Muni Credit News October 1, 2015

Joseph Krist

Municipal Credit Consultant


A recent letter from a local tax entity in Texas has raised an interesting issue with regard to the tax exempt status of student housing projects operated as public private (P3) partnerships on public lands. Brazos Central Appraisal District (“BCAD”) has requested seek an  Attorney General opinion to assist BCAD and its chief appraiser in  determining  whether  certain properties and improvements located in Brazos County, Texas are exempt  from  taxation. This request concerns two student housing  projects  on  property  owned  by  the  Texas A&M University System (“TAMUS”) in College Station, Texas. The first project described below is under  construction,  and  the  second  project  described  below  is  completed and occupied.

The District makes the case that these projects will be in competition with private  housing projects that do not enjoy tax exempt  status, and when those private projects  compete against tax exempt projects they are at a competitive disadvantage. The projects in question comprise a 3,400-bed complex with rooms ranging from studio apartments to three-bedroom,  garden-style units built on 48 acres of A&M land.

According to the District, there does not appear to be any definite restriction on the right to lease to persons other than faculty, staff and students of TAMUS or Blinn College. The lease contemplates that the facilities will be subleased to students, faculty and staff of Texas A&M, and also to students, faculty and staff of Blinn College, but it appears to permit subleases to persons who are not faculty, staff or students  of  Texas A&M or Blinn College. A&M’s agreement with the developer says that during the term of the land lease, all improvements will be owned by the developer and therefore the developer will have the legal title to those improvements.

A&M is relying on existing case law, including a 1992 case in which the court held that improvements to state land were exempt from taxation, despite the fact that the legal title to the improvements was not owned by the state. A&M maintains that “the new projects clearly serve a public purpose directly related to the University’s mission, providing housing for our students. “The concerns of local officials and local apartment owners are misplaced. The new projects are exempt from property taxes because they serve a public purpose, like the Corps of Cadets dorms and other dorms on the University campus.”

We suspect that the projects will be found to be exempt from local property taxes but the question raised is interesting and has implications for other P3 projects as well as possible challenges to property tax exemptions for other “not for profit” entities.


On Monday, the trustee of the Puerto Rico Electric Power Authority (PREPA) filed a notice in which it warns the utility about the end, since Sept. 15, of a period in which the trustee had limited power to take such actions as sending default cure notices and impose other enforcement measures, as a result of the forbearance agreements that were in place with PREPA’s main creditor constituencies — the Ad Hoc Group of bondholders, fuel-line lenders and monoline insurers.

The trustee, U.S. Bank National Association, stated that as a result of the Sept. 15 deadline expiration, its power to send cure, or need for corrective action notices and take enforcement actions with respect to defaults is no longer limited by a requirement that called for a written request from a majority of principal holders for the trustee to act. Moreover, a temporary relief that allowed PREPA to not fulfill its obligation to transfer money “from the General Fund to the Revenue Fund has also ended.”

“The Trustee continues at this time to monitor and assess the negotiation process, and reserves all rights and remedies under the Trust Agreement, including, without limitation, the right to send cure notices and the right to pursue enforcement actions following an event of default,” the filing states.

As first reported by CARIBBEAN BUSINESS, PREPA reached an agreement with its fuel-line lenders last week to restructure about $700 million in debt held by the group of banks, which also agreed to further extend their forbearance agreement from Sept. 25 to Oct. 1. Meanwhile, the utility reached a restructuring agreement at the beginning of the month with the Ad Hoc Group that calls for an exchange of unwrapped, or uninsured, bonds for new, securitized paper; a 15% haircut, or debt reduction, on principal; and a moratorium on principal payments for the next five years, among other items. PREPA also secured an additional extension on its forbearance agreements with the Ad Hoc Group, through Oct. 1.

However, PREPA hit a snag with its other main creditor constituency, monoline insurers, when they failed to reach an agreement before negotiations hit the Sept. 25 deadline. In addition, while bond insurers Syncora and Assured Guaranty first agreed to extend their forbearance agreement with the utility from Sept. 18 until Sept. 25, MBIA Inc.’s National Public Finance Guarantee did not consent to it. National filed a petition Sept. 17 at the Puerto Rico Energy Commission (PREC), seeking a rate revision and hike of 4.2 cents per kilowatt-hour, which should take place within four months. The insurer is expecting a response from PREPA by Oct. 1, according to the document filed by the insurer at PREC.

The utility remains deadlocked with its monoline insurers, with all three currently out of their forbearance agreements with PREPA. “We continue to negotiate with our bond insurers in an effort to reach an agreement that will allow the authority to further progress in its transformation,” PREPA Chief Restructuring Officer Lisa Donahue stated after reaching the preliminary deal with fuel-line lenders. Insurers are now technically allowed to notify the trustee of a default event, putting the utility on a 30-day clock to address the issue after a notice is sent by the trustee requiring corrective action, or potentially face litigation..

The PREPA negotiations have been a litmus test of sorts, separate from the García Padilla administration’s recent announcement that it intends to restructure some $47 billion — not including PREPA and the Puerto Rico Aqueduct & Sewer Authority — of the commonwealth’s $72 billion debt. The commonwealth was hopeful that the financially troubled public corporation, with its outsized debt towering at $9.4 billion, could represent an example for creditors of the shape of restructuring to come.


For many of us who have observed Puerto Rico’s unwillingness to honestly face its financial failings, Tuesday’s hearing before the Senate Finance Committee was yet another example of why it is hard to take the Puerto Rican government seriously. The officials sent by that government were told once again that the numbers they were using to make their case were too incomplete to persuade lawmakers that help was warranted — or that the money would be well spent. This reflects long-held views of the municipal bond analytical community.

Senator Orrin G. Hatch of Utah, chairman of the Senate Finance Committee, said that while he sympathized with the island’s plight, Congress needed to know more detail about the causes and structure of its debt, and whether help from Washington would benefit it in the long run. “We’d better get the right information, or nothing’s going to be done,” Senator Hatch warned.

The officials  came before the committee to argue for changes in various federal laws, which they said currently discriminate against Puerto Rico. It occurred in the face of large debt payments due in November and December, and warnings that it will not have enough cash to pay them while still providing an acceptable level of government services. None of the officials asked explicitly for a bailout, but they said the United States had a moral duty to help Puerto Rico, and identified a number of federal laws and programs that they said were discriminatory and ought to be changed.

“I want to help you,” Mr. Hatch told them. “I don’t think Puerto Rico is treated fairly. But we have to get really good information in order to help you.” Melba Acosta Febo, the head of the Government Development Bank, told Senator Hatch that the lack of financial data reflected Puerto Rico’s antiquated computer systems, which the government wanted to replace. She promised to gather as much information for the senators as possible. Given the need for such data, one would think that some of the island’s huge debt could have financed an updated system. But yet again, Puerto Rico failed to take responsibility for their own shortcomings.

These shortcomings have been well known for a long time but have continued to go unaddressed. They affect not only Puerto Rico’s ability to generate financials that can be audited but also casts doubt as to whether the island can actually account for ongoing cash flow and develop a base of economic data to support realistic planning and execution of economic development plans.

Instead, the Puerto Ricans relied on old complaints about federal laws they considered inequitable, particularly those that govern health care for the elderly and the poor, like Medicare and Medicaid. Yes, Puerto Rico’s population is older, and considerably poorer, than the rest of the United States. Ms. Acosta estimated that amending the relevant laws would be worth an additional $1.5 billion for Puerto Rico.

Sergio M. Marxuach, policy director for the Center for a New Economy, a nonpartisan research institute in San Juan, said that the best way Washington could reduce poverty and promote growth in Puerto Rico was to extend a version of the federal earned-income tax credit program to the island. The credit is for low- and moderate-income working individuals and couples — particularly those with children. He said this could be done even though residents of Puerto Rico do not now pay federal income tax — a questionable assumption. He also acknowledged that at some point Puerto Rico’s legal status as a territory would have to be changed. That message was mixed at best.

Pedro Pierluisi, Puerto Rico’s nonvoting member of Congress, chose to take a less diplomatic route. “We should treat Puerto Rico equally,” he said. “They are fellow American citizens. You shouldn’t be looking the other way. You shouldn’t be ignoring us. If you do so, you do so at your peril.”

Interestingly, the only witness who was not from Puerto Rico, Douglas Holtz-Eakin, the former head of the Congressional Budget Office, and now president of the American Action Forum expressed skepticism that giving Puerto Rico more federal health care money would bring about the structural economic changes the island needed. “You don’t generate long-term economic growth by increasing health care spending in Puerto Rico,” said Mr. Holtz-Eakin. “You might relieve some budget pressure, but so would a check for anything else.” “The primary emphasis should be on economic growth,” rather than simply finding new sources of money, he said. This supports arguments that many have made regarding the long-term outlook for Puerto Rico.

The hearing did produce some firm statements from the GDB which will only serve to steel the resolve of general obligation bondholders in any upcoming negotiation. Senator Hatch asked the witnesses about other types of debt that Puerto Rico owes, such as its pension obligations to retired government workers. He wanted to know which had priority in the hierarchy of creditors — Puerto Rico’s general obligation bondholders, or Puerto Rico’s pensioners. He elicited a response from Ms. Acosta that affirmed that general obligation bonds have an explicit constitutional guarantee and pensions did not. “It’s a very big problem,” she added. Further, she stated that the pension system will probably run out of cash in 2018. She said that at that point Puerto Rico would have to pay retirees directly from its general fund. “This is one of the reasons that we’re saying that we have to restructure the debt,”. “The idea is to use some of that money to put into the pension plans, because they badly need it.” As was the case in Detroit, this directly pits bondholders against pensioners.

From our standpoint, it was a very poor performance from the Puerto Rico officials both strategically and tactically. At this point, the Puerto Rican government appears to be clearly outmatched and its interests are not being best served by the current cast of characters. It also raises questions about the quality of the advice it is receiving. Sadly, this is not anything new. It points to our standing belief that the restructuring process will be long and messy and not be settled anytime soon.

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