Muni Credit News December 10, 2015

Joseph Krist

Senior Municipal Credit Consultant


Just as the storm surrounding the credit woes of Puerto Rico intensifies, the worst suspicions of the most cynical investors and observers are confirmed. U.S. Attorney Rosa Emilia Rodríguez-Vélez of the District of Puerto Rico announced that 10 Puerto Rico businessmen and government officials have been indicted for their alleged participation in several schemes to corruptly give things of value to public officials within the government of the Commonwealth of Puerto Rico in exchange for favorable treatment and awarding of government contracts to various corporations. The 25-count indictment includes charges of conspiracy to commit federal programs bribery and honest services wire fraud, wire fraud, federal program bribery, extortion through fear of economic harm, money laundering, false declarations before a grand jury, and obstruction of justice.

Among the indictees are the Purchasing Director of the Puerto Rico Aqueduct and Sewer Authority and the Administrator and Special Assistant for Administration at the House of Representatives of Puerto Rico.

Just when it needs to show that it is serious about tackling its problems, Gov. Alejandro García Padilla signed into law the commonwealth’s self-imposed fiscal oversight board. Several amendments watered down the original version including provisions that the five-member board will only certify or endorse, rather than control, the commonwealth’s fiscal practices, while investigative, approving and budgetary-control powers also remained toned-down. The board will certify if each monitored entity is undertaking sustainable fiscal practices and complying with the five-year fiscal and economic plan. Such entities may request the board to be excluded from its scope if certain criteria are met, including long-term fiscal health and not running counter to the FEGP. The legislative and judicial branches, PREPA and PRASA, and the University of Puerto Rico are not considered monitored entities, so they do not fall under the board’s review powers.


The Supreme Court on Friday agreed to decide whether Puerto Rico, which is in the midst of a financial crisis, may allow public utilities there to restructure $20 billion in debt. Puerto Rico’s lawyers had urged the court to take immediate action in light of the overall magnitude of the commonwealth’s debts, around $72 billion, which it says it cannot pay. “Anyone who has even glanced at the headlines in recent months knows that the commonwealth is in the midst of a financial meltdown that threatens the island’s future,” the lawyers wrote in their petition seeking review of an appeals court decision that struck down a 2014 Puerto Rico law allowing the restructurings.“Because that decision leaves Puerto Rico’s public utilities, and the 3.5 million American citizens who depend on them, at the mercy of their creditors,” the commonwealth’s lawyers wrote, “this court’s review is warranted — and soon.”

The United States Court of Appeals for the First Circuit, in Boston, said the 2014 law, the Recovery Act, was at odds with the federal Bankruptcy Code, which bars states and lower units of government from enacting their own versions of bankruptcy law. Puerto Rican officials countered that the Recovery Act addressed a gap in the way its debts are treated. Chapter 9 excludes all branches of Puerto Rico’s government, including its public utilities. The Recovery Act, Puerto Rican officials said, merely filled the gap in the overall legal structure.

Creditors of the utilities sued, arguing that the Bankruptcy Code displaced, or pre-empted, the local law. So far, the courts have agreed. The decision to accept the case for review seems to have reinforced the government’s strategy of appearing to put all of its eggs in the bankruptcy basket so to speak. PR lawmakers were informed Saturday, Dec. 5, that the Governor  won’t be calling a special session to consider the Puerto Rico Electric Power Authority (PREPA) Revitalization Act bill, after all.


Senate Republicans introduced a bill Wednesday to include up to $3 billion in cash relief, a payroll tax break for residents of the island and a new independent authority that could borrow for Puerto Rico — but with no taxpayer guarantee. “Consistent with the views of Congress and the administration that there will be no ‘bailout’” of Puerto Rico, said a bill summary, “the full faith and credit of the United States is not pledged for the payment of debt obligations issued by the Authority.” “Consistent with the views of Congress and the administration that there will be no ‘bailout’” of Puerto Rico, said a bill summary, “the full faith and credit of the United States is not pledged for the payment of debt obligations issued by the Authority.” The legislation also included a provision to require Puerto Rico — and all the states — to disclose, for the first time, the true financial condition of their pension systems for government workers.

The bill provides for tapping a $12 billion public-health fund created under the Affordable Care Act, for research and preventive medicine programs nationwide. The bill summary said the money was as yet “unobligated,” and could be “repurposed” with federal supervision to help Puerto Rico through an expected cash squeeze this winter. The legislation was introduced by the Republican chairmen of three Senate committees with jurisdiction over Puerto Rico’s: Senator Hatch of Utah, whose Finance Committee has jurisdiction over tax policy; Senator Grassley of Iowa, whose Judiciary Committee is responsible for bankruptcy law; and Senator Murkowski of Alaska, whose Committee on Energy and Natural Resources has jurisdiction over matters involving America’s territories.

The bill would designate a “chief financial officer” for Puerto Rico to advise the island’s governor on drafting and sticking to an annual budget. The designee would remain in place even if the government changes hands in next year’s election, giving Puerto Rico a better chance of seeing through its five-year economic recovery plan no matter who is elected. The bill proposes only further study of  how to revive Puerto Rico’s failing pension system, or changing the way doctors on the island are paid by federal programs like Medicare.

By waiting until the end of the current Congressional session, the bill’s sponsors implicitly indicate that the measure is at best a band aid to fund the upcoming January 1 general obligation bond payment and provide more time for a more serious and comprehensive plan in 2016.


The Pennsylvania state Senate passed a public pension reform plan Monday by a 38-12 bipartisan vote. Monday’s vote sends the bill  to the House for further action. For school teachers hired after July 1, 2017 and state workers hired after Jan. 1 2018, the bill creates a new, two-track pension plan that combines a reduced guaranteed benefit based on years of service and final salary at retirement with a separate 401(k)-style component. It also will change some rules pertaining to current employees, though the basic form of their pension plan would not change.

Pennsylvania union leaders immediately blasted the bill as unfair to future workers, and noted that it may have passed improperly without a required independent actuarial note from the state’s Public Employee Retirement Commission. Unsurprisingly, the leader of the largest state employees’ union, vowed to continue to fight against the bill in the House, and also promised a certain court challenge if passed because of the changes for current employees.

The  director of the Pew Charitable Trusts States’ Public Sector Retirement Systems project has said that his reviews showed that while retirement benefits for a career worker hired under the new bill’s terms would be reduced about 10 to 15 percent from present, with Social Security that worker could still expect to receive an average of about 90 percent of their take-home pay through the course of their retirement.

The new benefit would cut the current “defined benefit” pension formula in place for workers hired since 2011 in half, essentially guaranteeing new hires 1 percent of their final salary for each year served as opposed to the 2 percent multiplier in place now. That would be paired with a mandatory 401(k)-style piece, into which the state would contribute the equivalent of 2.5 percent of an employees’ salary to their personal retirement account. Between the two components, school district employees hired under the new plan would contribute 7.5 percent of their salaries to their retirement. Affected state workers would contribute 6.25 percent.

There is a carve-out for “hazardous-duty” workers, including state police, corrections officers, game wardens and park rangers, for whom the current defined-benefit plans would continue. Current state and school district employees would see changes including changes to rules regarding lump-sum withdrawal of individual pension contributions for any payments made into the system, starting Jan. 1 for state workers and July 1 for school employees. Also included were resets to the final salary calculation to the higher of average salary over the last three years of employment, excluding overtime; or the average of the last five years’, overtime included.

The bill includes an adjustment up to workers’  payroll contributions by 0.5 percent if, over the prior 10-year period, the state’s two major retirement funds have missed their investment return targets by a full percentage point. On the other hand, contributions would be cut by a half-percent if investment gains beat targets by 1 percent. The review would be applied once every three years. Actual savings from the reform bill are small: the Senate released an analysis Monday putting the number at $2.6 billion over the next 20 years, against a cumulative cost of over $200 billion. As a result, other budget issues will have to be relied upon to stabilize the Commonwealth’s finances and ratings.

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