Muni Credit News May 31, 2016

Joseph Krist

Municipal Credit Consultant

PR BILL MOVES TO THE FULL HOUSE

The House Natural Resources Committee approved the Promesa legislation 29-10.  Now it moves to the full House for consideration. The bill will be subject to a full House vote this Wednesday at the earliest. The markup hearing saw 32 amendments introduced to House Resolution 5278. Opposition remains among several Puerto Rico politicians including Senate President Eduardo Bhatia, who called the imposition of a fiscal oversight board a “totalitarian fiscal authority.” Puerto Rico’s resident commissioner in Washington, Pedro Pierluisi, has offered “grudging support”.

Initially, three bipartisan amendments were approved through a voice vote. The first amendment seeks to employ the General Accountability Office to carry out a study on the root causes of Puerto Rico’s debt crisis. The second, called for the fiscal oversight board to have the authority to investigate whether any selling practice of Puerto Rico securities was based on misinformation. The third aimed to expand the committee’s leadership to include ways and means and finance committees of the Senate to include economic growth mechanisms for the island. The amendment also aims to shorten the time it takes to approve task force members to 15 days from 30.

A fourth amendment sought to require the congressional task force to hold at least one of their hearings in Puerto Rico to know first-hand the issues affecting the island’s residents. The amendment was approved. Another sought to include the disparity in federal healthcare programs between Puerto Rico and other U.S. jurisdictions as an issue for the board’s consideration.

Puerto Rican-born Rep. Raúl Labrador (R-Idaho), opposed that amendment. “The root cause is not that they’re getting federal money, but the poor management decisions that have gone on for years,” he said. “This amendment puts stamp on the bill [saying] we are asking for federal money, and people have said this money is a path to a bailout,”

To this, Resident Commissioner Pierluisi responded: “The Puerto Rico government is struggling with the medical indigent; if you’re looking for the task force to go into ways for Puerto Rico to grow, you must look into this issue.” The amendment passed.  An amendment by Rep. Jody Hice (R-Ga.), aiming to give the oversight board the ability to promote the private sector on the island, and another by Rep. Tom MacArthur (R-N.J.) calling for a fiscal reform and economic pro-growth measures, were both approved via voice vote.

Three amendments which were not approved were all proposed by CO Rep. Jared Polis. One of them aimed to bring back some of the jobs and incentives that were lost with the phaseout of Section 936, which for decades provided tax incentives to the island’s manufacturing sector. Another amendment attempted to strike the bill’s overtime pay rule, which sets a salary cap of $47,000 to receive overtime pay. “I believe it does not lead to any additional economic growth if workers are not compensated 50 to 60 hours a week,” he said. “It drives productive people from the island.”

The third amendment sought to change the definition of the HUBzone (Historically Underutilized Business zone) program to extend to the whole island. The program creates incentives for the U.S. federal government to do contracting with businesses that operate and create jobs in communities with statistically proven economic needs. “Although it is not a bad idea, it is still out of the scope of jurisdiction of this committee,” Bishop noted.

Now the heavy lifting of garnering the needed votes, especially on the democratic side begins. Prominent Hispanic members of the House and Senate have expressed opposition primarily due to the oversight requirements. Our view is that any legislation which does not provide strong oversight would essentially gut the value of any other measures contemplated to help Puerto Rico. We discuss a major reason why next.

PR AUDIT MAY FINALLY COME IN JULY

GDB President and Chairwoman Melba Acosta stated on Monday that the Government Development Bank (GDB) is closing in on a deal to write off about 40% of the more than $5 billion owed by the central government to the troubled bank. With this move, the Alejandro García Padilla administration expects to find the way for the delivery of the commonwealth’s audited financial statements for fiscal year 2014, which were due over a year ago. This is because two commonwealth components have yet to finish their auditing processes, namely the GDB and the island’s largest retirement system. Without the completion of these, independent auditors KPMG can’t sign off on the audited statements. The central government employees’ retirement system is projected to finish its pending process this week, while the bank’s statements would be ready by mid-June.

GDB chief Acosta said in the PR House’s public hearing over the island’s budget for the next fiscal year, which begins July 1, “If the bank fails to get paid for its loans, which would give liquidity to the GDB, unfortunately we don’t see a future for the institution, and the governor should consider appointing a receiver to liquidate the bank, with the implications this would have on local creditors, including credit unions.” The bank has only $238 million in liquidity as of today. She further noted that half of its roughly $4 billion debt is held by local creditors, which prompted the bank to pay $22 million in interest due at the beginning of this month. Nevertheless, the bank defaulted on about $370 million also due May 2.

ATLANTIC CITY LEGISLATION SIGNED

Gov. Chris Christie of New Jersey signed legislation on Friday that will help Atlantic City, the struggling seaside resort, avoid bankruptcy and give local officials time to develop a recovery plan before the state intervenes. The Commissioner of the Department of Community Affairs is empowered under this bill to determine whether the city government’s proposed recovery plan is likely to achieve financial stability for Atlantic City and if he determines that the plan will fall short of this goal, the state will intervene and manage the city with all of the tools necessary to turn this troubled city

To ensure that Atlantic City’s government maintains fiscal discipline as the recovery plan is developed and implemented, if the Commissioner approves its recovery plan, he has the authority to determine at any time that state intervention is necessary if Atlantic City fails to strictly comply with its plan or if circumstances indicate that the plan is no longer likely to achieve financial stability.

The Governor is agreeing only to a secured bridge loan for the next six months, under terms and conditions set by the Commissioner of the Department of Community Affairs, the repayment of which must be factored into the recovery plan to be developed by the city. The city will also receive regular payments from casinos to help stabilize its finances. The money from casinos would amount to $120 million in the first year and increase by at least 2 percent each year for the next nine years.

The bill also allows the city to use early retirement packages to try to reduce its public work force. The city would also have to identify ways to increase revenue and reduce debt, and it would have to make required payments to the local school district and Atlantic County. The city plans to sell vacant properties in an auction this summer. It has already raised fees for city permits and will add more parking meters.

PENNSYLVANIA TO TEST MARKET PATIENCE

Pennsylvania will offer $1 billion of general obligation debt in the middle of its budget process for the fiscal year beginning July 1. Investors suffered through last year’s budget debacle which left all sides unsatisfied and the Commonwealth’s credit ratings lowered. The conditions which led to those ratings declines still exist including uncertainty over education funding and tax policies which continue to pressure localities. Above all of this looms the Commonwealth’s continued need to firmly address its unfunded pension liabilities.

Next week, legislators will return for what promises to be weeks, at least, of haggling over the budget. And Republican leaders intend to make gambling part of the discussion. The House last week considered measures that would have legalized online gambling, allowed slot machines at airports and offtrack betting sites, and permitted 24-hour liquor sales at casinos. One proposal would also have allowed video-gaming terminals at bars and truck stops. The bills failed – one was voted down by a 2-1 ratio.

Gov. Wolf has said the state must raise taxes to fill a billion-dollar budget hole blamed in part on pension, human service and corrections costs. The proposals to expand gaming are estimated to generate from $205 to $270 million.

It’s not clear yet if disagreements over taxes and level of education spending will again prevent an agreement from being reached by June 30. The situation may not result in as much of a cost penalty to the Commonwealth as it might deserve as strong market fundamentals including continuing demand could outweigh the credit fundamentals. The need to reinvest July 1 coupon payments reinforces these trends.

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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