• GASB Establishes New Implementation Guidance to Assist Stakeholders with Recent Pronouncements.
• Custodial Receipts: A Useful Tool for Restructuring Insured Municipal Bonds.
• The Week in Public Finance: Governments Haven’t Had Rules for Revealing Their Private Debt — Until Now.
• Banking Bill Expected to Help Lower State and Local Borrowing Costs.
• Better Disclosure Is One Florida Issuer’s Path to Lower Borrowing Costs.
• Three Sneaky Ways Brokers or Dealers Can Take Advantage of Bond Transactions.
• Fitch: Build IL Downgrade Contrasts State/Local Dedicated Tax Approach.
• A Narrow Win for Bondholders Still Sets an Ominous Precedent in Illinois.
• BDA’s 10th Annual National Fixed Income Conference is Open for Registration.
• And finally, James Madison, I Need a Hug is brought to us this week by Manley v. Law, in which the Federal  Court of Appeals had to gently break it to a school board member that she did not have a “protected liberty interest in her emotional well-being upon which she could base her procedural due process claim.”  While we do not recall this particular issue arising in Con Law, that is almost certainly due to the fact that this is simply the first incident in which the government has failed to tend to the emotional well-being of (3/5 of) its citizens.  Surely no group has been treated as insensitively as school board members who have been publicly shamed for “accosting a student outside a high school play.” Surely.

 

Billboard owner, which had rebuilt billboard that was blown over in a windstorm, filed petition for writ of mandate to challenge citation issued by County Department of Regional Planning for violation of county zoning ordinances.

The Superior Court denied the petition, and billboard owner appealed.

The Court of Appeal held that:

• Reconstruction did not constitute “customary maintenance” under the Outdoor Advertising Act;
• Advertising display was completely destroyed in windstorm such that billboard was not eligible for customary maintenance and its re-erection was a placement of a billboard; and
• Billboard did not fall within county ordinance allowing restoration of a “damaged or partially destroyed” nonconforming structure.

Reconstruction of non-conforming billboard which was blown down by wind did not actively maintain its display in its existing approved physical configuration and size dimensions, and therefore did not constitute “customary maintenance” under the Outdoor Advertising Act; reconstructed billboard had a smaller wood surface face, reconstruction added an electrical box as well as new lateral supports and a new catwalk, and billboard repairs were not incidental, but rather owner essentially replaced and upgraded the entire display mounted on the posts.

Billboard’s advertising display was completely destroyed in windstorm such that it was not eligible for customary maintenance and its re-erection was a “placement of a billboard” under the Outdoor Advertising Act, even if some of the support poles did not fall over in the windstorm, where owner replaced the entire advertising display mounted on the posts.

Billboard blown over in windstorm was totally destroyed and thus did not fall within county ordinance allowing restoration of a “damaged or partially destroyed” nonconforming structure, where billboard could no longer function in any way as an advertising surface, billboard was unrecognizable after the windstorm and consisted only of some remaining “telephone posts” and “lateral boards,” there was no message for the motoring public to see, and billboard owner had to replace entire advertising display mounted on the posts.

Property owners and operator of sand and gravel mine on their property brought action alleging that county and county officials revoked owners’ right to continuing mining on their property in violation of their procedural and due process rights, and retaliated against them by dramatically increasing financial deposit necessary to continue operating mine after they filed case.

After jury verdict in plaintiffs’ favor, defendants filed renewed motion for judgment as matter of law and, in alternative, for new trial.

The District Court held that:

• Defendants waived claim that plaintiffs lacked any cognizable due process liberty interest;
• Substantial evidence supported jury’s determination that owners had due process property interest in continuing to conduct mining operations on their property;
• Clear weight of evidence supported jury’s conclusion that plaintiffs had due process liberty interests in pursuing their chosen occupations;
• Substantial evidence supported and clear weight of evidence was not against jury’s finding that plaintiffs had vested right to mine entire tract;
• There was sufficient evidence to support jury’s determination that county officials acted with improper motive;
• Substantial evidence supported jury’s finding that plaintiffs experienced complete deprivation of their substantive due process rights;
• Jury’s damages award of $105 million was not excessive;
• Evidence supported jury’s finding that officials violated plaintiffs’ procedural due process rights;
• There was sufficient evidence to support jury’s finding that county retaliated against owners for filing suit;
• Member of county board of supervisors was not entitled to legislative immunity;
• Issue of whether officials were entitled to qualified immunity was for jury; and
• Substantial evidence supported jury’s punitive damages awards.

Owners of beachfront property brought § a 1983 action against city, alleging that city encouraged and invited access to property by the general public, causing an illegal seizure in violation of their Fourth Amendment rights, and a taking without just compensation in violation of the state constitution.

The United States District Court denied city’s motion for judgment as a matter of law, and subsequently entered judgment on the jury verdict, and awarded $1,489,700 in damages. City appealed.

The Court of Appeals held that:

• Evidence was sufficient to support takings claim, under Florida law, and
• City was not entitled to transfer of fee title to beachfront property.

Evidence was sufficient to prove that city encouraged and invited access and use by the general public of owners’ beachfront property, supporting judgment in favor of owners, in takings claim against city, under Florida law; the testimony and other evidence presented showed that the city placed beach access signs, cleared vegetation around the parcel, created nearby parking spaces, hosted events at the property, and refused to remove trespassers from the property.

City was not entitled to transfer of fee title to beachfront property, upon jury verdict in favor of property owners and award of damages in the amount of $1,489,700, in takings claim against city, under Florida law; jury did not find that city had affected a physical taking of the entire beachfront parcel, but that the city’s actions in encouraging general public access gave members of the public a permanent and continuous right to pass across the parcel, which was in the nature of an easement, and the damages award was based on appraisal which determined the loss of the value to the owners’ property as a result of the easement-type taking.

City brought action for declaratory relief against home developer and homeowners’ association, seeking declaration that parties’ impact fee agreement and parks dedication agreement were valid and enforceable.

After developer and homeowners’ association amended their original answer and conceded validity of agreements, the District Court entered order declaring that agreements were valid and enforceable. Parties then filed cross-motions for summary judgment regarding amount of public access space developer and homeowners’ association were responsible for under parks dedication agreement. The District Court ultimately ordered developer and homeowners’ association to designate 12.8 acres of land as public access space and ruled that they were obligated to provide financial guarantee, if necessary, and found city to be the prevailing party and awarded city $28,048.17 in attorney fees. Developer and homeowners’ association appealed, and city cross-appealed.

The Supreme Court of Idaho held that:

• Trial court did not abuse its discretion by considering declaratory judgment in determining that city was prevailing party for purposes of rule providing that prevailing party was entitled to costs;
• Trial court did not abuse its discretion by failing to consider impact fees that city returned to developer and association when determining that city was prevailing party for purposes of rule entitling prevailing party to costs;
• Trial court did not abuse its discretion by failing to consider that developer and association were four separate entities when determining which party was prevailing party for purposes of rule entitling prevailing party to costs;
• Trial court’s error, if any, in failing to consider that developer and association were four separate business entities was invited;
• Trial court did not clearly err by determining that judgment was entered on date when clerk placed filing stamp on judgment, not on date when judge signed judgment;
• Trial court did not clearly err by determining that city’s petition for attorney fees and costs was served on date listed on certificate of service; and
• Trial court did not abuse its discretion by awarding city attorney fees.

School board member and her husband brought § 1983 action in state court against school district and district superintendent, alleging their handling of investigation of board member’s alleged bullying of student and their public criticism of board member violated her due process rights.

Defendants removed action to federal court. The United States District Court granted summary judgment to district and superintendent. Board member appealed.

The Court of Appeals held that:

• There is no liberty interest, protected by the Due Process Clause, in a feeling that the government has dealt with an individual fairly;
• Board member did not have a protected liberty interest in her emotional well-being upon which she could base her procedural due process claim; and
• District’s and superintendent’s alleged failure to follow school board policy and state procedural law in investigating board member did not constitute a denial of any constitutionally protected liberty interest.

Developers brought action seeking declaration that water and sewer impact fee ordinances adopted by city exceeded city’s municipal authority under Public Enterprise Statutes.

The Superior Court granted summary judgment in favor of city. Developers appealed. The Court of Appeals affirmed. Developers sought discretionary review, which was granted. The Supreme Court reversed and remanded. On remand, the Court of Appeals, 795 S.E.2d 436, reversed and remanded to trial court on statute of limitations grounds. Town sought discretionary review, which was granted.

The Supreme Court of North Carolina held that:

• Claims accrued at time of fee payments rather than on effective date of ordinances;
• Three-year statute of limitation for a “liability created by statute, either state of federal,” applied, overruling Point South Properties LLC v. Cape Fear Public Utility Authority, 243 N.C. App. 508, 778 S.E.2d 284; and
• Doctrine of estoppel by the acceptance of benefits did not bar developers’ claims.

Developers, who claimed that water and sewer impact fee ordinances adopted by city exceeded city’s municipal authority and sought to recover fees, sustained injury when they were required to make impact fee payments for development approvals, rather than when impact fee ordinances were adopted, and thus claims accrued at time of fee payments rather than on effective date of ordinances.

Three-year statute of limitation for a “liability created by statute, either state of federal,” applied to developer’s action seeking declaration that water and sewer impact fee ordinances adopted by city exceeded city’s municipal authority and seeking to recover fees; overruling Point South Properties LLC v. Cape Fear Public Utility Authority, 243 N.C. App. 508, 778 S.E.2d 284.

Doctrine of estoppel by the acceptance of benefits did not bar developers’ claim that water and sewer impact fee ordinances adopted by city exceeded city’s municipal authority and seeking to recover fees; developers did not receive any benefit from the payment of the challenged water and sewer impact fees that they would not have otherwise been entitled to receive, and developers’ only alternatives were to either pay the fees or to discontinue development business.

Department of Transportation (DOT) initiated quick-take eminent domain proceeding.

Following trial, the District Court entered judgment on jury verdict awarding landowner severance damages in excess of amount deposited by DOT as well as attorney’s fees and costs. Landowner appealed award of fees and costs.

The Supreme Court of North Dakota held that:

• Court is not limited to awarding fees for only a single attorney;
• Court’s explanation for drastically reducing first attorney’s requested
  fees was inadequate;
• Court adequately explained reason for reducing second attorney’s fee request;
• Court adequately stated reasons for awarding landowner $5,625 for expert’s appraisal;
• Court acted arbitrarily by failing to consider expert appraiser’s review of DOT appraisal; and
• Landowner could recover costs which expert appraiser incurred in preparing for and attending DOT’s deposition.

Mortgagee, construction company, and other interested parties brought civil actions, in which city later intervened, as a result of the failure of a mixed-use development whose owner later pleaded guilty to criminal charges.

After consolidation of the cases and the appointment of a receiver, the Court of Common Pleas issued a determination of the priority of liens. Mortgagee and construction company appealed. The Court of Appeals affirmed in part, reversed in part, and remanded. On remand, the Court of Common Pleas entered summary judgment that mortgage on one of the five parcels that composed the development was a valid lien and that construction company’s mechanics’ liens were invalid, then later determined that city’s special assessment was not a valid lien, denied construction company’s supplemental motion for summary judgment as to the validity of company’s judgment lien, and made determinations relating to the distribution of receivership assets. City, mortgagee, and construction company appealed.

On reconsideration, the Court of Appeals held that:

• City substantially complied with requirements to levy a special assessment on the development; but
  Trial court had authority to authorize the sale of the development free and clear of the city’s lien by special assessment; but
• City’s special-assessment lien had priority over other liens, except for the 10% secured-creditor allocation set up for the benefit of the receivership; but
• City was not entitled to collect legal fees, engineering fees, other professional fees, and miscellaneous expenses associated with its special-assessment lien;
• Legal description in mortgage on parcel in development was sufficient to provide constructive notice to construction company; and
• Trial court abused its discretion by ordering receiver to distribute to unsecured creditors any remaining funds in secured-creditor allocation account.

City substantially complied with requirements to levy a special assessment on failed mixed-use development, and thus any issues with compliance did not constitute a reason to hold the assessment invalid, despite argument that city began work on the project prior to the passage of the special assessment; then-owners petitioned the city to make the special assessment, then-owners knowingly waived defects and irregularities, and subsequent owners benefited from the improvements to the land.

Trial court had authority to authorize the sale of the failed mixed-use development free and clear of the city’s lien by special assessment, where the total amount owed on the mortgages and liens on the development exceeded the value of the properties that composed it as estimated before the sale, and where the trial court determined that a sale of the properties other than one free and clear of liens, claims, and encumbrances would have adversely affected the receivership estate and would have been substantially less benefit to the receivership estate.

City’s special-assessment lien had priority over other lienholders as to failed mixed-use development, except for the 10% secured-creditor allocation set up for the benefit of the receivership, despite mortgagee’s argument that the city began construction on the development before the city passed an ordinance to proceed; only a fraction of work had been done on the project before the city passed its resolution and ordinance to proceed.

City was not entitled to collect legal fees, engineering fees, other professional fees, and miscellaneous expenses associated with its special-assessment lien on a failed mixed-use development, even though the fees may have been part of the project-development agreement where such fees were not included in city’s ordinance nor certified to the county auditor for collection.

Legal description in mortgage on parcel in a mixed-use development was sufficient to provide constructive notice to construction company that recorded a mechanic’s lien against the parcel, as would support finding that mortgagee’s lien had a higher priority than company’s mechanics’ lien, even though construction company might not have had a legal obligation to do a title search; title agent found that mortgage’s legal description for the parcel ended abruptly at a semicolon, and agent also noted that the description’s missing portions were along dedicated public roadways whose boundaries could be determined by other instruments of record.

Trial court abused its discretion by ordering receiver to distribute to unsecured creditors any remaining funds in secured-creditor allocation account from the proceeds from the sale of a failed mixed-use development, even though the remaining balance in the account was minimal; funds placed in the account were derived directly from the assets of each secured claim, and secured creditors had vested rights in the balance of the account by operation of law.

Minor student and his parents brought action against county school district and school district employees, alleging that employees had committed various torts, including negligence, battery, child endangerment, civil trespass, assault, false reporting, and intentional infliction of emotional distress, that school district was liable for employees’ actions under doctrine of respondeat superior, and that school district also committed direct acts of negligence.

The District Court found that school district and employees were immune from suit under the Wyoming Governmental Claims Act and granted school district’s and employees’ motion to dismiss with prejudice. Parents and student appealed.

The Supreme Court of Wyoming held that:

• Student and his parents failed to allege that employees were acting outside scope of their duties, as was required for student and parents to allege that employees and school district were not entitled to immunity under Act, and
• Supreme Court would reject student’s and parents’ argument that Court, in determining whether school district and employees were entitled to immunity under Act, should balance respective equities and recognize exception to immunity for violations of school policy and/or criminal conduct.

(Reuters) – Washington, D.C.’s airports authority will lead a holiday-shortened week in the U.S. municipal bond market, issuing $578 million in refunding bonds as it forges on with capital projects at the region’s two main airports.

City and state government agencies will borrow $3.41 billion in bonds and another $464 million in notes next week, with markets closed on Monday for Memorial Day. Municipal bond issuance has been slow this year as a result of U.S. President Donald Trump’s tax overhaul.

The Metropolitan Washington Airports Authority manages Reagan National Airport and Dulles International Airport, which cover a total of nearly 13,000 acres in northern Virginia. The bonds, underwritten by Barclays, will help fund a new regional airline concourse and parking garage at Reagan, and infrastructure improvements at Dulles, according to bond documents.

The South Carolina Ports Authority will issue $325 million in negotiated revenue bonds next week, underwritten by Bank of America Merrill Lynch, while the biggest note issuance will come from the New York City Transitional Finance Authority, a $100 million negotiated offer underwritten by Jefferies.

With muni issuance low and banks trimming municipal holdings, Trump on Thursday signed legislation that reclassifies investment-grade municipal bonds as high-quality liquid assets (HQLA).

The law means banks can hold muni bonds as part of their liquidity requirements, potentially making those bonds more attractive.

Public officials say the long-awaited move will help lower financing costs on infrastructure projects nationwide, but some analysts aren’t so sure.

“Lawmakers have taken concrete action to … better position states to invest in infrastructure projects at the state and local level,” said Beth Pearce, Vermont’s state treasurer and president of the National Association of State Treasurers.

But Barclays analyst Mikhail Foux said in a Friday note that the move, while a positive development for the municipal market, is “unlikely to preclude banks from trimming their municipal holdings.”

“At this point, we believe that HQLA is less important to banks, as most have [liquidity coverage] ratios well above 100 percent,” Foux said.

Reporting by Nick Brown; Editing by Paul Simao

MAY 25, 2018

A new requirement forces states and municipalities to annually report the terms and amount of loans they have taken directly from banks. It’s a growing source of financing for many public entities.

A new rule is going into effect next month that many believe will shed light on a controversial spending area for state and local governments: how much they owe banks for private loans.

The rule, issued by the Governmental Accounting Standards Board (GASB), lays out standards for reporting these loans in government financial reports. Unlike public debt — which is issued through the municipal bond market and subject to regular disclosure requirements — disclosures about direct loans from banks are not regulated. So, up until now, governments revealed as much — or as little — as they wanted about their private debt.

The lack of continuity has been a source of growing frustration, particularly as governments’ private debt rolls have ballooned. Since 2009, banks have more than doubled their municipal holdings to $536 billion in securities and loans.

Continue reading.

GOVERNING.COM

BY LIZ FARMER | MAY 25, 2018

Attend this two-day conference to learn more about building and leading resilient communities and GFOA’s new Financial Sustainability Framework….

Click here to learn more and to register.

GFOA facilitates networking groups that meet periodically throughout the year. Meetings are open to all GFOA members.

Click here to learn more.

Author: Shayne Kavanagh Vincent Reitano
Year: 2018

Citizens’ trust in government is vital to the functioning of a democratic system. Transparency is one way in which governments can build trust. However, “transparency” does not mean just making financial data available to those who have an interest in it. In fact, psychological research suggests that people do not rely solely or even primarily on logic and reason to form judgements, such as trust. Hence, governments must go beyond open and accessible data strategies in order to build trust. There are costs associated with transparency. These range from time and money spent on transparency initiatives to less obvious concerns about unintended consequences, like misunderstandings about what data means and giving too much access to special interest groups. Thus, the future of government may not necessarily lie in more transparency, but rather in smarter transparency that:

• Shows that the values government operates by are the same core values held by its citizens;
• Demonstrates that government officials care about citizens’ well-being and acting fairly; and
• Provides information on government performance with enough context for citizens to evaluate the quality of government’s work.

Download

Government Finance Officers of America

Norwalk, CT—May 23, 2018 — The Financial Accounting Foundation (FAF) today posted its 2017 Annual Report to the FAF website. The report is available in print, PDF, and interactive digital versions.

The theme of the annual report is “Standards That Work.” It focuses on how the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) ensure standards work for all stakeholders—a process that begins before a project is added to the agenda and continues after a final standard is issued. Additionally, it highlights how the FAF participates by supporting the Boards and the standard-setting process.

The 2017 Annual Report includes:

• Letters from FASB, GASB, and FAF leaders
• Infographic snapshots of 2017 outreach and other activities that contribute to making standards work, and
• Complete 2017 management’s discussion and analysis and audited financial statements (previously posted to the FAF website).

The interactive, mobile-friendly version of the annual report also features new videos and complete lists of all FASB and GASB advisory group members, including the Emerging Issues Task Force and the Private Company Council.

About the Financial Accounting Foundation

Established in 1972, the Financial Accounting Foundation (FAF) is the independent, private-sector, not-for-profit organization based in Norwalk, Connecticut responsible for the oversight, administration, financing, and appointment of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). The FASB and GASB establish and improve financial accounting and reporting standards—known as Generally Accepted Accounting Principles, or GAAP—for public and private companies, not-for-profit organizations, and state and local governments in the United States. For more information, visit www.accountingfoundation.org.

Norwalk, CT, May 21, 2018 — The Governmental Accounting Standards Board (GASB) today issued implementation guidance containing questions and answers intended to clarify, explain, or elaborate on certain GASB Statements.

Implementation Guide No. 2018-1, Implementation Guidance Update–2018, addresses new questions about application of the Board’s standards on pensions, other postemployment benefits, the statistical section, regulatory reporting, and tax abatement disclosures. The Implementation Guide also includes amendments to previously issued implementation guidance on relevant topics.

The requirements of Implementation Guide 2018-1 are effective for reporting periods beginning after June 15, 2018. The guide is available to download free of charge on the GASB website.

Fitch Ratings-New York-25 May 2018: Today’s Build Illinois downgrade highlights Fitch Ratings’ credit view that the framework for rating U.S. state dedicated tax bonds must differ from that for rating local government dedicated tax bonds because local government security structures fall under Chapter 9 of the U.S. Bankruptcy Code. In contrast, there is no bankruptcy framework for U.S. states, which means that evaluating the prospects for varying state security structures at a time of fiscal distress is by necessity somewhat judgmental.

The downgrade of Build Illinois sales tax revenue bonds reflects a change in Fitch’s criteria for rating U.S. state dedicated tax bonds. In the revised criteria, Fitch specified more limited situations in which a state dedicated tax security can be rated without regard to the state’s general credit quality. Additionally, the revised criteria include detail on circumstances in which a state dedicated tax security, while not considered distinct from the state’s Issuer Default Rating (IDR), can be treated as stronger than but still linked to the state’s general credit risk. Fitch determined that the structure of the Build Illinois bonds enhances the prospects for full and timely payment, allowing for a rating above the state’s IDR, but does not meet the revised criteria for rating without regard to the IDR. (For more information, see “Fitch Downgrades Illinois’ $2.5B Build Illinois Bonds to ‘A-‘; Outlook Negative” dated May 25, 2018.)

Fitch’s approach to rating dedicated tax bonds of U.S. local governments was unchanged in the revised criteria.

The automatic stay under Chapter 9 applies with few exceptions to all tax-backed debts issued by a local government. A local government security’s exposure to the government’s general credit risk is therefore predictable under the provisions of the Code. The pledged revenues are either subject to the automatic stay, and the dedicated tax rating is capped by the IDR, or they are not, allowing for a dedicated tax rating distinct from the local government’s IDR. Fitch does not ‘notch up’ from the IDR for local governments unless we can identify the likelihood of enhanced recovery prospects for bondholders, such as the presence of a statutory lien.

Both state and local dedicated tax bonds can be rated separately from and without regard to the IDR in limited situations in which Fitch believes that the nature of the dedicated revenue stream or the legal structure render remote the possibility of a successful impairment argument. For states, the security must be very clearly segregated from operations and have no nexus with general functions.

For local governments, Fitch’s criteria outline four exceptions where a dedicated tax bond of a local government can be rated above the government’s IDR: (1) bondholders are granted a lien on and pledge of revenue that Fitch concludes would be considered special revenues under Chapter 9 of the U.S. Bankruptcy Code; (2) the debt is issued pursuant to a specific state intercept program; (3) the debt is structured as a securitization specifically authorized by state law; or (4) Fitch can identify the likelihood of enhanced recovery prospects.

Contact:

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

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

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com

Additional information is available on www.fitchratings.com

• Competitive bond sales rise to 28 percent of the market
• Taxpayers get lower borrowing cost through bidding, states say

State and local governments are selling the greatest share of their bonds competitive bidding in more than two decades as issuers including New York and Rhode Island embrace auctions as a way to save taxpayers money and boost transparency.

Municipalities have sold $33 billion of municipal bonds this year through auctions, about 28 percent of total sales, instead of relying on underwriters picked in advance to set the interest rates and line up buyers. If that percentage holds for the rest of 2018, it would be the highest since 1994, according to The Bond Buyer Yearbook.

The shift comes as sales of new bonds have tumbled this year, leaving banks eager to bid on new deals, after Congress did away with tax-exempt debt sales for a popular refinancing tactic that governments often relied on underwriters to arrange. New York plans to sell at least half of its debt in the current fiscal year, or about $3.5 billion, on a competitive basis, according to the state’s capital program and financing plan released this month. Last year, the state auctioned off 79 percent of its debt, about $6.6 billion.

“New York is achieving lower interest and underwriting costs by doing about half our sales through the competitive marketplace, saving money for taxpayers,” said Morris Peters, a spokesman for the Division of the Budget. “The decision of whether to conduct a competitive sale reflects market conditions and the level of complexity, but even when we need bank expertise afforded by a negotiated sale, the benchmark set by competitive sales helps with the pricing.”

In a competitive sale an issuer offers its bonds for sale and banks bid against each other to purchase the securities at the lowest cost to the issuer. The bank assumes the risk that it might not be able to sell all the bonds it bought. In a negotiated sale, a municipality hires a pool of banks to find buyers, with interest rates set in discussions with those underwriters.

Last year, states and local governments sold about 24 percent through auction, their highest level since 2000. Bank of America Corp. is the top underwriter of competitive deals this year, winning more than a quarter of municipal bonds auctioned.

Debt issued by highly-rated municipalities, well-known issuers or with simple structures — such as bonds backed by a general pledge to pay or by utility revenues — are suitable for sale by auction, said Jonas Biery, business services manager at Portland, Oregon’s Bureau of Environmental Services and the chair of the Government Finance Officers Association’s debt committee.

By contrast, negotiated sales are suitable for lower-rated bonds, debt with unique security features and terms or securities sold by infrequent borrowers.

“If you think about the volume of things that go the market, there should be more competitive sales,” Biery said. “The majority of credits are going to be more akin to well rated, A or above, fairly standard terms, fairly standard credits.”

Biery speculated that the share of competitive sales has grown because Congress abolished advanced refundings, which were often sold by negotiation, the volume of lower-rated debt sales has dropped and direct loans by banks has declined because the reduction in corporate tax rates made them less lucrative for lenders.

Rhode Island adopted a policy of issuing general-obligation bonds through competitive bid in 2016 after newly elected state treasurer Seth Magaziner realized the state hadn’t auctioned its bonds in a decade.

“We thought it would be a more transparent approach to begin selling the state’s GO debt competitively,” said Kelly Rogers, Rhode Island’s deputy treasurer for policy and public finance. “Through a competitive sale you’re able to point to the specific savings that you potentially gain through the bidding process, which is information you’re not privy to through the negotiated process.”

When Rhode Island auctioned $150 million in tax-exempt and taxable bonds last month, the winning bids saved the state $1.5 million, said Rogers.

New York State, one of the biggest issuers of municipal bonds, could push the percentage of competitive sales over 30 percent.

In fiscal 2009, New York instituted a policy to sell 25 percent of its bonds competitively, raising that to 50 percent three years later. Over the past five years, the state has sold $19.4 billion of its debt, or 60 percent of the total issued, through competitive bid, according to the state’s division of the budget.

A budget division analysis of New York’s personal income tax-backed bounds found that the yields on bonds sold by competitive bidding were 0.1 percentage point closer to the benchmark, on average, than when the state selects an underwriter in advance, said Peters.

New York also pays lower fees to underwriters on competitive sales. Over the last five years, the state paid $2.19 per $1,000 bonds for bonds sold by auction and $4.79 per $1,000 on negotiated deals, on average, for personal income tax- and sales tax-backed securities, according to Peters.

Bloomberg

By Martin Z Braun

May 25, 2018, 7:31 AM PDT

— With assistance by Joe Mysak

• Senior bankers in New York, Los Angeles, Chicago leave
• Public finance chief’s shake up follows loss of market share

Wells Fargo & Co.’s new public finance chief Stratford Shields is shaking up the department by dismissing senior bankers in New York, Chicago and Los Angeles and bringing in colleagues from his former employer, Morgan Stanley.

Fifteen employees from its public finance department were removed, retired or quit as the bank shifted its strategy, according to a person familiar with the matter. Shields, who took over in November, has hired six bankers and plans to continue hiring, said company spokeswoman AnnMarie McDonald.

“Wells Fargo has one of the largest balance sheets of municipal lenders and a superior municipal sales and trading operation,” McDonald said in an email. “The change in leadership gives us an opportunity to reinvest to position the business for continued growth.”

The steps come after Wells Fargo’s share of the municipal-bond underwriting business shrank in part because some governments severed ties with the San Francisco-based bank after revelations that employees created bogus accounts in customers’ names to meet sales targets. Competition has also increased as debt sales plunged 20 percent this year after Congress eliminated a popular refinancing tactic and interest rates increased.

Wells Fargo was the seventh-biggest underwriter of U.S. municipal bonds last year, falling two spots from the previous year, according to data compiled by Bloomberg. This year, it fell to eighth as it managed $4.9 billion long-term debt sales.

California, Illinois and Chicago suspended no-bid business with the bank after regulators fined the firm for opening potentially millions of bogus customer accounts, while New York City imposed a ban because Wells Fargo received a poor federal Community Reinvestment Act rating. While Chicago’s ban has since expired, the others are still in force.

Illinois’s ban applies to investments through the treasurer’s office, according to Paris Ervin, a spokeswoman for the treasurer.

Lawrence Richardson, who led the Midwest public finance group in Chicago, and David Johnson, who headed California municipal banking, are no longer at Wells Fargo, according to broker registration records. Craig Hrinkevich, a senior banker in New York City, also no longer works at Wells Fargo, records show.

Wells Fargo also cut derivatives and quantitative positions, but is hiring for positions in transportation, infrastructure, affordable housing and health care, McDonald said.

Richardson didn’t return a call seeking comment and Hrinkevich declined to comment. Johnson couldn’t be reached.

Shields ran public finance at Morgan Stanley for five years before joining Royal Bank of Canada in 2014. He has hired former Morgan Stanley colleagues Paula Dagen, Chuck Peck, Randy Campbell and Jim Perry, as wells Kevin Hoecker, a former RBC banker based in Chicago.

Dagen, a managing director in Wells Fargo’s northeast group, was Morgan Stanley’s lead banker covering New York. Peck, based in Denver, is taking over as head of the west and Midwest region.

Campbell and Perry are on so-called garden leave, after giving notice to Morgan Stanley. Campbell will serve as head of public-private infrastructure partnerships and sports finance, while Perry will be a managing director in the south-central region.

Separately, Wells Fargo’s foreign-exchange business cut 22 salespeople, according to a person briefed on the matter, the latest casualties of a slump in market activity.

Bloomberg

By Martin Z Braun and Danielle Moran

May 23, 2018, 9:28 AM PDT Updated on May 23, 2018, 4:32 PM PDT

— With assistance by Elizabeth Campbell, Romy Varghese, and Amanda Albright

It’s already stirring anger among corporations, and nearby cities are trying to capitalize on that.

Seattle’s new so-called head tax is far from the first of its kind. But while the per-employee tax on the city’s largest employers may not be unique, it may be the most blatant effort yet to grab revenue and is already stirring anger in the business community.

Earlier this month, the Seattle City Council unanimously passed a $275-per-employee tax on companies that gross over $20 million a year, such as Amazon and Starbucks. The city estimates it will generate nearly $50 million per year — a roughly 3.5 percent increase to its budget — to address housing affordability and homelessness, which reached emergency levels in recent years. The tax is scheduled to go into effect in 2019 and sunset after five years.

Unsurprisingly, the idea is controversial. Seattle businesses have already formed a coalition to get a voter referendum on this fall’s ballot to repeal the tax.

But observers say the issue isn’t necessarily the tax, it’s Seattle’s approach to it. “There are places where this concept can be successful,” says Brian Kirkell, principal at the tax consulting firm RSM. “It’s just that Seattle isn’t one of them.”

A big factor is the price tag. Both Chicago and Denver have implemented head taxes on companies, but they only charged businesses $48 per employee. Even at $48 a year, Chicago Mayor Rahm Emanuel called the tax a job killer and eventually eliminated it in 2014. (Denver’s head tax is still in effect.)

Another issue is that many see Seattle’s move as a thinly veiled attempt to squeeze revenue from Amazon, which would contribute $1 out of every $5 the new tax raises. When it was initially proposed, city officials were calling for an even higher rate. In retaliation, Amazon halted construction on a 17-story downtown tower.

It has since resumed the skyscraper, which will host as many as 8,000 workers, but Amazon Vice President Drew Herdener blasted the city council last week for its “hostile approach and rhetoric toward larger businesses, which forces us to question our growth here.”

Nathan Jensen, a professor for the University of Texas at Austin, agrees that targeting a jurisdiction’s wealthiest employer isn’t an attractive policy solution. He sympathizes with Seattle’s limited options — it is prohibited from charging an income tax, and many feel the city’s property and sales tax rates are maxed out. “But I think it would have been better if Seattle came up with a plan to address homelessness, [determined] how much it needed and then figured out the best way to raise additional revenue,” he says. “I’m worried this approach is more symbolic than real.”

Indeed, Seattle’s legislation didn’t designate a set-aside for the new revenue. So, while the city plans on spending the new money on housing, the final decision will be left to the budgeting process next year. By contrast, Washington, D.C., took a targeted approach to a new employer charge. It recently implemented a 0.62 percent payroll tax on employers to fund the city’s paid family leave program for residents.

Kirkell, the tax expert, also suggests that before implementing a tax like this, cities should consider whether they offer something its regional competitors can’t. For Washington, that’s quick access to Capitol Hill and the White House. “Are K Street lobbyists and lawyers going to leave D.C. to move their entire business to Northern Virginia?” asks Kirkell. “It could happen, but the probability is low.”

Seattle’s neighbors are already lobbying corporations to make the move. Last week, the city of Tacoma began courting Seattle-based companies with a “No Head Tax Here” ad campaign.

Still, some think that’s a long shot. Calling the tax “relatively modest,” Fitch Ratings says the city’s talent pool of employees, highly educated population and public amenities all point to strong economic growth. Even if companies do decide to respond by leaving or curtailing their plans for expansion, Fitch says, “any impact would be felt marginally over many years and would thus be difficult to distinguish from other rationales for corporate decisions.”

GOVERNING.COM

BY LIZ FARMER | MAY 23, 2018

The Fight to Re-generate Access to Advanced Refundings Continues

Discussions around the ongoing fight to recreate access to advanced refundings through new legislation have been in the news. Steve Benjamin, Mayor of Columbia, S.C., Chair of Municipal Bonds for America (a non-partisan coalition of municipal bond issuers and state and local government officials), and the incoming President of the Conference of Mayors, has been particularly vocal in his defense of advanced refundings.

There are three main components to understand and consider in this discussion:

Continue reading.

by George Friedlander

Posted 05/23/2018

Neighborly Insights

These Insights are brought to you by Court Street Group Research.

CHICAGO – Harvey, Illinois, revenue bondholders won a partial victory this week when the state comptroller concluded they will continue to get first crack on local home rule sales tax collections.

But the comptroller’s ruling sets a precedent that is worrisome for many other local bondholders around the state who fear they will fall behind bondholders in competition for a limited pot of revenue.

Holders of the Harvey’s $6 million Hotel-Motel Sales Tax Revenue Bonds issued in 2008 will continue to receive the city’s home rule taxes collected on its behalf by the state — likely enough to cover debt service. But they took a backseat on the city’s normal share of state sales taxes, which will go directly to cover overdue pension fund contributions.

State Comptroller Susana Mendoza delivered a letter ruling on the Harvey dispute ahead of a court hearing Monday. It marks the conclusion of her review of the city’s protest of the Harvey police pension fund’s certified request that state funds be diverted to meet a $7 million pension funding judgment.

“The office of the comptroller is statutorily bound to withhold and remit to the pension fund the payments that are the subject of this protest,” the letter says.

The first implementation of the state’s newly implemented public safety pension intercept law appears to give pension funds an edge to claim revenues bondholders and local government services also rely upon.

Conclusion of the review clears the path to distribute of $2.3 million of intercepted funds to the police fund Wednesday under a 2011 public safety pension funding law and 2015 amendments that allow for the diversion of “state funds” beginning in fiscal 2016.

The letter does not address a competing firefighter pension fund claim, filed shortly after the police fund’s certified request, arguing it should share in the distribution to cover its own $12 million judgment.

Withheld home rule taxes would be distributed to the bond trustee at the same time as the other taxes are sent to the police fund.

“Municipal home rule sales taxes are not state funds” under the applicable pension code articles “and shall therefore be released according to standard procedure,” the letter continued. The comptroller has so far diverted $279,000 in home rule taxes that would have flowed to bond trustee Amalgamated Bank of Chicago in monthly payments since February.

Those funds plus future monthly additions will likely be sufficient to cover the next debt service payment of $415,000 due Aug. 1. The $145,000 Feb. 1 payment was made with previously forwarded funds.

The latest development in the Harvey saga unfolded Monday in Cook County Circuit Court Judge Raymond Mitchell’s courtroom. The comptroller’s office distributed the letter to lawyers for Harvey, Amalgamated Bank, the police fund, and the firefighters’ fund.

The distribution plans, however, are far from final. Harvey is trying to reach what it describes as a “global settlement” with the various stakeholders to free up about 75% of the $2.3 million of the withheld funds and divert a similar amount going forward.

Such a settlement remained elusive Tuesday.

“I’m more optimistic than I have been,” Mitchell said Monday. The city and the firefighters’ pension fund asked Mitchell to issue a temporary restraining order blocking the comptroller from distributing the funds as planned Wednesday whether or not a settlement is reached. That’s because it would take several days for the pension boards to convene and cast a vote. The judge granted the firefighters’ fund TRO request Tuesday..

The withholding has triggered municipal market concerns that a flood of such requests could have widespread impact on local government finances. It’s also fueled broader concerns outlined in several rating agency reports that debt service will take a back seat to pension obligations around Illinois.

In the case of the Harvey revenue bondholders, those fears came to fruition with the interruption of their flow of revenue to the trustee.

It was not immediately clear whether the comptroller’s finding, given the mixed results for Harvey bondholders, would ease worries or further fuel concerns among municipal market participants.

It was also not immediately clear whether the comptroller’s decision would fully resolve the bondholders’ involvement in the Harvey case. “That’s to be determined,” Brent Vincent of Bryan Cave Leighton Paisner, a lawyer representing the bond trustee, told the judge Monday, but it was generally viewed in the courtroom as a victory for bondholders.

Lawyers predicted even if the Harvey revenue bondholder claim is resolved by freeing up home rule taxes, other similar situations could surface as public safety funds take advantage of the intercept law. The comptroller’s conclusions could also face litigation from another municipality.

“Harvey is the first, but it’s not the last,” according to one lawyer, who said there are eight to 10 other borrowers with similar sales tax bond structures. The diversion issue could also eventually impact general obligation bondholders if intercepted revenues leave a municipality to choose between maintaining critical services and paying debt service.

For Harvey, the intercept law has prompted a funding crisis that threatens city operations. The city already cut its public safety staff by about half. Without a solution, the city would not see any state-collected funds until the $7 million police pension judgment and $12 million firefighters’ fund judgment are paid off.

“The city can’t afford any more and maintain operations,” Harvey’s attorney, Bob Fioretti, said Monday.

The revenue bondholders were granted authority to intervene in the case on May 10.

Holders of the Hotel-Motel Tax and Sales Revenue Bonds are repaid with revenues from the city’s hotel-motel tax and then by its share of state-collected sales, use, and occupation taxes under the bond ordinance adopted by the city council on Aug. 25, 2008.

All state-shared sales taxes and all home rule taxes needed to cover debt service go directly to the trustee from the comptroller. The city treasurer is supposed to remit all hotel taxes directly to the trustee but the city has long failed to forward any from existing facilities and the hotel project was never built.

The city collected $163,000 in hotel motel taxes in 2016 but debt service totaled $560,000 that year.

In their complaint, bondholders argue that the pension law in question, approved in 2010 and amended in 2015, does not apply to overdue contributions prior to fiscal 2016 when the diversion provision took effect.

The intercept levels were phased in from 2016 to fiscal 2018 with 100% of funds now available for diversion. The intercept process was not put in place until this year.

The lawsuit asks the court to declare that the bondholders’ irrevocable “contractual pledge” of state collected revenues is superior to the pension fund claims because they possess “a pre-existing superior vested right to payment from those collections.”

The bondholders also want the judge to find that the home rule taxes don’t qualify as “state funds” because the state solely collects them on behalf of the city – an argument the comptroller agreed with in her decision Monday.

“The interception of 100% of local share state taxes and home rule taxes substantially impairs the city’s performance of its pre-existing contractual obligation under the 2008 bond ordinance” and is unconstitutional, the bondholder complaint says. “The legislature’s decision to prioritize the rights of pension fund holders to the intercepted funds over parties such as the Series 2008A bondholders who have pre-existing contractual pledges of and irrevocable rights to the local share state taxes and home rule taxes is arbitrary and capricious.”

The comptroller’s office did not elaborate or publicly disclose its reasoning behind the finding that the pension claim comes ahead of the bond obligation with regard to state sales taxes.

Various lawyers at the hearing suggested that the office’s finding was likely based on the city’s ordinance, which simply directs the state to send to a third party – the trustee – revenue the city is entitled to receive.

The pension claims take precedent because the intercept is a direct order under state law that interferes with the existing flow of revenues.

“We don’t have discretion,” an official from the comptroller’s office said during the hearing.

The issue could eventually be the subject of litigation, several lawyers at the hearing said.

Proceeds of the revenue bonds were supposed to finance construction of a hotel and conference center. The city diverted proceeds to cover operations and the project was never built, so bondholders have had to rely on the sales tax collections to recoup their investment. All debt service payments are current.

The city faced regulatory sanctions for misleading bondholders about the use of proceeds and repayment prospects and the Securities and Exchange Commission in an unprecedented move went to court to block an impending sale in 2014 as its probe was ongoing.

The city argues in its own lawsuit filed last month to free up the withheld funds that bondholders have a priority claim on the sales taxes and the sales taxes are city property that is pledged to bondholders.

The diversion prompted a recent back-and-forth in the courts as the circuit court originally rejected the city’s preliminary injunction request to free up the funds. An appellate court overturned that decision but the Illinois Supreme Court on April 26 vacated the appellate ruling.

The central issue holding up a potential settlement is how to divide funds between the police fund and the firefighters’ fund. The firefighters fund wants a greater share than the police fund has offered and the city has so far said it can’t make up the difference, lawyers told the judge Monday.

“We’ve got kind of an impasse here,” said Andrew Schwartz, of Schwartz & Kanyock LLC, who represents the firefighters’ fund. He contends the 2011 law does not define priority status on pension fund claims. The firefighters fund also wants any share it is to receive under a settlement to flow directly from the comptroller’s office and not the city.

If a settlement is not reached, the firefighters fund would likely contest the comptroller’s decision that the police fund comes first because it was first to submit a certified claim. The pension statute doesn’t provide direction on priority status of claims.

The comptroller’s office is hoping for a settlement or court guidance and its attorney general’s office lawyers suggested the parties could seek a recertification process that would specify what percentage of funds are to be withhold and the parties to which they would be distributed.

The law stands to have a sweeping short- and long-term impact statewide, S&P said in a recent special report, because if the intercept becomes commonplace it could strain some issuers. Moody’s Investors Service warned that the Harvey crisis illustrates how municipal pensions are ‘must-pay’ obligations under Illinois law and have greater protection against default than a city’s general obligation bonds.

Published reports have warned that several hundred pension funds may qualify for use of the intercept with more than 600 local government public safety pensions outside Chicago carrying about $9.9 billion of unfunded liabilities with a collective funded ratio of 57.58%. Harvey is not rated by any rating agency and it has previously defaulted on some debt service payments.

BY SOURCEMEDIA | MUNICIPAL | 05/22/18 07:04 PM EDT

By Yvette Shields

Municipal restructurings pose many challenges distinct from those encountered in a typical corporate bankruptcy. One challenge frequently encountered in the context of a municipal restructuring is how to restructure municipal bonds insured by a monoline insurance company. Custodial receipts, which have long been used to facilitate secondary market insurance for muni bonds, can be a useful tool that allows a policy on a legacy bond to be mated with a new muni security being issued in a restructuring.1

Municipal Bond Insurance in a Nutshell

Under a classic municipal bond insurance policy, a bond insurer will agree to essentially guarantee payment of principal and interest when due on the insured bonds, in accordance with the original payment schedule. If the issuer of the insured bonds defaults, in the payment of interest or principal, the insurer makes the payment to bondholders and will be subrogated to the bondholders’ right to the missed payment. Typically, as a condition of, and in exchange for, the insurer covering the missed payment, bondholders will be required to assign their rights to the missed payment to the insurer, and the insurer will be fully subrogated to the bondholders’ rights to the missed payment. Usually, so long as a bond insurer has not defaulted on its policy, the bond insurer will control the exercise of most remedies in respect of the insured bonds.

Challenges in Restructuring Insured Municipal Bonds

This works well enough so long as the original bonds remain outstanding. However, often in bankruptcy, an issuer’s bonds are canceled, and new restructured bonds are issued in their stead. The economic terms of the restructured bonds may diverge from those of the original legacy bonds in certain key ways, including reduced principal amount and interest rate and an extended amortization schedule. The cancellation of insured bonds in exchange for new restructured bonds gives rise to various questions and uncertainties, including:

• Are payments made by the issuer under the restructured bonds credited against payments owed by the bond insurer on its insurance policy for the legacy (i.e., now canceled) bonds?
• How does the right to payments under the bond insurance policy trade following the restructuring, after the insured bonds are no longer outstanding? Should it trade separately from or together with the restructured bonds?
• How do the insurer’s subrogation and assignment rights apply where bonds it is insuring no longer exist, and does the insurer retain subrogation/assignment rights in respect of the new restructured bonds?
• Who has voting rights with respect to the restructured bonds issued in exchange for the legacy insured bonds?

The challenges posed in restructuring insured bonds were highlighted by a New York case in which a monoline insurer argued that it was no longer obligated to make payments on its policy since the insured bonds were canceled as part of the plan of reorganization.2 While the trial and appellate courts both rejected this argument, the case demonstrated the importance of considering issues relating to bond insurance policies when preparing a plan of reorganization.

Custodial Receipts and Secondary Market Insurance

One tool that may be useful to address the challenges of restructuring an insured muni bond is custodial receipts — an instrument borrowed from the secondary insurance market.

Unlike the primary insurance market, where policies are purchased by a bond issuer contemporaneously with the original issuance of the insured bonds, secondary market insurance is purchased by holders of uninsured bonds at some point after the original issuance of the bonds. Bondholders wishing to acquire the insurance deposit their bonds with a custodian and receive a custodial receipt, often referred to as a “certificate of bond insurance” or “CBI,” representing the right to receive scheduled principal and interest payments from the custodian.

Ordinarily, payments from the custodian would simply be principal and interest payments on the bonds held in custody, which the custodian receives from the issuer. Should there be a default on the bonds, the custodian will fund the payments through a draw on the secondary market insurance policy issued by the insurer.

The terms of the custody agreement are set forth in a custody agreement between the insurer and custodian, with the holders of the CBIs being identified as third-party beneficiaries of the custody agreement.

The SEC staff has granted no-action relief for secondary market issuance of custody receipts without registration under the Securities Act of 1933 and without the custodian having to register as an investment company under the Investment Company Act of 1940. See Fin. Sec. Assurance, Inc., SEC No-Action Letter, 1988 WL 234169 (Mar. 30, 1988). This no-action relief has been premised on various representations, including that the custodian would play a purely ministerial role.

Custodial Receipts as a Tool for Restructuring Insured Municipal Bonds

While originally developed in the secondary insurance market, custodial receipts can be used to facilitate a restructuring of insured bonds. And unlike secondary insurance market arrangements where the custodial agreement is grafted onto the existing debt documentation, in the restructuring context, the indenture and other bond documents can be designed to work in tandem with the custody agreement.

Of course, the utility and feasibility of custodial arrangements will depend on the particulars of the terns of the restructuring. However, where the replacement debt securities are designed to track certain basic features of the legacy insured bonds, such as their payment schedule, a suitable custody arrangement can be engineered.

CBIs as a Replacement for Legacy Insured Bonds

The terms of a custodial arrangement may in these circumstances include features and provisions such as the following:

• On the effective date of the plan of reorganization, the insured legacy bonds are canceled, and the former holders of the insured legacy bonds receive custody receipts, or “CBIs,” representing a participation in the custody arrangement established under the plan.
• The CBIs are issued under their own CUSIP in “street name” through DTC, which facilitates the trading of beneficial interests in the CBIs.
• Also on the effective date, the restructured bonds issued in respect of the insured legacy bonds are deposited with an independent custodian. Consistent with the no-action letters for secondary market insurance, the role of the custodian is purely ministerial.
• The insurance policy for the insured legacy bonds is also deposited with the custodian.
• The custodian holds the restructured bonds and the insurance policy in custody on behalf of, and for the exclusive benefit of, the holders of the CBIs, pursuant to the terms of a custody agreement, to which the custodian and the insurer are parties.
• The CBIs represent the right to receive the payments that would have been due on the legacy uninsured bonds (had they not been canceled) in such amounts and at such times as they would have been due in accordance with the original unaccelerated payment schedule of the insured legacy bonds.
• The custodian uses debt service on restructured bonds held in custody to fund a portion of these payments.
  To the extent debt service on the restructured bonds is insufficient, the custodian makes a draw on the insurance policy to fund the shortfall.
• As part of the custody arrangement, the insurer agrees to remain bound by its original insurance policy, notwithstanding the cancellation of the original insured bonds.
• So long as the restructured bonds remain in custody and the insurer continues to perform under its policy, the insurer retains its rights of consent and control over exercise of remedies in respect of the restructured bonds to the same extent as it had such rights and control in respect of the legacy insured bonds under the legacy indenture.
• After all amounts are paid to the holders of the CBIs in accordance with the original payment schedule of the legacy insured bonds, the custodial relationship is dissolved and the restructured bonds held in custody are transferred to the insurer.

Issues to Be Considered

The parties, particularly representatives of the legacy bondholders, will need to consider and address a variety of issues in structuring a custodial arrangement under a muni bond plan of reorganization. These may include:

• How and by whom the custodian is compensated.
• The means for removing and replacing the custodian.
• Availability of information concerning the CBIs and the custodial arrangements, through postings on EMMA or otherwise.
• Availability of information concerning payments of principal and interest on the restructured bonds, and draws on the insurance policy, which may be required by bondholders for tax and accounting purposes.
• How and under what circumstances the custody agreement may be amended.
• The rights and remedies available to holders of the restructured bonds in the event of an insurer default, including the role, if any, of the indenture trustee in these circumstances.

Custodial Receipts as One Tool Among Many

Custodial arrangements will not be suitable for all situations. For example, these arrangements are unlikely to be attractive where long dated insured capital appreciation bonds are to be replaced with current pay restructured bonds. Also, the parties will need to be cognizant of the tax and securities law and other regulatory considerations relevant to CBIs. Where custodial arrangements are unsuitable, parties and their counsel will need to consider alternative means of preserving the benefits of the insurance policy for the legacy bondholders and their successors. Nonetheless, the custodial model should be on the radar of parties engaged in the restructuring of insured municipal bonds. In the appropriate circumstances, it can be a linchpin of a successful restructuring that effectively preserves the economic expectations of insured bondholders.

____________________________________________

1 Kramer Levin recently served as counsel to holders of insured municipal bonds in a restructuring that employed custodial arrangements of the kind described in this article.

2 See Oppenheimer AMT-Free Municipals v. ACA Fin. Guar. Corp., 959 N.Y.S.2d 90 (Table), 36 Misc. 3d 1229(A) (Sup. Ct. 2012), aff’d as modified, 971 N.Y.S.2d 95 (App. Div. 2013).

Kramer Levin Naftalis & Frankel LLP

by Steven Segal

May 3, 2018

Whether you are managing your own investment portfolio or a private or public institution looking for investment vehicles for their pooled cash accounts to earn a better return than a bank account, we all directly or indirectly deal with brokers or dealers in the investment world.

In this day and age, more and more investors are turning towards online platforms to customize their investment portfolios and look for investment choices that best fit their needs. A broker or dealer is even more necessary in the municipal debt markets where an investor seeking municipal debt as a potential investment must contact one to get any pricing information on a buy or sell transaction. This is primarily due to the non-standardized and decentralized nature of the municipal capital markets. In simple terms, there are over 1 million municipal debt instruments outstanding at any given time and each debt could have a different structure. This warrants a need to have broker and dealers in the markets to facilitate trading.

In this article, we’ll take a close look at the broker/dealer role in the municipal debt markets, various ways in which brokers can manipulate investors and some way to help investors protect their interests.

Brokers, Dealers and Municipal Debt Markets

Before we look at the mechanics of a municipal debt transaction, investors must be fully aware of the firm – either broker or dealer – and their role in the trade execution.

Let’s look at the following example to understand a firm’s capacity in executing a client’s trade. Suppose a client goes to XYZ firm seeking to purchase a particular municipal debt instrument. If the firm is acting as a broker, it is simply taking a client’s purchase order to market and helping him or her fill the order for a commission or fee. However, when a firm is acting as a dealer, they are filling the client’s order themselves, meaning that if a client goes to XYZ firm to sell his muni debt instrument, the firm will buy (i.e. fill) that order by purchasing those instruments for the firm’s own account and can resell them later. This also means that a dealer is acting in a principal capacity (i.e. as a market maker) and charges a markup or markdown when executing a transaction.

In either capacity, brokers and dealers are playing an integral part in the transaction execution. As mentioned above, the municipal debt markets still operate under a decentralized structure, which means that independent investors are highly dependent on their brokers and dealers to execute their trades at the right prices and look out for their best interests. Brokers and dealers often use a system where multiple brokers and dealers can provide quotes for bond transactions they are interested in buying or selling, also known as the Alternative Trading System (ATS). In theory, this creates a competitive environment for the individual investor looking to buy or sell.

Check out our article on the benefits of the all-to-all trading system here.

However, there are ways dealers can potentially take advantage of their retail customers.

How Muni Bond Market Intermediaries Can Take Advantage of You

There are the 3 key scenarios that muni bond investors need to be aware of while sending their next trade order to their brokers and dealers.

1. Internalization of Highest Bids

This practice is still prevalent in some of the dealer trade executions and can be quite costly for investors looking to buy or sell a particular security.

As mentioned above, in an ideal situation, when a dealer is to sell a bond on its customer’s behalf, the dealer can host bids wanted on an alternative trading system and sell the bond at the highest bid, which will serve the client’s best interest. However, there is a loophole; since the dealer has access to see all the bids coming in for their client’s security, they are very well aware of the highest bid.

However, instead of informing the client about the highest bid, the dealer will buy the bond as a principal from their client below the highest bid price and keep it as inventory. The dealer knows that they have bought the instrument for less than the actual highest bid, and there is potential for them to later resell that security and make a profit.

Be sure to check out our previous article here that explains how to avoid overpaying for individual munis.

2. Bid Filtering

While partaking in the ATS, both the brokers and dealers can potentially filter out some of the bids coming in for a particular security they are trying to buy or sell for their investor as long as they have a valid reason not to transact with a particular counterparty.

However, the reason to not transact with a particular party is loosely monitored by the regulatory authorities. Therefore, dealers can unethically use this method to weed out the highest bids under false pretenses, and the dealer can execute that trade from its inventory at a lower bid. This also means that the customer will have to sell or buy the new security at an unfavorable price and without even knowing that there could have been higher offers.

3. Last Look Advantage

This tactic may not be as harmful to individual investors looking to buy or sell as the previous two tactics. But it certainly goes against trading fairness for other individual buyers or sellers in the market. Under this technique, a dealer reviews all the bids offered for the debt instrument an investor is looking to sell, and instead of selling the bond to the higher bidder, he or she acts as the principal and creates their own bid, slightly higher than the highest bid, and purchases that security for their own inventory.

Although the investor selling the particular security got the highest bid and it worked in his or her favor, it was still an unethical practice due to the unfair treatment of the other buyers or bidders. The dealer has an unfair advantage to look at all the bids and offer a slightly higher bid to win the business.

Not sure how to go around looking for the right muni bond? You can check our newly launched Municipal Bond Screener to explore muni bond CUSIPs across the U.S. based on custom parameters including issuing state, insurance status and a range for different bond attributes such as maturity, coupon, price and yield.

municipalbonds.com

by Jayden Sangha

May 24, 2018

MunicipalBonds.com provides information regarding the performance of muni bonds for the past week in comparison with Treasury yields and net fund flows, as well as the impact of monetary policies and relevant economic news.

• Treasury and municipal yields all increased this week.
• Muni bond funds saw its second week of inflows.
• Be sure to review our previous week’s report to track the changing market conditions.

Continue reading.

municipalbonds.com

by Brian Mathews

May 22, 2018

More than a dozen states have above-average international trade exposure, per a new Moody’s report.

Implementation of U.S.-China tariffs or withdrawal from the North American Free Trade Agreement would have bigger economic effects on some states compared to the more limited impacts of other recent trade decisions, a new Moody’s Investors Service report found.

U.S. talks with Mexico and Canada to renegotiate NAFTA are ongoing, although it remains unclear exactly when a new deal might be inked. President Donald Trump has said reducing the trade deficit with China is a major priority, with both sides at various points raising the threat of tariffs on imports.

The impacts of the U.S. pulling out of the Trans-Pacific Partnership after Trump became president and imposing duties on washing machines, solar panels, steel and aluminum earlier this year were short lived.

Continue reading.

ROUTE FIFTY

by Dave Nyczepir

MAY 25, 2018

A notice issued on Wednesday could have implications for some recently passed state laws.

The Internal Revenue Service and the Treasury Department are calling into question the leeway states will have to provide taxpayers with ways to circumvent a recently imposed federal limit on state and local tax deductions.

Last year’s Republican-led overhaul of the nation’s tax code capped at $10,000 a deduction households can claim on their federal tax returns for state and local property, income and sales taxes they have paid.

Since then, lawmakers in some states have looked for legislative workarounds to the cap for their residents.

But, on Wednesday, the IRS and Treasury signaled they could take a dim view of states taking this sort of action.

The agencies issued a notice saying that they plan to propose regulations to “help taxpayers understand the relationship between federal charitable contribution deductions and the new statutory limitation on the deduction of state and local taxes.”

“Taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes,” the notice says.

Jared Walczak, a senior policy analyst at the Tax Foundation wrote Wednesday that the move by the IRS and Treasury is “clearly bad news for the charitable contributions in lieu of taxes approach.”

That approach involves states allowing taxpayers to effectively pay their taxes in the form of “charitable contributions,” which would be credited against the taxes they owe at the state and local level, but still fully deducted at the federal level.

New Jersey is one state that turned to this option.

Other states, including New York and Connecticut, have come up with more elaborate alternatives to get around the cap. Walczak noted that the effect the new regulations would have on these workarounds remains unclear, but that they could also be at risk.

The IRS and Treasury did not indicate specifically when the regulations would be released.

New York Gov. Andrew Cuomo, a Democrat and a leading critic of last year’s tax revamp, issued a statement on Wednesday slamming the pending regulations. “We have been and will continue to fight against this economic missile with every fiber of our being,” he said.

“The IRS should not be used as a political weapon,” he added.

Capping the state and local tax, or SALT, deduction, helped the lawmakers who crafted the tax law partially offset the loss of billions of dollars in revenues expected in the coming years due to corporate and individual tax cuts.

State and local government groups fought against the elimination of the tax break, and characterized it as a threat to their ability to levy taxes in order to pay for expenses like schools, infrastructure and public services.

Route Fifty

By Bill Lucia,
Senior Reporter

MAY 23, 2018

Taxpayer, a non-profit fraternal organization that was exempt from federal income tax, sought review of city’s assessment of a fraternity house that it owned.

City moved to dismiss taxpayer’s complaint on grounds that taxpayer failed to respond to assessor’s request for income and expense information of the property.

The Tax Court held that:

• Fraternity house was “income producing” under state statute barring a property owner from appealing an assessment after failing or refusing to respond within 45 days of request for income information if property was income-producing;
• City was not required to plead as an affirmative defense in its answer that taxpayer failed to respond to request for income information;
• City’s motion to dismiss did not equate to a summary-judgment motion;
• Taxpayer was not entitled to discovery on a revaluation firm’s involvement in sending request for income information; and
• Taxpayer was not entitled to discovery to explore whether the assessor would have used the information provided had taxpayer responded to request for income information.

Landowner petitioned for writ of certiorari to challenge board of review’s tax assessment of developer’s property, which had been re-classified from agricultural to residential.

The Circuit Court affirmed. Landowner appealed, and the Court of Appeals affirmed. Landowner petitioned for certiorari review, which was granted. While appeal was pending, landowner filed motion to vacate based on alleged faulty testimony, which the Circuit Court denied. Landowner filed petition to bypass the Court of Appeals. The Supreme Court granted the petition and consolidated the cases.

The Supreme Court of Wisconsin held that:

• Use of property only to maintain ground cover was not an agricultural use, and
• Assessor’s improper reasoning for re-classification of property, which was based on injunction prohibiting agricultural use of the property, did not warrant relief from judgment.

Use of property to maintain ground cover was not an “agricultural use” required for agricultural tax classification, even if village assessor incorrectly believed when re-classifying property from agricultural to residential that injunction which prohibited agricultural uses required selection of residential classification for the property.

Assessor’s re-classification of landowner’s property from agricultural to residential based on improper reasoning that injunction prohibited agricultural use of the property did not warrant relief from judgment based on any other reason justifying relief, as landowner, who admittedly only used property for ground cover maintained by regular mowing, did not present any evidence before board of review to support a finding of agricultural use as defined by tax law.

A foundation with a philanthropic vision is combining forces with impact investors to provide charter schools with alternative low-cost financing options for building and renovating schools.

The Walton Family Foundation, based in Bentonville, Ark., provided seed funding to create two “innovative” educational facility financing vehicles that it said would provide charter schools with new long- and short-term financing choices, in part because some schools don’t have access to public financing.

With $200 million from the foundation to start up, the Charter Impact Fund will be a revolving-loan-type fund offering long-term, fixed-rate loans to high-performing charter schools for up to 100% of project costs.

It will also offer impact investors a forum to support high-quality charter schools, and will eventually tap into the bond market, according to Chief Executive Officer Anand Kesavan.

The Facilities Investment Fund, backed by commercial and philanthropic capital, will offer charter schools five-year, fixed-rate loans for up to 90% of project costs for new construction or renovations. It received $100 million from the foundation and Bank of America Merrill Lynch.

“Funds like Walton’s will help charter schools send more resources directly to students and teachers, and work toward the day when more private, public, and philanthropic dollars lead to a level playing field for charter facilities,” said Walton K-12 Education Program Director Marc Sternberg.

Charter schools – public schools that are independently run – serve more than 3.2 million students in 44 states and the District of Columbia.

Surveys suggest there are an additional 2.5 million students whose parents would enroll them in a charter school if location and capacity were not problematic, according to “Strengthening Federal Investment in Charter School Facilities,” a February report commissioned by the Washington, D.C.-based National Alliance for Public Charter Schools.

“Access to facilities is and will continue to be a challenge to the growth of the sector,” the report said. “Public charter schools do not have access to the same financing structures as traditional district schools.”

The report said 15% of every dollar spent by charter schools goes to facilities or facility-related costs.

It also estimates that the interest rate for charter school borrowing is two times higher than it is for traditional public schools.

Charter school advocates say that less than half of all states authorizing them provide a per-pupil monetary allowance for their facilities, and that opportunities to share space with district schools are rare.

Charter school access to the municipal bond market is also on the rise across the country.

With two decades of tax-exempt bond financing activity on the books, the charter school sector continues to mature with “healthy increases” in the number of transactions and par-amount sold annually, NewOak director and senior analyst Wendy Berry said in a 2017 Year in Review released Feb. 20.

Charter school tax-exempt bond volume in 2017 totaled $3.5 billion, representing the sixth consecutive year of record issuance, said Berry, who specializes in covering the charter sector.

“This volume figure represents a robust increase of more than 20% in par-amount issued over 2016 statistics,” she said, adding that a “substantial amount” of the increase was fueled by the proposed elimination of private activity bonds in early versions of the federal Tax Cuts and Jobs Act.

Although the final act signed into law in December retained PABs, Berry said she believes 2018 could be another year of record volume with issuance likely once again to be concentrated in a handful of states.

Given the solid growth rate in the number of charter schools, along with the expansion of many high-performing schools, she said it is not surprising that more charter schools are accessing the tax-exempt bond market.

“Although charter school bond issuance represents a relatively small piece of overall tax-exempt issuance – still less than 1% of annual municipal volume – it continues to grow at a very healthy pace,” she said.

Charter schools in 22 states and the District of Columbia entered the bond market in 2017, Berry’s year-end review found, though the number of transactions and the par amount associated with each jurisdiction varied widely.

On a combined basis, the top five issuing states were responsible for 54.6% of the number of transactions as well as 59.5% of the total par sold in 2017.

Arizona topped the list with $824.5 million of bonds issued in 27 transactions.

Texas came in second with sales of $482.9 million and California was third with $295.3 million, followed by Florida with $258 million and Utah with $199.7 million.

Because some charter schools don’t have access to the bond market, advocates contend that’s why there’s a need for alternative low-cost financing, a void that the Walton Family Foundation’s initiatives can help fill.

Kesavan said interest from prospective borrowers has been strong since the Charter Impact Fund was announced in April.

“We are in the underwriting process with several borrowers and expect to announce our first round of loans in late summer,” Kesavan said. “Interest from schools has considerably exceeded what our initial capital can fund, which tells us that we should bring more impact investors into the opportunity to help high-quality charter schools serve more students and families.”

The structure of the CIF, Kesavan said, is modeled after successful state revolving funds that serve projects in other sectors, such as clean water and affordable housing.

Over time, the CIF plans to expand lending activity with the objective of tapping the tax-exempt bond market with a structure that will preserve lower-cost financing for school facilities while offering impact investors an attractive option to put capital to work in the sector.

The “CIF is the first pooled fund of its kind for public charter schools, providing permanent, credit-enhanced loans at low cost,” Kesavan said.

Loans will offer charter schools funding for a project from a single source, freeing them from spending significant resources securing multiple streams of private funding. There will be no fees associated with issuance, and no debt service reserve costs.

Generally, loans will be guaranteed by the borrower’s credit, net revenues and real property.

“Chief among our eligibility criteria is the charter school’s academic standing, which must be high, and its sustainability, which we can gauge in part through family demand for seats,” Kesavan said. “The goal, of course, is to finance projects for high-quality, in-demand schools that will operate far into the future.”

The Facilities Investment Fund, created in collaboration with BAML and managed by Civic Builders, said it is actively underwriting several deals with schools across the country.

Charter management organizations — which run two or more charter schools — have also shown interest, FIF officials said.

“There continues to be a lot of excitement around the Facilities Investment Fund from charter schools and CMOs that see the program as a solution to many of their facilities funding challenges,” the FIF officials said.

The FIF loans also expect to save charter schools money by providing funds from one source. Interest rates are currently under 5% and there’s no prepayment penalty.

“The philanthropic and private capital blend allows FIF to achieve an interest rate for schools below commercial market levels,” officials said.

FIF loans will be structured with a first-lien position on the property being financed.

Loans can be made in jurisdictions where real assets revert to the district upon charter revocation, depending upon jurisdiction and how the deal is structured.

Both CIF AND FIF initiatives are designed to make it easier and more affordable for public charter schools to build and renovate facilities, according to foundation board member Alice Walton, the daughter of Walmart founder Sam Walton and his wife Helen.

“This effort will allow resources that were spent on facilities to be directed back into the classrooms, back to the teachers and back to where it should be with the students,” she said.

BY SOURCEMEDIA | MUNICIPAL | 05/23/18 07:08 PM EDT

By Shelly Sigo

This week’s theme is, infrastructure! Global Practice Leads Tina Morris and Susan Gray talk about public and private sector infrastructure issues. Kurt Forsgren discusses autonomous vehicles and Ted Chapman and Obioma Ugboaja cover water bundling.

View Related Article

Listen to Audio

May 21, 2018

Washington Metro Mini Summer of Hell

The Washington Metropolitan Area Transit Authority (WMATA), the operator of the Washington, D.C., metro system, has endured several years of delays and disruptions as it attempts to maintain the system’s physical plant and improve its safety operations. It may be the most glaring example of infrastructure underinvestment existing right under the noses of Congress.

Now it’s embarking on a three-year capital project with dedicated capital funding recently approved by legislatures in Virginia, Maryland and the District of Columbia. It does not include any federal money, once again reinforcing our emphasis on the trend of states and localities moving forward despite federal legislative inertia of infrastructure. Sen. Tim Kaine (D-VA) may have said it best when he said: “This is what happens when we fall decades behind on maintenance — commuters bear the brunt of the inconvenience when it finally comes time to dig out the backlog.”

Continue reading.

by Joseph Krist

Neighborly Insights

05/24/2018

This Credit Focus is brought to you by Court Street Group Research.

The city plans to undertake eight projects worth $12.9 million making its Westside more resilient to flooding.

Atlanta is the first U.S. city to use a publicly offered environmental impact bond to fund green infrastructure projects, which the Department of Watershed Management plans to use to improve drainage in a neighborhood plagued by flooding.

The city proposed eight projects worth $12.9 million for improving the resilience of the Proctor Creek Watershed and nearby, flood-prone Westside neighborhoods to win The Rockefeller Foundation’s Environmental Impact Bond Challenge.

Investment advisory firm Quantified Ventures is helping Atlanta structure the deal, while financial technology company Neighborly is acting as underwriter.

“I think it really allows the municipality to deploy green infrastructure and apply the findings of projects to its broader infrastructure plans,” Lindsey Brannon, Neighborly’s head of public finance, told Route Fifty.

The municipal bond market is worth a billion dollars per day, Brannon said, but issuers and investors increasingly seek a “pay-for-success” model that measures project impact—holding state and local governments more accountable for their spending.

Neighborly first worked with DC Water in 2016 on a private environmental impact bond, or EIB, for green infrastructure projects aimed at flood relief. Payment was dictated by successful stormwater reduction over several years.

Rockefeller helped finance that offering and later partnered with Neighborly in July on the new, public challenge. The foundation provides grant funding on Neighborly’s online brokerage platform, which then underwrites the bonds and places investors.

There’s enough funding for two cities, but Atlanta was the first to be announced.

Green infrastructure captures water with soil and vegetation more cheaply than traditional grey infrastructure, while also creating more urban green space. All eight of the city’s proposed projects—including bioretention basins, stormwater planters, bump-outs, and permeable pavement—are designed to reduce strain on its combined wastewater-stormwater sewer system.

“Utilities nationwide are all searching for innovative ways to acquire creative financing, and these projects will successfully demonstrate how community partners working together can advance green infrastructure for our communities,” said Kishia Powell, Watershed Management commissioner, in the March announcement.

Atlanta has spent $2 billion on wastewater infrastructure in recent years, earning a Clean 13 designation in 2017 from the Georgia Water Coalition.

Projects benefiting Vine City, English Avenue, Mozley Park, Grove Park, and the Bankhead/Hollowell corridor were shovel-ready, Brannon said, and having stakeholder buy-in ahead of time made Atlanta the perfect choice for an EIB. Neighborly needed an upfront revenue source that could pay back the bonds and wanted to see them benefit vulnerable communities while growing the investor base interested in resilience, Brannon said.

“We wanted to make sure the contribution of the project was also scalable,” Brannon said. “Other cities could use this as an example of impact, in terms of financing approach.”

Route Fifty

By Dave Nyczepir,
News Editor

MAY 24, 2018

Setting priorities is hindered by the lack of systematic information available on the nation’s inventory of infrastructure assets, their location and condition.

It is widely accepted that the general condition of America’s infrastructure is poor and that major investments are needed. In its latest annual Infrastructure Report Card, the American Society of Civil Engineers issued an overall grade of D+ and estimated that $4.6 trillion would be needed to address the challenge.

Even though major investment in America’s infrastructure was called for by many of the candidates running for president in 2016, including President Trump, positive movement on this issue has been stymied by political gridlock. One can blame partisan politics. But, perhaps we find ourselves at a political impasse for other reasons. Perhaps we lack a clear, data-driven picture that could provide public administrators, politicians, industry partners, and citizens alike a common understanding of this enormous infrastructure challenge at sufficient geographic detail that it has meaning to them. Perhaps we need a National Infrastructure Map.

On May 1, the National Academy of Public Administration, in partnership with the American Geographical Society, the National Academy of Construction, the American Society of Civil Engineers, and Arizona State University, convened leaders in public administration, infrastructure development, geospatial technology, and data integration/open data—spanning industry, government, universities and the social sector—to tackle this very basic question.

These organizations came together on this important issue because all understood that to have a hope of a coherent national infrastructure investment strategy, we must have a common understanding, a common picture of our national infrastructure. We must know the condition of all of our highly interdependent infrastructure systems, and how they are arrayed geographically, at a very fine scale if we are to set priorities for investment. This is not just a problem for the federal government. Infrastructure is a fundamentally intergovernmental challenge that requires transparency and accountability across local, regional, and federal governmental organizations of all kinds.

Priority setting is an inherently political process that requires the recognition of mutual interest and deal-making. But this political process cannot function well in the absence of good information. Priority setting in infrastructure is hindered by the lack of systematic information available on the nation’s inventory of infrastructure assets, their location and condition. All politics is local and infrastructure is local, yet granular information on the location and condition of infrastructure across the nation is not readily available in a way that can enable a positive-sum politics.

To solve this problem, it is imperative that leaders from every sector join in a thoughtful dialogue about how we, together, can help envision our national infrastructure challenge in a common geographic context that allows us to understand the very specific interdependences that exit between our very real local, regional and national infrastructure needs.

In an age increasingly defined by internet-based systems and open data, the challenge is not primarily one of technology. Geographic information systems for capturing location-based data on infrastructure have been broadly adopted by public agencies and private organizations at every level of government for decades. But access to this information is constrained by a variety of factors, including the lack of interoperability across systems, jurisdictional issues and proprietary rights. Moreover, data is collected for different purposes using different standards and, therefore, is often not comparable.

Consequently, information on the nation’s infrastructure is uneven and stovepiped. Infrastructure challenges cannot be assessed in an integrated way or communicated effectively to the relevant decision-makers and constituencies. However nerdy this may sound, the lack of an online, digital National Infrastructure Map that organizes such information for citizens and policymakers alike is a major cause of our nation’s inability to achieve political consensus on infrastructure investment. Its absence leaves us unable to govern across the divide.

Congress should be investing in the creation of a National Infrastructure Map—one that provides political leaders and citizens with readily available, systematic, comparable, location-based information about the nation’s infrastructure to support an informed political process for determining priorities and acting on them. Done right, this will help overcome the public leadership challenge that has left us stalled, enabling political leaders at all levels of government, across our nation, to marshal support among citizens and key stakeholders around a positive vision for a better nation.

Route Fifty

By Teresa W. Gerton, Christopher K. Tucker, Wayne A. Crew and Jonathan Koppell

MAY 22, 2018

Teresa W. Gerton is the president and CEO of the National Academy of Public Administration; Dr. Christopher K. Tucker is the chairman of the American Geographical Society; Wayne A. Crew is general secretary of the National Academy of Construction; and Jonathan Koppell is dean and professor at Arizona State University’s College of Public Service and Community Solutions.

A House committee passed its Water Resources Development Act legislation unanimously on Wednesday.

WASHINGTON — A House panel moved forward Wednesday with a bill that would call for certain tax dollars be spent on port and harbor projects in future years.

The House Transportation and Infrastructure Committee unanimously approved its Water Resources Development Act, or WRDA, legislation that would set policy for the U.S. Army Corps of Engineers, an agency involved in public works like dams, locks and harbors.

Committee Chairman Bill Shuster, a Pennsylvania Republican, said the bill could hit the House floor in early June.

Continue reading.

Route Fifty

By Bill Lucia,
Senior Reporter

MAY 23, 2018

Provisions involving the Water Infrastructure Finance and Innovation Act have drawn backlash from some utility groups.

WASHINGTON — Water infrastructure legislation a Senate committee approved Tuesday would make changes opposed by some major utility groups to low-cost lending programs for water and sewer projects.

The American Water Works Association, which says it represents almost 4,000 utilities that supply about 80 percent of the country’s drinking water, withdrew its support for the bill over changes that involve the Water Infrastructure Finance and Innovation Act, or WIFIA.

Tommy Holmes, the group’s legislative affairs director, described the provisions as “a virus being injected into the WIFIA program” with the long-term aim of killing it.

But both Democratic and Republican lawmakers support the WIFIA-related provisions, which also have strong backing from the National Rural Water Association.

Sen. John Barrasso, the Wyoming Republican who chairs the panel that passed the bill, said the language would “help smaller rural communities” complete waterworks upgrades.

The Senate Environment and Public Works Committee voted 21-0 to approve the Water Resources Development Act, or WRDA, legislation it passed on Tuesday.

Apart from the the squabble over WIFIA, the bill enjoys bipartisan support and has the backing of groups ranging from the National Association of Counties to the National Audubon Society.

WRDA bills typically come up in Congress every two years and deal primarily with policy for the Army Corps of Engineers, an agency that oversees infrastructure like locks, dams and levees.

But the Senate bill also has sections that deal with drinking water, sewer utilities and the Environmental Protection Agency.

Lawmakers on the House Transportation and Infrastructure Committee are taking a different approach. The WRDA bill they released last week focuses tightly on Army Corps.

“I’m committed to getting a major infrastructure piece of legislation to the president’s desk,” Barrasso said when asked about the differences between the bills after Tuesday’s hearing.

“We’re looking forward to working with the House,” he added.

The version of the bill the Senate committee approved includes language that would effectively extend WIFIA lending terms to another set of waterworks programs known as the drinking water and clean water state revolving funds.

With the revolving funds, EPA awards “capitalization grants” to states. States contribute a 20 percent match, and then use the money to provide low-cost loans and other financing assistance for drinking water and wastewater projects. The funds are one of the primary ways the federal government provides support for local water infrastructure across the U.S.

WIFIA was created in 2014. It currently allows the federal government to lend directly for water projects at interest rates that mirror the generally low rate for U.S. Treasury debt.

The program targets larger projects, with cost thresholds of at least $5 million in communities with 25,000 people or less and at least $20 million in bigger places.

Critics of WIFIA frequently complain that it has left small and rural communities boxed out.

This idea of blending WIFIA with the revolving funds was proposed in a bill that Sens. John Boozman, an Arkansas Republican, and Cory Booker, a New Jersey Democrat, introduced in the Senate in January. An identical bipartisan bill was also introduced then in the House.

The legislation would enable states to offer revolving fund loans, with Treasury interest rates, for water and wastewater projects that they’ve determined to be priorities.

In some cases, the bill would allow for interest rates that are even lower than the Treasury rate. It would also allow for loans to cover up to 100 percent of project costs, in contrast to a 49 percent cap that is imposed under the traditional WIFIA program.

“I’m proud to support this innovative provision,” Booker said Tuesday.

When the possibility emerged that the WIFIA-related provisions could end up in the Senate WRDA bill, the American Water Works Association, the Association of Metropolitan Water Agencies and the Water Environment Federation sent a seven-page letter to the Environment and Public Works Committee outlining in detail why they were opposed, as Route Fifty reported earlier this month.

One of their main arguments against the legislative proposal is that it would undercut the ability of the WIFIA program to “leverage” limited federal dollars for major projects.

“Communities that wish to finance large-scale water and wastewater projects would be unable to take advantage of any of the funding made available,” the groups wrote.

Holmes, with the American Water Works Association, said some boosters of the revolving fund-WIFIA concept fought against the creation of WIFIA, and have opposed appropriations for the program since then.

But Mike Keegan, who lobbies for the National Rural Water Association, applauded the WIFIA measures in the Senate bill. “This simply increases the fairness of WIFIA,” he said. “Large communities can still compete.”

Keegan highlighted language meant to direct funding to places with greatest “need,” which he said the current WIFIA program does not do.

“This created an unfair playing field for federal funding, allowing federal funds to be used by less needy projects at the expense to the more needy,” he said.

WRDA bills are not spending measures. But the Senate bill would authorize lawmakers to appropriate $100 million annually for fiscal years 2019 and 2020 to support the types of revolving fund-WIFIA loans that the legislation proposes.

Although the EPA and the Army Corps have the authority to establish WIFIA programs only EPA has one up and running. The agency awarded its first WIFIA loan last month—up to $134.5 million for a Seattle-area stormwater and wastewater facility.

Estimates by states and the EPA show that needed investments in U.S. water and wastewater infrastructure will total $744 billion over a 20-year period.

Route Fifty

By Bill Lucia,
Senior Reporter

May 22, 2018

CHICAGO — The heat is on for Illinois lawmakers to address the state’s financial problems in a fiscal 2019 budget that faces a May 31 deadline for passage with a simple-majority vote, credit rating analysts said on Friday.

Illinois’ general obligation (GO) bond ratings, the lowest among the 50 states, are just a notch or two above the junk level, reflecting a huge unfunded pension liability, escalating pension contributions and a chronic budget deficit.

“The question is what progress will the state make, if any, in breaking out of those long-running challenges?” Moody’s Investors Service analyst Ted Hampton said in a phone interview. He added that the outcome of the budget process will be more significant than when the process ends.

An impasse between Republican Governor Bruce Rauner and Democrats who control the legislature left the nation’s fifth-largest state without complete budgets for an unprecedented two-straight fiscal years. Lawmakers enacted a fiscal 2018 budget and income tax rate hikes over Rauner’s vetoes in July, sparing Illinois from becoming the first state with a junk rating.

“Nobody sees the advantage of creating another impasse,” said Steve Brown, spokesman for House Speaker Michael Madigan.

Rauner, who proposed a $37.6 billion general fund budget in February, has been meeting with legislative leaders to try to reach a deal on a spending plan for the fiscal year that begins July 1.

But details are scarce.

“Rank and file members have no idea what the budget is going to look like,” State Representative Jeanne Ives, who narrowly lost the March Republican primary for governor against Rauner, said during Friday’s House session.

Prospects for tackling the state’s $129 billion unfunded pension liability appear to be slim given bipartisan opposition in the House to Rauner’s proposal to shift some pension costs onto school districts.

Constitutional concerns are also clouding chances for legislation Rauner wants to reduce pension costs by giving workers a choice of counting future raises they may receive toward their pensions or receiving retirement payments that include a 3 percent annual cost-of-living increase.

Fitch Ratings analyst Eric Kim said a return to political gridlock that fuels fiscal pressures could trigger a negative rating action for Illinois’ GO debt.

Using recently revised criteria, Fitch on Friday downgraded by five notches the rating on $2.5 billion of Build Illinois sales tax revenue bonds to A-minus. The firm cited too big a spread between the debt’s previous AA-plus rating and the state’s GO rating of BBB with a negative outlook.

Meanwhile, Illinois’ so-called credit spread for 10-year bonds over Municipal Market Data’s benchmark triple-A yield scale narrowed in recent days to 190 basis points, signaling easing concerns by investors over the state’s debt.

(Graphic: Illinois credit spread January-May 24 – https://reut.rs/2KVG25c)

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

By Reuters

May 25, 2018

Fitch Ratings-New York-25 May 2018: Fitch Ratings has downgraded and removed from rating watch negative the ratings on the following Build Illinois sales tax revenue bonds of the state of Illinois to ‘A-‘ from ‘AA+’:

–$1.41 billion senior obligation bonds;
–$1.08 billion junior obligation bonds.

Fitch placed the bonds on Rating Watch Negative on April 4 following release of its revised criteria for rating U.S. state dedicated tax bonds. With the annual update to its “U.S. Public Finance Tax-Supported Rating Criteria”, Fitch specified more limited situations in which a state dedicated tax security can be rated without regard to the state’s general credit quality. Additionally, the revised criteria include detail on circumstances in which a state dedicated tax security, while not considered distinct from the state’s Issuer Default Rating (IDR), can nonetheless be treated as stronger than but still linked to the state’s general credit risk. In these cases, Fitch limits the rating to no more than three notches above the state’s IDR.

Under the revised criteria, the degree of allowable notching above the state’s IDR, for those credits that do not meet Fitch’s requirements for rating without regard to the state’s IDR, is informed by: the breadth of the dedicated revenues (the narrower the better); the nature of the borrowing program (the more specific the better); and the use of residual revenues (the more segregated the better).

This downgrade is based on a review of the Build Illinois bonds under the revised criteria.

The Rating Outlook is Negative, reflecting the Negative Outlook on the state’s IDR, to which the Build Illinois bond ratings are now linked.

SECURITY
Build Illinois bonds have a first and prior claim on the state share of the 6.25% unified sales tax and a first lien on revenues deposited into the Build Illinois Bond Retirement and Interest Fund (BIBRI). Debt service payments on the junior obligation bonds are subordinate to outstanding senior lien debt service; the senior lien is not closed.

KEY RATING DRIVERS

RATING LINKED TO STATE IDR: Dedicated revenues for the Build Illinois bonds are structurally protected from the state of Illinois’ general operations through statutory and bond document provisions, warranting a rating above the state’s IDR of ‘BBB’, Outlook Negative. However, because the bond security includes a statutory pledge of the state share of sales tax revenues, and those revenues flow to state general operations after debt service set-asides, the bonds cannot be rated without regard to the state IDR under Fitch’s revised criteria.

TWO-NOTCH DISTINCTION: The narrowness of the pledged revenue stream, based on the additional bonds test leverage limitations for the senior and junior liens, and the statutorily defined nature of the borrowing program support a rating two notches above the Illinois IDR.

ROBUST COVERAGE AND RESILIENCE: Debt service coverage on both the senior and junior lien bonds from the state share of sales tax revenues (pledged revenues) is very high. Given the legal leverage limitations, pledged revenues can sustain a significant level of decline and still maintain ample debt service coverage on both the senior and junior liens. This is consistent with a ‘aaa’ assessment of resilience through economic declines.

MODEST GROWTH ANTICIPATED: Illinois’ economic performance, while positive, has lagged that of the U.S. as a whole and Fitch anticipates pledged revenues will grow essentially in line with inflation. This is consistent with a ‘a’ assessment for pledged revenue growth prospects.

RATING SENSITIVITIES
STATE IDR LINKAGE: The ratings on the Build Illinois bonds are sensitive to changes in the state of Illinois’ IDR, to which they are linked.

PLEDGED REVENUE TRENDS: The ratings are also sensitive to the performance of sales tax revenues and resulting debt service coverage, although the state IDR linkage currently limits the rating to well below what an analysis of the pledged revenue stream alone would support. Limits on additional debt issuance that require very high historical coverage provide significant cushion against revenue declines.

CREDIT PROFILE

Illinois is a large, wealthy state at the center of the Great Lakes region. It benefits from a diverse economy centered on the Chicago metropolitan area. Illinois’ economy has gradually shifted, similarly to the rest of the U.S., away from manufacturing to professional and business services. The remaining manufacturing sector is less concentrated in the auto sector than surrounding states but remains vulnerable to cyclical downturn. By most measures the economy has grown slower than the nation for many years, and population levels have been stagnant.

Build Illinois bonds are secured by a first priority pledge of the state share of sales tax revenues (80% of total state sales tax revenues) up to the amounts needed annually to meet debt service requirements, as well as a lien on the moneys in the fund (BIBRI) that receives monthly transfers of the state share of sales tax revenues. The state sales tax rate has been 6.25% since 1990 and the state share is defined statutorily as 80%, or 5% out of the 6.25% levy. The state share was $8.5 billion in fiscal 2017 (essentially flat with 2016), providing 26x coverage of annual debt service on aggregate debt, including the junior obligations. Debt service declines steadily each year.

Certain of the Build Illinois bonds authorized by legislation enacted in July 2009 also benefit from revenues deposited in the state’s Capital Projects Fund. These revenues include sales taxes levied on candy and grooming products, and on certain beverages. Ultimate security for these bonds is the same as all other Build Illinois bonds and Fitch’s analysis focuses on the pledge of the more significant state share of sales tax revenues.

LINKED TO STATE IDR
To rate a state dedicated tax security above the state’s IDR, dedicated revenues must be structurally insulated from the state’s general financial operations. Strong legal provisions for the Build Illinois bonds establish a flow of funds where the state share of sales tax revenues (pledged revenues) is segregated from Illinois’ general operations to first meet requirements under the Build Illinois bonds’ master indenture, including for debt service. This structure enhances the prospects for full and timely payment, allowing for a rating above the state’s IDR, but does not meet Fitch’s criteria for rating without regard to the IDR.

As there is no bankruptcy framework available to U.S. states, evaluation of the prospects for varying security structures at a time of fiscal distress is by necessity somewhat judgemental. Absent a bankruptcy framework, the primary limit on state action and source of protection for state bondholders is the contract clause of the U.S. constitution and equivalent clauses in state constitutions. Although contract clause protections under federal and state constitutions restrict the ability of a state government to impair its obligation to pay bondholders from dedicated tax revenue, the judicial interpretations of the contract clause indicate that it does not impose an absolute constraint. One of the key legal tests of whether a contract can be impaired is whether the impairment is necessary and reasonable.

Given this legal backdrop, under the revised criteria, the only cases in which Fitch can rate a state dedicated tax bond distinct from and without regard to the state IDR are rare situations where Fitch believes that the nature of the dedicated revenue stream or the legal structure render remote the possibility of a successful impairment argument. The security must be very clearly segregated from state operations and have no nexus with general state functions. Examples include bonds issued to fund state unemployment compensation and worker’s compensation systems.

STRONG LEGAL PROVISIONS
In the Build Illinois Bond Act and the 1985 master indenture for the Build Illinois bonds, the state pledges and establishes a first and prior claim on the state share of pledged revenues for payment of the bonds. The pledge is limited to the greater of the amount necessary to meet annual debt service requirements, or 3.8% of the state share – the indenture defines this amount as the Required Bond Transfer and this has been the 3.8% of pledged revenues since fiscal 2013. The Act and the indenture require the State Treasurer and Comptroller to make monthly payments of the greater of 1/12th of 150% of the certified annual debt service or 3.8% of the state’s share of sales tax revenues to the trustee.

The Act serves as an irrevocable and continuing appropriation and provides irrevocable and continuing authority for the Comptroller and Treasurer to make these monthly payments, as directed by the Governor. Under the Act and Indenture, the state also covenants not to impair the rights of bondholders, and specifically not to limit or alter the basis of the pledged revenues.

TWO-NOTCH DISTINCTION
The Build Illinois bond structure warrants a rating two notches higher than the state’s IDR given the narrowing of the dedicated revenues through the additional bonds tests (ABT) and the specific nature of the borrowing program. The open-ended use of residual revenues for general state operations keeps the rating below the maximum three notches above the state’s IDR allowable under Fitch’s criteria.

While the state share of the sales tax revenues is a broad revenue source, the leverage limitations imposed by the senior and junior liens’ ABTs’ significantly narrow the scope of the dedicated (pledged) revenues. At full leverage under the ABTs, 9.8% of the state share of sales tax revenues would be used for debt service.

Specific uses for Build Illinois bond proceeds are defined in the Act. While the four defined uses are broad, the Act also explicitly lists specific projects or types of projects to be funded with Build Illinois bond proceeds. The state has targeted its use of the Build Illinois program with bond proceeds primarily used by three agencies (Department of Commerce and Economic Opportunity, Department of Natural Resources, and the Environmental Protection Agency) and for smaller economic development projects. The state has not used the program for general capital borrowing.

The state share of sales tax revenues in excess of the annual Required Bond Transfer is available for general operations. Sales tax revenues are a key revenue source for Illinois’ general operations, comprising between 25%-30% of annual general fund revenues in most years. The recent increase in income tax rates will reduce the portion of general fund revenues derived from sales tax revenues, but they will remain significant. Also the indenture permits the state to transfer excess pledged revenues at the end of each fiscal year to its general fund. The state reports that $2.5 million is typically kept within the indenture with any amounts above this transferred to the general fund. Between fiscal 2015 and 2017, the state transferred an average of approximately $125 million of excess pledged revenues to its general fund.

EXCEPTIONAL RESILIENCE OF PLEDGED REVENUES

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers the results of the Fitch Analytical Sensitivity Tool (FAST), using a 1% decline in national GDP scenario, as well as assessing the largest decline in revenues over the period covered by the revenue sensitivity analysis.

Based on a 15-year pledged revenue history, FAST generates a 3% scenario decline for the state share of sales tax revenues in the first year of a moderate economic downturn. The largest peak-to-trough historical decline was 12% between fiscal 2008 and 2010.

Additional bonds tests require debt service be no more than 5% of the state’s prior year sales tax receipts to issue senior lien bonds and 9.8% to issue junior obligation bonds; this effectively requires 20x coverage to issue senior lien bonds and 10.2x coverage to issue junior obligation bonds. With issuance up to the 10.2x ABT for junior lien bonds (the maximum legal leverage on the pledged revenues), the state share of sales tax revenues could withstand a 90% decline – equivalent to 31x the projected decline in Fitch’s scenario of a moderate economic downturn and 7.5x the largest historical peak-to-trough decline – and still cover maximum annual debt service . This is an exceptional level of resiliency.

MODEST GROWTH IN REVENUES

With a relatively slowly growing state economy, Fitch expects pledged revenues will grow essentially in line with inflation. Sales tax revenues are economically sensitive, as illustrated by the cumulative 12% decline during the Great Recession. Revenue performance was more robust after the end of the Great Recession. But growth has tailed off recently and fiscal 2017 collections were roughly equal to fiscal 2015. The state reports that the current softness is caused in part by lower gasoline prices. The state levies its sales tax on gasoline as a percentage of the per-gallon price. Over the past decade and including the Great Recession, average annual growth in pledged revenues has been 1.4%, just below inflation. Fitch anticipates pledged revenues will grow modestly on a real basis over the long term.

Contact:

Primary Analyst
Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Karen Krop
Senior Director
+1-212-908-0661

Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575

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

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com

Additional information is available on www.fitchratings.com

A series of questions and answers can help.

Our discussion last week about representatives of the League of California Cities urging CalPERS, the state’s huge pension fund for public employees, to juice up investment returns generated a lot of interesting feedback.

It is clear that public-pension funds need some help. Rather than offer specific investment recommendations, I am going to make some suggestions to help them think about what they should be considering when reviewing their own portfolios.

It is important for managers and public representatives to understand what they know, what they don’t know, and what they can’t possibly know. Some of the biggest mistakes in asset management come from not knowing the answers to those deceptively simple questions.

Continue reading.

Bloomberg View

By Barry Ritholtz

May 21, 2018, 10:00 AM PDT

Stress tests help policymakers plan for the next recession.

Eager to strengthen the long-term financial health of their public-sector pension systems, officials in several states have embraced a nonpartisan, data-driven approach to more precisely assess their ability to fulfill the benefit promises made to public employees.

Called stress test reporting, this new practice can show policymakers how adverse economic scenarios could affect retirement system investments and state budgets. Because earnings on investments typically make up the largest share of pension fund revenue, lower returns or losses need to be offset by higher contributions from the state government and workers. The stress testing model created by The Pew Charitable Trusts also allows states to account for the condition of their economy and tax collections, offering a broad look at the impact of pensions on their overall fiscal health.

A forthcoming report by the John F. Kennedy School of Government at Harvard University looks at initial results using the Pew approach in 10 states.

Continue reading.

Route Fifty

By The Pew Charitable Trusts

May 22, 2018

The Mossavar-Rahmani Center for Business and Government at Harvard University studies what could happen to pension funds in 10 states under various economic scenarios.

CHERRY HILL, NEW JERSEY — Many pension funds for public workers already owe far more in retirement benefits than they have in the bank, and the problem will only grow worse if the economy slows down, according to a report released Thursday.

The study from The Pew Charitable Trusts found that the New Jersey and Kentucky funds are in such perilous shape that they risk running dry.

Governments have been ramping up contributions to the funds to help cover the promises they’ve made to retirees, but that leaves less money to spend on schools, police, parks and other core government services.

Another option is reducing pension benefits. A plan to do that in Kentucky led to teacher walkouts earlier this year.

The Pew study, published by the Mossavar-Rahmani Center for Business and Government at Harvard University, examines what would happen to pension funds in 10 states under various economic scenarios.

If a fund doesn’t bring in enough money to cover its promised retirement costs, the state would have to make up the difference. In New Jersey, that would mean spending at least $2 billion more a year.

“These findings don’t come as a surprise and underscore the need to bolster the state’s surplus,” said Jennifer Sciortino, a spokeswoman for the state Treasury Department. She said Gov. Phil Murphy, a Democrat who took office in January, wants to increase the surplus by 50 percent.

New Jersey is gradually raising its contributions, but the Pew report says getting to full funding will be a challenge for the state.

Kentucky Gov. Matt Bevin, a Republican, signed a bill last month reducing some retirement benefits for current and future teachers, but not for those already retired.

On Thursday, Bevin spokeswoman Elizabeth Kuhn said the Pew findings echo warnings from the governor since he took office. She said addressing the pension fund’s $60 billion unfunded liability is his top fiscal priority.

“After years of Kentucky governors underfunding and mismanaging the pension system, the report confirms that Gov. Bevin’s commitment to fully fund the system will provide a stronger financial outlook for the state,” she said in a statement.

The report said that even with changes, Kentucky could be in a situation similar to Connecticut and Pennsylvania. Both states have increased state pension contributions and might have to keep them high for decades to come, squeezing out funding for other priorities in the state budget.

The report also found that the relatively healthy pension systems in North Carolina and Wisconsin are more likely to weather downturns. Pew also looked at the funds in Colorado, Ohio, South Carolina and Virginia.

Notably absent from the report was California, which has the two largest public pension funds in the nation. They had a combined $168 billion in unfunded liabilities in 2016, according to another recent Pew report. Mennis said California’s funds were not included in the stress test study because they are so large and uniquely structured.

Nevertheless, the issue has been on the mind of California Gov. Jerry Brown, a Democrat who is in his final year in office. Brown suggested earlier this year that when a recession hits, pensions “will be on the chopping block.”

By Geoff Mulvihill

May 25, 2018

Copyright 2018 The Associated Press. All rights reserved.

In the wake of the Great Recession, there was broad consensus that Congress and bank regulators needed to take measures to ensure the largest banks in the country, those deemed systemically important financial institutions (or SIFIs), were safeguarding themselves and the role they play in the national economy from dangerous levels of risk.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act established a host of regulations for the financial industry and defined SIFIs as banks with more than $50 billion in assets. Consensus split on whether or not $50 billion was a fair threshold for determining whether a bank was “too big to fail,” or an arbitrary number that would harm community and regional banks.

This March, the Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), otherwise known as the Senate Banking Bill. And yesterday (May 23), after an agreement to tackle other banking legislation at a future date, the House passed S. 2155 as is and sent it to the President’s desk for him to sign into law. The measure is the most substantive banking bill since Dodd Frank and eases some financial regulations.

The legislation also contains provisions, outlined below, that will help cities served by community banks by providing targeted regulatory relief, and will lower interest rates for municipal bonds by making them more attractive to large institutional investors.

1. Community Banks: By raising the threshold for SIFIs from $50 billion in assets to $250 billion, S. 2155 alleviates stricter regulations for smaller community and regional banks. Many community and regional banks fall within the original range and have been constrained by the accompanying compliance regulations that larger national banks are more easily able to meet.

By alleviating these constraints, community banks will be better able to compete in a market that has recently been marked by consolidations of smaller banks into larger ones. Regulatory relief for community banks will help encourage lending and investment in city economies across the country, spur job creation, provide stronger support for anchor institutions and strengthen local economies in communities that have lagged while the national economy has recovered.

2. HQLA Reclassification for Municipal Bonds: Dodd-Frank also required certain banks to meet a Liquidity Coverage Ratio (LCR) to ensure financial institutions have enough liquid assets to weather periods of financial stress. As part of the requirements, banks needed to retain certain levels of “high quality liquid assets” (HQLA).

Bank regulators failed to include municipal bonds as HQLA when they jointly issued their Final Rule on Liquidity Coverage Ratio in the fall of 2014, despite municipal debt having a near-zero default rate and being as — if not more — stable than other assets included in the final rule. Since 2014, NLC and other state, local and public finance groups have pushed for municipal bonds to be classified as HQLA.

S. 2155 instructs bank regulators to reclassify investment grade municipal bonds that are both market ready and liquid as level 2B “high quality liquid assets” (HQLA). Classification of municipal bonds would make them more attractive to larger financial institutions who would then be able to use municipal bonds to satisfy part of their Liquidity Coverage Ratio (LCR) requirements. This in turn would lower interest rates on municipal debt.

National League of Cities

By Brian Egan

NEW YORK (Reuters) – The U.S. House of Representatives on Tuesday passed legislation that reclassifies investment-grade municipal bonds as high-quality liquid assets, a long-awaited move that public officials say will help lower financing costs on infrastructure projects nationwide.

The measure was included in bipartisan legislation, which already passed the Senate in March, that would ease bank rules introduced in the wake of the 2007-09 financial crisis.

The bill also raises the threshold at which banks are subject to stricter oversight and eases trading, lending and capital rules for smaller banks.

Cities and states sell muni bonds to finance construction of bridges, roads, schools and an array of other projects.

If the bonds are designated as so-called HQLA assets, banks can hold them as part of their liquidity requirements, therefore making the bonds more attractive overall and supporting the muni market.

“Lawmakers have taken concrete action to lower borrowing costs and better position states to invest in infrastructure projects at the state and local level,” said Beth Pearce, Vermont state treasurer and president of the National Association of State Treasurers in a statement after Tuesday’s vote in the House.

The bill now goes to President Donald Trump, who is expected to sign the legislation as part his campaign promise to try to spur more economic growth by cutting regulation.

Reporting by Hilary Russ; Editing by Lisa Shumaker

May 22, 2018

This week the House of Representatives passed Senate legislation addressing a rule approved by the Federal Reserve Board, Federal Depository Insurance Commission and the Comptroller of Currency in September of 2014, which established new liquidity standards for banks. The new standards, which went into effect in January of 2015, require financial institutions with at least $250 billion in total assets to maintain prescribed levels of liquid assets that can quickly be converted into cash in times of national economic stress. These asset classes included foreign sovereign debt, but failed to classify municipal securities as High Quality Liquid Assets.

S. 2155 – Economic Growth, Regulatory Relief, and Consumer Protection Act (Closed Rule, One Hour of Debate) (Sponsored by Sen. Mike Crapo / Financial Services Committee) is now headed to the President’s desk. Included in the bill is a provision that will mend an oversight of the Liquidity Coverage Ratio rule to include municipal securities as High Quality Liquid Assets. The core features of investment grade municipal securities are consistent with all of the criteria characterized as HQLA, including limited price volatility, high trading volumes and deep and stable funding markets, as described below.

The municipal securities market is a large, deep pool of capital representing a $3.85 trillion market. Institutional investors dedicate capital to the municipal market because muni securities are a secure investment. Municipal bonds are traded by a large number of committed retail participants in high trading volumes with timely and observable market prices through the MSRB’s reporting system, EMMA.

After US Treasuries, municipal securities are the safest available investment, with state and local governments having nearly a zero default rate. Some municipal bonds (such as the GO bonds of nine states) are more highly rated that US treasury securities.

Classifying investment grade municipal securities as HQLA helps ensure that low-cost infrastructure financing remains available for state and local governments to continue to build the infrastructure for commerce, public safety, job creation and the development of an educated workforce. We applaud Leadership’s recognition that the ability of banks to invest in municipal securities for infrastructure projects is critically important and should not be impaired and Congress’ dedication to ensuring the municipal bond remains the cornerstone of a healthy and productive economy.

On May 22, 2018, the US House of Representatives passed by a vote of 258-159 the Senate’s bank regulatory reform bill, The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155). With the bill’s passage in both Chambers, the President is expected to sign it into law before the start of the weekend.

A legislative success for BDA members in the bill is a provision (Section 403) that directs the FDIC, the Federal Reserve, and the OCC to classify qualifying investment-grade, liquid and readily-marketable municipal securities as level 2B liquid assets under the agencies’ liquidity coverage ratio (LCR) rules. This classification ensures that municipal bonds remain an attractive and low-cost financing tool for public infrastructure.

Working in tandem with state, local, and issuer groups, BDA has supported and advocated for the high-quality liquid asset (HQLA) provision in the bill. BDA’s work on this issue can be viewed here.

Next Steps

The BDA will be tracking and updating members as the federal banking agencies amend LCR regulations to reflect the change in law.

Section 403 directs all the banking agencies to amend their LCR rules and any other regulation that incorporates similar liquidity definitions within 90 days after the date of enactment of the legislation.

Bond Dealers of America

May 23, 2018

The banking bill President Trump signed into law on Thursday promises to help reduce state and local borrowing costs, public finance officials and experts said.

A section in the bill would reclassify investment grade municipal bonds as “high-quality liquid assets,” referred to as HQLA for short.

This change opens the door for the nation’s biggest banks to use the bonds to meet federal liquidity requirements. Liquidity is a measure of how swiftly assets can be converted to cash to meet financial obligations.

Enabling banks to count the bonds as liquid assets is expected to drive up demand for the bonds and, in turn, push down interest rates for state and local borrowers.

“HQLA is huge for us,” said Emily S. Brock, who leads the Government Finance Officers Association’s federal liaison center. “We’ve been working it for about four years.”

The Federal Reserve, Federal Deposit Insurance Corporation and the Comptroller of the Currency approved liquidity rules in 2014 for banks with over $250 billion in assets, setting guidelines for the high-quality liquid assets that they need to maintain. But “muni” bonds didn’t qualify as an HQLA asset under those rules.

Vermont Treasurer Beth Pearce is the current president of the National Association of State Treasurers.

“For me as a treasurer, and treasurers across the country, we’re concerned about the cost for our taxpayers and we see this as an important improvement,” Pearce said.

“It’s a very big deal,” she added.

State and local governments commonly borrow to pay for infrastructure like roads, schools and water systems. The municipal debt market in the U.S. totals about $3.8 trillion.

It’s too early to know how much the HQLA designation could save states and localities, according to Brock and Pearce.

But Brock anticipates no shortage of interest among banks in municipal debt. “Banks love safety, they love liquidity and they love yield,” she said. “Municipal securities do it for them.”

The bipartisan legislation the president signed Thursday is dubbed the Economic Growth, Regulatory Relief, and Consumer Protection Act.

It rolls back rules for small- and medium-sized banks that were imposed as part of the 2010 Dodd-Frank law, which lawmakers passed in the wake of the nation’s 2008 financial crisis.

Route Fifty

By Bill Lucia,
Senior Reporter

MAY 24, 2018

Another courtroom battle is shaping up between holders of the Puerto Rico Sales Tax Corp (COFINA) bonds and Puerto Rico general obligation bonds. At stake are who has the first claim on the sales tax revenue, one of the few reliable revenue sources dedicated to bond service. The issue arises because the government has not guaranteed the COFINA bonds in a way that puts them on par with GO obligations. The issue is particularly critical to the bond insurers who differ on their exposure to the two issuers. AMBAC has insured some $7.3 billion and MBIA some $4.2 billion of COFINA bonds representing 75% of AMBAC’s and 49% of MBIA’s total exposure in Puerto Rico. Hence, a ruling that favors the GO bondholders could be devastating to AMBAC and windfall to Assured Guaranty (AGO) which has greater GO bond exposure. Some $26.3 billion of Puerto Rico’s $73 billion in bonds carry monoline bond insurance, so all the carriers face serious write offs no matter who wins, however, the AMBAC exposure appears the most crippling. The total exposures are $8.5 billion for AGO, $9.7 for AMBAC and $8.5 billion for MBIA. While this battle takes shape COFINA has also gone into court to obtain relief from its $17 billion bond obligation through a mandatory reduction of the principal amount.

On another front, Governor Ricardo Rossello has thrown out a projection of a 70% to 90% recovery for island GO bondholders if all goes well over the next decade. This projection is more motivated by his power struggle with the oversight board, which wants deeper cuts in the Governor’s budget, than by economic realities. The facts in support of any such projections would lead one to a different conclusion. The islands debt burden from bonds and pension obligations total some $123 billion. Divide this by a population of 5.3 million and you get an average debt burden per person of $35,142. Consider this in the light of a population where almost half live in poverty and the average income is $19,350 making the average debt burden 181%. Compare this to the USA where we worry about a 20 trillion national debt which works out to about $55,500 per citizen. Compared to an average income of $53,800 means we have a much lower average debt burden of only 103%. Oh, but I forgot to include our unfunded social security and Medicare obligations of at least another, say, $10 trillion? That would kick our average person debt burden up to 155%. Is that scary or what? Maybe those worrying about our unsustainable debt growth aren’t so far off.

The economic hard facts are that, while a few select bondholders with better collateral may possibly achieve a 70% recovery, the average for the rest will likely achieve no more than 15%. This will be done in stages as agreements are reached which are unachievable but have to be dealt with by other than the current participants. A few years later the next generation gets to redo the agreements, blaming the incompetence of their predecessors and the inability to see into the future or anticipate the next hurricane. Isn’t a Puerto Rico moment what politicians of all stripe are facing? Isn’t that what’s going on with those tobacco bonds or unfunded state and municipal pension promises? Yet the market must go on and we all play musical chairs without recognizing that high coupons on bonds mean a lower chance of getting your principal back. Want proof? Our Distressed Municipal Debt database, which contains over 4,000 defaults shows an average coupon rate since 1983 of 8.03%. So when you see yields of 8%, recognize that when they default, the average recovery was 8.7 cents on the dollar.

Forbes

Richard Lehmann, Contributor

MAY 26, 2018

Analysis of the Opportunity Zone Designations

Abstract
The Tax Cuts and Jobs Act included a new federal incentive—Opportunity Zones—to spur investment in poor and undercapitalized communities. Governors (and the mayor of the District of Columbia) have now selected which among the roughly 56 percent of eligible census tracts in the U.S. should be classified as Opportunity Zones. While many criteria could be used to assess how successfully governors targeted Zones, we offer two for consideration: need and benefit. In this brief we gauge governors’ selections against tract measures of the investment flows they are receiving and the social and economic changes they have already experienced.

Download PDF

The Urban Institute

by Brett Theodos, Brady Meixell & Carl Hedman

May 21, 2018

Explore the Explorer.

Now that most Opportunity Zones have been designated, we thought it would be good to provide some insight on the basics of Opportunity Zones and how this tax incentive could be used to spur investment into low-income and underserved communities across the country. How should local communities with Opportunity Zones begin the important work of identifying potential investments and attracting investors? We review the basics in this post from the Council of Development Finance Agencies.

Overview
Created as part of the Tax Cuts and Jobs Act, Opportunity Zones are a federal economic development tool aimed at improving the outcomes of distressed communities around the country. Opportunity Zones are low-income census tracts that offer tax incentives to investors who invest and hold their capital gains in Opportunity Funds. These Opportunity Funds must invest at least 90% of their assets in qualified investments located in Opportunity Zones. Investors in Opportunity Funds receive a temporary deferral on their capital gains taxes if they hold their investments for at least 5 years, and a permanent exclusion from a tax on capital gains from the Opportunity Zones investments if the investments are held for 10 years.

Continue reading.

Smart Incentives

by Ellen D. Harpel | May 22, 2018

Attached is a Hawkins Advisory describing Qualified Opportunity Zones, which were introduced by the Tax Cuts and Jobs Act of 2017 as a temporary measure to incentivize economic growth and development in certain low-income communities.

Read the Advisory.

When: October 25-26, 2018
Where: Four Seasons Hotel, Washington, DC

Click here to learn more and to register.

May 22, 2018

Fitch Ratings-New York-24 May 2018: The potential budgetary impact of legalizing marijuana for recreational use in New York State would be modest for New York City with no impact on credit quality, according to Fitch Ratings. Fitch expects the decision to legalize in New York State, which as a whole would also see modest revenue gains, will be based on political and public policy considerations rather than budgetary ones.

A recent report by New York City’s Comptroller estimates the legal adult-use marijuana market at $3.1 billion in New York State, including $1.1 billion in New York City. The $336 million in annual tax revenue to New York City estimated by the comptroller represents 0.3% of fiscal 2019 budgeted revenues of $89 billion. The budget, which does not assume legalization for recreational use, includes $100 million in excise taxes from medical marijuana, which has been legal since 2014. Fitch expects any increased receipts would take time to become fully realized. If legalization is approved by the state, many details would remain to be worked out, including which elements to tax and at what rate.

The comptroller also estimates a $36 million savings from reduced misdemeanor arrests if legalization is approved, although the mayor has already announced an order for the New York Police Department to stop making marijuana-related arrests and the Manhattan district attorney announced that his office would no longer prosecute most marijuana-related cases.

As Fitch noted in “U.S. States Experiment with Cannabis Legalization,” (August 2017) states have taken a variety of approaches to cannabis legalization (Fitch uses the broader term cannabis to refer to both marijuana, which typically connotes the dried form of the plant used for smoking, as well as oils and other formulations derived from the same plant). Eight states and the District of Columbia have legalized cannabis use for adults for nonmedical purposes, and another 22 have legalized it for medical purposes only. Taxes on nonmedical cannabis vary greatly, reflecting a range of both tax rates and the elements that are taxed. Some states tax based on price, with others based on weight, and taxes can be levied on producers, retailers and/or customers.

The New York City comptroller report’s estimate of $336 million in annual taxes, which is based on surveys of marijuana use and sales per user in states that have already legalized recreational marijuana, equates to a tax rate of 30%, which is sizable but in line with the effective tax rates estimated by Fitch in its review of states that already have legalization for recreational use. States with high effective tax rates may see legal sales shift back to black markets over time, especially if neighboring states legalize with lower effective rates. Price declines over time could also result in reduced tax revenues if the tax is tied to price.

Neighboring states New Jersey and Connecticut are also considering legalization for recreational purposes. Legislators in all three states have proposed bills, and the new governor of NJ made legalization a campaign promise.

In our earlier report, Fitch noted the need for flexibility in implementing new laws, as they may not achieve the expected goals within the anticipated timeframe. Obstacles to successful legalization include state restrictions on cultivation, distribution and sales, which may conflict with other policy goals.

Contact:

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

Stephen Walsh
Director
+1-415-732-7573

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

Additional information is available on www.fitchratings.com

Fitch Ratings-New York-22 May 2018: California’s potential building requirement for many types of new residential construction to include solar panels will have a limited credit effect on public power issuers, homebuilders and the housing markets in the state, Fitch Ratings says. If the requirement is implemented, it will be an incremental component of a broader regulatory trend for which Fitch-rated issuers have prepared. California building code already requires all new residential construction to be zero net energy (ZNE) by 2020 and all commercial buildings to be ZNE by 2030. The lack of new construction in California will lower the impact on house prices.

We do not expect the building requirement to have a material effect on public power issuer ratings. The requirements are consistent with the ongoing trend toward greater energy efficiency and reduced per capita electricity consumption in the state. Public power utilities have been planning for, and adapting their long-term supply strategies to, responding to this trend.

Furthermore, many Fitch-rated public power issuers are in built-out communities with modest levels of new home growth. Those in higher growth areas, such as Roseville, already factored the much greater energy efficiency of new homes into their load forecasts.

We do not expect the mandate to install solar panels to meaningfully affect prices of existing homes in the state. Sales of new homes account for a smaller portion of homes sold in California. The incremental cost of installing solar panels is relatively marginal to the buyers of homes in the state, where home prices are already high to begin with. However, higher interest rates and increasing home prices in recent years, combined with the additional cost of installing solar panels, will likely continue to erode affordability for new homes in the state, particularly for entry level/first-time homebuyers. Nevertheless, the total cost of homeownership is likely to go down with lower monthly energy costs. California is one of the largest states, in terms of new home construction, with new home permits in the state accounting for about 9% of the U.S. total in 2017.

Homebuilders in the state have already begun marketing roof top solar features and changed practices to comply with ZNE codes, although adoption has been relatively limited, as most homebuyers have not been willing to pay for the added cost. The requirement to install solar panels could exacerbate the already tight construction labor market. Thus, the large public homebuilders rated by Fitch are well-positioned for the change, as these builders generally have better access to labor and materials due to scale. We expect homebuilders not marketing solar features to have ample time to do so, as the rule would not go into effect for two years. There is a small risk solar panel installations rise quickly, creating supply pressures that raise prices and slow down construction. This risk would be higher if states such as Nevada, Texas and Florida adopt similar building standards.

On May 9 the California Energy Commission voted to adopt the building standards beginning in 2020. The standards still need approval from the California Building Standards Commission. In addition to solar panels, the standard includes requiring residential and commercial buildings to have updated attic insulation and commercial buildings to conform to more energy efficient lighting standards. The standards would apply to apartment buildings of 1-, 2- and 3-stories and single-family homes.

Contact:

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

Robert Rulla
Director, U.S. Corporate Ratings
+1 312 606-2311
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602

Robert Rowan
Senior Analyst, Fitch Wire
+1 212 908-9159

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com
Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com

Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

• Miami Beach most exposed city in the U.S to climate change
• Four Twenty Seven developed new climate change risk index

The picturesque Florida cities of Miami Beach and Sarasota carry high investment-grade credit ratings and are popular travel destinations. They’re also two of the most exposed U.S cities to climate change in the country, according to a new analysis by advisory firm Four Twenty Seven.

The Berkeley, California-based firm has developed an index surveying 761 cities’ and 3,143 counties’ exposure to sea level rise, water stress, heat stress, cyclones and extreme rainfall based on analysis of changes between current and future conditions. It found that communities in Florida are the most susceptible to climate change risks, with Miami Beach being the most exposed city and Manatee County being the most-exposed county.

The data will help investors, ratings companies and local governments better evaluate the issue, said Frank Freitas, chief development officer at Four Twenty Seven. “We’re hoping that municipalities and investors can engage in conversations that see market support for initiatives that foster resilience going forward, just like we’ve seen investors engage with companies in equity markets on ESG and climate risk,” Freitas said.

The $3.9 trillion municipal-bond market has been slow to take climate change risks seriously, said Nicholas Erickson, assistant vice president of portfolio management at Sage Advisory Services. But the hurricanes that battered Florida, Texas and Puerto Rico last year show how significant weather-related events could be for local economies, he said.

“It could have a huge impact,” he said.

Investors have pushed credit-ratings companies to give them more of a warning about environmental risks. Moody’s Investors Service and S&P Global Ratings say they incorporate environmental risks in their ratings through their analysis of factors such as leaders’ preparedness for weather events. Even so, rating methodologies for states, local governments and utilities don’t “explicitly” address climate change as a credit risk, Moody’s said in a report last year.

For Florida cities and counties, home values could suffer as a result of the risks of cyclones and flooding, which could in turn hurt property-tax revenue that governments rely on, the Four Twenty Seven report said. In order to address water shortages or droughts, water utilities may have to spend more on infrastructure or their customers may have to pay more in fees, it added.

Charleston, South Carolina, and Virginia Beach, Virginia, topped the ranking for cities susceptible to severe hurricanes and typhoons in the future. Heat stress, which measures the frequency and severity of hot days and average temperature, was found to predominantly affect the Southeast and Midwest.

Freitas said he hopes the firm’s findings don’t cause investors to avoid investing in projects out of the most exposed places to climate change. “Understanding risk is the first step toward helping people invest in resilience as well,” he said.

Bloomberg

By Amanda Albright and Danielle Moran

May 22, 2018, 4:00 AM PDT

Some states were getting ready to jump into sports gambling even before the U.S. Supreme Court legalized it last week, lining up legislation that would allow their states to cash in as quickly as possible on millions of dollars in tax revenue.

New Jersey, which won the high court case, and Delaware, with its racetracks, could be the first to benefit, potentially hosting sports gambling in a matter of weeks. Mississippi and Pennsylvania also expect to see legal betting soon.

But gambling experts warn that starry-eyed lawmakers might be overestimating their haul from legalized sports betting. Differences in state tax structures, competition for a limited market of gamblers, the push for a federal framework and the continued allure of black-market betting all could cut into the hoped-for windfall.

Continue reading.

The Pew Charitable Trusts

By Elaine S. Povich

May 22, 2018

DALLAS (S&P Global Ratings) May 21, 2018 – On May 9, Colorado’s legislature passed Senate Bill 18-200, which outlines adopted changes to the state’s pension system to restore to full funding within 30 years. The governor has not yet signed the law.

Continue Reading

Local government (LG) ratings in the Commonwealth of Virginia remain strong and stable characterized by low unemployment, high income and wealth levels, and strong budgetary performance, often supported by formal financial policies and regular budget monitoring.

Continue Reading

May 23, 2018

As the treasurer for the country’s fourth-largest school district, Tony Vu says his goal is to lower borrowing costs for a voter-approved $1.2 billion general obligation construction program in south Florida.

Vu said his Miami-Dade County School District is “a Fortune 500-sized organization” that is limited by legislation and faces shrinking resources, growing mandates and tighter regulations.

A priority since becoming the treasurer 10 months ago, he said, was to create a new investor community website to augment the district’s use of Digital Assurance Certification and the Municipal Securities Rulemaking Board’s EMMA filing system.

The Miami-Dade County School District has $3.73 billion of outstanding debt.

As he considered a new platform, Vu said he was approached by representatives of BondLink, a Boston-based financial technology company that provides investor outreach to municipal issuers. Vu liked what he saw.

“I think from the investor’s standpoint we can reach a larger group and a larger pool,” he said. “I think one thing we’ll definitely be able to do is have a more localized outreach effort.”

Vu said he expects BondLink to give him with the ability to get the district’s “story out there as effectively as possible,” and to conduct targeted and proactive outreach to new retail investors and existing bondholders.

“Higher transparency typically means lower borrowing costs,” he said.

Studies have supported the notion that issuers with good disclosure practices tend to elicit lower interest rates.

That was the conclusion of “When transparency pays: The moderating effect of disclosure quality on changes in the cost of debt,” a paper by Christine Cuny and Svenja Dube of New York University’s Stern School of Business.

In their research, presented at Brooking’s July 2017 Municipal Finance Conference, Cuny and Dube examined the relation between disclosure choice, changes in issuer credit ratings, and adverse local housing conditions.

The “results suggest that disclosure quality can lower the cost of debt by attenuating the impact of negative economic outcomes,” they said.

Vu said he hopes improved disclosure will help the district lower borrowing costs as it completes its $1.2 billion 21st Century GO Bond Program approved by voters in 2012. To date, the district has issued $929 million of GOs, leaving $271 million in bonding capacity to be sold.

The district’s bond advisory committee reported that $546 million has been spent on new and renovated schools and technology upgrades as of Dec. 31.

The Miami-Dade School District also has $2.37 billion of certificates of participation lease-revenue debt outstanding, secured by its capital millage rate, impact fees, and other legally available funds.

The ability of Florida school districts to issue COPs in the future is in question as a result of the Legislature’s passage of House Bill 7069 in 2017.

The sweeping education bill required districts for the first time to share with charter schools a portion of their optional 1.5 millage rate dedicated to capital funding. One mill equals $1,000 of the assessed taxable property value.

HB 7069 “won’t impact already issued debt,” Vu said. The bill requires outstanding debt service of the districts to be paid first before funds are shared with charter schools.

The State Board of Education is continuing to implement the bill, and has yet to determine how the law will impact the ability of Florida school districts to issue COPs in the future.

More than a dozen districts have filed a law suit challenging HB 7069.

The Miami-Dade County School District, which operates 342 traditional public schools and must share a portion of its capital millage with 130 charter schools in the county, is not participating in the HB 7069 suit.

S&P Global Ratings raised its rating on the district’s GO bonds to AA-minus from A-plus and its rating on the district’s COPs to A-plus from A in April 2017. Moody’s Investors Service (MCO) assigns an Aa3 rating to the GOs and an A1 to the COPs. Both have stable outlooks.

BY SOURCEMEDIA | MUNICIPAL | 05/14/18 07:03 PM EDT

By Shelly Sigo

WASHINGTON – The Financial Industry Regulatory Authority is going to immediately begin examinations of firms’ compliance with markup disclosure rules, with early returns indicating minor speed bumps in the implementation of those landmark requirements, regulatory officials said Tuesday.

Cindy Friedlander, the senior director of fixed income regulation within FINRA’s Regulatory Operations group, said during a panel at FINRA’s annual conference that the regulator will not wait to begin examining firms’ compliance with the markup disclosure requirements that took effect less than two weeks ago.

Amendments to Municipal Securities Rulemaking Board rules G-15 on confirmation and G-30 on prices and commissions require dealers as of May 14 to disclose their markups and markdowns on certain transactions in the confirmations they send to retail customers. Dealers had hoped for a compliance extension, but didn’t get it.

Under the rules, dealers initially must look at their contemporaneous trades of the same muni with other dealers or customers to establish a presumption of prevailing market price. If that data is unavailable, they must make a series of other successive considerations.

They must look at contemporaneous trades of the muni in interdealer trades, then trades of the muni between other dealers and institutional investors, then trades on alternative trading systems or other electronic platforms. Further down the waterfall, dealers can look at contemporaneous trades of similar securities.

Markup disclosures must be given as a total dollar amount and a percentage of the prevailing market price.

“We will be examining firms immediately,” Friedlander said. “We are going to be very careful to take into account firms’ good faith efforts to comply with the rules.”

Michael Post, MSRB general counsel, said the board has been discussing how compliance with the markup rule has gone over the first week or so.

“What we’ve heard is that things have gone relatively smoothly,” Post said, acknowledging that there have been reports of some hiccups. “It’s a relief that the issues that people are encountering are things that they think that they can address.”

Post reserved some measure of caution about his remarks, realizing that a firm experiencing a significant compliance failure might be hesitant to admit that to the MSRB.

Peg Henry, a deputy general counsel at Stifel Financial (SF) in St. Louis, said she has spent a lot of time on the trading floor recently and has asked traders in the past couple of days how things are going with markup disclosure.

“The responses I got ranged from ‘not bad’ to ‘so far so good’ to ‘it is what it is,’” she said.

Henry said her firm has experienced some issues, such as the fact that it works with several vendors in its day-to-day business that don’t standardize how they report information. She also added that the size of the markup that needs to be reported on a trade could seemingly be affected by a trade of the same security that occurs later in the day.

“There are situations that have arisen just in the first week that have created problems for us,” she said. “We’ve developed workarounds, but the workarounds are very labor intensive.”

Post said that firms can choose to calculate the prevailing market price of a security earlier in the day if it chooses, so it can disclose the markup before another transaction occurs that could muddy the waters.

Ivonia Slade, an assistant director in the Securities and Exchange Commission’s Public Finance Abuse Unit, said her group is going to remain focused on topics it has acted on over the past several years, such as offering fraud that occurs when issuers make misleading statements in their bond documents. She highlighted the SEC’s focus on enforcing the fiduciary duty requirements of municipal advisors.

“Our focus has been on making sure that they’re meeting those obligations,” she said.

The FINRA conference began May 21 and concludes May 23.

BY SOURCEMEDIA | MUNICIPAL | 05/22/18 07:04 PM EDT

By Kyle Glazier

The Los Angeles County Metropolitan Transportation Authority launched a new investor relations website Thursday.

The site is powered by BondLink, a Boston-based firm that has been rolling out new municipal bond investor websites regularly since Colin MacNaught, a former Massachusetts deputy treasurer, created the company in 2016 with Chief Technology Officer Carl Query.

The new website comes just months after Metro unveiled a $5 billion capital plan with a long list of projects it wants to complete before the city hosts the 2028 Summer Olympics and Paralympics. The Twenty-Eight by 28 plan is aimed at completing 28 major road, transit and bicycle projects before the event.

“We are excited to work with them; they have a robust capital program, good management and they are an active credit and issuer,” said Colin MacNaught, BondLink’s co-founder and chief executive officer.

The company has created investor websites for issuers across the country. In California, it created websites for the state government, the Port of Los Angeles and West Basin Water District and hopes to launch two more California websites next week.

The websites provide a portal for issuers to share status updates on projects funded by bonds or quarterly cash reports, and allows investors to sign up for custom alerts. The Metro website will provide access to more than 10,000 documents including information on bond sales, credit ratings and investor resources.

BondLink’s websites enable issuers to provide more frequent disclosure to investors, which besides accomplishing the Government Finance Officers Association’s best practices goals, also attracts a broader swath of investors, MacNaught said.

“Academic research shows that more timely disclosure can lower borrowing costs for issuers,” MacNaught said.

Metro remains committed to minimizing borrowing costs in its capital finance program, Metro Treasurer Donna Mills said in a statement.

“This new website will enhance our investor outreach and improve our disclosure and transparency in the capital markets,” Mills said.

Given the size of its capital program, even a small increase in demand for the bonds would lower borrowing costs significantly, MacNaught said.

“California is such a big market and retail plays such a big part of that bond market,” MacNaught said. “Providing a really convenient investor platform for issuers like Metro and the Port of Los Angeles is a big benefit for bond investors including retail.”

BY SOURCEMEDIA | MUNICIPAL | 05/24/18 07:05 PM EDT

By Keeley Webster

This past January, the city council of Clark County, Nevada, approved over $750 million in tax-free municipal bonds for the construction of a $1.9 billion stadium for the NFL’s Raiders. This comes on the heels of Arlington, Texas, agreeing to provide $500 million for a new $1.1 billion stadium for the MLB’s Rangers.

Around the country, other cities’ budgets are still reeling from the costs of subsidizing stadiums. Bloomberg News linked Oakland’s 2011 decision to decrease its police force by 18 percent to debt from building the Coliseum, cuts which increased average police response time to 17 minutes. And in 2014, Detroit was forced to cut pensions for retirees by 4.5 percent to subsidize a new stadium for the Red Wings, a stadium which the Red Wings will pay one dollar a year to lease.

These projects reflect a larger nationwide trend of local governments footing the bill for the construction of sports stadiums. Of the 45 major stadiums built since 2000, 36 were financed through tax-free municipal bonds. Their total cost to taxpayers? Over $3.2 billion.

Continue reading.

Harvard Political Review

By Michael Wornow | May 21, 2018

NEW YORK (Reuters) – Pennsylvania Governor Tom Wolf’s administration on Monday sued an array of financial, legal and other professional firms over their involvement in a 15-year-old incinerator upgrade project that nearly bankrupted the state capital, Harrisburg.

The state sued RBC Capital Markets, Buchanan Ingersoll & Rooney PC, Public Financial Management Inc (PFM) and others over the 2003 ill-fated trash-to-energy project, which saddled the city with more than $360 million of debt.

The city filed for bankruptcy in 2011 but the case was later thrown out. In its time, Harrisburg’s debt saga was the most dramatic episode in U.S. public finance, coming before both Detroit and Puerto Rico filed their respective bankruptcies.

“It is time to hold those responsible for the failed incinerator debt scheme accountable and recoup the taxpayer dollars wasted by their negligence and deception,” Wolf said in a statement.

In their push to close bond deals so they could be paid, the professionals named in the lawsuit, dubbed the Working Group, misled the city by providing false information and concealing important facts, according to the complaint.

The city backed the bonds used to finance the project. After the bonds defaulted, the city was forced into the state’s first and only municipal receivership – paid for by state and local taxpayers.

A spokeswoman for RBC declined to comment. Representatives of Buchanan Ingersoll & Rooney and PFM did not immediately respond to emails seeking comment.

Eckert Seamans, which provided legal advice to underwriters of the 2003 bonds and in 2007 to the authority that issued the bonds, said on Monday that it had cooperated fully with investigations over the years “because we are confident that the firm represented its clients professionally, competently, and ethically.””We will vigorously defend our service to our clients and aggressively fight these unfounded allegations,” the firm’s Chief Executive Officer Timothy Hudak said in a statement.

The state seeks punitive damages, with interest.

Adding to taxpayer frustration was the case of Stephen Reed, who was mayor at the time and who ended his 28-year tenure in 2010.

Reed was charged in 2015 with hundreds of criminal counts for using some bond proceeds to travel the country and buy a bizarre list of roughly 10,000 artifacts, including a sarcophagus, a suit of armor and a “vampire hunting kit,” that he said were destined for museums.

Last year he pleaded guilty and received probation to a shortened list of charges.

BY HILARY RUSS

May 21, 2018

(Reporting by Hilary Russ; editing by Richard Chang and Lisa Shumaker)