Category Archives: State & Local Finance

OPEB Brief: The Credit Impacts Of OPEB Obligation Bonds

Source: S&P Global Ratings, March 11, 2019
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Other postemployment benefit (OPEB) underfunding of obligations is pervasive across U.S. state and local governments, and costs are likely to continue to rise rapidly. Although, compared with pensions, these obligations may have some more flexibility in how they’re provided, we recognize that funded levels are almost universally lower than those of pensions and could quickly become a challenge to budgets if not addressed. With the implementation of Governmental Accounting Standards Board (GASB) Statements Nos. 74 and 75, many governments are seeing large new OPEB liabilities on their balance sheets that are growing due to insufficient contributions (see “Credit FAQ: New GASB Statements 74 And 75 Provide Transparency For Assessing Budgetary Stress On U.S. State & Local Government OPEBs,” published March 14, 2018, on RatingsDirect). In response, governments are looking to OPEB obligation bonds (OOBs) as a way to address funding concerns. Depending on the circumstances surrounding the OOB, issuance could have rating implications.

Puerto Rico and its banks will benefit from US government-led economic analysis

Source: Jason Mercer, Genevieve Nolan, Moody’s, Sector Comment, March 10, 2019
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On 4 March, the US Department of Commerce’s Bureau of Economic Analysis (BEA)announced that later this year it will produce new economic data for Puerto Rico to estimate the island’s GDP. The move is credit positive for the island’s banks because it will bolster reforms by the island that should encourage unbanked residents to participate in the banking system, thereby spurring loan growth and increasing operating margins. Among the banks that will benefit are Popular Inc. (B2 review for upgrade, b1), FirstBank Puerto Rico (Caa1review for upgrade, b3) and Banco Santander Puerto Rico (BSPR, Baa1 stable, ba3).

Rating revisions: Upgrades top downgrades for fourth straight year in 2018

Source: Susanne Siebel, Florence Zeman, Gail Sussman, Leonard Jones, Alexandra S. Parker, Naomi Richman, Timothy Blake, Lisa Goldstein, Susan I Fitzgerald, Kendra M. Smith, Kurt Krummenacker, Michael Mulvaney, Moody’s, Sector In-Depth, March 8, 2019
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The number of upgrades outpaced downgrades for the fourth year in a row in 2018,continuing a trend of improving credit quality across public finance. Additionally, the $99.4billion in upgraded debt (or par value) widely outpaced the $42.0 billion in downgraded debt,a reversal from 2017 when action on major issuers such as Illinois (Baa3 stable) and Puerto Rico (Ca negative) contributed to a wide lead for downgraded debt. The fourth quarter in2018 was similar to the full year as the number of upgrades widely outpaced downgrades and upgraded debt ($22.2 billion) topped downgraded debt ($15.8 billion), led by a $6.1billion upgrade on the city entity that owns and operates Los Angeles International Airport(LAX, Aa2 stable)….

Rise in uninsured population is negative for consumers, hospitals and governments

Source: Rebecca Karnovitz, Shahdiya Kureshi, Atsi Sheth, Daniel Steingart, Nicholas Samuels, Jessica Gladstone, Lisa Goldstein, Dean Ungar, Moody’s, Sector In-Depth, March 5, 2019
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The number of uninsured individuals in the US has been rising since 2017, and we expect it to continue to increase due to rising insurance premiums and recent federal and state policy changes. The trend is negative for consumers, healthcare providers and governments because uninsured households are less likely to seek medical care and are particularly vulnerable to healthcare-related financial shocks. Healthcare providers may therefore face reduced volumes and greater levels of bad debt and charity care. The federal government and states may also take on some of the costs of uncompensated care through transfer mechanisms to hospitals.

America’s schools are crumbling – what will it take to fix them?

Source: Michael Addonizio, The Conversation, March 5, 2019

….Indeed, miserable conditions like these are not only hard on the children. They seriously impair school districts’ ability to retain their most valuable asset – their teachers. Teachers leave their jobs for a variety of reasons, but facility quality is a key factor.

Addressing the infrastructure needs of America’s public schools will be costly. However, continuing to ignore them would be even more costly. The educational impact of substandard facilities on students cannot be overstated…..

….Funding for public education, including school facilities, is primarily a state and local matter. But while most states have tried to help poor local districts with basic operating expenses – such as paying teachers and buying supplies and materials – state support for school infrastructure has been much less reliable.

Local districts vary widely – usually along lines of race – in their ability to build or renovate schools. Property-poor districts, including most big city districts, are left behind……

Arizona Sports & Tourism Authority: AzSTA maintains key source of bondholder repayment with back-to-back wins in tax litigation

Source: Patrick Liberatore, Eva Bogaty, Leonard Jones, Moody’s, Issuer Comment, February 27, 2019
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On February 25, the Arizona Supreme Court affirmed a state appellate court’s 2018 order upholding the validity of a car rental tax levied by the Arizona Sports & Tourism Authority (AzSTA, A1 stable), a credit positive for the authority. The tax in Maricopa County (Aaa stable) comprised about 25% of AzSTA’s $54.9 million annual revenue pledged to bondholders as of the fiscal year ended June 30, 2018. The state Supreme Court also upheld the nullification a 2015 order by a lower court that the Arizona Department of Revenue (ADoR) must refund over $150 million of tax collections to car rental companies.

Pension Brief: Are Asset Transfers A Gimmick Or A Sound Fiscal Strategy?

Source: S&P Global Ratings, February 19, 2019
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(Editor’s note: This publication marks the start of a series of short comments on credit matters of interest in the municipal retirement space. This first “Pension Brief” follows up on our publication one year ago surveying pension reform initiatives across the states (“Recent U.S. State Pension Reform: Balancing Long-Term Strategy And Budget Reality,” Feb. 9, 2018). ….)

…. To face persistent and growing pension challenges, some U.S. state and local governments have looked to develop creative solutions to help mitigate expanding liabilities and bolster wanting asset levels. ….

Illinois Budget Proposal Places Risky Bets On Asset Transfers and Graduated Income Tax

Source: S&P Global Ratings, February 22, 2019
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S&P Global Ratings believes that Illinois’ (BBB-/Stable) executive budget proposal precariously balances the current budget, but punts measures to address fiscal progress to future years. It prioritizes service solvency at the expense of lower pension contributions and does not make meaningful progress toward tackling the $7.9 billion bill backlog or projected out-year deficits….