Muni Credit News November 6, 2014

Joseph Krist

Municipal Credit Consultant


Voters sent mixed messages on their view of pension reform at least in two widely watched votes. Gina Raimondo became the first Democrat elected governor in Rhode Island since 1992 in spite of heavy union discontent with her 2011 backing for changes to Rhode Island’s pension system that raised the retirement age, put workers into 401(k)-type plans and suspended raises for retirees until the system was better funded. She built her campaign around her success at cutting pension costs, while pledging to revive the economy. The pension changes she advocated followed after Central Falls became the state’s first city to go bankrupt, which eventually forced retirees to accept cuts to pension checks. She said the reductions were needed to prevent rising retirement costs from bankrupting other cities and crowding out funding for schools and other programs. The pension changes are forecast to save $4 billion over 20 years. The steps cost her thesupport of the unions, the changes were imposed through legislation instead of negotiation. In Phoenix, AZ voters rejected a ballot measure that would have made Arizona’s capital the largest U.S. city to do away with guaranteed pensions for new public workers.  Nearly  57 percent of voters voted against the proposal to put new non-safetyemployees into 401(k)-style defined contribution plans that rely on individual investment returns. Retirement expenses comprised $218 million, or 22 percent, of Phoenix’s general-fund expenditures through June 2013, up from 11 percent in 2007. Phoenix voters previously approved a measure in March 2013 to increase employee contributions toward pensions and require higher retirement ages. Those changes are projected to save $600 million over 23 years. These events followed the approval of the City of Stockton’s Plan of Adjustment to emerge from bankruptcy which we discuss below.


Stockton, California, won court approval of its plan to exit bankruptcy on October 30. “This plan, I’m persuaded, is the best that could be done in terms of restructuring the city’s debts,” U.S. Bankruptcy Judge Christopher Klein said at a hearing today in Sacramento, the state capital.

The case has drawn the attention of the municipal market to see whether pensions administered by the California Public Employees’ Retirement System would be protected from cuts. Klein ruled earlier that Calpers doesn’t deserve special protection, the first time the biggest U.S. public pension fund was found vulnerable to cuts in a bankruptcy. The earlier ruling by Klein gave Stockton the opportunity to end the Calpers contract, but it declined to do so because, as the judge said, the workers “would be the real victims.”

Ending the contract with Calpers would have reduced pensions by 60 percent and caused many employees to leave, Marc Levinson, Stockton’s lead bankruptcy attorney, has said. It would have taken years to set up a new pension system, he said. Offsetting the preservation of the pension system was done when  workers agreed to “quite substantial” concessions in pay, which has an indirect effect on pensions, Klein said.

CALPERS was publicly pleased with the end result if not the actual ruling on the pension question. “The city has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future,” Calpers Chief Executive Officer Anne Stausboll said today in a statement. “We will continue to champion the integrity and soundness of public pensions.”

Not all observers were as pleased with the result. Dan Pellissier, president of Sacramento-based California Pension Reform, said Stockton is going forward with “one hand tied behind its back” by choosing not to reduce its pension burden.“Pension obligations have driven many government agencies toward financial insolvency, and Stockton is betting that they can manage their financial future without fixing its unsustainable pension obligations,” he said in a phone interview. “The purpose of bankruptcy is to get a fresh start on your finances.”

Stockton filed for bankruptcy in 2012 after spending too much on downtown improvement projects and seeing its property-tax revenue plunge in the housing crisis. Creditors filed $1.18 billion in claims. The major holdout in the case was Franklin Resources. Under the city’s plan, Calpers will be fully repaid while two Franklin funds will get back only about 1 percent of the unsecured portion of the $36 million they’re owed. Franklin will get full payment on its $4 million secured claim. A lawyer for Franklin, told the judge “We are obviously disappointed by your ruling and we will evaluate our options.”


On October 30, the Government Development Bank unveiled a detailed plan to borrow up to $2.5 billion through a bond issue backed by a new hike in the crude oil and petroleum products tax. Legislation enabling the deal was filed on Thursday, substituting a bill that was introduced last June, but never acted upon. House Bill 2212 would increase the excise tax on a barrel of crude oil to $15.50 from $9.25. That tax was increased from $3 just last year.

The $1.9 million loan on the GDB’s books was made to the Puerto Rico Highway & Transportation Authority (HTA), mostly for public works, but market conditions and the public corporation’s own fiscal problems have prevented it from returning to the market to undertake a bond issue to pay off the GDB loan.

House Bill 2212 would transfer a $1.9 billion loan on the GDB’s books which was made to the Puerto Rico Highway & Transportation Authority (HTA)to the Infrastructure Financing Authority (PRIFA) along with the revenue to pay for it to be generated by hikes in the crude oil and petroleum products that were undertaken in June 2013. This tax is expected to generate an additional $178 million per year.

The taxes would be divided as follows: $6.00 per barrel for the PRHTA to cover its operational costs and debt service obligations, $8.25 per barrel for the PRIFA to cover the new debt service from the new proposed bond issue, and $1.25 per barrel to finance the new Integrated Transportation Authority, which would combine the Metropolitan Bus Authority bus services, the ferry services (Maritime Transportation Authority) and the Urban Train system, once their transferred is completed.

The measure explicitly excludes the taxation of crude oil and its by products used by the Puerto Rico Electric Power Authority to generate electricity, as well as those that are exported from Puerto Rico; those used by local refineries and petrochemical companies in the oil refining process; and those used as lubricants or fuel for aircrafts and shipping vessels traveling by air or sea between Puerto Rico and other places; among other exclusions, according to the GDB.

The legislation also provides additional guarantees and legal protections to investors in the proposed new bonds. The Commonwealth has been impacted by downgrades since the enactment last June of the Puerto Rico Public Corporations Debt Compliance & Recovery Act (Recovery Act), which provides a mechanism for a  local bankruptcy-like procedure for most public corporations to restructure their debts. Both GDB and PRIFA are barred from restructuring its debts under the Recovery Act. It has been feared that the  HTA would  follow PREPA in moves to restructure long-term debt, but government officials insist they are working to resolve the public corporation’s fiscal challenges without resorting to the Recovery Act.

Officials also discussed plans for a new tax reform aimed at making the tax simple more just and simplified, while providing sufficient revenue for government operations and promoting economic development. The hope is that the resulting system will feature  streamlining of its numerous deductions, credits and incentives, resulting in a system that will be much easier to enforce. This is seen as an important element in any long-term plan to bolster the competitiveness of the island’s products, workers and businesses. It is expected to increase emphasize on consumption based taxes, while transitioning the island’s 7 percent sales tax into a new value added tax.

The GDB sais that the tax plan has the explicit support of the four bond insurers with the highest exposure to Highway Authority debt.


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