NEW YORK UNIVERSITY ROBERT F. WAGNER GRADUATE SCHOOL OF PUBLIC SERVICE PADM-GP.2146 TOPICS IN MUNICIPAL FINANCE. Spring 2015

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1 NEW YORK UNIVERSITY ROBERT F. WAGNER GRADUATE SCHOOL OF PUBLIC SERVICE PADM-GP.2146 TOPICS IN MUNICIPAL FINANCE Spring 2015 Instructors: Gerard J. Lian and Jerrold H. Abrahams This team-taught course is designed to provide students with a detailed understanding of basic areas of municipal finance: (1) the municipal bond market; (2) municipal credit analysis; (3) derivatives management; and (4) timely topics in municipal finance. This course is organized and developed in segments. Part 1 begins with an overview of the fundamentals of municipal bonds. Part 2 provides a detailed examination of municipal credit analysis and Pension and OPEB liabilities. Part 3 centers upon the analysis of the use of municipal derivatives and an in-depth examination of renewable energy. Municipal Credit Analysis Texts and Readings Frank Fabozzi & Sylvan Feldstein, Handbook of Municipal Bonds, Wiley, 2008 (This text is recommended but not required for Purchase) The Fundamentals of Municipal Bonds, (Sixth Ed.)(Wiley Finance) SIFMA An Analyst s Guide to Government Financial Statements, Dean Michael Mead, (Second Ed.) GASB Publication GUG03R (2012) Rowan A. Miranda and Ronald D. Picur, Benchmarking and Measuring Debt Capacity, Feb 2008 (Third Ed.), Government Finance Officers Association Municipal Derivatives John C Hull, Options, Futures and Other Derivatives (6th or 7th edition), Prentice Hall Series in Finance, 2008 John F. Marshall and Kenneth Kapner, Understanding Swaps, Wiley Finance Grading: Grades will be developed as follows: (a) 60% of your grade will be based upon completion of take-home assignments prescribed in each course segment: 20% for municipal credit analysis, 20% for Pension/OPEB analysis and 20% for municipal

2 derivatives; and (b) the remaining 40% will be based upon an integrated final project that tests basic skills acquired in different course segments. The final assignment will make use of a Team Project that includes a written report and an oral presentation that will fall on the date of the regularly assigned Final Exam. Assignment Weight Due Date Municipal Credit 20% Mar 06, 2015 Pensions and OPEBs 20% Mar 27, 2015 Derivatives/Tax Credits 20% May 03, 2015 Final Project 40% Team Project 100% Class Schedule and Readings Set forth below is a detailed listing of class lectures, topics and corresponding reading assignments, organized for each course segment. In order to actively participate in classroom discussion, these readings are to be completed prior to class. It is equally important to review slide presentations in advance of class to maximize your understanding and draw the most benefit from each of the lectures summarized below. Lecture 1 Fundamentals of Municipal Bonds I (Jan. 28 th, 2015) This initial lecture will consist of a general introduction to the course and an overview of the course materials. Initial reading assignments to be completed are set forth below. Topics to be covered in this initial class will consist of a variety of issues, including: Importance of Municipal Debt Financing Overview of the Municipal Bond Market Strategic Importance of Public Infrastructure Eligible uses of municipal debt issuance under the Federal Tax Code Public Policy Issues Relating to Use of Tax-Exempt Bonds

3 Fabozzi & Feldstein, Handbook The Fundamentals of Municipal Bonds Richard Briffault Judy Wesalo Temel The Central Place of State and Local Government Municipal Market Overview; Regulatory Disclosure Ch. 1, pgs Ch. 1, pgs Ch. 8, pgs Section 103 of the Internal Revenue Code (excerpt of actual federal tax statute) Fabozzi & Feldstein, Handbook Perry Israel; Martin Mauro Federal Tax Rules Federal Revenue Effects of Tax- Exempt Bonds The Threat to Tax-Exemption The Case for Tax-Exemption Joint Committee on Taxation Alan Schankel George Friedlander Ch. 7, pgs ; ; July 16, 2012 Pgs Oct. 19, 2012 Pgs. 1-7 Janney Montgomery Scott Citi Pgs Lecture 2 Fundamentals of Municipal Bonds II (Feb. 4 th, 2015) This second lecture will focus upon: (a) the emergence of the municipal bond market in the US and the importance of state and local sponsorship of infrastructure projects to the development, form and structure of the municipal market; (b) the structural imprint that unique historical forces have had on the legal framework of municipal finance; and (c) public policy benefits and challenges tied to the use of debt limits and other fiscal constraints governing the issuance of municipal debt. Topics to be covered in this class will include: Historical circumstances that led to creation of Debt Limitations

4 Emergence of Revenue Bonds and Public Authorities Ascendance of Revenue Bonds and User Fees Public Policy Implications Fabozzi & Feldstein, Handbook Seeking Local Government Financial Integrity Through Debt Ceilings, Tax Limitations and Expenditure Limits A State Saves a City: The New York Case Richard Briffault M. David Gelfand Shalala and Bellamy The Central Place of State and Local Government Minnesota Law Review (Vol. 63, pg. 545, 1979) Duke Law Journal (Vol. 1976, 1119) Ch. 1, pgs Pgs Pgs Credit Analysis (Lectures 3, 4, 5, 6, 7, 8 and 10) Instructor: Gerard J. Lian The next segment of the course consists of learning how to evaluate credit risk with respect to discrete areas of the municipal bond market: Lecture 3 Lecture 4 Lecture 5 Lecture 6 Lecture 8 Lecture 9 Lecture 11 High Grade Municipals Intermediate Grade Municipals Public Private Partnerships Pension and OPEB Liabilities NYC Project Finance Distressed Credits High Yield Credits Your grade for the first portion of this course segments will be based upon a take-home credit analysis project for a credit selected from one of high grade sectors enumerated above which evaluates quantitative and qualitative credit factors based upon published rating criteria or other criteria extracted from the list of readings. Your grade for the second portion of this segment will be based upon analysis of a Pension and OPEB case study. Each Project will account for 20% of your final grade.

5 Lecture 3 High Grade Municipal Bonds (Feb 11 th, 2015) This lecture will focus upon the credit analysis of a representative sample of investment grade municipal bonds. Topics to be covered in this class include: 1. Methodology and Framework for Analyzing Municipal Bonds 2. Review of Fund Accounting Basics 3. Credit Analysis of Specific Sectors a. Public Power Bond Case Study: Chelan Public Utility District The Fundamentals of Municipal Bonds An Analyst s Guide to Financial Statements Moody s Criteria Report on Public Power Electric Judy Wesalo Temel Dean Michael Mead Excel Worksheet on Public Power Bonds Credit Analysis Ch. 7, pgs Final Statement Pgs. 1-25; Information; Proprietary Pgs ; Funds pgs ; pgs Moody s Public Power Pgs (Apr. 2008) Chelan Public Utility District Excerpts from Official Statement for Case Study 1: Public Power Bonds Fabozzi & Feldstein, Handbook Oliver & Clements How to Analyze Airport Bonds Ch. 50, pgs Fitch Criteria Report Cherian George Rating Criteria for General Airport Bonds ( ) Pgs. 1-10

6 Lecture 4 Intermediate Grade Municipal Bonds (Feb. 18 th, 2015) This lecture will focus upon case study of Private Higher Education Revenue Bonds in which a specific municipal analyzing credit quality for various types of corporate-backed debt. Credits and topics to be covered in this class include: b. Airport Revenue Bond Case Study: Denver Airport Fitch Criteria Report Cherian George Rating Criteria for General Airport Bonds ( ) Pgs Denver Airport Excerpts from Official Statement for Case Study 2: General Airport Bonds Excel Worksheet on Airport Bonds Lecture 5 Public Private Partnerships (Feb. 25 th, 2015) The third lecture on credit quality will focus on issues and topics relating to the rise and use of Public Private Partnerships. There will be Guest Lecturer(s) for this credit segment. Topics to be covered include: 1. Overview of Public Private Partnerships 2. Examples of Public Private Partnerships 3. Theoretical Considerations for Public Administrators Privatization & the Public Interest Fitch Criteria Report Fitch Criteria Report Fitch Report Illinois PIRG Fall 2009 Pgs Cherian George Cherian George Cherian George US Toll Road Privatizations: Seeking the Right Balance Global Toll Road Rating Guidelines US Public Private Partnerships (July 2014) Pgs Pgs Pgs. 1-5

7 Global Infrastructure Irene Walsh Changing Landscape for Infrastructure Funding (Deloitte 2009) Pgs Lecture 6 Public Pensions and OPEBs (March 4 th, 2015) This lecture will focus upon evaluating public pension debt and OPEB liabilities and their impact upon municipal debt capacity. There will Guest Lecturer(s) for this credit segment. Credit sectors and topics to be covered include: - Public Pension and OPEB Liabilities - Key Accounting Measures and other Metrics - Profile of Present Funding Crisis - Financial Impact Upon Debt Capacity - Road to Reform An Analysts Guide to Financial Statements The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform Truth in Numbers GASB The Pew Center on the States State of Rhode Island Public Pension Plans Gina M. Raimondo Pgs Pgs Pgs (Nov. 2010) 2012 State Pension Funding Review Benchmarking & Measuring Debt Capacity Loop Capital Markets Author: Chris Mier Pgs. 1-22; 49 GFOA Chapters 2 and 4 Pgs ; 31-41

8 Lecture 7 Case Studies of Financial Distress (March 11 th, 2015) This lecture will focus upon evaluating distressed credits using two contemporary bond defaults as case studies: (i) the City of Harrisburg, Pennsylvania; and (ii) Jefferson County, Alabama. The lecture will begin with a detailed overview of Chapter 9 of the US Bankruptcy Code then proceed to evaluate each individual credit. Topics to be covered will include: - Credit analysis of the underlying obligor - Unique factors responsible for default - Range of remedial options for issuer and investors - Lessons Learned Moody s Report on City of Harrisburg, Pa Feb, 11, 2010 Moody s Report on Harrisburg Authority Jan. 18, 2011 Moody s Report on Jefferson County, Alabama Feb, 27, 2008 Moody s Lowers Jefferson County Alabama to B2 Mar 04, 2008 Municipal Bankruptcy Under Chapter 9 Dubrow, 1992 Additional reference readings will be available on Blackboard. These will include relevant Official Statements for each issuer and notable consultant reports. Lecture 8 New York City Project Finance (March 25 th, 2015) This lecture will focus upon evaluating two economic development projects currently underway in New York City: (i) Hudson Rail Yards; and (ii) World Trade Center. Invited speaker(s) include public finance banker(s) instrumental in structuring these financings and the issuance and sale of underlying securities: Topics to be covered will include: - Detailed Project Overview - Developmental Issues and Objectives - Innovative Structure and Security Pledge - Credit Analysis of Underlying Projects

9 Moody s Report on Hudson Rail Yards Nov 01, 2006 Moody s Report on Hudson Rail Yards Sep 29, 2011 S&P Report on NYC Liberty Development Corp (4 WTC Project) Dec 10, 2010 Hudson Yards Infrastructure Corporation Senior Revenue Bonds Oct 20, 2011 Official Statement New York Liberty Development Corporation (1 WTC Project) Dec 01, 2011 Official Statement Municipal Derivatives, Tax Credits and Renewable Finance (Lectures 9, 11, 12 and 13) Instructor: Jerrold H. Abrahams The next segment of the course will focus on three topics that are especially topical and relevant. Lectures 9 will provide an overview of the municipal derivatives market. Course lectures and readings will provide a survey of the nontraditional financial strategies available to tax-exempt issuers. Lecture 11 and Lecture 12 will provide an overview of the role tax credits play in municipal finance and economic development. Lecture 13 will provide an overview of renewable energy finance in the municipal and not-for-profit sphere. Your grade for this course segment will be based upon completion of an assignment or exercise(s) which will account for 20% of your final grade. There are two primary texts and others assigned readings for this segment of the course. These are: - Derivatives in the Public Sector (Published by Citi) - Understanding Swaps (Marshal and Kapner) Published by J. Wiley & Sons Lecture 9 Municipal Derivatives I and II (April 1 st, 2015) Lecture 9 will provide a broad qualitative introduction to the use and history of interest rate swaps in the municipal market. Lecture will focus on the creation of synthetic fixed rate debt and the financial implication of such instruments to governmental and not-for-profit borrowers. Performance of swaps during financial crises and recent municipal bankruptcies (Jefferson County, Detroit) will also be addressed. No previous course work or experience with derivatives instruments is required but a good understanding of present value is needed.

10 Fundamentals of Municipal Bonds Judy Wesalo Temel Ch. 4 Ch. 10 Marshall/Kapner Ch. 1, 2.1 to 2.3 DIPS Pgs. 1 to 36 Lecture 10 High Yield Municipal Bonds (Apr. 8 th, 2015) This lecture will focus upon evaluating credit risk and relative value in the municipal high yield market. There will be Guest Lecturer(s) for this credit segment. Credit sectors and topics to be covered include: - MMD Spreads in the Municipal Market - Yield and Return Differentiation in High Yield Sector - Leading High Yield Credit Sectors a. Continuing Care Retirement Communities b. Stadium Finance Continuing Care Retirement Facilities Fitch Rating Non-profit CCRCs ( ) Pgs Land Secured Debt Financings Moody s Land Secured Debt Pgs. 1-4 (Dec. 2008) US Sports Facilities Fitch Rating Sport Facilities ( ) Pgs Lecture 11 Introduction to Tax Credits I (Apr. 15 th, 2015) Affordable housing, economic development, renewable energy are all activities that the federal government wishes to promote. However, political realities limit direct subsidies. Instead a complex ecosystem of tax-based incentives has emerged. Lectures 11 and 12 will provide a broad overview of this uniquely American brand of state support. Lecture 11 will provide an introduction to the mechanics of tax

11 credits and the role of tax equity with respect to capital formation. Lecture 12 will build upon Tax Credits by considering specific tax credit programs. Lecture 12 Introduction to Tax Credits II (Apr. 22 nd, 2015) Lecture 12 will build upon the basic introduction to tax credits provided in Lecture 11 and examine the details of the following specific tax credit programs: - Low Income Housing Tax Credits - New Market Tax Credits - Historic Tax Credits - Renewable Energy Tax Credits - Modified Capital Recovery System Lecture 13 Alternative Energy I (Apr. 29 th, 2015) This lecture will address the fundamentals of renewable energy finance in governmental and not-for-profit space. Emphasis will be on recent development booms in solar and wind under American Reinvestment and Recovery Act of 2009 ( ARRA ) and the role federal tax incentives play. The theory and practice of the Renewable Energy Certificate (REC) markets, net metering and other incentive schemes will be reviewed. Basic project finance modeling concepts will be introduced.

12 Lecture 14 Conclusion and Closing Remarks (May 6 th, 2015) This last lecture will offer a summary of the key substantive components of the course and relate the materials to the form and substance of the Final Project. The class will be divided into six (6) teams of four (4) students to undertake the Final Project. The requirements of the Final Project will include preparation of a written report and supporting materials to make an Oral Presentation. 1. Summary of Credit Risk Analysis 2. Summary of Pensions and OPEBs 3. Summary of Municipal Derivatives 4. Summary of Renewable Energy and Tax Credits 5. Discussion and Explanation of the Final Project 6. Overview of Career Paths in Municipal Finance