Monthly Archives: September 2015

Muni Credit News September 24, 2015

Joseph Krist

Municipal Credit Consultant


Mayor Rahm Emmanuel announced his proposed budget for fiscal year 2016 on Tuesday. It includes a record city property tax increase ($543 million), a Chicago Public Schools construction property tax increase ($45 million), a new garbage hauling fee ($62.7 million), Uber and cabdriver tax and fee hikes ($48.6 million), new electronic cigarette taxes ($1 million) and building permit fee increases ($13 million). The city property tax hike, to be phased in over four years, would go toward the police and fire pension fund. It would amount to an estimated 70-percent increase in the city’s levy. The mayor wants state lawmakers to pass a law to exempt private homes valued at less than $250,000. The CPS money goes to the school district. The rest of the money goes toward reducing the year-to-year operating deficit, also known as the structural deficit.

The sharp increase in payments to the pension funds has been looming over the City for some time. Now that the actual numbers required have been made public, the issue becomes a political one. The City Council has avoided these kinds of increases for a long as possible but it has become clear that the State’s own pension and  difficulties preclude any real current help from that source. Emmanuel will have to obtain the votes of 26 of the 51 council alderman. The property tax increase may actually be the least contentious item if the homestead exemption is allowed. The garbage fee will actually be politically more difficult.

According to the Mayor, cutting its way to find the money for increasing pension payments would cause the City to cut 2,500 police officers, or about 20 percent of the force. He also said 48 fire stations — about half the city’s total — would have to be shut down while laying off 2,000 firefighters, or 40 percent of the department. Even if he wins approval of all the tax hikes, Emanuel’s $7.8 billion budget proposal comes with a measure of risk. It counts on Republican Gov. Bruce Rauner not standing in the way of legislation, supported by the Democratic legislative leadership,  that gives Chicago more leeway on required increases in police and fire pension payments. If that bill is not enacted, the city could find itself $219 million in the hole next year. The uncertainty over the outlook for the proposed budget continues to pressure the City’s ratings and supports the continuing maintenance of the current negative ratings outlooks.


The Puerto Rico Electric Power Authority (PREPA) announced Saturday morning that it secured extensions on its forbearance agreements with the Ad Hoc Group through Oct. 1, and fuel-line lenders through Sept. 25. Although monoline bond insurers, the public corporation’s other main creditor constituency, are not parties to the extension agreements, they continue to engage in discussions with PREPA and other creditors, according to the utility. “We are making progress and will continue working toward a consensual resolution that benefits PREPA and all of its stakeholders,” said Lisa Donahue, PREPA chief restructuring officer.

Without an agreement with the monoline insurers ahead of the deadline, they are technically allowed to notify PREPA’s trustee of a default event, which would commence a 30-day cure period, or potentially face litigation. Supposedly, the utility believes it will not end up in litigation with its bond insurers, which along with the Ad Hoc Group and the fuel-line lenders are PREPA’s three main creditor constituencies.

PREPA’s fuel-line creditors, a group of banks, and the Ad Hoc Group, which holds about 35% of the utility’s $9 billion debt, were willing to grant the forbearance agreement extensions Friday. Monoline insurers continued to hold out. At the beginning of the month, MBIA Inc.’s National Public Finance Guarantee chose not to join the other forbearing creditors in granting the deadline extension.

Meanwhile, the preliminary agreement reached between the utility and the Ad Hoc Group is said to call for an exchange of uninsured bonds for new, securitized paper; a 15% haircut on principal; and a moratorium on principal payments for the next five years, among other items. National is exposed to approximately $1.4 billion on PREPA. The utility’s other monoline backers, Assured and Syncora, insured about $900 million and $170 million, respectively, according to Bloomberg. National has a total exposure of some $5 billion across the commonwealth.

The way this deal [with the Ad Hoc Group] is structured is said to be viewed as being punitive to National relative to Assured in that National has a lot of front-ended maturities. The cost to National is about twice what the cost is to Assured, even on an equal dollar basis. Even on something that they both have $100 worth of exposure to, the cost to National is about $30 and the cost to Assured is about $15 on a present value basis.  The commonwealth has hoped a PREPA workout could be a template  for creditors in the overall restructuring to come.

The utility still faces significant hurdles before it can successfully complete a consensual restructuring plan, among them securing participation of at least 75% of bondholders that have not previously been part of the yearlong restructuring talks. Also, legislation is required for many of the plan’s components — including approval for the debt-exchange procedure and changes to PREPA’s governance provisions.  Securing majority support from the Legislature has proven to be difficult at best in many instances for the García Padilla administration.


One of the best examples of a deal that could only be done in the muni market has always been bonds issued for the Santa Rosa Bay Bridge near Pensacola FL. The bridge was built in 1999 primarily to support real estate development on Santa Rosa Island on Florida’s Gulf Coast. “Bo’s Bridge” as it was known in the area, was driven primarily by support from its biggest backer, former House Speaker Bolley “Bo” Johnson. It remains a prime example of speculative investment backed by poor research by both the consultant and bond investor communities. Usage has never met projections and underutilization along with demand diminishing toll increases have combined to produce a facility which will likely never cover its debt service. Coverage shortfalls have characterized the credit since 2010.

The bridge is now back in the news with a move by the Trustee for the bonds to initiate litigation against the FL DOT. Representatives of Trustee’s counsel and a project consultant met with State Representative Doug Broxson (Santa Rosa) to discuss potential resolutions to the situation in November, 2014 and February, 2015. Neither of the meetings were successful. On March 16, 2015, the Trustee notified FDOT of the Authority’s noncompliance with the Bond Resolution, and demanded that FDOT immediately implement a toll schedule recommended by the project toll consultant. In May, 2015, FDOT’s general counsel sent a response r that posed numerous questions to the Trustee and also requested additional items that the Trustee will not be able to provide. These included a request for indemnification by the Trustee of FDOT from individual Bondholders’ claims that, following the requested adjustment to tolls, cause revenues to either decline or remain insufficient to timely pay debt service on the Bonds and to fully meet all other requirements of the Resolution. Trustee’s counsel responded to FDOT, reiterating that FDOT is contractually required to raise tolls, and requesting that FDOT raise the rates.

The Trustee has now notified bondholders that it is willing to file suit against FDOT provided it receives direction and satisfactory indemnity against the costs, expenses and liabilities, including attorneys’ fees and expenses from Bondholders that may be incurred as a result of such litigation. Bondholders representing not less than a majority in aggregate principal amount of the Bonds Outstanding would have to approve the litigation. Without Bondholder support, the Trustee is unwilling to file suit against FDOT given the costs of such litigation and the potential damage to Bondholders who are satisfied with the partial debt service payments currently being disbursed to Bondholders.

When the financing was done in 1996, it was clear that it had been structured so that all of the risk of shortfalls in use and revenues would be borne by the bondholders. Many investors felt that despite the lack of any guarantees, the State would ultimately step in and pay debt service. We do not see what has changed to make the State of Florida suddenly decide that it should take on responsibility for payment of the bonds.


The State Water Board will issue its first series of bonds under its SWIFT program. SWIFT finances the purchase of obligations from local water systems secured by either their general obligation or revenue pledge. Pledged revenue bonds would be secured by one year of reserves and required annual coverage. The Board has been funded with a $2 billion appropriation by the Texas legislature under voter approved constitutional changes. It differs from existing state revolving fund bonds in that there are no federal dollars involved in funding the pool of money available to be lent.

The program is designed to help local communities develop new water resources to meet growing water needs to support new development which is occurring at a rapid pace. The pooled nature of the borrowing and the high credit ratings obtained through the proposed structure are intended to achieve the lowest possible financing cost for the underlying borrowers.

The Board will make subsidized low interest loans, deferred interest loans, and financings accomplished through board ownership of projects which will then be sold back over long-term schedules to the underlying local agency. Loans may be substituted as appropriate.  The portfolio was structured and secured in such a way as to obtain a program rating of triple A. Those ratings have been obtained from Fitch and S&P.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website 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.

Muni Credit News September 17, 2015

Joseph Krist

Municipal Credit Consultant


The State Controller has released results for the first two months of the State’s fiscal year. Strong August numbers pushed overall receipts for the 2015-16 fiscal year to $674.7 million, or 5.0 percent, above projections. For the fiscal year to date, all three major sources of revenue are surpassing expectations. August receipts were$1.5 billion higher than a year ago, and year-to-date receipts $1.9 billion higher. August retail sales and use tax revenues of $3.1 billion beat those from a year ago by 36.7 percent, while personal income tax revenue of $4.2 billion came in 6 percent higher, and corporation tax revenue of $159.1 million was 26.2 percent higher. The state ended the month of August with unused borrowable resources of $29.8 billion, which is 10.1 percent more than anticipated. This year, because of the state’s improved fiscal position, the Controller anticipates internal borrowing will be sufficient to meet cash flow without having to issue revenue anticipation notes (RANs). In 2013, California issued a $5.5 billion RAN with an 11- month term. In the next year, the state borrowed $2.8 billion from private investors for roughly nine months.


Nearly four dozen state-funded social service programs have been denied state tax dollars in the midst of the budget impasse, some of which report being near the point of having to close their doors. Among them: After school programs for teens, early childhood intervention, autism assistance, domestic violence shelters and services, funeral and burial services for the poor, and programs to help parents prevent Sudden Infant Death Syndrome. These entities are a share of the 10% of state spending don’t have a law or court order to keep their funding flowing. Even with federal money making its way to some programs, it’s not enough to fund the services. Domestic violence programs, for example, are 91% unfunded because they don’t have access to state funding. Fortunately, state debt service is included in the 90% of state spending which is able to be maintained even without an enacted budget. This may account for the lack of real alarm from bondholders about the state’s seemingly intractable budget impasse.


While the State legislature continues to try to figure out how to meet state court funding mandates for education, After four months of negotiations, a five-day strike and one final all-night talk, the Seattle teachers union and Seattle Public Schools reached a tentative contract agreement early Tuesday, and school is scheduled to start Thursday for the city’s 53,000 students. It was the first strike by Seattle teachers in some 30 years.

The Seattle Education Association’s board of directors and its elected building representatives both voted Tuesday afternoon to suspend the strike, after four months of negotiations, a five-day strike and one final all-night talk, recommending the union’s membership approve the deal. The agreement will go to a full vote of the union’s 5,000 members at a Sunday meeting.


Pa. Senate Republicans are trying to force a vote on a stopgap budget which would eliminate about a third of the funding that was included in the GOP-passed $30.2 billion budget that Gov. Wolf vetoed in its entirety on June 30. That would provide temporary relief to social service agencies and school districts that have laid off staff, curtailed some services and put off paying bills while awaiting a budget agreement. The plan is to call for a vote to move a stopgap budget bill out of the appropriations committee on Wednesday to set up a vote by the full chamber on Friday.

A simple majority of the votes is required to gain passage and send the bill to the House for consideration. The Republican-controlled House returns to session next Monday and plans to begin its consideration of the stopgap proposal. The House rules would allow that chamber to consider it for final passage by Wednesday, at the earliest. The Governor could then  veto it, sign it, or use his line-item veto authority and veto only certain budgetary lines.


Its history of conservative and strong financial operations has allowed North Carolina’s lack of a budget for the biennium which began July 1 to fly under the radar. So investors may be surprised to find out the State legislature is just getting around to approving a budget. After 11 weeks without one, the State Senate approved a budget which includes a cut in marginal income tax rates but increase in sales taxes through an expansion of the items subject to the tax to cover repairs, maintenance and installations. Division of Motor Vehicles fees also would rise. On the spending side, the plan spends barely 3 percent more than last year, with much of the increase going to the public schools and the University of North Carolina system. All teachers and state employees get $750 bonuses.


In the midst of efforts to restructure its already troubled finances, the Puerto Rico Aqueduct and Sewer Authority (PRASA) has agreed to make major upgrades, improve inspections and cleaning of existing facilities within its Puerto Nuevo system and continue improvements to its systems island-wide, according to an announcement from the U.S. Justice Department. The sewer system serves the municipalities of San Juan, Trujillo Alto, and portions of Bayamón, Guaynabo and Carolina. It updates existing agreements reached in 2004, 2006 and 2010. The improvements will supplement projects already being implemented under the previous settlements including construction of infrastructure at wastewater treatment and sludge treatment systems, as well as the Puerto Nuevo collection system.

In recognition of the financial conditions in Puerto Rico, the U.S. government waived the payment of civil penalties associated with violations alleged in the complaint filed Tuesday. “These upgrades are urgently needed to reduce the public’s exposure to serious health risks posed by untreated sewage,” said the Justice Department’s Environment and Natural Resources Division. “The United States has taken Puerto Rico’s financial hardship into account by prioritizing the most critical projects first, and allowing a phased-in approach in other areas, but … these requirements are necessary for the long-term health and safety of San Juan area residents.”

Violations include releases of untreated sewage and other pollutants into waterways in the San Juan area including the San Juan Bay, Condado Lagoon, Martín Peña Canal and the Atlantic Ocean. These releases have been in violation of PRASA’s National Pollutant Discharge Elimination System (NPDES) permits and the Clean Water Act. PRASA also violated its NPDES permit by failing to report discharges in the Puerto Nuevo collection system and by failing to meet effluent limitations and operations and maintenance obligations at numerous facilities island-wide.

Under the agreement, PRASA will spend approximately $1.5 billion to make necessary improvements. The utility will undertake a comprehensive operation and maintenance program in the Puerto Nuevo sanitary sewer system, including conducting an analysis of the system to determine whether subsequent investments must be made to ensure the system is brought into legal compliance and to conduct immediate repairs at specific areas of concern. PRASA has also agreed to invest $120 million to construct sanitary sewers that will serve communities surrounding the Martín Peña Canal, a project that will benefit approximately 20,000 people.

The settlement is subject to a 30-day public comment period and approval by the federal court.


The battle has begun in reaction to the Puerto Rican government’s plan to restructure all of its debt, including general obligations. There are already two competing analyses which have been made public, at least on a limited basis, which call into question many of the government plan specifics. These questions question many of the economic assumptions relied on by the government as well as the absolute level of cash shortfalls to be realized over the plan’s five year time horizon. A Virginia-based group called Main Street Bondholders accused the governor on Wednesday of distorting the island’s financial situation.

The reaction sets the stage for a protracted battle between the government and its creditors as well as one between the government and its employees and taxpayers. The politics of the restructuring are a minefield of competing and somewhat mutually exclusive interests and past history shows that reliance on political will provides a shaky foundation at best for belief that a resolution will be relatively quick. That belief is rooted in the recent statement by the Governor when he said that if Puerto Rico’s creditors would not negotiate concessions, he would have to execute the five-year plan without them. Legislators from both the opposition and the governor’s own party said this week that the plan does not have the votes needed to be adopted, especially provisions that call for slashing the budget of the island’s largest public university by one-third and imposing a 10-year waiver from future minimum wage increases for young workers.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website 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.

Muni Credit News September 10, 2015

Joseph Krist

Municipal Credit Consultant


An independent financial control board will be tasked with ensuring that the recently released Fiscal & Economic Growth Plan (FEGP), once approved, is followed. It would comprise “experienced individuals from inside and outside the commonwealth,” according to an executive summary of the FEGP, with most of its members selected from a list that will not be determined by the government. It assumes that it would have the necessary powers to ensure compliance, particularly if subsequent administrations decide to do away with the final plan. The board would have the authority to approve the plan, as well as the power to force budgetary cuts, among other corrective actions that will be part of draft legislation submitted to allow for its establishment. It has yet to be revealed when the Economic Recovery Working Group will deliver its proposed legislation to Puerto Rico lawmakers for their necessary approval.

The board will oversee new budgetary regulations and practices, pursuant to a proposed law that would be known as the Fiscal Responsibility & Economic Revitalization Act. Constitutional questions have surrounded this topic since the group first began its work back in July. Legislation to this effect would have to be thoroughly analyzed to ensure it doesn’t infringe on the commonwealth’s Constitution and the delegation of powers.

Puerto Rico’s government will also need to get help from Washington, D.C., with many of the plan’s critical aspects depending heavily on federal action, as the commonwealth attempts to achieve economic growth and solve its fiscal woes. The plan again highlights the commonwealth’s lack of an orderly procedure to restructure its liabilities.

To control healthcare costs, the plan urges for parity in Medicare and Medicaid funding from the federal government. The FEGP recommends a long list of initiatives that would provide the commonwealth with equal treatment under both federal programs, allowing the local government to control healthcare costs.

Commonwealth efforts to achieve budget balance include extension until FY 2021 the Act 66 of2014’s freeze of new hires, formula-based appropriations, service costs, increase in salaries and collective bargaining agreements although the impact does not include the negative effect on Additional Uniform Contribution to the public pension systems. To reduce payroll costs the Commonwealth would implement a 2% annual attrition target. To achieve the attrition target, the Office of Management and Budget (“OMB”) may offer early retirement window to selected public sector employees. The Commonwealth may use a portion of the proceeds of P3 initiatives to incentivize voluntary retirement.

The FEGP calls for legislation to, beginning FY 2018, gradually adjust subsidies provided to municipalities by the central government, while empowering municipalities with the proper legal, administrative and operational tools for them to offset such decrease. The Commonwealth proposes significant changes to the funding scheme for the University of Puerto Rico in order to reduce the general fund subsidy requirement.

Much has been made of the demands from certain creditor groups to reduce education spending. This reflects the facts that since 1980, enrollment at public schools has declined 41% and, due to demographic trends, it is expected to fall an additional 25% (317,000 students) by 2020. This decline has led to a reduction in school utilization and a decrease in the student to teacher ratio to 12:1 (US average is 16:1). The Commonwealth proposes reduction of the  PRDE payroll through 2% attrition.

Other Commonwealth actions include proposals to concession remaining toll roads, including PR-20, PR-52 and PR-66 as well as maritime transport and bus system operations. These include 5-year minimum concession agreement for the operation and maintenance of the public maritime transportation services.

Several efforts will be made  to encourage Congress to provide Puerto Rico with tax treatment that encourages US investment on the island, such as the amendment of the US Internal Revenue Code to add new Section 933A to permit US-owned businesses in Puerto Rico to elect to be treated as US domestic corporations; enactment of  an economic activity tax credit for US investment in Puerto Rico designed as a targeted, cost-efficient version of former Section 936 of the US Internal Revenue Code; and in the event the US moves towards a territorial taxation system, exempt Puerto Rico from base erosion and/or minimum tax measures.

Other Federal action that could provide short-term impact include financing from the Department of Energy for the Aguirre Offshore GasPort project and finalizing its federal permit process; Federal Aviation Administration approval for airport consolidations; and technical assistance from the Bureau of Economic Analysis, Census Bureau, National Agricultural Statistical Service and Build America Transportation Investment Center.

The plan will also need an extension of the ruling that allows manufacturing companies that pay the Act 154 excise tax to deduct it against federal taxes. Successfully achieving an extension will allow the Puerto Rico government to extend the 4% tax until December 2017, after which it would be replaced by a “modified source income rule tax.” The large share of the island’s General Fund revenue comes from the levy, accounting for about 20%.

The plan’s base-case scenario assumes approximately -1% real growth in GNP while the high-growth scenario assumes structural reforms lead to GNP growth of 2% by 2020 (2% inflation is assumed in both cases). In the end however, the plan comes up short in terms of providing for sustainable budgetary balance. The government estimates a $ 27.8 billion cumulative financing gap over five years but 27.8 billion cumulative financing gap even after full implementation of the plan the proposed initiatives, together with economic growth, are expected to reduce the five-year financing gap by only about $13.8 billion, when taking into account $2.5 billion in incremental costs of the measures.

As for the Commonwealth’s debts, here is what the report concludes. “As difficult as debt restructuring is likely to be, the Working Group has instructed its advisors to begin working on a voluntary exchange offer to be made to its creditors as part of the implementation of the Fiscal and Economic Growth Plan  In the design of the voluntary exchange offer, the Working Group has directed its advisors to take into account the priority accorded to various debt instruments across the Puerto Rico debt complex, including its GO debt, while recognizing that, even assuming the clawback of revenues supporting certain Commonwealth tax-supported debt, available resources may be insufficient to service all principal and interest on debt that has a constitutional priority  Therefore, a consensual compromise of the creditors’ competing claims to the Commonwealth’s revenues to support debt service will be required in order to avoid a destabilizing default on the Commonwealth’s debt and to avoid a legal morass that will further destabilize the Commonwealth’s economy and finances  Accordingly, the Working Group has directed its advisors to meet with the creditor groups that have already been organized (and those that may be formed hereafter) to explain the Fiscal and Economic Growth Plan and to begin negotiation of the terms of a voluntary exchange offer that can garner widespread creditor acceptance  It is the Working Group’s belief that a voluntary adjustment of the terms of the Commonwealth’s debt that allows the measures contained in the FEGP to be implemented is the best way to maximize all creditor recoveries.”

Undermining the statements about voluntary exchanges is the Commonwealth’s announcement on Wednesday of its long-awaited debt restructuring proposal. The plan does not include the debt payments of its electric utility and its water and sewer authority which are being handled separately. Nor did they include debts structured without any payments due in the next five years. That leaves DEBT with a face value of some $47 billion. Five years’ worth of interest and principal payments on them is estimated at $18 billion. These include Puerto Rico’s general obligation bonds, which were sold to investors with an explicit constitutional promise that timely repayment would take priority over all other expenditures on the island.

The restructuring would provide $13 billion to finish paying for government services over the coming five years, which would leave just $5 billion for the bondholders over that period. It was not detailed how they thought this might be divided among the different classes of debt. Creditors are expected to get a more detailed set of cash-flow projections from the working group and form negotiating groups of their own over the next few weeks, according to the types of debt they hold. Then the negotiations over altering the repayment are expected to begin.

One way or another, it is clear that the Commonwealth is likely relying on both a reduction and an extension of its debt repayment schedule to finance itself. We continue to believe that this will lead to a protracted and uncertain process which can and should hamper the Commonwealth’s ability to access needed capital financing in the public debt markets.


Standard & Poor’s downgraded Kentucky’s debt and credit rating last Thursday, citing the enormous and growing unfunded liabilities of its public pensions plans, as well as the lack of commitment by the state’s elected officials to do anything about it. The rating was lowered from AA- to A+. S&P said, “the downgrade reflects our view of Kentucky’s substantially underfunded pension liabilities that are the result of chronic underfunding and that we view as placing long-term pressures on the state’s finances. Despite pension reform efforts that began in 2008, Kentucky lawmakers have yet to make meaningful progress in reducing its long-term pension liability, especially as it relates to Kentucky Teachers’ Retirement System (KTRS). Although pension reform was discussed in the 2015 legislative session, the session ended without a resolution on how to address  KTRS’ large unfunded liability.”

The estimated combined $48 billion of unfunded liabilities for both pension systems is the equivalent of $12,000 for every man, woman and child in the state.


In communities with large numbers of charter schools, legacy school districts struggle with declining enrollments that can lead to school closings and leave the remaining schools with students who often are the most difficult to educate. One such example is the Detroit Public Schools. Population declines and the availability of charter schools have reduced revenues distributed to it on a per pupil basis. This has made it more difficult for the DPS to balance its operations and reduced available funds for debt service.

As a result, Standard & Poor’s Rating Service announced its downgrade of two series of long-term bonds issued by the Michigan Finance Authority for DPS. S&P lowered the rating on 2011 revenue bonds to “A” from “A+” while 2012 revenue bonds dropped to “A-” from “A+.” This even though the bonds are pledged to be repaid from state aid to the schools, with the money passing each month directly from the state to a trustee charged with making the bond payments.


Washington State’s highest court declared last week that much of the law underpinning new charter schools around the state was unconstitutional. The court set a 20-day clock, at which time the charter system could be dismantled — a step that legal experts said no other state court had ever taken. The failure to enact school funding reform was already a huge budget and political issue. The panel that struck down the charter law, last month began assessing $100,000 a day in fines on the state until the Legislature comes up with a plan to better fund the K-12 system as a whole. Some teachers unions, including Seattle’s — the state’s biggest system — have been threatening to strike over issues of pay and staffing. Classes are scheduled to start on Wednesday in Seattle.

The court ruled that under the state Constitution, charter schools had to be run by a locally elected school board because they are operated with public money. The Washington court defined public schools in a unique way — the court cited in particular a 1909 legal precedent requiring that schools be governed by locally elected school boards —other states.

In the initial schools case, McCleary et al v. Washington, which led to the order last month on fines, the court said years of underfunding had created a patchwork of rich and poor, with some districts better able to raise taxes and money for their schools than others. The court said it would put the $700,000 a week in contempt-order fines assessed on the state into an education fund and keep collecting the money until a new plan was approved.

In its new ruling on the second case, League of Women Voters of Washington et al v. State of Washington et al, the court said that public funding and local control were intertwined and enshrined in Washington law and that privately run charter school boards did not constitute that elected control. “The fiscal impact of the initiative was merely to shift existing school funding from existing (common) schools to charter schools,” the court said.

One option under consideration if the State Legislature does not address the issue soon, is to treat the charter schools as extensions of home school, allowing students to continue in their current schedules and classes while issues of money were sorted out.


Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website 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.

Muni Credit News September 3, 2015

Joseph Krist

Municipal Credit Consultant

It was a mixed week for Puerto Rico.


Investors were disappointed when it was announced at the start of the week that Puerto Rico’s long awaited overall debt restructuring proposal was to be delayed for one week until September 8. We viewed the announcement with some suspicion when the delay was attributed to the impact of Tropical Storm Erika. It seemed to be just another in a long line of missteps by the government in its effort to cope with its mountain of “unpayable debt”. The decision made more sense in light of later events.


The Puerto Rico Aqueduct & Sewer Authority announced Monday it had secured an extension until Sept. 15 on a $90 million credit-line payment due Aug. 31 to Banco Popular. As a part of the deal, Bank of America will assume $75 million of this debt beginning Sept. 15, with payment due Nov. 31. Popular will keep the remaining $15 million.

In a release the Authority said “PRASA achieved an extension of the $90 million credit facility maturing Aug. 31. It will run until Sept. 15 with Banco Popular, and thereafter with Bank of America, until Nov. 30. Bank of America will acquire about $75 million, while Popular will keep about $15 million.

The utility’s initial plan was to pay the $90 million credit line to Popular with part of the $750 million bond deal PRASA had to effectively cancel due to high uncertainty in the minds of investors. These included the government’s looming deadlines to deliver the five-year fiscal stability & economic development plan, and a consensus restructuring plan between the Puerto Rico Electric Power Authority (PREPA) and its creditors.

The Authority went on to say “This extension will allow the corporation to continue its process of accessing financial markets for the issuance of up to $750 million in bonds, through which we will be able to meet the payment of this credit line and other obligations, as well as the capital improvement plan on agenda.

After the utility was unable to close the $750 million bond deal, PRASA Executive President Alberto Lázaro had said PRASA would wait until the beginning of September to make another attempt at closing the deal, particularly after several of the uncertainty factors surrounding it had cleared.

Technically, the bond issuance is in a day-to-day status, which means it is waiting for the right time to go to market. Other external, but pending, issues before the issuance include the conclusion of negotiations with PREPA bondholders and the release of the commonwealth’s fiscal adjustment plan report. Once these issues are clearer, PREPA will be better positioned to sell its bonds in the market, according to PRASA’s statement.

If the utility had failed to get the credit-line extension, it could have been forced to tap its rate-stabilizer operational fund, something that, according to Lázaro, is being avoided since it could trigger a sooner-than-expected water rate hike.


Puerto Rico announced that it had agreed on terms for restructuring up to $5.7 billion of bonds late Tuesday, even though its plans to propose a much broader debt moratorium remained delayed. The restructuring plan covers only the uninsured bonds of PREPA. Its outstanding bonds have a total face value of about $8.1 billion, but of that, about $2.4 billion are insured and not part of the agreement.

The main party to the agreement was The Ad Hoc Group owns about $4.5 billion in Puerto Rico debt and comprises more than 30 funds, such as BlueMountain Capital Management, Franklin Advisors, Oppenheimer and Knighthead, among others. The group includes some who had been considered most likely to litigate.

The Ad Hoc Group will exchange all of its outstanding power revenue bonds for new securitization notes and receive 85% of their existing bond claims in new securitization bonds, which must receive an investment grade rating.  Bondholders will have the option to receive securitization bonds that will pay cash interest at a rate of 4.0% – 4.75% (depending on the rating obtained) (“Option A Bonds”) or convertible capital appreciation securitization bonds that will accrete interest at a rate of 4.5% – 5.5% for the first five years and pay current interest in cash thereafter (“Option B Bonds”).

Option A Bonds will pay interest only for the first five years, and Option B Bonds will accrete interest but not receive any cash interest during the first five years.  All uninsured bondholders will have an opportunity to participate in the exchange.  Ad Hoc Group will negotiate with PREPA in good faith to backstop a financing that will allow PREPA to conduct a cash tender for bonds held by non-forbearing creditors.

Melba Acosta Febo, president of Puerto Rico’s Government Development Bank, called the deal “an example of the promising results that can be achieved when the commonwealth and its creditors work together.” The agreement calls for an exchange of debt, according to press accounts. Current bondholders are to accept new bonds with a par value 15 percent less than the bonds they now hold. At the same time, the new bonds are to be backed by a securitized stream of revenue that is intended to make them much safer and likelier to repay investors than PREPA’s current bonds.

The planned new bonds are also intended to cost PREPA less in interest. The bonds have not yet been rated, but the securitization is supposed to make them so much stronger that they could have a coupon rate somewhere between 4 and 5 percent. The terms also call for a portion of the new bonds to pay only interest — no principal — for the first five years, to help PREPA conserve its cash. An Ad Hoc counterproposal carried a lower average interest rate of 4.11% versus PREPA’s proposal of 5.45%, depends on securitization of debt, guaranteed by 2 cents per kilowatt-hour (kWh) of PREPA’s electricity rate, which would go to a repayment fund.

The agreement assumes participation from 75% of uninsured bondholders outside the Ad Hoc Group, is forecasted to reduce PREPA’s total debt principal by approximately $670 million, save more than $700 million in principal and interest payments over the next five years and substantially reduce PREPA’s interest rate expense on the exchanged bond debt. In addition to its agreement with the Ad Hoc Group, PREPA announced an extension of its forbearance agreements through Sept. 18. All of the creditors that were parties to the existing forbearance agreements agreed to the extension other than National Public Finance Guarantee Corp.

The announcement that PREPA had an agreement with a big block of its creditors gives Puerto Rico a needed positive step in its effort to deal with its debt. The government is likely to use the PREPA agreement  something to show to other creditors the merits of negotiating consensual restructurings instead of litigating and insisting on full payment.


Press reports indicate that the GDB is taking initial steps towards a restructuring of some of its obligations as it faces continuing liquidity issues. The GDB is reported to be entering into nondisclosure agreements with some of its creditors, as the bank aims to begin debt-restructuring negotiations and raise capital. Talks would reportedly begin as soon as Sept. 8 — the same day the Puerto Rico government expects to deliver the delayed  five-year fiscal stability & economic development plan.  An exchange of GDB notes has been mentioned by government officials as one of the most sought-after measures to bring in liquidity to the government to secure its operations beyond November.  The GDB is said to have drafted a nondisclosure agreement for creditor group being represented by law firm Davis Polk & Wardwell and advised by Ducera Partners. The group includes such firms as Avenue Capital Management, Brigade Capital Management, Candlewood Investment Group and Fir Tree Partners.


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