Archive for the ‘Municipal Bonds’ Category

Affordable Housing Bonds Are Good Investments (If You Can Find Them)

April 12, 2018

Smith’s Affordable Housing Finance Conference returned to Fort Lauderdale, Florida, this year. It was another great year for housing bond investors, as the S&P Muni Bond Housing Index illustrated by posting a 250.85% Ever To Date Total Return and 2.95% Annual Total Return.

More than double your money AND no worries about credit problems given the very strong average credit quality.

Compare those investment parameters to the increasingly volatile stock market moves over the past week and its easy to see why housing bonds play a role in the municipal investment process. (

The U.S. stock market has gone berserk in the face of national public policy positions that undermine global trading strategies. It shouldn’t come as any surprise since Smith’s Regulars know that stocks are inherently more volatile.

Law of Unintended Consequences
With hopes of improving Portland’s brand-new mandatory affordable housing policy, Portland City Council recently agreed to woo developers with its original (optional) affordable housing policy: the Multiple-Unit Limited Tax Exemption (MULTE). The old plan would incentivize (read optional) residential developers to lease 20 percent of their apartments to low-income renters.

The Portland City Commission’s decision comes at the end of the city’s year-long slog to create and retain affordable housing after passing its “Inclusionary Housing” (IH) policy. The new program requires any new apartment building with 20 or more units to lease a chunk of those units below market rate.

Sure, those “below market rate” units are not really that affordable when compared to other cities around the country.

But, instead of spurring a wave of affordable new housing across the city, the IH policy has practically ground the affordable housing construction to a complete halt.

Months before the IH policy went into effect on February 1, 2017, developers wanting to avoid the onerous rule, submitted building permits for no less than 19,000 units across the city. Since then? Only 12 buildings (containing a total of 682 units) have applied for new permits from the city’s Bureau of Development Services. In the past, the city fielded permits for between 3,000 to 6,000 new units a year—making 2017’s numbers look even more pathetic.

If you think Portland’s affordable housing crisis bad, take a look at Seattle, where during a one-year period in 2015–16, Seattle rents increased by 9.7 percent — four times the national average. In 2017, the cost of an average two-bedroom topped $2,000. The results have been predictable: nearly half of Seattle renters are currently “housing-cost burdened,” meaning they spend more than 30% of their income on rent.

A recent Zillow study cited the connection between even modest rent increases and resulting homelessness. King County’s 2017 One Night Count tallied 11,643 homeless people, which is second only to New York and Los Angeles in homelessness.

Seattle’s Housing Affordability and Livability (HALA) program claims it will create 6,000 affordable housing units over the next ten years.

To put it into some context, Seattle’s population has risen by an average of 15,000 every year since 2010, growing by nearly 21,000 in 2015–16 alone.

Touted by Seattle politicians as the result of a tough negotiation between the city and developers, it’s little more than a giveaway, as the overwhelming majority of apartments constructed as a result of the “Grand Bargain” will be sold and rented at market rates.

Indeed. The affordability mandate is currently as low as 2% in some parts of Seattle.

Smith’s Political Event Risk Grading Alert: U.S. Sanctuary Cities (-1)

February 14, 2017

Smith’s Political Event Risk Grading Alert was issued the first week of February for U.S. Sanctuary Cities (-1).

Smith’s Research & Gradings (SRG) publishes its SRG Political Event Risk Grading whenever Smith’s Sentinel System triggers a predetermined response. SRG was founded in 1992 to provide principles-based, independent, conflict-free (Paid By Investor/Stakeholder) analysis.  One of the principles is to provide credit analytics that are “Universal” so investors can compare risks across all classes of investments.

Smith’s Gradings have three components: 1) long-term payment probability gradings 2) recovery gradings, 3) event risk gradings.

Smith’s reported a Political Event Risk Alert for the United States Treasury Debt at Smith’s Affordable Housing Conference in March of 2011. “Probability of Sovereign Debt Crisis Now Escalating to Over 40%”, according to Terence M. Smith, CEO, SRG.  He noted the “Weak US$ Policy vs. Weak Chinese Yuan”.

Smith’s Political Event Risk Covers (classes):
1) Currency inconvertibility (CI) and exchange transfer (FX);
2) Confiscation, expropriation and nationalization (CEN);
3) Political Violence (PV) or War (including revolution, insurrection, politically motivated civil strife, terrorism);
4) Breach of Contract, Contract Frustration (CF), Contract Repudiation.
5) Wrongful Call of a Guarantee (WCG).

The 2016 Presidential election of Donald Trump was as much about the middle class revolting against the political  class in Washington, D.C., and the concentration of wealth in America, as it was about “Making America Great Again.”   President Trump is not much of a Republican, really, which is why he could move so swiftly to secure the borders and address immigration.

In his wake, the Republicans (the real ones) are moving to quickly move to consolidate legislative power.  And, once one grasps why he was elected, the likelihood that the U.S. Senate and Congress will become even more conservative is inevitable. To quote a well-respected friend on Wall Street, “The political correctness of the Democratic Party is what defeated them because no one told the truth during the polling. Everyone lied about Hillary and the polls were wrong when they said she was going to win.”

Sanctuary Cities
Steve Salvi, Founder of Ohio Job and Justice PAC, has the oldest non-governmental website that tracks Sanctuary Cities. He started in 1997.

Mr. Salvi explained that in 1996, the 104th U.S. Congress passed Pub. L. 104-208, also known as the Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA). The IIRIRA requires local governments to cooperate with Department of Homeland Security’s Immigration and Customs Enforcement (ICE) Agency.  Despite the IIRIRA, hundreds of urban, suburban, and rural communities have ignored the law and adopted so-called “sanctuary policies.”

Generally, sanctuary policies instruct local or state government employees not to notify the federal government of the presence of illegal aliens living in or passing through their communities, counties, or states. These policies may also blur the legal distinction between legal resident aliens and illegal aliens, so illegal aliens can have access to the same taxpayer funded programs and benefits available to legal permanent resident aliens.
Sanctuary policies exist in two forms, formal and informal.

Already, in the wake of President Trump’s comments,  many sanctuary cities have taken steps to revoke formal sanctuary policies, such as Fairbanks and Juneau, Alaska.  However, some people express skepticism about these “formal” repeals being substituted with informal sanctuary policies.

U.S. Senator Jeff Sessions has been one of the strongest advocates for immigration law enforcement in the U.S. Congress. He introduced Senate Bill 1640 (S. 1640) in June, 2015, to address Sanctuary Cities.  Senator Sessions’ bill gives states and local governments the authority to enforce immigration laws. It is named the Davis-Oliver Act, after two law enforcement officers who where murdered by illegal aliens.  Congressman Trey Gowdy introduced a companion bill in the U.S. House (H.R. 1148).

SRG will remain vigilant to monitor the political event risks facing investors in the bonds of sanctuary cities.


Cal Green Stumble

July 11, 2016

Smith’s Critical Infrastructure Assessment of the US Public Power Supply and Transmission System has gone on high alert for potential catastrophic failure due to a collapse in baseload generation.  Smith’s has hosted webinars and participated in global energy conferences in the US and around world as a subject matter expert during the past six months.

Recently, California’s public power utility officials are warning that Los Angeles could face two weeks of “brown outs” this summer due to critical shortages in the natural gas supply.

Smith’s Event Risk Alert was issued in February when the California’s Aliso Canyon underground natural gas storage facility experienced a massive leak this past winter. Smith’s warned the L.A. region would be short of the fuel due to the massive gas leak that displaced thousands of people in the nearby Porter Ranch neighborhood.

Natural gas is California’s largest energy source.  It is transmitted via a pipeline system, which is a major vulnerability as well as a critical infrastructure asset.  The Aliso Canyon facility is one of more than 400 underground gas storage facilities that use old oil fields, aquifers, and salt domes.

Marcie Edwards, general manager of the Los Angeles Department of Water and Power (LADWAP), the nation’s biggest municipal utility, has take proactive measures by signing contracts for space on electrical transmission lines to import more electricity in the event Southern California Gas Co.  is not able to get enough natural gas to keep power plants running.

But, the contracts underscore California’s dirty little secret, which allows it to access coal-based generation.  Canada, which participates in the California cap-and-trade system, has members like Quebec that are threatening to exit over the coal-based energy contracts.

Last month, California’s quarterly cap-and-trade auction produced only 2% of the expected  bids. Typically, the California quarterly auction produces $500 million for the state.

A quick recap: In 1996, the California High-Speed Rail Authority (CHSRA) was established to begin formal planning in preparation for a ballot measure in 1998 or 2000. The ballot measure, Proposition 1A, finally was put to a vote in 2008 when 52.7% of voters approved the issuing of $9.95 billion in bond sales for the construction of the core rail segment between San Francisco and Los Angeles/Anaheim. The law, AB 3034 included an additional $950 million, approved for improvements on local railroad systems, which will serve as feeder systems to the planned high-speed rail system.

In 2010, California received $2.35 billion of its American Recovery and Reinvestment Act funding, with $2.25 billion dedicated for California High Speed Rail. Over the next 18 months, the federal government awarded the Authority a further $4 billion in high-speed rail funding, mainly from states that rejected building rail projects.

The cap-and-trade funding was approved in 2014,  when California announced it was apportioning the state’s annual cap-and-trade funds so that 25% goes to high speed rail (under the authority of CHSRA) and 15% goes to other transportation projects by other agencies. The state’s Legislative Analyst’s Office estimated that cap-and-trade income in 2015 and 2016 could total $3.7 billion, of which $925 million would be allocated to HSR. As of mid-2015, current funds allocated for designing and constructing the system total $6.302 billion, with another $2.024 billion for connectivity and bookend transportation projects.

In the wake of the anemic auction, an enormous number of projects across California have been told not to expect to receive their cap-and-trade allocations.  What’s more, the CHSRA mandate expressly prohibits any outside subsidies for the construction or operation of the projects, which makes it virtually impossible for the State of California to fill-in any temporary disruptions in funding.

Court Case
The California Chamber of Commerce and other business groups have filed a lawsuit that contends the cap-and-trade is a multibillion-dollar tax.  And, Smith’s Regulars know that new taxes  in California require a two-thirds legislative vote. The Air Resources Board (ARB), of course, dismissed the allegation by trying to pooh-pooh the auction proceeds as ancillary to the  emission regulation and not a purposeful revenue generator. However, the fact is much of the money has been spent for purposes with little or no connection to carbon emissions. For example, $500 million of carbon cap and trade was swept into the state’s general fund, which makes the Air Resource Board’s position almost absurd.

2020 Sunset Blvd.
California State Senator Jean Fuller, the Senate’s Republican leader, asked for an opinion from the Legislature’s legal counsel about whether AB 3034 must end in 2020 unless reauthorized.  The request was made in response to Governor Brown’s executive order setting new emission standards for 2030.

The Governor interprets the AB 3034 as requiring carbon reduction beyond 2020. However, in 2010, Californians voted to approve Proposition 26, which expressly limits any such ‘end runs’  around the California Constitution requirement for a two-thirds approval on new taxes.

What should be an easily understood concept is probably going to end up in court (again).

Puerto Rico Conversations

November 5, 2015
James Colby

James Colby, Van Eck Global

Jim Colby, Senior Municipal Strategist and Portfolio Manager at Van Eck Global, was the leader of a panel discussion on Puerto Rico at Smith’s High-Yield Conference in Greenwich, Connecticut on October 1. Mr. Colby started the discussion with a brief introduction of the panelists.

Jim Colby:
The interesting feature about this particular panel is that we’re represented by two on the investment side — myself from Van Eck High Yield ETF and John Schorle of Invesco.

We have the insurance industry covered with Tom Weyl from National Public Finance Guarantee.  And, we have excellent legal representation  with Bill Kannel, partner at Mintz Levin in Boston.

We have a past president of the Puerto Rico GDB, Jorge Irizarry. Jorge served as president of the Government Development Bank for two terms and 8 years.

And, we have Terry Smith, founder of this conference 10 years ago and CEO of Smith’s Research & Gradings.

Manny Mirabal is from Puerto Rico and a principal of Gray Global Advisors in Washington, D.C.  Manny has spent well over 20 years of his career in and around The Hill, in and around Washington D.C., with some influential and important people in congress and on island in Puerto Rico.

So, the topic is almost like a sports page, because every single day, there are headlines. To just throw out a couple, I happened to see on Bloomberg today, which I’m sure our analysts will be talking about and discussing.

One headline reads:
Puerto Rico Talks Are Positive and Ongoing.

Puerto Rico Working to Obtain Liquidity by November

There is another positive headline: Puerto Rico to Introduce Professional Services and Business Tax.

In fact, Manny corrected me in interpreting this headline because it has already passed and I understand that it has in fact, been signed. So, just today those three headlines popped up on Bloomberg along with many more issues and topics.

I would like to invite Manny, who has just come state-side from San Juan to give us a little picture as to exactly what discussions have been had.  And, maybe give us a quick update on the bill that was just signed by the government.

Manny Mirabal:
I’m a government relations specialist and I basically represent clients before various bodies, whether it’s here in Washington, DC and New York or in Florida.  And unfortunately for me, since February, in Puerto Rico dealing with a lot of what’s being talked about it here today.

I have also been dealing with a number of other items related to bills that are being passed, which all converge and dovetail in some way with the fiscal situation in Puerto Rico.

Last year when I was here, I made a comment that I felt that Lisa Donahue [restructuring agent] was going to find out soon that she was in over her head.  Unfortunately, for Puerto Rico, that came to pass, but she made a hell of a lot of money by extending her contract.

If there was one door in a room with four walls, they’re sure gonna have a tough time finding their way out that door. Because those four walls have to do with politics on one side, unions who control employees — everything from vacation time, work time, break time, bonus time, whatever. And the rates that are being charged to individuals in Puerto Rico for a record service at PREPA, which had been helped tremendously because of lowering of the price of oil.  But it doesn’t take away the fact that as of today, PREPA is still negotiating to try to settle its $9 billion worth of debt.

The entities that hold/control their bonds expect to get paid.  The governor started out by saying, we are going pay our debts and there’s a general constitution obligation for GO bonds that they get paid first.

One of the things that’s so interesting about what the governor and his people have done up till now — they passed four sets of increases in taxes. The governor very conveniently, did a number of things, including increasing taxes four times since January: crude oil tax, increase the tax on consumption, currently impose new business to business (B2B) taxes, and a couple of others, all in an effort to raise additional dollars.

He also lowered some government spending.  So all told, that saved about a billion dollars.  The one thing he did not do was related to the unions.  He’s consistently said, I will not layoff anyone. It is the reason the last governor didn’t win reelection. He layed-off about 20,000 people to close the gap, because the government was employee heavy.

And this governor, learned a lesson from that, because he is trying to beat the last guy.  And he’s consistently said, I’m not laying anybody off, that is clearly part of Puerto Rico’s problem.

Smith’s Stadium Bond Gradings

July 16, 2015

Stadium bonds have been the subject of several articles in Smith’s Research & Gradings over the years. What started as a curious endeavor quickly became a more serious work upon discovering even the most serious Stadium Bond analysts appear to have overlooked the history of stadiums in Western Civilization.

Smith’s Stadium Bond Gradings reflect decades of researched on the subject matter. We have developed several interesting conclusions about the nature and durability of the revenue streams.

To begin, the word “Stadium” is a Latinization of the Greek word for the distance of a race (which measured 660 feet and is a distance of one “stadia”). For track fans, this race is still run today — the 220 yard or 200 meter dash — which is still the measure of endurance, cunning, and speed amongst sprinters. In contrast, the Greeks built amphitheaters for public festivals and ritualized plays, constructed so views were unobstructed on a steep incline, so even the highest tier of seats was within earshot of the stage.

The Greek stadiums eventually grew larger, but retained a horse-shoe shape. This allowed participants at earlier sporting events to compete both on the track and in the field — quite literally. The most famous of Greek stadiums was the Hippodrome.

However, the stadiums eventually became the site of horse races — more specifically, chariot races. The largest and greatest expression of this type of stadium is arguably the Circus Maximus.The first Etruscan King, Lucius Tarquinius Priscus, drained the swamps beneath the Capitoline Hill for the construction of the first Circus Maximus around 600 B.C. Perhaps the Circus Maximus was conceived as an engine of social homogeneity at a time when Etruscans ruled the larger population of Latins — within two generations, the Latins had overthrown the Etruscan Kings (ostensibly for the rape of the virtuous Lucretia).

Circus Maximus

Circus Maximus

Eventually, the horse-shoe shaped Circus Maximus was expanded — larger than the Yale Bowl by one and one half times — with a seating capacity of 250,000 (plus the “sky boxes” on Palatine hill). Indeed, standing on the patio of the home thought to belong to Julius Caesar, which is situated high atop the Capitoline Hill, visitors can well imagine the throngs of working class Romans filling the Circus Maximus. The vantage point provides a glimpse into a vibrant Roman economy, where people cheered for the chariots drawn by four horses on a track 2,000 feet long and 600 feet wide. It was the Indianapolis Speedway and the demolition derbies of the old Charlotte Motor Speedway on a grand scale.

Surely, societies that are growing are fascinated by machines that are driven dangerously fast. Speed was everything, whether you were digging ditches or laying bricks, in ancient Rome.

The Roman Coliseum — the first of the modem day “stadiums” — was constructed to provide unobstructed seating for 50,000. The “sport” at the Coliseum was the death of gladiators and Christians; seating bespoke a person’s station in life — Patricians, Senators, Tribunes, Equites, and Publicans. Indeed, the Coliseum had little to do with “sport” and everything to do with the exaltation of ego. It was about “seeing people and being seen.”  Stadium-building did not stir the public’s imagination again until late in the 1800s.

Perhaps the construction of Cathedrals and Universities provided sufficient employment for stone workers?

Modern Era
In any event, the modem era of stadium building began with the construction of a stadium in Athens for the Olympics in the late 1890s. It was built on a foundation from an earlier Greek stadium.

At the turn of the century, America embarked on a stadium-building binge that is still unrivaled by today’s construction craze. A whole series of massive stadiums were constructed, with seating capacity in excess of 100,000 people: The Yale Bowl, Ohio State University’s Stadium, The Los Angeles Coliseum, Soldier’s Field, JFK Stadium, Notre Dame’s Stadium. These were built as great football and Olympic stadiums.

Yankee Stadium became known as “The House That Ruth Built” and decks were constructed to accommodate more fans. However, baseball stadiums remained intimate environments that allowed fans to nurture the national past-time. Only Camden Yards and Wrigley Field remained relatively unaffected by stadium construction during the later half of the century. Cleveland’s municipal stadium was built as the largest baseball stadium in the world with seating over 70,000.  Dubbed “The Mistake By the Lake”, the Cleveland Municipal Stadium funneled winds from Lake Erie toward homeplate, making it a pitcher’s park.

These fields were largely financed by the fortunes of the various teams. And, it was the ancient allure of unobstructed views that sent the Brooklyn Dodgers to Los Angeles: “Dodger Stadium” was the first three-tiered stadium constructed without columns. Such sedentary concerns had turned Ebbets Field into an apartment complex and sparked a stadium building craze.

Enter the “Astrodome”, which was the first completely enclosed stadium, in the early 1960s. Baseball franchise movement stirred the imagination of stadium builders and municipal finance executives. However, television increasingly put pressure on the margins of stadium and franchise owners, while the lucrative contracts provided enormous compensation. But, the profit motif inspired owners to fill every seat, which is still used by owners to cover the fixed costs.

Gradually, the public’s capital was used to entice private sector franchises to play at stadiums in “new” cities, such as New Orleans and Miami. The people approved bond referendums and politicians promoted the concept by stating “a major league town” moniker was necessary to attract corporations to a city — which has nothing to do with the love of sports and everything to do with power.

Cleveland Browns Leave Town
The Browns football team’s announcement that it wanted to move to Baltimore from Cleveland (eventually leading to buses leaving in the middle of the night)  prompted a lot of guffaws among backbench analysts who have been skeptical about the creditworthiness of stadium bonds. But, to understand the creditworthiness of stadium bonds, investors need to know that in many cases, repayment has little to do with revenue streams like stadium gate receipts.

For example, MBIA insured bonds that constructed a stadium for the winter “cactus” baseball league in the Southwest. However, repayment is largely secured by a tax on car rentals in the Phoenix area.

Indeed, a better name for “stadium bonds” might be “enterprise bonds”, which would lump them in with convention centers and other erstwhile endeavors by municipalities to stimulate economic enterprise. Municipal investors and analysts know that municipalities have a somewhat dubious track record in managing enterprises.

As a result, in the mid 1990s, rating agencies forced investment bankers to cobble together various revenue streams to support the debt service repayment of stadium bonds. In the 1990’s, Ernest Perez, who was one of SRG’s Regulars, provided several insights into the stadium bond financing frenzy. In 1995, he noted the St. Louis Rams -related financing essentially included a G.O. pledge from the State, which gives an indication of the importance given professional sports.

Mr. Perez agreed with SRG’s suggestion that bondholders should ideally have a “put” if the professional team leaves the stadium. But, to date, no exit signs have appeared for bondholders if a team fires the stadium.Stadium Cost

Preliminary work at S&P yielded an interesting feature, which is a sort of travelling first lien on the team’s revenues. Basically, the team ownership would agree to pay enterprise-type fees for a stadium, even if it moves to another stadium.

The Doghouse
Fresno State (California State University, Fresno) issued municipal bonds to finance the construction of a new arena. Hence, the Bulldog’s last game on March 1, 2003, at the old Selland Arena proved to be a sweet farewell as Fresno State finished atop the regular season in the Western Athletic Conference (WAC).

The WAC winning press release from Fresno State said, “Next year, the ‘Dogs will play in their new Doghouse…the Save Mart Center on campus.”

On the following Wednesday, Fresno State took harsh action by self-imposing sanctions to ban participation in the NCAA or NIT postseason tournaments because of academic fraud.

The next day, Thursday, the WAC announced the WAC-champion Fresno State Bulldog’s season would end on Saturday against Rice.

The Fresno Bee, a local newspaper, reported allegations made by some players that assistance was provided in completing writing assignments by an individual who was paid to complete those assignments. Subsequent investigations by the NCAA and Fresno State found the allegations to be true.

Yes, the Bulldogs were in the real doghouse.

Reaction among existing bondholders was one of absolute denial. “It means nothing. Well, not nothing. But, it’s not a professional franchise. If the team doesn’t have a winning season, Fresno State isn’t going to leave town.”

A trader said, “There isn’t any other form of entertainment in the region.”

NHL Strikes
Fitch Ratings determined that in the event of a complete cancellation of the National Hockey League’s 2004-2005 season, Fitch would place all currently rated sports arena debt associated with a NHL team on Rating Watch Negative.

The two publicly rated arena transactions — L.A. Arena Funding (Staples Center, Los Angeles) and the Denver Arena Trust (Pepsi Center, Denver) were both rated ‘A’.

Of course, the NHL did cancel the entire 88th season in 2004-2005. It was the first time a professional sport league cancelled an entire season due to labor disputes.

Once again, the NHL had a lockout (strike) in 2012-2013. Fitch placed one private arena rating with a NHL anchor franchise on Rating Watch Negative and continued to closely monitor the operations of other arenas with a NHL anchor franchise. Currently, Fitch rates L.A. Arena Funding’s (Staples Center, Los Angeles) $201 million revenue backed notes ‘BBB+’, Stable Outlook and the Denver Arena Trust’s (Pepsi Center, Denver) approximately $46.7 million revenue backed notes ‘BBB-‘, Stable Outlook.

Fitch did not rate the NHL league-wide borrowing facility secured by national television contracts and other league revenues.

Despite the canceled games Fitch said that the Pepsi Center, Staples Center and other Fitch-rated private arenas with an anchor NHL franchise retain some, albeit limited, financial flexibility. Fitch noted that the above-mentioned arena ratings also have an NBA franchise as an anchor tenant and host a significant amount of other events, providing some level of revenue certainty to support operations. Additionally, the arenas maintain a significant level of contractually obligated revenue in the form of multi-year suites and club seats, sponsorship and advertising and other long-term contracts. However, renewals of these revenue agreements may be impacted in the event of a canceled season. The pressure on renewal rates stemming from local economic conditions and, in some cases, recent on-ice performance could be exacerbated by labor uncertainty.

The lockout shortened the 2012–13 NHL season, originally scheduled to begin on October 11, 2012, from 82 to 48 games, a reduction of 41.5 percent.

Troubled Stadiums and Towns
Standard & Poor’s Ratings Services downgraded Bridgeview Illinois’ bond rating on general obligation (GO) bonds in 2014. The outlook is negative, S&P reported:

“The downgrade reflects the significant level of stress placed on the village’s finances by its underperforming soccer stadium. To minimize property tax increases, the village has used general fund revenues and issued additional debt to pay debt service on its GO bonds related to the stadium. The village’s very high debt level is mainly due to its series 2005 GO bonds, of which $128.4 million is outstanding, to build a soccer stadium.

The village also issued $50 million of variable-rate GO bonds in 2008, proceeds from which the village mostly used to refund economic development notes and bank lines that it incurred to buy land around the stadium and other parts of the village for future development. Because of the uncertainty about the extent to which the stadium fund will be able to support debt service from net revenues, the village is faced with either levying property taxes or using general fund resources to make up the difference.

The city of Glendale, Arizona, tried to sell its City Hall so they could pay off their hockey arena in 2013. They also considered mortgaging the police station. The city had already tapped out its land-fill fund and the water and sewer fund to pay sports debts. When Glendale residents collected signatures for a referendum, city council changed the rules. They placed the proposed City-Hall sale on the agenda as an “emergency measure” in order to bypass the referendum and prevent the voters from having a voice.

The city’s promise of economic development, stores and restaurants, vanished in the recession. Glendale’s reserve fund is gone, and the city has now approved another sales-tax hike.

Many other cities suffer from crushing debt as a result of bad stadium investments.

Hamilton County, Ohio, sold a municipal hospital to pay just one year’s worth of stadium debt. They also cut their operating budget, slashed social services, and raided the rainy-day fund.

The town of Harrison, just across the Passaic River from Newark, had its bond rating cut a rare eight notches in a single year, when it was unable to pay the debt on a soccer stadium.


Stadiums are the coronation of public construction on a grand scale in the history of Western Civilization.  The public’s capital provides a glorious return to great and growing cities by promoting civic pride in the community. For medium scale cities, smaller scaled stadiums (“right sized”) support local sports and attracted world class entertainment.

However, Smith’s Research & Gradings has found stadiums provide little in the way of economic development.  Moreover, the use of tax-incentives to lure sports teams to play in stadiums in tiny townships can lead to financial ruin.  Particular attention needs to given to claw-back mechanisms and make-whole provisions that will allow the municipality (and bondholders) to recoup their capital investments in the event a sports team wants to leave.

When it comes to stadium finance, the broader the base, the better the bonds.

Smith’s Critical Infrastructure Review: Water

June 16, 2015

j0321110Smith’s  Critical Infrastructure Review of Water (an essential resource)

We have found the United States continues to face dramatic event risks.  Tops on the list of Smith’s Event Risks for Water is Global Climate Change.

Smith’s has found more than half of the dams in the United States are beyond their expected useful life. Smith’s Gradings of reservoirs go hand-in-hand with dams.  The water level behind a dam is very important to measure slow moving events, like droughts, or fast moving events like floods. The loss of human lives and property damage factors into Smith’s Sentinel System that powers Smith Information System.

Smith’s Database of Critical Infrastructure Assets includes Safe Drinking Water and Clean Waste Water. Smith’s Drinking Water Research includes water mains, which are driven, in part, by water main breaks. These water main breaks occur 850 times a day (on average), and when coupled with slow leaks, are the reasons why one-sixth (1/6) — 2.1 trillion gallons of  treated drinking water — never reach the faucet.

The age of the water mains is a key performance indication (KPI) for Smith’s Water Main Gradings. Other H2O KPIs include the pipe material, soil, climate/weather, seismic faults/activity, location, and any recent pipe inspections.

America’s older urban areas, such as major cities along the East Coast and Mid-Atlantic, have water systems that are well beyond their expected lives.  Baltimore’s water system suffers more than a 1,000 breaks a year, for example.

The American Water Works Association, a lobbying group for non-profit and corporate water works, estimated the cost of repairing the U.S. underground water system at more than US$1 trillion.

Principal Aquifers of the U.S. Source: U.S. Geological Survey

Principal Aquifers of the U.S.
Source: U.S. Geological Survey

Smith’s Aquifer Gradings

Understanding water, as an essential resource, requires digging deep into the subject matter to learn about the aquifers, which are underground water-bearing layers of rock that serve as subterranean rivers and lakes. Smith’s Aquifer Gradings maps to 62 different aquifers in the United States.

The Great Plains Ogallala Aquifer is one of the world’s great aquifers, but in places it is being rapidly depleted by growing municipal and agricultural use. Even this huge aquifer, which underlies portions of eight states, is being depleted. It contains primarily fossil water from the time of the last glaciation. The annual recharge, in the more arid parts of the aquifer, is estimated to total only about 10% of annual withdrawals.

Moreover, Smith’s review has shown an increased presence of chemicals used in pesticides/fertilizers, proven to be harmful to human beings.

Understanding the three major Aquifers that form the Florida Aquifer is essential to investing over the next 10 to 30 years. It is one of the world’s most productive aquifers. It is under all of Florida as well as large parts of coastal Georgia and areas of coastal Alabama and South Carolina.  The Florida Aquifer provides fresh water to major cities, such as Savannah and Brunswick in Georgia, as well as Jacksonville, Tallahassee and St. Petersburg, Florida.

Smith’s Florida Bond Gradings reflect our growing concerns about the saltwater intrusion, particularly in South Florida, where the unconfined Biscayne Aquifer merges with the Atlantic Ocean. Smith’s Aquifer Gradings are linked to the bond credits of Miami and Dade County.

The Edwards Aquifer in Central Texas provides clean water to more than 2 million people.  It is located in the Permian Basin, which is famous for natural gas and the movie “Friday Night Lights”.  What’s more, the Central Texas Aquifer remains fully charged due to the tremendous recharging from local lakes, streams and rivers.

The Mahomet Aquifer is located in central Illinois. It supplies water to some 800,000 people and contains approximately four trillion gallons of water.

The Kirkwood-Cohansey Aquifer is located under the Pine Barrens (New Jersey) of southern New Jersey. It not only contains 17 trillion gallons of water, it provides some of the purest water in the world.

The Buried Valley Aquifer System is in the central basin of the Passaic River watershed as defined by the U.S. Army Corps of Engineers and U.S. Environmental Protection Agency. This aquifer impacts drinking water sources and, thus Smith’s Gradings for twenty-six municipalities in four northern New Jersey counties: Morris, Union, Essex, and Somerset.

In California, Smith’s Aquifer Gradings include the Bishop Sub-basin, which supplies San Ramon, California in Contra Costa County. The Bishop Sub-basin, together with the Mocho Sub-basin, are candidates for recharging from “reclaimed reverse osmosis waters.” to support communities in the Livermore Valley.

The Santa Clara Valley Aquifer provides drinking water for the south San Francisco Bay area.  It has been under enormous pressure, which resulted in the water pressure dropping below 200 feet — which in turn, resulted in the ground dropping (subsiding) 15 feet in some areas.

The largest groundwater basin in California is the Turlock Basin, which is a sub-basin of the San Joaquin Valley groundwater basin, and it occupies approximately 13,700 total square miles. The Turlock Basin aquifer is located within California’s Central Valley and is to the east of the city of Turlock. Unlike most of California, the groundwater in the Turlock Basin occurs in older alluvial deposits and it is the sole source of water for the City of Turlock. Smith’s Aquifer Gradings reflect that portions of the San Joaquin Basin have “overdrafted” water, allowing infiltration of agricultural water pollutants and creating overall poor water quality.

Smiths Aqueduct Gradings
Smith’s Database of Critical Infrastructure Assets includes tunnels, which can be used to transport vehicles (cars, trucks, bus) or water, which are called aqueducts. The largest existing aqueduct in the world is the Thirlmere Aqueduct in North West England. It was built between 1890 and 1925 and runs 96 miles through the English countryside.

New York Aqueduct System

New York Aqueduct System

The second largest aqueduct in the world is New York Water, which has a storage capacity of 550 billion gallons and provides 1.2 billion gallons of fresh water per day to 8 million New Yorkers. In an engineering feat that rivals the great pyramids of Egypt, more than 95% of New York aqueduct’s water is moved by gravity. The New York water system has three aqueducts and three tunnels. The aqueducts serve as reservoirs and the tunnels serve as the distribution system.

The New Croton Aqueduct is the oldest in New York and it was completed in 1890 to transport water from New Croton reservoir in Westchester and Putnam counties. Today it supplies about 10% of New York City’s water needs.

The Catskill Aqueduct is the newest asset in the New York system. It was completed in 1960 to bring water from two reservoirs in the Eastern Catskill Mountains.  It supplies about 40% of New York City’s water needs.

The Delaware Aqueduct is the largest by volume.  It was completed in 1945 to bring water from tributaries of the Delaware River in the Western Catskills and it provides about 50% of the New York City’s water supply.

In terms of length, the top title would go to the California Aqueduct. It is 444 miles long and runs from the Sacramento Delta to Lake Perris.

No. 2 in length is the Colorado River Aqueduct, which supplies the Los Angeles area with water from the Colorado River nearly 250 miles to the east.

Smith’s Canal Gradings
America’s first financial boom and the birth of Wall Street came with the construction of the Erie Canal.  Prior to the canal, Philadelphia was the heart of banking, brokering and commerce. It was the Philadelphia Exchange which promulgated rules for traders, such as no spitting on the floor of the exchange and no feet on desks.

Smith’s Canal Gradings includes 18,241 canals. These are man made canals. Each state has given a name to the canal, which may be only a narrow irrigation or drainage ditch or a large ship, municipal water and/or irrigation canal. States with extensive agricultural acreage may have several hundred to thousands of canals. Smith’s Gradings consider the canals as economic arteries and cultural veins.

The longest canal is the Intercoastal Waterway, which is 3,000 miles long and extends from the Gulf of Mexico up the entire Eastern Seaboard.

The most important canals in America today, perform the same duties they did when created.

For example, the Augusta Canal still provides transportation and is the primary source of fresh water for Augusta, Georgia.

The Chain of Rocks Canal, “Lock No. 27”, allows traffic on the Mississippi to bypass the dangerous Chain of Rocks that can make the river unnavigable during low water. During droughts, Smith’ Gradings monitors the area as a major bottle neck for logistics and barges.  Situated just south of where the Missouri River flows into the  Mississippi, Lock No. 27  handles more  cargo than any other structure on the Mighty Mississippi.

Still, not every canal has been a success. The Mississippi River – Gulf Outlet Canal (abbreviated as MRGO or MR-GO) is a 76 mi. channel constructed by the United States Army Corps of Engineers in the 1950s that provided a shorter route between the Gulf of Mexico and New Orleans’ inner harbor Industrial Canal via the Intracoastal Waterway.

In 2005, although disputed by the Corps of Engineers, the MRGO channeled Hurricane Katrina’s storm surge into the heart of Greater New Orleans, contributing significantly to the subsequent multiple engineering failures experienced by the region’s hurricane protection network. In the aftermath the channel was closed. A permanent storm surge barrier was constructed in the MRGO in 2009, and the channel has been closed to maritime shipping.

Smith’s Ferry Gradings
Ferry systems provide transportation at a much lower capital cost than, say, bridges or tunnels, for communities located along waterways.

The Washington State Ferries operates the largest Ferry System in the United States. With ten routes on Puget Sound and the Strait of Juan de Fuca, the Washington Ferries transit between terminals in Washington and Vancouver Island. In 2012, Washington State Ferries carried 22 million passengers and 10 million vehicles.

The Staten Island Ferry is the nation’s single busiest ferry route by passenger volume. New York City also has a network of smaller ferries, aka “water taxis”, that shuttle commuters along the Hudson River from locations in New Jersey and Northern Manhattan down to the midtown and financial district in lower Manhattan.  Over the past decade ferry companies started to offer service linking midtown and lower Manhattan with locations, such as LaGuardia airport in the boroughs of Queens, as well as Brooklyn, by crossing the city’s East River.

Cape Cod is connected to the islands of Martha’s Vineyard and Nantucket by The Woods Hole, Martha’s Vineyard and Nantucket Steamship Authority. The ferry leaves Woods Hole to stop at Vineyard Haven (Martha’s Vineyard) as well as Hyannis and Nantucket.

New Orleans operates the Algiers Ferry, which has been in continuous operation since 1827. It is one of the oldest operating ferries in North America.

San Francisco operates the Blue and Gold fleet of Ferries that travel the San Francisco Bay area. The majority of ferry passengers are daily commuters (which is a pleasant way to get to work) and tourists.

SRG’s database of Ferries includes the Bridgeport-Port Jefferson Ferry.  The Bridgeport & Port Jefferson Steamboat Company was founded in 1883 by Phineas Taylor Barnum. It operates year round with two ferry boats that travel on a synchronized schedule (each leaving at the ports at the same time so as to maximize the dockspace/facilities)  Over 1 million people use the Bridgeport-Port Jefferson ferry and 500,000 vehicles are transported.

Smith’s Ferry Gradings consider weather, the age of the ferries, the inspection process, as well as the management  when making its assessments.  The ferries are often overlooked and many could potentially benefit from municipal bond financings.

Iowa: Smith’s Avian Influenza Event Risk Alert (-1)

May 26, 2015

Deadly avian influenza viruses have affected more than 33 million turkeys, chickens and ducks in more than a dozen states since the start of 2015.

Iowa, which produces 20% of the nation’s eggs (layers), has been hit hard. More than 40% of its egg-laying hens are dead or dying. The high density of layer birds at the egg farms explains why the flu, which can kill 90 percent or more of a flock within 48 hours, has decimated more birds in Iowa than in any other state.
The most recent Census of Agriculture reported 233,770 poultry farms in the United States in  2012.  In 2014, the U.S. poultry industry produced 8.54 billion broilers, 99.8 billion eggs, and 238  million turkeys. The combined value of production from broilers, eggs, turkeys, and the value of  sales from chickens in 2014 was $48.3 billion, up 9 percent from $44.4 billion in 2013.

South Dakota reported its first possible infection on a chicken farm with 1.3 million birds last Thursday.(See Map)

Smith’s Regulars can contact Pam Kilbourn for quotes on how to immunize investment portfolios using Smith’s Avian Influenza Event Risk Gradings. ( Influenza

Egg Prices Expected to Increase
China, Japan, and Mexico have banned poultry imports from the United States.  Already, U.S. consumers may have noticed a rise in the price of eggs.

When a egg farm is identified as having the avian flu,  the extermination of the birds requires hiring a company to  gas the entire barn with carbon dioxide.

Even when the Avian flu has been identified at a farm, the hens are still laying eggs in barns that had yet to be emptied.  Those eggs are being sold as a liquid product after undergoing a federally required extra pasteurization.  The liquid eggs are used in many food products, including cakes, ice cream, and cookies.

Once the barns are cleared, a mandatory 28-day period must pass before it is tested. Once the test comes back negative, then the barns can be put back into production.

The U.S. Department of Agriculture believes consumers may see an increase in the price of foods using liquid eggs, too.

HPAI, or “high path” AI, spreads rapidly and is often fatal to chickens and turkeys. The HPAI H5N8 virus originated in Asia and spread rapidly along wild bird migratory pathways during 2014, including the Pacific flyway.  In the Pacific flyway, the H5N8 virus has mixed with North American avian influenza viruses, creating new mixed-origin viruses. These mixed-origin viruses contain the Asian-origin H5 part of the virus, which is highly pathogenic to poultry.

The N parts of these viruses came from native North American avian influenza viruses found in wild birds.  USDA has identified Eurasian H5N8 HPAI and mixed-origin viruses, H5N2 and a novel H5N1, in the  Pacific  Flyway.  The HPAI H5N2 virus strain has been confirmed in several states along three of the four North American  Flyways:  Pacific, Central and Mississippi.

Detroit Trials and Tribulations

September 15, 2014

The Detroit Bankruptcy makes a complete mockery of the rule of law and threatens to set a precedent that will send a shiver through the municipal bond market in search of a spine to tingle.

What is so very sad, to date, is the lack of any real moral outrage on the part of investors.

Blatant violations of contracts and the complete repudiation of bond opinions have been greeted by silence or exceptionalism that sounds like the bleating of sheep before the shears.

It doesn’t matter if Detroit is the only City in America that would dare to steal money from investors on such a gigantic scale. What matters is the City of Detroit’s attempts to repudiate $18 bln. in debt service payments go without chastisement, rebuke, or revile.

The decisions, so far, by the Federal judge, the State of Michigan, and the government of Detroit are nothing less than outrageous. How dare the bankruptcy judge demand to know how much Syncora Guarantee would accept to go along with the Detroit bankruptcy plan? Judge Rhodes sounds like an auctioneer at a Mecum Auto show: Would you settle for 75 cents on the dollar…yes? I have 75 cents on the dollar. Do I hear 50? How about 50 cents, do I hear 50 cents on the dollar, now?

Clearly, Judge Rhodes must know any plan that does not provide the full payment on the Pension Obligation Bonds is destined to be overturned by a high court. And, when the higher court rules the pension fund must return the $1.5 bln. then the City of Detroit will go into bankruptcy, again.

The likelihood that Detroit will go into bankruptcy again is almost a certainty among many in the municipal analytical community.

During a conference call, a rating agency analyst quipped, “Detroit may be going into Chapter 18 — Chapter 9, twice.”

It is even more ludicrous when the City of Detroit and the Bankruptcy Judge argue that artwork is like schools, hospitals and essential public services.

New York City’s Art Capital Group offered a $3 bln. loan secured by Detroit Art Institute’s collection. But, the City of Detroit would rather have a $814 mln. loan from local area institutions. The corruption and self-dealing stinks to high heaven.

If Michigan is allowed to restructure Detroit’s debt without providing any measure of recovery, and the Federal bankruptcy court can subordinate the rights of bondholders to the needs of organized labor, then municipal bond market faces a long walk on a very short pier.

Smith’s College of Municipal Knowledge

July 18, 2014

New Carbon Rules and the Impact on Credit
July 31, 2014 at 2:00pm – Web Event

Be sure to register for Smith’s web event to find out how the EPA’s proposed carbon rules will impact your municipal bond portfolio and the economic viability of electric power plants across the country.

Smith’s First Team All-Star, Dan Aschenbach, Senior Vice President, Moody’s Investors Service will be joined by Heather Bailey,  Executive Director of Energy Strategy and Electric Utility Development for the City of Boulder, Colorado and Marc Gerken, Chief Executive Officer, American Municipal Power to discuss how the EPA’s proposed carbon emissions rules will impact coal-dependent utilities, power projects, merchant power generators and your portfolio.

America’s public policy initiatives for energy are shaping a cleaner climate model and greater energy independence. Utilities and unregulated power generators are faced with increasing regulatory risks. It leads us to ask, what are the challenges for coal-based utilities and what will the utilities of the future look like?

The nexus is the impact on bonds issued to finance America’s public power generators.

For more information visit Smith’s website:

SMITH’s College of Municipal Knowledge

June 12, 2014

SMITH’s Research & Gradings is proud to announce “SMITH’s College of Municipal Knowledge,” a new series of web-based seminars featuring the First Team All-Stars.

The inaugural program on June 26 at 2:00pm, will focus on Municipal Derivatives. The webinar will be led by Smith’s First Team All-Star, Eric Vandercar, Head of Municipal Funding for Mesirow Financial. He will be joined by Al Sawyers, Partner with Orrick, Herrington & Sutcliffe and Jim Phillips, Senior Portfolio manager for Invesco Advisers.

For more information go to our website: