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Stockton, CA Approves Sales Tax Increase, Clearing Hurdle in Bankruptcy Exit
The green light for the bump to 9% from 8.25% clears a major hurdle on the citys path to exiting bankruptcy. A no-vote could have ratcheted up pressure on bond insurers to renegotiate less favorable terms with the city.
RESEARCH HIGHLIGHTS
2 State HFA Delinquencies Continue to Grow
State Housing Finance Agencies continue to demonstrate solid financial performance, even as total delinquencies and foreclosures in their singlefamily whole loan programs are at an all-time, mid-year high of 7.29%.
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Illinois Improved Pension Liability Does Not Outweigh Failure to Enact Reforms
Preliminary valuations for five Illinois retirement systems show reductions in Moodys-adjusted net pension liability (ANPL) by $16.6 billion. Still, state inaction on benefit reforms leaves severe pension deficits as the main credit pressure for Illinois, the lowest-rated US state.
Loss of Federal Education Grants Would Be Credt Negative for California School Districts
The US Department of Education has warned the California State Board of Education that state legislation suspending standardized testing violates federal law, potentially costing the state at least $3.5 billion in federal funds
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CREDIT IN DEPTH
New Jersey Municipalities Benefit from Post-Sandy State and Federal Aid
Superstorm Sandy aftereffects continue to plague New Jerseys coastline, but we expect the credit quality of the states affected municipalities to remain intact. Federal and state aid continues to alleviate liquidity constraints, while capital markets are receptive to impacted local governments and many have modest debt burdens.
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Direct General Obligation Bonds, Fixed Rate Guaranteed Parking Authority Revenue Bonds State Infrastructure Loans Tax and Revenue Anticipation Notes Guaranteed Lease Revenue Bonds, Fixed Rate Guaranteed Lease Revenue Bonds, Variable Rate Direct General Obligation Bonds, Variable Rate Parking Authority note, Variable Rate Lease Revenue Bonds, Fixed Rate Total
$77,074,583 $49,450,000 $27,446,475 $14,500,000 $11,600,000 $5,885,000 $5,575,000 $2,800,000 $1,100,000 $195,431,058
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Debt Service Pension Contributions Retiree Healthcare Benefits Total Fixed Costs, Fiscal 2011 General & Debt Service Fund Expenditures, Fiscal 2011 Fixed Costs as a Percent of General Fund Expenses, Fiscal 2011
Note: 2011 audited financials are the most recent published by the city Source: City of Scranton, Pennsylvania, 2011 financial statements and 2012 Offering Statements
The continued crisis in Scranton underscores Act 47s limitations in assisting financially distressed cities. In Harrisburg, the mayor and city councils inability to agree on a recovery plan and city councils attempt to file for bankruptcy in late 2011 (which was rejected by a court) resulted in the state appointing a receiver to manage the citys finances via an amendment to Act 47. The receiver was unable to prevent further defaults on both guaranteed and direct general obligation debt, however, which had begun in late 2009. Under Pennsylvania law, local governments may only file for Chapter 9 bankruptcy protection with state consent. Act 47, which provides for outside advisors to assist distressed municipalities with their recovery plans, has been implemented 27 times since 1987. But it fails to give the state authority to compel local governments to follow specific courses of action, a weakness relative to other states distressed municipal oversight programs. That weakness has come into focus in both Harrisburg and Scranton, where acrimonious political climates have derailed recovery plans. Scrantons inability to resolve its political disputes and execute a recovery plan has undercut its credibility with key lenders. But elected officials have consistently maintained that bankruptcy protection is not an option, raising the prospect that the state could, as with Harrisburg, become more deeply involved either through further Act 47 amendments or other actions not addressed in the statute.
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Ted Hampton Vice President - Senior Analyst +1.212.553.2741 ted.hampton@moodys.com Thomas Aaron Analyst +1.312.706.9967 thomas.aaron@moodys.com
Illinois Improved Pension Liability Does Not Outweigh Failure to Enact Reforms
On October 25 and 29 , preliminary plan valuations for five Illinois (A3 negative) retirement systems showed that the plans had reduced their Moodys-adjusted net pension liability (ANPL) by $16.6 billion, or 9%, for the year ended June 30. Still, inaction on benefit reforms more than outweighs the modest ANPL decline and leaves severe pension deficits as the main credit pressure for Illinois, the lowest-rated US state. The statewide pensions combined ANPLs as of 30 June, and after our adjustments, fell to $173.0 billion from $189.6 billion a year earlier (see Exhibit 1). This was the result of favorable investment performance and rising interest rates. Investment returns totaled 12.9% on an asset-weighted basis, exceeding a 7.9% blended return assumption. The gains accounted for 37% of the net ANPL decline. Rising interest rates between valuation dates had an even bigger effect. We derive ANPL figures by making adjustments to reported numbers, such as applying a market-based discount rate (the Citibank Pension Liability Index) to estimate the present value of liabilities. The index rose to 4.81% as of June 30 from 4.13% a year earlier. Factoring in a rise in the plans reported liabilities, the 68-basis-point increase was responsible for 63% of the ANPL reduction.
EXHIBIT 1
Moodys-Adjusted Net Pension Liability for Illinois Five Pension Plans as of June 2013, $ Millions
2012 2013 Change
Teachers' Retirement System (TRS) State Employees' Retirement System (SERS) State Universities Retirement System (SURS) Judges' Retirement System (JRS) General Assembly Retirement System (GARS) Total
Source: Preliminary pension valuation data and our pension adjustments, as explained in Adjustments to US State and Local Government Reported Pension Data.
Pension deficits have factored into all five Illinois downgrades since early 2009 and are still the states primary credit challenge. The state will remain an outlier despite the 2013 ANPL decline, in part because the three-year average ANPL used in our methodology actually rose by 7.2% to $165.8 billion. Also, other states will benefit from the same investment and discount-rate factors. Our most recent ranking, published June 27, showed Illinois with an ANPL/revenues ratio of 241% versus a 50-state median of 45%. Only legislative reforms reducing liabilities through cuts in benefits, or very substantial increases in contributions to boost assets, will reduce the states ANPLs closer to median levels. Illinois annual pension contributions are governed by state law that requires an annual determination of a level percentage-of-payroll contributions that, according to actuarial forecasts, will leave the plan with assets equal to 90% of liabilities by 2045. This framework, although lax compared with common standards targeting full amortization in 30 years, still squeezes the resources available for other budgetary needs (see Exhibit 2).
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EXHIBIT 2
POB Debt Service (2010-11 Bonds) POB Debt Service (2003 Bonds) Regular Contributions Total Expense Projected General Fund Revenues (State and Federal) Pensions' Share of General Fund Revenues
Source: Three-Year Budget Forecast, FY 2014 FY 2016, Illinois Commission on Government Forecasting and Accountability, April 2013.
Including debt service on pension obligation bonds, the state legislature projected that the annual pension burden would rise to 26% of General Fund revenues in fiscal 2015 from 22% two years earlier, based on funding expected prior to the most recent valuations. The increased portion allocated to pensions and pension-related debt stems partly from the loss of 2011 income tax increases, which is expected to reduce 2015 revenues by $2.2 billion. The latest valuations appear to have little effect on the states statutorily required contributions, changing the combined 2014 and 2015 payments by only about $50 million. Illinois Governor Pat Quinn and other leaders have advocated benefit reforms to strengthen the retirement systems and limit associated budget pressure. Some observers had hoped legislators would enact reforms in a year-end session that runs through November 7, putting reforms in place for the new fiscal year. But consensus on how to cut liabilities while skirting legal challenges appears unlikely this week. Illinois has one of the few US state constitutions that explicitly bar reductions in pension benefits, so the state expects employees to sue shortly after legislators act, in any case. Without a special session, the legislatures next chance will come in the January to May session, which could mean litigation will delay the reforms implementation beyond the start of the next fiscal year.
NOVEMBER 7, 2013
Loss of Federal Education Grants Would Be Credit Negative for California School Districts
On October 28, the US Department of Education (DOE) warned the California State Board of Education that state legislation suspending federally mandated standardized testing violates federal law, potentially costing California school districts at least $3.5 billion in federal funds. The DOE notice is credit negative for California school districts because of the significant amount of funding at risk for at least the 2014-15 fiscal year. California school districts are in the process of moving from traditional standardized tests to new student examinations under the multistate Common Core standards. In a transition to the new tests, which the state has scheduled to begin in spring 2015, the new law (AB 484) removes the requirement that school districts conduct the traditional mathematics and language arts exams. Instead, the law requires districts to conduct field tests of the new Common Core examinations in either mathematics or language arts, but not both. The DOE argues the move violates Title I of the Elementary and Secondary Education Act (ESEA) of 1965. Withholding various federal grants would mainly affect school districts with significant populations of lowincome, special education, migrant and English-learner students. Although California school districts are funded primarily through state aid and local property taxes, federal funding accounts for 10% of total school district funding. A loss of $3.5 billion in federal grants would have a disproportionate effect on districts receiving a larger share of federal funds, including Palmdale Elementary School District (A1), Fresno Unified School District (Aa3 negative) and San Bernardino City Unified School District (A2) (see Exhibit). Largest Recipients of Federal Aid in Rated California School Districts
Effects of a Loss of Federal Funds Would Vary Among Districts
Federal Revenue* ($000) Total Operating Revenue ($000) Federal Revenue* as Percent of Operating Revenue
Los Angeles Unified (Aa2 stable) Fresno Unified (Aa3 negative) San Diego Unified (Aa3 stable) Long Beach Unified (Aa2) San Bernardino City Unified (A2) Santa Ana Unified (Aa3 negative) Sacramento City Unified (A1 stable) Stockton Unified (A2) Palmdale Elementary (A1) Fontana Unified (Aa3) Garden Grove Unified (Aa2)
$553,268 $79,139 $69,701 $55,875 $42,943 $32,365 $28,812 $26,822 $26,405 $24,426 $23,261
$6,785,392 $669,585 $1,160,203 $689,539 $499,315 $505,857 $420,763 $325,011 $162,332 $314,762 $378,070
8% 12% 6% 8% 9% 6% 7% 8% 16% 8% 6%
* Federal revenue includes certain grants under Title I and III of ESEA and the Individuals with Disabilities and Education Act. Data as of fiscal year ended 30 June 2012. Source: California Department of Education and Moodys
School districts receive a variety of federal aid. Just looking at certain grants under Title I and III of ESEA and Individuals with Disabilities and Education Act (the largest grants at risk under the notice from DOE), the Los Angeles Unified School District (Aa2 stable) received $553 million in fiscal 2012, more than any
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other district in the state by far. The second-largest recipient was the states fourth-largest school district, Fresno Unified, which received $79 million. In fiscal 2012, total K-12 school district funding was approximately $60 billion, so the loss of $3.5 billion would equal nearly 6% of statewide district funding. Some of the potential loss in federal funds would be offset by Californias recently adopted Local Control Funding Formula, which funnels additional aid to districts with populations of low-income and English-learner students. California was not blindsided by the DOEs threat. Immediately before the passage of AB 484, the DOE warned the state about the potential cuts if the legislation passed. Legislators moved ahead anyway and Governor Jerry Brown signed the bill. We expect any loss of federal funds to be temporary. Because school districts are forward-funded by the federal government, the first loss of federal funds is unlikely to affect California school districts overall until fiscal 2015. Given that districts are set to implement Common Core testing in spring 2015 and come into compliance with federal requirements, we believe an ongoing loss of federal funding after fiscal 2015 is unlikely. Also, state education officials and school districts still have time to negotiate a resolution with the DOE that will avoid the multi-billion-dollar cuts.
NOVEMBER 7, 2013
State Investment Accounts for One Third of Funding for Four Major Transportation Projects in Virginia
Project Cost $ Millions State Investment $ Millions Percent of Total Cost
495 Express Lanes 95 Express Lanes US Route 460 Corridor Elizabeth River Crossing Total
For the Elizabeth River project, tolls account for just 12% of the projected cost (see Exhibit 2).
See Virginias Robust New Transportation Funding Package Is Credit Positive, February 28, 2013.
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EXHIBIT 2
Private Investment Comprises Nearly 50% of Elizabeth River Cross Project Funding
Equity Commitments from Skanska & Macquarie 13% Project Revenue During Construction (Tolls) 12% VDOT Contributions to Reduce Tolls 20%
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Susan Fitzgerald Senior Vice President +1.212.553.6832 susan.fitzgerald@moodys.com Ted Damutz Vice President - Senior Credit Officer +1.212.553.6990 ted.damutz@moodys.com
50% 40% 30% 20% 10% 0% Public Universities Private Universities Public Universities Private Universities Public Universities Private Universities 2010 2011 Fiscal Year 2012
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In the case of the Hofmann Forest, the sale agreement contains provisions that would enable NC State to continue to use a portion of the property for academic needs. The $150 million purchase price will be added to an endowment supporting the CNR. Hofmann Forest has historically been carried in the endowment at $117 million, so the balance sheet impact is limited. However, the sale is expected to result in increased revenue generation. Under the universitys 4% spending policy, the $150 million endowment is expected to provide $6 million of support annually, compared to less than $1 million of net income derived from the land in 2012. This is material to CNR, but not the university overall, which has a $1.2 billion operating budget. The transaction has not yet closed, and a group is seeking injunctive relief to stop the sale. Onslow (Aa2) and Jones counties (unrated), which include portions of the forest, are expected to realize slight increases in assessed valuation after the sale with new residential and commercial developments. Onslow County officials estimate an additional $116,000 in annual property tax revenues to a $160 million budget. In another recent sale, St. Johns University (A3 positive) sold a building in Manhattan for $219 million, prompting us to revise the universitys outlook to positive from stable in August. The university doubled its unrestricted financial resources and increased its operating flexibility. With an assumed 5% spending rate, should the university hold the funds from the sale in an endowment, the operating impact would add $10 million, a positive but not substantial increase, to the universitys $470 million-plus of operating revenues. In response to declining enrollment, Brooklyn Law School (Baa1 stable) has placed six of its no-longerneeded residential buildings on the market. The school has other marketable real estate in Brooklyn, which could be sold over time without materially impacting core operations.
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CREDIT IN DEPTH
Josellyn Yousef Assistant Vice President - Analyst +1.212.553.4854 josellyn.yousef@moodys.com Dan Seymour Analyst +1.212.553.4871 dan.seymour@moodys.com
New Jersey Municipalities Benefit from Post-Sandy State and Federal Aid
Just over a year ago, Superstorm Sandy wreaked unprecedented damage along New Jerseys (Aa3 stable) coastline. Today, we expect the credit quality of the states affected local governments to remain intact because they receive state and federal aid, and the state provides effective help in applying for federal assistance. Additionally, most local government issuers in the state have low debt burdens and access to bond markets.2 Government aid is flowing. Both federal and state money continue to alleviate liquidity constraints and capital needs that the storm created. Last June, the Federal Emergency Management Agency (FEMA) approved an additional $81.5 million for New Jersey local governments to augment the $408 million originally promised (see Exhibit 1). The added money raises FEMAs contribution to cover damage-repair costs to 90%, up from the original 75%. The June-approved funds add to $125 million already distributed by federal Community Disaster Recovery Loans to affected municipalities to help offset property tax revenue declines. The added funds will boost the economies of a multitude of communities in Ocean County (Aaa negative) and other hard-hit areas (see Exhibit 1).
EXHIBIT 1
Largest Savings for New Jersey Municipalities as a Result of 90% FEMA Match
Municipality 75% FEMA Match 90% FEMA Match Savings
Toms River (Aa3 stable) Atlantic Highlands Middletown (Aa2) Sayreville (Aa3) Seaside Heights (A3) Brick (Aa2) Union Beach (A2) Freehold (Aa2) Monmouth Beach Jersey City (A2 positive) Total for All NJ Local Governments
Source: New Jersey Office of Recovery and Rebuilding
$87,363,820 $15,640,890 $11,346,286 $10,383,977 $8,133,735 $7,976,802 $7,143,497 $6,909,296 $6,866,597 $6,884,001 $407,980,852
$104,836,584 $18,769,068 $13,615,543 $12,460,773 $9,760,482 $9,572,162 $8,572,196 $8,291,155 $8,239,916 $8,250,401 $489,481,748
$17,472,764 $3,128,178 $2,269,257 $2,076,796 $1,626,747 $1,595,360 $1,428,699 $1,381,859 $1,373,319 $1,366,400 $81,500,896
FEMA is delivering on its initial promises and has distributed substantial portions of the reimbursements to affected communities. Seaside Heights (A3) has already collected $5.7 million of the approximately $9.7 million promised by the federal government, and Point Pleasant Beach (A1) has received $2.7 million of $6.1 million promised. FEMA will disburse the remaining funds over the next few years, although in areas where dollars are flowing more slowly, local governments may need to roll larger portions of their notes than originally planned.
See Hurricane Sandy Unlikely to Threaten Public Finance Issuers Credit, November 13, 2012 and US Public Finance Issuers Transition to Recovery state in the Aftermath of Hurricane Sandy, December 19, 2012.
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The state has aided local communities with additional operating funds, including the $1.8 billion received in Community Disaster Block Grant Disaster Recovery (CDBG-DR) funds, which the Department of Housing and Urban Development (HUD) allocated to New Jersey as part of its initial fund allocation. These CDBGDR funds must be used to satisfy unmet needs -- financial needs not satisfied by other public or private funding sources such as FEMA funds, Small Business Administration disaster loans or private insurance. HUD also requires that CDBG-DR programs focus predominantly on the states most affected counties and on the states low- and moderate-income populations. Capital markets remain accessible. Following the storm, many issuers passed special emergency resolutions to spend unbudgeted money on rebuilding and repairs, funded through temporary notes. In a few cases, issuers paid interest rates on these notes above market levels,3 but not to a degree that would impair financial operations. A receptive capital market for bonds and notes helps New Jersey communities manage liquidity disruptions or fund capital needs arising from the storm. Sandy-affected New Jersey issuers typically expect to repay the temporary notes with their FEMA reimbursements. Most local governments in New Jersey have small debt burdens. Modest debt burdens (see Exhibit 2) are fundamental credit strengths of the states local governments. Small debt burdens have allowed many governments to issue bonds or notes to fund post-storm expenditures without debt reaching unduly high levels.
EXHIBIT 2
Median Net Direct Debt as a Percent of Full Real Estate Valuation for New Jersey Cities and US Cities
New Jersey Cities Median Debt Burden 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% Aaa Aa1 Aa2 Aa3 A1 A2 US Cities Median Debt Burden
Source: Moodys
The state is playing a crucial oversight role. We expect the New Jersey Division of Local Government Services to remain active in helping recovery efforts and advising issuers on how to apply for federal loans and aid. In some instances, the division has completed federal Community Development Block Program Essential Service Grant applications for communities. The division also actively helps issuers develop plans for refinancing notes issued in 2012, including facilitating discussions with banks, to ensure timely and proper execution of financings. Challenges remain, despite these positive efforts. Communities must still identify funding sources to rebuild storm-eroded sand dunes, which, if not rebuilt, could leave them exposed to another storm and lower property values.
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For example, following Sandy, the Borough of Lavallette (General Obligation Aa3 negative) issued short-term notes with an interest rate of 1.4%, which was well higher than prevailing short-term rates.
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Some communities still have significant damage. Many residents could not start rebuilding their homes until FEMA guidelines were released during the summer. It is unclear how quickly property values and seasonal revenues such as beach fees will rebound, but we will learn more as governments adopt their 2014 budgets in the first quarter of next year.
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RESEARCH HIGHLIGHTS
State HFA Delinquencies Continue to Grow State Housing Finance Agencies (HFAs) continue to demonstrate solid financial performance. However, total delinquencies and foreclosures in their single-family whole loan programs reached an all-time, mid-year high of 7.29%. The sustained high level of delinquencies challenges management and growth of the programs since the higher percentage of delinquent loans translates into reduced loan revenue. However, we do not expect to take any rating actions because of mitigating factors such as the HFAs strong balance sheets, rising home prices and the continued solid performance of mortgage insurers helped by the federal government. US Not-For-Profit Healthcare Quarterly Ratings: Patient Volume Declines Continue to Steer Higher Pace of Downgrades In the third quarter of 2013, there were 10 rating downgrades and eight upgrades for not-for-profit hospitals resulting in a ratio of 1.3 to 1. This is an increase from six downgrades and three upgrades in the prior quarter. The par amount of debt downgrades impacted was $2.7 billion, compared to $2.4 billion of upgraded debt. Reduced patient volumes continued to be a key driver of rating downgrades. In line with second-quarter results, six of the 10 downgrades were due primarily to material declines in admissions. US Airport Medians for FY 2012 Enplanement medians for US airports point to growth at the major hub airports, but overall growth was weak, with the median growth in enplanements at 0.2%. The large hub airports experienced strong growth in connecting traffic, but enplanement levels at the medium and smaller hubs continued multi-year declines. We view the large hubs as benefiting from industry re-consolidation around the traditional hub-and-spoke model, largely at the expense of medium-sized hubs and limiting point-to-point travel between smaller markets. Tepid economic growth was not able to compensate for airline industry consolidation and the reduction of point-to-point service at medium hub airports.
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EDITORIAL CONTENT
Crystal Carrafiello Senior Vice President, Rating Communications Robert Cox Senior Editor, Rating Communications
Housing
Kendra Smith Managing Director, US Public Finance
PRODUCTION
Jason Lee Vice President, Production
Public Infrastructure
Chee Mee Hu Managing Director, Project Finance
WEBSITE
www.moodys.com
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