Muni Credit News June 30, 2016

Joseph Krist

Municipal Credit Consultant


After months of lobbying, politicking, strongarming, and hyperbole the Senate, eager to follow the House out of town for the Fourth of July weekend, voted 68 to 30 for the Promesa  on Wednesday evening.  President Obama is expected to sign the measure, about which his Treasury secretary, Jacob J. Lew, said “I could write a bill that I think would be a better bill, but I don’t know that anyone could write a better bill that would pass the Congress that also solves the problem.” The Promesa legislation will not prevent Puerto Rico from missing the payment due on Friday on a $2 billion debt. That was made clear by PR’s governor on Wednesday morning.

In an editorial released through CNBC yesterday the Governor said “Puerto Rico does not have the ability to repay the $70 billion debt that was generated by past administrations and their creditors. The debt must be restructured fairly and equitably to both the people of Puerto Rico and the bondholders.

A fair solution to the problem is critical in order to bring progress back to the island. The case of Puerto Rico is similar to New York City’s and Detroit’s, except they had the tools to restructure their debt, and Puerto Rico does not.

My administration has acted swiftly. Puerto Rico adopted the most stringent austerity measures. The Island’s budget has been cut by billions during my term. The payroll has been reduced dramatically. We have deferred other obligations. We have withheld tax refunds.

Payables to suppliers have reached more than $2 billion. The inability to pay our suppliers has resulted in the loss of commercial credit and many services must now be paid on delivery. Without supplier credit, medicines and supplies for public hospitals and air-ambulance service to trauma centers are now in jeopardy.

The emergency measures we have taken are unsustainable, harm our economy, reduce revenues and diminish our capacity to repay our debts. Puerto Rico cannot endure any more austerity.

In order to yield a permanent fix to the debt crisis, lacking the mechanisms that New York and Detroit had, we introduced our own restructuring statute; but the federal courts closed that door. We have tried to negotiate a settlement with the creditors to no avail. This is why we sought the support of Congress. Their response was PROMESA, the Puerto Rico Oversight, Management and Economic Stability Act.

PROMESA is a mixed bag. On the one hand, it provides the tools needed to protect the people of Puerto Rico from disorderly actions taken by the creditors. The immediate stay granted by the bill on all litigation is of the utmost importance in this moment. Most importantly, the authority to adjust our debt stock provides the legal tools to complete a broad restructuring and route Puerto Rico’s revitalization.

On the other hand, PROMESA has its downsides. It creates an oversight board that unnecessarily undercuts the democratic institution of the Commonwealth of Puerto Rico. But facing the upsides and downsides of the bill, it gives Puerto Rico no true choice at this point in time.

On July 1, 2016, Puerto Rico will default on more than $1 billion in general obligation bonds, the island’s senior credits protected by a constitutional lien on revenues. Creditors and bond insurers have initiated multiple lawsuits and last week, hedge funds filed an injunction before the Southern District of New York claiming the “absolute highest priority” over government resources, including those needed for essential public services. That complaint minces no words and states that, in “times of scarcity,” bondholders should be paid before essential services.

No amount of contingency planning can shield us from the fallout of the defaults in the coming days; no amount of contingency planning will replace the necessity of a debt restructuring regime. We have suffered a decade of economic contraction. We are facing a government less capable of providing the services which the public needs.

As governor, I will use my remaining time in office to benefit from the tools provided by PROMESA and develop a fiscal plan that is faithful to the best interests of the people of Puerto Rico.”

The most important provision of the bill for the Commonwealth stays any litigation against the Commonwealth related to the default. Now the Commonwealth will feel free to move the political fight to focus on the makeup of the oversight board. We see that as a crucial piece in assessing the long-term likelihood of success of any restructuring agreement. Without strong and binding oversight, we can easily see the Commonwealth slipping back into its old ways of lax fiscal policies and poor disclosure. The pressure to do so will be immense. That would be a formula for disaster.


As we go to press, the Illinois legislature and the Governor were still negotiating over a budget plan that would at least allow the state government to continue to operate. The process continues to be conducted in a highly contentious and partisan manner. While there are signs of progress, enactment is far from certain. There are two basic proposals in play currently.

Senate democrats propose a full-year school funding plan increases state aid for elementary and secondary education by about $760 million, with no district losing money. CPS, would receive $287 million more in general state aid – a 30 percent increase over the current year. About three dozen of Illinois’ roughly 800 school districts receive a larger percentage increase. The plan would provides $112 million to help cover the employer contribution for Chicago teacher pensions. It authorizes more than $680 million for state operations, such as overdue utility bills . A measure in the House is expected to provide money for road construction and local governments’ share of gas tax revenues.

The Republicans countered with a full-year education plan which increases funding for schools by more than $240 million, with no district losing money but does not include money for Chicago teacher pensions or an increase in state aid for CPS. It does provide $729 million for state agencies to cover the cost of operating prisons, veterans’ homes and other facilities and to pay for road maintenance and repair, and gas and repairs for Illinois State Police vehicles. Additionally, it allocates $650 million for human services, including mental health care and autism programs. They would authorize spending for road and school construction, and provide money for local governments. Tellingly, it would not include any of the pro-business legislation Gov. Rauner has been holding out for, such as curbs to labor unions’ collective bargaining rights or term limits for lawmakers.

At this point, the process has entered the theater of the absurd. Universities are facing huge cuts and even closing, social service and health providers which are the main mechanisms in Illinois to provide such services are facing suspension or closure. One non-profit suing the Governor over lack of payment from the state is chaired by the Governor’s wife. Failure to resolve the budget should mark the end of Illinois’ status as an investment grade credit.


We will next publish on July 7. Celebrate the 240th anniversary of our country’s independence safely!

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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