Talk about IMPACT! When thinking about how to adequately express my feelings in this week’s Minutes, I was torn between two equally powerful visual pictures. Which would YOU choose?
In the first, I was watching the tide quietly and slowly roll out while a giant tsunami-sized wall of water was just barely visible on the horizon. We’ve seen those graphic images on TV time and again. Can you see it in your mind’s eye? Me too – and it fits how I feel about today’s topic.
The second, was a giant, lumbering elephant – with its ears waving and its trunk swaying back and forth as it slowly but firmly walked into my living room toward my white leather sofa – trampling everything else in its path. Although you can see that image as well, it seems a little far-fetched, right?
Well – the elephant image won. And here’s why…
So…here goes…today’s Monday Muni Minutes!
Enjoy and have a great week! Deb
CURRENT EVENTS
The Elephant in the Room
~~Illinois Pension Reform Ruled UNCONSTITUTIONAL~~
Last Friday’s big news came from the Illinois Supreme Court – pension reform legislation put into place in 2013 by Illinois Legislators to deal with their burgeoning, out-of-control pension liability – was UNANIMOUSLY ruled unconstitutional.
While many professionals suspected this might be the verdict, what I am afraid is getting lost in the translation is “what are we going to do about the elephant in the room?”
That elephant’s name is Pensions Payable…
In its unanimous decision, the High Court rejected the state’s 2013 reform law, which would have dramatically help reduce their $100 billion pension funding deficit – a crisis which will now be harder to stop.
It came down to six very important words…
Six words in the state’s constitution that clearly says that pension benefits “shall not be diminished or impaired.” Six very important words indeed.
Here’s how it breaks out:
The Ruling:
Justice Lloyd Karmeier, writing for the court stated, “In ruling as we have today, we do not mean to minimize the gravity of the state’s problems or the magnitude of the difficulty facing our elected representatives.”
He further said, “It is our obligation, however, just as it is theirs, to ensure that the law is followed. That is true at all times. It is especially important in times of crisis when, as this case demonstrates, even clear principles and longstanding precedent are threatened. Crisis is not an excuse to abandon the rule of law.”
Plaintiffs:
Sean Smoot, attorney for We are One Illinois, one of the plaintiffs, said, “We are thankful that the Supreme Court has unanimously upheld the will of the people, overturned this unfair and unconstitutional law, and protected the hard-earned life savings of our members and other public service workers and retirees,”
Smoot further stated, “I, along with our entire coalition, look forward to working with Illinois’ political leaders in developing a fair and constitutional solution to pension funding, and I know we all remain ready to work with anyone of good faith to do so.”
Legislators:
State Representative Elaine Nekritz said, “Our goal from the beginning of our work on pension reform has been to strike a very careful, very important balance between protecting the hard-earned investments of state workers and retirees, and the equally important investments of all taxpayers in education, human and social services, health care and other vital state priorities,”
Ms Nekritz went on to explain, “In its ruling today, the Supreme Court struck down not only the law, but the core of that balance. Now our already dire pension problem will get that much worse and our options in striking that balance are limited. Our path forward from here is now much more difficult, and every direction will be more painful than the balance we struck in Senate Bill 1.”
So, what do you think?
To take it a bit further, how does this decision impact Chicago’s 2014 pension reform law? We shall see, hmmm?
[Editor’s Note: So why did I choose the elephant over the tsunami? Tsunamis are generally caused by a single catastrophic event – like a large earthquake. While I believe the impact of unfunded pensions qualifies as tsunami-worthy, I think what we have is more a situation of letting things run wild for a very long time and not understanding how large and dangerous it could become. Have you ever seen what happens to an elephant when backed into a corner? That quiet, grass-eating giant will flat out trample you…and everything else in its way.]
To Be…or Not to Be…a Political Subdivision
That IS the Question
The American Bar Association’s tax section is really up in arms…and asking the IRS to change or rescind its 2013 Technical Advise Memorandum (TAM) regarding its definition of what is – or is not – a political subdivision.
So why is this TAM such a big deal?
Well, if you want to issue tax-exempt bonds, you either need to be a state, a territory or a political subdivision thereof. So, this will impact those “thereof” entities…and there are a lot of them.
The TAM, which is controversial, is looking for accountability of the entity to a general electorate as a cornerstone to qualifying. It has a two-pronged test to pass the political subdivision hurdle:
- Is a division of a state or local government
- Has delegated to it sufficient sovereign powers
Many bond counsel provided comments to the IRS urging revision and clarification as well as the request that any such changes be prospective, due to its impact on transactions which have taken place.
The ABA said, “Our concern is that the analysis used in the 2013 TAM imposes new requirements for qualifying as a political subdivision that are not supported by existing legal precedent and could call into question a variety of financing structures that have been used for many years in many states.”
This TAM is controversial in that there is no other outside guidance which requires the general electorate accountability requirement. A committee reviewed case law on past rulings and noted that division language in existing regulations “is satisfied if the division is established by a proper authority of a state, acting within its constitutional power, for the purpose of carrying out governmental functions.”
The ABA asked for Treasury and the IRS to issue interim guidance “given the strong need for certainty in the tax exempt transactional practice.”
[Editor’s Note: We will continue to follow this and keep you posted…]
OUT & ABOUT
Conferences:
The Bond Buyer’s Midwest Municipal Market Symposium
June 30, 2015 InterContinental Chicago Magnificent Mile, Chicago, IL
Resources:
Check out the “muni deal of the week”…and look at it from the bondholder’s perspective.
On-Demand Post Issuance Compliance Training for Issuers
“Compliance Basics” – a Free, 3-part video training, plus the Monday Muni Minutes
On-Demand Webinar
Resource: On Demand Replay of Continuing Disclosure after MCDC
Slides: Final Slide Deck for Continuing Disclosure after MCDC
Muni Market Minute Updates
(Quick news bits on topics we’ve covered in earlier MMM editions!)
Highway Trust Fund – Tick…Tock…Three Weeks on the Clock
Here we go again. With less than three weeks left, where is the solution to funding the soon-to-be depleted HTF? Current funding expires May 31st.
What might be more annoying than anything else is that both sides of the aisle are just slinging insults at each other – rather than knuckling down and developing a solution.
A couple of real zingers from Senator Charles Schumer, D-NY:
- “We’re careening toward the highway cliff, and there’s no plan from the Republican leadership to stop us from driving right off it and no plan to keep our infrastructure in good shape for years to come,”
- “The Republicans told us last year when we passed this 10month patch that it would give them time to find a long-term revenue solution,” …”Where is it? We have no idea of what they are even thinking of.”
In the 2016 spending plan adopted last week by the House Appropriations Committee, it calls for flat funding for highways – essentially freezing federal spending at current 2015 levels. That apparently is unacceptable for Democrats, who have not provided any plan other than support for President Obama’s Grow America Act.
Republicans are not supportive of a solution which simply raises taxes for a multiyear solution and are looking for $11 billion in revenues to fund the HTF through December.
[Editor’s Note: As we know, the HTF has been extended over 30 times in the last six years – while largely under a democratically controlled federal government. Oh, those tiny details…]
Chicago’s Scott: “Meaningful Progress” Made During her Tenure as CFO
As noted last week, Chicago’s CFO, Lois Scott will be leaving on May 18th, after serving under Mayor Emanuel for the last four years. Her last official day will be Emanuel’s inauguration day for his second term in office.
Scott noted that her stint at Chicago has been a highlight to her career – and she has been lauded as being accessible, knowledgeable and fair while making many improvements to disclosure and investor relations.
Chicago is still facing strong headwinds in three major areas:
- Budgetary shortfalls, which were $700 million when she took office – are now cut in half
- Pensions – which include a $550 million public safety pension spike hitting a $9 billion budget
- Legacy debt – the city recently announced it will stop certain funding practices, but still uses refundings to stave off principal payments – and plans to convert to fixed rate debt
When Emanuel took office four years ago, the city’s debt was rated in the A to AA category with stable outlooks from all three rating agencies. Now, their $8.3 billion of GO debt is ranging from A to Baa2, just a couple notches above junk. This decrease in ratings significantly raises the city’s cost of borrowing.
Scott has not decided what her next move will be. She has expertise as a financial advisor, banker as well as being a White House fellow during the Clinton years.
[Editor’s Note: Whoever takes over as CFO will still have some large hurdles to overcome – with pensions possibly now being a bit more difficult to address with Friday’s Illinois Supreme Court ruling…]
We hope you found this week’s edition of the Monday Muni Minutes valuable and informative.
Chat soon!
As always, your comments are welcome…scroll down and leave a comment to let us know what you think about any of the articles!
To your compliance success,
Debbie
The greatest compliment you can pay us is to share this newsletter with your issuer friends….
P.S. Happy thoughts to issuers who have 45-day reporting requirements for your continuing disclosure this week…
P.P.S. Remember, invite your issuer friends to join us on Issuer 2 Issuer and to get their free online training, PIC Basics! Regis and I are just wrapping up the final details on the re-release of “PIC Essentials”… I have also been working on a dynamic business manager association presentation for an online conference this coming Friday!
P.P.S Want a one-click way to get faster information? If you are on LinkedIn, you can get access to breaking muni news articles as well as interesting compliance tips and resources, posted by us during the week. Join our private Group Page, and follow us on our Company Page.