ST. CROIX, V.I. (Reuters) – For a glimpse at the precarious financial health of this Caribbean island, visit its public hospital.

Pipes underneath the emergency room collapsed in May, causing waste water to back up through the drains. Now workers and visitors – even patients – use portable toilets set up on the sidewalk. The hospital doesn’t have the cash for new plumbing.

For years the U.S. Virgin Islands funded essential public services with help from Wall Street. Investors lined up to purchase its triple-tax-exempt bonds, a form of debt free from municipal, state and federal taxes.

Now the borrowing window has slammed shut. Trouble in neighboring Puerto Rico, which recently filed for a form of bankruptcy after a string of debt defaults, has investors worried that the U.S. Virgin Islands might be next.

With just over 100,000 inhabitants, the protectorate now owes north of $2 billion to bondholders and creditors. That’s the biggest per capita debt load of any U.S. territory or state – more than $19,000 for every man, woman and child scattered across the island chain of St. Croix, St. Thomas and St. John. The territory is on the hook for billions more in unfunded pension and healthcare obligations.

“We have a government that we can’t afford, and now all of it is converging,” said Holland Redfield, a former six-term U.S. Virgin Islands senator who hosts a radio talk show about politics in the territory. “We’re getting to the point where we may have a potential meltdown.”

Ratings agencies have downgraded the islands’ credit ratings deep into junk territory. With the U.S. Virgin Islands shut out of the credit markets after a failed January bond issue, officials are scrambling to stabilize its finances after years of taking on debt to plug yawning budget holes.

The government proposes to slash public spending by 10 percent. It recently hiked taxes on liquor, cigarettes, sugary drinks and vacation timeshares. And it has threatened to auction homes and businesses of property-tax deadbeats.

Governor Kenneth Mapp is quick to reassure bondholders that they get first crack at one of the territory’s largest funding sources: rum taxes. The money pays debt service before heading to government coffers, a protection called a lockbox.

The U.S. Virgin Islands has “never been late on a payment, much less defaulted on a bond or loan agreement,” Mapp said during his State of the Territory address in January.

But how these islands will recover from years of budget deficits and a severe liquidity crisis remains to be seen. The territory lost its single-largest private employer five years ago when a refinery shut down. Gross domestic product has declined by almost one-third since 2008. At times this year the government was operating with just two days’ cash on hand.

Locals live with pitted roads, crumbling schools, electricity outages and deteriorating medical care.

At the Juan F. Luis Hospital and Medical Center, plumbing troubles are just the beginning. Doctors have stopped performing some vital procedures, including implanting pacemakers and heart defibrillators, because the facility can’t pay suppliers for the devices, officials say.

“We have gone from bad to worse, and the patients are the ones who are suffering,” said Dr. Kendall Griffith, an interventional cardiologist who recently left the island to take a job in a Georgia hospital. “It’s forcing physicians to make hard decisions.”

FORGOTTEN ISLANDS

Before Puerto Rico imploded under $70 billion in debt and $50 billion of unfunded pension liabilities, few in Washington noticed troubles brewing in the other inhabited U.S. territories of American Samoa, Guam, the Northern Mariana Islands and the U.S. Virgin Islands.

Residents of these places are U.S. citizens, but they can’t vote in presidential elections and their Washington delegates are non-voting figureheads. Despite high poverty rates and joblessness, the territories receive just a fraction of the federal funding allocated to U.S. states for entitlements such as Medicare and Medicaid.

To bridge the gap, some have turned to the bond market. Bond issues typically fund infrastructure and capital projects. But in the case of Puerto Rico and the U.S. Virgin Islands, officials increasingly relied on borrowed money to fund government operations.

Debt loads for both territories have grown to staggering proportions, now surpassing 50 percent of their respective GDPs. That’s higher than anywhere in the nation and sharply above the state median of 2.2 percent, Moody’s Investors Service found.

Bond buyers for years whistled past the territories’ shaky finances, comforted in the knowledge that these governments couldn’t seek bankruptcy protections available to many municipalities.

“There was an idea that because of the lockbox structure and the fact that the territories did not have a path to bankruptcy, they had to pay you,” said Curtis Erickson, San Francisco-based managing director of Preston Hollow Capital, a municipal specialty finance company.

That all changed in 2016 when Congress passed legislation known as PROMESA giving Puerto Rico its first access to debt restructuring. The move sparked a ferocious battle among creditors to see who would shoulder the largest losses.

Investors quickly surmised the U.S. Virgin Islands might pursue the same strategy. In December, S&P Global Ratings downgraded the territory by a stunning seven notches to B from BBB+, putting it well below investment grade.

The U.S. Virgin Islands is adamant that S&P and other ratings agencies overreacted. The territory has been unfairly “tainted by Puerto Rico’s pending bankruptcy,” and has no intention of pursuing debt restructuring, said Lonnie Soury, a government spokesman.

In addition to tax hikes and budget cuts, he said the current administration is looking to do more with its tourism and horse racing industries to boost development.

BIG DEBTS, FEW OPTIONS

In the meantime, the U.S. Virgin Islands is trapped in a circle of hock that’s making it tough to maneuver.

The government and its two public hospitals, for example, owe a combined $28 million to the territory’s water and power authority, known as WAPA. In turn, WAPA owes about $44 million to two former fuel vendors.

Then there’s the $3.4 billion of unfunded liabilities for public pensions and retiree healthcare. The pension fund is 19.6 percent funded and projected to run out of money by 2023.

Pensioners can wait months before their annuities start, because the government is behind on its contributions. St. Croix resident Stephen Cohen, 67, said it took almost a year after he retired as a high school biology teacher before he received his first check in 2016.

“A lot of people are financially stressed,” Cohen said. “They didn’t realize how bad things would get.”

Territory officials can’t say how they will close a projected $100 million budget shortfall for this fiscal year. That’s on top of an accumulated net deficit of $4.4 billion, according to government financial records.

Back at Juan F. Luis Hospital, officials hope to move the emergency room into the cardiac wing so repairs can begin on the collapsed pipes.

The government has pledged $3 million for the job, but Tim Lessing, the facility’s chief financial officer, wonders if he’ll see it.

“The territory is in a tough position,” Lessing said. “Nobody’s buying the paper.”

Reuters

by Robin Respaut

August 1, 2017 / 10:27 PM

(Editing by Marla Dickerson)

Moody’s Investors Service has upgraded the state of Wisconsin’s General Obligation rating to Aa1. Moody’s has also upgraded the state’s appropriation backed debt as follows: to Aa2 for Certificates of Participation issued under the state’s master lease program; Aa2 for General Fund Annual Appropriation Bonds; Aa2 for Taxable Pension Funding Bonds; Aa3 for Appropriation Revenue Bonds; Aa3 for Milwaukee Public Schools Revenue Bonds Series 2007A and A1 for Milwaukee Public Schools Revenue Bonds Series 2013A. Moody’s also affirmed the short-term P-1 ratings on the state’s general obligation commercial paper programs based on the bank counterparty ratings and the long-term underlying state rating. The outlook for all the long-term ratings was moved to stable. The upgrade to Aa1 reflects the proven fiscal benefits of the state’s approach to granting and funding pension obligations when many other states are experiencing stress from rising costs and heavy liabilities; an economy that delivers steady but moderate growth; conservatively managed budgets; and adequate liquidity. Despite Wisconsin’s slightly elevated debt levels, its fixed costs for pensions, debt and retiree health benefits are below the median for Aa1 states and outweigh the credit challenge of the state’s negative unassigned fund balances. Appropriation debt is notched off the state’s GO rating to reflect risk of non-appropriation since the state is not obligated to appropriate debt service for the bonds. The Certificates of Participation, General Fund Annual Appropriation Bonds, and Taxable Pension Bonds are upgraded to Aa2, one notch lower than the state GO rating, to reflect their average legal structure and essential nature of the projects funded. The Appropriation Revenue Bonds funded a sports facility, which we view as a less essential purpose warranting an upgrade to Aa3, two notches off the state rating. The Milwaukee Public Schools Revenue Bond Series 2007A is upgraded to Aa3, two notches off the GO to reflect the moral obligation of the state to make debt service payments on the bonds. The Milwaukee Public Schools Revenue Bonds Series 2013A is upgraded to A1, three notches lower than the GO rating to reflect weak legal provisions.

Rating Outlook

The stable outlook reflects the expectation that the state will experience moderate economic growth and will continue its prudent fiscal management practices.

Factors that Could Lead to an Upgrade

Established trend of recurring structural budget balance reflected in elimination of the negative unassigned GAAP fund balance

Funding and maintenance of the budget stabilization fund to a level sufficient to provide a meaningful financial cushion in times of revenue volatility

Sustained job and economic growth

Factors that Could Lead to a Downgrade

Departure from prudent fiscal management practices that have aligned spending with the state’s moderate economic growth

Return to structural budget imbalance and reliance on non-recurring measures to address budget gaps

Accelerated deterioration of the state’s financial position resulting in weakening of liquidity or larger GAAP-negative fund balances

Legal Security

The state’s general obligation bonds are secured by its full faith and credit.The state’s certificates of participation, general fund appropriation bonds, Neighborhood Schools Initiatives bonds issued by the Milwaukee Regional Development Authority and pension funding bonds are payable from state appropriations.

Use of Proceeds

Not applicable

Obligor Profile

Wisconsin is the twentieth largest state, with a population of 5.7 million. Its GDP ranks twentieth among states.

Methodology

The principal methodology used in this rating was US States Rating Methodology published in April 2013. The additional methodology used in the lease-backed rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. The additional methodology used in the short-term rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Regulatory Disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Global Credit Research – 04 Aug 2017

Marcia Van Wagner
Lead Analyst
State Ratings
Moody’s Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Genevieve Nolan
Additional Contact
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Releasing Office:
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Client Service: 1 212 553 1653

Illinois is teetering on bankruptcy and other states are not far behind, largely due to unfunded pension liabilities; but there are solutions. The Federal Reserve could do a round of “QE for Munis.” Or the state could turn its sizable pension fund into a self-sustaining public bank.

Illinois is insolvent, unable to pay its bills. According to Moody’s, the state has $15 billion in unpaid bills and $251 billion in unfunded liabilities. Of these, $119 billion are tied to shortfalls in the state’s pension program. On July 6, 2017, for the first time in two years, the state finally passed a budget, after lawmakers overrode the governor’s veto on raising taxes. But they used massive tax hikes to do it – a 32% increase in state income taxes and 33% increase in state corporate taxes – and still Illinois’ new budget generates only $5 billion, not nearly enough to cover its $15 billion deficit.

Adding to its budget woes, the state is being considered by Moody’s for a credit downgrade, which means its borrowing costs could shoot up. Several other states are in nearly as bad shape, with Kentucky, New Jersey, Arizona and Connecticut topping the list. U.S. public pensions are underfunded by at least $1.8 trillion and probably more, according to expert estimates. They are paying out more than they are taking in, and they are falling short on their projected returns. Most funds aim for about a 7.5% return, but they barely made 1.5% last year.

Continue reading.

Published on Monday, July 24, 2017 by Common Dreams

byEllen Brown

Municipal bond-financed project failed to live up to projections

A Chicago suburb’s convention center project corporation entered chapter 11 bankruptcy on Friday, starting a court-supervised process to settle a $183 million municipal default.

Lombard Public Facilities Corp., a public financing entity in the village of Lombard, Ill., entered court protection having already hammered out a restructuring deal with its largest creditors, municipal bond giants Nuveen Asset Management LLC and OppenheimerFunds Inc.

The corporation’s $183 million in debt was issued to finance an 18-story building project that opened in 2007 with a Westin-branded hotel, convention space and restaurants.

The catalyst for the bankruptcy was the village’s refusal, starting in late 2011, to appropriate funds to cover shortfalls between what the project generated in revenue and the scheduled payments due to bondholders.

Reserve funds covered LPFC’s debt obligations until January 2014, when the municipal debt fell into default, trashing the credit ratings of both the village and the bond issuer.

Counting accrued interest and principal, the outstanding balance has ballooned to $247 million, according to court documents.

Under the restructuring deal, the village agreed to contribute $3 million to boost bondholder recoveries. It would also hand over the proceeds from a 1% increase in its restaurant tax that went into effect in January.

Subject to court approval, the plan would restructure some bonds into senior and subordinate securities and extend debt maturities until as late as 2069. A $69.5 million slice of the debt would be extinguished.

LPFC is required under the agreement to meet a series of milestones, such as filing a plan of reorganization by Sept. 29 and securing court approval for that plan by Dec. 15. LPFC would exit chapter 11 by Dec. 31.

ACA Financial Guaranty Corp., a bond insurer with $58 million in guarantees on the line, is also on board with the proposed workout plan.

The case has been assigned to Judge Jacqueline P. Cox in the U.S. Bankruptcy Court in Chicago. Law firm Adelman & Gettleman Ltd. is serving as debtor’s counsel in the case, numbered 17-22517.

The Wall Street Journal

By Andrew Scurria

July 28, 2017 6:15 p.m. ET

Write to Andrew Scurria at [email protected]

Fitch Ratings-New York-28 July 2017: The recently passed state of Illinois budget will affect local government finances, including those of the city of Chicago, Issuer Default Rating (IDR) ‘BBB-‘/Stable Outlook, the Chicago Board of Education (IDR ‘B+’/Negative Outlook), and Cook County (‘A+’/Stable Outlook), according to Fitch Ratings. Fitch does not expect the budget to result directly in any rating changes for local governments in the state, although school districts remain exposed to a potential impasse in finalizing school funding distributions.

Chicago Impacts: Removes Pension Uncertainty; Places Fee on Sales Taxes

For the city of Chicago, a big benefit of the state budget was the inclusion of the city’s Municipal and Laborers’ funds pension reform legislation, which had previously been passed by the legislature and vetoed by the governor. The passage of this legislation removes the uncertainty associated with the implementation of the reform plans for those two pension funds. It commits the city to a higher contribution schedule, with a gradual ramp up to an amount that would achieve 90% funding by 2060, according to actuarial projections. It also creates an additional tier for new employees, which allows the choice of a lower retirement age in exchange for higher employee contributions.

The budget imposes a two percent administrative fee on local sales taxes to generate additional revenue for the state. This should not result in a change to the Chicago sales tax bond ratings (‘BBB-‘/Stable Outlook), which are capped by the city’s IDR. The underlying sales tax revenue stream supporting those bonds would support a much higher rating if bondholders were not exposed to the operating risk of the city. New legislation discussed below gives the city a new tool that could accomplish this. In addition, the budget includes a 10% reduction in local government distribution funds (LGDF), which are statewide income taxes distributed to local governments; although, the state believes that more frequent remittance of those funds via direct deposit will offset to some extent the impact of the cut on a cash flow basis. Neither of these changes will have a significant budget impact on the city.

School District Impacts: Potential for Improved Cash Flow, Increased Funding

The biggest impact to the Chicago Board of Education is the presumption that a fully funded state budget will result in more prompt distribution of state aid to districts, although it is likely that the flow of categorical block grants will only improve to the extent the state’s own payment backlog improves. Currently, the district is owed $304.5 million in categorical block grants. Existing state statutes require that the block grants be paid no later than Dec. 31, 2017; if not paid by then, the appropriation expires, unless the Governor and Comptroller agree to extend the appropriation.

School Funding Vulnerable to Additional Legislation

The budget includes large increases in funding for preK-12 education, but distribution of most education funding is contingent upon the passage of what the budget refers to as an evidence-based education funding reform. The legislature has passed such legislation, Senate Bill 1 (SB 1), but has not yet sent it to the governor. He has stated that he intends to use an amendatory veto to bring the legislation closer to the Republican plan. The governor called the legislature into a special session, starting July 26th, to encourage the legislature to pass a new school funding bill by the end of July.

If passed into law, SB 1 would provide for $221 million of pension aid and $71 million of new state aid to Chicago schools for a total increase of $292 million. The Republican plan would result in a state aid reduction of $73 million and also separate the $221 million of pension aid out of the base formula and grant it in separate legislation, for a net increase of $148 million. Chicago schools is the only district in the state which is responsible for paying its own pension costs; other districts participate in the state-run plan and the state bears most of their pension costs. Separating out the $221 million pension aid would be less advantageous for Chicago schools, as it would make the aid vulnerable to budget appropriation each year. Either version represents a large increase in funding for the CBOE, whose financial position is characterized by chronic structural imbalance, slim reserves and a weak liquidity position.

Fitch is concerned that the requirement for agreement on an evidence-based education funding reform legislation before school monies can flow represents a vulnerability to all Illinois school districts. The state board of education has said that the legislation must be passed by August 3rd in order for state aid to flow to districts before the start of the school year. Fitch will closely monitor the potential impact this may have on Illinois school district ratings and if no legislation is passed by that date, will take action on a case by case basis as necessary.

New Pension Tier, Cost Shift to Schools

Another big impact of the state budget on school districts and universities/community colleges is the creation of a third tier in the pension system for new hires. New employees will be given a choice between participation in the tier 2 defined benefit plan with a more modest cost of living adjustment or a hybrid plan with a small defined benefit for those employees not covered by social security, plus a defined contribution component. With either choice, the local employer rather than the state will pay the normal cost and also determine the amount of the employer match. This, of course, is a bigger change for school districts outside Chicago, whose pension costs have been mostly borne by the state, than it is for Chicago Schools, which already is responsible for the payment of its pension costs.

Other Effects on Local Governments

Other effects of the state budget on local governments include a 10% reduction in funding for higher education, although the budget does provide full funding for grants to low income students which should particularly benefit community college districts, like City Colleges of Chicago.

Cook County should benefit from a reduction in delayed Medicaid payments to its health system, which threatened to strain liquidity. The county will also be affected by the 2% administrative fee on sales taxes, a 9% reduction in personal property replacement taxes (PPRT), and the 10% reduction in LGDF payments which may be partially or fully offset by catch up payments on a cash flow basis. While these are all relatively small impacts on the county’s overall budget, they come at a time when the county is still trying to solve for the loss of its sweetened beverage tax, which has been temporarily blocked by the courts.

New Capital Financing Option

Away from annual budget flows, the state budget made a change that could be significant to capital financing in the state. An amendment to the Illinois Municipal Code (65 ILCS 5) included in the state’s fiscal 2018 budget agreement provides a structure by which Chicago and other home rule municipalities in the state can create entities to issue debt that would not be constrained by the Issuer Default Rating (IDR) assigned to the local government by Fitch Ratings. If properly applied by a home rule municipality, the structure could result in ratings higher than and without regard to the IDR. For further information, please see ‘Fitch: Illinois Legislation Gives Chicago New Financing Tool’ (July 2017), available at www.fitchratings.com.

Contact:

Arlene Bohner
Managing Director
+1-212 908-0554
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Amy Laskey
Managing Director
+1 212 908-0568

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: [email protected].

Additional information is available on www.fitchratings.com

• Lawmakers starting special session on school funding Wednesday
• Rauner wants to remove what he calls Chicago ‘bailout’

Chicago school bonds are rallying even as Illinois Governor Bruce Rauner repeatedly threatens to veto state aid for the cash-strapped district.

The average price of federally tax-exempt Chicago Board of Education general-obligation bonds due in 2046 was 100.33 cents on the dollar on Wednesday, yielding 6.95 percent, compared to 92.427 cents on the dollar to yield 7.65 percent when the bonds sold on July 10, according to data compiled by Bloomberg.

Lawmakers overrode Rauner’s veto of a budget package, including an income-tax hike, to enact Illinois’s first spending plan in more than two years on July 6. Tucked into the legislation is a requirement that Illinois use an evidence-based funding model to distribute money to schools. A measure that does just that — Senate Bill 1 — also includes more than $200 million to help Chicago’s schools pay pension bills.

But Rauner, a Republican, plans to issue an amendatory veto to remove what he calls a Chicago “pension bailout.” Democrats haven’t sent the bill to his desk yet, prompting Rauner to call lawmakers back to the capital for a special session starting Wednesday to address school funding.

“The market sees Rauner as effectively neutered so his attempts to defund the schools are taken somewhat less seriously than they would have been a month ago,” said Matt Fabian, a partner with Municipal Market Analytics Inc.

The nation’s third-largest school district, which expects to see enrollment drop by 8,000 students this year, has been struggling to stay solvent because of mounting pension bills. The board has been draining reserves, shortchanging its retirement fund and borrowing at punishing interest rates to stay afloat.

The state owes Chicago schools about $466.5 million in delayed categorical payments, Moody’s Investors Service said on July 6. Passage of a state budget is good news for the district, and an excuse to tighten the bonds, according to Fabian.

“They had over-corrected to the cheap side,” Fabian said, “And now they’re over-correcting to the rich.”

Senate President John Cullerton, a Democrat, said he’ll send Rauner the bill on Monday, saying that he wants time to negotiate with the governor and address his issues with the measure. If Rauner does a partial veto, lawmakers will try to override him, Cullerton told reporters in Springfield, and warned that Rauner is at risk of exceeding his constitutional authority if he makes major changes to the bill.

At a separate press conference, Rauner reiterated his demand that the bill be sent to him immediately, and said he’ll deal with it in a “fully constitutional way.”

Bloomberg Markets

By Elizabeth Campbell

July 26, 2017, 10:19 AM PDT July 26, 2017, 2:06 PM PDT

On July 7, 2017, Illinois lawmakers overrode a gubernatorial veto and passed a state budget for the first time since fiscal 2015. For the state’s public higher education institutions, the approved fiscal 2018 budget and retroactive fiscal 2017 funding provide some monetary relief after two consecutive years of uncertainty and limited funding.

Continue Reading

Jul. 24, 2017

Hedge funds holding Puerto Rico bonds sued the U.S. government, the first time creditors have tried to put federal taxpayers on the hook for losses suffered in the island’s debt crisis.

A bondholder group represented by the Jones Day law firm filed suit in the U.S. Court of Federal Claims, the Washington tribunal that handles claims against the federal government. Creditors have been suing Puerto Rico since early last year over an escalating series of debt defaults, but never before has a group targeted Uncle Sam directly for damages.

Plaintiffs including Glendon Capital Management LP and Oaktree Capital Management LP are facing possible losses on bonds issued in 2008 to prop up Puerto Rico’s struggling pension fund. Their lawsuit, filed Wednesday, blames the federal oversight board that was installed by Congress to dig the island economy out from its $73 billion debt load. The seven-member board placed Puerto Rico’s largest public retirement fund under bankruptcy protection in May to restructure those $3 billion in pension bonds.

“Because the oversight board is so clearly a part of the federal government, its actions are themselves the actions of the United States,” the complaint says.

Preventing a taxpayer bailout for Puerto Rico’s financial woes was a priority for House Speaker Paul Ryan (Wis.) and congressional Republicans who designed Puerto Rico’s rescue package. That law, known by its acronym Promesa, “isn’t a bailout,” according to a statement from Mr. Ryan’s office last year. “It preserved that critical principle of protecting taxpayers.”

A spokesman for the oversight board didn’t immediately respond to a request for comment.

Promesa empowered the oversight board to write down Puerto Rico’s massive pile of municipal debt consensually through negotiated deals, or through court-supervised proceedings if negotiations failed. After a decadelong recession punctuated by high unemployment and poverty rates, the U.S. territory is desperate to stem the migration of its residents to the U.S. mainland.

Like many municipal governments, Puerto Rico has long struggled to keep its pension systems healthy. Proceeds from the pension bonds were supposed to help the Puerto Rico Government Employees Retirement System continue paying benefits until elderly pensioners died off and younger public employees began retiring with less-generous benefit packages. Instead, the value of the system’s investments cratered during the financial crisis, bringing the pension system to the brink of insolvency today.

The bonds are payable from the pension contributions paid by public employers toward their workers’ retirements. Bondholders thought they would be paid first, but the oversight board last month adopted legislation to move the contributions outside the pension system and beyond creditors’ grasp.

The plaintiffs asked for a court order declaring that maneuver an illegal taking of private property under the U.S. Constitution, as well as “compensation equal to payment of the principal amount of the [Employees Retirement System] bonds.”

Creditors were optimistic the oversight board would quickly approve consensual settlements and avoid prolonged bankruptcy proceedings, but now that hope is dwindling. Deals to restructure the island’s general obligation bonds and its electric utility debt have met the board’s veto, despite prodding from congressional Republicans to honor restructuring deals negotiated with local officials.

The Wall Street Journal

by Andrew Scurria

July 20, 2017 5:46 p.m. ET

Write to Andrew Scurria at [email protected]

(Reuters) – U.S. mutual funds that held onto Puerto Rican debt as its economy crept toward collapse could get drawn into battles that pit their own investors against each other, as the island navigates the biggest government bankruptcy in U.S. history.

The reason for the quandary lies in the territory’s Byzantine capital structure, where 18 public agencies owe a combined $120 billion in bond and pension debt.

Bonds held by the companies’ many funds are spread across myriad credits, some in direct competition for recoveries, meaning wins for some investors trigger losses for others.

For OppenheimerFunds and Franklin Advisers, whose combined $10.3 billion in Puerto Rican debt makes them among the island’s biggest creditors, negotiating that minefield is particularly important. (For a related graphic, click tmsnrt.rs/2eRyYw3)

The funds say their cross-holdings reflect a long-term commitment to Puerto Rico, and give them more of a stake than other creditors in righting the island’s ship. Bankruptcy and municipal bond experts say, however, the competing claims raise questions about whether they can represent investors’ best interests.

It adds a wrinkle to already complex restructuring talks, muddying the path to recovery for investors who tied up their savings in Puerto Rico.

Struggling with a 45 percent poverty rate and near-insolvent public healthcare, the island in May filed a form of bankruptcy under the federal 2016 rescue law known as PROMESA, confronting creditors with unique challenges.

“This is not something I’ve seen in the bankruptcy world,” said restructuring expert Drew Dawson.

While it is not rare for a creditor to hold multiple tranches of debt, it is less common when the creditor runs many funds with competing investments, said Dawson, a professor at the University of Miami School of Law.

“You run all these funds – which do you side with?” he said. “If I were an investor, I’d be concerned.”

As of April 30, Oppenheimer had about $7.3 billion of total exposure, while Franklin, after offloading some of its Puerto Rico holdings in recent years, had around $3 billion.

Those holdings, based on face value, may not represent exposure for debt bought at a discount, and some of the debt may be insured, shielding the funds from losses.

Playing Two Sides

The island’s $17 billion of so-called COFINA debt, secured by sales tax, is the main battleground.

COFINA creditors are locked in litigation with holders of Puerto Rico’s general obligation (GO) bonds, with both sides claiming a right to sales tax revenue.

Overall, Franklin and Oppenheimer held $3.2 billion of COFINA as of April 30, more than twice their combined GO holdings. Yet at Franklin, six funds held exclusively GO debt, claims worth a combined $276 million.

Similar clashes exist between senior COFINA holders, who have first claim on the tax revenue, and junior creditors.

Overall, the companies held nearly four times as much junior as senior COFINA debt. Yet Oppenheimer’s Rochester Fund Municipals, for example, had $384 million of senior debt and just $83 million of the junior tranche.

Smaller players face similar challenges. The Santander First Puerto Rico Family of Funds ran eight funds each with at least $28 million of COFINA debt. Three of those had at least two-thirds invested in the junior tranche; five had 70 percent or more in the senior class.

Oppenheimer, Franklin and Santander have formed an ad hoc bankruptcy negotiating group, whose strategy so far has been to maximize total returns across portfolios, rather than advocate for funds whose debt may be more senior, according to a Reuters analysis of court filings and public statements by the funds and their advisers.

“Our advocacy is not centered around particular classes of bonds, but around seeking the best overall return for our shareholders,” said Kimberly Weinrick, a spokeswoman for Oppenheimer.

A spokeswoman for Franklin declined to comment for this article, while Ann Davis, a Santander spokeswoman, declined to comment on the cross-holdings.One key exception to the alliance: the Franklin funds that hold exclusively general obligation debt have joined a separate negotiating group comprised only of holders of such debt, according to a July 13 court filing.

The GO and mutual fund groups have taken opposing sides in a handful of court battles, which could prompt questions from a judge or other creditors as to which side Franklin is more closely aligned with, Dawson said.

Cross-holdings are not prohibited in bankruptcy, though judges have the authority to decide whether a party is too conflicted to vote on a restructuring plan, he added.

Rival creditors, too, could try to exploit apparent conflicts to limit the mutual funds’ bargaining clout. In June, hedge fund owners of senior COFINA bonds asked a bankruptcy judge to bar the mutual funds from a role in nominating a COFINA fiduciary in settlement talks, citing their “undeniable conflict.”

The judge told the sides to try to resolve the issue internally, and talks continue.

Sensible but Risky

For years, mutual funds piled into Puerto Rico’s debt because it was exempt from local, state and federal taxes and because until PROMESA’s passage in June 2016, the island was barred from declaring bankruptcy.

Court documents and public statements from the mutual fund negotiating group suggest it tends to side with classes of debt where its funds have the most exposure.

For example, the funds have primarily advocated for the COFINA junior tranche, where they have the greatest exposure, at the expense of senior COFINA and GO creditors.

They have also fought hard for a restructuring deal at Puerto Rico’s power utility PREPA, which owes Oppenheimer and Franklin a combined $1.6 billion, even as Puerto Rico’s federally-appointed oversight board warned that a generous deal could hurt Puerto Rico’s broader economy.

The strategy is sound, but risky, said Tom Metzold, who spent nearly three decades as a municipal bond portfolio manager at Eaton Vance. By fighting for junior bondholders, the funds raise the odds of a settlement in which everyone gets a fair deal, given that senior creditors are already well represented, Metzold said.

Yet it also opens the funds to criticism that they did not fight hard enough for their senior-most holdings, he said.

“A number of people will be performing autopsies” on whatever decisions the funds make, Metzold said.

“I’m glad I’m not in their shoes.”

Reporting by Nick Brown; Editing by Tomasz Janowski

JULY 27, 2017

Fitch Ratings-New York-24 July 2017: Although Pennsylvania faces a sizable budget gap, the commonwealth’s ‘AA-‘ Issuer Default Rating (IDR) and Stable Outlook incorporates Fitch Ratings’ expectation that the commonwealth will utilize the significant budgetary flexibility available to most states to respond to its various fiscal pressures adequately.

The commonwealth enacted a spending plan for fiscal 2018, but has yet to enact a revenue package to provide full funding. Pennsylvania also must address a sizable revenue shortfall from fiscal 2017. Legislative leadership and the governor remain engaged in ongoing budget negotiations. Fitch anticipates updating the commonwealth’s IDR and related ratings following evaluation of an enacted revenue package.

Pennsylvania ended its last fiscal year on June 30 with a roughly $1.5 billion general fund revenue shortfall and has enacted a fiscal 2018 spending plan with a reported $700 to $800 million gap with revenues available under current law. Given the enactment of a general fund appropriations bill for fiscal 2018 (HB 218), Fitch anticipates further budget balancing will rely on revenue measures. General fund appropriations of nearly $32 billion include notable savings in recurring expenditures ($2 billion according to the governor’s office), as well as increases in key policy areas such as K-12 education.

Legislative leadership and the governor have indicated their intent to address the estimated combined budget gap of approximately $2.2 billion (across fiscal years 2017 and 2018) in one set of measures. All parties are reportedly considering a wide range of revenue solutions from one-time sources such as leveraging tobacco settlement revenues or fund sweeps, to recurring sources with varying levels of reliability and certainty. In evaluating a final revenue package, Fitch will assess whether proposed measures include reasonable estimates of anticipated revenues, and whether those revenues are sufficiently sustainable over the long term to address Pennsylvania’s ongoing structural budget gap.

Contact:

Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Laura Porter
Managing Director
+1-212-908-0575

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: [email protected].

Additional information is available on www.fitchratings.com

Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of AA- with a Stable outlook to the Miami-Dade County Aviation Revenue Refunding Bonds Series 2017B (AMT), Series 2017C (Non-AMT), and Series 2017D (Taxable). In addition, KBRA has affirmed the AA- rating and Stable Outlook on the County’s outstanding aviation revenue bonds that are not supported by an external third-party credit agreement and are not double-barreled aviation revenue and general obligation bonds.

The airport revenue and revenue refunding bonds are special limited obligations of the county, payable solely from a pledge of the net revenues derived from the Port Authority’s properties (PAP), including the operation of the Miami International Airport (MIA), three general-aviation airports, one flight-training airport, and one decommissioned airport. The major components of the PAP are the terminals, grounds, runways, and taxiways. The security for the aviation revenue bonds does not include any mortgage or lien or any security interest in any of the PAP.

To access the full report, please click on the link below:

Miami-Dade County’s Aviation Revenue Refunding Bonds

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Los Angeles City Councilmember Herb Wesson has proposed setting up a municipal bank to enable the recently legalized state cannabis industry to open accounts and secure loans.

“We cannot bury our heads in the sand on the issue of recreational and medical cannabis legalization, instead we must strive to reasonably regulate the emerging industry while creating opportunities for Angelenos,” Wesson said in the speech on Tuesday to the City Council, following his unanimous re-election as Council President.

When Californians passed Proposition 64 in November, it paved the way for legal recreational use of marijuana throughout the state (beginning in 2018). However, the legal complexities surrounding the sale profits still remain.

“It left significant questions unresolved,” John Chiang, Treasurer of California, told the Los Angeles Times. “How do you handle the taxation of cannabis dollars and the banking of billions of dollars of transactions that are going to take place here in California?”

The Times adds that the state’s cannabis industry saw $3.3 billion in sales for 2016, and that number is expected to hit $7.5 billion in 2018. Yet, large financial institutions refuse to take the industry’s money for fear of legal entanglement with federal regulations that still criminalize marijuana and list it alongside drugs like heroin and cocaine.

In his proposal to establish a municipal bank that would do business with the marijuana industry, Wesson noted that, currently, “[cannabis business owners] are going to go home tonight and sleep on a mattress that’s worth $2 million,” while others “have a million and a half dollars in cash buried in the backyard.” Wesson continued, “[w]e have to figure out a way to make this industry work.”

What further complicates the situation is that, though the city of Los Angeles accepts business tax payments in cash, the State Board of Equalization does not, reports the Los Angeles Daily News.

“We get lots of cash, and sometimes it has been washed — actually washed — because it had been buried out in the backyard,” said John Bartholomew, treasurer-tax collector for Humboldt County in Northern California, according to the Times.

“Right now, at the downtown [Los Angeles] office of finance, there’s a six-story parking structure 500 yards away. I have to walk through what is essentially a homeless encampment with a duffel bag full of cash, walk across the street, go through security and then sometimes stand in line,” said Jerred Kiloh, a dispensary owner in the Valley, while speaking on the complexities paying business taxes to the city. “No one comes in with the type of cash they come in with,” Todd Bouey, Los Angeles’ assistant director of finance, said of the marijuana industry. “ It was taking hours to get through one deposit.”

According to the Daily News, Councilman Herb Wesson is expected to introduce a formal motion for his municipal bank proposal to the City Council’s Budget and Finance Committee.

“[D]eposits could be used for public benefits including gap funding for affordable housing projects, but the Council President is awaiting further study from various city departments on the topic,” Vanessa Rodriguez, communications director for Councilman Wesson, told LAist.

“Should the Bank of Los Angeles proposal move forward, the Council President is committed to ensuring the city meets all banking guidelines set forth by both the Department of Justice and Department of Treasury.”

LAIST.COM

BY OREN PELEG

JUL 26, 2017 11:18 AM

• A rating cut is still possible as state has negative outlook
• Price of Illinois bonds rallied to highest since September

The Illinois State Capitol Building, in Springfield. Photographer: Raymond Boyd/Getty Images
Illinois avoided becoming the first junk-rated U.S. state after Moody’s Investors Service opted to leave its grade unchanged, pushing the price of the state’s bonds to the highest since September.

Moody’s on Thursday confirmed the state’s Baa3 rating, the lowest investment grade, after lawmakers overrode Governor Bruce Rauner’s veto this month to enact the first budget in two years. While that eased the immediate threat of a downgrade, the outlook is still negative, signaling that another cut is possible to its $32 billion of debt.

The enacted spending plan “alleviates immediate liquidity pressures, moves the state closer to fiscal balance and should keep pension and other fixed costs at manageable levels at least in the near term,” Moody’s said in a statement on Thursday. “While budget passage alleviates immediate threats to the state’s credit, long-term challenges remain.”

Illinois’s bonds have rallied since the legislature acted to raise taxes and end a long-running standoff that left the state with a record backlog of unpaid bills as it kept spending more than it brought in. The lawmakers were prodded in part by the threat of further downgrades if they failed to act, a step that would have rattled investors and left some mutual funds unable to buy its bonds.

On Thursday, Illinois’s taxable pension bonds due in June 2033 rose to an average of 97.3 cents on the dollar, the highest since September 2016 and up from 96.5 cents Wednesday, according to data compiled by Bloomberg. That pushed down the yield on the securities, the state’s most-actively traded, to 5.35 percent from 5.43 percent.

“The Moody’s affirmation should help the spread on the bonds tighten a little bit,” said Dennis Derby, a money manager in Menomonee Falls, Wisconsin, at Wells Fargo Asset Management, which holds Illinois bonds among its $40 billion of municipal debt. “It shows that the revenue increases have had a positive effect on investor sentiment as well as the rating agencies.”

Moody’s is the last of the major credit rating companies to wrap up its review of Illinois since the budget was enacted. S&P Global Ratings affirmed Illinois’s BBB- rating on July 12 and Fitch kept the state at BBB on July 17.

Illinois is still the worst-rated state and is struggling with more than $129 billion of unfunded pension liabilities. The $36 billion spending plan approved by the Democrat-led legislature with the help of some Republicans includes income-tax increases to ease chronic budget deficits.

Under the new budget, the state is authorized to sell as much as $6 billion of long-term bonds to help pay down the bill backlog. If the state comes to market and the backlog keeps growing, that would be “problematic,” Wells Fargo’s Derby said. Moody’s noted that could lead to a downgrade.

“It does give investors a little bit of breathing room,” Derby said. “And then they’ll have to wait to see what the state does with the new debt issue and how they manage.”

Bloomberg

By Elizabeth Campbell

July 20, 2017, 2:25 PM PDT

Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of AA+ with a Stable Outlook on the City of Chicago Sales Tax Revenue bonds.

This rating is based on KBRA’s U.S. Special Tax Rating Methodology. This methodology defines special tax revenue bonds as bonds that are secured by a lien on revenues derived from the levy of a tax or fee on the sale of goods and services or other specifically defined revenue streams.

To access the full report, please click on the link below:

City of Chicago Sales Tax Revenue Bonds

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Fitch Ratings-New York-18 July 2017: California’s extension of its cap-and-trade legal framework through 2030 will reduce regulatory risk for the state’s public power utilities by giving greater clarity on the legal framework beyond 2020, says Fitch Ratings. This in turn will allow for better resource planning decisions.

California’s public power utilities have been successful at managing the state’s numerous and ambitious environmental rules by recovering higher costs from ratepayers and maintaining financial margins. We expect this trend to continue and public power credit quality to remain strong through the second decade of California’s environmental transformation.

California’s cap-and-trade auction platform is the largest of its type in the US. Its original goal was to set an emissions limit equivalent to 1990 levels by 2020. Regular carbon auctions began in November 2012 by introducing hard emissions caps on electricity generators and large industrial sources. The program’s scope was expanded to cover transportation fuels, natural gas, propane and fossil fuels in 2015. The program included free allocations of carbon allowances in the initial years, and gradually phased those allowances out, providing utilities with a runway to downsize carbon emissions over time.

The original 2006 legislation did not address what would occur with the program beyond 2020, creating uncertainty for market participants. Utilities that expected to continue to have excess allowances after 2020 could not be certain a market would exist on which to resell those allowances. Utilities requiring more time during the transition toward cleaner generation may have needed to accelerate resource investments if the market framework was not extended.

The recently approved legislation allows for carbon allowances to be banked indefinitely, reduces the amount of carbon offsets to a maximum of 6% from 2025 to 2030, includes provisions for price ceilings, and allows for the provision of allowances to support industry efforts to comply with the law and minimize cost disruptions. The target for the extended program is to reduce state wide greenhouse gas emissions to 40% of 1990 levels by 2030.

Public power utilities owned much of the coal-fired generation when the cap-and-trade program began. Since coal-fired generation emits roughly double the amount of greenhouse gases as natural gas-fired generation, downsizing coal-fired generation became a priority. Most public power issuers sold coal-fired generation or are in the process of doing so. This includes the Navajo Generating Station (formerly owned by Los Angeles Department of Water and Power), the San Juan Generation Station (with ownership interests being divested by members of MSR Public Power) and the Southern California Public Power Authority (SCPPA) and plans to repower the Intermountain Power Project in Utah by 2026 (owned by members of SCPPA).

Contact:

Matthew Reilly, CFA
Director, U.S. Public Finance
+1 415 732-7572
Fitch Ratings, Inc.
650 California Street, 22nd Floor
San Francisco, CA 94108

Kathy Masterson
Senior Director, U.S. Public Finance
+1 512 215-3730

Dennis Pidherny
Managing Director, U.S. Public Finance
+1 212 908-0738

Robert Rowan
Senior Analyst, Fitch Wire
+1 212 908-9159

Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: [email protected].

Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

The state’s transportation chief calls a new $54 billion transportation package monumental. But the projects it funds will be more mundane than monumental

For the first time since 1989, California lawmakers this year passed a gas tax hike. The increase — by 12 cents a gallon on gasoline and 20 cents a gallon on diesel — will pay for a decade-long building program that will cost $54 billion.

California is one of many states this year to raise its fuel taxes, but the state’s sheer size makes the new transportation funding law significant. The Trump administration, by comparison, has broadly outlined a $1 trillion investment in infrastructure over a decade — only $200 billion of which would come from the federal government.

In other words, over the next decade, California will spend a quarter of what the federal government would spend on the entire country under Trump’s plan.

Continue reading.

GOVERNING.COM

BY DANIEL C. VOCK | JULY 18, 2017

The new approach is expected to bring higher prices for state housing tax credits.

Several affordable housing developers are working to close the financing on their latest projects using new “certificated” credits in California.

They will be the first to use the financing tool after California leaders made changes to the law to allow for the certification of state low-income housing tax credits (LIHTCs) under a three-year pilot. The move aims to help nonprofit developers receive higher pricing for their state credits and ultimately raise more equity for their projects.

State credits in California have recently sold for about 65 to 75 cents per dollar of credit, but officials think that the certificated credits could generate 90 to 95 cents per dollar of credit. That could result in about $20 million in additional equity to California projects and ultimately more affordable housing being built.

Under the program, participating developments must receive at least 80 cents per dollar of credit.

“From the prior floor to 80 cents is a 23% increase,” says Brian D’Andrea, senior vice president of housing at Century Housing. “Our hope and expectation is that we’ll be able to achieve at least that.”

Century Housing affiliate, Century Affordable Development, has chosen to use certificated credits to raise equity to build Beacon Pointe, a 121-unit affordable housing development for seniors in Long Beach, Calif. Sixty-one apartments will be set aside for seniors who have been homeless. The California Tax Credit Allocation Committee (CTCAC) recently reserved the project nearly $11 million in state credits.

It’s one of the first five developments electing to certificate credits. These initial developments received reservations for about $30.2 million in state credits. California has an annual state credit ceiling of about $94 million.

“We’re very pleased to have received the allocation, and we’re working toward a closing later this year,” says D’Andrea.

The Cesar Chavez Foundation, Coachella Valley Housing Coalition, National Housing Corp., and PATH Ventures are the other developers that received reservations for certificated credits from CTCAC.

How it worksTraditionally, LIHTCs are allocated to developers, who then sell them to an investor, usually in the form of a limited partnership interest. Certificated credits differ in that they are sold outright to investors who take no ownership interest in the development. This eliminates the impact of the state credits on an investor’s federal tax liability, allowing an investor to offer higher pricing.

CTCAC reserves certificated credits in the name of the nonprofit partner in a development. The nonprofit can then sell the credits to one or more investors, with the law allowing each initial investor to resell the credits one additional time.

The California Housing Partnership Corp. (CHPC) and state treasurer John Chiang co-sponsored and helped draft the legislation by state Sen. Jim Beall (D-San Jose) that opened the doors for the program. Supporters were working on the certificated credit program long before the recent turmoil in the LIHTC market.

Federal LIHTC prices dropped sharply after the November election as the prospects of tax reform increased with Donald Trump in the White House and Republicans in control of the House and Senate. Trump has called for slashing the business tax rate from 35% to 15% while members of Congress will likely be eyeing a rate in the 20% to 25% range. While a change in the tax rate does not affect the value of the tax credits themselves, it can impact depreciation and other tax losses that are part of the investment.

The uncertainty around tax reform caused some investors to pull out of funds or offer lower prices for LIHTCs, creating funding gaps in a number of affordable housing deals. As a result, the opportunity to get more value from the state credit comes at an ideal time.

“Everyone was interested in a way to get more bang for the buck out of the state’s existing program,” says David Dologite, senior housing finance consultant and policy counsel at CHPC. “It doesn’t involve the state spending any more money. The amount of tax credits that investors are receiving is the same. It increases the value of the credit and the price that sponsors are able to receive.”

Developers need to make an irrevocable choice upfront on whether to certificate when they apply for credits. The reason for that is CTCAC’s underwriting depends on what credit price developers use in their proposals.

Under the program, investors who buy certificated credits must have participated in state or federal tax credits previously, according to the state Treasurer’s Office. At least in the pilot stage, this ensures that participants are sophisticated, historic investors.

If the program is successful, supporters hope it will become permanent, Dologite says.

California leaders looked to other states in creating the new program, including Massachusetts, which has been a leader in the certification of housing credits. Other states have also used the approach for historic and economic development credits.

Housing leaders have high expectations for the program in California, with more developers expected to secure reservations for certificated credits in the second allocation round this year.

Affordable Housing Finance

by Donna Kimura

July 17, 2017

ABOUT THE AUTHOR

Donna Kimura is deputy editor of Affordable Housing Finance. She has covered the industry for more than a decade. Before that, she worked at an Internet company and several daily newspapers. Connect with Donna at [email protected] or follow her @DKimura_AHF.

PURCHASE, N.Y.–(BUSINESS WIRE)–National Public Finance Guarantee Corporation (“National”), an indirect subsidiary of MBIA Inc. (NYSE:MBI), today announced that National, along with the Ad Hoc Group of PREPA bondholders, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and Syncora Guarantee Inc. (“the Creditor Group”), has filed a motion in the U.S. District Court for the District of Puerto Rico to lift the PROMESA stay to seek to enforce its right to compel the appointment of an independent receiver in order to pursue increased rates and to oversee certain operations of the Puerto Rico Electric Power Authority (“PREPA”).

“As PREPA’s single largest creditor, we worked tirelessly for several years with all stakeholders on a comprehensive restructuring that the Oversight Board forced off the table in violation of PROMESA. As a result of the default precipitated by the Oversight Board’s unlawful action, we now have little option but to enforce our legal and contractual rights, and to ensure PREPA sets rates and charges that are sufficient to meet its financial obligations,” said Bill Fallon, CEO of National Public Finance Guarantee Corporation. “We cannot allow PREPA to continue to ignore its obligations under Puerto Rico law and the terms of our Trust Agreement. Given PREPA’s lengthy history of mismanagement and cronyism and the inherent conflicts of interest ignored by the Governor and the Oversight Board, an independent receiver will provide much-needed protection for PREPA, the citizens of Puerto Rico and its creditors. It is imperative that the rule of law is recognized and that the political manipulation of PREPA is halted. We continue to support the utility’s long-term viability and access to the capital markets.”

Puerto Rico law and the PREPA Trust Agreement require PREPA to set electricity rates at amounts sufficient to enable PREPA to pay its debts, which include approximately $8.3 billion of outstanding bond debt. Accordingly, today’s motion seeks to lift the stay under the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) so that the Creditor Group can enforce their rights under Puerto Rico law and the Trust Agreement following the payment default by PREPA earlier this month.

Bondholders holding at least 25 percent in principal amount of the PREPA bonds outstanding have a statutory right to the appointment of a receiver following an event of default. National, along with rest of the Creditor Group, represent almost 70 percent of the outstanding bonds.

In addition, National has filed an amended complaint in its lawsuit against the Oversight Board in the U.S. District Court for the District of Puerto Rico, asking the court to award National damages for the Oversight Board’s unlawful rejection of the RSA.

Forward-Looking Statements

This release includes statements that are not historical or current facts and are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “intend,” “will likely result,” “looking forward” or “will continue,” and similar expressions identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected, including, among other factors, the possibility that MBIA Inc. or National will experience increased credit losses or impairments on public finance obligations issued by state, local and territorial governments and finance authorities that are experiencing unprecedented fiscal stress; the possibility that loss reserve estimates are not adequate to cover potential claims; MBIA Inc.’s or National’s ability to fully implement their strategic plan; and changes in general economic and competitive conditions. These and other factors that could affect financial performance or could cause actual results to differ materially from estimates contained in or underlying MBIA Inc.’s or National’s forward-looking statements are discussed under the “Risk Factors” section in MBIA Inc.’s most recent Annual Report on Form 10-K, which may be updated or amended in MBIA Inc.’s subsequent filings with the Securities and Exchange Commission. MBIA Inc. and National caution readers not to place undue reliance on any such forward-looking statements, which speak only to their respective dates. National and MBIA Inc. undertake no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such result is not likely to be achieved.

National Public Finance Guarantee Corporation, headquartered in Purchase, New York is the world’s largest U.S. public finance-only financial guarantee insurance company, with offices in New York and San Francisco. Please visit National’s website at www.nationalpfg.com.

July 18, 2017 02:42 PM Eastern Daylight Time

Bondholders seek installation of a receiver following utility default

Wall Street investors asked a court to place Puerto Rico’s indebted public electric monopoly under receivership, escalating a standoff over reforming the U.S. territory’s dilapidated power infrastructure.

Financial creditors filed court papers on Tuesday demanding the appointment of a receiver at the power utility known as Prepa following the collapse of a proposed debt restructuring agreement last month.

Hedge fund bondholders Angelo Gordon & Co., BlueMountain Capital Management and Marathon Asset Management LLC joined in Tuesday’s request alongside mutual funds Franklin Resources Inc. and OppenheimerFunds Inc., as well as bond insurers Assured Guaranty Ltd. and MBIA Inc.

Prepa, one of the largest U.S. utilities, is a flashpoint in Puerto Rico’s financial crisis. The federal board installed to revive Puerto Rico’s economy placed the public corporation under bankruptcy protection this month to write down $9 billion in utility debt.

The seven-member oversight board had vetoed a proposed restructuring designed to avert bankruptcy, saying the financial settlement would have left too much debt outstanding and thwarted Prepa’s transition from a public monopoly to a modern, regulated utility model.

Creditors have argued that restructuring Prepa’s debts voluntarily would bolster its creditworthiness and attract private partners. A federal rescue package empowered the oversight board to write down Puerto Rico’s $73 billion in municipal bond debt either through negotiated settlements or through binding, court-supervised proceedings.

Board members and local officials are searching for private investment capital to upgrade outdated power plants and lower electricity costs with the goal of jump-starting the Puerto Rican economy after nearly a decade of recession.

Meanwhile Puerto Rico’s governor, Ricardo Rossellò, has consolidated control over Prepa, recently firing an independent board of directors installed under his predecessor. Creditors on Tuesday criticized the governor for “re-politicizing” the utility board to avoid what they called necessary rate increases on Prepa customers.

“The politicization of Prepa has only grown worse under the current administration,” the court motion said. “This has resulted in a giant step backwards for Prepa.”

The collapse of the proposed settlement was an unwelcome development for creditors, since a judge could impose larger losses than those they had agreed to accept. Prepa’s bankruptcy also roiled some Republican members of Congress who wanted the deal quickly blessed as a model for consensual settlements of Puerto Rico’s other debts.

Yet planned increases in electricity rates to repay creditors made the deal politically toxic in Puerto Rico, even after the governor obtained additional debt concessions in March to mitigate the hit to consumers. Costly, unreliable utility service remains a drag on family incomes and quality of life in Puerto Rico, where last year a massive blackout left Prepa customers without power for three days.

The Wall Street Journal

By Andrew Scurria

July 18, 2017 3:31 p.m. ET

Write to Andrew Scurria at [email protected]

Hedge funds seeking compensation from U.S. for potential losses

Hedge funds holding Puerto Rico bonds sued the U.S. government, the first time creditors have tried to put federal taxpayers on the hook for losses suffered in the island’s debt crisis.

A bondholder group represented by the Jones Day law firm filed suit in the U.S. Court of Federal Claims, the Washington tribunal that handles claims against the federal government. Creditors have been suing Puerto Rico since early last year over an escalating series of debt defaults, but never before has a group targeted Uncle Sam directly for damages.

Plaintiffs including Glendon Capital Management LP and Oaktree Capital Management LP are facing possible losses on bonds issued in 2008 to prop up Puerto Rico’s struggling pension fund. Their lawsuit, filed Wednesday, blames the federal oversight board that was installed by Congress to dig the island economy out from its $73 billion debt load. The seven-member board placed Puerto Rico’s largest public retirement fund under bankruptcy protection in May to restructure those $3 billion in pension bonds.

“Because the oversight board is so clearly a part of the federal government, its actions are themselves the actions of the United States,” the complaint says.

Preventing a taxpayer bailout for Puerto Rico’s financial woes was a priority for House Speaker Paul Ryan (Wis.) and congressional Republicans who designed Puerto Rico’s rescue package. That law, known by its acronym Promesa, “isn’t a bailout,” according to a statement from Mr. Ryan’s office last year. “It preserved that critical principle of protecting taxpayers.”

A spokesman for the oversight board didn’t immediately respond to a request for comment.

Promesa empowered the oversight board to write down Puerto Rico’s massive pile of municipal debt consensually through negotiated deals, or through court-supervised proceedings if negotiations failed. After a decadelong recession punctuated by high unemployment and poverty rates, the U.S. territory is desperate to stem the migration of its residents to the U.S. mainland.

Like many municipal governments, Puerto Rico has long struggled to keep its pension systems healthy. Proceeds from the pension bonds were supposed to help the Puerto Rico Government Employees Retirement System continue paying benefits until elderly pensioners died off and younger public employees began retiring with less-generous benefit packages. Instead, the value of the system’s investments cratered during the financial crisis, bringing the pension system to the brink of insolvency today.

The bonds are payable from the pension contributions paid by public employers toward their workers’ retirements. Bondholders thought they would be paid first, but the oversight board last month adopted legislation to move the contributions outside the pension system and beyond creditors’ grasp.

The plaintiffs asked for a court order declaring that maneuver an illegal taking of private property under the U.S. Constitution, as well as “compensation equal to payment of the principal amount of the [Employees Retirement System] bonds.”

Creditors were optimistic the oversight board would quickly approve consensual settlements and avoid prolonged bankruptcy proceedings, but now that hope is dwindling. Deals to restructure the island’s general obligation bonds and its electric utility debt have met the board’s veto, despite prodding from congressional Republicans to honor restructuring deals negotiated with local officials.

The Wall Street Journal

By Andrew Scurria

July 20, 2017 5:46 p.m. ET

Write to Andrew Scurria at [email protected]

Puerto Rico entered its own form of bankruptcy in early May, and the financial crisis there is still getting worse. But even as the restructuring process devolves into more lawsuits, defaults, and downgrades, some ripple effects are creating surprising opportunities for investors.

Consider what’s going on with MBIA the parent of bond insurer National, which insures about $4 billion in par value of Puerto Rico bonds. (That’s about $8.5 billion in total debt exposure, including all scheduled interest payments and principal.) MBIA’s business plans were torpedoed by a two-notch rating downgrade by S&P Global Ratings in late June. The firm laid off employees and said it would give up trying to write new business, as bond insurers have to be rated higher than municipalities for the insurance to add any value.

Yet, MBIA’s shares have been rising ever since. On Tuesday, management told investors to expect shareholder-friendly moves, such as more stock buybacks and perhaps a special dividend—even as it had to increase accounting for losses related to Puerto Rico. Executives say the firm, which has the ability to pay claims equal to $4.6 billion, is now “unshackled from most of the limitations imposed by the rating agencies,” by not writing new business. The stock has risen to $10 from $8 in the past two months.

Investors expect MBIA to be acquired by fellow bond insurer Assured Guaranty. Deal speculation has fueled the gains. CreditSights analyst Josh Esterov thinks it will be challenging for the two companies to reach a deal, but calls the logic behind it “sound.”

Such special situations aren’t normally the purview of municipal-bond investors. But the bonds insured by MBIA and Assured may be. Richard Daskin of RSD Advisors believes that investing in insured Puerto Rico paper can be a good opportunity, even though he qualifies that it “should probably be done with professional help.”

Mark Taylor, portfolio co-manager of the Alpine High Yield Managed Duration Municipal fund, has recently added to his fund’s stake in insured Puerto Rico munis, raising his allocation to 6% from about 5%. He won’t touch uninsured Puerto Rico paper, and he keeps maturities to within five years. For example, he owns some general-obligation bonds maturing in 2020 that now yield 3%, equivalent to a 5% taxable yield for investors in a high tax bracket.

Mr. Taylor was surprised by MBIA’s downgrade, which he calls “draconian.” He believes the firm has adequate reserves for at least the next several years. Plus, if MBIA is sold, the bonds it insures would climb in price, he says.

Other muni-fund managers are avoiding Puerto Rico bonds altogether. “I think the ultimate outcomes will be significantly worse than where the bonds are trading now,” says Nicholos Venditti of Thornburg Investment Management. While Puerto Rico’s GO bonds are trading at about 60 cents on the dollar, he believes they could ultimately be worth as little as 25 cents. And if Assured, which has higher reserves than MBIA does, has to pay out large amounts in claims, it could get downgraded.

“These entities live and die by their credit ratings,” Mr. Venditti says. Yet if bond insurers get through Puerto Rico’s restructuring, pay all their claims, and don’t get downgraded, they could have a great sales pitch to boost their business, he notes.

Puerto Rico’s road to restructuring is going worse than expected for creditors so far. “The judge is the one picking winners and losers, and that isn’t a good place to be,” says Mr. Taylor. But for owners of insured Puerto Rico bonds—and even shareholders of beleaguered MBIA—things may turn out just fine.

The Wall Street Journal

By Amey Stone

July 17, 2017 12:05 p.m. ET

Write to Amey Stone at [email protected]

Fitch Ratings-New York-20 July 2017: Fitch Ratings has downgraded the rating on the following bonds issued by the Employees Retirement System of Puerto Rico (ERS) to ‘D’ from ‘C’ and removed from Rating Watch Negative, to reflect the failure to make timely payment of interest on its due date:

–Senior pension funding bonds, series 2008A, 2008B, 2008C.

As a result of the application of the automatic stay in the ERS’ Title III bankruptcy-like proceedings under PROMESA, the ERS missed the scheduled July 1st interest payment, but will make the payment pursuant to a stipulation approved by an order from the U.S. District Court Judge overseeing the Title III proceeding. The ‘D’ rating reflects the failure to make payment on the scheduled due date under the contractual terms of the obligation. The stipulation requires payment of monthly interest from certain “pre-petition” funds through Oct. 1st. The stipulation further provides that the Commonwealth will cause certain amounts to be deposited on certain agreed-upon dates into a “post-petition” account, and the distribution of those amounts will be subject to the judge’s future orders regarding the validity, perfection and enforceability of the ERS bondholders’ liens.

The Commonwealth’s Issuer Default Rating (IDR) remains ‘RD’, indicating that the issuer has defaulted on a select class of its debt.

RATING SENSITIVITIES
The ratings on the bonds have reached the lowest level on Fitch’s rating scale. Fitch expects to re-examine the commonwealth’s credit profile once debt restructuring plans become more clear.

Contact:

Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Laura Porter
Managing Director
+1-212-908-0575

Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: [email protected].

Additional information is available on www.fitchratings.com

NEW YORK — Elias Sanchez, Governor Ricardo Rosselló’s liaison to Puerto Rico’s financial oversight board who has been criticized over his financial disclosures, resigned on Thursday.

Sanchez, a trusted adviser to Rosselló who was effectively the face of the Puerto Rican government on issues concerning the U.S. territory’s massive debt restructuring, said in an interview that he wanted to focus on opportunities in the field of law.

Rossello appointed Christian Sobrino Vega, president of Puerto Rico’s Government Development Bank (GDB), as Sanchez’s replacement on the board. In a statement, the governor called Sobrino “instrumental in the success of our administration.”

Puerto Rico is in a historic economic crisis, with $72 billion in debt it cannot repay, a 45 percent poverty rate, and insolvent public pensions. Its finances are under the oversight of a federal board that has been given the task of helping the island craft and follow a blueprint for its fiscal turnaround.

As Rosselló’s delegate on the board, Sanchez, a former lobbyist, had become a favorite target of investors unhappy with potential cuts to debt repayment.

Specifically, Sanchez was disparaged for his financial disclosure forms – a requirement of all board members. According to critics, he did not provide enough information on the forms about his sources of income and potential conflicts of interest related to his role on the board.

Espacios Abiertos, a Puerto Rico-based nonprofit promoting transparency in government, said in a report this month that Sanchez’s disclosures were more deficient in those areas than any of the other seven board members.

One adviser to a major Puerto Rico creditor group said many stakeholders “found it extremely concerning that his disclosures were so sparse.”

“Not only does that undermine the board and Governor Rosselló’s commitment to transparency, but it raises many questions when you’ve been in the lobbying sector,” said the adviser, who spoke on condition of anonymity.

Sanchez, who had worked as a lobbyist in Puerto Rico, did not say whether he planned to return to lobbying.

“Right now I’m evaluating every alternative that I might have,” in Puerto Rico and Central and South America, Sanchez said in a phone interview on Thursday morning.

Sanchez insists the decision to resign was his alone. “In no way was I pressured by anyone,” he said, adding that while he may have come under attack, he is “very comfortable with everything” he did on the board to represent the best interests of the people of Puerto Rico.

In a statement issued in Spanish, Rossello praised Sanchez’s “great professional skills.”

“I wish to thank (Sanchez) for his willingness to serve Puerto Rico, his commitment to our administration and, on a personal level, our respect and esteem,” Rossello said.

As a non-voting member on the board, Sanchez did not have a direct role in board decisions. However, he acted as the governor’s eyes, ears and voice on the board, helping him form positions on financial matters, and communicating them to the board and the public.

Jose Carrion, the chairman of the oversight board, said Sanchez “was always available, committed and dedicated to represent with determination the governor’s postures before the Board.”

ALWAYS ENVISIONED LEAVING

The liaison position is unpaid, and Sanchez was technically not a government employee.

A spokesman for the governor said Sobrino will continue as president of the GDB, the island’s now-defunct fiscal agent, which is being wound down as part of a liquidation agreement with creditors.

Sobrino, a lawyer, worked as a compliance officer for drug company AbbVie before his appointment to the GDB last December.

In May, Puerto Rico filed the largest bankruptcy in U.S. municipal history, sparking hard-fought litigation between the board and Puerto Rico’s creditors over the fates of the island’s agencies and the loans that back them.

The oversight board, created under the federal 2016 Puerto Rico rescue law dubbed PROMESA, certified a turnaround blueprint for Puerto Rico in March.

Sanchez said he had always envisioned leaving once the plan was in place.

The board and Rossello’s administration have not always seen eye to eye, with the governor resisting some of the board’s proposed austerity measures.

Sanchez attributed the tension to “growing pains associated with a new framework.”

“Puerto Rico had never had something like [PROMESA] before,” he said. “Were we not aligned in certain circumstances? Yes … In the net, it’s been a positive experience.”

By REUTERS

JULY 20, 2017, 1:12 P.M. E.D.T.

(Reporting by Nicholas Brown in New York; Editing by Jeffrey Benkoe and Daniel Bases)

Fitch Ratings has downgraded the ratings on several Oklahoma bonds one notch — a move that could increase the state’s borrowing costs on a number of projects.

The American Indian Cultural Center in Oklahoma City, the Oklahoma Museum of Popular Culture in Tulsa, some higher education construction projects and a new state Health Department lab are among upcoming bond-financed projects likely to be impacted by the downgrade.

The rating change won’t impact Oklahoma Turnpike bonds, because they are backed by revenue generated by the turnpike system and are not dependent on state appropriations for the repayment of bonds.

Rating change

Fitch Ratings, one of the big three municipal credit rating services, announced Tuesday that it was lowering the state of Oklahoma’s issuer default rating from AA+ to AA.

Fitch also announced that it was lowering the rating on the state’s general obligation bonds from AA+ to AA and reducing the ratings on the state’s Oklahoma Capitol Improvement Authority and Oklahoma Development Finance Authority bonds from AA to AA-.

Following the downgrade, Fitch’s Oklahoma ratings will closely align to those of Standard & Poor’s credit rating service, which lowered Oklahoma’s rating March 1, and Moody’s rating service, which has been slightly lower than Fitch’s for a number of years, said state Treasurer Ken Miller.

“This downgrade is certainly not surprising … to anyone who has been paying attention to state finance in the last year or so,” Miller said.

Miller said he and other state leaders warned before the last legislative session that a downgrade was likely if the Legislature did not take steps to address the structural imbalance that the state has in its revenue sources.

“Clearly, Fitch did not see the necessary corrective steps taken last session and this downgrade is the result,” Miller said.

Oklahoma has relied on a continued drawdown of the state’s Rainy Day Fund and one-time revenue sources to fill large revenue gaps over the last couple of years rather than broadening the tax base, Fitch noted in its downgrade report.

Investors rely on the credit ratings to evaluate the risk of default and generally demand a higher interest rate for bonds with a lower rating.

A drop from a rating of AA+ to AA or from AA to AA- is not a drastic change because all are considered to be investment grade bonds of very high credit quality.

Still, the change is not insignificant.

For every $100 million the state borrows under a 20-year repayment structure, a difference between a AA and AA- rating means the state may end up paying around $2.4 million in additional interest over the life of the bonds, an individual knowledgeable in bond financing told The Oklahoman.

In 2016, the state sold $360.2 million in tax-backed obligations, so if a similar amount were to be issued this year, the difference between a one-notch lower rating could end up costing state taxpayers an additional $8.64 million or so over the life of the bonds.

State Bond Advisor Jim Joseph cautioned that it is impossible to predict with precision what impact a rating change will have on bond interest rates, noting that many other things factor into the decisions of investors, including the size and structure of the deal and general market conditions.

For that reason, Joseph said he has always declined to predict what interest rates might be.

Miller also pointed out that the other two rating agencies already had Oklahoma rated lower, so the lower evaluation is already likely factored into the interest rates the state has been getting.

Still, it’s not going to help, Joseph said.

“Anytime you’re downgraded, it’s going to end up costing you more money in the long run,” Joseph said. “Any investor is going to ask for more yield when they buy a lower-rated bond.”

Besides making new projects more costly, higher interest rates also make it more difficult for the state’s issuers to refinance outstanding bonds at a savings, he said.

The Oklahoma Museum of Popular Culture project in Tulsa will be among the first to test the impact of the credit rating downgrade. Fitch assigned the $27.315 million deal a AA- rating. The bonds are expected to be sold through private negotiation later this month.

Why the downgrade?

Fitch cited both economic factors and political factors in a five-page paper explaining the downgrade.

Oil and gas prices have been down and “about one-third of the state’s gross state product is attributable to the drilling, production and economic multiplier effects of the oil and natural gas sectors,” the credit agency said.

“Volatility related to the energy industry is an inherent part of the state’s economy and the industry is expected to be a drag over the medium term,” the report said.

“The state has been unable to address its fiscal challenges with structural and recurring measures and revenue collections continue to reflect subdued energy prices,” Fitch reported.

The report noted that lawmakers are constrained, somewhat, in their ability to tap new revenue sources by a constitutional amendment that requires either a three-fourths vote of the Legislature or majority vote of the people to pass a tax increase.

Constitutional challenges have been filed to revenue-generating moves by the Legislature last session. The court will decide on the legality of new fees on cigarettes, measures involving electric and hybrid motor vehicle registration, motor vehicle purchases and personal income tax deductions.

“The validity of the measures, which are forecast to bring in almost $320 million in fiscal 2018, will be decided by the state’s Supreme Court in August,” the report said. “If the court rules that the measures are invalid, the state would be required to solve for any resulting budget gaps.”

The Oklahoman

by Randy Ellis

Published: July 13, 2017

• Ad hoc group holds $3.3 billion of commonwealth debt
• Puerto Rico owes $13 billion of general-obligation debt

A group of hedge funds that owns $3.3 billion of Puerto Rico bonds disclosed in court documents the amount that each of them holds.

The disclosure is related to the territory’s May 3 bankruptcy, which will allow Puerto Rico and its agencies to reduce the $74 billion of debt left after years of economic decline and borrowing to cover operating expenses. The group includes distressed-debt buyers and municipal mutual fund Franklin Mutual Advisers LLC.

The group claims that general-obligation bonds must be paid before other types of Puerto Rico debt because the island’s constitution gives those securities the highest claim to the government’s cash. The group wants Puerto Rico’s sales-tax revenue to help repay general-obligation debt. The island sold sales-tax bonds backed by that revenue stream.

The amounts that each firm holds, as of July 12, are as follows:

• Aurelius Capital Management LP: $470.9 million of general obligations and $2.5 million of Highways and Transportation Authority bonds
• Autonomy Capital (Jersey) LP: $937.6 million of general obligations
• FCO Advisors LP: $422 million of general obligations and $10.2 million of junior-lien sales-tax bonds
• Franklin Mutual Advisers LLC: $294 million of general obligations
• Monarch Alternative Capital LP: $585 million of general obligations and $21.5 million of highway debt
• Senator Investment Group LP: $254.7 million of general obligations
• Stone Lion LP: $310 million of general obligations and $15 million of highway debt

A portion of debt held by Aurelius, FCO Advisors, Monarch Alternative and Stone Lion is guaranteed repayment by bond insurers.

Bloomberg Markets

By Michelle Kaske

July 13, 2017, 2:37 PM PDT

Two important events have occurred in Puerto Rico in the last couple months that should be noted. First, on May 3, 2017 the Oversight and Management Board created by the federal legislation PROMESA, filed in Federal District Court of Puerto Rico under its Title III provisions for the protection of the Commonwealth of Puerto Rico from its bondholders and creditors.

This bankruptcy-like proceeding under Judge Laura Taylor Swain promises to be a hard and complex litigation for all parties involved. Second, on June 11, 2017 a plebiscite on the various status options for Puerto Rico was held in which statehood was overwhelmingly favored by a third of able voters, notwithstanding the incoherent call for abstention by the opposing political parties and the bloated voting lists.

Although at first glance apparently unrelated, both events need to be seen as interrelated pieces on the ongoing puzzle that is Puerto Rico’s political status question and fiscal and economic spiraling downturn.

As we know, political and legal processes and economic conditions affect one another, at times in unforeseen ways. In July 2016, Congress legislated PROMESA to create an Oversight and Management Board, expressly based on the authority provided by Article IV, Section 3, of the United States Constitution.

Together with the Supreme Court’s opinion Commonwealth of Puerto Rico v. Sanchez Valle rejecting Puerto Rico’s claim of sovereignty for purposes of avoiding the application of the constitutional protection against double jeopardy in criminal cases, this legislation finally put to bed the midsummer’s nightmare of those that for decades have argued for the oxymoronic status of “Estado Libre Asociado”.

Today, there is no doubt that legally Puerto Rico has been a territory under the plenary powers of Congress since 1898. In this regard, the long held historic fallacy argued by the pro-territory Popular Democratic Party that Puerto Rico had achieved some sort of political autonomy in 1952 not subject to Congress has finally been put to rest.

The underlying causes for the political and fiscal/economic crisis of Puerto Rico can be summarized as a reliance by a top heavy public sector dependent on debt financing and federal transfers and tax exemptions as a strategy for economic development for the last fifty years; a weak private sector dependent on government contracts and patronage; an incompetent and/or corrupt public administration looking out for short term political advantages and private enrichment at the expense of long-term stability and development; a political culture in Washington, D.C. indifferent to the inherent limitations of territorial status, and populist grandstanding by many leading Puerto Rico politicians.

It is a wonder that it took so long for the bubble to burst. It should be noted as a matter of historical record that our fiscal predicament is partly due to the triple exemption tax advantages Puerto Rico bonds had in the municipal bond market for the benefit of all parties, while the going was good. That is, it is the territorial status that has allowed for a beneficial taxation treatment by Congress and the Treasury Department for investors – bondholders as well as “foreign” corporations using Puerto Rico as a tax haven. We should not ignore the fact that the responsibility for our current woes is shared by many.

There are those — including former New York Gov. George Pataki — that argue now acting as a spokesperson for certain bondholders – that Puerto Rico needs to attend its economic and fiscal problems before addressing the political question of our status. Although there is something to be said to the fact that a change in Puerto Rico’s political status under current conditions may seem politically untimely, it is also evident that no headway in our economic development can be achieved unless we address the issue of long-term political stability.

It is a chicken and egg question. As the Bush (2007) and Obama (2011) White House Reports on Puerto Rico made abundantly clear, our political lack of definition has been holding back our economic development. A petition for a change in Puerto Rico’s political status will always be untimely for somebody, somewhere.

In this context, the June 11, 2017 plebiscite ratifying the 2012 plebiscite favoring statehood, should be understood as a petition by the people of Puerto Rico that our current territorial status and its lack of economic development needs to be addressed by Congress, the sooner the better for all concerned.

THE HILL

BY ANDRÉS L. CÓRDOVA, OPINION CONTRIBUTOR – 07/14/17 08:30 AM EDT

Andrés L. Córdova is a professor at Inter American University of Puerto Rico School of Law.

In an overwhelming majority, Puerto Rican citizens recently voted in favor of becoming the 51st U.S. state. According to poll results, nearly 97 percent of Puerto Ricans were in favor of statehood. Puerto Rico’s governor, Ricardo Rosselló, declared the results a clear victory in favor of becoming a state — the solution he preferred. In a televised speech after announcing the results, he said, “the federal government will no longer be able to ignore the voice of the majority of the American citizens in Puerto Rico.”

What he should have said was the federal government could no longer ignore the voice of 23 percent of the American citizens of Puerto Rico because those are all that bothered to turn out for the vote. In a country where voter turnout is normally closer to 80 percent, a 23 percent turnout is hardly exciting.

Here is a territory that is so thrilled to become a U.S. state that over three-quarters of the population did not bother to even show up at the polls. The reason for this low turnout: they are only considering statehood because it seems like the best option to get out of the more than $70 billion debt crisis they are in.

How Puerto Rico got into this mess

Puerto Rico was forced to declare a form of bankruptcy in May. Its filing represented the largest municipal bankruptcy filing in U.S. history — seconded only by Detroit’s $17 billion bankruptcy under Chapter 9 bankruptcy code. Notably, the Puerto Rican bankruptcy surpasses Detroit by a vast margin, as it has managed to reach $123 billion in debt across bonds and pensions payments outstanding.

To put the territory’s size, and proportionate debt, into perspective, there are 20 states that are less populous and have vastly more expansive geographies than Puerto Rico, according to the U.S. Census Bureau. Since Puerto Rico is not a U.S. state, and thus not entitled to the privilege of bankruptcy — which is a recourse for all U.S. state and local governments — it is entering a court-supervised bankruptcy-esque proceeding made possible by legislation enacted by Congress last year.

With an uncertain outlook on just how its obligations will be restructured, to say the island is drowning in debt would not be an understatement. The island previously enjoyed an exemption from U.S. federal taxes that allowed many U.S. companies to set up manufacturing operations there. These tax breaks ended in 2006, leaving the island with a sudden loss of revenue.

The Puerto Rican government tried to offer tax exempt municipal bonds on the U.S. markets to generate ready cash, but this came at the cost of even more debt. Unable to pay off all its obligations, Puerto Rico is turning to the U.S. government for relief. The hope is that if they became a state, the federal government would take more responsibility for the island’s overwhelming debt.

As U.S. states are not immune from similar troubles — even ones as wealthy as Illinois, which is possibly headed towards a “junk” credit rating — sheltering Puerto Rico from its obligations by allowing it to become a state is not the solution. Debt of this magnitude cannot be whisked away with a granting of statehood.

The solution to get Puerto Rico out

It’s not that the U.S. should do nothing for the territory of more than 3 million, but the government shouldn’t pretend that statehood is the best solution. Allowing Puerto Rico to default on its debt would be the best thing the U.S. could do for the territory. Looking to Detroit as an example, its municipal default gave the Motor City some breathing room and has allowed for a nascent economic recovery from its crisis.

The best way to remedy the current and desperate financial condition of Puerto Rico is to stop lending money to the government so it can no longer be squandered. Contrary to what certain governments’ and stakeholders’ actions might suggest, nothing is too big to fail. It is also the best hope we have of ending the trend of countries, states, and cities needing to be bailed out after borrowing more money than they can repay.

Denying Puerto Rico statehood in its time of need may sound like callous indifference, but at the end of the day, it is the best thing for the island. What Puerto Rico needs more than statehood is to be forced to own up to its obligations. 77 percent of Puerto Ricans made it clear that if the U.S. was their only option, they would rather not vote.

If Puerto Rico becomes a U.S. state, let it be because its people want to be an official part of this nation, not because they are desperate for a way out of their debt.

THE HILL

BY CHRIS MARKOWSKI, OPINION CONTRIBUTOR – 07/10/17 09:00 AM EDT

Chris Markowski (@ChrisMarko) is an author, investment banker, stock market analyst, and consumer advocate. He is the personality behind Watchdog on Wall Street and the founder of Markowski Investments.

On July 8, Governor Malloy signed into law Public Act No. 17-147, An Act Concerning State Taxation and Collection, Tax Gap Compliance, Tax Preparers and Facilitators, Changes to the Tax and Related Statutes, a Mental Health Community Investment Account and Municipal Bonds.

The legislation makes noteworthy changes regarding the structuring of municipal bonds. The legislation:

• extends the permitted maximum maturity of general obligation debt issued by Connecticut municipalities from 20 years to 30 years
• permits Connecticut municipalities to issue refunding bonds for a period of up to 30 years; and
• allows such refunding bonds to be secured by a statutory lien on all revenues received by the municipality from its tax levy and collection.

These changes are applicable to obligations issued during the period from July 1, 2017 through June 30, 2022. The refunding provisions require a two-thirds vote of the municipality’s legislative body.

Any municipality considering issuing bonds in accordance with this legislation should address the implications of doing so with its municipal financial advisor and bond counsel.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Last Updated: July 13 2017

Article by Judith A. Blank and Namita Tripathi Shah

Day Pitney LLP

Moody’s Investors Service knocked its rating for Hartford debt down another three notches Thursday from a level that already classified the city’s bonds as junk.

With the downgrade, Moody’s has Hartford’s credit and most of the city’s outstanding bonds rated as B2, down from Ba2. That lowers the rating from “speculative” to “highly speculative,” both of which are considered non-investment grade, or junk.

“The downgrade reflects the recent increased likelihood that Hartford will pursue debt restructurings to address its fiscal challenges,” Moody’s said in a report. “The new rating also reflects the city’s challenging liquidity outlook in the current fiscal year and weak prospects for achievement of sustainably balanced financial operations.”

The move by Moody’s follows a downgrade at Standard & Poor’s late Tuesday, to BB, which is equivalent to the Ba2 that Moody’s assigned last fall.

Hartford Mayor Luke Bronin said Wednesday the city and its newly hired bankruptcy and restructuring law firm, Greenberg Traurig, will immediately approach bondholders in an effort to persuade them to accept lower payments on the city’s debt. That could help the city avert bankruptcy, but some experts in municipal finance said the effort has only small chance of succeeding without a court filing.

As Bronin Seeks Givebacks From Bondholders, Averting Bankruptcy A Huge Challenge
The downgrade could lead to lower values for Hartford debt that’s traded in the markets. It also decreases the city’s ability to borrow additional money, although more borrowing was already difficult and expensive before the latest Moody’s action.

Both Moody’s and S&P continue to have Hartford on a watch for further downgrades.

Moody’s also has a B2 rating for Detroit, which emerged from the nation’s largest municipal bankruptcy in late 2014. In all, Moody’s has about 3 percent or fewer of 8,500 local governments rated with junk debt, and many of those are higher than Hartford’s rating.

The new rating affects about $550 million out of slightly more than $700 million in outstanding city debt.

Moody’s said in Thursday’s report Hartford’s budget is “unlikely to provide a pathway to structural balance over the longer term” even if the state fills this year’s estimated $50 million gap — in part because of escalating debt payments coming due over the next several years.

The report also acknowledged, as Bronin has said, that the city’s prospect for raising taxes is extremely limited by high current rates and low incomes, and its ability to cut costs is “limited as the city has already gone through multiple round sof expense cutting.”

The Hartford Courant

by Dan Haar

July 13, 2017

Standard & Poor’s downgraded Hartford debt to junk bond status late Tuesday, less than a week after the financially troubled capital city hired a New York law firm with expertise in restructuring municipal finances.

The Wall Street ratings agency downgraded most city of Hartford outstanding debt to BB, a level that’s classified as speculative, also known as non-investment-grade, or junk, from BBB-. That reflects a strong possibility that Hartford could default on its debt or renegotiate it to pay bondholders less money.

The move, announced on the S&P website just after 4 p.m., follows a series of downgrades by ratings agencies over the last year, as Mayor Luke Bronin has warned that Hartford could file for bankruptcy protection if it doesn’t receive tens of millions of dollars in additional aid from the state and concessions from unions.

Moody’s Investors Service downgraded Hartford bonds last October to Ba2, which is similar to S&P’s BB — non-investment grade, aka junk.

Both Moody’s and S&P still have Hartford on a negative watch, meaning mor downgrades could happen soon. On Tuesday, S&P also downgraded Hartford Stadium Authority bonds.

The S&P move is related to Hartford on Thursday hiring Greenberg Traurig, a large New York firm, to help sort through options on how to restore the city to financial health.

Even without a bankruptcy filing, one option for the city could be to renegotiate the payback terms of Hartford’s outstanding debt. Because of the way the debt was refinanced in recent years, the city’s obligations increased sharply this year and will rise further next year.

Bronin confirmed the possibility of bond restructuring negotiations in an interview Tuesday, and in a written statement issued after the S&P action. It’s unclear whether such talks would start even before a state budget is reached, as the state began its fiscal year July 1 without a budget — leaving Hartford and other municipalities millions of dollars short in expected state aid.

“I have said for months that we cannot and will not take any option off the table, because our goal is to get Hartford on the path to sustainability and strength,” Bronin said in the statement. A long-term solution, he said, “will require every stakeholder — from the State of Connecticut to our unions to our bondholders — to play a significant role.”

He added, “Today’s downgrade should send a clear message to our legislature, to labor, and to our bondholders that this is the time to come together to support a true, far-sighted restructuring.”

Bronin said Tuesday his administration is still actively seeking concessions from city unions, including police.

BY TRIBUNE NEWS SERVICE | JULY 13, 2017

By Dan Haar

With the start of the 2017-18 fiscal year the Town of Darien has adopted a new platform for financial reporting. Detailed budget information dating back to 2013 can now be accessed by the public through the OpenDarien link on the town’s website, DarienCT.gov.

Darien’s Department of Finance has implemented a module called OpenGov to provide the public with greater financial transparency and clarity on the town budget. Finance Director Jennifer Charneski briefed the Board of Selectmen with an overview of the reporting platform on on Monday.

“Darien is excited about our partnership with OpenGov, and the immediate improvements this new platform can bring to our town,” Charneski said in a statement. “Through this new site, we will be able to make budgeting and decision making more efficient and effective, and most importantly, better communicate with Darien residents.”

Using the online module visitors can organize budget information by department and review monthly expenditures. Data within the program can be organized into a number of different graphs at the user’s request and all of the data is available for export. Information for the OpenDarien platform is provided directly from the Department of Finance’s accounting software and will be updated on a monthly basis to reflect ongoing changes to the budget. The OpenDarien portal will also be updated to include information about the town’s capital projects, such as the upcoming redevelopment of the town’s public works garage.

For town officials the OpenGov platform will make financial information more readily available and organized. The Department of Finance will be able to create specific user groups for town officials to access and organize more specific data within the town’s budget. Members of the Board of Selectmen suggested those user groups would be useful during budget season, when members of the Board of Finance or RTM Finance & Budget Committee need to review a wide range of information. Furthermore, OpenGov provides another module that can be used to directly generate budgets and related documents, if the town chooses to adopt it.

“This could be the end for the budget books,” Selectmen Marc Thorne joked, referring to the nearly 300-page document used by town officials during budget review.

Currently OpenDarien does not include detailed information on the Board of Education budget as their budget is managed independently from the town’s. Charneski said the Board of Education could choose to adopt the software at a lower cost and be connected to the same OpenGov portal. She said that while the town’s adoption of OpenGov took several weeks to complete, the company has changed it’s implementation process.

If more local towns adopt the OpenGov it would also allow them to easily share and compare budgeting information through the platform. Charneski said Darien is the sixth town in Connecticut to move to OpenGov. Contrasting what Darien’s peer towns earn in parking revenues or how much they pay in police overtime could provide more clarity on financial decisions and trends in the future. For now, the public can use the OpenDarien portal to access budget data for the new fiscal year.

DarienTimes.com

By Kevin Webb on July 14, 2017

CHICAGO — A decision on whether Illinois becomes the first U.S. state whose bond ratings tip into junk was not imminent on Monday as credit rating agencies said they were still reviewing the state’s newly enacted budget and tax package.

Analysts at the three major rating agencies, which rate Illinois one or two notches above junk, declined to comment on the timing of their decisions.

With the help of some Republican votes, the Democratic-controlled Illinois Legislature last Thursday overrode Republican Governor Bruce Rauner’s vetoes and enacted a $36 billion fiscal 2018 budget and a $5 billion income tax increase.

The action ended an unprecedented two-year budget impasse that ballooned the state’s unpaid bill backlog to about $15 billion.

Illinois State Treasurer Michael Frerichs, a Democrat, on Monday unveiled a five-step plan to avoid a junk rating that included Rauner taking steps to issue up to $6 billion of bonds the legislature authorized to begin paying off bills. He also recommended the governor visit credit rating agencies to assure them he intends to implement the budget package.

A junk rating would make future bond sales more difficult and expensive.

Eleni Demertzis, Rauner’s spokeswoman, did not answer questions about the borrowing but underscored the governor’s dissatisfaction with the budget.

“Even with the tax increase, this budget remains $2 billion out of balance for fiscal year 2018,” she said. “The best thing we can do is to work collaboratively to pass truly balanced budgets that pay down our debt, reform our pension system, and make the changes necessary to drive economic growth in our state.”

Moody’s cited the budget’s “substantial implementation risk” when the state’s Baa3 rating was placed on review last week for a possible downgrade to junk. Analyst Ted Hampton said risks include revenue and cost-saving assumptions built in to the budget for the fiscal year that began July 1.

Hampton and S&P analyst Gabriel Petek said they expected Rauner to implement the budget as required by law.

John Humphrey, co-head of credit research at Gurtin Municipal Bond Management, said optimism that Illinois finally has a budget should be tempered against the state’s strained finances and how much execution risk remains.

“I think Moody’s has been pretty clear that they view the state’s political dysfunction combined with continued unaddressed long-term liabilities, and unfavorable baseline revenue performance as casting some degree of skepticism on the state’s ability to manage out of the very fragile financial situation they are in,” he said.

By REUTERS

JULY 10, 2017, 5:30 P.M. E.D.T.

(Reporting by Karen Pierog and Dave McKinney; Editing by Matthew Lewis)

CHICAGO — The financially troubled Chicago public school system will pay hefty interest rates for a general obligation bond issue that was doubled in size on Monday to $500 million, up from the $250 million that the district announced last week.

The refunding portion of the deal was increased on Monday to $215 million from the previous $50 million, while the new money portion was raised to $285 million from $200 million, according to a preliminary pricing scale.

Underwriters led by J.P. Morgan priced the unrated general obligation bonds targeted at “qualified institutional buyers,” with a final 7.65 percent yield and 7 percent coupon for new bonds due in 2046, according to the district. The bonds were initially priced to yield 7.75 percent.

The repricing of refunding bonds due in 2042 dropped the yield 5 basis points to 7.55 percent with a 7 percent coupon. The yield on refunding bonds due in 2030 with a 6.75 percent coupon remained at 7.25 percent.

Escalating pension payments have led to drained reserves, debt dependency and junk bond ratings for Chicago Public Schools (CPS), the nation’s third-largest public school system.

“CPS successfully completed the issuance of its GO bond offering, with more than $1 billion in orders for $500 million in bonds,” Ron DeNard, the district’s senior vice president of finance, said in a statement.

The bonds’ spreads over Municipal Market Data’s benchmark triple-A yield scale ranged from 474 basis points to 489 basis points, indicating the U.S. municipal market was demanding fat yields for the debt. Those so-called credit spreads were narrower than spreads in the district’s February 2016 bond sale, in which yields topped out at a massive 8.5 percent.

The refunding will restructure outstanding bonds in a “scoop and toss” that pushes out payments on the bonds. The prospectus included nine pages of potential risks for buyers.

By REUTERS

JULY 10, 2017, 8:09 P.M. E.D.T.

(Reporting By Karen Pierog; editing by Diane Craft)

• City won pension fix, averting looming insolvency for funds
• Fate of cash-strapped, junk-rated school system is uncertain

Illinois enacted a full-year budget for the first time in more than two years, ending a record-long stalemate that cast financial uncertainty across the state. Here’s three big takeaways for the city of Chicago, which has been contending with its own fiscal struggles:

• Pensions: Chicago won state approval to overhaul its municipal employee and laborer retirement funds, which had been on track to run out of money by 2025 and 2027, respectively. The changes allow Chicago to boost contributions to those pensions and have new city employees pay more into their retirement plans, part of Mayor Rahm Emanuel’s efforts to put all four of the city’s pensions on a path to solvency. The measure became law despite Governor Bruce Rauner’s veto.
• Borrowing: State budget includes provisions that allow a home-rule municipality like Chicago to sell debt secured by state funds they receive. By providing greater protection against default, that “should be favorably received by investors and is likely to lower the borrowing cost to the extent that” the city utilizes it, said Richard Ciccarone, the Chicago-based president of Merritt Research Services LLC, which analyzes municipal finances. This could especially come in handy for the city, given that it is rated below investment grade by Moody’s Investors Service and pays a steep premium to sell traditional general-obligation debt.
• Schools: Chicago public schools, along with districts statewide, are still in limbo. The enacted state budget dictates that general aid for schools now be doled out through an evidence-based funding model. While the Democrat-led legislature passed legislation that rewrites the formula to do that, its fate is uncertain because Rauner has threatened to veto it, calling it a bailout for the city. Emanuel said Monday that enacting that law is his “number one effort.”

Bloomberg Politics

By Elizabeth Campbell

July 12, 2017, 2:00 AM PDT

• As previously covered on this blog, a number of local jurisdictions throughout the U.S. – like Berkeley, CA; Philadelphia, PA; San Francisco, CA; Oakland, CA; and Boulder, CO – have sought to introduce legislation to tax sweetened beverages. Late last year, on November 10, 2016, the Cook County Illinois Board of Commissioners passed the Cook County Sweetened Beverage Tax Ordinance which would impose $0.01 per ounce on the retail sale of all sweetened beverages in Cook County. The tax was slated to go into effect on Saturday, July 1, 2017. But on June 27, 2017, the Illinois Retail Merchants Association – which represents more than 20,000 stores – and several grocers filed a complaint against the Cook County Department of Revenue to block the sweetened beverage tax, arguing that the tax is unconstitutional and too vague for stores to implement. The Plaintiffs further contend that: (1) Cook County’s penny-per-ounce beverage tax violates the state constitution by imposing different taxes on similar beverage products and (2) the tax would make retailers vulnerable to becoming ineligible for the federal Supplemental Nutrition Assistance Program (SNAP) as the program prohibits purchasing food that has a state or local sales tax.
• On Friday, June 30, 2017, Cook County Circuit Judge Daniel Kubasiak granted the Plaintiff’s request for a temporary restraining order (TRO), effectively putting Cook County’s penny-per-ounce tax on sweetened beverages on hold at least until July 12, 2017.
• Looking ahead, it remains to be seen what, if any, impact the outcome of this lawsuit will have on the appetite of other U.S. jurisdictions to pursue such legislation.

National Law Review

Wednesday, July 5, 2017

© 2017 Keller and Heckman LLP

Kroll Bond Rating Agency (KBRA) has affirmed the insurance financial strength rating of AA+ with a Stable Outlook on Municipal Assurance Corp. (MAC). MAC demonstrates an ability to withstand KBRA’s conservative stress case loss assumptions and to satisfy all claims in full and on time.

As a major part of its analysis, KBRA determined a level of stress losses to be applied to MAC’s insured portfolio. MAC’s ability to pay these aggregated claims, together with other expenses, was assessed in KBRA’s Bond Insurer financial model and MAC met all requirements with a comfortable balance remaining.

Please click on the link below to access the full report:

Municipal Assurance Corp.

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of AAA with a Stable Outlook on the State of Texas’ general obligation bonds. This rating applies to all of the state’s outstanding general obligation bonds, excluding bonds backed by a letter of credit or liquidity facility.

This rating is based on KBRA’s U.S. State General Obligation Rating Methodology. KBRA’s rating evaluation of the long-term credit quality of state general obligation bonds focuses on four key Rating Determinants:

• Management Structure, Budgeting Practices and Policies
• Debt and Additional Continuing Obligations
• Financial Performance and Liquidity Position
• State Resource Base

In the process of rating the State of Texas, KBRA has reviewed multiple sources of information and spoken with representatives of the State.

Please click on the link below to access the report:

State of Texas’ General Obligation Bonds

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has released a public finance research report commenting on the Board of Education of the City of Chicago’s recent issuance of Unlimited Tax General Obligation Bonds (Dedicated Revenues) Series 2017A & 2017B.

On July 10, the Board sold a limited offering of $500 million General Obligation Bonds Series 2017A & Series 2017B. KBRA understands that, prior to delivery of the bonds, the Board intends to establish an additional security feature, the Post Default Security Mechanism, by entering into a State Aid Revenues Escrow Agreement. The Board has stated that it will authorize the state comptroller to intercept state-aid revenues into the escrow fund. In the event of a default, the escrow agent will be required transfer funds to the security account within the escrow fund until 100% of debt service is collected. It is our understanding that this additional security feature will apply only to Alternate Revenue Bonds payable from state aid. The Board has stated that this security feature is intended to apply to all alternate revenue bonds payable from state aid, subject to changes to the legal documents of existing bonds. The legal documents associated with the current issuance have not yet been made available to KBRA. KBRA will evaluate the credit implications of this transaction after we have completed a review of the legal documents.

Please click on the link below to access the full report:

Chicago Public Schools’ Latest Transaction

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) announces the preliminary rating of BBB- for the Orange County Transportation Authority Toll Revenue Senior Bonds, 2017 TIFIA Series, which evidences the $627 million loan from the United States Department of Transportation to the Orange County Transportation Authority (OCTA). The TIFIA Loan constitutes federal project credit assistance under the Transportation Infrastructure Finance and Innovation Act for the Interstate 405 Improvement Project (“the Project”) located in Orange County, California.

The TIFIA loan will have a senior-lien priority in project revenues. The interest rate will be set at closing at the 30-year U.S. Treasury State and Local Government Series rate plus 0.01%. The actual maturity of the TIFIA Loan is limited to the earlier of 35 years after substantial completion of the Project (68 months after financial close) or December 1, 2057. Interest on the TIFIA loan will be paid semi-annually while principal will be paid annually. The TIFIA loan will fully amortize by the projected maturity date, and therefore there is no refinancing risk in the transaction. Proceeds of the TIFIA loan will be used to fund a portion of design-build and other costs for the Project, which are currently estimated at $1.9 billion. Other sources of funds for such costs include OCTA’s Measure 2 sales tax revenue, sales tax revenue bonds issued in relation thereto and various federal and State funds and grants. Senior debt service coverage ratios for the TIFIA Loan average 3.35x under KBRA’s rating case and stressed assumptions KBRA used in analyzing project cash flows include higher construction and O&M costs, and lower traffic volumes.

Please click on the link below to access the report:

Orange County Transportation Authority Toll Revenue Senior Bonds, 2017 TIFIA Series

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) announces the preliminary rating of BBB for the Riverside County Transportation Commission Toll Revenue Bond, 2017 TIFIA Series. The bond evidences the $152.5 million loan (“the TIFIA Loan”) from the United States Department of Transportation to the Riverside County Transportation Commission (RCTC). The TIFIA Loan constitutes federal project credit assistance under the Transportation Infrastructure Finance and Innovation Act for the I-15 express lanes project (“the Project”) located in Riverside County, California.

The TIFIA Loan will have senior lien priority in project revenues. The interest rate will be set at closing at the 30-year U.S. Treasury State and Local Government Series rate plus 0.01%.The maturity of the TIFIA Loan will be limited to the earlier of 35 years after substantial completion of the Project (currently projected for July 1, 2020) or June 1, 2056. Interest on the TIFIA Loan will be paid semi-annually while principal will be paid annually. The TIFIA Loan will fully amortize by the projected maturity date, and therefore there is no refinancing risk in the transaction. Proceeds of the TIFIA Loan will be used to fund a portion of design-build and other costs for the Project, which are currently estimated at $471 million. Other sources of funds for such Project costs include RCTC’s Measure A sales tax revenue and Measure A sales tax bonds issued in relation thereto and various federal grants. Senior debt service coverage ratios for the TIFIA Loan average 3.13x under KBRA’s rating case and stressed assumptions KBRA used in analyzing Project cash flows include higher construction and O&M costs and lower traffic volumes.

Please click on the link below to read the full report:

Riverside County Transportation Commission Toll Revenue Bond, 2017 TIFIA Series

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

It’s the first city to set water rates based on income.

This week, Philadelphia is launching a first-of-its-kind program to address a common problem: Late and unpaid water bills can leave low-income people without the ability to shower or cook food in their homes.

In Philadelphia, more than 40 percent of the city’s water utility customers are delinquent in paying their water bills, amounting to about $242 million in uncollected revenue, according to the Philadelphia Water Department.

The city’s solution? Charge residents based on how much money they make.

Continue reading.

GOVERNING.COM

BY J.B. WOGAN | JULY 5, 2017

• Gap between yields on Illinois debt and benchmark narrows
• Despite action, Moody’s warns that cut to junk still possible

Illinois bonds climbed after the state enacted its first full budget in two years and raised taxes to reduce its chronic deficits, ending a long-running impasse that triggered multiple downgrades and pushed the state’s rating to the precipice of junk.

The securities were the most actively traded municipal bonds Friday, a day after the legislature overrode Governor Bruce Rauner’s vetoes to enact the spending plan. Without that step, Illinois was at imminent risk of another downgrade, which could have scared off individual investors who dominate the market and left some mutual funds unable to buy its debt. That’s remains a possibility, with Moody’s Investors Service saying this week that it has placed the state on watch for a potential downgrade.

“Investors are breathing a sigh of relief,” said Vikram Rai, a municipal-bond analyst with Citigroup Inc. “If it weren’t for the overhang of the Moody’s downgrade after the recent statement, the bonds would have rallied more.”

Over $21 million of Illinois general-obligation bonds due in 2023 traded Friday morning, according to data compiled by Bloomberg, and the average price rose of 101.4 cents on the dollar from 98 cents on Thursday. That pushed the yield to 2.3 percentage points more than benchmark securities, down from 2.9 percentage points.

The push for lawmakers came largely from major rating companies, which threatened to pull Illinois’s investment-grade rank if the government did not produce a budget for the year that began on July 1. Though that deadline was missed, lawmakers worked through the weekend and and on the July 4 holiday to avoid the cut, which would have reduced Illinois’s rating to an unprecedented low for a U.S. state.

Bloomberg Markets

By Kristy Westgard

July 7, 2017, 9:29 AM PDT

• District challenged by deficits, pensions, falling enrollment
• Bonds are trading at better levels than that of Texas

Los Angeles Unified School District has credit ratings others would envy — yet faces challenges that if left unchecked could undermine its stellar reputation with investors.

The bonds of the nation’s second-largest school system are ranked AAA by Fitch Ratings and Aa2 by Moody’s Investors Service though the district, like others in California, wields little power to raise revenue and relies on a state funding formula pegged to student enrollment. And that enrollment is in steady decline, with the 2019-2020 class rolls projected to be more than a third lower than in 2003.

So far, its borrowing costs don’t seem to be reflecting any concern, as a sample of the district’s 5-year and 10-year general-obligation bonds shows them yielding less than similar debt from Texas, a state that carries the top rank from all three major credit raters, data compiled by Bloomberg show.

The school administration, which forecasts deficits within two years, saw contracts for all but one of its bargaining units expire Friday. It’s a “significant” time for officials, who haven’t built in any related cost increases for future budgets, said Moody’s analyst Helen Cregger. Meanwhile, contributions for pensions and lifetime retiree health-care benefits are escalating.

“We may be at an important inflection point,” Cregger said. “Going forward, annual increases in state funding may be more moderate. So the pressures will be compounded.”

Los Angeles officials are taking action, laying off and reassigning some employees while hoping through contract negotiations to slow the growth in retiree health-care liabilities that have reached $13.6 billion, or 366 percent of payroll. The district must also contend with a rising pension tab as general-fund contributions for retired teachers will reach $497 million in fiscal 2021 from $215 million seen in 2014.

Ksenia Koban, municipal strategist at Payden & Rygel, anticipates the district’s debt rating falling within three to five years to the A-level category and spreads over benchmark bonds widening. While the rating companies assign the district a stable outlook, their analyst reports and interviews flag the potential for the school system’s challenges to deepen. Administration officials declined to comment on the prospect of future ratings downgrades.

“The fundamental problems it has to address are almost insurmountable,” said Koban, who has stopped adding to the firm’s holdings of district bonds. “I don’t know how you can get out of this in two years, forget ten.”

Bloomberg Markets

By Romy Varghese

July 5, 2017, 2:00 AM PDT

• Lawmakers override governor’s veto to end record budget fight
• S&P warned of likely downgrade without budget by July 1

For the past two years, nearly Illinois Governor Bruce Rauner’s entire time in office, his state was locked in a political paralysis that battered its universities, left contractors waiting to be paid and undermined its standing on Wall Street.

Then on Thursday, faced with the risk of becoming the only U.S. state with a junk bond rating, Democrats who control the legislature and almost a dozen of the governor’s fellow Republicans voted to override his vetoes of a $36 billion spending plan and across-the-board tax hikes, enacting a budget for the first time since mid-2015.

“If we don’t have a budget, with virtual certainty, we will go to junk status,” said Representative David Harris, a Republican who broke ranks with the governor. “At least with a budget, we hold off.”

The resolution will ease the cash-flow crisis that threatened to halt payments to pensions, schools and government workers. It will allow the state to borrow money to pay down a record pile of unpaid bills that tripled to $15 billion during the impasse. Social service providers and universities starved of aid will get some relief. And Illinois will have an actual spending plan for the next 12 months, instead of haphazardly running deeper into the hole by spending more than it’s taking in because of court orders and continuing appropriations.

After the deal came together over the last week, with votes during the weekend and on the Fourth of July holiday, Illinois bond prices rallied on signs that the elected leaders would finally tackle the government’s long-building financial strains. On Friday, the state’s bonds were the most actively traded municipal securities, with taxable Illinois bonds due in 2033 rising to an average of 96.8 cents on the dollar, up from 91.5 cents on June 30, according to data compiled by Bloomberg. That pushed the yield down to 5.4 percent from 5.9 percent.

The House of Representatives on Thursday followed the Senate by approving the budget bills despite Rauner’s objections that it would unduly burden residents by raising their taxes. House Speaker Michael Madigan, a Democrat, praised the the end of a “destructive” impasse while noting there’s still work to do.

Even though it’s over, the risks to the state may not be. While officials clashed over the budget, the state’s obligations to its deeply underfunded pensions grew to about $130 billion. On Wednesday, Moody’s Investors Service, in anticipation of the successful override, said it could still downgrade the state over the next few months, citing potentially optimistic revenue assumptions and the massive retirement fund debts.

“This budget will not solve all our problems tomorrow,” Comptroller Susana Mendoza, a Democrat, said in a statement Thursday, praising the passage of the budget, but noting that vendors still won’t get paid as fast as they want. “We haven’t won the lottery.”

The fight between Rauner, who in 2015 became the first Republican to lead the state in more than a decade, and legislative Democrats was stoked in part by the expiration of temporary tax increases just as he took office. Rauner has held the line against any plan that failed to include elements of the agenda he says he was elected to enact, including a property-tax freeze, legislative term limits and changes to the workers’ compensation insurance system to cut costs for businesses.

Rauner had said he vetoed the budget measures because they were insufficient. On Thursday, he said the “tax-and-spend plan is not balanced, does not cut enough spending or pay down enough debt, and does not help grow jobs or restore confidence in government.”

The break in the record-long impasse came after S&P Global Ratings and Moody’s last month dropped Illinois’s credit rating to one step above junk and warned of further downgrades if the government failed to take steps to stanch the bleeding. A cut below investment grade would be unprecedented for a U.S. state. That possibility hasn’t entirely receded, though Fitch Ratings earlier this week called the budget plan “concrete progress” and S&P said it was a “meaningful step.”

“Even with this override, it is one step in a long journey that Illinois is going to need to stay on in order to stabilize its finances,” said Laurence Msall, president of the Civic Federation, a Chicago nonprofit that tracks state and municipal finance. He added that there doesn’t appear to be a “silver bullet” for addressing the state’s unfunded pension liabilities.

Even with the resolution, John Humphrey of Gurtin Municipal Bond Management said he wants to see a more stable political atmosphere before buying Illinois’s debt. Gurtin doesn’t hold any Illinois general-obligation or sales tax bonds, he said.

“In the short-term yes, they stanched the most immediate liquidity pressures that they were facing,” said Humphrey, Gurtin’s Chicago-based head of credit research. “But the amount of fiscal discipline that’s going to be required each year, every year remains to be seen, especially given the political environment.”

Bloomberg Politics

By Elizabeth Campbell

July 6, 2017, 2:33 PM PDT July 7, 2017, 6:12 AM PDT

• Mayor Bronin: law firm was hired ‘to examine all options’
• City facing $50 million deficit, nearly 10 percent of budget

Hartford, Connecticut, capital city of the wealthiest U.S. state, hired Greenberg Traurig LLP to evaluate restructuring options for the cash-strapped city, including a potential bankruptcy, as the state’s failure to pass a budget put further pressure on its finances.

Hartford, where a third of its 123,000 residents live in poverty, faces a $50 million deficit, nearly 10 percent of its budget, and may not receive a lifeline from the state, which hasn’t adopted a budget for the fiscal year that began July 1. Last week, Aetna Inc., its fourth-largest taxpayer, said it was moving its headquarters to New York from the city it’s called home since 1853. Hartford’s credit rating may be downgraded deeper into junk by Moody’s Investors Service.

Greenberg Traurig’s team will be led by Nancy Mitchell, a co-chair of the firm’s restructuring practice, the city said in a news release. When Hartford was soliciting proposals from firms that specialize in bankruptcy, Council President Thomas Clarke told the local newspaper that looking into seeking court protection from creditors would only be a last ditch option.

“Nancy Mitchell and the team at Greenberg Traurig have extensive experience in municipal restructuring, and they will be working with us to examine all options for putting the city of Hartford on a sustainable path,” Mayor Luke Bronin said in a statement. “As we start a new fiscal year without a state budget and with significant uncertainty, we will have the advice and counsel of an experienced and highly respected restructuring firm.”

Hartford’s tax base of about $4.1 billion is about two-thirds that of neighbor West Hartford, which has far fewer residents, because half of property — state buildings, hospitals, universities, non-profit agencies — is tax-exempt. The city has $672 million in debt, including $228 million uninsured bonds, according to data compiled by Bloomberg. It also guarantees about $70 million in debt for a minor-league baseball stadium downtown and Aetna, Hartford’s fourth-largest property-taxpayer, is moving 250 jobs to New York City. It will still have thousands working in Hartford.

In 2016, Bronin, a Democrat, took over a city that’d been delaying its fiscal reckoning by pushing debt payments into the future, draining reserves and resorting to one-time measures, such as selling a parking garage, while its debt swelled by 52 percent from 2011 to 2015, according to Moody’s Investor Service figures.

Since taking office in 2016, he’s cut 100 jobs and renegotiated leases and energy contracts. Bronin’s been less successful in getting concessions from unions: The city’s fiscal 2017 budget assumed $16.5 million of concessions, the bulk of which haven’t materialized. Hartford managed to strike a deal with its firefighters that saves about $4 million a year through 2020 by freezing pay increases, increasing pension contributions, lowering salaries for new hires and requiring employees to pay more for health care.

Bronin is lobbying the state to fully fund a program that compensates local governments for revenue lost to tax-exempt properties, which alone would provide enough money to close next year’s deficit, and has joined with cities pushing to raise Connecticut’s 6.35 percent sales tax to 6.99 percent to provide more aid. He also persuaded Hartford Financial Services Group Inc., Travelers Cos. and Aetna to pledge $50 million to the city over five years as part of a “comprehensive and sustainable solution for Hartford.”

Hartford could renegotiate labor contracts and cut debt and pensions in bankruptcy, as a handful of cities have done since the recession. It would need the governor’s consent to file chapter 9.

Connecticut, facing a $5 billion two-year deficit failed to adopt a biennial budget by July 1. Governor Dannel Malloy is controlling spending while legislators continue negotiations.

Bloomberg Markets

By Martin Z Braun

July 6, 2017, 11:24 AM PDT July 6, 2017, 2:17 PM PDT

• Hartford hires law firm to explore ‘all options’ available
• Officials haven’t ruled out filing for bankruptcy protection

The hedge-fund enclave of Greenwich, on the Connecticut Gold Coast, is about 100 miles and a world away from the state capital.

But the fiscal crisis in Hartford, the historic center of the American insurance industry, is fast becoming more representative than mansions or yachts of the wealthiest state in the U.S. The city is edging closer than ever to the breaking point, waiting for the financially troubled state government to step in.

It may seem crazy that a place as rich as the Nutmeg State, which counts among its residents hedge-funds masters like Ray Dalio and Steven A. Cohen and legions of Wall Street bankers, could be in such fiscal trouble. Last year, the per-capita income there was $71,033, the highest in the nation, according to the U.S. Bureau of Economic Analysis.

For all that, state-worker pensions have been underfunded for decades. Tax increases aimed at closing deficits have put a strain on an economy struggling from the loss of high-paying finance jobs, leaving it among the few that still haven’t recovered from the recession. The hedge fund industry fell on hard times, with about 1,060 shuttering globally last year. UBS Group AG abandoned the world’s largest trading floor in Stamford after the financial crisis, and the Royal Bank of Scotland downsized its office there. Pension, debt and health-care costs just kept growing.

“There’s a limit to how much you can tax and there’s a limit to how much you can cut before you damage the viability and attractiveness of the city,” Mayor Luke Bronin said in May. “Right now, from a fiscal standpoint, you have a capital city fighting with its hands behind its back.”

Like many other local governments across the country, Hartford — city of Mark Twain and the young John Pierpont Morgan — has been grappling with budget problems for years. On the same day that Illinois lawmakers finally scraped together a long-overdue budget, Hartford hired the law firm Greenberg Traurig LLP to evaluate its options, which include bankruptcy. It would be the first prominent U.S. municipality to seek protection from its creditors since Detroit did so in 2013.

As for Connecticut, it faces a projected two-year deficit of $5 billion that lawmakers haven’t figured out how to close, even though the new fiscal year began on July 1.

In Hartford, the woes have been piling up for a while. Like Puerto Rico, which filed a record-setting bankruptcy in May, or even Greece, the city came to the edge in the usual way: slowly, then suddenly. The population declined 23 percent between 1960 and 2000 and has remained stagnant ever since. A third of its residents live in poverty, a higher share than in Baltimore or Newark. From 2010 to 2014, the metropolitan area saw the fifth-biggest decline in employers in the nation, according to the Economic Innovation Group, a Washington-based public policy organization.

Hartford’s tax base of about $4.1 billion is about two-thirds that of neighbor West Hartford, which has far fewer residents, because half of the property — state buildings, hospitals, universities, non-profit agencies — is tax-exempt. Hartford has the highest property tax rate in the state and faces a $50 million deficit, nearly 10 percent of its budget. The city’s credit rating may be downgraded deeper into junk by Moody’s Investors Service.

Uninsured Hartford bonds maturing in 2024 traded at yields of more than 6 percent in late June, compared with about 4.4 percent in January, as investors’ jitters mounted. The city has $672 million in debt, including $228 million of uninsured bonds, according to data compiled by Bloomberg. It also guarantees about $70 million in debt for a minor-league baseball stadium downtown.

Governor Dannel Malloy and Republican and Democratic leaders in the legislature agree the bankruptcy of the state’s capital isn’t another negative headline they need. General Electric Co. has decamped from Fairfield to Boston, and last week Aetna Inc. said it was moving its corporate headquarters from Hartford, where it has been since 1853, to New York. About 250 jobs are going with it, though thousands will stay in town.

“The state needs a budget that supports Hartford, its residents and its employers,” said Chris McClure, a spokesman for Malloy. “In the absence of action by the General Assembly on a budget vote, it’s entirely appropriate that the city explore all its options and prepare for every contingency.”

Greenberg Traurig’s team will be led by Nancy Mitchell, a co-chair of the firm’s restructuring practice, the city said in a statement. When Hartford was soliciting proposals from firms that specialize in bankruptcy, Council President Thomas Clarke told the local newspaper that looking into court protection from creditors would only be a last ditch option.

“They will be working with us to examine all options for putting the city of Hartford on a sustainable path,” the mayor said in a statement. “As we start a new fiscal year without a state budget and with significant uncertainty, we will have the advice and counsel of an experienced and highly respected restructuring firm.”

In 2016, Bronin, a Democrat, took over a city that had been delaying its fiscal reckoning by pushing debt payments into the future, draining reserves and resorting to one-time measures, such as selling a parking garage, while its debt swelled by 52 percent from 2011 to 2015, according to Moody’s figures.

Since taking office, he’s cut 100 jobs and renegotiated leases and energy contracts. Bronin’s been less successful in getting concessions from unions: The city’s fiscal 2017 budget assumed $16.5 million of concessions, the bulk of which haven’t materialized.

Hartford managed to strike a deal with its firefighters that saves about $4 million a year through 2020 by freezing pay increases, increasing pension contributions, lowering salaries for new hires and requiring employees to pay more for health care.

The city could renegotiate labor contracts and cut debt and pensions in bankruptcy, as a handful of cities have done since the recession. But it would need the governor’s consent to file for Chapter 9.

Bronin is lobbying for the state to fully fund a program that compensates local governments for revenue lost to tax-exempt properties, which alone would provide enough money to close next year’s deficit, and has joined with cities pushing to raise Connecticut’s 6.35 percent sales tax to 6.99 percent to provide more aid.

He also persuaded Hartford Financial Services Group Inc., Travelers Cos. and Aetna to pledge $50 million to the city over five years as part of a “comprehensive and sustainable solution for Hartford.”

Bloomberg Politics

By Martin Z Braun

July 7, 2017, 2:00 AM PDT

Fitch Ratings-New York-06 July 2017: Fitch Ratings has downgraded the Puerto Rico Electric Power Authority’s (PREPA) Long-Term Issuer Default Rating and power revenue bond ratings to ‘D’ from ‘C’. The action follows the authority’s failure to pay principal and interest due on the revenue bonds on July 3, 2017 and the commencement of insolvency proceedings under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) on July 2, 2017.

Both ratings have been removed from Rating Watch Negative.

PREPA had previously disclosed a restructuring plan and related support agreement that anticipated the reduction of existing debt by means of a proposed distressed debt exchange but could have resulted in the continuing performance of certain securities. However, the plan and support agreement were effectively terminated following a vote on June 29, 2017 by the Financial Oversight and Management Board appointed under PROMESA not to certify the agreement as eligible for debt modification procedures under Title VI of PROMESA. On June 30, 2017, the Board certified PREPA to file a voluntary petition under Title III of PROMESA.

RATING SENSITIVITIES

The Puerto Rico Electric Power Authority’s Issuer Default Rating and power revenue bond ratings have reached the lowest level on Fitch’s rating scale. It is Fitch’s intent to continue to monitor PREPA’s Issuer Default Rating and reexamine PREPA’s credit profile once debt restructuring plans become clear.

Contact:

Primary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

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Lina Santoro
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+1-212-908-0522

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Jessalynn Moro
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+1-212-908-0608

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: [email protected].

Additional information is available on www.fitchratings.com

Puerto Rico’s troubled power company defaulted on a deal to restructure roughly $9 billion in bond debt and sought court protection from its creditors, the government said on Sunday.

The government said the move to, in effect, file for bankruptcy was the only way to reduce the existing debt of the Puerto Rico Electric Power Authority “to a sustainable level.” The utility, known as Prepa, had previously negotiated an out-of-court deal to reduce its bond payments by about 15 percent. The bondholders now seem likely to sustain larger losses under court supervision.

Puerto Rico’s Fiscal Agency and Financial Advisory Authority, which announced the move, said it did not expect any disruption of service to Prepa’s residential or commercial customers on the island.

Bondholders had hoped that Prepa’s debt could be reduced consensually, as planned. Some questioned the legality of moving into federal court to redo the deal.

Bill Fallon, the chief executive of National Public Finance Guarantee Corporation, a bond insurer, called the move “improper” and warned that it “would leave Prepa years away from attracting the private investment necessary to modernize.”

Electrical power has long been a drag on the island’s economy. Prepa’s antiquated generating plants burn imported oil to produce electricity. Efforts to modernize the plants and shift to clean and renewable fuels have been delayed repeatedly. Customers pay rates that follow oil prices up and down, and while the rates are relatively low at the moment, they are vulnerable to rising again.

In addition, there are longstanding accusations that Prepa’s fuel-purchasing office for many years bought dirty oil sludge as fuel, charged consumers the much higher price of cleaner distillates, and then created a slush fund with the difference. The Puerto Rican senate held a series of hearings on Prepa’s fuel-purchasing irregularities, and has referred its findings to the Federal Bureau of Investigation.

Prepa got into severe financial trouble before the rest of the Puerto Rican government, when it was unable to pay for fuel in 2014. Its creditors extended fuel-purchasing credit that year, and subsequently negotiated a deal to restructure about $5.7 billion of Prepa’s $9 billion in total debt.

The deal was held up as a model at the time, because it was achieved without the sort of leverage that can be exerted in bankruptcy. In addition to taking a 15 percent loss, the bondholders had agreed that Prepa could put a portion of the savings toward its long-promised modernization and conversion to cleaner sources of power.

But the agreement also called for Prepa to continue paying down its remaining debt by adding an unpopular increase in power customers’ monthly bills. It also required the restructured debt to be secured to an investment-grade rating, an insurmountable challenge with the island’s central government itself effectively bankrupt, and its economy in a painful decline.

Last week, the federal oversight board that is guiding Puerto Rico’s finances voted to authorize Prepa to seek debt relief under Title III of Promesa, which is similar to Chapter 9 municipal bankruptcy. Natalie Jaresko, the board’s executive director, said then that talks could continue, and the utility’s bondholders said they still hoped to pursue the consensual deal. They also offered to cover a $170 million interest payment that Prepa was required to make to bondholders on Saturday.

But Prepa declined that offer, defaulting on the payment and paving the way for the move on Sunday for court protection.

THE NEW YORK TIMES

By MARY WILLIAMS WALSH

JULY 2, 2017

The Commonwealth of Puerto Rico’s ad hoc group of general obligation bondholders, Ambac Assurance, Assured Guaranty, Assured Guaranty Municipal, Mutual Fund Group, National Public Finance Guarantee and Puerto Rico Funds (collectively, “Responding Creditors”) filed a statement in response to the Commonwealth’s status report regarding (a) financial disclosures to creditors and (b) status of settlement discussions. Because the Responding Creditors occupy different positions in the capital structure of the Commonwealth and its instrumentalities, their interests are diverse and, in certain respects, in conflict with one another; however, the statement notes that all parties are united in their rejection of certain fundamentally misguided and misleading positions set forth by the Oversight Board the status report.

The statement notes, “The Oversight Board’s Status Report rests on a breathtakingly overbroad conception of the Oversight Board’s authority under the Puerto Rico Oversight, Management, and Economic Stability Act (‘PROMESA’). In the Board’s view, PROMESA confers upon the Board a unilateral – and unreviewable – power to dictate the amount of revenues that will be available to service the debts of the Commonwealth and its instrumentalities, through the certification of a Fiscal Plan. All that is left for creditors to do, the Oversight Board asserts, is ‘negotiate to divide up the money available for debt service under the fiscal plan.’…The Oversight Board therefore contends that creditors may not even obtain discovery regarding the analyses, judgments, and projections that underlie the certified Fiscal Plan…The Oversight Board’s position fundamentally misunderstands PROMESA.”

In addition, “To make matters worse, Commonwealth officials have been engaging in a mad dash to pay certain creditors before a restructuring plan is proposed – trade creditors, tax refund claimants, and others are being paid in full at a rapid rate, without any regard for lawful liens or priorities. The Oversight Board’s insistence that it may dictate to creditors, rather than negotiate with them, also dooms any possibility for a consensual resolution of these Title III cases.”

BANKRUPTCY COMPANY NEWS

BY BRANDY CHETSASON

JUNE 28, 2017

Territory seeks private companies to run ports, airports, ferries, and more; utilities could be next

Puerto Rico has no cash and can’t borrow money anymore. So it is looking to sell itself off in parts.

The troubled U.S. territory is preparing to seek bids in coming months from private companies willing to operate or improve seaports, regional airports, water meters, student housing, traffic-fine collections, parking spaces and a passenger ferry, according to a government presentation reviewed by The Wall Street Journal.

The goal is to attract more than $500 million in investment starting this summer, according to a spokesman for the Puerto Rico Public-Private Partnerships Authority. Future possibilities include the island’s power utility, water and sewer system and waste management, according to presentations made in April to private investors.

Puerto Rico officials haven’t disclosed exactly how they plan to use any proceeds. The government currently needs cash to pay down debt, run operations and for other purposes.

Potential deals are a cornerstone of a new plan to revitalize the territory, which in May was placed under court protection, the largest-ever U.S. municipal bankruptcy. Gov. Ricardo Rosselló predicts public-private partnerships launched over the next three years will bring $5 billion in new investment and 100,000 jobs to Puerto Rico. Economic projections in the commonwealth’s revitalization plan are based in part on the completion of public-private partnership deals.

It’s an ambitious goal. U.S. public-private transportation projects—the most common type of partnerships—have attracted about $30 billion in total private and public investment since 1993, according to Public Works Financing newsletter’s P3 Projects Database.

“I hope it happens but I recognize it’s aggressive,” former Puerto Rico Gov. Luis Fortuño, who created the Public-Private Partnerships Authority, said of the $5 billion target.

In public-private partnerships, the government allows private firms to lease and operate public infrastructure for decades in exchange for upfront cash or a promise of long-term improvements. Some arrangements also involve building new infrastructure. Unlike municipal bonds, public-private partnerships insulate investors from the government’s financial distress: The money typically flows straight to the private operator without ever passing through government officials’ hands.

Proponents say privately run projects are typically more efficient and well-run than public projects, creating savings that lower the overall cost.

Critics of the partnerships say governments are pledging away revenues they need to fund core services in exchange for infrastructure improvements that could cost less if publicly financed. In one example, after Chicago leased its parking meters to a private firm in 2008, the city’s inspector general found the firm’s $1.157 billion upfront payment was $974 million less than what the city would have gotten from operating the meters itself.

“Just as it is imprudent to sell your house to make a monthly credit card payment, valuable governmental assets shouldn’t be viewed as a one-shot budget solution,” said Chris Hamel, head of municipal finance at RBC Capital Markets, speaking generally about public-private partnerships.

Puerto Rico has had issues in the past with private partners.

Former Gov. Alejandro García Padilla tried to find partners for a passenger ferry from the mainland to the islands of Culebra and Vieques. But the government couldn’t afford to put down collateral to guarantee to a private operator that it would make payments to supplement ferry fares, and prospective partners lost interest.

Rick Newman, a developer and owner-operator of hotels in Puerto Rico who runs a private ferry service, opted against bidding to operate the Culebra and Vieques ferry under Mr. García Padilla’s plan. He said the proposed partnership carried too much risk. He said he would consider a new partnership, but not if the private partner is expected to rely solely on passengers for revenue.

“If the request for proposals comes out and says you have to live off of the fare box, the government may not find a private operator,” Mr. Newman said.

Other public-private partnerships in Puerto Rico have done better.

In 2009, then-Gov. Fortuño pushed through legislation creating an authority that could move forward with public-private deals without legislative approval. Puerto Rico’s largest airport is run by a public-private partnership.

The authority’s first major deal was a decision to lease the island’s busiest road, the José de Diego Highway, and a shorter nearby road. Puerto Rico got $1.08 billion in upfront cash—almost all of it went to pay off debt—and a promise from the private firm, Autopistas Metropolitanas de Puerto Rico LLC, to invest about $350 million in the roads, according to the Federal Highway Administration.

The private firm made a range of improvements, paving and widening the expressway and enhancing toll-collection efforts. It also raised prices for drivers by 20% since 2011; driving from end to end now costs $4.45.

Mr. Fortuño said without private investment, he wouldn’t have had the upfront capital to make needed safety improvements. “I didn’t have a choice,” he said.

The private operator’s owners, Goldman Sachs Infrastructure Partners and the Spanish infrastructure firm Abertis , each received about $40 million in earnings before interest, tax, depreciation and amortization from the road last year, according to people familiar with the matter.

Prices on the toll road’s bonds have risen by about eight cents on the dollar since October and now are trading at par value. Puerto Rico highway bonds, in contrast, are trading at close to 50 cents on the dollar after the island’s highway authority entered a court-supervised bankruptcy process last month.

“This is the solution that Puerto Rico has to move forward,” said Wilson Ortiz-Vega, advisory leader with the insurance brokerage Aon , which worked on a previous public-private partnership with Puerto Rico.“They don’t have access to capital markets at a reasonable rate, and they don’t have the resources.”

Even so, Carlos A. Colón De Armas, a professor of finance at the University of Puerto Rico Graduate School of Business, said the commonwealth would have been better off continuing to operate the José de Diego Highway. His 2011 study found the present value of the revenue the government would have collected over 40 years was $2.1 billion.

The Wall Street Journal

By Heather Gillers

June 26, 2017 7:00 a.m. ET

Write to Heather Gillers at [email protected]

It would reduce the cost of living and spur economic growth.

This article was written by Andrew G. Biggs, Arthur J. Gonzalez, Ana J. Matosantos and David Skeel, four of the seven members of the Financial Oversight and Management Board for Puerto Rico. They were appointed by President Obama based on recommendations by the Democratic and Republican Congressional leadership.

In July 2016, Puerto Rico defaulted on its more than $70 billion of debt, putting at risk those liabilities as well as more than $50 billion in public pension obligations. Just before the default, Congress had enacted the Puerto Rico Oversight, Management and Economic Stability Act, or Promesa, which established the Financial Oversight and Management Board for Puerto Rico. Today, under the board’s guidance, Puerto Rico is undertaking the largest municipal restructuring in U.S. history, with the goal of sorting out its longstanding fiscal issues and reigniting economic growth.

The board has worked steadily toward these goals over the past year. After rejecting turnaround plans submitted by two successive Puerto Rican governors, last March the board approved an amended plan that includes a nearly 30% cut in government health spending, sizable reductions in government subsidies, school closings, consolidations of government agencies, and the most extensive public-employee pension reforms ever passed in the U.S.

This week, after much deliberation, the board rejected the Puerto Rico Electric Power Authority’s request to move forward with a restructuring support agreement with its creditors. Puerto Rico’s electricity costs are two to three times as high as mainland levels. The board concluded that lowering the price of electricity and spurring economic growth depended on reforming Prepa’s operations, not merely restructuring its credit. Affordable electricity could boost growth by up to half a percentage point annually, raising family incomes on the island, stemming outmigration and increasing funds available to repay creditors.

Successful reform will require a true transformation of Puerto Rico’s power sector. As the Center for the New Economy, a Puerto Rican think tank, put it in a 2009 report: “PREPA’s operations are substantially less efficient than the operations of its U.S. counterparts and it underperforms in virtually every area of operations under consideration.” While mainland utilities have reduced costs by shifting to natural gas, Prepa relies on outmoded oil-fired generating plants. The company also loses 12% of sales revenue to faulty billing and theft, three times the U.S. average. Prepa has languished under heavy administrative overhead and politicized management, which contribute to its failure to deliver reliable, cost-effective energy.

We believe that only privatization will enable Prepa to attract the investments it needs to lower costs and provide more reliable power throughout the island. By shifting from a government entity to a well-regulated private utility, Prepa can modernize its power supply, depoliticize its management, reform pensions, and renegotiate labor and other contracts to operate more efficiently. A reformed Prepa is key to restoring opportunity for the people of Puerto Rico.

Prepa’s credit restructuring proposal would make effective privatization impossible. Under the proposal, bondholders would grant Prepa a five-year reprieve from principal payments and some would accept a 15% reduction in debt. In return, those bondholders would be guaranteed repayment of remaining debt through an electricity surcharge. If demand for electricity continues to decline, the surcharge will have to rise to compensate the creditors. The Prepa proposal and its guarantee to current creditors would increase costs to ratepayers while leaving new investors—the ones Prepa needs to transform its operations—assuming all the risk.

Private investors would not involve themselves with Prepa on those terms, meaning the company would lack the capital to modernize. Electricity costs would remain high, and economic growth, families and bondholders would suffer. The board’s economists estimate that without pro-growth energy reforms, funds available to pay Puerto Rico’s creditors would be reduced by $15 billion.

The Board’s decision was not easy. Promesa gave preferential treatment to the credit support proposal, not requiring it to satisfy the same criteria as other debt restructuring settlements. Some members of Congress have suggested that Prepa’s credit agreement should have been considered a “done deal.” But not all the proponents of Promesa understood its provisions in that way. The law clearly expresses that the board must authorize any voluntary debt restructuring, and the agreement proposed by Prepa itself explicitly requires board authorization.

The board cannot amend the Prepa agreement, as it did with the fiscal plan submitted by Puerto Rico’s government. But the board will pursue improved terms of agreement for creditors, and more equal sharing of risk between current creditors and new investors.

Transformation of Puerto Rico’s energy sector is only one part of a broader reform agenda, which must include fundamental public pension and welfare reforms, as well as the modernization of labor laws. Prepa’s viability must be addressed in the context of these larger solutions to Puerto Rico’s fiscal and economic crisis. But unless Prepa can be modernized, Puerto Rico’s economic recovery and its ability to repay its debts will suffer.

The Wall Street Journal

June 29, 2017 6:55 p.m. ET

Here are answers to questions investors may be asking

Illinois is locked in a political stalemate, and in danger of becoming the first U.S. state to have its debt downgraded to junk status. S&P Global Inc. threatened to take that action if Gov. Bruce Rauner and Democratic Speaker of the House Michael Madigan can’t agree on a package of spending and taxes by the start of the next fiscal year on Saturday. Below is a breakdown of what this unprecedented event would mean for everyone from individual investors to large Wall Street money managers.

Who owns Illinois’s debt?

Much of Illinois’s $25 billion in outstanding general obligation debt is held by individual investors seeking a stable source of income, according to analysts’ estimates. But Wall Street is also exposed via mutual funds, hedge funds and insurers that purchased the state’s bonds. Money management giant Vanguard Group has $1.2 billion spread across seven mutual funds. It is the biggest holder among all mutual-fund firms that had a total of $4.5 billion in Illinois bonds, according to the most recent figures from research firm Morningstar.

What would a downgrade do to those investments?

Not much, say analysts. They predict prices would drop only a few cents in the event of a junk downgrade. The state’s uninsured general obligation debt traded this week as high as 95 cents on the dollar. Junk bonds don’t usually trade near par, but state general obligation debt is considered safer because states have broad power to tax and lack the legal ability to declare bankruptcy.

Will investors still get paid?

A junk rating won’t affect the state’s ability to pay bondholders. State officials have said those payments are their No. 1 priority.

What does a ‘junk’ rating mean, anyway?

Ratings firms rank debt according to how safe an investment they believe it is. The 12 safest tiers are considered “investment grade,” meaning investors have what S&P terms “adequate” protection against the risk of default. Below that, bonds are considered junk, or “speculative grade,” meaning they face “large uncertainties” or “major exposure to adverse conditions,” according to S&P. Investors who buy junk may earn greater profits if the bonds perform well but they also face greater danger of losses.

Are mutual funds even allowed to own junk municipal bonds?

Most mutual funds have rules limiting their investment in junk-rated debt, but when bonds drop below investment grade they may not be required to sell them. At Vanguard, mutual funds are allowed to hold a “modest allocation” of junk bonds, a spokesman said. Vanguard’s municipal bond team, a spokesman said, is “comfortable with the risk/reward” of investing in Illinois bonds.

How are investors expected to react to a downgrade?

Bonds are still likely to change hands as holders spooked by the state’s deteriorating credit sell and high-yield investors take advantage of the opportunity to buy. Mutual funds have already sold more than $100 million in Illinois general obligation bonds since the end of 2016, according to Morningstar, and buyers have been taking advantage of temporary dips. Howard Cure, director of municipal bond research at Evercore Wealth Management, said some of his clients might buy more Illinois bonds if prices drop further.

How would a downgrade affect Illinois?

The most immediate impact would likely be a rise in borrowing costs, making it more expensive to raise money for new projects. Analysts predict investors could demand an additional half-percent to a percent in interest, meaning the state would pay an additional $5 million to $10 million for every $1 billion it borrows. Illinois already pays a premium. When it last sold tax-exempt debt in November 2016, the state paid yields of 4.4% for 20-year bonds. In contrast, 20-year bonds issued by the state of Wisconsin around the same time yielded 2.8%.

Is Illinois on its way to becoming the next Puerto Rico?

Analysts say no, noting that Illinois’s problems are largely political. Unlike Puerto Rico, which is in the midst of a court-supervised restructuring, Illinois has a strong underlying economy and annual revenues that are about 10 times its yearly debt service payments. Puerto Rico, on the other hand, has endured more than a decade of economic distress. “There’s no risk of Illinois losing market access,” said Matt Fabian, a partner at Municipal Market Analytics.

Will a junk downgrade spill over affect other states and cities?

It could. New Jersey and Connecticut, among the lowest-rated states after Illinois, may face more scrutiny from investors, analysts said. Both are wrestling with budget problems and mounting liabilities. But New Jersey and Connecticut still have a long way to go to match Illinois’s ratings dilemma. They are rated several notches higher by S&P and Moody’s Investors Service.

The Wall Street Journal

By Heather Gillers

June 29, 2017

Write to Heather Gillers at [email protected]

• Bonds had been sliding as board delayed approval of deal
• Agreement would have given investors 85 cents on the dollar

Puerto Rico’s government electric company bonds tumbled after the island’s federal oversight board rejected an agreement with creditors to restructure $9 billion of debt, pushing the agency toward bankruptcy.

The price of Puerto Rico Electric Power Authority bonds due in 2040, one most actively traded Wednesday, changed hands for an average of 52.7 cents on the dollar, down 15 percent from when they last traded on June 14, according to data compiled by Bloomberg.

A rout followed the board’s announcement late Tuesday that it shot down the agency’s deal with insurers and investors that would have allowed bondholders to receive 85 cents on the dollar. Prepa, as the utility’s known, first struck the agreement in 2015, before Congress enacted emergency rescue legislation that placed Puerto Rico under federal oversight and gave the island the option to file for bankruptcy.

“It’s pretty negative from the perspective that you have an agreement and it’s been out there for a long time,” said Daniel Solender, head of municipals at Lord Abbett & Co., which manages $19 billion of state and local debt, including Puerto Rico bonds. “It makes it hard to proceed going forward with them if agreements don’t hold up.”

The restructuring of Prepa, the largest U.S. public power utility by customers and revenue, will likely happen using a form of bankruptcy called Title III, the board said. Puerto Rico’s central government took that step on May 3 after negotiations with creditors failed.

Investors had been speculating that the Prepa deal could unravel, given that the board had failed to approve revisions that Governor Ricardo Rossello made nearly three months ago. Without it in place, Prepa may default on a $423 million principal and interest payment due July 1. It would be the first missed payment for the agency after it negotiated for nearly four years with hedge funds, mutual funds and bond-insurance companies to find an out-of-court solution.

Board members have questioned the deal’s ability to lower electricity rates and sufficiently modernize the system.

“Affordable and reliable electricity is central to Puerto Rico’s economic turnaround, without which customers will seek alternative measures to satisfy their needs resulting in increased pressure to increase the rates to the remaining customer base, thereby inhibiting growth and long-term viability,” the board said in a statement Tuesday.

The board voted four to three against the deal, according to a person familiar with the vote who asked not to be named because the meeting wasn’t public.

The vote comes after MBIA Inc.’s National Public Finance Guarantee Corp. and units of Assured Guaranty Ltd. sued the board Monday in U.S. court in Puerto Rico, seeking to prevent the panel from blocking Prepa’s restructuring agreement.

Congress last year passed legislation, known as Promesa, that allows Puerto Rico and its agencies to file Title III to force creditors to take losses on their investments. The legislation included language that directed the board to approve any already-crafted creditor agreement. U.S. Representative Rob Bishop, chairman of the Natural Resources Committee, which drafted Promesa, earlier this month urged the board in a letter to approve Prepa’s restructuring deal.

The board’s decision was criticized by a group of Prepa bondholders, including OppenheimerFunds Inc. and Franklin Advisers, that were involved in the negotiations.

“We do not understand the board’s decision to block this deal after more than three years of cooperative, good faith negotiation by all stakeholders, exhaustive third-party review and explicit statements from the chair of the Congressional committee that drafted PROMESA that the law wasn’t intended to give the board the power to take this action,” the group said in a statement. “At this stage we remain open to working with the oversight board but are considering all options.”

Bloomberg

By Michelle Kaske

June 28, 2017, 9:13 AM PDT June 28, 2017, 11:08 AM PDT

Fitch Ratings-New York-26 June 2017:  Florida water utilities have seen a rise in debt outstanding over the past three years, according to Fitch Ratings’ 2017 Florida Water and Sewer Sector Update. Fitch believes this will continue as concurrent increases in capex have not resulted in declines in the average age of water plants.

Renewal and replacement of water infrastructure has driven the majority of capital spending for Florida water and sewer utilities. However the average age of the state’s water utilities has remained mostly stable, at 14.5 years in fiscal year 2016.

“Increasing focus on alternative water sources and efforts around water quality most likely mean more financing will be required to meet needs that go above and beyond regular renewal and replacement,” says Eva Rippeteau, Director, U.S. Public Finance.

Regulatory requirements for wastewater quality, storm water and flood mitigation are major capital spending drivers throughout the state.

Nutrient reduction, in particular, remains a big focus and has both environmental and economic implications. In early May, Governor Scott authorized a $1.5 billion plan aimed at mitigating algae blooms caused by nutrient accumulation in Lake Okeechobee, the largest such plan to date. Increasingly, storm water capture and disposal systems are under greater scrutiny due to persistent flooding and pollution risk. Utilities requiring system changes to address these methods may require additional financing.

Some utilities have on-going requirements to expand or seek alternative water sources to accommodate renewed population growth. Certain supply projects can be expensive and necessitate regional coordination in order to finance, operate and sustain. One example is the Central Florida Water Initiative, which spans five counties, three water management districts, the Florida Department of Environmental Protection and other stakeholders.

Despite the increase in debt, most Florida water and sewer utilities saw significant improvements in finances in fiscal 2016 relative to the year prior. Four upgrades and only one downgrade comprised the year’s ratings changes. The ratings for 34 other systems were affirmed. The average Florida water and sewer utility rating continues to be ‘AA’. Fitch anticipates credit quality will remain high.

The 2017 Florida Water and Sewer Sector Update was published in conjunction with the 2017 Fitch Analytical Comparative Tool (FACT) for Florida Water and Sewer credits. The 2017 FACT contains financial data for 58 water and sewer utilities in Florida, including historical statistics and metrics going back to 2012.

The FACT includes a dashboard feature to plot annual issuer metrics and median performance, a peer analysis tool which allows users to review and compare metrics of two issuers, and a charting tool which generates a comparison of issuer metrics against rating category medians.

The full reports, “Florida Water and Sewer Sector – 2017 Update,” and “Florida Water & Sewer – Fitch Analytical Comparative Tool (FACT) – 2017,” are available at www.fitchratings.com.

Contact:

Eva D. Rippeteau
Director
+1-212-908-9105
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Andrew DeStefano
Director
+1-212-908-0284

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: [email protected].

Additional information is available on www.fitchratings.com

Fitch Ratings-New York-23 June 2017:  The New York State legislature is expected ultimately to approve extending key revenue sources for local governments, despite adjourning its 2017 session without approving the extensions, says Fitch Ratings. However, there may be a lapse in tax collections by local governments if the legislature does not arrive at an agreement prior to its next scheduled session in 2018.

The legislature adjourned its 2017 session on Wednesday without an agreement on a bill that would extend the right for 53 counties to charge sales taxes above the 3% base sales tax rate and New York City to continue its current income tax rate. Many counties levy an additional 1% or more, some of which may be shared with their municipalities. This tax must be renewed biennially by the legislature. The bill would also have continued mayoral control of the New York City public school system.

We do not believe the legislature’s intention was to deprive local governments of a revenue source that for many funds a significant portion of their budgets. However, the parts of the bill concerning the schools were highly politicized.

State officials are reportedly discussing arrangements to vote on a bill incorporating the tax extensions before the next session. Fitch expects the extensions to ultimately be extended before they expire, but Fitch will take any rating actions it deems appropriate if this expectation is not met.

In addition to potentially affecting government operations, failure to extend taxes would impact debt service coverage for a number of state-created authorities whose bonds are secured by sales tax revenue. The New York City Transitional Finance Authority’s (TFA) bonds are secured by both sales and income tax revenues. While only a minimal portion of the city’s sales tax revenue is at risk, the loss of the extension of the current income tax base rate and 14% surcharge could result in a loss of tax revenues of $8.1 billion by fiscal 2021, according to an analysis by the TFA. Debt service coverage on TFA bonds is very strong, as it is for bonds issued by the Nassau County Interim Finance Authority, the Buffalo Fiscal Stability Authority and the Erie County Fiscal Stability Authority – all rated ‘AAA’/Stable.

TFA reports the effects on fiscal 2018 revenues of a reduction in the income tax rate, effective Jan. 1, 2018, would be $2.9 billion. This has a modest impact on TFA coverage yet would create a gap in the city’s fiscal 2018 budget (beginning July 1, 2017) as the income taxes reduced represent 3.4% of budgeted revenues. However, for those with fiscal years ending December 31 and taxes expiring on November 30, current year budget adjustments would be needed.

Contact:

Amy Laskey
Managing Director, U.S. Public Finance
+1 212 908-0568
Fitch Ratings, Inc.
33 Whitehall Street, New York

Robert Rowan
Senior Analyst, Fitch Wire
+1 212 908-9159

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: [email protected].

Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Fitch Ratings-Austin-26 June 2017: On June 21, in a decision that Fitch Ratings found to be credit-neutral, the California Court of Appeal gave both parties reason to claim victory in its decision on litigation between the Metropolitan Water District of Southern California (Metropolitan, rated ‘AA+’/Stable) and the largest of its 26 member agencies, the San Diego County Water Authority (CWA, rated ‘AA+’/Stable). The court ruled in favor of the CWA on most points, but the ruling favored Metropolitan on the core financial aspect of the case. The appellate court affirmed the legality of the aspect of Metropolitan’s rate-setting methodology that includes State Water Projects (SWP) costs, reversing the trial court decision of Nov. 2015. We believe the most recent appellate court ruling is credit-neutral for Metropolitan in that the bulk of its transportation rate was found to be appropriate, and credit-neutral for San Diego CWA, since it could receive some relief in the transportation rate that would be credited back to its members. The case is expected to be appealed to the State Supreme Court.

Water Transportation Rate at Heart of the Case

CWA pays water transportation rates to Metropolitan for the movement of imported water CWA purchases from the Imperial Irrigation District. Metropolitan’s transportation rate-setting methodology includes SWP charges (charges associated with the 444-mile California aqueduct that moves water from northern California to southern California), which CWA has contested as costs that are more appropriately characterized as water supply costs and not allocable to transportation costs. Based on the 2010 legal filing, CWA asserted that the inclusion of SWP costs resulted in an overcharge of at least $24.5 million per year and inclusion of the water stewardship rate resulted in a further overcharge of $5.4 million per year, in comparison to CWA’s full payments to Metropolitan of approximately $328 million in recent typical years.

The trial court, in its 2015 decision, had awarded San Diego CWA $188.3 million in breach of contract claims to San Diego CWA for rate overcharges (both SWP and water stewardship rate) during the years 2011-2014 plus additional amounts for interest and legal costs. While there is legal precedent that affirms water transportation rate methodology can include system costs broader than just the facilities used to convey specific water supplies in an individual contract, the trial court found Metropolitan’s inclusion of the SWP charges improper because the SWP is not directly owned by Metropolitan However, the appellate court’s recent ruling reversed the trial court’s determination, finding that the SWP, while not owned by Metropolitan, is an integral component of its water supply system and can be included in the transportation rate.

The remaining points in the litigation on which the appellate court found in favor of the CWA are 1) in regard to the exclusion of Metropolitan’s water stewardship rate in its water transportation charge methodology (in agreement with the Nov. 2015 trial court decision); 2) the more generous calculation methodology of CWA’s rights to preferential water during a shortage (also in agreement with the trial court decision); and 3) a finding that CWA has standing to challenge an unconstitutional component of Metropolitan’s water conservation program contracts that allowed Metropolitan to cut off conservation program funding to a member that is in active litigation to challenge the Water Stewardship Rate. The trial court had found this aspect of the conservation program to be unconstitutional but determined that CWA lacked the standing to challenge the provision.

Credit Rating Outcomes Expected to be Relatively Neutral

Fitch believes the current credit ratings of Metropolitan and CWA provide sufficient room to incorporate any potential outcomes in the case pending ultimate resolution. Fitch believes Metropolitan is positioned to absorb the costs and required rate restructuring required by the appellate court ruling if it were upheld. This outcome would allow Metropolitan to include SWP costs but exclude the water stewardship rate in its transportation rates and pay certain damages to CWA, assumed to be substantially less than those awarded by the Nov. 2015 trial court decision. The appellate court’s decision would lower the transportation rates charged to CWA in the future by removing the water stewardship rate but Metropolitan could recover those lost revenues through an incremental rate increase to other members. Metropolitan’s revenue stability will depend on the timeliness of rate restructuring to recover the revenues at issue from other members. Metropolitan’s cash reserves were spent down in fiscal 2016 related to the state drought but should recover to more typical robust levels prior to a final decision by the Supreme Court. Reserves could be necessary to provide financial cushion until rate restructuring could be put into place. If a final ruling is instead consistent with the original trial court decision, resulting in a more urgent need for rate restructuring among Metropolitan’s members, strong reserves and rapid Board action will become more critical credit considerations.

San Diego CWA’s credit quality is unlikely to shift regardless of the outcome, given the upside potential of receiving financial damages and the intent to return any funds directly to customers. If the appellate court ruling is upheld, CWA would receive a smaller portion of the damages being sought but the higher rates have already been paid to Metropolitan and recovered in CWA’s own rates charged to its customers. CWA has committed to returning any funds received from the litigation to its customers (net of legal costs). Fitch believes the credit impact would be neutral for San Diego regardless of whether the final ruling includes the large $188.3 million settlement awarded by the trial court or the smaller amount related only to the water stewardship rate component implied by recent appellate ruling. Future water rates may be higher than what CWA had hoped, but CWA has cautiously assumed a continuation of current rates in its conservative forecast planning and rate methodology.

Contact:

Kathy Masterson
Senior Director
512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701

Andrew Ward
Director
415-732-5617

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: [email protected].

Additional information is available on www.fitchratings.com

• House plans Sunday vote after adjourning without agreement
• S&P warns of downgrade if the impasse isn’t soon resolved

Republican Governor of Illinois Bruce Rauner. Photographer: Scott Olson/Getty Images
Illinois entered its third straight fiscal year without a budget as Republican Governor Bruce Rauner and Democratic lawmakers struggle to agree on how to rein in the government’s chronic deficits, pushing it closer toward becoming the first junk-rated U.S. state.

State legislators failed to enact a budget by the end of Friday, the last day of the fiscal year, though negotiations continued. Speaker Michael Madigan, a Chicago Democrat, said in a statement on Saturday the House would vote Sunday “on a revenue package that is modeled on the bill supported by the governor, and House and Senate Republicans.”

The failure marked a continuation of the unprecedented impasse that’s left Illinois without a full-year budget since mid-2015. Without a deal around July 1, S&P Global Ratings has warned that the nation’s fifth-most-populous state will likely get downgraded again, losing its investment-grade status.

After Madigan, 75, appeared briefly on the House floor, Republicans stood and chanted in objection, with one member shouting “Speaker Junk” as Madigan left the floor.

On Friday, Madigan, who controls much of the legislative agenda, pleaded with rating companies to “temporarily withhold judgment” as lawmakers negotiate.

‘Job Done’

“Much work remains to be done,” Madigan said on the floor of the House Friday, before the chamber adjourned for the day. “We’ll get the job done.”

Without a spending plan, the state has effectively been on autopilot, leaving it with a record $15 billion of unpaid bills as it spent over $6 billion more than it brought in over the past year. The impasse has devastated social-service providers, shuttering services for the homeless, disabled and poor. The lack of state aid has wrecked havoc on universities, putting their accreditation at risk.

If the standoff isn’t resolved, Illinois officials have said they won’t be able to pay contractors and road construction will shut down, putting thousands out of work. The yields on the state’s bonds have risen as investors anticipate a downgrade.

At its root, the fight is a showdown between former private equity executive Bruce Rauner, who in 2015 became the first Republican to lead Illinois since 2003, and Madigan, who’s served as speaker for decades. The two can’t agree on how to end deficits that were exacerbated when tax hikes expired just as Rauner took office.

The partisan gridlock has created the longest budget standoff ever for a state, according to the National Conference of State Legislatures. Rauner has demanded any plan come with parts of his self-described pro-business reforms, like a property-tax freeze and legislative term limits. Democrats have resisted, saying his agenda would devastate the middle class. They’ve passed some of his initiatives, but Rauner argues they didn’t go far enough.

School Funding

Without a budget that includes borrowing to pay down the bill backlog, Illinois by August will run out of money for key expenses for the first time since the stalemate began, according to Comptroller Susana Mendoza, a Democrat. That means school funding, state payroll, and pension payments could be affected, she said. There won’t be enough money for these mandated or court-ordered payments.

This won’t jeopardize debt-service payments, she said. Illinois hasn’t missed any bond payments and state law requires it to make monthly deposits to its debt-service funds.

Investors have been punishing Illinois for its fiscal woes. Yields on the state’s 10-year bonds have soared to 4.8 percent, 2.8 percentage points more than those of benchmark debt. That’s the highest yield of all 22 states that Bloomberg tracks.

“Recognizing that they’re continuing to work through the weekend, it doesn’t look good to adjourn halfway through your last day,” said John Humphrey, the Chicago-based head of credit research for Gurtin Municipal Bond Management, which oversees about $10.1 billion of state and local debt.

Bloomberg Politics

By Elizabeth Campbell

June 30, 2017, 9:01 PM PDT July 1, 2017, 2:53 PM PDT

• The state’s G.O. bonds offer attractive spreads for HY buyers
• Build Illinois Bonds (BIBs) ‘somewhat on par with GOs’

Illinois general-obligation debt may be attractive for high yield investors as the state contends with a two-year budget impasse that has its rating on the verge of junk, according to Citigroup’s municipal research team led by Vikram Rai.

General-obligation bonds are trading from 1.55 percentage point to 2.05 percentage points more than securities with the lowest investment-grade ratings, though large-scale, forced selling in the event of a downgrade to junk is unlikely, the analysts stated in a note. Investors should show a preference to the 5- to 7-year part of the curve, they said.

The analysts also note:

• Build Illinois Bonds (BIBs) are “somewhat on par with GOs” as state law provides for irrevocable and continuing appropriation in much the same manner seen for the GOs and sales-tax revenue bonds. In addition, the amount outstanding is low and payment is backed by a first lien on the state’s share of sales tax revenue.
• The state’s appropriated debt (Metropolitan Pier & Exposition Authority) have already been downgraded to junk and have outperformed GOs of late; this may continue as the notional amount is just about $3.6 billion and is backed by dedicated sales tax revenues.
• Taxable pension obligation bonds have limited upside.
• Expect Illinois bonds to rally only after a budget passes; even a stopgap measure should lead to some price improvement.
• The state “has the ability to continue to pay for most debt service and pension contributions” whether or not a budget is passed. State law mandates a monthly set aside for debt service on GOs and sales-tax revenue bonds and this mandate has not been breached.

The state’s budget impasse shows little sign of resolution by the end of the week. Republican Governor Bruce Rauner, who called a special session to breach the stalemate between the Democratic-led legislature, called the first few days of talks “a waste of time.”

Bloomberg Markets

By Kristy Westgard

June 27, 2017, 1:59 PM PDT

By putting the burden on the companies, Chicago is keeping its costs low while providing an efficient framework and better mobility.

Around the country, cities are grappling with the question of how best to regulate the rapidly expanding ride-sharing industry. While many mayors and local transportation regulators are pre-empted by their state legislatures, others are free to test different policy solutions and experiment with how best to conduct background checks on drivers, ensure vehicle safety, set insurance requirements and ultimately decide who gets to be on the road.

Chicago’s approach may be one that could serve as a model for other cities. In Chicago, regulators and transportation network providers (TNPs) such as Uber and Lyft agreed early on that getting good drivers on the road with minimal friction would be a key priority for the city. When ride-sharing services were first becoming popular in Chicago, the city worked with (and sometimes at odds with) TNPs to devise a licensing and regulatory framework that aims to guarantee basic safety standards for passengers while minimizing permitting expenses for drivers, ultimately giving the city new mobility options while keeping the city’s overhead costs low.

To ensure baseline safety standards for ride-sharing drivers, Chicago regulators required that each prospective operator take courses and be tested on the rules of the road, how to transport passengers safely and how to provide access to people with disabilities, among other essential skills. The city tasked ride-share companies with developing the courses and administering the tests. Rather than subject prospective drivers to expensive multi-day, in-person instructional programs, TNPs instead designed their coursework to be accessed via smartphones, which made the classes far less onerous for prospective drivers.

The city also set requirements for background checks that must be undertaken for each driver. The TNPs use third-party vendors to perform these checks by running drivers’ names and Social Security numbers through a series of databases and public records, singling out individuals with violations who don’t meet the city’s minimum standards. Background-check reports are submitted to the city, and the TNPs must keep drivers’ personal information — name, contact information, address and driver’s license number — up to date with the city.

And whereas city vehicle inspections are typically costly and wait times build up quickly, TNPs worked with the city to develop and partner with certified inspection shops to ensure that cars can be seen in just a few minutes for as little as $20. A standard form is used by each TNP to guarantee that a car’s essential safety components, such as lights, brakes and suspension, are in good working condition. Once a car is inspected, the form is submitted to the city and the driver must keep a copy in the car. To minimize the risk of fraud, the city maintains wide discretion to review documentation, request information and impose penalties on rule-breakers.

Once the city has ensured baseline safety standards, it utilizes the TNPs’ internal customer feedback systems, such as app ratings and customer support, to identify unsafe drivers and driving practices. Each TNP must have in place a process to notify the city of any driver who has been deactivated due to complaints from riders that give rise to public safety concerns. Moreover, the city requires that each car has a 311 sticker so that riders are aware of how they can take complaints directly to the city.

Chicago has done well to put the burden of training, background checks, inspection and disclosure on its ride-sharing companies. By doing so, regulators have kept obstacles to becoming a driver to a minimum while helping to ensure customer safety and keeping the city’s regulatory costs low. And by partnering with TNPs, the city has enhanced job opportunities and consumer choice while expanding Chicagoans’ mobility options.

GOVERNING.COM

BY WYATT CMAR | JUNE 29, 2017

Tax-exempt bonds are usually the best, lowest-cost way to finance major public projects, but it’s not yet possible to say that’s superior to privately financing Kansas City International Airport improvements, city finance officials said Wednesday.

Other factors can include speed of construction, capitalized interest, other financing costs, timing of when bond funds versus private funds become available, and private equity in a project, City Finance Director Randy Landes told the council’s finance and airport committees.

“We would encourage you to be open-minded,” Landes urged the council members as they weigh the best financing approach to building a $1 billion single terminal at KCI.

One assurance from both Landes and Aviation Department Chief Financial Officer John Green was that, regardless of financing, the city will retain ownership of the airport and operations would not be privatized.

Green said basic maintenance and operation expenses would be covered first, with surplus funds going for debt service or capital lease costs. He said the airlines would cover any debt service gap or private lease obligation, as they always have, and no general city taxpayer dollars would be at risk. The additional cost of a $1 billion terminal, financed over time, would allow Kansas City to remain among the country’s more affordable airports.

In early May, Mayor Sly James and City Manager Troy Schulte announced their support for a proposal from Kansas City-based engineering firm Burns & McDonnell to design, build and privately finance a new single terminal at KCI.

Burns & McDonnell and supporters argued the private financing option could be as affordable as public airport revenue bonds, and the airport improvements could be completed two years faster, in 2022 instead of 2024. They also said private financing would assure a skeptical public that no taxpayer dollars are used, even though the airport is already totally funded by user fees and other enterprise funds, not by Kansas City general taxpayer dollars.

But Councilwoman Katheryn Shields and some others argued that public financing is cheaper and still does not involve taxpayer dollars, so it could be the preferable option for airport improvements and should be given fair consideration.

Shields has sponsored an ordinance that the committees considered Wednesday, calling for a Nov. 7 election and authorizing up to $990 million in aviation bonds, which would clearly signal voter preference for the public financing alternative. The committees took no action Wednesday, and Shields’ idea remains on hold.

Shields argued Wednesday that, because KCI is healthy financially and has a good credit rating, and because public financing usually carries a lower interest rate, the public approach could potentially save $400 million in interest payments over 30 years, at no risk to taxpayers.

“It is only the revenue at the airport that will pay off those bonds,” she said, adding that she thought a design-build approach could be just as swift as a private construction model. She said voters need a clear comparison between public and private airport financing to judge the best solution.

But Landes and Green said it’s not possible yet to make a fair cost comparison with private financing, since the Burns & McDonnell pro forma and other engineering firm proposals haven’t yet been submitted.

After the Burns & McDonnell proposal surfaced, the city decided it was more fair to open up the bid process to other engineering firms. The deadline for firms to submit qualifications and airport concepts is July 27.

The city may then narrow the field before asking the finalists to submit their financing plans by Aug. 10. Presentations are expected Aug. 14.

All of this is a tight timeframe, because the City Council still wants to put an airport improvement plan to voters in November. The council’s deadline to adopt ballot language for the November election is Aug. 24.

Councilman Scott Wagner asked whether the city can realistically evaluate the private financing proposals against a public finance model between Aug. 10 and Aug. 24.

“It’s a matter of how much we sleep,” quipped Assistant City Attorney Galen Beaufort.

“This is arithmetic,” Landes replied. “It should work.”

Several economic development and labor representatives reiterated their support Wednesday for Burns & McDonnell as the hometown team with a reputation for hiring a diverse local workforce. They argued voters are more likely to support private financing in November, because they equate public financing with public taxes, even though that’s not accurate for the airport.

But Jim Fitzpatrick, a former longtime Kansas City Star reporter and editor and now a blogger, said public financing gives the public more control and more assurance of the best cost, and he said voters are smart enough to figure that out.

THE KANSAS CITY STAR

BY LYNN HORSLEY

Lynn Horsley: 816-226-2058, @LynnHorsley

Lawmakers fail to approve routine measure tied to legislation over mayoral control of New York City

Albany lawmakers failed to approve a series of tax extenders tied to an elusive agreement over mayoral control of public schools, leading to stern warnings from the three major credit-ratings firms.

Fitch Ratings, S&P Global Ratings and Moody’s Investors Service said Albany lawmakers had failed to approve a routine measure allowing New York City to levy personal income taxes, a critical source of revenue. That tax extender went unapproved when lawmakers linked it to deadlocked legislation extending mayoral control of New York City schools.

The legislature also failed to pass measures affecting tax revenues in 53 counties and three other cities outside New York City.

New York Gov. Andrew Cuomo has summoned Albany lawmakers back to session to reach a deal on mayoral control. The ratings firms said they expected the tax extenders would eventually be approved before they were allowed to sunset in November and December. But they said any lapse of the extenders could have a severe impact on local governments.

If the measure allowing New York City to levy personal income tax isn’t approved by Dec. 31, when it expires, the city could lose $2.9 billion in personal income tax revenue, Fitch said, leading to an immediate budget gap. Moody’s said Tuesday the city’s personal income tax revenue would decline by more than 60%.

Fitch said a lapse could also ultimately affect credit ratings for New York City municipal bonds, and those of several other cities across the state secured by personal income taxes.

“Fitch expects the extensions to ultimately be extended before they expire, but Fitch will take any rating actions it deems appropriate if this expectation is not met,” the ratings firm said June 23.

On Tuesday, S&P said it estimated revenues for the Transitional Finance Authority, which funds the city’s capital projects, could decrease by 15% in fiscal year 2018 if the tax extender is allowed to lapse. Fiscal year 2018 begins July 1 and ends June 30 of next year.

Maria Doulis, a vice president of the Citizens Budget Commission, a nonpartisan watchdog group, said it was unfathomable Mr. Cuomo and lawmakers would allow the series of tax extenders to lapse.

“The personal income tax is so essential to New York City and to funding its operations that there is no way this won’t be renewed,” Ms. Doulis said. “We’re not terribly worried about it. We think it will be in whatever deal they come up with on mayoral control.”

But Dick Dadey, executive director of the Citizens Union, a good-government group, said it was “extraordinarily irresponsible” for Albany lawmakers to use local taxing authority to gain political leverage.

“It’s these kind of shenanigans the legislature and governor are able to participate in that puts the health at the state’s economy at risk,” Mr. Dadey said. “It just shows how brazen our elected officials have become in thinking they can play with taxpayer dollars.”

The Wall Street Journal

By Mara Gay

June 27, 2017 4:01 p.m. ET

Write to Mara Gay at [email protected]

CHICAGO — The Chicago Public Schools finalized the second and last part of a short-term loan, placing $112 million of notes with J.P. Morgan at a huge initial interest rate of 6.41 percent, the cash-strapped district reported on Monday.

The rate on the grant anticipation notes is even higher than the 6.39 percent initial rate on $275 million of similar variable-rate notes CPS placed with the bank earlier this month. All of the notes mature on March 30, 2018.

By contrast, top-rated debt due next March was yielding just 0.92 percent on Municipal Market Data’s short-term debt scale on Monday, indicating the junk-rated district is paying a big penalty due to its financial woes.

The Chicago Board of Education approved the note sale last month as a way to avoid ending the current school year early and to help make a $721 million pension payment due to its teachers’ retirement system on Friday, the end of the district’s fiscal year.

Escalating pension payments have led to drained reserves, debt dependency and junk bond ratings for the nation’s third-largest public school system.

The notes are backed by delayed grant funding owed the district by the state of Illinois, which is struggling through a second-straight fiscal year without a complete budget. As a result, the state has been forced to delay payments to vendors and others, ballooning its unpaid bill pile to about $15 billion.

“Governor (Bruce) Rauner’s total failure to fully fund education in a timely way means that hundreds of districts around the state including Chicago are scrambling to make up for the state’s funding shortfall,” CPS spokeswoman Emily Bittner said in a statement.

The Republican governor’s veto of a bill giving CPS $215 million in one-time state money to help make its pension payment punched a hole in the district’s $5.41 billion fiscal 2017 budget. The hole grew bigger with delayed state grants, totaling about $467 million to cover items such as transportation and special education.The initial rates on the notes will expire next week and will be reset monthly at 70 percent of the LIBOR rate plus 550 basis points.

By REUTERS

JUNE 26, 2017, 6:21 P.M. E.D.T.

(Reporting by Karen Pierog; Editing by Matthew Lewis)

CHICAGO — Chicago Mayor Rahm Emanuel on Wednesday proposed an ordinance that would lock in higher city payments to two pension funds after state legislation to do so became mired in Illinois’ political stalemate.

The ordinance would put payments for the city’s municipal and laborers’ pensions on a five-year ramp to reach actuarial levels that would make the retirement systems 90 percent funded by the end of 2058. The city has already put into place a tax on water and sewer usage and a telephone surcharge to fund the higher payments.

Without the additional money, the two pension funds would become insolvent within 10 years.

The mayor told reporters he decided to seek city action on pension payments to send a positive signal to credit ratings agencies and to ease city workers’ possible concerns about their retirement security.

Emanuel said using this “home-rule” option offers a way to address the city’s pension problem given opposition from Governor Bruce Rauner.

“We are taking steps to wall ourselves economically and financially and fiscally off from Springfield – and specifically Governor Rauner’s chaos,” he said, referring to the state capital.

The Republican governor vetoed a bill in March that would have mandated the payment plan in state law, saying it would lead to a city tax hike and that a fix for Chicago needed to be part of broader, statewide pension funding changes. Those cost-saving changes are a factor in Illinois’ ongoing political impasse that has left the state without a complete budget for two years.

A second identical bill for Chicago was subsequently passed by the Democratic-controlled legislature but has not been sent to Rauner.

Molly Poppe, a city spokeswoman, said the mayor still wants to codify the payment plan in Illinois law, and needs the state to enact a bill requiring higher pension contributions from some employees.

Credit ratings for the nation’s third-largest city have tumbled into the low investment grade to junk levels due largely to an unfunded pension liability that stood at $33.8 billion at the end of fiscal 2015 for its four retirement systems.

S&P Global Ratings, which rates Chicago BBB-plus, earlier this year called pension funding “critical” to the city’s budget stability and said a delay in boosting pension contributions could lead to a downgrade.

By REUTERS

JUNE 28, 2017, 4:42 P.M. E.D.T.

(Editing by Matthew Lewis)

Kim Fetsko sat on the border of Island Beach State Park in New Jersey as a park ranger patrolled the coastline on Saturday. State lawmakers and Gov. Chris Christie were unable to agree on a budget, forcing the closure of state-run parks and beaches. Credit Tom Brenner for The New York Times
The New Jersey state government was forced to shut down at midnight on Friday, as the State Legislature remained locked in a standoff with Gov. Chris Christie that left them unable to agree on a budget plan.

The most immediate effect of the shutdown will be on those headed to state-run parks and beaches for the holiday weekend. Mr. Christie’s office indicated that those parks and beaches would be closed, although their municipal counterparts will remain open.

Mr. Christie declared a state of emergency and called for a special session of the Legislature for 11 a.m. Saturday. Essential government services were to continue operating.

Mr. Christie is demanding that the $34.7 billion budget negotiated by the Legislature, which is controlled by the Democrats, include a provision requiring that Horizon Blue Cross Blue Shield spend some of its reserve fund on public health initiatives — particularly his drug treatment initiative. Without that provision, Mr. Christie, a Republican, has threatened to veto any budget that lawmakers send him.

The Democrat-controlled State Senate had passed a form of the legislation Mr. Christie is demanding, but Vincent Prieto, a Democrat and the speaker of the State Assembly, said on Friday that he would “absolutely not” pass the Horizon bill.

In a news conference late Friday afternoon, Mr. Christie, who has six months left in office, tried to shift the blame to the Legislature.

“I’m upset because this will inconvenience the people of New Jersey,” Governor Christie said on Friday. Credit Michael Catalini/Associated Press
“I’m upset because this will inconvenience the people of New Jersey,” he said. “That’s the only reason I’m upset. Otherwise, legacy, all that other stuff, please. There will be a long list of things pro and con on my legacy.”

The government shutdown is the first in New Jersey in more than a decade, and it came as many in the state were heading to the Jersey Shore and its many state parks to celebrate Independence Day. The state’s casinos and racetracks will remain open, however, because of a law passed after a shutdown in 2006.

While the state will continue to provide emergency services and other functions that are deemed essential, it was less clear throughout Friday how other agencies would operate during the shutdown. The governor’s office sent a letter at midnight on Friday detailing which agencies would be closed and to what extent government operations would continue.

In addition to the closing of state parks and beaches, all public events within parks and historic sites would be canceled. Some rest stops and travel and tourism centers would be closed, as well as many administrative offices in major state agencies, from the Motor Vehicle Commission to the Department of the Treasury.

During the day on Friday, the state offered no guidance to anyone traveling to the parks and beaches, and calls by reporters to the relevant agencies went unreturned. Many settling in for the holiday weekend were left anxious, angry and in limbo.

Just before midnight, the Ocean County Sheriff’s Office announced that Island Beach State Park would be closed on Saturday because of the shutdown.

Earlier Friday, Sue Deck said that she, her husband and two children had come to the park in their R.V. and had planned to fish through the holiday weekend.

They were not pleased about the possibility of having to cut their trip short, she said.

“We will not be very happy, to put it nicely,” said Ms. Deck, 50, of Jackson, N.J., who added that the outing is a weekend ritual for her family. “This is our spot.”

Her sentiment was echoed by other beachgoers who flocked to the park to swim, sunbathe, fish and, in the case of Wayne Morley, photograph birds. Mr. Morley, a 74-year-old retired schoolteacher from West Creek, N.J., hiked three miles for a glimpse of a rare piping plover on Friday morning.

“It would be a huge hit to the state park system,” he said of a shutdown. “A real problem.”

Robert Hanley, 69, a retired dock builder, vented his anger at state politicians as he let air out of his pickup truck’s tires to better drive to his favorite fishing spot across the soft sand.

“I’ve been coming here for 18 years. I love it; it’s the best place in New Jersey,” he said. “If I can’t come here maybe I should go down to the governor’s mansion. I want to go down and find Christie and find where he’s spending his weekend.”

THE NEW YORK TIMES

By NICK CORASANITI

JUNE 30, 2017

Taxpayer protections don’t stop revenue growth

(Editor’s Note: The following is a modified version of a presentation given by James Hohman, assistant director of fiscal policy, as part of a debate hosted by the Midland Chamber of Commerce on June 19, 2017.)

So there are some things that I think the [Michigan Municipal League] and I are going to agree on. For instance, that unfunded liabilities for pension benefits and retiree health care are a huge cost driver for local governments. But we are not here to talk about the things we agree on but instead the things that we disagree on. So I am going to talk about our remarkably robust municipal finance system, while I assume that Anthony [Minghine] is going to talk about the broken municipal finance system.

In building the case for my opinion, I’ll emphasize one point most of all: From 2000 to 2007, Michigan went through a one-state recession. Michigan was down one out of every 11 jobs.

Then the rest of the nation joined us for the prolonged Great Recession. At the worst of it, Michigan had just one-third of the auto jobs that existed in 2000. Of course, not everything else in Michigan was as bad as that. Michigan didn’t lose two-thirds of its GDP. Nominal GDP was flat from 2000 to 2009, real GDP was down 13 percent, by far the worst in the country.

This meant major changes to government as well. State revenue was down 2 percent from 2000 to 2009. Now, that has to be taken with a grain of salt since lawmakers did a lot of spending outside of the budget. They ramped up refundable tax credit programs over that period, for instance, which lowers the total revenue available to spend in the budget.

Yet even with that, property tax revenue — the largest source of revenue for local governments — increased. While everything else was going down in Michigan, the state was still participating in the housing boom. That was in a much more muted way, but still an increase. Property tax revenues increased from $9.5 billion in 2001 to $14.1 billion in 2009, a 49 percent increase at a time when few other things were growing as much. Local governments only get a share of that, of course, but it’s a share of a growing pie.

So it’s not surprising that the discretionary payments that the state makes to local governments is down. The state’s total revenue sharing payments to local governments declined from $1.6 billion to $1 billion over the period. Note that the decline is far less than the $1.9 billion increase in city, village, township and county property tax growth over that period.

It was the same for the money that the state gives to state universities. The state was struggling and schools were not. The schools would be fine with fewer dollars — they’d just have to have to raise tuition more than otherwise. Hence, real cuts to state universities.

(And it was not as if the state even had the money to keep tuition from increasing if it wanted to, given the ever-inflating costs of higher education. But that’s a lecture for another day.)

Now things are different. Michigan is rebounding. It’s attracting people back to the labor force. Wages, personal income and production are all up.

That’s meant more money in the state budget and more money going to local governments. Revenue sharing increased from $1 billion to $1.2 billion.

State payments to local governments went beyond that. As part of the personal property tax package approved by voters in 2013, local governments are being reimbursed for the money they lose out on new exemptions. But the amounts approved in the bills over-reimburse governments, this year to the tune of $135 million.

Plus, there’s been more money for local roads and road commissions. The 2015 road package ramps that up another $700 million over time.

There is one lagging piece in the recovery: construction. Housing construction fell from roughly 4,500 units per month in 2004 to around 1,000 units per month from 2009 to 2012. And it’s been a slow recovery. We’re around 2,000 now and there is upward trend.

This is very important for local governments. New construction is exempt from Headlee calculations, which automatically lowers property tax mill rates when property values grow without approval of an overriding vote. The exemption of new construction is one of the reasons why local property taxes increased faster than inflation.

And it’s the reason that total property taxes are not back to their peaks. They are up from their troughs, though even with newer property tax exemptions. And perhaps this growth will continue.

So with these two general purpose spending sources — the larger property tax sources and the smaller revenue sharing — here’s what’s happened over the past 16 years. It’s kept up with inflation at a time when few things did before the recession, even as the state cut revenue sharing.

During the Great Recession, there was a reduction in local government revenue of 6 percent. Since then, it’s increased above the inflation rate.

Here’s my takeaway about our revenue system. It’s been remarkably robust through a historic change in the state economy. And it’s rebounding.

It’s unreasonable to expect that the taxpayer financing of our local governments should continue to increase regardless of the state of the taxpayers that support them. And during a time when there have been profound economic changes, our local governments have been remarkably protected.

I wanted to comment on a couple of the proposed policy changes. In the past, and I presume today, our friends at the Michigan Municipal League have recommended two things: give more state taxpayer money to local government and loosen constitutional restrictions.

As to revenue sharing, we are giving more of it in addition to other assistance.

But let’s talk about this further. If our friends at the MML are interested in making the case for more, they ought to say how much, what residents will get out of it, and where it will come from. There aren’t too many options for where it will come from — either from ongoing growth, from somewhere in the budget specifically, or from a specific increase in taxes.

I would also question some of the necessity. There are some important declines in government service cost drivers. Violent and property crime is down 30 percent from 2007 to 2015, according to data from the state police. In 2006, local agencies reported 35,000 fires. That was down to 22,000 fires in 2016. Those are impressive improvements in public safety, and ought to provide some very positive fiscal effects on local governments.

The next recommendation that has been made is a request to loosen constitutional taxpayer protections from the 1978 Headlee Amendment and the 1994 Proposal A.

There are two limitations on local government provided by the Headlee Amendment: when a community’s tax base is broadened through property value growth above inflation, tax millage rates get automatically rolled back. This prevented what was considered unfair and unpopular increases in the burden of government. But even this limitation still allows for above-inflation growth since new construction is exempt. Officials can also call for voters to approve overriding the automatic rollbacks. The other limitation is to require new millages to be voted upon. But both ensure that local tax policy carries direct popular support. And you should want your residents to directly support your tax policies. If you don’t, then we have to have a much different discussion about democracy in municipal government.

Proposal A prevents individual property assessments from increasing faster than inflation. This protects people on fixed incomes from being taxed out of their homes if their neighborhood takes off. But it also provides some general tax protections to individual homeowners that I imagine are both popular and preferred. While we hope that our homes increase in value over time, it’s rarely something that is in our direct control and people probably don’t want to be penalized much for it.

I think there are some ways that we can ensure that local governments have the resources to provide important services to residents. But I think the revenue side of the equation has been remarkably robust, while there are glaring improvements that need to be made on the spending side.

Mackinac Center for Public Policy

James M. Hohman on June 27, 2017 at 12:00pm

Cook County Commissioner Jesus “Chuy” Garcia filed an ordinance Thursday that would bar attorneys, law firms and other businesses that file property tax assessment appeals from contributing to the political campaigns of the county assessor.

He will introduce the measure when the board meets on July 19. The same day, Berrios is scheduled to appear before the full board during a meeting of the finance committee, where he’ll testify about assessments produced by his office.

Garcia, a former Chicago mayoral candidate, was among the first commissioners to push a resolution last week calling on Berrios to testify in the wake of the Tribune series “The Tax Divide.” The investigation documented deep flaws in assessments under Berrios that punished the poor while giving wealthy homeowners financial breaks.

The new measure, Garcia said, stems from findings in the series that revealed a steep increase in property tax appeals at a time when the bulk of campaign contributions Berrios collected came from property tax attorneys or other businesses involved in the appeals industry. As part of a collaboration with the University of Chicago’s Municipal Finance Center, the Tribune found that residential appeals make an already unequal system more unfair.

“The series the Tribune published in collaboration with other experts, including the University of Chicago, has raised many questions about the system,” Garcia told the Tribune. “I’ve been getting calls and questions from my constituents who appear to have been impacted. Just reading about how much money has been raised, it’s begging for answers. That’s why we’re looking forward to the assessor’s appearance.”

Garcia represents and lives in Little Village, a neighborhood where homes were routinely overvalued by the assessor, according to a Tribune analysis of more than 100 million property tax records. More affluent neighborhoods, meanwhile, were undervalued.

Known as regressivity, these types of disparities in the assessments led to inequities in property tax bills. That finding was documented by the Tribune’s analysis as well as the U. of C. study on appeals done in conjunction with the newspaper.

The county assessor has long been a relatively low-profile elected position. But among insiders, it is considered one of the most powerful political offices in the state, affecting the interests of real estate developers, law firms and wealthy individuals.

The ordinance limiting contributions to the assessor is among a growing list of headaches for Berrios, who is also the Cook County Democratic Party chairman.

State Sen. Daniel Biss, D-Evanston, a candidate for governor, also wants limits on contributions to local assessors from tax attorneys who appeal assessments as well as other changes to the state’s property tax system.

And, last week, the Tribune learned that the inspector general for Cook County has begun investigating issues raised in the Tribune’s series.

Berrios and Cook County Board President Toni Preckwinkle, also a Democrat, have agreed to bring in a third party to examine the county’s property tax system. The effort appears to include all aspects of the county’s complex system rather than focusing solely on the assessor’s office.

Contacted for comment on Garcia’s proposed ordinance, Berrios’ campaign spokesperson, Jacob Kaplan, said the assessor had not been contacted about the legislation and hadn’t seen a copy of it.

“We would be happy to review it, and we always follow the law,” Kaplan said in a written statement. “However, any ordinance, or, indeed, any legislation should apply equally to all officials — including the Cook County commissioners.”

Garcia, who said he shared the new ordinance with Commissioners Larry Suffredin and John Fritchey, said he was open to including other officials in the legislation but pointed out that “no one has a role as unique as the assessor’s office.”

by Jason Grotto

June 29, 2017

Chicago Tribune

While it’s not clear if there are sharks in the waters surrounding Puerto Rico, the island does have sharks of a different kind — ones that hail from mainland hedge funds, municipal bond funds and insurance companies that insure against bond defaults.

The human sharks have been circling Puerto Rico’s bonds, given that the island has more than $70 billion of debt that has defaulted or is in danger of doing so.

Some investors have been holding the island’s debt for years, but others have more recently snatched up Puerto Rico-related bonds for significantly less than 100 cents on the dollar. They want a debt restructuring that gives them a big fat profit.

The fighting is particularly fierce at the moment over what will happen to $9 billion worth of bonds that were issued by the Puerto Rico Electric Power Authority.

After several years of difficult negotiations, the authority, known as Prepa, reached an agreement in April with its creditors, which include the hedge fund Blue Mountain Capital, bond funds managed by Oppenheimer and Franklin Templeton and insurance companies like MBIA and Assured Guaranty, which are obligated to make up the difference between the negotiated recovery of the bonds and 100 cents on the dollar.

Like everything having to do with Puerto Rico and its finances, the deal cut between the power authority, which is owned by the municipal government, and its creditors is complex.

But the gist of it is that the creditors are hoping to get a present value recovery of around 75 cents on the dollar: new bonds with a face amount of 85 cents on the dollar, issued at a below market interest rate.

It’s great deal for the creditors, given what rough shape Prepa is in operationally. Puerto Ricans pay some of the highest electricity rates around — in the vicinity of 27 cents per kilowatt-hour. By contrast, New Yorkers pay around 13 cents per kilowatt-hour, one of the highest rates in the United States.

There are also problems with patronage and the high costs of labor, pensions and the fuel that powers the electricity generators. The authority’s physical plant is woefully in need of repairs and an upgrade, which are likely to cost billions of dollars.

The deal with the creditors does not address those serious problems at the authority. Nevertheless, it does somehow come to the conclusion that electricity rates on the island will decrease to 21 cents per kilowatt-hour. But there will also be a monthly surcharge on the bills of consumers and businesses in Puerto Rico that will be dedicated to pay the interest and principal payments on the newly issued debt.

In other words, if the restructuring deal as proposed is approved, Prepa’s customers — both consumers and businesses — effectively will be taxed in order for the hedge funds and other creditors that bought the bonds at a discount to make a profit. That’s a profit that cannot be renegotiated if Prepa again finds itself in financial distress down the road because the new revenue generated from the surcharge will be placed in a new, bankruptcy-remote entity for the creditors’ benefit.

Worse, as electricity use falls with the continuing exodus of the island’s residents and businesses, those that remain will pay higher and higher surcharges to meet the Prepa debt payments.

It is unfair to tax the people and businesses of Puerto Rico so that investors can make hundreds of millions of dollars in profit. It makes no sense to restructure the debt of the company without fixing its operational problems, or at least to have a restructuring that addresses both operational and financial problems.

Puerto Ricans deserve a restructuring plan that provides them with affordable electricity on a realistic future timetable. What is being proposed virtually guarantees that they will still pay unusually high rates for electricity so that a few hedge funds and bond funds can make a profit and so that the insurance companies can avoid paying up for their poor underwriting decisions.

The restructuring with the bondholders started before the June 2016 passage of the Puerto Rico Oversight, Management and Economic Stability Act, known as Promesa. That law allowed Puerto Rico’s other debts to be restructured in a way similar to how bankruptcy works in the United States, with a judge approving a deal that issues new debt based upon what a debtor can reasonably be expected to pay while also making necessary operational fixes, too.

The power authority’s creditors claim the company received a waiver exempting it from Promesa. That’s not fair, since the new act gives debtors like Prepa far more leverage to negotiate — leverage the power authority didn’t have years ago when it started the negotiation with its creditors.

The deal the authority cut with its creditors before Promesa should be junked. It’s a windfall for hedge funds and the insurance companies and it brutalizes the people and businesses of Puerto Rico. Prepa should restart the negotiation with creditors, under the auspices of the Promesa law, and make sure that any debt restructuring is paired with the operational fixes that the power authority desperately needs.

The creditors know they have a great deal for themselves. That explains why they are lobbying Republicans in Congress and are working overtime to persuade the independent Prepa board to approve the restructuring as is.

The creditors’ lobbying is having an effect. On June 15, Representative Rob Bishop, Republican of Utah and chairman of the House Committee on Natural Resources, wrote a letter to José B. Carrión III, the chairman of the financial oversight and management board of Puerto Rico, urging the board to approve the Prepa restructuring as is.

A day later, two other members of Congress, Representatives Nydia M. Velázquez, Democrat of New York, and Raúl M. Grijalva, Democrat of Arizona, urged Mr. Carrión to reject the restructuring. “Higher electricity costs are detrimental to the local economy, causing businesses both large and small to operate with reduced margins, leaving them less able to expand and hire new employees,” they wrote. The restructuring “will only accelerate the out-migration of residents and businesses. This downward spiral will deplete what is left of the island’s economic foundation,” they said.

It’s hand-to-hand combat. And the latest deadline to decide what to do is Friday. It could still be pushed back again.

Regardless, it’s clear that the deal as currently drafted is not fair to the people and businesses of Puerto Rico. It will keep electricity rates on the island at absurdly high levels and negatively affect the island’s ability to recover economically. It’s a recipe for future disaster, and all so that a few rich people can get even richer.

THE NEW YORK TIMES

By WILLIAM D. COHAN

JUNE 23, 2017

• Volume shows market remains liquid despite downgrade risk
• ‘Bonds are already trading as if below investment grade’

Illinois bond trading volume has increased amid a two-year long budget impasse that’s left the government at imminent risk of becoming the first U.S. state to have its bond rating cut to junk.

The average daily trade volume of Illinois debt has jumped to $616 million this month from $346 million in May, with $1.14 billion changing hands on Wednesday, the most since January 20, according to data compiled by Bloomberg. Daily trading three times this month has exceeded $1 billion, a level previously not breached since January.

The figures show that the bonds remain liquid despite widespread anticipation they’ll lose their investment-grade rating, which would prevent some mutual funds from purchasing them and could scare off the individual investors who are the biggest buyers of municipal bonds.

The yields on Illinois securities have risen since S&P Global Ratings and Moody’s Investors Service downgraded the state to one step above junk on June 1, with S&P warning that another cut could come around July 1 if a budget isn’t enacted. The state’s 10-year debt yields about 4.6 percent, or 2.8 percentage points more than top-rated bonds, according to Bloomberg’s indexes. That spread jumped to as much as 3.4 percentage points earlier this month.

“If you look at your benchmark maturities in block size, bonds are already trading as if below investment grade,” said Jeffrey Lipton, head of municipal research at Oppenheimer & Co. “The downgrade had already been baked in.”

Municipal analysts have said they don’t anticipate a massive sell-off of Illinois debt if the rating is cut because the move has been telegraphed well in advance, giving investors who want to reduce their holdings ample time to do so. Some of the biggest mutual funds that hold the state’s bonds have said the loss of an investment-grade rank won’t force them to dump the securities.

Lipton said he’ll be keeping an eye out for “any pick up in hedge fund interest when coming into a downgrade,” with the funds seeking to profit by snapping up steeply discounted bonds.

Bloomberg Markets

By Kristy Westgard

June 23, 2017, 12:37 PM PDT

Illinois may soon become the first state on record to have its bond rating cut to junk. Behind that financial trouble is an intractable political impasse and drama that’s been building for more than two years as Republican Governor Bruce Rauner and the Democrat-led legislature battle over how to close the state’s chronic budget deficits. Illinois is on track this fiscal year to spend over $6 billion more than it brings in, and public universities are reeling from the loss of state aid. On June 1, S&P Global Ratings warned that the loss of its investment-grade rating is likely unless action comes soon.

1. Can Illinois go bankrupt?

No. States aren’t eligible to petition U.S. courts to escape from their debts, the way cities such as Detroit have. While Congress amended the law to allow for Puerto Rico to do so, any effort to extend that to states is extremely unlikely, would face intense opposition and may not pass constitutional muster. When the idea was raised in Congress after the last big recession, it was roundly opposed by governors and U.S. lawmakers from both parties who said it would rattle the bond market and punish even financially prudent governments. Some saw it as a tool to gut the pensions of public employees.

2. Is Illinois the next Puerto Rico?

Its fiscal squeeze isn’t nearly as bad as the one gripping Puerto Rico, which in May agreed to use bankruptcy-like proceedings to slash its debt. A U.S. territory, Puerto Rico is contending with a shrinking economy, years of deficit borrowing and a declining population. It owes more than twice as much to investors as Illinois, a state with a larger, wealthier pool of residents and an expanding economy that’s vastly bigger. While Illinois’s financial challenges are significant, the crisis is largely politically self-inflicted.

3. What are the politicians fighting about?

Rauner and Democrats who control the legislature can’t agree on how to eliminate budget shortfalls that persisted after a temporary tax hike expired in January 2015, just as the governor took office. Rauner has pushed for any fiscal fix to include key elements of his agenda, such as property-tax curbs, an overhaul of the workers’ compensation insurance system to cut costs and legislative term limits. Democrats say they’ve passed compromise measures that incorporate some of his goals, but Rauner says they don’t go far enough to enact real change.

4. What will happen once Illinois is cut to junk?

The downgrade will likely force Illinois to pay higher interest rates whenever it needs to raise money in the financial markets. Mutual funds that are only allowed to own investment-grade securities would be unable to purchase its bonds, leaving it potentially more dependent on non-traditional buyers such as high-yield and hedge funds. That’s what happened after Puerto Rico was cut to junk in 2014. The stigma could also scare off some individual investors, who hold more than 40 percent of all municipal securities directly in their portfolios. Individual investors are sometimes prone to react to negative news reports, a phenomena municipal analysts refer to as “headline risk.”

5. Will there be a big selloff of Illinois bonds?

Probably not. Some of the biggest money-management firms that own Illinois bonds have said they could continue to hold them if the rating is cut. Matt Fabian, a partner at Municipal Market Analytics, said that funds that would have to sell their bonds have likely already done so, given that the downgrade is widely expected and was telegraphed in advance. Prices have already declined considerably since the last downgrades on June 1. The yields on Illinois 10-year bonds have jumped nearly half a percentage point to around 4.8 percent, some 3 full percentage points more than those on top-rated securities, according to data compiled by Bloomberg.

6. Is Illinois going to default?

Putting the state’s bonds just one step below investment grade indicates that’s a fairly distant possibility. S&P says that a BB rated borrower is “less vulnerable to nonpayment than other speculative issues,” though it faces major ongoing uncertainties that could undermine its capacity to make good on its debts. Despite the lack of a budget, debt service has continued to be paid and Illinois can draw on any unrestricted funds to ensure that it is. No state has defaulted since Arkansas did in the Great Depression.

7. Will this pressure Illinois into passing a budget?

Possibly. Rauner on June 15 called lawmakers back to Springfield to act on a Republican compromise plan before the new fiscal year begins on July 1. But a string of previous ratings downgrades didn’t break the logjam. Democrats and Republicans have each blamed the other side for the paralysis, leading to speculation that their impasse will continue through the 2018 elections, when Rauner can seek a second term.

Bloomberg Markets

By William Selway, Elizabeth Campbell, and Martin Z Braun

June 19, 2017, 9:01 PM PDT

INDIANAPOLIS (AP) — The state of Indiana has reached agreements to take control of a long-delayed section of the Interstate 69 extension three years after hiring a private developer to complete the work, the Indiana Department of Transportation said Friday.

The Indiana Finance Authority, the privately run I-69 Development Partners and the company’s bond holders reached settlement agreements in principle for the state of Indiana to assume control of the halfway-completed Section 5 between Bloomington and Martinsville by July 31, state officials said. The deal is subject to approval by the Finance Authority’s board.

Dan Huge, Indiana Public Finance director, said the deals will not increase the overall project cost to taxpayers and may provide some savings. The original cost of the project in current dollars was about $590 million over 35 years, and the new agreements and financing structure total about $560 million, he said.

Section 5, which is about 21 miles long, has been plagued by delays since work started on it in 2014. It was originally scheduled to be completed in October 2016, but the Finance Authority said in a notice to bond holders earlier this month that it estimates work on Section 5 to be substantially complete by Aug. 31, 2018.

“I am delighted for Indiana taxpayers that we have reached an agreement for the State to assume control and finish this project,” Governor Eric J. Holcomb said in a statement.

The Finance authority will issue lower-interest highway-revenue bonds that are expected to be rated AA+. Those will fully replace the developer’s private-activity bonds, which were originally rated at BBB-, Indiana officials said. I-69 Development Partners will provide an additional $12 million to bondholders and $50 million to the Finance Authority as part of the settlement, INDOT said.

A message seeking comment was left for I-69 Development Partners on Friday.

The agreements will release the state from future liabilities or claims with bondholders, I-69 Development Partners, the design-builder Isolux Corsan and insurance and surety companies, state officials said. However, the state will assume all future financial risk to operate, maintain and preserve the roadway over 35 years. The developer previously had assumed that risk.

Currently, more than 30 subcontractors are working on the roadway and that will continue, state officials said.

Subcontractors have repeatedly halted work because of payment disputes with Isolux Corsan.
Sections 1 through 4 of the I-69 extension between Evansville and Bloomington are complete. INDOT has started surveying work on Section 6 from Martinsville to Indianapolis.

By: Associated Press June 19, 2017 9:41 am

KEN KUSMER

Associated Press

On June 12, 2017, Texas Governor Greg Abbott signed the $217 billion biennium budget, but not before vetoing $120 million. The two-year budget is about $360 million higher than in the prior biennium (an increase of 0.2%).

Continue Reading

Jun. 19, 2017

S&P Global Ratings has placed its ‘AA+’ general obligation (GO) rating, ‘AA’ appropriation rating, and ‘A+’ moral obligation rating on the state of Alaska’s debt on CreditWatch with negative implications.

Continue Reading

Jun. 20, 2017

(Bloomberg) — If Illinois’ debt gets downgraded to junk status next month, it’s unlikely there will be a stampede to the exits by the largest bondholders.

The seven largest holders of the debt, who collectively hold about $5.9 billion of the $23 billion in outstanding state general-obligation bonds, according to data compiled by Bloomberg, all said they will not be forced to sell should the bonds fall below investment grade.

The firms, each of which run mutual funds, said they can own varying amounts of junk-rated debt and can exercise their discretion to avoid unloading bonds under fire-sale conditions.

Illinois’ debt was cut to one step above junk by Moody’s Investors Service and S&P Global Ratings on June 1, giving it the lowest ranking on record for a U.S. state, because of a clash between the Democrat-controlled legislature and Republican Gov. Bruce Rauner that has left the government without a full-year budget for nearly two years.

If the state doesn’t enact a plan that reins in its chronic deficit, S&P warned, Illinois will likely lose its investment-grade status around July 1.

Here are the seven largest holders of Illinois state debt, from largest to smallest. All derivatives, fully refunded and insured bonds are excluded from these calculations. Any zero coupon bonds are shown at accreted value.

Fidelity Investments: $1.77 billion

Fidelity, without addressing Illinois specifically, said in an email from spokeswoman Sophie Launay that its taxable and tax-exempt bond funds may invest in securities of less than investment-grade quality.

Vanguard Group: $1.44 billion

Vanguard spokesman Freddy Martino said in an email that the firm’s actively managed investment grade national municipal bond funds are allowed to have as much as 5 percent of assets invested in junk-rated securities and that currently the funds were not close to that threshold.

Nuveen Investments: $854 million

John Miller, co-head of fixed-income at Nuveen, said the company’s Illinois debt is held in funds that can own debt rated below investment grade. Some of the funds can have as much as 50 percent of their money in that category, he added.

​ Dodge & Cox: $561 million

The $50 billion Dodge & Cox Income Fund can own up to 20 percent in non-investment grade debt, spokesman Steven Gorski wrote in an email.

​ AllianceBernstein: $545 million​

Guy Davidson, director of municipal bonds at AllianceBernstein, said in an email his firm could continue to hold its Illinois bonds if they were cut to junk.

Wells Fargo Asset Management: $441 million

“Our fund prospectuses allow for flexibility to retain securities that fall below investment grade, specifically to reduce the need to pressure sales following a downgrade,” Lyle Fitterer, head of tax-exempt fixed income at Wells Fargo Asset Management, wrote in an email.

BlackRock: $334 million

Peter Hayes, head of municipal bonds at BlackRock, said his company could continue to hold its Illinois bonds if they were cut to junk.

Crain’s Chicago Business

June 21, 2017

• Distict pays penalty yields after choosing not to remarket
• Rising variable-rate debt costs recall 2008 credit crisis

Chicago’s school system is paying bond-market penalties similar to those seen during last decade’s credit crisis.

The junk-rated district, reeling from escalating pension costs and fallout from the Illinois budget gridlock, has been stuck paying punitive interest rates on $167.5 million of adjustable-rate bonds after choosing not to attempt to remarket the bonds. The rate on the bonds, which are supposed to stay extremely low because investors can resell them to banks periodically, jumped to a maximum 9 percent on March 1 from 4.64 percent the week before and has stayed there ever since, according to data compiled by Bloomberg.

The spiraling interest bills are reminiscent of the chaos that erupted in the wake of the Lehman Brothers Holdings Inc.’s bankruptcy in 2008, when state and local governments were stung by soaring costs after investors sold the variable-rate securities en masse just as banks were scrambling to raise cash. In Chicago’s case, though, it reflects how skittish investors have become about holding the debt of the cash-strapped school system.

“Chicago Public Schools has been unable to create a fiscally responsible budget and it relies on outside sources that, as we see, sometimes comes through and sometimes don’t,” said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which manages $6 billion of municipal bonds, including about $3 million of insured Chicago school debt. “That’s unsettling investors.”

The school district agreed this week to pay a rate of 6.39 percent — subject to adjustment — for a short-term $275 million loan from JPMorgan Chase & Co. to help make a pension payment and cover the cost of staying open through the end of the school year. The schools didn’t receive $215 million more in state aid to make the retirement-fund contribution after a measure was vetoed by Governor Bruce Rauner. Illinois has failed to pass a budget for more than two years as the Republican governor and Democrat-led legislature battle over how to close the state’s chronic budget deficits.

Michael Passman, a spokesman for Chicago’s schools, wrote in an email that the district is waiting for “a more opportune time” to remarket the bonds.

Bloomberg Markets

By Martin Z Braun

June 20, 2017, 11:21 AM PDT June 21, 2017, 11:58 AM PDT

Bloomberg clients: We’ll be doing a TOPLive Q&A on Thursday, June 22 at noon ET, moderated by Martin Z. Braun, in which you can ask Joe Mysak questions about the latest with Connecticut, its debt downgrades, budget deficit and more. You can watch it here. If you want to ask a question, please send to [email protected]

TULSA, Okla. — For years, residents in this cash-strapped city watched helplessly as thieves gutted 33 miles (53 kilometers) of streetlight wiring, plunging long stretches of roadway into darkness. The thousands of dollars criminals pocketed at off-the-books salvage yards wreaked millions of dollars in damage.

Now Tulsa is scrambling to make patchwork repairs to its decimated grid, opting for a quick fix to appease frustrated motorists, including 48-year-old resident Bill White, who says broken streetlights could become a liability for the city and a hazard for drivers, not to mention an eyesore.

“If I’m visiting the city from the airport, what’s going to be my first impression?” White said. “Am I still in the country?”

Copper thieves have pillaged lighting grids in cities large and small across the nation, causing municipal budgets to skyrocket. Law enforcement agencies estimated that the copper theft racket was costing cities $1 billion a year. At peak demand, copper went for around $4 per pound; it fetches about half that now. Scrap aluminum hovers around 40 cents.

The lighting dilemma in Tulsa also tells the larger story of the country’s deteriorating infrastructure due to decades of neglect, deferred maintenance and unwillingness by officials to make tough funding decisions. Many bridges and overpasses are obsolete; roads are pocked with potholes; sewer systems are time bombs. Some federal officials estimated it would take about $1 trillion to fix the mess.

“Tulsa has the problem that almost every city in the country has: Their maintenance costs are outside what they can afford, so they’re making piecemeal repairs just because of the cash flow,” said Sean Crotty, an assistant professor of geography at Texas Christian University.

Cities that can afford more expensive solutions have overhauled their lighting grids with solar or LED technology. Last year, Detroit completed a $185 million conversion of its archaic streetlight system to LED — light-emitting diode — after emerging from bankruptcy. The cost of an LED overhaul, though, could get “staggeringly expensive,” explained Crotty, referencing San Diego as one example.

“Just the pole itself on a highway is a shocking, expensive thing: $60,000 per post,” said Crotty, who’s also a faculty member in the university’s Center for Urban Studies.

In an effort to switch most of the lights back on by December, the city is using cheaper, less-durable aluminum wiring instead of more reliable copper and gambling that theft-deterrent doors and stickers affixed to light poles exclaiming in English and Spanish, “We Use Aluminum Wire” will be enough to thwart would-be criminals.

But what the state’s second-largest city is looking to save for the sake of convenience and immediacy could end up throwing its streetlight grid into chaos again, city officials and urban designers say.

“Even with aluminum, really, as long as these materials remain valuable, there’s no magic bullet,” said Terry Ball, the director of Tulsa’s streets and storm water department, which began tracking the thefts in 2014. “There’s no one approach you can take.”

There’s also no guarantee how long aluminum wiring will hold up, especially given Oklahoma’s wild weather swings. Many of the light poles themselves date to the 1960s and 1970s. One industry group says copper is still the better option, even if it costs more.

“Copper is the standard conductor metal against which all other conductor materials are measured,” said Thomas Passek, the president of the Copper Development Association Inc. “Although first-time cost may favor other materials, municipalities should consider the total cost of ownership.”

But in these dire budget times, Tulsa’s mayor, G.T. Bynum, said his city of about 400,000 people has little choice but to go with “the least expensive, still expensive option” to the tune of around $3 million.

Ilyas Bhatti, an associate professor of design and construction management at the Wentworth Institute of Technology in Boston, said cities such as Tulsa run the risk of having “the same problems, trading one precious metal for another metal.”

“To some, (criminals) may think (aluminum) is silver” when they cut the line,” Bhatti said.

In Tulsa, which allocates only $68,000 a year for streetlight repairs, the cost to outfit its 6,000 or so lights with LED would be somewhere between $12 million and $15 million, said Tracy Nyholm, the traffic operations planning manager.

Ball, the streets and storm water department director, said the only way the city will be able to afford better technology is through a sales tax, bond package or grant. And even then, those options could be at least five or more years off, he said.

Until then, Tulsa is gambling on a quick fix and hoping cheaper options come along sooner than later.

“The thing when you get into electronics, you buy it one day and the next day, it’s obsolete,” Ball said. “Two years from now, there may be a whole new light bulb we don’t even know about.”

By THE ASSOCIATED PRESS

JUNE 25, 2017, 11:57 A.M. E.D.T.

CHARLOTTE AMALIE, V.I. — The United States Virgin Islands is best known for its powdery beaches and turquoise bays, a constant draw for the tourists who frequent this tiny American territory.

Yet away from the beaches the mood is ominous, as government officials scramble to stave off the same kind of fiscal collapse that has already engulfed its neighbor Puerto Rico.

The public debts of the Virgin Islands are much smaller than those of Puerto Rico, which effectively declared bankruptcy in May. But so is its population, and therefore its ability to pay. This tropical territory of roughly 100,000 people owes some $6.5 billion to pensioners and creditors.

Now, a combination of factors — insufficient tax revenue, a weak pension system, the loss of a major employer and a new reluctance in the markets to lend the Virgin Islands any more money — has made it almost impossible for the government to meet its obligations. In January, the Virgin Islands found itself unable to borrow and nearly out of funds for basic government operations.

The sudden cash crunch was a warning sign that the financial troubles that brought Puerto Rico to its knees could soon spread. All of America’s far-flung territories, among them American Samoa, Guam and the Northern Mariana Islands, appear vulnerable.

“I don’t think you can say it’s a crisis, but they have challenges — high debt, weak economies and unfunded pensions,” said Jim Millstein, whose firm, Millstein & Company, advised Puerto Rico on its economic affairs and debt restructuring until this year and has reviewed the situation in Guam and the Virgin Islands. He called the combination of challenges in the territories “a recipe for trouble in the future.”

For decades, these distant clusters of islands in the Caribbean and the Pacific have played critical roles as American listening posts, wartime staging grounds, practice bombing ranges and even re-entry points for astronauts splashing down in the Pacific.

The military presence buoyed their small economies, and a federal tax subsidy made it relatively easy for them to issue bonds. Over the years, they have collectively borrowed billions of dollars to build roads, run schools, treat drinking water and fund hospitals.

Congress has generally relied on the Government Accountability Office to monitor the financial health of the territories, but it did not intervene over the years when the auditors brought back reports of “formidable fiscal challenges” or “serious internal control weaknesses” on the islands. Not, at least, until Puerto Rico went over the edge.

Now the G.A.O. auditors are back, re-examining the debt and repayment ability of each territory, amid concerns that other crushing debt burdens may have escaped notice. An agency spokesman, Fuller O. Griffith, said it would report by the end of the year on “federal options to avert the future indebtedness of territories.” It is not clear what those options will be.

“Washington can’t appropriately manage its relationship with the states, much less the territories,” said Matt Fabian, a partner at Municipal Market Analytics.

Even the states are not immune, despite their legal status as sovereigns. Illinois, stuck in political gridlock, is just days from entering its new fiscal year without a balanced budget, in violation of its own constitution. The ratings agencies warn that Illinois’s bond rating is in peril of being downgraded to junk. Once that happens, as the territories show, hedge funds move in and economic management becomes a series of unpleasant choices.

American Samoa, one of the smallest territories, lost one of the biggest engines of its economy in December when a big tuna cannery closed after being required to pay the federal minimum wage. Moody’s Investors Service then put the territory’s debt under negative outlook, citing its fragile economy.

In the Northern Mariana Islands, the depleted public pension fund was wreaking such fiscal havoc in 2012 that the territory declared it bankrupt, but the case was thrown out. The government then tried cutting all retirees’ pensions 25 percent, but the retirees have been fighting the cuts, and the fund is nearly exhausted anyway.

Even Guam, which enjoys the economic benefit of several large American military installations, has been having qualms about its debt after Puerto Rico’s default.

“Puerto Rico’s troubles provide a teachable moment for Guam,” said Benjamin Cruz, the speaker of the legislature, who recently helped defeat a proposal to borrow $75 million to pay tax refunds. “Spending borrowed money is too easy.”

But the debt dilemma is now most acute in the Virgin Islands — the three main islands are St. Thomas, St. Croix and St. John — where the government has been struggling ever since a giant refinery closed in 2012, wiping out the territory’s biggest nongovernment employer and a mainstay of its tax base.

Its troubles began to snowball last July, when Puerto Rico defaulted on most of its debts.

Last August, Fitch downgraded the Virgin Islands’ debt to junk, citing the territory’s chronic budget deficits and habit of borrowing to plug the holes, like Puerto Rico.

More downgrades followed, and in December, Standard & Poor’s dealt the territory a rare “superdowngrade” — seven notches in one fell swoop — leaving it squarely in the junk-bond realm. That scared away investors and forced it to cancel a planned bond offering in January.

The failed bond deal meant there was not enough cash to pay for basic government operations in February or March. As a stopgap, the territory diverted its workers’ pension contributions.

The Virgin Islands’ governor, Kenneth E. Mapp, said he had no intention of defaulting on any bonds.

“I didn’t ask anybody for debt relief, so don’t put me in the debt-relief boat,” Mr. Mapp said in an interview at Government House, the ornate seat of the territorial government, perched on a hillside overlooking the lush palms and bougainvillea of the capital, Charlotte Amalie, located on St. Thomas.

Still, Mr. Mapp is contending with many of the same problems that proved too much for Puerto Rico, driving it in May to seek bankruptcylike protection under a new law for insolvent territories, known as Promesa. Puerto Rico is now embroiled in heated negotiations over how to reduce its roughly $123 billion in debts and unfunded pensions.

When Congress drafted the Promesa law last year, it made it possible for the other American territories to seek the same kind of help.

Now, even though the Virgin Islands maintains it has no intention of defaulting on its debts — and has even given creditors new protections — the mere prospect of bankruptcy has spooked the markets, putting borrowed money beyond the territory’s reach and greatly limiting its options.

In something of a self-fulfilling prophecy, by giving territories the option to declare bankruptcy, Congress seems to have made such an outcome more likely.

“That innocuous provision, when sent to the bond market, said, ‘Here’s an escape valve for your debt obligations,’” said Mr. Mapp. “That changed the whole paradigm.”

The problem is that in Puerto Rico, Promesa is turning out to shred the many legal mechanisms that governmental borrowers use to make their debts secure. These include liens and allowing creditors access to the courts.

“Under Promesa, all the security structures are dissolving,” Mr. Fabian said.

Investors who thought they were secured creditors before now find themselves holding moral obligation pledges, which are not enforceable.

After the Virgin Islands’ bond offer fell through in January, the fuel supplier to its electric authority stopped shipments, saying it had not been paid; the authority was already in court with its previous fuel supplier, which had not been paid either.

Then came the House of Representatives’ plan to repeal and replace the Affordable Care Act. Mr. Mapp saw the federal money that the Virgin Islands relies on for its public hospitals going up in smoke.

Mr. Mapp scrambled. He reactivated a five-year economic plan that had been languishing and pushed higher taxes on alcohol, cigarettes and soft drinks through the legislature. He fought for a permanent electric rate increase. He got $18 million in new federal funds for health care. He struck a deal to tax Airbnb rentals.

He hired collection agents to go after delinquent property and income taxes. He scheduled auctions for delinquent properties. He hired a team to work on the pension system, which is in severe distress, with only about six years’ worth of assets left.

Until recently, the pension system was chasing high returns by investing in high-risk assets, like a $50 million placement in life viaticals — an insurance play that is, in effect, a bet that a selected group of elderly people will die soon. It also made loans to an insolvent inter-island airline, a resort that went bankrupt, and a major franchisee of KFC restaurants. The territory’s inspector general has declared the loans illegal.

Mr. Mapp said he hoped to start restructuring the pension system in the fall. Already, he said, the government had stopped diverting the workers’ pension contributions, as residents began filing their tax returns and payments in April. The tax payments eased the immediate liquidity crisis.

Recently, he met with the Treasury Secretary, Steven Mnuchin, to discuss possible incentives to attract tech business to the Virgin Islands. And he hopes to return to the capital markets.

“The fact that we didn’t complete the sale in January gives the impression that our market access is constrained,” said Valdamier O. Collens, the territorial finance commissioner.

Investors have nothing to worry about, said the governor. For decades, the Virgin Islands has used a lockbox arrangement that makes default all but impossible.

Merchants collect sales taxes and send the money to a trustee for the bondholders. Not a cent goes to the territorial government, including the pension fund, until the bond trustee gets enough to make all scheduled bond payments for the coming year.

“We have no access to the moneys before the bondholders are paid,” Mr. Mapp said. “These moneys are taken out of the pie before the pie is even in the oven. Our debt has never been in jeopardy.”

But in Puerto Rico, such lockbox arrangements have turned out to be one of the thorniest disputes of the bankruptcy proceedings. And Mr. Collens, the finance commissioner, is all too aware that the same dynamic could upend the Virgin Islands, too.

“We know that there has been a contagion effect with Puerto Rico,” Mr. Collens said. “The market saw that by the stroke of a pen, Congress could create a Promesa for the rest of the territories.”

THE NEW YORK TIMES

By MARY WILLIAMS WALSH

JUNE 25, 2017

MTA’s Transportation Revenue Bond Anticipation Notes, Series 2017B

Kroll Bond Rating Agency (KBRA) has assigned a short-term rating of K1+ to the Metropolitan Transportation Authority’s (MTA) Transportation Revenue Bond Anticipation Notes, Series 2017B in an approximate amount of $700 million. The Notes will be sold during the week of June 19, 2017.

KBRA also affirms the short-term rating of K1+ on the outstanding MTA Transportation Revenue Bond Anticipation Notes: Series 2017A-1; Series 2017A-2; Series 2015B-2e (Taxable); and Series 2015B-2f (Taxable).

MTA’s Transportation Revenue Bonds, Series 2017B (Climate Bond Certified)

KBRA has assigned a long term rating of AA+ to the Metropolitan Transportation Authority’s (MTA) Transportation Revenue Bonds, Series 2017B in an approximate amount of $500 million. The Bonds will be sold during the week of June 26, 2017.

KBRA also affirms the long-term rating of AA+ with a Stable outlook on the outstanding MTA Transportation Revenue Bonds, except for bonds backed by a letter of credit or liquidity facility.

To access the full report, please click on the link below:

MTA’s Transportation Revenue Bonds

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of AA with a Stable Outlook to the General Obligation Bonds Series 2017-A (Taxable) and the General Obligation Refunding Bonds Series 2017-B (Tax-Exempt) for the City of Los Angeles. KBRA has also affirmed the AA rating and Stable Outlook on the City of Los Angeles’ outstanding general obligation (G.O.) bonds. This rating applies to all of the City’s outstanding general obligation bonds except for bonds backed by a letter of credit or liquidity facility.

This rating is based on KBRA’s U.S. Local General Obligation Rating Methodology. KBRA’s rating evaluation of the long-term credit quality of local government general obligation bonds focuses on four key rating determinants:

• Governance, Management Structure and Policies,
• Municipal Resources Base,
• Debt and Additional Continuing Obligations, and
• Financial Performance and Liquidity Position.

To access the full report, please click on the link below:

City of Los Angeles G.O. Bonds Series 2017-A and 2017-B

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has assigned a AA long-term rating and Stable Outlook to the State of Wisconsin’s General Obligation Refunding Bonds of 2017, Series 1. Concurrently, KBRA has affirmed the AA long-term rating and Stable Outlook on the state’s outstanding general obligation bonds, excluding bonds backed by a letter of credit or liquidity facility, unless otherwise noted.

KBRA has also affirmed the K1+ ratings on the state’s general obligation commercial paper (CP) program, the general obligation (GO) CP 2016 Series A Notes, and the State’s GO extendible municipal commercial paper program.

Please click on the link below to access the report:

State of Wisconsin G.O. Refunding Bonds

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

In our view, Los Angeles’ $9.2 billion budget–which was adopted by the City Council on May 24, 2017 and signed by the mayor on May 25, 2017–is balanced and includes reasonable revenue assumptions paired with restrained spending.

Continue reading.

Jun. 12, 2017

S&P Global Ratings raised its long-term rating on the city of Los Angeles, Calif.’s outstanding general obligation (GO) bonds to ‘AA’ from ‘AA-‘ and raised its rating to ‘AA-‘ from ‘A+’ on the city’s outstanding lease revenue and judgment obligation bonds.

Continue reading.

Jun. 9, 2017

Pennsylvania Governor Tom Wolf signed a pension reform measure into law on June 12, 2017. While the bill represents a bipartisan effort to address the commonwealth’s long-term liabilities, it does not address the state’s acute budgetary stress.

Continue reading.

Jun. 13, 2017

S&P Global Ratings has placed its ‘AA+’ rating on the State of Minnesota’s general obligation debt on CreditWatch with negative implications.

Continue reading.

Jun. 15, 2017

Dive Brief:

• The Arizona Department of Transportation has reported that the public-private partnership (P3) constructing the $1.9 billion Phoenix-area Loop 202 South Mountain Freeway will deliver the project in late 2019, three years ahead of schedule, according to Equipment World.
• The P3’s private component, Connect 202 Partners — which is made up of Fluor Enterprises, Granite Construction, Ames Construction and WSP — restructured the 22-mile project so that the last section could be built all at once instead of as nine separate projects as the state originally planned.
• This is the first time a P3 as been used for a highway project in Arizona. Connect 202 Partners will also maintain the Loop 202 addition for 30 years.

Dive Insight:

​ADOT awarded the project to Connect 202 Partners in December 2015, but it was an unsolicited proposal in 2013 that pushed the agency to consider entering into a P3 for Loop 202. ADOT previously projected that, upon completion, the new highway would provide a $200 million economic benefit to the area by saving commuters 15 million hours of drive time every year.

This isn’t the only P3 to be inspired by unexpected pitches from the private sector. In May, Kansas City, MO, construction firm Burns & McDonnell sent city officials a $1 billion proposal in which they offered to finance a new Kansas City International Airport terminal. Two weeks later, international engineering and construction giant AECOM sent the city a letter suggesting integrated project delivery was the way to build a new terminal and asked to be part of the process.

Soon after, Kansas City officials decided to move forward with a P3 for delivery of a new terminal and issued a request for proposals for a 750,000-square-foot, $1 billion terminal and parking garage. Bids for the project are due next week.

In February, Los Angeles County Metrorail officials also reported that they had received several unsolicited P3 proposals from teams — including Skanska USA-Kiewit Infrastructure and Parsons Transportation Group-Cintra US Services — that wanted to deliver two major transportation projects, the Sepulveda Pass Transit Corridor and the West Santa Ana Branch Transit Corridor.. The agency said using a P3 could help bring the projects on line 14 to 15 years earlier than planned.

Government agencies are increasingly using P3s to take on large transportation projects, typically those with lengthy operations and maintenance components. Organizations like the American Road & Transportation Builders Association say P3s will continue to play a role in future projects, and they will also be a key component of President Donald Trump’s $1 trillion infrastructure plan.

However, not all P3 projects see such positive results. Earlier this month, Indiana Finance Authority officials said they want to take over a delayed and reportedly financially troubled highway project that is currently being constructed under a P3 structure. Completion of the Interstate 69 Section 5 project, which has been pushed back four times, is now set for August 2018.

Construction Dive

by Kim Slowey

June 13, 2017

• Offering statement for mall project has 36 pages of risks
• Pricing of sale, initially set for Wednesday, is postponed

Goldman Sachs Group Inc. delayed its sale of the American Dream.

The investment bank pushed off the planned pricing of $1.1 billion of unrated municipal bonds to finance the long-stalled shopping and entertainment center in New Jersey’s Meadowlands, about 10 miles (16 kilometers) west of Manhattan, according to three people familiar with the matter.

The deal for the project, named for the national belief that anyone can succeed, was supposed to price today. Speculative debt offerings sometimes take longer than initially planned because bankers need to drum up buyers and address the questions of would-be investors. Goldman Sachs spokesman Michael DuVally declined to comment. It may still come as soon as Thursday, according to Bloomberg data.

The Las Vegas-inspired mega complex will pair an indoor amusement park and water park, skating rink, ski slope, Ferris wheel, aquarium, and performing-arts theater with 500 stores, anchored by Saks Fifth Avenue and Lord & Taylor.

“This thing is going to be all things to all people,” said Robert Amodeo, head of municipals in New York for Western Asset Management. “I can’t recall another credit that looks like this.”

The debt offering — the largest of unrated municipal bonds this year — comes amid a steady drumbeat of headlines about the death of the American shopping mall. Credit Suisse Group AG predicts that one-quarter of them will close over the next five years as Internet shopping grows and wages stagnate. In addition, flows into high-yield municipal funds have been a modest $4.4 billion since the start of the year, according to Lipper US Fund Flows data, suggesting that the securities are being issued at a time when investors are becoming more risk averse.

The bonds will be sold through a Wisconsin agency, the Public Finance Authority, that specializes in acting as a conduit for risky debt. Borrowers for speculative projects sometimes forgo credit ratings rather than risk the taint of being labeled junk.

The 2.9 million square-foot complex is targeted to open in 2019, 15 years after prior developers broke ground. More than 20 million people live within 50 miles of the Meadowlands and the developers Triple Five Group are also “salivating” over the 62 million tourists who come to New York City, said Don Ghermezian, whose family controls the Triple Five Group. The billionaire family owns the Mall of America and the West Edmonton Mall.

“When we took the project over the last thing we wanted was to build another shopping center,” said Ghermezian at an investor presentation. “New Jersey doesn’t need another shopping center.”

Triple Five Group is issuing $800 million of bonds backed by payments in lieu of property taxes and $300 million that are secured by New Jersey grants it will receive if the project meets sales-tax revenue targets.

Investors purchasing the American Dream bonds will need to weather the potential pitfalls: The 1,136-page offering statement includes 36 pages of risks, ranging from whether the project will be completed on time to the “difficulty, expense, unfamiliarity and time-consuming nature” of getting to the center.

American Dream is across the highway from MetLife Stadium, the home of the National Football League’s New York Giants and New York Jets. Events at the stadium could adversely affect attendance.

Lisa Washburn, a managing director at Municipal Market Analytics, was skeptical that tourists coming to New York, with all of its culture, entertainment and shopping, would get on a train or bus to the Meadowlands, “a difficult to-get to destination in a relatively unattractive part of New Jersey.”

“Parking and transportation is really substandard in this area,” said Washburn.

If American Dream doesn’t make the full payment in lieu of taxes, bondholders can take over the property, according to Western Asset. Bondholders can also come out ahead if it’s a success: the securities also have a “turbo” feature, which means that they will be paid off faster if revenue comes in better than projected.

“The good part is you get prepaid so there’s less risk in your portfolio, this being a non-rated security and there’s some hair on it,” said Amodeo, the investor with Western Asset. “‘But if they’re cash-flowing more than their debt service requirement that’s an improving credit situation and you’d like that to stay outstanding for longer. It’s a Catch-22.”

The projected payments in lieu of taxes of $16.43 per square foot is comparable to the Mall of America’s taxes at $15.83, according to the official statement.

The total cost of the project is estimated at $2.8 billion, which will be covered by the tax-exempt bonds, $500 million from the developer, payments from tenants and nearly $1.7 billion in loans from JPMorgan Chase & Co.

Bloomberg

by Martin Z Braun

June 14, 2017

Fitch Ratings-New York-12 June 2017: Recent issues regarding a public private partnership project (PPP) to rebuild a portion of I-69 are unlikely to affect the state of Indiana’s credit profile, according to Fitch Ratings. Fitch recently downgraded the rating on private activity bonds (PABs) issued by the Indiana Finance Authority (IFA) on behalf of the developer (I-69 Development Partners LLC) to ‘CC’/Rating Watch Negative. The state is not obligated on those bonds. IFA recently disclosed that it is actively negotiating a state takeover of the project that would include redemption of the PABs and assumption of project completion risk. Fitch’s IDR for Indiana (‘AAA’/Stable Outlook) already incorporates the par amount of the outstanding PABs, and the estimated exposure for completion risk is well within the state’s capacity to absorb at the current rating.

Fitch’s recent rating actions on the I-69 PABs reflect various challenges, including substantial construction delays, unresolved disputes between the construction contractor and the IFA and the deteriorated credit quality of Isolux Corsan SA (Isolux), parent of the construction contractor Corsan-Corviam Construccion SA. This has all culminated in an inability to reach a global solution between all stakeholders on the project to avoid a default on the bonds.

As the grantor, IFA (acting on behalf of the state) has been heavily involved in the negotiations. In a recent disclosure, IFA indicated that it has offered to redeem the $240 million in outstanding PABs with the redemption to be funded by proceeds of a separate IFA issuance. IFA is the state’s issuer for appropriation-backed debt, which Fitch rates ‘AA+’/Stable Outlook, linked to the state’s ‘AAA’ IDR and Stable Outlook.. Under Fitch’s U.S. tax-supported rating criteria, the par amount of the PABs are already incorporated into the long-term liability burden analysis since the project is an availability payment based PPP with the IFA as the public sector counterparty. Fitch uses the par amount of debt issued by project companies as a proxy for a state grantor’s liability on availability payment based PPPs.

The IFA’s disclosure also indicated that based on current estimates, the gap between currently available resources within the transaction, and remaining construction costs and outstanding claims costs is $165 million. Fitch considers this amount, whether met through the state’s cash on hand, additional financing, or a mix, to be immaterial to Indiana’s credit profile.

At the end of fiscal year 2016 the state maintained available balances of over $2 billion. Fitch anticipates those levels, while down modestly for planned one-time uses this fiscal year, are still substantial and in excess of $1.5 billion. Fitch’s calculation of the state’s long-term liability burden includes $2.5 billion in debt (including $900 million for two availability-payment based PPPs). Indiana could absorb additional issuance of $165 million to fully fund the estimated additional costs of the I-69 project without changing Fitch’s ‘aaa’ assessment of its long-term liability burden.

Fitch will continue to monitor the I-69 PABs and IFA’s role in the project. Default on the PABs will not have a direct effect on the state’s IDR or appropriation-backed ratings, given Fitch’s criteria approach and Indiana’s credit profile as described above. Issues around this transaction may affect the state’s willingness to enter into future similarly structured PPP transactions. Fitch notes the state recently implemented legislation to increase various transportation taxes and fees, and to explore tolling of interstate highways, providing additional financing and funding methods for infrastructure needs.

Contact:

Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Stacey Mawson
Director
+1-212-908-0678

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: [email protected].

Additional information is available on www.fitchratings.com

Measure will move most future state and public school workers at least partly into 401(k)-style plans

Pennsylvania Gov. Tom Wolf signed a pension-overhaul bill Monday that the nonpartisan Pew Charitable Trusts says will be one of the most comprehensive state-level reforms in the U.S.

The compromise measure will move most future state and public school workers at least partly into 401(k)-style plans to help shore up the deeply underfunded pension system and shift market risk from taxpayers to employees. An independent analysis estimates the state will save $5 billion to $20 billion over 30 years, depending on investment performance.

“I think we have a road map to actually move out of the nightmare that we’ve been in for the last 20 years,” Gov. Wolf, a Democrat, said in an interview Monday.

Pennsylvania is one of many states, including New Jersey, Illinois and Connecticut, grappling with rising pension costs and huge unfunded liabilities—the gap between promised benefits and the funding available to meet those obligations. A 2015 Pew report found that the nation’s state-run retirement systems had a collective $968 billion shortfall.

Pennsylvania’s pension crunch dates to a 2001 move by the legislature to sweeten benefits, combined with subsequent underfunding by state government and school districts, and weak investment returns, particularly after the 2008 financial crash.

A 2010 law boosted the government pension contributions, and Mr. Wolf said the current bill represents a key second step.

Republicans and Democrats in the GOP-led state legislature hashed out the bipartisan deal along with the governor and his aides.

The Pennsylvania School Boards Association applauded the bill, saying school districts have faced growing financial pressure because legally required pension contributions have risen at an unprecedented rate.

Current and retired employees will remain under the traditional “defined benefit” pension that provides set retirement payments. The two pension systems for state and public school employees have about 863,000 active, vested and retired members. The new law won’t apply to state troopers or correctional officers.

Greg Mennis, director of Pew’s public-sector retirement systems project, said the bill breaks new ground.

“Our research indicates that this would be one of the most—if not the most—comprehensive and impactful reforms any state has implemented,” he wrote in a letter to lawmakers.

Critics of the legislation say it would do little to address the state’s roughly $62 billion in existing pension debt.

“Pension debt is the sole reason for doing pension reform and yet, ironically and bizarrely,” the bill doesn’t address existing unfunded liabilities, Republican state Rep. John McGinnis said during a recent debate. “We’re not making history, we are repeating it.”

Gov. Wolf said the criticism amounts to “crying over spilled milk,” adding: “A big part of that is because the commonwealth didn’t pay its bill and kicked the can down the road” until the 2010 change.

Republican House Speaker Mike Turzai acknowledged the state isn’t likely to see major savings for years under the pension overhaul, but said it is time to follow the private sector into 401(k)-type retirement plans, where the market determines future benefits.

“At a certain point you’ve just got to turn off the spigot, and you’ve got to move to where the private sector’s been,” he said in a video on his website.

His office says 18 states have enacted some 401(k)-style plan for state workers, and notes that the state’s Independent Fiscal Office estimates pension payments by Pennsylvania taxpayers will account for nearly 10% of the state’s general fund budget by 2019.

Gov. Wolf, who vetoed a 2015 GOP pension bill that he deemed unfair, said one key element of the current bill is a push to cut Wall Street investment fees by $3 billion over three decades. Pennsylvania has the fifth-highest fee levels of any state, according to Pew.

The union representing more than 65,000 Pennsylvania state employees said it can “live with” the bill because it lets current employees keep their plans and offers retirement security for new employees.

“Ultimately, this proposal may be as good as it gets with a Republican-controlled legislature that has constantly been going after pension reform,” said David Fillman, executive director of the American Federation of State, County and Municipal Employee Council 13, on the union’s website.

Starting in 2019, the retirement age for new employees will rise to 67 from 65.

Mr. Wolf said the new approach offers portability that better suits many workers. “There are a lot of people who might want to stay in public service four or five years,” he said, but it takes employees 10 years to vest in the state pension system.

The Wall Street Journal

By Scott Calvert

June 12, 2017 11:33 a.m. ET

New Jersey Gov. Chris Christie is betting that the lottery is the ticket to shoring up one of the state’s most vexing money problems: ever-growing obligations to the pensions for public employees.

The idea of linking the lottery to pensions has been around for years, but legislation backed by the Republican governor was introduced this week to make the lottery the property of the pension system for 30 years.

Analysts and advocates say the deal — an arrangement that would be unique to New Jersey — probably won’t hurt, but there’s not a consensus on how much it might help.

“Where it does provide tremendous relief is optically,” said Lisa Washburn, managing director at Municipal Market Analytics, a firm that analyzes government bonds. “The numbers look better on a whole lot of levels. Whether or not they’re truly better is questionable.”

Since Christie took office in 2010, the state has contributed more than $6 billion to retirement funds to which past governors have often skimped on payments — or skipped them entirely. Still, the gap between the money expected to be in the funds and that which is owed to retirees has only grown. By any measure, it’s among the biggest unfunded pension liabilities in the country.

Trying to solve the problem makes it harder for officials to expand other government services or make major tax cuts.

State Sen. Paul Sarlo, a Democrat sponsoring the legislation, called it an “intriguing” proposal that deserves to be debated. He said there’s a long-term benefit under the administration’s projections. “The next governor will have the huge benefit after five years of being able to reduce the pension payment,” he said.

Here’s how the measure that will now be debated by the state’s Democratic-controlled Legislature would work:

THE CLEAR BENEFIT — AND COST

There’s a consensus that the lottery deal would give the state a guaranteed stream of money coming in to make a portion of its pension contributions.

That income — a projected average of more than $1 billion annually — is a bit more than one-fifth of the $5 billion the state would have to annually contribute to fully fund the pension funds.

Christie’s budget proposal for the fiscal year that starts July 1 calls for about $2.5 billion in pension contributions — which would be a record.

But the lottery revenue isn’t found money: It is currently used to help pay for institutions including the state’s universities, psychiatric hospitals and a home for disabled soldiers. The state would still need to pay for those programs; officials say the move would not increase costs for taxpayers.

ADDRESSING THE UNFUNDED LIABILITY

The state treasurer’s office is promoting a second benefit of the lottery deal. This is the part Washburn and others are skeptical about.

Christie’s administration says the value of the lottery, assessed at $13.5 billion, could be used to offset the unfunded liabilities in the pension funds.

The administration says that would immediately shrink the gap — which it pegs at $49 billion, but some other calculations say could be as high as $136 billion.

Using the state’s evaluation of those unfunded liabilities of $49 billion, that would shrink the gap significantly and immediately. Under accounting rules, it would mean the state could recalculate how much it needs to pay into the fund to meet its obligations. That could mean the state would need to contribute less each year. A better pension position could result in a better bond rating for the state, allowing it to get more favorable borrowing rates.

Hetty Rosenstein, the New Jersey director of Communications Workers of America, the biggest union of state government workers, said she isn’t taking a position on the idea because she doubts it would reduce the liability anywhere but on paper. “At the end of the day, you can’t pay out pieces of the lottery,” she said.

Tom Byrne is a former chairman of the state Democratic State Committee who currently heads the Council on Investment, which oversees investment of pension funds. He says that the move could be helpful, despite the doubts of union leaders.

“Their brows might be a little furrowed,” he said. “They’re saying, ‘It’s not cash, so is this real?’ From an accounting standpoint, it is.”

By THE ASSOCIATED PRESS

JUNE 13, 2017, 3:52 P.M. E.D.T.

Public schoolteachers and other education workers in Connecticut should soon have an easier time figuring out how much they are paying for their retirement investments.

These costs should not be a mystery, yet they are often difficult to find and even more challenging to understand, particularly for employees in public schools. These workers are commonly sold expensive and complex investments inside their 403(b) plans, which are retirement accounts offered to educators, nonprofit employees and many hospital workers. Most of these plans leave employees more vulnerable because they are more lightly regulated than their better-known counterparts, 401(k) accounts.

A bill passed by the Connecticut Legislature tries to improve this situation by requiring all 403(b) retirement plan providers to disclose fees and compensation to state and municipal workers. The legislation, which unanimously passed in the state Senate last week, is headed to Gov. Dannel P. Malloy for his signature.

The bill was written by Matthew Lesser — a Connecticut state representative who leads the House banking committee — after he read a series of articles published in The New York Times that documented the problems in 403(b) plans.

The legislation — which will take effect in 2019, but could be changed to 2018 as language in the bill is completed — would require companies that operate 403(b) plans to disclose the charges and returns (after subtracting fees) for each investment offered. It would also require plan administrators to disclose fees paid to any person “who for compensation provides investment advice.”

The disclosures must be made to all plan participants when they enroll, and every year after that. Alternatively, a provider can follow federal disclosure rules — as part of the Employee Retirement Income Security Act of 1974 — that govern 401(k)’s and other retirement plans.

“This bill grants teachers the same fee and conflict-of-interest disclosures available to private sector workers having a 401(k) and allows the comptroller to make lower-cost plans available directly to local boards of education,” said Mr. Lesser, a Democrat.

Mr. Lesser was referring to a state-run 403(b) plan, overseen by the state comptroller, which includes several low-cost funds and a low administrative fee. He said the process of crafting the legislation brought a renewed focus on other ways to help school employees, which includes giving them access to low-cost retirement plans already in place and offered through the comptroller’s office. The comptroller already has the authority to market the state’s 403(b) and 457 plans — another type of retirement plan offered to state and local government workers — to school districts and other municipal employees.

A spokeswoman for Kevin Lembo, the Connecticut state comptroller, said his office was analyzing ways to make those plans more readily available. “I am hopeful that we can encourage more opportunities for municipalities, particularly school districts, to partner with the state,” Mr. Lembo said in a statement, “including through both the 457 and 403(b) plans.”

Joshua B. Gottfried, a financial planner in Connecticut who works with many teachers, has said he often tells them to avoid the 403(b) altogether, given the dismal lineup of available investments and the high fees.

He said the state-run plan is a better option. “Compared to many of the products we see in local districts, it does provide a better platform by offering teachers the benefits of low-cost funds and diversification,” Mr. Gottfried said.

THE NEW YORK TIMES

By TARA SIEGEL BERNARD

JUNE 15, 2017

ATLANTA — Next to Fabian Williams’s fresh mural and around a corner from a wasp-infested wall where he had painted another one, the graffitied doors along Flat Shoals Avenue seemed like an ideal canvas.

“So, I did this,” Mr. Williams said last week as he stood between a weave shop and a tax preparation office and a few feet from a recently finished aerosols-and-acrylics depiction of James Baldwin, the novelist and social critic.

The owner of the tax business loved the painting, which hardly seemed out of place in a city full of colorful visual tributes to cultural figures, civil rights heroes and local music. But to some here, the Baldwin mural is like many other works of street art on private property: potentially illegal because it is in public view and displayed without a series of government approvals detailed in a seldom-enforced 2003 city ordinance.

This spring, the city abruptly suggested that it might begin to carry out the ordinance, leaving Atlanta in a dispute of art and municipal zoning that turns on constitutional principles and quickly landed in court.

Atlanta is hardly the only American city increasingly marked by wall-size splashes of color and design. But it the latest place to contemplate whether and how it can regulate murals that can be reflections of neighborhood pride, artistic visions, and local debates over commercialization and gentrification.

Artists contend that the First Amendment is their surest shield against rules that municipal officials argue are necessary to prevent works that some find obtrusive.

“It can be an extremely politicized road,” said Olga Garay-English, a former executive director of the Department of Cultural Affairs in Los Angeles, where she was involved in a battle over mural rules. “Once you start bringing in elected officials to be arbiters of what is a mural and what isn’t, my opinion is that it’s very tempting to start looking at content when that’s really the first thing you’re not supposed to be doing.”

In Atlanta, where the streets can sometimes seem like galleries, the controversy ignited after a surprising threat to invoke a longstanding, but mostly ignored, ordinance that effectively requires murals on private property to receive approvals from five sources, including the mayor, the City Council and a representative of the Urban Design Commission.

City officials are also supposed to examine whether a proposed work will “constitute a traffic hazard or undue or dangerous distraction to motorists or pedestrians” and ensure that it is “not inconsistent with the City of Atlanta’s public art program.”

Violators risked jail time, but compliance and enforcement were sporadic. Then the city stunned muralists in April when it quietly introduced a sweeping amnesty program to allow artists to receive retroactive, streamlined certifications. Murals that remained unsanctioned and defied a June deadline, an Atlanta official warned, were “subject to removal.”

The dispute renewed a debate about street art that has percolated for more than a decade at neighborhood meetings, acts of protest and City Hall debates.

Mr. Williams, who said he thought the sudden shift was an effort to sanitize Atlanta’s culture and appease developers, joined other artists in going to Federal District Court.

“The city is not empowered to regulate or prohibit or criminalize, in this case, artistic expression on a person’s own property,” said Gerry Weber, a lawyer who represents Mr. Williams and who, in 2006, negotiated a settlement to a separate graffiti ordinance. “We’re not saying the city doesn’t have a significant amount of discretion in saying what art goes on public property.”

Mayor Kasim Reed said that there was “no city policy to remove artwork on private property” and that “any communications from the city suggesting otherwise were a mistake, and do not represent the city’s position.”

Mr. Reed, who was not in city government when the ordinance took effect and who represented performing artists when he was a practicing lawyer, said that Atlanta’s existing standard warranted reconsideration. But he said Atlanta did “need some standards to govern art on private property which can be viewed by the public.”

“Of course we must and will be mindful of the First Amendment and, consistent with the First Amendment, protect against offensive and harmful content,” Mr. Reed said. “At the same time, we can and should create space for artists to express themselves through their work, and bring more vibrancy and beauty to our city.”

The city has not filed its answer to Mr. Williams’s lawsuit, but lawyers are discussing a settlement.

“At the beginning, the champions of zoning did not emphasize that because of their fear that zoning would be struck down as too arbitrary because beauty is in the eye of the beholder,” said Michael Allan Wolf, a law professor at the University of Florida, who was written extensively about zoning and land use. “In reality, it cannot be denied that one of the reasons we have land use regulation is because it looks better, and a community that looks better is a healthier community, a more vibrant community.”

But Atlanta’s requirements, experts said, could trouble the courts if Mr. Williams’s case ever went to trial. The ordinance appeared “to be pushing the envelope,” Professor Wolf said, because it involves art on private property.

The city does not seem to want to test the professor’s prediction. A judge ordered an update on settlement negotiations by June 23, and Mr. Reed suggested that Atlanta could revise the city code “in the next few weeks.”

THE NEW YORK TIMES

By ALAN BLINDER

JUNE 15, 2017

Puerto Rico’s bankruptcy, with $74 billion in debt at stake, is the largest municipal default in history.

Despite the scope of the U.S. territory’s financial troubles, one of the bond business’ most respected analysts said Puerto Rico’s debt is unlikely to break the foundation of the muni market.

Lou Schimmel, 80, is a retired former executive director of the Municipal Advisory Council of Michigan and emergency manager in the Michigan cities Pontiac and Hamtramck. Today, Schimmel does turnaround consulting on a contract basis.

The buying of municipal bonds represents a loan from bondholders to government, and they should be paid back, Schimmel said. But that’s isn’t always possible.

“At some point, when [finances] get bad enough, you go to bankruptcy. Not all bankruptcies are the same, but they are the same in the sense that somebody’s not going to get 100 cents on the dollar.”

The restructuring case before U.S. District Judge Laura Swain includes $74 billion in debt and $49 billion in unpaid pension liabilities.

The recovery level for Puerto Rico’s 500,000 bondholders could range from 5 cents on the dollar to 75 to 80 cents on the dollar, depending on the type of debt, Puerto Rico Clearinghouse analyst Cate Long told Benzinga in a recent interview. Puerto Rico’s proposed 2018 budget dedicates one-fifth of its $9.6 billion in spending on pension payments, according to Bloomberg. The territory’s pension systems are projected to go broke by July, the wire service said.

Every stakeholder in Puerto Rico’s restructuring will take some kind of loss, Schimmel said.

“In Puerto Rico, it’s going to be more than a haircut. It’s going to be part of the scalp as well.”

Lessons From Detroit

Detroit’s July 18, 2013, filing for Chapter 9 bankruptcy with $18 billion in debt didn’t have the rub-off effect on other municipal debt that some expected, Schimmel said.

“It didn’t ruin everybody next door. You look at what you’re buying,” he said, adding that “each individual credit” should be evaluated separately.

“I don’t believe Connecticut is going to have a higher interest rate because Puerto Rican bonds are in trouble.”

In Detroit, the plan of adjustment approved Nov. 7, 2014 by U.S. Bankruptcy Judge Steven Rhodes incorporated a $800 million “Grand Bargain” package of public and private funds.

The money allowed the city to exit bankruptcy without selling pieces from the Detroit Institute of Arts to raise capital.

The appearance of a third party in the Puerto Rico case — for example, assist with pension shortfalls — wouldn’t surprise Schimmel.

“You never know in the situation who’s going to show up,” he said. “If there’s an outside source, all the better for the bondholders.”

‘There Was No Other Option’

When Schimmel served as emergency manager in Pontiac, a city of 60,000 located 30 miles north of Detroit, he paid off $87 million in debt.

Pontiac never declared bankruptcy, but Schimmel said the city had more options than Detroit or Puerto Rico.

“There was no other option,” Schimmel said of Puerto Rico’s May 3 bankruptcy filing under PROMESA, a restructuring law signed by former President Barack Obama.

“And that’s why the bondholders made the mistake of misjudging who they loaned money to. I’m on the side of the bondholder until it becomes impossible to get repaid.”

Schimmel compared a bond default to taking out a mortgage without any intention of paying it back.

“You honor it until it’s [not possible]. You’re going to have to break a promise.”

A unique challenge for governments in distress is that they must continue to provide basic services while a restructuring is underway.

“You’ve got to provide basic services above all else,” Schimmel said.

“I’ve closed economic development authorities. I’ve closed all sorts of things. You’ve got to have police, fire [and] public works. That was first.”

Benzinga

by Dustin Blitchok

June 07, 2017

In its latest session, the Texas legislature formally adopted significant pension reforms for the City of Houston (AA/Negative), which are a step in the right direction toward improvement in the city’s pension plans’ funded status and plan sustainability.

Continue reading.

Jun. 9, 2017

The creditworthiness of Kansas cities and counties remains stable in 2017, despite potential challenges that could stem from the state itself.

Continue reading.

Jun. 9, 2017

(Bloomberg)—Some of the top holders of Illinois debt aren’t bailing out, even as the state slides toward a junk bond rating. The reason? They say Illinois isn’t an economic basket case, just the victim of a political logjam that will one day be broken.

“Illinois’ problems are self-inflicted,” said Guy Davidson, director of municipal bonds at AllianceBernstein Holding, which owns about $550 million of the bonds. “They have the resources to pay their debt and we think they ultimately will.”

Illinois’ debt was downgraded June 1 to one step above junk by Moody’s Investors Service and S&P Global Ratings, giving it the lowest ranking on record for a U.S. state, because of a clash between the Democrat-controlled legislature and Republican Gov. Bruce Rauner that’s left the government without a full-year budget for nearly two years.

If the state doesn’t enact a plan that reins in its chronic deficits, S&P warned that Illinois will likely lose its investment-grade status around July 1, an unprecedented step for a state that would bar certain funds from buying its securities and has stoked speculation that some investors would sell off their holdings en masse.

Fidelity Investments is the biggest public holder of Illinois general-obligation bonds, with about $1.8 billion, according to data compiled by Bloomberg. Vanguard Group holds about $1.6 billion, and Nuveen Asset Management about $920 million. Three other firms—Dodge & Cox, AllianceBernstein and Wells Fargo Asset Management—hold more than $500 million each.

BlackRock, the world’s largest money manager, wouldn’t have to dump its Illinois bonds if the rating is cut, a move the company sees as a strong possibility, said Peter Hayes, head of municipal bonds at the company. Illinois accounts for less than 1 percent of its $122 billion holdings of state and local debt.

Like other money managers, Hayes sees Illinois as a state with a solid economy but serious political problems. “In that sense, it is very different from places like Detroit and Puerto Rico,” he said.

While Illinois has drawn comparisons to Puerto Rico, which collapsed into bankruptcy after the U.S. gave it legal power to escape from its debt, the differences are vast. Illinois’ bond debt is less than half the Caribbean island’s, even though the state’s population is more than three times as big.

Illinois’ $800 billion economy—more than 10 times the size of Puerto Rico’s—is growing, albeit slower than the rest of the nation. It has been adding jobs, sending its unemployment rate tumbling to 4.7 percent from more than 11 percent in the aftermath of the recession. State law requires the government to appropriate sufficient money to pay debt service and it can draw from all unrestricted funds to do so. Illinois has never defaulted.

Dropping the state’s already historically low rating to junk won’t unleash a wave of selling, said John Miller, co-head of fixed income at Nuveen, who oversees about $124 billion of municipals.

“Illinois’ taint is a fairly well known fixture of the municipal-bond market,” Miller said. “What’s happening in Illinois is not being replicated across other states.”

Investors have been steadily driving up the yields on Illinois bonds, relative to top-rated debt, as the state’s gridlock persisted. Its 10-year bonds yield 4.5 percent, 2.6 percentage points more than those on benchmark debt. That gap, a measure of the perceived risk, is the highest since at least January 2013 and more than any of the other 19 states tracked by Bloomberg.

Illinois’ plight reflects in part the expiration of temporary tax increases that helped the state deal with the toll of the recession. Facing a $13 billion deficit in 2011, it boosted the income tax from 3 percent to 5 percent. It dropped to 3.75 percent in 2015 and officials have been at loggerheads over how to eliminate the deficit ever since.

Pushing the tax back to 5 percent would go a long way to plugging the state’s ongoing deficit, said Lyle Fitterer, head of tax-exempt fixed income at Wells Fargo, where he oversees $40 billion. Fitterer, who has held an outsized allocation of Illinois bonds for five years, said a cut to junk could be the catalyst that compels politicians to act.

“The market will ultimately force them to pass a budget or they will lose access to the capital markets,” said Fitterer. “Something will have to give.”

While the money managers agreed now was not the time to sell, they were divided on whether Illinois might represent a buying opportunity.

“We would not be a buyer right now,” said BlackRock’s Hayes. “We don’t think you are being compensated for the risk at current spreads. There is more bad news to come.”

At AllianceBernstein, Davidson agreed there was no rush to buy more Illinois. “We might add more if the bonds get cheap enough after a downgrade,” he said.

Nuveen might add to its position, depending on how much more yields widen against other securities, Miller said.

Sophie Launay, a Fidelity spokeswoman, declined to comment. Steve Gorski, a spokesman for Dodge & Cox, declined to comment. Freddy Martino, a spokesman for Vanguard, said the company’s municipal specialists said it made sense to continue holding Illinois based on their confidence the state will find a path through the budget impasse.

June 07, 2017

• Trading volumes have edged up since unprecedented bankruptcy
• It may be easy to sell, but prices are still near record low

Puerto Rico bondholders who don’t want to roll the dice in the island’s record bankruptcy can still find a quick way out.

The volume of trading in Puerto Rico securities has ticked up since the island turned to a federal court last month to cut its $74 billion debt, showing that the market hasn’t seized up despite the U.S. territory’s defaults and the prospect of deep haircuts faced by investors.

A daily average of $267.4 million of commonwealth debt changed hands in the past 50 days, higher than the $195.9 million average seen over the past 200 days, according to data compiled by Bloomberg. That 50-day average reached $291 million on May 24, the highest since September 2015.

Puerto Rico’s bonds were for years among the most actively traded in the U.S. municipal-debt market because they were tax-exempt everywhere in the U.S., giving them a national base of buyers. While mutual funds spurned the debt once Puerto Rico’s credit rating was cut to junk more than three years ago, it still found buyers among hedge funds who wagered it wouldn’t go broke.

But it since has, and a federal board installed to oversee the government’s finances approved a fiscal plan in March that allocates less than a quarter of the $33.4 billion the commonwealth owes in principal and interest payments through fiscal 2026. After negotiations with creditors failed to advance, Puerto Rico on May 3 filed a form of bankruptcy protection created by Congress last year to allow the island to force its creditors to take losses in court.

Since that filing, the 50- and 200-day moving averages for daily trade volume have increased by 17 percent and 6 percent, respectively.

“It has become more clear that there isn’t much money,” said Matt Fabian, a partner with Municipal Market Analytics Inc. “Maybe Puerto Rico investors were too optimistic in what they thought the control board would do or what Puerto Rico could theoretically pay them.”

While the securities are easily sold, some are still hovering near record lows.

An index of commonwealth securities has fallen 6.7 percent since March 1, according to S&P Dow Jones Indices. General obligations with an 8 percent coupon that mature in 2035, the island’s most-actively traded fixed-rate security, changed hands May 25 at an average 58.9 cents on the dollar, the lowest since the bonds were first sold in 2014, Bloomberg data show. The debt traded Tuesday at an average 59.8 cents.

Bloomberg Markets

by Michelle Kaske

June 7, 2017, 2:00 AM PDT

City says there are concerns about fatigued drivers, traffic congestion and pollution

Uber Technologies Inc. and Lyft Inc. are in the crosshairs of the city of San Francisco, as the city attorney said the ride-hailing companies have received subpoenas to turn over four years of records on driving practices, disability access and service.

City Attorney Dennis Herrera said Monday the records from Uber and Lyft are needed in response to growing concerns about commuting from long distances before starting 12- to 16-hour shifts, potentially elevating the risk of accidents with other drivers or pedestrians. He said there are also concerns from residents about the impact the companies are having on traffic congestion and efforts to reduce greenhouse gas emissions, since the companies have a combined 45,000 vehicles on San Francisco roads.

The city said Monday that a public records request has also been sent to the California Public Utilities Commission for the information. He said the request to the commission seeks annual reports from Uber and Lyft dating back to 2013.

“No one disputes the convenience of the ride-hailing industry, but that convenience evaporates when you’re stuck in traffic behind a double-parked Uber or Lyft, or when you can’t get a ride because the vehicle isn’t accessible to someone with a disability or because the algorithm disfavors the neighborhood where you live,” Mr. Herrera said.

An Uber spokeswoman responded, “We’re more than happy to work with the city to address congestion, but it should be a comprehensive solution including construction, the city’s population increase, and the rise of online delivery services.”

Lyft said it “has always been focused on improving transportation access for people across all cities in which we operate. In San Francisco, nearly 30% of rides take place in underserved neighborhoods and 20% of Lyft rides begin or end at a public transit station. We also have a track record of working collaboratively with policy makers who regulate us, including the CPUC here in California, to ensure that our service complements existing transportation options.”

Uber is already engaged in a legal battle with the city about whether it has to comply with a city subpoena seeking contact information for drivers. The city sued Uber last month in San Francisco Superior Court, seeking records to determine whether the company’s drivers are properly registered to do business.

The company has resisted providing information, requesting that permission be sought from individual drivers before it is shared publicly.

Municipal, state and federal governments have turned up scrutiny on Uber and Lyft in recent years as the companies have become a larger part of the transportation picture.

Mr. Herrera said Uber and Lyft have 15 days to comply with the subpoenas.

The Wall Street Journal

By Bowdeya Tweh

June 5, 2017 4:15 p.m. ET

Write to Bowdeya Tweh at [email protected]

SAN FRANCISCO — San Francisco has issued subpoenas to Uber Technologies Inc [UBER.UL] and Lyft Inc for a broad scope of records on driving and business practices as part of an investigation to determine whether the ride-services companies have become a public nuisance.

City Attorney Dennis Herrera said on Monday he was seeking records to investigate whether Uber and Lyft fail to adequately serve poor neighborhoods and the disabled and whether their drivers create hazards on the road.

Herrera said the subpoenas sought four years of records from the companies, which are based in San Francisco and have an estimated 45,000 total drivers in the city. The sweeping request includes hours and miles logged by drivers, driver incentives, traffic infractions and city zip codes visited by drivers.

“No one disputes the convenience of the ride-hailing industry, but that convenience evaporates when you’re stuck in traffic behind a double-parked Uber or Lyft, or when you can’t get a ride because the vehicle isn’t accessible to someone with a disability or because the algorithm disfavors the neighborhood where you live,” Herrera said.

The subpoena sets up San Francisco and Uber for yet another legal battle, as the two are already locked in a fight over the city’s demands for drivers’ names and addresses. Herrera sued Uber last month to compel the company to comply with the data request, which Uber has said is an invasion of driver privacy.

Investigating whether Uber and Lyft are a public nuisance in the city is an unusual approach for San Francisco. An influx of cars driving for the two companies often clog city streets and block bicycle lanes and double-park while they wait for passengers, according to the city.

Such concerns reflect how large the two companies have grown in their hometown.

A Lyft spokeswoman said that 30 percent of rides in San Francisco take place in underserved neighborhoods, and 20 percent begin or end at a public transit station, underscoring its collaboration with public transit agencies.

“Lyft has always been focused on improving transportation access for people across all cities in which we operate,” said spokeswoman Chelsea Harrison.

Uber pointed to a report by the San Francisco Municipal Transportation Agency which says it has the goal of making ride-sharing one of the “preferred means of travel” by 2018. Spokeswoman Eva Behrend said Uber is “more than happy to work with the city to address congestion,” but that the city needs to also look at contributing factors such as construction and population growth.

Herrera added that the “long-distance” Uber and Lyft drivers who travel hours from the Central Valley and small communities elsewhere to find rides in San Francisco are a potential “threat” to public safety. They are on the road for such long shifts that they become drowsy, making the streets unsafe.

Herrera also requested four years’ of documents and data submitted by Uber and Lyft to the California Public Utilities Commission, the state agency that regulates ride-services companies and collects much of the data the city is looking for.

The commission did not immediately respond to a request for comment.

By REUTERS

JUNE 5, 2017, 5:03 P.M. E.D.T.

(Editing by Jeffrey Benkoe)

CHICAGO — Illinois general obligation bond prices plummeted and yields soared in the U.S. municipal market on Thursday, a day after a federal judge ordered the cash-strapped state to find more money to pay Medicaid providers.

Yields on bonds due in 2024 climbed to 5.15 percent in secondary market trading where the yield on a top-rated bond maturing that same year was only 1.42 percent, according to Municipal Market Data.

“It’s a real meltdown today,” MMD analyst Randy Smolik said.

Illinois already had the widest so-called credit spreads among the 50 states over MMD’s benchmark triple-A yield scale. The spread on its 10-year bonds widened to a record 335 basis points at the end of trading on Thursday from 280 basis points on Wednesday, MMD reported.

For 20-year bonds, the spread widened to a record 290 basis points from 256 basis points. This signals even higher borrowing costs for the nation’s fifth-largest state.

“This drop today should be a wake-up call,” said John Mousseau, director of fixed-income at Cumberland Advisors, adding that the market appears to be reaching a tipping point on bad news about Illinois.

Late on Wednesday, U.S. District Court Judge Joan Lefkow said Illinois’ action to make only minimal payments to healthcare providers in the Medicaid program for the poor and disabled due to an ongoing budget impasse does not comply with existing federal consent decrees.

While the judge did not specifically push Medicaid payments ahead of other state priorities like debt service on bonds and pensions, she set a June 20 deadline for Illinois and healthcare advocates to reach a deal resulting in “substantial compliance” with the decrees that stem from federal court cases filed in 1992.

That could be tough given the state’s nearly $14.8 billion unpaid bill pile as of Wednesday and $1.85 billion of monthly priority payments that flow to bonds, pensions, schools, payroll and other mandated areas that consume 90 percent of Illinois’ monthly revenue.

Illinois is limping toward the June 30 end of a second-straight fiscal year without a complete spending plan due to a political stalemate between its Republican governor and Democrats who control the legislature.

Lawmakers ended their spring session on May 31 without a fiscal 2018 budget deal, triggering downgrades that pushed Illinois’ credit ratings from S&P and Moody’s Investors Service to a step above junk.

By REUTERS

JUNE 8, 2017, 3:57 P.M. E.D.T.

(Editing by Chizu Nomiyama and Matthew Lewis)

DALLAS — Texas recently enacted two laws that state and local officials hope will stabilize the Dallas Police and Fire Pension and a similar one affecting Houston’s police, fire and municipal workers.

The state stepped in after the Dallas fund saw about 20 percent of its assets withdrawn in about four months last year, pushing it closer to insolvency.

Pension members say the impact of the new laws will be painful with reductions in retiree benefits and increases in worker contributions, but something had to be done to save the systems that had billions of dollars in unfunded liability.

The Dallas pension near-meltdown is part of a national malaise in public pensions. But the Texas cure may not work in many states, which have stricter laws on altering pension benefits.

By THE ASSOCIATED PRESS

JUNE 10, 2017, 11:36 A.M. E.D.T.

Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of A with a Stable outlook on the City of Chicago, Chicago Midway Airport Second Lien Revenue Bonds, with the exception of Series 2004C-1 and Series 2004C-2, Series 2004D, and Series 2014 C Bonds, which are backed by direct pay letters of credit.

Please click on the link below to access the report:

City of Chicago, IL Chicago Midway Airport Second Lien Revenue Bonds

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of AA- and revised the outlook from Stable to Negative on the State of Connecticut’s outstanding general obligation bonds. This rating applies to all of the state’s outstanding general obligation bonds, but excludes bonds backed by a letter of credit or liquidity facility. The state has approximately $19 billion of general obligation debt outstanding.

Please click on the link below to access the report:

State of Connecticut General Obligation Bonds

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Jacksonville, Fla.’s city council unanimously approved legislation finalizing its pension reform package late last month. In our view, the overall reform package represents an improvement to the previous pension framework, but we believe there are still some inherent risks with this strategy that largely cancel out its immediate benefits to Jacksonville’s credit quality.

Continue reading.

May 24, 2017

During its latest session, the Texas legislature formally adopted pension reforms for the City of Dallas (AA-/Negative), which is a first step in stabilizing the city’s police and fire pension plan and addressing some of the structural issues that led to rapid declines in the pension’s funded ratio over the past year.

Continue reading.

Jun. 1, 2017

The city is on the brink of making a speedy turnaround. Many worry that the tough financial decisions it took to get there could reverse some of its political progress.

After a quarter-century of being branded by the state as “fiscally distressed,” Scranton, Pa., is the closest it’s ever been to shedding that label. If its finances remain stable, the city is expected to exit the state’s Act 47 distressed cities program — which it entered in 1992 — in the next three years.

What makes the news remarkable is the tailspin that Scranton was in just a few short years ago. When Mayor Bill Courtright took office in 2014, he inherited a city that had balanced its budget for five straight years using onetime revenues and deficit financings. “In early 2014, everyone wrote us off,” says Courtright. “It was like we had a disease.”

But thanks to what observers are calling a new era of political cooperation between the mayor and council, Scranton has made considerable progress. City officials have approved several tax increases aimed at balancing the budget, including a hike in property taxes and garbage fees. Those, combined with a new commuter tax, have injected $16.2 million in new annual revenue into the $90 million general fund.

Courtright credits a team that stubbornly adhered to a financial recovery plan devised with the help of a financial consultant. The mayor, also a former councilmember, says he and the current council have communicated better and worked to move beyond the infighting that dominated public meetings in previous years. “We knew we had to change the image between past mayor and past council,” he says. “We knew we wouldn’t get the financial community to go along with us if we couldn’t cooperate amongst ourselves.”

But this kind of swift financial progress usually comes with a political cost. To understand the political implications, one must first understand how Scranton came to its current state.

Making Tough Choices

Facing a new state law in 2014 that would have placed the city in receivership if it didn’t make progress, Scranton conquered several key financial demons in recent years.

For starters, the city reached a settlement with police and fire unions over a multimillion-dollar back pay lawsuit first filed more than a decade ago. The Pennsylvania Supreme Court sided with the unions in 2011, but the city couldn’t afford to pay the initial $24 million settlement and instead let the award collect interest.

Last year, Courtright announced the city had agreed to pay the unions most of what it owed — now $30 million — in exchange for reforms to the city’s troubled public safety pension. The biggest concessions were that workers would increase their pension contributions over time and that the pension funds would be managed by a third-party professional administrator. The administrative transfer also included more stringent guidelines for determining whether an employee is eligible for a disability pension.

In the name of budgetary stability, the city has unloaded a couple of albatross assets as well.

Officials negotiated a long-term lease of its parking authority, which had gone into receivership after the default in 2012 because of political infighting between the council and previous mayoral administration. Last year, the city entered into a lease concession agreement that turns over the system’s day-to-day operations and long-term maintenance to the nonprofit National Development Council and ABM, a parking operator. After they pay off the parking authority’s outstanding debt, ownership of the system will be returned to the city.

The final deal has perhaps been the most controversial and may even be responsible for upending the political harmony the city has achieved. Late last year, elected officials approved the sale of the city’s sewer authority to the private company Pennsylvania American Water for $195 million. The city expected to net $95 million from the sale, but various costs, such as easement acquisition, reduced the net to $83 million.

To Courtright, the sale is something of a crowning achievement. Selling the system gave Scranton cash to help pay off some of its pension and high-interest debt. It also unloaded an EPA-required $140 million upgrade to the system to protect the Chesapeake Bay onto Pennsylvania American Water. The requirements would have meant a 5 percent rate hike each year for 25 years. Instead, the sale stipulated the private company could raise rates no more than 1.9 percent on average for the first 10 years.

A Political Cost?

That deal, however, has not been cheered by everyone. Councilmember Bill Gaughan says it was ill-advised and lacked transparency. He points to a closed-door meeting in February with Council President Joe Wechsler, Councilmember Wayne Evans and Jason Shrive, the new sewer authority director, that discussed the sewer’s lower price tag.

Adding fuel to the fire was a report in early May by local ABC television affiliate, Newswatch 16. The station reported that the sale’s fees were a whopping $3.1 million charged by 50 different attorneys.

The controversy has taken its toll: In Scranton’s Democratic primary election, Wechsler failed to win nomination while Gaughan sailed ahead easily.

Jean Wahl Harris, a professor of political science at the University of Scranton, said that while the council president voiced concerns about the sale, he wasn’t as adamant as others. “I’m not sure why Wechsler was picked out,” she says, “except that the other two [incumbents] spoke up a little more against the mayor and called for accountability in the sewer sale.”

Many worry that the fallout could affect the political cooperation the city has achieved. Still, most agree that Scranton — politically and financially — is in a much better place than it was just a few years ago. “The times following the political meltdown [in 2012] called for someone willing to look at a different direction and someone with a different style,” says Gerald Cross, executive director of the Pennsylvania Economy League, Scranton’s recovery coordinator. “I think we have the right people in the right place.”

“They used to be insane,” Cross adds of those council meetings in which tensions between elected officials and the public got so high that metal detectors were installed at one council meeting in 2007. “But it’s hard to argue now with balanced budgets and progress downtown. The budget is stable, now we have to strive for sustainability — and that’s all very boring.”

GOVERNING.COM

BY LIZ FARMER | MAY 30, 2017

• Starting Thursday, three-fifths majority needed to pass budget
• State at risk of being first cut to junk since at least 1970

Illinois leaders will blow past a deadline that will leave the state careening toward the third straight year without a budget.

The Illinois House isn’t voting on a budget on Wednesday, which means the gridlock-prone government won’t pass a spending plan by midnight. That means approving a budget — a usually routine task that has eluded the state for 700 days — will become even more difficult because a three-fifths majority will be required. Democratic lawmakers, who control both chambers, and Republican Governor Bruce Rauner have repeatedly failed to agree on how to solve chronic budget deficits worsened by the expiration of tax hikes in January 2015.

“We are probably approaching that point of impaired ability to function at basic level,” said John Humphrey, the Chicago-based head of credit research for Gurtin Municipal Bond Management, which oversees about $10.1 billion of state and local debt and has steered clear of Illinois. “We’ve already probably passed that point. We haven’t seen this in a modern state before.”

The self-inflicted crisis has left the fifth most-populous state with a record $14.5 billion of unpaid bills, ravaged entities like universities and social service providers that rely on state aid and undermined Illinois’s standing in the bond market. Unless a surprise deal emerged before midnight, it’s increasingly likely that Illinois enters its third fiscal year on July 1 without a budget.

Democratic House Speaker Michael Madigan, who controls much of the legislative agenda, blamed Rauner for “holding the budget hostage” to his agenda, and said in an emailed statement Wednesday that Democrats will keep working on a budget and hold public hearings, starting in Chicago on June 8.

In turn, Rauner criticized the Democrats, calling the failure a “complete dereliction of duty by the majority in the General Assembly” and said there should be no tax hikes without a property tax freeze and local control of those levies.

Bond-rating companies have warned of further ratings cuts, signaling that Illinois could be the first state since at least 1970 to lose investment-grade status.

Investors have long punished the state for its financial woes, and the penalty has only gotten worse amid the impasse. Its 10-year bonds yield 4.4 percent, 2.5 percentage points more than those on top-rated debt. That gap — a measure of the perceived risk — is the most since at least January 2013 and more than any of the other 19 states tracked by Bloomberg.

Rauner, who in 2015 became the first Republican to lead the state since 2003, wants any spending plan to be tied to his key priorities, such as property tax-freeze. The Senate on Tuesday approved measures that would lock most local real estate levies in place for two years, but Republicans said they didn’t go far enough.

In the meantime, Illinois is spending more than it’s taking in because of consent decrees, court orders and other appropriations that have kept the government from shutting down despite the lack of a budget. Its current-year operating deficit is about $6 billion, Moody’s Investors Service said in a March report.

Moody’s and S&P Global Ratings have warned that Illinois could be downgraded deeper if no budget is enacted. The companies rank the state at Baa2 and BBB, respectively. That’s two levels above junk.

The unpaid bills are also adding to the fiscal squeeze. The comptroller has estimated that the state will owe at least $800 million in interest and fees on overdue bills by the end of June.

That backlog is “headed in the direction of being a factor that just by itself really threatens the sort of financial foundations of the state,” Ted Hampton, Moody’s lead analyst on Illinois, said in an interview, citing litigation from those demanding payment. “There is kind of an uncertain but very real legal and political limit to the state’s ability to keep deferring payments.”

A group of school superintendents from districts statewide held a press conference in the Illinois State Capitol on Wednesday, calling for the passage of a full-year budget, instead of just a temporary stopgap, and changes to the school funding formula. Illinois owes districts $1.1 billion, which is “unconscionable,” said Tony Sanders, chief executive officer of the state’s second-largest school system, in Elgin.

Despite the gridlock, Illinois hasn’t missed any bond payments and state law requires it to continue making monthly deposits to its debt-service funds. Still, the fighting has impeded any progress on bolstering a state retirement system that has more than $129 billion of unfunded liabilities — a source of stress that has helped drive its rating down.

The Clock Is Ticking

State leaders still have the month of June to find an agreement before the start of fiscal year 2018 on July 1. Last year, lawmakers approved a six-month, stopgap budget to keep schools open and operations going.

So far, consensus has proven elusive. The Illinois Senate approved a spending plan on May 23, with only Democratic votes, that raised income taxes and expanded the sales tax levy. It still needed House approval as of Tuesday afternoon.

Rauner has called for freezing property taxes before raising any income tax increase is considered, but he rejected the two-year property tax freeze that the Senate approved Tuesday. Eleni Demertzis, a spokeswoman for Rauner, called the move “a phony two-year freeze riddled with holes.” It exempted Chicago, and Rauner had pushed for a lengthier time frame.

The impasse is decimating social services agencies that help the most vulnerable citizens, including school children, the elderly and the mentally ill, according to a coalition of groups including the Civic Federation, which tracks the state’s finances.

“Forty-nine other states would never try this experiment,” Laurence Msall, president of the Civic Federation, said in a press conference last week. “Only Illinois, which has seen its credit rating crumble, which has seen its social service infrastructure weaken, which has seen its higher education punched into the stomach in terms of what its future looks like, would try this experiment. It’s not working. We have to have a state budget to move forward.”

Bloomberg

by Elizabeth Campbell

May 31, 2017, 5:23 AM PDT May 31, 2017, 3:13 PM PDT

• Voters approved debt issue for school construction in November
• It may be more than a decade before some districts get funds

A potential deluge of bond sales for California schools may be more like a trickle.

Although state voters in November approved borrowing $9 billion for school construction, the sales may span more than a decade, according to the nonpartisan Legislative Analyst’s Office. Democratic Governor Jerry Brown, who opposed the debt measure, wants to tighten requirements on eligibility and oversight that kindergartens through high schools must adhere to before bonds are sold for their projects.

To prevent delays, advocates are lobbying legislators to limit the changes to be included in the budget due June 15, said Dennis Meyers, assistant executive director of governmental relations for California School Boards Association. About $600 million of general obligations authorized by the voters would be sold in the fiscal year starting in July, according to Brown’s finance department. Supporters of the debt issue want the funds raised at a faster pace.

“The worst-case scenario is that the bond funds would be stalled indefinitely,” said Meyers, who argues that it would hurt the creation of construction jobs. “Our goal is to let legislators know the importance of getting these funds out the door under current law and to act quickly.”

A subdued approach to the debt sales may help support prices of bonds issued by California, the biggest issuer in the $3.8 trillion municipal market. The state’s securities have gained as the booming economy erased once massive budget shortfalls, allowing Brown to pay down debt built up during previous downturns. California’s 10-year securities yield about 2.16 percent, or just 0.2 percentage point over benchmark debt, a third of the premium investors demanded four years ago.

The state has seen its credit rating rise to the highest in more than a decade, in part because of the decision to pay down debt and sock away more into its reserves. California’s outstanding general-obligation and lease-revenue debt has declined to $84 billion in May from about $86 billion in June 2016, according to the treasurer’s office.

Even with rates low, investors have clamored for bonds from issuers in California as the amount of maturing securities outstrips new debt. About $1.3 billion in California bonds are expected to be sold within 30 days, down from about $4.5 billion in the middle of last month, according to data compiled by Bloomberg.

The governor’s approach to the school bond sale would prevent a surge in the supply of debt. The regulations would ensure proceeds are being spent appropriately, considering a state audit last year that showed that previous bond funds were used on ineligible items such as golf carts, said H.D. Palmer, a spokesman for Brown’s finance department.

“We will be able to put in place a process that provides further guarantees to the taxpayers who approved this multi-billion dollar bond authorization that these dollars are in fact being spent in the manner in which they were told would be spent,” Palmer said.

Californians embraced the first statewide education bond in a decade despite Brown’s objection that it will benefit richer school districts with stronger tax bases. Under the program, school districts raise local dollars and apply for matching state dollars for projects. Low-income communities can also request grants.

Of the $9 billion, $2 billion is dedicated to community colleges and the rest for K-to-12 schools. A delay in bond funds could see a court challenge from those who seek expeditious action since the voters indicated they want the bonds sold, according to the Legislative Analyst’s Office. It encouraged lawmakers to adopt a plan with a quicker pace.

Some of the provisions the administration is proposing are “changing the rules mid-stream” and could set precedent by allowing any funds that the state may seek to claw back from school districts to come from aid for operating costs, said Meyers, the school board association lobbyist.

The measures are clarifications of existing regulations, Palmer said. The passage of the bond didn’t “reverse the administration’s concerns and focus on adopting additional reforms.”

Bloomberg

by Romy Varghese

May 31, 2017, 2:00 AM PDT

Hartford, the beleaguered Connecticut capital, may have its credit rating cut deeper into junk by Moody’s Investors Service amid uncertainty over whether the state will extend a lifeline to help the city close a $50 million budget shortfall.

Moody’s rates Hartford’s $550 million of general-obligation bonds Ba2, two steps below investment grade. The company said Tuesday that it’s conducting a 90-day review of the city that will take into account how much Connecticut, which is facing a two-year deficit of about $5 billion, can give Hartford in the budget to be adopted over the next several weeks. Connecticut was downgraded by all three major bond rating companies earlier this month, after plummeting income-tax collections widened the government’s deficit.

“Unable to generate significant incremental revenues internally or to cut expenses further, the city is primarily relying on increased state aid to close its budget gap,” Moody’s wrote in a report. “At the same time, the state of Connecticut’s fiscal position has become weaker over the last year.”

Hartford’s ability to increase property-tax collections, a key source of revenue, is constrained by its already high levies and sluggish real estate market, Moody’s said. About half of the property in Hartford is tax-exempt. A proposal by Governor Dannel P. Malloy to allow municipalities to levy a property tax on hospitals hasn’t gained traction in the legislature.

Cost-cutting opportunities in the city are limited because the city has already gone through previous rounds and labor negotiations haven’t led to concessions, Moody’s said.

The city’s large deficits are driven by escalating costs for debt service, pensions and health care, without sufficient revenue growth to offset them. The city has considered soliciting proposals from law firms that specialize in municipal bankruptcy, according to the Hartford Courant newspaper.

“While reflecting prudent contingency planning for a shortfall in state funding without a viable alternative solution, we believe it also indicates increased willingness by the city to entertain bankruptcy as a tool to address its growing fiscal pressures,” Moody’s wrote.

Bloomberg

by Martin Z Braun

May 30, 2017, 4:00 PM PDT

• Goldman Sachs Group Inc. will manage $800 million bond issue
• American Dream features indoor water and amusement parks

The Canadian developer building the long-stalled mega-mall in New Jersey’s Meadowlands plans to sell $800 million of tax-exempt municipal bonds next week to help complete the construction of the complex begun more than a decade ago.

Goldman Sachs Group Inc. is managing the deal, the largest sale of unrated municipal bonds this year, for mall owner Triple Five Group, run by the billionaire Ghermezian family. The bonds are backed by payments in lieu of property taxes and will be issued through a Wisconsin agency, the Public Finance Authority, that specializes in acting as a conduit for risky debt. Borrowers for speculative projects sometimes forgo credit ratings rather than risk the taint of being labeled junk.

The sale may benefit from a rally in the tax-exempt securities market as investors steer money into municipal-bond mutual funds, pushing yields to the lowest since early November. As investors seek bigger returns, high-yield state and local bonds have delivered gains of 6.1 percent this year, compared with 3.6 percent for the overall market, according to Bloomberg Barclays indexes.

Initial construction on the project in East Rutherford, about 10 miles (16 kilometers) west of Manhattan, began in 2004, only to be halted after the initial developers ran short of funds. Triple Five took over the project in 2011 and will receive $350 million in grants from New Jersey if the project meets sales-tax revenue targets.

The 2.9 million square-foot (270,000 square-meter) American Dream, originally called Xanadu, will feature an indoor amusement park and water park, an 800-foot (245-meter) ski slope, a 300-foot Ferris wheel, aquarium, 1,500-seat performing-arts theater, skating rink and a 1,400-seat movie theater with “wind, rain, snow, fog and scents all synchronized to the on-screen action,” the company says. It will also have 500 stores, restaurants and food shops.

The total cost of the project is estimated at $2.8 billion, which will be covered by the tax-exempt bonds, $500 million from the developer, payments from tenants and nearly $1.7 billion in loans from JPMorgan Chase & Co.

Last year, a New Jersey appeals court rejected a non-profit group’s challenge to the bond sale.

Bloomberg Markets

by Martin Z Braun

May 30, 2017, 10:57 AM PDT May 30, 2017, 12:24 PM PDT

Illinois may become the first U.S. state to be given a junk rating

Illinois is on the verge of becoming the first U.S. state with a junk-bond rating following downgrades from two of the world’s largest ratings firms.

S&P Global Inc. warned that Illinois could be downgraded to junk status next month if it doesn’t solve its partisan gridlock. Illinois hasn’t had a budget for two years due to a standoff between the Republican governor and Democratic legislature.

Illinois is one of many cities and states that, despite a generally strong U.S. economy, are struggling to close budget gaps because of pensions and other entitlements. State and local retirement liabilities have ballooned after the financial crisis, and most governments don’t have enough assets to cover all future obligations.

S&P on Thursday dropped its grade on the state’s general-obligation bonds one level to BBB-minus, the lowest possible investment-grade rating, citing Illinois’s inability to pass a budget. Moody’s Corp. also dropped its Illinois rating to one notch above junk. Fitch Ratings has rated Illinois at two notches above junk.

A downgrade to a junk rating would worsen Illinois’s financial straits by likely increasing interest rates on all future borrowings.

“By letting the state get downgraded, Illinois’s government is only making its own budget problems worse,” said Matt Fabian, a partner at Municipal Market Analytics

Gov. Bruce Rauner and the state’s Democratic House speaker, Michael Madigan, have been deadlocked over taxes and spending since Mr. Rauner took office in 2015.

“Madigan’s majority owns this downgrade because they didn’t even attempt to pass a balanced budget, get our pension liability under control, and other changes that would put Illinois on better financial footing,” a spokesman for Mr. Rauner said Thursday.

A spokesman for Mr. Madigan couldn’t be reached for comment, but a spokesman for Illinois Senate President John J. Cullerton, a Democrat, said “our worst fears are being realized daily as this impasse lingers…I urge the governor to recognize the need for compromise…and end this chaos that has gone on far too long and hurt far too many.”

State lawmakers can continue to work toward a budget in the coming weeks, but they will need more votes. After the regular session of the General Assembly ended Wednesday, three-fifths of both houses must support the budget, instead of a simple majority.

Investors didn’t react severely to Thursday’s actions from the Wall Street ratings firms. Prices on some Illinois general-obligation bonds fell to about 99 cents on the dollar Thursday after trading as high as 105 cents earlier in May.

Even in the face of high pension costs and stretched budgets, most U.S. states maintain high ratings in large part because they have the power to tax residents and lack the ability to declare bankruptcy.

New Jersey, the next lowest-rated state after Illinois, is pegged at four notches above junk by both S&P and Moody’s despite burdensome pension liabilities and a persistently imbalanced budget. Moody’s also rates Connecticut at that level.

Other states have had their ratings fall nearly as low and been able to engineer a turnaround. California has largely recovered from fiscal distress that drove its rating down to two notches above junk by S&P in 2003 and kept it low for much of the next 10 years.

The state regained the confidence of rating analysts in part by making regular deposits to a rainy-day fund, according to reports from S&P.

Puerto Rico last month was placed under court protection in what amounts to the largest-ever municipal bankruptcy, owing $73 billion to creditors. That dwarfed the roughly $9 billion in bond debt owned by the city of Detroit when it entered what was previously the largest municipal bankruptcy in 2013.

Puerto Rico created problems for itself by borrowing money to buy time while its economy deteriorated.

But no state had gone without a budget for over a year since the Great Depression until Illinois. The stalemate originated with ideological differences between two major political figures in the state. Gov. Rauner has called for broad changes, including curbs on unions he argues would save the state and businesses money. Democrats, who are led by Mr. Madigan, have said those issues are unrelated to the budget.

In the meantime the state’s backlog of bills has swelled to roughly $15 billion, or 40% of the state’s operating budget, according to Moody’s. The state’s budget deficit is more than $5 billion, according to S&P and Moody’s.

The current problems are aggravated by burdensome debts that eat into the money available to run the state. Illinois’s pension debt last year reached $251 billion, according to Moody’s calculations. Retirement and health benefits combined with debt payments now absorb 29% of the state’s general fund expenditures, S&P said.

“Legislative gridlock has sidetracked efforts not only to address pension needs but also to achieve fiscal balance,” said Ted Hampton, a Moody’s analyst, in a release. “During the past year of fruitless negotiations and partisan wrangling, fundamental credit challenges have intensified enough to warrant a downgrade, regardless of whether a fiscal compromise is reached in an extended session.”

The budgetary issues in Illinois have rippled well beyond the state capital of Springfield, denting everything from infrastructure spending to the amount of books in elementary schools.

Public universities have been among the hardest hit with many schools pausing on any new construction and forced to stop hiring for vacant positions. Some universities including Northeastern Illinois, Governors State and Southern Illinois are weighing fixes such as raising tuition, cutting academic programs or laying off student workers.

While the state is still funding certain core functions, many nonprofits have had to shut down or reduce operations and lay off staff after going without payments from the state.

If Illinois does get downgraded to junk it would have to make millions of dollars in termination payments on contracts designed to stabilize interest payments on some state debt, according to S&P.

Those penalties would be about $10 million in the event of a downgrade to junk by one rating firm, would reach $19 million if two firms gave the state a junk rating and could reach $108 million in the event of further downgrades, according to estimates by S&P based on current market conditions.

“In our view, the unrelenting political brinkmanship now poses a threat to the timely payment of the state’s core priority payments,” S&P analyst Gabe Petek said in his ratings report Thursday.

The Wall Street Journal

By Heather Gillers

Updated June 2, 2017 2:54 p.m. ET

Write to Heather Gillers at [email protected]

With the rich tapped out, the state may resort to Puerto Rico bonds.

The Aetna insurance company has been based in Hartford, Conn., since 1853, but this week it said it is looking to move to another state. Governor Dannel Malloy has pledged to match other states’ financial incentives, but taxpayer money can’t buy fiscal certainty and a less destructive business climate. That’s the real problem in Connecticut, which saw GE vamoose to Boston last year and which even Mr. Malloy now seems to recognize.

“As a huge Connecticut employer and a pillar of the insurance industry, it must be infuriating to feel like you must fight your home state policymakers who seem blind to the future,” Mr. Malloy wrote in a May 15 letter to Aetna CEO Mark Bertolini. “The lack of respect afforded Aetna as an important and innovative economic engine of Connecticut bewilders me.”

Now he tells us. Gov. Malloy has spent two terms treating business as a bottomless well of cash to redistribute to public unions. Now that his state is losing millionaires and businesses, he has seen the light. But the price of his dereliction will be steep.

Last month the state Office of Fiscal Analysis reduced its two-year revenue forecast by $1.46 billion. Since January the agency has downgraded income-tax revenue for 2017 and 2018 by $1.1 billion (6%). Sales- and corporate-tax revenue are projected to fall by $385 million (9%) and $67 million (7%), respectively, this year. Pension contributions, which have doubled since 2010, will increase by a third over the next two years. The result: a $5.1 billion deficit and three recent credit downgrades.

According to the fiscal analyst, income-tax collections declined this year for the first time since the recession due to lower earnings at the top. Many wealthy residents decamped for lower-tax states after Mr. Malloy and his Republican predecessor Jodi Rell raised the top individual rate on more than $500,000 of income to 6.99% from 5%. In the past five years 27,400 Connecticut residents, including Ms. Rell, have moved to no-income-tax Florida, and seven of the state’s eight counties have lost population since 2010. Population flight has depressed economic growth—Connecticut’s real GDP has shrunk by 0.1% since 2010—as well as home values and sales-tax revenues.

Corporate revenues also took a hit after General Electric relocated to Boston. Mr. Malloy then offered tax breaks to hedge funds and companies to stay in Connecticut, which has further eroded revenue.

The Governor—a slow learner—seems finally to have accepted that raising taxes on the wealthy is a dead fiscal end. Democrats are now proposing higher taxes on tobacco, expanding casinos and eliminating some tax breaks, though they don’t want to touch an exemption for teacher pensions. The state teachers union warns that axing the exemption would impel retired teachers to relocate. A quarter of pension checks are currently sent out of state.

Mr. Malloy is also seeking $1.6 billion in concessions from unions, which would be easier to achieve if collective bargaining weren’t mandated by law. He’s suggested increasing municipal pension contributions and cutting state-revenue sharing, both of which could drive up property taxes and imperil insolvent cities like Hartford. Mr. Malloy’s budget includes a $50 million bailout for Hartford to prevent bankruptcy, which might occur in any case if Aetna—its fourth largest taxpayer—leaves.

The state treasurer has advocated “credit bonds” securitized by income-tax revenues to reduce the state’s borrowing costs. Investors beware: Puerto Rico tried something similar with its sales tax, and bondholders might not get back a penny. Maybe Democrats should follow Jerry Seinfeld’s advice to George Costanza and do the opposite of the instinct that has brought the state so low: Cut taxes.

THE WALL STREET JOURNAL

June 2, 2017 6:52 p.m. ET

NEW YORK — A federal judge on Tuesday ordered the trustee for Puerto Rico’s COFINA bonds not to make a $16 million payment due on June 1, allowing creditors to litigate competing claims to the money that could be central to how the bankrupt U.S. territory restructures debt.

Judge Laura Taylor Swain made the ruling during a hearing in her Manhattan courtroom, putting a freeze on the payments while stakeholders hash out central disputes over who is to be paid first and from which revenue sources.

Puerto Rico, with $70 billion in bond debt and another $49 billion in pension liabilities, is embarking on the biggest financial restructuring in U.S. municipal history. Sorting out obligations of the COFINA sales tax authority, which owes some $17 billion, is arguably the biggest task in the restructuring.

Swain’s ruling granted a request by the COFINA trustee, Bank of New York Mellon, for “interpleader,” a move authorizing the bank to hold onto the interest payment due on Thursday without fear of liability, while claims over the money are resolved.

Judge Swain did not rule on the underlying claims, a process that could take months, but said “their existence makes it clear that interpleader is warranted.”

Senior creditors of COFINA argue the authority has already defaulted, through the Puerto Rican government’s indications that it plans to cut debt repayments. They say junior COFINA creditors should therefore stop being paid, to ensure payment for seniors.

Meanwhile, holders of Puerto Rico’s $18 billion in general obligation (GO) debt argue that COFINA’s assets belong to them, under a constitutional guarantee giving them first claim on all the island’s resources.

By freezing Thursday’s payment, Judge Swain is giving sides the green light to litigate at least parts of these issues, though the primary dispute is the one between senior and junior COFINA creditors. Judge Swain stressed she was not ruling immediately on whether GO holders would be allowed to intervene.

Separately on Tuesday, Puerto Rico’s government said it would make a $13.9 million payment on June 1 to bondholders of the Employees Retirement System, the island’s largest pension, settling a lawsuit filed last week.

By REUTERS

MAY 30, 2017, 3:36 P.M. E.D.T.

(Reporting by Nick Brown; Editing by Meredith Mazzilli)

Detroit. Stockton. Puerto Rico. The list of places bankrupted by ballooning pension obligations and other debts is growing. But now comes some good news about two cities, Dallas and Houston, that have pulled back from the brink.

Just six months ago, the mayor of Dallas, Michael S. Rawlings, was warning that his city might need to declare bankruptcy after a panic led stampeding retirees to pull half a billion dollars out of its pension fund for police officers and firefighters.

But instead of going to bankruptcy court, Mr. Rawlings went to Austin, the state capital, to lobby for state pension laws that would stop the bleeding. So did the mayor of Houston, Sylvester Turner, who faced other pension problems and had persuaded the city’s labor groups to agree to concessions worth $1.3 billion over the next 30 years.

The resulting legislation — which essentially averts crises in Texas’ biggest and third-biggest cities — was signed into law by Gov. Greg Abbott on Wednesday.

Each city had its own bill, because each had its own unique problems. But both bills involve measured reductions in pension accruals for workers and retirees — mainly in secondary benefit categories like inflation adjustments and lump-sum payouts. In exchange, the pension funds will receive more money from the cities to protect the core benefits.

Most important, both bills establish financial benchmarks for the coming years. If the pension funds do not meet them, there will be more benefit cuts, some of which could be steep. The point of this is to keep elected officials from giving the can one good kick down the road now, then declaring victory and turning their backs while the same intractable problems are festering under the surface.

“The key to all this is, not one retiree’s pension check is going to be reduced one penny,” said Ray Hunt, the president of the Houston Police Officers Union. “It just means that future increases are slowed or stopped. I believe the majority of our members think this is the responsible way.”

As happy as the resolution may seem, the steps that Texas took are illegal in other places where public pensions are imperiling the finances of cities and states. Illinois, California, Oregon, Pennsylvania and Kansas are among the states where, by law, public pensions cannot be reduced — not even the pensions that current workers hope to earn in the future.

That doctrine, known as the California Rule, explains why California cities like Vallejo and Stockton reduced their payments to other creditors when they went into bankruptcy but did not touch their workers’ costly pension plans.

Of all labor groups in the public sector, police and firefighters’ unions tend to be the California Rule’s most ardent champions. When Memphis recently tried to scale back pensions, for example, half the police force called in sick and hundreds of others resigned.

Police unions in California are now pushing a critical test of the California Rule through the courts, after a lower court ruled that they did not have “an immutable entitlement” to the best pension they could hope for, but “only to a ‘reasonable’ pension.” Final adjudication appears to be many months away.

Against that forbidding backdrop, Dallas and Houston show there is still room for compromise (although Houston’s firefighters did withdraw their support for the bill that was just signed into law).

Both cities were spurred to act by the risk of credit downgrades and by a recent accounting change that calls for cities to calculate the number of years before their pension funds will run out of money — a once-unthinkable catastrophe that has come to pass in Prichard, Ala.; Central Falls, R.I.; and now Puerto Rico.

Those developments — and Detroit’s bankruptcy — have shown that Washington will not bail out government pension funds that go bust; officials had to patch together money from other sources, and even then, the retirees of Prichard, Central Falls and Detroit had their benefits cut. Cuts are expected soon in Puerto Rico, too.

Seeing that, and knowing that the doomsday clock was also ticking in Dallas and Houston, made labor leaders in those cities conclude that fighting concessions to the finish would not, in the end, protect their members. The Dallas pension fund was on track to run out of money in 10 years, and Houston’s in less than 15.

And in both cities, the police and firefighters have opted out of Social Security, something state and local workers often do in hopes of avoiding the Social Security payroll tax. Federal law allows that, but if a government pension fund collapses, older adults are left without a backstop.

“We have to have a fair pension system, both for us and for taxpayers,” said Mr. Hunt of the Houston police union. “It’s either that or take a 100 percent pension cut in the future, when you have no pension fund.”

Josh McGee, the chairman of the Texas Pension Review Board, a state oversight body, called Houston’s overhaul “one of the most comprehensive I’ve seen in the country,” and all the more notable because the mayor who pushed it through is a labor-friendly Democrat.

As for the Dallas pension measure, Mr. McGee called it a good first step.

“Dallas waited until they were in crisis before they did anything, so it’s really, really painful, and it’s going to take more actions in the future to solve the problem,” he said.

Dallas’s measure includes raising the retirement age, slowing benefit accruals, ending most cost-of-living increases and raising each worker’s required pension contribution to 13.5 percent of pay, from 8.5 percent.

Importantly, the new law for Dallas also bans the kind of big, one-time withdrawals that caused last year’s run, in which retirement-age police and firefighters stripped about $500 million out of their pension fund, leaving it tattered almost beyond repair.

Such lump-sum withdrawals were allowed under a fairly common program known as a DROP, for deferred retirement option program, but they caused a stampede after workers learned that the pension fund had been overstating its assets.

The workers started to grab cash for fear that it would not be there later if they waited. Hundreds of people qualified for payments over $1 million each, in addition to their regular pensions.

The changes approved Wednesday are not expected to turn the fund around, only to stabilize it. The law calls for Dallas to stress-test the fund in seven years and to make more cuts if it fails. City officials have warned that they may still claw back some of the money people took during last year’s run.

On Thursday, Fitch, the credit-rating agency, said it would review Dallas’s rating. The city had been on a watch list for likely downgrades because of pension risks.

Houston had different pension troubles, dating to 2001, when officials decided that the bull market of the 1990s justified big benefit increases. The dot-com crash quickly showed that the decision was a mistake, but instead of revoking the increase, the city coped by not making its yearly contributions to the fund.

“The city was on a path to bankruptcy, and we just realized we were going to have to have some kind of reform,” said Mark Watts, the head of the Greater Houston Partnership’s municipal finance task force.

Under the new law, Houston reduces certain secondary pension benefits, like a DROP feature and cost-of-living increases, in exchange for better funding.

If costs still keep rising too sharply, the law calls for further reductions. And if that does not work, the system automatically shuts down the defined-benefit plan and switches to a hybrid, called a cash-balance plan.

“That caps the city’s downside risk,” said Mr. McGee, of the Texas Pension Review Board.

THE NEW YORK TIMES

By MARY WILLIAMS WALSH

JUNE 1, 2017

Some of Illinois’ debt is sliding toward junk status, and that’s a wakeup call for muni investors, writes InvestmentNews.

The state’s financial troubles are “a reminder that financial advisers should pay extra attention to underlying holdings in muni bond funds,” the publication writes.

High-quality muni funds can contain junk, and vice-versa. A recent Citigroup report said Illinois’ high-yielding debt could present a buying opportunity, because the state has room to “tax and grow” its way toward safe ground.

But Ronald Bernardi, president of Chicago-based Bernardi Securities, tells InvestmentNews he won’t touch the state’s 10-year bonds, which yield 4.45%. His reasoning: At twice the yield of the highest-quality muni bonds, they’re too dangerous.

Those willing to bet on Illinois can do so through a number of mutual funds with meaningful exposure to the state’s munis.

Gurtin National Municipal Opportunistic Value Fund, with $117 million, is 23.7% allocated to Illinois’ muni bonds. Hartford Municipal Income Fund and Wells Fargo CoreBuilder Share Series each have a little more than 20% weightings.

Barron’s

May 31, 2017 4:30 p.m. ET

Nuveen’s John Miller calls it “stunning” that MetPier’s rating can fall so far due to politics when its economics remain healthy.

The muni market can be quite slow moving — for example, Puerto Rico’s bonds have been falling pretty gradually for about two weeks since it declared a version of bankruptcy.

But muni investors are pretty swift to sell when there is a major downgrade — which happened with Illinois bonds Thursday.

The state’s general obligation bonds and Metropolitan Pier & Exposition bonds were both wider by approximately 25 basis points Thursday afternoon, estimates John Miller, who heads municipal bond investing at Nuveen Asset Management.

MetPier bonds were rated triple-A not that long ago, notes Miller. Plus, revenues (sales and tourism taxes) have actually increased the great majority of years. “Debt coverage is excellent,” he adds.

But since the MetPier revenues now essentially pass through the state budget, the bonds have to be downgraded when the state is.

Miller calls it “fairly stunning” to see what dysfunctional politics can do to a bond rating even when the finances of an issuer are healthy. “The economy is moving along and yet the politics are so bad that the bond went from triple-A to double-B-plus purely on politics,” he says.

Barron’s

By Amey Stone

June 1, 2017 2:21 p.m. ET

New York City voted on Wednesday to suspend Wells Fargo from its municipal debt issuance operations, citing a rating tied to doing business in low and moderate-income communities as having fallen below a “satisfactory” level.

The commission also cited last year’s scandal, in which the bank was caught creating bogus customer accounts to boost performance measures.

The New York City Banking Commission, in a unanimous 3-0 vote, decided it will give no new bond underwriting mandates or renew existing contracts with Wells Fargo. The decision follows a Federal Community Reinvestment Act (CRA) rating of “needs improvement” for the San Francisco-based bank.

The decision adds New York City to other states and municipalities that have banned the bank from handling their funding operations.

The commission was composed of Mayor Bill de Blasio, Comptroller Scott Stringer and Commissioner of Finance Jacques Jiha.

“What happened at Wells Fargo was fraud – and there must be consequences for wrongful behavior,” Stringer said in a statement.

Wells Fargo, however, was given a conditional designation as a New York City bank. That means it can still hold funds under current contract because it would be too disruptive to immediately disentangle the city from the bank.

“The ban will be revisited only when the bank’s rating is raised,” de Blasio and Stringer said in a joint statement prior to the vote.

The Wells Fargo scandal and the repercussions on its municipal banking operations contributed to a slump in its underwriting business, Reuters reported earlier this month.

Prior to the vote, the bank told Reuters it appreciated the continuing dialogue with the city.

“More than four years have passed since the end of our last CRA evaluation period and we are seeking an expedited review of the 2012-2015 exam,” Wells Fargo spokesman Gabriel Boehmer said in an email.

Wells Fargo holds $227 million of collected city taxes and fees and acts as a trustee to the New York City Retiree Health Benefits Trust, currently holding its roughly $2.6 billion in assets.

The ban will suspend the bank’s role as a senior book-running manager for the city’s General Obligation as well as Transactional Finance Authority bond sales.

“The only allowable exemption will be for affordable housing financing, which has a direct benefit to New York City residents,” the joint statement said.

REUTERS

By Dan Freed | NEW YORK

Wed May 31, 2017 | 6:10pm EDT

(Reporting by Dan Freed; Additional reporting and writing by Daniel Bases, editing by G Crosse and Dan Grebler)

SAN JUAN, Puerto Rico — Puerto Rico is seeking help from federal court to restructure the debt of the U.S. territory’s public pension system, which is projected to run out of money this year.

A federal control board overseeing the island’s finances said Monday that the move was taken in part to shield the government from a flurry of lawsuits.

“The government’s liquidity and solvency problems are massive, and Title III has now become necessary to protect the people of Puerto Rico,” the board said in reference to the court-supervised restructuring process.

Gov. Ricardo Rossello said late Sunday that his administration requested the board approve a court-supervised process because it had been unable to reach a deal with creditors to whom it owes some $3 billion.

“Given the system’s uncertain situation … its eventual insolvency in upcoming months and the inability to reach a deal with creditors … I have no other option to protect our retirees,” he said.

The U.S. territory is increasingly turning to the courts to restructure portions of the $73 billion public debt it holds as it struggles to emerge from a decade-long recession. The board on Monday also said it will seek to restructure via courts more than $4 billion in debt held by the island’s Highway and Transportation Authority.

Rossello said retired workers will still receive their pensions, and that the government will dip into its general fund once the pension system itself runs out of money.

Roberto Aquino Garcia, president of the Association of Retired Puerto Rico Government Workers, said he doubts a court-ordered restructuring will bring substantial relief to the more than 150,000 former government workers who depend on a system underfunded by some $50 billion.

“We hold very little hope, because unless the system receives a significant cash infusion to stay afloat, it will collapse,” he said in a phone interview.

Aquino said many retirees worry the general fund will not be able to fund their pensions because it is already low on cash.

“We don’t know what the government’s priorities will be,” he said. “Do we fall under essential services?”

The government is Puerto Rico’s largest employer, and the overall liability of its three main retirement systems grew by $10 billion from 2009 to 2013, prompting the previous administration to increase retirement ages, reduce benefits and increase employer and employee contributions.

Puerto Rico’s average public pension is roughly $1,100 a month, but more than 38,000 retired government employees get only $500 because of the type of job they had and the number of years worked.

A federal control board overseeing the island’s finances is now seeking more cuts. It has said the system will switch to pay-as-you-go funding, and that teachers and public safety workers will be enrolled in Social Security by 2020. Currently, teachers and police officers in Puerto Rico do not receive Social Security.

Aquino said a nonprofit group representing nearly 100,000 retired Puerto Rico government workers has hired the same attorney who represented retired workers in Detroit, which had less than $20 billion in debts when it filed for bankruptcy in 2013 in the biggest U.S. municipal bankruptcy ever.

“There’s going to be a humanitarian crisis,” Aquino warned. “The government made a commitment to us since 1951 when it created the pension system. It’s a contract that all of us have held up on our end.”

Puerto Rico economist Vicente Feliciano said it’s unlikely the government will be able to fulfill that contract.

He noted that retirees in Detroit were hit with a 5 percent cut, and anticipated that those in Puerto Rico will face a similar or worse fate.

“The majority of retirees will get their pensions cut,” he said. “Everybody must take a hit.”

By THE ASSOCIATED PRESS

MAY 22, 2017, 10:27 A.M. E.D.T.

Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of AA- with a Stable outlook to the City of Chicago’s Second Lien Wastewater Transmission Revenue Bonds, Project Series 2017A and Second Lien Wastewater Transmission Revenue Bonds, Refunding Series 2017B. KBRA has also affirmed the outstanding AA- rating and Stable outlook on the City of Chicago’s outstanding Second Lien Wastewater Transmission Revenue Bonds.

The bonds are limited obligations of the city having a claim for payment solely from Second Lien Bond Revenues that are derived from the net revenues available for bonds in the city’s sewer fund, and deposited into the Second Lien Bond Account, which claim to the net revenues available for bonds is subordinate to the claim of Senior Lien Bonds. The senior lien is open but there are no plans to issue any additional senior lien debt.

Please click on the link below to access the report:

Second Lien Wastewater Transmission Revenue Bonds

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of AA with a Stable outlook to the City of Chicago, IL’s Second Lien Water Revenue Refunding Bonds, Series 2017. KBRA has also affirmed the outstanding AA rating and Stable outlook on the City of Chicago’s outstanding Second Lien Water Revenue Bonds.

The City of Chicago’s Second Lien Water Revenue Bonds are limited obligations of the city having a claim on payment solely from Second Lien Bond Revenues derived from net revenues available in the city’s water fund, and deposited into the Second Lien Bonds Account, which claim is subordinate to the claim of Senior Lien Bonds. The senior lien is open, but has not been utilized since 2001 and KBRA is comfortable with the city management’s assurances that no further senior-lien issuance is contemplated.

Please click on the link below to access the report:

Second Lien Water Revenue Refunding Bonds, Series 2017

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

King County’s commitment to environmental protection and sustainability has earned a “dark green” designation – the highest rating awarded by an international research institute – for its environmentally friendly green bond program that was launched this week to fund County projects with multiple benefits.

The County’s new certified green bond program offers investors the opportunity to finance public projects that help the County continue its commitment to protecting the environment and confronting climate change.

In crafting its green bond program, the County followed financial market and industry best practices by submitting its program to a review by an internationally recognized leader of second opinions, the Center for International Climate and Environmental Research (CICERO).

As is the case with traditional municipal bonds, King County’s green bonds are secured by the County’s full faith and credit and benefit from the County’s high municipal credit rating. What’s unique about green bonds is that the entities issuing them can apply the borrowed funds only toward environmentally beneficial projects, such as green-energy projects, or projects that help respond to climate change impacts.

The County’s first sale of green bonds today features Citigroup Global Markets as underwriter. The County is selling limited tax general obligation bonds to provide $35.2 million of funding for the capital program of the King County Department of Natural Resources and Parks’ Solid Waste Division, primarily for development and construction of transfer stations and the restoration of closed landfill sites.

The County is anticipating that other projects in the future will also be good candidates for the green bond program. Such projects involve clean transportation conversions to zero-emission buses; habitat restoration to offset greenhouse gas emissions; and design and construction of green-built facilities that include recycled and energy saving materials, improve air quality, reduce water use, and achieve high ratings for sustainable construction.

As an independent, not-for-profit research institute, CICERO has been providing independent reviews of green bonds since the market’s inception in 2008. CICERO works with numerous international institutional investors, banks, companies and municipalities.

CICERO second opinions are graded “dark green,” “medium green” and “light green” to give investors insight into the environmental quality of green bonds.

The organization, which has been rated as the best provider of independent green bond reviews, gave King County’s green bond program its highest certification of “dark green.”

“CICERO’s ‘dark green’ rating affirms King County’s leadership and commitment to environmental sustainability,” said Ken Guy, King County Finance Director. “We expect the green bond program, combined with our historically strong credit ratings, will encourage an increasing number of environmentally-conscious investors to participate with King County in our efforts to create a greener future.”

To learn more about King County’s unique green bond program, contact Felix Amerasinghe, Chief Financial Officer, King County Department of Natural Resources and Parks, at 206-477-7586.

• Debt paying highest yields over benchmark since at least 2013
• Multi-notch downgrade into junk is unlikely, Citi says

Illinois’s nearly two-year budget impasse has created a buying opportunity for municipal-bond investors willing to bear the risks, according to Citigroup Inc.

With the Democrat-led legislature and Republican Governor Bruce Rauner unable to forge agreement on how to close the state’s chronic budget deficits, Illinois’s 10-year bonds yield 4.43 percent, or 2.45 percentage point more than top-rated municipal borrowers, according to data compiled by Bloomberg. That’s the biggest premium since the indexes were started in January 2013.

That may mean it’s a good time to buy, according to Citigroup. Despite the governmental gridlock, the fifth most-populous state has “strong fundamentals” and the power to tax and grow its way out of the financial hole, the bank said in a report to clients this week, citing the diverse economy and strong legal security backing its debt. While Illinois hasn’t had a full-year budget in place since June 2015, it hasn’t missed any bond payments and state law has required it to continue making monthly deposits to its debt-service funds.

“The state’s credit rating and bond prices have suffered and may present opportunity for a bold investor,” analysts Vikram Rai, Jack Muller and Loretta Bu, said. “We strongly encourage investors to take advantage of the cheapness of the front and intermediate IL GOs.”

The crisis stems from a fight between Rauner and the legislative leaders over how to plug budget shortfalls that were worsened by the expiration of income-tax increases in January 2015. With agreement elusive, entities like public universities have been stung by the loss of state aid, triggering cuts to their credit ratings.

Citigroup published its report before Illinois Senate Democrats approved an income-tax hike and spending plan without Republican support, making the outlook for a bipartisan, comprehensive solution even more uncertain. The Senate bills still need approval by the House. The state has until May 31 to approve a budget by a simple majority. Starting June 1, a three-fifths majority is needed, making a deal even more difficult.

Moody’s Investors Service and S&P Global Ratings have warned of potential rating cuts if the state enters a third year without a budget. Many of Citigroup’s clients expect a one-notch downgrade, and that drop looks like it’s already been priced in, according to the bank’s analysts. A multi-notch downgrade to junk isn’t likely, Citigroup said.

Bloomberg Markets

by Elizabeth Campbell

May 24, 2017, 9:34 AM PDT

California’s revised budget proposal for fiscal 2018 aims to keep the state’s finances on a structurally oriented path while adding to its budget reserves, in S&P Global Ratings’ view.

Continue Reading

May 15, 2017

But observers disagree about whether it will work.

Besieged by budget shortfalls, Connecticut’s credit rating was downgraded in recent days by Fitch Ratings and Moody’s Investors Service. The downgrades were the state’s fourth and fifth in the past year alone. But if State Treasurer Denise Nappier gets her way, that credit hit might not matter the next time Connecticut goes to sell bonds.

Nappier wants the state to start offering investors revenue bonds that are paid back directly from the state’s income tax revenues. Called tax-secured revenue bonds, these new bonds would be offered in place of general obligation bonds, which are backed by the state’s general revenue collections. Nappier’s office believes the dedicated income stream would mean the bonds would fetch ratings as high as AAA, resulting in a better interest rate and lower debt service costs.

The idea has received mixed reviews.While some observers call it a product that will offer comfort to bondholders wary of Connecticut’s troubles, others say it’s a “financial engineering gamble” designed to game the market. “To create something out of nothing — they’re not being more fiscally responsible by doing it this way,” says Municipal Market Analytics’ Lisa Washburn.

In the past year, Fitch has downgraded the state’s credit rating twice, and Kroll, Moody’s and S&P Global Ratings have each downgraded it once. The latest action puts the credit rating at A+. It is the result, in part, of the state’s third straight budget shortfall. Currently, Connecticut is facing a $2 billion hole over the next two fiscal years. The deficits, caused mainly by weak income tax revenues and burdensome debt costs, have all but drained the state’s rainy day reserve and made it difficult to keep up with its mounting pension obligations.

Deputy Treasurer Lawrence A. Wilson says the tax-secured bonds will insulate investors from the budget and pension concerns they have expressed. Instead, the bonds are “focusing on one of our highest credit positives, which is the high wealth of our state.”

If approved by the General Assembly, the state would issue about $2 billion in revenue bonds a year. Any interest rate savings would be directed into the state’s rainy day fund. Wilson says he expects those savings to total $980 million in fund deposits over 12 years.

When asked if state lawmakers would be tempted to keep raiding the rainy day fund, given the state’s deficit struggles, Wilson acknowledged that was a possibility. “This is the part we can control,” he says. “It’s still a positive contribution.”

Revenue bonds are common with lower levels of government and with housing and transit authorities, but are rarer at the state level. In 2001, New York state created a revenue bond program for streamlining purposes. Rather than having a handful of state authorities individually issuing tax-backed debt, New York’s program created sales and income tax-backed bonds for them.

When it comes to assuring investors they’ll be paid back, most states tend to opt for statutory or constitutional pledges. Illinois, for example, hasn’t passed a budget in two years and has also suffered multiple ratings downgrades. But its constitution contains a “non-impairment” clause that prohibits action by the General Assembly that would damage the state’s ability to pay back bondholders. State law also allows bondholders to sue the state to compel payment.

Belle Haven Investments’ Tamara Lowin says Nappier’s proposal is simply another way to assure investors they’ll get their money back with interest. “This market loves the transparency of being able to see a direct revenue stream,” she says. “It’s a way to offer a credit designed with the ratings agencies in mind.”

But Washburn isn’t so sure that potential investors will be reassured by the new bonds and be willing to take a lower interest rate on the debt. “The likelihood that Connecticut will ever default and be in a situation where you have to test the structural provisions is really, really low,” she says. “But would I want to give it a pricing benefit as an investor? It’s definitely questionable.”

GOVERNING.COM

BY LIZ FARMER | MAY 17, 2017

• State’s yields rise to record over benchmark amid gridlock
• Less than two weeks remain in regular legislative session

With less than two weeks left in the regular legislative session, Illinois lawmakers and Governor Bruce Rauner are still divided on how to end the worst-rated state’s nearly three-year budget impasse. Investors aren’t pleased.

Bondholders are demanding yields of 4.49 percent on Illinois’s 10-year bonds, some 2.45 percentage points more than those of benchmark tax-exempt debt. That’s the biggest gap since the Bloomberg indexes began in January 2013.

After May 31, a three-fifths majority will be required to pass anything, making a deal even more difficult to reach. Senate Democrats advanced several bills that had been considered part of a bi-partisan compromise on Wednesday, but they were unable to pass a spending plan for lack of Republican support.

“We’re two weeks away from the 31st and that’s the deadline that’s set,” said Dennis Derby, a money manager in Menomonee Falls, Wisconsin, at Wells Fargo Asset Management, which holds Illinois bonds among its $40 billion of municipal debt. “They’ve had substantial time to work on this. So far we haven’t seen any substantial progress.”

Lawmakers are continuing to push forward legislation in an effort to resolve the stalemate by the end of the month. The unprecedented impasse has left the state without a full-year spending plan since July 2015 as Rauner, the first Republican to lead the state since 2003, and the Democrat-led legislature can’t agree on how to plug chronic budget deficits. The gap worsened after temporary income tax hikes expired in January 2015. The gridlock has sunk Illinois’s credit rating and forced state-supported entities like public universities and social service providers to slash programs and furlough workers.

Moody’s Investors Service and S&P Global Ratings have warned that the state’s credit could deteriorate further if it enters a third year without a budget. The rating companies rate Illinois Baa2 and BBB, respectively, which is two levels above junk. Both have a negative outlook on Illinois.

Rauner has called for any spending plan to be tied to structural changes like a property tax-freeze and an overhaul of workers-compensation practices. Without a budget in place, the state is still spending money through consent decrees, court orders and continuing appropriations. Its current-year operating deficit is about $6 billion, Moody’s said in a March report, citing the governor’s office of management and budget.

“We should never give up in getting a balanced budget,” Rauner told reporters in Chicago on Thursday. He said he was encouraging lawmakers to keep working on a deal.

On Wednesday, Senate Democrats approved a plan to allow the state to borrow as much as $7 billion to pay down the state’s record $14.5 billion of unpaid bills. Legislation to allow local government consolidation and expand gambling were approved and received some Republican votes. Measures that would change the state’s procurement practices and pension system won bipartisan approval. They still need to be approved by the House.

Democrats also passed an overhaul of school funding practices, including giving $215 million to the cash-strapped Chicago school system. The measure received no Republican votes and was immediately rejected by Rauner who called it a “bailout at the expense of every other school district in the state.”

Bloomberg Markets

by Elizabeth Campbell

May 18, 2017, 8:49 AM PDT May 18, 2017, 2:51 PM PDT

Carlos Burgos Alvarado sank the $50,000 he inherited from his father into “bonos.” He believed they were safe, high-yielding, tax-exempt bonds issued by Puerto Rico.
He was wrong.

According to Burgos, the Santander Securities LLC broker who sold him the investment in April 2013 didn’t tell him its credit rating had been downgraded the previous December, making it riskier to own. She didn’t tell him that Santander had underwritten the debt, sharing $15.6 million in fees. She didn’t tell him that the bank was in the process of selling its own inventory of the bonds.

Burgos said he didn’t discover any of this until late last year, when he hired a lawyer, who’s trying to figure out whether what Burgos bought came from Santander’s own portfolio. Santander Holdings USA Inc. said it was common for broker-dealers to both underwrite and sell the bonds and the bank obeyed all laws and regulations.

“Very bad, very bad,” Burgos said in an interview. “It made me very angry.”

Puerto Rico’s $74 billion debt crisis has been cast as a wrestling match between the government and the hedge funds that bought distressed debt on the cheap. But tens of thousands of bondholders are people like Burgos, Puerto Rico residents who invested a total of $7 billion in bonds, much of them low-rated, to fund their retirements.

“A lot of the stuff that went on in Puerto Rico would not have been allowed on the mainland,” said Craig McCann, founder of Securities Litigation & Consulting Group in Fairfax, Virginia, and a former economist at the Securities and Exchange Commission.

Closed-End Funds

McCann points to the absence in Puerto Rico of what investors in the 50 states take for granted: a conflict-of-interest prohibition for banks. Democratic Representative Nydia Velazquez of New York called this discrepancy “unconscionable treatment of Puerto Ricans as second-class citizens.” She sponsored legislation, which passed the House this month, to close the loophole. Senate approval would make it law.

Unlike Burgos, who owned the bonds directly, many locals bought government debt through closed-end funds — products similar to mutual funds which were purchased by locals who wanted to own government debt. Santander and UBS Group AG’s Puerto Rico unit, among the island’s biggest brokerages, sold closed-end funds. Unlike most mutual funds, however, the funds used as much as 50 percent borrowed money, meaning a downturn would cause amplified losses.

Santander’s funds “complied with all applicable laws, regulations and requirements, including those established by Puerto Rico’s securities regulator, and these requirements were fully disclosed in the funds’ prospectuses,” Ann Davis, a bank spokeswoman, said in a statement. “Each fund’s prospectus also included an extensive discussion of risk factors associated with investing in the fund.”

Peter Stack, a UBS spokesman, said in a statement that despite the island’s economic woes, “these funds have to date paid out over $4 billion in dividends to Puerto Rico investors.”

As much as the island’s situation differs from the mainland’s, there are parallels, too. There’s the timing of ratings companies’ downgrades and the role of retail investors, whose sleep-at-night money fueled a profit machine that benefited everyone — until the island’s dismal economic condition ground it to a halt.

On the island, the May 3 municipal bankruptcy filing, the biggest in American history, pits a half-dozen or so investor classes against Puerto Rico and against one another for a piece of a pie that’s too small to satisfy everyone. The commonwealth says it can only cover about $8 billion of $33.4 billion in bond payments due through 2026.

Bad Advice

There are two types of local bond investors, said Sergio Marxuach, policy director at the Center for the New Economy in San Juan. “There’s a group of people that got bad advice from their financial adviser or their broker,” he said. And then there are those who “decided to go all in on Puerto Rico bonds just to reduce significantly their tax liabilities,” he said. Those people “knew that was a very risky strategy.”

For local bond investors, the wheels began to come off in 2013, soon after Burgos invested the money, which was more than he’d ever made in a year. In August, a Barron’s cover story on the risks of the island’s securities sent prices tumbling. By the end of that year, many of UBS’s closed-end funds lost half or nearly half their value, according to research conducted by McCann.

Something Wrong

Burgos said his broker told him not to worry even as his principal shrank, that he would get his investment back when the bonds matured. According to McCann, Santander should have known the bonds were effectively junk when it sold them to Burgos.

“By the time you get to the end of 2012, sophisticated market professionals, including the ones at Santander, knew that Puerto Rican municipal bonds should be considered junk,” he said. “Even though they hadn’t been downgraded to junk status yet, they were trading at credit spreads consistent with them being junk bonds.”

Between late 2012 and October 2013, Santander marketed more than $280 million in Puerto Rico municipal bonds and its closed-end funds to clients while unloading its holdings of the securities, according to Financial Industry Regulatory Authority documents. UBS and Santander would eventually agree to pay fines through settlements with Finra for inadequately monitoring the risks of closed-end funds. Santander’s Davis had no comment on the settlements.

‘Protected Themselves’

“They protected themselves and sold their positions but left their clients holding the bag,” said Peter Mougey, a Florida-based attorney at Levin Papantonio who represents local investors filing Finra claims against the banks.

Arbitration claims are mounting. More than 1,870 have been filed, according to Securities Litigation & Consulting Group, and more than $200 million doled out as awards. McCann said he expects that the number of claims will rise now that the island has begun a bankruptcy proceeding. Mougey’s law firm says it’s set to represent 400 clients.

One of them is Burgos, now 65. After the bonds he held stopped paying interest, he said he’s had to turn to his partner’s children to help pay medical bills.

“I’m always paying the bills late,” Burgos said. “We take it day by day, and we’re always behind on things each month.”

He said he’s seen his Santander broker when she appears in newspaper society pages. The bank settled eight arbitration claims filed against her for fraud and breach of fiduciary duty, Finra data show. At least 14 other claims are pending.

“Call me a cynic, but the firms had to find a home for the bonds they were underwriting,” said Mougey, the plaintiffs’ attorney. “They had to move them out the back door and the funds and the clients were the mechanisms to do that.”

Bloomberg Quint

by Rebecca Spalding and Michelle Kaske

May 17, 2017, 6:37 am

Puerto Rico reached a restructuring agreement with bondholders invested in the commonwealth’s Government Development Bank, officials announced Monday in San Juan.

Parties to the agreement include the Ad Hoc Group of Bondholders, whose members are funds managed or advised by Avenue Capital Management II, Brigade Capital Management, Fir Tree Partners and Solus Alternative Asset Management. The group’s financial adviser, Bradley Meyer of Ducera Partners in New York, said in a statement that the agreement “is fair to all parties.”

Puerto Rico’s Federal Affairs Administration said in that statement that GDB creditors “have agreed to substantial discounts to the principal,” but did not provide further details on the agreement, which calls for bondholders to exchange claims for one of three tranches of bonds issued by a new municipal entity. The new bonds will have varying principal amounts, interest rates, collateral priority, and other payment terms.

Restructuring agreements must be approved by the Financial Oversight Management Board and the U.S. District Court in San Juan. Mr. Rosello said in the statement that the agreement “is an example that the government is regaining the credibility it had lost over the past few years.”

PENSIONS & INVESTMENTS

BY HAZEL BRADFORD · MAY 15, 2017 2:55 PM · UPDATED 7:41 AM

NEW YORK — Puerto Rico is due to embark on a bankruptcy process on Wednesday that could take years to resolve, as investors scramble to get the highest recovery on their bonds.

The debt is still trading at elevated levels versus what the government has set aside for payment under its financial recovery plan, and creditors worry about whether they will be able to recoup at those prices.

Whether they get that level of recovery is debatable, according to investors and analysts, as the U.S. territory seeks to restructure more than $70 billion in debt, from multiple agencies, and another near $45 billion in underfunded pension liabilities.

“The 25 percent may be what the Commonwealth identified as a available to cover debt service but it doesn’t necessarily mean that will be the ultimate recovery,” said Shaun Burgess, portfolio manager and lead trader for Puerto Rico strategy at Sarasota, Florida-based Cumberland Advisors.

Puerto Rico, with 3.5 million U.S. citizens, has spent the last ten years in recession with debt piling up to pay for basic services. The poverty rate is at 45 percent, unemployment is at 11 percent and the population is shrinking as islanders emigrate to the mainland United States in search of a better life.

Burgess, who owns insured Puerto Rican debt, did not want to speculate on the final recovery prices, or the potential losses for major mutual funds, but said negotiations could include lowering the coupon rates, reducing principal and extending maturity dates.

“There isn’t enough information, especially as it relates to time frame and potential recoveries,” he said.

Yet to be worked out is how an $800 million pot of money set aside in the government’s certified 10-year fiscal recovery plan will be apportioned between competing claims including those of constitutionally backed general obligation debt (GO) and sales-tax backed bonds known as COFINA.

That pot of money represents less than a quarter of what is needed to service debt annually.

That question will ultimately be settled by U.S. District Judge Laura Taylor Swain of the Southern District of New York when the bankruptcy-like proceeding begins in a San Juan courtroom on Wednesday.

Swain, appointed by U.S. Chief Justice John Roberts on May 5th, is operating under the authority granted by the U.S. Congress, which passed a law last year known as PROMESA (Puerto Rico Oversight, Management, and Economic Stability Act).

PROMESA established a federal oversight board with the authority to negotiate the restructuring of the island’s debt. It includes a provision known as Title III that establishes a legal pathway, previously unavailable, for Puerto Rico to settle its obligations through a bankruptcy-like process.

Normally, GO debt is the most senior in a municipality’s capital structure and the first to be paid. COFINA creditors are fighting to ensure its revenue stream doesn’t get diverted to pay other debt.

“Clearly we don’t know what to expect, but it is going to be a lengthy and tortuous process. This is going to take longer than Detroit,” said Mikhail Foux, municipal research director at Barclays Capital in New York. Detroit’s case took 18 months.

“I would assume the final solution should also address the pensions because if you are bondholder why would you take a haircut knowing the pension liability question could just send you back to square one again,” he said.

UNPRECEDENTED

Puerto Rico’s bankruptcy dwarfs Detroit’s, the previous record holder for municipal bankruptcy at $18 billion in debt and obligations that was ultimately reduced by $7 billion.

“The main take-away I have from the experience of Detroit or GM (General Motors) is that politics trumps contracts. I expect the final result to involve big haircuts, low coupons and long maturities for bondholders, and it probably doesn’t matter if its GO’s or COFINAS,” said Robert Rauch, senior partner and portfolio manager at emerging market asset manager Gramercy.

Currently Puerto Rico’s benchmark general obligation debt, an 8 percent coupon bond maturing in 2035, last traded at a bid price of 60, according to Thomson Reuters data. <74514LE86=MSRB>

“Current prices reflect the fact that the muni market doesn’t permit shorting. As long as the current core of bondholders is supporting the market it won’t go down to a level that reflects realistic recoveries,” said Rauch, whose firm specializes in emerging markets and distressed debt.

COFINA bondholders were the first to sue the government after the freeze on creditor litigation under PROMESA expired at Midnight May 1st. They accuse Puerto Rico, Governor Ricardo Rossello and other officials of angling to repurpose the tax revenue earmarked to pay COFINA debt.

“If COFINA is pierced, many people would say it is one-off situation and not precedent setting. But it could have some effect on other municipal credits,” Foux said.

Senior COFINA debt carrying a 5.25 percent coupon maturing in 2057 was bid at 57 with a yield of 9.39 percent on Tuesday. <74529JAR6=MSRB>

The 6 percent 2042 subordinated COFINA bond has steadied, last bid at 23.71 with a yield rising to 25.5 percent <74529JHN8=MSRB>. This bond has dropped by more than 50 percent since the board certified the government’s fiscal plan in March.

“The fiscal plan only allows for a certain amount of money for debt servicing and it isn’t enough. Why are market prices still implying higher recoveries? One factor to remember is there are competing claims between GO and COFINA. They can’t both be right. Therefore, in aggregate prices to need to go lower,” said David Hammer, head of municipal bond portfolio management at Pimco in New York.

By REUTERS

MAY 17, 2017, 5:30 A.M. E.D.T.

(Reporting By Daniel Bases; editing by Diane Craft)

NEW YORK — The U.S. Department of Justice’s bankruptcy watchdog said on Friday it plans to appoint a committee of retirees in Puerto Rico’s bankruptcy to negotiate for pensioners facing benefit cuts as part of the island’s debt restructuring.

Puerto Rico, carrying some $50 billion in unfunded pension liabilities, “clearly needs a retiree committee and sooner rather than later,” the office of the U.S. Trustee said in a filing in federal court in San Juan.

Puerto Rico filed the biggest municipal bankruptcy in U.S. history earlier this month. In addition to its pension debt, the U.S. territory has around $70 billion in bond debt it cannot pay.

While retiree committees are common in bankruptcies with big pension debts, the Trustee in Puerto Rico’s case took the rare step of announcing intentions to appoint a committee without waiting for a blessing from the judge in the case, U.S. District Judge Laura Taylor Swain.

“The Trustee typically will refrain from exercising his discretion … to appoint an additional committee until the court has an opportunity to rule,” the filing said. “But this case is not like most cases.”

Puerto Rico’s biggest public pensions are almost 100 percent underfunded, a gap thought to be the largest state-level pension hole in U.S. history.

The federally-appointed board overseeing the island’s finances has called for cuts to pension benefits, saying they are necessary to pull the island out of a crisis marked by a 45 percent poverty rate, unemployment more than twice the U.S. average, and near-insolvent public health systems.

The Trustee said it expects to complete the solicitation process for the committee by June 16.

At the island’s first bankruptcy hearing this week in San Juan, Robert Gordon, an attorney for an informal group comprising 91,000 retirees, argued “they have earned the right to participate in this process.”

The Trustee, however, stressed in its filing that Judge Swain should not grant Gordon’s group the right to serve as the official committee. Appointing the committee is the job of the Trustee, the filing argued.

Gordon could not be immediately reached for comment.

By REUTERS

MAY 19, 2017, 4:09 P.M. E.D.T.

(Reporting by Nick Brown; editing by Grant McCool)

Kroll Bond Rating Agency (KBRA) has affirmed the AA+ long-term rating and Stable Outlook assigned to the San Diego Unified School District’s (CA) (SDUSD or “the District”):

• 2016 General Obligation Bonds (Dedicated Unlimited Ad Valorem Property Tax Bonds) (Election of 2008, Series J-2),
• 2016 General Obligation Refunding Bonds (Dedicated Unlimited Ad Valorem Property Tax Bonds) Series SR-1 and R-5,
• 2016 General Obligation Bonds (Dedicated Unlimited Ad Valorem Property Tax Bonds) (Election of 2008, Series I), and
• 2016 General Obligation Bonds (Dedicated Unlimited Ad Valorem Property Tax Bonds) (Election of
• 2012, Series F and Series G Bonds) (together “the Rated Bonds”).

Please click on the link below to access the report:

San Diego Unified School District GO Bonds

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of AA- with a Stable outlook on the Municipal Improvement Corporation of Los Angeles (MICLA or “the Corporation”) Lease Revenue Refunding Bonds, Series 2016-A (Capital Equipment) and Lease Revenue Refunding Bonds, Series 2016-B (Real Property). This rating is based on the City of Los Angeles’ long-term general obligation rating and evaluation of the factors discussed in KBRA’s U.S. State and Local Government Abatement Lease Methodology. Generally, ratings assigned to the majority of the U.S. state and local abatement lease obligations by KBRA will be one to two notches below the government lessee’s general obligation rating.

KBRA has also affirmed the long-term rating of AA with a Stable outlook on the general obligation debt of the City of Los Angeles, California (L.A. or “the City”). This rating applies to all of the City’s outstanding general obligation bonds except for bonds backed by a letter of credit or liquidity facility. As of November 1, 2016, the City has approximately $703.8 million of general obligation bonds outstanding. The rating of the City’s general obligation bonds is based on KBRA’s U.S. Local General Obligation Rating Methodology.

Please click on the link below to access the report:

MICLA Lease Revenue Refunding Bonds, Series 2016-A and Series 2016-B

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of AA with a Stable outlook on the City of Los Angeles Solid Waste Resources Revenue Bonds. As of June 30, 3016, the city has approximately $209.3 million in Solid Waste Resources Revenue Bonds outstanding.

This rating is based on KBRA’s U.S. Special Tax Rating Methodology, which identifies special tax revenues as taxes or fees levied on the sale of goods and services or other specifically defined activities. The City of Los Angeles Solid Waste Resources Revenue Bonds are secured by a solid waste resource fee, which is collected from certain residential properties in the city of Los Angeles and used by the Los Angeles Bureau of Sanitation to fund portions of the city’s solid waste program. The fee is the not considered to be a tax.

Please click on the link below to access the report:

City of Los Angeles Solid Waste Resources Revenue Bonds

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Island’s power monopoly seeks private bond sale

The U.S. Virgin Islands’ public utility is asking Wall Street to help finance an upgrade of its energy infrastructure as unpaid bills pile up and conflict with its regulator escalates.

The Virgin Islands Water & Power Authority, or WAPA, expects to privately sell up to $85 million in debt by next month, according to people familiar with the matter. The sale, managed by Atlanta-based broker-dealer IFS Securities Inc., is open to select investors and won’t carry a rating from the major credit rating firms, these people said.

A WAPA spokesman didn’t return requests for comment. A spokeswoman for WAPA’s regulator, the Virgin Islands Public Services Commission, also declined to comment.

A successful sale would signal that credit markets aren’t closed to WAPA despite dwindling cash balances, large capital needs and rocky relations with its regulator. Credit ratings firms have hammered the utility with downgrades into junk status over the past year.

The Virgin Islands has never defaulted on its debt obligations, but its financial standing is top-of-mind for investors in the U.S. municipal bond market following the financial collapse of Puerto Rico, a Caribbean neighbor 80 miles away. The U.S. territories share common fiscal problems including high debt levels, mounting pension costs, outdated infrastructures and shrinking tax bases.

Those troubles extend to WAPA, the power monopoly serving the Virgin Islands’ roughly 105,000 inhabitants. The PSC has refused since January to approve a requested rate increase, prompting a public war of words with WAPA, and with cash flows under pressure the utility is behind on its supplier bills. The utility relies on the PSC to approve customer rates that cover the cost of generating and distributing power.

WAPA was forced over the weekend to switch to burning oil at its generation plants after Vitol Group suspended shipments of liquefied petroleum gas, their usual fuel source. After the announcement, the PSC said WAPA had failed to explain why the invoices had gone unpaid when the rates charged to customers should cover the cost of fuel deliveries.

“Those costs are not surprises, and are included in WAPA’s rates, but not being paid,” the regulator said.

Oil supplier Glencore Ltd. also cut off shipments temporarily in January, according to the PSC. Trafigura Trading LLC, another vendor, recently won a $24 million court judgment against WAPA over unpaid bills.

Proceeds from WAPA’s planned bond sale would cover costs associated with the conversion of its generating units to liquefied propane, a cleaner-burning fuel than oil. Yields on the proposed sale have risen during the marketing process to placate prospective investors, and terms may change further before the deal is completed, a person familiar with the matter said.

WAPA owes $253 million in bond debt, according to its financial disclosures.

Twice in the past six months, the Virgin Islands has tried and failed to sell debt amid fears it could wind up under a restructuring proceeding similar to what Congress designed for Puerto Rico. A federal rescue law passed last year allows Puerto Rico to restructure its debts outside the U.S. bankruptcy system, which the U.S. territories can’t access.

“It certainly casts a heavy shadow on our approach to the market,” said Valdamier Collens, commissioner of the Virgin Islands Department of Finance. “We’re very aware of the contagion effects.”

Like Puerto Rico, the Virgin Islands isn’t funded on an equal basis with U.S. states in federal health-care, highway and tax programs, Mr. Collens said. A five-year plan adopted by the Virgin Islands in December calls for raising property tax levies, timeshare fees and “sin taxes” on cigarettes and alcohol while improving revenue collection and cracking down on past-due taxes.

The Virgin Islands has relied increasingly on bond proceeds to pay operating costs while contributing less to pension plans. That borrowing has increased its debt to a level similar to that of Puerto Rico, on a per capita basis.

Meanwhile, Puerto Rico’s creditors are bracing for a potentially lengthy legal fight over how to restructure a $73 billion mountain of debt.

The federal oversight board that placed Puerto Rico under court protection is pushing a fiscal plan that pays creditors less than a quarter of the $35 billion they are owed over the next decade. Creditors are scheduled to face the board in court for the first time on May 17 as its benchmark general obligations tumble to all-time lows in the wake of the oversight board’s action.

The Wall Street Journal

By Andrew Scurria

Updated May 11, 2017 10:40 a.m. ET

Write to Andrew Scurria at [email protected]

Whatever the president says, this state does the opposite. It’s working.

To justify his executive orders nullifying policies protecting people from climate change, hazardous working conditions and persecution because of their religion or citizenship status, President Donald Trump during a Feb. 16 press conference said: “To be honest, I inherited a mess. It’s a mess. Jobs are pouring out of the country.” He later told the Conservative Political Action Conference that regulations are “crushing our economy.”

That’s a claim worth exploring. Look at California, which is one-eighth of the U.S. population with 39 million people and one-seventh of the nation’s gross domestic product of $2.3 trillion. Far from being a mess, California’s economy is bigger than ever, rivaling the U.K. as No. 5 in the world, when figures for 2016 are officially tabulated.

California is the chief reason America is the only developed economy to achieve record GDP growth since the financial crisis of 2008 and ensuing global recession, according to data compiled by Bloomberg. Much of the U.S. growth can be traced to California laws promoting clean energy, government accountability and protections for undocumented people. Governor Jerry Brown, now in his fourth term, considers immigrants a major reason for the state’s success: “39 percent of us are Latino and the majority are from Mexico,” he said in a March 2 interview in his Sacramento office.

In the stock and bond markets, where investors show no allegiance to political parties, California has outperformed the rest of the U.S. the past five years, especially since the Nov. 9 election, when Trump became the fifth person to win the Electoral College and lose the popular vote. California’s creditworthiness keeps getting better, measured by the declining premium global investors must pay to ensure against depreciation of the state’s debt obligations. That premium has diminished more than for any other state since 2012, according to data compiled by Bloomberg. California, whose voters favored Hillary Clinton two to one, outperformed Treasury bonds since the November election. Texas, which is the second-largest state in population and which supported Trump, became cheaper compared to Treasuries and California in the market for state and local debt since the November election. Investors see security in the state with more protections for immigrants and more regulations.

California’s borrowing cost is 0.15 percentage points lower than the average for states and municipalities and has declined to just 0.24 percentage points more than the U.S. pays on its debt, down from 1.97 percentage points in 2013.

At the same time, bonds sold by California’s municipalities produced a total return of 2.3 percent since November, outperforming the benchmark for the U.S., according to data compiled by Bloomberg. The growing popularity of bonds sold by California issuers is a consequence of the state’s more rigorous regulation of the market, specifically legislation signed by Brown last year, creating greater transparency and accountability for issuers of California debt.

No state or country has created as many laws discouraging fossil fuels and carbon while promoting clean energy. That convergence of policy and voter preference is paying off in the stock market.

California is home to 20 of the 130 companies in North America and South America that meet the standard classification of clean energy. These 20 companies produced a total return of 45 percent during the past 12 months, beating the clean energy benchmark’s 13 percent, the S&P 500’s 19 percent and the S&P 500 Energy Index’s 6 percent.

California clean energy companies reported annual revenue growth of 26 percent, almost three times the benchmark, and they turned more revenue into profit with an average gross margin of 46 percent, compared to 41 percent for the benchmark. California companies also spent 13 percent of their revenue on research and development compared to 8 percent for the benchmark. Jobs at clean energy companies in California increased 14 percent last year, double the average rate for the industry. Analysts surveyed by Bloomberg say these 20 stocks will gain only 1 percent during the next 12 months, because they achieved their target valuations much sooner than predicted. Tesla Inc., the Palo Alto-based manufacturer of electric vehicles, appreciated 60 percent since Trump’s election and is now worth more than $50 billion, greater than Ford Motor Co.’s $45 billion market capitalization and almost as much as General Motors Co.

“We have a goal of a million and a half electric vehicles by 2025 and that’s quite a steep curve to get there,” Brown said in the interview in March. “No matter what Trump says, China, the world, the academies of science and all the major countries have all recognized climate change. Certainly, businesses acknowledge they have to make these investments. California is well on its way.”

Technology driving the clean energy boom is the reason California companies lead most of their peers in U.S. The 467 California-based firms in the Russell 3000 Index produced a total return of 185 percent since 2012, easily surpassing the 94 percent for the index, according to data compiled by Bloomberg. Analysts also are more bullish on companies in California than the rest of the U.S., predicting a 12-month average total return 12 percent (income plus appreciation) versus 9 percent, according to data compiled by Bloomberg.

Behind such a favorable outlook is the diversity of the California economy, which grew $42.3 billion during the first three quarters last year. That’s almost as much as the next two fastest-growing states, New York and Florida, combined.

California’s revenue from agriculture, forestry, fishing and hunting totaled $39 billion in 2015, plus $279 billion from manufacturing. The trailing 12-month revenue from California technology companies is $720 billion, or 54 percent of the U.S. industry, according to data compiled by Bloomberg.

The capitalist juggernaut that is California helps explain why the state’s per capita income increased 9.5 percent since 2015, the most of any state and the most since 2012, according to data compiled by Bloomberg. Far from losing jobs overseas, California keeps creating them with an unemployment rate declining to 4.9 percent from 5.7 percent in 2016, faster than the national average.

None of this is lost on the residents of California. They are proudly enacting policies in opposition to Trump’s. The legislature became the first to vote to become a sanctuary state, and supported raising gas taxes and vehicle registration fees to improve infrastructure. While Trump gets the lowest approval of any new president after 100 days and the Republican Congress does worse, the politics of California are the opposite. A recent University of California Berkeley Institute of Government Studies poll found 57 percent of California’s registered voters approve of the legislature’s job performance. Brown gets 61 percent approval.

If that’s a “mess,” Trump could only hope for more of it.

Bloomberg View

By Matthew Winkler

May 10, 2017, 2:00 AM PDT

(With assistance from Shin Pei.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matthew Winkler at [email protected]

To contact the editor responsible for this story:
Philip Gray at [email protected]

Fitch Ratings-New York-05 May 2017: The Commonwealth of Puerto Rico’s ratings are unchanged following the filing on May 3, 2017 by the Puerto Rico Oversight Board of a petition under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), according to Fitch Ratings.

The sales tax bonds of the Puerto Rico Sales Tax Financing Corporation (COFINA) and the pension funding bonds of the Employees Retirement System of the Commonwealth of Puerto Rico (ERS) are currently rated ‘C’ by Fitch and are on Rating Watch Negative. The ‘C’ rating indicates Fitch’s belief that default of some kind on the COFINA and ERS bonds appears inevitable due to the Commonwealth’s previously stated intent to restructure its debt.

Although sales tax revenues pledged to COFINA continue to be set-aside per the flow of funds and debt service has been paid, there is significant uncertainty as to the eventual impact of a broader restructuring of the commonwealth’s debt on COFINA bondholder protections.

The ERS has begun to draw on the debt service reserve to make debt service payments. A default on the pension bonds is expected once the debt service reserve is depleted, which is expected as early as this month (May 2017). Under the Commonwealth’s debt moratorium, enacted in April 2016, the Commonwealth has suspended transfers of employer contributions to the ERS in an amount equal to the debt service payable by the ERS and suspended the obligation of the ERS to transfer pledged funds to the trustee under the bond resolution.

Fitch rates securities on which the Commonwealth has already failed to make full and timely payment ‘D’. These securities include the general obligation (GO) bonds and government facilities revenue and revenue refunding bonds, issued by the PR Building Authority and guaranteed by the Commonwealth.

The Commonwealth’s Issuer Default Rating (IDR) remains ‘RD’, indicating that the issuer has defaulted on a select class of its debt.

Other ratings of Commonwealth entities include:

Puerto Rico Electric Power Authority (PREPA): The current rating of ‘C’ and the Rating Watch Negative continue to reflect Fitch’s view that a payment default or restructuring of PREPA’s debt obligations is inevitable. A common component of the PREPA restructuring plans being considered is the reduction of existing debt by means of a proposed distressed debt exchange.

Puerto Rico Aqueduct and Sewer Authority (PRASA): PRASA’s rating of ‘C’ and Negative Watch reflects Fitch’s view that a payment default or restructuring appears inevitable. PRASA’s fiscal plan recently approved by the Oversight Board projects annual shortfalls over the next 10 years absent significant cuts in debt service costs or sizeable rate increases that may be untenable. To date, PRASA has made all payments related to its rated bonds, although PRASA entered into forbearance agreements related to its state revolving fund and rural development obligations in June 2016 and currently owes more than $70 million to contractors.

Housing Finance Authority (HFA): Fitch currently rates two of the Authority’s outstanding bond issues; both ratings are on Rating Watch Negative:

–Puerto Rico Housing Finance Authority capital fund modernization program subordinate bonds (Puerto Rico Housing Projects), series 2008 (Non-AMT) ‘A’. The capital fund bonds are secured by payments from Puerto Rico Public Housing Administration’s public housing HUD capital fund annual appropriations;
–Puerto Rico Housing Finance Authority mortgage-backed certificates, 2006 series A ‘AAA’. The certificates are limited obligations of the issuer secured by the revenues and assets of a trust indenture portfolio of GNMA and FNMA MBS.

Contact:

Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

PREPA Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738

PRASA Analyst
Douglas Scott
Managing Director
+1-512-215-3725

HFA Analyst
Vincent Barberio
Managing Director
+1-212-908-0505

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: [email protected].

Additional information is available on www.fitchratings.com

• Bondholders would exchange debts for newly issued securities
• Pact needs broader approval of creditors and U.S. court

Puerto Rico said creditors of the insolvent government development bank agreed to accept losses by exchanging their bonds for new securities, moving the island another step toward escaping from some of its crushing debts.

Governor Ricardo Rossello said Monday that his administration struck a deal with major bondholders of the bank, which borrowed for the U.S. territory until the island’s fiscal crisis pushed it to default. If approved by others creditors, the financial oversight board and a U.S. court, the bank would be wound down and investors would receive bonds issued by a new entity that would take over its assets, which are worth some $5.3 billion.

Under the agreement, bondholders would exchange their debts at 55 percent, 60 percent or 75 percent of face value, depending on whether they elected to receive higher interest payments or the prospect of a greater recovery through debt with less legal claim to the bank’s cash, according to terms disclosed in a bond filing.

The deal comes less than two weeks after Puerto Rico initiated bankruptcy-like proceedings, giving it power to have debts dismissed in U.S. court if creditors don’t voluntarily agree to accept less than they’re owed. Puerto Rico has already reached a similar agreement with creditors of the government electric company and officials have said they intend to continue negotiating with investors who hold securities sold by other arms of the island’s government.

“This agreement is an example that the government is regaining the credibility it had lost over the past few years,” Rossello said. “We are satisfied with this agreement.”

While imposing losses on bondholders, the agreement will allow them to recoup more of their investment than current trading prices suggest. Government Development Bank bonds due in August, for example, traded Monday for an average of 24.3 cents on the dollar.

Rossello said at a press conference Monday that 45 percent of bondholders have so far consented to the restructuring. Under the federal emergency rescue law that allows for Puerto Rico to legally cut its debts, any voluntary agreement must be approved by a two-thirds vote of bondholders.

The agreement included the so-called ad hoc group — comprised of funds managed or advised by Avenue Capital Management, Brigade Capital Management, Fir Tree Partners and Solus Alternative Asset Management — as well as local bondholders.

“While we are voluntarily accepting to sustain significant losses, up to 45 percent of the savings that Puerto Ricans worked for, it is because we are Puerto Ricans first and we recognize the circumstances in which Puerto Rico is today,” Rafael Rojo, a spokesman for local bondholder group Bonistas del Patio said in a statement.

Under the terms of the deal, the bank’s assets, including municipal loans, real estate and cash, would be transferred to the new entity. The issuer would cover payments on the two senior debt classes first, and holders of subordinate securities wouldn’t receive any principal until those other bonds are paid. If cash isn’t available for interest payments, bondholders would receive more debt instead, according to the term sheet released by the bank.

The bank, which used to borrow for public works, was undermined by the loss of its investment-grade bond rating in 2014, which effectively shut it out of the capital markets. Puerto Rico’s fiscal oversight board, which was installed to help end the island’s crisis, has already approved a fiscal plan that would shut it down.

That plan said the bank had key assets of $6.5 billion and major liabilities of $7.4 billion.

Bloomberg Markets

by William Selway and Alexander Lopez

May 15, 2017, 6:38 AM PDT May 15, 2017, 9:10 AM PDT

• Billions sunk into grand projects, expenses and bureaucracy
• In San Juan, $2.25 billion bought a money-losing train line

San Juan’s gleaming commuter train seemed like a coup — the kind of big-ticket item many U.S. cities can only dream of.

More than a decade on, the Tren Urbano is a monument to the folly, bloat and abuse that finally bankrupted Puerto Rico. Despite years of planning, it sells only a third of the rides it needs to, and loses roughly $50 million a year. The cost so far: $2.25 billion, $1 billion more than planned.

That, in a nutshell, is Puerto Rico’s story. With Wall Street’s help, the U.S. commonwealth borrowed tens of billions in the bond markets, only to squander much of it on grand projects, government bureaucracy, everyday expenses and worse. Debts were piled on debts, even as the economy gave way.

Continue reading.

Bloomberg Politics

by Martin Z Braun and Jonathan Levin

May 15, 2017, 2:00 AM PDT May 15, 2017, 7:22 AM PDT

Prices of bonds from Puerto Rico’s record $3.5 billion municipal junk offering in 2014 are tumbling to fresh lows. The general obligations due in 2035, many of which were bought by hedge funds when they were issued at 93 cents on the dollar, changed hands at an average of 61.9 cents Tuesday in trades of more than $1 million, with smaller lots sold for as little as 58.4 cents. The territory’s decision last week to use bankruptcy-like powers granted by Congress has cast doubt on how much of their investment bondholders will recoup.

Bloomberg Markets

by William Selway

May 10, 2017, 7:34 AM PDT

• Commonwealth’s pension systems set to go broke this year
• Island’s $123 billion bankruptcy biggest in municipal history

The message in Puerto Rico is blunt: pay us, not Wall Street.

Anger over the biggest municipal bankruptcy in U.S. history has centered on the urgent question of public pensions. Puerto Rico has promised its workers and retirees $49 billion in benefits, but it’s guaranteed bondholders even more.

The pension system is scheduled to run out of money as soon as July, and many on the island fear, with benefit cuts already under discussion, that the hedge funds who own one-third of the commonwealth’s bonds will wrangle a better deal than ordinary Puerto Ricans.

“The whole situation is unfair,” said Maria Rodriguez, a 64-year-old retired employee of the Public Building Administration. “I worked for over 35 years for the government and now it’s apparently clear that my pension will be cut by at least 10 percent. This is the result of the actions of multiple administrations from both parties.”

It’s a no-win situation for Puerto Rico and its 3.5 million people. Schools are being closed, talented residents are leaving and the economy has been contracting for years.

That’s the mess confronting U.S. District Judge Laura Taylor Swain as the adversaries face off for the first time in federal court May 17 in San Juan. They’ll be tussling over $123 billion owed to retirees and creditors.

‘Don’t Care’

In pre-hearing rhetoric, labor groups are painting rich hedge funds as uncaring vultures looking to extract money from less-wealthy public workers. The creditors say there would be more money for everyone if Puerto Rico improved its revenue collections and thinned its hulking government bureaucracy.

“Hedge funds don’t care what happens to the people, they want to get more profits,” said Emilio Nieves, president of Puerto Rico’s National Union of Educators and Education Workers. “They are our oppressors. We will resist and the government of Puerto Rico must decide if they are in favor of the people or the bondholders.”

Average annual pension benefits are $14,000, according to Puerto Rico’s federal oversight board, and roughly one-third of employees are ineligible for Social Security benefits. Nearly half of island residents live in poverty and the median household income is $19,350, compared with $53,889 in the 50 states, according to U.S. Census data.

The commonwealth’s federal oversight board anticipates a 10 percent cut in pension expenses. That’s more generous than what Governor Ricardo Rossello offered bondholders in his latest public proposal. General-obligation bonds, or GOs, which the island’s constitution says must be repaid before other bills, would receive a best-case recovery of 90 cents on the dollar. Since that estimate depends on an improvement in the government’s finances, the recovery could be as low as 70 percent.

Divide Payments

Rossello’s fiscal plan would pay bondholders less than a quarter of what they’re owed in principal and interest through 2026. The government hasn’t said how they would divide those payments, or which group is first in line.

“As much as there were promises made to various stakeholders on the island — pensioners, current government employees or contractors who work for the government — those are all implicit promises,” said David Tawil, president and co-founder of Maglan Capital LP in New York, who bought Puerto Rico bonds in 2013 but has since sold them. “The bondholders have explicit promises whether they be in offering documentation or whether they be pursuant to the constitution.”

The court hearing comes two weeks after Puerto Rico’s federal oversight board filed a form of bankruptcy called Title III to help reduce its $74 billion of debt and tackle its unfunded pension crisis. It will be the largest restructuring in the history of the $3.8 trillion municipal-bond market.

Title III, a provision in the Puerto Rico relief law that Congress passed last year, is the only way for the island to force pension recipients to accept benefit cuts in court. Puerto Rico needed to pursue Title III in part because of its pension crisis, the board wrote in its May 3 filing. Another negotiating provision called Title VI didn’t include retirement savings.

Official Committee

The various parties have already begun wrestling over repayment. A coalition of retiree groups has asked Swain to appoint an official committee to represent government pensioners in the court battle. Until now, pensioners have been excluded from talks between bondholders and Puerto Rico because the negotiations took place under Title VI.

A court-recognized committee would give retirees an equal footing with other creditors, said Robert Gordon, a lawyer with Clark Hill PLC, who’s representing more than half the island’s 160,000 public employee retirees.

“We need a voice in the case,” said Gordon, who also represented the retirement systems in Detroit’s bankruptcy case.

In a separate suit, a labor group representing more than 12,300 commonwealth workers and retirees is asking a court to declare Rossello’s fiscal plan unlawful because of its proposed pension cuts, though it doesn’t specify the impact on a retiree’s monthly check. That lawsuit is on hold while the bankruptcy case goes forward. Other suits directly affecting the restructuring will also likely be put on hold.

Detroit’s Example

In Detroit, retired police and firefighters saw no reduction, while general employees got about 95 percent of what they were promised. Cost-of-living increases were cut for police and firefighters and eliminated for general employees. Both groups also saw health benefits cut. The changes were expected to result in a 74 percent reduction in the city’s total post-employment benefit costs.

It may be difficult for pensioners to avoid taking losses. Puerto Rico’s constitution says that general obligations must be repaid before other bills, and retirement expenses don’t have the same repayment pledge, said Ted Hampton, a Moody’s Investors Service Inc. analyst in New York.

“Pensions are not up there with GOs,” Hampton said. “The judge is going to have to think about what that means.”

Sales-Tax Bonds

Another class of creditors, those who own sales-tax bonds, have a dedicated claim on levy revenues. Rossello’s plan offers them as much as 58 cents on the dollar, if Puerto Rico’s finances improve, and as little as 39 cents on the dollar.

Hedge funds, like public workers, find fault with Rossello’s fiscal plan, which estimates annual government expenses, including essential services, will total $17.9 billion this year and reach $22.3 billion in 2026. Creditors want to see a breakdown of which services are deemed essential.

Hedge funds holding $1.4 billion of general-obligation bonds sold in 2014, including Aurelius Capital Management and Monarch Alternative Capital, sued the commonwealth on May 2, seeking overdue payments. Another group of hedge funds holding $1.9 billion of senior sales-tax bonds, including Whitebox Advisors, Merced Partners and Tilden Park Capital Management, also sued the governor on May 2 to stop his fiscal plan from redirecting sales-tax revenue to the island’s general fund and away from bond repayments.

Puerto Rico only has roughly $1 billion of the $49 billion promised to current and future retirees. That gap is a result of the commonwealth skipping employer contributions to the system, offering benefits without adequate funding and extending loans to retirement-fund participants.

“Puerto Rico’s pensions unfortunately had a history of engaging in practices that were not common elsewhere and that were very threatening to their long-term solvency,” Hampton said. “Part of what the court will look at is the legacy of those unusual or ill-advised practices.”

Bloomberg Markets

by Michelle Kaske and Steven Church

May 12, 2017, 2:00 AM PDT

• OppenheimerFunds is top mutual fund holder with $6.3 billion
• Mutual funds hold $15 billion of uninsured Puerto Rico debt

The biggest restructuring in the history of the U.S. municipal-bond market will fall heavily on hedge funds that wagered Puerto Rico wouldn’t go broke. But there’s plenty of little guys left holding the bag, too.

More than two-dozen mutual funds hold about $15 billion of uninsured Puerto Rico bonds, about 20 percent of Puerto Rico’s $74 billion debt, according to the most recent data compiled by Bloomberg. While that’s less than what it was more than three years ago — before the island’s rating was cut to junk — the figures show that smaller investors who own mutual fund shares still have a significant stake, despite a buying spree by speculators who scooped up about a third of the government’s debt when others fled.

OppenheimerFunds Inc., a unit of Massachusetts Mutual Life Insurance Co., is the biggest mutual-fund holder with $6.3 billion. Franklin Resources Inc., the second-biggest, has about $3.1 billion. UBS Asset Managers of Puerto Rico funds hold $1.4 billion, followed by those run by Goldman Sachs Group Inc., which have about $1.2 billion.

Mutual funds bought the island’s debt because it offered high-yields and was exempt from taxes across the nation.

While those investments have been jeopardized by the island’s decision Wednesday to turn to a U.S. court to restructure its debt after a series of defaults, those mutual funds will likely see little immediate impact. The Caribbean territory’s crisis has been building for two years, giving funds plenty of time to pare their exposure. And the court filing — allowed under emergency legislation enacted by Congress last year — had little impact on bond prices, which had already tumbled. One of the island’s most active securities, general-obligation bonds that were first sold for 93 cents on the dollar in 2014, traded for 64 cents Friday.

The variety of bond holders, however, underscores the broad reach of the commonwealth’s crisis, which will be sorted out under the supervision of U.S. District Judge Laura Taylor Swain after it proved too vast for the government to do out of court. Puerto Rico has issued many different classes of debt backed by different revenue sources: general revenue, sales taxes, utility fees — even rum-tax money.

While analysts say it’s impossible to gauge exactly how much of their money various bondholders will get back, they won’t be totally wiped out. Before seeking out court protection, Puerto Rico offered general-obligation bondholders at least 70 cents on the dollar, with the possibility for 20 cents more if the island’s finances rebound.

Despite its stake in Puerto Rico, OppenheimerFunds’ Rochester High Yield Municipal Fund is the top-performing municipal fund over the last three years, returning 8.3 percent annualized, according to data compiled by Bloomberg. The $5.8 billion fund is a large holder of junk-rated tobacco bonds, which returned an annual 11.3% in the three years ending March 31, according to the S&P Municipal Bond Tobacco Index.

“Rochester funds have long believed that a negotiated resolution and restructuring without the expensive delay of protracted litigation is the best way forward for all parties,” said Kimberly Weinrick an OppenheimerFunds spokeswoman. “In view of the financial oversight board’s Title III filing and its decision to ignore a serious and constructive plan that we put forward in good faith, we are considering all appropriate legal remedies to protect and preserve the rights of fund shareholders.”

Franklin has reduced its exposure to Puerto Rico since 2012 because of the government’s weakening finances, said Stacey Coleman, a spokeswoman for the company. Its mutual-fund investors are also relatively protected against what was retained: None of Franklin’s funds have more than 5 percent of its assets invested in the island, and some have none at all, she said.

“We retained those investments that we believed were in the strongest position and felt had significant legal and constitutional protections by their indentures and the Puerto Rico constitution itself,” she said.

Peter Stack, a UBS spokesman, declined to comment, as did Andrew Williams, a spokesman for Goldman Sachs.

Bloomberg calculated fund holdings as face value for non-zero coupon bonds and at accreted value of zero coupon bonds. Derivatives, fully refunded bonds, insured and tobacco debt weren’t included.

Bloomberg Markets

by Martin Z Braun

May 8, 2017, 2:00 AM PDT May 8, 2017, 7:21 AM PDT

• Bondholders push competing claims but island may void them all
• ‘This is a government restructuring, not a court one’

Dealing with Puerto Rico’s crushing debt has started to resemble a circular firing squad.

Simply put, the bankrupt island can’t pay everything it owes, so creditors are taking aim at each other as they squabble over who will get what’s left. But the debt’s size and the tangled process invented to rescue Puerto Rico mean there’s no established rule book to shape what comes next.

Holders of general-obligation debt have declared their right to be paid first, owners of sales-tax bonds are squabbling with one another over who deserves priority, and they’re all up against the commonwealth’s leaders, who want the cash for essential services. Amid this melee, Puerto Rico’s federal overseers will have to choose between paying U.S. hedge funds everything they’re owed or keeping schools, water and electricity running.

“There just isn’t enough money,” said Matt Fabian, a partner with Municipal Market Analytics Inc. in Concord, Massachusetts, who foresees a chaotic brew of lawsuits, federal interventions and politics. “Nobody has any idea what’s going to happen.”

All told, Puerto Rico has about $74 billion in debt and $49 billion in pension liabilities. Hedge funds holding $1.4 billion of general-obligation bonds, including Aurelius Capital Management and Monarch Alternative Capital, have already sued to get overdue principal and interest. On the other side, owners of $17 billion in sales-tax bonds, including Tilden Park Capital Management and GoldenTree Asset Management, have entered the fray. They’ll meet for the first time in court on May 17 in San Juan.

Default Notice

The dispute over the sales-tax bonds, named Cofinas after the agency that issued them, began in earnest May 4. That’s when the trustee, Bank of New York Mellon Corp., sent a notice of default to the authority that sold the bonds. The object was to keep the government from diverting the sales-tax revenue to other purposes before it pays what it owes to investors.

The New York-based bank acted after weeks of pressure from senior bond owners who urged the trustee to safeguard their claims. In the process, junior bondholders were irked because the default notice could mean no payments for them until the senior bondholders are paid in full. The notice sets a 30-day deadline for a response from Puerto Rico, which is supposed to pay about $256 million of principal and interest on Aug. 1, according to data compiled by Bloomberg.

Puerto Rico’s status as a commonwealth means it’s not subject to traditional bankruptcy laws. Instead, the island filed for the next best thing to deflect claims, called Title III. It’s an in-court restructuring based on the U.S. bankruptcy code that was created under Puerto Rico’s Promesa law last year. But it’s never been used before, which means any cuts imposed by U.S. District Court Judge Laura Taylor Swain will be more likely to face years of appeals than a typical case.

Delayed Filing

Puerto Rico’s initial Title III filing on May 3 didn’t include Cofina. If it had, BNY Mellon may have been prohibited from sending its May 4 default notice. But the oversight and management board didn’t file its separate Title III action for Cofina until May 5, giving the bank a window to declare the default.

The delay means it’s unclear whether the Title III filing voids BNY Mellon’s default notice, as well as a separate default notice sent by Ambac Assurance Corp. on May 1. Regardless, BNY Mellon and senior creditors are prepared contest a court’s decision if it’s not in their favor, according to a person familiar with the matter, who asked not to be identified discussing private information. The government hasn’t said how it will respond.

“As a public policy, legal defense strategies are not discussed until they are presented in judicial forums,” Yennifer Alvarez, a spokeswoman for Governor Ricardo Rossello, wrote in an emailed comment.

The senior bondholder group, which controls about one-third of the senior Cofina bonds, is led by hedge funds Whitebox Advisors, Tilden Park Capital Management, GoldenTree Asset Management and Merced Capital, according to Susheel Kirpalani, a lawyer at Quinn Emanuel Urquhart & Sullivan who represents the group.

Debt Due

For investors, there’s a lot at stake. Cofina holders are owed more than $8 billion in debt service through 2026, with $704 million in payments due in the next fiscal year, which starts in July, according to the commonwealth’s fiscal plan.

The territory owes all bondholders $33.4 billion in debt payments between now and 2026, according to the plan, but it proposes to pay only about $8 billion. The government hasn’t said how bondholders should divide those payments, or which group is first in line.

“This is a government restructuring, not a court one, so the government will be in the driver’s seat,” Fabian said. “Creditors will not be heard to the extent they’re saying, ‘let’s do it a different way.’ Those arguments won’t have any standing in a court.”

Owners of junior Cofinas could be left vulnerable. BNY Mellon holds a trustee reserve fund of sales-tax revenue with about $400 million, more than enough to handle the upcoming August payment, according to people familiar with the matter.

But because of the default notice, junior bondholders are unlikely to be paid, in order to safeguard claims of the senior Cofinas, said the people, who asked not to be identified discussing private transactions. Given the limited funds available for debt repayment, there’s a chance the subordinated holders could get little or no recovery. A representative for BNY Mellon declined to comment.

What’s more, general-obligation bondholders claim that the entire Cofina structure violates the island’s constitution, and all the sales-tax revenue is owed to them. If the general-obligation claims are supported in court, all of the Cofina debt could be ruled invalid and investors could receive nothing at all.

Bloomberg Markets

by Emma Orr, Steven Church, and Michelle Kaske

May 11, 2017, 2:00 AM PDT May 11, 2017, 6:25 AM PDT

• Restructuring may leave less than market expects, analyst says
• Some general-obligations trading around 60-cents on the dollar

Puerto Rico’s record-setting restructuring may leave bondholders with larger-than-expected losses, according to according Pacific Investment Management Co.

The investment firm, which oversees $40 billion of municipal debt and has steered clear of the Caribbean island’s government bonds, said Tuesday that recoveries on some Puerto Rico securities may be less than what the current trading prices suggest. The U.S. territory, which resorted to bankruptcy-like proceedings last week, projects it can cover less than a fourth of what’s owed to investors in the next 10 years, even after taking sweeping steps to steady its finances. A federal oversight board approved that plan in March.

“We would have expected a larger drop in bond prices year-to-date considering the Promesa Financial Oversight and Management Board announced a ‘once-and-done’ approach to addressing Puerto Rico’s fiscal difficulties,” Sean McCarthy, Pimco’s head of municipal credit research, wrote in a report Tuesday.

The investment firm isn’t entirely spurning Puerto Rico. “We do see pockets of opportunity in select revenue bonds and have added a small amount of Puerto Rico enterprise debt to municipal high yield portfolios (but remain void of Puerto Rico primary government debt),” McCarthy wrote.

Before it filed for court protection, Puerto Rico’s last public offer gave general-obligation bondholders as much as 90-cents on the dollar, although some of that repayment depended on an improvement in the government’s finances.

That offer is higher than where the bonds are trading now. General obligations with an 8 percent coupon and maturing in 2035 traded Tuesday at an average 59.7 cents on the dollar, according to data compiled by Bloomberg.

Bloomberg Markets

by Michelle Kaske

May 9, 2017, 8:33 AM PDT

Shares of firms that insure some of Puerto Rico’s municipal bonds took a hit Wednesday after the island commonwealth was placed under bankruptcy protection.

Shares of Ambac Financial Group, which guarantees $10 billion in Puerto Rican debt, including the full value of the bonds at maturity, dropped 1.9% Wednesday, bringing its fall this week to 5.2% and its 2017 losses to 18%. The stock has been down for five straight sessions.

MBIA fell 0.9% and Assured Guaranty slipped 0.2%, underperforming the S&P 500′s 0.1% drop.

“Right now, Puerto Rico is the primary driver of these stock prices,” said Mark Palmer, an equity research analyst at BTIG, who believes a “dire scenario” is already baked into their prices.

About $12 billion of the island’s $73 billion in debt is insured, according to insurers’ filings on the par value of the bonds. On Tuesday, ahead of the decision by federal officials to place Puerto Rico under bankruptcy protection, Ambac challenged the commonwealth’s debt restructuring plan in federal court.

The stocks have long followed the twists and turns of the Puerto Rico case. Ambac’s stock jumped 22% in the final two months of 2016 as Puerto Rico’s new governor, Ricardo Rosselló, was seen to favor repaying the island’s debts.

Creditors had fought with the previous governor, Alejandro Garcia Padilla, but thought Gov. Rosselló, would be on their side when he took office earlier this year. Wall Street’s relationship with the governor has since deteriorated.

THE WALL STREET JOURNAL

By BEN EISEN

May 3, 2017 5:05 pm ET

WILMINGTON, Del. — Puerto Rico will begin its bankruptcy proceedings on May 17 in San Juan with a series of requests for managing the case as the commonwealth begins the process of restructuring its $70 billion in debt, according to court filing on Tuesday.

Puerto Rico’s federally appointed financial oversight board on May 3 filed the debt restructuring petition under Title III of last year’s U.S. Congressional rescue law known as PROMESA. While the initial filing was limited to obligations of the central government, it was still the largest-ever U.S. municipal bankruptcy, dwarfing that of Detroit.

Two days later, the oversight board sought bankruptcy protection for debt backed by sales tax revenues, known as COFINA.

The bankruptcy will be overseen by U.S. District Judge Laura Taylor Swain of the Southern District of New York, who was appointed by U.S. Chief Justice John Roberts.

The commonwealth has asked Swain to issue orders for case management, such as notifying its creditors and hiring a firm to manage claims, according to court filings.

Bankruptcy may not immediately change the day-to-day lives of Puerto Rico’s people, 45 percent of whom live in poverty, but it could lead to cuts in pensions and worker benefits and a reduction in health and education services.

The island’s economy has been in recession for nearly a decade, and has a current unemployment rate of about 11 percent.

The bankruptcy process will also give Puerto Rico the legal ability to impose drastic discounts on creditor recoveries, but could also spook investors and prolong the island’s lack of access to debt markets.

Prices for the commonwealth’s benchmark general obligation bonds fell to a record low on Tuesday of 58.45.

By REUTERS

MAY 10, 2017, 10:57 A.M. E.D.T.

(Reporting by Tom Hals in Wilmington, Delaware; Editing by Meredith Mazzilli)

Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of AA+ with a Stable outlook on the State of New York’s general obligation bonds. This rating applies to all of the state’s outstanding general obligation bonds but excludes bonds backed by a letter of credit or liquidity facility.

The state’s outstanding general obligation bonds are secured by its full faith, credit, and taxing power. Pursuant to the state’s constitution, general obligation debt must be voter approved. The constitution further provides that if the legislature fails to appropriate the funds necessary to make debt service payments, the comptroller must set aside the first available revenues to make such payments. KBRA views the security provisions supporting general obligation debt in New York as very strong.

Please click on the link below to access the report:

State of New York’s General Obligation Bonds

Kroll Bond Rating Agency (KBRA) has affirmed the long-term rating of AA- and stable outlook on the Chicago Transit Authority (CTA) Rail Fleet Renewal Project (Series 2016A TIFIA Bonds) loan from the U.S. Department of Transportation (DOT) and the 2015 Transportation Infrastructure Finance and Innovation Act (TIFIA) (CTA Your New Blue Improvement Project) Loan.

The TIFIA loans are secured by all CTA farebox revenues on a gross lien basis, which is defined in the legal documents as all transit fare revenues derived from CTA operations. The CTA’s TIFIA loans for the 95th Street Station project, the Your Blue Improvement Project, and the Rail Fleet Renewal Project were issued as secured bond obligations under the master trust indenture, dated April 1, 2014.

KBRA views the Chicago Transit Authority (CTA) as an essential public transit system that is critical to the economic and social infrastructure of the greater Chicago metropolitan area. The CTA also provides critical transportation links to the larger regional transportation system. The CTA is the nation’s second largest public transit system, after New York City’s, in terms of ridership, providing bus and rail service to the City of Chicago and 35 adjacent suburbs, covering 234 square miles and over 3.5 million residents. Rail service extends to both O’Hare and Midway airports. The CTA provides 81% of public transit trips in the Chicago metro area through direct service or through connecting service to Metra and Pace.

Please click on the link below to access the report:

CTA Rail Fleet Renewal Project (Series 2016A TIFIA Bonds)

Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of AAA with a stable outlook to the State of Wisconsin’s $286 million Transportation Revenue Bonds, 2017 Series 1 and affirms the rating of AAA with a stable outlook on the State’s outstanding first lien transportation revenue bonds (TRB or “the Bonds”). After issuance of the 2017 Series 1 Bonds, the State will have a total of approximately $2.1 billion in Transportation Revenue Bonds outstanding.

The long-term rating on the state’s Transportation Revenue Bonds is based on KBRA U.S. Special Tax Revenue Bonds Rating Methodology. KBRA’s evaluation of the long-term credit quality of the Wisconsin Transportation Revenue Bonds focuses on five key rating determinants:

• Legal Framework
• Nature of Pledged Revenue Tax Base
• Economic Base and Demographics
• Revenue Analysis
• Coverage and Bond Structure

Please click on the link below to access the report:

Wisconsin Transportation Revenue Bonds, 2017 Series 1

If you have any difficulties accessing the report, please contact [email protected] or visit www.kbra.com.

Assured Guaranty sues oversight board over debt-cutting plan

A bond insurer looking to minimize losses on $5.4 billion in Puerto Rico bond guarantees has fired the first legal volley following the U.S. territory’s entry into court protection.

Assured Guaranty Ltd. Thursday sued Puerto Rico’s federal oversight board, which one day earlier placed the ailing U.S. territory in what amounts to the largest ever U.S. municipal bankruptcy. The complaint, filed in federal court in San Juan, marks the first legal challenge to Puerto Rico’s debt-cutting plan by creditors following the board’s unprecedented action.

The insurer says the board overstepped when it ordered the payment of no more than $787 million annually in debt service over the next decade. That sum, less than a quarter of the $3.5 billion creditors are owed on average each year, is at the heart of a board-approved fiscal plan that forms the basis for restructuring negotiations.

Bond payments, education subsidies and pension spending were all cut in the plan, which the board approved last month after ordering more conservative economic assumptions that further diminished the surplus available for creditors.

The proposed financial overhaul, “unless totally recast, cannot possibly be permitted to serve as the basis for any lawful plan of adjustment,” Assured said in a statement.

The board’s petition under a court-supervised restructuring process known as Title III was meant to put the brakes on creditor litigation—outside of the bankruptcy-like process—seeking redress for past payment defaults. Assured filed its case in the Title III proceeding, which pits Puerto Rico against a number of hedge funds, mutual funds, insurance companies and retail investors holding its $73 billion in municipal debt.

The Wall Street Journal

By Andrew Scurria

May 4, 2017 9:24 a.m. ET

Write to Andrew Scurria at [email protected]

Shares of firms that insure some of Puerto Rico’s municipal bonds took a hit Wednesday after the island commonwealth was placed under bankruptcy protection.

Shares of Ambac Financial Group, which guarantees $10 billion in Puerto Rican debt, dropped 1.9% Wednesday, bringing its fall this week to 5.2% and its 2017 losses to 18%. The stock has been down for five straight sessions.

MBIA fell 0.9% and Assured Guaranty slipped 0.2%, underperforming the S&P 500′s 0.1% drop.

“Right now, Puerto Rico is the primary driver of these stock prices,” said Mark Palmer, an equity research analyst at BTIG, who believes a “dire scenario” is already baked into their prices.

About $12 billion of the island’s $73 billion in debt is insured, insurers’ filings show. On Tuesday, ahead of the decision by federal officials to place Puerto Rico under bankruptcy protection, Ambac challenged the commonwealth’s debt restructuring plan in federal court.

The stocks have long followed the twists and turns of the Puerto Rico case. Ambac’s stock jumped 22% in the final two months of 2016 as Puerto Rico’s new governor, Ricardo Rosselló, was seen to favor repaying the island’s debts.

Creditors had fought with the previous governor, Alejandro Garcia Padilla, but thought Gov. Rosselló, would be on their side when he took office earlier this year. Wall Street’s relationship with the governor has since deteriorated.

THE WALL STREET JOURNAL

By BEN EISEN

May 3, 2017 5:05 pm ET

WASHINGTON — U.S. Chief Justice John Roberts on Friday appointed a federal judge based in Manhattan to oversee Puerto Rico’s landmark bankruptcy case two days after the island’s government filed for protection from creditors.

In a brief statement, Roberts said he had designated U.S. District Judge Laura Taylor Swain of the Southern District of New York to handle the biggest bankruptcy in the history of the U.S. municipal debt market.

Puerto Rico, which has roughly $70 billion in debt, filed for bankruptcy on Wednesday.. Some of its public agencies are expected to do the same in coming days.

Because the U.S. territory is not eligible for traditional bankruptcy protection, the filing came under Title III of PROMESA, the federal Puerto Rico rescue law passed last year.

“I see the selection as a sign that Chief Justice Roberts knows very well the importance of this case and the need for the case to be perceived as having a fair process,” said Melissa Jacoby, bankruptcy expert and professor at UNC Law.

Under PROMESA, the chief justice is tasked with selecting a federal judge to oversee the case, which was filed in federal court in San Juan, Puerto Rico.

Swain played an important role in the revisions to the Federal Rules of Bankruptcy Procedure, which apply to PROMESA Title III, Jacoby said.

A Harvard Law School graduate, Swain served from 1996 to 2000 as a bankruptcy judge for the Eastern District of New York after working in private practice at the law firm Debevoise & Plimpton. She specialized in employee benefits, executive compensation, employment and federal health and pension laws.

Swain has presided over other notable cases since being appointed to the federal bench by President Bill Clinton in June 2000, including trials of associates of Bernard Madoff tied to his multibillion-dollar investment Ponzi scheme.

She presided over several financial crisis related cases over soured mortgage-backed securities against major banks.

Last year, the 2nd U.S. Circuit Court of Appeals in Manhattan voted 3-0 to overturn her decision to dismiss a class-action lawsuit brought by investors. They accused drugmaker Pfizer Inc of causing tens of billions of dollars in shareholder losses by misleading them about the safety of its Celebrex and Bextra pain-relieving drugs.

“ALL BETS ARE OFF”

Puerto Rico is saddled with a 45 percent poverty rate and unemployment about double the U.S. average. While it remains to be seen how much of the $70 billion in debt will be included in the bankruptcy, its restructuring is sure to be the largest and among the most complex in municipal market history.

Deep-pocketed creditors from myriad public issuers are battling on many fronts, competing for repayment priority while challenging the authority of Puerto Rico’s federal financial oversight board to put the island into bankruptcy in the first place.

Several creditors sued Puerto Rico after Monday’s expiration of protections against lawsuits under PROMESA.

Creditors holding constitutionally-backed general obligation debt argue they should be paid first while creditors holding sales tax-backed bonds, known as COFINA, have said they are entitled to the collected money.

The broader implications for the municipal bond market are not lost on investors.

“In particular as it pertains to securitized debt such as COFINA debt. You have similar debt in places like Illinois. This case could have far reaching implications,” said Sean Burgess, portfolio manager and lead trader for Puerto Rico strategy at Sarasota, Florida-based Cumberland Advisors.

“Investors thought that their revenues were secure and claims and liens were (to be) respected. It could end up that COFINA bondholders get a haircut,” said Burgess. “Once it goes to a judge all bets are off.”

By REUTERS

MAY 5, 2017, 3:39 P.M. E.D.T.

(Reporting by Lawrence Hurley; Additional reporting by Nick Brown and Nathan Layne in New York, Tracy Ricinski in Chicago, Daniel Bases in San Francisco; Editing by James Dalgleish and Tom Brown)

Islanders will feel some cuts and, despite some optimism, a long-term fix is uncertain

Puerto Rico’s leaders who put the island into a form of bankruptcy on Wednesday have gained access to a powerful tool that has helped a handful of U.S. cities get back on their feet, restructuring experts say.

The island and its agencies owe creditors $73 billion in what is the largest U.S. municipal bankruptcy. But when Puerto Rico entered the court-supervised restructuring process known as Title III, leaders gained the leverage to impose cuts on Wall Street firms and other investors in the island’s debt, experts say.

“Chapter 9 is always the worst option until it’s the only option,” said Marc Levinson, referring to the section of the U.S. bankruptcy code used by municipalities. Mr. Levinson, a Sacramento bankruptcy lawyer, helped shepherd the California cities of Vallejo and Stockton through bankruptcy.

While Puerto Rico’s bankruptcy will likely result in cuts to public workers’ benefits and increased costs for government services, the filing has given some Puerto Rico residents optimism. Charles Cuprill, a bankruptcy lawyer for the island’s small businesses, said construction is at a standstill and roads are in disrepair.

“Puerto Rico didn’t have any other choice,” he said.

As a U.S. territory Puerto Rico wasn’t eligible for chapter 9, which is only available to U.S. municipalities. But federal lawmakers who recognized the island’s problems passed an oversight law in June that gave it access to a form of bankruptcy that incorporates parts of chapter 9 law. Both forms of bankruptcy give leaders the power to halt lawsuits, the autonomy to govern during the process and the ability to propose a debt-repayment plan to a judge. Unpaid debts at the end of the process would be canceled.

Lawyers and advisers who have helped struggling cities like Detroit and Stockton navigate the bankruptcy process say the island’s filing could ultimately improve the quality of life for its residents.

The cities used the process to cut debt and repair their reputation in the borrowing community. Before bankruptcy, “no one in their right mind would have loaned [them] money,” said Mr. Levinson. The lawyer isn’t involved in the Puerto Rican case but his firm, Orrick, Herrington & Sutcliffe, represents some creditors.

The Caribbean island of roughly 3.4 million people has an unemployment rate that tops 12%, more than twice the U.S. average. The territory has been in a recession for most of the past decade after Congress ended a series of generous tax breaks designed to grow the island’s manufacturing sector and steer it away from agriculture after World War II. Global financial troubles in 2008 also hurt growth.

Sprawling bureaucracy and high electricity costs have stunted business investment, while government cuts have closed everything from schools to social-service providers. The departure of some citizens has also sapped the island’s tax base, further squeezing budgets. Puerto Rican leaders borrowed money to pay operating expenses. The cost of the mounting debt has kept island officials from providing services to citizens.

Mounting debt and a declining population are problems for many U.S. cities. Detroit officials had also blamed its financial problems on the loss of residents, who fled in large numbers for its safer suburbs. The 680,000-resident city filed for bankruptcy in July 2013 to negotiate cuts to $18 billion in debt, blaming tax revenue that fell after the real-estate crash.

The judge that presided over Detroit’s case said the city’s failure to provide basic services that protect residents’ health and safety was “inhumane and intolerable, and it must be fixed.” Detroit’s bankruptcy-exit plan proposed to cut $7 billion in debt owed to Wall Street firms, city retirees and others. Its plan also called for $1.7 billion reinvestment in removing blighted buildings and boosting police and fire services in the city.

In Stockton, a city of 300,000 in California’s Central Valley that filed for bankruptcy protection in 2012, the response to the city’s debt restructuring has been mixed.

“The stigma is starting to fade,” said the city manager, Kurt Wilson, who noted that the bankruptcy filing brought financial stability, though the level of public services has yet to bounce back. Stockton residents, for example, have been disappointed that city staffing levels remain low. Retired city workers also suffered in the long run.

“When we took away their health care, it didn’t come back,” Mr. Wilson said.

Federal judges in charge of Detroit’s and Stockton’s bankruptcies ruled that pensions could indeed be cut. In Detroit, for example, city retirees agreed to take a 4.5% pension cut and lose cost-of-living increases. In San Bernardino, Calif., which filed for bankruptcy in 2012, officials have agreed to make full payments into the pension fund run by the California Public Employees’ Retirement System. The system distributes payments to thousands of retired city workers—often their lone source of income.

Like Stockton, San Bernardino also stopped paying retiree health benefits.

Puerto Rico has more than 300,000 pensioners, and they are facing bigger cuts and possibly harsher consequences because teachers and police officers don’t participate in Social Security, leaving them with no fallback if pensions are reduced. The island’s public pension funds have fewer workers contributing, and the plans are now underfunded by an estimated $45 billion. The federal financial oversight board wants to finance the plans on a pay-as-you-go basis once they exhaust their assets this year or next while reducing benefits by 10% on average to save $540 million over a decade.

Widener University law professor Juliet Moringiello pointed out that Puerto Rico’s problem are unique compared to municipalities on the U.S. mainland that used chapter 9 because, once debts are cut, it’s unclear who will be in charge of fixing its broader economic problems.

“The big open question with Puerto Rico…is what gets fixed otherwise and who’s going to do it,” Ms. Moringiello said. “Once the debts are adjusted, is there the political will on the island to fix the structural problems?”

The Wall Street Journal

By Katy Stech

May 4, 2017 7:08 p.m. ET

—Andrew Scurria and Heather Gillers contributed to this article.

Hedge funds, bond insurers, mutual funds and other creditors have competing interests

Puerto Rico’s entry into court protection ends a chaotic period of lawsuits and defaults. But the process likely won’t satisfy everyone.

A federal oversight board created by Congress placed the struggling U.S. territory under a court-supervised restructuring proceeding akin to bankruptcy on Wednesday, creating a single forum to sort out Puerto Rico’s mountain of liabilities to bondholders, pensioners and service providers. The U.S. territory and its agencies owe $73 billion in municipal bond debt accumulated through years of borrowing to finance deficits against a declining tax base.

Wednesday’s filing, however, is only “the beginning of the story,” said Richard Ravitch, who was involved in the negotiations that helped New York City avoid bankruptcy in the 1970s as well as the bankruptcy negotiations in Detroit.

The bankruptcy proceeding pits Puerto Rico against its creditors, and its creditors against each other. Puerto Rico’s investor base includes mutual funds, bond insurers, hedge funds and individual retail bondholders, who either bought commonwealth debt or agreed to guarantee it. They all acquired exposure at different prices and want different restructuring terms.

Some hedge funds scooped up bonds at cut-rate prices as Puerto Rico lost the confidence of the financial markets and they have placed bets on specific tranches of debt, said Craig Barbarosh, a restructuring attorney at Katten Muchin Rosenman. Meanwhile big mutual-fund managers generally purchase debt closer to par values, meaning they have greater incentive to agitate for the maximum recovery across bond classes.

Bond insurance companies Assured Guaranty Ltd AGO 1.17% , MBIA Inc. MBI -0.12% and Ambac Financial Group AMBC 0.54% have billions of dollars in guarantees on the line that make them jointly liable for Puerto Rico’s obligations. But the insurers’ interests are not aligned either. Ambac guarantees roughly $8 billion in sales-tax bonds maturing decades from now, while Assured wraps a different universe of debt comprised mostly of general obligation and utility bonds, according to their financial disclosures.

In addition to its obligations to bondholders, the commonwealth has roughly $45 billion in pension debt and education and health care costs to cover. Mr. Ravitch said he believes the restructuring proceeding will strengthen Puerto Rico’s hand with creditors, who now have the threat of a court-enforced settlement hanging over their head.

An estimated $13 billion in debt is held by local bondholders and financial institutions, a potential drag on growth if those bonds are restructured and island residents lose income streams they depend on.

Treating local holders preferentially is also problematic because of restructuring principles that call for equal payment among creditors.

Complicating matters, Puerto Rico hasn’t yet decided which creditors have priority in a restructuring. Competing groups of hedge funds holding general obligation and sales-tax bonds each have claims to top status, but no court has ever defined their respective payment rights.

“We always talked about the rock fight that would break out between these two and now this is the rock fight,” said Rob Amodeo, head of municipals at Western Asset Management, which sold its Puerto Rico debt several years ago.

Advisers to Gov. Ricardo Rossello nearly reached an agreement with general obligation creditors this week, before the board intervened in a late-night conference call to stop negotiations, according to people familiar with the matter.

The fiscal plan that formed the basis for negotiations allocates $800 million annually for debt service in the next decade, treatment creditors have objected to when they are owed more than four times as much.

The board is also caught between current creditors who say Puerto Rico can’t risk alienating credit markets by writing down bonds too deeply, and firms that previously sold out of Puerto Rico debt and now argue for aggressive debt restructuring to revive the island economy and make its debt attractive again.

Puerto Rico was cut off from the credit markets in 2015 after nearly a decade of decline, and restoring market access is a must for the federal oversight board tasked with cleaning up its financial mess.

Dave Hammer, head of municipal bond portfolio management at Pacific Investment Management Co., said bond values should be cut below their current trading values to get investors who have shunned Puerto Rico off the sidelines.

Creditors are also competing with pensioners who the board wants to pay 90% on average for the next 10 years.

The Wall Street Journal

By Andrew Scurria and Heather Gillers

May 4, 2017 6:49 p.m. ET

Write to Andrew Scurria at [email protected] and Heather Gillers at [email protected]

Puerto Rico has officially requested to enter into a bankruptcy-like proceeding to restructure its massive debt load after talks with its creditors failed.

Puerto Rico’s governor, Ricardo Rossello, announced Wednesday that he had requested that the federally appointed oversight board trigger Title III of the Promesa Act, a court-supervised debt restructuring similar to bankruptcy, in order to guarantee the best interests of the Puerto Rican people.

The restructuring of Puerto Rico’s roughly $70 billion in outstanding debt would be the largest in the history of the U.S. municipal bond market and will set the stage for a lengthy legal battle between the island and its creditors, which include multiple hedge funds and mutual funds, as they face off in court where a federally appointed judge could force creditors to accept unfavorable repayment terms.

In a statement issued Wednesday, Rossello said that “after extensive discussions in good faith and the opening of the financial books of the Government of Puerto Rico to the creditors, there has not been sufficient progress in the negotiations.”

“While the Government remains willing to continue to pursue good-faith dialogue and negotiations with its creditors, the recent expiration of the Promesa stay imposed against enforcement of creditor liability claims dictates that the best course of action is for the Government to enter into Title III.”

Rossello officially notified the oversight board of his decision in a letter dated May 2.

“The Government has made good-faith efforts to reach a consensual restructuring with its creditors,” the letter says. “Puerto Rico’s creditors have not demonstrated a sufficient willingness to fairly share in such sacrifice through a necessary reduction in their debt to a sustainable level.”

‘Turn Puerto Rico into the next Argentina’

Following the Title III announcement, the Ad Hoc Group of General Obligation bondholders, which holds approximately $3 billion of the island’s debt, issued a strongly worded statement accusing the oversight board of sabotaging creditor talks in order to push Puerto Rico into bankruptcy.

“Over the past several days, the GO bondholder group and the Commonwealth have been negotiating a consensual deal. Yesterday, just as a deal was within reach, we understand that the Oversight Board intervened to block it, and the Governor acquiesced to the Board,” Andrew Rosenberg, the legal advisor to the group, said in the written statement.

“For months, the Oversight Board has made every effort to sabotage consensual negotiations, to flout the requirements of PROMESA and Puerto Rico’s constitution, and to force Puerto Rico into bankruptcy,” the statement continued. “With that bankruptcy now started, the Governor has forfeited all power over the restructuring, and the economy of Puerto Rico will be put on hold for years. Make no mistake: The Board has chosen to turn Puerto Rico into the next Argentina.”

A separate bondholder group, the Cofina Seniors Coalition, had a different take on the Title III decision, calling it “sound public policy” that respects congressional intent and supports an orderly debt restructuring process.

“A Title III filing at this point in time enables Puerto Rico to freeze numerous lawsuits, maintain essential services for its residents, and rely on a court-driven restructuring process to objectively determine respective creditors’ rights,” said Susheel Kirpalani of law firm Quinn Emanuel Urquhart & Sullivan in the statement. “While it is regrettable that Puerto Rico is facing a bankruptcy-like process to resolve its historic fiscal challenges, this was certainly an option of last resort.”

80 percent cut to debt service payments

The governor noted his plans to continue to make payments to the island’s creditors of nearly $800 million per year — an 80 percent cut in the total debt service payments due annually — as the fiscal plan previously certified by the oversight board, details.

A range of $3.0 billion to $3.8 billion is due cumulatively every year over the next decade on the 11 issues included in the fiscal plan.

Holders of Puerto Rico’s general obligation bonds, one of the highest tier securities that is backed by the island’s constitution, are due the most over the decade — with about $10 billion coming due in the time period.

The announcement comes just a day after the island was hit with multiple creditor lawsuits after a stay on litigation expired. Title III will put that automatic stay back in place, protecting the U.S. territory from further lawsuits.

Moody’s Investors Service analyst Ted Hampton believes that overall the decision to invoke Title III is a positive step for bondholders.

Although he notes that “a court proceeding will take considerable time and likely involve losses for all Puerto Rico bondholders, it will be an orderly process that should be better for creditors in the aggregate than a chaotic and uncertain period involving proliferating lawsuits among holders of the commonwealth’s numerous debt types.”

Rossello closed his note to the oversight board with his hope that Title III will “accelerate the negotiation process, leading to as much creditor consensus where possible.”

CNBC

By Dawn Giel

Wednesday, 3 May 2017

Puerto Rico is seeking protection from creditors so it can continue paying bills and address a $7.6 billion budget deficit, Gov. Ricardo Rossello announced Wednesday at a San Juan press conference.

Detroit, D.C. offer clues to the future of Puerto Rico’s public pension funds
The governor also notified the federal fiscal oversight board created by last year’s PROMESA law, which includes provisions for actions that mirror bankruptcy protection.

Mr. Rossello said he also expects other government entities to seek restructuring agreements under another provision of Title VI of the Puerto Rico Oversight, Management and Economic Stability Act.

That protection complicates efforts by several groups of bondholders to restructure at least $70 billion in debt, who until May 1 were under a litigation stay created by PROMESA.

“We remain committed to maintaining negotiations in good faith to reach agreements with creditors,” Mr. Rossello said, pointing to a recent restructuring agreement with creditors of the Puerto Rico Electric Power Authority. “However, given the deficit that we have inherited, it is my responsibility to guarantee the best interests of the Puerto Rican people.”

Puerto Rico’s fiscal plan, approved March 13 by the oversight board and expected to be finalized by June 30, calls for it to pay creditors nearly $800 million per year, 80% less than previous administrations committed to debt service.

Mr. Rossello acknowledged insufficient progress in negotiations with bondholders, and said that Title III of PROMESA will allow a special court to restructure its debt “to a sustainable level,” adding that he hoped that it would accelerate the negotiation process, “leading to as much creditor consensus where possible and achieving where necessary a prompt and efficient judicial resolution of any issues or disputes.”

Ted Hampton, vice president at Moody’s Investors Service, said in a statement that invoking Title III “marks a positive step for bondholders overall” because while it will cost bondholders time and money, “it will be an orderly process that should be better for creditors in the aggregate than a chaotic and uncertain period involving proliferating lawsuits among holders of the commonwealth’s numerous debt types.”

PENSIONS & INVESTMENTS

BY HAZEL BRADFORD | MAY 3, 2017 1:15 PM | UPDATED 1:24 PM

— Contact Hazel Bradford at [email protected] | @Bradford_PI

Move amounts to the largest-ever U.S. municipal bankruptcy, sets up showdown with Wall Street creditors

Puerto Rico was placed under court protection on Wednesday in what amounts to the largest-ever U.S. municipal bankruptcy, a stark illustration of the depth of the economic crisis afflicting a U.S. territory with more than three million inhabitants.

Puerto Rico and its agencies owe $73 billion to creditors, dwarfing the roughly $9 billion in bond debt owed by the city of Detroit when it entered what was previously the largest municipal bankruptcy in 2013.

The move by a federal oversight board installed by Congress is the culmination of years of economic distress and heavy borrowing that more recently has pitted Wall Street creditors, hungry for payments, against the struggling island.

The officials’ decision sets up a showdown with Wall Street firms, including mutual-fund giants Franklin Resources Inc. and OppenheimerFunds Inc., hedge funds Aurelius Capital Management LP and Monarch Alternative Capital LP and some bond insurers. The federal action could mean deeper losses on bonds than analysts have anticipated, though some investors purchased bonds at lower prices and Puerto Rico bond prices were largely unchanged on Wednesday.

It also further complicates the island’s bid to improve its relationship with Washington lawmakers, which has grown more fraught as Puerto Rico officials sought aid critical to ending a decadelong economic swoon—aid U.S. officials were loath to provide. Analysts said the bankruptcy could provide a forum for the orderly allocation of Puerto Rico’s potential resources.

The Puerto Rico Financial Oversight and Management Board, installed last year by Congress, on Wednesday invoked a law that puts the standoff with creditors before a federal judge in San Juan in a restructuring process known as Title III that doesn’t involve the U.S. bankruptcy court system.

The maneuver itself is unlikely to immediately change day-to-day life in Puerto Rico—an island already beset by an unemployment rate above 12%—more than twice the national average.

Sprawling bureaucracy and high electricity costs have stunted business investment, while government cutbacks have closed everything from schools to social-service providers. The departure of some citizens has sapped its tax base, further squeezing budgets.

“What I see all around me is uncertainty. People sometimes just leave the key in the house or the car in the airport and just go,” said Nancy Madden, founding director of an educational nonprofit in Humacao, Puerto Rico.

The territory has been in recession for most of the past decade. For years, federal tax credits helped cultivate a robust manufacturing sector and steer the island away from agriculture after World War II. But Congress ended those incentives in 2006, and the economy fell into a recession. Puerto Rico has struggled to create jobs ever since.

As the loss of jobs damped the economy, local leaders strained to cut spending and boost tax collections. Instead, they borrowed to make up for recurring revenue shortfalls.

For over a decade, Puerto Rico’s government and its municipal corporations borrowed more to buy time to stave off deeper economic overhauls. With government payrolls down over the past decade, pension funds have fewer workers contributing and the plans are now underfunded by an estimated $45 billion.

For years, investors overlooked these fiscal and demographic problems because Puerto Rico’s bonds offered high yields and because they believed the island’s economy would eventually recover. Puerto Rico can issue debt exempt from federal, state and local taxes, unlike U.S. states, which made these bonds attractive to many mutual-fund investors and more recently, hedge funds.

But Puerto Rico began to lose access to the credit markets three years ago, when its ratings were downgraded. The door closed for good in 2015 when the island’s governor declared the debts unpayable.

Unrest has been growing on the island over installation of the oversight board and cutbacks by government. A massive blackout last year left half the island without power at one point. When the Zika virus landed on Puerto Rico last summer, the government had limited funds to fight back. Also last year, the Santa Rosa Hospital in the southern coastal town of Guayama had its power cut off suddenly after failing to pay millions of dollars in utility bills. A court eventually ordered the power to be turned back on.

When the board first convened last year, about 50 demonstrators surrounded the entrance to the Alexander Hamilton U.S. Custom House in downtown Manhattan, where the meeting was held. Several people were later escorted out of the meeting room after shouting “down with colonialism.”

Protests continued as recently as Monday, affecting services at Puerto Rico’s largest public hospital, paralyzing the bus system and forcing many businesses to close, the Associated Press reported.

Puerto Rico was in marathon closed-door talks this month toward a global deal with various groups of creditors battling for top repayment priority in a restructuring. Hedge-fund creditors holding defaulted general obligation bonds were on the verge of completing an agreement late Tuesday before the oversight board intervened to stop negotiations, a spokesman for those creditors said.

Federal officials last month approved a wide-ranging framework for government spending that would scale back expenditures and allocations to creditors. Wednesday’s move represents a step toward implementing the plan.

The plan “imposes pain everywhere,” said Ignacio Alvarez, president and chief operating officer of Banco Popular de Puerto Rico in San Juan. “The cuts to the health system are massive. The cuts to the universities are large.”

The Trump administration has largely embraced the oversight-board framework established by the Obama administration. Following a meeting with Gov. Ricardo Rosselló in February, Treasury Secretary Steven Mnuchin said Puerto Rico should continue to work with the oversight board, and a Treasury spokeswoman on Wednesday said the department supported the board’s decision to invoke its Title III authority.

The decision marks the start to what could be a lengthy legal fight as Wall Street watches closely to see how other indebted municipal governments, including Chicago and Illinois, may fare in confrontations with investors.

Any write-downs also would hit bond insurers Assured Guaranty Ltd. , MBIA Inc. and Ambac Financial Group , which have guaranteed billions of dollars of Puerto Rico’s bonds.

The Title III request, while unprecedented, isn’t unexpected. The board signaled in negotiations this month it wouldn’t consider paying creditors more than the roughly $800 million in annual sums allocated to debt service, according to people familiar with the matter.

A legal stay protecting Puerto Rico from lawsuits expired Monday night without standstill agreements with creditors in place. Hedge funds holding general obligation and sales-tax bonds filed lawsuits on Tuesday, naming Gov. Rosselló as a defendant.

The slide into bankruptcy marks a new low in Wall Street’s relations with Mr. Rosselló, a political newcomer who pledged as a candidate to repay the territory’s debts, shrink the government and strengthen ties with the U.S. Creditors clashed with the previous administration of Alejandro Garcia Padilla but considered Gov. Rosselló a likely ally, said Chas Tyson, vice president at investment banking firm Keefe, Bruyette & Woods Inc.

Mr. Rosselló on Wednesday said he requested the bankruptcy move.

“Now it seems like the honeymoon’s over,” Mr. Tyson said. “It seems that we’re back where we used to be.”

The Wall Street Journal

By Andrew Scurria and Heather Gillers

Updated May 3, 2017 7:47 p.m. ET

—Kate Davidson contributed to this article.

Write to Andrew Scurria at [email protected] and Heather Gillers at [email protected]

 

 

With pension payouts skyrocketing, tax credits expiring and the inability to pay operating expenses, Puerto Rico filed for bankruptcy protection May 3. The U.S. territory owes an estimated $73 billion to assorted creditors, including Wall Street firms. This makes the bankruptcy the largest-ever American municipal debt restructuring in history.

A senior lecturer in finance at Washington University in St. Louis’s Olin Business School says the situation should serve as a dire wake-up call to the municipal bond market.

“Earlier this year, when the bankruptcy of the fictitious town of Sanidcott became the subject of the hit Showtime series ‘Billions’, I knew we had reached a new low point in the municipal bond market,” said Rich Ryffel, who advised governments, corporations and more about financings and capital structure in his 30-year career in investment banking and asset management. “So common had the once-unheard of notion of municipal bankruptcy become, that it would now be understandable to the television audience and fodder worthy of acting out on the small screen. Well, now the folks in Puerto Rico have given us an even better subject. Reminiscent of CSI Las Vegas, CSI Miami, CSI Whatever, we now have – Municipal Bankruptcy: Puerto Rico.

“Puerto Rico has become the U.S. municipal bond market’s own little Greece, seeking from the courts what it could not find the will nor the way to do on its own; change its profligate ways and pay its creditors. Its move to the courts lowers the recovery floor in its negotiations with creditors and gives it remedies heretofore unavailable… . Years of preferential tax and trade treatment failed to create an island economic paradise, so after seeking new assistance from Congress last year, Puerto Rico is now adding itself to the list of those expecting others to suffer the hangover after they they enjoy the bender; think Greece, Argentina, Wall Street. Where does this end?”

Ryffel says the long-held assumption that governments could repay their debt has eroded, and that’s changed the playing field for lenders.

“Not that long ago, the municipal bond market used two standards when considering whether to open the lending tap to borrowers — one’s ability to pay and one’s willingness to pay,” Ryffel said. “The first threshold was fairly easy to assess. The second was always more difficult to gauge — being more qualitative in nature — but it was assumed that governments would only borrow what was needed to provide essential public services and would take all necessary means to repay its obligations. Default, let alone bankruptcy, was a remote thought.

“Now, however, we see with growing and concerning frequency borrowers treating repayment as optional, as the redemption provision in their bonds themselves. The problem is that the markets depend on this second lending standard and as it erodes, the availability of municipal credit will both shrink and become more expensive for all market participants.”

The Puerto Rico bankruptcy dwarves that of Detroit, which was previously the U.S.’s largest municipal bankruptcy. The city filed for Chapter 9 protection in 2013, with $18 billion in debt. While studies are underway to assess the impact of Detroit’s financial woes, Ryffel says the Puerto Rico situation could send even more shockwaves, not just because of the amount owed, but also for the way it could change laws allowing massive debt forgiveness.

“Puerto Rico may have even larger impacts on the market because they have not only moved to the Doomsday scenario, they successfully had law changed to allow them to do so,” Ryffel said. “In essence, they not only started the markets down the slippery slope, they had a slippery slope built for them.

“To be fair, Puerto Rico is only doing what they need to do to protect their citizens, and they have used every tool available to them. One can’t blame their leadership for that. While there may not be enough money to go around, there is plenty of blame to go around. Healthy portions of it go to prior administrations which borrowed without a plan to repay and which borrowed to pay operating expenses rather than invest in the future. Still too, blame must also go to the municipal bond markets, which for years knew of Puerto Rico’s increasing lack of ability to pay, yet still lent it money.”

The Source

By Erika Ebsworth-Goold May 4, 2017

Ryffel is available for interviews and may be reached at [email protected]

• District leaders say schools may close early without state aid
• Judge deals setback to lawsuit in Friday ruling, paper reports

Chicago’s debt-ridden schools are running out of options.

The nation’s third-largest school district — whose credit rating has tumbled well into junk — must make a $721 million pension payment by June 30 and officials are scrambling to find the funds. Ending the year early, canceling summer school, and slashing classroom spending are all possible, the Chicago Board of Education said in connection with a lawsuit that’s seeking to wrest more cash from Illinois.

“They’re trying any way they can to try to make the state provide more funding,” said Daniel Solender, head of municipals at Lord Abbett & Co., which manages about $19 billion of debt.

A local judge Friday dealt a blow to the schools’ lawsuit against Governor Bruce Rauner and the state board of education, which challenges funding practices that have made the district the only one in Illinois that pays most of its pension costs. Cook County Judge Franklin Valderrama rejected the board’s assertion that the funding system is discriminatory to the heavily minority-student district, though he gave Chicago until May 26 to file an amended complaint, the Chicago Sun-Times reported.

Escalating pension bills are the crux of the financial squeeze that’s threatening the solvency of the school system. For years it has been draining reserves, shortchanging its pensions and borrowing to pay bills. Its retirement system is short by $9.6 billion, and this year’s required payment will eat up 13 percent of the district’s operating budget.

Chicago covers a far greater share of its teachers’ pension contributions than the rest of Illinois’s schools, which receive more state aid. For the year that started July 1, Chicago’s will spend about $1,891 per student on teacher pensions, while other districts only spend about $86, according to Chicago officials. Illinois kicks in about $32 per Chicago student, while other districts get $2,437, the district said in court documents.

The “disparate pension-funding obligations imposed by the state severely undercut CPS’s ability to educate CPS students,” according to court filings by the school board.

The lawsuit came after Rauner vetoed $215 million of aid for Chicago’s schools in December, though it wouldn’t have received the money unless the state enacted pension reforms –something it’s been unable to do. Illinois has more than $129 billion of unfunded retirement liabilities and lawmakers haven’t even been able to agree on a full-year budget in almost two years.

To get by, the district has had to “borrow massive amounts of money at crushing rates of interest,” the board said in court documents. Given its fiscal woes, the school board probably couldn’t borrow in a big public offering right now, said Paul Mansour, head of municipal research at Conning, which oversees $10 billion of state and local debt, including some Chicago school securities.

“They could probably do a private transaction or a direct placement of debt, but to try to issue debt in this environment where there’s so much uncertainty, the risk factors would scare most investors away,” Mansour said. “Who’s going to buy this?”

Bloomberg

by Elizabeth Campbell

April 28, 2017, 2:00 AM PDT April 28, 2017, 1:59 PM PDT

The territory’s industrial development bank owes about $4.5 billion to creditors

Puerto Rico’s industrial development bank has decided to liquidate, proposing a fiscal plan to federal officials that calls for winding down its operations over 10 years.

The Government Development Bank for Puerto Rico, which for decades acted as the U.S. territory’s fiscal agent and government lender of last resort, can’t repay its obligations to bondholders and should wind down, Puerto Rico officials said Friday at a meeting in New York with federal oversight officials.

The federal board overseeing Puerto Rico’s financial restructuring swiftly approved the liquidation proposal, details of which weren’t made public prior to the board’s decision. The bank will continue collecting on its outstanding loans to Puerto Rico agencies, and make disbursements to bondholders and depositors, board members said.

The development bank owes roughly $4.5 billion to bondholders, including hedge funds that have argued in court that they must be paid out on an equal basis with the bank’s depositors.

GDB’s debt pile is only a fraction of Puerto Rico’s $70 billion debt load, accumulated through years of borrowing to finance budget deficits against a diminishing tax base.

The board has already approved a fiscal plan for the central government to serve as the basis for negotiations with creditors that allocates less than $800 million a year for debt service. That represents less than a quarter of the roughly $3.5 billion a year creditors are owed under existing contracts.

Creditors are up against a deadline to reach consensual settlements by Monday, when a legal shield protecting Puerto Rico from debt-related lawsuits is scheduled to expire. Next week, the board can continue to keep the courthouse doors closed to creditors by placing Puerto Rico under bankruptcy protection. Creditors could then be forced to accept unfavorable repayment terms under this court-supervised process, known as Title III, that was created by Congress last year.

Oversight board chairman Jose Carrion said that the board could petition for Title III without a public hearing and declined to comment further on the board’s strategy for the impending deadline. Filing the bankruptcy petition requires votes from five of the board’s seven members.

“We reserve the right to pass judgment on these issues in executive session,” Mr. Carrion said.

Puerto Rico’s advisers have proposed that creditors enter into standstill agreements to forestall litigation while private talks continue. But it remains unclear if creditors are willing to continue negotiating under forbearance agreements or if the board would agree to delay invoking Title III.

The board also approved fiscal plans for other Puerto Rico government agencies that call for creditor concessions to close multiyear fiscal gaps. Puerto Rico’s highway authority, its sewer company and its public power monopoly, all of which owe billions of dollars in municipal bond debt, secured approval of fiscal plans predicated on reductions in their debt service outlays. The University of Puerto Rico hasn’t yet coordinated with the territorial government to develop its plan, Mr. Carrion said.

Only the Puerto Rico Electric Power Authority, known as Prepa, has hammered out a deal with its creditors, a $9 billion agreement dating to 2015 that Gov. Ricardo Rossello recently renegotiated to include additional debt concessions.

The board certified fiscal plan adds requirements for Prepa to evaluate selling off assets and privatizing aspects of its power-generation capabilities.

The Puerto Rico Aqueduct and Sewer Authority is considered by investors to be in better fiscal shape than other instrumentalities and was the last Puerto Rico issuer to attempt to tap the bond markets, floating an abortive $750 million offering in late 2015. Now Prasa will seek holidays on principal repayments or reductions in interest rates to help close a $3.5 billion funding gap, according to its presentation to the board.

Water and sewer customers meanwhile would pay higher utility rates toward deferred capital expenditures. The less money the utilities need to set aside for their bondholders, the less they need to seek politically unpopular rate hikes on Puerto Rico residents and businesses.

“If we don’t have competitive rates in Prepa and Prasa, we will never be able to compete in our region,” said Elias Sanchez, the governor’s representative on the board. “We have to build a competitive scheme in our rates.”

Mr. Carrion said the board didn’t have enough time to release public copies of the plan before their approval.

“Simply it was a decision of time constraints,” he said. “We had a lot on our plate and it all just came together today.”

The Wall Street Journal

By Andrew Scurria

Updated April 28, 2017 12:55 p.m. ET

Write to Andrew Scurria at [email protected]

President Trump’s tweets on the U.S. territory fan GOP divisions as bankruptcy looms

President Donald Trump’s criticism of a “bailout” for Puerto Rico is disrupting a bipartisan consensus on Capitol Hill to send the struggling U.S. territory more federal Medicaid dollars, according to people familiar with the matter.

The president has criticized efforts to funnel additional Medicaid dollars to Puerto Rico, saying in a Wednesday evening Twitter post that congressional Democrats “are trying to bail out insurance companies from disastrous #Obamacare, and Puerto Rico with your tax dollars.”

Securing additional Medicaid dollars from Washington has been a priority for Puerto Rico as it sits on the verge of an unprecedented court-supervised bankruptcy. Mr. Trump weighed in after Democratic and GOP leadership reached an agreement to provide incremental assistance to Puerto Rico ahead of an impending health-care funding cliff on the island, according to people familiar with the matter.

Puerto Rico is projected to exhaust a $6.4 billion Medicaid grant before the end of the year and has been struggling without replacement funding in place to complete annual renewals of its contracts with managed-care organizations, according to the Department of Health and Human Services. Almost half of Puerto Rico residents are covered by its Medicaid program, which Washington funds on a different formula than U.S. states.

Congress meanwhile is up against a Friday deadline to pass spending legislation to keep the U.S. government funded, and GOP leadership intends to buy another week for negotiations by passing a one-week extension known as a continuing resolution. A subsequent omnibus spending package would provide Puerto Rico with an incremental Medicaid grant, the size of which is still in flux, these people said.

House Democrats are now requiring such assistance as a condition for supporting the continuing resolution, and GOP leadership agrees it should be included, Puerto Rico Sen. Eduardo Bhatia said in an interview. But Mr. Trump’s apparent skepticism aligns him with conservative House Republicans inclined to view its request as a bailout, leaving the deal a narrow path to passage in Congress.

Mr. Trump doubled down on his earlier remarks Thursday morning, tweeting that Democrats “want to shut government if we don’t bail out Puerto Rico… NO!”

A representative for Speaker Paul Ryan (R., Wis.) couldn’t immediately be reached for comment.

HHS this week estimated that Puerto Rico needs $900 million to fund its Medicaid program through mid-2018. But Gov. Ricardo Rossello’s lobbying for federal subsidies on Capitol Hill has drawn the ire of Puerto Rico creditors who are being asked in debt restructuring negotiations to take large write-downs on $70 billion in municipal bonds.

While Congress negotiates the continuing resolution and omnibus spending package behind closed doors, Puerto Rico’s creditors are up against their own deadline. A legal shield protecting the territory from lawsuits over debt defaults is set to expire on Monday, and key creditor groups haven’t yet signed forbearance agreements to postpone litigation so confidential talks can continue, according to people familiar with the matter.

Without standstill agreements in place, the federal board overseeing Puerto Rico’s finances has the authority starting Tuesday to invoke a quasi-bankruptcy proceeding known as Title III. That process includes mechanisms to bind creditors to unfavorable repayment terms.

Dissatisfaction with the board has grown among Republican lawmakers, several of whom have questioned its 10-year fiscal blueprint, which earmarks $800 million a year to pay creditors, or roughly a quarter of what they are owed under existing debt contracts.

With Monday’s bankruptcy deadline looming and the board slated to meet on Friday in New York, Mr. Bhatia said creditors are making a last-ditch lobbying push to delay or restrict the board’s power to invoke Title III as a condition of the Medicaid assistance.

One idea gaining traction with conservative House lawmakers is to require Government Accountability Office approval for any bankruptcy petition, according to people familiar with the matter. Backers of Title III say it was carefully negotiated when Congress passed a federal rescue law for Puerto Rico last year and shouldn’t be revised now.

“The governor should come out strongly and say, no way,” Mr. Bhatia said. “I’m making sure that whoever is behind this, we expose them.”

The Wall Street Journal

By Andrew Scurria

Updated April 27, 2017 6:28 p.m. ET

• GOs would receive as much as 77 cents on the dollar in plan
• Sales-tax bonds would get as much as 58 cents on the dollar

Puerto Rico bondholders rejected Governor Ricardo Rossello’s debt-restructuring proposal days before a May 1 deadline to craft a deal or face a potential wave of creditor lawsuits.

The Caribbean island is offering holders of its general-obligation bonds as much as 77 cents on the dollar while proposing as much as 58 cents on the dollar for its sales-tax debt, according to the commonwealth’s latest creditor proposal, dated April 24 and posted at midnight Saturday on the Municipal Securities Rulemaking Board’s website, called EMMA.

The cash-strapped commonwealth is negotiating with its investors and has until Monday night to reach a restructuring accord, otherwise a legal stay that shields the island from creditor lawsuits expires. Absent a restructuring deal or an agreement to suspend legal claims, Puerto Rico may face potentially adverse rulings on cases already filed, as well as new legal challenges.

Puerto Rico is seeking to reduce its $70 billion debt load after years of economic decline and overspending. It would be the largest restructuring in the $3.8 trillion municipal-bond market. The island is operating under a federal oversight board that has the ability to seek creditor losses through a bankruptcy-like process called Title III.

Title III

Groups holding general-obligation bonds and senior sales-tax debt, which get the first claim on that revenue, rejected the offer. The senior sales-tax group now wants Puerto Rico to seek Title III, which Congress approved last year. The commonwealth’s plan doesn’t offer a better recovery to senior sales-tax bonds compared with the subordinate lien, a feature the investor pool disagrees with, Matt Rodrigue, managing director at Miller Buckfire & Co., financial adviser to the senior sales-tax group, said in a telephone interview.

“The right next step is a Title III filing to provide a forum in which creditors’ rights will be respected and it also will provide a continuance of the stay, which will protect the people of Puerto Rico,” Rodrigue said.

The senior group has declined Puerto Rico’s request for a 60-day forbearance, Rodrigue said.

While general obligation bondholders are looking to avoid Title III, they say Puerto Rico’s plan isn’t a credible starting point for negotiations. The offer is based on the commonwealth’s fiscal plan, which creditors say doesn’t allocate enough money for principal and interest payments.

‘Consensual Solution’

“We urge Puerto Rico’s elected leadership to work with creditors to construct a consensual solution that is based on a credible financial forecast and that avoids the free fall Title III that the Oversight Board seems intent on imposing,” Andrew Rosenberg, a partner at Paul Weiss Rifkind Wharton & Garrison, who advises the group of GO bondholders, said in an email Saturday.

The governor on Saturday reiterated his believe that the parties can reach a deal and that talks may continue beyond Monday. He didn’t rule out using Title III.

“I believe that there is a possibility that all parties could reach an agreement,” Rossello told reporters in San Juan. “One of the powers I have is Title III and if I have to use it I will.”

The commonwealth’s proposal illustrates the gap between the parties. Senior Cofinas, as the sales-tax bonds are called, want to receive 95 cents on the dollar, with the subordinate lien getting 60 cents, Rodrigue said.

Puerto Rico is committed to reaching a consensual resolution with its creditors, Gerardo Portela Franco, executive director of the island’s Fiscal Agency and Financial Advisory Authority, said in a statement Saturday.

“This proposal is intended to maximize returns to its creditors in a manner consistent with Puerto Rico’s goals for economic growth equitably,” Portela Franco said. “The government anticipates the discussions to continue over the coming weeks.”

Puerto Rico general obligations are trading below the best-case scenario recoveries in the commonwealth’s plan. General obligations with an 8 percent coupon and maturing in 2035, the most actively traded GOs, changed hands Thursday at an average of 64.6 cents, below the 77-cent offer, according to data compiled by Bloomberg.

Senior sales-tax bonds with a 6.05 percent coupon and maturing in 2036 traded Thursday at an average of 60.7 cents, above the 58-cent proposal, the data show.

Recovery Range

Puerto Rico is offering to repay general-obligation bondholders as much as $10.25 billion of the $13.2 billion it owes, according to the proposal. The island also would repay as much as $10.2 billion of $17.6 billion of sales tax bonds.

Investors would exchange their existing securities for two different types of debt: tax-exempt senior bonds with a constitutional priority maturing in 30 years, and cash-flow bonds that would be repaid after the senior securities, depending on the commonwealth’s liquidity.

That structure gives general-obligation bondholders a recovery range of as little as 52 percent — if Puerto Rico only repays the senior bonds — and as much as 77 percent if it repays both the senior debt and the cash-flow securities. The recovery range for sales-tax securities is 39 percent to 58 percent.

Bloomberg Markets

by Michelle Kaske

April 28, 2017, 10:47 PM PDT April 29, 2017, 1:32 PM PDT

• Oversight board gives itself right to hold session on topic
• Decision comes as island faces creditor lawsuits as stay ends

Puerto Rico’s federal overseers took an initial step toward considering the use of bankruptcy-like proceedings to allow the island to escape from $70 billion of debt and approved a plan that calls for extracting concessions from owners of water agency bonds.

The territory’s oversight board, which was created to help resolve the fiscal crisis, unanimously approved a measure that allows it to hold executive sessions to consider petitioning a court to cut Puerto Rico’s obligations. That process, known as Title III, was created under a rescue law enacted last year. The vote also allowed the board to consider a negotiated settlement with creditors should one be reached.

“We’re trying to do our best and trying to do the right thing by all the stakeholders and the people of Puerto Rico,” Jose Carrion, chairman of the board, told reporters after the meeting. “It’s a very difficult situation. These folks have lent Puerto Rico money and we are where we are and it’s not a situation where we don’t understand.”

The decision comes just days before the expiration of a legal stay that has sheltered Puerto Rico from lawsuits filed by bondholders after an escalating series of defaults. The government has also struggled to make headway in negotiations with creditors, leading analysts to speculate that the issue is likely to be resolved in court.

The board approved increasing water rates as part of a plan to steady the Puerto Rico Aqueduct and Sewer Authority, the island’s main water utility. Prasa, as the agency’s known, will seek to cut its $4 billion of debt by negotiating with bondholders to accept less than what they’re owed, according to the plan. Prasa says it needs to reduce debt service costs by 35 percent and that it would be able to cover $2.13 billion of the $3.26 billion of payments due during the next decade — a shortfall of $1.1 billion.

Separately, the board approved winding down Puerto Rico’s government development bank, which financed public works on the island until it defaulted during the crisis.

“This will provide a viable path for an orderly process for the Government Development Bank with the least impact for stakeholders involved,” said Elias Sanchez, Governor Ricardo Rossello’s representative on the federal board.

Puerto Rico’s debt restructuring, however it’s ultimately done, will be the largest ever in the $3.8 trillion municipal-bond market, with the commonwealth’s debt issued by more than a dozen agencies and backed by sometimes competing repayment pledges. It promises to impose steep losses on investors, with Rossello’s fiscal recovery plan covering less than a quarter of the debt payments that are due over the next decade, even after he takes steps to cut spending and raise revenue.

Bloomberg

by Michelle Kaske

April 28, 2017, 6:56 AM PDT April 28, 2017, 10:50 AM PDT

• Debt restructuring likely to wind up in court, analysts say
• Bonds trade below recovery rates suggested by Moody’s ratings

Hedge funds first starting buying Puerto Rico debt in the summer of 2013 because they liked what they saw: A government that was paying high, tax-free yields that couldn’t go bankrupt.

Nearly four years later, the Caribbean island has defaulted on most of its bonds and Governor Ricardo Rossello, who took office in January, says it can pay less than a quarter of what’s owed over the next decade, assuming he can slash the budget and increase the island’s revenue. Some of the securities are trading near record lows. And, thanks to the U.S. Congress, Puerto Rico and its federal overseers can use bankruptcy-like proceedings to have some of its $70 billion debt written off in court, something investors once assumed it couldn’t ever do.

“It’s been a really long trade,” said David Tawil, president and co-founder of Maglan Capital LP, who bought Puerto Rico bonds in 2013 but has since sold them. “I don’t think when they first got into this they bargained for this type of length of trade. There’s been a lot more twists and turns and not to any substantial progress point between then and now.”

Puerto Rico investors holding general-obligation bonds and sales-tax debt and insurance companies are negotiating through mediation on a restructuring deal, the largest ever in the $3.8 trillion municipal-bond market. There isn’t much time: The commonwealth faces a fresh hurdle on May 1, when a temporary hold that’s sheltered it from the impact of creditor lawsuits is set to expire. If Puerto Rico fails to strike a deal with its creditors or gets bogged down in a legal morass, it can seek to reduce its obligations through a court — an avenue that analysts say looks increasingly likely.

“We’re at the very beginning of a process that will likely take years,” said Matt Fabian, partner at Concord, Massachusetts-based Municipal Market Analytics Inc.

Hedge funds, which hold about one-third of Puerto Rico’s debt, started buying in 2013, after the island’s long-running recession and unremitting budget shortfalls caused other investors to flee. The distressed-debt buyers scooped up the bonds as traditional municipal-bond investors dumped their holdings and prices fell. An index of Puerto Rico bonds plunged nearly 10 percent in August 2013, the biggest monthly decline since the index’s inception in 1999.

The size of Puerto Rico’s outstanding debt made it easy to take large positions and the discounted value left open the chance of a price rebound — dangling an opportunity for speculative gains rarely seen in the municipal market, where few borrowers default. Distressed debt was scarce at that time and the island’s bonds were one of the few places to buy cheap securities, Tawil said.

“This was the first real distressed opportunity in U.S. municipals,” Tawil said. “It’s a gigantic capital structure so all of the big distressed guys can go ahead and look at this and say ‘I could put a couple hundred million to work here, no problem.”’

Hedge funds wagered that investors would ultimately allow the island to push out maturities if the commonwealth did its part to cut the government’s spending, Tawil said. Instead, by 2015, Puerto Rico started defaulting on bonds to avoid potentially devastating budget cuts.

“There’s just not enough money,” Fabian said. “We have a basic problem of where do municipal-bond payments fit as far as the priority of payment? GO and Cofina believe that they’re at the top and the board believes they’re at the bottom.”

While Puerto Rico’s debts include a web of obligations sold by different government entities with various repayment pledges, investors are now fighting over an average $787 million that Rossello says he has each year to pay principal and interest over the next decade. One key issue is what will receive a better recovery — the $12.5 billion of general obligations or the $17.3 billion of sales-tax bonds.

Puerto Rico’s constitution states the island’s general obligations are to be paid before other expenses, while sales-tax bonds have a claim on that revenue before the commonwealth can use it for other expenses. The government hasn’t missed payments on its sales-tax bonds.

Moody’s Investors Service estimates the general obligations and senior Cofinas, which get first claim on the sales-tax receipts, will receive 65 cents to 80 cents on the dollar in a restructuring deal. MMA’s Fabian doubts the recovery rates will be that high because Puerto Rico’s outcome is unpredictable. Securities with even weaker repayment pledges may receive less than 10 cents on the dollar, he said.

Some bonds are trading below the projected recovery rates. General obligations with an 8 percent coupon and maturing in 2035, the island’s most-actively traded, fell to as little as an average 61.8 cents on the dollar on March 30, the lowest since they were first sold in 2014 at 93 cents, data compiled by Bloomberg show. The debt traded at an average 63.1 cents on Friday.

Cofinas with 6.05 percent coupon and maturing in 2036 traded at an average 60.8 cents Friday after falling to 58.7 cents on April 12, the lowest in nearly a year, Bloomberg data show.

Analysts say Puerto Rico’s debt crisis will ultimately be resolved in court, given the long odds of convincing creditors — some of whom have already taken opposing sides in lawsuits — to voluntarily accept steep losses, despite whatever legal claims they have on the government’s cash.

“It’s hard to see how mediation could succeed theoretically,” Fabian said. “There are fundamental points like the constitutional prioritization of GOs and the purported segregation of Cofina that need a court to decide their staying power.”

Bloomberg

by Michelle Kaske

April 24, 2017, 2:00 AM PDT

RACINE — State law gives municipalities the tool of tax increment financing to develop or redevelop defined areas, and since 1980 the City of Racine has used it to boost its tax base by a net $181-plus million and counting.

Tax incremental financing allows a municipality to pay for improvements in a defined area, or tax increment district, with the future taxes generated as development occurs there.

With the city in the process of forming its 20th TIF district — for the Regency Mall area — The Journal Times assessed information from the Wisconsin Department of Revenue and City of Racine to see how previous TIF districts have performed.

In general, Racine’s TIF districts have been a proven way to manifest new development and thereby build the city’s tax base in particular areas.

“I would say on the whole, they have done well,” said City Finance Director David Brown, who was not with the city when it established its first TIF district to upgrade the infrastructure for a portion of Downtown. “They have done what the city had hoped for.”

As examples, the city laid the groundwork for Young Industrial Park, off Mount Pleasant Street on the north side, and Olsen Industrial Park, on the far south side, with TIDs created in 1983 and 1985, respectively. Together, those two areas contribute more than $23 million in city tax base and have likely employed thousands of people over the years.

Successful TIF districts

One of Racine’s most successful active TIF districts is No. 9, the Johnson Building at 555 Main St., which was formed in 2000. From its base value of $877,600, its assessed value has mushroomed to well over $29 million.

Like any TID, the additional property tax revenue collected on the tax base increase, or “increment,” from the Johnson Building TIF district is used only to repay the city for its investment in creating it, until the TID’s termination.

A TIF district is terminated either by reaching the end of its preset life or by paying off the municipality’s initial investment earlier. Then all other taxing jurisdictions can begin sharing in the additional property taxes flowing from the greater tax base that was created.

(Brown said Racine’s TID No. 2 remains active at 34 years old by special legislation passed for that purpose.)

Racine’s most successful TIF district ever, which closed in 2013, was Gaslight Pointe, a project done by Wispark, the development arm of Wisconsin Energy Corp. Gaslight put about $41.5 million worth of property on the tax rolls to benefit the city, county, Racine Unified School District, Gateway Technical College and State of Wisconsin.

Assessing negative numbers

Brown pointed out that some of the city’s active TIF districts don’t have large amounts of tax base increment, and a few are negative. But he said in general, the city doesn’t have much of an investment in them.

An example is No. 14, the former Walker Manufacturing and Pugh Marina, now called Harborside District. That area at one time was to have become an enormous project by developer Scott Fergus, called Pointe Blue. The TIF district was set up for that purpose, “But the city doesn’t really have any investment there,” Brown said.

“Should a developer come in and want to do a development there,” he said, “the TIF is in place to take care of that.”

TIF district No. 15, the former Homeward Bound block on the near north side, is a similar example, Brown said. “We haven’t put any money into the infrastructure.”

No. 17, the former Porters of Racine site, was formed to support a planned redevelopment of the furniture store into retail and apartments, by property owner Micah Waters. But he eventually abandoned the project and had the sprawling Porters building removed.

“When the TIF was created, those buildings were there, and now they’re gone,” Brown said. “So the assessment has decreased. But the city hasn’t spent money on it. The city’s expenses, for all practical purposes, are nothing.”

Help for mall’s owners

Hull Property Group, recent buyers of Regency Mall, appreciate that the city is forming a TIF district to help them try to reverse the fortunes of that troubled property.

“Hull Property Group views the TID as an inducement to invest heavily into Regency Mall,” said Hull Vice President of Government Relations John Mulherin. “The TID creates a financial framework which provides some clarity as to what future operating costs may be, which in turn, provides some comfort in making a significant investment to the property.”

“Stabilizing the Regency Mall property will eventually attract additional retail and restaurants to the area,” Mulherin said. “The TID is critically important to help ‘jump-start’ this process. We commend the community leadership who had the vision to begin the work to help revitalize this critically important retail node.”

THE JOURNAL TIMES

MICHAEL BURKE [email protected] Apr 2, 2017

Recent border battles have once again redrawn the lines of the metro area.

On the Saturday before Election Day last November, Jason Lary, a former insurance executive, crouched on a rough patch of grass at the center of a busy intersection 20 miles outside of Atlanta in DeKalb County. Lary was holding a hammer, and he tapped carefully on the thin wire base of a campaign sign. “My hand is like Fred Flintstone’s right now because I banged my hand in the night,” he said, noting his latest sign-related injury. This hazard, though, was worthwhile: “If you don’t start [the sign] with your hand, it will bend. It takes longer—guys are 10 times faster than I am. But my sign’s still gonna be up.”

This was a non-trivial advantage for Lary, who for the past month had begun most mornings with a kind of ground-game whack-a-mole. He would put up signs under the cover of night, only to have his opponents dislodge them by hand or, when that failed, run over them with their cars. Nevertheless, Lary was feeling good. “My opposition? Worn down,” he told me. “They don’t even have any more signs. And I kept a stash, knowing this time was coming. This is not my first picnic with nonsense.”

Continue reading.

THE ATLANTIC

SAM ROSEN APR 26, 2017

Senators John McCain (R) and Jeff Flake (R) on April 25 introduced S.930, the Western Area Power Administration Transparency Act, to require the Western Area Power Administration (WAPA) to establish a website containing detailed information about customer rates and agency expenditures. The bill would also require WAPA to produce an annual summary of rate and expenditure information, as well as a detailed accounting of its current and projected unobligated balances.

Here is a joint press release from Senators McCain and Flake.

Click here to view the text of the bill.

• Gridlocked state headed to third year without a budget
• Rating companies warn of further downgrades without a solution

What’s worse than the worst? Illinois may find out.

The lowest-rated U.S. state is headed toward its third year of an unprecedented budget impasse as Republican Governor Bruce Rauner and the Democrat-led legislature repeatedly fail to agree on how to plug chronic deficits and halt the growing backlog of unpaid bills.

Both Moody’s Investors Service and S&P Global Ratings have warned that Illinois could be downgraded again, while investors are already demanding higher yields on its bonds than they do from borrowers that are on the cusp of junk, according to data compiled by Bloomberg.

“It’s getting harder and harder to find a reason to be optimistic for a budget,” said Ty Schoback, a senior analyst in Minneapolis at Columbia Threadneedle Investments LLC, which holds some Illinois debt among its $22 billion of municipal holdings. “That being said, this is politics — you can’t predict. Two years ago, we were debating whether or not Illinois falls into BBB. Today, we’re debating whether it falls to junk status. If the status quo persists, what are we going to be debating in two years?”

The standoff has wreaked havoc on the fifth-most-populous state’s finances and sunk its credit rating. Unpaid bills have soared to a record $13 billion, and entities that rely on state aid, including public universities, have had to furlough workers and cut services. A stopgap budget expired in December and a bipartisan package of tax increases and spending cuts aimed at ending the standoff fizzled in March. Illinois’s leaders are at a “critical juncture,” according to Moody’s.

“Governor Rauner is optimistic that a balanced budget will be passed soon that will contain reforms to protect taxpayers and recruit new businesses that will boost the economy and create jobs across Illinois,” Eleni Demertzis, a spokeswoman for Rauner, said in an e-mailed statement.

If an agreement isn’t reached by the end of May, when the regular legislative session ends, a three-fifths majority will be required to pass anything, making a compromise even harder to reach.

Both Moody’s and S&P have warned of further credit deterioration if Illinois enters a third year without a spending plan. Both companies rank Illinois only two steps above junk with negative outlooks, signaling the rating could fall again. No U.S. state general-obligation bonds have ever been rated below investment-grade, according to data going back to at least 1970.

Investors have to be prepared for the possibility, said Matt Fabian, a partner with Municipal Market Analytics Inc.

Illinois is “being managed as if it were a speculative credit,” Fabian said. “It’s hard to get on board and say that Illinois is a buy for anyone besides speculative investors.”

Investors already demand higher yields to hold debt issued by Illinois. The state’s 10-year yields have climbed to 4.3 percent, or about 2.2 percentage points more than benchmark tax-exempt debt, according to Bloomberg’s indexes. That’s the most of all 20 states tracked by Bloomberg and more than investors recently demanded on debt issued by borrowers with the lowest investment-grade ratings.

“Barring a comprehensive solution and a budget in place and some real concession on both sides, I think there’s always room for spreads to widen,” said Adam Buchanan, senior vice president of sales and trading at Ziegler, a broker-dealer in Chicago. “There is certainly room for more deterioration in their levels.”

No U.S. state has defaulted on its debt since the Great Depression, and no one is expecting that from Illinois anytime soon. Illinois has been making monthly deposits to its debt service funds for its general-obligation and sales tax-backed bonds, despite the lack of a budget, according to Moody’s. But without a compromise by the end of May, there’s a risk of “creditor-adverse actions” like borrowing from debt-service funds, or “eventually, prioritizing core operating needs over debt service,” according to Moody’s.

Losing its investment-grade rating would make borrowing more expensive and limit the pool of buyers for Illinois debt, further complicating efforts to ease the liquidity crisis. The compromise that lost traction in March included a plan to issue as much as $7 billion of bonds to pay overdue bills.

The state has time to stabilize its finances. The next fiscal year begins July 1. If the two sides are able to come together operating liquidity can get restored quickly, according to Moody’s. The state has the capacity to raise taxes. Its income tax rate is 3.75 percent, after a temporary hike to 5 percent expired in January 2015.

Rauner and Democrats can’t agree on how to fill the hole from that lost revenue even as the state continues to spend money through a combination of continuing appropriation bills, court orders and consent decrees. Rauner, who took office in January 2015 as the first Republican to lead the state since 2003, wants any spending plan to be linked to parts of his agenda, like property-tax limits or changes in workers-compensation laws, which Democrats have resisted.

“They still have the ability to make changes should they desire to do so,” said Eric Friedland, director of municipal research in Jersey City, New Jersey, for Lord Abbett, which manages about $20 billion of municipal debt, including some Illinois holdings. “But the longer this goes, the more difficult it is for them to put themselves on a good course.”

Bloomberg Markets

by Elizabeth Campbell

April 21, 2017, 2:00 AM PDT

• State offers $1.25 billion in taxable debt for construction
• Court could prevent state from using proceeds for rail line

California isn’t letting litigation or Donald Trump stand in the way of one of the most expensive and controversial projects in the U.S.

The state on Thursday sold $1.25 billion in taxable bonds to finance a $64 billion high-speed rail system, the first debt issue for construction since voters approved it nearly a decade ago. The offering marks a show of faith from officials that the project will proceed despite a lawsuit from a county and farmer opposed to it and roadblocks from the Trump administration, which has delayed a grant that would have benefited the bullet train running from San Francisco to the Los Angeles area.

The general-obligation debt, backed by California’s full faith and credit, isn’t dependent on the success of the project, the first publicly financed U.S. high-speed rail line. Lack of federal support would push more of the burden on Californians to finance the project, which Democratic Governor Jerry Brown says will transform the traffic-choked state by increasing access to affordable housing and boosting local economies.

“California can well afford it, and it will make our state a much better place,” he said in February in a recorded news conference to which his press office referred in response to questions. “I know we’re going up against a very red tide here of opposition. This thing is a long-term project, and one way or another we’re going to get it.”

It’s a good time for California to borrow, with its bond ratings their highest since the turn of the century and after it turned a spate of deficits into surpluses. The state’s 10-year tax-exempt securities yield about 2.3 percent, or 0.24 percentage point more than benchmark debt, less than half the premium it paid three years ago, data compiled by Bloomberg show. Yields on the newly issued fixed-rate taxable bonds ranged from 1.25 percent for securities due in 2018 to 2.37 percent for those due in 2022, according to the state treasurer’s office.

After years of delay, due partly to legal challenges, construction is underway on 119 miles of track in the Central Valley. By 2029, if work goes as planned, passengers will be able to travel at speeds of more than 200 miles an hour between San Francisco and Anaheim, south of Los Angeles, according to the California High-Speed Rail Authority.

Voters in 2008 approved almost $10 billion of general obligations for the project, and of that, about $1 billion has been sold to finance costs such as design and environmental reviews, according to the state treasurer’s office. So far, work has cost about $3 billion, with about $2.35 billion coming from the federal government.

On April 26, opponents of the project will ask a Sacramento County Superior Court to block the state from using proceeds from the bond sale for it. A victory for the opponents could lead federal officials to demand that the state pay back money it has so far received, according to bond documents circulated to investors.

Another risk: future federal grants may not roll in. The high-speed rail authority’s most recent business plan in May 2016 said it plans to seek additional funds from Washington, without specifying the amounts.

Already, a $647 million federal grant slated for the electrification of another commuter rail line, which is also needed for the high-speed system, was suspended by Trump’s administration after California’s House Republicans asked for it to be withheld.

One of them was U.S. Representative Jeff Denham, from the Central Valley, who said he doubts the project will get additional federal dollars until there’s a full explanation of all funding sources and costs.

“If you’re going to continue to obligate state dollars that you do not have, then you’re in jeopardy of at some point the federal government calling for those notes to be due, which could then put public safety dollars at risk, other transportation dollars at risk or education dollars at risk,” said Denham, who sits on the transportation and infrastructure committee.

Under the measure approved by voters, California’s department of finance must review the funding plan for each segment of the rail before permitting the use of bond funds. It did so in March, saying that for the $7.8 billion Central Valley portion, the risks “are more limited because the bulk of funding is nearly in hand, and much work has already been completed.”

A study previously commissioned by the U.S Treasury Department under then-President Barack Obama listed the project as among 40 with major economic significance that were at risk of not coming to fruition. Under an assumption that the costs totaled $59 billion, it pegged the net economic benefits at at least $130 billion.

“There are a lot of federal questions,” said Howard Cure, head of municipal research in New York at Evercore Wealth Management. “When you don’t have the Republican contingent from your state pushing for it, it is potentially a big problem.”

Bloomberg Markets

by Romy Varghese

April 20, 2017, 2:00 AM PDT April 20, 2017, 4:40 PM PDT

After recent rating reviews driven by the state of Illinois’ continued budget impasse, S&P Global Ratings lowered the debt ratings on six of its seven rated public universities–some by multiple notches–and placed the ratings on all seven universities on CreditWatch with negative implications on April 20, 2017.

Continue reading.

Kroll Bond Rating Agency (KBRA) has released a public finance research report entitled “Puerto Rico: Is It Doing Enough To Regain Capital Market Access?”

The report notes that the fiscal plan certified by the oversight board established under PROMESA presents a troubling outlook for bondholders over its 10-year time frame. While the fiscal reform and debt restructuring envisioned by PROMESA is still at an early stage, responsible debtor behavior by the commonwealth through the unfolding process will be essential in determining whether efficient access to the capital markets can be regained.

Please click here to access the full report.

WASHINGTON — The Justice Department escalated its fight with big cities and other jurisdictions over immigration on Friday, suggesting that illegal immigration is increasing urban crime and threatening to pull grant funding from uncooperative jurisdictions.

New York City, which reported record-low crime rates last year, responded angrily, as did the state of California.

The specific issue at hand is fairly small: whether jurisdictions are complying with federal rules that block them from preventing their officials from communicating with federal agencies about immigration. The Justice Department sent letters to nine jurisdictions on Friday threatening to withhold grant funding if they don’t affirm they are in compliance with that law.

The bigger issue is the Trump administration’s effort to crack down on “sanctuary cities,” or jurisdictions that to varying degrees decline to assist federal officials in their efforts to identify and potentially deport people living in the U.S. illegally.

Many liberal jurisdictions maintain that they are under no obligation to assist the Trump administration as it works to ramp up deportations of people in the U.S. illegally.

A Justice Department statement accompanying the letters said the jurisdictions had agreed, as a condition of receiving department grants, to provide documentation they are adhering to the federal rule. “The Department of Justice expects each of these jurisdictions to comply with this grant condition,” the statement said.

The department’s tone wasn’t well-received by some of the jurisdictions. “Fear-mongering and falsehoods will not intimidate our state into compromising our values,” said California Attorney General Xavier Becerra. “Federal threats to take away resources from law enforcement or our people in an attempt to bully states and localities into carrying out the new administration’s unsound deportation plan are reckless and jeopardize public safety.”

Friday’s letters follow up on an announcement last month from Attorney General Jeff Sessions threatening to pull the grant money. They were sent to officials in Chicago, New Orleans, Philadelphia, Las Vegas, Miami, Milwaukee and New York City, as well as the state of California and Cook County, Ill.

Those jurisdictions were identified in a Justice Department inspector general’s report last year as potentially out of compliance with the requirement that they do nothing to hinder communication between their own officials and federal authorities regarding immigration.

Friday’s letter asks the cities to send documentation that they are in compliance by the end of June. In California, the Board of State and Community Corrections, which received the letter, said it was under review and that the board complies with the statute at issue.

In the statement accompanying the letters, the Justice Department said many of the cities it is targeting are “crumbling under the weight of illegal immigration and violent crime.”

New York Police Commissioner James O’Neill said he was angered by the characterization. “I like to think of myself as a pretty calm and measured person, and I think most of time I present myself that way, but when I read that statement by the DOJ this afternoon, my blood began to boil,” Mr. O’Neill said. “To say we’re soft on crime is absolutely ludicrous.” He added that the comment was insulting to the NYPD officers who have been killed in the line of duty this year.

The city reported 335 murders last year, down from 352 in 2015 and significantly below the 673 murders reported in 2000.

Later in the day, the Justice Department issued a second statement clarifying that it was criticizing the city’s policies, not its police. “Unfortunately, the Mayor’s policies are hamstringing the brave NYPD officers that protect the city,” it said.

In its initial statement, the department also said the number of murders in Chicago had “skyrocketed” since 2015. Figures show the city is enduring a surge in violent crime.

The letters came as the Trump administration approaches the end of its first 100 days in office. Sending the letter is an action officials can point to as an example of the administration working to implement President Donald Trump’s campaign promises.

Some experts said it wouldn’t be difficult for most cities to show they are in compliance with the provision of law at issue, because it simply requires that local officials do nothing to impede communication with federal officials.

A more serious threat to cities would be if the administration follows through on threats to withhold funding from jurisdictions that don’t comply with requests to hold people in jail in order to give immigration officers time to come and arrest them.

Sanctuary city policies vary widely, but they all limit cooperation with federal immigration enforcement to some extent. Some municipal officials say their sanctuary policies are increasingly important given this administration’s more aggressive deportation policies, which focus on criminal offenders but aren’t limited to that group.

The Wall Street Journal

By Laura Meckler and Beth Reinhard

Updated April 21, 2017 7:09 p.m. ET

—Zolan Kanno-Youngs contributed to this article.

Write to Laura Meckler at [email protected] and Beth Reinhard at [email protected]

SAN FRANCISCO — A California appellate district court ruled unanimously on Tuesday to dismiss a lawsuit brought against the city of San Diego by the state’s Public Employees Relations Board.

The decision upholds Proposition B passed by San Diego voters in 2012 that replaced defined benefit pension plans for newly hired public employees, except police officers, with 401(k)-style defined contribution plans.

San Diego Mayor Kevin Faulconer tweeted on Tuesday that the court had “protected the clear will of voters and upheld pension reform.”

Public workers in California and across the nation typically receive a “defined benefit” pension plan, that leaves the city or other governing municipality on the hook to pay the retirement benefit if invested contributions do not grow to the defined benefit amount.

A 401(k)-style plan, on the other hand, is called “defined contribution” plan and does not guarantee a particular benefit amount, leaving the city with no risk.

The appellate court’s ruling potentially saves San Diego millions of dollars that it could have been forced to spend creating pensions for roughly 2,000 workers hired since 2012.

Michael Sweet, partner at Fox Rothschild, said this legal fight is ending with a whimper.

“Certainly if the court had gone the other way, it might have taken some of the wind out of the sail of pension reform efforts,” said Sweet. “But it isn’t a grand ruling on the questions that are still out there: Under what circumstances, if any, can changes be made to pension plans of existing public employees?”

California has long been a battleground for the fight over public pension reform. The largest debt for most California cities and counties is pension liability. Pensions were also a significant factor in the recent municipal bankruptcies of Vallejo, Stockton and San Bernardino, but pensions were not cut in those cases.

By REUTERS

APRIL 11, 2017, 6:57 P.M. E.D.T.

(Reporting by Robin Respaut; Editing by James Dalgleish)

Fitch Ratings-New York-13 April 2017: Fitch Ratings has upgraded nearly all its ratings on tax allocation bonds (TABs) issued by California Redevelopment Agencies (RDAs). The upgrades follow a review of the portfolio under Fitch’s revised U.S. tax-supported rating criteria (released April 18, 2016).

The revised criteria introduced consistent scenario analysis to support the evaluation of the financial resilience of dedicated tax bonds. They also emphasize the structure’s resilience to declines in pledged revenue relative to historical economic cyclicality. In addition, positive credit events since the dissolution of the RDAs in December 2011, including the prohibition on issuing additional debt, have led Fitch to conclude that pledged revenues supporting most TABs can withstand more significant stress while still providing sound debt service coverage than was assumed in the prior ratings.

DISSOLUTION PROCESS PASSES FIVE-YEAR MARK
Legislation dissolving the RDAs (AB 1x 26) was upheld by the California Supreme Court in December 2011. The ensuing dissolution process included state-required procedures to insure that pledged incremental tax revenues were properly allocated and remitted to make timely TAB debt service payments. Early in the process, market participants including Fitch had significant concerns that these somewhat complicated and untested procedures might result in missed payments. It has since become clear that the procedures set forth by the state to insure timely bond repayment have become institutionalized.

REAL ESTATE MARKET RECOVERY
At the time of the RDA dissolution, there was uncertainty as to the pace and durability of the real estate market recovery. Statewide assessed valuation (AV) was flat in fiscal 2012 but had declined by 4% from its peak in fiscal 2009. Some RDA project areas suffered much greater declines. Uncertainty regarding the future direction of AV was heightened by the lag in timing between changes in market conditions and tax collections and the non-linear impact of changes in market values on property assessments created by Proposition 13. The amount of ‘Prop 13 cushion,’ or the difference between assessed and market value, varies based on a property’s age or the date of its most recent resale.

Since fiscal 2012, the real estate market recovery has been strong in most parts of the state. Statewide AV was up 20% as of fiscal 2016, although a few project areas have not fully recovered. The Prop 13 cushion, which helped keep AV from falling more during the housing downturn, is being rebuilt.

STRONG RESILIENCE HIGHLIGHTED BY NEW CRITERIA
The combination of prior concerns about the sufficiency of state procedures and the direction of the real estate market led Fitch to be cautious in changing ratings for RDAs. Ratings have been stable to rising since dissolution but at a modest rate.

Fitch’s review of dedicated tax bond structures under its revised criteria includes analysis of the dedicated revenue stream’s vulnerability to cyclical decline. Fitch considers the revenue stream’s sensitivity to a 1% decline in national GDP as well as the largest aggregate decline in pledged revenues over the period covered by the revenue sensitivity analysis. The review period extends as far back as fiscal 1999. The analysis focuses on the cushion between pledged revenues and maximum annual debt service (MADS), taking both revenue sensitivity measures into account.

This analysis highlights the resilience of California TAB structures given generally sound debt service coverage, the inability to issue additional parity debt, and mostly moderate historical revenue declines. For a few, resilience to downturns is still a concern, but for most the high coverage cushions lead Fitch to believe the bonds would be well insulated even in a reprise of the Great Recession, which Fitch does not expect. The recovery has led to a rebuilding of the Prop 13 cushion between AV and market values, which should again provide a buffer in the event of another drop in real estate prices.

Tax base concentration continues to weigh on ratings, though many have become more diversified as AV has grown. The increased diversification further reduces Fitch’s concerns about the ability of the project areas to generate sufficient revenue to repay the bonds.

SUCCESSOR ENTITIES REMAIN DISTINCT ENTITIES
Pursuant to the California Health and Safety Code, successor agencies are separate and distinct public entities and are therefore not exposed to the operating risks of the governments that have assumed responsibility for their operations. Given the limited scope of successor agency operations, Fitch does not assign them Issuer Default Ratings.

Contact:

Amy Laskey
Managing Director
+1-212-908-0568
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Karen Ribble
Senior Director
+1-415-732-5611

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: [email protected].

Additional information is available on www.fitchratings.com

NEW YORK — Bankruptcy for Puerto Rico is looking ever more likely as the clock ticks down toward a May 1 deadline to restructure $70 billion in debt, ramping up uncertainty for anyone betting on returns from the island’s widely held U.S. municipal bonds.

When U.S. Congress last year passed the Puerto Rico rescue law dubbed PROMESA, it froze creditor lawsuits against the island so its federally appointed oversight board and creditors could negotiate out of court on the biggest debt restructuring in U.S. municipal history.

The freeze expires on May 1, however, and an extension by Congress is “not going to happen,” said a Republican aide to the House Committee on Natural Resources, which is in charge of territory matters.

A round of mediated talks is scheduled to begin on Thursday. But absent an agreement soon, a growing number of analysts say Puerto Rico will seek protection from creditors under PROMESA’s court-sanctioned restructuring process, akin to U.S. bankruptcy.

Forbearance deals could let negotiations continue past May 1, but a source directly involved in the talks said avoiding an eventual bankruptcy is “impossible.”

The source, who declined to be named because the talks are private, said parties have grown further apart since Governor Ricardo Rossello took office in January.

The negotiating tactics of Rossello and the board have jarred investors who expected more creditor-friendly approaches from both. The board is pushing debt repayment cuts more than double those proposed by former Governor Alejandro Garcia Padilla, a populist whose policies had already alienated creditors.

Disparate stakeholders have united to question the legality of a fiscal turnaround blueprint approved by the board, and to resist mediation efforts.

Hector Negroni, whose Fundamental Credit Opportunities fund holds Puerto Rico debt, said he recalled “constructive comments” from Rossello and board members “about protecting the priorities of creditors” during the board’s early days. “But their words are not being followed up by their actions,” Negroni said.

Bankruptcy is now “the most likely outcome,” said Height Securities analyst Ed Groshans, who increased loss projections for bond insurers like MBIA Inc and Assured Guaranty Ltd in an April 3 note.

Elias Sanchez, Rossello’s liaison to the board, said the government holds out hope for at least partial compromise. “We feel very confident we can strike some deals by May 1, maybe not all of them,” Sanchez said.

The oversight board is committed to pursuing agreements out of court, its spokesman, Francisco Cimadevilla, said. “A transaction is always better than a lawsuit,” he said.

But with myriad creditor classes competing for priority, compromise over Puerto Rico – once a rising star of U.S. high-yield muni funds – could be tough.

“The more creditors insist that part of their position is that no one fare better than they do, the more difficult that is to effectuate outside of bankruptcy,” said restructuring expert Melissa Jacoby, a professor at the University of North Carolina School of Law.

Puerto Rico is trying to escape a crisis marked by a 45 percent poverty rate and rampant emigration.

Since bankruptcy gives debtors the ability to impose payment cuts over creditor objections, it is seen as a negative for bond markets, Jacoby said.

Trading prices of Puerto Rico’s benchmark 2035 general obligation bonds have reflected that concern, falling precipitously in recent weeks.

But risk cuts both ways and Sanchez said the government wants to avoid bankruptcy as much as creditors.

Putting Puerto Rico’s fate in the unpredictable hands of a judge “could go really bad for the government too,” he said.

By REUTERS

APRIL 12, 2017, 3:03 A.M. E.D.T.

(Reporting by Nick Brown; Editing by Tom Brown)

The city has created a huge problem for itself — one so big that bankruptcy isn’t off the table.

Dallas has enjoyed enormous success in recent years. Texas’ third-largest city has seen the fastest job growth of any major metropolitan area in the country, as well as the second-fastest population growth. But despite its good fortune, Dallas has created a huge problem for itself — one so big that even bankruptcy isn’t off the table.

The problem is the city’s pension funding, particularly the cost of its commitments to public safety workers. The public safety pension fund has a shortfall somewhere in the neighborhood of $8 billion. The pension board would like the city to pitch in more than $1 billion — an amount almost equal to the city’s entire general fund. Meanwhile, Dallas is facing a lawsuit over back pay for police and firefighters that could cost the city up to $4 billion.

The pension mess came about through a familiar set of circumstances. Back in the early 1990s, workers were offered generous benefits that included a guaranteed return rate of 8.5 percent on individual savings accounts. In order to pay for such benefits, the board engaged in some risky investments. “They had some investments in real estate that unfortunately turned out to be disastrous,” says James Spiotto, managing director of Chapman Strategic Advisors. “They promised a high return. They earned far less than that.”

Not surprisingly, problems this big have triggered a good deal of acrimony. Mayor Mike Rawlings has been unable to convince public safety workers that they’ll ultimately have to give up a lot of what they’ve been promised. The mayor accuses the Dallas Police and Fire Pension Board of committing a “grave breach of trust,” and has called in the crime-fighting Texas Rangers to investigate the board’s administration. The board is separate from the city, although it includes several members of the city council. It’s also made up of police and fire workers and retirees.

In the meantime, Rawlings has gone to court to try to block any of the city’s retirees from taking money out of their deferred retirement funds. A group of workers also has sued, blocking a vote on potential voluntary benefit reductions.

Given pension rules in the state, the legislature is going to have to sign off on any plan to address the problem. Lawmakers are confronting a similar-sized hole in Houston, but a crisis seems to have been averted there because the city and its employees have agreed to a deal. Dallas, by contrast, has been unable to bring state legislators an overhaul that has the blessing of both the city and its pension board. One proposal legislators are talking about would convert individual accounts of Dallas workers into annuities. That might save some money, but Texas lawmakers need to consider how they can reshape pension oversight to avoid similar problems in the future.

The quasi-independent nature of pension boards in Texas may be one reason why its plans keep running into trouble. Seven Texas municipalities have filed for bankruptcy protection over the last 35 years, notes Frank Shafroth, a government finance expert at George Mason University and a Governing columist. “The state of Texas needs to really think through what kind of structure they have that enables municipalities to avoid accountability,” Shafroth says.

GOVERNING.COM

BY ALAN GREENBLATT | APRIL 2017

ST. LOUIS, MO–(Marketwired – April 04, 2017) – Stifel Financial Corp. (NYSE: SF) today announced that its Public Finance group led the nation in number of municipal negotiated issues in 2016, serving as sole or senior manager for 801 transactions with a total par value of more than $16.9 billion, according to data from Thomson Reuters SDC. It is the firm’s third consecutive No. 1 ranking and its sixth consecutive top ten ranking (including acquired firms).

In addition, Stifel ranked No.1 nationally in par value and number of issues in the following categories:

• K-12 Financing: 409 issues totaling nearly $8 billion
• Tax Increment Financing: 118 issues totaling $2.9 billion
• Negotiated Deals Below $25 Million: 574 issues totaling $5.1 billion

Stifel ranked No. 1 nationally in number of issues in the following category:

• Bank Qualified Bonds: 221 issues totaling $1.3 billion

In the individual state rankings, Stifel was No. 1 in par value in Michigan and Missouri.

“Our success is a testament to the quality of our public finance team nationwide,” said Ken Williams, Director, Municipal Finance Group. “We’ve continued to enhance our capabilities with the addition of several experienced bankers in the past couple of years. These professionals have added depth to our group, which allows us to provide even greater service to our clients. Our public finance team, along with our dedicated municipal sales group, our broader fixed income capital markets sales group, and our retail network, enables us to deliver superior results for our issuer clients.”

Stifel Public Finance Information

A leader in public finance, Stifel’s areas of expertise include state and local governments, tax increment/development districts, K-12 school districts, utilities, transportation agencies, higher education institutions, and pension. With 150 public finance associates in 30 offices, Stifel has one of the largest municipal finance practices in the country.

Stifel Company Information

Stifel Financial Corp. (NYSE: SF) is a financial services holding company headquartered in St. Louis, Missouri, that conducts its banking, securities, and financial services business through several wholly owned subsidiaries. Stifel’s broker-dealer clients are served in the United States through Stifel, Nicolaus & Company, Incorporated; Keefe Bruyette & Woods, Inc.; Miller Buckfire & Co., LLC; Century Securities Associates, Inc.; and Eaton Partners, LLC, and in the United Kingdom and Europe through Stifel Nicolaus Europe Limited. The Company’s broker-dealer affiliates provide securities brokerage, investment banking, trading, investment advisory, and related financial services to individual investors, professional money managers, businesses, and municipalities. Stifel Bank & Trust offers a full range of consumer and commercial lending solutions. Stifel Trust Company, N.A. and Stifel Trust Company Delaware, N.A. offer trust and related services. To learn more about Stifel, please visit the Company’s web site at www.stifel.com.

Politicians who had supported an increase have reversed course

BALTIMORE—Cities and counties from Portland, Maine, to Los Angeles have successfully passed local minimum-wage increases, but recent resistance in seemingly friendly territory suggests a momentum shift.

The newly elected Baltimore mayor last month vetoed an increase of the local wage floor to $15 an hour by 2022, despite favoring the policy as a candidate. Earlier this year, the top elected official in Montgomery County, Md., outside Washington blocked a similar measure despite the county previously being at the forefront of local minimum-wage increases.

Continue Reading.

THE WALL STREET JOURNAL

By SCOTT CALVERT and ERIC MORATH

April 6, 2017 10:36 a.m. ET

Creditors would take the same haircut as in previous agreement while delaying principal repayment for longer, backstopping a potential new-money loan

Creditors of Puerto Rico’s public power monopoly agreed to revise a $9 billion restructuring accord, providing additional debt relief to mitigate politically unpopular rate increases for consumers.

The U.S. territory on Thursday announced a new restructuring agreement covering the public utility known as Prepa ahead of a May 1 deadline to reach consensual settlements with creditors. The new framework modifies a debt-cutting agreement dating to 2015 that Gov. Ricardo Rossello sought to renegotiate after his January inauguration.

The governor, with the support of federal officials overseeing Puerto Rico’s finances, reopened negotiations last month to ask for additional concessions from holders of Prepa’s power revenue bonds and insurance companies that guarantee more than $2 billion of Prepa’s approximately $9 billion debt load.

The original deal called for Prepa bondholders to exchange their bonds for new securities at a 15% discount. Under the framework announced Thursday, creditors would take the same haircut while delaying principal repayment for longer and backstopping a potential new-money loan, according to a person familiar with the matter.

Thursday, a group of bondholders said the revised restructuring terms represent a “fair solution” and are “in the best interest of Puerto Rico, its people and the future of Prepa as a sustainable utility.”

Mr. Rossello’s decision to wrest negotiations from Prepa’s independent board rankled creditors and U.S. lawmakers who argued that he should honor the pre-existing agreement. But creditors ultimately proved willing to deal rather than risk potentially larger losses in a court-supervised proceeding, according to a person familiar with the matter.

Puerto Rico is scheduled to begin mediated talks next week with creditors holding billions of dollars of other government bonds. Under discussion will be how to divvy up $800 million a year earmarked for debt service, according to a person familiar with the matter. But Puerto Rico has little time to reach voluntary agreements, with less than four weeks remaining before the expiration of a legal shield freezing creditor lawsuits.

Puerto Rico is negotiating based on a fiscal plan approved by federal authorities with more bearish economic assumptions than investors expected, sparking a selloff last month in benchmark Puerto Rico securities. The U.S. territory owes creditors roughly four times what they will collect over the next decade under the fiscal plan. Puerto Rico owes roughly $70 billion in overall municipal debt, including the approximately $9 billion attributable to Prepa.

After May 1, when the legal stay expires, federal oversight officials have authority to invoke a quasi-bankruptcy process and potentially force creditors to accept unfavorable terms. The threat wasn’t available when Prepa negotiated its original restructuring agreement under Mr. Rossello’s predecessor.

THE WALL STREET JOURNAL

By ANDREW SCURRIA

Updated April 6, 2017 2:18 p.m. ET

(Reuters) – Legislation addressing public pension problems in the two biggest cities in Texas are on track for a House vote this month, a key state lawmaker said on Wednesday.

A bill for Houston’s retirement system passed the Texas House Pensions Committee on Wednesday and State Representative Dan Flynn, the committee’s Republican chairman, said a Dallas measure should follow suit by next week.

“I believe both bills will make it to the House floor in the next couple of weeks,” he said in an interview, noting the legislation is the culmination of 18 months of work to find fixes for the financially ailing pension systems.

With the Dallas police and fire pension system projected to become insolvent within 10 years, legislation would cut the nearly $3.7 billion unfunded liability to $2.18 billion and boost the funded ratio to nearly 50 percent from the current 36.8 percent, according to a bill analysis. To accomplish that, the measure would increase retirement ages, hike worker and city contributions, limit cost-of-living (COLA) increases for retirees, and restructure governance.

During a hearing on the bill this week, Dallas Mayor Mike Rawlings pushed for city control of the pension board and against “a taxpayer bailout.”

Flynn dismissed the mayor’s opposition.

“There’s probably a little heartburn for everybody, which makes it a pretty good bill because if only one side was happy we’d still have problems,” he said.

The Houston bill, supported by Mayor Sylvester Turner, would reduce the unfunded liability in the city’s municipal, police, and firefighter funds to about $5.5 billion from $8.1 billion by boosting retirement ages, suspending and reducing COLAs, and increasing employee contributions. For its part, Houston would have to make actuarially required annual payments to the funds, which would lower their projected investment return rates to 7 percent, and sell $1 billion of pension bonds.

Potentially complicating matters for Houston is another bill, which passed the Senate last week, requiring voter approval for the issuance of pension bonds by local governments.

“We do not believe in taking a tool away from municipalities solving pension problems, especially in a higher interest cost environment,” said Darian Ward, the mayor’s spokeswoman.

Flynn said his committee became involved because pension problems contributed to credit rating downgrades for both cities.

“If the two largest cities in Texas start getting downgraded, well, it could actually affect our Texas bond ratings,” he said, referring to the state’s triple-A credit standing.

By REUTERS

APRIL 5, 2017, 5:36 P.M. E.D.T.

(Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis)

• MBIA, Assured Guaranty shares fall amid push for concessions
• Conflict marks prelude to restructuring of entire debt load

When Puerto Rico struck a deal more than a year ago to cut the government electric company’s $9 billion debt, one group was spared the hit: bond insurers, whose guarantees the island needed to win back the faith of investors.

That agreement and the precedent it set are now at risk as Governor Ricardo Rossello threatens to use the bankruptcy-like powers the U.S. has since given the territory to seek additional concessions from MBIA Inc. and Assured Guaranty Ltd. That’s triggered a decline in bond insurers’ shares over speculation about the scale of the losses they face as Puerto Rico moves toward the bigger effort to slash its entire $70 billion debt.

“For an outsider coming in, like the governor, it probably doesn’t seem to him like the people of Puerto Rico got the best deal here,” said Chas Tyson, an analyst with Keefe, Bruyette & Woods.

The push to reopen the Puerto Rico Electric Power Authority’s December 2015 agreement — the only one the island has reached — marks an opening salvo in Rossello’s effort to pull the government out of a crisis that’s promising to impose deep losses on bondholders, who snapped up the territory’s high-yielding debt for years even as the economy contracted. Puerto Rico has already defaulted on a major swath of its debt and the fiscal recovery plan approved this month by U.S. financial overseers would cover less than a quarter of what it owes between 2018 and 2026, assuming the government can accomplish its goals of cutting spending and raising revenue.

Analysts say bond insurers have enough cash to weather their exposure to Puerto Rico and that’s reflected in the price of guaranteed commonwealth bonds, some of which trade for over 100 cents on the dollar.

But insurers’ shares have slid amid speculation the resolution will be more costly than previously anticipated. Since the end of January, MBIA has fallen 18 percent and Assured 5 percent, while Ambac Financial Group Inc., which also insures Puerto Rico debt, has declined 11 percent. The S&P 500 Index has gained nearly 4 percent over the same time.

The companies that insured the debt of the utility, known as Prepa, were set to avoid paying out claims under the deal. Owners of uninsured bonds, including Franklin Advisers Inc. and OppenheimerFunds Inc., agreed to accept 85 cents on the dollar by exchanging their securities for new debt backed by a share of residents’ electricity bills.

Instead of covering payments on the other debt they guaranteed, the insurers agreed to fund a $462 million surety bond that would backstop the securities — providing investors with protection against a default. Assured and MBIA also purchased bonds from Prepa to provide the utility with cash needed to cover debt payments.

Prepa’s uninsured debt is trading around 60 cents, indicating creditors got a good deal relative to the market, said Tyson. “Every dollar that you don’t spend on debt service can be passed on to utility customers in the form of lower prices,” he said.

Rossello’s push has riled insurers and bondholders, who said it cast doubt on his ability to negotiate with other creditors and jeopardizes the government’s ability to return to the capital markets. If his administration can’t strike an agreement, Puerto Rico and the federal oversight board may turn to the courts to reduce what is owed, thanks to a provision included in a U.S. law passed last year to give the island tools to deal with its debt.

Puerto Rico is facing a deadline to reach out-of-court settlements with creditors by May 1, when a legal stay that’s sheltered it from the consequences of most lawsuits is set to lapse. The Prepa deal could also expire on Friday if it’s not extended, as insurers and bondholders have previously agreed to do.

The gulf between Rossello and Prepa’s creditors was on public display at a March 22 congressional hearing in Washington, where Adam Bergonzi, chief risk officer of MBIA’s National Public Finance Guarantee unit, said the governor has done little to reach out to creditors. An adviser to Franklin and Oppenheimer also questioned Rossello’s failure to close the deal. On Tuesday, U.S. Representative Doug LaMalfa, who heads the House panel that held the hearing, urged Rossello to complete the Prepa agreement by Friday’s deadline.

MBIA’s National insures $8.6 billion of principal and interest payments, including $1.8 billion of Prepa debt, and had $4.6 billion of claims-paying resources at the end of 2016, according to the company’s disclosures. Assured guarantees $8.1 billion of principal and interest payments, including $1.1 billion from the utility, and had $11.7 billion to meet claims as of Dec. 31.

Syncora Guarantee Inc., which is also a party to the Prepa deal, had only about $461 million of exposure to Puerto Rico as of Sept. 30. Ambac insures $9.7 billion of principal and interest, $7.3 billion of which comes due from 2047 to 2054, according to a filing. The company reported $8.8 billion of claims-paying resources as of Dec. 31. It doesn’t guarantee Prepa securities.

MBIA spokesman Greg Diamond, Assured Guaranty spokeswoman Ashweeta Durani and Syncora spokeswoman R. Sharon Smith declined to comment. An e-mail and phone message seeking comment from Ambac weren’t returned.

Puerto Rico’s move to extract concessions from the insurance companies may be short-sighted, said Mark Palmer, managing director at BTIG LLC. He said the island may need the companies to guarantee its bonds whenever it wants to resume borrowing for public works, given that investors may be worried that it would default again if the economy doesn’t turn around.

“It makes sense to use insurance where the investors are really taking risks on the insurer and not the municipality,” he said.

The conflict between Puerto Rico and the utility creditors is unlikely to be resolved outside a broad agreement to restructure all of the island’s debts, said Tyson, the analyst with Keefe, Bruyette.

“There’s a pretty wide distance between the governor, the oversight board and the major creditors of Prepa,” he said.

Bloomberg Markets

by Martin Z Braun and Jordyn Holman

March 30, 2017, 2:00 AM PDT March 30, 2017, 11:19 AM PDT

Michigan cities and towns are hurting for cash. Many have had to cut services like street and sidewalk repair. Some have had to reduce the size of their police and fire departments.

The usual suspects of municipal finance woes—weak property tax revenues and rising employee retirement costs—share much of the blame.

But today there is another culprit: the state of Michigan itself.

For years, the state Legislature has been claiming a bigger share of revenue from the statewide 6% sales tax. Facing their own budget problems, decision makers in Lansing have shifted the financial stress to the local level.

According to the Michigan Municipal League, municipalities lost out on more than $6 billion because of reductions in revenue sharing from 2001 to 2014.

Marcus Peccia is city manager of Cadillac, Michigan. Peccia said his city of around 10,000 people has lost more than $4.5 million in revenue from the state since 2001.

In a city with an annual general fund of just $6.5 million, that has had a huge effect.

“We’re down to essentially one operational crew from our public works department year-round,” Peccia said. “And so, especially in the winter, with winter conditions, it makes it more difficult for us to provide the same level of services that we want to provide and that our citizens expect.”

Peccia said that it can take up to five days to clear snow off the streets after a snowstorm, far longer than in past years. In the snowy northwest of the Lower Peninsula, that can mean the streets aren’t even fully plowed before the next snowfall arrives.

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Hamtramck, a city of 20,000 located in the Detroit metro area, has also felt the funding squeeze.

“From 2003 to 2014, we lost about $13.3 million,” said Hamtramck Mayor Karen Majewski. “That’s almost the equivalent of a full year’s general fund budget for us.”

Hamtramck’s budget issues lead to the city being taken over by a state-appointed emergency manager in 2013.

While the city’s finances are in better shape since coming out of emergency management in 2014, the situation remains far from ideal. Some local residents have even taken charge of filling the city’s potholes themselves.

Both Majewski and Peccia reported that their local representatives in Lansing are aware of the municipal funding problems. But the message does not seem to have reached the entire Legislature.

In recent months, there have been several proposals to cut state income taxes, in some cases to zero. At the same time, the governor hopes to increase the size of the rainy-day fund, which already holds more than $500 million.

The purpose of the fund is to avoid budgetary crises in the future. But for local leaders like Peccia and Majewski, who have been battling shrinking budgets for years, such proposals seem counterproductive at best.

“To have a rainy day fund at that magnitude that’s being proposed and being talked about, in combination with also reducing the income tax levy, I think that could potentially be a combination or a mixture for ultimate financial disaster and ruin for many more communities across this state,” Peccia said.

By STATESIDE STAFF & NICK WALLACE • MAR 29, 2017

• Football team exit means less expenses for regional agency
• Cost of new arena to keep Raiders may have outweighed benefit

The Oakland Raiders’ slogan is “Just Win, Baby.” For the San Francisco area community that hosts the National Football League team, it may as well be “Just Leave, Baby.”

The team’s departure will help narrow the annual losses for the municipal agency running the stadium by eliminating its game-day expenses and the risk the city of Oakland and surrounding Alameda County could incur more debt and bills to keep the franchise.

“It’s never better to lose an NFL team,” said Scott McKibben, executive director of the Oakland-Alameda County Coliseum Authority, which owns the sports complex. “But in terms of pure dollars and cents, operationally, it’s to our benefit.”

The Raiders, a franchise famed for its dedicated fans, have decamped from Oakland before, playing in Los Angeles from 1982 until returning in 1995. This time the team is headed to Las Vegas, lured by a new arena financed with the largest public subsidy in pro-football history.

Across the country, the cost of hosting professional sports has strained municipal finances, from spring-training facilities in Glendale, Arizona, to the NFL stadium in Indianapolis. While some governments such as Nevada continue to woo teams through public resources for new venues, others have curbed their enthusiasm.

San Diego has seen its credit improve after its professional football team announced its departure for Los Angeles following voters’ rejection of increased taxes to fund a replacement arena.

Indeed, a municipal bond issued by the Oakland coliseum authority is priced at the same spread over benchmark debt as seen on Jan. 19, the day the team officially filed to move to Las Vegas. The agency sold $198 million of debt in 1995 to lure the Raiders back to Oakland with a renovated complex. The securities were refinanced in 2012.

The Raiders were never obligated to pay any of the debt service, which totaled about $13 million in the last fiscal year. Adding to the strain on the authority’s finances, the team doesn’t pay for game-day expenses, such as security officers, said McKibben.

He expects the gap between the cost of hosting Raiders games and the revenue from rent, beer sales and parking fees to saddle the authority with at least a $1 million loss for the coming season. The shortfall may grow as the Raiders, which may leave after 2018 when the new venue in Las Vegas is complete, lose fans and fewer attend games, he said.

The city and county each commit to paying half of the authority’s costs and debt service. Last fiscal year, their contributions totaled $22 million. The $83 million in outstanding bonds for the Raiders’ stadium, which mature in 2025, remains their obligation no matter the team’s location.

Local officials did vie to keep the Raiders, with Oakland Mayor Libby Schaaf pledging land and $200 million in municipal bonds backed by tax revenue generated by a new arena. The fact the team spurned it in favor of a more expensive and bigger facility in Las Vegas takes away a risk to the city, said Jenny Poree, senior director at S&P Global Ratings.

“We think the economic impact to the city is pretty minimal relative to what the additional debt and potential additional costs would have been,” she said.

Las Vegas and its surrounding Clark County won’t see a significant financial hit based on how that deal is structured, she said. An increase in hotel taxes provides the public subsidy, and although Clark County is pledging its general-obligation credit as a backstop, its strong financial characteristics would leave its rating unaffected.

Oakland’s loss of the Raiders may not translate to a windfall for Las Vegas and Clark County either, said Eric Hoffmann, senior vice president at Moody’s Investors Service.

“There’s really very little evidence that professional sports teams have a material economic effect on either a local economy or municipal government,” he said.

Bloomberg Markets

by Romy Varghese

March 31, 2017, 2:00 AM PDT

ClearGov, a startup company that uses data to make sense of municipal finance for taxpayers and public officials, said this week it has raised its largest venture-funding round yet: $1.2 million from Boston-based Kepha Partners and quasi-public venture capital firm MassVentures.

The Hopkinton-based tech startup was founded in late 2015 by Chris Bullock, a data analytics expert who previously had founded a legal-focused startup after working at the Nasdaq Stock Market. Bullock said he was inspired to build the company, which has a total of 10 employees, after he found himself looking for information related to a vote to build a new elementary school in his town. When he went to understand the finances of the town, he discovered the town’s website was not helpful: He found a sizable, downloadable PDF document outlining the town’s finances, but not much else.

“Most importantly, there was no context to the data,” said Bullock. “I can see the town spends $55 million on education. That’s just a big, amorphous, meaningless number.”

So he began to form the company, which focuses on benchmarking and comparing municipal financial data for residents — all of this data giving taxpayers a transparent, customizable view into their town’s finances.

“We go out and gather data from state, local and national entities and scrub and clean and normalize it,” he said. Then that data is transformed into infographics, so that taxpayers will be able to see “where the money is coming from and where it’s going.”

ClearGov makes money by charging towns or cities an annual subscription fee. So far, there are about 100 municipalities in five states paying for the service on its website (Brookline is one of the company’s paying customers). But ClearGov has more than 20,000 cities and towns displayed out of 89,000 municipal entities across the United States. Municipalities can communicate to residents on the site about budget details and the towns can also access data about its own finances.

“Most people don’t trust what they don’t understand,” said Bullock, who declined to disclose revenue. “There’s a lot of misperceptions out there. When I started meeting with local government officials, one thing that struck me is these are normal people who want to do the right thing. They want to battle waste. They’re doing that, but they don’t have a great way to communicate that.”

Bullock will use the new funding to build up ClearGov’s sales and marketing team “and expand our data reach and also develop new technologies,” he said. He hopes to double the startup’s headcount in the next year.

Boston Business Journal

Mar 30, 2017, 7:16pm EDT

David Harris oversees the Boston Business Journal’s digital content.

CHICAGO — Illinois Governor Bruce Rauner on Friday vetoed a legislative fix favored by Chicago Mayor Rahm Emanuel for two of the city’s struggling pension funds and castigated it as a “kick-the-can approach.”

The financial footing and credit ratings for the nation’s third-largest city have slipped precipitously as its unfunded pension liabilities grew to $33.8 billion for Chicago’s four retirement systems in the most recent accounting.

The plan that passed the Illinois Senate unanimously in January and cleared the House overwhelmingly last December would have granted the state’s blessing to alter the city’s pension repayment schedule for its municipal and laborers’ retirement systems.

The systems are projected to run out of money in the coming decade and were depending on legislative sign-off of the city’s enactment of a water and sewer usage tax and telephone surcharge designed to help get them 90 percent funded in 40 years.

City officials have acknowledged that more money will be needed starting in 2023 when payments will reach actuarially required levels.

But Rauner rejected the package, saying it created a payment schedule that eventually would necessitate a tax increase for Chicago. He said it needed to be part of a broader, statewide pension funding strategy to address Illinois’ $129.8 billion unfunded pension liability.

“This is another kick-the-can approach to pension funding that landed Chicago in fiscal crisis in the first place,” Rauner said in a prepared statement. “This bill will create an unsustainable funding schedule that will lead to tax increases without solving the real problem.”

A spokesman for the Democratic mayor slammed the Republican governor’s action as an “irresponsible and irrational decision.”

“Instead of helping secure the future of our taxpayers and middle-class retirees, the governor chose to hold them hostage – just as he has done to social service providers, schoolchildren and universities across the state,” Emanuel spokesman Adam Collins said in a statement, referring to Rauner’s inability to broker a state budget deal for 21 months.

Rauner’s action left Democrats with no ability to block his veto because the pension bailout passed in the previous session of the state General Assembly, which ended in mid-January, and the governor’s only options were to approve or reject the measure.

But the city is pinning its hopes on an identical piece of legislation that passed the newly seated state Senate in late January and is awaiting action in the House, Collins said.

By REUTERS

MARCH 24, 2017, 6:18 P.M. E.D.T.

(Editing by Matthew Lewis)

SPRINGFIELD, Ill. — Illinois Gov. Bruce Rauner vetoed legislation Friday that Chicago officials hoped would bolster the city’s sagging pension systems.

The Republican criticized the plan as too limited and argued the state should tackle the state’s onerous pension debt while shoring up municipal retirement accounts.

“It’s like trying to fix a drought with a drop of rain,” Rauner said in his veto message. “We see pension funding challenges throughout the state. ‘One-off,’ short-sighted approaches won’t really fix the problem.”

Rauner forecast the action in January, when he announced disapproval of the plan after it sailed out of the state Senate unanimously.

It was intended to deal with laborers’ and municipal workers’ pension accounts. Fire and police systems are separate.

The plan would have required new employees pay 11.5 percent of their paychecks toward retirement, up from 8.5 percent. The city would have tripled its contributions to the programs in part with increases on water and sewer services.

“The governor continues to make one irresponsible and irrational decision after another,” Adam Collins, spokesman for Chicago Mayor Rahm Emanuel, said in a statement. He said lawmakers overwhelmingly approved the legislation “because it improves our fiscal stability for taxpayers and shores up pensions for thousands of retirees who earned them.”

Collins noted that financial rating agencies revised the city’s credit outlook last fall, pinning hopes on the plan. Without it, the accounts go broke as early as 2025.

Rauner indicated Friday he wants to combine Chicago pension fix with a long-awaited overhaul of the state’s five employee pension programs, which are a combined $130 billion short of what they need to cover all obligations.

He has been urging the Senate to separate its pension plan from the compromise budget deal known as the grand bargain so that a funding fix can get underway sooner. That legislation includes extra money for Chicago Public Schools to get the system through the school year.

By THE ASSOCIATED PRESS

MARCH 24, 2017, 6:57 P.M. E.D.T.

LANSING, Mich. — The Michigan Senate on Wednesday approved a $5 million interest-free state loan to help repair a large sinkhole in suburban Detroit, narrowly rejecting a call to stick with a House plan that would instead give Macomb County a $3 million infrastructure grant.

The midyear budget bill , which also would formally allot $100 million in federal aid toward Flint’s water crisis, cleared the Republican-controlled chamber 36-1. Democrats and some Republicans from Macomb County and elsewhere unsuccessfully tried to reinstate the proposed grant, which had been overwhelmingly endorsed by the GOP-led House last week.

“It’s their problem to solve,” Republican Senate Majority Leader Arlan Meekhof said of Macomb County. “I’m happy to give them a no-interest loan, which we did. But I’m not interested in having the line out my door go forever for people that want to get in line for free money for their infrastructure.”

A broken sewer line caused the football field-sized sinkhole on Christmas Eve in Fraser. Three houses had to be condemned and a major road has been closed.

Macomb County Public Works Commissioner Candice Miller, a former Republican congresswoman, called Meekhof “pompous and arrogant” and accused him of standing in the way of a project designed to keep raw sewage out of 150,000 basements and the Great Lakes.

“He has the wrong job title. He’s not a leader,” she said in a statement that also credited the House and the governor’s office. “Term limits can’t come fast enough for some people. … If I had $5 million to pay him back, I wouldn’t need the money in the first place.”

Meekhof spokeswoman Amber McCann countered that Miller “spent too much time in Washington” and “doesn’t get to dictate the terms” of the assistance.

“The majority leader and 35 other senators voted to help fix the problem,” she said.

Sen. Steve Bieda, a Warren Democrat, voted against the legislation after his amendment to issue a grant rather than a loan failed 17-20. He said the sinkhole has had a broad impact because millions of gallons of sewage were discharged into a river.

“This is an issue that affects everybody, as it stands to negatively impact the Great Lakes,” Bieda said. “And it’s one that needs to be fixed in the near future as the rains that are anticipated in April will only exacerbate the problem.”

The $3 million grant would offset the cost of a $12 million-plus pipe system that was installed to divert sewage around the collapsed sewer interceptor, according to Macomb officials. A local drainage district will sell municipal bonds to finance the cost of emergency work on the damaged pipe, Miller said.

The bill also would allocate $100 million in Flint aid that Congress and former President Barack Obama enacted into law in December. And it includes $1 million for capital improvements to the Michigan Capitol building.

Sen. Tory Rocca, a Sterling Heights Republican, was angered by the GOP majority’s decision to authorize a loan instead of a grant.

“Year after year you come to my county for money. And now when we need a little bit of help and a tiny bit of our money back, people are pretty hostile to that. It doesn’t seem right,” he said.

It is unclear how the House will respond. It is expected to vote Thursday, before the Legislature’s two-week spring break.

By THE ASSOCIATED PRESS

MARCH 29, 2017, 6:33 P.M. E.D.T.

CHICAGO — Illinois’ already low credit rating could be downgraded if the state does not end its record-breaking budget impasse over the next two months, Moody’s Investors Service said on Thursday.

The credit rating agency said the state is at a “critical juncture,” and failure to reach a budget consensus by the May 31 end of the legislative session would “signal deepening political paralysis, heightening the risk of creditor-adverse actions.”

“This is sort of a do-or-die moment here with respect to the leaders in state government,” Moody’s analyst Ted Hampton said.

Moody’s rates Illinois Baa2, which is just two steps above the junk level and is the lowest rating among the 50 states. Illinois also pays a bigger penalty than other states in the U.S. municipal bond market after six credit downgrades since 2015 by the three major rating agencies.

A 21-month standoff between Illinois’ Republican governor and Democrats who control the legislature has left the state operating on continuing appropriations and court-ordered spending.

As a result, the state’s pile of unpaid bills, a barometer of its deep financial woes, has tripled since 2015, hitting a record-high $13 billion last week.

If Illinois begins a third straight fiscal year without a complete budget, money set aside for payments on its $26 billion of outstanding general obligation bonds could be at risk of being borrowed to cover operational expenses, Moody’s said in a report.

Another possibility could be that core operational needs would be prioritized over debt service, it added.

With a budget deal, Illinois would be able to stabilize its financial position, the report said, noting that political gridlock, not fundamental economic factors, are largely driving the state’s financial pressures.

Asked about Moody’s report by a reporter in the state capitol, Governor Bruce Rauner said he continues to push for a budget that includes structural changes to spur economic growth.

Moody’s said a bipartisan bill package that surfaced in the Senate in January but has since stalled could improve the state’s financial prospects.

The package includes legislation to complete the fiscal 2017 budget, which expired on Dec. 31, as well as to hike taxes, cut pension costs by about $1 billion annually, authorize borrowing to pay down the bill pile, expand casino gaming and freeze local property taxes.

“We continue to work toward compromise but aren’t there yet,” said John Patterson, a spokesman for Democratic Senate President John Cullerton.

Illinois’ fiscal year begins July 1.

By REUTERS

MARCH 30, 2017, 4:18 P.M. E.D.T.

(Reporting by Karen Pierog; Editing by W Simon and Matthew Lewis)

Gage County, Neb. faces bankruptcy after $28.1 million judgement following exoneration of 6 defendants

A small rural county in Nebraska, Gage County, is facing bankruptcy after a jury awarded $28.1 million to six people who sued the county. They were exonerated by DNA evidence after being wrongly imprisoned for a crime that took place there in 1985. Collectively, they spent 75 years in prison.

While Gage County waits to see if the verdict gets tossed out on appeal, county supervisors are weighing their options. Two bankruptcy attorneys hired by the county “are working on giving us information on how that [bankruptcy] would proceed and how that would affect the county,” Gage County Board Chair Myron Dorn said.

With a population of a little more than 20,000, the county has an annual budget of $27 million and collects about $8 million in taxes per year. Legal fees totaling more than $3 million have already sucked funds from the county’s operational budget over the past seven years.

Nebraska limits the amount counties can collect from property taxes; the county could increase their property taxes to raise another $4 million annually, before it hit that ceiling, Dorn said. County residents could also vote to raise their own taxes even more, but “we’ve had that discussion,” he said “and our Board agrees that that wouldn’t pass.”

The county could also look to the state legislature to pass a generic bill at a future session that would provide funding for the county, he said.

Exonerated by DNA evidence

The specter of bankruptcy is the result of the decades-old crime case that dates to Feb. 6, 1985, when a 68-year-old grandmother was found raped and murdered in her home in Beatrice, the county seat.

The people who served time for the crime, three men and three women, became known as the “Beatrice Six.” They were exonerated by DNA evidence in 2008. By then, they had collectively served 75 years in prison.

Jury awards $28.1 million

The Beatrice Six filed a federal lawsuit against Gage County, as well as a former sheriff’s deputy and reserve deputy, claiming that investigators worked to close the case despite contradictory evidence. Last summer, a federal jury awarded the Beatrice Six $28.1 million, plus additional money for legal fees.

Unless the verdict is tossed out on appeal, the county will need to pay the $28.1 million plus lawyer fees.

“Everything is still on the table until the Eighth Circuit makes a ruling,” Dorn said. In January, Gage County asked the Eighth Circuit to overturn the federal jury ruling or set a new trial. They expect oral arguments to take place this spring before a three-judge panel of the Eighth Circuit.

Nebraska Intergovernmental Risk Management Association (NIRMA), Nebraska Association of County Officials and the Nebraska Sheriffs’ Association filed friend of the court briefs. The groups did not side with either Gage County or the Beatrice Six, but wanted to weigh in because the outcome could have significant effects upon the state’s counties, law enforcement and all Nebraska residents, Dorn noted.

Insurance claims denied

In 2009, Gage County filed claims with both the risk-sharing pool and a private insurer, Dorn said. The county used the private insurer when the Beatrice Six were arrested and convicted. Both insurers denied the county’s claims.

The county hired two lawyers to dig into the county’s insurance history to leave no stone unturned in hopes of finding something that would help the county pay the judgement, Dorn said.

“They have filed in court on behalf of the county,” Dorn said. “One suit was filed against our current insurance company since about 1997. The other was against the insurance company the county had before 1997. Both lawsuits are challenging the companies’ claims of ‘no’ liability or insurance coverage. “If we don’t pursue it, we won’t know if we will get anything [from them],” Dorn said.

“We [the Gage County Board of Supervisors] meet every two weeks and we have closed sessions just about every meeting about this,” he said.

“It has taken on its own personality; it has a life of its own. Whatever the verdict, it will have a profound impact on the county.”

One of the kickers to the story: A DNA test in 1989 that could have cleared things up in the cold case was deemed too expensive. Cost? $350, the Associated Press reported.

DNA evidence has exonerated hundreds

Of the 349 people exonerated with DNA evidence nationwide, 254 have been awarded compensation though state statutes, civil suits or private bills, according to the Innocence Project. These 254 people have been awarded a total of $657 million.

Some 144 people have been awarded compensation though state statutes, 119 through civil suits and 26 through private bills, the Innocence Project said.

Pretrial settlement limits damages

In a somewhat similar case, New York resident Jeffrey Deskovic served nearly 16 years in prison after he was wrongfully convicted in Westchester County, N.Y., but got separate awards from the City of Peekskill, the county of Westchester, the state of New York and the New York State Police.

A federal jury in 2014 awarded him $40 million after finding ex-Putnam Sheriff’s Investigator Daniel Stephens fabricated evidence and coerced Deskovic’s false confession in the 1989 murder of a Peekskill High classmate, USA Today reported.

Lawyers told the newspaper they believed it was the largest jury award in a wrongful conviction case. Putnam County was expected to pay less than the $40 million — $10 million — because of a pretrial settlement that limited damages.

Going bankrupt

Other jurisdictions that have faced bankruptcy include Jefferson County, Ala., as well as several cities. The Alabama county’s debt escalated after bond issuance deals for upgrading the county’s sewer system soured, Reuters reported. The county filed a $4.23 billion bankruptcy in 2011, the largest ever for a jurisdiction until Detroit’s $18 billion case two years later.

The City of Dallas is facing financial hardships due to unfunded public safety pensions for retired police officers and firefighters and back pay liabilities, and is reported to be $5 billion in the red, The New York Times recently reported.

The Times reports that officials are considering raising property taxes, borrowing money for the pension fund, delaying long-awaited public works or even taking back money from retirees.

COUNTY NEWS

By MARY ANN BARTON Mar. 20, 2017

• Expenses will outpace revenue by about three to one, plan says
• Uncertainty on state and federal funding weighs on outlook

San Francisco’s budget deficit is projected to hit $907 million by 2022, up from a previous estimate of $848 million, as costs such as retirement expenses outpace revenue.

Accounting for higher inflation drove the increase in the forecast, which was released Thursday in the city’s five-year financial plan, updated from a previous report in December. Over the period, San Francisco’s expenses are seen rising 30 percent, about three times as much as collections. The city is required to balance its budgets.

The outlook underscores the challenge fixed obligations such as pensions can impose on cities even as wealthy as San Francisco. The forecast doesn’t consider the loss of any state or federal dollars, which comprise 20 percent of municipal revenue. The federal administration has pledged to withhold aid to cities such as San Francisco over its handling of undocumented residents.

That threat comes amid expectations that while property collections will remain strong, revenue sources sensitive to the economy, such as sales and hotel taxes, will slow or even decline, according to the city’s report.

“This shift, coupled with great uncertainty from the state and federal budgets, results in real downside risk to the city’s financial outlook,” the analysis said.

Bloomberg Markets

by Romy Varghese

March 24, 2017, 6:14 AM PDT

The fiscal 2018 budget put forward by the Trump Administration, if enacted as proposed, would have a disproportionate effect on the D.C. regional economy and Maryland and Virginia finances in particular, S&P Global Ratings believes.

Continue reading.

Mar. 21, 2017

NEW YORK (Reuters) – Puerto Rico’s benchmark government bond slumped to an all-time low on Monday after competing groups of bondholders stepped up their legal battle over who should be paid first out of a smaller-than-expected pool of cash.

Benchmark Puerto Rico general obligation (GO) debt maturing in 2035 and carrying an 8 percent coupon, fell 5.15 points in price to 61.35 on Monday, according to Thomson Reuters data.

The U.S. commonwealth is in the midst of trying to pull itself out of a financial quagmire that leaves it with $70 billion in debt it cannot pay without a massive restructuring.

It is also fighting a 45 percent poverty rate and islanders fleeing for the mainland in search of a better life.

The debt, which has been in default since last year when the U.S. Congress passed a rescue law known as PROMESA that suspended debt payments, has dropped 11.4 points in price since a new fiscal rescue plan was accepted on March 13. Defaulted debt trades more like an equity and is not typically quoted with a yield.

Investor sentiment turned more negative when so-called COFINA bondholders, whose debt is backed by sales tax revenue, asked a federal judge in San Juan on Sunday to deny the GO bondholder group’s effort to stop the island’s government from making payments on COFINA debt.

GO debt traditionally is considered senior to all other debt obligations as it is backed by the good faith and credit of a municipality. A larger amount of COFINA debt is held on the island than GO debt, which is held widely in U.S. municipal bond portfolios.

The Financial Oversight and Management Board for Puerto Rico, established by the PROMESA law, certified a revised fiscal turnaround plan on March 13 that set aside less money for servicing debt payments than originally planned.

A lower-than-expected amount of money set aside to service debt under the new plan, $800 million per year versus $1.2 billion a year over a 10-year period, puts the recovery rate for bondholders, in aggregate, around 30 cents on the dollar, according to analysts.

“The most liquid bond prices have dropped after the acceptance of the fiscal plan by the PROMESA board and the recovery rate being on the low side,” said Joe Rosenblum, director of municipal credit research at AllianceBernstein in New York. “I’m not making a comment on whether it is correct or final, but at least sets up from Puerto Rico’s side a much lower recovery rate.”

“That is carrying forward and over the weekend the COFINA creditors committee went hard against the GO bondholders. We knew all along that was going to be a tough battle,” he added.

Municipal analysts at Barclays Capital estimated that even if 100 percent of the additional revenue and expense measures are met, “the debt stack would need to be reduced to about 31 percent in order to achieve a stable debt-to-GNP ratio.”

“We assume exit yields of $4.9 percent post restructuring, consistent with where 10 year single-B high yield municipal bonds trade,” Barclays said in a March 15th research note.

Reuters

By Daniel Bases

March 20, 2017

(Editing by Bernadette Baum and Chizu Nomiyama)

(Reuters) – The Detroit City Council’s approval this month of a special fund to cover pension payments is a positive credit move, although concerns remain over the availability of money to cover retirement benefits, Moody’s Investors Service said on Monday.

The council on March 10 approved Mayor Mike Duggan’s proposal to deposit $377 million into a trust fund by the end of fiscal 2023 to help Detroit cover higher-than-expected pension payments starting in fiscal 2024.

“This credit positive action will improve the city’s capacity to meet the upcoming pension contribution hike,” Moody’s said in a report.

Detroit, which has a junk rating of B2 from Moody’s, exited the biggest-ever municipal bankruptcy in December 2014 with the assistance of money from a so-called grand bargain that included donations from foundations and others to help cover pension costs.

Moody’s said Detroit could become financially stressed once money from the trust fund and from the grand bargain is depleted in the 2030s. The credit rating agency also said planned deposits into the pension trust fund could be hampered by lower-than-expected revenue growth.

“Because future (trust fund) deposits are not legally mandated, they could be an attractive cost-cutting target to close potential budget gaps,” Moody’s added.

Detroit’s court-approved bankruptcy exit plan had projected city pension payments to spike to $111 million beginning in fiscal 2024 after years of minimal or no payments by the city. But a subsequent actuarial analysis pegged the payment spike at $200 million or more.

The bankruptcy allowed the city to shed about $7 billion of its $18 billion of debt and obligations. Since its bankruptcy exit, Detroit’s finances have been subject to a state oversight commission.

By REUTERS

MARCH 20, 2017, 12:09 P.M. E.D.T.

(Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis)

FAIRFIELD — Oversight of school construction bonds – proposed by creating citizen committees in California – is not taking place for the most part, the Little Hoover Commission said in a study.

Independent training is needed for citizens bond oversight committees created in 2000 when the threshold to pass school bond measures in California was reduced from two-thirds to 55 percent, said the study released late last month.

“Bond oversight committees in many communities act simply as cheerleaders for the district, often because members simply do not understand their roles or know what actions they can take,” states the study, “Borrowed Money: Opportunities for Stronger Bond Oversight.”

Little Hoover Commission recommendations include requiring school districts in the state to provide a minimal budget for oversight committees, with money to hire independent counsel with municipal bond expertise.

Bonds proposed to voters should list projects the money will pay for, the commission also recommends.

Sharon Bacinett, vice chairwoman of the Citizens Bond Oversight Committee for the Measure C bond in the Fairfield-Suisun School District, said Monday she has not yet seen the Little Hoover Commission report but that hiring an attorney would be a waste of time and money.

The school district has attorneys and any questions the oversight committee had were answered, Bacinett said.

Every project Measure C paid for was on time and under budget, she said.

Bacinett said that Kim Van Gundy, assistant director of facilities and operations, goes to school construction sites to see about change orders requested on projects.

“Kim Van Gundy is right on top of it,” Bacinett said. “As long as we’ve got Kim Van Gundy we’re going to be fine.”

Voters passed the $100 million Measure C bond in 2002. The district leveraged that money to get about $108 million more to complete various facilities projects. Voters in the district passed the $249 million Measure J school facilities bond in June 2016.

Lyman Dennis, chairman of the Citizens Bond Oversight Committee for Measure Q at Solano Community College, said he has not read the commission report but that allowing oversight committees to hire attorneys “would be good.”

“There’s room for improvement,” Dennis said of the citizen panel’s work.

Voters passed the $348 million Measure Q bond in 2012.

Ivette Ricco, who served from 2010 to 2016 on the citizens bond committee for the West Contra Costa County School District, said in a letter to the Little Hoover Commission that school districts completely control the oversight committees.

Dennis Clay, in an August statement to the commission, said that he works at the West Contra Costa school district as a whistle-blower.

“West Contra Costa likes to claim transparency, but for the most part it has actively worked against it,” Clay wrote. “People in West Contra Costa, and maybe in government in general, are not hired based on competence,” he said, but as a school district official said, “on cultural fit.”

Matthew Duffy, superintendent of the West Contra Costa district, said of the school district’s practices on bonds over the past 15 years, in a Sept. 22 letter to the Little Hoover Commission, “We knew and understand the concerns expressed by many members of our community.”

Several changes have improved the district’s practices, Duffy wrote He concluded his letter by stating, “We look forward to the continued conversation around our school construction program.”

Richard Michael of the California School Bond Clearinghouse Project testified before the commission Sept. 6 about “oversight in the era of government by what it can get away with it.”

“There is no oversight of district bond expenditures in California,” Michael said.

A few private firms working hand-in-hand to sell bonds to school districts control the industry, he said. Deals happen on a very local level and avoid scrutiny, he said.

“The industry has had the advantage of operating in plain sight,” Michael said, “but in the dark with respect to the voters in the districts that comprise its clientele.”

Bonds typically include broad categories of vague projects, Michael told the commission.

School districts with previous bond measures trumpet the fact the oversight committee has “approved” its “good stewardship of public funds,” he said. No empirical evidence supports such conclusions, Michael said, and the school district has captured the bond committee.

Committees look good on paper but fall apart in practice, he said before the commission.

Public knowledge about bonds is limited, Michael said, and celebrity news often dominates the media.

“To most of the people in the state, even the tens of millions with bond programs already in place, it doesn’t even appear on their news stream. The Kardashians, yes. Bonds, no,” Michael said.

The firms of Piper Jaffray and RBC Capital Markets LLC contributed to the Solano College district’s Measure Q bond campaign for the November 2012 election and then after the measure passed, served as the bond underwriters. Piper Jaffray was the leading contributor to the campaign, providing $25,000, according to campaign records; and RBC Capital Markets was the third-highest contributor, providing $18,000, campaign records show.

The services of the bond underwriters were already under contract with Solano College prior to the election, Yulian I. Ligioso, the college’s vice president of finance and administration, has said. Those agreements were approved by the college’s governing board in August 2011, Ligioso has said.

The Sacramento-based Little Hoover Commission describes itself as “an independent state oversight agency.”

Daily Republic

By Ryan McCarthy | March 15, 2017

Reach Ryan McCarthy at 427-6935 or [email protected].

For years, Chicago has patched up budget deficits with long-term borrowing — an expensive habit that Mayor Rahm Emanuel inherited, perpetuated and has vowed to break.

But a Tribune analysis of the city’s latest bond sale, a $1.2 billion offering earlier this year, shows that the mayor will continue to run the city with borrowed money, at great long-term expense, through the rest of his term in 2019.

Among the findings of that analysis:

•The majority of the money will be used for budget relief and come at a very high cost. Almost all of the additional costs, however, do not kick in until after the end of Emanuel’s current four-year term. By paying only interest for the first several years of the loan, Emanuel can use the funds borrowed this year to smooth out budgets through 2019 at minimal expense.

•Some of the money will be used to refinance previous borrowing but at a higher interest rate. The main advantage for the city is that it kicks the costs further into the future. In all, taxpayers are on the hook for $1.1 billion in interest on the loan, which will cost $2.3 billion to repay over 20 years.

•The city will continue to rely on borrowed money to pay legal settlements, turning to a new stockpiling strategy rather than trying to pay these costs out of its regular operating revenues as many municipalities do. Borrowing this way adds $120 million in interest costs to the $225 million set aside for settlements.

The city portrays the new $1.2 billion in borrowing as a turning point, saying it will no longer restructure old debt to push costs into the future at greater expense. That tactic, known as “scoop and toss,” has been widely criticized as a desperation move during the terms of Emanuel and his predecessor, Mayor Richard M. Daley.

City Budget Director Alexandra Holt told the Tribune: “It is the last time we are borrowing for scoop and toss. It is the last time we are borrowing for routine settlements and judgments.”

The Tribune detailed Daley’s reliance on debt in its 2013 investigative series “Broken Bonds,” which showed how the mayor built his political legacy through spending then left taxpayers with a huge debt to pay. The city’s massive liabilities, which also include unpaid pension obligations, have driven down the city’s credit rating and made it much more expensive to borrow money. Chicago’s general obligation bond ratings fell below investment grade in 2015 and remain at junk status.

Carole Brown, the city’s chief financial officer, said January’s bond sale is intended to show investors and municipal market analysts action on Emanuel’s financial reform agenda. The mayor recently urged Moody’s Investors Service to reconsider its low opinion of Chicago’s creditworthiness or withdraw its public ratings of the city, arguing in a December letter that the city is on a path to financial stability.

But experts say that, given Chicago’s history of borrowing, pension burden and continued struggles to balance its budgets, there can be no certainty the city can make good on promises to end its bad habits.

Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics, said he is not convinced that the city has its budget problems solved and that it won’t need to scoop and toss old bonds or borrow for judgments and settlements in the future to make ends meet.

“That is the promise from the mayor, and you can’t fully dismiss that promise, but as an investor you have to assume they will do this again.” Fabian said.

“We all know that the city does not have any extra money, so it makes sense that they would finance what they are going to do,” Fabian added, “but this is a cost of the city not having liquid resources elsewhere. This is an example of in America why poor people fall farther behind, because they are forced to finance things that other people would just pay for.”

By using bond funds to close its budget gaps, the city can spare residents from further tax increases and avoid more painful cuts to city services in the short term, said Jason Horwitz, the Chicago-based director of public policy and economic analysis for Anderson Economic Group.

But Horwitz said the tactic comes at a high price and essentially guarantees future budget deficits or tax increases, as debt payments pile up for years to come.

“Borrowing more and accumulating more debt has been an expensive choice,” he said. “I think the fact the city has drawn out its fiscal problems has made it much more difficult to find remedies.”

Of the $1.2 billion the city borrowed, $687 million will go to help close its budget gaps through 2019, including debt payments that are coming due and anticipated legal claims. Just $365 million will go to municipal bonds’ more traditional uses — city maintenance, construction and equipment.

Payments on the massive deal are limited to just over $130 million through the next mayoral election. In a particularly complicated move known as “capitalized interest,” the city is using $77 million of the borrowed money to pay interest costs on the loan through 2019. That strategy lowers debt costs for several years but increases the amount that must be repaid, adding more than $87 million in interest.

Since Emanuel took office in 2011, the city’s general obligation bond liabilities have increased dramatically. The city now owes $18.1 billion in payments on $9.8 billion in debt, up from $13.2 billion on $7.2 billion in 2011.

Debt service on all of Chicago’s outstanding general obligation bonds totals $500 million this year, but in 2020 — after the mayoral election — it will grow to more than $900 million. Payments then do not decline significantly until after 2036.

Asked how the city will balance its budgets in those years, budget office spokeswoman Molly Poppe said officials will continue to cut costs through spending reforms and find other available revenues.

Holt said the size and structure of the borrowing was necessary because the city would not be returning to the bond market for several years and needed to be prepared for a variety of costs.

“We need to be prepared to pay for expenses, whether they are fixing bridges or repairing the lakefront or fixing the roofs on buildings or paying judgments and settlements or buying a new fire engine — all of that stuff needs to be paid for, and we do our planning ahead of time,” she said.

In a 2015 speech to civic leaders, Emanuel promised that Chicago would begin to pay for more of the city’s routine judgments and settlements with operating funds, preserving its long-term debt for the other more common uses of municipal bonds mentioned by Holt.

Indeed, the city plans to use operating funds to pay for all of its 2016 judgments and settlements, which are expected to total roughly $110 million, according to the budget director. That would be the first time since Emanuel took office that no debt would be issued to pay for legal liabilities. According to the city’s online financial records, since 2006 the city borrowed to pay a portion of its legal claims every year through 2015.

But this year’s bond deal also includes $225 million set aside for future liabilities. In other words, although this could be the last time Chicago borrows money to make these payments, it expects to use borrowed money for that purpose for some years to come — a strategy that adds huge interest costs to each legal claim.

For instance, if the city uses the stockpiled funds to pay $1.8 million in new legal settlements that the City Council approved last month, interest costs would boost the total outlay to $2.8 million, according to the Tribune’s analysis.

Including the new bonds, the city has borrowed just under $1 billion for legal costs since 2006, of which $664 million came under Emanuel’s watch.

According to Fabian, using some of the borrowed money to stockpile funds to pay for unidentified future liabilities was an expensive and risky budget gimmick that may suggest city leaders fear they may have trouble selling more debt in the future. Brown told the Tribune that the city is not concerned about losing access to the municipal bond market.

Richard Ciccarone, president of the municipal bond research company Merritt Research Services, said the city was being closely watched for progress on the mayor’s debt reform agenda, and he was surprised that plan had evolved to borrowing in advance for legal liabilities.

“I think we assumed they would pay off legal liabilities known to them at this time and begin to pay them off going forward with current funds as a pay-as-you-go,” Ciccarone said. “The stockpiling for the future might not be the spirit of the way this was understood by many analysts or investors.

“On the positive side, it does provide a contingency for unexpected difficulties that may occur, especially some very highly visible and contentious situations in Chicago both on the law enforcement side as well as the issues involving labor,” he said.

The size and scope of Chicago’s repeated borrowing to pay for legal claims is extraordinary, according to Ciccarone, who said most cities borrow only occasionally for that purpose — such as when the cost comes unexpectedly or is too large to be paid from available resources.

Ald. Scott Waguespack, 32nd, who sits on the City Council’s Finance Committee, said paying more than $100 million in interest to borrow for the city’s future judgments and settlements was more than he expected. But specifics about the deal — why the city was borrowing for legal claims, how much it would cost — were hard to obtain from the mayor’s finance team, he said.

“They kind of argue that this is what we are going to do, and that is all there is to it,” Waguespack said. The bond sale was approved without opposition by the City Council in October.

Brown and Holt said that they spent extensive time briefing the council on the bond issuance and that aldermen were aware of the high cost of the borrowing and how the funds would be used.

Another pledge Emanuel made in his 2015 speech was that the city would end “scoop and toss” refunding by 2019. However, the Tribune found that the latest deal includes refinancing of bonds that would have come due between 2020 and 2022, for a total of just under $50 million in old debt. All of the restructured bonds have higher interest rates and the majority have longer maturities — the hallmarks of scoop-and-toss deals.

Most of that debt — $33 million — would have been paid in 2020. Poppe said the restructuring of those bonds meets the mayor’s 2019 deadline because these bonds would have been accounted for in the 2019 budget, despite maturing in 2020.

As for the remaining bonds, she said the debt coming due in 2021 and 2022 is being refinanced using new bonds that will be repaid in the same year as the old bonds, so it is not a scoop and toss. However, the new bonds have a higher interest rate, 7.0 percent compared with 5.6 percent, leading to a small increase in cost.

The Chicago Tribune

by Peter Matuszak

March 21, 2017

[email protected]

As governments across the country grapple with rising pension and other postemployment benefit costs, some are reconsidering pension reforms in addition to those they adopted following the Great Recession of 2007 to 2009. South Carolina is one such state.

Continue reading.

Mar. 14, 2017

The two largest public pension systems in the U.S. — California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) — both have committed to lowering their discount rates without changing their funds’ asset allocations.

Continue reading.

Mar. 15, 2017

S&P Global Ratings today said that New Jersey Gov. Chris Christie’s fiscal 2018 budget proposal might look fine in the near term, but long-term structural balance remains elusive thanks to the state’s continued deferral of full funding for future retirement obligations.

Continue reading.

Mar. 16, 2017

CHICAGO – Illinois’ sovereign powers over spending and revenues and its sturdy general obligation repayment statute are being tested as its budget gridlock inches toward the two-year mark.

The two factors have propped up the state’s credit profile but as the state’s budget deficit, bill backlog, and unfunded pension obligations climb to record levels, some market participants and politicians are questioning how long Illinois can preserve investment-grade status.

They see risk in the state’s failure to overcome political gridlock and use its sovereign powers to fix its budget problems, and the threat that liquidity strains could overwhelm the GO repayment provisions.

“Nothing is off the table here,” S&P Global Ratings analyst Gabriel Petek, a senior director in the state governments group, said when asked how long the state could hold on to an investment-grade rating while continuing on its current course.

Illinois is the lowest rated state, now at the Baa2/BBB level across the board, only two notches away from speculative grade territory where no state has gone in recent memory

“It’s something that we are watching. It’s unprecedented for a state to go this long without a budget,” Petek said during a panel discussion at the rating agency’s state and local government credit forum in Chicago Thursday.

Moody’s Investors Service and S&P assign Illinois a negative outlook and Fitch Ratings has the credit on negative watch.

The market already trades Illinois paper at junk level. The state’s 10-year GO is trading at a 215 basis point spread to the Municipal Market Data’s top-rated benchmark. That’s up from a 12-month average of 191 bp and up from 170 bp a year ago.

MMD’s BBB in the 10-year range trades at a 97 basis point spread.

“Illinois has a much higher spread than this level,” said Thomson Reuters MMD’s Daniel Berger. “The market does not consider Illinois GOs as an investment grade.”

Spreads hit a peak of 238 basis points at the end of 2016. “Illinois is paying a steep price for going two years without a budget,” Triet Nguyen, head of public finance credit at NewOak Fundamental Credit, wrote in a March 6 report looking at Illinois and New Jersey trading levels. “This is an unheard-of spread for a state GO credit and we can only infer that the market is already viewing the Prairie State as below investment grade.”

S&P’s negative outlook suggests there’s at least a one-third probability that the state will see a downgrade over a one- to two-year timeframe. Petek said when looking at the state’s $12 billion backlog of unpaid bills and a pension system funded ratio of just 39.2%, “the trend is not good.”

About 90% of state government spending continues based on continuing appropriations and court orders, while higher education and social services, have received just piecemeal appropriations.

A downgrade looms if the state begins fiscal 2018 on July 1 without progress, S&P warned in a report earlier this month after negotiations stalled on a bipartisan Senate budget deal known as the “Grand Bargain.”

Entering a third fiscal year without a comprehensive budget “could indicate to us an erosion in political will that renders its credit quality and fundamental fiscal conditions as inconsistent with the state’s current rating,” the report said.

Fitch also issued a pointed warning in connection with its Feb. 1 downgrade.

“If the state continues on the current path, a further downgrade would be warranted,” its analysts wrote.

“We have ample liquidity to make debt service payments and are committed to make all bond payments in full and on time,” Gov. Bruce Rauner’s administration said in a statement. “Monthly general funds revenue on average are more than 12 times monthly general revenue fund general obligation debt service transfer requirements.”

GOBRI AND SOVEREIGN POWERS

The sovereign powers that provide broad authority to manage expenses and taxation are highlighted in all Illinois rating reports as a key rating strength, along with its GO statutory protections and its diverse economy.

At some point, however, “you lose the natural protections” afforded by your sovereign powers, said Richard Ciccarone, president at Merritt Research Services LLC.

“Illinois still has the economic capacity to turn it around,” Ciccarone said. “That’s a big distinction; we have a political stalemate that puts the state in a credit condition that’s not consistent with the economic capacity of the state.”

A core strength of the state GO – highlighted in state investor presentations and recognized by market participants as one of the strongest among states – is the irrevocable and continuing appropriation for debt service payment.

Statutes direct the state treasurer and comptroller to make all necessary transfers monthly from any and all revenues and funds of the state to cover 1/12 of principal and 1/6 of interest for payments due in the next 12 months. They flow into the General Obligation Bond Retirement and Interest fund known as GOBRI.

“These features remain integral to the state’s investment grade ratings,” a recent S&P report said.

Analysts worry that such a prioritization over other state stakeholders starved for their aid or vendor payments is not “sustainable.”

“Sometimes those protections can fall away,” Petek said, citing challenges posed to debt structures in Detroit, Puerto Rico, and Stockton. Calif. At the end of the day, he said, flow of funds and security features don’t make up “for what is fundamental insolvency.”

Illinois is nearing a point of “service level insolvency,” and “it’s problematic,” he said.

He’s not the only analyst with such concerns.

If basic functions of a state cannot be implemented or carried out or vendors or organizations in dire need take the state to court, “that could force the state to reprioritize” its use of revenues, said Howard Cure, director of municipal research at Evercore Wealth Management LLC.

As the state’s bill backlog and other liabilities mount so that liquidity is stretched, “layers of protection that cushion you between default and on time payment are diminished,” Ciccarone said.

INVESTMENT GRADE

While it’s unheard of for a state to fall to speculative grade status, “it’s also unheard of to go two years without a budget,” Cure said.

“I think the market is still willing to give them a benefit of the doubt” that leaders can reach a compromise, because it’s not an economic issue but political paralysis, Cure said.

A one-notch downgrade would send Illinois’ appropriation-backed and moral obligation debt, which is one notch below the GO rating, down to junk.

At risk is the Metropolitan Pier and Exposition Authority’s $2.6 billion of convention center bonds, $431 million of Illinois Sports Facilities Authority sports facilities bonds and $267.8 million of Chicago motor fuel tax revenue bonds.

Illinois has $26 billion of GO debt and $2.5 billion of sales tax-backed Build Illinois bonds. Moody’s links the two ratings. Fitch and S&P assign high-grade ratings to sales tax paper.

No state in recent memory has been rated in speculative territory, according to the three rating agencies.

All three major rating agencies had California in triple-B territory in 2003 and 2004, and Fitch and Moody’s also sent California there in 2009 and 2010.

Moody’s in 2009, when it rated California Baa1, notched some regional center debt three rating levels off the state credit, which put them at junk.

Market participants are pondering the rating agencies’ next steps and the impact on trading values.

NewOak in its report said it sees Illinois as a better relative value than New Jersey because it’s already trading at junk levels.

A downside for buyers is the prospect that the “Grand Bargain” dies and no new fix surfaces and the rating agencies junk the rating, Nguyen wrote.

“There might be a short-term market over-reaction, which we would view as a buying opportunity,” he wrote. “A more likely scenario would call for other rating agencies to downgrade the state to the lowest investment grade status and just stop there.”

Nguyen believes it “will still take a lot” for rating agencies to drop the rating below investment grade.

As the budget gridlock drags on, concerns mount that a resolution might not come before the 2018 election, when Democrats hope to win back the governor’s office. Rauner, a Republican, is expected to seek re-election.

Nguyen raises the specter that the state will limp along until the next election. That would result “in short-term market volatility, but investors should be well compensated for that risk at a spread of 240 [bp] or wider.”

The impasse has been driven by Rauner’s refusal to approve a budget with any tax hikes unless lawmakers also pass his policy and governance reforms, which are opposed by the legislature’s Democratic majorities.

Senate President John Cullerton, D-Chicago, a co-author of the “Grand Bargain,” warned against such a position in a recent speech.

“By then, we’ll have been downgraded to junk status and no one will lend us money. The new governor will have that hung around his or her neck,” he said.

“The governor is very concerned about the state’s finances and does not expect the state to be rated below investment grade,” the administration said in a statement. “He is seeking a balanced budget and structural changes to grow the economy and improve the state’s fiscal health.”

The Bond Buyer

By Yvette Shields

March 14, 2017

DALLAS ­­- Oklahoma plans to complete an unfunded Tulsa highway project that’s been on the books for 50 years with a seven­-way partnership that would include an expected $100 million investment from the one private sector partner.

The private partner would recoup its investment by collecting tolls on the five­-mile, four-­lane segment, including a bridge over the Arkansas River, that would complete the Gilcrease Expressway highway loop around Tulsa.

Oklahoma transportation secretary Gary Ridley said the project is expected to cost $240 million, but the total amount of funding from all seven partners, including money already spent on the extension, will be closer to $300 million.

Six of the partners are public and the private partner probably will contribute about $100 million to the project, he said.

“From the public sector, we’re putting in somewhere around $190 million,” Ridley said. “The private sector puts in whatever the balance is. Then the tolls or a portion of the tolls go to pay that off.”

The private partner will be selected in six months to a year, Ridley said. Once the funding is in place, construction will take about two­-and-­a-­half years.

Public sector participants in the Gilcrease extension include the Oklahoma Department of Transportation, the city of Tulsa, Tulsa County, the Indian Nations Council of Governments, Oklahoma Turnpike Authority, and the Federal Highway Administration.

Planning for the Gilcrease Expressway loop began in the 1950s but stalled at the Arkansas River crossing needed to complete the road around Tulsa.

A study by the turnpike authority in 2010 determined that traffic on the bridge would not generate the toll revenue needed to finance it. Cost of the final 6.7 miles of the project was estimated at $373 million in the study.

Available funding for the project in recent years has included $6.5 million per year from the FHWA and $1 million per year from the city, but at that rate the project would not have been fully funded until 2050.

That would be almost 100 years after the project was envisioned, Ridley said.

“Thank you all for your patience for 50 years,” Ridley said at Friday’s announcement of the P3 proposal. “You’ve got about three more years of patience we’re going to need from you before we open this up, but it will come and it will happen.”

Tulsa Mayor G.T. Bynum said his 90­-year­-old grandfather attempted to find a funding solution for the expressway project as a city official in the 1960s.

“It’s surreal for me as the mayor to be talking today about the plan to finish something that he was working on as street commissioner in 1964,” he said.

Partnering with the state and a private investor on the highway project will remove much of the city’s financial burden, Bynum said. The route for the road was determined in 1961, with the expectation that Tulsa would build it.

“The city of Tulsa was trying to do this by ourselves when building expressways is not the city of Tulsa’s area of expertise,” he said. “We do streets.”

The turnpike authority has a better ability to access capital markets for the expressway extension, said Deputy Mayor Michael Junk.

“Roads aren’t free,” Junk said. “There are many times that we have seen the need for infrastructure improvements, but we haven’t had the capital to do so. A toll way is another means to accomplish that goal.”

The Gilcrease project was included in Gov. Mary Fallin’s Driving Forward program, an $892 million turnpike package that she proposed in October 2015.

Fallin used her State of the State address in February to push for an increase in Oklahoma’s gasoline and diesel taxes and a $350 million infrastructure bond program.

Fallin’s tax proposal includes a 10 cent per gallon increase in the state’s gasoline tax of 17 cents per gallon and an increase of 7 cents per gallon in the diesel tax of 14 cents.

The Bond Buyer

By Jim Watts

March 14, 2017

• In St. Louis, Bosnians revitalize a depleted neighborhood
• Post-industrial cities are hungry for newcomers from abroad

In 1997, refugee Alem Boric and a partner started Europa Market, 600 square feet of Bosnia in St. Louis.

Today, what began as a corner store in the city’s Bevo Mill neighborhood is a 96,000-square-foot (8,900-square-meter) juggernaut that distributes smoked meats, cheeses, cakes and Croatian jams from the former Yugoslavia, Germany, Italy and Greece to 28 U.S. states. The company, now up to 45 employees, has seen its revenue double annually for the past several years.

Bevo Mill windmill-shaped restaurantPhotographer: Eric Englert/Bloomberg
In the suburbs and countryside of Rust Belt swing states, President Donald Trump’s anti-immigrant message may have carried the day, but in St. Louis and the rest of the region’s dilapidated, post-industrial cities, it’s anathema. Immigrants represent rebirth: They’ve stabilized neighborhoods, cushioned city coffers and, in the process, supported credit ratings and bond sales. Mayors from Detroit to Cleveland — as well as northeastern cities like Albany, New York, and Lowell, Massachusetts — see financial salvation in these newest Americans and are dismayed by Trump’s drive to tighten the borders.

St. Louis Mayor Francis Slay raves about the booming Bosnian immigrant community in his city.

“We were losing population and people more than almost any city in America before the Bosnians came,” said Slay, a Democrat. “They’ve helped us revitalize this city.”

Much of the Rust Belt’s pain comes from the excruciating transition it’s making to a service-sector economy from one predicated on manufacturing. In its cities, the share of the nation’s employment dropped to 27 percent in 2000 from 43 percent in 1950, according to one study. Sustaining population has been a struggle: More than half of 23 municipalities, including Detroit, Syracuse, and Toledo, saw losses from 2000 to 2014, according to census data.

Haven Found

Many Bosnians in St. Louis fled Yugoslavia’s brutal civil war in the 1990s and are largely Muslim. That carries particular resonance as the Trump administration tries to block refugees in the name of stopping Islamist terrorism during a conflict that’s forced almost 5 million people from Syria.

The U.S. Conference of Mayors has decried Trump’s measures, pointing to a tradition of providing “safe haven, freedom and opportunity.” Leaders of cities including Los Angeles, Dallas, Seattle, Louisville, Phoenix and Boston spoke out separately, many saying immigrants were key to prosperity.

“Cities see immigrants and refugees filing into the labor market where native-born Americans aren’t,” said Christina Pope, a regional manager at Welcoming America, a Decatur, Georgia, nonprofit that boosts immigrant entrepreneurship and economic integration.

Voters who propelled Trump to the White House acted in the face of such judgments by people they saw as “global elites,” said John Mauldin, Dallas-based president of Millennium Wave Advisors, an investment advisory firm.

“The data — you can make it say almost anything that you want it to say,” said Mauldin, who says the U.S. has admitted too many refugees without valuable skills. “It really boils down to people’s impressions, what do they feel, their political bias.”

Suburbs are Trump country: While St. Louis went 79 percent for Hillary Clinton, the encircling towns voted for Trump at shares exceeding 60 and 70 percent.

“I am in total support of Trump. I don’t want St. Louis to be a sanctuary city,” said Rene Artman, a Republican activist from suburban Fenton. “My mother-in-law was an immigrant. She came in the right way. We are a country of immigrants. Come in the right way and everyone is welcome.”

St. Louis can use whomever it can get.

Withering City

The population withered to about 316,000 from 347,000 in 2000. U.S.-born residents decreased by about 10 percent while the smaller crop of foreign-born rose by a similar magnitude.

“Population growth is very important for healthy communities and economies — usually it’s a telltale sign,” said Dan Heckman, a Kansas City-based fixed-income strategist at U.S. Bank Wealth Management.

The overall decline contributed to a bleaker outlook for the city’s debt, according to Heckman. A St. Louis bond that matures in 2033 traded March 15 for an average yield of 3.6 percent, about 1.2 percentage points more than top-rated debt, according to data compiled by Bloomberg.

So St. Louis is doubling down on its welcome. The city needs personal-care aides, food workers and customer-service representatives, according to a St. Louis Community College report last year. Immigrants make an outsize impact in those roles.

Refugees are helped by the International Institute of St. Louis, which provides short-term help with employment and housing. From 1979 through 2016, the group sponsored about 23,000 refugees, about 30 percent Bosnians, said Chief Executive Officer Anna Crosslin.

Immigrant spending power in the metropolitan area amounted to about $3 billion in 2014, when they contributed about $1.1 billion in taxes to local coffers, according to New American Economy, co-founded by former New York Mayor Michael Bloomberg. (Bloomberg is founder and majority owner of Bloomberg News parent Bloomberg LP.) The newcomers are about 29 percent more likely to be entrepreneurs than native-born St. Louisans, the data show.

Meet the Residents

Ibrahim Vajzovic

Ibrahim Vajzovic, a former civil engineer, landed in Bevo Mill in 1994 and took an entry-level job. He said Bosnians “cleaned up the area,” named for a windmill-shaped restaurant and populated by successive waves of immigrants. Now, he runs a multifaceted business providing real estate, travel and insurance services, but spends most of his time teaching business courses for Fontbonne University.

Sadik Kukic arrived in 1993 with about $58 and no English. Two decades later, he’s the owner of Taft Street Restaurant and Bar and president of the Bosnian Chamber of Commerce.

The chamber was a leading voice in establishing a community improvement district in Bevo Mill. A special assessment for building owners and a fresh 1 percent sales tax for residents will fund the project, which will raise about $750,000 by 2021. More than a third will go toward public safety, with another 20 percent for infrastructure.

Residents are enjoying brighter housing prospects even as the city overall has been slow to recover since the housing crisis. Among 84 zip codes with at least 100 sales in the metro area, several in and around Bevo Mill were among the top 15 for greatest price appreciation over the past five years, according to Daren Blomquist, vice president at ATTOM Data Solutions in Irvine, California. The old Bevo Mill is slated to become a biergarten.

Boric said the city helped him and Europa Market thrive, as did previous immigrants and their descendants.

“A lot of the folks in the neighborhood, those Germans, appreciated us, as they saw themselves in us,” he said. “Bosnians were well-received. The city and the mayor appreciated us.”

Bloomberg Markets

by Michelle Jamrisko and Eric Englert

March 17, 2017, 2:00 AM PDT

• Waiting for startups to produce cash, it couldn’t meet debts
• Venture-capital fund’s returns have lagged benchmark

The venture-capital fund created by Ohio to cultivate local startups is going on public assistance.

Still waiting for its young companies to morph into the next Snap Inc. or Facebook Inc., the Ohio Capital Fund, which was financed through the sale of municipal bonds, didn’t generate enough money from its investments to pay $9.8 million on February 15, when the first principal payments on its debt started coming due, according to a securities filing. To avoid a default, it had to draw on $7.5 million from the state, the only time the fund has turned to that taxpayer lifeline in its 11-year history.

Ohio is among at least a dozen states, including New York, North Carolina and Pennsylvania, that have established funds to foster nascent tech companies. The Ohio fund, founded in 2005, was created by the state legislature to transform an economy upended by the decades-long loss of manufacturing jobs.

To encourage investors to buy the fund’s bonds, Ohio agreed to extend as much as $20 million of tax credits per year over the thirty-year life of the program — insuring it can cover the debt even while waiting for investments to pay off. This allowed securities issued for the program to carry a AA- rating, just two levels below Ohio’s general-obligation debt.

“Anyone you talk to would prefer a scenario where you don’t use tax credits,” said Mark Williams, chairman of the Ohio Venture Capital Authority, which oversees the fund. “I think when this was built and designed it was understood that was very possible.”

The Ohio fund, managed by an affiliate of Cincinnati-based Fort Washington Investment Advisors, has only delivered an annualized return of 7.2 percent, compared with 8.9 percent for the median venture capital fund, according to the Ohio Venture Capital Authority. When factoring in debt costs, expenses and the $15 million in management fees paid to Fort Washington-affiliate Buckeye Venture Partners since 2005, though, that swings to a 6.5 percent yearly loss.

“Due to the geographic constraints and the limited universe of funds in which OCF could invest, we feel that the underlying fund performance is in line with expectations,” said Stephen Baker, Fort Washington’s head of private equity. The legislation creating the fund didn’t set a performance objective.

The regional effort marked a push to jumpstart the economy by breaking the near monopoly that America’s coasts have on the venture-capital industry. Just 22 percent of such investments went to companies outside San Francisco, New York, Boston and Los Angeles in 2015, according to the Center for Regional Economic Competitiveness and Brentwood, Tennessee-based Cromwell Schmisseur LLC, which designs state venture programs. The consulting firm didn’t work with Ohio.

“Because of the extreme geographic concentration of venture capital, it is much harder for good deals to get financing where they’re at,” said Eric Cromwell, founding member of Cromwell Schmisseur. “When well-designed, programs like this encourage private investment in high-growth potential businesses between the coasts.”

Greatest Hits

The fund has committed capital to 30 venture funds, which are required to put at least half of the money in state-based startups. Those funds have invested $284 million in 88 Ohio companies, helping to spur the creation of about 1,100 jobs, according to a Nov. 16, 2016 program summary.

It has scored some hits. Among them is CardioInsight, a Cleveland-based medical device company that’s developed a new approach to improve the mapping of electrical disorders of the heart and was purchased by Medtronic Plc for $93 million in June 2015. Simbionix, another Cleveland company that creates virtual reality surgical simulation and training, was sold in 2014 for $120 million.

The Ohio fund has received $82 million from its investments so far. Its holdings were valued at $96.6 million as of June 30.

Until February, it only had to pay semi-annual interest on almost $160 million of debt. Then principal payments kicked in, increasing debt-service costs from about $7 million to $19.5 million a year. The fund is scheduled to make $195 million in debt payments between Feb. 2018 and August 2027, according to the state.

Its next payment is due Aug. 15 and it’s possible the state may need to cut another check if distributions from the underlying funds don’t materialize, Williams said.

Ohio Governor John Kasich opposes issuing more debt for the fund and wants the cash it earns to pay off debt first, instead of being reinvested, said Lyn Tolan, a spokeswoman for the Ohio Development Services Agency, which advises the fund.

Ohio moved into venture capital to nudge the economy more than to make a profit, given that steadier returns can be found elsewhere. Returns after fees for the median venture capital fund that began making investments between 2005 and 2014, ranged from 0.77 percent in 2014 to 19.4 percent in 2010, according to data compiled by Cambridge Associates.

“Overall, returns are disappointing and fall short of expectations,” said Diane Mulcahy, an adjunct lecturer at Babson College’s division of entrepreneurship and a Senior Fellow at the Ewing Marion Kauffman Foundation, where she manages the foundation’s private equity, venture capital and real assets investments. “If the state’s true intent was to create jobs, is borrowing to invest in a venture capital fund the best way?”

Bloomberg Markets

by Martin Z Braun

March 17, 2017, 2:00 AM PDT

• Prices of most-active securities fall after board backs plan
• Final proposal suggests need for bigger bondholder concessions

Puerto Rico general-obligation bonds fell after the federal oversight board approved a financial recovery plan that will cover less than a quarter of the debt payments coming due, underscoring the deep concessions the island plans to seek from investors.

The price of securities due in 2035, among the most actively traded, dropped 5 percent to an average of 67.5 cents on the dollar Tuesday to the lowest in two months, according to data compiled by Bloomberg. Those maturing in 2039 slipped to 60.2 cents from 63.8 cents Monday.

The decline followed the panel’s approval of a revised proposal from Governor Ricardo Rossello on Monday that lays out a path for closing the territory’s chronic budget deficits. The blueprint leaves an average of less than $800 million annually for debt service over the next decade, a fraction of the more than $3 billion owed each year from 2018 through 2027. The latest figures marked a reduction from what the governor initially proposed to repay.

The plan will serve as benchmark as the island begins discussions with creditors over how deeply to reduce its debts.

“The sentiment definitely turned negative on some of these numbers, but we still don’t know what the final restructuring will be,” Daniel Solender, head of municipals at Lord Abbett & Co., said in a telephone interview. “If this news triggered someone to sell, it’s a thin market so it would have driven the markets down further.”

In an interview Monday, Rossello said that he was pursuing talks with creditors “aggressively” after the panel approved his proposal. “Right now, having a certified plan allows us to sit down with the different bondholders at different levels,” he said.

In a follow up interview on Bloomberg Television Tuesday the governor added they would “see if we can find a best alternative, best solutions for both bondholders and of course the people of Puerto Rico.”

Bloomberg Markets

by Rebecca Spalding

March 14, 2017, 11:24 AM PDT March 14, 2017, 1:01 PM PDT

Plan lays groundwork for debt negotiations as May 1 deadline looms

The federal board overseeing Puerto Rico’s finances approved a fiscal plan for the island Monday after marathon talks over the weekend with advisers of Gov. Ricardo Rosselló. The deal clears the way for the governor to start negotiations with creditors over the U.S. territory’s $70 billion debt load.

Puerto Rico is racing to meet a May 1 deadline to reach a settlement with bondholders under legislation passed by the U.S. Congress in June that permitted the commonwealth to restructure its debts. Obtaining board approval for the fiscal plan required newly elected Mr. Rosselló to agree to potentially painful spending cuts while leaving less money to repay bondholders, but the deal allows for more expenditures if the island’s economy improves.

“We were limited by what we could do with creditors before having a plan certified,” Mr. Rosselló said in an interview. The governor said he would be personally involved in talks with bondholders in coming days.

The federal oversight and management board approved the plan at a meeting Monday in New York, modifying a proposal last week by the governor that would have paid bondholders $1.2 billion a year over a decade, or roughly a third of what they are owed under existing contracts.

The approved plan forecasts that a roughly $800 million primary surplus will be available annually to service debt over the next 10 years. The reduction reflects the oversight board’s more conservative forecasts of economic contraction and budget deficits in Puerto Rico.

The board rejected the governor’s proposal last week, saying it relied on overly optimistic revenue assumptions and didn’t include enough government spending cuts to close a yawning fiscal gap. The board’s modifications opened the door to austerity measures the governor had resisted, including possible employee furloughs, pension spending reductions and the elimination of Christmas bonuses.

Mr. Rossello’s administration agreed with the board’s required expenditure cuts on health-care and public-sector payroll: by $650 million in 2018, by $1.2 billion in 2019 and by $2.05 billion in 2021, Elias Sanchez, the governor’s representative on the board, said in an interview.

The plan also assumes that Congress won’t extend health-care funding for Puerto Rico under the Affordable Care Act, or ACA, that is scheduled to lapse in December, something Mr. Rosselló is lobbying to prevent.

“The elephant in the room is the assumption that there will be no federal funding for health care,” Mr. Rosselló said. “If we do get federal funding at the same level it means we’ll have $1.5 billion more in fiscal 2019 and forward.”

Despite Republican efforts to repeal the ACA, Puerto Rico could get its current funding extended when Congress passes in coming weeks a new continuing resolution, a bill that keeps the government funded in the absence of a full-year spending bill, Mr. Rosselló said.

The plan could be amended if Congress sends Puerto Rico additional federal health-care dollars but that won’t necessarily boost money paid to bondholders, said David Skeel, a law professor and oversight board member.

Puerto Rico bond prices held steady Monday as investors bet that the island would ultimately generate more cash to pay its debts than projected under the fiscal plan. The island’s benchmark $3.5 billion bond due 2035 dipped slightly to about 72 cents on the dollar, according to Electronic Municipal Market Access

The debt-relief law that Congress passed last summer protects Puerto Rico from creditor lawsuits until May 1, when a stay on litigation is scheduled to expire. The governor has called for an extension of the stay to pursue consensual deals with creditors, but any extension must be approved by Congress.

Mr. Skeel said he “would not bet” on an extension of the May 1 deadline. After that date, Puerto Rico can switch to a quasi-bankruptcy process that can bind creditors to unfavorable repayment terms.

THE WALL STREET JOURNAL

By ANDREW SCURRIA and MATT WIRZ

Updated March 13, 2017 5:39 p.m. ET

Write to Andrew Scurria at [email protected] and Matt Wirz at [email protected]