MUNIS IN FOCUS: Joe Mysak, Editor for Bloomberg Brief: Municipal Market, on the Puerto Rico bonds. Hosted by Abramowicz and Paul Sweeney.
Running time 06:10
February 8, 2019 — 11:17 AM PST
MUNIS IN FOCUS: Joe Mysak, Editor for Bloomberg Brief: Municipal Market, on the Puerto Rico bonds. Hosted by Abramowicz and Paul Sweeney.
Running time 06:10
February 8, 2019 — 11:17 AM PST
Dan Solender, Partner and Head of Municipal Bonds at Lord Abbett, and Michelle Kaske, Puerto Rico reporter for Bloomberg, on Puerto Rico winning approval for its plan to restructure more than $17 billion of sales-tax bonds. Hosted by Lisa Abramowicz and Paul Sweeney.
Running time 06:20
February 5, 2019 — 9:44 AM PST
DALLAS (S&P Global Ratings) Feb. 5, 2019–On Feb. 4, 2019, the federal court overseeing Puerto Rico’s (NR) Title III bankruptcy approved its settlement with COFINA bondholders and its COFINA plan of adjustment, resolving multiple claims on nearly $18 billion in COFINA debt.
Detroit’s credit rating is one step closer to exiting the Wall Street doldrums of junk bond status that has hampered the city’s ability to borrow for years.
S&P Global Ratings on Thursday upgraded Detroit’s credit rating on unsecured debt from B+ to BB-, which is still three notches below the highly coveted status of investment grade for municipal bonds.
“The rating improvement reflects our view of the city’s stabilizing financial position, whereby we feel it is well situated to absorb increasing pension commitments and scheduled increases in debt service in the coming years, as well as possible revenue setbacks, while still sustaining year-to-year budget balance and very strong reserves,” S&P analysts wrote in a note to investors published Thursday.
S&P analysts cited several economic and budgetary factors that continue to restrain Detroit’s credit rating, including a looming increase in pension payments set to escalate in 2024 after a 10-year post-bankruptcy pension holiday ends.
“We feel that stabilizing these neighborhoods will be key to long-term stability,” S&P analysts wrote. “A major factor still holding back this progress continues to be the struggling state of the Detroit public school system.”
At the end of June, the Detroit Police and Fire Retirement System was 77 percent funded, while the larger General Retirement System for city civil servants was 70 percent funded, according to the S&P report.
Detroit has set up a trust fund to cushion the blow of increased pension payments in 2024 when the city has to resume making full payments to the retirement systems after getting a 10-year reprieve in its 2013-2014 bankruptcy.
“In our view, despite the longer-term planning involved, there remains a pension funding gap that constitutes a structural imbalance, resulting in a management score of weak under our local (general obligation) criteria, which caps the rating,” S&P analysts wrote.
The improved credit rating was issued for $135 million in unlimited-tax general obligation (UTGO) bonds Detroit sold in December — first bond sale solely using the city’s credit in more than 20 years. S&P’s new credit rating applies all city bonds that aren’t secured by a specific revenue source.
The S&P upgrade — the second in 14 months — follows credit-rating upgrades by Moody’s Investors Service in October 2017 and May 2018.
“We believe an improved credit rating is a strong reflection that our strategies to improve the quality of life in Detroit are working,” Detroit Mayor Mike Duggan said in a statement.
S&P also issued rating downgrades for two separate Detroit-related bonds issued by the state of Michigan.
Michigan Finance Authority’s financial recovery bonds issued in 2014 for the city were downgraded from an A rating to S&P’s BB+ rating.
The rating agency also downgraded the credit rating for the Michigan Finance Authority’s Local Government Loan Program bonds for the Detroit Public Lighting Authority from A to BB+.
CRAIN’S CHICAGO BUSINESS
CHAD LIVENGOOD
February 07, 2019 02:20 PM
On April 2, 2018, S&P Global Ratings released its criteria “Special Assessment Debt” detailing implementation of new methodology across its rated portfolio. Ratings nationwide have so far met expectations stated in the report, but ratings in California have undergone slightly more changes than expected, and mostly positive.
Feb. 5, 2019
San Francisco is such a seller’s market that the city is marketing municipal bonds for a new $2.2 billion transit terminal that’s been shut down for months while crews make emergency repairs to cracked support beams.
The city’s offering of $184 million of taxable municipal bonds Wednesday will finance work at the Salesforce Transit Center, where buses from throughout the Bay Area are supposed to drop off and pick up tens of thousands of daily commuters. The terminal was closed in September, a month after it opened, after crews found cracks in two structural steel beams. There’s still no re-opening date scheduled and the cause of the fissures remains unknown.
The bonds are backed by special taxes levied on the buildings in the district around the regional bus and train hub, formerly known as Transbay. The assessed value of the properties for this fiscal year is more than $3 billion, deal documents show.
Even with the terminal closed, tax collections continue and development is underway on buildings around the facility that would fall under the levy that supports the bond payments. Fitch Ratings ranks the new securities AA+, second highest. The train and bus hub itself doesn’t fall under the levy.
Wealthy California residents seeking tax shelters have helped drive down yields on bonds issued in the state. 10-year California general obligations are yielding just 10 basis points over AAA securities.
San Francisco — where the assessed value of property has risen by 57 percent in six years — is seeing “exceptional” demand for its debt, said Tom Lockard, head of investment banking at 280 CapMarkets. He expects investors will snap up the new securities.
From his office window in the City by the Bay, Lockard says he can see busy construction cranes raising buildings all around the terminal. “We can complain about the affordability, but it’s a pretty special place to be here right now in terms of development and progress and Transbay is part of it,” he said.
Bloomberg Business
By Romy Varghese
February 5, 2019
A measure to consolidate St. Louis City and County could go before Missouri voters as soon as 2020. But St. Louisans are mixed on what that means.
On Monday, the St. Louis think tank Better Together unveiled a formal proposal to combine the City of St. Louis and St. Louis County in a new type of local government for Missouri: a metropolitan city. Governed by an elected “Metro Mayor” and a 33‑member council, the new Metro City of St. Louis would have sweeping powers to enact new laws, tax residents, and oversee law enforcement, justice, planning, zoning, and economic development. This proposal, which would be decided by voters across Missouri, would essentially do away with the present government of the City of St. Louis, including the city’s 29-member Board of Aldermen and the office of Mayor Lyda Krewson.
Such a consolidation would overnight transform St. Louis into the 10th largest city in the U.S., with 1.3 million people—larger than San Jose and right behind Dallas.
The idea is rekindling a longstanding debate in several cities that are pondering the virtues and potential pitfalls of joining up with their surrounding counties. There have been about 40 city-county mergers in the U.S.; in recent decades, major examples include Nashville (1962), Indianapolis (1970), and Louisville (2003). They’re rare because they’re difficult to pull off: Voters may be skeptical of the money-saving arguments for consolidation and susceptible to fears over changing borders between segregated communities. Louisville only got their union done on the fourth try.
CITY LAB
JACK GRONE JAN 30, 2019
Fitch Ratings-San Francisco-07 February 2019: Fitch Ratings does not expect to take rating action on the Oakland Unified School District’s ‘BBB+’ Issuer Default Rating (IDR) based solely on the Oakland Education Association’s (OEA) vote to authorize a strike as early as Feb. 15. The IDR, which already incorporates slow revenue growth and pressured budgets, assumes the district will maintain solid expenditure flexibility and adequate financial resilience throughout economic cycles, including at least a 2% reserve for economic uncertainties as required by the state.
The strike vote comes after months of negotiations, mediation and fact finding have failed to settle new agreements for contracts that expired June 30, 2017 and as the district is attempting to reduce ongoing expenditures by about $30 million in fiscal 2020 (equal to about 7% of estimated fiscal 2020 expenditures). Fitch will incorporate the impact of any eventual agreement and other implications of the labor impasse on the district’s ability to balance its fiscal 2020 and 2021 budgets and, more broadly, on its expenditure flexibility and expectations for operating performance over time.
OUSD’s planned expenditure reductions would help accommodate cost increases associated with the final agreement. The district had offered a 5% pay increases over three years which OEA rejected. OEA is seeking a 12% pay increase over three years. The district estimates each 1% salary increase costs about $1.9 million per year for teachers and $3.5 million per year for all employees.
Based on unaudited information, the district ended fiscal 2018 with a $17.4 million unreserved fund balance, equal to 3.3% of spending, an improvement from the $3 million, or 0.6% at the end of fiscal 2017.
Operating pressures do not affect the ‘AAA’ rating and Stable Outlook that Fitch maintains on the district’s unlimited tax general obligation (GO) bonds, which are based on a dedicated tax analysis, without regard to the district’s financial operations. The distinction between the ‘AAA’ ratings on the GO bonds and the ‘BBB+’ IDR reflects Fitch’s assessment that the pledged special revenues for repayment of the GO bonds meet the definition of “pledged special revenues” under the U.S. Bankruptcy Code, and therefore bondholders are legally insulated from any operating risk of the district.
For more information on Fitch’s analysis of the OUSD, see “Fitch Affirms Oakland USD, CA’s GOs at ‘AAA’ and IDR at ‘BBB+’; Stable Outlook,” dated April 18, 2018.
Contact:
Karen Ribble
Senior Director
+1-415-732-5611
Fitch Ratings, Inc.
One Post Street, Suite 900
San Francisco, CA 94014
Andrew Ward
Director
+1-415-732-5617
Amy Laskey
Managing Director
+1-212-908-0516
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
Fitch Ratings-New York-05 February 2019: Potential amendments to Alaska’s constitution proposed by the governor last week would constrain the state’s ability to proactively manage its financial operations and could result in negative pressure on the state’s Long-Term ‘AA’ Issuer Default Rating (IDR)/Stable Outlook, according to Fitch Ratings.
The proposed amendments would require voter approval for new or increased taxes; enshrine the Permanent Fund (PF) dividend (PFD) formula, which is currently controlled by state statute, in the state constitution; place a more restrictive cap on annual growth in state expenditures; and prioritize the deposit of any fiscal year’s unappropriated state general fund surplus to the PF ahead of the budget reserve fund, reducing funds available to cure any future budget shortfalls.
Fitch believes the enactment of these amendments, which require approval by two-thirds of each legislative chamber and a state-wide vote, could weaken assessments for key rating drivers related to budget control (i.e., independent legal ability to raise revenues, expenditure flexibility, financial resilience, and budget management), and therefore, exert pressure on the ‘AA’ IDR for the state. Removing legislative discretion over the PFD formula alone would require a $1.9 billion dividend payment to residents in fiscal 2020, well ahead of the $1.2 billion payment proposed by the prior governor in his $6.9 billion executive general fund budget. Barring other offsetting action, this would result in a more significant draw on the approximate $16 billion PF Earnings Reserve (PFER) than currently expected. The maintenance of reserves is a significant rating consideration for Alaska given the volatility inherent in the economic and resource base (see “Fitch: Depletion of Alaska’s PF Earnings Reserve a Possibility” dated July 2, 2018).
Separate legislation submitted on behalf of the governor seeks to appropriate additional funds from the PFER over the next several years to retroactively restore residents’ full dividend payments pursuant to the dividend formula; this amount has been reduced in each of the last three fiscal years as part of the state’s budget balancing measures. Passage would result in larger PFD payments from the PFER for eligible residents in fiscal years 2020 through 2022. The state estimates restoration payments would total a maximum of $2.3 billion based on proposed eligibility guidelines.
Under the PF Protection Act of 2018, the state established annual draws on the PFER as a means for addressing ongoing projected budget gaps. Fitch’s analysis at that time determined that eventual depletion of the PFER was likely in the long term, and noted that prudently structured draws would be necessary to sustain the assets. Enactment of the proposed measures would be expected to escalate depletion of the PFER, barring other moves to reduce the anticipated use of PFER funds to support general operations.
Governor Dunleavy’s fiscal 2020 budget proposal is expected to be presented to the legislature on February 13 for their consideration. The governor has publicly committed his administration to delivering a balanced budget without the use of budget reserve funds. In the context of crude oil prices that are forecast at $64/barrel, as compared to much higher historical averages, there is the potential for significant spending cuts. Fitch will evaluate the details of the budget once it is available with an eye toward the critical drivers that have sustained the state’s ‘AA’ IDR: substantial independent management power over revenue raising and expenditure decisions and maintenance of sizable reserves to offset volatility in key revenue sources.
Contact:
Marcy Block
Senior Director
+1-212-908-0239
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Douglas Offerman
Senior Director
+1-212-908-0889
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
Fitch Ratings-Austin-07 February 2019: Bills recently filed in both chambers of the Texas legislature (HB 2 and SB 2) propose to significantly lower the rollback property tax rate for local Texas taxing entities with a certain amount of annual tax revenue and require ratification elections if rollback rates are exceeded. According to Fitch Ratings, this legislation if enacted could negatively impact Fitch’s assessment of certain local governments’ ability to independently raise revenues for operations–a component of one of Fitch’s four key rating drivers in its U.S. public finance tax supported rating criteria.
The rollback rate in Texas currently is a calculated rate that produces an increase in operating tax levy of 8% from the prior year’s levy. If local taxing jurisdictions exceed the rollback rate they are subject to a petition and, if the petition garners enough signatures, an election to reduce the rate back to the rollback rate. HB 2 and SB 2, which are backed by the governor, lieutenant governor and speaker of the house, would both reduce the rollback rate from 8% to 2.5% for local taxing units with combined annual property and sales tax revenue of at least $15 million. Taxing units below the $15 million threshold would retain the current 8% rollback rate. School districts, which have separate operating tax rate constraints, are excluded from the proposed changes. The bills would also require a ratification election–replacing the current petition process–if any local taxing unit exceeds its rollback rate (either 2.5% or 8%). Local rollback petitions and elections historically have been relatively rare.
In analyzing a local government’s revenue framework, Fitch considers the entity’s ability to independently increase operating revenues (without voter or other jurisdiction approval). For Texas cities, counties, community college and special districts, Fitch views the current rollback tax structure as only a potential threat to revenue-raising ability, noting that a restriction on tax revenue increases would require both a successful petition effort and subsequent election. Fitch considers the limit on operating revenues to be the more restrictive of the constitutional and statutory tax limits (e.g. $2.50 for cities, $0.80 for counties, $1.00 for community college districts), or the voted or charter caps on local government tax rates and/or revenue growth. Nearly all of the Texas local governments rated by Fitch are well below their tax rate or revenue limits. As a result, the assessments for independent revenue-raising ability for Texas cities, counties, community college and special districts are with few exceptions at the ‘aaa’ level.
The magnitude of the reduction to independent revenue-raising ability for targeted Texas local governments will depend on the requirements of any legislation ultimately signed into law. Previous efforts to reduce the rollback rate have failed, due in no small part to concerted opposition from local governments around the state; lobbying efforts to defeat the current proposal are already underway. Legislators also may negotiate a reduction in the rate to a level between the current 8% and 2.5%; other bills have been introduced that would reduce the rollback rate to 4%.
Both the current and proposed rollback rate calculations consider an entity’s tax base growth, which can reduce the revenue impact. Most local governments also retain the ability to increase non-tax operating revenues (e.g. fines, service charges and fees), which could offset the impact of a lower rollback rate as it relates to revenue-raising ability. In addition, Fitch considers the amount that can be raised relative to expected revenue volatility in a typical downturn; as a result, application of a uniform rollback rate limitation would not have the same effect on all governments. Finally, the assessment of independent revenue-raising ability is only one component of Fitch’s analytical framework. The strength or weakness of other considerations (revenue growth prospects, expenditure flexibility, long-term liability burden, and operating performance) will determine how much a shift in the revenue-raising ability assessment will affect an entity’s overall rating.
Contact:
Steve Murray
Senior Director
+1-512 215-3729
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
Amy Laskey
Managing Director
+1-212 908-0568
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
Fitch Ratings-Austin-05 February 2019: Public school funding proposals from both the Texas House of Representatives and Senate for the 2020-21 biennium include sizable increases, which if realized would boost near-term revenue growth expectations for Texas school districts, according to Fitch Ratings.
Fitch’s U.S. public finance tax-supported rating criteria consider the prospects for future revenue growth in assessing one of its four key rating drivers. Of the nearly 100 Texas districts that Fitch rates, 80% currently have either an ‘aaa’ or ‘aa’ revenue growth prospect assessment. The primary considerations for school district revenue growth are enrolment and state funding trends, and to a lesser extent local economic/tax base growth. The limits on Texas school districts’ ability to increase local operating tax revenue (unless voter approved) typically result in a weak assessment of independent revenue-raising ability. However, the state’s responsibility for and control over education funding overall reduces the emphasis on the lack of local revenue control when assessing a district’s revenue framework.
The House proposal would boost state funding for K-12 education by more than $7 billion and contribute to a nearly 17% jump from the last biennium to more than $70 billion in total funding (state, local and federal). The proposal specifies part of the funding be used for property tax relief, salary increases and other specific programs. The proposed $6 billion Senate increase includes $3.7 billion for a $5,000 teacher pay raise and another $2.3 billion for property tax relief, if reforms to the current equalization (recapture) system are enacted.
Several factors likely contributed to the increased K-12 funding proposals introduced as the 2019 session gets underway. First, the state’s continued strong economic growth produced an 8% increase in estimated general purpose revenues for the upcoming biennium (total revenue estimate of $119 billion). Also, legislators seem to be responding to ongoing criticism about local property tax burdens on homeowners and businesses and increasing recapture burdens on property wealthy districts. Finally, a 2016 Texas Supreme Court ruling found the current funding system constitutional but flawed and advocated for major reforms. The state’s K-12 finance system has been the subject of periodic lawsuits over the past 50 years, mostly aimed at questions of equity and adequacy.
Fitch will monitor the fate of these funding proposals as the legislative session progresses through the spring. The session is scheduled to end May 27th.
Contact:
Steve Murray
Senior Director
+1-512-215-3729
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
Jose Acosta
Senior Director
+1-512-215-3726
Amy Laskey
Managing Director
+1-212-908-0568
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
About $323 million of taxable bonds are sold at a not-too-punitive rate.
Michigan State University on Thursday sold about $323 million of taxable bonds to fund a settlement with the more than 330 women and girls who were victims of serial sex abuser and campus doctor Larry Nassar. It was never truly a matter of whether the deal would get done, but at what cost to the school.
Now there’s an answer: 4.5 percent over almost 30 years.
That was the top yield on the $304 million of debt that matures in 2048. It’s about 150 basis points above the going rate on 30-year U.S. Treasuries. For context, the spread is 134 basis points on a Bloomberg Barclays index of taxable municipal bonds, which averages about 22 years to maturity and counts Illinois as its largest component. The state, of course, is rated just one step above junk by Moody’s Investors Service and S&P Global Ratings, while Michigan State has the third-best investment grade rating. In another comparison, top-rated Texas A&M University issued 30-year taxable securities last month at a spread 25 basis points less than Michigan State.
I wrote in June that “it’s an open question whether investors will show up for this offering as they would any other.” It’s a good thing that the proceeds will compensate Nassar’s victims, but it’s easy to see why investors might pass on lending to an institution where at least 14 representatives reportedly received reports of Nassar’s crimes over the two decades before his arrest. Incidentally, that question was never put to the test until now, as Bloomberg News’s Danielle Moran reported.
Even though the school had always intended a public sale of municipal bonds, it was forced to seek private lenders because terms of the settlement required payment to the victims within 10 days of court approval.
“It is not logistically possible to issue public debt and close in that time period,” Mark Haas, vice president for finance and treasurer at Michigan State said in an emailed statement.
…RBC Capital Markets was the original lender in December. It in turn sold the loan to its affiliate Royal Bank of Canada, according to a filing.
The results of the sale show that there’s almost always a clearing price in the market, and often when things are operating smoothly, it’s lower than expected. Suppose the school could have priced the 30-year debt at a yield 15 basis points lower if the proceeds weren’t tied up in the Nassar scandal, which Moody’s says raises “potentially material financial and reputational risks.” Roughly, that comes out to $456,000 a year in higher interest costs. For a 50,000-student university with a $2.5 billion in operating revenue, that’s easily manageable.
For bond investors, it usually takes a direct threat to getting paid back to really put the brakes on any sort of deal. In one high-profile example in 2015, Louisiana State University took the rare step of scrapping a $114.5 million offering. Buyers were spooked by talk that because of state budget cuts, it was exploring the option of financial exigency, declared when schools face insolvency.
Michigan State will try to come to terms with Nassar’s crimes by paying what appears to be a slight premium to fund its $500 million settlement. More important, as I said more than seven months ago when the sale was first in the works, I hope this public offering is one of the last steps for the victims to get some closure and move forward.
Bloomberg Opinion
By Brian Chappatta
February 7, 2019, 11:51 AM PST
Nisha Patel, muni portfolio manager at Eaton Vance, examines California’s municipal bond market. She speaks with Bloomberg’s Taylor Riggs in this week’s “Muni Moment” on “Bloomberg Markets.”
Bloomberg MarketsTV Shows
January 30th, 2019, 9:31 AM MST
The municipal bond market has a small amount of direct exposure to the bankruptcy of PG&E (PCG), California’s largest utility, though the Chapter 11 filing creates uncertainty for the state and localities where the utility operates.
The company, which provides natural gas and electric service to 16 million people in northern and central California, emphasized in a customer alert that it will not be “going out of business” as it embarked on plans to restructure an estimated $51.7 billion in debts balanced by assets of $71.4 billion.
PG&E Corp. (PCG) and its primary operating subsidiary, Pacific Gas and Electric Co. filed for Chapter 11 Tuesday in the U.S. Bankruptcy Court for the Northern District of California.
All three ratings agencies dropped the utility’s ratings to junk after it reported a few weeks ago that it was facing up to $30 billion in liabilities from California wildfires.
The California Public Utilities Commission, the utility’s regulator, reported in December it was exploring such options as splitting PG&E’s (PCG) gas and electric operations or even requiring that regional companies be created.
San Francisco Mayor London Breed, in a letter to the director of San Francisco’s Public Utilities Commission, reportedly requested an analysis of the city’s options in the face of PG&E’s (PCG) likely bankruptcy, “including the possibility of acquiring and building electrical infrastructure assets.”
A California PUC spokeswoman said she did not know if the commission would have the power to move ahead on those plans now that the utility is in bankruptcy, but said the commission would work with the court.
The company signaled earlier this month that it planned to file for bankruptcy in compliance with a recently enacted state law that requires it to provide a 15-day notice before taking that step.
Municipal bonds comprise less than $1 billion of PG&E’s outstanding debt. “And $762 million of the $920 million in municipal debt was backed by bank letters of credit, so actual exposure to PG&E (PCG) in the municipal market is quite small,” Nuveen analysts wrote in a Jan. 22 report.
The municipal bonds are unsecured general obligations of PG&E (PCG), according to Nuveen.
“The corporate bonds generally have a covenant by which if a lien is granted to other creditors it must be granted to the corporate bonds,” Nuveen analysts wrote. “The municipal bonds are exempt from this provision and could be subordinated to the other debt.”
The municipal debt was issued through two state conduit issuers, the California Pollution Control Financing Authority and the California Infrastructure & Economic Development Bank.
The conduit issuers provide access to the tax-exempt bond market for private companies and nonprofits and have no responsibility to pay the debt back.
Put simply, the conduit issues the bonds, places the proceeds with the trustee, who then re-lends the money to the borrower, said Tim Schaefer, California’s deputy treasurer for public finance. The CPCFA is staffed out of the treasurer’s office.
The borrower, in this case PG&E (PCG), has the responsibility to provide disclosure prior to the bond sale and after on the risks for bondholders, Schaefer said.
The risk to bondholders is minimal, because the banks will buy the variable rate demand obligations back from the current bondholders, said Matt Fabian, a partner with Municipal Market Analytics.
A search on the Municipal Securities Rulemaking Board’s EMMA site of the CUSIPs indicated the banks had not executed a mandatory tender of the debt as of Tuesday afternoon.
In an earlier interview with The Bond Buyer, Joan Hempel of Moody’s Investors Service said that the banks have the right to terminate the letter of credit early and call for a mandatory tender. The banks can make the payment and pay the bondholders off early and then PG&E (PCG) would be obligated to pay the bank back directly.
The bank letters of credit means the bank has an irrevocable and unconditional obligation to make the payments directly to the bondholders, Hempel said. The bank then has a reimbursement agreement under which PG&E (PCG) agrees to pay the bank. So the bondholders look to the bank as the first source of payment of the bonds, she said.
There are five banks with exposure instead of just one with a concentrated position, which helps to spread out the risk, Fabian said. As of last Friday, he said, the liquidity banks were MUFG Union Bank with $149 million, Sumitomo Mitsui Banking Corp. with $165 million, TD Bank with $100 million, Mizuho Bank with $200 million and Canadian Imperial Bank with $149 million.
In conjunction with the bankruptcy filings, PG&E (PCG) also filed a motion seeking interim and final approval of the bankruptcy court to enter into an agreement for $5.5 billion in debtor-in-possession financing with J.P. Morgan, Bank of America (BAC), Barclays (BCS), Citi, BNP Paribas (BNPQF), Credit Suisse (CS), Goldman Sachs (GS), MUFG Union Bank and Wells Fargo (WFC) acting as joint lead arrangers.
The DIP financing, when approved, will provide PG&E (PCG) with capital needed to operate throughout the bankruptcy, according to the company.
The PUC board granted exemptions for the utility to obtain the DIP financing at a heated meeting Monday at which protestors shouted “no bailout for Wall Street” while commissioners discussed the matter. The extensions do not extend to the transfer of ownership of any utility asset that is pledged as part of the DIP finance, however.
PUC President Michael Picker urged his fellow commissioners to approve the exemptions, saying that if PG&E (PCG) were not able to secure the financing and continue to operate it could represent a substantial public safety and health risk because it could compromise hospitals and public facilities.
California Gov. Gavin Newsom said his focus through the bankruptcy remains “protecting the best interests of the people of California.”
“My administration will continue working to ensure that Californians have access to safe, reliable and affordable service, that victims and employees are treated fairly, and that California continues to make forward progress on our climate change goals,” Newsom said.
By Keeley Webster
BY SOURCEMEDIA | MUNICIPAL | 01/30/19 12:08 PM EST
Puerto Rico won court approval Monday for a restructuring deal that wipes out one-third of its $18 billion in sales-tax bond debt, a milestone in its quest to fix its broken finances.
U.S. District Judge Laura Taylor Swain confirmed a debt adjustment plan covering the revenue bonds known as Cofinas, marking the largest renegotiation yet of the U.S. territory’s bond and pension obligations.
The write-downs imposed on the Cofina bonds, first issued as rescue financing in 2007, will save the island government $17 billion in interest and principal payments over the coming decades as it tries to reverse a decade of economic decline and out-migration.
Creditors holding more than $14.5 billion in Cofina debt supported the accord, which resolves one of the thorniest conflicts in Puerto Rico’s unprecedented, court-supervised bankruptcy.
The settlement is tied to a negotiated split of the sales taxes pledged to Cofina that releases 46% of the money back to the island’s government — providing $456 million a year on average that otherwise was earmarked for bondholders.
Judge Swain acknowledged that the settlement “commits substantial portions of Puerto Rico’s scarce revenues to bond payments over a period of decades,” while also slashing claims from bondholders, including individual investors who bought Cofina securities for their retirement.
But she concluded the adjustment plan “is essential to ensure that Puerto Rico is on a path that will restore its access to financial markets as it builds a stronger economy.”
The settlement marks the first adjustment plan approved under the quasi-bankruptcy process created by Congress under a 2016 rescue law that also installed an oversight board to manage Puerto Rico’s spending and pilot the debt- restructuring process.
The oversight board was able to wring savings from Cofina’s bondholders in part because of lingering doubts about the strength of their claims on sales-tax revenue. Critics of the Cofina structure have long insisted that sales taxes never should have been transferred out of the government’s control, and other creditors holding Puerto Rico general obligations said they, not Cofina bondholders, had an ironclad claim on the revenue.
First issued in 2007, the Cofina bonds were backed by sales taxes that provided investors a secure source of repayment and lowered Puerto Rico’s financing costs after the municipal bond market lost confidence in the U.S. territory as a borrower.
The Cofina bonds quickly became a go-to financing source that made up roughly 40% of Puerto Rico’s core government obligations when it entered bankruptcy protection in 2017.
Doubts about who owned the sales taxes — the government or Cofina’s bondholders — have clouded Puerto Rico’s bankruptcy since it entered court protection in 2017. Forcing Judge Swain to decide the issue could have wiped out Cofina’s bondholders completely — or guaranteed them a 100% recovery if the pledge was upheld.
The Cofina plan instead relinquishes more than 46% of the pledged sales taxes, supplying cash to correct the government’s budget imbalance and ameliorate politically unpopular austerity measures.
BY DOW JONES & COMPANY, INC. | MUNICIPAL | 02/04/19 05:47 PM EST
By By Andrew Scurria
Write to Andrew Scurria at [email protected]
Traditional bond buyers are going back to Puerto Rico.
After shunning the U.S. territory for much of the past six years, municipal-bond mutual funds are again buying the government’s debt as it recovers from the 2017 hurricane and inches closer to winning a potential court approval to restructure more than $17 billion of sales-tax-backed debt, a major step in its record-setting bankruptcy.
Pacific Investment Management Co. held about $506 million of commonwealth securities as of Sept. 30, nearly 10 times the $52 million held the month before Hurricane Maria, according to data compiled by Bloomberg. AllianceBernstein LP increased its exposure to $347 million, as of Nov. 30, up from $53 million in August 2017. Capital Group and Massachusetts Financial Services Co. increased their exposure by nearly 50 percent.
Bloomberg Markets
By Michelle Kaske
January 31, 2019, 7:19 AM MST
The demand for 30-year municipal bonds is weakening, so New York City is reducing the supply.
The nation’s most-populous city, one of the biggest borrowers in the $3.8 trillion state and local government debt market, is planning to sell fewer of the longest-dated bonds because of investor “resistance” amid concerns about higher interest rates and price volatility, Marjorie Henning, the city’s deputy comptroller for public finance, said at a Bond Buyer Conference in New York.
She said that marks a shift from past years, when investors were moving away from intermediate-maturity debt.
30-year yields have edged up while others were little changed
The yields on 30-year municipal bonds have edged up this month while those on 10-year securities have been little changed, according to Bloomberg’s benchmark indexes. That’s driven securities that mature in 2022 or longer to the worst performance in the market, according to Bloomberg Barclays indexes.
New York plans to issue just over $10 billion of bonds for projects in fiscal year 2020, which begins July 1, $11.5 billion in 2021 and $12.6 billion the year after.
“One of the things that we’re exploring is ways to move down the yield curve,” she said.
Bloomberg Markets
By Martin Z Braun
January 29, 2019, 11:51 AM MST
California’s leaders sued the seaside city of Huntington Beach over claims that it worsened the state’s housing shortage by refusing to cooperate with a plan for more affordable units.
The unusual legal action by the most populous U.S. state against of one of its own municipalities — a historically red-voting place dubbed Surf City, USA, for the breaking waves along its 9.5-mile (15.3-kilometer) stretch of sandy Pacific Ocean beach — was brought Friday by Attorney General Xavier Becerra at the behest of new Governor Gavin Newsom.
The case is being touted as the first test of a law that allows California officials to revoke a city’s housing plan that’s out of compliance with state standards. The suit was filed in Orange County Superior Court but couldn’t immediately be verified in electronic records.
“Cities and counties are important partners in addressing this housing crisis, and many cities are making herculean efforts to meet this crisis head on,” Newsom said in an emailed statement. “But some cities are refusing to do their part to address this crisis and willfully stand in violation of California law. Those cities will be held to account.”
No other state faces a housing shortage as deep and wide as California. Fees, regulations and delays have pushed building costs to among the highest in the nation, and the state adds far fewer new units than it needs each year to meet demand. As a result, median home prices have about doubled since the end of the Great Recession, to $558,000. Two in five households in the state are considered “cost-burdened,” paying more than 30 percent of their income on housing. Homelessness has reached crisis proportions.
Huntington Beach is in Orange County, once a Republican stronghold that has seen its edge slip after the 2018 elections. The Republican congressman representing the city, Dana Rohrabacher, lost to a Democrat. Becerra and Newsom are Democrats.
In Friday’s complaint, the state’s housing agency said the Huntington Beach city council voted unanimously in March 2016 to defeat a proposal that would have committed the city to more affordable housing. When the state told the city in November 2018 that it still wasn’t in compliance, city officials said they wanted to first resolve a 2015 lawsuit brought by affordable housing advocates.
“The time for empty promises has come to an end,” according to the complaint. “The city should not be allowed to avoid its statutory obligations any longer.”
Huntington Beach officials didn’t immediately respond to a request for comment on the suit.
This isn’t Becerra’s first court showdown with Huntington Beach. The city sued the attorney general and Newsom’s predecessor, Jerry Brown, last April over a 2017 law that bars local police from telling federal officials when immigrants subject to deportation are about to be released from custody.
Huntington Beach supported a legal challenge by then-U.S. Attorney General Jeff Sessions to California’s immigrant sanctuary laws that was largely rejected by a federal judge in Sacramento.
The case is California Department of Housing and Community Development v. City of Huntington Beach, California Superior Court, Orange County.
Bloomberg Politics
By Peter Blumberg and Romy Varghese
January 25, 2019, 1:18 PM MST Updated on January 25, 2019, 2:00 PM MST
— With assistance by Noah Buhayar, and Edvard Pettersson
In an opinion filed December 27, 2018, and later ordered published on January 15, 2019, the Fourth District Court of Appeal (Div. 1) affirmed the trial court’s judgment rejecting CEQA and other challenges to the City of San Diego’s (City) approval of an amended and restated lease of City-owned land containing an oceanfront amusement park in its Mission Beach neighborhood (Belmont Park), which restated lease potentially extends the prior lease term for a significant period. San Diegans For Open Government v. City of San Diego (Symphony Asset Pool XVI, LLC, Real Party in Interest) (2019) ___ Cal.App.5th ___.
Relevant Factual Background
Belmont Park, developed in 1925, contains original amusement attractions including the Plunge (an indoor swimming pool) and the Giant Dipper roller coaster. Upon its developer’s death, it was granted to the City, which thereafter in the early 1970’s dedicated it along with adjacent land (collectively named Mission Beach Park) for public park and recreational purposes. In 1987, to renovate and revitalize the aging Belmont Park, the City entered into a 50-year Lease and Development Plan for Belmont Park (excluding the Roller Coaster) providing for the demolition and construction of various facilities, including restaurants, shops, and parking, for recreational and visitor-serving commercial uses. The 1987 Lease gave the lessee/operator (Belmont Park Associates) the right of first refusal to enter into a new lease upon terms within City’s sole discretion upon City’s finding of a continuation of the property’s uses to be in the public’s best interest.
A few months after execution of the 1987 Lease, City’s electorate passed Proposition G limiting commercial development of Mission Beach Park to preserve its recreational and visitor-serving parkland uses and its amusement park’s historical remnants. Proposition G provided exemptions for certain development and redevelopment projects or proposals which had obtained vested rights under its standards as determined by the City Council after an application and noticed public hearing. The City subsequently determined the Roller Coaster and Belmont Park Associates Project had vested rights to continue operation and complete development. In 1989, the Mission Bay Precise Plan was amended to recognize Mission Beach Park development would be guided by the Council-approved Lease and Development Plan until the lease expired on March 31, 2037, but recommended that future development thereafter be limited to public and recreational uses with commercial uses restricted to the Plunge building.
City’s Resolution Approving The Restated Lease And The Litigation Challenging It
Following a number of lease assignments, in late 2012 Symphony became the lessee under the 1987 Lease and also acquired the entity that was lessee/operator of the Roller Coaster lease. In 2015, the City approved and entered into an amended and restated lease with Symphony encompassing both Belmont Park and the Roller Coaster. That Restated Lease recognized Symphony had already invested $18 million in capital improvements and upgrades to the property (and planned to additionally invest $5.9 in Plunge pool refurbishment); required Symphony to maintain and operate the Plunge and Roller Coaster and pay City annual rent; and provided it an opportunity for an extended lease term (of from 40 to 50 additional years) if it completed the contemplated improvements, made additional City-approved capital improvements, and paid the City a lump sum of $500,000. The Restated Lease specified numerous allowed uses of the premises and provided City could approve additional uses in its sole discretion, subject to all applicable laws.
City determined its approval of the Restated Lease was categorically exempt from CEQA under Guidelines § 15301’s exemption for existing facilities. Petitioner SDOG challenged City’s resolution approving the Restated Lease, alleging it violated Proposition G, CEQA, and a City Charter provision requiring actions authorizing “contract[s], agreement[s], or obligation[s] extending for a period of more than five years” be taken by ordinance with notice published in City’s official newspaper. The trial court rejected all three arguments, and the Court of Appeal affirmed.
The Court Of Appeal’s Decision On the Non-CEQA Issues
Reviewing the matter as challenging legislative action and thus subject to ordinary mandamus review (Code Civ. Proc., § 1085), the Court of Appeal held (with respect to the non-CEQA arguments) that: (1) the Restated Lease fell within the vested rights determined by the City Council in 1988, and that the broad language of the 1987 Lease encompassed all the uses specifically set forth in the Restated Lease (e.g., restaurant, full service and fast foods, and recreational); (2) the Restated Lease’s extension provision was permissible because the 1987 Lease contemplated possible extensions and did not mandate a fixed inflexible term, and the Mission Beach Precise Plan did not address vested rights (which were not limited in time) and its recommendations regarding future development were not legally binding; and (3) the City Charter provision was ambiguous when considered in context with surrounding provisions, but was properly construed (consistent with City’s long-standing interpretation, the legislative history, and established rules of construing charters) only to restrict City’s authority to enter into long-term contracts and projects that would require it to expend funds, not agreements (like the Restated Lease) under which it received revenues.
The Court Of Appeal’s Holdings On The CEQA “Existing Facilities” Exemption Issues
With respect to the CEQA claim, the Court reviewed it under Public Resources Code § 21168.5, which provides the standard of review in CEQA challenges where no evidentiary hearing is required, and under which a prejudicial abuse of discretion is established where the agency has not proceeded in a manner required by law or if the determination or decision is not supported by substantial evidence. Guidelines § 15301’s existing facilities exemption from environmental review under CEQA applies to the “operation, repair, maintenance, permitting, leasing, licensing, or minor alteration of existing public or private structures, facilities, mechanical equipment, or topographical features, involving negligible or no expansion of use beyond that existing at the time of the lead agency’s determination.” (Emph. added.) SDOG’s argument that Symphony’s willingness to pay over $25 million in construction costs proved the Restated Lease exceeded the exemption’s “negligible or no expansion of [existing] use” provision failed because, as reflected by the Restated Lease, “the $18 million in improvements… had already been completed and, accordingly, were existing facilities” at the time of City’s exemption determination; SDOG did not argue that the contemplated $5.9 million for future Plunge refurbishment fell outside the exemption. The Court also rejected SDOG’s attempt to rely on case law addressing whether CEQA litigation becomes moot when a challenged project is completed during that litigation; here, per the Court, “the existing facilities exemption applied from the time that the Restated Lease was approved, and the City made its CEQA determination because all the structures at issue were already completed.”
Finally, the Court rejected SDOG’s argument that Guidelines § 15300.2(c)’s “unusual circumstances exception” to the exemption applied. It noted that the party challenging the exemption has the burden of producing evidence supporting an exception. Per the Court: “SDOG has not identified any unusual circumstances due to which there may be a significant effect on the environment.” While SDOG argued “that the single unusual circumstance present here is that the electorate passed Proposition G to govern the development of Mission Beach Park,” and that a “fair argument” existed that the Restated Lease would result in increased environmental impacts (i.e., significant noise and traffic) that Proposition G sought to avoid, this “undeveloped and conclusory argument” failed for two reasons. First, the Court found it “entirely speculative” that the “sole fact cited by SDOG” – over $100 million in City revenues over the course of the lease – would result in significant visitor increases and increased traffic and noise.
Second, it held that “even if there was evidence to support SDOG’s contention that the Restated Lease will result in increased traffic and noise, SDOG has made no attempt to show that the increased traffic and noise would be due to the unusual circumstances it cites, namely the existence of Proposition G.” The Court observed: “In order for the unusual circumstances exception to apply, the significant environmental effect must be due to the unusual circumstance. [citations.] No such causal connection has been identified.” (Emph. Court’s, citing Guidelines § 15300.2(c) and Berkeley Hillside Preservation v. City of Berkeley (2015) 60 Cal.4th 1086, 1105.)
by Arthur F. Coon
January 23, 2019
Miller Starr Regalia
Fitch Ratings-San Francisco-23 January 2019: California credits, specifically the state, counties and cities and school districts, are all better prepared to manage through the next economic downturn; however, some school districts throughout the state may feel its effects more acutely, according to a new Fitch Ratings report.
California school districts face a challenging budget environment during the next recession due to what Fitch Senior Director Karen Ribble describes as “scheduled teacher pension contribution increases, limited to no control over revenues, relatively low reserves compared to elevated revenue volatility due to reliance on volatile state funding.”
School district reserves are higher than in fiscal 2008, which will help to some extent. Also important to consider is that California school districts have essentially no ability to raise revenue without voter approval.
Conversely, most Fitch-rated California counties appear to be the most well-positioned out of the three local governments to weather cyclical declines while maintaining financial flexibility. For one, counties have the least volatile revenues. Much of it comes from relatively stable property tax revenues and counter-cyclical intergovernmental revenues instead of more cyclical revenue streams like sales taxes and transient occupancy taxes. However, cities are also well-positioned. “California cities and counties will likely trim service levels, negotiate labor concessions and temporarily curtail discretionary spending so its expenditures are more closely better aligned with temporary lower revenues,” said Ribble.
The state as a whole is very susceptible to revenue volatility since it is reliant on two economically sensitive revenues (personal income taxes and sales and use taxes). Additional risk exists because California contains some of the more overvalued housing markets in the nation. On the positive side, California has paid back the debt it borrowed during the last two recessions and has a rainy day fund that will equal 10% of revenues by the end of fiscal 2019. These excess funds will help mitigate revenue volatility.
Drilling down into the ratings themselves, Fitch expects the vast majority of them to remain stable throughout a moderate downturn since the expected stresses have been factored into the ratings. Only unforeseen policy decisions or an unusually long and/or severe economic downturn would result in rating changes.
“How Prepared Are California Credits for the Next Recession?” is available at www.fitchratings.com.
Contact:
Karen Ribble
Senior Director
+1-415-732-5611
Fitch Ratings, Inc., 650 California Street
San Francisco, CA 94108
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
Fitch Ratings-San Francisco-14 January 2019: Fitch Ratings does not expect to take further rating action on the Los Angeles Unified School District’s issuer rating based on the teacher union’s decision to strike on Jan. 14th. The strike was postponed from Jan. 10th due to disputes about the notification period and concern about a possible court injunction.
Fitch downgraded LAUSD’s Issuer Default Rating (IDR) to ‘A’ from ‘A+’ in September 2018 and assigned a Negative Outlook to the rating at that time. This action considered the ongoing labor dispute and the expectation that the issues raised in the negotiations (regardless of whether a strike occurred) would likely result in some erosion of the district’s practical ability to control spending.
Fitch expects management to work to maintain financial flexibility that is consistent with the current rating, and will incorporate the eventual agreement and other implications of the labor impasse into its analysis. Aside from the immediate implications of a teacher strike, there could be longer-term negative effects if the strike results in families choosing alternatives to LAUSD, including private and charter schools, or transferring out of the district. Declining enrollment is already a significant challenge for the district. Failure to maintain reserves that provide adequate gap closing capacity in a downturn and/or deferral or non-recurring support of required spending beyond current expectations would result in negative rating pressure.
Teachers at LAUSD, the nation’s second largest public school district, are striking starting Monday Jan. 14th after almost two years of negotiations failed to secure a new contract for fiscal years 2018 – 2020. The last contract expired in June 2017. Representatives from United Teachers Los Angeles (UTLA) and the district met again last week after completing the fact-finding stage to avert a strike but have still not come to agreement.
Although the district has increased its offer to include 6% raises over two years starting in fiscal 2018 plus $105 million for additional staffing, the two sides still disagree. UTLA is requesting 6.5% raises all at once retroactive to fiscal 2017, but more importantly is demanding more funds than offered to increase staffing levels at schools. Specifically, UTLA wants schools to be “fully staffed” with more teachers for lower class sizes and more counsellors to reduce caseloads. The district has stated it cannot afford such increases with ongoing revenue, given the district’s sharply declining enrollment and associated per-pupil revenues from the state. Declining enrollment is due to demographic changes and competition from charter schools, which have increased their enrollment over 1000% since fiscal 2003, and currently accounts for almost 20% of total district enrollment.
Based on its fiscal 2018 audit, the district began fiscal 2019 with $714.7 million unassigned/unappropriated fund balance (excluding its reserve for economic uncertainties). In its first interim financial report dated Dec. 11, 2018, the district factored in the 6% salary increase proposed to UTLA and estimated that its unassigned/unappropriated fund balance will decline to $353.4 million at the beginning of fiscal 2021 and then to negative $4.2 million at the beginning of fiscal 2022.
The district’s projections are conservative, and management typically outperforms its projections. The ‘A’ IDR assumes that the district will act to reduce the rate of unassigned/unappropriated general fund balance drawdown laid out in these projections. The downward trajectory is pronounced and will be difficult to counteract meaningfully without significant changes to the district’s expenditure profile. Moreover, as noted above, in current labor negotiations UTLA is seeking spending increases well above those assumed in the projections.
The state’s final fiscal 2020 budget could include more funding than currently projected and alter the pace of reserve drawdowns.
The Los Angeles County Office of Education (LACOE) announced on Jan. 9th that, after the district’s fiscal 2019 first interim report submitted Dec. 17th did not adequately address its structural imbalance, LACOE is assigning a team of fiscal experts to work with the district to eliminate the structural imbalance and restore the required level of financial reserves.
Fitch maintains ‘AAA’ ratings and Stable Outlook on the district’s unlimited tax general obligation (GO) bonds, which are based on a dedicated tax analysis, without regard to the district’s financial operations. The distinction between the ‘AAA’ ratings on the GO bonds and the ‘A’ IDR reflect Fitch’s assessment that the pledged special revenues for repayment of the GO bonds meet the definition of “pledged special revenues” under the U.S. Bankruptcy Code and therefore bondholders are legally insulated from any operating risk of the district.
For more information on Fitch’s analysis of the LAUSD, see “Fitch Downgrades Los Angeles USD, CA’s IDR to ‘A’; Outlook Negative” dated Sept. 12, 2018.
Contact:
Karen Ribble
Senior Director
+1415-732-5611
Fitch Ratings, Inc.
One Post Street, Suite 900
San Francisco, CA 94014
Alan Gibson
Director
+1-415-732-7577
Amy Laskey
Managing Director
+1-212-908-0568
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
When PG&E Corp. went bankrupt almost two decades ago, an energy crisis and the dot-com crash were hurling California toward a financial abyss of crippling budget deficits, soaring debts and escalating penalties in the municipal-bond market.
This time, California’s finances are buttressed by a surging economy and record reserves, while officials have shown little interest in bailing out the beleaguered utility, which said Monday it faces $30 billion in liabilities from deadly wildfires. And its plan to file for bankruptcy hasn’t triggered a pullback from state bonds by investors, who are eager to own them as a tax haven.
But the fallout from the company’s 2001 insolvency — triggered by botched deregulation of electricity markets — offers investors reasons for caution if the state must step in again to protect its residents. Then, California’s credit rating took a hit and it was forced to sell what was then a record amount of bonds to keep the lights on.
“I don’t anticipate the state at this point making any sort of a financial commitment,” said Paul Mansour, head of municipal research at Conning. “But it doesn’t preclude them from being creative in using the state’s stronger credit quality like they did in 2001 in some undetermined form to help keep costs down for California ratepayers.”
Governor Gavin Newsom and other state officials say they want to ensure that power service isn’t disrupted; that compensation flows to wildfire victims and ambitious climate-change targets remain on track amid intensifying fire seasons. Those are challenging goals in a state where utility customers already pay among the highest electric rates in the country.
“This is a real huge problem,” said Howard Cure, head of municipal research in New York at Evercore Wealth Management. “The state is under enough pressure already to keep businesses in state.”
Different Situation
State fire investigators have blamed PG&E’s equipment for starting 17 of the wildfires that tore through Northern California in 2017. The company’s electric lines are also suspected of sparking last year’s Camp Fire, the deadliest in California history, which killed 86 people and destroyed the Butte County town of Paradise.
The situation was markedly different last time around. After lawmakers partially deregulated the power market, wholesale prices, manipulated by companies such as Enron Corp., jumped more than tenfold in 2000 and 2001, and the utilities were barred from passing the cost on by raising rates. Rocked by rolling blackouts, the state agreed to buy power at above-market prices to prop up insolvent utilities and sold $11.2 billion of municipal bonds to finance the contracts.
The state suffered several credit-rating downgrades as it grappled not only with the power crisis, but the fallout from the dot-com bust. California’s revenue, which is heavily dependent on the wealthy, is notoriously volatile and vulnerable to market gyrations.
“Those two things together were a big driver of what happened to the state’s credit rating,” said Matt Butler, an analyst at Moody’s Investors Service.
All Options
Now, thanks to an economic boom and financial safeguards such as a voter-mandated rainy-day fund, California’s ratings are at the highest since that era. While its tax revenue is still vulnerable to swings, investors and ratings analysts point to the progress state officials have made in paying off its obligations and boosting its savings.
For now, Newsom says he’s considering all options. The state could decide to own a slimmed-down version of PG&E, said Bloomberg Intelligence analyst Jaimin Patel in a report. He called it a “more viable option” than directly supporting an investor-owned utility.
And California is likely to give PG&E more flexibility to raise customers’ bills, said Jason Ware, head of trading at brokerage 280 CapMarkets. But that’s still a negative for the state’s credit, he said. California’s cost of living is already high, something that was exacerbated by the federal limit on state and local tax deductions enacted last year, Ware said.
“There’s very little wiggle room for California to go out and ask the taxpayer for more money,” Ware said.
Bloomberg Business
By Romy Varghese and Amanda Albright
January 18, 2019, 6:09 AM MST
The impending bankruptcy of PG&E Corp. is threatening to foist large liabilities on five banks that have agreed to act as buyers of last resort for more than $760 million of bonds that the teetering utility issued through California government agencies.
The company’s announcement Monday that it plans to seek protection from creditors triggered an surge of selling by owners of the floating-rate securities, causing dealers to push up the yields to draw buyers. If the selling persists and new investors can’t be lined up, the banks have committed to buy the bonds at full face value, leaving them potentially exposed to losses.
Sumitomo Mitsui Banking Corp., Mizuho Bank Ltd., Mitsubishi UFJ Financial Group Inc.’s Union Bank, the Toronto-Dominion Bank and the Canadian Imperial Bank of Commerce have provided such letters-of-credit for about $762 million of the $920 million of municipal debt issued on behalf of PG&E, according securities filings. Such guarantees are widely used for floating-rate debt and banks typically have an “unconditional” commitment to pay principal and interest if the borrower defaults, according to the market’s regulator.
Adjustable-rate PG&E backed municipal debt without a bank guarantee is trading for about 78 cents on the dollar, showing that investors are bracing for losses.
“Those letters of credit insulate muni holders,” said Matt Fabian, a partner at Municipal Market Analytics. “There’s no real risk for the muni holders. It’s all about the banks.”
The power company’s financial strains have brought renewed attention to the floating-rate municipal market, where governments can issue debt that doesn’t mature for decades at short-term rates because investors frequently have the option to sell the securities back at 100 cents on the dollar. That market — where businesses can raise money for projects with a public benefit — was roiled during the wave of selling amid the credit crisis of 2008, when the fallout helped push Jefferson County, Alabama, into a then-record bankruptcy.
There have been no disclosures showing that the banks had to buy any unwanted securities during this week’s selling, and bondholders recovered their full investment after the company’s last bankruptcy.
Spokespeople for TD Bank, MUFG, CIBC, Mizuho, and SMBC declined to comment. James Noonan, a PG&E spokesman, declined to comment specifically on the company’s municipal debt.
The banks’ guarantees have insulated the municipal market from the impact of PG&E’s distress, which was brought on by deadly California wildfires that have left it facing as much as $30 billion of liabilities. The Vanguard Group, a major owner of PG&E’s municipal bonds, said all but $2 million of its holdings are backed by banks. In a Jan. 11 report to clients this week, Barclays Plc analysts told bondholders that they face little risk of losses because of the letters-of-credit guarantees.
But the banks face more uncertainty if they wind up holding a large chunk of the debt. While bondholders remained whole after PG&E emerged from its 2001 bankruptcy, when Jefferson County went bankrupt, banks that had to purchase the variable-rate sewer bonds unloaded by investors had to take a haircut.
Union Bank’s letters of credit on PG&E-backed municipals expire in June, while the others expire in 2020. If PG&E avoids bankruptcy for now, it’s unlikely that another bank would be willing to step in after the current pacts expire, said Josh Perry, an analyst for Brown Advisory.
Bloomberg Business
By Amanda Albright and Martin Z Braun
January 17, 2019, 8:45 AM MST
PG&E Corp.’s plan to file for bankruptcy is trickling into the municipal-bond market, where the California utility has raised cash for power projects.
Some tax-exempt bonds the company issued through state and local conduits have slid as the fallout from California’s devastating wildfires pushes the electric utility closer toward bankruptcy, raising the risk that even debt that was issued through government agencies may not be paid back in full.
The price of a bond issued through the California Infrastructure and Economic Development Bank that are backed by the utility’s revenue have tumbled to an average of 80.1 cents on the dollar from 90.1 cents in mid-December, according to data compiled by Bloomberg. PG&E’s securities were the most actively traded in the $3.8 trillion municipal-debt market Monday, when investors unloaded its floating-rate bonds that can be resold at face value before it seeks court protection from creditors.
Bloomberg Markets
By Danielle Moran and Amanda Albright
January 14, 2019, 7:30 AM MST Updated on January 14, 2019, 12:47 PM MST
This is a chance a make its power system safe, efficient and sustainable.
It’s rare for a utility to go bankrupt, especially twice. For PG&E Corp., which may enter Chapter 11 by the end of the month, there are compelling reasons to do it anyway — and not just for the utility itself.
PG&E, facing perhaps $30 billion or more of claims and penalties, has started the clock ticking even before the last of its cash runs out. One look at its stock — trading at a princely 0.17 times book value — tells you it has lost the confidence of public markets. That rather undercuts the whole point of being an investor-owned utility.
Clearing the uncertainty hanging over the company begins with consolidating the litany of claims against it into a known quantity and dealing with them expeditiously. As Luckey McDowell, a partner at Baker Botts LLP specializing in corporate restructurings, puts it, a bankruptcy court gets you to a point where “You can say, ‘This is the number,’ and then you can craft a solution around that number.”
Bloomberg Politics & Policy
By Liam Denning
January 17, 2019, 6:45 AM MST
PG&E Corp.’s looming bankruptcy could lead to an unprecedented spectacle — a major American power company being taken over by the state or broken up for city governments to run.
More often, it works the other way. Local governments have a long history of selling off municipal utilities, switching them from the public sector to the private. Witness the ongoing efforts to privatize Puerto Rico’s troubled power authority.
But with PG&E planning to file for bankruptcy this month — the result of mounting wildfire liabilities that could reach $30 billion — a government takeover has become a real possibility. In fact, the future of the power giant that has long reigned over a broad swath of California could very well involve a complete dismantling of its system and a takeover by multiple municipalities.
Bloomberg Markets
By David R Baker and Mark Chediak
January 16, 2019, 3:00 AM MST
CHICAGO, Jan 15 (Reuters) – Puerto Rico general obligation bond prices tumbled on Tuesday after the island’s federally appointed oversight board put the squeeze on bondholders late on Monday by announcing a plan to invalidate about half of the U.S. commonwealth’s full faith and credit-backed debt.
The board, along with an unsecured creditors committee, asked the U.S. District Court overseeing Puerto Rico’s bankruptcy case to wipe out more than $6 billion of GO bonds sold by the island in 2012 and 2014 that were already in default.
The news pushed prices on bonds due in 2035 with an 8 percent coupon down into the 48 to 49 cents on the dollar range from 53.5 cents on Monday.
With one debt restructuring completed and others in the works, the board is taking aim at the island’s roughly $13 billion of GO bonds and nearly $50 billion in unfunded pension liabilities. As a prelude to mediation, the board and creditors committee are seeking to declare some of the GO bonds null and void because their issuance exceeded a debt limit and violated a balanced budget requirement in Puerto Rico’s constitution.
“It is clearly part of the kabuki theater of negotiations,” said James Spiotto, managing director of Chapman Strategic Advisors and a municipal bankruptcy expert.
He said while the legitimacy of the debt could have been challenged years ago, “they chose now because it’s leverage.”
Last month, the board’s lawyer told U.S. Judge Laura Taylor Swain, who is hearing the bankruptcy case, that mediation efforts would resume early this year on Puerto Rico’s core government debt and that a plan of adjustment could be imposed on creditors if there is insufficient support. With roughly $120 billion in debt and pension liabilities, Puerto Rico and four of its public corporations commenced bankruptcy proceedings in May 2017, under Title III of the so-called PROMESA Act.
Wiping out bondholders’ investments, a move President Donald Trump suggested for the island in 2017, would have expensive repercussions for Puerto Rico’s return to the $3.8 trillion municipal bond market. here
“If that is the solution, all they’re going to wind up doing is paying a lot more money to borrow money,” Spiotto said.
Puerto Rico completed the restructuring of about $4 billion of Government Development Bank debt in November in the first consensual deal under the bankruptcy. This week the court will take up a deal to restructure debt issued by the island’s Sales Tax Financing Corporation known as COFINA. A deal over Puerto Rico Electric Power Authority (PREPA) debt is pending.
By Karen Pierog
Reporting by Karen Pierog in Chicago, additional reporting by Luis Valentin Ortiz in San Juan Editing by Matthew Lewis
U.S. territory’s oversight board favors sales-tax bonds in deal
Puerto Rico’s federal supervisors are making a final push to write down $18 billion in sales-tax bonds under a settlement that would mark their largest renegotiation yet of the U.S. territory’s crushing debts.
The restructuring proposal covers the revenue bonds known as Cofina s, which make up roughly 40% of Puerto Rico’s core government debt. First issued in 2007, the Cofina bonds are backed by sales taxes that provided investors a secure source of repayment and lowered Puerto Rico’s borrowing costs.
Sales-tax revenue has never fallen short of paying off the Cofina bonds. But a decade of economic contraction has pushed Puerto Rico’s authorities to seek concessions from those bondholders to avoid further cutbacks in public services.
The settlement pending before U.S. District Judge Laura Taylor Swain would eliminate $6 billion in Cofina debt and release to Puerto Rico roughly half of the future sales-tax revenue currently earmarked for bondholders.
Court approval would resolve one of the thorniest conflicts in Puerto Rico’s bankruptcy while clearing the way for resolutions with competing bondholder groups.
Judge Swain didn’t issue an immediate ruling after hearing arguments Wednesday and Thursday from Cofina creditors—most of whom support the restructuring proposal—and from the oversight board installed to rehabilitate Puerto Rico’s economy.
“People voted overwhelmingly with their ballots and their wallets to accept the deal on the table,” said Matthew Feldman, a lawyer representing the interests of Cofina holders.
Bondholder support for the plan has buoyed prices on benchmark Cofina bonds close to 80 cents on the dollar, while subordinated Cofina bonds were trading at just under 50 cents on Thursday, according to Electronic Municipal Market Access.
If approved, the settlement would pay off senior bondholders owed nearly $8 billion at 93 cents on the dollar. Junior bondholders including Goldman Sachs Group Inc. and Santander Securities LLC would receive 56 cents on the dollar.
Under the proposal, creditors would receive new sales-tax bonds, affirmed by a court order to be valid and binding. The original Cofina bond structure was vulnerable to attack by rival bondholders who insisted it was unconstitutional, saying the sales taxes should never have been transferred out of the government’s control and pledged as collateral.
Investors have long debated whether Cofina bonds or Puerto Rico’s general obligations would come out on top in a restructuring since each group asserted an ironclad claim on sales tax money. The oversight board on Tuesday attacked the general obligations, saying that $6 billion of those bonds are worthless because they layered more debt on Puerto Rico than its constitution allowed.
Doubts about who owned the sales taxes—the government or Cofina’s bondholders—have clouded Puerto Rico’s bankruptcy since it entered court protection in 2017. Forcing Judge Swain to decide the issue could have wiped out Cofina’s bondholders completely—or guaranteed them a 100% recovery if the pledge was upheld.
Either outcome would have hamstrung the restructuring process and made it more difficult to buy peace with all creditors, said Luc Despins, a lawyer who negotiated the settlement.
The Cofina plan instead relinquishes more than 46% of the pledged sales taxes, supplying cash to correct the government’s budget imbalance and ameliorate politically unpopular austerity measures.
Island residents would still be on the hook for repaying the newly issued sales-tax debt through 2058. Rolando Emmanuelli Jimenez, an attorney for Puerto Rico’s public utility union, said the proposal didn’t require enough sacrifice from Cofina bondholders given the territory’s shrinking tax base.
Adriana Irizarry, a nonprofit worker and mother of three from San Juan, spoke in support of the proposal even though it will impair the Cofina bonds her family bought for retirement. She said she felt “betrayed and defrauded” by the government she had trusted to pay her back.
“I have already given the government half of my life savings. What are others willing to give?” she said. “They want to punish us for investing in our island.”
The Wall Street Journal
By Andrew Scurria
Jan. 19, 2019 9:00 a.m. ET
U.S. territory’s oversight board says post-2012 bond issuances are void
Puerto Rico’s financial supervisors attacked investors holding $6 billion of general obligations, saying the bonds are worthless because they layered more debt on the U.S. territory than its constitution allowed.
The Puerto Rico oversight board filed court papers on Monday seeking to nullify general obligation debt issued after 2012, based on constitutional restrictions on the amount of debt backed by the island government’s full faith and credit.
The objection covers Puerto Rico’s sale of $3.5 billion of high-yielding general obligations in 2014, the largest-ever deal for junk-rated municipal debt.
The oversight board, which is helming Puerto Rico’s court-supervised bankruptcy, said the post-2012 general obligations “should be disallowed in their entirety” to ease the restructuring of tens of billions of dollars in bond and pension debts owed by the central government.
“Where a government transaction is found to have violated a clear public policy embodied in statutory or constitutional law, allowing any remedy to a private counterparty would undermine that public policy, which exists to protect the people of Puerto Rico,” the filing said.
A spokesman for a group of general obligation bondholders including Aurelius Capital Management, LP, Monarch Alternative Capital LP and Autonomy Capital didn’t immediately respond to a request for comment.
The objection concerns several provisions of the Puerto Rico constitution. One clause bars Puerto Rico from guaranteeing debt if the borrowing costs would exceed 15% of its revenues from the prior two years. Puerto Rico is also barred from issuing general obligations to cover budget deficits, according to the objection. It also contended that bonds backed by rent payments on government buildings are tantamount to general obligations and should have counted toward the debt limits.
The oversight board said general obligation sales under former governors from both of Puerto Rico’s largest political parties breached these provisions.
The objection echoes a legal strategy employed by the formerly bankrupt city of Detroit, which argued that $1.5 billion in debt issued to finance pension obligations was invalid because it exceeded Michigan’s limits on municipal borrowing. Those bonds were paid back at 14 cents on the dollar when Detroit emerged from bankruptcy.
A restructuring plan for Puerto Rico’s general obligations isn’t expected to materialize for months. The oversight board is currently vying with dissident bondholders to write down $18 billion in sales-tax bonds known as Cofinas and has proposed a debt adjustment plan that is scheduled to be heard on Wednesday by U.S. District Judge Laura Taylor Swain.
By driving down Puerto Rico’s $125 billion debt load, the oversight board is hoping to free up money for investment in dilapidated infrastructure and entice private capital back to the island, which was devastated by two hurricanes in 2017.
The Wall Street Journal
By Andrew Scurria
Jan. 15, 2019 1:48 p.m. ET
A federal oversight board says more than $6 billion of bonds should be declared null and void. Trump spoke about erasing the island’s debt in 2017.
It turns out that President Donald Trump’s ad-lib about wiping out Puerto Rico’s debt wasn’t as far-fetched as it seemed.
Longtime followers of the bankrupt U.S. commonwealth, which is attracting renewed attention thanks to Lin-Manuel Miranda and Jimmy Fallon, may recall when Trump appeared on “The Sean Hannity Show” in October 2017 and said the following about Puerto Rico, just a couple of weeks removed from Hurricane Maria:
“They owe a lot of money to your friends on Wall Street. We’re going to have to wipe that out. That’s going to have to be — you know, you can say goodbye to that.”
Bloomberg Markets
By Brian Chappatta
January 15, 2019, 10:12 AM MST
Governor surprises towns and villages with a proposed cut in their state aid, a move municipal officials say could spark layoffs or raised property taxes
Gov. Andrew Cuomo surprised towns and villages with a proposed cut in their state operating aid, a move that municipal officials say could lead to layoffs or increased property taxes.
Mr. Cuomo, a Democrat in his third term, reduced the state’s aid and incentives for municipalities program, or AIM, from $715 million to $656 million in the budget plan he released this week.
The reduction will not affect cities, the biggest recipients of AIM funding, but towns and villages for whom the state money is less than 2% of their budget. Funding for the AIM program has been flat for the last 10 years.
Gerry Geist, executive director of the New York state Association of Towns, said the move was shocking because towns already adopted their annual budgets in November and December, before Mr. Cuomo proposed the cuts. Ninety percent of towns are losing their AIM funding, including all the towns in Columbia, Dutchess, Greene, Rockland, Putnam, Nassau and Suffolk counties.
“You can’t look at it as these percentages,” Mr. Geist said, noting Hempstead in Nassau County is losing $3.85 million. “Those are real dollars. It’s letting go personnel.”
In budget documents, Mr. Cuomo said the loss wasn’t a significant source of revenue for the affected municipalities. The governor has included additional money in this year’s budget for municipalities that share services to improve efficiency as well as changes to force major online marketplaces, like Etsy , to collect sales tax on behalf of third-party sellers. Legislators rejected similar online marketplace taxes in the last two years.
“The median impacted AIM payment is only $14,000 while the budget includes $225 million to match local government savings through the shared-services program and $390 million in new local sales tax revenues by eliminating the internet tax advantage,” said Morris Peters, a spokesman for Mr. Cuomo’s budget division.
Mr. Cuomo also proposed making permanent a 2% cap on the annual increase in local property taxes, most of which are levied by school districts. Municipal officials have said the cap makes it difficult to provide services. The governor and business groups say the cap provides relief to taxpayers and has led to greater predictability.
Robert Kennedy, the mayor of Freeport in Nassau County, stands to lose $901,311, which is less than 1% of his 50,000-person village’s 2017 expenditures. He has around $12 million in reserve funds, he said, but is loath to use them because he feared it would downgrade the village’s bond rating.
“We’re skin and bones right now the way we’ve been doing it, and they pull the rug out from under us,” he said. “After recovering from superstorm Sandy, we have to deal with New York state.”
The Wall Street Journal
By Jimmy Vielkind
Jan. 16, 2019 6:30 p.m. ET
The New Jersey Appellate Division has determined that the City of Hoboken cannot retroactively apply municipal land use ordinances to effectively revoke prior land use approvals.
The City of Hoboken (Hoboken) Planning Board granted Shipyard Associates, LP (Shipyard Associates) approval for a residential development consisting of high-rise residential buildings along the Hudson River along with several indoor tennis courts to be built on a pier extending into the Hudson River. Prior to completion of the development, Shipyard Associates proposed to build two additional high-rise buildings on the pier instead of the previously approved indoor tennis courts. As part of a multifaceted strategy by Hoboken and other intervenors to block the additional high-rise buildings, Hoboken convinced the Planning Board to refuse to schedule a hearing for the Shipyard Associates application. This refusal resulted in litigation heard by the Appellate Division. In Shipyard Assocs., L.P. v Hoboken Planning Bd., Nos. A-4504-14, A-4637-14, A-4763-14 (App. Div. Aug. 2, 2017), certif. denied, 232 N.J. 106, 133, 148 (2018), the Appellate Division determined that the Planning Board’s unlawful refusal to hear the application resulted in automatic approval of the preliminary and final subdivision application for the new high-rise buildings effective as of 2012, when the refusal occurred.
In late 2013, while the litigation regarding refusal to hear the Shipyard Associates application was pending, Hoboken enacted two municipal ordinances prohibiting construction of high-rise buildings on waterfront piers. The ordinances permitted only limited uses where residential construction was previously permitted and, if applied retroactively to the Shipyard Associates project, would effectively invalidate the automatic 2012 land use approval.
Shipyard Associates brought action to prevent Hoboken from enforcing the ordinances to prevent the Shipyard Associates project. In Shipyard Associates, LP v. City of Hoboken and Fund for a Better Waterfront and Hudson Tea Buildings Condominium Association, Inc., Docket No. A-1085-17T3 (Decided January 7, 2019), Hoboken argued that state statute N.J.S.A. 40:55D-49(a) authorizes a municipality to retroactively apply municipal ordinances to land use approvals if done in the interest of public health and safety. N.J.S.A. 40:55D-49(a) provides that the general terms and conditions of a preliminary approval shall not be changed, “…except that nothing herein shall be construed to prevent the municipality from modifying by ordinance such general terms and conditions of preliminary approval as relate to public health and safety….” The Appellate Division disagreed with Hoboken’s reliance on N.J.S.A. 40:55D-49(a), noting the use of the term “modifying” in N.J.S.A. 40:55D-49(a) indicates that a “change, revision or tweak” to the general terms of an approval may be permissible under certain circumstances for health and public safety purposes, but not a complete change of the permitted uses in a zone resulting in the revocation of a prior approval as a whole. With respect to the Shipyard Associates project, the Appellate Division held that the application of the two ordinances would effectively constitute a complete revocation of Shipyard Associates’ 2012 approval. The Appellate Division reasoned this result would be in direct conflict with the plain wording of N.J.S.A 40:55D-52(a), which provides that the zoning requirements applicable to a preliminary approval shall not be changed for two years after the date on which the resolution of final approval is adopted.
This case has not been approved for publication; thus, its use in other cases is currently limited. However, the Appellate Division’s ruling demonstrates recognition of the important protection against zoning changes afforded to developers under N.J.S.A 40:55D-52(a) and provides a degree of comfort that municipalities may not use the public health and safety exception in N.J.S.A. 40:55D-49(a) to erode such protection and retroactively apply land use ordinances to nullify a prior land use approval.
Should you have any questions concerning this decision or land use issues in general, please contact any of the attorneys listed in the sidebar.
Publisher: Day Pitney Alert
Day Pitney Author(s) Katharine A. Coffey Jennifer L. Solberg Peter J. Wolfson Brooke Luxenberg Kaplan
January 14, 2019
The Pennsylvania Department of Labor & Industry’s municipal authority and municipality bidding thresholds will rise 2.3 percent in 2019.
The Department published its bidding thresholds for 2019 under Act 90 of 2011. Under Act 90, the bidding thresholds provide for an annual inflation adjustment based on the Consumer Price Index for All Urban Consumers.
Effective January 1, 2019, the bidding thresholds for Pennsylvania municipal authorities and municipalities are:
Tucker Arensberg, P.C.
by Daniel Conlon
January 15, 2018
Alabama Municipal Insurance Corporation (AMIC) has agreed to dismiss with prejudice its federal lawsuit against Munich Re after an arbitrator rendered judgment against AMIC in a case we previously wrote about here.
Munich Re had resisted arbitration, contending that AMIC’s claim did not arise under a contract which contained an arbitration clause. The district court disagreed, finding that another contract applied to the claim and that contract provided for “final and binding” arbitration of disputes. Despite losing the initial round, Munich Re has emerged victorious from the arbitration it initially sought to avoid, and the court dismissed AMIC’s lawsuit with prejudice on December 7, 2018, pursuant to the parties’ joint request. Alabama Municipal Insurance Corporation v. Munich Reinsurance America, Inc., Case No. 2:16-cv-00948-WHA-SRW (USDC M.D. Ala. Dec. 7, 2018) (final judgment); (Nov. 9, 2018 Joint Status Report Regarding Arbitration).
Carlton Fields
by Benjamin Stearns
January 16, 2019
On January 7, 2019, in Green Sols. Recycling, LLC v. Reno Disposal Co., No. 3:16-cv-00334-MMD-CBC, 2019 BL 4611 (D. Nev. Jan. 07, 2019), the District Court for the District of Nevada granted summary judgment on plaintiff’s antitrust claim in favor of defendants Reno Disposal Company, Inc. (“Reno Disposal”), and Waste Management of Nevada, Inc. (“WMON”), on the basis of the doctrine of state-action immunity. The litigation arose out of the City of Reno’s entry into an exclusive franchise agreement with Reno Disposal, which provided Reno Disposal with the exclusive right to collect and dispose of waste and certain recyclable materials. The plaintiff challenged the City of Reno’s authority to grant a monopoly for the collection and disposal of garbage and recyclable materials as an unlawful restraint of trade in violation of Section 1 of the Sherman Act. The defendants argued that they were entitled to summary judgment under the doctrine of state-action immunity.
The doctrine of state-action immunity derives from Parker v. Brown. In Parker, the Supreme Court held that “because ‘nothing in the language of the Sherman Act . . . or in its history’ suggested that Congress intended to restrict the sovereign capacity of the States to regulate their economies, the Act should not be read to bar States from imposing market restraints ‘as an act of government.’” FTC v. Phoebe Putney Health Sys., Inc., 568 U.S. 216, 224, (2013) (quoting Parker v. Brown, 317 U.S. 341, 352 (1943)). Following Parker, the Court recognized that “under certain circumstances, immunity from the federal antitrust laws may [likewise] extend to nonstate actors carrying out the State’s regulatory program.” Id. at 225. Given our “fundamental national values of free enterprise and economic competition,” however, state-action immunity is the exception rather than the rule, and the inquiry is even more exacting when a non-state actor invokes the protection of Parker immunity. See id.
In Midcal, the Supreme Court set forth a two-part test for determining whether the anticompetitive acts of private parties are entitled to state-action immunity. Id. (citing California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980)). First, “the challenged restraint must be ‘one clearly articulated and affirmatively expressed as state policy.’” Midcal, 445 U.S. at 105. Second, the policy “must be ‘actively supervised’ by the State.” Id.
Applying these principles, the District of Nevada found that this case presented one of those rare circumstances where private parties are entitled to state-action immunity. The court first concluded that the clear-articulation prong of the Midcal test was met, because the statute at issue expressly authorized anti-competitive conduct by allowing municipalities to displace or limit competition in collection and disposal of waste. Moreover, the court found it foreseeable that the statute would result in a monopoly over the collection and disposal of materials that arguably qualified as waste.
With respect to the second prong, the court emphasized that the active supervision requirement did not apply “when the ‘challenged activity is within a traditional municipal function,’” or “when ‘the actor is a municipality rather than a private party.’” Green Sols. Recycling, LLC, 2019 BL 4611, at *9 (citations omitted). The court reasoned that the “traditional municipal function” exception applied, because waste disposal is “‘both typically and traditionally a local government function.’” Id. (citations omitted). The court likewise concluded that the second exception applied, because the true actor was the City of Reno, rather than Reno Disposal or WMON. The court explained that it was the City of Reno that was engaged in municipal regulation, and that Reno Disposal and WMON “have no authority to set pricing or in any way regulate the collection and disposal of garbage and other waste.” Id. The court held that both exceptions applied and that, accordingly, the defendants did not need to establish active supervision.
While the court’s decision thus makes clear that non-state actors are entitled to state-action immunity only in narrow circumstances, it also illustrates the vitality of this doctrine.
by Meghan Larywon and Robert LoBue
January 18, 2019
Patterson Belknap Webb & Tyler LLP
Fitch Ratings-New York-10 January 2019: As a new legislative session begins in Kentucky with pension changes likely up for debate, the commitment to address rising expenditure demands, particularly for pensions, remains a key determinant in the trajectory of the commonwealth’s ‘AA-‘/Stable Outlook Issuer Default Rating (IDR), according to Fitch Ratings.
Kentucky has made fiscal progress in recent years, including raising additional revenues to support spending growth, which included full pension actuarial contributions. However, continued budget balancing challenges despite economic recovery indicate a structural problem that extends beyond the effects of economic cyclicality on Kentucky’s financial operations. Pension benefit changes could be helpful in easing fiscal pressure over a very long timeframe, but are likely to have only a modest effect on the commonwealth’s pension burden in the near term. Fitch’s primary focus remains whether Kentucky can continue recent progress towards structural budget balance, including maintaining full pension funding.
Kentucky’s governor called the legislature into special session in December to consider legislation that would largely re-enact provisions of a pension bill recently struck down by the commonwealth’s Supreme Court. The court overturned the bill, SB 151, on procedural grounds and did not assess the legality of the benefit changes. The special session ended without a bill; however, leadership indicated plans to revisit the issue in the regular session that began this week. Even if the legislature and governor enact replacement legislation, Fitch anticipates further litigation. Given the modest savings anticipated, the proposed pension benefit changes, and any related litigation, would not affect the state’s rating.
While Kentucky’s somewhat elevated long-term liability burden, including net pension liabilities, is amongst the highest for U.S. states, Fitch considers the burden moderate and anticipates it will remain there for the foreseeable future. SB 151’s legislative sponsor estimated it would generate roughly $300 million in savings over the next 30 years, less than 1% of the commonwealth’s Fitch-adjusted net pension liability of approximately $40 billion. Assuming the legislature pursues similar provisions in a new bill, Fitch anticipates any beneficial effects to emerge slowly, as new hires with lower benefits gradually replace existing employees with higher benefits. These changes are unlikely to materially affect Fitch’s view of Kentucky’s long-term liability burden.
Fitch’s primary rating sensitivity for Kentucky is the commonwealth’s ability to maintain structural spending commitments, most notably for pensions, while continuing to reduce reliance on non-recurring budget measures. Over the past several biennia, Kentucky’s budgets moved closer to addressing inadequate pension contributions, which had been one of the primary drivers of the state’s elevated pension burden. For the biennium that began July 1, 2018, the commonwealth has budgeted full actuarial contributions for all systems, reaching an important fiscal milestone. To achieve this, the budget included significant spending cuts across most state agencies, tax changes resulting in a sizable net revenue increase, and several one-time fund transfers.
In addition to the benefit changes, SB 151 also established an ongoing statutory commitment for the commonwealth to make full pension system actuarial contributions, calculated using a more actuarially conservative level dollar amortization method. A replacement bill would likely include similar provisions.
Fitch views an ongoing statutory funding provision as a positive step, but not determinative in assessing Kentucky’s commitment to meeting pension budgetary obligations. As demonstrated most explicitly in New Jersey several years ago, future legislatures and governors generally have discretion to revise statutory multi-year budgetary commitments to pensions.
Instead, Fitch will focus on the state’s actual budgetary practices and performance over the next several years to assess Kentucky’s ability to meet rising spending demands. The 2019 – 2020 biennial budget includes approximately $500 million in one-time fund transfers that likely will be challenging to address in the next budget even if the economy continues to grow at the current pace. The challenge would be exacerbated by any downturn in the economy and revenues. Kentucky’s ability to manage rising spending demands while reducing reliance on one-time items will continue to drive Fitch’s assessment of the commonwealth’s financial resilience as the next, inevitable, recession draws closer.
Contact:
Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Karen Krop
Senior Director
+1-212-908-0661
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
The New Jersey Appellate Division reversed a decision allowing the Borough of Glassboro to condemn property just because it was part of a “Redevelopment Area” and has been since 2000. In Borough of Glassboro v. Grossman. Glassboro attempted to condemn a small parcel about a block from an ongoing retail redevelopment project. In court filings, Glassboro stated the condemnation was needed to increase the availability of public parking for the project.
The Appellate Division reversed, finding Glassboro’s justification to be unsupported by any evidence. New Jersey allows municipalities to declare areas as “in need of redevelopment” (previously called “blighted”) under various circumstances and grants the municipalities condemnation authority, but only if the condemnation is “necessary” for a redevelopment project. Because of this, the Court concluded, a municipality cannot take any property just because it is located in a “Redevelopment Area.”
Instead, going forward, when contested, municipalities and other condemning authorities will have to connect the condemnation with a specific redevelopment project and present some evidential basis – facts, data, or even an expert report – to show that the taking of the property is necessary for the project. The Court stressed that this will not be a heavy burden since the State’s redevelopment laws expressly give municipalities broad discretion.
For municipalities and private developers that work with municipalities on redevelopment projects, this decision serves as a warning for the need to develop specific facts and data regarding the need to acquire specific parcels.
by Lawrence Bluestone
January 9, 2019
Genova Burns LLC
2019 Brings Changes to Election, Revenue, Conflict of Interest, Property and Public Safety Laws… and More
The California Legislature passed a number of laws last year that will have a significant impact on how public agencies — including cities and counties, special districts, schools and school districts and more — do business. In this Legal Alert series, Best Best & Krieger LLP summarizes these new laws. Please be sure to contact us for further information. All laws went into effect Jan. 1, unless otherwise noted.
Elections
SB 759: Elections: vote by mail ballots
Previously, the law prohibited an elections official from counting mailed-in ballots if the voter’s signature did not match the signature on the voter’s affidavit of registration or the signature on the form provided as part of the voter’s registration record. This bill lifts the counting prohibition and requires the elections official to notify the voter, and give the voter the opportunity to verify his or her signature, before certification of the election. Certain state-mandated costs associated with the bill will be reimbursed to the local agency.
Revenue
AB 888: Charitable raffles
Under the California Constitution, a major league sports organization is authorized to conduct a raffle if 50 percent of the gross receipts directly support a California beneficial or charitable purpose or financially support a private nonprofit organization. The amount of the gross percentage can also be amended by statute, by a 2/3 vote of both houses. This measure extends the operation of these provisions until Jan. 1, 2024.
SB 961: Enhanced infrastructure financing districts
Enhanced infrastructure financing districts undertake economic development projects for public facilities, affordable housing and economic revitalization with funding from voter-approved bonds. Under the Neighborhood Infill Finance and Transit Improvements Act, a city or county is authorized to adopt a resolution to allocate tax revenues from that entity to the EIFD. This new law enacts the Second Neighborhood Infill Finance and Transit Improvements Act, which follows the provisions of the original Neighborhood Infill, provided that the area financed is within 1/2 mile of a major transit stop, and the issuance of bonds does not require voter approval. Under the Second Neighborhood Infill, the EIFD must follow certain notice, protest and election proceedings for the adoption of the financing plan.
SB 1145: Enhanced Infrastructure financing districts: maintenance
Previously, the legislative body of a city or county could establish an enhanced EIFD to finance capital facilities or certain community projects. It authorized the issuance of bonds to fund this work if approved by 55 percent of the voters. This measure authorizes a district to finance ongoing or capitalized costs to maintain capital facilities, but prohibits the use of bond proceeds to finance maintenance of any kind.
Conflicts of Interest
SB 1239: Political Reform Act of 1974: campaign disclosures
This new law amends the Political Reform Act of 1974 to include online and electronic filing processes for elected officials, candidates and committees who are required to file statements and reports with the Secretary of State’s Office. The law repeals former monetary restrictions and makes the online and electronic filing requirements applicable to all specified filers. The new law extends the deadline for payment of the annual fee to April 30 of each year, and requires the funding details statement to direct the reader to the Secretary of State’s website for a list of top contributors. The law requires that statements and reports be signed under penalty of perjury, and provides that any violation of the law is punishable as a misdemeanor. By expanding the scope of existing crimes, the law imposes a state-mandated local program, but also provides that the state is not required to reimburse local agencies for the mandated costs for a specified reason.
Public Property
AB 939: Local Government: taxicab transportation services
This measure makes it unlawful to operate a taxicab company without a valid permit issued by a city or county where the taxicab company is “substantially located” (as defined), and requires a city or county to adopt an ordinance or resolution providing for a permitting program for taxicab drivers of those companies. The bill removes the prohibition that a taxicab company or driver cannot operate in a county unless the company or driver are substantially located in at least one city within the county or the unincorporated area of that county. It also authorizes a permitted taxicab company to prearrange trips anywhere in that county subject to compliance with vehicle inspection requirements and a mandatory controlled substance and alcohol testing certification program for drivers.
AB 1999: Local Government: public broadband services
This measure expands the government entities expressly authorized to own broadband facilities and provide broadband Internet services. The bill allows a county service area to build, maintain or operate broadband Internet access services, and allows an infrastructure financing district or EIFD to transfer the management and operation of any broadband facility to a local agency. The bill also applies net neutrality provisions to the broadband Internet services provided by county service areas, local agencies and community service districts. Additionally, the bill removes the requirement that a community services district first determine that a private party is unwilling or unable to provide broadband services before the district may construct, own, improve, maintain or operate broadband facilities, and the bill no longer requires that the district lease or transfer title of the broadband facilities if a private party offers to provide those services.
AB 2179: Municipal corporations: public utility service: water and sewer service
This bill simplifies the voting requirements for a municipal corporation to consolidate its sewer service with neighboring sewer systems. A municipal corporation owning and operating a public utility offering sewer service outside its boundaries may lease, sell or transfer that part of its service to another public entity or utility with a majority vote of its legislative body and adequate justification. A municipal corporation that wants to sell the public utility offering sewer services within its boundaries may now do so with a majority vote of its legislative body and its electorate, instead of a super majority vote. The measure also provides that an acquiring entity must satisfy certain disclosure requirements to the public.
AB 2339: Water utility service: sale of water utility property by a city
Until Jan. 1, 2022, this measure authorizes the cities of El Monte, Montebello and Willows to sell their water utility services and consolidate with another water utility service located within the boundaries of the city, if the city determines that it is uneconomical and not in the public interest to own and operate the its water utility service, and if other requirements are met. If 50 percent of interested persons protest the sale, the measure would prohibit the city from selling the water utility service for 1 year.
AB 2392: Vehicles: towing and storage
This bill requires that storage fees for a towed vehicle be reasonable as defined. The bill also provides additional consumer protections, including the requirement that facilities are open and accessible during business hours. The measure also applies to repair garages or service stations that charge for vehicle storage.
AB 2544: Parking Penalties
Currently, processing agencies can use the Department of Motor Vehicles to collect unpaid parking citations and late fees. Beginning July 1, this measure requires processing agencies to provide a payment plan option and a waiver of late fees to indigent people before sending an itemization of unpaid parking penalties to the DMV.
AB 2876: Vehicles: removal and impound authority
This measure reinforces state and federal constitutional protections to vehicle owners by providing that a warrantless removal of a vehicle must be reasonable under Fourth Amendment jurisprudence. Moreover, the new law provides that a warrantless removal based on community caretaking is only reasonable if it is necessary to achieve the community caretaking need, such as ensuring the safe flow of traffic, or protecting the property from theft or vandalism.
SB 946: Sidewalk vendors
This measure seeks to protect sidewalk vendors from criminal penalties by requiring local authorities that elect to adopt a sidewalk vending program to comply with certain time, place and manner provisions. The measure addresses the regulation of sidewalk vendors in public rights of way, public parks, certified farmer’s markets and permitted swap meets, and imposes an administrative fine (based on an ability to pay) for any violation instead of a criminal penalty. A local authority is not required to adopt a new program if its existing program substantially complies with the provisions of this new law. (More information can be found here.)
Public Safety
AB 1747: School Safety Plans
This measure imposes a state mandated program requiring that all public schools, kindergarten to grade 12, develop a comprehensive school safety plan, in cooperation with the fire department and other first responder entities, including strategies for tactical responses to criminal incidents, and training of all school staff about the safety plan.
AB 1793: Cannabis-convictions resentencing
The Control, Regulate and Tax Adult Use of Marijuana Act, known as AUMA, enacted by voters in 2016 allows the possession, processing, purchasing and transporting of cannabis for people over 21 years of age. As such, the AUMA allows a person to petition for the recall or dismissal of a sentence, the dismissal and sealing, or the redesignation of a cannabis conviction. This new law goes one step further and requires the Department of Justice to review the state criminal history database before July 1, 2019, and notify prosecutors of all cases that are eligible for recall, dismissal, sealing or the redesignation of a conviction. The law further requires prosecutors to review all cases before July 1, 2020 to determine whether to challenge a case. Prosecutors may challenge a case if an individual is ineligible or poses an unreasonable risk to public safety, and must comply with certain notice requirements. The measure also requires the court to reduce or dismiss the conviction if there is no challenge by July 2, 2020. The law also requires the Department of Justice to modify the state criminal history database to conform to any changes in an individual’s status within 30 days.
AB 2989: Motorized scooter: use of helmet: maximum speed
Previous law prohibited motorized scooter operation on a highway with a speed limit over 25 miles per hour (unless operated in a Class II bike lane). It also required a person to drive a motorized scooter no faster than 15 miles per hour (regardless of the speed limit). The new law maintains this speed limit in general, but allows a local authority to authorize motorized scooters on highways with a speed limit up to 35 miles per hour, and higher if the scooter is operated in a Class IV bikeway. The new law requires an operator under 18 years of age to wear a helmet.
AB 3077: Vehicles: bicycle helmets
Under the Vehicle Code, a minor must wear a bicycle helmet while operating or riding a bicycle, scooter, skateboard or skates on a public street, bike path or trail. Violators and can be cited and issued a $25 fine. This measure provides a corrective mechanism for a minor who has been cited or fined for failure to wear a helmet. The new law prohibits an issuing agency from transmitting a record of the citation to the court or imposing a fee, if a parent or legal guardian of the infracting minor delivers proof to the issuing agency within 120 days that the minor has a helmet and has completed a local bicycle safety course.
SB 1205: Fire protection services: inspections: compliance reporting
The new law requires that every city, county or district fire department required to annually inspect buildings used as a public or private school and certain other structures, including hotels, motels, lodging houses and apartment houses for compliance with building code standards must now annually report on compliance with the inspections to its administrative authority. The measure also requires that the administering authority acknowledge receipt of the report by resolution or similar document. If the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs will be made.
Miscellaneous
AB 1884: Food facilities: single-use plastic straws
This measure prohibits a full-service restaurant from providing single-use plastic straws to customers unless requested by the customer. The new law provides that first and second violations of the provisions will result in a notice of violation, and subsequent violations will be considered an infraction punishable by a $25 fine for each day the restaurant is in violation, not to exceed $300 a year. The provisions will be enforced by California Retail Food Code officers. This bill imposes a state-mandated local program and reimbursement for costs will be made.
AB 2178: Limited service charitable feeding operation
A limited service charitable feeding operation provides food service to a consumer for charity administered by a nonprofit organization. The bill exempts such operations from the provisions of the California Retail Food Code except for general food and safety requirements. With some exceptions, the organization must register with a local enforcement agency. The bill authorizes the operation to distribute food in an outdoor location for 4 hours per day, using best management practices and subject to the approval of the local enforcement agency. The operation cannot provide food service unless it has registered with the local law enforcement agency. The bill authorizes the local enforcement agency to recover reasonable regulatory costs from the operation. If the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs will be made.
SB 1498: Local Government Omnibus Act of 2018
Lastly, the Legislature compiles several minor, local government-related bills into a single omnibus bill. While some of these are non-substantive technical updates, there are some changes that do impact cities and other local agencies. In general, the substantive changes in the bill remove various inefficiencies in existing statutes.
There is a trend in recent legislation to use local agencies’ websites as a means to provide more efficient and effective notice to constituents. This bill continues that trend in two ways. First, the Mello-Roos Community Facilities Act of 1982 requires cities and other local agencies to report information on their community facilities districts’ bonds and expenditures to the State, and to display the reported information prominently on their websites. This bill would allow cities to simply link to the information on the State Treasurer’s website, along with other identifying information. Similarly, when forming an EIFD, cities must mail information about the proposed district to affected landowners. This bill enables cities to mail a single-page notice that provides information regarding the website, where the full documents are available.
The Legislature has also removed a redundancy in the process for forming a property and business improvement district. Cities were previously required to adopt both a resolution of formation and resolution of establishment, containing the same information. This bill removes the need for a second resolution. For special districts, previous law required the State Controller to report annually on the fund balance, retained earnings, fixed assets and cash investments of each agency. This bill simply requires that the report be consistent with generally accepted accounting principles and Governmental Accounting Standards Board statements. Additionally, for counties with population in excess of 200,000, the purchasing agent may contract with independent contractors when the annual aggregate cost does not exceed $100,000. This bill increases the threshold to $200,000.
Next in the New Public Agency Law Legal Alert Series:
January 10, 2019
Best Best & Krieger LLP
Wells Fargo & Co. named Charles Peck as the head of public finance to replace Stratford Shields, who left the job after little over a year at the bank.
Shields brought Peck to Wells Fargo last year from Morgan Stanley to run municipal investment banking in the west and Midwest. Peck, who worked at Morgan Stanley for 12 years and was based in Denver, will move to New York and report to Marty Bingham.
“We have a diverse platform of talented bankers, and I’m pleased to be leading this team in 2019 from a position of strength,” Peck said in an emailed statement.
Shields, who was previously a managing director at RBC Capital Markets and head of public finance at Morgan Stanley, joined Wells Fargo in November 2017 as the company was dealing with fallout from the bank’s fake accounts scandal. Some municipalities and states halted work with the bank, putting pressure on the department as debt sales dropped and underwriting fees stayed stagnant.
Shields shook up the department by dismissing senior bankers in New York, Chicago and Los Angeles and bringing in colleagues from his former employer.
Wells Fargo was the sixth-biggest underwriter of long-term municipal debt in 2018, up one spot from the previous year, according to data compiled by Bloomberg. However, the bank’s share of the market for underwriting new municipal-bond deals declined by almost 1 percentage point to 4.6 percent.
Peck served as an executive director of the Pennsylvania House of Representatives Subcommittee on Select Issues and Majority Policy Committee before he joined Morgan Stanley, according to his LinkedIn page. While working in politics, Peck focused on debt and capital markets issues, land-use policy, economic development and pension reform, according to Wells Fargo spokeswoman AnnMarie Mcdonald.
He is a graduate of York College of Pennsylvania and has a Masters in Public Administration from George Washington University.
Bloomberg Markets
By Martin Z Braun
December 31, 2018, 11:01 AM MST
(Reuters) – California utility company PG&E Corp is exploring filing some or all of its business for bankruptcy protection as it faces billions of dollars in liabilities related to fatal wildfires in 2018 and 2017, people familiar with the matter said on Friday.
The company is considering the move as a contingency, in part because it could soon take a significant financial charge for the fourth quarter of 2018 related to liabilities from the blazes, the sources said.
A bankruptcy filing is not certain, the sources said. The company could receive financial help through legislation that would let it pass on to customers costs associated with fire liabilities, the sources said. But that is just a possibility, they said, so bankruptcy preparations are being made.
As of Friday, PG&E was shying away from negotiating so-called debtor-in-possession financing that companies typically line up before a bankruptcy filing to help keep operating while under court protection, one source familiar with the matter said.
A bankruptcy filing is not PG&E’s preference for addressing liabilities from the catastrophic blazes, some of the sources said. But the preparations could put pressure on California politicians hoping the company can avoid such an outcome.
Shares of PG&E, which has a market capitalisation of $12.7 billion (9.9 billion pounds), dropped 30 percent in after hours trading in New York on Friday on the news.
“PG&E’s board and management are working diligently to assess the company’s potential liabilities as a result of the wildfires and the options for addressing those liabilities. We recognize the need to balance the interests of many stakeholders while maintaining safe, reliable and affordable services for our customers, which is always our top priority,” the company said in a statement.
PG&E is also exploring selling its gas unit, potentially through a court-supervised auction during bankruptcy proceedings, one of the sources said. The sale could also take place outside a bankruptcy process, the same source said. The company is weighing using proceeds from the unit’s sale to address death and injury claims arising from the recent wildfires, this source said.
NPR first reported on the exploration of the gas unit sale earlier on Friday.
PG&E, which filed for bankruptcy once before in 2001, said in November it could face “significant liability” in excess of its insurance coverage if its equipment was found to have caused last year’s fires in northern California.
The Camp Fire broke out on the morning of Nov. 8 near the mountain community of Paradise, sweeping through the town and killing at least 86 people, in the deadliest and most destructive wildfire in state history.
PG&E also faces dozens of lawsuits from owners of homes and businesses that burned during 2017 fires.
The utility has been wrestling with how best to proceed after two years of destructive fires. California policymakers had approved a bill that let utilities pass on to customers some costs related to wildfires, according to Moody’s. But the bill did not cover 2018 fires.
Filing for bankruptcy would shield PG&E from the liabilities, giving it time to figure out how to handle the claims.
The company said on Friday that it was reviewing its “structural options” and assessing its operations, finances, management, structure and governance. It also said it is searching for new directors at its holding company and its utility subsidiary Pacific Gas and Electric Co.
PG&E added that it has formed a special board committee that includes independent experts to advise on wildfire safety best practices.
Reuters reported last year that the company was working with bankruptcy advisors.
The utility has borrowed more than $3 billion under credit lines available to it, a move companies in financial distress will often make to shore up cash.
The California Public Utilities Commission last month opened proceedings to consider penalties against the company for falsifying pipeline safety records.
PG&E also filed for bankruptcy in 2001 during California’s energy crisis. It had amassed too much debt by buying electricity, which it was then not allowed to recoup by increasing rates for its customers. It emerged from bankruptcy in 2004.
By Reuters
Jan. 5, 2019
(Reporting by Liana B. Baker, Greg Roumeliotis and Mike Spector in New York; Additional reporting by Jessica DiNapoli in New York; Editing by Daniel Wallis)
The EMPG, an emergency preparedness and disaster planning grant, seeks to address critical risk areas of natural and man-made crises.
California emergency management agencies are now eligible to apply for the state’s Emergency Management Performance Grant (EMPG), a disaster planning grant, the funds from which should be used to bolster emergency preparedness.
The EMPG program is operated from the California Governor’s Office of Emergency Services (Cal OES), and encourages a focus on critical areas determined by the National Preparedness Goals:
efficientgov.com
by Rachel Engel
November 2, 2018
The state’s Teachers Retirement System is offering the first round of pension buyout plans for Tier I pensioners as a way to lower the system’s unfunded liability, but there’s no money yet, and a public finance watchdog worries things could go south.
State lawmakers included pension buyout plans as part of this year’s budget, Lawmakers said the buyouts could save hundreds of millions of dollars over time. The plans would vary, but essentially would give the option to different classes of employees to accelerate some pension payouts in exchange for lesser overall benefits over time.
TRS Communications Director Dave Urbanek said the first round of accelerated pension benefits is being offered with a second round later this year, but those opting in after getting all their benefit changes calculated will have to wait for the check.
“Money for these checks will come from a state bond sale and the state has not yet sold the bonds,” Urbanek said. “We’re not sure with the change of administration what’s going to happen with any of this.”
The incoming administration of Gov.-elect J.B. Pritzker takes office Jan. 14.
An Illinois Auditor General financial report released Thursday showed TRS’s funded ratio was up seven-tenths of a percent to 40 percent funded, but that was with a soaring stock market six months ago.
Truth In Accounting Research Director Bill Bergman said if a stock market decline continues, it’s problematic.
“It cements a citizen’s concern that these plans are still a threat to the taxpayer,” Bergman said.
The TRS report was for the fiscal year that ended June 30, 2018. The Dow Jones Industrial Average was on an upward swing at 24,200. Near the close of business Thursday, the Dow was at 22,700 and seeming to trend downward over the past month.
Urbanek said TRS covers itself in all areas “so when bonds go up and stocks go down, we’re also covered.”
Bergman said taxpayers should go to StateDataLab.org to get the full taxpayer cost of public retirement.
Including retiree health care, Illinois’ unfunded liability for all retirement benefits is estimated at more than $200 billion. Truth In Accounting puts each taxpayer in Illinois on the hook for $50,800 to pay off that debt.
The Auditor General released financial audits for the State Universities Retirement System Thursday as well. SURS’ funded ratio ticked down about eight-tenths of a percent to 41.2 percent funded.
With actuary associations saying 100 percent funded is the goal, financial analyst website Wirepoints President Ted Dabrowski said Illinois’ pension ratios are abysmal.
“I think it’s really immoral that politicians force workers to be in one type of plan, a plan that’s managed by the politicians, they’ve done a horrendous job of it,” Dabrowski said.
Urbanek said state law requires teachers, or their school district employers, to put in 9 percent to the pension funds. He said over the decades, state lawmakers have diverted the taxpayer portion from the pension systems to other budget items they see as higher priorities.
“It’s immoral and what the self-managed plan in the state university system allows employees to do is to have control over their own retirements,” Dabrowski said.
Dabrowski said the 20,000 public university employees who opted for the self-managed plans since 1998 don’t have to worry about collapsing pension plans.
By Greg Bishop | Illinois News Network Jan 3, 2019
City attorneys and Gulch critics sparred in court Friday over a portion of the public financing package for the huge downtown project.
The two sides appeared in Fulton County Superior Court before Judge Robert McBurney during one of several bond validation hearings required by state law before a government body can issue bonds.
While such legal proceedings are typically a routine matter, in the high-profile Gulch case, opponents have seized on the courtroom as another place to halt tax incentives for the project.
The Atlanta City Council in November approved an up to $1.9 billion public financing package to aid in development of the Gulch. The financing comes from two pots of public money – a portion of future sales taxes and property taxes created within the development.
The sales tax revenue will be used to support up to $1.25 billion in bonds for future infrastructure needed at the 40-acre site, where developer CIM Group plans office towers, apartments, hotels and retail. It was about this funding stream that the two sides argued on Friday and during another court hearing earlier this week.
The Gulch area has been deemed as an Enterprise Zone, allowing the developer to fund infrastructure improvements via bonds that are repaid by five cents of the local 8.9-cent sales taxes created within the development zone.
Under the plan, the city, through its Downtown Development Authority, would issue up to $1.25 billion bonds to be repaid by the future sales taxes.
Opponents on Friday pushed back on projections about the amount of tax revenue the project would generate and if that revenue is enough to support the bonds.
“It’s highly speculative and no evidence has been brought to bear… to support any of these numbers,” testified Julian Bene, a vocal Gulch critic.
The consulting firm Municap drafted a report that projected the future Gulch development could create more than $600 million in future sales tax revenue to fund bonds. The projection was characterized as conservative by a Municap executive earlier in the week.
On Friday, Ralph Dickerson, a city finance executive, was asked by an attorney for developer what happens if projections don’t come true.
“That risk falls squarely upon the developer,” Dickerson said.
CIM Group would be the purchaser of the bonds, at least initially, meaning the company would be on the hook if the future sales taxes aren’t sufficient to pay off the bonds, the city has said.
But the city must prove to the judge the bonds are sound, reasonable and feasible.
While the $600 million-plus estimate is well short of what’s needed to finance $1.25 billion in bonds, a city official testified earlier that the city doesn’t plan to issue that much in bonds, at least not initially, and only wants the flexibility to issue a higher amount if the development can support it.
The city would only issue bonds according to a set schedule that requires CIM to meet certain verified development thresholds before new bonds are issued. And new sales taxes would have to provide 110 percent coverage on the annual principal and interest charges before they can be issued, Dickerson said.
The court hearing lasted into Friday evening. A hearing regarding the property tax portion of the public financing project is scheduled for January.
The Atlanta Journal-Constitution
By Vanessa McCray & J. Scott Trubey
Dec 21, 2018
A new report on Illinois underfunded pension systems says the state needs to put more money into the benefits programs before they become unsustainable and consume an even larger share of the state’s tax revenue.
The state will be required to contribute $9.39 billion to six pension funds in fiscal 2020, about $845 million more than the previous year, according to the report.
In addition to being underfunded, the state’s pension systems are susceptible to a volatile stock market, the report found. Two public finance watchdogs said the report underscores the need for changes moving forward, including some changes that won’t be popular.
“It’s definitely wonky and often times very difficult for ordinary citizens to understand, but we’re talking about hundreds of billions of dollars and how do we actually calculate that and what do we assume when we are coming up with the expectations which have massive implications for Illinois taxpayers in general,” Truth In Accounting Research Director Bill Bergman said.
The Illinois Auditor General released its annual State Actuary’s Report on Thursday. The report has been required since 2012. The state contracted with Cheiron, an actuarial consulting firm, to serve as the State Actuary to review assumptions, issue reports to pension boards and identify recommended changes.
“The funded ratio of the retirement systems ranged from 47.9 percent to 15.3 percent, based on the actuarial value of assets as a ratio to the actuarial liability,” the report said. “If there is a significant market downturn, the unfunded actuarial liability and the required State contribution rate could both increase significantly, putting the sustainability of the systems further into question.”
Cheiron also “noted that the systems are, or will be, experiencing negative cash flows which may impact the interest rate returns that are realized.”
The state’s Teachers, State Universities and General Assembly retirement systems are already seeing negative cash flows while the State Employee and Judges retirement systems are projected to have negative cash flows in the near future, the report said.
“Contributions should ramp up as quickly as possible to a level that is expected to prevent the unfunded actuarial accrued liability from growing,” the report said. “Continuing the practice of underfunding the systems increases the risk of needing even larger contributions in the future that may make the systems unsustainable.”
The report should serve as a warning call as it seeks more state money sooner for the growing pension liability, said Ted Dabrowski, president of the financial analysis website Wirepoints.
“If billions more a year have to go into pensions, you’re talking about huge cuts to everything else, whether it’s education or health care or roads,” Dabrowski said. “It creates a real spiral, a death spiral problem because people are already tired of paying taxes. They’d have to pay a ton more.”
Dabrowski said he expects to see the state’s tax base erode if policymakers only look at increasing taxes. He said the state’s continued out-migration with most recent numbers showing people leaving the state at a faster pace over the past five years. The most recent U.S. Census Data showed Illinois lost 45,000 people from 2017 to 2018.
The report deemed the actuary’s estimated rate of return on investments “reasonable,” but Bergman questioned that conclusion, noting that those assumptions often lead to the state shorting the pension funds and increasing the pension debt.
Bergman said by budgeting pension funding with an assumed rate of return, not a risk-free discount rate, taxpayers are increasingly on the hook to fill the gap if investment returns don’t meet the estimates.
The math around the assumed rate of return is not just an issue for the state pensions, Bergman said it also affects local police and fire funds as well.
The report said that on the state’s targeted funding goal of 90 percent by 2045 was inadequate.
“This contribution level does not conform to generally accepted actuarial principles and practices,” the report said. “Generally accepted actuarial funding methods target the accumulation of assets equal to 100 percent of the actuarial accrued liability, not 90 percent.”
Dabrowski said it was refreshing to see that recognition. He also said it’s further evidence that a proposal from the Center for Tax and Budget Accountability is the wrong plan.
The Center for Tax and Budget Accountability proposed in May moving the goal posts for funding the state’s pensions “from a target of a 90 percent funded ratio in [fiscal year] 2045 to a target of between 70 and 80 percent.”
“Those proposals by the [Center for Tax and Budget Accountability] should be dismissed, disregarded and thrown away because I think Chiron was spot on that 100 percent funding is where we need to be headed if we really want these pension funds to be healthy,” Dabrowski said.
Earlier this month, credit rating agency Fitch also flagged the Center for Tax and Budget Accountability’s plan as a potential concern.
Gov.-elect J.B. Pritzker has advocated for state resources put in up front, somewhat mirroring the center’s plan. Pritzker picked a member of the center to serve on his budget transition team.
Dabrowski said the solution is to change the state constitution to reduce the debt owed to state workers.
“The debt is so large that there’s no way to just raise taxes or borrow some money,” he said. “Those days are over. It’s so badly funded and the promises are so large.”
He said unions should come to the table to reduce the debt or pensions could become insolvent.
Pritzker, along with other Democrats and union groups, have been opposed to the idea of changing the pension protection clause in the state’s constitution. They have mostly advocated for changing the state constitution’s flat tax provision to a progressive tax to increase how much the state collects from income taxes.
The Commission on Government Forecasting and Accountability earlier this month pegged the state’s five pension funds with a combined $134 billion of unfunded liabilities and an average funded ratio of 40.2 percent. That doesn’t include other post-employment benefits, or OPEBs.
Pew Charitable Trusts put out a report this month based off 2016 data that put the total liability of OPEB in Illinois at $53.4 billion with a -0.2 percent funded ratio, the worst in the country. Truth In Accounting pegs the unfunded retiree health care costs at $52.5 billion based on 2017 data. Wirepoints pegs the cost OPEBs at $72.6 billion. That’s on top of the $134 billion in pension debt.
Major credit-rating agencies say the state’s unfunded liabilities is one of the biggest reasons the state has the worst credit rating in the nation, a notch above junk status with a negative outlook.
By Greg Bishop | Illinois News Network
Fitch Ratings downgrades city to AA+ rating, city has $580.5M left to issue
SAN ANTONIO – In the middle of its largest-ever municipal bond program, the City of San Antonio is still calculating how much a downgraded rating will cost it.
After nine years of perfect AAA bond ratings from Fitch Ratings, one of the three major credit rating agencies, the City of San Antonio was downgraded to a AA+ rating. The change would affect the interest rates the city is able to get when borrowing money, including for the lion’s share of its current $850 million bond program.
The other two agencies, Moody’s and Standard & Poor’s Global Ratings, reaffirmed their AAA ratings for the city.
“The city has remaining $580.5 million in bonds left to issue for the 2017 bond program,” Chief Financial Officer Ben Gorzell said in in emailed statement. “We will be evaluating and assessing the potential cost impact of this split bond rating on our future bond issues to include what is remaining to be issued for the 2017 bond program.”
The city blamed the rating change on the passage of propositions B and C during the November election. The two changes to the city charter limit the city manager’s term and compensation and allow the fire union to call for binding arbitration while negotiating with the city, respectively.
Fitch cited Proposition C in November in its decision to lower the city’s bond rating, saying it would affect the city’s “expenditure flexibility.” And the amendment’s effects on the bond ratings may not be over.
“It will depend on exactly what happens when they start using this arbitration power,” said Professor David MacPherson, chairman of Trinity University’s Department of Economics.
MacPherson believes Proposition B, which concerns the city manager position, could also play a role. Should the pay limits result in lower-quality candidates, the city may not be as well-managed, he said, which could also affect its ratings.
The city is planning on selling $24.5 million worth of General Improvement Refunding Bonds next month to refund an existing loan.
Gorzell said that, in respect to those bonds, “we expect the impact to be minimal, if any, which is primarily due to the small size of the bond issue, its term of 7 years and current financial market conditions.”
Even with a split rating, MacPherson said, the downgrade is certain to result in higher interest rates, which will affect normal San Antonians in one of two ways.
“When the city starts paying those higher interest rate payments, they’re going to feel it through higher taxes or reduced services — one or the other,” MacPherson said. “Some way, that money is going to have to be made up somehow.”
Others are anticipating blowback, too. Jenna Saucedo-Herrera, CEO of the San Antonio Economic Development Foundation, said the new rating will affect the group’s ability to lure businesses to the Alamo City.
“Because we have been for nine years the largest city that’s maintained that AAA bond rating, that’s been a significant selling point for us that we’ll now have to adjust,” she said.
ksat.com
By Garrett Brnger
December 21, 2018
MMA’s research and analysis will be available in client portals, offering detailed weekly overview of market conditions.
BOSTON, Dec. 20, 2018 /PRNewswire/ — BondLink, the sole provider of investor relations (IR) software solutions in the $4 trillion municipal bond market, today announced a partnership with Concord, Mass.-based Municipal Market Analytics (MMA) to deliver exclusive bond market research and insights to BondLink issuer clients.
The new MMA Market Conditions Index (MCI) gives issuers a concise read of current conditions in the municipal bond market, providing them valuable perspective during the period they are accessing capital by issuing bonds. The elements comprising the MCI are MMA-curated market factors that have historically influenced bond yield movement and investors’ perception of value.
“BondLink was founded to help public sector CFO’s and finance directors improve how they issue bonds,” said Colin MacNaught, BondLink co-founder and CEO. “We empower them with technology and tools they’ve never had access to before. Through our new partnership with MMA, they can access valuable insight into key market indicators. I know first-hand the quality of MMA’s research, and we are excited to partner with them on this premier resource for the betterment of our issuer clients and the market.”
MMA is a leading strategic research firm providing expert municipal sector analysis and commentary. Led by industry veteran and thought leader Tom Doe, MMA is a trusted voice across the municipal market. This partnership will further amplify MMA’s voice through BondLink’s fast-growing platform.
“MMA knows partnering with BondLink and its clients advances the goal of improving dialogue among market participants when utilizing the capital markets,” said Tom Doe, Founder and President of MMA. “Our independent, concise, consistent and key insightful data delivers a strong foundation for enabling these better dialogues.”
Because most issuers in the municipal bond market issue bonds infrequently and most finance officers have other responsibilities like budgeting and tax collections, it can be difficult to shift gears as a bond sale approaches to gauge bond market conditions. The Market Conditions Index is intended to make that process much more efficient for finance officers and be another helpful information resource in their dialogue with advisors, bankers and underwriters.
The MCI will be provided on a weekly basis exclusively to issuers who subscribe to BondLink. The proprietary index will include insights on market conditions such as bond prices, new-issue supply, secondary market trading, and investor fund flows, to name a few.
Today’s announcement is the latest of recent enhancements to BondLink’s IR platform. The Boston-based company last month announced new capabilities to help issuers communicate with investors via digital roadshows; a compliance tool that includes a drag-and-drop upload to the Municipal Securities Rulemaking Board’s EMMA® website; and debt management tools including a dynamic investor database.
About BondLink
Led by founders Colin MacNaught, CEO, and Carl Query, CTO, BondLink’s cloud-based IR platform provides efficiencies to issuers and investors in the $4 trillion municipal bond market. Since the launch of its first investor platform two years ago, BondLink has expanded its network across more than 25 different states, in addition to the District of Columbia and the U.S. Virgin Islands. Key clients include the State of California, the City of Chicago, and the University of Texas System. Headquartered in Boston, BondLink is backed by top investors, including Franklin Templeton Investments, one of the largest municipal bond fund managers in the country.
About MMA
Municipal Market Analytics is an independent research firm based in Concord, Mass., founded in 1995. MMA’s core business is to provide strategic market and credit analysis and commentary on current, historical and quantitative conditions of the US municipal sector. In 2012, MMA introduced the Portfolio Credit Benchmark, an enterprise risk solution for bank portfolios to meet their regulatory needs pertaining to the credit review of municipal bonds. Also in 2012, MMA established its professional consulting division that provides independent analysis on important municipal issues. The division’s projects have involved municipal risk and liquidity management, credit risk assessments and default/loss modeling.
Press Contact:
David Lewis, Director of Marketing
617-597-4900 x1019
[email protected]
www.bondlink.com
SOURCE BondLink, Inc.
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Fiona Ma officially assumes her post of California’s treasurer in January, but she has already made it clear that she won’t act as a rubber stamp for an office that sold more than $10 billion of bonds this year.
After Ma, a Democrat elected in November, learned that the office was planning to sell veterans’ housing bonds next month, she demanded information on the program to be funded before allowing it to proceed, according to Ma and Tim Schaefer, deputy treasurer. The sale will now occur in February, Schaefer said.
“I believe in checks and balances, accountability and also being proactive,” Ma said in an interview at Bloomberg’s San Francisco office. She has already reorganized the lines of command under her to improve coordination.
Ma, a certified public accountant, has racked up an array of government experiences: most recently, she was on the state’s tax-oversight agency known as the board of equalization. She has also served in the state Assembly and on the board of supervisors in San Francisco, her hometown. “I have a unique understanding of how government works,” she said.
Here are a few areas that Ma is tackling:
Rating Analyst Outreach
No More Bankruptcies
Marijuana Banks
Housing Crisis Relief
Bloomberg Markets
By Romy Varghese
December 27, 2018, 8:46 AM MST
MUNIS IN FOCUS: Joe Mysak, Editor for Bloomberg Brief: Municipal Market, discusses whether the fund exodus is over, and universities selling century-bonds. Hosted by Pimm Foxx and Lisa Ambramowicz.
Running time 05:07
Bloomberg Markets
December 21, 2018 — 9:34 AM MST
The sum earned by investment managers from one pension fund exceeded employee contributions for the same period
Pennsylvania officials noted payments of hundreds of millions of dollars to investment managers for the state’s pension funds in a report released Thursday that features recommendations for improving the health of the underfunded retirement accounts.
The Public Pension Management and Asset Investment Review Commission, which was tasked with the project under a state pension reform law passed last year, says its 393-page report includes recommendations that could result in estimated savings over three decades ranging from $8.2 billion to $9.9 billion.
In it, the panel notes investment managers for the Pennsylvania Public School Employees’ Retirement System earned upwards of $1.03 billion, including estimated “carried interest,” in the 2016-2017 fiscal year. The fund’s portfolio was about $52 billion during that timeframe.
Route Fifty
by Bill Lucia
DECEMBER 20, 2018
State auditors have found the Iowa Finance Authority misspent $549,399 in the roughly two years before former Executive Director Dave Jamison was fired over sexual harassment allegations.
The report released Friday was one of several investigations launched weeks after Gov. Kim Reynolds fired Jamison, a personal friend of hers, on March 24.
The review found Jamison made several decisions “which were not in the taxpayers’ best interest.”
These include choosing to relocate IFA offices to a building that would be more costly than renovating the current office, delegating spending authority to some staff, and leasing vehicles that cost at least $40,000 more than borrowing state-owned cars.
The auditors also found improper and unsupported credit card purchases of things like meals with no work-related purpose, excessive travel costs, and reimbursement for staying at hotels in Des Moines. The report says Jamison and a few other employees did these things.
The biggest portion of questionable spending went to large pay increases Jamison granted to high-ranking IFA employees. The state report says his actions caused “payroll costs which were not reasonable or necessary for IFA operations.”
Auditors found the IFA Board of Directors did not properly carry out its oversight responsibilities and seems to have asked few questions of Jamison and staff, at least in public. The report said board members met in closed committee meetings to avoid having discussions in a public setting.
Overall, the report says, “The culture at IFA illustrates a lack of concern for the use of taxpayer funds.”
Although IFA doesn’t get state appropriations, the auditor’s office says it is still supported by taxpayer dollars and therefore should follow the same rules as other state agencies. IFA has chosen to use certain policies set by the Department of Administrative Services, and the auditor’s office made recommendations to help IFA comply with those policies.
The auditor’s office is also recommending that the legislature mandate an annual audit of IFA like it does for other state agencies.
In addition, Jamison told auditors he was unaware of the state’s rule prohibiting the purchase and consumption of alcohol during work hours. He was found to have purchased drinks while traveling for work, but the audit did not find that he used IFA funds for alcohol.
An IFA representative did not immediately respond Friday to a request for comment.
Two earlier reviews by accounting firm Eide Bailly LLP found no significant financial mismanagement.
The Weinhardt Law Firm also investigated Jamison and IFA, and released a report in September that concluded Jamison committed “egregious” acts of sexual harassment against two employees.
Republican State Auditor Mary Mosiman told lawyers during that investigation that she recused herself from her office’s review of IFA because her family is close friends with Jamison and his family. This is likely one of the last reports her office will issue, because Democrat Rob Sand will be sworn in as State Auditor Jan. 2.
IOWA PUBLIC RADIO
By KATARINA SOSTARIC
CHICAGO — Mayor Rahm Emanuel laid out a multi-pronged plan on Wednesday to tackle Chicago’s huge pension burden, urging the city council to approve the issuance of $10 billion of bonds to boost funding for the city’s four retirement systems.
Emanuel, who leaves office in May after declining to run for a third term as mayor, also called for changing the Illinois Constitution and earmarking new revenue from a possible casino and legalized marijuana for pensions.
“Issuing these bonds and depositing the proceeds directly into our pension funds would immediately increase the health of our pension funds to levels not seen in at least a decade before asking more of Chicago’s hard-pressed taxpayers,” the mayor said in a speech to the city council.
Chicago’s big unfunded pension liability, which stood at $27.6 billion in 2017, along with years of structural budget deficits, led to downgrades of the city’s general obligation credit ratings and higher borrowing costs.
Even after raising fees and taxes in recent years to save the retirement funds from becoming insolvent, the third-largest U.S. city faces pension contributions that will grow to $2.13 billion in 2023 from $1.02 billion this year.
With the bond proceeds, the retirement systems’ low funded ratio of just 26 percent would jump to 50 percent, while city contributions to the funds would decline, saving taxpayers nearly $7 billion over 50 years, Emanuel said.
Emanuel introduced an ordinance to securitize state-collected revenue due the city, including income taxes, to back $7.7 billion of the debt, which would be issued through a new Dedicated Tax Securitization Corporation.
Chicago has already employed a similar bond structure to refund low-rated outstanding debt through a securitization of sales tax revenue with a statutory lien for investors that resulted in higher credit ratings and lower borrowing costs.
The remaining $2.3 billion of bonds would be backed by a water and sewer excise tax enacted in 2016 for the city’s municipal retirement fund.
An economic adviser to Emanuel first introduced the idea of the bond plan at a city investors’ conference in August. However, the plan was put on hold earlier this fall in the wake of Emanuel’s September decision not to run again and surging interest rates.
S&P Global Ratings in October cautioned the city that the move comes with risk and could have negative rating implications depending on how the bonds are structured and other factors.
Emanuel said even higher taxes would pose a risk to Chicago’s economy, while inaction on pensions risks more credit downgrades. He urged the 50-member council to act on the bonds, warning that interest rates are heading up and the market window for doing the deal will close.
It was unclear if aldermen would move forward with the bond plan before a new mayor takes office. Scott Waguespack, chairman of the city council’s progressive reform caucus, said the plan should be “vetted when the next mayor comes into office.”
One of the 21 candidates vying for mayor, Paul Vallas, a former Chicago budget director, said on Wednesday the bond plan “is just kicking the can down the road.”
There was immediate pushback from labor unions against Emanuel’s proposal to amend protections for public worker retirement benefits in the Illinois Constitution to lower a costly 3 percent annual compounded cost of living adjustment given to city retirees.
Leaders of the Chicago Federation of Labor and the Illinois AFL-CIO issued a joint statement that said: “Those pushing to repeal the Illinois Constitution’s pension clause ignore the real problem, which is not the cost of benefits but the decades-long habitual failure of politicians to pay the employer’s share.”
Citing the clause, the Illinois Supreme Court rejected past attempts by the state and the city to reduce retirement benefits.
The Democratic-controlled Illinois General Assembly would have to approve the placement of an amendment on an upcoming state-wide ballot, as well as pass bills authorizing a Chicago casino and legalizing marijuana to complete Emanuel’s proposal.
By Reuters
Dec. 12, 2018
(Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis)
Selling debt is a short-term fix that could exacerbate a challenging long-term problem.
Mayor Rahm Emanuel of Chicago, a former investment banker, should understand why issuing debt to fund pensions is a risky idea.
Emanuel, who is leaving office in May, told city council members on Wednesday that he would set in motion a plan for Chicago to sell what he branded as “fund stabilization bonds.” Officials have floated the prospect of an offering as large as $10 billion, which would be the largest-ever for a locality. Even that wouldn’t even completely solve the problem: Chicago’s four pension systems are underfunded by a combined $28 billion. Even with the sale, the funding status of the systems would rise to just 50 percent, still well below what any observer would consider healthy.
The city would essentially be gambling that its retirement plans could earn a long-term return greater than the interest rate it pays on the taxable securities. Say that’s 5 percent. Sure, the plans’ projected rate of return is about 7.5 percent, but does anyone really think that’s a surefire target in the years to come? Among those who are skeptical about future returns is Ray Dalio, founder of Bridgewater Associates, which has made the most money for investors in the history of the hedge fund industry.
Bloomberg Opinion
By Brian Chappatta
December 12, 2018, 1:48 PM MST
Arguing that the window of opportunity may soon close, Mayor Rahm Emanuel urged the City Council on Wednesday to sign off on a $10 billion pension borrowing to save beleaguered Chicago taxpayers “as much as $200 million” in his successor’s first budget.
Standard & Poor’s has warned that pension obligation bonds “in environments of fiscal distress or as a mechanism for short-term budget relief” could threaten Chicago’s BBB+ bond rating.
Mayoral candidate Paul Vallas has portrayed the pension borrowing as a financial “straight-jacket” that will tie the next mayor’s hands.
Municipal finance experts have also raised concerns, pointing to pension-bond defaults in Detroit, California and Puerto Rico.
They wonder what would happen if the market tanks and what specific city revenue would be used to back the bonds, now that Emanuel has isolated sales tax revenue in a special fund and used that “securitization” structure to refinance $3 billion in city debt.
But Emanuel argued Wednesday that not issuing pension obligation bonds was equally risky and, in fact, a missed opportunity to minimize the pain from another punishing round of post-election tax increases.
He’s so convinced of that argument, the mayor introduced an ordinance at Wednesday’s Council meeting setting up the structure for issuing up to $10 billion in pension obligation bonds in the event that aldermen decide to follow his lead.
“We can refinance a portion of that debt at lower rates, locking in savings of as much as 2.5 percent over 40 years. Now, that works out to between $6 billion and $7 billion in savings for Chicago taxpayers,” Emanuel said.
“It is not more debt. It is the same amount of debt, but at a much lower and cheaper cost to taxpayers and the city . . . We would decrease the amount of projected new revenue that will be required over the next 50 years just to fund pensions by almost $7 billion. We would save Chicago taxpayers as much as $200 million in the city’s next budget, without creating any more total debt than we have today.”
Although robust debate should follow introduction of the mayor’s ordinance setting up a borrowing structure for pension stabilization bonds, Emanuel argued that there is “not an endless amount of time.”
Interest rates are going up. The fed chairman “has indicated they will hold steady, but we do not know for how long,” Emanuel said.
“There is a window in the market today for this to work. At some point, that window will close,” the mayor said.
“I know this plan has risk. The truth is, there is risk in every choice and there is a risk if you do nothing. The question is, which calculated risk is worth taking for the benefit gained?”
Although the state issued pension bonds in 2003, billions of dollars of the proceeds were used to “plug operating holes” in the state budget, the mayor said. He called it a classic “bait-and-switch.”
His plan is different. It has safeguards.
“Under this structure, all proceeds must go directly, immediately into a lockbox for the city’s pension funds to be invested. Nowhere else,” the mayor said.
“Unlike the state’s pension bonds, this is part of a broader plan with specific dedicated revenue sources backing up the bonds. The state bonds were not backed up by any specific revenue for the pensions. [And] it is based on realistic projections. Through ups and downs in the market, there has never been a 30-year period when pensions have not earned at least an 8 percent return on their investments.”
Chicago taxpayers have already endured a $2 billion avalanche of tax increases just to begin to solve the city’s daunting pension crisis. But the boom will be lowered again shortly after the new mayor and City Council are sworn in.
After a five-year ramp to actuarial funding ends, Chicago taxpayers will be on the hook to keep city employee pension funds on the road to 90 percent funding.
By 2023, the city’s contribution to all four funds will nearly double, from $1.2 billion this year to $2.1 billion, according to the city’s annual financial analysis.
The obligation will smack the next mayor and City Council in the face. In 2020, the city will need another $276 million in new revenue to pay for higher police and fire contributions.
In 2022, new revenue for the Municipal and Laborers pension funds is projected to increase by $310 million.
Arguing that the “mantle of progressivity must not just be more taxes on the wealthy,” Emanuel talked about a few alternative revenue sources already popular with the crowded field of mayoral candidates vying to replace him.
If the Illinois General Assembly legalizes recreational marijuana and ends Chicago’s elusive quest for a land-based casino, any revenue derived from both should be devoted exclusively to pensions, the mayor said.
But he also acknowledged that he is not 100 percent sold on recreational pot , which Gov.-elect J.B. Pritzker has vowed to lead the charge to legalize.
“I believe recreational marijuana has social costs that must be considered. And like a casino, revenue would take time to be realized,” the mayor said.
“But if the state goes down that path, those resources can and should be used to further solidify our pensions without asking more of Chicago taxpayers. If we take all of these steps — from a consideration model to amending the constitution to issuing bonds to a casino to recreational marijuana, we will dramatically reduce what is asked of our taxpayers.”
When Emanuel ended what will likely be his last major policy speech to the City Council, aldermen responded with mild applause. It was hardly a rousing endorsement.
The Chicago Sun-Times
By Fran Spielman
12/12/2018
Mayor Rahm Emanuel on Wednesday will put his waning — but still formidable — political muscle behind a constitutional amendment to ease a $1 billion spike in pension payments that will confront his successor.
Sources said Emanuel will also urge the City Council to start debate on his stalled plan to borrow $10 billion to fund pensions — by setting up the legal structure that will allow bonds to be sold if aldermen decide the move could minimize the need for another punishing round of post-election tax increases.
Mayoral candidate Paul Vallas has portrayed the pension borrowing as a financial “straight jacket” that will expose taxpayers to even greater risk.
Standard & Poor’s has warned that pension obligation bonds “in environments of fiscal distress or as a mechanism for short-term budget relief” could threaten Chicago’s BBB+ bond rating.
“There’s a lot of volatility and uncertainty on investment returns. … If you borrow at 5 percent and only earn 3, you’ve made the problem bigger,” a municipal finance expert, who asked to remain anonymous, said Tuesday.
“The massive number would also impact the city’s ability to borrow for routine infrastructure needs,” the expert said.
The Illinois Constitution’s pension protection clause states those benefits “shall not be diminished or impaired.” It’s why the Illinois Supreme Court overturned Emanuel’s plan to save two of four city employee pension funds.
Mayoral candidate Bill Daley has already argued that it’s high time to amend the state constitution.
On Wednesday, Emanuel will join him.
“What kind of progressive, sustainable system guarantees retirees 3 percent annual compounded pay increases when inflation has been at basically zero and current employees have, at times, been furloughed, laid off or received 1 percent raises?” Emanuel was prepared to ask, according to excerpts of his speech released by the mayor’s office.
“A 3 percent compounded COLA in an era of low inflation is not progressive and not sustainable. It made sense in 1970 when we had more workers than retirees and high inflation. But it does not make sense today.”
Arguing that the “mantle of progressivity must not just be more taxes on the wealthy,” sources said Emanuel will suggest a few alternative revenue sources already popular with the crowded field of candidates vying to replace him.
If the Illinois General Assembly legalizes recreational marijuana and ends Chicago’s elusive quest for a land-based casino, any revenue derived from both should be devoted exclusively to pensions, the mayor will say. Emanuel has supported a Chicago casino since 2011.
But, he will not “push” the General Assembly to legalize recreational pot, well aware that Gov.-elect J.B. Pritzker has vowed to lead the charge. The mayor will also argue that recreational pot and a Chicago casino are “not solutions in and unto themselves,” sources said.
“Amending the state constitution to allow for both a progressive income tax and new agreements with labor is an important step towards fiscal stability and progressivity,” the mayor was prepared to say.
“Coming at this challenge from both sides — reform and revenue — is the clearest path out of this challenge … and the fairest. I said that when we started our discussions with labor almost eight years ago. I believed it then. And I believe it today.“
Chicago taxpayers have already endured a $2 billion avalanche of tax increases just to begin to solve the city’s daunting pension crisis. But the boom will be lowered again after the election.
That’s because, when a five-year ramp to actuarial funding ends, Chicago taxpayers will be on the hook to keep city employee pension funds on the road to 90 percent funding.
By 2023, the city’s contribution to all four funds will nearly double, from $1.2 billion this year to $2.1 billion, according to the city’s annual financial analysis.
“In 2020, just around the corner, the city will need another $276 million in new revenue to pay for higher police and fire contributions. In 2022, new revenue for the Municipal and Laborers pension funds is projected to increase by $310 million. These contributions must be made,” Emanuel is prepared to say.
“Whatever the results of the coming election, we cannot afford to return to the politics of the past … where promises are made without the means to fulfill them. We cannot allow the boulder we pushed up the hill to roll back down.”
Ald. Pat O’Connor (40th), the mayor’s City Council floor leader, said it makes sense for Emanuel to frame the pension debate with a call for a constitutional amendment.
“That was an idea that both the city and many of our partners in labor had embraced during the course of the negotiations previously,” O’Connor said Tuesday.
“Many unions saw that as a necessary evil to preserve the pension structure. … It was acceptable then, and, if there’s a chance that those pensions could go away if these things aren’t corrected, it would probably be a route forward-thinking people would accept.”
To get on the ballot, a constitutional amendment needs a three-fifths vote from the Illinois General Assembly. A constitutional convention “shall be called if approved by three-fifths of those voting on the question or a majority of those voting in the election,” the constitution states.
Civic Federation President Laurence Msall said he can only hope the mayor’s plan is “comprehensive and sustainable” and “does not simply push payments into the future.”
“The city should identify specific revenues and avoid gimmicks or on-paper savings,” Msall wrote in an email to the Sun-Times.
“It needs to be a plan that city officials revisit on a regular basis. It should not be a `one-and-done’ plan. The city should also publicly release an actuarial analysis of any plan, with stress testing. The Civic Federation remains concerned that pension obligation bonds could be a part of the forthcoming plan.”
The Chicago Sun-Times
By Fran Spielman
12/11/2018
Today, Rep. Dutch Ruppersberger (D-MD) announced Congressman Steve Stivers (R-OH) will co-chair the Municipal Finance Caucus. Rep. Ruppersberger is an original founder of the caucus, along with outgoing co-chair Rep. Randy Hultgren (R-IL). You can view the statement released by Rep. Ruppersberger here. The MBFA Coalition looks forward to working with Rep. Stivers and his staff in the ongoing effort to preserve that tax-exempt status of municipal bonds.
Members of the MBFA Coalition released a statement on Rep. Stivers joining the caucus that can be read here.
Municipal Bond for America
December 10, 2018
New Jersey municipalities and counties find themselves in an uncertain position. They could face a large hike in pension costs should the state not follow the current schedule of increasing pension contributions.
Dec. 12, 2018
HOUSTON (CN) – The Houston Police Department won’t have the manpower to investigate home burglaries and car wrecks if the cash-strapped city is forced to lay off hundreds of officers to help finance a voter-approved pay raise for firefighters, the police chief testified Friday.
Harris County Judge Randy Wilson on Friday declined Houston firefighters’ request to lift a temporary restraining order against a recently enacted charter amendment that mandates pay raises for firefighters so they make as much as police of similar rank.
In the weeks before 59 percent of voters approved Proposition B on Nov. 6, Houston Mayor Sylvester Turner warned it would force hundreds of layoffs of municipal employees, firefighters and police.
The city’s first responders are now battling over Proposition B in court.
The Houston Police Officers Union won a temporary restraining order against the amendment Nov. 30 after suing the city and the Houston Professional Firefighters Union.
Houston has sided with the police. City finance managers estimate Proposition B will cost the city $100 million per year and Mayor Turner says Houston simply cannot afford it.
Each fiscal year, Houston must cut expenses to close a $120 to $130 million budget gap thanks to a law voters approved in 2004 that caps the city’s property tax revenue at $1.1 billion annually, its finance director Tantri Erlinawati-Emo testified during a three-hour hearing Friday.
Houston Police Chief Art Acevedo said on the witness stand the police department is already stretched thin with around 5,100 officers for a city of 627-square miles, due to budget constraints imposed by the revenue cap.
“There are 300 fewer Houston police than 20 years ago and 500,000 more residents,” he said. Houston is the nation’s fourth-largest city by population with 2.3 million people.
Chicago, the third-most populous U.S. city, covers 234-square miles and has more than 12,200 police officers.
Clean-cut on the stand in his crisp black service uniform, Acevedo said that city staff asked the police department to prepare a plan for Proposition B and it determined, because personnel costs account for 94 to 95 percent of its budget, it will have to lay off 600-800 police and police cadets and shut down its police academy.
“We will not be responding to residential burglaries,” he said. “We won’t be responding to auto accidents unless they are blocking traffic. We won’t be responding to unverified home alarm notifications if we don’t know something is going on. We will have to prioritize violent crimes in progress.”
Baker Botts attorney Travis Sales, counsel for the firefighters’ union, told Judge Wilson that voters approved Proposition B despite the “parade of horribles” Mayor Turner cited in TV and newspaper ads and at several town hall meetings he hosted ahead of the vote, warning voters of the amendment’s potential consequences.
Echoing Turner’s concerns, city attorneys claimed at the hearing and in court filings it has met the burden of proving it will suffer irreparable harm without an injunction.
Layoffs of police and firefighters will result in delayed emergency response times, fire permit and building inspection fees will go up and the city’s credit rating, which dictates the interest rate it pays on loans, will be downgraded, the city claims in a Dec. 10 brief seeking a stay of Proposition B.
Fitch Ratings, one of three major credit-rating agencies in the U.S., cited Proposition B’s passage when it downgraded Houston’s credit outlook from “stable” to “negative” last month.
The Houston Police Officers Union’s attorney Kelly Sandill, with the law firm Hunton Andrews Kurth, told Judge Wilson that Proposition B suffers from two fundamental flaws.
She said it conflicts with a Texas law that Houston voters implemented in 2004 under which Houston firefighters’ pay must be based on, or comparable to, similarly situated private-sector employees, not public employees like police officers.
She also said it violates the provision in state law requiring a city’s police and firefighters to have separate collective bargaining negotiators.
“When Houston voters passed legislation forcibly tying the two groups together, that violates Texas public policy. Bargaining agents are to be separate unless they agree to be put together,” she said.
Attorneys for the city said firefighters will get a free ride without having to negotiate new labor contracts.
“The Pay-Parity Amendment effectively eliminates collective bargaining between the city and its firefighters. Whenever a police officer receives a pay increase or a new benefit, the allegedly comparable firefighter receives the same increase and the same benefit with no collective bargaining whatsoever,” the city states in a brief.
But Sales, the firefighter union’s attorney, said the city has admitted it does not base its firefighters’ pay on private-sector salaries because there are no private-sector employees comparable to firefighters.
Siding with the city’s interpretation that private-sector pay dictates firefighters’ salaries, Judge Wilson posed a hypothetical to Sales.
“If a probationary police officer receives $100 per day under Proposition B, then a probationary firefighter gets $100 per day. Suppose comparable pay [for the firefighter] in the private sector is $80. How do you harmonize that?” he asked.
Sales said, “It has to be substantially equal, not identical, and you can harmonize it through collective bargaining.”
Wilson kept the temporary restraining order against in place, but said he will issue a ruling on whether to block the amendment with a preliminary injunction next week.
“Hold on a minute!” Wilson shouted, as the 40 people in the courtroom packed up their stuff to leave. He said the hearing was his last on the bench for the 157th Harris County District Court and thanked the attorneys for presenting good arguments.
Wilson, a Republican who has presided over the court since January 2011, lost his re-election bid in November to Democrat Tanya Garrison. She will take over the case in January.
COURTHOUSE NEWS SERVICE
CAMERON LANGFORD
December 14, 2018
Washington, DC — In the face of rapidly changing technologies that could potentially accelerate progress for American cities, the United States Conference of Mayors (USCM) in collaboration with the New York University’s Robert F. Wagner Graduate School of Public Service, has launched the Mayors Leadership Institute on Smart Cities (SCI). The goal of the Institute is to provide participating mayors with a clear path forward for a major initiative, a framework for approaching smart city opportunities, and a set of guiding principles to improve their relationships with vendors and future tech partners. The Institute will convene twice a year.
Currently, no fully developed smart city exists anywhere in the country and there are no clear standards or financing strategies for their formation. In an effort to help mayors make sense of the vast array of new technology tools that could address potential issues such as affordable housing, crime, public transit, and citizen engagement, the SCI will provide practical skills, resources and best practices in a peer-to-peer setting. The Institute will flip the current industry-led dynamic, positioning municipal leaders to define priorities and build a model that fast-tracks growth and efficiency for cities across the country.
“The drive to make cities ‘smarter’ is all about harnessing data and digital technology to meet the challenge of doing more with less. Technology alone can’t solve every urban problem, but it’s a powerful and cost-effective tool for helping cities accelerate progress. As natural incubators of innovation, cities have an opportunity to step up and lead at this critical time. Ultimately, the Institute is about empowering mayors to be better leaders,” says USCM President Columbia (SC) Mayor Steve Benjamin.
“NYU Wagner is proud to partner with the US Conference of Mayors on this Institute,” says Sherry Glied, the school’s dean. “NYU and universities as whole play an important role in helping cities address today’s critical public service challenges. As a recognized leader in the urban space, we are excited to collaborate with mayors here in New York City—one of the world’s most vibrant urban epicenters—on their efforts to create ‘smarter’ cities.”
The inaugural meeting of the Institute will take place on December 5 – 7, 2018. Ten mayors from across the country will convene in New York City for three days of closed-door working sessions. Featured experts will include renowned scholars, industry professionals, data officers and public officials widely recognized as leaders in the field. Mayors will construct plans tailored to their specific priorities that can then be practically implemented.
The Mayors Leadership Institute on Smart Cities is supported by Verizon, The Knight Foundation and Parsons.
Wells Fargo & Co.’s head of public finance, Stratford Shields, is no longer leading the department after about a year on the job, according to a person familiar with the matter.
It’s the latest in a series of personnel changes within the public finance business. Earlier this year, Shields hired bankers from Morgan Stanley while others left for competitors or were dismissed. AnnMarie McDonald, a spokeswoman for Wells Fargo, declined to comment on his status as an employee.
Shields, who was previously a managing director at RBC Capital Markets, joined Wells Fargo in November 2017 as the company’s public finance business was dealing with fallout from the bank’s fake accounts scandal. Some municipalities and states halted work with Wells Fargo, putting pressure on the department as debt sales dropped and underwriting fees stay stagnant.
Bloomberg Markets
By Amanda Albright
December 4, 2018, 4:48 PM MST Updated on December 5, 2018, 6:18 AM MST
Springfield, Mass., is in the best shape it’s been in a generation.
Successful cities nearly all have something in common: leadership that can figure out where the community needs to go and can execute a plan to take it there. Fifteen years ago, it seemed inconceivable that Springfield, Mass., could be described in such terms. But after almost collapsing into bankruptcy, Massachusetts’ third-largest city is in the best shape it’s seen for more than a generation.
Heading into the 21st century, financial mismanagement wasn’t just a problem in Springfield, but a perennial habit. The city kept its property tax records on filing cards and budgeted as if it could collect 100 percent of the revenues that were owed, even though it continually fell millions of dollars short. As a result, Springfield ran deficits for 18 unbroken years. By the time a state control board took over in 2004, the cumulative deficit was, in fact, twice as big as city officials themselves realized — $41 million, not the $20 million estimated.
Springfield’s finances were too big a mess even to qualify it for junk bond status. The credit rating agencies couldn’t get enough information out of the city to be able to rate it, so they gave up. “A deficit that was twice as high as they thought — what does that tell us about the condition of the city at the time?” asks Stephen Lisauskas, who served as executive director of the state control board.
City officials knew very little about what was happening under their own roof. They were unsure how many employees they had or the extent of their health-care costs. Timesheets were done on paper, using an honor system that was barely honored.
During its five years in charge of Springfield, the control board restructured city departments, laid off employees and ran a rigorous performance measurement program, using data to keep track of what was going on. Mayor Domenic Sarno, who was first elected in 2007, has helped put in place real-time accounting systems that allow agencies to respond promptly when changes are called for. “If you manage your people costs, you’re freeing up money for all the other investments needed in the city,” says T.J. Plante, the city’s finance director.
Springfield now has real-time crime analysis that takes advantage of cameras all over the city, including newly negotiated body cameras worn by the police. The schools have improved: High school graduation rates are up 56 percent over the past five years, and the dropout rate has been cut in half. After a tornado ripped through town in 2011, city officials used federal funds strategically, melding their own investments and infrastructure planning with economic development projects. Previously, public and private investment had rarely been knitted into coherent long-range plans. A big downtown casino and a rail car manufacturing plant are now starting to have spinoff effects, with a total of $3 billion worth of public and private development projects at various stages of construction and planning.
Springfield is not a renewed paradise. Nearly 1 in 4 residents lives in poverty, and more than half of schoolchildren qualify for free or reduced meals. It has not been able to overcome the larger economic forces that have kept Boston booming while Western Massachusetts keeps slipping behind. City pension plans are still sorely underfunded. But Springfield’s credit rating is now the highest it’s ever been. Housing prices have been perking up after decades in the doldrums, showing that people are willing to invest in a city that has finally figured out the proper ways to invest in itself.
GOVERNING.COM
BY ALAN GREENBLATT | DECEMBER 2018
Municipal Bonds for America | Dec. 4
We are continuing our series on the details of the Amazon HQ2 incentive agreements with Virginia, New York, and Tennessee. This article examines the terms of New York’s memorandum of understanding pertaining to $1.7 billion in incentives from the Excelsior Jobs Program (tax credits) and Empire State Development (capital grant).
What is incentivized
Process
Reporting and Transparency
Smart Incentives
by Ellen D. Harpel | Dec 2, 2018 | Incentive programs
Fitch Ratings-New York-03 December 2018: Illinois faces important fiscal policy choices in its upcoming legislative session that will go a long way toward determining the direction of its credit rating and Outlook, according to Fitch Ratings in a new report.
Illinois’ governor-elect has some rather daunting tasks ahead, among them filling sizable mid-year gaps in the 2019 budget, addressing a significant structural gap in the fiscal 2020 budget and taking steps to set the state’s pensions on a more sustainable path. “A proposal to use pension obligation bond proceeds to finance near-term contribution increases as part of a re-amortization of the state’s pension liability, even as the state lowers its already inadequate statutory funding target, would be a credit negative,” said Director Eric Kim.
Illinois will return to single-party control in January when the Democratic governor-elect takes office. However, this is not a panacea for Illinois nor does it mean the end of the state’s credit challenges. “Decisions may be made more quickly but not necessarily more prudently,” said Kim. Proof of this took place between 2003 and 2014 when the state’s credit quality deteriorated considerably even with two different Democratic governors and sizable Democratic majorities in the General Assembly.
In fact, Illinois is still trying to rectify some of those poor fiscal decisions made particularly over the past decade, many of which revolved around liabilities including an unusually large accounts payable balance and severely underfunded state pensions. Deferring bill payments has been a common budgetary-balancing tactic for the state, resulting in unpaid bills that peaked at nearly $17 billion, or almost half of general funds revenues, by last November. After a debt-supported pay-down last year, the bills backlog is at risk of climbing once again.
Retiree benefit demands loom large with Illinois’ combined debt and net pension liabilities ($200 billion) representing nearly 30% of the state’s personal income. The state’s challenging pension burden is the legacy of a decades-long practice of making inadequate pension contributions, a situation which has yet to be rectified. Illinois is one of the few states where courts have imposed legal constraints around the state’s ability to modify OPEB benefits for current employees and retirees.
Illinois’ ‘BBB’ Issuer Default Rating reflects ongoing weak operating performance and irresolute fiscal decision-making while the state’s Negative Rating Outlook reflects the likelihood of fiscal pressures accelerating in the near term. Countering those credit pressures are Illinois’ revenue framework, expenditure framework and long-term liability burden, all of which are strong enough for a state with an ‘A’ rating. Illinois also retains wide revenue-raising ability over a deep economic base that includes Chicago, the economic epicenter of the Midwest.
‘Illinois: What Happens Next’ is available at ‘www.fitchratings.com’
Contact:
Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Karen Krop
Senior Director
+1-212-908-0661
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
Luck was on Detroit’s side when it returned to the municipal bond market.
A Treasury market rally, low supply and strong demand for high-yielding securities greeted the city when it sold $135 million of debt Tuesday, the first sale of bonds backed only by the city’s promise to repay since it filed a record-setting bankrupt five years ago. The conditions allowed Detroit to secure lower interest rates than initially expected, leaving it paying even less than some borrowers that haven’t reneged on their debts.
Bonds were priced with yields ranging from 3.36 percent on a 2020 maturity to 4.95 on those due in 2038 — tighter than what was first offered. The city also was able to increase the size of the deal from $111 million to $135 million, an indication of strong demand.
“It’s a perfect recipe to come to market,” said Kathleen McNamara, senior municipal bond strategist at UBS Wealth Management. “They should be very, very happy.”
Detroit filed for bankruptcy in 2013 to escape from debts it couldn’t afford after the population tumbled, tax collections slid and the automobile-industry’s decline left the economy reeling. The bankruptcy, like Puerto Rico’s which followed, unsettled the municipal bond market and raised the specter that governments would be punished by the market when they returned to borrow again.
But the penalty wasn’t that large. Last week, Chicago’s junk-rated school system sold 5-year bonds for a yield of 4.16 percent, or 1.95 percentage points more than what top-rated borrowers pay. Detroit’s 5-year bonds sold Tuesday for a yield of 3.91 percent, about 1.81 percentage points above the benchmark.
“From our perspective the bankruptcy penalty is pretty small to none,” said Dora Lee vice president at Belle Haven Investments, “I think that people just want yield right now and they’re hoping that they will get that with Detroit.”
“Investors obviously have short memory when they see a 5 percent yield,” McNamara said.
Bloomberg Markets
By Danielle Moran
December 4, 2018, 1:09 PM MST
For the first time since its bankruptcy, the Motor City issues stand-alone general obligation bond
Investors embraced Detroit’s first stand-alone bond sale since its historic bankruptcy, a sign many remain willing to lend to the city despite the lingering pain of losses from its restructuring.
The lure of higher yields from the below-investment grade debt outstripped concerns about the city’s troubled financial history, analysts said. Investors suffered losses on Detroit debt when it became the biggest U.S. city to ever file for bankruptcy in 2013.
The sale Tuesday marked the first time since bankruptcy more than five years ago that the city issued stand-alone general obligation bonds—those backed by its own full faith and credit. Those bonds hit investors with losses during Detroit’s restructuring, raising questions about the risks of what many had considered the safest form of state and local debt.
The Wall Street Journal
By Gunjan Banerji
Updated Dec. 4, 2018 5:40 p.m. ET
CHICAGO — Detroit on Tuesday sold its first standalone bonds since exiting bankruptcy four years ago to U.S. municipal market investors, who snapped up the debt albeit at hefty yields.
The unlimited-tax general obligation bond issue sold solely under the city’s junk-rated credit was increased to $135 million from nearly $111 million due to strong investor demand and “attractive borrowing costs,” according to John Hill, Detroit’s chief financial officer.
He attributed the deal’s success to a combination of market conditions and the city’s message of how far it has come since it ended what was then the biggest-ever U.S. municipal bankruptcy in December 2014.
“This shows we’re back in the market now on our own credit. It’s quite a milestone,” Hill said.
The deal also sends a message to other financially distressed issuers that a bond default or bankruptcy may not lock them out of the $3.8 trillion muni market for that long, according to Nicholos Venditti, a portfolio manager at Thornburg Investment Management.
“My goodness, this is a pretty quick turnaround from bankruptcy to selling debt in a very short amount of time,” he said.
Detroit’s bonds were sold amid a muni market price rally that lowered yields on Municipal Market Data’s (MMD) benchmark scale as much as 8 basis points, while U.S. Treasury yields also fell and U.S. stock indexes suffered steep drops.
Yields topped out at 4.95 percent for bonds due in 2038 with a 5 percent coupon. Spreads over MMD’s triple-A yield scale ranged from 183 basis points in 2023 to 200 basis points in 2033 and 190 basis points in 2038.
Daniel Berger, MMD’s senior market strategist, said investors “were willing to give (Detroit) a fresh start, but at a high-yield price.” He said spreads in the city’s deal were comparable to those in last week’s junk-rated Chicago Board of Education GO bond sale.
Venditti said the bonds’ pricing had less to do with Detroit’s post-bankruptcy story and more with market dynamics.”Yield is still very, very difficult to find and hey here’s some yield,” he said.
The bonds were rated three to four notches below investment grade at Ba3 by Moody’s Investors Service and B-plus by S&P Global Ratings. Detroit tapped voter-approved authority that dates back to 2004 and 2009 for the bonds, which will fund capital projects.
Ahead of the sale, Detroit officials touted improvements in the city’s financial management, budget, and services as well as increased economic development. The bankruptcy, which was eclipsed by Puerto Rico’s 2017 filing, allowed the city to shed about $7 billion of its $18 billion of debt and obligations.
Michigan’s largest city was able to terminate active post-bankruptcy oversight of its finances in April after concluding three straight fiscal years with balanced budgets.
By Reuters
Dec. 4, 2018
(Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis)
The city of Detroit completed a sale Tuesday of $135 million in general obligation bonds, the first time in more than 20 years that Michigan’s largest city has tapped the municipal bond market on the back of its own credit — and without the need for expensive layers of insurance for bondholders.
The 4.8 percent interest rate Mayor Mike Duggan’s administration was able to secure on the bonds allowed city officials to increase the borrowing from $110 million to $135 million, said John Hill, Detroit’s outgoing chief financial officer.
“We got back in the markets for the first time in quite a long time on our credit,” Hill told Crain’s.
In the years leading up to Detroit’s July 2013 bankruptcy filing, the city could only borrow money with the backing of the state of Michigan or with costly insurance layered atop of the debt, which proved complicated to untangle in the bankruptcy.
About 30 institutional investors bought Detroit’s new debt, Hill said.
“The (bond) market is really good today. But, as you know, it can change tomorrow,” Hill said on a day the Dow Jones Industrial Average plunged 799 points, while the S&P 500 and NASDAQ indexes fell sharply.
The bond sale was completed a week short of the four-year anniversary of Detroit’s emergence from a Chapter 9 bankruptcy restructuring that left some past bondholders and insurers with as little as 10 cents on the dollar for past debt deals.
Detroit’s new unlimited tax general obligation bonds will be used to finance a series of capital improvement projects at the Detroit Department of Transportation Coolidge bus terminal, neighborhood parks, the Charles H. Wright Museum of African American History and Aretha Franklin Park (formerly Chene Park), according to a memo sent Oct. 22 to City Council members.
The Duggan administration also plans to use a portion of the funds for buying out property owners in areas where officials are trying assemble large tracts of land for potential real estate and economic development opportunities, Hill said.
“This has money in it that would allow the city to assemble larger parcels of land,” Hill said.
The mayor’s office also is budgeting money from the bond proceeds for transportation infrastructure improvements and capital expenses for public safety facilities and vehicles, according to Hill.
In recent years, the city has been restricted to using budget surpluses to pay for capital expenditures.
“These bonds help take pressure off the city’s general fund to support its capital needs,” Hill said.
The city will have immediate access to the proceeds of the tax-exempt bond, but plans to spread out the capital projects over a period of two years, Hill said.
Moody’s Investors Service assigned a Ba3 credit rating to the bonds, which is still deemed noninvestment grade or junk bonds in the eyes of investors.
CRAIN’S CHICAGO BUSINESS
CHAD LIVENGOOD
December 05, 2018 09:39 AM
LOUISVILLE, Ky. — HL Financial Services, LLC (the parent company of Hilliard Lyons and Hilliard Lyons Trust Company) announced today that it has signed a definitive agreement to allow Hilliard Lyons and Hilliard Lyons Trust Company to join Baird. The agreement has also been approved by Houchens Industries, Inc., the majority shareholder of HL Financial Services, LLC.
Hilliard Lyons, an independent wealth management firm, and Hilliard Lyons Trust Company are headquartered in Louisville, Ky., and Baird is headquartered in Milwaukee, Wi. Baird is an international, employee-owned wealth management, capital markets, private equity and asset management firm with more than $200 billion in client assets. Terms of the deal, which is subject to regulatory approvals, were not disclosed. The transaction is expected to close in the first half of 2019.
Established in 1854, Hilliard Lyons is one of the nation’s oldest investment firms and has nearly 1,000 employees, including more than 380 financial advisors, operating in more than 70 offices in 11 states. Along with its sister company Hilliard Lyons Trust Company, the firm offers wealth management, trust, and estate planning services, as well as investment banking, municipal finance, and asset management services. It has over $50 billion in client assets and had more than $280 million in revenue for its fiscal year ended September 30, 2018. Baird, established in 1919, has more than 3,450 associates, including 890 financial advisors, working from 97 locations in 30 states.
“On every level, Baird is a great fit for our clients and for the Hilliard Lyons team,” said Jim Allen, chairman and CEO of Hilliard Lyons. “We are especially pleased to return to our roots and rejoin an employee-owned firm. Baird’s culture, values and business model align seamlessly with ours, and its reputation as a best place to work is unsurpassed in the industry.”
“Joining forces will accelerate the success of both firms and the success of our clients,” said Baird Chairman Paul Purcell. “We have a close relationship with Hilliard Lyons that goes back more than two decades, and we couldn’t be happier to have Jim Allen and the rest of the Hilliard Lyons team join Baird.”
Steve Booth, president and CEO of Baird, stated, “Hilliard has an excellent reputation and similarities to Baird including a strong, client-centric culture and business model, a commitment to being a great place to work and a long history of giving back to the community.”
“It has been an honor for Houchens Industries to be the major shareholder of Hilliard for almost 11 years,” said Spencer Coates, president, and Jimmie Gipson, chairman of Houchens. They continued by saying, “We are very pleased with the merger of Hilliard and Baird. This union of great firms will allow Hilliard to continue to expand, grow, and bring additional value-added services to both existing and new clients.”
Jim Allen also expressed his sincere appreciation and respect for Houchens. “Houchens has been a tremendous partner for more than 10 years. Their support and commitment to our growth and development clearly puts us in a position of strength as we pursue this exciting next chapter with Baird. We will be forever grateful to Jimmie, Spencer, and the entire Houchens team. Of course, our strong relationship and friendship will endure.”
Hilliard Lyons top leadership – Chairman & CEO Allen, President Tom Kessinger III, and Alan Newman, executive vice president and director, Private Wealth – will continue in their roles, working closely with Baird’s Private Wealth Management (PWM) Leadership to ensure a smooth transition for the firm and its clients. When the merger is completed, likely in the second half of 2019, Allen will serve as a vice chairman of Baird and a member of Baird’s executive committee out of Louisville; Kessinger will serve in a PWM Leadership role in Lexington, Ky., while continuing to serve his wealth management clients; and Newman will serve in a PWM Leadership role in Evansville, In. All will remain active in their respective communities as leaders at Baird.
The combined firm will have approximately 1,300 financial advisors serving clients from nearly 170 locations in 34 states. That will include maintaining a significant presence in the Louisville community.
Hilliard Lyons and Baird share a longstanding tradition of giving back to the communities in which their associates live and work. Both firms and their associates support a variety of service, cultural, health, and education-related organizations. In 2017, Baird Foundation provided more than $3.1 million in support to charitable organizations.
Wyatt, Tarrant & Combs served as legal counsel to HL Financial Services, LLC and JP Morgan Securities, LLC, served as exclusive financial advisor and provided a fairness opinion to the Board of HL Financial Services, LLC.
November 27, 2018
SAN JUAN, Puerto Rico — The U.S. territory of Puerto Rico said Thursday that it has completed its first debt-restructuring deal since the government announced it was bankrupt more than three years ago, giving creditors overall $550 in new bonds for each $1,000 they had held.
The agreement was finalized with creditors holding more than $4 billion in debt issued by the now-defunct Government Development Bank. The bank once issued loans and oversaw the island’s debt transactions but ceased operations in March amid a 12-year recession.
“The closing of the GDB debt restructuring is a historic milestone in Puerto Rico’s road to economic recovery,” said Gov. Ricardo Rossello. “It is clear evidence that Puerto Rico has the credibility and resolve necessary to resolve its fiscal challenges.”
It’s not clear, however, how much the agreement will affect some $70 billion in other debt still outstanding. Much of that is being addressed in court rather than in voluntary agreements.
The government said its Debt Recovery Authority will soon issue nearly $2.6 billion in bonds to the creditors.
However, some economists are wary of the agreement, uncertain if the payments can be sustained because of the fragility of Puerto Rico’s finances and the ongoing crisis that was caused in part by previous administrations borrowing millions of dollars to cover ballooning deficits.
“A lot of us economists are concerned that these deals are temporary and don’t guarantee that Puerto Rico won’t fall into another debt crisis,” economist Jose Caraballo said by phone.
However, he praised the way the deal gives different treatment to different sorts of bondholders. One group, made up largely of hedge funds, will be paid first but at a lower percentage of their original investments. A second group, which includes local investors, will get paid later but receive a larger percentage.
But Caraballo warned another crisis may hit the island before the second group gets paid, and he said the deal does not end Puerto Rico’s financial troubles because the accord isn’t based on the government’s long-term ability to pay.
“These agreements are not sustainable,” he said. “It’s not the end of the story. It’s a comma in the middle of this crisis.”
Another economist, Vicente Feliciano, noted that the deal depends on municipalities continuing to make payments out of the property tax they collect. Property values have been hit by large-scale migration off the island due to economic woes and last year’s devastating Hurricane Maria, which caused estimated damage of more than $100 billion.
“There’s always a risk that at some point the municipalities may have challenges meeting their obligations,” he said in a phone interview.
Overall, Puerto Rico agencies still hold roughly $70 billion in public debt and are trying to restructure a portion of it via court and mutual agreements with creditors. A federal control board appointed by Congress is overseeing the bankruptcy-like process as well as Puerto Rico’s finances.
In January, a federal judge is expected to rule on a billion-dollar debt restructuring deal involving bonds backed by a sales tax.
By The Associated Press
Nov. 29, 2018
The county incurred a deficit in 2017 and is forecast to end this year with an almost $40 million deficit
One of the richest U.S. counties, Westchester, lost its triple-A rating Tuesday.
S&P Global Inc. downgraded the suburban county north of New York City to a double-A plus rating from the highest grade, triple-A.
Analysts at S&P cited Westchester’s thin reserves and inability to balance expenses and revenues. The county incurred a deficit in 2017 and is forecast to end this year with an almost $40 million deficit, partly driven by retroactive salary increases to union workers.
“As we have said these past few months, the county is in serious financial stress,” said George Latimer, Westchester’s county executive, in a statement.
Westchester’s costs continue to swell because of such salary costs, the S&P analysts said, though it has turned to its wealthy tax base to help its budget. The county’s financial plan for this year and next includes property tax increases of 2%, one of the biggest sources of municipal income, according to S&P.
Westchester is one of the richest counties in the nation based on income per person, according to S&P. Almost a million people reside in Westchester, which benefits from its proximity to New York City, with more than a third of its residents commuting to the city.
Some of the county’s prior tactics to help finances may not work in the future, the analysts said. Westchester previously tapped one-time measures, like selling property and privatizing the county’s assets, to balance its budget, they said.
The analysts at S&P warned that there is a chance Westchester’s rating could be lowered further in the next two years, if county officials aren’t able shore up its reserves and finances continue to deteriorate.
Westchester lost its triple-A rating in 2013 from Moody’s , which also has a negative outlook on the county, indicating its credit could be further downgraded.
The Wall Street Journal
By Gunjan Banerji
Nov. 27, 2018 6:53 p.m. ET
For Wall Street bankers and investors prospecting for municipal-bond deals at a conference in Texas, Michael Phemister promised them a gusher.
The vice president for treasury management at Dallas Fort Worth International Airport said he was planning on selling between $10 billion and $11 billion in municipal bonds over the next five to seven years to add more capacity to an airport that serves one of the fastest-growing areas of the nation.
“Our airfield is in pretty good shape, but we’re out of gates again,” Phemister said at a Bond Buyer conference in Dallas.
Dallas Fort Worth International will join a surge of U.S. airports that have issued debt this year. In an arms race to expand and improve terminals, municipal-bond sales issued by airports are up more than 30 percent this year to $13.7 billion, including those in Denver, New York, Los Angeles, San Francisco and Salt Lake City. The increase stands in contrast to the rest of the municipal-bond market, where debt sales dropped this year after interest rates rose and the federal tax-overhaul pulled subsidies from a key type of refinancing.
Half of the Dallas airport bonds will be for airfield and terminal improvements, with the rest going to refund existing debt, Phemister said. The first refinancing issue is tentatively planned for the summer of 2019 to take out $1.3 billion of higher-cost debt. The airport has the option to call about $5.2 billion through 2023. He also detailed that a large portion of the debt was going to be subject to federal income taxes, instead of tax-exempt or alternative minimum tax bonds.
“The difference in yields between AMT and taxable we believe to be marginal and they’re just going to get tighter,” he said.
By issuing the bonds as taxable securities, the airport hopes to draw interest from international buyers, who are looking abroad for high-grade bonds because debt yields across much of Europe and Asia are well below those in the U.S. Foreign investment in municipal debt has been increasing, giving overseas buyers a small but growing segment of the market.
Phemister said he met with over 25 investors during a two-week trip to court foreign buyers in Europe and Asia, making stops in London, Paris, Seoul and Taipei “to talk to them about the U.S. airport credit and how we have never defaulted.” The airport aims to get about 20 percent in international participation in the first-issued taxable deal.
A 10-year capital plan is currently being negotiated with the airlines, including American Airlines, which has a major presence at the Dallas airport, according to 2017 financial statements. Proposed projects include a $2.5 billion terminal and $1.5 billion for airfield improvements.
The airport is also considering a multi-billion dollar sale of short-term debt to help finance its operations.
“$1 billion will get you noticed,” Phemister said of such commercial paper sales. “We hope to bring $1 billion deals once a year over the next four to five years.
Bloomberg Markets
By Danielle Moran
November 30, 2018, 7:48 AM MST
Illinois lawmakers hand the mayor a victory and defer immediate action on regulating car-sharing firms, as the end of the fall veto session approaches.
Mayor Rahm Emanuel scored a victory on the development front, and a truce was called in a battle over how to regulate car-sharing firms in separate developments late yesterday in the General Assembly’s fall veto session.
In the first action, the Senate followed the lead of the House and voted to authorize the City Council to extend by 13 years the life of four city tax-increment financing districts, most notably the Goose Island TIF adjacent to the proposed River North development.
Details of exactly how those TIFs will be used and how much money they will provide have not been released. But according to city officials, tens of millions of dollars likely are headed to infrastructure and related needs in the districts.
Meanwhile, an effort to regulate car-sharing firms such as Turo in the same manner as car rental firms such as Enterprise and Hertz stalled when sponsors of a bill that would have done that failed to call it for an override of a veto by Gov. Bruce Rauner.
The issue had sparked a massive lobbying campaign on both sides, with substantial campaign cash beginning to flow. Sponsors claimed they had the votes, but I’m told they agreed to talk peace after House Speaker Mike Madigan sent word that he’d prefer not to proceed with an override now. Beyond that, a couple of key lawmakers who favored an override were not able to attend this week’s session, I’m told.
In a statement, bill sponsors and the American Car Rental Association said they are “encouraged” that both sides have agreed to come to the bargaining table.
“We welcome peer-to-peer car rental platforms to join us to ensure greater consistency, fairness and safety on behalf of the entire industry,” said Greg Scott, government relations representative for the association.
The override previously had cleared the Senate. Details were not available on when a compromise might emerge, but it now won’t be until at least next year, since lawmakers are scheduled to adjourn for the year later today.
CRAIN’S CHICAGO BUSINESS
BY GREG HINZ
November 29, 2018 06:00 AM
“… Candidate Bill Daley, son of former Mayor Richard J. Dailey, brother of former Mayor Richard M. Daley, and Emanuel’s successor as President Barack Obama’s chief of staff (can Chicago’s political dynasty get any more incestuous?), is proposing a commuter tax to try to get more money from suburbanites who work in the city of Chicago. … adding to the pension crisis via a new city bureaucracy and then trying to get even more money from a reduced population seems remarkably irresponsible.”
Read the full article on: Reason
Scott Shackford | December 3, 2018
The California fires haven’t sparked a sell-off in the secondary markets in a sampling of muni bonds in devastated areas.
“Muni investors are either unconcerned or do not fully understand the extent of the fire damage and its impact upon these bonds,” said Daniel Berger, a senior market analyst with TM3/MMD and Refinitiv, the financial and risk business of Thomson Reuters (TRI).
Berger took a look at trading for the Paradise Redevelopment Agency, Santa Monica-Malibu Unified School District and Butte Glenn Community College District.
In the three major fires burning in the state, Paradise has been most affected as roughly 90% of the town has burned, according to fire officials.
The $1.47 million in Paradise RDA debt issued in 2016 has been thinly traded, Berger said.
After the fire, S&P Global Ratings placed the Paradise Unified School District on CreditWatch with negative implications. The school district’s only direct debt was certificates of participation that have since been defeased, according to information on the Municipal Securities Rulemaking Board’s EMMA website.
On Nov. 6, voters in the Paradise school district passed a $61 million general obligation bond measure. The devastation throughout the community and its tax base will complicate any plans to use the authorization.
The California Teachers Association said the Camp Fire destroyed at least five of the nine schools in Paradise and that many educators lost their homes. Paradise USD had an estimated 3,165 students in fiscal 2017.
Santa Monica-Malibu-Unified School District issued $120 million in general obligation bonds in September, but there does not appear to be an elevated level of concern there based on trading, Berger said.
“We used the MMD Trade Tracker and did not see any blocks of more than $1 million trade since November 1,” Berger said.
Malibu’s four schools were evacuated as the Woosley Fire that started Nov. 8 in Ventura County spread south to Malibu. The California Department of Forestry and Fire Protection reported that three lives were lost and 1,500 buildings were destroyed by the fire that burned 97,000 acres. That fire was 97% contained as of Tuesday morning.
Malibu’s three elementary schools are in “good condition,” with some landscaping damage to Malibu High School, according to news reports.
Malibu had 5,589 households with a medium value of $1.8 million, according to U.S. Census as of July 1, 2017. Santa Monica has 46,463 households and homes with a medium value of $1.08 million.
The joint school district agreed to a plan to split into two in March with a 50-year revenue sharing plan. More than 80% of the students in the joint district resided in Santa Monica. Malibu has 1700 students enrolled in its four schools.
None of the Butte-Glenn Community College District campuses are in the fire zone, but the loss of homes in Butte County, which has a population close to 230,000, could affect assessed value — particularly if homeowners don’t decide to rebuild. The county had 85,000 households as of the July 1, 2017, census.
The community college district is located south of the Camp Fire, the state’s most destructive historically and a fire that has resulted in 79 deaths, destroyed roughly 17,000 homes and businesses and consumed 151,373 acres. That fire was 70% contained as of Tuesday morning, according to CalFire.
Berger also used the MMD Trade Tracker to look at three series of bonds issued by the Butte-Glenn Community College District and said he found that the bonds were trading better than MMD’s Triple A scale.
News of the fires has prompted investors to question issuers on California deals that have priced since fire began to ravage areas of the state, particularly since most syndicates and sales desk are New York-based, but pricing has appeared to be more relative to the individual credits, according to one banker. The California deals that priced last week were in areas that have not been affected by fire.
By Keeley Webster
BY SOURCEMEDIA | MUNICIPAL | 11/21/18 07:03 PM EST
The “downside credit risks” from the California wildfires are the most pronounced for investor-owned utilities, which could face large liabilities if IOU equipment is found to have ignited the fires.
And negative credit implications could emerge for the reinsurance industry and the U.S. public finance sector, given the potential for a state-wide economic slowdown, damaged infrastructure and associated environmental issues, according to a report from Fitch Ratings released on Wednesday.
The utilities sector is the most directly exposed to credit risk from the wildfires, with Pacific Gas and Electric’s (PG&E:BBB-/RWN) and Southern California Edison (BBB+/Stable) experiencing downgrades earlier this year due to potential outsized liabilities from wildfires, Fitch says.
“The increased frequency of wildfires and sheer magnitude of potential exposure, coupled with an uncertain path to recovery, meaningfully expands business risk for electric utilities operating in California,” the ratings agency said.
Industry data provider CoreLogic this week reported total losses from the wildfires in Northern and Southern California could reach from $15 billion to $19 billion.
A report that PG&E filed with regulators on Tuesday shows that in the days before the Camp Fire, California’s deadliest wildfire, erupted near a PG&E Corp. power line during a windstorm, the company kept a close eye on the weather, warned customers it might shut off electricity in the area, and finally decided conditions weren’t bad enough to warrant it.
Fitch estimates that PG&E’s financial exposure for the 2017 wildfires could be roughly $15 billion, “with large incremental liability possible” if it is found that PG&E equipment was involved in ignition of the 2017 Tubbs and 2018 Camp wildfires. PG&E common stock has lost more than half of its value and spreads have widened significantly.
A new data analysis from BuildFax released on Wednesday shows construction performed on properties in Butte County, where the Camp Fire burned, rose 8.57 percent year to date compared to January through October 2017.
“This suggests carriers may not have accurate assessments of the wildfire’s true damage on their books, which could pose challenges in the recovery phase,” the BuildFax analysis states.
The Fitch report shows that credit implications for other U.S. corporate sectors, including homebuilding, oil and gas, metals and mining, transportation, healthcare, retail, and agriculture, should be minimal.
“Insurance will partially cover losses with operational disruptions likely temporary and not prolonged enough to negatively affect individual credit profiles,” the report states. “Moreover, many issuers including those mentioned above along with lodging and leisure and media and entertainment are either diversified geographically or by type of business properties.”
According to Fitch, the recent California wildfires mark a second consecutive year of major wildfire losses for reinsurers as the industry incurred $11.5 billion of insured losses in 2017.
Prior to this year’s fires, California wildfires in July 2018 resulted in $845 million of direct-insured losses.
“Insured losses, while certainly significant, are expected to remain within the estimated ranges used by insurance industry when pricing catastrophe risk into premiums,” Fitch stated. “Furthermore, insurance companies with exposure to the California wildfires are generally the larger, more capitalized national carriers that, as a group, have high insurer financial strength ratings.”
Insurance Journal
November 28, 2018
NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) affirmed its insurance financial strength rating of AA, with a Stable Outlook, for Assured Guaranty Corp. (AGC), a financial guaranty subsidiary of Assured Guaranty Ltd. (together with its subsidiaries, Assured Guaranty)(NYSE:AGO) on November 30, 2018.
In the report, KBRA noted that “AGC’s financial position is strong” and cited the following key strengths to support its rating conclusion:
“Once again, KBRA recognized the strength of AGC’s financial position, affirming AGC’s AA stable rating. KBRA also conducted a detailed analysis of AGC’s corporate governance, credit and risk management processes and consider them reflective of the industry’s best practices,” said Dominic Frederico, President and CEO of Assured Guaranty, adding: “KBRA also noted that our leverage ratios remain at historic lows.”
AGC is part of Assured Guaranty, the leading provider of financial guaranty insurance. Including AGC and its affiliates, the group has $12 billion of claims-paying resources. Assured Guaranty generates approximately $400 million of annual investment income from its high-quality, fixed-income investment portfolio. On average, $2 billion of municipal bonds insured by Assured Guaranty companies trade each week.
AGC affiliates Assured Guaranty Municipal Corp. (AGM) and Municipal Assurance Corp. (MAC) are both rated AA+, Stable Outlook, by KBRA. Additionally, AGC, AGM and MAC are all rated AA with Stable Outlooks by S&P.
After major natural disasters in the state, utilities are typically required to front the costs of repairs and are only reimbursed by the Federal Emergency Management Agency and state government afterward. Utilities in towns that are small or poor, on the edge of flammable wilderness, or far from a major city will have particular trouble in paying for those costs upfront or reestablishing service quickly so they can resume collecting revenue, according to the report by credit analyst Tim Tung.
California has been rocked by deadly and destructive fires that burned across the state in recent weeks. The most severe, the Camp Fire, destroyed thousands of homes and other structures, killed 79 people with about 700 still missing, and burned over 151,000 acres in the northern part of the state.
California’s fire season is set to get longer and more severe, the report states, if recent research on California’s climate holds true. The report warned that “in the future, the state will experience shorter, more concentrated rain seasons” as well as “longer dry periods during which fires may threaten.”
Bloomberg Markets
By William Green
November 20, 2018, 1:28 PM MST
Hollywood has created a popular image most Americans have of California, where we all live in a sunny paradise with homes lining the beach or in lush suburbs. With a state brimming with cutting-edge companies, a highly skilled workforce, and the world’s fifth-largest economy, there’s no argument that, for some of us, this picture can be somewhat accurate. But there’s another, darker image of California — of workers, young and old, struggling to make ends meet, with each generation on track to retire poorer than the last. While our state has reached new heights of wealth and prosperity, still, today, 75 percent of low- and middle-income retirees rely solely on Social Security for their livelihood, and nearly half of California workers are projected to retire into economic hardship.
Demographic trends portend an even more dire outcome. The State Department of Finance has found that Californians over 65 are the fastest-growing segment of the population — expected to more than double over the next 40 years. This means even higher rates of poverty and homelessness among older Californians, which will inevitably put an even greater strain on publicly funded health and human services.
At the same time, many younger Californians, including thousands working in the gig economy, lack access to retirement savings plans, like 401(k)’s at their job, and are on track to have little to nothing saved for retirement.
Add to this, crushing housing costs, a shortage of college-educated workers, and depressed conditions in much of Inland California, and it’s not hard to envision a bleak scenario for the Golden State.
That is why State Senator Kevin de León and I have created a bold new program to secure a brighter financial future for 7.5 million hard-working Californians — over 40 percent of the state’s workforce. Later this month, we will begin to roll out CalSavers, a state-run program that will help workers — from Generation Z to baby boomers — save for their retirement. CalSavers will help facilitate the most ambitious expansion of retirement security since the passage of Social Security more than 80 years ago. CalSavers will first launch a pilot with a small group of employers to fine tune the program before launching statewide in 2019.
CalSavers will give employees access to a completely voluntary, low-cost, portable retirement savings vehicle, with professionally managed investments, overseen by a public and transparent board of directors, for which I have the privilege of serving as chairman. In addition, the program is fully sustained by competitive participant fees, which will be reduced further as the program grows. There is no taxpayer cost; similarly, there are no fees for employers.
Following the pilot, and beginning in mid-2019, the program will open fully for statewide enrollment. Eligible employers of any size will be able to register at any time, but eligible employers with 100 or more employees, who choose not to offer a retirement plan, will have no more than one year from the full program launch date to register. Employers with 50 or more employees will be required to register within no more than two years, and those with five or more employees in no more than three years.
In 2012, California was the first state to enact legislation aimed at remedying the personal financial crisis faced by millions of working people here and across the country. We were the first to enact legislation establishing a board and program, providing a model for other states, including Oregon and Illinois, which have followed our lead and done a great job of leading on implementation.
Securing California’s economic future requires a range of bold initiatives that address multiple challenges. That’s why I have joined with leaders in government, business, nonprofit, and labor who are stepping up, through legislation and other actions, to address critical issues such as housing, homelessness, and support for seniors and veterans.
We cannot measure success by the wealth we create for our most privileged citizens. Indeed, we are only as successful as our ability to significantly improve the lives of all Californians. This means affordable housing, good jobs, and access to quality education and health care. And, just as importantly, it means creating an easy path to retirement security for all working Californians. That is the mission of CalSavers and the reason why we are fervently committed to its success.
BY CALIFORNIA STATE TREASURER JOHN CHIANG
NOVEMBER 20, 2018
While many of the California utility issuers that S&P Global Ratings rates are exposed to some level of natural disaster risk, the incidence of catastrophic damage is extremely rare. In the past, we have typically observed wildfires that have damaged only a minor portion of an overall service area or disasters in which the severity of damage was manageable such that utility operations were restore…
Nov. 20, 2018
CHICAGO, Nov 20 (Reuters) – Detroit is eyeing savings from a just-launched redemption offer for bonds it issued in 2014 as part of the city’s exit that year from its historic bankruptcy, municipal officials said on Tuesday.
The city is targeting $131 million of its nearly $632 million of series 2014B financial recovery bonds that mature in 2044 with a tender offer that expires Dec. 3. The move follows the redemption of $70 million series 2014C bonds earlier this year.
“This is a limited tender and we will only move forward if we achieve our savings goals,” said John Hageman, chief of staff for the city’s finance office, in a statement that did not disclose the goals.
Detroit issued the bonds as part of its federal court-approved plan to exit what was then the biggest U.S. municipal bankruptcy, which allowed the city to shed about $7 billion of its $18 billion of debt and obligations. Debt proceeds were used to fund settlements with bond insurers, interest-rate swap providers, city pension funds, as well as to raise money for capital projects.
The tender offers were initiated as a way to save money for Detroit, which has only been paying interest on the financial recovery bonds. Principal payments are due to commence in 2025 around the same time that higher-than-expected city pension contributions start.
Unlike previous bond redemptions, which were financed with a budget surplus and proceeds from a property sale, Detroit will pay for the latest one through financial recovery bond refunding issued via the Michigan Finance Authority and backed by a fifth lien on the city’s distributable state aid revenue.
Early next month, Detroit will sell the first unlimited tax general obligation bonds on its own credit since the bankruptcy, which included defaults on GO debt.
Underwriters led by Goldman Sachs & Co are scheduled to price nearly $111 million of junk-rated bonds to fund capital projects under voter-approved authority that dates back to 2004 and 2009.
Michigan’s largest city was able to shed active post-bankruptcy oversight of its finances in April after concluding three-straight fiscal years with balanced budgets.
Moody’s Investors Service recently warned that big capital needs at Detroit’s public school system posed a threat to the city’s “post-bankruptcy economic revitalization” unless the state or philanthropic community step in with funding.
Fitch Ratings-New York-20 November 2018: The State University System of Florida’s 12 public universities have more stringent requirements for raising revenues following passage of amendments 5 and 7 in the November election, according to Fitch Ratings. Amendment 5 will require a two-thirds vote (rather than a simple majority) by each chamber of the legislature to increase undergraduate in-state tuition levels, while amendment 7 will require a supermajority vote (rather than a simple majority) by the university’s Board of Trustees or the Board of Governors to raise, impose or authorize any university fee (such as capital improvement fees, athletic fees, activity and service fees, student housing fees, transportation access fees, decal fees, and health fees).
The independent ability of public universities to set tuition rates is a sub-factor in Fitch’s assessment of Revenue Defensibility in its ‘Exposure Draft: U.S. Public Finance College and University Rating Criteria’ (Criteria Exposure Draft, dated Nov. 15, 2018). However, in this assessment, Fitch also considers the level and consistency of direct and indirect support from the state government as an offset to tuition control imposed by the state.
In Florida, the legislature sets the undergraduate in-state tuition rate but tuition has not been raised for many years in an effort keep the cost of higher education affordable. Instead, Florida public universities receive generous levels of state operating support and other revenue allocations (performance funding, pre-eminent funding and other grant-like funding), and are expected to continue to do so. Moreover, tuition may not be pledged to any revenue bonds, pursuant to current Florida law. Fitch does not expect financial operations to narrow or overall credit quality to decline as a result of the new voting requirement in amendment 5.
The implementation of new university fees or increases to existing fees are typically approved by unanimous or near unanimous votes of the required board or boards. Since debt of Florida public universities is issued by blended component units (generally to support housing, parking and student health and other type of auxiliary systems on each university’s campus), the debt is expected to be solely supported by the pledged revenues of these entities themselves. As such, the boards have covenanted in bond documents authorizing capital improvement debt to set fees at levels sufficient to cover debt service. The Board of Governors has stated that based on current Florida law, amendment 7 will not affect such covenants.
Fitch not does not expect any immediate impact on the financial operations of Florida’s public universities or their auxiliaries as a result of the constitutional amendments; and expects little, if any, impact on their ability to repay debt obligations. However, over time, more stringent requirements for raising revenues could lead to erosion of cash flow and debt service coverage levels, particularly if there is broader university operating pressure. The amendment could limit a university’s ability to make a rate adjustment if needed to offset enrollment decline. If several fees are collected, an increase in one pledged fee supporting an auxiliary system may need to be offset by a reduction in another auxiliary system fee, suppressing the pledged revenues that support that system’s bonds. Pressure on cash flows supporting the pledged revenues for any one auxiliary system could have rating implications. In most cases, the sum of the fees is limited by law (to a percentage of student’s base tuition fee) unless authorized by the state legislature, leaving limited flexibility to increase rates over time if needed.
Fitch continues to take a forward looking approach to ratings in the sector as described in the Criteria Exposure Draft. In its assessment of Revenue Defensibility, Fitch considers the level of local university control over tuition as one factor that could be deemed ‘weaker’ in this case. However, the final determination of the Revenue Defensibility assessment will also reflect other components, such as demand, market reach, pricing power and other revenue sources. Lack of tuition and student fee control could be expected to have greater impact on a smaller, regional public university with weaker or eroding demand than on a state flagship university with more resilient demand and other revenue sources available to preserve overall revenue levels going forward.
Contact:
Nancy Moore
Director
+1-212-908-0725
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Margaret Johnson
Director
+1-212-908-0545
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
As the dust settles on the 2018 elections, the DC Council continues to weigh action on clean energy legislation that could halve greenhouse gas emissions in the region. The bill contains funding for a critical tool the Council adopted over the summer: the DC Green Finance Authority, a “green bank” which was established to leverage public and private funds to invest in clean energy technologies and infrastructure.
The Clean Energy DC Omnibus Act of 2018 would help DC transition to a greater reliance on renewable energy sources and reduce carbon emissions, which drive climate change. The record on the second of two DC Council committee hearings closed last week, and the Committees on Transportation and Environment and on Business and Economic Development will soon make recommendations on the bill.
Here’s what a green bank does
In passing the Green Finance Authority Establishment Act this July, DC joined a growing list of jurisdictions creating so-called “green banks” that use various financial tools, including loans and credit enhancements, to support investment in clean energy projects.
Green banks use public dollars to attract private investment in projects using solar, wind, and other clean energy technologies. This reduces costs that can otherwise complicate or preclude the implementation of sustainable energy. Green banks are already operational in California, Connecticut, New York, and Maryland, among other places. The Connecticut Green Bank, for example, estimates that from its inception in 2011 through 2017, it drove public and private investment totaling more than $1 billion toward clean energy projects.
In a 2017 report prepared for the DC Department of Energy and Environment (DOEE), the non-profit Coalition for Green Capital (CGC) defined the goal of green banks as “accelerat[ing] the deployment of clean energy by removing the upfront cost of adoption, leveraging great private investment in clean energy, and increasing the efficiency of public dollars.” The CGC report shows that the District’s current levels of private investment are far from sufficient to meet the potential demand.
DC’s law allows the Green Finance Authority to use its funding for various financing tools. For example, the bank might use loan loss reserves and loan guarantees (“credit enhancements”) to make private investment more secure, and thus more attractive. Alternatively, it might offer a loan for a particular project, supplementing private funds and thereby facilitating more clean energy projects and more investment.
In general, green banks prefer financing rather than grants. Green banks start with some initial funds, and while grants would deplete the bank over time and require periodic recapitalization, financing enables the bank to recycle capital through multiple projects over time.
Because green banks want to preserve their capital, they tend to prefer low-risk investments that facilitate short-term cash flow. That means the Green Finance Authority will likely promote investments in specific projects and in the application of mature technologies, rather than funding development of new modes of clean energy. Installation projects (think solar panels and fuel cells) tend to carry less risk and also create revenue streams as consumers divert their utility payments to (less expensive) loan repayment.
Could this be successful in the District?
Though the District offers a substantial clean energy market, the success of the Green Finance Authority will depend significantly on its own management and strategy. Because the projects facing the largest private funding gap are smaller, distributed projects, the Green Finance Authority will need to actively solicit private investors.
Strong oversight will also allow the bank to successfully engage in more complex funding strategies, such as “warehousing.” That’s where the bank bundles smaller loans and sells them to private investors at scale.
The Green Finance Authority’s responsibilities will also reach outside its own confines. The bank will have the authority to provide technical assistance in the development of sustainable programs more broadly. It will also seek to implement projects that complement other DC government sustainable energy initiatives through a Special Committee on Sustainable Program Cooperation.
Though certain details of the Green Finance Authority remain unresolved—DOEE’s solicitation of proposals for plans to “stand up” the green bank closed on November 13—one question certain to arise in the coming years will be the matter of funding. The CGC has estimated that every $1 in public capital can attract $5 in private funding, potentially helping the District take significant strides toward its renewable energy goals.
But while the Establishment Act identifies several potential funding sources (including federal funds, donations, settlement proceeds, loan repayment and interest, and Green Finance Authority revenues), it does not provide for any specific allocation. It does refer to a $7 million transfer from the District’s Renewable Energy Development Fund (REDF), but only if that transfer is included in an approved budget and financial plan.
Here’s what’s next for DC’s green bank
As the DC government continues to roll out the Green Finance Authority, it may answer the critical funding question through action on the Clean Energy DC Omnibus Act. The current draft of that bill would secure for the Green Finance Authority $70 million in funding from the Sustainable Energy Trust Fund, to be spread out over six years.
Should that legislation stall out, the DC government will need to return to the drawing board. Other potential funding options including upfront capitalization (potentially including the REDF transfer, which would likely require supplementation for the bank to be successful) or bond issuances. DC must also appoint the governing Green Finance Authority Board, which will be filled by four non-voting District government executives and seven voting members appointed by the mayor.
Regardless, if the recent elections demonstrated the public’s faith in the District’s incumbent lawmakers, it may soon be time for those representatives to pay up with real support for a critical tool for fighting climate change.
Greater Greater Washington
By Jake Grubman
November 15, 2018
“Warren Buffett called Bitcoin ‘rat poison,’ but the technology behind it is something everyone can agree on. …
Here’s how it works: a business signs up through OhioCrypto.com, enters their tax payment information then pays through a third-party processor, BitPay. BitPay then converts the bitcoin into dollars that are deposited into the state’s accounts. There is a minimal fee, 1 percent, for the transaction compared with 2.5 percent assessed when businesses use credit cards.”
Read the full article on: The Cincinnati Enquirer
Truth in Accounting
Jessie Balmert | November 26, 2018
Election results may still be in flux throughout California, but on school spending, one trend is clear: Once again, voters appear to have given a hearty thumbs up to borrowing for local school improvements, with nearly $12 billion in new bond measures on track to being approved.
About 80 percent of the local bond measures on the Nov. 6 ballot—83 out of 105—appear headed by toward approval, according to preliminary election results compiled by Michael Coleman, fiscal policy adviser for the League of California Cities.
Voters also appear to have approved harder-to-pass parcel taxes, which pay for classroom-related expenditures, in seven out of 12 school districts. A handful of measures remain close calls, so the projected outcomes in some ballot measures could change.
CalMatters
By Ricardo Cano | Nov. 10, 2018
California voters have approved a $1.5 billion bond measure to help the state’s children’s hospitals fund renovations, expansions and upgrades, The Mercury News reported.
The California Children’s Hospital Association sponsored the measure, which will provide bond money over 15 years to eight nonprofit hospitals and five University of California hospitals.
Nearly 75 percent of the bond money will go to nonprofit facilities, including Lucile Packard Children’s Hospital in Palo Alto, while 18 percent will go to UC hospitals, including UC San Francisco. About 150 California hospitals that treat children will also have 10 percent available in competitive grant funds.
The association said the bond money would help hospitals expand and improve facilities and acquire equipment, “so more kids will have access to the specialized care they need.”
Opponents, including the League of Women Voters of California, said that state money shouldn’t go to private facilities and there other ways to pay for the improvements, according to the report.
Becker’s Hospital Review
Written by Kelly Gooch | November 09, 2018
For the last several years, school districts in California have faced continued increases to pension contributions. Offsetting these increases, however, has been a strong state economy that has produced substantially more revenue for schools. As a result, S&P Global Ratings has not seen any evidence of widespread adverse credit impacts to schools, and believes that school districts have the flexible…
Nov. 8, 2018
In every disaster, natural or man-made, a price is exacted first in human terms. From the relative safety of where I write this, I can recall the damage from superstorm Sandy that crippled the Northeast six years ago, and from which many in the area have yet to recover. Yet that pales next to the wildfires that have engulfed California, which follows this year’s crop of hurricanes in the East. The toll isn’t only human, either; our foster dog rescued after Hurricane Florence just left for her permanent home on Thursday.
Even though it might be unseemly to consider the economic costs while the wildfires are still burning in California and the fatalities are still climbing, they can’t be ignored. A price is already being exacted in the declines in the prices of securities of the entities affected. There will also be costs for insurers and property owners, as well as for state and local government budgets. Finally, there is an as-yet incalculable hit to property values, not just from the current damage, but also the concerns of potential buyers who may be reluctant to bear the environmental risk that has become increasingly apparent.
The most dramatic, immediate impact has been on the stock of utility PG&E (ticker: PCG), which plunged 31% on Thursday, pushing its loss past 62% in the five trading sessions to that point. But the shares jumped in after-hours trading Thursday and were up 38% in Friday trading. That bounce came after Bloomberg reported that, in a conference call for investors organized by Bank of America Merrill Lynch, the California Public Utilities Commission indicated that it didn’t want PG&E to enter bankruptcy.
The utility conceivably could have embraced Plan B—meaning bankruptcy—wrote Carol Levenson, who heads Gimme Credit, the very independent credit analysis firm. That was especially clear after a filing with the Securities and Exchange Commission last week disclosed that PG&E had fully drawn down its $3.3 billion revolving credit facility and had made an “electric incident report” the day California’s fire began.
A PG&E spokesperson wrote in an email that the borrowing was “to provide greater financial flexibility, including to pay down coming debt maturities and for general business purposes.”
Moody’s Investors Service also late Thursday downgraded PG&E’s debt to Baa3, the rating firm’s absolute lowest rating before crossing into junk territory, where the power company’s bonds already trade, based on the prices they’re fetching. Standard & Poor’s took the equivalent step of cutting its rating to BBB-minus, its lowest investment grade. While Levenson wrote that the ratings firms’ actions weren’t financially crippling, she warned that the potential liability warrants a junk rating, and she recommends selling the bonds.
The PG&E 6.05% bonds due March 1, 2034, traded at 97 Friday, for a yield to maturity of 6.36%, or 3.03 percentage points over the comparable Treasury.
For California’s finances, there is good news, along with bad news. Natalie Cohen, formerly head of municipal research at Wells Fargo Securities and now in charge of National Municipal Research, an independent public-finance analysis firm, notes that the Golden State’s finances were in tiptop shape as of Sept. 30. But they surely suffered in the fourth quarter, owing to the record-breaking fires.
There are other factors to consider, she continues in an email. At the local level, hits to property values may hurt the municipalities affected by the fires. Insurance often doesn’t cover the full property and casualty losses for schools, public hospitals, and infrastructure. So local governments may strain to pay for rebuilding.
On the other hand, Cohen continues, spending and employment to put things back together generates a surge in income and sales tax revenues. Hotel taxes should also benefit as occupancy jumps from stays by residents who have lost their homes. But tourism is certain to suffer.
Finally, California’s state revenues depend heavily on capital-gains taxes, so she posits that the recent stock-market setback may be costly. Yet despite the seemingly annual hits from fires (2017’s had been thought to be the worst ever, with insured losses of $12.6 billion, according to Moody’s estimates for property and casualty insurers), Cohen remains impressed by California’s resilience.
One has to wonder, though, what effect the seemingly annual wildfires will have on the perceived livability of California and on the state’s population trends, Patricia Healy of Cumberland Advisors writes in a client note.
If California were a sovereign nation, its gross domestic product would be the fifth largest in the world, ahead of Britain’s. Given that, California’s strengths and resilience are formidable. Even so, Healy points out, municipal-bond investors should diversify among credits within the state—something the wild fires have emphasized again.
Taxes are a powerful incentive for California muni investors to stick with in-state credits, which are exempt from state and federal taxes. The top state income tax bracket is 13.3%, and under the new tax laws, the federal deduction for state and local taxes is capped at $10,000. Diversification among various types of credits and sectors, from tax-supported general obligations to revenue bonds for water and health-care systems, can mitigate risk for investors sticking to their home state, she adds.
There are considerations other than dollars and cents, however. Philippa Dunne of the Liscio Report, who grew up in Malibu, writes that the fires were a central part of her childhood. Dragging panicked horses from their stalls for the safety of the beach when fires raced through her area was her job, which provided a unique perspective.
She writes that she spoke recently with a real estate agent friend from Montecito, which she describes as “one of the most idyllic places on earth.” He said he couldn’t tell if business was slow because of the rise in mortgage rates or maybe “because buyers are afraid to invest in multimillion-dollar properties threatened by fires and rushing mud.” (Mudslides are a problem in the Golden State, too.)
For now, investors are trying to come to terms with the immediate losses from the California fires. Once the damage is repaired, the question will remain: Who will want to face the seemingly annual onslaught of fires and their aftermath? A similar question may be asked of Florida and the rest of the Gulf and Atlantic coastal regions beset by seemingly worsening hurricanes. Regardless of whether one accepts the scientific evidence of climate change, the economic risks appear to be increasing. And increased risk inevitably is reflected in asset prices.
Barron’s
By Randall W. Forsyth
Nov. 16, 2018 1:06 p.m. ET
Fitch Ratings-San Francisco-16 November 2018: Similar to past wildfires, Fitch Ratings sees no immediate credit impact on Fitch-rated U.S. public finance credits from the current California wildfires, which are ongoing both in Northern California in Butte County and Southern California in Ventura and Los Angeles Counties.
The primary areas affected by the latest fires are in Butte County (Camp Fire) and in and around the city of Thousand Oaks in Ventura County as well as adjacent areas of Los Angeles County (Woolsey Fire). The Camp Fire has burned over 142,000 acres and was reportedly 45% contained as of Nov. 16. The Woolsey Fire has burned over 98,000 acres and is 69% contained.
As with most natural disasters, Fitch believes the fiscal impact of the fires on rated entities in Ventura and Los Angeles Counties will be largely mitigated by their financial flexibility and support from federal and state governments and private insurance policies. The federal government declared a federal disaster on Nov. 12.
The local governments affected by the fires are likely to use a combination of federal relief funds, state support and insurance claims to pay for most fire-related damage. Economic damage, such as lost tourism income, and crop damage and lost revenue due to school closures, is likely to be temporary and followed by significant increases in economic activity as communities rebuild after fires or waived by the state in the case of lost school revenue due to fewer school days.
Individuals and local governments can seek assistance from the federal government. In addition, the state of California’s fiscal 2019 enacted budget includes $2.3 billion in the state’s fund for economic uncertainty which can be tapped for unexpected events such as natural disasters. Despite the state and federal assistance available, the recurrence of wildfires in certain parts of the western states does point to the need to maintain reserves for economic or capital emergencies. Once federal and state assistance ends, if an isolated community such as Paradise does not rebuild, the reduction in tax revenues could cause an ongoing mismatch between revenues and expenditures.
Fitch does not rate any entities in Butte County; however, the devastation in Paradise points to the inherent asymmetric risk of natural disasters in smaller, remote areas where a single incident can devastate such a large proportion of a local or regional economy. The fire has reportedly destroyed over 90% of residences and 50% of the businesses in Paradise. The lost housing makes up about 10% of the entire county’s housing stock. It is not clear if/when residents will be able to return and how many businesses will decide to remain.
Ventura County (Issuer Default Rating (IDR) ‘AA+’), located north of Los Angeles County, is a mix of suburban, rural, tourism, military and agriculturally-oriented communities and had a 2017 population of over 850,000. Fitch expects any near-term budgetary fire-related impacts due to assessed valuation (AV) declines and the added cost of fire-fighting and clean-up to be manageable relative to the county’s roughly $1 billion general fund budget. Given its location within the greater Los Angeles metropolitan area, Fitch expects most damaged property in affected communities in Ventura County to be rebuilt, which will maintain tax bases, rather than residents and businesses leaving the area.
Conejo Valley Unified School District (‘A+’IDR/’AAA’ 2018 general obligation bonds) is located in Thousand Oaks where the Woolsey Fire started. The district has closed all schools until Nov. 26 and reports that while no schools sustained any structural damage, all require some level of restoration and/or cleaning.
The following school districts were closed for one or more days due to air quality but are now all reopened:
–Hueneme Elementary School District (‘AA-‘ IDR);
–Mesa Union School District (‘AA’ IDR);
–Simi Valley Unified School District (‘A’ IDR/’AAA’ 2016 and 2017 GO bonds);
–Oxnard Union High School District (‘AA-‘ IDR).
On Nov. 9, Tom Torlakson, the state’s superintendent of public education announced that state assistance is available for any schools forced to close. State law allows local educational agencies to apply for a waiver to hold them harmless from the loss of Local Control Funding Formula (LCFF) funding based on attendance and state instructional time penalties, if they have to close because of a natural disaster such as floods, fires, or earthquakes.
On Nov. 16, schools, universities and other facilities throughout the Sacramento and Bay Areas are closed to due unhealthy air quality.
For more information on environmental risk considerations in Fitch’s ratings, please see “Environmental Risk in U.S. State and Local Government Ratings” at https://www.fitchratings.com/site/re/10031874.
Contact:
Karen Ribble
Senior Director
+1-415-732-5611
Fitch Ratings, Inc.
1 Post Street, Suite 900
San Francisco, CA 94104
Graham Schnaars
Analyst
+1-415-732-7578
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
CHICAGO — The Chicago City Council on Wednesday gave overwhelming approval to the final budget proposed by Mayor Rahm Emanuel, who leaves office next year, and who said he will address looming pension funding challenges in December.
“Our work is not done but we can say given where we were at a fiscal cliff seven years ago, financial drain on the city, we can say with confidence we’re back on solid ground,” Emanuel told the council following its 48-1 vote on his $10.67 billion budget for fiscal 2019.
The mayor, who announced in September he will not seek a third term in office, said he would return to the 50-member council next month to lay out “necessary steps” for city pensions.
Chicago’s unfunded pension liability was $28 billion in 2017, down from $35.7 billion in the prior year. The big liability, along with years of budget deficits, led to downgrades of Chicago’s general obligation credit ratings and higher borrowing costs.
The third-largest city in the United States also faces pension contributions that will grow to $2.13 billion in 2023 from $1.02 billion this year even after raising fees and taxes to save the city’s four pension funds from becoming insolvent. A decision on pursuing the issuance of as much as $10 billion of pension debt had been delayed in the wake of Emanuel’s lame-duck status and rising interest rates.
S&P Global Ratings, which rates Chicago BBB-plus, last month cautioned Chicago about the use of pension obligation bonds (POBs).
“Depending on the structure of the POBs and whether or not the city would make changes to its pension funding discipline, issuance could have rating implications for Chicago,” the credit rating agency said.
The spending plan for the fiscal year that begins on Jan. 1 includes a $3.82 billion operating budget, but no new tax increases.
It also aims to eliminate a projected $98 million deficit, the smallest since fiscal 2008, and accommodate nearly $114 million in additional spending through various measures, including savings from refinancing outstanding GO bonds with a higher-rated securitization of sales tax revenue.
The city placed a $1.3 billion bond refunding issue on hold late last month because of adverse conditions in the U.S. municipal market. Kristen Cabanban, a spokeswoman for Chicago’s finance department, said the city’s Sales Tax Securitization Corporation will sell approximately $624.6 million of tax-exempt bonds on Thursday.
By Reuters
Nov. 14, 2018
(Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis and Grant MCCool)
City Hall is racing the clock to lock in development deals for a series of megaprojects.
Racing against the electoral clock, the Emanuel administration is moving quickly to lock in development deals for a series of megaprojects in neighborhoods abutting the central area of the city—potentially providing a huge boost to Chicago’s economy but at a cost of what easily could be $1.5 billion or more in subsidies.
In an interview, David Reifman, commissioner of the city’s Department of Planning & Development, said he hopes to win final approval by May of pacts involving the 62-acre vacant property that developer Related Midwest wants to build along the east bank of the river from Roosevelt Road to Chinatown; the Lincoln Yards project that developer Sterling Bay wants to build along the North Branch of the Chicago River between Lincoln Park and Bucktown; and the long-vacant former site of the Michael Reese Hospital on the east edge of the Bronzeville neighborhood. May is when Mayor Rahm Emanuel leaves office.
The administration also would like to see a deal involving Tribune Media’s riverside parcel between Grand and Chicago avenues—a project it has dubbed the “River District”—with work already underway on a less-noticed NorthPoint industrial development at 120th Street and Avenue O, Reifman said.
CRAIN’S CHICAGO BUSINESS
GREG HINZ ON POLITICS
November 05, 2018 12:27 PM
Detroit’s ready to issue bonds that are not backed by the state of Michigan. Moody’s Investors Service reports the city should be able to handle that. But Moody’s says Detroit’s future rests on economic development reaching the city’s neighborhoods.
The credit ratings service Moody’s says Detroit has recovered enough from bankruptcy to safely borrow millions of dollars without being backed by the state of Michigan.
But Moody’s is concerned whether the city’s recovery will continue if it is mainly anchored in Detroit’s downtown.
Moody’s reports that Detroit officials plan to issue $115 million in tax-exempt municipal bonds around the beginning of December.
The Detroit City Council had previously approved a request from Mayor Mike Duggan to issue a total of $255 million in new bonds over the next five years.
The borrowing is supposed to pay for capital projects in the city.
The credit ratings agency Moody’s approves of the move, noting there’s been an economic resurgence in Detroit’s downtown since it exited the nation’s largest-ever municipal bankruptcy.
But Moody’s warns that Detroit will continue to see people move out if progress does not extend to the city’s neighborhoods.
Moody’s estimates Detroit has lost about 35,000 residents since 2010.
The credit ratings agency also fears the Detroit Public Schools Community District could dramatically slow the city’s revitalization.
The school system was rescued by the state of Michigan and now has very little funding on hand to make badly-needed improvements to its buildings and infrastructure.
Nov. 12, 2018
CHICAGO — Puerto Rico violated a law meant to safeguard the pensions of its public-sector workers who have been unable to invest the more than $300 million they contributed to a new retirement plan, according to a lawsuit filed against the U.S. commonwealth’s government and others by two labor unions on Thursday.
The litigation, filed in U.S. District Court in San Juan, joins a long list of adversary cases in a form of bankruptcy Puerto Rico’s federally created oversight board initiated in May 2017 to restructure the island’s $120 billion of debt and pension obligations.
It is also the latest chapter in a fraught relationship between Puerto Rico and its government employees, particularly teachers.
In the latest lawsuit, the American Federation of Teachers and the American Federation of State, County & Municipal Employees point to Law 106, enacted in August 2017 to require wage deductions from workers participating in a new retirement plan to be placed into segregated employee-controlled, 401(k)-style accounts that they said have not been created.
The unions claim that while workers’ contributions totaled $316 million as of July 31, employees have been unable to invest the money, missing out on “historically high stock market returns.”
“For all intents and purposes, the commonwealth is seizing employees’ own funds and hiding them under a mattress – in this case, upon information and belief, government bank accounts at Banco Popular earning virtually zero interest,” the lawsuit claimed.
The unions, which represent thousands of teachers and government workers in Puerto Rico, asked the court to find the defendants in violation of Law 106 and of their fiduciary duties and require the creation of accessible retirement accounts by yearend. The lawsuit also seeks an undetermined amount of compensation for lost investment income.
Defendants in the lawsuit include Banco Popular, Puerto Rico’s governor, chief financial officer, treasurer, fiscal and financial advisory authority, retirement board, as well as the oversight board. The latter, an entity established by a federal law known as PROMESA, failed to force the commonwealth government’s compliance with the law, according to the lawsuit.
“We agree the government of Puerto Rico should set up the defined contribution accounts as soon as possible; however, we won’t comment on the lawsuit at this time,” Natalie Jaresko, the oversight board’s executive director, said in a statement.
There was no immediate comment on the litigation from the other defendants.
By Reuters
Nov. 16, 2018
(Reporting by Karen Pierog in Chicago; Additional reporting by Luis Valentin Ortiz in San Juan; Editing by Matthew Lewis)
Puerto Rico’s lawmakers approved legislation that would vastly overhaul taxation on the island, including through controversial provisions that legalize certain types of still-underground gambling.
The bill, which received final approval by the Senate late Tuesday, would also impose a 29 percent tax on non-island companies that provide services to the Puerto Rican government, including lawyers and financial consultants involved with the commonwealth’s record setting bankruptcy. It now goes to Governor Ricardo Rossello for his signature.
The legislation would also reduce the corporate tax to 18.5 percent from 20 percent. But overall, the changes are projected to increase annual revenue by as much as $400 million a year, in part due to other new forms of taxation, according to Carmelo Rios, majority leader in the Puerto Rican Senate.
With much of the overhaul widely supported, the recent debate has centered around a contentious provision to legalize slot machine-like gambling terminals outside of casinos. The bill allows for as many as 50,000 so-called video lottery machines, which lawmakers project will generate some $100 million a year in revenue for the bankrupt U.S. commonwealth.
An estimated 25,000 such terminals are already operating illegally around the island in bars, supermarkets and even gas stations.
“These machines already exist and compete with our casinos,” Senator Rios said Wednesday in a phone interview.
The island’s federal oversight board — which was installed by the U.S. Congress to help chart Puerto Rico’s fiscal turnaround — said before the vote that it hadn’t seen evidence that the video lottery proposal wouldn’t eat into other island revenue streams. The government currently allows for the operation of on-island casinos, an important part of the tourist economy and a significant generator of taxes, which go in part to the commonwealth’s general account, as well as to the University of Puerto Rico and the Puerto Rico Tourism Company.
The bill allocates the lottery machine revenue to the police pension fund and municipal governments.
The 29 percent tax on the government’s service providers — in addition to mainland federal taxes — is partially meant to encourage companies to set up shop locally with a local payroll, according to accountant Kenneth Rivera, a former head of the local chamber of commerce.
Bloomberg Markets
By Yalixa Rivera
November 14, 2018, 2:56 PM MST
Fitch Ratings-New York-07 November 2018: A prospective Amazon headquarter split between Long Island City in New York and Crystal City in Northern Virginia would have at most a muted impact on the economies and credit quality of Arlington County and New York City, according to Fitch Ratings. The final announcement is expected by year end, although it may come as early as later this week.
The total impact of HQ2 is expected to include 50,000 new employees with an average salary of over $100,000 within 15 years and more than $5 billion in investment over up to 17 years. The additional economic activity could positively affect two of the four local government key rating drivers Fitch assigns, revenue framework and long-term liability burden, over the long term. However, given the large size of the locations remaining in contention, any impact would be modest, particularly if HQ2 is split.
We do not expect much change in home prices in either location as healthy economic dynamics are already pushing up prices and supply should be sufficient to absorb the needs. The Washington, D.C. area is more likely to benefit than New York City as it has slower growth in rents and home prices.
Similarly, an Amazon HQ2 split would not have much effect on employment. An analysis conducted by Fitch earlier this year indicates that even the full impact of HQ2 would represent a modest 1.5% of the labor force in the Washington, D.C. Metropolitan Statistical Area (MSA) and only 0.5% in the vast New York City MSA. Both MSAs have low unemployment rates. The impact could be more significant if the new facilities attract substantial numbers of related jobs.
The direct impact on local government revenues from Amazon will be reduced not only by splitting HQ2 but also by anticipated state and local incentives. The winners and their surrounding MSAs will see some indirect benefit from increased tax revenues generated by employees and related businesses.
Fitch rates Arlington County ‘AAA’/Stable and New York City ‘AA’/Stable. Both already have ‘aaa’ assessments on their revenue frameworks. New York City has a weaker long-term liability assessment at ‘a’, but the incremental growth in the resource base from one of the HQ2’s would be insufficient to improve the assessment. Arlington County’s long-term liability assessment is already strong at ‘aaa’.
Contact:
Amy Laskey
Managing Director, USPF
+1 212 908-0568
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Grant Bailey
Managing Director, RMBS
+1 212 908-0544
Justin Patrie
Fitch Wire
+1 646 582-4964
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
A report released by the state shows some of the different proposed costs for commuters, out-of-state truckers and others using the proposed tolled routes.
As state governments continue to face constrained sources of revenue to fund transportation projects, some have been interested in adding tolls to highways that are currently free.
It’s a political hot potato for sure and something that isn’t a new idea in places like Connecticut, a state that faces numerous fiscal challenges and deteriorating roads and bridges.
Outgoing Gov. Dannel Malloy’s administration recently released a new report showing that introducing all-electronic tolling to highways across the state would raise approximately $1 billion annually.
Route Fifty
By Michael Grass,
Executive Editor
NOVEMBER 16, 2018
California Governor-elect Gavin Newsom’s top item on his agenda after winning the race to succeed Jerry Brown Tuesday is one important to municipal investors: the state budget.
“The number one priority right now is the budget,” the Democrat told reporters in San Francisco Thursday at his first news conference after the election. “I know everyone says that and they all say it. They should.”
He said the fiscal blueprint is “being put together as we speak” and that it should be “fully baked” around December 15. The state’s constitution requires that the governor submit a balanced budget to the legislature by Jan. 10.
Municipal investors are looking to the budget for signs that Newsom would continue the fiscal discipline Brown was credited for. Newsom on the stump has pledged to work for ambitious goals, from single-payer health care to universal pre-school, and bond buyers want to see how he would balance them against the threat of billion-dollar deficits during a recession.
Brown, a term-limited Democrat, has warned of the risk of new spending commitments when a recession occurs, which some economists see as soon as next year. California’s finances are particularly vulnerable in a downturn because of its reliance on wealthy residents for income-tax collections.
Bloomberg Business
By Romy Varghese
November 8, 2018, 12:23 PM PST
Golden State voters rejected Proposition 6, an effort to repeal increases to California’s fuel and vehicle taxes enacted last year by the Democrat-controlled state legislature.
Governor Jerry Brown signed the tax package, which boosted gas taxes by 12 cents a gallon, to raise $5 billion annually for transportation improvements. Many in the state objected to the tax increase after years of shouldering among the nation’s highest gas prices, leading to the attempt to repeal the tax.
GOP leaders saw the issue potentially stoking turnout among Republicans, although support for the gas tax rollback faltered. A mid-October poll by the Public Policy Institute of California showed the measure would likely fail by a small margin.
The measure would have also required voters to approve future gas tax increases, a shift Fitch Ratings and municipal-bond investors warned could limit the state’s financial flexibility in a recession.
Bloomberg Politics
By Jeffrey Taylor and Romy Varghese
November 6, 2018, 11:09 PM PST
LOS ANGELES (CBSLA) – Los Angeles voters Tuesday overwhelmingly rejected the proposed creation of a city-owned bank, something first suggested more than a year ago as a way to finance local entrepreneurs and affordable housing while also potentially creating a safe avenue for marijuana businesses.
By a margin of 57 to 42 percent, voters soundly rejected Measure B, which would have amended the city charter to allow it “to establish a municipal financial institution or bank.”
The L.A. City Council unanimously in June to place the ballot measure before voters.
Since City Council President Herb Wesson introduced the idea last year, the city council’s Ad Hoc on Comprehensive Job Creation Plan Committee has held several meetings on the topic, but many of the key details on how or if the city could actually create its own bank remain unanswered.
Wesson’s motion acknowledged the uncertainty, noting, “There are many milestones that must be met in order to achieve the formation of a municipal bank. Changes in federal and state law are necessary and significant decisions regarding the governance structure of a municipal bank must be made.”
In December of last year, lawyers with the City Attorney’s Office told the committee the public bank would be subject to the same laws that any other bank is when it comes to marijuana businesses. And since marijuana is still a Schedule 1 drug at the federal level, accepting deposits from cannabis businesses could violate the Banking Secrecy Act and open the city and employees at the bank to potential liability, the attorneys said.
However, there are efforts both at the state and federal level to change laws that would allow cannabis businesses to freely use banks, including the SAFE Banking Act, which is under consideration by a Senate committee and would make banking legal for the cannabis industry in states that allow the sale of the drug.
No city in America has its own bank, and the only public bank in the nation is the Bank of North Dakota, which was created in 1919.
November 7, 2018 at 1:00 pm
SAN JUAN, Puerto Rico — A federal judge overseeing a bankruptcy-like process for Puerto Rico has approved the restructuring of the island’s Government Development Bank in a move that officials called a “major milestone.”
The government issued a statement saying Tuesday’s ruling is a significant step forward for the U.S. territory as it tries to restructure a portion of its more than $70 billion public debt. The bank oversaw the island’s debt transactions and was a lender to the central government and municipalities.
A federal control board overseeing Puerto Rico’s finances also praised the ruling, which comes as the island struggles to emerge from a 12-year recession.
The Associated Press
Nov. 6, 2018
SAN JUAN, Puerto Rico — More than a year after Hurricane Maria caught Puerto Rico’s government wildly unprepared, officials acknowledge they still haven’t come up with a plan to cope with the next such disaster — and it’s not clear when they will.
The U.S. territory’s government insisted for months that it had a complete, updated disaster plan, saying it was kept secret due to protect information about vulnerable infrastructure and officials’ private contact details.
But a suit filed by Puerto Rico’s Center for Investigative Journalism led officials to concede last month that that plan doesn’t deal with catastrophic events such as hurricanes and earthquakes, prompting outrage on an island where many blame government bungling for the estimated 2,975 deaths linked to Category 4 Hurricane Maria, which hit in September 2017.
“The government has clearly failed the people and hid the fact that the plan was under revision,” said Nazario Lugo, a former executive director of Puerto Rico’s emergency management agency and president of the island’s Association of Emergency Managers.
“We are talking about the lives of people. Someone is not going to react the way they’re supposed to. This is a team effort, and when the team is not in tune, when it’s not in position, it fails,” he said. “Lives are lost.”
Carlos Acevedo, director of Puerto Rico’s Bureau for Emergency and Disaster Management, did not respond to requests for comment about why the plan hasn’t been updated.
At the Oct. 30 court hearing, government lawyer Tania Fernandez said she didn’t know when the plan would be finished and made public because officials haven’t yet hired experts to create such plans.
A partial plan released by the government last month stresses the risks of poor preparation and blames previous administrations.
“The consequences of Hurricane Maria made it clear that we did not have emergency plans that contemplated such scenarios, nor the sufficient resources to face catastrophic disasters of such historical magnitude,” the document states.
However, Lugo and another former emergency management agency director, Epifanio Jimenez, said Puerto Rico has had a plan for a Category 4 hurricane that was drawn up after Hurricane Hugo, a Category 3 storm, hit the island in 1989. They say Gov. Ricardo Rossello’s administration failed to follow it.
“They’re using the impact of Maria … to justify the unjustifiable,” Jimenez said of what many consider a botched government response to that storm. “Improvisation is the worst enemy of emergency management, and we saw that.”
Lugo and Jimenez said that emergency response was hindered by a lack of fuel and truck drivers, communication between local government agencies broke down, supplies weren’t dispatched quickly enough and officials didn’t know the immediate needs of each municipality.
Despite the lack of a finished formal plan, local and federal officials have learned lessons from Maria and are more prepared than they were when that storm hit, according to Jesus Cuartas, an operational planning chief for the Federal Emergency Management Agency, who urged patience.
“We are not racing for time,” he said. “Any plan that is simply rushed out the door … the thought of that being viable is slim to none.”
The Associated Press
Nov. 6, 2018
Contractors worry minimum-wage law and Trump administration tariffs could slow rebuilding efforts
Miguel Córdoba had trouble finding steady work as a carpenter and handyman before Hurricane Maria devastated Puerto Rico last year. Now the 52-year-old says he pulls steady 40-hour workweeks for a taxpayer-financed housing program that repairs damaged residences.
His wages have nearly doubled, too, thanks to a new minimum-wage law enacted last summer by Puerto Rico Gov. Ricardo Rosselló, coupled with a surge in demand for construction labor across this struggling U.S. territory. Mr. Córdoba spent his summer days fixing roofs and windows and installing toilets, wash basins and cabinets in houses mostly in eastern Puerto Rico, where Hurricane Maria first made landfall.
The construction workforce, estimated at roughly 33,000 before Hurricane Maria, will need to double to keep up with demand to rebuild roads, houses and other infrastructure damaged in last year’s storm season, said Emilio Colon-Zavala, president of the Puerto Rico Builders Association. Cement sales, a proxy for construction activity, increased for eight months straight after Hurricane Maria to 33% above prestorm levels.
The Wall Street Journal
By Andrew Scurria and Julie Wernau
Nov. 6, 2018
In a 29,000-resident city on the outskirts of Atlanta, voters struck down a ballot proposal that would have allowed the wealthiest neighborhoods to secede and form their own town, according to the Atlanta Journal-Constitution.
The referendum in Stockbridge, Georgia, is the sort that would usually get little national notice. But it could have created a worrisome precedent: The proposed municipality would have taken about half the city’s tax revenue with it while leaving Stockbridge with all of its debt. S&P Global Ratings said the credit ratings of Georgia cities could be jeopardized if such crackups proliferated.
Bloomberg Politics
By William Selway
November 7, 2018
Baltimore’s water works won’t be sold off.
Voters in Maryland’s largest city on Tuesday by a vote of 77 percent supported a ballot measure that bars it from privatizing the government-owned water and sewer system, with votes from all but six precincts reporting, according to preliminary returns.
The results promise to make Baltimore the biggest American municipality to ensure that its system remains in public hands, bucking a movement by companies including America Water Works Co. to run such utilities. Some cities, including Allentown, Pennsylvania, have relinquished control of utilities in order to raise needed cash, and Jacksonville, Florida, has weighed whether to privatize its electric and water system.
The election in the 612,000-resident city came as Democrats won the U.S. House of Representatives from Republicans. President Donald Trump unsuccessfully pushed for a broad expansion of private investment in America’s infrastructure, seeing it as a way to reduce the federal cost of improving roads, bridges and other public works. To advance any infrastructure plans, he’ll now have to work with a party less welcoming to privatization.
Bloomberg Politics
By Danielle Moran
November 7, 2018, 11:34 AM PST
The 2019 Rhode Island budget demonstrates a determined effort to keep expenditures in line with modest revenue growth. A larger-than-expected surplus in 2018 provides the state some additional budgetary flexibility in the current year. In May 2017, the Employees’ Retirement System of Rhode Island board reduced its pension discount rate from 7.5% to a more conservative 7.0%, along with other assump…
Nov. 5, 2018
North Carolina’s economy has diversified over time and demographic trends remain relatively healthy with a continued modest pace of economic recovery since the Great Recession. The state is managing growth and its financial future by addressing its long-term liabilities. This year, it enacted the 2018 Build NC Bond Act, a $3 billion authorization of appropriation-backed obligations of up to $300…
Nov. 5, 2018
Oregonians approved statewide ballot Measure 102 on November 6 and, in doing so, have provided local governments in Oregon with a powerful new tool to help address Oregon’s affordable housing crisis. The passage of Measure 102 offers new opportunities for partnerships between local governments and private entities to develop and preserve affordable housing throughout Oregon.
Housing Crisis in Oregon
Many Oregonians struggle to afford housing. The cost of housing in Oregon has risen by more than 300 percent since 1980. The National Low Income Housing Coalition reports that more than 50 percent of renters in Oregon are rent-burdened, spending more than 30 percent of their income on housing.[1]
The average Fair Market Rent for a two-bedroom apartment in Oregon is approximately $1,105, according to the Department of Housing and Urban Development. For such Fair Market Rent to be less than 30 percent of household income (i.e. for a household not to be rent-burdened), annual household income must be at least $44,214. As a result, there are only a handful of rural, sparsely populated counties in Oregon where a full-time minimum wage worker can afford a two-bedroom apartment at what HUD has determined to be the Fair Market Rent for those counties.[2]
The City of Portland has declared a housing emergency to combat escalating rent prices and homelessness. Likewise, Metro, the regional government in the Portland metropolitan area, has prioritized the funding of affordable housing. Voters in Portland, in 2016, and for Metro, on November 6, approved general obligation bond measures authorizing hundreds of millions of dollars of property-tax-supported funding for affordable housing. Given the passage of Measure 102, other communities across the state may consider similar general obligation bond measures to help address the affordable housing crisis.
How Affordable Housing Projects Are Financed
The vast majority of affordable housing projects are financed with a combination of funding sources, most prominently including federal Low Income Housing Tax Credits (“LIHTC”), and conventional taxable debt or tax-exempt obligations issued by a governmental entity (depending on the LIHTC program being utilized). The LIHTC program provides tax credits to developers who create affordable housing units. These credits, in turn, are sold to private investors to generate funding for the affordable housing project. The LIHTC program requires private ownership of such affordable housing.
Given rising land and construction costs for new affordable housing projects and the rising costs of acquiring and rehabilitating existing affordable housing projects, the funds provided by LIHTC and taxable or tax-exempt debt are rarely sufficient to finance an affordable housing project. These projects must also rely on various other sources to provide the necessary “gap” funding. Sources for gap funding include subordinate loans and grants provided by the State of Oregon, local government resources including urban renewal funds, and loans, grants and other funds provided by project sponsors, foundations and others.
The Benefits of Measure 102
Prior to the passage of Measure 102, Section 9 of Article XI of the Oregon Constitution prohibited local governments from partnering with private entities to construct projects funded by general obligation bonds for any project that was privately owned. This “lending-of-credit” prohibition contained in the Oregon Constitution, adopted in 1859, states: “No county, city, town or other municipal corporation, by vote of its citizens, or otherwise, shall become a stockholder in any joint company, corporation or association, whatever, or raise money for, or loan its credit to, or in aid of, any such company, corporation or association.”
Measure 102 creates an affordable housing exception to the lending-of-credit prohibition. With voter approval of Measure 102, Oregon counties and cities can now ask their voters to approve property-tax-supported general obligations bonds to finance the construction and preservation of affordable housing without requiring governmental ownership of such housing, making LIHTC and other private capital available for such housing. Measure 102 requires each local government issuing general obligation bonds for affordable housing to define how a specific bond issue may be used and the type of affordable housing that can be financed. This measure-specific requirement will provide local governments with flexibility in determining the appropriate projects to support, ranging from deeply affordable projects for people earning much less than area median income, to workforce housing for people earning higher wages, possibly at or higher than area median income, all depending on specific community needs.
With the passage of Measure 102, the proceeds of general obligation bonds approved and issued to finance affordable housing can be used as a much-needed source of gap financing for affordable housing projects. Leveraging property-tax-supported funds with private LIHTC investment and debt will create and preserve many more affordable housing units than would be possible under a public ownership model and should operate to close the funding gap on projects that would not otherwise be feasible. Measure 102 provides local Oregon communities with an opportunity to increase the stock of affordable housing and become key players in addressing and finding solutions to Oregon’s affordable housing crisis.
Orrick’s Affordable Housing Finance Expertise
The Portland-based lawyers who work in Orrick, Herrington & Sutcliffe’s public finance practice have unmatched experience in affordable housing finance, serving as Bond Counsel to state and local issuers of housing bonds in Oregon, and representing banks and underwriters who provide capital for affordable housing projects. We also regularly represent Oregon local governments and special districts in the issuance of voter-approved general obligation bonds, providing us with a unique combination of expertise in the implementation of Measure 102. Please feel free to contact the Orrick team if you want to learn more about Measure 102 and the possibilities it provides for financing affordable housing in your community.
[1] “Out of Reach 2018: Oregon,” National Low Income Housing Coalition, available at https://nlihc.org/oor/oregon.
[2] Id.
Public Finance Alert | November.07.2018
AUSTIN — Lacking a good source of high-speed internet, Bridgeport kids have resorted to hanging out at fast-food restaurants to get online and do homework.
That could change soon, thanks to a new cable that’s coming to town under a public-private partnership between the small Wise County city and a private company.
“It’s going to be kind of a next-generation kind of thing,” said Kevin Lopez, a city council member in Bridgeport, about 45 miles northwest of Fort Worth. “Business or manufacturing weren’t coming out: we didn’t have the infrastructure in place.”
It’s a common cry around in rural and smaller Texas cities, where local governments may have limited ability to float bonds to cover infrastructure upgrades.
To meet demand, local entities, such as an economic development corporation, are turning to public-private partnerships, or P3s, to address a variety of needs.
“In addition to small city public-private partnerships for redevelopment, infrastructure and amenity projects, there are numerous examples of P3s that address broadband, water and wastewater facility operations and parking garages,” Mary Scott Nabers, of Austin-based Strategic Partners, Inc., wrote recently. “New small city public-private partnerships are also emerging in the areas of smart lighting, solar energy, municipal facilities consolidation and green storm water infrastructure.”
Cities can offer private partners grants, as well as “exclusive development rights…long-term leasing agreements…revenue-sharing opportunities,” and tax increment financing “in which future gains in taxes from a redevelopment effort are used to repay bonds that provide a financial incentive to an investor,” Nabers wrote.
Texas lawmakers last session rejected legislation authorizing the Texas Department of Transportation TxDOT to use P3s for a number of highway projects.
The move came after the state’s first public-private toll road, a 41-mile highway connecting Austin and San Antonio, hit a series of high-profile problems including a lack of traffic, debt and low revenues, according to the San Antonio Express-News.
Still, P3s spread as public funding hits limits.
At fast-growing Texas A&M, there’s a $368 million 3,400-bed P3 student-housing project.
To summarize a Bisnow report on the deal, a nonprofit builds on the university-owned land under a ground lease and the university owns the housing when the least ends.
A Texas’ attorney general’s opinion said that, “property held or dedicated for the support, maintenance, or benefit of an institution or institutions of higher education that is leased to students or employees of such institution or institutions is tax-exempt.”
According to an the Real Estate Center at Texas A&M, the university “has used the P3 model almost exclusively in recent years to expand access to student housing.”
Smaller Blinn College in Brenham, Texas, is also involved in a P3 project.
In Texarkana, Texas, the local housing authority is using a P3 renovate nearly 300 decades-old housing units.
The housing authority takes title to the properties from HUD, uses equity to obtain financing and outsources management.
“Subsidies are shrinking,” said Antonio Williams, executive director of Texarkana’s housing authority. “The housing authority ends up with equity.”
In Bridgeport, Fred Meyers, a board member of the local economic development corporation, is eagerly awaiting the arrival of cable and an improved internet connection .
He said the city and the economic development corporation each contributed about $10,000 to the project.
“We decided if we’re going to be competitive, we’ve got to be competitive in all areas,” Meyers said. “We decided as an economic development board (that) to attract business, we had to have better service.”
Once the private company finishes bringing cable from Decatur, about 10 miles to the east of Bridgeport, it wouldn’t take much to continue to smaller neighbors such as Chico or Paradise, each about five miles away, Meyers said.
“This affects everybody,” including the employees at his insurance agency, who Meyers said, talk about slow internet “day in and day out.”
He’s still waiting for the hook up at home, as is his wife, a retired school teacher.
It’s a big enough issue, Meyers said, “that my wife talks about it three days out of seven.”
By JOHN AUSTIN CNHI State Reporter [email protected] Oct 29, 2018
The state is currently in the depths of a drought.
Commenting on drought conditions now affecting much of Utah, the ratings agency Moody’s recently drew a connection between warming global temperatures and state credit quality.
Utah Gov. Gary Herbert, a Republican, in mid-October signed an executive order declaring a drought emergency. All of the state’s counties have experienced some level of drought in recent months, with those conditions persisting up through this week.
At the time Herbert issued the emergency order, 16 of Utah’s top 49 reservoirs were less than 20 percent full.
The year-long span between last October and this September was the driest on record in Utah, according to National Oceanic and Atmospheric Administration precipitation data.
Analysts with Moody’s Investors Service say the drought situation the state is now dealing with will not have an immediate effect on its credit quality. But they go on to say that it does highlight “Utah’s vulnerability to drought and its credit-negative exposure to drier conditions in the western US as global temperatures warm.”
Local governments are in a similar boat, the article from Moody’s says, noting “credit-positive economic and population trends are unlikely to be affected by the drought.”
“However, local governments and utilities may face negative credit effects over a longer time frame if the drought continues unabated,” the article adds.
The challenge going forward will be to balance limited water, much of which flows from mountain snowpack into the state’s watersheds, with a growing state population and agriculture—currently the biggest water user in the state.
Population Growth, Pending Pipeline
Utah’s population, now around 3 million, is expected to roughly double by around 2065, according to some estimates.
While the state’s population is growing, irrigation for agriculture has accounted for about two-thirds of the state’s water consumption in recent years. Moody’s notes that farming makes up less than 1 percent of Utah’s gross domestic product.
Utah is currently in the early stages of moving ahead with a project known as the Lake Powell Pipeline, which would transport water to communities in southern Utah from Lake Powell, a reservoir on the Colorado River, on the state’s border with Arizona.
The project would involve about 140 miles of buried pipe and other infrastructure and has an estimated cost of $1.1 billion to $1.8 billion.
State legislation passed in 2006 outlines a framework where the state would provide funding and then local water districts would pay it back, but all of the details of that arrangement are still not finalized.
The project needs to move through a federal permitting review to proceed.
The Utah Rivers Council is among the groups opposed to the project. It argues that there are less expensive options available, that residents in the areas the pipeline would serve could conserve more water, and that the project would reduce river flows downstream.
Route Fifty
By Bill Lucia,
Senior Reporter
NOVEMBER 2, 2018
Following the financial crisis of 2008, the financial regulations were tightened and financial markets have been expected to adhere to new regulations that promoted financial transparency and accountability in the corporate and local government operations.
The federal oversight agencies, like the Securities and Exchange Commission (SEC), have also been quite diligent with their oversight efforts and ensuring proper adherence. Furthermore, when credit rating agencies perform their analysis to assess the ability of borrowers, either local governments or private entities, to repay their debt, they also assess the entity’s compliance with financial regulations and compliance with its financial disclosures.
This rightful scrutiny of financial disclosures and transparency had recently been tested in the case of Manassas Park, VA, where S&P Global Ratings withdrew its AA- underlying rating on the city’s outstanding general obligation debt due to its non-compliance with filing comprehensive annual financial report (CAFR).
In this article, we will take a closer look at the role of credit rating agencies in assessing and monitoring the financial health of U.S. local governments and things that led up to the rating suspension of Manassas Park, VA.
municipalbonds.com
by Jayden Sangha
Oct 31, 2018
Little more than a year after Hurricane Harvey paralyzed Houston and wrecked thousands of homes, residents of the fourth-largest U.S. city will vote on a bitterly contested measure over firefighter pay that municipal leaders warn could trigger massive layoffs and service cuts.
In a Texas election season featuring an insurgent challenge to Republican U.S. Senator Ted Cruz by Democrat Beto O’Rourke, Houston residents are riveted on Proposition B, the Nov. 6 ballot measure that would bring firefighter pay to parity with police officers. At stake, according to Mayor Sylvester Turner, are hard-won public pension reforms that stabilized the city’s long-term financial outlook in the aftermath of last year’s devastating hurricane.
Bloomberg Politics
By Joe Carroll
October 31, 2018, 1:00 AM PDT
Baltimore may push back against privatization.
Maryland’s largest city on Tuesday will vote on a ballot measure that would bar it from selling off the government-owned water and sewer system, a step other financially struggling cities have explored to raise cash. If approved, Baltimore would be the biggest American municipality to ensure that its system remain in public hands, bucking a movement by companies including America Water Works Co. to run such utilities.
“This would be the first major city to basically say were not in the market for this,” said Michael Klein, attorney at Cozen O’Connor who specializes in water transactions. “It’s fair to say that a lot of different groups on all sides are watching what’s going to happen in Baltimore.”
The election in the 612,000-resident city comes after President Donald Trump unsuccessfully pushed for a broad expansion of private investment in America’s infrastructure, seeing it as a way to reduce the federal cost of improving roads, bridges and other public works. Some cities, including Allentown, Pennsylvania, have relinquished control of utilities in order to raise needed cash, and Jacksonville, Florida, has weighed whether to privatize its electric and water system.
But privatization plans have proven politically contentious and drawn push back from residents. Stockton, California, which collapsed into bankruptcy after the recession, cancelled after just four years a $600 million, 20-year deal struck in 2003 for its water and sewage systems. In Bayonne, New Jersey, water rates have risen about 28 percent since a private equity firm and water company took control in 2012.
Aging Utilities
The private capital can be a boon for cities struggling to find money to invest in aging utilities. Nationwide, the U.S. needs about $470 billion over the next 20 years for its water infrastructure alone, according to the Environmental Protection Agency. In Baltimore, where nearly a quarter of the residents live below the poverty line, the century-old system has entered into a consent degree with the EPA that will require it to spend an estimated $1.6 billion in a little over a decade to stem pollution caused by its wastewater system.
Should the measure pass, Baltimore would need to find the money on its own, potentially through higher rates. Still, supporters of the privatization ban say it will protect residents because a corporation would need to charge even more to turn a profit on its investment. That argument has proven successful. Northampton, Massachusetts, in 2016 approved a measure that made it illegal for the city council to sell the water system. In 2010, Trenton, New Jersey, struck down such a sale at the polls by a nearly four-to-one margin.
“When you talk about a private company running a utility the only way it is going to turn a profit, which is what they’re concerned with, is reducing services or to jack up prices,” said Lester Davis, deputy chief of staff for Baltimore city council president Jack Young. “This is a public utility that deals with an essential element of life. There’s no amount of cost savings or consideration that will lead to elected leaders to gamble with that.”
He said the ballot measure was proposed after a spate of discussion about privatizing Baltimore’s water system.
“There was chatter around it that needed to be tamped down,” he said. “It was never going to be acceptable to privatize. By making it illegal, we could save a lot of time and just shut the door completely.”
Bloomberg Politics
By Danielle Moran
November 2, 2018, 7:25 AM PDT
It’s been more than three years since the Puerto Rican government acknowledged it was on the verge of economic collapse.
Since then, the island’s journey back to fiscal health has been a trying one, defined by a lengthy restructuring process, contentious litigation and the devastating impact of Hurricane Maria. Finally, however, the prognosis is improving.
This month marks a major step forward on Puerto Rico’s path to restructuring its massive public debt load. The island’s oversight board has filed a formal plan of adjustment in federal court to restructure roughly $17.5 billion in bonds issued by the Puerto Rico Sales Tax Financing Corporation (COFINA). With any luck, it will be confirmed by early next year.
The COFINA plan reflects the spirit of compromise that Congress envisioned when it passed the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) in 2016. Its terms stem from a settlement agreement reached by the commonwealth and COFINA parties that were previously squaring off in court.
If litigation had not given way to a negotiated resolution, it could have proved devastating. A likely ruling in favor of the COFINA camp would have cost Puerto Rico billions of dollars in debt relief and new capital.
On the other hand, an unforeseen victory for the commonwealth parties would have eroded confidence in constitutionally-protected property rights and rattled the entire municipal finance market.
With this context in mind, it is clear PROMESA worked as intended by facilitating cooperation and consensus. The proof is in the COFINA plan’s numbers.
The restructuring is slated to significantly cut the principal amount of outstanding debt by $7 billion and reduce future interest payments to bondholders. The commonwealth will also recoup more than 46 percent of the sales tax revenues that previously belonged to COFINA, resulting in hundreds of millions of dollars per year going back to the local government.
Along with anticipated reforms intended to entice private-sector investment, increasing the commonwealth’s share of annual sales tax revenues should be a legitimate growth catalyst. The local government will have much more financial flexibility to invest in infrastructure, improve essential services and pay general obligation debt.
Another key component of this compromise is that it balances equitable recoveries for local bondholders while sending a signal to market participants about Puerto Rico’s eventual ability to re-access capital markets. This is critical given that COFINA is the most widely held bond issuance among on-island retail investors and retirees.
Fair recovery levels, along with the resumption of coupon payments, can help stem outmigration and limit overdependence on the government.
But not everyone is on board. A handful of progressive pundits, including one former Treasury Department official involved in PROMESA’s development, are now pointing to highly-pessimistic financial forecasts to poke holes in the COFINA plan. However, their skepticism and underestimation of our fellow Americans in Puerto Rico is unjustified.
Data shows the commonwealth has been running considerable budgetary surpluses in recent years, ranging from $1.6 billion in 2015 to $2.9 billion in 2018. The annual surplus available to pay creditors could easily rise to $4 billion or more by 2020 if reforms sought by the oversight board are expeditiously implemented.
This underscores that the COFINA restructuring, which will require $420 million per year in the near-term, is a very feasible deal.
Even when the escalated payment rate of more than $900 million per year is reached in 2041, the commonwealth should have ample resources to pay the restructured debt while comfortably funding other public initiatives and obligations.
Of course, this deal is only one facet of Puerto Rico’s broader recovery. The local government must continue pursuing equitable restructuring agreements and deliver on important reforms called for in the oversight board’s fiscal plan. Building on the momentum achieved this month is critical to restoring the island to full financial health.
THE HILL
BY FORMER SEN. JUDD GREGG (R-N.H.) — 10/29/18 05:30 PM EDT
Former Sen. Judd Gregg (R-N.H.) previously served as chairman and ranking member of the Senate Budget Committee. He is also the former governor of New Hampshire. He has been an advisor to the COFINA Senior Bondholders Ad Hoc Group.
Wells Fargo Securities, the investment banking and capital markets business of Wells Fargo & Company, has announced the following new hires to its Government & Institutional Banking Division: Patrick McCarthy, Moira Baldwin and Ian Spier. Each join from Jefferies LLC and will specialize in Wells Fargo’s healthcare division within Public Finance.
“I’m pleased to welcome a trio of the industry’s top talent to our growing team,” said Stratford Shields, head of Wells Fargo Securities’ public finance. “As our clients grow and consolidate in the rapidly changing not-for-profit healthcare business, we are now able to provide both financing and strategic advisory services to help them achieve their objectives.”
Patrick McCarthy, a 28-year public finance industry veteran, will join the firm as managing director and co-head of Not-for-Profit Healthcare in early 2019. He previously headed Jefferies’ not-for-profit healthcare group. His predecessor firms include Goldman Sachs, where he served as managing director, and Morgan Stanley. A graduate of Lake Forest College, McCarthy will be based in New York. He will report to Shields.
Moira Baldwin and Ian Spier recently joined the firm as directors. They previously served as senior vice presidents in healthcare under the management of McCarthy at Jefferies. Baldwin, whose advanced expertise includes children’s hospitals and capital market solutions, attended Penn State Smeal College of Business, where she earned an MBA. She worked at Goldman Sachs prior to Jefferies. Spier, a graduate of Wake Forest University, has extensive experience in M&A and capital market transactions on behalf of not-for-profit healthcare systems. He worked at Bank of America prior to Jefferies. Both Baldwin and Spier will be based in New York and report to McCarthy and sector co-head Melissa Bastan.
“I’m thrilled to broaden our team’s scope of services for our clients,” said Bastan. “Patrick, Moira and Ian are proven leaders who will help our clients prepare for opportunities ahead.”
October 31, 2018
Miami’s government could face a tough financial future after it has been forced to dip into its reserves to pay for two costly legal settlements with its police and fire unions.
The city has settled pension and salary disputes with the unions to the tune of $53.5 million, resolving a legal battle stemming from austerity measures taken during the Great Recession. More than half of the money will come from the city’s reserves, which will dip about $10 million below the city’s self-imposed threshold for maintaining a healthy rainy day fund.
The decrease could impact the city’s ability to borrow money for public projects. Bond rating agencies look at reserve balances when assigning ratings to cities. If Miami’s rating were lowered, it would mean the city would have to deal with higher interest rates when paying off municipal bonds.
Coupled with conservative financial projections that assume Florida voters will approve a state constitutional amendment that would expand the homestead exemption and reduce property tax revenue, city administrators say they will have to tighten their belts because of a potential $20 million deficit in the next fiscal cycle.
“We have to find ways to increase revenue and cut expenses,” said City Manager Emilio Gonzalez.
While the city has to pay out hefty legal settlements, it could have been worse. A city fiscal analysis shows the city could have been on the hook for $486,000,000 in back pay and pensions for the city’s police officers and firefighters. Settlements with each union approved by commissioners this month total $53.5 million, which includes about $37 million in upfront payments that will diminish the reserves. The commission approved the agreements and new labor contracts with the firefighters union Oct. 11 and the police union at Thursday’s commission meeting.
The contracts passed with little public discussion, though on Thursday, Commissioner Joe Carollo commented on the possible money issues down the road.
“If we don’t start cutting back now and finding new revenue, we’re going to be in big trouble in the next fiscal cycle,” he said.
“I agree,” said Christopher Rose, the city’s budget director.
Rose told the Miami Herald city departments have already begun meeting to discuss ways to save more and spend less. The city’s finance staff anticipates costs will increase and property tax revenue growth will slow.
“We’re being very cautious heading into the future,” he said.
One measure is already in motion. Commissioners are considering increasing parking rates across the city for nonresidents, a change that could bring in an estimated $6 million in revenue. After initial approval in September, the rate hike needs one more vote to become law.
The union lawsuits were precipitated by the actions taken the last time Miami faced a serious fiscal crisis.
In 2010, the city declared a financial emergency and invoked a state law that allowed administrators to force open union contracts and unilaterally impose cuts — the city cut salaries by as much as 12 percent and capped pensions. The controversial maneuver, led by former Mayor Tomás Regalado, saved the city about $100 million in labor costs and helped it avoid a financial meltdown as it faced a securities fraud investigation and flirted with bankruptcy. But the unilateral cuts also spurred lawsuits from the unions, who ultimately won in the Florida Supreme Court.
Instead of facing a nearly half-billion-dollar liability, the city hashed out deals with each bargaining group to settle the litigation and agree on new contracts.
“I believe we reached a fair deal with the city,” said Freddy Delgado, president of the Miami Association of Firefighters. “This is a new beginning with a new administration that values its employees. Our agreement brings stability to the city’s finances and we will continue to serve the citizens of Miami with excellence.”
After the upfront payments, which will occur after the legal formalities, each group will receive annual damages payments of between $2 million and $3 million over the next several years. The city budget, which went into effect Oct. 1, already factored in the pay increases under the new police and fire contracts. Firefighters are getting a 5 percent raise across the board. Police are receiving 3 percent.
THE MIAMI HERALD
BY JOEY FLECHAS
October 25, 2018 09:14 PM
Fitch Ratings-New York-24 October 2018: Fitch Ratings believes the state of North Carolina is well-positioned to absorb the costs and address the impact of Hurricane Florence, which the state estimates inflicted more than $12 billion in direct and indirect damage. North Carolina’s strong operating framework and high level of financial flexibility should allow it to address recovery costs, assist local government, citizens, and businesses, and begin to develop plans for future storm resilience in the hurricane’s aftermath.
North Carolina’s initial recovery plan from Hurricane Florence relies on a significant draw on the state’s budget reserve or rainy day fund, utilizing $756 million of the approximately $2 billion held in the fund. The sizeable remaining balance in the rainy day fund represents 5.5% of expected fiscal 2019 revenues. The appropriation from the rainy day fund to the new Hurricane Florence Disaster Recovery fund was incorporated in recently enacted legislation designed to address immediate recovery needs as well as longer term resiliency of the state to future storms. The legislation allocates $849.4 million to recovery activities out of $1.5 billion requested by the governor, most of which will come from the rainy day fund. The state does not anticipate a current need to reduce spending in other areas to address the costs of recovery, but does expect additional funding needs in future years.
Fitch expects the recovery costs from the storm will be shared between the state, private insurers, and significantly, the federal government through FEMA and the National Flood Insurance Program (NFIP). The state currently estimates receiving $2.3 billion in federal aid and is requesting an additional $3.4 billion. This, in combination with expected private funding, leaves an estimated $3.7 billion in unmet needs. The $849.4 million appropriation allows the state to begin addressing this need; however, the state will need to identify additional sources of funding to address the balance. One area of significant unmet need will be in the state’s agricultural sector where the state currently estimates there is over $2.3 billion in direct and indirect damage, of which less than $200 million will be covered by either federal programs or private insurance. Almost half of the state’s initial spending will address immediate needs in housing and agriculture, including $65 million FEMA matching funds for housing and public assistance.
Contact:
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Eric Kim
Director
+1-212-908-0241
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
The Boston Red Sox need to win two more games against the Los Angeles Dodgers to become 2018 World Series champions. But Worcester, Massachusetts, is already betting on the club’s future.
The city, about 50 miles (80 kilometers) west of Boston’s Fenway Park, is selling $30 million of municipal bonds next week to begin construction of a new stadium for the Red Sox’s triple-A minor league affiliate. The farm team is moving from Pawtucket, Rhode Island, their home of nearly 50 years, following a protracted bidding war between the two cities.
Minor-league baseball stadiums have evolved into smaller versions of their big league counterparts, complete with luxury boxes, kids’ attractions and nearby commercial development. And municipalities have jumped at the chance to host the teams. Fayetteville, North Carolina, sold $50 million in municipal bonds earlier this year to fund a stadium for a Houston Astros’s affiliate, for example. Wichita, Kansas, is selling $42 million in sales-tax debt next week to fund a stadium expected to house the Miami Marlins triple-A team.
Worcester’s bonds will kick off funding for the design, construction and equipment of the city-owned ballpark. Known as Polar Park, the stadium will seat about 10,000 fans and is expected to open for the start of the 2021 season. The city expects to sell another $73 million of debt for the project.
The ballpark will anchor a $240 million redevelopment effort that will include $90 million of urban apartments, a 150-room hotel, a second boutique hotel, and 65,000 square feet of retail and restaurant space.
The new issue bonds will be secured by Worcester’s full faith and credit and a limited tax on city residents, giving the bonds an AA grade from Fitch Ratings. They city expects revenue from the new development district to pay the bonds, while the team has agreed to make lease payments to the city in “amounts sufficient to meet the city’s obligations,” according to the bond documents.
Bloomberg Markets
By Danielle Moran
October 26, 2018, 10:55 AM PDT
The fiscal contrast between California Governor Jerry Brown and Gavin Newsom, the frontrunner to replace him, may best be shown through a decades-old program to fight blight.
Facing a $25 billion budget deficit, Brown entered office in 2011 with a cost-cutting plan that included killing hundreds of redevelopment agencies. Eight years later, Newsom is poised to inherit an almost $9 billion surplus. One of his campaign planks: bring the agencies back.
That kind of divergence is making bond investors in boom-and-bust California nervous. Newsom, a Democrat who is seen as coasting to victory over a Republican businessman, would have to balance campaign promises against the threat of a return to massive deficits.
“The fear is, will Gavin Newsom be able to enforce the discipline that Brown had?” said Eric Friedland, director of municipal research at Lord Abbett & Co., which oversees about $20 billion in munis. Loosening the budget would “be problematic, as we’re probably going to be facing an economic slowdown.”
There are 36 state gubernatorial elections on Nov. 6, and while California’s race isn’t exactly a nailbiter, it’s viewed as one of the most important. The state is the most populous in the U.S., boasts the fifth-largest economy in the world and is the country’s largest issuer of municipal bonds — with $73 billion in general-obligation bonds outstanding as of the beginning of the month.
Newsom, currently the lieutenant governor, is up against John Cox, who has never held political office. Cox has trailed in all independent polls and faces an uphill battle in California, which hasn’t elected a Republican to statewide office since 2006.
Wealth Disparities
Newsom, 51, has cited his previous experience as San Francisco’s mayor to support his pledge of fiscal responsibility. In a debate with Cox on public radio station KQED earlier this month, he said that his biggest concern is “addressing the income and wealth disparities in the state, in a way that doesn’t begrudge other people’s success but addresses these issues in a systemic way.” He declined to be interviewed for this story.
For investors, the question is just how long the market for California bonds will remain robust amid the leadership turnover and a potential recession. Wealthy Californians have clamored to own municipals as a tax shelter after last year’s federal tax overhaul curbed some of their deductions. That’s pushed yields on some state securities to levels close to those for top-rated bonds.
“Over time, as the credit begins to deteriorate, it could have some impact,” Friedland said. “Right now, California bonds are very, very rich.”
When Brown took office in 2011 — he also served two terms after Ronald Reagan was governor — California was the lowest-rated U.S. state and sparking grim comparisons to debt-ridden Greece. He presented what he called a “tough budget for tough times.” The elimination of redevelopment agencies, which had reversed blight but also embarked on dubious ventures such as golf courses, shifted property-tax revenue to schools and other purposes.
The state’s fiscal turnaround has been striking, bolstered by Brown’s spending cuts and voter approval of higher taxes that were billed as temporary but later extended through 2030. Fueled by Silicon Valley’s technology industry and a real estate revival, California’s economy has outpaced the nation’s since 2012.
Tax Reliance
The higher personal income tax rates for wealthy residents, however, have made the budget even more susceptible to fiscal downturns. When markets tumble, so do capital gains — and the state’s revenue.
Although Brown has padded the rainy-day fund to about $13.8 billion — the constitutional maximum approved by voters — it won’t be enough to completely absorb the effects of a moderate economic downturn, according to the Legislative Analyst’s Office. And after the second-longest expansion on record, some economists are expecting a recession by as soon as next year.
The next governor “stands a chance that four years from now, the state may be in a worse off position than what he’s coming into,” said Carol Flynn, co-head of the municipal bond department at DWS, which manages about $18 billion in munis.
Meanwhile, California suffers from more deep-seated problems. It has the highest poverty rate of any state — 19 percent — exacerbated by a shortage of affordable housing.
In response, Newsom is campaigning on priorities including access to preschool for every child and broader family leave policies. While use of the rainy-day fund is strictly governed, he could tap $2 billion in other savings for his plans.
To boost affordable housing, he would expand a version of redevelopment agencies from their current limited use that would enable more building. Cities could set up entities that tap taxes generated by new development for infrastructure projects and issue bonds. “We have specific goals” for these districts, Newsom said during his debate with Cox.
Newsom’s ambitions for future office may dictate how he governs, said Ksenia Koban, a municipal-credit analyst at Payden & Rygel Investment Management. Eighty-year-old Brown didn’t seem to care about making people angry by squirreling away money, she said.
“I don’t know if Newsom would have that degree of comfort,” she said.
Bloomberg Markets
By Romy Varghese
October 26, 2018, 9:28 AM PDT
Dive Brief:
Dive Insight:
When it comes to P3s, what often comes to mind are civil infrastructure projects such as highways, bridges and toll roads. While still not the norm, some state agencies have turned over the design, finance, construction and operations of these assets to the private sector while still retaining ownership. However, the P3 model can be used for any public project, like the Vermont Corridor project.
Proponents of the P3 model claim that private industry can deliver a building, road or most anything else more efficiently, allowing the public sector to take advantage of its design, construction and operations expertise, as well as access to financing. One of the major benefits of the structure is that it allows the public entity to spread out payments over a longer period of time, leaving enough cash to finance other projects. Some critics maintain that P3s don’t provide long-term financial value because private partners pay more to borrow money and include profit in their pricing.
For contractors that have the opportunity to participate in a P3 for the first time, the Associated General Contractors of America said it’s important that construction companies consider a wide range of issues, such as whether their role is short-term or long-term, what kind of financial risk and obligations the deal entails, and what level of community outreach will be required.
Construction Dive
by Kim Slowey
Oct. 23, 2018
Eight years of strong budget management simultaneous with an expanding economy, booming stock market, and (for six years) tax increases on its high-income taxpayers have dramatically strengthened California’s budget position. Compared with most states, California has assembled one of the strongest fiscal recoveries of the post-recession period.
Oct. 23, 2018
Political dysfunction as far as the eye can see.
Payson, Ill.
As the sun rose, the first frost of the season flashed silver across the mowed fields of Adams County, Illinois, and the same small group of regulars gathered at the Fast Stop gas station in Payson. They get their coffee here most mornings before commencing the day’s business. (One definition of progress: Americans used to worry about getting gas from a coffee shop; now we think nothing of getting coffee from a gas station.) Most of the guys are retired or close to it—firefighters, farmers, machinists. All but a couple of them are Republicans, and when they talk politics, as a visitor from out of town asked them to do one morning not long ago, they speak with an air of weary resignation. Like most people who’ve bothered to pay attention, they’re pretty certain what will happen on November 6, when the state decides who its governor will be for the next four years—the incumbent Republican, Bruce Rauner, or the Democrat challenger, J. B. Pritzker.
“We were just debating whether there’s such a thing as a conservative Democrat in Illinois anymore,” one of the regulars told the visitor. “We decided there are not.”
Another regular agreed. “Just about everybody around here owns a gun,” he said. “And nowadays if you own a gun in Illinois, you’re a Republican.”
“Basically,” said a third, “we’re never going to win another election statewide. The numbers just don’t add up. Which means not much is going to change.”
The Weekly Standard
by Andrew Ferguson
October 29, 2018
A FINRA arbitration panel ordered UBS to pay a client nearly $19 million in the latest case stemming from the performance of the firm’s closed-end funds of Puerto Rican muni bonds.
Luis Moyett accused the firm of breach of contract, negligence and violations of Puerto Rican securities laws among other misconduct, according to a copy of the arbitration award.
His claims mirror those of other UBS clients who purchased the firm’s closed-end funds of Puerto Rican municipal bonds, which took a beating when prices tumbled in 2013. Burned by the experience and losses, clients have filed hundreds of arbitration claims against UBS.
In its second quarter earnings report, UBS said it faced claims with aggregate damages of $2.6 billion. So far the firm has resolved more than half through settlements, arbitration or withdrawal of the claims. It did not disclose how much it has paid out so far.
Separately, the firm reached settlements with SEC and FINRA totaling more than $33 million.
In Moyett’s case, two other clients, Joseph and Carmen Quijano, were part of the initial arbitration proceedings. But the Quijanos reached a separate settlement with UBS in November 2017, details of which were not publicly available.
Peter Mougey, an attorney representing the Quijanos and Moyett, says he cannot talk about the Quijanos settlement because of its confidential nature.
At the start of the arbitration in 2015, the three claimants collectively sought $21.8 million in damages, according to FINRA arbitration records. It is not clear from publicly available arbitration records how that figure broke down per client.
Ex-Morgan Stanley advisor claims ‘trashing’ reputations is ‘common practice’ for firm
After the Quijanos’ settlement, Moyett pursued the arbitration through 35 hearings in July and August. Last week, the panel of three arbitrators issued a ruling in his favor. They granted him $14.9 million in compensatory damages plus 5% post-award interest; $3.8 million in attorneys’ fees; $215,000 in costs; and $750 to reimburse Moyett for the arbitration filing fee.
Mougey says the award has helped make his client whole and heralded the arbitrators’ conduct during the arbitration.
“This was a grueling job, often 13-hour days of testimony. There were over 300 exhibits, some hundreds of pages long. We think the panel got it perfect and I was very impressed with the long days they put in and their attention to detail,” he says.
Mougey, an attorney at Pensacola, Florida, law firm Levin Papantonio, says he’s represented about 300 former UBS clients. This was the largest award one of his client’s has received.
The arbitrators also ordered UBS to pay $56,700 of the $59,400 cost of the hearings.
The panel did not, however, grant Moyett’s request for punitive damages, a fact noted by UBS.
“While we respectfully disagree with this decision, it is important to note that the claimants were awarded less than they sought, perhaps because for over 20 years Puerto Rico bonds provided steady and substantial returns also coupled with extraordinary tax advantages available only to Puerto Rico residents,” the firm said in a statement.
The Bond Buyer
By Andrew Welsch
October 22 2018, 3:18pm EDT
A deal would clear one of the largest obstacles to emergence from the bankruptcy court protection
Puerto Rico bond prices soared Monday after the federal oversight board that runs the U.S. territory’s finances released a revised fiscal plan that raises expectations for disaster funding and economic growth.
Prices of Puerto Rico’s benchmark general obligation bond due 2035 jumped 10% to about 60 cents on the dollar, according to data from the Municipal Securities Rulemaking Board, reflecting higher expectations for bondholder recoveries.
Improving economic expectations have set the stage for a potential compromise with the hedge funds that hold much of the island’s $13 billion general obligation, or GO, bonds and have formed a unified group to negotiate a restructuring with the government and oversight board. A deal would clear one of the largest obstacles to Puerto Rico’s emergence from the bankruptcy court protection it entered in May 2017.
The Wall Street Journal
By Matt Wirz
Updated Oct. 22, 2018 5:47 p.m. ET
Puerto Rico’s latest fiscal plan anticipates a temporary return to economic growth and a potential $30 billion surplus over the next 15 years thanks in part to billions of expected federal disaster aid that may help lift the bankrupt island from a 12-year recession.
But that may be too optimistic, according to the Center for a New Economy, a non-partisan think tank that analyzes Puerto Rico’s debt and finances. While the influx of an anticipated $46 billion of federal public disaster aid will provide a jolt to the economy, it’s still unclear if those dollars will arrive fast enough to offset the impact of other austerity measures, such as cuts to municipal aid and the University of Puerto Rico, according to Mike Soto-Class, president and co-founder of CNE.
“There is what I think is an irrational exuberance right now in this money,” Soto-Class said about the federal disaster aid funds during a press conference Wednesday with reporters in the organization’s new offices in D.C. “Everybody in Puerto Rico thinks that this is going to be kind of our saving grace and billions are already pouring in and even more will come and everything’s going to be great. But that is not necessarily so.”
The federal relief funds and private insurance money expected to come into the island since last year’s hurricane has led its federal financial overseers to offer a more optimistic outlook for the bankrupt government’s financial turnaround.
The recovery plan it approved on Tuesday projects that the government will have a surplus of $17 billion through 2023, a stark reversal from the large shortfalls projected soon after the storm. That’s pushed up the price of Puerto Rico debt as bondholders speculate they may recover more of their investment than previously expected.
CNE’s concern stems from the slow distribution of FEMA cash. Of the nearly $15 billion that FEMA has directed toward Hurricane Maria relief, only $8.9 billion, or 60 percent, has been spent as of Sept. 30, according to FEMA’s most recent monthly report. That compares with 80 percent and 75 percent of disaster relief money spent, through September, for Hurricane Harvey, which flooded Houston in August 2017, and Hurricane Irma, which affected Puerto Rico and the U.S. Virgin Islands.
The latest fiscal plan, which a federal board that oversees Puerto Rico’s finances approved Tuesday, doesn’t take into account the time lag associated with these federal funds, Sergio Marxuach, CNE’s public policy director, said during the meeting with reporters. FEMA has warned that it can take a year and a half for funds to be paid out to contractors, according to Marxuach.
“If you obligate money to fix a road today and it takes you 18 months to actually disperse the money, that has an economic impact because that money that could be flowing now will be flowing later in the process,” Marxuach said.
Puerto Rico is using an alternative procedure to process all of the FEMA public relief money, which accounts for the slower disbursement, according to CNE. FEMA is allowing the commonwealth to waive its upfront cost share. That saves Puerto Rico money now but if projects run over budget, the island is obligated to cover those future costs.
The slower pace puts optimistic economic projections at risk, Marxuach and Soto-Class both said. Drivers still contend with dangerous intersections without traffic lights and dark, unlit streets. Some water pumps and cell-phone towers continue to rely on generators and people have stopped maintaining their lawns.
“If you see debris out and the grass isn’t cut and everything looks terrible, that just really weighs on you as a person and the effects of that remain to be seen,” Soto-Class said. “Those are going to be long-term effects.”
Bloomberg Markets
By Michelle Kaske
October 25, 2018, 8:26 AM PDT
Puerto Rico bonds rallied Monday after the commonwealth’s federal oversight board published an updated fiscal plan that apparently acknowledged a greater ability to repay its debt than had been previously estimated.
The latest projections suggest the island would have surpluses after contractual debt service through fiscal 2023, after accounting for a program of planned reforms, whereas previous plans had projected deficits. Without the reforms, the island is still projected to run deficits from fiscal 2021 onward, as federal disaster aid runs out.
Puerto Rico general-obligation debt with an 8 percent coupon and maturing in 2035 traded at an average of 59.3 cents on the dollar on Monday at 1 p.m., up more than 8 percent from its average of 54.6 cents on the dollar on Oct. 18. The bonds are the most actively-traded securities in the municipal market on Monday.
“In other words, Puerto Rico in the draft Fiscal Plan acknowledges that it will have the capacity required to pay its debts,” said Mark Palmer, an analyst covering municipal bond insurers at BTIG.
He also said that the projections “support the case for a consensual deal with creditors and insurers of its general obligation (GO) bonds at a recovery level well above the level at which the bonds currently trade.”
Puerto Rico general-obligation debt with a 5 percent coupon and maturing in 2041 traded at an average of 58.9 cents on the dollar on Monday afternoon, up more than 14 percent from its average of 51.4 cents on the dollar on Oct. 19. The bonds are the most actively-traded securities in the municipal market on Monday.
A footnote in the plan makes clear that the surplus is “for illustrative purposes only” and doesn’t represent expected future payments on restructured debt, but the bond market nevertheless took it as an improvement over past plans.
Still, Puerto Rico has a tough road ahead. The new plan calls for the commonwealth to trim financial support to municipalities and the University of Puerto Rico. It also says the island’s government should cut the number of agencies to no more than 35 from the current 114.
“Overall, this is just a plan that lays out a scenario if Puerto Rico were to implement significant reforms and cost cutting measures,” said Dora Lee, vice president at Belle Haven Investments, which oversees $7.5 billion in municipal debt. “So far the Puerto Rico government has not shown a willingness to do that.”
Bloomberg Markets
By Jonathan Levin and Amanda Albright
October 22, 2018, 11:04 AM PDT
— With assistance by Yalixa Rivera
Communities hoping to create their own cities by tearing away from established municipalities may find the price tag too high following a federal judge’s recent decision, political experts and residents watching the Eagle’s Landing effort say.
U.S. District Court Judge Leigh Martin May affirmed last week that if Eagle’s Landing’s is successful in its attempt to become a city by de-annexing and taking half of Stockbridge, it also will inherit millions in municipal bond debt and other obligations contractually tied to the territory.
“It should change the political, economic and financial calculation” of any community trying to copy the Eagle’s Landing, said Bart Hildreth, a professor at Georgia State University and expert on municipal bonds. “What it says is that there is an exit price from any kind of arrangement.”
How Eagle’s Landing’s secession plays out in Henry County is important to metro Atlanta because many believe other wealthier communities could use it as a template to break away from their home cities. For example, Buckhead could bolt from Atlanta.
If voters approve on Nov. 6 to take half of Stockbridge to create a new city, Eagle’s Landing would be overturning decades of precedent on how towns are formed, which is usually done by annexing unincorporated parts of a county.
Sandy Springs led the incorporation movement in 2005 when residents there overwhelmingly voted to chart their own path by becoming a city. What followed was a number of other incorporations, including South Fulton, Stonecrest, Milton, Brookhaven and Peachtree Corners.
Backers of Eagle’s Landing cityhood say they want to seperate to improve services such as roads and libraries and to spur economic development. Stockbridge leaders argue that would better accomplished as one community.
The Georgia Supreme Court and Judge May last week both declined to cancel the vote in court challenges brought by Stockbridge, which has called the referendum unconstitutional.
The judge made the ruling after Stockbridge and Capital Once Public Funding, the municipal bonding arm of banking giant Capital One, sought to stop the ballot referendum because they argued that the state had failed to create a mechanism for Eagle’s Landing to pay a share of more than $17 million in municipal bonds owed by Stockbridge.
Joshua Meddaugh, an associate professor of political science at Clayton State University, said knowing that municipal bond and other debt may follow residents will be a deterrent for similar incorporation movements.
But he thinks Eagle’s Landing residents who are seeking cityhood might think it’s a price worth playing.
“If they are benefiting from work that has already happened and if the money is going to be split in a way that makes sense … they may not object,” he said, especially for residents in unincorporated Henry County who might get sanitation and other services that they don’t currently have.
Vikki Consiglio, a leader in the fight for cityhood, said Eagle’s Landing was always going to have some role in paying the bond debt and that the judge’s affirmation of that has been overblown. She said how that debt will be handled and what the potential new city would pay will be negotiated with Stockbridge if Eagle’s Landing becomes a city.
James Carmichael, a resident of Eagle’s Landing who plans to vote against the measure, said he thinks backers of cityhood have been disingenuous in how it would impact the community. He said he believes that Eagle’s Landing would have to impose a city tax to pay for the money it would owe Stockbridge and that had this issue not been fought in court, residents would have never known it was within the realm of possibilities.
“It’s a game changer,” he said of the impact the debt could have on the vote.
Charles Marshall, who supports cityhood, said the debt does not change his mind, but he thinks it could have an impact on anyone who is wavering or has been suspicious of the motives of cityhood supporters. Because it’s unclear how the debt would be paid, he is taking a wait-and-see approach on cityhood.
“My hope is that whatever the outcome of this, it strengthens business in south metro,” he said. “That has been my goal from the start.”
The Atlanta Journal-Constitution
By Leon Stafford
Oct 24, 2018
Fitch Ratings-New York-17 October 2018: The city of Jacksonville’s Issuer Default Rating (IDR; AA/Stable) or related ratings and the Jacksonville Electric Authority’s (JEA) outstanding revenue bond rating are unaffected by the litigation filed by JEA in connection with its participation in the development of the Plant Vogtle nuclear power plants, according to Fitch Ratings.
A lawsuit filed by the JEA on Sept. 11 in Duval County, FL circuit court asserts that its purchase power agreement (PPA) signed in 2008 with Municipal Electric Authority of Georgia (MEAG Power; Project J revenue bonds rated A/Negative Watch) is invalid. The PPA requires JEA to pay MEAG Power for a portion of the energy output of the Vogtle 3&4 nuclear project, once completed, for the first 20 years of operation. JEA’s payments under the PPA are used to pay debt service on MEAG Power’s Project J revenue bonds and certain Department of Energy (DOE) loans used to finance Vogtle 3&4. The PPA requires JEA to pay for 50% of construction costs in the event the Vogtle 3&4 projects are not completed and construction is terminated. JEA’s legal claim asserts that JEA is not authorized to be a party to this PPA, given its unlimited nature, the fact that it was not approved by the Jacksonville City Council and that provisions of the PPA are in violation of the Florida constitution. In related litigation filed earlier the same day in the U.S. District Court of Georgia, MEAG Power asked for a declaratory judgement affirming JEA’s obligations under the PPA.
The nature of the legal claim and its outcome are critically important to repayment of the MEAG Power Project J bonds. Potential rating outcomes for the MEAG Power Project J bonds are discussed in the most recent rating action on MEAG Power with the relevant press release listed below. However, in regards to JEA’s and the city’s ratings, Fitch does not believe that the filing of litigation specific to this PPA represents a repudiation by the city and/or JEA of the PPA, or an unwillingness on the part of the city or JEA to pay its debts generally. The ratings on the city and the JEA continue to reflect their fundamental credit quality.
JEA’s management has indicated publicly that it will continue to honor its obligations under the PPA unless and until such time as a court determines that the PPA is not valid. JEA’s obligations under the PPA are unconditional and payable as operating expenses under JEA’s bond resolution. Fitch’s ratings on JEA, as well as the MEAG Power Project J bonds, assume that JEA’s obligations pursuant to the PPA will continue to be met. Fitch’s view is based on multiple legal opinions that were provided at the PPA signing and each MEAG Power Project J bond issuance, including opinions provided by the city and JEA’s General Counsel that JEA had all necessary power and authority to enter into the PPA. The PPA was additionally court-validated by the Fulton County, GA Superior Court and reviewed by the DOE as part of the federal loan security package.
While the timing and outcome of the court proceedings cannot be known, JEA has made, and expects to continue to make, all payments due under the PPA unless and until a court invalidates the PPA. JEA has set aside more than $50 million in funds for this purpose, which it expects will be sufficient to fund its PPA obligations until the scheduled commercial operation of Vogtle Unit 4 in November 2022. JEA’s legal claim with respect to the PPA appears isolated to the legal validity of this one specific contract. Any change in JEA’s current intention to continue paying its obligations under the PPA absent a court ruling striking down its validity would cause Fitch to reevaluate all relevant ratings.
Fitch has a rating of ‘AA’ on JEA’s outstanding electric system, bulk power supply and St. John’s River Power Park revenue bonds. The ‘AA’ rating reflects JEA’s strong financial profile, rate setting authority, continued reduction in outstanding debt and a diversifying power resource portfolio. In Fitch’s view, the significant cost overruns and timing delays associated with Plant Vogtle remain a concern. However, JEA has taken positive steps to minimize the impact on ratepayers by reducing operating costs and retiring debt early, leaving current cost escalations largely manageable to date. Further delays or cost overruns could erode future credit quality, depending on the severity, and will be assessed as they arise.
Fitch’s ‘AA’ IDR on the city reflects our expectation that the city will continue to demonstrate a prudent level of fiscal management, contributing to generally stable financial results and adherence to formal reserve policies that we view as an integral part of the city’s overall financial resiliency. Fitch believes JEA will continue to abide by the terms of an interlocal agreement with the city, pursuant to which it makes an annual contribution to the city’s general fund budget. The JEA transfer is the second-largest revenue stream for the general fund accounting for approximately 10% of total revenue.
Payments made by the JEA under the PPA secure approximately $1.4 billion in Project J bonds issued by MEAG that are currently rated ‘A’/Rating Watch Negative by Fitch. For more information on the Vogtle project and legal disputes, see Fitch Press Releases, ‘Fitch Maintains Rating Watch Negative on Municipal Electric Authority of Georgia Power Bonds Project J’, dated Sept. 18, 2018 and ‘Fitch Places Municipal Electric Authority of Georgia Bonds on Rating Watch Negative’, dated Aug. 10, 2018.
Contact:
Andrew DeStefano (JEA)
Director
+1-212-908-0284
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Michael Rinaldi (City of Jacksonville)
Senior Director
+1-212-908-0833
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
With California’s finances reaping the benefits of a booming economy, voters will have a chance to decide whether to run up the government credit card to alleviate a housing crunch and pay for public works: There’s about $16.4 billion of state bonds on the November ballot, the most since 2006.
But don’t expect a surge of sales even if voters feel generous. California already has the legal power to issue about $33 billion of bonds that have yet to be sold. Some of it was approved more than 20 years ago, according to data from the treasurer’s office. California has about $74 billion in outstanding general-obligation debt.
“They’ve definitely shown themselves to really pick their spots in terms of the market on when to make their debt issuances work for them, which is not always great if you’re an investor looking for more yield,” said Dora Lee, vice president at Belle Haven Investments, which manages about $7 billion of municipal bonds.
California holds statewide elections every two years. In November 2016, voters approved $9 billion for schools, the only bond measure on the state ballot.
In November 2006, voters signed off on all bond measures totaling more than $42 billion.
Here are the four state bond measures:
Bloomberg Markets
By Romy Varghese
October 18, 2018, 8:09 AM PDT
Cities across California are banking on sales tax as a solution to inflation, residents’ demand for services and looming pension costs.
Nearly 70 cities and counties will ask voters Nov. 6 to increase or extend sales and use taxes to help pay for public safety, road maintenance, homeless services and a grab bag of amenities often described in their ballot titles as “vital” and “essential.”
Locally, 19 cities in Los Angeles, Orange, Riverside and San Bernardino counties are seeking more sales tax revenue, and nearly all measures are increases. Just one – in the city of San Fernando – would extend an existing tax.
The Orange County Register
by Alicia Robinson
October 19, 2018
The Fifth Circuit Court of Appeals recently held that a New Orleans charter school was not a “political subdivision” exempt from the National Labor Relations Act (NLRA). The NLRA does not apply to States and their political subdivisions. In this case, the charter school challenged the National Labor Relations Board’s (NLRB) finding that its operator, Voices for International Business and Education, Inc., was not a political subdivision of Louisiana and thus was not exempt from the NLRA. The Fifth Circuit denied the school’s petition for review and in so doing affirmed the NLRB’s decision that the school’s operator had committed an unfair labor practice when it refused to recognize or negotiate with the labor union that was elected by the employees of the school and ordered the school to recognize and bargain with the union. Voices for International Business and Education, Inc. v. NLRB, No. 17-60364 (September 21, 2018).
Background
Voices for International Business and Education, Inc., a Louisiana nonprofit corporation formed by a group of citizens in 2009, operates the International High School of New Orleans (IHS). Since 2009, Voices has operated IHS under a charter with the Louisiana Board of Elementary and Secondary Education.
The United Teachers of New Orleans filed a petition with the NLRB seeking to represent Voices’ employees. Voices objected on the ground that the NLRB lacked jurisdiction because Voices was not a private employer subject to the NLRA but a political subdivision of the State of Louisiana. Voices’ position was rejected by a hearing officer and the NLRB. Specifically, the NLRB determined that Voices was not a political subdivision of the State of Louisiana as it “was neither created directly by the state of Louisiana so as to constitute a department or administrative arm of the government nor administered by individuals who are responsible to public officials or the general electorate.” The NLRB also rejected Voices’ request to exercise its discretion and decline jurisdiction.
IHS employees then voted in favor of union representation. Voices again refused to recognize or negotiate with the union, claiming that it was exempt from the NLRA as a political subdivision of Louisiana. The union filed an unfair labor practice charge against Voices for refusing to bargain as required by the NLRA. The NLRB found Voices committed an unfair labor practice and ordered it to recognize and bargain with the union. Based on the NLRB’s decision, Voices filed a petition for review with the Fifth Circuit challenging the NLRB’s finding that Voices was not a political subdivision of the State of Louisiana.
The Fifth Circuit’s Decision and Analysis
The Fifth Circuit ruled that a Louisiana charter school like IHS is subject to the NLRA just as most other private employers in the United States. After noting the NLRA does not define the term “political subdivision,” the court relied on the NLRB’s definition, which provides that a political subdivision is an entity that is either “(1) created directly by the state, so as to constitute departments or administrative arms of the government, or (2) administered by individuals who are responsible to public officials or to the general electorate.”
In finding that a charter school like IHS was not a political subdivision of the State of Louisiana, the court analyzed Louisiana’s legislation establishing charter schools in the state and the legislature’s purpose for doing so. The court noted that because, by design, the members of Voices’ board of directors are privately selected and the public has no control over the selection of Voices’ policymakers, Voices lacked the requisite direct political oversight as well as the requisite public control over policymaking to constitute a political subdivision pursuant to the NLRB’s definition. Therefore, Voices, as most private employers, is subject to the NLRA.
Notably, in reaching its decision, the Fifth Circuit rejected Voices’ argument regarding the public nature of charter schools, which relied on the Louisiana Supreme Court’s recent ruling that while Louisiana charter schools are “independent public schools,” they are treated as, and are a part of, the public school system. Instead, noting that the Louisiana Supreme Court’s ruling was not dispositive of the legal issue before it, the court relied upon a Louisiana attorney general opinion that explains that the mere fact that charter schools are public schools does not mean they are political subdivisions of the State of Louisiana. It likewise rejected arguments that Voices was exempt under the NLRA based on its receipt of public funding, tax-exempt status, and subjection to open meeting laws.
Key Takeaways
While the Fifth Circuit’s ruling effectively bars Louisiana and other similar states’ charter schools from arguing they are legally exempt from having to deal with unions or union organizing pursuant to the federal labor laws, this is likely not the end of this issue. This is especially true because the NLRB has taken opposite and conflicting views regarding the exempt status of other charter school systems throughout the country. Therefore, charter school operators that do not feel unionization would be a good fit for their respective schools may want to begin (or resume) educating their workforces about the pros and cons of unionizing.
Ogletree, Deakins, Nash, Smoak & Stewart
by Andrew Burnside and Javier Jalice
October 22 2018
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.
The City of Madison issued a one-week selling period of municipal bonds in early October to fund the renovations of Olbrich Botanical Garden. Sold in $500 increments, the bonds are meant to be more accessible to residents to provide an opportunity for them to invest in their community.
While these appropriately-named “community bonds” are receiving much attention, the use of bonds to fund City projects is less unusual than it may seem.
David Schmiedicke, City Finance Director, says the City of Madison issues about $100 million of debt a year in the form of bonds to pay for things like facility renovations, road construction and park improvements.
Typically, these investments are sold in $5,000 denominations. They provide low risk for investors because bonds, unlike stocks, are backed by a governmental authority with the power to tax, raise revenue and make investors whole if projects go under.
For the Olbrich project, the community bonds sold at one-tenth of the typical cost are priced to make such investments more accessible to Madison residents.
“This is about…democratizing our debt, allowing people in the City to more easily make that investment, and it’s a way for them to participate in the civic action of the City,” said Schmiedicke.
The cost of the renovation is split equally between Olbrich Botanical Society, who is doing private fundraising to cover its half, and the City. If community bonds would not have fit for the project, the City would have used normal bonds.
“The City share was going to be debt issued by the City,” which is a common way to fund projects such as this, Schmiedicke said. “We’re just taking a portion of that debt and issuing it in smaller denominations so that citizens and residents in the city can more easily purchase those investments.”
Not only are the community bonds opportunities to financially invest, but are ways to make an emotional connection with the community.
“From a growth perspective, our hope is really that this is something that attaches people to valuable projects and allows us to show that kind of community spirit,” said Eric Knepp, superintendent of the City of Madison Parks Division. “There’s a certain amount of public good, public commons through funding projects. That’s really where the essence of growth comes from.”
Schmiedicke said there has been a lot of positive interest expressed in the program. Knepp hopes the majority will be bought by Madison and Dane County residents.
“One thing that we look forward to is the $2.5 million in bonds will be owned by Madisonians who will not only get to enjoy the facility, but get a return on their investment,” Madison Mayor Paul Soglin said at a bond information session last week.
Madison Commons
By Sophia Dramm | October 21, 2018
City government officials and business leaders warn that San Antonio taxpayers would face tax increases and cuts to city services and infrastructure projects if some or all of three propositions on the November ballot are approved.
But how do propositions aimed at referenda rules, city manager salaries, and a firefighter labor contract translate to higher taxes? The answer lies in the City of San Antonio’s bond ratings.
Passage of the charter amendments and the changes they would bring could impact the City’s perceived stability, which could result in credit rating agencies giving the City a lower bond rating. That means the City would pay higher interest rates on money borrowed for infrastructure projects and the City would “pay more for less city services,” officials have said. And if the City wants to maintain the same level of services, taxpayers would fit the bill with increase taxes.
THE RIVARD REPORT
by IRIS DIMMICK
OCTOBER 21, 2018
Chicago Mayor Rahm Emanuel gave city council members a parting gift by proposing a 2019 budget that doesn’t ask them to raise taxes ahead of February’s municipal election. But it leaves a heavy lift for his successor.
The next mayor, who will take over in May, will see Chicago’s required annual contribution to the city’s four pension funds double from about $1 billion in 2018 to $2.1 billion in 2023, city documents show.
During his tenure, Emanuel has put all four retirement plans on a path to solvency and already boosted contributions to the funds, raising property taxes and utility fees to cover those bills. While that made headway toward arresting mounting financial strains that caused Moody’s Investors Service to downgrade Chicago’s bonds to junk grade, his plan delayed until after he left office a big jump in payments needed to pay down a $28 billion debt to the retirement system that built up years before he took office.
“What a lost opportunity,” said Dora Lee, vice president at Belle Haven Investments, which manages about $7.5 billion in municipal bonds, including Chicago debt. “This is the time to do something bold and expend the last of your political capital to really put Chicago on a better path, instead of waiting for the next person to deal with the problem.”
“He was so bold in his prior budgets, and he did make such great strides in years before in setting Chicago up on a more sustainable path, that this budget was kind of like ‘oh, okay,’ ” Lee said. “I wanted to see given his boldness with previous budgets a little bit more vision.”
Emanuel, a two-term Democrat who has decided not to run again, on Wednesday proposed a $10.7 billion spending plan for 2019. The 2019 budget speech touted his work since taking office in 2011, highlighting investments in education, public safety and steps to steady the pensions after the city shortchanged them for years.
“There’s no doubt that the mayor can take credit for stabilizing the city’s finances,” said Laurence Msall, president of the Civic Federation. “He leaves the city after 8 years in much better financial shape than he found it, but the challenges going forward are real.”
Emanuel thanked the council for taking the hard votes to steady the city’s finances and acknowledged that there is still more work to do.
“They do not build statues for people who restore fiscal stability,” Emanuel told a packed council chamber on Wednesday. “But without sound, strong, stable finances, nothing else is possible. Breaking news, you’re not going to get a statue. But you have built something more important, more fundamental, and more lasting than any statue. You have built a foundation.”
The pension bills will jump because the city will have to pay what actuaries say is needed into the public safety funds starting in budget year 2020 and in 2023 for the municipal employees’ and laborers’ plans. That means not only covering what it owed for newly earned benefits, but making up for the shortfall that resulted from years of not paying the full amount.
While Emanuel isn’t running for re-election in February, the aldermen who have to vote to approve the budget are on the ballot.
“Politically it’s difficult to address things like that in an election year,” said Neene Jenkins, a vice president and municipal analyst at AllianceBernstein, which oversees $42 billion of state and local bonds, includes some Chicago debt.
Chicago Chief Financial Officer Carole Brown told reporters that Emanuel is planning to have a more comprehensive discussion around pensions and speak to what he thinks is necessary to help address that issue. That may happen in December, she said. Brown has said that the city hasn’t ruled out issuing pension-obligation bonds to pay off a big chunk of the pension debt.
Near the end of his final budget speech, Emanuel warned his successors to stay fiscally disciplined.
“If our leaders run up debt, run down pensions, run dry the rainy day fund, it is the next generation whose chances will run out,” Emanuel said.
Bloomberg Politics
By Elizabeth Campbell
October 18, 2018, 9:39 AM PDT
CHICAGO — Chicago Mayor Rahm Emanuel unveiled the final budget of his tenure on Wednesday, but put off addressing a pension funding challenge that will hit during his eventual successor’s term in office.
Emanuel, who announced last month he was not running for a third term, laid out a $10.67 billion all-funds spending plan, which includes a $3.82 billion operating budget, for the fiscal year that begins on Jan. 1.
Much of the mayor’s budget address to the 50-member city council focused on his administration’s accomplishments over the last seven years, including raising fees and taxes to save the city’s four pension funds from becoming insolvent and shrinking a chronic budget deficit.
“One thing I have learned is that they do not build statues for people who restore fiscal stability,” he said in prepared remarks. “But without sound, strong, stable finances, nothing else is possible.”
The nation’s third-largest city faces pension contributions that will grow to $2.13 billion in 2023 from $1.02 billion this year. Plans to seek council approval for as much as $10 billion in pension debt have been delayed in the wake of Emanuel’s lame-duck status and rising interest rates.
Chicago’s unfunded pension liability was $28 billion in 2017, down from $35.7 billion in the prior year. The big liability, along with years of budget deficits, led to downgrades of Chicago’s general obligation credit ratings and higher borrowing costs.
Carole Brown, Chicago’s chief financial officer, told reporters that a pension borrowing would not constitute a complete solution and that Emanuel intends to have a comprehensive discussion on addressing the problem by year-end.
Laurence Msall, president of the Chicago-based Civic Federation, a government finance watchdog group, said besides pensions, the city is also dealing with rising operating costs and modest revenue growth, which city officials pegged at just over 2 percent for the fiscal 2019 budget.
“There will need to be additional structural changes,” Msall said.
Emanuel’s budget includes $25.7 million to fund a proposed consent decree mandating changes in police practices. It also incorporates a new contract with the American Federation of State, County and Municipal Employees, but not with police and fire unions, whose contracts expired in 2017, according to city officials.
The spending plan, which eschews new hikes in taxes and fees, eliminates a projected $98 million deficit through various measures, including savings from refinancing the city’s GO bonds with a higher-rated securitization of sales tax revenue.
By Reuters
Oct. 17, 2018
(Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis)
Maryland Gov. Larry Hogan’s (R) $9 billion plan to add tolled express lanes to the Capital Beltway and Interstate 270 is flawed.
Maryland transportation officials are proposing to borrow the project’s cost from private investors, but they are downplaying how much more expensive it is to borrow directly from a Wall Street bank or a global corporation rather than use municipal bonds, the traditional method of financing. And they are minimizing the potential risks for Maryland residents now and in the distant future, as so-called public-private partnership contracts include pages of complex agreements that extend for decades.
Instead of being up front with the public, those officials point to an alleged local success story: Virginia’s experiment with using private financing to add tolled express lanes to the Beltway and Interstate 95. So, let’s take a look.
The Washington Post
By Jeremy Mohler
Jeremy Mohler is a member of the strategic communications team at In the Public Interest.
October 12
Illinois investors are endorsing fiscal stability this election.
No matter who wins the gubernatorial race next month, bondholders want the next chief executive to avoid a repeat of the longest budget impasse in U.S. history, one that put Illinois on the brink of becoming the first junk-rated state. That gridlock — the result of a two-year standoff between Republican Governor Bruce Rauner and the Democrat-run legislature — drove unpaid bills to a record $16.7 billion, forced cuts in social services, and sent borrowing costs to multi-year highs.
The fiasco also kept the state’s leaders from making any real progress on fixing its biggest challenge — the government worker pension plans that are falling deeper into the red while consuming more and more tax dollars.
“We don’t care if it’s a Democrat or Republican, we just want to make sure that whoever is in the office knows how much new taxes and revenue increases are needed to make those hard decisions of trying to deal with pensions,” said Dora Lee, vice president at Belle Haven Investments, which manages about $7.5 billion in municipal bonds, including Illinois debt. “We just need someone who has the vision and the political capital to make those hard choices because time is kind of running out.”
Prolonged Stalemate
Rauner, a former private-equity executive and multimillionaire, is running for re-election against Democrat J.B. Pritzker, the billionaire Hyatt hotel heir. Rauner took office in January 2015 as the state confronted a deficit amid expiring income-tax hikes. Rauner refused to raise taxes unless lawmakers agreed to an agenda that included property-tax cuts, limits on unions and changes to worker-compensation laws. Democrats balked. The stalemate didn’t end until July 2017, when lawmakers, including members of his own party, overrode his veto to enact a spending plan that raised income levies.
Rauner is calling for reforms and says more tax hikes won’t solve the state’s problems. Pritzker is campaigning for a graduated income tax — instead of the current flat tax — that he argues will lower those on the middle class. That would require a constitutional amendment.
Pritzker held a 20-point lead over Rauner among likely voters, according to an Ipsos, Reuters and University of Virginia Center for Politics poll released Wednesday. Likely voters favored Pritzker 50 percent, compared to 30 percent for Rauner, the poll showed.
One party rule has worked to ease impasses in other places. California Governor Jerry Brown, a term-limited Democrat, is leaving office after amassing a surplus of about $9 billion compared to the $27 billion deficit when he took over for his Republican predecessor in 2011. But single-party control is no guarantee. New Jersey’s leaders have yet to right the state’s finances since Republican Governor Chris Christie exited office in January, with Governor Phil Murphy and fellow Democrats struggling to find common ground.
Beyond Gridlock
Even though Rauner pushed for fiscal reforms that would have cut costs, none of those were enacted, said John Miller, head of municipals at Nuveen, which holds more than $140 billion in state and local debt, including Illinois bonds.
“The concept that there could be a better, maybe a more productive dialogue where you could actually pass some fiscal changes that require legislation, that’s got to be considered better than gridlock,” Miller said. “I actually think the bond market would respond more positively to a change,” said Miller, who noted that his comments were from a revenue, expenses and budgeting point of view and not a political perspective.
Investors have long punished Illinois for its fiscal woes. Yields on Illinois’s 10-year general-obligation bonds jumped to as much as 3.4 percentage points above benchmark in June 2017 as credit-rating companies warned that Illinois could lose investment-grade status if the impasse wasn’t resolved. That gap has since fallen to 1.8 percentage points but is still the highest among the 20 U.S. states tracked by Bloomberg.
“If there’s unified government, whether you view that favorably or unfavorably, it does mitigate appropriation risk and decreases the chance of a government shutdown, and it also mitigates the risk of not having a budget passed,” said Dennis Derby, a portfolio manager at Wells Fargo Asset Management, which holds $39 billion of municipal debt, including Illinois bonds. “No matter who wins, going forward, we would want to see balanced budgets, attempts at pension reform and a reduction in the payables backlog.”
Bloomberg Markets
By Elizabeth Campbell
October 11, 2018, 6:29 AM PDT
— With assistance by Danielle Moran
CHICAGO (Reuters) – A continued surge in interest rates could sink a plan under consideration by Chicago Mayor Rahm Emanuel’s administration for a massive bond sale to boost pension funding, a city official said on Thursday.
FILE PHOTO: A general view of the city of Chicago, March 23, 2014. REUTERS/Jim Young
Carole Brown, the city’s chief financial officer, said a securitization was still on the table while she keeps a watchful eye on rates.
“If rates continue to rise it is conceivable they will rise to the level where the financing didn’t make sense and we wouldn’t proceed,” she told Reuters.
The U.S. Federal Reserve has signaled that it will continue to raise rates after it lifted the key lending rate on Sept. 26.
Rates in the U.S. municipal bond market have jumped particularly over the last week. Since the pension bond idea first surfaced at an Aug. 2 investors conference hosted by Emanuel, 30-year bond yields on Municipal Market Data’s benchmark triple-A scale climbed to 3.41 percent from 3.05 percent.
Brown is mulling a highly rated securitization of a Chicago revenue stream that could produce as much as $10 billion for pensions, boosting their currently low funded ratio of 26 percent.
The city has already employed a bond structure to refund outstanding debt that securitizes sales tax revenue with a statutory lien for investors that resulted in higher credit ratings and lower borrowing costs.
Chicago’s unfunded pension liability was $28 billion in 2017, down from $35.7 billion in the prior year. That liability, along with chronic budget deficits, led to downgrades of the city’s general obligation credit ratings and higher borrowing costs.
Uncertainty over the pension bond plan grew with Mayor Rahm Emanuel’s announcement last month that he will not seek a third term in office.
Prior to that announcement, the head of the Chicago City Council’s Progressive Reform Caucus and Paul Vallas, a former Chicago budget director who is running for mayor, cautioned against hasty consideration of the plan by the council.
Brown said she does not have a timetable for a decision on moving forward, noting however that a new mayor will take office next May.
Meanwhile, pension bonds will not play a part in the fiscal 2019 budget Emanuel is scheduled to unveil next week, she added.
“The mayor had always planned on considering it separate and apart from anything else including the budget,” Brown said.
Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis
OCTOBER 11, 2018
Mayor Rahm Emanuel vowed Friday to confront Chicago’s skyrocketing pension payments “before the end of the year,” but he refused to say whether the solution he seeks will include $10 billion in pension borrowing.
“I’ve never been patient. I have a sense of urgency to get work done. And I have a moral commitment—-both to the public and to my successor–to leave the city better off and in a stronger position than the day I walked in,” the mayor said.
“We’ve always confronted challenges regardless of political risk . . . I’m a mayor for all eight years, not 7 1/2 . . . I’m gonna deal, first with the budget. I will, before the end of the year, address the issue of pensions.”
Under repeated questioning by the Chicago Sun-Times, Emanuel refused to say whether he would revisit the $10 billion borrowing, even though the potential savings has been diminished by rising interest rates.
Nor would he say whether there is a viable alternative that would minimize the need for another punishing round of post-election tax increases.
“I’m gonna address the issue of pensions, and you’ll just have to wait for that,” he said, playing it coy.
Emanuel’s lame-duck status has emboldened aldermen who have taken a series of tough votes, just to begin to solve Chicago’s $28 billion pension crisis.
Chicago taxpayers have already endured a parade of property tax increases for police, fire and teacher pensions, two increases in the monthly tax tacked on to telephone bills and a 29.5 percent surcharge on water and sewer bills.
It’s not at all clear whether Emanuel still has the juice to push the pension borrowing through the City Council.
Even his own Chief Financial Officer Carole Brown acknowledged this week that, “Your political capital changes when you’re not running for re-election.”
But during Friday’s interview, Emanuel bristled at the suggestion that his lame-duck status has diminished his ability to finish the job he started.
“The first test [after he announced he wasn’t running] was a vote I had on e-cigarettes. And we passed it in 24 hours overwhelmingly,” the mayor said.
“I believe this budget will pass. We’ve never not passed a budget obviously. And never had to struggle. In 7 1/2 years, never lost a vote. So, I don’t buy that” claim that his political capital has diminished.
In late August, Emanuel offered a spirited defense of the pension borrowing plan — even after mayoral candidate Paul Vallas warned that it would put beleaguered Chicago taxpayers in a “financial straightjacket.”
The mayor initially planned to rush the borrowing through the City Council in September — before introducing his final city budget.
That timetable was dramatically altered on Sept. 4. That’s when Emanuel touched off the political equivalent of an earthquake by choosing political retirement over the uphill battle for a third-term.
After that, the budget became the primary focus because, as Brown put it, “We know we have a finite amount of time.”
Brown said this week she still believes the $10 billion borrowing makes “financial sense if we can achieve the right rate.”
“Whether or not we do this, the next administration will be faced with how to pay more than $277 million in pension payments next year. It’s what they’re gonna be looking at when they do their 2020 budget,” she said.
“If we can come up with a financially sound way to stabilize our pension funds while we still make contributions, but make those contributions more manageable over time and lower the cost of funding our pensions, I don’t know why we wouldn’t consider it. Which is why the mayor is still considering it.”
But if interest rates continue to rise, Emanuel may be forced to shelve the borrowing and find another way.
“If it doesn’t cost us money in the long run, we should do whatever we can that’s fiscally responsible to avoid the big hit . . . But with interest rates rising, I don’t know how feasible it will be,” Ald. Joe Moore (49th) said earlier this week.
After a five-year ramp to actuarial funding ends, Chicago taxpayers will be on the hook to keep city employee pension funds on the road to 90 percent funding.
By 2023, the city’s contribution to all four funds will nearly double, from $1.2 billion this year to $2.1 billion, according to the city’s annual financial analysis.
The $10 billion pension borrowing was tailor-made to soften the post-election blow.
But municipal finance experts have raised concerns, pointing to pension-bond defaults in Detroit, California and Puerto Rico.
They wonder what would happen if the market tanks and what specific city revenue would be used to back the bonds, now that Emanuel has isolated sales tax revenue in a special fund and used that “securitization” structure to refinance $3 billion in city debt.
The Chicago Sun-Times
By Fran Spielman
10/12/2018
Mayor Rahm Emanuel’s final budget will not include a controversial $10 billion pension borrowing, but that doesn’t mean he has shelved the massive borrowing tailor-made to minimize the need for another punishing round of post-election tax increases.
Chief Financial Officer Carole Brown said it was never the mayor’s intention to tie the pension borrowing and the budget together.
The plan was to do them separately, with the borrowing coming first.
That timetable was dramatically altered on Sept. 4. That’s when Emanuel touched off the political equivalent of an earthquake by choosing political retirement over the uphill battle for a third-term.
“When that changed, the conversation internally and externally changed because we start making sure that we’re all focused on the right priorities because we know we have a finite amount of time,” Brown said.
“It’s never just about the math because the math works. It’s about timing. … It’s about having other things that we have to get done like the budget and what Council and others want to be focused on.”
Now a final decision on the pension borrowing has been put off until after the City Council approves what Brown described as a “pretty vanilla” budget with no new taxes and fees.
Meanwhile, interest rates have started to rise, cutting into the potential savings.
Brown still believes the $10 billion borrowing “makes financial sense if we can achieve the right rate.”
“Whether or not we do this, the next administration will be faced with how to pay more than $277 million in pension payments next year. It’s what they’re gonna be looking at when they do their 2020 budget,” she said.
“If we can come up with a financially sound way to stabilize our pension funds while we still make contributions, but make those contributions more manageable over time and lower the cost of funding our pensions, I don’t know why we wouldn’t consider it.”
Emanuel’s lame-duck status has emboldened aldermen who have taken a series of tough votes just to begin to solve Chicago’s $28 billion pension crisis.
It’s not at all clear whether he still has the juice to push the pension borrowing through the City Council.
Brown acknowledged that “your political capital changes when you’re not running for re-election.”
But she also said that “a lot” of incumbent aldermen seeking re-election “understand the difficult choices they’re gonna have to make” next year and “the benefits” of the $10 billion borrowing “and would be supportive of it.”
Ald. Joe Moore (49th), an Emanuel ally, said he’d like nothing more than to minimize the post-election pain for Chicago taxpayers.
They have already endured a parade of property tax increases for police, fire and teacher pensions, two increases in the monthly tax tacked on to telephone bills and a 29.5 percent surcharge on water and sewer bills.
“Most of my colleagues are expecting to come back next year. If at all possible, they’d like to avoid what will be a very difficult choice in how we close that pension gap and avoid going off the cliff. But you don’t want to repeat the mistakes of the past,” Moore added.
“If it doesn’t cost us money in the long run, we should do whatever we can that’s fiscally responsible to avoid the big hit. … But, with interest rates rising, I don’t know how feasible it will be.”
After a five-year ramp-up to actuarial funding ends, Chicago taxpayers will be on the hook to keep city employee pension funds on the road to 90 percent funding.
By 2023, the city’s contribution to all four funds will nearly double — from $1.2 billion this year to $2.1 billion, according to the city’s annual financial analysis.
The $10 billion pension borrowing is tailor-made to minimize the need for another punishing round of post-election tax increases.
Days before pulling the plug on his re-election bid, Emanuel offered a spirited defense of the pension borrowing plan. Mayoral candidate Paul Vallas, meanwhile, has warned it would put Chicago taxpayers in a “financial straitjacket.”
Municipal finance experts also have raised concerns about Emanuel’s plan, pointing to pension-bond defaults in Detroit, California and Puerto Rico.
They wonder what would happen if the market tanks and what specific city revenue would be used to back the bonds, now that Emanuel has isolated sales tax revenue in a special fund and used that “securitization” structure to refinance $3 billion in city debt.
The Chicago Sun-Times
By Fran Spielman
10/11/2018
Columbia Threadneedle has expanded its strategic beta exchange-traded fund (ETF) offering with the launch of Columbia Multi-Sector Municipal Income ETF (MUST).
MUST tracks the Beta Advantage Multi-Sector Municipal Bond Index, which has exposure to five sectors of the municipal bond market using a rules-based approach to bond selection. Columbia Threadneedle drew upon its expertise as an experienced active investment manager of municipal bond portfolios to create the strategic beta rules that are the foundation for the construction of the index. MUST’s custom index was designed by Columbia Threadneedle’s municipal fixed-income team and is administered by Bloomberg Index Services Limited.
MUST is intended to serve as a core municipal bond allocation in investors’ portfolios but can also complement traditional core holdings to deliver higher tax-exempt income and risk-adjusted return potential than traditional benchmark products.
“Today’s municipal market is comprised of nearly USD4 trillion in assets spread out among more than one million debt offerings from 80,000 issuers,” says Catherine Stienstra, who oversees more than USD18 billion in assets as head of municipal bond investments at Columbia Threadneedle Investments and serves as Lead Portfolio Manager of MUST. “In the muni space, buying individual bonds or purchasing a debt-weighted benchmarked product doesn’t give investors the diversification they need, nor the ability to manage credit risk transparently and efficiently. We created MUST with the goal of simplifying investors’ municipal bond exposure without compromising their investment objectives.”
Many of the standard municipal bond benchmarks in the market today were designed by index providers to measure limited areas of the market. As a result, they adhere to narrowly defined parameters that deliver distinct characteristics rather than desirable investment outcomes. Also, traditional benchmarks can distort the true investment opportunity set by favouring larger state general obligation bond issuers at the expense of revenue-backed bonds, since their constituents are typically weighted based on indebtedness.
“Even though most investors’ current exposure to municipals is through actively managed portfolios or individual bonds, we’ve seen a growing interest in passive products in the municipal space,” says Marc Zeitoun, CFA, head of strategic beta at Columbia Threadneedle Investments. “Given the limitations of existing municipal bond benchmarks, we opted to draw upon our expertise in managing active municipal bond portfolios to build an innovative, strategic beta fund that leverages our best thinking, but in a cost-effective, risk-managed way.”
11/10/2018
Our weekly “New Starts” roundup of new and newsworthy transportation projects worldwide.
Atlanta Council Votes to Spend $2.7 Billion on “More MARTA”
After several months of discussion and bickering, the Metropolitan Atlanta Rapid Transit Authority (MARTA) board voted unanimously Oct. 4 to approve a plan for spending $2.7 billion in sales tax revenues headed its way from the city of Atlanta.
The Atlanta Journal-Constitution reports that the transit expansion plan finally approved by MARTA differs significantly from the one the agency first presented to the public in the spring. Reflecting some adjustments that had been recommended a week before the vote, the plan calls for more money for light rail service along the Atlanta Beltline and less money for service along the “Clifton Corridor” leading to Emory University and the Centers for Disease Control. The revised plan also upgrades a proposed bus rapid transit line along Campbelltown Road to the Greenbrier Mall in the city’s southwest corner to a light rail line.
The shift in emphasis from the Clifton Corridor to the Beltline came in response to both Beltline advocates who wanted light rail on the entire 22-mile loop around the city (that’s not in the plan), Clifton Corridor opponents who argued that the project should get no funding at all because the city of Atlanta had not yet annexed the Emory University area when the half-cent sales tax that will fund these projects was approved in 2016, and residents who felt Campbelltown Road deserved higher-quality transit service.
The projects described in the plan will be built over a 40-year time frame. The sales tax revenue will not be enough to cover the cost of these projects, let alone the entire $11.5-billion wish list the Atlanta City Council prepared after the tax was approved. MARTA will have to find other local, state and Federal funds to make these improvements and expansions a reality.
But Robbie Ashe, executive director of the MARTA board, told the AJC that this package reflects a larger change in attitudes towards mass transit regionwide. “Over the decades there have been fights to keep transit out of pieces of the region,” Ashe said, according to the Atlanta Journal-Constitution. “We’re no longer having that fight. … Now the fight is why isn’t transit in my community and why isn’t it there soon enough.”
Work Begins on “Express” Tram-Train Line in Paris Suburbs
Metro Report International reports that work has begun on a new tram-train route that will connect several communities in Paris’ western suburbs. The T13 Express construction project commenced Oct. 5 with groundbreaking for a new tram terminal at Versailles.
This first phase of the T13 Express line involves mostly upgrading existing track along Paris’ Grand Ceinture freight rail belt line. Most of the 18.8-kilometer (11.7-mile) initial segment will use this right-of-way. Trains will run from the RER Line C station at Saint-Cyr to Noisy-le-Roi on a currently unused segment of the line and from Noisy to Saint-Germain GC on a section that already carries passenger traffic. Four kilometers of new tracks will be laid to take the line from Saint-Germain GC to an interchange station with RER Line A in Saint-Germain-en-Laye.
The tram-trains will stop at 11 stations, six of them new and five refurbished. In addition to the connections with the two RER lines, the T13 Express line will also have interchanges with Transilien lines L, N and U.
The line is expected to carry 21,000 passengers daily when it opens for service in 2021. A northern extension planned in the long term would nearly double the daily ridership to 40,000. The Île-de-France region is picking up more than half of the line’s €306.7 million (US$355.6 million) cost, with the département of Yvelines and the central government taking care of the remainder.
Public-Private Partnership to Boost Reverse-Commute Service in Chicago Suburb
With public funds to operate and expand service in short supply, Metra, the agency that operates commuter and regional rail service in Chicagoland, is turning to a public-private partnership for the money it needs to boost service from Chicago to a major suburban employment center north of the city.
According to a news story in Railway Track and Structures, Metra has entered into an agreement with Lake County Partners, an economic-development organization funded by Lake County businesses and the county government, to fund additional reverse-peak train service and build a universal crossover near Lake Forest, which Metra says is necessary for it to add even more service on the Milwaukee District North Line.
The agreement responds to a request from Lake County officials that Metra explore ways of enhancing reverse-commute service so businesses in the county can more effectively recruit and retain employees who live in Chicago. Currently, there are no outbound express trains during morning peak hours, and the afternoon trains into the city depart either too early or too late to be of use to most employees living in Chicago. Upgrades to the signaling system on the North Line now make additional reverse-commute service possible. Lake Forest is the closest Metra station to a major employment cluster in Lake County.
Under the agreement, Metra and the partnership will split the $1 million cost of running one new reverse-commute train each way during the peak hours under a two-year pilot program. The joint venture will also draw up a definitive agreement for splitting the crossover’s $4.75 million construction cost, with the business partnership contributing $2.75 million and Metra and local governments in Lake County chipping in $1 million each.
NEXT CITY
BY SANDY SMITH | OCTOBER 12, 2018
Rosy assumptions about what the island can afford to pay bondholders threaten to doom its future.
History is littered with examples of ill-designed debt restructuring exercises that soon unraveled at great economic and human cost. Judging by the recently announced debt restructuring arrangement for Puerto Rico’s sales tax-backed bonds (COFINA), the island’s economy risks joining those ranks.
The COFINA restructuring doesn’t go nearly far enough. It saddles Puerto Rico with escalating debt payments for the next 20 years, even though the economy has been in a decade-long slump. It also sets a dangerous precedent. If Puerto Rico’s government and the oversight board created by Congress agree to similar terms with creditors who hold General Obligation bonds, it will be just a question of time before the commonwealth is forced to default yet again or curtail public pension payments upon which more than 325,000 workers depend.
By far the most important condition for a successful debt restructuring is a realistic assessment of the economy’s growth potential and its capacity to repay its debtors. Overly optimistic assessments of those prospects are a sure recipe for failure. They set up the economy for another debt restructuring and, as the economy labors under the weight of a debt overhang, they undermine investor confidence.
Anyone doubting the adverse consequences of such unrealistic assessments of an economy’s ability to pay might want to look at Greece’s recent sorry experience.
The Greek economy has paid dearly for the failure of the International Monetary Fund in 2010 to recognize that Greece had a solvency problem rather than a liquidity problem, and that its economy was likely to contract sharply by attempting draconian budget belt-tightening within a Euro straitjacket. The net result of such wishful thinking: After almost a decade since the first restructuring, the Greek economy is still deeply depressed and in need of further debt restructuring.
The Puerto Rican government and its oversight board similarly appear to be unrealistically optimistic about the island’s economic growth prospects and thus its ability to pay. The proposed COFINA debt restructuring arrangement, which covers around $17 billion, or one-third of the island’s bonded debt, initially reduces Puerto Rico’s debt service payments. However, those payments eventually double and then remain at a high level due to the inclusion of an insidious “capital appreciation bond,” which rapidly increases in value while the other bonds are being paid off.
Although an influx of federal disaster relief and Medicaid funding is temporarily boosting Puerto Rico’s economy, it would be irresponsible to expect these benefits to last and support a rising debt service burden. Indeed, federal budget transfers are due to fall off a cliff in five years. Moreover, the island’s economic growth will be impeded by poor demographics, as the economically active population likely will continue to move to the mainland in search of better opportunity.
Prior to Hurricane Maria, Puerto Rico’s economy was in a 10-year secular decline that saw it contract by more than 10 percent. Absent the reinstitution of generous investment incentives from Congress or the introduction of a federally funded earned income tax credit, it would seem irresponsible to premise a debt restructuring program on the idea that the Puerto Rican economy is somehow going to boom just as federal grants are scheduled to dry up.
As we have previously written, structural reforms that improve the efficiency of doing business in Puerto Rico are important and would help boost economic growth. However, they cannot reasonably be expected to offset the loss of federal funds, the contractionary effects of fiscal consolidation and ongoing outmigration.
The implications of the proposed COFINA deal for restructuring the remainder of the island’s debt obligations are also a concern. The old COFINA bonds were a fast path to deep insolvency, with debt service rising from $0.7 billion to $1.8 billion over the next 25 years. The new bonds offer some relief, with debt service starting at $0.45 billion and reaching $1 billion. The restructured bonds also offer the junior COFINA bonds enhanced security in exchange for the fall in debt service, and the new bonds will be harder to restructure in the future. And by the end of the 2020s, the proposed payments on the COFINA bonds alone would push Puerto Rico’s debt burden — assessed using the standard municipal bond metric of debt service against the entity’s own revenues — over that of an average U.S. state.
With Puerto Rico’s limited ability to repay, generosity to one set of bondholders necessarily reduces what the commonwealth can reasonably offer to other bondholders and claimants. The sustainability of Puerto Rico’s debt restructuring needs to be assessed comprehensively, not by looking narrowly at each piece of the bigger puzzle.
It is hardly in Puerto Rico’s interest to have a failed debt restructuring agreement that will hobble the island’s economic growth prospects, even as it struggles to restore basic living conditions following the devastation of hurricanes Maria and Irma and the loss of thousands of American lives.
From the outset, the oversight board has said that it would seek a “once and done” restructuring of Puerto Rico’s debt. One can only hope that it has not now switched to an “over and out” strategy, whereby overly generous consensual agreements are reached with the island’s creditors before the board’s current term expires in August 2019.
Instead of taking refuge behind unrealistically optimistic assumptions, the board and Puerto Rico’s government need finally to take the difficult decisions needed to reset the island’s debt at sustainable levels for the long term.
Bloomberg Opinion
By Antonio Weiss, Brad W. Setser, and Desmond Lachman
October 8, 2018
Antonio Weiss, a senior fellow at the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government, served as counselor to the secretary of the Treasury until January 2017.
Brad W. Setser is the Steven A. Tananbaum senior fellow for international economics at the Council on Foreign Relations.
Desmond Lachman is a resident fellow at the American Enterprise Institute.
SAN JUAN — Puerto Rico’s unsecured creditors will drop their opposition to a deal to restructure roughly $4 billion of debt issued by the U.S. commonwealth’s defunct Government Development Bank (GDB), under an agreement revealed on Friday.
During a U.S. District Court hearing, lawyers for the government, the unsecured creditor committee (UCC) and Puerto Rico’s federally appointed financial oversight board announced the agreement. This advances the island’s first consensual debt restructuring under the federal Puerto Rico Oversight, Management and Economic Stability (PROMESA) Act.
“We think that Title III debtors and creditors are better off,” said Luc Despins, a lawyer from Paul Hastings who represents the creditor committee.
Overwhelmed with $120 billion of debt and pension liabilities, the Puerto Rico government and four of its public corporations last year filed for a court-ordered bankruptcy process under Title III of the PROMESA Act.
The proposed GDB restructuring deal is being pushed through Title VI of the federal law, which provides for a consensual restructuring framework between the government and creditors. The plan, overwhelmingly approved by creditors last month, would transfer to a GDB Debt Recovery Authority the bank’s municipal loan portfolios, real estate assets and unencumbered cash. The authority would issue new bonds backed by a statutory lien on those assets in an amount equal to 55 percent of outstanding debt.
The deal calls for establishment of a Public Entity Trust, which would mostly receive non-performing loans made by the GDB to other government entities.
The unsecured creditor committee, mostly government suppliers and labor unions, had tried to halt the proposed GDB restructuring deal, arguing it violated the court-ordered bankruptcy stay and PROMESA. The group also raised a flag over the deal’s release of potential claims against current and former GDB directors, officers and other representatives.
U.S. Judge Laura Taylor Swain, who is overseeing the island’s bankruptcy, last month rejected a motion by the committee to stop the deal. Under the latest agreement, the creditor committee will withdraw all legal actions against the deal, as well as any claim in connection with issuance of GDB debt. Certain funds and deposits that would have gone to the GDB Debt Recovery Authority will now go to the Public Entity Trust.
If Swain approves the agreement, the next step would be final court approval, which the government expects by Nov. 6.
The agreement does not require a recertification of the GDB restructuring deal, nor does it affect the schedule for its approval, lawyers said.
Puerto Rico also has deals in the works to restructure debt issued by its bankrupt Sales Tax Financing Corporation, known as COFINA, and Electric Power Authority (PREPA).
By Reuters
Oct. 5, 2018
(Reporting By Luis Valentin Ortiz, additional reporting by Karen Pierog in Chicago; Editing by Daniel Bases and David Gregorio)
Action Follows Successful Appeal of Title III Court Ruling That Had Denied a Similar Motion Made in 2017
Receiver Necessitated by Chronic and Ongoing Mismanagement and Undue Political Influence at PREPA
PURCHASE, N.Y.–(BUSINESS WIRE)–National Public Finance Guarantee Corporation (“National”), an indirect subsidiary of MBIA Inc. (NYSE:MBI), today announced that National, Assured Guaranty Corp., Assured Guaranty Municipal Corp., and Syncora Guarantee Inc. (“the Creditor Group”), have filed a motion in the U.S. District Court for the District of Puerto Rico to lift the PROMESA litigation stay that will allow the Creditor Group to seek to enforce its right to compel the appointment of an independent receiver for the Puerto Rico Electric Power Authority (“PREPA”). The Creditor Group filed a similar motion in July 2017 that was denied by the District Court. The new motion follows a successful appeal of that denial, as the First Circuit Court of Appeals recently vacated the District Court’s decision and remanded the case for further proceedings.
The appointment of a receiver, which would assume operational control of PREPA to protect the interests of PREPA’s customers and creditors, is necessitated by the utility’s well-documented history of mismanagement and undue political interference in its operations, the combined results of which were laid bare by Hurricanes Irma and Maria.
“Successfully transforming PREPA is critical to the future of Puerto Rico and its citizens,” said Bill Fallon, CEO of National Public Finance Guarantee Corporation. “However, PREPA’s current governance structure is incompatible with achieving that goal. Political meddling in PREPA’s affairs has resulted in five different chief executives in the past thirteen months, a management team made up of political operatives rather than utility experts, a board of directors that is beholden to political forces and conflicts of interest throughout the organization. The end result is an overstaffed yet underskilled utility lacking in transparency. PREPA has failed to collect $3.4 billion in receivables while it sits in bankruptcy, openly defies the orders of its regulator, and subjects its customers to frequent outages and long repair times. It is inconceivable that PREPA can transform itself or attract the necessary private investment to do so under the current circumstances. An independent receiver will insulate PREPA from political influence, stabilize the company’s operations and set it on a path for future success. The people of Puerto Rico and all of PREPA’s stakeholders deserve nothing less.”
Bondholders holding at least 25 percent in principal amount of the PREPA bonds outstanding have a statutory right to the appointment of a receiver following an event of default. The Creditor Group represents approximately 27 percent of the outstanding bonds.
Forward-Looking Statements
This release includes statements that are not historical or current facts and are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “intend,” “will likely result,” “looking forward” or “will continue,” and similar expressions identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected, including, among other factors, the possibility that MBIA Inc. or National will experience increased credit losses or impairments on public finance obligations issued by state, local and territorial governments and finance authorities that are experiencing unprecedented fiscal stress; the possibility that loss reserve estimates are not adequate to cover potential claims; MBIA Inc.’s or National’s ability to fully implement their strategic plan; and changes in general economic and competitive conditions. These and other factors that could affect financial performance or could cause actual results to differ materially from estimates contained in or underlying MBIA Inc.’s or National’s forward-looking statements are discussed under the “Risk Factors” section in MBIA Inc.’s most recent Annual Report on Form 10-K, which may be updated or amended in MBIA Inc.’s subsequent filings with the Securities and Exchange Commission. MBIA Inc. and National caution readers not to place undue reliance on any such forward-looking statements, which speak only to their respective dates. National and MBIA Inc. undertake no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such result is not likely to be achieved.
October 04, 2018 09:04 AM Eastern Daylight Time
National Public Finance Guarantee Corporation, headquartered in Purchase, New York is the world’s largest U.S. public finance-only financial guarantee insurance company, with offices in New York and San Francisco. Please visit National’s website at www.nationalpfg.com.
Contacts
National Public Finance Guarantee Corporation
Media:
Greg Diamond, 914-765-3190
or
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Kevin Brown, 914-765-3385
or
MBIA Inc.
Investor and Media Relations:
Greg Diamond, 914-765-3190
Rules city did not meet requirements when it posted notice of court hearing
Second District Judge Gregory FitzMaurice on Wednesday dismissed the city of Lewiston’s request to issue bonds to rebuild its wastewater treatment plant, ruling that the city didn’t meet the legal requirement to post notice of a court hearing at a “prominent” location at city hall.
Boise attorney Stephanie Bonney, who argued the case for Lewiston, said the city will refile its request for judicial confirmation of the bonds. But city officials have not decided whether to reboot the whole process, including holding a new public hearing and bringing a new resolution to the city council.
“The statues don’t address that,” Bonney said, noting that starting over would be the safest route. “But that also bumps you back for at least a couple of months. And the issue here is that they need to proceed with funding and the project as soon as possible.”
City Engineer Shawn Stubbers said the setback shouldn’t affect when construction can begin on the plant. The city can’t apply for state revolving loan funds for the project until January and won’t know the results until March, so he said there is time to pursue judicial confirmation again.
The state loans are preferable because they carry a lower interest rate than the municipal bond market, Stubbers said. Previous applications have been unsuccessful, so the city needs the municipal bonding capacity to backfill the $28.5 million needed for the project if the state application is completely or partly denied.
FitzMaurice didn’t rule on the substance of the city’s request. The city council decided this summer to seek judicial confirmation rather than put the issue on the November ballot, and Bonney argued that the need for repairs is urgent enough to seek approval from a judge, rather than voters.
Retired 2nd District Judge John Bradbury filed a motion to dismiss the request Sept. 12, the day before the confirmation hearing. Bradbury argued that even though the city complied with the statutory requirement to post notice of the hearing 30 days in advance, its placement on a bulletin board with several other notices eight to 10 steps away from the city hall front door was not prominent enough.
In a ruling the judge himself described as harsh, FitzMaurice said he can lawfully have jurisdiction over the case through publication and posting of the hearing notice, according to the requirements in Idaho code. The city complied with the publication requirement by placing a notice in the Lewiston Tribune for three consecutive weeks, but it fell short on the posting requirement by placing the notice on a bulletin board labeled for public meeting agendas at the east end of the lobby.
“A Lewiston citizen, who was going to city hall to pay their water and sewer bill or to get a building permit, would likely not look at the board,” FitzMaurice wrote. “They would be more likely to see a notice posted on the front door of city hall, particularly since there are not nine notices posted on the front door.”
The judge noted Bradbury’s separate argument that the request for judicial confirmation should be dismissed because there is no evidence of an emergency situation at the plant, but he didn’t rule on its merits either.
Bradbury agreed that the word “emergency” doesn’t exist in the judicial confirmation statute, but said earlier court decisions have interpreted it that way. He also said he will lodge another objection once the city refiles its request, this time based solely on the merits of the case.
“As long as the right to vote is involved, I’m going to be involved,” Bradbury said. “My view is that the judicial confirmation statute is designed to correct an emergency at as little cost as necessary until you can get to the voters on the overall issue.”
The council enacted 40 percent increases to wastewater and water rates earlier this year to create enough revenue to repay the wastewater treatment plant debt, plus any future financing for a new water treatment plant. Those rates kicked in Monday, and are unaffected by FitzMaurice’s ruling.
THE LEWISTON TRIBUNE
By JOEL MILLS of the Tribune Oct 4, 2018
Fitch Ratings-Austin-02 October 2018: A recent change to the assumed return of the Teachers’ Retirement System of Texas (TRS) is not expected to materially affect local school districts’ spending flexibility, according to Fitch Ratings.
The TRS board at its July 2018 meeting voted to lower the investment return assumption for the TRS pension plan to 7.25% from 8%. This move increases the plan’s current $35.5 billion unfunded liability by $10 billion. If current statutorily fixed contribution rates are left unchanged, this adjustment extends the time needed to pay down the unfunded liability to 86 years from 32 years currently (assuming all other funding assumptions are met). The state currently contributes 6.8% of salaries, members contribute 7.7%, and school districts that do not contribute to social security contribute 1.5% of certain salaries.
The TRS legislative funding request for the 2020-2021 biennium includes an increase in the state contribution rate to 8.62% from 6.8%, at a cost of $1.68 billion for the biennium; this increase assumes no change in member or district contribution rates. TRS estimates that this increase would reduce the period needed to amortize the unfunded liability from 86 years to 31-35 years–consistent with the current 32 years.
The state likely will consider sharing the burden of increased contributions with plan members and local districts, in line with legislative reforms to the state’s pensions in recent sessions. Fitch has consistently considered the risk that the state could increase district contributions to TRS in its assessment of each entity’s expenditure framework, and believes most districts can accommodate a moderate increase without compromising flexibility. Nevertheless, Fitch will monitor consideration of this issue during the 2019 Texas legislative session and the potential impact to local districts’ expenditure flexibility that would result from increasing pension contributions.
The lower 7.25% investment return assumption approved by TRS is a step in the right direction toward a more realistic assessment of the long-term funding burden that the state and local school districts will have to carry, although the rate remains above the 6% level which Fitch uses for assessing pension liabilities.
The TRS pension system is currently the 13th largest in the world. The pension trust fund ended fiscal 2017 with a market value of $147 billion. According to the TRS appropriation request, the system plans to distribute more than $26 billion in retiree benefit and healthcare payments to more than 400,000 retirees and healthcare providers during the 2020-2021 biennium.
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Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
Douglas Offerman
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Amy Laskey
Managing Director
+1 212 908-1568
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Fitch Ratings-New York-01 October 2018: Fitch Ratings expects credit ratings for Fitch-rated public entities in North Carolina and South Carolina affected by Hurricane Florence to remain stable despite challenges posed by significant property damage and unprecedented flooding.
The financial and budgetary strength of these municipalities can withstand credit risks associated with various recovery costs and revenue disruption in the aftermath of the hurricane. Fitch considers prospects for rebuilding sound based on the underlying demographic and economic characteristics of the affected areas, coupled with support from the federal government via the Federal Emergency Management Agency or FEMA, which has made federal disaster assistance available for affected counties in both states.
Hurricane Florence made landfall near Wrightsville Beach, NC two weeks ago, yet many parts of the Carolinas remain submerged and/or remain at risk to additional flooding. Thousands remain without power, and the heavy rainfall has led to crop damage and the discharge of untreated wastewater and other pollutants into drinking water supplies. Conditions on the ground have forced the closure of many roadways and businesses and the temporary dislocation of area residents. Property damage assessments are still preliminary and vary widely, with several reports indicating a total impact upwards of $50 billion. The damage caused by Florence is fairly nominal in relation to the roughly $20 trillion U.S. economy (about 0.3%) whose 2Q’18 annualized rate of growth registered 4.2% (according to IHS Markit, the North Carolina and South Carolina combine to account for 0.7% of U.S. GDP).
Fitch expects FEMA to shoulder much of the damage costs from the storm along with the National Flood Insurance Program (NFIP) and, to a lesser degree, the state governments and the private sector insurance market. For counties covered by the federal emergency declaration, federal aid will be made available to state and local governments and certain non-profit organizations for eligible costs incurred in connection with the protection of life and property, for public health and safety, debris clearance, and facility and equipment damage, among other outlays. Assistance to individuals can include grants for temporary housing and home repairs and low-cost loans to cover uninsured property losses.
For local governments in the Carolinas, general fund budgets are largely supported by property taxes which generally become due each year on Sept. 1 in NC (which was prior to Florence’s landfall) and on Jan. 15 in South Carolina, which allows time for property owners to address financial difficulties associated with the hurricane. As for mortgage-backed properties, lenders will make property tax payments when due from pre-funded escrow accounts established on the property owner’s behalf. Property taxes are generally based on valuations updated each January, with the upcoming valuation effective for the fiscal year that will not end for another 21-24 months for most local governments in each state.
Sales tax and other consumption-based fees and charges may experience a temporary decline. However, in most cases following the initial interruption, economic activity and related revenue are likely to increase, as residents and business purchase items related to repair and rebuilding and workers are hired to assist in this effort. The majority of Fitch-rated local government debt in North and South Carolina are backed by a general obligation pledge of the government or an appropriation-backed lease or rental payment payable from all legally available funds. Bonds backed by dedicated tax pledges are fairly uncommon across both states. Fitch-rated local governments in both states exhibit a high degree of credit quality with the majority of Issuer Default Ratings in the ‘AA’ or ‘AAA’ rating categories.
Utilities in the Carolinas experienced significant short-term disruption with over 900,000 total customer outages at the peak of the storm. The U.S. Energy Information Administration reports that 16% of the population in South Carolina was without power at one point. However, most customers were restored to power within a few days with assistance provided by standing mutual aid agreements among electric utilities that provide crew and equipment during natural disasters. Concerns remain related to widespread flooding and the potential for coal ash ponds at power plants to spill into rivers in both North and South Carolina. The coal ash ponds are being protected with additional temporary measures and the rivers closely monitored for any contamination. Longer-term, the public power and cooperative utilities in the region have the financial flexibility and liquidity to mitigate the risk of lost revenue and fund capital repairs until FEMA funding reimbursements are received.
Contact:
Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Amy Laskey
Managing Director
+1-212-908-0568
Tim Morilla
Associate Director
+1-512-813-5702
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
Fitch Ratings-San Francisco-01 October 2018: California school districts face a challenging budget environment when the next recession comes, though credit ratings should withstand said challenges according to Fitch Ratings in a new report.
Salaries and benefits make up about three-quarters of school general fund spending and many districts are already feeling the pressure to raise salaries due in part to California’s high cost of living. Pension costs are also rising faster than expected revenue growth and will continue to do so at least through fiscal 2021. ‘Declining enrollment experienced by some school districts will exacerbate the slowing of revenue growth and is only partially mitigated by the need for fewer teachers,’ said Fitch Senior Director Karen Ribble.
How districts respond to current wage and pension pressures will heavily influence their options and ability to absorb revenue declines in future recessions. If districts are in a structural deficit spending position during economic expansion, gap-closing capacity is compromised. Conversely, if districts can maintain structural balance while contributing to reserves now, they will be better able to absorb the impact of revenue declines with less disruption to service levels and financial flexibility.
Consolidating schools is often a good cost-cutting option for districts with budgetary pressures stemming from declining enrollment. However, districts facing competition from charter or private schools make closing neighborhood schools counterproductive and exacerbate the enrollment problem as cutbacks can result in lower enrollment, which further reduces funding. These districts are likely to be particularly challenged during a downturn.
That said, Fitch expects the vast majority of its rated California school districts will keep their ratings intact through a downturn because it has already factored these forward-looking scenarios into its ratings.
‘How Will California School Districts Fare During the Next Recession?’ is available at ‘www.fitchratings.com’
Contact:
Karen Ribble
Senior Director
+1 415 732-5611
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
Bordered by beautiful wetlands along the Gulf of Mexico, Louisiana is a hub of transportation and industry. A pilot environmental impact bond could seed a set of wetland-restoration projects for the state. Environmental Defense Fund, Quantified Ventures, and their project partners are proposing to draw on funding from the Deepwater Horizon oil-spill settlement to make this happen.
Conservation Finance Network
Kat Friedrich
September 25, 2018
An Oxford University professor tasked with tracking spending in Pennsylvania’s pension system has concluded that the commonwealth’s two largest public funds have underreported billions of dollars they paid to private investors.
The review was undertaken at the behest of a commission of lawmakers and state officials, who are trying to find ways to ease the massive debt these funds are carrying.
Between them, the State Employees Retirement System and Public School Employees Retirement System manage about $80 billion.
Sometimes they invest it with private equity firms. That can be lucrative, but the investments are typically riskier and more expensive than traditional ones, which has led state officials to question whether they’re a waste of valuable resources.
Treasurer Joe Torsella said the commission has repeatedly requested records to figure out how much the pension funds pay private investors, but have largely been denied.
Now, Dr. Ludovic Phalippou, Assistant Professor of Finance at Oxford, estimates the funds have underreported the money paid to private equity firms by a third over the last decade. That’s $3.8 billion the state didn’t know about.
The commission’s review of the funds is still ongoing, and Torsella said he’s not necessarily saying SERS and PSERS should fully stop investing in private equity. But he does think transparency has to improve.
“One of the disturbing things I heard this morning was that the consultants who were brought in to help the commission do its work couldn’t get access to the data on what the performance is and what we’re spending,” he said. “That’s just unacceptable.”
Mike Tobash, a Dauphin County Representative who’s chairing the commission, said it’s easy for pension discussions to seem remote from the daily work of funding state programs and getting state workers their retirement income.
But the size of the unfunded liability SERS and PSERS are carrying—somewhere around $70 billion—means the money to pay thousands of public pensions isn’t there right now. So in order to get that money together, the state has spent years scraping the bottoms of lots of different financial barrels.
“We struggle with budgets as a result of the massive pension debt that we’ve got,” he said. “Doesn’t’ it only make sense that we’ve formed this commission to make sure that the costs aren’t exorbitant and that the returns are fair?”
Auditor General Eugene DePasquale expressed outrage at the money being spent on private investments, saying in a statement that he is “sick and tired of learning about fuzzy contracts that leave taxpayers holding the bag while Wall Street sharks get rich.”
He indicated he plans to take some form of action on the issue himself.
Governor Tom Wolf, too, expressed support for the pension commission taking “substantive measures to reduce fees.”
Reached for comment, spokespeople for both SERS and PSERS said the funds are working to reduce the amount of money that goes to private managers.
Earlier this year, the SERS board directed passed a motion directing its staff to request that investment managers of private equity funds and real estate funds adopt a widely used disclosure procedure known as Institutional Limited Partners Association, or ILPA.
However, spokeswoman Pamela Hile said SERS is still not tracking carried interest, which made up a significant portion of the unreported payments to private equity firms. She maintained, “our reporting process follows industry standards and is more transparent than many other state public pension plans.”
PSERS has gone slightly further to increase transparency. It has already adopted ILPA, and spokeswoman Evelyn Williams said the fund will be presenting its first-ever report tracking carried interest at next month’s board meeting.
Williams took issue with the Torsella’s characterization of the fund’s responses to information requests. She said PSERS ignored none of the requests, and “contrary to today’s comments, in fact we have cooperated with the Commission and Treasurer requests for information.”
90.5 WESA
Pittsburgh’s NPR News Station
By Katie Meyer • Sep 21, 2018
The Georgia Municipal Association has formally come out against taking land from an established city to form another, four months after Gov. Nathan Deal signed legislation allowing Eagle’s Landing to seek cityhood by taking half of Stockbridge.
The group’s Legislative Policy Council earlier this month adopted a policy stating its support for citizens seeking more responsive representation, but said “portions of existing municipalities should not be de-annexed to create municipalities.”
The issue has been central to the debate over the desire of the Eagle’s Landing community to become Henry County’s fifth city. After being given the go ahead from the Legislature and Deal earlier this year to hold a referendum, Henry voters will decide Nov. 6 whether to approve de-annexing about half of Stockbridge and combining the territory with parts of unincorporated Henry to form the new city.
The Atlanta Journal-Constitution
By Leon Stafford
Sept 21, 2018
Indiana Finance Authority approves a new deal with the vendor operating the Indiana Toll Road allowing 35 percent fee increases for large trucks as part of Gov. Eric Holcomb’s plan to pump an additional $1 billion into infrastructure.
INDIANAPOLIS (AP) — The board of the Indiana Finance Authority unanimously approved a new deal Thursday with the vendor operating the Indiana Toll Road, allowing 35-percent fee increases for large trucks as part of Republican Gov. Eric Holcomb’s plan to pump an additional $1 billion into infrastructure projects around the state.
The rate hike takes effect Oct. 5 and the state would receive $400 million that same day from the Indiana Toll Road Concession Co. The rate increase applies to vehicles with three or more axles.
Indiana would receive a total of $1 billion over three years. Indiana Public Finance Director Dan Huge told the board the new deal comes with a letter of credit, meaning banks have guaranteed Indiana will receive its future payments.
Holcomb did not attend the meeting. He was on a trade mission to Italy on Thursday.
The infrastructure plan Holcomb announced earlier this month would earmark $600 million to speed up completion of the Interstate 69 extension in southern Indiana; $190 million for projects on U.S. Routes 20, 30 and 31; $100 million to boost rural broadband access; $90 million for improving hiking and biking trails; and $20 million to lure new direct flight routes to the state’s airports.
Democrats say the new Toll Road rates amount to a tax increase for the trucking industry, but Holcomb has stressed that the new fees won’t apply to passenger cars and would bring Indiana in line with what nearby states charge.
The trucking industry also has criticized the rate increases. Gary Langston, president of the Indiana Motor Truck Association, told the South Bend Tribune that they follow a large increase in state fuel taxes that went into effect last year. The combination of higher tolls and fuel taxes on truckers will ultimately hurt consumers and businesses since nearly all products travel to Indiana via trucks, Langston said.
Langston also predicted trucks will bypass the Toll Road, resulting in more congestion on toll-free highways and the possibility of more accidents.
U.S. News & World Report
Sept. 20, 2018, at 8:06 p.m.
When nearly the entire power grid of Puerto Rico was knocked out by a pair of ferocious hurricanes last year, utility companies from across the United States sent crews and equipment to help.
It was a power emergency on a scale rarely seen before, and companies spent tens of millions of dollars to mobilize. The utility in Sacramento, Calif., sent 30 workers and a dozen trucks. Ameren, which serves over two million customers in Missouri and Illinois, sent 225 workers. New York dispatched workers on at least five deployments to repair power lines and assess damaged substations. Florida Power & Light sent more than 100 trucks, several tons of equipment and 800 employees, many of whom spent Thanksgiving and the winter holidays working 16-hour days.
Though their costs are expected to be reimbursed by the federal government, the companies were not earning a profit. So it was with astonishment that, over the summer, some of the utility companies that had sent aid crews opened letters from the towns where they had worked in Puerto Rico: bills demanding millions of dollars in license and construction taxes.
The New York Times
By James Glanz and Alejandra Rosa
Sept. 26, 2018
Sept 21 (Reuters) – Two major holders of Puerto Rico bonds that opposed a restructuring deal for the bankrupt U.S. commonwealth’s Sales Tax Financing Corporation (COFINA) revenue bonds are now part of the agreement, the island’s federally appointed oversight board announced on Friday.
The board said Aurelius Capital Master Ltd and Six PRC Investments LLC, an affiliate of Monarch Alternative Capital, have opted to support the deal. Both own significant amounts of COFINA senior and junior bonds, but mostly own Puerto Rico general obligation (GO) bonds.
The move ends opposition from the island’s Ad Hoc Group of GO Bondholders to a COFINA debt restructuring plan, according to the board. The three-member group, which includes Aurelius and Monarch, objected to a COFINA settlement framework in bankruptcy court in June, calling parts of it unlawful. GO and COFINA bondholders have long debated the ownership of Puerto Rico’s future sales tax revenue.
Claims by Aurelius and Monarch in a lawsuit filed in federal court in 2016 challenging COFINA’s constitutionality will also be dropped, under terms of the agreement.
“The Amended and Restated Plan Support Agreement represents the restructuring of nearly 24 percent of Puerto Rico’s crushing debt, and provides the Commonwealth of Puerto Rico a 32 percent reduction in COFINA debt and more than $17 billion in debt service savings,” the oversight board said in a statement.
The deal is expected to be presented to a U.S. judge overseeing Puerto Rico’s bankruptcy case next month, the statement added.
Puerto Rico has been in bankruptcy court since May 2017 trying to restructure about $120 billion of debt and pension obligations.
Other parties to the COFINA deal, which would be Puerto Rico’s first debt adjustment plan under the bankruptcy to seek court approval, include bond insurance companies, municipal bond funds, and holders of bonds sold exclusively to island residents.
Outside of the bankruptcy case, Puerto Rico has secured overwhelming creditor approval for a plan to restructure its Government Development Bank debt.
Reporting by Karen Pierog in Chicago and Luis Valentin Ortiz in San Juan Editing by Matthew Lewis
SEPTEMBER 21, 2018
Fitch Ratings-New York-24 September 2018: An initiative on the California ballot in November highlights the extent to which voter initiatives can limit the state of California’s operating flexibility, according to Fitch Ratings.
Proposition 6 would repeal legislatively authorized tax increases dedicated to transportation improvement projects and make it more difficult for the state to increase transportation related fees and taxes in the future. The initiative uses the ballot to counter revenue raising decisions made by the legislature to support significant spending actions, illustrating the ways in which California voters can directly affect state operations. Adding a requirement to seek voter approval of transportation fee and tax increases could also increase the likelihood that infrastructure spending demands, often funded through use of dedicated funds, may to a greater extent compete with general operating needs.
Proposition 6 would repeal the tax increases incorporated in the “Road Repair and Accountability Act of 2017” and require voter approval for increases in gas and vehicle taxes going forward. Voter approval would be in addition to the legislative two-thirds vote that is already required to increase taxes and fees. The Road Repair and Accountability Act, passed as Senate Bill 1 (SB1), increased transportation-related taxes and fees and dedicated the increased revenue to improving the state’s transportation infrastructure. Voters further protected the revenues by passing Proposition 69 in June 2018 to constitutionally limit spending of SB1 revenues to transportation. The state estimates SB 1 will generate over $5 billion annually, allowing the state to direct an estimated $54 billion to transportation improvement projects over the next ten years. Approximately two-thirds of the money is to be directed toward highway and road repairs, with the balance applied to other programs, including mass transit.
Proposition 6, which is contentious but has received support in a high-profile election year, highlights the impact of voter initiatives on California’s operating flexibility. Passage of SB1, albeit along partisan lines in the Democratically- controlled legislature, represented a breakthrough in funding for backlogged infrastructure projects that had accumulated through a period of budget shortfalls and a deadlocked legislature. Repeal of the SB1 tax increases would likely cause delays or cancellation of projects, even as supporters of Prop 6 indicate that funding for state transportation projects can be found elsewhere in the budget. The fiscal 2019 budget includes approximately $35 billion in transportation funding, of which approximately $12 billion comes from the state, an amount which has increased by approximately 75% over the last two years with the additional SB1 funds.
A requirement for voter approval of future tax increases may factor into Fitch’s assessment of the state’s operating resiliency related to its ability to raise revenues. As with all states, California has an unlimited legal ability to raise revenues, even with a requirement for a two-thirds vote in the legislature. If Proposition 6 passes, the state would continue to have extensive control over its revenues, but the voter approval requirement of future transportation tax increases would create a limit on at least a portion of that revenue raising ability. Additional extensions of voter approval requirements for state revenue increases could erode the state’s revenue framework and ultimately its ability to manage its budget in response to changes in the economy.
Contact:
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Karen Ribble
Senior Director
+1-415-732-5611
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
Study concludes that California needs to raise overall school spending by 32 percent.
A team of researchers managed by Stanford University and Policy Analysis for California Education (PACE) recently released a massive study of California schools’ successes and shortcomings.
It concluded that for California’s elementary and secondary schools to reach academic performance goals, the state should expand education into early childhood, prior to kindergarten, and raise overall school spending by 32 percent.
The report said that “while public schools in California spent about $69.7 billion on school operations in 2016-17, an additional $22.1 billion — 32 percent above actual spending — would have been necessary for all students to have had the opportunity to meet the goals set by the state Board of Education.”
One could question the premise that spending more — a lot more — would have the desired effect. Nationwide school finance and academic data reveal almost no correlation between the level of per-pupil spending and outcomes as measured by the federal government’s nationwide testing.
States that spend less than California often do better on those tests. Those that spend more — even much more — don’t appear to be doing any better than California, indicating that money is not a panacea for this state’s low performance. More money would make a difference only if it reaches the classroom in the form of better instruction.
Getting such an increase, moreover, would be a very heavy political lift.
A $22.1 billion increase in annual school support would require a 100 percent increase in state sales taxes, a 25 percent increase in income taxes or a more than one-third increase in property taxes.
If anything, the financial future of the state’s school districts is headed the other way, as a new report from Moody’s Investors Service, which charts trends in public and private finance and rates debt-worthiness, catalogs.
Moody’s sees California schools facing “a confluence of financial complications over the next decade,” to wit:
Schools have seen sharp increases in state and local revenue — averaging 13.8 percent a year for the last half-decade — thanks largely to a booming economy, rising taxable-property values and a state income-tax increase. Going forward, however, Moody’s sees school spending rising by less than 3 percent a year, just about the rate of inflation.
· Enrollment has dropped slightly over the past decade, even as the state’s population increased, thanks to declining birth and immigration rates. Over the next decade, state officials expect a steeper decline, which will impact district financing largely based on enrollment.
· School-district pension costs are escalating rapidly as both the California Public Employees Retirement System and the California State Teachers Retirement System seek more money to attack their large “unfunded liabilities.” The rising pension bills will largely consume the lower level of state aid also being projected.
We’re already seeing real-world examples of the trends in Moody’s report. Despite the large increases in school revenue over the last half-decade, many districts, especially those with declining enrollments, are struggling to balance their books.
Sacramento Unified, for example, just saw its budget rejected by the county superintendent of schools because it dipped into reserves meant to cover pension costs to finance a hefty raise for its teachers.
Los Angeles Unified faces immense deficits, in part because it is seeing a steep decline in enrollment due to both demographic factors and a strong shift of students into charter schools.
The next governor and the Legislature will have to stabilize current school finances before giving any thought to the 32 percent increase advocated in the Stanford/PACE report.
SAN JOSE MERCURY NEWS
by DAN WALTERS, CALMATTERS
PUBLISHED: September 30, 2018
California’s school district credit quality remains strong, in S&P Global Ratings’ view, supported by a dynamic economy that has been one of the nation’s top performers for the past several years. S&P Global Ratings maintains public ratings on 650 school districts (roughly 70% of the statewide total).
Sep. 18, 2018
Judge bars investor class action over closed-end fund losses
Investors who lost money on UBS Group AG mutual funds stuffed with Puerto Rico government bonds can’t sue as a group, a federal judge said Monday, a setback in their efforts to collect from the Swiss financial services giant.
The ruling by Judge Sidney H. Stein of the U.S. District Court in New York means that investors in closed-end mutual funds managed by UBS Financial Services of Puerto Rico Inc. must pursue their claims individually through arbitration, a more difficult path to recouping damages, rather than proceeding as a single, certified class.
Investors have claimed that UBS brokers told them their mutual funds were safe when in fact their assets were heavily concentrated in just a few Puerto Rican municipal bonds and the funds had used leverage to improve returns.
Judge Stein said the plaintiffs’ circumstances and their decisions to buy and sell were so dissimilar that their claims needed to be adjudicated case-by-case. Attorneys for the plaintiffs didn’t respond to a request for comment.
A decline in Puerto Rico bond prices starting in 2013, when the U.S. territory’s fiscal crisis came into focus, drained value from the mutual funds and sparked hundreds of claims against UBS. Prices on some securities have declined further since Puerto Rico embarked on a court-supervised restructuring of its $73 billion debt load last year.
UBS said in its second-quarter report that mutual-fund customers had claimed $2.6 billion in damages through arbitration complaints arising from the downturn in Puerto Rican bonds. Of those complaints, $1.6 billion worth have been resolved through settlements, some of which were for millions of dollars, according to the regulatory filing.
Investors said UBS failed to structure the mutual funds to preserve capital as advertised and reaped millions of dollars in fees by selling and trading mutual-fund shares. UBS largely controlled the market for those shares, making them illiquid and prone to outsize price swings, according to investor complaints.
UBS has said investors received excellent returns for years that often exceeded the broader bond market.
UBS paid roughly $34 million in 2015 to settle accusations of failing to supervise a former broker who had customers invest borrowed money into the bond funds. The U.S. Securities and Exchange Commission separately sued the former broker, Jose Ramirez Jr., in federal court. He was fired by UBS in early 2014.
The Wall Street Journal
By Andrew Scurria
Sept. 18, 2018 3:40 p.m. ET
The State of Delaware and a subsidiary of Gulftainer Company Limited (“Gulftainer”) have finalized a concession agreement for the operation and further development of the 100-year-old Port of Wilmington (“Port”).
While the concession agreement signed on September 18, 2018 is not publicly available, it is expected, based on deal terms described in Port documents submitted in support of approval of the P3 transaction,[1] that the agreement grants Gulftainer exclusive rights to manage the Port for a 50-year term. In return, Gulftainer agrees to invest up to $584M in the Port in the first 10 years to improve the Port’s cargo terminal facilities, $411M of which will be used to develop a new 1.2 million TEU (twenty-foot equivalent units) container terminal. Gulftainer will pay concession fees to the State based on cargo volume along with periodic adjustments for inflation. These fees could reach $13M by the tenth year of the concession.[2] At the end of the concession, Gulftainer must hand the Port facilities back with the capacity to handle specified minimum service and tonnage volume requirements.
In May 2017, Diamond State Port Corporation (“DSPC”), the state entity that owns and operates the Port, issued an RFQ seeking private partners to develop, finance and/or operate port-related infrastructure.[3] After evaluating submissions, DSPC signed a non-binding letter of intent with Gulftainer in December 2017.
By Andrée Blais and Racquel Muindi on September 27, 2018
Infra Insight Blog
Nossaman LLP
States are putting taxpayers on the hook for more and more debt, with Illinois among the state’s with highest tax burden per taxpayer in the nation, according to the latest report from public finance watchdog Truth In Accounting.
Despite the improving national economy, some states are in worse shape now than they were shortly after the end of the Great Recession. Truth In Accounting’s ninth Fiscal State of the States report reviews states’ comprehensive annual financial reports (CAFR) for the overall financial condition for all 50 states. From there, TIA offers up a letter grade for each state, from “A” to “F,” where Illinois lands.
“Based on our grading methodology, three states received A’s, seven received B’s, 12 received C’s, 18 received D’s, and 10 states received failing grades,” The report said.
Illinois was the third-worst state in debt per taxpayer at $50,800. That’s $400 more than the previous year’s report. Only Connecticut, at $53,400 debt per taxpayer, and New Jersey with $61,400 debt per taxpayer, were worse than Illinois.
Truth In Accounting considers Illinois one of five Sinkhole States that don’t have enough assets to cover their debt.
“Illinois only has $28.8 billion of assets available to pay bills totaling $244.9 billion,” according to the report.
The other four Sinkhole States were Massachusetts, Kentucky, Connecticut and New Jersey.
At the other end of the spectrum were the five Sunshine States, with Alaska leading the country with a per-taxpayer surplus of $56,500. The other were North Dakota ($24,900 surplus per taxpayer), Wyoming ($19,600), Utah ($4,400) and South Dakota ($3,100).
TIA Research Director Bill Bergman said some states – like Illinois – are in worse shape than they were shortly after the Great Recession.
“Given that we’ve had a recovery since then, and a significant one in the stock market, the fact that Illinois’ financial condition has worsened since 2009 is even more of a concern,” he said.
Illinois keeps getting worse, Bergman said, with a per taxpayer debt liability of $29,000 in 2009 ballooning to $50,800 in TIA’s most recent report.
Bergman said states that are running surpluses have something in common.
“The good states have a record of funding their pensions and funding their [other post-employment benefits] in a timely way that doesn’t kick the can down the road,” he said.
While credit rating agency reports are for bond holders, TIA’s rating is designed to show taxpayers what’s going on, Bergman said.
“Our review is something that’s guided by the concern for the common citizen and the average taxpayers, whereas credit ratings focus on bond holders,” Bergman said.
Moody’s has Illinois’ general obligation bonds rated at Baa3 with a stable outlook, S&P at BBB- with a stable outlook and Fitch at BBB with a negative outlook, all just above junk status.
Some ratings reports acknowledge Illinois’ unfunded liabilities and structural debt, but they change the outlook from negative to stable because of things like tax increases. In the summer of 2017, Illinois’ ended a more than two-year budget impasse by increasing income taxes by $5 billion over the governor’s veto. Credit ratings agencies hinted at a junk status rating if there wasn’t a budget.
“[Governments] have the power to tax and that’s definitely something worth respecting, but from the point of view of the average taxpaying Joe or Jane, that’s not necessarily the source of financial strength,” Bergman said. “In fact, they’re relying on the average taxpayer to make the bonds whole with the power of tax and the power of force.”
The TIA report also shows that because of new financial reporting rules requiring all unfunded post-employment benefits to be reported, Illinois’ hidden debt was among the worst in the country at $36.1 billion, for a total of $52.5 billion in promised benefits.
Another area Illinois failed at were filing comprehensive annual financial reports within 180 days. Illinois was 258 days tardy from the end of its fiscal year, the report said. Illinois was tied for fifth worst in the nation there.
Bergman said he wants to bring awareness to taxpayers about the true cost of their government’s structural debt.
“This is hard stuff,” Bergman said. “A lot of people, their eyes just fog over. We’re trying to help them understand it.”
While Illinois is among the worst states, the report notes that the entire country is in financial trouble.
“States in general do not have enough money to pay all of their bills,” the report said. “Based on our latest analysis, the total unfunded debt among the 50 states increased by $53.4 billion to more than $1.5 trillion in fiscal 2017. Most of this debt comes from unfunded retiree benefit promises, such as pension and retiree healthcare debt. This year, pension debt accounts for $837.5 billion, and other post-employment benefits – mainly retiree healthcare liabilities – totaled $663.1 billion.”
The Fiscal State of the States report can be found at StateDataLab.org.
WBGZ Radio
By Greg Bishop – Illinois Radio Network
9/27/2018
(Copyright WBGZ Radio / www.AltonDailyNews.com)
Fitch Ratings-Austin-13 September 2018: California has ratcheted up its statewide environmental goals with the passage of the California 100% Clean Energy Act. The legislation, signed by the Governor earlier this week, is the latest step in the state’s ambitious transformation of its energy supply through the implementation of additional constraints on utility power supplies.
Fitch Ratings expects the credit quality of Fitch-rated public power utilities in California to remain strong over the medium term, although compliance with the legislation will require careful resource planning and heighten the importance of meaningful industry developments in areas that extend beyond individual publicly owned utility (POU) control. Advances in generation and storage technologies, the pace of electrification in the transportation sector, and potential regional market expansion and design changes will be crucial to the state’s success in reaching its targets.
California’s 100% Clean Energy Act requires utilities to achieve 60% of their energy supply from renewable sources by 2030, which is an increase from the 50% renewable by 2030 mandate set by legislation passed as recently as 2015. Significantly, the legislation also requires 100% of a retail utility’s energy supply to be provided by renewable or carbon-free energy by 2045, the same goal as the state of Hawaii, which previously held the most ambitious renewable standard.
POUs must make long-term resource decisions while factoring in the requirements of the new legislation, the limitations of existing storage technologies and carbon-free generation resources, and near-term system needs. Decisions regarding the development of additional natural gas-fired resources must now be evaluated under the legislatively imposed deadline of 2045, which shortens the timeframe over which to recover the investment.
MOUNTING REGULATIONS ADD TO LONG-TERM INVESTMENT UNCERTAINTY
The 100% Clean Energy Act was proposed during the 2017 legislative session so the industry was prepared for it or a similar bill to be enacted. The act’s requirements are in line with the trajectory established by previous mandates. However, this legislation further heightens investment uncertainty for natural gas-fired generation. The rapid decline in energy that can occur from both wind and solar requires a corresponding generation resource that can ramp-up energy production in minutes to provide grid stability and service reliability. One such option is natural-gas generation given its flexibility and fast start capabilities. Several utilities have delayed or changed planned or expected investment in natural gas resources given the uncertainty regarding the state’s unfolding environmental mandates.
Los Angeles Department of Water and Power (LADWP; power revenue bonds rated ‘AA’/Stable Outlook) placed its multi-decade local generation investment plan on hold in 2017. Since 2011, LADWP has been investing capital to reconstruct three of its local gas-fired generation facilities. In order to comply with state regulations, the plants must be rebuilt to cease using ocean water for once-through power plant cooling purposes by 2029 with a total estimated cost of over $2.0 billion. The three power plants account for 70% of the 4,736MW net generating plant capacity owned by LADWP. LADWP’s pause in the long-term investment is intended to provide time to analyze the need for the continued investment in local gas-fired generation in light of other alternatives, including the increased availability of renewables in the state and the greenhouse gas emissions of various alternatives.
Glendale Water and Power (electric revenue bonds rated ‘A+’/Stable Outlook) has also been planning the replacement of its older gas-fired generation unit, the Grayson Power Plant. The city’s integrated resource plan identified the rebuild of the Grayson power plant on the existing site with approximately 200 MW of new, efficient natural gas-fired capacity as the city’s best option at an estimated cost of just under $500 million. However, earlier in 2018, Glendale decided to place the repowering decision on hold while it solicited alternative proposals. Similar to LADWP’s reasoning, Glendale wanted to explore renewable and non-carbon emitting alternatives.
In both cities, the alternative exploration process was initiated by community requests and City Council direction ahead of the passage of the 100% Clean Energy Act but both actions reflect the climate of uncertainty in which utilities are attempting to make long-term investment decisions. While it appears that natural gas-fired generation will need to continue to play a significant role in the state’s power supply until other technology developments occur, the 2045 deadline now puts a hard limit on the potential useful life of this investment, with the ongoing risk that subsequent state legislation moves the target date forward in the future.
THE FATE OF THE INTERMOUNTAIN POWER PROJECT REPOWERING
Certain POUs in California are involved in a multi-year process to implement a repowering of the Intermountain Power Project (IPP), a 1,800 MW coal-fired generation plant located in Utah with a 490 million 500 kV direct current transmission line into California. California utilities are contracted to purchase the output of the IPP coal plant through 2027. IPP represents one of the last sources of coal-fired generation for California’s POUs following the recent divesture of the San Juan power project in New Mexico and the Navajo Generating Station in Arizona. The repowering was designed to allow the California participants to comply with state legislation enacted in 2006 that limits the use of coal-fired resources in the future by repowering the resource as a combined cycle natural gas-fired plant. Project participants have worked through a multi-year process towards this goal. The repowered IPP may still provide valuable capacity and reliability benefits prior to 2045 and the IPP transmission line into California provides valuable import capability for out-of-state renewable energy.
STRONG CREDIT QUALITY BUT WITH COMPLIANCE COST RISKS
California’s POUs have managed the challenge of mandated energy targets thus far and have exhibited strong credit quality due largely to the timeliness of cost recovery and the preservation of margins. Fitch expects this success to continue over the medium term. It is noteworthy, however, that the rate impact to consumers during the initial years of regulatory compliance was materially dampened by the corresponding decline in the cost of renewable energy and natural gas commodity prices during the same period of time. Future compliance costs may not experience the same buffer.
Future compliance costs could also be significantly higher than recently observed. While the 100% Clean Energy Act is just one in a succession of mandates levied on the state’s POUs that began over a decade ago, the legislation further constrains future resource options. The confluence of the 2045 deadline and reliance on still emerging technologies raises the concern that utilities will be hampered by sizable cost increases while simultaneously challenged to maintain the high reliability levels that ratepayers have come to expect. Over the longer term, the preservation of credit quality will continue to depend upon the timely recovery of those costs and maintenance of strong financial margins during any potential operational challenges.
Contact:
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
Matthew Reilly, CFA
Director
+1-415-732-7572
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
AT&T and the City of Los Angeles are in talks regarding a public-private partnership to make LA one of the smartest cities in America. AT&T’s role in the partnership is the provision of IT technology and support for the deployment of small cell technology to address the problems that matter most to the people that live, work, and visit there.
To help the city solve issues related to road traffic, natural disaster preparedness, and public safety, AT&T said it’s exploring the deployment of a variety of smart city products ranging from digital kiosks to structural monitoring to digital infrastructure. The deployment of these technologies will benefit all neighbourhoods in Los Angeles, helping to provide better connectivity to neighbourhoods that have been traditionally left behind in the digital divide, the company said in a press release.
To enhance existing voice and data capacity in LA, the company said it will be looking to deploy a greater number of small cells more rapidly to expand its existing network and begin deployment of a 5G network.
Small cell technology also helps bring increased capacity to first responders. This is in addition to the increased coverage and capacity that FirstNet is providing to the LA public safety community through the network’s Band 14 spectrum build and integration of assets from the Los Angeles Regional Interoperable Communications System.
Thursday 13 September 2018 | 13:12 CET | News
LA WATCHDOG–Charter Amendment B: Shall the City Charter be amended to allow the City to establish a municipal financial institution or bank?
Over the next two months, we will be experiencing a full court press by the well-financed proponents of Charter Amendment B, the pet project of City Council President Herb Wesson, promising billions in savings and benefits to the City.
But these pie-in-the-sky claims have not been documented, substantiated, or made available to the public because the City does not have a business plan for the proposed City owned Bank of Los Angeles.
Rather, the fiscally irresponsible politicians who occupy City Hall want us to give them a blank check to form a bank that will eventually require a cash investment of $1 billion from the City to capitalize the bank, to establish the required loan loss reserves, and to pay for the new bank’s “exorbitant” start-up costs.
Again, there is no plan to raise the $1 billion in capital, especially since the City’s two underfunded pension plans would be prohibited from making such a risky, related party investment, contrary to comments made by several Councilmen.
The proponents claim that the City paid $170 million in banking fees last year, implying that the Bank of Los Angeles will eventually save the City tens of millions. But this will require the Bank to develop and manage sophisticated data processing systems, a highly unlikely prospect given the City’s poor record of developing and operating management information systems.
For example, we certainly experienced the pain associated with the disastrous rollout of the DWP billing system.
Furthermore, it is unlikely that the Bank of Los Angeles will be as efficient as Bank of America or JP Morgan who have some of the most sophisticated, secure systems in the world staffed by experienced personnel and programmers.
The proponents claim that the “big banks receive billions in City deposits virtually interest free.” But according to reports from the Office of Finance, banks deposits are only about 1% of the City’s $9 billion investment portfolio.
The proponents claim that the City paid $1.1 billion in interest to “big banks” and investors. But there is no evidence to support this claim, especially given that the City is budgeting only $28 million in interest expense on its outstanding General Obligation Bonds. Of course, the City’s three proprietary departments (DWP, the Port of Los Angeles, and LAX), the Sewer Department, and other special revenue departments have outstanding bonds which require interest payments. But $1.1 billion in interest expense appears to be a vast overstatement.
The supporters of the Bank of Los Angeles anticipate that the bank will invest in City debt, resulting in huge savings for the City. While the savings are probably overstated given the need for the proposed Bank of Los Angeles to charge high interest rates to cover its anticipated City mandated payroll and overhead, the bulk of the savings will go to the proprietary departments or the capital-intensive Bank, not to the City’s treasury.
There is also the risk that the proposed Bank will be financing its investment in long term bonds with short term deposits, a recipe for disaster if interest rates should happen to increase. In that case, the Bank, its capital, and its deposits would be exposed to significant losses.
The Mayor and the City Council will tell us that the proposed Bank of Los Angeles is the answer to our prayers, overlooking the risks of bad loans and investments and swings in interest rates. Maybe that is why they have not developed a plan, unlike the Bay Area governments who are considering a public bank.
It is no wonder that the City Legislative Analyst recommended against establishing the Bank of Los Angeles.
The same City Hall politicians that gave us unbalanced budgets, a Structural Deficit of $1 billion a year, unfunded pension liabilities of $15 billion, and lunar cratered streets want us to give them a blank check that will allow them to raid the cash reserves of the City and its proprietary and special revenue departments.
We would be crazy to give a blank check for a City owned bank that would be controlled by the Mayor, the City Council, and their cronies.
Vote NO on Charter Amendment B.
JACK HUMPHREVILLE 10 SEPTEMBER 2018
The City of Highland Park is joining with the villages of Buffalo Grove, Elk Grove Village and Hoffman Estates to form a Suburban Liability Insurance Pool that is expected to save the city between 13 and 37 percent over current insurance costs.
Buffalo Grove proposed forming a pool among similar communities with similar loss histories in 2017. Municipal administrators have been meeting for more than a year with the chosen broker, A.J. Gallagher, to define the structure for a possible cooperative — a first step toward estimating coverage costs and quantifying potential savings.
The Highland Park City Council Sept. 12 approved membership for a three-year term starting Jan. 1. The Buffalo Grove Village Board is scheduled to consider the matter Sept. 17.
According to the city, the Suburban Liability Insurance Pool (SLIP) will maintain a self-insurance loss fund to cover that portion of any claim that exceeds the municipality’s deductible but is not yet covered by the pool’s insurance carrier.
Funds in the pool’s own loss fund will be invested and can earn interest income. Surplus funds can be returned to member municipalities in proportion to their contributions once an actuary has determined the funds are no longer needed to pay claims.
“Right now, if you cut a $100,000 check to your insurance company and they only pay out $10,000, they’re not giving any of the money back,” said Tia Incapreo, a Gallagher representative, during an Aug. 27 presentation to Highland Park city council members. “Being part of a cooperative like this allows you to have more control over your insurance program.
City Finance Director Julie Logan said insurance premiums have tended to go up each year regardless of claims experience.
“Currently, we go to market by ourselves basically and they just kick us up by five percent every year,” Logan said.
She said some of the pools managed by Gallagher have gone for five and 10 years without increases.
Highland Park’s fixed annual liability insurance costs are expected to drop from about $407,000 this year to about $222,000. In addition, the city would make a contribution to the pool’s loss fund that could be as high as $132,000 but is expected to be around $33,000.
The Chicago Tribune
by Karen Berkowitz
September 14, 2018
Facing down critics from all sides, Natalie Jaresko has broad powers to revamp the island’s economy; ‘something has to change’
Natalie Jaresko has faced almost constant criticism since taking the helm of Puerto Rico’s federal oversight board 18 months ago. Investors and politicians on the mainland attack her for pushing reforms too slowly, while those on the island blast her austerity measures and criticize her $625,000 annual salary. Lawyers and bankers involved in the restructuring—all men—call her blunt and brusque.
“I’m getting used to it,” said Ms. Jaresko, 53, who restructured Ukraine’s finances in 2016 as that country’s finance minister and now is looking to do the same in Puerto Rico. “With all due respect, the challenges in this situation are as great, or greater than, in Ukraine, which is much larger and has been attacked and occupied by Russia.”
The project to revamp Puerto Rico’s economy is at a critical juncture as the board shifts from fact finding and economic forecasting to actually enacting the debt restructurings and structural reforms needed to stabilize the island’s financial health. Ms. Jaresko aims to install policies she hopes will reverse more than a decade of economic stagnation on the island, but such measures are politically unpopular, especially after the devastation caused by Hurricane Maria last year.
The Wall Street Journal
By Matt Wirz
Sept. 14, 2018 9:00 a.m. ET
Financial advisers who are putting together an agreement allowing Gary city government to sell its Public Safety Building, then lease it back tried Wednesday to reassure Common Council members that the deal would not change anything about the way the city operates.
Brandon Coleman and Jimmy Shanahan, municipal advisers working to put together the deal that Common Council members will be asked later this year to approve, said the intent is to allow city government to raise up to $40 million, which would be used in upcoming years to pay municipal government bills.
Council members last month approved a broad outline for a sale and lease-back of the Public Safety Building at 555 Polk St. Specific details of the transaction have yet to be put together, which is why Coleman and Shanahan were before the council’s finance committee to explain how things are progressing.
Coleman said the city followed up last month’s council vote of approval by sending out Requests for Proposals to some 20 financial institutions to gauge interest in the concept. Nine of those institutions expressed interest, and now talks are taking place between a three-member committee of city officials chosen by Mayor Karen Freeman-Wilson and those banks that could wind up buying the bonds that would produce money for Gary.
“It won’t matter that we say we want to raise $40 million if no one out there wants to do this,” Coleman said.
Selling bonds would create debt for Gary government in future years and Coleman said the plan originally was to devote the city’s share of proceeds from the Majestic Star Casino to guarantee the debt. Coleman said city officials are now confident that local income tax proceeds will provide enough – allowing them to use casino monies for other future projects.
Shanahan said the terms of the deal being put together likely would state that upon the full repayment of the fundraising bonds, ownership of the Public Safety Building would revert back to Gary municipal government.
Even during the years that debt existed, the title to the property would indicate the structure being owned by the Gary Building Corp., an entity to be created for whomever winds up buying the bonds.
Police Department will not be at risk at any point in the future of being evicted from their longtime headquarters, officials said.
“If the Building Corporation defaults on the bonds, the city will not lose use of the facility,” according to a memorandum Shanahan presented to council members. “The facility is not being mortgaged or pledged as security to the repayment of the bonds.”
Shanahan’s memo also stated, “no property taxes will be raised to make lease payments and debt service on the bonds.”
Councilwoman Rebecca Wyatt, D-1st, said she is skeptical that taking on additional debt to repay bonds will somehow help Gary municipal government get out of debt over the long-term.
“I don’t have a lot of confidence we can do this,” Wyatt said. Councilwoman LaVetta Sparks-Wade, D-6th, agreed, saying she fears what could happen if the city can’t pay the lease.
Mayoral Chief of Staff Dayna Bennett said the sale-and-lease back transaction is part of an overall play by which the city will be engaging in cost-cutting measures meant to reduce government expenses while also increasing the amount of money available to the city.
Some of those changes will become evident as soon as October, which Bennett said will be when the full Common Council will be asked to consider a series of fees the Fire Department would charge to increase the amount of income it can produce for the city.
“We’re going to see the gap shrink in the amount of money we’re short of paying our bills” Bennett said.
Coleman said this is all part of a long-range plan to bolster Gary’s financial status. “The adage of ‘you can’t borrow your way out of a financial problem’ is true,” he said. “But if we don’t develop a plan that brings more revenue into Gary, then we might as well all go home and just give up.”
The Chicago Tribune
by Gregory Tejeda
September 14, 2018
Gregory Tejeda is a freelance reporter for the Post-Tribune.
Wells Fargo Securities, the investment banking and capital markets business of Wells Fargo & Company (NYSE: WFC), has made two additions to its Public Finance team: Tom Wynne has joined the company and will lead a new housing financing initiative in the West, and Michael Colton has joined the company to support the municipal finance business in New York.
Based in Los Angeles, Wynne joins Wells Fargo as a director in the Public Finance Housing group. His focus includes multifamily housing deals, land-secured financing, and general government transactions in the company’s Western region. He previously led business development with municipal bond issuers in the Western Region at Morgan Stanley in Los Angeles. Wynne earned an MBA from Oxford University Business School and a Bachelor of Science degree from the University of Colorado at Boulder.
“As one of the largest commercial real estate leaders in the U.S., we’re in a strong position to leverage our balance sheet, bringing greater focus on capital market financing for both governmental and developer clientele,” said Wynne. “I look forward to increasing multifamily housing financing in the West to match what we have in the East.”
Colton brings 30 years of municipal finance experience to Wells Fargo. His industry tenure includes 20 years in Morgan Stanley’s municipal securities group, serving most recently as managing director at Lamont Financial Services. As managing director for Wells Fargo Public Finance, Colton focuses on both New York City and New York state issuers. He has specialized in municipal infrastructure, transportation, utilities, and sports facilities at the local and state levels. Colton holds a master’s degree in industrial engineering and operation research from Columbia University and a bachelor’s degree in computer science from Yeshiva University.
“Whether our clients are city or state issuers, our service sets our team at Wells Fargo Securities apart,” said Colton. “I’m proud to join some of the industry’s best talent, and I look forward to expanding our business in the Northeast.”
Wynne and Colton are the seventh and eighth industry veterans to join Wells Fargo Securities’ Public Finance division under Stratford Shields, head of Public Finance, who assumed his role in late 2017. Eight junior level associates have also joined the firm during his tenure.
September 13, 2018, 07:18 AM
A local government watchdog is raising new questions about the financial and practical assumptions behind the Ernest N. Morial Convention Center’s proposed 1,200-room high-rise hotel.
The nonpartisan Bureau of Governmental Research says the view of a consultant hired by the Convention Center “appears to substantially underestimate the value of the proposed public contributions.”
BGR and that firm, HVS Convention, Sports and Entertainment Facilities Consulting, are at odds over the size of the public contributions being sought by the hotel’s would-be developers. BGR says the total is close to $330 million, but HVS puts it at about half as much under a formula that the authority that governs the giant facility has endorsed.
BY RICHARD THOMPSON | THEADVOCATE.COM SEP 13, 2018
North Las Vegas, once considered the poster child of the housing bust, is betting the municipal-bond market will validate its rebound from the brink of insolvency.
The city is selling $99 million of general-obligation bonds on Sept. 11, its first such sale since 2011. The refinancing was made possible after it was upgraded back to investment-grade status in June last year by Moody’s Investors Service and then this April by S&P Global Ratings.
The community of 243,000 bordering Las Vegas has benefited from the growth in the national and local economies and from diversifying its tax base. Amazon.com Inc. in April said it was building the state’s fourth facility there, and Sephora, a cosmetics company under Paris-based conglomerate LVMH, broke ground on a distribution center in July.
“We really had no place but up to go,” the city’s chief financial officer, Darren Adair, said in an interview. “This recognizes the hard work that the city has done to restore structural balance.”
The bond sale from North Las Vegas, which just four years ago faced the prospects of a state takeover and forcing concessions on bondholders, comes as money flows into funds and sales of new issues remain subdued. Wall Street memories can be short when demand for yield runs high, said Jason Ware, head of trading at brokerage 280 CapMarkets.
“That deal would have no problem getting done,” he said.
North Las Vegas was the nation’s third fastest-growing municipality from 2000 to 2009, until property values went into free fall from the recession and ensuing aftermath. Moody’s cut its rating 10 notches from June 2011 through January 2014, according to spokesman David Jacobson. The city will have about $431 million in municipal debt outstanding after the refinancing, bond documents show.
Officials in Nevada, which doesn’t permit municipal bankruptcy filings, discussed taking over the city’s finances and possible legal changes that would force concessions on bondholders. Ultimately, the city didn’t fall under the state’s control and embarked on cutting costs and expanding its appeal to warehouse developers and logistics centers.
In June 2017, Moody’s, which put the city in junk in 2013, returned it to investment-grade status by upgrading it to Baa3. Last month, the company bumped it up two notches to Baa1 with a positive outlook because of the continuing financial improvement.
S&P Global Ratings, which cut North Las Vegas to junk in 2014, moved it back to investment-grade in April with a BBB rating with a stable outlook.
Bloomberg Markets
By Romy Varghese
September 6, 2018, 7:57 AM PDT
A financially struggling Chicago suburb was sued by investment firms for defaulting on $32 million of debt, claiming the town violated its contract with bondholders.
The Oppenheimer Rochester High Yield Municipal Fund, Oppenheimer Rochester AMT-free Municipal Fund and Susquehanna Government Products sued Harvey, Illinois, its mayor and Cook County officials for the city’s failure to make more than $2.5 million of payments on bonds sold in 2007, according to a copy of the lawsuit filed in Cook County court.
The Sept. 4 suit alleges that the Cook County tax collector hasn’t been depositing property-tax revenue collected for the city into a separate account to pay principal and interest on the bonds, as the city had guaranteed. Instead, the revenue has been distributed to the city first, in violation of the bond contract, according to the suit. The funds are supposed to be transferred to the city only after the debt is paid, the suit says.
Tom Corfman, a spokesman for Cook County Treasurer Maria Pappas, didn’t immediately respond to a request for comment, nor did spokespeople for the companies that filed the suit.
Harvey, about 20 miles south of Chicago, has long been wracked by poverty and crime and was sued by the Securities and Exchange Commission four years ago for misusing money raised by selling bonds for an ill-fated hotel project.
The city missed six bond payments in fiscal year 2017, according to Moody’s Investors Service, which described the municipality as “structurally insolvent” in a May report. Its available fund balance was negative $56 million at the end of April 2017, according to Moody’s.
By Aug. 1, Harvey was more than $2.5 million in arrears on principal and interest payments due on the bonds sold in 2007. That includes more than $1.2 million owed to the plaintiffs, according to the suit.
Harvey Mayor Eric Kellogg didn’t immediately respond to an email seeking comment on the suit, and his voicemail box was full. In 2016, Kellogg agreed to never participate in another municipal bond-offering in order to settle the SEC’s charges of defrauding investors in connection with the hotel project.
Bloomberg Markets
By Elizabeth Campbell and Martin Z Braun
September 6, 2018, 10:20 AM PDT
President Donald Trump won’t have Rahm Emanuel to kick around anymore, but corporate leaders in Chicago may not be as happy with the mayor’s decision not to seek a third term.
In a move that promises to trigger a political free-for-all and could rattle investors in bonds tied to the nation’s third-most-populated city, Emanuel, 58, announced Tuesday that he won’t run for re-election next year.
Rahm EmanuelPhotographer: Scott Olson/Getty Images
The news comes as Chicago’s population growth has stalled, the city faces massive pension liabilities, and it’s routinely used by Trump as a synonym for urban decay and crime. Emanuel’s announced departure also creates uncertainty just as he has helped stabilize the city’s finances and led its bid to attract Amazon.com Inc.’s second headquarters, with its 50,000 jobs. Chicago is one of 20 finalists in the competition.
“This is a big moment for Chicago, which is now at a crossroads,” said Jack Lavin, president and chief executive officer of the Chicagoland Chamber of Commerce. “Mayor Emanuel has been good for the growth and development of the city, and the business community needs stability to continue creating jobs and opportunities for people.”
Wooing Corporations
Emanuel has had success wooing corporations: more than 50 companies have relocated their headquarters to Chicago during his tenure. And others like Chicago-based United Continental Holdings Inc., one of the city’s largest private employers, have added jobs to the city.
“We are proud of the productive partnership we’ve built with the mayor and his team, working together toward a common goal of creating greater economic opportunity for all Chicagoans,” United CEO Oscar Munoz said in a statement. “Particularly, the mayor’s focus on building 21st century infrastructure, especially forging a landmark agreement to modernize O’Hare, will support Chicago’s economic competitiveness and success long into the future.”
The city’s fiscal challenges remain daunting, with pensions still only 27 percent funded. Chicago plans to contribute $1.18 billion to the retirement funds in fiscal year 2019 with payments ramping up in the coming years, according to an annual financial analysis. Chief Financial Officer Carole Brown has also been considering issuing pension-obligation bonds to further stabilize the massive debt.
“They have before them one of the most serious fiscal problems in America right now, and that is the huge liabilities,” said Richard Ciccarone, president of Merritt Research Services LLC, which analyzes municipal finance. “They’re going to have to be paid for by taxes and new revenues without disturbing economic stability in the city of Chicago.”
Chicago’s fiscal picture improved under Emanuel, said Laurence Msall, president of the non-partisan Civic Federation, which tracks the city’s finances. He cited Emanuel’s move to end the borrowing for operations and selling bonds to pay off maturing debt.
Who’s Next?
“It will remain to be seen whether the next mayor will continue to embrace these practices or slip into such financial lapses,” Msall said. “It’s difficult to know who the next mayor will be or whether they will be able to match Mayor Emanuel’s persona and dedication to economic development. But many of the structural improvements that Mayor Emanuel can rightfully take credit for will continue beyond his administration.”
An adviser close to Emanuel said he thinks the announcement was made now so that candidates more to the mayor’s liking still had enough time to enter the race and that the decision to leave the job was more personal than political.
His decision came on the eve of a murder trial where a white Chicago police officer is accused of repeatedly shooting a black teenager — a case that encapsulated Emanuel’s struggle to both improve public safety and community relations with police in a city Trump has ridiculed for its crime problems.
“Chicago Police have every right to legally protest against the mayor and an administration that just won’t let them do their job,” Trump tweeted in May. “The killings are at a record pace and tough police work, which Chicago will not allow, would bring things back to order fast…the killings must stop!”
In fact, Chicago’s murder rate is down this year. But the city still suffered nearly twice as many homicides as New York City, which has more than three times the population. Chicago recorded 375 murders this year through Sept. 2, down 19 percent from last year, according to police department data. New York has recorded 188 murders as of Aug. 26.
The city’s bloodshed has drawn national attention. After a single weekend saw about 70 wounded last month, Rudy Giuliani, Trump’s lawyer and the former mayor of New York, tweeted about the crisis, blaming the city’s Democratic rule and expressing support for one of Emanuel’s challengers: Garry McCarthy, a former New York City police official who the mayor hired to lead Chicago’s force.
Police Shooting
McCarthy was fired by Emanuel in 2015 in the wake of the release of a video showing the fatal police shooting of 17-year-old Laquan McDonald. The incident brought calls for Emanuel’s resignation. The murder trial of the police officer accused of killing McDonald, Jason Van Dyke, is scheduled to start this week.
Emanuel’s departure also raises uncertainty for investors who have praised his work to right the junk-rated city’s finances. For years, Chicago hadn’t paid enough into its four retirement funds, and the strain had been weighing on the city’s ability to provide services to residents.
As mayor, Emanuel enacted higher property taxes and utility levies as part of a series of steps to shore up Chicago’s retirement funds. Moody’s Investors Service, which had cut Chicago’s rating to below investment grade in 2015, raised the city’s outlook to stable in July, citing some of the work of Emanuel’s administration. S&P Global Ratings and Fitch Ratings consider the city’s bonds investment-grade.
Daley Successor
Emanuel’s tenure was relatively brief, at least by Chicago standards. Before his election, a Daley had run Chicago for 43 of the previous 55 years.
“This has been the job of a lifetime, but it is not a job for a lifetime,” Emanuel told reporters during a City Hall news conference on Tuesday, flanked by his wife, Amy Rule.
In his 2011 win, Emanuel beat a field that included five other candidates to became Chicago’s first Jewish chief executive. While in office, he generally remained composed in public, not showing what he has acknowledged to be a sometimes expletive-laced, explosive personal style.
The mayoral election is scheduled for Feb. 26. If a single candidate doesn’t receive more than 50 percent of the vote, the two contenders with the most votes will compete in a run-off on April 2, according to the city’s Board of Election Commissioners.
Emanuel, former President Barack Obama’s first chief of staff and a former Chicago congressman, had been raising money ahead of next year’s election. In the second quarter alone, his campaign took in more than $6 million, according campaign finance disclosures.
Emanuel had $7.5 million in his campaign account at the start of July, disclosure reports show. While he’s not obligated to do so, Illinois law would allow him to give any amount of that total to a political party committee or even a mayoral candidate.
Among the dozen challengers he was facing were McCarthy and former Chicago Public Schools chief Paul Vallas. There’s no clear frontrunner now.
Emanuel’s departure has left the city with a “political free for all” where candidates will be forced to address issues rather than attack the incumbent, said Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago.
“They’re going to have to start proposing solutions,” Pagano said. “It really has to be based on who has the proposal that can appear to move us away from those two major issues: financial issues and gun violence.”
Bloomberg Markets
By Elizabeth Campbell and John McCormick
September 5, 2018, 2:00 AM PDT
A previously deferred proposal to create a revenue forecasting commission designed to give additional financial analysis to the Cook County Board is slated to formally be presented for a vote on Wednesday, Sept. 12 in the Board’s finance committee.
So far, the idea has support from several commissioners and at least one notable detractor.
Supporting the proposal is its sponsor, 7th District Commissioner Jesus “Chuy” Garcia (Pilsen), and co-sponsors 1st District Commissioner Richard Boykin (West Side), 14th District Commissioner Gregg Goslin (Glenview), and 17th District Commissioner Larry Suffredin (Evanston).
Board President Toni Preckwinkle came out against the idea earlier this summer, resulting in Garcia deferring the presentation until this month.
Making the case
Those on each side of the issue have stated their case going into the September meeting.
Garcia has been reframing the proposal, meeting with his co-sponsoring supporters as well as Michael D. Belsky, executive director of the Center for Municipal Finance at the University of Chicago Harris School of Public Policy. He aims to present to fellow commissioners a vote-friendly proposal.
The initial proposal included establishing a seven-member panel of financial experts, selected by the board president and approved by the board.
Garcia said, “This independent body would specialize in conducting five-year revenue forecasting and would serve as a much needed fiscal resource and research arm to the board and would not pose a burden to the County as has been previously characterized.”
Boykin said an independent commission would help because the board president “currently has all the information” regarding revenue and that “we basically rely on her in good faith though the budget office.”
He referred to last year’s soda tax, which the board later rescinded, as an example of needing a better method to forecast revenue needs.
“Just like Congress has the budget office independent of the president, we need something that will provide transparency,” Boykin said.
Preckwinkle opposition
Becky Schlikerman, spokesperson for Preckwinkle, said, “We do not believe creating this commission at this time is an appropriate use of tax dollars. Incurring additional expenses at a time when we continue to face financial challenges and have to make difficult decisions on how to balance our budget would be irresponsible.”
Schlikerman pointed to other concerns, including adding a new layer of government. She also said revenue projections over the past three years have come within 2% of home rule taxes and that commissioners already are well informed about revenues and have the option to meet with the president’s finance team. She drew a further difference with revenue commission proponents in noting the effectiveness of the 2017 beverage tax projections and needed collections.
“The projection was spot on,” Schlikerman said.
“I don’t recall any of our revenue projections being that far off,” agreed 11th District Commissioner John Daley, noting that the board members all have an equal opportunity to discuss revenue matters. He said the revenue commission may be worth considering, though he also expressed concern over costs that may increase over time.
Other commission proponents and opponents have focused on anticipated costs of creating a revenue commission as well. A June 26 letter from Ammar M. Rizki, chief financial officer of the County’s Bureau of Finance, to the Board of Commissioners noted that first-year costs could amount to at least $600,000. The Better Government Association (BGA) in Chicago, which offered a July 19 letter to commissioners supporting the revenue commission creation, outlined a $400,000 cost based on one part-time and two full-time staff members. The letter uses a comparative example of the Office of Economic and Financial Analysis in Washington State’s King County.
Rachel Leven, policy manager and co-author of the BGA letter, said her organization recommends a three-person staff, including one economist, that ideally would forecast five years and assess whether the County’s proposed budget is balanced. The proposal also suggests the commission could offer education and assessment to other Cook County governments, including small municipalities and townships.
“I imagine there is an element of control,” Leven said. “Revenue forecasting is understandably political because it may be hard to trust someone else to do that.”
Academic views
Local academic experts said they see value in creating a revenue commission, with added suggestions.
Michael Pagano, dean of the University of Illinois at Chicago (UIC) College of Urban Planning and Public Affairs, favors having an extra set of eyes. He noted the Congressional Budget Office has operated along with the U.S. President’s Office of Management and Budget since 1974. While that move resulted from Congressional mistrust toward the Richard Nixon administration, Pagano said better revenue forecasting is likely with a commission.
He also said the BGA’s estimated $400,000 price tag may not be enough.
“That’s hardly enough for the kind of staff that is truly independent,” Pagano said. “What it might be able to do is provide research in certain cases.”
Pagano also suggested obtaining research through resources at a university level. UIC has a Government Finance Research Center.
At Roosevelt University, Ralph Martire, Arthur Rubloff Endowed Professor and executive director of Chicago-based think tank Center for Tax and Budget Accountability, said there are two ways to look at the proposed revenue commission.
“This is one of those interesting situations where they [Preckwinkle and Garcia] both make good points,” Martire said. “When you struggle with a shortfall, you wouldn’t want to take away from services to fund a good government initiative. But you do want to put a policy in place for a long-term benefit. Preckwinkle won’t always be in office. Cook County government is larger than most state governments, and it has unique challenges. It’s a balancing act.”
For the BGA, log on to https://www.bettergov.org/. For the Cook County Board, log on to https://www.cookcountyil.gov/board-of-commissioners. For CUPPA, log on to https://cuppa.uic.edu/. To contact Martire, email [email protected].
Gazette Chicago
By Rick Romano
September 7, 2018
The Act –
School district board members, administrators and employees are required to abide by the Michigan Campaign Finance Act. The Act prohibits the contribution of public funds or resources to a campaign for a candidate or ballot proposal while permitting the dissemination of objective factual information and permitting employees to volunteer services or express their views on their own time. Board members and policy-making administrators (at least the superintendent) may engage in advocacy at any time as long as no district resources are used to disseminate those views.
Please see full Article for more information.
Miller Canfield
September 6, 2018
We have previously blogged about the many recent legislative developments in Florida and the Miami area, with a focus on legislation that is designed to facilitate public/private development projects (P3). Although an increasing number of P3 projects are now in various stages of development, the success of Florida’s legislative effort can also be seen in the positive reaction by other jurisdictions.
Earlier this month, the State of New Jersey adopted comprehensive P3 legislative that largely mirrors Florida’s recent P3 law, including the broad authorization to units of local governments to deliver public facilities and services using the P3 model. Like Florida’s P3 law, the New Jersey law also permits governments to accept unsolicited proposals from the private sector. (Unsolicited Proposals have been used to jumpstart several P3 projects throughout Florida, including the Seminole County government center and the recently proposed extension of Brightline from Tampa to Orlando.)
We have also mentioned the recent expansion of Miami-Dade County’s Rapid Transit Zone, or RTZ, which facilitates the development of mass-transit infrastructure and adjacent private or public/private transit-oriented development by granting zoning jurisdiction to the County, even for property located in cities, and permitting more development near transit stations than would often otherwise be the case. This month, the California Senate adopted a bill that would similarly grant zoning jurisdiction to the Bay Area Rapid Transit Authority (BART), with the goal of increasing housing density near stations. The bill previously passed the California State Assembly, but the Senate made amendments that will need to be adopted by the Assembly before the bill becomes law.
Imitation is the sincerest form of flattery, as the saying goes, and the recent legislative activity in New Jersey and California should give state and local leaders in Florida and Miami some additional comfort that they are on the right path.
Bilzin Sumberg
September 4, 2018
The schedule for review of the investment strategies of the Public Employees’ Retirement System and School Employees’ Retirement System just became accelerated.
At its hearing on July 30, 2018, Pennsylvania’s Commission—tasked with looking into the costs and benefits of actively managed investment strategies—noted that it expects to deliver its findings on the topic to the governor and the state legislature “prior to November 30th.” We previously discussed this subject in our Alerts, “PSERS Takes Action to Reduce Fees Paid to External Investment Managers” and “PA Commission Scrutinizes Active Management of Public Pension Assets.”
Pennsylvania’s Auditor General Eugene DePasquale decided not to wait until November 30 to chart his path forward. On August 23, 2018, he announced that he will conduct a review to assess whether PSERS and SERS have done enough to implement his recommendations from his 2017 audits, which focused generally on reducing fees and increasing transparency. This work, which is part of DePasquale’s much broader review, will “begin in 2020.”
Increased litigation seems to be a possibility as well. At its recent hearing, the Commission’s chairman recognized the lurking possibility of litigation:
One of the things that I notice in the marketplace and our practice is that you have got participants that are suing people in fiduciary capacities of 401k plans. It’s not uncommon today. And I kind of always look, you know, when is the day going to occur when defined benefit participants start going back after, or taxpayers start going back after the fiduciaries of defined benefit plans?
We will continue to monitor the proceedings and provide updates as warranted.
Jones Day
September 5, 2018
As California’s lawmakers debated late Friday night under the statehouse capitol dome in Sacramento, the city’s utility district kept the lights on for them. But the legislators fell short for the electricity provider.
Officials at the Sacramento Municipal Utility District had wanted legislators to support Governor Jerry Brown’s proposal to give all utilities relief from strict liability rules. That didn’t happen. Instead, they passed a bill on the last day of session that benefits publicly-traded competitors such as PG&E Co. by allowing new customer fees to help pay fire damages.
California Approves Bill to Help PG&E Pay for Wildfire Costs
Under California law, a utility can be held liable if its equipment caused a fire — even if the company followed safety rules. So if a tree limb outside the Sacramento Municipal Utility District’s right of way blows into its power line and sparks a fire, the agency, which has about $2 billion in municipal bonds outstanding, could be on the hook.
Utilities are pressing the issue with increasing urgency after deadly fires last October destroyed large swaths of California wine country, including thousands of homes, and killed 44 people. California investigators have already named PG&E power lines and other equipment as the source of 16 fires last year.
Subject to Damages
“We’re subject to damages that we have no control over,”said chief legal officer Laura Lewis in an interview Friday before the vote. “This legislation does nothing to help mitigate that potential risk, which we don’t feel is equitable.”
Unlike PG&E, the district, which earns 48 percent of its revenue from residences, has no shareholders. “We have no other recourse than to pass along costs to our customers,” Lewis said.
The utility estimates that if saddled with $1.5 billion in damages, it would increase rates by 25 percent. That would hurt those with limited budgets — already, the district offers a low-income discount to 15 percent of its residential customers, bond documents show.
Lewis said the utility, along with its peers, will continue to raise the issue with lawmakers next year. It’s becoming more significant as the climate changes. The average area burned by fires statewide would increase by 77 percent by 2100 if greenhouse gas emissions rise unchecked, according to California’s Fourth Climate Change Assessment released in August.
“Extreme weather is going to continue,” Lewis said. “That’s going to fuel more wildfires down the road.”
Bloomberg Business
By Romy Varghese
September 4, 2018, 8:37 AM PDT
— With assistance by Mark Chediak
California municipalities’ credit quality remains very strong, in S&P Global Ratings’ view, supported by a dynamic economy that has been one of the nation’s top performing for the last several years, generally strong budgetary performance facilitated by steady revenue growth, and financial management often supported by formal policies and regular budget monitoring.
Sep. 6, 2018
The City of Los Angeles sends the nation-wrecking finance industry more than $100MM/year in the form of fees and penalties for its banking business, supporting the institutions whose racist lending practices, financial engineering and mortgage fraud have wreaked untold harm on the city’s residents.
This November, Angelenos will get to vote on a proposition to create a public bank that will back LA’s smaller community banks and do the city’s business without lining finance’s pockets. This bank will be able to fund community projects from housing to transit to health-care, and will be able to take deposits from the city’s burgeoning cannabis industry, which is presently shut out of the federally guaranteed bank system and relies on safes in entrepreneurs’ homes or businesses to stash millions in cash.
The finance industry hates and fears this proposal and is spreading FUD about how a bank that is under democratically elected political control will inevitably become corrupt — while the discipline of the market will supposedly keep banks on the straight and narrow. Tell that to the millions of Americans whose suffered from Wells Fargo’s corruption.
And those are not the only benefits of a public bank, backers claim. A public bank would enable the city to loan money for badly needed affordable housing development. They believe a city-owned bank could extend the credit lines of community banks and credit unions to offer loans to low-income residents and help bankroll affordable housing.
Another benefit touted by bank promoters: badly needed investment in infrastructure. They hold out the example of Costa Rica’s public bank, Banco Popular. Advocates claim that this bank has been the financial linchpin behind the financing of water supply systems, residential solar panels, and hydroelectric generators.
“A public bank could make some investments that in the long-term would be profitable for LA… [investments that] no bank focused on short-term profit would dare to invest in,” Baradaran asserted.
A public bank is also seen by many as a means to local self-determination and bypassing high Wall Street interest rates. For example, LA public bank advocates estimate Los Angeles pays $3.14 billion in debt service, the cost to borrow money, from Wall Street. They argue a municipal bank would allow the city to recapture that money and give Los Angelenos a say in redirecting this funding toward local projects.
boingboing.net
Dive Brief:
Dive Insight:
Contractors are just one piece of a P3 construction project, which also see some combination of design, financing, maintenance and operation components as well.
While P3s can be used for most any project, there is a growing demand for transportation-related P3s, according to a report earlier this year from law firm Husch Blackwell. This is because public agency budgets are such that these entities have started to explore other ways to get their projects done. Husch said that the agencies taking on P3s are not just using the full-on version in which the private partner takes on design, build, finance, operations and maintenance duties — but various permutations of that model.
As far as opportunities in P3s, public respondents to Husch’s annual survey of registrants of the annual Public-Private Partnership Conference and Expo said that they were most likely to pursue public-facility (62.5%), government-facility (57.5%) and transportation (52.5%) P3s during the next three years. Those in the private-sector responded that they would most likely pursue those projects in the transportation (69%) sector.
Construction Dive
by Kim Slowey
Aug. 27, 2018
All Aboard Florida got the go-ahead Wednesday from a state board to issue $1.75 billion in federal tax-exempt bonds for its Brightline passenger-rail system, as officials and residents from the Treasure Coast and Central Florida fought over a planned northern extension.
The Florida Development Finance Corp. Board of Directors backed issuing what are known as “private activity” bonds needed to extend Brightline north from West Palm Beach.
The approval came after board members asked Brightline officials for assurances that the Treasure Coast region wouldn’t be hurt economically. Many residents and officials in Treasure Coast areas such as Martin and Indian River counties have long objected to the rail service.
But Central Florida officials, with the backing of the Florida Chamber of Commerce and other business-lobbying groups, view the passenger trains as an alternate link from South Florida that would complement the existing SunRail system in the Orlando area.
Florida Development Finance Corp Chairman Daniel Davis, whose agency has the authority to approve the federal bonds, said after the vote he hoped outstanding issues between Treasure Coast leaders and All Aboard Florida could be worked out.
The board approved a new series of $1.15 billion in bonds and the refinancing of $600 million in previously approved bonds, which helped set up the existing southern portion of the service.
Brightline, which started running between West Palm Beach and Miami this year, is looking to extend north to Orlando in 2021. Brightline has also started to work with the state on pursing an Orlando-to-Tampa route.
Officials representing Martin and Indian River counties, which have brought lawsuits against the service, raised questions about safety and potential economic and quality-of-life impacts of higher-speed trains running through their communities.
Brightline officials said they have approached Treasure Coast communities to consider stops and have taken similar steps for Cocoa in Brevard County.
Indian River County Attorney Dylan Reingold was among critics pointing to low ridership numbers — 74,780 people collectively paid $663,667 for tickets in the first three months of this year — for the service running between Miami and West Palm Beach, as he forecast little chance of the service becoming a financial success.
Brightline Chief Executive Patrick Goddard responded that the service was running between West Palm Beach and Fort Lauderdale in the first quarter.
Reingold also joined opponents — including state Sen. Debbie Mayfield, R-Rockledge, and state Rep. MaryLynn Magar, R-Tequesta — in requesting the bond decision be delayed, as federal litigation in pending about environmental impacts and as members of Congress have been looking into the proposal.
Reingold also said if the bonds were approved, conditions should have been added to limit the fiscal impact on what taxpayers must cover to maintain rail crossings that will have to be upgraded from freight service.
“It’s a private company owned by a Japanese hedge fund,” Reingold said. “It expects Indian River County taxpayers to pay for the maintenance of their (rail crossing) improvements for eternity.”
All Aboard Florida is owned by Fortress Investment Group LLC, a global investment management firm acquired last year by Toyko-based SoftBank Group Corp.
Ruth Holmes, a Martin County attorney, said Brightline should also be required to use an alternative route or to double-track the single-rail drawbridge north of downtown Stuart over the St. Lucie River. Otherwise, Holmes said, the constant opening and closing of the spans — from existing freight traffic and Brightline planning 16 daily round trips between Miami and Orlando — would hinder maritime traffic and business in the downtown area.
“That draw closure and opening is going to happen about 52 times a day,” Holmes said. “That effectively shuts down that bridge.”
Indian River County Commission Chairman Peter O’Bryan noted a number of deaths that have occurred in the past year with the new rail service in South Florida and warned that approving the issuance of the bonds would equate to giving “a license to kill for All Aboard Florida.”
Countering those arguments, Central Florida lawmakers urged support for the bonds as they envision Brightline bringing economic growth to the state by removing cars from the highways and giving tourists more travel options.
Rep Jason Brodeur, R-Sanford, said Brightline is seen as a link to South Florida for the SunRail service, and he joined others in pointing out that most of the rails for Brightline have been in place since the late 1890s, when industrialist Henry Flagler brought passenger trains south.
“I have 500,000 people who are really looking forward to this,” Brodeur said of the people he represents in Seminole County, north of Orlando.
Rep. Mike Miller, R-Winter Park, said the expansion of the service means jobs at both ends of the line.
“One of our jobs as legislators is to create an environment where there are jobs,” Miller said. “This not only creates 2,000 jobs, and $2.4 billion worth of economic impact, directly because of Brightline, but it creates billions of dollars in jobs and job opportunities in Miami, West Palm, Orlando and throughout our state.”
Rep. Tom Goodson, R-Rockledge, said residents in Brevard County are “enthused” at the prospect of a station in Cocoa that could serve the space industry and Port Canaveral.
Dennis Grady, President and CEO of the Chamber of Commerce of the Palm Beaches, said since being introduced in January, Brightline has made the Miami-Dade, Broward and Palm Beach region a “smaller, more manageable place to live and work.”
But he added, for the state goal of a viable inner-city rail system, Brightline must be able to expand to Orlando.
News Service of Florida
by Jim Turner
August 29, 2018
WASHINGTON, D.C.—Congresswoman Eleanor Holmes Norton (D-DC) today announced that she will introduce a bill that clarifies the District of Columbia’s authority to enter into public-private partnerships (P3s). The District recently began the procurement process for its first-ever P3s: rehabilitating the Metropolitan Police Department headquarters (Daily Building) and modernizing streetlights. The bill makes it clear that the federal Anti-Deficiency Act (ADA), which uniquely applies to D.C., does not prohibit the District from entering into P3s. The bill provides legal certainty that D.C. may enter into multi-year contracts to design, construct, improve, maintain, operate, manage and/or finance projects procured pursuant to a local D.C. law, the Public-Private Partnership Act of 2014.
“Federal law potentially limits the authority of only one jurisdiction, the District of Columbia, to enter into public-private partnerships,” Norton said. “The federal government, many states and other countries have used P3s. There is no reason that the District should not be able to take advantage of this option. Among other benefits, P3s will free up District funds that would otherwise be spent on infrastructure for other pressing needs, such as education and health care.”
The federal ADA prohibits the federal and D.C. governments from obligating or expending funds in advance or in excess of an appropriation. A critical benefit bestowed by P3s is that the District would not have to appropriate all the funds upfront, freeing up funds for the District to spend on other matters. An ADA violation may occur if the District terminates a P3 contract. Under P3 contracts, the District would make payments on an annual basis over the life of a contract, and the District would appropriate the funds for such payments annually. However, upon termination, the District would have to pay all costs incurred up to that point, but would not yet have appropriated all the funds for such payments, potentially causing an ADA violation.
Under D.C. law, “a ‘public-private partnership’ means the method in the District for delivering a qualified project using a long-term, performance-based agreement between a public entity and a private entity or entities where appropriate risks and benefits can be allocated in a cost-effective manner between the public and private entities in which:
(A) A private entity performs functions normally undertaken by the government, but the public entity remains ultimately accountable for the qualified project and its public function; and
(B) The District may retain ownership or control in the project asset and the private entity may be given additional decision-making rights in determining how the asset is financed, developed, constructed, operated, and maintained over its life cycle.”
August 29, 2018
Downtowns across the country are seeing an increase in population and North Carolina is no exception.
From 2016-2018, 45% of North Carolina’s population growth occurred in its seven largest municipalities. During that same time, rural areas in the state saw their populations decrease.
This “urbanization,” or flow of people from small towns and counties into North Carolina’s cities, is increasing the need for development projects and opportunities for developers. In an already competitive development environment, public-private partnerships (“PPP’s”) can offer developers opportunities that would not otherwise exist, including the chance to collaborate with municipalities on large-scale projects that can result in cost savings and a competitive advantage.
Ward and Smith, P.A.
August 30, 2018
Advances Resolution of COFINA Title III Proceedings
NEW YORK, Aug. 30, 2018 (GLOBE NEWSWIRE) — Ambac Financial Group, Inc. (Nasdaq:AMBC) (“Ambac”), a holding company whose subsidiaries, including Ambac Assurance Corporation (“AAC”), provide financial guarantees, announced today that AAC, the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”), the Puerto Rico Sales Tax Financing Corporation (“COFINA”), Puerto Rico Fiscal Agency and Financial Advisory Authority, Bonistas Del Patio, Inc., other bond insurers, and certain holders of senior and junior COFINA bond claims have executed a Plan Support Agreement (the “COFINA Plan Support Agreement”) for the restructuring of all senior and junior COFINA bonds.
AAC insures $808.5 million of the initial principal amount of Senior COFINA Capital Appreciation Bonds (approximately $1,325.4 million of accreted value as of, but not including, the May 5, 2017 petition date (the “Petition Date”) in the COFINA Title III proceeding). AAC also owns approximately 58% of AAC-insured senior COFINA bonds.
The COFINA Plan Support Agreement furthers the agreement-in-principle announced by the Oversight Board on August 8, 2018. Under the COFINA Plan Support Agreement, the creditor parties agree, among other things, to support the filing of a plan of adjustment with respect to COFINA that provides for a distribution of Plan consideration comprised of new COFINA bonds and cash, with a face amount in the aggregate equal to approximately 93% (plus accrual, as of August 2018) of senior COFINA bond holders’ Petition Date claim amounts, without taking into account AAC’s insurance policy for the AAC-insured bonds, and a face amount of approximately 56% (plus accrual, as of August 2018 ) of junior COFINA bond holders’ Petition Date claim amounts. The contemplated Plan of Adjustment, once confirmed by the court overseeing COFINA’s Title III proceeding, will also finally resolve all COFINA-related litigation and validate the COFINA structure.
Under the COFINA Term Sheet (attached as an exhibit to the COFINA Plan Support Agreement), holders of AAC-insured senior COFINA bonds would have the option to elect to either (i) commute their rights in respect of the AAC insurance policy associated with the existing senior COFINA bonds, which bonds will be cancelled, in exchange for new COFINA bonds, cash amounts to be paid by COFINA, plus additional consideration provided by AAC, or (ii) exchange their senior COFINA bonds for trust certificates issued by a custodial trust, which trust would receive distributions from COFINA under the new COFINA bonds, plus payments under the existing AAC insurance policy in respect of any shortfalls. Payments on the new COFINA bonds deposited in the custodial trust would reduce AAC’s obligations on its insurance policy.
The terms of the COFINA Plan of Adjustment and related documentation which will effectuate the contemplated transactions remain subject to negotiation and court approval.
Claude LeBlanc, President and Chief Executive Officer of Ambac commented “While there is a lot of work left to be done, the execution of the COFINA Plan Support Agreement is a definitive step towards a final resolution of Puerto Rico’s debt restructuring and we are pleased to be a party to the COFINA Plan Support Agreement. The negotiated settlement of the Commonwealth-COFINA litigations also provides significant value to the Commonwealth through a sharing of the sales tax revenues, and resolution of the COFINA Title III proceedings will provide clarity regarding one of Ambac’s key adversely classified credits.”
The COFINA Plan Support Agreement, and related term sheet can be found on Ambac’s website under the heading “Information for Investors Regarding COFINA Plan Support Agreement.”
About Ambac
Ambac Financial Group, Inc. (“Ambac” or “AFG”), headquartered in New York City, is a holding company whose subsidiaries, including its principal operating subsidiaries, Ambac Assurance Corporation (“AAC”), Everspan Financial Guarantee Corp. and Ambac Assurance UK Limited (“Ambac UK”), provide financial guarantees of obligations in both the public and private sectors globally. AAC is a guarantor of public finance and structured finance obligations. Ambac’s common stock trades on the NASDAQ Global Select Market under the symbol “AMBC”. The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock or a holder of 5% or more of Ambac’s common stock increases its ownership interest. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information, and the posting of updates to the status of certain residential mortgage backed securities litigations. For more information, please go to www.ambac.com.
Contact
Lisa A. Kampf
Managing Director, Investor Relations
(212) 208-3177
Source: Ambac Financial Group, Inc.
Funds holding about $1.9 billion in general obligation bonds split from a rival group in a bid to further broader restructuring efforts
Investment funds owning about $1.9 billion of Puerto Rico’s general obligation bonds have formed a committee to negotiate a consensual restructuring with the commonwealth and the federal oversight board that manages its finances, people familiar with the matter said.
Members of the committee are seeking to differentiate themselves from a pre-existing group of general obligation bondholders that includes Aurelius Capital Management LP, which is fighting the board and the island’s government in ongoing litigation, the people said
The new group organized in August after the oversight board reached important deals with Puerto Rico’s two other largest classes of debt—bonds issued by its power utility and its sales-tax authority—raising hopes that general obligation creditors might also broker a settlement. The committee includes hedge funds Fir Tree Partners and Mason Capital Management LLC and mutual-fund manager First Pacific Advisors LLC, according to a bankruptcy-court filing.
The formation of the new group increases the likelihood that Puerto Rico will settle with its last large group of bond investors, potentially paving the way for a global restructuring of its finances.
Prices of Puerto Rico’s $3.5 billion general obligation bond due in 2035 have risen about 33% this month to 53 cents on the dollar, according to data from the Municipal Securities Rulemaking Board.
Brokering restructurings with investment funds that own much of its $70 billion of bonds is critical for Puerto Rico because it needs to regain access to capital markets as a precondition for the removal of the oversight board. Litigation with creditors also has grown expensive for the island since it entered bankruptcy court in May 2017. Legal fees are expected to exceed $1.1 billion over six years.
Relations between Puerto Rico and general obligation creditors have been frosty for much of the past two years. Fiscal plans published by the government and oversight board last year left little to repay its $13 billion of general obligation bonds. Aurelius is suing the board, contending its appointment was unconstitutional. The committee Aurelius is part of also has argued that general obligation bondholders should have first claim on tax revenues before holders of about $18 billion of bonds issued by the island’s sales-tax authority known as Cofina.
“We have participated in constructive negotiation with the [Oversight] Board, and we hope that will continue,” a spokesman for the committee that includes Aurelius said. “We’ve submitted proposals that would have achieved a consensual outcome, and we would welcome the Board’s engagement and commitment to a solution.”
The oversight board reached an agreement in early August with a committee of Cofina bondholders granting them claim on a portion of sales-tax revenues and average recoveries of 74.5% of face value.
The recent deals with other creditor groups opened the door to a possible detente for general obligation bondholders, the people familiar with the new group said. Fir Tree and the other funds in the group already had been negotiating a deal with Puerto Rico to restructure bonds they own issued by its Public Buildings Authority and saw an opening to do the same for their general obligation bond investments.
A key negotiating point will be how the oversight board and Puerto Rico calculate revenue in future fiscal plans, the people familiar said. The larger the revenue assumptions, the more cash will be left over for debt servicing, they said.
The Wall Street Journal
By Matt Wirz
Aug. 29, 2018
Fitch Ratings-New York-30 August 2018: Fitch Ratings has assigned a ‘AA-‘ rating to the Chicago Housing Authority’s (CHA) 2018 A & B general obligation (GO) bonds. The Rating Outlook is Stable.
CHA expects to issue its series 2018 A&B bonds in the amount $325 million during the week of Sept. 4, 2018. Proceeds of the series 2018 A&B bonds will be used to finance certain capital costs of the authority and related projects within its portfolio. In addition, the proceeds will be used to fund the debt service reserve fund and pay the cost of issuance.
SECURITY
The series 2018 AB bonds are secured by the general obligation pledge of CHA.
ANALYTICAL CONCLUSION
CHA’s rating reflects continuing demand for public and affordable housing within the city of Chicago. In addition, CHA exhibits stable and predictable revenue and cash flow derived from its rented properties, as well as public housing grants. It further exhibits strong and prudent management of operations evidenced by its management of finances and its good standing with the federal oversight provided by the Housing and Urban Development (HUD).
KEY RATING DRIVERS
Revenue Defensibility: Midrange
Fitch assesses CHAs revenue defensibility as midrange given the authority’s pricing characteristics. Although, Fitch expects demand to remain strong within the city of Chicago, CHA has limited flexibility to raise rates on its existing portfolio given income and rental rate limits for public housing. CHA shows healthy occupancy (95%) and turnover within its housing properties. Demand is evidenced by the authority’s current waiting list of 108,922 Chicago residents in need of low income housing. In addition, CHA operates with a collection rate of 99% of tenant rent. It also manages a housing choice voucher (HCV) program, which allows the authority to house an additional 47,000 tenants. This program permits residents to take their affordability voucher to units outside of the CHA portfolio, fulfilling its mission of providing affordable housing to the city.
Operating Risk: Stronger
CHA’s ‘stronger’ operating risk is supported by its designation as one of 39 Moving-To-Work (MTW) PHAs, which allows for flexibility and fungibility in the use of its intergovernmental grants from HUD for cost efficiency. Participation in the rental assistance demonstration (RAD) further provides greater funding certainty for potential lenders and increased operational flexibility for the authority. Strong resource management is also reflected in CHA’s year-over-year funding from HUD and its recently renewed MTW status through 2028; both indicate the oversight agency’s view of the authority’s overall management capabilities.
Financial Profile: Stronger
Low debt levels, healthy cash balances and net annual surpluses over the last five years support CHA’s ‘stronger’ financial profile. The authority’s business plan forecasts positive funds available for debt service (FADS) as they continue to transform nearly 44% of its public housing portfolio units to Section 8 and mixed-income properties through the RAD conversion program, where rent rates may become more flexible. Despite anticipated debt issuance, Fitch expects CHA’s net leverage to remain consistent with the assessment over the next five years.
Asymmetric Additive Risk Factors
Asymmetric risk factors are neutral to the rating. Debt characteristics are manageable with level debt service payments. In addition, the governing body is solid with sound extensive experience and stability.
RATING SENSITIVITIES
Lower Grants and Transfers: CHA could be subject to negative rating pressure if a consistent decline in grants and transfers were to weaken funds available for debt service and increase the authority’s leverage ratio.
CREDIT PROFILE
CHA was created in 1937 to own and operate housing built by the federal government under President Franklin Roosevelt’s Public Works Administration. CHA is one of the largest PHA’s in the United States with 21,359 housing units in 117 properties. The first three housing projects, built in the late 1930s, included Jane Addams, Julia C. Lathrop and Trumbull Park Homes. They were all part of Roosevelt’s New Deal programs to provide affordable housing for low-income families and combat blight.
CHA provides homes to more than 50,000 families and individuals, while supporting healthy communities in neighborhoods throughout the city. It has utilized the flexibility of the MTW agreement to test innovative, locally-designed strategies that use federal dollars to more efficiently help residents become self-sufficient and to increase housing choices for low-income families. In 2000, 15% of work-eligible heads-of-household were employed. Now more than 58% are employed. CHA is a municipal not-for-profit corporation, governed by a Board of Commissioners consisting of 10 members. The commissioners are appointed by the Mayor.
The authority is one of 40 (out of 3,300) public housing agencies participating in HUD’s MTW Demonstration Program. The authority’s original MTW Demonstration Agreement was executed with HUD in February 2000 and was amended and restated in 2008. Congress extended the authority’s agreement through 2028. The MTW Agreement gives the authority latitude in implementing its transformation plan via the exemptions from many existing HUD related public housing and voucher rules, and allows for more flexibility with how they use federal funds. In addition, it incorporates numerous waivers and modifications of HUD administrative, regulatory and/or legal requirements which further support the authority’s transformation plan.
Revenue Defensibility
Demand for public housing remains strong within the city of Chicago and any changes in the rents that PHA’s are able to charge would be unlikely to materially affect demand. CHA recently completed their five-year strategic plan along with a five-year capital and operating program. This plan expands from 2018-2022. The authority has delivered a diverse range of housing assets that are high quality and in high demand. As of June 30, 2018, the authority has delivered approximately 24,000 units towards its goal. The overall portfolio is comprised of approximately 11,000 family units, 11,000 senior/elderly units, and 2,000 supportive housing units. The authority plans to deliver an additional 1,000 units in 2018 for an overall total of 25,000 housing units. Average occupancy for the units over the past three has been at 96.7%.
CHA administers 47,000 housing choice vouchers, which accounts for 92% utilization rate of the program. Based on the Institute for Housing Studies at DePaul University in Chicago report, “2018 State of Rental Housing in Cook County,” the growth in renters is leveling off, but there are still about 182,000 more people who need low-cost housing than there are affordable apartments in Cook County. The report explains that since 2012, the number of affordable rental units in Chicago has declined by more than 10% while demand for affordable housing has declined by less than 5% over the same period. CHA had a total of 108,922 households on their waitlists at the beginning of FY 2018.
Given the core mission and industry standard for rental rates for PHAs, CHA’s pricing characteristics coupled with the makeup of its current portfolio drive the authority’s midrange revenue defensibility. Like all PHAs within the U.S. with public housing or Section 8 units, rental rates are set using residents income levels to create affordability. This limits flexibility in raising revenue through rental income.
Currently, rental income is roughly 5% of CHAs total revenue, which is in line with industry standards. CHA sets its rental rates using HUD guidelines. HUD sets the lower income limits at 60% and very low income limits at 30% (for public housing) of the area median income (AMI) for the county or metropolitan area in which residents reside. CHAs current portfolio consists of 23,810 public housing units.
The authority applied for, and HUD accepted, applications for CHA to participate in the RAD program allowing the conversion of over 10,000 of its public housing units to project based Section 8 with 20-year housing assistance payment (HAP) agreements, or to mixed-income properties utilizing HCVs. To date CHA has converted 2,815 units to RAD. Upon transformation of the portfolio Fitch expects that CHA will have more flexibility in the pricing characteristics as revenue from the properties, via partnerships with private developers as an equity member, show a return on the units from either mixed-income properties or fees associated with administering the PBV or HCV programs that will maintain affordability in the converted units.
The income levels for those units converted must adhere to other HUD regulated programs such as section 8 and low income housing tax credit (LIHTC). Those projects are likely to have eligible income limits of 60% of AMI for units deemed affordable. CHA’s overall conversion of public housing units to RAD will become realized within the next two to five years as projects are converted.
Operating Risk
CHA, like all public housing authorities in the U.S., receives an operating grant deposited into the authority’s operating fund. The operating fund is available by formula distribution to PHAs to cover operating and management costs. Funding eligibility is offset by the amount of expected tenant rental revenue. In FY 2017 CHA received a total of $178 million for operations. CHA has received a five-year average operating grant in the amount of $170 million. The cost to operate the units and the grant provided fluctuates based on the number public housing units in the portfolio along with the overall budget allocations to HUD programs from the appropriations committee within congress. While the HUD grant is not anticipated to cover the entire operating cost for the authority, it covers a very significant portion, on average 85% operating expenses from 2013-2016.
CHA can use operating funds for operating and management costs, including administration, routine maintenance, anti-crime and anti-drug activities, resident participation in management, insurance costs, energy costs, and costs, as appropriate, related to the operation and management of mixed finance projects, as well as repayment of debt service to finance rehabilitation and development of public housing units. CHA has full discretion in how it allocates this grant in its operating fund. CHA may leverage operating funds to make capital improvements through the operating fund financing program by pledging a portion of their operating reserves to make future debt service payments. CHA may also leverage operating funds to enter into energy performance contracts, by pledging, in accordance with section 30 of the U.S. Housing Act of 1937 and, with HUD’s approval, to use energy savings for debt service payments.
Resource Management Risk
CHA manages its resources via its MTW plan approved by HUD along with its five-year strategic plan. To obtain MTW status CHA had to demonstrate solid and robust financial management, allowing them the flexibility to expend the federal revenue stream that makes up 91% of the CHA’s balance sheet, as they see fit. CHA has no supply constraints for labor or resources in terms of amount and cost. The authority’s average number of employees was 651 in FY 2017 and is set to stay at this level. Wages and salaries are assumed to increase by 3% each year while fringe benefit rates are expected to remain unchanged. Total personnel costs were estimated at$61.2 million in FY 2017. With increases CHA budgeted for FY 2018 a 4.7% increase over FY 2017. The authority’s pension contribution is over 100% funded and has been at least 100% of the actuarially determined contribution for the past three years.
The preparation of the authority’s Annual Budget is the culmination of a seven-month budget process, which begins in May and ends in November of each calendar year. CHA’s budget is organized into 12 divisions: Executive Offices, Internal Audit, Legal Services, and Office of the Inspector General, Finance, Investment Management, Administration, Procurement, Property Office, Capital Construction & Development, Housing Choice Voucher and Resident Services.
CHA has demonstrated a history of successful capital planning and execution. The authority has adequate mechanisms for capital planning and funding, and has demonstrated generally effective management. Capex benefits from documented assessment and aligns to plan in a reasonable way. Capital expenses are primarily covered by a variety of funding mechanisms including the capital fund grant provided to the authority by HUD for capital projects. As CHA develops newer units the expense for capital repairs are expected to decline.
Financial Profile
CHA’s available funds, defined as cash and investments not permanently restricted, have declined in recent years, but remained robust at $224 million at year end 2017. CHA’s liquidity cushion has remained well above 1.0x over the past five years.
Lower grant funding from HUD in FY 2017, as a result of prior overfunding, contributed to the decline in liquidity, as well as to lower Fitch-calculated FADS. Income generated from public housing activities has been relatively consistent year over year, with rental income from public housing being at or slightly above $51M over the past five fiscal years. During the same period, the proportion of revenue from public housing rents has been between 5%-7% of total revenue. CHA, like most PHA-MTW authorities, receives more than 90% of their revenue from HUD subsidies in the form of various grants. Whereas CHA’s FADS averaged approximately $130 million over the period 2013-2016 reflecting consistently strong grant funding, lower funding in 2017 resulted in FADS of only $59 million.
CHAs leverage profile has remained low in recent years as available funds have exceeded total debt obligations. Fitch’s five-year forward scenario analysis indicates that the authority’s leverage and financial profile should remain strong, even after considering the proposed issuance of the 2018AB general obligation bonds. Fitch expects FADS to migrate higher toward historical levels beginning in 2018, based on year to date results, which should support of ratio of net debt to FADS of between 3.0x and 4.1x through 2022 even through a temporary stress in CHA’s revenue base.
Asymmetric Additive Risk Factors
Debt Profile
CHA issued $25 million in taxable Build America Bonds (BABS) in FY 2010 that were special obligations of the authority. The bonds are fully amortizing and debt service is level at around $1.80 million a year. The debt was backed by the full faith and credit of the CHA, consisting of all revenues and funds pledged for the payment of debt service. The bonds were issued to take advantage of HUDS energy use and cost reduction incentives. The proceeds were used for the removal of 50 year old boilers/controls domestic hot water heaters, asbestos abatement and disposal and demolition of existing equipment, such facilitates to be replaced by 85% efficiency boilers/controls and hot water heaters. This resulted in the installation of remote monitoring devices at 22 of the authority’s developments affecting 4, 8111 residential units.
The authority maintains a $20 million line of credit from Federal Home Loan Bank of Chicago at an interest rate not to exceed 2.5% for a period not to exceed 36 months from the time of lending. The line of credit is collateralized by cash and investments held by CHA. Proceeds from the line of credit are designated for the authority’s unit acquisition program. In 2016, the Board approved a resolution to expand the use of funds borrowed under this line. There was an outstanding balance of $3.0 million and $3.35 million at Dec. 31, 2017 and 2016, respectively.
The authority also maintains an unsecured, $20 million line of credit, from BMO Harris Bank N.A. at an interest rate not to exceed 2.0% for a period of 12 months. Proceeds from the line of credit are designated for the authority’s acquisition of the former Presbyterian Homes senior housing units. There was an outstanding balance of $20.0 million and $19.0 million at Dec. 31, 2017 and 2016, respectively.
Governance and Management
CHA is governed by a 10 member board of commissioners including a board chairperson. Members are appointed by the Mayor and confirmed by City Council. At least two commissioners are CHA residents. In the last few years, numerous board members have been appointed in order to strengthen the board as well as due to members stepping down after reaching the maximum five-year term. Board members bring a broad range of experience and are deeply rooted in public service.
Day-to day operations are managed by an executive team that includes the chief executive, chief operating officer, chief financial officer, chief investment officer, chief administrator, chief legal officer, chief development officer and chief property officer. Most of the executive staff joined CHA or have taken on their respective role since 2015. This is the result of a review to refocus the team on strategic change and to help drive their mission and build new partnerships involving people, process data and systems and to create a more efficient and effective structure. Each team member brings extensive experience reaching all facets of the sector and maintains a strong relationship with HUD and key stakeholders. The chief executive has over 35 years’ experience in the industry and has recently renewed his contract with CHA for the next two years.
Contact:
Primary Analyst
Mikiyon Alexander
Director
+1-646-582-4796
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Secondary Analyst
Teresa Galicia
Associate Director
+1-312-368-2083
Committee Chairperson
Ronald McGovern
Senior Director
+1-212-908-0513
In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis.
Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: [email protected]
Additional information is available on www.fitchratings.com
Why is Chicago pursuing issuing $10 billion in bonds to remedy its pension funds’ woeful underfunding? The answer, we’re told, is that the city hopes to earn money with an investment return greater than the interest rates they’ll be paying to investors for these bonds. But the real reason — or a significant contributor to their motivation — may be entirely different: due to the nature of pension accounting for government benefits, their real objective may be to keep the plans’ valuation interest rates high by avoiding a poorly-funded-plan “penalty” interest rate.
Here’s the background:
Forbes
by Elizabeth Bauer
Aug 28, 2018
Mayor Rahm Emanuel on Wednesday offered a spirited defense of his controversial plan to sell more than $10 billion in pension obligation bonds to minimize the need for another punishing round of post-election tax increases, even as he insisted that a final decision has not yet been made.
Mayoral challenger Paul Vallas has urged the City Council to stop that train from leaving the station to avoid putting Chicago taxpayers in what he called a “financial straightjacket.”
Former Police Board President Lori Lightfoot, who’s also running for mayor, has likewise demanded that Emanuel “slow down the process and open it to public scrutiny.” She wants a detailed plan subject to an independent analysis, followed by “multiple public hearings” and “substantive debate.”
On Wednesday, Emanuel made his first public comment about the massive borrowing that has municipal finance experts waving red flags.
“I’ve asked my staff to explore all options to achieve the goals of retirement security without overburdening our taxpayers. It would be equally reckless not to explore options … to avoid a significant tax increase when you can minimize that and shore up peoples’ pensions. If we didn’t do that, we wouldn’t be doing our jobs,” Emanuel said.
“So I’ve asked everybody to explore all available options and think creatively out of the box. One of the things I won’t do is kick the can down the road.”
Vallas has argued that kicking the can is precisely what Emanuel is doing.
It allows the mayor to wait until after the election to spell out which taxes he intends to raise when the five-year ramp to actuarial funding will end and taxpayers will be on the hook to keep city employee pension funds on the road to 90 percent funding.
By 2023, the city’s contribution to all four funds will nearly double — from $1.2 billion this year to $2.1 billion, according to the city’s annual financial analysis.
Asked Wednesday about Vallas’ claim, Emanuel fell back on the same argument that prompted the long-simmering tensions between Emanuel and Mayor Richard M. Daley to boil over last spring. At the time, William Daley demanded that Emanuel “put on his big-boy pants” and stop blaming his older brother for the $2 billion avalanche of tax increases imposed, just to begin to solve Chicago’s $28 billion pension crisis.
“I didn’t create this problem. That’s all I’ve got to say. I’m here in asking the public and trying to figure out, how do you ensure people’s retirement, which was not done before. And how do we ensure that we don’t let the cost explode to taxpayers,” the mayor said.
“I think it’s a responsible thing because we’ve had a lot of irresponsible decisions made. The responsible thing is to explore options that achieve both goals.”
After joining the mayor at a ribbon-cutting ceremony for the new Chicago Architecture Center, Ald. Brendan Reilly (42nd), vice-chairman of the City Council’s Budget Committee, said he, too, has “reservations” about the pension borrowing that would dwarf the city budget.
“Versions of this idea have not gone well in other municipalities. That’s why the details of this proposal are so important,” Reilly said.
“If this is truly a different type of deal than other cities have done, then we need to see that on paper and understand the numbers and how those work. The last thing we want to do is saddle taxpayers with even more liabilities on the back end of this deal.”
Emanuel points with pride to having identified dedicated funding sources for all four city employee pension funds. But Chicago taxpayers have paid a heavy price.
They have already endured a parade of property tax increases for police, fire and teacher pensions; two increases in the monthly tax tacked on to telephone bills; and a 29.5 percent surcharge on water and sewer bills.
If Emanuel decides to forge ahead, the city would take a portion of its $28 billion in pension debt and finance it at an interest rate considerably lower than the 7-to-7.5 percent annual rate of return assumed by the four city employee pension funds.
Last week, Chief Financial Officer Carole Brown told aldermen the city may sell even more than $10 billion in pension obligation bonds if there’s enough available city revenue to support it. Brown has not explained what the city’s fallback would be if the market tanks.
She promised a final decision on whether to proceed by early September.
The Chicago Sun-Times
By Fran Spielman
08/29/2018
Fiscally-strapped Chicago may issue $10 billion of pension obligation bonds to help pay down a $28 billion gap
As Chicago considers a multibillion sale of pension obligation bonds, analysts say such bonds have rarely succeeded at topping up unfunded public pensions, and are historically linked to fiscal stress and municipal debt defaults.
“Generally, most muni analytics folks don’t look upon pension bonds favorably,” said Alan Schankel, municipal strategist for Janney Montgomery Scott.
Pension obligation bonds, or POBs, have been connected with high-profile municipal defaults in California’s San Bernadino and Stockton, as well as Detroit. At the state level, issuers of POBs including New Jersey and Connecticut, and the territory of Puerto Rico, have seen a decline in their pension funding ratios and suffered downgrades to their credit rating as a result, noted analysts at Municipal Market Analytics. Illinois, in fact, issued pension bonds in 2003 that only temporarily brought up funded ratios.
MarketWatch
by Sunny Oh
Aug 22, 2018
Concrete is finally rising from an enormous pit at the site of Nashville’s former convention center, but the developers still have a $25 million hole in their financing plan.
The team led by longtime Nashville developer Pat Emery has asked the Metropolitan Development and Housing Agency to issue tax-exempt bonds to finance a portion of the project.
It would be an unprecedented arrangement for a Nashville redevelopment project, and may be a sign of trouble for the delayed high-profile development, now five years in the making. Nashville taxpayers have a large stake in the success of the $450 million office, retail and residential development at the corner of Fifth Avenue and Broadway, considered the city’s most prime commercial real estate. City leaders targeted the site for development after the 2013 opening of Music City Center.
Nashville Tennessean
by Mike Reicher
Aug. 19, 2018
Illinois is poised to reap lower borrowing costs as it returns to the municipal-bond market for the first time since pulling back from the brink of becoming the first junk-rated U.S. state.
Illinois is offering $920 million of general-obligation refunding bonds for yields ranging from 3.05 percent to 4.41 percent, according to three people familiar with the terms who declined to be named as the pricing isn’t final. The preliminary yields are about 30 basis points lower than the state’s deal in April, according to data compiled by Bloomberg. Proceeds from the negotiated offering will also pay termination payments to banks to cancel interest-rate swap agreements and eliminate Illinois’s derivative exposure, bond documents show.
Bondholders and rating companies have praised Illinois’s progress. Spreads on the worst-rated state’s 30-year bonds over benchmark debt tightened to the lowest since March 2015 after Moody’s Investors Service lifted its outlook to stable from negative last month. It’s the first time Illinois has been at that level since December 2012, according to Moody’s.
The so-called Illinois penalty, or extra yield that investors have long demanded to own the state’s debt, has receded from the high of nearly 3 percentage points in June 2017. The premium was 1.4 percentage points on Monday.
“They’ve shown some progress with a successful budget,” said Gabe Diederich, portfolio manager for Wells Fargo Asset Management, which oversees $39 billion of state and local bonds, including Illinois debt. “At the same time, I think the yield penalty is certainly not going to evaporate with this deal given some of the continued work that lies ahead for the state.”
Illinois’s fiscal woes are far from over. The budget, while enacted before the July 1 start of the 2019 fiscal year, has a $1.2 billion structural gap, and the state is struggling with $137 billion of unfunded pension liabilities, according to bond documents.
Debt Swaps
The deal will “de-risk” Illinois’s portfolio by refinancing $600 million of variable-rate debt from 2003 into fixed-rate, according to S&P Global Ratings, which rates the deal BBB-. Proceeds will also terminate interest rate swaps that Illinois originally entered into to hedge risk associated with the variable-rate bonds, S&P said.
The variable-rate debt was backed by six letters of credit that were going to expire in November 2016, and Illinois refunded that with proceeds from bonds sold to four banks under direct purchase agreements. Those agreement are set to expire in November, according to S&P. As of Aug. 1, the termination payments were estimated at $74 million, bond documents show.
There’s “clear market recognition” of the budget progress, said Neene Jenkins, a vice president and municipal analyst at AllianceBernstein, which oversees $42 billion of state and local bonds, including Illinois debt.
“I recognize both the tremendous amount of progress the state has made relative to last year and the challenges that still face the state moving forward,” said Jenkins, who is looking at the deal. “They have a lot of work to do.”
The effects of the record two-year impasse that wrecked havoc on Illinois’s finances haven’t disappeared. That political stalemate drove unpaid bills to a record $16.7 billion. That backlog is now about $7.8 billion, reduced because the state borrowed $6 billion in November to pay it down.
“We are optimistic because the state is in a better fiscal position today with enactment of a full-year budget,” Elizabeth Tomev, a spokeswoman for the governor’s office, said in an email. “The ratings agencies have acknowledged our efforts to address our pension burden and are encouraged by the budget’s passage into law.”
Slim Calendar
Wednesday’s bond sale comes amid a much smaller issuance calendar compared to last week. U.S. state and local governments are scheduled to sell about $4 billion of debt this week, compared with about $12 billion last week. Illinois’s offering is the largest long-term deal this week, according to data compiled by Bloomberg. Texas is scheduled to sell $7.2 billion in short-term notes on Wednesday.
The offering comes amid ongoing demand for high-yield paper in a low-rate environment. Investors added $244.2 million to high-yield municipal funds in the week ended Aug. 15, according to Lipper US Fund Flows data. Those funds have seen inflows in nine of the past 10 weeks.
“They still pay a penalty because of their history and because of the uncertainty going forward,” said Daniel Solender, head of municipal investments at Lord Abbett & Co., which manages $20 billion of state and local debt, including Illinois bonds. “They’re definitely headed in a better direction, but there’s still a lot of things that need to happen for the situation to materially improve.”
Bloomberg Business
By Elizabeth Campbell
August 21, 2018, 10:30 AM PDT
A year to the day after Hurricane Harvey ravaged the Gulf Coast of Texas, residents there head to the polls to decide a $2.5 billion bond referendum for critical flood control projects in an area that the Category 4 storm plunged underwater.
Harris County officials purposely chose Saturday’s anniversary for the election, seeking to bring out voters and quickly cash in on matching federal funds. Proceeds from the bond, if approved, would finance about 237 projects, including repairs to flood-damaged drainage infrastructure, buyouts of flood-prone properties and channel modifications to improve the flow of storm water. It’s the largest bond measure in the county’s history.
The vote comes as coastal cities around the country are facing the threat of catastrophic infrastructure damage from storms exasperated by climate change. Last year, the U.S. was hit by three major storms that virtually destroyed Puerto Rico’s electric grid, flooded Texas with record rains and ripped into Florida, sending the sea into the streets of Miami. The number of deaths is still uncertain and the storms racked up losses totaling more than $200 billion, the most ever.
For Houston Mayor Sylvester Turner, the vote is one of the most important decisions residents there will make. “We can’t afford to wait any longer. We cannot afford to get this one wrong,” he said during a press conference earlier this month.
A poll by the University of Houston found that 55 percent of residents support the bond referendum even though it would result in a 1.4 percent property-tax increase for the average homeowner in Harris County, the nation’s third most populous. Just 10 percent of those surveyed said they would vote against it, while a third were undecided.
Before Harvey, the Houston area had never experienced flooding of the magnitude caused by the storm as it lingered over land for four days, dropping record rainfall. Even experts were unprepared. The National Weather Service had to add two colors to its graphics when mapping the storm movement because of the unprecedented amount of rain.
The National Oceanic and Atmospheric Administration estimates Harvey caused $125 billion in damages, making it the second costliest storm in recorded U.S. history behind the $161 billion in damages inflicted by 2005’s Hurricane Katrina, according to Moody’s Investors Service.
“It will not accomplish everything we need to accomplish. We need to recognize that,” Judge Ed Emmett, head of the county commissioners court, the governing board for Harris County, said during a meeting in June prior to placing the measure on the ballot.
The storm was too much for the Harris County Flood Control District and its $120 million annual budget. “We just have a lot of ground to cover, a lot of infrastructure to maintain and a lot of problems to solve and $120 million doesn’t go that far,” said the district’s director of operations Matthew Zeve.
Taking Action
Harris County isn’t alone in asking voters to back bond sales to cope with climate change.
In 2012, Seattle voters overwhelmingly approved a $290 million debt measure to rebuild the Elliott Bay seawall that protects the downtown waterfront. In the San Francisco Bay area, residents approved a tax to fund a $500 million restoration of tidal marshes, which act as a buffer against storm surges. Following Hurricane Irma last year, Miami voters approved $400 million in bonds to finance projects to protect the city against the impact of global warming.
The Union of Concerned Scientists found that sea level rise, driven primarily by climate change, puts hundreds of thousands of homes and commercial properties in the U.S. at risk of being flooded at least 26 times per year by 2030. The incessant deluges would depreciate property values, erode infrastructure and eventually diminish tax revenue, causing local credit ratings to sour and making it more difficult to finance projects needed to contend with rising sea levels.
“The more that we wait the worse the effects of climate change will be,” said AllianceBernstein LP’s Eric Glass, who manages the firm’s $365 million municipal-impact portfolio. “And the bigger investment in climate change we will have to make.”
Bloomberg Markets
By Danielle Moran
August 24, 2018, 6:30 AM PDT
— With assistance by Sophie Alexander, Brian K Sullivan, and Joe Carroll
The 608-page investigative report prepared for Puerto Rico’s Financial Oversight & Management Board isn’t exactly a whodunit.
Who was responsible for Puerto Rico borrowing its way to bankruptcy? How was it even possible for the island to build up $74 billion in bonded debt and $49 billion of unfunded pension liabilities, a burden that is described as “catastrophic”?
Well, nobody, really. Or everybody. Puerto Rico’s debt debacle, as recounted here in almost excruciating detail, was, so to speak, a crime without criminals. It was committed over more than a decade, very slowly and for the most part in plain sight.
For years, until that summer day in 2015 when Governor Alejandro Garcia Padilla declared on the front page of the New York Times that the debt was not payable, analysts and observers had to keep two conflicting premises in their heads.
The first was that Puerto Rico would repay its bonded debt, no matter what the financial or humanitarian cost, because that’s what municipalities do. The second was that the territory’s debt per capita, a multiple of that carried by the most indebted mainland states, was absurd and unsustainable. Now we know that only the second was valid.
The report, prepared by independent investigator Kobre & Kim LLP, is critical of the island’s leadership and lawmakers and processes, but only up to a point. It’s the same with the bond lawyers and bankers, advisers and analysts. Everything, it seems, was done with the best of intentions.
Consider, for example, the credit-rating companies. Couldn’t the analysts involved been more aggressive in shutting down Puerto Rico’s borrowing binge? “We have not seen any evidence to establish that the credit rating agencies did not genuinely believe that contemporaneous circumstances justified their assigned ratings,” the report says.
Or take the Government Development Bank, which enabled so much of the borrowing to go on. “The evidence we examined does not support the conclusion that current or former GDB officials violated any applicable ethics restriction in connection with relevant Puerto Rico-related transactions.”
Didn’t the island violate its own constitutional debt limits? “The evidence we reviewed supports the conclusion that Puerto Rico employed a reasonably robust process for these Debt Limit Calculations,” the report says. “We did not find any evidence that Puerto Rico’s government personnel believed that Puerto Rico’s interpretation of the Constitutional Debt Limit was wrong or that Puerto Rico performed the Debt Limit Calculation incorrectly.”
And so on. The chapter on Puerto Rico’s use of interest-rate swaps is the usual catalog of horrors, and there is a banker who does not recall a lot, but Puerto Rico wasn’t alone in its enthusiasm for the things.
The enormity of the Puerto Rico blowup seems to demand conspiracy theories to explain it. You won’t find them in the Final Investigative Report.
Bloomberg Business
By Joe Mysak
August 21, 2018, 12:26 PM PDT
(Joe Mysak is a municipal market columnist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.)
New Jersey has enacted legislation that greatly expands the pool of public agencies authorized to enter into public-private partnerships (P3s) for capital projects in the state, in order to address growing infrastructure needs.
Only public colleges and universities were authorized to use P3s in New Jersey prior to Governor Phil Murphy signing Senate Bill No. 865 on August 14.
SB 865 authorizes local governments, school districts, public authorities, and state and county colleges to enter into P3s for capital projects. The new law also allows for statewide road or highway P3 projects, as long as a project includes an expenditure of at least $10 million in public funds or any expenditure of solely private funds.
With billions in upgrades needed throughout the state, the new law is expected to generate a significant number of new projects. New Jersey has 21 counties, 565 municipalities, and nearly 600 school districts in addition to hundreds of public authorities. The state recently ranked as one of the country’s 10 worst for infrastructure.
Projects proposed under SB 865 must be submitted to the New Jersey Economic Development Authority (NJEDA) for review and approval, and are also subject to review and approval by the State Treasurer. NJEDA and the State Treasurer’s Office will oversee New Jersey P3 projects. In accordance with the new law, NJEDA will post on its website the status of each P3 project.
SB 865 requires local public input and finance controls for any project proposed under the legislation, as well as land use and financial approvals. The process begins when a public agency issues a Request for Proposals (RFP).
Solicitation, Procurement, and Criteria
Under SB 865, a public entity, which may include a local government unit, school district, state government entity, and state or county college, will issue a request for proposals (RFP) with no more than a 45-day response period. The public entity must have qualifying proposals from at least at least two private entities in order to select one.
NJEDA will review all completed project applications and request additional information as needed. The application must include, among other things, a long-range maintenance plan and a long-range maintenance bond, and must specify the expenditures that qualify as an appropriate investment in maintenance.
The criteria for assessing the projects described in the application include:
feasibility and design of the project;
experience and qualifications of the private entity;
soundness of the financial plan;
adequacy of the required exhibits;
adequacy of the long-range maintenance plan;
evidence of a clear public benefit; and
a resolution by the applicable public entity of its intent to enter into P3 agreement for the project.
The procurement process cannot begin until NJEDA approves the application.
After the proposals have been received, and any public notification period has expired, the applicable public entity will rank the proposals in order of preference. The public entity will consider professional qualifications, innovative engineering, architectural services, cost-reduction terms, finance plans, and the need for public funds to deliver the project.
Following the procurement process, but before the public entity enters into a P3 agreement, the project and the resultant short list of private entities is submitted to NJEDA for final approval. NJEDA shall retain the right to revoke approval if it determines that the project has “substantially deviated” from the plan submitted, and retains the right to cancel a procurement after a short list of private entities is developed if deemed in the public interest to do so.
P3 Agreements
SB 865 establishes specific requirements for P3 agreements, including provisions that building construction projects contain a project labor agreement and affirming that the agreement and any work performed under it is subject to the provisions of the Construction Industry Independent Contractor Act. Each worker employed for the construction, rehabilitation, or building maintenance service of facilities by a private entity under a P3 agreement must be paid not less than the prevailing wage rate for such worker’s craft or service in accordance with the New Jersey Prevailing Wage Act.
A project with an expenditure of under $50 million developed under a P3 agreement includes a requirement that precludes contractors from engaging in the project if the contractor has contributed to the private entity’s financing of the project in an amount of more than 10 percent of the project’s financing costs. If the agreement includes the lease of a new project in exchange for upfront or structured financing by the private entity, the term of the lease may not be for a period greater than 30 years.
Tax-Exemption
SB 865 provides that as long as a P3 project used in furtherance of the purposes of the applicable public entity is owned by or leased to a public entity, foreign or domestic nonprofit business entity, or a business entity wholly owned by the nonprofit business entity, then P3 projects under SB 865 are exempt from property taxes. The law further states that, notwithstanding any section of law to the contrary, P3 projects are not required to make payments in lieu of taxes. The project and land where it’s located are not subject to the applicable provisions of law regarding the tax liability of private parties conducting for-profit activities on tax-exempt land, or the applicable provisions of law regarding the taxation of leasehold interests in exempt property that are held by nonexempt parties.
Costs
SB 865 requires that prior to the commencement of work on a project, the private entity establish a project-specific construction account that includes the funding and/or financial instruments that will be used to fully capitalize and fund the project. The legislation requires that the private entity appoint a third-party financial institution to act as a collateral agent, manage the construction account, and maintain a full accounting of the funds and instruments in the account. The funds and instruments in the construction account must be held in trust for the benefit of the contractor, construction manager, and design-build team involved in the project, and will not be the property of the private entity unless all amounts due to the construction account beneficiaries are paid in full.
The legislation states that, if required by the applicable public entity, the private entity shall assume responsibility for all costs incurred by the applicable public entity before execution of the P3 agreement, including costs of retaining independent experts to review, analyze, and advise the applicable public entity on the RFP.
SB 865 provides that, when there is a substantial opportunity for innovation for a particular P3 project and the costs for developing a proposal are significant, stipends may be used. The public entity may elect to pay unsuccessful proposers for the work product they submit in response to an RFP. The public entity’s use of any design element contained in an unsuccessful proposal will be at the sole risk and discretion of the public entity unit and shall not confer liability on the recipient of the stipulated stipend amount.
After payment of the stipulated stipend amount, the applicable public entity and the unsuccessful proposer shall jointly own the rights to, and may make use of any work product contained in the proposal, including the technologies, techniques, methods, processes, ideas, and information contained in the proposal, project design, and project financial plan. The use by the unsuccessful proposer of any part of the work product contained in the proposal shall be at the sole risk of the unsuccessful proposer and shall not confer liability on the applicable public entity.
Ballard Spahr’s P3/Infrastructure Group is a leader in representing government and private sector developers, investors, and lenders in innovative public-private projects that range from transportation systems and energy facilities to military and public housing.
Copyright © 2018 by Ballard Spahr LLP.
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August 20, 2018
On August 25, the anniversary of Hurricane Harvey’s landfall, Harris County will vote on a $2.5 billion flood-control bond package that one disaster expert calls “a first step.”
August 25, 2017, is a date certain to be remembered as one of the worst in Houston’s history. But officials are hoping that August 25, 2018, will stand out as the day the city took a giant step toward securing its long-term future.
On Saturday, one year on from Hurricane Harvey’s landfall on the Texas coast, Harris County residents will decide whether to approve a $2.5 billion bond package that proponents say will deliver funds for crucial flood mitigation and prevention projects.
“This vote is one of the most important votes that the people of the City of Houston will cast,” Houston Mayor Sylvester Turner said at a press conference. (Houston is the seat of Harris County.)
CITY LAB
TOM DART
AUG 23, 2018
(TRENTON) – Legislation sponsored by Assembly Democrats Eliana Pintor Marin, Cleopatra Tucker and Wayne DeAngelo authorizing municipalities to levy special assessments, and issue bonds, to replace certain lead-contaminated water service lines, has been signed into law.
“This law will put us one step closer to ensuring that our drinking water is safer to drink and lead free,” said Pintor Marin (D-Essex). “In Newark alone, there are approximately 15,000 homes in which the water service lines connecting the property to the city’s main water line are lead. This can lead to contaminated home drinking water.”
“The impact of lead in plumbing systems can have adverse effects on public health,” said Tucker (D-Essex). “This law will move us in the right direction by improving these plumbing systems, providing cleaner drinking water and producing better health outcomes.”
“Clean drinking water is essential,” said DeAngelo (D-Mercer/Middlesex). “This will help municipalities finance projects that will help replace lead-contaminated pipes to ensure the quality and safety of our drinking water.”
Under current law (R.S.40:56-1), if a municipality engages in a project that is categorized as a “local improvement,” the municipality may assess the cost of the project on local property owners in the vicinity who benefit from the project. The law (A-4120) signed today by Gov. Murphy adjusts language in R.S.40:56-1 to ensure that the replacement of certain lead-contaminated home service connections fall within this category, allowing those projects to be assessed as local improvements.
The law also amends a section of the local bond law to allow municipalities and counties to issue 30-year bonds to fund the replacement of lead-contaminated house connections to publicly-owned water systems. Specifically, these bonds will fund replacement of lead-contaminated house connections from the distribution main onto privately-owned real property, and into the privately-owned structure.
The law also amends the County and Municipal Water Supply Act, and the municipal and county utilities authorities law to provide that the public entities operating under those laws are not prevented from undertaking projects to replace lead-contaminated service connections, regardless of possible private service connection ownership.
The provisions of this law will only apply to service line replacement projects that are: (1) undertaken as environmental infrastructure projects; and (2) funded either by loans from the New Jersey Infrastructure Bank, or by loans issued through the Department of Environmental Protection.
By NJ ASSEMBLY DEMOCRATS
August 24, 2018 at 10:25 PM
Lawyers for the city of Stockbridge, Georgia, claim in a federal lawsuit that a plan to carve off parts of the city to form a new, wealthier, whiter city impairs its citizens’ right to vote and harms the city’s ability to pay municipal bond obligations.
The lawsuit was filed Monday against the state of Georgia, Gov. Nathan Deal and other state officials. It comes just days after Capital One Public Funding—one of the nation’s largest issuers of municipal bonds—filed a similar lawsuit seeking to stop the referendum to create the new city of Eagles Landing from moving forward as planned in November.
Deal signed legislation in May allowing for the creation of Eagle’s Landing, in part from land currently in Stockbridge. The new city’s formation must first be approved by local voters, and a referendum is planned for November’s midterm elections. Stockbridge residents outside the proposed new city won’t get a vote.
If created, Eagle’s Landing would take approximately one-third of Stockbridge’s residents and about half of its tax revenue.
Christopher Anulewicz, an attorney representing Stockbridge, said the city’s lawsuit centers on three claims. “Two of them deal with voting rights, one of them deals with the right to have integrity in our contracts,” he said.
Anulewicz said the creation of Eagle’s Landing would bring African-American voters from a majority voting bloc in Stockbridge to a minority position in the new city and would hurt the city’s obligation to pay bond debts taken out in 2005 and 2006, thereby harming an existing contract between the city and its lenders.
A Henry County Superior Court judge in July declined to issue an injunction stopping the vote from proceeding. The city is appealing the ruling.
Vikki Consiglio, chairman of the committee for the city of Eagle’s Landing, dismissed the lawsuits and said that proponents were pushing forward to the vote in November.
“Anybody can file a lawsuit for anything,” Consiglio said. “A lawsuit has already been filed, and the courts have ruled in our favor.”
“This is all about the vote and them trying to do everything they can to stop the vote,” she said. The lawsuit filed by Capital One Public Funding, says the company currently holds $11.75 million of bonds from Stockbridge, which mature in 2031. It says that the creation of Eagle’s Landing will shrink Stockbridge’s tax revenue by half, thereby “severely reducing” the “collateral that was contractually promised and pledged to (Capital One Public Funding).”
It follows a report issued by Moody’s Investor Service in May that said the creation of Eagle’s Landing would be “credit negative for local governments in Georgia generally because they establish a precedent that the state can act to divide local tax bases, potentially lowering the credit quality of one city for the benefit of another.”
Residents pushing for the new city say they are driven by a desire to secure better city services, increase property values and attract high-end businesses. But opponents of Eagle’s Landing, including several elected officials from the area, say race is a factor.
Stockbridge, about 20 miles southeast of Atlanta, is predominantly black, while the proposed city of Eagle’s Landing would have a higher proportion of white residents.
By BEN NADLER | Associated Press | August 22, 2018 at 01:58 PM
The city may try to paper over its pension woes with new debt.
If Chicago politicians applied as much cunning to solving their fiscal problems as financially engineering their way out of them, the city would be a triple-A credit.
Last year we wrote about Chicago’s scheme to reduce its borrowing costs by floating low-interest-rate bonds securitized by sales tax revenue. Investors snapped up the bonds, which fetched a triple-A rating from Fitch and yields as low as 2.22%. By comparison, Chicago’s junk-rated general obligation bonds landed above a 6% yield.
But junk by any other name is still junk, and Chicago’s finances have continued to erode even as property taxes soar to pay for pensions that remain woefully underfunded. Last year the city smacked homeowners with a 10% increase and this year they will have to pay 2.75% more. Mayor Rahm Emanuel is preparing to run for re-election next year, and he’d rather not raise taxes again.
So he’s now considering a plan by Michael Sacks, CEO of asset management firm GCM Grosvenor, to issue $10 billion in bonds to backfill the city’s pension funds. The details will have to be worked out, but the idea is to transfer the investment risk from workers and retirees to creditors while exploiting interest-rate arbitrage.
Chicago would presumably issue the bonds at a lower rate than the 7% expected return on its pension fund assets. Over time this would supposedly add to pension fund assets. In the short term, dumping $10 billion into the pension funds would also reduce the city’s annual pension payments since liabilities would appear to be smaller.
Caveat, creditors. The cities of Detroit and Stockton and San Bernardino in California defaulted on their pension obligation bonds in Chapter 9 bankruptcy. Stockton’s bond insurers got 50 cents on the dollar. Puerto Rico in 2008 issued $3 billion in pension bonds. But Congress in 2016 passed legislation allowing the commonwealth to wriggle out of those obligations. Hedge funds have sued the federal government and are demanding that U.S. taxpayers bail them out.
Like those other pension bonds, Chicago’s version would also have to be financed every year out of city revenues. A chunk of sales tax revenue is already earmarked for other bonds. If revenues shrink in the next recession, pension bondholders would compete with city services for payment priority. Who do you think wins if the city has to start laying off police officers to pay bondholders who have been getting 5% or 6% a year?
Investors might be willing to take these political risks if they can snatch a hefty enough interest-rate premium. And if they haven’t learned from the experience of Detroit and Puerto Rico, they will deserve whatever political haircut they eventually get.
THE WALL STREET JOURNAL
By The Editorial Board
Aug. 17, 2018
S&P Global Ratings believes about 5% of the New Jersey school districts it rates are left with aid awards significantly lower than amounts included in districts’ adopted budgets due to changes to state aid allocations in the adopted fiscal 2019 state budget, and this could pressure ratings.
Aug. 10, 2018
Environmental impact bonds can help restore Louisiana’s coast more efficiently than previous methods of funding, according to a report released Tuesday by the Environmental Defense Fund.
The bonds are a financing tool in which repayment to investors is linked to the achievement of a desired environmental outcome. In this case, the outcome is sustained wetlands that help curb land loss and provide risk reduction for coastal residents and businesses. The bonds can be scaled and replicated to support efforts across Louisiana and beyond to help areas coping with sea level rise, land loss and damaging storms.
In the study, the EDF and Quantified Ventures will pilot the program on restoration efforts near the Belle Pass-Golden Meadow Marsh Creation project adjacent to Port Fourchon.
The organization said the bonds will allow coastal projects to be constructed more quickly than waiting on other money sources. The bond would be repaid through future BP oil spill settlement payments.
“Using environmental impact bonds provides Louisiana the opportunity to put more capital to work now and to find new sources of capital,” said Steve Cochran, associate vice president for coastal resilience at EDF. “Those are great outcomes for Louisiana’s coastal communities and can provide a model for other coastal areas around the world.”
The state will lose 4,000 square miles of land in the next 50 years if nothing is done, according the EDF. That would add to the 2,000 square miles of land loss that has occurred since the 1930s. The state has a vision for restoring and protecting its coast through its $50 billion Coastal Master Plan, but it has identified only $9 billion to $12 billion of the money needed to fully implement the plan.
The director of coastal resilience at EDF, Shannon Cunniff, said that the bonds work like other bonds but come with a bonus.
“These bonds are a new form of pay-for-success debt financing,” said Cunniff. “The big difference is that the repayment of the bond depends on the extent to which the desired environmental benefits are achieved.”
The director said a third-party will be used to help define exactly what would qualify as meeting the desired benefits. The investors will get a bonus if the project exceeds the defined goals.
“Environmental impact bonds can be a big-time game changer for Louisiana’s disappearing coastline. This (bond) will have major implications for coastal restoration efforts around the world,” said Eric Lestinger, founder and CEO of Quantified Ventures.
To help assess the feasibility of using the bonds for Louisiana’s coastal restoration efforts, EDF brought in Quantified Ventures. The firm was instrumental in designing the nation’s first environmental impact bond, which financed the restructuring of the Washing, D.C., Water and Sewage Authority.
“We looked at 31 coastal restoration projects across the coast at their potential economic benefit,” said Cunniff.
The EDF representatives said they picked the Port Fourchon area because of the site’s role in the offshore oil industry.
“It’s a great port in terms of the local, regional and national economy,” said Cunniff. “All of these factors made it an ideal location for facilitating the piloting of the partner payer transaction.”
The bonds would allow the state to use its money more efficiently by building wetland restoration projects sooner, involve local owners who benefit from restoration and reward high-performing wetland projects and the contractors who build them, according to the EDF.
“Environmental impact bonds provide the state of Louisiana with another outcome-based performance tool that can help us speed up coastal restoration while lowering costs and involving local partners in financing those efforts,” said Johnny Bradberry, the Louisiana Governor’s Executive Assistant for Coastal Activities. “This approach to bonding shows that (the state) is looking to innovate on all sides of our business: the projects, the procurement and the financing.”
The report outlines the next steps the state has to take to test the bonds, noting that many steps – including establishing credit rating, resolving any issues with Gulf oil spill money and determining the bonds’ tax-exempt status – are the same as those necessary to pursue a more traditional bond.
By Scott McLendon
Aug 14, 2018
A bill signed into law by Governor Murphy expands the use of public-private partnerships to develop essential projects and grow the state’s economy.
Senate President Steve Sweeney says those partnerships helped colleges get private capital to build new facilities, and the bill he sponsored will give the state, county, and local governments more flexibility to advance critical infrastructure projects.
“Public-private partnerships are the most important thing we could be doing in the state. As the governor calls for a stronger fairer economy, this is one the pieces that will actually build that. With private sector ingenuity, technology they can do it better.”
Jack Kocsis is CEO of the Associated Construction Contractors of New Jersey. He says the law has the potential to spur development of much needed public works projects and create additional work opportunities.
“It really has the ability to advance New Jersey’s economy. It really demonstrates that New Jersey is serious about working with private entities to actually attract capital to improve our infrastructure.”
Governor Murphy expects the new law will enable vital projects to replace water lines and upgrade the transportation infrastructure without putting a burden on taxpayers.
“Many of them would stretch government entities far beyond the ability of taxpayers to pay, but this newfound ability and flexibility will go a long way to allowing us to get vital statewide and community-focused improvements off the drawing boards and into reality.”
The legislation provides for financial oversight and approval of the partnership agreements by the State Treasurer.
WBGO.COM
By PHIL GREGORY • AUG 14, 2018