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Muni Week Review / Preview 5/22/2017

Monday, May 22, 2017

CONNECTICUT BUDGET GAP… CALIFORNIA BOOSTS PENSION SPENDING… ILLINOIS MAKES EFFORT TO FIX BUDGET… JEFFERSON CO TO ACCESS MUNI MARKET… CHICAGO SCHOOLS PLUG BUDGET GAP… COFINA JUNE DEBT PAYMENT HEARING SET FOR MAY 30 IN NYC…

Connecticut To Address Budget Gap...The finances of the wealthiest state in the U.S. are on the radar after all three major ratings agencies have downgraded the state’s credit to “A” territory. The state projects a $5.1 billion budget deficit over the next two fiscal years, fueled by increases in fixed costs including pension obligations, healthcare expenses and debt servicing. To address the revenue shortfall, Governor Malloy is seeking $700 million in concessions from public sector unions as well as cuts of $700 million in state funds to cities and towns. Connecticut faces a fiscal 2017 year-end budget deficit of nearly $400 million because of unexpectedly disappointing April tax collections; by 2018 this gap could range between $600 million and $2 billion. To close the current year fiscal 2017 gap, the state must find late year spend-ing reductions and it will deplete its $235 million rainy day fund in keeping with the Governor’s pledge to avoid deficit borrowing. The state’s fixed costs or its spending on debt service, pension and other post employment benefits are high at over 30% of General Fund revenues. High fixed costs are partly attributable to the state’s absorption of certain costs covered by local governments in most other states. CT’s top income tax rate is close to 7%. Politically, hiking state income tax is harder as states weigh the impact of President Trump’s tax policy that seeks to repeal a deduction on state taxes. Not having a meaningful reserve lowers the state’s flexibility when faced with lower than expected revenues. Connecticut is a wealthy state, with per capita personal income exceeding 143.3% of the U.S. average. However, the state’s economy continues to lag that of the nation. As states carry the power to restrain funding to lower levels of government, CT’s Governor seeks to transfer teacher pension costs to cities and towns. Democratic Governor Malloy said, “Without an agreement from labor, quite frankly, it will be hard to move forward in a timely fashion.” CT, NJ and IL are the only three U.S. States rated below “AA”. To maintain budgetary balance amid  declining revenues, policy action is a must. They may have snuffed out the idea of legalizing marijuana in past legislative sessions, but Connecticut lawmakers now include it among several speculative proposals they are seriously considering to balance the state’s deficit plagued budget. Democrats are also pitching highway tolls and at least one new casino to help generate more state revenue to fill the state’s empty coffers. It’s somewhat uncertain how much revenue these ideas will actually generate. Republicans offered up their own unproven proposal. They contend an additional $260 million can be saved next fiscal year in unidentified labor concessions from state workers. That would be on top of the $700 million that Governor Malloy’s administration is now seeking from state employee union leaders. “I think some are more speculative than others,” he said of the budget saving ideas that are sure to come up in discussions this week during bipartisan budget negotiations.

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California Boosts Pension Funding… Governor Jerry Brown is proposing a $6 billion infusion, in addition to the annual pension payment to the California Public Employees’ Retirement System. This would be the first time a state would make an extra pension payment and would go on record as the largest state pension contribution outside of required payment without resorting to capital markets. If approved by the state legislature, the capital infu-sion would come from an internal investment account to be repaid by the state. California’s continued growth in revenue makes the move possible. It would help reduce the state’s liabilities and follows the trajectory of lower debt and higher reserves set by Governor Brown. Timely policy actions were well received by investors and rating agencies who awarded multi-step upgrades to a state that not to long ago was reported to be bankrupt. The Golden State is now rated Moody’s “Aa3”, S&P “AA-”

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IL Budget Efforts… Lawmakers are continuing to push forward legisla-tion in an effort to resolve the stale-mate by the end of the month. With less than two weeks left in the regular legislative session, Illinois lawmakers and Governor Bruce Rauner are still divided on how to end the worst-rated state’s nearly three-year budget impasse. After May 31, a three-fifths majority will be required to pass anything, making a deal even more difficult to reach. Senate Democrats advanced several bills that had been considered part of a bi-partisan compromise on Wednesday, but they were unable to pass a spending plan for lack of Republican support. The gridlock has sunk Illinois’s credit rating. Bondholders are demanding yields of 4.49% on Illinois’s 10-year bonds, some 2.45 percentage points more than those of benchmark tax-exempt debt. That’s the biggest gap since the Bloomberg indexes began in January 2013.

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Jefferson Co. to Access Market… More than three years after emerging from its 2013 bankruptcy, Jefferson County’s property tax base has risen almost 9%. Sales tax revenue has grown 8.5% reflecting the area’s growing and diverse economy. In 2011, Jefferson County AL made the headlines when it couldn't pay on more than $3 billion sewer bonds and lost significant tax revenues after a judicial ruling. To exit bankruptcy, officials agreed to raise sewer rates 8% annually through October 2018, followed by yearly jumps of 3.5% until 2053, creditors took a cut and the County lowered payroll and put off essential roadwork. “Their finances have stabilized, said a Moody's analyst. The tax base in both the County and Birmingham seems to be moving along at fair clip.This summer, Jefferson Co plans to issue sales tax secured bonds. The county's sales tax bonds did not default during the 2013 bankruptcy. The new issue should be rated or Baa3 and will refinance school debt and restore some public services.

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Chicago Schools Plug Budget Gap... To fill a budget gap, Chicago Public Schools (CPS) will borrow $389 million of short-term notes against $467 million block grants owed by the state. The borrowing will allow CPS to make a pension payment, keep schools open and prevent operations from shutting down after the end of the regular school year. The state, which has a $13 billion backlog of payments amid a long-running partisan budget stalemate, has been keeping up with general education funding payments to school districts across Illinois, but the last quarterly grant-funding payment was made in April for money due in September. CPS will make good on its fiscal 2017 pension contribution $733 million with the help of a grant antic-ipation note. While officials are banking on more state pension help and general aid, the city is also eyeing potential revenue sources as part of a long-term solution. CPS also has open capacity of $600 million on its $1.5 billion line of credit backed by tax collections. Through a series of operating cuts and tax hikes, CPS has whittled its budget deficit to $129 million. “The city has a bunch of options on the table,” Brown said. Talk has circulated of reinstating a head tax on business or imposing a tax on high net-worth individuals. The new, short-term fix “gets us through 2017”, Brown said, buying Mayor Rahm Emanuel and CPS leaders more time to work on a “per-manent solution.”

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COFINA Hearing Set For May 30… A Federal Judge overseeing Puerto Rico’s bankruptcy set a May 30 hearing in the Southern District of New York to address a $16 million June 1 interest payment owed to bond-holders of the Island’s sales tax debt.

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PR Revenues Set To Outpace Estimate… So far fiscal 2017 General Fund revenues exceed estimates by $236 million and prior year by $97 million. With only two months left of fiscal 2017, Puerto Rico General Fund revenues as well as sales and use tax revenues are likely to outpace projections and prior year results.

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Puerto Rico Asks Courts to Restructure Highway and Pension Debt… Puerto Rico agencies that sold pension bonds and debt for transportation projects are seeking to restructure through the bankruptcy-like process being used to address the Commonwealth’s General Obligation and Sales Tax debt. The highway agency has $4.1 billion of bonds outstanding and the Common-wealth has $3.2 billion of pension debt. Under  PROMESA’s  Title III, the Judge can force creditors to take losses on their investments if the parties fail to reach a negotiated deal out of court.

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Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.