing the global economy in 2019 and the UN has warned of major risks to food security.

APR 10, 2019

• Climate change threatens an increasingly large part of the $3.8 trillion US municipal bond market, the asset manager BlackRock warned.
• The firm analyzed the economic impact that climate-change-related risks — like flooding and hurricane-force winds — could have at a local level in the coming years.

BlackRock, the world’s largest asset manager, is doubling down on its view that investors in the US don’t yet fully appreciate the just how disastrous an economic impact climate change could have at a time when environmental, social, and corporate governance investing is garnering mainstream attention.

“Climate-related risks already threaten portfolios today, and are set to grow, we find,” strategists at the BlackRock Investment Institute wrote in a report this week, homing in on threats the massive US municipal bond market could face as the planet warms.

“A rising share of issuance in the $3.8 trillion market is set to come from regions facing climate-related economic losses,” the strategists said of the municipal bond market’s creditworthiness.

Continue reading.

Markets Insider

Rebecca Ungarino

Apr. 19, 2019, 08:00 AM

• Miami Beach wants bond buyers to know it takes risk seriously
• BlackRock says climate change will hit more and more issuers

When Miami Beach borrowed $162 million from Wall Street this week, it wanted investors to know rising seas and extreme weather are a real risk to the city and that it’s doing something about it.

An increasing number of states and local governments are including climate change in their list of risks investors should consider before buying their bonds. There’s good reason. BlackRock Inc., the world’s largest asset manager, says that within a decade, more than 15 percent of debt in the S&P National Municipal Bond Index will come from regions that could suffer losses from climate change adding up to as much as 1 percent of gross domestic product annually.

“Climate is becoming a bigger and bigger part of calculating risk in our market,” said Eric Glass, a portfolio manager for fixed income impact strategies at AllianceBernstein. “We have to take these things into consideration as we build out our portfolios.”

Miami Beach, which sits on a barrier island off the southeastern coast of Florida, devotes more than two pages in its official bond offering document to climate change, saying city officials are “keenly aware of the risks from hurricanes and sea level rise.”

History Lesson

That warning is warranted. The picturesque beach destination along with Sarasota on the state’s western coast, are among the most exposed cities to climate change in the country, according to an analysis last year by advisory firm Four Twenty Seven.

Recent history has investors concerned:

• Puerto Rico was decimated by Hurricane Maria in 2017, a disaster that all but destroyed the already-bankrupt island’s electricity grid and set back efforts to settle with bond holders and to emerge from bankruptcy court.
• Superstorm Sandy caused some $70 billion in damages when it slammed into the Eastern seaboard in 2012, flooding half of Hoboken and parts of lower Manhattan and Wall Street and inundating subways.
• California wildfires, which have intensified in severity because of climate change, in part sent PG&E Corp., the state’s largest power company, into bankruptcy amid mounting liability costs.

BlackRock developed a model which uses climate data to analyze the physical risks and probabilities of flooding and hurricane force winds on a granular level across the U.S. The company’s research found that Coastal Florida, the Gulf Coast region — which was recently battered by Hurricane Harvey — and Arizona because of extreme heat, are most susceptible to economic losses from climate change.

“Our early findings suggest investors must rethink their assessment of vulnerabilities,” BlackRock’s Global Chief Investment Strategist Richard Turnill wrote in a research note this week. “Climate-related risks already threaten portfolios today, and are set to grow.”

Paying Attention

Miami Beach asked voters last year to approve $439 million in general obligation bonds, a fourth of which would be used to directly address the effects of climate change. The measure passed overwhelmingly. A portion of the latest sale will be used for infrastructure and capital improvements, including storm-water, flooding and mitigation efforts. The bonds priced with spreads ranging from 3 basis points for debt maturing in 2020 to 82 basis points on debt with a 3.25 percent coupon maturing in 2049, according to data collected by Bloomberg.

San Francisco voters passed a referendum for a revitalized sea wall and Harris County, Texas — home to 4.65 million people — approved flood bonds a year after Harvey dumped a record amount of water on the region in 2017. New York Mayor Bill de Blasio last month proposed a $10 billion plan to push out the lower Manhattan coastline as much as 500 feet, or two city blocks, to protect from flooding that’s expected to become more frequent as global temperatures rise.

In the meantime, investors are mindful that municipalities can borrow money for 30 years out and a lot of catastrophic weather can happen in that time. All five of the costliest hurricanes on record — Katrina, Harvey, Maria, Sandy and Irma– hit in the last 15 years, according to the National Oceanic and Atmospheric Administration.

“Does Miami Beach look like what we know Miami Beach to look like in 25 or 30 years?” Glass said.

Bloomberg

By Danielle Moran

April 18, 2019, 4:00 AM PDT

MUNIS IN FOCUS: Joe Mysak, Editor Bloomberg Brief: Municipal Market, discusses climate change influencing muni issuers. Hosted by Lisa Abramowicz and Paul Sweeney.

Running time 04:40

Play Episode

April 12, 2019 — 8:58 AM PDT

There are several U.S. Department of Health and Human Services (HHS) proposals as well as possible congressional legislation that could affect the creditworthiness of companies within the health care sector.

Continue Reading

Apr. 18, 2019

WASHINGTON — Municipal and corporate bond issuers are awaiting the release of standardized fallback language for the eventual phaseout of Libor, market participants told a Securities and Exchange Commission’s Fixed Income Market Structure Advisory Committee on Monday.

The phaseout of Libor, also known as the London Interbank Offered Rate, will affect municipal finance in not just the bond market but also in some legacy contracts with suppliers where Libor language is used, experts said. Fallback language is expected to be released before year-end by both the Alternative Reference Rates Committee (ARRC) convened by the Federal Reserve and the International Swaps and Derivatives Association (ISDA).

Pat McCoy, past president of the Government Finance Officers Association and finance director of the New York Metropolitan Transportation Authority, said ISDA’s work “is going to be a critical piece of the work that ARRC undertakes.”

“It will make more clear to the issuer community what they need to focus on with their existing legacy agreements and, obviously to the extent that they want to do new derivative agreements, what is available to them,” McCoy told The Bond Buyer.

McCoy said the GFOA is encouraging municipal governments to consult with their municipal advisor and their counsel before deciding how to proceed.

Tom Deas of the National Association of Corporate Treasurers said at Monday’s meeting that Libor language is contained in many supplier contracts.

McCoy said it’s likely not as prevalent in municipal contracts, but it does occur.

“There’s typically a fallback language in the documents,” he said. “Obviously with derivatives there’s fallbacks in that as well. That affects the municipal market as well as the corporate market.”

There are about $1.8 trillion in outstanding floating-rate corporate and municipal bonds tied to Libor, the Fixed Income Market Structure Advisory Committee was told Monday.

Tom Wipf, who was named last week as the new chairman of ARRC and is vice chairman of municipal securities at Morgan Stanley (MS), told the panel that Libor is being phased out because “the underlying cash transactions that support Libor had really stopped taking place.”

“Post the financial crisis, interbank lending pretty much grounded to a halt,” Wipf said. “The 19 banks who report into the Libor panel really had no observable transactions to look at so they used what we call expert judgment.”

The successor to Libor in the United States, the Secured Overnight Financing Rate known as SOFR, is based on the overnight Treasury repo, which has from $750 billion to $1 trillion in daily activity.

But Libor has a term component and a credit component while SOFR has neither of them.

Wipf said the ARRC is working on a way to bridge that. He described 2019 as “deep in the second act of a three act play” with the official phaseout of Libor coming in 2022.

He described standardized fallbacks and protocols as a “first step in risk management in putting us in a better position than we are today, but by no means are they the answer to all issues.”

Julian Potenza, a fixed income portfolio manager for Fidelity Management & Research Co., said he’s encouraged that the ARRC will soon publish recommended fallback language.

“We are hopeful that the publication of that language will give the buy side a common set of principles to rally around as we negotiate for terms that are friendly to investors in Libor-linked issuance,” Potenza said.

In terms of “legacy securities,” Potenza said his understanding is that it’s “unlikely that there is any regulatory Big Bang solution.”

“On the new-issue front, our preference is for the development of clear, consistent and investor-friendly fallback language across markets,” Potenza said. The investor-friendly components should include clear Libor succession triggers, minimal agent or issuer discretion and value neutral spread adjustments so there are no winners or losers, he said.

McCoy, in his presentation of the Fixed Income Market Structure Advisory Committee, said the New York MTA will have about eight transactions this year that will need to remarket using either SIFMA-based, Libor-based or SOFR-based floating-rate note or, alternatively, fixed-rate financing.

“While different market participants are coming together to make this as painless as possible, we know that it will be disruptive,” McCoy told the panel. “I think one of the keys to avoiding that disruption is early planning and early adoption to the degree that an entity can do that.”

By Brian Tumulty

BY SOURCEMEDIA | ECONOMIC | 04/16/19 12:08 PM EDT

It takes money to get money — this rule of thumb shapes so much of our financial system. If you have a couple thousand dollars saved up in a bank, it’s easy to use that as collateral to get a secured personal loan up to the same amount. It works that way for businesses, too; the more money a business can set aside and leave in the bank as cash reserves, the more banks or other investors are willing to open up their coffers and invest in that business.

That same basic principle lies at the heart of the Community Development Financial Institutions Fund, or CDFI Fund, an arm of the U.S. Treasury created to support financial institutions that serve low- and moderate-income areas, rural areas, and native lands. The fund was created under the Clinton Administration, but its roots are much deeper than that.

No one knows those roots better than Clifford Rosenthal, who recently completed “Democratizing Finance: Origins of the Community Development Financial Institutions Movement,” a 556-page history of mission-driven lending and investing in the United States.

“What is totally unique about the CDFI Fund in policy history is that it provides capital — not loans, but discretionary capital — to build your balance sheet,” says Rosenthal.

In other words, the CDFI Fund is the only federal program that distributes money to organizations who don’t have to go out and spend it. They can choose to leave it on their balance sheets, then they can use those dollars to go out and attract more capital from others.

It’s never been very big — since its inception in 1994, the CDFI Fund has awarded only $3 billion to CDFIs in this way.

But still, if that sounds like a program rife with opportunities for corruption and waste, you’d be right — which is partly why the application process is remarkably onerous, to a fault, many would say. It involves user accounts created at three separate federal websites, and at least 17 application components, including some with multiple documents and steps under each component. There are four different deadlines across two months, some with multiple components due that day. This year’s application process is currently underway, to conclude in June.

And that’s just the application process. There’s also a separate process to become certified as a CDFI and therefore eligible to apply at all. Then there’s the annual data reporting back to the CDFI Fund for a typical period of three years after being awarded dollars from the fund’s main financial assistance program. Current regulations require CDFIs to show at least 60 percent of their lending going to low- and moderate-income census tracts.

While the need to protect the program from corruption and waste is important, in some ways the onerous process has kept out the institutions Rosenthal hoped would benefit most from the CDFI Fund — the tiny credit unions and community banks like the one he helped found on Manhattan’s Lower East Side in the mid-1980s. Nonprofits simply turned out to be a better fit for the program, with their professional grant writers and experience seeking funding from government agencies.

“The charts I developed show 80 cents out of every dollar the CDFI Fund put out in capital over its first 20 years went to nonprofit loan funds, while less than 20 percent went to banks and credit unions,” Rosenthal says.

The loan funds — although some of them have gone on to do striking things like raising capital from Wall Street investors to bring back to Main Street — don’t quite fulfill the vision Rosenthal sees for CDFIs.

“It’s done a lot in terms of building the CDFI field, but it has not transformed banking, and for my particular bias, what it has not done is empowered the people in those communities in the same way,” Rosenthal says. In other words, the loan funds are doing for communities, but not always with them, with leadership and at least some dollars from those communities.

In recent years, the CDFI Fund has made efforts to reduce barriers for credit unions, including Puerto Rico’s 100-year old network of state-insured credit unions known as the ‘cooperativas.’

Still, Rosenthal sees it as a success that there are now more than a thousand organizations certified as a CDFI. There are CDFIs in every state as well as Puerto Rico and Guam. Collectively, these organizations account for more than $136 billion in assets — though that’s still just a rounding error compared to the $17 trillion in assets held by commercial banks or the $22 trillion in assets managed by U.S.-registered investment companies.

But the growth in numbers and asset size, especially over the past decade, has not been matched by similarly rapid growth in size for the CDFI Fund. Its $250 million budget proposed by Congress for FY2019 is the highest it’s ever been, but the Trump administration has repeatedly requested to zero out the CDFI Fund budget, and only bipartisan support in Congress for CDFIs has kept it at $250 million a year.

The growth of CDFIs in conjunction with stagnant funding has meant more and more applications being turned away. More and more communities are learning how to form CDFIs and access the fund, but the fund isn’t growing in response. Last year, 538 applications came from 485 organizations across the country, requesting a total of $504.5 million. The fund awarded just 265 organizations a total of only $188 million from its main program.

One criticism of CDFIs has been that politicians on both sides of the aisle have used their support for them as a distraction or excuse to do little else to make the economy work better for people at the bottom of the economic ladder — as generations of politicians have used black banking as a distraction from needed structural change to deconstruct the overlapping legacies of slavery, Jim Crow, redlining and mass incarceration.

The transformative potential for CDFI Fund is in how it can complement the organizing work in communities like the Lower East Side, whose residents and organizers Rosenthal worked alongside to found the Lower East Side People’s Federal Credit Union in 1986, taking over what had been the last bank branch operating in the neighborhood.

“This was the first wave of banks leaving those neighborhoods,” says Rosenthal. “Branches generally were unprofitable, they were leaving these neighborhoods, poor neighborhoods, and I was saying the next wave should be credit unions.”

For 30 years, Rosenthal also served as president of the National Federation of Community Development Credit Unions (which recently changed its name to Inclusiv), where he wrote the white paper that was eventually used as an early template for the legislation to create the CDFI Fund. He envisioned the fund as helping to overcome a key regulatory challenge for credit unions as well as community banks — the need to meet capital requirements as regulated depository institutions.

For every $100 in loans, regulators typically require banks and credit unions to hold around $8 of capital in reserve. For banks, those funds typically come from shareholders or profits; for credit unions they usually come from members, net income, or philanthropic contributions. Rosenthal wanted the CDFI Fund to help credit unions like those in his federation raise capital to meet their regulatory requirements.

Today, Rosenthal feels a sense of camaraderie with community organizers in the Black Lives Matter movement who are interested in moving deposits into community-owned, community-led financial institutions, especially credit unions.

“The lack of diversity in the CDFI field in terms of the leadership has been striking,” Rosenthal says as we sit in a coffee shop just a few blocks from where the Lower East Side People’s Federal Credit Union’s headquarters still stand today.

He brings up the folks behind Village Financial Cooperative, a credit union forming in Minneapolis as a direct response to the police killing of Philando Castile, as an example of the racial justice work he hopes to see grow as part of the CDFI Fund’s portfolio. He wants the federal government, so long after breaking its promise to former enslaved persons after the Civil War, to stand behind such communities in the work they are already doing.

“I would love to see the CDFI Fund as a source of start-up capital for that,” he says. “It’s the kind of story that I think that gives me hope of its relevance in a new era, that it could still matter.”

NEXT CITY

by OSCAR PERRY ABELLO

APRIL 18, 2019

Municipal bonds are a specific corner of the bond market that has its own nuances to be wary of, such as costs and tracking errors, but this pair of ETFs eliminates the guess work involved–the Vanguard Tax-Exempt Bond ETF (NYSEArca: VTEB) and iShares National Muni Bond ETF (NYSEArca: MUB).

With bond market mavens warning investors of headwinds in the fixed income space like the possibility of an inverted yield curve, rising rates and BBB debt sliding out of investment-grade, investors need to be keen on where to look for opportunities.

One area is within the municipal bond space, which may have gotten a boost following last November’s midterm elections. In particular, with respect to infrastructure spending—it’s one of the few things, if any, that Democrats and Republicans can agree on, but with the newly-divided Congress, this could fuel municipal bond ETFs.

Still, investors need to be aware of the costs associated with investing in this fixed income space, as well as certain tracking errors that could arise with respect to their prices.

In the video below, inflows of municipals bonds in 2019 have topped $20 billion, the highest in 13 years. Analysts say taxpayers who face higher taxes because of the new cap on state and local tax deductions are pouring into municipal bonds as tax shelters. CNBC’s Frank Roberts reports.

by ETF TRENDS on APRIL 16, 2019

There’s a strong case for letting the U.S. central bank help states weather an economic downturn.

Almost 10 years after the Great Recession ended, the growing threat of a new economic slowdown raises a troubling question: When the next recession strikes, what can the world’s central banks do? With interest rates low and their balance sheets still loaded with assets bought to fight the 2008 crisis, do they have the tools to respond? This column is one of five looking at that question.

U.S. state governments suffered major damage from the last recession 10 years ago. During the second quarter of 2009, the final months of the downturn, personal income taxes tumbled 27 percent from a year earlier. At the same time, expenses grew as enrollment for Medicaid and state unemployment insurance soared, while crumbling asset prices suddenly left public pension systems with massive shortfalls relative to their liabilities. In statehouses across the country, money was tight, to say the least. California went so far as to issue IOUs.

Over the past decade, the slow-but-steady economic expansion has covered up these issues, but hasn’t erased them. State government employment remains below its pre-financial crisis peak. Public pension plans are still largely in a sea of red ink, with an overall shortfall of $1.4 trillion at the state level, and even those with an acceptable level of assets are just one bear market away from the brink. And it’s no secret that the U.S. has fallen terribly behind in funding its roads, bridges, airports and public transit systems. The American Society of Civil Engineers estimates the money needed to get infrastructure into an overall “state of good repair” will fall short by $2 trillion over the next several years.

Continue reading.

Bloomberg Politics

By Brian Chappatta

April 18, 2019, 4:30 AM PDT

• Firm says threats made to cut off business with broker-dealers
• Biggest high-yield muni fund manager accused of intimidation

Preston Hollow Capital LLC subpoenaed Deutsche Bank AG, Goldman Sachs Group Inc. and JPMorgan Chase & Co. for telephone recordings and communications with Nuveen LLC related to the Dallas-based municipal lender, according to filings in Delaware Chancery Court.

Preston Hollow has sued rival Nuveen, accusing head of municipal bond investments John Miller of threatening and intimidating broker-dealers to cut off business with Preston Hollow. The companies compete in the market for high-yield municipal bonds, which are in scarce supply as investors reaching for yield have flooded into the market.

Preston Hollow asked Deutsche Bank to turn over all documents and communications with Miller and five other Nuveen employees concerning the bank’s tender-option bonds and funding arrangements with Nuveen, as well as all other communications related to Preston Hollow. The company also subpoenaed Goldman Sachs and JPMorgan for communications and documents about whether they considered serving as underwriters or placement agents on bond deals involving Preston Hollow, Howard University and Roosevelt University.

‘Economic Pressure’

Preston Hollow, which lends directly to municipal projects that banks won’t finance because they’re too risky, has accused Nuveen of moving $500 million of tender option bond financing and the revenues associated with it from one bank to another as part of its pressure campaign. Nuveen and other firms use tender option bonds for leverage. Such programs finance the purchase of higher-yielding long-term municipal bonds by selling tax-exempt floating-rate securities to money-market funds.

Miller and his team allegedly made threats to dealers following Preston Hollow’s exclusive purchase of Howard University and Roosevelt University bonds. The bonds were underwritten by Bank of America Corp. and Wells Fargo & Co., respectively. Preston Hollow alleges that three broker-dealers have refused to do business with the firm in the aftermath.

Chicago-based Nuveen, which oversees more than $140 billion of municipal bonds and manages the biggest U.S. high-yield municipal bond fund, generates millions of dollars in revenue for Wall Street municipal bond trading desks. By contrast, Preston Hollow has extended about $2 billion in loans to municipal projects.

Nuveen has moved to dismiss the case, arguing that it can urge its counterparties to share investment opportunities and not support a competitor in the design and execution of exclusive investments.

“The ability to choose with whom to do business is a fundamental economic right, which includes the right to select business partners based on whether they work with competitors and to use economic pressure to persuade third parties,” lawyers for Nuveen wrote in an April 10 brief in support of a motion to dismiss the case.

“Just because plaintiff does not like that conduct does not make it wrongful, even if negatively impacted plaintiff’s business.”

Nuveen sent banks letters on Feb. 22 saying they were free to do business with anyone, including Preston Hollow. Preston Hollow hasn’t identified any contract or investments it may lose, and so can’t show tortious interference with a contract, Nuveen’s lawyers wrote.

The case is Preston Hollow Capital LLC v. Nuveen LLC. Docket Number: 2019-0169 in Delaware Court of Chancery.

Bloomberg Markets

By Martin Z Braun

April 15, 2019, 10:48 AM PDT

The new Hill Farms State Office Building created a more efficient use of shared space by allowing the State of Wisconsin to consolidate seven State of Wisconsin agencies, including anchor tenant, the Department of Transportation (WisDOT), into one state owned property in lieu of scattered smaller leased spaces. This over 5-year process, which started with the development of a Custom Proposal and P3 Development Agreement, was the result of a double joint venture in both the developer — Gilbane Development Company and Summit Smith Development and contractor roles –Gilbane Building Company and CD Smith Construction (“Smith Gilbane”).

Through the combination of a purchase and sale agreement and design-build-finance arrangement that leverages the state’s existing asset (land) and the market’s potential (growing demand base), Smith Gilbane:

1. Delivered WisDOT’s new facility and a 1,700-space parking garage on a turn-key basis, below budget and ahead of schedule, saving the WisDOT and the tax payers of Wisconsin millions of dollars in capitalized interest alone; and
2. Will deliver a vibrant $300MM mixed use development consisting of 450 residential units, up to 450,000 SF of office and medical office space, a 200-room hotel, up to 200,000 SF of retail including a 50,000 SF Grocer, Restaurants and Other Destination Services and 2,600 parking spaces over 2 phases.

Working with HGA as architect, Smith Gilbane and WisDOT’s facility incorporates concepts that merge “form and function” to engage visitors, enhance productivity of the building’s occupants and meet the public’s expectation for a government office facility that streamlines services while reducing operating expenses.

In addition to the direct social and economic impact realized by delivering WisDOT’s new facility, Smith Gilbane expects to have an even greater impact as it delivers Madison Yards, the $300MM mixed-use place-making component of the project.

Overall, the project was completed 3 months ahead of schedule and on budget in January 2018, allowing reduced Capital Interest Expenses to the State of Wisconsin.

Hill Farms State Office Building/Madison Yards is an industry leading example of how the public and private sectors can forge a strategic relationship to leverage each party’s respective strengths, jointly overcomes obstacles and create “place-making” developments, while delivering value to the internal/external stakeholders, end-user and investors alike.

APRIL 8, 2019

Changes to the U.S. tax code have been good for the state and local government debt market—possibly too good.

Individual investors have been putting cash into municipal bonds at a near-record pace this year, in search of tax-exempt interest income to offset larger tax bills. For fund managers, a flood of cash into a market is normally a reason to celebrate. But they have a problem: State and local governments haven’t been issuing enough new debt to match the increase in demand.

In effect, the new tax law has kicked off a competition among investors to finance state and municipal spending. That has reduced borrowing costs for states, but made it tougher for muni-bond investors to find deals.

“I get that taxes stink, and we all hate paying them, and we hate them even more every April because that’s when it’s the most real for us,” says Nick Venditti, managing director at Thornburg Investment Management. “But we’ve managed to drive up valuations to levels that are probably unsustainable.”

The U.S. Tax Cuts and Jobs Act capped the amount of state and local taxes that Americans can deduct from their federal tax bills. Investors in high-tax states have been loading up on municipal debt to offset their higher state and local tax bills.

While that demand would push muni yields lower—and prices higher—on its own, another tax-law change has made it more difficult for state and local governments to take advantage of those lower rates by refinancing their existing bonds.

Until recently, local governments could refinance debt well ahead of its maturity or call date in a process called “advance refunding.” But the new tax law imposes taxes on the interest paid to holders of advance-refunding municipal bonds, which has essentially killed that part of the market, strategists say.

Now, by at least one measure, muni bonds are more expensive than they have been in over a decade. On April 16, 10-year benchmark muni bonds yielded 1.965%, while 10-year Treasuries yielded 2.6%. That is the widest gap since at least 2009, according to Bloomberg data.

Because the law raises tax bills most for the residents of high-tax states, demand for bonds issued by those states—California and New York, in particular—has climbed especially far.

Consider a $306 million bond recently issued by California’s Department of Water Resources, which manages the state’s dams and aqueducts. Its 10-year bonds sold at a yield of 1.73%, well below even the 10-year benchmark rate.

For investors who already own muni bonds and plan to hold them to maturity or their call date, there are worse fates than a nearly 2% tax-free coupon and paper losses.

But those looking to put cash into cheaper corners of the market may want to consider taxable muni bonds, says Robert DiMella, co-head and senior portfolio manager at MacKay Municipal Managers. That category includes securities like pension bonds, industrial development bonds, some hospital bonds, and Build America Bonds.

“The need for income is strong, and a lot of people are starting to worry about the corporate debt market,” says DiMella, and that makes taxable munis attractive.

Another option is to invest in closed-end mutual funds that hold municipal bonds. Many of them trade at a healthy discount, even though the Federal Reserve isn’t expected to raise interest rates for most of this year. The BlackRock Municipal 2030 Target Term Trust (ticker: BTT), a previous Barron’s recommendation, still offers a 9% discount.

Thornburg’s Venditti recommends that investors keep their cash in short-term high-quality municipal debt or floating-rate short-term securities called variable-rate demand obligations, or VRDOs.

“The best place for investors to be is shorter duration, higher-quality credit, so when opportunities present themselves, they have the flexibility to take them,” he says. “You can’t really set it and forget it.”

Barron’s

By Alexandra Scaggs

April 19, 2019 7:30 a.m. ET

Financial Services firm Morgan Stanley sees a way to both make some money and do some good when it comes to plastic waste.

The company is launching a multi-pronged effort through its Morgan Stanley Institute for Sustainable Investing to tackle the issue.

Morgan Stanley will work from what the company is calling the Plastic Waste Resolution “to engage all relevant stakeholders to collaborate in designing, innovating, financing and deploying effective scalable solutions.”

The goal is to “retain the beneficial qualities of plastics while reducing the negative effects of plastic waste,” the company said.

Initial commitments by Morgan Stanley include underwriting bonds to fund reduction of plastic waste and exploration of financial products “that aim to consider and help address the plastic waste challenge” as well as “consider the risks and opportunities from plastic waste, across both public and private market funds.”

The company’s public finance unit will work with local governments and public agencies, schools, hospitals and non-profits to provide funding for improved collection, recycling and disposal systems.

Morgan Stanley also will work with investors to help them consider plastic waste reduction and the “new plastics economy” for their strategies.

The firm will partner with the University of Michigan in Ann Arbor, Mich., to create a Plastic Waste Reduction Fellowship in the School for Environment and Sustainability to study systemic approaches and solutions for plastic waste.

An existing program at the financial firm’s Multicultural Innovation Lab will seek proposals for plastic waste reduction innovations. The lab supports women and multicultural entrepreneurs working on early stage technology and technology-enabled startups.

“At Morgan Stanley, we are committed to leveraging our best thinking; our broad capital markets reach; our relationships with innovators, entrepreneurs, corporations and governments; and our ongoing commitment to our communities to address this daunting challenge at a systemic level,” Vice Chairman Tom Nides said in a statement.

By JIM JOHNSON

April 16, 2019

PLASTICS NEWS

HIGHLIGHTS:

• The U.S. Court of Appeals for the First Circuit has upheld a controversial ruling by a U.S. District Court in a case involving special revenue bonds issued by the Puerto Rico Highway Transportation Authority (PRHTA).
• The District Court ruled in January 2018 that the Authority was permitted, but not required, by the U.S. Bankruptcy Code to apply special revenues to pay the bonds during adjustment proceedings under the Puerto Rico Oversight, Management and Economic Stability Act of 2016 (PROMESA).
• The District Court’s ruling contradicted long-held conventional wisdom regarding a municipal debtor’s obligation to apply special revenues after commencing a bankruptcy proceeding.

The First Circuit’s affirmation may have widespread impact on the municipal revenue bond market.
The U.S. Court of Appeals for the First Circuit has affirmed a controversial ruling regarding the treatment of municipal revenue debt, leaving investors with lingering questions about the value and significance of a revenue pledge in a municipal bankruptcy.

The original U.S. District Court decision roiled the municipal markets in January 2018, when Judge Laura Taylor Swain, the judge overseeing Puerto Rico’s debt restructuring, ruled that municipal debtors were permitted, but not required, to apply special revenues to pay related bonds. Judge Swain’s ruling reversed long-held conventional wisdom regarding the mandatory application of special revenues following municipal bankruptcy.

Background and District Court Decision

The case involved several series of bonds (the Bonds) issued by the Puerto Rico Highway and Transportation Authority (PRHTA), a public corporation of the Commonwealth of Puerto Rico. By statute, the Bonds were secured by a gross lien on revenues derived from certain highway tolls and excise taxes (collectively, the Pledged Special Revenues). The Bonds were also insured by a number of financial insurers (the Insurers), who were subrogated to the bondholders’ rights upon payment of a covered default of the Bonds.

In March and April 2017, each of the Commonwealth and PRHTA adopted fiscal plans purporting to modify the application of the Pledged Special Revenues. Under the Commonwealth’s fiscal plan, certain of the Pledged Special Revenues would be diverted to the Commonwealth for its general revenue purposes, and under the PRHTA fiscal plan, PRHTA would be authorized to apply Pledged Special Revenues to pay operating expenses ahead of debt payments, in contravention of the gross lien granted to holders of the Bonds.

On May 21, 2017, the Financial Oversight and Management Board for Puerto Rico (the Board) commenced debt adjustment proceedings for the PRHTA under Title III of the Puerto Rico Oversight, Management and Economic Stability Act of 2016 (PROMESA), which under Section 301 thereof incorporates and makes applicable to it portions of the U.S. Bankruptcy Code. Shortly thereafter, the trustee for the Bonds was instructed by the Puerto Rico Fiscal Agency and Financial Advisory Authority, on behalf of PRHTA, to cease making scheduled payments, based on the rationale that such payments violated the automatic stay under Section 362(a) of the U.S. Bankruptcy Code (as incorporated into PROMESA by Section 301 thereof). On July 3, 2017, PRHTA defaulted on a scheduled payment of $219 million.

The Insurers filed suit against the Commonwealth, the PRHTA, the Board and various other entities and individuals, seeking declaratory and injunctive relief. The Insurers asked the court to declare, among other things, that the Bonds were secured by special revenues exempt from the automatic stay and to grant an injunction requiring PRHTA to resume remittance of the Pledged Special Revenues. The Insurers’ arguments hinged on the interpretation of Sections 922(d)1 and 9282 of Chapter 9 of the U.S. Bankruptcy Code (each incorporated into PROMESA by Section 301 thereof), which address the treatment of special revenues in municipal bankruptcy.

Judge Swain granted the defendants’ motion to dismiss the Insurers’ claims, holding, in effect, that while Section 928 extended the Bonds’ statutory lien to cover post-filing special revenues and Section 922(d) indeed permitted the municipality to apply those special revenues to make the secured payments, neither Bankruptcy Code section affirmatively required such payments.

Many commentators expressed surprise at Judge Swain’s ruling, which upset the widely held view in the municipal market that the protections afforded special revenues in municipal bankruptcy were, in fact, intended to provide bondholders with the certainty of payment during the adjustment proceeding, resulting from not only the continuing lien on special revenues, but a statutory obligation to apply those special revenues to pay the secured debt notwithstanding the automatic stay. Fitch Ratings, in a statement issued following Judge Swain’s original ruling, warned that “If the ruling is upheld on appeal, credit ratings that could be negatively affected include utility, transportation and tax revenue bonds rated higher than a municipality’s Issuer Default Rating,” echoing the sentiment of others in the market.

First Circuit Decision and Potential Effects

The First Circuit heard the Insurers’ appeal and, on March 26, 2019, affirmed Judge Swain’s ruling, dismissing the Insurers’ claims. In its opinion, written by Judge Juan Torruella, the First Circuit found that “In sum, Sections 928(a) and 922(d) permit, but do not require, continued payment during the pendency of the bankruptcy proceedings. The two provisions stand for the premise that any consensual prepetition lien secured by special revenues will survive the period of municipal bankruptcy, and, accordingly, municipalities can elect to voluntary [sic] continue payment on these debts during the course of the bankruptcy proceedings so as to not fall behind and thus be at risk of being unable to secure financing in the future.”

Although the First Circuit’s ruling covers only Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island, commentators and rating agencies have expressed concern that the ruling will have a broader impact on holders of municipal revenue debt, particularly given the relative scarcity of case law interpreting issues of municipal bankruptcy. The First Circuit’s affirmation raises serious concerns about the value of a municipal revenue pledge and creditors’ ability to enforce any lien on such revenues post-bankruptcy or to otherwise protect the revenue stream.

As the First Circuit noted, like its analog in Section 904 of the U.S. Bankruptcy Code that applies in Chapter 9 municipal bankruptcies, Section 305 of PROMESA denies the court presiding over the Commonwealth and the PRHTA’s debt adjustment proceedings the power and jurisdiction to “interfere with … any of the property or revenues of the debtor; or … the use or enjoyment by the debtor of any income-producing property.” Thus, in a situation where some portion of the pledged revenues is being expressly diverted away from the issuer and the remainder of the pledged revenues are being applied, on an ongoing basis, to operating expenses in violation of the applicable bond documents, the courts’ dismissal of the Insurers’ claims appears to leave bondholders exposed as the stream of revenues continues to be depleted, without any recourse in the adjustment proceeding itself. If this is the case, it appears that the Insurers’ only remedy, then, would be to persuade the court to grant relief from the automatic stay imposed by PROMESA on the grounds that the property interest embodied by the lien was not being adequately protected, and seek a remedy from some other competent court of more general jurisdiction to enforce their contractual and statutory rights (although the First Circuit’s opinion does not comment on this).

Because the First Circuit’s decision rests entirely upon the interpretation of provisions of Chapter 9 that are incorporated into (but not otherwise modified by) PROMESA, the court’s ruling could be viewed as equally applicable to all special revenues in municipal bankruptcies. Accordingly, while the First Circuit’s decision stands, municipal revenue bond ratings may be negatively impacted by the weakened bondholder protections; Fitch Ratings has already indicated that it will continue to monitor the case to determine whether ratings action is warranted. As a function of perceived credit risk, the price and valuation of new and existing municipal revenue debt may also be impacted, regardless of whether the rating agencies take action. Issuers of revenue bonds may consider taking additional steps to assure the market that they intend to honor their obligations, although the relative value of such an assurance may also be negatively impacted by the First Circuit’s decision. In addition, new debt issues may benefit from structures that provide greater protection for pledged revenue streams. Market participants will need to consider whether new disclosure is warranted in light of the ruling’s reversal of long-established market views regarding special revenues.

Assured Guaranty, one of the Insurers, has indicated that it is considering its legal options, including an appeal to the U.S. Supreme Court, or a challenge that the effective destruction of the lien constitutes an unconstitutional taking. Assured had previously been unsuccessful in its attempt to lift the automatic stay. In light of the facts surrounding the diversion of the pledged revenues and the subsequent actual default, however, perhaps another attempt will be better received, giving Assured another opportunity to seek protection of its lien. Regardless of the actions to be taken by Assured and the other Insurers, the market will continue to watch this case closely, considering its potentially wide-ranging ramifications.

by Douglas I. Youngman, Peter Baumgaertner and Phillip W. Nelson

April 9 2019

Holland & Knight LLP

On March 26, 2019, the First Circuit Court of Appeals, affirming a decision by the District Court emanating out of the Puerto Rico Title III bankruptcy cases, found that Sections 928(a) and 922(d) of the Bankruptcy Code “permit, but do not require, continued payment during the pendency of the bankruptcy proceedings.”[i] The First Circuit found that these provisions provide that (i) liens granted prior to bankruptcy that are secured by special revenues will survive while the municipal debtor is in bankruptcy, (ii) the debtor may elect, on a voluntary basis, to continue making payments on these debts during the bankruptcy case, but that (iii) the debtor is not required to make such payments during the pendency of the case.[ii] While the Opinion was issued in the Puerto Rico Title III case, the Opinion will have implications in municipal bankruptcy cases generally.[iii] And, this Opinion has important implications for holders of bonds secured by special revenues, as it may conflict with a prior decision suggesting that municipal debtors must continue to remit those pledged special revenues during the pendency of a Chapter 9 bankruptcy case.

Background

This dispute concerned bonds issued by the Puerto Rico Highway and Transportation Authority (“Authority”) that were secured by toll revenues (“Tolls”) and excise taxes (“Taxes,” and collectively with the Tolls, collectively, the “Revenues”). According to the Appellants (who are the insurers of the secured bonds), the Puerto Rico Secretary of Treasury is required by statute to transfer, monthly, the Taxes to the Authority for the benefit of bondholders. Appellants also argued that the Revenues were their property and must be transferred to the fiscal agent to replenish funds (“Reserve Accounts”) held in trust by the trustee (“Trustee”) for the benefit of bondholders.

In March 2017, after the enactment of the Puerto Rico bankruptcy law and the appointment of the Financial Oversight and Management Board (“Board”), the Board established a financial plan whereby the Tolls and Taxes would be transferred into Puerto Rico’s general revenues and not transferred to the Reserve Accounts benefitting the bondholders. In May 2017, after the Authority commenced its bankruptcy case, the Trustee was instructed to cease making monthly payments from the Reserve Accounts because “making such payments would constitute an act ‘to exercise control’ over [the Authority’s] property in violation of the automatic stay” provisions of the Bankruptcy Code.[iv] Thereafter, the Authority defaulted on scheduled bond payments. Appellants then commenced an adversary proceeding asserting, among other things, that the transfer of the Tolls and Taxes was exempt from the automatic stay, that failure to remit them was a violation of Sections 922(d) and 928 the Bankruptcy Code, and that the funds held in the Reserve Accounts were the property of the bondholders.[v] The debtors moved to dismiss the complaint, arguing that the Authority was not required to remit payment during the pendency of the bankruptcy case.[vi] The District Court agreed with the debtors and dismissed the case.

First Circuit’s Decision

The First Circuit noted that the Bankruptcy Code establishes generally that property acquired by the debtor after the commencement of the case is not subject to any security agreement entered into by the debtor before the commencement of the case.[vii] However, Section 928 of the Bankruptcy Code exempts liens on “special revenues” from application of that general rule. The First Circuit found that while those liens on special revenues will remain in place during the bankruptcy case, the statute does not mandate any action on the part of the debtor.[viii] Accordingly, the First Circuit held that the Bankruptcy Code does not mandate the ongoing transfer of the Tolls and Taxes to the Trustee, nor does it mandate payment on the Authority’s Bonds, during the pendency of the bankruptcy case.[ix]

Appellant bond insurers also argued that Section 922(d) of the Bankruptcy Code requires the continued transfer of Tolls and Taxes that secure the bonds and exempts bondholder enforcement actions from the Bankruptcy Code’s automatic stay provisions. The First Circuit ruled that the automatic stay provisions do not prohibit the application of pledged special revenues to payment of debt secured by such revenues.[x] Nonetheless, while agreeing that the Bankruptcy Code permits a debtor to pay creditors voluntarily during the pendency of the bankruptcy case, and allows a secured party to apply special revenues in its possession to bond payments without violating the automatic stays, the First Circuit found that “[n]othing in the statute’s plain language . . . addresses actions to enforce liens on special revenues . . . or allows for the compelling of debtors . . . to apply special revenues to outstanding obligations.”[xi]

Conclusion

The First Circuit Opinion may be at odds with a decision issued in the chapter 9 bankruptcy case of Jefferson County, Alabama.[xii] That case presented a similar dispute—whether bondholders could compel the transfer of pledged revenues from accounts held by the municipal debtor to accounts held by the bond trustee. There, the court found that the Bankruptcy Code required payment of the special revenues held by the County as of the petition date to the bond trustee, even if the payment occurs after the bankruptcy filing.[xiii] The First Circuit (and the lower court) tried to distinguish Jefferson County on the ground that it did not specifically address whether those payments by the municipal debtor were voluntary or mandatory.[xiv] Clearly, the First Circuit ruling has now created uncertainty as to what legal principles would apply in cases outside of the First Circuit. If the First Circuit holding becomes the commonly-accepted view of the law, that result could impact the pricing and ratings for bonds secured by special revenues, and the willingness of bond insurers to stand behind special revenue bonds in the future.

____________________________________

[i] In re Financial Oversight and Management Board of Puerto Rico, Nos. 18-1165, 18-1166, 2019 WL 1349223, at *7 (1st Cir. March 26, 2019) (emphasis added). Section 928 of the Bankruptcy Code provides: “Notwithstanding section 552(a) of this title and subject to subsection (b) of this section, special revenues acquired by the debtor after the commencement of the case shall remain subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case.” Section 922(d) of the Bankruptcy Code provides: “Notwithstanding section 362 of this title and subsection (a) of this section, a petition filed under this chapter does not operate as a stay of application of pledged special revenues in a manner consistent with section 927 of this title to payment of indebtedness secured by such revenues.”

[ii] Financial Oversight and Management Board of Puerto Rico, 2019 WL 1349223, at *7.

[iii] While the Opinion concerns Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), “PROMESA is largely modeled on municipal debt reorganization principles set forth in Chapter 9 of the Bankruptcy Code.” Financial Oversight and Management Board of Puerto Rico, 2019 WL 1349223, at *1. Accordingly, as noted, the First Circuit’s rulings will have application in municipal debtor bankruptcy cases commenced under Chapter 9 of the Bankruptcy Code.

[iv] Financial Oversight and Management Board of Puerto Rico, 2019 WL 1349223, at *1-*2.

[v] Id. at *2.

[vi] The District Court also found that the bondholders did not have a property interest in the funds being held in the Reserve Accounts. The First Circuit noted that it need not address this issue as Appellants failed to develop any argument on appeal going to the “property right” issue. Id. at *3 n.5.

[vii] Id. (quoting 11 U.S.C. § 552(a)).

[viii] Id.

[ix] Id. While the Appellants sought to rely on legislative history, because the First Circuit found that the statute was unambiguous, it was unnecessary to review the legislative history. Id. at *5.

[x] Id. at *5.

[xi] Id. at *6.

[xii] See In re Jefferson County, Alabama, 474 B.R. 228 (Bankr. N.D. Ala. 2012).

[xiii] Id. at 271. The bankruptcy court in Jefferson County also stated that Section 928’s inclusion in the Bankruptcy Code “demonstrates that Congress wanted to ensure no delay occurred in payment to creditors secured by special revenues received by a municipal debtor post petition.” Id. at 269.

[xiv] Financial Oversight and Management Board of Puerto Rico, 2019 WL 1349223, at *7.

by Arthur J. Steinberg, Floyd C Newton III, William A Holby (Bill) and Scott Davidson

April 1 2019

King & Spalding LLP

• Puerto Rico ruling may have big implications for muni market
• Decision could trigger credit downgrades, debt repricing

A haven for American investors is looking less bulletproof.

A federal court decision in Puerto Rico’s record bankruptcy that departs from past precedent in the $3.8 trillion municipal-bond market is threatening to upend the secure reputation for some types of debt. The legal fight could go all the way up to the U.S. Supreme Court, with the potential to erode the value of billions of dollars in bonds and ripple through a niche that finances roadways, airports and water systems.

That 2018 ruling was upheld by an appeals court last month and lets Puerto Rico’s highway agency raid tolls and other fee revenue dedicated to bondholders until the case is settled. It has dashed hopes that the island’s bankruptcy case would have little spillover into the U.S. mainland, because the ruling throws into doubt the belief that revenue bondholders will keep getting paid even when a government seeks to cut its debts in court.

“This is a backbone item of the muni market — understanding what your pledge is,” said Gabe Diederich, a senior portfolio manager at Wells Fargo Asset Management. “The biggest question is, What is the knock-on effect to confidence in different security pledges?”

The decision from U.S. District Court Judge Laura Taylor Swain contrasts with how special revenue bonds have been treated in all past municipal bankruptcies under Chapter 9 of the U.S. bankruptcy code, said James Spiotto, who specializes in that kind of restructuring as managing director at Chapman Strategic Advisors.

Spiotto was involved in crafting a 1988 Congressional amendment to the bankruptcy code that said revenue bondholders would have an “unimpaired” right to the project revenue pledged to them. He said the latest ruling is inconsistent with that amendment and would have big implications for future municipal bankruptcy cases if it’s upheld. “We can all imagine some bankruptcy lawyer from a debtor’s perspective saying, ‘Here in Puerto Rico, they didn’t have to. Why are you shorting your taxpayers?’”

Precedent Setting Collapses

Municipal bankruptcies are so rare that each of them has the ability to set precedents that reshape how investor protections are viewed, and the Puerto Rico decision that casts doubt on revenue bonds marks a shift from the last big case. As part of Detroit’s bankruptcy in 2013, some general-obligation bondholders took losses while debt backed by water and sewer revenues emerged unscathed, leading analysts and buyers to favor deals backed by specific revenue streams because of that extra protection.

Now, the pendulum could swing in the other direction. Debt sold for city utilities or airports could be considered at risk of getting sucked into cases of government distress, said Howard Cure, director of municipal bond research at Evercore Wealth Management.

“It’s worrisome and potentially a game-changer in how you analyze special revenue bonds — bonds that you thought were separately secured and somewhat immune from the travails of problem cities,” Cure said.

Fitch Ratings warned on Thursday that it may cut the credit rating of seven different municipal-bond issues if the ruling is upheld. Chicago water revenue bonds that have a much higher rating than the cash-strapped city are among those that could be downgraded. The ratings company said it believes the decision, if upheld, will be influential in future municipal bankruptcies.

Breckinridge Capital Advisors estimated last year that there is $1.2 trillion in outstanding special revenue bonds, which includes dedicated tax, water and sewer, transportation and tax-increment financing bonds. But the firm noted that “very few” special revenue bond investors are at risk of seeing their revenue raided if related governments face financial distress, particularly because some states, including Illinois, don’t allow localities to file for Chapter 9.

The Battle

The U.S. Court of Appeals for the First Circuit in March upheld Swain’s ruling, prompting bond insurer Assured Guaranty Ltd. to request that the court re-hear the case. The issue is of “exceptional importance for municipal bankruptcy law and the municipal bond markets,” the April 9 court filing says. If that effort is unsuccessful, then the ruling could be appealed to the Supreme Court, though the high court rarely intervenes in such petitions.

The National Federation of Municipal Analysts, a trade group, expects that if it stands the prices of some revenue bonds would need to be cut to account for the risk that investors won’t’ be repaid during a bankruptcy.

The group emphasized in a May 2018 court filing that the ruling could hurt localities’ ability to finance infrastructure projects, given that revenue bonds pay for water, energy and transportation systems. That could add anywhere from 5 to 50 basis points in yield on revenue bonds for infrastructure projects, the group said. Even a five-basis point bump in interest rates for infrastructure revenue bonds would translate to $2 billion in increased costs over the next decade, according to the estimate.

In the aftermath of Detroit, cash-strapped localities like the junk-rated city of Chicago began selling bonds that securitized some fees and taxes as a way to separate the revenue stream from the troubled local government, which helped earn them higher credit ratings and lower costs of financing.

But investors have become more skeptical of the protections they may have in a bankruptcy. S&P Global Ratings last year began changing the credit ratings of issuers to account for the risk of a distressed government raiding the revenue meant for bondholders, causing billions of dollars in debt to be both upgraded and downgraded.

Chicago’s Sales Tax Securitization Corp. was downgraded last year by S&P to put it more in line with that of the city’s rating. When it sold such bonds in January, investors demanded 1.7 percentage points in extra yield over benchmark securities, up from 0.9 percentage points more a year earlier — showing investors are starting to price in the risk that a bankruptcy court might shatter the securitization protections.

Erin Ortiz, a managing director at Janney Montgomery Scott, said any bankruptcy ruling in the municipal-bond market is “incredibly important.” But she noted that Swain’s ruling may not be the final decision on the subject.

“In terms of municipal bankruptcy cases, there always remains much uncharted territory,” she said.

Bloomberg Markets

By Amanda Albright

April 12, 2019, 7:47 AM PDT

Fitch Ratings-New York-11 April 2019: In response to the March 26, 2019 ruling by the United States Court of Appeals for the First Circuit regarding the bondholder protections provided by special revenue status under Chapter 9 of the U.S. bankruptcy code, Fitch Ratings has developed rating sensitivities corresponding to the likelihood and severity of potential rating changes resulting from a final court ruling upholding the decision. Fitch will consistently incorporate the appropriate sensitivity into each rating action commentary released until the court ruling is finalized.

Ratings for which the sensitivities are relevant are utility and tax-supported ratings that are higher than but within six notches of the related government’s Issuer Default Rating (IDR). Fitch has placed ratings more than six notches above the IDR on Rating Watch Negative, indicating the expectation that they would be downgraded if the decision limiting the protections afforded by special revenue status were to stand. For more information, see “Fitch Places Seven USPF credits on Rating Watch Negative Pending Court Decision,” dated April 11, 2019.

Fitch’s criteria allow for rating bonds secured by pledged special revenues distinct from and higher than the IDR. While special revenues offer substantial protections in the event of a bankruptcy filing, the ruling creates uncertainty about full and timely payment of special revenue obligations during the bankruptcy of the associated government.

The following rating sensitivity will be included in RACs for special revenue ratings between one and three notches above the IDR:

“The rating is unlikely to be affected by a recent ruling by the United States Court of Appeals for the First Circuit regarding the protections provided to holders of bonds secured by pledged special revenues. Fitch believes those protections warrant a distinction in ratings above the IDR regardless of the outcome of the case.”

The following rating sensitivity will be included in RACs for special revenue ratings between four and six notches above the IDR:

“The rating may be affected by the recent appeals court ruling regarding the protections provided to holders of bonds secured by pledged special revenues. Fitch believes those protections warrant a distinction in ratings above the IDR regardless of the outcome of the case. However, a final decision consistent with the First Circuit’s ruling may result in security ratings closer to the IDR.”

The following rating sensitivity will be included in RACs for California school districts with ratings above the IDR that are not currently on Rating Watch Negative because of the ruling:

“The rating may be affected by the recent appeals court ruling regarding the protections provided to holders of bonds secured by pledged special revenues. Fitch believes those protections warrant a distinction in ratings above the IDR regardless of the outcome of the case. However, a final decision consistent with the First Circuit’s ruling may result in security ratings closer to the IDR. Given state constitutional and statutory restrictions, Fitch believes potential rating changes would be modest.”

Fitch will not include a rating sensitivity related to the ruling for special revenue ratings that are below or equal to the IDR, or for ratings on stand-alone enterprise systems that are not related to a general government, as those ratings are unaffected.

Fitch believes U.S. airport ratings are unlikely to be affected by the ruling, even if made final, as federal laws specific to airport enterprises provide protections against revenue diversion to the general government. See “Fitch Rtgs: U.S. Airport Debt Shielded from Muni Bankruptcy Risk.” Therefore, no rating sensitivity related to the ruling will be applied to those credits.

Contact:

Amy Laskey
Managing Director
+1-212-908-0568
Fitch Ratings, Inc.
300 West 57th Street
New York, NY 10019

Arlene Bohner
Senior Director
+1-212-908-0554

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

Additional information is available on www.fitchratings.com

Puerto Rico’s bankruptcy is a consistent reminder of what really matters when investing in municipal bonds. It’s pretty simple: sound economics, responsible financial management, well-articulated public policy, positive social impacts and essential public service projects.

The most recent reminder comes from a new United States Court of Appeals ruling. The ruling appears to strip away the core legal tenet backing the security provisions investors in municipal bonds backed by a pledge of dedicated revenues rely on: a statutory lien on revenues reserved for debt service is not affected by a bankruptcy filing.

By affirming a previous U.S. District Court decision, the Court rejected that. This latest ruling has “raised broad concerns about the protections provided in Chapter 9 of the U.S. bankruptcy code to holders of bonds secured by pledged special revenues,” according to Fitch Ratings.

As with any investment, you should be doing your own research and drawing your own conclusions. Read the ruling, then read the actual law 11 U.S. Code Section 922 and Section 928 on the matter. Read the well-written Amicus Curiae brief submitted by the National Federation of Municipal Bond Analysts for a fair summary of the background and the issues. For an independent legal perspective, read the very tightly crafted memorandum on the ruling’s implications by Mintz Levin’s Public Finance Counsel Leonard Weiser-Varon.

The overall lesson municipal bond investors, both current and prospective, should take from reading these legal proceedings is that all the covenants in an OS, or all laws on the books, will not protect you if any or all of those initial five simple but critical components mentioned in the first paragraph are not present. Of course, covenants and legal protections are factors in the investment decision process: if done properly, they can be structured to create early warnings and some semblance of enforcement capability. But no investor should rely solely on the covenants and enforcement of legal protections to bail them out of trouble. No amount of legalese ever generated a dollar of debt service coverage.

As bondholders in the various debts of Puerto Rico as well as investors in other bankruptcy proceedings have experienced–and having gone through three municipal bond bankruptcies, including testifying in Federal Bankruptcy Court, I have had that experience–there is logic, then there is the law. Or perhaps more to the point, to quote Mr. Bumble, “the law is an ass.” No one relies on an ass to protect their financial interests.

Forbes

by Barnet Sherman

Apr 10, 2019

Barnet Sherman is the Director of Municipal Impact Credit Research, Neighborly Investments, an Adjunct Professor of Public Finance at Boston University, and is published in his field.

Fitch Ratings-New York-11 April 2019: Fitch Ratings has placed the seven U.S. Public Finance ratings that are more than six notches higher than the Issuer Default Rating (IDR) for the associated local government on Rating Watch Negative. This action is in response to the March 26, 2019 ruling by the United States Court of Appeals for the First Circuit regarding the bondholder protections provided by special revenue status under Chapter 9 of the U.S. bankruptcy code.

KEY RATING DRIVERS
RATINGS MOST AFFECTED: The ratings placed on Rating Watch Negative have the highest ratings relative to their associated governments’ IDRs. Ratings on special revenue bonds that are closer to the associated government’s IDR are less likely to be affected by a re-evaluation of special revenue protections. While special revenues offer substantial protections in the event of a bankruptcy filing, the ruling creates uncertainty about full and timely payment of special revenue obligations during the bankruptcy of the associated government. The potential impact of the ruling on such ratings will be reflected through tailored sensitivities.

RULING AFFIRMS DISTRICT COURT DECISION: In the ruling, the circuit court agrees with a 2018 district court opinion concerning Puerto Rico Highways and Transportation Authority (PRHTA) bonds that section 922(d) of Chapter 9 grants permission to, but does not require, a municipality to continue paying special revenue obligations during a bankruptcy proceeding. By stating such payments are optional, the ruling creates uncertainty about full and timely repayment of special revenue obligations during bankruptcy of the related municipality.

INCONSISTENT WITH HISTORICAL TREATMENT: The decision affirming the 2018 district court ruling was inconsistent with Fitch’s and market participants’ general understanding of the meaning of section 922(d) and the treatment of special revenue obligations in bankruptcy since the code was amended in 1988. Nevertheless, with an appeals court validation Fitch believes its impact on ratings must be evaluated.

INFLUENTIAL NATIONWIDE: While the ruling only directly affects districts in the First Circuit (Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island), Fitch believes that this decision would be influential in future municipal bankruptcy cases nationwide.

TIMING UNCERTAIN: The plaintiffs in the PRHTA case have multiple avenues of appeal. Fitch will monitor any court proceedings as they occur and incorporate the results into any affected ratings.

RATING SENSITIVITIES

FINAL RESOLUTION: A final ruling consistent with the March 26, 2019 Court of Appeals ruling would result in downgrades to the affected ratings to a level closer to the IDR.

FULL LIST OF RATING ACTIONS

Fitch has placed the following ratings on Rating Watch Negative:

Chicago (IDR BBB-/Stable)
–Senior lien water revenue bonds ‘AA’

Chicago Board of Education (IDR BB-/Positive)
–Limited ad valorem tax revenues ‘A’

Maricopa County Special Healthcare District (IDR BBB/Stable)
–Limited tax general obligation ‘AAA’

Oakland Unified School District (IDR BBB+/Stable)
–General obligation – unlimited tax – dedicated Tax ‘AAA’

Palomar Health (IDR BB+/Positive)
–General obligation – unlimited tax – dedicated Tax ‘AAA’

Sacramento City Unified School District (IDR BBB/Negative)
–General obligation – unlimited tax – dedicated Tax ‘AAA’

Sweetwater Union High School District (IDR BBB+/Negative)
–General obligation – unlimited tax – dedicated Tax ‘AAA’

Contact:

Primary Analyst
Amy Laskey
Managing Director
+1-212-908-0568
Fitch Ratings, Inc.
300 West 57th Street
New York, NY 10019

Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554

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

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

Additional information is available on www.fitchratings.com

WASHINGTON — The transition of financial markets to the Secured Overnight Financing Rate known as SOFR continues to make progress but needs to accelerate in the coming year ahead of a planned phase out of the the existing benchmark, members of the Financial Stability Board said Wednesday.

The municipal bond market, meanwhile, has been slow to issue SOFR-based floating rate notes despite the success of two issuances by New York’s Metropolitan Transportation Authority in the fourth quarter of 2018.

The problem, according to some market participants, is that buy-side demand for SOFR-based debt has been slow to emerge as the industry moves toward a 2022 deadline for the phase out of the London Interbank Offered Rate, commonly referred to as Libor.

Randal Quarles, chairman of the Financial Stability Board and vice chairman of supervision for the Federal Reserve Board, described SOFR as “robust transaction-based rates.”

“This is an important effort across the globe, but nowhere is it of more importance than in the jurisdictions relying on Libor,” Quarles said.

Quarles pointed out that “much of the global financial system had come to rely on Libor” at the time of the financial crisis.

“And yet Libor was a very poorly structured rate,” he said. “Contributing banks were asked to submit quotes without any requirement of evidence of transactions or other facts to back them up, which made them susceptible to manipulation.”

Tom Wipf, vice chairman of institutional securities for Morgan Stanley (MS), described 2019 as “a mission critical year for this work.”

Patrick McCoy, director of finance for the MTA and past president of the Government Finance Officers Association, said at Wednesday’s meeting his agency was “very pleased” with its SOFR-based floating rate notes.

The MTA, McCoy told the panel, has a diverse portfolio of about $40 billion in bonds outstanding that include variable rate debt.

“Variable rate debt continues to be a lowcost method of financing as compared to issuing fixed-rate bonds,” McCoy told the group.

McCoy said GFOA has published best practices recommendations for its members that are considering using SOFR.

Privately placed debt at banks by smaller issuers is often based on Libor, so GFOA wants smaller issuers to have the information they need to make the transition, McCoy said.

McCoy declined in an interview after the meeting to speculate on why other muni debt issuers haven’t yet embraced SOFR and of reports of soft interest on the buy side.

“I can only speak for our experience with our issue and we had strong investor interest from a wide swathe of institutional investors who typically buy and hold FRN type obligations,” he said.

The MTA issued the FRNs on behalf of the Triborough Bridge and Tunnel Authority with the first round of TBTA debt for one-year SOFR FRN and a day later for a term of two years.

“The one year was much more desired by the investor community than the two year, and I think that really spoke to the newness of the tax -exempt SOFR-based FRN,” McCoy said.

Floating rate debt is only a small fraction of the municipal bond market.

The Securities Industry and Financial Markets Association listed $76.9 billion of publicly issued municipal bonds from 872 issuances that used floating rate debt as of Dec. 18, 2018. That’s only 2% of the $3.8 trillion municipal bond market and includes debt that uses the SIFMA index but doesn’t include swaps.

Libor-based municipal debt was an even smaller amount at $47.6 billion or about 1.3% of the overall muni market.

In the bigger picture, the Federal Reserve estimated last year there were roughly $200 trillion of financial securities referencing U.S. dollar Libor.

By Brian Tumulty

BY SOURCEMEDIA | ECONOMIC | 04/10/19 04:27 PM EDT

This week you can hear Kaiti Vartholomaios talk about our recent publication that highlights rating actions over the past two years and the role ESG factors played. Erin Boeke Burke discusses her findings on water and sewer rate affordability and Andrew Bredeson joins the conversation to help cover the 2019 Green Bond outlook.

Listen to Audio

Apr. 8, 2019

&P Global Ratings assigns short-term ratings to the commercial paper (CP) programs and variable-rate demand obligations (VRDOs) of U.S. not-for-profit health care organizations that have elected to support these obligations with their own liquidity sources rather than with a third-party liquidity facility such as a line of credit or standby bond purchase agreement.

Continue Reading

Apr. 12, 2019

According to Sheila Weinberg, a CPA, there is so little truth in so many government budgets, that they could be considered works of fiction.

Read the full article on: Illinois Channel

April 11, 2019

Personal financial advisors often recommend that families should have enough money in an emergency fund to cover at least three to six months of living expenses. Corporations such as Microsoft, General Electric and Home Depot maintain excess operating funds for their own business reasons. Why should water utilities be any different?

Quite frankly, they aren’t different. In fact, emergency funds or utility cash reserves for a water utility are required to meet the operational, maintenance and capital needs of the utility while providing a necessary service 24 hours a day, every day of the year. Here, we’ll review operating reserves. Capital reserves, debt service and rate stabilization reserves will be discussed in a future article. It is recommended that water utilities establish either formal or informal financial policies regarding utility cash reserves.

Operating Reserves

Having an adequate level of operating reserves improves a water utility’s ability to respond to seasonal fluctuations in revenues brought on by droughts or significant rain events, mitigate potential risks such as major emergency repairs or natural disasters, as well as provide working capital needs. Revenue-backed debt includes bond covenants often requiring a minimum required operating reserve that must be maintained by the utility.

A few of the key considerations are discussed below for setting the appropriate level of operating reserves for your utility. Please bear in mind that some of the considerations listed may not apply if a utility has developed other specific reserves (namely Capital Reserves, Debt Service Reserves, or Rate Stabilization Reserves).

Credit Rating Objectives. Operating reserves that are not restricted are a key consideration that credit rating analysts utilize when determining a utility’s bond rating. Each rating agency has its own criteria for credit rating evaluations. Generally speaking, the greater the amount of unrestricted operating reserves for a utility, then the greater the opportunity for a higher credit rating (and thus lower interest costs).

Availability of Other Reserves. Many utilities maintain several specific reserves (Capital, Debt Service and Rate Stabilization) that can be used to mitigate financial challenges. The existence of these other reserves need to be considered when determining the size of your utility’s operating reserves.

Non-Utility Resources. The level of operating reserves could be affected by resources available outside your utility in emergency conditions such as general fund cash for publicly-owned water utilities or cash from affiliate entities for investor-owned utilities.

Bond Requirements. Bond covenants often require minimum levels of operating reserves that must be maintained in addition to debt service reserves.

Insurance Requirements. Insurance policies often require that reserves be held by the utility, and these reduce the level of operating reserves needed as a result of emergencies.

Rate Structure. The use of conservation rates (revenues generated by higher usage blocks are at risk of not materializing) and pass-through rates (recovery of raw water costs) affect the level of needed operating reserves. In addition, the more revenue generated from volumetric rates as opposed to fixed components affects the level of operating reserves needed.

Customer Usage Variability/Seasonal Cash Flow. Changes in customer usage brought on by weather, conservation, and economic factors affect the level of operating reserves for the utility.

Billing Frequency. Utilities utilizing a lower frequency of billing (bi-monthly or quarterly versus monthly billing cycles) should consider higher levels of operating reserves since expense incurrence leads revenue collection by greater dollar amounts.

Strength of Bill Collection Policies. A utility with stronger collection policies would need a lower level of Operating Reserves due to lower levels of receivables and past due accounts.

System Size. Financial risk and economic changes have a more dramatic effect on smaller utilities so they would need a higher relative level of operating reserves.

Age of System and Customer Concentration. Older utility systems have a greater likelihood of unplanned emergency repairs and those with an increased customer concentration (a small number of customers that generate a majority of the revenues) cause the utility to have a higher level of risk (and thus higher levels of operating reserves needed) than newer systems and utilities with less customer concentration.

Use of Contingencies. Utilities that budget for contingencies may affect the level of operating reserves needed.

Metrics for Evaluating Operating Reserves

The metrics commonly used by utilities for evaluating the level of operating reserves are: Days (or months) of operating expenses, a specific dollar amount, or a percentage of revenues. Each utility selects the best metric for its given circumstances.

The following are the minimum recommendations for utilities cited from several organizations:

• Water Environment Federation (WEF): One to three months of operating costs depending on instability of revenues and expenses.
• International City/County Management Association (ICMA): One to two months of expenses depending on size, challenges faced, and the availability of special reserves.
• Government Finance Officers Association (GFOA): No less than 45 days of annual operating expenses including depreciation expense.

Each utility is unique and operates under a special set of circumstances that must be considered when selecting the type of cash reserves and the corresponding policies to best meet the utility’s objectives and requirements. A utility should consider adopting a formal reserve policy to help guide and govern the decision maker’s actions while providing greater clarity to the investment community. Having a formal policy must always be weighed against informal policies as there are benefits from greater flexibility with an informal policy.

Water Finance & Management

By Andy McCartney

February 19, 2019

_____________________________________________________

*Editor’s Note:

This article provides a summary of the recent AWWA Rates & Charges Committee report, “Cash Reserve Policy Guidelines,” and the Journal AWWA article titled Utility Cash Reserves from April 2018. The “Cash Reserve Policy Guidelines” report provides a more comprehensive review of reserve policy considerations, as well as case studies providing examples of various reserve policies from utilities across the United States. Click here for more information.

Other contributing authors to the above-referenced AWWA report are Andrew Burnham, Stantec; Christine DeMaster, Trilogy Consulting, LLC; Robert P. Ryall, Arcadis; and John Mastracchio, Raftelis.

Editor’s Note: This is the second article in a two-part series on cash reserves for water utilities. As mentioned in the first article on operating reserves, cash reserves are required to meet the operational, maintenance and capital needs of the utility while providing a necessary service 24 hours a day – every day of the year. This article will specifically review capital reserves, debt service and rate stabilization reserves. It is recommended that water utilities establish either formal or informal financial policies regarding utility cash reserves.

Part 1: Enhancing Your Utility’s Long-Term Financial Sustainability through Cash Reserves

Capital Reserves

Utilities are able to develop the amounts and timing of future capital project costs to replace and rehabilitate their infrastructure systems with good record-keeping, long-range planning, and regular inspections. Capital reserves are established by utilities to serve one or more purposes as indicated below.

Rehabilitation and Replacement Reserves

Rehabilitation and replacement reserves fund unplanned or accelerated infrastructure rehabilitation or replacement needs when assets wear out before the end of their expected useful life or when the utility wants to accumulate funds for future rehabilitation and replacement needs. These reserves also may be used as a source of cash funding for the utility’s Capital Improvement Program (CIP) Plan or to set aside funds for intermediate to long-term future replacement of major assets not included in the CIP Plan.

Equipment Replacement Reserves

An equipment replacement fund can be established to pay for the periodic replacement of assets with relatively short useful lives. Assets defined as equipment include vehicles, pumps, computer & office equipment, mechanical equipment, laboratory equipment, and similar equipment with an expected life in the range from three to 20 years.

Emergency Capital Reserves

Emergency capital reserves are utilized to fund replacement of critical infrastructure damaged by catastrophic events such as natural disasters. The following factors should be considered when determining the amount of emergency capital reserves.

• Risk Factors – Types of natural disasters, extreme weather conditions, or other force majeure events that the utility could face and the extent of damage that could result.
• Critical Facilities – Specific facilities (including replacement costs and condition) that are identified as being critical to utility system operations and could be vulnerable to potential threats.
• Availability of Other Funds – Quick access to other funds in the event of an emergency such as a line of credit, transfer from the municipal general fund, or funds from related affiliates for investor-owned utilities.

Special Purpose Capital Funds

Utilities often impose special assessments, system development charges (impact fees), or other charges to fund system expansion or the replacement of specific facilities. These assessments or charges have specific purposes defined by state statutes and local ordinances or resolutions. Often, a segregated account or fund must be established and maintained for the revenues from such fees. Even if not legally required, it is often prudent to establish a segregated account fund to ensure that these types of funds are held and used for the intended purpose and are not comingled with other utility funds.

Debt Service Reserves

Utilities utilize debt service reserves to pay debt service if revenues are not sufficient to satisfy their annual principal and interest requirements on debt. Debt service reserves are commonly established as a legal covenant of a debt issuance and is used in whole or in part to pay debt service in the event of a revenue shortfall. Revenue bond issues commonly require a Debt Service Reserve Fund (DSRF), but may be required (or voluntarily established by the utility) for other types of subordinate indebtedness. Typically, a DSRF requirement is specified as a fixed percentage of the average or maximum annual debt service on the bonds. The DSRF can be funded entirely with bond proceeds at the time of issuance, funded over time through revenue accumulation, funded with a surety or other type of guaranty policy, or funded only upon the occurrence of a special event.

Rate Stabilization Reserves

Rate stabilization reserves are cash reserves that can mitigate the effects of occasional shortfalls in revenue. Revenue shortfalls result from a number of events such as weather factors (wet weather or drought events and natural disasters), increased water conservation, and poor regional economic conditions. Rate stabilization reserves assist in smoothing out revenue variability resulting from these factors and ensure that adequate resources are available during such times that might otherwise require large rate increases.

Revenue and expenditure volatility often drive the decision to establish and maintain Rate stabilization reserves. Smaller utilities may be more prone to such volatility relative to the size of the overall budget as compared with utilities with larger customer bases. In addition, the decision may also depend on whether established reserves are adequate to address the utilities exposure to revenue volatility.

Each utility is unique and operates under a special set of circumstances that must be considered when selecting the type of cash reserves and the corresponding policies to best meet the utility’s objectives and requirements. A utility should consider adopting a formal reserve policy to help guide and govern the decision maker’s actions while providing greater clarity to the investment community. Having a formal policy must always be weighed against informal policies as there are benefits from greater flexibility with an informal policy.

Water Finance & Management

By Andy McCartney

April 8, 2019

____________________________________________________

*Editor’s Note:

This article provides a summary of the recent AWWA Rates & Charges Committee Report, “Cash Reserve Policy Guidelines,” and the Journal AWWA article titled Utility Cash Reserves from April 2018. The “Cash Reserve Policy Guidelines” provides a more comprehensive review of reserve policy considerations, as well as case studies providing examples of various reserve policies from utilities across the United States.

Other contributing authors to the above referenced AWWA publications are: Andrew Burnham, Stantec; Christine DeMaster, Trilogy Consulting, LLC; Robert P. Ryall, Arcadis; and John Mastracchio, Raftelis.

Summary

• As tax season is upon us, we wanted to again highlight why many investors find municipal bonds a valuable addition to their portfolios.
• As individuals work through their 2018 tax return filing process, many may be shocked to find they have a tax bill to pay for 2018 when they may not have in the past.
• In addition to the expected pick-up in demand for munis, we also continue to see a decrease in supply in the market.

Many investors flock to municipal bonds because of potential tax advantages. While this year’s taxes are probably already done and dusted, Franklin Templeton’s municipal bond team felt it was an appropriate time to revisit the opportunities and risks that recent US tax reform poses for the space. Sheila Amoroso and Christopher Sperry discuss how constrained supply is impacting the market.

Continue reading.

By Sheila Amoroso, Senior Vice President, Director, Municipal Bond Department, Franklin Templeton Fixed Income Group®; Christopher Sperry, CFA, Vice President, Portfolio Manager, Franklin Templeton Fixed Income Group®

Apr. 12, 2019

Heading into 2019, the Federal Open Market Committee (FOMC) adopted a more dovish stance than some market participants had expected. In December, the committee held the federal-funds target rate within the 2.25%-2.50% range after it had previously signaled the likelihood of more increases, and it maintained that position in March. The majority of FOMC members expect rates to remain unchanged the rest of 2019. This was the first quarter without a rate hike since the third quarter of 2017.

In March, the Fed also announced a plan for ending its balance-sheet unwinding process by September 2019, not the end of the year as investors previously expected. This accelerated timeline implies that the Fed will maintain a larger balance sheet than initially signaled, which should provide additional liquidity to the market.

Overall, bond market participants reacted positively to the Fed’s more dovish tone, as U.S. Treasury yields fell and credit spreads tightened throughout the first quarter. The Bloomberg Barclays U.S. Aggregate Bond Index, a proxy for the U.S. investment-grade market, gained 2.9% during the quarter–a strong start after a seesawing 2018 in which the index ended the year roughly flat. The index’s main sectors–agency mortgages, investment-grade corporates, and U.S. Treasuries–all experienced gains. Investment-grade corporate credit was the index’s key driver for the period, returning 5.1%, while agency mortgages and U.S. Treasuries each gained just over 2%.

The Yield Curve Inverts

U.S. Treasury yields have remained low in 2019, and the yield curve inverted at the end of the quarter. The three-month U.S. Treasury yield, which is heavily influenced by the federal-funds target rate, remained roughly stable, ending the quarter at 2.4%. Meanwhile, the 10-year U.S. Treasury note’s yield declined to 2.4% from 2.7%, slightly lower than the six-month yield. That modest yield-curve inversion temporarily spooked the markets, as pundits were quick to point out that inverted yield curves have often preceded recessions. But the market ultimately shrugged off these concerns.

Credit Rallies Following a Tough Fourth Quarter
Following a credit sell-off in late 2018, corporate credit was buoyed in early 2019 as credit spreads tightened, supported by the Fed’s dovish stance. Risk-taking generally rewarded strategies that had larger stakes in lower-quality credit over their more conservative peers. Energy-related debt, in particular, benefited as the West Texas Intermediate crude-oil price rose to just over $60 per barrel from $45 to start the year, representing one of the largest quarterly increases in recent years. Energy’s large presence in the high-yield bond space fueled gains.

Within the high-yield bond Morningstar Category, Fidelity Advisor High Income Advantage (FAHCX), one of the more aggressive strategies in the peer group, generated a 10.3% gain for the first quarter. This fund, which has a Morningstar Analyst Rating of Silver, benefited from its flexible mandate that can carry up to 20% in common stock, as the S&P 500 rose 13.6% during the period. More-conservative high-yield strategies, such as Bronze-rated Diamond Hill Corporate Credit (DHSTX) (up 5.6%), still performed well in absolute terms, even if they didn’t rise to the top of their peer group rankings.

Convertible securities, which combine corporate bonds and an equity call option, also posted strong returns for the period.

Strong Technicals Fuel Munis

Municipal-bond market technicals remained supportive throughout the first three months of 2019, as demand outstripped supply. Tax reform that passed in late 2017 continued to impact the muni landscape. With a lower corporate tax rate, many traditional long-term municipal buyers such as insurance companies and banks have shifted away from the sector, propping up the long end of the muni yield curve. The muni curve’s upward slope and relatively high yields added to the sector’s attractiveness versus U.S. Treasuries.

While the distribution of returns in muni categories was narrow during the quarter, strategies with longer durations generally outperformed their shorter peers, and funds holding lower-rated issues also benefited from the market’s risk-on mentality. For example, Silver-rated BlackRock National Municipal (MANLX) delivered a 3.0% gain, beating more than three fourths of its muni-national intermediate category peers, thanks to its longer duration and allocation to lower-quality issuers–notably Illinois, Puerto Rico, and tobacco bonds. The more conservative Bronze-rated Franklin Federal Intermediate-Term Tax-Free Income (FITZX), which focuses primarily on AA rated issues and avoids junk-rated bonds, gained 1.9%, trailing the majority of its competitors.

Puerto Rican credit got a boost from a federal-court-approved deal between the commonwealth and creditors. Puerto Rico’s Cofina bonds, which are backed by the territory’s sales tax, were exchanged for new non-investment-grade Cofina debt.

Going Global

Similar themes played out in fixed-income markets outside the United States. Hard-currency emerging-markets debt, which comes with credit risk, rallied almost as much as U.S. high-yield, with indexes gaining nearly 7.0%. Yields on developed-markets government debt dropped during the quarter, resulting in a 2.2% gain for the U.S.-dollar-hedged Bloomberg Barclays Global Aggregate Bond Index. As a result, the total of negative-yielding debt globally grew above $10 trillion during the quarter.

Exchange-rate fluctuations versus the U.S. dollar–for both developed-markets and emerging-markets currencies–were mixed in early 2019. The dollar appreciated versus the euro and yen, which created a modest headwind for unhedged world-bond category funds. But despite Brexit uncertainty, the British pound appreciated against the dollar during the quarter. After recovering somewhat in the second half of 2018, the Argentine peso depreciated sharply versus the dollar in 2019’s first quarter, a position that continued to cause indigestion for a number of actively managed funds over the past year.

But overall, credit risk and emerging-markets exposure was likely a bigger differentiator for world-bond funds. Bronze-rated Dodge & Cox Global Bond (DODLX), which has a sizable corporate and emerging-markets debt stake, returned just under 5.0%, while the higher-quality Hartford World Bond (HWDIX) (also Bronze rated) gained 1.4%.

Morningstar

by Zachary Patzik, CFA

09 Apr 2019

Zachary Patzik, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

NEW YORK, NY, APRIL11, 2019 – CUSIP Global Services (CGS) today announced the release of its CUSIP Issuance Trends Report for March 2019. The report, which tracks the issuance of new security identifiers as an early indicator of debt and capital markets activity over the next quarter, found a noteworthy increase in requests for new municipal debt identifiers, while requests for corporate identifiers declined in March.

Read Report

“Interest rates are holding at historic lows on a global basis and central banks are signaling that they will stay that way for the near term,” said Gerard Faulkner, Director of Operations for CUSIP Global Services. “Clearly, that sentiment is weighing on the minds of issuers who are seizing the opportunity to raise new capital, but they are doing so at a fairly measured pace.”

Read Press Release.

Fitch Ratings-New York-11 April 2019: Fitch Ratings does not anticipate near-term credit effects from a recently negotiated drought contingency framework outlining water cutbacks for states in the lower Colorado River Basin. However, for some wholesale water suppliers and municipal utilities, particularly in Arizona, cuts in allocations could lead to rate increases tied to the rising cost of purchased water and could eventually pressure rate affordability.

The Colorado River Drought Contingency Plan (DCP) received congressional approval on Monday, April 8 after several years of negotiations and despite technically missing various deadlines set by the US Bureau of Reclamation (USBR). The finalization of the DCP comes after years of negotiations between states in the Colorado River Basin hoping to stabilize water levels in Lake Mead following years of drought and over allocation. The DCP will manage water shortages on the Colorado River until 2026.

Based on the terms of the DCP, Arizona would see the greatest impact of the lower basin states, with the largest cuts being absorbed by the Central Arizona Water Conservation District (CAWCD; AA/Stable), which transports water to central and southern Arizona annually through the Central Arizona Project (CAP). However, Fitch believes Arizona water users will absorb the cuts and offset the effects with rate increases. If mandatory cuts in the DCP are triggered, it is expected that rates for overall delivery of CAP water will increase by approximately 13% to 20%.

California allocation reductions per the DCP are not expected to significantly affect supplies, given the manageable near-term demand and additional supply sources, including high water storage levels in Southern California. Although the DCP allocation cuts would not significantly impact California issuers in the near term, the continued drought conditions in Colorado coupled with an uncertain State Water Project supply could stress future supplies.

Nevada would see a smaller annual cut of nearly 3% of its allocation and up to 10% if conditions worsen. Southern Nevada, which comprises more than 70% of the state’s population including Las Vegas, receives 90% of its water from the Colorado River. However, the Southern Nevada Water Authority, which treats and delivers water to the region, is able to access lower levels of water in Lake Mead due to an intake that can draw water from below 1,000 feet. As such, effects are expected to be manageable.

The path to finalization of the DPC was not without some impediments. On Jan. 31, 2019, the original deadline set by the USBR, the Arizona legislature approved the state’s participation in the DCP but 16 intrastate agreements included as part of legislation were not finalized by the original USBR deadline. The USBR did not consider the state’s participation in the DCP complete until all internal agreements were finalized.

In addition, there was a holdout to the California portion of the plan – Imperial Irrigation District (IID) – which had indicated its support of the drought plan was contingent upon funds for Salton Sea restoration. In mid-March the Metropolitan Water District of Southern California (AA+/Stable) intervened and agreed to contribute water stored in Lake Mead through conservation to the DCP in order to complete California’s part of the DPC participation, which removed the Salton Sea restoration from the DPC negotiations.

Under federal law, the USBR has the responsibility for managing the water of the Colorado River’s upper and lower basins. If the DCP was not in place this year, the USBR would have moved forward independently to reduce the risk of further declines in the water supplies of the Colorado Basin.

Contact:

Teri Wenck, CPA
Director, US Public Finance
+ 1 512 215-3742
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701

Shannon Groff
Director, US Public Finance
+1 415 732-5628

Sarah Repucci
Senior Director, Fitch Wire
+1 212 908-0726

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

MUNIS IN FOCUS: Joe Mysak, Editor Bloomberg Brief: Municipal Market, discusses climate change influencing muni issuers. Hosted by Lisa Abramowicz and Paul Sweeney.

Running time 04:40

Play Episode

Bloomberg

April 12, 2019 — 8:58 AM PDT

• States don’t get lower borrowing costs from green bonds: study
• Wall Street charges about 10 percent more on green bond deals

There appears to be a good reason why states and cities don’t go out of the way to market their bonds to environmentally conscious investors: it doesn’t save them any money.

That’s the conclusion from a study by Stanford University accounting professor David Larcker and Edward Watts, a doctoral student at the business school there. Instead, they found that governments wind up paying higher fees to bankers when they sell certified green bonds than they do when they forego that brand, based on a review of debt issued for clean water, commuter trains, solar energy and other such projects.

The findings underscore the municipal-bond market’s image as a haven for slow-moving investors largely concerned about getting tax-free income. It also explains why such green-certified bonds account for only a small fraction of the $3.8 trillion that’s been raised by state and local governments, even though much of the money is used for work — like new public transit systems — that has a positive environmental impact.

“Municipal investors appear entirely unwilling to give up monetary gains to support Green projects,” wrote Larcker and Watts, who said underwriting fees are 10 percent higher for green bond issues. “Our results suggest that municipalities actually increase their borrowing costs by issuing Green bonds.”

States, cities and transit agencies have sold $3 billion of green bonds this year, accounting for about 3 percent of new debt sales, according to data compiled by Bloomberg. At its peak in 2017, such issuance hit $10 billion.

Some government officials have noticed that the marketing efforts — which arguably could increase demand — did little to drive down their borrowing costs. After the Iowa Finance Authority borrowed for a clean water project this year, the agency found no pricing difference.

“It helps to broaden the investor base and eventually, maybe, they’ll be more momentum toward driving our costs lower,” said Cindy Harris, the chief financial officer at the Iowa Finance Authority. The agency pays the same underwriting fees on green bonds as non-green securities, she said.

Last week, the Illinois Finance Authority issued $450 million of green bonds for clean water projects. While the agency didn’t see any pricing difference, one of the largest buyers was a self-identified “green bonds investor,” said director Chris Meister.

“I believe the sale benefited from the green designation –- and that, once closed, this transaction will positively contribute to the development of the green bond market here in the U.S.,” Meister said in an email. In January, Illinois Governor J.B. Pritzker joined the U.S. Climate Alliance, whose members commit to implementing policies that advance the goals of the Paris climate agreement.

The lack of impact on pricing may be because the market is just developing. But asset managers have started setting up socially responsible investment funds, while S&P Global Ratings Inc. and Moody’s Investors Service created evaluations to assess whether bond issues meet guidelines for being certified as green. Even bond insurer Build America Mutual Assurance created a service, GreenStar Assessment, which is free to municipalities that buy insurance from the company.

“Municipal investors shouldn’t have to give up monetary gains to support Green projects. All of our infrastructure investments should be going to create a low carbon economy,” said Eric Glass, who manages AllianceBernstein LP’s municipal-impact portfolio in an email.

“I, for one, do NOT care whether a deal is officially certified ‘green,’ ’chartreuse,’ or ‘indigo.’ What’s essential is that the utility (municipal entity) be transparent and help the investment community document and understand the environmental impact of the original investment in year one and every year thereafter in which there are bonds outstanding.”

Larcker and Watts’s results are based on a sample of 640 matched pairs of green and non-green bonds issued on the same day, with identical maturity and ratings and issued by the same municipality. In 85 percent of matched cases, there was essentially no yield difference.

Prior studies on whether there’s a difference yielded mixed results. One study found that green bonds had 0.08 percentage point higher yields while another found green bond yields are 0.06 percentage point lower.

Bloomberg Markets

By Martin Z Braun

April 11, 2019, 10:46 AM PDT Updated on April 11, 2019, 1:34 PM PDT

— With assistance by Amanda Albright

Conference President Columbia Mayor Steve Benjamin, joined by Carmel Mayor Jim Brainard and Salt Lake City Mayor Jackie Biskupski, discussed their local climate strategies before a key House Subcommittee yesterday afternoon, urging the panel Members and Congress broadly to invest in city and other local government efforts as part of a national response to our changing climate.

The Conference leaders each called for new funding for the Energy Efficiency and Conservation Block Grant (EECBG) Program, a Conference of Mayor-led initiative that received a one-time $2.8 billion commitment as part of the ARRA recovery package, helping further stimulate local action to curb greenhouse gases and move our cities toward a cleaner energy future.

Brainard who serves as the Co-Chair of USCM’s Energy Independence and Climate Protection Task Force and Biskupski who serves as the Chair of the USCM’s Alliance for a Sustainable Future testified with Benjamin before the House Energy and Commerce Subcommittee on Environment & Climate Change at the hearing, entitled “Learning from Across the Nation: State & Local Action to Combat Climate Change.” Congressman Tonko, who chairs this subcommittee, is an energy and climate expert in his own right, having previously directed New York State’s well-known energy agency, NYSERDA. As a Congressman, he represents Schenectady Mayor Gary McCarthy and Albany Mayor Kathy Sheehan, both leaders on energy and climate.

In his remarks, Benjamin told the panel that “climate change is the biggest issue we face” and that “climate change is already impacting our infrastructure.” Brainard used his remarks to challenge his Republican party colleagues to return to earlier values and leadership on the environment and work with Democrats to address climate protection. Discussing how her region’s poor air quality has forged a bipartisan consensus for action, Biskupski explained how this has helped drive a move toward renewable energy and transportation solutions to address air pollution and reduce public health threats to people.

The mayors’ statements — Benjamin, Brainard and Biskupski — before the House panel tell the story of continuing mayoral leadership on climate protection. The accumulating local record of accomplishment and innovation has largely defined the national response to our nation’s climate challenges in light of federal inaction. Their efforts are part of a larger campaign by the Conference to secure increased federal investment in energy infrastructure and initiatives. Refunding the EECBG Program is one key component of our 5-Point Infrastructure Agenda. Conference Membership Chairman Piscataway Mayor Brian Wahler is leading a statewide effort in New Jersey to support House Energy and Commerce Committee Chairman Frank Pallone’s efforts to elevate EECBG as a priority.

We thank them for their commitment of time and energy to this effort, as we press forward on these issues in this new Congress. The day is coming when Congress will invest in cities to help show that locally there are climate solutions are at hand.

Learn how calculating costs and forecasting future savings when budgeting cloud migration can help your local government realize tech modernization.

Budget requests for technology investments hold the promise of running government more efficiently at a reduced cost by improving resource management, processes and decision-making, according to the report, “Transforming Government Through Technology,” developed in 2018 to counsel federal operations in digital modernization.

In the report, the Technology CEO Council (TCC) recommended cost-reduction estimates over a 10-year period be used to justify investments in federal workforce, processes and technology tools.

Likewise, civic technology applications that do not have a clear revenue stream often require creative thinking, and potentially a reform of local procurement processes. But budgets can be used to tackle the issue, according to “The Civic Technology Landscape,” a 2015 report by the Urban Sustainability Directors Network.

When targeting investment in new capabilities — such as migrating government services and operations to the cloud — consider simultaneously developing cost-reduction plans for outdated technologies and wasted resources as you shift costs from capital expenses to operating expenses.

Continue reading.

EfficientGov

by Andrea Fox

April 1, 2019

A beginner’s guide to the popular account for saving for college

When saving for college, it’s often parents who need to educate themselves about the financial options they have in front of them. As with any major expense, understanding the impact your decisions will have on your future is the first step of the process.

One popular college-saving vehicle parents can evaluate is the decades-old “529” savings account. These accounts offer tax advantages but can also have limited utility since the purpose is so specific.

These are some of the pros and cons of 529s:

The Pros:

• Money in 529 accounts grows tax-free and remains that way until you withdraw it for qualified educational expenses.
• Depending on where you live, you could be eligible for tax deductions or credits if you invest in a 529. More than 30 states offer some kind of tax break.
• The account’s beneficiary can usually be changed later on to a different direct relative if your child doesn’t end up using all the money in the 529. That provides flexibility and can allow the account to survive for generations.
• Anyone can contribute, though it’s best to have a parent own the account for tax reasons.
• 529s can offer financial-aid advantages. While the Fafsa, the federal application that determines financial-aid eligibility, typically counts 20% of student-held assets as available funds to pay for college, 529s owned by students or parents are only considered at 5.64%.

The Drawbacks:

• 529s can be restrictive. Once you invest into the account, the money is earmarked for higher education. Withdrawing the money for any other purpose will impose penalties and fees on the money you’ve saved.
• What counts as qualified educational expenses can be confusing. Many community colleges, for example, don’t include room and board in their total cost of attendance, meaning funds in a 529 can’t be used to cover that part of the college experience.
• The plans are subject to changing tax regulation conditions. What the funds can be used for has expanded, but since they’re tax-advantaged, the uses can change in varying political conditions.
• There isn’t a one-size-fits-all approach to 529s, which means how you open and maintain the account could subject you to higher fees.
• Noncustodial guardians or grandparents who open 529s will face a tougher road with financial aid. As soon as a student withdraws money, it can be counted as untaxed income, which can be counted toward the expected family contribution calculation at a rate of up to 50% of the amount.
• The funds in a 529 cannot help for precollege expenses, such as campus visits or application fees.

Your Resources

Depending on your personal situation, some advantages could work against you and some of the disadvantages could work in your favor. For example, if you don’t have a direct relative to whom you can transfer the account, you’d need to get creative about spending down the money in that account if there is any left over.

As with any major decision, you need to consider the future to determine how your actions now could affect your financial reality. If you are unclear, a financial professional can help you sort through the nuances. But there are resources available to you before you seek out professional advice.

The SEC has a 529 account guide for investors as they weigh their options. It dives deeper into the specifics around the tax code. Using the information here in conjunction with the government’s guide can be a good way to begin evaluating your options.

Additionally, Chana Schoenberger writes a regular column about saving for college and recently answered the top six questions she has received about the often-confusing plans. She has answered several years of questions that range from common to unique, which may prove helpful to your decision.

However you approach the decision, it’s important to consider all the information in front of you. There may be further considerations beyond the pros and cons listed that apply to your particular situation.

But as tuition prices continue to rise, your savings options now could affect your child’s college choice in the future. Being financially smart can mean that your money isn’t the one making the final decision for them.

The Wall Street Journal

By Kevin McAllister

March 24, 2019 2:00 p.m. ET

Baltimore hopes to spearhead two class action lawsuits that accuse banks of rate fixing.

Baltimore has filed two antitrust lawsuits in eight days, alleging price-fixing by big banks and hoping to turn both procedings into class action suits that seek billions in damages for governments and pension plans.

The suits address two different kinds of municipal market bonds, but both levy the same charges: that banks manipulated interest rates to their advantage, at the expense of taxpayers.

“That’s a big accusation because what that means is these banks were all in cahoots with each other,” says David Brunori, a research professor of public policy at the George Washington University. He adds that the complaint “reads like a crime novel,” conjuring up images of collusion behind closed doors in smoke-filled rooms. “I suspect it doesn’t actually work that way.”

If the allegations are true, Brunori estimates the liabilities for banks could be in the billions. That makes it likely many plaintiffs would opt for a settlement, as has happened with other municipal market lawsuits.

Continue reading.

GOVERNING.COM

BY LIZ FARMER | APRIL 5, 2019

The U.S. can have sound public pensions or sound infrastructure. Choose one.

States and municipalities face the twin crises of collapsing bridges and underfunded pensions and public-sector retirees’ medical costs. The result is that those retirement expenses are crowding out critical infrastructure needs, according to Bank of America Merrill Lynch municipal-finance analysts.

The numbers are so huge that they numb the mind. Unfunded liabilities of state pension plans total $5.96 trillion, or about six times the federal budget deficit, according to a 2018 estimate by the American Legislative Exchange Council, or ALEC, a group of conservative state legislators. At the same time, there are more than 47,000 structurally deficient bridges in the U.S., according to the American Road & Transportation Builders Association—and at the rate we’re going, it would take over 80 years for us to make the needed repairs.

Continue reading.

Barron’s

By Randall W. Forsyth

April 4, 2019 8:00 a.m. ET

State and local governments rely on municipal bonds to finance infrastructure projects. Our new resource highlights one such project in every congressional district.

Find out how munis are making an impact in your community.

Look who’s benefiting from the limit on state-and-local tax deduction.

Democratic politicians in the states love to blame the GOP tax reform for blowing holes in their budgets even as they quietly benefit from the new limitation on state-and-local tax deductions. Lo, investors seeking to reduce their tax liability are gobbling up municipal bonds, driving down yields and reducing government borrowing costs.

Municipal bond funds are experiencing near-record inflows. More money poured into muni funds during the first eight weeks of this year than during the same period since at least 2006. No longer able to deduct most of their state-and-local taxes on their federal returns, investors are seeking alternative vehicles that offer protection from the tax man.

Surging demand for tax-exempt investments and low interest rates have let state and local governments borrow more cheaply. The 10-year AAA tax-exempt muni bond this week traded below 2%—about 60 basis points lower than the 10-year Treasury and 170 below a similarly rated corporate bond. Even low-quality muni debt like Illinois bonds boast yields as low as 3.6%.

Beyond the federal tax dispensation, most states exempt their own agency and local government debt. Hence the biggest beneficiaries of the muni-bond rally have been high-tax states, especially those with precarious finances. Eight of the 10 biggest bond issuers during the first quarter were in California, New York and Connecticut. New Jersey and the junk-rated city of Chicago were close behind.

Last week Chicago increased the size of a bond offering to take advantage of swelling demand and low interest rates. The spread on a 10-year Chicago bond relative to a top-rated muni has slid 125 basis points since 2017 despite the city’s deteriorating finances and soaring pension payments. Investors last week also inhaled $440 million in bonds issued by Illinois, which is rated one notch above junk.

Democrats can’t be blamed for trying to take advantage of the muni-bond mania. Illinois Gov. J.B. Pritzker has proposed selling $2 billion in bonds (which would be taxable) to inject into the state’s insolvent pension funds that are only 40% funded. The idea is the state can borrow at a rate of around 5% and then earn 7% on pension-fund investments. Sweet.

But the state has already borrowed more than $17 billion to prop up its pension funds, and the interest-rate arbitrage transfers risk from state taxpayers and workers to investors. Recall that investors in Puerto Rico, Detroit and Stockton, Calif., were eventually burned by similar schemes.

One question is whether investors are underpricing the risk of muni bonds due to their tax exemption and the low interest-rate environment. This is especially concerning since rating agencies Moody’s and Fitch recalibrated their muni-bond ratings in 2010. According to a new accounting study by MIT researchers, the subsequent grade inflation “appears to have yielded significant reductions in interest costs paid by issuers” while bringing in more business and higher fees for the raters.

Misaligned incentives may also be distorting investment decisions. Businesses could often put investor cash to more productive use than municipal governments, which in many cases are borrowing for projects that private industry could do at lower cost. Most muni-bond buyers are merely looking for a higher after-tax return, but they should remember that there’s no such thing as a risk-free investment.

The Wall Street Journal

By The Editorial Board

April 4, 2019 7:58 p.m. ET

Fitch Ratings-New York-03 April 2019: Fitch Ratings has published the final, revised version of its sector-specific criteria report titled “U.S. Public Power Rating Criteria“. This follows Fitch’s June 14, 2018 exposure draft outlining various proposed changes to the criteria for which Fitch sought market feedback. Fitch’s previous criteria report from May 18, 2015 and the noted exposure draft have both been retired.

Fitch has also published a special report titled “Feedback Report: U.S. Public Power Rating Criteria” that reviews the market feedback received on the noted exposure draft and Fitch’s responses. Fitch made no substantive changes to its exposure draft as a result of market feedback. However, Fitch did include select changes to key rating drivers and the scenario analysis tool in the final criteria report. Primary changes to the rating criteria incorporated in the exposure draft and retained in the final revision are described below.

PRIMARY CRITERIA CHANGES

–Introduction of three key rating factors: revenue defensibility, operating risk, and financial profile;
–Individual assessments for each key rating factor;
–Financial profile alignment with business profile in rating assessment;
–Forward looking consideration of the impact of existing or needed capital investments that may increase financial leverage;
–Introduction of FAST, an issuer specific scenario analysis tool measuring the effect of demand stress on revenue, operating expenses, cash flow and rates.

RATINGS IMPACT

Fitch does not expect the proposed criteria revisions to trigger widespread rating changes, nor will the implementation curtail or influence normal rating migration. Within the next week, Fitch plans to publish rating action commentary to designate various ratings that could potentially be affected by the changes in the criteria as Under Criteria Observation (UCO). However, not all of the ratings designated as UCO will necessarily experience rating changes.

Rating changes will most likely reflect the criteria’s heightened emphasis on leverage through the cycle, with upgrades reflecting relatively low leverage, and downgrades resulting from the recognition of higher leverage and/or elevated operating risk. In addition, Fitch also expects that debt ratings of issuers may be designated as UCO, where additional new information required under the revised criteria is currently unavailable and further analysis is necessary to assess the effect of the criteria on the rating. Overall, Fitch estimates fewer than 10% of the ratings covered by the criteria will be affected over time, with a roughly equal mix of upgrades and downgrades.

Fitch will review all of the ratings designated as UCO as soon as practical, but designation must be resolved within six months.

For more information, the full reports titled “U.S. Public Power Rating Criteria”, “Feedback Report: U.S. Public Power Rating Criteria”, “FAST Public Power – Fitch Analytical Stress Test V 1.1.1 and “FAST Public Power – Fitch Analytical Stress Test, Description and Model Foundation” are available at www.fitchratings.com.

Contact:

Dennis Pidherny
Managing Director
Fitch Ratings, Inc.
+1-212-908-0738
33 Whitehall Street
New York, NY 10004

Kathy Masterson
Senior Director
+1-512-215-3730

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

Additional information is available on www.fitchratings.com

• Bagasse plant in Florida seeks to raise $190 million in debt
• Muni landscape is littered with similar deals that went bust

This is one bagasse story.

I wrote that lead back in September of 1996, which shows that my sense of humor hasn’t changed a whit, as well as how rarely bagasse enters the municipal market lexicon. When it does, investors can sometimes get hurt.

Bagasse — a French word, accent on the second syllable — is what’s left after you extract the juice from sugarcane. The Florida Development Finance Corp. is selling $190 million in unrated solid waste disposal revenue bonds to do just that.

The deal is emblematic of a new generation of plants being financed in the municipal market designed to turn all matter of waste into fuel or building materials or something else. Over the last two years issuers in California, Colorado, Florida, Indiana, Nevada, Oregon, South Carolina, Texas and Washington have sold unrated — often high-yield — debt for such projects.

The limited offering for Southeast Renewable Fuels aims to build a mill that will turn bagasse, “other vegetative waste products’’ and “energy sorghum’’ into pulp for paper, as well as lignin, a chemical used by cement, adhesive and road-building companies.

The Southeast Renewable Fuels facility will be built in Clewiston, Hendry County, on the south bank of Lake Okeechobee and right in the middle of sugarcane plantations. The mill will be ready in 26 months after the bond deal is closed, and is expected to employ 70 people.

Sticky End

The last time bagasse featured in a municipal bond issue seems to have been in 1993 and 1994, when Flo-Sun Inc., one of Florida’s largest sugar companies, borrowed almost $300 million to build two power plants to burn bagasse and, after sugarcane grinding season, wood. This was to produce steam and electricity, to be sold to Florida Power & Light.

The plants never quite achieved efficient operation, went bust, and the bonds defaulted. Bondholders eventually recouped 77 cents on the dollar, according to Richard Lehmann, publisher of the Forbes/Lehmann Distressed Municipal Debt Report.

There are some reassuring statements throughout the latest limited offering memorandum. The Southeast project uses “conventional pulp manufacturing equipment and processes,’’ similar to projects already running in Kenya and India.

There are agreements for biomass feedstock in place, and for the sale of all of the pulp and some of the lignin. All of which is great — and of course we like the idea of turning waste into something useful.

The biggest risk here — as it was in 1990s bagasse, and the latest co-generation and recycling deals — is operational. Can Southeast and all the various engineers and experts produce a successful commercial operation? Because taking one thing and turning it into something else isn’t as easy as it may sound. The municipal market’s landscape is littered with similar projects that ran out of money and time.

The risk factors section of the offering memorandum flags “start-up problems, the breakdown or failure of equipment or processes, the performance of the Plant below expected levels of output or efficiency,’’ and so on. Management is key.

An executive in the salvage business told me a couple of decades ago why a string of bond-financed de-inkers failed. These were mills designed to take waste paper, soak the ink off, and produce new pulp. The technology was fine, this man told me; he was buying the equipment. The management just couldn’t get it to work, or get back to market to raise the money needed to buy it more time.

Bloomberg Business

By Joe Mysak

April 5, 2019, 5:00 AM PDT

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

• Marshals Service, Bureau of Prisons haven’t responded: S&P
• Regular contact with federal agencies is important, S&P said

In 2015, a riot broke out at the detention center in Willacy County, Texas, as inmates protested flooding toilets, rodents and overcrowding in the facility overseen by Management & Training Corp. That prompted the Federal Bureau of Prisons to pull out its inmates and the prison closed, shutting off some of the revenue needed to repay its debts.

The closure shows the level of volatility that investors owning prison bonds can encounter. In fact, Wall Street analysts still aren’t sure how to gauge the risk of a default on $13 million of outstanding debt tied to another Willacy County lockup for an entirely different reason.

Those bonds and debt issued for three other Texas jails had their already-junk credit ratings pulled by S&P Global Ratings, an unusual step that reflects the spotty financial disclosures in a corner of the $3.8 trillion market that once boomed as local governments sought to profit by holding federal inmates. That uncertainty has been amplified under President Donald Trump, whose policy shifts have left it unclear whether federal contracts will be renewed or jeopardized by deals cut in Congress.

S&P said in a statement that it withdrew the ratings after repeated, unsuccessful efforts to speak with the Bureau of Prisons and the U.S. Marshals Service, leaving its analysts doubtful that “meaningful dialogue will be forthcoming or be maintained on a regular basis.” In December, the company said such regular contact with federal agencies has become increasingly important.

In addition to Willacy County’s jail, S&P also withdrew the rating on debt sold for detention centers in Fannin County, Hudspeth County and Garza County.

“As an investor, you have to assume that no news is bad news for a credit,” said Matt Fabian, a partner at Municipal Market Analytics. “S&P is totally on solid ground pulling those ratings.”

Ripple Effect

Financial disclosures made to investors in the municipal-bond market are less closely regulated than those made by corporations that sell stocks and bonds, whose filings are monitored by the U.S. Securities and Exchange Commission. Some government’s audited financial statements can take a year or more to be reported.

But the ripple effects cast by the federal government is unusual. S&P said information from agencies in Washington has become key amid debates like the one in February over the budget, when Democrats sought to slash the amount of money being provided to U.S. Immigration and Customs Enforcement to detain immigrants swept up by Trump’s crackdown on those who enter the country illegally. It also said it had “little insight” into issues like contract renewals.

Garza County Judge Lee Norman said he thinks part of the issue is that the detention center, which is run by MTC, hasn’t been able to secure a long-term contract with the Bureau of Prisons. Its troubles began when then-President Barack Obama’s administration moved to end the Bureau of Prisons’ use of privately-run prisons. But even under the Trump administration, which reversed that order, Garza County’s detention facility has had a tough time securing a 10-year contract with the agency.

“It’s been hard to get back on track, honestly,” Norman said. He added that he thinks it comes down to bureaucratic issues at the Bureau of Prisons rather than issues with the detention center.

More Arrests

Representatives at the Marshals Service and the Bureau of Prisons did not respond to requests for comment. Issa Arnita, a spokesman for MTC, didn’t respond to requests for comment.

The outlook for jail financings has improved under Trump, Fabian said. Former Attorney General Jeff Sessions in April 2018 announced a “zero-tolerance policy” toward illegal entry into the U.S. and said law enforcement would prioritize prosecuting criminal immigration offenses.

That’s helped translate into more arrests by ICE, which is good financial news for the state and local detention facilities that house detainees on behalf of ICE and receive payment for doing so. ICE’s Enforcement and Removal Operations reported an 11 percent increase in arrests of people in the country illegally in fiscal 2018.

Lack of information over what was happening in Willacy County’s corrections facility was an issue prior to the 2015 riots. The county sued MTC in 2016, saying the company failed to alert the county to issues at the prison. MTC “turned a blind eye to the enormous problems that plagued the prison from its inception,” according to the complaint. After the Bureau of Prisons ended its contract, investors that owned bonds sold for that portion of the prison complex took losses on the debt as part of a distressed exchange, according to S&P.

The county, which is in a remote area of the Rio Grande Valley, struggled after the prison closed, given many people in the area worked for MTC. Ultimately, officials last year decided to reopen the privately-run corrections center, something that was met with protests, according to local news reports.

The withdrawn ratings could suggest something “systemic” with the risks surrounding jail projects, Fabian said. “Lack of disclosure is typically more telling than what’s being disclosed,” he said.

Bloomberg Politics

By Amanda Albright

April 4, 2019, 6:56 AM PDT

— With assistance by Sophia Sung

New research shows places that rely more on property taxes and less on state aid tend to have better-funded retirement systems.

For a range of reasons, some local governments have accumulated massive unfunded pension liabilities over many years. Most often, these shortfalls are attributed to political climates, downturns in the local economy and aging populations.

New research reveals that cities’ revenue structures — the mix of taxes, fees and intergovernmental aid they take in — also play a critical role, potentially putting some places at greater risk of mounting pension liabilities.

The University of Texas at Dallas study, published in the journal State and Local Government Review, provides one of the first academic analyses of what factors influence pension funding at the local government level. It finds that localities that rely heavily on property taxes tend to contribute more to their pension systems, while those that depend more on state aid for revenue often experience greater pension funding woes.

Continue reading.

GOVERNING.COM

BY MIKE MACIAG | APRIL 2, 2019 AT 4:00 AM

The municipal bond market began as a general obligation market similar to the Treasury market. Since then, the market has grown to include revenue bonds backed by specific municipal revenue sources and private activity bonds (PAB) designed to finance private projects that benefit the public.

Conduit bonds are a type of PAB designed to capture the tax benefits of municipal bonds to advance private projects.

In this article, we will take a closer look at conduit bonds, implications for investors, and tips to keep in mind when considering them for your portfolio.

What Are Conduit Bonds?

Conduit bonds are municipal securities designed to raise capital for revenue-generating projects that benefit the public. For example, a for-profit real estate development firm may issue conduit bonds to finance the construction of student housing or low-income housing projects. The issuer collects the tax or revenue used to secure the bonds and distributes it to the bondholders, but the conduit borrower is ultimately responsible for the debt obligations.

Continue reading.

municipalbonds.com

Justin Kuepper

Apr 03, 2019

Fitch Ratings-New York-02 April 2019: Precedents of similar lawsuits indicate that the $6 billion lawsuit filed by commercial truckers is unlikely to have a material adverse effect on the Pennsylvania Turnpike, according to Fitch Ratings. The practice of transferring a portion of tolls for the benefit of transit and other transportation-related purposes is both widespread and long-standing. To the extent a tolling entity must show transferred tolls are benefitting toll payers, courts have tended to take an expansive view regarding the knock-on benefits of transit recipients on toll road congestion. Although these precedents point to a likely favorable outcome for the turnpike, in the event the lawsuit prevailed including through any appellate process, Fitch would consider the terms of the settlement and management responses in assessing potential rating action. Fitch will continue monitoring the lawsuit and will consider any material developments in its rating.

The lawsuit, filed in March 2018 by the Owner Operator Independent Drivers Association (OOIDA), claims that the turnpike is violating the Commerce Clause by raising tolls to fund non-highway transportation projects in the state. Under Act 44, the turnpike must pay PennDOT $450 million a year to support non-highway programs, through fiscal 2022. Act 89 amended Act 44, reducing the payments to $50 million starting in fiscal 2023, with the balance to be made up by the commonwealth from its motor vehicle sales tax revenues. In order to make these payments, the turnpike issued subordinate debt. The higher debt service requirements necessitated toll rate increases in excess of inflation every year since 2009, most recently by 6% in January 2019. The OOIDA requested (1) a preliminary injunction requiring the segregation of all toll receipts in excess of current operating and maintenance costs and funding for the senior revenue bonds, (2) a permanent injunction preventing the issuance of any additional bonds for Act 44 payments outside the turnpike system and (3) a permanent injunction prohibiting the use of toll revenues to make payments on outstanding subordinate bonds issued for Act 44 payments. The lawsuit also requested monetary damages including a refund of a portion of certain tolls. The preliminary injunction was withdrawn, allowing PTC to make its payments on the outstanding subordinate bonds. Since the lawsuit was filed, the turnpike has not issued any additional subordinate debt and thus has not made three Act 44 payments. The Act 44 Lease and Funding Agreement was amended to allow for the deferral of payments through June 2019. Fitch expects that the Agreement would be further amended if the lawsuit is still unresolved.

Similar lawsuits have been filed against state entities and proved unsuccessful. The Ohio Turnpike and Infrastructure Commission was sued in 2015 for raising tolls to divert funds to non-turnpike projects. A federal district court dismissed all except one claim. The court ruled that despite not being spent on the maintenance of the turnpike, the funding spent on non-turnpike projects benefited turnpike users. The outstanding claim that the increased tolls were an unlawful tax or user fee was remanded to state court where it was dismissed in 2017. The judge ruled that the turnpike commission has the legal ability to charge the tolls even if they are considered taxes. The American Trucking Associations (ATA) have filed lawsuits in New York and Rhode Island claiming that tolls on commercial trucks violate the commerce clause of the U.S. Constitution. The lawsuit filed against the New York State Thruway in 2013 was dismissed by a federal appeals court in 2018. The court ruled that Title 23 of the Intermodal Surface Transportation Efficiency Act of 1991 defined the upstate canal system as an eligible recipient of excess funds from the Thruway. In March 2019, the ATA’s lawsuit against the Rhode Island Department of Transportation for tolling tractor-trailers was dismissed by a federal district court judge on the grounds that the matter was more appropriate for state courts because the tolls are a state tax. The state anticipates the case will be refiled in state court.

If the ruling on the Pennsylvania Turnpike lawsuit prohibits future issuance of debt for transfer payments, the turnpike would be able to continue servicing its outstanding debt on the senior and subordinate liens. A ruling could also require the turnpike to pay a lump sum refunding up to the $6.1 billion paid out under Act 44. In that unlikely scenario, Fitch anticipates the turnpike would look to the commonwealth’s general government (AA-/Stable) and legislature for assistance. The legislature enacted Acts 44 and 89, which led to the subordinate lien debt issuances and associated toll increases that spurred the litigation. Fitch will continue monitoring developments in the case and assessing potential rating implications. Fitch rates the Pennsylvania Turnpike senior and subordinate bonds ‘A+’ and ‘A-‘, respectively, with Stable Rating Outlooks.

Contact:

Anne Tricerri
Associate Director
+1-646-582-4676
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Scott Monroe
Director
+1-415-732-5618

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

Additional information is available on www.fitchratings.com

Funding could leverage $6 billion in public and private investment for construction-ready projects to protect drinking water from lead and emerging contaminants, upgrade aging infrastructure, promote water recycling and reuse.

WASHINGTON — Today, U.S. Environmental Protection Agency (EPA) Administrator Andrew Wheeler announced the availability of funding to provide an estimated $6 billion in Water Infrastructure Finance and Innovation Act (WIFIA) loans in 2019.

“Through WIFIA, we are addressing several of President Trump’s top priorities simultaneously: modernizing our nation’s aging infrastructure, improving public health protections, and creating jobs,” said EPA Administrator Andrew Wheeler. “This new round of WIFIA funding provides up to $6 billion in credit assistance which, combined with other sources, could support $12 billion in water infrastructure projects and create more than 180,000 jobs. For this round, we are prioritizing construction-ready projects in three areas: water reuse and recycling, reducing exposure to lead and addressing emerging contaminants, and updating aging infrastructure.”

The WIFIA program plays an important role in President Donald Trump’s efforts to rebuild America’s aging water infrastructure while improving local water quality, creating jobs and better protecting public health.

WIFIA loans are available to public and private borrowers for a wide range of drinking water, wastewater, drought mitigation, and alternative water supply projects. This year’s Notice of Funding Availability (NOFA) highlights the agency’s priority to finance projects that are ready for construction in three key areas: reducing exposure to lead and addressing emerging contaminants in drinking water systems; updating aging infrastructure; and implementing water reuse and recycling.

The WIFIA program received $68 million in funding in the Consolidated Appropriations Act of 2019, which was signed into law by President Trump on February 15, 2019. This is a $5 million increase in the program’s funding from 2018. Leveraging private capital and other funding sources, these projects could support $12 billion in water infrastructure investment and create more than 180,000 jobs. EPA will accept letters of interest (LOI) from prospective borrowers for 90 days after publication in the Federal Register.

To date EPA has issued eight loans totaling over $2 billion in WIFIA credit assistance to help finance over $4 billion for water infrastructure projects and create over 6,000 jobs. EPA has invited an additional 42 projects in 17 states and D.C. to apply for a WIFIA loan. These 38 borrowers will receive WIFIA loans totaling approximately $5.5 billion to help finance nearly $11 billion in water infrastructure investments and create 172,000 jobs.

Background

Established by the Water Infrastructure Finance and Innovation Act of 2014, the WIFIA program is a federal loan and guarantee program at EPA that aims to accelerate investment in the nation’s water infrastructure by providing long-term, low-cost supplemental loans for regionally and nationally significant projects.

WIFIA credit assistance can be used for a wide range of projects, including:

• drinking water treatment and distribution projects;
• wastewater conveyance and treatment projects;
• enhanced energy efficiency projects at drinking water and wastewater facilities;
• desalination, aquifer recharge, alternative water supply, and water recycling projects; and
• drought prevention, reduction, or mitigation projects.

EPA will evaluate proposed projects described in the LOIs using WIFIA’s statutory and regulatory criteria as described in the NOFA. Through this competitive process, EPA will select projects that it intends to fund and invite them to continue the application process.

For more information about WIFIA and this funding announcement, visit: https://www.epa.gov/wifia

03/29/2019

Investors pouring record sums into infrastructure funds are betting the sting of mishaps like Chicago’s parking meter deal has faded enough to make P3s, as they’re called, fashionable again. And local investment firms are grabbing their share of the inflows.

Investors are throwing record sums of money at investment funds designed to finance the refurbishing of America’s crumbling roads, creaky bridges and outdated airports—and Chicago firms such as Loop Capital and GCM Grosvenor are grabbing their share.

Last year, $90 billion flowed into such infrastructure funds worldwide, a near doubling over 2014, according to research firm Preqin, a London-based tracker of the alternative-assets market. Much of that money went to U.S. firms, but it may not stay in the country.

It could help cash-strapped local governments like Chicago and Illinois shore up public properties, to avoid mishaps like the Lake Shore Drive girder crack in February. But Chicago’s flawed 2008 sale of parking meters to private interests chilled such deals nationwide, and financial firms face a hard sell in drawing U.S. cities and states back into public-private partnerships—P3s, in industry parlance.

Continue reading.

Crain’s Chicago Business

by LYNNE MAREK

March 29, 2019 01:50 PM

There is an infrastructure crisis in America. The U.S. earned a D+ in infrastructure for 2017 from the American Society of Civil Engineers. State pensions aren’t in great shape either. They are underfunded by an astounding $6 trillion. And as Barron’s Randall Forsyth points out, U.S. states face a dilemma: they need to fund both infrastructure and pensions, but have trouble doing either.

Maybe America’s neighbors to the north can teach it something about funding infrastructure projects. Friday, Canadian engineering & construction firm SNC-Lavalin (SNC.Canada) sold 10% of a toll road it owned to the Ontario Municipal Employee Retirement System for $2.4 billion.

SNC has fallen on hard times. It is embroiled in a bribery and kickback scandal that stretches back to 2015 and shares plunged 28% on Jan. 28 due to a problem in one of its mining projects. SNC stock has lost about 2% a year on average since news of the bribery scandal broke, about 7 percentage points worse than the Canadian TSX Composite Index.

Continue reading.

Barron’s

By Al Root

April 6, 2019 7:00 a.m. ET

Market power mitigation measures adopted in 2005 to address horizontal market power concerns arising from the merger of Louisville Gas and Electric Company and Kentucky Utilities and the subsequent withdrawal of LG&E/KU from the Midcontinent Independent System Operator, Inc. have recently been terminated by the Federal Energy Regulatory Commission, over the objection of Commissioner Cheryl LaFleur.  Louisville Gas and Electric Company and Kentucky Utilities Company, 166 FERC ¶ 61,206 (2019).

Need for Market Power Mitigation

LG&E and KU are electric public utilities in Kentucky which proposed to merge in 1998. One of the issues FERC considers when it reviews utility mergers under Section 203 of the Federal Power Act is the effect of the merger on competition. In order to allay horizontal market power concerns raised by their proposed merger, LG&E/KU committed to join the Midcontinent Independent System Operator, Inc. (MISO), which was then being organized as an independent regional transmission organization.

Members of MISO may obtain transmission service throughout the multi-state MISO footprint for a single, non-pancaked transmission charge. Therefore, LG&E/KU’s participation in MISO enabled load-serving entities connected to its transmission system to obtain electricity from sources outside of the LG&E/KU footprint without paying multiple transmission charges. In its order approving the merger, the FERC found that the availability of transmission service to customers connected to the LG&E/KU system from anywhere within the MISO footprint at a single, non-pancaked rate helped to mitigate any horizontal market power concerns. An increase in potential electricity suppliers within the LG&E/KU destination market meant more competitive rates for consumers.

Adoption of De-pancaked Mitigation Measures

In 2005, after the merger had closed, LG&E/KU sought FERC authorization to withdraw from MISO, and proposed instead to offer transmission service over their combined transmission systems through a stand-alone Open Access Transmission Tariff (OATT). In order to provide transmission customers the benefits of non-pancaked transmission rates comparable to those enjoyed while LG&E/KU belonged to MISO, it also adopted a De-pancaking Mitigation mechanism involving transmission rates for new service into and through its system from MISO.

Under that mechanism, certain load-serving municipal electric utilities within the LG&E/KU footprint that purchase power from generation sources in MISO receive a credit for transmission service under the LG&E/KU OATT equal to charges for transmission and ancillary services they paid under the MISO Tariff. In addition, LG&E/KU waived transmission and ancillary service charges under the LG&E/KU OATT for power delivered by such customers from generation sources connected to the LG&E/KU system into MISO. As a result, load-serving utilities within the LG&E/KU footprint have continued to obtain transmission service through the KG&E/KU and the MISO systems for a single, non-pancaked transmission charge.

Termination of De-pancaked Mitigation Mechanism

In August 2018, LG&E/KU filed an application with the FERC to terminate the De-pancaking Mitigation provisions. In considering this request, the FERC rejected arguments that any market power mitigation measures either (a) must remain in effect in perpetuity, or (b) have a finite term. Instead, the FERC explained that the De-Pancaking Mitigation measures could be terminated “if LG&E/KU has demonstrated that loads located in the LG&E/KU market will continue to have access to a sufficient number of competitive suppliers after the mitigation is removed.”

In support of its request, LG&E/KU argued that market conditions in the Midwest have changed substantially since the adoption of the De-pancaking Mitigation mechanism. LG&E/KU submitted an analysis showing that the wholesale requirements customers within its boundaries have many more sources of power available today than in 1998; that many of those customers had successfully solicited power supply arrangements from suppliers other than LG&E/KU; and that a delivered-price test revealed more than 100 entities with capacity that could be delivered into the LG&E/KU footprint at competitive rates. After reviewing the record, the FERC found that:

…the Merger continues to be consistent with the public interest without the De-pancaking Mitigation because the record shows that loads located in the LG&E/KU market will continue to have access to a sufficient number of competitive suppliers after the mitigation is removed.

Transition Period

At the time of the FERC’s acceptance of the De-pancaking Mitigation, all wholesale requirements customers connected to the LG&E/KU system had long-term contracts to purchase the electricity needed to meet their bulk power supply requirements from LG&E/KU. Some of those customers have now terminated the purchase of power from LG&E/KU and are purchasing power from third-party suppliers, while other customers are in the process of doing so.

Nevertheless, the FERC was concerned that these customers may have made arrangements to procure power from generation sources located outside of the LG&E/KU footprint in reliance on the De-pancaking Mitigation measures. Therefore, as a condition of their termination, the FERC required that the De-pancaking Mitigation measures remain in effect for all wholesale requirements customers dependent upon the MISO transmission system during a transition period equal to the initial term of each power purchase agreement entered into by each such customer.

Commission La Fleur’s Dissent

Although the FERC granted the request to terminate the De-pancaking Mitigation provisions after a transition period, Commissioner LaFleur was concerned that the delivered price test provided by LG&E/KU showed that customers would have limited access to alternative generation suppliers during periods of the year when the market is highly or moderately concentrated. She also believes that because the solicitations relied on by LG&E/KU were conducted while the De-pancaking Mitigation mechanism was in place, they were insufficient evidence of adequate competitive options that might be available without mitigation. She therefore would have preferred that the FERC set the matter for an evidentiary hearing in order to confirm that the wholesale requirements customers connected to the LG&E/KU system would have adequate access to competitive third party generation suppliers after the mitigation was terminated. With due regard for rate pancaking, she concluded by saying that:

…while people frequently talk about how the sausage gets made, this case shows how the pancakes get made. While a single pancake may be fine, I do not believe that LG&E/KU should be able to force feed a short stack of pancakes to [the wholesale requirements customers]. Without better ingredients than are presented in this record, the conclusion that these customers have adequate menu alternatives is half-baked at best. While I expect the majority would rather than I hop to their decision, I am not waffling, and respectfully dissent.

Conclusions

The order reflects the FERC’s pragmatic attitude in determining whether horizontal market power mitigation measures are needed to protect against potential adverse effects of utility mergers on competition. Although termination of the De-pancaking Mitigation mechanism might affect the ability of some potential suppliers to serve loads within the LG&E/KU market economically, the FERC was satisfied that loads located in the LG&E/KU market would continue to have access to a sufficient number of competitive suppliers after the mitigation is removed. Although Commissioner LaFleur would have preferred that there be additional evidence to support the FERC’s conclusion, the transition arrangements provide a reasonable opportunity for affected wholesale customers of LG&E/KU to test the FERC’s conclusions while seeking new supplies of electricity to take effect when their existing power purchase agreements with LG&E/KU expire.

by James K. Mitchell

April 4, 2019

Davis Wright Tremaine LLP

On March 26, 2019, FERC accepted, subject to condition, AMP Transmission, LLC’s (“AMP”) proposed formula rate template and implementation protocols (collectively “Formula Rate”) to recover a revenue requirement based on a cash-flow method for AMP’s integrated transmission facilities located in the PJM Interconnection, L.L.C. (“PJM”) region. As a minor condition of acceptance, FERC directed AMP to revise on compliance its Formula Rate to enable AMP to use it in PJM transmission zones that require different rate years, as opposed to only in zones whose rate year is based on the calendar year.

AMP is a non-profit entity that was formed solely to provide transmission-related services in PJM through its ownership of some of the transmission facilities of American Municipal Power, Inc.’s members that require compliance with certain NERC Reliability Standards. On November 1, 2018, AMP submitted to FERC a proposed cost-based, forward-looking formula rate that utilizes a cash-flow method to develop its revenue requirement, which does not include an allowance for depreciation expense or for return on rate base. Rather, the cash-flow method incorporates a provision for the recovery of debt service payments and a margin requirement, which is a percentage of AMP’s debt service obligation. AMP stated that, as a start-up entity with no equity, it must debt-finance the facilities it will purchase or build, and because the term of any available loans is expected to be shorter than the service life of transmission facilities, a non-cash flow approach does not ensure that AMP will receive the revenue it needs each month to service its debt. AMP also requested approval of the Formula Rate to be used in any PJM transmission zone for any facilities that AMP Transmission may own or lease in the future.

In its order, FERC accepted AMP’s proposed Formula Rate, subject to condition. FERC found that AMP had demonstrated that the cash-flow based formula is more appropriate for its circumstances, allowing it to closely match expected revenue with the time of debt service requirements, than the non-levelized approach, which may not ensure it receives the revenue it needs each month to service its debt. FERC also found just and reasonable: (1) AMP’s margin requirement; and (2) AMP’s proposal that its Formula Rate apply to transmission facilities that are acquired in yet-to-be determined PJM transmission zones with implementation at some point the future. However, FERC found that AMP’s Formula Rate did not allow for use in a PJM transmission zone using a non-calendar based rate year, which was contrary to AMP’s stated intent to provide flexibility for use of Formula Rate in zones with different rate years. FERC thus directed AMP to revise on compliance its Formula Rate to enable AMP to use it in PJM transmission zones that require different rate years, as opposed to only in zones whose rate year is based on the calendar year.

A copy of FERC’s order is available here.

by Meghan Mandel and Miles Kiger

April 2, 2019

Troutman Sanders LLP

CHICAGO, March 28 (Reuters) – A decision this week by a U.S. Appeals Court in a lawsuit related to Puerto Rico’s bankruptcy raises concerns over the payment of municipal bonds backed by specific revenues during future Chapter 9 cases, Fitch Ratings said on Thursday.

The Boston-based First Circuit court on Tuesday determined that municipalities are not required to make payments on debt secured by special revenues while bankruptcy proceedings are ongoing, although municipalities can voluntarily opt to do so.

“The ruling, by stating such payments are optional, creates uncertainty about full and timely payment of special revenue obligations during bankruptcy of the related municipality,” Fitch said.

The credit rating agency added that if the ruling stands, it could negatively affect ratings on certain bonds secured by utility, transportation and tax revenue.

The appeals court affirmed a ruling by U.S. District Court Judge Laura Taylor Swain, who is overseeing the island’s bankruptcy, which was filed in 2017 in an effort to restructure about $120 billion of the U.S. commonwealth’s debt and pension obligations.

Swain had dismissed a lawsuit by insurance companies guaranteeing payments on defaulted Puerto Rico Highways and Transportation Authority bonds. The bond insurers claimed that payments on the debt from pledged toll and other revenue should not be halted during the bankruptcy.

Assured Guaranty Corporation, one of the plaintiffs in the lawsuit, said on Thursday it is assessing options, including an appeal to the U.S. Supreme Court.

“We disagree with the court’s ruling, which is at odds with prior court decisions and the legislative history relating to special revenue bonds and has potential negative implications for revenue bonds throughout the municipal bond market,” Assured said in a statement.

Chapter 9 municipal bankruptcy expert James Spiotto, managing director of Chapman Strategic Advisors, said the appeals court decision came as a surprise to the municipal bond market, which had assumed Swain’s ruling would be reversed.

“This could have a very adverse effect on the use of special revenues all over,” he said.

Revenue bonds accounted for an average of 64 percent of annual issuance in the $3.8 trillion municipal market since 1990, according to Refinitiv data. Not all revenue bonds qualify as being backed by special revenues under the bankruptcy code, which specifies special excise taxes or revenue derived from governmental projects or systems providing transportation, utilities or other services.

Reporting by Karen Pierog in Chicago Editing by Matthew Lewis

MARCH 28, 2019

Credit analysts and ratings agencies said this week’s federal court decision in Puerto Rico’s bankruptcy may have implications for special revenue bonds across the nation.

The ruling called into question a long-standing assumption that special revenue bonds would continue to be paid in Chapter 9 municipal bankruptcies.

“If this decision were to hold, it would be a game changer in the municipal bond world,” Evercore Director of Municipal Research Howard Cure said Thursday. “Holders of these special revenue bonds that thought they had bankruptcy protection from a government entity would ultimately be lumped into the government’s credit profile.”

On Tuesday the 1st Circuit Court of Appeals ruled that the relevant Chapter 9 sections made payment of these bonds in bankruptcy optional and not mandatory. The court ruled in a case brought by four bond insurers concerning Puerto Rico Highways and Transportation Authority bonds. The appeals court panel was affirming an earlier decision by Puerto Rico bankruptcy Judge Laura Taylor Swain.

Fitch Ratings said it was “evaluating the potential rating implications” of the ruling.

“Credit ratings that could be negatively affected by the decision, if it stands, include bonds secured by utility, transportation and tax revenues that are currently rated above the municipality’s Issuer Default Rating (IDR),” Fitch said. “Although technically the decision only affects districts within the 1st Circuit (Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island), Fitch believes that this decision will be influential in municipal bankruptcy cases nationwide given the overall lack of municipal bankruptcy case law.”

The court’s ruling was “contrary to the long-established belief in the municipal market that payment on the special revenue debt, such as that issued by utility systems, was required throughout the automatic stay period,” Fitch said.

On Thursday Assured Guaranty Corp. told The Bond Buyer that its professionals were “reviewing all of our options,” including seeking Supreme Court review of the appeals court ruling.

Fitch said, “The insurers have several avenues of appeal, and Fitch will monitor the court proceedings as they occur.”

Kroll Bond Rating Agency said Wednesday it “is analyzing the potential implications to the broader market of the decision rendered on March 26 by the U.S. Court of Appeals for the First Circuit.” Kroll said special revenue opinions informed its ratings of Los Angeles School District general obligation bonds, San Diego Unified School District general obligation bonds, and Board of Education of the City of Chicago general obligation bonds.

Cure said if the ruling became the prevailing legal interpretation of special revenue bonds, investors would have to treat the credit of special revenue bonds similarly to the way they treat related government entities. “A case in point would be the City of Chicago and the impact on the water and sewer system bonds, where the city does have some control of rates, or, a more extreme case, Chicago’s O’Hare and Midway airports where the city has little if any control over rates charged to airlines and concessionaires.”

Moody’s Investors Service had a different response to the court’s ruling: “The recent 1st Circuit ruling in the HTA case highlights the ongoing uncertain treatment of special revenue bonds in Chapter 9,” said Moody’s Vice President Genevieve Nolan.

“Case law offers few precedents, and only a handful of examples to support the assertion that a special revenue designation protects revenue bonds in bankruptcy,” she continued. “For these reasons Moody’s continues to link its special tax and municipal utility ratings to the general credit quality of the issuer.”

BY SOURCEMEDIA | MUNICIPAL | 03/28/19 04:47 PM EDT

By Robert Slavin

The NFMA is disappointed that the U.S. Appeals Court affirmed U.S. District Court Judge Swain’s decision allowing for Puerto Rico’s Highway and Transportation Authority to withhold bond payments backed from pledged tolls and other revenues during bankruptcy. As we stated in the amicus brief that we filed on May 16, 2018 (click here for Amicus Brief), revenue bonds are a critical source of financing for infrastructure projects and it has been an underlying premise and expectation of the municipal market that timely payment of debt service on special revenue bonds would be honored in all circumstances, including Chapter 9 bankruptcy. Judge Swain’s Assured Guaranty decision, and the recent affirmation by the Appeals Court, is at odds with prior court decisions and legislative history and is likely to result in negative market implications for revenue bonds throughout the municipal market.

Fitch Ratings-New York-28 March 2019: Fitch Ratings is evaluating the potential rating implications of Tuesday’s ruling by the United States Court of Appeals for the First Circuit regarding the bondholder protections provided by special revenue status under the bankruptcy code. The ruling, in a case brought by Assured Guaranty Corp, and three other bond insurers regarding the Puerto Rico Highways and Transportation Authority’s (PRHTA) special revenue bonds, affirms a 2018 district court decision regarding special revenues as defined in Chapter 9 of the U.S. Bankruptcy Code. The circuit court ruling is in response to a creditor appeal of the district court’s dismissal of claims regarding payment of the PRHTA bonds. The insurers have several avenues of appeal, and Fitch will monitor the court proceedings as they occur.

In the ruling, the circuit court agrees with the district court’s opinion that section 922(d) of Chapter 9 grants permission to, but does not require, a municipality to continue paying special revenue obligations during a bankruptcy proceeding. This is contrary to the long-established belief in the municipal market that payment on special revenue debt, such as that issued by utility systems, was required throughout the automatic stay period. The ruling, by stating such payments are optional, creates uncertainty about full and timely payment of special revenue obligations during bankruptcy of the related municipality.

The circuit court opines that since the plain language of the code is unambiguous, there is no need to rely on the legislative history of Chapter 9 to interpret them. However, the legislative history appears to clearly indicate the intent to limit the reach of the automatic stay for municipal entities and to make it inapplicable to pledged special revenues.

Credit ratings that could be negatively affected by the decision, if it stands, include bonds secured by utility, transportation and tax revenues that are currently rated above the municipality’s Issuer Default Rating (IDR). Although technically the decision only affects districts within the first Circuit (Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island), Fitch believes that this decision will be influential in municipal bankruptcy cases nationwide given the overall lack of municipal bankruptcy case law.

Contact:

Amy Laskey
Managing Director, U.S. Public Finance
+1-212-908-0568
Fitch Ratings, Inc.
300 West 57th Street, New York

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

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

Additional information is available on www.fitchratings.com

Municipal consolidations generally materialize to reduce expenditures and save taxpayers’ money through operating efficiencies. However, despite some large-scale and notable consolidations, municipalities and school districts rarely follow through on merging.

Continue reading.

Mar. 26, 2019

The National Council for Public-Private Partnerships’ (NCPPP) is proud to name Paine Field, Snohomish County Airport the recipient of the 2019 Innovation Project Award. Paine Field in Snohomish County, Washington is the first privately funded, built and operated passenger terminal in the U.S. as a result of a uniquely structured public-private partnership (P3).

Enormous economic growth in the Seattle region… read more →

At Shenandoah Growers’ indoor farm in Rockingham, Va., rainwater is collected on the roof and channeled into a retention tank, where it is mechanically filtered before being pumped into a proprietary system that creates a natural nitrogen cycle indoors.

Then the U.S. Department of Agriculture certified organic water is intermittently supplied to the roots of herbs, micro-lettuces, and other leafy greens growing in soil-filled containers, with leftover water circulating back to the tank in a closed-loop system. Meanwhile, the plants are bathing in energy-efficient LED lights.

“It’s a soil-based approach to growing organic produce that uses far less water and avoids the typical agricultural runoff that pollutes land and groundwater with fertilizers and pesticides,” says Timothy Heyden, Shenandoah’s CEO.

XPV Water Partners, an investing firm focused on small, growing companies tackling big water challenges, invested in Shenandoah in 2016, leading the 30-year-old company’s second round of funding, during which it raised $35 million to expand its U.S. indoor growing capacity.

Toronto-based XPV, which has raised two funds totaling $400 million since launching in 2006, provides one of the few pure vehicles for impact investors to address water scarcity and quality challenges resulting from the big macro trends it follows: urbanization, population growth, and climate change.

XPV was drawn to Shenandoah for its innovative approach to addressing the biggest issues at the food-water nexus: water scarcity and water quality.

“It takes a lot of water to produce food,” says David Henderson, who founded XPV in 2006, catering to big institutional investors including large family offices. “And agricultural runoff is probably the single largest point-source pollution in the world.”

Shenandoah Growers, which has grown more than 200% in the past five years to more than $100 million in sales, presents a clear way to address the central water challenges.

But investing in water for impact—to create a social or environmental benefit while earning a financial return—isn’t always simple. Because water touches so many systems—municipal, industrial, and agricultural—it’s often difficult to tease out as a separate investible category. And because governments and regulators are often involved, things can move slowly.

Water is also very local. “The challenges you face in California are going to be different than the challenges you face in Beijing,” Henderson says. “But, of course, wherever there’s complexity, there’s also opportunity.”

Greentech Capital Advisors, an investment-banking and asset-management firm focused on sustainability, is also finding opportunities in the trends that XPV identifies, such as the widening gap between supply and demand driven by population growth. Filling that demand will boost the price of water, and require that aging infrastructure be replaced.

“The extremes of water, like drought and flooding, and the implications of those extremes have led water from being seen as a commodity and, particularly in the U.S., free and available to anyone, all the time, to water being properly priced and seen as something that’s a valuable resource,” says Duncan Williams, a partner at Greentech.

Any boom in water investing for social and environmental impact, however, is unlikely to happen fast.

Encourage Capital, a U.S. social-impact private-equity firm, is realizing the scope of the difficulties as it works with partners to find investments to solve some of the seemingly intractable problems in the Colorado River Basin, a region it has extensively studied in recent years with support from the Walton Family Foundation.

The firm is pursuing opportunities in agriculture and ranching—which accounts for 70% of the basin’s water use—as well as in municipal water and infrastructure. “Urban use is growing, and growing much more rapidly” in the region, says Ricardo Bayon, an Encourage Capital partner.

The greatest promise lies in agriculture, where sometime this year the firm expects to have a pilot investment or portfolio of investments to take to high-net-worth individuals, family offices, and other investors.

The plan would involve buying land and/or working with landowners to substitute high-water-use, low-value crops with low-water-use, high-value crops, Bayon says. “You make money on the water, and you make money on the change in the crop.”

The lead time on the municipal projects it’s pursuing in cities like Los Angeles and San Francisco to address storm-water management and other water problems will take far longer because “we’re dealing with municipal agencies, and they do not move at the speed of light,” Bayon says.

Encourage Capital has partnered with the World Resources Institute to work on these challenges over the long term, and has identified potential areas where private capital could overlap with municipal finance.

One goal is to integrate water systems like drinking water, storm water, and sewage water that are typically handled by separate agencies.

“It’s clear the future of the way we manage water for a city has to be a lot more integrated,” he says.

Encourage Capital and the Liquid Assets Project, a consortium it’s part of, conclude that through their efforts to put together deals, philanthropic capital will be needed to “prime the pump and guide” water impact investments into the future, Bayon says.

“It’s not that private capital won’t get there on its own, but it’s not necessarily as cognizant of the social and environmental implications,” he says.

The firm’s difficulties in finding investments that can ensure both financial returns and impact should give some impact investors pause.

As XPV’s Henderson says, “Water is a great area to invest in; there’s lots of growth, but you’ve got to be cautious in how you approach it.”

Barron’s

By Abby Schultz

March 27, 2019 7:30 a.m. ET

General PPP framework

Overview

How has the concept of public-private partnership (PPP) developed in your jurisdiction? What types of transactions are permitted and commonly used in your jurisdiction?

There is no uniform statutory definition of PPP in the United States. The scope of transactions that each state may use to procure from, or partner with, the private sector for the delivery or operation of infrastructure varies from state to state. In some cases, including, perhaps most notably, the state of New York, with respect to transportation projects, some infrastructure-related procurement laws have not permitted the typical forms of contracts used in PPPs, requiring, for example, the separation of the procurement of the design of a project from the procurement of the constructions of the same.

Some authors trace back the development of the modern form of PPP to the power purchase agreements developed in the United States during the 1980s, which provided for a two-component compensation system: a capacity availability payment and an actual usage payment.

The market for PPP transportation projects began to develop in the 1990s with the SR-91, Dulles Greenway and Camino Colombia projects. However, when these projects ran into financial difficulty, the market for this kind of PPP project froze for several years. It was only in the mid- to late 2000s that the transportation PPP market in the United States began gaining new momentum. However, many PPP projects at the municipal level had existed for long before that, mainly in the water and waste water sectors. Correctional services companies have also built prisons and offered their services to all levels of government for several years.

Covered categories

What categories of public infrastructure are subject to PPP transactions in your jurisdiction?

The categories of public infrastructure that can be procured through the PPP model also vary from state to state. The most visible projects developed using this model are transportation projects. However, it is becoming more common to find social infrastructure projects being developed in the form of PPPs, particularly courthouses, prisons and schools.

Legislative framework

Is there a legislative framework for PPPs in your jurisdiction, or are PPPs undertaken pursuant to general government powers as one-off transactions?

Some states have PPP-specific enabling legislation; others rely on legislation relating to their procurement authority and common law. In some cases, the PPP enabling legislation is limited to specific categories of projects, such as transportation. In others, it allows the performance of all types of infrastructure projects.

Currently, most states and Puerto Rico have enacted PPP-specific legislation that permits PPP transportation or social projects. In some cases, the PPP-enabling legislation authorises specific projects on an ad-hoc basis. Some states have enacted pilot programmes authorising the procurement of a limited number of projects using the PPP model.

Relevant authority

Is there a centralised PPP authority or may each agency carry out its own programme?

This mostly depends on the approach followed by each state. In those cases where, for example, PPP enabling legislation is limited to specific types of projects, such as transportation, it is commonly the state’s department of transportation that is charged with the execution and performance of the applicable PPP project. In other states, a centralised PPP authority (which may be an authority created expressly to fulfil such a role, an office within a department of the state government or an existing instrumentality of the state) is in charge of coordinating the PPP policy for the state. In some cases, such an authority is also directly in charge of executing and performing the PPP directly with the private sector, and in others it is a sector agency (eg, the department of transportation) that executes the PPP under the supervision of the centralised PPP authority. States that have created centralised PPP authorities include California, Colorado, Georgia, Michigan, Oregon, Virginia and Washington. All of these authorities exist within the department of transportation or treasury. Among these states, the PPP authorities of California and Michigan have a broad sector mandate, while the other state authorities are focused primarily, if not solely, on transportation. In other states, the PPP programme has been entrusted to more than one authority. For example, in the case of Indiana, the power to execute transportation PPP agreements has been granted to two separate authorities: the Indiana Finance Authority, the state’s authority in charge of the centralised debt programme, with respect to toll road projects only; and the Department of Transportation, for a broader scope of ground transportation projects.

Procurement

Are PPPs procured only at the national level or may state, municipal or other subdivision government bodies enter into PPPs?

Owing to the distribution of powers in the United States, most PPP projects are procured at the state or local level. Some localities and other municipalities, such as city governments or transportation authorities, have traditionally entered into PPPs based on the powers assigned to them under home rule laws or the general powers granted to authorities. However, the federal government has also entered into PPP projects, mostly relating to social infrastructure (eg, through the Department of Veterans Affairs, the National Park Service and the Postal Service), but most importantly, the federal government has significantly encouraged the use of the PPP model, particularly in the transportation sector, through financing and grant programmes such as the Water Infrastructure Finance and Innovation Act (WIFIA), the Transportation Infrastructure Finance and Innovation Act (TIFIA), Railroad Rehabilitation and Improvement Financing (RRIF) and Infrastructure for Rebuilding America (INFRA) (formerly Fostering Advancements in Shipping and Transportation for the Long-term Achievement of National Efficiencies (FASTLANE)). The Federal government created the Build America Bureau to serve as a single point of contact and coordination for states, municipalities and project sponsors looking to explore ways to access federal financing programmes.

Remuneration

How is the private party in a PPP remunerated in your jurisdiction?

The permitted forms of remuneration for the private party vary depending on the state. However, commonly used forms of remuneration include construction milestone payments, availability payments and shadow tolls and user payments (eg, tolls). Although historically some PPP projects have been entered into on the basis of the private party being compensated with the right to collect and keep toll revenue, most of the recent projects are being pursued as availability payments.

Sharing revenue and usage risk

May revenue risk or usage risk be shared between the private party and the government? How is risk shared?

As discussed above, the form of compensation varies depending on the jurisdiction. Some jurisdictions, such as Texas, have incorporated the sharing of usage risk through the use of shadow tolls in public-private projects. In certain revenue-risk deals, it is not unusual for the public entity to retain a share of revenues and thus share the risk.

Government payment obligations

In situations where the private party is compensated in whole or in part through availability or other periodic payments from the government, are the payment obligations of the government subject to the relevant legislative body approving budgetary funding in the future?

State constitutions vary on the period for which a legislature may appropriate payment obligations. Appropriation risk is generally present in PPP agreements in the United States and addressed by remedies entitling the private party, among other alternatives, to suspend work or claim relief events.

Rate of return caps

Is there any cap on the rate of return that may be earned by the private party in the PPP transaction?

Some PPP agreements in the United States have included a mechanism whereby, if the project company refinances the project debt, and as a result thereof there is an improvement in the rate of return of the sponsors, some or all of the gain is passed through to the public entity. Customarily, if the normal operation of the project produces an improved rate of return, there is no rebalancing requirement. On the other hand, some PPP agreements include terms that limit the obligation of the public entity to compensate the project company for adverse actions or certain termination events by reference to a maximum rate of return, as reflected in the financial model used in connection with the closing of the PPP agreement, regardless of the actual financial performance of the project.

Restriction of ownership transfer

Is the transfer of direct or indirect ownership interests in the project company or other participants restricted?

Some PPP statutes establish restrictions relating to the transfer of ownership in the project company depending on the stage in the procurement of the project. For example, in some cases, once a consortium has been shortlisted to participate in the bidding for the project, its members cannot change prior to the award of the PPP agreement. In addition, even in the absence of statutory restrictions, it is customary for the PPP agreements or the bidding rules to include restrictions on transfers by the owners of the project company.

Procurement process

Relevant procedure

What procedures normally apply to a PPP procurement? What evaluation criteria are used to award a PPP transaction?

Generally speaking, statutes include planning and approval processes for PPP projects to determine in the first instance whether the project is worth pursuing. Statutes differ on how this process is performed, mostly based on whether a dedicated PPP authority exists or not. In some states, this process is also involved with respect to unsolicited proposals. Once the relevant authority has decided to procure a project under the PPP model, generally, a public bidding process is required under the applicable legislation. The most commonly used process involves a solicitation for expressions of interest together with a submission of qualification, following which the procuring authority selects a shortlist of bidders to which a request for proposal is issued. It is customary for the procuring authority to request comments and invite commentary by the shortlisted bidders before formally issuing the request for proposals.

Evaluation criteria vary from state to state. In some cases, a specific set of factors must be evaluated. In others, the generic best value for money test (in addition to satisfying the technical requirements of the project) is used.

Consideration of deviating proposals

May the government consider proposals to deviate from the scope or technical characteristics of the work included in the procurement documentation during the procurement process, without altering such terms with respect to other proponents? How are such deviations assessed?

Many jurisdictions within the United States allow proposers to offer alternative technical concepts on a confidential basis, and it is a common feature in many of the current PPP procurements. The authority may accept these deviations and determine whether the procuring authority will indeed receive better value for money by accepting the deviations, while at the same time satisfying the expected outcome from the original technical requirements. After receiving the confidential proposal, in advance of the proposer’s bid, the authority would then analyse if it is willing to accept it or not, based on value for money offered and satisfaction of its expected goals. Typically, before performing such an analysis, the authority will receive the confidential proposal and decide whether it indeed constitutes a deviation or not.

Unsolicited proposals

May government parties consider unsolicited proposals for PPP transactions? How are these evaluated?

Some PPP statutes, particularly in the most active states in the PPP market, permit receipt of unsolicited proposals. The proposal is, in most cases, subject to an analysis similar to that of projects that the states propose by themselves. If the authority decides to proceed with the project as proposed, it then has to proceed through the same procurement process as if it had proposed the project itself. In some cases, the proponent is entitled to either credit in the evaluation of the proposals or to a special stipend for its work.

Government stipend

Does the government party provide a stipend for unsuccessful short-listed proponents or otherwise bear a portion of their costs?

In the case of some states, the procuring authority is permitted to offer a stipend. Where this is permitted, the stipend is customarily paid to the extent that the unsuccessful proponents agree to assign their work product related to their bid to the procuring authority, which can then incorporate it into the project at hand or other projects.

Financing commitments

Does the government party require that proposals include financing commitments for the PPP transaction? If it does not, are there any mechanisms during the procurement process to ensure that the applicable PPP transaction, once awarded, is financeable?

It is customary in the United States for the procuring authority to require evidence of availability of financing as part of the proponents’ bids. Most commonly the requirement is to deliver financing commitments. However, in at least one recent case, the procuring authority has been satisfied with the delivery of highly confident letters.

Legal opinion

May the government ask its counsel to provide a legal opinion on the enforceability of the PPP agreement? May it provide representations as to the enforceability of the PPP agreement?

Typically, in the United States, the public entity does have its counsel provide a legal opinion and provide representations regarding the enforceability of the PPP agreement.

Restrictions on foreign entities

Are there restrictions on participation in PPP projects by foreign entities? May foreign entities exercise control over the project company?

Generally speaking, there are no specific restrictions regarding participation by foreign entities in PPP projects or controlling the project company. However, in the case of brownfield infrastructure projects that are deemed critical, depending on the amount of control that the private entity will exercise or whether the private entity is controlled by a foreign government, the transaction may be subject to review by the Committee on Foreign Investments in the United States, and the authority of the president of the United States to block the transaction if it is determined that it threatens to impair national security. The Exon-Florio provision (Title V, Section 5021 of the US Code, 23 August 1988), as amended, establishes a list of factors that the president must analyse in making a determination. It has been proposed to extend the authority under the Exon-Florio provision to greenfield projects. However, so far this proposal has not been adopted.

Design and construction in greenfield PPP projects

Form of contract

Does local law mandate that any particular form of contract govern design and construction activities? Does it mandate the choice of governing law?

Some PPP statutes mandate the use of specific forms of contracts. In some cases, the statutes create a specific form of PPP agreement or comprehensive agreement, and include the terms that have to be included therein. In such cases, even if the statute does not expressly say so, they create the obligation that the PPP agreement be governed by the law of the relevant state. Typically, a state is not amenable to accept a governing law other than the laws of such a state.

Design defect liability

Does local law impose liability for design defects and, if so, on what terms?

Generally, laws governing design defects in construction vary from state to state to a degree that would be well beyond the scope of this publication. However, although it is common that, in non-PPP projects, design professionals disclaim warranties of the adequacy of their services, some courts have held that, in the case of design-build contracts, unless expressly disclaimed, the design portion of the agreement is warranted in a similar fashion as the construction portion, based on the overall contract being a ‘construction contract’ and not treating each portion differently.

Warranties

Does local law require the inclusion of specific warranties? Are there implied warranties in cases where the relevant contract is silent? Does local law mandate or regulate the duration of warranties?

Although PPP statutes may imply or list as one of the terms of the PPP agreement the inclusion of warranties, generally the legislation defers on the terms of the warranties to the terms negotiated by the granting authority and the private parties. It will be particularly important for a party participating in a PPP project to confirm whether the local legislation overrides any warranty requirements generally applicable to public contracts and, if permitted, to consider including any disclaimer thereof.

Among the implied warranties that are generally found in state legislation, good workmanship may be the most common. State laws generally regulate the duration of warranties, particularly in connection with hidden defects. However, it is common that the terms of these warranties can be altered by the agreement of the parties.

Although, generally, the uniform commercial code is not applicable to construction contracts, it is important to consider whether the PPP agreement has a component that could be characterised by courts as a goods’ supply agreement. Some state courts have recharacterised certain construction agreements as dealing more precisely with the supply of goods. In such cases, implied warranties of merchantability, fitness for a particular purpose and good title could be made applicable to portions of the agreement. Therefore, the parties to a PPP agreement should consider whether they should be expressly disclaimed.

Damages for delay

Are liquidated damages for delay in construction enforceable? Are certain penalty clauses unenforceable?

Liquidated damages are generally enforceable to the extent that they are a reasonable estimation of damages that are difficult to calculate, and the intent of the clause is to compensate the non-breaching party and not to penalise the breaching party. On the other hand, clauses requiring the payment of a penalty owing to breaches are generally unenforceable.

Indirect or consequential damages

What restrictions are imposed by local law on the contractor’s ability to limit or disclaim liability for indirect or consequential damages?

Generally speaking, any disclaimer of a contractor’s liability that arises owing to its wilful misconduct or gross negligence is likely to be held unenforceable.

Non-payment

May a contractor suspend performance for non-payment?

This remedy is usually negotiated on a case-by-case basis.

Applicable clauses

Does local law restrict ‘pay if paid’ or ‘paid when paid’ clauses?

Payment terms are governed by different rules in each state. Some states deem some payment terms in construction contracts to be matters of public policy and, therefore, the terms provided for in the applicable statutes cannot be modified. In particular, some states have enacted ‘prompt payment’ statutes that would prohibit pay if paid or paid when paid terms in construction contracts, requiring contractors to review and approve invoices or pay them within a maximum period of time, regardless of whether payment from the owner has been received.

Are ‘equivalent project relief’ clauses enforceable under local law?

Equivalent project relief clauses are generally enforceable. However, to the extent that they run afoul of prompt payment statutes (eg, permitting a contractor to withhold payment to a subcontractor simply because the payment has been withheld by the owner and not on the basis of a specific breach by the subcontractor), equivalent project relief may be unenforceable.

Expansion of scope of work

May the government party decide unilaterally to expand the scope of work under the PPP agreement?

Subject to the right of the private party to request compensation for such a change, the government party typically may request changes to the scope of work under the PPP agreement. The terms of such a right to request changes are usually negotiated on a case-by-case basis.

Rebalancing agreements

Does local law entitle either party to have a PPP agreement ‘rebalanced’ or set aside if it becomes unduly burdensome owing to unforeseen events? Can this be agreed to by the parties?

This is not generally found in the United States. However, the general concept is more commonly addressed through a negotiated set of relief events forming the basis for compensation to the private party. We are not aware of a specific rebalancing requirement included in a PPP statute.

Liens laws

Are statutory lien laws applicable to construction work performed in connection with a PPP agreement?

Statutory lien laws are not necessarily overridden by PPP statutes, and therefore would be applicable to any work performed in connection with a PPP agreement. However, it must be noted that, to the extent that the asset on which work is performed is the property of the state, different rules may apply to such liens.

Other relevant provisions

Are there any other material provisions related to design and construction work that PPP agreements must address?

Different states may have different degrees of requirements related to the provision of construction bonds or other forms of performance assurance. Some PPP statutes override those requirements generally applicable to public contracts. However, in some states (or in states without a PPP statute), the generally applicable requirements may be applicable to PPP agreements, which may result in a significant financial cost.

Operation and maintenance

Performance obligations

Are private parties’ obligations during the operating period required to be defined in detail or may the PPP agreement set forth performance criteria?

There is no mandatory uniform treatment across states. In recently closed projects and projects that are currently in the procurement stage, a mixed approach of detailed obligations and performance criteria is being used.

Failure to maintain

Are liquidated damages payable, or are deductions from availability payments possible, for the private party’s failure to operate and maintain the facility as agreed?

There is generally no specific regime of liquidated damages or deductions in PPP statutes; they are determined on a case-by-case basis. As availability payment projects have become the most common model in use, it has become more common for PPP agreements to include a deduction regime.

Refurbishment of vacated facilities

Are there any legal or customary requirements that facilities be refurbished before they are handed back to the government party at the end of the term?

There is no particular legal requirement regarding the degree to which facilities must be refurbished before they are handed back to the government party. Recently closed projects and projects currently in procurement include handback requirements to varying degrees. In some cases, such handback requirements include the establishment of a reserve account, funded from payments received by the project company, starting a number of years before the end of term, which must be handed (in whole or in part) to the government in case the scheduled refurbishment of the project is not performed to the required level.

Risk allocation

Delay

How is the risk of delays in commercial or financial closing customarily allocated between the parties?

This varies from project to project. The project company typically is not excused from achieving commercial close, unless the state authority has failed to satisfy its obligations, including obtaining authorisations allocated to it. To the extent that a delay in financial close is not because of the project company (including, for example, trying to renegotiate the terms included in the financing term sheet used for the procurement of the PPP agreement, failing to obtain required approvals assumed by the project company, etc), some states have agreed to take on the risk of timely financial close by agreeing to cover differences in margin or interest rates assumed in the applicable financial model.

How is the risk of delay in obtaining the necessary permits customarily allocated between the parties?

If responsibility for the acquisition of the permit was allocated to the government party (which is typically limited to major environmental authorisations), a delay in obtaining such a permit typically entitles the private party to relief in the form of an extension of the time to perform its obligations. In some cases, the private party assumes the obligation to continue the approval process for some approvals initiated by the government party, and, in such cases, the private party then assumes the risk of timely issuance of such approvals.

Force majeure

How are force majeure and geotechnical, environmental and weather risks customarily allocated between the parties? Is force majeure treated as a general concept relating to acts outside the parties’ control or is it defined with reference to specific enumerated events?

In different jurisdictions within the United States, and at different times, PPP agreements have included a force majeure concept that is treated both as a general concept relating to acts outside the parties’ control and a list of specific enumerated events that have satisfied the typical concept of force majeure. Occurrence of a force majeure event typically entitles the private party to relief in the form of an extension of the time to perform its obligations, but not additional economic compensation. Weather conditions are usually covered by the concept of force majeure in those cases in which the private party is entitled to relief.

Discovery of geotechnical circumstances that were not shown in the reference information provided by the government party, or that could not be expected or learned after a reasonable investigation (the standard of which may vary from state to state), typically entitles the private party to relief in the form of an extension of time to perform its obligations and payment of additional compensation to cover for additional costs. A similar approach is usually followed for pre-existing environmental conditions and third-party release of hazardous substances, but the calculation of the compensation for additional costs arising from these circumstances in some cases is different.

Third party risk

How is risk for acts of third parties customarily allocated between parties to a PPP agreement?

Depending on the type of project, the government party typically assumes responsibility for some matters, such as access rights to real estate property or the performance of work by other contractors. However, PPP agreements sometimes make the private party responsible for obtaining some access rights or cooperation from third parties (including in connection with additional property (not originally contemplated for the project)). To the extent that the government party has assumed such a responsibility, any failure to provide access, lack of cooperation or failure to perform by third parties typically entitles the private party to relief, including in the form of economic compensation or extensions to the schedule.

Political, legal and macroeconomic risks

How are political, legal and macroeconomic risks customarily allocated between the parties? What protection is afforded to the private party against discriminatory change of law or regulation?

Risk of political actions (including discriminatory changes in laws and regulation) that occur because of the government of the state to which the government party to the PPP agreement belongs is assumed by the government party. The occurrence of such events typically entitles the private party to extension of time and economic compensation for additional costs. However, in the case of non-discriminatory actions by the state, the economic downside is shared between the state and the private party to varying levels.

Mitigating events

What events entitle the private party to extensions of time to perform its obligations?

See questions 33 to 37.

What events entitle the private party to additional compensation?

See questions 33 to 37.

Compensation

How is compensation calculated and paid?

The calculation of compensation is determined on a case-by-case basis by the PPP agreement, and to a large extent is dependent on the model of PPP used. In revenue risk projects, it is customary to see an allowance for increase in tolls or extensions of the term of the PPP agreement. In availability payment transactions, it is customary to find increases in the availability payment. In both cases, it is common to find an obligation to pay a lump sum by the government party, which, in some cases, is intended to restore the private party to the situation it would have been in but for the occurrence of the relief event, and in other cases, it is intended to restore the private party to the situation it projected in the financial model used for commercial close (in some cases as updated from time to time).

Insurance

Are there any legal or customary requirements for project agreements to specify a programme of insurance? Which party mandatorily or customarily bears the risk of insurance becoming unavailable on commercially reasonable terms?

Customarily, PPP agreements include a programme of insurance that each party must carry. Typically, unavailability on commercially reasonable terms entitles the party obliged to maintain the affected insurance to some form of relief, which may take different forms on a case-by-case basis.

Default and termination

Remedies

What remedies are available to the government party for breach by the private party?

Typically, PPP agreements in the United States allow the government party to collect liquidated damages or apply deductions on the payments due to the private party. To the extent of repeated or material breaches, the government party typically may terminate the PPP agreement. Additionally, the government party has the right to order the suspension of work, to enter into the site and correct any wrongful use or to step-in and perform actions that the project company fails to perform.

Termination

On what grounds may the PPP agreement be terminated?

This varies on a case-by-case basis, but some of the most common termination events that are included in PPP agreements include material or repeated breach (including violations of laws and governmental approvals), abandonment of the project, failure to achieve substantial completion by a certain longstop date, insolvency of the project company or, while its equity commitments remain outstanding, of an equity member, and changes of control.

Is there a possibility of termination for convenience?

PPP agreements in the United States typically provide for termination for convenience, subject to payment of compensation.

If the PPP agreement is terminated, is compensation available?

Customarily, compensation is available in the event of termination of the PPP agreement, including in the case of termination owing to default by the government party or the private party, convenience and extended relief events. Depending on the cause of termination, the termination payment typically includes a combination of amounts due to lenders and, as long as termination is not owing to default by the private party, a component to compensate the private party for its equity in the project. Most commonly, the calculation of the portion of the termination payment that corresponds to the private party involves a determination of the present value of the amounts that the private party was projected to receive during the remaining time of the agreement or a fair market value calculation, depending on the PPP model used for the particular project.

Financing

Government financing

Does the government provide debt financing or guarantees for PPP projects? On what terms? Which agencies are responsible?

States may have different incentive programmes that can apply to different projects. However, the most common debt financing and guarantee programmes for PPP projects are the TIFIA, RRIF, WIFIA and INFRA federal programmes described in question 5. In addition, states and their instrumentalities sometimes agree to issue private activity bonds (a type of tax-exempt bond), and on-lend the proceeds for such an issuance to the project company, to be used for the construction of the relevant PPP project.

Privity of contract

Are lenders afforded privity of contract with the government party through direct agreements or similar mechanisms? What rights will lenders typically have under these agreements?

Typically, PPP agreements in the United States provide for lender rights, naming such lenders as third-party beneficiaries. In addition, it is common for the procuring authority to enter into direct agreements with lenders. These rights typically include the right to cure defaults by the project company, or step into the stead of the project company.

Step-in rights

Is there a mechanism under which lenders may exercise step-in rights or take over the PPP project? Are lenders able to obtain a security interest in the PPP agreement itself?

Lenders regularly obtain a security interest in the PPP agreement itself, and are actually entitled to step into the stead of the project company themselves or through a party appointed by them, which must satisfy certain criteria set forth in the PPP agreement.

Cure rights

Are lenders expressly afforded cure rights beyond those available to the project company or are they permitted to cure only during the same period and under the same conditions as the project company?

This has varied from project to project, depending, in particular, on the jurisdiction procuring the project. In some cases, the cure period is in addition to the cure period of the project company, and in others, the lenders are afforded only the same period as the project company.

Refinancing

If the private party refinances the PPP project at a lower cost of funds, is there any requirement that the gains from such refinancing be shared with the government? Are there any restrictions on refinancing?

This term is not necessarily addressed by PPP statutes. However, PPP agreements that have recently achieved commercial close, or that are currently in the procurement stage, have included an obligation to share any refinancing gain, or even give it all up.

Governing law and dispute resolution

Local law governance

What key project agreements must be governed by local law?

Several jurisdictions deem construction agreement terms to be matters of public order. As such, construction contracts may be required to be governed by the law of the state where the project is located.

Government immunity

Under local law, what immunities does the government party enjoy in PPP transactions? Which of these immunities can be waived by the government?

Generally, states have adopted sovereign claim acts that allow for the state to be sued for liability subject to the satisfaction of certain procedural formalities, in some cases having to prosecute the claim before specific (in some cases, special) courts. However, the scope of immunities that states have retained varies from state to state, and may include immunity from exemplary or punitive damages.

Availability of arbitration

Is arbitration available to settle disputes under the project agreement between the government and the private party? If not, what regime applies?

Arbitration is generally available for the resolution of disputes. Some PPP statutes expressly provide that the granting authority may submit disputes to arbitration. However, many states have been reticent to accept binding arbitration, making PPP agreements subject to the jurisdiction of local courts. Some states have accepted the inclusion of non-binding arbitration clauses into their PPP agreements, where the state has the option to remove an action and have it heard by a court or reject the award and have the dispute further resolved by a competent court.

Alternative dispute resolution

Is there a requirement to enter into mediation or other preliminary dispute resolution procedures as a condition to seeking arbitration or other binding resolution?

There is no specific approach that can be deemed uniform throughout jurisdictions in the United States. This has varied from project to project, but it is common to find PPP agreements providing for the requirement of engaging in prior negotiations or mediation as a condition for submitting a dispute for binding determination by an arbitrator or court.

Special mechanisms

Is there a special mechanism to deal with technical disputes?

PPP agreements generally include mechanisms to deal with technical disputes through determination by technical experts. However, there is no particular mechanism that is uniform throughout jurisdictions.

Updates and trends

We continue to see the most US PPP activity in the transportation infrastructure sector, and there is growing interest in applying the PPP model to the social infrastructure sector. The LaGuardia Airport Central Terminal Building (CTB) project and the Maryland Purple Line light rail transit project were both long-awaited, marquee transportation infrastructure projects that achieved financial close in 2016. The University of California Merced Campus Expansion also achieved financial close in 2016, and will test the viability of the PPP model for delivering social infrastructure projects.

We have also seen a notable increase in the airport sector, notwithstanding the limitations in the Federal Aviation Administration’s (FAA) airport privatisation pilot programme that have hindered PPPs at US airports. Financial close for the Denver International Airport Great Hall project and for the Los Angeles International Airport’s Automated People Mover PPP project was achieved in 2017 and 2018, respectively, Indianapolis International Airport tendered a storm and waste water treatment PPP in 2016, and the Illinois Department of Transportation is currently evaluating a PPP structure to develop, finance, operate and maintain a new South Suburban Airport. In addition to the LaGuardia CTB project, the Port Authority of New York and New Jersey is pursuing the redevelopment of Terminal A at Newark Airport through a modified PPP structure, which will involve multiple separate contracts for different aspects of the project, and the redevelopment of Terminals C and D at LaGuardia Airport, largely from private-sector investment.

In terms of procurement structure, one trend we are seeing is the ‘beauty contest’ procurement. In these procurements, the shortlisted bidders are asked to submit indicative proposals for a conceptual project, instead of a substantively complete concession, and the procuring authority will pick the team that it wants to directly negotiate the detailed terms and provisions of the project. Essentially, the preferred proponent wins a pre-development agreement and the right to negotiate the project with the procuring authority. Both the Indianapolis International Airport waste water project and the Denver Airport Great Hall project were procured on this basis, and it is expected that the newly announced South Suburban Airport in Illinois will also be procured this way.

Broadband network PPP projects is a new category that has attracted particular interest in the past few years. Starting with Kentucky’s KentuckyWired project, which achieved commercial close in 2015 and was the result of an unsolicited bid, several broadband projects have come to market in the past three years. Currently, there are more than half-a-dozen projects in procurement process or about to start their procurement process, including proposed projects by the Pennsylvania Turnpike, Riverside County and City of San Francisco in California, the Georgia Department of Transportation and Oakland County, Michigan. Each of these projects seeks to implement the PPP model to either use and improve existing assets or build completely new networks that will serve the needs of the procurement authority (in some cases allowing incremental capacity to be used and marketed by the concession company) or create public access networks. The diversity in the scope of works and services to be provided, assets being allocated and goals pursued make it interesting to follow and see if and in which cases the PPP model will prove adequate for this type of infrastructure.

The current Trump administration has put forward a plan to invest up to $200 billion dollars in federal funds in infrastructure with the goal of stimulating at least $1.3 trillion dollars in new investment by states, local government and private investors over the next 10 years. A number of practical questions have been raised about the plan, and in any event, it is considered unlikely that Congress will implement it. Therefore, it is unclear whether existing incentives will continue in the longer term and what if any new incentives will be put in place. In the current market, TIFIA funding remains vitally important and, historically, the TIFIA Joint Programme Office (JPO) (the office at the US Department of Transport that administered the programme) worked hard to ensure a level playing field among all bidders for any project eligible for TIFIA financing. It is worth noting that the administration of the TIFIA loan programme has now been consolidated under the new Build America Bureau with other loan and grant programmes, namely the RRIF loan programme, Private Activity Bonds (PABs) and INFRA grant programme under a single agency. The hope is that by consolidating these programmes in a single office, federal resources will be deployed more effectively.

Debevoise & Plimpton LLP

by Armando Rivera Jacobo and Ivan E Mattei

USA March 26 2019

“The Budget devolves responsibility to State and local governments, which are better positioned to assess local community needs and address unique market challenges.” – The President’s budget proposal for fiscal year 2020, explaining the proposed elimination of the Community Development Block Grant and HOME Investment Partnership programs for the third straight year.

The administration’s budget proposal for FY20 begins with a message touting an “unprecedented”, two-year economic boom that has, among other things, resulted in the creation of five million new jobs. For the administration, this means now is a good time for Congress to bring federal spending and debt “under control”.

The president’s budget proposes to bring spending and debt under control through drastic cuts to safety net programs, including food stamps, Medicaid and Medicare. The proposal also looks to eliminate programs that expand economic opportunity and mobility, including Community Development Block Grants, Economic Development Grants, Community Services Block Grants, Social Services Block Grants, 21st Century Community Learning Centers, and the Weatherization Assistance Program.

For cities, towns, and villages, the 35-day partial government shutdown was a disturbing period of uncertainty that spurred local leaders into action to minimize impacts on vulnerable residents. According to the Congressional Budget Office, the overall economy lost $11 billion during the shutdown. Individual cities have also calculated local economic losses and have adjusted budget and revenue projections accordingly.

The cost of emergency measures and economic losses associated with the shutdown exposed a growing number of fiscal headwinds that would make it difficult, if not impossible, for cities to make up for the cuts proposed by the administration. Among them:

• Local tax revenue is slowing down. NLC’s 2018 City Fiscal Conditions survey indicates that local tax revenue growth is experiencing a year-over-year slowdown, with growth in service costs and other expenditures outpacing it. This suggests that many cities may be approaching the limits of their current period of fiscal expansion.
• Federal funding for domestic discretionary programs is already historically low. According to a report from the Center on Budget and Policy Priorities, funding for federal programs (other than Social Security and Medicare) is historically low as a percent of GDP – and it is projected to fall further. Funding for domestic discretionary programs, which includes grants to cities and towns, has been limited since 2011 by the Budget Control Act (BCA) that mandates sequestration if Congress is unable to reach pass higher spending caps.
• States continue to preempt local authority. NLC’s report, City Rights in an Era of Preemption: A State-by-State Analysis, shows that 42 states have enacted tax and expenditure limitations on local governments. State preemptions created additional uncertainty during the partial government shutdown and have created additional obstacles to raising revenue or spending at the local level to make up for significant losses at the federal level.
• New Limits on the State and Local Tax Deduction. The new $10,000 cap on state and local tax deductions, enacted under recent federal tax reform legislation, will hit nearly 11 million taxpayers nationwide this year, according to a report by the Treasury Department. Treasury estimates the cap will prevent those 11 million taxpayers from deducting $323 billion in state and local tax payments from their federal tax returns, which takes money out of local economies.
• Advance Refunding Bonds Eliminated.  That same tax reform bill exposed that cities’ fiscal vulnerabilities are larger than federal budget and appropriations decisions. The bill eliminated advance refunding municipal bonds, a valuable cost-saving tool for municipalities that allowed municipal debt to be refinanced at lower interest rates. Earlier iterations of the legislation even threatened private activity bonds, which put billions in municipal market savings at risk. NLC research shows that 61% of city finance officers think the loss of tax-exempt advance refunding bonds will negatively impact their city’s ability to meet financial needs.

Add to these headwinds that municipal governments are generally required to balance their budgets and cannot resort to deficit spending of the sort that the federal government relies on, and it becomes clear how unprepared states and cities are for the kind of wholesale devolution of responsibilities proposed by the administration.

NLC is again tracking funding for city priorities throughout the federal budget and appropriations process at www.nlc.org/budget. A breakdown of proposed funding for individual programs is available at the link.

National League of Cities

By Michael Wallace

March 25, 2019