Muni Credit News June 14, 2016

Joseph Krist

Municipal Credit Consultant


The state Supreme Court on Thursday upheld a landmark 2011 law freezing cost-of-living adjustments for retired government workers. The 6-1 ruling is a victory for Gov. Chris Christie. The lawsuit was filed by a group of retired prosecutors and hinged on whether the legal promise not to reduce workers’ pensions includes cost-of-living adjustments. Christie and state lawmakers suspended the regular increases in 2011 as part of an overhaul of employee benefits that also raised the retirement age and required workers to pay more for their pensions and health care.

Public workers sued, arguing before the court in March that their cost-of-living adjustments have the same protections as the pensions themselves and cannot be reduced, while a lawyer for the state said COLAs fall outside that “non-forfeitable,” or absolute, right. Assistant Deputy Attorney General Jean P. Reilly argued if there was any ambiguity in the language of the 1997 law, which granted a non-forfeitable right to the “benefits program,” it should be interpreted narrowly and in the state’s favor.

Writing for the majority, Justice Jaynee Lavecchia agreed, finding “In this instance, proof of unequivocal intent to create a non-forfeitable right to yet-unreceived COLAs is lacking. Although both plaintiff retirees and the state advance plausible arguments on that question, the lack of such unmistakable legislative intent dooms the plaintiffs’ position.”

The COLA suspension was part of a broader law requiring public employees and the state to pay more into the pension system. The legislation was enacted to reduce the state’s massive pension debt by $140 billion over 30 years and preserve the fund. Freezing cost-of-living adjustments was projected to save more than $70 billion of that total.

With this ruling, it could be decades before many public workers’ COLAs can be restored. Under the law, they won’t receive increases until the individual pension plans that make up the pension fund are much healthier, which the statute defines as at least 80 percent funded.

In his dissent, Justice Barry Albin, wrote that in drafting the law the Legislature could have, but didn’t explicitly exclude COLAs from the contractual right. “Many public employees may not have retired or may have deferred their retirement had COLAs not been guaranteed as part of their pension benefits program,” he said. “Although the Legislature had the right to suspend COLAs for those public employees whose pension benefits had not vested and who had yet to retire, it did not have the right to do so for those public employees who retired expecting that the state would keep its word.”

The full contribution recommended by actuaries — well above what the state actually pays — for this year would immediately jump from $4.4 billion to $5.7 billion. And for the governor to stick to his current payment schedule next year he would need to kick in $400 million more than planned and $1 billion more than the state is to pay in this year.

Thursday’s ruling was the second major state Supreme Court decision on the 2011 pension reform law in favor of the State in as many years. In June 2015, the high court ruled a piece of the law requiring Christie to gradually increase annual payments into the system couldn’t be enforced.

In both cases, the court invalidated what public workers believed to be contractual obligations binding the state to make annual contributions or pay out COLAs. The decisions re only partial victories for bondholders in that they do not force the State to adequately fund the remaining legal pension obligations. While theoretically reducing the ultimate total liability, the State’s credit does not significantly benefit from maintenance of the status quo. We find this development to be credit neutral at best.


The House on Thursday overwhelmingly passed a rescue package for Puerto Rico, clearing a major hurdle in the ongoing effort to bring relief to the U.S. territory. The bipartisan vote was 297-127 for the legislation that had the strong support of President Barack Obama, House Speaker Paul Ryan, R-Wis., and Minority Leader Nancy Pelosi, D-Calif.  Despite leadership support, the measure faced opposition from some in the ranks of both parties, as some bondholders, unions and Puerto Rican officials have lobbied against it. Some conservatives said it would cheat bondholders, while some Democrats argued the control board has colonial overtones.

In spite of an impassioned appeal from the Speaker, Republican support was mixed. While the vote met the “Hastert Rule”, the fact is that 103 out of 240 Republicans voted against the bill. Despite some outspoken opposition from Democrats before the vote, only 24 of them voted against the bill. Hours before the vote, the White House strongly endorsed the bill, saying that failing to act could result in an “economic and humanitarian crisis” in the U.S. territory beyond what the island is already facing. In a push to get the bill passed, Obama summoned House Democrats with ties to Puerto Rico to a meeting in the Oval Office on Wednesday, including supporters and opponents of the measure.

Democrats and labor unions opposed a provision in the bill that would allow the Puerto Rican government to temporarily lower the minimum wage for some younger workers. A Democratic amendment that would have deleted that provision was rejected, 225-196.

On the same day the U.S. House approved Promesa, Sen. Bernie Sanders (I-Vt.) filed a measure that seeks another alternative to the island’s fiscal and economic woes. Sanders’ Puerto Rico Humanitarian Relief Act would recognize the Federal Reserve’s authority to provide emergency financing to the commonwealth. His bill would grant the island’s public corporations with access to Chapter 9 bankruptcy protections, on a prospective basis.

The bill would create the Reconstruction Finance Corp. of Puerto Rico — an entity to be run by a seven-member board and designed to assist in the commonwealth’s debt-restructuring efforts. It calls for ensuring that the Puerto Rico Commission for the Comprehensive Audit of the Public Credit continues its work and allow Puerto Rico not to pay any debt issued against the island’s Constitution. Holders of affected bonds would be prompted to “seek redress from the investment banks that helped market and sell these unconstitutional instruments,” according the a copy of the bill obtained by press sources.

Sanders’ measure would also seek to improve federal healthcare funding, and calls for providing $10.8 billion over the next five years to modernize Puerto Rico’s infrastructure, an initiative that would create 140,000 jobs, according to a summary of the bill. It would also grant Puerto Rico with access to the federal earned income and child tax credits. A process would be established to allow Puerto Rico and municipal governments to file for insolvency with the proposed public corporation, which would also be allowed to lend money to the commonwealth and its instrumentalities. It would be capitalized through the U.S. Treasury’s Exchange Stabilization Fund.

Upon an insolvency filing, a legal stay and a moratorium on debt payments would be imposed, and affected bonds “would be written down to whatever the current owner paid for [it],” reads a summary of the bill. The new entity would then buy those bonds at said price, resetting their par value.

“This section makes clear that the pensions of ordinary investors should be protected, and that Wall Street speculators should not be able to profit from the misfortune of [Puerto Rico’s people],” the document further states.

The entity’s board members would need to be all Puerto Rico residents, to be chosen by the island’s governor (2), Legislature (4) and the U.S. President (1). The bill also calls for “a vote or a series of votes” in which Puerto Rico’s people can decide whether to become a state, an independent country or be allowed “to reform the current commonwealth” status. The federal government would be required to “respect and honor the will of the people of Puerto Rico,” and votes would need to take place by January 31, 2018, with a transition process be put into place by January 31, 2022.

The bill’s healthcare provisions seek “to ensure Puerto Rico receives payments under Medicare and Medicaid that are at least equal to payments received by all states,” by increasing Medicare payments to healthcare providers, removing caps on Medicaid funds and fully applying the federal poverty level limitation.

Our view is that the Sanders legislation has little prospect of passage. Getting Promesa enacted will be hard enough.


The U.S. Supreme Court followed up its ruling in the Sanchez case dealing with Puerto Rico’s sovereignty by ruling 5-2 against the Debt Enforcement and Recovery Act of 2014 in Puerto Rico v. Franklin California Tax-Free Trust, No. 15-233. Puerto Rico argued that it could enact its own measures since the island is precluded from using bankruptcy law. But lower courts struck down the law. Writing for the court, Justice Clarence Thomas said the plain text of the law bars Puerto Rico from enacting its own municipal bankruptcy schemes. He said Congress “would have said so” if it didn’t want the exclusion to apply to the island.

The issue before the high court was how to interpret a 1984 amendment to the nation’s federal bankruptcy laws. The law allows states to let their cities and utilities seek bankruptcy relief, but it specifically excludes Puerto Rico – a territory – from doing so. Now Puerto Rico’s best hope would seem to rest with the enactment of Promesa including its provisions for oversight.

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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