COURT STREET GROUP Research LLC October 6, 2017

Munis Follow Treasuries Weaker; Supply Picks Up a Bit Next Week

Generic municipal benchmarks saw an increase in yields this past week anywhere from 3 to 7 basis points, generally in line with Treasury market movement. On Friday, the monthly payrolls report came in much lower than expected — largely attributed to the two hurricanes that rocked the Southeastern United States and its territories. In an odd market move, the market sold-off briefly early on Friday morning but then rallied back to end the day mostly unchanged.

We attribute this largely the Trump impact on markets. While bond markets have largely lost ground over the past 30 trading days, there continues to be a hovering uncertainty (and risk-on trade) as a result of this President.

Speaking of which, the President’s comments on Puerto Rico put the GO 8s of 2035 at all-time lows (more on this below and view chart for more information).

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THE WEEKLY MUNICIPAL PERSPECTIVE

We at CSG encourage anyone who can help financially for the people of Texas, Florida and Puerto Rico to visit Charity Navigator and choose where you think your money will be best spent.

Executive Summary: Managing Partner, George Friedlander, outlines 10 issues to monitor in the municipal space, even though he’s supposed to be on vacation in Europe. He covers tax reform vs. tax cuts; infrastructure; P3s; Privatization; Emergency Recovery Bonds; Technological Change and what it means for states and localities; and much more.

In our Credit Focus, Partner, Joseph Krist, looks at the MTA delays and what it means for credit and resiliency; The Battle to keep SALT in tax reform and what it means for various stakeholders; A few topics on Puerto Rico and the uphill battle its facing as well as Trump’s comments on its debt; California high-speed rail moves forward; An FAA bill; and more.

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10-YrAAAMuni toUST(Source:Bloomberg)

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As we enter the final quarter of the year we point to a few items:

◦ Supply is now nearly 20% below last year’s lackluster pace. September was two-thirds lower than the last September — a generally large new-issue month.

◦ Flows of cash into mutual funds posted a negative figure this past week of just about

$140 million — the first cash lost in more than a month. This is not surprising given the market losses over the the past month but something to keep an eye on.

◦ Looking forward, October usually brings a lot of supply into the marketplace (anywhere from 10% to 12% of the annual haul). If supply were to see an uptick we could expect continued pressure on yields to move into higher ranges. Next week’s largest deal is from the North Texas Tollway Authority, a $2.6 billion deal and the next biggest in size is from the San Francisco Airport Commission, at $896 million.

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10-YrAAAMuni toUST(Source:Bloomberg)

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THIS WEEK’S NEW DEALS FROM AROUND THE COUNTRY:

$2.6 billion of first tier and second tier system revenue and refunding bonds for the North Texas Tollway Authority, Series A, A1/A/NR, Series B A2/A-/NR. Bank of America Merrill Lynch is head underwriter.

$896 million of San Francisco International Airport second series revenue bonds, AMT, taxable and tax-exempt for the Airport Commission of the City and County of San Francisco, A1/NR/A+. Jefferies is head underwriter.

$153 million of Environmental improvement revenue bonds for the Director of the State of Nevada Department of Business and Industry. Morgan Stanley is head underwriter.

$141 million of state revolving fund program green revenue and refunding bonds for the Indiana Finance Authority, Aaa/AAA/AAA. Bank of America Merrill Lynch is head underwriter.

$137 million of floating rate and fixed rate single-family mortgage revenue bonds for the Michigan Housing Development Authority, Aa2/AA+/NR. Barclays Capital is lead underwriter.

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Ten thoughts for a Gloomy Day Off the Coast of Malta, by Managing Partner, George Friedlander

We suspected this might happen. First, that, while vacationing in Italy and points east in the fall, we would hit a rainy patch and second, that so much new “stuff” would be swirling around that we could use said rainy patch to lay out some new or amended ideas. So, here are 10 somewhat interrelated ideas and the promise that we shall return to most of them in expanded fashion—when we come back.

1) Infrastructure Plan to Come? According to new comments out of the Administration, the bare-bones outline of an Infrastructure funding or financing program may come as soon as next week—or it may not. It may include a privatization strategy—or it may not. (See #__ below.) It may be linked to Tax Reform, in the hope that it can be used to induce Democrats to support some form of Tax Reform—or it may not. (We expect not, since the portions of Tax Reform that may be opposed by many Democrats may be much bigger, and vastly more costly, than proposed Federal support for Infrastructure spending.) It may properly distinguish between funding and financing—or it may not. In any event, we expect this process to continue into early 2018, at the earliest, so we will have many more opportunities to comment in much greater detail in the weeks ahead. See our thoughts on Infrastructure from last week here.

2) Tax Reform vs. Tax Cuts

This week, the House is voting on a Fiscal Year 2018 budget while at the same time the Senate is debating its own version—and there are a number of stark differences.

In our view—and that of Maya MacGuineas, president of the Committee for a Responsible Federal Budget, the differences are profound. With the Republicans in Congress beginning work on so-called “Tax Reform,” it is important to make the distinction between such reform and what is simply a tax cut. And, in our view, those differences have extremely important implications for 1) the outlook for the enactment of a tax bill, and 2) the implications for state and local governments should any such legislation be enacted into law.

As Ms. MacGuineas notes, for all the years of GOP lawmakers calling for balanced budgets, at least on paper, the House budget would reach balance, while the Senate budget would not.

The House also expedites a down payment on deficit reduction by calling for more than $200 billion in spending cuts from reconciliation. That, she notes, is far more than the Senate’s minimum target of $1 billion in savings. Yes, one. Now, while we would differ considerably, we suspect, from the committee as to how spending cuts could be achieved, we do agree that a bill which simply slashes taxes by increasing the Federal Deficit is not really reform—it does nothing to improve economic incentives in the current tax code, and it does nothing to offset lower revenues through the “base broadening” that was a cornerstone of prior tax proposals. The Senate bill then is simply a tax cut with important potential implications for state and local governments over both the short-term and the longer term. A deficit-enhancing tax cut would, we suspect, generate more inflation, and induce the Fed to raise rates more aggressively than under true tax reform.

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As The Committee notes: “Both budgets rely on vastly overstated economic growth numbers, but the Senate budget includes those assumptions in a way that will actually make the debt worse … No independent economist or forecaster anywhere is predicting the kind of sustained economic growth that would be necessary for tax cuts to be self-financing, and Congressional leaders should not be banking on it as policy. In fact, tax cuts that add to the debt will suppress economic growth, not unleash it…If the current Senate GOP budget—or anything close to it … If lawmakers are unwilling to pass a budget that would truly put our debt on a downward path and address both tax and major entitlement reform, members of Congress should at least reject adding trillions to the national debt on massively exaggerated promises of economic growth and take an approach that more closely resembles the House budget.”

A key issue in the distinction between the current Senate plan and true Tax Reform is the lack of offsets to the sharp cuts in taxes being proposed. These cuts come through a sharply lower corporate tax rate, through deep cuts in the tax rate on pass-through entities, through elimination of the corporate and individual Alternative Minimum Tax (AMT), through cuts in tax rates on high-income individuals, and through elimination of the estate tax even on a portion of an estate that has avoided being taxed even once. There is no double taxation issue for the part of an estate that benefits from step-up in the basis of a capital asset from the time it was purchased. If a stock was purchased at $10 per share and is worth, say $200 per share, the $190 per share increase in value remains untaxed, except under an estate tax, if the owner dies without the stock being sold. The same is the case with unsold real property, a significant portion of the value of many large estates. There is no double taxation in these cases under an estate tax. We fail to see how such a change represents greater tax equity, or how it would lead to a higher national economic growth rate.

As we noted last week:

A) It is extremely difficult to envision how tax cuts will add appreciably to economic growth while the unemployment rate is already tight, and the U.S. and global economies are already awash in surplus unspent capital.

B) The Fed will surely be poised to incorporate the impact of a deficit-increasing tax cut in its plans to raise short-term interest rates, and such a change in plans would likely result in higher Federal borrowing costs—which would also be passed on to state and local governments in the form of higher muni borrowing costs; and,

C) To the extent that projections of the economic upside from tax cuts fall far short, as we anticipate, we expect strongly that future Congresses will feel compelled the offset a portion of the newly created deficit by cutting programs, including the types of programs that currently pay for some portion of state and local activities. How, for example, would the benefits of any theoretical infrastructure program be maintained if a future Congress is seeking to find ways to offset new deficits resulting from tax cuts? We suspect that the now-infamous Federal Budget proposal introduced earlier in 2017 provides a template.

Finally, we note that the case for this entire exercise may become politically more difficult if a) the tax cuts have to be eliminated after 10 years to stay within Reconciliation rules required by a balanced budget,

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and b) little or nothing is done to enhance the efficiencies or economic motivations that true tax reform are supposed to generate.

1. There is a double taxation issue in the Tax Cut plan. Recent tax cut proposals are supposed to increase efficiently and fairness specifically by reducing Federal taxes that generate double taxation. However, state and local tax deductibility exposes a higher share of an itemizing taxpayer’s income to federal taxation because it adds back mandatory payments of state and local taxes already paid as taxable income—and that is clearly double taxation. The good news, such as it is, is that a substantial number of Federal lawmakers, particularly in the House, are beginning to resist the full elimination of deductibility of state and local taxes that can currently be deducted. A number of schemes for doing so have been proposed, including leaving the deduction alone, or giving taxpayers a choice of deducting these payments or mortgage interest payments—or something in between. However this is handled, we are becoming somewhat more confident that at least a portion of deductibility will be preserved—assuming that a tax bill is actually enacted. Joseph Krist discusses the deductibility issue further below.

2. Corporate vs. individual provisions in the tax plan. The battle over the relative implications of the tax plan for corporations versus individuals is going to be a fierce one, we suspect. For one model of the projected relative benefits for corporations and individuals, one early analysis was done by The Urban-Brookings Tax Policy Center. By their estimates, essentially all of the net cut in tax revenues occurs on the corporate side, while individuals’ tax revenues actually go up modestly over the 10-

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year period. Their analysis, including a comparison of corporate and individual tax revenue changes by year, can be found here.

Now, we note that Republicans in Congress have already objected strongly to this analysis. Nevertheless, we expect that over time, work from the Urban-Brookings Tax Policy Center will continue to be part of the debate.

5) Will Trump really move away from privatization as a way to provide additional infrastructure?  More about this to come, but just a few points for now. First, we were greatly surprised at the rapid turn by President Trump away from privatization as playing a significant role in expanding our nation’s infrastructure. On the other hand, we note that one comment on this was made while sitting adjacent to Vice President Pence, who comes from a state, Indiana, where a significant number of privatizations have failed, and had to be bailed out in some fashion. In our view, privatizations, properly designed, can play at least a moderate role in providing funding and financing for state and local infrastructure projects—albeit surely not the dominant role. So, we are not at all convinced that this strategy is off the table. How will it look in any final infrastructure bill? At this point we can’t tell, but we will have some additional thoughts in coming weeks and months.

6) The case for P3s—technological change makes them more effective. One issue related to the likely growing role for Public-Private Partnerships that has, in our view, been under-discussed is the likely impact of accelerating technological change on state and local projects. Again, we will return to this issue in much greater detail at a later date, but our main points are as follows:

• Rapid technological change has the potential to both make infrastructure projects more effective and efficient, and to disrupt long-term projects by introducing rapid, disruptive changes in infrastructure needs—for example, through Transportation as a Service, as we discussed in a Special Focus from earlier this summer.

• As these changes occur, governments are going to need to work much more closely with technologically savvy private companies, from the beginning of project development, right through operational management. In many cases, the result will be a transition from traditional design/bid/build infrastructure processes to design/build, or even design/build/manage.

• As a consequence, we believe that it is extremely likely, or even inevitable, that state and local governments hook up with private vendors in order to a) utilize the most modern technological applications, b) prepare for future changes in optimal technology, and, c) “smooth out” the impact of disruptive change as it occurs. We simply do not envision a way for governments to accomplish this that does not lead to closer working relationships with a whole host of major technological vendors, from design/architecture through project management and adaptation to change.

7) A Brief Comment on CDFA’s Disaster Recovery Bond Proposal. As discussed in a press release dated September 15, The Council of Development Finance Agencies (CDFA) is calling on Congress to create a permanent, special category of federal tax-exempt bonds, to be known as Disaster Recovery

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Bonds, which can be used by states and municipalities to support recovery efforts in the areas affected by disasters, both natural and man-made.  

“Tax-exempt bonds are a vital instrument enabling states and municipalities to invest in public infrastructure and support recovery efforts after major disasters,” said CDFA President & CEO Toby Rittner. “With storms like Harvey and Irma becoming a more regular occurrence, Congress should act to create a permanent category of tax-exempt bonds so that recovery efforts don’t stall following a disaster.”

If implemented by Congress, Disaster Recovery Bonds would provide permanent, additional authority for state and local governments to issue private activity bonds, as was done on a temporary basis after 9/11, Katrina, Sandy and a number of other major disasters. We note that the case for such a program is consistent with our frequently published view that tax-exempt financing can be a highly efficient way to provide low-cost financing for needed governmental projects. And of course, the need for access to such low-cost financing post disaster is particularly urgent in light of this year’s horrendous hurricane season.

8) Federal vs. state/local efficiency—can block grants and other shifts in responsibility and funding really help?  

The question as to whether the Federal Government or state and local governments can provide services more efficiently came up again—in spades—in light of the attempt to radically change the Federal role in healthcare, including turning of Medicaid payments to the state into block grants. An article on the site Route 50 takes on this issue in considerable detail.

But there is little evidence that the states are more efficient administrators than Washington is, and some evidence that they might be less so. “The basic argument for state efficiency is based more on hopes and prayers than on clear evidence, across the board,” said Don Kettl, a professor of public policy at the University of Maryland. Delegating programs to the states would likely result in greater disparities in what programs offer and slimmer budgets overall, more than any radical improvements in efficiency.

As a general point, Kettl and other political scientists agree, despite its reputation for bureaucracy and incompetence, the federal government runs pretty well, and where it runs poorly it tends to be stifled by outdated rules and regulations. “The underlying argument is that the federal government is unwieldy and inefficient,” said Kettl. “That’s not true.””

The article can be found here.

In our view, there are a great number of challenges involved with turning funding for a specific purpose and turning it over to the states. One important issue is that block grants are typically set at a lower dollar amount than was provided directly before the transition—under the potentially mistaken assumption that the states could do more with less. That might be true in a few states, but many state governments do not have the expertise assumed to be available to instantly be more efficient. In such cases, service levels will simply deteriorate.

Further, in many cases, money distributed via block grants will not sit still.  Using Medicaid as an example, especially in states with budgetary pressures, Medicaid block grants  will compete within state

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budgets with a) Pensions, b) Employee health benefits, which are zero funded in most states, c) Infrastructure spending, d) Essential services of all sorts, and, e) keeping many healthcare facilities fiscally solvent, and other potential needs. Quite simply, the money isn’t escrowed. There are lots of ways to move it around within a budget.

9) 10 ways technology is changing disaster response.

In a really important article (in our view), the online magazine TechRepublic notes a list of 10 ways that technological change is already improving disaster response, and is likely to continue to do so in the future.

Factors include a) Internet-connected sensors, b) drones, c) machine learning, d) social media, e) shelter innovation, f) remote-activated technology and five more. The article can be found here.

Our point in this is that within all of the challenges and complexities generated by technological change there are a host of potential benefits, that come within the framework of “smart city” innovation, and as above, the capacity to respond more efficiently to unexpected new needs.

10) One final issue for future comment: Expected changes in management of the Fed will have an uncertain impact.

We noted last week that a number of Federal Reserve Governors are beginning to consider more closely the possibility that technological change may be limiting potential future increases in inflation. This discussion becomes more important in light of the discussions in the press that possibility a hawk, such as Kevin Walsh, might take over as Chairman of the Fed. Our only points on this for now are twofold. First, that in our view, a more hawkish stance by the Fed might not push long-term rates higher, if it simply slows growth or reduces asset bubbles, without having a significant impact on inflation. And second that, ironically, more hawkish management at the Fed could hurt any potential positive impact of tax cuts by “taking away the cookie jar” just when stronger growth is needed.

CREDIT FOCUS: by Joseph Krist, Partner     

MTA DELAY COSTS ESTIMATED AT $170 MILLION A YEAR (AT LEAST)

While the "Summer of Hell" was the name for the emergency repairs to Pennsylvania Station, New York's Metropolitan Transportation Authority has been experiencing its own well-publicized version. A new analysis by New York City Comptroller Scott M. Stringer finds that the economic cost of subway delays could be as high as $389 million annually.

The analysis is based on data from the MTA on train schedules, passenger volumes, and wait assessments by subway line. The MTA provides delay metrics in its monthly committee meetings, based on weekday, 6 a.m. to midnight experience. “Minor” delays are those that cause trains to be delayed by 25% to 50% over

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their scheduled time – so-called “headway gaps.”  “Medium” delays are headway gaps of 50% to 100% over scheduled time, and “major” delays are those over 100% over schedule time.  For example, a subway line with a headway of 6 minutes – i.e., a train is scheduled to arrive at a station every 6 minutes – would experience a minor delay if the actual gap between trains was between 7.5 and 9 minutes, a medium delay if the gap was between 9 and 12 minutes, and a major delay if it arrived more than 12 minutes after the prior train.

Assuming an average hourly New York City wage of $34, the estimated cost of delays varies with the extent of major delays.  Using the midpoint of the range of Wait Assessment delays for minor and medium delays (37.5% and 75% behind schedule, respectively, or 2 and 4 minutes on average, systemwide), and a major delay equal to 100% behind schedule, or 5 minutes systemwide, yields a low-end estimate of $170 million per year.

Given the recent frequency of extended delays and the greater overcrowding during rush hour, which extends delays, major delays might involve waits of 10 or even 20 minutes, which raises the cost to as much as $389 million of lost productivity annually. Of course, this is just one estimate and one that the state agency is likely to take some issue with. Regardless, it does speak to the need for improved maintenance and investment in existing capital facilities. This, in turn, makes it difficult to envision a scenario in which the trend of debt issuance would be anything but higher.

As we have written in previous publications, resiliency may become a credit issue for issuers.

Even though the damage and replacement costs caused by the recent hurricanes, the cities impacted by the storm are facing the fact that resiliency has become a credit issue.

Let’s review:

Before the storm had even struck Florida, for example, the mayor of Tampa indicated that one of his greatest concerns was the ability of the city's storm water drainage system to withstand the expected demand. He pointed out that the system was not only old, but also that its maintenance had not been a high-priority item. As a result it was unclear as to what the system's actual capacity was, let alone its structural integrity.

This serves to highlight one of the major points of debate in the discussion of the Trump Administration’s infrastructure plans. On one hand, we hear the clamor for new projects designed to handle recent and expected growth – whether it be urban transit or rural broadband. These items are supported by the President's stated preference for the new and visible — so-called shiny objects. On the other hand, we hear the lament regarding outdated and aging infrastructure, from century-old core water and sewer infrastructure to highways and bridges and subways nearing the end of their expected lives.

Events such as Hurricanes Harvey and Irma and Maria — and back a few years ago — Sandy — expose the need for both types of investment. Some areas are growing despite the lack of sufficient infrastructure, while the very hard hit west side of Houston showed the perils of development getting ahead of itself. The lack of flood mitigation infrastructure in recently developed areas worsened the

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flood’s impact. The last time a storm of this magnitude hit Tampa was 90 years ago when the area population was 300,000. Since then the area of vulnerability has grown tenfold.

As the two regions dig out and dry out, how much investment will be necessary and which type will get priority?

Maintenance generates cost and generally no new growth to cover it, while expansion generates growth but does nothing to mitigate existing vulnerability. It creates a Hobson's choice for managers and planners. Both options obviously need significant capital and revenue to finance that capital. This choice isn’t getting any easier, since the federal proposals to date provide little in terms of outside capital but creates greater demand for local revenue.

History tells us that the credit impact, in terms of actual ratings, is likely to be not that great. But will the market decided that the cost of higher levels of debt and greater levels of required revenue from local economies should not impact valuations on an absolute and/or relative basis? In the end it is the market's call. But it is something that must be considered as we view the aftermath of these and future similar events.

Given the rather spectacular nature of recent damage, we expect both the market and rating agencies/entities to begin to incorporate resiliency into the rating/pricing process. If anything, the market will be looking to generate a hierarchy of factors related to resiliency. If anything, climate change, rising sea levels, and potentially stronger storms magnify the need for such parameters. Resiliency as a credit factor will affect all issuers. We will weigh in over time.

BATTLE TO PRESERVE SALT DEDUCTION BEGINS

One of the six original federal tax deductions, the state and local government tax deduction, or SALT, has been a staple of the federal tax code for more than 100 years. Since 1913, SALT has helped support vital investments in infrastructure, public safety, homeownership and education and provided states and local governments with the financial flexibility to meet the needs of their constituents. SALT also prevents double taxation of Americans by allowing taxpayers to claim a deduction for the state and local taxes they have already paid from their incomes.

Eliminating state and local tax deductibility exposes a higher share of an itemizing taxpayer’s income to federal taxation because it adds back mandatory payments of state and local taxes already paid as taxable income. The National Governors Association, National Association of Counties, National League of Cities, U.S. Conference of Mayors, International City/County Management Association, Government Finance Officers Association, Council of State Governments, and the National Conference of State Legislatures are the governmental organizations which have banded together to oppose the proposal. The same coalition successfully preserved SALT in the tax reform package signed by President Ronald Reagan in 1986.

The SALT deduction is one of the largest federal tax expenditures, with an estimated revenue cost of $95 billion in 2015 and $527 billion over the 5-year period from 2015 to 2019. In 1964, deductible taxes were limited to state and local property (real and personal property), income, general sales, and motor fuels

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taxes. Congress eliminated the deduction for taxes on motor fuels in 1978, and eliminated the deduction for general sales tax in 1986. It temporarily reinstated the sales tax deduction in 2004, allowing taxpayers to deduct either income taxes or sales taxes, but not both. Subsequent legislation made that provision permanent starting in 2015.

The percentage claiming the deduction ranged from 18% in South Dakota and West Virginia to 47% in Maryland. In general, a higher percentage of taxpayers in states in the Northeast and the West claimed the deduction than in states in other regions.

The initial reaction against the proposed change may be having an early effect. Comments attributed to one of the leading Congressional Trump supporters, New York Rep. Chris Collins, indicated that House Ways and Means Chairman Kevin Brady discussed options including capping the deduction for top earners, and allowing individuals to choose between deducting mortgage interest or property taxes -- but not both -- when calculating their taxes. Collins called the discussion “a way to get the California, New York and New Jersey Republicans on board for tax reform.”

Fifty-two Republicans represent districts that use the state tax deduction disproportionately. They have received heavy constituent blowback and are concerned that they might lose votes in primaries where many of them expect to be challenged from the extreme right. White House economic adviser Gary Cohn has said that scrapping state and local deduction was one of the items that the President would include behind his so-called “red Line” on tax reform.

This concept throws another wrench into the tax reform debate and shows how each component affects various stakeholders and everyone will be trying to keep the tax benefits that benefit them the most. Again, we at CSG think that full-blown tax reform is a very big uphill battle.

IS TRUMP SERIOUS ABOUT PUERTO RICO'S DEBT?

Late on Tuesday of this week, the President said the following: “They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out,” the president said. “You’re going to say goodbye to that. I don’t know if it’s Goldman Sachs but whoever it is you can wave goodbye to that.” And with the stroke of one statement we have the President advocating that the Commonwealth effectively walk away from its debt.

Municipal bond investors can only hope that this is one in a continuing stream of impulsive and uninformed utterances by the President. The impact on the municipal bond market would be transformative if Puerto Rico was able to renounce its debt. A market that relies on constitution and statute for so much of its underlying security and low default rates would undoubtedly have to rethink its entire outlook on the creditworthiness of the debt it supports if an issuer was able to repudiate nearly 2% of the outstanding debt in the market.

This could only have negative impacts on valuations of outstanding debt and would raise borrowing costs to issuers through a significant narrowing of the ranks of willing investors.

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The proof of the impact of such irresponsible remarks was in the drop in the dollar price of Puerto Rico GO debt from $44 to $32. Someone lost money. This despite the efforts of Mick Mulvaney, director of the White House budget office, who said "I think what you heard the president say is that Puerto Rico is going to have to figure out a way to solve its debt problem." "We are not going to bail them out. We are not going to pay off those debts. We are not going to bail out those bondholders."

At the same time the President's remarks may have unrealistically raised hopes on the island as it negotiates with creditors. Alfonso Orona, the governor's chief legal counsel, said in an interview "We have to wait and see the extent of the comments and what that means for the debt in Puerto Rico." "We have to wait and see what he meant by that and how it's going to translate into some type of legislation, some type of executive action. So we don't know yet."

MEANWHILE, PROMESA AND ITS EFFECTS NOW AFTER MARIA

Puerto Rico’s financial control board announced it will no longer discuss the reduction of working hours for public employees, at least until next summer. “In the aftermath of the catastrophic storm that has devastated Puerto Rico, the board is postponing any discussion of furloughs until next fiscal year and it is withdrawing its related lawsuit.” The board says it urged the federal government to “expedite responses to all requests for assistance from the government of Puerto Rico, increase financial assistance, lift the caps on individual programs of financial aid available to the island, and waive the local government cost-sharing requirements across available programs, including permanent recovery work.”

The House Natural Resources Committee announced a member forum for Wednesday, Oct. 4, to discuss potential legislative actions within the committee’s purview to reinforce ongoing rescue and recovery efforts in Puerto Rico and the U.S. Virgin Islands.

Sens. John McCain and Marco Rubio have introduced legislation to permanently repeal the Jones Act. The Commonwealth has long lobbied for an exemption from the provisions of the act which require that all goods that are shipped from one U.S. port to another U.S. port be carried on U.S. flag ships with U.S. crews. This has historically increased the cost of goods shipped to Puerto Rico. It was waived by executive order for purposes of fuel deliveries to the Commonwealth in the aftermath of the storm.

PREPA BEGINS RECOVERY

The Puerto Rican government seeks to restore power to at least 25% of the utility’s clients by the end of the month. There is a 10% goal for this week. The Authority hopes to have the Costa Sur and Aguirre power plants energized to add to the generation of power. The bulk of the work is done by PREPA personnel, although there are also private contractors performing jobs, including a team from the New York Power Authority. Out of the eight plants that supply energy to PREPA’s grid, three are already online.

In a positive sign, the Governor stated publicly that the government seeks to stay away from “rebuilding the same old grid that doesn’t work and that will suffer equal or greater damage if another storm hits.” That meshes with our proposition last week that the Commonwealth consider private entities and the use of alternative energy sources as the system is rebuilt.

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The use of NYPA personnel reflects its experience with long distance transmission over a variety of terrain. The major share of power generation resides on the southern side of the island, while demand mostly comes from the north. Therefore, restoring transmission lines between the two—which mostly runs across the central mountainous region of the island—presents a significant challenge.

FEDERAL FUNDING OF INFRASTRUCTURE TAKES ANOTHER STEP BACK

The fate of the FAA legislation that finally wended its way through the Congress is hopefully not symbolic of the potential outcome of any comprehensive legislation in this area. Congress cleared a six-month extension of the FAA's authority last week. This provides Rep. Bill Shuster until the end of March to keep trying to build support for his full reauthorization bill that would divorce air traffic control operations from the FAA.

This was the plan brought forward to much fanfare by the President who then left leadership on the process of passing legislation to the congressman. Ever since late June, when the House Transportation Committee approved the bill (H.R. 2997 (115) ), Shuster has been lobbying his colleagues hoping to get enough support to bring it to the floor. Unfortunately, the bill too closely resembled legislation previously sponsored by Shuster which had twice failed in the House.

As a result, several target dates for floor consideration have now passed, and the differences between the House and Senate bills as well as their respective controversial provisions forced both chambers to resort to an extension. The legislation had glaring weaknesses. First it was a version of already warmed over legislation. It was not backed up by any serious policy analysis or support from the White house. It did not have a clear constituency for support. Consequently, it faced an uphill battle which it did not have to force to overcome.

As a serious component of any overall infrastructure program, the failure of this privatization based plan does not bode well for any plans which might be based on privatization. The reaction against the bill was strong both in Congress as well as from industry. And that reaction was obvious and should have been anticipated.

CALIFORNIA HIGH-SPEED RAIL MEETS SPENDING DEADLINE

One infrastructure program which continues to move forward is The California High-Speed Rail Authority project. The California High-Speed Rail Authority (Authority) announced it has met federal American Recovery and Reinvestment Act of 2009 requirements by fully investing the more than $2.55 billion granted to the State since 2009 to build the nation’s first high-speed rail system. With more than 119-miles of active construction in the Central Valley, construction of a high-speed rail line between the Silicon Valley and Central Valley is planned for passenger service beginning in 2025.

Major construction is progressing in the Central Valley with more than a dozen active construction sites over 119 miles. Workers are building bridges, viaducts and grade separations at multiple locations, and the first complete structures are expected to be finished this year. As of June 2016, more than 630 different

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private sector firms have worked on the program, and companies from 35 different states have contributed to everything from planning and engineering to construction services. 100 percent of the steel and concrete used is domestic, consistent with federal Buy American provisions, stimulating California and the nation’s economy.

From July 2006 through July 2017, the Authority invested over $3.5 billion in planning and constructing the nation’s first high speed rail system – $2.553 billion of that was federal ARRA funds. ARRA funding has also been used to cover project development, preliminary engineering and environmental work for the Phase 1 system from San Francisco/Merced to Los Angeles/Anaheim. The first complete structure, the Tuolumne Street Bridge in Fresno, was completed this year.

FEDS PLUNGE AHEAD WITH NEW SUPPORT FOR GEORGIA NUCLEAR PLANT

Georgia Power announced that it has reached an agreement with the U.S. Department of Energy (DOE) for a conditional commitment of about $1.67 billion in additional loan guarantees for the Plant Vogtle nuclear expansion project. Georgia Power owns 45.7% of the new units, with the project's other Georgia-based co-owners including three municipal utilities - Oglethorpe Power, MEAG Power and Dalton Utilities.

On August 31, Georgia Power filed a recommendation with the Georgia Public Service Commission (PSC) to continue construction of the Vogtle nuclear expansion supported by all of the project's other co-owners. The recommendation was based on the results of a comprehensive schedule, cost-to-complete and cancellation assessment launched following the bankruptcy of Westinghouse in March. The Georgia Public Service Commission is expected to review the recommendation and make a decision regarding the future of the Vogtle 3 and 4 project.

Final approval and issuance of these additional loan guarantees by the DOE cannot be assured and are subject to the negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions.

HOTEL FINANCING MOVES AHEAD AFTER DELAY

The Austin-Bergstrom Landhost Enterprises, Inc. is a nonprofit public facility corporation and was created by Austin's city council in 1998. The ABLE was created to finance the construction of the airport Hilton hotel. The project was undertaken during a period when hotel financings were a prominent economic development tool for municipalities and high-yield bonds funds where in a phase of high demand for bonds.

In the spring of this year, ABLE planned to refund outstanding debt originally issued in 1999. That debt has been in default since 2004. The 1999 bonds were used to convert a building at the former Bergstrom

Air Force Base into a hotel for the new airport that opened in 1999 on the site of the base.  After some delay, the issue is now expected to come to market. The delay has been attributed to ongoing negotiations with the operator of the Hilton-brand hotel.

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The original $43 million of bonds were backed only by hotel revenues. Like many hotel issues, the dampening impact of 9/11 on travel and recession-related impacts on business travel and meeting demand made it difficult for the project to generate enterprise revenues sufficient to cover debt service. An investor specializing in distressed municipal debt owns the majority of the outstanding debt. The proposed refunding issue will bail out the original bonds.

To do so, a new financing and security structure has been established. The new debt is secured by a subordinate claim on airport net revenues. The airport is obligated to replenish, from available subordinate net revenues, any deficiency in the hotel debt service fund within 120 days of notice by the trustee. In the event the airport does not have sufficient available subordinate net revenues, the airport is obligated through its rate covenant to provide sum sufficient coverage of all obligations, including subordinate obligations, and would be required to adjust rates and charges to remedy the deficiency in the debt service fund. The hotel debt service reserve fund is sized at maximum annual debt service every five years, providing sufficient balance in excess of the next year's payment in most years.

The security structure is sufficient to secure A3/A- ratings from Moody's and Standard and Poor's respectively.

Disclaimer: The opinions and statements expressed in this report are solely those of the author(s), who is solely responsible for the accuracy and completeness of this report. The opinions and statements expressed in this report are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice. Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

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