Happy President’s Day! In this week’s Muni Minutes: The Winds of Change & ABAG’s Embezzlement, Crowdfunding for Muni’s, Wayne Goes to Junk and Illinois Budget Magic…?
CURRENT EVENTS
Feel The Winds of Change Blowing? ABAG Embezzlement Probe
Sacramento Delivers Response Quick…A Sign of Things to Come?
In a rather quick response, Sacramento is engaging several follow-up actions related to the $1.3 million bond fund embezzlement from ABAG director: Clarke Howatt.
Per the Bond Buyer article, among the actions which will be taken very shortly is a bond oversight hearing as well as forming a task force to increase future bond accountability.
Hmmm….
Controller Betty Yee will also conduct an audit for fiscal years 2012 through 2014 on ABAGs internal administrative and accounting controls. She stated, “As California’s chief fiscal officer, when public money goes missing, I need to determine how it happened and whether effective controls are in place.”
The controller’s office also stated “we have our own responsibilities independent of that to make sure state funds are secure and internal funds are in place”
California Treasurer John Chiang stated “the ease in which one of ABAGs leaders allegedly fleeced more than a million dollars in bond funds raises concerns regarding whether there are sufficient safeguards at the thousands of state and local agencies which are responsible for nearly three-quarters of a trillion bond dollars”.
You may wish to read that again.
This is a well-placed warning and, I think, a sign that states are also going to be ratcheting up oversight efforts along with the IRS and SEC.
The request for qualifications is currently out for a forensic auditor and also bond council to review any bond that Howatt worked on. The controller’s audit is expected to take around 2 months, but could extend depending on what they find within the first two years of documents.
I see California, once again taking the lead on defining controls which will have far-reaching impacts .
Treasurer Chang shared that, due to the myriad of reasons why bonds are issued, the management and spending of bond proceeds could differ based on the controlling documents.
Unfortunately this means that inconsistent and sometimes less rigorous practices could be employed.
He concluded, “these practices may in some cases expose the agency to a greater risk of fraud and abuse which could ultimately lead to the loss of public funds”.
What do you think?
[Editor’s Note: So, in addition to the SEC and IRS are pledging to pay closer attention to muni debt as a whole…and smaller issuers going forward, the states may end up developing or reinstating pre-bond issuance oversight boards as well as tightening up the compliance reins on a state-by-state basis.]
Crowdfunding with a Twist…of Muni?
I am not sure if many of you read the Bond Buyer on the 12th, but an unusual article caught my attention: Small investors can have a piece of the World Trade Center Debt….via a new Crowdfunding site called Fundrise, which is an LLP created solely to hold the 3WTC debt.
If you are not aware of what Crowdfunding is – that is where large sums of money can be raised online. This is typically used via popular social media networks with lots of public emotion and visibility.
Not your normal municipal broker environment for sure….
That’s right – 3 WTC Tax-exempt bonds are available via online purchasing…in smaller denominations ($5,000) which is much
less than the $100,000 minimum denomination offered during the primary market sale, usually reserved for institutional investors.
Now, before you get all excited, there are several other twists to consider:
- First, the bonds are considered highly speculative…and therefore, riskier
- Second, there is no active secondary market for trading these particular crowdfunded bonds
- Third, the Port Authority of New York and New Jersey are not involved in the crowdfunding effort
- Finally, the vast majority of the space in 3WTC is still not rented and the market for leasing such space is highly competitive
Congress approved the Liberty Bond program after Sept 11, 2001 – and this provided the unusual ability for tax-exempt status for rebuilding the World Trade Center.
3WTC is expected to open in 2018.
[Editor’s Note: What do you think? I know that Crowdfunding has really gained in popularity for a whole host of reasons…but as an alternative online vehicle to purchasing tax-exempt bonds? We will have to see how this shakes out…]
More on Wayne County, MI – All Ratings now Junk with Negative Outlooks
In last week’s Muni Minutes, we discussed the challenges that both Pennsylvania and Michigan faced. Of particular concern was Wayne County, MI with their pending “fiscal Armageddon”, which has really been in the making for several years.
The rating agencies agree that the information presented by the Ernst & Young report are troubling….to the point where both S&P and Moody’s joined Fitch in reducing their ratings on the County’s Bonds to junk status, with negative outlooks…
“The downgrade to Ba3 reflects a very stressed financial position tied to an underlying structural imbalance that county management had been unable to curtail given the steady loss of revenue.” Said Moody’s analyst Matthew Butler, “the negative outlook reflects our expectation that the county faces hurdles in implementing significant cost reductions.”
To recap, the E&Y report showed that the finances were worse than originally projected – with the expectation that the county 
would be almost out of cash in summer 2015 (less than $35 million in liquidity) and actually be in a negative cash position in 2016.
So how big of a deal is this?
Well for starters, Wayne County is not only Michigan’s largest county (and the home of Detroit), but it also one of the most populous counties in the entire country.
As shared last week, the county has an accumulated deficit of $161 million and pension funding has decreased to 45% today – down from 95% ten years ago. Wayne has $730 million of LTGO Bonds and $340 million of LTGO Notes outstanding.
The report squarely pointed to significant losses in property tax revenues since 2009 – by 21%, as well as skyrocketing “significant legacy expenditures” of nearly $100 million annually for retiree healthcare and pension costs, which is says are “unsustainable.”.
Fitch analysts also cite the hiring of a restructuring chief as “raising concerns” about timely debt service payments in the future.
The county needs to come up with $70 million per year to cover the shortfall and address the pension liability.
In the article last week, Wayne County Executive Evans was clear that restructuring their debt, a state takeover and bankruptcy are all options stating, “The bottom line is everything is on the table, there’s no sacred cows.”
[Editor’s Note: As with Detroit, Stockton and other recent bankruptcies, the pattern was remarkably similar beforehand. I really hope that Mr Evans can turn this around and reach a workable solution short of ending up in bankruptcy court…I am not holding my breath though.]
OUT & ABOUT
Conferences in Q1 – 2015:
The Bond Buyer’s National Outlook 2015 Conference
NEW DATE: February 18, 2015 | Metropolitan Club, New York, NY
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
Editor Commentary: What’s Behind the New Illinois Governor’s Budget 
Curtain?
Like all eyes swing to Iowa to glean information on presidential hopefuls…in two days most muni analyst’s eyes will be on Illinois to see how Governor Bruce Rauner plans to erase billions of dollars of red ink and solve his state’s long term financial problems.
Illinois faces a $1.4 billion dollar shortfall out of it total $35 billion general fund budget.
Part of this budget cut call relates to nearly $3 billion in income tax revenue that is lost due to the partial expiration of an earlier income tax hike. The governor may request that the rates be extended, but most experts are already preparing for deep cuts to be made in budget expenditures.
Among solutions being speculated include a retroactive increase in the income tax rate for individuals as well as corporations. There’s also the possibly that Rauner will broaden the income tax base to cover some retirement income if individuals have income in excess of $50,000.
Illinois is one of only three of the 41 states with an income tax that does not tax pension income….yet.
What are your thoughts on how well that little change will go over?
Other recommendations include restricting discretionary spending as well as including a temporary elimination of the sales tax exemption for food and non-prescription drugs to give a temporary source of new revenue.
One of the big sticking points which is still under discussion pertains to the Illinois Supreme Court’s pending decision regarding the states 2013 pension overhaul, which was overturned. The overhaul allowed for pensions to be adjusted to balance declining revenues rather than just being protected carte blanche at the expense of other services.
As we can see, burgeoning pensions keep coming up again and again and again…Illinois is no exemption.
Illinois has pension pressures of $111 million of unfunded pension liabilities, while its borrowing costs are high, given its weak financial position.
This is sounding like a catch 22 situation…
In several earlier articles late last year regarding the pension case before the Supreme Court, there was a heated argument that says “the Illinois Pension Clause does not specifically state that pension obligations shall be paid under all circumstances even to the exclusion of the full funding of necessary services for the health safety and welfare of the people”.
This will be an interesting case to watch as in earlier cases pension legislation and cuts were invalidated because such cuts were found to violate the States Constitution clause that protects pensions under “an enforceable contractual relationship, the benefits of which shall not be impaired”.
The State countered that the US Supreme Court has long held that the State has police powers, which allow it to alter contracts to provide for the welfare of its citizens.
So…what say you?
In closing, As shared last week, your Issuer 2 Issuer team is hard at work developing three new programs for post issuance compliance education. The PIC Essentials members have already suggested 1) Policies and Procedures, and 2) Bond Accounting Boot Camp – both from the Issuer’s perspective. There seems to be a tremendous interest…plus over 20% of the participants on the Orrick webinar indicated they did not have current policies in place.
The third is a more robust offering, covering Issuer compliance & accounting needs and solutions from A to Z.
Now, this will be approached from the Issuer perspective, not as an underwriter or bond counsel. However, it will cover the Regs and key aspects of your Bond Documents as well – after all, that is what drives what you, as the issuer, have to comply with.
More on that to come later…
We have also had multiple requests to re-offer the PIC Essentials course that just wrapped up on the 6th. The team is discussing what may be the best way to accomplish this while still focusing on the next series of classes…
So stay tuned…OK?
As you can see, the webinars and resulting conversations are hugely beneficial…to all of us!
While we continue to watch what comes out of California with the ABAG case and MCDC, the need to provide quality issuer-focused post issuance compliance training that is convenient, relevant and reasonably priced is emblazoned on the forefront of my mind.
After all, time is money, right?
I also have another tiny, but fun idea swirling around – geared toward getting you information easily and more efficiently…I need to talk to Regis first though…I’ll share more next week!
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. 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.