In this Week’s Edition: Fiscal Woes Hit 2 More Major Cities, Free Online Training, Disclosures Up by 19%, Muni Market Minutes and Which State is On Its Own “At Risk” List?
CURRENT EVENTS
Fiscal Woes Hit Two More Major Cities …
1) State Auditor Declares Emergency in Maple Heights, a Cleveland Suburb
The City of Maple Heights missed three sewer loan payments in January, triggering Ohio State Auditor David Yost’s emergency declaration.
A second factor contributing to Yost’s action is that the city is in the red in both its general and debt service funds, by $531,000 and $80,000 respectively. This means a recovery plan, led by a commission, will be developed in 120 days.
Maple Heights with a population of 23,000 located just 10 miles south of Cleveland, has about $14.4 million in GO Bonds outstanding. Their rating is Baa3 negative from Moody’s.
Like many other smaller municipalities, high unemployment, faltering economic development, plummeting property tax values, along with high debt and pension burdens are all wreaking havoc on the city’s cash position.
The loans were due on January 2nd, and Maple Heights did not make the payments until 45 days later, according to Scott Campbell, the Ohio Water Development Authority – the issuer of the bonds.
Campbell called the 45-day delinquency “pretty unusual”.
He said “Typically a payment is due on January 1 and July 1 and we collect almost all the revenue on those dates. A handful of communities may be 10 to 15 days late, but it’s pretty unusual for there to be much of a balance outstanding 30 to 45 days late,”
“This is a call to action for Maple Heights — their fiscal crisis demands it,” Yost said in a statement. “Tough decisions will need to be made, and my office stands ready to provide
assistance where it can.”
[Editor’s Note: Having grown up in a small town about an hour away from Cleveland, I remember Maple Heights as being one of the “suburbs to live in” if you worked in or around the area. Without aging myself too much, reading this is pretty scary as it really brings home how quickly things can change…and if we are not careful, it can happen without us even knowing it. So, the next logical auditor question on my mind is…how many more Maple Heights events are looming?]
2) The Windy City Gets Squeezed…by More Ratings Downgrades
As if all the snow and below-normal temperatures of the last few weeks were not enough, Chicago felt the blast of another arctic chill…this one hitting them right in the pocket book.
Moody’s dropped Chicago’s rating from Baa1 and Baa2, with the negative outlook. This action triggered a couple of immediate events, including termination events on four floating rate swaps, further damaging the city’s reputation while raising costs it could ill afford.
Beyond the swap termination pain, the downgrade could raise Chicago’s borrowing costs, while causing some investors to get rid of their Chicago debt holdings.
Ouch – this is a BIG deal…read on…
Laurence Msall, president of the Civic Federation of Chicago said, “This is wakeup call for anyone still asleep as to the precarious financial condition of the state of Illinois and many local units of government especially Chicago,”
He further stated, “The downgrade has immediate financial costs to the taxpayers and puts enormous additional financial pressure on the city’s budget which is dependent on access to the credit markets.”
One of the single biggest reasons cited by Moody’s for the action is the “daunting” $20 billion unfunded pension liability.
There’s that pesky “P” word again….
Moody’s analyst Rachel Cortez stated, “The main thing is that another year has passed and gone by without a solution to the pension issues, both with respect to curbing the growth in the unfunded liabilities and dealing with the police and fire pension spike that is getting closer and closer,”
Shawn O’Leary of Nuveen Investments brings it home… in a short, simple and clear message.
“They are getting to a pretty critical point”, he warned. Nuveen views Chicago as a pre-distressed credit.
Interestingly enough, Fitch has Chicago at an A-, and S&P holds them at A+, both with negative outlooks. That is a pretty wide spread in ratings between the three agencies.
No matter what, investors should pay close attention going forward.
The ratings impacts $8.38 billion of GO debt, $542 million of sales tax bonds and $268 million of motor fuel bonds.
In a move that many have called “irresponsible”, Mayor Emanuel’s 2015 budget did not address the looming spike in pension contributions, which is now at a whopping annual contribution of $550 million.
Really???
[Editor’s Note: How can the CEO of a MAJOR city simply not address over half a billion dollars in current annual contribution expense as part of their budget process? The state of Illinois is having plenty of its own financial problems…so where is the stop-gap?]
Double Digit News – MSRB: Trading Volume Down, but Disclosures are UP
In Friday’s Bond Buyer, the MSRB shared some interesting stats about both the volume of municipal bonds trading in the market, as well as recent activity regarding disclosures.
Here are the stats:
Trading:
- $2.77 Trillion in Par was traded in 2014 (down 11% from 2013)
- Compared to $6.69 Trillion traded in 2007
- 8.91 million trades in 2014 (down 16% from 2013)
Disclosure:
- Up nearly 19% in 2014, over the prior year
The decrease in trading is being attributed to the post-Dodd-Frank environment and the increasing number of bank loans to issuers, which is moving them away from the secondary market.
The sharp increase in disclosures is believed to be a result of last year’s MCDC Initiative, which should not be a surprise.
[Editor’s Note: With banks becoming more involved in the municipal bond market with private placements, do you think this trend will continue…particularly if the low-rate environment persists as projected by the Fed?]
OUT & ABOUT
Conferences in Q1 – 2015:
The Bond Buyer and BDA’s National Municipal Bond Summit March 1-3, 2015
The Westin Beach Resort & Spa, Fort Lauderdale, FL
Resource: On Demand Replay of Continuing Disclosure after MCDC
Slides: Final Slide Deck for Continuing Disclosure after MCDC
NEW: A Couple of Muni Market Minute Updates
(My tiny new idea hint from last week – quick bits on ongoing topics…let me know what you think!)
It’s Official! Stockton is out of Bankruptcy…
After the much-debated wrangling and appeals by one of Stockton’s debtors, Franklin Advisors regarding the CalPERs system, which remained virtually untouched in the bankruptcy fallout, Judge Klein has approved Stockton’s exit from bankruptcy.
Franklin, who claimed they would only receive a penny on each dollar, will actually get 17.5 cents per dollar on its $36.6 million claim.
Editor Note: This is great news for the city…and now they have much work to do – writing thousands of checks to bring this over the finish line.
Detroit Schools…Wanting Their Own Grand Bargain?
As an update from some of our earlier MMM articles…
As the single biggest key to Detroit Public Schools (DPS) turnaround focuses on easing its burgeoning debt, reformers are looking to the $800 million public-private “grand bargain” which was crafted during Detroit’s recent Chapter 9 solution…and they are taking some serious notes.
While emphasizing that they are not “talking bankruptcy”, committee members have also said that nothing is off the table – yet.
David Heckler, President of the American Federation of Teachers Michigan/AFL-CIO said, “People say: ‘There was a grand bargain for the city, can something similar work for the schools?”
To bring it into perspective, the annual debt service for DPS is $56 million per year, or $1,200 per student.
“This absolutely has to be addressed,” Heckler said. “Alleviating the debt is extremely important for Detroit public schools to be able to move forward.”
Editor Note: DPS, also has some vertical hills to climb – and Governor Rick Snyder is also working at the state level on the Distressed School Fund. We will watch this closely and keep you posted.
Editor Commentary: What Do You Do When Your State Fails Its OWN Audit?
Fellow issuers…if you were an auditor faced with this scenario, what would YOU do?
In Monday’s Bond Buyer, an article caught my attention. In the State of New Mexico, their State Auditor, Tim Keller, had the dubious honor of putting his own state on the “At Risk” Report for failing to file their annual audits on time.
Oops….Seriously…
The state government and 43 other governmental units failed to file their annual reports in time. Of those listed, 13 – including the state – are more than one year behind.
So…is this a case of “do as I say, not as I do?” It sounds like a serious problem, and one that begins at the top.
“The public rightly expects the timely completion of audits to ensure our tax dollars are used appropriately,” Keller said.
In addition to the “At Risk” report, the independent auditing firm, CliftonLarsonAllen did not offer an opinion of the 2013 CAFR and also indicated that the 2012 CAFR was not even audited.
So why was no opinion issued for 2013?
Clifton cited eight issues, with the two biggest being:
- A finding that “the State lacks adequate controls and processes to properly consolidate all of the financial information for each audited component of the State into the financial statements in accordance with U.S. GAAP [generally accepted accounting practices]” and,
- That the state has not “identified and evaluated and/or disclosed all subsequent events and potential contingencies at the component or statewide level.”
One of the reasons cited by the State in being behind is the implementation of a new accounting system which will help alleviate some it its cash management remediation.
Having been in the midst of a few major system implementations myself, I know how challenging this can be. However, at the State level…and for two years? Not good.
While Moody’s cited many of these same issues in their rating, they maintained a Aaa – stable outlook on the state’s $398 million of GO debt. S&P holds them at AA+ with a negative outlook.
The State has pledged to make improvements across a number of areas to address the findings and has set aside $101 million reserve in case any adjustments are needed in resolving the cash reconciliation differences. That’s 25% of their debt outstanding.
While this eases my mind a bit, the article further shares something that happened in 2011 that has the hair standing up on the back of my neck…
There was a phony audit…and a major scandal involving the New Mexico Finance Authority which was used in a bond sale in 2012…where the executive management provided little or no input into the audit. Talk about a “culture of complacency”.
Houston, or should I say Santa Fe…we may have a problem here.
A couple other recent issues involved abuses of public resources and violations of state law at the Bernalillo County Treasurer’s Office, which includes the largest city in the state – Albuquerque.
In this instance, a November 2014 report shows that nearly $900 million in county investment purchases may not have been in the county’s best interest. It also appears certain brokers may have gotten special, preferential treatment.
There is so much more in this article…if you are interested, simply click here to read more… particularly what is going on with the tiny town of Bernalillo.
So why are New Mexico’s audit shortcomings my commentary?
This highlights what we, as issuers, need to be aware regarding our accounting & compliance programs and particularly how our piece of the accounting and debt puzzle ties in.
In the case of the agencies in New Mexico, they are all part of one big pie…and unfortunately, problems appear to be systemic and occurring at the top…the state level too.
As we have so clearly seen in other states…California, Michigan, Pennsylvania and Illinois most recently, county and local agencies look to the state for help in case they get into trouble. In New 
Mexico, would that be an effective solution?
Their debt appears to be very manageable compared to our four state friends above, BUT not 1) knowing where your cash stands, 2) having a watchful eye on your investments, and 3) being multiple years behind on audits…is simply a recipe for disaster…if it continues.
What do you think?
In closing, I have to share that much of the news in the muni market over the last several months has really been a bit scary – maybe not each piece in and of itself…
But… when they are put in the same bucket – I see the same themes…with no easy solutions in sight. Dominoes, snowball – I am not sure what to call it, but it is scary none the less.
What do you think?
I also realize that you are probably feeling pressures of your own. You have tight budgets, limited time and virtually no access to quality training that you can actually use…and the enforcement just keeps on coming.
It is starting to keep me up at night…mainly because I am worried about you.
While we continue to work on the next sets of trainings, namely, 1) Policies and Procedures (over 20% of issuers still need policies), 2) Bond Accounting Boot Camp –the Issuer’s perspective and, 3) PIC Essentials Blue Print – Building a Comprehensive Post Issuance Compliance Program…
Regis was able to get the free training from December on the website for new members, so please share this opportunity with your issuer friends. It’s simple, and quick to sign up…
It’s been divided into 3-segments and can be taken from the comfort of your office. They will also get their own copy of the Monday Muni Minutes by signing up for the training.
We are also making progress on a plan to re-offer PIC Essentials – the 10-Step Compliance Framework in an on-demand video series format – within a secure membership site.
It’s taking a bit longer than I hoped…online training and security is way more complicated than it sounds. We will send more details on all of these “next steps” via e-mail soon…
After all, time is money, right?
We hope you found this week’s edition of the Monday Muni Minutes valuable and informative.
As always, your comments are welcome…
To your compliance success,
Debbie
The greatest compliment you can pay us is to share this newsletter with your issuer friends….
P.S. Remember, invite your issuer friends to join us here on Issuer 2 Issuer and to get their free online training!
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