Los Angeles Has Been Hammered by Covid. But Its Muni Bonds Are Holding On. Here’s Why.

Los Angeles is suffering what may be the hardest Covid-related health and economic hit of any big city. But the city’s $2.6 billion in municipal bonds outstanding, while hardly thriving, appear in decent shape.

Unemployment in the Los Angeles region, at 9.6% in November, was the highest among the five biggest metropolitan areas and 3.2 percentage points worse than the national average. And that was before the surge of infections and deaths in Southern California accelerated into the new year, straining hospitals and morgues and dashing hopes for a rebound in the city’s revenue.

Fitch Ratings analyst Alan Gibson last month revised the outlook to negative on Los Angeles’ AA issuer default rating, citing “the extensive budget-balancing actions necessitated by the current economic downturn, which have the potential to reduce the city’s financial resilience during the subsequent economic recovery period.”

The pandemic threatens to reverse much of the progress the city made in the decade since the Great Recession, as it built its rainy-day reserves to almost $600 million in 2019. With the revenue shortfall for fiscal 2021 at $700 million, the city is about to pull a quarter of a billion dollars from reserves. Having already agreed to furloughs and early retirement for some city employees, Los Angeles is poised to start layoffs at its 10,000-member police department, a sign of fiscal distress to municipal bond professionals.

“When you see they’re starting to cut into a significant number of employees, they’re not just cutting fat in the budget,” says Tom Kozlik, head of Municipal Strategy and Credit at Hilltop Securities. “They’re cutting into the muscle.”

Los Angeles’ budget woes mirror those of cities, states, and authorities across the nation, as they struggle to fill a trillion-dollar revenue shortfall over three years caused by the pandemic. An unexpected dip in U.S. jobs in December dashed hopes that the U.S. economy will rebound quickly enough to ease the budget pain.

“The revenue decline that the City of Los Angeles has suffered as a result of Covid is multiples more than the decline during the Great Recession,” says City Councilman Paul Krekorian, who chairs the council’s budget committee. “We’re now experiencing the biggest surge [in Covid] in the county. We have no reason to think our revenue is going to get better in the next months.”

At the same time, Democratic victories in the Georgia runoffs for the Senate raised expectations that the new Biden administration will be able to enact direct federal aid to help states and cities like Los Angeles avoid layoffs that could cascade into the private sector and prolong the recession. Democrats last year proposed as much as $1 trillion in aid, an amount that was whittled down to nothing as Republicans argued the money would amount to a bailout for cities that had mismanaged pensions and finances.

Moody’s Investors Service in the midst of the first Covid surge in April revised its outlook on the Los Angeles’ Aa2 rating to stable from positive. The city’s $2.6 billion in debt outstanding includes $585 million of general obligation bonds. It issued $1.8 billion of short term tax and revenue anticipation notes to bolster liquidity early in the fiscal year.

Moody’s cited the city’s large and diverse economy, strong management, and relatively modest debt burden. Los Angeles’ $614 million of debt service is a fraction of the $5.8 billion New York City pays to investors, according to a separate Moody’s report. Debt service plus retirement-benefit costs amount to only 22% of revenue, compared with Chicago’s 46% burden, the heaviest in the nation. Moody’s is still monitoring the situation, and the $250 million draw on reserves is in line with expectations, analyst Lori C. Trevino said on Jan. 13.

Investors have stood by the city’s debt. Based on analysis by Ice Data Services, the price of a Municipal Corp. of Los Angeles lease revenue bond maturing in 2037 has risen to $122.427 on Jan. 14, from $120.51 at the beginning of 2020.

“I don’t really see L.A. bonds trading much cheaper than the general market,” says John Mousseau, head of fixed income at Cumberland Advisors. “This is why cities have reserves and why bonds have debt-service reserve funds—for those times. No doubt federal aid will help post-inauguration.”


By Stephen Kleege

Jan. 15, 2021 8:39 am ET

Developer Says Work on Vegas-to-L.A. Line Could Start This Year.

Developers of the proposed $8-billion high-speed train between Southern California and Las Vegas—a project that has been on financial hold since last fall—have told Nevada regulators that construction, originally planned to start in 2020, could begin this year.

The president of Brightline West said in a Jan. 4 letter to the Nevada High-Speed Rail Authority that construction heading south from Las Vegas could begin in the second quarter of 2021. Last fall, Brightline’s parent company, Fortress Investment Group, put the brakes on the project when it was unable to complete financing.

“We are preparing a revised financing plan for 2021 that is expected to include additional equity and a relaunch of the bond sale,” wrote Brightline West President Sarah Watterson. The letter cited Brightline’s recent issuance of nearly $1 billion in tax-free bonds to fund an expansion of its existing Florida line as evidence of “improving market conditions and strong interest in private intercity passenger rail projects.”

The letter also announced that the company has contracted with Siemens Mobility to provide its Velaro trains for the SoCal-to-Vegas project. Brightline promises one day to link Las Vegas with Los Angeles, its biggest feeder market, with an initial 170-mile train line that would cut the six-hour driving time in half.

“We continue to make progress on Brightline West and remain focused on expanding our plans to connect further into L.A. County,” says Greta Seidman, Brightline West’s director of public affairs. “We appreciate the tremendous support from Nevada and California and are actively engaging officials in both states on our financing and construction plans.”

In 2020, Brightline secured the rights to issue $800 million in private activity bonds allocated by California and Nevada. The company let those rights lapse last fall, citing financial market uncertainty caused by the pandemic. A bond industry newsletter said at the time that there were no markets for the securities, which were offered with yields running from 7% to 7.5%, about four times what top-rated municipal bonds pay.

The company says the project would create 40,000 construction jobs and 1,000 permanent jobs. It also says the all-electric train, with speeds of up to 200 mph, will keep 400,000 tons of carbon dioxide out of the air each year and remove three million cars from Interstate 15, which is often clogged with travelers on weekends.

Along with the rail project connecting Southern Nevada and Victorville, the company is also discussing additional links to California cities Rancho Cucamonga and Palmdale, where riders can then connect with the Metrolink railway to downtown Los Angeles.

The company’s letter also mentioned it is recruiting for its executive and project management teams in Las Vegas and offered to provide an in-person briefing for the Nevada High-Speed Rail Authority in the near future.

Ninyo & Moore and Terra Contracting have been conducting geotechnical testing and exploratory boring for Brightline near the planned Las Vegas station south of the Strip.

Brightline West is the latest name for the project. It was introduced in 2019 as Virgin Trains USA and included participation by billionaire investor Richard Branson’s Virgin Group Ltd.

It was renamed Xpress West after Branson left the project last year and is now being reintroduced as Brightline West, to better associate with the Florida Brightline train that, before being suspended during the pandemic, traveled from the Miami area to Orlando.

by Doug Puppel

January 14, 2021

Illinois and MTA Bonds Rally on Bet That Democrats Win Senate.

Municipal-bonds investors are buying up debt from New York’s Metropolitan Transportation Authority and Illinois, but they have Georgia on their minds.

Some bonds sold by the MTA, the largest U.S. mass-transit system, and Illinois are trading up in price Wednesday as Democrats’ chances of taking back the U.S. Senate increased after Tuesday’s runoff elections in Georgia. Illinois and the MTA are two well-known, financially-stressed governments that would benefit if Democrats control both chambers of Congress as they are more likely to aid states and municipalities, said Matt Dalton, chief executive officer of Belle Haven Investments, which oversees $14 billion of municipal debt.

“MTA is probably the most visible entity out there right now that’s in need of cash,” Dalton said. “A lot of the focus within our industry is ‘OK, MTA is probably going to benefit on the back of the Blue Wave.’ So that’s going to be the real power behind seeing MTA spreads tighten.”

Illinois, the lowest-rated state, and the MTA are the only two borrowers that tapped the Federal Reserve’s emergency lending program, which ended on Dec. 31, as low interest rates in the $3.9 trillion municipal-bond market kept the Fed program attractive only to the most fiscally-challenged.

MTA debt maturing in 2031 traded Wednesday at an average price of 121.1 cents on the dollar, up from an average 112 cents during the prior three months, according to data compiled by Bloomberg.

An Illinois bond maturing in 2030 traded at an average price of 128.3 cents on the dollar, up from 124.8 cents at the end of 2020, Bloomberg data show.

The MTA’s near-term finances got a boost last month as Congress approved $4 billion of additional federal aid to help close the agency’s 2021 budget deficit as ridership has plummeted. That infusion of cash allows the MTA to avoid drastic service cuts and laying off thousands of employees.

Even with the federal help, the MTA faces an $8 billion budget deficit through 2024. The MTA was seeking $12 billion of federal aid as ridership may not return to pre-pandemic levels until 2024.

While federal stimulus won’t help Illinois’ long underfunded pension systems, it could help with other losses connected to the pandemic that are contributing to back-to-back budget gaps.

Illinois is facing a $3.9 billion deficit in fiscal 2021 and has only $1.85 million in its rainy day fund. It borrowed $1.2 billion in June from the Federal Reserve Municipal Liquidity Facility to close a gap in fiscal 2020 and then another $2 billion in December for fiscal 2021.

“Illinois has more to gain from potential stimulus out of Congress and more ground to make up,” said Daniel Solender, director of the municipal bond group for Lord, Abbett & Co., which owns Illinois debt as part of $31 billion in muni assets under management. “The reason it has more to gain is the state and local funding is potentially a direct source of funding for them.”

Bloomberg Markets

By Michelle Kaske and Shruti Singh

January 6, 2021, 9:33 AM PST

Fitch: New York Transit System Risk Remains Despite Government Stimulus

Fitch Ratings-New York-05 January 2021: The $908 billion coronavirus stimulus package includes funding that will tide the New York Metropolitan Transportation Authority (MTA) over in 2021, but financial challenges will remain in future years, absent a strong recovery in ridership, according to Fitch Ratings. The infusion of funding should be sufficient to balance the MTA’s 2021 budget, temporarily staving off substantial service reductions and layoffs, but without ridership improvement or additional aid some cuts will still likely be needed by next year, as the MTA reports a nearly $8 billion budget gap for 2022-2024.

The bill, signed into law on Dec. 27, includes $14 billion for transit systems with more than $4 billion going to the MTA, according to Senator Charles Schumer of New York. The MTA received a similar amount of funding in the Coronavirus Aid, Relief and Economic Security (CARES) Act, passed in March. Without the new aid, the MTA was projecting the need for 40% service reductions in subway and bus systems and 50% in commuter rail lines, resulting in an estimated 9,400 layoffs.

Fitch believes the service and workforce reductions proposed by the MTA would be difficult to implement, given the need for essential workers and others to travel by mass transit. Other gap closing actions, such as increased deficit borrowing, deferring capital spending or use of any remaining reserves could further weaken the authority’s credit profile. Fitch downgraded MTA’s Long-Term IDR (A-/Negative) multiple times in 2020. To close its 2020 budget gap the MTA tapped more than $500 million in reserves and $424 million in capital lockbox funds, and exhausted its borrowing capacity under the Municipal Liquidity Facility with the issuance of $2.9 billion in deficit financing notes in December.

The additional federal aid does not address the MTA’s fundamental ridership problem. Subway ridership was down a drastic 64% as of Dec. 30, 2020 from last year and bus ridership was down 44%. Ridership growth has flattened after an initial boost coincided with the partial reopening of the economy during the early summer, as restrictions on public gatherings and significant work-from-home levels continue. The MTA is forecasting a return to a ‘new normal’ ridership level — the equivalent of 90% of the pre-pandemic trend — by 2024 in the best-case scenario. Fitch expects ridership to remain highly sensitive to the effective distribution of coronavirus vaccines and widespread inoculation, and the permanency of the transition to remote work and migration to lower-density suburbs.

The MTA fared better in relative terms under the new bill than in the CARES Act. The agency will receive about 30% of transit aid in this bill, compared with only 16% in the earlier one. Transit ridership among the MTA’s constituent agencies, responsible for subways, buses and commuter rail, represented 37% of all transit passenger trips in 2018 in the U.S., according to the American Public Transportation Association’s 2020 Public Transportation Fact Book.


Michael Rinaldi
Senior Director, US Public Finance
+1 212 908-0833
Fitch Ratings, Inc.
Hearst Tower
300 W. 57th Street
New York, NY 10019

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

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

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

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

S&P Pension Spotlight: Ohio

Key Takeaways

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7 Jan, 2021

Michigan Public-Private Partnership Authorization Nears Passage.

A bill package headed to the Michigan governor’s desk would authorize certain municipalities to enter into public-private partnerships to get needed bridge work done.

Options to cover road and bridge repairs in Michigan are a constant pursuit at the statehouse. Since taking office, Gov. Gretchen Whitmer has advocated for a 45-cent fuel tax increase.

In the past year, the governor signed into law a bill to have the Michigan Department of Transportation hire an independent consulting firm to study the feasibility of collecting tolls on interstates. The agency is interested in the viability of tolls on Interstates 75, 94 and 96.

Local public-private partnerships

The bill package headed to Whitmer addresses infrastructure needs.

SB1215-1218 would update the state’s Home Rule Act to allow cities with moveable bridges, or bascule bridges, to enter into public-private partnerships to cover repairs and construction.

Sen. Ken Horn, R-Frankenmuth, said the legislation is intended to benefit the entire Great Lakes Bay Region. There is no specific municipality identified, but he said it would benefit municipalities like Bay City.

The locale near the base of the Saginaw Bay on Lake Huron has two bridges described by legislators as “in dire need of repair.”

Horn and Sens. Jeremy Moss, D-Southfield, and Wayne Schmidt, R-Traverse City, say costs to make repairs far outweigh what is feasible from the local level.

“Unfortunately, especially after revenues have been even further affected by COVID-19, the city’s repair needs are beyond available funding at all levels of government,” Horn said in prepared remarks.

According to a legislative analysis, Bay City has partnered with United Bridge Partners to work on the city’s two bascule bridges. The Legislature must act before the work can get underway.

SB1215 also would specify that tolls could not be collected on drivers until a bridge is either renovated or constructed. Additionally, toll agreements could be for up to 75 years.

Other bills in the package cover limits on affected projects, how counties approve projects, and public-private partnership tax collection.

In addition to Bay City, bascule bridges in the region are located in Alpena, Manistee, Menominee, Port Huron, and South Haven.

Tolling study

The 2020 law giving the state DOT authority to move forward with a tolling study requires consideration to be given to the economic impact, providing discounts to in-state drivers, toll amounts, and how to pay for the toll. The impact of tolls on out-of-state operators expected to use Michigan interstates also will be considered.

A written report on the firm’s findings will be provided to state officials. At that time, the governor will be authorized to move forward with a strategic plan to implement tolls.

If the state were to decide to move forward with toll implementation, a federal waiver would be required to collect tolls on highways built with federal funds.

Land Line Media

by Keith Goble

JANUARY 4, 2021

New Jersey to Sell $350 Million in Self-Designated Social Bonds.

New Jersey says it’s getting into the social-bond market.

The Garden State’s Economic Development Authority Thursday is selling $350 million of what officials have self-designated as social bonds through a negotiated offering managed by Loop Capital Markets. It’s the first social bond for the state, according to data compiled by Bloomberg.

Continue reading.

Bloomberg Markets

By Danielle Moran

January 7, 2021, 6:54 AM PST

California Treasurer Launches Interactive Public Finance Guide.

California Treasurer Fiona Ma’s office has gone virtual with the California Debt Financing Guide, making it easier for public finance professionals to find information they need.

Ma announced the release of a new interactive software version of the guide Wednesday, which up until now had only been available as a static PDF document. It’s available at

“The new interactive application responds to the needs of present-day finance officers, many of whom require quick answers to complex questions,” Ma said.

California has more than 4,400 units of government that tap the muni market to fund projects and look to the guide for answers to questions on how to issue bonds.

The app was developed by the California Debt and Investment Advisory Commission (CDIAC), which Treasurer Ma chairs. CDIAC provides educational resources to public finance professionals in California.

Robert Berry, CDIAC’s executive director, told the Bond Buyer when he was named head of the commission early this year that this project was on his short list of goals.

“This version of the Debt Guide enables users to easily search for public finance terms and concepts and then save their personal notes and bookmarks for future use,” Berry said in a statement.

The Debt Guide is the 2020 update to CDIAC’s flagship resource, the California Debt Issuance Primer.

As designed, the app enables users to create an account to highlight sections, save notes and bookmark sections for future use. In addition, the application can be accessed and viewed on any personal device. The app also has a legal references appendix.

“One of the most important aspects of the Debt Guide app is that it can be accessed on any device, a shortcut to the application can be saved to the home screen of your phone, tablet, or computer and easily accessed when needed,” Berry said.

By Keeley Webster


New MI Drain Code Amendments Signed into Law.

On Dec. 29, Governor Whitmer signed two Drain Code amendments into law—House Bills 5126 and 5504, now Public Acts 281 and 291, respectively. Public Act 281 does not go into effect until March 29, 2021, however Public Act 291 is effective immediately. Below are summaries of the more significant revisions to the Drain Code:

Public Act 281 (House Bill 5126, Effective March 29, 2021)

Public Act 281 amends Section 135 to allow a county drainage district or intercounty drain drainage district be extended into a new county by a petition signed by five freeholders or a municipality (previously a petition under Section 135 could only be brought by 50% or more of the landowners affected by the drain or the proposed drain). A petition under Section 135 can now be combined with a petition under Section 192 (maintenance and improvement of an intercounty drain).

Public Act 281 also amends Section 154 to separate the notice of letting (advertisement for bids) and the notice of the day of review of apportionments. The notice of letting must only be posted on the drain commissioner or county’s website at least 10 days before the bid letting. The notice for the day of review must now be published only once (instead of twice), mailed to property owners, and served (by personal service or certified mail) on the county clerk, a member of the road commission, township supervisors, and city and village clerks at least 10 days before the day of review. The notice for the day of review must now also include all of the following:

The address of the drain commissioner or county’s website, as applicable, and that the following information will be available on that site:

– A description of the drainage district or a map depicting the drainage district;
– The number and length of sections, average depth and width of each section, and if the drain will be a closed drain,                   the amount and specifications of all tile or pipe required;
-The location, number, type, and size of all culverts and bridges;
-The conditions upon which the contract will be awarded.

The full text of Public Act 281 is available here.

Public Act 291 (House Bill 5504, Effective Immediately)

Public Act 291 amends various sections of the Drain Code as summarized below:

The full text of Public Act 291 is available here.

December 31, 2020

Missouri Supreme Court Won't Hear Appropriation Bond Default Case.

The Missouri Supreme Court’s refusal to hear the bond trustee’s appeal deals a final blow to litigation over whether Platte County bears legal responsibility to repay $32 million of defaulted appropriation-backed, development bonds, the county’s attorneys said.

UMB Bank NA asked the state’s high court to hear its appeal of lower court rulings backing the county’s position that it was not on the legal hook to cover a shortfall in revenues generated in a special tax district that repay the bonds.

The case was considered a longshot among market participants based on the appropriation backing that does not legally obligate a sponsoring government to honor the pledge with the incentive instead being a government entity’s investment grade rating and market access.

But the trustee had argued that the financing agreement tied to the bonds offered a layer of protection that did require the county to make up pledged revenue shortfalls.

“This puts an end to the unfortunate effort by the trustee to force Platte County into paying taxpayer funds to bondholders that it never agreed to pay at the outset,” said attorney Todd Graves, who represented Platte County along with Graves Garrett partner Dane Martin. “This case could potentially impact countless bond financing arrangements for counties and cities throughout Missouri.”

Platte County leaders decided in 2018 not to cover a $765,000 shortage in tax monies generated by the Zona Rosa shopping center in Kansas City. Revenues had been pledged to repay a 2007 Platte County Industrial Development Authority issue. Officials worried that the price tag would eventually total more than $40 million through 2032, forcing tax hikes or service cuts. The estimated shortfall is currently about $3.6 million.

The decision cost the county its investment grade bond rating.

The county filed a lawsuit against UMB in November 2018 seeking court affirmation that it was not obligated to cover shortfalls because the trustee had threatened its own action. A Platte County Circuit Court judge agreed with the county in a May, 2019 ruling.

The trustee appealed and an appellate court panel on Aug. 25, 2020 upheld the lower court decision that the county bears no legal obligation. The trustee in September sought a rehearing that was rejected and it then asked the Missouri Supreme Court to take the case. The high court rejected the application on Dec. 22.

“The trustee will provide further information on EMMA as it becomes available, continue to advise the committee formed regarding the bonds, and work with counsel to explore and consider its options, all in the best interests of bondholders,” UMB wrote in a Dec. 24 notice filed on the Municipal Securities Rulemaking Board?s EMMA website.

Though the county won’t cover shortfalls, bondholders continue to see some payments from what revenues the shopping center district does generate that are pledged to repayment.

UMB reported in the Dec. 24 notice that it made the full $724,750 interest payment due on the bonds Dec. 1 but none of the $850,000 of principal due was paid. “The payment was made up of funds received from the districts but also a draw of $392,228.49 from the debt service reserve,” UMB said. The reserve fund held $1.69 million following the payment and other fees.

The district sent $113,000 in revenue to the trustee last January. That dwindled to a low of $38,000 in June as the COVID-19 pandemic stung sale tax collections. It fluctuated in subsequent months hitting $95,000 in September, was $45,000 in November and $78,000 for December.

A debt service payment of $724,750 in interest was paid in full June 1. No principal was due. The bonds traded this month around 45 cents on the dollar. About $29 million is outstanding.

The bonds are not secured by a deed or mortgage and remedies in the event of a default are heavily influenced by judicial actions should a restructuring or bankruptcy be sought.

Municipal Market Analytics did not believe the legal case had much traction but finds the county’s willingness to renege on the pledge despite market consequences as troublesome.

“This was an appropriation security, so its payment was always subject to the county’s appropriation. But the county’s failure to pay debt service speaks to its lack of willingness to honor its agreement with bondholders. Platte County is no longer a good faith participant in the municipal bond market, and none of its security pledges can be considered investment grade or should be sold to retail bond buyers,” said Matt Fabian, a partner at MMA.

Since 2009, MMA has seen nine local appropriation credits in Missouri suffer impairment.

“It’s a compelling pattern. Municipal investors need to be skeptical about local Missouri governments honoring their appropriation securities if the underlying project struggles, meaning that local GOs in the state are relatively more vulnerable to getting downgraded to junk if their issuer has appropriation debt outstanding,” Fabian said.

Moody’s Investors Service cut the county”s rating – then at Aa2 – to junk in September 2018. Moody’s rates the county Ba3 with a negative outlook.

S&P Global Ratings stripped the Zona Rosa bonds of their investment grade rating in September 2018 after county commissioners discussed at a public meeting their opposition to making up future shortfalls absent a long-term solution.

By Yvette Shields


Fitch: Illinois' MLF Borrowing Reflects Deep Challenges, but Options Remain

Fitch Ratings-New York-22 December 2020: Illinois’ $2 billion borrowing from the Federal Reserve’s Municipal Liquidity Facility (MLF) illustrates the depth of its budget challenges, but the state also retains fiscal tools to address them, Fitch Ratings says.

The loan provides a short-term solution for a $3.9 billion fiscal 2021 gap. The governor also recently announced $711 million in budget reductions, and the 2021 legislative sessions will include further action to address the gaps in 2021 and future years. Available options include further expenditure cuts, revenue increases and non-structural solutions.

Fitch considers Illinois notably more constrained in its fiscal choices than other U.S. states. Illinois’ ‘BBB-‘ Issuer Default Rating (IDR) and GO ratings and Negative Outlook reflect Fitch’s anticipation of a fundamental weakening of the state’s financial resilience given its already tenuous position entering the pandemic. Illinois will be challenged to maintain its investment-grade IDR.

Before the most recent MLF loan, Illinois faced a sizable budget gap the governor estimated at $3.9 billion on a roughly $43 billion general funds budget. Pandemic-driven shortfalls reportedly account for about half of the gap with the remainder reflecting underlying structural issues that are a key factor in the state’s relatively weak credit profile.

Revenue performance has been well ahead of expectation in May’s enacted budget. Both the Governor’s Office of Management and Budget and the legislature’s Commission on Government Forecasting and Accountability revised revenue forecasts upwards by more than $2 billion in November, even while assuming slowing economic growth and additional coronavirus mitigation measures.

The revisions are consistent with trends in many U.S. states as economic activity has rebounded faster than originally anticipated from the spring’s coronavirus-driven trough, as noted in our on-demand webinar US States’ Path to Economic Recovery. Gains have been slowing in the face of rapid virus spread and resultant mitigation responses. Recently enacted federal stimulus should support near-term stabilization of economic activity, and dependent tax revenues, in Illinois and elsewhere (New Federal Aid to Steady State and Local Budgets, published Dec. 2020 on

The $2 billion MLF borrowing follows the state’s $1.2 billion MLF cashflow borrowing in June. The state will use proceeds primarily to pay down Medicaid bills, leveraging over $1.1 billion in federal matching revenue. To address the remaining $1.9 billion gap for fiscal 2021, the governor announced $711 million in budget reductions last week, most of which will be imposed unilaterally. The reductions do not include any change in education funding.

Despite failure of the graduated income tax ballot initiative, Illinois retains legal authority to implement various revenue enhancements, though political willingness is uncertain. In February 2019, the Commercial Club of Chicago Civic Committee outlined up to $6.4 billion in recurring revenue options, although these estimates relied on pre-pandemic economic expectations.

While the governor has ruled out one suggestion, $1.9 billion from taxing retirement income, other options including raising the personal and corporate income taxes by 1 percentage point ($3.7 billion and $300 million respectively), and a sales tax expansion to more services ($500 million) could generate significant recurring revenue. Changes to income tax credits could be paired with a rate increase to mimic a graduated income tax rate structure.

Fitch anticipates the legislature will consider revenue options and further expenditure changes in early 2021, along with non-recurring options such as further bill deferrals, fund sweeps or utilization of remaining Coronavirus Relief Funds. While the state retains broad legal capacity, Illinois also has a history of deferring or avoiding difficult fiscal choices and instead implementing short-term, non-recurring budget measures that add to long-term challenges. This repeated inability to address its structural challenges remains a key negative rating consideration.


Eric Kim
Senior Director
Fitch Ratings, Inc.
300 West 57th Street
New York, NY 10019

Karen Krop
Senior Director

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

Additional information is available on

Providence Pension Could Bankrupt Rhode Island City.

The financial condition of the City of Providence, Rhode Island certainly looks precarious. The municipality may need to seek bankruptcy protection in the near future primarily as a result of its over $1 billion in unfunded pension obligations.

As indicated below, the Mayor of Providence agrees with this dire analysis.

According to the Comprehensive Annual Financial Report (CAFR) of the City for the fiscal year ended June 30, 2019, the Employee Retirement System of the City (ERS) had a funded ratio of only 25.83%. That is, ERS had approximately $367 million in assets to cover its total $1.4 billion pension liability.

Continue reading.


by Edward Siedle

Dec 16, 2020

NYC’s Whitney Museum Wins Bond-Market Reprieve From Covid Hit.

The Whitney Museum of American Art got a reprieve in the bond market.

The Manhattan art museum, founded in 1931 by Gertrude Vanderbilt Whitney, completed a debt refinancing this week that will prevent a $50 million principal payment from coming due next year by pushing it to 2031 with newly issued bonds, according to Fitch Ratings.
The refinanced bonds were initially sold in 2011 to help finance its new $422 million facility located in the Meatpacking District, which opened in 2015 and features about 50,000 square feet for indoor galleries, outdoor terraces facing The High Line, and a 170-seat theater.

The Whitney, which had to close its doors for about six months in 2020 due to Covid-19, is one of the many borrowers that have rushed to the municipal-bond market to seize on low interest rates to cut debt costs or push payments into the future. Even governments, museums and other agencies hit hard by the pandemic have had little trouble selling debt, with cash flowing into the market on optimism that the rollout of vaccines will set off a recovery next year.

“I think the sale went phenomenally well,” said Eric Wild, a managing director at Morgan Stanley who co-leads the bank’s nonprofit and higher education team. “The Whitney’s credit strength, despite the challenge of the pandemic really came through and resonated with investors.”

The $73.3 million deal priced to yield 1.13% for debt due in 2031, about 42 basis points more than AAA rated municipals, according to data compiled by Bloomberg. In 2011, bonds due in 2021 were priced with a 3.7% yield.

The pandemic has been particularly hard on Manhattan cultural institutions that had to close their doors and face the prospect of a tough winter, with New York City Mayor Bill de Blasio warning this week that there could be another shutdown after Christmas. The Whitney, which reopened in September with capacity limited to 25%, is expecting a cash operating deficit of up to $4.5 million for fiscal 2021, according to bond documents.

The number of visitors has fallen to about 550,000 in fiscal 2020 from 1.19 million in 2019. The museum has had to postpone events like a retrospective of artist Jasper Johns’ career, which would have been a boon for attendance, according to the bond documents. It laid off nearly a fifth of its staff in April and had to implement pay cuts.

But donors have also stepped up, with funding from contributions, grants and bequests totaling $11.2 million in fiscal 2020, even though that’s slightly less than it expected to raise before the pandemic, according to bond documents. Fitch, which rated the bonds AA, the third-highest level of investment grade, pointed to the stability of the donor base in a report this month.

Since reopening in September, locals have kept the galleries relatively busy, with New Yorkers representing about 75% of visitors, compared with about 31.5% over the same period in fiscal 2020.

The bond deal was three times oversubscribed, helping cut yields by three basis points and adding to the museum’s bond investor base, including accounts focused on environmental and socially-beneficial investments, said Luke Hale, director of the municipal syndicate desk at Morgan Stanley.

Beyond big issuers like the city itself or New York’s Metropolitan Transportation Authority, “investors are also willing to pay special attention for the diversification benefits of adding a security like Whitney Museum to their portfolio,” said Gabriel Diederich, a portfolio manager at Robert W. Baird & Co.

“The pricing is indicative of New Yorker’s hunger for tax-exempt income,” he said.

Bloomberg Markets

By Amanda Albright and Fola Akinnibi

December 16, 2020, 10:43 AM PST

New York’s MTA Forms Underwriting Groups for Debt Sales.

New York’s Metropolitan Transportation Authority implemented a new pool of underwriting firms to work on its bond and note sales as declining revenue and ridership challenge the agency’s finances.

The MTA’s board approved the new underwriting appointments during its meeting on Wednesday. The agency, the nation’s largest mass-transit provider, is a major borrower in the $3.9 trillion municipal-bond market, with $44.6 billion of outstanding debt as of Nov. 27.

Bank of America Securities, Goldman Sachs & Co., JP Morgan Securities, Jefferies, Ramirez & Co., and Siebert Cisneros Shank & Co. will serve as senior managers for the MTA, according to board documents posted on its website.

The MTA elevated Jefferies to the senior manager group from its co-senior managing pool. Citigroup Global Markets will serve as a co-manager, after previously working in the senior manager group, according to board documents.

Citi, along with 14 other firms, will form the MTA’s co-managing pool. Of the 21 businesses in the senior managing and co-managing groups, nine of them are owned by women, minorities and veterans.

The MTA recommends the groups stay in place for three years, or until the agency completes its next request for proposals. The MTA last updated its underwriting group in September 2016.

Bloomberg Markets

By Michelle Kaske

December 16, 2020, 5:00 AM PST Updated on December 16, 2020, 9:29 AM PST

A Public Utility May Not Qualify as a “Public Utility” - Nossaman California Eminent Domain Report

The Refugio Oil Spill in 2015 resulted in not only impacts to a highly diverse stretch of California’s coast, but also years of associated litigation. In a recent California Court of Appeal opinion, State Lands Commission v. Plains Pipeline, L.P., No. B295632 (Nov. 19, 2020), the court held that the judicial doctrine establishing that public utilities do not owe the public a duty to provide their services continuously and without interruption did not apply to Plains Pipeline, L.P. and its affiliates (collectively, “Plains Pipeline”) on the ground that despite being a public utility, it did not “deliver essential municipal services to members of the general public.”


The burst pipeline that led to the Refugio Oil Spill previously served as a connection between offshore facilities and refineries for a few other oil companies. As a result of the closure of the pipeline, one of the oil companies stopped production, quitclaimed its lease back to the State, and halted its royalty payments to the California State Lands Commission (“Commission”). As a result, the Commission was left with loss of royalties and alleged that upkeep and maintenance costs after the shutdown amounted to recoverable property damage. It therefore brought suit against Plains Pipeline. The trial court agreed with Plains Pipeline’s argument that, as a public utility, it was exempt from liability for interruption of service based on the long-standing rule that public utilities owe no duty to provide uninterrupted service, first recognized in Niehaus Bros. Co. v. Contra Costa Water Co. (1911) 159 Cal. 305.

Appellate Court Opinion

The California Second District Court of Appeal reversed and instead held that Plains Pipeline was not exempt from liability because the public utility rule was not applicable. In so holding, the Court construed prior case law applying that doctrine to be limited to situations where the “utility directly serves members of the general public.”

The Court held that Plains Pipeline did not qualify under the public utility doctrine because it concluded that Plains “does not deliver essential municipal services to members of the general public.” This rationale was based upon the Court’s belief that Plains Pipeline “transport[ed] oil to a private entity for commercial purposes.” In reaching this result, the Court declined to follow a recent decision by the Ninth Circuit applying the same doctrine to bar the same tort-law claims by the oil company that had ceased operations and quitclaimed its lease back to the state. (See Venoco, LLC v. Plains Pipeline, L.P. (9th Cir. 2020) 814 Fed. Appx. 318.)

In making such a decision, the Court declined to recognize a blanket immunity to all public utilities for service disruptions. Instead, the Court held that merely being a public utility with rates set by a regulatory agency was insufficient for purposes of asserting immunity against liability for service disruptions – such immunity stems from the provision of “essential municipal services” to the general public.

The dissent warned that “the majority casts doubt on more than a century of cases holding public utilities exempt from liability for interruptions to service,” and “gives rise to more questions than it answers.” Thus, while seemingly narrowing the public utilities exemption, this opinion may actually result in increased litigation as parties attempt to decipher this new requirement.

Nossaman LLP – Jillian Friess

December 18 2020

Why Chicago Should Start a Public Bank.

Arresting poverty, inequality and the racial wealth gap requires this genuinely transformational tool.

As Chicago contemplates a COVID-19 economic recovery plan, the city cannot afford to think small. For too long, civic and business leaders have relied on corporate philanthropy, tax credits, and market reforms to recover from crises. These tools work only on the margins, which is why they invariably fizzle.

Arresting poverty, inequality and the racial wealth gap requires a genuinely transformational tool: a public bank.

Why do we need a public bank? Banks create money when they lend. This superpower is the cornerstone of economic development. Loans stimulate economic growth, increase property values, and build wealth — and we can harness this power to benefit all communities.

Continue reading.

The Chicago Sun Times

by Daniel La Spata, Matt Martin, Robert Peters and Ameya Pawar

Dec 7, 2020

MTA Borrows $2.9 Billion From Fed Before Window Closes.

New York’s Metropolitan Transportation Authority borrowed $2.9 billion from the Federal Reserve’s emergency credit line for states and local governments, marking the second time the transit agency has turned to the central bank as it contends with a steep drop in ridership from Covid-19.

The transit agency sold payroll mobility tax bond-anticipation notes with a 1.33% coupon for those maturing in 2023 to the Fed’s Municipal Liquidity Facility, according to data compiled by Bloomberg. Aaron Donovan, a spokesperson for MTA, confirmed the sale in an email on Thursday.

The MTA has turned to short-term borrowings to close the budget gaps created by the pandemic and it seized on the chance to borrow from the Fed before the little-used credit line expires at the end of the month. The agency has warned that it will have to slash subway and bus service by 40% and chop commuter rail service by half if it doesn’t receive aid from Washington. Fares and tolls will increase and roughly 9,300 jobs will also be eliminated.

The Fed’s $500 billion municipal lending program was designed to serve as a lender of last resort for cities and states to ensure they could still raise cash if the bond-market froze up, as it did in March amid panic about the fallout of the pandemic. But it has barely been used because it charges high penalties, leaving the public market a better deal for virtually all local governments. Three-year benchmark municipal debt yields just 0.13%, according to Bloomberg BVAL.

The MTA — and the state of Illinois, the only other one to borrow from the Fed, based on central bank data last month — is a rare exception. Investors still demand high yields on the MTA’s bonds because of the agency’s financial strains. Some MTA debt due in 2023 traded at a nearly 2.2% yield on Thursday, about 2 percentage points higher than AAA rated bonds.

Bloomberg Markets

By Amanda Albright, Michelle Kaske, and Danielle Moran

December 10, 2020, 12:19 PM PST

New York City Is Selling Bonds. Fitch Ratings Just Downgraded Its Credit.

New York City is planning to sell $1.5 billion of bonds next week to refinance maturing debt. And two ratings firms have warned about the city’s credit ahead of the sale, citing the potential for long-term fallout from the coronavirus pandemic.

The bonds, which will be sold with maturities from one to 16 years, are being issued to refinance existing debt. The sale is happening at a vulnerable time for the city, as Covid-19 cases start to rise and officials weigh closures of schools and businesses.

Declining sales and tax receipts are responsible for a 9.1% decline in the city’s revenue forecast for 2021, about $6.5 billion less than it expected before the pandemic began, according to marketing documents for the Dec. 16 sale. Notably, property taxes are expected to only be about 1% below original projections and real estate taxes made up about 47% of the city’s tax revenue in 2020.

“The city has sound independent legal ability to adjust property tax rates and a variety of fees and charges to offset the modest revenue declines expected in a typical economic downturn,” Fitch Ratings said in a note downgrading the credit late Tuesday. Still, “rates for other important revenue sources (mainly income and sales taxes and state aid) are not within management’s independent control.”

Fitch cut the city’s credit rating by one notch, to AA- from AA, leaving it with its fourth-best rating, and six tiers above junk. The move reflects the firm’s “expectation that the impact of the coronavirus and related containment measures will have a longer-lasting impact on New York’s economic growth than most other parts of the country.”

That move follows S&P Global Ratings’ decision on Tuesday to assign a “Negative” outlook to the city’s bonds, though it kept its AA rating on the securities.

New York City is also under pressure because of the potential for mass-transit service reductions, according to S&P. The Metropolitan Transportation Authority has said it might need to cut service and lay off workers if it doesn’t receive federal aid, but it isn’t clear when such a relief package might be passed. The MTA is tapping the Federal Reserve’s municipal liquidity facility—closing at the end of this year—to help cover a sizable budget deficit this year and next.

The outlook implies a “one-in-three chance” that the rating will be downgraded over roughly the next two years, S&P said in its note.

“The negative outlook reflects our opinion of uncertainties, such as a recent uptick in the virus transmission rate that could negatively affect the city’s financial forecast, the trajectory for global tourism trends and additional federal stimulus funding for state and local governments, service reductions at the [MTA] that could affect the economic recovery within the region, and weakness in property tax values that will not be evident until fiscal 2023,” S&P analyst Nora Wittstruck said in a statement.


By Alexandra Scaggs

Dec. 9, 2020 4:11 pm ET

Illinois’s Bond-Market Penalty Hits Lowest Since Pandemic Crash.

No state is reaping the bond-market benefits from the promised end of the pandemic more than Illinois.

The state, whose bonds tumbled early this year on speculation it would become the first stripped of its investment-grade credit rating, has since seen its bonds rally back as investors plow into higher-yielding debt on speculation the financial blows of the shutdowns won’t be as bad as once feared. That’s driven down the yield on Illinois’s 10-year bonds from more than 6% in March to about 2.8%, reducing the yield penalty investors are demanding to the smallest in nine months, according to Bloomberg’s BVAL indexes.

The drop reflects the broader optimism among investors and shows how the Federal Reserve’s promise to keep interest rates low has cut the financing costs for governments. Connecticut’s and California’s yields have drawn closer to the benchmark, too, as their tax collections stand to gain from this year’s stock market surge. Even the water utility of the still bankrupt territory of Puerto Rico borrowed $1.4 billion this week for yields of 3.2% on those due in five years.

“During the spring when the pandemic hit, Illinois got hurt worse than other states because they have less margin for error with their budget,” said Daniel Solender, director of the municipal bond group at Lord, Abbett & Co. LLC, which holds Illinois debt as part of $31 billion in municipal assets. “Of the states, Illinois is benefiting the most from the recovery of the lower quality part of the municipal bond market.”

The expected rollout soon of vaccines in the U.S. has helped buoy optimism that an economic recovery is on the way even as an impasse in Congress over another stimulus measure threatens to withdraw support that has helped states to weather the slump.

In Illinois, the state increased its revenue estimates for the current fiscal year by about $2.3 billion as sales- and income-tax collections outstrip previous expectations, according to a November report by the Commission on Government Forecasting and Accountability.

But Illinois still has a bond rating just one step above junk, partly due to its persistent budget deficits. It has a $141 billion unfunded pension liability, a $7.9 billion bill backlog, and is the only state that has turned to the Fed’s emergency lending program for governments that are facing high interest rates in the public market.

Gabe Diederich, a portfolio manager at Robert W. Baird & Co., said the drop in Illinois’s bond yields shouldn’t be interpreted as a sign that investors think the state has addressed its financial challenges.

Investors searching for yields “are forced to cast a wider net” to issuers such as Illinois and New Jersey, said he said.

Recent deals by the Puerto Rico Aqueduct and Sewer Authority and Fortress Investment Group-backed passenger railroad Brightline Holdings LLC bonds also show “demand for spread,” he said. It “feels like there is a recovery trade taking place.”

Bloomberg Markets

By Shruti Singh

December 11, 2020, 11:13 AM PST

Fortress Returns to Muni Market, This Time For Florida Train.

Less than two months after failing to sell $2.4 billion of unrated municipal debt for a Las Vegas tourist train, Fortress Investment Group is back in the market — this time with a smaller deal for its inaugural rail in Florida.

Through its company Brightline Holdings LLC, Fortress on Thursday is planning to sell $950 million of unrated tax-exempt debt, with proceeds financing the train’s extension to Orlando from West Palm Beach. Last year, it sold $1.75 billion for the country’s first new privately financed intercity passenger rail in a century, launched in 2018 along Florida’s east coast.

The train missed passenger and revenue forecasts even before the coronavirus pandemic forced it to suspend operations in March. But in this offering, the company touts its plans for a new station at Walt Disney World property near Orlando and three more in the works along its initial line from Miami to West Palm Beach. And it says more revenue is likely from fees paid by Miami-Dade County, which wants to use the corridor for a separate commuter service.

It projects 9.9 million passengers and $792 million in revenue in 2024, its first full year of complete operations, or almost four times the average revenue per passenger seen in 2019.

This sale comes after Fortress in late October pulled the deal for its proposed rail to Las Vegas that failed to attract enough interest following weeks of investor pitches even after it was downsized from $3.2 billion. The postponement was a “positive” for the Florida train, said John Miller at Nuveen LLC, which holds 80% of the bonds sold for it. Before Fortress offered the bonds for the Las Vegas venture, Miller had said he had wanted to see the $950 million deal converting short-term securities sold in 2019 into long-term debt first.

The new bonds maturing in 2049 were being offered with a 7.375% coupon, a 7.75% yield and a price of about 95.73, according to a preliminary pricing wire viewed by Bloomberg Tuesday. That’s higher than the 94 cents on the dollar reached by an existing bond on Dec. 4, according to data compiled by Bloomberg.

The Florida train still has potential after the coronavirus pandemic is over and the full line is running, said Miller, head of municipal investments at Nuveen, which holds about $1.4 billion of the bonds sold for the project under the name of Virgin Trains USA.

“This is essentially a construction project until it’s finalized,” Miller said. “The long-term popularity of the route, which will be seen in 2023, the long-term popularity of Florida for both a destination and increasingly a place to live, the long-term traffic trend — those are all unchanged.”

Fortress has also dangled a sweetener for investors: it’s willing to buy back $250 million of the existing Florida bonds at par, contingent on this week’s deal getting completed. It had tried that with the Las Vegas deal without success, but after this buyback offer was made last week, prices of some of the thinly-traded bonds rose to the highest since March.

Heavy Demand

The $950 million deal, which comes amid heavy demand for high-yield securities, will test how far investors will go for juicier returns. In 2019, buyers of the Fortress bonds weighed more typical risks such as whether passenger estimates would materialize and construction would proceed as planned. Now, investors have those risks, plus uncertainty over whether and when tourism will bounce back after the Covid vaccine, said Terry Goode, a senior portfolio manager at Wells Capital Management.

“In this particular environment, there’s probably even more uncertainty around whether that ridership will be there and how soon it will be there,” Goode said.

Last year, 1 million passengers rode the Florida railroad, half the number estimated. In addition, the system was supposed to earn $37 of total revenue per passenger in 2019; instead, it was an average of about $22. In an online presentation, the company said it had “strong momentum” and was on track to carry 2 million passengers this year before Covid.

The train is expected to reopen for service in the third quarter next year, bond documents show. Construction of the 168-mile extension to Orlando International Airport has continued amid the pandemic, and service is slated to start in 2022. The station at Disney Springs, a retail and entertainment complex a mile from the theme park, is projected to open in 2023.

Second Run

While he’s a “bit skeptical” about the train’s latest forecasts, Jason Appleson at PT Asset Management said the company “has made some very good improvements.” The buyback offer shows Fortress is “willing to stand behind the project,” said Appleson, who helps manage about $2.5 billion in municipal debt, including Fortress bonds.

Success in Florida could facilitate a second run at issuing bonds for the Las Vegas venture. California Treasurer Fiona Ma said she expects Fortress to return in the first quarter next year to request a smaller amount of bonding authority from the state.

“The focus on Vegas was too early,” Miller said. “At some point next year, I think they would have a better chance of parlaying that success story in Florida into a new issue.”

Bloomberg Markets

By Romy Varghese

December 9, 2020, 4:00 AM PST

— With assistance by Danielle Moran, Natalia Lenkiewicz, and Bert Louis

California City That Sold Pension Debt Now at Fiscal Brink.

West Covina, California, which sold $204 million of pension bonds in July, is at the fiscal brink because of its ineffective management and raiding of reserves, according to a report Tuesday by State Auditor Elaine Howle.

The southern Californian city of about 105,000 residents helped cover salary and benefit costs for its public safety workers by siphoning from reserves, halving its year-end balance in fiscal 2019 to about $10 million over four years, the report said.

The city, which has about $227 million in outstanding municipal debt, has made “questionable” financial decisions, has likely understated the impact of the coronavirus pandemic and doesn’t have a fiscal recovery plan, raising the risk of bankruptcy, according to Howle’s report.

“West Covina is at high risk of being unable to meet its future financial obligations and provide effective city services,” the audit said. “If West Covina is unable to resolve its structural deficit, it risks becoming embroiled in the lengthy and complex process of declaring municipal bankruptcy.”

In July, West Covina’s financing authority sold $204 million of taxable lease-revenue debt rated A+ by S&P Global Ratings, with the top yield of 3.89% for a bond maturing in August 2044. A bond due in August 2038 traded Monday at a 3.12% yield, according to data compiled by Bloomberg.

Proceeds of the sale went to paying down the city’s unfunded pension liability, which would initially reduce its annual pension obligation to the California Public Employees’ Retirement System. But that leaves the city on the hook for required debt payments that gradually increase every year by 2044 and still at the risk of higher pension bills should the retirement system underperform its target and require more from municipal governments to make up the difference, the audit said.

West Covina plans to sell land and use the proceeds to pay down its debt obligations, according to the report. But, such “large one‑time revenue sources will be insufficient on their own to reverse the city’s negative financial trend and rebuild its reserves,” it said.

City Manager David Carmany said in an interview that he and the finance director were brought in recently to address the city’s fiscal issues. With public safety expenses accounting for about 80% of West Covina’s general fund, Carmany said that officials are negotiating with unions to help defray the burden, and police officers agreed to contribute more toward their pensions. The city may also disband the fire department and instead contract with Los Angeles County for its fire services, a decision that the council may make early next year, he said.

“We are aggressively exploring all options,” Carmany said. “This community is going to be facing some tough choices.”

Bloomberg Markets

By Romy Varghese

December 1, 2020, 11:25 AM PST Updated on December 1, 2020, 2:43 PM PS

Illinois Plans to Borrow Another $2 Billion From Federal Reserve.

Illinois plans to borrow an additional $2 billion from the Federal Reserve in an effort to prop up its already-struggling finances as the state’s bills rise amid the pandemic

It would be the second time the worst-rated state has borrowed through the central bank’s Municipal Liquidity Facility, an emergency lending program for state and local government issuers. Illinois already borrowed $1.2 billion from the Fed during fiscal year 2020 to cover pandemic-induced losses, and has since repaid $200 million of that loan, according to the governor’s office.

“Short-term borrowing is a short term band-aid to address the urgency of a short-term problem like one caused by a pandemic,” Governor J.B. Pritzker said during a virtual press conference on Wednesday.

Illinois is the only state to tap the Fed’s borrowing program so far and is at risk of seeing its debt cut to junk. The pandemic worsened Illinois’s already strained finances: the state is struggling with $137 billion of pension debt and $7 billion of unpaid bills. Illinois is projecting a fiscal 2021 budget gap of about $3.9 billion and deficits are expected to continue through 2026, according to a Nov. 13 forecast from the Governor’s Office of Management and Budget.

Yield Penalty

Investors have long punished Illinois for its fiscal woes, boosting the penalty the state pays to borrow from the bond market. Illinois 10-year general obligation bonds yield about 2.77 percentage points more than benchmark debt, the highest of the 20 states tracked by Bloomberg.

The state still has market access, but it’s not a surprise that officials are turning to the Fed, said Daniel Solender, head of municipal securities at Lord Abbett & Co., which manages $30 billion of state and local debt, including Illinois bonds.

“It makes sense to use it while they can,” said Solender. “The reason they’re using the facility is because the cost for them in the market, it’s higher for them than other states.”

Spending Cuts

The decision comes after Illinois voters rejected a ballot measure that would have let the state raise taxes on its wealthiest residents, a key component of Pritzker’s plan to balance the budget. Since the failure of the graduated income tax proposal, Pritzker, a billionaire Democrat, has warned of potential spending cuts for public safety, education and health services.

Pritzker said the new borrowing is less than half of the $5 billion authorized, and that it would be “irresponsible” to saddle the state with the full amount. He said the state plans to repay the debt “as early as possible.”

“The $2 billion is necessary given that this targeted borrowing will allow us to stabilize Illinois’ health care system in the middle of a global pandemic and a COVID-19 spike here in Illinois,” Illinois Comptroller Susana Mendoza said in an emailed statement.

Mendoza plans to use the loan to pay medical bills for which the state receives federal matching dollars and also to avoid late-payment interest penalties, she said. The borrowing will be repaid over a three-year period and any new federal stimulus will be earmarked to repay the loan, according to Mendoza.

Dec. 1 is the last day for state and local governments to notify the Fed of their intent to tap the program before it expires on Dec. 31.

Bloomberg Markets

By Nic Querolo and Shruti Singh

November 25, 2020, 2:56 PM PST

Pittsburgh Sports Authority Bond Rating Slashed by S&P.

The municipal authority that owns Pittsburgh’s pro football, baseball and hockey stadiums had its ratings cut down two notches, from A-plus to A-minus, by S&P Ratings to reflect“a steep drop in pledged hotel tax revenue, a direct result of the severe toll of the pandemic,” the agency stated in its ratings note.

The Pittsburgh & Allegheny Sports & Exhibition Authority owns the Steelers’ Heinz Field, the Pirates’ PNC Park and the Penguins’ PPG Paints Arena, as well as the city’s convention center and some infrastructure, such as parking garages and roads near sports facilities. As part of building and maintaining those properties, the sports authority has $585 million in municipal bond debt outstanding. The A rating is the bottom of three “strong” credit ratings S&P Ratings maintains. The A rating , like most other S&P scores, can be further rated a “plus,” “minus” or standalone. “We anticipate either cash on hand or debt service reserve may need to be tapped to meet debt service due in February 2021, unless there is further revenue growth in the coming months,” the agency wrote.

Pledged revenues supporting the sports authority’s bonds were down 59% year to date through September, to about $11.3 million, according to S&P. Based on earlier disclosures by the authority, revenue was on par with prior years in the first quarter of the year, then plunged starting in April. The bonds are initially backed by two hotel taxes of 5% and 2% on room transactions. With annual debt service of $54 million on the sports authority bonds, Pittsburgh will fall well short of what’s needed.

Yet according to a September report from the Allegheny Institute for Public Policy, while the sports stadiums are technically revenue-backed bonds that would default if tax revenue continues to drop, a series of side agreements with Pennsylvania means the pro teams’ home arenas will continue to have their debt paid on time. For PPG Paints Arena, the state signed a 2014 deal to pay the rink’s debt service if other revenues fall short. Similarly, any unmet balance in the football and baseball stadium payments gets covered by the state annually through another side deal. The net effect is that while other tax revenue-supported facilities in Pittsburgh have had budget cuts due to lower revenue, the sports facilities haven’t. “So, while parks, libraries, the zoo, the aviary and numerous other organizations took cuts, the [sports] debt allocation was unchanged,” economist Eric Montarti wrote in the Allegheny Institute analysis.

The bond rating’s downgrade doesn’t have an immediate effect on the Pittsburgh sports authority itself. A drop in the credit rating means those people owning the existing bonds will experience a drop in value. The sports authority would likely be affected by higher borrowing costs in the future, however. A 2017 study found that every notch of ratings downgrade cost issuers an average of six basis points (100 basis points equals one percentage point). A 12-basis-point shift would mean Pittsburgh paying $120,000 more in interest on a $100 million A-minus bond than it would pay on one rated A-plus.

Yahoo Sports

by Brendan Coffey

November 24, 2020

Supreme Court Ends Puerto Rico Bondholders’ Bid for Pension Assets.

The U.S. Supreme Court on Monday declined to review an appeals court ruling against a group of Puerto Rico bondholders seeking pension assets and a share of future revenue.

On Jan. 30, the 1st U.S. Circuit Court of Appeals in Boston upheld a June decision from the federal judge overseeing Puerto Rico’s complex bankruptcy case that went in favor of the Employees Retirement System of the Government of Puerto Rico and the federal oversight board. The ruling dismissed arguments by ERS bondholders holding $3 billion of ERS debt that they were entitled to some assets that existed when they bought the bonds as well as future pension contributions, which are now coming from general revenues.

The Financial Oversight and Management Board for Puerto Rico said at the time of the 1st Circuit ruling that it “clearly denies ERS creditors access to public pension contributions.”

Seeking to have that decision overturned, the ERS creditors, including Andalusian Global Designated Activity Co., Glendon Opportunities Fund LP, Mason Capital Master Fund LP and several Oaktree Capital funds, argued in their petition that the 1st Circuit decision conflicted with other circuits, “thereby endangering secured lending and municipal finance.”



November 16, 2020 03:37 PM

The MTA Is Developing Plans to Cut Costs and Borrow From Fed. Its Bonds Have Rallied.

The Metropolitan Transportation Authority next month will be discussing cutting service by up to 40%, laying off thousands of workers and increasing fares, as it weighs options to offset sliding revenues from the pandemic.

Officials reiterated the need for federal funding at a Wednesday meeting, and said deep cuts to service and jobs will be necessary if Congress doesn’t offer aid.

Yet the market seems to be taking a slightly less downbeat perspective than it was before. Yields on some MTA bonds have declined since the U.S. presidential election and news of a vaccine: A two-year bond yield, for example, was trading at 3.5% Tuesday, down from 4.6% on Nov. 6, according to Bloomberg data. Prices and yields move oppositely.

MTA officials have requested $12 billion in grants from Washington, and forecast deficits of more than $15 billion in the next three years without any steps to reduce that gap. The deficits will total about $7 billion if the MTA takes deficit-reduction steps that aren’t service or jobs cuts.

The four-year “worst case” budget plan introduced Wednesday reflects no deficit spending, though the state has recently passed a law that allows the MTA to borrow up to $10 billion to cover pandemic-related costs in coming years.

To be sure, MTA bond yields are still well above their levels from the start of this year, when the two-year bond traded around 1.4%. The coronavirus pandemic prompted the yield to soar as high as 7.9% in March. Last week, subway ridership was down as much as 70% compared to similar days last year.

So the moderate decline in bond yields is likely the result of investor optimism about federal aid. Help from Congress likely won’t arrive until at least next year, however, and the possibility of Republican control of the Senate may hamper the amount of aid received.

So to help fill this year’s budget gap, MTA officials are working on an application to tap the Federal Reserve’s Municipal Liquidity Facility for the maximum $2.9 billion available. The process is under way, said Robert Foran, the MTA’s chief financial officer, in Wednesday’s board meeting. That should allow the MTA to access the facility by the end of this year.

The MTA’s board will take action on its 2021 budget proposal at next month’s meeting.


By Alexandra Scaggs

Nov. 18, 2020 1:37 pm ET

Michigan Court of Claims Denies Request for Injunction Against State Over Local Licensing Decisions: Dykema Gossett

On November 11, 2020, Attitude Wellness D/B/A Lume Cannabis Company (Lume), filed suit in the Michigan Court of Claims against the Michigan Marijuana Regulatory Agency (MRA), the Village of Edwardsburg, and two private parties, after the Village denied Lume’s application for village marijuana establishment licenses. Lume sought an injunction to prevent the MRA from issuing state licenses to the two businesses that won licenses from the Village. Last week, the Court of Claims denied that request, finding Lume’s claims against MRA to be “speculative and inexact.”

Under the state’s adult-use law, the Michigan Regulation and Taxation of Marihuana Act (MRTMA), if the MRA is faced with more applications from a municipality than the number of establishments that the municipality allows, then the municipality is to select from among competing applications by a competitive process. That process must be intended to select the applicants who are best suited to operate in compliance with MRTMA. As permitted under MRTMA, the Village limited the number of licenses for retail establishments, in this case to two, and chose from among the applicants.

In the Michigan Court of Claims, Lume alleged that the Village inappropriately selected Alvarez Cultivation (Alvarez) and NOBO Michigan (NOBO), in violation of MRTMA. Michigan’s Court of Claims is a court of limited jurisdiction, which can only entertain claims against the State and its agencies. Lume argued that the MRA was the proper defendant and that MRA should be enjoined from awarding state licenses to Alvarez and NOBO because the Village failed to follow MRTMA’s requirements with respect to competitive selections.

Lume’s case illustrates the difficulty of succeeding in such challenges. Although MRTMA requires a municipality to select applicants by virtue of a competitive process aimed at ascertaining which are best suited to comply with the law, by its plain language MRTMA’s requirement applies only in cases where MRA receives too many applications. But an MRA application is not complete without a municipal attestation that the applicant is in compliance with local ordinances. And municipalities generally will not provide such an attestation until applicants have been selected at the local level. As such, MRA does not face more applications than a municipality allows, because the municipality has already whittled the number down before the applicants come to MRA.

While the practicalities of the MRA licensing process and specific language of MRTMA has led to substantial debate as to whether and how a competitive process is truly required, Court of Claims Judge Michael J. Kelly issued an opinion in Lume’s case last week that did not address this issue. Rather, Judge Kelly simply assumed that the MRTMA requirement was implicated here.

Nevertheless, Judge Kelly denied Lume’s motion for an injunction. In doing so, he found that “the crux of plaintiff’s allegations is against Edwardsburg and its decision to approve applications by Alvarez and NOBO.” The Court further found that the few allegations levied against the MRA were “speculative and inexact” because they assumed that “Alvarez and/or NOBO will receive licensure—first local licensure and then state licensure.” And Alvarez and NOBO apparently had not yet even applied for licensure from MRA.

Even though the MRA was the only state-actor named in the complaint, none of the defendants were dismissed. While the Court of Claims has no jurisdiction over non-state actors, Judge Kelly stated in a footnote that “the Court has jurisdiction over the only defendant against whom it has been asked to grant relief—the MRA—at least for purposes of the instant motions.” Given that, “while the court questions whether it has jurisdiction over the non-state actors, it will not sua sponte dismiss them at this time, as doing so is unnecessary for resolving the currently pending motions.” But this is a fundamental problem for aggrieved applicants who wish to sue the MRA and municipalities over a licensing fight—the Court of Claims lacks jurisdiction over non-state actors, yet the Circuit Court that has jurisdiction over the municipalities lacks jurisdiction over the MRA.

As this case moves forward, there may be further insight to gain.

Dykema Gossett PLLC – R. Lance Boldrey and Soujoud C. Hamade

November 23 2020

Austin Voters Approve Tax Measure to Help Fund $7.1B Project Connect Plan: Nossaman

On November 3rd, Austin voters approved a property tax increase to help fund the $7.1 billion Project Connect mass transit project. The initial investment, which is a portion of the “Project Connect System Plan,” includes 27 miles of rail service, 31 stations and a transit tunnel. Specific elements of the plan include:

Blue Line: An approximately 15-mile light rail line running from Austin-Bergstrom International Airport (AUS), connecting through the downtown station and running north to Lamar Boulevard at Highway 183
Orange Line: A 21-mile light rail line running from North …

Continue reading.

Nossaman LLP

By Patricia de la Peña on 11.19.2020

Denver Supportive Housing Social Impact Bond Initiative: Housing Stability Payments.


In February 2016, the City and County of Denver and eight private investors closed on the city’s first social impact bond, an $8.6 million investment to fund a supportive housing program for 250 of the city’s most frequent users of the criminal justice system. The city will make outcome payments over five years based on the initiative’s goals of housing stability and a decrease in days spent in jail by participants. This brief details the fourth assessment of housing stability payment outcomes and interim housing stability outcomes for the program.

Read the study.

The Urban Institute

by Sarah Gillespie, Devlin Hanson, Alyse D. Oneto, Patrick Spauster, Mary K. Cunningham, Mike Pergamit

November 13, 2020

San Francisco Sees $116 Million Gap as Revenue Falls Short.

San Francisco’s revenue is falling short of forecasts as the economy recovers more slowly from the coronavirus pandemic than the technology hub expected, creating a $116 million budget shortfall just a few months into its fiscal year.

In a report issued Tuesday by city Controller Ben Rosenfield, revenue is forecast to be $144 million less than expected in the adopted budget for the year that began in July, largely due to drops in business and hotel taxes. Still, higher than expected property tax collections are softening the blow and boosting reserves by $21 million.

The city already raided reserves to help plug a $1.5 billion deficit over the next two years due to the pandemic. Rosenfield’s update comes a week after city voters approved new business taxes and changes, which will add a net $11 million to the budget. Mayor London Breed in October had warned that failure of the measures could lead to service cuts. The budget for the fiscal year was enacted that month, later than usual to deal with the uncertainty amid the pandemic, and the city is already seeing changes to its forecast.

San Francisco’s predicament is true for other local governments across the country dealing with the uncertainty of the outbreak and resulting shutdowns. Municipal officials are also hoping for a federal stimulus package, but Congress remains in gridlock. Chicago is planning to raise taxes and lay off workers to plug its record $1.2 billion gap, and New York City is using $4 billion in reserves, and warning it may have to lay off as many as 22,000 city workers if it doesn’t get federal aid or state approval for borrowing to help close its $9 billion shortfall.

“The level of uncertainty regarding city revenues and expenditures remains extraordinarily high, driven by the economic and financial impacts of the public health emergency,” Rosenfield wrote.

Indeed, the city on Tuesday said it will temporarily roll back the reopening of indoor dining and reduce the capacity of fitness center and theaters after a spike in Covid cases.

By tapping reserves, San Francisco, a city and county of about 880,000 residents, avoided layoffs but the Board of Supervisors approved scheduled raises for city workers against the wishes of the mayor, who called it irresponsible. The two-year general fund budget is about $6 billion per year.

Rosenfield told the Board of Supervisors Tuesday that another concern is the availability of funds from the Federal Emergency Management Agency, which the city relies on for temporary housing for those at risk of contracting the coronavirus, such as those over age 65 or those who have qualified medical conditions.

The FEMA program, which is dependent upon the executive branch continuing it, can be cut off with 30 days’ notice, and is only authorized month to month. “So I don’t say that to scare anybody, but only to note that I think there is a significant risk that FEMA will fall away at some point,” Rosenfield said.

Rosenfield’s report assumes a vaccine will be available in spring 2021, and widespread adoption by December 2021. It expects a slower rebound in travel and tourism than previously forecast, not returning to pre-pandemic levels until the fiscal year that begins in July 2025.

Another key source of uncertainty is telecommuting, because even if offices can return to full capacity — which they currently aren’t — it’s unknown if managers will continue to allow employees to work from home as much as possible, according to the report. If remote work returned to its pre-pandemic levels, the city would get $190 million more in business revenue. San Francisco expects to collect $3.7 billion in total receipts, down from $4.4 billion the previous year, according to the report.

Bloomberg Economics

By Romy Varghese

November 11, 2020, 6:00 AM PST Updated on November 11, 2020, 10:35 AM PST

— With assistance by Joyce Cutler, and Henry Goldman

New Jersey Joins Hawaii in Pandemic Credit Downgrades, but Their Bonds Have Diverged.

New Jersey just became the second state to get a credit-rating downgrade since the coronavirus pandemic struck, following Hawaii’s downgrade earlier this year.

But New Jersey’s bond yields have declined since then, even though rating downgrades typically drive bond prices lower and boost yields.

Last week New Jersey’s 10-year general obligation bond—debt backed by a state’s pledge to use its taxing power to repay, rather than a specific project or revenue stream—yielded 1.82%. At Tuesday’s close, the bond yielded 1.77%, even though the state’s credit was downgraded Friday to BBB+, three tiers above junk, by S&P Ratings.

In contrast, Hawaii’s bond yields have climbed since its downgrade by Moody’s in August. Its 10-year benchmark general-obligation bond yielded 1.1% on Tuesday, according to Bloomberg data, compared with 0.8% shortly before its downgrade.

Some of New Jersey’s minor bond-price gains could be the result of the downgrade not being as severe as investors feared. But it could also be the result of optimism around the recent U.S. presidential election and a vaccine.

Yet Hawaii’s finances—which are tied to the state’s tourism industry—could be helped by a vaccine more than New Jersey’s. Earlier this year, Hawaii said its tourism revenues aren’t expected to get back to normal before 2024, according to Moody’s. But it seems reasonable to think that an effective and widely distributed vaccine would move up that date.

New Jersey’s problems, on the other hand, are more structural, as S&P Ratings pointed out in its Nov. 6 note downgrading the credit.

“Until the recent recession, New Jersey had been making progress on closing its…deficit,” the analysts wrote. “However, this progress depended on steady revenue growth during the long previous economic expansion. In recent years, most of the state’s revenue growth has gone toward increasing New Jersey’s annual pension contributions.”

And the possibility of a divided government could constrain the amount of federal aid New Jersey can obtain. That likely won’t be determined until early January, when Georgia hosts two runoff elections.

In other words, if New Jersey’s credit looks better after the election and vaccine, Hawaii’s should look much better.


By Alexandra Scaggs

Nov. 11, 2020 9:43 am ET

Illinois Faces Risk of Junk After Voters Reject Tax on Rich.

Illinois voters defeated a measure that would have allowed the state to raise taxes on its wealthiest residents, striking down a pillar of Governor J.B. Pritzker’s plan for shoring up the state’s finances and preventing its debt from being cut to junk.

The failure of the constitutional amendment that would have scrapped the flat income tax by a vote of 55% against sent the prices of Illinois’s bonds tumbling, with those due in 2034 down about 7%. The costly campaign ended in a win for Citadel founder Ken Griffin who spent nearly $54 million to fund the opposition, while Pritzker, the billionaire heir to the Hyatt hotel empire, gave $58 million in support.

“The citizens of Illinois have delivered a clear message to our political leaders in Springfield,” Griffin, the billionaire head of the Chicago-based hedge fund, said in an emailed statement on Wednesday. “Now is the time to enact long overdue reforms to save our state from fiscal ruin.”

The loss adds a new challenge to the Democratic governor’s effort to steady the finances of Illinois, whose rising pension-fund costs and chronic budget shortfalls left it with the lowest bond rating among U.S. states even before the pandemic struck. Failure of the measure won’t automatically trigger a downgrade to junk. The three major rating companies, which all consider Illinois the lowest level of investment grade, said they’ll be watching for the state’s backup plan.

“There will be cuts and they will be painful,” Pritzker said during a press conference on Wednesday. Without the additional revenue from the graduated income tax, the state will look at various options including cuts potentially for public safety, education and health services and may have to rely on its “regressive” tax system for more revenue, he said.

Downgrade Risk

If approved, the state would have been able to proceed with enacted legislation to apply higher rates to incomes over $250,000, raising levies on the highest earners. Rejection by voters means the “risk of a downgrade would increase” unless the state eventually increases the flat tax, Barclays Plc said in a report Wednesday.

“The amendment’s failure makes greater reliance on deficit financing more probable and is therefore credit negative, but the state’s likely pursuit of other recurring fiscal strategies mitigates this impact,” Moody’s Investors Service analysts led by Ted Hampton, said in a report on Wednesday. The likelihood of “credit-negative strategies” like deferring near-term pension contributions may also rise, Moody’s said.

Even with the graduated income tax failure, Illinois has other options available, Carol Spain, S&P’s director of U.S. public finance, said in an emailed statement. Illinois will need to look at other budget-balancing steps, Eric Kim, head of state government ratings for Fitch, said in an emailed statement.

Alternatives for Illinois include more borrowing, tapping the Federal Reserve’s Municipal Liquidity Facility for a second time, cutting spending or raising revenue with sales taxes and a higher flat income tax rate, Kim said.

‘Budget Crisis’

Previously, Pritzker has said budget cuts of 15% over two years or potentially borrowing from the Fed again are possible if the amendment failed and no more federal aid comes through.

“While the fair tax would have helped to address our budget crisis with the least damage to the working families of Illinois, the millionaires and billionaires opposed it to protect their own wallets, deceiving the public about its purpose and they ended up prevailing,” Pritzker said Wednesday. “Sometimes politics works against the best solutions.”

The business closures due to Covid-19 since March have added to the fiscal challenges and all three major rating companies have a negative outlook on Illinois, signaling that it could be the first state stripped of its investment grade rank. Such a step would likely add to its financial problems by saddling the government with higher interest bills and preventing many mutual funds from owning its debt.

Pritzker said Wednesday he considers the state’s investment grade rating “very important” and will continue to work to fix the state’s structural financial problems to avoid it going lower.

“In this election, Illinois voters sent a resounding message that with an $8 billion deficit and two massive tax hikes in the last ten years, we cannot trust Springfield Politicians with another tax hike,” the Coalition to Stop the Proposed Tax Hike Amendment, said in an emailed statement late Tuesday.

“We are undoubtedly disappointed with this result but are proud of the millions of Illinoisans who cast their ballots in support of tax fairness in this election,” Quentin Fulks, chairman of the Vote Yes For Fairness campaign, which supported the measure, said in an emailed statement on Wednesday.

“Now lawmakers must address a multi-billion dollar budget gap without the ability to ask the wealthy to pay their fair share,” Fulks said. “Fair Tax opponents must answer for whatever comes next.”

If enacted, the new graduated rates would have brought in $1.2 billion for fiscal 2021, which began July 1, and $3.1 billion for a full year, according to state estimates.

Red Ink

It was no panacea. Illinois has about $8.3 billion of unpaid bills, some $137 billion of unfunded pension liabilities, and its rainy day fund has just $68,459. With the bond market demanding high penalties to own its debt, it’s one of just two that have borrowed from the emergency lending facility the Federal Reserve rolled out after the pandemic.

“Illinois — it’s not a stretch to say — it was a net loser in the preliminary aftermath of the election,” said Ty Schoback, senior analyst for Columbia Threadneedle Investments, which owns Illinois debt as part of its $17 billion in muni assets under management. He cited the lack of expected Blue Wave and the graduated tax failure.

The state has budget flexibility and sufficient liquidity for now, he said, adding that market participants will look for willingness to fix problems with structural changes that may be unpopular rather than only borrowing more or one-time tactics.

“I don’t think the rating agencies have an itchy trigger finger and I think they are going to give the state a little bit of time,” Schoback said. “All that being said, the state is definitely on the clock with rating agencies and investors.”

Bloomberg Markets

By Shruti Singh

November 4, 2020, 8:56 AM PST Updated on November 4, 2020, 2:48 PM PST

Illinois Isn’t a Junk-Rated Credit. It’s Just Trading That Way After Voters Rejected a Progressive Tax.

Illinois’ bond prices fell after voters rejected a graduated income tax proposal on Tuesday’s ballot. And while its debt hasn’t been downgraded, it is already trading like junk.

Several years after its budget-setting process was frozen by political gridlock, the state has been taking steps to increase revenue and reduce its reliance on bond markets—partly because its bonds are rated BBB-, just one tier above junk.

The state’s constitution mandates a flat tax, and overturning that policy would have required 60% of people voting on the amendment to approve it, or more than 50% of all voters casting ballots, according to Moody’s.

Instead, about 55% of voters rejected the measure, according to the Associated Press. A graduated income tax would have brought in an estimated $1.3 billion this year, according to Fitch.

It is also looking less likely that states (or other stressed local governments) will receive substantial amounts of aid from Congress this year, as strategists say there is a higher probability of a divided government in Washington.

So Illinois’ bonds have sold off. Yields of bonds maturing in five years have climbed roughly half of a percentage point since last Friday, to 3.5%, according to Bloomberg data.

The selloff has been even sharper over the past seven days, and the yields of six- and seven-year bonds have increased most on the news—the benchmark yields on Illinois’ six-year bonds have climbed to 3.8% from 3% since last week.

S&P, Moody’s, and Fitch all assign Illinois their lowest investment-grade rating, the equivalent of BBB-. But their current yields are closer to junk-rated municipal bonds, rather than investment-grade debt, according to Bloomberg data.

The Bloomberg Barclays High-Yield GO Index has a yield of 3.8% with a maturity of 5.4 years. The index of BBB-rated municipal bonds yields 2.6%, with roughly the same maturity.

To put it in simpler terms: The fact that Illinois’ five- and six-year bond yields are trading around 3.5% and 3.8% shows that investors think the state’s credit is closer to junk-rated municipals than its investment-grade peers.

“Now this is where it gets interesting, to see if the rating agencies actually have the chutzpah to pull the trigger on the first ever U.S. state junk rating,” wrote Eric Kazatsky, analyst with Bloomberg Intelligence, in a Wednesday note.

To be sure, Illinois still has options to raise revenue that it can pursue during coming legislative sessions, according to a Wednesday note from Moody’s.

If the state raises its flat income tax by 0.7 percentage points to roughly 5.7%, it could bring in about $3 billion of additional revenue, says Moody’s, the same amount that it had projected it would raise under a proposed graduated income tax.

Gov. J.B. Pritzker has also asked state agencies to identify potential spending cuts: 5% for the current fiscal year and 10% for the coming fiscal year.

But to free up $3 billion, “the state would have to impose across-the-board reductions of almost 11%, based on actual 2019 figures,” Moody’s wrote. “This degree of austerity would have significant implications for delivery of core education, healthcare, corrections and other services.”

It can also tap the Federal Reserve’s Municipal Liquidity Facility again, says Fitch. If the state does end up getting downgraded by ratings firms, however, it will need to pay higher interest rates to use the facility.

As the state weighs its options, “Illinois’ upcoming post-election legislative session could be particularly consequential this fiscal year,” wrote Eric Kim, head of state government ratings at Fitch, in a Wednesday note.


By Alexandra Scaggs

Nov. 5, 2020 9:15 am ET

California’s Financials Come in So Late They Reflect Bygone Era.

On Friday, California’s bondholders finally got the most up-to-date look at the government’s audited financial statements, revealing how things looked when the economy was in the midst of a record-long expansion, nobody had Covid-19 and the state’s savings account was rapidly growing.

California’s certified annual financial report for the 2019 fiscal year — which ended 16 months ago — is later than any other state’s, a dubious distinction in a corner of the bond market known for the slow pace of such disclosures.

California had blamed the delay on the difficulty multiple agencies had with rolling out a new accounting system called the Financial Information System for California (FI$Cal), a $1.06 billion modernization project that has ballooned in cost since original estimates. The coronavirus pandemic subsequently complicated the task.

Many other states were far more timely, closing the books on their years within six months. Big companies do it even faster: Securities and Exchange Commission rules require them to file their annual reports within 60 days.

While California does provide regular updates on budgets and debt, the so-called CAFR includes other information such as pension liabilities that are integral to rating-company decisions. The document filed Friday showed the state’s sum of liabilities, deferred inflows and net position had grown to $329 billion from $310 billion the previous year.

State Controller Betty Yee had pushed back her estimates several times for when the 2019 report would come out because of the difficulties the state’s departments had in using the new technology to produce their statements that go into it. Even Illinois, on the brink of being the first U.S. state to fall to junk status, filed its 2019 audit in April, or about 10 months after the end of its fiscal year.

To be sure, investors are more concerned about the state’s response to closing the deficits triggered by the pandemic than about a document that lays out its fiscal position before the onset of the worst recession of modern times.

But the outdated statements illustrate a long-running gripe about the loose disclosure rules in the $3.9 trillion municipal market. They also leave taxpayers unaware of long-term expenses like workers’ pensions, said David Crane, an adviser to former Governor Arnold Schwarzenegger and president of Govern For California, which funds state lawmakers’ campaigns.

The costs of these obligations aren’t necessarily disclosed in annual budgets but get “spread out over time,” Crane said before the 2019 filing came out.

“It’s all created without voter approval or knowledge. That’s what the CAFR discloses,” he said. “And that’s how you find out the truth about an enterprise.”

Bloomberg Economics

By Romy Varghese

October 30, 2020, 12:17 PM PDT

A Junk Bond Rating for Illinois Is on the Ballot.

The state’s standing in the municipal-debt market will depend on voters approving a “fair tax” amendment, but which party holds power in Washington may also play a role.

Illinois doesn’t get as much attention as some other Midwestern states around Election Day. It’s no secret why: Unlike Iowa, Michigan, Minnesota, Ohio and Wisconsin, it’s not even remotely close to being a toss-up for the presidency.

What it lacks in White House intrigue, however, it more than makes up for in its own drama.

Illinois has long held the unenviable distinction of being the lowest-rated U.S. state. Its retirement systems are so underfunded, and have been for such a long time, that the phrase “Illinois pensions” is practically used as shorthand among Republicans in Washington as a reason the federal government shouldn’t send a huge aid package to state and local governments to help them get through the pandemic.

Continue reading.

Bloomberg Opinion

By Brian Chappatta

October 28, 2020, 4:00 AM PDT

Chicago Mayor Plans Tax Hikes, Layoffs to Fill $1.2B Budget Hole.

Mayor Lori Lightfoot’s plan includes raising property, gas taxes

Chicago approaches 600 homicides already in 2020; insight from Chicago Alderman Raymond Lopez on what leaders can do to stop the violence.

Chicago Mayor Lori Lightfoot on Wednesday evening unveiled her plan to fill the city’s $1.2 billion budget deficit, the largest in its history.

The $12.8 billion plan includes a number of tax increases and cost savings to help fill the hole in the city’s budget that was exacerbated by the COVID-19 pandemic.

“Chicago’s 2021 Budget represents our city’s roadmap toward an inclusive and fiscally responsible recovery from the extensive challenges of the unprecedented COVID-19 crisis,” Lightfoot said in a statement.

Lightfoot’s plan includes raising $94 million through property tax hikes, in addition to increasing the gas tax by 3 cents per gallon and the cloud-computing tax by 1.75 percentage points. Also included is an annual property tax increase that is tied to the consumer price index.

More than $537 million in savings are identified, including $106 million through layoffs, furloughs and the elimination of unfilled jobs. At least 350 workers are expected to lose their jobs beginning in March 2021.

Lightfoot’s plan also calls for the city to refinance $501 million in debt to take advantage of historically low interest rates.

Other revenue sources include $76 million of tax increment finance surplus funding and $30 million from the city’s rainy day fund.

The budget provides $18.6 million in new investments, including an additional $5.25 million for community-based violence prevention and reduction efforts. Chicago homicides are up 53% so far this year versus last year, according to the Chicago Police Department.

Further community investments include $1.7 million for youth programming, $2 million for affordable housing and $7 million to support workforce training.

Lightfoot’s budget proposal comes as Chicago’s economy has shrunk 10% as a result of the COVID-19 pandemic.

The sharp drop in economic activity came as the city was just starting to get its fiscal house in order. Lightfoot last year identified more than $500 million in structural solutions, the most since 2012, to fill the city’s then-record $838 million gap.

By Jonathan Garber | Fox News

October 22

Chicago Turns to Scoop and Toss, Tax Hikes, and Job Cuts to Manage Coronavirus Wounds.

Chicago’s fix for a record $1.2 billion 2021 budget shortfall and remaining 2020 COVID-19 pandemic tax wounds count on $948 million of relief through a $1.7 billion refinancing and restructuring of general obligation and Sales Tax Securitization Corporation debt.

Chicago Mayor Lori Lightfoot’s proposed 2021 budget totals $12.76B when counting all funds, including a $4 billion corporate fund.

Heading into 2021, the city was still working to close an $800 million revenue hole caused by the pandemic’s economic blows while the 2021 gap was estimated at $1.2 billion due to roughly $800 million of pandemic-related tax losses and $400 million of rising structural costs.

The $1.2 billion shortage is wiped out through a mix of structural measures like tax increases and efficiencies as well as non-recurring, one-shots like debt restructuring and furloughs. The city will take $501 million of debt savings and relief, bank $184.9 million of new revenue, and cut $537.2 million in costs through savings and efficiencies. It mostly leaves the city’s healthy reserves alone.

The city attributes 35% of its 2021 hole to structural demands and 65% to COVID-19 blows with 47% of the measures tackling the $1.2 billion shortfall structural in nature.

“We believe that these structural reforms will set us up well to continue along our path toward structural balance, we which are targeting for 2023. And I hope you will agree and ultimately vote to support this budget,” Lightfoot told the City Council in her budget address Wednesday.

Staying on course with the goal to structurally balance the city’s books by 2023 will prove more difficult given a post-debt restructuring spike in 2022 of about $600 million in debt service and a $300 million price tag to cover an actuarial pension contribution for the municipal and laborers funds. Those factors are likely to weigh heavily in what rating agencies have to say on the proposed plan.

The city’s general obligation credit is rated junk-level by Moody?s Investors Service, at Ba1, it’s rated BBB-minus by Fitch Ratings, BBB-plus by S&P Global Ratings, and A by Kroll Bond Rating Service. S&P moved the outlook to negative in April over mounting pandemic pressures that make structural balance targets a tougher task. The others assign a stable outlook.

Chicago’s GO paper is thinly traded but recent trades put spreads at about 325 basis points to the Municipal Market Data’s top benchmark, said Daniel Berger, senior market strategist at MMD-Refinitiv.

“Ratings agencies have demonstrated unusual patience, due to the unusual circumstances” said Brian Battle, director of trading at Chicago-based Performance Trust Capital Partners, who added, at first glance the budget proposal and debt restructuring appears “reasonable as this voluntary quarantine is unprecedented.”

Market participants will welcome that spending cuts and tax increases are part of the equation and may be willing to swallow the return to scoop-and-toss debt restructuring. “The mayor’s office is being responsible by talking about tax increases and spending cuts,” Battle said, adding that on debt restructuring the city “did it way before there were circumstances” like the pandemic.

Bigger questions loom large over the city’s post-pandemic fiscal picture. “The more salient question for the city is what is the long-term revenue and spending plan.  What is the one, three, and five projections for revenue increases and spending cuts and how does the city attain fiscal stability,” he said.

The package now heads to the council with hearings beginning Monday and a vote expected next month. While Lightfoot labeled the tax hikes and layoffs modest, they may prove a hard sell for some council members who prefer other tax proposals, want police spending cut and more spending on human services, and may look skeptically at the debt refinancing.

“I think it is a fair division and reasonable approach to structural change during this pandemic with little federal help,” said Alderman Scott Waguespack, Lightfoot’s Finance Committee chair, who was a frequent critic of the former mayor’s budgets. “They have a balance in here where we cannot do all structural changes at once. We don’t want to hit personnel too hard, or raise property taxes too high but I believe rating agencies are looking for a good balance.”

The $537.2 million of savings and efficiencies include $106.3 million in personnel reductions from measures like five furlough days and the elimination of 1,900 positions, including 350 layoffs. The budget cuts about 600 police department positions, but Lightfoot said she has no plans to cut other police spending, especially given demands associated with reforms under a consent decree.

The city will sweep old accounts, moving $59 million to the corporate fund and will require Chicago Public Schools to reimburse it for $40 million of pension contributions for CPS employees who participate in the city’s pension funds and $54 million will come from improved rates in healthcare contracts.

The $184.9 million of new revenue comes from a $33.5 million increase in an expected tax-increment financing surplus declaration, a $30 million draw on city fund balances, new tax revenue, including a $93.9 million property tax hike, including $16 million for new property and a $42.5 million hike due loss of collections. The city lost litigation filed by the pension funds and now must make up the difference between what’s levied to cover pension contributions and what’s collected. Future annual property tax hikes will be tied to inflation, a shift from existing practices. The city will also raise $25 million from a hike on cloud computing and motor fuel taxes.

Council members have pressed the administration to dip deeply into reserves. The city’s fiscal chief Jennie Huang Bennett has pushed back, warning that preservation of the reserves that total $900 million between an unassigned fund balance, a cash reserve, and long term reserves are central to maintaining the city’s ratings and weathering a prolonged pandemic hit.

“To be clear, folks, we are not experiencing a rainy day. It is truly a rainy season, and we must continue to be prudent and cautious,” Lightfoot said.

The city will declare a $300 million TIF surplus, pocketing $76 million or $33.5 million more than previously anticipated. Chicago Public Schools receives half of any surplus and the city’s sister agencies and Cook County receive the remainder.

Pension appropriations rise to $1.815 billion in 2021 from $1.68 billion. The city is carrying $31.8 billion of net pension liabilities, and funded ratios for the funds are at 18% for firefighters, 21% for police, 24% for municipal, and 43% for laborers. The contributions shoot up in 2022 to $2.245 billion due to a roughly $300 million spike when the laborers and municipal fund payments move to an actuarial level and due to modest growth in contributions to police and firefighters which moved to an ARC this year.


A cornerstone of the 2021 package that will also cover half of the 2020 hole will come from a $1.7 billion debt refinancing and restructuring. If approved by the council, the city would issue the first piece of the refinancing in December, according to budget documents.

Lightfoot refinanced GO and other debt with $1.5 billion of borrowing under the GO and STSC credits in January generating a total of $300 million in savings that were mostly taken upfront. Bennett has stressed the upfront savings may mark a one-time maneuver but did not constitute scoop-and-toss, as maturities were not extended and savings were achieved in all maturities.

“Unlike the refinancing in 2020, the city will be increasing the debt service on the bonds in future years and extending the debt,” reads a city description of the proposed transaction. “Overall, the city will use the refinancing savings  to help pay for the cost of the debt restructuring and overall the transaction will still generate positive savings on a net present value basis.”

The city says the debt will be layered into STSC debt structure to create a level debt service schedule that meets projected of sales tax collections, which are pledged to payoff the bonds. A chart included in the budget presentation shows a reduction in combined GO and STSC debt service to about $200 million in both 2020 and 2021 from existing levels of $600 million in 2020 and $700 million in 2021.

The expected $800 million of debt service owed in 2022 is held steady and continues with modest increases through 2029, holds mostly steady through 2032 with higher payments owed through 2047 with new debt piled on in 2048-2050.

The STSC bonds are sold through a bankruptcy-remote entity that garners higher ratings in the double-A to triple-A category, depending on whether they are senior or second lien.

Pushing off 2020 and 2021 debt service and extending debt will mark a return to the past fiscal tactic of scooping and tossing debt first used by former Mayor Richard M. Daley as he sought to hold the line on property taxes while financing infrastructure projects. Mayor Rahm Emanuel inherited the practice when he took office in 2011 and then phased it out in his second term.

Some market participants considered the city’s first issues under the STSC, which was established in 2017, as “scoop-and-toss lite” as the maturities of some general obligation bonds being refunded were pushed a few years out and interest was capitalized. The city’s last deal also capitalized interest.

By Yvette Shields


New York Subway’s Pain Could Bring Riches for Bond Investors.

Riders and revenues are way down at the Metropolitan Transportation Authority. Its bonds look risky, but some investors are tempted.

You can make a lot of money betting on government bailouts.

Swooping in to buy the dirt-cheap stocks and bonds of troubled entities is a time-honored — and profitable — tactic throughout the investing world. When deep-pocketed public saviors come forward, such a wager can pay off handsomely.

Given the vital role it plays in the economy of the nation’s largest city, the Metropolitan Transportation Authority, which runs New York’s subway, bus and commuter rail system, is a likely candidate for a lifesaving infusion of government cash.

“It’s very explicitly too big to fail,” said Matt Fabian, a partner at the research firm Municipal Market Analytics who has been pitching M.T.A. debt to his clients.

The agency was dealing with high costs even before the pandemic, and the beating the coronavirus has given its finances has raised the possibility of deep service cuts. That economic pressure is translating into low bond prices and some of highest — and therefore most tantalizing — yields available to investors anywhere in the bond markets.

Investors who buy 10-year M.T.A. bonds right now — the agency was expected to issue around $258 million more in debt on Thursday — are capturing a yield of about 4 percent. That’s roughly three percentage points more in annual interest than they would get buying the safest long-term municipal debt. It also trounces the yields of other major transit systems, which hover around 1 percent.

If it were a for-profit corporation, the M.T.A. would most likely be heading for bankruptcy. Its budget deficit has exploded, and last week Fitch downgraded the agency’s bond rating, citing weak ridership and revenue outlook.

But the M.T.A. is a quasi-governmental body — technically a public benefit corporation, formed in 1968 — that’s deeply entwined with the economic health of the region. That means its risk of default is almost infinitesimal, investors and analysts say.

There’s another reason to like these bonds: federal and state tax exemptions on municipal debt. To match the after-tax return on M.T.A. bonds without taking on a lot more risk, analysts say, investors would need to find relatively safe corporate bonds yielding almost 9 percent — all but nonexistent nowadays.

Len Templeton, president of Templeton Financial Services in Chandler, Ariz., has allocated roughly 5 percent of his client assets to the securities issued by the M.T.A. He said he couldn’t imagine the agency’s being allowed to default.

“I mean, how could you not think they should have public transportation in a city like New York?” asked Mr. Templeton, who manages some $425 million in client assets in bond funds. “And how can the city survive and do what it needs to do without it?”

Even Fitch, in downgrading the agency’s rating to A– from A+, said the M.T.A. continued to have “the highest strategic and economic importance” and would continue to benefit from government support.

Mark Paris, who manages New York and national municipal bond funds for the asset management firm Invesco, said M.T.A. bonds were “definitely a great place to get some yield.” He has been adding them to his holdings, but warned of violent swings in their prices as the agency struggles to stabilize itself over the next few years.

“Is there going to be volatility?” he said. “Yes.”

In fact, there already has been quite a bit. Prices for M.T.A. bonds are normally quite stable, but as the virus gripped New York in March and April, they plunged more than 20 percent and sent yields shooting up.

In normal times, the M.T.A.’s massive ridership is a stabilizing force: Subway, commuter train and bus fares, as well as bridge and tunnel tolls, matched 50 percent of the operating costs in 2019.

“It’s a strength because it reduces their reliance on statewide and citywide politics,” Mr. Fabian said.

That strength disappeared with the arrival of the pandemic. Subway ridership — averaging around 5.5 million on weekdays last year — collapsed more than 90 percent as a result of widespread shutdowns intended to limit the spread of the virus, which was killing more than 500 people a day in the city. Even with infection rates well down from their peak, subway ridership is still 70 percent below last year’s level.

And that means the M.T.A. needs money — badly. Before the pandemic, the agency projected an estimated surplus of $270 million for 2021. Now? It is projecting a deficit of roughly $5.8 billion. Its annual deficit is expected to add up to about $16 billion by 2024.

While investors and analysts expect that financial help will materialize, exactly where it will come from and when it will arrive aren’t clear.

The agency, which already received $4 billion under the CARES Act, is asking for some $12 billion in emergency aid from the federal government to make it through next year. But talks in Washington have been stuck in neutral from months.

If Democrats capture both the White House and the Senate next week, most observers predict the federal government will come through with more help. But even if Republicans retain control in Washington, that won’t be the end of the line for the M.T.A. Rather, investors believe that would just force the state to cough up the money the agency needed.

“The expectation is the State of New York can and will support the M.T.A. if additional federal moneys aren’t forthcoming,” said Howard Cure, director of municipal bond research at Evercore Wealth Management in New York.

There’s a simple reason: New York City is the economic engine of the state, providing nearly half its jobs. By itself, Wall Street — the securities industry centered in Manhattan — accounts for roughly 17 percent of the state’s tax revenues. The state simply can’t afford not to keep the M.T.A. running and New York City functioning.

Analysts at credit ratings agencies are already beginning to factor in the financial toll that additional support from Albany could take on the state. Moody’s analysts downgraded New York State’s bond rating this month, noting the “state assistance in various forms” that the M.T.A. will require even though the state has reduced financial resources.

So if a bailout is such a sure thing, why haven’t people rushed to buy the M.T.A.’s bonds?

In part, the answer has to do with some of the idiosyncrasies of the market for municipal bonds: how heavily such bonds are traded, and by whom.

At roughly $4 trillion, the market is relatively small, with most bonds traded irregularly. Its prices might not accurately capture information as quickly as prices in some other markets. And it’s dominated by affluent individuals who buy municipal bonds for their safety and tax benefits. Such investors are easily turned off by noisy and negative headlines, advisers said.

That can cause wealth managers to steer clear — despite attractive yields — simply to avoid the risk of aggravating clients.

“Holding an M.T.A. bond now, versus not holding one, means triple or double the number of conversations with an angry dentist from Long Island,” Mr. Fabian said. “There’s a cost to that.”

The New York Times

By Matt Phillips

Oct. 30, 2020

The MTA Is Selling Green Bonds This Week. Investors Should Prepare for More Borrowing.

New York’s Metropolitan Transportation Authority is planning to sell tax-exempt green bonds backed by the agency’s transportation revenues. Analysts at Fitch have downgraded that debt, citing the risk that the country’s largest transit system could borrow a lot more in the future as the pandemic has sharply reduced ridership.

The MTA said it would sell $257.5 million of bonds this week to pay down bonds that mature in mid-November. The bonds are backed by a lien on revenues from the commuter and transit system, along with some of the surplus from the city’s bridges and tunnels, state-and-local-government operating subsidies, and revenue from other miscellaneous taxes and fees. They will also be green bonds with certification from the Climate Bonds Initiative, thanks to their use financing mass transit.

The offering comes as revenues have slumped for New York’s subways, buses, and commuter rail, however, as pandemic-wary commuters avoid public transit. On Oct. 23, for example, subway ridership was down nearly 70% from last year, bus ridership was down more than 50%, Long Island Railroad ridership was down 71%, and Metro-North ridership was down 76%. Bridge and tunnel use was down 12% from last year.

In a recent investor presentation, the MTA reiterated past estimates that put its budget shortfall at $3.2 billion for this year and $5.8 billion for 2021 in the absence of federal funding. MTA Chairman and CEO Patrick Foye has requested $12 billion in federal grants for the next two years to cover the deficits—but it isn’t clear how quickly the MTA will be able to obtain aid from Congress, or how much aid it will end up receiving.

Until the outlook becomes clearer, officials estimate they can reduce this year’s deficit by $1.1 billion by cutting spending and tapping other sources of cash within the agency, such as retirement-benefit reserves.

Beyond those steps, board members have proposed tapping the full $2.9 billion of cash available from the Federal Reserve’s Municipal Liquidity Facility, though the MTA has only a little more than a month to file a Notice of Interest to meet the Fed’s current requirements. The MTA has already tapped the Fed facility once, borrowing $450 million in August.

New York state has given the MTA permission to borrow to cover up to $10 billion in deficits through 2022. But ratings-firm Fitch says that increases the MTA’s reliance on capital markets, along with its “sensitivity to the timing and strength of an eventual revenue recovery that is highly dependent on public health and economic conditions and mass transit ridership behaviors.”

For now, the pandemic-related revenue crunch has prompted Fitch to downgrade all of the MTA’s outstanding transportation revenue bonds by two notches, to A- from A+.

The firm’s analysts estimate that the transit authority is burning $300 million of cash per week, and have a “Negative Outlook” for the debt, meaning that future downgrades are more likely than upgrades.

On the bright side, the MTA has about $5.2 billion of liquidity on hand, with about $2 billion of that in cash, according to Patrick Luby, analyst with CreditSights.

What’s more, the market’s pricing of the MTA’s bonds does seem to reflect the risks created by the pandemic—meaning that while the MTA will likely need to pay high interest rates to borrow, the bond yields may be too high for risk-tolerant investors to resist.

The spread between the MTA’s bonds and AAA-rated benchmark muni yields closed around 338 basis points (or about 3.4 percentage points) on Friday, Luby wrote in a recent note. That is up from a spread around one-tenth that size—33 basis points—at the start of this year. In its investor presentation, the transit authority cited “strong legal provisions [enacted] to ensure timely payment” of those interest costs, such as a New York state law that prevents the MTA or its affiliates from voluntarily filing for bankruptcy to reorganize its debt.

The bonds are expected to price on Thursday, according to Fitch.


By Alexandra Scaggs

Oct. 28, 2020 6:15 am ET

Fortress Fails to Sell Record Bond Deal for Las Vegas Rail.

Fortress Investment Group is postponing its plan to build a train to Las Vegas from Southern California after failing to sell a record amount of unrated municipal debt to finance the speculative project, showing the limits of investor appetite amid an economic downturn.

Since the end of September, Fortress, through its company Brightline Holdings, had been marketing $3.2 billion of debt to be issued through California and Nevada agencies. It subsequently reduced the size to a still-record offering of $2.4 billion and tried to purchase some of the bonds it sold for a Florida rail as a way to entice investors to commit to the Las Vegas sale before terminating that buyback offer Friday.

“Unfortunately there is not a lot of liquidity in the market and a lot of economic uncertainty at this moment,” California Treasurer Fiona Ma said Saturday by email. “The project is postponed until market liquidity improves.”

Brightline spokesman Ben Porritt confirmed the postponement. “We will continue to move the project forward,” he said Saturday by email.

California and Nevada had given Fortress the ability to sell private activity bonds, which are meant for ventures for the public interest that are capped annually in each state by the federal government. California had provided the bulk, $600 million, which was leveraged four times to $2.4 billion in bonds because of federal rules extending that special boost to railroads.

California had given Fortress a Dec. 1 deadline to sell the bonds. Now, Ma said, the state will take back the bond capacity and give it to affordable housing projects and other kinds of qualifying ventures, such as recycling facilities. Before Fortress won its allocation from Ma’s debt committee earlier this year, affordable housing advocates had pressed for all of the state’s low-cost financing resource to go toward easing California’s homelessness crisis.

Ma said she didn’t know when Fortress would return to California to request bonds again.

“That will be part of the discussions with Brightline West over the next several weeks,” she said.

The failure to sell the bonds shows that deal sweeteners and juicy yields weren’t enough to overcome investor concerns about a project that depends on the recovery of the pandemic-ravaged travel and entertainment industries and has few comparisons in the U.S.

While Fortress said the rail would ultimately go to Los Angeles, it would need to do multiple rounds of financing to do so. The venture planned to raise a total of $6.38 billion in debt for the $8.4 billion project. The bond issue would have financed construction for a 169-mile (272-kilometer) line connecting Las Vegas to a Southern California desert town called Apple Valley, 90 miles away from downtown.

Lead underwriter Morgan Stanley pitched corporate junk-bond buyers and overseas investors, as well as traditional municipal-bond managers, according to people familiar with the matter who asked not to be named as the talks were private. Prospective yields in October ranged from 7% to 7.5% depending on the call dates, with final maturity in 2050. That yield on a 30-year bond would have been about four times what the highest rated state and local governments pay, data compiled by Bloomberg show.

Bloomberg Markets

By Romy Varghese

October 31, 2020, 6:44 PM PDT Updated on October 31, 2020, 7:33 PM PDT

SoCal to Vegas High-Speed Rail Project Hits the Brakes as Financing Falters.

Plans to build a high-speed electric train between Los Angeles and Las Vegas have been sidetracked over the investor’s inability to finance the project.

Fortress Investment Group announced Oct. 30 it has postponed its planned $8-billion Brightline West project, which was expected to start construction this quarter.

Fortress and its subsidiary, Brightline Holdings, had been marketing $3.2 billion in tax-free private activity bonds authorized by officials in California and Nevada. The amount investors sought was reduced to $2.4 billion in recent weeks but still met a skeptical response in the bond market.

“Unfortunately, there is not a lot of liquidity in the market and a lot of economic uncertainty at this moment,” California Treasurer Fiona Ma told Bloomberg News over the weekend. “The project is postponed until market liquidity improves.”

California had given Brightline until Dec. 1 to put financing in place and will now shift its bonding authority toward affordable housing or other projects for the public good. Treasurer Ma said she did not know when Fortress would again seek bonding authority.

Private-activity bonds let states give third parties access to lower financing costs by issuing bonds free of federal income tax.

The Bond Buyer reported that lead underwriter Morgan Stanley offered the bonds in October with a yield running from 7% to 7.5%, depending on the call dates, with final maturity in 2050. That yield is about four times what top-rated municipal bonds pay.

A Brightline spokesman said the project would continue but did not offer details.

New Website Launched
The Florida-based company had recently launched a website that includes engineering and construction information for the Brightline West project.

Groundbreaking had been scheduled for late this year on what’s being called the High Desert Segment, a 190-mile stretch from Victorville, Calif., to a proposed station south of the Las Vegas Strip.

The planned route follows rights-of-way along Interstate 15, which links Las Vegas with its biggest tourism market, Southern California. The train will run through the I-15 median at some points and alongside the highway in other areas.

Completion of the entire project had been set for 2024. Brightline says that its train, which can operate at speeds up to 200 mph, will cut in half the normal six-hour drive between Los Angeles and Las Vegas.

The company says the project would create 40,000 construction jobs and 1,000 permanent jobs. It also says the all-electric train will keep 400,000 tons of carbon dioxide out of the air each year and remove three million cars from Interstate 15, which is often clogged with travelers on weekends.

Brightline has been conducting geotechnical testing and exploratory boring near its planned Las Vegas station, according to the Nevada Dept. of Transportation, which issued advisories about possible traffic delays in the area. Ninyo & Moore and Terra Contracting are the contractors.

Brightline West is the third name for the project this year. It was briefly XpressWest, and before that it was branded as part of Virgin Trains until investor Richard Branson pulled out of the deal this summer.

Brightline operates a high-speed train line in Florida linking Fort Lauderdale, Miami and West Palm Beach, with plans underway to extend it to Orlando. Service is currently suspended because of the pandemic.

by Doug Puppel

November 2, 2020

S&P ESG U.S. Public Finance Report Card: Tri-State Region Governments And Not-For-Profit Enterprises

Key Takeaways

Continue reading.

28 Oct, 2020

‘City Hall’ Review: An Inspiring Display of Municipal Bonds.

Set in Boston, Frederick Wiseman’s documentary epic celebrates the ideals of civic governance and the realities of urban life.

There’s a puzzlement worth pondering in Frederick Wiseman’s “City Hall,” the latest in a remarkable string of 43 documentary features that began with his “Titicut Follies” in 1967. (This one is streaming as a Film Forum release in virtual cinema, and will soon share online revenues with other theaters around the country.)

Why would a serious filmmaker, and a lawyer by training, open a film focused on the workings of city government—the city in question being Boston—with a call-center operator taking a report of a stray dog walking on a roadway, and close his leisurely epic 275 minutes later with another operator intoning earnestly over the end credits: “I have down that you’re reporting there is something wrong with the hawk’s eyes, and that the hawk isn’t acting normal, and it is feeding on a pigeon on the street rather than flying away with its food, and there are a lot of people around the hawk, but the hawk didn’t seem to be able to fly away”? Is Mr. Wiseman, who can be sly on occasion, trying to tell us that the city is going to the dogs, or that it’s for the birds?

Not likely. His film, narration-free as always, constitutes a love letter to civic governance, and the notion of democracy, at a time when public discourse seethes with scorn for urban life. It is also a celebration, simultaneously clear-eyed and optimistic, of what Boston’s government, under its mayor, Martin J. Walsh, has been trying to achieve in a city that’s endured more than its share of racial turmoil in the recent past. There is slyness, for sure, but also sweetness, in using people’s concerns for animals as bookends for a documentary that tracks the city’s everyday life in minute and enthralling detail. (Completed before the pandemic, the film also serves as a bittersweet reminder of how vital urban life can be.)

You can imagine all those people standing over the troubled hawk. But you can watch the ubiquitous mayor and scores of officials and workers doing their jobs with visible diligence, while citizens all across the venerable city meet, schmooze, discuss, plan, argue, negotiate, marry, speechify (often eloquently), rejoice (for the Red Sox, of course), plead for relief from parking tickets and demand respect, as well as get it, from their chosen representatives.

“Respectful” is a word heard often in the film. It’s part of ritual exhortations from the mayor and his staff, the thing they know they all need to be in this angry moment of American history if they’re going to keep, or regain, their constituents’ trust. “Diversity” and “inclusiveness” come up a lot too, illustrated by elaborate efforts at outreach. The film renders no judgments on the city’s success, yet you can’t help but be bedazzled by the polyglot complexity of the place—a poor section of Dorchester that’s 42% Cape Verdean, a Chinese-American festival where a woman in a cheongsam plucks a pipa while she sings “Red River Valley.” And you marvel that the city holds together as well as it does from day to day. (Unlike local TV news, “City Hall” keeps any and all street violence off-screen. The conflicts here play out peacefully, if often fervently, in conference rooms and community centers.)

When my daughter was little, one of the books I loved reading with her was Richard Scarry’s “What Do People Do All Day?” All those workers doing all that work in Busytown! “City Hall” conveys a similar sense of intense industriousness, even if the workers don’t have cute animal heads.

A clerk listens, really listens, to a first-time father, as he describes, at great and endearing length, how his car happened to be parked in front of a fire hydrant in the middle of the night. (Does she still make him pay the ticket? Watch the film to find out.) A youngish Black health department inspector understands that he’s also being pressed into service as a therapist for an elderly white resident with a rodent-infestation problem. In addition to the rat that’s taken up residence in a greasy stove, the poor man is beset by his own failing health, the sad state of his house, and his brother’s effort to evict him. “My spirit is broken,” he says, to which the health department guy replies quietly, with feeling, “I hear you.”

If I’ve given the impression that “City Hall” portrays Boston as a shining, happy city on Beacon Hill, that is hardly the case. No city has been exempt from the nation’s upheavals, even before the pandemic struck. But Mr. Wiseman’s film shows us, without telling us, that American cities continue to be laboratories for rebirth and innovation. The spirit of this one is embodied in its mayor, Marty Walsh. A Democrat and unabashed liberal, he’s also a cancer survivor, a recovering alcoholic, and a virtuoso storyteller with a gift, common to great pols of the past, for connecting to everyone who crosses his path. “If you see me on the street,” he says at one meeting, “grab me and tell me what the problem is.” That’s what people do, and it’s a pleasure to watch them do it.

The Wall Street Journal

By Joe Morgenstern

Oct. 29, 2020 4:13 pm ET

Puerto Rico Judge Rejects Request for Probe into Allegedly Improper Bond Trades.

The judge overseeing Puerto Rico’s debt restructuring process has rejected a bond insurer’s request for an investigation into what it said were potentially improper bond trades based on information obtained during confidential mediation sessions.

During a telephonic hearing on Wednesday, U.S. District Judge Laura Taylor Swain, who sits on both Manhattan and Puerto Rico federal courts, called bond insurer National Public Finance Guarantee Corp’s suggestion of wrongdoing by bondholders “sensational and largely speculative.” Her ruling comes as the commonwealth and the federally appointed oversight board guiding the restructuring, which has been proceeding in court for more than three years, attempt to continue negotiations with creditors on a plan of debt adjustment.

To read the full story on Westlaw Today, click here:


By Maria Chutchian

OCTOBER 28, 2020

Illinois to Sell $850 million of Bonds as Investors Brace for Junk Status.

CHICAGO (Reuters) – Illinois is scheduled to sell $850 million of bonds on Tuesday as investors demand fatter yields for the state’s debt due to increased worries over its deep financial woes, which were exacerbated by the coronavirus pandemic.

Ahead of the competitive sale of general obligation bonds due over the next 25 years, the spread for Illinois 10-year bonds over Municipal Market Data’s benchmark triple-A yield scale has widened by 10 basis points to 281 basis points since Oct. 1.

Howard Cure, director of municipal bond research at Evercore Wealth Management, pointed to “a legitimate fear that the state could go into junk status – although not default on its debt.”

“The state continues to delay tough decisions with a number of speculative revenues as part of its current budget, including additional federal aid, voter approval for a progressive income tax, and more Municipal Liquidity Facility (MLF) debt,” he said, referring to the possibility Illinois, which took out a $1.2 billion cash-flow loan in June from the Federal Reserve’s MLF, could borrow more.

Illinois is the lowest-rated state at a notch above junk due to its huge unfunded pension liability and chronic structural budget deficit. All three major credit rating agencies assigned negative outlooks to their ratings in the wake of the pandemic.

Earlier this month, a Citi research report said Illinois is “almost guaranteed” a credit rating downgrade to junk if a constitutional amendment to replace its flat income tax rate with graduated rates fails to pass on Nov. 3. The ability to tax high earners more would increase revenue by an estimated $3.1 billion annually.

In addition to uncertainty over congressional passage of unrestricted federal virus aid to states, Andrew Richman, senior fixed income strategist at Sterling Capital Management, said Illinois was experiencing a surge in virus cases ahead of its sizeable bond sale. The state reported its highest one-day total of 4,554 cases on Friday.

“Illinois had problems before the pandemic,” Richman said. “Things are getting worse not better.”

Still, John Mousseau, president and CEO of Cumberland Advisors, said the high yields will attract buyers.

“People will buy it. They are yield-starved,” he said.

By Karen Pierog

OCTOBER 19, 2020

Reporting by Karen Pierog in Chicago; Editing by Alden Bentley and Matthew Lewis

Chicago Poised for Painful Choices to Close Record Budget Gap.

Mayor Lori Lightfoot on Wednesday will lay out how she plans to close the largest budget gap in Chicago’s history as Covid-19’s resurgence threatens to hobble the junk-rated city’s recovery in the years ahead.

Spending cuts, increases to property taxes, pension obligation bonds and debt refinancings have all been under consideration to close the record $1.2 billion deficit for fiscal 2021 in the corporate fund, the main vehicle used to pay for services the city provides and other operating expenses. That comes after a nearly $800 million gap this year.

“We are facing a stark reality,” said Christopher Mier, a managing director for Loop Capital Markets, whose investment-banking clients include Chicago. “I expect the mayor will confront that reality head on and seek the best solutions in difficult circumstances.”

While cities across the country are confronting revenue declines and deficits, Chicago’s pain is more acute because its finances were strained even before the pandemic exacerbated its budget shortfall. Pension costs have weighed on the city’s credit rating for years, which partly spurred Moody’s Investors Service to downgrade the city to junk in 2015. And those bills are climbing. Chicago’s four retirement funds are short about $30 billion, and the city’s projected pension contribution climbs to about $1.8 billion for the coming year.

‘Unprecedented’ Pressure

S&P Global Ratings, which rates Chicago three levels above junk, lowered the city’s outlook in April to negative because of the “unprecedented” pressure from the pandemic and recession. The credit rater is focused on the balance between one-time versus ongoing fixes, funding levels of pensions and any potential use of reserves, said Jane Ridley, an S&P credit analyst.

“What we are looking for is how they set themselves up in 2021 to handle 2022, particularly from a structural standpoint,” Ridley said in an interview. “How many of the budget solutions are one-time versus structural?”

Lightfoot will present the second budget of her administration during a Chicago City Council meeting that starts at 10 a.m. local time. The city has been weighing a variety of options, including earlier this month targeting up to $200 million in labor cuts, according to a source familiar with the talks who asked not to be named. City officials this week declined to confirm speculation about property tax hikes and other measures.

“During this unprecedented time when we’re facing the largest deficit in the City’s history, we plan to present a fiscally responsible budget that is fair, inclusive and rooted in our values,” according to a statement from the Office of Budget and Management on Monday.

Virus Resurgence

Despite the shortfall, Chicago doesn’t expect to tap the nearly $900 million in its reserves to close its budget holes this year and next, Chief Financial Officer Jennie Huang Bennett said last month. The city was not looking for additional lines of credit and consideration of pension-obligation bonds would need to include reforms to the liability, according to Bennett.

The city is also seeking help from the cash-strapped state, which is facing its own budget shortfall of more than $4 billion. Chicago wants Illinois to increase the amount the city receives from the local government distributive fund, which provides a designated portion of state income tax revenues.

Chicago’s budget presentation comes as the city is seeing an increase in coronavirus cases, adding uncertainty to the economic outlook. On Monday, Lightfoot outlined how Chicago is seeing a “second surge” with cases rising more than 50% over the past two weeks to about 500 daily, according to the city’s health department. It’s the highest daily case count since late May.

Given the uncertainties around the pandemic and federal help, the city’s management has taken a “conservative” approach to revenue, said Dennis Derby, a portfolio manager for Wells Fargo Asset Management, which holds Chicago bonds among $40 billion in municipal assets. It should not rely too heavily on federal or state aid as it faces various unknowns, Derby said.

“The trajectory of a recovery is fairly unknown at this time,” Derby said in an interview. “It’s up in the air. We don’t know how long this is going to go on for. We don’t know the long-term effects.”

Bloomberg Politics

By Shruti Singh

October 21, 2020, 3:00 AM PDT

As Chicago Budget Hearings Start, Ratings Agency Sounds Alarm.

As Chicago grapples with a second wave of the coronavirus pandemic, a Wall Street ratings agency fired a shot across the bow as aldermen prepared to start a month of hearings Monday morning on Mayor Lori Lightfoot’s $12.76 billion spending plan for 2021.

Standard & Poor’s, one of a handful of major ratings agencies, warned in a special report issued Friday that the city could see its credit rating — which the firm already considers negative — drop further.

That rating helps determine how much the city has to pay in interest to borrow money, much like an individual’s credit score.

A year ago, Lightfoot said the city would have a structurally balanced budget by 2022, even as a state law forced the city to spend an additional $1 billion between 2019 and 2022 to put its four pension funds on firmer financial ground.

But the pandemic, as well the rising cost of the city’s pensions, means the city’s ability to meet that goal is “particularly challenged,” and its credit rating could drop from BBB-plus, which is three notches above junk status, according to the report from lead Chicago analyst Jane Ridley and secondary analysts Carol Spain and Scott Nees.

“If the city’s final budget and management’s plans to address potential pressures beyond 2021 don’t make sufficient progress to return to structural balance, the rating will be pressured further,” according the report. “The city’s ability to absorb the additional pension expenditures and stay on a course to structural balance will be critical to maintaining the rating.”

A structurally balanced budget is one where expenses do not annually outpace revenues, which allows the city to keep its books in the black without using budget maneuvers that generate revenue that the city cannot rely on in future years.

It is of “critical importance” that Chicago make progress toward a structurally balanced budget to maintain its current rating, according to the report.

In 2021 the city will pay its four pension funds $1.8 billion, approximately $91 million more than in 2020, from its $4 billion general operating fund, according to Lightfoot’s proposed budget. That is a 9% drop from 2020, according to the analysis.

Chicago’s four pension funds — police, fire, municipal and laborers — are less than a quarter of the way to being fully funded. In 2022, Chicago will have to pay $2.25 billion toward those funds to reach a funding level that could meet 90% of the fund’s liabilities during the next 40 years, according to the report.

But given the economic collapse triggered by the coronavirus pandemic, that might not be enough.

“In addition, given the magnitude of the problem and reliance on market returns to stay on track with pension funding, it is possible that even if the city takes all the right steps to align expenditures with revenue, effects from COVID-19 and the recession could still result in fund performance that sets funding levels further back,” according to the report.

The pressure from the city’s underfunded pensions — deemed “acute” by Standard and Poor’s — accounts for 45% of the 2021 property tax hike proposed by Lightfoot.

Chicago finance officials project that 10% of property owners won’t pay their tax bills in 2021 — although in a typical year, approximately 3% of property owners do not pay their taxes.

Lightfoot blamed a 2016 state law for forcing the additional increase because it requires the city to use property tax revenue to make the full required payments to its pension funds, regardless of how many property owners fail to pay their bills.

After 2021, the city’s property tax levy will be tied to increases in the cost of living, as measured by the federal government’s consumer price index. Most government agencies follow a similar procedure, and Lightfoot said it would help avoid huge increases in the future.

The city needs $51.4 million in new property tax revenue to help fill the $1.2 billion budget gap, according to Lightfoot. But the rest of the revenue expected to be generated by the proposed increase, equal to 1.3% of a property’s value, will be earmarked for pension payments, according to Lightfoot’s proposal.

If the City Council approves Lightfoot’s plan, it will add $56 per year to the tax bill for the owner of a home worth $250,000, city officials said.

The analysis by Standard & Poor’s acknowledges that it would be nearly impossible for Chicago officials to close such a large deficit by cutting spending or raising revenues to get to a structurally balanced budget.

Approximately 53% of the budget solutions proposed by Lightfoot come from one-time measures, primarily $500 million in savings from restructuring outstanding debt, according to the analysis.

Lightfoot’s proposal to close an additional deficit of $799 million for the 2020 fiscal year relies entirely on one-time solutions. Including $100 million from refinancing approved by aldermen in 2019, $350 million in federal relief funds approved in March and $350 million from the new debt restructuring plan.

The report from Standard & Poor’s also warns aldermen and the mayor not to dip into the city’s reserve funds, which they say has about $1 billion in cash.

“In our view, a sustained deterioration in liquidity or reserves could also negatively pressure the rating,” according to the report.

The report calls Chicago’s reserves “strong and stable” and says the agency considers them “a high point.”

Chief Financial Officer Jennie Huang Bennett has already made that case to the City Council’s Finance Committee, only to face pushback from aldermen reluctant to lay off workers and hike property and gasoline taxes while the city has so much money in the bank.

Instead, Lightfoot’s plan proposes to borrow an additional $1.7 billion to refinance existing city debt to save $450 million in 2020 and $501 million in 2021 using scoop and toss, a budget-stretching tactic reviled by fiscal watchdogs as a costly gimmick.

“This approach increases the city’s fixed costs and can limit flexibility in the future by elevating the debt burden and extending the final maturity,” according to the report. “However, it also allows the city to keep reserves on hand to fill future budget gaps or revenue shortfalls, if needed.”

In addition, those funds could be used quickly to respond to another wave of the pandemic, which could cost the city another $442 million in a worst-case scenario, officials said.

Heather Cherone | October 26, 2020 7:25 am

Fortress Plans to Sell $2.4 Billion for Vegas Rail, Still Record.

Fortress Investment Group cut the size of its municipal bond sale for for a passenger railroad between California and Las Vegas by $800 million to $2.4 billion, seeking to draw enough buyers to finance the speculative project.

The size of the offering of unrated securities was included in a preliminary pricing wire viewed by Bloomberg. While it’s less than the $3.2 billion the company had intended to sell, it would still be the largest ever offering of unrated municipal securities. They are expected to price this week.

Yields range from 7% to 7.5% depending on the call dates, with final maturity in 2050, in line with earlier price guidance although the call features differ. That yield on a 30-year bond would be about four times what the highest rated state and local governments pay, data compiled by Bloomberg show.

The update comes as Fortress’s Brightline Holdings LLC is offering to buy back as much as $250 million of bonds from investors sold for its Florida railroad. It will buy them for 100 cents on the dollar, about 17% more than where some of the securities have been trading, on the condition that its sale for the Las Vegas line occurs.

Ben Porritt, a spokesperson for Brightline, declined to comment. Samantha Kreloff, a spokesperson for lead underwriter Morgan Stanley, didn’t immediately respond to a request for comment.

Last week, Fortress updated terms to put more equity into the Las Vegas project and lengthened the period that a reserve account could be used for payments to bondholders. The increase in equity brings it to a total of $3 billion, representing 32% of the capital structure, up from the previous 28%, according to bond documents. The venture plans to use a total of $6.38 billion of debt for the $8.4 billion project.

Brightline expects the rail to ultimately extend to Los Angeles. For now, the bond issue will cover a 169-mile (272-kilometer) line connecting Las Vegas to a southern California desert town called Apple Valley, 90 miles away from downtown Los Angeles. The first high-speed, fully electric rail in the U.S. will run in 2024, according to offering documents.

Bloomberg Markets

By Romy Varghese

October 20, 2020, 10:48 AM PDT

Fortress Eases Nuveen’s Concerns With Tweaks to Vegas Deal.

Nuveen’s John Miller, the biggest backer of Fortress Investment Group Inc.’s Brightline passenger railroad in Florida, had been skeptical of plans to forge ahead swiftly with a multi-billion dollar venture to build a second line running between Southern California and Las Vegas.

But with the company now offering to buy back some of its Florida bonds and provide added safeguards for investors, Miller said in an interview that he’s starting to see the debt offered for the Las Vegas project “in a more positive light.”

With this week’s changes, Fortress is counting on money managers like Miller, who runs the biggest high-yield mutual fund in the tax-exempt debt market, to complete a record sale of unrated municipal bonds to finance its latest venture just as the coronavirus is roiling the tourism and transit industries.

Deal Changes

Fortress-backed Brightline Holdings cut the size of the debt sale by about $800 million to $2.4 billion, according to a preliminary pricing wire viewed by Bloomberg, an indication that some investors were balking at buying the securities.

On Tuesday, Brightline offered to buy as much as $250 million of bonds sold for its Florida railroad for 100 cents on the dollar, about 17% more than where some of them have been trading, on the condition that its sale for the Las Vegas line occurs. It also said it will lengthen the ability to tap a reserve account for debt payments, a protection for bondholders.

In addition, last week Fortress told prospective buyers that it put more equity into the Las Vegas project and did a similar extension of the period that a reserve account could be used for debt payments. While the bonds being marketed will cover a 169-mile (272-kilometer) line connecting Las Vegas to a Southern California desert town called Apple Valley, 90 miles away from downtown Los Angeles, Fortress plans to ultimately connect to an existing rail station serving the second-most populous U.S. city.

‘Positive’ Change

The action on the Florida bonds shows Fortress’s commitment to that project and “improves the confidence level” in the Las Vegas venture, said Miller, whose firm manages about $30 billion in high-yield bonds and owns 80% of those issued for the Florida railroad. Also, the proposed connection to Los Angeles is “a really important change from a fundamental standpoint and a positive,” Miller said.

“These are the sorts of the points of progress that should for our team get us more excited about Los Angeles to Las Vegas,” said Miller, who declined to say whether the firm would buy the debt.

Fortress has until Dec. 1 to turn enthusiasm into orders to meet a deadline for the sale from California, which extended the company the power to sell tax-exempt debt through a state agency. Officials there and in Nevada, which approved similar authority, declined to comment on the decision to cut the size of the debt offering. Brightline spokesperson Ben Porritt declined to comment.

Fortress needs continued support for the Las Vegas venture, with plans to raise a total of $6.4 billion in debt for the $8.4 billion project it expects to open for service in 2024.

Borrowing Surge

The Brightline debt sale is coming just as municipal managers are swamped with new offerings as governments race to borrow now in case the November presidential election upsets financial markets.

At $2.4 billion, the offering is “still a pretty sizable high yield deal that is not without risk,” said Terry Goode, a senior portfolio manager at Wells Capital Management, which holds $2.3 billion in high-yield securities among its $41 billion in municipal debt under management. He noted that it also comes amid a busy debt sale calendar and “just before potential volatility from the election.”

Bloomberg Markets

By Romy Varghese

October 21, 2020, 4:00 AM PDT Updated on October 21, 2020, 9:03 AM PDT

— With assistance by Danielle Moran

Brightline Offers to Buy $250 Million of Florida Train Bonds.

The Fortress Investment Group-backed passenger railroad in Florida, Brightline Holdings LLC, is offering to buy back as much as $250 million of bonds from investors for 100 cents on the dollar, about 17% more than where some of the securities have been trading.

The company is offering to purchase $100 million of bonds priced with a 6.25% interest rate and a mandatory tender in 2024 and $150 million of those with a 6.5% coupon and subject to a mandatory tender in 2029, according to a notice filed to the Municipal Securities Rulemaking Board’s online repository on Tuesday.

The 2024 bonds last traded on Sept. 28 at 87.5 cents on the dollar and the 2029 tranche last traded on Oct. 7 at 85.5 cents, according to trade data collected by Bloomberg.

The company is making the tender offers in connection with a bond sale for Brightline West, the planned passenger railroad stretching between Las Vegas and Southern California. The tender offers are conditioned upon the execution of that sale, according to the document.

The sale of $2.4 billion in unrated municipal securities for the project is scheduled to price this week, according to a pricing wire seen by Bloomberg. Yields range from 7% to 7.5% depending on call date, with final maturity in 2050. The deal was originally marketed as a $3.2 billion sale and was scheduled for Oct. 14.

Bloomberg Markets

By Danielle Moran

October 20, 2020, 7:37 AM PDT Updated on October 20, 2020, 10:58 AM PDT

— With assistance by Davide Scigliuzzo, and Romy Varghese

CEQA Amended to Expedite Transit and Sustainable Transportation Projects: Nossaman

Governor Newsom recently signed into law Senate Bill 288 (the “Sustainable Transportation COVID-19 Recovery Act”), which will temporarily add new exemptions to the California Environmental Quality Act (CEQA) statute. The purpose of SB 288 is to fast track transit and sustainable transportation projects, provide a boost to public transit agencies affected by COVID-19, aid economic recovery by producing jobs, and reduce driving and GHG emissions.

These statutory exemptions may help expedite environmental review of transportation projects that are specifically … Continue

By Tina Kim on 10.19.2020

Nossaman LLP

New York Faces $59 Billion Revenue Shortfall.

Gov. Cuomo says services will be cut and taxes will increase if Congress doesn’t pass another relief package

ALBANY, N.Y.—New York governments and authorities are projecting $59 billion of revenue shortfalls through 2022 because of the continuing coronavirus crisis, one of the deepest funding holes of any state.

Gov. Andrew Cuomo, a Democrat, said services will be cut and taxes will increase if Congress doesn’t pass another relief package—which Democrats say should include direct aid to states and cities hit by the pandemic. Mr. Cuomo said recently that he will postpone decisions in the hope that Democrats make gains on Election Day Nov. 3.

New York reported more than 32,000 deaths due to the coronavirus, and the pandemic decimated public finances. New York’s state government lost an estimated $14 billion in the current fiscal year and $16 billion in the coming fiscal year. Transportation authorities around New York City expect to take in $15 billion less revenue due to drops in subway, train and air passengers. And New York City and other local governments will be grappling with $13.5 billion in shortfalls over the next two years, Mr. Cuomo’s office estimates.

Continue reading.

The Wall Street Journal

By Jimmy Vielkind

Oct. 20, 2020 8:51 am ET

Vermont Bond Bank Accepted to the Nasdaq Sustainable Bond Network.

Winooski, VT (October 19th, 2020) – The Vermont Bond Bank (“Bond Bank”) joined the Nasdaq Sustainable Bond Network following an application and a positive review by Nasdaq of the Bond Bank’s conformance with their sustainability criteria.

The Nasdaq Sustainable Bond Network is an international network of bond issuers meeting sustainable standards. The platform provides investors with a readily available source to find impactful fixed income investments through proprietary market data feeds.

The Network, launched in late 2019, defines sustainability bonds, “as loans used to finance projects that bring clear environmental and social-economic benefits.”

In joining the network, Executive Director Michael Gaughan commented, “We’re thrilled to join the Nasdaq Sustainable Bond Network and its international effort highlighting issuers that are committed to social and environmental causes. Vermont’s communities also share this commitment and the platform further helps us support local sustainability efforts throughout the state.”

The Bond Bank will join other municipal issuers such as the New York Housing Finance Agency and the San Francisco Public Utilities Commission that are also committed to financing impactful public projects.

About the Bond Bank

The Vermont Municipal Bond Bank was created by the Vermont legislature in 1970. The Bond Bank is governed by a five-member Board of Directors with four appointed by the Governor and the State Treasurer serving as an ex-officio member.

The Bond Bank is a state instrumentality with a mandate to “foster and promote by all reasonable means” access to long-term debt financing for governmental units while, to the extent possible, reducing related costs to taxpayers and residents.

The Bond Bank also co-manages the Clean Water and Drinking Water State Revolving Funds with the Department of Environmental Conservation.

Please visit for more information on the Bond Bank and its programs.
Contact: Michael Gaughan
Phone: 802-654-7377
Email: [email protected]

Oct 20 2020, 9:09 AM

Prince George’s Co. School Board Approves Public-Private Partnership to Build Schools.

The school board in Prince George’s County, Maryland, approved alternative financing to build six schools.

The board voted Wednesday night, 11-1 with one abstention, to approve a public-private partnership to finance, design and build the schools and maintain them for 30 years. In exchange, the school system will pay $1.2 billion over 30 years.

Prince George’s County Public Schools CEO Monica Goldson said when students at Drew-Freeman Middle School in Suitland return to classes Feb. 1, 2021, they will see the same outdated building.

“They will enter a school building that is 60 years of age and nothing has changed,” Goldson said. “All we have done is a Band-Aid and patchwork. And unfortunately, Drew-Freeman is not the only school.”

Goldson told reporters that the county school system is facing a backlog of $8.5 billion in school infrastructure replacement and renovation. She also stated that over 40% of the school buildings are over 60 years old.

County Executive Angela Alsobrooks was one of the speakers at a news conference Wednesday, calling for support of the partnership.

“It is well-needed and well-deserved by all of our families who have said to us they did not want delay. They did not want us to be bound up in bureaucracy. They wanted action,” Alsobrooks said.

According to the school board, the partnership with Prince George’s County Education and Community Partners would allow for faster construction of five new middle schools, including Drew-Freeman, and one K-8 school.

Under traditional public funding, it would take up to 16 years to complete, while the partnership projects are expected to be completed in three.

Under the partnership, private firms would build the six schools and maintain the facilities for 30 years.

The school system would pay off the $1.24 billion price tag for the project, which would include interest, over that 30-year period.

“If we wait, our student enrollment will only continue to increase and our school buildings will grow older,” Alsobrooks said. “And we cannot predict that the state budget will make adequate funding available for school construction.”

Opponents argued that work with a private group could cause problems like those seen on the Purple Line project. They were also wary of transparency and the terms of the contract.

But for supporters, such as former teacher Elsie Jacobs, who spent years at Drew-Freeman Middle School, the time is now.

“The heat didn’t work; the air didn’t work. It is time that somebody do something for these kids in this community,” Jacobs said.

by Luke Lukert

October 21, 2020, 9:20 PM

Fortress Delays Pricing of $3.2 Billion Vegas Train Deal.

Fortress Investment Group delayed the pricing of $3.2 billion of municipal bonds to build a passenger railroad between southern California and Las Vegas, a sign that investors were hesitant to finance such a speculative project at a time of deep economic uncertainty.

The company boosted the equity contribution to the project by $500 million, among other changes, according to updated documents released Wednesday.

Lead underwriter Morgan Stanley had planned to price the deal Wednesday, according to a pricing wire viewed by Bloomberg. The offering has now been postponed with no new date set, according to people familiar with the matter who asked not to be identified because the discussions are private. The deal is listed as day-to-day.

Samantha Kreloff, a spokesperson for Morgan Stanley, and Ben Porritt, a spokesperson for Fortress’s Brightline Holdings, declined to comment.

Updated Rate

The company has been holding investor calls since at least the last week of September, when offering documents were released. Investors were pitched last week on yields ranging from 7% to 7.5% depending on call date, with final maturity in 2050, for the largest offering of unrated municipal securities. Updated documents Wednesday estimated a 7.25% interest rate.

“If they can open that deal up to crossover buyers then it could get done, but if they can’t — I think they will struggle filling that order book,” said Jason Appleson, a portfolio manager at PT Asset Management in Chicago. “The muni market just isn’t big enough to support a deal like that.”

The increase in equity brings it to a total of $3 billion, representing 32% of the capital structure, up from the previous 28%, according to bond documents. Other changes include boosting a reserve account and reducing future indebtedness. The venture now plans to raise a total of $6.38 billion in debt, down from $6.5 billion, for the $8.4 billion project.

Deadline Looming

Brightline has until Dec. 1 to sell the bonds to meet a deadline from California officials, who had granted the company the ability to sell tax-exempt debt. In September, Brightline sold $1 billion in short-term securities to preserve its federal allocation of so-called private activity bonds that it will refinance next year, according to offering documents.

Brightline expects the rail to ultimately extend to Los Angeles. For now, the bond issue will cover a 169-mile (272-kilometer) line connecting Las Vegas to a southern California desert town called Apple Valley, 90 miles away from downtown. The first high-speed, fully electric rail in the U.S. will run in 2024, according to offering documents.

Bloomberg Deals

By Romy Varghese

October 14, 2020, 8:10 AM PDT Updated on October 14, 2020, 11:37 AM PDT

— With assistance by Danielle Moran

California’s Boom Collapses as Fires Add $1.1 Billion Toll.

The wildfires, power outages and extreme weather that have ravaged California are setting the stage for a deepening economic crisis for an engine of U.S. growth.

Blazes that scorched 4.1 million acres, more than the past three years combined, have cost a record $1.1 billion to battle. S&P Global Ratings is warning that a new fund to help utilities cover liabilities may fall short. California’s finances are already battered, with the coronavirus pandemic busting a $54 billion hole in the budget and hope fading for federal stimulus anytime soon.

Meanwhile, the state’s financial needs and strains with the Trump administration came to the fore Friday after the White House denied a request for disaster aid for six blazes in September. That decision was later reversed, Governor Gavin Newsom said.

Continue reading.

Bloomberg Green

By Romy Varghese

October 16, 2020, 5:00 AM PDT Updated on October 16, 2020, 2:42 PM PDT

Governor Newsom Signs Major Housing and Transit CEQA Streamlining Bill: Nossaman

On August 29, 2020, Governor Newsom signed into law AB 2731, which is intended to support the potential redevelopment of the 70-acre Navy Old Town Campus in downtown San Diego. The site would include a LEED Gold certified transit hub, a public transit connection to the San Diego International Airport and adjacent transit-oriented development, including up to 10,000 new residential units. The bill was authored by California State Assemblymember Todd Gloria and Senate President pro Tempore Toni G. Atkins. It authorizes the San Diego Association of Governments (SANDAG) to acquire a portion of the site to house the new transit facility and to expedite judicial review of future California Environmental Quality Act (CEQA) challenges to SANDAG’s Environmental Impact Report evaluating the facility.

Public infrastructure projects that are necessary to support local and state transit and climate change goals may be mired in years of litigation, delaying delivery of major projects even when the public agency has prepared a full Environmental Impact Report. Consistent with CEQA, AB 2731 encourages disputes regarding the content of the Environmental Impact Report to be resolved through a robust public engagement process instead of through protracted and costly litigation.

A transit hub and airport connection at the Navy-owned site is one of several concepts being evaluated by SANDAG as part of its ongoing transportation planning efforts. Increasing regional connectivity to the San Diego International Airport is a key planning objective of the agency.

In order to qualify for streamlining, AB 2731 requires that the future transit facility result in no increases in greenhouse gas emissions and support substantial reductions of single-occupancy vehicle use in the San Diego region.

AB 2731 also streamlines environmental review for future transit-oriented development on the site by authorizing the use of an Environmental Impact Statement that is being prepared by the U.S. Navy for purposes of future CEQA compliance required for the development’s approval. The U.S. Navy published a Notice of Intent to Prepare an Environmental Impact Statement for the Navy Old Town Campus Revitalization on January 24, 2020. In order to be used for CEQA compliance, AB 2731 requires both that the future transit-oriented development be consistent with the U.S. Navy’s development assumptions and that the Environmental Impact Statement satisfy CEQA’s procedural and substantive requirements, including the adoption of all feasible mitigation measures to reduce the potentially significant impacts of future development.

AB 2731 passed without opposition in both houses of the California Legislature and is among the most significant CEQA streamlining bills enacted this year.

Nossaman LLP

By Liz Klebaner on 10.08.2020

Central Arkansas Utility Set to Issue 'Green Bonds'

Funds earmarked for environmentally friendly projects
A clarifier, used to remove particles and solids from water, is shown in this July 2019 file photo.
Central Arkansas Water will be the first-ever municipal water utility to issue bonds that meet Climate Bonds Initiative standards, which dictate the funds must be used for conservation and environmentally friendly projects.

Bonds are loans made to large organizations, such as local governments in the case of municipal bonds. Cities and governmental organizations, including Central Arkansas Water, often use debt financing to fund capital projects and ongoing infrastructure needs.

Central Arkansas Water commissioners last week approved the issuance of about $31 million in “green bonds,” which meet standards set by the Climate Bonds Initiative, an international nonprofit organization that seeks to harness the $100 trillion global bond market to create solutions to climate change, according to its website.

According to the initiative’s standards, proceeds from “green bonds” are to be specifically directed to pay the costs of design, construction, property acquisition and other related expenses necessary for eligible projects.

Central Arkansas Water estimated that 35% of the proceeds from the bond issue will be allocated to purchase land around the Lake Maumelle watershed. The utility routinely acquires parcels of land in the watershed in an effort to protect drinking water from contaminants.

The other 65% is set to go toward infrastructure that the utility says will help improve its ability to transport and deliver water and prevent water waste, including installing high-efficiency water treatment equipment and replacing and rehabilitating pipelines to prevent leakage and overflow.

Jeff Mascagni, chief financial officer for the utility, said meeting the criteria would expand the group of people who could be interested in buying those bonds, as well as make Central Arkansas Water an industry leader among municipal water utilities.

“It’s an innovative deal. We’re going to be the first one that’s issued this kind of bond under these criteria, so we’re really proud of that,” Mascagni said at last week’s regular board meeting.

The “green bonds” were part of a $60 million bond package the utility’s board of commissioners approved Thursday.

Central Arkansas Water worked with the World Resources Institute, a Washington-based think tank that works on environmental and economic issues, and Encourage Capital, a financial services firm in New York City, to prepare the issuance of the bonds and certification under the Climate Bonds Initiative’s criteria for water infrastructure.

“This bond is special because it will help secure clean drinking water for the residents of central Arkansas by both financing state-of-the-art infrastructure and also protecting our rich forestland and other natural ecosystems,” Central Arkansas Water Chief Executive Officer Tad Bohannon said in a news release from the World Resources Institute.

Central Arkansas Water received certification from the Climate Bonds Initiative on Tuesday.

The bonds are set to be posted today.

Central Arkansas Water provides water for a population of nearly 500,000 in the seven counties that make up its service area.

by Rachel Herzog | Today at 7:20 a.m

Bon Secours Mercy Health Refinances $322 Million Through JEDA.

Bon Secours Mercy Health, Inc., through its partner HealthSpan, is using $322 million in bond funding from the S.C. Jobs-Economic Development Authority (JEDA) for refinancing across its system of six hospitals in Greenville, Charleston, Mount Pleasant and Goose Creek.

The Catholic health care ministry, one of the nation’s 20 largest health systems, employs 8,800 people at Roper Hospital, Bon Secours St. Francis Hospital, Roper St. Francis Mount Pleasant Hospital, Roper St. Francis Berkeley Hospital, St. Francis Hospital and St. Francis Hospital (Eastside).

The $322 million in hospital facilities revenue bonds will be used to refinance prior debt incurred by Roper St. Francis Healthcare, for expansions in Charleston and Berkeley Counties, and by St. Francis Hospital, for expansions in Greenville County.

“We’re pleased we could be part of the team to help Bon Secours Mercy Health with these complex financial issues. It is always an honor to help healthcare providers meet their missions and serve the healthcare needs of South Carolinians,” said Jeremy Cook, South Carolina Bond Counsel with Haynsworth Sinkler Boyd, P.A., in Charleston.

“JEDA appreciates once again being called upon to help provide these outstanding medical providers with the tax-advantaged financing they need. That’s been an important segment of our bond work for decades,” said Harry Huntley, CPA, Executive Director of JEDA in Columbia.

October 13, 2020

Las Vegas High-Speed Rail Bonds Test Wall Street’s Risk Appetite.

Fortress Investment Group plans to sell a record $3.2 billion of unrated municipal securities next week to finance a passenger train to Las Vegas. The pricing will signal how far investors will go for higher returns amid persistently low rates and economic uncertainty.

Morgan Stanley, the lead underwriter, intends to set pricing terms next week, according to people familiar with the matter who asked not to be identified because the discussions are private. The deal is listed as day-to-day. Samantha Kreloff, a spokesperson for Morgan Stanley, declined to comment on the timing.

The company’s Brightline Holdings expects the rail to ultimately extend to Los Angeles. For now, the bond issue will cover a 169-mile (272-kilometer) line connecting Las Vegas to a southern California desert town called Apple Valley, 90 miles away from downtown. The venture plans to raise a total of $6.5 billion in debt for the $8 billion project. The first high-speed, fully electric rail in the U.S. will run in 2024, according to offering documents.

Success of this deal will show that “there’s a lot of people looking for yield in this low-rate environment and people are comfortable with the risks of infrastructure projects,” said Dan Solender, head of municipal debt at Lord, Abbett & Co.

In a video to prospective buyers, Brightline predicted profit margins of at least 70%. Its train would provide a comfortable and environmentally friendly ride to Las Vegas and take about three hours, compared with up to six hours by car, and entail less hassle than flying. Potential pitfalls listed in the offering documents include construction delays and diminished demand because of the coronavirus pandemic and more specific issues like Richard Branson’s Virgin Enterprises Ltd. challenging Brightline’s termination of their branding agreement.

Brightline had said it planned to sell the debt for the Las Vegas rail by Sept. 30 to meet a California deadline, but it received an extension to Dec. 1. In September, Brightline sold $1 billion in short-term securities to preserve its federal allocation of so-called private activity bonds that it will refinance next year, according to offering documents.

Last week, Morgan Stanley pitched corporate junk-bond buyers and overseas investors on the offering and suggested yields as high as 7.5%, according to people familiar with the matter who asked not to be named as the talks were private. That yield on a 30-year bond would be about four times what the highest rated state and local governments pay, data compiled by Bloomberg show. Ben Porritt, a Brightline spokesman, declined to comment on the deal.

Fortress, owned by Softbank Group Corp., has invested more than $30 billion in infrastructure-related assets over the past decade. Officials in California and Nevada, which awarded the company the ability to issue tax-exempt debt, have touted the prospect of jobs and economic development the project could bring. The company is considering adding a commuter station in Hesperia, California along the line. Office workers could use the rail instead of driving, said Jim Colby, senior municipal strategist at Van Eck Associates Corp.

“Long-term, this has some aspects that are positive, and not just driven by tourism,” Colby said. “Pandemic aside, this probably can be a profitable enterprise.”

Profits haven’t materialized for the company’s previous venture, the first privately funded intercity passenger train in the U.S. in a century. The luxury rail line in Florida has struggled to meet revenue estimates and has suspended service because of the pandemic. The company is looking to boost future ridership by adding stations.

Fortress last year raised a then-record $1.75 billion of unrated municipal debt for the project under the name Virgin Trains USA. Those securities were sold at initial yields of as much as 6.5%. The price of its bonds due in 2049 has slid to an average of 87 cents on the dollar.

For the Las Vegas to Los Angeles venture, the company projects $1.1 billion in annual revenue in 2027, after three years of operations, according to the offering documents. It expects about 11 million one-way trips that year.

The securities are being marketed as green bonds because they’re financing clean transportation and environmentally friendly buildings. Besides eliminating tons of carbon emissions annually by replacing car trips, the company will pledge to plant a tree for every ride.

Bloomberg Markets

By Romy Varghese

October 7, 2020, 4:00 AM PDT

— With assistance by Davide Scigliuzzo

Illinois Eyes Second Fed Loan If Aid, Income-Tax Vote Fail.

Illinois, the only U.S. state to borrow from the Federal Reserve, will likely have to tap the central bank again to help close its $4.1 billion deficit if federal aid doesn’t come through and voters reject a ballot measure to raise taxes on the rich, according to Governor J.B. Pritzker.

The cash-strapped state sold $1.2 billion in short-term debt in June to the Fed to help close its fiscal 2020 budget gap. While Pritzker is optimistic that stimulus will arrive at some point and voters next month will approve his signature agenda item to end Illinois’s flat income tax, he’s prepared to use the Fed’s Municipal Liquidity Facility, a lifeline for state and local governments, for a second time.

“If there is no support from the federal government or there’s no fair tax, and so given that situation, we would certainly, for some of that, we would need to go to the MLF borrowing facility, but we would also implement cuts,” Pritzker, a billionaire Democrat, said in an interview. He’s asked state agencies to submit proposals for 5% spending cuts this year and another 10% for fiscal 2022.

Illinois isn’t alone in its woes. States are facing about a $200 billion revenue shortfall from fiscal 2020 through 2022, according to Moody’s Analytics, but Illinois has little cushion. The state has more than $8 billion of unpaid bills, about $137 billion of unfunded pension liabilities, and its rainy day fund has $858,873. Its borrowing penalty is the highest among states tracked by Bloomberg, with its credit rating only one step above junk.

Higher Levies

If approved in November, the graduated income tax would bring in about $1.2 billion for fiscal 2021, which began July 1. For a full year, it would bring in $3.1 billion, according to state estimates. Illinois’s flat tax of 4.95% would move to a progressive rate in January 2021 and boost levies on those earning more than $250,000. Rates would range between 4.75% and 7.99% for individuals.

According to a poll released in March by the Paul Simon Public Policy Institute at Southern Illinois University Carbondale, about 65% of voters supported the amendment, and 32% were against it. The survey of 1,000 registered voters, conducted between Feb. 10 to 17, has a margin of error of plus or minus 3.1 percentage points.

Still, opponents of the graduated tax have grown more vocal as Election Day approaches. The Coalition to Stop the Proposed Tax Hike Amendment calls the measure “bad for Illinois,” arguing it would give politicians more power to raise taxes, hurt small businesses and not provide “material” relief to middle- and lower-income taxpayers, according to its website.

“The bottom line is we can’t trust the politicians in Springfield with a blank check,” Lissa Druss, spokesperson for the coalition, said in an email.

Ken Griffin, founder of hedge fund Citadel LLC, has donated $46.75 million to that group to help fight the measure, while Pritzker has given $56.5 million to the “Vote Yes for Fairness” committee, which supports the change.

The passage of the measure, “at this point, it seems more uncertain,” said John Shaw, director of the Paul Simon Public Policy Institute. The pandemic, racial tensions and other political debates in the state and around the U.S. have taken up a lot of the attention and “deepened Illinoisan’s cynicism” of government, he said.

‘Draconian Cuts’

In Washington, U.S, Senate Majority Leader Mitch McConnell said the differences are likely too big for an agreement on a new comprehensive stimulus package before the election, despite President Donald Trump’s renewed interest in striking a deal.

Without additional revenue from the higher levies or federal aid, Illinois Comptroller Susana Mendoza is warning that the state could see unpaid bills balloon and will have to look at “draconian cuts.”

The graduated income tax “won’t get us all the way there but a combination of cuts, plus new revenues coming in and ideally we get federal funding,” Mendoza said. “But I think we have to plan on worst case scenario.”

A defeat of the income-tax measure doesn’t mean a downgrade will be automatically triggered, said Eric Kim, an analyst for Fitch Ratings. Fitch lowered the state’s rating in April to just one notch above junk, the same level as S&P and Moody’s Investors Service. All three cut their outlook on the state’s debt to negative in April amid the pandemic.

This week, S&P and Fitch Ratings affirmed their BBB- rating on Illinois and Moody’s affirmed its equivalent Baa3 rating. All three have a negative outlook. Those ratings apply to $850 million in general obligation bonds the state plans to issue Oct. 20 to pay for capital projects and its early retirement program.

Economic Outlook

The passage of the graduated income tax may help the market’s perception of Illinois but doesn’t completely change the fundamentals, said John Miller, head of municipals for Nuveen, which holds Illinois among its $188 billion in muni assets under management as of June 30.

“You still need growth in the economy to improve their budgetary situation,” Miller said.

Through September, general fund state sales tax receipts were $1 billion ahead of forecasts, according to S&P. Sales taxes through the first quarter were 9.9% above forecasts and roughly flat compared to the previous year, the ratings company said in an Oct. 7 report.

“Our revenues have outperformed our projections,” Pritzker said. “That’s a very good thing. It means our economy is recovering at a faster rate than our experts, economists had predicted.”

Still, Pritzker cautioned that he’s concerned about the level of unemployment and the ongoing spread of the pandemic. Illinois’s unemployment rate is still about 11% and its rolling 7-day virus positivity rate is about 3.7%, with the daily case count reaching the highest since May on Thursday, excluding a day in September when the state released backlogged data.

“This pandemic is not over,” he said. “This is going to be a difficult period for the country.”

Bloomberg Economics

By Shruti Singh

October 9, 2020, 5:00 AM PDT Updated on October 9, 2020, 9:01 AM PDT

‘Plenty of Ways for Illinois to Hit Junk Pretty Quickly,’ Analyst Says.

(The Center Square) – A public finance watchdog said the latest report on Illinois’ finances from Fitch Ratings is evidence the state is on the verge of having a junk credit rating.

Fitch gave $850 million of borrowing the state issued a BBB- rating. Some of that borrowing is for the state’s pension buyout program, the rest is for capital projects.

Wirepoints President Ted Dabrowski said the pension buyout program is a distraction and not providing real savings. He said the Fitch report shows state’s politicians are running out of options and are costing taxpayers more by borrowing more money.

“They’re even warning ‘yes, the tax hikes might help the bondholders,’ the bondholders would be happy with tax hikes because that’d be more money for them, but that doesn’t help the average Illinoisans,” Dabrowski said.

Dabrowski said while neighboring Indiana may be borrowing at 1.5 percent with a good credit rating, Illinois’ near junk status has the state paying 5.5 percent for borrowing.

“And the worse it gets the more of that the budget gets eaten up by the costs and the worse the public services go,” Dabrowski said. “This is a state in decline in that sense because all of the money is being eaten up by financial costs.”

Including pensions and debt service, Dabrowski said as much as 30 percent of the state budget is set aside to cover financial services like paying on growing debt obligations.

Last fiscal year, on $2.8 billion of borrowing, taxpayers incurred interest costs of $1.6 billion. The state also spends around a quarter of every tax dollar it takes in on pension debt.

Without real reforms to pensions to lower the obligation, and without real reforms to how much the state spends, Dabrowski expects the state to hit junk status.

“Clearly if the [progressive income] tax hike doesn’t pass, that’ll happen, and some people will view that as bad,” Dabrowski said. “But it’s actually, what the government doesn’t need is more money. What the government needs is reform.”

There’s also the $5 billion of federal funds Illinois Democrats put in the budget that’s nowhere in sight.

“If that doesn’t happen, Gov. [J.B.] Pritzker has made no plans to figure out how to reduce expenses to do that so I think that could easily trigger a junk bond rating,” Dabrowski said. “There’s plenty of ways for Illinois to hit junk pretty quickly. It’s all a question about how fast that happens and what triggers, but I think there’s plenty of triggers there waiting.”

Without specifics, Pritzker said earlier this week that agencies under his control are looking at cuts.

“What our agencies are looking at is grant programs, they’re looking at their own personnel, and the hiring that they’ve needed to do,” he said.

By Greg Bishop | The Center Square Oct 8, 2020

Flint Residents Sue Investment Banks, Accuse Them of Helping Create Water Crisis.

Flint residents seeking damages from the water crisis are accusing three investment banks of aiding in the exposure of tens of thousands of residents to toxic water when the city switched its water source more than six years ago.

Filed on behalf of 2,600 children in federal court in Detroit on Wednesday, the lawsuit against JPMorgan Chase & Co., Wells Fargo, and Stifel, Nicolaus & Co. claims that by financing the city of Flint’s participation in a $220 million municipal bond sale for the construction of a new water pipeline, the banks knowingly put Flint on a path to rely on the corrosive Flint River as a temporary water source and an ill-equipped water plant to treat the water.

“All three knew 100% that if they participated in the bond sale, children would get hurt, children would be brain damaged and people’s lives would forever be changed,” said Corey Stern, a lawyer at Levy Konigsberg LLP who filed the lawsuit.

The EPA determined in 2016 that Flint’s water distribution system was too large and its treatment plant was inadequately staffed, operated and administered.

“But rather than doing the right thing, the ethical thing, the moral thing, they participated with government defendants in creating that situation for the kids in Flint because of the money that they stood to earn.”

The plaintiffs are seeking monetary damages, a potential award that Stern values could be worth at least $2 billion.

Wednesday’s filing comes after Flint residents joined several other water crisis lawsuits that brought pressure and led to a $600 million settlement two months ago with the state of Michigan for its role in the public health disaster that potentially exposed thousands of children to toxic levels of lead.

According to Stern, the case is centered on children younger than age 19 due to the level of damage he believes children incurred and because of statute of limitations laws in Michigan that allow minors to file claims that accrued when they were children until they reach the age of 19.

JPMorgan Chase declined to comment. Wells Fargo and Stifel, Nicolaus & Co. couldn’t be immediately reached for comment Wednesday.

Flint’s water crisis began in April 2014 when the city began using the Flint River as a temporary water source in order to cut costs so that it could upgrade its water treatment plant and connect to the new water pipeline once it was built. For decades, the city purchased already treated water from the Detroit Water and Sewerage Department, but it terminated the relationship in April 2013 after deciding to enter into a long-term customer contract with the Karegnondi Water Authority.

The bonds at the center of the lawsuit were issued in spring 2014 by the KWA, backed by Genesee County and Flint, to pay for the construction of a $300 million pipeline from Lake Huron in Sanilac County that would carry water 70-miles inland to Genesee County and the city of Flint. The water authority was formed by officials in Genesee, Sanilac and Lapeer Counties several years prior with the intent of providing a new water supply alternative from Detroit’s water system.

At the time, the city was at its debt limit, as regulated by the state constitution, and could not afford to participate in the sale of bonds. As a workaround, the bond counsel for Flint and the KWA, an outside environmental lawyer and the Michigan Department of Environmental Quality worked out an environmental consent order to remediate a toxic sludge pit tied to the water treatment plant.

The order allowed the city to access additional funding and also included a stipulation regarding the city’s participation in the KWA project as part of the compliance program for the violation. The order allowed Flint to participate in the securities offering and was included in the bond’s official statement, which allowed the bond sale to move forward as designed in April 2014. This provided financing for the pipeline project in time for construction season that year, but the money was used to pay for the KWA, not to help Flint pay to remediate the sludge pit.

Flint’s total share of the project amounted to roughly $85 million, and within weeks of the initial bond issuance, the city sought to quickly bring its water treatment plant online to start distributing Flint River water.

But the plant was not ready to dispense drinking water to residents, a Genesee County drain official testified at a criminal preliminary hearing of four Michigan Department of Environmental Quality employees in 2016. David Jansen, the senior assistant director of the Genesee County Drain Commission, said at the time that the water wasn’t treated with corrosion control chemicals and resulted in lead leaching from aging pipelines into the city’s drinking water.

According to the lawsuit, were it not for JPMorgan Chase, Wells Fargo and Stifel, Nicolaus & Co. underwriting the bond sale, the city would have been forced to continue buying water from Detroit, as it did not have the funds to pay to upgrade the plant once the pipeline was built or to use the Flint River in the interim.

“JP Morgan Chase, Wells Fargo and Stifel locked arms with the city of Flint. They locked arms with the Treasury Department. They locked arms with the DEQ. They locked arms so tight that it was impossible to tell one from the other,” Stern said. “And in doing so, they violated every citizen of Flint’s right to bodily integrity.”

Christine Chung, an Albany Law School professor, said typically in municipal bond or bankruptcy cases, residents do not have standing in proceedings, with elected officials or municipal managers representing those interests.

But she did note the effort of federal Judge Steven Rhodes, a retired federal judge who oversaw Detroit’s bankruptcy, to hear from the city’s residents during the bankruptcy proceedings.

“That’s where this is new,” said Chung, who serves as the co-director for the law school’s Institute for Financial Market Regulation. “That’s just sort of a sad and defining characteristic of these cases, that where is the place for the voice of the residents in legal proceedings involving these matters of public finance and public governance?”

LeeAnne Walters, a Flint resident and mother who is one of the named plaintiffs in the case on behalf of her children, said she was cautiously optimistic about the lawsuit and believes bringing claims against the banks is an important step.

“All the players have been involved, need to be held accountable,” said Walters, one of the earliest whistleblowers during the water crisis and now an environmental activist, on Wednesday. “The banks that put profit over safety need to be held to the same standard as everybody else and they deserve to pay for the lives of lives that they have devastated.

Walters, whose twin children were three at the time of the crisis, says she sees the emotional and physical toll of the water crisis reflected in her kids every day from issues with hand-eye coordination to speech impairments and a continued refusal to drink water from a tap.

“It’s taken some time, but good things come to those who wait,” she said. “Hopefully as we go forward on this, the good guys keep being the good guys and the bad guys learn that it’s not OK to be bad guys.”

Arthur Woodson of Flint uses a bullhorn to chant with the crowd outside the Capitol as part of a Flint water crisis protest in 2016.
Upon learning about the lawsuit on Wednesday, Flint community activist Arthur Woodson was taken aback by the news and felt like it would bring a welcome spotlight to the six-year-long saga.

“I’m ecstatic because they’re bringing more attention now and show people it was about them making money, not saving money,” Woodson said of the lawsuit.

Woodson said the addition of the financial institutions feels like the start of a new phase in the water crisis litigation. “For them to go after the bank, that’s for real, you’re getting ready to fight,” he said.

The Detroit News

by Kayla Ruble

Oct 7, 2020

Fortress Eyes Junk Market for Record Las Vegas Train Deal.

Fortress Investment Group is turning to corporate junk-bond buyers and overseas investors to help finance its planned passenger train from Southern California to Las Vegas through the sale of $3.2 billion of tax-exempt debt, a deal that’s far larger than most issued in the state and local-government securities market.

Morgan Stanley, the lead underwriter, began reaching out to traditional U.S. high-yield money managers on Tuesday to gauge interest, according to people familiar with the matter who asked not to be identified because the discussions are private. The bank has also pitched the securities to European bond buyers familiar with infrastructure projects.

Such buyers are likely needed given the size of the securities offering. It would be the largest ever sale of unrated debt in the municipal market, a haven for risk averse investors where high-yield bonds are largely held by a handful of firms.

In initial conversations with potential buyers, the bank has indicated that the securities will yield as much as 7.5%, the people said. The sale is not expected to price until next week. A 7.5% yield for 30-year debt would be nearly five times what the highest rated state and local governments pay, data compiled by Bloomberg show.

Ben Porritt, a spokesperson for Fortress’s Brightline Holdings, the company behind the railroad, said the project is generating a lot of interest. “Brightline West is one of the most ambitious and transformative projects in the country and we are excited to introduce it to investors,” he said.

A spokesperson for Morgan Stanley declined to comment.

The offering will test the appetite for risky securities in the municipal market, where investors are desperate for fatter returns amid historically low interest rates. It comes as the pandemic continues to weigh on the economy, including the travel and entertainment industry that the Brightline project depends upon.

The sale is being done through California and Nevada agencies that extended their power to issue tax-exempt debt. The proceeds will finance construction of a rail line from Las Vegas to the California desert town of Apple Valley, about 90 miles (145 kilometers) from Los Angeles. The company intends to issue more debt to finance an extension to Los Angeles that will begin running in 2024, according to offering documents.

Offering tax-exempt bonds to high-yield investors worked out well for Fortress last year, when it raised a then-record $1.75 billion of unrated municipal debt for a passenger rail project in Florida under the name Virgin Trains USA. Those securities were sold at initial yields of as much as 6.5%.

The unprofitable Florida line, however, has struggled to meet revenue estimates and has suspended service because of the pandemic. The price of its bonds due in 2049 has slid to 87.5 cents on the dollar to yield around 8.6%. The company is looking to boost future ridership by adding stations.

Bloomberg Markets

By Davide Scigliuzzo and Romy Varghese

September 29, 2020, 12:57 PM PDT

— With assistance by Gowri Gurumurthy

Virgin Islands Suspends Nearly $1 Billion Bond Sale.

The U.S. Virgin Islands suspended a nearly $1 billion debt sale after a group of retirees filed a lawsuit challenging legislation that authorized it, extending the territory’s exile from America’s bond market.

The cancellation of the deal was necessary because of “the negative impact of ill-intentioned litigation deliberately filed in the Superior Court of the Virgin Islands on the eve of bond pricing and closing,” Governor Albert Bryan Jr. said in a statement on Monday.

The deal was intended to refinance outstanding debt through a securitization corporation backed by the nearly $250 million a year the Virgin Islands receives from the U.S. government, the territory’s cut of the excise taxes on rum it ships to the mainland. Last week, the government delayed the deal, which was expected to price Sept. 24. The lawsuit was filed Sept. 22.

The sale had been expected to be a major test of the $3.9 trillion municipal bond market, where investors have continued to snap up riskier securities as benchmark yields hold near the lowest in decades. The territory hadn’t sold long-term debt publicly in the U.S. for years as it wrestles with the same economic forces that drove its bigger neighbor, Puerto Rico, into financial ruin.

A debt service payment the island owes on Oct. 1 will be made on schedule, according to Bryan’s statement.

Bloomberg Markets

By Danielle Moran

September 28, 2020, 12:35 PM PDT

S&P Medians And Credit Factors: Colorado Metropolitan Districts


Leading up to 2020, Colorado metropolitan districts had demonstrated overall positive credit quality for several years, supported by strong economic growth in the state, continued housing development, and lower debt ratios through good assessed value (AV) growth for several districts. However, the COVID-19 pandemic has introduced some uncertainty to the recently stable property tax collection history for districts created pursuant to the Colorado Special District Act (Title 32, Article 1).

Despite the recessionary impacts as a result of the pandemic, S&P Global Ratings expects the credit quality of Colorado metropolitan districts with tax rate flexibility and additional reserves to remain stable in the near term. For districts with limited-tax structures and little available reserves, a prolonged recession and decline in property tax collections could lead to downward rating pressure in the near term. In addition, should the trend of fluctuating oil prices in 2020 persist, there could be rating implications for districts with concentration in oil and gas.

According to U.S. Census Bureau population estimates, Colorado was the third-fastest-growing state in the nation from 2010 to 2019, with a cumulative population growth rate of 14.1% during that time. Metropolitan districts’ responsibilities include both the construction of residential area improvements and the ongoing operation and maintenance of those improvements.

Continue reading.

28 Sep, 2020

Council Bills Could Pave the Way for a Public Bank in NYC.

The measures would require broader disclosure of where the city stashes its money now.

The City Council is considering measures that would scrutinize the city’s relationship with corporate banks and other financial entities—disclosures that could pave the pathway to creating a municipal public bank in the future.

The first bill, Intro 2099, would require the Department of Finance (DOF) to submit a quarterly report, every March, June, September and December, which would include the average daily balance, interest rate or earning allowance, interest earned, costs and fees reported both net and gross for each account. The DOF would submit the report to the Speaker of the City Council and publish on its website for the public.

The second bill, Intro 2100, would require the Director of Management and Budget to issue quarterly reports on the city’s use of non-bank financial institutions such as payroll, lockbox, advisory, management, and bond-underwriting services. The reports would be issued to the Speaker of the Council, and would be posted on the Office of Management and Budget’s (OMB) official website for the public.

Both bills were introduced by Manhattan Councilmember Mark Levine and have support from Councilmembers Keith Powers, Kalman Yeger and Robert Cornegy and Public Advocate Jumaane Williams.

“Today we are taking a big step forward by introducing legislation which will give us the critical information we need to move ahead in this project—clear reporting on just where all of our money is sitting right now,” said Levine during an online press event last week. “The public should have this information. So we understand where our money is and what it is costing us. This is the first step.”

Moves in Albany as well

Levine said the City Council is also working with state elected officials in the Senate and Assembly. The state legislature is considering a bill, introduced in January, which would authorize local municipalities to lend money to public banks and authorize public ownership of stock in them. The bill is currently both in the state Assembly and Senate legislature’s banks committees for evaluation. The Senate bill S5565A and the Assembly bill A09665A; they were introduced by state Senator James Sanders and Assemblymember Ron Kim, respectively, both of Queens.

The City Council bills are part of a package of bills, targeting more financial transparency and how to help disparate communities, are now being developed to establish the country’s first municipal bank.

A public bank is a bank of which a state, municipality or other public entity is the owner–unlike a private bank, where the owners are usually private shareholders. Current major public banking models include the Bank of North Dakota and the German Public Bank System as well as many nations’ postal bank systems. In North Dakota, the public banking system was created to serve its agricultural economy and has existed for more than a century.

Last October, California passed a law that would allow local counties and municipalities to create public banks. The following month, San Francisco launched a task force to create a plan for establishing a public bank for that city. The task force report is due June 30th.

In New York, Public Bank NYC, a coalition of over 30 advocacy groups, has been pushing elected officials for the last two years to create a public bank system for local or state governments. NYPIRG, Chayya Community Development Corporation, New Economy Project, South Bronx Unite, Cooper Square Committee, New York Communities for Change, Brooklyn Cooperative Federal Credit Union are some of the members of the coalition.

According to the coalition, currently the city deposits its cash with 30 “designated banks,” including JPMorgan Chase, Bank of America, and among other large corporate banks. Coalition members said the current banking system underscores the central role many corporate banks which deal with the city’s finances and taxpayers monies play in financing industries such as fossil fuel and real estate — “fueling the climate crisis, tenant harassment and displacement, and widening inequality.”

They want a public bank that would instead invest the city’s holdings in entities like Community Development Financial Institutions, or CDFIs, which channel investment to distressed communities.

“By partnering with—and investing in—CDFIs, the public bank would increase their capacity to expand to even more communities and provide funding to worker-owned businesses and MWBEs that have been hardest hit by the pandemic,” said Linda Levy of the Lower East Side People’s Federal Credit Union, one of the oldest federal credit unions in the city.

“We are fighting for a public bank as part of a broader effort to fundamentally transform our unfair, extractive economy,” said Deyanira Del Rio, co-director of New Economy Project, which coordinates the Public Bank NYC coalition. “Through a public bank, New York City can support permanently-affordable housing, small and worker-owned businesses, green infrastructure, and other equitable development in Black and Brown neighborhoods—and divest from Wall Street banks that are actively harming New Yorkers, our economy, and the planet.”

Seeking flexibility and disclosure

According to the coalition, under current New York law, local governments who are interested in establishing a public bank must apply for a commercial bank charter, which advocates say forces the local government to change the public banking approach to conform to a system designed for private, for-profit banking.

The Sanders bill, the “New York public banking act” updates and authorizes the state Department of Financial Services to allow lending of public credit and public ownership of stocks of special-purpose public bank charters to counties and regions across the city.

The two pieces of City Council legislation would allow the public to further scrutinize the city’s relationship with corporate banks, said Andy Morrison, campaign director at the New Economy Project.

“It’s really just as simple as, the city has open data goals and city data should be available in ways that are responsive to the public that encourage public engagement,” he said. “Right now the information about [the city’s] banking relationships are virtually unknown and the costs incurred by the city. We don’t have that information and it should be available as a matter of transparency and public interest. That’s the rationale just for the bill(s), irrespective, of the campaign for a public bank”

According to the City Charter, the DOF commissioner is already required to keep a record of the accounts of deposits in, monies drawn from and banks and trust companies in which the deposits shall be made—essentially, the data covered by Intro 2099. Those records are shared with the City Comptroller but the details are not required to be made public, as the new law would mandate.

The quarterly reports covered by Intro 2100 would include balances, fees, and returns on any money market account holding city funds for each city bond and city note, its issuance costs, the amount and cost of any credit default swap payment and any other non-depository city financial services costs.

A complex goal

Some experts say the coalition’s vision for a public bank is a long-term process which will require extensive regulatory review and comes with its own set of challenges.

Andrea Batista Schlesinger, Partner at HR&A Advisors, and Ariel Benjamin, a Director at HR&A Advisors, both have been extensively involved in leading feasibility studies for public banks in major cities such as Seattle and Philadelphia, and say it is important to identify what problem the public bank is attempting to solve, then understand what type of public bank model would be chosen to be implemented.

“It’s really hard to create a municipal bank. It’s hard because it requires legislation and permission. It’s hard because the federal regulatory environment is designed to limit risk. And, it’s not a bad thing, but there is an extra hurdle for a public institution to be both a steward and a repository for funds and investment decisions,” said Batista Schlesinger. “By putting this legislation out there, it is really an important first step because you don’t have to rewind to even understand how the city is currently banking. That in and of itself can be a Herculean task. This campaign has already unfolded and in a smart and strategic way, I think the next critical step for them is to determine all the challenges.”

On the challenges, Benjamin said collateralization policies and insurance requirements are a few important factors to take into consideration. First, collateralization ensures that the city’s money is available and protected from unrecoverable financial loss at all times. Second, public banks seeking to accept retail deposits from the general public must typically meet insurance requirements which have been set up on the federal level by the Federal Deposit Insurance Corporation (FDIC).

A third consideration is the City’s credit rating, should the City seek to use their reserve balance to capitalize a public bank, or make loans that commercial banks deem too risky. “That’s what they’re putting on the line here potentially by engaging in public banking. By setting up a public bank, cities are putting their credit and credit ratings at risk which has deep implications for financing municipal projects and city budgets,” said Benjamin.

Morrison from New Economy Project said the coalition has been working with lawyers to address these challenges as it sets the path for a public bank in New York City.

by Sadef Ali Kully

September 29, 2020

Moody’s Downgrades New York’s Credit Ratings Because of the Pandemic.

New York’s credit ratings are the latest casualties of the coronavirus pandemic.

Moody’s downgraded both the city and state’s general-obligation bonds by one notch to Aa2, the firm’s third-highest rating, from Aa1.

The firm’s analysts kept a negative outlook on New York City’s debt, meaning they could downgrade the city’s debt again in the next year or two. They changed their outlook for New York state’s debt to stable from negative, meaning more downgrades of its debt are unlikely in coming months.

New York City certainly isn’t the only municipal bond issuer coming under pressure because of the Covid-19 pandemic. But it has been one of the worst affected by the crisis, as Moody’s points out, and the state could experience consequences as well because the city is one of its largest economic engines.

Continue reading.


By Alexandra Scaggs

Oct. 1, 2020 5:52 pm ET

Moody’s Downgrades New York State, New York City Credit Ratings.

Ratings concern cites mounting toll of coronavirus pandemic on state and local economies, with sales-tax and income-tax revenues cratering

Moody’s Investors Service downgraded the credit ratings of both New York City and New York state on Thursday, a consequence of the coronavirus pandemic’s mounting toll on the New York economy.

The general obligation bond ratings of both the city and state fell one level, to Aa2 from Aa1, though they remain high investment grade. Moody’s kept the city’s outlook “negative,” saying its rating could drop further if the city relies heavily on borrowing for cash flow.

A spokeswoman for Mayor Bill de Blasio’s office expressed disappointment with the downgrade and said his administration has a “track record of strong fiscal management.”

The pandemic, which has killed far more people in New York than in any other state, crushed sales and income tax revenues for both the city and state as they implemented sweeping shutdowns to slow the spread of the coronavirus. Both governments face significant revenue shortfalls.

The downgrades could drive down the trading price of hundreds of millions of dollars worth of outstanding general obligation debt issued by the city and state. They could raise interest rates for both governments, increasing the cost of new borrowing to finance capital projects or plug budget holes. Any increase in borrowing costs would likely force the already-cash-strapped governments to raise taxes, to find new revenue streams or to cut spending.

Moody’s said New York state has so far used stopgap actions to balance the budget, postponing lasting changes, and that the city has been relying on the federal government to send aid or the state government to grant borrowing authority.

Robert Mujica, budget director for New York Gov. Andrew Cuomo, called the downgrade evidence that the nation’s state and local governments need half a trillion dollars in aid from Congress to make up for the hit from the pandemic.

After a cash infusion in the spring, Congress has been unable to agree on a follow-up aid package, with Republicans opposing aid levels sought by Democrats. The spring funding didn’t include replacement dollars for revenue lost by state and local governments.

“Today’s action by Moody’s should be a wake-up call to the federal government,” Mr. Mujica said in a statement.

New York state lowered its expected revenues by $14.5 billion as a result of the pandemic, and to conserve cash has been holding back 20% of scheduled payments to municipalities, social service organizations, and, in some instances, school districts.

State financial documents released in August project an $8.4 billion deficit for the fiscal year that starts on April 1. Mr. Cuomo, a Democrat, has resisted calls from labor unions and progressive legislators to raise taxes on the wealthy.

At the city level, Mr. de Blasio, a Democrat, has slashed some city services and ordered 5-day furloughs for more than 9,000 municipal employees, including himself, through March.

The ratings firm predicted that the lasting economic impact of Covid-19 on the city will be among the most severe in the country, dragging down the state and state-controlled Metropolitan Transportation Authority. The firm said containing the global spread of Covid-19 and bringing office workers, travelers and families back to the city will be crucial for recovery.

In a letter to Mr. de Blasio last month, more than 160 business leaders expressed concern about public safety, cleanliness and other quality-of-life issues in the city.

The mayor has warned that up to 22,000 city employees could be laid off if the city can’t find another way to close the budget gap.

Mr. de Blasio has said the city needs to balance a $9 billion budget deficit over the next two years, and still hopes for a federal bailout or the authority from the state to borrow up to $5 billion.

Investors are likely to be patient with public officials using debt to plug budget holes if they commit to an ongoing plan to raise revenue or cut expenses, said Howard Cure, director of municipal-bond research at Evercore Wealth Management, a firm that invests in municipal bonds, including those issued by New York state and city.

“I think the financial community and citizens would be tolerant of some kind of short-term borrowing, but you need a plan to make it viable,” said Mr. Cure, a lifelong New York City resident, as he prepared to buy a takeout dinner of beef chow fun—and pay sales tax on it—on 1st Avenue in Manhattan.

The Wall Street Journal

By Heather Gillers, Katie Honan and Jimmy Vielkind

October 1, 2020

Virgin Islands Eyes End to Bond-Market Exile With Mega Deal.

The U.S. Virgin Islands has been locked out of America’s bond market for years as it wrestles with the same economic forces that drove its bigger neighbor, Puerto Rico, into financial ruin.

Now, with a credit rating cut deeply into junk and under pressure to raise cash as a tourism drought stings its economy, the U.S. territory is seeking to sell nearly $1 billion in debt this month by extending an unusual promise to investors: the bonds will be repaid even if it goes bankrupt.

The step, pitched to the island by investment bank Ramirez & Co. and a New York advisory firm, is similar to a tactic used by Puerto Rico and Chicago to pledge a big chunk of tax collections directly to public corporations that pay off debt backed by the revenue. That was intended to assure investors that the funds wouldn’t be diverted even if their financial strains worsened, reducing the risk to bondholders and driving down their borrowing costs.

In the case of the Virgin Islands, it’s pledging the nearly $250 million a year it receives each year from the U.S. government, the territory’s cut of the excise taxes on rum it ships to the mainland.

Governor Albert Bryan Jr., who has spearheaded the plan, said in a local news interview said it represents one of the territory’s only options. “If you don’t have a better idea, then support this one,” he said.

The bond offering was set to be priced as soon as Thursday but has been delayed, according to two people familiar with the matter, who spoke on the condition of anonymity because they weren’t authorized to discuss it publicly.

The sale will provide a major test of the $3.9 trillion municipal bond market, where investors have continued to snap up riskier securities as benchmark yields hold near the lowest in decades. That’s allowed some borrowers hard hit by the nation’s economic collapse to easily raise cash.

The Virgin Islands’ bonds are using a so-called bankruptcy remote structure. That involves steering the money to a newly created corporation and providing a legal pledge that the cash won’t be siphoned off even if the government is forced to restructure its debts in federal bankruptcy court.

Bondholders have reason for skepticism. Lisa Washburn, a managing director for Municipal Market Analytics, said such a structure is not necessarily “bankruptcy proof,” though it would likely give investors a better negotiating position. Even though Puerto Rico’s bonds securitized by its sales taxes weren’t walled off from bankruptcy, owners recouped as much as 93 cents on the dollar, more than other creditors stand to receive.

“The Virgin Islands could end up eventually in trouble,” Washburn said. “If they end up in trouble, it’s my guess that the durability of this transaction is questioned.”

Dennis Derby, a portfolio manager at Wells Capital Management, said a restructuring could still affect the bondholders even if the structure itself is bankruptcy remote. After paying debt service, the territory uses matching fund money to pay incentives to the rum producers. In a bankruptcy, those payments could be affected and threaten rum producers’ operations within the territory, which could in turn end up affecting the securitized bonds because they rely on rum production for repayment, he said.

“Should there be a disruption in subsidies or incentives, that could cause problems with this particular matching stream,” he said. “That’s a risk.”

Even before the slowdown in tourism caused by Covid-19, the Virgin Islands was struggling under outsize debts and a pension system projected in a 2018 valuation to run out of assets by the fiscal year starting October 2023 or sooner. In 2017, it stopped providing financial information to credit-rating companies after it was dropped far into junk amid speculation about its solvency.

Kroll Bond Rating Agency rates the nearly $1 billion of bonds being offered by the territory’s securitization corporation BBB, the second lowest investment-grade, because of the “strong protections.”

The government is seeking to sell the debt before a bond payment is due on Oct. 1, a step that will allow it to push off some payments for the next three years.

While that will provide short-term relief, some officials are dubious. Senator Janelle Sarauw compared the bond deal to predatory lending that will just push off problems on future generations.

“Why do we want to tie up our greatest revenue stream for the next ten to 15 years?” she said in an interview.

On Sept. 17, territory lawmakers passed an amendment to the legislation that would cap the interest rate at 3.75%, which Sarauw said they did to make it “impossible” to price the bonds. Representatives from Ramirez, the underwriter, and Capital Markets Advisors, LLC, the financial adviser, on the bond deal did not respond to inquiries about the 3.75% rate cap.

In testimony on the new bond structure to the legislature, Virgin Islands Finance Commissioner Kirk Callwood said that it was an opportunity to take advantage of low rates and that “naysayers” were promoting bankruptcy.

Such a collapse, he said, would send a “message to the world that the U.S. Virgin Islands is neither capable, nor has the courage, to attempt to solve its challenges.”

Bloomberg Markets

By Amanda Albright

September 23, 2020, 2:54 PM PDT Updated on September 24, 2020, 8:43 AM PDT

— With assistance by Michelle Kaske

S&P Charter School Brief: California

As of Sept. 22, 2020, S&P Global Ratings maintains 35 public ratings on bonds secured by California charter schools. In 1992, California became the second U.S. state to enact a charter school law. Today, California is home to more than 1,200 charter schools that serve about one-tenth of the state’s kindergarten through 12th grade (K-12) students. In California, there are many charter networks and 16 of our 35 ratings are for schools that are part of a charter network with more than five campuses. Overall, 31% of California charter school ratings are investment grade compared with 44% for the sector as a whole. We believe this stems from more charter issues on average due to the prevalence of district-authorized schools, challenges for independent study schools, and other case-by-case factors.

Continue reading.

S&P Bulletin: Illinois’ Credit Faces Mounting Pressure As Stimulus Stalls

CHICAGO (S&P Global Ratings) Sept. 21, 2020–S&P Global Ratings today said the odds of Illinois (BBB-/Negative) balancing its budget without additional borrowing or a sizable increase in the bill backlog are looking slimmer as congressional agreement on further federal assistance remains elusive. Illinois had placed a sizable $5 billion placeholder in its fiscal 2021 budget for additional federal assistance, and we expect that any future stimulus bill will likely fall short of this assumption. When including $1.274 billion of projected graduated income tax revenues on the November ballot, speculative revenues account for nearly 15% of Illinois’ fiscal 2021 budget. S&P Global Ratings expects that Illinois will likely cut spending if there is no further federal assistance by the end of September.

In a letter to congressional members, Illinois’ governor recently suggested as much as 15% across-the-board budget cuts, which may be unpalatable to lawmakers–in particular, cuts to education. In a letter to department heads, the deputy governor and head of the Office of Management and Budget requested a 5% reserve of general fund appropriations in the current fiscal year and 10% to be considered in fiscal 2022 (with deviations allowed for agencies responsible for life, safety, and health in the state’s COVID-19 response). All such actions would likely have negative downstream effects on the state’s economy and revenues, and could limit its flexibility to make additional cuts in out-years.

In the meantime, Illinois finances are already suffering. As of Sept. 21, 2020, Illinois’ general funds payable backlog was $7.65 billion, higher than it has been since fiscal 2018 and well above the $5.4 billion to close fiscal 2020. This excludes $2.25 billion in short-term borrowing that Illinois is required to repay, made up of $1.2 billion in short-term borrowing through the Federal Reserve’s Municipal Liquidity Facility (MLF) and $1.05 billion under interfund borrowing authorization. As spending continues at budgeted levels without federal funding, the state’s cash deficit will continue to grow. While the practical limits of Illinois’ bill backlog are unclear, a past federal court ruling compelled the state to pay on deferred Medicaid bills, implying that it cannot return to its backlog peak of $16.7 billion. As delayed payments mount, we think it is likely that Illinois will issue bonds or again borrow through the MLF to meet cash requirements.

We expect that Illinois will enact some budget cuts in fiscal 2021, but these will not likely be timely enough or sufficient to address the entire budget gap. The next state legislative session is in November, and we expect lawmakers will act based on the outcome of the graduated income tax measure, likelihood of federal assistance, and revised fiscal estimates. Last week, the administration ordered departments to identify budget cuts of at least 5% for the current fiscal year and 10% for fiscal 2022. However, depending on the outcome of the graduated income tax, this still leaves the state with at least a 5%-10% budget gap for fiscal 2021.

The magnitude of the current budget gap and reliance on one-time measures make us question Illinois’ ability to achieve structural balance in a reasonable time. Even if Illinois receives federal aid in fiscal 2021, we expect that it will face challenging budget gaps beyond the current fiscal year. Before the pandemic, the state faced large budget gaps as a result of slow economic growth, weak demographics, rising fixed costs, and carried-over deficits. Illinois’ pension plans, which are among the lowest-funded in the nation, employ funding methods that have resulted in deferral of costs and chronic underfunding of contributions. The potential for market volatility could contribute to larger pension cost growth. Illinois has already borrowed $1.8 billion from the federal government related to unemployment claims, and this liability could limit further general fund increases on corporate taxes or cause the state to incur further debt. Revenue recovery to pre-pandemic levels is unlikely in the near term. S&P Global Economics estimates that following the COVID-19 outbreak, it will take about two years for U.S. GDP to regain its year-end 2019 level, with unemployment remaining high, consumer spending depressed, and business demand recovering only slowly (see “The U.S. Faces A Longer And Slower Climb From the Bottom,” published June 25, 2020, on RatingsDirect). The lack of additional federal stimulus increases the likelihood of a worse economic outcome. Furthermore, potential layoffs at state and local government levels could contribute to a lasting drag on Illinois’ economy.

With the need for additional borrowing, an elevated bill backlog, and lingering substantial structural imbalance, Illinois could exhibit further characteristics of a non-investment-grade issuer. While borrowing would provide the state with cash flow relief, Illinois is required to repay the debt. Further federal assistance is possible within fiscal 2021, but it is far from certain and could fall short of what’s needed to close the gap. We think that Illinois will face difficulty repaying a large borrowing within the three-year MLF timeline from its general fund, and taking out long-term debt to repay the short-term loan would add to fixed costs. Although the debt may lessen the state’s cash flow pressures, it would add to the state’s structural imbalance. Illinois has had strong market access, supported by the MLF, but if conditions change, its budget would be further stressed.

To date, Illinois’ general fund budget has trended in line with expectations. Propped up by the $1.2 billion short-term borrowing through the MLF, the state expects to close fiscal 2020 with a surplus, on a cash basis, despite a $2.4 billion revenue shortfall. Through August 2020, general fund state sales tax receipts were down 1.4% compared with fiscal 2020. However, general fund personal and corporate income taxes were inflated, tied to the delayed July 15 filing deadline, up $1.25 billion and $276 million, respectively, making it difficult to discern underlying economic trends. Total general fund revenues are up $1.051 billion year-to-date. Without the support of enhanced unemployment benefits and other federal stimulus, tax receipts may soften, and Illinois’ budget outlook will also hinge on the path of the pandemic and response.

Illinois Could Soon Start Looking Like a Junk-Rated Borrower, S&P Says.

Strategists who follow the municipal bond market are starting to warn that federal aid may not arrive soon. That would mean even more trouble for Illinois.

The state has a growing bill backlog, as S&P Ratings highlighted in a bulletin on Monday. Illinois’ general funds payable backlog was nearly $7.7 billion as of Monday, up from $5.4 billion at the end of its fiscal year on June 30. That is the highest the backlog has been since fiscal 2018, when its deficit was shrinking from record levels reached during a fiscal crisis.

It is looking less likely that federal aid to state and local governments will arrive by the end of September. And S&P says that even if federal funding eventually reaches Illinois, it is unlikely that it will cover the full budget shortfall. Thanks to these pressures, the state “could exhibit further characteristics of a non-investment-grade [or junk-rated] issuer,” the ratings firm said in its bulletin.

Illinois is the lowest-rated state in the U.S., with S&P grading it one tier above junk at BBB-. S&P’s bulletin isn’t an official warning about a downgrade (known as a watch), but the analysts do have a negative outlook assigned to the state’s credit rating, indicating they think a downgrade is more likely than an upgrade over the next year or two.

While Illinois has taken some steps to shore up its finances—a graduated income tax will be on the ballot this November—they may not cover the gap of income lost to the coronavirus pandemic. State officials have repeatedly warned about potential cuts to state services and funding, including educational funding.

“Illinois will likely cut spending if there is no further federal assistance by the end of September,” S&P analysts wrote in their bulletin. “We expect that [the state] will enact some budget cuts in fiscal 2021, but these will not likely be timely enough or sufficient to address the entire budget gap.”


By Alexandra Scaggs

Sept. 22, 2020 10:55 am ET

Fitch to Downgrade S-T Rating to 'F1' on Austin, TX Combined Utilities System Taxable CP Notes.

Fitch Ratings-New York-25 September 2020: On the effective date of Oct. 1, 2020, Fitch Ratings will downgrade the short-term rating assigned to the City of Austin, Texas combined utility system $100,000,000 taxable CP notes, to ‘F1’ from ‘F1+’. The rating action is in connection with the substitution of the current Revolving Credit Agreement (RCA) provided by JPMorgan Chase Bank, N.A. (AA/F1+/Negative) with a substitute RCA to be provided by Barclays Bank PLC (Barclays, A+/F1/Rating Watch Negative). Concurrently with the substitution, the authorized amount of taxable CP notes will be increased to $100,000,000 from $75,000,000.

On the effective date, the short-term rating on the CP notes will be downgraded to ‘F1’ based on the liquidity support to be provided by Barclays in the form of an RCA, which has a stated expiration date of Sept. 30, 2022, unless extended or earlier terminated. The substitute RCA provides coverage for the principal amount of the notes plus 270 days of interest calculated at 10% based on a 365 day year.

U.S. Bank, National Association continues as the Issuing and Paying Agent (IPA) for the notes, and as IPA, is directed to request an advance under the substitute RCA whenever proceeds of the sale of rollover notes are insufficient to pay maturing notes.

All notes will be issued at par. Following the occurrence of an event of default under the substitute RCA, the bank may direct the IPA to immediately stop the issuance of any additional notes. In such event, the substitute RCA will expire after all the notes supported by such RCA mature and have been paid from funds drawn on the substitute RCA. In addition, the substitute RCA may be terminated by the bank upon the occurrence of specified immediate termination events.


Factors that could, individually or collectively, lead to positive rating action/upgrade:

–The short-term ‘F1’ rating assigned to the notes will be adjusted upward in conjunction with the short-term rating of the bank providing the RCA and, in some cases, the long-term rating of issuer.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

–The short-term ‘F1’rating assigned to the notes will be adjusted downward in conjunction with the short-term rating of the bank providing the RCA and, in some cases, the long-term rating of issuer.

ESG Considerations
The ESG.RS conforms to that of the Austin TX Combined Utility System and Barclays.

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entities, either due to their nature or to the way in which they are being managed by the entities. For more information on Fitch’s ESG Relevance Scores, visit
The rating reflects the short-term rating that Fitch maintains on the substitute bank providing liquidity support and will be adjusted upward or downward in conjunction with changes to the short-term rating of the bank and in some cases, the long-term rating of the issuer.


Primary Analyst
Linda Friedman
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Ronald McGovern

Committee Chairperson
Mario Civico
Senior Director

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: [email protected]

Additional information is available on

Fortress Delays Record $4.2 Billion Vegas-Train Bond Sale.

The company that wants to build a high-speed train from California to Las Vegas is delaying its record $4.2 billion unrated municipal-bond sale that was supposed to happen by the end of this month.

The venture backed by Fortress Investment Group’s private-equity funds had said it would sell the debt for its proposed 170-mile (274-kilometer), line to Las Vegas from a southern Californian desert town called Apple Valley by Sept. 30. Instead, it intends to sell $1 billion in short-term securities, to be refinanced by long-term debt later this year, according to Terry Reynolds, director of Nevada’s department of business and industry.

The company’s first passenger rail in Florida under the name Virgin Trains USA in 2019 sold such short-term securities, a $950 million offering it has continued to roll over instead of converting into long-term debt. It’s looking to add stations to boost ridership of the unprofitable line, whose service has been suspended due to the pandemic.

“It shows that this is a complex deal and that this might not be the right time to bring it to the market with its Florida line shutdown due to the virus and transportation volumes well below historical levels,” Dan Solender, head of municipal debt at Lord, Abbett & Co, said of the Las Vegas sale delay.

California Treasurer Fiona Ma said she had granted an extension for the company to sell its long-term bonds to Dec. 1 as she has done for housing developers who had run into pandemic-related delays.

“We understand that they will be marketing their bonds soon and we are excited for their success!” Ma said by text message.

California and Nevada have given part of their states’ limited allotment of private activity bonds to the project, which also had received some capacity directly from the federal government. The short-term financing, which will be AAA-rated because the proceeds will be held in an escrow account invested in securities backed by the U.S. government, will enable the company to maintain its federal allocation, Reynolds said.

“People are excited about the future of high-speed rail in America and the
environmental and economic benefits it provides,” Ben Porritt, a spokesman for Brightline Trains LLC, said in an email. “Brightline West is one of the most ambitious and transformative projects in the country and we are excited to introduce it to investors.”

Bloomberg Business

By Romy Varghese

September 21, 2020, 3:52 PM PDT Updated on September 21, 2020, 4:45 PM PDT

New York’s MTA Wants to Borrow Up to $2.9 Billion From Federal Reserve.

Operator of New York City’s subway system had hoped for a federal coronavirus bailout, but the relief package has stalled in Congress

New York’s Metropolitan Transportation Authority plans to apply to the Federal Reserve to borrow as much as $2.9 billion from a short-term lending program, as it faces an unprecedented financial crisis.

Lawrence Schwartz, chairman of the MTA’s finance committee, told board members at a meeting Wednesday that in the absence of a new federal coronavirus bailout, which has stalled in Congress, the MTA should seek the maximum amount possible from the Fed program.

MTA officials estimate that they are losing $200 million a week because of a slump in fares, tolls and dedicated taxes caused by the coronavirus pandemic. They have said they might have to slash subway and bus service in New York City by as much as 40% and lay off thousands of workers if they don’t receive federal aid soon.

The state-controlled authority, which received almost $4 billion in a federal coronavirus bailout earlier this year, projects a deficit of about $12 billion through the end of 2021.

The MTA and the state of Illinois are the only two borrowers to have tapped the Fed’s municipal-lending program so far. In August, the MTA sold $450 million in bonds to the Fed at a yield of 1.9%, rejecting offers from the private market at yields of about 2.8%.

Based on the Fed program criteria, the MTA could be eligible to borrow a total of almost $3.4 billion, transit officials said.

Mr. Schwartz told board members that he believes the MTA could borrow $2.9 billion at a rate of about 1.8%. “That is the cheapest money the MTA will ever be able to get as a loan,” he said.

He asked the MTA’s chief financial officer, Robert Foran, to begin drawing up an application. If the MTA’s application is approved, the authority would have until the end of the year to decide how much, if any, of the money to draw down.

Authority officials say they have enough liquidity to carry the agency through the first quarter of 2021. But the Fed program is scheduled to close on Dec. 31 this year. Mr. Foran said the funds could act as a bridge loan and be repaid as early as next year if federal bailout money comes through by then.

Patrick McCoy, the MTA’s director of finance, said at a congressional hearing last week that the Fed should extend the borrowing deadline beyond the end of 2020 and increase the maximum maturity for facility debt beyond three years.

Budget watchdogs and even some MTA board members have raised concerns that the authority, which already owes more than $45 billion, shouldn’t take on more debt.

Rachael Fauss, a senior research analyst at fiscal watchdog group Reinvent Albany, said in an interview that a low-cost federal loan could make sense under certain conditions. But she added that as one of the nation’s largest issuers of municipal debt, the MTA should work with the Fed and with Congress to lower interest rates further.

The Wall Street Journal

By Paul Berger

Updated Sept. 23, 2020 4:19 pm ET

Scottsdale Flexes Financial Strategy to Prepay, Redeem 2010 Bonds.

Scottsdale will be moving forward with a strategic plan to approve a redemption of 2010 municipal property corporation excise tax bonds that financed water and sewer improvements.

The redemption of the Series 2019 MPC bonds that mature in 2029 and 2030, with unrestricted water and sewer revenues, will avoid nearly $375,000 in annual interest expense, according to a city staff report.

Scottsdale City Council approved the bond redemption on consent at a Sept. 8 meeting.

By redeeming $8.7 million in outstanding Series 2010 MPC Bonds that mature in 2029 and 2030 with unrestricted water and sewer revenues, the water and sewer funds can avoid more than $3.3 million in interest expense.

The city of Scottsdale Municipal Property Corporation is a nonprofit corporation created by the city in 1967 to finance the construction or acquisition of certain capital improvements.

The Municipal Property Corporation issues its own bonds, which are repaid from amounts paid by Scottsdale to the MPC. Arizona law precludes the use of property tax to repay these bonds, according to a city staff report.

The city’s financial adviser — Minneapolis-based Piper Sandler & Co. — has been monitoring market trends and suggests this may be an optimal time to redeem a portion of the outstanding MPC bonds in order to lower debt financing costs to the city.

“Based on current market conditions (municipal borrowing and investing rates) and the call features of previously issued MPC bonds, portions of Series 2010 MPC bonds are candidates for redemption with unrestricted water and sewer revenues,” according to a city staff report penned by Enterprise and Finance Director Gina Kirklin.

The Series 2010 MPC Bonds were issued for various water and sewer projects.

“Our financial strategy to proceed requires that market conditions upon a redemption of the bonds must produce minimum overall debt service savings to the taxpayer with a present value, net of all costs, of at least 3.00% of the principal amount of the bonds or $1 million,” Ms. Kirklin said. “It is estimated that the bond redemption will exceed minimum requirements.”

According to the city staff report, Scottsdale’s city treasurer’s division reviewed the above redemption with its financial adviser, bond counsel — Denver-based Sherman & Howard — and the MPC board. All parties concur with the recommendation to proceed at this time, Ms. Kirklin said.

Scottsdale Independent

By Melissa Rosequist

September 23, 2020

MarketAxess to Acquire Municipal Bond Operator MuniBrokers.

NEW YORK, Sept. 16, 2020 (GLOBE NEWSWIRE) — MarketAxess Holdings Inc. (Nasdaq: MKTX), the operator of a leading electronic trading platform for fixed-income securities, and the provider of market data and post-trade services for the global fixed-income markets, has entered into an agreement to acquire MuniBrokers, a central electronic venue serving municipal bond inter-dealer brokers and dealers.

MuniBrokers connects 14 leading Municipal Securities Broker’s Brokers and hundreds of institutional traders and Broker Dealers through a central electronic marketplace to trade over $400 million of taxable and tax-exempt municipal bonds per day. MuniBrokers is the leading aggregator of content distribution, trade processing, client connectivity and liquidity provision for the municipal inter-dealer broker market.

This acquisition is designed to expand MarketAxess’ existing municipal bond trading solution for global institutional investor and dealer clients. MarketAxess recently announced the expansion of liquidity provision for taxable municipal bond securities beyond the United States through its regulated trading venues in the United Kingdom, the European Union and Singapore, creating a truly global marketplace.

In addition to the acquisition of MuniBrokers, MarketAxess and Hartfield, Titus & Donnelly LLC (HTD), the leading inter-dealer municipal bond brokerage firm and the owner of MuniBrokers, have agreed that HTD will continue to use the MuniBrokers platform to ensure an uninterrupted level of liquidity is provided through the MuniBrokers platform.

Chris Concannon, President and Chief Operating Officer of MarketAxess, commented, “The acquisition of MuniBrokers further bolsters our growing footprint in the municipal bond market. Connecting our leading trading technology with the liquidity of one of the industry’s largest electronic inter-dealer marketplace creates a compelling and diverse liquidity solution that will ultimately deliver an improved execution experience.”

“This relationship represents a great opportunity in the intermediated Municipal Securities market, leveraging the time-tested strengths of MuniBrokers, the experience of HTD as the leading Broker’s Broker and the industry-leading capabilities of MarketAxess,” said Ron Purpora, Chairman of parent company Hartfield, Titus & Donnelly. “We are eager to demonstrate the benefits of this relationship to the market and to our customers.”

The transaction is expected to close in the fourth quarter of 2020, subject to the satisfaction of customary closing conditions.

Marlin & Associates LLC acted as strategic and financial advisor to Hartfield, Titus & Donnelly.

New York MTA Bonds Rally While Agency Seeks Federal Funds.

Debt sold this week by New York’s Metropolitan Transportation Authority has rallied even as the agency warns that it will impose drastic service cuts and layoffs without $12 billion of additional federal funds.

The MTA, the largest U.S. mass-transit system, sold through competitive bid Tuesday $900 million of bonds backed by fare box and toll revenue and government subsidies. The bonds have rallied since then while yields in the overall tax-exempt market are relatively unchanged.

MTA’s sale is the latest example of investors seeing quick gains on their bets after participating early on when troubled borrowers hit by the coronavirus outbreak sell bonds. Municipal debt backed by Delta Air Lines Inc. and bonds sold by the Chicago Transit Authority, which like the MTA has seen its ridership plunge, rallied this month after their initial sales.

MTA bonds with a 4% coupon and maturing in 2048, the most-actively traded MTA security in the past week, changed hands Friday at an average yield of 4.11%, down from 4.41% when the debt sold on Tuesday, according to data compiled by Bloomberg. The additional yield that investors demand to hold the bonds rather than top-rated tax-exempts shrunk Friday to an average 256 basis points from 285 basis points at Tuesday’s sale.

The MTA borrowed through the capital markets as it’s weathered multiple cuts to its credit rating, including a downgrade last week from Moody’s Investors Service. It’s also seeking $12 billion of additional federal aid to cover budget gaps this year and next.

Given the size of the deal and the MTA’s financial challenges, the bonds at Tuesday’s sale needed to price attractively, said Howard Cure, managing director for municipal-bond research at Evercore Wealth Management, which has $9.1 billion of assets under management.

“$900 million is a lot of paper to move and they wanted to make sure there was a market for this,” Cure said about the financial institutions that won the deal. “So they bid on it accordingly so the banks wouldn’t have excess inventory.”

Bank of America Corp. won $600 million of the sale while JPMorgan Chase & Co. was awarded $300 million.

The MTA, which had $45.4 billion of debt as of July 8, warned its subway car manufacturers, bus makers and other vendors on Thursday that contracts are in jeopardy absent federal help. The MTA has said it may be forced to cut subway and bus service by 40% and slash commuter-rail service by 50% without federal assistance. Its multi-year $51.5 billion capital plan is already on hold and major infrastructure projects and upgrades are at risk.

“The MTA is in a tough position,” Cure said. “They’re trying to sell their bonds as economically as they can while at the same time pleading for money and threatening draconian cuts if they don’t get it.”

Bloomberg Markets

By Michelle Kaske

September 18, 2020, 7:52 AM PDT Updated on September 18, 2020, 10:10 AM PDT

— With assistance by Amanda Albright

Chicago Is Considering Issuing A Pension Bond - And Taking A Gamble.

How is Chicago going to solve its budget crisis? Two weeks ago, when Mayor Lightfoot gave her budget forecast address, she spoke of dreams for a “world-class” entertainment district surrounding a Chicago casino, the revenues from which are slated to fund the police and fire pension funds. But, it turns out, that may not be the only way in which Chicago attempts to use gambling to resolve its pension woes.

Let’s recap:

Chicago, we learned in late August, is facing a serious budget hole as it ends 2020, and an even worse one in 2021, to the tune of $1.2 billion — or, expressed differently, 25% of the total corporate budget. Mayor Lightfoot hopes to find some coins in the metaphorical couch cushions by refinancing debt, and is urgently pleading for more federal money. Why, their plight is so serious that they may even go to extremes such as reducing payrolls or cutting pay. (Yes, that’s right – unlike elsewhere, neither Illinois nor Chicago has yet made any spending reductions.)

Now we learn, according to Bloomberg (via Yahoo on September 3), that the city is once again considering a pension obligation bond.

Continue reading.


by Elizabeth Bauer

Sep 15, 2020,02:54pm EDT

Las Vegas Monorail Files for Bankruptcy Again as Coronavirus Shuts Service.

The Covid-19 pandemic has stopped the mass transit system from running for months

Las Vegas Monorail Co., a transit system financed with municipal debt that serves some of the city’s marquee hotels, filed for bankruptcy for the second time in just over a decade after the coronavirus pandemic shut down service.

The nonprofit transit system is proposing a quick bankruptcy sale to the Las Vegas Convention and Visitors Authority for about $24 million, a fraction of the roughly $650 million cost of construction, according to papers filed Monday in the U.S. Bankruptcy Court in Las Vegas.

The bulk of the purchase price—roughly $22 million—would cover the monorail’s debt, held entirely by municipal-bond investor Preston Hollow Capital LLC.

The monorail, which opened in 2004, filed for bankruptcy for the first time in 2010 after ridership fell short of expectations. The previous bankruptcy wiped out most of the project’s debt, over $600 million in tax-exempt bonds sold in 2000.

Much of the municipal-bond market has been cruising along despite the pandemic, fueled by seemingly endless investor demand for tax-exempt debt and the Federal Reserve’s extraordinary efforts to backstop the U.S. economy. But the monorail’s latest bankruptcy is a reminder of the risks lurking in municipal credit, especially among more speculative projects that aren’t backed by government taxing power. Municipal defaults have reached their highest rate since 2011, the aftermath of the last recession, according to Municipal Market Analytics data.

The monorail’s chief executive, Curtis L. Myles III, said it was forced to shut down in March due to the pandemic and hasn’t been able to reopen. He said it was in the system’s best interest to file for bankruptcy and trigger an asset sale that would “help ensure that the mobility benefits the monorail provides continue during conventions, events and throughout the year.”

In a declaration filed in the U.S. Bankruptcy Court in Las Vegas, he said pandemic restrictions forced the monorail to lay off 93% of staff, reduce compensation for the remaining workers by up to 30% and “cut maintenance and operational expenses to the bare minimum.” Since April, the system has been dipping into debt-service reserves to pay bondholders—a signal it didn’t have enough operating revenue to cover the bondholder payments.

The monorail is a 3.9-mile system along the Las Vegas Strip, including two parallel elevated tracks, seven elevated stations and an operations and maintenance building. Substantial outlays in coming years are required to run the system smoothly, Mr. Myles said. Topping the list are new trains, needed in 2034 and expected to cost $190 million.

The Wall Street Journal

By Andrew Scurria

Sept. 8, 2020 2:46 pm ET

Chicago’s Pension-Bond Plan Could Use a FAANG Rout.

The Windy City is again considering a risky strategy to shore up its retirement funds.

Chicago should be cheering on the recent decline in U.S. technology stocks.

The city, like many across America, is staring down huge budget shortfalls in the coming years after shutting down the local economy to slow the coronavirus pandemic. Mayor Lori Lightfoot last week estimated that the fund that accounts for most of its services will have a deficit of almost $800 million in 2020 and $1.2 billion in 2021, with Covid-19 related revenue losses accounting for 65% of the gap.

That’s bad enough for any U.S. city. For Chicago in particular, it’s devastating given its highly precarious financial situation even before the pandemic. Moody’s Investors Service downgraded the city’s credit rating to junk more than five years ago, sending shockwaves across the $3.9 trillion municipal-bond market and forcing investors to consider whether it was destined to be “the next Detroit.” Instead, former Mayor Rahm Emanuel made some politically tough decisions to help put its four underfunded retirement plans on a path to solvency and veer the city toward so-called structural balance by 2022.

Continue reading.

Bloomberg Opinion

By Brian Chappatta

September 11, 2020, 3:30 AM PDT

S&P Bulletin: New Jersey Governor's Budget Proposal Contains Large Structural Deficit

NEW YORK (S&P Global Ratings) Sept. 9, 2020–S&P Global Ratings said today that the recent New Jersey executive budget proposal for the remaining nine months of fiscal 2021 uses reasonable economic assumptions and would leave the state with what we would view as an adequate fund balance, but also contains what we view as a large structural budget deficit.


Continue reading.

New Details on NJ Borrowing Plan as Fight Looms Over Tax Estimates.

Gov. Phil Murphy wants to borrow $4 billion. Lawmakers point to revenue forecasts saying more money may be coming than he expects

Just how much New Jersey will borrow to prop up the next state budget remains uncertain, but some important details about how new debt would be issued — and paid back by taxpayers — are beginning to emerge.

According to budget documents and recent testimony during hearings before lawmakers, Gov. Phil Murphy’s administration is planning to use a 10-year repayment schedule for a total of $4 billion in new debt to help fund a nine-month budget he put forward last month.

Annual interest on the bonds could be around 2%, and repayment would begin almost immediately at a cost of about $400 million annually in a full budget year, Department of Treasury officials told lawmakers last week.

Continue reading.



Fitch Rtgs to Affirm S-T Ratings on Dept of Airports of the City of Los Angeles, CA Sub Rev CP Notes.

Fitch Ratings-New York-03 September 2020: On the effective date of Sept. 9, 2020, Fitch Ratings will affirm the following short-term ratings assigned to the Department of Airports of the City of Los Angeles, California (the Department) Los Angeles International Airports Subordinate Revenue Commercial Paper Notes (CP notes) subseries A-1, A-2, and A-3 (Governmental-Non-AMT), subseries B-1, B-2, and B-3 (Private Activity-AMT), subseries C-1, C-2, and C-3 (Federally Taxable), and subseries D-1, D-2, and D-3 (Private Activity – Non-AMT):

–Subseries A-1, B-1, C-1 and D-1 CP notes at ‘F1’;
–Subseries A-2, B-2, C-2 and D-2 CP notes at ‘F1’;
–Subseries A-3, B-3, C-3 and D-3 CP notes at ‘F1+’.

A maximum of $500 million in aggregate principal amount of authorized notes may be outstanding at any given time.

The rating actions will be in connection with the Sept. 9, 2020 (i) amendment of the reimbursement agreement between the Department and Sumitomo Mitsui Banking Corporation acting through its New York Branch (SMBC; A/F1/Negative) relating to the SMBC irrevocable direct-pay letter of credit (LOC) supporting the Subseries A-1 to D-1 notes; (ii) amendment and restatement of the reimbursement agreement between the Department and Barclays Bank PLC (Barclays; A+/F1/Rating Watch Negative) relating to the Barclays LOC and the amendment and restatement of the Barclays LOC supporting the Subseries A-2 to D-2 notes and (iii) substitution of the current LOC provided by Wells Fargo Bank, N.A. (AA-/F1+/Negative) supporting the Subseries A-3 to D-3 notes, with a LOC to be provided by Bank of America, N.A. (AA-/F1+/Stable).

On the effective date, the ‘F1’ rating on the subseries A-1, B-1, C-1 and D-1 notes will be affirmed based on the support of the SMBC LOC, which will have a stated expiration date of Sept. 9, 2022, unless extended or earlier terminated; the ‘F1’ rating on subseries A-2, B-2, C-2 and D-2 notes will be affirmed based on the support of the Barclays LOC, which will have a stated expiration date of Sept. 8, 2023, unless extended or earlier terminated; and the ‘F1+’ rating on the subseries A-3, B-3, C-3 and D-3 notes will be affirmed based on the support of the BANA substitute LOC, which will have a stated expiration date of Sept. 9, 2021, unless extended or earlier terminated.

U.S. Bank acting as Trustee will continue as the authenticating and paying agent for the notes, and as Trustee, is directed to request an advance under the related LOC to pay principal and interest on maturing notes. Each LOC provides coverage for the principal amount of notes and interest coverage equal to 270 days of interest coverage at 12% based on a 360 day year. The SMBC LOC provides coverage for $200,000,000 principal plus $18,000,000 for interest. The Barclays LOC provides coverage for $210,000,000 principal plus $18,900,000 for interest and the BANA LOC provides coverage for $90,000,000 principal plus $8,100,000 for interest.

All subseries A, B and D notes are issued at par, with interest due at maturity. Subseries C notes may be issued at par or at a discount. Following the occurrence of an event of default under the reimbursement agreement, the related bank may direct the Trustee to immediately stop the issuance of any additional notes. The respective bank may also notify the Trustee that the stated amount of the LOC shall be permanently reduced to the principal amount of notes then outstanding and interest thereon, and shall be further permanently reduced following the maturity of any such notes. The related bank may also issue a final drawing notice directing the Trustee to draw on its LOC for all notes outstanding plus interest due thereon at maturity. The dealers for the notes are: Citigroup Global Markets Inc., J.P. Morgan Securities LLC, Loop Capital Markets LLC, BofA Securities, Inc., Morgan Stanley & Co. LLC, Samuel A. Ramirez & Company, Inc. and Wells Fargo Bank, National Association

Factors that could, individually or collectively, lead to positive rating action/upgrade:

–The short-term rating assigned to the subseries A-1 to D-2 notes and subseries A-2 to D-2 notes will be adjusted upward in conjunction with the short-term rating of the bank providing the respective LOC;

–The short-term rating assigned to the subseries A-3 to D-3 notes is at the highest rating level and cannot be upgraded.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

–The short-term rating assigned to the notes will be adjusted downward in conjunction with the short-term rating of the bank providing the respective LOC.

ESG Considerations
The ESG.RS conforms to that of the Department of Airports of the City of Los Angeles and SMBC, Barclays and BANA.

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entities, either due to their nature or to the way in which they are being managed by the entities. For more information on Fitch’s ESG Relevance Scores, visit

Primary Analyst
Ronald P. McGovern
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Linda Friedman

Committee Chairperson
Joseph Staffa
Senior Director

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

Additional information is available on

San Luis Obispo Regional Transportation Authority Closes First TIFIA Loan Under Rural Projects Initiative

San Luis Obispo Regional Transportation Authority Closes First TIFIA Loan Under Rural Projects Initiative Proposed San Luis Obispo Regional Transit Facility Project.

On September 3, 2020, San Luis Obispo Regional Transportation Authority (SLO RTA) closed the first TIFIA loan under the U.S. Department of Transportation’s (Department’s) Transportation Infrastructure Finance and Innovation Act (TIFIA) Rural Project Initiative (RPI). The SLO RTA manages several local and express fixed-route transit lines, as well as several paratransit and dial-a-ride services throughout San Luis Obispo County located in the Central Coast region of California. The SLO RTA’s current administration, operations, and bus maintenance facility has …


Nossaman LLP

By Barney Allison on 09.10.2020

California’s Two Debt Entities: What’s the Difference?

Assisting all state and local government units in the planning, preparation, marketing, and sale of debt issues

California has two debt-related entities: California Debt Limit Allocation Committee and California Debt and Investment Advisory Commission. What’s the difference?

California Debt Limit Allocation Committee

Government Code Title 2, Division 1, Chapter 11.8 sets forth the California Debt Limit Allocation Committee in Sections 8869.80 to 8869.94. Section 8869.80 makes a number of legislative findings and declarations regarding the volume ceiling on the aggregate amount of private activity bonds that can be issued in each state. The stated purpose of the Committee is “to designate a state agency and create an allocation system to administer the state volume ceiling.”

Moreover, there is “a substantial public benefit by promoting housing for lower income families and individuals. A substantial public benefit is served by preserving and rehabilitating existing governmental assisted housing for lower income families and individuals. A substantial public benefit is served by providing federal tax credits or reduced interest rate mortgages to assist teachers, principals, vice principals, assistant principals, and classified employees who are willing to serve in high priority schools to purchase a home. A substantial public benefit is served by constructing educational facilities for the state’s children.”

As a result, Chapter 11.8 was enacted to implement the state volume limit established by the Federal Tax Reform Act of 1986 and other federal acts and provisions of the Internal Revenue Code. Section 8869.83 establishes in state government the California Debt Limit Allocation Committee which consists of the following six members:

The Treasurer serves as chairperson of the Committee and the office of the Treasurer must provide an executive director and any administrative assistance and support staff that is needed for the Committee to operate. The Committee members do not receive compensation and two voting members of the Committee constitute a quorum. The affirmative vote of two voting members of the Committee is necessary for any action taken by the committee.

Under Section 8869.85, each state agency must apply to the Committee for allocation of a portion of the state ceiling, supplying any information which the Committee may require. The application may be for a specific project, or it may be for a designated dollar amount, to be utilized for projects or programs at the discretion of the state agency. No private activity bonds issued by any state agency is be deemed to receive the benefit of any portion of the state ceiling unless the Committee has allocated or permitted the transfer of a portion of the state ceiling to the state agency.

Pursuant to Section 8869.90, the Committee may charge fees to the lead underwriter, the bond purchaser, or the bond issuer to cover the Committee’s costs in carrying out the duties and responsibilities set forth in the law. Under Section 8869.93, the Treasurer, or his or her designee, is designated as the state official to certify that an issue of private activity bonds meets the requirements of the Internal Revenue Code.

According to the California Debt Limit Allocation Committee (CDLAC), it is a three-member body that was created in 1985 by a gubernatorial proclamation in response to the 1984 Tax Reform Act, which imposed an annual limit on the dollar amount of tax-exempt private activity bonds that may be issued in a state. Private activity bonds included student loan bonds and industrial development bonds (including exempt facility bonds, small-issue industrial development bonds, and bonds for industrial parks).

In 1987, the California Legislature statutorily established CDLAC and the 1998 Omnibus Budget Act raised the volume cap on private activity bonds to $75 per capita or a minimum of $225 million. The purpose of CDLAC is to implement Section 1301 of the Federal Tax Reform Act of 1986 and Section 146 of the Internal Revenue Code which impose a limit on the amount of tax-exempt private activity bonds which a state may issue in a calendar year. According to CDLAC, its programs have resulted in the allocation of more than $65 billion of private activity, tax-exempt bonds to over 220 municipal, state, and joint powers authority issuers.

California Debt and Investment Advisory Commission

Government Code Title 2, Division 1, Chapter 11.5 sets forth the California Debt and Investment Advisory Commission in Sections 8855 to 8859. Section 8855 creates the California Debt and Investment Advisory Commission, which consists of nine members, selected as follows:

The term of office of each appointed member is four years, but appointed members serve at the pleasure of the appointing power. In addition, any legislators appointed to the Commission meet with and participate in the activities of the Commission to the extent that the participation is not incompatible with their respective positions as Members of the Legislature.

The Treasurer serves as chairperson of the Commission and presides at meetings of the Commission. The Commissioners do not receive a salary but are entitled to receive per diem allowance for attending meetings. The office of the Treasurer furnishes all administrative assistance required by the Commission.

The Commission is charged with numerous duties, including assisting all state and local government units in the planning, preparation, marketing, and sale of debt issues to reduce cost and to assist in protecting the issuer’s credit; maintain contact with state and municipal bond issuers, underwriters, credit rating agencies, investors, and others to improve the market for state and local government debt issues; and, publishing a monthly newsletter describing and evaluating the operations of the Commission during the preceding month.

According to the California Debt and Investment Advisory Commission (CDIAC), it improves the practice of public finance in California by providing responsive and reliable information, education, and guidance to state and local public agencies and other public finance professionals. The Commission was created in 1981 as the State’s clearinghouse for public debt issuance information and required it to assist state and local agencies with the monitoring, issuance and management of public debt.

By Chris Micheli, September 11, 2020 7:50 am

Fortress Eyes Building Two Phases of Las Vegas Rail Concurrently.

The company backed by Fortress Investment Group’s private-equity funds plans to build two phases of a Las Vegas rail project concurrently, although it has yet to secure financing or break ground.

The venture that goes by the name of DesertXpress Enterprises in California and Nevada has proposed building a 170-mile (274-kilometer), high-speed line to Las Vegas from a southern Californian desert town called Apple Valley. It has approval to sell $4.2 billion in municipal bonds for that initial phase, and has said it intends to market those unrated securities, the largest such high-yield deal ever, by the end of September.

For the second phase, the company that also operates under the name Brightline Trains is looking to extend that yet-to-be-built line from Apple Valley to an existing California commuter rail station in Rancho Cucamonga, some 50 miles from downtown Los Angeles. Its representative Sarah Watterson told members of the San Bernardino County Transportation Authority at a meeting Wednesday that construction of both segments would occur at the same time and the Rancho Cucamonga hub would open for service at the end of 2023, which would be the same as the first phase.

The extension could include a station in Hesperia, located between Apple Valley and Rancho Cucamonga.

“There is strong market demand,” Watterson told the board, which oversees various modes of transportation in the region. “We would expect that our system could actually capture thousands of riders daily.”

The firm hasn’t yet secured regulatory permits or California’s approval to sell municipal bonds for the expansion. Its first passenger rail in Florida, financed through tax-free bonds issued under the name Virgin Trains USA, has suspended service because of the pandemic. It’s looking to boost ridership of the unprofitable line by adding stations.

Bloomberg Business

By Romy Varghese

September 2, 2020, 12:45 PM PDT

California Hit by Fires and Virus Sells $2.6 Billion in Debt.

Last September, California entered its bi-annual bond sale flush with a ratings upgrade from Fitch Ratings and a $21 billion budget surplus.

A year later, California kicks off its fall debt sales under dramatically different circumstances. Wildfires scorching thousands of acres are creating another stress on the state’s resources and its response to the coronavirus pandemic. S&P Global Ratings is warning that it may lower the Golden State if its finances become unbalanced for a long period. To close a $54 billion shortfall, California resorted to deferring payments and plumbing reserves, while holding out hope for federal aid that has yet to materialize.

For Franklin Templeton’s Jennifer Johnston, the blazes, which came much earlier in the fire season than usual, could exacerbate the state’s existing problems with housing affordability and the economic wreckage from pandemic-related shutdowns. They can eventually undermine local tax bases, especially if the disease persists without a vaccine, she said.

“Will wildfires be the last straw? And over time, will we see population decline? It’s bringing general climate-related risk more to the forefront,” said Johnston, a vice president and research analyst. “You have to factor it into your analysis, if you’re going to own a credit where this happens every year, versus communities that don’t have this as an issue.”

Relative Yields

Such long-term concerns won’t impede the state’s access to capital. But relative yields on its $2.6 billion general-obligation sale, which sold Wednesday, show investors receiving more in compensation. Ten-year bonds were priced to yield 1.2% yield, or 40 basis points over benchmark debt, compared with 0.94% yield, or 13 basis points over benchmark debt for California securities, according to data compiled by Bloomberg. Because of demand, the state increased the deal size from $2.4 billion.

So far, wildfires have burned 1.48 million acres, with three of the 20 largest blazes in California history occurring in August, according to the state’s fire service. The agency has already consumed about 80% of the amount budgeted for the year ending in June 2021 to deal with them, finance department figures show.

The blazes, many of them sparked by lightning from extreme weather, forced evacuations, with about 27,000 still unable to return to their homes as of Tuesday and facing the difficulty of relocating safely as the pathogen continues to spread. The far-drifting smoke is pushing air quality to dangerous levels, undermining the ability of restaurants in cities to offer outdoor dining to keep afloat during the pandemic.

Meanwhile, the state’s about a month away from cuts that will be triggered absent federal aid, including $6.6 billion to its schools and community colleges, under the budget lawmakers passed for the current fiscal year.

So far, the three major credit rating companies have held their stable outlooks on the state, meaning a downgrade isn’t imminent. And California has sufficient cash on hand so it doesn’t need to borrow through revenue anticipation notes, unlike during past crises. But S&P has flashed a warning in a release ahead of the bond sale.

Stressed Liquidity

“Should reserves drop to the point where liquidity is stressed, or the state experiences undue political difficulty in making necessary budget adjustments when addressing its projected sizable budget gaps in fiscal 2022 and beyond, we could potentially lower the rating or revise the outlook,” the company said.

For this year’s budget, the state deferred $12.9 billion in payments to schools and community colleges and borrowed $9.3 billion from other funds — obligations officials must honor, even if the economic recovery lags. They anticipate general fund revenue growing by 2% for the year beginning in July and then by more than double for the year after that, bond documents show.

“If we don’t see a rapid recovery in the economy, I think the budget may create greater challenges for them in 2022 and 2023 than we expect,” said James Dearborn, director of municipal credit research at DWS.

Bloomberg Markets

By Romy Varghese

September 2, 2020, 8:36 AM PDT Updated on September 2, 2020, 12:50 PM PDT

Chicago Eyes Refinancing, Pension Bonds With Rebound Elusive.

Chicago is looking to the $3.9 trillion municipal-bond market for options to close its ballooning budget deficits, Chief Financial Officer Jennie Huang Bennett said.

Options on the table include selling pension obligation bonds, as well as refinancing general obligation and sales tax-backed bonds, Bennett said in a telephone interview on Wednesday. The refinancing of a yet-to-be-determined amount of debt is targeted for the fourth quarter, she said, adding it could save as much as $100 million in the 2020 budget.

Mayor Lori Lightfoot on Monday projected that the 2020 deficit in the corporate fund, which accounts for most services the city offers, would expand to almost $800 million from a June projection of $700 million. The gap would reach $1.2 billion in 2021 with revenue losses connected to the Covid-19 pandemic making up 65% of the hole. A complete budget proposal will be released in October.

The city has mulled pension obligation bonds in past years. Former Mayor Rahm Emanuel had considered issuing $10 billion of them to cover rising costs of public employee retirement funds. The pension costs have weighed on the city’s credit rating for years with Moody’s Investors Service giving the city a junk rating in 2015. The city’s unfunded retirement liability stands at about $30 billion.

“Everything is on the table,” Bennett said. “We’ve spent time analyzing a pension obligation bond, what the pros and cons are and have had a number of conversations about what that could mean for the city.”

Risky Bet

Pension obligation bonds come with risk, especially for Chicago. Proceeds from the sale would need to be invested in such a way that returns exceed the bonds’ fixed interest rate, a tough target given how much the city pays in yield penalty because of its fiscal troubles. Pension bonds contributed to municipal bankruptcies in Detroit as well as Stockton and San Bernardino in California. The Government Finance Officers Association has advised against them.

It’s premature to discuss the size of any potential pension bond deal because the city still hasn’t decided whether these bonds will be used, Bennett said. Any discussion about pension obligation bonds should be paired with potential reforms for how the city pays for retirement costs and what benefits are provided, she said. Bennett declined to comment on specifics for reforms but said the city plans to have conversations with groups including beneficiaries.

“We ought to work on the solution together as it relates to how we make sure that the pension funds remain healthy financially,” Bennett said. “That conversation is really important with the rating agencies in demonstrating that we have a credible path forward” for financial sustainability for pensions, she said.

Hiring slowdowns, changes to procurement and contracts and new revenue sources are also under consideration to fill the budget shortfall, she said. Raising property taxes is toward the end of the list, she added.

Washington Help

Meanwhile, the city doesn’t expect revenue to begin recovering to pre-pandemic levels until early 2022, according to its baseline scenario. Before the virus hit, the city had planned on reaching a so-called structural balance in 2022 but now that target appears to be later.

States and municipalities across the country are pushing Congress to come to an agreement that includes aid for governments trying to make up for revenue losses. Illinois is counting on additional federal aid and loans from the Federal Reserve’s Municipal Liquidity Facility of up to $5 billion to balance its budget. The Chicago Board of Education last month approved a budget that assumes $343 million in additional federal funding.

Chicago has not yet determined how much additional federal aid it will incorporate into its spending plan because the final agreement may or may not pass before the city’s budget proposal is released in October, Bennett said. The city is actively looking at contingency plans in case more federal stimulus doesn’t come through, she said.

“Ultimately, we are going to have to make some hard choices,” Bennett said. “What’s really important is federal stimulus.”

Bloomberg Markets

By Shruti Singh

September 3, 2020, 2:00 AM PDT

Florida Seizes on Low Rates for Hurricane Fund as Storms Start.

With hurricane season barreling down on Florida, the state is seizing on low interest rates to borrow $2.25 billion for its catastrophe insurance fund.

The State Board of Administration Finance Corp. is joining state and local governments that have rushed to sell bonds since yields tumbled this year to the lowest in decades. While rates have edged up over the past three weeks, benchmark 10-year debt is still yielding only about 0.8%, matching the lows seen before the pandemic upended financial markets in March.

“The market has been extraordinarily strong on the demand side and interest rates are very low — those two things don’t normally go hand and glove,” Ben Watkins, Florida’s director of bond finance, said in an interview. “From an historical perspective, this is an extraordinary opportunity.”

The pace of debt sales surged as rates tumbled in July, with the volume of new municipal bond offerings jumping 58% from a year earlier to about $46 billion that month, according to data compiled by Bloomberg. Even with the uptick in rates since then, sales have stayed strong, with another $41 billion issued this month.

The offering will be the first since 2016 by the Florida Hurricane Catastrophe Fund, which acts as a backstop for the state’s insurance market.

Because of the amount of money already in the fund, Watkins said it didn’t need to borrow more, but the low level of interest rates was too good to pass up.

“We don’t really need to borrow, we want to,” he said. “I don’t know what interest rates or demand is going to be like in five, seven, ten years from now, so lets put some debt on the balance sheet because we don’t know when we’ll need it.”

The bonds are rated Aa3 by Moody’s Investors Service and AA by S&P Global Ratings and Fitch Ratings. They will be federally taxable and marketed to non-traditional municipal buyers, like corporate-debt investors and overseas firms, Watkins said.

The move to shore up the fund comes as scientists anticipate that climate change will cause more damaging hurricanes.

The Florida fund is estimated to incur total losses of about $8 billion from Hurricanes Irma and Michael, which hit the state in 2017 and 2018, respectively, according to projections as of June 30.

Watkins said that the state is preparing for the future by selling bonds now. “It’s out of an abundance of caution and we are looking at how beneficial it will be and how inexpensive it will be to have that borrowing on the balance sheet,” he said.

Bloomberg Finance

By Danielle Moran

August 31, 2020, 10:30 AM PDT

Chicago Projects $2 Billion Deficit Through 2021 on Pandemic.

Chicago faces a 2021 budget deficit of $1.2 billion as the coronavirus pandemic decimates the city’s revenue with businesses shut down due to social distancing while recent unrest hurt reopening efforts.

Next year’s projected gap comes on top of a 2020 deficit of nearly $800 million for its corporate fund, which accounts for many of the services the city provides, Chicago Mayor Lori Lightfoot said on Monday. That’s up from a June forecast of $700 million because rising virus cases have hampered the city’s recovery. Lightfoot called for additional federal stimulus for states and cities and stressed in prepared remarks that Chicago is struggling with “a catastrophic collapse of our local and national economy.”

Revenue losses spurred by the pandemic are the biggest factor hobbling city finances in 2020 and 2021, she said. To make up for the gaps this year and next, Lightfoot’s administration will likely need to cut headcount, control spending, refinance debt, borrow and ask for more federal aid. The city has not ruled out raising property taxes and is also looking at a personal property levy on computer leases, which may help raise money as telework expands.

“This is the reality of a budget deeply impacted by this horrible virus,” Lightfoot said in prepared remarks.

The pandemic is exacerbating the challenges for the city that’s seen retirement costs climb and financial stress build up for years, factors which led Moody’s Investors Service to give Chicago a junk rating in 2015. The corporate fund contributions to pensions will increase $91.4 million to $426.9 million next year. Chicago’s total 2021 contributions to its four pension funds will reach $1.8 billion from $1.7 billion this year, according to budget documents.

Purely Covid

“Astounding and quite staggering as those numbers are, they are kind of in line with what we’ve been expecting,” said Ty Schoback, senior analyst for Columbia Threadneedle Investments, which owns Chicago debt as part of its $16 billion in muni assets under management. “As a bondholder what we look for is budget solutions that are longer-term in nature.”

The city has identified $550 million, including up to $350 million in funding from the CARES Act and at least $200 million from debt refinancing, to help close the 2020 shortfall.

Chicago’s confirmed virus cases, which have disproportionately hit black and brown communities, are above 71,000 and climbing back to concerning levels. Deaths stand at more than 2,800. Business activity is still limited to curb the spread of the virus, and protests since May have led to looting and violence in key commercial corridors and impoverished neighborhoods.

About 65% of next year’s budget gap is “purely” due to Covid-19-related revenue loss, and the city continues to work toward structural balance, according to Chicago Chief Financial Officer Jennie Huang Bennett.

No Bankruptcy

Among the financial solutions to close the gap could be pension obligation bonds, which are a vehicle to spread out and defer payments in future years, along with reforms, Bennett said in response to reporters’ questions on Monday. She quashed the notion of Chicago filing for bankruptcy because she said it doesn’t solve the city’s problems. Bennett also said the city currently isn’t looking at the Federal Reserve’s Municipal Liquidity Facility because it could access the bond markets at better rates if needed.

“This disease has forced a seismic disruption of our economy, and — as a consequence — our city’s finances,” Lightfoot said during her remarks. “Also affecting the recovery was looting and damage to our businesses that occurred three months ago and again more recently.”

Meanwhile, the costs of Chicago’s health and social services are growing as Lightfoot’s administration works to curb the spread of Covid-19, reassure businesses that it’s safe to operate in Chicago and rejuvenate communities with scant investment for decades.

More than 900,000 Chicago-area residents have filed for unemployment since the pandemic began and the region’s unemployment rate has risen to 12.6% from 3.6% in February. Sectors such as hospitality, convention and tourism and personal services are among the hardest hit by shutdowns.

‘Exceptionally Large’

“Many are still seeing a fraction of their typical revenues and some businesses have sadly closed with no hope of coming back,” Lightfoot said. “While we are fortunate to have a diverse economy, nonetheless, the significant loss of revenues in these areas continues to be felt now and likely deep into 2021,” she said referring to tourism, hospitality and transportation.

In early July, the city pegged the economic cost of canceled conventions and similar events at $900 million, according to Moody’s. Lightfoot reiterated her call for more federal stimulus for municipalities like Chicago. Lightfoot said even amid a campaign season leading up the November election she’s advocating for a bipartisan solution.

“The fiscal gap that Mayor Lightfoot announced is exceptionally large and absent new federal help there are no easy solutions for Chicago,” said John Ceffalio, municipal credit research analyst at AllianceBernstein, which has about $50 billion in municipal securities under management. “The weight of the city’s debt and unfunded pension liabilities severely limit the mayor’s flexibility to cope with budgetary impact of the pandemic and the recession. The mayor didn’t create any of those problems but they are now hers to manage.”

Bloomberg Politics

By Shruti Singh

August 31, 2020, 12:42 PM PDT Updated on August 31, 2020, 4:17 PM PDT

Michigan Supreme Court Holds City Attorney Records and Communications Subject to FOIA Disclosure.

The Michigan Supreme Court (MSC) recently held in Bisio v City of Clarkston, ___NW3d___; 2020 Mich. LEXIS 1237 (July 24, 2020), that non-privileged documents and communications involving a city attorney may be subject to disclosure under the Freedom of Information Act (“FOIA”), MCL 15.231 et seq.

Plaintiff Susan Bisio filed a FOIA request with the City of the Village of Clarkston (“City”) seeking correspondence between the City’s attorney and a developer of vacant property within the City. The City denied the request on the basis that a public record was not subject to the FOIA under MCL 15.232(i) because it must be created or obtained by a public body and the City Attorney is not a public body.

The Supreme Court reiterated the democratic purpose of the FOIA of providing Michiganders with “full and complete information regarding the affairs of the government and the official acts of those who represent them as public officials and public employees.” The Court held that the determination of whether records are public records under the FOIA is a question of “whether the public body prepared, owned, used, possessed, or retained them in the performance of an official function.”

To answer this question, the Court looked to the definition of a “public body” under the FOIA and noted that, while the definition includes a collective group, it also includes “[a] state officer [or] employee” and “other body in the executive branch of state government.” MCL 15.232(h)(i). The Court also drew on the FOIA’s distinction between individual state officers and their offices, which the Court interpreted to mean that individual officers are distinct from their offices.

Further, the governor, lt. governor, and county clerk are expressly excluded from the definition of public body under the FOIA, which lead the Court to conclude that those offices are “presumptively an ‘other body’ under MCL 15.232(h)(i)” which required their express exclusion if they were not to be subject to FOIA requirements. With the understanding that the category “other body” encompasses an office, the continued definition of public body in MCL 15.232(h)(iv), which includes “[a]ny other body that is created by state or local authority,” must also encompass offices. Accordingly, the office of the city attorney, which is typically created by local authority, must be included as an “other body” in the definition of “public body.”

Here, because the office of a city attorney is a public body and the documents were indisputably prepared and possessed by the city attorney, the Court held that the documents requested by Bisio were subject to the FOIA.

This decision may have a significant impact for both municipal attorneys and those seeking public records held by municipal attorneys. Under this decision, documentation controlled by a municipality’s attorney and not protected by the attorney-client privilege may be subject to the FOIA.

Foster Swift Collins & Smith PC – Alexander J. Thibodeau

September 2 2020

Florida Seizes on Low Rates for Hurricane Fund as Storms Start.

(Bloomberg) — With hurricane season barreling down on Florida, the state is seizing on low interest rates to borrow $2.25 billion for its catastrophe insurance fund.

The State Board of Administration Finance Corp. is joining state and local governments that have rushed to sell bonds since yields tumbled this year to the lowest in decades. While rates have edged up over the past three weeks, benchmark 10-year debt is still yielding only about 0.8%, matching the lows seen before the pandemic upended financial markets in March.

“The market has been extraordinarily strong on the demand side and interest rates are very low — those two things don’t normally go hand and glove,” Ben Watkins, Florida’s director of bond finance, said in an interview. “From an historical perspective, this is an extraordinary opportunity.”

The pace of debt sales surged as rates tumbled in July, with the volume of new municipal bond offerings jumping 58% from a year earlier to about $46 billion that month, according to data compiled by Bloomberg. Even with the uptick in rates since then, sales have stayed strong, with another $41 billion issued this month.

The offering will be the first since 2016 by the Florida Hurricane Catastrophe Fund, which acts as a backstop for the state’s insurance market.

Because of the amount of money already in the fund, Watkins said it didn’t need to borrow more, but the low level of interest rates was too good to pass up.

“We don’t really need to borrow, we want to,” he said. “I don’t know what interest rates or demand is going to be like in five, seven, ten years from now, so lets put some debt on the balance sheet because we don’t know when we’ll need it.”

The bonds are rated Aa3 by Moody’s Investors Service and AA by S&P Global Ratings and Fitch Ratings. They will be federally taxable and marketed to non-traditional municipal buyers, like corporate-debt investors and overseas firms, Watkins said.

The move to shore up the fund comes as scientists anticipate that climate change will cause more damaging hurricanes.

The Florida fund is estimated to incur total losses of about $8 billion from Hurricanes Irma and Michael, which hit the state in 2017 and 2018, respectively, according to projections as of June 30.

Watkins said that the state is preparing for the future by selling bonds now. “It’s out of an abundance of caution and we are looking at how beneficial it will be and how inexpensive it will be to have that borrowing on the balance sheet,” he said.

Bloomberg Markets

by Danielle Moran

August 31, 2020

Fitch: NJ Proposal Aims to Stabilize Finances; Challenges Remain.

Fitch Ratings-New York-01 September 2020: New Jersey’s budget proposal for the shortened nine-month fiscal 2021 year marks a further step toward fiscal stabilization since the coronavirus pandemic upended the state’s economic and budgetary situation earlier this year, according to Fitch Ratings. Fitch downgraded New Jersey’s Issuer Default Rating to ‘A-‘/Rating Outlook Negative on April 21 given the narrow fiscal resilience the state had available to confront the emerging crisis, relative to most other states. Since then, swift action by the Governor and Legislature and the presence of federal response funds appear to be laying the groundwork for the state to steady its finances. However, multiple uncertainties weighing on New Jersey’s credit quality have yet to be clarified, including the ultimate course of the pandemic, its economic and fiscal ramifications and whether additional federal support emerges. Moreover, the significant one-time actions necessary to address the downturn now, including planned deficit borrowing, may temporarily derail the state’s progress in recent years in addressing its many fiscal challenges, including its persistent structural imbalance, high liabilities and limited reserves.

The Governor’s proposed budget for the shortened, nine-month fiscal 2021 period reflects the state’s progress toward stabilizing its finances. It forecasts that fiscal 2020 (12 months through June 2020) will have ended with a revenue gap of only $1.4 billion relative to the January 2020, pre-pandemic forecast; this compares with the $2.7 billion gap expected as of the May financial condition report.

Better performance in fiscal 2020 partly reflects economic trends before the pandemic, which have supported recent income tax collections, but withholding has not deteriorated as sharply as expected since the pandemic began and enhanced federal unemployment benefits have shored up sales tax receipts. More than $1 billion in planned fiscal 2020 appropriations were also held back by the state early in the crisis, which appears to have offset most of the estimated fiscal 2020 revenue gap, enabling the state to end the year with a fund balance now estimated at over $1.7 billion.

The projected revenue decline in fiscal 2021 remains more of a challenge, despite the improved outlook. Prior to any tax law changes, New Jersey is forecasting a $5.6 billion revenue gap relative to the pre-pandemic forecast, compared with a $7.2 billion gap in the May fiscal update. The governor’s proposal targets ending fiscal 2021 with a fund balance exceeding $2.2 billion, a potentially critical cushion against the many uncertainties the state faces through the remainder of the fiscal year.

The revenue gap identified by the state is addressed most notably by $4 billion in deficit borrowing, either via General Obligation bonds or through the Federal Reserve’s Municipal Liquidity Facility, in lieu of deeper spending cuts. Additionally, $1 billion in revenue actions are in the proposal, the largest of which is raising the top rate on taxable income over $1 million to 10.75%; the Legislature has rejected this proposed increase several times before. The proposal cuts a range of spending but preserves the state’s ramp up schedule to full actuarial contributions (ADC) for pensions with a payment equal to 80% of the ADC, an important signal of the state’s commitment to stabilizing its pension funding and addressing a source of credit weakness. The Governor and the Legislature have only a few short weeks to reach consensus on a final budget, but their quick agreement at several critical junctures since the start of the pandemic raises expectations for a smooth process.

Yet, even as state finances appear to be solidifying, significant risks remain for the state beyond the current fiscal year. Economic recovery is likely to be slow, and thus the rebound of tax revenues in fiscal 2022 is unlikely to fully recoup the lost revenues being offset in fiscal 2021 through deficit borrowing and other one-time actions. Moreover, future baseline spending will have to rise both to cover debt service on the operating debt and the next scheduled increase in pensions contributions.


Douglas Offerman
Senior Director
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Fitch Ratings, Inc.
Hearst Tower, 300 West 57th Street
New York, NY 10019

Marcy Block
Senior Director
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Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

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Mesirow Arranges Tax-Exempt P3 for University of Illinois.

Mesirow Financial’s Public Finance and Credit Tenant Lease and Structured Debt Products teams acted as the senior underwriter for one of the first tax-exempt healthcare public-private partnership financings in the U.S.

Mesirow acted as the financing arm of the winning development team that was assembled by the University of Illinois to outsource the development, design, financing, and maintenance of the university’s Outpatient Surgery Center and Specialty Clinics building near the Chicago campus.

The 200,000-square-foot clinical building, to be located across from the University of Illinois Chicago Hospital on the Near West Side, is slated for fall 2022 completion. By incorporating a 501(c)(3) ownership structure, the bonds could be secured on a tax-exempt basis at very competitive borrowing levels.

“This is a terrific transaction for the University of Illinois, as well as for the State of Illinois because of its public-private partnership model,” said Dominick Mondi, Mesirow Financial president & CEO.

September 1, 2020

Fitch: California Wildfires, Blackouts Highlight Utility Operating Risk

Fitch Ratings-Austin/New York/Chicago-27 August 2020: California wildfires and rolling power outages earlier this month do not have an immediate effect on the credit profiles of the state’s investor-owned utilities (IOUs), public-owned utilities (POUs), community choice aggregators (CCAs) and renewable developers, Fitch Ratings says. The occurrence of these two events simultaneously, although unrelated, underscores the challenging utility operating environment in a state prone to natural disasters, which is incorporated in the ratings.

Due to increasingly destructive wildfires triggered by IOU equipment in 2017 and 2018, the three largest California IOUs initiated public safety power shutoffs (PSPS) designed to prevent catastrophic wildfires in 2019. In Fitch’s view these outages, in concert with power interruptions driven by heat-related, supply-demand and other issues, diminish customer satisfaction while increasing political risk. A potential decline in ratepayers in those areas where residents and businesses choose not to rebuild, coupled with increased wildfire-related and green economy costs, could pressure utility cash flows in the longer term, absent robust regulatory constructs or other offsetting factors, such as greening the transportation sector and buildings.

Blackouts and wildfires will encourage residential installation of solar-plus-battery storage as utility customers increasingly look for alternative energy sources, reducing demand for utility-provided energy and eroding revenues. Widespread adoption of residential storage would shift load patterns and may obscure the California Independent System Operator’s (CAISO) ability to estimate appropriate reserve margins.

Some renewable projects are at risk of unreimbursed curtailment if CAISO directs them to derate for emergencies, such as wildfires, which has not occurred but could erode credit quality if it were to become a persistent issue. If there are increasing periods where power prices jump by many multiples above average pricing, some renewable projects may be able to capitalize on those opportunities and receive a short-term revenue boost.

A record of almost 1.4 million acres has burned across California since last week, leading to the declaration of a state of emergency. The current fires, which were caused by an usually large number of lightning strikes related to intense thunderstorms and extreme heat, are not expected to expose utilities to third-party liabilities and financial harm. Under the doctrine of inverse condemnation, California utilities are held strictly liable if their equipment is determined to have sparked a wildfire.

The blackouts earlier this month, which occurred primarily in some IOU service areas, were initiated by CAISO, due to an unprecedented heat wave in the Western US and system challenges related to meeting electricity needs with existing resources. The power outages will be investigated by key regulatory agencies with the goal of delivering more reliable power as California transitions to a clean energy economy. The outages are unlike the service interruptions initiated last year by the three large IOUs to decrease wildfire risk. Fitch expects PSPS to be used by IOUs as a tool to prevent catastrophic wildfires during periods of high weather-related risks. CCAs are affected by CAISO blackouts and PSPS events as their energy supplies are delivered by the IOUs’ transmission and distribution systems.

Wholesale electricity prices in California spiked due to the recent energy shortfall. IOUs meet supply needs through a mix of in-house generation and long-term purchase power contracts. When demand is high and IOU supply is insufficient, they may need to purchase higher cost power on the spot market to help meet demand, which could temporarily pressure cash flow until such costs are collected in rates.

Fitch-rated POUs did not experience blackouts earlier this month. The POUs own generation assets and, in some cases, high-voltage transmission lines that permit energy to be imported from other states. Generation assets and transmission capacity provided a physical and financial hedge against the capacity and energy shortages.

POUs had sufficient resources to serve their own loads when energy supply became scarce and market prices spiked. A number of POUs also sold energy into the wholesale market, augmenting revenue when prices rose. Nevertheless, risk exists that any potential solution will impose greater cost and regulatory requirements on the POUs, but there is no short-term credit impact of the blackouts on POUs.

Fortress Wins California Approval for Vegas Rail Reimbursement.

A company backed by Fortress Investment Group’s private-equity funds got the go-ahead Wednesday from the California Infrastructure and Economic Development Bank to get reimbursed for the cost of a Las Vegas rail project from a future bond sale, even though it failed to answer questions from California’s finance department.

The permission is a step forward for the venture that goes by the name of DesertXpress Enterprises in California and Nevada. It doesn’t yet have the authorization to sell the estimated $1.65 billion in debt, although at least one of the required approvals could occur in early 2021, according to a report by the authority that issues municipal debt for private borrowers.

The company that also operates under the name Brightline Trains has proposed building a 170-mile (274-kilometer), high-speed line to Las Vegas from a southern Californian desert town called Apple Valley. It already has approval to sell $4.2 billion in municipal bonds for that initial phase, and has said it intends to market those unrated securities, the largest such high-yield deal ever, by the end of September.

The company is looking to extend that yet-to-be-built line from Apple Valley to existing commuter rail stations in Rancho Cucamonga and Palmdale, California, which would bring it closer to downtown Los Angeles.

Gayle Miller, a representative for the state’s finance department on the board, said that while the first phase is a “priority project,” the department’s questions about right-of-way considerations received no response from the company. She also noted that the firm hasn’t yet sold bonds for the initial track.

“We continue to believe that any financial transaction in this state deserves due diligence and at the very least questions answered in order to move ahead,” Miller said before casting the sole vote against the reimbursement resolution.

Board member and California Treasurer Fiona Ma said that agreeing to allow the company to get paid back with bond proceeds doesn’t commit the agency to sign off on the sale itself.

“It really just provides the flexibility” for the firm, Ma said before the vote.

“We have a tremendous amount of support in California,” Ben Porritt, a spokesman for the firm, said by email after the meeting. “People are excited about the private sector investing in infrastructure and transportation and recognize the economic impact a project of this scope can bring to the region.”

The company’s first passenger rail in Florida, financed through tax-free bonds issued under the name Virgin Trains USA, has suspended service because of the pandemic. It’s looking to boost ridership of the unprofitable line by adding stations.

Bloomberg Markets

By Romy Varghese

August 26, 2020, 3:29 PM PDT

California Considers Bonds to Boost Economy as Buyers Crave Debt.

California could issue billions of dollars in debt under a legislative blueprint designed to jump start its economy ravaged by the coronavirus pandemic.

While the main plank of the stimulus plan is a proposal is to give people and businesses an incentive to pay their income taxes years ahead of time, a securitization portion would have the state sell bonds backed by revenue from a 2017 gasoline tax increase, the state’s cap and trade program for emissions of greenhouse gases, and fees the California Public Utilities Commission levies on broadband services.

The plan also calls for speeding up sales of general-obligation bonds that voters have already approved but have yet to occur. No size has been set but gas-revenue debt sales could total $5 billion. Lawmakers have until Aug. 31 to pass the proposal.

Generally, issuing debt for infrastructure instead of paying cash during a downturn “is a smart idea” for states to free up resources and help the economy at the same time, said Josh Goodman, senior officer with the state fiscal health project at the Pew Charitable Trusts. California bond investors eager to shelter their income from taxes may snap up the new supply, given demand is outstripping bonds for sale. There’s about $1.9 billion less in available California securities than the amount likely to be reinvested from maturing debt, according to data compiled by Bloomberg.

“If the market is right and interest rates are low and there’s a need to help stimulate the economy, now’s not a bad time to be in the market pricing debt,” said Howard Cure, head of municipal research at Evercore Wealth Management.

Unsold Bonds

Democratic leaders in both chambers see the proposal as a way to rejuvenate the economy, protect small businesses and provide services to people hard hit by the downturn, such as the unemployed, undocumented immigrants and working parents, without raising taxes.

The biggest pool to be bonded may be the revenue from gas taxes and vehicle fees that generate about $5 billion annually. It is unclear yet how much the state could securitize from cap and trade or broadband revenues, California Deputy Treasurer Tim Schaefer said.

The state has the authority to issue about $31.8 billion unsold bonds, some dating back to 1960, about 20% of the $158.5 billion approved by voters. California has about $72.3 billion in general-obligation debt outstanding.

Although Governor Gavin Newsom’s office hasn’t commented on the legislative proposal, the Democrat said during an unrelated news briefing Aug. 12 that “we have a lot of projects that are ready to go and permitted. It can happen. All we need is to move that money out a little bit faster.”

Evercore’s Cure said that based on the state’s wealth and population, California could handle more debt, but he cautioned that officials should ensure there’s enough revenue to back it as they grapple with the effect of the public health crisis. The state is banking on federal aid that hasn’t materialized yet to help close its two-year shortfall of $54 billion.

“I think California and every state has to be somewhat careful about adding more fixed costs when they don’t know the extent of damage to their budgets,” he said. “So as long as they have specified revenues going to pay the debt and you’re comfortable with that, that’s fine. But just to make general obligation or appropriation debt in an era when they’re running big operating deficits, you have to be careful about that.”

Bloomberg Markets

By Romy Varghese and Laura Mahoney

August 25, 2020, 10:30 AM PDT

Coronavirus Shutdown Stings New Jersey Mall’s Bondholders.

Mutual funds took hundreds of millions of dollars in paper losses this spring on the American Dream project despite market’s rally

This summer’s markets rally hasn’t helped banks and investors who lent about $2.7 billion to build the country’s second-largest mall, near the Meadowlands Sports Complex in New Jersey.

The American Dream Mall has been shut since March, and mutual funds that bought municipal bonds backing its construction have since taken hundreds of millions of dollars in paper losses. The troubles highlight the growing disconnect between ailing segments of the U.S. economy and the surge on Wall Street.

Even with schools in New Jersey preparing to reopen, American Dream remains closed because of a state order aimed at reducing the spread of the new coronavirus. The longer the hybrid mall and amusement park goes without paying customers, the harder it will be for its owner, Triple Five Group, to repay the money it borrowed from banks and mutual funds in 2017.

Continue reading.

The Wall Street Journal

By Matt Wirz

Aug. 26, 2020 5:30 am ET

S&P: New York State Fiscal 2021 Revenues Fall Short, Increasing The Likelihood Of Expenditure Cuts

Key Takeaways

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27 Aug, 2020

Muni-Bond Buyers Side With Seinfeld: NYC Isn’t ‘Dead Forever’

Jerry Seinfeld came to New York City’s defense after a blogger wrote that the city is “Dead Forever.” For now, the bond market agrees with the comedian.

There were plenty of mutual funds, insurance companies and other institutional investors willing to lend to the city when it sold $1 billion of bonds on Wednesday. The 10-year bonds were priced to yield just 1.45%, far from a signal of imminent default. The yield was slightly higher than general obligation bonds rated A-, four levels below the city’s current rating and the same as Philadelphia, according to data compiled by Bloomberg.

The city received about $1.9 billion of orders, or twice the bonds offered for sale, from institutional investors and another $212 million from individual investors.

“I have to explain to clients that the city isn’t on the verge of bankruptcy,” said Howard Cure, who has analyzed municipal bonds for more than 30 years and is head of municipal research at Evercore Wealth Management. “It’s not the 1970s.”

Which isn’t to say New York City, the epicenter of the coronavirus pandemic in March, doesn’t have serious problems.

Unemployment has swelled to 20%. Revenue in the city’s $88.2 billion budget is $7.1 billion lower than projected in January. Evictions loom. Violent crime is on the rise, with murders up 30% in the first seven months of 2020 and shootings up 177%, according to the New York Police Department. More than 420,000 residents left the city between March 1 and May 1, the New York Times estimated, based on an analysis of data from cellular phone towers. The Metropolitan Transportation Authority, which runs the subways, buses, and commuter trains, is warning of draconian service cuts that would upend residents’ daily lives.

But the dark headlines haven’t affected investors, who are more concerned with how low bond yields have dropped than they are about the demise of the most populous U.S. city, said Cooper Howard, director of fixed-income strategy at the Schwab Center for Financial Research, the firm’s independent research arm. The Federal Reserve’s commitment to keep interest rates near zero and lend to states and local governments if necessary — coupled with a wave of muni debt payments this summer that were reinvested — has depressed yields to the lowest since the 1950s.

Howard, like other municipal analysts, is projecting credit-rating downgrades, but not defaults on state and local government debt. The muni market expects that Congress will likely pass an aid package for states and local governments, he said. And states and cities entered the recession in relatively strong shape, having seen tax collections swell during the long economic expansion.

Mayor Bill de Blasio balanced this year’s budget using almost $3 billion in reserves and $3 billion of cost-saving measures, including cutting police overtime and cutting July’s police officer class. The mayor has threatened to lay off as many as 22,000 employees if the city and public employees unions can’t find $1 billion in savings, like changing work rules or modifying health benefits

New York City is counting on a federal relief package and is pushing for state legislation that would allow it to borrow as much as $5 billion if relief isn’t forthcoming. The biggest risk is the trajectory of the virus itself: Although the percentage of people testing positive for the virus in the city has plummeted to less than 1%, a recurring surge could lead to another round of shutdowns and spur more residents to leave the city.

Still, New York, the financial capital of the world, has a lot going for it. Wall Street’s profits soared to $10.7 billion in the first quarter, the most profitable quarter in more than a decade, as traders capitalized on volatility. Facebook Inc. and Inc. recently announced large leases in midtown Manhattan. The city’s cultural institutions and universities won’t disappear, neither will its attraction to strivers and tourists, alike.

“Energy, attitude and personality cannot be ‘remoted’ through even the best fiber optic lines,” Seinfeld wrote in a New York Times op-ed. “That’s the whole reason many of us moved to New York in the first place.”

Bloomberg Markets

By Martin Z Braun

August 27, 2020, 8:00 AM PDT

Fortress Eyes More Debt for Las Vegas Rail Still to Be Built.

A company backed by Fortress Investment Group’s private-equity funds wants to sell $1.65 billion in tax-exempt bonds for a second phase of its proposed passenger train to Las Vegas, even though it has yet to break ground or secure financing on the first leg, according to a report from a California bond agency.

The company, which goes by the name of DesertXpress Enterprises in California and Nevada, has proposed building a 170-mile (274-kilometer), high-speed line to Las Vegas from a southern Californian desert town called Apple Valley. It already has approval to sell $4.2 billion in municipal bonds for that initial phase, and has said it intends to market those unrated securities, the largest such high-yield deal ever, by the end of September.

Now the company is saying it wants to extend that yet-to-be-built line from Apple Valley to an existing commuter rail station in Rancho Cucamonga, about 40 miles from downtown Los Angeles — and wants the bond authorization to make that happen. At least one of the required approvals could occur in early 2021, according to a report prepared by the staff of the California Infrastructure and Economic Development Bank that issues municipal debt for private borrowers.

At a meeting on Wednesday, the agency’s board is scheduled to consider a request from DesertXpress to permit the company to be reimbursed for the second phase costs with the proceeds of a future bond issuance should that be approved. Agreeing to the reimbursement wouldn’t commit the board to sign off on the bond authorization.

“The sooner the project is complete, the sooner it will generate revenue. To complete the project as quickly as possible, DesertXpress must begin the design, development, and construction of Phase II in advance of IBank’s future tax-exempt conduit revenue bond financing,” the staff report said.

Ben Porritt, a spokesman for the company that now goes by the name Brightline Trains LLC, said it doesn’t have an application before the U.S. Department of Transportation or the California Debt Limit Allocation Committee, whose approval would be needed as well for the bond authorization.

The company is also looking into connecting its rail to Palmdale, California, which has a commuter rail line too. The board of that rail agency, Metrolink, is scheduled to vote later Friday on an agreement exploring the possibility of linking both Palmdale and Rancho Cucamonga to the private line.

The reimbursement resolution Wednesday “is the first step in a long process as we continue to explore connections to Rancho Cucamonga and Palmdale,” Porritt said.

The company’s first passenger rail in Florida, financed through tax-free bonds issued under the name Virgin Trains USA, has suspended service because of the pandemic. It’s looking to boost ridership of the unprofitable line by adding stations.

Bloomberg Markets

By Romy Varghese

August 21, 2020, 8:19 AM PDT

S&P: California’s Cash Position Remains Strong Despite Budgetary Deficit

Key Takeaways

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20 Aug, 2020

Mounting Debt Threatens to Derail New York Transit System.

Subway, bus and rail systems could be starved of funds, budget watchdogs warn

New York’s Metropolitan Transportation Authority needs to control its rising debt or it risks a drastic deterioration of service, budget watchdogs say.

The nation’s largest transit agency already has a debt load surpassing $45 billion, mostly to pay for new buses, trains and infrastructure. But it is now considering borrowing billions of dollars just to keep its system—including New York City’s subway—running during the new coronavirus pandemic.

“A true red line has to be drawn on how much debt is too much debt for the MTA,” said Rachael Fauss, a senior research analyst at watchdog group Reinvent Albany.

Continue reading.

The Wall Street Journal

By Paul Berger

Updated Aug. 20, 2020 11:49 am ET

New York's MTA Taps The Fed Funding Facility: Kazatsky (Radio)

MUNIS in FOCUS: Eric Kazatsky, Senior U.S. Municipals Strategist for Bloomberg Intelligence, discusses skinny stimulus, the MTA tapping the Fed facility, and junk munis. Hosted by Paul Sweeney and Vonnie Quinn.

Play Episode

Bloomberg Radio

August 21, 2020 — 10:11 AM PDT

NY’s MTA Rejects Bank Bids for Cash Notes as Fed Loan Likely.

New York’s Metropolitan Transportation Authority rejected all the bids from Wall Street banks to purchase $465 million of short-term notes Tuesday, setting the stage for the struggling transit agency to borrow the cash from the Federal Reserve’s new municipal lending program.

The transit agency, bleeding cash because ridership is down amid the pandemic, rejected all the bids from banks including Citigroup Inc., Jefferies, and Barclays Plc, according to a notice by Grant Street, which runs an auction platform for municipal sales. The Fed had previously agreed to buy the debt that the MTA did not award to other bidders, according to documents released as part of the sale.

Aaron Donovan, spokesman at the MTA, did not have an immediate comment on the sale.

The central bank created the program earlier this year after the economic collapse from the pandemic rocked state and local government budgets and sent the $3.9 trillion municipal bond market into a tailspin. The Fed’s decision to act as lender of last resort arrested the steep sell-off in March by reassuring investors that the market wouldn’t be rocked by another liquidity crisis.

Since then, though, it’s only been used once, by Illinois, as municipal-bond yields have stayed low and cash continues to flood into the market. The MTA’s offering was seen as a test of whether the Fed’s decision on Aug. 11 to lower prices on the loans would increase use of the $500 billion program.

The New York MTA, the largest U.S. transit system and among the agencies hardest hit financially by the coronavirus shutdowns, said it’s facing a $16.2 billion deficit related to the pandemic, according to documents associated with the debt sale.

It was seeking to borrow the $465 million through cash-flow notes due in three years. Yet the weighted average true interest cost on bids submitted by the banks totaled about 2.79%, according to Grant Street. Investors have signaled nervousness about the MTA’s finances. Yields on an MTA bond-anticipation note maturing in 2023 have fallen to 2.24% after increasing as high as 7.5% during the market’s sell-off.

The transit agency’s transportation revenue bonds are rated A2 by Moody’s Investors Service, A+ by Fitch Ratings, BBB+ by S&P Global Ratings, and AA+ by Kroll Bond Rating Agency, according to its website.

The Fed’s term sheet for the Municipal Liquidity Facility says it will determine pricing for split ratings by calculating an average rating. Using the pricing laid out in the term sheet, that could put the potential interest-rate spread on the MTA’s debt at about 200 basis points above an overnight index swap with a comparable maturity.

Bloomberg Business

By Amanda Albright and Danielle Moran

August 18, 2020, 9:38 AM PDT Updated on August 18, 2020, 10:32 AM PDT

New York’s MTA Is Saved Less by Fed and More by Kroll.

The largest U.S. public transit system locked in much cheaper borrowing costs with the central bank thanks to one credit rating.

New York’s Metropolitan Transportation Authority became the second municipal-bond issuer to tap the Federal Reserve’s $500 billion emergency lending facility for state and local governments, locking in cheaper borrowing costs than if it had stuck with Wall Street.

But before crediting Fed Chair Jerome Powell and his colleagues for providing the MTA with more affordable funding, the state, city and subway riders alike might want to thank Kroll Bond Rating Agency.

Bloomberg News’s Amanda Albright and Danielle Moran reported that the Fed’s Municipal Liquidity Facility charged a true interest cost of 1.92% to buy the MTA’s $450.7 million of notes, a savings of more than 85 basis points relative to its attempted auction earlier in the public market. Given the pricing scale from the central bank, which was tightened last week by 50 basis points, the MTA’s rate implies it was given a composite rating of A+. That grade requires a 190-basis-point yield spread to overnight index swaps, which are near zero.

According to the Fed’s term sheet, the facility determines pricing for split ratings by calculating an average among grades from “major nationally recognized statistical rating organizations.” And “for purposes of the MLF, ‘major NRSRO’ means S&P Global Ratings, Moody’s Investor Service, Inc., Fitch Ratings, Inc., and Kroll Bond Rating Agency, Inc.”

To put it plainly, including Kroll as one of the four accepted credit-rating companies ended up saving the MTA millions of dollars. While the agency’s transportation revenue bonds are rated BBB+ by S&P, A2 by Moody’s and A+ by Fitch, Kroll assigns them its second-highest grade: AA+. (For context, this is the same rating S&P gives the United States.) Without Kroll’s lift, the MTA would most likely have had to pay 10 to 25 basis points more to borrow from the Fed.

Lower Hurdle

The Fed cut muni interest rates by 50 basis points across credit ratings

The MTA is the largest U.S. transit system and has been ravaged by the coronavirus shutdowns. It’s now confronting a $16.2 billion deficit related to the pandemic as New Yorkers largely stay away from public transportation. Even after the successful deal with the Fed, MTA Chief Executive Officer Patrick Foye reiterated the need for $12 billion of federal funding in an emailed statement to Bloomberg News. One key feature of the agency is it can’t legally go bankrupt, as I wrote in June, meaning that one way or another, either the federal, state or city government (or all three) will have to pay up. It’s a chief reason Michael Rinaldi, Fitch’s lead analyst on the MTA, stood by its comparatively higher rating relative to S&P and Moody’s.

Kroll, for its part, has the MTA’s AA+ rating on review for downgrade. On the positive side, “management has a strong track record of balancing its operating budget over changing economic cycles and unforeseen events as well as managing complex capital programs designed to improve and expand the system,” analysts wrote in July. Still, “the Covid-19 crisis presents unprecedented challenges to the MTA’s fiscal operations.”

There’s no denying that a AA+ rating seems high for the MTA, given its projected budget gap. But I’m not going to say one grade is right and the other is wrong — they’re opinions, after all. I just come back to what Jim Nadler, president of Kroll, told me several years ago about “the curse of a new rating agency.”

“No one is going to add a fourth rating that is lower,” he said in 2014. “You’ll never see the ones that we turn away or gave lower ratings to.” Years later, it was still struggling to gain widespread traction in the $3.9 trillion muni market.

For the MTA’s sake, it was a good thing Kroll’s analysis came up with a higher rating than its rivals. Without a clear indication that federal funding is on the way, the agency could resort to using the Fed’s facility again. According to the term sheet, the central bank can buy notes up to “20% of the gross revenue as reported in the audited financial statements” for fiscal year 2019. The MTA’s website said it took in about $16.7 billion last year, implying it could borrow roughly $3.3 billion from the Municipal Liquidity Facility in total if necessary.

MTA officials will hope federal aid comes through before it needs to borrow again. Meanwhile, the Fed’s pricing scale is still probably too steep for any other issuers aside from Illinois, which tapped the facility in June. Still, the MTA has shown the Fed’s muni backstop works in cases of extreme stress. In this instance, with an assist from Kroll.

Bloomberg Markets

By Brian Chappatta

August 19, 2020, 3:00 AM PDT

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

New York’s MTA Becomes Second to Tap Fed as Banks Demand Higher Yields.

The Federal Reserve bought $451 million of notes sold by New York’s Metropolitan Transportation Authority, making the beleaguered transit agency the second to borrow from the central bank’s $500 billion lending program for states and cities.

The Fed charged a true interest cost of 1.92%, “resulting in savings of over 85 basis points compared to the public market levels,” according to an emailed statement from MTA spokesperson Tim Minton.

The transit agency, bleeding cash because ridership is down amid the pandemic, turned to the Fed after rejecting the higher bids from Wall Street banks Tuesday, according to a notice by Grant Street, which runs an auction platform for municipal sales. The Fed had previously agreed to buy the debt that the MTA did not award to other bidders, according to documents released as part of the sale.

Dan Solender, a partner at Lord, Abbett & Co., said the Fed is ensuring that issuers like the MTA hit hardest by the virus-induced recession can have access to “reasonable rates” when they borrow.

“This is a positive for the MTA and for the market,” he said. “This shows the benefit of what they’re providing, which continues to be a reason why the muni market has performed so well.”

The central bank created the program earlier this year after the economic collapse from the pandemic rocked state and local government budgets and sent the $3.9 trillion municipal bond market into a tailspin. The Fed’s decision to act as lender of last resort arrested the steep selloff in March by reassuring investors that the market wouldn’t be rocked by another liquidity crisis and government agencies would still be able to raise funds.

Since then, though, it has only been used one other time, by Illinois, according to central bank data as of last week. That’s because the Fed is charging steep penalties at a time when most can borrow at the lowest rates in decades, thanks in part to the confidence created by its move to act as a lender of last resort.

The MTA’s offering was seen as a test of whether the Fed’s decision on Aug. 11 to lower prices on the loans would increase use of the program.

“This financing underscores again the MTA’s need for $12 billion of Federal funding to offset projected revenue losses through 2021,” MTA Chief Executive Officer Patrick Foye said in an emailed statement on Tuesday.

The New York MTA, the largest U.S. transit system and among the agencies most affected by the coronavirus shutdowns, said it’s facing a $16.2 billion deficit related to the pandemic, according to documents associated with the debt sale.

It was seeking to borrow through cash-flow notes due in three years. Yet the weighted average true interest cost on bids submitted by the banks totaled about 2.79%, according to Grant Street. That’s far more than the market’s 3-year benchmark yield of about 0.12%, showing the level of risk investors are pricing into the securities.

The Fed’s pricing was based on an average rating of A1 and A+, MTA spokesman Aaron Donovan said in an email.

The transit agency’s transportation revenue bonds are rated A2 by Moody’s Investors Service, A+ by Fitch Ratings, BBB+ by S&P Global Ratings, and AA+ by Kroll Bond Rating Agency, according to its website.

Bloomberg Markets

By Amanda Albright and Danielle Moran

August 18, 2020, 11:51 AM PDT Updated on August 18, 2020, 2:24 PM PDT

New York Transit Agency Turns to Fed for $450 Million Borrowing.

(Reuters) – New York’s financially beleaguered Metropolitan Transportation Authority (MTA) said it sold $450.7 million of debt to the New York Federal Reserve’s Municipal Liquidity Facility (MLF) on Tuesday in a move that substantially lowered its borrowing costs.

The MTA is only the second muni bond market issuer to tap into the Fed’s program, one of around a dozen emergency credit facilities launched by the central bank this year to help ease the blow from the coronavirus pandemic. The deal came a week after the Fed eased some credit terms for the MLF.

The mass transit agency, which has been hit hard by a sharp drop in ridership on its buses, subways and trains amid the pandemic, said it sold the bond anticipation notes at a true interest cost of 1.92%, saving more than 85 basis points.

The MTA said it initially offered the three-year notes in competitive bidding on Tuesday in the U.S. municipal market, receiving 20 bids from 10 banks, with an average clearing true interest cost of 2.79%.

So far, the Fed has reported that only Illinois, the lowest-rated U.S. state, had tapped the MLF for a $1.2 billion cashflow issue in June.

After complaints that MLF borrowing costs were too high, the Fed announced last week that it would lower the interest rate spread charged on loans issued by the facility by half a percentage point for each credit rating category.

The $500 billion short-term borrowing program was announced in April as a way for states and local governments to access cash as their revenue fell due to the pandemic. In June, it was expanded to include mass transit agencies.


August 18, 2020

(Reporting by Karen Pierog in Chicago and Jonnelle Marte in New York; Editing by Will Dunham)

University of California Receives $2.65B from State Treasury Sale of Bonds.

The University of California system received $2.65 billion from a California state sale of revenue bonds which will help finance projects across UC campuses.

Revenue bonds are a type of municipal bond, which function like loans and are sold to fund projects. Revenue from the project is used to repay the investors who bought the bonds.

California State Treasurer Fiona Ma sold revenue bonds to third-party investors to help the UC fund or refinance different projects, according to a press release from the California Treasury. About $1.15 billion will be spent on campus projects and another $1.5 billion will be used for “working capital,” according to the press release. Working capital includes funding for the UC regents’ financial assets and capital needs like equipment, according to a UC Office of the President financial policy document.

The UC will use the money from these bonds to fund more than 50 construction projects at all 10 UC campuses and the UC Agriculture and Natural Resources Research and Extension Center, which include maintenance and seismic upgrades for new buildings, UC spokesperson Sarah McBride said in an emailed statement.

Some money from the bond designated for construction projects will go toward earthquake safety improvements for Franz Hall, McBride added. The UC rated Franz Hall as a Level V risk, according to a 2016 document from the UC regents, meaning it posed a “serious” risk to life in the event of an earthquake.

Dana Cuff, a professor of architecture, urban planning and urban design at the School of the Arts and Architecture and Luskin School of Public Affairs, said using the bonds for seismic work on Franz Hall is a wise investment.

“Doing seismic work is always money well spent,” Cuff said. “We just had an earthquake (11) days ago, and there’s no indication that the so-called ‘big one’ is any less likely than before.”

The United States Geological Survey recorded a 4.2 magnitude earthquake originating in the San Fernando Valley on July 30.

The 1971 Sylmar earthquake in the San Fernando Valley was a turning point for many seismic standards, Cuff said. Therefore, buildings constructed before then are sometimes not up to standard, she added.

Cuff said the John Wooden Center may also require seismic upgrades. Since there are three or four pieces of the building that were constructed at different times, they would all need different types of seismic improvements, she said.

Usually, a campus architect is responsible for ensuring the safety of campus buildings but after the previous campus architect, Jeff Averill, passed away in 2017, and UCLA has not filled the role, Cuff said.

Without a campus architect, no one is specifically designated with the responsibility of ensuring that UCLA’s buildings are safe, even if UCLA Capital Programs may be keeping an eye on the campus’ buildings, Cuff said.

There are still a number of on-campus improvements that need to be made, said Sachi Cooper, the Undergraduate Student Association Council Facilities Commissioner, in an emailed statement.

FAC is working to fund a redesign of the UCLA Center for Accessible Education to improve accessibility and increase space for programming, Cooper said. They are also working on establishing safe parking and temporary housing for students experiencing homelessness, she said.

Cooper added FAC also advocates for more lights around campus, increased transportation from the residential buildings and campus to Westwood and greater accessibility on campus as a whole because of infrastructural problems like broken elevators and a lack of ramps.

Since many students and faculty won’t return to campus during the upcoming school year, now is an opportune time to do as many facilities improvements as possible, Cuff said.

“We already have so many hits against us as a campus with COVID-19 and our new attention to antiracist policies,” Cuff said. “We should be doing everything we can to make student, staff and faculty experience not only safer, but better.”

The Daily Bruin

By Alexis Duke and Vivian Xu

Aug. 10, 2020 2:54 p.m.

Fortress Debt Sale for Vegas Train Sees Bond Market Skeptics.

During the municipal-debt market’s pre-pandemic boom days, investors poured almost $2 billion into America’s first new privately financed intercity passenger rail in a century, allowing Fortress Investment Group to expand its unprofitable line to Orlando.

Now Fortress is back, seeking $4.2 billion more to build a new railroad to Las Vegas from a desert town near Victorville, California, about 90 miles (145 kilometers) outside Los Angeles. But even the investor who bought about 80% of the previous deal said the company should focus on improving its inaugural train before trying to market the largest ever offering of unrated muni bonds as Covid-19 sidelines travelers.

“Before we even go down that path, let’s get more detail and more accomplishment in Florida,” said John Miller, head of municipal investments at Nuveen LLC, which holds about $1.4 billion of the bonds sold for the project under the name of Virgin Trains USA. “And if that were to occur successfully, I think the whole marketplace would then be a lot more excited about Victorville to Vegas.”

The massive offering will test the appetite for risky municipal securities in a market where investors are desperate for fatter returns amid historically low interest rates. And it comes as local governments face great economic uncertainty from the pandemic, as well as challenges for the train company as it navigates a contested breakup with Richard Branson’s Virgin brand and tries to boost ridership.

“There’s a lot of negatives,” said Dan Solender, head of municipal debt at Lord, Abbett & Co., which runs a $3.2 billion high-yield fund among its total $29.5 billion in municipals under management. “You don’t know if there’s really a demand for this type of thing. The history in Florida is not very good right now for how that’s going.”

Last year, 1 million passengers rode the Florida railroad, half the number estimated. In addition, the system was supposed to earn $37 of total revenue per passenger in 2019; instead, it was an average of about $22.

The company, which is now calling itself Brightline Trains LLC, is planning three more stations along the existing line besides building the extension to Orlando’s airport. It’s in talks with Walt Disney Parks and Resorts to put a stop at the Orlando attraction as well, and with Miami-Dade County for a new commuter rail service, according to regulatory filings. But its service has been suspended indefinitely since March 25 because of the pandemic.

The Las Vegas line, compared with the Florida one, requires much more buy-in from investors — and more of them. For the roughly $5 billion project, $3.25 billion in bonds will be issued through a California agency and $950 million from a Nevada one, according to company statements. Fortress’s contribution to the venture is about $600 million, or about 12% of the capital structure, according to documents presented to Nevada’s board of finance. In contrast, its investment in the Florida line was about 36%.

The California and Nevada debt will be sold as private activity bonds, which are meant for ventures for the public interest that are capped annually by the federal government. The decision by officials in California to spend that scarce low-cost financing resource on a train to shuttle tourists to casinos raised the ire of advocates who had pressed for all of the state’s allocation to go toward alleviating California’s housing crisis.

California set an Oct. 1 deadline for the bond sale. The company intends to market the bonds by the end of September, spokesman Ben Porritt said. He wouldn’t say if the company would ask for permission to put off the sale until next year. He also declined to comment on investor concerns about the project.

With a completed bond sale for the Las Vegas venture, combined with that for the Florida line, Brightline would account for about $6 billion of high-yield debt in the municipal market. And that doesn’t include another $950 million the company could sell in additional borrowing for the Florida system because it has yet to convert the equivalent in variable-rate financing done in 2019 into long-term securities.

The thinly-traded Florida bonds haven’t benefited as much from the rally in high-yield debt after the pandemic-triggered March rout. A 6.5% coupon security due in 2049 traded July 30 at an average price of 86 cents on the dollar, compared with about 104 cents in February, according to data compiled by Bloomberg.

Investors are wondering if holding that much long-term debt will pay off given trends that may diminish ridership, such as self-driving cars and increased online gaming.

“I do think there are some clear changes we’re going to have with how people choose to interact with each other,” said Terry Goode, a senior portfolio manager at Wells Capital Management, which holds $2.3 billion in high-yield securities among its $41 billion in municipal debt under management. “It’s all going to boil down to whether people buy into train travel, and whether they feel like train travel from Victorville to Las Vegas, for whatever pricing, whether that makes sense.”

Bloomberg Markets

By Romy Varghese

August 13, 2020, 4:00 AM PDT Updated on August 13, 2020, 7:39 AM PDT

Goldman Sachs Dropped by NYC From Key Muni Underwriting Team.

New York City, among the biggest borrowers in the $3.9 trillion U.S. municipal bond market, cut Goldman Sachs Group Inc. from the ranks of those who underwrite a big chunk of its debt.

The firm will no longer be part of the pool of underwriters that sell its senior general-obligation bonds and debt for the Transitional Finance Authority as a result of its periodic reshuffling of bankers, New York City said on Aug. 7. It wasn’t immediately clear why the city made the change from Goldman.

While Goldman Sachs isn’t a major banker to states and local governments when it comes to more mundane bond deals, the decision still means the firm will miss out on billions of dollars of bond sales over the next few years.

Such deals aren’t a major focus of Goldman Sach’s municipal bond business. Instead, the bank focuses more on specialized deals like a $1.1 billion issue of unrated bonds to finance American Dream, the long-stalled shopping and entertainment center in New Jersey’s Meadowlands, as well as public utilities offerings by issuers like the Long Island Power Authority.

New York City last selected senior underwriters in 2016. The city judges investment banking proposals on criteria including deal execution and the quality of ideas and analysis pitched to city officials.

New York City, which had to close a $8.3 billion budget deficit in the fiscal year that began July 1 as revenue plummeted and coronavirus related spending increased, plans to issue about $39 billion of general-obligation bonds and Transitional Finance Authority debt in the next four fiscal years, according the city’s financial plan. The Transitional Finance Authority was created in 1997 to circumvent limits on New York City general-obligation bond sales and its debt is backed by the city’s income tax, and if needed, its sales tax.

Goldman ranks 8th among muni bond underwriters this year, just below Piper Sandler & Co., a regional investment bank based in Minneapolis.

The underwriters were selected in a “competitive process” by the city’s Office of Management and Budget and the Comptroller’s Office, said Hazel Crampton-Hays, a spokesperson for Comptroller Scott Stringer.

“OMB and the Comptroller’s Office determined that the interests of the City and its related issuers are best served by the announced underwriting assignments,” Hays said.

Nicole Sharp, a spokesperson for Goldman Sachs, declined to comment. Laura Feyer, a spokesperson for New York City Mayor Bill de Blasio, said the city was confident the investment banks selected will help New York achieve its financing goals in support of funding critical infrastructure.

The city’s senior GO and TFA bond managers include Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Jefferies Financial Group Inc., Loop Capital Markets LLC, Samuel A. Ramirez & Co., Royal Bank of Canada, Siebert Williams Shank & Co., LLC and Wells Fargo & Co.

New York also selected Barclays Plc, Loop, Raymond James Financial Inc. and Siebert to serve as senior managers for bonds issued by the city’s Municipal Water Finance Authority. Goldman can compete for a senior manager role on New York Water bond issues following deals managed by the four other firms, the city said in a statement.

One-third of GO and TFA senior bankers and 40% of New York Water’s senior managers are minority and women-owned businesses, the city said.

Bloomberg Markets

By Martin Z Braun

August 10, 2020, 12:22 PM PDT Updated on August 10, 2020, 3:35 PM PDT

LA Metro Prices Its Biggest Bond Deal Ever as Ridership Plunges.

The Los Angeles County Metropolitan Transportation Authority is seeing half the ridership it had a year ago because of the coronavirus pandemic, but that crisis isn’t deterring its biggest bond deal ever.

The agency known as Metro is selling about $1.35 billion in tax-free revenue debt Tuesday to take advantage of historically low rates. Intervention by the Federal Reserve to prevent a liquidity crisis among municipalities has built up confidence among buyers, who are also favoring highly-rated issuers especially as they seek to shield income from taxes levied by California and other high-tax states.

“It’s a good time to enter the market,” said John Ceffalio, municipal credit research analyst at AllianceBernstein, which has about $50 billion in municipal securities under management. “People are looking for high-quality paper, particularly high-quality California paper.”

Debt from California issuers is beating that of the overall market, returning 4.7% year-to-date compared with the market’s 4.34%, Bloomberg Barclays indexes show.

The agency is issuing the debt to refinance Transportation Infrastructure Finance and Innovation Act loans covering improvements and extensions to its rail system. Its construction projects continue despite the pandemic. The authority is offering $1.35 billion of tax-exempt bonds for yields ranging from 0.14% to 1.36% on debt maturing from 2023 to 2037, according to a preliminary pricing wire viewed by Bloomberg.

“Based on what we have seen with other California offerings during the last month, we expect good investor reception,” Metro Treasurer Donna Mills said in a statement.

Metro isn’t the only transit system that’s coming to market during the pandemic. In May, New York’s Metropolitan Transportation Authority, the nation’s largest mass transit system, sold two bond offerings, and upsized both deals to meet buyer demand. The MTA, like Metro, is also struggling with declining ridership and falling revenue.

Operating buses, subways and rail, Metro spans 1,433 square miles in Los Angeles County, the nation’s most populous and also one hit hard by the coronavirus outbreak. Restrictions on economic activity first occurred in March and while some were rolled back, others were reimposed as cases rose.

In June, 14.3 million people rode the system, compared with 29.4 million in June 2019, Metro’s figures show. That month, collections of sales taxes used to back its bonds dropped 14% from the previous year, according to documents circulated to investors ahead of the sale. The agency said the sales tax receipts for the year ending in June may decline anywhere between 2% to 8% from the 2019 collections.

Still, even with the revenue drop, there will be more than enough to cover debt service, a factor in why the bonds carry a AA rating from S&P Global Ratings, the third-highest investment grade. The company has the rating on a negative outlook, however, as it does on other transit systems, because of the pandemic.

“Even if you were to have a hit worse than the last recession, bondholders would still be comfortable,” said Ceffalio, who said his firm is looking at the deal.

Bloomberg Markets

By Romy Varghese

August 11, 2020, 10:56 AM PDT

N.J. Wins Ruling to Issue Up to $9.9 Billion Debt for Crisis.

Governor Phil Murphy can sell as much as $9.9 billion in debt to plug a revenue hole from the coronavirus, New Jersey’s highest court ruled amid a looming budget deadline and as states across the country grapple with their finances.

The decision by the New Jersey Supreme Court allows one of the most financially strapped U.S. states to increase bonded debt — long-term debt with payments made over decades — by 22%. New Jersey Republicans had challenged the bond sale, saying it violated the state’s constitution by bypassing voters, while Murphy said the pandemic was a crisis that gave him the power to act.

“The pandemic has caused a health emergency, a broad-based economic one that has devastated many individuals and families, and a fiscal crisis for the state,” Chief Justice Stuart Rabner wrote for the seven judges in Wednesday’s unanimous decision. “The present ‘emergency caused by disaster’ extends to all three areas.”

The court did limit the size of the offering to the budget gap, requiring New Jersey to certify its revenue projections and the size of the shortfall before the sale. Should the hole be $7 billion, the state would be allowed to borrow only that amount. If it goes in the other direction, however, $9.9 billion — the projected revenue shortfall the state treasurer reported in May — is still the limit.

The ruling comes as states across the U.S. are racing to figure out budget plans rendered useless when the pandemic forced an economic halt. The National Conference of State Legislators was tracking revenue declines due to the virus in at least 34 states as of last month, with some projections exceeding 20%. A fight over whether to send federal aid to states is among the issues that have stymied a broader stimulus bill in Congress.

“Our schools can be funded, our residents and communities can be protected and our state can move forward,” Murphy said at a news conference in Trenton. But New Jersey still will “need the federal government to step up and provide direct assistance to us and our fellow states,” he said.

New Jersey Republican Chairman Douglas Steinhardt tweeted out a different perspective.

One concern from an investor’s perspective is that New Jersey was already on a shaky budget footing before the pandemic upended its finances, said Howard Cure, head of municipal research at Evercore Wealth Management.

“The state doesn’t really have reserve funds, their pension is very underfunded, they were slow to get out of the last recession as well,” he said. “It’s a bad debt practice and budgeting practice to create a long-term liability to take care of a yearly operating expenditure.”

Still, Cure said, the debt will probably be well received by investors clamoring for yield.

“Rates are so low, for a little extra yield there could be some pretty strong demand for this,” he said.

Murphy, a first-term Democrat and retired Goldman Sachs Group Inc. senior director, has estimated a $10.1 billion revenue shortfall in New Jersey through June 2021. He said that without the borrowing, state and local governments would have to dismiss at least half of their 400,000 public employees, including teachers and first responders.

If he can’t find enough revenue to pay off the bonds, Murphy said, he would raise sales and property taxes for homeowners, who already shoulder the nation’s highest such levies, averaging $8,953 last year.

Murphy, who took office in January 2018, campaigned on a return to fiscal health for New Jersey, whose credit rating is second-worst among U.S. states, behind Illinois. New Jersey bonded debt was $44.4 billion as of June 30, 2019, but the state since has added at least $2.2 billion in borrowing. Non-bonded debt, including what’s owed for public pensions, amounts to at least $200 billion, making the state among the country’s most indebted.

The New Jersey Republican State Committee, which brought the lawsuit, argued that under the state constitution, voters must approve such spending, and Murphy’s plan bypassed them. The committee cited a 2004 state Supreme Court decision that found then-Governor Jim McGreevey, a Democrat, had violated the constitution’s appropriations and debt-limitations clauses when he borrowed $2 billion to balance a budget without going to voters.

Murphy argued that in this instance, voter approval wasn’t needed because the constitution gave him emergency borrowing power. In addition to issuing debt, Murphy has been counting on billions of dollars in far-from-certain federal grants toward budget aid while the state continues to reel from the economic and health effects of the pandemic. Almost 16,000 New Jersey deaths have a lab-confirmed or probable link to Covid-19.

Murphy must present a fiscal 2021 budget to lawmakers by Aug. 25. The state lengthened the current fiscal year by three months, to Sept. 30, and shortened the next by three months to weather budget uncertainty as a result of the pandemic.

The case is New Jersey State Republican Committee et al v. Philip D. Murphy, Supreme Court of New Jersey, Docket M-1291, September Term 2019, 08471.

Bloomberg Politics

By Elise Young and Chris Dolmetsch

August 12, 2020, 9:05 AM PDT Updated on August 12, 2020, 11:41 AM PDT

— With assistance by Danielle Moran

NJ Supreme Court Upholds COVID-19 Emergency Bond Act: Ballard Spahr

The Supreme Court of the State of New Jersey upheld the New Jersey COVID-19 Emergency Bond Act (the Act), authorizing the State to issue up to $9.9 billion in state borrowing either through general obligation bonds or short-term debt through the federal Municipal Liquidity Facility program to respond to the financial crisis caused by the COVID-19 pandemic. The court made the decision August 12, 2020, in New Jersey Republican State Committee v. Philip D. Murphy.

The Act was signed into law by New Jersey Governor Phil Murphy on July 16, 2020. The New Jersey Republican State Committee filed suit against the Governor, arguing that the Act violated the Appropriations Clause and the Debt Limitation Clause of the Constitution of the State of New Jersey.

The appropriations clause requires the State to maintain a balanced budget each fiscal year and requires that all moneys for the support of State government and other State purposes be made in one general appropriation law each fiscal year. The debt limitation clause prohibits the State from creating debt that exceeds 1 percent of the total amount appropriated in the general appropriations law without voter approval. However, the debt limitation clause does not apply to any debt incurred “to meet an emergency caused by disaster.”

The Decision

Subject to the limits imposed by the court, the Act was upheld and found to be constitutional. In reaching this decision, the court addressed whether the act and any borrowing thereunder meets the emergency exception of the debt limitation clause. It was determined that (1) COVID-19 qualifies as a “disaster;” and (2) subject to certain limitations, the State may borrow money to meet the needs of the emergency (i.e. the State’s fiscal shortfall in revenue caused by the COVID-19 pandemic).

by the Public Finance Group

August 13, 2020

Copyright © 2020 by Ballard Spahr LLP.

(No claim to original U.S. government material.)

Fitch: Calif. Court Decision Maintains Pension Protections

Fitch Ratings-New York-05 August 2020: In a much-anticipated ruling last week, the California Supreme Court upheld a 2012 state pension reform provision that prevents pension “spiking” while simultaneously choosing not opining on, and therefore leaving in place, the “California rule,” a legal doctrine that sets a high bar for rolling back the pension benefit provisions of existing workers. The ruling has no impact on Fitch’s ratings on California state and local governments, as the 2012 reforms and limitations on changing benefits are already assumed in Fitch’s analysis.

Fitch views the court’s affirmation of the anti-spiking provision as a positive step toward eventually achieving the savings envisioned by the state’s comprehensive 2012 reform package. However, most of these savings will be limited and take decades to emerge. In the meantime, retaining the California rule leaves governments in California with little discretion to manage their pensions, and underscores that near-term funding trends will be driven by more immediate factors, including asset performance, actuarial and economic assumptions and the ability of participating governments to continue making rising contributions. Other cases challenging the California rule have been on hold awaiting last week’s decision. Since the court did not opine on the rule itself, the new ruling fails to offer a precedent for these other cases.

In Alameda County Deputy Sheriff’s Association v. Alameda County Employees’ Retirement Association, employees had sought to overturn the restriction on spiking, a practice that allowed excess compensation to be earned by employees nearing retirement in order to inflate future benefits. The restriction was adopted in 2012 as part of the Public Employees’ Pension Reform Act (PEPRA), the comprehensive pension reform law that broadly rolled back benefits for workers hired beginning on Jan. 1, 2013.

At the time of passage, PEPRA was anticipated to save $42 billion to $55 billion over 30 years just in the plans administered by the California Public Employees Retirement System (CalPERS); additional savings could be expected in the California State Teachers’ Retirement System, county systems operating under the County Employees’ Retirement Law (CERL) and the University of California Retirement System.

Most benefit changes in PEPRA pertained to new hires, although a handful of provisions affected existing workers, including the anti-spiking provision. Benefits for existing workers are protected under the California Rule, a legal interpretation of contract protections dating to a 1955 state Supreme Court case that limits the ability to modify pension benefit provisions of current workers, unless offset by other benefits of equal value. The impact is that governments subject to it can change benefits only for new hires, and therefore any savings from reform only accrue gradually over decades, as employee turnover shifts the workforce into the newer, lower benefits structure. Many other states have modeled their own contract protection of pensions on the California rule, although other states have adhered to somewhat less restrictive contract protections, including those that permit changes to benefits prior to vesting or changes to noncore benefits, such as cost-of-living adjustments.

PEPRA is undoubtedly improving the sustainability of California’s public pensions, as more of the workforce is covered under PEPRA benefit provisions and as the court affirms some of the minor reform provisions applicable to workers hired before 2013. The ruling last week held that closing the spiking loophole among county systems subject to CERL was within the powers of the legislature, without having to grant an offsetting benefit. It marks the top court’s second decision in two years affirming specific PEPRA reforms while leaving the California Rule untouched. In March 2019, the ruling in Cal Fire Local 4881 v. California Public Employees’ Retirement System preserved PEPRA’s prohibition on “airtime”, a practice whereby employees could buy additional years of retirement service credit.


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Challenge to $14 Billion in Illinois Debt Revived.

The decision is a victory for the head of a conservative think tank who had sued to block further payments on state debt sold in 2003 and 2017

An appeals court in Illinois has reinstated litigation seeking to block payments on $14.3 billion in municipal debt, saying the attempt to restrain borrowing in the country’s worst-rated state isn’t frivolous or malicious.

The appellate court said John Tillman, chief executive of the right-leaning Illinois Policy Institute, had put forth a legitimate claim in support of his theory that past bond sales by the state were impermissible. The court stressed that it wasn’t deciding the merits of Mr. Tillman’s claims but said that the litigation could continue in a lower court.

The complaint accused Illinois of taking on more debt than its constitution allows and breaking a state rule prohibiting deficit financing with bond deals in 2003 and 2017. Some of those bonds raised money to prop up Illinois pension funds, while others funded back payments to stretched government vendors.

Mr. Tillman, a prominent foe of public-sector unions, argues Illinois is barred from taking out long-term debt except for “specific purposes” or to refinance longer-term debt, while the state had instead borrowed to bridge deficits and to speculate on financial markets.

He has asked for a court order declaring the 2003 and 2014 debt sales invalid and unenforceable and prohibiting state officials from making further payments to bondholders.

A state judge dismissed the litigation last year, saying it risked “an unjustified interference with the application of public funds” and it would draw the courts into political questions that should be left to lawmakers.

Mr. Tillman’s challenge has drawn fierce responses from state officials, including Gov. J.B. Pritzker, a Democrat who was named as a defendant in the complaint and who has accused Mr. Tillman of a “pathological focus to drive Illinois into bankruptcy.”

A spokeswoman for Mr. Pritzker said, “This lawsuit continues to be a tired tactic of the extreme right who continue to push their ideology over sound fiscal policy. This administration will continue to focus on the important work of acting responsibly to keep the state on stable fiscal footing.”

Municipal bond-market investors including Nuveen Asset Management and AllianceBernstein LP have defended the state, saying the case had roiled the market for Illinois debt and cost them money.

While state and local governments nationwide are grappling with how to cover revenue gaps stemming from coronavirus restrictions, few are as strained as Illinois, which entered the pandemic with the worst credit rating of any state—just above junk status.

Financial instability at the municipal level has become a national political issue, with both President Trump and Senate Majority Leader Mitch McConnell (R., Ky.) questioning whether states should receive federal assistance during negotiations over stimulus legislation.

Mr. McConnell suggested in April that instead of coming up with a federal bailout for states, Congress should consider allowing them to use bankruptcy protection to cut their debts, an option they don’t currently have. Illinois was the first borrower to access the Federal Reserve’s municipal lending program earlier this year.

No U.S. state has failed to pay bondholders since Arkansas in 1933, although the island territory of Puerto Rico defaulted in 2016 and was later placed under a court-supervised bankruptcy.

The Wall Street Journal

By Andrew Scurria

Updated Aug. 6, 2020 7:21 pm ET

U.S. Lawmakers Seek Probe of Investment Firms' Dealings in Puerto Rico Debt.

(Reuters) – Five members of U.S. Congress from New York said on Wednesday that several investment firms involved in Puerto Rico’s ongoing bankruptcy may have engaged in insider trading and urged the state attorney general to investigate.

In a letter to New York Attorney General Letitia James, the lawmakers cited allegations arising from the island’s bankruptcy litigation “that some hedge fund groups may have been engaging in insider trading and using the PROMESA restructuring process to artificially manipulate bond markets.”

Using the 2016 PROMESA Act, Puerto Rico’s federally created financial oversight board filed a form of municipal bankruptcy for the U.S. commonwealth in 2017 in an effort to restructure about $120 billion of debt and obligations.

“Not only is this another example of deep pocketed interests profiteering off Puerto Ricans’ suffering, but these hedge funds may have also violated securities law,” U.S. Representative Nydia Velázquez, a New York Democrat, said in a statement.

The letter, which was also signed by Congress members Alexandria Ocasio-Cortez, Carolyn Maloney, José Serrano, and Adriano Espaillat, pointed out that the federal judge overseeing the bankruptcy ordered detailed disclosures from the Lawful Constitutional Debt Coalition (LCDC), whose members include Aristeia Capital LLC, Whitebox Advisors LLC, Taconic Capital Advisors LP, and GoldenTree Asset Management.

Those disclosures revealed that LCDC members “significantly increased their holdings of bonds they argued in court were of no value while engaging in confidential mediation talks about their restructuring,” according to the letter.

Meanwhile, the bonds increased in value “and the restructuring plan revealed at the end of the mediation period increased their return.” The LCDC was part of a global settlement announced in February to restructure Puerto Rico’s core government debt.

“An investigation is needed to reveal whether some hedge funds may have made these trades with non-public information obtained through the mediation discussions, and without disclosing their true economic interests,” the letter said.

In a statement, the LCDC said its members “adhered to and respected all elements of the mediation protocol and trading restrictions during the period in which they were negotiating with the oversight board.”

“As creditors with long-term investments in Puerto Rico, our members have consistently engaged in a constructive, transparent manner with the oversight board to facilitate the commonwealth’s timely emergence from bankruptcy and economic recovery,” it added.

The individual firms listed in the letter did not immediately respond to requests for comment or deferred to the LCDC statement.

A spokesman for the New York Attorney General’s office said: “We’re reviewing the letter now, and will look further into this matter.” The oversight board declined to comment.

By Reuters

Aug. 5, 2020

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

New York Lawmakers Seek Probe of Puerto Rico Bondholders.

Reps. Alexandria Ocasio-Cortez, Nydia Velázquez are among those asking New York’s attorney general to investigate allegations that bondholders concealed interests

Five New York-based members of Congress are asking their state’s attorney general to probe whether investment firms that own billions of dollars in Puerto Rico bonds concealed aspects of their investments to manipulate prices and profit unfairly.

In a letter sent Wednesday, the Democratic lawmakers, led by Reps. Alexandria Ocasio-Cortez and Nydia Velázquez, asked New York Attorney General Letitia James to investigate allegations of insider trading using the Martin Act, a broad antifraud statute commonly used to pursue financial crime, or other similar laws.

“Although hedge funds have secured generous settlements and made billions off this crisis, it now appears that their greed may have driven some New York financial institutions to take illegal actions,” said Ms. Ocasio-Cortez, a critic of the management of Puerto Rico’s debt crisis.

Fabien Levy, a spokesman for the New York attorney general’s office, said the office had received the letter.

“We appreciate multiple members of Congress reaching out with their concerns,” he said. “We’re reviewing the letter now, and will look further into this matter.”

The letter concerns allegations that a bondholder committee took public positions that drove down the price of certain debt securities while its members bought them at discounted prices and negotiated a restructuring proposal that improved how they would be repaid.

The lawmakers said those bond trades might have been made without proper disclosure of the “true economic interests” of bondholders, including Aristeia Capital LLC and Taconic Capital Advisors LP.

Puerto Rico’s financial oversight board, which is steering the bankruptcy and leading negotiations, declined to comment.

A spokesman for the bondholder committee said its members “adhered to and respected all elements of the mediation protocol and trading restrictions during the period in which they were negotiating.”

“As creditors with long-term investments in Puerto Rico, our members have consistently engaged in a constructive, transparent manner with the oversight board to facilitate the Commonwealth’s timely emergence from bankruptcy and economic recovery,” the spokesman said.

The Martin Act was used successfully in the early 2000s by Eliot Spitzer, New York’s attorney general at the time, to go after Merrill Lynch and the investment-banking industry. More recently, New York’s attorney general attempted to use the antifraud statute in a case against Exxon Mobil Corp., alleging that the oil giant misled investors about how it accounts for the impact of climate change on its operations by using internal estimates that differed from its public statements.

New York State Supreme Court Justice Barry Ostrager ruled in December last year that the attorney general’s office didn’t prove that the company had violated the law. Lawyers for Exxon said the company had done nothing wrong.

Wednesday’s letter said the Martin Act could be used to investigate possible wrongdoing by Puerto Rico bondholders “and ensure the integrity of the municipal bond markets.”

Puerto Rico entered bankruptcy in 2017 under the weight of government debts, spiraling pension obligations and a poverty rate over 40%. While the bankruptcy has crushed the value of many of the U.S. territory’s bond debts, some savvy investors have profited handsomely, buying bonds on the cheap that have rallied on expectations about how much they will recover.

Since the bankruptcy, some investors have argued that older government bonds should be treated more favorably in a restructuring, saying that more recent debt issuances breached debt limits in Puerto Rico’s constitution and should be reduced or disallowed.

Bondholders generally have to disclose the size of their investments in court filings, but weren’t always required to break down which securities they owned. That changed in May, when the federal judge overseeing the bankruptcy case ordered the submission of more detailed disclosures.

Some bondholders later revealed they owned bonds they had said publicly were of no value while “engaging in confidential mediation talks about their restructuring,” according to the New York lawmakers. A restructuring proposal released after those restructuring talks included higher recoveries for some of the older, disputed bonds compared with earlier discussions, rallying prices.

The lawmakers’ letter called for an investigation “to reveal whether some hedge funds may have made these trades with non-public information obtained through the mediation discussions.”

Other large creditors in Puerto Rico’s bankruptcy have hinted at similar concerns about bondholder disclosures. In March, financial guarantors with billions of dollars on the line asked for greater transparency and raised concerns about bond trading based on nonpublic information. They later amended their court filings to remove those allegations, though they maintained that bondholders had traded and negotiated without making proper disclosures.

U.S. House Members Seek Probe into Puerto Rico Bond Trading.

A group of New York Congressional members are seeking an investigation into alleged insider trading of Puerto Rico debt by hedge funds as the firms were negotiating with the bankrupt island on how to reduce its debt.

The hedge funds may have manipulated bond prices by trading on non-public information while they were involved in mediation discussions and without disclosing their entire exposure to Puerto Rico debt, the federal lawmakers, including Alexandria Ocasio-Cortez and Nydia Velazquez, wrote in a letter to New York Attorney General Letitia James.

“Your office has a powerful tool in the Martin Act to investigate possible wrongdoing by these financial actors and ensure the integrity of the municipal bond markets,” the lawmakers wrote, citing the state’s law that enables attorney generals to investigate securities fraud.

Puerto Rico went into bankruptcy in May 2017 after racking up $74 billion of debt owed by the commonwealth and its agencies during a decade-long economic decline. Hedge funds have been buying the securities for several years at discounted prices.

The letter singles out one ad hoc group of investors called the Lawful Constitutional Debt Coalition. That group includes, as of June 24, 2020, GoldenTree Asset Management, Whitebox Advisors, Monarch Alternative Capital, Taconic Capital Advisors, Aristeia Capital, Farmstead Capital Management, FCO Advisors and Marble Ridge Capital, according to court documents.

“The LCDC’s members adhered to and respected all elements of the mediation protocol and trading restrictions during the period in which they were negotiating with the oversight board,” Greg Marose, a spokesman for the group, said in a statement. “As creditors with long-term investments in Puerto Rico, our members have consistently engaged in a constructive, transparent manner with the oversight board to facilitate the commonwealth’s timely emergence from bankruptcy and economic recovery.”

Puerto Rico’s oversight board declined to comment.

“We’re reviewing the letter now, and will look further into this matter,” a spokesperson for AG James said in a statement.

Bloomberg Markets

By Michelle Kaske

August 5, 2020, 1:12 PM PDT

Supreme Court Validates PR Financial Oversight Board, but Challenges Remain: Skadden

Since PROMESA was enacted in 2016 to pave the way for a comprehensive restructuring of Puerto Rico’s mounting municipal debt obligations, the U.S. District Court for the District of Puerto Rico (District Court) has become a haven for litigious groups of creditors and other constituencies. Undoubtedly frustrated with the progress and trajectory of the cases of the commonwealth and its subsidiaries, these groups have mounted a number of complex legal attacks to the efficacy and validity of PROMESA. However, the debtors recently secured a significant win in Fin. Oversight & Mgmt. Bd. for P.R. v. Aurelius Investment, LLC, No. 18-1334, when the U.S. Supreme Court, reversing a decision of the U.S. Court of Appeals for the First Circuit, concluded that the appointment of the members of the Financial Oversight and Management Board (Oversight Board) — the debtors’ statutory representative under PROMESA — passed constitutional muster.


In 2016, Puerto Rico faced a dilemma: It was burdened by a seemingly insurmountable debt load, yet because Chapter 9 of Title 11 of the United States Bankruptcy Code only permits municipalities of states to declare bankruptcy, it was unable to restructure that debt under the traditional avenue for municipal bankruptcy relief. In response, Congress enacted the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). PROMESA created the Oversight Board and authorized it to, among other things, commence bankruptcy proceedings under the statute on behalf of the commonwealth and its instrumentalities. PROMESA also vests the Oversight Board with significant, sometimes final, authority over the various debtor entities. For example, the Oversight Board — and not the municipal debtors themselves — is the statutory representative of the debtor entities in bankruptcy. Pursuant to the statute, the members of the Oversight Board were appointed by President Obama, without subsequent confirmation of those appointees by the Senate. The Oversight Board commenced restructuring proceedings on behalf of the commonwealth and five of its instrumentalities (PROMESA Cases) in the District Court.

Shortly thereafter, a group of creditors filed a motion to dismiss the PROMESA Cases, contending that President Obama’s appointment of the members of the Oversight Board violated Article II, Section 2, Clause 2 of the United States Constitution (Appointments Clause), which provides that the president “shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States … .” The District Court denied the motion. The First Circuit subsequently reversed, concluding that the appointment process did violate the Appointments Clause. However, the court ultimately found that the actions of the Oversight Board taken to that point were valid under the de facto officer doctrine.1


Writing for a unanimous court, Justice Stephen G. Breyer2 began by concluding that the Appointments Clause, by its plain language, directly applied to the appointment of all “Officers of the United States,” including those exercising power in, or in relation to, Puerto Rico. See Slip Op. at 8-9. However, the Court explained that this conclusion was not dispositive, next addressing whether or not the members of the Oversight Board fell within the purview of the “Officers of the United States” covered by the Appointments Clause. See id. at 9. Justice Breyer read the text to suggest a distinction between “federal officers” exercising powers on behalf of the national government, and officers exercising authority on behalf of “some other government” — which, based on the federalist structure envisioned by the Constitution, included local (usually state) governments. See id. at 9. Noting the unique way that territories such as Puerto Rico fit into this federalist structure, the Court explained that Congress had in fact been given the power to establish localized governance constructs on behalf of territories that were unable to do so on their own (i.e., non-states). See id. at 9-10 (citing Const. Art. I, § 8, cl. 17; Const. Art. IV, § 3, cl. 2).3 Justice Breyer explained that this clearly contemplated a distinct, localized exercise of authority. See id. at 10. And indeed, the Court noted that these powers had long been used to create and fill government offices on behalf of U.S. territories without resort to the process contemplated by the Appointments Clause, and that even Puerto Rico itself had a long-standing history of doing so. See id. at 10-13. Justice Breyer explained that this reflected an underlying trend of permitting such actions to be taken outside of the strict constitutional appointment construct for “federal officers” where the officers and their corresponding duties were “primarily local” in nature. See id. at 14.

Thus, Justice Breyer proceeded to examine whether the statutory mandate and authority of the Oversight Board were primarily local in nature; the Court held that they were. See id. The Court reasoned that the Oversight Board was the statutory representative of the commonwealth and its instrumentalities, effectively all of its powers and responsibilities were circumscribed by Puerto Rican — not federal — law, and it carried out its duties in conjunction with existing commonwealth government officials. See id. at 15-17. That the Oversight Board’s actions in the realm of PROMESA might have broader, national consequences was irrelevant. See id. at 16. In light of the Oversight Board’s “primarily local duties,” the Court held that the selection of the board’s members “is not subject to the constraints of the Appointments Clause.” See id. at 17.4


PROMESA is a unique response to a unique event in modern American history — the solution to crippling municipal debts of an American territory. As such, the statute and structure of the PROMESA process, such as the validity of the Oversight Board appointments, have been subject to numerous legal challenges. While the Supreme Court upheld the validity of the Oversight Board and its appointments, other challenges remain. Indeed, only several weeks ago an insurer of certain Puerto Rican bonds filed a complaint contesting the constitutionality of the PROMESA statute itself.5 This challenge, brought by bond insurer Ambac Assurance, asserts that the PROMESA statute violates the Constitution’s uniformity requirements with respect to bankruptcy legislation. The complaint argues that while the Constitution gives Congress plenary power to legislate on the subject of bankruptcy, such legislation must be uniform and not favor a specific debtor, such as the PROMESA debtors. Whether this latest attack will gain any traction with District Court Judge Laura Taylor Swain remains to be seen, but practitioners and interested parties are wise to continue to pay close attention to the continuing proceedings challenging the PROMESA process and structure.


1 As the First Circuit explained, the doctrine “‘confers validity upon acts performed by a person acting under the color of official title even though it is later discovered that the legality of that person’s appointment … to office is deficient.’” See Aurelius Inv., LLC v. Puerto Rico, 915 F.3d 838, 862 (1st Cir. 2019) (citation omitted). The court applied the doctrine based on its conclusion that (1) the Oversight Board members acted in the good faith belief that they had the requisite authority under PROMESA and (2) unwinding the PROMESA Cases would jeopardize the substantial progress made by the commonwealth and its instrumentalities to date, along with the livelihood of Puerto Rican citizens.

2 The Court’s decision was unanimous, but Justices Clarence Thomas and Sonia Sotomayor wrote separate concurring opinions.

3 The latter is known as the Territorial Clause, which provides in full: “The Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States; and nothing in this Constitution shall be so construed as to Prejudice any Claims of the United States, or of any particular State.” See Const. Art. IV, § 3, cl. 2. The First Circuit’s decision rested largely on its conclusion that the Territorial Clause did not trump the Appointments Clause. See Aurelius, 915 F.3d at 855.

4 In doing so, the Court rejected the First Circuit’s analysis as dependent on case law examining the clause’s role in the appointment of officers exercising primarily federal duties. See id. at 18. The Court seemed to reject an approach that emphasized the legal source of those duties — i.e., state or federal law — instead focusing on the level at which those duties are exercised — i.e., “primarily local” in nature. See id.

5 See Complaint, Ambac Assurance Corp. v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), Case No. 17-03283 (LTS), Adv. Proc. No. 20-00068 (LTS) (D.P.R. May 26, 2020), ECF No. 1.

Skadden Arps Slate Meagher & Flom LLP – Julie E. Cohen, Joseph O. Larkin, Stephen J. Della Penna and Steve Walsh

August 3, 2020

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.

New Water, Sewer Main Extension Rules Issued for Indiana Municipal Utilities: Barnes & Thornburg

Earlier in 2020, the Indiana General Assembly adopted IC 8-1-2-101.5, which requires all municipalities to comply with the water and sewer main extension rules promulgated by the Indiana Utility Regulatory Commission (IURC).

The new statute applies to all main extension agreements entered into after June 30, 2020. All municipally owned sewer utilities are now covered by the IURC rules, even though municipal sewer utilities are not otherwise regulated by the IURC. The rules also apply to all municipal water utilities even if they have withdrawn from IURC jurisdiction.

What does this mean for municipalities? The core impact is that the extension rules govern how much the customer can be required to pay if they request a main extension and what opportunity must be given to the customer to recoup its investment as later customers tap onto the main.

The IURC put together a handout about the new legislation and about its main extension rules.

Another resource is the Indiana Administrative Code for the now applicable water main extension rules and sewer main extension rules.

Barnes & Thornburg LLP – Nicholas K. Kile, Lauren M. Box and Hillary J. Close

August 5, 2020

Moody's Announces Completion of a Periodic Review of Ratings of MBIA Inc.

New York, July 31, 2020 — Moody’s Investors Service (“Moody’s”) has completed a periodic review of the ratings of MBIA Inc. and other ratings that are associated with the same analytical unit. The review was conducted through a portfolio review in which Moody’s reassessed the appropriateness of the ratings in the context of the relevant principal methodology(ies), recent developments, and a comparison of the financial and operating profile to similarly rated peers. The review did not involve a rating committee. Since 1 January 2019, Moody’s practice has been to issue a press release following each periodic review to announce its completion.

This publication does not announce a credit rating action and is not an indication of whether or not a credit rating action is likely in the near future. Credit ratings and outlook/review status cannot be changed in a portfolio review and hence are not impacted by this announcement. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history.

Key rating considerations are summarized below.

The Ba3 senior unsecured debt rating of MBIA Inc. (MBIA) and Baa2 insurance financial strength (IFS) rating of National Public Finance Guarantee Corporation (National) reflect National’s capital resources, the meaningful delinking from MBIA Insurance Corporation (MBIA Corp., IFS rating Caa1) and the amortization of its insured portfolio. Offsetting these strengths is National’s run-off status, which results in a weaker alignment of interests between shareholders and policyholders, its significant exposure to below investment grade credits, as well as the firm’s transition toward a higher risk investment portfolio, which includes substantial investments in debt and equity securities issued by MBIA.

The Caa1 IFS rating of MBIA Corp. reflects the firm’s weak liquidity and capital position following large claims payments in recent years, as well as uncertainties associated with the outcomes of several ongoing loss recovery efforts, which could put either upward or downward pressure on the rating.

The Caa1 IFS rating of MBIA Mexico, S.A. de C.V. (MBIA Mexico) is based on the implicit and explicit support from its parent, MBIA Corp.

This document summarizes Moody’s view as of the publication date and will not be updated until the next periodic review announcement, which will incorporate material changes in credit circumstances (if any) during the intervening period.

The principal methodology used for this review was Financial Guarantors Methodology published in November 2019. Please see the Rating Methodologies page on for a copy of this methodology.

This announcement applies only to EU rated and EU endorsed ratings. Non EU rated and non EU endorsed ratings may be referenced above to the extent necessary, if they are part of the same analytical unit.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history.

© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

Loan Woes Heighten Risks to American Dream Bonds.

Three missed mortgage payments on another megamall property operated by the owners of the bond-financed American Dream development have investors concerned whether the large-scale New Jersey project can withstand the lengthy closure caused by the COVID-19 pandemic.

American Dream developer Triple Five Group missed three straight monthly loan payments on a $1.4 billion mortgage for the Mall of America in Minnesota that it also owns. Last year, Triple Five was forced to put up Mall of America as collateral on a construction loan for American Dream.

“The unknowns of whether the developers will step up makes it very hard for bondholders,” said municipal bond analyst Joseph Krist. “At the end of the day you want to know you have someone behind the credit that will step up and carry a deal during trying times.”

Continue reading.

National Mortgage News

By Andrew Coen

July 29, 2020, 4:06 p.m. EDT

New Jersey Could Allow Local Governments to Borrow to Avoid Budget Cuts.

Lawmakers this week approved legislation that would allow county and municipal governments to issue “coronavirus relief bonds” they would then pay back over 10 years.

Local leaders in New Jersey could issue “coronavirus relief bonds” to help offset shrinking tax revenues under a bill passed this week by state lawmakers.

The legislation, passed 24-16 by the state Senate on Thursday, would allow counties and municipalities to borrow up to 30% of the previous year’s budget with a repayment period of up to a decade, backed by local property tax revenue. Localities could also seek permission from the state to borrow higher amounts with longer repayment periods.

The Assembly approved the bill 57-20 in May.

Continue reading.

Route Fifty.

By Kate Elizabeth Queram,

JULY 31, 2020

COVID-19 and the Future of Transportation in California: Nossaman

On July 23, 2020, the California Transportation Foundation convened a panel of transportation professionals for the webinar “Transportation Outlook: Moving Beyond COVID-19.” The panelists discussed the impacts of the coronavirus and what the future holds for California’s transportation sector in the wake of the pandemic. Below are key takeaways from the panel:

Adjusting to a “New Normal”

Financial Outlook

COVID-19’s Effects on the Construction Industry

Silver Linings for the Future

Although the pandemic has resulted in significant adverse impacts for the transportation sector, there have been bright spots, including:

An end to the coronavirus pandemic is far from certain, but these difficult times have underscored the transportation sector’s resilience. By the panel’s conclusion, it was clear that the collaborative spirit and problem-solving mindset of those working in the transportation industry have been essential to weathering a global crisis over the last several months, and that such qualities will continue to shape California’s transportation future.

Nossaman LLP

By Brandon Nguyen on 07.30.2020

New Municipal Bond Buying Program Comes to Aid of NJ Municipalities During COVID-19 Crisis and Beyond.

Parsippany, N.J. — Finding ways to finance debt has become a major priority for municipalities across New Jersey as a result of the COVID-19 pandemic. The Municipal Excess Liability Joint Insurance Fund (MEL), which serves nearly 65% of all municipalities in the State, has established a special program to provide aid and stabilize the Municipal Bond Market.

The MEL created the Joint Cash Management and Investment Program (JCMI) to purchase short-term (1 year) Bond Anticipation Notes (BAN) at fair market prices to save towns money and enable the continuation of important local improvement projects such as roads, bridges, equipment, and construction. The MEL is the largest workers’ compensation, liability, and property insurer of local governments in New Jersey.

“At the beginning of the COVID-19 pandemic municipal markets were in turmoil, no one was buying municipal debt and interest rates had risen,” said Jon Rheinhardt the MEL Investment Chairman. “We had been working on getting this program operational when we received a call from the Governor’s office asking what we could do to help and how fast we could do it.”

With more than $500 million in funds to invest, the MEL entered the marketplace to help stabilize a tightening municipal bond market.

“Many regular investors left the market due to uncertainty and the few that still bid were at really high rates,” explained Dan Mariniello a Principal with NW Financial Group, which is a financial advisor to the MEL. “By entering the market and bidding a more appropriate market interest rates they were able to stabilize the rising interest rates in the market.”

MEL has already developed a significant market presence. More than $95 million in notes for 26 municipalities have been purchased, which represents approximately 9 percent of the short-term competitive notes sold in New Jersey since April.

The Borough of Ringwood was the first town to benefit from the program.

“We had a $6.5 million Bond Anticipation note coming due in early April,” said Scott Heck the Manager of the Borough of Ringwood. “We were concerned whether or not we would get any bids in light of the economic uncertainty, or that the interest rate would be very high which could seriously affect the community’s budget.” He added, “This program saved us directly with a great rate and also took away the financial uncertainty, and I am grateful.”

To date, the JCMI has focused bidding only on short-term debt from municipalities that are affiliated with MEL, which includes 388 municipalities across New Jersey. However, the success of the program has ultimately benefited all municipalities seeking to finance their short-term debt in New Jersey during this crisis.

“We are always looking for ways to assist our members, but we are also committed to developing programs that positively impact municipalities and the state,” said Joseph Hrubash, Deputy Executive Director of the MEL JIF.

David Grubb, Executive Director and Co-Founder of the MEL JIF said that this is only the beginning. “We will be able to do even more if bills A-3971 and S-2475 are passed, which would authorizes towns to issue ‘coronavirus relief bonds’ to borrow money to cover shortfalls and unanticipated costs that are a direct result of the COVID-19 pandemic.”

The Joint Cash Management and Investment Program was made possible after special rules were adopted (NJAC 5:38-1) in 2019 by the Department of Community Affairs Division of Local Government Services to allow Joint Insurance Funds to expand investments to include the purchase of short and long-term municipal debt.


The Municipal Excess Liability Joint Insurance Fund is the largest governmental self-insurance pool for property and casualty in the country. For more than 30 years, the MEL JIF has provided risk management, training, education, resources and guidance to municipalities, public entities and public officials across New Jersey. Since 1987 MEL JIF has saved New Jersey taxpayers over $3 billion dollars. Visit for details.

July 28, 2020

California’s Infrastructure Bank.

The IBank issues a number of different bonds in order to finance programs

In 1994, California created an Infrastructure Bank (IBank) in state government. It is found in the California Government Code Title 6.7, Division 1, Chapter 1. The formal name of the IBank is The Bergeson-Peace Infrastructure and Economic Development Bank (Section 63002). The IBank is the state’s only general-purpose financing authority. Its purpose is to finance public infrastructure and private development that promote a healthy climate for jobs, contribute to a strong economy, and improve the quality of life in California communities.

Article 1 sets forth a number of findings and declarations. Section 63000 provides the following findings and declarations by the Legislature:

The Legislature finds and declares the following:

(a) Economic revitalization, future development, and a healthy climate for jobs in California will depend upon a well-conceived system of public improvements that are essential to the economic well-being of the citizens of the state and are necessary to maintain, as well as create, employment within the state for business.

(b) It is necessary for public policy to support the efforts of businesses attempting to expand, businesses seeking to locate in California, and local economic development organizations, public agencies, and new entrepreneurs by dedicating public fiscal resources to confront obstacles and barriers that impede economic growth.

(c) Existing mechanisms that coordinate federal, state, local, and private financial resources are inadequate to attract and sustain that level of private investment that is essential to a growth economy.

(d) In order to secure and enhance the economic well-being of Californians, promote economic development in the state, and provide a healthy climate for the creation of jobs, it is necessary for public policy to support the efforts of expanding businesses, businesses seeking to locate in California, local development organizations, public bodies, and new entrepreneurs to gain access to capital through current and potential operations of financial markets.

(e) The high cost and the lack of availability of industrial loans for small- and medium-size businesses is making it difficult for thousands of these enterprises to get established, to maintain their present employment levels, or to expand employment.

(f) The problem of access to capital is acute in the high technology industry clusters because companies must often finance large capital expenditures early in their development cycle, and cannot obtain financing sufficient to cover the cost of those expenditures. Consideration should be given to industry clusters that may include the following:

(1) Health care technology.

(2) Multimedia.

(3) Environmental technology.

(4) Information technology.

(g) The high cost and limited availability of loans and capital has led a number of states to take action to remedy these conditions through concerted public and private investment programs that include efforts to do the following:

(1) Use the state’s access to capital markets more effectively for economic development.

(2) Create financing pools to access national capital markets or help government sponsors and public-private economic development organizations obtain credit enhancement on their own.

(3) Facilitate credit enhancement for selected specific projects.

(4) Provide or arrange for loan insurance.

(5) Create and support secondary markets for loan portfolios of urban and rural economic development corporations and others.

(6) Improve access to international capital markets.

(7) Provide opportunities for public pension funds and other institutional investors to play a larger role in state economic development.

(8) Arrange for or provide subordinated debt for selected projects.

(9) Increase support for local infrastructure development.

(h) Local governments in California bear a primary responsibility for the business of promoting job creation and economic development efforts. California’s continued reliance on autonomous local entities often fails to adequately consider regional impacts of business expansion. Projects of a regional nature need the benefit of a state coordinating function to augment and enhance local economic development and environmental efforts.

(i) The State of California has not embarked on a major infrastructure financing effort since the decade of the 1960’s, despite persistent unemployment and soaring population growth.

(j) California’s ability to compete in a global economy depends upon its capacity to implement policies that take maximum advantage of public and private resources at the local, regional, state, and national levels. These policies should be coordinated with any future legislative plan involving growth management strategies designed to make economic growth compatible with environmental protections. It is the intent of the Legislature in enacting this act to create a mechanism to finance projects needed to implement economic development and job creation and growth management strategies, and to provide a secure and stable funding source for implementation of this act in order to meet critical economic, social, and environmental concerns.

(k) The State of California needs a financing entity structured with broad authority to issue bonds, provide guarantees, and leverage state and federal funds using techniques that will target public investment to facilitate economic development. The goal is to produce more private sector jobs with less public sector investment.

(l) The mechanisms for financing public improvements and private job creation strategies provided for in this act are in the public interest, serve a public purpose, and will promote the health, welfare, and safety of the citizens of the state.

(m) The public policies and responsibilities of the state, including all of the above purposes and functions, cannot be fully obtained without the use of financing assistance and can be most effectively furthered by the creation of the California Infrastructure and Economic Development Bank.

The IBank is housed in GO-Biz, which is the Governor’s Office of Business and Economic Development, and is governed by a 5-member Board of Directors and has a full-time Executive Director to run the daily operations. The Board is comprised of the Director of the GO-Biz, State Treasurer, Director of Finance, Secretary of the Transportation Agency, and a gubernatorial appointee.

The IBank issues a number of different bonds in order to finance programs. According to the IBank, the following are the types of bonds issued:

Industrial Development Bonds (IDBs), which is tax-exempt conduit revenue bond financing for eligible small to mid-size manufacturing companies up to $10 million for the acquisition, construction, rehabilitation and equipping of manufacturing and processing facilities.

IRC Section 501(c)(3) Bonds, which are tax-exempt conduit revenue bonds that provide low-cost financing for capital improvement projects for nonprofit public benefit corporations.

Public Agency Revenue Bonds (PARBs), which is tax-exempt bond financing for government entities used for projects that enhance infrastructure, or the economic, social or cultural quality of life for residents in the community or State.

Exempt Facility Bonds, which is tax-exempt financing for projects that are government-owned or consist of privately used or leased facilities on public -property; such as private airline improvements at publicly owned airports, ports, water facilities and other private enterprises that serve the general-public.

There are a number of benefits to doing business with the IBank, such as its Infrastructure State Revolving Fund Program, which offers below-market interest rates, a non-competitive application process, and no matching fund requirement or federal overlays. It also has numerous bond financing programs as set forth above. These bond programs have competitive applications with technical assistance provided by IBank staff. There is also the Jump Start Loan Program, which is intended to assist low-wealth entrepreneurs in low-wealth communities start, grow, and thrive. This program offers financial literacy training and microloans. There is also the California Small Business Loan Guarantee Program that is focused on helping lenders provide loans to small businesses, farmers and exporters that may not otherwise qualify if it were not for the guarantee.

Among other services, the IBank issues loan guarantees in partnership with seven partner Financial Development Corporations (FDCs) located throughout the State of California. Potential borrowers may contact FDCs directly to apply for a loan through participating financing institutions, credit unions, or Community Development Financial Institutions (CDFIs). These programs include the Infrastructure State Revolving Fund (ISRF); the California Lending for Energy and Environmental Needs (CLEEN) Center, which includes the Statewide Energy Efficiency Program (SWEEP) and Light Emitting Diode (LED) Street Lighting Program; the Small Business Finance Center, which includes the Jump Start Loan Program, which includes the California Small Business Loan Guarantee Program (SBLGP) and Farm Loan Program; and the Bond Financing Program, which includes 501(c)(3) bonds, Industrial Development Bonds (IDBs), Exempt Facility Bonds, and Public Agency Revenue Bonds (PARBs).

According to the IBank, they have financed more than $55 billion in infrastructure and economic development projects throughout the State of California.

California Globe

by Chris Micheli

Chris Micheli is a lobbyist with Aprea & Micheli, as well as an Adjunct Professor of Law at the University of the Pacific McGeorge School of Law.

July 30, 2020 6:23 am

Vegas Train Approved for Record $4.2 Billion of Unrated Debt.

The sale of a record $4.2 billion in unrated municipal bonds to finance a passenger train to Las Vegas moved closer to happening with a key vote in Nevada, promising to test investor appetite for risk amid a coronavirus pandemic.

Nevada’s state board of finance Friday cleared the way for Virgin Trains USA to sell $950 million in tax-exempt private activity bonds for a high-speed rail to the gambling hub from a southern California desert town. The company, backed by Fortress Investment Group private equity funds, had already won the ability to sell $3.25 billion in such debt through a California state agency.

Virgin Trains plans to sell both issues together by September 30, according to spokesman Ben Porritt. That would surpass the biggest unrated tax-exempt deal on record, $1.75 billion the company sold last year for its inaugural rail system in Florida. That line hasn’t run since March because of the outbreak.

The 170-mile (274-kilometer) California to Nevada project is expected to break ground by the end of this year. The company says that its electric trains to a Las Vegas station three miles from the Strip will reach 200 mph and take 85 minutes from the California terminus in Apple Valley.

The cost of the project, about $5 billion, will be covered primarily through the debt, while the company will contribute $583 million, according to a report reviewed by the Nevada board.

“I’m very thankful and appreciative of the jobs that this is going to create as we move out of this Covid recession that we’re dealing with right now and try to get our people back to work,” said Nevada Governor Steve Sisolak, chair of the state’s finance board, before the unanimous vote.

Bloomberg Markets

By Romy Varghese

July 24, 2020, 10:31 AM PDT

New York MTA Looks to Spending Cuts While Congress Debates Aid.

New York’s Metropolitan Transportation Authority is seeking another $350 million of spending cuts in its 2021 budget as the transit agency grapples with billions in lost revenue and Congress negotiates another coronavirus relief bill.

The MTA, the largest U.S. public transportation system, plans to discuss the spending reductions with its board on Wednesday, MTA Chairman Pat Foye said Tuesday in an interview with video site Cheddar. The MTA is reworking its budget as it seeks about $10.4 billion of federal aid for the rest of 2020 and next year. Without additional federal help, the MTA may consider service cuts, employee layoffs and deficit borrowing.

“Those are things unattractive, unpalatable and unacceptable to New Yorkers,” Foye said during Tuesday’s interview. “But obviously we’ve got to balance our books.”

States, cities and mass-transit agencies throughout the U.S. are looking to the federal government for additional help. Public transportation systems are seeking $36 billion to cover lost revenue as riders have avoided subways, buses and commuter rail lines.

Even as ridership declines and increased disinfecting and cleaning costs have rocked MTA’s finances, some municipal-bond investors see the transit agency’s $45.4 billion of outstanding debt as a buying opportunity. Yields on MTA bonds increased this year and the debt offers relative value, according to Citigroup Inc.

Citi’s long-term view on the credit follows S&P Global Ratings’ downgrade of the MTA to BBB+ from A- on July 8, and Moody’s Investors Service in April cut its rating to A2 with a negative outlook, meaning it could be dropped further.

The potential $350 million reduction along with earlier budget cuts and savings from MTA’s plan to reduce headcount could help the agency slash its 2021 budget by $1.1 billion, Foye said. The $350 million spending cut would come from reducing overtime and cutting or ending consulting contracts.

The MTA may not receive the full $3.9 billion it’s requesting from the federal government to help the agency through 2020, S&P analysts said in the July 8 report.

Still, states and cities may get around $500 billion of federal funds, which may be tied to covering coronavirus-related costs, Bloomberg Intelligence analysts Nathan Dean and Eric Kazatsky wrote in a report Tuesday.

Federal lawmakers have only a few weeks to pass another stimulus bill before Congress takes a scheduled August break.

Bloomberg Politics

By Michelle Kaske

July 21, 2020, 11:39 AM PDT

S&P Bulletin: New Jersey’s $9.9 Bil. Borrowing Plan Could Pressure Its Credit

NEW YORK (S&P Global Ratings) July 16, 2020–S&P Global Ratings said today that the credit impact of the recent agreement between the governor and legislative leaders of New Jersey (A-/Negative) to borrow up to $9.9 billion for budgetary relief will depend upon the amount of actual borrowing and its long-term implication for the state’s ongoing structural deficit. The agreement would allow for general obligation (GO) borrowing through fiscal 2021. The state has not yet directed any new borrowing to take place, and the current three-month budget ending Sept. 30 does not call for new cash flow or deficit borrowing, although it defers a substantial amount of expenses that would normally be paid in September 2020 into October 2020. The amount of borrowing in fiscal 2021 will depend on what is included in the state’s fiscal 2021 budget, expected to be enacted in September. However, by authorizing up to $2.7 billion of GO budgetary relief borrowing between now and Sept. 30, the new agreement makes it increasingly likely, in our view, that new legislative action will lead to a borrowing of near that amount, either to avoid budget cuts, or to eliminate the need for the September cash deferrals–particularly cash deferrals to schools. The currently enacted three-month budget anticipates $2.2 billion of cash deferrals from September into October, close to the amount of borrowing that would be authorized. An additional $7.2 billion of borrowing for budgetary relief would be authorized for the state’s nine-month fiscal year ending June 30, 2021. A borrowing of that size would amount to about 27% of the state’s earlier projection of $26.2 billion of budgetary operating revenue for the 12 months ending June 30, 2021, which we would view as a large structural deficit, if it were fully issued long-term for budgetary relief. Over the last several years, the state has typically arranged for up to $2 billion of cash flow notes due within its fiscal year. The governor is expected to release his fiscal 2021 budget proposal in August, which will outline specific borrowing proposals. We believe that until July revenue returns are known, it may be difficult to assess the amount of borrowing needed. The budget relief borrowings are expected to have maturities of three to 10 years, although they could be longer. It is unclear whether the proposed borrowings can pass legal muster, since the state’s constitution requires GO bonds to be approved by popular vote except in the event of “emergency.” The state Office of Legislative Services has raised questions as to what might be permissible. However, we believe that even if courts disallow a GO bond, the state would still have the ability to issue short-term, within-the-fiscal-year cash flow notes, or refund long-term annual appropriation secured debt under a “scoop and toss” structure for near-term budget relief without a popular vote, although perhaps at less favorable interest rates. The state could also defer cash payments across fiscal years, although we would view this as a sign of significant fiscal pressure. No legislation has actually been enacted at this point authorizing the proposed GO bonds, but legal challenges are expected once the proposed bill passes. THE THREE-MONTH ENACTED BUDGET The state extended its fiscal year that normally ends June 30, to Sept. 30, 2020, to allow $1.5 billion of current cash flow borrowing to remain outstanding while it collects in July on income tax payments coming due under the extended July 15 income tax filing deadline, as well as to have more time to assess the effect of the pandemic on revenue before enacting a final fiscal 2021 budget for the nine-month period ending June 30, 2021. The current cash flow notes have a renegotiated final maturity of Sept. 25, 2020, just before the end of the state’s newly extended fiscal year. In our view, the enacted extended three-month budget puts off hard decisions regarding cutting expenditures or raising revenue. The state will need to address these issues in its nine-month fiscal 2021 budget that must be adopted before the end of September. The current three-month budget solves cash shortfalls, after repayment of $1.5 billion of outstanding cash flow notes due at the end of September, by deferring substantial expenses for one month in September into October of the next fiscal year. However, this is not a long-term solution. The enacted three-month budget is similar to the governor’s proposal (see “New Jersey’s Revised Fiscal 2021 Budget: A Work In Progress,” published June 15, 2020, on RatingsDirect), with slightly higher revenues and expenditures, reflecting slightly improved tax collections, and with a slightly higher fiscal end Sept. 30, 2020, fund balance equal to $957 million, or what we calculate as a modest 3.1% of annualized appropriations, compared to the $494 million fund balance projection in the governor’s original proposal. However, without the one-month cash deferrals of expenditures, the state would have a negative ending fund balance at Sept. 30, 2020. (For more information as to the nature of what payments are temporarily deferred, please refer to our earlier report.) Our credit focus remains on the size of the state’s ongoing structural budget deficit between long-term revenues and expenditures, including the significant shortfall in funding of the state’s pension contribution on an actuarial basis. The state has indicated that despite projected budgetary deficits it will increase its annual pension contribution from to 80% of actuarially determined contribution from 70% for the 12 months ending June 30, 2021. In our view, however, funding an increased pension contribution by deficit borrowing for it does not change the size of the structural deficit. We expect the state’s fiscal 2021 budget to provide clues as to the state’s willingness to implement ongoing expenditure cuts or revenue increases. In this respect, a budget that relies primarily on large one-time deficit financing could indicate significant credit pressure.

Continue reading.

Fitch to Assign a S-T Rating to Indiana Fin Auth (Stadium Project) Ser 2005 A-5 of 'F1+'

Fitch Ratings-New York-22 July 2020: On the effective date of July 29, 2020 Fitch Ratings will assign a ‘F1+’ short-term rating to $97,200,000 Indiana Finance Authority lease appropriation bonds (Stadium Project), Series 2005 A-5.


The short-term ‘F1+’ rating assigned to the bonds will be based on the liquidity support provided by U.S. Bank National Association, rated ‘AA-‘/’F1+’/Negative, in the form of a Standby Bond Purchase Agreement (SBPA), The long-term ‘AA+’/Stable rating is based on the rating assigned to the bonds. For more information on the long-term rating, see Fitch’s rating report dated July 21, 2020, at

The SBPA will provide for the payment of the principal component of purchase price plus an amount equal to 37 days of interest calculated at a maximum rate of 12%, based on a year of 365 days for tendered bonds during the daily and weekly rate modes in the event that the proceeds of a remarketing of the bonds are insufficient to pay the purchase price following an optional or mandatory tender. The SBPA will expire on July 28, 2023, the stated expiration date, unless such date is extended; upon conversion to any interest rate mode other than daily or weekly; or upon the occurrence of certain events of default that result in a mandatory tender or other events of default related to the credit of the bonds that result in an automatic and immediate termination. The remarketing agent is U.S. Bancorp Investments, Inc. The bonds are expected to be converted to daily rate mode from the indexed rate mode on July 29, 2020.

The bonds will be issued in the daily rate mode, but may be converted to a weekly, flexible, indexed or term rate mode. While bonds bear interest in the daily and weekly rate modes, interest is paid on the first business of each month, commencing Aug. 3, 2020. Holders of bonds bearing interest in the daily and weekly rate modes may tender their bonds for purchase with the requisite prior notice. The trustee is obligated to make timely draws on the SBPA to pay the purchase price in the event of insufficient remarketing proceeds, and in connection with the expiration or termination of the SBPA, except in the case of the credit-related events permitting immediate termination or suspension of the SBPA.

Funds drawn under the SBPA are held uninvested, and are free from any lien prior to that of the bondholders. The bonds of each series are subject to mandatory tender: (1) upon conversion of the interest rate (except between daily and weekly); (2) upon expiration, substitution or termination of the SBPA; and (3) following the receipt of written notice from the bank of an event of default under the related SBPA, directing such mandatory tender. Optional and mandatory redemption provisions also apply to the bonds.

Bond proceeds were issued to (i) purchase the Stadium Notes, (ii) pay the costs of issuance of the Stadium Bonds, (iii) fund the Debt Service Reserve Account of the Debt Reserve Service Fund and (iv) pay capitalized interest on the Stadium Bonds during construction of the Stadium Project.


Factors that could, individually or collectively, lead to positive rating action/upgrade:

–The short-term ‘F1+’ rating to be assigned to the Bonds is at the highest rating category level and cannot be upgraded.

Factors that could, individually or collectively lead to negative rating action/downgrade:

–The ‘F1+’ rating to be assigned to bonds the will be adjusted downward in conjunction with the short-term rating of U.S. Bank, National Association.

ESG Considerations

The ESG.RS conforms to that of U.S. Bank, National Association.

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimum credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit


Primary Analyst
Mario Civico
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Janet Rosen
Analytical Consultant

Committee Chairperson
Joseph Staffa
Senior Director

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

Additional information is available on

Fitch: Supreme Court Ruling Creates Uncertainty in Oklahoma

Fitch Ratings-New York-16 July 2020: The recent U.S. Supreme Court ruling concerning Native American nations in eastern Oklahoma (Issuer Default Rating AA/Stable) presents the state with a score of jurisdictional issues that will take time to address. However, Fitch Ratings expects the generally cooperative relationship between the nations and the state will help clarify sovereignty issues raised by the ruling and provide for an agreement that limits the long-term credit implications to the state.

In McGirt v. Oklahoma, the court held that three million acres of eastern Oklahoma, which includes 24% of the state’s population and much of the greater city of Tulsa area, remain reservation land of the Muscogee (Creek) Nation. In addition to the Creek Nation, the ruling extends by interpretation to four other Native American nations in the state, as these nations’ boundaries were established through the same federal legislation. In total, these areas account for 43% of the state’s land mass.

In the short-term, the ruling primarily affects criminal prosecution under the federal Major Crimes Act (MCA). An estimated 1,700 tribal inmates tried under state law and currently serving out their sentences may choose to seek a new trial in federal court. The extent to which eligible inmates seek retrial will determine the scale of disruption to the state’s judicial and correction systems but Fitch expects the state to manage this process effectively.

While the Supreme Court majority’s opinion stated that the ruling only considered the MCA, Fitch believes the ruling creates ambiguity around the regulatory and civil powers of the state and its municipal governments, including excise, property and income taxation of up to 200,000 tribal members if they reside within the newly affirmed reservation boundaries. The Court has repeatedly ruled against state or local government taxation of income earned by tribal members on a reservation, land owned by tribal nations and the enrolled tribe members that live on such lands, absent U.S. Congressional action authorizing it.

Following the Court ruling, the state is expected to continue its negotiations with Native American nations to resolve jurisdictional uncertainties on criminal justice and other government functions. Oklahoma has a long history of navigating dual sovereignty with Native American nations and a generally cooperative relationship that will likely continue. Fitch anticipates that current tension around gaming issues in the state may hamper these discussions somewhat, but not materially so. Reflecting the cooperative relationship, following the Court’s ruling, the state, along with the five nations, released a joint statement that noted their significant progress toward an agreement to present to Congress and the U.S. Department of Justice to address any jurisdictional issues raised by the Court’s decision.


Marcy Block
Senior Director
Fitch Ratings, Inc., 300 West 57th Street, New York, NY, 10019

Karen Krop
Senior Director

Media Relations: Sandro Scenga, New York, Tel: +1 (212) 908 0278, Email: [email protected]

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

Additional information is available on

Bond Experts Raise Caution Flags on Detroit's $250M Anti-Blight Borrowing Plan.

Experts say municipal bonds with Detroit’s high interest rates could charitably be called high yield for potential investors. Others might call them junk bonds.

Five years removed from bankruptcy, the city of Detroit is on a path to borrow a quarter-billion dollars to address the city’s extensive blight problem in the middle of an economy destabilized by the ongoing coronavirus pandemic.

Despite the uncertain economy, the municipal bond market is humming and several experts say the city is likely to find investors for the approximately $250 million in bonds Mayor Mike Duggan wants to issue for blight removal.

But some see a range of potentially problematic issues — the city’s history of financial struggles, the scandal-tainted demolition program and the possibility that the pandemic will sharply constrain city revenues.

Detroit also will have to pay an estimated $240 million in interest on the debt in addition to the amount of the high-yield bonds, according to a spokeswoman for the city.

“This deal looks like it has a lot of hair on it,” Daniel Berger, senior market strategist for Refinitiv, a data and analytics firm that specializes in global financial markets, said, referring to risks and obstacles associated with the proposal.

Marilyn Cohen, who worked as an analyst and bond broker before founding Envision Capital Management in California more than 20 years ago, put it more bluntly.

“This to me looks like it’s fraught with disaster,” Cohen said. “Just because you have access to the money because it’s cheap money doesn’t mean you should grab it unless you have all your ducks in a row.”

Duggan is plowing ahead, driven by the severity of the city’s blight crisis and the job opportunities for Detroiters expected to be hired for demolition and rehab work. His plan — known as Proposal N, for neighborhoods — is headed for the Nov. 3 ballot for voters to decide. If approved, the city would issue up to $250 million in bonds to demolish an estimated 8,000 blighted homes and secure another 8,000 vacant houses so they can be more fully rehabbed.

The city has thoroughly considered the cost and affordability of the neighborhood improvement bonds, according to the city’s finance and demolition departments. The bonds will be repaid through property taxes connected to the city’s debt millage, which provides a more stable revenue stream than those more directly affected by the COVID-19 pandemic, such as taxes on casinos.

The city has projected it will lose about $194 million in general fund revenues in the current fiscal year, which began July 1. The projected losses represent about 18% of the previous year’s general fund budget.

Property taxes that flow into the city’s general fund are expected to drop about 6%, or $7 million, this fiscal year compared with the previous year’s budgeted amount. The city is expecting income tax revenues to drop about 13%, or $150 million, from the start of the pandemic through June 2021.

Duggan acted quickly to address the pandemic-related budget crunch. He laid out a series of cuts in April to address the overall $348 million budget deficit the city projected through June 2021.

“In general, national experts are finding that the cities that rely more heavily on property taxes will not experience such an immediate collapse in their revenues from the coronavirus economic contraction,” city officials wrote in response to written questions from the Free Press. Detroit’s CFO”projected a recession scenario for this bond sale and found that even in the recession scenario projection, the city would be able to pay debt service without driving the debt millage rate above the current level,” officials wrote.

The answers provided through the city’s media relations department did not identify the specific city officials who compiled the answers.

Based on the city’s financial modeling, Detroit expects to issue a blend of 64% tax-exempt bonds and 36% taxable bonds that will be repaid over 30 years. The plan is to issue $175 million in bonds next year and $50 million in 2023, leaving room to issue another $25 million in bonds if the market conditions remain favorable, according to a city memo.

The city of Detroit anticipates interest rates on its new bonds to be between 3.64% and 6.58%. That’s significantly more expensive than borrowing by neighbors like Oakland County, armed with the highest possible bond rating. Long-term interest rates on AAA-rated government bonds currently are about 1.45%, according to Berger.

While elevated interest rates are not optimal for the city, they are expected to spur interest in the municipal market because higher interest rates mean higher yields for investors.

“Everybody’s grabbing for yield,” Cohen said.

But Cohen said she would advise her clients to put their money elsewhere.

The city’s recent history of managing demolitions — federal authorities investigated contracting irregularities, among other problems — raises questions about how the bond proceeds would be spent. Cohen said she also has doubts about the city’s ability to repay the debt because the rest of this year and 2021 could be a nightmare for cities’ balance sheets.

“Overall, I just worry about a repeat performance in some way, shape or form,” she said, referring to the city’s historic bankruptcy filing.

City leaders could inspire confidence in their plan if they tapped local businessman Dan Gilbert or someone else qualified in the private sector who could be involved in the city’s blight removal efforts, Cohen said.

Detroit businessman Dan Gilbert has studied Detroit blight and participated in a blight task force in 2014. One bond expert suggested city leaders tap his expertise to boost the city’s pitch to investors should voters approve Mayor Mike Duggan’s $250 million bond proposal.
Detroit businessman Dan Gilbert has studied Detroit blight and participated in a blight task force in 2014. One bond expert suggested city leaders tap his expertise to boost the city’s pitch to investors should voters approve Mayor Mike Duggan’s $250 million bond proposal. (Photo: Junfu Han, Detroit Free Press)

Gilbert has studied Detroit’s blight problem. He was involved in a blight removal task force in 2014 and testified during the city’s bankruptcy trial that year, saying, “I’d probably put myself in the top 1% in knowledge of blight in the city of Detroit.”

In response to concerns about its demolition program, city officials said that a newly established demolition department has policies and procedures in place that have improved operations.

“With the creation of the new demolition department, we assessed existing processes, policies, and failures with the goal to create a more effective and efficient demolition program that meets or exceeds industry standards,” city officials said.

Duggan needs a cash influx to continue fighting blight before more houses deteriorate past the point of saving. The federal funds that previously fueled the city’s demolition efforts are used up.

Since its exit from bankruptcy in late 2014, Detroit has received several credit upgrades from ratings services. Moody’s Investors Service in February rated a portion of the city’s debt as Ba3, which is three levels below investment grade.

Municipal bonds with such high interest rates could charitably be called high yield, Berger said, while others would call them junk bonds.

Duggan’s pitch to sell the plan to City Council and voters has focused on the need to solve Detroit’s vast blight problem so that vacant, dilapidated homes no longer are part of everyday life for children in Detroit.

It’s a compelling narrative to pitch to investors, but they will be more interested in details about the city’s revenue streams and tax base, Berger said.

“It’s quite a story and to explain it to bondholders, it’s quite a job to do,” Berger said. “Investors will get down to brass tacks and it’s either ‘Will they pay or won’t they pay?’ ”

The city’s current debt millage is 9 mills. If voters approve the bonds, the millage will remain at current levels because other debt will be paid off as the city takes on new debt. If the blight bonds are not issued, the millage will fall to 6 mills, according to an analysis of the proposal by the City Council’s Legislative Policy Division.

For the average homeowner, that would be a difference of about $57 in annual property taxes, according to the analysis.

For the most part, the city is no longer under state oversight that was in place post-bankruptcy. However, debt issuance approval is one of the few remaining responsibilities of the state’s Detroit Financial Review Commission, said state Treasury spokesman Ron Leix.

Ron Rose, a member of the commission, praised Duggan’s blight removal efforts so far. Any problems that cropped up were the result of having to tear down so many homes, he said.

Rose said the city has done a spectacular job of financial planning since the bankruptcy, particularly with respect to its pension payments.

“They’ve put themselves in as good a position as any city could’ve done to meet those obligations,” he said.

Detroit Free Press

by Joe Guillen

July 24, 2020

Nuveen Slapped with New Antitrust Suit by Preston Hollow.

Nuveen, a major player in the municipal-bond market, is facing an antitrust suit filed Monday by smaller competitor Preston Hollow Capital, months after the conclusion of a similar case in a Delaware court.

Nuveen and John Miller, the firm’s head of municipal finance, attempted to “organize a boycott” of Dallas-based Preston Hollow through “threatening and anticompetitive” correspondence with banks and broker-dealers, according to the lawsuit filed in New York federal court.

Preston Hollow, which has $3.6 billion in investable assets, posed a “direct threat” to Nuveen — a behemoth with $1.1 trillion in assets under management — and its “ability to buy sufficient high yield municipal bonds,” the lawsuit states. To push the firm out, Nuveen pressured major investment banks, including Goldman Sachs, JPMorgan and Wells Fargo, to stop working with Preston Hollow or lose business with Nuveen, the suit alleges.

The firm is now suing for damages of not less than $100 million.

A spokesperson for Nuveen declined to comment on the matter.

Preston Hollow made similar claims in another suit in the Delaware Chancery court, in which a vice chancellor in April ruled that Nuveen “used threats and lies” to successfully damage the firm. The court, however, refused to issue an injunction against Nuveen, and said Preston Hollow should have instead sought money damages.

The firm also has a pending defamation lawsuit in Delaware Superior Court, where it is seeking $100 million in damages.

Preston Hollow in April said it would “vigorously pursue” monetary damages in the defamation claim and at the time hinted it was looking into lodging the antitrust lawsuit.

“Municipal borrowers deserve a truly competitive marketplace where they are able to select the capital provider that meets their needs in funding their vital projects, not the needs of a large money manager like Nuveen,” Preston Hollow CEO Jim Thompson said. “This is, in essence, the very injustice that the vice chancellor exposed.”

By Rachel Uda

July 21, 2020.

Florida to Use Municipal Bonds to Boost Private Space-Launch Industry.

The state of Florida is getting ready to utilize the issuance of municipal bonds in order to further its agenda of boosting the private space-launch industry. This throws the spotlight on fixed income investors who haven’t yet allocated their exposure to municipal bond exchange-traded funds (ETFs).

Per a Bond Buyer report, “Gov. Ron DeSantis signed legislation in late June enabling Space Florida, the state’s aerospace economic development agency, to bypass approval from the governor and cabinet to issue revenue bonds for private companies pursuing capital projects. The bill’s sponsor, Sen. Tom Wright, R-New Smyrna Beach, said the law provides Space Florida with the same streamlined bonding process afforded to other governmental entities and will foster a more competitive marketplace for the state’s space industry.”

“Space Florida has done a tremendous job in attracting companies to our state,” Wright said in a statement. “From this bill’s passage, they will be able to conduct business and save costs for all involved parties, while ensuring the state of Florida is not on the hook when it comes to issuing bonds.”

“This legislation clarifies and simplifies the process for Space Florida to utilize its bonding authority to further grow the aerospace industrial capacity in Florida,” Ketcham said. “The financing tool kit of Space Florida is akin to a commercial enterprise as it is not backed by the full faith and credit of the State of Florida. This recent legislation removed potential ambiguity on that issue.”


by BEN HERNANDEZ on JULY 16, 2020

The Bay Area's Transit Dilemma: Too Many Agencies, Not Enough Riders.

With budget gaps fraying a large and fragmented public transportation system, transit voices in San Francisco and Oakland push for a single regional operator.

As public transit agencies across the U.S. grapple with budget holes, safety concerns, and ongoing economic uncertainty, a number of policymakers, advocates and officials in the San Francisco Bay Area are calling for the region’s numerous and disjointed systems to join together for better interoperability. Bus and rail operators must coordinate pandemic response plans and reduce barriers to access, or riders will suffer, they say.

“The Covid-19 crisis has laid bare the ways in which our current system puts modes in competition with each other—with serious consequences for access, equity, and the financial stability of the network,” Laura Tolkoff, a regional planning policy director at the think tank SPUR, wrote in a letter to regional transportation leaders on Sunday. “The failure to coordinate service now could leave the Bay Area’s riders with significantly degraded service and access.”

Tolkoff’s letter was addressed to the members of the Blue Ribbon Transit Recovery Task Force, a group of agency leaders, politicians, government officials and stakeholder representatives convened by the Metropolitan Transportation Commission to split up tranches of federal pandemic aid. The MTC—a regional authority charged with coordinating and allocating funding to transportation projects around the Bay—does not have authority to override or require agencies to plan or operate service in tandem with one other. With 27 transit agencies serving the region’s 9 counties and 101 municipalities, lack of coordination is a real problem.

The fragmentation of Bay Area transit has long been a target of local complaints. Back in 1872, “Emperor” Joshua Abraham Norton, a local eccentric known for issuing pretend proclamations via newspaper, called for the immediate construction of underwater link between Oakland and San Francisco. Norton commanded the leaders of the two cities to “determine the practicability of a tunnel under water; and if found practicable, that said tunnel be forthwith built for a railroad communication.”

More than a century later, the real-life Transbay Tube opened as the final segment of the original Bay Area Rapid Transit plan. But while BART provides rail service across a vast area, it is just one player on a crowded stage of transit providers and agencies. From large operators such as the San Francisco Municipal Transportation Agency, Alameda-Contra Costa Transit District, and Caltrain to much smaller ones such as the Golden Gate Transportation District and the Rio Vista Delta Breeze, each agency largely functions as an independent fiefdom, with its own planning, operations, and fare payment concerns. The Bay Area is unique in the U.S. for being a massive metropolitan area without one central transit operator, in contrast with the Metropolitan Transportation Authority in New York City, the Los Angeles County Metropolitan Transportation Authority, or Regional Transportation District in Denver.

That splintering creates problems for riders and taxpayers even under normal circumstances, advocates say. Complaints about afternoon SFMTA trains scheduled to arrive just minutes after a Caltrain departure at the adjacent station are common. A multibillion-dollar BART extension plan that has redundancies with a simultaneously planned Caltrain electrification has been a recent punching bag for local rail wonks.

“There’s never been a better moment to reimagine this entire system.”

Ian Griffiths, the policy director for Seamless Bay Area, a group that advocates for a regional transit merger, said that the pandemic is revealing new frictions, such as the SFMTA bus routes traveling near full capacity, while BART trains that are nearly empty run parallel underground.

“If an alien came to look at the Bay Area and saw those long trains running empty, they’d probably observe that it’s not very efficient,” he said. With ridership and sales tax revenues gutted amid the pandemic, “there’s never been a better moment to reimagine this entire system.”

Efforts by SPUR, Seamless, and other local policy and advocacy groups culminated earlier this year in AB 2057, a bill put forth by California State Assembly member David Chiu that sought to force transit agencies to improve interconnectivity, with efforts like discounted fare programs that work between systems, standardized wayfinding and real-time arrival signage, and a comprehensive system map. “Every agency has wanted to do these kinds of things, but the bill would finally require it,” Chiu said.

The bill would have also convened a task force for tackling harder things like coordinating route planning and considering a common set of bus and rail fares—all paving the way towards a centralized transit-planning authority.

The pandemic knocked AB 2057 off the state’s formal legislative docket in late April. But Chiu, Griffiths, and other advocates are continuing to push their vision while the region’s transit recovery task force splits up emergency transit funding from Congress and develops a cohesive public health plan. They’ve gained support among a few county supervisors and smaller-agency transit managers.

“We are faced with an opportunity that we haven’t had in all the years I’ve served on the commission, which is to look at how transit operates across the region,” Jim Spering, a Solano County Supervisor who is also chair of the task force, said at a virtual meeting in April.

But plenty of transit leaders warn that the devil is in the details. Jeffrey Tumlin, the executive director of the SFMTA, said that forcing big city transit agencies to cede their independent route planning authorities—in the absence of additional state or federal funding—would inevitably mean worsened service quality on systems like his, which is the largest in the Bay and serves 45% of the region’s transit riders. For example, if SFMTA bus arrivals had to match BART’s schedule, it would almost inevitably mean fewer buses for SFMTA passengers than what they have now. “Advocates are just not understanding the massive unintended consequences of their well-intentioned ideas,” he said.

Tumlin said that he and other agency heads recognize that they must work together, and that there are appropriate ways to coordinate, such as creating an official regional service map and helping passengers navigate stations and stops with more uniform and legible signage. State Senator Scott Wiener’s recent bill, which would remove environmental review requirements for simple transit and bike lane projects, is another way the entire Bay Area can speed transit improvements, he said.

Janice Li, a member of the Bay Area Rapid Transit Board of Directors, is conflicted. She said that she believes that advocacy for system integration is logical, and that eliminating certain redundancies could help transit agencies save money. At the same time, she worries about the effects on riders who are already reeling from the pandemic’s grave social and economic impacts.

“Communities of color are already facing evictions, police brutality and the inability to access employment,” she said. Given that those groups have disproportionately used public transit in the past and have continued to as essential workers through the pandemic, “pushing forward with dramatic changes” on transit could be yet another disruption in their lives.

Further complicating these challenges are the dramatic changes that the transit landscape has undergone in the past three months, and which continue to unfold. Virtually every agency in the country is dealing with massive budget shocks, but in the Bay Area that looks different for each fiefdom: Caltrain’s ridership base of tech workers are still largely working from home, and it’s now mulling shutdown. Meanwhile, SFMTA is continuing to transport tens of thousands of daily riders, but still faces $568 million in revenue loss over the next four years.

While the vision of a “seamless” regional transit system was always supposed to about providing better service for Bay Area transit riders, the harsh financial reality could mean fewer transit agencies, period—which could be counterproductive to the original goal, said Bob Allen, the director of policy and advocacy campaigns at Urban Habitat, a housing and transportation justice nonprofit that has urged network coordination.

“Consolidating and saving money doesn’t mean transit is better or more equitable for riders,” he said. “The goal should be to run more and better transit service.”

But that leaves difficult questions for transit agencies across the region as leaders argue about how to fairly allocate resources, with limited emergency aid from Congress eventually set to expire.

“What are the answers? And who makes the answers?” Li asked. “Then the question of restructuring and governance reform also becomes, who lives and who dies? It feels kind of Hunger Games-y.”

Bloomberg CityLab

By Laura Bliss

July 6, 2020, 7:01 AM PDT Corrected July 7, 2020, 10:18 AM PDT

S&P Bulletin: New York City Fiscal 2021 Budget Reflects Caution Amid Uncertain Economic Recovery

NEW YORK (S&P Global Ratings) July 7, 2020–S&P Global Ratings said today that New York City’s $88.2 billion fiscal 2021 adopted budget is balanced and reflects a reduction of $4.6 billion, or nearly 5%, from the fiscal 2020 adopted budget, indicative of the ongoing revenue challenges stemming from the fragile economic recovery as well as uncertainty over further state aid reductions that could be implemented to shore up the state’s financial position. Furthermore, we believe the unknown timing for a rebound in tourist activity could weigh on the revenue forecast, as the governor recently implemented a travel quarantine for visitors arriving from states with high infection rates while federal restrictions on arrivals from many foreign countries remain in place.

We believe the city’s fiscal 2021 budget and June 2020 financial plan incorporate a cautious approach to recovery, including total private sector employment not returning to the precrisis peak until first-quarter 2023. It mirrors S&P Global Economics’ forecast as identified in our report “The U.S. Faces A Longer And Slower Climb From The Bottom,” published June 25, 2020 on RatingsDirect, which indicated that although the recession may have reached bottom in May 2020, the lingering effects of COVID-19 will severely limit upside potential until an effective vaccine is widely available. Over the longer term, we will observe how various changes could affect the city’s revenue sources, including how smaller real estate footprints by major corporations or continued net out-migration by individuals and families could initiate a negative feedback loop of declining property values and lower personal income tax revenue, potentially leading to service cuts. That said, New York City has successfully diversified its corporate tax base with technology and other service sector companies. We believe that this, coupled with excellent universities, diverse entertainment offerings, and attractiveness as a leisure and business travel destination, will lead the city’s economy to ultimately rebound, albeit potentially at a slower pace than that of other large cities.

Central to the budget negotiations and a key factor in adopting the budget is a $1 billion reduction to the New York Police Department’s budget, which consists of:

Shifting $430 million in operating funds to youth and social services and $537 million in capital funds primarily to the New York City Housing Authority;
Limiting overtime costs; and
Reducing headcount by 1,100 by canceling a cadet class.

The revision largely reflects the community unrest that led to a change in expenditure priorities. We believe policing practices could be modified in a way that reduces the social risk stemming from these protests. Furthermore, despite the acceleration in revenue loss from March to June to $9 billion (affecting both fiscal years 2020 and 2021), the utilization of reserves remains the same with $1.3 billion in fiscal 2020 and $2.75 billion in fiscal 2021.

The June 2020 financial plan through 2024 reflects out-year budget gaps in fiscal years 2022 through 2024 at 4.4%, 3.1%, and 3.2%, sequentially, declining to 3.1%, 1.8%, and 1.9% of revenue net of contingency line items for the city’s general and capital stabilization reserves equal to $1.25 billion. Given the recurring personnel and agency expense savings, the projected gaps are smaller than those estimated with the April executive budget. The plan includes restoration of the general and capital stabilization reserves in the out-years as anticipated in the fiscal 2021 executive budget following near depletion in fiscal years 2020 and 2021.

This report does not constitute a rating action.

Howard Taps Bond Market Most Black Colleges Miss Out On.

When Howard University completes a $215 million bond sale this week, it will become the first historically Black college to join in the unprecedented borrowing binge that has swept over U.S. markets.

American universities as a whole have been active participants in this frenzy, with more than 100 of them selling $27 billion of bonds this year. But historically Black colleges and universities, known as HBCUs, have accounted for only $147 million, or 0.5%, of that amount. And that came from a deal that Howard, which was founded in Washington, D.C., in 1867, did in February. The country’s 100 other HBCUs have been left out.

By many measures, the cards are stacked against Black institutions. They tend to serve lower-income students, which makes their balance sheets less robust and their endowments smaller — the sorts of things that may limit prospective bond buyers. No Black institution cracks the top-100 richest schools in the country and HBCUs average $15,000 per student in endowment funds, compared to $410,000 for similar non-HBCU schools, according to a 2018 U.S. Government Accountability Office report.

It is only now, months into the torrid bond-market rebound orchestrated by the Federal Reserve, that Howard’s Chief Financial Officer Michael Masch is confident that investors are ready to buy the school’s debt once again. Masch was forced to put a planned sale on hold in March, when the pandemic briefly caused the bond market to seize up, and has been waiting for the right moment to revive it ever since.

“There was just no market to go to,” Masch said in an interview. “We just folded our tents and faded back into the night and waited until there would be a settling down of the credit markets.”

The sale also marks the first debt offering by an HBCU since the police killing of George Floyd on May 25 sparked widespread protests and a broader national conversation about racism and systemic inequality in the U.S.

The heightened focus on such issues may lure in more buyers than normal and help push down the interest rate that Howard has to pay, bond analysts say, but that will ultimately do little to address the financial difficulties that HBCUs face.

Serving underrepresented groups means that Black institutions have to chip in more for tuition for low-income students than peers, said Emily Wadhwani, an analyst for Fitch Ratings. Their endowments are much smaller as well, with the median endowment coming in at half that of a comparable predominantly white school, according to the 2018 GAO report. The combined endowment of all 101 HBCUs totals about $3.86 billion, a tenth of Harvard University’s endowment, according to an estimate by the United Negro College Fund.

This financial picture is not one that’s rewarded by Wall Street. As a result, even a top-tier HBCU like Howard carries a low investment grade credit rating, despite receiving more than $200 million in direct aid annually from the federal government. Most of the universities that tapped the muni market since the sell-off in March have been in the highest rating tier.

For lower-rated issuers, it costs more to borrow because investors require higher yields to make up for owning riskier bonds. And HBCUs have to contend with racial bias on Wall Street, according to a 2018 academic study that found they pay higher fees than peer schools even when accounting for credit quality, maturity and the size of the deal.

Bill Mayew, a professor of accounting at Duke University and one of the original authors of the 2018 report, said that two years later, such bias likely still exists though he hasn’t done an updated analysis. There is “no reason to suspect any difference in how the market operates,” he said.

“Their resources that they have on hand via a foundation or cash endowments, are often, not always, but often smaller than their peers,” said Fitch’s Wadhwani, who analyzes higher education credits. “How well they fundraise and how long they’ve been around — all of those things are frequently weaker than those of their greater peers.”

The Howard deal has underlying ratings one notch above junk by S&P Global Ratings and Fitch. The taxable offering is scheduled to price Thursday, in a negotiated sale managed by Barclays Plc and Loop Capital Markets. The bonds are expected to carry Assured Guaranty Municipal Corp. insurance, and proceeds will be used to refinance higher yielding debt sold in 2011.

Howard, named for Civil War hero General Oliver O. Howard, head of the post-Civil War Freedman’s Bureau, has awarded more than 100,000 degrees. The university is made up of 13 schools and colleges and hosts a leading research library on African American history. Howard’s alumni include California Senator Kamala Harris, Supreme Court Justice Thurgood Marshall and novelist Toni Morrison.

The timing of Howard’s bond sale during a national reckoning around racial inequality may draw more demand and new buyers to the deal. Clients have been asking about ways they can invest in minority communities, said Ron Homer, head of impact strategy at RBC Global Asset Management.

And investing in HBCUs checks the boxes for impact investment strategies, said Eric Glass, a portfolio manager at AllianceBernstein. “There’s no better social investment within the education space in my opinion,” he said. Glass said he participated in Howard’s February sale, receiving a smaller allocation than he wanted because the deal was “incredibly” oversubscribed.

That interest is already beginning to be reflected on the fundraising side, where HBCUs have lagged historically, according to Michael Lomax, chief executive officer and president of the United Negro College Fund.

In June, Netflix CEO Reed Hastings and Patty Quillan donated $120 million to the UNCF, Spelman College and Morehouse College, the largest individual gift for scholarships at HBCUs ever. Public funding for HBCUs has seen some increased support even amid other pandemic-induced spending cuts. In Florida, Governor Ron DeSantis set aside $123 million in the budget for the state’s historically Black institutions, including $17 million for Bethune-Cookman University, which has been grappling with major financial challenges. And HBCUs received $577 million from the federal stimulus package in April.

The Netflix donation is a breakthrough, but it will take more than a one-time donation to push these schools forward, Lomax said. “This is a community which has received significant gifts but is generally speaking not the beneficiary of the same level of philanthropy as their white peers.”

Still, the Howard sale doesn’t appear to be the prelude to an HBCU bond boom. There are no other such deals on the calendar so far, according to data complied by Bloomberg. Howard plans to come to market again this year, its first new money issuance since 2011, to finance a steam distribution center, said Masch.

But even as the market continues to favor borrowers, HBCUs simply don’t have the financial profile to come to market and take advantage in the way other, richer institutions can, he said.

“If you have a lot of cash around and a pretty robust income portfolio which is not tuition dependent — the bond markets are going to view your ability to repay your debt favorably,” Masch said. “It’s a great opportunity if you have the cash.”

Bloomberg Markets

By Danielle Moran and Fola Akinnibi

July 7, 2020, 9:35 AM PDT

— With assistance by Janet Lorin

S&P Bulletin: Michigan's 2020 Budget Agreement Is Not Expected To Materially Affect Most Schools, Despite Aid Cuts

NEW YORK (S&P Global Ratings) July 8, 2020–On June 29, Michigan’s governor and legislature reached an agreement to balance the state’s 2020 budget for the fiscal year ending Sept. 30. We believe this agreement, which includes a $256 million reduction in per-pupil state aid, does not pose immediate fiscal pressure for most public schools, including locally governed school districts as well as charter schools. This is primarily because the state will be allocating $530 million in federal CARES (Coronavirus Aid, Relief, and Economic Security) Act funding for COVID-19 related expenses that schools have or will incur as they prepare for the 2020-2021 academic year. Our understanding is that this funding will function as a grant to schools to offset related expenses. And while the exact timing and allocation of funds is still uncertain, it affords flexibility as the federal funding can provide relief for COVID-related expenses that may have otherwise been supported by state aid.

The $256 million state aid reduction translates to a $175 per-pupil, or 23%, cut in the August 2020 disbursement to schools, which equates to a 2% cut to the total fiscal 2020 foundation allowance. The August payment is the last payment of the state’s fiscal year, as funding is distributed to schools from October through August in equal increments. S&P Global Ratings maintains public ratings on 317 school districts and 28 charter schools in Michigan, with median enrollment of 1,985 and 811, equating to a median cut of $347,000 and $142,000, respectively. The state has not released new information regarding fiscal 2021 funding since its May revenue estimating conference, at which time it projected a $3 billion budget shortfall, with more than two-thirds of its funding derived from sales and income taxes. We expect more clarity in the coming months as budget deliberations continue for the fiscal year beginning Oct. 1. In our view, as state aid is a major revenue source for charter schools and most school districts, Michigan schools will face increased credit pressure should state aid cuts increase in magnitude in fiscal 2021, especially if they are not offset by additional relief funding. This stress would be heightened for those schools with a greater reliance on state funding, low liquidity, or already limited operations, such as many of our rated Michigan charter schools which have a weaker ratings distribution compared to the sector as a whole. For more information on Michigan charter schools, see our “Charter School Brief: Michigan,” published May 17, 2019, on RatingsDirect.

In anticipation of possible cuts, school districts and charter schools across the state have already begun adjusting their budgets, focusing on staffing plans and expense flexibility. In our view, these decisions will be key to maintaining credit quality. Those that have already taken action will be better prepared for the August reduction and possible further cuts. Many schools annually issue state aid anticipation notes in July and August (and in particular through the Michigan Finance Authority borrowing pool), which should help weather potential cash flow disruptions. We expect the number of borrowers and sizing of borrowings could increase, in anticipation of further cuts. While the pandemic has resulted in certain expense savings from facilities being closed and federal relief provides near-term support, we expect increased costs associated with preparing to reopen in the fall will place a greater burden on schools’ fiscal 2021 expenses. In addition, we believe enrollment trends could also fluctuate for individual schools given uncertainty around modes of instruction, which would have a direct impact on revenues and operations. We expect to monitor state aid updates closely in the coming months and evaluate each school’s operating flexibility, liquidity cushion, and ability to make necessary expense adjustments in response to any further funding cuts.

This report does not constitute a rating action.

Riskier Bet: Why CalPERS, the Country’s Largest Pension Fund, is Getting into Banking.


How does the nation’s biggest public pension system pay down its debts amid a global economic collapse? One idea: Become a banker.

Retired DMV clerks, former firefighters and aging government bean-counters across California, put on your three piece suits: You might be getting into the banking business.

The California Public Employees’ Retirement System, which manages a nearly $400 billion basket of nest eggs for retired public workers across the state, is wading into the rollicking market for private debt.

It used to be that lending directly to small and medium-sized companies not traded on public stock exchanges was the business of big banks. But after the financial crisis of 2008, those traditional lenders were forced to park their money into less risky ventures. And that left behind a financial vacuum into which “shadow bankers” such as private equity financiers have been rushing ever since.

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JULY 9, 2020

California ‘Wall of Debt’ Returns as State Bets on Federal Aid.

California’s “wall of debt” is returning.

Former Governor Jerry Brown coined that term in May 2011 as he pushed for an extension of tax increases to chip away at the mounting burden from payment deferrals, internal borrowing and bonds sold to keep the state afloat in a previous fiscal crisis. It took until this year for the last block of the wall to disappear.

In the face of a $54.3 billion two-year deficit driven by the coronavirus pandemic, the $133.9 billion budget for the fiscal year beginning Wednesday will start to build that wall up again. It defers $12.9 billion in payments to schools and community colleges and borrows $9.3 billion from other funds to avoid steep cuts in the hope that Washington will send additional aid by October.

The blueprint that current Governor Gavin Newsom signed Monday entails some upfront pain. The state’s two higher-education systems will lose about $1 billion combined and $2.8 billion will be slashed from state employee compensation, which would be made up if the federal rescue happens. But the approach to put off cuts to protect residents most in need from the unprecedented crisis risks erecting a debt burden that may take years to dissipate.

“I would expect that California will develop another wall of debt as it tries to solve this budget gap,” said Jennifer Johnston, vice president and research analyst for Franklin Templeton Investments. “The question is just how excessive do they get?”

More Aid

California joins other states raiding reserves and counting on hypothetical federal dollars to deal with the pandemic-induced downturn that has already resulted in the loss of more state and local jobs than were seen in the previous recession. States and cities will need $500 billion in additional federal aid over the next two years to avoid major economic damage, Moody’s Analytics said in a report released last week.

“Nearly overnight, the revenue drop from the Covid-19 recession knocked the constitutional level of school spending more than $10 billion below where it was in last year’s budget,” said H.D. Palmer, a spokesperson for Newsom’s finance department, who added that the K-12 spending deferrals are “to avoid significant reductions to school spending at this critical time.”

“Up to $5.7 billion of these deferrals can be eliminated if the federal government provides the state with additional fiscal relief – funding the governor will continue fighting for,” Palmer said.

A Democrat-backed bill that would give states and cities about $1 trillion has stalled in Congress. Still, many municipal credit analysts believe a round of stimulus will come considering the dire consequences without one.

Citi Backs Big-Government Solutions to Avert State Fiscal Crisis

“It makes sense that they don’t want to make drastic cuts to schools if they’re going to get additional aid from the federal government,” said John Ceffalio, municipal credit research analyst at AllianceBernstein, referring to California. “It’s not ideal, but it’s understandable.”

Brown, who left office in 2019, blasted what he called California’s “wall of debt” after the state deferred payments and used accounting gimmicks leading to nearly $35 billion of budgetary borrowing as of May 2011, according to state documents.

While the coming year’s spending plan doesn’t include deficit borrowing, the general fund is supported by loans from state departments and special accounts, such as a $500 million loan from the underground storage tank cleanup fund, $107 million from the labor and workforce development fund, and $77.7 million from Department of General Services, budget documents show.

Budget Compromise

The deal struck by Newsom and Democratic legislative leaders reflects a compromise between the governor’s May budget that called for immediate expense reductions in July absent $14 billion in federal aid and the lawmakers’ framework that triggered cuts only in October if Congress fails to pass a rescue package. They had to balance a $13.4 billion deficit this year and $40.9 billion in the next.

Under the agreement, should the federal government come through with $14 billion by October 15, the dollars will flow to priorities such as paying off the school deferrals. Officials will also draw down the state’s $16 billion rainy day fund by about half in the year starting Wednesday.

“Now is not the time to slash services, especially when Californians need their government the most,” Assembly budget chair Phil Ting said in statement Friday after the budget’s passage. “We learned from the Great Recession that deep cuts can prolong economic recovery and have no desire to repeat that.”

Franklin Templeton’s Johnston said she hopes that California’s leaders will return to the fiscal practices that helped propel the state’s standing among investors, while they grapple with the current uncertainty wreaked by the pandemic.

“That’s one difference about the way Covid has impacted state and local governments versus any recession. There was no gradual easing into it,” Johnston said. “It’s hard to model, and I think everybody is trying to figure out the rules as we go along.”

Bloomberg Markets

By Romy Varghese

June 30, 2020, 6:00 AM PDT

Chicago’s Pension Debt Soared $1.7B in 2019: City Analysis

Chicago’s pension debt soared by approximately $1.7 billion in 2019, according to the city’s audited annual financial report released Thursday.

In all, Chicago owes $31.79 billion to its four employee pension funds representing police officers, firefighters, municipal employees and laborers, according to the 2019 Certified Annual Financial Report. That is an increase of nearly 5.6% from 2018, according to the report.

Chief Financial Officer Jennie Huang Bennett said that growth was “not surprising” because the city was not required in 2019 — the last full year of Mayor Rahm Emanuel’s tenure — to contribute to its pension funds based on actuarial estimates. That requirement, which took effect in 2020, has helped balloon the city’s deficit.

That law is designed to force the city’s pensions to be funded at a 90% level by 2045, to ensure that funds can pay benefits to employees as they retire.

The city made no significant progress toward that goal in 2019, with the laborers’ and firefighters’ pension funds funding level rising slightly and the police officers’ and municipal employees’ funds funding level flat, as compared with 2018, according to the report.

The firefighters’ fund has the lowest funded level of the four funds at 17%, according to the report.

The laborer’s fund has the highest funded level of the four funds at 43%, according to the report.

The city’s 2020 budget called for the city to contribute $1.68 billion to its four pension funds, city records show.

The city ended the year with $185 million in cash on hand, an increase of $23 million from the end of the 2018 fiscal year, officials said. In addition, the city ended 2019 with a $4 million surplus in its general fund, which it uses to pay for most city services, according to the report.

That allowed the city to add $10 million to its long-term reserves, Huang Bennett said.

The audit provides a snapshot of the city’s finances before the coronavirus pandemic hit, causing a financial catastrophe and blowing a $700 million hole in the city’s 2020 budget.

Huang Bennett told reporters Thursday that the city’s finance team had not seen anything to suggest that the shortfall has grown since Mayor Lori Lightfoot detailed the gap on June 9.

The city’s 2020 budget forecast, released in August 2019, warned that the city’s annual budget deficit could swell to $1.6 billion in 2021 if the economy fell into a recession. Federal data shows a recession began in February, as the pandemic sickened tens of thousands of Americans.

Heather Cherone | July 2, 2020 4:20 pm

Largest Public-Private Partnership Social Infrastructure Project In U.S. History Completed At UC Merced.

MERCED, Calif., June 22, 2020 /PRNewswire/ — After four years, a coalition of organizations has completed the largest public-private partnership (P3) social infrastructure project in U.S. history. The 1.2-million-gross-square-foot campus expansion, known as UC Merced 2020, was officially delivered to the University on June 1.

“This project will enable UC’s newest and fastest-growing campus to serve up to 10,000 students and increase access to the exceptional research, teaching, and public service opportunities provided by the most respected public university system in the world,” says Nathan Brostrom, UC Merced’s Interim Chancellor.

The $1.3 billion project includes student housing, classrooms, teaching and research space, student wellness and counseling facilities, and recreational spaces. Delivery occurred in three phases, beginning in mid-July 2018, with the second phase finished in mid-2019.

The P3 development team, which banded together under the banner of Plenary Properties Merced (PPM), was led by developer and equity provider Plenary in partnership with Webcor; Skidmore, Owings & Merrill LLP, the lead campus planner; and Johnson Controls Inc, which is responsible for operations and maintenance.

Proving the Viability of the P3 Model

Public-private partnerships are collaborations between a government entity and private-sector companies to design, build, finance, operate, and maintain projects, allowing the project to be completed on time or ahead of schedule and typically for a lower cost than would have been possible if the project was developed in a more traditional manner.

“The project was conceived as a design, build, finance, operate, and maintain (DBFOM) project,” says Webcor Chief Operations Officer Matt Rossie. “The University provided a vision. The Plenary Properties Merced team turned the vision into designs, procured subcontractors, installed the infrastructure, constructed the buildings, and commissioned the building systems – all in less than four years.”

“Because of the DBFOM delivery method, everything was designed and built with long-term maintenance, operations, and energy costs factored into the equation, resulting in a project that has been holistically designed and built to provide long-term value,” Rossie adds.

“The project’s on-time completion significantly improved UC Merced’s response to the novel coronavirus pandemic,” Interim Chancellor Brostrom says. “The additional space we have opened on campus will be critical in ensuring that we could comply with social distancing requirements while still serving our students who remained on campus. We are grateful for these partnerships.”

“We appreciate the contributions of all who have had a hand in this accomplishment and we look forward to making sure these new facilities perform to the highest standards and serve the needs of current and future generations of UC Merced students, faculty and administrators,” says Dale Bonner, executive chairman of Plenary Concessions.

“This on-time, on-budget completion of the 2020 Project shows that incredible things can happen when all stakeholders work together with a true spirit of partnership,” adds Bonner.

Overcoming Obstacles

The myriad obstacles the P3 team overcame made the project’s on-time and on-budget completion particularly noteworthy. “This team persevered through floods, wildfires, and a pandemic. They respected their client and the community. They never lost sight of their obligation to deliver this project on time and on budget,” says Rossie. “We all believed in the purpose of the project: building an institution of higher learning that would benefit the residents of the Central Valley and further the futures of young people.”

The project team committed to the local community by locally sourcing workers and ensuring the community benefited from the UC’s investment in Merced. In addition to purchasing locally, project leaders staffed 82 percent of the field labor with local San Joaquin Valley residents. Hundreds of apprentices, who worked a total of nearly 800,000 hours, gained training and experience that will serve as the foundation of future lucrative and successful careers in the construction industry.

Team members were also actively engaged in local volunteer opportunities, from fundraisers and parades to building sets for a local high school play.

The Model of the Future

Public-private partnerships have traditionally been employed for transportation projects. “UC Merced 2020 proves that the P3 model is a highly advantageous way to build social infrastructure projects, as well,” Rossie says. “The project has demonstrated what Webcor’s approach of transparency, collaboration, and partnership with our clients and subcontractor partners can achieve, and sets the stage for future projects to take advantage of the same formula to deliver social infrastructure projects with speed, efficiency, and quality.”

The UC Merced 2020 project has been recognized with numerous awards, including the 2017 Infrastructure Journal Global Award, a 2016 P3 Award, a Public Sector Champion Award from the Performance-Based Building Coalition, and a 2017 award for P3 Social Infrastructure Project of the Year.

About Webcor

Webcor is a premier provider of commercial construction services, known for its innovative and efficient approach, wide range of experience, cost-effective design-build methodology, skill in concrete construction and expertise in building landmark projects. Webcor’s mission is to build structures of superior quality with integrity, continuously improve its processes by employing the best talent in the industry, and add social and economic value to its communities. Founded in 1971 and repeatedly honored as one of the Greenest Builders in California, Healthiest Employers, Top Corporate Philanthropists, Best Places to Work and Largest California Construction Firms, Webcor has offices throughout the state in San Francisco, Alameda, San Jose and Los Angeles. More information is available on the Webcor website and on LinkedIn, Facebook, Twitter and Instagram.

About Plenary

Plenary (previously as “Plenary Group” and now developing and maintaining PPP investments as “Plenary Americas” following its acquisition by Caisse de dépôt et placement du Québec) is North America’s leading long-term investor, developer and operator of public infrastructure. With a reputation built on having delivered diverse and challenging privately-financed public infrastructure projects, Plenary prides itself on innovation and delivering first-class infrastructure on-time and on-budget. Plenary’s project portfolio of $16 billion across both the United States and Canada includes 50 projects in the health, transportation, defense, justice, education and government accommodation sectors. Plenary is recognized for its holistic approach to delivering projects – embracing finance, planning, design and construction, complementary commercial development, asset management and operations. Learn more at or @PlenaryAmericas on Instagram and LinkedIn.

About UC Merced

UC Merced opened in 2005 as the newest member of the University of California system, and is the youngest university to earn a Carnegie research classification. The fastest-growing public university in the nation, UC Merced enjoys a special connection with nearby Yosemite National Park, is on the cutting edge of sustainability in campus construction and design, and supports high-achieving and dedicated students from the underserved San Joaquin Valley and throughout California. The Merced 2020 Project, a $1.3 billion public-private partnership that is unprecedented in higher education, will nearly double the physical capacity of the campus and support enrollment growth to 10,000 students.

S&P: Missouri School Districts' Liquidity And Reserves Should Provide Near-Term Cushion Against Funding Cuts

Key Takeaways

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26 Jun, 2020

S&P: New York State's Withholding Of $74 Million In Aid Could Create Liquidity Pressure For Certain Municipalities

NEW YORK (S&P Global Ratings) June 25, 2020–S&P Global Ratings said today that a decision by New York State to withhold $74 million in aid could create liquidity pressures for the 12 affected cities.

Of the 12 cities, S&P Global Ratings rates four, each of which received a 20% reduction in scheduled Aid and Incentives for Municipalities (AIM) payments for May and June. Of note, the payments are delayed but not permanently suspended.

The move comes amid the state’s budgetary pressures. Although the change to AIM payments is not a major drag on the cities’ budgets (shortfalls range from 2.5% of revenues for Yonkers to 5.2% for Syracuse), it comes on top of an already pressured budgetary environment caused by revenue loss associated with COVID-19 and the deep national recession. Moreover, the reduction comes just as the cities were to close their books for fiscal 2020, leaving management teams with limited ability to reduce expenditures.

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Puerto Rico Puts Private Firms in Charge of Public Power.

The territory’s bankrupt power monopoly signed a 15-year deal with operators including Quanta Services, hoping they can reverse years of mismanagement

Puerto Rico’s bankrupt public power utility signed a long-term deal to outsource the business of delivering electricity, making an expensive bet that private operators can curb the high costs and service problems that have long plagued consumers.

The U.S. territory’s government-owned power monopoly is putting a consortium of operators including infrastructure contractor Quanta Services Inc. in charge of running the electricity grid for 15 years, hoping they can reverse years of mismanagement.

The operators are inheriting steep challenges as they take over an energy system crippled by years of under-investment, a legacy of political interference and lasting damage stemming from the 2017 hurricane season.

The deal marks a seminal moment for the Puerto Rico Electric Power Authority, which emerged as a crown-jewel public asset during and after World War II, powering the island’s industrialization efforts and helping turn it into a manufacturing hub for pharmaceuticals and medical devices.

The utility, known as Prepa, became less efficient over time, skimping on capital investments while piling up debt. When Puerto Rico sank into recession more than a decade ago, demand for power from industrial and residential customers declined, stretching the utility’s finances to the breaking point by 2014.

Putting the consortium—Quanta and its partners ATCO Ltd. and IEM—in charge of the grid will come at a cost, including a roughly $60 million mobilization fee during a yearlong transition period, people familiar with the matter said. In subsequent years, the operators will also receive fixed annual service fees adding up to hundreds of millions of dollars over time, with the potential for additional payments based on performance metrics, one of the people said.

“We understand that electricity is not only about poles and wires and megawatts, it is the enabler of societies and economies,” Wayne Stensby, president and chief executive of the consortium, said during a press conference announcing the agreement, which was first reported by The Wall Street Journal.

“We are truly humbled by the trust you are placing in us and the responsibility you have bestowed to us,” he said.

The deal would maintain Prepa’s ownership of the grid assets, easing its efforts to collect federal disaster relief money.

Proponents of the agreement have said that installing private management at Prepa would help address reliability problems, stabilize the executive ranks and put an end to political interference in the utility’s affairs. Prepa has long been plagued by frequent turnover at the top, with high-level officials cycling in and out depending on the party in power, making long-term capital planning difficult.

The utility has been under bankruptcy protection for nearly three years, weighed down by roughly $13 billion in bond and pension debt and facing a shrinking customer base. Power customers from manufacturers to households have been exploring ways to decouple from the utility, fed up with the cost and quality of service.

Prepa needs to end its bankruptcy to realize the full benefits of the deal, which provides the operators with more favorable terms if the utility can’t exit court protection for an extended period. But the bankruptcy is far from over. Gov. Wanda Vázquez and other leaders have said they won’t raise electricity rates to cover a proposed settlement with bondholders, leaving Prepa with no clear path back to solvency.

“It is now all the more critical to advance the Prepa restructuring agreement to exit bankruptcy expeditiously, or this privatization could become a bridge to nowhere,” a bondholder spokesman said.

The oversight board supervising Puerto Rico’s finances has long favored dismantling the utility’s public-monopoly structure, saying that politically appointed bureaucrats should be replaced with professional outsiders capable of reforming its operations.

“The people of Puerto Rico deserve a power system that can withstand hurricanes to ensure they are safe in their homes, and Puerto Rico’s businesses deserve to open every day without relying on backup generators to ensure they can serve their customers,” board chairman José Carrión said.

Former Gov. Ricardo Rosselló endorsed the privatization push in January 2018, allowing officials to solicit private-sector bidders to run the grid. The move came in response to the aftermath of Hurricane Maria, which left some customers without power for as long as 11 months and made Prepa the target of intense criticism by customers, elected leaders and federal officials.

The grid remains brittle and in need of billions of dollars of federal relief to toughen poles, power lines and generating stations against future natural disasters.

Since filing the largest-ever municipal bankruptcy in 2017, Puerto Rico has explored privatizing a variety of public functions, including seaports, water meters, student housing and traffic-fine collections. But Puerto Rico’s record in past privatization initiatives is mixed, with some residents and politicians wary of turning public corporations over to profit-seeking investors.

Deals to privatize the San Juan airport in 2013 and toll roads in the island’s north in 2011 have been well-received, while a sewer-service privatization in the early 2000s failed to produce the expected savings and was terminated early.

Quanta, ATCO and IEM were selected as the preferred bidder over a competing offer from PSEG Services Corp., people familiar with the matter said. The hope is that the consortium can drive cost savings that will outweigh the fees they collect, lowering electricity rates over time.

The Wall Street Journal

By Andrew Scurria

Updated June 22, 2020 6:21 pm ET

Fed Aid Helps Illinois Cut Unpaid Bills to Lowest in Five Years.

Illinois, the first U.S. state to tap into Federal Reserve aid for pandemic-battered governments, has reduced its unpaid bills to the lowest level since 2015.

The backlog shrank to $4.8 billion on June 12, down from $6.9 billion at the start of the month, according to data from Illinois Comptroller Susana Mendoza’s office. The number, which stood at about $5.5 billion on Wednesday, had swelled to more than $8 billion in April after shelter-in-place policies were enacted.

The state used $1.2 billion of proceeds from a short-term Fed loan to help pay down the bills, said Carol Knowles, a spokesperson for the Governor’s Office of Budget and Management. The Fed established its Municipal Liquidity Facility to help state and local governments bridge funding gaps created by the pandemic.

Illinois cut its bill backlog to five-year low in June after Fed loan
Illinois officials have said that if Congress doesn’t approve additional aid they may need to borrow almost $5 billion more from the Fed facility in the upcoming fiscal year to help close a more than $6 billion deficit. In April, after the state delayed its income tax filing deadline to July, officials forecast a $2.7 billion revenue drop for the fiscal year ending June 30.

Illinois, which has the lowest credit rating among the 50 U.S. states, has struggled with its finances long before the pandemic. Its unpaid bills swelled to a record $16.7 billion in November 2017 after a two-year impasse between then-Governor Bruce Rauner, a Republican, and the Democrat-controlled General Assembly. The state used nearly $6.5 billion in proceeds from a general-obligation bond sale that year to reduce the backlog.

Bloomberg Markets

By Shruti Singh

June 24, 2020, 12:41 PM PDT

— With assistance by Alexandre Tanzi

How Fresno’s County Pension Fund Is Helping Finance its Recovery.

If you live in Fresno County, California, and over the past year you got your first home mortgage, or a small business loan, or a loan to develop some new affordable apartments, there is a chance the local county employee pension fund financed it.

As the economy recovers from the COVID-19 pandemic recession, that chance is even greater, since the county pension fund recently allocated millions more dollars to local investments, in anticipation of greater need for capital locally during the recovery period.

“As we headed into COVID-19 market crisis, we recognized there was a need for more liquidity in the Fresno market,” says Nathan Magsig, a Fresno County Supervisor who is also currently serving as chair of the board of trustees for the county’s public pension fund, the Fresno County Employees’ Retirement Association, or FCERA.

Continue reading.



JUNE 25, 2020

PG&E Rescue Fund Bond Sale Delayed by Drop in Power Demand.

The coronavirus-related economic shutdowns have led to one arcane consequence: delaying California’s sale of $10.5 billion in bonds to finance future wildfire costs.

Power customers are using less electricity with shops and businesses closed, and that has slowed the efforts to pay down bonds sold in the last energy crisis that must be defeased before the new debt is offered.

The delay means the state can’t take advantage of the current rally in the $3.9 trillion municipal market. While investors in need of tax-havens generally seek California bonds, the market now is seeing even greater demand for such securities. Bondholders are set to receive a wall of debt payments this summer that’s expected to exceed the amount of new securities on tap.

“It’s hard to anticipate what the fall is going to look like,” said James Dearborn, director of municipal credit research at DWS. “If they were issuing bonds today, I think they would be well received.”

Last year, California Governor Gavin Newsom and state legislators agreed to establish a $21 billion fund to help utility giants including PG&E Corp. and Edison International cover future liabilities when their equipment ignites catastrophic blazes. Such exposure led to PG&E Corp.’s bankruptcy last year, and its incipient exit will allow it to tap the fund.

The fund was part of legislation needed to keep investor-owned power companies operating as wildfires increase in number and severity. An unusual California doctrine holds utilities liable for wildfires that their equipment sparks, even if they aren’t proven negligent, leaving officials worried about the reliability of power in the most-populous U.S. state.

Helping finance the fund is $10.5 billion to be raised through the sale of municipal revenue bonds. The bonds will be backed by a charge customers are already seeing on their bills from the $11.2 billion in bonds the state sold starting in 2002. That issuance reimbursed California from buying electricity for insolvent utilities hobbled by rising prices and manipulation by Enron Corp. and other companies in the deregulated market.

The catch: California officials have to wait until they can defease those bonds, of which $1.5 billion is outstanding. The amount collected by the $.005 per kilowatt hour charge depends on usage. With the state mandating residents to shelter in place at the end of March, electricity demand dropped. Since the first full week of the statewide stay-at-home order through June 7, homes, businesses and manufacturers used 3.7% less in electricity on an average weekday, according to California ISO, which manages the state’s power grid.

Originally, the bonds were to be retired around the third week of August. Due to lower than projected revenue, the estimate is now mid- to late-September, with the new bonds potentially being sold in October, according to the state treasurer’s office. It’s likely the new bonds would pay back the $2 billion in loans to the fund from the state’s general fund, said H.D. Palmer, a spokesman for Newsom’s finance department.

Contributions from the utilities make up the rest of the fund. PG&E’s share is $4.8 billion. Southern California Edison made its initial contribution to the fund of $2.4 billion in September 2019 and made the first of its 10 annual payments of $95 million in December. SDG&E made its first initial contribution of $322.5 million and its first of its ten annual payments of $12.9 million.

Bloomberg Law

June 22, 2020, 10:33 AM

–With assistance from Mark Chediak.

To contact the reporter on this story:
Romy Varghese in San Francisco at [email protected]

To contact the editors responsible for this story:
Elizabeth Campbell at [email protected]

Michael B. Marois

© 2020 Bloomberg L.P. All rights reserved. Used with permission.

N.Y. Seen With 40% Drop in Tax Revenue, Steepest Fall in U.S.

Tax collections will fall by more than 30% in at least 10 American states due to Covid-19, according to a new report from researchers at Arizona State and Old Dominion universities.

On average, states will suffer a 20% decline in tax revenue, the economists predict. New Jersey and New York have already reported sharp declines, while California is implementing higher taxes on corporations to help deal with the revenue shortfall.

Budget shortfalls are forcing state and municipal authorities to cut jobs and spending, as they did after the 2008 financial crisis when local austerity held back the economy’s recovery. Congress is deadlocked over sending more cash to the states to plug the gap.

Continue reading.

Bloomberg Economics

By Alexandre Tanzi

June 15, 2020, 6:53 AM PDT

Marijuana Taxes Could Help Blunt NY's Pain: Kazatsky (Radio)

MUNIS in FOCUS: Eric Kazatsky, Senior U.S. Municipals Strategist for Bloomberg Intelligence, discusses how legal marijuana could help NY’s fiscal pains. Hosted by Vonnie Quinn and Paul Sweeney.

Running time 04:57

Play Episode

Bloomberg Business

June 12, 2020 — 10:42 AM PDT

California Bets on Trump’s Help With $54 Billion Budget Gap.

In 2009, President Barack Obama’s administration rejected a plea by top state officials to bail out California, whose yawning fiscal hole at the time prompted its comparisons to debt-riddled Greece.

The state needed to solve its problems itself, the feds said. And California did: once the worst-rated state, it slashed spending, paid off debt, raised taxes and overhauled legislative rules to curb political dysfunction hobbling it. Also key: socking away some of its revenue gains from the nation’s record economic expansion into a rainy day account with the hope of avoiding crippling cuts in the next downturn.

Indeed, in January, California, with its highest credit rating in two decades, was expecting continued growth in jobs and revenue and mulling expanding services and moving even more cash into its reserves. But then the pandemic struck. In just two months California lost more jobs than it did through the Great Recession and now faces a $54 billion shortfall through fiscal 2021 — more than three times its record savings account.

The speed and severity of the coronavirus-induced economic downturn, exacerbated by recent civil unrest, has policy makers in Sacramento and statehouses across the country calling on the federal government for more aid. And as the Monday deadline for lawmakers to pass a balanced budget approaches, California’s Democratic leaders are faced with counting on help from President Donald Trump, a Republican who routinely disparages their policies.

“Do you make structural cuts in the budget, or do you just hope that the federal government will recognize the need to fund state and local governments at a time when they’re really bearing the brunt of the responsibility?” said Howard Cure, head of municipal research at Evercore Wealth Management. “How do you make cuts in the budget under those circumstances when there’s really a need for help?”

California is contemplating a combination of raiding reserves, cutting services, internal borrowing and accounting gimmicks to balance its books. That’s similar to other states, some of which have already acted. Missouri slashed education funds, while Illinois, at risk of being the first U.S. state to be cut to junk status, passed a budget dependent on loans from the Federal Reserve and another potential Congressional rescue package.

“It’s a mix of acting now and being in wait-and-see mode,” said Josh Goodman, senior officer with the Pew Charitable Trusts. “There’s some real pain in the decisions that states are making.”

Job Losses Are Shifting to States, Cities After Business Rebound

That was seen in the most recent labor data, which showed that in the past two months, states and cities have cut more jobs than they did in the aftermath of the last recession. While the Trump administration is “unpredictable,” Moody’s Analytics expects it will ultimately approve a rescue package to assist state and local governments because of the consequences, said Sarah Crane, an economist at the company.

“It would have the potential to send us into a double-dip recession, if the money doesn’t come through,” Crane said. “We would think that the administration would try to hold on to their own jobs by doing what they can to preserve American jobs.”

The deep financial hit has largely had little impact on the state’s bonds, which have rebounded along with the rest of the market from the March selloff triggered by the pandemic. California debt due in 2032 is yielding about 1.3%, about 24 basis points more than top-rated debt. That spread, the main gauge of perceived risk, is down from as much as 108 basis points in March.

A Democrat-backed bill that would give states and cities more than $1 trillion has stalled in Congress. California Governor Gavin Newsom said in May that money would reverse the need for around $14 billion in cuts he’s proposed for the year beginning July 1. Those include reducing pay for all state workers by 10% as well as less money for education and safety-net programs such as health care for low-income residents.

Last week, Democratic leaders of both legislative chambers said they’ve agreed on a budget framework that takes a different approach: it counts on federal aid and only triggers cuts in October if it doesn’t materialize. Their plan, if Congress fails to act, relies on measures such as deferring payments and moving the June payroll date for state workers into the next fiscal year. They’re negotiating with Newsom ahead of the Monday deadline.

Complicating the state’s budget struggle is uncertainty from the pathogen: whether there will be a second outbreak; when a vaccine is developed; and if and how businesses will be transformed.

“It’s really challenging to have this type of debate now when not only you’re suffering so much from decline in revenue, but you just don’t know or have any realistic idea when there’s going to be a recovery,” Cure said.

Bloomberg Politics

By Romy Varghese

June 9, 2020, 6:00 AM PDT Updated on June 9, 2020, 7:54 AM PDT

Citigroup Sees Illinois Bonds Already Pricing In Worst Outcome.

When it comes to Illinois bonds, Citigroup Inc. says the worst-case-scenario has already been priced in.

The difference between the yields on the state’s debt and top-rated securities — a key measure of risk — widened to a record high in May on speculation that the financial hit from the coronavirus will make it the first state to see its credit rating cut to junk. That selloff pushed its yields to junk-bond levels, surpassing those on some debt issued by still bankrupt Puerto Rico.

But Citigroup analysts Vikram Rai, Jack Muller and Vedanta Goenka said in a note to clients Monday that a default like Puerto Rico’s is not a risk since the state has many ways to contend with its tax shortfalls. That includes borrowing from the Federal Reserve’s municipal lending facility, as it did last week.

Illinois bond yields surged on risk of cut to junk
The analysts’ comments reflect greater optimism on Wall Street as much of the nation begins to reopen, even though record unemployment and business shutdowns are leaving governments facing massive budget shortfalls.

Illinois’s bonds, which tumbled more than any other state since the pandemic spread in the U.S., have since rebounded along with the rest of the $3.9 trillion municipal market.

The 10-year bonds that Illinois sold in mid-May for a yield of 5.65%, or 452 basis points more than the benchmark, have since rallied. That bond last changed hands Friday at an average yield 4.2%, or a 340 basis-point spread.

“We believe that we could potentially see a downgrade to speculative grade though the GOs are already trading at HY spreads,” the Citigroup analysts wrote. “A default, we believe, is out of [the] question and the state has already announced that it would avail itself of the Fed’s MLF to address its cash flow needs. Thus, we believe that the recent tightening of spreads is reflecting the un-pricing, if you will, of the worst possible outcome.”

Bloomberg Markets

By Danielle Moran

June 8, 2020, 10:30 AM PDT

S&P: Pennsylvania Fiscal 2021 Short-Term Spending Plan Provides Some Breathing Room Ahead Of Substantial Fiscal Challenges

HARTFORD (S&P Global Ratings) June 5, 2020–S&P Global Ratings believes the short-term general fund budget recently enacted by the Commonwealth of Pennsylvania (A+/Stable) provides some budgetary stability by addressing immediate funding demands. However, we expect the pandemic-driven recession will create a sizable budget gap for the commonwealth in fiscal 2021. Pennsylvania’s budget and liquidity management will be crucial to maintaining the commonwealth’s long-term credit quality.

Pennsylvania’s temporary general fund spending plan for fiscal 2021 totals $25.8 billion and funds public education (including pre-kindergarten, kindergarten through grade 12, and higher education) for a full 12 months, while most other agencies are funded for the five months ending Nov. 30, 2020. The budget sustains education funding at 2019-2020 funding levels, fully funds debt service, and makes pension contributions at actuarially determined levels. Approximately $2.6 billion of federal Coronavirus Relief Fund (CRF) funding from the Coronavirus Aid Relief and Economic Security (CARES) Act is appropriated for fiscal 2021, which leaves about $1.3 billion of CRF funding available.

We believe the short-term budget provides additional time to make informed fiscal decisions. Looking ahead, we expect Pennsylvania’s estimated budget gap for fiscal 2021 will be sizable. Officials have projected up to a $5 billion general fund shortfall on a combined basis for fiscal 2020 and fiscal 2021. This represents about 7.1% of combined fiscal-year expenditures, but we expect that the fiscal 2021 budget will shoulder the majority of the shortfall. The Department of Revenue reports that through May, collections were down $2.6 billion (8.2%) for fiscal 2020, of which management estimates $1.9 billion is attributed to delayed tax filing deadlines and $700 million reflects reduced economic activity. Officials expect the commonwealth’s revenue forecasting for fiscal 2021 will be updated before a long-term budget is needed at the end of November. However, the timing of a revenue forecast update is unknown.

It’s unclear how Pennsylvania intends to solve the projected budget gap. But management reports it’s considering various options. Heading into the downturn, Pennsylvania’s rainy-day reserves were a low $342 million or 1.0% of budgeted appropriations. In our view, the commonwealth’s history of prolonged budget impasses, limited willingness to raise taxes, and the budget’s relatively minor level of discretionary spending could also limit options for solving the gap. For example, in 2018, the commonwealth helped solve a $2.2 billion budget shortfall (7% of general fund expenditures) by issuing $1.5 billion of deficit bonds backed by tobacco master settlement payments.

We believe active management of Pennsylvania’s liquidity will remain a key credit factor because officials anticipate the commonwealth’s liquidity needs will substantially increase in fiscal 2021–assuming declining revenues due to the pandemic and level expenditures. Management is currently holding internal discussions regarding options for obtaining additional liquidity, including internal and external sources. Pennsylvania has not borrowed externally since fiscal 2011 when it issued tax anticipation notes to mitigate cash flow imbalances. As of May, there was no balance outstanding against the state’s current $2.0 billion line of credit with the treasury’s short-term investment pool.

The extent of Pennsylvania’s budgetary challenges will depend on the severity and duration of the pandemic’s effects on the economy. S&P Global Economics forecasts a 5.3% contraction in the U.S. economy this year (see “An Already Historic U.S. Downturn Now Looks Even Worse,” published April 16, 2020, on RatingsDirect). Officials report that economy activity has begun to resume with the vast majority of Pennsylvania’s counties expected to be involved in some phase of reopening by June 5, 2020. We incorporate the commonwealth’s history of acrimonious budget negotiations, chronic structural imbalance, and stressed liquidity position into our ‘A+’ rating on Pennsylvania and expect these credit factors to persist as the commonwealth faces new budgetary hurdles in an uncertain economic environment.

This report does not constitute a rating action.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world’s leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

S&P Charter School Brief: New York

As of June 8, 2020, S&P Global Ratings maintains eight public ratings on New York charter schools. New York adopted charter school legislation in 1998, with the first charter school opening in New York City the following year. Per the state education department, as of April 2020, 315 charter schools currently operate in the state, with an additional 36 scheduled to open in the 2020-2021 or later school years. Charter schools in New York City comprise the vast majority (over 80%) of the state total. New York charter schools served over 150,000 students in the 2019-2020 school year (up from 1.7% in 2010); this equates to approximately 6% of the total kindergarten through 12th grade (K-12) state public school enrollment; the state’s charter enrollment is second only to Los Angeles Unified School District in a comparison by district. State charter per pupil funding levels are the highest in the country, with comparatively generous provisions for the special education category.

Continue reading.

Ohio Considers Muni Bonds to Bolster Unemployment Trust Fund.

Ohio could sell municipal bonds to as an option for replenishing its depleted unemployment trust fund in times of economic stress, a group of state lawmakers proposed.

Ohio state Representative Craig Riedel is working on a Republican-sponsored bill that would allow the sale of bonds backed by state employers’ unemployment insurance premiums if it’s cheaper than the federal government loan program. The move comes as record jobless claims, fueled by the coronavirus pandemic that shut down large swaths of the U.S. economy, have stressed unemployment insurance trust funds.

“Currently, in Ohio the only option we have when the trust fund goes to zero is we have to borrow from the federal government,” Riedel said in a telephone interview. “If this bill is passed it would give Ohio a second option.”

Discussions over the bill come as the dire jobless picture in America saw its first signs of reversal. U.S. payrolls rose by 2.5 million in May, beating forecasts for decline and coming after a drop in the prior month that called back to the Great Depression. Still, 21 million Americans are unemployed and the benefits being paid out are rapidly draining state trust funds.

Ohio’s unemployment fund was ill prepared for the surge in claims caused by the virus. At year’s open it had a $1.3 billion balance, a level deemed inadequate for entering a recession, according to the U.S. Department of Labor.

“In recovery periods, revenues into the program exceed outlays to pay benefits. In the case of Ohio, they didn’t really have much of a recovery,” said Wayne Vroman, an economist with the Urban Institute. “They burned through the trust fund between March and April.”

The historic jobless claims have affected state unemployment trust funds across the country. New York, California, Illinois and Texas have all stretched their accounts thin and have requested loans from the federal government.

Ohio expects to empty its fund in a little over a week. Last month it requested $3.1 billion in borrowing authority from the Department of Labor, according to Bret Crow, a spokesman for the state’s Department of Job and Family Services.

Tapping the bond market is a move that was used by Texas, Pennsylvania, Michigan, Illinois, Colorado, Idaho, Nevada and Arizona during the last recession, Vroman said. Currently, interest is waived for federal loans, but it is unclear whether that will continue into 2021 and beyond, said Riedel.

The proposed legislation will just give the state more options to choose from going forward, Riedel added. The interest rates for the federal loans are a bit above 2% during normal times. Rates in the municipal market can be slightly higher, but there is a longer period of repayment and are they often issued with a premium, Vroman said.

“Ohio could’ve raised employer taxes in good times, but they didn’t do it,” Vroman said. “Now they’re facing a more difficult situation because the economy is in bad shape.”

Bloomberg Markets

By Fola Akinnibi

June 5, 2020, 12:16 PM PDT

New York’s MTA Gets Direct Access to Fed’s Lending Program.

New York’s Metropolitan Transportation Authority will be able to access the Federal Reserve’s $500 billion lending program for states and local governments, giving the mass-transit agency another avenue to raise cash as it faces a potential $8.5 billion deficit this year.

The MTA is the largest U.S. mass-transit system. Ridership has sunk on its subways, buses and commuter rail lines as people avoid public transportation and work from home. The agency faces a deficit of as much as $8.5 billion through December. Last month Pat Foye, MTA’s chairman and chief executive officer, sent a letter to Fed Chairman Jerome Powell requesting to tap the municipal lending program directly.

The Fed Wednesday expanded the new program to include smaller borrowers and to allow governors to pick two issuers whose revenue comes from operating government activities — such as mass-transit, airports and toll roads — to access the MLF program directly. New York has designated the MTA as one of them.

“We thank the state for its designation of the MTA as an eligible issuer to the Federal Reserve’s Municipal Liquidity Facility program,” Foye said in a statement Thursday. “This is welcome news that will help improve our dire financial outlook by enabling us to refinance existing short-term debt.”

The Fed created the lending program after concerns over the coronavirus shook the $3.9 trillion municipal-bond market in March. Prices temporarily dropped by the most since at least 1980 and investors yanked record amounts out of mutual funds. The market has since recovered, helped by the possible intervention by the central bank.

Bloomberg Markets

By Michelle Kaske

June 4, 2020, 8:02 AM PDT

Illinois to Sell Debt in First Deal with Fed's Muni Liquidity Facility.

CHICAGO, June 2 (Reuters) – Illinois announced on Tuesday an agreement to tap a new Federal Reserve borrowing program, marking the first state or local government to access funding to address revenue shortfalls due to the economic fallout from the coronavirus outbreak.

Facing high borrowing costs in the U.S. municipal market, Illinois, the lowest-rated U.S. state at a notch above junk, said it entered into an agreement to sell $1.2 billion of one-year general obligation certificates directly to the Fed’s Municipal Liquidity Facility (MLF).

The deal between Illinois and the MLF is expected to close on Friday. Sample purchase rates released by the New York Federal Reserve on Monday indicated a 3.83% one-year rate for issuers like Illinois that are rated BBB-minus and Baa3.

Illinois, which pays the largest yield penalty among states, had originally planned to sell the cash flow debt in the market in early May, but postponed a competitive offering citing market conditions.

Legislation passed by Illinois state lawmakers last month allows for the direct sale of debt to the MLF, as well as up to $5 billion in additional borrowing.

Besides Illinois, few governments have announced plans or have legislation pending to use the $500 billion MLF for loans of up to three years. Analysts have said the program, announced in April, was set up to be the lender of last resort and would make the most sense for lower-rated governments.

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

Illinois to Sell Debt in First Deal With Fed's Muni Liquidity Facility.

CHICAGO — Illinois announced on Tuesday an agreement to tap a new Federal Reserve borrowing program, marking the first state or local government to access funding to address revenue shortfalls due to the economic fallout from the coronavirus outbreak.

Facing high borrowing costs in the U.S. municipal market, Illinois, the lowest-rated U.S. state at a notch above junk, said it entered into an agreement to sell $1.2 billion of one-year general obligation certificates directly to the Fed’s Municipal Liquidity Facility (MLF).

The deal between Illinois and the MLF is expected to close on Friday. Sample purchase rates released by the New York Federal Reserve on Monday indicated a 3.83% one-year rate for issuers like Illinois that are rated BBB-minus and Baa3.

Illinois, which pays the largest yield penalty among states, had originally planned to sell the cash flow debt in the market in early May, but postponed a competitive offering citing market conditions.

Legislation passed by Illinois state lawmakers last month allows for the direct sale of debt to the MLF, as well as up to $5 billion in additional borrowing.

Besides Illinois, few governments have announced plans or have legislation pending to use the $500 billion MLF for loans of up to three years. Analysts have said the program, announced in April, was set up to be the lender of last resort and would make the most sense for lower-rated governments.

By Reuters

June 2, 2020

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

Illinois Becomes First to Tap Fed Loans After Yields Surge.

Illinois, which has faced escalating penalties in the bond market as the coronavirus batters its finances, is poised to become the first state to borrow from the Federal Reserve’s $500 billion lifeline for local governments.

The state is planning to borrow $1.2 billion from the central bank for one-year to cope with revenue losses brought on by the economic shutdowns caused by the pandemic and the delay of its annual tax-filing deadline.

The step comes after Illinois last month put off a planned auction of such short-term debt as the interest rates demanded by investors soared amid concern it could be the first state to have its bonds cut to junk. The deal was put on day-to-day status, and now the state is instead turning to the Fed. The central bank will charge an interest rate of 3.82%, more than a full percentage point less than it paid during a bond sale last month.

“The Federal Reserve Bank worked closely with our team to make this transaction possible through the Municipal Liquidity Facility, which is an important tool the state is using to answer the unprecedented economic challenges posed by the COVID-19 pandemic,” Alexis Sturm, director of the Governor’s Office of Management and Budget, said in the statement.

The closing is planned for June 5, and the borrowing will be repaid on or before June 5, 2021, according to the statement.

Illinois will be the first to tap the Federal Reserve’s lending program, which was rolled out after the municipal-bond market was hammered by a liquidity crisis in March that raised the risk that some governments would be unable to borrow to close temporary budget shortfalls.

Since the announcement of the program, the market has rallied, driving yields on some of the safest securities to nearly zero.

But Illinois continues to face a steep penalty to borrow. That has left it among those that could benefit from the Fed’s loans, since the penalty the central bank is charging is less than it would face in a public debt sale.

Illinois in April lowered its fiscal 2020 revenue projections by $2.7 billion and its estimates for 2021 by $4.6 billion after the stay-at-home order brought a near halt to economic activity. Illinois’s $138 billion of unfunded pension liabilities, lack of savings, and $7 billion in unpaid bills has left it with a bond rating one step above junk.

On Monday, S&P Global Ratings, which has a negative outlook on the state, said Illinois’s fiscal 2021 budget “continues to be precariously balanced, and does not include measures to meaningfully address structural instability.”

Illinois’s General Assembly during its short spring session in May amended the state’s borrowing statutes to allow it to sell short-term debt to the Fed facility. Until now, the state’s short-term borrowing required competitive bids.

The new provision also authorizes longer-term borrowing of up to $5 billion, if merited, from the Fed.

Governor J.B. Pritzker, a Democrat, has been advocating for more aid from the federal government. Pritzker has said he’s seeking more than $7 billion in federal aid to make up for revenue lost amid the virus outbreak.

Bloomberg Economics

By Shruti Singh and Amanda Albright

June 2, 2020, 2:40 PM PDT Updated on June 3, 2020, 8:20 AM PDT

S&P: Illinois Fiscal 2021 Budget Anticipates, And Needs, Additional Federal Aid

BOSTON (S&P Global Ratings) June 1, 2020–S&P Global Ratings believes that Illinois’ (BBB-/Negative) adopted budget continues to be precariously balanced, and does not include measures to meaningfully address structural instability. We consider the fiscal 2021 budget structurally misaligned, as along with an outstanding $7.2 billion bill backlog, the pension and other postemployment benefit obligations are not funded based on actuarial recommendations. On a budgetary basis, the total resources exceed the total expenditures, but the revenue side anticipates an additional $5 billion in either additional direct federal aid or borrowings through the Federal Reserve’s Municipal Liquidity Facility (MLF). Whereas we believe that additional direct federal aid is possible, the amount, timing, and potential restrictions on use are unclear at this point, and so budgeting potential use introduces risk.

Should additional federal aid not be received or not be received to provide liquidity in time for budgetary use, the state passed legislation allowing for MLF borrowing, with potential repayment over up to a 10-year period, although the current MLF authorization allows only for 36-month repayment schedules. Management indicates that the $5 billion may not be borrowed at one time, but if needed, could be tapped in various borrowings from the MLF over the fiscal year. There is capacity in the MLF authorization legislation for an additional $5 billion from Illinois, but such a borrowing simply shifts the repayment to future budget years, and the hope for additional aid is a precarious assumption. The state recently sold $800 million in tax-exempt general obligation (GO) bonds on the open market, demonstrating some level of market access, and the MLF is designed to provide liquidity when other market conditions would be uncertain or costly.

The new budget has a $39.0 billion operating component and then another $3.9 billion in additional expenditures, including statutory transfers out, debt service, and other borrowing repayments (including those needed to fund operations in fiscal 2020). All spending considered, the $42.9 billion budget is 5.8% larger than the fiscal 2020 budget. Illinois entered into this recession slowly working toward budget stability, but with little to no money in the budget stabilization fund (BSF). Where many other states had taken advantage of the long economic expansion following the Great Recession, Illinois faced political gridlock through multiple fiscal years, built a significant bill backlog, delayed action to reduce a sizable pension obligation, and could not accumulate a rainy day fund. We consider the state’s current options available to address the pandemic to be limited, compared to those of other states.

In the 2021 budget, the revenue side introduces more risk. Compared with the draft executive budget presented in January, the adopted budget reflects over a $4 billion decrease in recurring revenues, or 10.5% lower. The nominally largest revenue decrease is in the individual income tax line: the $1.8 billion decrease is 8.8% off the January estimate. But the sales tax estimate decrease is a larger percentage decline, with the almost $1.6 billion reduction reflecting a 17.5% decrease in assumed receipts for the fiscal year. These, and all other, revenue declines are offset through an increase of $300 million in interfund borrowing, the previously mentioned $5 billion MLF borrowing or federal aid receipts, and $1.274 billion in potential new individual income taxes, should a constitutional amendment pass in November instituting a graduated income tax. The original estimate of additional revenue receipts attributable to the graduated income tax was $1.435 billion, and so the state is reflecting a reduction caused by the recession.

So, in order to fully meet the total expenditure obligations in the budget, the state is relying on interfund borrowing, either federal aid or further federal borrowing, and the support of the electorate to vote to revise the tax structure to raise more revenue. Should any of those not materialize as expected, the state will need to look to more significant expenditure cuts through later legislative action. We believe the state has capacity to make cuts to close a gap, as there are no cuts in the current budget.

Illinois expects that the $5 billion MLF borrowing would be tapped if direct federal aid is not sufficient in terms of timing or amount. Should the direct federal support not materialize as hoped, the security for the MLF borrowing is the state GO, and we would view this borrowing on parity with existing GO debt. Currently the outstanding GO debt has a relatively rapid maturity with 74% retired within the next decade, and so there is some replacement capacity, but by our calculations, Illinois already has the fifth-highest debt per capita in the nation. Debt service on existing debt declined from fiscal 2020 by 11% or $211 million in the adopted fiscal 2021 budget.

The expenditure side of the fiscal 2021 budget holds most line items to the fiscal 2020 spending levels, but there are no layoffs or program eliminations being adopted to help balance the budget. Level funding, though, will extend personnel and purchasing controls put in place at the outset of the pandemic, into fiscal 2021. The school funding formula is set equal to fiscal 2020; however, this is $350 million less than the state intended to fund for fiscal 2021 when it revised its school funding formula several years ago, and $462 million or 5.2% less than the governor’s original budget earlier this year. The college and university system, although funded $129 million less than in the January draft budget, is also level funded to the fiscal 2020 budget. So, the state is holding the districts to level funding assumptions, but with existing teacher contracts and other obligations, we do expect cuts to be passed down to the local school level decision-makers.

There are a couple of credit positives in the adopted budget. First, the statutorily set annual pension contribution is being fully met. As the statutory pension funding is designed to attain a 90% funded status in 2045, this is one of the least conservative funding methodologies in the nation among state peers, and so anything less than meeting this obligation would have been seen as a notable credit negative. Second, the state appropriated the necessary amounts to support the priority lien ratings we have tethered to the state, Build Illinois (BBB/Negative), Metropolitan Pier and Exposition Authority (MPEA) (BBB/Negative), and Illinois Sports Facility Authority (BBB/Negative), with additional provisions to support the MPEA operations.

As we have noted in past reports, Illinois has a history of leaving difficult fiscal choices to future budgets, and to the extent that expected federal aid does not materialize and the state does not adjust expenditures to reflect available resources, the fiscal 2021 budget could weaken the state’s credit trajectory.

Fiscal Year 2020 Closeout
The state expects a $2.7 billion shortfall through the end of the fiscal year and is closing that gap predominantly through federal aid and borrowing. Not all of this is lost revenue, however, as income taxes will be due in the next fiscal year, on July 15, conforming with the federal change to the tax filing date. The largest component of the resources needed to close the fiscal 2020 gap is a $1.2 billion borrowing likely through the MLF. The contemplated GO Certificate Series of June 2020 would need to be repaid in June 2021. This borrowing provides immediate cash flow support, but does create a cash flow pressure for the time of repayment. Additionally, the state is using other interfund borrowings to close out the fiscal year, including $400 million through the Treasurer’s Investment Pool. In times of fiscal challenge, we often see budget gaps closed with use of reserves, expenditure cuts and deferrals, new revenues, and debt. As Illinois entered the recession without reserves to tap, and believes state government services critical to responding to the pandemic, the solutions to date have all been on the debt and federal assistance side of the ledger.

The state has over the past three months received more than $5 billion in federal aid. Much of that has restrictions on use, in that it has to be used to cover costs associated with fighting COVID-19. As the state’s expenditures to date have not been to this level, and the state has until Dec. 31, 2020 to account for the spending, the receipt of these funds has been helpful in addressing the unbudgeted costs associated with the pandemic.

Unemployment Insurance Fund
The state has been authorized by the federal government to borrow up to $5 billion in May and $6.4 billion in June to help pay claims or replenish unemployment insurance funds. This shows the severity of social distancing measures affecting the economy. Federal law mandates that if a state fails to fully repay a loan after approximately two years, the state unemployment tax credit on employers in that state decreases in each subsequent year in favor of a greater allocation of the tax rate to the federal government, until the state repays the loan. States also have the ability to issue bonded debt to repay such loans, and Illinois issued $1.5 billion in the series 2012 A, B, and C bonds for this purpose. Therefore, the federal borrowing aids in immediate liquidity and supporting the ability to pay claims, and S&P Global Ratings does not consider this federal loan as debt, until it is repaid through a public bond sale, but it does introduce another potential longer term credit pressure.

We recently revised the outlook on the State of Illinois to negative. For further detail, please see our full analysis published April 28, 2020.

Related Research
Illinois Fiscal 2019 Audit Shows Little Improvement, As Expected, May 8, 2020
State of Illinois, full analysis, April 28, 2020
This report does not constitute a rating action.

1 Jun, 2020

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world’s leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

S&P: California Governor’s May Budget Revision Outlines School Cuts And Reserve Drawdowns

Highlights Of The Proposal

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3 Jun, 2020 | 15:35

Federal Reserve’s Municipal Liquidity Facility: Arizona Impact - Ballard Spahr

On April 9, 2020, the Municipal Liquidity Facility (MLF) was established pursuant to Section 13(3) of the Federal Reserve Act to assist States and certain local governments with their increased liquidity needs due to the coronavirus pandemic. In general, the MLF provides for the establishment of a special purpose entity to purchase up to $500 billion of short-term securities (Eligible Notes) from U.S. states, counties with populations in excess of 500,000 and cities with populations in excess of 250,000 (referred to as Eligible Issuers) whose general obligations or issuer credit were rated, as of April 8, 2020, at least BBB/Baa3 by two or more major nationally-recognized statistical rating organizations. Eligible Notes are tax anticipation notes, tax and revenue anticipation notes, bond anticipation notes and other short-term notes issued by Eligible Issuers, provided that the notes mature no later than 36 months from the date of issuance.

In Arizona, Eligible Issuers are the State, Maricopa and Pima Counties and the Cities of Phoenix, Tucson, Mesa, Chandler, Scottsdale and Glendale. And, for the purposes of the MLF, Eligible Notes would generally be tax anticipation notes issued by the State of Arizona pursuant to Article 1, Chapter 3, Title 35 of the Arizona Revised Statutes and tax anticipation notes, grant anticipation notes and revenue anticipation notes issued by a county or city pursuant to Articles 3.1, 3.2 and 3.3, respectively, of Chapter 3, Title 35 of the Arizona Revised Statutes.

State tax anticipation notes may be issued for a term of six months in an aggregate principal amount not exceeding 50 percent of the ad valorem taxes and 50 percent of the excise taxes not expected to be collected during the current fiscal year at an interest rate not exceeding 9 percent per annum.

In the case of tax anticipation notes of a county or city which is an Eligible Issuer, the principal amount of the notes cannot exceed 90 percent of the taxes that are not expected to be collected in the current year (for whatever reason), taxes thereafter received must be applied to pay down the note and the notes must mature on or before July 31 following the fiscal year in which they are issued.

Revenue anticipation notes may be issued and sold in advance of the receipt of revenues by a county or city which is an Eligible Issuer (other than ad valorem property taxes, grants, sales taxes, or transaction privilege taxes or State or restricted revenues) provided that the notes must mature not later than the fiscal year in which issued.

In addition, the MLF would permit Eligible Issuers to borrow funds to purchase similar notes from subordinate political subdivisions or other governmental entities in order to assist those entities with their liquidity needs. Although the State of Arizona has announced its own AZCares Fund, this represents a decision by the State to make $441 million of the $1.86 billion it received in Federal coronavirus relief funding available to some Arizona municipalities which do not qualify as Eligible Issuers.

The Federal Reserve Bank of New York has established the Municipal Liquidity Facility LLC, a Delaware limited liability company, as the special purpose purchaser of the notes. The LLC has issued a term sheet and FAQs here. An Eligible Issuer can indicate its desire to participate in the MLF by filing a “Notice of Interest” with the Federal Reserve Bank of New York. The Notice of Interest can be found here.

The Federal Reserve, and most commentators, regard the MLF as a lender of last resort, intended to fund Eligible Issuers that might not otherwise have access to the credit markets. Notably, the published interest rates at which the LLC will purchase Eligible Notes are based on a comparable maturity overnight index swap plus an applicable spread based on the rating of the Eligible Notes being purchased. For example, in the case of AAA/Aaa-rated Eligible Notes, the spread is 150 basis points; in the case of A+/A1-rated Eligible Notes, the spread is 240 basis points; and in the case of BBB/Baa3-rated Eligible Notes, the spread is 380 basis points.

For further information or assistance in analyzing or accessing the MLF, please contact Bill Hicks (602-798-5423), Michele Bax (602-708-5483), or Tyler Cobb (602-798-5420).

by the Public Finance Group

June 5, 2020

Copyright © 2020 by Ballard Spahr LLP.

Supreme Court Upholds Puerto Rico Financial Oversight Board.

WASHINGTON — The Supreme Court on Monday upheld the oversight board established by Congress to help Puerto Rico out of a devastating financial crisis that has been exacerbated by the coronavirus outbreak, recent earthquakes and damage from Hurricane Maria in 2017. The justices reversed a lower court ruling that threatened to throw the island’s recovery efforts into chaos.

In a unanimous holding, the court will allow the oversight board’s work to pull the island out of the largest municipal bankruptcy in U.S. history to proceed. At one point, Puerto Rico faced more than $100 billion in debt and unfunded pension obligations.

The case stemmed from a constitutional challenge to the oversight board’s composition led by hedge funds that invested in Puerto Rican bonds. A lower court ruled last year that board members were appointed in violation of the Constitution because they were not confirmed by the Senate.

The president selects the board’s seven voting members. They and one other non-voting member chosen by Puerto Rico’s governor approve budgets and fiscal plans drawn up by the island’s government. The board also handles bankruptcy-like cases that allow the island to restructure its debts.

In his opinion for the court, Justice Stephen Breyer wrote that the board’s makeup is not controlled by the Constitution’s provision on appointments, but by a different provision giving Congress significant control over U.S. territories, including Puerto Rico.

“The Board’s statutory responsibilities consist of primarily local duties, namely, representing Puerto Rico in bankruptcy proceedings and supervising aspects of Puerto Rico’s fiscal and budgetary policies. We therefore find that the Board members are not “Officers of the United States.” For that reason, the Appointments Clause does not dictate how the Board’s members must be selected,” Breyer wrote.

Justices Clarence Thomas and Sonia Sotomayor, whose parents moved to New York from Puerto Rico, wrote separate opinions agreeing with Monday’s outcome, though Sotomayor said she did so reluctantly.

“The Board’s decisions have affected the island’s entire population, particularly many of its most vulnerable citizens. The Board has ordered pensions to be reduced by as much as 8.5 percent, a measure that threatens the sole source of income for thousands of Puerto Rico’s poor and elderly. Other proposed cuts take aim at already depleted healthcare and educational services. It is under the yoke of such austerity measures that the island’s 3.2 million citizens now chafe,” she wrote.

Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act in 2016, creating the board and allowing the president to appoint members without Senate confirmation. The hedge funds sued and won a ruling in the Boston-based 1st U.S. Circuit Court of Appeals, which includes Puerto Rico. The board was allowed to keep functioning in the meantime.

Almost a year ago, the justices agreed to review the appeals court decision on a relatively quick basis, scheduling arguments for October. But it took the court nearly eight months to issue its own decision.

Many who oppose the board and resent the austerity measures it has imposed on the U.S. territory lamented Monday’s ruling. Jenniffer González, Puerto Rico’s representative in Congress, also seized it as an opportunity to push for statehood.

“This decision proves once again that if Puerto Rico wants to have control over local affairs, it must become a state,” she said.

But the oversight board itself said it would continue its work “to help Puerto Rico recover from an unsustainable debt burden and decades of fiscal mismanagement.” In a statement issued following the decision, the board said, “It is paramount that we turn the corner from this crisis as soon as we can.”

By The Associated Press

June 1, 2020

S&P: Sunshine State's Tourism Slump Clouds Budget Outlook

With Florida’s (AAA/Stable) general revenues declining nearly 28% for the month of April relative to estimates, the state’s positive momentum for much of last year has all but stalled as recessionary headwinds intensify. Additionally, as the unwelcome hurricane season approaches, the state’s phased efforts to safely re-open its economy could be further challenged by a natural disaster. While the short-term economic outlook remains murky, S&P Global Ratings believes the state is well positioned to address the mounting challenges over the near term supported by its strong structural budgetary management and reserves.

Coinciding with the beginning of spring break, the final quarter of the fiscal year is typically when general revenues peak. With the onset of the COVID-19 pandemic in early-to-mid March, however, the state’s economic activity largely began to idle, reflecting a considerable slide in its sales tax collections. With two months left in collections, the state’s general revenues would have to increase at least 11% more than initially estimated to make up the difference. Additionally, while its total net collections for the fiscal year are down 2.6% relative to forecast, April collections largely reflect economic activities that occurred in March just as economic activities were slowing. The Office of Economic and Demographic Research noted, however, that certain declines, including corporate income taxes, highway safety fees, and corporate filing fees, reflect deferments in payment now due in June and beyond. Collectively, these revenue sources represented 35% of the total revenue collection decline for the month. Given our baseline assumption that U.S. economic activities will not meaningfully rebound until later in the third and fourth quarters of the year, we do not anticipate the state’s collections quickly returning to near-estimated levels, but rather gradually growing as economic activity improves. (For additional information, please see “An Already Historic U.S. Downturn Now Looks Even Worse,” published April 16, 2020, on RatingsDirect.)

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Supreme Court Upholds Federal Response to Puerto Rico Debt.

The case concerned the constitutionality of appointments to a government board charged with restructuring billions of dollars of debt.

The Supreme Court on Monday unanimously upheld a key aspect of the federal response to the worst debt crisis in Puerto Rican history, one that threatened basic services like schools and hospitals, some $50 billion in public pension obligations and more than $70 billion in debts to bondholders. The crisis worsened after Hurricane Maria destroyed much of the island’s infrastructure in 2017, with the commonwealth estimating that recovery costs would exceed $139 billion.

The court ruled that members of a government board created by Congress in 2016 to clean up the financial mess had been properly appointed. Had the court come to the opposite conclusion, its ruling could have undone years of work on restructuring the commonwealth’s debts.

The 2016 law at issue in the case — the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA — created an independent entity to restructure the commonwealth’s debt, the Financial Oversight and Management Board. Since then, the board has tried to resolve about 165,000 claims from creditors, not always to their satisfaction.

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The New York Times

By Adam Liptak

June 1, 2020

Puerto Rico Board Backtracks on Planned Bondholder Payments.

The board overseeing Puerto Rico’s finances concludes it doesn’t have the money to cover bondholder payments under a $35 billion restructuring plan

Puerto Rico’s financial oversight officials are backing away from commitments made to bondholders as the economic damage from the coronavirus becomes clearer, according to people familiar with the matter.

The board overseeing Puerto Rico’s finances has concluded it won’t have a sufficient surplus to cover bondholders’ settlement payments under its current debt-adjustment proposal, these people said.

The proposed restructuring, which writes down $35 billion in government bonds by 70%, laid out a path to end the U.S. territory’s court-supervised bankruptcy with the backing of major creditors. But the business and travel restrictions put in place to combat the spread of Covid-19 cut into the revenue needed to settle the government’s debts to bondholders and pensioners.

The board, which sets Puerto Rico’s repayment terms, is considering trying to renegotiate the proposed settlement and avoid sparking litigation with creditors, people familiar with the matter said.

A spokesman for the board said it would meet Wednesday to approve a new fiscal framework that would lay out how much bondholders could be repaid over the coming years.

Elected leaders in Puerto Rico have said the proposed terms are no longer workable, reflecting anxiety about the pandemic’s economic impact, which the island’s fiscal agency has estimated could reach $5.7 billion through the 2022 fiscal year.

The fallout from stay-at-home mandates and social-distancing guidelines also has darkened the outlook for many U.S. states, though none are under as much fiscal strain as Puerto Rico. As a territory, Puerto Rico can’t borrow from the Federal Reserve’s municipal lending facility, which has authority to purchase up to $500 billion in short-term debt from states and large cities.

Before the pandemic, bondholders had been more optimistic about a possible end to the bankruptcy, which began in 2017, as support coalesced around settlement terms. The board secured backing from a committee of public retirees and from competing hedge funds including GoldenTree Asset Management LP and Autonomy Capital.

If the board tries to secure additional concessions from creditors, the negotiating process could lengthen the bankruptcy process past the November gubernatorial election and well into 2021.

The Wall Street Journal

By Andrew Scurria

Updated May 26, 2020 2:14 pm ET

In Boom-and-Bust San Francisco, Pandemic Brings Grim New Reality.

Uber, Lyft and Airbnb have slashed thousands of jobs. Salesforce and Visa are letting employees work remotely for months; Twitter and Square are allowing them to do so for good.

For the companies’ hometown of San Francisco, the moves are early signs of a dire blow.

In a city with a long history of booms, busts and natural calamities, the coronavirus pandemic has suddenly upended nearly a decade of prosperity. While municipalities across the U.S. are grappling with economic fallout from the virus, San Francisco stands to take a deeper hit given its high concentration of office jobs that make remote working easier, a tech industry battered by layoffs and a pricey real estate market that has already driven out some residents.

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Bloomberg Markets

By Romy Varghese

May 29, 2020, 4:00 AM PDT

Illinois Passes $40 Billion Budget Counting on Federal Help.

Illinois lawmakers early Sunday approved a budget of about $40 billion for the year starting in July that relies on federal loans to close the revenue shortfall exacerbated by the coronavirus pandemic.

The budget for fiscal 2021 maintains most funding levels from a year earlier, and boosts pension payments and spending on health and human services along with some other agencies that are seeing increased demand due to the pandemic and resulting unemployment. It expects to close the projected deficit of as much as $7.4 billion partly by borrowing as much as $5 billion from the Federal Reserve’s Municipal Liquidity Facility.

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Bloomberg Economics

By Shruti Singh

May 24, 2020, 7:28 AM PDT Updated on May 24, 2020, 11:23 AM PDT

Small Alabama City Says It’s Broke, Files for Bankruptcy.

A small city on the outskirts of Birmingham, Alabama, filed for bankruptcy, a rare step by a local government that comes as budgets across the nation are being upended by the coronavirus pandemic.

The city of Fairfield’s filing Tuesday in the U.S. Bankruptcy Court for the Northern District of Alabama listed assets and liabilities between $1 and $10 million. A resolution signed by Mayor Eddie J. Penny included with the filing said Fairfield has “exhausted its options” after years of financial stress.

“The city has faced a substantial decline in revenues in recent years due to economic forces beyond its control,” the resolution says. It was unclear whether the shutdowns intended to mitigate the spread of the coronavirus in the U.S. worsened the city’s problems.

Located about eight miles (12 kilometers) from Birmingham, Fairfield is a mostly African-American community with about 11,000 residents. About one-fifth live in poverty, according to the U.S. Census Bureau. The city is located in Jefferson County, which went bankrupt in 2011.

The city’s finances have been troubled for years. In 2016, while it was struggling to make payroll, the Birmingham Water Works threatened to shut off service at city offices because of more than $128,000 of overdue bills, according to the local newspaper.

Penny, the mayor, said in an interview that the city is looking for a “fresh start” to better align its revenues with expenses. He said restructuring the city’s debts will help address the shortfalls.

“I think we should be able to rebound,” he said.

While not the cause of its bankruptcy, Fairfield is also being affected by the shutdowns in businesses that are meant to mitigate the spread of the coronavirus, Penny said.

“We are going to be one of thousands of cities all over the United States that are going to feel the impact of that,” he said.

Ambac Financial Group Inc. insures some Fairfield city bonds and is listed as a creditor in filings associated with the bankruptcy. The city has about $17 million in bonds outstanding, according to data compiled by Bloomberg.


By Amanda Albright

May 19, 2020, 5:34 PM PDT Updated on May 20, 2020, 11:27 AM PDT

— With assistance by Matthew Begley

New Jersey to Delay Billions for Pensions, Trains, Schools and Towns.

Governor Phil Murphy is seeking to balance New Jersey’s spending for the remainder of this fiscal year in part by pushing off payments to schools, pensions, transit and towns into the next budget period.

Facing billions in lost revenue from the coronavirus lockdown, state Treasurer Elizabeth Muoio released long-awaited plans for $5 billion in “deep cuts and spending deferrals.” The proposal calls for $2.1 billion of cuts to spending, including property-tax benefits, college operating aid and assistance to schools.

Murphy seeks to save another $3.2 billion in part by disbursing payments in October that otherwise would be due in September — the last month of an extended fiscal year. New Jersey was the only state to alter its fiscal year amid uncertainty over the coronavirus’s impact on revenue and spending. Its fiscal 2020 will end in September, rather than June, and its fiscal 2021 will be nine months instead of 12.

Had the state stuck to the normal fiscal year, lawmakers and the administration would have had to evaluate the numbers immediately and make adjustments far sooner, Senate President Stephen Sweeney said in a May 20 interview. By now, New Jersey would have had a “much clearer picture” of its finances, he said.

Postponing Payment

A $951 million pension payment, due in September, will be paid the next month, according to a revised spending plan. Other September-to-October deferrals include $467 million for school aid; $354 million for municipal property-tax relief; $250 million for special education and $28 million in budget aid to distressed cities.

New Jersey is the second-hardest-hit state after New York, with almost 153,000 Covid-19 cases. In March, Murphy closed nonessential businesses and ordered social distancing — a necessary step, he says, that sent state revenue “off the fiscal cliff.” He has faced increasing pressure in recent days to end the lockdown.

Murphy froze $920 million in expenditures, including aid to homeowners and cities, in March. He now is proposing $850 million in other cuts, including $336 million in local school aid, $132 million for New Jersey Transit and $80 million for lead water line replacement.

Dropping Fast

The governor expects revenue to fall short by $2.7 billion, or 7%, this fiscal year. For 2021, his proposed $40.9 billion budget is projected to be short by $7.2 billion, or 18%. His administration will give a revised plan for next fiscal year in August.

The Murphy administration had made “great strides” over the past two years to improve New Jersey’s fiscal condition, building the surplus and and making record pension payments, said Muoio, the treasurer. The pandemic “halted this progress in its tracks,” she said.

New Jersey will require “a combination of budget and appropriation adjustments, critically needed borrowing and more robust federal assistance,” she said.

The state constitution bans borrowing to plug budget holes, and federal grants are far from certain. Without the assistance, Murphy has said, the state will have to cut public employees, including teachers and police, firefighters and health workers who have been crucial to combating the new coronavirus.

Bloomberg Politics

By Elise Young

May 22, 2020, 1:40 PM PDT

New York MTA Asks Federal Reserve to Tap New Lending Program.

New York’s Metropolitan Transportation Authority, the largest U.S. transit system, is asking the Federal Reserve to allow it to borrow through the central bank’s new $500 billion lending program.

The Fed currently allows states, some municipalities and multi-state entities to access the program, called the Municipal Liquidity Facility. While the MTA could have the state borrow on its behalf, it’s seeking to do so directly.

While the agency has twice sold long-term debt this month, the coronavirus pandemic has challenged the MTA’s ability to borrow over the short term, Pat Foye, the agency’s chief executive officer, said in a letter Thursday to Fed Chairman Jerome Powell.

“Investors have shown confidence in MTA’s long-term prospects but remain concerned about near-term risks,” Foye wrote in the letter. “Based on our current surveillance, we believe public issuance of MTA transportation revenue notes would result in a premium incurred well in excess of the MLF pricing grid issued on May 11.”

The Fed created the lending program after concerns over the coronavirus shook the $3.9 trillion municipal-bond market in March. Prices temporarily fell by the most since at least 1980 and investors pulled record amounts out of mutual funds. The market has since recovered, buoyed by the mere prospect of the central bank’s unprecedented intervention.

“There’s been a disruption in the short-term market,” Bob Foran, the MTA’s chief financial officer, said during the agency’s monthly board meeting on Wednesday. “Effectively right now, the short-term market costs as much to borrow as the long-term market.”

The MTA has been able to raise money through the muni market by selling long-term debt, although the difference between the yield it paid on its $1.1 billion revenue bond sale and the tax-exempt market’s benchmark was more than four times greater than when the MTA borrowed in January, before the pandemic hit.

Investors have been willing to lend the MTA money over the long term. It boosted its bond sale Thursday by $125 million to $525 million to raise money for bridge and tunnel infrastructure. That comes after the agency nearly doubled the $1.1 billion issuance on May 5.

The MTA estimates its deficit for 2020 may grow to as much as $8.5 billion. It’s seeking an additional $3.9 billion of federal funds to help cover lost revenue. Ridership has sunk as people work from home and avoid using the system.

The system services a region of more than 15 million people through its network of subways, buses and commuter rail lines that reach Long Island, the northern suburbs of New York City and Connecticut.

The agency is looking for help from Washington as its transportation services will help restore economic growth in the area.

“The New York metropolitan region represents over 8% of the nation’s total gross domestic product, and the MTA’s operations are critical to the economic health of the New York region and the country,” Foye said in the letter.

Bloomberg Markets

By Michelle Kaske

May 21, 2020, 2:07 PM PDT

New York MTA Upsizes Second Bond Sale in Sign of Buyer Demand.

New York’s Metropolitan Transportation Authority increased the size of its bond sale to $525 million and reduced the yields from what were initially offered amid confidence by investors that the subway and bus operator will recover once the coronavirus pandemic subsides.

The MTA, the largest mass-transit system in the U.S., boosted the deal Thursday by $125 million, a sign of strong demand. Debt maturing in 2049 yielded 2.44%, 10 basis points less than those first set on the securities, according to preliminary pricing information viewed by Bloomberg. Yields on bonds due in 2054 were also lowered by 10 basis points.

Proceeds will finance infrastructure needs for the MTA’s Triborough Bridge and Tunnel Authority.

It’s the second upsized debt sale by the MTA this month. The MTA doubled to $1.1 billion a transportation revenue bond sale that paid down notes that matured May 15.

New York Public Transport Demand Rises on Week: City Tracker

The transactions show the agency can still garner interest from investors, even though the difference between the yield it paid on the $1.1 billion sale and the municipal-bond market’s benchmark was more than four times greater than when it borrowed in January.

The MTA estimates a potential deficit for the year of as much as $8.5 billion as ridership plummets amid the coronavirus pandemic. It’s seeking an additional $3.9 billion of federal funds to help cover lost revenue.

Bloomberg Markets

By Michelle Kaske

May 21, 2020, 11:55 AM PDT

California's Newsom Seeks to Slash Budget to Close $54 Billion Gap.

California Governor Gavin Newsom on Thursday proposed a budget that slashes spending about 9%, cuts state workers’ pay by a tenth and said that most of the government can’t be spared from deeper pain unless the federal government does more to help all states.

The $133.9 billion budget for the year beginning in July will draw down the state’s reserves by $8.3 billion, putting it on track toward exhausting the $16 billion in the main savings account over three years.

It will redirect payments that were slated to pay off pension debt to now cover obligations due over the next two years and cancel planned program expansions to save $6.1 billion. Newsom is also proposing a 10% pay cut to state workers even if labor unions don’t agree.

Plummeting tax collections coupled with costs to respond to the novel coronavirus have led to a $13.4 billion deficit this year and $40.9 billion in the next. By law, California must balance its budget, which legislators have to approve by June 15. They can change it afterward, however, as was done during the recession.

While a federal package backed by House Speaker Nancy Pelosi that would provide direct cash payments to state and local governments pends in the U.S. Congress, municipalities across the country must balance their books. Local officials are grappling with laying off workers and cutting services to residents facing a deadly virus and business closures that are spurring deep job losses.

“President Trump with the stroke of a pen could provide support for Speaker Pelosi’s Heroes Act and these cuts would be eliminated,” Newsom said during a Sacramento briefing. “If the federal government does what it must do to help states, these cuts would go away.”

California, by virtue of its size, is facing by far the biggest deficits as a result of the pandemic, though the swift loss of tax revenue is delivering large hits to states nationwide. By one estimate, states could face shortfalls of as much as $650 billion through mid-2022, more than were left by the last recession.

Newsom’s budget marks a stunning reversal from January, when he unveiled his preliminary proposal that would have padded its rainy-day account to a record $18 billion and steer more toward services. Instead, the state would no longer allocate the funds planned then for initiatives such as building new kindergarten facilities, maintaining state parks and boosting sustainable groundwater.

Under state formulas tied to revenue collections, schools and community colleges will receive $19 billion less than expected in January, although Newsom’s budget proposes some measures to alleviate that. The state’s universities would be hit with a 10% cut in aid, absent federal action.

Personal income tax collections, a key source of revenue, is estimated to plummet nearly 19% next year from this year, while sales taxes would drop by 17%. Overall, major sources of revenue would decline by 6.8%. The budget expects that by June, one in four Californians will be out of work, and that the unemployment rate will slowly improve to 10.6% by the fourth quarter of 2023.

Bloomberg Politics

By Romy Varghese

May 14, 2020, 12:35 PM PDT Updated on May 14, 2020, 2:47 PM PDT

San Francisco’s Boom Fizzles With $3.6 Billion in Shortfalls.

San Francisco expects budget shortfalls of $3.6 billion over the next four years, showing the extensive impact the pandemic-induced shutdowns will leave even if the health crisis eases.

With restaurants and stores shuttered and hotels vacant, city officials most immediately must resolve the $1.74 billion deficit for this fiscal year and the next two through June 2022, according to a report released Wednesday by Controller Ben Rosenfield and budget analysts. The city is projecting a total gap of $2.11 billion in the following two budget cycles through 2024.

“When we think about how far we’ve come and how we’ve expanded services and what we’ve done as a city and now we’re facing a deficit that is something that we have not experienced before, we have to be prepared,” Mayor London Breed told reporters on Wednesday as she warned of hard financial decisions ahead. “We all have to brace ourselves. Everything is being considered. And it could mean challenges to services with our police department, with our fire department, with our homeless services.”

The grim forecasts from San Francisco come as other municipal governments across the country report unprecedented declines in revenue from the closings of businesses and schools to stem the spread of the novel coronavirus. California Governor Gavin Newsom will announce Thursday how he intends to resolve a $54 billion shortfall. Congressional Democrats this week announced a $3 trillion aid proposal that would give state and local governments cash directly.

San Francisco, at the epicenter of the nation’s technology industry, and its surrounding communities have ordered residents to stay home until May 31, a mandate first put in place on March 16 and considered among the most restrictive in the state. Breed by June must present the 2021-2022 spending plan, which is about $6 billion a year, that the board of supervisors must approve by Sept. 30.

The city’s shortfalls will likely grow because the forecast in the next two years doesn’t account for expenses related to the health crisis, “which are likely to be significant,” according to Breed. Already, San Francisco has spent $375 million on its emergency response. In addition, in a change from the city’s March report, the controller and budget analysts no longer see a quick economic recovery likely, but one that begins later in 2020.

Breed wants to place a $438.5 million bond measure before voters in November to spur job growth in the wake of the coronavirus pandemic and to bolster mental health and substance abuse services.

The bond will also “get our economy going and get people back to work right away” in a way that’s financially responsible without raising property taxes, Breed said. “It’s going to be critical to our economic recovery.”

Bloomberg Markets

By Romy Varghese and Joyce Cutler

May 13, 2020, 1:16 PM PDT Updated on May 13, 2020, 2:23 PM PDT

Illinois Hit with Fat Yields in $800 million Bond Sale.

CHICAGO, May 13 (Reuters) – Illinois paid a stiff penalty for its financial woes on Wednesday with yields in the state’s sale of $800 million of bonds topping out at a hefty 5.85%.

While investor demand lowered yields on the tax-exempt, general obligation bonds in a repricing, they remained at extremely wide spreads over the U.S. municipal market’s benchmark scale.

Illinois is the lowest-rated U.S. state at just a notch above junk due to its huge unfunded pension liability and chronic structural budget deficits. With its revenue sinking due to the economic fallout from the COVID-19 pandemic, the state risks eventually slipping below investment grade.

The state brought the bonds to market after initially signaling it would first sell $1.2 billion of one-year, cash-flow certificates, which remain on hold. There was no immediate comment from Illinois officials.

At 5.65%, the yield on 10-year bonds was 452 basis points over the Municipal Market Data (MMD) triple-A scale’s 1.13%, and the 5.85% yield for 25-year bonds was 396 basis points over the scale’s 1.89%. By contrast, New York State’s 10-year bond spread was just 13 basis points.

Greg Saulnier, MMD’s managing analyst, said the market is continuing to charge a big penalty for Illinois bonds, noting that the bond sale included coupons above the typical 5% level, ranging from 5.125% to 5.75%.

“(Illinois is) pretty much trading like it’s in junk category. That’s why you saw the bigger coupons. I think anybody who’s going to buy this stuff is demanding the bigger coupon payments just for some sort of peace of mind,” he said.

Still, Daniel Solender, director of the municipal bond group at Lord Abbett, said, “Illinois should be happy.”

“Given where bonds have been trading in the secondary (market) in recent weeks, these yields are good for them and they have proved that they have market access, which is important,” he said.

The deal had originally included $300 million of taxable GO bonds. That debt, which was expected to attract overseas investors, was not priced.

Proceeds from Wednesday’s bond sale will fund summer construction projects.

Reporting by Karen Pierog in Chicago Editing by Matthew Lewis

With Federal Aid Uncertain, Illinois and New York’s MTA Test Muni Market.

The Metropolitan Transportation Authority paid up but attracted investors, while Illinois postponed

Two of the country’s largest municipal borrowers asked investors to buy bonds this week, a key test of the $3.8 trillion market where state and local governments turn to fund themselves.

Illinois and New York’s Metropolitan Transportation Authority have been marketing about $3 billion of bonds in recent days—the state to help plug budget holes and the authority to repay debt that is coming due. The MTA found plenty of investors willing to buy bonds Tuesday, but the debt came at a high cost, and it remains unclear how Illinois’s deal will pan out, investors and analysts said.

Financial instability in state and local governments has become a national political issue during the coronavirus pandemic, with both President Trump and Senate Majority Leader Mitch McConnell (R., Ky.) questioning bailouts of municipal entities. The reception for the two deals highlights uncertainty about how long the pandemic’s economic fallout will last, how much assistance will be made available for municipal borrowers and which ones will be eligible to receive it.

Continue reading.

The Wall Street Journal

By Matt Wirz

Updated May 6, 2020 6:01 pm ET

New York Subway Is Too Big To Fail: Long MTA Bonds


My investment thesis for investing in the Metropolitan Transportation Authority (MTA) bonds is based on:

Continue reading.

Seeking Alpha

May 8, 2020

New York MTA May Turn to Riders to Raise Cash in the Bond Market.

The fiscally ravaged Metropolitan Transportation Authority is considering a tool that hearkens back to New York City’s financial crisis in the 1970s: sell bonds in low denominations so riders and residents can invest in subways and buses.

The MTA, the biggest mass-transit system in the U.S., is having to explore different ways of raising cash as the coronavirus pandemic has decimated ridership and sunk revenue collections. Already, the agency has won approval to sell debt to cover operating costs, or so called deficit bonds; it’s tapped bank loans and is asking for an additional $3.9 billion of federal funds.

Now the agency is looking at offering individuals tax-exempt MTA bonds in $1,000 denominations, said Pat Foye, the agency’s chief executive officer. The Municipal Assistance Corp., created in the 1970s to help steady the fiscally distressed city, sold a similar type of bond at the time as a way raise cash.

“It’s one that we’re looking at,” Foye said during a web cast with Association for a Better New York. “The MAC experience is well known and that is also on the table and could be part of a portfolio of ideas put together.”

The MTA is facing a potential $8.5 billion deficit this year. Subway ridership is down about 92%, as cleaning and sanitation costs increase, Foye said. The agency this week began closing the subway system down between 1 a.m. to 5 a.m. to disinfect trains, an unprecedented move that suspends its 24-hour service.

Selling tax-exempt debt in smaller sizes would drive more individual investors to participate in the agency’s borrowing. The MTA on Tuesday sold $1.1 billion of bonds in denominations of $5,000. Smaller allotments can attract a larger pool of investors who may not have as much as $5,000 to invest.

Still, it’s costing the MTA more to borrow. Tuesday’s sale included debt maturing in 2045 that priced at a yield of 4.95%, 290 basis points more than top-rated municipals, according to data compiled by Bloomberg. That’s more than four times the 69-basis-points spread on 25-year debt the MTA sold on Jan. 9.

Bloomberg Markets

By Michelle Kaske

May 6, 2020, 2:28 PM PDT

New York MTA Debt ‘Priced Attractively’ in Upsized Deal.

New York’s Metropolitan Transportation Authority boosted its first bond offering since the coronavirus pandemic shut down the city to $1.1 billion as the additional yield compensation to attract buyers soared to more than four times the agency’s last sale in January.

The bonds are backed by fare and toll revenue, which have fallen dramatically. Debt maturing in 2045 sold at a yield of 4.95%, 290 basis points above top-rated municipals, according to data compiled by Bloomberg. That’s up from a spread of 69 basis points when the MTA sold 25-year bonds on Jan. 9, Bloomberg data show.

MTA appeared to be “a really cheap bond,” John Miller, head of municipals at Nuveen, said in an interview Tuesday before pricing was final. “I would imagine MTA and the underwriter wanted to make sure that this deal would have ample demand,” Miller said. “So, it was priced attractively, and they got ample demand.”

Miller declined to say whether Nuveen, which holds MTA debt, participated in the sale.

The sale is the MTA’s first since the pandemic nearly wiped out ridership on its subways, buses and commuter rail lines. The shutdown has left the MTA facing a potential $8.5 billion deficit this year. It’s seeking an additional $3.9 billion of federal aid.

The deal comes as the agency this week began closing the subway system from 1 a.m. through 5 a.m. every night to clean and disinfect trains, suspending its 24-hour service.

The agency was able to cut yields from what it originally offered. Bonds due in 2055, the longest maturity, priced at 5.23%, down from an initial offering of 5.3%.

The MTA, which owed $45.7 billion of debt as of April 29, originally planned to sell $672 million of securities but boosted the size of the deal. Proceeds will help pay down $1 billion of notes maturing May 15.

All three credit-rating companies have downgraded the MTA’s rating because of the agency’s dramatic revenue loss during the pandemic. It still carries single A credit ratings, solidly in the investment-grade rung.

Bloomberg Markets

By Michelle Kaske and Shruti Singh

May 6, 2020, 10:00 AM PDT

Fear Drives MTA, Illinois Yields to Emerging-Market Heights.

To judge by American bond buyers, New York’s Metropolitan Transportation Authority is a riskier investment than the government of Mexico, which defaulted on its debt less than four decades ago.

Ukraine was forced to restructure its bonds in 2015 to emerge from a major financial crisis. But it’s still paying roughly the same to borrow as Illinois, once the tax breaks on the state’s debts are factored in.

A steady drumbeat of headlines about plunging tax revenue, massive budget deficits and sky-high unemployment are pushing yields to emerging-market levels for some of America’s most financially stressed municipal borrowers.

The MTA, which is facing a $8.5 billion budget deficit after the coronavirus decimated ridership, offered 30-year bonds Tuesday at a yield of 5.1%, tax-exempt, the equivalent to more than 10% on a taxable basis for New York investors in the highest tax-bracket. Mexico’s economy is reeling from a combination of a plunge in oil prices and declines in exports and tourism. Its 30-year U.S. denominated debt yields 5.1%.

Meanwhile, Illinois’s 10-year bonds are trading at 5.7%, akin to a taxable bond yield of 9.3%, roughly the same as Ukraine’s dollar denominated debt with the same maturity. Illinois’s economy is several time larger than that of Ukraine, which is still at war with Russia. And Illinois, like other states, can’t go bankrupt, nor has it ever defaulted on its debts.

The municipal-bond market “is being hit by these headlines and confusion on what municipal credit is like,” said Dan Solender, head of municipals at Lord Abbett & Co. “The MTA, they have a lot of cash, they have a lot of government support. As soon as things open up, whether people love the idea or not, they’re going to use the subway to get around New York.”

Even though state and local government debt is one of the world’s safest investments, the individual investors who dominate the market are still prone to so-called headline risk, or bad news stories that undermine the market’s well-deserved reputation as a haven.

From 1970 through 2018, the average five-year annual default rate for municipal bonds was 0.09%, according to Moody’s Investors Service. Corporate bonds, which have lower ratings, had a 6.6% default rate over the same period.

Debt costs are typically a relatively small percentage of a state’s or city’s overall budget and is fully amortizing, like a mortgage. Corporations and nations that borrow money that must be paid in one lump sum when the debt comes due may be more vulnerable to rapid shifts in market sentiment.

Illinois spent about $1.8 billion in interest in 2019, a small share of the government’s $81.5 billion budget, according to the most recent audited financial statements.

While the MTA’s ridership has declined 95%, it has about $3.2 billion in cash, reserves and lines of credit to provide a bridge until it can secure more state and federal aid or find other fixes for its deficit, according to bond offering documents. The MTA received $3.8 billion from the federal CARES Act and has asked for an additional $3.9 billion. Barring more aid, the MTA would have to make politically difficult choices to cut essential services or raise fares, take on more debt, or defer critical infrastructure spending.

Aaron Donovan, an MTA spokesman, declined to comment on Tuesday’s sale.

Even so, New York state law specifically prohibits the MTA and its subsidiaries from filing for bankruptcy and the authority must pay debt before using revenue for operations. And the big yields appear to have drawn plenty of investors: the size of the deal was boosted to $1.1 billion from some $705 million, according to a person familiar with the matter.

Mixed messages from Washington on more aid for states and cities is giving investors pause, Solender said. Democrats want to send as much as $1 trillion in more aid to deal with the fallout from the coronavirus, while Republican Majority Leader Mitch McConnell has voiced support for giving state’s the power to file bankruptcy.

On Tuesday, Illinois delayed the planned auction of $1.2 billion of short-term debt after its yield penalties surged to record highs.

“Given this environment, given the confusion and uncertainty, those are the kinds of yields they need to pay to raise money,” Solender said.

Bloomberg Markets

By Martin Z Braun

May 5, 2020, 11:14 AM PDT Updated on May 5, 2020, 12:33 PM PDT

— With assistance by Michelle Kaske

Illinois Delays $1.2 Billion Debt Sale After Penalty Soars.

Illinois delayed the planned auction of $1.2 billion of short-term debt as it faces record-high penalties to borrow on Wall Street because of the deep financial hit the state is being dealt by the coronavirus shutdown.

The worst-rated state had planned to sell about $1.2 billion of short-term tax-exempt general-obligation debt on Wednesday, its first borrowing during the pandemic, to ease the revenue shortfall in the last two months of the fiscal year. The deal has been moved to “day-to-day status,” meaning it will be sold if market conditions warrant.

With the economic slowdown raising the risk of Illinois having its bonds cut to junk, investors have driven the yields on its two-year debt to nearly 4 percentage points above benchmark, far exceeding every other U.S. state.

“Their spreads had already widened out dramatically on covid impact, on forecasted budgetary deficits for the next few years, obvious revenue declines,” John Miller, head of municipals at Nuveen, said in a telephone interview on Tuesday. Coming to market now “would be more expensive than it has to be.”

The sale would have marked a major test of whether struggling American governments will be able to borrow easily to cover temporary shortfalls in their budgets as tax revenue disappears. The concern that market access could dry up — or become prohibitively expensive — has prompted the Federal Reserve to roll out plans to lend as much as $500 billion if needed, though the program has yet to extend any loans.

“The state of Illinois has developed its plan and is positioned to enter the market very soon if needed, but with the flexibility to assess the market as it returns from unprecedented dislocation,” Carol Knowles, a state spokesperson, said in an emailed statement. “Like many issuers, we are going day to day and assessing conditions to determine the best time to enter the market.”

The size, timing and structure of the state’s expected deals this month are subject to market conditions, she added. In response to a question about whether the state would consider tapping the Fed facility, Knowles said “Illinois’ short term borrowing law requires competitive bidding.”

“We fully intend to do both the short-term and the long-term borrowing,” she said. “The timing is fluid.”

Even before the global crisis, Illinois was deemed among the least prepared of states for a downturn with its $7 billion in unpaid bills, $137 billion in pension debt and almost no rainy day fund. Now the economic fallout from the virus is pushing states toward their worst fiscal crisis in decades, and Illinois has been singled out by some Republicans as undeserving of federal budget relief.

Illinois isn’t the only cash-strapped borrower testing the municipal market this week. On Tuesday, New York’s Metropolitan Transportation Authority increased the size of its revenue-bond sale to $1.1 billion from $705 million in its first long-term borrowing since the coronavirus pandemic, according to a source familiar with the transaction. The MTA lowered initial yields, offering bonds ranging from 2045 to 2055 with various coupons and a top yield of 5.23%, according to the source.

While states nationwide are facing massive deficits because of the economic shutdowns, Illinois has been singled out for its fiscal challenges. Last month, Senate Majority Leader Mitch McConnell said on a radio show that he’s open to states filing for bankruptcy in response to a question about those with unfunded pension liabilities like Illinois, and President Donald Trump questioned in a tweet why taxpayers should bail out “poorly run” states such a Illinois.

Illinois, which has among the highest number of Covid-19 cases in the U.S., has received $3.5 billion from the $150 billion of federal pandemic aid, which is intended to cover virus response costs not budget gaps. States are seeking $500 billion of federal aid to help make up for lost revenue as social distancing to curb infections shut down large swaths of the economy.

The delay “could prove to be a positive,” said Nuveen’s Miller, whose firm is typically involved in longer-term fixed-rate Illinois bonds as part of its $180 billion in municipal assets under management. Postponing could relieve the technical pressure in the market given the state also has said it is planning another $1 billion long-term bond issue next week, Miller said.

“That’s a lot of bonds that have to be absorbed,” he said.

The timing of Wednesday’s proposed sale was a little “strange” because there are a lot of short-term unknowns with state finances, said Daniel Solender, head of municipals at Lord Abbett & Co., which owns Illinois debt as part of its $27 billion in municipal assets under management.

“It’s not a complete surprise they delayed it,” he said. “There is the Fed program which hasn’t really been set up yet and states are still waiting on what Congress is going to do.”

Illinois’s 10-year penalty over benchmark securities reached a record of 4.4% on Monday, according to data compiled by Bloomberg. Given the relatively high volume of Illinois bonds being offered, analysts said the state would have had to pay a larger premium to float new debt.

“They are in a tough financial spot,” Lord Abbett’s Solender said.

Bloomberg Markets

By Shruti Singh and Danielle Moran

May 5, 2020, 9:52 AM PDT Updated on May 5, 2020, 4:20 PM PDT

“Everything Happened All At Once”: Can California Cities Weather the COVID Recession?


For local governments still sporting the budgetary scars of the last “once in a generation” recession, this downturn is at once familiar — forcing elected leaders to cut, furlough and delay — and entirely new. Never in state history has so much economic activity ground to a halt so fast.

Ever since the end of the Great Recession, Rancho Cucamonga has been on a tear.

New retailers and restaurants have sprung up to serve the residents of its gated ‘burbs. The city’s population has swelled with Angelenos in search of cheaper housing. And at last count, its unemployment rate sat at just 4%. The city earned an upgraded credit rating earlier this year.

But now that shopping and dining have been deemed non-essential activities, the good times are gone, said Rancho Mayor Dennis Michael.

Continue reading.



Fitch: California Can Withstand Income Tax Collections Drop-Off

Fitch Ratings-New York-04 May 2020: Fitch Ratings believes that the state of California has sufficient liquidity to absorb the significant drop in personal income tax (PIT) collections being reported by the state Controller for the month of April, an impact of deferring the income tax filing date from April to July. The governor’s budget proposal for fiscal 2021, which was published in January and will be revised in May, assumed the state would collect $18.4 billion in April, or approximately 18% of annual collections. This includes both regular withholding and final 2019 tax payments. According to the Controller’s daily informal tally of PIT collections, as of April 29, the state has collected $5.1 billion, $13.3 billion below target. PIT collections are down $8.6 billion year-to-date as compared to last year, having started the month $5.8 billion ahead of last year’s collections. Some portion of this shortfall will be made up by July 15, the new deadline for PIT payments, but a portion will be lost entirely given the significant economic dislocation driven by the coronavirus pandemic.

Fitch believes the state has sufficient internal liquidity to absorb the expected delay and drop in collections between now and the new income tax filing date of July 15, including from borrowable resources, which were $42.8 billion as of the end of February and are expected to be reduced to approximately $8.7 billion by the end of the fiscal year. With enhanced cash tools developed both during and after the Great Recession, a strong cash position entering this crisis and the receipt of federal aid, the state does not expect it will need to access external liquidity.

As in California, April revenue data for states across the country is likely to reflect the effect of widespread stay-at-home orders. Fitch is monitoring revenue collections as it is made available.


Karen Krop
Senior Director
+1 212 908 0661
Fitch Ratings, Inc.
Hearst Tower 300 W. 57th Street
New York, NY 10019

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]

Additional information is available on

S&P: Louisiana's Resilience To Be Tested As Economic Pressures Weigh On Budget Outlook

FARMERS BRANCH (S&P Global Ratings) May 4, 2020–As Louisiana (AA-/Stable) state lawmakers return to Baton Rouge, the task of balancing the state’s next budget will be met against a growing cloud of uncertainty with the U.S. economy in recession and the state addressing a COVID-19 hot spot. In S&P Global Ratings’ view, Louisiana’s liquidity and reserve position will adequately support it through heightened economic headwinds caused by the pandemic and ongoing energy sector volatility in the near term.

Louisiana began the current fiscal year on a positive trajectory for both its revenues and economy, with forecasts for continued modest growth. For the first eight months of fiscal year 2020, the state’s principal general fund revenues–sales and individual income tax revenues–were collectively up approximately 5%, compared to the year prior. However, with the onset of the COVID-19 pandemic, S&P Global Economics now forecasts a 5.3% contraction in the U.S. output this year (see “An Already Historic U.S. Downturn Now Looks Even Worse,” published April 16, 2020, on RatingsDirect). The forecasted economic contraction will, in our view, result in a significant decline in state revenue and economic output. Additionally, given Louisiana’s limited industrial diversity, which still leans on chemical manufacturing and petroleum-refining industries, the state faces added pressure as the volatility in the energy sectors intensifies. As noted by S&P Global Ratings researchers, in the first quarter of 2020, the U.S. oil and gas sector experienced the largest quarterly increase in negative bias, up by 32 percentage points as companies coped with volatile energy prices, liquidity issues, high leverage, and limited demand growth expectations in the second quarter of the year due to the pandemic. (For additional, please see “U.S. Corporate Credit Stress Surges To Recession Levels On COVID-19 And Oil Shocks,” published on April 14, 2020, on RatingsDirect.) While the state has worked to support additional economic diversity, roughly 25% of its total gross state product (GSP) comes from merchandise exports, including energy products, manufacturing goods, and agricultural products linked to the prominence of shipping along the Mississippi River and Gulf of Mexico.

Favorably, Louisiana entered the recession on a relatively stable footing. As required by its constitution, when a general fund operating surplus occurs in a fiscal year, a deposit equal to 25% of the surplus is deposited into the budget stabilization fund (BSF) the subsequent fiscal year. This has resulted in the state increasing its reserve profile in fiscal 2019 following strong revenue collections in fiscal 2018. The resulting operating surplus in fiscal year 2019–totaling $535 million–required a $133 million deposit into the BSF in fiscal 2020, which, coupled with $24 million in one-time settlement funds, is estimated to bring up the balance to $565.8 million or nearly 5.8% of general fund expenditures, which we consider good. Absent the required transfers, reserve balances would cover just over 4% of expenditures. Appropriations from the BSF are limited in any fiscal year to one-third of the balance and require a two-thirds supermajority in both houses of the legislature. We anticipate the state will use a portion of its reserves, as it has in challenging economic periods, to help bridge a balance for its 2021 budget.

In addition to the positive budgetary performance coming into the recession, Louisiana’s general fund liquidity position remained strong through the first half of the fiscal year, averaging slightly over $2 billion, or roughly 1.7x greater than the monthly average in fiscal 2017. This should provide flexibility as it manages its cash-flow difficult revenue periods, especially if the shift in the filing deadline for income taxes to July 15 from May 15 causes temporary disruptions. Federal relief from the Coronavirus Aid Relief and Economic Security Act and increases in the federal medical assistance percentage of Medicaid, will help alleviate some of the fiscal strain. Disbursements from Coronavirus Relief Fund to the state total $1.8 billion, although limited to direct costs associated with the pandemic. While Louisiana’s revenue collections, like those across states, will meaningfully decline given the current economic environment, due to its comparatively stronger budget reserves and liquidity position, we believe it can manage these increased pressures within the short term.

Louisiana’s legislative session began on March 9, 2020, but due to safety concerns stemming from the COVID-19 outbreak, legislators have been largely unable to work through the budget development process. Notably, the state’s Revenue Estimating Conference (REC)–had been delayed indefinitely. We understand the REC will meet the week of May 11. The constitution requires the state’s official revenue forecast to be based on existing, recurring revenues. If the state projects a shortfall, the governor and the Division of Administration can make budget amendments to improve structural budget gaps and officials are required to respond quickly and empowered to cut expenditures directly. The constitution requires the state to pass a balanced budget.

Given that the governor’s stay-at-home order is currently in place until May 15, we do not expect the legislature will be able to resume budget talks for fiscal 2021 until at least early-to-mid-May. If legislators are unable to complete their work by the end of current regular sessions, which end June 1, then the governor would have to call a special session to adopt a budget. While we do not anticipate it, in the absence of a budget adoption by the beginning of the fiscal year, resources collected and held in the Bond Security and Redemption Fund would still be available to support debt service on the state’s general obligation (GO) bonds. There are no debt service payments that would require a fiscal 2021 appropriation until Aug. 15, 2020.

The governor’s initial 2021 budget proposal, released prior to the acceleration of the COVID-19 pandemic, reflected a modest increase in general fund outlays, which we anticipated would have to be revised downward. As the lawmakers work through the next budget, a standing challenge is the relatively limited room they have to cut, given that roughly 70% of the general fund is non-discretionary. Of the state’s $9.72 billion general fund budget in fiscal 2020, the discretionary portion–totaling $2.78 billion–mostly supports higher education and health care initiatives which may be difficult to cut. In previous periods of budgetary stress, the state resorted to one-time budget measures (including using reserves) to balance its budget, although since fiscal year 2017, it has worked on structural measures to achieve balance.

However, the state’s major revenue mix is far removed from what is was decades ago, when mineral-derived revenue accounted for a substantial share; it now relies on sales and personal income taxes, which together account for three-fourths of general fund revenues (net of dedications). While mineral revenues (severance and royalty) account for around 7% of general fund collections, we anticipate the hit to the current and next fiscal year budget will be the ancillary services and payrolls that support the state’s energy sector. The state doesn’t tax groceries intended to be prepared and consumed at home, so the temporary bump in grocery purchases will not have a meaningful effect on collections, in our view.

Ultimately, the magnitude of the effects of an energy shock and pandemic will depend on their depth and duration, but at present, Louisiana’s good financial position, combined with its strong oversight, will, in our view, provide a fair degree of flexibility to manage challenges as they arise.

This report does not constitute a rating action.

Florida Hurricane Season Threatens Second Hit to State Finances.

As Florida begins to emerge from the coronavirus shutdown, another unseen threat lays in wait: hurricane season.

The virus has already thrown more than a million Floridians out of work and caused a massive blow to the tourism-driven state where sales taxes provide more than half of the government’s revenue, with beaches, restaurants and amusement parks temporarily shuttered. Even as the state starts to re-open, Florida may see an $8 billion to $10 billion hit to its budget because of the virus, amounting to about a quarter of its general fund, according to analysis by Moody’s Analytics.

“Hurricane season is right around the corner,” said Florida Chief Financial Officer Jimmy Patronis, who also serves as the state’s fire marshal, on a Wednesday call with fire chiefs. “Severe weather does not care that our communities are dealing with this pandemic.”

The 2020 Atlantic hurricane season, which begins June 1, is projected to see “above normal” activity, according to Colorado State University researchers. And as hurricanes get more severe, they’re also getting more costly in terms of physical and economic damage.

While the AAA rated state has $3.7 billion in reserves that could be tapped for disaster relief, those funds are likely to be depleted to make up for lost sales-tax revenue from the virus, said Nick Johnson, a senior vice president for state fiscal policy at the Center on Budget and Policy Priorities. He said that Florida was particularly ill prepared for a recession even before the pandemic and the resulting budget cuts could leave state agencies unequipped for a disaster.

“That’s the problem when you have states not well prepared for one disaster,” he said. “If a hurricane were to hit, Florida would be in even more trouble.”

The economic fallout from hurricanes can be sizable. Hurricane Michael, which devastated Florida’s northern panhandle in 2018, caused an estimated $25 billion in damage and spurred lawmakers to allocate more than $1 billion in emergency funds. The state has tapped unspent general-fund reserves for disaster recovery expenses that it expects to get reimbursed for later. All five of the costliest hurricanes on record — Katrina, Harvey, Maria, Sandy and Irma — hit in the last 15 years, according to the National Hurricane Center’s data.

“Hurricanes and hurricane seasons are getting worse and worse,” Johnson said. “It would be a huge problem. I think you would see Florida really scrambling to find the resources to respond.”

Historically, hurricanes and other major weather events haven’t lead to drastic credit issues or lower prices for municipal bond issuers because the Federal Emergency Management Agency provided assistance and the resulting rebuilding led to new jobs and spured economic development. Because of that, climate change and the risks of weather events aren’t priced into the market, said Cooper Howard, a director at Charles Schwab.

“I don’t think many states, cities, or local governments have done an adequate job of preparing for an issue like this,” Howard said in an interview, referring to climate readiness.

This hurricane season could be worse than prior years with major hurricanes making landfall along the continental U.S. and in the Caribbean, according to projections from the researchers in the CSU department of atmospheric science. The group said there is a 45% likelihood of a category 3, 4 or 5 storm hitting the U.S. east coast, including the Florida peninsula and a 44% chance of one hitting the Gulf Coast and the Florida panhandle. Both of those estimations are about 15 percentage points higher than the average for the last century.

“It’s a pretty dire situation,” said Eric Glass, a portfolio manager at AllianceBernstein. “So much more needs to be done from a mitigation, resilience, and adaptation perspective and now you have a larger than normal hurricane season bearing down on you with limited resources, that doesn’t add up to sunshine and rainbows.”

Glass, who runs the firm’s municipal impact policy group, said as some investors grow wary of municipal credit amid the fiscal hit to many states and cities, the borrowing costs for governments will increase. It’s already happening: this week, New York’s Metropolitan Transportation Authority saw its borrowing penalty quadruple compared to its previous deal in January.

Some of Florida’s beach towns are among the most exposed cities to climate change in the country, according to an analysis by advisory firm Four Twenty Seven that indexed cities and counties exposure to climate-related risks like sea level rise.

The pandemic is already wreaking havoc on state and municipal finances, spooking investors in the municipal bond market. And Florida’s reliance on now-depleted sales taxes and the looming potential for a major storm may raise the price for the state’s investment in infrastructure, Glass said.

“This will make it more expensive for Florida to borrow to fund any type of resilience to climate change,” he said.

Bloomberg Politics

By Danielle Moran

May 7, 2020, 9:38 AM PDT

San Francisco Facing Steep Revenue Hit Finds Willing Bond Buyers.

San Francisco is expecting that its deficits from the virus-related downturn will be even greater than the $1.3 billion over two years it had projected in March. That didn’t dissuade investors from buying its bonds Thursday.

The technology hub sold $196 million in general-obligation bonds, with one-year notes yielding 6 basis points less than benchmark. The highest yields were 2.27% on 4% coupon bonds maturing in 2035, according to data compiled by Bloomberg. San Francisco sold the debt to refund higher-costing securities.

The reception showed how investors are picking winners and losers among local governments hit by the pandemic in the $3.9 trillion municipal-bond market, which has yet to return to normal amounts of sales. While San Francisco warned in offering documents that it expects to update the projected budget gaps as early as May 8 and that “the magnitude of such larger shortfalls is uncertain,” buyers are betting that the AAA-rated city would fare better than other localities lacking its resources.

Eric Friedland, director of municipal research at Lord Abbett & Co LLC, pointed to San Francisco’s large reserves and its property-tax base — a significant component of revenue — which is less volatile than sources such as sales taxes. He also noted that it’s home to technology jobs that “are well suited for social distancing.”

“San Francisco is positioned very well in this period,” Friedland said by phone. “We see strong resilience for the city.”

Bloomberg Markets

By Romy Varghese

April 30, 2020, 11:26 AM PDT

NYC Bondholders Pricing In Downgrades on Worst Crisis in Decades.

New York City’s bondholders have downgraded the city, even if rating companies haven’t.

Yields on the city’s bonds are rising to compensate for the risks posed by the pandemic lockdown that could destroy an estimated 475,000 jobs this year and cost the government $7.4 billion in lost tax revenue. That has left New York’s general-obligation debt trading at a level akin to A- rated securities, three steps below its current grade from S&P Global Ratings, according to data compiled by Bloomberg.

The coronavirus is providing one of the biggest tests of bondholders’ faith in the most-populous U.S. city, which rebounded from a 1975 brush with bankruptcy, the Sept. 11, 2001 terror attacks and the 2008 financial crisis. While investors are confident New York will pay its debts, they’re uncertain how long it will take for the economy to regain its footing.

“People who live in New York tend to love it and they have a lot riding on getting it back in place,” said Guy Davidson, chief investment officer of municipal investments at AllianceBernstein Holding LP. “Will it come back? Yes. It’s just a matter of how quickly.”

New York’s Office of Management and Budget forecasts the city’s economy will contract 13% in 2020, almost triple the decline during the financial crisis of 2009. Job losses of 475,000 projected by the city’s Independent Budget Office would be the worst the city has faced since the early 1970s, with the leisure, hospitality and retail expected to be the hardest hit. Budget officials project employment won’t fully recover until 2023.

Risk Reflected

The city’s bond yields reflect the risk. New York City’s 10-year general-obligation bonds yield 1.85%, in line with those on full, faith and credit bonds rated A-, according to Bloomberg BVAL indexes. The city’s bonds now yield 0.55 percentage point more than AAA bonds of the same maturity.

Investors’ views of the Metropolitan Transportation Authority are more dire. With ridership down 95%, its bonds maturing in 3 years trade at an average yield of 5.1%, or the equivalent of 8.6% on a taxable bond — higher than the 8.3% yield on Nigeria’s 5-year bonds.

S&P and Fitch Ratings rate the city’s general-obligation debt AA, the third highest level. Moody’s Investors Service rates the city’s debt Aa1, one step higher. Both Fitch and Moody’s changed their outlook on the city’s bonds to negative this month.

New York isn’t facing an immediate cash crunch. It had $8 billion available at the end of March, according to Fitch. If necessary, it can borrow from the $500 billion municipal lending facility set up by the Federal Reserve last month to support the $3.9 trillion municipal-bond market by extending short-term loans.

Bondholders take comfort in safeguards imposed after the 1975 fiscal crisis. The state would take over the city’s finances if it doesn’t pay its debts on time. Holders of the city’s $38.8 billion general-obligation bonds are paid before property taxes are released to the general-fund budget.

Stable Source

The property tax, a stable source of revenue during recessions, is projected to raise $31 billion in the fiscal year starting July 1, more than seven times the debt service on general-obligation bonds. Another $40.7 billion of revenue bonds are backed by a first claim on personal income-tax receipts and sales-tax revenue.

“We’ve gone through a financial crisis, so the security on most of the bonds are pretty darn strong,” said Davidson, the investor with AllianceBernstein.

Before the pandemic hit, New York City’s economy was growing at a solid pace.

Employment grew for a 10th consecutive year in 2019, marking the longest expansion since at least 1950, as an economy long dominated by Wall Street continued to diversify.

Rising personal income-tax collections enabled the city to build up its reserves to about $10 billion.

“We’re not talking about something that was teetering before this happened,” said John Flahive, head of fixed income investments for BNY Mellon Wealth Management.

In the short term, New York City is balancing its budget by cutting spending and drawing on reserves. Mayor Bill de Blasio has proposed an $89.3 billion budget for the fiscal year beginning July 1 that was $6 billion less than the one planned in January. To bridge an $8.7 billion gap over the next 14 months, the city is tapping $4 billion of its reserves and cutting $2.7 billion in spending. The city expects to receive $2.6 billion in federal aid.

More Aid

Both de Blasio and Governor Andrew Cuomo are asking the federal government for billions more to make up lost tax revenue and increased spending related to the coronavirus. Without additional aid, the state could cut aid to municipalities by more than $8 billion, with most of the cuts falling on New York City.

“I’m very, very concerned,” de Blasio said Sunday at a news conference, where he announced the formation of advisory councils to guide a reopening of the city’s economy. “If New York City can’t provide basic services there won’t be a restart of the economy in New York City or New York State.”

Also on Sunday, Cuomo outlined plans to begin a phased restart, beginning with construction and manufacturing, once the region experiences a 14-day decline in the hospitalization rate. The second phase, separated by a two week gap to assess progress, would open businesses based on how essential they are and the risk levels of infection, Cuomo said.

The phased reopening could begin upstate as soon as May 15. Reopening the densely populated New York City metropolitan area will take longer because of the complexity and need to coordinate with neighboring states, Cuomo said.

Businesses will have to develop plans to protect employees and customers and minimize the risk of infection. Everything from office configurations, to cleaning to transportation will have to be reexamined, Cuomo said.

Investors don’t foresee an exodus of companies from New York. In time, commuters will return to the subways, trains and buses, albeit wearing masks and gloves.

“The habits of people in New York City will just adapt as they did after Sept. 11,” said Rob Amodeo, head of municipal bond investments at Western Asset Management.

Bloomberg Markets

By Martin Z Braun

April 27, 2020, 10:26 AM PDT

— With assistance by Henry Goldman, and Christopher Dereza

PA Law Allows Municipal Governments to Hold Virtual Meetings for Zoning and Land Development Applications.

On April 20, Pennsylvania Gov. Tom Wolf signed into law Act 15 of 2020 (previously SB 841), which expressly authorizes municipal governments and local agencies to hold virtual meetings during the pendency of the COVID-19 emergency in the Commonwealth. Act 15 may end the current confusion among municipal officials and the real estate developers that have business before them as to how to handle pending matters.

Under the Pennsylvania Municipalities Planning Code, a municipality’s governing body must approve or deny a land development plan application within 90 days of the first planning commission meeting following submission. Similarly, a zoning hearing board must commence a hearing on a variance or special exception application within 60 days of submission. If the decisions are not made or the hearings are not held within the statutory time periods, an application is deemed approved. Pennsylvania law also requires a quorum of a municipal agency to be present to take formal action.

Because of the stay-at-home orders in place in the Commonwealth, municipal governments and their agencies, such as planning commissions and zoning hearing boards, have struggled to hold timely meetings and hearings to consider zoning and land development applications. While many meetings and hearings were cancelled or postponed indefinitely with the consent of the applicants, some municipalities have attempted to hold meetings and hearings through virtual means, like Skype or Zoom. But without express statutory authorization for these virtual meetings, the actions taken at those meetings may be invalid. This is concerning to real estate developers that do not want to make additional investments in a project without certainty that the initial zoning approvals cannot be the subject of a procedural challenge at a later date.

The enactment of Act 15 provides clarity to municipalities and developers alike. Initially, Act 15 authorizes municipal governments and agencies to conduct meetings, hearings and other proceedings during the COVID-19 emergency by means of authorized telecommunication devices. The Act defines “authorized telecommunications device” as including “any device which permits, at a minimum, audio communication between individuals.”

Also under Act 15, all time periods within which a municipality must act on zoning and land development applications are suspended and tolled from March 6, 2020 to May 20, 2020, and each applicant subject to the time extension is to receive written notification of the time extension. These applicants will also receive notice that they may request a meeting or hearing on the application to be held before May 20, 2020, and the municipality or local agency may proceed with such a request at its discretion. Notice of the meeting or hearing must be provided to the public and interested parties at least five days before the meeting or hearing via a post on the municipality’s website or in a newspaper of general circulation. Also, any party receiving actual notice of the meeting or hearing is deemed to waive any challenge based on the Commonwealth’s open meeting laws and other applicable laws governing the notice, conduct or participation in a meeting or hearing.

Although Act 15 does provide some guidance to municipalities and developers alike, as a newly developed law, practical difficulties in holding virtual meetings and hearings will almost certainly arise, such as the presentation of witnesses and evidence by applicants and objectors. Nevertheless, the Act protects municipalities against deemed approvals during these challenging times, and creates a path for developers to move forward with the approval process.

Pepper Hamilton LLP – David J. Tshudy

April 27 2020

New York MTA Delays $1 Billion Bond Sale as It Scrambles for Funds.

Deal postponed until next week as state announces cuts in aid to authority

New York’s Metropolitan Transportation Authority postponed a roughly $1 billion bond sale this week as it grapples with a drastic reduction in ridership and cuts in state aid, highlighting how the global pandemic is upending the finances of mainstays in the normally staid municipal debt market.

The bond deal would be the first for the state-controlled operator of New York City’s subways and buses since the spread of Covid-19 sparked a selloff in its bonds that significantly increased its borrowing costs. The authority is also seeking additional federal aid to boost cash needed to meet obligations, Chief Financial Officer Robert Foran said in an interview.

The MTA and its investment bank Jefferies LLC told investors Tuesday that they would delay the sale of the debt until next week, people familiar with the matter said. Money from the deal is earmarked to repay $1 billion of debt that falls due May 15.

Continue reading.

The Wall Street Journal

By Matt Wirz

Updated April 30, 2020 4:46 pm ET

Cash Flow and Budget Relief for Local Governments and Borrowers in California: Orrick

As a result of the COVID-19 virus, local governments in California are facing sudden, unexpected, unprecedented, dramatic shortfalls or delays in a number of their core revenue streams, in some cases combined with significantly increased expenses. To assist in addressing these issues, Orrick has published a brochure Cash Flow and Budget Relief for Local Governments and Borrowers in California, that identifies potentially relevant financing tools available in California. Some address budget relief, some cash optimization, some structural deficit financing and some cash-flow financing. Some are based on tools used when the State of California was running huge deficits affecting local governments. Some are based on techniques used in the 2008 financial crisis, which also disrupted the municipal bond market. Some are new. Some are also relevant to private nonprofit and other borrowers from state and local government issuers. Some touch on but do not focus on specific CARES Act or Municipal Liquidity Facility programs.

The brochure is available for download here.

Public Finance Alert | April.16.2020

Short-Term Financing Options for Illinois Units of Local Government: Ice Miller

The State of Illinois (the “State”) is likely to suffer material adverse consequences from the continued spread of COVID‑19 and any economic downturn, which would affect the amount of State-shared revenues, such as Local Government Distributive Fund payments, appropriated to units of local government. The spread of the virus could also reduce sales tax, income tax, motor fuel tax, video gaming tax, and other collections dependent on local business activity, which is likely to be slower, and property tax collections could also be adversely affected. While Illinois governmental units are working to identify potential revenue impacts and aligning their budgets accordingly and, to the extent possible, developing reserve funds to assist with potential cash flow issues, units of local government may benefit from borrowing on a short‑term basis.

Since local governments are generally labor‑intensive, these working capital management measures might also include layoffs and furloughs that necessitate service reductions, payroll deferrals, or delays in vendor payments. Local governments, particularly those governments that do not carry large liquidity balances relative to operating needs, may explore extraordinary cash flow support measures in the near term. These may include financial market solutions such as lines of credit and tax/revenue anticipation notes or warrants issued either through public sales or private placements.

Can Illinois units of government borrow from the Federal Reserve Bank pursuant to the Federal Revenue Act? Under a new lending option called the Municipal Liquidity Facility authorized by the Federal Reserve Act, the City of Chicago and Cook County are authorized to form a special purpose vehicle (“SPV”), said SPV being authorized to then borrow from a Federal Reserve Bank. Due to population requirements, other units of local government are not authorized to borrow under this program. We are hopeful, however, that some further relief will come from future federal legislative action, because many issuers will have shortfalls and will need tools to deal with those shortfalls.

What tax collection delays have been instituted in Illinois to help taxpayers cope with the stress of COVID‑19 and what is the expected impact to Illinois issuers? In order to help businesses cope with lost revenue and prevent layoffs, the State mandated through emergency legislation that certain local governments may delay the collection of some property tax payments. Certain units of local government in Illinois have adopted similar delay policies. Illinois has delayed the income tax filing deadline to align with the new federal filing date of July 15, 2020. Property taxes are typically the largest portion of total tax burdens imposed by Illinois local governments.

What financing tools are available for Illinois local governments to finance short‑term obligations?

  1. Working Cash Fund Bonds Traditionally, working cash fund bonds have been issued as short‑term obligations where the proceeds are used to cover a governmental unit’s temporary cash flow or operating deficit. Short‑term budgetary deficits also may arise from a mismatch in timing between the receipt of annual revenues (e.g., property taxes) and the incurrence of annual expenditures of the governmental unit within a year. Counties, cities, villages, school districts, library districts, park districts, and community college districts are authorized to issue working cash fund bonds pursuant to statutory requirements.
  2. Tax Anticipation Warrants Tax anticipation warrants (“TAWs”) often are issued in anticipation of taxes levied, but not yet collected. TAWs may be issued in an amount not to exceed 85% of the issuer’s last known equalized assessed valuation (“EAV”) multiplied by the maximum permitted tax rate of the issuer for the particular fund against which the TAWs are issued. Counties, cities, villages, school districts, library districts, park districts, and community college districts are authorized to issue TAWs.
  3. Tax Anticipation Notes Tax anticipation notes (“TANs”) allow a governmental unit flexibility to balance its revenue collections from anticipated levies with anticipated expenditures. A governmental unit may be permitted to incur debt by issuing TANs in an amount not to exceed 85% of the issuer’s last known EAV multiplied by the maximum permitted tax rate of the issuer for the particular fund against which the TANs are issued. Unlike TAWs, TANs are required to mature within two years and may not be issued if there is an unpaid note from any prior year. Although TANs are generally a means of balancing a governmental unit’s operating expenses with revenue collections, TANs sometimes may be used as a “bridge” to fund a pending capital project while the governmental unit structures more permanent funding. Counties, cities, villages, school districts, library districts, park districts, and community college districts are authorized to issue TANs.
  4. Lines of Credit ‑ Promissory Notes and Debt Certificates Many banks offer lines of credit to Illinois units of local government. Typically, these are structured as promissory notes or debt certificates, normally in amounts greater than $50,000 to be considered as “issued” for tax‑exempt bond purposes. Notes and debt certificates are general obligations of the governmental unit, which are payable from all available resources including but not limited to ad valorem taxes, state aid, and the general fund of the governmental unit. Counties, cities, villages, school districts, library districts, park districts, and community college districts are authorized to issue these types of obligations.

What can be used as security for the short‑term obligation? The Local Government Debt Reform Act (the “Debt Reform Act”) allows flexibility in what may be pledged as a “revenue source” to the repayment of a debt obligation. “Revenue source” means a source of funds received or available to be received by a governmental unit and available for any one or more of its corporate purposes. Note that the source cannot be an enterprise revenue, for example revenue from a municipal water or sewer plant. The Debt Reform Act further authorizes a governmental unit to direct a county collector to deposit directly (“intercept”) any amount of tax proceeds pledged to the payment of warrants into a designated escrow account established by the governmental unit. Utilizing an intercept provides the bondholders the security of having the pledged revenue source wired directly from the respective county collector to an escrow account to be used by the escrow agent for debt service on the obligation before any payment to the governmental unit.

As noted above, loans and debt certificates are general obligations of the governmental unit, which are payable from all available resources including but not limited to ad valorem taxes and state aid and the general fund of the governmental unit.

What is the difference between a debt certificate or promissory note and a TAN or TAW? Generally, a TAW or TAN is payable solely from the tax levied but not yet collected for a specific fund or funds of the governmental unit and is generally outstanding for a short period of time; while a promissory note or debt certificate is a general obligation of the governmental unit, secured by all sources of the governmental unit and may be outstanding for more than one year.

When can short-term financings be financed as tax-exempt? Federal tax rules allow tax-exempt bonds or notes to be issued to finance working capital expenditures under certain circumstances. Working capital expenditures are expenditures that are not capital expenditures. For example, costs incurred to acquire, construct, or improve land, buildings, and equipment generally are capital expenditures. Costs of operations, debt service, or pension payments are working capital expenditures.

What are the primary tax law issues raised by the use of tax‑exempt bond proceeds for working capital expenditures? The sizing of tax‑exempt financings for working capital takes into account on a monthly basis the available amounts of revenue, the anticipated expenses, and a permitted working capital reserve that results in a cumulative cash flow deficit. The term is typically limited to 13 months, and certain rebate accounting can be avoided by sizing the obligations to cover a deficit that occurs within six months of the date of issuance of the obligations. The tax law also permits the financing of certain extraordinary working capital expenditures without regard to a cash flow deficit.

Federal tax rules also permit the issuance of longer‑term working capital obligations, including extraordinary working capital borrowings. These rules require the issuer on the issue date to determine the first fiscal year following the 13‑month period after date of issue in which it reasonably expects to have a surplus (the “first testing year”), which must be within five years of the date of issuance; determine the amount of surplus at the beginning of each testing year; and redeem bonds and/or purchase eligible tax-exempt bonds up to the amount of the outstanding working capital bonds.

What changes can be made to existing tax-exempt bonds to assist Illinois issuers in dealing with budget shortfalls during COVID‑19? Any change to payment terms of a bond will require bondholder consent. Issuers may find that it is more difficult to get such consent for public bond issues than it is for private bond issues or bank-purchased bond issues. Some issuers are asking bondholders for accommodations to existing bond documents because of the COVID‑19 crisis. Such changes could result in loss of tax‑exempt status, so it is best to consult bond counsel first. Most documents will require an opinion of bond counsel, although that could be waived. The deferral of one or more scheduled payments on a bond (either principal or interest) within a safe-harbor period does not cause a reissuance resulting in loss of the bond’s tax‑exempt status if the deferred payments are unconditionally payable no later than at the end of the safe-harbor period. The safe-harbor period begins on the original due date of the first scheduled payment that is deferred and extends for a period equal to the lesser of five years or 50% of the original term of the instrument.

A bondholder’s temporary forbearance to stay collection or waive default rights for a period of up to two years, plus any additional period during which parties conduct good faith workout negotiations or a bankruptcy case is pending, does not cause a reissuance resulting in loss of the bond’s tax exempt status.

Changes to a bond’s interest rate, obligor, or security always need to be analyzed, although the rules are different if such changes are permitted by the original bond documents. Some private placement deals contain formulas in the original bond documents which address the possibility of changes to the original structure.

This chart is intended to show the various options to finance working capital and basic requirements thereof:

Ice Miller LLP – Amy M. Corsaro and James M. Snyder

S&P: Kentucky’s Budget Management Tools Offset Near-Term Fiscal Effects Of COVID-19-Induced Recession

Table of Contents

NEW YORK (S&P Global Ratings) April 15, 2020–S&P Global Ratings believes the Commonwealth of Kentucky (A/Stable) is adequately positioned in the near term to manage fiscal and economic pressures induced by the COVID-19 pandemic. Kentucky has adopted a one-year budget, unlike its typical biennial budget, to be in a position to more effectively make adjustments as conditions change. The enacted budget initially reduces fiscal 2021 estimated revenues from earlier baseline forecasts and further reductions are likely as the pandemic and effects of the economic recession become more apparent.

Continue reading.

Murphy Says He Wants to Borrow Up to $9 Billion From Fed.

New Jersey Governor Phil Murphy wants to borrow as much as $9 billion from the U.S. Federal Reserve’s first-ever move into the municipal-bond market, with its $500 billion promise for states and cities.

“I don’t see any other way around it,” Murphy, 62, a retired Goldman Sachs Group Inc. senior director, said at a Trenton news conference. He called it a necessary “tool in our tool kit” as the coronavirus pandemic has shut down large swaths of the nation’s economy, decimating state and local revenue.

Details of his borrowing plan were contained in draft legislation seen by Bloomberg on April 15. His administration would borrow for this fiscal year and next, relying on future revenue to repay. Should income not hit marks, he would raise property and sales taxes. The draft leaves blank the dollar amount sought.

Murphy today said the Federal Reserve would limit New Jersey to $9 billion in borrowing based on revenue-related caps, though he said he wasn’t sure whether the state would seek that much.

Murphy said he discussed the plan Thursday with legislative leaders and called it “a good discussion.” On April 15, Senate President Steve Sweeney, a fellow Democrat and New Jersey’s highest-ranking lawmaker, said he had many questions about the plan, including how much the state would seek and whether it could repay borrowing without raising taxes. The state also has a constitutional ban on general-obligation borrowing without voters’ consent, but Murphy may have a workaround under emergency or act of God provisions.

The Fed last week said it would extend as much as $500 billion of loans to states, Washington, D.C., and some of the most-populous cities and counties. The central bank hasn’t released program details, including how much it will charge for the loans. Citigroup Inc. has estimated it could take weeks for the program to start dispensing funds.

At least three states — Hawaii, Massachusetts and Rhode Island — aren’t waiting for the Federal Reserve opportunity. They have taken steps to borrow from Bank of America Corp. to cover temporary cash shortfalls as the wide economic shutdown crimps their tax revenues.

Bloomberg Markets

By Elise Young

April 16, 2020, 11:34 AM PDT Updated on April 16, 2020, 12:25 PM PDT

— With assistance by Amanda Albright, and Danielle Moran

Amendments to CA Proposed Legislation Would Change Municipalization / Eminent Domain Takeovers of Electric, Gas and Water Utilities: Nossaman

We’ve previously reported on Senate Bill 917, which was introduced on February 3, 2020, by Senator Wiener (D-San Francisco) to establish a process for a potential government takeover of investor-owned electrical, gas and water corporations. While the stated intention of the bill was to facilitate an eminent domain acquisition of PG&E by the state government, its wording goes much further. Additionally, on April 3, a series of amendments were introduced that would potentially significantly change the burden of proof on a municipalization takeover effort.

Specifically, the amendments to SB 917 would make changes to Sections 1240.650, 1245.210, 1245.250, and 1268.610 of the Code of Civil Procedure, which govern the standard of proof and different evidentiary presumptions relevant for eminent domain actions. Under existing law, when the government takes private property for private use, if that property is used for the same purpose (e.g., continuing to use a water supply system to provide water), then there is a rebuttable presumption that it is a “more necessary use,” thus fulfilling one of the requirements to allow the government to condemn it. The proposed new language changes that and states:

(c) Where property that has been appropriated to a public use is electrical, gas, or water public utility property which the public entity intends to put to the same use, the presumption of a more necessary use established by subdivision (a) is conclusive, and not rebuttable, including in the circumstances when (1) the acquiring public entity is a sanitary district exercising the powers of a county water district pursuant to Section 6512.7 of the Health and Safety Code, and (2) the public utility that owns the public utility property has been convicted of one or more felony criminal violations of laws enacted to protect the public safety within 10 years of the date the condemnation action is commenced.

This proposed language would result in a significant change for investor-owned utilities, as it negates the utility’s ability to introduce evidence and contradict the public agency’s findings regarding whether the agency really needs to undertake the takeover of the utility to provide the same service. The existing “rebuttable” presumption has been used by utilities to defeat a public agency’s right to take, primarily by introducing evidence that the public agency would not be able to provide better or more cost-effective services. By eliminating this rebuttable presumption, and making it “conclusive,” the utility would arguably lose the ability to contest the public agency’s determinations.

While the intention of this proposed new language appears to be aimed at making the conclusive presumption regarding “a more necessary use” applicable to public utilities that have been convicted of a felony, the language is ambiguous in that it uses the word “including” those situations — not “limited to” those situations. Therefore, a government entity may attempt to interpret this proposed statute to make all municipal takeover eminent domain actions involving “electrical, gas, or water public utility property” subject to the same “conclusive” presumption. This would, in effect, make contesting any municipalization takeover effort incredibly difficult and would effectively eliminate a significant potential defense that was previously available.

There are also several other amendments to the initial SB 917 language, including:

You can view the April 3, 2020 amendments to the initial SB 917 language introduced in February here or view how the amended language would change existing statutory codes here.

by Bradford B. Kuhn and Willis Hon

April 9 2020

Nossaman LLP

Puerto Rico Debt Plan at Risk as Economic Outlook Darkens.

(Bloomberg) — Puerto Rico and a group of investors in February agreed to a debt-cutting deal that would allow them to recover as much as 77.6 cents on the dollar from their investment in the island’s bonds. But that deal may have to be revisited as the coronavirus darkens the outlook for the economy.

While the commonwealth estimates its economy has been growing after more than a decade of contraction, the coronavirus could exert a considerable drag on Puerto Rico’s economy over the next two quarters.

The tentative plan for how to slash nearly $18 billion of Puerto Rico’s debt is on hold after the judge overseeing the record bankruptcy canceled hearings set for early June as island officials work to slow the spread of the disease. They’ll also be working with Puerto Rico’s financial oversight board to assess the economic impact of the virus on the island’s ability to repay bondholders, the commonwealth’s Fiscal Agency and Financial Advisory Authority said in a court document filed Thursday.

“This is going to make it harder to give the same level of revenue growth and it’s going to force them to cut deeper into bondholder principal,” said Matt Fabian, a partner at Municipal Markets Analytics.

Economy Halts

States and cities throughout the U.S. are struggling to get a handle on how bad their finances will be hit as businesses, schools and cultural institutions close. In Puerto Rico’s case, it must also work through its nearly three-year old bankruptcy as most economic activity halts.

The latest challenge will likely force island official to place the debt restructuring on the back burner, as it did after being battered by Hurricane Maria in 2017. Depending on how Puerto Rico weathers the economic blow, the amount of money to pay debt service may change.

“It may impact recoveries,” said John Ceffalio, municipal credit research analyst at AllianceBernstein, which manages $47 billion of debt, including Puerto Rico securities. “Our desired outcome from the board’s work is sustainability for the island — sustainable economy, sustainable budget, sustainable debt service — and given the uncertainty with the virus there are a lot of questions right now as to what is sustainable.”

While addressing Puerto Rico’s finances is a central task for the oversight board, the virus has become the main issue in the near term.

“The oversight board’s focus right now is on supporting the government to help Puerto Rico through the COVID-19 crisis,” Matthias Rieker, a spokesman for the board, said in a statement. “The oversight board’s goal continues to be to reduce Puerto Rico’s debt to a sustainable level.”

The debt restructuring plan faced hurdles even before the coronavirus. Bond insurers hadn’t signed on to the tentative deal and Governor Wanda Vazquez criticized the proposal.

The oversight board on Feb. 9 struck the tentative deal with Aurelius Capital Management and other investors. It includes a range of recoveries depending on the security. General obligations sold in 2014 with an 8% coupon would get 65.4 cents on the dollar while Public Buildings Authority debt sold before 2011 would get 77.6 cents.

Trading Below

Some Puerto Rico bonds are trading below those levels following the steep sell-off in the municipal market earlier this month. General obligation bonds with an 8% coupon and maturing in 2035 traded Monday at about 59 cents on the dollar, down from an average 73.8 cents in February, according to data compiled by Bloomberg.

Puerto Rico is set to file by May 1 a status report to the court on the effects of the virus on the economy. Island officials will also be reviewing the debt adjustment plan.

“During this adjournment, the government, in collaboration with the oversight board, will work to assess the economic impact of COVID-19 on Puerto Rico’s debt service capacity under the proposed plan of adjustment (or any future plan),” AAFAF, the fiscal agency, said in a court document filed Thursday.

While the oversight board and Puerto Rico will work to achieve the best settlements in their interest, the debt adjustment plan spans many years and doesn’t rely just on the economy’s immediate performance, said Howard Sitzer, senior municipal analyst at CreditSights Inc.

That longer horizon and the potential federal aid that Puerto Rico will receive along with Governor Vazquez’s $787 million stimulus plan will help support the island’s economy, Sitzer said.

“The question is what kind of drag will the pandemic have in terms of the intermediate to longer range economic performance of Puerto Rico?” Sitzer said.

Bloomberg Markets

by Michelle Kaske

March 30, 2020

Near-Junk Illinois Faces Record Bond Penalties on Financial Risk.

The extra yield that investors are demanding to own Illinois bonds has surged to a record high, surpassing even the levels hit three years ago when it was on the verge of seeing its rating cut to junk, as the coronavirus threatens to deal a devastating blow to its precarious finances.

The yield on the state’s 10-year debt has climbed to about 340 basis points above the top-rated benchmark, according to Bloomberg’s indexes, which were started in 2013. That’s above the previous record in June 2017, during the height of a protracted two-year budget impasse that left the government contending with a swelling backlog of unpaid bills and threatened to turn it into the first state to be stripped of an investment-grade credit rating.

Since then, Illinois had gained some ground as lawmakers crafted plans to stabilize its budget and tumbling interest rates boosted demand for higher-yielding securities. But the market since last month has been rocked by a series of sell-offs and investors are on edge about the deep financial hit the pandemic-induced economic slowdown will deliver to Illinois, which already had $137 billion in unfunded pension liabilities, more than $7 billion in unpaid bills and almost nothing in its rainy day fund.

With its bonds rated just one step above junk by Moody’s Investors Service and S&P Global Ratings, a downgrade could set off a round of forced selling by mutual funds that can only hold investment-grade debt.

“The situation is more precarious because they are currently rated just above investment grade,” said Jason Appleson, a portfolio manager for PT Asset Management, which holds Illinois debt. “The more investors fear there’s a chance for Illinois to get downgraded to below investment grade, the greater the chance of spread widening.”

Illinois 10-year bond spread hits record ahead of tightening cash
Governor J.B. Pritzker has acknowledged the steep economic toll, though he has yet to provide estimates for how severe it will be.

Making matters more difficult, the state has joined those that pushed their annual tax-collection deadlines until July, creating cash-management challenges even with the $150 billion in federal emergency stimulus money about to flow to states and local governments. Illinois Comptroller Susana Mendoza said Friday the state will delay some payments in the coming months to pay more immediately needs such as equipment and services to curb the outbreak.

During previous fiscal crises, Illinois continued to cover its bond payments, and no state has defaulted on its debts since the Great Depression. Illinois’s general-obligation debt is funded a year in advance, effectively insulating bondholders from a near-term default, said Matt Fabian, a senior analyst for Municipal Market Analytics.

“Because of the wider spread, they will have to pay more,” he said. “It will make their budget balancing harder. The spread widening does have real world consequences.”

Most states are “really cash poor this quarter” but Illinois is “going to have a much tougher time looking for short-term financing” than a highly rated state, said Dan White, head of public sector research for Moody’s Analytics.

“There’s going to be some real cash crunch time coming,” White said.

Bloomberg Markets

By Shruti Singh

April 3, 2020, 10:32 AM PDT

New York City’s Economy Is in the Crucible of the Crisis. The Rest of the Country Is Next.

New York City, as the nation’s epicenter of the Covid-19 pandemic, is battling an unprecedented health crisis. It is also grappling with a rapid economic slowdown that is undermining hard-won gains in its fiscal health that have been achieved since the financial crisis of the 1970s.

The country’s largest metropolis operates on a massive scale, with an annual budget of $95 billion that exceeds that of nearly every state. It has a population of 8.4 million, total employment of 4.7 million, public-school enrollment of 1.1 million, a municipal labor force of 327,000, nearly 300,000 retirees drawing from a huge underfunded pension plan, and $91.6 billion of outstanding debt.

New York’s situation is emblematic of the one that many states and cities across the country soon will be facing as unemployment surges and tax revenues drop.

Continue reading.


By Andrew Bary

April 3, 2020 7:01 pm ET

California Municipal Bond Investors Must Do This While They ‘Stay At Home’

Year in and year out, California consistently tops the nation in bond issuance.

The Office of the Treasurer for the State of California notes general obligation and lease revenue bonds outstanding and supported by the General Fund currently total $80.8 billion so far this year. At the close of 2019, there was another $35.7 billion in State Revenue Bond Financing Programs as well as $31.7 billion in through Conduit Financings with outstanding bonded debt.

In addition to these state supported or issued bonds, add outstanding debt of local government, district, agency, and authority, including all general obligation and revenue bonds. In total, it’s estimated some $482 billion in bonds are outstanding—just over 12% of the total municipal bond market.

That’s a lot of investors holding a whole lot of bonds. Morningstar reports that as of March 2020, $82.9 billion were held in California intermediate and long muni mutual funds. Individual bondholders, separately managed accounts, trust accounts, and other institutional investors hold the balance.

Regardless of where the bonds end up, all that debt is held in a portfolio somewhere. California Governor Newsom’s “Stay at Home” order is going to affect every last dollar of it in one way or another.

The order sharpens the focus on the vulnerability geographically concentrated portfolios incur when faced with systemic risk.

Diversity Vs. Correlation

Diversification in a California-only municipal bond portfolio generally means maintaining some geographic dispersion within the state as well as sector heterogeneity.

However, with the public policy response to the coronavirus pandemic affecting the entire state, portfolio diversification becomes far less defensive both on individual holdings as well as, and perhaps even more importantly, the portfolio as a whole.

Credits that initially may have seemed unrelated and uncorrelated are now inextricably connected. Prior to this event, the portfolio may have looked like a well-ordered Venn Diagram. The coronavirus now has those circles converging in ways previously not considered.

Defaults Or Downgrades

Default risk among large public service providers of basic infrastructure, such as mass transit, bridges and highways, municipal services and ports, remain low at this time, in my view. The risk of downgrade, however, is significantly higher.

With downgrades comes not only a decline in pricing but also an increase in volatility. Expand that across an entire portfolio’s holdings, even a portfolio with shorter (under 10 year) maturities, and the effect can be substantial.

Actions To Take

There are some specific actions investors should consider taking in assessing the risks this order has heightened, both on individual credits and the portfolio overall.

While perhaps prompted to start these due to the coronavirus, note these are good investment and portfolio management practices that any investor should be doing as part of ongoing surveillance. Appropriate for this time, I draw from the scientist who discovered and promoted vaccination, Louis Pasteur: “Luck Favors the Prepared Mind.”

Here is an initial list of several key factors to chart:

1. Revenue Security Source (i.e., ad valorem taxes, sales taxes, fees)

2. Underlying economics of the Security Revenue Source (i.e., home values, sales volume, project or service usage)

3. Backstop Security Provisions (i.e., regulation or legislation permitting or limiting fee increases, release of state support funds, imposition of state oversight)

4. Debt Service Reserve Fund

5. Security Liens (i.e., unlimited taxes, first lien on tax revenues)

6. Number of people served by the service, both directly and indirectly.

While there may be no investment buy or sell to take at this time of market dislocation and illiquidity, I am reminded of another quote. As the proverb goes, “Forewarned is forearmed.”

In this market, either quote will suffice.


by Barnet Sherman

Mar 23, 2020

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