Hedge funds like Appaloosa Management, Paulson & Company and Blue Mountain Capital gathered in a conference room at the Barclays offices in Midtown Manhattan last September to talk about what was then the hottest trade: Puerto Rico.

An hour into the conversation, however, it became clear that if things started going bad, not everyone in the room was going to get along. Some had wagered on real estate, while others had bought up the debts of the central government and its troubled electric utility.

Those divisions intensify an increasingly contentious battle the hedge funds are beginning to wage to salvage an investment that, less than a year ago, looked like a sure thing.

This week’s announcement by Gov. Alejandro García Padilla of Puerto Rico that the commonwealth may seek to delay debt payments has thrown the hedge funds’ investment strategies into turmoil.

Even debts that appeared to be secure now seem in jeopardy, sending hedge funds and other investors scrambling to re-examine their legal rights and potential remedies should the government push for a restructuring.

A vast restructuring of the commonwealth’s bonds could scare away more risk-averse investors from buying them for many years to come, causing major problems for the hedge funds.

“Those investors are not coming back,” said Robert Donahue, a managing director at Municipal Market Analytics. “The hedge funds miscalculated and they are feeling the pain.”

While some hedge fund managers say they were caught off guard by Governor García Padilla’s call for a debt restructuring, they are not panicking, even as the price of some of their bond holdings has fallen 17 percent in the last two days.

They see the governor’s announcement as more of an opening salvo in a negotiation rather than an indication of imminent and widespread defaults, particularly on debts that Puerto Rico’s Constitution says must be repaid.

Some analysts say the governor’s announcement may have been intended in part to drive down the value of the hedge funds’ bonds so that the firms would be more willing to agree to concessions in order to minimize their losses.

“The Puerto Rico government has engaged in the creation of a crisis where there isn’t one,” said Hector Negroni, a principal at Fundamental Advisors, which owns Puerto Rico debt. “But I don’t think they will ultimately flout the rule of law. At the end of the day, they need to borrow money again. And no one will lend them money if they break the Constitution.”

Lending more money to Puerto Rico had been a major part of some hedge funds’ strategy. They planned to allow the commonwealth to help fund its operations with borrowed money so it could take steps to jump-start the economy.

When Puerto Rico issued $3.5 billion in general obligation bonds last March, a long list of hedge funds participated, including Paulson & Company and Och-Ziff Capital Management.

Paulson & Company immediately sold its approximately $120 million holding, according to a person familiar with the firm’s trading, and it was unclear whether the other hedge fund managers later sold their similarly sized positions.

The bonds were sold last March at about 93 cents on the dollar. On Tuesday, the bonds were trading as low as 64 cents, according to Municipal Market Analytics.

Many of the same hedge funds have been offering to lend the government as much as $2.9 billion in a bond supported by a fuel tax. But the government has refused to negotiate a deal in recent months, hedge funds managers say.

Aides to Governor García Padilla said in an interview last week that they had not ruled out borrowing more money from hedge funds, but that they first needed to examine all their options, including a vast restructuring of current debts. The aides added that the initial deal terms were too onerous.

Some hedge funds had invested in Puerto Rico debt, expecting a restructuring all along. Firms like Blue Mountain Capital have bought up bonds owed by the Puerto Rico Electric Power Authority at steep discount. On Tuesday, the utility was close to a deal that would avert a default and possibly allow some of its creditors to eventually profit from their investments in its $9 billion in debt.

Until this week, a restructuring of general obligation bonds, which carry a constitutional guarantee to repay, seemed like an impossibility, making the hedge funds’ investment look bulletproof.

For the hedge funds, the idea was to lend the money at high interest rates, then flip the bonds to traditional municipal bond investors, like mutual funds, once the fiscal crisis on the island had passed. As part of that strategy, some of the hedge funds circulated research last summer arguing that Puerto Rico’s problems were overstated.

But Governor García Padilla is now contending exactly the opposite, releasing a report by former officials at the International Monetary Fund and the World Bank that says that Puerto Rico’s deficit is worse than it appears and that the commonwealth cannot solve its problems without restructuring its debts, possibly even its general obligation bonds.

Still, Puerto Rico’s relationship with the hedge fund industry is complicated. At the same time the government is gearing up for a series of restructurings with hedge funds and other creditors, officials are courting investments in the broader economy.

Hedge funds have been among the few investors willing to take a chance that Puerto Rico can turn things around.

Puerto Rico’s biggest hedge fund cheerleader in New York has been the billionaire John A. Paulson. Mr. Paulson told investors at an investment conference in San Juan last year that Puerto Rico’s economy was turning a corner. He went as far as to predict it would be the Singapore of the Caribbean, referring to the Southeast Asian city-state that is considered the region’s biggest economic success story.

Mr. Paulson bought up some of the island’s most exclusive luxury hotels, including the St. Regis Bahia Beach Resort, the Condado Vanderbilt Hotel and the La Concha Renaissance hotel and tower.

And he has acted as a de facto liaison between the commonwealth and Wall Street.

Mr. Paulson recently suggested that Puerto Rico officials attend the hedge fund industry’s biggest event of the year — the SkyBridge Alternatives Conference in Las Vegas, according to Alberto Bacó Bagué, Puerto Rico’s secretary of economic development.

Mr. Paulson met with Mr. Bagué on the sidelines of the conference and helped arrange a meeting with James J. Murren, the chief executive of MGM Resorts, Mr. Bagué said.

“He is building a home, and he is validating our economic model with all his colleagues and friends and the investments that he has,” Mr. Bagué said.

THE NEW YORK TIMES

By MICHAEL CORKERY and ALEXANDRA STEVENSON

JUNE 30, 2015

NEW YORK — When Puerto Rico hired former Detroit judge Steven Rhodes it sent a signal to creditors that one possible solution it sees is the one thing it cannot do now: declare bankruptcy.

Gaining access to the U.S. Chapter 9 bankruptcy laws for the commonwealth would give a framework for creditors and debtors of public corporations to work out their differences. Allowing the Commonwealth itself to follow the same path as the city of Detroit, which emerged from bankruptcy last year, would be a further step.

“The parallels between Detroit and Puerto Rico are strong enough that I think any of the public corporations or the commonwealth itself could take advantage of the same kind of process that we used in Detroit,” Rhodes told Reuters.

A more concerted push for a bankruptcy framework concerns some creditors, who fear it will weaken their negotiating position and reduce their chances of recovering their money.

“Every time Chapter 9 is used, bondholders get destroyed,” said one creditor source.

In testimony ahead of a February congressional hearing on a proposal to allow Puerto Rico to apply the code to its municipalities, Thomas Mayer, a partner at Kramer Levin law firm representing PREPA utility’s bondholders, cited recoveries in Detroit, Stockton, Vallejo and Jefferson County and concluded that the code hurt bondholders.

Puerto Rico’s Governor Alejandro Garcia Padilla dropped a bombshell on holders of its $73 billion debt on Monday by saying that he wants to restructure debt and postpone bond payments. He also called on Washington to make changes to U.S. bankruptcy laws to include Puerto Rico.

Padilla’s office had hired Rhodes, who is retired, on June 1, to use his experience from presiding over Detroit – the biggest U.S. municipal bankruptcy. Rhodes will be devoting 25 percent of his time to the island, he said.

“(Rhodes) has made a very public statement about wanting Chapter 9 applied to the Commonwealth,” said David Tawil, president of New York-based hedge fund Maglan Capital, which sold its Puerto Rico exposure about a year ago. “It’s a big deal.”

The creditor source said Rhode’s appointment gave them the impression that Puerto Rico was “hiring him to help push for Chapter 9,” because of his experience.

Chapter 9 is the bankruptcy statute governing municipal filings. Puerto Rico’s entities now cannot use the statute because it only covers political subdivisions or public agencies of a state.

The island’s congressional delegate, Democrat Pedro Pierluisi, has already proposed legislation to allow Puerto Rico’s public corporations such access.

Rhodes said that creditors “need to accept that the island, the commonwealth and its public corporations are simply not able to pay their obligations as they come due.”

“What bondholders need to understand is that the filing of a bankruptcy by itself doesn’t create any harm to any creditors,” Rhodes said. “What creates the harm to creditors is the inability of public corporations to pay their debt.”

CHAPTER 9 STRETCH

Allowing Puerto Rico to use Chapter 9 as it is currently proposed would not apply to general obligation debt issued by its government because the statute excludes states from restructuring their own debt, said Daniel Hanson, analyst at Height Securities.

“To give them a special ability to restructure their obligations on a state level would be different to what the rest of the states have,” said Hanson. “It seems extraordinarily unlikely to pick up any kind of political traction.”

One large Puerto Rico bondholder said that anything that opened the door to a restructuring of the island’s general obligation bonds would be negative for the bonds, but played down such a possibility.

“They will have a hard time defending why bondholders should be getting less than they are currently getting.”

Puerto Rico would have to amend the bankruptcy laws to have it considered a state for the purpose of Chapter 9; and then get a provision to allow it to file its state debt.

Pierluisi himself sees no appetite in Congress for giving Puerto Rico more favorable treatment than the states have, his spokeswoman said.

But Rhodes said there could be less resistance to allowing such an option for the territory than it would have been with a state.

“Territories are not sovereign entities in our constitutional structure the same way states are,” Rhodes said. “So while from a constitutional perspective, Congress probably could even authorize a state to file bankruptcy, the political, legal and constitutional sensitivities are very much stronger when you are dealing with a state compared to a territory.”

The push for Chapter 9 took on more importance when a U.S. federal judge in February voided a restructuring law Puerto Rico had introduced to make some of its agencies eligible for court-supervised debt restructuring.

But Chapter 9 also looks like a long shot and some negotiations go on despite the lack of a legal framework. Puerto Rico’s utility PREPA continues to negotiate a restructuring of its $9 billion debt and on Wednesday struck a deal to avoid default. Puerto Rico could also consider setting up a financial control board, such as that used by the then nearly-bankrupt District of Columbia in 1995.

Rhodes said some form of a settlement was still the best option, but that could be facilitated if Chapter 9 were available, even if it were not used.

“All parties would much rather have an out of court solution,” said Rhodes, who is not expecting to play any role in negotiations with creditors. “Bankruptcy is always the last resort.”

By REUTERS

JULY 3, 2015, 11:28 A.M. E.D.T.

(Additional reporting by Edward Krudy and a contributor in San Juan; Editing by Tomasz Janowski)

The $3.6 trillion municipal-bond market’s first reaction to Puerto Rico saying it can’t pay its $72 billion of debt? A collective yawn, as far as prices went.

While the commonwealth’s securities tumbled after Governor Alejandro Garcia Padilla said his administration will seek to restructure its debt, the fallout has so far been contained: Yields on top-rated 10-year municipal bonds declined 0.02 percentage point, or 2 basis points, this week, as prices rose, according to data compiled by Bloomberg. Top-rated 30-year bond yields were little changed, even as investors pulled money from municipal-bond funds for a ninth straight week.

Puerto Rico securities have traded at speculative levels for more than a year, which has given investors time to pare holdings of the junk-rated island. The long-building strains on the U.S. commonwealth, which has more debt per resident than any state, are also unique.

“Problems with Puerto Rico aren’t news,” said Phil Fischer, head of municipal research at Bank of America Merrill Lynch in New York. “Puerto Rico paper has been treated as speculative for a long time now.”

Garcia Padilla said this week that his administration will seek to put off some debt payments for a “number of years.” The specter of such a restructuring caused Puerto Rico’s newest general-obligation bonds to trade at an average of 69.8 cents on the dollar Thursday, down from 77.3 cents last week.

Risk Appetite

Fischer said individual investors have reduced their holdings of Puerto Rico bonds, many of which are now owned by hedge funds and other buyers with more appetite for risk. About half of U.S. mutual funds that focus on municipal debt hold the securities, down from 77 percent in October 2013, according to Morningstar Inc.

The island’s debt crisis could force fund managers to sell other bonds if losses lead investors to withdraw their money. Investors have pulled cash from municipal-bond funds for the past two months, and some analysts say a Puerto Rico restructuring could weigh on a market already bracing for higher interest rates.

Investors withdrew $1.2 billion from municipal bond funds in the week ended Wednesday, the most since Jan. 2014, Lipper US Fund Flows data released Thursday show. About 40 percent of that total was from high-yield funds.

High Yield

If Puerto Rico defaults, some high yield funds, which have higher concentrations of the commonwealth’s bonds, may be the hardest hit. Municipal debt backed by a 1998 national settlement with tobacco companies and those issued by lower-rated hospitals may be vulnerable, said Mikhail Foux, municipal debt strategist at Barclays Plc.

Still, Bank of America’s Fischer said Puerto Rico’s struggles don’t reflect any broader financial pressure on state and local governments.

“The risk with regard to Puerto Rice is not in some sense a contamination of other municipal credits,” he said. “There’s almost no economic dependency of other muni issuers on Puerto Rico.”

Bloomberg

by Martin Z Braun

July 2, 2015 — 12:19 PM PDT Updated on July 2, 2015 — 3:16 PM PDT

Municipal bond researchers at Franklin Templeton, whose funds are among the largest owners of Puerto Rico debt, on Wednesday predicted a “long and costly” legal battle as the Caribbean nation tries to restructure more than $70 billion in obligations.

“At the very least, in our assessment, Puerto Rico can expect creditors to seek legal affirmation and protection of contractual rights,” said Rafael and Sheila Amoroso, co-directors of the municipal bond department at Franklin Templeton. Their report was published on the company’s website.

“Unfortunately, we think it will likely be a long and costly battle regardless of the outcome,” they said.

However, the co-directors said they didn’t see Puerto Rico’s problems affecting the rest of the $3.7 trillion U.S. municipal bond market in a negative way.

Reuters

Wed Jul 1, 2015 12:39pm

(Reporting By Tim McLaughlin)

Best Credit Data (BCD), a provider of end of day bond pricing data, is partnering with Exchange Data International (EDI), to distribute BCD Municipal Bond End-of-Day Pricing data to EDI clients around the world.

BCD Municipal Bond Pricing provides end of day pricing for over 1.25 million US municipal bonds every day and roughly 8 years of daily history. The partnership gives EDI’s customers the opportunity to subscribe to BCD municipal bond pricing data. Customers will be able to access data fields including: price, yield, spread, multiple duration calculations, convexity, and OAS.

“We are excited to partner with EDI,” says Pierre Robert, CEO of Best Credit Data Inc. “Its global presence and its extensive experience with data-feeds makes it an ideal partner.”

“We are excited to bring BCD on as a new partner to help us fill the need for customers in regards to municipal bond pricing,” says EDI CEO, Jonathan Bloch, “It is the perfect partner to help bring transparency to a market sorely in need of high quality information due to severe illiquidity.”

The firm BTIG came out on Monday and downgraded Assured Guaranty Ltd. (NYSE: AGO) and MBIA Inc. (NYSE: MBI). BTIG said that this risks makes the two insurers not buyable and that investors should not get involved in the names. Assured Guaranty and MBIA are municipal bond insurers, and their ratings were each downgraded to Neutral from Buy.

Puerto Rico has warned that it is effectively near default after Puerto Rico’s governor said that its $72 billion in debt is unpayable. The governor had previously said that Puerto Rico would effectively do whatever was necessary to pay its debt.

Puerto Rico faces crunch time this week with a June 30 deadline to restructure some of its debt or bump the deadline.

It is estimated that Puerto Rico stands to have an overall deficit of $2.5 billion per year, over the next five years.

MBIA Inc. (NYSE: MBI). shares fell 23.50 % by days end to $6.36 per, down $1.95 per share with more than 20 million shares trading hands. The average daily volume is 3 million shares. That marks the lowest level for the issue since mid-November 2012 when it bottomed at $6.78.

About MBIA

MBIA Inc. (NYSE:MBI) provides financial guarantee insurance, as well as related reinsurance, advisory and portfolio services, for the public and structured finance markets, and asset management advisory services. MBIA conducts its United States public finance only financial guarantee business through its subsidiary National Public Finance Guarantee Corporation (National), and its global structured finance and non-United States public finance financial guarantee insurance business through its subsidiary MBIA Insurance Corporation and its subsidiaries (MBIA Corp.). Related advisory and portfolio services are provided by the Company’s subsidiary Optinuity Alliance Resources Corporation (Optinuity), which provides support services, such as surveillance, risk management, legal, accounting, treasury and information technology.

Ira Market Report

June 30, 2015

By Don Miller

U.S. municipal bond issuance rose to $213 billion in the first half of 2015, nearly 49 percent higher than the same period last year, according to preliminary Thomson Reuters data on Tuesday.

Refundings comprised $139.6 billion, or 66 percent, of the total for the period.

Reuters

Jun 30, 2015 3:26pm EDT

(Reporting by Hilary Russ in New York)

Puerto Rico’s debt headache isn’t confined to the island. Some of the largest mutual funds have placed sizable wagers on the U.S. commonwealth’s municipal bonds.

One fund, in fact, had nearly half its assets in Puerto Rican debt.

Now, investors are bracing for losses after the island’s governor said Puerto Rico can’t pay its debts. Already, some of the Puerto Rico holdings in the mutual funds are touching record lows.

In a low-interest rate world, Puerto Rico’s bonds have offered investors juicy yields over the past several years. Puerto Rico’s $3.5 billion in general-obligation bonds issued in 2014 initially had a yield of 8.7%. The yield on 10-year U.S. Treasury notes, by contrast, hovered between 2% and 3% last year.

But now investors are getting a fast lesson on the risk that comes with those sorts of high yields. More than half of all U.S. municipal-bond funds, or 298 of 565, have invested in Puerto Rico’s debt, according to the most recent fund holdings compiled by Morningstar.

Municipal-bond mutual funds run by OppenheimerFunds and Franklin Resources BEN -0.24%’ Franklin Templeton Investments have the highest exposure to Puerto Rico’s debt, Morningstar says. OppenheimerFunds and Franklin Templeton respectively hold roughly $4.5 billion and $2.3 billion of Puerto Rico’s $73 billion in municipal debt, according to the most recent Morningstar data.

The mutual fund with the biggest exposure, a roughly $230 million fund called the Franklin Double Tax-Free Income Fund trading under the ticker “FPRTX”, had about 47% of its assets in Puerto Rico debt at the end of the first quarter, the highest on Morningstar’s list. OppenheimerFunds’ Oppenheimer Rochester line of funds have between 2% and 37% of their assets in Puerto Rico’s debt.

Of Wells Fargo’s 14 municipal-bond funds, ten have wagered on Puerto Rico’s debt, and 20 of Eaton Vance’s 27 muni funds have invested in Puerto Rico’s bonds, according to Morningstar.

Puerto Rico bonds pay interest that is exempt from federal taxation and have the ability to issue bonds exempt from federal and state taxes in every state. By contrast, most muni-bond interest is exempt from both federal and state income taxes only if the investor lives in the state where the bonds were issued.

A spokesperson for OppenheimerFunds said that its among creditors that have offered Puerto Rico’s governor “numerous creative and viable solutions to the current fiscal situation,” and said the firm is “disheartened” by the governor’s recent comments. He added: “We expect Puerto Rico to act within the tenets of the law, including the Commonwealth’s Constitution, and are ready to defend the previously agreed to terms in each and every bond indenture.”

A spokesperson for Franklin Templeton said in an email that they “are currently analyzing the report, and we are waiting to hear more from the governor on next steps.”

THE WALL STREET JOURNAL

By MAUREEN FARRELL

Jun 30, 2015

It’s a problem state government can’t solve with existing resources, the private sector won’t take on without public partners, and nonprofits can’t address alone.

California lacks funding for every type of infrastructure—from moving goods to moving information—but the scope of this challenge (a $300 billion shortfall over the next 10 years just for maintaining the state’s transportation system) has proven too much for traditional public investment. The state and federal government simply haven’t been able to close these gaps.

Continue reading.

JUNE 25, 2015 BY JUSTIN EWERS

Prices on benchmark U.S. municipal bonds rose on Monday, driving down yields as much as 6 basis points on Municipal Market Data’s preliminary scale read.

The lift came after a weekend of financial turmoil in Greece left investors pulling money out of stock markets and pouring into safe haven securities including bonds, according to MMD analyst Gregory Saulnier. MMD is a unit of Thomson Reuters.

Reuters

(Reporting by Hilary Russ)

Mon Jun 29, 2015 10:14am EDT

The state of Maine is firmly committed to municipal broadband — it just doesn’t want to pay for it.

If Maine Gov. Paul LePage signs LD1185, the state will create a new fund that would endeavor to provide residents with a wider array of high-speed broadband providers in the coming years. The fund would offer grants to research how municipalities might build open-access gigabit broadband networks, expanding competition in a rural state dominated by Time Warner Cable and Fairpoint Communications.

When the bill was introduced, the fund was $12 million, then reduced to $6 million; now the fund is a $500 placeholder that Congress will revisit next year.

Originally municipalities would have been eligible to apply for up to $200,000 in funding to research the development of an open-access gigabit network. The old version of the bill required that a minimum of 50 such grants be made available, at least half of which would be granted to low-income areas. If signed, the new fund will exist in spirit, but with no funds to distribute.

The organization that would distribute the funds should they become available would be the ConnectME Broadband Authority, the state’s broadband advocacy and engagement arm. Lisa Leahy, associate executive director of ConnectME, said the bill is an excellent idea that has had a lot of support from all directions.

“It establishes that there can be a fund and now the work will continue in regard to ‘OK, how do we fund it?’” Leahy explained. “At this time, I think there’s been such a concern around budget that any bill that has a fiscal note attached to it is being looked at very closely.”

When or how the fund would contain more than $500 is unknown, but it’s something the state Legislature will look at next year, Leahy said.

Chris Mitchell of the Institute for Local Self-Reliance said that what the state is doing is smart, though the lack of funding is disappointing.

“The thing that I found really exciting is it’s only for municipalities or nonprofit types of approaches and it’s requiring open access, and I think that’s a real smart thing for states to do,” Mitchell said. “Because I think local governments can be trusted to maintain that sort of open-access approach for a very long time, where I think the private sector might decide to go back to a monopoly model.”

In an open-access model, a network’s physical infrastructure is available for rent to any company that wants to sell services to the public, allowing for more competition than if each provider is required to build their own network to compete.

“I like that it’s open access because in most of Maine, if you don’t build competition into your system, there won’t be competition,” Mitchell said. “Either one of the existing incumbents will stick around or the city will build a system, but people aren’t going to have a real robust choice unless you build a network that allows multiple providers to do it, and there’s one company already operating in Maine called GWI that does a really good job.”

In Maine today, several municipalities are investing in municipal fiber, like the town of Rockport, which is working with GWI to develop an open-access municipally run fiber network. Broadband development often goes slowly — projects often take years rather than months — but if this bill is signed into law, consumers might find in the next few years that both the speed of Internet access and the number of providers available will have increased dramatically.

It’s frustrating to see such a promising piece of legislation relegated into uncertainty, Mitchell said.

“It still sets an interesting precedent in terms of targeting municipal open-access approaches, which I think is valuable, although clearly much less so if they’re not going to put any money into it,” he said. “Just about every elected official wants to vote and tell their constituents that they supported better broadband, but they really don’t want to upset the Fairpoint and Time Warner Cable lobbyists, so they’ve kind of done both. The lobbyists are happy because there’s no real funding, but a lot of people will go home and say, ‘Well, I voted for better broadband for the state.’”

The bill’s potential passage into law could have some positive effects. If federal funding becomes available, Maine would be well positioned with such a fund in place to apply for it. Such funding from the federal government, however, doesn’t appear to be forthcoming, Mitchell said, nor would Maine be guaranteed a slice of the pie anyway.

There is at least one precedent of an unfunded state broadband fund that might indicate the future of Maine’s legislation, which can be found in the Virginia Resource Authority — a state agency that funds infrastructure projects. In 2007, the state of Virginia decided to add broadband to its repertoire, but as with Maine’s recent legislation, it provided no funding to support such projects. In the department’s 2014 annual fiscal report, there is just one mention of broadband: The department maintains authority to fund such projects. Any evidence of actual funding for such projects is absent.

Editor’s Note: This story was updated on June 26, 2015 to reflect the fact that Rockport is a town, not a city.

Governing.com

Colin Wood Colin Wood | Staff Writer

Colin has been writing for Government Technology since 2010. He lives in Seattle with his wife and their dog. He can be reached at cwood@govtech.com and on Google+.

As City Manager Ed Zuercher tells it, trash “is in Phoenix’s DNA.” From two guys throwing cans of garbage into the back of a truck to automated side-loading trucks to single-stream recycling, Phoenix, says Zuercher, has always been innovative in solid waste. Now the desert city has plans to take its long-running relationship with waste innovation a step further: It wants to turn trash into a resource.

That’s the tagline for the city’s new sustainability initiative, which calls for reducing the amount of trash sent to city landfills by 40 percent over the next five years. It’s an ambitious goal. While Phoenix was one of the first cities in the country to introduce single-stream recycling, it only has a 16 percent diversion rate — well below the national average of 34 percent.

In order to meet the ambitious target, Phoenix needs an ambitious plan. That’s where its Resource Innovation Campus comes in. As its name suggests, the campus will be a hub for waste innovation. The focus will be on what city leaders call the “5 R’s”: reduce, reuse, recycle, reconsider and reimagine. This might mean, for instance, turning a beer bottle into new glassware or compost into natural gas.

Construction on the hub is scheduled to start next year on 50 acres of vacant land in the southern portion of the city. Adjacent to a closed landfill, a transfer station and a recycling facility, the land will become home to an Arizona State University (ASU) research center and waste-to-products companies. With access to the city’s solid waste stream, these businesses will work with the university to create new uses for garbage. “We’re giving local researchers the tools they need to turn trash into cash,” says Mayor Greg Stanton.

In addition to the research and development campus, Phoenix is building a compost facility on the site, which will be completed and in operation by next summer.

Part of the incentive for creating the hub is growth. Like many cities, Phoenix is expecting to see rapid expansion in the next few decades. “With our population projected to double by 2050, it’s just not sustainable for us to keep burying trash,” says John Trujillo, director of the city’s public works department. “With this program, we are trying to create a circular economy. We want to create a system where the material gets used over and over again here in Phoenix.”

While still in the preliminary stages, the Resource Innovation Campus has already garnered a lot of interest. When Phoenix put out a “call for innovators” this spring, it received 117 proposals from 70 different companies across the U.S., Canada and abroad, including Sweden, Switzerland and the U.K. Perhaps the most important attention it has earned so far came in the form of funding. The Closed Loop Fund, which is composed of Fortune 100 consumer goods companies and retailers such as Coca-Cola, Procter & Gamble and Walmart, will offer below-market interest rate loans (some as low as zero percent) to the businesses selected to be part of the campus. The group, according to Trujillo, is also interested in providing funding to help build the site.

Specialized hubs like Phoenix’s Resource Innovation Campus are becoming more and more common. Milwaukee started transforming an old industrial area in the southeast part of the city into a center for water research and technology a few years ago. Charlotte, N.C., is working to be a clean energy hub. These hubs are largely modeled after university business parks. In the 1980s, North Carolina State University’s Centennial Campus brought academics, nonprofits and businesses together to facilitate the interaction required to bring research breakthroughs to market.

For Phoenix, bringing everyone together in one place “creates an entrepreneurial spirit around garbage,” says Trujillo. As he sees it, trash can become a valuable resource that encourages entrepreneurship, creates jobs, brings environmental benefits to the community, elevates the quality of life and creates alternative forms of energy. “Who,” he says, “would have thought trash would be so exciting?”

Governing.com

Elizabeth Daigneau | managing editor

edaigneau@governing.com

The worst Texas drought in half a century has ended, with storms flooding downtowns and once-parched prairies. A deluge of $8 billion of bond sales for water works in the Lone Star state is just getting under way.

The Texas Water Development Board is planning to sell $800 million of municipal debt this year, beginning a decade-long borrowing spree for projects like reservoirs, pipelines and plants that make saltwater fit to drink.

No state is growing as much as Texas, whose infrastructure is being taxed by a population that’s swelling by more than 1,000 a day. The water supply is no exception: It’s projected to decline over the next 50 years, while global warming is raising the risk of droughts like the one still gripping the far West. So Texas is borrowing to lend cities money for needed work, using $2 billion of its reserves to subsidize the cost.

“It’s very hard to capture the funds needed to ensure large supplies,” said Randall Gerardes, vice president for municipal research at Wells Fargo Securities LLC in New York. “This could be a model for how states work with smaller jurisdictions.”

The Texas economy expanded at the second-fastest pace in the U.S. last year, even as a slide in the price of oil began rippling through the energy industry. With an influx of residents, the state is pouring billions into construction to keep up. Texas and its localities have sold $23 billion of debt this year, 47 percent more than the same period a year earlier, according to data compiled by Bloomberg.

Drought Racked

In November 2013, voters approved tapping the state’s reserves for the water program, following the onset of a drought that devastated its farms. Texas forecasts that the amount of available water will decline by about 10 percent by 2060, while its population will grow by some 20 million.

Under the program, top-rated Texas will sell bonds and lend the proceeds to local governments. Those loans will be cheaper than issuing debt on their own: Texas will charge as much as 36 percent less than what it pays to borrow.

The state expects to sell $8 billion of bonds over the next 10 years, with the first coming in September or October, said Amanda Lavin, assistant deputy executive administrator with Texas’s water board. Over the next five decades, the program may finance as much as $27 billion of work.

The agency has received applications for about 25 projects that will cost a total of $3.9 billion, said Merry Klonower, its spokeswoman. It will decide by the end of July which to fund with the first round of bond money.

Dallas Saves

Dallas is among those looking to borrow. It’s working on a $2 billion pipeline with the neighboring Tarrant Regional Water District, which supplies more than 1.7 million people. Terry Lowery, assistant director of business operations for Dallas’s water utility, said the subsidies would cut costs by about $1 million a year.

“It helps us, but it also helps utilities that don’t have a lot of funding,” Lowery said.

Texas already enjoys low borrowing costs because it’s one of just nine states with the highest general-obligation bond rating from both Standard & Poor’s and Moody’s Investors Service. Its 30-year bonds yield 3.57 percent, or 0.16 percentage point above benchmark municipal debt, according to data compiled by Bloomberg.

Unlike other water programs funded with Texas general-obligation bonds, the new securities will be backed by the revenue it receives when the loans are repaid.

Brandon Ratzlaff, a financial adviser with Carter Financial Management in Dallas, said he expects yields to be around 3 percent, based on estimates from its affiliate, Raymond James Financial Inc. That’s equivalent to about 5 percent for an investor in the top federal tax bracket.

“It’s not going to come with a coupon that will get everyone excited,” said Ratzlaff, whose firm manages $850 million. “But the social impact appeals to some of our investors because they want to make a difference.”

Bloomberg

by Darrell Preston

June 21, 2015 — 9:01 PM PDT Updated on June 22, 2015 — 4:29 AM PDT

Bridgeview, Illinois, is saddling taxpayers with more debt as the arena it built almost a decade ago to host Major League Soccer’s Chicago Fire fails to hit the economic goal promised by its proponents.

The village 15 miles (24 kilometers) southwest of Chicago is selling $16 million in general-obligation debt this week to refinance existing securities, most of which are tied to the site that opened in June 2006. The venue, called Toyota Park, generates an annual loss of $3 million to $4 million for Bridgeview, said Daniel Denys, owner of Austin Meade Financial Ltd., the government’s financial adviser.

Standard & Poor’s this month cut the municipality’s grade one step to BBB, two levels above junk, and said it could reduce it again because of its high debt burden. After the sale, the village would have about $250 million in debt, mostly tied to the stadium and the area around it slated for redevelopment, Denys said.

Bridgeview’s experience demonstrates the challenges faced by small communities building facilities for sports teams, said Jim Colby, who manages about $1.6 billion of high-yield munis at Van Eck Global in New York.

“It’s very hard to stomach the long-term risks that occur with some of these stadium financings,” Colby said. For Bridgeview, “it has to be a pretty significant fiscal drag on their budget because they are the ultimate payer relying on a soccer team.”

Colby said he would consider buying its new bonds since the rating fits the criteria for his purchases. Denys said the sale may be Wednesday.

‘Economic Anchor’

The cost of hosting professional sports has strained municipal finances, from hockey and baseball spring-training facilities in Glendale, Arizona, to the NFL stadium in Indianapolis. States and cities have sold more than $9 billion of debt for professional sports sites since the 1980s, seeking to keep teams or revitalize local economies.

A 2004 Bridgeview newsletter to residents said the soccer stadium would be “an economic anchor” that would pay for itself and spur development around it. A much-publicized water park never materialized. A gas station that opened this year is the only business on the site around the stadium that was expected to be redeveloped, said Denys, who’s based in Naperville, Illinois. Bridgeview officials are closing on deals with developers for more growth, he said.

“We’re optimistic that the economic development will help reduce or eliminate the need for future debt restructuring,” Denys said. “If not, there’s still a solid tax base there that could sustain our worst-case plan. Either way, we’re fine.”

Debt Burden

The village sold $134.6 million of bonds in 2005 for the project, and its debt burden has nearly doubled from subsequent refinancing deals. If restaurants and other revenue-generating ventures don’t work out, Bridgeview could push its debt back to 2056 with another restructuring and tax increases, Denys said.

Residents have paid higher taxes for the past five years due to stadium losses, Denys said. The levies more than doubled between 2009 and 2013, according to the S&P report this month.

Each resident’s share of the village’s total debt burden is about $18,000, deal documents show. The home of the Fire, which is in last place in its conference this season after finishing second-to-last in 2014, is “not yet self-sustaining,” according to the documents.

S&P said there’s “at least one-in-three chance” it could lower the community’s rating again in a year, depending on its financial position, costs and ability to win more revenue.

A Bridgeview general-obligation due in December 2043 traded on June 19 at an average yield premium of 4.48 percentage points, compared with the 3.12 percentage point average this year, data compiled by Bloomberg show.

Residents like having the stadium in their hometown, said Denys, who said he was speaking about the issue for Mayor Steven Landek, who had pushed for the venue.

“There is high enthusiasm in the community,” Denys said. “There’s a lot of pride.”

Bloomberg

by Romy Varghese

June 23, 2015 — 2:00 AM PDT Updated on June 23, 2015 — 5:30 AM PDT

The debt load of U.S. states declined in 2014 for the first time in almost three decades and probably won’t rebound this year, showing lawmakers are still reluctant to borrow even six years after the recession.

Total net tax-supported debt among states fell 1.2 percent to $509.6 billion last year, according to a Moody’s Investors Service report released Wednesday. It marked the first annual drop in the 28 years the company has compiled the data.

States and cities have rejected raising fresh cash at the lowest interest rates since the 1960s, instead opting to tap the $3.6 trillion municipal market mostly to refinance. The scars from the financial crisis and tepid economic growth have left lawmakers struggling to balance budgets and wary of embarking on capital projects.

“States continue to be reluctant to take on new debt with tight operating budgets, a slow economic recovery, and uncertainty over federal fiscal policy,” analysts at New York-based Moody’s said in the report. “We expect debt levels to remain stable or even decline again in 2015.”

Credit Barometer

The debt medians can serve as a barometer of a state’s creditworthiness. New York and California were two of the three states that paid down the most debt last year, according to the report. They both won rating increases in June 2014.

In contrast, Moody’s two lowest-rated states, Illinois and New Jersey, had the largest increases in 2014 as they borrowed for transportation and other projects.

About two-thirds of the $206 billion of munis sold this year through June 18 were for refunding, rather than new projects, according to Bank of America. That would be the biggest portion since 1993. Most refinancing deals don’t add to municipalities’ debt load because the higher-cost bonds are replaced with obligations carrying lower interest rates.

California, Massachusetts, Pennsylvania and Washington are among issuers with the biggest refunding deals of 2015, data compiled by Bloomberg show.

Debt Aversion

“Most states will continue to avoid major new debt service commitments in the face of moderate revenue growth and continuing pressure for increased education and health care spending,” Moody’s said. “Few states have announced large new borrowing initiatives.”

An index of state obligations has lost 0.2 percent this year, compared with a 0.1 percent decline for all munis, Bank of America Merrill Lynch data show. The governments’ securities have still outpaced Treasuries and investment-grade company debt, which have fallen 0.6 percent and 0.9 percent, respectively.

Adjusted for inflation, tax revenue is still lower than at the start of the recession in 21 states, according to a report Tuesday from the Nelson A. Rockefeller Institute of Government in Albany, New York.
Connecticut, where officials are confronting limits in how much revenue they can squeeze out of their tax base, has the most debt per capita among states, at $5,491.

Massachusetts, Hawaii, New Jersey and New York round out the top five, each with more than $3,000 of obligations per person.

Puerto Rico, the junk-rated U.S. commonwealth, had $55.5 billion of net tax-supported debt last year, more than all states except California and New York. That comes out to $15,637 per person.

Bloomberg

by Brian Chappatta

June 23, 2015 — 9:01 PM PDT Updated on June 24, 2015 — 6:42 AM PDT

Municipal bond sales in the U.S. are set to increase in the next month while the amount of redemptions and maturing debt falls.

States and localities plan to issue $12.9 billion of bonds over the next 30 days, according to data compiled by Bloomberg. A week ago, the calendar showed $11.6 billion planned for the coming month. Supply figures exclude derivatives and variable-rate debt. Some municipalities set their deals less than a month before borrowing.

Los Angeles plans to sell $1.386 billion of bonds, Massachusetts has scheduled $938 million, Miami-Dade County School Board will offer $461 million and Maryland Health and Higher Education Facilities Authority will bring $263 million to market.

Municipalities have announced $12.8 billion of redemptions and an additional $32.2 billion of debt matures in the next 30 days, compared with the $49.9 billion total that was scheduled a week ago.
Issuers from California have the most debt coming due with $8.51 billion, followed by New Jersey at $3.66 billion and New York with $3.38 billion. California has the biggest amount of securities maturing, with $2.82 billion.

The $3.6 trillion municipal market shrank by 4 percent in 2014. This year, maturities are poised to drop 38 percent to $176 billion from the 2014 levels.

Fund Flows

Investors removed $653 million from mutual funds that target municipal securities in the week ended June 10, compared with a reduction of $1 million in the previous period, according to Investment Company Institute data compiled by Bloomberg.

Exchange-traded funds that buy municipal debt increased by $87.72 million last week, boosting the value of the ETFs 0.53 percent to $16.761 billion.

State and local debt maturing in 10 years now yields 102.783 percent of Treasuries, compared with 100.086 percent in the previous session and the 200-day moving average of 99.236 percent, Bloomberg data show.

Bonds of Puerto Rico and Tennessee had the best performance over the past year compared with the average yield of AAA rated 10-year securities, the data shows. Yields on Puerto Rico’s securities narrowed 24 basis points to 9.33 percent while Tennessee’s declined five basis points to 2.36 percent. Illinois and New Jersey handed investors the worst results. The yield gap on Illinois bonds widened 38 to 4.2 percent and New Jersey’s rose 25 basis points to 3.18 percent.

Bloomberg

by Luis Daniel Palacios and Kenneth Kohn

June 22, 2015 — 4:12 AM PDT

Applications to become a GFOA standing committee member are being accepted through July 24. Serving on a standing committee is an excellent opportunity for GFOA members to contribute their experience and knowledge to the entire membership. GFOA’s seven standing committees meet twice each year and develop best practices, advisories, and policy statements for the approval of the Executive Board and membership. GFOA associate members from the private sector may also apply to be advisors to one of the committees.

The GFOA’s seven standing committees are: Accounting, Auditing and Financial Reporting; Canadian Issues; Economic Development and Capital Planning; Governmental Budgeting and Fiscal Policy; Governmental Debt Management; Retirement and Benefits Administration; and Treasury and Investment Management.

Submit your application today.

Wednesday, June 17, 2015

Municipal bond sales in the U.S. are set to increase in the next month while the amount of redemptions and maturing debt falls.

States and localities plan to issue $12.9 billion of bonds over the next 30 days, according to data compiled by Bloomberg. A week ago, the calendar showed $11.6 billion planned for the coming month. Supply figures exclude derivatives and variable-rate debt. Some municipalities set their deals less than a month before borrowing.

Los Angeles plans to sell $1.386 billion of bonds, Massachusetts has scheduled $938 million, Miami-Dade County School Board will offer $461 million and Maryland Health and Higher Education Facilities Authority will bring $263 million to market.

Municipalities have announced $12.8 billion of redemptions and an additional $32.2 billion of debt matures in the next 30 days, compared with the $49.9 billion total that was scheduled a week ago.

Issuers from California have the most debt coming due with $8.51 billion, followed by New Jersey at $3.66 billion and New York with $3.38 billion. California has the biggest amount of securities maturing, with $2.82 billion.

The $3.6 trillion municipal market shrank by 4 percent in 2014. This year, maturities are poised to drop 38 percent to $176 billion from the 2014 levels.

Fund Flows

Investors removed $653 million from mutual funds that target municipal securities in the week ended June 10, compared with a reduction of $1 million in the previous period, according to Investment Company Institute data compiled by Bloomberg.

Exchange-traded funds that buy municipal debt increased by $87.72 million last week, boosting the value of the ETFs 0.53 percent to $16.761 billion.

State and local debt maturing in 10 years now yields 102.783 percent of Treasuries, compared with 100.086 percent in the previous session and the 200-day moving average of 99.236 percent, Bloomberg data show.

Bonds of Puerto Rico and Tennessee had the best performance over the past year compared with the average yield of AAA rated 10-year securities, the data shows. Yields on Puerto Rico’s securities narrowed 24 basis points to 9.33 percent while Tennessee’s declined five basis points to 2.36 percent. Illinois and New Jersey handed investors the worst results. The yield gap on Illinois bonds widened 38 to 4.2 percent and New Jersey’s rose 25 basis points to 3.18 percent.

Bloomberg

by Luis Daniel Palacios & Kenneth Kohn

June 22, 2015 — 4:12 AM PDT

Controversy, Intrigue, Investigations Surrounding 38 Studios Investigations are Far from Over
A Rhode Island asset manager has asked the U.S. Securities and Exchange Commission to investigate the pension fund of capital city Providence after an accounting firm acknowledged a $62 million spike in its unfunded liability.

“I did file an official complaint,” said Michael Riley, co-founder of investment firm Coastal Management Group LLC in Narragansett, R.I. “My feeling is that this has been going back a long time. I think it’s huge.”

Riley, who ran for Congress in 2012, said he noticed what he considered irregularities while participating in a Stanford Graduate School of Business class. He questions how the city’s handling of municipal bond documents and financial disclosure statements, and also said the shortage could run up to $200 million.

City and state officials say the problem reflects timing and cash flow, not mismanagement or chicanery.

“All would agree that the timing of the city’s contributions to its pension plan is not the norm or desirable,” state Auditor General Dennis Hoyle wrote Riley. “However, my perspective is that the city has appropriately accounted for these events consistent with generally accepted accounting principles.

“I don’t believe it is fair or appropriate to characterize the city’s accounting for this matter as a ‘scam and fraud.’ My point is not to endorse the city’s practice of making its pension contribution subsequent to year-end. However, I believe it is important not to mischaracterize the situation unfairly.”

Hoyle said he would continue to work with city officials to explore options of making contributions “on a more normal and frequent basis” during the fiscal year.

A $62 million payment to the pension fund is due June 30. Providence traditionally has been making such payments in October.

Two months ago, accounting firm Segal Group Inc. told the City Council’s finance committee that an actuarial asset method change and to a lesser degree a change in rate-of-return assumptions increased the unfunded liability of the Employee Retirement System of the City of Providence by $62.2 million. Segal officials at the time said the system’s unfunded liability stood at $894.3 million as of July 1, 2014.

Segal officials advised the city to begin making its payments in June.

“We will not be able to do this immediately, but we will make sure it happens. We’re working with our actuary,” said Evan England, press secretary to Mayor Jorge Elorza. “We’ve done everything to be open, transparent and proactive on this.”

According to England, Elorza’s administration is working to bring the city’s long-standing pension payment practices into compliance with new reporting standards, notably the Governmental Accounting Standard Board’s rules 67 and 68. In consultation with Segal, said England, the administration is developing a three-year plan that phases in periodic pension contributions so the city can complete its actuarially required contribution, or ARC, payment by June 30.

England called the late payments “a not-a-best-practice decision made a decade ago.”

Elorza succeeded Angel Taveras in January, after Taveras vacated his seat in an unsuccessful run for governor.

Segal replaced Buck Consulting Inc. after the city fired Buck and sued it early in 2013, accusing the firm of miscalculating $700,000 in savings. Segal told council members in April that the plan’s funded ratio has dropped to 29% on a market-value basis and 27.4% on an actuarial basis.

Last year Segal said Providence shouldn’t count future pension contributions as part of current assets. “We recommend that future valuations exclude discounted contributions from reported assets,” the firm said in mid-2004. “This does not affect the determination of the contribution requirement, which is based on projected liabilities and assets.”

City officials at the time – and shortly after criticism from Riley — rewrote bond documents to include Segal’s concerns.

In May, Local 799 of the International Association of Firefighters said it would sue the city, alleging misreported pension funds and seeking immediate replenishment of the $62 million.

“Our concern is that this practice dates back farther than we originally understood when the issue came to light, and that our members may suffer – or may have already suffered – a loss because of this unorthodox and potentially illegal practice,” union president Paul Doughty said at the time.

As of Friday, though, no evidence existed of such a lawsuit filed. A message seeking comment was left with Doughty.

Separately, the union this week asked Rhode Island Superior Court to block Elorza’s plan to restructure the department until both sides can agree on payment to firefighters for working 14 extra hours each week.

Providence in 2012 crafted a series of pension and health care benefit reductions after Taveras likened the situation to a “Category 5 hurricane” and said the city was headed to bankruptcy.

The new package reduced the city’s costs by suspending cost-of-living adjustments for retired pensioners for 10 years and transferred retirees to Medicare. City officials at the time estimated nearly $15 million of annual savings in pension contributions.

THE BOND BUYER

BY PAUL BURTON

JUN 22, 2015 9:30am ET

CHICAGO – A federal judge has ruled that the federal government’s approval of the controversial Illiana toll road is invalid.

The decision could deliver a death blow to the bi-state project, which has already been on life support.

The June 16 ruling comes a week after Illinois Gov. Bruce Rauner, who has never publicly supported the project, halted all work on the Illiana to save money for the cash-strapped state, which is facing a budget crisis.

The project, estimated to cost $1.5 billion, would build a 47-mile toll road between Indiana and Illinois. Both states planned to use public-private partnerships to finance their portions.

U.S. District Judge Jorge Alonso of the Northern District of Illinois Eastern Division ruled that federal approval was “arbitrary and capricious” and in violation of environmental law because state transportation officials used a “fatally flawed” analysis to justify the project.

“It’s a very big deal,” Howard Learner, executive director of the Environmental Law & Policy Center, which represented the environmental groups, including Openlands, Midewin Heritage Association and the Sierra Clubs, that brought the lawsuit.

The environmental law center describes Illiana as a waste of taxpayer money that conflicts with long-term regional development plans and threatens globally significant wildlife prairie habitat.

The center argues that rebuilding, modernizing and maintaining current roadways in high-density areas makes more sense than building a greenfield highway project it sees as encouraging sprawl.

The U.S. Department of Transportation and the Illinois and Indiana transportation departments were defendants.

“This ought to be the opportunity for the federal and state transportation departments and Gov. Rauner and [Indiana] Gov. [Mike] Pence to stop wasting money and bring the Illiana tollway to and end and move forward with high-priority projects,” Learner said.

The opinion overturns the federal highway administration’s tier one record of decision approving the project. A separate lawsuit targets the tier two record of decision, which the FHWA granted in December 2014, allowing the two states to move from planning to the implementation stage.

Learner said the new ruling will likely invalidate the tier two record of decision as well.

“As a practical matter the tier one record of decision was the foundation for the tier two record of decision,” said Learner. “The federal highway administration, the Indiana and Illinois departments of transportation need to go back to square one and redo the environmental review process in a way that complies with federal law and good policy sense, or not do it at all and simply bring the proposed boondoggle to an end.”

Alonso ruled that state transportation officials used a “faulty” analysis that, among other things, relied on the research of “market-driven forecasts developed by consultants” instead of long-range forecasts crafted by professional planners Chicago Metropolitan Agency for Planning and Northwestern Indiana Regional Planning Commission.

The transportation agencies also relied on a faulty ‘no build’ review when deciding to move forward with the Illiana, the ruling said.

“In short, the purpose and need for the Illiana Corridor identified in the EIS are derived directly from the faulty ‘no build’ analysis,” Alonso wrote. “Because that analysis does not substantiate the purpose and need, the FHWA’s approval of the [record of decision] and final [environmental impact statement] is arbitrary and capricious and in violation of [the National Environmental Policy Act.”

The Illinois transportation department said it was reviewing the ruling and “exploring our options.”

A spokesman for the Indiana department also said its attorneys were reviewing the ruling and that meanwhile, work “remains temporarily suspended.”

THE BOND BUYER

BY CAITLIN DEVITT

JUN 17, 2015 3:29pm ET

Chicago’s next financial obstacle lies with its school system, which for the first time ever may not have enough cash to make a required payment into its teachers’ retirement fund.

As the Chicago Board of Education faces a $634 million pension payment due June 30, yields on some of its bonds are climbing toward records set last month. Officials of the nation’s third-largest school district are also struggling to plug a $1.1 billion deficit for the fiscal year starting July 1 and trying to get out of $228 million of termination payments for derivatives that went awry.

Given the demands, the district may fail to make the full pension payment, inflating its retirement-fund shortfall and leaving it vulnerable to more downgrades after its $6.2 billion of debt was cut to junk last month, said Laurence Msall, president of the Civic Federation, a Chicago-based research group that’s tracked the city’s finances since 1929.

“Of all the Chicago issuers, CPS seems to be the one that’s struggling the most,” said Adam Stern, director of muni research in Boston at Breckinridge Capital Advisors, which oversees $20 billion in municipal strategies, but holds no Chicago school debt. “I don’t think anyone is investing with the thought that the spreads are going to come back in. There are a lot of medium- and long-term structural issues.”

‘Tough Choices’

Charles A. Burbridge, executive director of the teachers’ pension fund, called for the full payment in a statement Wednesday, while noting the “tough choices” confronting the district. Bill McCaffrey, a schools spokesman, didn’t respond to e-mail and phone queries Thursday regarding the payment.

Mayor Rahm Emanuel signaled a solution has to come from the state capital. Chicago, with 2.7 million people, gets less pension cash than suburbs and cities downstate, he said.

“Springfield has to step up and help,” Emanuel told reporters Wednesday. Kelley Quinn, a city spokeswoman, didn’t respond to e-mail and phone messages seeking comment Thursday.

The school system may not get much assistance given Illinois’s deteriorating finances. The state doesn’t have a spending plan for the year starting July 1, and if a budget isn’t passed, schools won’t get aid set for distribution Aug. 10.

Junk Move

Moody’s Investors Service and Fitch Ratings cut the district, which educates about 400,000 students in more than 600 schools, to one level above junk in March, giving banks the right to demand payments to end interest-rate swaps. Moody’s lowered the district again in May to Ba3, three levels below investment grade, citing the strain of pension costs on its “precarious financial position.”

Board of Education bonds maturing in December 2039 yielded 2.66 percentage points above benchmark munis Thursday, the widest spread since May 21, according to data compiled by Bloomberg on the most-traded debt of the past week. The data are for trades of more than $1 million, a benchmark for institutional investors.

The securities yielded as high as 6 percent, approaching the record of 6.5 percent set May 14.

Burbridge at the teachers’ fund said that to his knowledge the board has never missed a required payment.

The system, which was 51.5 percent funded as of June 30, 2014, has three options, said Msall at the Civic Federation: skip or delay the payment, make budget cuts or seek relief from state lawmakers.

“It would not be surprising to find that the Chicago Public Schools may have difficulty having the cash to make the payment,” Msall said.

‘Worse Picture’

“Any deferral of the pension contribution could provide short-term budgetary relief, but it would also provide for a much worse picture down the road,” Rachel Cortez, a Moody’s analyst in Chicago, said by phone.

The board has already cut more than $740 million in non-classroom spending since 2011 and drawn on reserves.
After the mayor-appointed school board closed 50 schools in 2013, saving an estimated $40 million, the move fueled a voter backlash that helped push Emanuel into an unprecedented mayoral runoff election.

“The sad reality is how many schools can you shut down? How many teachers can you lay off?” said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management, which oversees about $127 billion in Kansas City, Missouri. The firm holds no Chicago school debt, because of the rating.

“They’re still going to have daunting challenges financially,” he said.

Bloomberg

by Elizabeth Campbell & Brian Chappatta

June 18, 2015 — 9:01 PM PDT Updated on June 19, 2015 — 6:10 AM PDT

New York, June 18, 2015 — Coastal cities in southeastern Virginia’s Hampton Roads region are becoming more vulnerable to flooding risk caused by weather-related and tidal flooding, and will require continued capital investment and effective planning to mitigate negative credit effects on the municipalities, Moody’s Investors Service says in a new report.

The region includes notable cities like Virginia Beach (Aaa stable) and Norfolk (Aa2), whose significant urbanization and military development has exacerbated flooding risks and stormwater drainage issues. Hampton Roads is home to the world’s largest naval base and second-largest US east coast port.

“Annual planning and spending for stormwater management in the near term reduces the need for Hampton Roads municipalities to spend larger amounts later. However, cost forecasts indicate a potential need for greater investment in this area by local governments across the region,” Moody’s Analyst Tiphany Lee-Allen says in “Virginia’s Hampton Roads Region Responds to Flood Risk.”

Hampton Roads’ municipalities have relatively high credit ratings and conservative fiscal management, owing to the region’s economic strength, which is buttressed by its concentrated military and government presence, port activity and tourism, Moody’s says. These cities therefore possess the financial flexibility to manage fixed costs and support day-to-day operations.

In the last three years, Hampton (Aa1) has spent $28.7 million on flood mitigation and has set aside funds in its 2016 budget for additional consultancy preparation.

Other cities, such as Virginia Beach have completed $43 million in flood control projects in the last five years and plans to spend $135 million in the next decade on multiple stormwater management projects.

Norfolk’s annual capital investments of $7 million for flood resiliency projects have helped minimize long-term costs and allowed the city to manage increases related to storm events without significantly impacting its debt profile.

The report is available to Moody’s subscribers here.

WASHINGTON — The Supreme Court ruled Thursday for an Arizona church in a dispute over a town’s sign law in a decision that three justices said could threaten municipal sign regulations across the country.

The court unanimously agreed to strike down a law in Gilbert that set tougher rules for signs that direct people to Sunday church services than for signs for political candidates and real estate agents.

But the justices divided over why the law violated the rights of the Good News Community Church.

Gilbert’s attorney said the ruling will make it exceptionally hard for cities across the nation to regulate signs, and it will be a special problem for Arizona because of a state law specifically allowing political signs.

“All municipalities throughout the country and especially in Arizona are going to have to review this matter,” said Gilbert Town Attorney Michael Hamblin. “Arguably, the contention is if you allow political signs in the right of way for these periods of time then you can’t make distinctions for other types of signs.”

But the attorney for the church, David Cortman of the Scottsdale, Arizona-based Alliance Defending Freedom, said the fears of cities were overblown.

“I think it’s an overstatement – I don’t think the sky is falling, nor will it,” Cortman said. “Towns and municipalities have many different ways to regulate signs in a constitutional fashion.”

The church complained that the law forced the church to put up smaller signs than those for political candidates, real estate agents and others. The church’s signs also could be in place for short periods of time.

Lower federal courts upheld the town’s sign ordinance, saying the distinction it drew between different kinds of temporary signs was not based on what a sign said.

Justice Clarence Thomas rejected that argument in his majority opinion for six of the nine justices. Thomas said political signs are “given more favorable treatment than messages announcing an assembly of like-minded individuals. That is a paradigmatic example of content-based discrimination.”

Under the rigorous review the court gives to laws that treat speakers differently because of content, the law must fall, Thomas said.

Justice Elena Kagan said she fears that all sign ordinances now will have to face the same strict review and many “are now in jeopardy” because of Thursday’s decision.

There was a narrower way to decide the case in the church’s favor, Kagan said. The town’s defense of its sign ordinance was marked by the “absence of any sensible basis” for distinguishing between signs and did not pass “even the laugh test,” she said.

Justices Stephen Breyer and Ruth Bader Ginsburg joined Kagan’s opinion.

“I think Justice Kagan got it right,” said Charles Thompson, executive director and general counsel for the International Municipal Lawyers Association. “It’s likely to make the courts a super sign board. We’re going to be seeing the federal courts litigating questions over whether a sign falls within the narrow exception.”

Thomas said the decision would not prevent cities and towns from regulating signs to take account of safety and aesthetic concerns.

The Good News Community Church is led by Pastor Clyde Reed and serves roughly 30 adults and up to 10 children, but lacks its own building. The church and Reed sued Gilbert for treating religious groups more severely than others, alleging violation of the First Amendment’s guarantee of religious freedoms.

The sign ordinance struck down Thursday allowed directional signs, like the ones put up by the church inviting people to Sunday worship, to be no larger than 6 square feet. They had to be placed in public areas no more than 12 hours before an event and removed within an hour of its end.

Signs for political candidates, by contrast, can be up to 32 square feet and stay in place for several months.

By THE ASSOCIATED PRESS

JUNE 18, 2015, 5:36 P.M. E.D.T.
___

Associated Press reporter Bob Christie contributed from Phoenix

(Reuters) – Michigan’s Wayne County, home of Detroit, has asked the state for a fiscal emergency declaration to deal with a chronic budget deficit, spokesmen for the county and state confirmed on Thursday.

Wayne County Executive Warren Evans late on Wednesday formally asked Michigan Treasurer Nick Khouri to initiate a review process that would lead to a consent agreement between the county and the state.

The action led the county to postpone until next week the sale of nearly $187 million of general obligation, limited-tax notes through Bank of America Merrill Lynch that had been scheduled for Thursday.

“It is now expected to be rescheduled to Wednesday or Thursday of next week in order to give investors time to digest and react to the executive’s announcement as well as understand the strengths and vitality of the delinquent tax program,” Wayne County Deputy Treasurer Christa J. McLellan said in a statement.

In a letter to Khouri, Evans said the county’s general fund budget deficit was projected to jump to $171.4 million in fiscal 2019 from $9.9 million this year due to declining tax revenue and escalating personnel costs. In addition, the county’s finances are sagging under an $870 million unfunded pension liability and its credit ratings have fallen into the junk level.

Michigan Treasury spokesman Terry Stanton said the county’s request was under consideration.

Wayne County’s taxable notes, which mature on Dec. 1, 2017, will raise money to cover delinquent 2014 property taxes due the county and local governments in it.

In its offering document for the note sale, the county warned potential investors it could be headed to federal bankruptcy court if it did not implement its plan to address chronic budget deficits by curbing pension and healthcare benefits and cutting wages. That could lead to an appointment of an emergency manager, who could recommend a Chapter 9 municipal bankruptcy filing, the document said.

Detroit exited the biggest-ever municipal bankruptcy last year, shedding about $7 billion of its $18 billion of debt and obligations.

By REUTERS

JUNE 18, 2015, 11:09 A.M. E.D.T.

(Reporting by Karen Pierog; Editing by Lisa Von Ahn)

The Chicago City Council on Wednesday approved with no debate Mayor Rahm Emanuel’s proposal to sell $1.1 billion of bonds to continue restructuring outstanding debt and pay other obligations.

“This is a step that is necessary to refund existing debt and begin to take steps to claw out of the financial condition we are in at the present time,” said Alderman Ed Burke, chairman of the council’s finance committee, which approved the bond plan on Monday.

The city is repairing damage from Moody’s Investors Service’s downgrade of its credit rating to junk last month, even as it braces for a possible further drop in the rating as pension payment pressures mount.

Chicago will use the authorization to convert short-term commercial paper into long-term fixed-rate bonds and complete the refinancing of interest rate swap agreements. The bond deal will free up $170 million for the city’s coffers by pushing payments on outstanding bonds into future years.

Proceeds will also be used to cover obligations, including $75 million in retroactive police pay.

The general obligation (GO) bonds will be priced through senior underwriter Morgan Stanley this summer.

Moody’s downgrade of Chicago’s GO bond rating to Ba1 triggered $2.2 billion in accelerated debt and fee payments by the city.

Forbearance agreements with banks that provided letters of credit backing the variable-rate debt or swaps used to hedge interest-rate risk on it gave the city time to convert $918 million of variable-rate debt into fixed-rate bonds so far. Those debt conversions attracted many yield-hungry investors, but still left Chicago with hefty interest costs compared to higher-rated issuers in the U.S. municipal bond market.

The city, the third largest in the United States by population, is struggling with a projected $300 million structural budget deficit and a looming $550 million contribution increase to its public safety workers’ retirement funds.

A bill passed by the Illinois Legislature last month would reduce the pension payment, but Governor Bruce Rauner, who has criticized the legislation, may not sign it into law.

With hope fading, the mayor is moving up the process for the city’s next budget that normally starts in October.

“I think it’s important for the city of Chicago to seize the moment and as best it can determine its own future and not have it held somewhat by (the state government) and their inaction,” Emanuel told reporters after the city council meeting.

Wed Jun 17, 2015 4:00pm EDT

REUTERS/JIM YOUNG

(Reporting by Karen Pierog; Editing by James Dalgleish and Jeffrey Benkoe)

Georgia Governor Nathan Deal signed into law new public-private partnership (P3) legislation, the Partnership for Public Facilities and Infrastructure Act (SB 59) (the Act) on May 5, 2015. The Act allows state and local government entities to partner with private entities on “qualifying projects,” broadly meaning any project deemed to meet a public purpose or public need and satisfying those requirements set forth under the Act.

The Act covers those qualifying projects pursued with local government entities, meaning any county, municipality, consolidated government, or board of education, as well as with state government entities, including institutions of the University System of Georgia.

The Act does not apply to projects procured through the State Transportation Board, the Department of Transportation, or the State Road and Tollway Authority; these state authorities are already authorized to engage in and procure P3 projects. Projects involving the generation of electric energy for sale, communication services, cable and video services, and water reservoirs, however, are not eligible to be qualifying projects under the Act.

Summarized below are some of the key terms of the Act. The procurement process and requirements for projects on the local level are similar in many respects to the procurement process the State is required to follow. Certain distinctions are worth highlighting, however, and we have addressed these in more detail below.

New P3 Committee

The Act requires the establishment of a new 10-person committee (the Committee) to prepare model guidelines for local government entities, including counties and municipalities. The Governor will appoint four members, and the Speaker of the House of Representatives and the Lieutenant Governor will each appoint three members to the Committee.

The Committee is required to issue model guidelines to local governments by July 1, 2016. These guidelines then are required to be updated every two years.

Guidelines

Local Government P3 Projects

A local government must adopt a set of guidelines prior to executing an agreement for a qualifying project with a private entity. It may adopt the model guidelines from the Committee or establish its own set of guidelines as a policy, rule, regulation or ordinance, but such guidelines must contain such information that is required to be contained in the model guidelines under the Act.

At a minimum, the model guidelines must set forth the following:

• Key Dates: Specific periods during the calendar year when the local government will consider unsolicited proposals for qualifying projects.
• Financial Review: Procedures for the financial review and analysis of an unsolicited proposal.
• Fees: Criteria for determining any fees that the local government elects to charge the private entity for the processing, review, and evaluation of an unsolicited proposal.
• Issuance of an RFP: A requirement that the local government issue a request for proposal (RFP) if it decides to proceed with a qualifying project pursuant to an unsolicited proposal.
• Certain Procedures for Competing Proposals: Procedures for posting and publishing notice of the opportunity to offer competing proposals, procedures for the processing, review, and consideration of competing proposals, procedures for determining whether information included in an unsolicited proposal should be released as part of any RFP to ensure fair competition, and procedures for identifying and appointing an independent owner adviser with certain expertise to assist the local government in evaluating unsolicited proposals if the local government elects to have such an adviser.

State Government P3 Projects

The Act also requires that those public entities at the state level participating in the procurement of qualifying projects adopt a set of guidelines, and designates specific entities as responsible for setting such guidelines. For qualifying projects undertaken by the State Properties Commission, guidelines for the process must be developed by the Georgia State Financing and Investment Commission. For qualifying projects undertaken by the University System of Georgia, guidelines for the process must be developed by the Board of Regents of the University System of Georgia. The Act does not specify any further guideline requirements for other state government entities.

Unsolicited Proposals

Private entities may submit for consideration, and the applicable local or state government may approve, an unsolicited proposal for qualifying projects.

Certain materials and information must be submitted as part of any unsolicited proposal, including a project description, a feasibility statement, a project schedule, a financial plan, a business case statement describing benefits to be derived from the project, and any such other materials that may be reasonably requested by the local or state government.

The private entity bears all risk in submitting an unsolicited proposal and the local government has the right to reject any such proposal at any time without providing reason for its denial.

Additional Requirements for State Level Projects

For those projects on the state level, unsolicited proposals must be submitted to a “responsible public entity” between May 1 and June 30 of each year. A responsible public entity means a public entity that has the power to contract with a private entity to develop an identified qualified project. More specifically, for any unsolicited proposal for a project at one or more institutions at the University System of Georgia, the responsible public entity is the Board of Regents of the University System of Georgia or its designees. For any unsolicited proposal for a project for one or more state entities other than an institution of the University System of Georgia, the State Properties Commission is the responsible public entity.

There is an additional notice requirement for private entities submitting proposals for qualifying projects at the state level. Any private entity submitting an unsolicited proposal to a responsible public entity must also notify each affected local jurisdiction, meaning any county, municipality, or school district in which all or a portion of a qualifying project is located, by furnishing each such jurisdiction with a copy of its proposal.

There will be a comment period for unsolicited proposals. Each affected local jurisdiction that is not a responsible public entity for such project may submit comments to the responsible public entity within 45 days of receiving such notice, indicating whether the project is compatible with local plans and budgets. For instance, a project must be consistent with zoning and land use regulations of the responsible public entity and of each affected local jurisdiction.

Determination of a Qualifying Project

Before the procurement process begins, the state or local government must decide which projects, both solicited and unsolicited, become “qualifying projects.” For unsolicited proposals, once a state or local government receives an unsolicited proposal, such public entity must review such proposal according to its guidelines adopted pursuant to, and the requirements set forth under, the Act and make a determination of whether such project meets a public purpose or public need. If a determination is made that a project is a qualifying project, the relevant state or local government entity will take the following steps:

• First, seek competing proposals for the qualifying project by issuing an RFP;
• Second, review all such proposals received in response to the RFP and rank them based on various factors, such as the cost of the project, the design of the project, the general reputation, expertise and financial capacity of the private entity, and benefits of the project to the public, among other factors; and
• Lastly, negotiate with the highest-ranked private entity, or the next-ranked private entity if it is unable to reach a comprehensive agreement or interim agreement with the highest-ranked entity.

At any time during the above process, and prior to executing a comprehensive agreement, the relevant state or local government entity may cancel its RFP or reject all proposals received in response to an RFP for any reason whatsoever without any liability to the private entities or third parties.

Comprehensive Agreement

Upon determination of a qualifying project, the relevant state or local government entity and the selected private entity may enter into a comprehensive agreement setting forth the terms and conditions of such project. In addition to any terms and conditions that the state or local government entity determines will serve the public purpose contemplated by the Act, each comprehensive agreement must include, among other provisions, the following:

• A thorough description of the duties of each party in the completion and operation of the qualifying project.
• Dates and schedules for the completion of the qualifying project.
• Any user fees, lease payments, or service payments as may be established by agreement of the parties (as well as any process for changing such fees or payments) and a copy of any service contract.
• Any reimbursements to be paid to the state or local government entity for services provided by such public entity.
• A process for reviewing the plans and specifications for the qualifying project, inspecting such, and monitoring the practices of the private entity by the relevant state or local government.
• Terms regarding performance and payment bonds and insurance policies.
• Provisions governing the rights and responsibilities of the parties in the event of termination or material default.
• In the event of a material default by the private entity, the ability of the relevant state or local government entity to terminate the comprehensive agreement and exercise any other rights and remedies that may be available at law or in equity.

Miscellaneous

All power or authority granted under the Act to public entities is in addition to and supplemental to, and not in substitution for, the powers conferred by any other general, special, or local law. Remember, the Act does not apply to all procurement projects. For instance, state or local government entities that proceed with procurement pursuant to competitive sealed bidding or any other traditional purchasing options available under existing law are not required to comply with this Act.

by Han C. Choi, Brian Walsh, Stephanie S. Kim, and Steve T. Park

June 1, 2015

Attorneys in Ballard Spahr’s P3/Infrastructure Group routinely monitor and report on new developments in federal and state infrastructure programs. For more information, please contact Han C. Choi at 678.420.9308 or choih@ballardspahr.com, Brian Walsh at 215.864.8510 or walsh@ballardspahr.com, Stephanie S. Kim at 678.420.9366 or kimss@ballardspahr.com or Steve T. Park at 215.864.8533 or parks@ballardspahr.com, or the member of the Group with whom you work.

Copyright © 2015 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

Amid comparisons to “shuffling the deck chairs” on the Titanic, the City Council’s Finance Committee agreed Monday to add another $1.1 billion to the mountain of debt piled on Chicago taxpayers after aldermen were warned the city’s junk bond rating demanded it.

When its bond rating dropped below investment grade, Chicago could have faced paying nearly $2.2 billion to bankers under a series of complex deals dating back to former Mayor Richard M. Daley’s tenure.

The city has already eliminated roughly half that risk by converting $918 million in variable rate debt to fixed interest rates and by terminating 21 “swap” agreements. The other half was still outstanding, and therein lies the risk.

“We are technically in default…There would be the potential that we would have to come up with close to $900 million to pay back the banks if we did not execute this transaction,” newly-appointed Chief Financial Officer Carole Brown told the Finance Committee.

“It’s a critical first step. … We are addressing some …financial practices that … were inherited and have happened over the course of many years. We’re trying to get [them] off the balance sheet … to help prepare the finances of the city and this body for some of the financial choices you’re gonna be asked to make in the future.”

The biggest borrowing of Mayor Rahm Emanuel’s tenure will be used to pay those “legacy costs” inherited from Daley and to complete Emanuel’s debt restructuring plan to end or move away from risky financial practices that Daley used to “mask” the true cost of city government.

Plans for the borrowing include: $151 million to convert variable-rate general obligation bonds to fixed interest rates; $192 million to cover swap termination costs; $40 million in variable-rate penalties triggered by the double-drop in the city’s bond rating; $170 million to continue so-called “scoop and toss” and two years of capitalized interest.

Bond proceeds also include: $35 million to make the city’s 2015 payment on a loan Daley used to purchase the site of the old Michael Reese hospital for an Olympic Village that was never needed; $19 million to compensate the consortium that leased Chicago’s parking meters for meters taken out of service; $62 million to pay a judgment tied to Daley’s decision to authorize a parking garage at the Aqua building even though the deal that privatized downtown parking garages included a do-not-compete clause; $4 million to terminate an equipment lease transaction; $181 million to terminate a 2005 agreement that financed work on the CTA’s Orange Line and $75 million to bankroll a retroactive pay raise and back pension payments for Chicago Police officers.

As promised, the police borrowing will be paid back over the two years remaining on the contract.

The kitchen sink of projects without any discussion of new revenue to solve the city’s $30 billion pension crisis infuriated Ald. John Arena (45th). He peppered Brown with questions, even though he is not a member of the Finance Committee.

“Are we just shuffling the deck chairs [on the Titanic]?” Arena asked Brown.

“We don’t hear anything about new revenue. We get fines here and fees there and everybody knows it’s not enough. When we have $1.1 billion put in front of us and say, ‘Approve this’ without at least a plan for revenue — this is irresponsible. It makes it very hard for me to support this strategy because I don’t know this strategy. I don’t know the plan.”

Brown countered: “This is not kicking the can. This is not shuffling the deck chairs. This is a real step toward doing what I think all of you … want to see us doing, which is to return to a state of more fiscal stability.”

The CFO acknowledged that new revenue “has to be part of a larger discussion around — not just this year’s budget, but budgets going forward” and said that’s a debate Emanuel is “committed” to having in plenty of time for aldermen to weigh the difficult choices.

“I understand the frustration. But what the administration has to bring to this body is a responsible plan that addresses all of the upcoming obligations of the city. That’s what the mayor is committed to doing,” she said.

Since Arena does not have a vote on the Finance Committee, his Progressive Caucus colleague, Ald. Scott Waguespack (32nd), cast the only “no” vote.

“We’re just kicking the can down the road. They’re not addressing the core issues that the rating agencies keep telling us is the problem. … We need to find hundreds of millions to pay off what we’re borrowing here today,” Waguespack said.

The senior managing underwriter on the $1.1 billion borrowing with an estimated $2.64 million in fees is Morgan Stanley. The company’s affidavit was signed by William Daley Jr., whose uncle is the former mayor and whose father and namesake replaced Rahm Emanuel as White House chief of staff.

That not only raised eyebrows among black and Hispanic aldermen demanding a bigger seat on the gravy train tied to city bond issues. It rankled Arena.

“The same folks who told us we should sell these assets to generate all this revenue and then turned around and sued us are now gonna benefit from these actions because this is how we’re generating the money to do this. They’re the ones in the room telling us this is the right step. There’s got to be a certain amount of caution or skepticism,” Arena said.

Rookie Ald. David Moore (17th) asked Brown whether there was any alternative to the $1.1 billion borrowing. The CFO said there was not. Moore then asked whether the massive borrowing came with a guarantee that there would be no further ratings downgrade. Once again, Brown’s answer was no.

Emanuel has promised to phase out the dubious practice of scoop-and-toss by 2019. But, he still plans to use it to the tune of $225 million this year, $150 million next year, $100 million in 2017 and $50 million in 2018, Brown said.

THE CHICAGO SUN-TIMES

WRITTEN BY FRAN SPIELMAN

POSTED: 06/15/2015, 12:43PM

Michigan’s Wayne County plans to sell nearly $187 million of general obligation limited-tax notes next week, while warning potential investors that it could be headed to federal bankruptcy court.

The note sale is part of about $8 billion of debt expected to be offered in the U.S. municipal bond market in the coming week, according to Thomson Reuters estimates on Friday.

Wayne County said if its plan to address chronic budget deficits by curbing pension and healthcare benefits and cutting wages is not implemented, the state of Michigan is likely to appoint an emergency manager, who could recommend a Chapter 9 municipal bankruptcy filing, according to offering documents for the note deal.

Detroit, which is in Wayne County, exited the biggest-ever municipal bankruptcy last year, shedding about $7 billion of its $18 billion of debt and obligations.

Wayne County’s taxable notes, which mature on Dec. 1, 2017, are scheduled to be priced by Bank of America Merrill Lynch on Thursday. The deal will raise money to cover delinquent 2014 property taxes due the county and local governments in the county. The notes are rated SP-1, one notch below the top investment-grade level for notes by Standard & Poor’s. The county’s long-term GO debt is rated in the “junk” level by all three major credit rating agencies.

Next week’s biggest negotiated offering is $750 million of New York City Transitional Finance Authority building aid revenue bonds. Lead underwriter Goldman, Sachs & Co will hold a Monday and Tuesday retail presale period for the bonds ahead of formal pricing on Wednesday. The bonds are structured with serial maturities in 2016 through 2044 along with a term maturity, according to the preliminary official statement.

Topping the week’s competitive calendar is a $155 million South Carolina Transportation Infrastructure Bank revenue refunding bond issue pricing on Thursday.

Meanwhile, investors pulled money out of municipal bond funds for a sixth week in a row. Net outflows totaled $411.8 million for the week ended June 10, up from $380.7 million in outflows the previous week, according to Lipper, a unit of Thomson Reuters.

REUTERS

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

Jun 12, 2015

Debt-burdened Puerto Rico has the potential to upset the municipal bond market if there is a broad restructuring of the U.S. commonwealth, causing uncertainty among retail investors, the head of asset manager BlackRock’s Municipal Bonds Group said on Thursday.

Puerto Rico finance officials have said the island could run out of money by the end of September without financing. Governor Alejandro Garcia Padilla in May signed into law a tax bill expected to provide about $1.2 billion in revenue for the next fiscal year, allowing Puerto Rico to pursue negotiations with creditors over a much-delayed bond deal of up to $2.95 billion.

BlackRock’s Peter Hayes said at a press briefing that the delay in the bond deal, originally expected late 2014, “should be concerning to investors because lack of access to the capital markets and higher borrowing costs is always an indication of greater problems.”

Puerto Rico bonds are fairly widely held by a variety of investors, he said, and a default or restructuring has the “bigger potential to upset the market.”

“It has the potential to create some uncertainty among retail and the potential for some outflows, if you get a larger broader restructuring of commonwealth in general,” Hayes said.

BlackRock does not own any bonds of power utility PREPA, which is struggling with $9 billion of debt and is currently working on a turnaround plan. But he said he could see a buying opportunity if the price fell from around 50 cents on the dollar to around 30 cents on the dollar. PREPA’s bonds maturing 2043 are trading around 53.50 cents on the dollar.

BlackRock also cited concerns about some states, particularly Illinois and Alaska, wrangling with budgets before their fiscal 2016 begins in July.

Overall, BlackRock forecast that municipal bond issuance was on pace for more than $400 billion this year. Total issuance was $315 billion in 2014 according to Thomson Reuters data.

REUTERS

(Reporting by Megan Davies; Additional reporting by Jessica DiNapoli; Editing by Richard Chang)

Jun 11, 2015

The U.S. municipal bond market grew to $3.694 trillion during the first quarter, following an increase to $3.652 trillion in the prior quarter, according to a quarterly report from the Federal Reserve released Thursday.

Retail buyers acquired a total of $13 billion of municipal bonds, a rebound from 16 straight quarters of declines in bonds held by households, the biggest buyers in the municipal bonds market.

Institutional investors picked up their buying, as bank holdings of municipal bonds grew $68.5 billion in the first quarter, after increasing by $41 billion in the prior quarter.

Mutual funds holdings grew by $59.4 billion in the first quarter, compared with $57.9 billion in the fourth quarter, the Federal Reserve said.

Property casualty-insurance companies shed $5.7 billion and life-insurance companies picked up $1.3 billion in municipal bonds.

REUTERS

(Reporting by Elvina Nawaguna; Editing by Chizu Nomiyama)

WASHINGTON, JUNE 11

San Diego, still dealing with the legacy of a pension crisis that led politicians to consider bankruptcy a decade ago, may throw taxpayer money behind municipal bonds for a football-stadium bidding war.

The city and the National Football League’s Chargers are negotiating on a proposed $1.3 billion coliseum to keep the team from leaving for Los Angeles. A plan backed by a city panel would have San Diego pay $121 million of the new stadium’s debt, even though it still owes $52 million for the Chargers’ current home. San Diego County would chip in, too.

The quest to keep the team has triggered a debate over whether to finance professional football as the city deals with $2 billion of deferred maintenance brought about in part by mounting pension costs. The city’s retirement system has a shortfall just as large, which led voters three years ago to approve reducing benefits for city workers.

“A core function of government isn’t to subsidize private companies,” said Bob Ottilie, a lawyer who’s organizing opposition to using tax money for the stadium. “A sports stadium doesn’t do anything for your community. It doesn’t create jobs or expand the tax base.”

Debt Sales

States and cities have sold more than $9 billion of debt for professional sports facilities since the 1980s, seeking to revitalize local economies or keep teams from fleeing. Last week, Wisconsin Governor Scott Walker, a Republican, backed using as much as $250 million of public funds for a new home for the Milwaukee Bucks of the National Basketball Association.

Mark Fabiani, a spokesman for the Chargers, which have been seeking a new stadium for 14 years, declined to comment on the negotiations.

Matt Awbrey, a spokesman for Mayor Kevin Faulconer, said voters would have to approve any deal after the terms have been finalized. The team and city officials are set to meet Monday afternoon to continue negotiations.

“The mayor has committed to giving voters a final say with a public vote,” Awbrey said.

The financing plan from the panel appointed by Faulconer is intended to keep the football team from moving 120 miles (193 kilometers) north to Carson, a Los Angeles suburb. While Carson isn’t offering any subsidies, the location would give the team access to a larger population. The Oakland Raiders are also considering the site.

Public Funds

The San Diego mayor’s panel last month proposed covering about one-third of the stadium’s cost with public funds, including $225 million from land sales. Adam Day, who heads the committee, said the stadium could be financed by $1 billion of bonds sold by a newly created authority, which would repay the debt with stadium revenue and the taxpayer funds.

Faulconer last month lauded the panel for finding a way to keep the team without raising taxes, though he didn’t comment on its specific recommendations.

The San Diego plan was designed to overcome a tax-wary electorate, which shot down tax increases for fire protection even after devastating wildfires, said Day.

“We have to take into account the political and economic conditions here in San Diego,” he said. “We do think it’s fair for the team, the city and the taxpayers.”

The proposal would rely on $300 million from the team, $200 million from the NFL and more than $100 million from the sale of seats, parking and tickets. An additional $173 million could come from debt backed by the team’s rent payments.

Brian McCarthy, spokesman for the NFL, didn’t respond to a request for comment.

The Risks

There’s also risk to the city, said Erik Bruvold, president of the National University System Institute for Policy Research in San Diego. The amount planners expect to raise through land and seat-license sales may fall short, he said, and the public may need to raise the subsidies if attendance doesn’t hold up.

“If those things don’t materialize, somebody is going to have to make up the difference, and that’s going to be the taxpayers,” he said.

San Diego has been working to steady its finances for over a decade, since its retirement fund was left reeling from the collapse of the Internet stock bubble. In 2005, then-Mayor Dick Murphy resigned after a $1.2 billion shortfall in the city’s pension fund prompted criticism of its accounting practices.

When Faulconer proposed a budget in April, he said San Diego has turned a corner toward a “healthy financial future.” San Diego has the third-highest credit rating from Moody’s Investors Service and Standard & Poor’s. Both companies have a stable outlook on its rating.

Cory Briggs, a lawyer who opposes the stadium project, said the city shouldn’t take on additional risk, given the pressure it still faces to shore up the pension fund. He said the subsidies the city’s offered may not be enough to hold the team.

“City officials are putting something together so they can say they tried,” he said. “But it’s probably too little, too late.”

Bloomberg

by James Nash & Darrell Preston

June 7, 2015 — 9:01 PM PDT Updated on June 8, 2015 — 12:32 PM PDT

Governor Chris Christie won a decisive victory over New Jersey unions when the state’s highest court ruled he isn’t required to fill a $1.57 billion pension budget gap, defusing an issue that hung over his potential presidential campaign.

While the ruling averts an immediate cash crunch, the pension hole continues to restrain spending on schools, tax relief and municipal aid. Christie has vowed not to raise taxes even as he acknowledges there’s no alternate plan for closing a deficit that may top $2.7 billion through June.

The New Jersey Supreme Court ruled it’s up to the state legislature to resolve the pension funding issue. Legislators have the power to appropriate funds as necessary for the financial health of the state, the court said Tuesday in a 5-2 decision.

“That the state must get its financial house in order is plain,” the court said. “The need is compelling in respect of the state’s ability to honor its compensation commitment to retired employees. But the court cannot resolve that need in place of the political branches.”

Christie hailed the ruling as an important victory for taxpayers “who simply cannot afford these unsustainably high costs.”

“The court’s position is clear, as is mine, it is time to move forward and work together to find a tangible, long-term solution to make our pension system and public employee health benefits costs affordable,” Christie said in a statement posted on Twitter.

Union Response

Hetty Rosenstein, state director for the Communications Workers of America representing about 40,000 of 74,000 state workers, said her union will lobby politicians to include funding in the budget they send Christie later this month, and said it plans to press for full funding with demonstrations, if necessary.

“It’s a terrible decision for the pension plan,” Rosenstein said in a phone interview. “People in the pension plan have legal rights. If we don’t pay them, there will be a total collapse of the New Jersey economy. One in seven people in this state rely on that plan.”

Christie, a Republican, said last year that an unanticipated drop in revenue forced him to trim pension payments to balance the budget, as required by law. The move came after he and the Democratic-led legislature approved a bill in 2011 that increased the state’s annual payments into the pension fund in exchange for higher employee contributions.

Christie made the first two payments, deferred $887 million last year when revenue sagged, and withheld payment on the remainder for the year ending June 30.

Unions Sue

Unions for teachers, firefighters and other public employees sued seeking full payment into a pension system underfunded by $83 billion. State court Judge Mary Jacobson sided with the governor in June 2014.

She said that confronted with “staggering” shortfalls in the state’s budget that year, Christie acted reasonably in making only a partial payment.

Jacobson, however, ruled in February that Christie and state legislators had had enough time to find a solution and ordered him to work with lawmakers to fill the gap.

The Supreme Court majority disagreed with Jacobson’s interpretation of the 2011 agreement and ruled the deal didn’t create a legally enforceable contract. The state’s constitution prohibits such long-term financial arrangements without voter approval, the court said.

Judges Dissent

Chief Supreme Court Justice Stuart Rabner and Justice Barry Albin dissented saying the decision strikes down the promises made to thousands of public workers and will have “far-reaching, negative consequences.”
“Public workers continue to pay into a system on its way to insolvency,” Albin wrote.

The issue is dire for New Jersey as the retirement burden grows, casting a shadow on the state budget and driving down its credit rating, which has already been cut a record nine times.

David Rosen, the legislative budget officer, told lawmakers last month that it may not be “fiscally possible” to come up with the amount needed to make a full payment. Assistant Attorney General Jean Reilly told the Supreme Court at a hearing last month that the governor is willing to pay an additional $200 million before the fiscal year ends.

Christie’s bid for state pension reform helped propel him into the national spotlight and could continue to haunt him as he weighs a run for the White House in 2016. The issue may leave an opening for Republican rivals who also have gubernatorial experience such as Scott Walker of Wisconsin, Jeb Bush in Florida and John Kasich in Ohio.

Opponents’ Response

Those men have the ability to say “we ran our state a lot better than you have,” Patrick Murray, director of polling at Monmouth University in West Long Branch, New Jersey, said in a phone interview on Monday.

Christie’s total 2016 spending plan of $33.8 billion has yet to be scheduled for a vote in the legislature as it approaches the June 30 deadline. A separate union lawsuit is also pending on a $3.1 billion commitment that Christie cut to $1.3 billion.

The case is Burgos v. New Jersey, L-1267-14, Superior Court of New Jersey, Mercer County (Trenton).

Bloomberg

by Sophia Pearson & Terrence Dopp

June 9, 2015 — 7:05 AM PDT Updated on June 9, 2015 — 8:57 AM PDT

Investor demand allowed Chicago to lower yields on $111.7 mln of sales tax revenue refunding bonds that were priced on Wednesday, according to details of the deal released on Thursday.

But Chicago continues to pay a penalty for its financial woes, which include a $20 billion unfunded pension liability.

Yields fell one to five basis points in most maturities in a repricing through lead underwriter RBC Capital Markets that dropped the top yield to 4.62 percent from an initial 4.67 percent for bonds due in 2034 with a 5 percent coupon, according to the final pricing scale.

That narrowed the spread over Municipal Market Data’s benchmark triple-A scale for the U.S. municipal bond market from the initial pricing by 10 basis points to 160 basis points, indicating investors continue to demand much fatter yields from Chicago compared to most other issuers.

The issue is part of the city’s plan to convert certain variable-rate debt into fixed-rate bonds to end bank letters of credit and interest-rate swaps. Last week, big investor demand drove yields down by as much as 16 basis points for $674 million of Chicago general obligation bonds. Still, the spread over the MMD scale was a hefty 264 basis points for bonds due in 2042.

Chicago officials said investors put in $464 million of orders for the $111.7 million of sales tax bonds, which were rated AAA by Standard & Poor’s, AA-plus by Kroll Bond Rating Agency and BBB-plus by Fitch Ratings.

The city did not request a rating from Moody’s Investors Service, which pushed its rating on Chicago’s GO and sales tax bonds into the junk level last month.

The Moody’s downgrade triggered $2.2 billion in accelerated debt and fee payments by Chicago. However, the city entered into forbearance agreements with banks that provided letters of credit backing the variable-rate debt or swaps used to hedge interest-rate risk on it to allow time for the bond conversions, according to city bond offering documents.

Reuters

Thu Jun 4, 2015 2:31pm EDT

(Reporting By Karen Pierog; Editing by Chris Reese)

(Reuters) – Chicago’s $111.7 mln of sales tax revenue refunding bonds were initially priced on Wednesday with a top yield of 4.67 percent for bonds due in 2034 with a 5 percent coupon, according to a pricing scale obtained by Reuters.

The issue is part of the city’s plan to convert certain variable-rate debt into fixed-rate bonds to end bank letters of credit and interest-rate swaps.

The spread over Municipal Market Data’s benchmark triple-A scale for the U.S. municipal bond market was much tighter for the revenue bonds than it was for $674 million of general obligation bonds Chicago converted to fixed rate last week, about 170 basis points versus 264 basis points.

The sales tax bonds were rated AAA by Standard & Poor’s, AA-plus by Kroll Bond Rating Agency and BBB-plus by Fitch Ratings. Moody’s Investors Service dropped its rating on Chicago’s GO and sales tax bonds to the junk level of Ba1 last month, but Moody’s was not asked by the city to rate the bond conversions.

The Moody’s downgrade triggered $2.2 billion in accelerated debt and fee payments by Chicago. However, the city entered forbearance agreements with banks that provided letters of credit backing the variable-rate debt or swaps used to hedge interest-rate risk on it to allow time for the bond conversions, according to city bond offering documents.

Wed Jun 3, 2015 10:59am EDT

(Reporting By Karen Pierog; Editing by Chizu Nomiyama)

NEW YORK (Standard & Poor’s) May 29, 2015–Standard & Poor’s Ratings Services today said that it believes the State of Florida (AAA/Stable) still has time to reach budget agreement in its special session that begins on June 1, but it would be unprecedented and significant if the Florida legislature failed to pass a budget by fiscal year-end.

The senate and the house have called the special session to complete the state budget over the course of 20 days and by the end of June. Florida constitution requires the state to adopt a balanced budget for each fiscal year and Florida has never passed a late budget. Assuming the absence of a budget in early fiscal 2016, we expect ‘AAA’ rated Florida will continue to make its debt service payments on time and in full. However, should budget disagreement extend well into July without an appropriation, we note that the state would need to make Aug. 1, 2015, debt service payments from debt service reserve funds held by the trustee. From a credit standpoint, continued political brinkmanship that results in a late budget (past June 30) with a need to use debt service reserve funds to cover scheduled debt service payments would reflect a weakening of state budget management that we consider uncharacteristic of a ‘AAA’ rated state.

The Florida constitution requires that the state pass a balanced budget for each fiscal period and it does not have a provision that calls for a continuation budget. Gov. Scott has asked agencies to identify critical services that need state funding if Florida is unable to pass the budget on time, thereby causing a government shutdown. The governor’s office has also identified a baseline budget at fiscal 2015 levels, in addition to critical spending needs, that could serve as a budget model, although we understand the legislature and governor would still need to approve such a plan. Florida has passed a budget after the end of regular session only three times since 1992 when it adopted the budget on the last day of that fiscal year. More important, although extremely close in 1992, the state has never failed to pass a budget before July 1.

The house’s unprecedented early adjournment on April 28 with no budget, two days before the end of the regular session, reflected positions in the legislature that were far apart and entrenched. The primary cause of the budget impasse is a disagreement about health care funding. The state previously received $1.3 billion of federal revenue for the $2.2 billion low income pool (LIP) program based on a federal waiver that expires in June 2015. The house and governor disagree with a senate plan that would have offset the potential loss of funding from the LIP program by expanding Medicaid. The federal Centers for Medicare and Medicaid Services (CMS) sent a letter to the state last week preliminarily estimating $1 billion in total federal and state funding needs for the LIP program for fiscal 2016, although it still did not guarantee the funding. Should the CMS decide not to renew funding by July 2015 and should Florida decide not to replace that funding, payments to health care providers could drop. The special session agenda includes the state budget, Medicaid expansion, tax cuts, the implementation of Amendment 1, and the associated use of documentary stamp taxes, along with several other issues.

In the event the Florida legislature is unable to adopt a fiscal 2016 budget before July 1, state officials report that there are sufficient resources appropriated from the fiscal 2015 budget to meet all July 1 debt service payments for revenue, appropriation, and full faith and credit-backed bonds, which are due to the paying agent at least one day before the debt service date. Fiscal 2015 budget appropriations also cover scheduled Sept. 1, 2015, debt service payments for the Department of Management Services’ facilities pool revenue bonds. We understand, however, that without a fiscal 2016 appropriation, Florida might need to tap debt service reserves for Florida Correctional Finance Corp.’s certificates of participation debt service
payments due Aug. 1, 2015. State officials report that amounts in associated debt service reserve funds held with the trustee are sufficient to cover such a contingency; nevertheless, we would view a need to use debt service reserves as uncharacteristic of a ‘AAA’ rated state. A budget standoff that continued past June 30, without appropriations in place for upcoming debt service payments, would be a sign of weak budget management that could pressure our outlook on Florida. We will continue to monitor the status of deliberations as the state works through its budget impasse during the special session.

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.

Standard & Poor’s Ratings Services, part of McGraw Hill Financial (NYSE: MHFI), is the world’s leading provider of independent credit risk research and benchmarks. 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 and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.

29-May-2015

Primary Credit Analyst: Sussan S Corson, New York (1) 212-438-2014;
sussan.corson@standardandpoors.com

Secondary Contact: John A Sugden, New York (1) 212-438-1678;
john.sugden@standardandpoors.com

New state and local government employees in California would no longer earn guaranteed public pensions unless voters decide otherwise, under a 2016 ballot measure proposed by two former city officials.
Former San Jose Mayor Chuck Reed and former San Diego City Councilman Carl DeMaio, who championed efforts to reduce benefits in their cities, said Thursday the measure would allow local voters to decide how to balance employee pensions against the cost of municipal services.

Growing public employee retirement costs have hobbled California cities since the recession, contributing to municipal bankruptcies in Vallejo, San Bernardino and Stockton. Elected officials in cities and counties began boosting pensions for police and firefighters after lawmakers in 1999 raised benefits for state troopers. At the time, the California Public Employees’ Retirement System had 138 percent of the assets needed to cover projected liabilities. It now has about 77 percent.

“We’re filing this because pension costs and retirement costs generally are going up dramatically in California,” Reed said on a conference call with reporters. “This initiative is to empower local governments to do what is necessary in their communities. We’re not telling them how to solve the problem.”

They would need to overcome opposition from public-employee unions and gather 585,407 valid signatures by Nov. 25 to place their “Voter Empowerment Act” on the November 2016 ballot.

The measure wouldn’t affect pensions for current state and local government workers, except for prohibiting enhancements to their benefits without voter approval, Reed and DeMaio said.

Retirement Security

Employees hired after Jan. 1, 2019, would be placed in 401(k)-style defined-contribution plans, with the government paying no more than 50 percent of retirement costs, unless voters decide differently.
“This is yet another destined-to-fail attempt to eliminate the retirement security of teachers, firefighters, school bus drivers and other public employees that they have earned and agreed to in good faith at the bargaining table,” Dave Low, chairman of union-backed Californians for Retirement Security, said in an e-mailed statement.

Across the nation, state and local governments are grappling with pension deficits that exceed a combined $2 trillion, according to a Moody’s Investors Service report last year.

DeMaio said the measure would save “billions” over the next 30 years, although he wasn’t more specific.
In 2012, voters in San Diego and San Jose, the second- and third-largest cities in California, approved measures to curb employee pension costs.

San Diego’s measure put new employees except police into a 401(k)-style retirement plan, rather than one with guaranteed payments, while San Jose’s allowed current employees to choose whether to pay more to keep their existing retirement plan, or switch to one with reduced benefits and a higher retirement age. Reed, a Democrat, backed the San Jose plan while DeMaio, a Republican, endorsed San Diego’s.
Reed’s city measure was stymied by unions, which sued to block the changes.

Last year, Phoenix voters rejected a ballot measure that would have made Arizona’s capital the largest U.S. city to do away with guaranteed pensions for new public workers. Almost 57 percent of voters turned down a proposal to replace pensions with 401(k)-style defined contribution plans for city workers other than police and firefighters.

Bloomberg

by James Nash

June 4, 2015 — 11:57 AM PDT

Puerto Rico’s junk-rated electric utility, weeks away from owing a $416 million debt payment, is moving closer to a legal showdown as bond insurers consider blocking a move to give it more time to fix its finances.

The Puerto Rico Electric Power Authority, called Prepa, has been negotiating with insurers, banks and bondholders since August on ways to revamp its operations and finances, under a pact known as a forbearance agreement. That accord, which keeps the talks out of court, expires Thursday. The power provider said this week that it isn’t generating enough cash to service its $9 billion of obligations.

Without the forbearance pact, creditors can sue Prepa, which has breached bond contracts by using reserves for debt payments. Units of Assured Guaranty Ltd., MBIA Inc. and Syncora Guarantee Inc. insure about $2.6 billion of the debt, according to their websites. Some members of that group are weighing ending the accord because the turnaround process is taking too long, according to three people with knowledge of the discussions who requested anonymity because the talks are private.

Negotiating behind closed doors “appears to be unworkable,” said Robert Donahue, managing director at Municipal Market Analytics Inc., a Concord, Massachusetts-based research firm. “Now the likelihood is high that this will be forced into a court and that near-term losses are almost certain.”

July 1

A restructuring of Prepa, the main electricity supplier on the island of 3.5 million, would be the largest ever in the municipal-bond market.

Its next principal and interest payment is July 1. It’s premature to predict whether Prepa will pay what it owes on time, U.S. Bank National Association, the bond trustee, said in a May 7 filing. Moody’s Investors Service warned in March that Prepa may default on next month’s bill.

“No decision has been made about the July 1 payment,” Lisa Donahue, Prepa’s chief restructuring officer, said in an e-mail. “There can be no assurance that the payment will be made.”

Kevin Brown at Armonk, New York-based MBIA, Ashweeta Durani at Hamilton, Bermuda-based Assured, and Michael Corbally at Syncora in New York declined to comment.

Distress Case

Prepa’s securities, along with other bonds from the commonwealth, have traded at distressed levels for almost two years as the local economy reels.

The agency’s bonds have recovered from their lows. Securities maturing in July 2028 have risen to an average price of 52.6 cents on the dollar, up from a 2014 low of about 37 cents, according to data compiled by Bloomberg on Prepa’s most actively traded securities Wednesday. The tax-exempt bonds yield about 12.5 percent.

The utility is discussing an extension of the forbearance agreement with creditors and will make an announcement before the deadline, Prepa’s Donahue said Monday. A turnaround plan she submitted to some creditors that day said ratepayers, employees, bondholders and management need to share the burden of the agency’s recovery.

Default Trigger

In the event of a default, the bond trustee can ask a court to appoint a receiver to take over Prepa’s operations, if holders of at least 10 percent of the debt agree, bond documents show.

Investors say Prepa can come up with the money to pay its bonds by cracking down on overdue bills. Late balances among residents, businesses and government tallied $1.75 billion in September, according to a report compiled by a subsidiary of FTI Consulting Inc. The agency is also obligated to pass on to consumers its cost savings from lower oil prices.

A Prepa default would undermine bondholders’ faith that the island will honor its debts, said Richard Larkin, director of credit analysis at Herbert J. Sims & Co. in Boca Raton, Florida. Puerto Rico bonds rallied after lawmakers last month moved to ease a cash crunch by boosting the sales-tax rate.

“That confidence will be diminished, however, if one of its largest authorities, Prepa, continues to subsidize lower rates and free municipal service at the expense of repaying investors,” Larkin wrote in a report Wednesday.

If investors push Prepa into the courtroom or the hands of a receiver, the utility still would have to keep the lights on across the Caribbean island. That may require bondholders to take a loss, said MMA’s Donahue.
“Can Prepa honor all of the legal pledges it’s made as well as its critical mission to provide power?” he said. “This situation is at a head where Prepa’s ability to do just that is clearly in question.”

Bloomberg

by Michelle Kaske

June 3, 2015 — 5:00 PM PDT Updated on June 4, 2015 — 7:29 AM PDT

Puerto Rico’s junk-rated power authority won a two-week extension to an agreement with creditors that will give it more time to sort out its finances as it teeters under $9 billion of debt.

The accord will end June 18, the agency said in an e-mailed statement Friday. It allows the Puerto Rico Electric Power Authority, known as Prepa, to negotiate with bondholders, banks and debt insurers outside of court on ways to revamp its operations and finances. Talks have been going on since August.

It’s the fourth time creditors have consented to prolong the agreement, which was set to expire Thursday night. Prepa has breached bond contracts by draining its reserves and may default on an interest and principal payment due next month.

“While progress has certainly been made towards a negotiated solution, the timeline is not on the side of a peaceable, agreed-to outcome,” Daniel Hanson, an analyst at Height Securities LLC, a Washington-based broker dealer, wrote in a report Friday. “The utility is likely to pursue a plan that impairs bondholders over their objections, which could result in a protracted legal battle.”

Without a forbearance agreement, the creditors could sue Prepa. Some bond insurers earlier this week weighed blocking an extension because the restructuring talks were taking too long, according to three people with knowledge of the discussions who requested anonymity because the talks are private.

Insurers’ Role

“We continue to work with creditors towards a consensual resolution and the transformation of Prepa for the benefit of all stakeholders,” Lisa Donahue, Prepa’s chief restructuring officer, said in the statement.
Units of Assured Guaranty Ltd., MBIA Inc. and Syncora Guarantee Inc. insure about $2.6 billion of Prepa’s debt, according to their websites.

Prepa owes investors $416 million of principal and interest July 1. Most of the bonds maturing that day carry bond insurance, data compiled by Bloomberg show.

It’s premature to predict whether Prepa will pay what it owes on time, U.S. Bank National Association, the bond trustee, said in a May 7 filing. Moody’s Investors Service warned in March that Prepa may default on next month’s bill.

“No decision has been made about the July 1 payment,” Donahue said in an e-mail Wednesday. “There can be no assurance that the payment will be made.”

A restructuring of Prepa, the main electricity supplier on the island of 3.5 million, would be the largest ever in the municipal-bond market. The utility’s securities and other debt from the commonwealth have traded at distressed levels for almost two years.

Prepa bonds maturing in July 2040 were little changed Friday, trading at an average price of 52.1 cents on the dollar, for a tax-exempt yield of about 10.8 percent, according to data compiled by Bloomberg. The bonds have recovered from as low as about 38 cents in July 2014.

Debt from the island has earned about 0.6 percent this year, while the entire municipal market has lost almost 0.1 percent, S&P Dow Jones Indices show.

Bloomberg

by Michelle Kaske

June 5, 2015 — 5:01 AM PDT Updated on June 5, 2015 — 10:02 AM PDT

A group of politicians and business leaders is making a new effort to reduce California’s mounting pension problems, with a ballot campaign that would curb retirement benefits for new hires and give voters a larger say on future cost increases.

The California coalition hopes to ask voters next fall to approve an initiative giving governments the power to deny guaranteed retirement payouts to new workers and instead cycle employees into 401(k)-style plans starting in 2019. Future increases to the benefits of current pensioners would also be subject to a popular vote, among other changes.

The effort is expected to be watched closely around the U.S. as it sets up a potential battle with the California Public Employees’ Retirement System, known as Calpers, which controls retirement money for many municipal and state workers as the country’s largest public pension fund.

Calpers relies on contributions from governments to fund worker pensions, and it has argued those retirement benefits are guaranteed by California law and can’t be cut.

Pension contributions are among the heaviest costs shouldered by California municipalities. California cities are expected to make a total of $5.1 billion in contributions during fiscal 2015, accounting for nearly 7% of total revenue, according to the California Policy Center, which analyzed 459 municipalities. Higher contributions often mean cash-strapped cities are forced to cut services or raise taxes to cover the bill.

“We need to do something to get control over these skyrocketing costs,” said former San Jose Mayor Chuck Reed, one of the backers of the new campaign.

A Calpers spokeswoman said via email that “comprehensive pension reform has already been enacted in California,” adding that “defined benefit plans are the most cost-effective way to save for retirement and should remain an important tool in retirement planning.”

The proposed California initiative would put new hires onto a 401(k)-style plan, requiring municipalities that want to keep a more traditional defined-benefit plan to put it up for a popular vote. Otherwise, new government hires would be placed into the system starting Jan. 1, 2019, which more closely resembles those at private-sector companies.

In a traditional pension plan, administrators choose where to put the money and employees receive a set payout at retirement regardless of how well or poorly the funds were invested. In a 401(k)-style plan, employees typically decide where to invest their funds. At retirement, they have a sum of money reflecting how much was contributed and how the investments fared.

Voters don’t typically have much say when it comes to designing retirement benefits, a responsibility typically left to elected officials. “It’s unusual for pension benefits to be subject to popular vote,” said Keith Brainard, research director at the National Association of State Retirement Administrators.

The ballot-measure campaign still has several hurdles to clear, needing to gather around 560,000 signatures and emerge from a review by Attorney General Kamala Harris. The ballot campaign would also have to overcome opposition from organized labor, which is expected to mount opposition to it.

A similar effort to curb pension benefits in California failed to come up for a vote last year. Where this attempt differs is that it doesn’t ask for benefit reductions from current employees.

The group backing the new effort includes former San Diego council member Carl DeMaio, a Republican, and Mr. Reed, a Democrat who was able to pass a pension overhaul in his previous job as mayor of San Jose. The group has spent $180,000 so far on the campaign but ultimately could require around $25 million, Mr. Reed said.

If successful, the initiative “puts the power in the hands of the voters to service a check on bad deals made by politicians,” Mr. DeMaio said.

THE WALL STREET JOURNAL

By TIMOTHY W. MARTIN

Updated June 4, 2015 5:16 p.m. ET

Write to Timothy W. Martin at timothy.martin@wsj.com

It is shaping up as a hectic summer for investors in Puerto Rico’s more than $70 billion in outstanding debt.

On Monday, the U.S. commonwealth’s publicly owned electric monopoly presented creditors with a restructuring plan, a month before a roughly $400 million payment comes due that analysts say the utility doesn’t have.

The plan includes efforts to modernize the authority and increase efficiencies, with a goal of stabilizing power rates, according to Chief Restructuring Officer Lisa Donahue, who declined to talk about a possible debt restructuring, citing continuing confidential talks with creditors.

The power authority, known as Prepa, is negotiating with creditors ahead of a June 4 deadline to extend talks or face a possible default. Prepa has been drawing on reserves to make debt payments and doesn’t have enough in those accounts to make the July payment, its trustee said in an April bond disclosure.

The episode highlights the volatility of Puerto Rico’s fiscal situation as the commonwealth and its indebted public agencies face a series of deadlines in coming weeks, each of which has the potential to change investor attitudes toward the island’s debt.

The average price of Puerto Rico bonds sold last year rose above 84 cents on the dollar last week, their highest level since March, after lawmakers approved a sales-tax increase and moved toward a value-added tax, according to Municipal Market Data. That bolstered confidence that Puerto Rico can balance its budget and borrow enough to avoid running out of cash.

But Guy Davidson, director of municipal investments at AllianceBernstein, which manages about $33 billion in tax-exempt debt, said the island still must deliver spending cuts and a plan for economic growth, which remains elusive amid a decade of stagnation.

“Our view is that all these things they have to do—raise taxes, lower expenses, take on debt—all of these things are short-term solutions,” he said. His firm is avoiding Puerto Rico bonds.

Investors are waiting on lawmakers to wrap up a budget by July and sell an additional $3 billion in bonds. The government says it may have to shut down by September if it can’t raise fresh funds.

Puerto Rico lobbyists, meanwhile, are fighting on Capitol Hill to clear a potential path to bankruptcy. As a commonwealth, the island is currently excluded from chapter 9 of the U.S. bankruptcy code, the statute that covers municipalities like Detroit. Puerto Rico is working to change that.

Daniel Hanson, an analyst at Washington-based investment researcher Height Securities LLC, prepared a calendar last week packed with more than two dozen important dates and deadlines for Puerto Rico stretching through June 2016.

“They’re now up against a real serious material liquidity constraint, and they have yet to deliver on reform, despite two years of grandstanding about it,” he said.

Puerto Rico’s bonds also have benefited from low interest rates in the $3.7 trillion market for debt sold by U.S. state and local governments, which have left investors pushing into riskier securities in pursuit of higher yields. Hedge funds bought more than half of the debt offered in the island’s $3.5 billion bond sale in 2014, and investors including Jeffrey Gundlach’s DoubleLine Capital have been purchasing the island’s debt.

Ms. Donahue said Prepa’s plan calls for about $2.3 billion in capital investment, which will involve a competitive bidding process for third parties to build and operate new generating plants. Creditors, which include funds managed by Franklin Templeton Investments and OppenheimerFunds Inc., have proposed a $2 billion plan to revamp Prepa, saying it would provide the agency with liquidity while replacing its antiquated, oil-burning generators with natural-gas facilities.

A consortium of NRG Energy Inc., ITC Holdings Corp. and York Capital Management also is proposing a $3.5 billion plan to modernize Prepa. That would include building new natural-gas facilities and transmission lines and selling power to Prepa, saving the authority money. The plan doesn’t include job cuts at Prepa and doesn’t spell out what Prepa would do with money saved, said Jeff Rosenbaum, managing director at York, which oversees about $26 billion.

Stephen Spencer, a managing director at investment bank Houlihan Lokey who is financial adviser to Prepa’s bondholders, said that, while some elements of Prepa’s proposal will require further negotiation, “Overall, we feel the plan provided a basis for this further collaboration, and we remain committed to finding a fair solution for all parties.”

The authority is still talking with creditors about extending the June 4 deadline, Ms. Donahue said.

Whatever the immediate outcome at Prepa, which has extended numerous deadlines with creditors, there is still much work ahead. John Miller, co-head of fixed income at Nuveen Asset Management LLC, which manages about $100 billion in municipal bonds, ticked off a summer to-do list for Puerto Rico that included passing a budget, issuing the new bonds, paying short-term notes and implementing the tax changes.

“I think there’s a lot left to be accomplished,” he said.

THE WALL STREET JOURNAL

By AARON KURILOFF

June 1, 2015 7:22 p.m. ET

Write to Aaron Kuriloff at aaron.kuriloff@wsj.com

(Reuters) – A new statewide ballot measure campaign aimed at reforming public worker pensions was filed in California on Thursday, led by former Democratic San Jose mayor and longtime pension reform advocate Chuck Reed.

The ballot initiative is the latest in a long fight to reduce public pension obligations in California, where debts are particularly burdensome and have contributed to municipal bankruptcies in some cities.

Voters would be required to approve pension benefits for new government employees and any increases in benefits to existing workers. The measure would also prohibit taxpayers from subsidizing more than 50 percent of government retirement benefit costs, unless approved by voters.

While California’s economy has improved in the past few years, public worker pension debt grew to $198 billion in 2013 from $6.3 billion in 2003. Unfunded liabilities for retiree healthcare benefits is approximately $150 billion, according to the group.

“We’re filing this because pensions costs are going up dramatically,” Reed said. “We’re giving voters the opportunity to weigh in on employee benefits that they have not had in the past.”

As San Jose mayor, Reed helped pass a pension reform measure for his city, parts of which have been struck down after union lawsuits. He abandoned a similar statewide ballot initiative in 2014, after Kamala Harris, California’s Democratic attorney general, altered the wording.

A coalition of politicians and business people led by Reed and former Republican San Diego City Council member Carl DeMaio spent several hundred thousand dollars on policy and polling work ahead of this ballot initiative. They are in discussions with various potential donors, including John Arnold, hedge fund billionaire-turned-philanthropist and the single biggest donor for Reed’s last, failed ballot initiative.

This initiative – unlike his last one, which sought to give mayors and other local officials the power to alter pension benefits for current workers – asks workers hired after January 2019 to cover at least half of their retirement benefits costs.

“This protects taxpayers,” Reed said.

Dave Low, chairman of Californians for Retirement Security, called the initiative “another destined-to-fail attempt to eliminate the retirement security” of state public employees.

Expected to appear on the November 2016 ballot, the initiative would apply to all California local governments, not just workers covered by the state pensions fund Calpers. Big cities, such as Los Angeles, San Francisco and San Jose, have their own pension systems and Reed’s proposed law would also apply to them.

By REUTERS

JUNE 4, 2015, 2:58 P.M. E.D.T.

(Reporting by Robin Respaut, additional reporting by Tim Reid; Editing by Chizu Nomiyama and Grant McCool)

On May 19, 2015 The Georgia Department of Transportation (“GDOT”) announced that it will not allow Kinder Morgan to exercise eminent domain to seize private property in order to build the Palmetto Pipeline. Kinder Morgan plans to build a pipeline that would stretch between Belton, South Carolina and Jacksonville, Florida, transporting gasoline, diesel, and ethanol at a rate of up to 167,000 barrels per day. The GDOT’s decision is a major roadblock for the proposed pipeline. However, Kinder Morgan plans to “pursue all available options to move forward with the project.”

More details on this story are available in the WOTC article.

Article by David M. Moore and Andrew S. Bauer

May 21 2015

Smith Gambrell & Russell LLP

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

May 27 (Reuters) – Strong investor demand pushed yields lower for $674 million of Chicago bonds priced on Wednesday, but the city continued to pay a penalty for its shaky finances.

Carole Brown, Chicago’s CFO, said the four bond issues attracted $6 billion in orders.

“This further shows that investors remain confident in the city’s credit and a secure economic future for Chicago,” she said in a statement.

Chicago initially offered bonds due in 2042 with a hefty 6 percent yield and 5.75 percent coupon. A repricing cut the yield by 16 basis points to 5.84 percent with a 5.50 percent coupon. The lower yield compressed the spread over Municipal Market Data’s benchmark triple-A scale for the U.S. municipal bond market to 264 basis points from 280 basis points. The city’s bonds had been trading about 300 basis points over the scale.

But the spread was still nearly 300 basis points over the scale for yields on bonds due in 2021-2013, according to MMD. While there was big demand for long bonds, underwriters had to take some bonds with shorter maturities into their inventories, a market source said.

On May 12, Moody’s Investors Service downgraded Chicago’s credit rating to junk, due to an Illinois Supreme Court ruling that narrowed the city’s options for dealing with its $20 billion unfunded pension liability.

Tom Metzold, a portfolio manager at Eaton Vance Management, said he did not participate in the deals.

“We didn’t think (the bonds) were priced appropriately given (the city’s) risk profile,” he said.

The city, the third-largest in the United States by population, is struggling with a $300 million structural budget deficit and a looming $550 million contribution increase to its public safety workers’ retirement funds.

Yields in several maturities in the four issues repriced through lead manager Bank of America Merrill Lynch fell by 1 to 15 basis points.

The general obligation bond issues are part of Chicago’s plan to convert about $805 million of variable-rate debt to fixed rate and end related interest-rate swaps and bank letters of credit.

The Moody’s downgrade triggered $2.2 billion in accelerated debt and fee payments by Chicago. However, the city entered into forbearance agreements with banks that provided letters of credit backing the variable-rate debt or swaps used to hedge interest-rate risk on it, according to city bond offering documents. Those give Chicago until June 8 to complete converting the bonds to a fixed-rate mode.

By Karen Pierog

(Reporting by Karen Pierog; Editing by Jeffrey Benkoe, Dan Grebler, Christian Plumb and David Gregorio)

NEW YORK (Standard & Poor’s) May 29, 2015–Standard & Poor’s Ratings Services today said that it believes the State of Florida (AAA/Stable) still has time to reach budget agreement in its special session that begins on June 1, but it would be unprecedented and significant if the Florida legislature failed to pass a budget by fiscal year-end.

The senate and the house have called the special session to complete the state budget over the course of 20 days and by the end of June. Florida constitution requires the state to adopt a balanced budget for each fiscal year and Florida has never passed a late budget. Assuming the absence of a budget in early fiscal 2016, we expect ‘AAA’ rated Florida will continue to make its debt service payments on time and in full. However, should budget disagreement extend well into July without an appropriation, we note that the state would need to make Aug. 1, 2015, debt service payments from debt service reserve funds held by the trustee. From a credit standpoint, continued political brinkmanship that results in a late budget (past June 30) with a need to use debt service reserve funds to cover scheduled debt service payments would reflect a weakening of state budget management that we consider uncharacteristic of a ‘AAA’ rated state.

The Florida constitution requires that the state pass a balanced budget for each fiscal period and it does not have a provision that calls for a continuation budget. Gov. Scott has asked agencies to identify critical services that need state funding if Florida is unable to pass the budget on time, thereby causing a government shutdown. The governor’s office has also identified a baseline budget at fiscal 2015 levels, in addition to critical spending needs, that could serve as a budget model, although we understand the legislature and governor would still need to approve such a plan. Florida has passed a budget after the end of regular session only three times since 1992 when it adopted the budget on the last day of that fiscal year. More important, although extremely close in 1992, the state has never failed to pass a budget before July 1.

The house’s unprecedented early adjournment on April 28 with no budget, two days before the end of the regular session, reflected positions in the legislature that were far apart and entrenched. The primary cause of the budget impasse is a disagreement about health care funding. The state previously received $1.3 billion of federal revenue for the $2.2 billion low income pool (LIP) program based on a federal waiver that expires in June 2015. The house and governor disagree with a senate plan that would have offset the potential loss of funding from the LIP program by expanding Medicaid. The federal Centers for Medicare and Medicaid Services (CMS) sent a letter to the state last week preliminarily estimating $1 billion in total federal and state funding needs for the LIP program for fiscal 2016, although it still did not guarantee the funding. Should the CMS decide not to renew funding by July 2015 and should Florida decide not to replace that funding, payments to health care providers could drop. The special session agenda includes the state budget, Medicaid expansion, tax cuts, the implementation of Amendment 1, and the associated use of documentary stamp taxes, along with several other issues.

In the event the Florida legislature is unable to adopt a fiscal 2016 budget before July 1, state officials report that there are sufficient resources appropriated from the fiscal 2015 budget to meet all July 1 debt service payments for revenue, appropriation, and full faith and credit-backed bonds, which are due to the paying agent at least one day before the debt service date. Fiscal 2015 budget appropriations also cover scheduled Sept. 1, 2015, debt service payments for the Department of Management Services’ facilities pool revenue bonds. We understand, however, that without a fiscal 2016 appropriation, Florida might need to tap debt service reserves for Florida Correctional Finance Corp.’s certificates of participation debt service payments due Aug. 1, 2015. State officials report that amounts in associated debt service reserve funds held with the trustee are sufficient to cover such a contingency; nevertheless, we would view a need to use debt service reserves as uncharacteristic of a ‘AAA’ rated state. A budget standoff that continued past June 30, without appropriations in place for upcoming debt service payments, would be a sign of weak budget management that could pressure our outlook on Florida. We will continue to monitor the status of deliberations as the state works through its budget impasse during the special session.

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.

Standard & Poor’s Ratings Services, part of McGraw Hill Financial (NYSE: MHFI), is the world’s leading provider of independent credit risk research and benchmarks. 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 and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.

Primary Credit Analyst:
Sussan S Corson, New York (1) 212-438-2014;
sussan.corson@standardandpoors.com

Secondary Contact:
John A Sugden, New York (1) 212-438-1678;
john.sugden@standardandpoors.com

No matter whether Governor Chris Christie wins or loses a New Jersey Supreme Court case on his $1.6 billion pension-payment cut, the municipal-bond market sees his state’s credit suffering.

As New Jersey grapples with a growing retirement burden and a record nine downgrades, investors are demanding the most extra yield since at least January 2013 to own its bonds instead of benchmark munis, according to data compiled by Bloomberg.

Bondholders are souring on the state’s fortunes as the court is poised to rule as soon as this month on whether the second-term Republican and potential presidential candidate must make full pension contributions, after he cut payments for this fiscal year amid a revenue shortfall. While a decision in his favor would avert a sudden budget crunch, it would exacerbate a pension-funding deficit that’s restraining spending on schools, tax relief and municipal aid.

“There are negative credit implications either way,” said Joseph Pangallozzi, a managing director at New York-based BlackRock Inc., which oversees $114 billion of munis. “If the court rules against the administration, they have to come up with the money fast. If they rule with the administration, there is still no concrete long-term plan in place for addressing the unfunded liability.”

Record Gap

Ten-year New Jersey debt yields 3.2 percent, or almost 0.9 percentage point above AAA munis. That gap has more than tripled in the past year to the widest since Bloomberg began compiling the data in January 2013. The state carries an A grade from Standard & Poor’s, sandwiched between California’s A+, and Illinois at A-. The three are the lowest-rated U.S. states.

Aside from Illinois, whose highest court rejected a solution this month for its $111 billion pension shortfall, New Jersey’s spreads are the widest among the 20 states tracked by Bloomberg. They’re almost triple those on California, which S&P put on “CreditWatch with positive implications” Thursday.

Eaton Vance Management is reducing New Jersey holdings and expects the state’s spreads may keep increasing whichever way the ruling goes, said Tom Metzold, senior portfolio adviser in Boston at the firm, which oversees $28.6 billion in munis. Unlike Illinois, as a high-tax state New Jersey has less room to raise levies even if Christie agreed to that step, Metzold said.

‘Hard Look’

“I would be taking a hard look at considering a downgrade because I don’t see how you can keep it at its current level given their unwillingness to even consider a solution,” Metzold said.

With the biggest parts of the budget already spent and no taxes that could generate revenue quickly, a full pension payment this year may be impossible, David Rosen, fiscal analyst at the nonpartisan Office of Legislative Services, said this week at a hearing in Trenton.

Brian Murray and Kevin Roberts, spokesmen for Christie, didn’t return an e-mail and phone call requesting comment.

The three biggest rating companies have lowered New Jersey nine times under Christie, a record for a governor of the state, citing the pension-funding shortfall, now $83 billion.

Deferred Payments

Christie and the Democratic-led legislature approved a bill in 2011 that increased the state’s annual payments in exchange for cost-cutting, such as higher employee contributions. Christie made the first two payments, deferred $887 million last year when revenue sagged, and withheld about $1.6 billion for the year ending June 30.

State lawyers, in response to a suit by public-worker unions seeking the full contributions, claim the 2011 law was unconstitutional.

The governor has called for reducing pension benefits to control costs. Democrats have said they won’t agree to cuts until Christie makes full payments.

“As governor, I have put more money into the pension system than any governor in history,” Christie said in a town hall meeting May 14, according to a transcript.

Through fiscal 2015, Christie will have contributed $2.89 billion to the pensions, more than any of his predecessors.

If the court orders payments, Christie and legislators have options, Treasurer Andrew Sidamon-Eristoff said without specifying details during a Trenton committee meeting this week.

Illinois, which also has shortchanged retirement obligations, is getting punished even more severely in the bond market. Yields on 10-year Illinois debt are about a percentage point above New Jersey’s, the biggest gap since November.

“Both states seem to be in denial as to making required payments that they agreed to make,” Metzold said.

Bloomberg

by Romy Varghese and Elise Young

May 21, 2015

Puerto Rico’s descent into junk has made its bonds more attractive to Goldman Sachs Asset Management and OppenheimerFunds Inc. even as their rivals flee.

Goldman Sachs increased its stake in Puerto Rico bonds to $1.3 billion as of May 5 from $351 million in February 2014, when the island was cut to speculative grade, according to data compiled by Bloomberg. OppenheimerFunds has snapped up sales-tax backed debt since the downgrade.

The two are bucking the trend among the 10 largest mutual-fund holders of Puerto Rico bonds by increasing their stakes as yields on some securities have climbed to 10 percent. That’s the equivalent of almost 18 percent for top earners when factoring in the tax exemption. Those payouts are alluring with municipal-bond yields holding near a five-decade low.

“There’s a point where there’s going to be value — these securities aren’t worthless,” said Gabe Diederich, a research analyst at Wells Capital Management, which ranks seventh among mutual-fund owners of Puerto Rico bonds. It holds mostly insured debt. “We have been hearing more and more that traditional buyers have been looking at buying Puerto Rico again.”

Too Speculative

The split among the mutual funds highlights how Puerto Rico debt has increasingly become too speculative for many municipal-bond buyers, who seek tax-free income, not the outsized returns chased by hedge funds.

OppenheimerFunds’s increased stake keeps it the biggest mutual-fund owner of Puerto Rico bonds. The push from Goldman Sachs elevated the company’s rank to third from eighth since February 2014. Franklin Resources Inc.’s holdings have declined by more than $1 billion since then, though it’s still the second-biggest owner.

The jump in Goldman’s investment began with the commonwealth’s record junk deal in March 2014 and kept going as it more than tripled its ownership of the securities. The buying was led by its Strategic Income Fund, which invests in global bonds and uses derivatives to bet that asset prices will fall.

New York-based OppenheimerFunds has made Puerto Rico a core holding for years because it’s tax-free nationwide. The company’s position in sales-tax bonds, known as Cofinas, increased to $325 million by the end of 2014, up from $40.6 million earlier in the year, Bloomberg data show. The securities, which don’t mature until 2057 and aren’t insured, trade at about 65 cents on the dollar.

Insurance Split

Andrew Williams, a spokesman for Goldman Sachs in New York, declined to comment on the holdings, as did Ray Pellecchia, a spokesman for OppenheimerFunds. Stacey Johnston Coleman, a spokeswoman for San Mateo, California-based Franklin, also declined to comment.

Puerto Rico and its public agencies are struggling with $72 billion of debt and a sluggish economy. Bond prices have been trading at distressed levels for more than a year on speculation the island won’t be able to pay all investors.

Last week, its House of Representatives passed a tax plan that may help the commonwealth balance the fiscal 2016 budget. That pushed Puerto Rico’s newest general-obligation bonds to a two-month high. The Senate passed an amended version Monday, sending it back to the House.

OppenheimerFunds created a “Puerto Rico Roundup” part of its website and said its shareholders “may want to bookmark” it. The most-recent commentary on May 20 said elected officials usually “know better than to contemplate compromises related to their full and timely payments on general obligation debt.”

Different Roadmaps

MacKay Shields and Capital Group Cos., the fourth- and eighth-biggest holders, respectively, have expanded their ownership by largely buying insured debt. They weren’t in the top 10 when the island lost its investment-grade rank.

Nuveen Asset Management, which oversees more than $100 billion in munis, has been paring its position: It was the third-largest holder of Puerto Rico bonds in February 2014. It now ranks sixth.

“The lack of a roadmap for how you get to recovery, and what that recovery might be, is one of the hardest things to figure out right now,” said John Miller, co-head of fixed income in Chicago at Nuveen. “We’d want to have a better sense of that before committing capital.”

Eaton Vance Management, at ninth, has about 95 percent of holdings backed by insurers, said Craig Brandon, who helps oversee the company’s $28.6 billion in munis.

‘No Referee’

“There came a point where we were uncomfortable with each credit on an individual basis,” Brandon said. “Without Chapter 9, you’re playing the game with no referee — anything can happen out there.”

Unlike U.S. local governments, Puerto Rico’s indebted authorities, including its public-power company, can’t file for bankruptcy to have their debt restructured in court.

Allison Scott, a spokeswoman for MacKay, said most of the company’s $330.8 million in Puerto Rico bonds are insured. Neither Robert DiMella nor John Loffredo, the co-heads of muni investments, were available for an interview, she said.

Below is a table of the fund companies with the biggest Puerto Rico holdings.

Spokespeople or money managers for the funds declined to comment, with the exception of those cited above.
The figures are based on the most recent company filings to Bloomberg, except for MacKay, which provided more up-to-date data. The tallies exclude derivatives and debt that’s pre-refunded or escrowed to maturity.
Bond values were calculated as position multiplied by market price. Pricing figures are from either Municipal Securities Rulemaking Board trade data or Bloomberg Valuation data, and if neither are available, par or accreted value.
================================================================
Rank Debt Holder Amt (Millions)
================================================================
1 OPPENHEIMERFUNDS INC. $5,469
2 FRANKLIN RESOURCES INC. $2,275
3 GOLDMAN SACHS GROUP INC. $1,294
4 MACKAY SHIELDS $331
5 LORD ABBETT & CO. $318
6 NUVEEN ASSET MANAGEMENT $314
7 WELLS FARGO & CO. $287
8 CAPITAL GROUP COS. $281
9 EATON VANCE MANAGEMENT $251
10 INVESCO LTD. $248
================================================================
SOURCE: Bloomberg

Bloomberg

by Brian Chappatta

May 26, 2015

That ugly B word, bailout, has come to dominate debate in Washington about Puerto Rico’s debt crisis.

One side argues that passing a bill allowing Puerto Rican government agencies to restructure their debts will stave off an eventual bailout of the whole island. The other side says that’s all wrong: The very act of approving the legislation will constitute a bailout.

The public battle for ownership of the word underscores how despised such assistance remains in America seven years after the financial crisis. It also shows how the U.S. territory’s $72 billion debt saga has become a booming business for Washington lobbyists, who are developing websites, creating advertisements and lining up the support of conservative advocacy groups.

“Puerto Rico may soon reach a height of budget crisis that can be addressed only through a massive bailout package from the federal government,” says a Web page for the Puerto Rico Fiscal Stability Coalition, an organization promoting passage of the bankruptcy bill. A group of 35 asset managers, including Fir Tree Partners Inc., Brigade Capital Management LLC and Monarch Alternative Capital LP also supports the bill.
A website set up by 60 Plus Association, a senior-citizen advocacy group, opposes the legislation.

“Make no mistake: Extending Chapter 9 bankruptcy protection to Puerto Rico is not a way to avoid a bailout,” says NoBailout4PR.org. “It is a bailout.”

Bond Risk

Opponents also include BlueMountain Capital Management LLC, OppenheimerFunds Inc. and six other investment managers, who are “not coordinating with any third-party advocacy groups at this time,” according to Dan Zacchei, their spokesman. They are fighting the bill because they own bonds issued by the Puerto Rico Electric Power Authority, or Prepa, so bankruptcy would put their holdings at risk.

The 35 asset managers and other supporters own Puerto Rico’s general-obligation and sales-tax bonds, so restructuring Prepa’s debt would leave more money to pay off their holdings.

The U.S. territory’s legislature passed a bill this week raising the sales tax to 11.5 percent, higher than in any state, to ease the financial strains. The junk-rated island’s woes have been a topic of debate on Capitol Hill since February, when Pedro Pierluisi, the island’s resident commissioner in the U.S. House of Representatives, introduced H.R. 870.

Amend Code

The legislation would amend the Federal Bankruptcy Code to treat Puerto Rico as a state, giving it the option to authorize its municipalities and public agencies to file for Chapter 9 protection. This would help Prepa restructure its $8.6 billion of debt.

Chapter 9 currently doesn’t apply in Puerto Rico, a territory since the Spanish-American War.

The lobbying efforts focus on Republicans, who control the House. BlueMountain, Franklin Resources Inc. and several other investment managers have hired former high-ranking Republican staffers from the House Financial Services Committee and Senate Banking Committee who now work at Venable LLP, a law and lobby firm, to defeat the bill, according to disclosure records.

Others that oppose the legislation include Tea Party activists and the Alexandria, Virginia-based 60 Plus, which describes itself as a “seniors advocacy group with a free enterprise, less government, less taxes approach.”

‘Shortchange Millions’

“Chapter 9 is a bailout and a deliberate effort by Puerto Rico to evade its debt obligations,” 60 Plus Chairman Jim Martin said in a press release. “It would shortchange millions of seniors, pensioners and other unwitting Puerto Rican bondholders who placed their faith — and life savings — in Puerto Rican bonds, only to see the rules changed.”

On the other side, the 35 asset managers favoring the legislation share that support with the Puerto Rico Fiscal Stability Coalition, co-chaired by former Puerto Rico Governor Luis Fortuno. Russ Grote, a spokesman for the managers, declined to comment on whether they provided any financial support.

The coalition’s spokesman, Phil Anderson, is a former special assistant to Dan Quayle, U.S. vice president from 1989 to 1993, and held positions in the National Republican Party. He is now president and a founder of Navigators Global LLC, a Washington-based lobbying group that has set up English- and Spanish-language websites and produced video ads targeting the Puerto Rican public and Congressional members and staff.

Gathering Support

The coalition has gathered backing for Pierluisi’s bill from groups such as Citizens Against Government Waste and Grover Norquist’s Americans for Tax Reform.

Allowing Puerto Rico entities to file for bankruptcy would prevent what Anderson calls the “potential collapse” of the $3.6 trillion municipal-bond market, about 40 percent of which is held directly by U.S. households. An orderly restructuring would allow debtors and creditors to settle the dispute without involving taxpayers, he said.

“What solution is in the best interest of the U.S. taxpayer and what’s the most conservative solution to apply to the problem,” Anderson said in a telephone interview. He declined to say who is funding the fiscal-stability coalition’s publicity campaign or to quantify its budget.

Darrell Issa, a Republican from California, has been the most outspoken member of Congress in questioning the legislation.

“Do we have a constitutional and legitimate role in retroactively changing contracts in place so that a bankruptcy can occur?” Issa asked during a February hearing on Pierluisi’s bill before the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law.

Regular Meetings

Pierluisi is meeting regularly with members of the House Judiciary Committee to argue that the bill isn’t a bailout, Carmen Feliciano, his chief of staff, said in an interview.

The committee’s chairman, Republican Representative Bob Goodlatte of Virginia, recently met with Puerto Rico Governor Alejandro Garcia Padilla to discuss the economic consequences of the legislation. While Goodlatte hasn’t backed it, he feels the committee has responsibility to review its merits, according to an aide.

The full panel hasn’t taken up the bill, however, and it hasn’t been introduced in the Senate, where Puerto Rico doesn’t have a representative, so opponents may win by default. Given the difficulty Congress has passing any legislation, the likelihood of enacting H.R. 870 is low, according to Daniel Hanson, an analyst in Washington with Height Securities LLC.

Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics Inc., says Puerto Rico’s deteriorating situation increases the chance of Congress considering the bill at some point, which is why opponents and supporters are boosting the amount of money they’re spending.

The island and its agencies have amassed more debt than all but two U.S. states, and the bonds have traded at distressed levels for more than a year. The commonwealth’s newest general obligations, which mature in July 2035, yield about 9.85 percent, or about 6.7 percentage points above benchmark debt.

“There is so much money being invested in the Puerto Rico-related strategies,” Fabian said. “The bill might move in the future.”

Bloomberg

by Kasia Klimasinska and Martin Z Braun

May 27, 2015

Illinois’s Republican governor and Democratic-led legislature are at an impasse over how to fill a $6.2 billion budget hole, undermining the state’s credit in the eyes of investors and driving up borrowing costs.

The extra yield buyers demand on Illinois bonds relative to benchmark debt has climbed to the highest since 2013, according to data compiled by Bloomberg. Asset managers at Conning and Wasmer, Schroeder & Co. say Illinois, already with the lowest credit rating among U.S. states, is at risk of being cut closer to junk.

Challenges have only mounted since voters last year chose Governor Bruce Rauner, a Mr. Fix-it business executive, to repair Illinois’s finances. Lawmakers are poised to pass a spending plan that’s short by billions of dollars for the second straight year. The state also lacks a solution for the nation’s worst-funded pension system after the state Supreme Court this month overturned a 2013 overhaul.

“They haven’t been really willing to make tough decisions and get something done politically that everyone can agree upon,” said Justin Land, who helps oversee $4 billion of munis as director of tax-exempt management at Wasmer, Schroeder in Naples, Florida. “The market is telling you that things aren’t going to be fixed, at least not in the near-term.”

Bill Burden

After meeting with legislative leaders Friday in Springfield, Rauner told reporters his plans for tax and regulatory change have been on the table for months. There’s ample time to reach an agreement by Sunday’s deadline to pass bills by a simple majority, he said.

“We will know if they are sincere and we have true reform — we’ll know by Sunday night,” Rauner said outside the Executive Mansion. “Nobody’s going to have to say, ‘Well, we didn’t have enough time to think about it.’ That’s baloney.”

Thirty-two states are confronting budget gaps this year, next year or both, according to Standard & Poor’s. Some are reducing services, while others are proposing tax increases, even in Republican-led capitals. Yet the struggles of Illinois, with a backlog of $4.4 billion of unpaid bills, stand out, partly because the strains have left it ranked four steps above junk.

While Rauner won’t agree to new taxes without spending cuts and steps such as letting localities exempt workers from union dues, Democrats demand more revenue, suggesting steeper levies on high earners. The deficit for the fiscal year starting July 1 emerged after an income-tax increase approved in 2011 expired at the start of January.

Investors are penalizing Illinois as the fiscal pressure builds. Yields on the state’s 10-year obligations reached a 16-month high of 4.17 percent last week, data compiled by Bloomberg show. The spread was about 1.8 percentage points above benchmark debt, the widest since December 2013.

Debt from Illinois has lost about 1.3 percent this year, while the entire municipal market is about flat, Barclays Plc data show.

Downgrade Risk

Illinois is graded A3 by Moody’s Investors Service and an equivalent A- by S&P. While both give it a negative outlook, S&P put Illinois on review for a rating cut after the court’s May 8 ruling, and said it would decide within three months.

“I don’t see how this credit does not get downgraded within the next two months,” said Paul Mansour, head of municipal research in Hartford, Connecticut at Conning, which oversees $11 billion in munis for insurance companies.

Trading in Illinois bonds suggests the municipal market is moving in that direction. Federally tax-exempt general obligations maturing in March 2032 traded Thursday for an average yield of about 4.9 percent. In comparison, a Bank of America Merrill Lynch index of BBB general obligations due in about 17 years has an effective yield of 4.85 percent.

Voting Hurdle

Legislators’ task is about to get more difficult. After Sunday, a three-fifths vote will be needed to approve a spending plan.

The Democrats “are only interested in maintaining the status quo of broken budgets,” Catherine Kelly, a Rauner spokeswoman, said in an e-mail.

Democratic House Speaker Michael Madigan, who controls the legislative agenda, told reporters this week that the $36.3 billion budget he intends to send to Rauner, a former private-equity executive, is about $3 billion short. Democrats plan to work with Rauner to raise the money, Madigan said.

Steve Brown, a spokesman for Madigan, said by phone Thursday that Rauner’s budget, proposed in February, had “significant” gaps, including more than $2 billion in unrealized pension savings.

While Illinois voters elected their first Republican governor since 1998 in November, the choice hasn’t done much to alter the political balance of power. Democrats held onto super-majorities in the legislature, setting up the potential for bipartisan compromise — or gridlock.

“People were hopeful coming into the session because it was a fresh start,” said David Yepsen, director of the Paul Simon Public Policy Institute at Southern Illinois University. “Now it’s turned sour.”

Bloomberg

by Elizabeth Campbell and Tim Jones

May 28, 2015

Chicago sold about $674 million in bonds at yields approaching 6%, a sign that investors are demanding a premium to purchase the city’s debt following a recent downgrade by Moody’s Investors Service.

The nation’s third-largest city paid a top yield of 5.84% on Wednesday. That is as much as about 2 percentage points more in yield than a measure of A-rated municipal bonds, according to Municipal Market Data. Standard & Poor’s Ratings Services rates the city A-minus, an investment-grade rating, while Moody’s rates the city Ba1, a speculative grade.

The sale attracted $6 billion in orders, while proceeding with Mayor Rahm Emanuel’s plan to address the city’s debt portfolio and eliminate “a substantial amount of taxpayer risk,” according to a statement from Carole Brown, Chicago’s chief financial officer.

“This further shows that investors remain confident in the city’s credit and a secure economic future for Chicago,” she said.

Major ratings firms have taken unusually divergent stances on the nation’s third-largest city. Moody’s stands alone in rating Chicago’s debt as junk. Meanwhile, S&P and Fitch Ratings view the city several levels into investment grade.

Chicago didn’t hire Moody’s to rate the recent refinancing deal, but the yield gap shows the impact of the downgrade, said Daniel Solender, head of municipal bond management at Lord Abbett & Co., who helps manage about $17 billion.

The gap reflects investor uncertainty over the outcome of the city’s budget and pension funding situations, though robust demand lowered yields during the day, he said.

“Even though the deal does not have a Moody’s rating, the bonds are being priced at below investment-grade level anyway,” he said. “The upside is that Chicago does have market access and with interest rates at a low level, the interest rate is not too prohibitive for borrowing.”

The top yield paid by Chicago for bonds maturing in 2042 was lower than some government borrowers with distressed finances. Cash-strapped Puerto Rico last year sold $3.5 billion of junk-rated debt maturing in 2035 at an 8.72% yield.

Some Chicago general obligation bonds maturing in 2040 traded at an average price of about 92.2 cents on the dollar Tuesday, up from a low of about 88.5 cents after the downgrade, according to MMD. Yields fall as prices rise.

Moody’s downgraded Chicago debt to junk earlier this month, citing expected increases in unfunded pension burdens after a ruling by the Illinois Supreme Court that overturned a state law seeking similar pension cuts. Chicago’s four pensions collectively have more than $20 billion in unfunded liabilities, the city says.

Moody’s, meanwhile, pegs Chicago’s pension costs at $32.1 billion. Mr. Emanuel called the Moody’s downgrade “irresponsible.”

Chicago is the lowest-rated of the top 100 U.S. cities Moody’s analyzes except for Detroit, according to the firm.

Moody’s junk rating also could have triggered up to $2.2 billion in accelerated payments and fees on some variable-rate debt, the ratings firm said. Chicago has negotiated with banks to avoid those payments and fees, allowing the city to complete its already-planned refinancing of those bonds on Wednesday, according to offering documents.

THE WALL STREET JOURNAL

By AARON KURILOFF and TIMOTHY W. MARTIN

May 27, 2015 6:32 p.m. ET

Write to Aaron Kuriloff at aaron.kuriloff@wsj.com and Timothy W. Martin at timothy.martin@wsj.com

(Reuters) – Lockheed Martin received a deal this week to expand a plant in Arkansas using $87 million of state general obligation bonds, an unusual method of funding a private project with taxpayer debt.

The deal, which could be signed by the governor before week’s end, is contingent on Lockheed winning a contract from the U.S. Department of Defense to manufacture joint light tactical vehicles.

States regularly utilize various tools to lure companies within their borders, such as tax abatements or low-risk conduit bonds. But Arkansas’ plan to sell general obligation bonds to fund construction of Lockheed’s new facility is more uncommon. In the case of default, the state would be responsible for paying bondholders.

Americans for Prosperity, a political group supported by billionaire brothers David and Charles Koch, called the deal a “multi-million dollar, debt-financed giveaway to a single corporation.”

“Arkansas taxpayers should not be fronting the money for one of the largest and most successful companies in the world,” the group posted on its website.

“This is out of the ordinary,” said Mike Taylor, senior municipal bond analyst at Columbia Threadneedle Investments. Although legally authorized by the Arkansas legislature, “It’s unusual for a state to provide funds for what would be considered a private activity like this.”

Lockheed Martin, one of three firms competing to build ground vehicles to replace the iconic Humvee, would locate the plant adjacent to an existing facility in Calhoun County, population 5,200, in southcentral Arkansas.

Lockheed would not reimburse Arkansas for the debt, but it agreed to spend at least $125 million on capital improvements and to provide almost 600 new jobs.

Republican Governor Asa Hutchinson described the deal as “a golden opportunity” and “exactly what we need to be doing, even in tight budget times, because growing our economy is going to allow us to address all of the needs.”

“We would all like to be purists in which there is not any government involvement in high-stakes super-projects, but the fact is we’ve got a competitive environment with other states,” Hutchinson said this week.

John Lenio, senior vice president at CBRE, a large commercial real estate services firm, said a deal this size comes to a region like southcentral Arkansas once every five years on average, which is why the state is pursuing it aggressively.

Lockheed Martin would be required to repay a portion of the money if it failed to meet its commitment to hire workers.

“The state is being fiscally responsible,” said Lenio. “They are not just giving to a company without contingencies.”

But after one corporation enjoys a public financing, said Greg LeRoy, executive director of Good Jobs First, a policy resource center and subsidy watchdog, what stops other companies from expecting the same treatment?

“If I were an Arkansas taxpayer, I would be nervous about putting my public eggs in a private basket,” LeRoy said. “That’s a risky principle.”

By REUTERS

MAY 28, 2015, 5:27 P.M. E.D.T.

(Reporting by Robin Respaut; Editing by Cynthia Osterman)

SAN FRANCISCO (Standard & Poor’s) May 21, 2015–Standard & Poor’s Ratings Services today placed its ‘A+’ general obligation (GO) and ‘A’ appropriation-backed debt ratings on California on CreditWatch with positive implications. The CreditWatch placement follows the release on May 14 of Gov. Edmund G. Brown’s revised budget proposal for fiscal 2016.

“Fueled by upward revenue estimates, the budget plan shows the state’s fiscal rebound not just continuing, but accelerating,” said Standard & Poor’s credit analyst Gabriel Petek. “Under the governor’s plan, the state would pay down most of a large funding obligation owed to its schools, continue to retire what remains of its budgetary debts, and make significant deposits to its reserve funds,” added Mr. Petek.

Progress on these fronts, pending agreement from the legislature, would be well ahead of what the Department of Finance (DOF) projected as recently as January. We expect to resolve the CreditWatch within three months.

“Our primary focus,” according to Mr. Petek, “will be on the enacted budget and whether it reflects a fiscal structure similar to that of the governor’s revised budget proposal. In our view, the governor’s revised proposal avoids a disproportionate reliance on windfall-like revenues from capital gains to fund ongoing commitments, thus allowing the DOF to forecast budgetary balance beyond fiscal 2016. Insofar as the forecast the DOF produces after the budget is enacted shows the same, we could raise the state’s rating, mostly likely by one notch. We expect any potential rating action would follow the DOF’s release of the state’s projected monthly cash flows, which typically become available within a month of final budget enactment.”

The “May Revise” also shows the state paying over $800 million more in budgetary debt than in January. The state’s success in reaching these fiscal milestones while still projecting underlying operating balance, including into future years, has led us to reevaluate the near-term trajectory of California’s credit quality. We have concluded that, to the extent the enacted budget anticipates fiscal results similar to those shown in the revised proposal, the state’s credit quality could be consistent with a higher rating.

NEW YORK (Standard & Poor’s) May 20, 2015–Standard & Poor’s Ratings Services has raised its issuer credit rating (ICR) on the State of Arizona to ‘AA’ from ‘AA-‘, as well as raised its rating on the state’s general fund appropriation-secured certificates of participation (COPs) outstanding to ‘AA-‘ from ‘A+’. The outlook for both the ICR and COP ratings is stable.

“The upgrade reflects what we consider Arizona’s good fund balance position, on a budgetary basis, and expected near structural budget balance in fiscal 2016, based on recent above-budgeted growth in tax revenues,” said Standard & Poor’s credit analyst David Hitchcock. “This follows a period of imbalance triggered by the expiration of a temporary sales tax hike at the end of fiscal 2013,” Mr. Hitchcock added.

The state had budgeted in fiscal 2015 for an almost complete drawdown of its large general fund balance in fiscal 2015 and a modest draw on in its budget stabilization fund (BSF); the state now reports revenues significantly above budget because of surging income tax collections that could potentially negate the need to draw on the BSF in 2015. Based on the additional revenues, we foresee no drawdown in the BSF in either fiscal years 2015 or 2016, and only a very small decrease, or possibly an increase, in the general fund balance in fiscal 2016.

The rating on the COPs reflects what we view as:

• The long-term creditworthiness of Arizona; and
• Pledged lease revenues subject to annual appropriation by the state.

Our view of Arizona’s long-term creditworthiness, as reflected in our ‘AA’ ICR, is based on what we consider the state’s:

• Diverse economy, with continued strong population growth, and adequate, but below-average and slowly declining income levels, as well as a turnaround in a housing market that had suffered a severe downturn;
• Strong financial position, and anticipated structural balance in fiscal 2015, despite the expiration of a temporary sales tax surcharge at fiscal year-end 2013; and
• Low other postemployment benefits (OPEB) and moderate debt burden.

Partially offsetting factors, in our opinion, are Arizona’s:

• Historically cyclical finances, including large general fund balance drawdowns in fiscal years 2007 through 2009;
  fiscal years 2010 and 2011 would also have reported drawdowns if not for one-time borrowing for
  ongoing operational purposes, while fiscal 2014 had a large drawdown following expiration of a temporary sales tax; and
• Restrictions on operational flexibility as a result of voter initiatives, notably a two-thirds requirement for a legislative vote to increase state revenues (Proposition 108) and a high bar on executive or legislative modification of programs or revenues approved by voters (Proposition 105).

In addition, recent litigation has required the state to resume inflation funding for local schools that had not occurred during the recession, and could hamper Arizona’s ability to make cuts in future downturns. The state has not fully funded a lower court’s mandated increase in school inflation funding — the case is currently on appeal.

For the COPs and lease revenue debt, Arizona’s obligation to make lease payments is absolute and unconditional, subject to annual appropriations by the state legislature and annual allocations of such appropriations for lease payments.

The stable outlook reflects recent strong revenue growth and spending restraint that we expect to keep Arizona near structural balance in fiscal 2016 and for the foreseeable future, as well as limited future debt plans.

Although housing may again experience slumps, we do not expect the state to repeat such a severe housing crisis as it did in the last recession for the foreseeable future.

Should large structural budget imbalances develop again, we could adjust our rating or outlook downward.

Rating improvement would likely require improved income levels and lower pension liabilities. We believe Arizona’s credit quality is also somewhat constrained by an active voter initiative process and recent court decisions on school funding that are unlikely to change impediments to expenditure flexibility over our two-year outlook horizon.

CHICAGO — Illinois is facing one of the worst fiscal crises of any state in recent decades, largely because it has mismanaged its pension system.

The shortfalls could potentially mean sharply higher taxes and cuts in spending. And even though the state’s highest court just this month threw out a landmark plan to cut worker and retiree benefits, some lawmakers say they may have to find another way to make those reductions as well.

Illinois’s problems resonate well beyond its borders. Pennsylvania, New Jersey and Kentucky are among the states confronting similar problems, and to them, Illinois is a model of what can go wrong — with political intransigence, mounting costs and a complicated legal terrain.

So elected officials, union leaders, investors, fiscal hawks and even bankruptcy lawyers across the country are watching Illinois closely to see how it addresses the crisis. In Washington, some Republicans have even raised pointed concerns that President Obama’s home state might someday seek federal help.

The state faces a range of problems. Illinois has one of the worst-funded pension systems in the nation. Chicago also has a pension crisis, leading Moody’s Investors Service to downgrade its credit rating to junk status on May 12, potentially threatening the city’s ability to borrow.

And the state faces an expected budget deficit of $6 billion, which it needs to address quickly. With just days before a legislative deadline, the new Republican governor, who ran on cutting costs and holding down taxes, is at odds with Democrats who hold a veto-proof supermajority in the legislature.

“Really, it’s not a clear road map at this point,” the governor, Bruce Rauner, said of solving the pension crisis.

“We have to make big decisions,” Mr. Rauner told reporters. “The state is in dire financial straits. Chicago is in big, big challenges. And everybody’s a little bit on edge.”

Courts in other states, including Colorado and Minnesota, have sometimes approved measured pension cuts for public workers, especially for the benefits that current workers have not yet earned. And in Detroit and Stockton, Calif., federal judges have said pensions could be cut in a bankruptcy.

But Illinois has one of the most explicit constitutional pension guarantees of any state. The State Supreme Court found that the landmark plan was unconstitutional, and interpreted the clause in a way that protects even benefits that current public workers have not yet earned, as well as cost-of-living adjustments for retirees.

That has made a dire situation worse and raised the possibility that Illinois, its biggest city and Chicago’s schools must all simultaneously find a way to keep running pension systems that are already unsustainable.

“What has happened is the loudest wake-up call possible,” said Laurence J. Msall, president of the Civic Federation, a watchdog group. “This is a financial tsunami for the City of Chicago and the State of Illinois that will not be fixed without politically painful changes.

Many states and cities around the country have been doing what Illinois did — promising pensions without calculating the costs correctly or really preparing to pay them — but to a lesser degree.

Other states have pulled back from the brink of fiscal disaster through extraordinary measures, including New York in 1975, to deal with the threat of bankruptcy in New York City, and California in 2012, when Gov. Jerry Brown talked his famously tax-averse voters into approving a tax raise.

But the Illinois public pension system is at or near the bottom of national rankings. Standard & Poor’s Rating Services said in 2014 that the Illinois system was last among state systems, with just 40 cents available for every dollar of promised benefits.

The pension system sank over decades, as officials promised pensions without setting aside enough money to pay them. In its unanimous opinion on May 8, the State Supreme Court cited commissions dating to 1917 that had warned of a crisis as more retired workers started drawing benefits.

Warnings were ignored, though, and shortfalls accumulated. It was easy for officials to let that happen, because actuarial calculations can understate the true cost of a pension plan, and Illinois had some of the biggest actuarial distortions of any state. In 2013, Illinois became the second state in history, after New Jersey, to be accused of fraud by the Securities and Exchange Commission, which found that it had misled the public about the condition of its pension system.

In recent years, with the system estimated to be more than $100 billion short and Illinois’s yearly pension payments consuming more and more of the state’s budget, Democratic leaders broke with unions that had traditionally been their allies.

In late 2013, Gov. Pat Quinn signed what was considered a landmark bill that claimed to bring the state’s pensions up to full funding, in part by curtailing cost-of-living increases for workers, capping salary levels used to calculate pension benefits and raising the retirement age for some.

The state argued that the changes did not violate the provision in the State Constitution banning the reduction of pensions, because a financial emergency had taken hold. But the Illinois Supreme Court said that any emergency was of the state’s own making and that the cuts could not stand.

That has left officials scrambling at a moment when the state has a divided government for the first time in a decade and the political differences between Mr. Rauner and the Democratic-controlled legislature make compromise difficult. A splintered set of political leaders is now debating options including tax increases, large spending cuts, new pension reductions, changes to the State Constitution and even legislation to permit Illinois municipalities to file for bankruptcy.

Some in Illinois assert that changes to pension benefits remain possible under certain conditions, and various deals are being discussed in the State Capitol in Springfield, though cuts are all but certain to draw more legal challenges.

Mr. Rauner has proposed switching workers into a pension plan that would let them earn less generous benefits starting in July, but he has acknowledged that even he is uncertain whether his idea would hold up in court.

Some leaders want to amend the State Constitution so benefit changes for future years of service can be made — an idea that other states are closely watching. But that path is long and uncertain: An amendment would need support from three-fifths of the House and Senate, then approval from voters.

“I do think there should be attempts to amend constitutions for current employees, not just in Illinois but probably other states, including California,” said Joshua D. Rauh, a finance professor at Stanford University who has written about public pensions.

Others say the State Supreme Court ruling takes benefit changes off the table and means that the government must pay what has been promised even if it means sharp increases in taxes and spending cuts.

“This will present major challenges for any policy maker, and they really have no other alternative,” said Richard C. Dreyfuss, an actuary and senior fellow at the Commonwealth Foundation, a public policy research organization in Harrisburg, Pa.

For Chicago, the state pension ruling could not have come at a worse time. The city is facing about $20 billion in unfunded pension liabilities, an additional $550 million yearly pension payment it must start making next year, and a school system that has a $1 billion deficit of its own, underfunded pensions and a new contract for teachers under negotiation.

Only a few American cities have shakier pension systems than Chicago’s, according to a 2013 Pew Charitable Trusts report on 61 major city pension systems.

The State Supreme Court ruling raised new doubts about efforts Chicago has made to shore up two of its four main pension funds. Last year, after discussions with some unions, Mayor Rahm Emanuel pressed state lawmakers to approve an overhaul that would require some workers in the two funds to pay more for retirement benefits, and would slow cost-of-living increases for retirees.

That overhaul is also being challenged in court, but city officials have argued that, over the long term, it would protect the existence of the pensions rather than unconstitutionally diminish them. Talks are underway with those tied to the city’s remaining pension funds, and Mr. Emanuel has sought permission for a Chicago-based casino to help fund those systems.

Facing debts including unfunded pensions, Detroit in 2013 became the largest city ever to seek federal bankruptcy protection. But bankruptcy is not an option available to any state, and legislators would need to pass a law to allow an Illinois city to take such a step. Some here, including Mr. Rauner, have said they support such a notion.

Mr. Emanuel, who was sworn in on May 18 for a second term, disputed Moody’s downgrades as outliers and said Chicago, despite its pension problems, still had a vibrant economy. Asked what the developments all bode for a property tax increase in Chicago, Mr. Emanuel told WTTW television’s “Chicago Tonight” this month that revenue “has to be part of any solution.” Yet Mr. Emanuel said a tax increase would be a last option, not the first one, adding, “You cannot put all the burden on the taxpayers alone.”

Illinois is racing to settle on a budget for the fiscal year that starts July 1, and pension costs are estimated to consume as much as a quarter of general fund spending — an unusually high share and a sign of real trouble.

In a State Capitol that had grown accustomed to being run by Democrats, the election of Mr. Rauner has complicated hopes for a budget solution by Sunday, after which the number of votes required for passage will increase.

He opposed an extension of a temporary income tax increase enacted four years earlier and has demanded billions in spending cuts. Democrats accuse him of trying to use the budget impasse to leverage concessions on other elements of his agenda to shrink union power and help businesses. Republicans assert that the state’s Democratic leaders are not genuinely negotiating.

By Friday, there was talk of the Democrats drawing up their own budget, and Mr. Rauner’s allies were offering new legislation featuring his priorities, including property tax freezes and term limits for legislators.

“So far, it looks like partisan bickering is the dominant theme,” said Bob Reed, director of programming for the Better Government Association, a watchdog group based in Chicago. “Governor Rauner and House Speaker Michael Madigan talk about compromise and negotiation, but there’s no evidence of that happening, and time is running out.”

By MONICA DAVEY and MARY WILLIAMS WALSH

MAY 25, 2015

Monica Davey reported from Chicago, and Mary Williams Walsh from Harrisburg, Pa.

 

Mayor Rahm Emanuel is forging ahead with a massive refinancing to convert $805 million in variable-rate debt to fixed-interest rates, even though the price will be higher now that Chicago’s bond rating has been reduced to junk status.

The refinancing is at the center of Emanuel’s plan to move away from risky financial practices that former Mayor Richard M. Daley used to “mask” the true cost of city government.

It will now be completed in two phases: $382.6 million in variable-rate debt will be converted to fixed-interest rates on May 29 and $422.8 million will be refinanced on June 8.

Chicago taxpayers will have to wait until the bonds are priced Wednesday to find out how much the $30 billion pension crisis that prompted Moody’s Investors Service to drop the city’s bond rating to junk status will increase city borrowing costs.

“We will pay a modestly higher price, but we won’t know how high that price is until we price the bonds next Wednesday,” said departing Chief Financial Officer Lois Scott.

“What we’ll see is that investors have their own view about what our value is. Investors are taking the Moody’s rating into consideration. But they also look at many other factors, including the opinion of three other rating agencies. Most investors also have their own analyses. They rate that more heavily” than the Moody’s rating.

In an affidavit filed in the state pension case, Scott warned that any further downgrade in the city’s bond rating would cost the city hundreds of millions of dollars in penalties and interest costs, “crowding out” funding available for other vital city programs.

On Thursday, Scott said she foresees no circumstance under which the price of the Moody’s double-downgrade would be so high that the massive refinancing would be called off. She noted that “interest rates in general are at some of the lowest levels in history.”

“Our spread for credit has widened. . . . [But] we made a decision to move out of variable debt. We are just executing on that plan. We believe the market will be reasonable. There’s nothing on the horizon” that would suggest pulling back, she said.

Earlier this week, municipal finance expert Matt Fabian said Chicago is “paying Detroit’s bills” when it comes to the hundreds of millions of dollars in penalties and higher interest rates it will pay, now that its bond rating is no longer investment-grade.

“Detroit fractured trust between borrowers and lenders in the municipal bond market. That has created an extra cost for Chicago. Now, trying to assure those same investors that it is not going the same way” will cost more, Fabian said.

“If the city had changed course five years ago, four years ago or three years, they wouldn’t be in this position now. Interest rates for the city’s debt wouldn’t have risen by one- or two-hundred basis points in the last few days.”

The Illinois Supreme Court’s decision to overturn state pension reforms has placed Emanuel’s plan to save two of four city employee pension funds in similar jeopardy.

That triggered a downward spiral of events that saw Moody’s downgrade Chicago’s bond rating to junk status and do the same at the Chicago Public Schools and Chicago Park District. Standard & Poor’s and Fitch announced lesser drops.

Unless the General Assembly lifts the hammer, Emanuel and the new City Council must decide by December how to meet a state-mandated, $550 million payment to shore up police and fire pension funds.

The Chicago Public Schools is on the brink of bankruptcy with a $9.5 billion pension crisis, a $1.1 billion budget deficit and a federal investigation that has forced Schools CEO Barbara Byrd-Bennett to take a paid leave of absence.

In the so-called “preliminary re-offering circular,” the city talks about, what Emanuel has described as “good discussions” with police and fire unions about giving the city more time to ramp up to 90 percent funding levels.

“The city is currently in discussions with unions . . . concerning amendments that, if enacted by the General Assembly, could materially impact the contributions required to be made by the city . . . [and] reduce the city’s required payment in the initial years to allow for a more gradual phase-in of the requirement,” the circular states.

“The General Assembly may also consider other proposed legislation that could effect the city’s payment obligations and/or funding sources for those obligations, including a city-owned casino. The city makes no presentation whether or when any such legislation would be enacted.”

Emanuel said earlier this week he wants to wait to see how the frenzied final days of the spring session play out before asking the new City Council to begin the search for new revenue to solve the pension crisis.

The circular makes the same claim.

“The city expects the City Council will consider options for addressing its pension funding requirement, including improvements in operating efficiencies and incremental revenues, after the Illinois General Assembly concludes its spring session,” the filing states.

If a property tax increase was the “sole source” of the payment to shore up police and fire pensions, the $549 million increase would have to be filed “no later than the last Tuesday in December,” the circular states.

The increase — in an overall property tax levy of $4.2 billion including other units of local government — would be collected in two installments in the spring and fall of 2016.

THE CHICAGO SUN-TIMES

Posted: 05/21/2015, 04:30pm | Fran Spielman

Chicago will get its first taste of selling debt in the U.S. municipal bond market after its credit rating was dropped to “junk” by Moody’s Investors Service when it converts $805.7 million of variable-rate bonds to fixed-rate next week.

Competitive and negotiated sales, including notes, will reach $6.34 billion in a holiday-shortened week, according to data compiled by Thomson Reuters. U.S. markets are shut on Monday for the Memorial Day holiday.

Moody’s downgraded Chicago’s general obligation rating to Ba1 on May 12, triggering $2.2 billion in accelerated debt and fee payments by Chicago to banks.

The bond conversion is aimed at terminating bank letters of credit and swaps used to hedge interest-rate risk on the variable-rate debt. New forbearance agreements with the banks give Chicago until June 8 to complete the conversion.

The bonds, which will be priced on Wednesday through lead underwriter Bank of America Merrill Lynch, are likely to come cheap with fat yields.

The city’s bonds have been trading at yields about 300 basis points over the U.S. municipal bond market’s benchmark triple-A scale, according to Municipal Market Data, a unit of Thomson Reuters. Still, city officials are optimistic.

“Recent trading in Chicago bonds show interest rates normalizing as investors learn more about the ability of Mayor (Rahm) Emanuel and his finance team to adapt and manage through the effects of the Moody’s downgrade,” a Chicago official said on Thursday.

The Chicago Board of Education, which has also had its credit ratings downgraded, was socked with high interest rates in recent bond sales. Yields in a nearly $300 million GO bond issue priced in April topped out at 5.63 percent for bonds due in 2039. That yield was 283 basis points over the benchmark scale.

Offering documents for the upcoming Chicago debt conversion indicate the bonds will be rated by Standard & Poor’s, Fitch Ratings and Kroll Bond Rating Agency, all of which still have investment grade ratings for the city’s GO debt, but not Moody’s.

REUTERS

May 22, 2015

(Reporting by Karen Pierog in Chicago and Edward Krudy in New York; Editing by Matthew Lewis)

New Jersey’s American Dream entertainment and shopping center, the incomplete mega mall that Governor Chris Christie once called “the ugliest damn building” in the state, is poised for a jumpstart from the municipal-bond market.

A decade after ground was broken for the project in New Jersey’s Meadowlands Sports Complex, proceeds from about $675 million of bonds could speed up construction, according to East Rutherford Mayor James Cassella. The debt would be issued on behalf of Triple Five Group, which took over the project after previous developers ran out of cash and the financial crisis stymied funding.

As a first step, the borough council of East Rutherford, the site of the vacant structure, on Tuesday evening introduced an ordinance to authorize the sale of bonds for the Edmonton, Alberta-based Triple Five. The debt may be issued as taxable securities, instead of tax-free as initially planned, which would help prevent lawsuits against the borough should anything go awry, Cassella said.

Christie in 2011 had counted on American Dream, called Meadowlands Xanadu when it started, to bolster the local economy. The project by Triple Five, the developer of the Mall of America in Minnesota, was slated to open in 2013.

“We’re one step closer to finalizing this, and hopefully we can get it done,” Cassella said.

Meadowland Slope

Plans for the mega mall about 10 miles west of Manhattan include the country’s first indoor ski slope and a theme park. A spokesman told Bloomberg News in September the mall may open in 2016.

Debbie Patire, a spokeswoman for the project, didn’t return a call Tuesday, after earlier declining to comment on the financing. Brian Murray and Kevin Roberts, spokesmen for Christie, didn’t return e-mails requesting comment. Michael DuVally, a spokesman for Goldman Sachs Group Inc., which is underwriting the debt, declined to comment.

The state Local Finance Board in 2013 signed off on the issuance of as much as $550 million in municipal bonds. The borough must seek approval for the revised agreement before it can vote on the bond deal, Cassella said.

Payments by the developer would back the bonds issued by the borough. The sale could take place by November, he said.

Hang Up

“The big hang-up” between the borough and the company has been the municipality’s desire to be protected from any potential defaults or bondholder lawsuits over issues unique to the tax-exempt market, Cassella said.

“That goes away with the taxable bonds,” he said.

About 150 union members attended the council meeting to show their support for the project, said Rick Sabato, president of the Bergen County Building and Construction Trades Council. He said the developer may hire more than 5,000 construction workers.

“It’s been a long time waiting, and we finally got it,” he said. “It’s tremendous. It’s going to to change the face of the Meadowlands.”

Bloomberg

by Romy Varghese

May 19, 2015

The $3.6 trillion municipal-bond market is signaling growing confidence that Puerto Rico lawmakers can enact a tax increase that would open the door to a debt sale and ease the island’s cash crunch.

Prices on the commonwealth’s most frequently traded bonds have risen to almost seven-week highs as its House of Representatives prepares to meet Wednesday and potentially vote on a plan to raise the sales levy. The governor and legislative leaders agreed on the tax proposal last week, part of efforts to boost revenue and revive an economy that’s saddled with $72 billion of debt.

The accord, after the House rejected a previous tax overhaul last month, is feeding optimism that the junk-rated U.S. territory will be able to sell long-term debt for the first time since March 2014 and gain breathing room to repair its finances.

“It makes sense that the investors want to see a tax increase that will bring some balance and stability,” said Bob Donahue, a managing director at Concord, Massachusetts-based research firm Municipal Market Analytics.

While still trading at distressed levels, the island’s bonds have drawn renewed interest this week. Commonwealth general obligations maturing in July 2035 traded Wednesday at an average price of about 82 cents on the dollar, the highest since early April, according to data compiled by Bloomberg. That’s up from 79.13 cents May 13, the day before the announcement of the tax proposal.

Way Out

Wednesday’s average yield of about 10.1 percent is about seven percentage points above benchmark debt. The securities are the most-traded commonwealth general obligations in the past three months. Puerto Rico debt has gained for five straight days, the longest stretch since mid-March, S&P Dow Jones Indices show.

Puerto Rico bonds have still lost 2.3 percent in the past three months, underperforming the 0.7 percent decline for the broader municipal market, according to S&P Dow Jones Indices.

Governor Alejandro Garcia Padilla on Monday night sent legislators a plan that would raise the sales tax to 11.5 percent and convert that levy into a value-added tax by April 1. Signs of a broader consensus than in April are bolstering the debt.

“It increases the possibility that the commonwealth will be able to negotiate itself out of this difficult immediate financial position,” said Gary Pollack, who manages $6 billion of munis as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York.

The tax change requires at least 26 votes to pass the House. It had support from 27 members as of last week, Rafael “Tatito” Hernandez, who chairs the House Treasury Committee, said from San Juan. Members are reviewing the governor’s proposal, he said.

Opposition Plan

Opposition lawmakers plan to vote against the bill, according to Representative Jose “Quiquito” Melendez of the minority New Progressive Party.

The tax increase would help Puerto Rico balance its budget for the fiscal year starting July 1 and attract investors to a planned $2.9 billion sale of bonds backed by oil-tax revenue, according to the Government Development Bank, which lends to the commonwealth and its localities. Proceeds would repay money the highways authority owes the bank and help avert a partial government shutdown.

The GDB needs the cash. Its net liquidity dropped to $1.02 billion as of April 30, from $2 billion in October.

The island, with an unemployment rate that’s double the national average, faces challenges even if lawmakers approve the tax increase and pass a spending plan by June 30, said Joseph Rosenblum, director of muni credit in New York at AllianceBernstein Holding LP. The company manages about $32 billion of state and city bonds.

“It’s a step forward, but in the grand scheme of things it’s just a small piece of much larger problems they need to address,” Rosenblum said.

Bloomberg

by Michelle Kaske

May 19, 2015

The City of Santa Paula’s decision to purchase its much-touted and award-winning water recycling facility highlights how this pioneering public-private partnership project has proven to be a triumphant model of risk assessment and transfer critical to the success of any P3.

The City Council voted in April to issue bonds to buy back the facility — designed, constructed and operated by PERC Water and financed by Alinda Capital Partners — seven years into a relationship that many local and state leaders view as a potential flexible model for public infrastructure procurements in California. The P3 agreement included flexibility for the City to buyback the facility at any time after commissioning, under agreed upon pricing and terms.

When completed in 2010, the facility was the largest privately funded municipal wastewater plant of its kind in California. PERC Water will continue to run the day-to-day operation of the facility under a services contract with the City.

To date, the partnership worked well for the city, PERC Water and the investors, all of which benefited from the project. More than 2,000 acre-feet (more than 650 million gallons) of recycled water per year was delivered — under budget and ahead of schedule — to a city that could not have built the project on its own using traditional delivery methods in 2008 when the public finance markets were not operating.

The P3 project broke new ground in terms of its vision, and the results speak for themselves. As a result of changing from the design-bid-build option to the P3 approach, Santa Paula was able to avoid $18 million in construction costs, $1.8 million per year of current operating costs, increase design capacity by 25 percent, reduce facility footprint by 70 percent, reduce energy consumption by 30 percent and avoid $8 million of accrued fines assessed by the state.

Thus, in the final analysis, the City successfully transferred the risk associated with the design, construction, financing, commissioning and performance of the facility to the private partner and now, with five years of operational history, has decided to buy back the facility and take the forward risk associated with the timing and funding of routine capital expenditures, estimated at $30 million over the next 25 years.

JD Supra Business Advisor

by Seth Merewitz | Best Best & Krieger LLP

5/20/2015

Standard & Poor’s Ratings Services indicated it may upgrade California’s debt ratings, saying the state’s fiscal rebound appears to be accelerating.

The rating firm said Thursday it could upgrade the ratings by one notch based on the state Department of Finance’s cash-flow projections, which are typically released within a month of the state’s adopting a spending plan for the year.

S&P currently rates California’s general obligation debt A-plus and appropriation-backed debt A.

The move follows the release of Gov. Jerry Brown’s spending proposal last week.

Under Mr. Brown’s proposed budget, California would pay most of the money owed to schools and retire most debts while stashing away significant money for future expenses, S&P credit analyst Gabriel Petek said in a news release.

Mr. Petek credited the governor’s revised proposal for avoiding “disproportionate reliance on windfall-like revenues from capital gains,” which would help the state Finance Department project budget balances beyond the current fiscal year.

THE WALL STREET JOURNAL

By MARIA ARMENTAL

May 21, 2015

Write to Maria Armental at maria.armental@wsj.com

LOS ANGELES — San Bernardino’s council approved a bankruptcy exit plan on Monday night that seeks to virtually eliminate the southern California city’s pension bond debt while paying Calpers, the state pension system, in full.

The city council voted 6-1 for the plan after a debate which included input from residents.

The bankruptcy blueprint, called a plan of adjustment, must now be presented to the federal judge overseeing the city’s bankruptcy by May 30, under a court-imposed deadline.

Under the plan, city officials want to slash their $50 million pension debt to just a penny on the dollar. The city previously agreed to pay Calpers, its biggest creditor, in full now and at all times in the future, an agreement incorporated into the plan.

The Luxembourg-based bank EEPK, holder of the $50 million pension obligation bonds, Ambac Assurance Corp, which insures a portion of the bonds, and Wells Fargo, the bond trustee, have declined to comment since the plan was released last Thursday.

San Bernardino also intends to virtually eliminate retiree health care costs under the plan, and to outsource its fire, emergency response and trash services.

San Bernardino, a city of 205,000 65 miles east of Los Angeles, declared bankruptcy in August 2012 with a $45 million deficit.

Along with Detroit, Michigan, and Stockton, California, it has been one of a handful of municipal bankruptcies that have been closely watched by the $3.6 trillion U.S. municipal bond market.

(Reporting by Tim Reid; Editing by Richard Borsuk)

By REUTERS
MAY 19, 2015

NEW YORK/CHICAGO — With no easy way to financially engineer or negotiate its way out of a budget and pensions crisis, Illinois is likely to dish out some unpleasant medicine to its residents in the next few years. And investors say that is most likely to come in the form of higher taxes.

Given the Democrats’ control of the state legislature and their opposition to many proposals for spending cuts, municipal bond fund managers see little alternative for Republican Governor Bruce Rauner other than eventually agreeing to hike taxes, such as raising the state’s income tax or broadening its sales tax base.

The state has a chronic structural budget deficit, as well as the lowest credit ratings and worst-funded pension system among the 50 states. Chicago, the third biggest U.S. city and the place where about one in five of the state’s residents live, is suffering from similar pension issues and may have to take additional pain, the investors said.

“What is quite simple a solution is to raise taxes,” said Tom Metzold, senior portfolio manager at Eaton Vance Management, which has been paring down its Illinois exposure. “You’re going to have a game of chicken over who blinks first – the cutting expenditure side or raising taxes side.”

Rauner got into office in a November election after campaigning for eliminating a temporary 2011 personal income tax hike to 5 percent from 3 percent enacted under former Democratic Governor Pat Quinn. That was largely rolled back in January to 3.75 percent.

Rauner has ruled out hiking taxes unless he can get pension cuts and other reforms, including creating areas where employees in unionized workplaces can opt out of joining unions or paying union dues. The Democrat-controlled House rejected this so-called right-to-work proposal last week.

Balancing Illinois’ out-of-whack budget without raising taxes for the next fiscal year is already proving difficult. While Rauner got spending cuts passed by lawmakers to help plug a $1.6 billion hole in the current year, his $32 billion proposed budget for the fiscal year beginning July 1 met resistance from Democrats.

The contentious point is $6.6 billion in proposed spending cuts, and a key component of the budget – slashing $1.2 billion in spending from its human services department (which includes housing and child care services) – has already been voted down by the House.

SKIPPING AND SKIMPING

By far the biggest problem facing Illinois and Chicago are their grossly underfunded pension funds, the result of years of skipping and skimping on contributions and sweetening benefits for a mainly unionized workforce.

That already dire situation got a lot worse on May 8 when the Illinois Supreme Court threw out the state’s landmark 2013 pension reform law, saying it violated a clause in the state constitution. The reform attempted to rein in costs by reducing and suspending cost-of-living increases for pensioners, raising retirement ages and limiting salaries on which pensions are based.

“The court ruling will increase the likelihood of new revenue eventually becoming part of the budget solution,” said Nuveen analysts in a research note. “This could mean an expanded sales tax base or income tax increase.”

Illinois’ unfunded pension liabilities total $105 billion and the funded ratio is only 42.9 percent.

The day of reckoning is approaching as Rauner and legislators have to balance the budget for the next fiscal year. If they fail to agree on tax increases or spending cuts to make required payments to its pensions of $7.6 billion for 2016, the state risks further downgrades in its credit rating.

Rauner’s budget for next fiscal year relies in part on moving current state workers into less-generous pensions – now harder after the Supreme Court’s ruling. State contributions are ratcheting higher every year and are projected to grow to more than $10 billion a year in 12 years.

“New revenue cannot be discussed until we address the underlying structural issues that contributed to Illinois’ fiscal crisis,” said a spokeswoman for Rauner when asked about any possible tax increases.

A spokesman for powerful House Speaker Michael Madigan, a Democrat, said the budget plan should be a balance between spending cuts and revenue. Madigan scheduled a House vote this week on a proposal for a 3 percent additional tax on income over $1 million.

Illinois Senate President John Cullerton, also a Democrat, is hoping for a bipartisan budget solution that addresses both income and expenses, said his spokeswoman.

APPEAL SEEN UNLIKELY

Legal experts largely dismiss the idea of an appeal of the ruling, noting that the U.S. Supreme Court might decline to hear a case that is so tied to Illinois state law. A spokesperson for Illinois’ attorney general did not respond to a request for comment.

Rauner wants to amend the constitution to ensure his pension proposal sticks – but it is a formidable challenge to get the three-fifths majority vote required and even if successful would take years to take effect.

“Until citizens begin paying for the services they receive at the right price, the problems of the past 30-plus years will continue,” said Marti Kopacz, a restructuring consultant who advised the judge in Detroit’s historic bankruptcy.

“It doesn’t take much of a tax increase and/or a combination of some spending cuts to solve their problems, it just takes the political will,” said Guy Davidson, director of Municipal Fixed Income at AllianceBernstein, which owns some Illinois state general obligation bonds.

While Illinois ranks 31st among the states in terms of its state business tax climate for 2015, according to the Tax Foundation research group, its flat personal income tax rate is well below many other states, particularly for higher-income earners.

The state’s sales tax is 6.25 percent, though there are exemptions for some goods. Consumers also face additional sales taxes from local authorities – taking the total rate in Chicago, for example, to 9.25 percent.

The recent high court ruling could breathe new life into pension proposals that have previously been floated.

In one, Illinois would shift some costs from the Teachers Retirement System to local school districts. But this would likely pass an increased tax burden on in a different way and meet resistance from some state lawmakers.

SCOOP AND TOSS

As Illinois’ woes pile up, bankers are likely to pitch creative solutions such as pushing out debt maturities or privatizing assets. Those options each face major political or legal obstacles and cannot alone fill the unfunded liability, investors say.

Extending debt maturities can buy time. Debt service costs account for 5.6 percent of the state’s budget, according to Nuveen. However, the Illinois constitution prohibits “scoop and toss,” a practice used to free up revenue by pushing principal and interest payments into future years.

Privatizations could be a possibility, say some bankers, noting that selling Illinois’ toll roads and interstate highways is one option. This would, though, risk a political backlash. Privatizations got a bad name after the company that leased Chicago’s parking meters immediately tripled rates.

The state could also issue pension obligation bonds to boost funding levels – though critics say they just add to the burden of future taxpayers. Illinois already has $13.8 billion of outstanding pension obligation bonds, according to S&P.

Despite all the problems, Illinois state bonds with a 5 percent coupon trade at or above par, reflecting a sense that Illinois will avoid a default or a haircut for investors.

“The legal framework as it exists right now is that the bonds get paid in full, and there’s no talk yet of changing that,” said Emanuel Grillo, bankruptcy attorney and muni restructuring expert from Baker Botts.

There is no provision for U.S. states to file for bankruptcy under federal law – which means there is less pressure for everyone to get around the bargaining table.

In a corporate or municipal bankruptcy, stakeholders may fight hard to protect their investments, but often wind up in a deal that spreads the pain. In state finance, bondholders and pensioners can resist haircuts until the state “has exhausted its tax base,” Grillo said.

By REUTERS
MAY 20, 2015

(Reporting by Megan Davies and Nick Brown in New York and Karen Pierog in Chicago; Editing by Martin Howell)

An analysis issued by Moody’s Investors Service on Monday said Atlantic City could benefit from state support when it tries to sell about $55 million in bonds over the coming weeks, but added the municipality still faces fiscal uncertainty and significant challenges.

The city is receiving support from the state’s Municipal Qualified Bond Act program, which diverts future aid to municipal bond payments. The program aims to provide increased confidence the bonds will be paid back, security better borrowing rates in the process.

The Moody’s analysts said the MQBA program “should improve the city’s market access,” and that the sale “will remove a major short-term obstacle facing the city: a $40 million emergency bridge loan from the state.”

That loan was taken out in December to cover casino tax appeal payments. The city also aims to sell an additional $12 million in bonds borrowed in February.

However, Moody’s said it remains unclear how the city’s bonds will be rated by the market.
In addition, “Atlantic City continues to grapple with a $101 million structural deficit and narrow liquidity, which its planned MQBA bond issues do nothing to address,” Moody’s wrote.

Major state aid packages, such as the payment-in-lieu-of-taxes, or PILOT, bill affecting casino tax payments, also remain unresolved, Moody’s said.

“Without a significant liquidity infusion in 2015 and significant increase in recurring revenues,” Moody’s wrote, “debt service payments still remain highly susceptible to default in 2015 and the city’s future operations continue to face pressure from a large structural deficit.”

Finance Director Michael Stinson declined to comment on the Moody’s report Tuesday, saying instead that the city is moving ahead with its bond sales and is working to secure the best borrowing rates it can.

Tuesday, May 19, 2015 2:47 pm

Press of Atlantic City

By JOHN V. SANTORE, Staff Writer

Trading volume in U.S. municipal bonds dropped 13 percent to $618.5 billion in the first quarter of 2015 from $709.8 billion during the same period in 2014, the Municipal Securities Rulemaking Board (MSRB) reported on Tuesday.

“Historically, first quarter municipal trading volume has declined an average of 12.4 percent annually since 2008,” the MSRB said in a statement.

Fixed-rate bonds made up 68 percent of the par amount of bonds traded in the quarter, while the number of interest rate resets on variable-rate demand obligations reached a new low of 133,896, according to the MSRB, which regulates municipal securities firms.

REUTERS

May 19, 2015

(Reporting by Karen Pierog; Editing by Jeffrey Benkoe)

U.S. municipal bond sales are expected to reach $10.3 billion next week, led by a $750 million issue of bonds by a Florida state insurance company preparing for hurricane season.

The Citizens Property Insurance Corporation of Florida is issuing $750 million Coastal Account Senior Secured Bonds, Series 2015A-1.

The corporation was created by the Florida Legislature in 2002 as a not-for-profit, tax-exempt, government entity. Its mission is to provide insurance protection to Florida policyholders entitled to but unable to find property insurance coverage in the private market.

The new bond issue is meant to increase liquidity in preparation for Florida’s approaching hurricane season.

“This financing program provides a necessary cash ‘bridge’ to certain claims paying resources, especially reimbursements from the Florida Hurricane Catastrophe Fund,” Jennifer Montero, the corporation’s chief financial officer, said in a statement.

Overall bond issuance is expected to reach $10.3 billion, with the tender of tax-exempt bonds reaching $9 billion next week, above the weekly year-to-date average of $7.8 billion, said Dorian Jamison, a municipal research analyst at Wells Fargo Advisors.

Jamison added that since Jan. 30, yields for 30-year Triple-A rated municipal bonds have risen 75 basis points, much of that due to high supply. Through April, supply has been at its highest for 10 years, due mainly to a rash of refunding, he said.

The second biggest issue on schedule for next week is a $515 million sale of public utility refunding revenue bonds by the city of Springfield, Missouri.

REUTERS

LOS ANGELES | BY TIM REID

May 15, 2015

(Reporting by Tim Reid. Editing by Andre Grenon)

Municipal bond sales in the U.S. are set to increase in the next month while the amount of redemptions and maturing debt accelerates.

States and localities plan to issue $12.2 billion of bonds over the next 30 days, according to data compiled by Bloomberg. A week ago, the calendar showed $12.1 billion planned for the coming month. Supply figures exclude derivatives and variable-rate debt. Some municipalities set their deals less than a month before borrowing.

Citizens Property Insurance Corp. of Florida plans to sell $750 million of bonds, Springfield Missouri Public Utility has scheduled $515 million, Port Authority of New York and New Jersey will offer $500 million and the Miami and Dade County Florida Water and Sewer authority will bring $482 million to market.

Municipalities have announced $17.4 billion of redemptions and an additional $17.0 billion of debt matures in the next 30 days, compared with the $29.3 billion total that was scheduled a week ago.

Issuers from New York have the most debt coming due with $1.88 billion, followed by California at $1.87 billion and Florida with $1.38 billion. Citizens Property Insurance has the biggest amount of securities maturing, with $765 million.

Shrinking Market

The $3.6 trillion municipal market shrank by 4 percent in 2014. This year, maturities are poised to drop 38 percent to $176 billion from the 2014 levels.

Investors removed $36 million from mutual funds that target municipal securities in the week ended May 6, compared with an increase of $1 billion in the previous period, according to Investment Company Institute data compiled by Bloomberg.

Exchange-traded funds that buy municipal debt increased by $9.2 million last week, boosting the value of the ETFs 0.05 percent to $16.8 billion.

State and local debt maturing in 10 years now yields 107.04 percent of Treasuries, compared with 102.555 percent in the previous session and the 200-day moving average of 97.756 percent, Bloomberg data show.

Bonds of South Carolina and Michigan had the best performance over the past year compared with the average yield of AAA rated 10-year securities, the data shows. Yields on South Carolina’s securities narrowed 2 basis points to 2.37 percent while Michigan’s declined less than one basis point to 2.60 percent. Puerto Rico and New Jersey handed investors the worst results. The yield gap on Puerto Rico bonds widened 95 to 10.42 percent and New Jersey’s rose 25 basis points to 3.08 percent.

MAY 18, 2015 • BLOOMBERG NEWS

Less than a week after Chicago’s credit rating was cut to junk by Moody’s Investors Service, the timing on the biggest piece of a $383 million bond deal has been cast into doubt.

A $201 million offering managed by Ramirez & Co. and initially planned for Tuesday has been shifted to day-to-day status, according to data compiled by Bloomberg. The sale is part of an effort to refinance floating-rate debt that exposed the city to penalties after Moody’s cut Chicago to junk on May 12. Standard & Poor’s and Fitch Ratings also lowered the city last week, while giving it an investment grade.

The potential shift in the sale’s schedule is a setback for Mayor Rahm Emanuel, who began his second term Monday, as he moves to end some swaps and convert variable-rate debt to fixed-rate to bolster the city’s finances. The downgrades threaten to raise the city’s borrowing costs, as investors are demanding higher yields on its securities.

“If the market fails to do these deals, then of course market access becomes a front-and-center type of risk,” said Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services LLC, which analyzes municipal finance. Selling bonds would show “that the markets are still giving the city time to work out its problems.”

Kelley Quinn, a city spokeswoman, didn’t immediately respond to e-mail and phone messages seeking comment on the deal’s timing. Phillip Culpepper at Ramirez in Chicago didn’t respond to a voicemail seeking comment.

Tuesday Timing

A segment of about $182 million is still scheduled to price Tuesday, data compiled by Bloomberg show.
Federally tax-exempt Chicago bonds maturing in January 2033 traded May 15 at yields as high as 6.16 percent, the most since their issuance three years ago, Bloomberg data show. The spread of 3.28 percentage points over benchmark municipal bonds was the widest yet. They were the most-traded Chicago bonds on May 14-15, combined.

The Moody’s cut to Ba1, one step below investment grade, means Chicago may have to pay banks as much as $2.2 billion. The reduction allows banks to demand that the city repay debt early and exposes Chicago to fees to end swaps contracts.

Bloomberg

by Brian Chappatta and Elizabeth Campbell

May 18, 2015

The Wichita City Council this week approved the first step in a process that could lead to a public-private partnership to help pay for an estimated $1.6 billion in water and sewer infrastructure repairs and upgrades. The city will seek bids from companies interested in loaning money and expertise to the city. In exchange, the selected company would receive annual payments from the city, according to The Wichita Eagle.

“The whole goal in looking at these public-private partnerships is to see if we can pick up efficiencies in the way that we operate our system and looking at some unique tools that aren’t available to us today that may change our bond indebtedness in the future,” said Mayor Jeff Longwell.

The city would retain ownership of the water and related assets — such as plants, pumps and pipes — as well as the ability to set rates and make policy decisions, said public works director Alan King. “We would enter into a financial arrangement where we would commit to pay back that private capital over time and it would give us some flexibility we don’t currently have when we issue revenue bonds as a utility,” King said.

Currently, the city pays for infrastructure repairs and improvements with cash or revenue bonds, said Ben Nelson, strategic services manager for public works. The money ultimately comes from rate payers. An aging system, paired with deferred maintenance over the years, led to Wichita’s $1.6 billion water and sewer infrastructure needs, King said. City staff has been working on the P3 proposal for more than a year.

The first phase of the proposal will invite companies to evaluate Wichita’s infrastructure and create a plan to repair it. Staff then would seek City Council approval in July, King said. “To evaluate these proposals, we’re going to be looking to make sure we maximize our service levels at the lowest rates. That’s always been our guiding principle,” he said.

If approved by the council, the second phase likely would include a 10-year implementation agreement to put the plan into place. The selected company would bring in experts as consultants to work with the city’s field staff, assess the current conditions of the infrastructure, evaluate the risks, determine the remaining life of each asset and make recommendations on what to repair or replace first, King said.

It won’t be clear how much this will cost until the city receives bids, King said. If it’s not advantageous to the city after the initial bids, the city won’t be obligated to continue the 10-year implementation phase.

“We still needed to do a full assessment of the system regardless, and it kind of gives us an opportunity to look at our expertise and techniques and compare it to what they’re willing to offer from the private sector,” Longwell said. “I can’t see any downside to at least taking it to that next level.”

NCPPP

By Editor

May 14, 2015

As Detroit emerges from a record bankruptcy, its home county faces a fiscal crisis that’s jolting bondholders and leaving officials struggling to avert a state takeover.

Three months after Wayne County Executive Warren Evans warned of possible “financial Armageddon” in the face of a looming budget deficit, he’s proposing to reduce wages while ending health-care benefits for future retirees and trimming their pensions.

Bondholders are signaling skepticism that the junk-rated county of 1.8 million residents can solve its fiscal woes, including a stalled jail project that eats up $14 million a year through bond expenses. Yields on the debt set new highs last week as investors speculated the county will skip payments to conserve cash.

“There’s a lot of challenges with this security that are ahead of it,” said Adam Buchanan, senior vice president of sales and trading at Ziegler, a Chicago broker-dealer. “Despite the large yield, we haven’t found a way to find value in it. There are too many unknowns.”

Junk Grades

Moody’s Investors Service and Standard & Poor’s dropped the municipality to junk after Evans’s fiscal warning in February.

Fitch Ratings, which had already given the county a speculative grade, said the jail debt may be “particularly vulnerable,” as officials sort out its finances. If there is a bankruptcy, bonds backing an unfinished project would be the most likely to go unpaid, said Buchanan at Ziegler.

The county sold $200 million of securities in 2010 through a local agency to build a 2,000-bed jail in downtown Detroit. Officials halted construction in 2013 amid cost overruns.

The jail bonds, the most frequently traded Wayne County debt in the past three months, are serving as a proxy for investor bets on the municipality’s finances.

Debt backing the jail and maturing in December 2040 traded at an average yield of about 10.7 percent May 6, the highest yet, according to data compiled by Bloomberg. In the latest trading Monday, the yield fell to 10.34 percent, or about 7.5 percentage points above benchmark debt. The federally taxable obligations yielded 7.44 percent Feb. 4, the day before Evans’s warning.

Recovery Plan

Evans said in a recovery plan released last month that if his recommendations are implemented, the county can plan a new jail. Whether finishing the partially built facility is the answer remains an “open question,” according to his report.

He has proposed changes to cut $53.4 million from spending. The county has to negotiate wage and benefit reductions with unions. The largest, the American Federation of State, County and Municipal Employees Council 25, is pushing back, saying its members have already taken pay cuts.

The county, home to the headquarters of Ford Motor Co. and General Motors Co., says debt payments are safe. There is “no chance” of vendors or bonds not being paid, Gary Woronchak, chairman of the County Commission, said in an interview.

State intervention is “increasingly likely,” Fitch said in March, when it dropped the county to B, five steps below investment grade. If that does occur, the likely outcome is a consent agreement, in which county officials and the state agree on measures to resolve the crisis, according to Woronchak. Three Michigan communities and two school districts operate under that arrangement.

While the governor could appoint an emergency manager, that step won’t be needed because the financial challenges are manageable and bankruptcy “is not in the realm of what’s going to happen,” Woronchak said.

Detroit Echo

Wayne County faces many of the same stresses that plagued Detroit, which emerged from bankruptcy in December after 17 months.

Plummeting property taxes are putting its deficit on track to swell to $200 million by 2019, from $159.5 million in 2013, according to Fitch. The county’s pension assets are $910 million less than promised payouts, and retiree health care is underfunded by $1.3 billion.

“When we look at Wayne County’s tax base, its budget, its balance sheet, it looks eerily similar to the city of Detroit’s problems,” said Ty Schoback, a senior analyst in Minneapolis at Columbia Threadneedle Investments, which manages about $30 billion in munis. The company hasn’t owned Wayne debt for about a year.

Bloomberg

by Elizabeth Campbell and Chris Christoff

May 11, 2015

Illinois Governor Bruce Rauner says he knows how to pull the state out from under a mountain of pension debt. Simply create a new retirement plan and change the constitution. That’ll do it, he says.

If the legislature goes along. If voters approve a constitutional amendment. And if the Illinois Supreme Court, which last week overturned a 2013 pension repair, agrees the plan is sound.

The state’s highest court ruled Friday that any restructuring can’t cut promised benefits that have created a $111 billion shortfall. Rauner’s Plan B would preserve those that have been currently earned, create a new 401k-type plan and ask voters in 2016 to remove language from Illinois’s charter that protects retirement payments.

“It seems less likely that the governor’s plan will pass – – or that any plan where benefits are curtailed would pass — the state court’s test,” said Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics.

Rauner, 59, said his plan will pass legal muster as long as voters approve the constitutional change.
“We can’t afford to have years and years in court,” he told reporters Friday.

Yet that’s exactly what many lawmakers and legal experts predict, given the plans outlined by Rauner, a former private equity executive who is the first Republican elected Illinois governor since 1998.

‘Reckless’ Approach

His proposal is scheduled for a hearing Wednesday in a Illinois House of Representatives committee. The panel’s chairman, Democratic Representative Elaine Nekritz, said she doubts the measure would avoid a legal challenge.

“It would be my reading of the Supreme Court decision that his solution would be precluded,” Nekritz said.

House Speaker Michael Madigan, a Chicago Democrat who controls much of the legislative agenda, called Rauner’s plan to use $2.2 billion of anticipated savings from his pension-reform pitch “reckless” after the governor proposed his fiscal 2016 budget in February.

Asked to respond to such criticism, Rauner spokeswoman Catherine Kelly referred to his Friday comments.
Investors already have been punishing Illinois. The state’s 10-year bonds yield about 3.7 percent, the highest since November and the most among the 20 states tracked by Bloomberg.

About $4.6 million of taxable Illinois debt maturing in June 2033 changed hands today at an average yield of 5.6 percent, the highest since January 2014, according to data compiled by Bloomberg.

The pressure is unlikely to recede anytime soon; the road to a constitutional change is strewn with obstacles. Adding an amendment to an Illinois ballot would require a three-fifths margin by both houses of the Democrat-led legislature.

To get adopted, it would then need to win approval by three-fifths of voters casting ballots on the amendment, or a majority of all those voting in the election, according to the state constitution.

If voters did approve it in November 2016, a court challenge could further delay relief for the system.
The court’s ruling suggested that lawmakers bypassed a simpler fix: raising taxes. Rauner has rejected that option.

In its Friday decision, the court questioned why lawmakers allowed a temporary personal-income tax increase in 2011 to expire at the start of 2015. The move, in defiance of then-Governor Pat Quinn’s desire to keep the levies, opened a budget hole in the current fiscal year that lawmakers are still trying to close.

“No possible claim can be made that no less drastic measures were available,” the court ruling said.

In the wake of the decision, a new battle is evolving over alternative approaches to stabilizing the state pensions and those of Chicago, where a $20 billion shortfall threatens the city’s solvency.

Among the short list of suggestions is allowing municipalities to declare bankruptcy; shifting more retirement costs from the state to local government; and raising taxes.
The road ahead for Rauner and lawmakers is unclear.

“I don’t think anybody really has a firm grasp on what kind of outcome we’re going to have here,” said Adam Buchanan, senior vice president of sales and trading at Ziegler, a broker-dealer in Chicago. “They can’t file bankruptcy, they can’t impair pensions, so what can they do?”

by Tim Jones, Elizabeth Campbell, and Brian Chappatta

May 12, 2015

Forget all the nicknames attached to Chicago for generations — Windy City, City of Big Shoulders, the City that Works. This gleaming metropolis of 2.7 million people is now, along with Detroit, junk city.

When Moody’s Investors Service downgraded Chicago’s debt on Tuesday to junk status, it deepened the city’s financial crisis and elevated comparisons to the industrial ruin 280 miles to the east.

Chicago partisans, starting with Mayor Rahm Emanuel, argue vehemently that their city isn’t Detroit. They cite population growth, a diverse economy bolstered by an abundance of Fortune 500 companies, vibrant neighborhoods and a booming tourist trade.

Yet here are five reasons, now more than ever, that suggest Chicago is akin to Detroit — or, by some measures, even worse. Or, as Illinois Republican Governor Bruce Rauner put it last month: “Chicago is in deep, deep yogurt.”

BIG, SCARY NUMBERS: Chicago’s unfunded liability from four pension funds is $20 billion and growing, hitting every city resident with an obligation of about $7,400. Detroit’s, whose population of about 689,000 is roughly a quarter of Chicago’s, had a retirement funding gap of $3.5 billion, meaning each resident was liable for $5,100. A January 2014 report from Morningstar Municipal Credit Research showed that among the 25 largest cities and Puerto Rico, Chicago had the highest per-capita pension liability.

HOSTILE COURT: When Detroit filed for Chapter 9 in July 2013, a federal bankruptcy judge exerted his considerable powers and decreed that everyone — taxpayers, employees, bondholders and creditors alike — would get a haircut to settle the crisis. When the Illinois Supreme Court ruled on May 8, it said the state couldn’t cut pension benefits as part of a solution to restructure the state retirement system.

That decision sent a clear signal to Chicago, which was trying to follow the state’s benefit-cutting lead. Where the Detroit judge acted, the Illinois justices told elected officials to clean up the mess of their own making.

POLITICAL PARALYSIS: Just as Detroit slid into bankruptcy after decades of economic and actuarial warnings, Chicago politicians have watched the train wreck rumble toward them for more than a decade. During that time, they skipped pension payments and paid scant attention to the financial damage being done. In 10 years starting in 2002, the city increased its bonded debt by 84 percent, according to the Civic Federation, which tracks city finances. That added more than $1,300 to the tab of every Chicago resident.

In Michigan, Governor Rick Snyder acted when the crisis in Detroit couldn’t be avoided. He invoked a state law giving an emergency manager what amounts to fiscal martial-law power. In Chicago’s case, there’s no political pressure to invoke a similar law. And a proposal supported by Rauner that would allow municipalities to seek bankruptcy protection without state approval is languishing in the Illinois legislature.

NO BAILOUT: Detroit’s bankruptcy filing allowed it to restructure its debt, officially snuffing out $7 billion of it by cutting pensions and payments to creditors. In Illinois, the nation’s lowest-rated state with unfunded pension obligations of $111 billion, Rauner had a blunt message last week in an unprecedented address to Chicago’s City Council: The city will get no state bailout.

DENIAL: After years of denial, Detroit officials finally, if grudgingly, agreed to major surgery. At least for now, Chicago’s Emanuel is sticking to his view that the Illinois Supreme Court’s rejection of a state pension reform law doesn’t apply to the city. “That reform is not affected by today’s ruling, as we believe our plan fully complies with the State constitution because it fundamentally preserves and protects worker pensions,” he said in a statement on Friday.

Four days later, Moody’s begged to differ. “In our opinion,” it wrote, “the Illinois Supreme Court’s May 8 ruling raises the risk that the statute governing Chicago’s Municipal and Laborer pension plans will eventually be overturned.”

Bloomberg

by Tim Jones

May 13, 2015

Wildfire-prone San Bernardino will replace its firefighters unless their union agrees to cut costs to help the Southern California city exit bankruptcy.

The proposal, made public Thursday as part of a plan to emerge from court protection, is among the most aggressive threats aimed at public employees by a city trying balance its budget.

“We would hope that the closer we get to that option, that they would be willing to come to the table,” said Gary Saenz, the elected attorney for the city of 213,000 about 60 miles (97 kilometers) east of Los Angeles.

Since filing bankruptcy in 2012, the city has imposed cuts worth $26 million a year on its labor unions. To make further cuts that would be permanent, it must win approval of the debt-cutting proposal, known as a plan of adjustment. The plan made public Thursday also calls for saving about $4 million annually by paying investors who hold pension obligation bonds about 1 percent of what they are owed.

General unsecured creditors would get back 1 percent.

Under the plan, the city would also cut retiree health care benefits and contract for ambulance services, graffiti removal and park maintenance. It would ask voters to extend a 0.25-cent sales tax increase they approved in 2006.

San Bernardino may ask voters in November to rescind part of the city charter that makes it difficult to negotiate wage cuts with police and firefighters. Voters rejected a similar ballot measure last year.

San Bernardino cut deals with its smaller unions and California Public Employees’ Retirement System while firefighters walked out of talks a few months ago, Saenz said.

Fire Danger

The city’s location at the foot of the San Bernardino Mountains, where fires often rage during dry and hot summers, makes fire protection a critical consideration. City officials are expecting to receive at least one detailed proposal from a fire agency seeking to take over for the local department, Saenz said.

David Goodrich, a firefighter union attorney, didn’t immediately return a call seeking comment on the proposal.

The city’s stance toward firefighters is tougher than that taken by Detroit in its bankruptcy-exit plan, said Robert Gordon, an attorney who represented that city’s pension system in the municipal bankruptcy.

A city study of the 120 highest-paid firefighters in San Bernardino found the average annual salary for the top third was $190,000; the next third averaged $166,000; and the others got $130,000 on average.

Temporary Agreement

This year, San Bernardino won permission from U.S. Bankruptcy Judge Meredith Jury to cancel its contract with the firefighters union. The department is now working under a temporary pact that saves the city money, Saenz said.

The debt-cutting plan must be sent to creditors for a vote before the judge decides whether to approve it.
The city, now nearing a deal with its police union, had considered replacing the police department before deciding the initiative would cost too much, Saenz said.

“The city has had a long and difficult time in bankruptcy court,” said Matt Fabian, managing director of Concord, Massachusetts-based Municipal Market Advisors. “Its experience shows that bankruptcy is not at all an easy solution.”

The case is In re San Bernardino, 12-bk-28006, U.S. Bankruptcy Court, Central District of California (Riverside).

Bloomberg

by Steven Church and James Nash

May 14, 2015

Chicago Mayor Rahm Emanuel named Carole L. Brown, a managing director at Barclays Capital, as chief financial officer, the same day the city reeled from its third credit rating cut this week.

Brown will replace Lois Scott, who announced earlier this month that she’s stepping down after four years. Brown’s appointment comes one week after the Illinois Supreme Court overturned the state’s pension overhaul, prompting multiple downgrades and complicating the city’s options for reducing its own $20 billion pension shortfall.

“Carole Brown brings decades of financial experience to the City of Chicago,” Emanuel said in an e-mailed statement. “Carole’s experience and reputation as a tough, but honest financial manager will be a valuable asset as we continue to create a conducive environment for job creation and economic growth for the City of Chicago.”

Earlier Friday, Fitch Ratings lowered its rating by one step to BBB+, three levels above junk status. That followed Moody’s Investors Service move on Tuesday to cut the city’s general-obligation bonds to below investment grade. Standard & Poor’s lowered its rating for the city to A- on Thursday.

Brown heads Barclays Midwest municipal practice, serving as a senior investment banker for municipal clients. Barclays is among the city’s bankers.

“I am eager to begin working with the Mayor’s financial team to address the city’s financial challenges,” Brown said in the statement.

Bloomberg

by Elizabeth Campbell

May 15, 2015

Long Beach, a blue-collar California town known for cargo freighters, is selling $112 million of bonds to make itself a beacon for another kind of ship: the yachts of the prosperous Pacific coast.

Catering to the tiny-vessel owner has been a struggling business since the recession, as money-minded sailors left marinas to store their boats on land, said Rick DuRee, chairman of Long Beach’s Marine Advisory Commission. That costs about half as much as parking at the docks.

So the city of 469,000 is replacing hundreds of small slips to make way for $2 million pleasure craft, just as nearby wharves have done.

“This is an offshoot of the way the economy was going a few years ago,” DuRee said. “Boating is an expensive activity, no way around it. The big boats are getting bigger, while the idea of keeping your boat on land is a better option for the middle-income boater.”

Long Beach, an industrial hub known as the hometown of rapper Snoop Dogg, is scheduled to sell the bonds next week. About half the proceeds will repay loans from California for previous improvements. The rest will rebuild the Alamitos Bay Marina, which is some 20 miles (32 kilometers) north of Newport Beach, one of the state’s wealthiest enclaves.

Long Overdue

The marina is partially vacant, as crews scoop up garbage from the water and tear up buckled wooden docks to replace them with concrete structures. The work is long overdue, said Phil Friedrich, an Orange County retiree who docks his 60-foot power boat, Blarney, in the marina.

“This work was supposed to be done years ago,” he said. “But the finished product is just excellent.”
The Long Beach sale comes as investors are pushing up municipal bond yields, anticipating the Federal Reserve will raise a benchmark interest rate it’s kept near zero since 2008.

The debt is backed by revenue from Long Beach’s marina fund, which collects slip fees, rather than the general fund. Fitch Ratings ranks the securities BBB, two steps above junk.

Yields on 10-year revenue-backed bonds rated BBB rose Thursday to 3.27 percent, the highest in almost nine months, according to data compiled by Bloomberg. The difference in yield between those bonds and benchmark munis widened to 1 percentage point from 0.7 percent point in March.

Cautious Buyers

“You definitely have to be cautious about buying lower-rated paper in this environment unless you get paid for it,” said Kenneth Naehu, a managing director at Banyan Tree Asset Management in Los Angeles. “Those are the things that widen the most in a rising interest-rate environment.”

Long Beach, with a south-facing coastline buffered from the Pacific Ocean waves, is home to the nation’s second-busiest container port. With a median household income of $53,000, it has a more blue-collar character than other area marina towns, such as Newport Beach, where the income is twice as high.

Other ports are chasing bigger vessels, too. Los Angeles County, to the north, is eliminating more than a quarter of its slips at Marina Del Rey this year to replace them with larger ones. Dana Point Harbor, in Orange County, is making similar changes.

A recovering economy and retiring baby boomers with money to spend are driving the trend, said Wendy Larimer, legislative coordinator for the Association of Marina Industries in Washington.

$2 Million

New 40-foot sailboats range in price from $159,000 to $565,000 on Yachtworld.com. Power-driven craft that size run as high as $2 million.

Long Beach, whose three marinas can hold more than 3,000 ships, has rehabilitated two already by replacing rotting wooden docks and enlarging boat slips.

Next week’s bonds will finance similar work at Alamitos Bay, which is eliminating some slips for boats shorter than 30 feet to add more than 200 spaces for those 35 feet or longer. The city projects that revenue from Alamitos Bay will increase from $7.4 million this year to $11.4 million by 2018, when the docks will be completely redone.

After the recession struck, Alfredo Fernandez, the owner of a 25-foot sailboat, saw mariners like himself move out. He said dry storage costs about $100 a month for a 25-foot boat. A slip costs $287.

“After 2008 I saw the smaller boats disappear,” said Fernandez, who’s on the board of the Long Beach Marina Boat Owners Association. “But the bigger boats stayed.”

Bloomberg

by James Nash

May 14, 2015

(Reuters) – Detroit’s public sale of $275 million of bonds that financed the city’s exit from bankruptcy has been delayed but should take place no later than early August, a city official said on Monday.

Detroit is taking advantage of a new law that should give the bonds investment-grade ratings that could save the city between $20 million and $30 million over the life of the issue, according to the office of Michigan Governor Rick Snyder, a Republican.

The law took effect in April and places a specific statutory lien on Detroit income tax revenue pledged to pay off the debt.

The city is hoping the stronger payment pledge on the bonds will result in lower interest rates.

Detroit privately placed $275 million of variable-rate bonds with Barclays Capital to finance its Dec. 10 exit from the biggest-ever U.S. municipal bankruptcy. As part of the city’s U.S. Bankruptcy Court-approved plan, that debt was due to be sold in the U.S. municipal market in a fixed-rate mode by May 9. The deal will mark the city’s first post-bankruptcy public bond sale.

John Naglick, the city’s deputy chief financial officer, said Barclays and Detroit finalized an agreement late last week for a 90-day extension requested by the city. Detroit asked for the delay while awaiting final action on the Michigan bill and the completion of a fiscal 2014 audit by May 31, he said, adding that the public bond sale should occur no later than Aug. 7.

Proceeds from the privately placed bonds were earmarked for retiring a prior $120 million Barclays loan to the city, to pay certain creditor claims from the bankruptcy and to finance city improvements.

By REUTERS
MAY 12, 2015, 2:06 P.M. E.D.T.

(Reporting by Karen Pierog; Editing by Lisa Shumaker)

Days after the Illinois Supreme Court rejected an overhaul aimed at shoring up the state’s troubled pension system, Chicago, the state’s largest city, saw its credit rating downgraded two levels to junk status on Tuesday by Moody’s Investors Service. The move could mean higher borrowing costs for Chicago, which is wrestling with an underfunded pension system of its own. The State Supreme Court opinion, issued last week, barred the state from lowering pension benefits for public employees under a provision of the Illinois Constitution, but it also raised doubts about the legality of changes Chicago has made to two of its pension funds. Mayor Rahm Emanuel criticized Moody’s downgrade as premature. “While Chicago’s financial crisis is very real and at our doorsteps, today’s irresponsible decision by Moody’s to downgrade the city’s credit by two steps goes far beyond that reality,” Mr. Emanuel said.

THE NEW YORK TIMES

By MONICA DAVEY

MAY 12, 2015

Puerto Rico is trying to revive a law allowing its public agencies and utilities to restructure their mounting debt as Detroit and other U.S. cities have done.

Creditors won the first fight in the case by persuading a federal judge in San Juan to throw out bankruptcy protections similar to those alloted municipal entities in the 50 U.S. states.

Puerto Rico on Wednesday is asking the U.S. Court of Appeals in Boston to reverse that ruling as the commonwealth struggles with $73 billion in debt.

By blocking enforcement of the restructuring law, the lower court relegated Puerto Rico “to an anomalous legislative no man’s land,” lawyers for Governor Alejandro Garcia Padilla and Secretary of Justice Cesar R. Miranda Rodriguez said in a court filing. “If Congress had intended to leave utilities, and the people they serve, at the mercy of their creditors, it surely could and would have so indicated.”

Franklin Resources Inc. and OppenheimerFunds Inc. investment funds and BlueMountain Capital Management LLC won a ruling in February from the judge in San Juan that the local restructuring law was in “irreconcilable conflict” with federal statutes. The firms, which at one time held about $2 billion in bonds issued by the Puerto Rico Electric Power Authority, alleged that the new law might force them to accept unfavorable restructuring terms if the heavily indebted utility sought to use it.

Congressional Intent

The dispute springs from the island’s status as a U.S. territory dependent on federal lawmakers to grant it benefits provided states. Congress intended to exclude Puerto Rico from Chapter 9 bankruptcy protections, the investment funds argue.

Commonwealth officials “argue for a topsy-turvy world, where Congress’ expressed preemption of state-enacted municipal bankruptcy laws becomes an option for states to enact such laws,” lawyers for some of the investment funds said in court filings.

The island’s agencies may seek protection under those provisions “only if the legislative body that exercises ultimate control over them — Congress — determines to so authorize,” lawyers for the funds said.

After years of borrowing to balance budgets, Puerto Rico and its agencies have racked up $73 billion of debt, more than any U.S. state except California and New York. Because most of the debt is tax-exempt nationwide, it’s held by mutual funds and individual investors.

Creditor Negotiations

The island has struggled to grow since 2006 and is losing population, spurring speculation it will fail to repay the obligations. Puerto Rico’s power utility has been negotiating with creditors and may ask them to take a loss, which would be the biggest restructuring ever in the municipal-bond market.

The commonwealth’s debt has been trading at distressed levels since August 2013. Prices on Puerto Rico’s newest general obligations touched the weakest yet after the governor’s tax overhaul proposal was rejected by lawmakers.

Bonds maturing in July 2035 traded May 1 at an average price of 77.57 cents on the dollar, the lowest since they were issued in March 2014, according to data compiled by Bloomberg. The average yield on the tax-exempt securities was 10.74 percent.

The Puerto Rico Public Corporations Debt Enforcement and Recovery Act was passed under threat of “fiscal emergency” last year, the bondholders alleged. Investors called the law a “harsher copy” of federal bankruptcy provisions that allow financially distressed municipal entities to seek protection from creditors while negotiating changes to debt terms.

The island’s representative in Congress, Pedro Pierluisi, has been advocating for a bill to amend the bankruptcy code to include Puerto Rico. The measure, which was a subject of a House Judiciary Committee subcommittee hearing this year, is supported by most of the island’s creditors, Pierluisi said in a statement in February.

The case is Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, 15-1218, U.S. Court of Appeals for the First Circuit (Boston).

Bloomberg

by Christie Smythe

May 6, 2015

Puerto Rico’s troubled electric utility on Wednesday asked a U.S. appeals court for an alternative to restructure some $9 billion in debt, saying it would otherwise be at the mercy of U.S. bond funds.

The Puerto Rico Electric Power Authority (PREPA) is seeking to reverse a federal judge’s decision in February that blocked the utility’s bid to restructure its debt under court supervision, much like in a bankruptcy case. The legal battle moved on Wednesday to Boston where lawyers for both sides argued for more than an hour before the U.S. Court of Appeals for the First Circuit.

The Puerto Rico Public Corporation Debt Enforcement and Recovery Act, passed last year, was supposed to give PREPA some breathing room as it slipped into financial crisis. But OppenheimerFunds, a unit of insurer MassMutual Financial Group and Franklin Templeton, immediately sued the utility and argued that the recovery act violates the U.S. Constitution.

The value of PREPA’s long-dated bonds dropped about 15 percent as investors feared the Recovery Act would prevent them for getting full payment of principal and interest. Municipal bond funds run by OppenheimerFunds and Franklin Templeton were hit particularly hard, as they were among the largest investors in the PREPA debt.

But as PREPA lawyer Lewis Liman, of Cleary Gottlieb Steen & Hamilton LLP in New York, put it to the appeals court, the absence of restructuring alternatives is “a euphemism for a stick up, a euphemism for pay me or else.”

PREPA is largely the only source of electricity for Puerto Rico, which is battling a dwindling population and the exodus of its businesses. PREPA’s electric rates, meanwhile, are about two times higher than what mainland U.S. utilities charge, leaving PREPA no room to boost revenue.

“There’s just not a pot of money there to raise rates,” Liman said.

Lawyers representing the interests of the U.S. funds and the insurance companies that back municipal bonds argued that Puerto Rico’s recovery act would undercut the rights of bondholders. Matthew McGill, a lawyer for BlueMountain Capital Management, said Congress passed Section 903(1) of the Bankruptcy Code to prevent states and territories such as Puerto Rico from passing their own bankruptcy laws.

“Congress’ intention was not to give them carte blanche,” McGill told the court. Uniformity, lawyers for investors argue, is essential for the smooth operation of the $3.7 trillion municipal bond market.

Martin Bienenstock, a lawyer for the Government Development Bank for Puerto Rico, said that Congress has affirmed Puerto Rico’s constitution, which allows it to use police powers in a time of crisis.

Bienenstock said those police powers can be used to deal with an economic crisis, too.

The appeals court did not make a ruling in the case, giving no indication of when a decision might be made.

“It’s a very important case and we will work very hard on it,” Chief Judge Sandra Lynch said.

The First Circuit includes the Districts of Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island

BOSTON | BY TIM MCLAUGHLIN

(Reporting by Tim McLaughlin; Editing by Diane Craft)

May 6, 2015

Northwoods Police Chief Earl Heitzenroeder said Monday that he hadn’t heard a Washington-based police policy think tank was calling for the end of his department, but he didn’t think much of it.

The department, whose 21 officers patrol 0.71 square mile of north St. Louis County, is one of many police departments in the county that seem more focused on raising revenue through tickets than keeping the public safe, according to a report issued Monday by the Police Executive Research Forum.

As the Post-Dispatch reported Sunday, reforms suggested by the research group include a proposal to combine 18 police departments in north St. Louis County into three clusters. Under the proposal, the police departments in Northwoods and several of the town’s neighbors would become part of the much larger University City Police Department, which has 66 officers patrolling 6 square miles. Two other clusters would be part of St. Louis County police precincts.

“I know what they’re getting at, but I have no comment on that,” said Heitzenroeder. “Might be like me coming down and telling you how to run your newspaper.”

The report noted that about a third of the county’s municipalities have police departments that cover less than a square mile. The fragmentation makes it difficult to coordinate crime-fighting efforts regionwide, it said.

Several police and municipal officials lashed out at the report on Monday, saying they were upset that the research group did not contact them for comment.

“They haven’t come by here,” said Velda City Police Chief Dan Paulino. “I don’t know what surveys, what audits or what they’ve looked at. But they certainly have not come here. … I seriously question the research they used to come up with whatever they printed.”

The 79-page report recommended centralized training, data collection and communications for police across St. Louis and St. Louis County, and strengthening oversight of officers.

The group said the St. Louis area’s fragmented, revenue-oriented policing, uneven standards for law enforcement officers and the perception of racial bias undermine public safety and have contributed to high crime rates and costly services.

The report was commissioned by Better Together, a St. Louis-based nonprofit group studying possible benefits of regional cooperation, which has published a series of reports pointing to inefficiencies in public safety, public finance, public health and economic development.

Chuck Wexler, the research group’s executive director, said he was not surprised by the negative reaction.

He said the investigators who studied St. Louis-area policing had never seen anything like the dozens of tiny municipalities stacked on top of one another, using their police to raise revenue. The study found that police departments in a number of those cities were lacking.

“These cities were picked based upon high crime rates, high amounts of tickets written and a high number of officers, and they stopped people at a significant rate for minor things,” he said. “So it wasn’t like we picked them arbitrarily. We had criteria.

“Ultimately, these decisions are made by the people who live in these communities,” he added.

“The people who live there deserve the best type of policing and the best service.”

But Alan Baker, the city attorney for Hillsdale, questioned whether the best service would be turning his city’s policing over to University City.

He said about a decade ago, “we floated a proposal to St. Louis County about what it would cost and what we would receive if they took over the police department. … I could tell you at the time their bid was between 30 and 40 percent more than we were paying and it was for half the service. They were going to have one officer on a shift instead of a minimum of two.”

The study didn’t mention anything “about what U. City’s officers could do that our officers aren’t doing.”

Myrtle Spann, mayor of Beverly Hills, said she had not heard about the report calling for her city to join University City’s police department.

The policing policy group pointed to her city’s massive rate of arrests for nontraffic offenses, such as housing code violations: 1,088 violations per 1,000 residents. By comparison, St. Louis County police make just 21 such arrests per 1,000 people.

“This is something I believe has to be started by our citizens,” she said. “They’re the ones who started our police force.”

St. Louis Post-Dispatch

May 04, 2015 11:15 pm • By Jeremy Kohler

With tax revenue from the oil industry falling short of projections, the deficit has swelled to $1.6 billion for the fiscal year that starts July 1. Moody’s Investors Service and Standard & Poor’s say they may lower Louisiana’s credit rating if officials don’t come up with sustainable budget solutions.

Louisiana paid the price when it sold $335 million of general obligations Wednesday, its first deal this year. Borrowing costs jumped compared with an issue in November, with the yield spread more than doubling on some maturities.

“They have to make significant cuts across the board — it’s almost a foregone conclusion they’ll be downgraded,” said Tom Metzold, co-director of municipal investments in Boston at Eaton Vance Management, which oversees $25 billion in local debt.

Lawmakers are grappling with the state’s finances in part as the price of crude oil, which along with natural gas generates 13 percent of its revenue, is down about 40 percent from mid-2014. The mounting fiscal strains threaten to pinch funding for programs such as higher education, contributing to a buyers’ revolt last month against a bond sale from the state’s flagship university.

School Deal

Investors asked for extra compensation to own the state’s debt in Wednesday’s offering. Obligations maturing in May 2025 priced at a yield of 2.5 percent, or about 0.3 percentage point above benchmark munis, according to data compiled by Bloomberg. The gap swelled from 0.03 percentage point when the state issued 10-year securities in November.

Louisiana State University scrapped its $114 million bond offering after officials warned that exigency, which would allow it to restructure and fire tenured faculty, may be a worst-case scenario for the school.

Treasurer John Neely Kennedy had warned that the canceled deal might push up the state’s borrowing costs.
“When a state mismanages its money, it can’t expect people to give it more until it proves it changed its ways,” Kennedy said in an interview before the bond sale.

Waiting Game

Both Moody’s and S&P affirmed Louisiana at the third-highest rank last month. The companies dropped their outlooks to negative in February after sinking crude prices led the state to cuts its revenue forecast.

“They’re struggling to figure out how to balance their budget and we’re waiting to see” what happens, Marcia Van Wagner, a Moody’s analyst in New York, said in an interview.

As part of the fiscal fix, Governor Bobby Jindal, a potential Republican presidential candidate, is proposing cutting more than $200 million from higher education and lowering corporate tax credits by over $500 million.

“When there are budgetary challenges, we manage them in a timely way,” Kristy Nichols, Louisiana’s commissioner of administration, said in an interview from Baton Rouge before the bond issue. “There’s confidence that we’ll move through the legislative process in the next month and a half and walk away with a balanced budget that addresses some structural issues by identifying recurring savings and recurring revenue.”

Proceeds from Wednesday’s deal will fund hospital and sports-arena projects in New Orleans, nicknamed “The Big Easy,” Nichols said.

The yield spreads in recent trading aren’t enough for some investors.

Steve Hlavin, who runs a Louisiana fund for Nuveen Asset Management in Chicago, said he hasn’t bought state general obligations since 2010 and probably won’t dive back in Wednesday.

“For a state that’s exhibited chronic structural budget imbalance, you aren’t being compensated with a lot of credit spread,” Hlavin said. “They’re being forced to come to terms with the fact that one-shot solutions are no longer available.”

Bloomberg

by Brian Chappatta

May 5, 2015

An authority overseen by the city and Alameda County last month refinanced debt for the home of the National Basketball Association’s Golden State Warriors that won’t be repaid until 2026, even though the team plans to move in three years. Meanwhile, as the National Football League’s Raiders and Major League Baseball’s Athletics negotiate with Oakland for new facilities, taxpayers are on the hook for $99 million of bonds for the coliseum those two teams share, bond records show.

The borrowing burden reflects the downside of competition among municipalities to keep teams from leaving. States and cities have sold more than $9 billion of debt for professional sports facilities since the 1980s, including some no longer in use, according to data compiled by Bloomberg.

“Stadiums’ economic lives are often shorter than the lives of their debt,” said Randall Gerardes, vice president for municipal research at Wells Fargo Securities LLC in New York. “A building may stand for many years after the economic factors that once made it attractive to the owner no longer exist.”

Unique Arrangement

When the Oakland-Alameda County Coliseum Authority sold about $80 million of taxable bonds last month to refinance the basketball-arena debt, 10-year securities yielded 3.64 percent, or about 1.8 percentage points above similar-maturity Treasuries.

Fitch Ratings, which ranks the debt AA-, said the risk to investors is low even if the Warriors follow through on a move to San Francisco. Officials will likely continue to pay for the arena’s bonds, concerned that they would be punished by higher borrowing costs if they defaulted, Fitch said.

Oakland and surrounding Alameda County pay about $20 million a year combined for their two stadiums, including debt payments.

The A’s and the Raiders are pushing for a replacement for the half-century-old O.co Coliseum, the only venue in the U.S. that’s shared by a big-league football and baseball team.

Debt Weary

Mayor Libby Schaaf said in an interview that the city is looking for a way to fund any new venues privately and avoid taking on more debt.

“We will not be financing new stadiums,” Schaaf said.

Susan Muranishi, the Alameda County administrator, couldn’t be reached to comment on the bonds.

The A’s and Raiders want new stadiums to replace a coliseum that’s considered obsolete: sewage has leaked into the clubhouse. The Raiders played their first game there in 1966, followed by the A’s in 1968.
“We are still working on a location in the Bay Area that would work for both us and the majority of our fans,” Ken Pries, a spokesman for the A’s, said in an e-mail.

The competition for teams has intensified amid efforts to lure the NFL to the Los Angeles area. The Raiders, the St. Louis Rams and the San Diego Chargers have all explored moving there.

Last month, the City Council in Carson, California, outside Los Angeles, approved a $1.65 billion stadium project that may be a rival home for the Raiders. Will Kiss, a Raiders spokesman, didn’t respond to requests for comment on the team’s plans.

There are precedents for municipalities being stuck with debt for empty venues. King County, Washington, is set to finally pay off bonds for the Kingdome this year, 15 years after the demolition of the former home of the NFL’s Seahawks.

“Anytime you have the volatility of sports you have considerable risk,” said Alan Schankel, a managing director of fixed-income strategy at Janney Capital Markets in Philadelphia. “There’s a lot of dynamics going on, including sports-team economics and media-market economics, that don’t always jibe with the interests of a municipality.”

Bloomberg

by Darrell Preston

May 4, 2015

Fitch Ratings-New York-08 May 2015: The California State Water Resources Control Board’s new water conservation mandate will reduce revenues available to pay bondholders at many agencies and could create an unintended disincentive to invest in necessary local water supply and storage projects, Fitch Ratings says.

The rules adopted this week dictate cuts in customer usage regardless of local supply conditions. The impact will be greatest in Southern California communities that have borrowed billions of dollars to invest in water supply reliability and now must meet some of the highest reductions. The cutback levels and short compliance timeframe set by the board suggest many utilities will likely fail to meet the targets.

The state water board rules require all retail California water utilities to reduce usage from 2013 levels by 8% to 36% between June 2015 and February 2016. Utilities are acting quickly to curtail their retail usage through water conservation ordinances, mandatory use reductions to retail customers and price signals. However, it may be very difficult for utilities required to meet the higher percentage reductions to garner significant water consumption behavior changes in this short time frame. California’s Proposition 218 limits the speed at which new rates can be implemented, including rates that incentivize consumers to conserve. Initial compliance will be measured beginning in June 2015, and the state water board has indicated its willingness to work with utilities that are exhibiting a good faith effort to meet the requirements.

We expect the financial impact will occur primarily in fiscal 2016 and to vary across the 49 Fitch-rated retail California water utilities. Utilities that have decoupled revenues from water sales through a number of mechanisms will likely sustain their credit quality during this emergency compliance order. Tools that protect revenues from declines in consumption include drought rates, fixed drought surcharges, higher fixed charges in the overall rate structure, rate stabilization reserves and imported water expenditures that decline with lower usage. However, the speed of the cuts will force some to spend down their reserves or divert capital funds, possibly reducing credit quality in the short run. Fitch believes most utilities will adjust rates appropriately, avoiding widespread credit rating downgrades.

The state water board’s decision to impose conservation from the top down ignores various local supply conditions and brings local control regarding water supply planning into question. Fitch’s rating criteria assesses the quality of a utility’s long-term supply planning and acquisition of supplies, storage and backup arrangements to manage through cyclical hydrological conditions, including severe drought years. To the extent the emergency rules begin to shape long-term water supply planning and investments in the state, the impact could unintentionally delay long-term water supply investments. The board has indicated that the temporary rules are designed to preserve water supply into next year during these extraordinary emergency conditions and should not impair investment decisions during normal times.

Contact:

Douglas Scott
Managing Director
U.S. Public Finance
+1 512 215-3725
111 Congress Avenue
Suite 2010
Austin, Texas

Kathryn Masterson
Senior Director
U.S. Public Finance
+1 512 215-3730

Andrew Ward
Director
U.S. Public Finance
+1 415 732-5617
650 California Street, 4th Floor
San Francisco, CA

Shannon Groff
Director
U.S. Public Finance
+1 415 732-5628

Rob Rowan
Senior Director
Fitch Wire
+1 212 908-9159
33 Whitehall Street
New York, NY

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

Additional information is available on www.fitchratings.com.

Fitch Ratings-New York-07 May 2015: Legislation introduced in multiple states this year could, if advanced, have a material impact on the credit quality of two large public power utilities. Both Austin Energy (AA-/Stable) and Florida Municipal Power Agency (FMPA; [A+/Stable]) were the intended focus of legislation that would subject each of the utilities to extraordinary oversight by each of their state’s respective public service commissions. While Fitch does not anticipate either measure gaining traction, the proposed rules represent a credit concern as enactment would likely lead to negative rating action.

The ability of public power utilities to operate with limited regulatory oversight, particularly as it relates to ratemaking and the preservation of their exclusive service areas remains a hallmark of the sector and a key contributor to credit quality. Although Fitch does not believe that these initiatives represent a broader trend toward the regulation of public power systems, it will continue to monitor legislative developments that could have an impact on the credit quality of rated utilities.

Legislation currently pending in the Texas State legislature (Senate Bill 1945) would allow Austin Energy’s customers with load requirements above a certain threshold to effectively appeal their electric rates to the state public utilities commission (PUC). Depending on the PUC’s ruling and Austin Energy’s response to such a ruling, customers would potentially be permitted to purchase power from another provider in the deregulated market and pay Austin Energy solely to use its transmission and distribution infrastructure. The statutory change would limit Austin Energy’s ratemaking autonomy and challenge its monopolistic business nature.

A similar statute (House Bill 773) was proposed in Florida earlier this year, aimed at bringing FMPA under the regulatory authority of the state Public Service Commission. Passage of the bill would have stripped the joint action agency of its independent authority to establish electric rates to its wholesale customers. While the bill did not advance during the most recent legislative session, introduction of the legislation bill remains notable.

Contact:

Christopher Hessenthaler
Senior Director
U.S. Public Finance
+1 212 908-0773
33 Whitehall Street
New York, NY

Dennis Pidherny
Managing Director
U.S. Public Finance
+1 212 908-0738

Rob Rowan
Senior Director
Fitch Wire
+1 212 908-9159

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

Additional information is available on www.fitchratings.com.

Fitch Ratings-New York-06 May 2015: Last week’s Oregon Supreme Court decision to restore a 2% cost-of-living-adjustment (COLA) to approximately 120,000 state retirees and employees who were members prior to the 2013 law change is expected to lower the state’s Public Employees Retirement System (PERS) funded ratio and raise ongoing required contributions, according to Fitch. The state estimates its portion of PERS’s liability to be funded at 97% before the court’s decision. The court ruled that it was legal to reduce COLAs for services accrued after the 2013 reforms as they were not contractually guaranteed. This decision contrasts with other rulings across the country where COLA changes have been upheld by courts under the principle that COLAs differ from core retirement benefits.

In our view, Oregon will be able to manage the immediate impact of the court’s restoration of the COLA as it has reserve funds available for retroactive payments and other sources of flexibility. Before the Supreme Court’s decision, PERS had projected plan savings over time of approximately $5 billion from this and other pension reform efforts; a share of these savings is expected to remain in place as the court upheld other parts of the legislation. Funded ratios have also been bolstered in recent years by strong investment results and Fitch expects the state’s portion to remain well-funded, albeit at a lower level, than it was before the court decision.

The total impact of retroactive payments due to the employees and retirees from this ruling will be calculated over the next few weeks. The state has two potential sources for funding these payments. There are approximately $600 million in PERS’s contingency funds which could offset retroactive payments. And, the state could redirect a portion of a likely personal income tax credit from the current biennium. The state’s most recent quarterly report (March 2015) forecast personal income tax as growing by 14.8% in the current biennium with general fund revenues exceeding the kicker threshold by $59 million. This would lead to an income tax credit to be issued to taxpayers in the 2016 tax year of approximately $349 million.

PERS contribution rates for the next biennium (July 1, 2015 through June 30, 2017) have already been set by the pension system, but could be adjusted, subject to applicable rate collars. Any adjustment would have a financial impact on the budget currently being debated in the legislature. Contribution rates for subsequent biennia will include the required COLAs.

Contact:

Marcy Block
Senior Director
U.S. Public Finance
+1 212 908-0239
33 Whitehall Street
New York, NY

Douglas Offerman
Senior Director
U.S. Public Finance
+1 212 908-0889

Rob Rowan
Senior Director
Fitch Wire
+1 212 908-9159

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

Additional information is available on www.fitchratings.com.

New York, May 01, 2015 — Chicago’s (Baa2 negative) pension plans face an uncertain future. Statutes that govern the city’s pension funding requirements have come under legal and political fire, particularly during the last year, as pensioners, politicians, taxpayers and investors have questioned the laws’ constitutionality and affordability, Moody’s Investors Service says in a new report.

Regardless of the ultimate answers, one outcome is certain: Chicago’s unfunded pension liabilities and ongoing pension costs will grow significantly, forcing city officials to make difficult decisions for years to come.

If current laws stand, Chicago’s annual pension contributions are projected to increase by 135% in 2016; by an average annual rate of 8% in 2017-21; and by an average annual rate of 3% in 2022-26.

The 2016 increase alone equals a significant 15% of the city’s 2013 operating revenue, Moody’s says in “Chicago’s Pension Forecast — Tough Choices Now or Tougher Choices Later.”

“Although the growing contributions will place enormous strain on the city’s operating budget, the initial payments will still be insufficient to cover the annual interest accruing on the plans’ massive accumulated unfunded liabilities. By 2027, however, unfunded liabilities should begin to decline and annual contribution increases should begin to moderate,” says Moody’s Vice President and Senior Analyst Rachel Cortez.

If current laws do not stand, Chicago’s annual pension contributions will remain well below the plans’ actuarially determined funding needs.

The city’s impending contribution increases to the Municipal and Laborer plans will be reduced if the courts find Public Act 98-0641 unconstitutional. The city’s impending contribution increases to the Police and Fire plans will be reduced if the state amends Public Act 96-1495 per the city’s request. Without the increased payments that current statutes require of the city, the plans will continue to liquidate assets to pay benefits. As the plans approach insolvency, risks to the city’s solvency will grow.

The report is available to Moody’s subscribers here.

Fitch Ratings-New York-28 April 2015: A court ruling reinforcing the requirement that California water utilities link their tiered fees to the cost of providing water may reduce revenue and increase compliance costs slightly for a few but will likely have limited credit impact, Fitch Ratings says.

Nearly all Fitch-rated water utilities in the state use tiered water rate pricing. Those that have sufficiently justified their tiered water pricing based on direct cost recovery of capital, conservation programs, higher treatment, and purchased water costs will see limited impacts. However, some may be required to re-examine their rate structures, undergo more rigorous analysis of cost of service, and provide greater rate transparency going forward.

Further, Fitch expects utilities to raise rates to account for the higher cost of providing services and reduced revenues, if they have not already done so, in response to the state’s recently announced mandatory 25% reduction in water usage.

California’s 4th District Court of Appeal ruled in the case of the city of San Juan Capistrano last week that tiered rates are allowable but must be tied to the cost of service, as required by Proposition 218, passed in 1996.

If a utility’s rate structure does not comply with the requirements of Proposition 218 and reiterated by the court ruling, a reduction in revenues is possible. However, that reduction would likely be managed in the following fiscal year through reasonable budget modification as well as a change in rate structure and associated public notice and hearing (a legal requirement for local utilities in the state proposing changes to fees).

California water utilities developed a tiered-fee structure because they use a combination of groundwater, surface water, imported water, recycled water, stored water reserve agreements and brackish groundwater. The costs of these supplies vary widely. Desalination, slated to become a more significant component of the state’s water supply mix, will be among the most expensive sources. Tiered rate structures can be used to allocate higher cost supplies to higher usage customers, whose above-average demand has resulted in the need for adding costlier supplies.

Contact:

Kathryn Masterson
Senior Director
U.S. Public Finance
+1 512 215-3730

Shannon Groff
Director
U.S. Public Finance
+1 415 732-5628

Rob Rowan
Senior Director
Fitch Wire
+1 212 908-9159

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

Additional information is available on www.fitchratings.com.

(Reuters) – Lawyer Kevyn Orr will leave Atlantic City’s emergency management team, finalizing his work on the struggling New Jersey gambling hub by the end of the month, Governor Chris Christie’s office said on Monday.

Christie appointed the team, led by Kevin Lavin with Orr as an adviser, in January. Orr’s previous role as the man who crafted Detroit’s historic bankruptcy sparked concern in the $3.7 trillion U.S. municipal bond market that a bankruptcy or bond restructuring could be likely for Atlantic City.

The appointment by Christie, a possible 2016 Republican presidential candidate, also signaled to Wall Street credit rating agencies that New Jersey’s historically strong support of its struggling local governments could be eroding.

Moody’s Investors Service put seven distressed cities on notice of a possible ratings cut because of their reliance on state aid in a less supportive environment when the state’s budget itself is strained.

One of those cities, Trenton, was downgraded a week ago and forced to cancel a bond deal.

Last week, Jones Day announced that Orr, a corporate bankruptcy attorney, would return to the law firm on May 1 to serve as the partner in charge of its Washington office. Orr left Jones Day in March 2013 when he was tapped by Michigan Governor Rick Snyder to serve as Detroit’s emergency manager.

“From the start, it was made clear that Kevyn Orr would lend his expertise as a short-term consultant” to Lavin, Christie spokesman Brian Murray said in a statement.

Lavin and his team, which includes Ernst & Young consultants who worked closely with Orr in Detroit, plan to release their next report in June, Murray said.

Casinos, labor unions, bondholders and other creditors will be negotiating through a mediator to keep Atlantic City afloat.

State lawmakers are still pushing a plan to help stabilize the city’s free-falling property tax base, which has dwindled rapidly as casinos suffered from increased competition for gambling dollars in neighboring states.

Reuters requested Orr’s Atlantic City contract with the state, but was told in March that the Division of Local Government Services, which employs Lavin, had no such document.

“As soon as an executed contract is available, it will be made public and a copy will be provided to you,” the state said in its response. No contract was ever provided to Reuters.

By REUTERS

APRIL 27, 2015, 2:34 P.M. E.D.T.

(Reporting by Hilary Russ; Editing by Alan Crosby)

CHICAGO — Chicago’s clean up of its debt practices, including ending interest-rate swaps and phasing out bond restructurings, will cost more than $275 million, the city’s top financial officials said on Wednesday.

Mayor Rahm Emanuel unveiled several steps earlier on Wednesday that he said would restore “fiscal sanity” to Chicago’s sagging budget.

Lois Scott, Chicago’s chief financial officer, said the benefits from converting about $800 million of variable-rate general obligation bonds into fixed-rate bonds and the elimination of related interest-rate swaps should offset the approximately $200 million the city will have to pay banks to end the swaps, due largely to low interest rates.

But that move will lead to more debt as the city would raise the $200 million initially through the sale of commercial paper that would eventually be replaced with long-term bonds.

Chicago is already paying a hefty interest-rate penalty in the U.S. municipal bond market as it struggles with a $20 billion unfunded pension liability and a looming $550 million increase in pension contributions that needs to be made from a budget with a $300 million structural deficit.

“We have to get back to the basics – long-term fixed rate bonds, fund this year’s costs with this year’s revenues,” Scott said.

A rating downgrade of Chicago to two notches above the junk level by Moody’s Investors Service in February triggered the termination of four swaps and put the city closer to triggering another 11.

The mayor also called for phasing out over four years the so-called scoop and toss practice of restructuring the city’s debt service on bonds to push payments into future years and free up money for operations.

Chicago Budget Director Alexandra Holt said that plan would impact the city’s next operating budget by $75 million.

“What that looks like and how we pay for it, don’t know yet,” she said, adding that the mayor will first look to savings and reforms before turning to taxpayers.

The budget for the fiscal year beginning Jan. 1 would also have to accommodate an increasing share of legal settlements and judgments that have been funded in part with bond proceeds, under the mayor’s reforms.

Chicago’s $8.9 billion all-funds budget, which includes a $3.54 billion operating fund, is already buckling under escalating pension costs at the same time Illinois Governor Bruce Rauner has proposed cutting about $135 million in funding for the state’s biggest city.

By REUTERS

APRIL 29, 2015, 7:06 P.M. E.D.T.

(Reporting By Karen Pierog; Editing by Cynthia Osterman)

The Puerto Rico Electric Power Authority said that the forbearing bondholders’ plan to revamp its business and avoid default on more than $8 billion of debt was overly optimistic on costs.

Over the course of nine years the forbearing bondholder plan is at least $3.1 billion or 7.75% overly optimistic on costs, PREPA said in a public statement late Thursday.

“PREPA continues to work on a business plan that will provide a roadmap for a complete operational and financial transformation over the next several years,” chief restructuring officer Lisa Donahue said in the written statement. “We will continue to work with [the forbearing bondholders] and all of PREPA’s stakeholders to create a consensual plan that provides the best outcome.”

PREPA has openly been in financial distress since the summer of 2014, when a group of bondholders agreed to forbear as the authority worked to transform itself. PREPA has about $8.3 billion in bond debt outstanding.

On Thursday PREPA responded to a plan presented at the end of March by the Ad Hoc Group of PREPA Bondholders (the forbearing bondholders). The plan included $2 billion in capital investments to modernize PREPA’s plants, comply with environmental regulations and help the authority to meet debt obligations.

Donahue had expressed doubts about some of the plan’s assumptions on April 1. The authority’s formal response came Thursday.

PREPA’s said the Ad Hoc Group’s assumptions were incorrect or unrealistic in the following ways:

• Accounts payable terms. The proposal assumes unrealistic credit terms that artificially increase the authority’s cash flow;
• Aguirre Offshore Gasport Project. The plan’s assumptions for this capital project are not possible under existing permits. Its assumptions about timing of completion and flexibility of permits are not achievable and thus allow the bondholders’ plan to produce higher and more immediate savings than possible;
• Environmental compliance. The plan relies on fuel blending, which will not work in the authority’s plants, to achieve this compliance. This leads to artificially lower authority costs;
• Securitization financing. The proposal has financing assumptions that do not reflect what should be expected and artificially decreases PREPA’s costs;
• Renewables. The plan relies on a rapid increase in the use of renewable energy sources that is neither technically nor commercially realistic;
• Fuel costs. The plan assumes that future fuel prices will be lower than leading forecasts, thereby lowering the authority’s projected costs;
• Electrical use forecast. The plan predicts higher use, which is inconsistent with recent trends. This assumption allows the plan to include higher than realistic revenue levels.

PREPA said it doesn’t yet have exact projections of fuel costs or electrical use but is sure that if these were also factored in, the actual costs will add to the $3.1 billion extra that will need to be covered.

“We appreciate PREPA and its advisors providing detailed feedback in response to the Ad Hoc Group’s revitalization plan,” said Stephen Spencer of Houlihan Lokey, the Ad Hoc Group’s financial advisor. “The Ad Hoc Group looks forward to working with PREPA and its professionals to refine a long-term plan for PREPA that is in the best interest of all stakeholders. However, while we have had limited time to review PREPA’s critiques, we believe that a number of the criticisms are based on fundamentally flawed analysis or a misunderstanding of our proposal.”

PREPA said in its presentation to the bondholders that it did not expect the Aguirre Offshore Gas Port to start operating until July 1, 2017. In December 2013 PREPA chief executive officer Juan Alicea Flores told The Bond Buyer he expected this port to be operating in the summer of 2015.

The forbearing bondholders as well as other forbearing creditors have agreed to continue their forbearance until at least the end of April 30. Donahue has said she hopes this forbearance agreement will be extended into the summer.

THE BOND BUYER

BY ROBERT SLAVIN

APR 24, 2015 1:19pm ET

State Treasurer John Chiang today announced the successful sale of $1.09 billion in State general obligation bonds, which included the refinancing of approximately $1 billion in previously-issued bond debt.

“This successful sale is a strong indicator that investors are bullish about the Golden State. From approval of a rainy day fund to aggressively paying down debt accumulated during the Great Recession, California has made significant strides to put its fiscal house back in order and Wall Street has taken notice,” said Chiang. “Importantly, my office was also able to save taxpayers more than $180 million in debt service payments by refinancing more than $1 billion in previously-issued, higher interest rate borrowings.”

Since he took office earlier this year, he has carried out six different re-financings that will together save taxpayers more than $1.79 billion over the life of the bonds.

Some key facts from the sale:

• Final Size: $1.09 billion, the largest competitive sale in the U.S. markets in 2015.
• Final yields ranged from a low of 0.10% for a 2015 maturity to a high of 3.5% for a 2035 maturity.
• Today’s offering included $105 million in taxable bonds for infrastructure projects, providing much needed funds to transportation, education, and children’s hospitals.
• Notably, California enjoyed pricing that outperformed its credit rating. The $105 million portion of the sale was sold at a yield of just one basis point (i.e. 0.01%) above comparable taxable AAA municipal bonds. California’s current general obligation bond rating is Aa3 by Moody’s Investors Service, A+ by Standard & Poor’s, and A+ by Fitch Ratings.

The next State general obligation bond sale is expected to occur in the summer or fall of 2015.

The State Treasurer has broad responsibilities and authority in the areas of public investment and finance. In particular, he oversees the issuance of State debt and is responsible for crafting best practices for the sale of debt and the investment of public funds for California’s more than 4,000 local bond issuers, including the State, school districts, cities, counties, and special districts.

For more news, please follow the Treasurer on Twitter at @CalTreasurer, and on Facebook at California State Treasurer’s Office.

This article was released by the Office of the State Treasurer.

(Reuters) – New Jersey’s capital city, Trenton, has canceled a bond refunding sale because a credit downgrade on Monday left it unable to save enough money for the deal to meet legal standards, Trenton’s finance director told Reuters.

The scrapped deal is one of the first signs of local financial fallout from broader concerns about New Jersey’s public pension problem and Governor Chris Christie’s appointment of an emergency manager for the struggling gambling hub Atlantic City.

Cash-strapped Trenton had planned to sell about $17.8 million of general improvement and sewer utility refunding bonds on April 28. As a result of the ratings cut by Moody’s Investors Service, however, the city would have to pay a higher interest rate and therefore would not have met the minimum 3 percent savings required by state law, Trenton Finance Director Ronald Zilinski said.

“The state’s getting hammered, hence we’re getting hammered,” Zilinski said.

Christie, a likely 2016 Republican presidential candidate, appointed an emergency manager in January to run Atlantic City. The appointment signaled to investors in the $3.7 trillion U.S. municipal bond market that the state’s historically strong support of its struggling cities could be eroding.

Christie also slashed $1.6 billion from the state’s 2015 pension contribution, which New Jersey could now be forced to pay anyway with just over two moths left in the fiscal year. That would put further strain on the already tight state budget and could prompt cuts in state aid to Trenton and other struggling cities.

In March, Moody’s warned that it could downgrade seven distressed New Jersey cities, including Trenton, Newark and Paterson.

Moody’s cut its rating on the state a week ago, New Jersey’s ninth credit downgrade by Wall Street since Christie took office in 2010.

Debt from six of the seven cities subject to Moody’s review was priced weaker on Thursday than at the start of the year, according to a Reuters analysis of price evaluation data provided by Markit.

One of those cities, Newark, saw the price of one of its bonds drop by $1.74 since Jan. 2, but it’s still above par at $104.57, according to Markit.

Overall, though, the seven cities’ bonds have mostly charted the same path as benchmark 10-year muni yields, according to Municipal Market Data, a unit of Thomson Reuters.

Cities are also getting a lift from yield-hungry investors, who are paying higher prices even for riskier credits amid a shortage of available new muni bonds.

“Tax-free bonds are in huge demand, so people are willing to pay a little more to get yield than in the past,” said Ben Eiler, a partner at Georgia-based muni bond broker dealer First Southern Securities.

That could be good news for Trenton. It is still planning to sell $10.6 million of new bonds on May 28, though it will now have to pay more to insure them, Zilinski said. The city is also planning a bond anticipation note sale on June 3.

NEW YORK | BY HILARY RUSS

Apr 23, 2015

(Reporting by Hilary Russ; Editing by David Gregorio)

(Reuters) – Sales of U.S. municipal bonds and notes next week will total about $4.9 billion, according to Thomson Reuters estimates, a decrease from the more robust and much-heralded issuance levels so far this year.

No deal next week is expected to top the $275.4 million offering from the Dormitory Authority of the State of New York, a late entry on Thursday to the negotiated calendar.

The authority is selling State University of New York dormitory facilities revenue bonds on Thursday through lead manager Siebert Brandford. The bonds will refund outstanding lease revenue bonds the authority issued from 2003 through 2007, according to the preliminary official statement.

Separately, the authority plans to price $68.9 million of Orange Regional Medical Center Obligated Group Revenue bonds, rated Ba1 by Moody’s Investors Service, through lead manager JP Morgan.

Next week’s low level of issuance is a change from the first quarter, when primary muni sales spiked upward, driven mostly by refundings. By comparison, this week an estimated $9 billion of muni bond deals priced.

The low-interest rate environment has been favorable for refundings, with a “subdued transition upward across the curve” for the rest of the year expected, CreditSights analysts Isaac Codrey and Howard Sitzer said in a commentary on Friday.

With that interest rate outlook, “we would continue to expect strong refunding volumes over the remaining course of the year, just not at the remarkable levels that were realized” in the first quarter of 2015, they wrote.

NEW YORK, APRIL 24

(Reporting by Hilary Russ; Editing by Jonathan Oatis)

In light of the fourth consecutive year of drought conditions in California, concerns about the reliability of the state’s water supply have spiked, as have worries about the effects of Governor Jerry Brown’s recent statewide water conservation mandate. Standard & Poor’s Ratings Services seeks to explain the effects of the persistent drought on California water utilities’ financial performance and credit quality.

Frequently Asked Questions

What is the credit impact of the drought on California water utilities?

The financial and credit impact of the drought and required conservation levels vary across water utilities. Rate-setting flexibility, sources of supply, supply costs, and management’s actions — either proactive or reactive — all factor into the degree of credit impact, and thus we are analyzing the impact of the drought case by case. Many of the California water utilities we rate entered this drought period with good to strong debt service coverage and solid liquidity positions, which can somewhat mitigate the impact of lower water sales volumes for a time. Also, many water utilities plan in advance for droughts from both an operational perspective and a financial perspective. We are closely monitoring how our rated water utilities respond to Governor Brown’s executive order, including how they plan to adjust rates given the required conservation. Complicating the matter is the ruling by the 4th District Court of Appeal on April 20, 2015, in the case of Capistrano Taxpayers Association, Inc. v. City of San Juan Capistrano(1) that struck down certain tiered-rate structures, which are a common tool to encourage water conservation. If the regulatory framework the state adopts on May 5 or 6 differs significantly from the current proposal (which we describe below), then we will again comment on the potential for credit impacts.

Can you explain the executive order Governor Brown issued this month in response to the drought?

On April 1, 2015, California Governor Brown issued an executive order(2) mandating statewide water conservation. This is the first time in California’s history that water use restrictions have been mandated, and it represents a departure from prior requests for voluntary statewide water conservation. The governor issued the order following three consecutive years of drought and against a backdrop of historically low water supply: Snowpack in the Sierra Nevada Mountains — a critical source of water for the state during the spring and summer periods — was a mere 5% of the historical average(3) for April 1. The National Drought Mitigation Center estimates that about 67% of the state is experiencing either extreme or exceptional levels of drought(4), and virtually the entire state is experiencing some level of drought.

The objective of the order is to reduce statewide urban potable water usage by 25% through Feb. 28, 2016, but the order does not affect other water use categories, such as water used for agricultural production. If achieved, the State Water Resources Control Board (SWRCB) estimates that this level of water conservation would total about 1.5 million acre-feet(5), or roughly the volume of water currently held in Lake Oroville(6), one of the state’s largest reservoirs with a capacity of 3.5 million acre-feet.

How does the executive order affect California water utilities?

For urban water suppliers, the impact of the executive order varies primarily depending on 1) the service area’s per capita water usage and 2) and the level of water conservation already achieved during the past year. Although the executive order targets a 25% statewide reduction in water usage as compared to 2013, state officials do not expect to achieve the water savings through a uniform reduction in water usage across the state. Instead, the revised regulatory framework(7) — which SWRCB published on April 18 and is subject to board adoption on May 5 or 6(8) –contemplates nine conservation tiers ranging from 4% to 36% reductions, stepping up in 4% increments(9).

Each urban water supplier’s conservation standard is based on the service area’s residential per capita water use during July through September 2014, three summer months when water demand for outdoor irrigation is typically high. The conservation standard is lower for service areas with lower residential per capita usage and higher for service areas with higher residential per capita usage. Notably, the conservation standard is measured relative to water usage during a benchmark period from June 2013 through February 2014. Some urban water suppliers have already achieved the required conservation level or are nearly at the required level, and we don’t expect the modest additional conservation to significantly affect those suppliers’ operations or finances relative to their prior-year performance.

For example, of the 413 urban water suppliers subject to the executive order, San Francisco Public Utilities Commission (SFPUC) had the ninth-highest total water production during the benchmark period (20.4 billion gallons), but the service area had the second-lowest residential per capita water use during July to September 2014, at 45.4 billion gallons. Based on this residential per capita use, the assigned conservation standard is 8%; however, because SFPUC already achieved 8% water conservation in 2014 relative to the benchmark period, no additional conservation would be required to comply with the executive order. In contrast, Coachella Valley Water District (CVWD) had the seventh-highest total water production during the benchmark period (28.3 billion gallons), and the service area had the seventh-highest residential per capita water use during July to September 2014, at 475.1 billion gallons. Based on this residential per capita use, the assigned conservation standard is 36%. Given that CVWD achieved only 4% water conservation in 2014 relative to the benchmark period, significant additional conservation of 32% for 2015 is required to comply with the executive order.

The SWRCB plans to assess a water supplier’s compliance with the executive order by examining monthly reports that the suppliers will file. Enforcement actions for noncompliance may include informal enforcement, such as warning letters, or formal enforcement, such as cease and desist orders accompanied by administrative civil liabilities of up to $10,000 per day.

Agricultural water suppliers are not subject to the executive order; however, low river flows and low allocations from the two major water projects in the state have cut into their surface water supplies.

What impact does Standard & Poor’s expect the drought and the executive order to have on water utility revenues?

Although reduced volume of water sales seem likely to cause a corresponding reduction in operating revenues and net revenues, we understand that the financial performance of urban water suppliers also depends on other factors. For most retail water systems that have a volume-based component to their rate structure, reduced volume of water sales would indeed correspond to lower revenues (barring an increase in rates). However, the relationship between the percent reduction in the volume of water sales and the percent reduction in operating revenues is not necessarily one to one. User rates for most retail water systems have a fixed component, which lower sales volume would not affect.

Many rate structures also have tiered pricing, with higher water use leading to a higher per-unit rate. In these cases, the impact of lower water sales is more complex, with the loss of revenues determined in part by the water rate tiers and the amount of usage within each tier. Even further complicating the matter is the April 20 ruling on Capistrano Taxpayers Association, Inc. v. City of San Juan Capistrano. In that ruling, the 4th District Court of Appeal struck down certain tiered-rate structures; specifically, those for which the water utility has not demonstrated that the tiers closely correspond to the actual cost of providing service at a given level of usage. We understand that the case has been remanded for further proceedings related to another issue in the case. Water utilities could also offset the volume lost with increased rates, as we address below.

Can California water utilities increase rates to offset any decline in water sales volume?

In general, California water utilities have the ability to adjust rates to offset lower sales volume. However, to increase rates, they must meet the public hearing and protest requirements under Proposition 218. The requirements include a public notice and a public rate hearing at least 45 days after the notice. The rate increase can be prevented if a majority of the parcel owners within the utility’s service area protest at the public hearing or in writing. In our experience, it is rare for a rate increase to be outright prevented due to this provision although significant opposition from a vocal minority of the customer base may sway decision makers from the recommended course of action.

Some utilities already have the ability to increase rates in a drought because they have been through a previous Proposition 218 process. These utilities can likely increase rates up to the preapproved level through a governing board action. If a utility has not yet gained this ability, it would likely need to undertake a public notice process to comply with the procedural requirements of Proposition 218. This process could cause a lag between required conservation and the implementation of higher rates. In particular, if the ruling on Capistrano Taxpayers Association, Inc. v. City of San Juan Capistrano is left to stand, then the timeline to adjust rates may be significantly extended if the water utility is required to conduct a new cost-of-service study to demonstrate compliance with the ruling.

Could a reduction in water sales volume lower a utility’s operating expenses?

Yes. In many cases lower water sales will lead to lower operating costs, although the impact will vary among utilities depending on their water supply sources and the marginal cost of additional supply. A water system relying exclusively on groundwater from its own wells would likely save on pumping costs if it sells less water. However, the savings may only be modest relative to a utility’s operating budget because high-quality groundwater tends to be a relatively low-cost supply. If a utility directly purchases imported water on a per-unit basis, on the other hand, the lower water use will of course reduce water costs, and these savings could be substantial if imported water represents a significant portion of the utility’s budget.

Although utilities could see some expense reduction, many of their costs — including fixed payments to suppliers, rents, leases, and debt service — are independent from the volume of water sold and likely wouldn’t change. A decline in water sales would likewise have little short-term impact on salaries, benefits, and maintenance costs.

Footnotes
(1)http://www.courts.ca.gov/opinions/documents/G048969.PDF

(2)http://gov.ca.gov/docs/4.1.15_Executive_Order.pdf

(3)http://www.water.ca.gov/news/newsreleases/2015/040115snowsurvey.pdf

(4)http://droughtmonitor.unl.edu/Home/StateDroughtMonitor.aspx?CA

(5) http://www.water.ca.gov/waterconditions/waterconditions.cfm

(6)http://cdec.water.ca.gov/cdecapp/resapp/resDetailOrig.action?resid=ORO

(7)http://www.swrcb.ca.gov/waterrights/water_issues/programs/drought/docs/emergency_regulations/fact_sheet_implementing_25.pdf

(8)http://www.waterboards.ca.gov/waterrights/water_issues/programs/drought/docs/emergency_regulations/regulations_fact_sheet.pdf

(9)http://www.swrcb.ca.gov/waterrights/water_issues/programs/drought/docs/emergency_regulations/draft_usage_tiers.pdf

Primary Credit Analyst:
Tim Tung, San Francisco (415) 371-5041;
tim.tung@standardandpoors.com

Secondary Contact:
Robert L Hannay, CFA, San Francisco (1) 415-371-5038;
robert.hannay@standardandpoors.com

21-Apr-2015

Colorado State University sold $239 million of bonds to build a football stadium that students, faculty and credit-rating companies say may strain its finances. School leaders say the debt binge will help secure its future.

Colorado’s second-largest university is joining an intensifying national competition to attract high-tuition, out-of-state students by pouring billions into new dormitories, classrooms, student centers and gyms.

With borrowing costs holding close to the lowest since the 1960s, the university issued debt last month to replace its 47-year-old stadium two miles from the Fort Collins campus where the Rams now play. The new arena will help push CSU’s debt to $1.14 billion this year, more than double what it was in 2009, according to Standard & Poor’s.

“This is one of the few things that an institution can do that’s going to draw 40,000 people to campus,” said Joe Parker, the school’s director of athletics. “There are very few things that attract people with the same passion that athletics does.”

S&P has had a negative outlook on higher-education bonds for more than a year because of the mounting debt of universities. On March 17, the company said it may lower CSU’s A+ credit rating, the fifth-highest rank, as it plans to sell $160 million in additional bonds this year for new buildings.

‘Greater Pressure’

The new debt will “exert greater pressure on financial resources that we already view as very weak for the rating,” Jessica Wood, an S&P analyst in Chicago, wrote in a report.

Investors haven’t punished the university. CSU bonds maturing in 2038 traded for an average yield of 2.9 percent on April 16, close to the lowest this year, data compiled by Bloomberg show.

Ron Speaker, chief executive officer of Equus Private Wealth Management, a municipal-bond investor, said having an off-campus stadium was discouraging attendance.

“Fixing that problem is the right thing to do despite the financial implications it has,” said Speaker, whose firm is based in Carbondale, Colorado. “They can handle it. They’ve been under-leveraged compared to other competing high-quality institutions in the state and across the country.”

Rival’s Stadium

The University of Colorado, CSU’s in-state rival about 55 miles (88 kilometers) south in Boulder, is completing a $156 million renovation of its athletic facilities, including 90-year-old Folsom Field for the Buffaloes, which play in a separate conference, the Pac-12.

CSU plans to fund debt payments with revenue from premium seats, concessions, naming rights, sponsorships and events other than football. Rich Schweigert, the university system’s chief financial officer, said the stadium won’t need money from student fees or tuition to pay off the bonds.

“We financed the stadium using the lowest projected revenue stream, which is what our current stadium is doing now,” he said. “All we have to do is perform like we are currently performing — which would be inconceivable that we can’t do better.”

While schools in the five richest college football conferences are able to use revenue from media contracts to pay for new facilities, divisions like CSU’s Mountain West have relied on student fees to help support their programs, said Amy Perko, the executive director of the Knight Commission on Intercollegiate Athletics.

“The financial policies in athletics should aim to strengthen each institution’s broader educational mission, not to detract significant resources away from it,” she said.

Football’s Share

CSU spent $12 million on football in the 2014 budget year, the second highest in the Mountain West, according to data submitted to the U.S. Department of Education. That’s up from $5.5 million in 2005, as new media contracts created an explosion of revenue and spending across college sports.

Some faculty and students opposed the school’s decision to go into debt for the stadium. S&P’s reduced outlook on CSU’s rating signals the school is over-leveraged, said Steven Shulman, chair of CSU’s economics department.

“It’s the financial equivalent of a police car pulling up behind you with lights flashing and sirens blaring,” said Shulman, who writes about the economics of higher education.

Winning Record

The Rams have played post-season bowl games in the past two years, posting a 10-3 record in 2014 that included a 31-17 win over Colorado. Even so, attendance at its six home games averaged 26,575, leaving 5,925 seats empty. The new stadium, scheduled to open in September 2017, will have a capacity of 40,085.

Some students aren’t convinced that building a stadium on campus will increase attendance or that it won’t result in higher fees.

“They should keep using the old one,” said Elizabeth Bergersen, 21, a creative-writing major, as she read a textbook in front of the student center. “I don’t think more people will go to the new one because people who like football go now.”

Bloomberg News

by Jennifer Oldham

April 21, 2015

The Chicago Board of Education can’t catch a break as it borrows to pay for upgrades to the third-largest U.S. school system.

First, Moody’s Investors Service and Fitch Ratings cut it to one step above junk last month, delaying a planned $372 million bond sale. Then last week, before a pared-down $296 million version of the deal, set for Tuesday, Governor Bruce Rauner said the system may need bankruptcy protection, an option that’s not legally open to it.

There’s little prospect that the backdrop will brighten. The system faces a projected $1.1 billion budget gap next fiscal year as retirement costs climb. Its relative borrowing costs are close to a two-year high. And with negative outlooks from Moody’s and Fitch, a downgrade to junk may chase off investors.

“There are a lot of balls in the air when it comes to our outlook,” said John Miller, co-head of fixed income in Chicago at Nuveen Asset Management, which oversees about $100 billion of municipal debt. Nuveen may buy the new bonds for its high-yield fund, he said. “They might have to entice people with more spread, particularly with headline risk like this.”

Pension Strain

The fiscal strains are an amplified version of the city’s struggle to stave off insolvency. Chicago, with $20 billion of unfunded pension liabilities, has the lowest general-obligation grade among the 90 most-populous cities, apart from Detroit.

Michael Passman, a schools spokesman, said the bond sale is going forward as planned.

“The governor’s suggestion is not a viable option to remedy CPS’s financial difficulties,” he said via e-mail. “The solution to CPS’s financial situation lies in Springfield with legislators” who can help alleviate its budget deficit.

Tuesday’s offer includes a portion maturing in December 2039 that is being marketed at a preliminary yield of 5.63 percent, according to three people familiar with the sale who requested anonymity because the deal isn’t final. That’s about 2.7 percentage points more than benchmark municipal debt, data compiled by Bloomberg show.

At that level, the deal offers extra yield relative to previous bonds from the school board. Debt maturing in December 2042 traded Tuesday at an average yield of about 5.3 percent, or 2.3 percentage points above benchmark munis, Bloomberg data show. That’s close to the widest in at least two years, and up from 1.8 percentage points before Moody’s March 6 downgrade.

The securities were part of the last fixed-rate offering from the schools in 2012, when they priced to yield 0.89 percentage point above benchmark munis.

Bankruptcy Specter

Moody’s rates the school board Baa3, the lowest investment grade and equivalent to Fitch’s BBB-. Standard & Poor’s ranks it A-, three steps higher. All consider it riskier than Chicago. Mayor Rahm Emanuel effectively runs the schools, appointing the seven-member board.

Given the system’s more than $9 billion in unfunded pension obligations and growing deficit, Rauner, a first-term Republican, raised the specter of bankruptcy April 14 at an education forum in Chicago. The governor, who supports giving Illinois localities authority to file for Chapter 9 reorganization, repeated his claim that union contracts are putting local governments in financial peril.

Default Doubts

The mayor dismissed the suggestion in a press conference the following day, saying it’s better to focus on areas such as curbing pension costs. Chapter 9 isn’t even an option at this point: While lawmakers have introduced a bill in the Illinois House to allow municipal bankruptcy filings, the measure remains in committee.

The school bonds have “minimal payment default risk” and investors seeking extra yield should consider purchasing the debt, according to a report Monday from research firm Municipal Market Analytics in Concord, Massachusetts.

In the latest hurdle for the system, Chief Executive Officer Barbara Byrd-Bennett took leave April 17 after the board was served with federal grand jury subpoenas seeking records about contracts, according to updated bond documents.

The district, which educates about 400,000 students, has $6.3 billion of Moody’s-rated general obligations.
Perhaps most troubling for the board’s path to solvency is that it has nowhere to turn for help, said Bill Black at Invesco Ltd., which handles $22.8 billion of munis.

“There may be more bumps in the road ahead — there’s no one out there to spare money for the school district,” Black said from Downers Grove, Illinois. “The city has its own issues, and so does the state.”

Bloomberg News

by Brian Chappatta

April 20, 2015

Four months after emerging from the biggest municipal bankruptcy in history, Detroit may return to the bond market with investment-grade ratings.

Michigan Governor Rick Snyder signed legislation Wednesday that gives added security to investors who buy $275 million of debt Detroit plans to sell, which he said may save as much as $30 million in interest costs. The law gives bondholders first claim on income taxes that back the securities, on top of an arrangement with a trustee that helps shield the revenue from city officials.

The extra measure is a sign of what it will take to get investors in the $3.6 trillion municipal market to lend to the city, which collapsed into bankruptcy after a decades-long population slide. The debt sale, which will publicly re-offer securities that were privately placed with Barclays Plc, will be the city’s first since exiting court protection in December, state documents show.

Michigan provided the additional safeguards to keep credit-rating companies from giving the bonds a junk rating. Detroit’s $18 billion bankruptcy has increased scrutiny of the legal safeguards on municipal bonds, particularly those sold by financially distressed local governments.

“A statutory lien in general does give us more comfort that it’s going to be repaid,” said Jane Ridley, an analyst at Standard & Poor’s in Chicago, who declined to comment on how the bonds will be ranked. “In most circumstances, it would lead to greater security and potentially a higher rating.”

Detroit general-obligation bonds backed by state aid have a comparable security structure, Ridley said. That debt wasn’t impaired in bankruptcy and has a AA rating from S&P, the third-highest grade.

David Jacobson, a spokesman at Moody’s Investors Service in New York, said it may be too soon to comment on whether the bonds could earn investment grades. Elizabeth Fogerty, a spokeswoman at New York-based Fitch Ratings, didn’t have an immediate comment.

John Roach, a Detroit spokesman, didn’t have an immediate comment about when the bonds will be sold or the prospect that they will receive investment grades.

Bloomberg News

by Brian Chappatta

April 23, 2015

Investors who bought $114 million of debt sold by Louisiana State University on Wednesday were warned about the state’s fiscal struggles. What they weren’t explicitly told in bond offering documents was that the school was considering filing for exigency.

Officials at the Baton Rouge-based school said they plan to draw up a financial exigency plan, equivalent to college bankruptcy, in the wake of $608 million in budget cuts proposed by Governor Bobby Jindal. For those who analyzed offering documents, the first item listed under bondholders’ risks now takes on added meaning.

“The ability of the university to make principal and interest payments on the series 2015 bonds is indirectly contingent upon sufficient annual state appropriations to continue the operations of the university,” it reads.

Yet the word “exigency” doesn’t appear in the 204-page document dated April 13. Exigency, declared when schools face insolvency, would allow Louisiana’s flagship school to restructure and fire tenured faculty.

“It’s bad form, if nothing else,” said Bart Mosley, co-president of Trident Municipal Research in New York. “Obviously for LSU’s financial structure, the state budgeting situation is a risk factor. The question this is going to come down to is how well were potential bond purchasers informed.”

Buyer Aware

In an e-mail, Ernie Ballard, a Louisiana State spokesman, said: “We didn’t list every possible action/contingency that might ultimately be considered because the situation was and remains fluid due to the ongoing legislative process, as it is in many other states. We are confident that we were transparent and open in the offering statement about the current state budget situation to potential investors.”

The school “is exploring a wide range of contingency plans, one of which would be filing for exigency if solutions to the projected shortfall are not found,” he said.

The bond document says “the university will examine all possible options to address potential reductions to state appropriations” in fiscal 2015-2016.

The deal shrank from an initially planned $130 million, according to offering documents. The largest portion of debt matures in July 2045 and priced to yield 3.57 percent, or about 0.5 percentage point above benchmark munis, data compiled by Bloomberg show.

Yields rose Thursday among the four bond trades of at least $1 million in size. The debt due in 2045 changed hands at a yield of 3.62 percent. The yield on bonds maturing in July 2033 rose to 3.36 percent, from 3.31 percent at pricing.

Moody’s Investors Service rates the university A1, the fifth-highest grade. It lowered its outlook to stable from positive April 8, citing “material declines” in state support. Fitch Ratings ranks it a step higher, at AA-.

Bloomberg News

by Brian Chappatta

April 23, 2015

Travelers enjoying a cup of chowder or luxuriating in new seats while ferrying to Nantucket and Martha’s Vineyard next year can thank municipal-bond investors.

The Woods Hole, Martha’s Vineyard & Nantucket Steamship Authority is selling $38 million of tax-exempt debt April 27, according to data compiled by Bloomberg. The biggest bond offering in the service’s 55-year history will go to build a more spacious ferry equipped with a lunch counter, said Wayne Lamson, the agency’s general manager. The authority carried 2.9 million passengers last year back and forth to the islands off Massachusetts.

The operator of the largest ferry service between Cape Cod and the islands is borrowing to replace a 60-year-old vessel, and the timing couldn’t be better. Interest rates at the lowest in five decades are fueling record muni sales.

“We have a lot of people that visit the area from all over the country that are familiar with our operation, and then you’ve got the institutional investors as well,” said Lamson, who’s based in Woods Hole. “So we’re hoping there’ll be a lot of demand to buy the bonds.”

State Backing

The authority plans to repay the bonds using operating revenue, including fares. The debt is also backed by the full faith and credit of Massachusetts. Moody’s Investors Service ranks the bonds Aa1, its second-highest grade and the same as the state. The authority had $38.9 million of bonds as of April 17, according to bond documents.

When the agency sold debt in November, bonds maturing in March 2021 priced to yield 1.66 percent, or less than 0.1 percentage point above benchmark debt, Bloomberg data show.

Demand for the service has been rising. Ridership has climbed 5.8 percent since 2010, bond documents show.
The agency raised ticket prices this year after generating about $29.4 million in passenger revenue last year. For the trip to Nantucket, about 30 miles (48 kilometers) off Cape Cod, fares rose by $1, to $18, for adult passengers without a vehicle, Lamson said. Fare changes may bring in an additional $1.9 million, bond documents show.

The authority has never needed to tap the commonwealth guarantee, said Dan Belcher, a senior muni analyst at Columbia Threadneedle Investments. The firm, which manages about $30 billion of munis, owns some of the authority’s debt.

Chowder, Beer

“From a credit standpoint, we view it as very high quality,” Belcher said from Boston. “It’s kind of a double-barreled security. It’s self-supporting, and it has the pledge of the commonwealth.”

The new vessel, to be named the M/V Woods Hole, can hold 384 passengers, about 50 percent more than the M/V Governor, which it will replace. The ship is expected to go into service in May 2016.

For the famished or parched, the lunch counter will offer sandwiches and chowder as well as beer and wine, Lamson said. The vessel will boast individual seats, rather than just benches, and will have more outlets for riders to power up electronics, he said.

The M/V Woods Hole will also carry cars and trucks, and will be able to hold 10 to 12 semi trucks, double the capacity of the M/V Governor, Lamson said.

Route Flexibility

The new ship will be able to operate in shallower channels, allowing it to make the trip between Hyannis and Nantucket and also sail from Woods Hole to Martha’s Vineyard, he said. The M/V Governor is limited to the latter.

The authority, with nine vessels that typically have a service life of about 50 years, wants to replace a ship every six or seven years, he said. The last switch was in 2007.

While low borrowing costs help, the authority needed to go to the market regardless, said Robert Davis, its treasurer and comptroller.

“If it was a higher rate, we’d still be looking to go out in all likelihood,” Davis said. “The overwhelming need to maintain safe, reliable service to the islands is paramount.”

Bloomberg News

by Elizabeth Campbell

April 23, 2015

Louisiana State University scrapped a $114.5 million municipal-bond deal amid investor concern that its plans to address cuts in state funding may include filing for exigency.

Officials at the Baton Rouge-based school said they’re considering financial exigency, which is equivalent to college bankruptcy, because of budget cuts proposed by Governor Bobby Jindal. When the university sold the tax-exempt debt this week, the offering documents circulated to investors didn’t explicitly mention that possibility.

Louisiana State told investors Friday that the bond sale had been put off, said Ernie Ballard, a school spokesman. In a separate announcement, state Treasurer John Neely Kennedy said the postponement may increase borrowing costs for other state universities and even Louisiana itself as it grapples with a $1.6 billion budget gap in the coming fiscal year.

“Maybe the university was too candid in telling our taxpayers what’s going on, but they’re telling the truth,” Kennedy said in a telephone interview. “Every university we’ve got is doing contingency planning and looking at the possibility of financial exigency.”

If an offering is canceled before closing, the bonds aren’t considered issued, according to Jennifer Galloway, a spokeswoman at the Municipal Securities Rulemaking Board, which is based in Alexandria, Virginia. Investors don’t receive the debt and also don’t owe any money.

‘Continued Unpredictability’

“In light of recent events, LSU has decided to postpone the issuance” of the bonds, the school said in a statement. “Due to the continued unpredictably of our state budget, we believe this is the responsible thing to do, and we will re-evaluate the offering once the state’s financial picture becomes clearer.”

Ballard said Thursday that the university’s disclosures were adequate. Bond documents said “the university will examine all possible options to address potential reductions to state appropriations” in fiscal 2015-2016.

The U.S. Securities and Exchange Commission has been stepping up efforts to crack down on municipal borrowers that fail to make sufficient disclosures to investors.

Louisiana faces a budget shortfall next fiscal year because of declining oil-tax revenue and the state’s failure to enact adequate tax increases or spending cuts. Both Moody’s Investors Service and Standard & Poor’s lowered their outlooks on the state to negative this year.

Jindal has proposed higher-education cuts of more than $200 million to help plug the gap, along with reductions to tax subsidies for businesses.

LSU will explore its options in case state funding dries up, the school said. Exigency, declared when schools face insolvency, would allow it to restructure and fire tenured faculty.

“We remain hopeful that the legislature will develop solutions to protect funding for LSU and higher education in Louisiana,” the university said. “But we owe it to our students, faculty and staff to prepare for every possible outcome, as any responsible fiscal manager would do.”

Bloomberg News

by Brian Chappatta

April 24, 2015

Fortress Investment Group LLC’s plan to sell $1.75 billion of municipal debt to build the first privately run passenger railroad in a century is drawing opposition from some Florida residents. Bond buyers may pose a bigger obstacle.

Debt of All Aboard Florida, the company owned by Fortress private-equity funds that’s building the project, has lost more than 7 percent of its market value since it was issued in June. And the company has been paying interest in kind, racking up more debt, according to data compiled by Bloomberg.

The Florida train is part of a quest in the U.S. to revive the 19th-century mode of transportation even as Amtrak, the national passenger railroad, loses money. Investors said the $3 billion project may struggle to make enough to pay its debt.

“This is a very high-risk project,” said Dan Heckman, senior fixed-income strategist in Kansas City, Missouri, with U.S. Bank Wealth Management, which oversees $126 billion. “I would question whether they would get the kind of ridership they may need quickly enough to make it work.”

The 235-mile (378 kilometer) line would link Orlando to Miami. As highways grow increasingly clogged, privately funded railroads have been proposed in Texas and the Washington area. California’s already started work on a high-speed line to be funded in part with private money.

Lower Yields

All Aboard is asking the state-run Florida Development Finance Corp. to approve the sale of municipal debt to finance the railroad, which would have stations in Miami, Fort Lauderdale, West Palm Beach and at Orlando International Airport. That approach would allow it to borrow at tax-exempt rates, which are lower than on corporate bonds.

Gordon Runte, a spokesman for New York-based Fortress, declined to comment.

The project has drawn opposition from residents who are concerned that towns along the route would suffer and question the company’s commitment to keeping it running.

“They’re going to build this all up and sell it,” said Tom Campenni, a councilman in Stuart, Florida, a coastal city along its route. “It will put a burden on our community.”

Companies can raise money for public works such as airline hangers, toll roads and real-estate developments, as long as state or local-governments agree to issue the securities. All Aboard would be responsible for paying the debt. Taxpayers won’t be liable if it defaults.

Awaiting Approval

At an April 20 meeting of Florida’s development agency in Tallahassee, dozens of people urged officials to reject the bond plan. No date has been set to vote on it, said Beth Frady, a spokeswoman for Enterprise Florida, which oversees the development agency.

All Aboard says the rail line will provide an economic boost and reduce highway congestion.

“There is tremendous need in-state for a reliable and convenient transportation alternative to air-and-car travel,” Lynn Martenstein, an All Aboard spokeswoman, said in an e-mail.

When All Aboard sold $405 million of corporate debt in June, it paid a 12 percent interest-rate on five-year bonds. The price tumbled to a record low of 93.5 cents on the dollar by April 1 from from $1.03 in June, pushing the yield to 14.7 percent, a level typically associated with distressed securities. Five-year munis with the lowest investment grades yield about 2.1 percent, according to Bloomberg data.

Not Recommended

Marilyn Cohen, president of Envision Capital Management in El Segundo, California, said she’s leery of the possibility that the project’s price tag will swell.

“The fact that they’re trying to offload their risk to investors is very telling,” said Cohen, who manages $345 million for individual investors. “This isn’t something I would recommend for my clients.”

While it will lay some tracks, All Aboard is mostly using existing freight lines. Work has already started on the segment from Miami to West Palm Beach, which the company plans to open late next year. The entire railroad is expected to be running in 2017.

On a Feb. 26 earnings call with investors, Wesley Edens, a co-chairman of Fortress, said the company will benefit from developments around the railway.

He said the railroad is a “wild card that could have nothing but upside.”

(An earlier version of this story corrected the spelling of Stuart, Florida.)

Bloomberg News

by Darrell Preston

April 26, 2015

Fitch Ratings-New York-20 April 2015: Recent developments in Illinois and New Jersey are lessening the chances of state intervention that could result in better outcomes for bondholders than allowing distress to lead to bankruptcy, Fitch Ratings says. We believe efforts to resolve looming budget deficits and ensure the affordability of long-term obligations would be more productive than focusing on easing laws or practices to allow bankruptcy.

Illinois governor Bruce Rauner recently proposed granting the authority to local governments to file a Chapter 9 petition. The proposal is similar to a law introduced by a state representative last fall. It supports Fitch’s view that the needs of a distressed municipality are a better indication of the possibility of bankruptcy than whether current state law allows it. Current Illinois law bars local governments with populations over 25,000 from filing a Chapter 9 petition.

Further fueling concerns about the credit quality of Chicago Public Schools (CPS), Governor Rauner said this week that he fears the district may need bankruptcy as a solution to its large budget imbalance. According to CPS analysis, their reserves will likely be fully depleted by the end of fiscal 2016.

In New Jersey, the recent appointment of corporate restructuring experts to assist Atlantic City in resolving the city’s fiscal crisis appears at odds with the state’s strong history of aiding local governments to prevent the type of stress that could lead to bankruptcy. Of US states, New Jersey has historically provided among the strongest levels of early intervention to local governments with financial strain.

Fiscal intervention mechanisms vary by state. Most focus on helping local governments recover from distress, rather than preventing it. Many can approve or reject financial plans, budgets, and certain government contracts under state control. Their powers, however, are constrained by laws governing labor contracts, benefits including pension obligations, and service provision. Fitch believes this limits their ability to remediate financial distress.

More municipal-bond fund managers today have the freedom to range across a broad array of investments.

As a result, financial advisers are beginning to embrace these flexible funds as a possible hedge against rising interest rates.

At least six muni-bond funds have been launched or retooled to give their managers more flexibility to manage duration or buy below-investment-grade bonds, according to Morningstar Inc.

BlackRock Inc. revamped BlackRock Strategic Municipal Opportunities (MAMTX) last year, for example, to permit its management team to set its duration between zero and 10 years instead of the prior 3 to 10 years. Also, the team can invest up to 50% of its assets in below-investment-grade muni bonds.

In another example, Goldman Sachs Asset Management in December changed the name of its Goldman Sachs Municipal Income Fund to Goldman Sachs Dynamic Municipal Income Fund (GSMIX), and gave it the flexibility to buy junk bonds and target a broader range of maturities.

In addition to investors’ concerns over the possibility of rising interest rates, the changes stem from an evolving muni-market landscape that provides more opportunity for fund managers to distinguish themselves and the asset-gathering success of flexible bond funds that are taxable, says Elizabeth Foos, a senior analyst at Morningstar.

She recommends that investors approach the funds with caution for now. Many are new and the funds generally carry the same risks as flexible bond funds as well as some that are particular to the municipal-bond market.

For one thing: muni-bond funds fish from a far narrower universe than do their taxable counterparts, Ms. Foos says, which can make it difficult to make quick and cheap changes to credit and interest-rate exposure. Also, because these funds may have wide latitude to shift investments, investors can suffer amplified losses if a manager makes a bad call.

“The combination of thousands of unique debt obligors, ambiguous legal pledges to repay debt, and the lack of timely and consistent disclosure on the part of municipal borrowers can make it difficult to find the right high-yield investment for a portfolio,” she says. Also, junk bonds represent just a small portion of the muni market and can trade infrequently, she adds.

In addition, the market for credit-default swaps, and credit-default baskets that can be used to take broad-based exposure to credit risk, isn’t as deep or as liquid in the muni markets as it is in the taxable markets, Ms. Foos says.

Making swift and significant adjustments to duration in a muni fund also can be challenging. Taxable managers can adjust a fund’s sensitivity to changes in Treasury yields quickly and cheaply through the use of Treasury futures, and muni managers can adjust duration by changing their mix of long- and short-maturity bonds or using Treasury futures, she says.

But trading securities to adjust interest-rate sensitivity can be expensive, Ms. Foos says, and using Treasury futures can be problematic because muni and Treasury yields don’t always move in tandem. When that correlation breaks down, a muni portfolio hedged with Treasuries can behave in unexpected ways, something that caused headaches for many muni managers in 2008, she says.

Peter Hayes, head of the municipal bonds group at BlackRock, says Treasury futures aren’t perfectly correlated to munis. But over the longer term, there is a high degree of correlation between the two markets.

As for liquidity issues, they exist throughout the fixed-income markets with smaller issuers, but “most asset managers aren’t buying small, infrequently traded issuers,” Mr. Hayes says. The average credit quality of the BlackRock portfolio is around A+, he adds.

Regardless of the risks, however, investors have begun embracing the funds.

About $2.44 billion has flowed into BlackRock Strategic Municipal Opportunities since its modification in January of last year through March 31, according to Morningstar. The fund gained 4% in the 12 months through April 20, while the Barclays Municipal Bond Index rose 5.6%, according to Morningstar.

Roger Oprandi, an adviser at Vega & Oprandi Wealth Partners in Miami, has been using some flexible municipal-bond funds, including BlackRock Strategic Municipal Opportunities and Goldman Sachs Dynamic Municipal Income.

“We’re hoping that their managers will be able to navigate a rising-rate environment over time,” says Mr. Oprandi, whose firm is affiliated with Ameriprise Financial Services.

He’s using the allocation to complement clients’ municipal-bond holdings. In a portfolio calling for a 25% allocation to munis, for example, he might invest 10% in a flexible muni-bond fund. Mr. Oprandi says he hasn’t committed more to the funds partly because of their short track records.

Melissa Joy, director of wealth management at the Center for Financial Planning Inc., is also using some of the funds as a portion of clients’ muni allocations. The firm purchased the Thornburg Strategic Municipal Income (TSSIX) last summer and still holds it, says Ms. Joy, whose Southfield, Mich., firm manages $640 million.

But she does generally consider the funds more risky than a portfolio of general obligation bonds without the flexibility, and would discuss that risk with any client, she says. And managers of some of the new funds may have experience managing muni-bond funds, but no experience managing a flexible bond fund, she says.

“There will be some excellent opportunities within this space,” Ms. Joy says. “But it will take a while to figure out who’s got the staying power.”

Chad Carlson, an owner of and director of research at Balasa Dinverno Foltz in Itasca, Ill., isn’t using the funds yet for several reasons–one of which is their higher fees. He now uses two Vanguard funds for clients’ muni allocations.

In addition, performance hasn’t been great for any nontraditional bond funds generally, says Mr. Carlson, whose firm manages more than $3 billion. Most investors are concerned about rising interest rates, against which a typical defense is duration management, but it’s very difficult for managers to predict when they should alter a fund’s duration, he says.

That said, Mr. Carlson believes there’s probably room for some flexibility in a bond portfolio. In fact, his firm does use small doses of it in client portfolios through taxable bond funds.

THE WALL STREET JOURNAL

By DAISY MAXEY

April 23, 2015 9:44 a.m. ET

Write to Daisy Maxey at daisy.maxey@wsj.com

Some municipal-bond fund managers have more flexibility now. That means investors may need to exercise more caution.

In recent years, fund companies have changed the rules for some funds that specialize in tax-exempt muni securities to let managers buy debt that is riskier or that can be less sensitive to rising interest rates, according to Morningstar, the Chicago-based investment-research firm. The companies also have launched new muni funds that give managers a relatively free hand.

In December, for example, Goldman Sachs Group changed the rules governing a $600 million fund—and tweaked the name. The Goldman Sachs Municipal Income Fund became the Goldman Sachs Dynamic Municipal Income Fund, and managers now can invest up to 30% of its assets in below-investment-grade—or junk—muni bonds, which had been off-limits.

The fund also can vary its holdings to guard against rising interest rates to a greater extent than before. It charges annual fees of 0.79%, or $79 on a $10,000 investment. The fund has gained 4.9% over the past year, through Thursday, compared to a 5.3% gain in the Barclays Municipal Bond Index, according to Morningstar.

The $3.2 billion BlackRock Strategic Municipal Opportunities Fund made similar changes in January 2014. Managers now can invest up to 50% of the fund’s assets in junk bonds, up from 20%, and have greater leeway to adjust the portfolio to limit the impact if interest rates rise. The fund charges annual fees of 0.88%.

The changes have come at a time when many bond-fund managers are concerned that if the Federal Reserve raises interest rates, their holdings could lose value and investors could withdraw money. In addition, junk bonds tend to pay higher interest rates, which can help fund managers boost returns.

Investors have responded to the changes with enthusiasm. They poured about $2.4 billion into the BlackRock fund between Jan. 1, 2014, and March 31 of this year, according to Morningstar. The fund has gained 3.7% over the past year.

But municipal-bond funds with broader mandates could leave investors vulnerable if, for example, fund managers are wrong about the direction of interest rates or have difficulty unloading their junk bonds, which can be thinly traded in the muni market, says Elizabeth Foos, a senior analyst at Morningstar.

“For now, it’s probably best to approach these funds with caution,” she says. Their limited track records and the greater latitude they give fund managers make it “difficult to know how they’ll perform in a bout of real market stress and therefore how to best use them in the context of a broader portfolio,” she says.

Some muni funds use Treasury futures to curb their sensitivity to interest rates, according to Ms. Foos. That can pose a problem because muni and Treasury yields don’t always move in tandem—a phenomenon that caught some muni-bond fund investors off-guard when it occurred during the financial crisis in 2008, she says.

Peter Hayes, a portfolio manager for the BlackRock fund, says that over the long run, there is usually “a high degree of correlation” between Treasury futures and munis, limiting the risk.

In addition, Mr. Hayes says most asset managers don’t buy muni bonds issued by small, infrequently traded borrowers, so they are generally insulated from the risk that they will have difficulty unloading their holdings.

Roger Oprandi, whose firm, Vega & Oprandi Wealth Partners in Miami, is a franchise of Ameriprise Financial Services, says he has recently put some client money into muni funds that give managers wider latitude. In a portfolio calling for a 25% allocation to munis, for example, he might invest 10% of the overall portfolio in a flexible muni-bond fund.

“We’re hoping that their managers will be able to navigate a rising-rate environment over time,” Mr. Oprandi says. He says he hasn’t committed more to the funds in part because of their short track records.

Chad Carlson, director of research at Balasa Dinverno Foltz, an advisory firm in Itasca, Ill., isn’t using the funds, in part due to their higher fees.

Instead, Mr. Carlson, whose firm manages more than $3 billion, says he uses the Vanguard Intermediate-Term Tax-Exempt Fund and the Vanguard Limited-Term Tax-Exempt Fund, which both charge individuals 0.20% on a $10,000 investment.

Many investors are concerned about rising interest rates, but it is difficult to predict when they will rise and for a fund manager to adjust a bond portfolio in anticipation, Mr. Carlson says.

THE WALL STREET JOURNAL

By DAISY MAXEY

April 24, 2015

Write to Daisy Maxey at daisy.maxey@wsj.com

(Reuters) – New Jersey has appointed Donald Steckroth to negotiate talks between Atlantic City and the groups involved in its restructuring process, the former bankruptcy judge said on Thursday.

Steckroth, who served a 14-year term with the U.S. Bankruptcy Court in New Jersey, is currently a member of Cole Schotz as a part of its bankruptcy and corporate restructuring practice, according to the law firm’s website.

The Wall Street Journal reported the news earlier saying that Steckroth would be attempting to broker a deal between the city’s turnaround team and business and union interests.

Atlantic City faces a budget gap of more than $100 million this year, while four casino properties have closed since the start of 2014.

In January, New Jersey Governor Chris Christie had appointed an emergency management team for Atlantic City headed by Kevin Lavin. The team also includes former Detroit emergency manager Kevyn Orr.

In March, the team issued a report saying the struggling gambling hub had to consider cost cuts, layoffs and longer bond maturities, although it noted that bankruptcy was not yet on the cards.

Still, the appointment of the team has U.S. municipal bond investors and Wall Street credit rating agencies concerned that the move could signal a departure from the state’s historically strong support of its financially distressed cities.

(Reporting by Narottam Medhora and Ankush Sharma in Bengaluru and Hilary Russ in New York; Editing by Diane Craft)

By REUTERS

APRIL 23, 2015, 9:17 P.M. E.D.T.

Chicago Public Schools was forced to pay top-of-the-market interest rates on nearly $300 million in new bonds issued today amid the uncertainty created by a federal investigation and a looming annual budget deficit of more than $1 billion.

The top yield for investors was 5.63 percent on 25-year bonds, or 2.85 percentage points over benchmark triple-A rated bonds, according to published reports.

The Chicago Board of Education delayed the sale last month after getting hit with downgrades by three ratings agencies.

“While the board’s rating remains in investment grade territory, its yields aren’t,” according to a story published today by Bond Buyer, which tracks the municipal finance market. The yields, or amount that investors are paid, are in the range of bonds with a much lower credit rating, Bond Buyer said.

The relatively high interest rate was likely attractive to investors who discounted the chances that CPS would be unable to repay the bonds. The school district confronts a $1.1 billion budget deficit in fiscal 2016, which starts July 1. About $700 million is due in payments to the school district’s woefully underfunded retirement plan.

After this story was published, a CPS spokesman said in a statement that demand for the bonds was 1.7 times the supply, a sign that investors had a strong appetite for the bonds, given the interest rate.

“The strength of today’s bond sale is another indicator that investors have confidence in the district and the security of its bonds despite its well-known budget challenges,” according to the statement, which did not address the relatively high interest rate needed to attract buyers.

CPS had revenue of $4.94 billion in the fiscal year that ended June 30, 2014, and $6.6 billion in long-term debt, including accrued interest.

The delay in the sale gave investors the comfort of knowing the results of the April 7 runoff election, in which Mayor Rahm Emanuel won a second term. But it also added to the school board’s challenges.

TOUGH RATINGS

Reports surfaced on April 14 of a federal investigation into a $20.5 million, no-bid contract awarded to a firm with ties to CEO Barbara Byrd-Bennett. She has taken a leave of absence.

Complicating matters even more was Gov. Bruce Rauner, who talked up the option of bankruptcy for CPS and other governmental agencies. His jawboning likely unsettled investors, even if his comments were aimed at the Chicago Teachers Union, whose retirement plan is the source of much of the schools’ financial troubles.

Proceeds of the bond sale will be used to refinance existing debt. Today’s bond issue was actually a series of securities with different maturities and lower interest rates.

Even as the school board delayed the bond sale, it went ahead last month with the sale of about $180 million in floating rate debt. The rate on those notes, 4.02 percent, reflected a “steep penalty,” according to a Bond Buyer story published April 1.

Moody’s Investors Service led off the downgrade parade on March 6, lowering its rating on CPS two levels to Baa3, just above junk bond status. Then Fitch Ratings cut its grade to BBB-minus, just above junk bonds, from A-minus. Standard & Poor’s Ratings Services lowered the district’s rating by two notches, to A-minus, two notches above junk bond status.

The ratings reduction by Moody’s and Fitch triggered a possible $228 million penalty to be paid by CPS on swaps contracts the school district has on $1.1 billion in debt. Swaps are agreements intended to reduce the risk of interest rate changes.

Ahead of the new bond sale, CPS did not seek a rating from Moody’s, typically the most skeptical of the ratings agencies. Instead, CPS hired Kroll Bond Rating Agency, a relative newcomer to the field, which assigned a rating of BBB-plus.

Some bond market observers viewed dropping Moody’s as “rating shopping,” an attempt to obtain a more favorable report, but institutional investors were likely not affected by the change.

CRAIN’S CHICAGO BUSINESS

By THOMAS A. CORFMAN

April 21, 2015

DoubleLine Capital’s Jeffrey Gundlach bought $20 million of junk-rated Puerto Rico bonds this year as the commonwealth struggled with its fiscal crisis.

DoubleLine’s $2.26 billion Income Solutions Fund held $20 million of Puerto Rico general obligations as of Feb. 27, data compiled by Bloomberg show. The fund didn’t hold any commonwealth debt at the end of 2014. The bonds, which were issued in March 2014, traded Wednesday at record-low prices.

Puerto Rico securities, which are tax-exempt nationwide, have traded at distressed levels for more than a year amid speculation the commonwealth and its agencies won’t be able to repay $73 billion of debt. Municipal bonds sold in Puerto Rico lost 0.72 percent this year through April 21, the worst start since 2011, according to S&P Dow Jones Indices.

“I do think they are going to make it to the goal line,” Gundlach said of Puerto Rico in a March 10 conference call. The yield on the debt is “unbelievably high,” especially for residents of high-tax states such as California, he said.

As the value of Puerto Rico debt has dropped, hedge funds and distressed-debt buyers have purchased more of the securities, while municipal-bond mutual funds have cut their holdings.

High Reward

The bonds purchased by DoubleLine, which mature in 2035, traded Wednesday at an average price of 79.7 cents on the dollar, the lowest yet, for an average yield of 10.4 percent, Bloomberg data show. That’s equivalent to about a 17 percent yield on taxable bonds for investors in the highest tax bracket.

DoubleLine oversaw $73 billion of assets as of March 31. Its $46.2 billion Total Return Bond Fund has beaten 99 percent of peers in the past five years. Loren Fleckenstein, a spokesman for the Los Angeles-based firm, declined to comment.

The Income Solutions Fund is a closed-end fund. Corporate debt accounts for about two-thirds of its holdings, its largest allocation, Bloomberg data show. The Puerto Rico bonds are the fund’s only municipal holdings, taking up less than one percent of assets.

It’s not the company’s first purchase of Puerto Rico debt. DoubleLine had $2.5 million of the same general obligations in its $129.6 million Multi-Asset Growth Fund at the end of March, Bloomberg data show. That fund first bought the debt last year.

Bloomberg

by Michelle Kaske

April 22, 2015

(Reuters) – The Chicago Board of Education paid a stiff penalty for its fiscal woes on Tuesday as investors demanded fat yields for its $295.7 million general obligation bond sale.

The deal was slightly oversubscribed, but not enough to warrant a repricing, according to a market source. That left yields at their initially priced levels, which topped out at 5.63 percent for bonds due in 2039 with a 5.25 percent coupon, according to a pricing scale obtained by Reuters. That yield was 283 basis points over Municipal Market Data’s benchmark triple-A scale.

Municipal bonds carrying the same ratings as the Chicago school system, A-minus by Standard & Poor’s and BBB-minus by Fitch Ratings, would normally trade only 85 to 100 basis points over the scale, said MMD analyst Randy Smolik.

The 283 basis-point spread was also wider than the 250 to 255 basis points over the scale the board’s bonds were fetching in secondary municipal market trading just last week.

There was no immediate comment from the Chicago Public Schools (CPS).

The nation’s third-largest public school system is struggling with a huge pension liability and is projecting a $1.1 billion budget deficit in its upcoming fiscal year. Those fiscal woes factored in to credit rating downgrades by Moody’s Investors Service and Fitch last month to one notch above the junk level.

The downgrades triggered the termination of interest-rate hedges on variable-rate debt that unless renegotiated could cost the district about $228 million in payments to banks.

Illinois Governor Bruce Rauner raised the possibility that CPS could be headed for bankruptcy, according to local media reports, although such a move is not currently allowed under state law.

Meanwhile, the district’s chief executive officer, Barbara Byrd-Bennett, took a leave of absence pending the outcome of a federal probe into a contract the district awarded to a company that had previously employed her, CPS officials said on Friday.

(Reporting by Karen Pierog; editing by Matthew Lewis)

Tue Apr 21, 2015 5:44pm EDT

David A. Noyes & Company [Noyes], a 105-year old wealth management and investment banking firm, announced today the hiring of Thomas L. Enright, as Senior Vice President of its Capital Market Division.

Enright, 55, will be responsible for growing Noyes’ municipal bond underwriting business of its Capital Markets Division’s Public Finance Group and fixed income platform. He will report directly to Robert Welch, Jr., Senior Managing Director of Noyes’ Capital Markets Division.

Welch explained that Enright’s hire is perfectly aligned with Noyes’ plan to expand its fixed income platform and grow its municipal underwriting business with the intent to achieve three strategic goals: expand the firm’s revenue sources, add municipal bond capabilities to its platform to anticipate and meet advisors’ demand, and provide small municipalities with the level of service and attention they cannot obtain from larger Wall Street firms.

“Tom is a high-caliber professional with an impressive experience in municipal bonds,” stated Welch. “His hire is a strategic addition to our team that further underscores the depth and breadth of skills Noyes consistently continues to attract. Tom’s knowledge, expertise and energy lift our municipal efforts to another level.”

Enright joins Noyes with more than three decades of experience in the municipal bonds industry. Throughout his career, he has underwritten in excess of $30 billion of municipal bond issues—including the $400 million Indianapolis Airport Authority bond—and priced on a yearly basis over $2 billion of bond issues. Most recently, he was Manager of Municipal Bond Trading and Manager of Capital Markets at City Securities Corporation. Prior to that, he served as Manager of Indiana Municipal Bond Operation at Raymond James and Manager of the Municipal Bond Department of Raffensperger Hughes and Company, Inc. He began his career at Indiana National Bank as Municipal Bond Trader.

“I’m excited and honored to join an organization with such a solid industry reputation and be part of a dynamic, successful and talented team,” declared Enright. “In accepting this position, I was particularly impressed, among other things, with Noyes’ investment in human capital and systems, the firm’s enduring stability, pristine record and unwavering ‘clients first’ philosophy. I look forward to playing an instrumental role in helping Noyes grow a profitable and successful municipal bond underwriting business and empower them to deliver even more exceptional service and value to both their advisors and clients.”

Enright obtained a B.S. degree in Finance from Indiana University.

About David A. Noyes

David A. Noyes & Company is a full-service investment firm headquartered in downtown Chicago’s with branches throughout the Midwest. Founded in 1908, the firm has the unique distinction of being the oldest New York Stock Exchange Member based in Chicago, and has served the Indianapolis area for nearly 80 years. The privately-held firm offers a comprehensive menu of products and services to individual and institutional clients. David A. Noyes & Company has seven offices in Illinois, Indiana and Michigan. For more information on David A. Noyes & Company visit http://www.danoyes.com.

CHICAGO, IL (PRWEB) April 21, 2015

I work with New Jersey’s pay-to-play laws on a regular basis and anyone else who wades the muddy waters of this area understands that these laws are an intricate, confusing, and often conflicting web of rules, regulations, statutes, and executive orders that apply to mayoral, county, legislative, and gubernatorial elections – except when they don’t. Because every county and municipality has the legal authority to promulgate their own pay-to-play rules, things can get even more interesting. Until now, there has been very little case law or guidance on New Jersey’s local pay-to-play laws. That changed last week when the judiciary published an opinion on the topic.

Like many counties, Atlantic County has its own pay-to-play law that prohibits persons seeking or holding county contracts from making political contributions to anyone running for or holding county office, including the sheriff’s office. When Sherriff Frank Balles decided to run for state senate, he found no harm in taking a political contribution from Ford-Scott, a county contractor. In approving Ford-Scott’s contract, the Atlantic County Board of Freeholders determined that Ford-Scott was not prohibited from being awarded a county contract because Balles was not running for county office and the contribution made by Ford-Scott was specifically made towards Balles’ senate bid.

Without getting into details that might make the reader’s head explode, it is sufficient to say that, under normal circumstance, a person can legally contribute to a political candidate running for an office as long as the contributor does not have a contract with the particular body of government for which the candidate is running. It is for this reason that the Freeholders determined that Ford-Scott could legally take the county contract. In the first published opinion on local pay-to-play laws, the Law Division of the Superior Court disagreed.

Although the court was careful to restrict its analysis to the county pay-to-play law, its ruling was based primarily on the legislative intent. And, in one of those ironies that we see in legal opinions from time to time, the court determined that the same county governing body which wrote the pay-to-play law and approved the Ford-Scott contract actually intended for its law to preclude such contracts. The important part of this opinion lies in the reasoning behind pay-to-play laws – reducing actual and perceived government impropriety – which is the same policy behind all pay-to-play laws regardless of whether they apply locally or statewide. In other words, this precedential opinion will likely apply to any similar case under any pay-to-play law in New Jersey.

The practical impact of this opinion is widespread. For example, if Jersey City Mayor Steven Fulop decided to run for governor, and Jersey City had a local pay-to-play ordinance with similar language to the law in Atlantic County (which it does), this case could act to prevent any person who contracts with Jersey City or plans to contract with Jersey City in the future from contributing to Fulop’s gubernatorial campaign. Thus, this will be an important decision for all public contractors in the future. And, as an aside, now that this opinion is public and precedential, there exists a potential for future cases on this issue to include an action under the New Jersey False Claims Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Last Updated: April 15 2015

Article by Michael Coco

Fox Rothschild LLP

Bankruptcy, as one lawyer familiar with the legal process puts it, works best as kabuki theater.

The actors get all gussied up in outlandish outfits—some as samurai warriors with scary swords and scarier faces. Everyone postures and gestures and engages in exaggerated argument. In the end, they’re hopefully all frightened enough that they’ve worked out a compromise rather than pulling the trigger on Chapter 9.

I sure hope Gov. Bruce Rauner knows it’s theater. And I hope that his political foes—particularly in organized labor—know that theater sometimes echoes reality as Chicago Public Schools heads down the horrid path to fiscal collapse.

CPS has been making lots of news lately, almost all of it bad. Even before CEO Barbara Byrd-Bennett was ensnared in a federal corruption probe, the agency faced a $1.1 billion hole for the budget year that begins July 1, a hugely underfunded pension plan and tough negotiations with the Chicago Teachers Union.

Rauner’s seeming solution: bankruptcy. “The state has a crisis. The city has a crisis. I’m concerned that (CPS) is going to have to go bankrupt,” he told attendees at a school conference April 14. “Bankruptcy code exists to help the organization get out of financial trouble. There’s a reason for the bankruptcy code.”

The governor has his allies in pushing for a state law that would allow local governments to declare bankruptcy and bust those union contracts Rauner so detests. “I’m not saying it’s a good thing, but it ought to be an option,” Rockford Mayor Larry Morrissey says. “Sometimes it’s better to let a court work it out.”

But even Morrissey considers actually doing the deed “a last resort.” Others liken it to opening Pandora’s box—risky in the extreme.

“It’s like yelling fire in a crowded theater,” says Bill Brandt, a municipal finance expert who until last month was chairman of the Illinois Finance Authority. “Look at Detroit,” which just came out of bankruptcy. “People aren’t flocking (to invest) there. . . .You need to use a rifle shot in negotiations, not a cannon.”

Civic Federation President Laurence Msall echoes the point. “In every case around the country, the cost of government has gone up and the quality of services has gone down” after bankruptcies, Msall says. “And the risk of contagion is high” as other local governments have to pay more to finance debt, he adds, pointing to research that Detroit’s neighbors now pay as much as half a percentage point more to borrow than they should.

Others draw a distinction between private companies, which usually can fire their entire workforce with relatively minor harm to the larger society, and institutions such as schools, which can’t just drop math instruction this year because it’s unprofitable.

For reasons like that, veteran Chicago bond lawyer James Spiotto suggested in recent state House testimony, government bankruptcy is rare—fewer than 700 cases nationwide since the Depression, only six involving schools. “Chapter 9 is not a solution to the problems of a financially troubled (government). Rather, Chapter 9 is a process” to bring about compromise, he testified.

In that vein, the Civic Federation is pushing a plan to create a state oversight board that could intervene in distressed cases and use its expertise to help local governments come up with a way to solve their problems short of bankruptcy.

Does Rauner get that? Does he understand that scaring unions to the table may be good and effective theater, but actually pushing CPS or other governmental units into bankruptcy might blow up with lots of collateral damage?

No one seems to know. One source familiar with Rauner’s ways likens him to the “Animal House” character who has a devil perched on one shoulder and an angel on the other, each urging him to take different steps. Rauner’s dislike of unions is so deep he may have lost objectivity.

On the other hand, should the Illinois Supreme Court rule out any real changes when it decides a case soon governing the state’s troubled pensions, extreme actions might be necessary. And that’s no stage play.

CRAIN’S

GREG HINZ

April 18, 2015

Another April 15 has come and gone, and minimizing the taxes you’ll owe next year may be top of mind. For most investors, that means checking out municipal bonds. And if you want more income, high-yield munis may look tempting.

The average 12-month yield for Morningstar’s high-yield muni category is 4.34%, compared with 2.53% for intermediate municipal bonds. A 4% or 5% payout is impressive enough when the 10-year Treasury yields 1.9%, but for investors in the top bracket, that’s equivalent to a 7% yield.

Yet high-yield munis are remarkably controversial. Their “high” yields are still at historical lows, though the risks are not: Rising interest rates threaten, and many investors are still smarting from Puerto Rico, Detroit, and other troubled issuers.

High-yield muni funds often buy low- or unrated munis, says John Miller, co-head of fixed income at Nuveen Asset Management, which manages Nuveen High Yield Municipal Bond fund (ticker: NHMAX) and an exchange-traded index fund, SPDR Nuveen S&P High Yield Muni Bond (HYMB). They are usually revenue-backed, issued to fund a new project that will bring in the revenue to pay back investors.

Even so, “you’re not getting paid to take that risk,” says Nicholos Venditti, who helps run Thornburg Strategic Municipal Income (TSSAX), which has just 6% of its $253 million in assets in high-yield munis—though it can go as high as 50%.

Two summers ago, high-yield munis were much cheaper than they are today. That’s when Richard Bernstein, chief investment advisor at his eponymous firm, started investing. “When we took our position in July 2013, high-yield muni bond yields averaged roughly 250 basis points [2.5 percentage points] over Iraq bonds,” says Bernstein—an indication the market felt U.S. municipalities with poor credit were a bigger risk than the nation of Iraq. “That’s ridiculous.” Even as of last week, “they were still 44 basis points over Iraq bonds,” he says.

At current rates, he says he’s not adding more, but the asset class still makes up nearly 20% of various portfolios.

BUT DON’T WRITE OFF high-yield munis just yet. Krishna Memani, chief investment officer at Oppenheimer Funds, calls them “the best asset class of all for investors who can take advantage of the tax benefits.”

Municipalities, even those with below-investment-grade debt, still have much lower default rates than comparably-rated corporates. Miller is optimistic, noting that state and local tax collections are rising, and economic conditions in most cities are improving. Moody’s Investor Services says municipal finances are better than they were during the 2008 financial crisis or in 2013 when Detroit’s bankruptcy and Puerto Rico’s financial woes rattled the sector.

Investors who want the income bump should go with a broadly diversified, actively managed fund at a company with a deep research process, says Morningstar senior analyst Beth Foos. Most funds use leverage and hedging strategies, which are disclosed on fund Websites and in prospectuses. Nuveen, for example, is hedging a year of duration (to manage interest rate risk) and has 20% total effective leverage (it’s capped at 30%). The greater the leverage, the bigger the risk if the market falls.

T. Rowe Price Tax-Free High Yield (PRFHX), run by Jim Murphy, is the only high-yield muni bond fund to earn Morningstar’s gold ranking. Murphy says he focuses on managing credit risk. He’s avoiding Puerto Rico and tobacco bonds. He likes hospital bonds, which have attractive yields, and some corporate-backed bonds, such as those issued by airlines, and transportation projects.

“Rates are historically low and spreads are tight,” says Murphy, “That is always uncomfortable. But when I look at the global landscape, these are among the highest yields in the world.”

BARRON’S

By AMEY STONE

April 17, 2015 11:46 p.m. ET

(Reuters) – Negotiations between Puerto Rico’s troubled electric power authority and a group of its creditors turned into a testy public exchange on Tuesday as an agreement to prevent a possible messy default by Wednesday’s deadline proved illusive.

The public dispute, highly unusual in restructuring negotiations that are normally conducted behind closed doors, shows how difficult talks have become as the sides attempt to resolve the fate of over $9 billion in debt.

Lisa Donahue, the utility’s chief restructuring officer, told a Puerto Rico Senate hearing on Tuesday that a $2 billion bondholder plan to restructure the utility, PREPA, contained overly “aggressive” elements that are unlikely to work.

Donahue’s testimony came shortly after PREPA’s forbearing bondholders, a group led by Franklin Advisers and OppenheimerFunds, offered to extend a forbearance agreement for another 30 days after a previous 15-day extension was reached on March 31.

The forbearance agreement, which stops creditors from calling defaults during restructuring talks, expires on Wednesday.

PREPA’s board said late on Tuesday it had still not agreed to the extension and that creditors had sent the extension proposal at 10 p.m. on Monday and released it publicly on Tuesday morning without notice.

“The bondholders’ public description of the proposal is incomplete, leaving out material details,” the president of PREPA’s board, Harry Rodriguez, said in a statement. “No agreement has been reached, and it is unclear whether the proposal has the support of all of the forbearing creditors.”

Donahue said demands that creditors be paid in full and on time were unlikely to work as a starting point for negotiations, although that may be a possible outcome. She also said certain cost estimates were too low and that the plan forecasts an unlikely increase in demand.

“There are elements of the plan that can’t work,” Donahue told the Senate hearing. “I am disappointed the plan was made public before we had a chance to vet it.”

Negotiations became public after creditors released their restructuring plan earlier this month in a step that appeared to be aimed and putting pressure on PREPA to reach an agreement.

Donahue’s position is becoming increasingly difficult. In addition to having to contend with rebellious bondholders, she faced criticism during her Senate hearing from politicians who questioned the cost of restructuring, a lack of disclosure, and her experience of restructuring public utilities.

Creditors said their offer to extend the agreement included a commitment to continue working on a capital investment and rate plan, a timeline for further action, and third party review with an opportunity for public review.

A source close to the forbearing creditors acknowledged relations with PREPA are frosty but said extending the agreement was the best option. The person said Donahue’s apparent rejection of the notion that bondholders be paid in full and on time as a starting point for any plan had come as a surprise given her previous statements.

Failing an extension, bondholders could seek remedies, including eventually seeking a court-appointed receiver. While most bondholders might not find that option appealing given the destabilizing effect it could have on municipal bond markets, the chances of a “renegade” group of bondholders doing that would increase, the person said.

Still, Donahue said she is “optimistic” an agreement can be reached with the creditors. She said that PREPA has committed to responding formally to the restructuring plan by April 24 and would deliver a more comprehensive plan by June 1.

By Edward Krudy

(Additional Reporting by Nick Brown; Editing by Meredith Mazzilli and Gunna Dickson)

Tue Apr 14, 2015 6:24pm EDT

Florida hasn’t been hit by a hurricane since 2005, the longest stretch in more than a century. Its state-run property insurer isn’t taking any chances.

Even though forecasters predict this year will produce the fewest named Atlantic storms since 1997, Citizens Property Insurance Corp., which provides coverage when other insurers won’t take the risk, is selling as much as $1 billion of municipal debt to raise cash just in case. It would be the insurer’s first bond sale in three years.

With hurricane season set to start June 1, Citizens is taking advantage of interest rates close to generational lows to bolster its claim-paying ability. Investors in the insurer’s tax-exempt bonds welcome the steps toward a sturdier balance sheet: One storm is all it takes to rack up billions of dollars of expenses.

“I’m not sure they can predict what’s going to happen with the weather,” said Justin Land, director of tax-exempt management in Naples, Florida, at Wasmer, Schroeder & Co., which oversees about $5.3 billion. “Money is so cheap this is a good time to finance their pre-event capital.”

Wilma’s Toll

Wilma was the last hurricane to strike the state, in October 2005. It killed five people in Florida and caused $20.6 billion of damage, according to a National Hurricane Center report. The state hasn’t gone this long without a hurricane in records going back to 1851, NHC data show.

In its last bond sale in 2012, Citizens told investors that it writes policies in areas that “appear to be at the highest risk” of hurricanes and sinkholes, according to offering statements. If a storm produces enough claims to consume reserves, Citizens can ask for a surcharge on property-insurance policies sold statewide, including those from other companies, to repay its bonds. One risk is that regulators don’t grant the surcharge.

The exposure to the weather can generate higher yields for investors. In the 2012 tax-exempt sale, 10-year Citizens bonds priced to yield 3.77 percent, or about 1.8 percentage points above benchmark securities, data compiled by Bloomberg show. The bonds carry an A+ grade from Standard & Poor’s, the fifth-highest level.

Storm Wait

“They tend to trade a little wider based on Florida’s location and the potential that they could get a hurricane or two,” said Paul Brennan, a money manager in Chicago for Nuveen Asset Management LLC, which owns Citizens bonds among its approximately $100 billion of munis. “It’s only a matter of time before they get another hurricane.”

This year, partly because of cooler Atlantic waters, Colorado State University researchers predict seven named storms, compared with the 30-year average of 12, with three reaching hurricane strength of at least 74 miles (119 kilometers) per hour. The season lasts through Nov. 30.

The insurer still needs cash for possible claims, in part because it plans to pay off about $2.6 billion of debt, most of which matures within three years.

Most of the deal will be tax-exempt and fixed-rate, maturing in three to 10 years, Jennifer Montero, the chief financial officer, said in an interview. It will probably price next month, she said.

“This allows us to take advantage of the yield curve and lock in rates at historically low rate levels,” she said.

Risk Reduction

The insurer determines reserve levels based on expected losses from a storm that has a one-in-100 chance of happening.

The lack of storms has drawn competition from other insurers, reducing residents’ reliance on Citizens, which has been trying to move customers off its books to reduce risk.

With storms bypassing the state, the company earned net income of more than $1 billion the past two years, raising its surplus to $7.4 billion at year-end, compared with a deficit of $1.8 billion at the end of 2005, according to financial statements.

The value of property it insures that could be subject to losses has fallen to less than $200 billion, from $518 billion in 2011. The number of policyholders has dropped to 600,000 from a peak of about 1.5 million in 2012 after a string of storms in 2004-2005. It may sink to 450,000 if no storms hit, according to the company.

With less potential for claims, the planned bond sale is about a third smaller than in 2012.

The bonds are “a very acceptable risk,” said Land at Wasmer, Schroeder. The company owns Citizens debt and will consider the new bonds.

Bloomberg

by Darrell Preston

April 15, 2015

U.S. municipal-bond mutual funds suffered net withdrawals for the third straight week, the longest stretch in 15 months, as individual investors raised cash for tax bills.

Investors pulled out about $486 million in the week through April 15, the most since July, according to Lipper US Fund Flows data released Thursday. They’ve yanked a combined $820 million over the three-week span.

The outflows are curbing returns: Tax-exempt bonds have gained about 0.1 percent this month, compared with 0.2 percent for Treasuries and 0.5 percent for investment-grade corporate securities, Bank of America Merrill Lynch data show.

Muni mutual funds experienced weekly outflows seven times in 2014, as state and local debt gained in each month of the year for the first time in at least 25 years. The last time investors withdrew money for three straight weeks was the stretch through Jan. 8, 2014, at the end of a record wave of outflows that started in 2013 as interest rates rose and Detroit filed for bankruptcy.

If history is any guide, the municipal market will rally to end the month. Tax-exempt debt hasn’t declined in April since 2006, Bank of America data show.

Benchmark 10-year yields in the past five years have fallen by 0.22 percentage point on average during April, more than any other month, data compiled by Bloomberg show. Through April 16, they’ve declined 0.02 percentage point.

Bloomberg

by Brian Chappatta

April 16, 2015

(Reuters) – The largest U.S. public pension fund announced on Tuesday that the state of California and its schools will increase funding of employee pension funds by 6 percent starting July 1.

The California Public Employees’ Retirement System, or Calpers, said the increases were driven by payroll growth, salary increases and retirees living longer.

The state of California must increase its contribution by $487 million to $4.7 billion. Schools must increase their contributions by $111 million to $1.3 billion.

The state pension plan is roughly 72 percent funded, while the school plan is about 86 percent funded, as of last June. That represents an approximate 6 percent increase for both plans over the previous fiscal year.

“As the fund matures, and the retired population grows, it’s important that the rates reflect the changing demographics of our members,” Richard Costigan, chair of the finance and administration committee, said in a statement.

The growing cost of public pensions is a key issue for state and local governments across the nation as guaranteed payments to retired employees have often forced cuts in spending on public services.

In California, where the city of San Bernardino is in municipal bankruptcy and the city of Stockton recently emerged from Chapter 9 protection, the issue of pension contributions has been particularly contentious. Both cities proposed to keep contributions to Calpers untouched while cutting debts to bondholders.

Calpers has $300 billion in total assets and the pension fund was roughly 77 percent funded as of last June.

(This story corrects 6 percent increase to plan funding, not contribution rates; adds fourth paragraph about plan funding)

By REUTERS
APRIL 14, 2015, 5:37 P.M. E.D.T.

(Reporting by Robin Respaut in San Francisco; Editing by Jonathan Oatis and Lisa Shumaker)

(Reuters) – Kansas has begun a search for underwriters to sell $1 billion of taxable pension bonds that won final approval this week, the state’s Development Finance Authority said on Friday.

A bill signed into law Wednesday by Governor Sam Brownback authorizes 30-year bonds backed by annual state appropriations and limits the bond interest rate to 5 percent.

Potential underwriting firms have a May 1 deadline to reply to a request for qualifications for the deal.

The authority said no decision has been made on the timing or the structure for the bond sale.

Proceeds from the bond sale would flow to the Kansas Public Employee Retirement System, boosting its funded ratio to 66 percent from 60.7 percent and lowering the unfunded liability to $6.28 billion from $7.26 billion, according to a legislative report on the bill.

Kansas sold $500 million of insured pension bonds through the authority in 2004 with interest rates topping out at 5.5 percent for bonds due in 2034.

States and local governments have sold about $105 billion of taxable pension bonds since 1986, according to a July 2014 report by the Center for Retirement Research at Boston College. The practice, which relies on the assumption that invested proceeds will result in higher returns than the interest cost on the bonds, has come under scrutiny particularly in the wake of Detroit’s $1.4 billion issuance that was tied in part to soured interest-rate swaps that helped drive the city to file the biggest-ever municipal bankruptcy in 2013.

By REUTERS
APRIL 17, 2015, 2:40 P.M. E.D.T.

(Reporting by Karen Pierog; Editing by Leslie Adler)

The Puerto Rico government and the hedge funds that own its bonds are turning to former International Monetary Fund officials to help resolve a growing debt crisis that may require a restructuring more akin to Greece than a troubled city like Detroit.

The move comes as Puerto Rico is in talks with the funds and other investors to borrow up to about $3 billion in new bonds to replenish its nearly empty coffers. The commonwealth has more than $70 billion in debt, including that of its agencies such as the Puerto Rico Electric Power Authority, or Prepa, which is in restructuring talks with creditors ahead of a Wednesday deadline to extend some payments.

The development reflects the junk-rated commonwealth’s unusual status as neither a U.S. state nor a sovereign nation, unable to permit its municipal entities to access U.S. bankruptcy protections.

Puerto Rico has retained Anne Krueger, the IMF’s former first deputy managing director, as a consultant, while a committee representing the hedge funds is in talks about an engagement with Claudio Loser, the former director of the IMF’s Western Hemisphere department, said people familiar with the matter.

The involvement of IMF veterans highlights how market perception of Puerto Rico—a former darling of the $3.7 trillion municipal-bond market—has changed. The IMF serves as the lender of last resort to emerging-market countries, something some investors say Puerto Rico increasingly resembles.

Peter Hayes, head of BlackRock Inc.’s municipal-bonds group, said Puerto Rico is beyond simple fixes and it will be difficult for the island to escape restructuring. “The problem is they’re running out of time,” he said.

A federal judge in February blocked a local law that would have created a restructuring process for Prepa and other public authorities, and a U.S. House committee is considering a bill that would permit the commonwealth to allow those agencies access to the same Chapter 9 protections granted Detroit.

Investors have faced months of uncertainty from Puerto Rico, where the government is struggling with a weak economy, declining population and high unemployment. Its bonds are widely held around the U.S. because they are exempt from federal, state and local taxes and often provide higher yields than other munis.

As a U.S. commonwealth, the island also doesn’t qualify for IMF aid, but the excessive borrowing, inconsistent financial reporting and low tax collection that landed Puerto Rico in hot water are common in the developing countries that IMF economists deal with. Like a lot of those countries, Puerto Rico is wrestling with how to make politically contentious budget cuts and tax increases without strangling already-weak economic growth.

Puerto Rico’s government has relatively low levels of debt by international standards, and tackling the deficit is manageable, said Charles Blitzer, a former assistant director of the IMF’s monetary and capital-markets department and now principal at Blitzer Consulting.

“This is doable without great pain,” he said. “In fact, countries that have adjusted have found growth rates actually increase. I’m hopeful that the hiring of ex-IMF people by Puerto Rico signals their willingness to adjust their budgetary problems credibly and rapidly.”

The hedge funds that own much of Puerto Rico’s bonds are looking for tips from the IMF playbook on how to use the promise of new loans to coax governments into financial overhaul and, if that fails, how to negotiate with a sovereign in default, people familiar with the matter said.

Early this year, the bondholder group including Brigade Capital Management LP, Centerbridge Partners LP, Davidson Kempner Capital Management, Fir Tree Partners and Monarch Alternative Capital sent the island’s financial authorities a list of terms to include in the coming bond sale. The proposed covenants are meant to prod Puerto Rico into budget cuts and better financial disclosure, while ranking holders of the new bond above other creditors if there is a default, the people familiar with the matter said.

When Puerto Rico borrowed $3.5 billion in bond markets a year ago hoping to get financial breathing room, hedge funds bought more than half of the deal. The firms snapped up the bond for its attractive 8.7% yield but also because they hoped a successful financing would lift the prices of other Puerto Rico bonds they owned.

Since then, Puerto Rico has struggled to deliver a promised tax overhaul and bond prices have fallen. The price of the 2014 bond touched record lows below 80 cents on the dollar last month after three legislators proposed removing constitutional protections for bondholders.

Melba Acosta, president of the island’s Government Development Bank, has said that the bank and the administration oppose such legislation.

The tax-overhaul plan has also received an uneasy response, facing resistance from “many quarters of the Puerto Rico economy” and its passage remains uncertain, according to Janney Capital Markets. Ms. Acosta said it would fight tax evasion and contained exemptions aimed at protecting low-wage workers.

Puerto Rico’s hedge-fund creditors want more than promises of reform before they buy more bonds. The group has asked Ms. Acosta to include clauses that would raise the interest rate of the bond if the government fails to hit budget targets and would require timely standardized financial reports, the people familiar with the matter said.

“This financing explicitly seeks to bridge Puerto Rico to economic health,” Mr. Loser said in an email. “The Commonwealth needs to commit to developing a comprehensive plan that balances the budget with timely and transparent financial reporting.”

THE WALL STREET JOURNAL

By MATT WIRZ And AARON KURILOFF

April 12, 2015 6:37 p.m. ET

Write to Matt Wirz at matthieu.wirz@wsj.com and Aaron Kuriloff at aaron.kuriloff@wsj.com

Bonds of Puerto Rico’s struggling power utility rallied to the highest in more than year as the agency and its creditors hammer out proposals to repair its finances.

Some debt of the junk-rated authority, called Prepa, gained after creditors last week submitted a $2 billion plan that would help diversify fuel sources to stabilize energy costs. Prepa expects to release its own proposal in the next two months, Lisa Donahue, the agency’s chief restructuring officer, told Reorg Research in an April 8 article.

Prepa bonds maturing in July 2040 traded Friday at an average price of 66.19 cents on the dollar, the highest since March 2014, data compiled by Bloomberg show.

“It’s a good sign that bondholders are giving legitimate proposals that, at the surface, look reasonable,” said Dan Toboja, senior vice president of municipal-bond trading in Chicago at Ziegler, a broker-dealer. “That starts to look better for the underlying value of the bonds.”

Prepa, banks, investors and insurance companies are negotiating contracts to extend loans and give the agency time to create a turnaround plan. Those agreements end April 15.

The utility faces a $415.6 million principal and interest payment to bondholders July 1, according to New York-based NewOak Capital LLC. Prepa has $236.4 million in reserve, according to a filing by its bond trustee on the Electronic Municipal Market Access website.

Environmental Hiccup

Donahue expects the utility and creditors will agree to a plan enabling the agency to repay its obligations. She has said the fuel diversification offer wouldn’t meet environmental standards.

“I am optimistic that Prepa and the forbearing creditors will ultimately reach an agreement,” she said via e-mail Friday. “Any such plan will need to provide for a capital structure that allows Prepa to pay all such debts and honor other obligations as they come due in accordance with the plan.”

Investors are committed to providing capital to upgrade Prepa, Stephen Spencer, a managing director at Los Angeles-based Houlihan Lokey, adviser to bondholders, said in an e-mail Friday.

“We continue to believe the situation can be resolved consensually and productively with continued payment of Prepa’s debt and interest obligations as they come due and will do everything in our power to reach that outcome — for the benefit of Prepa, its many stakeholders and the island,” he said.

Bloomberg

by Michelle Kaske

April 10, 2015

PROVIDENCE, R.I. — Before a deal can be finalized to resolve years of legal wrangling over Rhode Island’s landmark public pension system overhaul, a court, lawmakers and the plaintiffs must sign off on it.

Last week the state struck a deal with most of the public sector unions and retiree coalitions suing over higher retirement ages and cuts to cost-of-living increases. Lawmakers restructured the pension system in 2011 to save $4 billion over 20 years — an effort that has been used as a model by other states.

Here is a look at what happens next in the pension saga, and what led up to the proposed settlement.

___

NECESSARY APPROVALS

The plaintiffs must amend their complaints to proceed as a class action for approving the settlement, and all of the class members must be notified about the proposed resolution. They are entitled to object.

The Superior Court judge presiding over the case will determine whether the settlement proposal is fair, and whether the court should approve it.

Separately, the settlement terms have to be approved by the General Assembly.

The pension reform was done legislatively so the terms have to be incorporated into the law. Leading lawmakers support settling, but others say they’re reluctant to change the original pension reform law.

The litigation could continue if lawmakers take no action or enact legislation that is different than the terms.

___

THE SETTLEMENT TERMS

The settlement provides for cost-of-living increases and one-time stipends for retirees. The cap for calculating the benefits would increase for some retirees, and the calculation would be based on a new formula using both the performance of investments and the Consumer Price Index.

Employees would be allowed to retire earlier if they meet set requirements.

Most of the public sector unions and retirees voted to accept the terms, which means that about 59,000 past and present state employees would be affected by the deal.

Unions representing municipal police, Cranston police and Cranston fire, which collectively represent about 800 people, did not. Their lawsuits are continuing and will be addressed by the court after the settlement is implemented.

The total cost of the settlement is about $300 million. It preserves 90 percent of the savings from the pension reform.

The shortfall in the pension fund would increase from $4.6 billion to nearly $4.9 billion.

___

THE PATH TO A SETTLEMENT

The state agreed to a tentative settlement last year with the unions and retirees that pulled back on some of the changes but preserved most of the overhaul. Ultimately it was rejected after police union members voted it down.

Judge Sarah Taft-Carter ruled in February that the trial would begin April 20, despite both sides asking for more time to prepare.

With the trial date looming, many plaintiffs were receptive to the settlement proposal because they had begun to believe they would lose at trial.

Gov. Gina Raimondo, the architect of the pension reform, said the state has a strong case, but it’s better to settle now and provide certainty for public employees, municipalities and the state.

The settlement doesn’t prevent future lawmakers from changing the pension system again, but Treasurer Seth Magaziner said he doesn’t think another major reform will be necessary.

In light of the settlement with most plaintiffs, the judge vacated the trial date. The parties have until May 18 to implement the settlement.

By THE ASSOCIATED PRESS

APRIL 7, 2015

(Reuters) – Ballooning pension payments, difficult negotiations with labor unions and threatened state funding cuts are some of the challenges facing Rahm Emanuel, who won a second term as Chicago’s mayor on Tuesday.

The third biggest U.S. city is teetering at the edge of a fiscal precipice brought on by years of insufficient pension contributions, high debt issuance and a reliance on nonrecurring revenue to plug budget holes.

As a result, rating agency Moody’s Investors Service has dropped Chicago’s general obligation credit rating six notches since 2010 to Baa2, two notches above junk. The only big U.S. city with a lower Moody’s rating is Detroit, which exited bankruptcy in December.

Here are the grim details of Chicago’s financial problems:

– Chicago’s total bond debt, including general obligation and water, sewer and airport revenue bonds, was $21.4 billion at the end of 2014, 60 percent more than in 2004.

– The city’s biggest liability is its pensions. It ended fiscal 2013 with an unfunded liability of $19.2 billion in its four retirement funds, leaving them only funded 37 percent, well below the 80 percent level considered healthy. In addition, the city’s unfunded liability for retiree healthcare was nearly $1 billion.

– Chicago last summer projected its contribution to its four pension funds, which totaled $478.3 million this year, will spike to $1.1 billion next year and steadily climb to $1.638 billion in 2020. At that level it would represent 46 percent of the city’s current operating budget. A looming $550 million increase is due to a 2010 Illinois law that requires higher payments to public safety worker pensions to reach 90 percent funding by 2040.

– An Illinois Supreme Court ruling is due soon on a union challenge to the constitutionality of public pension reforms. If it goes against the state, the ruling could unravel a 2014 law that cut benefits for two of Chicago’s four pension funds, increasing the unfunded liability in the city’s municipal and laborers’ retirement funds by $900 million.

– Chicago’s ratings could be downgraded if the reform law is tossed out. If its ratings continue to fall, the city could be forced to fund payments nearly equal to its operating budget of $3.53 billion. A default on bank letters of credit and other liquidity facilities could potentially force the city to repay nearly $3 billion of debt, the city said in a January court filing. It may also have to make $300 million in payments to banks for debt-related contracts linked to the city’s ratings. If the ratings are cut to junk then that would also substantially boost borrowing costs for future Chicago bond issues.

– Under Illinois Republican Governor Bruce Rauner’s proposed fiscal 2016 state budget, Chicago would lose about $135 million in state revenue sharing and the Chicago Transit Authority, which the mayor controls, would lose $130 million.

– The Chicago Board of Education, also under mayoral control, is mired in its own fiscal crisis, projecting a $1.11 billion deficit in its budget for the fiscal year that begins July 1. The school system ended fiscal 2014 with a $9.5 billion unfunded pension liability and a funding ratio of 51.5 percent, down from nearly 80 percent in fiscal 2008. A three-year contract with the Chicago Teachers Union expires June 30.

By REUTERS

APRIL 8, 2015

(Reporting by Karen Pierog; Editing by Megan Davies and Martin Howell)

Kansas, where Governor Sam Brownback is cutting pension payments and highway funding, sold $204 million of bonds as a “cash gift” to help the U.S. Homeland Security Department build a center for bioterrorism research.

The proceeds are part of the $307 million taxpayers are shelling out for the National Bio and Agro-Defense Facility at Kansas State University in Manhattan. The $1.25 billion facility, which will replace the Plum Island Animal Disease Center off New York’s Long Island, will research ways to protect livestock from zoonoses like anthrax and Ebola that may be intentionally introduced, offering documents show.

Pledging money from last week’s bond sale to the federal government shows the lengths to which states will go to secure economic-development projects. Over its first 20 years, the research facility is projected to inject $3.5 billion into the Kansas economy, according to a report cited by U.S. Senator Jerry Moran. The center may employ 326 people and support 757 construction jobs, he said.

“Kansas has a reputation in this region for being aggressive in economic development,” said Dan Heckman, a fixed-income strategist who helps oversee $126 billion at U.S. Bank Wealth Management in Kansas City. He said his company looked to buy some of the bonds because the research “fits a very critical need for the country.”

Knowing Zoonoses

From 2006 to 2009, the U.S. sought locations to replace Plum Island, where facilities are more than 60 years old. Manhattan, 118 miles (190 kilometers) west of Kansas City, won the competition, with the state pledging $105 million and the city offering $5 million for what at the time was a $725 million project, said Ron Trewyn, a liaison for the facility at Kansas State.

The cost swelled after years of delays and changes, including strengthening the the 713,000-square-foot facility to withstand a tornado with winds stronger than 200 miles per hour, Trewyn said.

Last year, the federal government allocated $404 million for construction and the state pledged an additional $202 million in proceeds from the bonds, which were issued March 31 by the Kansas Development Finance Authority. According to offering documents, “the state has offered and DHS will accept a cash gift.”

Kansas Penalty

Bonds for the project due in 10 years priced to yield 2.57 percent, compared with 2 percent for benchmark munis, data compiled by Bloomberg show. The spread of 0.57 percentage point for the securities, which have the fourth-highest investment grade, was about triple the penalty on similarly rated debt.

The “weird language” about the gift, combined with Brownback’s tax cuts and pension underfunding, probably drove up borrowing costs, said Joseph Rosenblum, director of municipal credit at AllianceBernstein Holding LP, which oversees about $32 billion of munis.

“We approached it on one level as purely an appropriation risk of the state,” he said in an April 1 interview at Bloomberg’s New York headquarters. “But we like to feel comfortable that the project makes sense.”

Eileen Hawley, a spokeswoman for Brownback, a Republican, didn’t respond to requests for comments on the gift and why the state agreed to increase funding.

The financing boost contrasts with Brownback’s treatment of the state pension system, which has 60.7 percent of the assets needed to pay for future benefits. He proposed cutting contributions by $41 million in December and also sought to divert almost $100 million from highway funds.

Economic Forecast

Brownback, who cut income taxes in 2012, estimated in a January budget report that Kansas would bring in $5.77 billion this fiscal year, or $206 million lower than estimated. That’s down about 10 percent below a peak of $6.4 billion in 2012. The state won’t get back to that level of collections by 2017, according to its forecasts.

When the facility’s location was announced, “calls came in from around the world from companies wanting to know what was available near the site,” Trewyn said.

Though inquiries have slowed amid the delays, he said he expects they’ll pick back up as the project nears completion. The central utility plant is 90 percent constructed, and operations will move to the Kansas site by 2023.

That type of interest differs from the intrigue about Plum Island’s facility, which has been the subject of controversy and conspiracy theories.

Lyme Link

A 2004 book by Michael Christopher Carroll, “Lab 257: The Disturbing Story of the Government’s Secret Plum Island Germ Laboratory,” drew connections between the center and outbreaks including Lyme disease, the illness named after the Connecticut town 40 miles north of Plum Island.

The American Lyme Disease Foundation still includes on its website a response that the facility wasn’t responsible for introducing the bacteria to the northeastern U.S.

A document posted on the Homeland Security Department’s website said suggestions to construct the center in a more remote location were trumped by the proximity to Kansas State’s existing research facilities.

Bloomberg

by Brian Chappatta

April 5, 2015

CARSON CITY — A bill that would permit Nevada cities and counties to file for Chapter 9 bankruptcy protection was endorsed Friday by North Las Vegas Mayor John Lee.

Senate Bill 475, which was heard by the Senate Government Affairs Committee, would allow the bankruptcy if the state Tax Commission found that a severe financial emergency existed and was expected to last at least three years.

It would also require such a bankruptcy petition to be reviewed and approved by the governor and attorney general before it could be filed.

Efforts would be made to avoid a bankruptcy filing which would only be a last resort. The committee did not take action on the measure.

Lee said in a letter supporting the bill that existing law fails to provide sufficient relief for distressed cities and counties. Cities and counties lack the tools necessary to ensure all stakeholders share an equal burden in a financial crisis, he said.

“I want to make it very clear: North Las Vegas does not need bankruptcy,” Lee said. “Even if existing law had allowed for municipal bankruptcy, North Las Vegas would not have sought its protection.

“However, I am convinced the existence of municipal bankruptcy in Nevada would have been a game changer for our negotiations and would have ensured all stakeholders shared equally in the burden of saving our town,” he said.

Current law allows local governments suffering from a fiscal emergency to receive assistance from the Department of Taxation and the Committee on Local Government Finance.

Lee said in May 2014 that the option of municipal bankruptcy would bring everyone to the table to find a solution in a financial emergency.

The Review-Journal reported in May 2014 that North Las Vegas faces continued declines in property tax revenue and ballooning payments on an estimated $422 million in outstanding debt obligations, a financial position that bond analysts at Fitch have likened to bankrupt municipalities in California and Pennsylvania.

Officials hope the specter of state-sanctioned bankruptcy would encourage bondholders to renegotiate those bonds in time to thwart a $7 million uptick in annual bond payments scheduled to hit the city’s books in 2016, the report said.

“Just having that threat there could make a world of difference,” Mayor’s Office Chief of Staff Ryann Juden said in May 2014. “We may never have to use it, but having it there would help out a lot.”

The bill was opposed by Barbara Flickinger, managing director of portfolio surveillance for the National Public Finance Guarantee Corp., who said in a letter that there are viable alternatives to bankruptcy.

“The most important ‘tool in the toolbox’ for distressed municipalities is fiscal discipline, a consistent focus on cost controls and revenue growth,” she said.

Bankruptcy is also expensive and time consuming, Flickinger said, noting that Detroit’s recently concluded bankruptcy cost over $180 million of taxpayer money for legal and other professional fees. It also took 18 months to resolve.

Access to Chapter 9 creates uncertainty which translates into higher interest rates on debt, she said.

“This perception will impact the cost of borrowing for local governments across the state, not just those in distress,” she said.

Marlene Lockard, representing the Nevada Service Employees International Union, also testified in opposition. She said there is another measure in the Assembly that addresses municipal financial emergencies short of bankruptcy that is a preferable alternative.

Posted April 3, 2015

By SEAN WHALEY

LAS VEGAS REVIEW-JOURNAL

Contact Sean Whaley at swhaley@reviewjournal.com or 775-687-3900. Follow @seanw801 on Twitter.

The City Council dais in Newport Beach is becoming like a verbal boxing ring, leaving onlookers wondering when the fight might end.

Whether in the council chamber or in email blasts to supporters, recently elected Councilman Scott Peotter and veteran Councilman Keith Curry continue to jab each other during disagreements about city issues.

Previous City Councils in Newport Beach mostly managed to avoid political squabbling that in neighboring cities often marks public discussions sparked by ideological differences.

“Even when we disagreed, we always worked together for the good of the city,” Curry said of previous councils.

But since the election in November of Peotter and three other new council members, arguments between Peotter and Curry often have escalated to personal attacks or name-calling.

A slate of candidates known as “Team Newport” swept the four available seats in the fall council election, the first time in more than a decade that four newcomers had won seats on the City Council.

The slate members — Peotter, Mayor Pro Tem Diane Dixon and Councilmen Kevin Muldoon and Marshall “Duffy” Duffield — promised to rein in what they considered out-of-control spending by city officials.

“The voters spoke and proved they didn’t like the direction of the old council,” Peotter said.

Curry was appointed to the council in 2006 and elected later that year.

He and Peotter squared off most recently during a March council meeting over Peotter’s idea of creating a debt-management fund to try to reduce the city’s pension liabilities and debt from the Civic Center project.

Peotter said the fund would be a way for the city to save money in case the council ever had the opportunity to make an early payoff of the $106 million worth of Build America bonds that funded the new Civic Center.

The bonds are to be paid off in installments between 2018 and 2040, similar to a home mortgage, according to a report by Fieldman, Rolapp & Associates, an independent financial advisor to the city.

The Build America bonds were used on the project instead of traditional municipal bonds because they presented savings to the city over time. However, the bonds come with a clause in which the city can be penalized about $27 million if it pays them off early, according to city documents.

Curry blasted Peotter over the issue during the meeting, calling it a “poorly thought-out, politically motivated and half-baked” idea.

He reemphasized his point in an email to his supporters the next day.

“In all my years in and around government, I have never seen anything that compares to the financial illiteracy and the political recklessness on display at City Hall,” he wrote.

Peotter did not respond to Curry during the meeting but sounded off in his own email to supporters.

“I’m not trying to pick a fight,” Peotter said in an interview Wednesday. “The email is a way to set the record straight.”

Peotter likened the situation with Curry to the defense used by Lyle and Erik Menendez, brothers who were convicted in the early 1990s of killing their parents in their Beverly Hills home in an attempt to gain sole access to the family fortune.

During the penalty phase of their trial, the Menendezes asked for mercy because they were orphans.

“They caused the problem and then they blame someone else for the problem,” Peotter wrote in the email.

He went on to state that Curry spent $143 million on the Civic Center and $40 million on Marina Park and that “he borrowed $128 million on behalf of the taxpayers … to pay for the excesses.”

“Then Curry blames me because I want to discuss possible ways to pay down the debt early … Menendez award anyone?” he wrote.

Curry said the email “speaks to Peotter’s character and his fitness for public office.”

“I hit him on the issues. I didn’t characterize him as a serial killer,” Curry said.

Peotter acknowledged that he sometimes places the blame for previous council actions squarely on Curry.

“I don’t mean to pin all of that on him, but he’s taking it personally,” Peotter said.

Since the election, Peotter and Curry have locked horns over a variety of issues related to the city’s finances and about reintroducing wood-burning fire rings to Newport’s beaches.

The heated arguments have left some observers wondering whether the two will ever be able to work together.

“At the end of the day, the council had always come together, regardless of disagreements,” Mayor Ed Selich said of previous members. “I’m certainly hopeful that the same thing is going to happen with this council.”

The Daily Pilot

By Hannah Fry

April 1, 2015 | 7:35 p.m.

Standard & Poor’s Ratings Services recently affirmed its ‘AAA’ issuer credit rating with a stable outlook on the state of North Dakota, signifying our confidence that the state is well-prepared to withstand the ongoing volatility in global oil prices. But for local governments in North Dakota’s Bakken Shale region, which experienced a period of rapid revenue and expenditure growth prior to the oil price slump, the recent decline in oil prices may have more immediate negative consequences. Cities like Williston, Dickinson, and Minot could begin to experience revenue pressures in the second half of 2015 and 2016 as declining oil-industry activity reduces sales-, income-, and property-tax revenues. A decline in oil activity could contribute to a decline in state taxes, but the impact would likely be greater for local governments whose economies are concentrated in the oil industry.

Many of the issuers we rate have reported no slowdown in economic activity yet in 2015, and layoffs in the oil industry in North Dakota have been limited. Well completion and maintenance are currently contributing to overall consistent employment levels, although growth may not be at the same rapid pace as in recent months. We have not taken any rating actions yet, but we do believe that credit quality could decline if economic activity slows.

Continue Reading.

02-Apr-2015

Bondholders of Puerto Rico’s Electric Power Authority are offering a plan that would inject $2 billion into the junk-rated utility to modernize facilities and repair its finances.

The authority, known as Prepa, is negotiating an agreement with creditors to extend loans and lower its dependence on oil. That contract is set to end April 15 after Prepa, investors, banks and insurance companies agreed this week to a 15-day extension.

Puerto Rico, whose bonds are tax-exempt in all 50 U.S. states, has struggled under the burden of $73 billion in debt issued by the commonwealth and its agencies. The securities have been trading at distressed levels for more than a year on concern that the island won’t be able to repay its obligations.

Prepa bondholders are proposing $2 billion of capital investment through existing and new investors. Converting the utility’s facilities to burn natural gas will cut average electricity rates about 20 percent, according to Stephen Spencer, a managing director at Los Angeles-based Houlihan Lokey, an adviser to bondholders.

“Both Prepa and Puerto Rico need continued access to new investment capital at reasonable rates,” Spencer said in a statement. “And the creditor plan is a big step toward restoring market confidence in the overall island economy.”

July Deadline

Prepa, the biggest U.S. public-power authority, has $8.6 billion of debt. It must pay investors about $400 million in principal and interest July 1. If bondholders agree to take a loss, it would be the largest debt restructuring in the $3.5 trillion municipal-bond market.

Some utility debt gained in value following reports of the proposed financing. Prepa bonds maturing July 2030 traded Wednesday at an average price of 58.06 cents, the highest since June 26, according to data compiled by Bloomberg.

The plan includes General Electric Co. upgrading Prepa’s Aguirre facility, near Puerto Rico’s southern coast, to burn natural gas.

“The plan was designed for immediate implementation to support the transformational efforts at Prepa,” Spencer said in the statement.

Jose Echevarria, a Prepa spokesman, declined to comment on the $2 billion financing proposal.

The utility last year used funds designated for infrastructure improvements to purchase fuel. It had $1.75 billion of overdue accounts in September as residents, businesses and government entities fail to pay bills on time.

BLOOMBERG

by Michelle Kaske

April 1, 2015

San Francisco Mayor Ed Lee will seek voter approval for the first housing bond since 1996 as his city becomes the least affordable U.S. housing market and uproar grows about gentrification fueled by the technology boom.

Lee plans to ask the city’s Board of Supervisors to place a housing bond of at least $200 million on the November ballot, spokeswoman Christine Falvey said. Unlike similar proposals rejected by voters in 2002 and 2004, Lee’s housing bond plan won’t trigger an increase in property taxes, a change that appeals to voters, she said.

“San Francisco is in a serious housing crisis, but we have aggressive housing goals and we need to put resources behind those goals,” Falvey said in a telephone interview. “The mayor wants to make sure that San Francisco remains affordable for low- and middle-income families.”

Lee’s proposal would provide funding for affordable housing. Growth of technology employment in San Francisco, boosted by tax breaks Lee championed in the city’s blighted Mid-Market district, has transformed California’s fourth-largest city into one of the most expensive housing markets in the country. Unions, affordable-housing advocates and others have protested the incentives, accusing the mayor of damaging the city’s character by transforming it into a place only the wealthy can afford.

Least Affordable

San Francisco will be the least affordable housing market in the U.S. this year, with 72 percent of median income needed to pay a 30-year, fixed-rate mortgage, according to a forecast by realtor.com. The average rent in the San Francisco metro area was $2,802 at the end of last year, second-highest in the U.S. behind New York City, according to Carrollton, Texas-based MPF Research.

Lee, who is seeking re-election in November, identified housing as his top priority when he unveiled an “affordability and shared prosperity agenda” in January that included the general-obligation bond that’s part of a goal to build and renovate 30,000 homes by 2020. Lee won his seat in 2011 with backing from the technology industry after being appointed interim mayor earlier that year.

While voters approved a $100 million bond in 1996 to build or renovate low-income apartments, they rejected a similar $250 million plan in 2002 and another $200 million bond proposal two years later. General-obligation bond measures need two-thirds approval to pass.

‘Very Difficult’

“It’s very difficult to get past the two-thirds threshold,” said Gabriel Metcalf, executive director of SPUR, a nonprofit urban policy organization. “Most people don’t get to live in affordable housing, so it’s a case where we’re asking the voters to do something that is altruistic.”

San Francisco voters in November approved a $500 million transportation bond. Lee’s administration promoted the plan by stressing that it wouldn’t raise property-tax rates.

He plans to do the same for his proposed housing bond, which would be used to renovate and build homes for working families and the city’s poorest residents. Under a 10-year capital plan instituted in 2006, the city is required to retire old debt before issuing new bonds so that property taxes don’t rise.

The demand for California debt is very high in the near term, said Michael Johnson, managing partner at Gurtin Fixed Income Management. San Francisco general-obligation bonds “are attractive to investors who are looking for high credit quality,” said Johnson, whose company oversees $9.2 billion in Solana Beach, California.

Five-Decade Lows

As municipal yields hover above five-decade lows, investors in the $3.7 trillion municipal market have treated San Francisco securities as better than AAA debt, even though Standard & Poor’s, Moody’s Investors Service and Fitch Ratings grade it one step lower.

The 1996 housing-bond measure led the city to issue $20 million in taxable general-obligation bonds each year from 1998 to 2000 and borrow the remaining $40 million in 2001, data compiled by Bloomberg show.

About 85 percent of the bond proceeds went to developing affordable housing, with the remaining 15 percent financing down-payment assistance to low-income, first-time home buyers, offering documents for the 1998 sale show.

None of the original affordable-housing bonds remain outstanding: The city included the securities in a $271 million refinancing deal in 2008 that also refunded debt for Golden Gate Park and the Asian Art Museum of San Francisco.

Additional Debt

San Francisco’s economy is on an upswing and its “budget has the capacity to absorb additional debt without necessarily affecting credit quality,” said Chris Morgan, director of U.S. local government at Standard & Poor’s in San Francisco.

The Massachusetts Development Finance Agency issued $95.5 million in tax-exempt bonds for six affordable-housing development projects in Boston, the agency announced March 2. In Seattle, another West Coast city in the midst of a tech boom, affordable-housing advocates, including staff for council members Kshama Sawant and Nick Licata, last month recommended issuing at least $500 million in bonds for low-income housing.

San Francisco’s Lee, who faces no major challengers in his re-election bid, should use his campaign and the housing bond to frame his second term, said Corey Cook, an associate professor of politics at the University of San Francisco.

Lee will have to build a broad coalition of support, including city lawmakers, public-housing advocates and housing developers, to win passage, Cook said.

If he doesn’t, “then he’s at risk of not having the public-policy tools to respond to the public’s top concern,” Cook said. “That would make for a very difficult term as mayor.”

Income disparity, aggressive competition for a limited supply of land and a frenzy of speculation on existing homes fueled the city’s housing woes, said Peter Cohen, co-director at the Council of Community Housing Organizations in San Francisco.

“You put those things together, you stir and you have on your hands one of the worst affordable-housing crises this city has ever experienced,” he said.

BLOOMBERG

by Alison Vekshin

April 1, 2015

Mayor Bill de Blasio’s administration for the first time laid out its plan to save $3.4 billion in employee health-care costs over the next four years. The strategy addresses a long-standing fiscal challenge and sheds light on how the city hopes to help offset raises negotiated over the past year with municipal unions.

The planned cost-cutting includes the city paying less than previously projected for employee health insurance, newly negotiated rates with insurers and greater incentives for preventative care.

At a City Council hearing Wednesday, lawmakers grilled Labor Commissioner Robert Linn over the savings, saying the administration had taken too long to offer details. The savings were first announced last May.

“We don’t want to have to bring you into a public meeting to get details,” City Council finance committee Chairwoman Julissa Ferreras told Mr. Linn.

Mr. Linn said the administration didn’t want to discuss proposed savings until they had been fully negotiated with the Municipal Labor Committee, a group of unions that represents the city’s 350,000 workers.

“I think it’s counterproductive to the bargaining process to describe what we were talking about when we were talking about it,” he said.

“Many thought that this was smoke and mirrors. I have to say we’ve demonstrated that that was wrong,” Mr. Linn said.

The city’s health-care costs doubled in the past decade, from $2.6 billion in fiscal 2005 to $5.3 billion in fiscal 2015, which ends on June 30, according to the Citizens Budget Commission, a nonpartisan watchdog group.

De Blasio administration officials said they were on track to secure $400 million in savings for fiscal 2015. The plan calls for an additional $700 million in savings in fiscal 2016, $1 billion in fiscal 2017 and $1.3 billion in fiscal 2018, then $1.3 billion in savings each year after that.

Mr. de Blasio said the savings were achieved by “changing the conversation with our workforce from one of deadlock and confrontation to real problem solving and collaboration.”

The city’s health costs continue to rise, but de Blasio officials say they have slowed the increases with a variety of approaches.

In fiscal 2015, the city will spend $17 million less than budgeted on costs because of a lower-than-expected health-care rate increase. That figure is projected to grow to $403 million in fiscal 2018, the city said.

The city found $108 million in savings this year by cutting benefits for non-eligible employees, such as the adult children of city employees who have aged out of the plan.

And it found $153 million by reaching an agreement with the Municipal Labor Committee to lower the sum the city pays into the Health Insurance Stabilization Fund. The fund was set up to ease health-care costs for employees and is jointly controlled by City Hall and the unions.

Mr. Linn said he expected savings from many of those initiatives to be greater next year.

More than $500 million of the projected $1.3 billion in savings in fiscal 2018 will be found in “potential new initiatives to be decided by the city” and labor unions, according to the plan. City officials said that could include wellness programs to improve the general health of city employees and incentives to reduce emergency-room visits.

If the unions decline to work with the city to meet the goals, an arbitrator would step in, Mr. Linn said.

Maria Doulis, director of city studies at the Citizens Budget Commission, said the city is pursuing the right initiatives to bring down costs but called the amount of savings held out by the de Blasio administration “misleading.”

The city’s health-care costs are projected to increase to $5.6 billion in fiscal 2016, $6 billion in fiscal 2017 and $6.4 billion in fiscal 2018, city officials said.

Ms. Doulis said many of the savings weren’t reliably recurring, such as the reduction in payments to the stabilization fund. “If the purpose is to really fundamentally change the cost structure, that’s not going to do it,” she said of the plan.

Ms. Doulis also said that while the de Blasio administration listed savings from the lower health-insurance rates it negotiated, insurers could try to make up the cost by raising the city’s rates in future years.

A spokeswoman for the mayor said the administration would find other ways to save money if insurers raise the rates.

THE WALL STREET JOURNAL

By MARA GAY

April 1, 2015 9:39 p.m. ET

Write to Mara Gay at mara.gay@wsj.com

A big pension shortfall is buffeting the Windy City. Fearing that the multibillion-dollar gap might undermine Chicago’s finances, some bond investors and credit-ratings firms are becoming wary.

Four pension funds in the nation’s third-largest city are facing a combined funding gap of about $20 billion after years of underfunding and market losses during the recession. In comparison, Chicago has a $3.5 billion annual budget for general operating expenses.

Moody’s Investors Service cut the city’s credit rating in February to Baa2, two notches above junk status, and maintained a negative outlook. The firm warned that the city’s “highly elevated” unfunded pension liabilities could increase, “placing significant strain on the city’s financial operations.” Other ratings firms give the city higher grades.

The concerns come as an April 7 mayoral runoff election approaches, pitting Mayor Rahm Emanuel against Jesus “Chuy” Garcia, a county commissioner. The city’s finances have featured prominently in the election campaign.

To make matters worse, there is a real possibility that Chicago may have to pay higher interest rates to issue new bonds.

Three bond insurers, Assured Guaranty Ltd., National Public Finance Guarantee Corp. and Build America Mutual, already have backed billions of dollars combined of Chicago bonds and are at or near their limits for how much Chicago debt tied to property taxes they are willing to insure, said people familiar with the matter. An insurer agrees to make payments if the municipality defaults, so no insurance means Chicago would have to offer higher interest rates on any new bonds to compensate investors for the added risk.

The situation is an example of how municipalities across the country still are struggling to fill gaps in their pensions, which sustained losses on investments during the financial crisis. The troubles are prompting investors to avoid debt from municipalities with large pension-funding gaps, like New Jersey, fearing officials would have to choose between promises made to bondholders and employees.

In a statement, the mayor’s office said Mr. Emanuel has “worked to right the city’s financial ship.” The statement also said the mayor has been clear that “Chicago’s pension obligations were the biggest threat to the city’s financial security.”

Burton Mulford, a portfolio manager at Eagle Asset Management Inc. in St. Petersburg, Fla., said his firm has been staying away from Chicago bonds and is waiting until the pensions are in better shape.

“There’s going to be a lot more pain before there’s improvement,” said Mr. Mulford, whose firm oversees $2.2 billion in municipal bonds.

Some Chicago bonds have largely missed out on a bond-market rally due to the concerns. The price of a 30-year Chicago bond sold in March 2014 has risen 2.7% over the past year, compared with a 22% jump in the price of a similar-maturity U.S. Treasury bond. The yield on the Chicago bond decreased from 6.3% at the time of sale to 6.1% when it last traded in mid-March, while the 30-year Treasury bond decreased from 3.6% to 2.5% over the same period. Yields fall when prices rise.

The pension gap in Chicago has some analysts warning the city could in a decade or more face the same fate as Detroit, which also had pension shortfalls before it filed for bankruptcy protection in 2013. Although Chicago’s economy is more robust, some investors said Chicago needs to address its pension situation.

“Chicago is Detroit 10 to 15 years from now, if they do not deal seriously with this pension problem,” said Tom Metzold, senior municipal portfolio adviser at Eaton Vance Management, with $28.3 billion of assets under management. Mr. Metzold said his firm has “virtually no holdings” in Chicago debt.

Mr. Emanuel has supported overhauling the city’s pensions, which are governed by state law. Last year, state lawmakers agreed to reduce benefits for city workers and retirees in two of the plans. The overhaul, however, has been challenged in court.

Another problem for the city: The ratings cut by Moody’s triggered potential fees of about $38 million on interest-rate swaps tied to Chicago bonds. The swaps were designed to protect the city from increases in interest rates, but rates fell instead. The city has said it is in discussions with Wells Fargo & Co., which is a party to the swaps, regarding the fees. Wells Fargo declined to comment.

Financial problems aren’t limited to the city itself. The Chicago Board of Education, which is separate from the city but whose board members are appointed by the mayor, is facing $228 million in potential swap fees after a series of credit downgrades. The school district said it is working to renegotiate the swap terms.

Not everyone sees Chicago’s situation as dire. Fitch Ratings gives Chicago a single-A-minus rating, two notches above Moody’s, and Standard & Poor’s Ratings Services rates the city at single-A-plus, four notches above Moody’s. And some traders sense an opportunity in Chicago bonds.

Dominick Mondi, president of global markets at Mesirow Financial, a Chicago-based financial firm, said yields on Chicago bonds are reasonable compared with other bonds, like debt from hospitals, that carry ratings similar to Chicago’s Baa2 mark from Moody’s. “There is a vibrant, alive downtown,” said Mr. Mondi, highlighting one of the city’s economic strengths.

Some investors said there will be appetite for Chicago debt, even without insurance guarantees, if yields are high enough.

“Chicago’s economy is doing fairly well,” said John Miller, co-head of fixed income at Chicago-based Nuveen Asset Management LLC, which oversees about $100 billion in municipal debt, including some Chicago bonds. “Education and health-care institutions are really strong.”

THE WALL STREET JOURNAL

By MIKE CHERNEY And AARON KURILOFF

April 1, 2015 6:18 p.m. ET

—Mark Peters contributed to this article.

Write to Mike Cherney at mike.cherney@wsj.com and Aaron Kuriloff at aaron.kuriloff@wsj.com

PROVIDENCE, R.I. — A deal in the legal fight over the state’s 2011 landmark public pension system overhaul was unveiled in court Thursday, affecting about 59,000 past and present state employees.

Frank Williams, a retired Rhode Island Supreme Court chief justice who worked to broker a settlement, said most of the retirees and public unions suing the state had accepted the terms, calling it an “awesome achievement.”

Gov. Gina Raimondo said the settlement provides certainty for public employees and for municipalities, locks in 90 percent of the savings from the pension reform and resolves six of nine lawsuits against the state.

“It’s in the best interest of all Rhode Islanders, now and into the future,” she said at a news conference after the hearing.

The deal, however, does not end years of legal wrangling over the higher retirement ages and cuts to cost-of-living increases that were designed to save the state $4 billion over 20 years.

The parties have to be notified and the settlement has to be formally approved by the judge. The pension reform was done legislatively, so the settlement terms have to be incorporated into the law and approved by the General Assembly.

The unions representing municipal police, Cranston police and Cranston fire, which collectively represent about 800 people, did not agree to the terms. Their lawsuits are continuing and will be addressed by the court after the settlement is implemented.

In light of the settlement with most of the plaintiffs, Judge Sarah Taft-Carter vacated the April 20 trial date. She gave the parties until May 18 to implement the settlement.

The settlement provides for cost-of-living increases and one-time stipends for retirees.

The cap for calculating the benefits would increase for some retirees, and the calculation would be based on a new formula using both the performance of investments and the Consumer Price Index. Employees would be allowed to retire earlier if they meet set requirements.

Carly Beauvais Iafrate, an attorney for the retirees, said Thursday’s announcement was the beginning of a “second process,” and she’s pleased it is starting because it is the best possible resolution.

House Speaker Nicholas Mattiello said that there’s no timetable for legislation incorporating the terms and that the House needs to “conduct its due diligence.”

Both Mattiello and Senate President Teresa Paiva Weed said the settlement was in the best interests of everyone involved.

Roger Boudreau, who leads the Rhode Island Public Employees’ Retiree Coalition, said the retirees won’t be happy with the settlement because they’re getting “a fraction” of what they were promised, and they made plans based on what they expected to receive when they retired.

But they’re also mindful that their chances of prevailing at trial are “very slim at best,” he added.

Treasurer Seth Magaziner said the past several years have been characterized by uncertainty for public employees, retirees and the state. He said the state’s credit is rated below average because of the pension lawsuit.

A previous settlement was rejected after police union members voted it down.

“It’s a sad chapter in our state’s history,” Magaziner said. “Now we can finally turn the page and move forward.”

By THE ASSOCIATED PRESS

APRIL 2, 2015, 10:01 P.M. E.D.T.

Bondholders of Puerto Rico’s cash-strapped power utility unveiled a revitalization plan on Wednesday, days after the authority reached another agreement with creditors to push back a deadline to extend some loans.

Without a deal, the Puerto Rico Electric Power Authority may need to repay about $696 million borrowed to help fund operations. The new deadline is April 15.

The junk-rated, state-owned utility, known as Prepa, said its bondholders’ plan provides for nearly $2 billion in new infrastructure investment, with bondholders and their capital partners backstopping the riskiest portion of this new investment. This new capital, Prepa says, will allow it to generate electricity at lower and more stable rates while continuing to service contractual debt obligations. It would also allow a workout of more than $700 million that Commonwealth government entities owe to Prepa.

Investors have faced months of uncertainty from Puerto Rico’s economic troubles. The island has more than $70 billion in debt that is widely held because it is exempt from federal, state and local taxes.

Prepa is at the forefront of the island’s financial woes. The authority, which has about $9 billion of debt, is struggling to find cash to fund operations and pay lenders as the commonwealth struggles with steep unemployment and a weak economy.

Puerto Rico is barred from permitting its government entities to access Chapter 9 bankruptcy protections afforded cities like Detroit.

THE NEW YORK TIMES

By LISA BEILFUSS

April 1, 2015 4:02 p.m. ET

Puerto Rico’s cash-strapped power utility got a reprieve from creditors at a time of heightened worry about the financial health of the U.S. territory.

Prices on some Puerto Rico bonds slumped to record lows last week amid concerns that problems at the Puerto Rico Electric Power Authority, known as Prepa, could be the harbinger of bigger trouble.

The utility on Monday said it reached another agreement with creditors to push back a deadline—this time by 15 days—to extend some loans. Without a deal, it may need to repay about $696 million borrowed to help fund operations. The most recent deadline was Tuesday.

“All parties believe advances have been made and there is merit to continue conversations with our creditors to find feasible solutions,” said Lisa Donahue, the authority’s chief restructuring officer, in a news release.

Some general-obligation bonds backed by the island and issued last year as part of a $3.5 billion sale traded at about 82 cents on the dollar last week. Some bonds touched a record low of about 79.4 cents Friday, below the previous low in February of 81 cents. Yields, which rise as prices fall, rose to about 10%.

The S&P Municipal Bond Index Puerto Rico, a broad, market-value-weighted index of debt from the island, has fallen 1.3% this month, including prices and interest payments.

This contrasts with the rest of the bond market, where investors have shrugged off warnings about a rise in interest rates by the Federal Reserve, sending yields on the 10-year Treasury note to 1.959% on Monday and pushing the broad municipal market index up 0.2%.

“Puerto Rico seems to be moving on its own nowadays, meaning it moves down while the rest of the market is stable or up,” said Daniel Solender, director of municipal-bond management at Lord Abbett & Co., which oversees about $17 billion in tax-exempt debt. He declined to discuss if he had bought or sold the commonwealth’s bonds recently.

Investors have faced months of uncertainty from Puerto Rico’s economic woes. The island has more than $70 billion in debt that is widely held because it is exempt from federal, state and local taxes.

A Puerto Rico law that attempted to create an orderly bankruptcylike process for the power authority and other agencies has been thrown out in court.

Plans for tax overhauls have bogged down. The commonwealth is working to borrow as much as $2.9 billion to fund operations. Several island lawmakers have proposed amending the island’s constitution to remove protections for bondholders.

Mutual funds are among those paring holdings. Almost one-quarter of municipal-bond funds that owned Puerto Rico debt sold it last year, according to data from research firm Morningstar Inc.

More than half of municipal-bond mutual funds still have debt from the commonwealth, down from about 70% at the end of 2013.

Hedge funds and distressed-debt traders were among the buyers of the $3.5 billion sale in 2014. Some are now purchasing the debt below face value, expecting to recover more than they spent even in the event of a restructuring or default, several investors said.

Prepa is at the forefront of the island’s financial woes. The authority, which has about $9 billion of debt, is struggling to find cash to fund operations and pay lenders as the commonwealth struggles with steep unemployment and a weak economy.

Prepa will likely default on a $400 million July payment to bondholders, according to Moody’s Investors Service. The junk-rated authority has already missed a March 2 deadline to provide lenders with a restructuring plan.

According to Richard Donner, vice president and senior credit officer at Moody’s, it is a good sign that creditors are still negotiating.

A spokeswoman for Prepa declined to comment, citing a confidentiality agreement.

Overhauling the island’s public entities has been a priority for the administration of Gov. Alejandro García Padilla as it tries to restart the economy, eliminate budget deficits and reassure investors that the island’s fiscal health is improving.

That included passing a law in June that would have allowed the island’s power, water and transportation authorities to restructure about $20 billion in debt. Puerto Rico is barred from permitting its government entities to access Chapter 9 bankruptcy protections afforded cities like Detroit.

A spokeswoman for the commonwealth declined to comment.

Prepa bond prices, which fell after the law’s passage, rose after a federal judge blocked it last month, saying it was unconstitutional. That ruling is under appeal. Also last month, a U.S. House of Representatives panel held a hearing on a bill that would permit Puerto Rico to allow its agencies access to Chapter 9 protections.

A report by Janney Capital Markets this month said that a Prepa default may be just the beginning. Population declines, increasing debt and pension burdens still drag on the economy, and other Puerto Rico bonds will probably also default or restructure in coming years, including general-obligation and sales-tax bonds.

Melba Acosta, president of the island’s Government Development Bank, who is also fighting for the governor’s tax-overhaul plan, said in a statement that the bank and administration both oppose the proposed legislation that would reduce investor protections on tax-supported debt.

“There seems to be a drumbeat on the island toward bondholders sharing pain,” said Robert Donahue, managing director at Concord, Mass., research firm Municipal Market Analytics.

That could complicate efforts for a new bond sale by the government. Fitch Ratings last week downgraded Puerto Rico’s general-obligation debt further into junk territory, citing recent statements by lawmakers that call into question the ability of the government to borrow the money and its willingness to repay debt.

John Mousseau, director of fixed income at Cumberland Advisors, Sarasota, Fla., said his firm bought the 2014 bonds and traded them quickly. While he now restricts Puerto Rico holdings to bonds protected by insurance, he said there may be value there eventually.

“You start to wonder at what price they would be a great buy,” he said.

THE WALL STREET JOURNAL

By AARON KURILOFF

Updated March 30, 2015 10:02 p.m. ET

Write to Aaron Kuriloff at aaron.kuriloff@wsj.com

On the 15th anniversary of the implosion of the Kingdome, a King County official said enough lodging-tax revenue has been collected to pay off debt of the former home of the Mariners and Seahawks.

Fifteen years after the Kingdome was imploded, King County taxpayers have finally stopped paying for the stadium that was home to the Mariners and Seahawks.

King County budget director Dwight Dively said Thursday that enough lodging-tax revenue has been collected to pay off what’s left of the $67.6 million in municipal bonds issued to repair the Kingdome’s tile roof back in 1994. The bonds can’t technically be paid in full until year’s end, so the $18.7 million still owed in principal plus interest will be placed in an escrow account until that time.

“It’s been a good couple of years in the hotel industry,’’ Dively said of the lodging tax on hotels and motels used to pay off the debt. “It isn’t just the money that’s come in this year. The last two or three years have been significantly stronger than expected.

“That’s not surprising, given the economy and how attractive this area is.’’

The Kingdome was imploded March 26, 2000 — 15 years ago Thursday — about 24 years after it opened.

The hotel/motel tax is 15.6 percent in Seattle, with 2 percent earmarked for Kingdome roof repairs, and is expected to generate $24.8 million for the county this year. Dively said the 2 percent amount no longer needed for the Kingdome will instead go to the 4Culture program, which helps arts, heritage and preservation efforts within the county.

King County taxpayers have financed the stadium via municipal bonds since 1972, when construction began on a stadium that opened in 1976. The original $40 million in bonds used for construction costs weren’t paid off until 2011.

Water seepage caused four 26-pound ceiling tiles to fall into the seating area July 19, 1994, a half-hour before fans were allowed into the stadium to see the Mariners play the Baltimore Orioles. The Mariners were forced to play their final 20 games that year on the road before the baseball players’ strike ended the season.

The Seahawks had to play both home exhibition games and their first three regular-season contests at the University of Washington’s Husky Stadium that year as repairs were completed. Two construction workers died during repairs before the Kingdome reopened in early November, but the falling tiles helped prompt calls to replace the Kingdome with new sports venues that eventually materialized nearby with Safeco Field and CenturyLink Field.

The Seattle Times

Geoff Baker

Originally published March 26, 2015 at 3:34 pm Updated March 26, 2015 at 6:15 pm

(Bloomberg) — For all the financial challenges confronting Chicago, its schools are in even more precarious shape as the Board of Education sells debt for the first time since 2013.

The nation’s third-largest system is grappling with pension and budget deficits that spurred the closing of 50 schools almost two years ago. This month, Moody’s Investors Service and Fitch Ratings cut its credit to one level above junk, potentially triggering a $228 million payment to end interest-rate swaps. The Moody’s move left the district grade one step weaker than the city.

The struggles of the system and its 400,000 students have become a rallying point for opponents to Mayor Rahm Emanuel. As Chicago heads for an unprecedented mayoral runoff, Emanuel is dealing with voter backlash after the school board he appointed carried out the closings. The system projects a $1.1 billion shortfall next fiscal year because climbing retirement costs are consuming a growing share of resources.

“It’s very difficult to see how they get out of this pickle,” said Paul Mansour, the Hartford, Connecticut-based head of municipal research at Conning, which oversees about $11 billion in municipal debt. “We’ve been trimming our position.”

Cooler Schools

The district sold about $178 million of floating-rate debt Tuesday, and plans to price an additional $372 million of securities March 31, according to data compiled by Bloomberg. Next week’s issue will include about $77 million of fixed-rate bonds for refinancing as well as debt to reimburse the system for capital work, according to officials and Bloomberg data. The projects include installing air conditioning and upgrading classrooms, said Ginger Ostro, chief financial officer for the system.

“As those projects occur, we pay for them using a line of credit, which is less expensive for us,” Ostro said. “When that’s fully used, then we would issue the bonds that we’re issuing now to replace that line of credit.”

The district hasn’t sold debt since issuing floating-rate securities in May 2013, according to Bill McCaffrey, a spokesman. It joins governments nationwide refunding with municipal yields hovering above five-decade lows.

Bond Support

Moody’s grades the board’s debt Baa3, while Fitch gives it an equivalent BBB-. S&P assesses it at A-, three steps higher. All three have a negative outlook.

Kroll Bond Rating Agency marks the borrowings BBB+, three levels above junk, with a stable outlook, noting that the bonds have protection as state aid is the main source of repayment.

Yet the looming crisis is evident in bond documents, which say that operating revenue may tally $4.8 billion in fiscal 2016, short of expenditures of $5.9 billion.

“We have exhausted all short-term solutions to our budget crisis,” Barbara Byrd-Bennett, chief executive officer of the system, said at a Feb. 25 board meeting. Given the outlook for fiscal 2016, “it is impossible for us to cut our way to a balanced budget.”

The travails have become a central issue in the leadup to the April 7 runoff pitting Emanuel, 55, against Jesus “Chuy” Garcia, a 58-year-old Cook County commissioner. While the election is nonpartisan, both are Democrats.

Emanuel’s Lead

Emanuel held a 51 percent to 37 percent lead in a poll of 712 registered voters that was taken March 6-11 and published in the Chicago Tribune. The survey had an error margin of 3.7 percentage points.

The winner will take over as the city of 2.7 million approaches a fiscal cliff. Chicago has $20 billion in unfunded pension liabilities, with a $600 million payment due next year.

Chicago’s mayor effectively runs the school system, appointing the seven-member board. Garcia has said he supports shifting to an elected board, a move voters approved in a nonbinding referendum Feb. 24.

In a TV commercial, Garcia stands in front of a shuttered school and blames Emanuel for the district’s financial strain. Garcia has called the decision to close the schools a disaster, while not promising to reopen any of them. He’s backed by the Chicago Teachers Union and its president, Karen Lewis, who’s publicly clashed with the mayor, most notably during a 2012 teachers’ strike.

Annual Savings

Emanuel, who has said the closed schools were underperforming and underused, repeatedly highlights his extension of the school day, enactment of full-day kindergarten and free community college for public-school students with a grade-point average of at least 3.0. Closings have saved an estimated $40 million a year, according to bond documents.

Since 2011, the district has reduced non-classroom spending by more than $740 million, eliminated hundreds of administrative positions and renegotiated contracts, according to officials.

In December 2012, it sold 21-year bonds to yield 3.57 percent, about 1.4 percentage points above benchmark munis, Bloomberg data show.

“We would anticipate that our credit spreads have widened slightly given the changes in our ratings, but again, that’s something that we’re evaluating day to day,” said Walter Stock, the system’s debt manager.

The district hasn’t done enough to ease its fiscal woes, said Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services LLC, which analyzes municipal finance.

“The cost of procrastination is coming home to roost,” Ciccarone said. “They’re going to have to pay the price for that.”

Mar 23, 2015 5:00 PM PDT

Elizabeth Campbell

To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Flynn McRoberts

NEW YORK (Standard & Poor’s) March 25, 2015–Standard & Poor’s Ratings Services today said it is reviewing its rating on Atlantic City, N.J.’s general obligation (GO) bonds outstanding based on the Emergency Manager’s 60-day report released March 23, 2015. The report does not directly reference bankruptcy. However, it does identify possible deferrals in debt service payments, which could occur as early as the current fiscal year. Therefore, our analysis will focus primarily on the debt restructuring and refinancing that the Emergency Manager identifies as potential options to address the city’s fiscal situation.

Should we view these options as having a detrimental impact on bondholders, we could lower the GO rating to as low as the ‘CC’ category, barring an actual default or distressed exchange by the city, which in our view would warrant a ‘D’. Conversely, if these actions are consistent with the terms of the bonds outstanding, our analysis will focus further on both the short- and long-term impacts of the Emergency Manager’s plan, consistent with our local GO criteria.

The ‘BB’ GO rating remains on CreditWatch with negative implications, where it had been placed Jan. 27, 2015. We expect to review our CreditWatch placement within the next 30 days based on our analysis of additional information presented in light of the report’s findings. For more information on the GO rating, please see the report published Jan. 27, 2015, on RatingsDirect.

Primary Credit Analyst: Lindsay Wilhelm, New York (1) 212-438-2301;
lindsay.wilhelm@standardandpoors.com

Secondary Contacts: Karl Jacob, Boston (1) 617-530-8134;
karl.jacob@standardandpoors.com
Lisa R Schroeer, Charlottesville (1) 434-220-0892;
lisa.schroeer@standardandpoors.com

CHICAGO (Standard & Poor’s) March 23, 2015–Standard & Poor’s Ratings Services is closely monitoring the reaction of the Chicago Board of Education (CBOE; A-/Negative) to possible swap termination payments in excess of $200 million following the downgrade of its general obligation (GO) debt to below ‘BBB’ by another rating agency. While we view the possible trigger payments as pressuring the district’s budget, we do not view these payments as likely to cause a liquidity crisis at present. For now, there is no change in our long-term and underlying ratings on CBOE’s debt. We believe that CBOE has several avenues to address the potential cash payments associated with swap terminations. First, we understand the board is actively negotiating with the swap counterparties to amend the swaps to avoid having to make the termination payments. However, Standard & Poor’s cannot be certain that the board will be able to avoid termination payments through its negotiations. If CBOE is unsuccessful in its negotiations and is forced to immediately make the termination payments, we believe that the board would be able to handle the payments given that it currently holds $174 million in cash in its debt service stabilization fund (as of March 10, 2015), which can be used to cover the swap termination payments, and has access to cash in other funds. The board’s general operating fund held $70.8 million of unrestricted cash as of June 30, 2014, and is currently at a high liquidity point in the fiscal year following the receipt of property taxes in February from the county’s first tax bills of 2015. The board also has access to $500 million in bank lines of credit, which management reports would be available to help pay swap termination payments. Over the remaining three months of the current fiscal year and next fiscal year, the possible loss of so much of cash and operating reserves to cover swap termination payments would put even greater pressure on the board as it structures its fiscal 2016 budget in the face of a budget gap of $1 billion. Given operating reserves that we consider strong as of fiscal year-end June 30, 2014 (10.1% of expenditures), but are projected by management to drop in fiscal 2015 due to a general fund shortfall of up to $916 million, accommodating the termination payment would mean that the board will have to cut costs even more or identify additional revenue sources, to maintain at least adequate reserves, which is a course of action we view as challenging. As reflected in our negative outlook, maintenance of the rating at the current level is conditioned upon the board’s ability to retain at least adequate unrestricted reserves. CBOE hedged most of its variable-rate debt with eight floating-to-fixed interest-rate swaps. According to management, as of March 19, 2015, the value of the board’s swaps for which termination payments may be due because of the lowered ratings was negative $228 million. The swaps were structured without any collateral requirements on the part of the board, but they could be terminated by the counterparties if two of rating agencies currently rating the board’s GO debt lower their ratings to below Standard & Poor’s equivalent of ‘BBB’. We lowered our ratings on CBOE’s GO debt two notches to ‘A-‘, with a negative outlook, on March 18, 2015, because of the board’s current and projected fiscal imbalances. For more information, see our report published March 18, 2015, on RatingsDirect.

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.

Primary Credit Analyst: John A Kenward, Chicago (1) 312-233-7003;
john.kenward@standardandpoors.com

Secondary Contact: Helen Samuelson, Chicago (1) 312-233-7011;
helen.samuelson@standardandpoors.com

Financially beleaguered Atlantic City is at risk of defaulting on millions in debt, a new credit analysis warned Thursday.

The city faces a $40 million loan repayment at the end of March and needs access to the credit market to refinance that loan. Its credit rating is at junk status, which will make it difficult for the city to find reasonable refinancing. “With only four business days between now and March 31,” the Moody’s Investors Service analysis said, “it will be difficult to refinance the loan in the capital markets.”

The Moody’s analysis comes just two days after Atlantic City’s emergency manager Kevin Lavin released his plan to address the city’s looming financial crisis. The city faces a $101 million budget gap in 2015 alone, a figure that amounts to 40 percent of Atlantic City’s entire budget last year. Lavin’s plan requires swift action by the state legislature, which would have to pass two bills proposed late last year to redirect nearly $48 million in special funds and taxes to the city’s coffers. It also calls for a deferral in paying $42 million in state health benefit and pension payments this year.

If the city survives the March 31 deadline, Moody’s predicts the state legislature will have about three months until it hits another wall with nearly $19 million in debt due on three separate dates in August.

Adding to the uncertainty are questions about the ability of struggling casinos to pay their property tax payments to Atlantic City. “Should a casino become delinquent on its property tax payments as Revel and Trump Taj Mahal did in 2014, the [emergency manager’s] short-term solutions will not be enough to prevent a 2015 debt service default,” Moody’s said.

Atlantic City has struggled for years as the near-collapse of the gambling industry there eroded its tax base. But this January saw a significantly dramatic drop in the city’s fortunes. Gov. Chris Christie appointed an emergency management team with ties to Detroit’s bankruptcy and asked the team to consider debt restructuring through bankruptcy. The move resulted in “super downgrades,” rare declines of multiple notches, by Moody’s and Standard & Poor’s to the city’s credit rating.

Following the emergency manager’s report this week, S&P warned it could downgrade the city’s credit rating again. (Although it is low, S&P’s credit rating for Atlantic City is still higher than the Moody’s rating.) Both rating agencies said they are worried about the city’s liquidity struggles and whether that would impair its ability to fully pay back its bondholders. S&P said it could drop the city’s rating as low as CC, which would match the Moody’s rating. If it defaulted on debt, it could drop to a D rating, S&P said. A rating of D is extremely rare for a U.S. city and typically given to cities in bankruptcy.

GOVERNING.COM

BY LIZ FARMER | MARCH 26, 2015

(Bloomberg) — Chicago could avert financial doom with a new casino or an expanded sales tax. Or it could relieve the pressure from $20 billion in pension debt by slapping a levy on commuters.

As the city’s credit rating slides toward junk status, the most direct remedy to dodge the threat of insolvency — raising property taxes — is barely mentioned by the two men vying to run Chicago in the next four years.

In the race for mayor, to be decided in an April 7 run-off, Mayor Rahm Emanuel and his challenger, Jesus “Chuy” Garcia, are treating the option as political poison even though it may be inevitable.

“My plan specifically avoids increasing property taxes,” Emanuel, 55, said in a March 16 debate, promoting a broader sales tax and the casino.

Garcia, too, supports expanding the sales levy, and suggested in a debate Thursday night that the city consider a luxury tax on some purchases by higher wage earners. He also says Chicago first needs performance audits to assess its financial situation.

“Difficult decisions, hard decisions are going to have to be made,” Garcia said in the latest debate.

Both candidates have stopped short of issuing irrevocable declarations against boosting property taxes. Yet their political discomfort is a tribute to the enduring public furor over such levies, about four decades after California sparked a nationwide revolt against the largest source of local-government income.

Recession Whammy

The sensitivity resonates in cities like Chicago, where the double-whammy of the recession and foreclosures cut home values by an average 24 percent from their peak in 2003, according to a study by DePaul University.

While proposing a property-tax boost may be abhorrent before the election, after the vote is a different matter. Even as Emanuel, mayor since 2011, and Garcia, a 58-year-old Cook County commissioner, try to distance themselves from it, an increase has taken on a sense of inevitability.

“I believe we can truly say that it will happen, but it is all in how much,” Chicago Alderman Carrie Austin, an Emanuel supporter and chairman of the City Council’s budget committee, said this month.

“That’s a bullet that we will have to bite because we have to right our ship,” Austin said.

Credit Deterioration

Investors who have watched the city’s credit standing deteriorate say there’s no choice if Chicago is to corral the cost of pension liabilities — the annual payment will swell to $1.1 billion, from $480 million this year. Moody’s Investors Service cut its $8.3 billion of general obligations to Baa2 last month, two steps above junk, citing the retirement expenses. Chicago can’t reduce workers’ retirement benefits without state legislative approval.

“Limitations on benefit reforms will likely leave large tax increases as the only viable solution, a challenge given the city’s historical reluctance to tap its property tax base,” Matt Fabian, a partner at Concord, Massachusetts-based research firm Municipal Market Analytics, said in a March 16 report.

Chicago isn’t master of its financial destiny. State legislators would have to approve a tax on the 600,000 commuters who work in the city, or any effort to impose an income tax.

Emanuel, former chief of staff for President Barack Obama, floated a $250 million property-tax boost last year to pay for pension obligations. He dropped the plan in the face of City Council opposition, and is taking a different route this time. He’s proposing to build a casino, dedicating the revenue to retirement debt, and extend the sales tax to services. Again, he can’t do either without state approval, and even with that consent, the casino wouldn’t be built in time to contribute to next year’s pension payment.

Direct Control

A property-tax increase, though, is within the city’s direct control. The levy generated $824 million last year, equivalent to about 9 percent of this year’s spending plan, according to Chicago’s annual financial analysis.

The population of the nation’s third-most-populous city fell 7 percent in the last decade to 2.7 million, according to the Census Bureau. The drop increases pressure on the tax base to pay for retirement commitments, some made decades ago.

“The problem is you’re paying the bills of the city of 30 years ago with today’s population,” said Norton Francis of the Tax Policy Center in Washington. “That’s a huge challenge for cities.”

Tax Burden

In Chicago, property taxes have risen even as housing values dropped. The effective tax rate jumped 32 percent from tax year 2003 to 2012, according to the Civic Federation, a nonprofit research group specializing in government finance.

Although the national recession ended in 2009, housing values in parts of the South Side have yet to recover, according to the Institute for Housing Studies at DePaul University. The area is home to many mostly black precincts, where Emanuel’s support has dropped relative to the 2011 election.

Opposition to property taxes is part of the campaign dialogue. Emanuel criticized Garcia for a vote he cast in favor of a higher levy — in 1986.

Credit analysts and rating companies want Chicago to enact sustainable solutions, not patchwork fixes, to its financial woes, said Paul Mansour, head of municipal research at Conning, which oversees about $11 billion in municipal debt, including Chicago holdings.

“As much as property-tax increases are abhorred by residents, we in the municipal community prefer them because they’re easier to predict,” said Mansour, who’s based in Hartford, Connecticut.

“It’s hard to imagine a situation where increases in the property taxes are not some part of the equation,” he said.

by Tim Jones

March 26, 2015

To contact the reporter on this story: Tim Jones in Chicago at tjones58@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, William Selway

(Reuters) – The holdout creditor in Stockton, California’s bankruptcy case filed its opening brief in an appeal of the city’s reorganization plan on Monday, claiming “no bondholder has ever received so little in the history of municipal bankruptcy.”

The creditor, two funds managed by Franklin Templeton Investments, said Stockton’s plan to exit Chapter 9 bankruptcy was discriminatory and punitive.

Franklin said it would receive less than 1 percent of its $30.5 million unsecured claim in the case, now before the U.S. Bankruptcy Appellate Panel of the Ninth Circuit.

The brief claimed that by confirming a plan providing such a small distribution, compared with recoveries of 52 percent to 100 percent for other unsecured claims, U.S. Bankruptcy Judge Christopher Klein erred in backing Stockton’s exit plan.

“The court’s errors of law, and the erroneous findings of fact on which those conclusions were premised, require reversal and remand with a direction for the city to fashion equitable plan treatment for Franklin,” the brief said.

Suffering a steep decline in revenue, Stockton filed for bankruptcy protection from its creditors in 2012. The Northern California city of about 300,000 residents got the green light from Klein to exit Chapter 9 last fall over objections by Franklin’s legal team.

The Franklin team argued that Stockton would leave its two funds with little while leaving the city’s pension fund, the California Public Employees’ Retirement System, untouched.

Stockton’s case had been closely watched in the $3.6 trillion U.S. municipal debt market, with a focus on its pension dispute. The issue is of growing concern for state and local governments, especially whether pensions can be cut during bankruptcy.

Klein said Stockton had the authority to cut pensions but the city declined to do so. It instead eliminated health care for more than 1,000 of its retired employees to help cut spending.

The city also reworked labor agreements, won concessions from various creditors and won voter approval for a sales-tax increase to help bolster its finances, moves that helped it win Klein’s support for its reorganization plan.

The plan took effect last month.

The case is In re City of Stockton, California, in U.S. Bankruptcy Appellate Panel of the Ninth Circuit, Case No. EC-14-1550

For Franklin: James Johnston, Jones Day

For Stockton: Marc Levinson, Orrick, Herrington & Sutcliffe

By REUTERS

MARCH 23, 2015, 6:07 P.M. E.D.T.

(Reporting by Robin Respaut and Jim Christie; Editing by Bernard Orr and Dan Grebler)

NEW YORK — A turnaround team tasked with reviving Atlantic City says New Jersey’s struggling gambling hub must consider cost cuts, layoffs and longer bond maturities, but bankruptcy is not in the cards – yet.

“Bankruptcy is not something that we are contemplating,” said emergency manager Kevin Lavin on a conference call on Tuesday. “We think that this process can be done without that necessity.”

Atlantic City’s tax base has been gutted, to just $7.35 billion in 2015 from $20.5 billion in 2010, as its casinos suffered from competition in neighboring states.

Lavin’s report, which comes about 60 days after his appointment by Governor Chris Christie, describes a city in acute distress.

“It’s actually a lot more severe than we thought when we first started,” Lavin said.

Many had feared his team, which has ties to the professionals that oversaw Detroit’s municipal bankruptcy, would prioritize bondholder losses and bankruptcy.

Instead, Lavin’s report proposes a mediator to negotiate with stakeholders, including labor unions and casinos.

Lavin’s first priority is closing the city’s projected budget deficit of $101 million. Without significant change, the cumulative deficit will be $393 million over five years, the report said.

Stakeholders would have to help staunch the bleeding, he said.

The city may have to cut expenses by $10 million, a combination of operational cuts and a 20 percent to 30 percent reduction of its 1,150 or so full-time employees. Six of the city’s labor contracts have expired and are already in negotiations.

Retirees, including lifeguards, could see pension plan changes or benefit delays.

Even taking adjustments into account – including delaying city contributions into pension funds, operational cuts and the infusion of $77 million of state aid – the city’s cash flow would still dip below zero twice by August, the report showed.

“Absent the continuation of significant state assistance … the city simply cannot stand on its own,” it said.

Matt Fabian, a managing director of Municipal Market Advisors, said the state was responsible for the city’s dependency on casinos.

“The state created Atlantic City,” he said. “The state should have some culpability.”

New Jersey Senate President Steve Sweeney, a Democrat who is spearheading legislation to help Atlantic City, said the Christie administration has held summits and issued reports, but “taken no real action.”

Mayor Don Guardian said he had been working with Lavin’s team, which will consider long-term solutions in a second phase of work.

By REUTERS

MARCH 24, 2015, 6:40 P.M. E.D.T.

(Reporting by Hilary Russ and Megan Davies; Editing by David Gregorio and Andre Grenon)

LOS ANGELES — The bankrupt California city of San Bernardino revealed on Thursday details of its deal with the state’s public pension system Calpers, in which the retirement fund will be paid in full under the city’s bankruptcy exit plan.

San Bernardino announced last year it intended to pay the powerful California Public Employees’ Retirement System in full under its bankruptcy plan, while cutting its bondholder debt. But it had not before revealed details of the deal with Calpers, America’s largest public pension fund with assets of $300 billion.

San Bernardino, a city of 205,000 located 65 miles east of Los Angeles, declared bankruptcy in August 2012 with a $45 million deficit. It is one of a handful of municipal bankruptcies, along with Detroit, Michigan and Stockton, California, that has been closely watched by the $3.6 trillion U.S. municipal bond market.

Bondholders, public employees and state and local governments want to understand how financially distressed cities handle their debts to Wall Street, compared with other creditors such as large pension funds during Chapter 9 protection.

San Bernardino was recently ordered by the federal bankruptcy judge overseeing the case to make public the Calpers deal. The city published details before a court hearing in the case on Thursday.

The Calpers deal has angered other creditors, including holders of $50 million in pension obligation bonds, who face cuts to their debt. They are suing the city over the Calpers deal.

After it declared bankruptcy in 2012, San Bernardino suspended its employer payments to Calpers for one year. It accrued roughly $16 million in arrears, plus millions more in penalties, fines and interest.

Under the deal with Calpers, the city agreed to pay it in full under its bankruptcy plan, which it must issue by May 31, and to “ratify” its relationship with Calpers.

To repay the arrears, the city paid $1.5 million to Calpers in May 2014, and agreed to pay roughly $600,000 a month for two years between July 2014 and June 2016.

The city also agreed to pay five annual payments of $400,000 to settle fines, penalties and interest.

Luxembourg-based EEPK, holders of the pension bonds, and Ambac Assurance Corp, which insures a portion of them, sued San Bernardino in January, claiming the bonds are part of a single pension obligation, so that any payment to Calpers requires equivalent payment to the bondholders.

Initial arguments on that lawsuit will be heard on May 11.

By REUTERS

MARCH 26, 2015, 6:29 P.M. E.D.T.

(Reporting by Tim Reid)

(Bloomberg) — Biloxi sold $21 million of bonds to pay for a baseball stadium, lured the Shuckers to town and auditioned singers for the national anthem. It’s now racing to avoid losses because the team has nowhere to play.

The Mississippi city, with a population of 45,000, may decide March 24 whether to spend an extra $1 million to complete work on the ballpark before Aug. 31, when it’s set to be finished. If the stadium isn’t ready when the season starts on April 9, Biloxi may have to pay $10,000 in fines for every game that can’t be played there. It also stands to forgo thousands more in tax revenue anticipated from visiting fans.

“We were worried the taxpayers would be on the hook if this stadium didn’t make money the way the city said it would,” said Roberta Avila, the executive director of the Steps Coalition, a Biloxi community group that opposed public funding for the stadium. “There was no guarantee.”

The costs underscore the risks to cities that borrow to build stadiums, seeking to boost their economies. More than $9 billion of municipal bonds have been issued to finance arenas for professional sports teams, data compiled by Bloomberg show. Hartford, Connecticut, sold about $62 million of bonds last month to make a home for the New Britain Rock Cats, the baseball team that will become the Hartford Yard Goats when they move.

Some Mishaps

Such minor-league stadiums don’t always deliver the expected benefits. Newark, New Jersey, is paying $1 million a year on bonds for a facility that’s been without a team since the Newark Bears folded because of dwindling attendance.

To finance the stadium, Biloxi sold general-obligation bonds and used $15 million of its share of what BP Plc paid after an oil spill damaged the Gulf Coast in 2010. General-obligation debt is funded by the city budget, instead of earmarked fees or other specific revenue.

Construction was delayed as the team waited for approval from Minor League Baseball to move from Huntsville, Alabama. The city may be required to pay fines to the Shuckers if the venue’s not open after the season begins. Early-season games are set to be played in Huntsville and at the fields of its opponents.

The team may be willing to play in an incomplete stadium if the city can certify that it’s safe, said Tim Bennett, the Shuckers’s vice president. The team is offering to help pay some of the cost to get the stadium open before August.

“We’re in negotiations to get in more quickly than planned,” said Bennett. “It doesn’t look very good for us to be collecting fines of $10,000 per game when the city is building us a $36 million stadium.”

Residents Leery

The potential costs have made some residents leery of the agreement Biloxi officials struck.

“I’m very happy to see my dream come true, but I have concerns with how the deal was structured,” said Barry Lyons, a Biloxi resident and former New York Mets catcher who pushed for two decades to get a team and stadium in his home town. “I’m concerned the city will be on the hook for the costs if it doesn’t work out as a catalyst for development and family entertainment.”

Stadium bond deals have also drawn national scrutiny. In his budget this year, President Barack Obama proposed barring the use of tax-exempt debt to finance sports arenas for team owners. Some studies by sports economists have found that the venues do little to boost tax collections and divert funds from other public services.

Other Priorities

Biloxi should address infrastructure and housing issues in areas still recovering from Hurricane Katrina, which hit the Gulf Coast almost a decade ago, said James Crowell, president of the National Association for the Advancement of Colored People there.

“It’s going to be a stress on our already strained city budget to complete this thing,” he said. “Since Katrina, a lot money hasn’t been used to revitalize our residential areas as it should have been. A lot of people haven’t been able to move back.”

Local officials said the team and stadium will bring new jobs by bolstering tourism near the casinos where it’s being built. The new stadium may generate $34 million of spending a year by visitors at restaurants, casinos and stores, according to an August 2013 economic analysis by Chicago-based Johnson Consulting.

“We have hundreds of hotel rooms right by the stadium, which is near our casino district,” said David Nichols, Biloxi’s city manager. “Now we just need to find a way to complete the stadium so we can get it open.”

by Darrell Preston

March 22, 2015

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net; William Selway at wselway@bloomberg.net; Jeffrey Taylor at jtaylor48@bloomberg.net William Selway

The Atlanta City Council voted unanimously Monday to create an oversight committee for the $250 million infrastructure bond program that city voters will decide on Tuesday.

If the two-part referendum passes, the 13-member committee would hold public meetings at least once per quarter to review the status of projects being financed by the bonds, potentially suggest changes to the project list and report its findings and recommendations periodically to the city council.

The $250 million bond referendum, an initiative spearheaded by Mayor Kasim Reed, is broken down into two separate bond requests. Voters will be asked to approve $187.9 million in bond financing for transportation improvements and a second $64.1 million bond for construction, renovation, maintenance and equipping of buildings, recreation centers and other city-owned facilities.

The bond package also is divided between $179.3 million in citywide projects and $70.7 million in local improvements.

The oversight committee will include four members appointed by members of the city council, Atlanta’s public works commissioner, two engineering faculty members from local universities, a member of the Atlanta Planning Advisory Board, a member of the State Transportation Board, a member of MARTA’s Board of Directors, a member of the local chapter of the Georgia Society of Professional Engineers and two utility representatives.

The ordinance forming the committee gives it five years to do its work. After that, it would have to be reauthorized by the city council.

The council also voted Monday to spend up to $500,000 on independent audits of the bond projects to be conducted throughout the life of the program.

Dave Williams
Staff Writer-
Atlanta Business Chronicle

Campaigning in New Hampshire recently, New Jersey Gov. Chris Christie told business leaders his move to install emergency managers in Atlantic City demonstrated his bold leadership.

“It was time to go in there, take more of a proactive role, make hard decisions,” said Bill Greiner, a New Hampshire real-estate developer, said of the Republican governor’s message.

Not everyone is so certain. In this struggling seaside city, some residents, business owners and local officials question whether emergency managers appointed in January will make the situation better.

In New Jersey, Atlantic City is an experiment in whether state control is the answer to the resort destination’s long-standing problems. While governors have previously controlled some aspects of troubled cities such as Newark, Trenton and Camden, the state hasn’t previously imposed an emergency manager.

The governor’s move is also being watched outside the state. Kevin Madden, a senior adviser to Mitt Romney’s 2012 campaign, said Atlantic City’s decline and the state’s finances are likely attack targets for Mr. Christie’s opponents as he eyes a 2016 presidential bid.

Mr. Christie’s appointment of emergency managers sent Atlantic City’s already low bond rating further downward and left city leaders scrambling to sell about $12 million in debt in February. The city ended up paying a pricey 5% interest rate on those short-term notes and officials are now unsure how future debt auctions will go.

“It’s had such a negative effect from the business community,” said Mayor Don Guardian, a Republican. “They immediately assume the worst when you bring two guys in that have worked with bankruptcy.”

The city intends to go back out in the market by April for roughly $50 million in financing, said Atlantic City Revenue Director Michael Stinson. The debt will be secured through a state financing program for municipalities, allowing Atlantic City to get better terms on the bonds than if it went into the market using its own lowered credit rating, Mr. Stinson said.

Senate President Steve Sweeney, the Legislature’s ranking Democrat, said that bringing in two individuals with experience in municipal and corporate bankruptcies translated into more difficulties for Atlantic City.

“I think it was a big mistake,” Mr. Sweeney said in a recent interview, noting the ratings downgrades that resulted. “It sent a very bad message to the markets.”

The emergency managers, who in recent weeks have met with casino executives and city officials and studied the city’s finances, and are expected to file their report and recommendations for the governor as soon as next week.

Turning around the city won’t be easy. As casinos opened in neighboring states, the resort city of 40,000 that once bet on a gambling-led revival fell on hard times. Four casinos have closed in the past 18 months. Gambling revenue has dropped by half, from $5.2 billion in 2006 to $2.6 billion in 2014, according to the state’s Department of Gaming and Enforcement.

The decline led casinos to successfully appeal their property taxes, leaving a big hole in the city’s budget.

Mr. Guardian has already trimmed the workforce and cut some municipal services, citing the city’s financial woes. Mr. Christie said at a recent town-hall meeting in Moorestown that an emergency manager can “right size the government” and do what government officials have been unable to do.

Mr. Christie’s choice of Kevin Lavin, a restructuring expert, and Kevyn Orr, who handled Detroit’s bankruptcy, has rattled confidence that the state would prevent a bankruptcy and maintain a safety net through state aid. Mr. Christie also issued an executive order that left open the possibility that the city could default.

The emergency managers declined to comment.

Emergency managers can offer financial expertise and make tough financial decisions without having to face the political pressure that elected officials can face, economists said.

Mr. Stinson, the city’s revenue director, said that he has seen Mr. Lavin in the city nearly every day since he assumed the role. “They are working hard,” he said of the emergency management team.

Across the city, talk in restaurants and among service workers has turned to whether the city will be the next Detroit, which emerged from bankruptcy in 2014 after officials struck deals with that city’s creditors and reorganized city services. Israel Posner, executive director of the gaming institute at Stockton University, called the prospect of bankruptcy a “Damocles sword” hanging over Atlantic City.

Some think following in Detroit’s footsteps might not be so bad in the long run. After that city’s bankruptcy, some are betting that Detroit will bounce back, with less debt and more development. Real-estate prices have started rising in some parts of Detroit, and businesses are reinvesting in the downtown area.

Many in Atlantic City’s casino industry have welcomed the emergency managers. Officials at the Golden Nugget said the city’s regulatory costs and taxes had made business challenging and an emergency manager could help provide relief.

Joe Lupo, senior vice president at Borgata Hotel Casino & Spa, said the hotel believed changes needed to be made and the managers seemed qualified.

The appointment of the emergency managers surprised many because Mr. Guardian had also moved to cut the city’s budget, staff and some municipal services, with Mr. Christie’s approval.

“Don Guardian is there tightening the belt, shaving where he had to shave, trimming where he had to trim,” said Tony Catonoso, owner of the city’s famous Steel Pier. “Don’s not going to sit there and pick fights. He’s not going to sit there and dig in his heels just for spite. He’s going to do whatever he has to do to move the city forward.”

The mayor said he is meeting with the managers and working closely with them, and city officials are trying to assure outsiders that the situation isn’t dire.

THE WALL STREET JOURNAL

By JOSH DAWSEY AND HEATHER HADDON

Updated March 20, 2015 2:51 p.m. ET

(Bloomberg) — Puerto Rico’s power utility is moving toward a record restructuring of its $8.6 billion debt load. For high-yield municipal investors, the move may be a trigger to add the junk-rated commonwealth’s bonds.

The Electric Power Authority, called Prepa, is poised to reduce its obligations this year through negotiations with creditors. Such an agreement may cheapen Puerto Rico securities, which already trade at distressed levels, while clarifying how the commonwealth and its agencies may tackle $73 billion of debt, said John Miller, co-head of fixed income at Nuveen Asset Management. The company runs the biggest high-yield muni fund.

Signs of interest from mutual funds would be welcome news for the struggling U.S. territory, which has relied on buying by hedge funds. Traditional purchasers stepped back as the risk grew: 54 percent of muni mutual funds hold Puerto Rico bonds this year, down from 77 percent in October 2013, according to Morningstar Inc. Puerto Rico’s securities are widely held because they’re tax-free nationwide.

“There will be opportunities,” said Miller, who helps manage $100 billion of munis in Chicago. “We’re not there yet because nothing’s been restructured and we don’t know who is going to take the hits here.”

‘Dry Powder’

Nuveen reduced its allocation about two years ago, Miller said. Its $10.8 billion High Yield Municipal Bond Fund, the largest of its kind, didn’t hold any Puerto Rico as of Feb. 28, down from a 1.8 percent allocation on June 30, 2011, data compiled by Bloomberg show.

The firm has room to add commonwealth debt in its muni funds, Miller said.

“All of these funds have dry powder in their below-investment-grade buckets,” Miller said. “That’s another reason why we want to follow it closely and try to identify an opportunity.”

Debt of Puerto Rico has earned about 0.1 percent this year, compared with 0.8 percent for the entire municipal market, according to S&P Dow Jones Indices.

Some commonwealth debt has been gaining. Prepa bonds maturing in July 2040 traded Thursday at an average of 52.6 cents on the dollar, up from about 50 cents at the start of 2015.

Borrowing History

The island was cut to junk a year ago because of its history of borrowing to balance budgets. The territory and its localities have more debt than all but two states: California and New York. Its economy has struggled to grow every year since 2006, and its population shrank by 7 percent in the past decade to 3.5 million, according to Census data.

Governor Alejandro Garcia Padilla’s administration is trying to avoid defaulting on Puerto Rico’s $13 billion of general obligations. Legislators passed a law allowing some public corporations to ask investors to take a loss, which might ease their financial strains and free them from relying on the island’s general fund. A federal judge threw the measure out, although the island has appealed.

As a result, there’s no road map for agencies seeking to reduce debt, and Puerto Rico localities can’t file for Chapter 9 bankruptcy protection. That leaves investors guessing how large potential losses may be.

Puerto Rico’s general obligations may be at risk: there’s a high probability that the island will default on the securities in the next two years, Moody’s Investors Service said in a Feb. 19 report.

Commonwealth lawmakers this week filed a bill that would allow Puerto Rico to default on its general obligations.

“The credit-negative discussions, regardless of whether they culminate in enacted legislation, signal the rising likelihood of consolidated debt restructuring that affects not only public corporations, but also the central government’s general obligation and other tax-backed securities,” Ted Hampton, a Moody’s analyst in New York, wrote in a report Thursday.

Zero Sum

“At some point there’s going to be a buying opportunity,” said Peter Hayes, who helps manage $116 billion as head of munis at New York-based BlackRock Inc. “It will probably be an attempt at some type of restructuring, but will it be just in the public corporations or will it be in the general obligations? It remains to be seen.”

BlackRock’s $538 million High Yield Municipal Fund had 0.9 percent of assets in Puerto Rico as of Jan. 31, Bloomberg data show. While that’s up from zero a year ago, the allocation was about 6 percent in July 2012, Bloomberg data show.

Prepa may fail to pay of about $400 million of principal and interest due July 1, Moody’s said in a March 16 report.

The utility in August signed an agreement with creditors to extend bank loans through March 31. In return, the agency promised to file a debt-restructuring plan, which it has failed to do. The utility, bondholders, bond insurers and banks are discussing an extension. Moody’s estimates a recovery rate of 65 percent to 80 percent if Prepa defaults. It would be a historic restructuring for a municipal issuer.

The Government Development Bank, which handles Puerto Rico’s debt sales, declined to comment through David Millar, a New York-based spokesman.

Entry Point

Puerto Rico has proven volatile, so investors may not have to wait for a restructuring to buy.

General obligations sold in March 2014 at 93 cents rose to an average of 96.6 cents that month, then fell to 81.9 cents Feb. 9. The debt traded Thursday at about 84.1 cents.

“You can effectively exit and re-enter at will,” said Jason Diefenthaler, who helps manage Wasmer Schroeder’s $80.5 million High Yield Municipal Fund, which directs about 6 percent to commonwealth debt. “There’s always a way to get involved with Puerto Rico.”

Some investors already added as yields reached 10 percent, equivalent to a taxable 16.6 percent for top earners.

MacKay Shields LLC in New York boosted its holdings to $247 million in its four MainStay muni mutual funds as of Dec. 31, or about 10 percent of assets, up from 0.2 percent in October 2013, according to Morningstar.
The Puerto Rico bonds are insured, according to MacKay Shields.

Inaugural Year

In the inaugural year for Wasmer Schroeder’s High Yield Municipal Fund, Puerto Rico accounted for as much as 9.2 percent of assets in November. That allocation is now about 6 percent, all insured, said Diefenthaler, who helps manage $5.1 billion of munis at the Naples, Florida-based firm.

The fund, which debuted on March 31, can direct as much as 10 percent to Puerto Rico, Diefenthaler said.
“If we can opportunistically add more insured paper, I would be all over that,” he said. “The Puerto Rico name itself detracts from the value of that insurance in the secondary market, so there’s opportunity to pick up yield.”

by Michelle Kaske

March 18, 2015

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, William Selway

(Reuters) – U.S. municipal bond yield dropped as much as 8 basis points on Thursday as investors took advantage of the cheapness of tax-exempt debt versus taxable U.S. Treasuries, according to a final market read by Municipal Market Data (MMD).

March 19, 2015 3:14pm EDT

(Reporting by Robin Respaut; Editing by Jeffrey Benkoe)

DALLAS–(BUSINESS WIRE)–Preston Hollow Capital, LLC announced today the addition of a seasoned municipal finance professional to lead its origination efforts. Ramiro Albarran was named Managing Director and Head of Origination for the Dallas-based merchant bank. “Ramiro brings 26+ years of municipal finance experience with unique and on-point capabilities to PHC,” says Jim Thompson, the Chairman and CEO of Preston Hollow Capital.

“Ramiro brings 26+ years of municipal finance experience with unique and on-point capabilities to PHC”

“As the Head of Origination, Ramiro will oversee asset origination for PHC and build out a team dedicated to working collaboratively with the broker-dealer and financial advisor communities, borrowers and investors,” Thompson added. “We’re confident that Ramiro’s skills and relationships will help establish Preston Hollow Capital as the premier solutions provider in municipal specialty finance.”

Mr. Albarran’s entire career has been focused on complex municipal, infrastructure and real estate related asset classes, including unique financings for 7 World Trade Center, the Bank of America Tower in New York, and the Harbor Point project in Stamford, Connecticut, the latter having been one of the largest tax increment financings completed since the recession. Mr. Albarran joins from Guggenheim Securities where served as Head of the Municipal and Infrastructure Finance Group. His prior experience includes various senior roles at Bank of America including heading the public finance department as well as various specialty banking groups including real estate. He also served as a principal at Starwood Infrastructure LLC and as a partner at Stone & Youngberg LLC. Mr. Albarran received a B.A. in Economics and Engineering from Dartmouth College.

About Preston Hollow Capital and Jim Thompson

Preston Hollow Capital is a diversified merchant bank launched in January 2014 by Jim Thompson, the former President and Chief Executive Officer of ORIX USA. The PHC team, comprised of former ORIX USA senior executives and employees, seeks to produce superior risk-adjusted returns across a broad spectrum of investment strategies. Mr. Thompson, along with his wife Angela, supports Dallas-area non-profits through the Jim & Angela Thompson Foundation, and STEM education initiatives through the Blue Sky Educational Foundation. He is a board member of the Dallas Urban Debate Alliance, and is a former board member of Dallas CASA, Angel Flight South Central and the AOPA Foundation.

March 18, 2015 10:00 AM Eastern Daylight Time

Contact Preston Hollow Capital at Admin@PHCLLC.com or 214-389-0800.

Contacts

C. Pharr & Company for PHC
Krystal Morris, 972-931-7576, ext. 355
Krystal@pharrpr.com

U.S. Bancorp (NYSE:USB) and ORIX USA Corp. announce the closing of U.S. Bancorp’s first renewable energy syndication, which is expected to enable SolarCity to install approximately 2,500 solar power systems at homes and businesses in nine states.

U.S. Bancorp led the transaction, introducing of an industry-leading product that will allow both first-time and experienced investors to tap into the renewable-energy tax credit market.

This agreement will help finance the installation of solar arrays in Arizona, California, Colorado, Connecticut, Hawaii, Massachusetts, Maryland, New Jersey and New York, with more to come. The syndication is expected to finance more than $100 million in solar projects.

The 2,500 systems installed by SolarCity are projected to produce enough clean-source electricity in their first year of operation to equal removing 4,250 cars from the roads each year. The fund makes it possible for many home and business owners to install solar panels with no upfront cost, and pay less for solar electricity than they pay for utility power.

“This is a new phase of business development for U.S. Bancorp,” said Zack Boyers, chairman and CEO of U.S. Bancorp Community Development Corporation. “Entering into our first renewable energy syndication agreement allows us to expand SolarCity’s ability to install more energy-saving solar arrays on homes and businesses across the nation that will, as a result, produce more jobs and assist in the country’s economic recovery.”

The syndication is a gain on multiple fronts for U.S. Bancorp: It boosts the capital in the solar market, increases use of clean energy, and diversifies the bank’s ability to serve the needs of a growing market as well as its products and services, Boyers said.

The syndication deal marks ORIX’s entry into the renewable-energy tax credit financing market.

“We welcome the opportunity to help consumers and businesses reduce greenhouse gas emissions by becoming solar energy users,” said Andrew Garvey, managing director and head of ORIX Municipal Finance. “ORIX is a unique platform, and this transaction shows how we can make our capital available in innovative ways to achieve the financing needs of our clients.”

The installations will produce more than 350 construction and installation jobs. They will also generate $76 million in economic impact from salaries, equipment purchases, construction materials and secondary spending by workers on local services and on solar industry vendor supplies and services.

ST. LOUIS (The Associated Press) – Mar 16

About ORIX Municipal Finance ORIX Municipal Finance makes investments of approximately $10 million to $50 million in public, semi-public and private entities. The company’s investment portfolio includes transactions for a wide range of industries, including health care, housing, education, energy and transportation. ORIX Municipal Finance is a subsidiary of ORIX USA, a Dallas-based financial services firm known for providing innovative capital solutions that clients need to propel their business to the next level. ORIX USA and its family of companies have more than 1,400 employees with principal offices in Atlanta; Chicago; Hartford, Conn.; Los Angeles; Minneapolis; New York; San Francisco; Seattle; Washington, D.C.; Frankfurt, Germany; London; and Paris. ORIX USA holds approximately $7 billion of assets and manages an additional $30 billion, approximately. ORIX USA is a wholly owned subsidiary of ORIX Corporation, a Tokyo-based, publicly owned international financial services company with operations in 36 countries and regions worldwide. ORIX Corporation is listed on the Tokyo (8591) and New York Stock Exchanges (IX). For more information on ORIX Municipal Finance, visit www.orix.com.

About U.S. Bancorp Community Development Corporation With nearly $15.8 billion in managed assets as of Dec. 31, 2014, U.S. Bancorp Community Development Corporation, a subsidiary of U.S. Bank, provides innovative financing solutions for community development projects across the country using state and federally sponsored tax credit programs. USBCDC’s commitments provide capital investment to areas that need it the most and have contributed to the creation of new jobs, the rehabilitation of historic buildings, the construction of needed affordable and market-rate homes, the development of renewable energy facilities, and the generation of commercial economic activity in underserved communities. Visit USBCDC on the web at www.usbank.com/cdc.

About U.S. Bank Minneapolis-based U.S. Bancorp (NYSE: USB), with $403 billion in assets as of Dec. 31, 2014, is the parent company of U.S. Bank National Association, the fifth largest commercial bank in the United States. The company operates 3,176 banking offices in 25 states and 5,022 ATMs and provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses and institutions. Visit U.S. Bancorp on the web at www.usbank.com.

CONTACT: U.S. Bank Corporate Communications

Shera Dalin, 314-335-3335

shera.dalin@usbank.com

@usbank_news

(Reuters) – The southern California city of San Bernardino has defaulted on nearly $10 million in payments on its privately placed pension bond debt since it declared bankruptcy in 2012, according to documents seen by Reuters.

In addition, the city has not negotiated with its bondholders since September, according to a person familiar with the stalled negotiations.

The missed payments illustrate the trend among cities in bankruptcy to favor payments to pension funds over bondholder obligations, which has increased the hostility between creditors and municipalities.

San Bernardino declared last year that it intends under its bankruptcy exit plan to fully pay Calpers, its biggest creditor and America’s largest public pension fund with assets of $300 billion.

The city continues to pay its monthly dues to Calpers in full, but has paid nothing to its bondholders for nearly three years, according to the interest payment schedule on roughly $50 million of pension obligation bonds issued by San Bernardino in 2005.

The non-payment of the bond debt and the city’s lack of interest in talks with its pension bondholders just weeks before it must produce a bankruptcy exit plan should serve as a wake-up call to Wall Street issuers of debt to struggling cities, according to Michael Sweet, a bankruptcy attorney with Fox Rothschild in San Francisco.

In January San Bernardino’s city attorney, Gary Saenz, told Reuters the city intended to cut its bondholder debt under its bankruptcy plan.

San Bernardino’s bankruptcy is being closely watched by the $3.6 trillion U.S. municipal bond market.

In the recent municipal bankruptcies of Detroit – the biggest-ever U.S. municipal bankruptcy – and Stockton, California, bondholders were forced to accept big cuts to their debt while pensioners emerged relatively unscathed.

“Bondholders should be realizing that in Chapter 9 cases those who will invariably get better treatment by the cities are former and current employers, who are part of the community, and not the faceless bankers holding commercial paper,” Sweet said.

But Sweet said San Bernardino’s treatment of its bondholders could come back to haunt it. “Down the road, the city may find that the capital market is unavailable to it or that it will be penalized at a very high rate when it seeks to borrow,” he said.

San Bernardino, a city of 205,000 located 65 miles east of Los Angeles, declared bankruptcy in July 2012 with a $45 million deficit.

Bondholders and public employees want to understand how distressed cities handle their debts to Wall Street compared with other creditors such as pension funds.

San Bernardino’s roughly $50 million pension bond debt was used in 2005 to pay off a portion of the city’s obligation to Calpers.

In an unprecedented legal argument for a Chapter 9 municipal bankruptcy, EEPK, the Luxembourg-based bank and holder of the pension bonds, and Ambac Assurance Corp, which insures a portion of the bonds, assert in a January lawsuit against San Bernardino that those bonds are part of a single pension obligation, so that any payment to Calpers by San Bernardino requires equivalent payment to the bondholders.

Next week EEPK attorneys will ask the judge overseeing the bankruptcy to set a schedule to adjudicate the lawsuit. Wells Fargo Bank, the flagship bank of Wells Fargo & Co., is the bond trustee but is not a party to the lawsuit.

On Friday, the city filed court papers to dismiss EEPK and Ambac’s lawsuit. The city said the bondholder argument “transcends novelty.”

Rosanna Westmoreland, a Calpers spokeswoman, said EEPK’s argument was “wrong.”

San Bernardino’s city attorney was not immediately available for comment.

BY TIM REID

LOS ANGELES Tue Mar 17, 2015 5:34pm EDT

(Reporting by Tim Reid; Editing by Leslie Adler)

CHICAGO – A bill designed to ease Detroit’s first appearance in the public debt markets since its bankruptcy sailed through a Michigan legislative committee this week.

Senate Bill 160 passed the Committee on Banking and Financial Institutions by a 7-0 vote on March 3.

The legislation is now on the Senate floor and could be taken up as early as next week, according to Patrick Tiedt, chief of staff for Sen. Darwin Booher, R-Evart, one of the sponsors.

The bill would give a statutory lien to city income tax revenue backing Detroit’s financial recovery bonds.

The measure essentially applies to only one of the city’s bond deals: a $275 million deal that Detroit privately placed with Barclays on December 10, 2014, the city’s final day in bankruptcy.

The borrowing marks the only time the city has tapped its income tax revenue to secure bonds.

The bonds, now in a variable-rate mode, are to be resold on the public market in a fixed-rate mode within 150 days of the Dec. 10 placement date, unless Barclays grants an extension.

The one-day secondary market sale, coming as soon as April, will be similar to a primary offering. Ratings from at least two agencies will be sought, according to the terms of the deal.

Detroit officials hope that the statutory lien might win an investment-grade rating from at least one rating agency.

Supporters believe SB 160 will boost investor confidence in the bonds with a statutory lien that is expected to make the bond revenue fully protected in the event of another bankruptcy or default by Detroit.

“Even though I am from a small town in northern Michigan, I recognize how important the recovery of Detroit is to the entire state of Michigan,” Booher, R-Evart, said in an email to The Bond Buyer. “I sponsored SB 160 because I believe this is common sense legislation and we should be encouraging ways to save the taxpayers money.”

Detroit, which filed for Chapter 9 bankruptcy in July 2013, floated $1.28 billion of new debt in December as it exited the bankruptcy, but none of that debt was sold in the public debt markets.

Fiscal analyst Elizabeth Pratt with the Senate Fiscal Agency said in a fiscal note that the city could see debt-service savings of $2 million to $3 million a year with the lien. The estimates come from the city’s own figures. The city’s documents also note that the Legislature passed a similar bill in 2011 to help the city of Ecorse access the bond market, although in that case the enhancement was an intercept feature, not a statutory lien.

“Bond rating agencies have stated that a statutory lien on the income-tax revenue pledged to repay the bonds would improve the bond rating and result in lower interest costs,” Pratt wrote in the fiscal note.

“What it effectively does is make the security a lot more airtight than it would be otherwise because there’s a lien on the revenue,” said Jeff Mann, a legislative analyst with the Senate Fiscal Agency who is following the bill.

The bill would apply only to Michigan cities with a population of more than 600,000, a category that includes only Detroit.

It would apply only to financial recovery bonds with a pledge of income tax revenue and only with the approval of the state treasurer.

The revenue would enjoy the lien and be held in a trust for the benefit of the bondholders regardless of whether the city directly collects the revenue, a third party collects it, or anyone else, according to the legislation.

“The lien would be superior to all other liens and interests of any kind, and would be perfected without delivery, recording or notice,” Mann’s analysis says. “The revenue held in trust would be exempt from being levied upon, taken, sequestered, or applied toward paying the debts or liabilities of the city other than those expressly specified in the agreement.”

Detroit Mayor Mike Duggan testified in favor of the bill before the banking committee. No one spoke against it.

THE BOND BUYER

BY CAITLIN DEVITT

MAR 5, 2015

Planned arenas in Milwaukee and Seattle could face a new hurdle that could potentially prove insurmountable. This coming, of all places, from Washington, D.C. President Obama has his sights on public subsidies for sports stadiums and arenas.

As chief executive of the U.S. federal government, one of the duties of the president is to present an annual operating budget. The feds operate on a fiscal year that starts on October 1st and ends on September 30th, and for the government to function in a given year, an approved budget must be in place. The president typically submits his budget proposal in February to begin the long, rigorous congressional approval process.

Reports came out this weekend about a proposed amendment to federal tax law buried within the 2016 proposed budget that could have significant and lasting impacts on the business of sports in the United States for years to come. That amendment, if approved, could prevent cities, counties, and states from participating financially in arena projects.

For decades, the various sports leagues have relied on public monies to make palaces for their teams a reality. What has frequently been sold as a show of community support of a team has often become outright ransom to keep teams from leaving. According to the Wall Street Journal, in just the past 30 years, about $17 billion have been raised through government bonds for sports facilities.

Milwaukee is currently fielding a proposal by Governor Scott Walker for his state’s biennial budget to issue $220 million in bonds toward supporting the arena effort to keep the Bucks. Seattle, of course, has a potential deal that, if approved, could provide $120-$200 million toward an arena in the SoDo district.

Just how could the federal government affect a city, county, or state from borrowing money through the bond process, you ask.

Municipal bonds are issued through these local entities as a means to both support and improve infrastructure. Infrastructure is, of course, publicly owned lands, buildings, and services vital to the proper function of a city. Roads, schools, sewer, utility, and police services all fall under the infrastructure category.

Bonds are technically only supposed to be issued for these purposes.

Long ago, cities began issuing municipal bonds to participate in private stadium and arena projects in the hopes that they would bolster economic development. Arguments have been waged on both sides of the issue for decades, with the sports leagues and politicians generally touting the cultural importance and economists decrying any sort of substantive economic improvement.

Cities don’t want to lose their teams, and team owners prefer to make use of municipal bonding capacity because it is federally tax-exempt. This was to make it easier for municipalities to borrow to lessen the cost of infrastructure projects over time.

With no federal tax to worry about, municipal bonds are generally issued with significantly lower interest rates than private borrowers are going to find through channels. Thus, the appeal.

But there’s the rub.

The Obama administration’s proposal is that, because of that federal tax exemption, the government should enforce the intended use of these bonds. The U.S. Treasury Department estimates that enforcement will save the federal government $542 million over the next ten years.

If passed into law, this wouldn’t be the first time the federal government has imposed restrictions against using municipal bonds for sports facilities. According to Stateline from the Pew Charitable Trusts (via USA Today):

Over the life of the $17 billion of exempt debt issued to build stadiums since 1986, Bloomberg said, taxpayer subsidies to bondholders will total $4 billion.

The tax-free bond provision dates to the 1986 Tax Reform Act. The authors of the bill actually sought to restrict the use of public subsidies for sports teams. The law said that no more than 10% of tax-exempt bonds’ debt could be repaid by ticket sales or concession — a provision its authors thought would deter using them to finance stadiums because cities and states wouldn’t want to obligate taxpayers to pay off the rest of the financing.

The intent of the change didn’t work because municipalities started to get creative in ways to work around the restriction. This is why increases in hotel, rental car, food, and beverage taxes, as well as securing debt with things like potential parking revenues, have become the common methods for repayment of bonds for sports projects.

Needless to say, this has the potential of drastically altering the sports business landscape as we know it, if passed into law. Could it, in effect, kill potential arena projects in Milwaukee and Seattle?

Not to don the tin foil hat, but there is a strong possibility.

The federal budget will go through its approval process over the next few months. There is a school of thought that any bonds issued prior to the start of Fiscal Year 2016 in October could be grandfathered into tax-exempt status.

If Wisconsin approves some level of municipal bonding through its state budget this year, it’s quite possible they wouldn’t have to worry about such a restriction.

The earliest Wisconsin’s budget can be signed into law is August 6, 2015. If bonding for the Milwaukee arena is approved, however, it’s not clear that the bonds could be issued prior to October 1st. That raises some question about grandfathering on the federal tax exemption.

As for Seattle’s arena effort, we’re likely a year away from the city council and the King County Council even being able to vote to agree to participate in the SoDo project. That could potentially push bond issuance to mid-to-late 2016, and then only if a team is acquired. If the federal tax amendment goes through, this would be too late.

Before anyone ties weights to their feet and picks out the keen spot on the bridge, President Obama’s budget proposal still has to go through committee, has to be voted on by both houses of Congress, and then has to be signed into law by the president.

That’s a long process over the next few months, and it’s by no means a guarantee that this restriction will make it to the final budget.

Still, it’s worth keeping an eye on.

By Matt Tucker  @TuckeratSR on Mar 16, 2015, 2:01p 41

EPA has been working to craft a general permit for small Municipal Separate Storm Sewer Systems for quite some time. The most recent draft permit, published last September, has received significant comment, most recently from the Massachusetts Department of Environmental Protection. While emphasizing cooperation and appreciate for EPA’s efforts at collaboration, it is difficult to read MassDEP’s comments as anything other than as a sign of significant concern about overreach by EPA.

What’s the problem with the draft permit? Nothing that a modicum of attention to cost – and cost-effectiveness – couldn’t solve. Indeed it’s telling that MassDEP led its comments with concerns about costs, noting that EPA’s owns estimates show that, for three small communities in the Charles River watershed, annual compliance costs would range from $865,000 to $1.7M annually.

MassDEP also requested that EPA “harmonize” the permit requirements with the Commonwealth’s 2008 stormwater rules, stating that EPA should use:

the Massachusetts Stormwater Standards as the basis for its successor MS4 permit, rather than requiring a second federal-only layer of permit requirements on top of the existing Massachusetts Stormwater Standards.

Substantively, MassDEP’s most significant concern was that the draft MS4 permit reflects:

a significant shift in approach from the BMP-based program envisioned in the 2003 permit to the current draft which includes additional provision to ensure that the discharges from small MS4s do not cause or contribute to an exceedance of water quality standards.

Hear, hear. There’s a reason that stormwater standards have always been focused on attaining reductions to the “maximum extent practicable” based on best management practices. As MassDEP also noted, it is this shift that significantly drives the increase in costs. I would have thought that it went without saying, but stormwater discharges aren’t like manufacturing discharges that are far more predictable and easy to control and predict.

There are a number of other important points in the MassDEP comments, including support for pollution credit trading programs, but this is the heart of the issue. If the MS4 general permit is going to succeed in obtaining cost-effective reductions in stormwater pollution, EPA is going to have to be responsive to these concerns.

To view Foley Hoag’s Law and the Environment Blog please click here.

Last Updated: March 9 2015

Article by Seth D. Jaffe

Foley Hoag LLP

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Election day is May 9, 2015, and many Texas communities are proposing new debt through local bond elections. Because there is no known centralized public resource of local bond elections, information about these elections and the amount of debt being proposed in taxpayers’ names is often difficult to find.

The Upcoming Bond Election Roundup attempts to solve this problem by providing you with easy access to upcoming bond propositions in Texas.

We also provide debt totals and trends for Texas cities, counties, school districts and community college districts, as well as Texas in the Debt at a Glance feature on TexasTransparency.org. If any of the entities listed in the roundup appear in Debt at a Glance, we’ll link to that page for additional debt context.

Upcoming Bond Elections Across the State (Alphabetical by Entity) as of March 09, 2015.

lection Date	Entity	Type	County	Proposed Amount	Prop	Purpose	Tax Supported Debt (as of 8/31/13)*
5/2015	Abilene	City	Jones, Taylor	$45,975,000	1	Streets & Roads	$97,265,000
5/2015	Abilene	City	Jones, Taylor	$2,810,000	2	Civic Center	$97,265,000
5/2015	Abilene	City	Jones, Taylor	$3,820,000	3	Sidewalks	$97,265,000
5/2015	Abilene	City	Jones, Taylor	$12,865,000	4	Police & Fire	$97,265,000
5/2015	Abilene	City	Jones, Taylor	$1,030,000	5	Zoo	$97,265,000
5/2015	Abilene	City	Jones, Taylor	$6,000,000	6	Aquatic Facilities	$97,265,000
5/2015	Abilene	City	Jones, Taylor	$2,500,000	7	Splash Pads	$97,265,000
5/2015	Abilene	City	Jones, Taylor	$1,490,000	8	Parks & Rec	$97,265,000
5/2015	Abilene	City	Jones, Taylor	$4,200,000	9	Airport Improvements	$97,265,000
5/2015	Alief ISD	ISD	Harris	$341,000,000	1	New Construction, Safety & Security, Transportation	$184,719,790
5/2015	Bullard ISD	ISD	Cherokee, Smith	$40,000,000	1	School Additions & Renovations	$36,160,986
5/2015	Canyon ISD	ISD	Randall	$34,800,000	1	School Building	$76,548,602
5/2015	Carthage ISD	ISD	Panola	$8,570,000	1	School Building & Buses	$22,729,931
5/2015	Carthage ISD	ISD	Panola	$19,750,000	2	Auditorium	$22,729,931
5/2015	Carthage ISD	ISD	Panola	$905,000	3	Athletic Field	$22,729,931
5/2015	Chico ISD	ISD	Wise	$7,000,000	1	Building Upgrades	$18,146,409
5/2015	Cleburne ISD	ISD	Johnson	$150,000,000	1	School Building	$47,452,102
5/2015	Comal ISD	ISD	Bexar, Comal, Guadalupe,	$147,400,000	1	New Schools, Renovations	$492,921,213
5/2015	Decatur ISD	ISD	Wise	$9,988,500	1	Transportation, Security, Technology, Facilities	$65,587,612
5/2015	Decatur ISD	ISD	Wise	$3,500,000	2	Multi-Purpose Center	$65,587,612
5/2015	Eanes ISD	ISD	Travis	$52,500,000	1	School Building & Technology	$136,275,000
5/2015	El Campo	City	Wharton	$10,500,000	1	Public Safety Facility	$11,730,000
5/2015	Fredericksburg ISD	ISD	Blanco, Gillespie, Kendall	$16,000,000	1	School Renovations	$15,760,000
5/2015	Frisco	City	Collin, Denton	$41,500,000	1	Public Safety Projects	$539,865,000
5/2015	Frisco	City	Collin, Denton	$125,000,000	2	Streets & Roads	$539,865,000
5/2015	Frisco	City	Collin, Denton	$3,325,000	3	Fleet Center Improvement	$539,865,000
5/2015	Frisco	City	Collin, Denton	$37,000,000	4	Municipal Center	$539,865,000
5/2015	Frisco	City	Collin, Denton	$9,000,000	5	Senior Citizen Center	$539,865,000
5/2015	Frisco	City	Collin, Denton	$32,000,000	6	Parks & Rec	$539,865,000
5/2015	Frisco	City	Collin, Denton	$10,000,000	7	Performing Arts	$539,865,000
5/2015	Frisco	City	Collin, Denton	$10,000,000	8	Parks	$539,865,000
5/2015	Georgetown	City	Williamson	$105,000,000	1	Roads	$125,830,000
5/2015	Gilmer ISD	ISD	Upshur	$28,500,000	1	New High School Building	$19,895,000
5/2015	Harlandale ISD	ISD	Bexar	$64,900,000	1	School Building & Security	$188,439,457
5/2015	Joshua ISD	ISD	Johnson	$50,000,000	1	Future Growth, Security & Technology	$72,443,390
5/2015	Kerr County	County	Kerr	$15,000,000	1	Jail Expansion	$9,650,000
5/2015	Klein ISD	ISD	Harris	$498,100,000	1	Growth, Safety & Security, School Buses, Renovations, and Technology	$741,990,000
5/2015	LaPoynor ISD	ISD	Anderson, Henderson	$4,120,000	1	New School	$680,000
5/2015	LaPoynor ISD	ISD	Anderson, Henderson	$4,870,000	2	Gymnasium	$680,000
5/2015	Liberty ISD	ISD	Liberty	$33,500,000	1	School Building	$16,522,933
5/2015	Marshall ISD	ISD	Harrison	$109,210,000	1	New Schools, Renovations	$0
5/2015	McAllen ISD	ISD	Hidalgo	$297,000,000	1	School Upgrades	$114,971,000
5/2015	Mesquite ISD	ISD	Dallas	$280,000,000	1	New School Construction, Renovations, Purchasing Sites, & Technology	$364,819,854
5/2015	Montgomery County	County	Montgomery	$350,000,000	1	Roads	$446,595,000
5/2015	Montgomery ISD	ISD	Montgomery	$256,750,000	1	Growth, Renovations, Safety, Security Upgrades	$127,239,690
5/2015	New Caney ISD	ISD	Harris, Montgomery	$173,000,000	1	New Campuses, Renovations, Purchase of Land for Future Growth	$276,909,358
5/2015	Pecos County	County	Pecos	$35,000,000	1	Hospital Upgrades	$4,890,000
5/2015	Pettus ISD	ISD	Bee, Karnes	$32,300,000	1	New Schools, Renovations, Athletics	$0
5/2015	Pleasanton ISD	ISD	Atascosa	$63,000,000	1	New School Building	$19,685,000
5/2015	Post ISD	ISD	Garza, Kent, Lynn	$18,000,000	1	New School Building	$27,560,000
5/2015	Rowlett	City	Dallas, Rockwall	$18,932,340	1	Streets	$81,585,000
5/2015	Rowlett	City	Dallas, Rockwall	$4,206,110	2	Parks	$81,585,000
5/2015	Rowlett	City	Dallas, Rockwall	$2,631,050	3	Public Safety Projects	$81,585,000
5/2015	Selma	City	Bexar, Comal, Guadalupe	$9,000,000	1	Roads	$12,375,000
5/2015	Slaton ISD	ISD	Lubbock, Lynn	$14,400,000	1	School Buildings	$3,690,000
5/2015	Thrall ISD	ISD	Williamson	$15,000,000	1	School Building & Technology	$1,965,000
5/2015	Waxahachie ISD	ISD	Ellis	$125,000,000	1	Growth & Facility Improvements	$116,749,295
5/2015	Weatherford ISD	ISD	Parker	$18,800,000	1	Renovations	$70,654,007
5/2015	Weatherford ISD	ISD	Parker	$49,500,000	2	Growth	$70,654,007
5/2015	Weatherford ISD	ISD	Parker	$6,600,000	3	Safety & Security	$70,654,007
5/2015	Whitney ISD	ISD	Hill	$11,000,000	1	Athletic Facilities	$28,335,000
5/2015	Wylie ISD (Taylor County)	ISD	Taylor	$15,000,000	1	School Building & Security	$0
5/2015	Ysleta ISD	ISD	El Paso	$451,000,000	1	Repurposing, Consolidating & Rebuilding Schools	$217,300,000

Two of the lead partners on the Pennsylvania Rapid Bridge Replacement Project have priced $800 million in private activity bonds (PABs) to help finance the effort.

The bonds, issued by Plenary and Walsh and priced by JP Morgan and Wells Fargo, will complement $60 million in equity from Plenary and Walsh and $225 million in milestone payments, some of which will pay down the shorter-dated PABs. The bonds carry a rating of BBB from Standard & Poor’s, reported IJ Global.

The bonds will mature between 2018 and 2047, have yields of between 1.5 percent and 4.3 percent, and have an all-in interest cost of 4.1 percent.

In January, the Pennsylvania Department of Transportation finalized all terms for the $899 million Rapid Bridge Replacement P3 and signed a contract with the Plenary Walsh Keystone Partners, clearing the way for the replacement of 558 bridges throughout the state. The project is made possible by a state P3 law enacted in 2012 and approved by the state Public-Private Transportation Partnership Board in September 2013.

The project will allow the state to replace structurally deficient bridges throughout the state in a more cost effective manor than traditional procurement. In addition, the Plenary Walsh Keystone Partners will be responsible for maintenance on the bridges for 25 years after they are built.

NCPPP

By Editor March 5, 2015

Property-assessed clean energy (PACE) loan programs for homes rebounded in a big way in 2014, with residential PACE projects eclipsing the commercial PACE market.

California leads the way going into 2015, with more than $500 million in completed residential projects. The majority of that money came through the Home Energy Renovation Opportunity (HERO) program.

PACE programs allow investments in water- and energy-efficiency retrofits and distributed renewable generation to be paid back through property taxes, which lowers the risk for both lenders and owners and can potentially open up a far larger swath of the energy-efficiency market.

Already a leader, the HERO program has expanded substantially in California in the last few months. In December, the HERO program was approved by the city of San Francisco, making it the first large city in California to return to residential PACE financing since it was halted a few years back because of conflicts with federal housing regulators.

Not to be outdone by its neighbors to the north, Los Angeles County voted to adopt HERO PACE programs for the 85 cities that make up the county, including Los Angeles.

“It’s good to see the LA County Board of Supervisors helping to conserve energy by approving the Residential PACE program that will help Angelenos conserve water, use less electricity, and harness renewable energy at home,” Los Angeles Mayor Eric Garcetti said in a statement. Some of HERO’s most popular products in California include water-saving technologies, solar panels, HVAC upgrades, energy-efficient windows and doors and roofing and insulation.

HERO is not the only PACE administrator scooping up partnerships across California. In January, Ygrene Energy Fund made its residential PACE program Ygrene Works available to every California city and county through a partnership with Golden State Finance Authority, formerly known as California Home Finance Authority.

The competition in residential PACE financing means that cities and counties can adopt PACE for homes and businesses quicker and easier than in the past. The major administrators, like HERO and Ygrene, promise no cost to taxpayers and no staff time required. By choosing more than one provider, municipalities can offer an array of financing options. California is also pushing the envelope on residential PACE with a pilot for using the loans for multi-family housing.

Although California is far in the lead on residential PACE, others are trying to ramp up. South Florida was one of the first places to get back into the residential PACE game when Ygrene launched a $230 million bond in 2013 that was available for homes and businesses.

But Ygrene and other administrators, like EcoCity Partners, have largely been on the sideline as PACE programs for homes across Florida are tied up in a court battle.

It’s not PACE programs themselves that are being challenged; instead, the Florida Bankers Association is contesting the validations on the bonds that back the PACE loans, according to the Sun Sentinel. The bankers don’t want PACE loans to be paid before mortgages if there are outstanding property obligations.

But it’s not just the bankers. In late February, the Florida Supreme Court dismissed the appeal of the Florida Green Energy Works bond validation that was filed by a taxpayer. The court dismissed the case because the appellant, James Gowen, “has no interest in this case,” the court stated. The court noted in the ruling this was the third PACE bond validation case where an appellant has appeared in the eleventh hour but has no direct interest in the case.

“[Florida Green Energy Works] program was structured as a statewide commercial PACE program initially, but the dismissal of this appeal allows the program to now scale up on the residential side statewide as well,” EcoCity Partners declared on social media.

Florida isn’t in the clear just yet, but the court’s most recent ruling gives PACE advocates confidence that other similar appeals will also be dismissed. Florida’s residential PACE market might not rival California’s by year’s end, but if the legal hurdles continue to fall, it could make a strong start.

greentechmedia.com

Katherine Tweed

March 6, 2015

SACRAMENTO – State Treasurer John Chiang today announced successfully completing the sale of $1.9 billion in State general obligation bonds, which included the refinancing of more than $1 billion in previously-issued bonds.

“Despite investors’ concerns over future interest rates, this week’s sale showed a healthy appetite for California paper,” Chiang said. “Recent credit upgrades have increased the market’s confidence in the State’s credit worthiness and individual and institutional investors alike eagerly got behind California.”

The yield for 30-year 5 percent coupon bonds, 3.27 percent, was the lowest paid by the State since at least 1989. The spread between the yield on the State’s 30-year bond and the yield on the most commonly-used market index was 35 basis points. This was the State’s lowest credit spread on this index for 30-year bonds since June 2007. The yield on five year bonds was 1.43 percent and the yield on 10-year bonds was 2.38 percent.

The Treasurer’s decision to take advantage of the current interest rate environment by re-financing $1 billion in previously-issued, higher interest rate bonds is expected to save taxpayers more than $198 million in debt service costs over the life of the refunded bonds.

This week’s sale also included $931 million in new borrowing for critical infrastructure needs, including transportation, education, and children’s hospitals.

Here are some key statistics associated with this sale:

• Final size: $1.935 billion
• True interest cost: 3.06 percent
• Final re-offering yields ranged from a low of 0.17 percent for a 2016 maturity to a high of 3.27 percent (5 percent coupon)/3.68 percent (4 percent coupon) for a 30-year maturity.
• Retail orders represented more than 30 percent of bonds sold.

The next State general obligation bond sale is expected to occur in April 2015. A list of other scheduled sales can be found on the Treasurer’s website.

The State Treasurer has broad responsibilities and authority in the areas of public investment and finance. In particular, he oversees the issuance of State debt and is responsible for crafting best practices for the sale of debt and the investment of public funds for California’s more than 4,000 local bond issuers, including the State, school districts, cities, counties, and special districts.

March 5, 2015

Until recently, Texas’ state water plan wasn’t much to look at.

Essentially a catalog of more than 3,000 water supply projects across the state that some government or another hoped to build, it was seen as nothing more than a wish list, compiled from the work of 16 regional planning groups every five years.

That changed in 2013 when lawmakers — with Texas voters’ approval — put $2 billion from the state’s savings account toward actually building some of the projects. That also put a spotlight on the Texas Water Development Board, a once-obscure agency charged with state water planning.

But the water plan’s new prominence is also highlighting how involved private engineering and consulting firms are in deciding what the state needs. The state water board paid such firms a total of $13.7 million for their work in putting together the most recent state water plan, with close to half of that going to the decades-old company Freese & Nichols.

The private hand has advantages and disadvantages, observers and experts say. Some worry that paying private firms to do water planning creates an inherent conflict.

“Critics would suggest that these folks operate out of ‘enlightened self-interest,’” said Ron Kaiser, a professor of water policy at Texas A&M University. “They’re going to push projects that have big infrastructure. … They might then have staff that could bid on these projects.”

The potential for conflict is bigger now that private consultants are also in charge of scoring the water projects and giving them a ranking in the plan, said Mary Kelly, an Austin-based water lawyer. The Legislature called for the ranking in 2013.

“It’s really punting a pretty important decision to a contractor” to let private firms do the ranking, Kelly said. She worries that firms used to working on reservoir projects, for instance, won’t give as good of a score to a brackish water desalination plant, or a conservation initiative.

But Jody Puckett, director of Dallas Water Utilities, said the role of private firms is smaller than critics think. “It’s kind of like when you make pasta, you have to run it through the mill to make spaghetti. That’s their role.”

Puckett is chair of the Dallas Fort-Worth region’s water planning group, and said it’s the group that makes final decisions about what projects end up in the water plan — not the consultants. And there’s no guarantee those same consultants will get design contracts or any other work for those same projects, because they have to go through competitive bidding to get that work.

“I can see how someone might want to connect the dots, but I don’t think they’re necessarily connected at all,” Puckett said.

Whether or not they like the system, few involved in Texas water planning think there’s a better way to run it. There’s not enough staff in state or local governments to do the work private firms perform.

“There’s a level of expertise with firms like ours,” said Preston Dillard, who is a contractor in Dallas-area water planning with the firm Alan Plummer Associates. “The advantages are, you’re involving the professionals that have experience in working with water systems.”

And as the drought has reached a new level in Texans’ consciousness, firms that used to always recommend new reservoirs, water treatment plants or big pipeline projects are starting to think differently, said Ken Kramer, water resources chairman of the Sierra Club’s Lone Star Chapter.

For instance, he said, both firms that do consulting work for the Dallas area — Freese & Nichols and Alan Plummer Associates — now do work on conservation and water reuse projects, something that may have been unthinkable a few decades earlier.

“You’re seeing a little bit of an evolution,” Kramer said. “But it’s definitely a slow evolution. It’s not a revolution yet.”

Still, concern about the private sector’s role exists at the state level, too. After the Legislature slashed the state budget in 2011, the water development board lost most of its funding dedicated to helping model groundwater across the state.

That forced individual groundwater conservation districts to contract out the modeling work to engineering and consulting firms. And the data they collect is important: It often serves as the basis for deciding how much water can be sustainably pumped from an aquifer.

In a recent report, the Legislative Budget Board recommended against such a system. Districts need to use a more “standard approach” in getting their data, the report said. Otherwise, they risk “non-uniform data collection practices and methodologies … compromising the accuracy of this process.”

BY THE TEXAS TRIBUNE | MARCH 13, 2015

By Neena Satija

(Bloomberg) — The biggest risk to the University of California’s sale of $2.8 billion of bonds this week, the most it’s offered at once, isn’t a battle over tuition increases and taxpayer subsidies. It’s the stumbling municipal market.

The 10-campus system, which educates 242,000 students, wants to use $2.3 billion of the proceeds for refunding as rising interest rates threaten the finances behind such deals.

Economic strength and accelerating sales of munis have the $3.5 trillion market on pace for its first back-to-back losses since 2013. Benchmark 10-year munis yield 2.17 percent, the highest since December, after Labor Department data last week showed the U.S. jobless rate fell to an almost seven-year low of 5.5 percent.

“Depending on what rate it takes them to issue the debt, to entice enough buyers to buy the debt, the refunding may not work for them,” said John Bonnell, who oversees about $3.8 billion as assistant vice president of mutual funds at USAA Investment Management Co. in San Antonio. “They may choose not to refund as much if that happens.”

Tuition Clash

Governor Jerry Brown and University President Janet Napolitano, the former U.S. Secretary of Homeland Security, are clashing over Napolitano’s plan to raise tuition as much as 28 percent if Brown won’t boost state funding. The Board of Regents voted in November to raise tuition 5 percent annually for five years. Brown, a board member, opposed the increase and is engaged in talks with Napolitano to end the impasse.

Yields have risen from close to five-decade lows since the start of February. Helping fuel the increase, localities offered a combined $62 billion of debt in January and February, almost double the 2014 pace, data compiled by Bloomberg show. About 68 percent of deals this year have been for refinancing, Bank of America Merrill Lynch data show.

“The Regents’ upcoming revenue-bond transactions are looking to take advantage of historically low interest rates in order to refinance existing debt and lock in low interest rates for new money needs,” Dianne Klein, spokeswoman for the university’s Office of the President, said in a statement.

Tuesday’s Business

The system leads governments issuing at least $5.9 billion of refinancing bonds this week, out of a $12.2 billion long-term sales slate, the most since December.

It’s set to begin offering $1.14 billion of general-revenue bonds Tuesday and $1.66 billion of limited-project revenue debt Wednesday. The combined amount is the most it’s sold at one time, according to data from the state treasurer’s website dating to 1996. About $1 billion of the refunding is to convert general-revenue bonds into limited-project revenue debt.

When the University of California regents borrowed in April 2014, they priced 10-year bonds to yield 2.74 percent, or about 0.17 percentage point above top-rated debt, Bloomberg data show. Standard & Poor’s rates the general-revenue debt AA, the third-highest level.

Those bonds are repaid from student fees and tuition, state subsidies, as well as grants, contracts and income from university-owned enterprises. The limited-project revenue bonds are paid from funds generated by infrastructure they finance, such as parking garages, athletic fields and student and faculty housing.
Nathan Brostrom, the system’s chief financial officer, declined to answer questions about the financing.

Funding Need

The university system also operates five medical schools and medical centers and four law schools. It’s involved in running nuclear-weapons laboratories and research facilities for the Energy Department. Its faculty and researchers have won 62 Nobel Prizes, more than any other U.S. public university system.

“The tuition controversy is short-term in nature,” said Michael Ginestro, director of muni research at Bel Air Investment Advisors, which manages $2.7 billion of munis. “If you look at the revenue, the endowment fund, the number of campuses they have and the product they deliver, it overwhelms any concerns.”

Napolitano has said additional funding is needed to stabilize revenue for a system that’s an incubator of leaders for government, industry and Silicon Valley in California’s economy, the world’s seventh-largest.
Brown, 76, who graduated from the flagship campus in Berkeley, says the system needs to rely less on taxpayer subsidies.

Tax Increases

In 2012, the Democrat won voter approval for higher sales-and income-taxes. He pledged to use the increased revenue to add more than $500 million to university funding over four years if the regents froze tuition. Lawmakers paid the first $125 million installment last fiscal year.

The tax increases he championed have spurred demand for the tax-exempt debt of California issuers. The state’s own borrowing costs have shrunk to the lowest since 2007.

“Any time the Regents issues debt it’s well-received,” Bonnell said. “I don’t think this one will be any different.”

Beginning in 2013, the state shifted some debt service for bonds it issued for the university from its books onto the system’s accounts.

Brown’s budget for the fiscal year beginning in July would boost spending for the system by 4 percent to $3.05 billion, including $200 million for debt service. The move is intended to force the university system to factor debt costs into its fiscal outlook.

Napolitano said March 3 that unless Brown boosts aid, she’d freeze enrollment of California students while admitting more out-of-state students because they pay higher tuition and fees.

Even after climbing for weeks, yields are hovering above generational lows, so issuers can still reap savings from refinancing. A Bond Buyer index of 20-year general obligations yields about 3.7 percent, compared with the 5.8 percent average since 1961.

“Even if rates start to back up a little bit, you as an issuer are still going to get pricing that is at your advantage,” said Ginestro at Bel Air.

by Michael B Marois

March 9, 2015

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Jeffrey Taylor

(Bloomberg) — Tom Wolf, the only Democrat to beat an incumbent Republican governor in November, wants to extend his disruptive streak by upending Pennsylvania’s taxes.

Wolf, a businessman in his first elected office, proposed a new tax on natural-gas drilling, the state’s first sales-levy increase in almost a half-century and a boost in the income tax to a record. The plan, released March 3 as part of his budget, would generate $4.7 billion, enough to close a projected deficit, reduce property taxes and fulfill a campaign pledge to raise education funding.

The 66-year-old took the helm as the state deals with mounting pension costs. Pennsylvania had its credit grade cut by each of the three biggest rating companies last year, to two steps below the average for U.S. states. Credit analysts pointed to one-time fixes used to balance this year’s budget.

The latest proposal differs from previous plans that were “piecing things together with duct tape,” said Chris Borick, director of the Muhlenberg College Institute of Public Opinion in Allentown. “His shooting for a big move is pretty important because we haven’t seen it in a while.”

‘More Palatable’

Wolf joins about 10 governors considering tax increases, according to the National Association of State Budget Officers. The levies often are tied to particular needs, such as infrastructure or education, said Norton Francis, senior research associate at the Tax Policy Center in Washington.

“It makes it more palatable when you can say we’re raising taxes for this express purpose,” Francis said.
Wolf beat Tom Corbett, the first Pennsylvania governor to lose re-election since 1968, even as Republican victories gave the party 31 governorships, the most since 1999.

Corbett kept residents’ taxes flat, lowered some business levies and cut funding for education and other programs. He failed to push through changes to public pensions, which are consuming a growing portion of the general fund, and a sale of the state’s wholesale and retail alcohol operations.

Pennsylvania ranked last in job growth from January 2011, when Corbett took office, to December 2014, according to data compiled by Bloomberg. As expenses swelled, lawmakers balanced the $29 billion budget for the year through June with $2 billion of one-time measures.

Buyers’ Demand

Investors have taken note, demanding 0.41 percentage point of extra yield to own 10-year Pennsylvania securities instead of benchmark municipal debt, data compiled by Bloomberg show. The difference is the most since at least January 2013 and is greater than the spread on California bonds, which carry a Standard & Poor’s grade one step lower, at A+.

S&P, Moody’s Investors Service and Fitch Ratings give Pennsylvania their fourth-highest marks.
Wolf’s use of tax increases is a “clear departure” from his predecessor, said Eric Kim, Fitch’s director of U.S. public finance in New York.

Wolf, who was chairman of a family-owned business that supplies kitchen cabinets, told voters he’d boost education funding through a severance tax on natural-gas production, a move that Corbett opposed. Jobs in the industry almost doubled in the four years through June 2014, according to the Department of Labor and Industry.

Wolf’s campaign received money from Michael Bloomberg, founder and majority owner of Bloomberg News parent Bloomberg LP.

Wolf’s Shift

The governor’s $29.9 billion budget would also shift education funding from property taxes to the sales and income levies. He’d increase the sales tax to 6.6 percent from 6 percent, where it’s been since 1968, and the income tax to 3.7 percent from 3.07 percent, while reducing a business-income levy. Average homeowners’ property-tax bills would drop by half, or $1,000.

“To create jobs that pay, schools that teach and government that works, we have to do things differently,” Wolf said in his budget address.

Jeff Sheridan, a Wolf spokesman, said previous Republican bills to reduce property taxes form the basis for the governor’s proposal.

The governor also called for raising the minimum wage and creating incentives for manufacturing jobs, highlighting national Democratic goals in a state that will host the party’s 2016 presidential convention.

‘Bad Plan’

Republicans, who control both legislative chambers, still expressed skepticism.

“It really is a very, very bad plan, put very simply, for all of Pennsylvania,” Senate President Pro Tempore Joe Scarnati told reporters after Wolf’s speech.

Republicans, and even some Democrats, would find it difficult to vote for tax increases because of the risk of primary challenges, said Ryan Shafik, founder of Rockwood Strategies, a Harrisburg consulting firm that works with Republican candidates.

Yet Wolf’s victory by 10 percentage points showed voters consider schools a priority, said Thomas Baldino, who teaches politics at Wilkes University in Wilkes-Barre.

“If Republicans want to demonstrate that they are hearing what the public wants, they need to work with Wolf on things like education funding,” he said.

Bloomberg Muni Credit

by Romy Varghese

March 11, 2015

To contact the reporter on this story: Romy Varghese in Philadelphia at rvarghese8@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Stacie Sherman, Mark Tannenbaum

(Bloomberg) — A Puerto Rico agency plans to sell notes maturing in May 2017 with an interest rate of 8.25 percent, underscoring the rising borrowing costs for the junk-rated commonwealth.

The Infrastructure Financing Authority, called Prifa, plans to issue the notes, which would be paid off with proceeds of a later bond sale, according to a filing with the Municipal Securities Rulemaking Board. Prifa also expects to sell as much as $2.9 billion of bonds backed by petroleum-tax revenue.

Proceeds of that deal would repay the two-year notes, according to a person with knowledge of the transactions who requested anonymity because they’re not final.

Puerto Rico and its agencies tend to borrow through the capital markets to balance operating budgets. That practice and the island’s struggling economy prompted the three largest rating companies to drop the commonwealth to speculative grade in 2014.

The borrowing costs reflect the island’s fiscal stress. The interest rate on the notes is about 7.6 percentage points more than the 0.6 percent yield on benchmark debt, data compiled by Bloomberg show.
It would be the first borrowing from the commonwealth since the Government Development Bank in October sold notes maturing in June 2015 at a yield of 7.75 percent.

Repayment Plan

Funds from the fuel-tax bond are intended to repay money the Highways & Transportation Authority owes the GDB. The bank needs the cash. It said it had $1.2 billion of net liquidity as of Feb. 28, down from $2 billion in October.

The funding in Puerto Rico’s budget for the fiscal year that began July 1 is also uncertain. The island’s revenue through February is $121.7 million below budgeted estimates, according to Treasury Department data. That shortfall has grown from $18.8 million at the end of January.

As of Friday afternoon, the development bank hadn’t provided a comment or additional details about the note sale through its New York-based spokesman, David Millar. The bank handles debt transactions for the commonwealth.

Puerto Rico bonds rallied this week after the legislature on March 10 approved changes to the Prifa oil-tax bond sale to attract buyers. Debt from the island is tax-free nationwide, so it’s widely held by individuals and mutual funds.

General obligations maturing in July 2035 traded Friday at an average price of 85.4 cents on the dollar, the highest since Jan. 28, data compiled by Bloomberg show. The average yield was about 9.7 percent.

by Michelle Kaske

March 12, 2015

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Alan Goldstein, William Selway

New York, March 11, 2015 — While the City of Detroit (B3 stable) has made important strides in its credit fundamentals as it emerges from Chapter 9 bankruptcy, it continues to face a number of fiscal and economic headwinds that limit its future growth, Moody’s Investor Service says in a new report, “Detroit Emerges from Bankruptcy Stronger, but Economic Hurdles Persist.”

Revitalizing Detroit’s economy and improving its city operations are crucial to its long term success, Moody’s says. In addition, Detroit’s ability to balance budgets amid the ongoing economic challenges burdens the credit in the intermediate term.

“The city achieved three main successes during its Chapter 9 filing, including substantially reducing long-term debt and retirement liabilities, but it also has a robust plan to reinvest in its tax base and services and a strong new management team that will benefit from ongoing state support,” says Moody’s Vice President — Senior Analyst Genevieve Nolan, and author of the report.

Positively, Detroit is dedicating resources to revitalize and strengthen its tax base through a proposed $1.4 billion reinvestment plan focusing on Detroit Police, Detroit Fire, Finance Department, General Services and blight removal. The projects will be funded with proceeds from a $120 million quality of life note issued during bankruptcy, and as well as some funds from the city’s $275 million post-petition financing issued as it exited bankruptcy.

Detroit was also able to significantly reduce its long-term liabilities in bankruptcy, with its net direct debt outstanding dropping to $1.8 billion from $2.5 billion. The city’s new management team will also benefit from ongoing state oversight and support.

However, Detroit’s economy and tax base continues to suffer amid valuation declines, weak demographic statistics, and a dwindling population. Unemployment is still high 13.0% as of November 2014, and its decline from a peak of 25% in 2009 is partly attributable to a persistently shrinking labor force.

The city also expects assessed valuation declines to persist through 2020 as the State of Michigan and city management reviews its assessment process. While income tax receipts are estimated to rise 2.1% annually, key revenues from property taxes are projected to drop by 1.3% annually through the same period. By the end of 2023, expenses and revenue projections estimate an ending cash balance of $65.8 million, a positive yet still narrow liquidity position. Negative variations from these projections could jeopardize the city’s financial plans.

While fixed costs, including annual debt service and retiree benefit contributions, were reduced during bankruptcy, they will grow after 2023 when the city is required to begin making pension contributions again.

“The city’s challenges are largely ones that bankruptcy could not immediately fix and may still result in weaker credit quality over the near to medium term,” said Nolan.

Moody’s research subscribers can access the report here.

***

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New York, March 12, 2015 — Even after substantial pension reform that was upheld by the state’s highest court, pension contributions by the State of Colorado and its local governments continue to trail actuarial recommendations, driving up future costs and increasing unfunded liabilities, says Moody’s Investors Service. Moody’s places Colorado’s FY 2013 adjusted net pension liabilities at $17.3 billion, equal to 93% of state revenues and 16th highest among US states.

Overall, Moody’s assesses fiscal pressures from Colorado’s state and local pension funds as moderate, with funding challenges caused by prior contribution shortfalls somewhat offset by the state’s established flexibility to enact substantial reform. Moody’s explores this assessment in detail in the latest report in its Public Pension Landscape series, called “Colorado’s Pension Costs and Funding Gaps Still Growing Despite Reforms.”

In Colorado, where pension liabilities are concentrated in plans administered by the Public Employees’ Retirement Association (PERA), the law requires participating governments to increase their contributions through 2018. Even with these additional contributions, however, costs are continuing to be deferred to later years and unfunded liabilities continue to rise.

There is some clarity and flexibility in terms of controlling costs, however, after the state’s Supreme Court ruled in October 2014 that the pension reform law the state passed in 2010 was legal. The law gave Colorado the authority to change a number of benefit provisions, including cost-of-living adjustments for retirees.

“The reforms substantially reduced PERA’s aggregate unfunded liability, first reflected in the actuarial valuation for fiscal-year ended 2009. But in subsequent years, unfunded liabilities have generally continued to grow,” says Moody’s AVP-Analyst Thomas Aaron.

Legislation signed by the governor in 2014 that calls for studying alternate retirement system options and private sector comparisons, however, signals there could be additional state action.

Moody’s also notes that the ratios of active workers to retirees are near-to-above national norms. Having more active employees currently provides Colorado with time to address funding gaps before liabilities grow considerably larger relative to government budgets In Colorado, however, the ratio of actives to retirees has been decreasing over the past decade.

For more information, Moody’s research subscribers can access this report here.

***

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LOS ANGELES — A ballot measure campaign to cut California’s public pensions will be launched in May by a coalition of politicians and business people led by former San Jose Mayor Chuck Reed, with the state’s largest retirement system a prime target.

The measure would take aim at California’s $300 billion giant Calpers, which has a near-iron grip on the state’s pensions. Calpers, America’s largest public pension fund and administrator of pensions for more than 3,000 state and local agencies, has long argued that pensions cannot be touched or renegotiated, even in bankruptcy.

“Calpers has dedicated itself to preserving the status quo and making it difficult for anybody to reform pensions,” Reed said in an interview. “This is one way to take on Calpers, and yes, Calpers will push back.”

Calpers spokeswoman Rosanna Westmoreland said: “Pensions are an integral part of deferred compensation for public employees and a valuable recruitment and retention tool for employers.”

The measure will be closely watched by reformers and their union opponents in other states, in an ongoing national battle between those who say public pensions are putting intolerable strains on budgets and those who argue pension cuts unfairly penalize retirees and workers.

For most California cities, their largest debt is pension liability, a significant factor in the recent bankruptcies of Vallejo, Stockton and San Bernardino. Calpers has said it will increase pension contributions for most cities by up to 50 percent in the coming years.

Reed, a Democrat, abandoned a similar statewide ballot initiative in 2014, claiming that Kamala Harris, California’s Democratic attorney general, had approved wording of the initiative that was biased and union-friendly.

But he vowed to fight on after leaving office in December, and in an interview with Reuters confirmed for the first time the launch of the initiative and its timing, while noting that a major motive was to challenge Calpers’ grip.

Reed says the push will seek to place a simpler, more legally watertight pension reform measure on California’s November 2016 ballot, giving mayors and other local government executives the authority to renegotiate contracts.

To win a place on the 2016 ballot, backers of the initiative will have to obtain the signatures of 585,000 registered voters, or 8 percent of the number of voters in California’s last gubernatorial election, in this case 2014.

Reed and his allies have been huddling with legal advisers for months to devise a voter initiative that is simpler and less vulnerable to court challenges than last year’s effort.

They have also been buoyed by a ruling in the recent municipal bankruptcy of Stockton, whose judge said California’s public pensions are not inviolate.

As San Jose mayor, Reed helped pass a pension reform measure for his city, parts of which have been struck down after union lawsuits.

Reed is working with other pension reform advocates, including former San Diego Republican council member Carl DeMaio, the primary backer of a pension reform initiative in San Diego that was approved by voters in 2012; and the Ventura County Taxpayers Association’s David Grau.

“We have done a lot of legal work to make sure this initiative is bulletproof,” DeMaio said. “Because the unions are going to throw the kitchen sink at us.”

The group is talking to potential financial backers, Reed said. Last year Reed took $200,000 from a group funded by Texas hedge fund billionaire John Arnold and they could partner again this time round, he said.

Karol Denniston, a public finance attorney and pension expert at Squire Patton Boggs in San Francisco, said voters should be working for legal change to provide more options than municipal bankruptcy: “Right now Calpers has no program for financially distressed cities,” Denniston said.

Dave Low, executive director of the California School Employees Association, said the group would campaign to defeat the measure and was “confident we can defeat it.”

By REUTERS

MARCH 11, 2015

(Reporting by Tim Reid; Editing by Megan Davies and Steve Orlofsky)

CHICAGO — Chicago Mayor Rahm Emanuel on Friday called for phasing in higher, state-mandated payments to city pension funds to avoid a shock to the city’s budget and a big property tax hike.

The move, which would require state legislation, was part of a plan released by Emanuel’s re-election campaign ahead of an April 7 runoff election against Cook County Commissioner Jesus “Chuy” Garcia, who also released his fiscal plan on Friday.

Under an Illinois law, Chicago’s contributions to its police and fire pension funds will increase by about $550 million next year. Another state law allowing cost-saving pension cuts to shore up Chicago’s municipal and laborers’ retirement funds is at risk of being voided as unconstitutional in state court.

Still, the mayor’s plan advocated measures that labor unions and others are challenging in court. These include slowing cost-of-living increases for pensions and gradually increasing workers’ contributions to ease costs.

Emanuel also called for closing Illinois tax loopholes to gain money for the third-biggest U.S. city, along with obtaining state approval for a publicly owned casino.

Garcia’s plan seeks cost savings through intergovernmental collaboration and creates a committee to examine revenue options. It does not address possible funding sources for Garcia’s campaign pledges to hire 1,000 new police officers and to replace traffic ticket revenue generated by red-light cameras he wants removed.

“It is too early to tell residents in the city of Chicago that we’re going to give them bad medicine without stepping back and taking a comprehensive look and approach to how city finances will be met,” Garcia told reporters.

He also said he opposes reducing pension benefits for current and retired city workers.

Emanuel received about 45 percent of the vote last month, short of the 50 percent level needed to avoid a runoff. He leads Garcia by 51-37 percent according to a Chicago Tribune voter poll released on Friday.

Mounting pension pressures led Moody’s Investors Service to lower Chicago’s credit rating by five notches since July 2013, with the last downgrade to Baa2 occurring on Feb. 27.

Garcia said Chicago could save as much as $350 million by consolidating purchasing and some services with other governmental bodies under the mayor’s control, including the Chicago Public Schools. He also said Chicago’s budget could receive a $150 million boost from reforming tax increment financing districts meant to spur economic development within certain geographic boundaries.

By REUTERS

MARCH 13, 2015

(Reporting by Karen Pierog; editing by Matthew Lewis)

(Reuters) – The U.S. municipal bond market grew to $3.652 trillion during the fourth quarter, Federal Reserve data released Thursday showed.

The fourth-quarter increase followed a decline to $3.631 trillion in the third quarter, according to the central bank’s quarterly report.

Retail buyers shed a total of $31.9 billion of municipal bonds, marking the 16th consecutive quarter of declines in bonds held by households, the biggest buyers in the municipal bond market.

The size of the municipal bond market peaked in the fourth quarter of 2010 at $3.77 trillion, as municipalities rushed to sell Build America Bonds, which carried special tax credits. Low interest rates have kept cities, counties and states hungry to borrow and refinance, and the market has held steady at around $3.7 trillion.

Institutional investors ramped up their buying, as banks picked up $41.1 billion municipal bonds in the fourth quarter, up from the prior quarter’s $34.5 billion.

Mutual funds gained $60.8 billion in the fourth quarter, compared with $51.1 billion in the third quarter, the Federal Reserve said. Property casualty-insurance companies shed $200 million and life-insurance companies picked up $5.1 billion in municipal bonds.

By Elvina Nawaguna

Thu Mar 12, 2015

(Reporting by Elvina Nawaguna; Editing by Andrea Ricci)

(Bloomberg) — OppenheimerFunds Inc. is maintaining its bets on Puerto Rico as other municipal-bond investors flee, banking on the strategy that’s made it a top performer over the past five years.

Bonds from Puerto Rico accounted for about $5.6 billion of the $26.2 billion invested across the money manager’s 20 muni funds as of Jan. 1, according to data compiled by research firm Municipal Market Analytics. The 21.4 percent allocation compares with about 19 percent a year earlier, before Puerto Rico was cut to junk in February 2014, data compiled by Bloomberg show.

OppenheimerFunds has outperformed many of its peers since 2010 thanks partly to debt of Puerto Rico, which has been a core holding because it’s tax-free nationwide and offers attractive yields. At stake is whether the gains can last as the island’s electric agency moves toward restructuring and as officials struggle to revive an economy with a 13.7 percent jobless rate, more than double the U.S. average.

“The circumstances have changed, but their holdings are static,” said Bob Donahue, a managing director at Concord, Massachusetts-based MMA who testified to a congressional panel last month about the island’s finances. “Shareholders have seen the volatility — they’ve benefited during the good times and suffered during the bad.”

Junk Limit

Kimberly Weinrick, an OppenheimerFunds spokeswoman in New York, declined to comment beyond the company’s published statements on Puerto Rico.

OppenheimerFunds said in February 2014 that it couldn’t add more junk bonds to some funds because Puerto Rico’s rating cuts pushed it over its speculative-grade limit. The company has nine of the 10 highest-yielding muni funds focused on specific states, including those for Maryland and Virginia residents, Bloomberg data show. Those funds had 48 percent and 38 percent stakes in Puerto Rico as of Jan. 31, respectively.

Their managers wrote about the benefits of state funds in November, saying that “because each fund emphasizes in-state securities, your investments also help support projects close to home.” Three paragraphs later, they mention holding Puerto Rico, Guam and the U.S. Virgin Islands.

Last year’s downgrades “did not change Oppenheimer Rochester’s opinion about the credit risk of Puerto Rico and its public authorities,” the company said in its annual overview, released in January. OppenheimerFunds money managers “saw opportunities to ride out the volatility and clip highly favorable coupons.”

Strategy’s Reward

The managers have said they focus on tax-free bonds offering higher yields, such as debt from U.S. territories and securities backed by cigarette shipments. Over the years, higher coupon payments can boost returns.

The strategy has paid off in terms of five-year annualized performance, Bloomberg data show. Excluding dedicated high-yield muni funds, the $2 billion Oppenheimer Rochester AMT-Free Municipal Fund is the best-performing national fund, while the $1.36 billion Oppenheimer Rochester California Municipal Fund tops open-end funds focused on the Golden State.

Among single-state funds outside of California and New York, which are marketed to residents for income excluded from state taxes, the Oppenheimer Rochester Minnesota Municipal Fund and the Oppenheimer Rochester Pennsylvania Municipal Fund have two of the three biggest five-year gains, Bloomberg data show.

The question for OppenheimerFunds is whether Puerto Rico bonds can keep generating outsize returns, said Beth Foos, a senior analyst at Morningstar Inc. in Chicago.

Beware Volatility

“These state-specific funds are achieving that tax-exemption while reaching for yield, which has been rewarded over the last several years,” Foos said. “That comes with additional risk going forward with this particular issue in Puerto Rico. They’ve got very challenging budget issues that aren’t going away.”

Unlike the broad $3.5 trillion municipal market, Puerto Rico bonds haven’t recouped losses suffered in 2013, when state and local debt fell the most in five years, S&P Dow Jones Indices data show. After falling a record 20.5 percent in 2013, commonwealth bonds gained 10.3 percent last year amid demand for high-yield munis.

The $3.5 billion of general obligations Puerto Rico issued a year ago have lost value. The debt priced at 93 cents on the dollar to yield 8.73 percent on March 11, 2014, Bloomberg data show. It traded Friday at about 83 cents, for a 9.93 percent yield.

Holding Rationale

For the Oppenheimer Rochester Maryland Municipal Fund, the company’s most heavily concentrated in Puerto Rico, the island is depressing returns. It fell 13.7 percent in 2013, compared with a 1.4 percent slide for the S&P Maryland index. The fund has trailed 98 percent of peers in the past three years.

Even as the fund’s net assets shrank to $63.5 million as of Dec. 31 from $67 million a year earlier, Puerto Rico holdings appreciated 1.8 percent to $30.3 million. That means 48 percent of the fund was dedicated to the island, up from about 44 percent.

The fund can invest as much as 25 percent in junk debt, according to its prospectus. It can exceed that limit if managers bought the debt while it was investment grade.

Dan Loughran, who leads the OppenheimerFunds muni group, explained the reasoning for the holdings in a September 2013 article in InvestmentNews: The commonwealth’s constitution puts bondholders first in line and the island can’t file for bankruptcy.

Investor Defense

Yet there’s a growing chance that those rationales may crumble amid attempts by lawmakers to let some island authorities either restructure debt or seek Chapter 9 bankruptcy protection, MMA’s Donahue said.

OppenheimerFunds is moving to defend bondholders. Along with investment funds of Franklin Resources Inc., it convinced a federal judge in San Juan to throw out the island’s Recovery Act, which would’ve allowed some agencies to restructure.

Some of the largest muni investors trimmed Puerto Rico holdings since the territory lost its investment grades. Nuveen Asset Management, which oversees about $100 billion in munis, holds almost no commonwealth debt, while Vanguard Group Inc., which manages $140 billion of munis, cut its stake by about half, to $257 million.

Sam Katzman, who advises high-net-worth individuals as chief investment officer at Constellation Wealth Advisors in New York, said Puerto Rico hasn’t been worth holding for 15 years.

Yet with interest rates close to generational lows and the top income-tax bracket the highest since 2000, the state funds’ yields may lure buyers who haven’t kept up with the island’s financial struggles, he said.
OppenheimerFunds’ holdings are in plain sight: Online fund summaries detail allocations to each state and territory.

“I always worry about what happens to the everyday investor,” said Katzman, whose firm oversees $6 billion. “If the yield looks too high, figure out why. There’s no free ride – – there’s always risk associated with the reward you’re getting. You have to pay attention. The information is there.”

Bloomberg Muni Credit

by Brian Chappatta and Kate Smith

March 8, 2015

To contact the reporters on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net; Kate Smith in New York at ksmith304@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Alan Goldstein

The municipal-bond market isn’t always the easiest to navigate. But the simple, cheap choice of investing in muni bonds through ETFs is about to get a boost.

Already, exchange-traded funds that focus on tax-exempt municipals make it possible to get a diversified holding of such bonds with a single trade, at low cost. That is a lot less labor-intensive than creating a portfolio with individual securities.

Still, until now, few people seem to have noticed. Muni ETFs hold only about $15 billion, remaining a niche in the $2 trillion ETF universe.

One possible reason: Unlike stock investments, it doesn’t cost that much more to own an active muni bond fund, whose manager can monitor the creditworthiness of issuers, says wealth adviser Vern Sumnicht, in Appleton, Wis.

That may change soon.

A first for Vanguard

This spring, index-fund giant Vanguard Group aims to launch its first tax-exempt muni index fund with an ETF share class. Vanguard says it will charge annual expenses as low as 0.12 percentage point of assets for the funds. That compares with 0.20 to 0.35 point for existing muni ETFs and around 0.50 to 0.90 point for actively managed muni funds.

With yields still near historic lows, a bond ETF with significantly lower expenses could be a strong draw, says Thomas Boccellari, a passive-strategies analyst at Morningstar Inc. “It would put more money in investors’ pockets,” he says.

Bonds of state and local governments have some attractive features, although their greatest appeal is to investors in higher tax brackets. The interest such bonds pay generally is exempt from federal taxation, and sometimes also from state and local taxes.

And despite some high-profile fiscal meltdowns, such as Detroit’s 2013 bankruptcy filing, defaults are significantly lower for munis than for debt of corporations.

Design challenge

Designing muni ETFs was more of a challenge than creating ETFs in other markets, though.

Unlike stocks, many munis don’t trade very often. The dilemma for fund companies was how to accurately value a basket of munis underlying an ETF throughout each trading day, says James Colby, senior municipal strategist for Van Eck Global’s Market Vectors ETFs unit.

Eventually, ETF sponsors, regulators and firms that track muni prices agreed that the baskets would be valued with the help of algorithms—rules-based mathematical analyses based on historic data and the prices of bonds that have traded. The resulting ETFs deliver tax-exempt income at “a very reasonable price with transparency and liquidity that investors don’t get in the underlying muni market,” says Mr. Colby.

For people who already own individual munis, an index-based, passively managed approach might provide further diversification, says David Mazza, head of research for SPDR ETFs at State Street Global Advisors.

Experts caution that anyone considering a muni ETF should understand the risks inherent in bond investing generally, as well as the differences between passive and active muni funds.

One ever-present concern is that inflation fears could push up yields. Bond prices move in the opposite direction of yields, so both index and active bond funds can lose value when yields rise.

Moreover, although credit risk is low in municipal bonds, a credit-ratings downgrade or a default can cause individual bonds to lose value—or in the worst case, cause the whole market to sell off.

Spreading the risk

ETF managers don’t do credit analysis or sell in anticipation of downgrades, says Matt Tucker, head of Americas Fixed Income Strategy for BlackRock Inc. ’s iShares unit.

The trade-off, he says, is that ETF holders get wide diversification, so problems affecting one bond likely would have modest impact. The iShares National AMT-Free Muni Bond (MUB) fund, the largest muni ETF, with more than $4.4 billion in assets, holds around 2,400 individual bonds.

Owning a larger muni ETF could have other benefits, too, says Michael Iachini, managing director of Mutual Fund & ETF Research at Charles Schwab Investment Advisory Inc. The bigger ones trade at significantly narrower bid-ask spreads, or the margins between the price at which market makers are willing to buy and sell. When spreads are wider, that raises costs if an investor periodically trades an ETF, he says.

Vanguard says its new muni funds will invest in investment-grade securities in various maturities. A Vanguard spokesman declined to comment beyond the firm’s announcement of the funds, citing restrictions while they are under review by regulators.

Executives at other fund firms wouldn’t speculate on the impact of Vanguard’s entrance to the sector. But some said it wouldn’t hurt if more investors notice that ETFs offer another route to owning munis.

THE WALL STREET JOURNAL

By MICHAEL A. POLLOCK

Updated March 9, 2015 12:03 a.m. ET

Earlier this year, Meeting of the Minds hosted a webinar discussion on a new set of infrastructure financing tools that had just become available in the state of California. The audience submitted over 100 questions to our panelists, many of which had to be collected and addressed by the panelists after the webinar. Questions have been consolidated and grouped into categories.

View the Q&A.

PANELISTS

Fred Silva
Senior Fiscal Policy Advisor
California Forward

Mark Pisano
Professor of the Practice of Public Administration
USC Sol Price School of Public Policy

Larry J. Kosmont, CRE®
President and CEO
Kosmont Companies

March 2, 2015

Cities and states will be able to require contractors on federally funded transportation projects to hire local workers for those projects, U.S. Transportation Secretary Anthony Foxx announced Tuesday.

The move, hailed by many mayors as a way to help create jobs, would also allow the localities to require the construction companies to hire veterans or low-income workers.

Federal law currently requires that bids be awarded to the lowest bidder, in most cases.

“We are developing a pilot that will help us learn about how having a more robust hire provision at the federal level would actually work and what some of the challenges actually are. It’s been 40 years since this has been tested,” Foxx said.

The changes would give the cities and states that participate in the program “maximum flexibility” to determine who would qualify as local residents, or whether to also include low-income residents or veterans, Foxx said.

But the one-year pilot program only applies to money received from the Federal Highway Administration and the Federal Transit Administration. Federal transportation officials will determine whether the extra requirements “unduly limit competition.” If they find the restrictions do not substantially affect competition for bids, they could further loosen restrictions in the future.

Los Angeles Mayor Eric Garcetti praised the move.

“Out here in L.A., if we had no money in, we could get creative and talk about local hires. But as soon as we had a dollar of federal money in, we could not put in there, ‘You’re going to hire locals,’” he said. “That was taking one of our most important tools away in exchange for a dollar or more from the feds.”

Garcetti’s predecessor, Antonio Villaraigosa, pushed the federal government four years ago to allow municipalities to include workforce requirements when they asked for bids. Villaraigosa had been looking for a way to rekindle the local economy at a period of high unemployment, and he wanted to make sure local residents got a larger share of the estimated 166,000 transportation jobs in the region. Villaraigosa raised the issue when he headed the U.S. Conference of Mayors, and the group later endorsed the concept.

William Bell, the mayor of Birmingham, Ala., said his city launched apprenticeship programs to train new construction workers after the recession.

“It would all be for naught if we did not have the jobs to support those young men and women who go through this training process,” he said. “The changes that have been made in the rules today would allow us to help create those job opportunities for our citizens and to put us on a stronger footing for growth in the future.”

Atlanta Mayor Kasim Reed said the new pilot project would help his city be “more bold” in its efforts to employ local residents, especially as the city leads a $6 billion effort to upgrade Hartsfield-Jackson Atlanta International Airport.

“To the extent that we can focus on local residents, low-income individuals and, of course, our veterans, cities are going to thrive and our country is going to do better,” Reed said.

GOVERNING.COM

BY DANIEL C. VOCK | MARCH 4, 2015

(Bloomberg) — California’s standing on Wall Street is the strongest since the recession, with revenue surging and cash tucked away for a rainy day. For some investors, the fiscal gains have only diminished the appeal of its debt.

Since Governor Jerry Brown took office in 2011, California has swung to a $5 billion budget surplus from a $25 billion shortfall. The Democrat won approval of higher taxes and a new reserve fund. Fitch Ratings’ upgrade last week gave the most-populous state its highest marks from the three biggest rating companies since at least 2009.

As the state begins selling $1.9 billion of general-obligation bonds Tuesday, a rally in its securities has shrunk their extra yield relative to top-rated municipal debt close to the skimpiest since 2007, according to data compiled by Bloomberg.

“I wouldn’t expect the yields to be high enough for us, but we will certainly take a look,” said Michael Johnson, managing partner at Gurtin Fixed Income Management, which oversees $9.5 billion in Solana Beach, California.

Day One

California’s offering will include $1.1 billion for refinancing and $790 million for projects such as water and school improvements, according to offering documents. Individual investors bid the first day and institutional buyers such as mutual funds submit orders Wednesday.

In initial marketing Tuesday, the state offered a preliminary yield of 2.35 percent on 10-year maturities, according to a person with knowledge of the sale who requested anonymity before pricing is complete. That would be about 0.25 percentage point above Bloomberg’s index for tax-free benchmark debt.

Investors demanded as little as 0.17 percentage point of extra yield on 10-year California obligations last month, data compiled by Bloomberg show. That’s down from a peak of about 1.7 percentage points in 2009, when the state resorted to IOUs to pay bills. In 2006 and 2007, before deficits soared amid the recession, the gap was as little as about 0.1 percentage point.

California munis earned almost 11 percent last year, compared with 9.3 percent for the entire municipal market, S&P Dow Jones Indices show.

The gains have left the debt with spreads resembling those of higher-rated states, such as Massachusetts and Ohio. Connecticut and Pennsylvania, with the same Aa3 Moody’s Investors Service grade as California, trade at spreads of 0.3 percentage point or steeper. Given California’s position as the largest debtor in the U.S. municipal market, some investors say they need to buy it no matter what.

Index Link

“If you want to have a portfolio that is somewhat linked to the indexes, you have to have it,” said Paul Mansour, head of muni research at Conning, which oversees about $11 billion in local-government debt in Hartford. “The question is do you go crazy on it or do you go with a more moderate level, and I think a more moderate level is our view.”

Brown, 76, in January proposed a record $113 billion spending plan for the year beginning July 1 that devotes most of a $5 billion surplus to schools, reserves and paying down debt.

In November, after voters agreed to bolster a rainy-day fund for fiscal emergencies, Standard & Poor’s boosted California to A+, its fifth-highest mark and the state’s best since 2009 from the company. Fitch on Feb. 25 raised California to the same level, also the strongest since 2009, citing a “disciplined approach to achieving and maintaining structural balance in recent budgets.”

Moody’s Aa3 assessment is the fourth-highest level and the best mark since 2001.

California Treasurer John Chiang, who took office in January, said the Fitch upgrade “is both a validation of California’s recently displayed fiscal discipline, as well as a stern warning against returning to business-as-usual.”

California’s rating sank to the lowest among states in 2009 as lawmakers were locked in a stalemate over how to eliminate a $42 billion shortfall. The state dealt with more than $100 billion of cumulative deficits from 2000 through 2010.

“California has had a dramatic change” in areas such as revenue growth and cost reductions, Mansour said. “You are still getting a decent spread in California.”

Bloomberg Muni Credit

by Michael B Marois

March 2, 2015

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, William Selway

(Bloomberg) — Texas’s Williamson County hired hundreds of workers and ran up debt as it became home to two of the 10 fastest-growing U.S. cities. Now, state tax cuts threaten to crimp the revenue it needs to pay for the expansion.

“It scares the fool out of me,” said Dan Gattis, a judge who helps oversee the budget for the county, an area north of Austin where farms gave way to congested roads as the population almost doubled since 2000.

“It takes so much money to run county government. We’ve got to have some way to pay the bills.”

Energized by an expanded majority in the Texas legislature, Republicans want to slash billions from homeowners’ taxes. That may squeeze funding for local governments that have borrowed $205 billion for roads, schools and infrastructure as Texas added more residents than any other state.

Lieutenant Governor Dan Patrick, who helps to set the legislative agenda, on Feb. 24 unveiled a plan to shave $2.4 billion over two years from homeowners’ levies that pay for schools. One Senate bill would require local elections on whether to roll back property-tax increases if they exceed 4 percent a year. Another would keep officials from marking up assessed values by more than 5 percent.

Money’s Flowing

“As values go up, tax rates never come down,” said Senator Paul Bettencourt, a Houston Republican who introduced the bill with the 4 percent limit. “The money’s flowing too fast into government coffers.”
The conflict is the latest between states and local governments over whether to buffer residents from the effects of rising home values. New Jersey Governor Chris Christie, a Republican, and New York’s Andrew Cuomo, a Democrat, both enacted property-tax limits following complaints about escalating bills. On Tuesday, Pennsylvania Governor Tom Wolf, a Democrat, proposed reducing property taxes that finance schools.

While Texans pay no individual income tax, real-estate taxes were $1,557 per capita in 2011, according to the Washington-based Tax Foundation. That was the 15th highest in the nation, ahead of California.

“At the state level there’s really been a lot of receptivity to the conservative message, and lawmakers to a large degree have embraced the model of low taxes and less government,” said James Quintero, director of the Center for Local Governance at the Texas Public Policy Foundation, an Austin nonprofit that favors smaller government. “At the local level there’s been an absence of conservative ideas.”

Ranked 48th

City and county officials said the revenue is needed to make up for lack of money from the state, which ranks 48th in spending per resident, according to the Henry J. Kaiser Family Foundation.

Localities have borrowed to fill the gap. Of the 10 most-populous states, only New York has more local debt per resident, according to figures from the Texas Bond Review Board. The debt of Texas local governments swelled by 75 percent over the past decade, according to the state’s figures, as officials poured more money into public works.

Williamson County is among them. An influx increased its population by almost 90 percent since 2000 to 471,000. Two of its cities — Cedar Park and Georgetown — were among the 10 fastest growing in 2013, according to the Census Bureau.

Government Grows

Its payroll has swelled 40 percent since 2003 to about 1,500 employees. Jail bookings are up 50 percent. Even the county’s miniature train has seen its ridership increase by more than one third since 2007. In 2013, Williamson County voters approved a $315 million bond for roads and parks.

“The state is not appropriating the money,” said Gattis, the county judge.

Standard & Poor’s and Fitch Ratings both rank the county’s bonds AAA, the highest level. Before an April 2014 bond sale, Fitch cited the county’s property-tax growth in support of its rating. It said the county’s $3.4 billion in debt was elevated compared with the value of assessed property.

“Our debt is high here, I don’t try to hide from that at all,” Gattis said. “There was no way we could have built the infrastructure we needed to build without going out and leveraging money.”

Taxman Tied

While Williamson County’s property-tax increases last year wouldn’t have exceeded the 4 percent limit lawmakers may impose, its officials are wary of how the proposal would tie their hands in the future.

“It’s extremely difficult to keep up with the growth in the demand for services when we have a capped rollback rate,” said Larry Gaddes, the county’s chief deputy tax assessor.

The property taxes of about one-third of 1,000 Texas cities would have exceeded that limit in 2013, according to the Texas Municipal League in Austin, which lobbies on behalf of local governments. If the cap were in place, it would cost McKinney, a Dallas suburb, $1.4 million, enough to pay salaries and benefits for 11 police officers and firefighters, according to the league. Midland, in the western oil fields, would lose $300,000.

Dallas Mayor Mike Rawlings said the tax-cut plans circulating in Austin would limit cities’ growth.

About 61 percent of the city’s budget is for public safety, so efforts to limit revenue growth would “be on the backs of our police and firefighters,” he said. “But it would also affect quality-of-life issues like parks and libraries.”

Local Control

Local governments were anticipating the intrusion from Texas officials. Governor Greg Abbott, a 57-year-old Republican who took office in January, has said cities have gone too far in passing local measures, including bans on plastic bags and cutting trees on private property. He said such developments were threatening to “California-ize” the state with unneeded regulations.

Bennett Sandlin, executive director of the Texas Municipal League, said cities should be left to manage their own money.

“Mayors rub elbows with citizens in grocery stores and churches every day,” he said. “They’re closer to the pulse of constituents than any other form of government. That’s the epitome of conservative government right there.”

by Lauren Etter

March 3, 2015

To contact the reporter on this story: Lauren Etter in Austin at letter1@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net William Selway, Mark Tannenbaum

(Bloomberg) — Chicago arranged with a bank to avoid paying $20 million to end an interest-rate swap and is working to avert a separate $40 million fee, according to Mayor Rahm Emanuel’s office.

The city faced the potential payments after Moody’s Investors Service cut its rating last week to Baa2, two levels above junk, because of mounting pension liabilities. The company said the deteriorating grade may trigger the payments to unwind the swaps, which Chicago entered into as a hedge. The city also is closer to ratings that may force an additional $133 million of payments. Fitch Ratings and Standard & Poor’s affirmed their grades for the city.

Chicago agreed with BMO Harris Bank N.A. to avoid the $20 million payment and is negotiating the $40 million sum with San Francisco-based Wells Fargo & Co., according to a statement from Emanuel’s office. Reuters reported the negotiations earlier.

“While we agree with Moody’s that the city continues to face serious fiscal challenges, under Mayor Emanuel’s leadership, we will continue to make the right – though difficult – choices and work toward a continued strengthening of the city’s finances and securing our city’s future,” the mayor’s office said in a statement.

Trigger Levels

In the case of Chicago, a downgrade below specified rating levels can trigger the swap termination payments. Chicago’s grade from Moody’s has fallen six levels since August 2010, and the company joins other credit raters in saying more cuts are possible.

Chicago has been addressing its debt since Emanuel took office, according to the city’s statement. The efforts include terminating seven swaps and renegotiating 11.

The city has swaps with termination payments of $133 million at lower ratings, according to Moody’s. It also is grappling with short-term borrowings of $1.2 billion, including commercial paper and credit lines, that it may need to repay should ratings fall below Baa3.

Municipalities nationwide have entered into swaps contracts, which are agreements to exchange fixed payments for floating ones, to cut borrowing costs. Most were structured to lower expenses when interest rates rose. Yet with the Federal Reserve keeping its benchmark rate at historic lows, some of the agreements backfired, putting borrowers in a position of owing banks money.

Elise Wilkinson, a spokeswoman for Wells Fargo, declined to comment. Jim Kappel at Chicago-based BMO didn’t respond to phone calls and e-mails seeking comment.

by Darrell Preston and Tim Jones

March 4, 2015

To contact the reporters on this story: Darrell Preston in Dallas at dpreston@bloomberg.net; Tim Jones in Chicago at tjones58@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Alan Goldstein

(Bloomberg) — Barclays Plc has hired Mikhail Foux from Citigroup Inc. to head municipal strategy, according to two people with knowledge of the move.

Foux worked at Citigroup for eight years, including as a member the muni strategy group with George Friedlander and Vikram Rai. He previously worked at Credit Suisse Group AG and Banco Santander SA, according to his LinkedIn profile.

He will fill the role formerly occupied by Tom Weyl, who left Barclays last year to head new business development at MBIA Inc.’s municipal-bond insurance unit, National Public Finance Guarantee Corp. Foux will start this month and be based in New York, according to one of the people, who requested anonymity because the hiring hasn’t been announced.

Barclays was lead manager on about $19 billion in muni sales last year, sixth among underwriters in the $3.5 trillion market, according to data compiled by Bloomberg. That included a $3.5 billion general-obligation offer from Puerto Rico, the largest long-term muni issue of 2014.

Marc Hazelton, a spokesman at Barclays in New York, declined to comment.

by Brian Chappatta

March 5, 2015

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Mark Schoifet

We have assigned our ‘A+’ long-term rating, and stable outlook, to California’s estimated $2 billion of general obligation (GO) bonds, consisting of $790 million tax-exempt various purpose GO bonds and $1.11 billion tax-exempt various purpose GO refunding bonds. At the same time, Standard & Poor’s affirmed its ‘A+’ long-term ratings and underlying ratings on California’s $76.4 billion of GO debt outstanding, as of Feb. 1, 2015, not including double barreled GO bonds rated higher based on additional pledged revenue. The outlook on all ratings is stable.

Gov. Chris Christie’s committee to study New Jersey’s troubled pension system wants to overhaul the retirement program for public employees, freezing the current setup and replacing it with a “cash balance” plan.

The plan would spread out the current pension system’s unfunded liability over many years, and would more closely reflect benefits in the private sector, according to members of the commission. Mr. Christie endorsed the report conclusions Tuesday in a speech to the Legislature.

The commission is also calling for a state constitutional amendment to require governors to make payments to the new plan.

“Although the proposed plans are likely to be less generous to long-tenured employees as compared with the current plans, a less generous plan that is funded is preferable to a more-generous plan that isn’t,” the report says.

Benefits in the new plan could swing based on fluctuations in the stock and bond markets, introducing an element of risk.

Workers in the system would have their current plan frozen, according to Tom Healey, the commission chairman, and new workers would be entered into the new plan. Employees would have individual accounts, he said.

“You can do lots of different things with a total mess,” Mr. Healey said in an interview. “You can either say, let’s try to fix it or you can move to Wisconsin. We’re at the edge of the cliff here.”

The proposal received pushback from some unions and Democrats. Mr. Healey said he had met with the state’s main teachers union, and said its leaders were cooperative. Other meetings are scheduled in coming weeks.

Wendell Steinhauer, president of the New Jersey Education Association, said the union supports the proposal’s recommendations to freeze benefits of the current pension system, create a newly managed one and adopt a guarantee of state funding in the state constitution.

But Mr. Steinhauer said that some of the pension proposal “unfairly burdens” workers and wouldn’t be feasible.

“There will be many things that NJEA disagrees with, some of them very strongly,” Mr. Steinhauer said in a statement. “This is a report. It is not a law, and it is not the final word on what will or must happen.”

Other states such as Kentucky and Louisiana have recently introduced cash benefit plans, though Louisiana’s plan was ruled unconstitutional.

Joshua Franzel, a vice president for research at the Center for State and Local Government Excellence, said cash benefit plans are a way for states to provide more predictability in their pension systems.

The plans tend to guarantee a certain rate of investment return, but unlike a defined benefit pension system the hybrid ones don’t lock in a fixed allowance based just on the worker’s salary. It shifts some of the risk of market fluctuations to the employee without fully doing so, Mr. Franzel said.

“It’s a middle approach for managing risk and trying to control costs and control liabilities,” said Mr. Franzel, whose center studies pensions. “We are seeing a trend to more states beginning to consider and implement hybrid plans.”

New Jersey’s pension system is underfunded by about $37 billion.

The commission’s report said parts of its approach are likely to be unpopular at first but that “in time they will be viewed as the best way to move forward.”

THE WALL STREET JOURNAL

By JOSH DAWSEY

Updated Feb. 24, 2015 8:37 p.m. ET

CHICAGO (Standard & Poor’s) Feb. 25, 2015–The surprise runoff election for mayor of Chicago could delay a crucial $600 million pension contribution plan for the police and fire departments in the city’s upcoming 2016 budget. This temporary speed bump puts into question a plan the city has been working on for the past four years and will mean the next administration will need to determine how to fit this cost into its budget in less than a year, in the opinion of Standard & Poor’s Ratings Services.

We will be monitoring how this short-term pension obligation will affect the city’s A+/Negative general obligation rating as well as how the next administration will address long-term pension issues that have been weighing on the city’s credit standing.

In the short term, whichever candidate is elected will need to devise a method to fund the additional annual contributions required for the city’s police and fire plans in time for budget year 2016, and future budgets thereafter. The city will have less than a year to determine how to fit this cost into its budget, even if the amount is lowered to some extent through statutory amendments or identifying a revenue stream and implementing it. The uncertainty of how this issue will be addressed prevents the city’s credit outlook from being stable at this point.

Under the current administration, the city has tried to address its longer term pension liabilities by restructuring two of its four existing pension plans for non-police and fire employees. These reforms are being challenged by some of the affected employee unions in court. Whether these challenges are successful or not, at this point the amount of increase that could occur from the municipal employees and laborers’ plans has a place in the city’s budgets, with an identified revenue stream. These costs will increase gradually over time and a credit factor will be whether the identified revenue stream can keep up with the costs.

In terms of magnitude, the city currently only contributes 26% of its annual required pension contribution (ARC) for its four plans. Not paying the full ARC leads to increases in the unfunded liability. The current payment represents 7% of its total governmental funds expenditures. If the city were paying down these liabilities with the full ARC payment today, the contributions would represent 27% of total governmental funds expenditures.

The four defined benefit plans had an overall unfunded liability of $20.1 billion as of 2013, and the plans altogether are 34% funded. Funding levels for each of the plans are as follows:

• The municipal employees plan: 37% funded, with an $8.7 billion unfunded
  liability;
• The laborers’ plan: 57% funded, with a $1.03 billion unfunded liability;
• The police officers’ plan: 30% funded, with a $7.2 billion unfunded
  liability; and
• The fire fighters’ plan: 24% funded, with a $3.14 billion unfunded
  liability.

While pensions cloud the city’s financial and debt profiles, the city offers a strong base from which revenues can be supported. It has a vibrant economy which supports the city’s credit quality.

As the city awaits voters’ final say on who will be the mayor, the city’s credit awaits a longer term resolution to its pension troubles. One answer will be found in six weeks, the latter may take some more time.

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.

Standard & Poor’s Ratings Services, part of McGraw Hill Financial (NYSE: MHFI), is the world’s leading provider of independent credit risk research and benchmarks. 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 23 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 and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.

Primary Credit Analyst: Helen Samuelson, Chicago (1) 312-233-7011;
helen.samuelson@standardandpoors.com

Secondary Contacts: Lisa R Schroeer, Charlottesville (1) 434-220-0892;
lisa.schroeer@standardandpoors.com

Jane H Ridley, Chicago (1) 312-233-7012;
jane.ridley@standardandpoors.com

Horacio G Aldrete-Sanchez, Dallas (1) 214-871-1426;
horacio.aldrete@standardandpoors.com

Cities have been hitting the brakes on red light cameras, and no wonder. Outrage over the devices is no longer limited to angry motorists facing hefty fines. Judges have now tossed tens of thousands of tickets. Newspapers and government inspectors have exposed deep flaws in many cities’ equipment and enforcement methods. And the former CEO of one of the two major camera manufacturers was indicted on bribery and other charges related to Chicago’s red light cameras.

The backlash began in 2013. After peaking at an all-time high in 2012, when 540 U.S. jurisdictions used red light cameras, the number dropped to 503, according to the nonprofit Insurance Institute for Highway Safety. Last year the numbers dropped even further. In December, New Jersey ended a five-year pilot program that had allowed 25 municipalities to use red light cameras. The same month, Ohio Gov. John Kasich signed a law that essentially blocks the use of traffic cameras in the state.

On the legal front, a California appeals court threw out a $500 ticket in January because drivers weren’t reliably given a 3.6-second yellow light as required by law. The decision sets a legal precedent for challenging red light camera violations, but it came after the city of Riverside­ — which had issued the ticket in question — scrapped its cameras last summer. Meanwhile, lawyers are working on a settlement in a class-action lawsuit against 20 Missouri cities and a camera manufacturer that could lead to refunds across the state.

What’s behind the red light reversals? For one thing, there’s growing skepticism that the cameras lead to a decrease in automobile accidents. The Chicago Tribune, for example, recently commissioned a study that showed Chicago’s red light camera program did not lead to an overall reduction in crashes. Many citizens, meanwhile, see the cameras as nothing more than a way for cities to make easy money by slapping fines on drivers. Now state lawmakers, city council members and citizen activists around the country are pushing measures to curb or outright ban the cameras.

But ditching the cameras can play havoc with city budgets. When New Jersey ended its pilot program, Moody’s, the credit rating agency, warned of the impact the development could have on the two dozen municipalities that had the devices. “These developments are credit-negative,” Moody’s analysts wrote, “because they further constrain governments’ ability to implement new revenue streams at a time when these governments are facing property tax limits, uneven sales tax growth and anti-tax sentiment.”

Proponents of red light cameras insist there’s also a cost in terms of public safety. “There’s no question that lives will be lost because some communities have ended their programs,” says Russ Rader of the Insurance Institute for Highway Safety, which backs red light cameras.

One of the problems he sees is that some cities implemented red light cameras not as a safety measure, but as a revenue source. If red light cameras are set up properly, Rader argues, they may not bring in much money because motorists stop rather than run a red light. “Some communities have shot themselves in the foot. If the public believes that red light cameras are more about revenue than safety, then communities have a problem.”

Backers of red light cameras say they can be used effectively, if the cities using them base their decisions on safety and explain the benefits to their residents. Cities should place the cameras at dangerous intersections, and then monitor safety data to make sure an improvement occurs, says Michael Green of AAA, the motorists group. He says cities should post signs alerting drivers to where red light cameras are in operation. “This shouldn’t be a surprise: The goal is not to ticket a motorist,” Green says. “The goal should be to get them to stop at the red light.”

GOVERNING.COM

BY DANIEL C. VOCK | MARCH 2015

(Bloomberg) — Philadelphia’s school district, the nation’s eighth-largest, wants to get more children into high-achieving schools. Doing so threatens its finances.

The panel that runs the district accepted five of 39 applications on Feb. 18 for new charter schools, which are publicly funded and privately run. The vote agitated both sides of the debate — parents and unions who say charters divert funds from the traditional system, and an opposing group of parents and advocates who wanted more approvals to help students stranded in failing schools.

The debate in Philadelphia echoes those in other urban districts, such as in New Jersey, Ohio and Michigan, that also face fiscal stress from charters. Philadelphia school officials next month plan to sell debt for the first time since 2011 that isn’t deficit financing. The rejection of most of the charter candidates boosts the junk-rated district because adding the schools would strain its budget, Moody’s Investors Service said this week.

“From an educational point of view, from a social point of view, they are a positive, especially for really dedicated students,” said Ted Molin, a senior credit analyst at Wilmington Trust Co. in Delaware. “But from a pure fiscal or credit point of view, I would have to say, unfortunately, they’re a negative.”

Budget Gap

While Philadelphia’s rating and finances have strengthened over the past several years, the district, run by a board of mostly state appointees, has deteriorated. Officials closed schools and sold about $300 million of debt to fill a budget gap in 2012. They’ve lobbied state and local lawmakers for more funds, including a $2-a-pack cigarette tax in Philadelphia and a portion of city sales-tax receipts.

Costs still outstrip revenue, as the district faces an $80 million deficit for the year beginning in July. In the next five years, 86 percent of the $282 million increase in expenses results from higher charter-school and retirement costs and debt service, according to the district’s plan.

Officials are requesting more state aid to educate students, 81 percent of whom qualify for free or subsidized meals. They’re also appealing a court decision that stopped them from implementing labor changes, such as health-care contributions from teachers, that would have saved $200 million over four years.

Charter Costs

About 30 percent of the system’s 204,000 students attend charters, up from about 14 percent a decade ago. The district estimates each charter student adds a net $7,000 of expenses. Charter costs next year may tally $769 million in a $2.7 billion district budget, the five-year plan shows.

The district in March plans to sell about $46 million of bonds for capital projects and $270 million to refinance older securities, said Fernando Gallard, a spokesman. The refunding may save $23.4 million, or 8.1 percent of par, according to a Moody’s estimate. The schools, which have $3.2 billion in debt, sell securities under a program that diverts state aid to bond payments, boosting security for investors.

Moody’s ranks the school system Ba3, three levels below investment grade, while it grades the bonds A1, eight levels higher, because of the state program.

Molin at Wilmington Trust, which handles $4 billion of munis, said the company probably wouldn’t add to its district holdings with the new deal because “underlying credit characteristics seem to be deteriorating.”

Negative Loop

Philadelphia’s district is the only one in Pennsylvania, and one of few in the U.S., without authority to levy taxes, said Dan Seymour, assistant vice president at Moody’s.

Efforts to balance the books with cuts to staff and services “have hurt the educational product,” he said from New York. That in turn has led more students to leave traditional schools, creating stranded costs. “It’s a negative feedback loop.”

The addition of five charter schools would cost the district $6.8 million by 2019, Gallard said. The rejected schools can appeal.

Gallard said even when the system was stronger financially, students didn’t perform as well as officials would have liked.

“There is a fiscal impact, but overall our goal is to improve the access to high-achieving schools for our students,” he said.

Plowing more money into the same system won’t improve outcomes, said Mark Gleason, executive director of the Philadelphia School Partnership, a nonprofit that provides grants to city schools and wanted more charters approved.

Less than half of students in traditional public schools showed proficiency in reading and math in last year’s state tests, according to Gleason’s group. For charter students, the rates rise to 55 percent for math and 52 percent for reading, it says.

“The district is in a precarious financial situation, but the disadvantaged kids in Philadelphia are in a more precarious situation,” Gleason said. “These are kids who are not getting a fair shot at life.”

by Romy Varghese

February 26, 2015

To contact the reporter on this story: Romy Varghese in Philadelphia at rvarghese8@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Stacie Sherman, Mark Tannenbaum

(Bloomberg) — Governor Chris Christie’s proposal for a record contribution to New Jersey’s pensions would erase less than 2 percent of an $83 billion funding deficit.

In his 2016 budget address Tuesday, Christie said the $1.3 billion infusion would stabilize benefits for 402,000 teachers, firefighters and other public employees and retirees. Yet the 52-year-old Republican, a potential White House aspirant, has a history of breaking promises on the contributions.

His decision in 2014 to shortchange the system for two fiscal years precipitated the eighth credit downgrade under his tenure, a record for a New Jersey governor. His latest pledge would cover less than half the $3.1 billion he was scheduled to pay, raising the specter of further rating cuts.

“That is essentially a deferral, and one of the chief causes of the rating pressure has been the growing pension liability,” said Paul Brennan, a money manager in Chicago at Nuveen Asset Management, which oversees about $100 billion of municipal debt. “Continuing to defer that is probably not going to be well received” by rating companies and investors, he said.

The governor joins municipal leaders nationwide balancing the rising expense of retirement and health-care costs with spending on infrastructure and other government services. Kansas and Kentucky are considering selling debt to replenish their pensions, even after a group of state and local-government finance officials advised against the practice.

Freeze Plan

Because of new accounting standards, New Jersey’s unfunded pension obligation grew from $37 billion in 2013, according to a report released Tuesday by a panel that Christie appointed to recommend ways to bolster the system.

Christie praised the report, released during the budget address, and said he had an agreement on one of its recommendations: to freeze the 245,000-member teachers pension fund, cede control to a trust and retire debt over 40 years.

Yet Wendell Steinhauer, president of the New Jersey Education Association, the state’s largest teachers union, said no final deal had been reached. Democrats, who control the legislature, said after the budget address that they won’t accept pension changes on top of those made during Christie’s first term until the governor makes full payments.

‘Big Negative’

Forgoing a full payment “is a big negative for New Jersey,” said Tom Metzold, co-director of munis in Boston at Eaton Vance Management, which oversees about $25 billion of state and local debt. “I appreciate the fact that Christie is trying to make more changes to the pension plan, but that doesn’t solve the problem of what the state needs to pay today.”

Investors have been demanding extra yield to buy New Jersey debt rather than benchmark munis. Yields on 10-year New Jersey bonds last week reached 0.64 percentage point above top-rated munis, the biggest gap since at least January 2013, according to data compiled by Bloomberg.

Moody’s Investors Service grades New Jersey A1, four steps below top-rated debt. Standard & Poor’s and Fitch Ratings score it one level lower at A. Illinois is the only state with lower ratings.

Christie faces the added burden this fiscal year of a state Superior Court decision, issued Feb. 23, to make good on a $1.6 billion pension payment he skipped as revenue missed targets. The $2.25 billion that Christie had promised was to be a state record; instead, he committed to just the actuarially required $681 million.

While crediting New Jersey for releasing the larger pension-funding deficit under the new accounting standards, Alan Schankel at Janney Capital Markets said insufficient pension payments are a concern.

“The historic amount is not necessarily relevant if the gap widens,” said Schankel, a managing director of fixed-income strategy in Philadelphia. “Any amount that makes the state fall further behind in their pension funding is unfortunate.”

by Elise Young & Michelle Kaske

February 24, 2015

To contact the reporters on this story: Elise Young in Trenton at eyoung30@bloomberg.net; Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Mark Schoifet

(Bloomberg) — Illinois Governor Bruce Rauner has a recipe for plugging the state’s $6.2 billion deficit that relies on cuts and avoids new taxes. The approach is breeding skepticism at debtholders BlackRock Inc. and U.S. Bank Wealth Management.

The first Republican elected to lead the state in 16 years, Rauner inherited $111 billion of unfunded pension liabilities and a budget that is set to run out of money by June 30 after lawmakers let a higher levy on income expire.

Illinois’s debt investors, whom Rauner may wind up tapping to finance roads or other capital projects, say the lowest-rated U.S. state doesn’t have the flexibility to lean so heavily on spending reductions.

“I’m very skeptical that his budget will be able to achieve balance by doing what he’s doing,” said Jim Schwartz, head of the municipal credit research team at New York-based BlackRock, which oversees $116 billion in munis. “The best way from his view is let’s cut spending, and I just look at it as very aggressive.”

Governors in about 10 states, including some led by Republicans, are proposing tax increases, according to the National Association of State Budget Officers in Washington. Illinois faces greater fiscal challenges than most: It has $6.4 billion in unpaid bills and the worst-funded state pension system.

Tax Rollback

A temporary tax increase, which raised personal and corporate income-tax levies by as much as two-thirds, expired Jan. 1. Its rollback will cost the state an estimated $1.8 billion this fiscal year and $4 billion in the year that starts July 1, according to the University of Illinois.

“I don’t think they’re going to be able to get to the level that they need to with budget cuts alone,” said Dan Heckman, a senior fixed-income strategist in Kansas City at U.S. Bank Wealth Management, which oversees $126 billion.

“There’s going to have to be some balance between revenue enhancements and cutbacks on spending,” said Heckman, whose firm holds less Illinois debt than indicated in its benchmark.

Neighbors’ Levies

Residents of the fifth-most-populous state will pay a 3.75 percent income tax in 2015, down from 5 percent last year, according to a report this month from the Federation of Tax Administrators. By comparison, the top rates in Iowa, Kentucky, Missouri and Wisconsin range from 6 percent to 8.98 percent. Indiana’s rate is 3.3 percent for all residents.

Rauner, 59, a former venture capitalist, wants to cut $2.9 billion in employee benefits, $1.3 billion in subsidies to localities and $1.2 billion in health-care reimbursements.

“Asking for more of the taxpayers’ hard-earned money without fundamentally reforming the structure of state government would further erode public confidence and accelerate our decline,” Rauner said in his Feb. 18 budget address in Springfield.

“Illinois taxpayers are currently not getting value for their tax dollars,” Catherine Kelly, a Rauner spokeswoman, said via e-mail Feb. 24.

House Speaker Michael Madigan, a Chicago Democrat who controls much of the legislative agenda, has said he wants revenue to be part of the deficit fix. Even Senate Republican leader Christine Radogno called the budget address “the opening shot” in negotiations. Lawmakers have until the end of May to approve the budget with a simple majority. After that, a three-fifths vote is required.

Campaign Talk

Moody’s Investors Service said in a Feb. 24 report that the state’s political landscape will make it tough to enact the governor’s proposals without raising revenue.

During his campaign, Rauner promoted an expanded sales tax. He also called for tax changes during his budget speech, without providing specifics, and blamed the state’s woes on years of poor decisions and budgeting gimmicks, rather than the expiration of the higher taxes.

Restructuring pensions is part of his plan. His budget includes anticipated savings of $2.2 billion in fiscal 2016 by giving some public employees less generous retirement benefits.

The state Supreme Court is set to hear arguments next month on the legality of a 2013 law overhauling the pension system. Illinois’s attorney general appealed after a judge in November said the legislation violated the state constitution’s protection of public-worker retirement benefits.

Negative Outlooks

Illinois is paying for its financial struggles. Standard & Poor’s, Moody’s and Fitch have negative outlooks on its debt, signaling they could lower its credit standing. The companies already rank the state four levels above junk.

Its borrowing costs are the highest among the 20 states tracked by Bloomberg. Investors demand 1.3 percentage points of extra yield to own 10-year Illinois bonds instead of benchmark municipal debt, according to data compiled by Bloomberg.

Illinois plans to sell about $1.5 billion of bonds, mostly in the year that starts July 1, as part of existing capital programs, according to Kelly, Rauner’s spokeswoman.

As bondholders assess the state, they’re waiting to see the fiscal solution its leaders produce.
“The feeling out there is that they have a lot of room to raise taxes, and theoretically they could,” said Peter Hayes, head of munis at BlackRock. “Eventually there will be some moment, some day of reckoning which makes everybody wake up and say we really need to pass something.”

by Elizabeth Campbell & Brian Chappatta

February 25, 2015

To contact the reporters on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net; Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Stacie Sherman

(Bloomberg) — Glendale, Arizona, which hosted the Super Bowl this month, is trying to reel in debt-service costs after selling almost $600 million of bonds to build facilities for professional sports teams.
The Phoenix suburb of 235,000 refinanced four bond deals this year, shaving $47 million off debt expenses and reducing long-term obligations by 5 percent to $915.6 million, said Tom Duensing, the city’s finance and technology director.

The former farming community has attempted to define itself as a sports hub, borrowing more than $580 million to finance projects, including a spring training facility for Major League Baseball’s Los Angeles Dodgers and Chicago White Sox. Savings from the bond deals will bolster the municipality’s finances as it deals with deficits triggered in part by the burden of keeping up with debt payments.

“It only bought us time; we’re not going to be able to add a bunch of new services or anything like that,” Duensing said in an interview. “It took the pressure off for the next few years when a majority of the savings are realized.”

Glendale is home to the University of Phoenix Stadium, the venue for the Feb. 1 Super Bowl. The National Football League’s Arizona Cardinals have played at the site since 2006.

The city sold tax-exempt debt in 2007 for a parking facility for the Cardinals; in 2008 for the shared spring training facility; and in 2013 for an arena for the National Hockey League’s Arizona Coyotes, according to financial statements. The securities were backed by revenue such as excise taxes.

Refunding Moves

With interest rates close to five-decade lows in January and this month, Glendale refinanced the deals from 2007 and 2008, as well as water-system debt and general-obligation borrowings, and is considering more refunding, according to Duensing.

Glendale has struggled to balance its budget and service its debt, depleting reserves, according to data compiled by Bloomberg.

City leaders are considering a plan to sell one of Glendale’s three library branches, including some books and DVDs, for an estimated $4.7 million, the Arizona Republic reported this month. City Council members have discussed putting proceeds toward reserves, Duensing said.

‘Big If’

“If that happens, and it’s a big if, it will be up to the City Council’s discretion as to where it’s allocated,” Duensing said. “There aren’t any restrictions on it.”

City council members didn’t respond to requests for comment through Joe Hengemuehler, a Glendale spokesman.
Moody’s Investors Service and Standard & Poor’s have recognized Glendale’s attempts to trim debt. Since September, both removed negative outlooks on the general-obligation rating. Moody’s has Glendale at A3, four steps above speculative grade, while S&P rates it BBB+, one step lower.

Moody’s cited “improved financial management despite ongoing challenges stemming from high fixed costs driven largely by a high debt burden and net operating costs associated with professional sports facilities” as reason for the improved outlook.

“That was a big step for us and we can come back to them with these new policies and have more positive improvement,” Duensing said.

by Kate Smith

February 26, 2015

To contact the reporter on this story: Kate Smith in New York at ksmith304@bloomberg.net

To contact the editors responsible for this story: Joseph Mysak Jr. at jmysakjr@bloomberg.net Mark Tannenbaum, Mark Schoifet

(Bloomberg) — Chicago had its credit rating cut to within two steps of junk by Moody’s Investors Service because of mounting pension liabilities, underscoring the city’s fiscal stress as Mayor Rahm Emanuel faces an unprecedented runoff election.

The one-step reduction to Baa2 affects $8.3 billion of general-obligation bonds, which were already the lowest-rated among the 90 biggest U.S. cities, excluding Detroit. The outlook remains negative, signaling more cuts are possible, New York-based Moody’s said Friday in a report.

“The city’s credit quality could weaken as unfunded pension liabilities grow and exert increased pressure on the city’s operating budget,” Moody’s analysts Matthew Butler and Rachel Cortez wrote. “We expect substantial growth in unfunded pension liabilities even if the city’s recent pension reforms survive an ongoing legal challenge.”

Chicago is obligated to pay $600 million into four pension funds in next year’s budget, though Standard & Poor’s said the contribution may be delayed after Feb. 24 elections led to an unexpected runoff vote between Emanuel and Jesus “Chuy” Garcia. The former White House chief of staff failed to capture more than 50 percent of the vote.

“Moody’s has been consistently and substantially out of step with the other rating agencies, ignoring the progress that has been achieved,” Kelley Quinn, an Emanuel spokeswoman, said in an e-mailed statement.

Difficulties Ahead

Quinn noted that two other major credit raters affirmed the city’s grade this week, recognizing the progress made under Emanuel.

“What we can agree with Moody’s about is that the city continues to face serious fiscal challenges and that difficult work remains to continue strengthening the city’s finances and securing our city’s future,” Quinn said.

While Illinois is the lowest-rated state, credit raters differ on Chicago’s standing. S&P affirmed its A+ rating on the city today, citing its broad and diverse economy. That’s the fifth-highest rank and four levels above Moody’s. S&P may cut its rating if Chicago doesn’t implement a plan by the end of 2015 to sustainably fund its pensions, analyst Helen Samuelson said in a report. Fitch Ratings ranks Chicago two steps higher than Moody’s.

State Action

The third-most-populous U.S. city has $20 billion in unfunded pension obligations that it can’t address without the approval of the state legislature. Lawmakers in June restructured two city pension plans with about $9.4 billion in underfunded liabilities for about 60,000 municipal workers and retirees by making them pay more and reducing benefits. The changes didn’t apply to the police and fire systems.

Labor unions in Chicago sued to block the law in December, and the litigation was put on hold pending the outcome of an Illinois Supreme Court ruling on a state pension overhaul.

The April 7 runoff is the first for the city of 2.7 million since it went to nonpartisan elections in 1999. Garcia’s campaign called the downgrade another sign that the city needs new leadership.

“The downgrade is an objective verdict on Emanuel’s lack of fiscal stewardship,” Andrew Sharp, Garcia’s campaign manager, said in an e-mailed statement.

by Brian Chappatta and Elizabeth Campbell

February 27, 2015

To contact the reporters on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net; Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Stacie Sherman, Mark Tannenbaum

The U.S. Department of Transportation, Pipeline and Hazardous Materials Safety Administration (PHMSA) is now accepting applications for the 2015 Technical Assistance Grants (TAG) for communities or impacted stakeholders seeking engineering, or other scientific analysis of issues relating to pipeline infrastructure. Governmental entities or non-profit groups may qualify for a grant of up to $100,000 per year. Applicants must be local communities or groups of individuals relating to the safety of pipeline facilities in local communities. ‘Communities’ are defined as cities, towns, villages, counties, parishes, townships, and similar governmental subdivisions or consortia of such subdivisions. For-profit entities are not eligible.

The announcement can be found by using the “SEARCH GRANTS” tab at Grants.gov.

Search by Funding​ Opportunity Number DTPH5615SN0002.

The closing date for applications is April 22, 2015.

For more information, or to apply for a grant, please contact Karen Lynch at karen.lynch@dot.gov.

The city of Stockton, Calif., will leave bankruptcy protection on Wednesday, bringing to close years of cost-cutting efforts that affected bondholders, taxpayers and its retired employees.

Stockton leaders said the 300,000-resident city will leave so-called Chapter 9 protection—the type of bankruptcy procedure used by struggling municipalities—on sturdier financial ground.

City manager Kurt Wilson said the milestone will enable the city, which was hit hard by the housing crash, to move forward toward recovery. “We emerge from bankruptcy a renewed city, perhaps better prepared for our future than any other city in the state, with a new value system, a thorough understanding of our operations and finances and the tools to maintain solvency and adjust to economic conditions for decades into the future.”

The city, located about 80 miles inland from San Francisco, is getting out of bankruptcy after more than two years. During the case, voters approved a new 3/4-cent sales tax increase to pay for more police officers, while more than 1,000 workers and retirees who had $538 million in claims against the city agreed to accept one-time payments worth $5.1 million instead.

U.S. Bankruptcy Judge Christopher Klein approved the city’s reorganization plan in October.

Stockton filed for bankruptcy protection in June 2012, with more than $700 million of debt, making it the largest city to seek bankruptcy protection under Chapter 9 until Detroit’s filing about a year later. Aside from the housing downturn, Judge Klein also blamed the city’s financial woes on former leaders who offered overly generous pay to city workers and took on debt for new projects that the city couldn’t afford.

One place where Stockton leaders didn’t try to cut costs was with its pension fund contributions. The city promised to continue making full payments into a pension plan administered by the California Public Employees’ Retirement System, the largest public pension in the U.S., even though Judge Klein decided that a California city’s pensions could indeed be cut using bankruptcy’s power.

A judge overseeing Detroit’s bankruptcy case has also ruled payments into pension funds could be reduced while a city is insolvent.

Stockton is emerging from bankruptcy proceedings despite the protests of one bondholder group. Mutual-fund giant Franklin Templeton Investments is appealing Judge Klein’s approval of the city’s reorganization plan, which proposed to pay Franklin-managed funds about $4 million on a roughly $37 million debt. Lawyers for the fund have argued that the city can afford to pay more than that amount.

Judge Klein said that the Franklin-managed funds aren’t likely to win the appeal. He agreed to let the city leave bankruptcy, despite the appeal, in part to give certainty about Stockton to the roughly $3.6 trillion bond market that extends money to municipalities.

The Franklin-managed funds are the only creditors to continue to challenge the city’s bankruptcy-exit plan.

THE WALL STREET JOURNAL

By KATY STECH

Feb. 24, 2015 4:58 p.m. ET

Write to Katy Stech at katherine.stech@wsj.com

At the Federal Communications Commission Thursday, the Klieg light of public attention beamed on the net neutrality vote. But there was an earlier vote on another matter, and that was the one that held Harold DePriest’s attention.

Mr. DePriest is the chief executive of the Electric Power Board, a community supplier of ultrahigh-speed Internet service in Chattanooga, Tenn. E.P.B. and the city of Wilson, N.C., another municipal broadband provider, last year petitioned the F.C.C. to preempt state laws that limit the build-out of community broadband services. The commission voted 3-2, along political party lines, in favor of using its federal power to override the restrictive laws in those two states.

In the Tennessee case, the result of the restriction, Mr. DePriest said, is that “a tenth of a mile from where my fiber system ends are people who have no Internet service.” He wants to extend his fiber-optic cable network to those nearby rural neighborhoods, but the state legal restraints had prevented him.

The law, Mr. DePriest explained, essentially prohibits the power board from offering its broadband service beyond the area the utility traditionally served with electric service. But that often doesn’t sync with government jurisdictions or logic. Because of the law, he said, there are two schools in the county without its high-speed broadband service. And E.P.B.’s fiber-optic cable into homes, businesses and schools offers the gold standard of broadband speed — 1 gigabit a second data transfer speeds. That is 40 times faster than the new standard, established by the F.C.C., for high-speed broadband of 25 megabits per second downloads.

The commission action is expected to be challenged in court. And comments from the two Republican commissioners Thursday were a preview of the legal argument. Ajit Pai said he did not believe the agency has the legal right to preempt state laws. Michael O’Rielly, the other Republican commissioner, agreed, saying the F.C.C. move showed “arrogance.”

To Mr. DePriest, the goal of the states’ rights ideology is to champion local control. “Why is it states’ rights to tell local communities what to do?” he asked, and added, “these laws prohibit communities from controlling their own destiny.”

Definitions vary, but the F.C.C. says that about 20 states have laws or rules that place restrictions on the freedom of community broadband providers to expand and offer competition to private Internet service providers, mainly cable and telecommunications companies. So while the preemption order only applies to two states, the ruling has wider implications.

Tom Wheeler, chairman of the F.C.C., said the state laws were anti-competitive because they “raise barriers to the deployment of and investment in new broadband networks and infrastructure.”

The F.C.C. asserts that it has the power to override the state laws under Section 706 of the Telecommunications Act of 1996, which directs the commission to remove barriers to broadband investment and competition.

There are cities across the country pursuing ultrahigh-speed networks either by building them on their own or in collaboration with companies. So far, the experience has been mixed in terms of offering a high-speed service that is economically viable.

Chattanooga was an early entrant, starting to lay fiber for its gigabit-speed network in 2009. The rationale, Mr. DePriest said, was that cutting-edge broadband service was a crucial tool of economic development. Good intentions, however, hardly guarantee success.

There were struggles, Mr. DePriest said, both with the technology and with generating sufficient demand to support a sustainable business. At the outset, he said, the EPB crews strained to wire one or two houses a day. Recently, they have wired up to 200 new customers in a day. Today, the .E.P.B. broadband network has 9,000 miles of fiber and serves just under 71,000 homes and businesses. The gigabit Internet service costs $70 a month, and $57 a month if it is part of a bundle of Internet, video and phone service.

“We’ve gone from nothing to a $100 million a year enterprise that pays for itself,” Mr. DePriest said.

Asked about the net neutrality rules the F.C.C. adopted Thursday, Mr. DePriest said he was a regulatory minimalist by instinct. But regulation, he added, has a role to play and that the key will be whether the new rules will as light-touch as Mr. Wheeler insists they will be. Still, Mr. DePriest has no trouble with utility-style regulation of Internet service.

“I’ve spent the last 10 years,” he said, “arguing that high-speed Internet service is a utility in the modern world.”

THE NEW YORK TIMES

By STEVE LOHR FEBRUARY 27, 2015

This week Federal Communications Commission chairman Tom Wheeler plans to seize regulatory control over the Internet by declaring private broadband carriers to be public utilities. Less well known is that he also wants to usurp state authority to regulate municipal broadband networks.

Local governments are forever seeking opportunities to diversify their, er, investments in sports stadiums, convention centers and such. Many lately have been getting into broadband. Municipalities have built some 180 fiber-optic networks in addition to about 75 cable services. Most operate as de facto public utilities with an implicit, if not explicit, taxpayer backstop.

President Obama last month hailed the municipal gigabit fiber optic network in Cedar Falls, Iowa, as an exemplar of public broadband’s potential to increase connectivity, spur competition and drive economic growth. Yet his laments of market failure are overwrought, and his anecdote of government success comes with caveats.

According to a report last year by New York Law School, the number of high-speed broadband lines more than doubled between June 2009 and December 2012, while the percentage of Census districts with one or fewer fixed broadband providers fell to 1.2% from 3.5%. Broadband cable prices plunged to $1.10 per megabit per second in 2013 from $19 in 1998.

Google ’s gigabit fiber-optic network is already available in Kansas City, Austin, and Provo, Utah, and is expanding into Atlanta, Nashville, Raleigh-Durham and Charlotte. With gigabit speed, a user can download a song in less than a tenth of a second. Most Internet users don’t require more than 10 megabits for downloads, and consumers don’t want to pay more for speeds they don’t need.

Rather than driving competition, municipal broadband can undercut the private market. Because they benefit from public financing and right-of-way, munis can price services below private carriers. Like other cities, Cedar Falls financed its broadband via tax-exempt municipal bonds, loans from the public electric utility and federal grants.

This puts taxpayers and in some cases electric-utility ratepayers on the hook if the ventures go belly up. Taxpayers in Monticello, Minnesota, had to bail out their government-run FiberNet after it defaulted on municipal bonds. The publicly financed network in Groton, Connecticut, was sold to private investors at a $30 million loss. Google paid $1 for the failed municipal broadband enterprise in Provo, which cost taxpayers $60 million. Largely because of these risks, 21 states impose restrictions on municipal broadband, which range from requiring public hearings to outright bans.

Enter the FCC’s Mr. Wheeler. Last summer, Wilson, North Carolina, and Chattanooga, Tennessee, petitioned the FCC to override state limits on expanding their networks to outlying communities under Section 706 of the 1996 Telecommunications Act.

Section 706’s boilerplate text instructs the FCC and states to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans . . . by utilizing, in a manner consistent with the public interest, convenience and necessity . . . measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”

Mr. Wheeler has interpreted this vague language as a federal mandate to pre-empt state laws restricting government broadband. He asserts that public broadband is necessary and in the public interest because “commercial broadband providers can pick and choose who to serve based on whether there is an economic case for it.”

Yet under the federalist system and the Constitution’s Tenth Amendment, states have sovereign authority to regulate their municipalities. The Supreme Court has affirmed that “if Congress intends to alter the ‘usual constitutional balance between the States and the Federal Government,’ it must make its intention to do so ‘unmistakably clear in the language of the statute.’”

Yet nowhere in Section 706 is the FCC explicitly authorized to pre-empt state laws regulating municipal broadband. In Nixon v. Missouri Municipal League (2004), the Supreme Court rejected federal pre-emption of a state ban on municipal telecom services.

Mr. Wheeler is trying to end-run this ruling by appealing to the FCC’s mandate to “promote competition” and “remove barriers to infrastructure investment.” But if the Labor Department construed its mandate to “foster, promote, and develop the welfare” of workers as broadly, the feds could nullify state laws that forbid cities from raising their minimum wage or restrict collective bargaining for local government workers.

Mr. Wheeler may figure that liberal ends justify illiberal means, but he is threatening serious damage to the federal system and local self-government.

THE WALL STREET JOURNAL

Feb. 24, 2015 6:50 p.m. ET

CHICAGO — Public finance banker R. Ray Kljajic, a staple of Chicago’s municipal bond community, is leaving Citi after a 25-year career there.

Kljajic said he was “very pleased yet saddened” to announce his impending departure, according to an email obtained by The Bond Buyer.

The firm announced Kljajic’s resignation internally on Tuesday in a memorandum distributed by Howard “Ward” Marsh, head of the broker-dealer’s municipal securities division.

The email said Kljajic was leaving to pursue other areas of interest involving U.S. infrastructure investment and tax policy. That includes work with investment funds, sources said.

“There is no doubt Ray will pursue these activities with the same passion, hard work, creativity and professional dedication that he brought to his work for so long as a leading senior banker here at Citi,” Marsh wrote. “Ray not only led the Midwest Region with distinction for many years, he has played key roles in several of Citi’s more prominent convention center, hotel, P3 and urban Infrastructure partnership initiatives.”

Marsh called Kljajic a “trusted confidant” for many of the firm’s long-time clients and noted his contributions to the national dialogue on public-private partnerships, infrastructure investment and related tax policies.

Kljajic and Marsh did not return calls to further comment. The firm declined to comment.

Sources said it was Kljajic’s choice to leave and he would be wrapping up work by the end of the month.

Citi finished off 2014 in the third slot among senior managers in the Midwest, credited by Thomson Reuters with leading $1.3 billion of deals.

Kljajic started at Citi, then Smith Barney, in 1989.

He was a general government banker who built a specialty in transportation and then in asset privatization and public-private partnerships.

The firm worked on the financing for the winning bidder on the groundbreaking lease of the Chicago Skyway toll bridge in 2005 and served in the same role in the subsequent lease of the Indiana toll road.

In past conversations, Kljajic said highlights of his career included project financings at O’Hare International Airport including the International Terminal, McCormick Place Convention Center financings, including the groundbreaking convention center hotel financing.

Citi currently is working on a short-term loan financing for a new hotel at the convention center that would eventually be rolled into long-term debt.

Kljajic, a Chicago native who grew up in nearby Gary, Indiana, previously worked at the former Drexel Burnham Lambert from 1988 to 1989.

He started his career at the former Continental Illinois National Bank and Trust as an analyst in 1978 and worked his way up to banking until his departure in 1987.

It was in 1984 while Kljajic was at Continental that he brought a short-term financing idea to Walter Knorr, then comptroller for the administration of Chicago Mayor Harold Washington.

Knorr, who went on to serve as chief financial officer to former Mayor Richard Daley, remembered calling Kljajic a “fine prospect” when asked by the Smith Barney team before the firm hired him.

Knorr, now chief financial officer for the University of Illinois, said he came to rely on Kljajic and the Citi team on transportation financing while at the city.

“You could tell Ray knew his stuff” from the beginning, Knorr said.

“Ray has just the right balance of understanding the financing needs of an issuer and the salesmanship of a banker. Some bankers come in with the product du jour. Ray brought in what an issuer needs,” Knorr said.

Kljajic recruited Knorr as he eyed a private sector job. Knorr joined the Citi team in 2002 to serve as a co-head of the Midwest group with Kljajic.

Illinois’ former debt manager John Sinsheimer, who recently resigned, praised Kljajic as a client’s banker.

“He always had the client’s interests foremost in mind and worked hard to get the best deal for the client,” Sinsheimer said.

During periods of his tenure at Citi, Kljajic led the firm’s Midwest group or served as a co-head.

More recently he had shifted his focus to the firm’s infrastructure finance and P3 group.

Thomas Coomes had been leading the Midwest public finance banking region until the summer of 2014 when Samantha Costanzo, previously of Jefferies, was hired. Coomes and Costanzo serve as co-heads of the region.

Sources said Kljajic had butted heads with Costanzo, who had previously worked for the firm and was cut during a round of layoffs in 2008.

Sources also said Kljajic had long been eyeing other opportunities more focused in the infrastructure field and felt with some recent top-level public finance changes it was good time to make the leap.

THE BOND BUYER

BY YVETTE SHIELDS

FEB 19, 2015 3:51pm ET

At $1.7 billion, the stadium being proposed in Carson by the San Diego Chargers and Oakland Raiders would be the costliest ever built in the National Football League.

And, the teams pledge, no new taxes or money from the city budget will be used to finance it.

So how do they plan to pay for the thing?

Look north, to Santa Clara, said Tim Romer, a managing director for municipal finance at Goldman Sachs and advisor to the Chargers on the deal.

That’s where the San Francisco 49ers and city officials created a new public agency that owns the $1.2-billion stadium that opened last year. The Santa Clara Stadium Authority, which is made up of City Council members, took out $621 million in construction loans — to be paid back with tax revenue generated by the stadium and naming rights — and raised $312 million selling personal seat licenses to season ticket holders. Other funds came from the team and NFL, Santa Clara’s redevelopment agency and a new hotel tax.

Goldman Sachs worked on that deal and led an investment group on the loans, and at Friday’s press conference Romer said a similar structure could work here.

“We’ve concluded that financing of a stadium here in Carson is very viable and doable,” he said. “Taxpayers and the general fund will be isolated and protected. It’ll be financed soley by revenues generated by the stadium.”

But observers have their doubts.

Neil deMause, editor of Field of Schemes, a website that tracks stadium subsidies, said that while he’s skeptical of St. Louis Rams owner Stan Kroenke’s ability to finance a stadium in Inglewood, he’s even more skeptical that the Chargers and Raiders will be able to find $1.7 billion for one in Carson.

“This seems extremely dubious,” he said. “That’s a crazy amount of money.”

He estimated the two teams could raise $400 million to $500 million selling personal seat licenses, and that while two teams might get more than one on naming rights and other in-stadium revenue, they wouldn’t get double. And league bylaws say teams can’t tap the NFL’s G4 stadium loan program – which could provide $200 million – if they’re relocating. That could change, but a majority of owners would have to agree.

“It makes way more sense that this is a bluff,” he said.

And while the NFL says it wants an L.A. stadium capable of hosting two teams, putting two teams in the same market – let alone the same building – doesn’t necessarily make economic sense, said John Vrooman, a Vanderbilt University economist who studies the league.

“The two teams may split the stadium cost 50/50 but their mutual competition will shrink the total [Southern California] revenue pie regardless of their relative market share,” he wrote. “The Raiders and Bolts are worth more as separate monopolies in separate markets than combined in L.A.”

And, deMause notes, no one’s saying what happens to the shared stadium plan if one of the teams decides to stay put. Neither franchise, he said, could finance this on their own.

“The whole thing is completely screwy,” he said.

THE L.A. TIMES

By TIM LOGAN

FEB 20, 2015

In a case with similarities to that of Sharon Scanlon in Shelton, the finance director of Plymouth has pleaded guilty to stealing more than $800,000 from that Litchfield County town.

David J. Bertnagel, 41, of Thomaston, waived his right to indictment on Feb. 20 in Bridgeport federal court and admitted to theft and tax charges stemming from his embezzlement scheme.

Bertnagel pleaded guilty to one count of theft from a local government receiving federal funds, which carries a maximum term of imprisonment of 10 years, and one count making and subscribing a false tax return, which carries a maximum term of imprisonment of three years.

He is scheduled to be sentenced on May 15. He was arrested on Jan. 20.
Sharon Scanlon, Shelton’s former assistant finance director, is now in prison after being charged with stealing $914,000 from the city. She was prosecuted at the state — not the federal — level, and also pleaded guilty.

Three years as finance director

According to the criminal complaint, Bertnagel was employed as the finance director for the town of Plymouth from October 2011 to October 2014. He previously worked as a part-time employee in the town’s Finance Department.

Plymouth is a town of about 12,000 people in northwestern Connecticut, slightly north of Waterbury and off Route 8.

Feds: Issued checks to himself

From about October 2011 through October 2014, it is alleged that Bertnagel issued 207 checks totaling approximately $808,030 from the town’s payroll account to himself.

Prosecutors said Bertnagel used the embezzled funds to make mortgage payments, pay credit card bills, fund home improvement projects and purchase more than $100,000 in coins, stamps and other collectibles.

He also converted more than $182,000 of the stolen funds by way of cashed checks, ATM withdrawals and money orders, according to prosecutors.

Tax returns, federal funding

Bertnagel’s federal tax returns for the 2012 and 2013 tax years failed to report any of his embezzled income, resulting in a tax loss to the government of $145,564 for those two years. He also did not file a tax return with the IRS for the 2011 tax year.

Since 2011, the town of Plymouth has received approximately $450,000 in grant awards from the U.S. Department of Health and Human Services.

Will pay restitution

As part of his plea agreement, Bertnagel agreed to make restitution in the amount of $808,030 to the town of Plymouth, and he must cooperate with the IRS to pay all outstanding taxes, penalties and interest.

He also has agreed to forfeit more than $45,000 that he held in bank accounts, and assorted jewelry, stamps, coins and other collectibles that were seized on the date of his arrest.

FBI and IRS involved

This matter is being investigated by the Connecticut Public Corruption Task Force, which includes the Federal Bureau of Investigation, Internal Revenue Service’s Criminal Investigation Division, U.S. Postal Inspection Service, and inspector generals from the U.S. Department of Housing and Urban Development, and U.S. Department of Health and Human Services. The case is being prosecuted by Asst. U.S. Attorney Christopher M. Mattei.

The U.S. Attorney’s Office for Connecticut is reminding citizens they can report corrupt activity to the Connecticut Public Corruption Task Force by calling 800-CALL-FBI (800-225-5324).

The Scanlon case in Shelton

Sharon Scanlon was the assistant finance director for the city of Shelton. She left her position in 2012 after an investigation began into her possible embezzlement of city funds. She had worked for the city for 17 years.

Scanlon was arrested on state charges in January 2013 and accused of stealing $914,000 in city money over the course of a decade, ending in July 2012.

The indictment charged her with 56 counts of first-degree forgery and one count of first-degree larceny.

She eventually pleaded guilty to one count each of first-degree forgery and first-degree larceny, and was sentenced to four-and-a-half years in state prison in January 2014.

“This is a serious case — a violation of the trust of the taxpayers of the city of Shelton,” State’s Attorney Kevin Lawlor told the court when Scanlon was being sentenced.

Issuing city checks to herself

Based on court evidence, Scanlon was writing municipal checks to herself and then listing them in city ledgers as either voided or payable to other people.

Her scheme began to unravel in June 2012 when co-workers noticed a city check for $7,825, made out to no one, on Scanlon’s desk that had been voided.

The workers wrote down the check number and later saw in bank records it had been made out to “Sharon Scanlon” but was listed as voided in the city’s check ledger.

When being sentenced, Scanlon told the court, “I’ll spend the rest of my life trying to make amends for this crime, both financially and emotionally.”

By Shelton Herald on February 20, 2015

— as edited by Brad Durrell for the Shelton Herald

Feb 20 (Reuters) – Debt sales by U.S. states, cities, schools and other municipal bond issuers next week will total about $8.8 billion, the largest weekly supply so far in 2015, according to Thomson Reuters estimates on Friday.

The week’s biggest debt sale comes from Atlanta, Georgia, which plans to refund $1.25 billion of water and wastewater bonds. Loop Capital Markets plans on pricing the deal on Tuesday.

The New York City Transitional Finance Authority will sell $700 million of future tax secured subordinate bonds through Wells Fargo Securities, which set a retail presale period for Monday and Tuesday, followed by formal pricing on Wednesday.

Deals from Nevada issuers top next week’s competitive calendar. The Clark County School District will offer $398.4 million of limited-tax general obligation refunding bonds in a two-part sale on Tuesday. The state of Nevada has set a three-part, $291.4 million sale of new and refunding limited-tax GO bonds for Wednesday.

Yields on Municipal Market Data’s benchmark triple-A scale have been ratcheting higher after falling in January.

The yield on 10-year bonds, which started 2015 at 2.01 percent, ended Thursday at 2.08 percent. The 30-year bond yield, which stood at 2.83 percent on Jan. 2, ended at 2.88 percent.

Weekly net flows into U.S. municipal bond funds dropped to just $59 million in the week ended Feb. 18 from $460 million in the previous week, according to Lipper. High-yield muni funds had a second-straight week of net outflows, totaling nearly $220 million in the latest week.

(Reporting By Karen Pierog; Editing by Andrea Ricci)

In early February, the newly elected Wayne Charter County, Mich., executive, Warren C. Evans raised concerns about the county’s ongoing financial problems, highlighting liquidity concerns and the need for major structural fixes, without which a state takeover and bankruptcy could be considerations. Standard & Poor’s Ratings Services views bankruptcy and a state takeover of the county as premature. To clarify our views, we are addressing some frequently asked questions regarding our Feb. 13, 2015, downgrade on Wayne County and our opinion of steps the county might take to remedy its financial problems.

Frequently Asked Questions

What was Standard & Poor’s recent rating action on the county?
On Feb. 13, Standard & Poor’s lowered its rating on Wayne County’s limited-tax general obligation (GO) bonds to ‘BB+’ from ‘BBB-‘, a change to speculative-grade from investment-grade. We based the downgrade on a differentiation between the limited- and unlimited-tax ratings and the county’s weakened financial position and ongoing budgetary challenges. The county has no Standard & Poor’s-rated unlimited-tax GO debt outstanding.

Standard & Poor’s rates the county’s limited tax GO bonds ‘BB+’ with a negative outlook. The rating reflects the county’s chronic structural imbalance, brought on in part by cost overages in some of the county’s major operating areas, such as the sheriff’s department. Of course, falling revenues have also played a part in the imbalance. In addition, chronic management problems, including political gridlock and an inability to create meaningful structural reforms, constrain the rating. These conditions have led to Wayne County’s inability to make sufficient changes to operations to eliminate the structural imbalance. (For further details, please see the summary published Feb. 13, 2015, on RatingsDirect.)

What does the negative outlook reflect?
Wayne County has significant, long-standing problems creating a balanced budget. With a new administration that faces such a chronic imbalance, we believed it was the appropriate time to signal that either management must address the imbalance in a relatively short time frame, or further negative rating action could be warranted. As such, the negative outlook reflects the magnitude of closing the county’s structural budget gap and concerns that the time frame for making the changes could be drawn out beyond the county’s current expectations.

What is Standard & Poor’s view on the comments from the new county executive?
In our view, to start treating the county as if it is about to file for bankruptcy is a bit premature, given the process required in Michigan to file. As we recently saw in Detroit, bankruptcy is a significant issue, with serious potential repercussions for bondholders. We take very seriously any possibility of bankruptcy, but we don’t want to rush to judgment before letting the process take its course.

What steps are necessary to file for bankruptcy?
Michigan’s Act 436 addresses the circumstances under which local governments can file for bankruptcy, and it outlines numerous steps before a local government can reach that point.

First, the state financial authority must conduct a preliminary review, after which the governor can decide to appoint a formal review team. That team then prepares a report on the local government’s financial condition and submits it to the governor’s office so the governor can determine if a financial emergency exists. If the governor determines it does, two paths allow a local government to file for bankruptcy. One is that the local government can pursue the appointment of an emergency manager, who has the authority to file for Chapter 9 bankruptcy–but only with the governor’s approval. The other path is to bypass the emergency manager and head directly to a Chapter 9 bankruptcy filing, but before this can occur, the governor must approve the action. Again, given this process, a rush to bankruptcy would be difficult for the county.

While many consider it a positive step to bring in a third party who has powers to make changes, such as the Emergency Manger option, given Detroit’s recent experience and very rapid move to bankruptcy, our view on the county’s trajectory could well change with the appointment of an emergency manager.

In addition to the pressure of the structural imbalance, what other pressures does the county face?
Although Wayne County does not have a lot of debt compared with many peers ($408.2 million in direct GO-only backed debt as of Sept. 30, 2013), it does have a significant other postemployment benefits (OPEB) liability ($1.6 billion at as of Oct. 1, 2012, the most recent actuarial report) and, perhaps most significantly, a pension funding issue. As the Wayne County Employees Retirement System is only 45% funded and carries an unfunded accrued actuarial liability of $878.3 million as of Sept. 30, 2012, (the most recent actuarial report) the pension funding level is clearly a rating factor, and the county definitely needs to address it to regain structural balance and solid financial footing. However, in the context of Detroit’s bankruptcy, it is important to remember that although Detroit’s pensioners did lose OPEB, the cuts that came out of bankruptcy were borne largely by bondholders, with relatively small—comparatively speaking—changes to pensions.

What issues could lead to a further negative rating action?
Outside of any actions taken toward filing for bankruptcy, an inability to make meaningful changes to the departments with chronic cost overruns is also a credit factor. The county has made progress in some areas, but these departmental overages are still adding to the structural imbalance. Wayne County’s management score (Very Weak) is also a credit weakness, given the county’s past political gridlock. A meaningful change to this is also important to prevent a further downgrade. Ultimately, we expect the county to show it can make meaningful spending cuts that allow it to regain–and maintain–ongoing structural balance. Without that, we could lower the rating further.

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.

19-Feb-2015

Primary Credit Analyst: Jane H Ridley, Chicago (1) 312-233-7012;
jane.ridley@standardandpoors.com

Secondary Contact: Lisa R Schroeer, Charlottesville (1) 434-220-0892;
lisa.schroeer@standardandpoors.com

The region’s transit system is crippled by more than terrible weather. It’s suffering from decades of irresponsible financial decisions.

Boston has endured over seven feet of snow in less than a month, and the most visible casualty has been the region’s decrepit transit system. A closer look at the woes bedeviling the Massachusetts Bay Transportation Authority (MBTA) reveals a more-than-20-year guide to how not to run a transit system, and the lessons don’t only apply to systems that have to contend with mountains of snow and extreme cold.

The MBTA’s struggle with this winter’s weather has become national news. Massachusetts Gov. Charlie Baker’s frustration grew as the system was unable to restore service after each storm, causing MBTA General Manager Beverly Scott to announce her resignation. She then said it would be 30 days before full commuter-rail and subway service could be restored — if there were no more snow in the interim.

Meanwhile, the economic cost to the region of the system’s inability to move its 1.3 million daily riders mounts.

It’s a mess that could easily have been avoided. The problems trace back to 1991, when state officials signed a consent decree with a local environmental advocacy group that had sued to stop construction of Boston’s now infamous “Big Dig” unless the state agreed to build new transit projects as environmental mitigation for the additional cars that the transportation megaproject would accommodate.

The consent decree bound the state to complete 14 new projects, including subway extensions and new commuter-rail lines. It set the MBTA on a path to being the fastest-growing major transit agency in the country even though it serves a relatively slow-growing metropolitan area. No funding source was identified for any of the expansions.

Almost a decade later, in 2000, a law was enacted to “forward fund” the MBTA. Believe it or not, the previous funding system consisted of the authority informing the legislature what it had spent during the previous year and the legislature cutting a check to cover it.

Under forward funding, the MBTA would get the revenue from one penny of the state sales tax and assessments from the municipalities it serves in addition to the revenue it could raise from such sources as fares, parking, advertising and rent on its extensive property holdings. The bonds sold to build the mandated new transit lines also became the MBTA’s responsibility.

But before the ink was dry on the forward-funding legislation, the phenomenon of tax-exempt Internet sales began to eat away at sales-tax receipts. It also quickly became clear that parts of the MBTA finance plan were unrealistically optimistic.

By 2002, the MBTA’s financial problems were obvious. Reports published in 2007 and 2009 detailed the problems. But state leaders did little, limiting themselves to raising the sales tax in 2009 and modestly increasing the gas tax four years later. By then it was too little too late.

Today the MBTA owes nearly $9 billion in debt and interest, which translates into more than one-quarter of its operating revenue going to debt service. And since money that should have funded maintenance had to be diverted to the legally mandated expansions, the system faces an estimated $5 billion maintenance backlog. Trains, buses and signal systems that should have been retired decades ago have been no match for this winter’s cold and snow.

The MBTA debacle holds two major lessons for other transit agencies. First, don’t undertake expansions without knowing how they’ll be paid for. And see that paying for them includes operations, maintenance and debt service, not just construction costs.

Second, elected officials must have the courage to ensure that transit systems have sufficient funding to meet their critical maintenance and other needs. By kicking the can down the road and waiting years to address the MBTA’s looming crisis, state leaders turned a multimillion-dollar problem into a multibillion-dollar disaster — and that’s before accounting for the staggering toll the system’s meltdown is taking on the local economy.

The long-term silver lining here may turn out to be Beverly Scott’s announcement that it will take at least 30 days to restore full service. With every day that customers can’t access trains and buses and motorists must contend with the resulting congestion, it becomes less likely that voters will allow their elected representatives to forget about the MBTA’s problems once the snow finally melts.

GOVERNING.COM

BY CHARLES CHIEPPO | FEBRUARY 20, 2015

Charlie_Chieppo@hks.harvard.edu

LOS ANGELES — A move by bankrupt San Bernardino to spend up to $200,000 on a public relations firm has angered some of the cash-strapped California city’s creditors, who face deep cuts under an imminent exit plan.

Negotiations between San Bernardino and most of its creditors have stalled, three months before it must produce a court-ordered bankruptcy exit plan. The city, 65 miles east of Los Angeles, is in year three of a bankruptcy process beset by delay and dysfunction.

City officials have made clear their intention to significantly cut their debt to the holders of $50 million in pension obligation bonds. The city has imposed deep cuts to its police and fire departments and wants to enshrine those cuts in a bankruptcy plan.

On March 2 the city council is set to discuss invited bids from eight public relations firms to improve the city’s communications strategy.

Bids have ranged from $72,000 to $201,000 annually. The city already has a $600,000 contract for fiscal year 2014/15 with a financial consultancy to help with the bankruptcy. In November it hired a management consultancy in a $300,000 deal.

“The city’s problem is not public relations. It’s a lack of leadership,” said Corey Glave, the attorney representing the city’s fire union.

Ron Oliner, representing the police union, said: “The city is bringing in new experts and advisors, but we cannot yet discern real progress toward its exit from bankruptcy.”

Calls to the city manager’s office were not immediately returned.

San Bernardino declared bankruptcy in August 2012 with a $45 million deficit, one of a handful of municipal bankruptcies closely watched by the $3.6 trillion U.S. municipal bond market.

Bondholders, public employees and state and local governments want to understand how financially distressed cities handle their debts to Wall Street, compared with other creditors like large pension funds during Chapter 9 protection.

Last year it agreed under any bankruptcy plan to pay in full its biggest creditor Calpers, the state public pension system.

In January, Luxembourg-based Erste Europäische Pfandbrief-und Kommunalkreditbank AG (EEPK), which holds $50 million in pension obligation bonds, sued the city over the Calpers deal.

EEPK argues that its debt should be treated the same as the city’s obligation to Calpers. EEPK was joined in suing the city by Ambac Assurance Corp, which insures a portion of the pension bond debt, and Wells Fargo Bank, the bond trustee and flagship bank of Wells Fargo & Co.

By REUTERS

FEB. 19, 2015, 5:39 P.M. E.S.T.

(Reporting by Tim Reid; Editing by Chris Reese)

CHICAGO — Governor Bruce Rauner is seeking to persuade credit rating agencies from further downgrading Illinois’ weak ratings, shortly after presenting his turnaround budget to the state General Assembly.

The Republican governor spoke with the three major credit rating agencies about his spending plan and agenda, his office said late on Thursday. Further downgrades would potentially boost the state’s already-high borrowing costs.

“He stressed he is intent on solving the years of financial recklessness that put us in this fiscal crisis,” the governor’s office said.

Rauner, who took office in January, delivered his first Illinois budget address on Wednesday.

Illinois’ credit ratings at A3 and A-minus are the lowest among the 50 states and due to negative outlooks are tipping toward triple-B, a low investment-grade rating level rarely assigned to states.

A chronic structural budget deficit, huge unfunded pension liability and big revenue loss from the recent partial rollback of temporary higher income tax rates are major credit factors for the fifth-biggest U.S. state.

Rauner’s $32 billion general funds budget for the fiscal year that begins July 1 aims to chop $6.6 billion from healthcare, local government revenue sharing, mass transit and other areas. Controversial pension changes account for a third of the savings.

“Obviously, Illinois is in a difficult position and these proposals are just proposals,” said Ted Hampton, an analyst at Moody’s Investors Service, noting the rating agency would be guided by the enacted budget and would weigh the risk that included reforms may not be implemented.

“The governor is certainly aware of the magnitude of the budget challenges Illinois faces and that’s important,” Hampton added.

Standard & Poor’s analyst John Sugden said the major focus is how Illinois will achieve structural balance in its budget regardless of whether that is accomplished with spending cuts or revenue. He added however that the state has had some challenges in the past in terms of delivering on expenditure reduction initiatives.

Illinois is paying a higher price to pay off its debt in the U.S. municipal bond market than many other governments. The state’s bonds are yielding 140 basis points over the market’s benchmark yield scale for AAA-rated bonds, according to Municipal Market Data. By contrast California, which has addressed many of its fiscal woes, has a so-called credit spread that tops out at only 30 basis points.

The governor’s budget was met with howls of protest from Democratic state lawmakers, labor unions, hospitals, and the city of Chicago, which estimates it would lose about $210 million of revenue sharing through the end of 2016.

By REUTERS

FEB. 20, 2015, 11:42 A.M. E.S.T.

What do people in the land of no debt think of today’s debt markets?

I wondered about that during a visit last week to Nebraska, my home state. After all, the forces whipping through markets—sharply falling oil prices, volatile stocks, 10-year Treasury yields stuck stubbornly below 2%, a Federal Reserve seemingly intent on raising rates, and a European Central Bank that just committed to buying a boatload of euro-zone debt—ultimately trickle down to the humble, workaday U.S. municipal bond. And the Cornhusker State, which has a state income tax, has its fair share of buyers and issuers of munis.

Over the past 12 months, munis have handed investors a return of about 7.5%, according to a Barclays index. In comparison, Treasury bonds have logged a 4.76% return across all maturities.

“PEOPLE STILL VIEW the muni market as a safe place to be,” says Craig Jones, managing director for public finance at First National Capital Markets in Omaha, Neb. “It’s kind of a safe harbor in the winds of the other markets,” he tells Barron’s. “I don’t think that’s changed.”

In Nebraska, there’s no such thing as debt, at least of the state general-obligation variety. The state’s constitution essentially prohibits it. A Barron’s analysis in 2013 found Nebraska’s debt profile to be the best among all the states and Puerto Rico.

Still, the state’s municipalities and state-backed organizations—its university and public-power systems among them—must fund capital projects and other big-ticket expenses, and use the bond market to do so.

So far, even with the uncertainty that has gripped markets in 2015, issuers are steady-on, says Jones, who deals mostly with clients in the Midwest and whose organization is part of First National of Nebraska, which manages $17 billion in assets.

Clients are “very aware” of the uncertainty, he says, “but we haven’t necessarily seen push back” in terms of putting a sale on hold or scrapping plans to issue debt altogether. Besides, he says, in his part of the nation, “We view debt as something that you only use when you need it.”

But Tom Carney, who manages Omaha-based Weitz Investments’ Nebraska Tax-Free Income fund (ticker WNTFX), says he’s positioning it “defensively” in anticipation of a Fed that could allow inflation to exceed its 2% target—potentially eating into fixed-income investors’ real returns.

Nebraska Tax-Free is part of the fund family of Wally Weitz, perhaps Omaha’s second-best-known investor. (You know who’s No. 1.) “We have been beating the drum about the challenging investment landscape in fixed income for some time now,” Carney observes. “Low Treasury rates have a gravitational effect on all other fixed-income assets, municipal bonds included.” The 10-year note traded around 1.985% late last week, compared with 2.173% at the end of 2014. (It began last year near 3%.)

SOME DANGERS CERTAINLY DO LURK: With oil prices having plummeted about 50% since June, New York advisory NewOak is warning clients to be wary of muni issuers exposed to energy.

The muni market appears to have taken oil’s fall “in stride, at least for the time being,” writes Triet Nguyen, a NewOak managing director. Yet, pressure from falling petro prices could end up being felt at the local level, Nguyen warns. “As you may recall, the last oil bust created one of the first large-scale municipal credit debacles in the country” he says, referring to the 1980s collapse that ravaged the Southwest’s oil patch. “It might be time to go over your muni loan portfolio more closely and figure out exactly where your risk is.”

Back in Omaha, Jones is keeping an eye on market volatility and oil prices. But, he says, “We’re pretty steady—I don’t want to say completely insulated from those things, but we don’t see the ups and downs that other parts of the country do.”

BARRON’S

By BRADLEY DAVIS

Feb. 13, 2015

It took six decades for Detroit to reach the brink of bankruptcy. Atlantic City, New Jersey, got there in less than one. With casino revenues falling by half between 2006 and 2014 and the local economy imploding, the beleaguered gambling mecca resorted to fiscal gimmicks to shield its budget from severe cuts. But the day of reckoning has come. The 5 percent loan that the city secured from Bank of America represents a near tripling of its borrowing costs in only one year. As unwise as it was for Detroit to have relied so heavily on the auto industry, a city economy based on gambling makes even less sense.

Atlantic City suffers from many of the same problems that have led other American cities to ruin. The city’s annual pension bill has risen over 200 percent since 2006, from $6.5 million to $20.2 million. City employees receive defined-benefit pensions administered through two massively underfunded statewide systems. In November, Governor Chris Christie’s administration released a report recommending that Atlantic City take a pass on the annual, actuarially recommended payments, a “reform” the city had already tried. So far, the city has not sought to reduce pension benefits, though it is trying to negotiate cheaper labor contracts.

Fiscal gimmicks have only exacerbated Atlantic City’s problems. As casino revenues tumbled, so did real estate values. The city reacted by raising tax rates and overvaluing its casino properties. Casino owners appealed these inflated assessments, and they won big on the overcharges. They’re not finished yet. Four out of the city’s top ten taxpayers now have outstanding tax appeals with the New Jersey Tax Court. Because the awards are too large to pay out in cash, Atlantic City issued general- obligation bonds to reimburse the casinos. Last month, Moody’s downgraded those bonds to junk status. Already, $125 million of the city’s $340 million debt burden consists of “Tax Appeal Bonds,” a total that may soon more than double. Simply put, the city has been borrowing to pay for current operating expenses—the big no-no of municipal finance. Atlantic City taxpayers face years of paying off debt used to finance past services. That means less money for future services.

Atlantic City officials are trying to revamp the local economy, but their plans will take many years to succeed, if they ever do. In the near-term, officials’ main concern is the debt. Bankruptcy is not out of the question. Harrisburg, Pennsylvania, Springfield, Massachusetts, and several other nearly broke cities have managed to restore solvency without going to federal court. (Springfield appears determined to jeopardize its fragile revival by opening a casino.)

The state government hasn’t decided whether to let Atlantic City go bankrupt. State senate president Steve Sweeney has staked out a strong anti-bankruptcy position, but Christie signaled his openness to bankruptcy by appointing Kevyn Orr, who oversaw Detroit’s bankruptcy, as a “special consultant” to emergency manager Kevin Lavin, a former financial consultant to Philadelphia. Though Christie’s November report called for an emergency manager with “ultimate power on hiring, firing and budget expenditures,” Lavin and Orr have no real authority. Their charge is to lay out a plan by mid-March that shows how to “place the finances of Atlantic City in stable condition on a long-term basis by any and all lawful means.” The plan will be welcome if only because it will shed some light on exactly what is going on. Atlantic City’s financial disclosure practices leave much to be desired.

Christie may have the legal authority to go ahead with bankruptcy over the objections of state and local officials. But before he does, he should define the problem that bankruptcy would solve. Is it incompetence? Corruption? Intractable creditors? Atlantic City is a fiscal and economic disaster, and Christie can’t turn it around on his own. The governor, who is considered a potential presidential candidate in 2016, should think carefully about how much political capital he wants to invest.

Politics aside, New Jersey has a responsibility to Atlantic City. Municipalities are creatures of their state governments. A failing city is prima facie evidence of failed state policymaking. Atlantic City’s casino-focused economic development policy is a state policy: state voters authorized casinos during the mid-seventies, and about $200 million in casino tax revenues still flow into Trenton’s treasury each year. Atlantic City’s future, whatever it might be, should not obscure the fact that, if not for casinos, the city wouldn’t be facing insolvency. More pain is certain for residents and businesses, who must now serve as martyrs for the cause of better fiscal management.

CITY JOURNAL

STEPHEN EIDE

12 February 2015

Stephen Eide is a Manhattan Institute senior fellow.

Only a few months after voters overwhelmingly approved the $7.5 billion water bond known as Proposition 1, the California Economic Summit is urging state lawmakers to give water agencies more precise direction for allocating these funds—and to provide systematic oversight so voters can see how this money is being spent.

Summit leaders offered these recommendations in testimony submitted today to the Assembly Committee on Water, Parks, and Wildlife, which last year earned plaudits for drafting clearly-defined “principles” for the bond—from prohibiting earmarks to increasing accountability—that many credit with contributing to the measure’s success.

With California’s drought lingering, the Summit remains focused on ensuring bond funds allow regions to take “the right next steps” toward sustainability. Echoing a set of Summit drought-response proposals released last year, the testimony emphasizes the need not just for more investment to the state’s aging water infrastructure, but for smarter investment that encourages more comprehensive governance of the fragmented water system—and more comprehensive solutions to the state’s water challenges.

Three ideas for implementing Prop 1

Today’s Summit testimony highlights three ways state leaders charged with implementing Prop 1 can accomplish these goals—all drawn from the Summit’s Roadmap to Shared Prosperity, a long-term plan for putting all of the state’s regions on a path to sustainable growth.

1. Refine the state role. The Summit has encouraged state leaders to use the water bond to advance state goals for water resiliency—with state government providing financial incentives and gap financing for projects that meet the priorities outlined in the California Water Action Plan. The Summit notes an immediate opportunity in the bond’s $100 million allocation for enhancements to “an urban creek”—a funding stream that could support a range of urban restoration projects, including the Los Angeles River. The Summit has already begun working with the City of Los Angeles on how the new authority of Enhanced Infrastructure Financing Districts could leverage bond funds to support river restoration.

2. Support integrated, multi-benefit projects across watersheds. Summit leaders have also urged the state to ensure Prop 1 advances the new paradigm where the state sets goals and regions compete to craft strategies that deliver the most benefit. This approach can be found in two different sections of the measure, which together add up to $2.3 billion:

Watersheds: The $1.495 billion watershed chapter is made up entirely of “competitive grants for multi-benefit ecosystem and watershed protection and restoration projects in accordance with statewide priorities.” The legislation provides a detailed list of ways these dollars can be used, giving highest priority to “multi-benefit” projects that could reduce fire danger, for example, while also increasing water supply, improving water quality, reducing flood impacts, and replenishing aquifers. The Summit notes that Prop 1 only allocates $38 million to the Sierra-Cascade region—meaning 0.5 percent of the bond’s total funds will go directly to the upper mountain watersheds that provide two-thirds of the state’s runoff. Still, the Summit letters outlines a variety of ways mountain regions can compete for more funds, connect these projects with their beneficiaries in the more populous valleys below, and ensure beneficial uses of water throughout the watershed—all keys to water sustainability.

Integrated water management: Prop 1 also allocates $810 million to “regional water management”—a decade-long effort to connect projects in upper and lower watersheds—with the measure directing funds first to projects “that cover a greater portion of the watershed.” The Summit letter calls out several opportunities for increasing these efforts—urging lawmakers to use bond funds to encourage local water agencies to accelerate development of their newly-required groundwater management plans, for example. The Summit also calls attention to its ongoing work with cities and local water agencies to identify ways to bring multiple local governments together to develop projects that capture and store stormwater.

3. Maximize return on investment: Before Prop 1 passed, many stakeholders expressed concern over how the state will spend $2.7 billion allocated to storage projects—a looming choice between funding new dams or investing in alternative means of storage. While the bond’s storage funds won’t be allocated for years, the Summit letter notes that Prop 1 outlines a set of laudable goals for distributing these dollars—with the measure requiring the California Water Commission to create a competitive process “that ranks potential projects based on the expected return for public investment as measured by the magnitude of the public benefits provided.” The Summit letter notes several ideas for how the state can ensure these new funds help water agencies more effectively coordinate surface and groundwater storage, conveyance, and habitat restoration.

Since the debate over Prop 1 began, the Summit has made the case that implementing the bond would be as important as the passage of the measure itself. The Summit letter makes the case that the bond’s language sets the bar high—and gives the Summit’s civic leaders an opportunity to work with lawmakers to ensure these funds help California begin the long journey to water sustainability.

FEBRUARY 09, 2015

BY JUSTIN EWERS

NEW YORK (Standard & Poor’s) Jan. 9, 2015—Standard & Poor’s Ratings Services believes two recent credit developments for the State of Kansas — a lower court ruling that could require substantially higher education funding if upheld on appeal, and the state’s projection of a substantial fiscal 2015 shortfall — raise additional obstacles for Kansas to achieve structural budget balance in fiscal 2016 and potentially beyond. In this respect, the extent of the state’s movement toward structural budget alignment in fiscal

2016 will be an important component in our view of Kansas’ future credit quality.

The lower court ruling on education could require the state to spend more than $500 million extra per year, beyond the $129 million of increased education funding the Kansas Supreme Court required the state to spend in fiscal 2015. We do not see an immediate impact from the new court ruling, as it will likely be appealed to the state supreme court. In our opinion, however, the ruling adds uncertainty to future years’ budgets.

Kansas also released a new forecast that projects a negative $280 million general fund budget balance at the end of fiscal 2015, or a negative 4% of budgeted expenditures, absent corrective action. This is in contrast to the adopted 2015 budget, which forecasts a positive 6% ending balance and also assumed that fiscal 2014 would end with a large 11.6% balance; instead the state’s preliminary estimate is that fiscal 2014 ended with a lower balance equal to 6% of 2014 expenditures, or $380 million.

The projected negative ending balance for fiscal 2015 has prompted Governor Sam Brownback to propose an offsetting $280 million of midyear corrective actions that would eliminate the projected general fund deficit position, although still leave the state with essentially no general fund balance at the end of the year. The bulk of the governor’s proposed midyear adjustments, involving fund transfers and other measures, will require legislative approval when the legislature reconvenes Jan. 12.

In our view, the proposed budget adjustments, if enacted, would result in a state general fund balance position broadly consistent with our expectation in August 2014, when we lowered our rating on Kansas to ‘AA’ from ‘AA+’ and assigned a negative outlook, although it would appear that the state’s structural imbalance has grown. We had earlier expected a marginal fiscal year-end 2015 balance due to large shortfalls in the April 2014 income tax collections that were not reflected in the adopted fiscal 2015 state budget.
Kansas’ current revenue forecast now incorporates the earlier April shortfall, resulting in a lowerbeginning balance that carries forward into a lower year-end balance. However, the state’s structural imbalance appears to have grown further due to increased education and Medicaid spending. Although the proposed midyear corrective actions could eliminate a year-end deficit position, they do not appear to significantly address the mismatch between recurring revenues and expenditures.

The governor’s $280 million proposed midyear adjustments include: $201 million of one-time transfers from other funds, the delay of a scheduled increase in pension funding ($41 million), savings from a bond refinancing ($3 million), delays in a hospital expansion ($5 million), reduced transfers out for capital
construction ($5 million), and 4% spending reductions for many state agencies.

Although Kansas will likely make adjustments to bring its general fund balance back to a marginally positive level at fiscal year-end 2015, we remain concerned about the one-time nature of most of the budget fixes, and the large fund balance drawdown on a budgetary accounting basis. (On a generally accepted accounting principles [GAAP] basis the fund balance is lower — the recent release of the state’s fiscal 2014 GAAP financial statement shows a fiscal year-end 2014 general fund balance of only $2.5 million.) We believe
the state will have enough working cash to operate using its other internally borrowable funds. However, the large reduction of the fund balance in the past two years during a period of economic recovery indicates credit stress, in our opinion, and contributes to our negative rating outlook. Kansas reduced its top individual income tax rate to 4.6% from 4.8% in fiscal 2015, and has another reduction in the top rate scheduled in fiscal 2018 to 3.9%. State credit quality could be affected to the extent tax reductions are not paired with ongoing spending cuts, absent significant economic growth.

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating
or Rating Outlook.

Primary Credit Analyst: David G Hitchcock, New York (1) 212-438-2022;
david.hitchcock@standardandpoors.com

Secondary Contact: Henry W Henderson, Boston (1) 617-530-8314;
henry.henderson@standardandpoors.com

State Sen. Joey Fillingane said as the result of a recent “debacle” concerning an economic development project in Madison County, Trustmark Bank has pulled its participation from similar projects in the state.

Fillingane, R-Sumrall, said that’s what prompted him to author Senate Bill 2550, which allows (but does not mandate) cities and counties to use general fund or other taxpayer money to make tax increment financing bond payments when in danger of defaulting.

TIF bonds are a financing option that allows counties and municipalities to borrow money to fund an economic development project based on the taxes the project would generate in the future. The payments are made off taxes from the property itself and adjacent lands, not regular taxpayer money.

In October, Madison County was unable to pay its November bond payment of $90,000 for its Galleria/Parkway South TIF bond. The county made the decision to restructure the payments in order to avoid default.

“Because of that debacle, the bank is protecting itself and saying, ‘We don’t want to get ourselves or our stockholders back into that situation again,’ ” Fillingane said.

Trustmark did not directly answer whether it has made any such decision or whether the Madison County project affected any others in the state.

“Trustmark has a long history of participating in the Tax Increment Financing market in Mississippi. The method of financing is not the issue; it’s the underlying, individual project that determines if Trustmark has an interest,” Barry Harvey, Trustmark’s executive vice president and chief credit officer, said in an emailed statement. “We will continue to look at each Tax Increment Financing transaction on its own merit and participate in the projects we feel are viable.”

Madison County Board of Supervisors attorney Mike Espy said in October the biggest revenue loss came from a single building owner who lowered his property tax liability, thus decreasing his payments. The county also made an error putting tax-forfeited properties in the TIF area.

This week, however, Espy said the building owner who had his tax liability lowered recently paid money from back taxes to Trustmark. County Administrator Mark Houston also said the county is getting a “little bit better collections” than expected since making the decision to restructure.

Commercial real estate attorney Ron Farris said Trustmark’s reported decision not to participate in TIF bonds in the state has hurt two major projects in Hattiesburg.

“It has impaired and hurt people in two major projects in Hattiesburg in terms of delay, cost and unmet expectations,” Farris said. “It’s a big threat to the commercial real estate industry in Mississippi.”

Farris was involved in the proposed plan for the Galleria TIF in its early stages.

Fillingane’s bill would also mandate county and city officials be provided separate tax rolls that identify any changes in valuations for properties associated with bonds so as to prevent a property’s valuation and thus its tax revenue from being decreased.

The bill has passed out of the Senate Finance Committee and will be voted on by the Senate.

Kate Royals

The Clarion-Ledger February 6, 2015

To contact Kate Royals, call (601) 360-4619 or email kroyals@jackson.gannett.com. Follow @KRRoyals on Twitter.

A nonprofit founded by mayors is helping seven cities finance and organize community service projects to revitalize low-income urban neighborhoods.

Mayors in seven cities have won a competition to receive a full-time AmeriCorps VISTA member, a $30,000 grant and on-going technical assistance for three years of neighborhood revitalization work.

Cities of Service, a national nonprofit organization, awarded the grants as part of its ongoing “Love Your Block” program, which focuses on urban neighborhoods and uses volunteers from the community to try to improve the local quality of life. Cities involved in the program organize volunteers to pick up litter, plant trees, clean vacant lots, create community gardens and remove graffiti.

Cities of Service is supporting a specific method of government-organized community service for eliminating neighborhood blight, which it explains in an online how-to guide. Part of the initial $30,000 will go toward planning. Cities may raise additional money from local foundations and then offer small grants to volunteers with proposals to improve a single block. Cities also look for ways to supplement the volunteer efforts by training a host of municipal services on the area to fix signs, repair potholes and replace damaged trash bins.

The winning cities announced Feb. 11 were Birmingham, Ala.; Boston; Lansing, Mich.; Las Vegas, Phoenix, Richmond, Calif., and Seattle. The awardees all plan to focus on improving low-income neighborhoods, though they outlined slightly different strategies. Volunteers in Las Vegas will work near low-performing schools; in Richmond, Calif., they’ll target only areas surrounding public housing.

To receive the grant, cities had to demonstrate that their mayor would spend time and attention on the project, said Myung Lee, the executive director of Cities of Service. “We’re not here to be just a funding source and then just walk away,” she said. “We are looking for partners.”

The grants are an extension of work that began in New York City under former Mayor Michael Bloomberg. His administration created an office in 2009 (NYC Service) that organized volunteers to address social problems. The office focused on data collection and measured the impact of volunteerism in several issue areas, such as health, education and the environment. Bloomberg’s initiative was itself inspired by a 2009 federal law aimed at expanding community service.

The year after NYC Service launched, the Rockefeller Foundation awarded $100,000 grants to 10 cities for a paid staff position in the mayor’s office to create and oversee their own version of NYC Service.* Bloomberg Philanthropies has since offered additional grants to expand the program and in January 2014, it helped fund the creation of an independent nonprofit, which is overseen by Lee, a former deputy commissioner of children’s services in New York City.

By now, the service model has a record of tangible results in participating cities. In New York City, volunteers have coated at least 618 rooftops with a reflective surface that reduces a building’s heating costs. In Flint, Mich., volunteers scrubbed at least 17,000 square feet of graffiti. Cumulatively, Cities of Service have recorded the removal of at least 1.9 million pounds of litter and the creation of at least 520 community gardens or other types of green space.

The biggest benefit from the latest round of grants isn’t the money; it’s access to technical expertise. Both the AmeriCorps employee and the supervisor who runs the service programs have to participate in monthly phone check-ins and webinars with Cities of Service. Staff from Cities of Service also conduct site visits to all their grantees.

Each city will report back on the immediate accomplishments of service projects, such as the number of volunteers who participated or pounds of litter collected. But Lee said the long-term goal is that as residents invest their time and energy in these blocks, the city will see measurable impact on crime and people’s perception of safety. The newest round of grants encourage cities to track those deeper indicators that might change as the aesthetics of the neighborhood improve.

“We’re trying to change how the world deals with volunteers,” she said. “Don’t think about how many volunteers are coming out. Think about what the volunteers are trying to address.”

*CORRECTION: A previous version of the story said the first Cities of Service grants were awarded in 2009. They were announced in 2009 and awarded in 2010.

GOVERNING.COM

BY J.B. WOGAN | FEBRUARY 12, 2015

jwogan@governing.com | @jbwogan

NEW YORK — Hopes of an orderly resolution to Puerto Rico’s debt crisis suffered a heavy blow after a court voided the island’s restructuring law, raising fears it may be heading for a longer, messier debt overhaul.

Late on Friday a U.S. federal judge ruled that the U.S. commonwealth’s so-called Recovery Act, which made some of Puerto Rico’s agencies eligible for court-supervised debt restructuring, violated the U.S. constitution by allowing a state government to modify municipal debt.

“This decision will ultimately result in a resolution being dragged out over a longer period of time, having the administrative costs incurred eat into the ultimate recovery for the bondholders,” said Tom Metzold, a senior portfolio advisor at Eaton Vance, which holds various insured Puerto Rico bonds.

Puerto Rico is expected to appeal the ruling, kicking off lengthy litigation with a hard to predict outcome and possibly delaying for months the matter’s final resolution.

Bondholders are, however, likely to interpret Friday’s ruling as a sign that the Puerto Rico authorities are on shaky legal ground. That could lift bonds of public corporations such as the Puerto Rico Electric Power Authority (PREPA) covered by the voided law, by strengthening bondholders’ negotiating position, investors said.

In contrast, holders of General Obligation (GO) bonds issued by the island could take a hit. The Recovery Act meant to isolate the government from potential liabilities incurred by agencies such as PREPA and that protection may now be in doubt.

“If you are a holder of a power bond, you could say: ‘I have a better negotiating position’,” said John Miller, co-head of fixed income for Nuveen Asset Management, which holds various insured Puerto Rico bonds. “But at the GO level and politically, it’s negative.”

Puerto Rico, struggling with debts of more than $70 billion, passed the law in June, to give public corporations a framework to restructure debt and ring-fence the government from a potential bankruptcy.

U.S. law forbids Puerto Rico’s government and its entities from restructuring debt under Chapter 9 of the U.S. bankruptcy code, which was used for Detroit last year, so the Puerto Rico government passed its own restructuring law in June based loosely on U.S. bankruptcy rules.

U.S. mutual funds OppenheimerFunds, a unit of insurer MassMutual Financial Group, and Franklin Templeton, which owned $1.7 billion of PREPA bonds, quickly sued Puerto Rico, saying the commonwealth had no right to pass its own law that ran counter to federal bankruptcy law.

Puerto Rico’s representative in Congress, Pedro Pierluisi, introduced a bill to include Puerto Rico in Chapter 9 of the U.S. Bankruptcy Code.

Metzold said that the picture could change if Congress passes this bill, avoiding a situation where bondholders with competing interests fight it out in a free-for-all battle with no framework to negotiate.

NEGOTIATING POWER

Friday’s ruling has implications for around $20 billion of debt potentially affected under the act, including $9 billion of debt outstanding at the power utility, which is in restructuring talks with bondholders.

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The move gives more negotiating power to holders of PREPA bonds and less power to the utility, as the Recovery Act had essentially allowed Puerto Rico to dictate terms, investors said. It could also have implications for Puerto Rico’s other highly indebted utilities: Aqueduct and Sewer Authority and Highways and Transportation Authority.

“This is a positive development for bondholders and insurers of the so-called public corporations,” said Miller.

How bondholders use their leverage remains to be seen. Without the specter of a bankruptcy process, creditors could cause restructuring talks to drag on.

On the other hand, some creditors may feel empowered to take initiative. PREPA’s problems must be resolved one way or the other, and one person close to Puerto Rico’s creditor community said the onus is now on them to propose a restructuring framework.

Law firm Kramer Levin, representing OppenheimerFunds and Franklin Templeton, said in a statement that the decision was “a major victory for municipal bondholders.”

A potential setback for holders of Puerto Rico’s general debt, Friday’s ruling could also make it tougher for upcoming new debt issues, some investors said.

“I think bringing new issues to enhance liquidity looks very difficult right now,” Miller said, adding that it would be hard to price a large new deal while effectively in a legal limbo.

By REUTERS

FEB. 9, 2015

(Additional reporting by Tom Hals and Ed Krudy; Editing by Tomasz Janowski)

Feb 10 (Reuters) – Puerto Rico’s lawmakers have scrapped a statutory cap on the interest the island would pay on a roughly $2 billion bond deal in a bid to make it more appealing to hedge fund investors.

The move comes after a federal judge voided a local law that was key to Puerto Rico’s efforts to carry out an orderly restructuring of its public corporations while securing funds for the central government.

The judge’s ruling late on Friday that the Recovery Act contravenes federal law, raised questions about the strength of government-backed debt, sending benchmark Puerto Rico’s bonds to record lows on Monday.

Eliminating the interest rate cap was “necessary to make viable a successful transaction in the capital markets because of current market conditions and the current value of Puerto Rico general obligation bonds,” according to the legislation approved by the Senate.

The amendment eliminated a restriction on how large a discount Puerto Rico could offer buyers that would have established a floor of 93 cents on the dollar, but they kept a provision that limits the average coupon rate to 8.5 percent.

The elimination of the discount restriction removes what would have been a roughly 9.2 percent cap on the yield even though the debt is trading with yields at over 10 percent.

Puerto Rico’s House approved the measure on Tuesday after the Senate backed it late the previous day.

Puerto Rico was planning to issue the bonds last year but delayed the sale due to disputes about raising a tax on oil needed to back them. Puerto Rico issued $3.5 billion of debt last March that was largely bought by hedge funds as risk-averse municipal bond investors stayed away.

The island’s Government Development Bank (GDB) wanted to work around the interest rate cap by insuring $500 million of the deal, which would have helped lower the average coupon rate. But given the slow pace of negotiations with bond insurers, officials are looking at alternatives.

“We are studying other options, but the best option is to amend the legislation. It’s a completely different market from last year,” said Melba Acosta, president of the GDB, which acts as Puerto Rico’s financing arm.

The GDB also wants lawmakers to index a hike in the petroleum tax to inflation, allowing them to increase the size of the deal to $2.95 billion. The petroleum tax is being used to back the debt.

“Without the (inflation) escalator this is just a patch for the GDB,” said one New York based hedge fund investor who may participate in the deal and had been at the legislature all day meeting with lawmakers.

Feb 10, 2015 7:35pm EST

(Reporting by a Contributor in San Juan; Writing by Edward Krudy; Editing by Ken Wills, Bernard Orr)