Muni Credit News February 26, 2015

Joseph Krist

Municipal Credit Consultant


The U.S. House Judiciary Committee’s subcommittee on regulatory reform, commercial and antitrust law, which has jurisdiction over bankruptcy law, will hold a hearing as we go to press on legislation that would allow Puerto Rico government-owned corporations to restructure their debts under Chapter 9 of the federal Bankruptcy Code. The bill, the Puerto Rico Chapter 9 Uniformity Act of 2015, is sponsored by Democrat Pedro Pierluisi, Puerto Rico’s non-voting representative to the House. Pierluisi introduced the bill last session, but it failed to move.

Puerto Rico is looking for alternatives to restructure its debts after a federal court in Puerto Rico struck down the Puerto Rico Debt Enforcement and Recovery Act on February 9. That law was enacted last year to give the island’s public corporations a process to restructure their debts. Pierluisi did not support that law, and has said repeatedly that Chapter 9 would be a better approach.

Pierluisi said “it is my hope and expectation that the hearing will be productive,” “Many stakeholders support this bill, and this hearing will provide them with the opportunity to memorialize and explain their support.  Although no objections to the bill have been registered with me up until now, if there are any concerns about the legislation, those concerns can be raised and addressed at the hearing.  The point of the hearing is to create a comprehensive record that will help the committee’s leadership determine whether to take the next step in the legislative process, which would be to hold a vote on the bill.”

Investors have concerns about the proposed bill as it could be key for those holding the bonds of financially distressed government corporations on the island. The Puerto Rico Electric Power Authority had to draw on its debt service reserves to make a July 1 interest payment. PREPA, which has more than $8 billion of bonds outstanding, is now in discussions with its creditors, and there had been speculation that it might ultimately use the Recovery Act. The Puerto Rican government has said that it supports amending Chapter 9.


It began with a bang and ends with an effective whimper but the City of Stockton emerged from bankruptcy this week. The well documented fiscal difficulties of the City led to the elimination of OPEB benefits for its retired employees and defaults on a number of lease revenue obligations. But most importantly, the City’s pensioners survived the process with those benefits intact. This creates one more brick in the emerging structure around municipal bankruptcy whereby pension obligations are assuming a superior position to debt obligations in the restructuring of liabilities through Chapter 9.


Since the advent of the automobile as the nation’s primary source of transport , the gasoline tax has provided the financial foundation for the nation’s roads. For each gallon pumped, motorists have paid several additional cents in taxes to their state and federal governments. So long as vehicle ownership grew and driving remained increasingly popular, this model worked. But as vehicles have become more fuel-efficient and younger people are less eager to obtain drivers licenses, gas tax revenue has flattened.

Generally decreased support for tax increases over time has impacted the federal gas tax such that it has lost more than one-third of its value to inflation since it was last raised to 18.4 cents a gallon in 1993. This has altered the debate over long-term transportation funding, especially for highways. As a result, state and federal officials are more willing to look at  alternatives to help pay for repairs and upgrades to highways. Those alternatives are briefly summarized.

In lieu of the traditional model of taxing retail sales of gasoline –  taxing each gallon of gas pumped, some states have begun levying a tax on the wholesale price. Virginia in 2013 repealed its 17.5-cents-a-gallon gas tax and replaced it with a 3.5 percent wholesale tax on gasoline. Minnesota Gov. Mark Dayton has proposed a wholesale tax that would be added to the state’s current per-gallon tax. Because of price swings, wholesale tax revenue can be volatile from year to year. Advocates believe it could provide more revenue growth than a flat, per-gallon tax over the long term.

Some states have begun funding highway projects by taxing all retail sales. Arkansas voters in 2012 approved a half cent sales tax increase with that portion dedicated to highways. The Michigan electorate will decide in May whether to impose a 1-cent sales tax for transportation. Because they are broad-based, retail sales taxes can generate large sums for highways. Opponents most commonly object that sales taxes tend to have a larger proportional effect on lower-income residents. That helped Missouri voters last August to defeat a proposed sales tax increase for transportation.

One new concept is the idea of a tax on the number of miles traveled. It is one of the most commonly discussed alternatives to direct fuel taxes but has not been widely implemented. Oregon plans to test the concept this July with 5,000 volunteers, who will be charged 1.5 cents for each mile they drive while getting a refund on their gas taxes. The vehicle mileage tax also has been studied in California, Minnesota and Nevada. One major obstacle has been privacy concerns from people reluctant to have their vehicles tracked with GPS devices.

Toll roads have existed in some form since the earliest eras in the country’s history and are receiving renewed interest in some places. Delaware raised tolls last year after legislators rejected the governor’s proposed gasoline tax increase. Governors in Connecticut and Missouri also recently referenced the potential for tolls. Opponents cite the relatively high levels of toll which might be required to pay for major projects.  One study found that covering the cost of rebuilding a 200-mile stretch of Interstate 70 in Missouri could mean tolls as high as $30 per car and $90 for heavy trucks.

Public private partnerships continue to be considered and tried although they have had very mixed operating results. In December, Virginia opened a 29-miles stretch of express toll lanes on Interstate 95 outside Washington, D.C. The state funded less than 10 percent of the cost for the $925 million project. Private entities invested their own money, secured a federal loan and made use of tax-exempt bonds. In exchange, Virginia gave them the right to manage the road and collect tolls for the next 73 years. A number of private toll facilities have failed to live up to operating results. The most glaring failure has been the Indiana Toll Road which is in the midst of Chapter 11 proceedings after it failed to achieve projected revenue levels.

One other alternative to increasing existing or establishing new taxes is for states to redirect existing revenue to roads. Idaho last year shifted part of its cigarette tax revenue to highways. Texas voters in November approved the transfer of a portion of oil and gas severance taxes from the state’s rainy day fund to roads. Some states have increased vehicle registration fees. Washington has imposed fees on owners of electric vehicles, and Gov. Jay Inslee recently proposed a carbon-emissions tax on the state’s largest polluters that would help finance transportation projects. He describes it as “transportation pollution paying for transportation solutions.”

The area of most uncertainty has been the issue of the establishment of a consistent funding plan for the federal Highway Trust fund. After years of relative consensus on the issue and regular approval of five year funding programs, the issue has become caught up in annual political wrangles.  Currently, various proposals from President Barack Obama and U.S. Senate and House members would help finance the federal Highway Trust Fund with taxes on the foreign-earned profits of U.S. corporations. Some proposals also would create a $50 billion infrastructure fund, to be financed by selling bonds to private companies or by taxes on foreign profits. Such a fund could be used to make equity investments and loans for state and local infrastructure projects.


New Jersey Superior Court Judge Mary Jacobson ruled Monday that the state’s failure to make a full pension payment is “substantial impairment” of the contractual rights of the police, firefighters, teachers and office workers who sued. “Because the state will now make nearly 70 percent less than the statutorily required $2.25 billion payment,” the expectations of workers have been “substantially impaired,” the judge ruled. “In short, the aim of the legislation is not being met.”

The decision is a change in course from last year for the same judge. Jacobson’s ruling contrasts with her decision days before the last fiscal year ended June 30, when Christie said he faced a fiscal emergency. Workers sued then as well, and the judge said Christie acted reasonably in paying $696 million to the pension system to cover current employees while deferring $887 million to help close the gap left by previous governors.


Jacobson’s ruling contrasts with her decision days before the last fiscal year ended June 30, when Christie said he faced a fiscal emergency. Workers sued then as well, and the judge said Christie acted reasonably in paying $696 million to the pension system to cover current employees while deferring $887 million to help close the gap left by previous governors.  The legislative and executive branches “have now had almost 10 months to find a solution to the pensions crisis for FY 2015,” Jacobson said in the latest ruling.  “Time is of the essence for the legislative and executive branches to work together to come up with a solution to the pension crisis,” Jacobson said, adding that there’s no evidence of “any serious efforts to find a solution since the revenue shortfall accrued.”

A  spokesman for the Governor blamed “liberal judicial activism” for the decision. Democrats faulted Christie for refusing to adopt their proposed balanced budget that fully funded the state’s pension obligation. “This ruling is the predictable and unfortunate result of the governor’s fiscally irresponsible decision,” Assembly Speaker Vincent Prieto, Majority Leader Lou Greenwald and Budget Chairman Gary Schaer said in a statement.

In his FY 2016 budget presentation, Mr. Christie called for a freeze of the existing state-run pension system and proposed that public workers be shifted into a different type of retirement plan, one that would not force state taxpayers to make what the Governor deems to be open-ended contributions. Both the existing plan and the new follow-on plan would be placed within a new legal entity – a trust –  over which public worker unions would have oversight. The freeze would not eliminate the underfunding in the existing pension system. Mr. Christie called for paying it down over 40 years proposing a constitutional amendment making the payments necessary to do so mandatory.

One major problem emerged immediately. Mr. Christie declared in the address that he had an agreement with the state’s largest teachers’ union to solve the pension problem, but the union countered that it had agreed only to a framework, and to keep talking. He offered no details as to how he would meet the obligations the judge said had to be made — to pay the full pension payments that were due this year under the legislation he signed in 2011. The governor fell short of that amount by about $1.57 billion. For next year, the governor proposed making another partial payment — $1.3 billion instead of the $2.9 billion called for in the 2011 legislation.

Another Christie proposal would require local government, including school districts, to finance their employees’ pensions, rather than leaving the state to do so as it currently does. It is unclear where that money would come from, as state law caps property tax increases at 2 percent and the Governor did not specify how localities were to develop the funding necessary to cover the new expense.

The governor’s proposal was although noteworthy in that it excluded any proposal for new or increased taxes as a potential source of revenue to finance pension and health benefit costs associated with the need to make up the State’s long existing pension shortfall. It does include a $1.3 billion payment for pensions but this appears to be below the required level of funding required by legislation enacted in 2011. There was no mention of the State’s Transportation Trust Fund difficulties. Should the proposals be adopted intact – something we see as unlikely – there would appear to be little prospect of relief on the horizon for the State’s beleaguered bond ratings based on this presentation. All in all a negative day for New Jersey bond holders.


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