As a followup on our MCDC focus last week – we’ll take a look at the Underwriter’s perspective today. Also, take a peek at the “Top five” report in the article on Illinois’ Chapter 9…
Remember to sign up for the IRS Webcast: QSCBs on June 18, 2015 – see link in Out & About!
So…here goes…today’s Monday Muni Minutes!
Enjoy and have a great week! Deb
CURRENT EVENTS
Illinois Facing Cash Crisis – While the Budget Fight Continues
Interesting things can happen when Illinois, who holds the dubious title of the lowest-rated state in the nation (at the A- level), says it’s having cash problems.
Investors and rating agency analyst are paying close attention…
After an ongoing stalemate regarding its 2016 budget, Illinois governor Bruce Rauner said the state must prepare for a cash flow challenge.
Rauners plan, called a “turnaround plan,” proposed cutting $6 billion from the budget beginning July 1st. He’s seeking a property tax freeze, caps on judgments of workers’ compensation claims, as well as constitutional amendments on term limits and redistricting.
Then there’s that tiny balanced budget issue…
Citing the requirement for a constitutionally balanced budget and unwillingness to compromise…
“We are going to be facing very serious operating and cash flow challenges,” Rauner said, “and the state must prepare contingency plans, “and “get ready for the very possibility that we are facing a cash crisis.”
So, what’s causing the stalemate?
Everyone acknowledges that the $36 billion plan is missing about $3 billion in revenue to balance it. Further, opponents believe the plan will not work because it relies on $2.2 billion from pension reform that may not withstand legal fights in Illinois.
The Governor also met with Mayor Emmanuel from Chicago, expressing disappointment that their city just won approval of legislation…giving Chicago more time to contribute to its public safety pension fund.
How will it end?
“We’ve seen this movie before,” Rauner said, when referring to the move to defer the payment of pension obligations.
He also plans to look for ways to address pension reform in the wake of the Illinois Supreme Court decision last month.
[Editor’s Note: Issues continue to heat up as most states are facing identical budget challenges. The budget or “B” word, is causing a lot of growling in finance departments across the land… With the increased focus on transparency regarding fiscal health, addressing deficits and the state of OPEBs while costs are skyrocketing, we can expect to read a lot more on this.]
Underwriters: We Also Fear MCDC for Disqualifications
Following up on last week’s Muni Minutes focus on issuers feelings regarding the MCDC, this week we’ll chat about our friends the underwriters.
Why should we pay attention?
Let’s face it, for the vast majority of us, it’s the underwriters who get our tax-exempt bonds to market and in the hands of our bond holders. So what would happen if underwriters were disqualified from taking our bonds to market – even if based on something that happens in the firm outside of the muni segment?
Based on what they self-reported in the MCDC, many underwriters fear just that.
But, hey, just get a waiver, right?
While waivers have been granted by the SEC for firms who “break the law,” recent criticisms of the waiver practice, combined with the enormous scope of the MCDC participation, raises unexpected, yet valid concerns. Concerns that SEC chair Mary Jo White seems to validate.
“For example, a firm’s broker-dealer charged with violating our net capital rules could, as part of a settlement with us, agree to retain a compliance consultant to help shore up the companies’ policies and procedures and to ensure future compliance,” she said.
SEC chair White continued…
“Absent a waiver, this particular term of the settlement agreement alone – a provision that is obviously designed to prevent the re-occurrence of the net capital violation and strengthen the broker-dealer’s compliance- could disqualify the entire firm from participating in private placements under Rule 506 because agreeing to retain a compliance consultant in this context constitutes a limitation on the business of the broker, which is an event triggering disqualification under that rule.“
Well, that makes perfect sense…right?
Although scathing views from Senator Barbara Boxer as well as recent waiver dissensions from SEC Commissioners Aguilar and Stein are causing increased focus, the jury is still out on where this will go.
“Hypothetically speaking, it would be very surprising if even the Democratic commissioners would do anything to make the MCDC not a success,” said one unidentified attorney.
[Editor’s Note: We will continue to watch how the aftermath of the MCDC reporting plays out in the enforcement arena. As expected, it is still providing plenty of painful – and not unexpected – consequences.]
If Law Passes – Oregon’s Bonding Clout May Cross State Lines
Oregon house bill 2492-A, introduced by Treasurer Ted Wheeler would give the Oregon Facilities Authority the power to issue bonds for projects beyond state lines.
Dubbed multiple-state issuance, Oregon is planning to follow a trend set by New York, Wisconsin and Wyoming.
OFA has been around for 26 years and issued over $3.2 billion in tax-exempt revenue bonds during its life time. It focuses primarily on cultural non-profits, housing, education and hospitals – with a particular emphasis on smaller issuers.
It’s a SNAP – or is it?
On its face, the focus of this bill would be to strengthen the “SNAP” or small nonprofit accelerated program, allowing small nonprofits better access to the tax-exempt bond market – without breaking the bank.
Maybe not so much…
If the bill is not passed before the legislature adjourns in a few weeks, it will die. If it becomes law, residents of the state may gain a personal income tax exemption for interest on OFA issued bonds… BUT only for projects within Oregon’s state lines.
[Editor’s Note: As we all know, cost of issuance can be a significant expense – even more so when the bond deal is small – say under $5 million. Small issuers can benefit from the economies of scale that OFA offers…but what about oversight?]
OUT & ABOUT
IRS Webcast THIS WEEK:
Qualified School Construction Bonds – QSCBs
June 18, 2015. Register Here
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!)
What’s Next if Illinois Allows Chapter 9?
In a fascinating report from Civic Partners LLC and Mark Joffe, an independent state and local government research analyst, roughly 20 local governments in Illinois meet the “distressed enough to qualify for Chapter 9” criteria although 5 won honors as top candidates…
The Five are:
Dolton, County Club Hills, Sauk Village, the city of Blue Island and the Village of Maywood.
So why did these make the list?
Simply stated – financial mismanagement.
“That’s one reason I felt strongly about highlighting those communities; there’s confirming evidence above the numbers,” said Joffe.
He went on to share, “I’m not saying these are absolutely the five most likely cities to default or get a bankruptcy, but clearly they’re among a very small number of municipalities that are vulnerable to bankruptcy given their extremely bad position.”
“A lot of times these things flow off the radar because they’re not rated,” said Joffe,”It’s good to do this full sweep because you find things that are not found by ratings agencies.“
The City of Dolton’s administrator, Stan Urban, responded, with a strong rebuttal:
“We are not anywhere near considering or talking about bankruptcy,” he said. “We have money in the bank, so I don’t know where they came up with the idea that we’d be a candidate for bankruptcy. I take personal offense at that.”
But wait, there’s one small detail…
Now, remember that the State of Illinois does not have a provision for Chapter 9 bankruptcy for local governments – although House Bill 298, which would make it an option, is still being considered in the legislature.
What do you think?
[Editor’s Note: I encourage you to read the report for yourself and draw your own conclusions…very enlightening information indeed.]
Follow Up: It’s been a Wild Ride for Wayne County
Last week Wayne County shaved $20 million a year from its budget after reaching a settlement with 5,000 pensioners, who retired before 1990, regarding paying their retirement healthcare 
benefits or OPEBS.
“It was difficult to ask this large group of retirees to agree to reduce their health care benefits this drastically,” Evans said in a statement. “Unfortunately given the county’s financial condition there was no choice.”
That’s a big deal.
However, just a few days later, investors officially heard the first official bankruptcy discussion when the county came to market with $187 million of taxable limited-tax general obligation notes.
Hiring Orrick, Herrington and Sutcliffe as special bankruptcy council for the deal – due to price on Thursday, June 18th – the County emphasized in their offering documents and online investor communications how these notes could fare during a bankruptcy proceeding.
“If an issuer of bonds is seen as being in significant financial distress, where the possibility even of bankruptcy is a consideration, then there is naturally a greater interest and focus on these disclosures in the risk section of the prospectus that relate to the possibility of the issuer filing a Chapter 9 bankruptcy,” shared Robert Gordon, an member of Clark Hill’s restructuring law practice.
That’s also a big deal.
As a note, here are a few more stats from Wayne County’s offering documents:
- $74 million negative general fund balance – September 2014
- Expected negative balance of $64 million – September 2015
What are your thoughts?
[Editor’s Note: Did you catch that tiny detail regarding the retirees? The plaintiffs in this lawsuit have been retired since before 1990 – that is 25 years ago! This brings home just how widespread the pension funding problem is – even from a historical perspective. It will also be interesting to see how these notes price on Thursday.]
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 let us know what you think about any of the articles!
To your compliance success,
Debbie
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