Muni Credit News December 4, 2014

Joseph Krist

Municipal Credit Consultant


The current soap opera that is the effort to reengineer a portion of outstanding Highways & Transportation Administration (HTA) debt took another turn when Gov. Alejandro García Padilla announced Sunday that he had enough votes to pass a bailout of the HTA and prevent a threatened  a shutdown of bus and Urban Train services. The federal government had warned Puerto Rico officials about the potential fallout from a shutdown of the mass transit systems. The consequences could include loss of federal funds and owing money to Washington.

The U.S. Department of Transportation ‘s Federal Highway Administration (FHA) and Federal Transit Administration sent letters to Puerto Rico Transportation & Public Works Secretary Miguel Torres saying that the FHA is “deeply concerned” that if the HTA ceases operations the island government would not be able to meet federal requirements on highway maintenance, enforcement and inspections. It warned that federal funds cannot be used to cover expenses from claims tied to the potential termination and consulting contracts if HTA workers are laid off.

The governor’s live televised message came after a day of talks with House Speaker Jaime Perelló and the three majority Popular Democratic Party lawmakers  who had said they would vote against the tax hike. A special session to approve the bailout was in recess.

The Government Development Bank said last Wednesday it was delaying moves to protect its own shrinking liquidity and suggested the potential for at least a partial government shutdown. The GDB said it has no legal authority to float a loan to the HTA to cover payroll and keep mass transit systems operating.   “Even with legal authority, granting a loan to the HTA with no repayment source would represent the type of fiscal irresponsibility that this administration has repudiated,” GDB President Melba Acosta and the board said in the statement. “It is those kinds of moves that were the main reason for the fiscal challenges the island faces now.”

“We are now confronting the consequences of the irresponsibility of these loans that were taken, situations so serious that it threatens to shut the operations of the HTA and important public works projects,” the governor also added. On Wednesday, the House passed the tax increase.

The Puerto Rico Aqueduct & Sewer Authority is also aiming to issue at least $770 million in bonds next year. The issue, planned for the first half of 2015, would be carried out only after the Government Development Bank carries out the planned $2.9 billion bond sale to bail out the Highways & Transportation Authority. That deal is now expected in 1Q 2015.  One unknown at this time is the impact of the news that the U.S. Federal Bureau of Investigation raided the offices of Puerto Rico’s Highways and Transportation Authority (HTA) on December 3, taking documents and arresting the organization’s treasurer for alleged bribery in programs using federal funds. Proceeds from the PRASA bond issue would go to pay off credit lines maturing this spring and about $500 million in capital spending over the next two years.

Lost in all the political maneuvering is an answer to the question of how any of this addresses the fundamental causes of Puerto Rico’s financial difficulties. None of the proposals alter the weak economic fundamentals underpinning the Commonwealth’s finances. So at best, each of these transactions serves as a temporary bandage on a hemorrhaging financial wound.


Last week we noted a small victory for tobacco sales in one MA locality. Such events must continue to be viewed in the larger context of trends in adult smoking habits. These are reflected in the release by the Centers for Disease Control of statistics on smoking for 2013. The cigarette smoking rate among adults in the U.S. dropped from 20.9 percent in 2005 to 17.8 percent in 2013, according to new data published by the CDC. That is the lowest prevalence of adult smoking since the CDC’s National Health Interview Survey (NHIS) began keeping such records in 1965. The report also shows the number of cigarette smokers dropped from 45.1 million in 2005 to 42.1 million in 2013, despite the increasing population in the U.S.

Drilling a bit deeper, statistics impacting individual “stick” sales showed that among current cigarette smokers, the proportion of those who smoke every day decreased from 80.8 percent in 2005 to 76.9 percent in 2013. The proportion of cigarette smokers who smoke only on some days increased from 19.2 percent in 2005 to 23.1 percent in 2013. Among daily smokers, the average number of cigarettes smoked per day declined from 16.7 in 2005 to 14.2 in 2013. The proportion of daily smokers who smoked 20 to 29 cigarettes per day dropped from 34.9 percent in 2005 to 29.3 percent in 2013, while the proportion who smoked fewer than 10 cigarettes per day rose from 16.4 percent in 2005 to 23.3 percent in 2013.

Cigarette smoking remains especially high among certain groups, most notably those below the poverty level, those who have less education, Americans of multiple race, American Indians/Alaska Natives, males, those who live in the South or Midwest, those who have a disability or limitation. Regionally, the lowest rate was in the West (13.9%) while the rate was highest in the Midwest (20.5%).


Four years ago, a school system in California assured investors that it was making adequate financial disclosures. In fact, The Kings Canyon Unified School District had not filed or was late in disclosing a half-dozen financial statements, something it did not report in documents used to market about $7 million of bonds in November 2010. In July the district became the first municipality to accept the SEC’s leniency offer for borrowers that report by December 1 any failures in providing adequate documentation to investors.

As the leniency program ends, borrowers could be fined if they are charged with fraud. The SEC has increased its focus on the municipal market in light of the occurrence of several high profile bankruptcies by municipal borrowers. Previously, the agency has settled with the states of New Jersey and Illinois and the city of Harrisburg, for misleading investors about their financial state. Last year, in a case against an agency in Washington state, the SEC levied its first fine against a municipal issuer that misled investors.

As we have discussed in prior editions of the MuniCreditNews, the leniency program introduced in March is aimed at municipalities that fail to file timely reports on rating changes and other information of interest to investors, while claiming in bond documents that they do. It’s also open to the bankers who underwrote the debt. The SEC said borrowers could settle without fines if they turn themselves in. Banks’ penalties are capped at $500,000.

While corporations must file quarterly financial statements and have four business days to report information relevant to investors, municipalities only submit annual reports and agree to disclose material events within 10 business days. Dozens of underwriters are said to have sought have sought leniency under the SEC offer. The institutions had until Sept. 10 to do so. An SEC spokesman in Washington, declined to comment on how many submissions the agency has received. The SEC’s did say in November that the agency had received a “tremendous number of submissions.”

The SEC in 2012 issued guidance to banks instructing them to review the disclosure practices of governments whose bonds they underwrite. The program will hopefully drive the market further in that direction. When the Kings Canyon district settled with the SEC, it agreed to comply with disclosure rules within 180 days and make sure it does not break the law again. The district’s business manager, said the failures resulted from staff turnover, not an effort to deceive. “We weren’t out to purposely mislead or do any harm,” he said. “That doesn’t relieve us of the responsibility.”


The Southern California Logistics Airport Authority has announced yet another default on  three issues of its outstanding subordinate tax allocation debt. The Authority has been issuing and refinancing debt associated with the reuse and redevelopment of a former military airfield into a facility designed to provide warehouse and transportation facilities for commercial use. The impacts of the Great Recession on both economic activity and property values have led to slow and variable valuation growth in the project area on which the bonds depend for incremental tax revenue to support debt service payments. Since FY 08-09, incremental value has dropped some 5.7% annually. While multiple refinancings have lowered debt service requirements, the changes have not been sufficient to lower those costs enough. Hence the latest notice from the Authority of an impending payment default.

The bonds are another example of why, at the end of the day, economics nearly always trumps all other factors. Whether it be land development, project finance, or service revenue based credit, if the economics are not there to support the plan, the plan will fail. Something to ponder by investors in speculative credits.

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