Weekly Credit Outlook for Public Finance - March 20, 2014

8/12/2019 Weekly Credit Outlook for Public Finance - March 20, 2014

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MOODYS.CO

MARCH 20, 20

FEATURE ARTICLESCalifornia Pension Reform Proposal Will Not Appear on 2014 Ballot, aCredit Negative for Local GovernmentsMayors in Anaheim, San Jose and other cities halted efforts for a statewidevote in November that aimed to help local governments with pensioncost flexibility.

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Rising Ridership is Positive for US Transit AuthoritiesTransit authorities are boosted by the highest public transportation use inin 57 years and growing sales tax revenues that they rely on for capital and

operating expenditures.

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Court Ruling Upholding Nassau County (NY) Wage Freeze isCredit PositiveThe ruling affecting police employees allows the county to avoid thereimbursement of $230 million (9.2% of budget) in lost wage increasesfrom 2011 through 2013.

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RESEARCH HIGHLIGHTSJefferson County, ALs Lower GO Leverage Fuels Higher Recoverythan SewerThe countys General Obligation Limited Tax creditors realized an overallrecovery rate of 88%, ranging from 88%- 95% for warrant holders to 0%for parity interest rate swaps. The overall GO recovery rate is much higherthan the overall recovery rate of 54% realized by county sewer warrantcreditors and slightly higher than our previous expectations.

7

Two-Midnight Rule Will Reduce Revenue for Most Hospitals We expect the two-midnight rule to reduce hospital operating profits in2014 because it will lower Medicare reimbursement for many cases.Although the rule will affect all acute care hospitals, smaller communityhospitals with shorter average lengths of stay and less complex cases aremost at risk.

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RATING CHANGE HIGHLIGHTSChicago Board of Education's (IL) GO Downgraded to Baa1;Outlook NegativeAffecting $6.3 billion, the downgrade to Baa1 from A3 reflects close ties tothe City of Chicago, whose rating we recently downgraded.

Chicago Park District's (IL) GO Downgraded to A3 from A1;Outlook Negative Impacting $826 million, we believe Chicago city officials influence on cosallocations and levy setting could indirectly affect the districts finances.

Orange County, NY's GO Downgraded to Aa2 from Aaa;Outlook Negative Affecting $268.5 million, the action incorporates operating deficits anddeclines in reserve levels, in combination with property value declines.

University of San Diego, CAs Revenue Bonds Upgraded to A1;Outlook Stable The upgrade to A1 from A2 impacts $168 million and reflects excellentfinancial management, contributing to strong cash flow and debt service.

Newark, NJs A3 GO and Baa1 GO Limited Tax Ratings Placed UnderReview for Downgrade Impacting $540 million, the action reflects the likelihood that the city willbe late producing its 2014 budget, and the citys persistentstructural deficit.

California Department of Water Resources' Power Supply RevenueBonds Upgraded to Aa2; Outlook StableThe upgrade to Aa2 from Aa3, affecting $6.6 billion, reflects an improvedrisk profile owing to support from the state public utility commission.

New Mexico State Universitys Bonds Downgraded to Aa3;Outlook StableThe downgrade to Aa3 from Aa2, affecting $136 million, incorporatesweakened operating performance and competitive enrollment pressures.

Access our moodys.com public finance landing page atmoodys.com/UsPublicFinance
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MOODYS WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION MAR

California Pension Reform Proposal Not on 2014 Ballot, a Credit Negative forLocal GovernmentsOn March 14, proponents of a pension reform initiative, including the mayors of Anaheim (Aa2 stable)and San Jose (Aa1 stable), postponed their efforts to qualify the initiative for the 2014 California (A1 stable

general election. The initiatives supporters will now aim for 2016 instead of qualifying for the 2014 baThe delay is credit negative for California local governments because they face rapidly growing pension

with few tools to address them. Adoption of this pension reform measure would have amended the stateconstitution and provided local governments with a significant measure of additional pension cost flexib

The mayors sought to allow local governments to negotiate lower pension benefits for future work by cemployees; benefits accrued prior to any such renegotiation would be unaffected. Currently, California protects both current employees accrued pension benefits and those for future work, foreclosing anyopportunity for renegotiation. Generally, pension benefits cannot be reduced once an employee has beenhired.

Proponents of pension reform postponed their push following a March 14 court ruling that turned aside

their efforts to change the measures official summary. Their challenge contended the state attorney genused false, misleading, partial and/or argumentative phrasing and unnecessarily highlighted popularsympathetic categories of public employees such as teachers, nurses and peace officers.1

Local government pension costs in California continue to rise, prompting San Jose Mayor Chuck Reed, Anaheim Mayor Tom Tait and several others to launch the initiative. For Moodys-rated local governmepension costs increased by an average of 14% from fiscal 2011 to 2012,2 and absent pension reform, weexpect this rate of increase to continue for the next several years. Costs are escalating particularly for ththousands of local governments that participate in the California Public Employees Retirement System(CalPERS), including Anaheim. For example, CalPERS projects Anaheims public safety pensioncontribution rates as a percentage of salaries will increase annually, reaching 44% by 2020, compared toin 2014 (see Exhibit).

EXHIBIT

Anaheims CalPERS Pension Contributions Projected to Grow Significantly

Source: CalPERS 6/30/2012 actuarial valuations for City of Anaheims Safety and Miscellaneous Plans. Does not reflect effects of CalPERS Februarate increase or any offsetting savings due to Public Employees Pension Reform Act of 2013 (PEPRA).

1 Petition for Writ of Mandate. Reed, Kampe, Tait, Morris and Gomes (Petitioners) v. Bowen and Harris (Respondents). Superior Court of the State of California for tCounty of Sacramento.

2 Source: Moodys Investors Service.

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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

C o n t r

i b u t i o n s a s %

o f C o v e r e

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Safety Contribution Rate Misc Contribution Rate

Thomas [email protected]

Eric HoffmannSenior Vice [email protected]
https://www.moodys.com/credit-ratings/Anaheim-City-of-CA-credit-rating-538825https://www.moodys.com/credit-ratings/Anaheim-City-of-CA-credit-rating-538825https://www.moodys.com/credit-ratings/Anaheim-City-of-CA-credit-rating-538825https://www.moodys.com/credit-ratings/San-Jose-City-of-CA-credit-rating-600013108https://www.moodys.com/credit-ratings/San-Jose-City-of-CA-credit-rating-600013108https://www.moodys.com/credit-ratings/San-Jose-City-of-CA-credit-rating-600013108https://www.moodys.com/credit-ratings/California-State-of-credit-rating-600023978https://www.moodys.com/credit-ratings/California-State-of-credit-rating-600023978https://www.moodys.com/credit-ratings/California-State-of-credit-rating-600023978https://www.moodys.com/credit-ratings/California-State-of-credit-rating-600023978https://www.moodys.com/credit-ratings/San-Jose-City-of-CA-credit-rating-600013108https://www.moodys.com/credit-ratings/Anaheim-City-of-CA-credit-rating-538825


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For local governments with CalPERS plans, costs could increase further with the February announcemethat the pension system will implement a third broad increase in plan contribution requirements since M2012. The state retirement system notes the impact of higher contribution levels and their continuancean extended period will be difficult for employers to bear.3

We are not able to quantify the reform proposals total potential savings had it become law, since the sa would depend on actions taken by local governments. However, the state Legislative Analysts Officeestimated the savings across that state would have reached hundreds of millions of dollars each year ormore in the near-term and billions more over the long-term.

The proposed ballot initiative was spearheaded by San Joses Reed, whose city manages its own pensioLocal governments that do not participate in CalPERS, including large cities such as Los Angeles (Aa2stable), San Diego (Aa3 stable) and San Jose, would still benefit from the flexibility to curb pension costafforded by the proposed measure.

If proponents are ultimately successful in gathering sufficient signatures to place it on the ballot, more t50% of voters must approve the measure for it to go into effect. This years signature gathering effort ceprior to achieving the required amount to qualify for the ballot. Reed has indicated efforts will be made place it on the ballot two years from now.

3 CalPERS. Annual Review of Funding Levels and Risks as of June 30, 2012.
https://www.moodys.com/credit-ratings/Los-Angeles-City-of-CA-credit-rating-600003106https://www.moodys.com/credit-ratings/Los-Angeles-City-of-CA-credit-rating-600003106https://www.moodys.com/credit-ratings/Los-Angeles-City-of-CA-credit-rating-600003106http://www.washingtonpost.com/business/economy/in-san-jose-generous-pensions-for-city-workers-come-at-expense-of-nearly-all-else/2014/02/25/3526cd28-9be7-11e3-ad71-e03637a299c0_story.htmlhttp://www.washingtonpost.com/business/economy/in-san-jose-generous-pensions-for-city-workers-come-at-expense-of-nearly-all-else/2014/02/25/3526cd28-9be7-11e3-ad71-e03637a299c0_story.htmlhttp://www.washingtonpost.com/business/economy/in-san-jose-generous-pensions-for-city-workers-come-at-expense-of-nearly-all-else/2014/02/25/3526cd28-9be7-11e3-ad71-e03637a299c0_story.htmlhttp://www.washingtonpost.com/business/economy/in-san-jose-generous-pensions-for-city-workers-come-at-expense-of-nearly-all-else/2014/02/25/3526cd28-9be7-11e3-ad71-e03637a299c0_story.htmlhttps://www.moodys.com/credit-ratings/Los-Angeles-City-of-CA-credit-rating-600003106


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Rising Ridership is Positive for US Transit AuthoritiesOn March 10, the American Public Transportation Association (APTA) released data that show publictransportation use increased in 2013 to 10.7 billion trips, outpacing population growth since 1995 andreaching the highest levels in 57 years. Strong ridership is credit positive for US mass transit authoritiesRidership increased by 1.5% in 2012, which contributed to a 4% increase in farebox revenues.

Mass transit system revenues typically include a high level of external subsidization in the form of grantransfers, and taxes from the local, state or federal government. Fare revenues cover only 36.5% of publtransportation operating expenses, according to the US Department of Transportation, highlighting the lreliance on passenger fares. The portion of operating expenses paid by fare revenue, the farebox recoveratio, estimates the degree that ridership fares covers costs. Systems with high farebox recovery ratios sgreatest benefits from increased ridership because rising fare revenues constitute a larger share of total than in systems with low farebox recovery ratios (see Exhibit 1). In 2012, the 1.5% overall increase in ptransit ridership resulted in a 4% overall increase in fare revenues, which also incorporates fare increaserevenues likely rose in 2013 as ridership increased.

EXHIBIT 1

Rated Transit Authorities with Highest Farebox Recovery Ratios

Transit AuthoritiesFarebox

Recovery Ratio RatingPledgedRevenues Primary Area

San Joaquin Regional Rail Commission, CA 64% A2 General revenue San Jose/Santa Clara

Port Authority of Allegheny County, PA 46% A1 Sales tax Pittsburgh

Bi-State Development Agency, MO 46% Aa3/A2 Sales tax Saint Louis

Western Contra Costa Transit Authority, CA 42% Aa3 General revenue Contra Costa County

Massachusetts Bay Transportation Authority, MA 41% Aa2 Sales tax Boston

Source: Moodys Investors Service

Other positive trends, including an overall improvement in the economy that has driven up sales taxrevenues that most transit authorities rely on for capital and operating expenditures, have helped the sec

Overall, increased ridership reflects economic improvement, in particular post-recession employment g(see Exhibit 2). Stronger employment results in increased disposable income and consumer demand, whin turn leads to increasing sales taxes. Systems that issue debt secured by dedicated local or statewide sataxes, 29 of Moodys 50 rated US transit systems, reported a median sales tax revenue growth of 5.4% i2013. The Rockefeller Institute of Governments reports state sales taxes increased by 5.5% in the fourthquarter of 2013, with only six of the 45 states with sales taxes reporting declines.

Andrew NowickiAssociate [email protected]

John LombardiAssociate [email protected]


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EXHIBIT 2US Economic Improvements Bolster Transit Ridership

Source: American Public Transportation Association; Moody's Economy.com

Strong ridership indicates positive public sentiment towards public transportation, which can lead toincreased political support and help advance broad based transportation initiatives.

The 2013 ridership results prompted APTA to request $100 billion from Congress over a six-year periodtransit-related grants, citing increased consumer demand. These grants are typically dedicated for capitaexpenditures, but they also expand operations and free up other revenues. If the request is approved,additional grant revenue will result in positive credit pressure in addition to increased and fare revenue.

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Total Ridership - left axis Total Employment - right axis


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Court Ruling Upholding Nassau County (NY)Wage Freeze is Credit PositiveOn March 12, a New York State Supreme Court judge ruled that a wage freeze on Nassau County (NY) stable) police employees imposed by the Nassau County Interim Finance Authority (NIFA, Aa1 stable) in2011 was legal. With the ruling, the county will now avoid the reimbursement of $230 million (9.2% ofbudget) in lost wage increases from 2011 through 2013, a credit positive.

NIFAs authorizing legislation gives the state-appointed financial oversight board the power to freeze NCountys labor contracts during a hard control oversight period. In previous years, unions representingNassau County employees had successfully argued, most recently in a US District Court ruling in Febru2013, that NIFAs power to freeze contracts ended in 2008. The US Second Circuit Court of Appealsvacated the lower federal court decision, ruling that New York State court should interpret state law.

Costly employee contracts have contributed to Nassau Countys financial deterioration, along with aggrbudgeting of economically sensitive sales taxes. As a result of operating deficits and a reliance on cash notes, the countys 2011 net cash balance (unrestricted plus restricted cash, net of outstanding cash flownotes) dwindled to negative 13% of 2011 revenues from 0.9% in 2006 (see Exhibit).

Nassau County Net Cash as Percent of Revenues

Notes: Fiscal Years 2001-12 based on a modified accrual basis of accounting; *fiscal 2013 on a cash basis, actuals through October; **fiscal 2014projected on a cash basis.Source: Nassau County CAFRs 2001-11

The wage freeze helped the county achieve an operating surplus in the fiscal year ended December 2012net cash improved to a still-negative 8.4% of revenues. Although the county expects liquidity to improvreducing cash flow borrowing, its financial position remains strained. The county would likely have bonfor any payment of lost wages, which would have further pressured the budget as debt service would haincreased from an already above average 13.5% of fiscal 2012 operating expenses. The county is currenthe process of negotiating the restructuring of its employee contracts, but no resolution has been reached

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014**

Valentina GomezAnalyst

[email protected]
https://www.moodys.com/credit-ratings/Nassau-County-Interim-Finance-Authority-NY-credit-rating-805189493https://www.moodys.com/credit-ratings/Nassau-County-Interim-Finance-Authority-NY-credit-rating-805189493https://www.moodys.com/credit-ratings/Nassau-County-Interim-Finance-Authority-NY-credit-rating-805189493https://www.moodys.com/credit-ratings/Nassau-County-Interim-Finance-Authority-NY-credit-rating-805189493


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RESEARCH HIGHLIGHTS

Jefferson County, ALs Lower GO Leverage Fuels Higher Recovery than Sewer On December 3, 2013, Jefferson County, AL (Baa3 stable) completed its exit from bankruptcy byrestructuring its outstanding sewer revenue warrants and certain general obligation limited tax warrants

Jefferson Countys General Obligation Limited Tax creditors realized an overall recovery rate of 88%,ranging from 88%- 95% for warrantholders to 0% for parity interest rate swaps. The overall GO recoverrate is much higher than the overall recovery rate of 54% realized by Jefferson County sewer warrantcreditors and slightly higher than our previous expectations.

Two-Midnight Rule Will Reduce Revenue for Most Hospitals The two-midnight rule for acute care hospitals classifies most hospital visits under 48 hours as outpatcases. Previously, inpatient status was largely determined by medical necessity. We expect the rule chaneffective since October 2013, will weaken hospital operating profitability in calendar year 2014 because

will lower Medicare reimbursement for these cases. Although the rule change will affect all acute carehospitals, the impact will not be uniform across the not-for-profit hospital sector. Smaller communityhospitals with shorter average lengths of stay and less complex cases are most at risk.
http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM165540http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM165540https://www.moodys.com/credit-ratings/Jefferson-County-of-AL-credit-rating-423811https://www.moodys.com/credit-ratings/Jefferson-County-of-AL-credit-rating-423811https://www.moodys.com/credit-ratings/Jefferson-County-of-AL-credit-rating-423811http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM165866http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM165866http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM165866https://www.moodys.com/credit-ratings/Jefferson-County-of-AL-credit-rating-423811http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM165540


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California Department of Water Resources' Power Supply Revenue Bonds Upgraded to Aa2;Outlook Stable

Mar. 17 - We upgraded the rating on the California Department of Water Resources (CA DWR) powersupply revenue bonds to Aa2 from Aa3, affecting $6.6 billion. The outlook is stable. The upgrade reflecimproved risk profile of the CA DWR power supply revenue bonds, owing to substantially reducedoperations coupled with a long history of California Public Utility Commission (CPUC) support of full timely cost recovery in compliance with a rate agreement with CA DWR. The stable outlook reflects ouview that the CPUC will continue to adhere to its rate agreement and annually approve all rate filings toensure full cost recovery through debt maturity in 2022. It also reflects our expectation that CA DWR wmaintain its indenture required reserves for a liquidity cushion.

New Mexico State Universitys Bonds Downgraded to Aa3; Outlook StableMar. 17 - We downgraded the ratings on New Mexico State University's revenue bonds to Aa3 from Aaaffecting $136 million. The outlook is stable. The downgrade reflects the university's weakened operati

performance and competitive enrollment pressures, which have led to limited prospects for financial resgrowth in line with Aa2-rated public universities. The stable outlook reflects our expectation that theuniversity will take the necessary steps to operate in equilibrium while maintaining or gradually buildinflexible reserves.
https://www.moodys.com/research/Moodys-upgrades-the-California-Department-of-Water-Resources-Power-Supply--PR_295132https://www.moodys.com/research/Moodys-upgrades-the-California-Department-of-Water-Resources-Power-Supply--PR_295132https://www.moodys.com/research/Moodys-upgrades-the-California-Department-of-Water-Resources-Power-Supply--PR_295132https://www.moodys.com/research/Moodys-upgrades-the-California-Department-of-Water-Resources-Power-Supply--PR_295132https://www.moodys.com/research/Moodys-downgrades-New-Mexico-State-University-bonds-to-Aa3-outlook--PR_295131https://www.moodys.com/research/Moodys-downgrades-New-Mexico-State-University-bonds-to-Aa3-outlook--PR_295131https://www.moodys.com/research/Moodys-downgrades-New-Mexico-State-University-bonds-to-Aa3-outlook--PR_295131https://www.moodys.com/research/Moodys-downgrades-New-Mexico-State-University-bonds-to-Aa3-outlook--PR_295131https://www.moodys.com/research/Moodys-downgrades-New-Mexico-State-University-bonds-to-Aa3-outlook--PR_295131https://www.moodys.com/research/Moodys-upgrades-the-California-Department-of-Water-Resources-Power-Supply--PR_295132https://www.moodys.com/research/Moodys-upgrades-the-California-Department-of-Water-Resources-Power-Supply--PR_295132https://www.moodys.com/research/Moodys-upgrades-the-California-Department-of-Water-Resources-Power-Supply--PR_295132


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MOODYS.CO

Report: 166

CREDIT RATINGS & ANALYSISMichel Madelain President and Chief Operating Officer

Michael RowanManaging Director, Global Public, Project &Infrastructure Finance

Gail SussmanManaging Director, US Public Finance

John Nelson

Director of Research, Global Public, Project,Infrastructure Finance

Christopher HolmesDirector of Research, US Public Finance

Local Government Ratings Jack DorerManaging Director, US Public Finance

Naomi RichmanManaging Director, US Public Finance

State Government RatingsRobert KurtterManaging Director, US Public Finance

Tim BlakeManaging Director, US Public Finance

Healthcare, Higher Education, Not-for-Profits

Kendra SmithManaging Director, US Public Finance

Housing

Kendra SmithManaging Director, US Public Finance

Public InfrastructureChee Mee HuManaging Director, Project Finance

EDITORIAL CONTENTCrystal CarrafielloSenior Vice President, Rating CommunicationsRobert CoxSenior Editor, Rating Communications

MARKETING & PRODUCT STRATEGY John WalterDirector, Senior Product StrategistSara Harris Assistant Director, Product Strategist

PRODUCTION Jason LeeVice President, Production

WEBSITEwww.moodys.com

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Weekly Credit Outlook for Public Finance - March 20, 2014