Muni Credit News October 29, 2015

Joseph Krist

Municipal Credit Consultant


After advising and standing back from direct involvement, the Obama administration has finally offered a plan for consideration by Congress to address Puerto Rico’s debt disaster. The plan would create new territorial bankruptcy rights and impose new fiscal oversight on Puerto Rico. But it requires cooperation from a Republican-led Congress bent on imposing spending restraint. Given the current state of Republican dysfunction in Congress, the likelihood of adoption is not high.

In describing the package, administration officials emphasized that they had exhausted the limits of their own authority to help Puerto Rico, and needed action by Congress to avoid a catastrophe. “Administrative actions cannot solve the crisis,” Jacob J. Lew, the Treasury secretary, said in a joint statement with Jeffrey D. Zients, the National Economic Council director, and Sylvia Mathews Burwell, the health and human services secretary. “Only Congress has the authority to provide Puerto Rico with the necessary tools to address its near-term challenges and promote long- growth”.

The administration is attempting to jumpstart consideration of the plan by calling Puerto Rico’s situation a humanitarian crisis. One senior administration official said the situation in Puerto Rico “risks turning into a humanitarian crisis as early as this winter”. That official was quoted anonymously in the press as saying that the Puerto Rican government has already “done a lot” to restore fiscal order but “Puerto Rico cannot do it on its own, and the United States government has a responsibility to 3.5 million Americans living in Puerto Rico” to step in with additional help.

Whether that is the case is open to debate. At the same time its administration allies were making the humanitarian case, the Government Development Bank said it had ended weeks of negotiations with certain creditors, aimed at persuading them to voluntarily accept lower bond payments. The bank has a bond payment of about $300 million coming due on Dec. 1.

It is our cynical view that the GDB never expected the negotiations to produce a settlement. The view that Puerto Rico has done all that it can is not shared here or by many others. For example, even the front man for PR’s efforts in Congress –  territorial  representative Pedro Pierluisi –  told Congress last week “the Puerto Rico government must break its entrenched spending habits, which have not adjusted to changing economic and demographic realities. Our government must be a better steward of funds received from taxpayers and lenders, accounting for every dollar it spends. The local tax system requires reform, because it is complicated and unfair. Some taxpayers owe too little, while others owe too much. And the government does a poor job of collecting what it levies.”

We think that real financial disclosure and a viable structure for accounting for and collecting revenues are the bare minimum required for debt holders to make any concessions let alone any of significance. Even Bernie Sanders called for more disclosure and transparency in a letter last week that effectively criticized debt holders as vultures seeking to starve children.


Chicago’s City Council approved a budget Wednesday that includes a massive property tax hike and other fees to help close a shortfall and improve the city’s underfunded pension system. The  $543 million property tax increase was for police and fire pensions, along with a separate $45 million property tax hike for school construction, a $9.50 monthly household garbage pickup charge and other fees. The property tax will be phased in over four years, with the largest chunk — $318 million — added to property tax bills payable in August 2016. That increase will be followed by successive increases of $109 million payable in 2017, $53 million payable in 2018 and $63 million added to the property tax bill due in 2019.

The proposal has state legislative approval but Republican Gov. Bruce Rauner has not been supportive of a tax increase. For the plan to be implemented, Gov. Bruce Rauner must sign the legislation that would give Chicago 15 more years to ramp up to 90 percent funding level for the pension funds. Business groups and a renters’ association have testified at the Capitol against the exemption, saying the property tax hike would get passed on to consumers and renters. One of Chicago’s difficulties in addressing its budget and pension problems has been the need for legislative approval. The legislatures unwillingness to approve actions taken by the City is just another indication of its lack of courage in dealing with the State’s problems.

For the owner of a home worth $250,000, the annual property tax bill will be roughly $550 more. Over four years, a homeowner’s property tax bill could rise 13% more. This is only the second increase in property tax rates in the City since 1987. The garbage collection fee, common in the suburbs, is a first for Chicago. It will be added to water bills that arrive in mailboxes every other month.


While the City of Chicago has been constructing a budget, it has also been taking advantage of the current interest rate environment to fix the cost of its debt. As of this month, the City has now converted to a fixed interest rate 100% of its GO, sales tax, and wastewater debt. We have seen other troubled credits with weak fundamentals also be saddled with variable rate interest exposure. The removal of this risk allows at least that one aspect of the City’s debt burden to be a lessened source of pressure on the City’s ratings. If the tax increase is finally implemented, the downward momentum impacting the City’s credit would be slowed.


The Commonwealth of Pennsylvania will likely enter its fifth month without a resolution of its budget impasse. In spite of rising difficulties for localities, school districts, and social service providers, the Pennsylvania Senate adjourned for two weeks as of yesterday. While negotiations will likely continue at the staff level and the Senate could be recalled to approve legislation in the event of an agreement, the decision to adjourn is telling. State Auditor Eugene DePasquale warned that the state’s schools were approaching a half-billion dollars in borrowed money simply to stay open. Those costs, he said, could double if there’s not a budget by Thanksgiving. The Philadelphia School District has already borrowed $275 million for cash flow.
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