Muni Credit News September 17, 2015

Joseph Krist

Municipal Credit Consultant


The State Controller has released results for the first two months of the State’s fiscal year. Strong August numbers pushed overall receipts for the 2015-16 fiscal year to $674.7 million, or 5.0 percent, above projections. For the fiscal year to date, all three major sources of revenue are surpassing expectations. August receipts were$1.5 billion higher than a year ago, and year-to-date receipts $1.9 billion higher. August retail sales and use tax revenues of $3.1 billion beat those from a year ago by 36.7 percent, while personal income tax revenue of $4.2 billion came in 6 percent higher, and corporation tax revenue of $159.1 million was 26.2 percent higher. The state ended the month of August with unused borrowable resources of $29.8 billion, which is 10.1 percent more than anticipated. This year, because of the state’s improved fiscal position, the Controller anticipates internal borrowing will be sufficient to meet cash flow without having to issue revenue anticipation notes (RANs). In 2013, California issued a $5.5 billion RAN with an 11- month term. In the next year, the state borrowed $2.8 billion from private investors for roughly nine months.


Nearly four dozen state-funded social service programs have been denied state tax dollars in the midst of the budget impasse, some of which report being near the point of having to close their doors. Among them: After school programs for teens, early childhood intervention, autism assistance, domestic violence shelters and services, funeral and burial services for the poor, and programs to help parents prevent Sudden Infant Death Syndrome. These entities are a share of the 10% of state spending don’t have a law or court order to keep their funding flowing. Even with federal money making its way to some programs, it’s not enough to fund the services. Domestic violence programs, for example, are 91% unfunded because they don’t have access to state funding. Fortunately, state debt service is included in the 90% of state spending which is able to be maintained even without an enacted budget. This may account for the lack of real alarm from bondholders about the state’s seemingly intractable budget impasse.


While the State legislature continues to try to figure out how to meet state court funding mandates for education, After four months of negotiations, a five-day strike and one final all-night talk, the Seattle teachers union and Seattle Public Schools reached a tentative contract agreement early Tuesday, and school is scheduled to start Thursday for the city’s 53,000 students. It was the first strike by Seattle teachers in some 30 years.

The Seattle Education Association’s board of directors and its elected building representatives both voted Tuesday afternoon to suspend the strike, after four months of negotiations, a five-day strike and one final all-night talk, recommending the union’s membership approve the deal. The agreement will go to a full vote of the union’s 5,000 members at a Sunday meeting.


Pa. Senate Republicans are trying to force a vote on a stopgap budget which would eliminate about a third of the funding that was included in the GOP-passed $30.2 billion budget that Gov. Wolf vetoed in its entirety on June 30. That would provide temporary relief to social service agencies and school districts that have laid off staff, curtailed some services and put off paying bills while awaiting a budget agreement. The plan is to call for a vote to move a stopgap budget bill out of the appropriations committee on Wednesday to set up a vote by the full chamber on Friday.

A simple majority of the votes is required to gain passage and send the bill to the House for consideration. The Republican-controlled House returns to session next Monday and plans to begin its consideration of the stopgap proposal. The House rules would allow that chamber to consider it for final passage by Wednesday, at the earliest. The Governor could then  veto it, sign it, or use his line-item veto authority and veto only certain budgetary lines.


Its history of conservative and strong financial operations has allowed North Carolina’s lack of a budget for the biennium which began July 1 to fly under the radar. So investors may be surprised to find out the State legislature is just getting around to approving a budget. After 11 weeks without one, the State Senate approved a budget which includes a cut in marginal income tax rates but increase in sales taxes through an expansion of the items subject to the tax to cover repairs, maintenance and installations. Division of Motor Vehicles fees also would rise. On the spending side, the plan spends barely 3 percent more than last year, with much of the increase going to the public schools and the University of North Carolina system. All teachers and state employees get $750 bonuses.


In the midst of efforts to restructure its already troubled finances, the Puerto Rico Aqueduct and Sewer Authority (PRASA) has agreed to make major upgrades, improve inspections and cleaning of existing facilities within its Puerto Nuevo system and continue improvements to its systems island-wide, according to an announcement from the U.S. Justice Department. The sewer system serves the municipalities of San Juan, Trujillo Alto, and portions of Bayamón, Guaynabo and Carolina. It updates existing agreements reached in 2004, 2006 and 2010. The improvements will supplement projects already being implemented under the previous settlements including construction of infrastructure at wastewater treatment and sludge treatment systems, as well as the Puerto Nuevo collection system.

In recognition of the financial conditions in Puerto Rico, the U.S. government waived the payment of civil penalties associated with violations alleged in the complaint filed Tuesday. “These upgrades are urgently needed to reduce the public’s exposure to serious health risks posed by untreated sewage,” said the Justice Department’s Environment and Natural Resources Division. “The United States has taken Puerto Rico’s financial hardship into account by prioritizing the most critical projects first, and allowing a phased-in approach in other areas, but … these requirements are necessary for the long-term health and safety of San Juan area residents.”

Violations include releases of untreated sewage and other pollutants into waterways in the San Juan area including the San Juan Bay, Condado Lagoon, Martín Peña Canal and the Atlantic Ocean. These releases have been in violation of PRASA’s National Pollutant Discharge Elimination System (NPDES) permits and the Clean Water Act. PRASA also violated its NPDES permit by failing to report discharges in the Puerto Nuevo collection system and by failing to meet effluent limitations and operations and maintenance obligations at numerous facilities island-wide.

Under the agreement, PRASA will spend approximately $1.5 billion to make necessary improvements. The utility will undertake a comprehensive operation and maintenance program in the Puerto Nuevo sanitary sewer system, including conducting an analysis of the system to determine whether subsequent investments must be made to ensure the system is brought into legal compliance and to conduct immediate repairs at specific areas of concern. PRASA has also agreed to invest $120 million to construct sanitary sewers that will serve communities surrounding the Martín Peña Canal, a project that will benefit approximately 20,000 people.

The settlement is subject to a 30-day public comment period and approval by the federal court.


The battle has begun in reaction to the Puerto Rican government’s plan to restructure all of its debt, including general obligations. There are already two competing analyses which have been made public, at least on a limited basis, which call into question many of the government plan specifics. These questions question many of the economic assumptions relied on by the government as well as the absolute level of cash shortfalls to be realized over the plan’s five year time horizon. A Virginia-based group called Main Street Bondholders accused the governor on Wednesday of distorting the island’s financial situation.

The reaction sets the stage for a protracted battle between the government and its creditors as well as one between the government and its employees and taxpayers. The politics of the restructuring are a minefield of competing and somewhat mutually exclusive interests and past history shows that reliance on political will provides a shaky foundation at best for belief that a resolution will be relatively quick. That belief is rooted in the recent statement by the Governor when he said that if Puerto Rico’s creditors would not negotiate concessions, he would have to execute the five-year plan without them. Legislators from both the opposition and the governor’s own party said this week that the plan does not have the votes needed to be adopted, especially provisions that call for slashing the budget of the island’s largest public university by one-third and imposing a 10-year waiver from future minimum wage increases for young workers.

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