It’s been another BUSY week in Muni Finance! Maverick “Red Flags” in EMMA filings, Chicago’s CFO to Depart in 3 weeks, Slashed to the Bone – Wayne County’s Plan to Avoid the “Big B” and was LSU’s Bond Deal Killed by Bad Words? Find out… in today’s Monday Muni Minutes!
Enjoy and have a great week! Yours in Compliance, Deb P.S. Happy Mother’s Day on Sunday!
CURRENT EVENTS
EMMA Filings “Red Flags” for Maverick County
There is a lot to be said for having strong, proactive relationships with members of your finance team…and there is also a lot to be said for adhering to your fiduciary duty. We also know that – sometimes – change is needed…
Talk about getting a swift kick on the way “out the door…”
In this case, the swift kick came from Maverick County Public Facility Corporation’s soon-to-be former FA, Robert Rodriquez, CEO of Southwestern Capital Markets. It came in the shape of his final disclosure filing on EMMA regarding the Maverick County Detention Center 0r MCDC. (I know, it brings forth other memories for me too, but is not to be confused with the SEC Disclosure Initiative.)
And what a kick it was…ouch!
The Material Event Notice filed on April 17th, disclosed the following:
- Losses incurred for the MCDC facility are over $2.5 million for FY14
- A recent audit approved by the Commissioners was materially inaccurate
- The facility operator left in 2013, and is still owed money
- The FA has sought protective advances in regards to the bonds
- The Trustee for the bonds has been unresponsive
- The facility is still, as best estimated, losing $100,000 per month
- Full details can be read here
Additionally, the notice detailed that MCDC was not able to make its principal payment – which was confirmed by the trustee on EMMA here.
It appears that this is just one in a string of “Events of Default” under the indenture – primarily as it relates to the county intercepting revenues from the MCDC to use for operating expenses – a clear violation of the lease.
As you may recall, Maverick County has been sizzling with scandal – with at least 22 officials who have been indicted by the FBI and/or pled guilty to kick-backs and bribery schemes as of February, according to their local newspaper.
Based on the best estimates (and the auditor’s report comes with a disclaimer that the records from the county are inadequate to form a valid opinion), the County has lost over $6 million in the last three years.
Additionally, it was repeatedly noted that there are not enough accounting records to adequately substantiate whether the borrowed funds were used appropriately or not.
Hello?? Hmmm, can we say forthcoming IRS bond audit…based on that tidbit of information?
There will likely be ongoing struggles, as criminal cases continue to unfold – but those will not immediately address how to stem the losses being incurred by the MCDC…or who may be left holding the (empty) bag on this one – the bondholders or the citizens.
[Editor’s Note: The FBI – and I suspect, soon, the IRS will be involved. Here we have another case of scandal and extreme misuse – and, again, leaving bondholders, taxpayers and legislators with a really bad taste in their mouth. While many do not think additional oversight is needed, I truly believe that we, as an industry, want to reconsider that. Without public trust in our actions, processes and self-management efforts – the entire municipal sector will suffer.]
Breaking News: Chicago’s CFO Announces 5/20 Departure
While Mayor Emanuel may have won a second term in office, it looks like he may spend considerable time at the beginning of it rebuilding his executive team.
On Friday, Chief Financial Officer Lois Scott announced her resignation – effective May 20. Emanual’s chief of staff, Lisa Schrader, has also announced she will be leaving.
Scott has been lauded by the mayor as a pioneer…
A pioneer who provided great support to the city. The mayor said, “When I asked Lois Scott to serve as my chief financial officer, I asked her to stay for one year but she ended up staying for four.”
However, Scott’s tenure was clouded by the little shakeup in 2013 when former Comptroller Amer Ahmad (whom Scott recommended be hired) was indicted and later pled guilty to running a kickback scheme when he was Ohio’s State Deputy Treasurer.
Evidence later surfaced that Ahmad approved $165,000 in business to Scott’s private bond consulting firm prior to both of their terms in Chicago.
So, what happens next?
The city needs to attract business and investment, along with figuring out how to deal with their burgeoning liabilities – namely pensions.
Mayor Emanuel’s Chicago Infrastructure Trust – which was designed to bring private investment to city projects, has largely fallen flat. He also just announced that he will be phasing out long-criticized borrowing practices.
That is another tall order…
Those involve unwinding existing swaps at a cost of $200 million and converting all variable rate debt to fixed rate debt.
But that really does not address the heart of Chicago’s long-term financial crisis.
Phasing out or eliminating some borrowing practices when the city’s pension bill is slated to increase by 135% next year – to a whopping $1.1 billion? If calculations are correct, that increase will balloon to $1.9 billion by 2026.
A recent Moody’s report stated that, absent significant change, the pension funds will be broke by 2029. “Regardless of the ultimate answers, one outcome is certain: Chicago’s unfunded pension liabilities and ongoing pension costs will grow significantly, forcing city officials to make difficult decisions for years to come,” the report stated.
Yes indeed, Mayor Emanuel will have his hands full as he begins his second term in Chicago…
[Editor’s Note: Chicago is just another example of how burgeoning unfunded municipal pension liabilities rightfully should be high on everyone’s radar. Whether you are a municipal employee, a bondholder or a taxpayer, this financial tsunami will impact each of us.]
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”…sometimes it’s helpful to step into the bondholder’s shoes.
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!)
Time Running Out – No Sacred Cows in Wayne County’s Plan to avoid the “Big B”
As shared in earlier editions, Detroit Michigan’s home county – Wayne County, has been teetering on the verge of financial chaos – and bankruptcy – for months.
So…just how bad are their finances?
We caught a glimpse of how dire the situation was in February from Executive Warren Evans – who shared these grisly details just a few weeks after he took the helm.
- Lost 70% of their property tax revenue base since 2008
- A $910 million shortfall in their pension fund
- A $200 million bond-financed jail that is half-built and abandoned
- $700 million in GO Bonds and $302 million in LTGO Notes
On Friday, Evans released a “deep cuts” plan, which includes MAJOR changes to OBEBs – including axing retiree healthcare – in order to save their financial ship from sinking.
While that may sound ominous – and to Wayne County retirees it surely is – the scary part, according to Wayne, is this: “This plan will prevent bankruptcy even though in some areas we are worse off [than when] Detroit was pre-bankruptcy.”
So, what do these changes to retiree OPEBs look like?
It is a similar tool used by Detroit during their bankruptcy – shifting retirees to the national exchange with limited subsidies for the purchase of insurance. The plan also calls for moving employees to high-deductible plans and would eliminate healthcare for future retirees. Bet that is going to be HUGELY popular…
Here are some additional stats:
- Savings of $28.4 million in 2015, growing to $49.8 million in 2020
- Raising the retirement age to 62
- Changing the pension multiplier to 10 years (currently 3 to 5 years)
- All employees will take a 5% salary cut
- In total, the savings add up to $60.3 million
Evans shared this plan with elected officials and unions. He was clear that time is running out. “I understand how terrible this sounds but it will be terrible to everybody, and that’s as honest as we can be and as transparent as we can be,” he said.
Evans continued, “This is a plan that will fix it if we come together as Wayne County,” he said. “If not, it will come to the next level, whether that’s an emergency manager or a bankruptcy; trust me, it’s going to get fixed.”
[Editor’s Note: Wow – that last statement took some guts – and is calling it like it is. Talk about getting dropped in at the deep end and swimming hard. Evans has only been in this position for 90 days and he comes out with a plan to address years of fiscal mismanagement. Despite the choppy financial and emotional waters, I am scanning the horizon for fins – there may be lots of blood in the water soon.]
LSU’s Bond Deal Demise…Poor Communications?
As a follow up on last week’s article on Louisiana State University’s $114.5 million bond deal that was scuttled just two days after pricing…
Was LSU a victim of its own actions?
According to Matt Fabian, a partner at Municipal Market Analytics, possibly so.
Let’s see. Phrases like “financial exigency” and “state budget reductions” being used on the day you are pricing your bonds…well, those might just give me cause for concern too – if I was a potential purchaser of debt that would be outstanding – for decades.
While financial exigency does NOT mean academic bankruptcy, it does take into consideration the financial strain on tenured faculty. Clearly a misunderstanding in the media.
“It was a huge blunder by the school,” Fabian said. “This is what happens when an issuer isn’t taking its responsibility vis-à-vis the bond market seriously enough, which should generally undermine trust in the statements the school continues to make.”
Another critical point which bears looking at: If LSU’s financial condition could be so materially impacted by Louisiana’s state budget woes that it might have to even consider financial exigency, was that properly disclosed in the POS and OS? That is something that bears serious consideration due to how fast the deal fell apart.
What do you think?
[Editor’s Note: This highlights two things for us as issuers: 1) how critically important effective, clear and accurate communication is when dealing with the bond market, and, 2) making absolutely sure that material items like “financial exigency” are clearly disclosed in your offering documents. P.S. The same communications theory holds true for IRS auditors…just ask your tax counsel!]
In closing, we hope you found this week’s edition of the Monday Muni Minutes valuable and informative.
How is your Q1 -15 continuing disclosure “to-do” list is progressing? Please feel free to reach out with any questions!
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! 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 municipal business manager conference presentation in mid-May too. I am so excited to be sharing with so many issuers at one time! The pre-event survey responses have been fascinating!
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