Muni Credit News November 20, 2014

Joseph Krist

Municipal Credit Consultant


Governor Alejandro García Padilla announced plans to convene a special session of the Legislature.  The session, announced on Friday,  was being called because the House failed to complete consideration of a bill to raise the petroleum excise tax from $9.25 to $15.50 per barrel stalled in the House of Representatives. The levy was increased from $3 last year.

“I would have preferred that the House finish the work of approving this measure during the regular session,” the governor said in a statement. “Unfortunately, they couldn’t finish it because some lawmakers need more time. That’s why I am calling a special session so they can finish their job.”

When the impasse over the tax hike emerged in the House, legislation to give the HTA a short-term injection of up to $45 million for payroll and operational costs was filed and approved by the lower chamber in a session Thursday. The money would come from cigarette taxes and feed a new fund managed by the Government Development Bank. The measure wasn’t taken up by the Senate before the close of the legislative term.

The Government is seeking to assuage market concerns that HTA will follow the Puerto Rico Electric Power Authority in moving to restructure its long-term debt, but government officials insist they are working to resolve the HTA’s fiscal challenges without resorting to the Recovery Act. Officials had recently discussed plans last month to borrow up to $2.5 billion in a bond deal backed by a proposed new hike in the crude oil and petroleum products tax. The issue is now expected to increase to $2.9 billion and the target issuance date has been pushed up to this month instead of early next year.  Legislation also provides additional guarantees and legal protections to investors to make the bond offering more appealing.

Puerto Rico is in talks with four bond insurers to insure at least part of up to $2.9 billion in bonds, the president of the Government Development Bank (GDB) said on Friday. GDB said last month it discussed the legislation with Assured Guaranty Ltd , Ambac Financial Group Inc, National Public Finance Guarantee Corp and FGIC Corp. The four insurers back over 70 percent of certain HTA revenue bonds.


The first clues regarding the Puerto Rico Electric Power Authority’s potential overhaul began to emerge as the first of a series of studies was released on Monday. The report by FTI Consulting covers outstanding receivables, billing and collections, and an analysis of PREPA’s employment of contributions in lieu of taxes on its balance sheet. It said the government utility should cut service to public corporations that aren’t paying their power bills. It also said PREPA should outsource collections on inactive accounts and revamp its general collections methods.

The study marks the first major deadline in the process of restructuring PREPA required under forbearance agreements reached in August between the government utility and certain of its creditors. Under the deal, PREPA brought on a chief restructuring officer from outside the utility. Restructuring expert Lisa Donahue is heading 10-person team from her firm, AlixPartners, with FTI Consulting working alongside.

As part of the forbearance agreements, PREPA has committed to complete a five-year business plan (as required in the new energy reform law) by December 15 and complete a full debt restructuring plan by March 2, 2015 that could impact holders of its roughly $9 billion in debt.

The Recovery Act, a Puerto Rico law enacted last summer with PREPA primarily in mind, provides for public corporations to restructure their debts through a bankruptcy like process in local courts. The law provides two methods to restructure the debt. A Chapter 2 filing would allow public corporations to create plans that postpone or reduce debt service payments with the consent of a majority of creditors. A Chapter 3 filing would allow public corporations go through the local courts if voluntary repayment plans cannot be reached with a majority of creditors.


The volume of cargo imports into Puerto Rico has declined to a nearly 20-year low amid the continued downturn in the PR economy. 1.7 million cargo containers reached Puerto Rico through San Juan last year, a 12 percent drop from the previous year. That was the lowest since 1994, when 1.5 million containers came in, according to American Association of Port Authorities statistics.

Earlier this month, Horizon Lines announced it is ending  its Puerto Rico operation amid deepening losses and the cloudy outlook for the U.S. territory’s economy. A dockworkers union said the exit will cost 800 jobs. Industry sources say the less crowded playing field could allow rival shippers Sea-Star, Crowley and Trailer Bridge to raise rates in the Puerto Rico trade lane as they seek to buoy their own bottom lines.

Puerto Rico’s trade surplus did improve  by more than 15 percent in fiscal 2014 as exports inched up while imports dropped sharply. Exports were $62.45 billion in fiscal 2014 (ended June 30), essentially flat rom $62.39 billion the previous year, according to Puerto Rico government statistics.

Exports to the United States were up 0.4 percent to $44.83 billion in fiscal 2014. Exports to foreign countries decreased 1.1 percent to $17.31 billion. Exports to the neighboring U.S. Virgin Islands rose 26.3 percent to $294 million. Imports into Puerto Rico from the United States sank by 5.7 percent to $42.47 billion. Foreign imports dropped 1.9 percent to $20.06 billion. Imports from the USVI surged by 20.7 percent to $11 million.

Puerto Rico’s trade balance of $19.98 billion in fiscal 2014 was 15.1 percent wider than the $17.35 billion mark the previous year.


The combination of lower oil prices and fewer miles driven seem to have changed to a small degree the atmosphere for discussions of possible increases in state gas taxes. Much research has been published about the failure of these taxes to reflect inflation, changes in driving habits and fuel efficiency. The reality is that the proportion of fuel costs related to taxes has steadily decreased. State transportation planners have noticed and in at least two states have recently floated the idea of raising state gas taxes as a source of funding for rehabilitation and expansion of bridge and road infrastructure nationally.

Wisconsin seems to be the farthest ahead in this trend. Recently, the state transportation Secretary Mark Gottlieb has proposed a variety of possible funding sources for consideration by the Wisconsin legislature. Gottlieb wants to increase the 32.9-cent-per-gallon gas tax by 5 cents, to 37.9 cents in September 2015. The tax would be linked in part to the wholesale price of gasoline, which would allow it to rise and fall in future years with the price of gas, though it could not fall below 37.9 cents per gallon. A similar change would be made for diesel fuel, raising it by 10 cents a gallon. The higher gas taxes would raise an additional $358 million through June 2017. Gottlieb is asking for more than $1 million to hire a consultant to study for 18 months the feasibility of tolling Wisconsin’s highways and bridges.

In New Jersey, where the fund that supports infrastructure improvements is set to run out of funds for new projects by next summer, some are suggesting extending the state’s sales tax to gasoline. At a hearing earlier this year of the Assembly Transportation, Public Works & Independent Authorities Committee, members discussed a proposal that would apply the 7% state sales tax to gasoline purchases to help raise revenue for infrastructure improvements.

The hearing was part of a series that is examining how to fill the state’s Transportation Trust Fund. Currently, the fund is fed by New Jersey’s gas tax of 14.5 cents per gallon (CPG), state highway tolls and part of the state sales tax levied on non-gasoline purchases. The gas tax has remained at the same level since 1988 and is among the lowest in the country.

The trust fund has spent $1.6 billion this year but most of it has gone to service debt on earlier projects under constitutional requirements. Funds for new projects are expected to run out by July 1, 2015, which is the beginning of fiscal year 2016. One proposed bill  would replace the current gas tax with a 7% tax on gasoline purchases, essentially extending the sales tax to fuel while eliminating the gas tax. Under a sales tax structure, revenues under this setup would vary by the price of gasoline.

Polling has shown that New Jersey residents are becoming less resistant to the idea of a gas tax increase. A recent Rutgers-Eagleton poll noted an eight-point drop from April in the percentage of respondents who opposed increasing the gas tax, to 58%.


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