MuniLand

Illinois says non-profit does not mean tax-exempt

In a series of decisions that may affect healthcare nationally, Illinois is tightening the noose on hospitals that claim tax-exempt, non-profit status. What began as the denial of a property tax exemption by the Champaign County Board of Review for one hospital system in 2002 has become a state-wide analysis of how much actual “charity care” hospitals are providing.

The immediate implication is that hospitals’ property tax exemptions could be revoked and vital revenues could be collected. However, this raises a broader structural question around the use of tax-exempt municipal bonds for entities that may be passive vehicles for for-profit activity.

Becker’s Hospital Review has the specifics:

[T]he Illinois Department of Revenue’s crackdown on Illinois non-profit hospital tax-exempt statuses came on the heels of an Illinois Supreme Court ruling from last year. In 2010, the Illinois Supreme Court ruled that Provena Covenant Medical Center in Urbana, Ill., could not qualify for property tax-exempt status because it did not provide enough charity care to its community, although Provena argued that it provided millions of dollars in other free care and community benefits.

The microscope on Illinois non-profit hospitals does not end there. Chicago Mayor Rahm Emanuel also recently proposed cutting free water and sewage services for city non-profits in October, and Moody’s Investors Service recently released a report that said the revocation of Illinois hospitals’ property tax-exempt statuses could be debilitating to the sector’s finances. “This has implications beyond property taxes,” Mr. Dunn says. “A not-for-profit status is, by virtue, about the level of charity work they do, and this could jeopardize their 501(c)(3) statuses.”

Fitch Ratings had a report today that gave some color on the legal and legislative processes:

Muniland’s most active states

In the municipal bond market, one of the most insightful ways to examine a state is to look at how actively its bonds trade. Broker-dealers make money by trading, so naturally they go where the action is and commit market-making resources to those states. It’s generally true that the most populous states are the ones with the most traded bonds, but if we map the wealth of a state’s citizens to how often that state’s bonds trade, we get some interesting results. For example, New Jersey, which has only 2.8 percent of the national population but a high proportion of its wealthy citizens, might have the highest number of municipal bond owners as a percentage of state population.

The municipal bond market does not trade on an exchange but rather on “alternative trading systems” (ATS). These are systems where dealers post inventories of bonds to be aggregated. The largest of the retail ATS is Bonddesk, which does some excellent data analysis for both the municipal and corporate bond markets.

From Bonddesk’s December Transparency Report I pulled the data for these charts showing the seven most actively traded states’ bonds. Bonddesk uses “investor buys” data, which represents trades that end up in a retail investor’s account. In the bond markets there are often many trades between broker-dealers before the securities land in an investor’s account, so Bonddesk scrubs the data to show the real level of investor demand.

Tapping the brakes on Illinois debt?

Illinois, the state in the weakest fiscal position, is planning two big bond deals in the first quarter of 2012. Next week they plan to raise $800 million in general obligation bonds to finance various transportation projects, followed by another $750 million later this winter in long-term bonds to fund construction projects.

Although the state is drowning in debt, unfunded pension liabilities and unpaid bills, these debt offerings are very restrained compared to the last two years when it borrowed to make obligatory payments to its heavily underwater pension system.

The State Treasurer, Dan Rutherford, had opposed issuing debt to fund pension obligations and managed to raise the alarm among his former colleagues in the Illinois legislature about the dangers of endless borrowing. Rutherford’s actions may have reversed the momentum of Illinois’s debt issuance. He is certainly the first fiscal officer that I have heard of who threatened to call the rating agencies to slow his state’s bond issuance.

Oh Illinois!

 

Oh Illinois!

Illinois has massive problems: the state has more liabilities than assets, and the credit-default swap market says they are the number one state at risk for default (see chart above). The Bond Buyer ran an excellent story on how the liabilities of Illinois are rapidly increasing:

In a sign of Illinois’ ongoing fiscal challenges, its net assets deteriorated by $8.4 billion in fiscal 2010, pushing its deficit in that category of financial reporting up to a negative $37.9 billion, according to a new report from state auditor general William Holland.

The figure takes into account the state’s accounts payable that were $9.1 billion in fiscal 2010 and $55.1 billion of debt obligations, including outstanding bonds and pension obligations. The figures provide a wider view of a state’s overall long-term fiscal health than the snapshot provided by annual budget numbers.

Insurers have “manageable” muniland risk

Insurers have “manageable” muniland risk

Meredith Whitney has made many assertions about muniland, but the only one that I had not heard from others before she stepped onto the national stage was her contention that insurance companies would be forced to sell their municipal bonds into a declining price spiral. She alleged this would collapse muniland, so it’s very interesting to see Moody’s assess the risk for insurance industry. From Property Casualty 360:

Property and casualty insurers remain the most exposed sector among financial institutions to volatility within the municipal-bond market, holding about $355 billion in municipal bonds, but the overall level of risk should be manageable, Moody’s says.

In a Special Comment, Moody’s says municipal bonds represent 60 percent of the industry’s equity capital base, as measured by policyholders’ surplus. This figure is down from the prior year, when the industry held about $370 billion in municipal bonds, representing about 70 percent of policyholders’ surplus.

Greening the city

Greening the city

Many cities took a big step forward for clean air when they adopted buses fueled by natural gas. But there are other important projects that will make getting around easier, quieter and less polluting. New York City is getting ready to take a big step. From American City:

New York City has the potential to take those [bike sharing] concepts and scale them up to a size unseen on this side of the Atlantic. Mayor Michael Bloomberg, a man the transportation community has a complicated relationship with, has been dangling a transformative bike sharing program in front of alternative transportation advocates since 2009 when New York’s city planners issued an “exhaustive proposal” that included a 10,000 strong fleet of safety-equipped, GPS-ready bikes.

Economically, the deal is a victory for innovative financing because it fully absorbs the burden of maintenance, damage, and —as this is a city— theft, vandalism, and “artistic destruction.” New Yorkers would buy their memberships on weekly, monthly, or yearly bases and get an unlimited number of free rides that take less than 30 minutes; ride a little longer, pay a little more. New York has decided that an initial burst of capital will serve their purposes the best not least because of their uniqueness among American cities in terms of density and population.

8 weakest U.S. states

According to the credit rating agencies and the bond markets, these are the 8 states with the weakest credit profiles. These states may be weak because their debts are too big, because their economy is flagging or because they haven’t adequately funded the retirement of their employees. If this were a school, these would be the students sitting in the back of the class. Maybe it’s time for these states to do a little more homework.

We start with the weakest Puerto Rico, a United States commonwealth. #1 – Puerto Rico

#2 – Illinois

#3 – California

#4 – Michigan

#5 – Nevada

#6 – New Jersey

#7 – District of Columbia

#8 – Rhode Island

Illinois’s crack habit

The state of Illinois has been riding the easy governance boat on a river of debt. It has run up its borrowing to fund infrastructure, pension liabilities and unpaid bills. According to state treasurer Dan Rutherford, Illinois’s debt load currently amounts to $198 billion — that is a mountain of debt. The amount is also about 31% of the 2009 gross state product of $630 billion.You get the feeling that Illinois state government is addicted to overspending and debt and just can’t let go of that overdraft account down at the bank.

Reuters describes the fiscal situation:

Even with a big income tax rate hike passed in January, Illinois is still spending about $5 billion more a year than it receives in revenue, according to the position paper, which also said the state’s low bond ratings have resulted in higher borrowing costs compared with other states.

Governor Pat Quinn has been pushing the legislature for anywhere from $2 billion to $8.75 billion of bond authority to pay off bills and other obligations incurred this fiscal year.

Muni sweeps: Education reform for Illinois

Happy Friday all!

Illinois passes landmark education reform

The Chicago Sun-Times reports that the Illinois state legislature has passed a substantial education reform bill. The legislation severely restrains the power of the teachers’ unions:

The measure continues to allow unions to strike in Chicago and the suburbs, but it imposes a requirement that school boards and unions take longer to negotiate and publicly disclose their bargaining positions before a strike can be launched.

In Chicago, no strikes could occur until as long as 120 days after the dispute goes to a special panel — and then, only if the Chicago Teachers Union has given a 10-day notice of a strike and has 75 percent of its bargaining unit members in agreement. Currently, a strike only requires a simple majority of everyone who votes.

Muni sweeps

FRB Atlanta: Changes in employment 2007-2011

Congress has managed to pass a three-day continuing resolution for a budget that began on October 1, 2010 for fiscal year 2011. Good show!

And out in the hinterlands where budgets are balanced every fiscal year officials wait with baited breath to see if federal cuts will effect their already stressed budgets. And they keep fighting the good fight.

The shrinking muniland work force:

Conventional wisdom is debunked by the simple chart above  from the  Federal Reserve Bank of Atlanta.

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