Muni Credit News April 21, 2016

Joseph Krist

Municipal Credit Consultant


The Kentucky General Assembly has passed a $21 billion Executive Branch budget for the next two fiscal years that will pour $1.28 billion into the state pension systems and make no cuts to K-12 education while authorizing the governor’s plan to cut most state agency funding by nine percent over the biennium. Most new money in HB 303 will go for state pension in the Kentucky Employees Retirement System and the Kentucky Teachers’ Retirement System. Funding in FY 2017 will be $933.1 mn and in FY 2018 will be $888.8 mn. That is 5.7% of enacted spending for the upcoming biennium.

Funding for K-12 education will not be cut under HB 303, which protects funding to schools and gives the Department of Education up to $20 million in additional funds over the biennium as a necessary governmental expense if there are not enough per-pupil SEEK funds available. Public preschool will be made available to families with incomes below 200 percent of the poverty level as part of a pilot program, and $15 million in preschool funding will be set aside for grants to help develop full-day programs for children eligible for state child care assistance.

In the area of higher education, HB 303 authorizes lesser cuts of 4.5 percent over the biennium for state colleges and universities that faced the possibility of 9 percent cuts under the governor’s original proposal. A performance-based funding formula for state universities is also found in the bill that will require 5 percent of state university base funding to be gauged on an institution’s performance. Kentucky State University would be exempt from the performance-based model.


On April 12, 2016, Louisiana Governor John Bel Edwards released his proposal for the state’s fiscal year 2017 budget. Citing shortfalls in the state budget, Edwards said that deep cuts to many state services were necessary to close gaps for the overall improvement of the state’s financial health. The proposal included cuts to the state’s primary college scholarship program (TOPS), cuts to “safety net hospitals” for low-income families, and cuts to education at both the K-12 and college levels. The funding for the TOPS program, in particular, would be reduced by about two-thirds of its current level, leaving the total funds at about $110 million. The state legislature went on to debate several bills that would alter how  cuts.

The cuts followed up a series of tax increases adopted during a special session of the legislature in late winter. These included a rise in the State sales tax rate of 1%, an expansion in the taxable base for the existing 4% sales tax through FY 2018, and the stabilization fund and appropriated $200 million of monies from funds received under the BP settlement agreement.

According to the U.S. Census, Louisiana had 14 state pension plans as of April 2015. Between fiscal years 2008 and 2012, the funded ratio of Louisiana’s state-administered pension plans decreased from 69.2 percent to 55.5 percent. The state paid 96 percent of its annual required contribution, and for fiscal year 2012 the pension system’s unfunded accrued liability totaled $18.4 billion. This amounted to $4,161 in unfunded   liabilities per capita.

The State continues to be negatively impacted by low oil prices. These have had a negative impact of revenues and employment and increased pressure on the expenditure side of the budget. So long as oil prices remain in a relatively depressed state, the negative pressure on the State’s credit ratings will persist. These are exacerbated by the State’s weak pension funding position reflecting years of underfunding now creating annual budget gaps.


So far this year’s budget process has not continued positive momentum which the State and the Governor had hoped to carry forward in regard to the State’s longstanding pension funding issues. In 2007, legislation was enacted which provided for surplus General Fund monies to be transferred to the State Retirement Fund. Pressures on the General Fund diminished support for this plan as it was felt that the funds were needed elsewhere and last year the Legislature effectively repealed these provisions keeping those surpluses within the General Fund.

Most prominent among those pressures were the need for additional state aid to struggling municipalities. Those struggles are based in changes in the local economies but also fiscal pressures resulting from increasing pension demands. Some 20 of the 36 municipal pension plans have funding ratios below 60%. These pressures resulted in the Chapter 9 bankruptcy of the City of Central Falls in 2011.

Now nearly five years later, several municipalities are considered to be distressed. For FY 2017, eight are determined to be eligible for funding from Rhode Island’s Distressed Communities Relief Fund. Pension requirements are but one of several criteria used to determine qualification for Fund monies. It is hoped that at least one community will be able to drop out of the program in FY 2017.

These factors are among many that weigh negatively on Rhode Island’s credit outlook as it continues to deal with the long-term decline of its major manufacturing industries. Its efforts to do so have been stymied by competition from the larger neighboring states in the region and larger and more established entities in those states in the commercial and service sectors that Rhode Island seeks to expand.

Our view is that those pressures will continue and will be sufficient to outweigh the impact of the positive steps which the State is undertaking. We would view that State’s debt as one to underweight versus other comparably rated state bonds.


According to press reports, the Government Development Bank (GDB) and a group of its creditors have struck a tentative deal, providing the bank with some relief ahead of its $422 million debt payment due May 2. The group of GDB creditors, which hold about a fourth of the bank’s roughly $4 billion debt, would agree to a forbearance agreement that covers only $120 million of the May payment. The government could still be pressed to declare a partial moratorium on the remainder of the payment, as there is not enough money to meet the payment in full. The tentative plan reportedly would also include a debt-exchange process whereby GDB creditors would get new with a haircut estimated at 50%. Creditors would have to accept that they would receive no principal payments in the next few years. The rest of the bank’s creditors would still need to join the agreement if the exchange is to take place.

Meanwhile in Washington, the Puerto Rico debt restructuring bill was still short of votes. The bill is still being rewritten, and as of yet the vote has not been rescheduled. The U.S. House Natural Resources Committee issued a statement Tuesday seeking support for its bill. “Congress cannot pass legislation to erase the decades of fiscal mismanagement and socialist policies that brought the territory to its knees. But a growing number of Members understand we must act on a responsible solution to prevent U.S. taxpayers from footing the bill,” the panel statement said.

Meanwhile, the situation on Puerto Rico remains “fluid”. The Puerto Rico House of Representatives passed a bill that would exclude general obligation (GO) and Sales Tax Financing Corp. (Cofina) bonds from the law that allows the governor to declare a debt moratorium. The leader of the PDP in the Senate said in an interview that he agrees that the government should not include general obligation debt or debt that is sustainable such as Cofina debt, which is guaranteed by the sales and use tax,  in the moratorium. He also said he believes the debt that was recently restructured at the Puerto Rico Electric Power Authority should not be part of the debt moratorium.
I don’t support including the general obligation bonds in the negotiation to restructure debt because it would be in violation of the constitution.”

However, Gov. Alejandro García Padilla immediately advised lawmakers in a statement that he plans to veto the bill if it reaches his desk. These maneuverings are why it is a fool’s errand for analysts to try to predict the outcome of this process. Those with the means and capacity to deal with these day to day machinations are most appropriately equipped to play in these bonds. Rare is the individual investor who is.

In the meantime, the Government Development Bank has filed with regulators to sell taxable debt that would mature May 2017 as officials negotiate with creditors about a $422 million payment owed at the start of May. And no, the Puerto Rican government has not released audited financial statements for FY 2014. They are requesting proposals from auditors for FY 2015 financial statements. And yes, it is FY 2017 that begins this July 1.

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.

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