Muni Credit News September 6, 2016

Joseph Krist

Municipal Credit Consultant


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President Barack Obama named the members of the Fiscal Oversight Board that will manage the island’s finances for at least five years. Obama named Republicans Carlos García, Jose Carrión III, Andrew Biggs and David Skeel. The Democratic appointees include Arthur González, José Ramón González and Ana Matosantos. Gov. Alejandro García Padilla is the eighth member of the board, but does not have voting rights.

Andrew Biggs is a former trustee of the Social Security administration. David Skeel is a professor at the University of Pennsylvania and has written at length about how bankruptcy laws are inherently biased against creditors. Skeel has argued that “rule of law took a beating in the Detroit bankruptcy,” and has argued that Congress should go out of its way to ensure that rule of law is enforced in Puerto Rico. José Carrión III as a Puerto Rico-based bankruptcy professional with an extensive history in Puerto Rico workers’ compensation system and other insurance vehicles on the island. Carlos García is close to the administration of former Gov. Luis Fortuño.

José Ramón González a  former Puerto Rico banking executive and current CEO of the Federal Home Loan Bank in New York. Arthur González is the former chief judge of the U.S. Bankruptcy Court for the Southern District of NY. Ana Matosantos was formerly a senior advisor to Governors Arnold Schwarzenegger (R-CA) and Jerry Brown (D-CA) on budget policy.

Candidates were chosen from lists submitted by Senate Majority Leader Mitch McConnell, Speaker of the House Paul Ryan, Senate Minority Leader Harry Reid and this was seen as limiting the availability of many individuals who might have been considered. This along with unfavorable tax provisions impacting sales of securities which these provisions would have required rendered service on the board (which is pro bono) economically infeasible for many candidates. There was no political support for amending the Act to deal with these issues.

As for the political reaction in P.R., it was immediate. One independence backing politician said “The appointment of various individuals with a Puerto Rican background in the board is only an attempt by the U.S. government to soften the blow, to give the impression that the board, in a twisted way, represents us. But at this juncture, nobody should fall for it. These people will respond, in the same way that their U.S.-mainland colleagues would, to the interests that lobbied for the board to act as a collection agency. Also, some of them, due to their close association with Popular Democratic Party (PDP) and New Progressive Party (NPP) administrations, are also responsible for the crisis they will allegedly address.”

The President of the Puerto Rico Senate said “It’s lamentable that Carlos García, who has direct and indirect links to the terrible Fortuño administration, is among [the board members]. Let us remember it was García who was the protagonist of the biggest period of loan-taking in Puerto Rico’s history, loans whose repayment terms have brought the country down to one of its worst economic crises. With these appointments, [this development] puts the crown on the campaign of lobbyists who present the island as a possible bastion of support for all the extreme right-wing policies of the Republican Party.”

A PDP representative said that while he was concerned about the appointments of various members, he also agreed with some of them.  “In my view, there are three figures in that board who will not benefit the country, and it has nothing to do with their professional capacities, because they’re are well prepared. In the case of Carlos García, he could have a conflict of interest with the lawsuits related to pension obligation bonds, and I believe that disqualifies him to become part of the board. Carrión, due to his proximity with the resident commissioner, also seems like he should be disqualified,” he said.

“In the case of González, who is a retired judge in the New York Bankruptcy Court, he would also have a conflict of interest because the bondholders want their cases to be addressed precisely in that court. I find that suspicious. His vision is not in Puerto Rico’s best interests,”

We would have been almost disappointed if there had been a measured non-political response to the control board. It has been that which has been so sorely lacking throughout the debt crisis so there is no real expectation that we would begin to see one now.  We note that there seemed to be little concern expressed about individual capabilities. As they say, let the games begin. It is going to be a long slog.


Earlier this year we discussed efforts to move away from volume based taxes on gasoline to fund roads in the U.S. and varying reactions to the idea. This week the concept received a boost when The U.S. Department of Transportation’s Federal Highway Administration announced $14.2 million in grants for states under a new program to explore alternative revenue mechanisms to help sustain the long-term solvency of the Highway Trust Fund.

The Surface Transportation System Funding Alternatives (STSFA) grant program will fund projects to test the design, implementation and acceptance of user-based alternative revenue mechanisms. The program will help address some of the concerns outlined in Beyond Traffic, the USDOT report issued last year that examines the challenges facing America’s transportation infrastructure over the next three decades, such as a rapidly growing population and increasing traffic.

Eight projects will pilot a variety of options to raise revenue, including on-board vehicle technologies to charge drivers based on miles traveled and multi-state or regional approaches to road user charges. The projects will address common challenges involved with implementing user-based fees such as public acceptance, privacy protection, equity and geographic diversity. The projects will also evaluate the reliability and security of the technologies available to implement mileage-based fees.

The participating state Departments of Transportation are California, Hawaii, Delaware, Minnesota, Missouri, Oregon, and Washington. The studies will cover fees based on odometer checks at pumps, charging stations, and inspection stations among other methods. Oregon will run two distinct programs. The grants total $14,325,000.


Duval County voters voted nearly two to one for a half-cent sales tax to pay off the city’s $2.7 billion pension deficit. Duval County Referendum No. 1, said “Permanently closing up to three of the City’s underfunded defined benefit retirement plans, increasing the employee contribution for those plans to a minimum of 10%, and ending the Better Jacksonville ½-cent sales tax are all required to adopt a ½-cent sales tax solely dedicated to reducing the City’s unfunded pension liability.  Shall such pension liability sales tax, which ends upon elimination of the unfunded pension liability or in 30 years maximum, be adopted?”

In English, it proposed a 30-year half-cent tax to begin in 2030, when the existing half-cent tax paying for city construction projects expires. The Mayor said the tax, along with closure of the city’s three existing pension plans and  a requirement for  existing employees to pay 10 percent toward their own retirement, will address the city’s pension liability obligation issues.

It should be noted that the plan to increase employee contributions still has to negotiated with the unions, but hopes are that those talks will begin in the fall. The Mayor hopes to have it done by the end of the year or shortly thereafter.”  The vote took place despite the efforts of a group opposed to the plan which filed a lawsuit against the amendment, saying the language in the referendum was just too confusing, and voters wouldn’t know what the amendment means.


In 2012, the City of Scranton, PA defaulted on its obligation to guarantee debt service on bonds issued by its public parking authority. The City, which operates under the Commonwealth of PA Distressed Municipalities Program, lost its bond rating and access to the public debt markets as the result of its actions. Earlier this year, the City returned to the market with a sale of bonds in June. Now the City has moved forward with a second bond issue that helps to address its position as guarantor of parking authority debt.

In June, the City partnered with a non-profit organization the National Development Council, which will run Scranton’s street meters and 5 parking garages  under a 40- to 45-year concession lease. NDC agreed to pay $28 million upfront to the city, which will retain ownership of the meters and garages, except for Electric City garage, which is being sold to a private entity. NDC will have a separate firm, ABM Parking, operate the meters, garages and 500 parking spaces at a mall as city monthly parking spaces.

The second City bond issue sold last week at lower-than-anticipated interest rates. The $32.8 million issue will refinance Scranton Parking Authority debt and $3 million pays for costs of the issuance. About $1.8 million will go toward improving city firehouses, a capital project added to the package. The parking bond issuance’s two series had an average “yield” of 3.7 percent, as compared to about 8 percent yields of post-default bonds of 2012-13. The city will no longer have an over $3 million-a-year financial obligation and actually reduce current parking rates in the garages.

On the downside, the City disclosed that the planned sale of its sewer system has run into regulatory hurdles. The City had hoped to generate up to $130 million from the transaction and apply half of that amount to funding its pension liabilities. Notwithstanding, the Public Utilities Commission’s public advocate has recommended against the sale and two administrative law judges in the PUC have also opposed aspects of the sale.

The City has vowed to clarify the part of the deal which is causing the opposition – an agreement to cap the growth of rates for Scranton and Dunmore customers at 1.9 percent per year over the next decade or pay an increased sale price — called a variance adjustment — if revenues end up exceeding the cap. Customers outside of those two communities object to the possibility that their rates could rise faster. If that issuer can be overcome, a PUC approval could continue to be pursued and the deal finalized.

The pension rise issue is an important downward weight on the City’s rating. Now rated below investment grade at BB, it is difficult to see how the City can rise above that rating without making a real dent in its pension liability.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

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