Muni Credit News February 12, 2015

Joseph Krist

Municipal Credit Consultant


Investors in billions of dollars of Puerto Rico bonds scored an initial major legal victory when a federal judge ruled that the commonwealth’s recently enacted debt-restructuring law was unconstitutional. Judge Francisco A. Besosa of the United States District Court in Puerto Rico said on Friday that the Puerto Rico Public Corporations Debt Enforcement and Recovery Act was void and enjoined commonwealth officials from enforcing it.

The act as passed enables the commonwealth to restructure its debts (other than Commonwealth G.O. bonds) and labor contracts of the island’s public corporations, including the Puerto Rico Electric Power Authority (PREPA). Puerto Rico cannot seek protection from creditors under federal bankruptcy law, so it has fewer options to restructure the finances of its troubled agencies.  A group of PREPA bond holders, including BlueMountain Capital and OppenheimerFunds, that own about $2 billion of the power’s authority’s debt sued the commonwealth in federal court, arguing that the recovery act violated their contractual rights.

The passage of the recovery act in June disappointed investors, particularly hedge funds, which had been active buyers of bonds issued by PREPA and other Puerto Rico entities at distressed prices. Investors perceived that the new law showed how the government of Puerto Rico was unwilling to pay, a keystone of municipal finance. Enactment led to a series of downgrades by Moody’s, which had already rated the commonwealth’s debt as junk.

The decision said that the legislation was pre-empted by federal bankruptcy law. “The commonwealth defendants, and their successors in office, are permanently enjoined from enforcing the recovery act,” according to the 75-page decision. A spokesman for the Government Development Bank said: “We will be reviewing all the aspects of the ruling rendered by Judge Francisco Besosa. In due time and after careful examination, we will decide on a course of action.” The ruling is a significant setback for the Puerto Rico government, as it tries to restructure the debts of its public corporations while still maintaining the confidence of the municipal bond market. Due time was not much time as  the government announced that it will seek to appeal the ruling.

We see the situation less positively. The reality is that Puerto Rico still needs to restructure its debt in the face of a persistently underperforming economy. Any celebration would be clearly premature.



Newly elected Gov. Bruce Rauner took his first step toward curbing the power of public sector unions this week by issuing an executive order that would bar unions from requiring all state workers to pay the equivalent of dues. Mr. Rauner said. “An employee who is forced to pay unfair share dues is being forced to fund political activity with which they disagree. That is a clear violation of First Amendment rights — and something that, as governor, I am duty bound to correct.”

The action follows that of other Republican governors in the Midwest who have aggressively taken on public sector unions in recent years. It started with Mitch Daniels of Indiana, who ended collective bargaining by state workers by executive order; Scott Walker of Wisconsin, led efforts to cut collective bargaining rights for most public employees; and Rick Snyder of Michigan, signed legislation ending the requirement that all workers in unionized workplaces pay union dues.

The  executive order affects about 6,500 of the state employees who are not in unions but currently pay fees in lieu of union dues. The American Federation of State, County and Municipal Employees said that about 42,000 state employees are represented by unions. Union leaders have described the fees, often called “fair share” payments, as reasonable contributions from workers who, while choosing not to be union members, still benefit from collective bargaining agreements.

The order does not affect private sector unions or state employees who choose to be in unions. A spokesman for the governor said that the executive order would take effect immediately but that the money from the union fees would be placed in escrow in case the order was challenged in the courts. In his recent State of the State address, Mr. Rauner called for a ban on political contributions by public employee unions to “the public officials they are lobbying, and sitting across the bargaining table” from, as well as allow local governments to enact “right to work” laws. Those laws typically abolish the practice of making both union membership and dues-paying automatic in unionized workplaces leading to declines in union ranks.

AFSCME, which is set to negotiate a contract with the state this year, is one of many unions that backed Mr. Rauner’s Democratic opponent in last year’s election. A spokesman for the National Right to Work Committee, said the action could be seen as a natural progression from recent victories in nearby states. “There will inevitably be a union battle on this,” he said, “but we’re excited this is bringing this issue to the forefront.”  “We’d like to see Illinois become a right-to-work state,” he said. “Obviously, you need more than just the governor to get that done.”

The move has some aspects of kabuki theatre to it in that it follows a pattern of regional governors taking the executive order route rather than offer a legislative proposal. In Illinois, the state’s legislature is controlled by Democrats, many of whom have received union support over the years. On Monday evening, the reaction from legislative leaders was strategically muted.

“Our legal staff is reviewing the governor’s executive order regarding fair share,” said the Senate president, John Cullerton, a Democrat. “At the same time, I look forward to hearing the governor’s budget as we search for common ground to address our fiscal challenges.” Bob Bruno, director of the labor education program at the University of Illinois at Urbana-Champaign, said “in principle, it’s a pretty serious assault. In terms of impact, it remains to be seen because it’s a relatively small percentage of the population that’s chosen fair share,” Mr. Bruno said. “This is an assault on the institutional existence of the union in the public sector, and these sorts of fights are historic fights and have big impact.”


Municipal investors continue to chew over the implications of the Detroit bankruptcy. The result there and its negative impact on debt holders versus other creditors has led to concern that Michigan issuers may consider similar moves to be available tools to deal with other entities in financial trouble. Hence, the importance of comments made by Wayne County Executive Warren Evans last week about a financial mess that could see the county’s general fund revenue depleted as early as May 2016.

A financial review from auditing firm Ernst & Young, along with research from a group put together during Evans’ transition into office, developed a forecast of general fund results going forward. The county currently has a $70-million deficit, and pension funds are funded at 45%, down from 95% just 10 years ago. “We understand the fiscal illness,” Evans said. “We’re working to make sure the illness isn’t terminal.”  He was quick to dismiss concerns on whether state oversight — or a potential bankruptcy – were looming. He characterized the problem as one which was solvable in-house. He implied that this would lessen the likelihood of outside oversight.

Evans said solutions have not been devised at this point as his administration has been working to find out “exactly how deep the hole was.” “Everything is on the table,” he said about the potential for cuts. “We’re working on solutions. And those need to be worked on by the stakeholders.” The county’s director for budget and planning attributed most of the shortfall to the economic downturn beginning around 2008, when the county began facing massive losses from property tax revenues. In the meantime, the county’s responsibility for legacy costs — employee healthcare and pension contributions — increased about $50 million annually.

According to the former county executive Robert Ficano, losses from property-tax revenue due to the economic downturn had left the county with more than $200 million in debt, unable to keep up with employee pension liabilities and increasing health care costs. For the 2012-13 fiscal year, with a budget of $2.34 billion, the county reported a deficit of about $30 million. The 2014-15 budget is for $1.68 billion.

In response to the comments, Moody’s downgraded to Ba3 from Baa3 the rating on the general obligation limited tax (GOLT) debt of the County. The county has a total of $695 million of long-term GOLT debt outstanding. Moody’s adjusted the outlook to negative to reflect its expectation that the county faces hurdles in implementing significant cost reductions. Failure to reach structural balance in the near term is seen as degrading available liquidity and could raise the probability of state intervention and increase the risk of the county seeking to restructure its debt and other obligations.


Colorado released data on tax revenue collections from recreational marijuana in the first year of sales, and they were below estimates — about $44 million. The release of December sales tax data was for its first full calendar year of the taxes from recreational pot sales, which began Jan. 1, 2014. Colorado was the first government anywhere in the world to regulate marijuana production and sale, so the data was widely anticipated. In Washington, where legal pot sales began in July, the state had received about $16.4 million in marijuana excise taxes by the end of the year; through November, it brought in an additional $6.3 million in state and local sales and business taxes.

Colorado’s total receipts related to marijuana for 2014 was about $76 million. That includes fees on the industry, plus pre-existing sales taxes on medical marijuana products. The $44 million represents only new taxes on recreational pot and  were initially forecast to bring in about $70 million. By all accounts, that estimate was a guess. Colorado has already adjusted downward spending of the taxes, on everything from substance-abuse treatment to additional training for police officers.

Colorado will also likely have to return to voters to ask to keep the pot tax money due to a 1992 amendment to the state constitution that restricts government spending. The amendment requires new voter-approved taxes, such as the pot taxes, to be refunded if overall state tax collections rise faster than permitted. Lawmakers from both parties are expected to vote this spring on a proposed ballot measure asking Coloradans to let the state keep pot taxes.

The results underscore a big conflict facing public officials considering marijuana legalization. Taxes should be kept low if the goal is to eliminate pot’s black market. But the allure of a potential weed windfall is a powerful argument for voters, most of whom don’t use pot. So far, the Colorado experiment shows the tax revenue isn’t trivial but it has also shown that pot-smokers don’t necessarily want to leave the tax-free black market and pay taxes. If medical pot is untaxed, or if pot can be grown at home and given away as in Colorado, the black market persists.

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