WOW – It’s been another SUPER BUSY week! Q-1 Quarter-end and April 15th (Tax Day) seem to be the two driving thoughts coming into our Monday…so I will keep this edition brief and to the point again this week!
So…here goes…this week’s “Mini” Monday Muni Minutes!
Enjoy and have a great week! Deb
CURRENT EVENTS
Got Road Projects? Take a Look at TIGER Grants…
The DOT just announced that it is seeking applications for $500 million worth of Transportation Investment Generating Economic Recovery or TIGER grants,
which are available to fund road and transportation projects which will have “significant impact” at the national, state or regional level.
That’s a lot of green paper…
One webinar on the TIGER process was held last week, with a second scheduled for tomorrow the 14th, a third on the 23rd and the final one on April 28th.
In its seventh round of funding since 2009, TIGER grants have funded 342 projects across all 50 states, plus DC and Puerto Rico – for a total of $4.1 billion. States, cities, counties, US territories, metro, regional transit and port districts, tribal governments, as well as state and local political subdivisions are eligible for the funding.
Since TIGERs inception, there have been more than 6,000 applications requesting over $124 billion in project funding, so this round is expected to be highly competitive.
“The TIGER program has funded innovative projects, sparked new partnerships, created intermodal connections and enabled hard to fund projects that are changing the face of communities across the country,” according to Anthony Foxx, the DOT Secretary. “We are excited to kick off this year’s competition,” he said in his DOT press release.
With the national Highway Transportation Fund still facing a yet-to-be-resolved looming deficit, TIGER is a solid option for projects. There are, however, some key points to be aware of…
Key points:
- Grants are generally capped at 80% of the project
- 100% may be funded for qualifying rural projects
- 20% or $100 million is dedicated to rural areas
- No more than 25% or $125 million can be awarded to a single state
- Planning, preparation and design costs may fall outside the funding, so be prepared
In addition to the webinars noted above, you can also sign up for the virtual summit held on April 16th, where applicants can get specific assistance, plus best practices and “lessons learned” tips.
Please note that TIGER requires a pre-application with basic information on the project, such as location, cost and its urban or rural classification. The pre-application deadline is 11:59 EDT on May 4th.
Final applications with all of the detailed information will then be due no later than 11:59 EDT on June 5th.
[Editor’s Note: TIGERs 2015 focus appears to be capital projects that will stimulate economic development and community revitalization while providing improved access to disconnected urban and rural areas. This will certainly be an interesting process to watch unfold…]
FL Power Agency Faces Rate Regulation if Bill Becomes Law
In what would be seen as a ratings downgrade event for the Florida Municipal Power Agency, House Bill 773, if passed, would require FMPA to come under the regulatory rate-setting authority
of the Public Service Commission.
Such regulatory action would impact 31 municipalities who own the FMPA as well as the 2 million Floridians they serve. FMPA has about $1.7 billion in long-term debt covering five projects.
So, why would this happen?
HB 773 came to life when the town of Vero Beach could not end its contracts with the FMPA due to bond protections…while complaining to no avail about high electric rates in their incorporated Indian River County. In many cases, customer rates are 41% higher.
Requested by Rep Debbie Mayfield, Vero Beach, an operational audit was conducted by the Auditor General’s Office. This audit raised harsh criticisms in 15 key areas about FMPAs overall operations over nearly a two year period from 2012 to 2014.
Three key issues caught my attention:
- Entering into a swap in advance of a bond issue – when the bond issue was canceled. The agency is still working on how to unwind the swap with a negative MTM of $150.3 million – which must be addressed by Sept 30th
- Agreeing to pay its CEO six month’s salary, plus health insurance premiums for life…if terminated for cause
- Lavish expenses including $106,850 on meetings, $23,844 on tickets, gifts and parties, and $12,030 on flowers and decorations
While Ms Mayfield continues to seek HB 733s passage, the FMPA’s chair responded, “I want to be clear that FMPA owns every decision we have made, including decisions that didn’t turn out the way we hoped,” said FMPA board chairman Bill Conrad. “We will address every finding in the audit.”
[Editor’s Note: If you are interested, you can read the entire audit here.]
Morgan Stanley Pays $675,000 for Misstated Muni Interest
Last week, Morgan Stanley Smith Barney and Morgan Stanley & Co., two divisions of Morgan Stanley, agreed to be censured and pay a fine of $675,000 for various FINRA violations surrounding $880,000 in taxable “short sale” interest that was improperly classified as tax-exempt to the bondholders.
In its audit of the firm’s books from mid-2009 to the end of 2013, FINRA found that “During the relevant period, Morgan Stanley generated or held more than 1,500 short positions in tax exempt municipal securities that corresponded to long positions in customer accounts.”
Additionally, FINRA cited “The short positions resulted primarily from trading and operational errors. In these instances, Morgan Stanley paid the interest to the customer and the interest was taxable.”
So, what is a short position?
It’s where the firm sells bonds that it does not own at the time and has to go into the market to purchase them to make delivery on the transaction. In that only interest paid from municipal issuers is considered tax-exempt, short positions are taxable.
In this case, the short positions originated in the retail branches, which were not known by the muni desk. Additionally, the firm’s tax department, which coded and issued the 1099s for tax reporting, was not aware the short positions existed.
Separation of duties without proper system checks became more of a left hand not knowing what the right hand was doing situation…and it was costly.
Christine Jockle, a Morgan Stanley spokesperson said “The firm addressed the tax issues with the [Internal Revenue Service] without impact to its customers. The firm cooperated fully with FINRA and revised its procedures to prevent recurrence of such issues. FINRA did not allege any willful or fraudulent behavior.”
[Editor’s Note: The good news is that the bondholders did NOT have to file amended tax returns. That would have been ugly. As a compliance geek, I am shaking my head…partly in disbelief and partly in sadness. I distinctly remember how utterly chaotic it was during the 2009 to 2013 period…with insurers failing, the auction rate debacle, credit and investments freezing up…just to mention a few. Then we add Dodd-Frank to the mix…]
OUT & ABOUT
Conferences:
The Bond Buyer’s Midwest Municipal Market Symposium
June 30, 2015 InterContinental Chicago Magnificent Mile, Chicago, IL
Resources:
Have you had time to check this site out yet? I am really enjoying the “new bond series” being featured each week – which provides insights into current public offerings around the country.
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
Downloadable White Paper: Jargon Watch
Ever wonder what a Black Swan is or Break the Buck means? Find out here.
Muni Market Minute Updates
(Quick news bits on topics we’ve covered in earlier MMM editions!)
What are Chicago’s Options as Wells Fargo Swap Struggle Persists?
Unless Wells Fargo lowers its rating threshold for the three swaps it holds, Chicago could be on the hook for $38 million in swap termination payments.
That’s serious dough that the city cannot afford. So, what are Chicago’s options?
- Continue negotiating with the bank and keep the swaps in place
- Re-market some of its variable rate debt into fixed rate
- Would the city need to cancel the swaps and pay?
- Leave the variable rate debt intact and pay the termination fees
In addition to the four Wells Fargo swaps, the city has an additional 20 swaps with are tied to $2.4 billion in debt. The total negative swap MTM is almost $400 million as of December 31, 2014.
Two more swaps face termination events if Moody’s drops the GO or sales tax rating another notch. The negative MTM on those is $33 million.
On the upside, the City’s finance team has terminated sevens swaps/options on a billion in debt and negotiated more favorable deals on 12 more facilities tied to another $1.3 billion.
Finally, the city currently does not have to post collateral on any of its swaps. That is pretty amazing – and welcome news while negotiations continue.
Editor Note: [I remember watching our swaps positions very closely when the market first tanked and during the following years until we re-marketed them to fixed rate. We had daily re-marketing, which meant we would have had to post every morning – should posting events have been triggered.]
IRS Grants QSCB Spending Extension to “Distressed” School District
In a private letter ruling issued last December, but not released until last week, the IRS granted a 16-month spending extension to a “financially distressed” school. The school was not named in the PLR.
Under federal tax law, issuers of QSCBs must expend 100% of available project proceeds within 36 months of issuance – or they must redeem bonds with any outstanding proceeds remaining.
As has been the trend over the last several years, issuers of QSCBs have been successful in being granted extensions, as long as requests are made BEFORE the due date and the reasons are valid and were unforeseen.
It should be noted that any PLR is applicable only to the issuer requesting it – as it is fact and case specific. However, we should definitely pay attention to those facts and circumstances.
[Editor’s Note: Another set of key points about this bond buyer article is not to confuse QSCB spending requirements and this PLR with spending requirements of tax-exempt (TE) bonds. For TE bonds not to be classified as hedge bonds, there is an 85% spending requirement within three years. However, there is no option to request an extension for TE bonds.]
In closing, we hope you found this week’s edition of the Monday Muni Minutes valuable and informative.
We wish you a smooth quarter-end schedule this week. Chat soon!
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 on Issuer 2 Issuer and to get their free online training, PIC Basics! Also, details will be coming on the re-release of “PIC Essentials” very soon.
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.