Beruflich Dokumente
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FEATURE ARTICLES
Volcker Rules Effect on Tender Option Bonds a Credit Negative for Municipal Market
The version of the rule adopted in December prohibits banks from participating in tender option bonds as currently structured. TOB providers are seeking alternatives.
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Courts Offer Contrasting Outcomes for California Cities Seeking to Cut Retirement Benefits
A court upheld restrictions on pension reform in San Jose, while another affirmed San Diegos right to modify non-vested retiree health benefits.
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New Mexico Supreme Court Upholds Pension Reforms, a Credit Positive for the State and Local Governments
A court decision reduces the adjusted net pension liabilities of the states two cost-sharing pension plans by $2 billion, while also curbing the rate of growth of pension costs.
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RESEARCH HIGHLIGHTS
Philadelphia School District: Fiscal Stabilization Requires Support of All Major Stakeholders
Moodys Ba2 underlying rating on the Philadelphia School Districts $3.4 billion of long-term general obligation revenue bonds reflects the districts high poverty, sizeable debt burden and history of uneven financial management.
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Greenville Utilities Commissions (NC) Revenue Bonds Upgraded to Aa3 from A1, Outlook Stable
The upgrade of $115 million in revenue bonds factors in the diverse utility revenue stream of the system, which is pledged to bondholders.
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Broward County Seaport Enterprise Port Facilities Outlook Revised to Positive, A2 Rating Affirmed
The outlook change on $224 million factors in expectations of increased traffic and operations.
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MOODYS.COM
Volcker Rules Effect on Tender Option Bonds a Credit Negative for Municipal Market
Section 619 of the final version of the Volcker Rule adopted by federal regulators in December prohibits banks from participating in tender option bond (TOB) programs as currently structured. Unless TOB program sponsors find a way to structure TOBs that does not violate the rule, the Volcker Rule will eliminate TOBs when it becomes effective in July 2015. The elimination of the TOB market, currently about $75 billion, would be a credit negative for the municipal bond market because it would put upward pressure on municipal interest rates as TOBs are unwound. On the margin, market volatility would also increase because the market would lose the TOB investor base. A TOB transaction typically involves the deposit of tax-exempt long-term municipal bonds into a trust. The trust issues two classes of securities: floater certificates and residual certificates. Like variable rate demand bonds (VRDB), the floater certificate provides the holder the option, generally on a daily or weekly basis, to tender the floater for purchase at par. On tender dates, a remarketing agent sets an interest rate for the floater certificate at a level it expects will allow for a sale at par. Investors, primarily money market funds, purchase floater certificates based mainly on a liquidity providers commitment to purchase any floater certificates that are not successfully remarketed. Residual investors receive all interest on the underlying bond minus whatever is paid to floater certificate holders. From a business perspective, the residual investor holds the underlying bond with financing provided by investors in the floaters. Residual certificates are typically held by the program sponsor, a mutual fund or a hedge fund. Banks participate in every TOB program as sponsor, residual investor and/or liquidity support provider, in many cases all three. The removal of TOB programs as buyers of municipal bonds as well as the unwinding of existing TOB trusts between now and July 2015 will put upward pressure on municipal interest rates by eliminating a source of demand and by increasing supply. Higher rates would be credit negative for the municipal issuers, particularly for those with significant borrowing needs. Redistribution of $75 billion mostly fixed rate municipal bonds currently held by TOB programs is effectively incremental secondary market supply equal to more than 20% of the new issue supply projected for 2014 (see Exhibit 1).
EXHIBIT 1
The elimination of the TOB market would also be a negative for tax-exempt money market funds that rely on such investments to remain fully invested within strict average maturity and diversification requirements. At a total of about $270 billion outstanding, tax-exempt money market funds represent the primary buyer of TOB floater certificates. Without TOB floaters some tax-exempt money market funds may not be able to stay fully invested (see Exhibit 2) in tax-exempt securities.
JANUARY 9, 2014
EXHIBIT 2
Without TOB Market Tax Exempt Funds Pressed in Decreasing Variable Rate Demand Obligation Market
Size of the Tax Exempt Money Market Funds and Municipal VRDO markets; $ billions
Total Tax Exempt Money Market Funds 500 450 400 350 300 250 200 150 100 50 0 2010 2011 2012 2013 Municipal VRDO Market
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Nicole Johnson Senior Vice President +1.212.553.4573 nicole.johnson@moodys.com Andrea Unsworth Analyst +1.415.274.1706 andrea.unsworth@moodys.com
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$ Millions
$300 $200 $100 $0 2004 2005 2006 2007 2008 2009 2010 2011 2012
Note: Estimated taxes include business and occupation, sales and other taxes. Source: Washington State Aerospace Industry Economic Impact Study, November 2013
JANUARY 9, 2014
Courts Offer Contrasting Outcomes for California Cities Seeking Retirement Benefit Cuts
In late December, California judicial decisions offered contrasting views on a municipalitys ability to alter retirement benefits. A court upheld restrictions on pension reform in San Jose (Aa1 stable 1), while another affirmed San Diegos (Aa3 stable) right to modify non-vested retiree health benefits. The credit implications are mixed for San Jose as the city will continue to realize $20 million in annual savings from some aspects of a 2012 reform initiative, according to the mayor. However, the city will be unable to achieve further savings called for by voters. San Diego will continue to benefit from retiree healthcare savings implemented in 2010, which at the time lowered its other post-employment benefits (OPEB) unfunded liability by 31% to $969 million, a credit positive. On December 23, a lower court ruled that certain provisions of a voter-approved reform measure in San Jose were invalid because they illegally impaired benefits. On December 26, a state appellate court upheld a ruling in favor of San Diegos ability to modify non-vested retiree health benefits. The decisions underscore a distinction between vested pension benefits, which cannot be modified even through a voter initiative, and non-vested OPEBs, which California local governments have flexibility to reduce. In San Jose, the judge blocked the city from suspending retiree cost-of-living adjustments (COLAs) and mandating that employees increase pension contributions or accept lower benefits for future work. The judge did leave in place the elimination of supplemental pension payouts and increases to employee contributions toward OPEBs, prompting the mayor to assert a continued $20 million in annual savings. The San Jose ruling upholds protections both for pension benefits that have already been earned and will be earned going forward. This locks municipal employers into the same or a more expensive benefit formula for the length of service. The San Jose mayor has proposed an amendment to the states constitution to allow pension benefit reductions for future work. Our projections show the provision could generate pension savings by reducing growth in actuarial accrued liabilities (AALs). The cost for funding one hypothetical workers pension could be trimmed by thousands of dollars annually. The liability at retirement could be lowered by hundreds of thousands of dollars, if five years into this employees career, the benefit formula were reduced from 3% of final average salary at age 65 to 2% (see Exhibit 1).
JANUARY 9, 2014
EXHIBIT 1
Changes to Pension Benefit Formulas for Future Work Could Generate Significant Savings
AAL - 3% @ 65 Normal Cost - 2% reform begin at age 31 $18,000 $16,000 $14,000 AAL - 2% Reform Begin Age 31 Normal Cost - 3% @ 65 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 25 30 35 40 45 Age 50 55 60
Source: Moodys. Assumptions: entry age of 25, $50,000 salary at age 30, retirement age of 65, 3% and 2% benefit multipliers of fiveyear final average salary, Entry Age Normal cost method, 7.75% discount rate, 3% annual salary growth, 3% COLA, mortality age 85.
In San Diego, a state lower courts ruling affirmed the citys reduction of retiree health benefits. The decision upheld a 2010 freeze of OPEB benefits for San Diego employees, which at the time lowered the citys OPEB unfunded liability from $1.4 billion to $969 million. Under the citys charter, changes to the pension system require a vote of employees and retirees. But the court affirmed that OPEBs are not provided under the citys pension system and do not require a vote to be changed. The San Diego ruling also relied partly on a federal Ninth Circuit Court of Appeals decision that OPEBs in San Diego are not protected contract rights, but are a term of employment that can be changed. Conversely, a recent ruling found that OPEBs for certain employees in Los Angeles (Aa2 stable) are contractually protected. That ruling concluded that sections of the citys Administrative Code signal a legislative intent to grant a vested right to retiree health benefits, unlike the case of San Diego. For more information on Moodys insights on employee pensions and the related credit impact on companies, governments, and other entities across the globe please visit Moodys on Pensions at www.moodys.com/pensions.
JANUARY 9, 2014
$ in Millions
$ Dollars
New Mexico Supreme Court Upholds Pension Reforms, a Credit Positive for the State and Local Governments
On December 19, the New Mexico Supreme Court upheld recent pension reforms enacted by the state last July, rejecting a challenge by retirees. The courts decision is credit positive for New Mexico (Aaa stable) and local governments in the state because it upholds measures that reduced the adjusted net pension liabilities (ANPL) of the states two cost-sharing pension plans by $2 billion, or 8%. The reform measures also curb the rate of growth of pension costs for participating governments. The New Mexico legislature passed two bills in July to reform the Public Employees Retirement Association (PERA) and Educational Retirement Board (ERB). The reforms reduced cost-of-living adjustments(COLAs) and increased employee contribution rates. As reported by the pension plans, fiscal 2013 unfunded accrued actuarial liability (UAAL) declined by an estimated $1.7 billion for PERA over the prior year, but ERBs UAAL only declined by $6.7 million because its COLA was not reduced as much. By increasing employee contributions, the reforms also enabled a reduction in the rate of growth of employer contributions. According to our calculations that make various adjustments to reported UAAL, PERAs ANPL declined by $4.4 billion in fiscal 2013, reversing 68% of the increase from the prior year (see Exhibit 1). The ERBs ANPL declined by $1.9 billion. About $2 billion of the two plans combined $6.3 billion reduction in ANPL in fiscal 2013 is due to the positive impact of the reforms. The remaining reduction was fueled by strong investment performance over the year and the higher interest rates used to calculate the present value of the liabilities. We derive ANPL figures by making adjustments to reported numbers, such as applying a market-based interest rate (the Citibank Pension Liability Index) to estimate the present value of liabilities. The index rose to 4.81% as of June 30, 2013 from 4.13% a year earlier, and accounted for the largest portion of the ANPL decline for both plans.
EXHIBIT 1
Millions
Source: Preliminary pension valuation data and our pension adjustments, as explained in (Adjustments to US State and Local Government Reported Pension Data)
Despite the recent improvement, the average ANPL of a contributing local governmental entity of PERA and ERB is approximately three-times its operating revenues, which is significantly higher than the national median of onetime. Going forward, even with the reforms, the unfunded liabilities will remain elevated, which will be a continued source of risk to local governments participating in the plans. Mending the large liabilities would likely require deeper cuts to benefits, more substantial increases in employer and employee contributions, or having a sustained multi-year trend of making contributions at full actuarial required levels.
JANUARY 9, 2014
The level that participating local governments contribute to the plans is set by the state. Historically, the state has set contribution levels much lower than what is actuarially required, which is a major reason why the unfunded liability is so high. The upheld reforms instituted last July raise contribution levels (see Exhibit 2), but not enough to reach levels prescribed by actuarial standards. To meet these standards, PERA and ERB would each need to increase annual statutory contribution rates by 4.3% in order to fully close unfunded liabilities over the next 30 years.
EXHIBIT 2
Employer Normal Cost Rate Amortization Rate Total Employer Contribution Rate
Source: PERA and ERB Fiscal Year 2013 Annual Actuarial Valuations
New Mexico is one of several of states that have enacted COLA changes affecting retirees and existing employees. Legal challenges to COLA reductions are currently in progress in a number states, such as Illinois and Montana, though these will be decided in the context of the legal framework in each state and will not be directly affected by the decision in New Mexico. For more information on Moodys insights on employee pensions and the related credit impact on companies, governments, and other entities across the globe please visit Moodys on Pensions at www.moodys.com/pensions.
JANUARY 9, 2014
Detroits mediation with multiple classes of creditors continues as the parties seek to reach compromises
before the city files its plan of adjustment, expected this month. water and sewer system.
The citys negotiation with suburban leaders continues regarding a possible long-term lease of the citys Recent Publications:
1. Court Approval of Detroit Public Lighting Authority Issuance is Credit Negative 2. Detroit Eligible for Bankruptcy; Pensions Will Not Be Protected, but Debt Priority Remains Unclear HARRISBURG, PA (UNRATED) City Erases Nearly $500 Million in Debt, Remains under State Control
The state-appointed receiver filed closing papers with Pennsylvanias Commonwealth Court on December
23 that erased approximately $492 million of debt and restructured an additional $100 million through the sale of the city waste-to-energy incinerator, a 40-year lease of parking assets and creditor haircuts. million. Both transactions involved the sale of new bonds to extinguish outstanding indebtedness of the Harrisburg Authority, which operated the troubled waste-to-energy incinerator.
The centerpiece of agreements concluded on December 23 were two bond transactions totaling $415
The city will remain under the control of the receiver until at least mid-2014.
JEFFERSON COUNTY, AL (Caa3 REVIEW FOR UPGRADE) Emerges From Bankruptcy, Exit Plan on Appeal Exited bankruptcy on December 3 by retiring $3.1 billion in defaulted sewer warrants and by issuing $1.78 billion in new sewer warrants. Warrant-holders had a 35%-65% recovery rate.
The countys general obligation limited tax debt was also in default. We now expect debt service payments
to resume.
All ratings are for general obligation debt unless otherwise indicated.
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JANUARY 9, 2014
One group of ratepayers, the Bennet group is appealing the confirmation of the countys exit plan and
prior court rulings, while another, the Wilson group has dropped their appeal. SAN BERNARDINO, CA (UNRATED) Mediation Continues, CalPERS Appealing Eligibility Mediation is scheduled to resume between the city and multiple parties on January 9 and 10.
California Public Employees Retirement System (CalPERS) is participating in the mediation, while also
opposing the citys eligibility for bankruptcy. Last month, a federal judge gave CalPERS approval to appeal to the 9th Circuit Court of Appeals. employees and retirees, bringing a direct challenge to CalPERS. The citys efforts could be emboldened by a Detroit ruling that pension agreements are contracts and are subject to impairment in bankruptcy proceedings.
Questions remain whether San Bernardino will look to Chapter 9 as a way to trim pension liabilities for
STOCKTON, CA (LEASE REVENUE Caa3 DEVELOPING) Negotiations Continue With Key Creditor In Advance Of Confirmation Hearing A court hearing to confirm exit plan is scheduled for March 5.
The citys plan faces a challenge from Franklin Advisers, Inc., which holds $35 million of the citys bonds
and would get less than 1% of par under Stocktons proposal. If Franklin does not approve the plan, the city will likely seek a cram down.
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Number of participating municipalities Administration and asset management Benefit determinations Sample municipality
More than one Independent agent-fiduciary, e.g. CalPERS Municipality from menu of options agent provides Vallejo, Stockton and San Bernardino
For a more detailed discussion of pension plan types, see our Pension Landscape publication. Single-Employer Plans May Be Easier To Restructure Than Agent Plans In Central Falls, which emerged from bankruptcy in 2012, the city conducted negotiations on cutting benefits to its single-employer plan. Central Falls retirees were not represented by unions who could defend their interests with a unified voice. Additionally, Rhode Island passed a law giving bondholders greater statutory protections than retirees. Pensioners voted in favor of reductions by as much as 55%. While an outcome in Detroit is pending, the judges decision on pension impairment will likely encourage the city to look into cutting benefits.
EXHIBIT 2
City
Plan Type
Treatment
Impaired (%)
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JANUARY 9, 2014
California Cases Offer Examples of Difficulty in Cutting Agent Plans CalPERS (the California Public Employees Retirement System, issuer rating Aa3) offers an example of a large, state-sponsored agent that has vigorously acted to protect pensions of its retirees, and current and future members. CalPERS administers agent plans for Vallejo, Stockton and San Bernardino. Agent plans inject a third party into the relationship between cities and public employees/retirees. A third party like CalPERS, may, through a combination of its legal status and mission, be more aligned with retirees than with distressed cities. State laws favoring retirees may also play a role in creating conflicts between cities and these fiduciaries. The well-financed agents may be better organized and able to press their cases through litigation more aggressively than retirees in single-employer plans, who lack the same bargaining power. CalPERS has publicly drawn distinctions between pension obligations in California and Michigan. It argues that unlike Michigan, where the judge ruled that public employees rights to their pension is by contract that can be impaired in bankruptcy courts, CalPERS administered pensions are outside of a bankruptcy courts jurisdiction. CalPERS strategy of defending pension rights has proven successful thus far by deterring cities from seeking to reduce or halt contributions to its plans. Vallejo opted not to challenge CalPERS before emerging from bankruptcy in 2011. Stockton is following the same path as it looks towards an exit in 2014. Compton (not rated), which has not filed for Chapter 9, issued a $10 million tax and revenue anticipation note to cover delinquent payments to CalPERS to avoid a costly legal battle. Following CalPERS lead, agents in other states may use or advocate a similar litigation strategy. San Bernardino May Be California Game Changer CalPERS is moving to appeal San Bernardinos bankruptcy eligibility to the 9th Circuit of Appeals. If San Bernardino is successful in restructuring its liability to CalPERS, it could embolden other distressed municipalities in agent plans, in California and elsewhere, to consider bankruptcy as an avenue to reduce their pension obligations. Cost-Sharing Plans Could Complicate Reorganization The pooled nature of cost-sharing plans reduces the likelihood that local government participants would be able to impair benefits. In Michigan, both Buena Vista (not rated) and Inkster (not rated) school districts were dissolved in 2013 amidst deteriorating finances and enrollment erosion. Any unfunded liability associated with former employees of the districts must be made up by contributions from employers remaining in the pool. We see a similar trend emerging in Pennsylvania as growth in charter schools shifts covered payroll away from school districts. Historically, employer contributions have been well below actuarial requirements, resulting in rapidly growing employer pension costs to shore up employee costsharing plans. While the state and school districts struggle to absorb rising contribution requirements, employee benefits are unlikely to be reduced.
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Full Faith and Credit Statutory Lien Ad Valorem Tax (State Legislature & Voter Approval Requirements) Voter Approval Required to Issue
Yes No Yes No
The Alabama Constitution limits the rate and dollar amount of an ad valorem tax levy for each class of property. Property taxes are limited to a certain percentage of a propertys value based on the fair and reasonable market value, and most jurisdictions levy taxes at the maximum rate. Under Amendment 373 of the Alabama constitution, an Alabama local government can increase the maximum rate if the proposal is vetted through public hearings, and if approved by a public referendum and the state legislature. These requirements create significant barriers to increasing property tax rates. Beyond property taxes, other Alabama local government revenues that are legally available to pay GO debt service can include sales and use taxes, occupational and business license taxes, permit fees, court fines and fees, lease taxes and revenues from operation of government-owned enterprises. Sales tax revenues are often a significant revenue source for many municipalities. Paying bonds from these revenues is consistent with a full faith and credit pledge, though none of these revenues are specifically pledged as security for bonds or warrants. Hence, there is no statutory lien on these revenues. While local governments have latitude to raise rates for non-property taxes, these taxes must be levied in accordance with state law. A prime example of the risk of noncompliance is the state supreme courts invalidation of Jefferson Countys occupational and business license taxes in 2011. The loss of these major revenue sources (approximately 30% of total county General Fund revenues) was a primary driver for Jefferson Countys bankruptcy filing in 2011. Despite limitations on revenue-raising, local governments have significant authority to cut expenditures to help mitigate budget pressures. Alabama is a right-to-work state, and municipalities have a long history of cutting services and workforces to balance budgets. Alabama has an unusually high rate of municipal bankruptcies, although most have occurred in small cities and towns. Over the past 25 years through 2013, seven of the 44 municipal bankruptcies have been in Alabama (see Exhibit 2).
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EXHIBIT 2
OTHER CONTACTS Greg Lipitz, VP-Senior Credit Officer, +1.212.553.7782, gregory.lipitz@moodys.com Naomi Richman, Managing Director, +1.212.553.0014, naomi.richman@moodys.com Jack Dorer, Managing Director, +1.212.553.1332, jack.dorer@moodys.com Alfred Medioli, VP-Senior Credit Officer, +1.212.553.4173, alfred.medioli@moodys.com Genevieve Nolan, AVP-Analyst, +1.312.706.9957, genevieve.nolan@moodys.com ASSOCIATE ANALYSTS Sarah Jensen, Associate Analyst, +1.214.979.6846, sarah.jensen@moodys.com Michael Alter, Associate Analyst, +1.212.553.4180, michael.alter@moodys.com
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RESEARCH HIGHLIGHTS
Philadelphia School District: Fiscal Stabilization Requires Support of All Major Stakeholders Moodys underlying rating (Ba2 negative) on the Philadelphia School Districts $3.4 billion of long-term general obligation and GO-backed lease revenue bonds reflects the districts high poverty, sizeable debt burden and history of uneven financial management. The districts fiscal difficulties have recently intensified due to slow growth in state and local revenues, enrollment losses to charter schools and reduced federal funding. The enhanced ratings (Aa3 stable) on the districts GO and lease revenue bonds remain unaffected by the districts credit stress, given ample amounts of interceptable state aid to cover annual debt service.
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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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