Muni Credit News June 13, 2017

Joseph Krist

Senior Municipal Credit Consultant



We see the effort by the Governor of Puerto Rico and his supporters to achieve statehood for the Commonwealth of Puerto Rico as being not constructive for the Commonwealth’s near term financial situation. We believe that there are a number of hurdles to be overcome that can only be addressed by the Commonwealth before statehood could begin to be seriously considered by Congress. The recent plebiscite on the question of status we see as being far less decisive than the results would indicate.

The Soviet-style result (97% in favor of statehood) is as much the result of a highly successful boycott effort by opposition parties. We see the meager 23% voter turnout as being a more relevant indicator. In addition, we see the decision by the US Department of Justice to disapprove the plebiscite and any funding for it to be relevant concerns. DOJ noted that the ballot omits Puerto Rico’s current territorial status.  “This omission,” the letter says, “appears to be based on a determination that the people of Puerto Rico definitively rejected Puerto Rico’s current status in the plebiscite held on November 6,2012.” The 2012 vote, however, has been “a subject of controversy” according to the Department, and “significant political, economic, and demographic changes have occurred in Puerto Rico and the United States” since that vote.

“As a result,” the letter concludes, “it is uncertain that it is the present will of the people to reject Puerto Rico’s current status.”“Accordingly, any plebiscite that now seeks to ‘resolve Puerto Rico’s future political status’ should include the current territorial status as an option,” the letter states, “[o]otherwise, there would be ‘real questions about the vote’s legitimacy’ and its ability to reflect accurately the will of the people.” DOJ had other issues with technical aspects of the ballot’s wording that it felt would be prejudicial.

Meanwhile, The Puerto Rico Electric Power Authority (PREPA) and its creditors have agreed once more to extend several deadlines under their restructuring support agreement (RSA), the commonwealth’s Fiscal Agency & Financial Advisory Authority (FAFAA) announced. Once the RSA is approved by the fiscal board under Title VI of the federal Promesa law, PREPA will now have until June 28 to finalize the required documentation and begin the voting process by all creditors over the “qualifying modification,” as defined by the out-of-court restructuring process provided by Title VI. June 28 is also the deadline for an agreement with certain creditors to fund Prep’s short-term liquidity needs, as well as to retaining a claims agent as established under the RSA.

Concerns have been expressed  that the seven-member panel does not have the votes to finally restructure PREPA’s $8.9 billion debt load, as well as the utility’s operations. All the creditors to the RSA and the commonwealth have agreed the deal should be implemented through Title VI of Promesa, which allows for voluntary agreements for debt restructuring among stakeholders but, it is reported, there may be some portions of the deal that may have to go through Title III or the court-brokered bankruptcy process.


Standard & Poor’s (“S&P”), downgraded the County of Suffolk, NY General Obligation Issuer rating to A- from A. “The downgrade reflects our view of the county’s available reserve levels, which have been negative for the past seven years, and our opinion that while the county’s continued efforts to narrow its operating gaps are improving, these efforts are unlikely to allow for the accumulation of reserves to positive levels over the next four to five years,” said S&P Global Ratings.

“Despite improvements in recurring revenue and expenditures, we believe the county is unlikely to generate an operating surplus without the continued use of one-shot revenue and expenditure items over the next two years, which we view as a credit weakness. It is our opinion that while the county’s operating performance has stabilized, the county will experience continued difficulty in generating surpluses over the near term, which would allow it to significantly improve fund balance over the near to medium term to levels in line with higher rated peers. We believe that current reserve levels are more comparable with those of lower rated peers, and despite the county’s very strong economy, result in a weakened ability to meet financial obligations if a period of substantial economic distress were to occur.”


In one piece of good news for Illinois, the State Comptroller has confirmed that the state has renegotiated the termination terms of some of its outstanding swap agreements. The new terms provide that the swaps cannot be terminated until the state’s general obligation bond rating is lowered below BB+ and Ba1. The increases the state’s ratings margin by one notch in terms of the agreement. With the perceived increasing likelihood of the state’s ratings being lowered as soon as July 1, this change does provide some cushion against increasing demands on the state’s cash. It is estimated that the cost of terminating the swap agreement would have been an immediately payable $70 million.


We know that it will not be adopted but the ongoing efforts in the Senate will have to take heed of the recent report by the Centers for Medicare and Medicaid Services’ Office of the Actuary. That report estimates that repeal bill would leave 13 million more Americans uninsured over the next decade and reduce federal spending by $328 billion. Both of those numbers, based on differing assumptions, are respectively lower and higher than the CBO estimates.

In 2018, the number of uninsured is estimated to be about 4 million higher under the AHCA than under current law, mainly due to the impact of repealing the individual  to 31 million in 2018 and to 32 million in 2019. By 2026, the number of uninsured is estimated to be roughly 13 million higher under the AHCA. Most of the longer term coverage losses stem from the anticipated rollback of Medicaid expansion. CMS estimates that 6 million fewer individuals would be shut out because of the House bill’s tighter eligibility criteria, and that an additional 2 million will cycle out of the program because of new requirements.

There will be 35 million uninsured in 2020 under the AHCA, a figure that is about 8 million higher than under current law. For those Medicaid enrollees who would lose coverage under the AHCA, most are assumed to ultimately be uninsured, though a small fraction would choose to purchase individual insurance. All States are assumed to choose to operate within the per capita caps. So even with the more “favorable” assumptions, cuts along these lines remain credit negative for the states. The reduction in available federal revenues as well as the increased pool of potential charity care patients would be damaging to State financial positions.


Cory Booker, D-N.J., and James Lankford, R-Okla., are sponsoring a bill that would prohibit teams from using municipal bonds, whose interest is exempt from federal taxes, to help finance stadium construction. The two senators could not be farther apart on the political spectrum but they have joined forces in this latest legislative effort against municipal bonds for stadiums.

A similar bill was introduced by Congressman Steve Russell, R-Okla., into the House of Representatives in March 2016. Municipal bonds have been used to fund 36 newly built or renovated sports stadiums since 2000. The bill would end federal subsidies for stadium financing, but would not prevent localities and states from bidding and offering economic incentives to teams.

This is the next of many efforts to eliminate bonds for stadium projects. While the evidence against the productivity of such financings is questionable at best, we see the likelihood of success to be low based on past history. So keep your eye out for Las Vegas Sports Authority bonds soon.


It is buried pretty in a report on bank regulatory reform but the US Treasury has joined a growing chorus in recognizing the credit quality on an overall basis of municipal bonds. Executive Order 13772 instructs the Treasury Secretary to report to the President the extent to which the existing financial regulatory system promote the Administration’s “Core Principles” of financial regulation, which include empowering Americans to make independent financial decisions, save for retirement, build wealth and prevent taxpayer-funded bailouts. In its section on Improving Regulatory Coherence to Improve the Functioning of Capital Markets, Treasury recommends expanded treatment of certain qualifying instruments as HQLA. This would include categorizing high-grade municipal bonds as Level 2B liquid assets (rather than generally not being counted as HQLA currently). This the latest iteration of what has been a changing position as to whether or not municipal bonds fit the bill.

The Federal Reserve has supported this position. Bipartisan legislation to this effect was introduced in the last session. Inclusion in the category of HQLA can be nothing but good for the market and support the generally favorable credit standing of municipal bonds among the public.

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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