Trying to close a stadium deal with local governments, David Beckham this week greeted the man who would be his landlord: Miami-Dade School Superintendent Alberto Carvalho.

The Wednesday meeting was at Miami Beach’s SoHo Beach House, the luxe hotel and private club that is Beckham’s regular base of operations during visits to the Miami area.

“We spent a lot of time talking about kids,” Carvalho said Thursday night. “I came away feeling very comfortable about the decency of this guy.”

The unannounced meeting was one stop on Beckham’s Miami swing, which included filming part of a soccer documentary for UNICEF and a nighttime visit with the University of Miami women’s soccer team. Beckham, a global fashion icon, was photographed wearing an orange T-Shirt emblazoned with “The U” in photos posted on Twitter from the encounter.

Beckham’s appearances come as his two-year stadium quest has never been closer to a final deal, but also as his negotiators warn it could still fall apart over real estate prices.

The plan is for his investment group to pay for a $200 million stadium to rise next to Marlins Park on a mix of privately-owned land and parcels currently owned by the city of Miami. Beckham’s group has agreed to pay Miami for the real estate, while negotiating separate deals with the private owners.

The stadium and site would be transferred to the school system in order to shield it from property taxes, and in exchange Beckham’s group would provide free space for large school events and some form of sports-related education for visiting classes and students. The Beckham group would also sponsor some school activities, including buying band uniforms and supplies.

Carvalho said Beckham’s people contacted him early in the week about a meeting.

The sit down marks something of a do-over for the Beckham group, which failed to invite school officials to a VIP reception with the soccer star in early 2014. The who’s-who event launched Beckham’s extended pursuit of a stadium site, and the stream of party pics of politicians and business leaders posing with the soccer celebrity came to represent the limits of star power to overcome political complications and commercial interests in Miami.

Carvalho said no photos were taken at his afternoon meeting with Beckham. “When I met Mr. Beckham, I was clear in telling him that I’ve seen how he comes to town, and everybody wants a Beckham kiss and a hug and a Beckham selfie. I said I’ll take a Beckham handshake. He laughed.”

A Beckham representative confirmed the meeting, but declined to provide other details. Carvalho said the 45-minute conversation mostly involved the two outlining their visions for the stadium: Carvalho on what it could do for the local school system, and Beckham on why he wants to bring Major League Soccer to Miami.

“He told me this is the one place in the world where he wants to have his name associated with a soccer team,” Carvalho said.

Carvalho had initially sought a magnet school within the stadium itself, but that provision has been publicly rejected by Beckham’s local negotiators. Carvalho said the alternative is a large amount of “educational” space within the stadium. Carvalho said the total benefits to schools would top $1 million, roughly equal to what the stadium would pay to the school board if subject to property taxes. Beckham’s group also agreed to continue paying the same amount of property taxes the current land owners pay to local governments.

Insiders say the bulk of the deal with Carvalho is done, and that approval by the elected school board is considered a certainty. But people involved in the talks say there is significant concern that negotiations with the site’s private land owners could fail as the would-be sellers demand higher prices than the Beckham group is willing to pay.

After resisting a stadium next to Marlins Park since early 2014, Beckham partner Marcelo Claure and Miami Mayor Tomás Regalado summoned reporters to City Hall in July to announce the site next to the baseball park had become the top choice for soccer.

That’s left Beckham’s real estate team to negotiate sales prices for land targeted for a stadium deal that’s attracting global attention.

Even if the landowners come to terms with Beckham, another hurdle remains: a referendum in the city of Miami. It would be held March 15, the same day as the presidential primary.

BY TRIBUNE NEWS SERVICE | NOVEMBER 13, 2015

By Douglas Hanks

(c)2015 Miami Herald

BRADENTON, Fla. — A second Florida environmental group is suing to block spending decisions by the Legislature related to a 2014 constitutional amendment earmarking funds for conservation purposes.

The Gainesville-based Florida Defenders of the Environment filed a lawsuit Nov. 9 in Leon County Circuit Court seeking an injunction to prevent state agencies from spending what the group considers misappropriated funds.

At issue is the fiscal 2016 state budget, and how the Legislature allocated the revenues authorized by Amendment 1, a ballot measure passed by 75% of those voting last year.

The amendment directs 33% of taxes collected on real estate sales to the Land Acquisition Trust Fund to acquire and improve conservation and recreation lands. The revenues can be used as cash for related expenditures, or to pay debt service on bonds.

The Florida Defenders’ suit argues that the Legislature improperly allocated $237 million from the $740 million in the Trust Fund to offset expenses normally be supported by the general fund, such as salaries, benefits, vehicles, insurance and certain capital projects.

Thomas Hawkins, executive director of the organization, said that his group fundamentally supports the protective environmental measures that Amendment 1 was designed to achieve.

“Environmental conservation in Florida is strongly supported by the voters,” Hawkins said in an interview. “We want the will of the voters implemented.”

The suit names as defendants the heads of the Florida Department of Environmental Protection, Department of State, Department of Agriculture and Consumer Services, and the Florida Fish and Wildlife Conservation Commission.

A day after Gov. Rick Scott signed a record $78.4 billion fiscal 2016 state budget into law on June 23, Earthjustice filed a lawsuit charging that lawmakers “defied” voters and the constitution by wrongfully diverting the $237 million.

The suit was filed on behalf of the Florida Wildlife Federation, St. Johns Riverkeeper, Environmental Confederation of Southwest Florida, the Sierra Club, and Manley Fuller, who is president of the Florida Wildlife Federation.

The Earthjustice suit, which names the Legislature and Chief Financial Officer Jeff Atwater as defendants, also seeks an injunction ordering Atwater “to remedy the Legislature’s misappropriations” by transferring the misspent revenues from agency budgets to the Land Acquisition Trust Fund.

Attorneys for the Legislature and Atwater have filed motions to dismiss the Earthjustice suit. A hearing is scheduled Dec. 3 in Tallahassee.

Florida Defenders takes a different legal tack than Earthjustice by arguing that certain state agencies should be forbidden to spend what the group believes are misappropriated funds, Hawkins said.

While the group believes that the Legislature violated the state’s constitution, it also accuses lawmakers of improperly using the appropriations bill to impermissibly spend Amendment 1 revenues, he said.

“What we have done is complementary to the Earthjustice suit,” Hawkins said. “We think there is a greater likelihood of success for what we are asking, and that is for agency heads to stop spending the misappropriated money.”

Scott, a Republican, signed the fiscal 2016 budget into law after vetoing $461.4 million of line-item expenditures sought by lawmakers.

In a letter accompanying the budget, Scott wrote that the spending plan fully complied with Amendment 1 by including more than $740 million to support land and water programs. The program’s expenses included debt service on outstanding conservation bonds.

Scott and the GOP-led Legislature did not authorize the issuance of bonds for any new environmental programs under Amendment 1.

The Bond Buyer

by Shelly Sigo

NOV 12, 2015 2:29pm ET

Puerto Rico’s main electricity provider extended an agreement with some bondholders to Nov. 20, giving the utility more time to negotiate with insurers that guarantee a portion of its debt against default.

The Puerto Rico Electric Power Authority, known as Prepa, is trying to restructure $8.2 billion of debt to reduce its costs and free up cash for plant upgrades. Investors holding about 35 percent of its debt on Nov. 5 agreed to take losses of as much as 15 percent by exchanging their bonds for new securities.

The deal was set to lapse Thursday if Prepa couldn’t win the support from companies that insure about $2.5 billion of the utility’s debt. The new deadline is Nov. 20, Prepa said in a statement.

“Prepa will use the extension to continue discussions with its monoline bond insurers, while the legislative process to approve the Prepa Revitalization Act continues,” according to the utility.

The restructuring would be the largest ever in the $3.7 trillion municipal-bond market and mark a first step by Puerto Rico to reduce a $70 billion debt load that Governor Alejandro Garcia Padilla says the island can’t afford to pay.

Debt Exchange

If MBIA Inc., Assured Guaranty Ltd. and Syncora Guarantee Inc. don’t sign on to the Nov. 5 agreement, the negotiations between Prepa, its fuel-line lenders and bondholders may ultimately be resolved through the courts, according to a notice posted on the Municipal Securities Rulemaking Board’s website.

Prepa bonds maturing July 2040, the utility’s most-actively traded uninsured security by volume in the past three months, changed hands Thursday at an average 58.6 cents on the dollar, for an average yield of 9.7 percent, according to data compiled by Bloomberg. The bonds traded at an average 50 cents at the start of the year.

The debt exchange would need to be approved by Puerto Rico lawmakers, who have until Nov. 17, the end of the current legislative session, to vote on Prepa’s Revitalization Act, which would change Prepa’s operations and allow it to restructure debt. Garcia Padilla could call a special session of the legislature to give lawmakers more time to work on the Prepa bill.

The new bonds must receive an investment-grade rating, and the exchange will be voided if more than $700 million of the utility’s uninsured bonds aren’t sold back, according to the terms of the agreement. The three largest rating companies grade Prepa at junk-bond levels.

Bloomberg Business

by Michelle Kaske and Laura J Keller

November 12, 2015 — 12:57 PM PST Updated on November 13, 2015 — 6:09 AM PST

On Election Day this month, just two Conroe, Texas, voters were the entire electorate for one of the biggest bond proposals on U.S. ballots, a $468 million sale that will transform the pinelands around a former Boy Scout camp into a sprawling community. Both of them approved.

The small-scale referendum is part of a record-setting trend in the Lone Star State, which has been picking up more than a thousand new residents a day. Texas special districts like the one in the Houston suburb, drawn up around virtually unpopulated tracts owned by developers, are borrowing billions to build roads, sewers and water lines needed for new houses. It’ll be repaid — eventually — by property owners.

With its population growing more than any other state, Texas is awash in the type of municipal bonds that flourished in Florida and California during the housing bubble, only to burn investors with losses after real estate prices crashed. Its districts are on pace to sell more than $2.5 billion of the securities this year, the most since at least 2007, according to data compiled by Bloomberg. At least $1.7 billion more were approved on Nov. 3.

“It’s been a busy 10 years,” said Richard Muller Jr., a lawyer in Sugar Land, Texas, who works with about 20 districts, including the one in Conroe. “We’re still catching up to all the new jobs the state added.”

 

The securities have been a draw to tax-exempt bond buyers who are looking for higher yields as interest rates in the municipal market hold near a five-decade low. When the Fort Bend County Municipal Utility District No. 194, some 23 miles (37 kilometers) southwest of Houston, sold $5.1 million of bonds on Nov. 5, the 10-year debt yielded 3.2 percent. That’s a percentage point more than top-rated securities.

“If you have the skill set you can pick up some additional yield, as long as you do your homework,” said Colby Harlow, president of the hedge fund Harlow Capital Management in Dallas. “You have to be super selective and look at them on a case by case basis.”

So-called dirt bonds are paid through a special tax levied on the property, which is typically covered by the developer until the homes are sold. The risk: That the homes never sell or tax bills aren’t paid.

While sales of the bonds shriveled in Florida and other states after the housing-market rout left new developments vacant, they’ve continued in Texas, home to five of the 10 fastest-growing cities last year.

After the oil-industry bust of the early 1980s pushed more than a dozen districts into bankruptcy, Texas lawmakers provided safeguards for investors: It required developers to begin paying for the infrastructure up front. They’re reimbursed later when bonds are sold.

“Dirt districts are dirt districts no more,” said Omar Tabani, an analyst with Standard & Poor’s in Dallas. “The developer fronts the cost and doesn’t get reimbursed until the district results in enough taxpayers to pay the debt.”

Surviving Recession

In March 2009, S&P raised the ratings on 250 of the Texas districts because few homeowners were falling behind on their tax bills, even though the recession still hadn’t ended. Since then, property values have continued to rise in the Houston area, where 80 percent of the districts are based, to more than $500 billion from a little over $300 billion in 2007.

“MUDs were the ugly stepsister of the municipal-bond market for many years,” said David Jaderlund of Jaderlund Investments in Santa Fe, New Mexico, who invests in Texas debt for clients. “The debt was issued, but there weren’t any buyers for the property. Now that’s not true any more.”

In Conroe, a city with some 66,000 residents about 40 miles north of downtown Houston, the debt will help build a 2,046-acre planned community called Grand Park Central, which will include residential neighborhoods, retail shops, office space, hotels, restaurants and a conference center. It’s not far from one of Exxon Mobil Corp.’s offices.

Oil’s Impact

One risk looming over the Texas real estate boom is the oil-price bust. A sustained decline in crude would eventually hurt employment and drive down property values, said Tabani, the S&P analyst. In the Houston area, home prices have continued to rise, even though oil is trading for about $40 a barrel, less than half what it was about a year ago. New home construction in the state rose 7.5 percent in August, according to the Federal Reserve Bank of Dallas.

“Today the land developer has skin in the game before they even sell bonds,” said Doug Benton, senior municipal credit manager for Cavanal Hill Investment Management, a Tulsa, Oklahoma-based company that handles about $6 billion, including Texas municipal bonds. “If we feel there is value that can be had, it is definitely a bond we will look at.”

Bloomberg Business

by Darrell Preston

November 15, 2015 — 9:01 PM PST Updated on November 16, 2015 — 6:39 AM PST

Nov 17 – The premium Connecticut pays to borrow money in the municipal bond market rose on Tuesday as the state tapped investors for $650 million amid concerns about its weakening revenues and underfunded public pension system.

Investors have been penalizing states with poorly funded pension systems this year and recent news that Connecticut will see a budget shortfall of over $600 million over the next two years has added an extra layer of scrutiny.

Connecticut paid a premium of 0.56 of a percentage point over top-rated states to borrow for 10 years compared to a spread of 0.47 of a percentage point in the secondary market, according to Thomson Reuters data. Connecticut is paying interest of 2.72 percent on the ten-year bonds.

Lyle Fitterer, a fund manager at Wells Capital Management, said the wider spreads were “not a surprise based on what’s happened to other states that have pressing pension issues.”

Fitterer said he had not brought the bonds as the yield was still not attractive enough given the risk.

“In all honesty I’d rather own something like Illinois where, while it’s lower rated and has similar pension issues, at least your getting paid to take that risk,” he said.

The state’s Treasurer’s office, which is responsible for organizing bond sales, did not immediately return a request for comment.

REUTERS

NEW YORK | BY EDWARD KRUDY

(Reporting by Edward Krudy; Editing by Bernard Orr)

Houston is weathering a prolonged plunge in oil prices, but the city may have an even bigger problem: its pensions.

Though economic growth has only slowed, not stalled, in Texas largest city, its finances are showing what several investors and analysts describe as warning signs.

Those include a rapidly growing gap in funding its retirement plans for public workers and a limit on its revenue-raising capabilities imposed by a voter-approved cap on property taxes.

The $3.2 billion pension-funding gap is threatening Houstons Aa2 credit rating from Moodys Investors Service, hurting demand for its debt and emerging as an issue in the citys mayoral race.

Moodys this summer warned it may downgrade the citys debt if Houston fails to address its pensions, noting the cap limits the citys financial flexibility.

A downgrade could lower prices for outstanding bonds and increase Houstons borrowing costs at a time when it needs improved infrastructure.

Some investors are backing away from the citys debt, saying there are better deals on similarly rated municipal bonds elsewhere. Guy Davidson, director of municipal investments at AllianceBernstein LP, said his firm trimmed its holdings of Houstons debt earlier this year.

We want to be compensated for those pension liabilities and at current levels, we dont think we are, he said.

Houston is the latest U.S. city to face threats from credit-rating firms and investors over bulging pension obligations. Investors have grown concerned about state and local governments ability to address unfunded retirement costs. Examples include Chicago and the states of Illinois and Connecticut, whose unfunded retirement costs have ballooned after investing losses from the 2008 financial crisis and chronic underpayments by policy makers.

Houstons predicament also shows how the decline in oil prices is forcing some U.S. state and local governments to re-evaluate their spending priorities.

Houston residents are reluctant to support any tax increases, including raising the property-tax cap, said Mark Jones, a political-science professor at Houstons Rice University.

At the same time, unsustainable pension costs have contributed to reductions in hiring of police officers and spending on pothole repairs, which have become issues in the mayoral race.

Houstons unfunded pension liabilities grew at a faster clip relative to its revenue than in any of the other 50 largest U.S. local governments rated by Moodys, the firm said in a July report, citing data from fiscal 2013.

The city also projects deficits in coming years despite revenue growth, Moodys said in October.

Before 2001, Houston had enough assets to fund future retirement payouts. But an across-the-board boost to retirement benefits around that time, plus losses from two recessions, have weighed on the citys pension funding. The city now only has about 75% of the funds it needs. That places Houston at the average level of funding among city and county plans, according to Wilshire Consulting.

While the city has paid contractually required amounts to plans for municipal employees and police officers over the past five years, the total falls short of fully funding the systems. A state law overseeing the firefighters plan has resulted in better funding while reducing the citys financial flexibility, Moodys said.

City officials have argued for greater control over pensions and revenue. Ronald Green, Houstons controller, said that while investors in the citys debt can remain confident they will get paid, the city should act soon to improve its finances.

You dont fix the roof when its raining, you fix it when its dry, he said.

Absent a concerted effort to adjust course, the city is headed toward Chicago-level distress, forced to choose between benefit cuts, tax increases and reduced public services, according to a report by the Houston-based Laura and John Arnold Foundation, which funds research on the fiscal health of public pensions.

Houstons pension parameters are set by state law, adding to the complexity of seeking a solution, while the drop in oil prices could magnify problems more quickly than expected, said Josh McGee, a vice president at the foundation.

Among other concerns, the citys plans assume relatively high investment returns of 8% or above, meaning the funding gap may be understated, said Marc Watts, chairman of the Greater Houston Partnerships Municipal Finance Task Force.

The new mayor, unless this is addressed, isnt going to have any resources to work with, he said.

Some plan officials said retired city workers arent the problem. Max Patterson, executive director of the Texas Association of Public Employee Retirement Systems, called such warnings grossly misleading and said any discussion of pension changes should be considered in a broader conversation about city finances.

Todd Clark, chairman of the Houston Firefighters Relief and Retirement Fund, said the plan has met and exceeded its assumed returns historically and the board will make any needed adjustments in consultation with an actuary going forward.

The issue is playing into the mayoral runoff between State Rep. Sylvester Turner, a Democrat, and former Kemah Mayor Bill King, a fiscal conservative.

Mr. Turner, running with the support of the citys three major public-sector unions, said the pension issues should be debated with all stakeholders in concert with the citys other fiscal concerns.

After that, he would consider raising the property-tax cap for public safety or paying down debt.

In order to be successful in addressing the pension issue, you have to engage in comprehensive financial reform, he said.

Mr. King favors adjusting pensions by offering 401(k)-style defined-contribution plans for new hires. He supports maintaining the cap, saying the city raises plenty of tax money and needs to spend less.

Weve got time to turn the boat around and not go over the falls, but we dont have a long time, he said.

Houstons situation highlights the need to address pensions and other fixed costs before they become an economic drag, said John Bonnell, senior portfolio manager of tax-exempt investments with San Antonio-based USAA Investments, which doesnt own the citys bonds.

If they end up doing nothing to address this budget issue, 10 years from now Houston could be facing the same problem Chicago is now, he said. I think they have the ability to address their issues prudently, it just hasnt gotten to the point where theyve been forced to do it.

Reporter Esthi Maharani – November 16, 2015

Write to Aaron Kuriloff at aaron.kuriloff@wsj.com

CHICAGO — Chicago’s contributions to its four retirement systems will be too skimpy to curb unfunded pension liability growth in the next 10 years regardless of how state lawmakers address the problem and how the court system rules, Moody’s Investors Service said on Tuesday.

The third-biggest U.S. city has been mired in a financial crisis largely fueled by its $20 billion unfunded pension liability.

Moody’s, which dropped Chicago to the “junk” level of Ba1 with a negative outlook in May, laid out four scenarios facing Chicago based on the fiscal 2016 budget it passed last month.

That spending plan for the fiscal year beginning on Jan. 1 includes a record $543 million, phased-in property tax increase dedicated to public safety worker pensions.

Mayor Rahm Emanuel linked the size of the tax hike to an Illinois bill reducing the city’s contribution to its police and firefighter retirement systems initially by $220 million. Senate bill 777 passed the House and Senate, but is on hold due to an ongoing budget battle between Democratic lawmakers who control the legislature and the Republican governor, who has been critical of that measure.

If the bill fails to become law, the city would remain subject to a 2010 state law that mandates an immediate $550 million increase in contributions, leaving the property tax hike initially $220 million short.

Emanuel’s budget also assumes the Illinois Supreme Court will find a 2014 state law that boosted contributions and reduced benefits for the city’s municipal and laborers’ retirement systems constitutional after a lower court tossed out the law.

Moody’s said the most positive outcome would be a high court ruling in favor of the 2014 law without the enactment of SB 777.

“Although it would require larger pension contributions than currently budgeted, the higher payments would achieve the slowest and least extensive growth in unfunded liabilities among the four scenarios,” said Moody’s analyst Matthew Butler.

Negative outcomes would involve the state supreme court’s rejection of the 2014 law with or without the enactment of SB 777.

“This would exert additional negative credit pressure on Chicago’s credit quality because it would likely remove all flexibility to reduce unfunded liabilities through benefit reform and raise the probability of plan insolvency,” Butler said.

The city plans to defend the 2014 law before the Illinois Supreme Court next week, claiming that without it the police and firefighter retirement systems will run out of money in the next decade.

By REUTERS

NOV. 10, 2015, 11:55 A.M. E.S.T.

(Editing by Matthew Lewis)

CHICAGO — The Illinois Finance Authority took steps on Thursday to speed funds to local emergency call centers and providers of essential state services that are in dire need of cash due to the state’s ongoing budget impasse.

A stalemate between Republican Governor Bruce Rauner and Democrats who control the legislature has left Illinois without a budget for the fiscal year that began on July 1. While various court orders and ongoing appropriations have kept money flowing to some services, bond payments and worker salaries, other items have not been funded, prompting Rauner’s office to enlist the IFA’s assistance.

The IFA board agreed to move forward with a plan to pay vendors for essential state goods and services through the authority’s issuance of up to $115 million of bonds backed by Illinois’ moral obligation pledge. The IFA would pay off the bonds through a state appropriation based on the amount of money Illinois owes the vendors.

IFA Executive Director Chris Meister said critical services would include snow plow repair companies and food suppliers for veterans’ facilities and prisons.

In the case of a debt service shortfall on the IFA bonds, the moral obligation pledge requires the governor to request an appropriation from the legislature, which is not legally obligated to act.

IFA Chairman R. Robert Funderburg noted the irony in the risk that money for the bonds might not be appropriated.

“An agency of the state of Illinois is discussing the relative risk of doing business with the state of Illinois,” he said at a board meeting.

Meister said that once structured, the bond deal would need final approval from the IFA board at or before its December meeting. The board approved Citigroup Capital Markets as the underwriter for the bonds, which could be sold in the U.S. municipal market or structured as a direct purchase or private placement.

Meanwhile, the IFA will tap in to its $12 million of available cash to immediately loan at no interest up to $3 million to local 911 call centers relying on a state pass through of revenue from a phone surcharge that has been held up due to the lack of an appropriation, according to Meister. Another allotment of up to $3 million would be made available to state vendors “at the end of their rope” in return for their state receivables and a 1 percent per month late payment penalty that kicks in after 90 days, he added.

By REUTERS

NOV. 12, 2015, 4:12 P.M. E.S.T.

(Editing by Matthew Lewis)

The largest deal to hit the U.S. municipal market next week is $1.75 billion of private activity bonds to help fund All Aboard Florida, a 235-mile (378 km) passenger rail project that will connect Miami to Orlando.

The bonds will be sold by the Florida Development Finance Corporation, a state authorized issuer of industrial revenue bonds, and the sale will be managed by Bank of America Merrill Lynch.

All Aboard Florida is a privately owned, operated and maintained passenger rail system with stations planned in Miami to Fort Lauderdale, West Palm Beach and the Orlando International Airport.

The express train is expected to take approximately three hours, move at speeds up to 125 mph (201 kph), and be completed by early 2017.

A handful of express and high-speed rail projects are currently planned to be built across the country, including projects in California, Texas, and Nevada.

Siemens Corporation will manufacture All Aboard Florida’s trains in Sacramento, California. Archer Western is upgrading rail infrastructure along the corridor.

Altogether, U.S. municipal bond issuers are expected to offer over $6 billion of municipal bonds and notes next week, according to Thomson Reuters preliminary data.

Reuters

Nov 6, 2015

(Reporting by Robin Respaut; Editing by Alan Crosby)

New York, November 04, 2015 — Moody’s Investors Service has withdrawn the ratings of 3 U.S. public finance local government obligors, affecting approximately $30.5 million of outstanding debt, due to insufficient information.

The affected obligors are:

• Canton, MS
• Lamar County, TX
• Mabank, TX

SUMMARY RATING RATIONALE

Moody’s has withdrawn the ratings because it believes it has insufficient or otherwise inadequate information to support the maintenance of the ratings. Please refer to the Moody’s Investors Service’s Policy for Withdrawal of Credit Ratings, available on our website, www.moodys.com.

REGULATORY DISCLOSURES

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.

Sarah Jensen
Associate Analyst
Public Finance Group
Moody’s Investors Service, Inc.
600 North Pearl Street
Suite 2165
Dallas, TX 75201
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Vanessa Youngs
Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

U.S. voters approved more than $10 billion of new municipal bonds for local governments, with returns showing strong support for large debt issues for Dallas schools, Houston roads and Denver’s stock show and convention facilities.

With interest rates near 50-year lows, localities nationwide sought authority Tuesday to issue $24 billion of debt for water systems, roads and economic development, according to Ipreo, a New York-based financial-market data provider. It was the most in an odd-year November election since 2007, before the worst recession since the 1930s cut tax revenue and pushed states and cities into a period of austerity.

While municipalities have been borrowing to take advantage of low rates to cut the cost of existing debt, they’ve been reluctant to take on new obligations. Borrowing costs have averaged just under 4 percent since 2012, the lowest since the mid-1960s, according to the Bond Buyer’s index of 20-year yields.

“The best case would be a wave of supply that pushes yields and spreads meaningfully higher,” said Matt Fabian, a managing director at Concord, Massachusetts-based research firm Municipal Market Advisors. “Unfortunately we are probably stuck with low yields for a while, regardless of what supply might come.”

Dallas Schools

A strengthening economy gave government officials confidence to ask voters for permission to borrow. The approved borrowings would make a small contribution toward some of the $3.6 trillion of investment in infrastructure that the American Society of Civil Engineers estimates the U.S. needs by 2020.

For Dallas Independent School District, the $1.6 billion of new debt will be used to replace and renovate schools that are more than a half-century old. Denver voters approved $778 million of debt to upgrade a facility for the National Western Stock Show and for improvements to a convention center. Meanwhile in Harris County, where Houston is located, voters approved $848 million of debt for road improvements, parks and flood control, according to county election returns.

Debt sales were also approved for the Aldine Independent School District, North East Independent School District and Conroe Independent School District, all in Texas, and the Fairfax County schools in Virgina. Nine Texas districts were among the largest approved.

Voters in Maine, the only state with bond questions on its ballot, also supported $100 million of debt for transportation and senior housing.

Rejected Proposals

Two of the largest issues that failed to pass included $816 million of bonds in Pima County, Arizona, which sought to use the proceeds for roads and highways, economic development and tourism, and other purposes. In Travis County, Texas, voters rejected $287.3 million for a new courthouse in downtown Austin.

Six years after the recession ended, state tax revenue is only 5 percent over the prior peak and far lower than in past recoveries, according to data released in July by the Nelson A. Rockefeller Institute of Government, which tracks state and local revenue and spending. The long recovery from the recession that began in late 2007, followed by a sustained decline in investment by state and local governments in infrastructure, has created demand, said Donald Boyd, director of fiscal studies at the Rockefeller Institute.

The record for bond proposals in a November general election was in 2006, when municipalities asked for $78.6 billion and voters approved $69.6 billion, according to Ipreo. November general-election ballots typically contain more debt in even years, when congressional and presidential elections are held, than in odd-numbered ones. Last year voters were asked to decide on $44 billion of bonds, more than twice the amount sought in 2010, and passed about 85 percent, according to Ipreo.

Bloomberg

by Darrell Preston

November 3, 2015 — 8:57 PM PST Updated on November 4, 2015 — 9:35 AM PST

NEW YORK – The second act of Puerto Rico’s long- building debt drama is about to begin, and waiting in the wings is a veteran cast. It includes an embattled politician, his foe, the former executive of a failed bank, and those with roles in the Wall Street bailout, Argentina’s default and America’s biggest municipal bankruptcies.

Locked out of the capital markets as it edges toward a record-setting default, the Caribbean island of 3.5 million people may run out of cash as soon as this month. With $354 million of debt payments due on Dec. 1, Gov. Alejandro Garcia Padilla would have to decide whether to pay bondholders or conserve whatever funds he can find to keep the government running.

While Puerto Rico has already defaulted on securities backed by legislative appropriations, it may mark the first time the government has failed to make good on obligations guaranteed by its full faith and credit — a pivotal moment that could haunt it for years.

With a debt load of $73 billion, more than any state but California or New York, and an economy that’s contracted in all but one year since 2006, Garcia Padilla says the island can’t afford to pay back what it owes. Puerto Rico expects to have a negative cash balance of $30 million this month, the governor told a U.S. Senate committee on Oct. 22, and the administration may cut civil servants to a three-day work week to conserve cash. The debt restructuring the governor wants to push through would be by far the largest ever in $3.7 trillion municipal market.

Here are the men and women who will chart the way:

-Alejandro Garcia Padilla, governor. Before becoming governor in January 2013, Garcia Padilla, a graduate of the Interamerican University of Puerto Rico School of Law, served in Puerto Rico’s senate. The 44-year-old is a member of the Popular Democratic Party, which is aligned with Democrats in the U.S. and favors keeping the island a territory over pushing for statehood. He raised excise taxes, increased the retirement age for government workers, and pushed to change the sales tax to a value-added tax, a step aimed at cracking down on widespread evasion.

He’s been unable to revive the economy or eliminate chronic deficits that have left the government reliant on borrowed money. In April, Garcia Padilla said it would be “folly” to default. By late June he reversed course, saying the deep spending cuts or tax increases that would be required to pay its debts would be too much to bear.

His administration plans to offer investors a chance to exchange their bonds for new securities that will be less costly to the government, though no details have been released and it’s unclear how many bondholders will go along. Facing re-election next year, Garcia Padilla hasn’t said whether he’ll run again. El Nuevo Dia, the island’s biggest newspaper, reported that he won’t so that his handling of the debt crisis is freed from the pressure of election-year politicking. About 12 percent of Puerto Ricans approve of Garcia Padilla’s performance, according to a poll published by El Nuevo Dia.

– Pedro Pierluisi. Puerto Rico’s sole representative in Congress since 2009 and president of the New Progressive Party that favors statehood, Pierluisi, 56, is planning his own gubernatorial run and has been critical of Garcia Padilla, giving the island a somewhat divided voice in Washington. With Garcia Padilla’s support, he proposed a bill that would allow the government-run power company and other struggling agencies to file for bankruptcy protection in U.S. court.

It’s gone nowhere for lack of a single Republican co-sponsor. In testimony prepared for a September hearing, he said debt guaranteed by the central government should be “sacrosanct” and that the governor had “badly tarnished” the island’s reputation by not standing firmly behind it.

A graduate of Tulane University, he has a degree from George Washington University Law School and worked as a lawyer in private practice before taking office.

– Melba Acosta, Government Development Bank. A Harvard University MBA, Acosta has been president of the GDB, which handles the commonwealth’s financial affairs, since October 2014 and previously worked as Puerto Rico’s Treasury Secretary. From 2004 to 2010, she was a vice president, chief operating officer and chief financial officer with R&G Financial Corp. and its subsidiary R-G Premier Bank, one of three Puerto Rico lenders that closed following the island’s severe recession. While at the GDB, she attempted to negotiate a restructuring of some of the agency’s debt in a trial run of what may be attempted on a larger scale. The talks collapsed last month.

In addition to her MBA, Acosta, 49, has degrees in accounting and law from the University of Puerto Rico.

– Jim Millstein, Millstein & Co. Millstein, the founder and chief executive officer of the financial advisory firm that’s serving as Puerto Rico’s main debt adviser, has experience with high-profile financial messes. Before starting his firm, from 2009 to 2011 Millstein served as the U.S. Treasury’s chief restructuring officer, responsible for monitoring the financial-industry bailouts from the 2008 credit- market crisis. He was the principal architect of American International Group Inc.’s recapitalization.

Millstein, 60, is a former co-head of Lazard’s restructuring group and before that was head of the corporate turnaround practice at Cleary Gottlieb Steen & Hamilton. At Lazard, he represented Argentina in connection with the exchange offer for its international bonds, which may serve as a template for Puerto Rico. A Princeton University graduate, he has a law degree from Columbia Law School.

– Antonio Weiss, Treasury Dept. After his nomination to serve as undersecretary for domestic finance was blocked by Sen. Elizabeth Warren over his long career on Wall Street, Weiss joined Treasury as an adviser to Secretary Jack Lew and serves as the point person for Puerto Rico. The Obama administration has suggested that Congress give Puerto Rico’s entire government the power to file for bankruptcy to allow for an orderly workout in court, a broader scope than Pierluisi’s stalled bill. It’s also proposed increasing health-care spending and tax credits for the island to help boost the economy.

At Lazard, Weiss was the head of investment banking, advising Walgreen in its acquisition of Alliance Boots and cigarette maker Reynolds American in its takeover of rival Lorillard. He was formerly publisher of the storied literary magazine The Paris Review, where he worked as assistant to founder George Plimpton just after graduating from Yale University. Weiss, 49, also has an MBA from Harvard.

– Lee Buchheit, Cleary Gottlieb. Buchheit, 65, who worked on the restructuring of Greece’s debt, is partner in the sovereign practice group at the firm, which is serving as legal adviser to Puerto Rico. Over three decades his clients have included Russia, Mexico, the Philippines, Iraq and Iceland. Buchheit received International Financial Law Review’s inaugural Lifetime Achievement Award for his contributions to international finance. Buchheit earned an undergraduate degree from Middlebury College and a law degree from the University of Pennsylvania Law School.

– Harrison Goldin, Goldin Associates. Harrison Goldin, 79, the firm’s managing director, was involved in one of the biggest municipal financial crises: New York City’s mid-1970s meltdown. Known as “Jay,” he served as the city’s comptroller when it was pushed to the brink of bankruptcy by years of unsustainable borrowing to pay bills, just like Puerto Rico. Goldin’s firm was hired to advise a group of investors holding some of Puerto Rico’s $13 billion of general- obligation bonds, the second biggest chunk of the island’s securities. He’s a graduate of Princeton and Yale Law School.

Bondholders, however, are far from unified. That’s because some 17 arms of the commonwealth have sold securities that are backed by different legal protections and revenue streams, setting up a clash between various bondholders over who will be saddled with the steepest losses. Case in point: a group formed to represent more than three dozen hedge funds holding $5 billion of Puerto Rico bonds disbanded, with the firms breaking into smaller alliances that would better represent their interests.

– Lisa J. Donahue, AlixPartners. Donahue, a managing director of the advisory firm’s turnaround practice, serves as the chief restructuring officer for the Puerto Rico Electric Power Authority, the government-run electric company that’s been negotiating for over a year in an effort to cut its $8 billion of debt. She was appointed in September 2014. She previously served as executive vice president and CFO at Calpine Corp., an independent power producer, and CFO for the Atlantic Power Corp. The authority has reached an agreement with some bondholders to restructure the agency’s debt, which would leave investors taking losses of as much as 15 percent. Finishing the rest of the deal has proved difficult. The utility still needs to get agreements with insurers that guarantee the debt against default. Donahue has a degree in finance and accounting from Florida State University.

– David Brownstein, Citigroup. Brownstein is head of public finance at the New York-based bank, the third-largest underwriter of U.S. municipal bonds during the first half of the year. Citigroup was hired to be the lead banker for the restructuring of Puerto Rico’s debt and hosted a July meeting between investors and officials at its Manhattan headquarters. Brownstein was the top banker to Jefferson County, Alabama, on the water and sewer refinancing that brought it out of the second-biggest U.S. municipal bankruptcy. He also worked with Detroit following its financial collapse. Brownstein has a bachelors degree from Beloit College.

Bloomberg

by Martin Z. Braun

Contributors: Michelle Kaske and Laura J. Keller in New York and Catarina Saraiva in Washington.

Nov. 6, 2015

Long associated with index funds, Vanguard Group didn’t launch its first municipal-bond index fund until this past August.

At an annual cost of 0.12%, Vanguard Tax-Exempt Bond ETF (VTEB) tracks the S&P National AMT-Free Municipal Bond Index, the same one tracked by iShares National AMT-Free Muni Bond ETF (MUB), which has a 0.25% expense ratio .

Vanguard, which already had active mutual funds for the sector, hasn’t set off fireworks with the ETF so far. The iShares fund dwarfs the Vanguard ETF in assets ($5.6 billion to $60 million) and average daily volume, where differences in expense ratio can be made up in trading spreads.

Yet, Vanguard’s launch is sure to bring added focus to muni-bond indexing and passive-investing strategies. Through Sept. 30, actively managed municipal-debt funds held $573 billion, compared with just $20 billion for index funds, the largest active/passive discrepancy for eight distinct fund types tracked by Morningstar Inc. And 85% of those passive funds were in ETFs.

Muni bonds (and funds) are typically held by investors in higher marginal tax brackets, those who benefit the most from the state, federal and local tax-exempt status of interest income from munis. Moreover, the muni market isn’t nearly as large or as liquid as those for federal or corporate debt—so trading individual bonds can be a challenge.

“In a more fragmented market, the sampling approach a manager uses to align with an index is extremely important,” says Peyton Studebaker, managing director of Caprin Asset Management in Richmond, Va. His clients are invested in the $1.2 billion Market Vectors Intermediate Municipal ETF (ITM). The fund, which costs 0.24%, has an effective duration of 7.1 years compared with 4.7 years for the more broadly based MUB.

“Intermediate muni ETFs offer a more-reasonable risk/reward in today’s interest-rate environment,” adds Mr. Studebaker. ITM yields 2.1%, or 3.52% tax equivalent at the 39.6% marginal federal rate. MUB yields 1.63%, or 2.89% tax equivalent as of Nov. 2, according to each company.

It remains to be seen whether Vanguard’s entry into the market will win over customers from existing funds, including the $1.5 billion SPDR Nuveen Barclays Municipal Bond ETF (TFI), or expand interest in muni-bond indexing generally.

THE WALL STREET JOURNAL

By ARI I. WEINBERG

Updated Nov. 8, 2015 10:02 p.m. ET

Mr. Weinberg is a writer in New York. He can be reached at reports@wsj.com.

The short of it is this: Dallas’ pension fund for police and firefighters is in big trouble. This week, the City Council heard from an outside auditor that the fund has $5 billion in commitments that it doesn’t have assets to pay, based on the new way the Governmental Accounting Standards Board will begin calculating pension liabilities. Previously, those commitments were calculated to be $1 billion.

In light of the $4 billion reassessment, both the Moody’s and Standard and Poor’s ratings services downgraded the city’s credit rating. Moody’s downgraded the city’s bond rating from its second highest level, Aa1, to its third highest Aa2. S&P did the same, using a slightly different lexicon — Dallas went from AA+ to just AA. The downgrades come less than a week after the city released $227 million in capital improvement bonds. Matt Fabian, a municipal finance analyst with Municipal Market Analytics, said that the credit downgrades in and of themselves shouldn’t cause an immediate crunch for the city, thanks to a friendly bond market and the high perch from which Dallas’ bond rating has only slightly dropped.

“Right now [municipal bond] yields are at or near an all-time low. That means that there aren’t enough bonds available for all the investors that want to buy them. They’re falling all over each other to buy bonds, to buy income for their municipal bond accounts, and so the penalty that Dallas is apt to pay is minimal,” Fabian says. “[Dallas’] ratings are still very solid in the AA category. That’s still an excellent rating. Typically, a city with a rating in the AA category or above receives minimal credit scrutiny from anyone.”

The ratings themselves, as they stand, are not a big problem, but things could get worse, Fabian says, if the city doesn’t show the political will to deal with the massively underfunded system.

“Investors are becoming a lot more sensitive to headline risks related to pensions, because pensions can create political instability. The debate about pensions can have a meaningful impact on how the city does business. Investors have been far more cautious on this topic than almost any other,” he says. “If the city lets things fester and get worse, a penalty that it pays could easily become much larger and the rating downgrades could accelerate. [The ratings cut] is a clarion call to the city to take action.”

Unfunded pension liabilities pile up, in part, because cities defer current costs (salaries) and take on future costs (pensions), Fabian says. Dallas pays its police officers some of the lowest salaries in North Texas but has one of the most generous pension systems. Given appropriate circumstances, it is possible for Dallas cops and firefighters to retire as millionaires, something Dallas police representatives have cited as one of the few things that can keep officers in the department. No matter how much retirees expect to get paid, it won’t matter if the pension system goes broke, something Moody’s warns could happen by 2038. Dallas can come out of the mess no worse for the wear, Fabian says, if it takes aggressive action to limit new liabilities and pay off old ones.

“Dallas could be a poster boy for fiscal management if it addresses this problem aggressively, but more likely than not, how these situations work out is that the large liabilities are very difficult to service,” he says.

So far, Dallas has hired a new executive director, Kelly Gottschalk, for the pension fund and suspended enrollment in the lucrative “DROP” program, which allowed police officers and firefighters to collect and reinvest retirement benefits at high rates while they were still on the job. According to Fabian, one way or another, the only way to save the fund is to cut benefits, potentially through negotiations with the city’s uniformed personnel, or increase income, which could happen through increased taxes or better performance from the funds investments.

THE DALLAS OBSERVER

BY STEPHEN YOUNG

FRIDAY, NOVEMBER 6, 2015

Voters approved a way to increase transportation funding without raising taxes or tolls. But some say it’s a bad approach.

Texas voters approved a measure Tuesday to provide more money for roads without raising taxes, adding debt or adding toll roads. The measure could add as much as $2.5 billion a year for the next decade toward building and repairing the state’s congested roads, and even more after 2019.

The voters’ approval is a major victory for Republican Gov. Greg Abbott, who vowed in his campaign last year to address the traffic problems that have come along with the state’s recent population surge. Legislators ultimately crafted the measure that went to the voters, which was called Proposition 7.

When it became clear that Prop. 7 and six other ballot measures passed Tuesday night, the governor expressed his gratitude on Twitter. “THANKS Texans for making Texas freer & stronger with lower taxes & better roads. Texas remains best state in U.S.,” he wrote.

The measure is the latest effort by Texas leaders to cope with the stresses more residents put on the state’s transportation networks without raising taxes. After all, part of the reason to move to Texas is that the state has low taxes. Texas hasn’t raised its gas tax since 1991.

But more than 1,000 new people a day mean bigger traffic jams in the Austin, Dallas and Houston regions. The additional taxes they pay don’t cover the cost of expanding and maintaining roads. The recent increase in oil production, which began with widespread adaption of fracking technologies, also strained roads that connect oil fields to the rest of the state.

Texans have turned increasingly to toll roads to handle the increase in traffic. But toll roads are unpopular. Voters may not way to pay higher taxes, but they also don’t want to have to pay just to drive on their roads (which explains a prohibition on Prop. 7 money going toward toll roads). Last year, the state used its flush rainy day fund to direct up to $1.7 billion more a year toward transportation. But that still fell short of the $5 billion a year that state transportation officials say is needed to maintain current levels of congestion. And the gap grew even bigger after oil prices fell this year, because oil tax revenues fund the rainy day fund.

So rather than adding new taxes, Prop. 7 will pull new money from certain existing taxes and direct it toward transportation. So, for example, once the sales tax — the state’s main source of tax revenue — brings in more than $28 billion a year, the next $2.5 billion will be devoted exclusively for transportation every year for the next 10 years. A similar mechanism will apply to the vehicle sales tax starting in 2019: Once collections reach $5 billion a year, 35 percent of the receipts beyond that will go toward roads.

It’s a more complicated solution than simply raising the gas tax or increasing vehicle registration fees, acknowledged Jack Ladd, the president of Move Texas Forward and the treasurer of a related political action committee backing Prop. 7. “There is no political will in Austin to do that” among Democrats or Republicans, he said. Conservatives don’t want to increase taxes at all, while liberals worry that gas taxes and registration fees hurt poor people.

“It’s also a question of priority: How big of a priority is transportation funding in Texas?” Ladd said. “You have to say, if you know the facts, it’s a really big problem and it should be addressed.” Prop. 7 puts transportation funding ahead of other priorities, like health care and education. But Ladd said those areas would also benefit from better roads.

“You can’t get to a hospital, you can’t get to a school without roads,” he said. “It’s not just a quality of life issue, it’s also a jobs issue.” There was little organized opposition to the measure, but critics worried that the measure will be too strict, because it puts roads ahead of schools, health care and even other kinds of transportation for new state money.

Jay Crossley was one of those who expressed doubts. Crossley, executive director of Houston Tomorrow, which promotes urban issues such as walkable neighborhoods, worried the ballot measure would promote bad transportation policy for a decade, because Prop. 7 specifies that the designated money could only be spent on roads — not on public transportation, bike paths or sidewalks.

The Texas Department of Transportation “has made it very clear that, if they could have a decade of guaranteed funding, it makes all the finances work better to build a lot of unnecessary roads,” Crossley said before the vote. According to Crossley, supporters of the measure essentially said, “We don’t want people to be able to change their mind.

We don’t want the people of Texas to be able to say, ‘Maybe we want transit. Maybe we would rather have safe streets. Maybe we want a transportation system that doesn’t subsidize sprawl.’”

(Crossley stressed that he was speaking for himself; Houston Tomorrow did not take a position on Prop. 7.)

But Ladd, the proponent of Prop. 7, said lawmakers made sure the measure would expire after 10 years, so lawmakers will review the approach later. “Future legislators who may not have been around when Prop. 7 passed … could look at it and say we want to raise taxes instead, we want to do something else, we don’t want to do this anymore,” he said. “There are other ways to solve this problem, but we have to fix it now.”

GOVERNING.COM

BY DANIEL C. VOCK | NOVEMBER 4, 2015

NEW YORK (Standard & Poor’s) Nov. 4, 2015 — Standard & Poor’s Ratings Services today said that its ratings on Atlantic City, N.J. remain on CreditWatch with negative implications, pending the release of an updated report from the city’s Emergency Manager and action on several bills approved by the state legislature. Standard & Poor’s expects to resolve or update its CreditWatch within the next 60 days.

We lowered the general obligation (GO) bond rating to ‘B’ and placed it on CreditWatch with negative implications on Aug. 3, 2015 (for more information on the GO rating, please see the summary analysis on Atlantic City, published on Aug. 3, 2015, on RatingsDirect).

While the state’s Local Finance Board approved the city’s fiscal 2015 budget last month, an anticipated updated report from the city’s Emergency Manager has not been released and there has been no action yet on several bills passed by the state legislature.

In compliance with state law, the city’s 2015 budget is balanced. However, this is achieved through anticipated revenues of $33.5 million in redirected casino taxes and $38.9 million in deferred pension and health care expenses. The governor hasn’t signed into law the legislature-approved redirection of casino taxes. The Atlantic City budget fully funds its annual requirements for settled tax appeals and was adopted in time for the mailing of fourth-quarter tax bills. The city reports that it will be able to make its $11 million December 2015 debt service payment if it does not receive the anticipated redirected casino tax revenue.

We have determined, based solely on the developments described herein, that no rating actions are currently warranted. Only a rating committee may determine a rating action and, as these developments were not viewed as material to the ratings, neither they nor this report were reviewed by a rating committee.

Primary Credit Analyst: Timothy W Little, New York (212) 438-7999;
timothy.little@standardandpoors.com

Secondary Contact: Lisa R Schroeer, Charlottesville (1) 434-220-0892;
lisa.schroeer@standardandpoors.com

DALLAS (Standard & Poor’s) Nov. 4, 2015 — Standard & Poor’s Ratings Services said today it lowered to ‘AA’ from ‘AA+’ its long-term rating and underlying rating (SPUR) on Dallas’ parity general obligation (GO) bonds. We also assigned our ‘AA’ rating to the city’s series 2015 GO refunding and improvement bonds. The outlook is stable.

In addition, Standard & Poor’s lowered to ‘A’ from ‘A+’ its long-term rating and SPUR on the Downtown Dallas Development Authority’s (DDDA) tax increment contract revenue bonds, issued on behalf of the city of Dallas. We also lowered to ‘A’ from ‘A+’ the rating on the Dallas Convention Center Hotel Development Corp.’s series 2009A, B, and C hotel revenue bonds, issued on behalf of Dallas. The outlook for both ratings is stable. (For more information, see the summary analyses on DDDA and Dallas Convention Center Hotel Development Corp. published Nov. 4, 2015.)

Standard & Poor’s also affirmed its ‘A-1+’ short-term rating on Dallas’ series 2010A and C GO commercial paper notes The rating reflects our view of the city’s strong general creditworthiness and liquidity.

“The GO debt downgrade is due to the city’s rising pension liabilities and lack of a sufficient plan to address them in the near term,” said Standard & Poor’s credit analyst Jennifer Garza. “The stable outlook reflects our view of the city’s consistent financial performance and economy, which is supported by very strong management.”

The pledge of an ad valorem property tax, limited to $2.50 per $100 of assessed valuation (AV) by state law, secures the GO bonds. In our opinion, the city has ample flexibility under the tax cap given its current tax rate of 79.7 cents per $100 of AV.

The GO debt rating reflects the city’s:

• Adequate economy, with access to a broad and diverse metropolitan statistical area;
• Very strong management, with “strong” financial policies and practices under our Financial Management Assessment methodology;
• Adequate budgetary performance, with an operating surplus in the general fund but an operating deficit at the total governmental fund level;
• Strong budgetary flexibility, with an available fund balance in fiscal 2014 of 14.4% of operating expenditures;
• Very strong liquidity, with total government available cash of 46.0% of total governmental fund expenditures and 1.8x governmental debt service, and access to external liquidity we consider exceptional;
• Very weak debt and contingent liability position, with debt service carrying charges of 14.6% of expenditures and net direct debt that is 145.3% of total governmental fund revenue, as well as a large pension and other postemployment benefit liability and the lack of a plan to sufficiently address the obligation; and
• Strong institutional framework score.

Los Angeles is starting to host a new type of hybrid infrastructure — a street light that doubles as a mini-cell tower — through a public-private partnership.

Royal Philips, which makes energy-efficient LED light bulbs, has teamed up with communications technology firm Ericsson to create the “smart pole,” which features energy-efficient lighting and 4G LTE wireless service, reported Los Angeles Magazine. The poles also can “monitor and regulate energy usage in real time,” reported Annenberg TV News.

Philips will cover the costs of providing and installing the poles on city streets and pay Los Angeles a portion of the rent it charges wireless carriers to use the cell towers. The city expects to receive $1,200 per year from each of the 100 poles to be installed this year. Revenues will rise to $720,000 annually from a network of 600 poles by 2018, said Ed Ebrahimian, director of the city’s street lighting bureau.

Ebrahimian hopes to negotiate additional P3s to continue expanding coverage. “I would think two or three thousand over the next five years. We are working with other carriers, not just Philips or Ericsson,” he said.

San Jose is preparing to install this infrastructure as well.

The smart pole concept is just one of the P3-based approaches states and cities are using to provide universal access to wireless technology. Kentucky is conducting a partnership to install statewide broadband and Lake Oswego, Ore., is considering a deal to install its own network as well.

NCPPP

November 6, 2015

Changes Rating Prospects for other California General Obligation Bonds

​For the last several years, Orrick’s General Obligation Bond Group has led an effort to improve the rating agencies’ understanding of the special character of California local agency general obligation bonds. The purpose of the effort was to improve the ratings and reduce the borrowing costs associated with California General Obligation Bonds for all school and community college district, city, county, and other local governments that issue General Obligation Bonds. Today that effort has borne fruit.

In partnership with San Diego Unified School District, Orrick drafted and assisted in the enactment of Senate Bill 222, which established a statutory lien for the benefit of bondholders on the property taxes levied to pay general obligation bonds. SB 222 was signed into law on July 13, 2015. Several rating agencies reacted by saying that while SB 222 was positive, it was not likely sufficient to change the ratings on California General Obligation Bonds because, while the property taxes levied to pay California General Obligation Bonds would ultimately be required to be applied to pay the bonds, the application of the taxes to the payment of the bonds could be temporarily interrupted by the automatic stay in the event of an issuer bankruptcy.

In response to the ratings agencies, Orrick drafted and delivered an opinion to certain rating agencies addressing whether the property taxes levied to pay general obligation bonds would be considered “special revenues,” and thereby not subject to the automatic stay.

Orrick and San Diego Unified School District presented the opinion and its bankruptcy analysis to several rating agencies. On November 4, 2015, Fitch assigned a “AAA” rating to $550 million of San Diego Unified School District 2016 General Obligation Bond (Dedicated Unlimited Ad Valorem Property Tax Bonds). Fitch’s announcement refers to and concurs with the opinion it received that the property taxes levied to repay the bonds would be “special revenues” in the event of a district bankruptcy, and states that “as a result, the rating is based on special tax analysis without regard to the District’s financial operations.”

This signals what should become a sea change in the rating and sale of school district, community college district and other local agency general obligation bonds in California.

Please contact any of the following members of the Orrick General Obligation Bond Group with questions or for further discussion:

Mary Collins
415-773-5998
marycollins@orrick.com

Eugene Clark-Herrera
415-773-5911
ech@orrick.com

Don Field
213-612-2287 / 949-852-7727
dfield@orrick.com

John Palmer
415-773-4246
jpalmer@orrick.com

11-04-2015

Hawkins Delafield & Wood LLP, a national leader in municipal finance and public law, announced today that it will open a new office in Ann Arbor, Michigan. The new office will be the firm’s first office in the Midwest region. A new partner, Lisa Hagan, will be resident in the Ann Arbor office. She previously was a senior principal in the Ann Arbor office of Miller, Canfield, Paddock and Stone, P.L.C.

Howard Zucker, a member of the Hawkins management committee, commented on the new office and the lateral hire: “For many years, Hawkins has enjoyed an active public finance practice in the Midwest. The opportunity to welcome a new lawyer to our firm, and to open an office near so many of our valued clients at the same time, is extraordinarily exciting. For existing Hawkins clients, this represents yet another example of Hawkins’ continued commitment to public finance and public projects.”

Lisa Hagan received her LL.M. in Taxation from Georgetown University Law Center, her J.D. from Michigan State University College of Law, and her B.A. from Michigan State University. Her practice is focused primarily on health care, higher education and housing financings.

Hawkins is of the municipal industry’s more storied law firms. Founded in 1854, the firm gained a reputation in the 19th Century for specialized expertise in the area of governmental finance. The firm continues to break new ground for its clients in finance transactions, including public power, transportation, housing, health care, higher education, cultural institutions and public contract representation, including public/private partnerships. Hawkins is perennially rated among the very top bond counsel and underwriters’ counsel nationally.

Hawkins has more attorneys (approximately 100) devoted to public finance and public projects than any law firm in the nation. The new Ann Arbor office will be the firm’s ninth office, joining New York, Washington D.C., Newark (NJ), Hartford, Los Angeles, San Francisco, Sacramento and Portland (OR).

Virginia’s capital is raising beer money — $23 million of it.

Richmond will sell bonds next week to build a brewery for Escondido, California-based Stone Brewing Co., the ninth-largest U.S. craft-beer maker, on property that’s been vacant for four decades. Stone will pay the 218,000-person city to lease the facility and won’t be on the hook to repay investors. Taxpayers will.

It may be the first time a U.S. city has put its credit on the line for a maker of the beverage Americans swill millions of barrels of, and it shows how the craft-beer boom has been drafted into the long-running bidding wars among states and cities for businesses. Elsewhere, the decision to stand behind less-flourishing corporations hasn’t always panned out: Rhode Island is stuck with debt that lured a now-bankrupt video game startup, while Moberly, Missouri, was burned by issuing bonds for an artificial-sweetener plant that was never built.

“There’s a growing movement for craft brewing, and if there are cities and states out there trying to encourage it, it’s a way of creating a new revenue base,” said Howard Cure, managing director of municipal research in New York at Evercore Wealth Management, which oversees $6 billion. “These companies are smart and they play one city against another.”

Craft beer, which comes from breweries that make no more than 6 million barrels a year, is the fastest-growing segment of the $102 billion U.S. market.

With the deal, Richmond is counting on the popularity of Stone’s brands such as Arrogant Bastard Ale and Stone Cali-Belgique IPA. The 19-year-old company’s production jumped 35 percent last year, twice as fast as craft breweries nationwide, despite a surge in competition from upstarts and behemoths such as Anheuser-Busch InBev NV.

With 22 million barrels produced in 2014, such small-scale producers account for 11 percent of the U.S. beer market, up from 5 percent in 2010, according to the Boulder, Colorado-based Brewers Association.
The growth of the industry — and its power as a tourist draw — has caught the attention of elected officials across the country, said Bart Watson, the chief economist for the association, which represents more than 2,800 companies.

“As the craft beer market has grown and these companies have grown into bigger job creators and bigger sources of economic impact, the reception from government officials has grown as well,” Watson said. “We’ve entered this era of second facilities in different parts of the country. There’s a lot more courting going on.”

Sierra Nevada Brewing Co. and New Belgium Brewing Co., the third- and fourth-largest craft brewers, have begun operating East Coast facilities in North Carolina after receiving government incentives. Lagunitas Brewing Co., the sixth-largest, set up its second facility in Chicago, though it rebuffed the junk-rated city’s offers of assistance.

Job Creator

Stone picked Richmond over more than 300 other potential sites for the brewery, which will also have a restaurant and beer garden. It’s projected to create 288 jobs.

Economic incentives were available at all of its other top sites, said Pat Tiernan, Stone’s chief operating officer. What set Richmond apart was the opportunity to revamp an area near the James River that was never rebuilt after flooding in the 1970s, he said.

“We wanted to gauge where we got the most buzz and enthusiasm and excitement, not just with fans, but with the community, the governments at the state and local level,” Tiernan said. “How they decided to fund it really had nothing to do with the selection of the site.”

Tammy Hawley, a spokeswoman for Richmond Mayor Dwight Jones, said no one from the city finance department was available to comment until after the bond sale, which is scheduled for next week. Moody’s Investors Service rates the $23 million of taxable debt Aa2, its third-highest grade. The credit-rating company said Stone’s payments to lease the brewery will match or exceed what the city will spend on principal and interest.

“The dollar amount for the city of Richmond is not particularly burdensome, and the city of Richmond is budgeting to pay for debt service every year,” said Julie Beglin, a Moody’s analyst. The city has $740 million of general obligations. “That’s different from other projects that we’ve occasionally seen where the anticipation is the project will pay and the city may or may not have available funds to pay debt service if that project failed.”

One example of a bust: Key West Brewery Inc. Based near the southernmost point of the continental U.S., it defaulted in 2001 on $7.4 million of revenue bonds that it was responsible for repaying. That company was tiny in comparison to Stone: By borrowing the money, it was seeking to boost production to 39,600 barrels a year from 3,000.

By contrast, the California brewer’s output will exceed 300,000 barrels for the first time in 2015, Tiernan said. He said the Richmond facility will eventually be able to make 700,000. Stone is also planning to open a brewery in Berlin.

Beer Lovers

In a sign of Stone’s influence in the industry, it has the fourth-most-popular India pale ale on the website BeerAdvocate and the three most-noted American strong ales. The brewery is known for flaunting the superiority of its beers with names like Sublimely Self-Righteous.

Stone even taunts its customers, questioning whether they should drop the bottle and pick up something a bit more banal.

“It is quite doubtful that you have the taste or sophistication to be able to appreciate an ale of this quality and depth,” says the Arrogant Bastard label.

Richmond is betting on the opposite.

Bloomberg

by Brian Chappatta

November 1, 2015 — 9:01 PM PST Updated on November 2, 2015 — 7:31 AM PST

Connecticut passed a budget in June that boosted funding for transportation projects, made required pension contributions and scaled back a tax increase on businesses. It appeared balanced, removing the risk of a downgrade from Fitch Ratings.

The good news didn’t last long.

Four months into the fiscal year, Connecticut is facing a $118 million deficit, thanks in part to a stock-market slide that erased more than $3 trillion from share prices before it ended in late September. With just $406 million in its rainy-day fund, about one-third of the pre-recession peak, Democratic Governor Dannel Malloy and lawmakers are working this week to figure out how to shore up the finances of a state that’s home to more hedge-fund money than any state but New York.

With Illinois and Pennsylvania still without budgets for the year that began July 1, Connecticut’s struggle shows that passing a spending plan isn’t enough if projected revenue doesn’t materialize. To stabilize the state’s finances, Malloy, who has already cut funding for hospitals and welfare programs, is aiming to eliminate 500 government jobs, overhaul the retirement system and change the way businesses are taxed to keep companies from leaving.

“That a budget gap has opened up so early in fiscal 2016 is definitely concerning,” said Paul Mansour, head of municipal research in Hartford, Connecticut, at Conning, which holds the state’s bonds among its $11 billion of local debt. “You have revenue coming in below projections, low reserves and political pressures not to cut social services. It’s when you combine all these things together that you get concerned.”

Connecticut is the wealthiest U.S. state by per-capita income, with an economy fueled by the finance industry. It had some 250 hedge-fund companies overseeing about $335 billion in 2013, according to the Connecticut Hedge Fund Association. Only New Yorkers rely on capital gains for a greater share of their income, said Carl Thompson, a municipal analyst in Boston at Eaton Vance Management, which oversees about $30 billion of local debt.

That leaves the government’s revenue sensitive to market routs like the one in August, when the Standard & Poor’s 500 index lost 11 percent in six days. The bout of selling, the worst in four years, wreaked havoc with the Connecticut’s tax-collection forecasts, despite the rebound that’s left stocks with gains for the year.

Rippling Down

That volatility is one reason tax collections will likely fall short of expectations, Office of Policy and Management Secretary Ben Barnes said in a letter to Comptroller Kevin Lembo last month. Lembo said the state’s economy has also been restrained by the disappearance of 14,900 financial-services jobs since the recession, which has weighed on wage growth.

“Until the overall growth in the state employment numbers results in higher wage growth, which is consistent with an expanding economy, the withholding portion of the income tax will continue to present significant budget challenges,” Lembo wrote.

Municipal-bond investors are demanding higher yields to hold Connecticut debt instead of other securities. Ten-year Connecticut general obligations yield 2.61 percent, about half a percentage point more than benchmark debt. That gap is near the most since Bloomberg data begin in January 2013 and up from as little as 0.27 percentage point in January.

Stable Outlook

Fitch took Connecticut away from the brink of a downgrade in July, when it lifted the outlook on its AA rating to stable because of the balanced budget. Under that plan, Malloy kept his pledge to maintain full pension contributions. He also won a higher sales-tax rate for transportation projects, one of his biggest initiatives, and reduced business-tax increases after companies including General Electric Co. threatened to move.

Connecticut has ample time in the current year to make adjustments to the deficit, said Douglas Offerman, the Fitch analyst in New York who monitors the state. It’s easier to tweak a passed budget than govern without one, like Illinois and Pennsylvania, he said.

“This was from all perspectives a pretty decent budget that happens to be in a state that has very volatile revenue streams,” said Thompson, the analyst at Eaton Vance, which owns Connecticut bonds. “With the stock market, their revenue projections change and that can really be a very sudden, unpredictable thing.”

Faced with the latest deficit forecast, Malloy said Oct. 28 that the state should cut its workforce by 500 in the current fiscal year. Connecticut is also deferring scheduled raises for 1,600 managers and negotiating over contracts with most bargaining units, according to a presentation titled “Connecticut’s Economic and Budgetary Reality.”

Barnes, Malloy’s budget official, is involved in negotiations over curbing the deficit and wasn’t available to comment, said Christopher McClure, a spokesman for the office of policy and management. Connecticut will release new revenue estimates on Nov. 10.

“Our plan is to set priorities and make smart, pragmatic decisions about spending cuts now, so that Connecticut continues to live within its means,” McClure said in a statement.

Bloomberg

by Brian Chappatta

November 3, 2015 — 9:01 PM PST Updated on November 4, 2015 — 5:58 AM PST

Puerto Rico Governor Alejandro Garcia Padilla’s administration sent to the island’s legislature a bill that would give its main electricity provider power to restructure about $8.3 billion of debt.

The Puerto Rico Electric Power Authority, known as Prepa, has been negotiating since August 2014 with its creditors on how to ease the utility’s debt payments and modernize a system that relies heavily on crude oil to produce electricity. Prepa faces a $1 billion shortfall for the fiscal year ending June 30, 2016, according to the governor’s legislation. The utility has a $196 million interest payment due to bondholders on Jan. 1.

“With this legislation we can realize the debt relief and savings offered by the creditor compromises and make the changes and investments needed to ensure that Prepa can provide the people and businesses of Puerto Rico with reliable power, stable rates and outstanding customer service for generations to come,” Javier Quintana Mendez, Prepa’s executive director, said Wednesday in a statement.

The utility has been hindered in its attempts to reorganize its finances because the commonwealth’s agencies don’t have access to bankruptcy, as do their counterparts in the U.S. A restructuring of the utility’s debt, which would be the largest ever in the $3.7 trillion municipal market, would serve as a key first step in Garcia Padilla’s plan for the island to reduce its $73 billion debt burden. The governor said in June that the island’s debt is unsustainable and has sought to gain concessions from creditors.

Electric Rate

The legislation will seek “a reasonable and stable electric rate” Jesus Manuel Ortiz, a spokesman for Garcia Padilla, told reporters Wednesday in San Juan.

Prepa should submit a request to change energy rates so revenue will cover annual debt servicing, “including principal, interest, reserves and other requirements imposed by the accords with creditors,” according to the legislation. Revenue should also cover costs such as the purchase of fuel, investments and general administration, according to the bill.

The legislation would enable Prepa to invest $2.4 billion to upgrade plants and give Prepa the authority to enter into public-private partnerships to help finance infrastructure improvements. Prepa’s new board would consist of seven members, including two people to represent citizens, Ortiz said.

The bill also seeks to improve Prepa’s process for collecting outstanding bills from public and private entities and change the utility’s ability to collect payments from municipalities.

Prepa and some of its bondholders reached a temporary agreement in September that would require investors to take a 15 percent loss in a debt exchange. The utility is also negotiating with bond-insurance companies that guarantee about $2.5 billion of Prepa debt against default.

The bill would give legislative authority to a deal that may emerge from the negotiations.

Bloomberg

by Michelle Kaske and Alexander Lopez

November 4, 2015 — 10:22 AM PST Updated on November 4, 2015 — 1:31 PM PST

Rebecca Friedrichs’s challenge to mandatory fees could reduce labor’s political clout.

A Supreme Court decision coming by the end of June could be devastating for organized labor. The case, Friedrichs v. California Teachers Association (CTA), challenges a 1977 ruling allowing public-sector unions to charge nonmembers covered by union contracts mandatory fees to pay for the costs of collective bargaining. The lead plaintiff, Rebecca Friedrichs, is an elementary school teacher. She claims that being forced to pay money to California’s politically powerful and overwhelmingly Democratic teachers’ union as a condition of her employment violates her First Amendment rights.

Conservatives want the court to ban the mandatory fees. That would create a crisis for organized labor, about half of whose members are in the public sector; dues and fees made up $174 million of CTA’s reported $186 million in revenue in 2013. It could also cause trouble for Democrats, who depend on union support during elections. CTA reported spending $211 million on campaigns and lobbying from 2000 to 2009, according to Friedrichs’s suit, including $26 million to oppose a school-voucher proposition.

The Supreme Court has already said government workers can’t be required to fund union activities if they’re unrelated to collective bargaining. But the plaintiffs argue that collective bargaining is inherently political when the government is the employer. “One of the things people fight about in politics is, should you spend more money on teachers or police?” says Ronald Cass, a former dean of Boston University School of Law, who co-wrote an amicus brief in support of Friedrichs.

Unions’ best hope of winning rests with an unlikely ally: Antonin Scalia. He wrote in a 1991 case that, because the government requires public-sector unions to provide equal representation to nonmembers, it has an interest in making sure that service is paid for. “Where the state imposes upon the union a duty to deliver services, it may permit the union to demand reimbursement for them,” he wrote.

Scalia has also argued that the government has much more leeway to exercise control over its employees than over private citizens, a view that could help unions. “Private citizens perhaps cannot be prevented from wearing long hair, but policemen can,” he wrote in a 1990 dissent involving public employees in Illinois.

Scalia brought up police officers’ First Amendment rights again last year in a union fees case involving home-health-care workers supported by Medicaid. In oral arguments, Scalia posited a discontented cop who insisted on meeting over and over with the police commissioner to bug him for a raise: “The commissioner finally is fed up and tells his secretary, I don’t want to see this man again—has he violated the Constitution?” In that case, Scalia ended up joining the 5-4 majority opinion, which found that “quasi-public employees,” like home aides, can’t be required to pay union fees.

The biggest public-sector unions, including the American Federation of State, County & Municipal Employees (AFSCME), are already canvassing workers, asking them to become dues-paying members before the court rules on the case. Even pro-union workers may be tempted by the chance to have their representation for free, says Lee Saunders, president of AFSCME. “That’s going to be a hard choice for some people.”

by Josh Eidelson

Bloomberg Businessweek

November 5, 2015 — 4:06 AM PST

The migration of Puerto Ricans to the U.S. mainland in search of work and better living conditions is proving to be an economic benefit to growing Florida municipalities such as Orange and Hillsborough Counties, according to Moody’s Investors Service.

The number of employed Puerto Rican workers in Orange County increased by almost 18 percent between 2010 to 2014, according to a Moody’s report released Tuesday. Coastal Hillsborough’s work force from the commonwealth has increased 31 percent during the period. The state’s September unemployment rate was 5.2 percent, less than half Puerto Rico’s 11.4 percent rate.

“With the in-migration feeding the ongoing expansion of industries in Orange County, the resulting dynamic is positive for the county’s credit strength,” Nisha Rajan, a Moody’s analyst in New York wrote in the report. “This expansion further increases the need for goods and services, augmenting sales tax and other local government revenues.”

Puerto Rico’s out-migration has increased by 40 percent from 2010 to 2014, according to Moody’s. The island’s economy has struggled to grow since 2006. Officials have increased taxes, curbed government hiring and cut social programs to help fix budget deficits. The commonwealth is seeking to reduce its $73 billion debt load by negotiating with bondholders to accept losses.

Transportation and tourism-related jobs in Orlando, the center of Orange County and home to Disney World, are attracting Puerto Ricans to the area. Puerto Ricans comprised 14 percent of the population of Orange County and 8.4 percent of Hillsborough, Moody’s said.

Residents of Puerto Rico are U.S. citizens and many are bilingual, making it easy to leave the island for work on the mainland. Moody’s estimates the commonwealth’s negative migration will continue through at least 2020. About 5 million Puerto Ricans lives in the U.S., compared with about 3.65 million in the island.

Bloomberg

by Michelle Kaske

November 3, 2015 — 2:54 PM PST

When Illinois returns to the municipal market after its unprecedented 18-month borrowing drought, it may find its budget impasse will cost taxpayers millions of dollars in the coming decades.

On a $1 billion offering of 25-year tax-exempt bonds, it would cost about $175 million more now than if an equal amount was issued with spreads at 2014 levels, based on data compiled by Bloomberg that assumes the yield equals the interest rate paid. Now in its fifth month without a spending plan, signs are mounting that debt sales for cash-strapped Illinois are only going to get more expensive.

After initially planning to sell $1.25 billion in general obligations for capital needs, the governor’s office said in September that it wasn’t ready to announce any amounts or sale dates. The state’s credit rating has been cut by two of the three largest rating companies, it’s missing pension payments, and yield premiums demanded by investors are hovering near the highest since 2013. Illinois last sold debt in April 2014 for a top yield of 4.5 percent, about 1.1 percentage points more than benchmark securities. That spread has widened by about 70 basis points.

“Investors are going to ask for wider spreads over the near term if there’s not a resolution for this budgetary crisis,” said Dennis Derby, a money manager in Menomonee Falls, Wisconsin, at Wells Fargo Asset Management, which holds some of the state’s bonds among its $39 billion of municipal debt. “It’s a headline risk. It’s the potential for spreads to widen out even further.”

The Land of Lincoln’s lack of borrowing contrasts with localities nationwide that are selling bonds at the fastest pace since at least 2003. That’s saving states and cities millions of dollars as interest rates are near the lowest in half a century. Meanwhile, Illinois is sidelined by political gridlock. Republican Governor Bruce Rauner and the Democrat-controlled legislature are showing no signs of nearing an agreement for a spending plan.

Catherine Kelly, Rauner’s spokeswoman, said Illinois plans to sell bonds this fiscal year, which ends June 30. She declined to comment on why the state has gone so long without borrowing. Illinois can legally still borrow.

“Speaking very generally, state law allows bond sales in these circumstances,” according to an e-mailed statement from the Office of the Attorney General Lisa Madigan.

Kelly Hutchinson, formerly of A.C. Advisory Inc., started Monday as Illinois’s director of capital markets and will handle bond sales for the state.

But returning to the market would come at a cost, and the state doesn’t have extra money to spend these days. Investors demanded 1.7 percentage points more yield to own Illinois 30-year bonds on Nov. 3 versus benchmark munis. That’s the most of all 20 states tracked by Bloomberg.

Debt Service

Illinois is running out of funds on a daily basis, according to Comptroller Leslie Geissler Munger. Unpaid bills totaled $6.8 billion, as of Nov. 3. Still, debt service remains a priority “above everything else,” Munger said Oct. 14, after announcing the delay of a $560 million monthly pension payment in November because of the cash crunch. The December payment may also be postponed.

The postponed contributions led the State Employees’ Retirement System to request the largest-ever sum of cash from the Illinois State Board of Investment to cover retiree benefits. Its pensions are already underfunded by more than $100 billion after years of skipped contributions.

Moody’s Investors Service slashed Illinois’s rating to Baa1, three steps above speculative grade, on Oct. 22, following a downgrade from Fitch Ratings three days earlier to an equivalent BBB+. Moody’s also lowered the ratings of six public universities less than a week later, citing their exposure to the budget turmoil.

“The state’s low rating and trading levels preclude them from taking much advantage, if any, of lower interest rates,” said Paul Mansour, head of municipal research in Hartford, Connecticut, at Conning, which holds Illinois debt among its $11 billion of state and local securities. “It does hurt that way.”

Market Access

In the past, credit downgrades have delayed bond deals for the state. Illinois had to cancel a planned $500 million general-obligation bond sale in January 2013 because Standard & Poor’s dropped its rating five days before. Yet about two months later it returned with an even bigger $800 million offering that had narrower 10-year yield spreads than the market average.

Not everyone expects Illinois will stay a stranger to the $3.7 trillion municipal market despite its financial woes.

“We’ve seen them in the past when market access seemed to be somewhat tenuous come to market with a big deal that they priced very cheap,” said Jason Diefenthaler, who runs a high-yield muni fund at Wasmer Schroeder & Co. in Naples, Florida. The company owns Illinois bonds. “Problem issuers tend to come to market more often.”

Long-term, the budget situation is fixable, according to Ty Schoback, a senior analyst in Minneapolis at Columbia Threadneedle Investments LLC, which holds some Illinois debt among its $30 billion of municipal holdings.

“As long as there’s adequate compensation in price, in addition to us having a view that they will ultimately come to a fix and get past this political gridlock, we certainly would consider additional purchases,” said Schoback. “You need to be compensated for the headline risk and the political uncertainty and these BBB+ downgrades.”

Bloomberg

by Elizabeth Campbell and Brian Chappatta

November 4, 2015 — 9:00 PM PST Updated on November 5, 2015 — 6:30 AM PST

Prices in the $3.7 trillion municipal-bond market are the most expensive of 2015 relative to Treasuries after U.S. payrolls increased by the most this year, causing yields to jump on federal government debt on bets that stronger employment data will spur the Federal Reserve to raise interest rates.

Benchmark 10-year munis yield 2.18 percent, compared with 2.31 percent on similar-maturity Treasuries, data compiled by Bloomberg show. The ratio is a measure of relative value between the asset classes. It touched 93.7 percent Friday, the lowest since December 2014, signaling that tax-free bonds are pricey relative to their federal counterparts.

Ten-year Treasury yields jumped as much as 0.1 percentage point after a Labor Department report showed the U.S. gained 271,000 jobs, the most this year and higher than all estimates in a Bloomberg survey of economists. Average hourly earnings climbed from a year earlier by the most since July 2009, signaling Fed officials may move forward with a December rate increase.

Muni yields rose 0.05 percentage point to 2.18 percent on Thursday, the largest increase since July, data compiled by Bloomberg show. The figure, which was little changed as of 9:09 a.m. in New York, is the highest since Sept. 24.

The 10-year muni-Treasury ratio was as high as 111.3 percent in March. Over the past decade, the figure has averaged 97 percent.

Bloomberg

by Brian Chappatta

November 6, 2015 — 6:34 AM PST

Taylor Riggs, a contributor to Bloomberg Briefs, talks with reporter Joe Mysak about this week’s municipal market news.

Watch the video.

9:28 AM PST
November 5, 2015

Puerto Rico’s Government Development Bank, which oversees the island’s finances, said it may fail to comply with legal reserve requirements by the end of December, putting the bank at risk of falling into receivership.

Puerto Rico’s Commissioner of Financial Institutions is examining the financial condition of the GDB, according to the commonwealth’s most recent financial disclosure, posted on the bank’s website late Friday.

The GDB serves as a source of liquidity for the Caribbean island and its municipalities. The bank estimates it may fall short of its legal reserve requirement by the end of 2015, according to the filing. That would put the bank in danger of operating under a receiver and further limit the commonwealth’s access to funds.

“If GDB is not in sound financial condition or becomes insolvent, the Secretary of Treasury may file a petition to a Puerto Rico court for the appointment of a receiver to suspend GDB’s operations and settle its obligations,” according to the filing.

The bank’s net liquidity as of Sept. 30 was $875 million, down from $1.1 billion in March. The GDB faces a $354 million debt-service payment on Dec. 1 and is working to raise funds to meet that obligation, according to the filing.

Outstanding Debt

Puerto Rico and its agencies had $70 billion of debt, including $12.7 billion of general-obligation bonds, as of Sept. 30, according to the filing. Commonwealth officials are seeking to reduce that debt load by asking bondholders to take losses or wait longer for repayment through a voluntary debt exchange. The island’s economy has contracted every year since 2006. It has $357 million of general-obligation interest due Jan. 1, yet the commonwealth’s cash flows show a negative balance in November, according to the filing.

Some investors believe general-obligation bonds would receive the strongest repayment because the commonwealth’s constitution stipulates that those securities must be repaid before other expenses. Yet bondholders cannot require Puerto Rico to raise taxes and no physical assets of the commonwealth may be foreclosed on to raise cash to pay general obligations, according to the filing.

Available Resources

If Puerto Rico failed to make a general-obligation payment, “the bondholders are only entitled to require the Secretary of the Treasury to apply available resources according to the constitutional priority provisions and do not have the right to compel the exercise of any taxing power of the commonwealth,” according to the filing.

Puerto Rico may take revenue currently used to repay certain highway bonds and convention center debt and redirect it to pay down general-obligation securities, if there are no other available resources, according to the filing.

“It is not certain what steps a commonwealth bondholder would be required to take or what proof such bondholder would be required to produce to compel the diversion of such funds from any such instrumentality to the payment of public debt,” according to the filing.

Bloomberg

by Michelle Kaske

November 6, 2015 — 7:20 PM PST

U.S. voters approved 79 percent of the $23.8 billion in municipal debt that local governments sought permission to sell on Tuesday’s ballots, according to Ipreo, a New York-based financial-market data provider.

The $18.9 billion included new bond authorizations for roads and water systems, economic development and other capital projects. The amount sought was the most in an odd-year November election since 2007, before the worst recession since the 1930s cut tax revenue and pushed states and cities into a period of austerity.
In this year’s biggest proposal, the Dallas Independent School District, won approval to sell $1.6 billion of debt to be used to replace and renovate schools that are more than a half-century old. Denver voters approved $778 million of debt to upgrade a facility for the National Western Stock Show and for improvements to a convention center. Meanwhile in Harris County, where Houston is located, voters endorsed $848 million of debt for road improvements, parks and flood control, according to county election returns.

Voters last year approved about 85 percent of the $44 billion on the ballot, more than twice the amount sought in 2010, according to Ipreo.

Bloomberg

by Darrell Preston

November 5, 2015 — 8:31 AM PST

ALGONQUIN, Ill. — District 300, Illinois’ sixth-largest public school system, has been waiting a decade for state dollars to complete a construction and improvement project that began with voter approval of $185 million of bonds in 2006.

The 21,000-student district in Chicago’s far northwest suburbs sold the bonds and was able to build, expand and update schools, officials said.

But not all of the projects that the district promised to parents, teachers and students were completed, and hopes for state money any time soon have been dampened by Illinois’ prolonged absence from the bond market and exacerbated by an ongoing state budget impasse.

District 300 had been counting on $30 million to $40 million in state construction grant money intended for roofs, asbestos abatement and heating and cooling systems for schools.

“There is part of us that feels we haven’t fulfilled the obligation to the community 100 percent,” said district Superintendent Fred Heid. “We were counting on leveraging those (state) dollars.”

A budget stalemate between Illinois’ new Republican governor and Democrats who control the legislature has led to gridlock and fed into last month’s downgrades of the state’s general obligation bond ratings to just three steps above the “junk” level by Fitch Ratings and Moody’s Investors Service.

Illinois, once a top issuer of municipal bonds, has been absent from the debt market for a year and a half despite having more than $4.8 billion of untapped bond authorization left from a $31 billion, partially bond-funded “Illinois Jobs Now!” program the state enacted in 2009.

Money on hand from state bond sales shrank to $552 million at the end of fiscal 2015 from $2.68 billion at the end of fiscal 2014, according to Moody’s.

Bruce Rauner, the state’s first Republican governor in 12 years, had pledged to pour “billions” into infrastructure. He has signaled Illinois will be resuming debt sales despite the lack of a state budget five months into fiscal 2016.

BIG SCHOOL CONSTRUCTION GRANT BACKLOG

In 2006, District 300 passed a “fairly contentious” referendum, and wants to avoid going back to voters for more money, Heid said.

He added that going back to voters could impede the district’s ability to finance future growth in students.

District 300 is one of 52 Illinois school systems on a 2004 list for grants funded through state bond sales. Lists maintained by the Illinois State Board of Education show 228 additional and unfulfilled grant requests made by schools between 2005 and 2015.

INFRASTRUCTURE PROJECTS STALLED

Metra, the Chicago area’s commuter train operator, said about $400 million of projects, including improvements to 16 stations, two rail yards and a major bridge replacement program, are on hold due to the lack of state bond money.

The transit agency, which is in the midst of a multiyear fare increase, said fares may have to rise even higher than expected in 2017 if it does not obtain proceeds from state bond sales next year.

“If you don’t take care of things in the beginning stage, they tend to need more comprehensive work done on them,” Metra Executive Director Donald Orseno said.

Illinois’ finances are sagging under a $105 billion unfunded pension liability and a chronic budget deficit that have left it with the lowest credit ratings and highest borrowing costs among the 50 states.

While the budget battle will delay a pension contribution, state bond payments are continuing.

A package of fees and taxes meant to pay off the “Jobs Now” bonds has fallen short of its revenue target. This is largely due to underperformance of a video gambling tax as some communities, most notably Chicago, blocked the gaming machines.

The package is expected to generate $830 million this fiscal year, short of legislative projections from 2009 that it would raise $943 million to nearly $1.2 billion annually, according to the Chicago-based Civic Federation.

By REUTERS

NOV. 3, 2015, 5:48 P.M. E.S.T.

(Editing by Daniel Bases and Matthew Lewis)

ST. LOUIS — A federal lawsuit filed Wednesday alleged a St. Louis suburb whose population is largely black relentlessly tickets for things such as mismatched curtains, walking on the wrong side of a crosswalk and barbecuing in front of a house.

The Arlington, Virginia-based Institute for Justice, a public interest law firm, filed the suit on behalf of two Pagedale residents and is seeking class-action status. The lawsuit also asks a judge to halt the 33,000-resident suburb that’s just north of St. Louis from future enforcement of codes that the suit considers an unconstitutional tactic to feed city coffers.

The number of non-traffic municipal fines issued in Pagedale, which has a roughly 93 percent black population, has soared by nearly 500 percent in the past five years, the lawsuit said, with revenue from non-traffic tickets making up nearly one-fifth of the city’s budget.

Last year, the lawsuit said, 2,255 non-traffic tickets were doled out under the municipal code that authorizes citations for such things as having mismatched curtains, walking on the left side of a crosswalk, wearing saggy pants, having holes in window screens and having a barbecue in front of a house, according to the lawsuit.

“This case demonstrates that property rights are fundamentally civil rights,” said William Mauer, the law firm’s senior attorney and the plaintiffs’ lead counsel. “Pagedale treats its residents like walking, talking ATMs, making withdrawals by issuing tickets for ridiculous things that no city has a right to dictate.”

An Associated Press message seeking comment from Pagedale Mayor Mary Louise Carter was not immediately returned.

The lawsuit comes four months after Missouri Gov. Jay Nixon signed into law a measure that limits cities’ ability to profit from traffic tickets and court fines. That marked the first significant step taken by state lawmakers to address concerns raised after the August 2014 police shooting in the St. Louis suburb of Ferguson. Eighteen-year-old Michael Brown, who was black, was unarmed when he was shot to death by white Ferguson police officer Darren Wilson during a confrontation in a street.

A St. Louis County grand jury and the U.S. Justice Department cleared Wilson in Brown’s death, concluding evidence backed his claim that he shot Brown in self-defense after Brown first tried to grab the officer’s gun during a struggle through the window of Wilson’s police vehicle, then came toward him threateningly after briefly running away.

But the Justice Department issued a report in March, saying there was racial bias and profiling in Ferguson’s policing as well as a profit-driven municipal court system that frequently targeted blacks, who make up about two-thirds of Ferguson’s populace.

Since then, practices of many municipal court systems throughout the St. Louis area came under increased scrutiny.

Wednesday’s lawsuit was filed on behalf of Valarie Whitner and Vincent Blount, housemates who the suit alleges have received more than $2,800 in fines for such alleged infractions as having a downspout with chipping paint, not having a screen door behind their home and having weeds in their vegetable garden.

By THE ASSOCIATED PRESS

NOV. 4, 2015, 5:43 P.M. E.S.T.

PAGEDALE, Mo. — This spring, officials in this tiny city near St. Louis ordered Valarie Whitner to replace her siding; repaint her gutters, downspout and foundation; and put up screens or storm covers outside every window and blinds or curtains on the inside.

And that was before the list of demands moved on to her roof, fence and yard.

Ms. Whitner, 57, who works nights at a hospital, said she and her longtime partner felt swamped beneath the costs of paying for the city-mandated repairs and for fees, fines and court costs, which her lawyers say included at least $2,400 in violations. She took out a high-interest payday loan, which she still owes hundreds of dollars on and calls her “Pagedale money.”

“It was horrible,” Ms. Whitner said the other day from her living room, which she has decorated with do-it-yourself vases and paintings. “Pagedale just kept coming back to us, bothering us. At some point, this is all just a way for the city

In the aftermath of the fatal shooting of an unarmed teenager named Michael Brown by a white police officer in Ferguson, residents in this region described a pattern of mounting traffic fines, fees and arrests in the 90 municipalities that make up St. Louis County. Many such abuses were described in a scathing Justice Department report about Ferguson.

But the problems facing Ms. Whitner in Pagedale represent another issue: what many residents consider the abusive levying of fines or fees for minor nontraffic ordinances, often involving unsightly lawns or houses.

On Wednesday, lawyers from the Institute for Justice, a libertarian public-interest firm based in Arlington, Va., filed a civil rights complaint against Pagedale, which like Ferguson is in north St. Louis County. The complaint, filed in United States District Court for the Eastern District of Missouri, accuses the city of violating due process and excess-fines protections in the Constitution by turning its code enforcement and municipal court into “revenue-generating machines” to go after residents.

The complaint, which seeks class-action status, calls for an injunction against the city’s reliance on such fines.

“We hope that if the court agrees with us, the residents of Pagedale will no longer be treated as walking cash machines by their city government and that the city will limit its regulatory authority to things that actually affect health or safety,” said William R. Maurer, the managing attorney of the Institute for Justice’s office in Washington State. The three named plaintiffs in the lawsuit include Ms. Whitner and her partner, Vincent Blount.

Sam Alton, the city attorney for Pagedale, said the city strongly disagreed with any assertion that it had pursued housing violations to make money. The portion of revenue the city derives from such tickets is small, Mr. Alton said, adding: “It’s got nothing to do with driving up revenue. And it’s got everything to do with making the properties code compliant and safe.”

After the Justice Department’s report, which asserted that Ferguson was using law enforcement to generate revenue for its budget, Missouri lawmakers enacted legislation that lowered a cap on how much of a city’s revenues may come from traffic fines; in St. Louis County, cities were limited to 12.5 percent of their revenues.

But that law addresses only traffic violations, and some here worry that St. Louis County municipalities are turning to nontraffic fees and fines to make up the lost revenue. In the case of Pagedale, Mr. Maurer said he believed the city had begun doing that years ago when an earlier limit on traffic revenues was imposed. In the mid-1990s, the traffic-fine cap had been 45 percent until legislation began gradually reducing it.

“I think it’s appropriate for policy makers to be mindful that there may be another wave of profiteering that manifests itself in a different form, and continues to create a cycle of poverty,” Eric Schmitt, a Republican state senator who had pressed for the tougher limits on traffic fines, said in an interview. “If we see that, all options are on the table.”

The practice of many St. Louis County municipalities of using traffic and nontraffic fines and fees to finance their budgets has also led to calls for some of those towns to consolidate operations as a means of reducing government costs. A commission assigned by Gov. Jay Nixon to study the underlying causes of the Ferguson unrest issued a long list of recommendations that included consolidating some of the 60 police departments and 81 municipal courts that serve the county.

Residents here say leaders in Pagedale, a predominantly black city of trim homes and about 3,300 people a few miles south of Ferguson, pride themselves on the city’s appearance and on a recent burst of new development, which includes a grocery store and a movie theater that was set to open this week. Some spoke with pride of the city’s Police Department and carefully kept sidewalks.

Yet in recent years, some here say, warning notices have begun appearing on house after house. In 2013, the city generated 17 percent of its $2 million in revenue from all fines and fees, documents show, though Mr. Alton said the portion was lower now. According to an article in The St. Louis Post-Dispatch that first described the rise in nontraffic cases in the region’s municipalities, Pagedale officials issued 495 percent more tickets and citations unrelated to traffic in the years since 2010. City officials dispute that claim, saying the increase was smaller.

To hear residents here tell it, the violations can seem endless: having a wading pool in front of the front line of the house; having a dish antenna on the front of the house; wearing pants below the waist in public; having a hedge above three feet in the front yard.

Mildred Bryant, who has lived here for nearly 47 years, got a warning letter in May. Her house is old, she says, but not unsafe. Still, she was given no more than 30 days to fix a dozen violations, the letter said, or face a court summons.

“I’ve never really gotten in trouble before,” said Ms. Bryant, 84, the third plaintiff in the class-action lawsuit. “I wasn’t sure what to think. What is this all about all of the sudden? Is it about wanting more money?”

Ms. Bryant said she found several of the violations baffling, not to mention beyond her limited retirement income. “All windows need screens and window treatment such as blinds and or matching curtains, slats, etc.,” the letter said. She also was ordered to repaint her porch and building foundation, “touch up paint or repaint entire house,” cut back weeds and “treat fence line with brush killer.”

In the months since, Ms. Bryant said, her sons have helped her try to meet the requirements.

Mr. Alton said that the city was working with Ms. Bryant to help her get her home up to code, as it is with other residents. She has not been fined, only warned. The point, Mr. Alton said, is to make sure properties are safe and code compliant, not to collect money.

“You have a city that’s trying to live within the law and to make the city nice for its residents and make its properties safe,” he said.

THE NEW YORK TIMES

By MONICA DAVEY

NOV. 4, 2015

(Reuters) – U.S. voters gave the green light on Tuesday to the sale of $18.9 billion or 81.6 percent of the about $23 billion of bonds cities, schools, parks and other issuers in the municipal debt market placed on ballots, according to results on Thursday compiled by data company Ipreo.

Nearly $3.2 billion of proposed bond issuance was rejected by voters while election results for about $1 billion of bond issues were still pending, Ipreo data showed.

Chris Mier, a muni analyst at Loop Capital Markets, said while the approval rate was a little higher than in recent years, the amount of bonds put up for voter approval has been dropping from a peak of over $100 billion in 2006.

The biggest issue winning approval was $1.6 billion of bonds for the Dallas Independent School District, while the biggest single referendum to lose was $287 million of bonds for a courthouse project in Travis County, Texas. Voters in Arizona’s Pima County rejected seven bond referendums totaling $815.7 million.

Issuance of muni bonds in 2015 totaled $332.5 billion as of the end of October, up 32.9 percent from the same period in 2014, according to Thomson Reuters data.

By REUTERS

NOV. 5, 2015, 5:30 P.M. E.S.T.

(Reporting By Karen Pierog; Editing by Bernard Orr)

Oct 30 U.S. municipal bond issuance totaled $31.56 billion in October, the biggest monthly supply since July, while November will launch next week with an estimated $6.61 billion in bond and note sales, according to Thomson Reuters data on Friday.

Sales of debt by U.S. states, cities, schools and other issuers this month totaled less than the nearly $35 billion sold in October 2014. Still, issuance of $332.5 billion so far in 2015 is up 32.9 percent over the same period last year, with refundings outpacing new money deals.

In the coming week, Massachusetts will sell $450 million of triple-A-rated commonwealth transportation fund revenue bonds through Citigroup, starting with a presale period on Wednesday, followed by formal pricing on Thursday. The bonds will be offered in serial maturities from 2017 through 2035 and term maturities in 2040 and 2045, according to the preliminary official statement.

The biggest competitive issues are from Nevada’s Clark County School District, which will offer $541.8 million of limited-tax general obligation new and refunding bonds in two deals on Tuesday.

Flows into municipal bond funds remained positive for the fourth-straight week with net inflows of $349 million in the week ended Oct. 28, according to Lipper, a unit of Thomson Reuters.

REUTERS

(Reporting by Karen Pierog; Editing by Dan Grebler)

CHICAGO (Standard & Poor’s) Oct. 28, 2015 — Chicago’s City Council today approved Mayor Rahm Emanuel’s 2016 budget, ahead of its Dec. 31 due date, with minimal changes. Standard & Poor’s Ratings Services’ ratings are unaffected by the approval of this budget.

Despite Chicago’s efforts to address its longer-term structural issues (starting with the approval of the 2016 budget), we still consider the city’s financial problems substantial, particularly because we anticipate that the city’s required pension contributions will continue to increase and place pressure on the city’s budget–one of the primary drivers of our rating. In our view, the extent of the city’s structural imbalance, when factoring in required pension contributions, will take multiple years to rectify.

Most notably, and as an important first step to address Chicago’s longer-term pension costs, the city council approved the mayor’s proposed property tax increase, which will be used to make over $300 million of additional payments on city’s pension obligations. The budgeted pension contributions are based on the assumption that the state will approve a level of pension relief on the city’s police and fire pension obligations. However, if the state ultimately rejects the revised payment plan, and if that decision occurs before the mayor’s proposed tax rate is finalized, the city would have the option to further increase its property taxes by roughly $200 million in order to satisfy the higher pension contributions currently mandated under state law in 2016; although it is questionable whether the city would propose that option or approve it before the Dec. 31, 2015 budgetary deadline and the Dec. 29, 2015 tax levy deadline.

If the city does not or is not able to accommodate the currently mandated police and fire pension contributions in its budget, its intergovernmental revenues will be intercepted to cover the pension contributions. At this time, the likelihood of this scenario is uncertain, but the risk is partly reflected in our negative outlook, which takes into account the possibility of budgetary pressures from pension costs.

The 2016 budget adopted by the city council closes the roughly $233 million corporate fund budget gap and implements increased property taxes to bear the bulk of the city’s rising pension obligations to its police and fire funds. The 2016 budget allocates $978 million in total pension contributions across all of its pension funds, a 78% increase from its $550 million total pension contributions in 2015.

The budgeted 2016 contributions meet current state requirements for the municipal and laborers plans, but they are below what current state statutes require on the police and fire plans and below actuarially determined amounts for all four of the plans. The city is assuming the state will approve SB777, which calls for a five-year step up to the amounts currently required under state law for the police and fire pension funds. Current state law calls for a roughly $550 million increase in the city’s annual contributions to its police and fire plans starting in 2016; under SB777, the amount is $328 million. Under the adopted 2016 budget, the majority of the assumed $328 million police and fire contributions will be covered by $318 million of additional property taxes. The 2016 contributions to all four plans are well below the actuarially determined amount of $1.7 billion, according to the actuarial valuation dated Dec. 31, 2014.

While the actions taken in this budget to raise property taxes are intended to address the cost pressures in 2016, they may not be sufficient to mitigate the city’s financial stress. The city’s required pension contributions escalate each year, and each subsequent budget for the next five years will need to address these increased contributions. In our view, the city has historically been reluctant to raise taxes, which limits our view of its budgetary flexibility and management. While raising taxes is politically unpopular, we view property taxes as one of the more predictable and reliable choices of revenues. The phased-in approach to the pension contributions (which is also utilized in the city’s municipal and laborers pension plans) provides for larger contributions, but they remain at levels lower than actuarially
determined amounts. Overall, a phased-in approach could still be viewed as deferring payments because phased-in contributions would be less than the actuarially determined annual required contributions. Given the extent of city’s contribution increases, these obligations will likely be an impediment to the city achieving significant future budget surpluses and improving its budgetary performance, which we currently view as very weak.

The city faces additional budgetary pressure if the state does not approve SB 777 and the city is required to make the pension contributions currently required under state law. In this scenario, the city’s required pension contributions would increase by $200 million to $1.178 billion in 2016, putting even more stress on the city’s budget.

The 2016 budget also assumes that the Illinois Supreme Court will uphold the 2014 state law reducing benefits under the city’s municipal and laborers pension plans, which the Illinois Circuit Court previously struck down as in violation of the state constitution. While the city has budgeted for the increased contributions to those plans that accompanied the benefit reductions under the 2014 law, it is possible that the law may not survive court challenge. If the Illinois Supreme Court strikes down the law, the city’s contributions to the municipal and laborers’ pension plans would revert to the original, and lower, formula. In the short-term, this would benefit the city’s budget, but it would have negative overall ramifications because it would set the stage for greater budgetary pressure in the medium to long term as pension plan assets are depleted.

Given the uncertainty regarding the reform of its police, fire, municipal, and laborers pension plans, we expect city management to consider contingency plans for addressing its pension contributions and liabilities. We expect the city to continue to address the structural cracks in its corporate fund budget, as exemplified by budget gaps, which the city forecasts will continue for the next two years, and to find additional solutions to manage its pension and debt obligations in a structurally sound way.

We have determined, based solely on the developments described herein, that no rating actions are currently warranted. Only a rating committee may determine a rating action and, as these developments were not viewed as material to the ratings, neither they nor this report were reviewed by a rating committee.

Standard & Poor’s Ratings Services, part of McGraw Hill Financial (NYSE: MHFI), is the world’s leading provider of independent credit risk research and benchmarks. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.

Primary Credit Analyst: Helen Samuelson, Chicago (1) 312-233-7011;
helen.samuelson@standardandpoors.com

Secondary Contacts: John A Kenward, Chicago (1) 312-233-7003;
john.kenward@standardandpoors.com

Jane H Ridley, Chicago (1) 312-233-7012;
jane.ridley@standardandpoors.com

​KentuckyWired, the innovative P3 project to expand high-speed Internet availability statewide, won the Excellence in Development Finance Project Award from the Council of Development Finance Agencies. The $324 million project, which will add over 3,200 miles of fiber op​tic cable statewide, is the first U.S. public-private partnership concession executed to fund the construction of a fiber optic network, and it was financed using a unique tax-exempt structure that was designed by Orrick’s Tax Group.

Congratulations to our team, which was led by Dan Mathews and Chas Cardall and included Ken Schuhmacher, Susan Long, Benjamin Bass and Walter Alarkon of the Energy & Infrastructure Group, Sarah Rackoff, Marc Bauer and Jennifer Grew of the Public Finance Group and Greg Riddle, Wolfram Pohl, George Wolf and Ashley Rodriguez of the Tax Group.

Contact

For more information, please contact us by e-mail pr@orrick.com or by phone: Ashley Laputka at (415) 773-5725 in San Francisco or Adi Weisman at (212) 506-5122 in New York.

10-23-2015

BRADENTON, Fla. – Kentucky’s novel statewide Internet project earned a top award from the Council of Development Finance Agencies.

The CDFA announced Oct. 22 that the KentuckyWired public-private partnership between the Commonwealth and Macquarie Capital won its Excellence in Development Finance Project Award.

“The work of our award winners is cutting edge, innovative, and an example of best practices in our industry,” said CDFA president and chief executive officer Toby Rittner.

The KentuckyWired P3 will install the 3,200-mile-long fiber optic backbone infrastructure to bring high-speed Internet service across the state, which currently ranks 46th in the country in broadband availability.

“The total project is the largest P3 fiber partnership in the country, and estimated to cost $324 million,” the CDFA said.

In August, the Kentucky Economic Development Finance Authority issued $232 million of 30-year tax exempt bonds to finance the project, which is the Bluegrass state’s first availability payment P3.

The deal received investment grade ratings of Baa2 from Moody’s Investors Service and BBB-plus from Fitch Ratings, which called the P3 a unique, first-of-its-kind approach to broadband connectivity on a statewide basis.

CDFA also named four other award winners.

The Excellence in Development Finance Program award went to the South Carolina State Small Business Credit Initiative Loan Participation Program.

The Excellence in Development Finance Innovation Award went to the Colorado Creative Industries Division while the Distinguished Development Finance State Agency Award went to the Colorado Housing and Finance Authority.

The Philadelphia Industrial Development Corp. received the Distinguished Development Finance Local Agency Award.

The winners will be honored during the CDFA’s National Development Finance Summit Nov. 3-6 in Charleston, SC, Rittner said.

THE BOND BUYER

by Shelly Sigo

OCT 23, 2015 3:08pm ET

The University of South Carolina (USC) is seeking a developer to replace four residence halls on its south campus with student housing towers containing up to 4,000 beds. The 18-22-acre campus village also would feature dining facilities, recreation and study space and parking.

The selected developer would lease the property from USC and design, build, finance, operate and maintain the buildings — ranging in size from three to six stories — for up to 40 years, according to the request for qualifications the university issued Sept. 23. Construction would be done in at least two phases over 10 years with a building containing the first 1,500 beds available for occupancy by July 2018. Responses to the RFQ were due Oct. 16.

The developer will pay USC a base rental fee each year and share profits. The university will set rental fees during the first year of operation — potentially after negotiating this issue with the developer — and the two would negotiate subsequent annual rent increases during the selection process.

USC is willing to consider several approaches to the delivery of operations and maintenance services during the lease term. Under the first option, the university would maintain and operate the village and be reimbursed for all costs by the developer. Alternatively, the developer would be responsible for operating and maintaining the village in accordance with university standards or could hire a third party to provide these services. A combination of these approaches also could be negotiated.

USC plans to issue a request for proposals to a select group of developers after reviewing the RFQ responses.

NCPPP

By October 21, 2015

For the billionaires with homes in Long Island’s Hamptons, a $50 fee for false security alarms won’t mean much. For Suffolk County, it would mean $7.3 million to help close a deficit that’s triggered a cut to its credit rating.

The fee is part of County Executive Steve Bellone’s $2.9 billion proposed budget that local lawmakers will vote on next month. If it’s adopted, the county would join a long-term push by local governments from Los Angeles to Cincinnati to claw back the more than $1.8 billion spent annually when police respond to phantom burglaries.

Suffolk’s government, despite the wealth of its beachfront communities, has been struggling with budget shortfalls since the end of the recession more than six years ago. Facing a $49 million deficit after already cutting the county’s payrolls by more than 10 percent, Bellone is searching for revenue to keep his promise not to raise property taxes by more than 2 percent a year.

“They’re really going to nickel and dime their people just to try to avoid whatever semantics they have on tax increases,” said Howard Cure, managing director for research in New York for Evercore Wealth Management, which holds some of the county’s debt among its $6 billion of investments. “You have to wonder whenever the next recession is, how prepared a county like Suffolk will be.”

Credit Impact

The persistent strains in the county of 1.5 million have tarnished its standing on Wall Street. On Oct. 8, Standard & Poor’s downgraded Suffolk County for the second time since 2012 by reducing the rating to A, the fifth-lowest investment grade. When it sold bonds this month, investors demanded yields of 2.9 percent on securities due in 2028, about a full percentage point more than benchmark debt, according to data compiled by Bloomberg.

With the false-alarm fee, Suffolk County is borrowing a tactic that’s long been used elsewhere. Los Angeles started billing alarm owners in 2004 because only about 5 percent of the calls police were responding to were actually burglaries. Cincinnati imposes a similar charge.

Such unnecessary dispatches are legion. Between 91 percent and 99 percent of security-alarm calls to police are false, said Simon Hakim, an economist at Temple University in Philadelphia. Fees like those being considered by Suffolk County — which will be $100 for businesses — still aren’t high enough to cover the cost, he said.

“Police should stop responding to false alarms,” Hakim said. “If they choose to maintain the service, they have to charge the full cost and some profit above it.”

In Suffolk County, about 14 percent of calls from security systems are false, which amounted to about 90,000 unnecessary ones in 2014 alone, said Vanessa Baird-Streeter, a county spokeswoman. Under the proposal, residents and businesses would also have to register their alarms, and the first two false calls would result in only warnings, she said.

Seeking Revenue

The alarm cash is part of a wider plan by Bellone to add an additional $42.2 million in revenue from new fees and increases to existing ones, including one aimed at the cost of billing residents for unpaid traffic and parking violations, according to an Oct. 16 report by the county’s Budget Review Office.

As the county legislature considers Bellone’s proposed spending plan ahead of next month’s vote, the Budget Review Office said it will have to find additional ways to cut spending or raise revenue after sales-tax collections fell short of expectations in the third quarter of this year. The drop indicates the county may miss Bellone’s sales-tax targets for 2015 and 2016 by a combined $48.6 million, the Oct. 16 report said.

Standard & Poor’s said that while the county has made progress since 2012 to balance the budget, further steps are still needed to bolster its reserves and make up for the slow pace of revenue growth. Fitch Ratings ranks Suffolk County at the same level as S&P, citing the persistent deficits and its high dependence on sales taxes.

The financial pressure has led investors to demand extra yields to hold its bonds instead of other securities, said Charles Grande, head of municipal research in New York at UBS Global Asset Management, which has $13 billion under management. That includes $13 million of Suffolk bonds.

“You take into account that you’re talking about a noteworthy credit in the muni market, and you’re fighting headline risk in terms of negative news on the county’s fiscal situation,” Grande said.

Bloomberg Business

by Freeman Klopott

October 26, 2015 — 9:01 PM PDT Updated on October 27, 2015 — 5:52 AM PDT

Jacksonville, Florida’s police and firefighter pension’s poor results led it to underperform the market by hundreds of millions of dollars as its board failed to provide oversight of outside managers and out-of-control travel spending by its own staff.

Those are the conclusion of an audit of the underfunded $1.43 billion Jacksonville Police and Fire Pension Fund released on Wednesday. Poor investment decisions contributed to under performance of at least $370 million and failure to scrutinize investment management led to $36 million in excess fees over six years, according to the report by Benchmark Financial Services Inc., hired by the city this year to audit the pension fund.

“You can look at this board and see profound fiduciary lapses over the decades,” said Edward Siedle, president of Benchmark, in an interview. “The performance of the fund is a very clear example of the lack of oversight. They didn’t adhere to minimal standards they were legally bound to.”

Unfunded Liability

The pension liability, which has risen to $1.65 billion from $798 million in 2008, has caused a drop in the city’s bond rating, which drives up borrowing costs in the municipal-debt market. Meanwhile rising pension costs are crowding out spending for raises for city workers, street repairs, children’s programs and other city services, said Bill Gulliford, a councilman who pushed Jacksonville to hire Benchmark, according to remarks to be released with the report.

“A vast and staggering sum of money has been recklessly squandered, and now lost forever to this community,” said Gulliford. “I feel a profound sadness for our citizens.”

A Moody’s Investors Service report in July found that the city has the fifth highest pension liability as a percentage of operating revenue, at 403 percent, behind Chicago, Dallas, Houston and Los Angeles. “Pension payments will continue to constrict the city’s financial operations,” Moody’s said when cutting the city debt rating to Aa2 from Aa1 last year.

Mayor Lenny Curry declined to comment until he reviewed the report, said his spokeswoman, Marsha Oliver.

John Keane, the fund’s executive director since 1990, who is now a consultant, didn’t respond to a telephone call requesting comment. Keane retired in September only to be hired as a consultant during the transition to a new top executive.

Poor Decisions

Since 2000, the pension’s so-called funded ratio, or the amount of assets needed to cover future payments, fell to 39 percent from 87 percent in 2000, according to the report. The board failed to provide fundamental oversight for such things as verifying and reporting how well its investments performed or even how much it paid in fees to manage and track money under its control.

“Poor investment decision making by the board” contributed to its underfunded status, the report said, citing the example of $27 million of losses on energy master limited partnerships.

The board’s failure to scrutinize fees paid to investment managers cost $6 million a year in excessive charges over the past six years. It’s failure to review the damages to the fund caused by its former investment consultant over two decades cost an estimated $300 million to $500 million in under performance losses, the report said.

Keane as executive director has been controversial, the report said, because of his frequent travel to conventions, $400,000 in unused vacation pay and a personally created pension within the plan. The administrator has made 31 trips since 2010 to Canada, Scotland and other places, staying in hotels operated by Caesars Palace, Hotel Frontenac, Four Seasons and Trump Tower. Keane was also the lead negotiator for police and fire unions in efforts to reform the pension, according to the report. And it found that trustees and staff traveled to conferences put on by investment and law firms seeking to get hired as asset managers and for legal work.

Documents Subpoenaed

The report cited a host of documents the board and the pension fund failed to provide, including accurate performance and return information and key contracts used to procure services. The fund refused to turn over some of the records needed to fully conduct the audit, the report said. In some cases it didn’t have fee analysis prepared by investment consultants or other third parties that would allow the board to monitor the reasonableness of fees, the report said.

The city council is subpoenaing documents the fund failed to turn over and Siedle has agreed to review them and supplement the audit, Gulliford said in his remarks.

“While we have estimated fund under performance losses of approximately $370 million, we simply do not know for certain how well, or badly, the fund’s investments have performed over the decades,” the report said. “And, based upon the information we were provided, apparently neither does the board nor anyone else currently involved with the fund.”

Bloomberg Business

by Darrell Preston & Neil Weinberg

October 28, 2015 — 10:00 AM PDT

Chicago Mayor Rahm Emanuel pushed through the biggest property-tax increase in the city’s history to help pay its annual pension-fund bills. Eliminating the $20 billion debt to retirees that’s pushed its bond rating to junk will still have to wait.

The city’s aldermen Wednesday voted 35 to 15 to boost real-estate levies by $543 million over the next four years. Emanuel, a Democrat who won re-election this year, said it will steady the city’s finances and avoid the need for police and firefighter layoffs.

The push has driven a rebound in the price of Chicago’s bonds, which tumbled after Moody’s Investors Service in May pulled the city’s investment-grade rating because of escalating retirement costs. It marks one of the strongest efforts yet to deal with financial pressure that built over the past decade as Chicago shortchanged employees’ pensions by billions, even though it may do little to cut the obligation that was left behind.

“No one should think that as a result of passing this property-tax increase and this budget that the city has accomplished stabilization of the pension funds or its overall finances,” said Laurence Msall, president of the Civic Federation in Chicago, who supports the tax increase, calling it a positive, needed step. “That is going to have to be worked on and evaluated every year going forward.”

Chicago has contributed $7 billion less than actuaries recommended over the last decade, which by last year left the public-safety, municipal and laborers funds with about 35.5 percent of what they need for retirement checks that will be due in the coming decades, city documents show. As the annual payments rise, the squeeze that has been put on the budget triggered a series of downgrades this year that have left Chicago with a lower rating than any big city except Detroit.

The tax will be increased by $318 million in 2015, followed by additional jumps of $109 million in 2016, $53 million in 2017 and $63 million in 2018. The funds will go to the police and firefighter pensions.

Emanuel praised the “decisive and determined” action by the council to address years of deferred payments and rising costs.

“I do believe the city of Chicago’s public finances are more secure, more stable, and stronger today than they were before,” Emanuel told reporters at City Hall after the passage of the real-estate levies and his $7.8 billion spending plan for 2016.

The uncertainty surrounding Chicago’s finances has been heightened by a political impasse in Illinois’s state capital, where Republican Governor Bruce Rauner and the Democrat-led legislature have been unable to pass a budget for the year that started four months ago. Emanuel has been counting on a law that would cut the city’s 2015 contribution to the public-safety pensions to $619 million from current law’s $840 million.

While lawmakers passed the bill in May, they haven’t sent it to the governor for his signature.

Kicking Can

Rauner in June called the plan “a kick the can down the road pension bill” without saying what he would do. Catherine Kelly, his spokeswoman, referred to those comments when asked whether he would sign it.

The nascent effort by Chicago to cope with the retirement strains has been welcomed by investors and credit-rating companies. Fitch Ratings called Emanuel’s budget a “positive credit development.” A portion of Chicago’s general-obligation bonds due in 2035 traded for an average of 98 cents on the dollar Tuesday to yield 5.2 percent. That price is up from 84 cents on May 18, soon after Moody’s cut the city to junk.

“Undoubtedly it’s the responsible thing to do,” said Ty Schoback, a senior analyst in Minneapolis at Columbia Threadneedle Investments, whose company manages about $30 billion in municipal bonds, including some Chicago debt. “At the end of the day, businesses and individuals just want to see that government is making steps toward stabilizing their financial situation.”

Emanuel has sought to shelter lower-income residents from the impact of the tax increase. His administration has asked Illinois lawmakers to allow Chicago to double the homestead exemption to $14,000. A bill that would do so was approved by a House committee last week.

Business groups argued that the higher taxes will punish employers already affected by a higher minimum wage that Emanuel championed. In January, Chicago will also have the highest sales tax in the nation because of an increase taking effect in Cook County, which needs to stem its own pension crisis.

“It’s another expensive burden,” said Michael Reever, vice president of government relations at the Chicagoland Chamber of Commerce. “It’s not good for the overall economic climate of the city, county and state to shift more of that responsibility and costs of these mandates onto businesses.”

Still Short

While the property tax increase shows that Chicago is willing to deal with its obligations, its annual payment is still “significantly short” of what actuaries would likely recommend, said Richard Ciccarone, chief executive officer of Merritt Research Services.

Chicago has budgeted $978 million in 2016 for its four pensions, up from $885.7 million in 2015, according to city documents. That still falls behind the 2014 actuarially-required contribution of $1.7 billion, according to bond documents.

“Taxpayers are going to be paying for past service for years to come after they’ve been retired,” said Ciccarone, who is based in Chicago. It’s “falling short while they leave a burden for the future.”

Bloomberg News

by Elizabeth Campbell

October 27, 2015 — 9:01 PM PDT Updated on October 28, 2015 — 1:15 PM PDT

Puerto Rico Government Development Bank’s disclosure of its available cash is leaving investors wondering if they’ll be paid on Dec. 1.

The bank, which oversees the island’s borrowings, had $875 million of net liquidity as of Sept. 30, according to a posting Wednesday on the agency’s website. That’s more than twice the $354 million of principal and interest due in 33 days, with $276 million of the bonds guaranteed by the commonwealth. A spokesman for Puerto Rico’s governor reiterated Thursday that while the government plans to make its general-obligation bond payments, it may run out of cash in November and the administration will focus on providing essential services over paying creditors.

“I don’t trust anything they send out,” said Daniel Solender, who oversees about $17 billion as head of municipal debt at Lord Abbett & Co. in Jersey City, New Jersey, and holds the commonwealth’s debt. “It’s just hard to tell what’s real or not anymore. It’s almost more political than anything as to what they decide to do with the next payments.”

Governor Alejandro Garcia Padilla’s administration is seeking to reduce the island’s $73 billion debt load by asking investors to take a loss and delaying principal payments. Officials and commonwealth consultants met Tuesday with bondholder advisers that have signed non-disclosure agreements to discuss a potential debt restructuring after talks with GDB bondholders fell through the week before.

Available Funds

“Certainly it’s a possibility that the government will run out of money, and we’ve said that several times, but we’re trying to make sure that does not happen,” Jesus Manuel Ortiz, the governor’s spokesman, said in San Juan. “If we arrive at that moment, we will have to choose whether to pay the creditors or to continue providing essential services. The governor has always been consistent in his position that we will continue to provide government services.”

The GDB serves as a measure of Puerto Rico’s available funds. The Sept. 30 net liquidity level was the first monthly disclosure of the GDB’s available cash since June, when it gave the May 31 net liquidity amount of $778 million.

“We’re working in two ways,” Manuel Ortiz said during a press conference at the governor’s residence. “As much as in the negotiations with creditors, as in finding measures that will help us maintain the liquidity as quickly as possible to avoid a closing.”

If the GDB and Puerto Rico were to not repay the commonwealth-backed securities maturing Dec. 1, it would be the first default on the island’s direct debt. A Puerto Rico agency in August failed to repay principal and interest on bonds backed by legislative appropriation.

Obama Proposal

Prices on commonwealth bonds differ, depending on whether they are insured against default. The commonwealth-backed GDB bonds maturing Dec. 1 are insured by National Public Finance Guarantee. The securities last traded Tuesday at an average price of 99.8 cents on the dollar, for an average yield of 6.9 percent, according to data compiled by Bloomberg.

GDB bonds without Puerto Rico’s repayment pledge or bond insurance and maturing Dec. 1 last traded Tuesday at an average price of 47 cents on the dollar, Bloomberg data show.

The governor and Antonio Weiss, counselor to U.S. Treasury Secretary Jacob J. Lew, last week at a Senate committee hearing urged Congress to assist the island in its financial crisis. The Obama administration wants Congress to give Puerto Rico broad bankruptcy powers, increase health-care funding, and create a federal fiscal control board that would weigh in on the commonwealth’s spending.

Lord Abbett held, as of Aug. 31, the GDB bonds maturing Dec. 1, including securities guaranteed by the commonwealth and insured by National Public Finance Guarantee and also GDB bonds without Puerto Rico’s repayment pledge, according to data compiled by Bloomberg. Lord Abbett hasn’t participated in talks with the GDB because the firm declined to sign non-disclosure agreements and restrict itself in trading the securities, Solender said. He has yet to hear from the commonwealth or the bond trustee regarding the Dec. 1 payment.

“It just seems like all they’re doing is trying to build their case for Washington and it seems like the odds are pretty low,” Solender said. “And they’re waiting until the last possible minute to take any action.”

Bloomberg Business

by Michelle Kaske

October 29, 2015 — 11:42 AM PDT

Taylor Riggs, a contributor to Bloomberg Briefs, talks with Joe Mysak about this week’s municipal market news.

Watch the video.

October 29, 2015

Fitch Ratings-New York-30 October 2015:  The Chicago City Council’s passage of the 2016 budget, including a significant property tax increase, is positive as it would create a recurring revenue stream to address the city’s rising pension expenses, Fitch Ratings says. However, it faces funding challenges in the near term. If an Illinois Senate bill is not signed by the governor this year, the city would be required to fund a much larger amount for public safety pensions in 2016. The state’s Supreme Court is hearing a case that could push reforms for the city’s other two pension plans back to their starting points.

The property-tax increase would raise $543 million and it would be phased in over four years. The forecast shows the average property tax bill would rise by 12%-13%. The budget also created new garbage and rideshare and taxi service fees.

However, significant challenges remain. The property tax increases are matched to the general government portion of the phased-in increases for police and fire pensions that would be required under Senate Bill 777. It was passed by the House and Senate in the spring of this year but has not been sent to the governor for his signature. Prospects for passage grow dimmer as time goes by. If it does not become an Illinois law in 2015, the city would be required to fund the entire incremental payment amount of approximately $543 million in 2016 from additional property taxes or other potentially nonrecurring means.

The sizable increase in the city’s pension obligations is largely due to a state law passed in 2010 requiring Illinois municipalities to shift to actuarially based annual contributions for policemen’s and firemen’s pension funds next year. A smaller portion is due to increased contributions for the city’s other two pension plans that are required under pension reform that is under legal challenge.

Efforts to shore up those non-public safety pension plans could be put into disarray if the Illinois Supreme Court rules against the city’s reforms to the Municipal and Laborers’ pension plans. That decision could cause the city to revert to an actuarially inadequate funding structure which would leave those two plans on a path toward depletion, or identify other sources to make even larger actuarially based deposits into the funds. Fitch maintains a Negative Rating Outlook on the city’s ‘BBB+’ rating. The ability of the city to meet all of its obligations, including actuarially based funding of its pension obligations, in a structurally balanced manner is paramount to the rating. The city’s reserves, including those in the general fund as well as the long-term reserve funds are an important aspect of the city’s overall credit quality. Drawing on them could trigger a rating downgrade.

CHICAGO — Chicago Mayor Rahm Emanuel’s $7.8 billion fiscal 2016 budget and a historic property tax increase to pay for public safety worker pensions easily cleared the city council on Wednesday.

But the spending plan for the fiscal year that begins on Jan. 1 still faces uncertainties in the Illinois Legislature and supreme court that could impair the mayor’s plan to address the city’s $20 billion unfunded pension liability.

Emanuel last month proposed a $543 million property tax hike phased in over four years, as well as fee increases and spending cuts in an attempt to fix the city’s financial crisis linked largely to pensions.

“The city council today took a big step forward in providing more stability and more certainty and a strong financial footing for the city going forward,” Emanuel told reporters after the 35-15 vote.

Some aldermen said there were no other viable options.

“This is the equivalent of a municipal illness,” said Alderman Patrick O’Connor. “We don’t have the option of saying no. We have the option of picking our choices for staying alive.”

Alderman Carrie Austin, who heads the council’s budget committee, said there was no place left to scour for savings or revenue.

“If there was a dollar to be found, we would’ve found it,” she said.

Ahead of the vote, Emanuel offered a stark choice – either slash vital public safety and other services or enact Chicago’s biggest-ever property tax increase.

If Chicago cannot get its finances under control, the third- largest U.S. city faces further downgrades by credit rating agencies, making it more expensive to raise funds through bond sales. The city’s rating was already dropped to “junk” by Moody’s Investors Service earlier this year.

Both Moody’s and Fitch Ratings said the use of higher property taxes to pay pensions is a positive step for the city. But the credit rating agencies noted parts of the mayor’s pension strategy are dependent on actions by the Illinois Legislature and the state supreme court, which will take up the constitutionality of a 2014 city pension reform law next month.

“Should these decisions not match the city’s assumptions, new operating pressures could materialize in the immediate- and longer-term,” Moody’s said in a statement.

Standard & Poor’s said Chicago’s financial problems remain “substantial,” and that given the pension uncertainties, it expects the city to have contingency plans.

“In our view, the extent of the city’s structural imbalance, when factoring in required pension contributions, will take multiple years to rectify,” S&P said in a statement.

Property taxes will be boosted between now and 2018 to cover state-mandated contribution increases to police and firefighter pensions. But the tax increase will fall short if Illinois’ governor does not enact a state law that would spread out annual contributions. The mayor is also pushing the state legislature for a bill to shield residential properties valued at $250,000 or less from the tax hike, although the city could consider a rebate program if that measure is not enacted.

The spending plan, which includes a $3.63 billion operating budget for fiscal 2016, creates Chicago’s first-ever garbage collection fee and generates new revenue from taxis and ride-sharing businesses. It also reduces the city’s dependence on so-called scoop and toss bond restructurings to $125 million from $225 million this fiscal year.

The budget includes an additional $45 million property tax increase to pay for Chicago Public Schools’ capital projects.

By REUTERS

OCT. 28, 2015, 5:03 P.M. E.D.T.

(Editing by Matthew Lewis)

NEW YORK/SAN JUAN — U.S. Treasury Secretary counselor Antonio Weiss warned that Puerto Rico faces a humanitarian crisis without federal action, as he appealed to Congress to help the debt-ridden U.S. territory, in comments to a Senate committee hearing on Thursday.

Puerto Rico, a U.S. territory home to 3.5 million, is buckling under $72 billion in debt and a 45 percent poverty rate. With financial creditors resisting reductions to debt payments and political gridlock threatening proposed spending reforms, some Puerto Rican leaders have called on the U.S. government to step in.

Weiss said that without action by Congress, Puerto Rico’s crisis would escalate and reiterated that the Obama administration’s policies were “not a bailout” for the island.

He repeated the key points of a plan released by the Treasury on Wednesday, saying Congress should provide tools for Puerto Rico to restructure its liabilities, increase Medicaid support and boost economic growth through tax credits.

A key element of Treasury’s proposal is its endorsement of extending bankruptcy protections not only to Puerto Rico’s public agencies, but to the island’s government itself – a notion championed by some Puerto Rican leaders but seen as too radical to be politically practical.

Cities, towns and municipal agencies can file for under the U.S. Chapter 9 bankruptcy code, while states cannot. Puerto Rico is exempt from Chapter 9 because it is a commonwealth.

“Bankruptcy is not a bailout,” Weiss said, according to testimony released ahead of his remarks. “Allowing Puerto Rico to resolve its liabilities under the supervision of a bankruptcy court involves no federal financial assistance whatsoever. Instead, bankruptcy requires shared sacrifice from both Puerto Rico and its creditors.”

By REUTERS

OCT. 22, 2015, 10:45 A.M. E.D.T.

Looking for a way to help debt-ridden Puerto Rico, administration officials on Wednesday proposed an ambitious — if politically perilous — plan that stops short of a direct federal bailout but that its backers hope is sweeping enough to keep the island from becoming America’s Greece.

The plan would create a new territorial bankruptcy regime and impose new fiscal oversight on Puerto Rico, which is mired in the depths of a decade-long recession, running out of cash and struggling to make payments on $72 billion of debt. It represents an urgent bid by President Obama to offer a way forward. But it requires cooperation from a Republican-led Congress bent on imposing spending restraint.

In describing the package on Wednesday, administration officials emphasized that they had exhausted the limits of their own authority to help Puerto Rico, and needed quick action by Congress to avoid a catastrophe.

“Administrative actions cannot solve the crisis,” Jacob J. Lew, the Treasury secretary, said in a joint statement with Jeffrey D. Zients, the National Economic Council director, and Sylvia Mathews Burwell, the health and human services secretary.

“Only Congress has the authority to provide Puerto Rico with the necessary tools to address its near-term challenges and promote long-term growth,” the statement said.

The situation in Puerto Rico “risks turning into a humanitarian crisis as early as this winter,” one senior administration official said, speaking on condition of anonymity because the person was not authorized to speak publicly. Antonio Weiss, Mr. Lew’s counselor, will explain the administration’s plan in Capitol Hill testimony on Thursday.

The Puerto Rican government has already “done a lot” to restore fiscal order, the official added, but “Puerto Rico cannot do it on its own, and the United States government has a responsibility to 3.5 million Americans living in Puerto Rico” to step in with additional help.

The plan was shared late Wednesday with The New York Times and Agencia EFE, a news organization in Puerto Rico. On the same day, the island’s Government Development Bank said it had ended weeks of fruitless negotiations with certain creditors, aimed at persuading them to voluntarily accept lower bond payments. The bank has a bond payment of about $300 million coming due on Dec. 1.

THE NEW YORK TIMES

By MARY WILLIAMS WALSH, MICHAEL CORKERY and JULIE HIRSCHFELD DAVIS

OCT. 21, 2015

SAN JUAN/NEW YORK — The U.S. Treasury on Wednesday urged Congress to help debt-stricken Puerto Rico, saying the U.S. commonwealth needs the ability to file for bankruptcy protection, changes to Medicaid funding and access to the Earned Income Tax Credit.

“Only Congress has the authority to provide Puerto Rico with the necessary tools to address its near-term challenges and promote long-term growth,” Treasury said in a statement.

Puerto Rico, a U.S. territory home to 3.5 million, is buckling under $72 billion in debt and a 45 percent poverty rate. With financial creditors resisting reductions to debt payments and political gridlock threatening proposed spending reforms, some Puerto Rican leaders have called on the U.S. government to step in.

A bailout by the United States is seen as unlikely, but Wednesday’s statement from Treasury is the strongest indication yet that President Barack Obama’s administration supports some form of federal assistance for the island.

A key element of Treasury’s proposal is its endorsement of extending bankruptcy protections not only to Puerto Rico’s public agencies, but to the island itself – a notion championed by some Puerto Rican leaders but seen as too radical to be politically practical.

Cities, towns and municipal agencies can file for under the U.S. Chapter 9 bankruptcy code, while states cannot. Puerto Rico is exempt from Chapter 9 because it is a commonwealth.

“With the escalating crisis, bankruptcy protection is now needed for the commonwealth as well,” Treasury said in a 10-page proposal. “Congress should authorize a broader legal framework that allows for a comprehensive restructuring of Puerto Rico’s debts.”

Treasury would be a key ally for Puerto Rico in Washington, where the island has struggled to find powerful supporters.

Antonio Weiss, a counselor to Treasury Secretary Jack Lew, is scheduled to testify on Thursday at a hearing on Puerto Rico before the Senate Committee on Energy and Natural Resources.

Treasury’s proposal also calls on Congress to create a fiscal control board for Puerto Rico.

In a statement, Puerto Rico Governor Alejandro Garcia Padilla said his administration would seek to ensure that any such board respected Puerto Rico’s autonomy.

Still, Garcia Padilla lauded the Obama Administration for taking what he called the “historic step” of presenting a set of recommendations to help Puerto Rico.

The department’s proposal makes clear its view that resolving Puerto Rico’s crisis requires a debt restructuring and concessions from bondholders, and that pension benefits should be protected.

While Treasury has also called on Puerto Rico to fix its traditionally opaque financial reporting practices and instill more credible fiscal oversight, the proposal is generally in line with what the island itself has said it needs from Congress and its creditors.

By REUTERS

OCT. 21, 2015, 8:15 P.M. E.D.T.

(Reporting by Nick Brown in San Juan and Megan Davies in New York; Editing by Chris Reese, Diane Craft and Leslie Adler)

New York, October 19, 2015 — Potential pension reforms to fix New Jersey’s (A2 negative) chronic teacher pension underfunding could lead to higher credit risk for the state’s school districts and their finances, Moody’s Investors Service says. A state commission is recommending reforming pensions by creating a new plan to be paid by school districts through savings realized from proposed, concurrent district and municipal health benefit reform.

The largest component of New Jersey’s FY 2014 $80.5 billion unfunded pension liability is the Teacher’s Pension and Annuity Fund (TPAF) at $53.8 billion, Moody’s says in “New Jersey Pension Underfunding Poses Risk to School Districts.” New Jersey currently pays all teacher pension and retiree health care costs.

“Since 2010, state pension contributions to TPAF have averaged only 15% of the annual required contribution (ARC), resulting in rapid liability growth. As the state has made efforts to increase its contributions, spending on pensions and other post-employment benefits have increased to 8% of the fiscal 2015 budget from 4.9% in 2010,” Moody’s Vice President Josellyn Yousef said.

The commission intends for the pension shift to be cost neutral for school districts through savings on benefit cuts at school districts and municipalities. However, if reforms fail or if the state decides to offload the pension burden in some other fashion, school districts can raise taxes, cut costs, borrow, or spend reserves to raise funds to cover the gap.

“Each option offers potential downsides or limitations,” Yousef said. “For example, raising taxes would be simplest but the ability and willingness of taxpayers to accept a higher levy may be limited.”

Further, Moody’s notes a potential wildcard via an ongoing lawsuit New Jersey faces regarding outstanding pension litigation which could meaningfully worsen the pension funding position owing to a 2011 cost-of-living adjustment (COLA) freeze. If the COLA freeze is reversed, it would materially increase the pension funds’ unfunded liabilities and annual contribution needs for TPAF by roughly 35%.

The report is available to Moody’s subscribers here.

Taylor Riggs, a contributor to Bloomberg Briefs, talks with reporter Joe Mysak about this week’s municipal market news.

Watch the video.

October 22, 2015

The Puerto Rico Electric Power Authority and insurance companies that guarantee repayment on some of its bonds are in talks to delay payments to free up cash and and help restructure $8.3 billion of debt, according to two people with knowledge of the matter.

A compromise with MBIA Inc., Assured Guarantee Ltd. and Syncora Guarantee Inc. is the missing piece in a plan announced last month in which some holders of uninsured bonds agreed to take a 15 percent loss in a debt exchange. The parties are working out details that would ease near-term debt payments, said the people, who asked for anonymity because the talks are private.

The negotiations come as Prepa, as the agency is known, won another eight days from investors that hold about 35 percent of its debt, and fuel lenders, to negotiate how to restructure its securities. The forbearance agreement, which now expires Oct. 30 and was set to end Thursday, keeps discussions out of court. This is the 11th extension since the parties first signed the agreement in August 2014. A Prepa restructuring would be the largest ever in the $3.7 trillion municipal-bond market.

Prices Increase

Lisa Donahue, Prepa’s chief restructuring officer, said Tuesday at a meeting organized by Puerto Rico’s Chamber of Commerce in San Juan that she’s confident the utility will come to an agreement with its bond insurers. Jose Echevarria, a spokesman in San Juan for Prepa, declined to comment Thursday.
The utility’s bonds maturing in July 2040 traded Thursday at an average price of 61 cents on the dollar, to yield 9.3 percent, according to data compiled by Bloomberg. The debt changed hands at about 50 cents at the start of the year.

“We continue to work with Prepa on a broad consensual settlement that would provide support from Assured Guaranty, and would put the utility on a sound financial footing,” according to a response from the bond insurer posted to its website Thursday night following a U.S. Senate committee hearing on Puerto Rico’s finances.

Michael Corbally, a spokesman for Syncora declined to comment. Greg Diamond, a spokesman for MBIA, reiterated that the insurer continues to work with Prepa, local government officials and other creditors toward a consensual solution.

Bankruptcy Proposal

The monolines, which insure about $2.5 billion of Prepa debt, are considering embedding in the potential debt exchange an instrument that would provide liquidity, one person said. Prepa and the bond insurers may reach a tentative agreement as soon as Friday, the other person said. The utility faces a $196 million interest payment on Jan. 1.

Doubts about the oversight of Puerto Rico’s broader finances is a sticking point in the discussions with the insurers, one person said. Governor Alejandro Garcia Padilla has filed legislation that would create a fiscal oversight board, with the five panel members selected by the governor and approved by the commonwealth’s Senate. A board on which members are separate from political leadership would provide better transparency and management of the island’s finances, the person said.

Prepa bondholders have objected to an Obama administration proposal released Wednesday that asks Congress to give the commonwealth and its municipalities access to bankruptcy protection to help reduce the island’s $73 billion debt load. The governor announced in June that debt payments were unsustainable.

Bloomberg News

by Michelle Kaske

October 22, 2015 — 2:07 PM PDT Updated on October 23, 2015 — 6:44 AM PDT

The New York Mets swept their way into the franchise’s first World Series in 15 years, and Citi Field bondholders are cheering along with the team’s fans.

Riding on this season’s playoff run, the team projects total 2016 attendance will rise by 500,000 to 3.1 million, generating an additional $25 million in revenue, according to a person familiar with the estimate. That’s on top of a 20 percent attendance increase this year.

The Mets beat the Chicago Cubs 8-3 on Wednesday night in Chicago, taking the seven-game series 4-0 and qualifying for the World Series. That’s good news for fans who suffered as the team cut payroll after the the majority owners of the club, led by Fred Wilpon, lost millions investing with Ponzi scheme swindler Bernie Madoff. It’s also good news for holders of almost $700 million Citi Field bonds, who’ve seen the ball park’s attendance and revenue fall below projections.

When the 42,000-seat Citi Field opened in 2009, the team projected an average attendance of about 37,980 in 2013, according to a bond offering statement. Instead, the Mets sold an average of 26,366 tickets per game that year, according to Baseball-Reference.com, falling short of projections by 31 percent. Last year, the Mets sixth consecutive losing season, turnout averaged 26,528.

Royals Boost

Boosting attendance to 3.1 million in 2016 would bring the average to 38,272. The Mets didn’t project attendance beyond 2013 in their bond offering statement. Mets spokesman Harold Kaufman declined to comment.
Attendance at Kansas City Royals games has increased almost 40 percent this year to 2.7 million, one year after they won the American League championship. The Royals lost to the San Francisco Giants in last year’s World Series. The Royals are one game away from the World Series.

A 500,000 increase in Mets attendance would result in a ‘meaningful” increase in the ratio of revenue available to pay debt service, said John Miller, co-head of fixed income at Nuveen Asset Management in Chicago. Nuveen is the largest holder of the longest-dated Citi Field bonds.

“I’m sure this season is going to help,” he said.

Scarcity Value

The Mets sold $613 million municipal bonds in 2006 backed by payments in lieu of property taxes, lease revenue and installment payments to finance the construction of Citi Field. The team also issued $82.3 million of insured debt in 2009, the year the ballpark opened. The 2006 bonds are rated Ba1 by Moody’s Investors Service and BB+ by Standard & Poor’s, one step below investment grade.

Citi Field bonds don’t trade frequently because investors hold them for their higher yields, Miller said. Citi Field bonds with a 5 percent coupon and callable in January 2017 traded Monday among dealers at a yield range between 2.8 percent and 3.4 percent. Top-rated bonds maturing in one-year yield 0.3 percent.
“There’s certain scarcity value to them that’s helping their performance,” Miller said.

In 2014, Citi Field generated about $117 million in revenue and had about $84 million in expenses, including a $43 million payment in lieu of taxes, according to a financial statement filed by Queens Ballpark Company LLC, a Mets subsidiary.

Citi Field bonds are rated below investment grade in part because of inadequate reserves to make up any deficits that may result from a players’ strike or an economic downturn, according to S&P. Debt-service reserves are guaranteed by a unit of Ambac Financial Group Inc., which had its rating cut to junk in 2009 because of losses it suffered insuring derivatives during the financial crisis.

An attendance boost alone won’t be enough for a rating change, said S&P analyst Ben Macdonald.
“If there was enough liquidity then it could be higher,” Macdonald said. “There isn’t at this point.”

Bloomberg News

by Martin Z Braun

October 21, 2015 — 12:42 PM PDT Updated on October 22, 2015 — 7:20 AM PDT

Puerto Rico’s Government Development Bank said talks with a group of bondholders over a restructuring of the agency’s debt and potential financing have ended after they failed to reach an agreement.

The development bank, which is closely tied to other government borrowers because it acts as a lender to the commonwealth and its localities, said in an e-mailed statement Wednesday that it continues to focus on a broader restructuring that would allow bondholders to voluntarily exchange their securities for new ones.

All seven of the members in the bondholder group exited the talks, according to two people with knowledge of the matter. The investors include Avenue Capital Management, Brigade Capital Management, Candlewood Investment Group, Claren Road Asset Management, Fore Research & Management, Fir Tree Partners and Solus Alternative Asset Management, said the people, who asked not to be named because the investor identities weren’t made public.

Representatives for each of the investment firms either declined to comment or didn’t immediately return messages left for comment.

Senate Hearing

The debt-swap talks ended as the GDB faces a $345 million principal and interest payment due Dec. 1, with $267 million of the bonds guaranteed by the commonwealth. The breakdown comes a day before Governor Alejandro Garcia Padilla, who is seeking to reduce the island’s $73 billion in debt, is scheduled to testify at a Senate hearing on Puerto Rico’s financial crisis. Officials have said the island may run out of cash in November.

“We do not believe that Puerto Rico has the ability to offer a strong enough exchange security to incentivize legacy holders to trade in their paper,” Daniel Hanson, an analyst at Height Securities, a Washington-based broker dealer, said in a note. “We further believe that the negotiating creditors, who likely made this clear to the GDB before beginning their negotiations, might be annoyed that the GDB did not have a good faith plan for exchanging debt when they sat at the negotiating table.”

Exchange Proposal

GDB bonds maturing February 2019, the bank’s most-actively traded security in the past three months, sunk nearly 3.3 cents when they were last traded Oct. 15 to an average of about 36.8 cents on the dollar, to yield 41 percent, according to data compiled by Bloomberg. That was the lowest average in more than five weeks, the data show.

The proposed transaction would have exchanged existing debt at prices equal to 130 percent of market value, according to an event filing posted on the Municipal Securities Rulemaking Board’s website, called EMMA. The new cash notes would have been priced with an 8.5 percent coupon at a 10 percent yield.

“We strongly believe that a voluntary adjustment of the terms of the commonwealth’s debt that allows the measures contained in the Fiscal and Economic Growth Plan to be implemented is the best way to maximize recoveries for creditors,” Melba Acosta, president of the GDB, said in a statement. “The GDB and the Working Group are engaging constructively with key stakeholders to achieve a comprehensive path forward, and we have begun the process of signing non-disclosure agreements and initial due diligence with a number of creditors.”

The U.S. territory had been seeking to restructure some of the development bank’s roughly $5.1 billion of obligations. The GDB on Sept. 30 offered the group of bondholders to exchange $850 million of existing GDB notes and sell $750 million of new tax-exempt debt issued by the Infrastructure Financing Authority and backed by taxes on petroleum products and guaranteed by the commonwealth, according to the filing.

The GDB has been working with Citigroup Inc. to help oversee its financial restructuring.

Bloomberg News

by Michelle Kaske and Laura J Keller

October 21, 2015 — 6:19 AM PDT Updated on October 21, 2015 — 10:18 AM PDT

Since California shut down 400 authorities that redeveloped blighted neighborhoods, the $30 billion of bonds left behind have rallied as local governments defied speculation about widespread defaults.

Debt from the agencies returned 42 percent in the four years that ended Aug. 31, almost double the overall municipal market and beating the 28 percent for California tax-exempt bonds, according to an analysis by Nuveen Asset Management. Only two cities have missed payments on the securities since Governor Jerry Brown shuttered the agencies in early 2012 to help close the state’s budget shortfall.

The bonds, which are financed with local property taxes, have benefited from an orderly payment process overseen by the state and surging real estate prices. The assessed value of California properties increased 4.4 percent to $4.8 trillion in the year ended June 2014, exceeding the peak reached in 2009 before the full impact of the housing-market crash rippled through local tax rolls.

“Whenever there’s noise, there’s often opportunity,” said Stephen Candido, senior research analyst in Chicago at Nuveen, which holds the debt among its $230 billion of assets. “The market is often fearful. We were more focused on the long-term upside, knowing from early on that repaying these bonds would be a priority.”

Brown and his fellow Democrats in the legislature abolished the agencies to redirect about $1 billion of their funds to schools, which eased the financial pressure on the state in the aftermath of the recession.

Some consultants to cities warned at the time that they may be unable to cover the agencies’ debt bills. In 2012 Moody’s Investors Service downgraded $11.6 billion of the securities to junk, citing uncertainty about whether localities would renege on the obligations.

While San Bernardino, a city of 215,000 east of Los Angeles, said the burden contributed to its 2012 bankruptcy, elsewhere the impact has been more limited. The only cities that have missed bond payments are Riverbank, near Modesto with $15.4 million of the debt, and Monrovia east of Los Angeles, which has $11.75 million, according to Municipal Market Analytics in Concord, Massachusetts.

Legacy Debts

Municipalities once used the agencies to borrow for projects that improved blighted areas. A portion of the real-estate taxes that resulted were used to pay off the bonds. Since the agencies were closed, local governments have been required to outline their obligations every six months to the state Finance Department, which has the authority to require them to prioritize payments to bondholders.

The process has gone smoothly, said H.D. Palmer, a spokesman for the department.

The outcome contrasts with investors’ initial concerns, said Matt Fabian, an analyst with Municipal Market Advisers.

“RDAs are performing better in the market because much of the uncertainty about the sector’s transition has gone away,” Fabian said by e-mail. “Plus the turmoil in the last few years likely shook loose a fair bit of the retail owner base, leaving the bonds in institutional hands, implying a bit more trading and liquidity than most municipal sectors.”

Bonds Gain

The $85 million of San Jose redevelopment agency bonds maturing in 2030 traded Tuesday for an average price of $1.04 on the dollar, up from 77 cents in December 2011. That reduced the yield to 2.1 percent from 6.4 percent. Bonds sold by Stockton’s authority, which come due in 2036, traded Wednesday for 100 cents on the dollar, up from 87 cents in late 2011.

Moody’s no longer takes a dim view of the sector, said Robert Azrin, a senior analyst for the company. The median rating for California redevelopment debt is Baa1, three ranks above junk, he said.

“At the time, they were valid concerns, but with each year that’s passed, we’ve seen that these payment schedules have gone smoothly,” Azrin said. “With the passage of time, a lot of the risks we identified haven’t come to fruition.”

Many redevelopment bonds may also be refinanced in the next couple of years as securities issued in 2006 and 2007 reach their 10-year calls, which allow the local governments to pay them off early at face value, said Candido, the Nuveen analyst. He said he expects the bonds to remain popular among investors because governments have been meeting their obligations.

“Here we are in 2015 and they’re finally addressing the concerns of investors,” he said.

Bloomberg News

by James Nash

October 20, 2015 — 9:01 PM PDT Updated on October 21, 2015 — 10:03 AM PDT

California is counting on private companies to kick in as much as $35.5 billion toward the most expensive public-works project in U.S. history, a proposed high-speed rail line linking San Francisco with Los Angeles. Banks and other contractors who’ve studied the plan say not so fast.

Even as builders clear land and begin work on viaducts near Fresno for the bullet train’s initial segment, financiers solicited by the state rail agency are calling on California to pitch in more than the $10 billion in bond funds already committed in order to give potential investors confidence that the project will become reality.

Their responses point out a dilemma for Democratic Governor Jerry Brown and other supporters of the line: persuading reticent taxpayers to ante up more than already approved under a 2008 bond measure as support for the project declines, though private investors may stay away unless they see a bigger public buy-in.

“We still have a funding gap,” rail authority chairman Dan Richard said at an Oct. 6 board meeting at which officials outlined responses from 36 firms and groups of companies asked to outline potential funding packages. “But we’re going to build this project notwithstanding that, because we can close that funding gap.”

Barclays Plc, AECOM and Kiewit Corp. were among the builders, lenders and contractors who responded to the California High-Speed Rail Authority’s request for expressions of interest by companies. The authority released the responses under a public-records request.

Large Financing

“Given the proposed delivery approach and available funding sources, we believe there are a number of concerns which the authority must address,” Kiewit, which reported $10.4 billion in revenue last year, said in its response. “The ability to service raised financing does not mean that such a large financing amount could in fact be raised.”

Backers of the train are counting on the private sector to finance most of the costs, after voters in 2008 authorized $9.95 billion in general-obligation bonds. Other sources of money include $3.2 billion in federal grants and 25 percent of the proceeds from auctioning credits to emit greenhouse gases under the state’s cap-and-trade program, which is estimated to yield the project $500 million a year.

Brown spokesman Evan Westrup did not immediately respond to an e-mail asking whether the state could increase its funding pledge. Lisa Marie Alley, spokeswoman for the rail authority, said the responses from the firms confirmed that “ridership and revenue would be available once the system is in operation and revenue is demonstrated.”

Critics including Congressman Jeff Denham, a Turlock Republican who represents an agricultural area to be bisected by the rail line, have called the project a “boondoggle” that will run out of money before it reaches population centers. Construction is under way in the lightly populated San Joaquin Valley on the first 29 miles (47 kilometers) of what’s envisioned as an 800-mile network with trains speeding as fast as 220 miles per hour.

Richard said that the state is constrained because the 2008 ballot measure approved by 53 percent of voters allowed only for $10 billion. Several polls since then have shown support for the project slipping below 50 percent.

Boost Commitment

Even so, the state and federal governments need to boost their commitment both to narrow the funding gap and persuade investors that the train will pay dividends, several companies said in their responses to the authority.

As of 2012, there were no similar projects anywhere in the world where the government paid less than half of the cost, according to John Laing Group Plc, a London-based investor and manager of infrastructure projects, including rail in its home country.

“Thus, we would anticipate the project would require comparable levels of capital contributions during construction,” the company said.

AECOM suggested that the state break down financing into a series of smaller segments of no more than $5 billion to attract investors. The Los Angeles-based infrastructure company also advised “significant” government contributions.

The state should be able to borrow $10 billion to $12 billion against the annual cap-and-trade revenue, Barclays said. The London-based bank invested in a high-speed rail project in South Africa that linked Johannesburg and Pretoria in 2010, and has underwritten municipal bonds in California.

Legal Challenges

California will need to prevail in legal challenges against devoting cap-and-trade proceeds toward rail, create a mechanism to borrow against the proceeds, extend the carbon-trading program beyond 2020 and lock in a 25 percent commitment of the revenue for high-speed rail as long as the obligations are outstanding, Barclays said.

California also would need to subsidize operations for at least a decade, according to Cintra Infraestructuras SA, a subsidiary of Ferrovial SA, a Spanish builder of roads, rail and airports in Europe, North America, Australia and the Middle East.

“It is doubtful that there is enough capacity in the debt markets for this type of project,” Cintra concluded.

Bloomberg News

by James Nash

October 19, 2015 — 2:00 AM PDT

The aftermath of racial turmoil in Ferguson, Mo., is exacting a toll on St. Louis-area communities that built their finances around speeding tickets, thanks to a state law limiting the income they can draw from traffic fines.

The city council of Charlack last week decided the community of 1,400 can’t afford an eight-officer police force under the new law, which says traffic citations in St. Louis County municipalities can’t exceed 12.5 percent of annual operating revenue, down from 30 percent. Policing in Charlack and in nearby Wellston, which dissolved its 23-officer force in May, is now handled by a recently created cooperative of local departments.

The 2014 police shooting of 18-year-old Michael Brown in Ferguson forced a national re-examination of what critics call “taxation by citation,” a situation exacerbated by the sheer number of departments, 18,000 throughout the U.S. A bill is pending in Congress to restrict the amount of revenue local governments can collect from traffic citations. In St. Louis County, which has 90 municipalities and 59 individual police departments, more communities are expected to follow the lead of Charlack and Wellston.

“This will have lawmakers around the country taking a second look at their agencies and making certain that the sole purpose of their existence is not for revenue, but to serve the public interest,” said Chuck Wexler, executive director of the Police Executive Research Forum, a Washington nonprofit. “Police departments should not exist if their sole purpose is to generate revenue. That’s what we have tax collectors for.”

Tense relations between the majority-black residents of Ferguson and the city’s mostly white police force grew in part from the excessive issuance of tickets. Some area municipalities were generating more than half their annual operating revenue from citations.

Charlack Mayor Frank Mattingly said disbanding the police and joining the local cooperative will save the city about $170,000. There was no alternative to shutting the department, which cost $520,000 to operate, roughly half the town’s annual budget.

“A lot of police officers aren’t writing tickets because they’re afraid they’ll get in trouble,” Mattingly said. “Why were we singled out?” Mattingly said more towns will be forced to consolidate their police with neighboring communities, which he said he believes is the intent of the new law.

“There’s nothing else they’ll be able to do,” he said.

St. Louis County, a suburban area of 1 million people, forms a crescent around its namesake city. About a third of the 59 departments cover less than one square mile, according to an April 30 report from the Police Research Forum.

“In many municipalities, policing priorities are driven not by the public safety needs of the community, but rather by the goal of generating large portions of the operating revenue for the local government,” the report said.

Missouri state Sen. Eric Schmitt, a Republican from St. Louis County and sponsor of the new law, said some municipalities have “broken down the trust” between residents and the police.

“Some of these communities have used their citizens as ATMs with these speed traps,” Schmitt said, pointing to economic pressures.

In the six years since the closing of the Northwest Plaza mall, the suburb of St. Ann increased the number of traffic citations 10-fold. Edmundson Mayor John Gwaltney reminded his town’s sergeants and patrolmen in an April 2014 memo that “tickets that you write do add to the revenue on which the P.D. budget is established and will directly affect pay adjustments at budget time.”

The Ferguson turmoil has expanded the national focus beyond frictions between blacks and police departments to the practice of ticket-writing, regardless of race.

In Colorado, the town of Nunn, which is about 31 miles south of Cheyenne, Wyo., depends on speeding citations for about 30 percent of its revenue, said Police Chief Joe Clingan. With 440 residents _ mostly senior citizens _ and few businesses, the city lacks the revenue sources that support most municipal governments, he said.

“We don’t have any tax base and no retail,” Clingan said. “If they want a town government, someone has to pay for it.”

It shouldn’t be drivers, said U.S. Rep. Emanuel Cleaver, a Missouri Democrat and sponsor of the proposed federal law restricting ticket revenue.

“That is a poor excuse and a bad plan for economic development,” Cleaver said.

Cleaver’s bill would establish a 30 percent limit on all municipalities and, he said, would have the effect of encouraging small police departments to merge with those of neighboring towns or have their patrolling done by the county.

“It would cost a lot less for these small towns to pay money to the county and have the county police patrol the area than to do it on their own,” Cleaver said.

BY TRIBUNE NEWS SERVICE | OCTOBER 23, 2015

By Tim Jones

(With assistance from Jennifer Oldham in Denver.)

(c)2015 Bloomberg News

Construction is underway on California’s $468 billion bullet train connecting Los Angeles and San Francisco. But the closer you look at the project, the shakier its finances appear.

The good news is that 36 companies from around the world responded to the California High-Speed Rail Authority’s request for suggestions about how to complete the project, and many expressed a willingness to participate. The bad news is that several of the respondents expressed serious concerns about the bullet train’s finances.

Perhaps the biggest concern was whether fare revenues would cover operating costs. The plan that state voters approved to fund the project bans the use of public subsidies for the operation of passenger service. State officials have long claimed that the line will turn a profit as soon as the first 300-mile segment between the San Fernando and Central valleys opens, but that hardly seems certain.

In its response to the authority’s request, Spanish construction company Sacyr wrote that “it is our opinion that revenue from ridership may not be sufficient to cover all [operation and maintenance] cost.” If Sacyr is right, does anybody doubt that maintenance is what would lose out? Skimping on maintenance saves money in the short run but dramatically increases costs over time and degrades service quality.

Subsidiaries of the Spanish company Ferrovial SA wrote that “it is highly unlikely that the [California system] will turn an operating profit within the first 10 years of operation and that “more likely, [the system] will require large government subsidies for years to come.”

The Ferrovial subsidiaries also noted that most high-speed rail systems around the world require operating subsidies and suggest that the same will probably be true for California’s. That is certainly at odds with High-Speed Rail Authority Chair Dan Richard’s assertion that every major high-speed rail system in the world operates without subsidies. It’s also at odds with the argument made by other high-speed rail boosters, that “every form of transportation requires government investment.”

If any high-speed rail line is likely to require subsidies, it’s California’s. The Los Angeles Times looked at a number of major rail corridors. Fares range from 25 cents per mile on Italy’s Milan-to-Salerno line to 50 cents per mile for Amtrak service between Boston and Washington, D.C. California’s bullet train plans to charge 20 cents per mile.

There is also uncertainty around the project’s capital funding. The state is committed to provide up to $500 million per year until at least 2020 from money it expects to collect from companies to offset carbon emissions. But these greenhouse gas fees are untested as a funding source, and post-2020 public funding is uncertain. While a number of firms have expressed a willingness to participate in the project, none have yet offered to put up their own money.

Since what feels like the beginning of time, governments have built transportation assets with revenue sources that are inadequate to fund ongoing operation and maintenance costs. California’s bullet train takes this bad practice a step further because the state only has on hand about half of the $31 billion needed to build the initial segment of the line.

Few public assets are more important to regional economies than transportation infrastructure. But moving forward on those projects without sufficient revenue sources usually results in a trip to a quagmire.

GOVERNING.COM

BY CHARLES CHIEPPO | OCTOBER 23, 2015

BlackRock Infrastructure will participate in a public-private partnership to upgrade and maintain Michigan’s freeway lighting system.

The international investment management firm will join forces with the Michigan Department of Transportation (MDOT) and Freeway Lighting Partners, which announced the P3 in August.

BlackRock-managed funds will finance the replacement and upgrade of approximately 15,000 freeway and tunnel system lights in the metropolitan Detroit region with energy-efficient LED lights. Blackrock will be responsible for ensuring that 95 percent of the lights remain operational for a 15-year term, which includes a two-year construction period.

More than 85 percent of metro Detroit’s freeway lights are outdated high-pressure sodium or metal halide fixtures, and about 30 percent of them don’t work. The state expects to save $35 million by using a P3 to replace and maintain them, MDOT spokesman Jeff Cranson said, according to Crain’s Detroit Business.

The contract is valued at $123 million. MDOT will receive an additional $79 million in federal funds for the project, which, with energy consumption factored in, has an estimated cost of $145 million.

NCPPP

October 23, 2015

Oct 22 – Broward County, Florida, plans to issue $488.9 million of airport system revenue bonds, the largest sales to hit the U.S. municipal market next week, according to Thomson Reuters data.

Altogether, U.S. municipal bond issuers are expected to offer about $4.1 billion of municipal bonds and notes, down from about $8 billion this week, the data showed.

The sale in Broward County, which operates the Fort Lauderdale-Hollywood International Airport and the North Perry Airport, comes as the municipal airport sector has recently seen signs of improvement. The 20 busiest airports have all experienced growth in passenger boarding revenue and above-average growth at international gateways. Two of the nation’s largest airports, Chicago’s O’Hare and Atlanta’s Hartsfield Jackson, were upgraded.

Airport bond volume is on pace to be flat in 2015 and 20 percent below average since 2008, according to Wells Fargo Securities. Primary market issuance was $12.1 billion in 2012 and $18.6 billion 2010.

“We see airports as resistant to the challenges faced by state and local governments with respect to post-employment benefits,” Wells Fargo reported last week. “Demand is not all that surprising as investors in municipal airports have been rewarded over the past three years with relatively attractive returns as have toll road investors.”

Airports have benefited from lower energy prices and a gradually improving economy. They have also weathered the most recent cycle of airline consolidation, which added stability to the sector, according to Janney Fixed Income Strategy.

The mergers may impact airports disproportionately, however. American Airlines, for example, now has nine hubs, which “may be more than needed,” Janney noted in a report earlier this month. That may leave airports, such as Philadelphia, particularly vulnerable to traffic decline if American Airlines were to cut back.

The Broward County airport sale is rated A+ by Standard & Poor’s Ratings and A1 by Moody’s Investors. The lead manager is Raymond James.

REUTERS

(Reporting by Robin Respaut; Editing by Frances Kerry)

Municipal bond sales in the U.S. are set to decrease in the next month while the amount of redemptions and maturing debt rises.

States and localities plan to issue $7.8 billion of bonds over the next 30 days, according to data compiled by Bloomberg. A week ago, the calendar showed $11.2 billion planned for the coming month. Supply figures exclude derivatives and variable-rate debt. Some municipalities set their deals less than a month before borrowing.

Broward County, Florida, Airport System plans to sell $489 million of bonds, Tennessee has scheduled $416 million, Florida State Board of Education will offer $230 million and California State Public Works Board will bring $223 million to market.

Municipalities have announced $13.8 billion of redemptions and an additional $10.6 billion of debt matures in the next 30 days, compared with the $21.3 billion total that was scheduled a week ago.

Issuers from New York have the most debt coming due with $2.63 billion, followed by California at $1.15 billion and Michigan with $695 million. New York City Transitional Finance Authority has the biggest amount of securities maturing, with $767 million.

Fund Flows

The $3.6 trillion municipal market shrank by 4 percent in 2014. This year, maturities are poised to drop 38 percent to $176 billion from the 2014 levels.

Investors added $617 million to mutual funds that target municipal securities in the week ended Oct. 14, compared with an increase of $558 million in the previous period, according to Investment Company Institute data compiled by Bloomberg.

Exchange-traded funds that buy municipal debt increased by $211.3 million last week, boosting the value of the ETFs 1.19 percent to $18 billion.

State and local debt maturing in 10 years now yields 100.4 percent of Treasuries, compared with 102.3 percent in the previous session and the 200-day moving average of 102.6 percent, Bloomberg data show.

Bonds of Tennessee and Michigan had the best performance over the past year compared with the average yield of AAA rated 10-year securities, the data shows. Yields on Tennessee’s securities narrowed 7 basis points to 2.05 percent while Michigan’s declined 2 basis points to 2.32 percent. Puerto Rico and Illinois handed investors the worst results. The yield gap on Puerto Rico bonds widened 64 to 10.67 percent and Illinois’s rose 28 basis points to 3.96 percent.

Bloomberg News

by Kenneth Kohn

October 26, 2015 — 3:59 AM PDT

HIGHLIGHTS:

• Maryland courts have issued two important decisions regarding assessing and collecting stormwater management fees in Montgomery County.
• Court rulings have held that Montgomery County must do a better job explaining how it will achieve its water restoration goals and how it charges its Water Quality Protection Charge (WQPC) to ultimately fund such work.
• Given the rising costs of compliance, Montgomery County and other counties across Maryland may best be served by greater private sector participation in the delivery and financing of stormwater projects.

Maryland courts have issued two important decisions pertaining to the ability of Montgomery County, Md., to assess and collect stormwater management fees from a private landowner and the validity of the Municipal Separate Storm Sewer System (MS4) Permit issued by the Maryland Department of the Environment (MDE) to Montgomery County.

MS4 permits are required under federal and state law to address stormwater runoff impairing water quality and to ensure that the municipalities manage, implement and enforce stormwater management programs to comply with Maryland’s receiving water quality standards. In Maryland Department of the Environment, et al. v. Anacostia Riverkeeper, et al., the Maryland Court of Special Appeals held that the MS4 permit requires the county to “implement or install best management practices on 20 percent of the impervious surfaces within the county in an effort to restore the pollution reductions functions performed by undeveloped land” and to submit “a long term schedule for completion of detailed assessments of each watershed in the County.” In order to fund these projects, Montgomery County assesses a Water Quality Protection Charge (WQPC) against all property (including businesses, HOAs and non-profit organizations) based on the potential for a property to contribute to stormwater runoff.1

In one case, the court held that the MS4 permit was faulty because it was not specific enough concerning the manner in which the county measures compliance with water quality goals. In the other, the court held that the county’s collection of a fee from a developer was inconsistent with state law. While these cases may be seen as a setback to Montgomery County, they do not alleviate the need of the county (and like counties in Maryland) to continue retrofitting impervious acres and finding a way to pay for it. Assuming the decisions stand, both the county and state can address the courts’ concerns with greater explanation of the rationale behind their decisions. Meanwhile, jurisdictions and counties across the region have begun looking at unique, alternative delivery mechanisms, such as public-private partnerships as a means to adhere to MS4 requirements while being more cost-effective. Given that overall requirements to clean up the Chesapeake Bay remain, creative solutions such as public-private partnerships may look increasingly attractive. These court rulings should not affect such creative solutions. In fact, they may make them more attractive.

Stormwater Fees

In Paul N. Chod v. Board of Appeals for Montgomery County, the Montgomery County Circuit Court heard a challenge to Montgomery County’s stormwater remediation fee (Section 19-35 of the County Code), also known as the WQPC. The challenge was brought by developer Paul Chod in response to an $11,000 WQPC bill assessed against his Shady Grove Development Park in Gaithersburg. Chod’s property had several stormwater management ponds that collect and treat all of the stormwater that drains from the park and surrounding private and public properties. In 1991, Chod entered into a Declaration of Stormwater Management Facility with the county that obligated Chod to provide landscaping and trash removal maintenance and the county to provide structural maintenance of the ponds, at the county’s discretion. In 2013, the county assessed a WQPC on the petitioner’s property for $14,932.17, and the petitioner applied for a credit of the charge. The county eventually proffered a partial credit, which prompted Chod to file suit.

At issue is §4-202.1 of the State Environment Article, the recently amended law2 requiring all 10 local jurisdictions subject to a MS4 permit to adopt a stormwater remediation fee. The underlying Maryland law provides the following:

(e)(3)i) If a county or municipality establishes a stormwater remediation fee under this section, a county or municipality shall set a stormwater remediation fee for property in an amount that is based on the share of stormwater management services related to the property and provided by the county or municipality.

(ii) A county or municipality may set a stormwater remediation fee under this paragraph based on:

1. A flat rate
2. An amount that is graduated, based on the amount of impervious surface on each property
3. Another method of calculation selected by the county or municipality

Typically, a larger, more developed property produces more runoff, and therefore, is assessed a higher WQPC. During trial, the county indicated that it uses the amount of impervious surface on a property to calculate the WQPC. The county further testified, however, that Chod’s retention ponds control the quality and quantity of stormwater for the entire 150-acre drainage area and that the county’s services are “essentially nonexistent.”

The court considered the following two questions concerning the WQPC: (1) whether the WQPC is invalid for failing to adhere to §4-202.1; and (2) whether the petitioner, Chod, was entitled to a full credit for the fee.

Consistency with §4-202.1

The county took the position that §4-202 was inherently flexible, allowing a charge to be imposed as a fee unrelated to the services provided. The court rejected this argument, holding that “the WQPC is not valid simply because it uses one of the methodologies permitted in subsection (e)(3)(ii), which in this case was the amount of impervious surface on the property. The statute still requires that the WQPC be based on the county’s stormwater management services that are related to the property.” Thus, the court “finds that the WQPC is invalid per se because this Charge need not reasonably relate to the stormwater management services provided by the County.”

WQPC as Applied to Chod

Chod also challenged the WQPC under the theory that the county’s stormwater management services to the property were essentially nonexistent. The court noted that the stormwater retention ponds service an area three times the size of the Shady Grove Development Park and receive essentially no services from the county in return. It found that, “as applied, the Charge does not take into account the services provided by the property owner compared with the services provided by the county. Property owners like the Petitioner are thus being burdened with the same charge as other property owners despite bearing the cost of managing the property themselves. Such an application of the statute clearly violates the intentions behind the law, thus creating an arbitrary and onerous burden on the Petitioner.”

Significance

While the court did set aside the WQPC as applied to Chod, it did not enjoin the county from continuing to assess stormwater fees. Therefore, this decision should be considered limited to the facts and circumstances of Chod. The county is free to continue assessing WQPCs consistent with the ruling (i.e., making sure that they address the services they provide related to the property – such as maintenance, repair and inspection of BMPs). While parties may see Chod as a roadmap to argue that no fee should be assessed if their system retains all stormwater on site, the county, equipped with information regarding the specific services provided related to the properties, is well positioned to argue that WQPCs are valid.

MS4 Permit

In Maryland Department of the Environment, et al. v. Anacostia Riverkeeper, et al., the Maryland Court of Special Appeals held that the MS4 permit issued by the MDE to Montgomery County violated the Federal Clean Water Act (CWA) and state law.

Montgomery County obtained its MS4 permit in 2010, requiring the county to restore 20 percent of impervious surfaces and complete a 10 percent restoration requirement from its previous permit term. In December 2013, Montgomery County Circuit Court Judge Ronald B. Rubin held that the MS4 permit did not meet federal or state requirements. The lower court judge found that MDE improperly failed to spell out how the agency would measure compliance. The court further held that “the permit’s requirements to restore 20 percent of impervious surface is simply too general to show how permittees will meet water quality standards.”

Level of Specificity in Permit

On appeal, the Court of Special Appeals held that the permit was not specific enough to allow for adequate public comment and did not provide meaningful deadlines to measure compliance with water quality goals. Specifically, the court held that permit “fails as a substantive matter because it does not contain ascertainable metrics that defines how the County must comply, or whether at some point it has complied with what all agree are two of the Permit’s most important terms: regulation of TMDLs and the twenty percent requirement.” The court reasoned that the permit does not “connect specific or measurable BMPs or various management programs [and] requires no justification for why a BMP strategy was selected and how that program or strategy will reduce discharges to the maximum extent practicable.” The court concluded that the permit fails to explain how “anyone can define the universe of impervious surfaces or how specific BMPs will achieve the 20 percent impervious restoration requirement under the permit.” The court appeared troubled by MDE’s reliance on references to the stormwater manual and other BMP guidance documents, which it found “indecipherable,” and expressed frustration that there is no way of knowing which BMPs the county will select until after the work is completed.

Significance

The court sent the permit back to MDE, but held the following:

Importantly, though, we hold that the Department and the County had the law right: the Permit falls short not for failing to hold the County to State water quality standards, as the challengers urge, but because it did not afford an appropriate opportunity for public notice and comment and because it lacks crucial details that would explain the County’s stormwater management obligations.

Thus, the overall impact of this ruling implicates the process and the level of detail in the permit. Upon remand, MDE must do a better job of explaining its calculations and BMP assessments. It is unclear how specific MDE can actually be given that BMPs usually are applied on a case-by-case basis. In turn, while the court found MDE’s guidance documents “indecipherable,” stormwater professionals have relied on them for years and appear to have little difficulty applying such documents.

Conclusion

Montgomery County experienced a one-two punch in the courts over the past several months. If the decisions stand upon appeal, the county will have to do a better job demonstrating how it will achieve its restoration goals and how it charges its WQPC to ultimately fund such work. Regardless, the obligation to continue the restoration work remains while MDE makes changes to the permit. Given the rising costs of compliance, Montgomery County may best be served by allowing for greater private sector participation in the delivery and financing of stormwater projects in conjunction with, or exclusive of, its current efforts. Counties in Maryland and elsewhere across the country can look to the green stormwater retrofit public-private partnership in Prince George’s County, Md., as an example of how to involve the private sector in developing innovative solutions to help meet their MS4 requirements.

Footnotes

1 Under recent revisions to State law sought by Governor Hogan, other Maryland counties may, but are not obligated to, assess stormwater fees. They do, however, have to ensure adequate funding for MS4 restoration work.

2 While Montgomery County was exempt from amendments to Section 402.1 pursuant to the Watershed Protection and Restoration Programs Revisions, under the law, the county is obligated to file a financial assurance plan that clearly identifies actions it will take to meet its MS4 permit; projected five-year costs; projected annual and five-year revenues; sources of funds to meet the requirements and actions and expenditures undertaken the previous fiscal year. In addition, the county has to demonstrate that it has “sufficient funding in the current fiscal year budget to meet its estimated annual costs.” MDE must approve the plan.

Last Updated: October 16 2015

Article by Rafe Petersen

Holland & Knight

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.

CHICAGO — Illinois’ ongoing failure to enact a fiscal 2016 budget due to political wrangling led to a second major credit rating agency downgrading the state’s debt to the low investment grade triple-B level this week.

Moody’s Investors Service cut the state’s general obligation bond rating one notch to Baa1 with a negative outlook on Thursday. The move occurred three days after Fitch Ratings dropped Illinois to BBB-plus.

Both ratings are now just three steps above the “junk” level.

Moody’s cited the potential that Illinois’ financial position could weaken further due to an impasse between the state’s Republican governor and Democrats who control the legislature that has left Illinois without a budget for the fiscal year that began on July 1.

“What we are seeing is the very real possibility of deterioration as the finances weaken with no plan in place,” said Moody’s analyst Ted Hampton.

The downgrade by Moody’s, which affects $26.8 billion of GO bonds, also pointed to Illinois’ inaction on its huge $105 billion unfunded pension liability. An Illinois Supreme Court ruling in May voided a law aimed at reducing that liability by cutting benefits, leaving the state limited options for dealing with the problem.

Worsening pension problems and a growing pile of unpaid bills could result in a further downgrade, Moody’s cautioned. Illinois’ bill backlog stood at $7 billion on Thursday, according to the state comptroller.

The downgrade by Moody’s marked the 17th by major credit rating agencies for Illinois since 2003 and the second under Governor Bruce Rauner, a political newcomer who took office in January with an agenda to turn around the state’s sagging finances.

A spokeswoman for Rauner said the latest downgrade confirms his contention the state needs pro-business and structural reforms that Democratic lawmakers have rejected.

Democrats, in turn, pointed the finger of blame at Rauner.

“Since Governor Rauner has taken office, revenue is down, the bill backlog is up, services are cut, jobs growth has slowed and now our credit rankings are lower,” said Rikeesha Phelon, a spokeswoman for Senate President John Cullerton.

Even before this week’s downgrades, Illinois had the lowest credit ratings among the 50 U.S. states. Ratings histories from the three major credit rating agencies indicate few states have ever had their GO ratings fall below the A level.

Robert Amodeo, a portfolio manager at Western Asset in New York, said bond investors are frustrated by the lack of progress in the fifth-largest U.S. state. Still, Illinois is contemplating a return to the municipal bond market this fiscal year after an absence of nearly 1-1/2 years.

“They will find a clearing level even at triple-B, but they will be penalized for it,” Amodeo said.

Illinois has been paying a hefty market penalty for a while. Its so-called credit spread over Municipal Market Data’s benchmark yield scale for triple-A-rated bonds is 190 basis points for 10- and 30-year debt.

Moody’s also downgraded Illinois’ sales tax revenue bonds to Baa1 from A3 and cut the rating on state appropriation dependent Metropolitan Pier and Exposition Authority bonds to Baa2 from Baa1.

By REUTERS

OCT. 22, 2015, 6:06 P.M. E.D.T.

(Additional reporting by Dave McKinney in Chicago; Editing by Bill Rigby and Matthew Lewis)

Like the U.S. territory, New Jersey is borrowing to cover its budget holes.

Mike Myers’ 1997 movie Austin Powers has a scene in which a character is squashed by a steamroller. The film is a comedy, and the humor in the scene comes from how avoidable the tragedy is. The steamroller starts far away, and moves pretty slowly. But instead of moving to avoid the steamroller, the victim just stands there, screaming “Oh no!” until he’s flat.

Puerto Rico and its creditors are now under the steamroller. As in Austin Powers, the steamroller did not move very quickly. Analyst Sergio Marxuach, for example, warned in 2006 that the Commonwealth’s finances were on an unsustainable path. Marxuach pointed out in his warning that in other cases of municipal distress, for example New York in the 1970s, fiscal discipline had been imposed from above. Puerto Rico’s peculiar status as a commonwealth has meant that discipline from above has so far been unavailable. And discipline from capital markets, though now severe, has been late to arrive.

So after years and years of borrowing, including borrowing to cover operating deficits, Puerto Rico and its government-chartered corporations now have a total debt of $72 billion. This is approximately a year of the island’s Gross National Product. As former U.S. Congressional Budget Office director Douglas Holtz-Eakin said in his September testimony before the Senate Finance Committee, a 10% ratio of interest payments to revenues marks something of a ‘bright line’ way to identify distressed sovereign borrowers, and Puerto Rico crossed that threshold in March of 2015. In August, Puerto Rico Governor Alejandro Garcia Padilla announced that the island’s debt was unpayable.

So I believe that it is now safe to describe the situation as a crisis. Two competing teams of former IMF economists are now laying out their prescriptions. One team, commissioned by the Commonwealth’s Government Development Bank, says that the only way forward is to impose some debt restructuring on the island’s bondholders. The release of this report coincided with Governor Padilla’s announcement that the island’s debt was unpayable. A second team of former IMF economists, commissioned by a group of hedge funds that hold some of Puerto Rico’s debt, claims that with sufficient fiscal austerity the island can, in fact, pay its capital market obligations. I conclude this from the two competing reports: the end of a long career at the IMF does not mean the end of opportunities to do well-compensated work in warm places.

One can create caricature versions of these two different views that are not as far apart as they seem at first glance. The (caricature) first report: the current debt is unpayable without imposing unprecedented and unacceptable austerity on the island’s residents. The (caricature) second: the current debt can be paid. You just have to impose unprecedented austerity on the island’s residents. The second set of economists make the point that stiffing today’s creditors will make it much more expensive to borrow in the future. The island must choose between firing its teachers today and being unable to finance new schools for the children of tomorrow.

Regardless of which generation of children we decide to punish in this crisis, the blame belongs to yesterday’s and today’s adults. This steamroller did not fall out of the sky – year after year the island failed to balance its books, and closed the difference by borrowing. Without a change in this pattern, the crisis was inevitable.

Whatever happens to the debt, some restructuring of the Puerto Rican economy is essential. Inefficient government monopolies raise the cost of electricity and water on the island. The Puerto Rican minimum wage is the same as in the mainland U.S., even though labor productivity is much lower. And I cannot imagine any serious economist coming out in support of the Jones Act, a protectionist measure that protects the U.S. shipbuilding industry. This much-discussed policy hurts the mainland economy a bit, but is much more damaging for Puerto Rico because of the island’s greater dependence on shipping.

Returning to the debt, competing reports now emerge about potential federal intervention in the situation. Democrats in Congress have introduced legislation that would give government entities in Puerto Rico access to Chapter 9 bankruptcy protection, but this legislation does not appear to have a realistic path towards enactment. Apparently credible reports of a Treasury-sponsored ‘superbond’ plan, through which the island’s debt would be consolidated, have now been denied by Treasury spokesperson, although officials have met with the indebted U.S. territory’s leadership to discuss how the federal government could help.

One type of federal intervention would be a bailout, but the current prices of Puerto Rican bonds seem to indicate that this is unlikely. On the other hand, a presidential election is on the horizon, and Puerto Rican voters in Florida are an important group in a potentially decisive swing state. I suspect that either of our political parties, if offered the presidency for the price of a bailout, would find a way to get comfortable with it. But Puerto Rico is just one issue in a very complicated election season, so I think that any help from the federal government simple enough to be described only with the word ‘bailout’ seems unlikely.

All that I am confident about now is that there will be litigation, that the litigation will be expensive, and that the people of the island, one way or another, will bear most of the costs.

Are there any lessons in the Puerto Rican experience that might be applied elsewhere? Well, at the end of 2010, Meredith Whitney created a stir in the municipal finance market, warning, in effect, that the steamroller was upon us. She claimed that a massive wave of municipal defaults would materialize in a matter of months.

At the time, many market participants argued that Whitney’s predictions were way off the mark. Harvard’s Randy Cohen and I wrote a paper in response to her statements, but our voice was just one among many. We argued then that in most places, there was still time, with responsible political behavior, to avoid the steamroller. Now five years later, the massive wave of defaults Whitney predicted has not materialized on anything close to the timetable she described.

But we are now five years on, and there are certainly places where the steamroller is closer in 2015 than it was in 2011. One feature of American municipal finance is that states and municipalities, in general, have rules that prevent them from borrowing in order to cover budget deficits. In practice, this rule means only that they have to employ trickery in order to accomplish the economic substance of borrowing to cover deficits while technically complying with balanced budget rules. The most important channel for this trickery has been through pensions, as Robert Novy-Marx of the University of Rochester and Joshua Rauh of Stanford have highlighted in a series of papers. There are other channels as well.

In the humorously named ‘Truth and Integrity in State Budgeting,’ the Volcker Alliance examines the situation in New Jersey. The report focuses on the recent financial chicanery that the state has employed in order to ‘balance’ its budget. A relatively simple example (and New Jersey is not alone here) is the issuance of bonds whose above-market coupons mean that they can be issued at prices above par, with the difference between the offering price and par value being used as revenue in the current fiscal year. This trick is just a back-door way for New Jersey to do borrow to close a budget shortfall, just like Puerto Rico.

Other examples are more complicated. The coverage of New Jersey’s catastrophic recent tobacco bond refinancing by Cezary Podkul of ProPublica has been an example of great journalism about an extremely convoluted financial topic. I think that only the deal’s complexity has prevented this and other similar transactions from becoming even greater national scandals than they have been. Tobacco bonds stem from the 1998 Tobacco Master Settlement Agreement, through which states gave up legal claims against tobacco manufacturers in exchange for future payments tied to tobacco consumption. Like many states, New Jersey years ago securitized much of it future payment stream, selling the future receipts off to investors in exchange for upfront cash.

The recent tobacco bond refinancing transaction boils down to this: New Jersey received $93 million in budget relief today in exchange for $400 million over the next several years. Some additional net payments based on smoking patterns decades into the future give the deal enough complexity that, should the need arise, a team of suitably incentivized experts will be able suppress their laughter while certifying that the deal was a good idea for the state.

But it’s bogus. It is borrowing to cover a budget hole, like Puerto Rico in 2006. It is a step in the direction of the steamroller that is now on top of Puerto Rico.

FORTUNE

by Daniel Bergstresser

OCTOBER 19, 2015, 12:11 PM EDT

Daniel Bergstresser is an associate professor of finance at Brandeis International Business School. The views expressed here are his own and not necessarily those of Brandeis. Bergstresser is also engaged in consulting activities for financial institutions, but he has no direct or indirect financial stake in the performance of municipal bonds issued out of either Puerto Rico or New Jersey.

Illinois will delay payments to its pension fund as a prolonged budget impasse causes a cash shortage, Comptroller Leslie Geissler Munger said.

The spending standoff between Republican Governor Bruce Rauner and Democratic legislative leaders has extended into its fourth month with no signs of ending. Munger said her office will postpone a $560 million retirement-fund payment next month, and may make the December contribution late.

“This decision is choosing the least of a number of bad options,” Munger told reporters in Chicago on Wednesday. “For all intents and purposes, we are out of money now.”

Munger said the pension systems will be paid in full by the end of the fiscal year in June. The state still is making bond payments, and retirees are receiving checks, she said.

“We prioritize the bond payments above everything else,” Munger told reporters.

The pension payment delay was inevitable, said some who have been watching the budget gridlock.

“This is just the tip of the iceberg,” said Ralph Martire, executive director of the Chicago-based Center for Tax and Budget Accountability, which monitors Illinois finances.

“Every month they go without resolving the impasse on the budget means it’ll cost more to ultimately resolve it,” Martire said. “This is a natural, predictable consequence if you do something called math.”

Bond Doldrums

Investors have long penalized the state for its fiscal woes. Illinois holds the lowest credit rating among U.S. states with an A3 from Moody’s Investors Service, four steps above junk, and an equivalent A- from Standard & Poor’s. Municipal investors demand an extra 1.9 percentage points to buy 10-year Illinois bonds instead of benchmark munis, according to data compiled by Bloomberg.

“We’re looking for signs that the we’re going to hit a level patch,” said Paul Mansour, head of municipal research in Hartford, Connecticut, at Conning, which holds Illinois debt among its $11 billion of municipal securities. “But this is an indication we’re still going down the hill.”

Bloomberg News

by Elizabeth Campbell and Tim Jones

October 14, 2015 — 11:39 AM PDT Updated on October 14, 2015 — 1:21 PM PDT

Puerto Rico bond prices suggest that investors are doubtful of a proposal being floated that would have the U.S. Treasury assist the commonwealth in the restructuring of its debt.

General obligations maturing July 2035, the most actively-traded Puerto Rico securities in the last three months and originally sold at 93 cents on the dollar, changed hands at an average price of 74.7 cents, little changed from Wednesday, data compiled by Bloomberg show. Trades of at least $1 million on taxable pension bonds maturing July 2038 show the bonds changed hands Thursday at an average price of 30.5 cents, up from 25 cents on Tuesday, Bloomberg data show.

“It’s still new,” said Gary Pollack, who manages $6 billion of municipal debt, including Puerto Rico bonds, as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “It’s still in its infancy, so you can’t get too excited about it as a bond investor. I would hold and wait for this thing to play out more.”

Puerto Rico and federal officials are discussing the possible issuance of new bonds administered by the Treasury to help restructure the commonwealth’s debt, with federal officials overseeing a portion of the island’s tax collections that would be used to repay the securities, a person familiar with the discussions said Wednesday. Treasury officials said in a statement Wednesday that while its inaccurate to suggest the U.S. is in talks to undertake any of Puerto Rico’s obligations, it continues to work with island officials to help the commonwealth return to a sustainable economic path.

The plan would face obstacles. It may require Congressional approval and Puerto Rico’s legislature would need to sign off on allowing the federal government to monitor its revenue collections and direct them to investors. Governor Alejandro Garcia Padilla’s administration faced a backlash from investors after he said in June that the island could no longer afford to repay all of its obligations and would seek to delay principal payments for a number of years. Puerto Rico has also failed to gain support in Congress for legislation to allow some of its agencies to reorganize under Chapter 9 bankruptcy.

Such a restructuring plan may be too late to help Puerto Rico pay investors in December and January. Officials have said the island may run out of cash in November. The Government Development Bank owes $354 million of principal and interest on Dec. 1, with $267 million of bonds maturing on that date guaranteed by the commonwealth. Another $357 million of general-obligation interest is due Jan. 1.

“It would probably take some kind of Congressional intervention in order to make this type of transaction take place,” Daniel Hanson, an analyst at Height Securities, a Washington-based broker dealer, said Thursday. “And Congress certainly doesn’t have the bandwidth between now and the end of the calender year to really seriously dig into Puerto Rico.”

Garcia Padilla met with Treasury officials in Washington on Wednesday to discuss the commonwealth’s debt crisis, Jesus Manuel Ortiz, the governor’s spokesman, told reporters Thursday in San Juan.

“The governor emphasized the need for the government of Puerto Rico to reach some kind of structured agreement to organize its debt,” Ortiz said.

Moody’s Investors Service wrote in a report Thursday that the deepening crisis might prompt U.S. intervention at some point, though lawmakers remain wary of providing any assistance that resembles a bailout.

Bloomberg News

Michelle Kaske

October 15, 2015 — 11:21 AM PDT Updated on October 15, 2015 — 1:59 PM PDT

Taylor Riggs, a contributor to Bloomberg Briefs, talks with reporter Joe Mysak about this week’s municipal market news.

Watch the video.

New York, October 15, 2015 — While the United States (Aaa stable) is unlikely to provide a financial bail-out for Puerto Rico (Caa3 negative) as the territory tries to restructure some of its $73 billion in debt, media reports suggest the US Treasury Department is considering taking a more active role, Moody’s Investors Service says, as the deteriorating fiscal situation leads to increasing pressure on Congress to take actions to stabilize the island’s economy or finances.

“A combination of federal initiatives could encourage Puerto Rico’s return to solvency and market access with little or no incremental cost to US taxpayers beyond current levels of support,” Vice President — Senior Credit Officer Ted Hampton says in “Puerto Rico (Commonwealth of):Deepening Fiscal Crisis Might Prod US Intervention.”

Current proposed legislation to amend the bankruptcy law would authorize Puerto Rico’s public corporations to file for Chapter 9 bankruptcy protection if they can demonstrate insolvency. While corporations like the Puerto Rico Electric Power Authority (PREPA — Caa3 negative) and Puerto Rico Highways and Transportation Authority (PRHTA — Ca negative) would likely qualify under the legislation, almost 80% of Puerto Rico’s debt probably would be ineligible for restructuring under Chapter 9, unless the legislation was to be broadened in scope.

Some in Congress have also suggested implementing a federal financial control board to put the commonwealth on a path to fiscal health. However, this is likely to meet heated opposition in Puerto Rico since the commonwealth has governed itself for many years. Congress instituted a control board for the District of Columbia (Aa1 stable) in 1995.

The treasury is reportedly considering a “superbond” proposal, where the US Treasury would hold certain pledged commonwealth revenues in trust for payment on debt service on newly issued securities.

Hampton says if a “superbond” came to fruition along with a financial control board, it could accelerate the restructuring negotiations.

Other measures to provide relief for Puerto Rico without burdening US taxpayers include loosening federal minimum wage requirements, or granting the commonwealth’s employers a reprieve in future minimum wage increases. Congress could also exempt Puerto Rico from Jones Act shipping restrictions.

Moody’s says the largest and most immediate impact would be stabilizing current federal healthcare funding on the island, which is scheduled to decline in coming years even as the share of citizens participating in Medicaid is higher in Puerto Rico (48%) than in any US state.

“However, any actions by the federal government will take time to implement,” notes Hampton, “given the current partisan gridlock in Congress and a lack of transparency on the commonwealth’s finances.”

Moody’s also notes that even as the commonwealth faces a liquidity crisis and potential new defaults, Congress is less likely to offer Puerto Rico assistance if it encumbers US taxpayers.

The report is available to Moody’s subscribers here.

Puerto Rico and U.S. officials are discussing the issuance of a “superbond” possibly administered by the U.S. Treasury Department that would help restructure the commonwealth’s $72 billion of debt, people familiar with the plan said.

Under the plan, the Treasury or a designated third party would administer an account holding at least some of the island’s tax collections. Funds in the account would be used to pay holders of the superbond, which would be issued to existing Puerto Rico bondholders in exchange for outstanding debt at a negotiated ratio.

Investors would receive less debt, likely taking an effective “haircut” on the value of their holdings, but would have higher expectations for getting repaid.

The proposal would mark an important change in Puerto Rico’s relationship with the U.S. government, which has resisted wading into the island’s debt morass. A superbond would need to clear high political hurdles in Washington and Puerto Rico to become a reality. Discussions with bondholders over the size of any haircut could present further challenges to reaching a deal.

Talks between Puerto Rico’s representatives and Treasury officials are preliminary, and any plan wouldn’t include financial aid or a U.S. guarantee of Puerto Rico debt, the people said. They said the proposed bond would be just one piece of a restructuring puzzle that the island’s government is trying to assemble, after admitting this year that it cannot pay its debt in full.

The plan has no immediate precedent but echoes in some respects the Brady bonds used in Latin American debt restructurings of the 1980s. One major difference: Those bonds, named for former Treasury Secretary Nicholas Brady, were backed by Treasury-issued zero-coupon bonds, which guaranteed repayment of the principal and part of the interest of the Latin debt.

The Obama administration “has said repeatedly that it has no plans to provide a bailout to Puerto Rico,” and the Treasury Department isn’t engaged in talks to “undertake any of Puerto Rico’s financial obligations,” a Treasury spokesman said Wednesday.

The Treasury and the commonwealth are debating how much of Puerto Rico’s taxes would be funneled to the account and who would collect the taxes, the people said. Puerto Rico’s leaders may not be willing to surrender control of tax revenue as required by the deal, the people said. Depending on how it is structured, it could also require congressional approval.

Puerto Rico hasn’t been able to sell bonds after years of issuing new debt to fund budget deficits. The commonwealth and its advisers have been working for months to develop a package of fiscal and financial overhauls.

A superbond could be appealing to creditors. Hedge funds that own billions of dollars of Puerto Rico debt have been pushing the idea of a superbond for months, hoping it would prevent a default and boost the value of their investments. Bondholders have been unwilling to swap the debt they hold for new bonds backed only by tax revenues under Puerto Rico’s supervision because they fear the money could be diverted.

Puerto Rico is working with law firm Cleary Gottlieb Steen & Hamilton LLP, a specialist in government defaults, and Millstein & Co., a financial-advisory firm founded by the Treasury’s former chief restructuring officer, Jim Millstein, who ran the successful turnaround of American International Group Inc.
Puerto Rico cannot restructure its bonds in bankruptcy court because it is a commonwealth, not a state. Democratic lawmakers have proposed bills making the island’s municipal entities eligible for bankruptcy protection. Republicans in Congress have floated the idea of a federal control board and have said they want Puerto Rico to produce a more detailed plan to balance its budget before they support the legislation.

Concerns about a potential default intensified over the summer as it became clear Puerto Rico was using tax revenue earmarked for debt payments to plug budget gaps. The commonwealth disclosed in September that it expects a $205 million shortfall this year when large bond payments are due.

Government Development Bank of Puerto Rico bonds that mature in 2016 traded at 49 cents on the dollar this month compared with 77 cents on the dollar in June, according to data from Electronic Municipal Market Access.

Fears of a default are intensifying divisions between different types of bondholders who are splitting into various factions, each of which claims priority in the event of a restructuring.

“Our view has always been that there’s a high probability of disorderly litigation here, and we see this looming now as imminent,” said Ted Hampton, an analyst at Moody’s Investors Service.

In September, a bondholder group represented by GLC Advisors & Co. with more than $5 billion in bonds of different stripes split into separate groups. Mutual funds managed by OppenheimerFunds Inc. and Franklin Advisers Inc. also own billions of dollars of Puerto Rico debt, while bond insurers Assured Guaranty Ltd., MBIA Inc. and Ambac Financial Group Inc. have guaranteed billions of dollars of bonds.

Puerto Rico is attempting to capitalize on the divisions by agreeing to negotiate only with bondholders who agree not to discuss terms with investors holding different types of bonds, a person involved in the talks said.

THE WALL STREET JOURNAL

By MATT WIRZ, NICK TIMIRAOS and AARON KURILOFF

Updated Oct. 14, 2015 8:47 p.m. ET

Write to Matt Wirz at matthieu.wirz@wsj.com, Nick Timiraos at nick.timiraos@wsj.com and Aaron Kuriloff at aaron.kuriloff@wsj.com

SAN FRANCISCO — Most California cities support a new strategy by the nation’s largest public pension fund to make its investment portfolio more conservative, even though the move could gradually increase how much employers pay into the fund.

Still, some cities expressed serious reservations about a California Public Employees’ Retirement System plan to incrementally lower the $293 billion fund’s assumed rate of investment returns following periods of strong performance.

The League of California Cities surveyed its members, which have been struggling to shoulder the burden of growing pension costs. The survey found that many cities prefer a more gradual increase in costs, as opposed to spikes following market downturns, said Bruce Channing, Laguna Hills city manager.

“As employers, more predictability and less spiking of rates from one year to the next is preferable,” said Channing, who is also chair of the league’s city managers pension reform task force.

Next week, the Calpers board will consider a new policy to gradually reduce the assumed return rate from 7.5 percent to 6.5 percent over a few decades. The average return rate across 126 funds tracked by the National Association of State Retirement Administrators was 7.68 percent as of May.

Calpers intends to reduce portfolio volatility as California’s baby boomers retire and payouts exceed active workers’ contributions. The idea is similar to that of an individual nearing retirement adopting a more conservative investment strategy.

But a lower, albeit less volatile, rate of return will necessitate higher contributions from local governments and public workers.

The league said 77 percent of those surveyed supported Calpers’ strategy to reduce portfolio risk, even though the move would over time raise pension contributions more than currently planned. Ten percent of respondents opposed the strategy, and the rest were unsure, the survey of 115 cities found.

Opponents of higher contributions included Alameda, a city of nearly 76,000 near San Francisco. Its pension costs for safety workers like police and fire consume 48 cents of every dollar paid in salary and are expected to grow to 65 cents in five years.

“It’s devastating on our bottom line,” said Alameda Interim City Manager Liz Warmerdam. “We have very little input. Whatever they want to do, local governments have to sit here and deal with it. It’s extremely frustrating.”

Massive pension costs contributed to a handful of recent municipal bankruptcies across the country, including in the California cities of Vallejo, Stockton and San Bernardino.

Stockton and Vallejho have emerged from bankruptcy. Vallejo City Manager Daniel Keen said he supports actions to ensure Calpers’ ability to pay benefits, but added it may require sacrifices.

“While this plan does cause us more pain on the part of our budget, it is pain we were anticipating,” said Keen. “It is going to require adjustments in our budget and might result in cuts to some services.”

“It’s undeniable that we have to deal with the fact that there are significantly fewer active employees paying in,” said Leyne Milstein, Sacramento’s finance director. “We need to make sure this system is sustainable.”

But like many cities across the state, Sacramento’s budget is not keeping pace with rising pension costs. Next year, the city’s expenses are expected to exceed revenues by $8.8 million, of which $5.8 million is pension growth, Milstein said. In five years, Sacramento expects to pay close to $80 million in pension costs from its general fund, up from $60 million today.

“This will be extremely painful on local government budgets, but it’s the honest approach to address the large unfunded liabilities,” said Senator John Moorlach (R-Costa Mesa), a pension reform supporter. “Unfortunately, it’s the taxpayers who are on the hook as pension debt eats up public funds meant for police and fire protection, as well as other services.”

By REUTERS

OCT. 16, 2015, 3:42 P.M. E.D.T.

(Reporting by Robin Respaut and Rory Carroll; Editing by David Gregorio)

SAN FRANCISCO (Standard & Poor’s) Oct. 6, 2015–Standard & Poor’s Ratings Services has assigned its ‘AA-‘ long-term rating, and stable outlook, to California’s estimated $961 million of general obligation (GO) bonds, consisting of $855 million in tax-exempt various purpose GO refunding bonds and $106 million in taxable variable purpose GO bonds.

At the same time, Standard & Poor’s affirmed its ‘AA-‘ long-term ratings and underlying ratings (SPURs) on California’s $75.6 billion of GO bonds outstanding as of Sept. 1, 2015.

Finally, we affirmed the long-term component of the ‘AAA/A-1+’ and ‘AAA/A-2’ ratings on some of the state’s GO variable-rate demand bonds. The long-term component of the ratings is based jointly (assuming low correlation) on that of the obligor, California, and the various letter of credit (LOC) providers. The short-term component of the ratings is based solely on the ratings on the LOC providers.

“The GO rating is also based on our view of the state’s diverse economy, which is currently expanding faster than the nation’s; demonstrated commitment in five consecutive budgets to aligning recurring revenues and expenses while paying down budgetary debts; good budgetary reserves; strong enough overall liquidity that the state’s typical intra-year general fund cash deficits can be financed entirely from internal sources; and declining, but still moderately high debt ratios,” said Standard & Poor’s credit analyst Gabriel Petek.

“Somewhat offsetting these strengths, in our view, are the state’s persistently high cost of housing relative to other states that contributes to a relatively weaker business climate in California, volatile revenue base, large retirement benefit liabilities, limited prefunding of retiree health care benefits to date, and large backlog of deferred maintenance and infrastructure needs across the state,” added Mr. Petek.

Under current conditions, the state’s fiscal structure generates modest operating surpluses that translate to larger projected budget reserves, according to the state department of finance’s forecast, than the state has had in recent memory. Passage of Proposition 2 in 2014 helped institutionalize a more disciplined approach by requiring annual deposits to the reserve fund. In addition, the measure captures capital gains-related revenue spikes, thereby discouraging the state from building instances of extraordinary revenue growth into its budget base. The state has also restored considerable fiscal flexibility by retiring much of its budgetary debt.

SAN FRANCISCO (Standard & Poor’s) Oct. 6, 2015–Standard & Poor’s Ratings Services assigned its ‘AA’ long-term rating and stable outlook to Nevada’s planned approximately $334 million issue of general obligation (GO) debt. We simultaneously affirmed our ‘AA’ rating on Nevada’s GO debt outstanding and our ‘AA-‘ long-term rating and underlying rating (SPUR) on the state’s appropriation-backed certificates of participation. The outlook on all ratings is stable.

“The state has taken steps to bring its fiscal structure into alignment,” said Standard & Poor’s credit analyst Gabriel Petek. “This, along with Nevada’ s demonstrated commitment to adhere to its policy of achieving an ending balance equal to at least 5% of appropriations (even if it potentially fell short in fiscal 2015) helps underpin the state’ s strong credit quality, in our view,” added Mr. Petek. “Also adding to credit stability, in our view, is the state’s recent record of good liquidity and a mechanism to prefund a significant portion of its annual debt service. In our view, these characteristics reduce the risk that an unanticipated revenue shortfall could result in strain on the state’ s ability from a cash flow perspective, to fund its debt service.”

The current bond offering consists of:

• $256.3 million of GO (limited-tax) capital improvement and refunding
  bonds, series 2015D;
• $20.94 million of GO (limited-tax) natural resources and refunding bonds,
  series 2015E;
• $47.1 million of GO (limited-tax) bonds (issued for Nevada Municipal Bond
  Bank Project Nos. 87, 88, and 89) series 2015F; and
• $10.1 million of GO (limited-tax) open space, parks, natural resources,
  and refunding bonds, series 2015G.

The ‘AA’ rating reflects our view of the state’s:

• Demonstrated willingness to address budget gaps with both cuts to
  spending and increased revenue measures when necessary;
• Consistently good financial liquidity on both an intra- and inter-year
  basis;
• Good constitutional protections, which require balanced budgets and give
  tax preference to debt service;
• Commitment to and track record of maintaining positive ending balances;
• Nascent signs of employment diversification; and
• Low total debt relative to the state’s economy and a low debt burden as a
  portion of the state’s budget.

Partly offsetting the above strengths, in our view, are the state’s:

• Depleted rainy day reserve fund, which it used during fiscal 2015 to
  address a biennium operating deficit that had emerged;
• Still slow economic growth despite population growth rates above the
  national average; and
• Still relatively narrow economy that relies on sectors sensitive to
  changes in discretionary consumer spending (tourism and gaming) and those
  with volatile performance (construction and real estate) — although we
  see evidence that this has begun to change.

In this week’s Extra Credit, Associate Director Sarah Sullivant discusses what’s driving California’s redevelopment sector and Senior Director Lisa Schroeer reviews the trends shaping the bank loan market.

Listen to the Podcast.

A week after calling this well-heeled beach town “selfish” for refusing to give up land needed for the state’s dune project, Gov. Christie on Thursday moved to give Margate no choice.

The state said it had filed an eminent domain action against the City of Margate to gain access to city-owned beachfront easements needed for the project. The city’s opposition has caused the Army Corps of Engineers to abort plans for dunes for Ventnor, Margate, and Longport.

Prior to the filing, the state had offered Margate $29,000 for nine beachfront easements, based on an appraisal, the city said. When that was rejected, the Christie administration took the action in Superior Court, saying it was seeking 87 municipally owned lots. Margate officials could not explain what 87 referred to. “I am aware of nine,” said Richard Deaney, city business administrator.

Margate voters have twice passed questions in referendums opposing dunes and authorizing their government to wage a legal battle against the state.

The state had been threatening to file eminent domain against Margate since January, when a federal judge in Camden told the state that eminent domain would be the proper, and perhaps only, way to get control of the easements. The state had attempted to take the land through an administrative order, which prompted Margate to file a lawsuit in U.S. District Court.

Thursday night, the city issued a response saying it was “prepared to defend in any court at any time the legal rights of the people of Margate to provide the best, safe and most effective storm protection.”

“The people of Margate know and love their community . . . and appreciate the need for the best protection against the storms,” the statement said. The city contends that its bulkhead system is sufficient and that dunes “eventually wash out to sea.”

“Margate’s opposition to the dunes is not based on a vain desire to preserve oceanfront views,” the statement said.

Deaney said the city had requested to negotiate the terms of the shore protection project in response to the $29,000 offer, but that the state had filed for eminent domain as soon as a 14-day time required by law following an offer had passed.

“We sent them a letter saying we’d like to negotiate with them,” Deaney said. “They ignored it.”

Deaney said the city was not against shore protection but wanted a chance to discuss changes in the technicalities of how that is done. Residents argue that dunes will be a costly, unsightly, and ineffective way of protecting the town. Most of the flooding issues from past storms have been from the back bay.

The Army Corps of Engineers had to put aside its Absecon Island protection project last winter after Margate fought the state to essentially a stalemate in federal court. Longport voluntarily gave the state access to its easements following Hurricane Sandy, after opposing the dunes for years. Ventnor has long cooperated with the state and federal agencies, and has had dunes on most of its oceanfront for years.

The release, issued directly from the governor’s office, tallies the amount of property at 87 lots owned by Margate, saying action “builds upon the ongoing work the Christie administration has been undertaking to secure easements necessary to construct these vital coastal protection projects.” The filing covers easements “over all city-owned properties east of the Margate bulkhead, south of Ventnor and north of Longport.”

Of 4,279 beachfront easements statewide, 366 are outstanding, owned by 239 property owners. Environmental Protection Commissioner Bob Martin said in the release that the state was “very disappointed” that Margate forced the state to go to court to protect its citizens and promised to “continue to be very aggressive in using eminent domain as a tool to obtain the easements.”

Also holding out in Margate are 10 private owners with beachfront easements. Those properties are being appraised, the state said.

Margate has been represented by former U.S. Rep. Robert E. Andrews of the Dilworth Paxson law firm. The state had been reluctant to take the case to state court, where eminent domain fights can drag on. The state will argue that the project is necessary “to protect lives, homes, businesses, and infrastructure.”

“We’ve never been happy with the design and proposal for shore protection,” Deaney said of the city. “We’re willing to negotiate the concept of shore protection. We have a lot of ideas as to how that can be accomplished. We don’t believe in their single arbitrary project.”

He called the $29,000 offered for access to the easements “low” but said price was not the issue.

The state declined to comment beyond the news release. The release noted that property owners in other municipalities voluntarily provided easements to allow the Army Corps to erect dunes. It said Longport and Margate both suffered “significant overwash” of its beaches and “damage to its bulkhead” during Sandy, “which required Federal Emergency Management Agency funds for the cleanup.”

The state’s release also notes a New Jersey Supreme Court ruling in July 2013 in which the Borough of Harvey Cedars acquired an easement through eminent domain, but the parties could not agree on fair compensation. The court reversed a jury ruling valuing the easement at $375,000, saying homeowners “were not entitled to a windfall” for a project they also benefit from. The couple subsequently settled for $1 as compensation.

In addition to the Absecon Island project, beach and dune construction projects are stalled in Monmouth County and in northern Ocean County, where residents are also fighting the state’s efforts to use their properties to construct dunes.

BY TRIBUNE NEWS SERVICE | OCTOBER 9, 2015

By Amy S. Rosenberg

(c)2015 The Philadelphia Inquirer

Even as Chicago confronts a fiscal crisis, investors are looking beyond its turbulent finances with anticipation toward the city’s biggest bond deal ever.

Chicago sold about $2 billion of securities for O’Hare International Airport, backed by revenue from the nation’s busiest airport and sheltered from the mounting pension obligations squeezing the third-most populous U.S. city. Fund managers at Wells Fargo Asset Management and Conning say any yield premium resulting from the city’s tainted reputation is likely a buying opportunity given the airport’s rising traffic and hub status.

“Just looking at the nuts and bolts of the deal, it’s been pretty impressive what’s going on there,” said Paul Mansour, head of municipal research at Hartford, Connecticut-based Conning, which holds O’Hare debt among its $11 billion of tax-exempt securities and is reviewing the deal. “There will be a certain amount of firms, individuals who say no Chicago under any circumstance. That will add some value for those that look through to the underlying credit.”

Chicago has the worst-credit rating of all major U.S. cities except Detroit, and had to pay yields approaching 8 percent for a taxable offering in July. Wednesday’s issue is raising $1.6 billion to refinance higher-cost bonds and about $330 million to cover costs of projects such as terminal improvements.

A portion of federally tax-exempt securities due in January 2046 were sold with a yield of 3.9 percent, according to preliminary data compiled by Bloomberg. That’s about 0.7 percentage point more than 30-year benchmark municipal bonds.

During the city’s last bond sale for O’Hare in November 2013, 20-year securities were issued for yields as high as 5.53 percent, about 1.7 percentage point more than benchmark debt, according to data compiled by Bloomberg. That premium has since narrowed by almost a third, trading for an average yield of 4.1 percent on Sept. 11.

The offering follows sales from the city and related agencies such as the Chicago Park District that have had to pay up to borrow. The O’Hare bonds are rated as much as two levels higher than the city’s general-obligation debt. The sale comes as U.S. airport bonds are outperforming the broader $3.7 trillion tax-exempt market for a fifth consecutive year amid an improving economy and falling energy costs.

Mayor Rahm Emanuel is working to ease Chicago’s fiscal challenges and convince the city council to pass the biggest property tax increase ever to help cover retirement costs. O’Hare is sheltered from the fallout of the city’s $20 billion pension hole because the Federal Aviation Administration limits the use of airport revenue to facility purposes. That prevents the city from taking excess O’Hare monies to fix its finances, Standard & Poor’s said in a Sept. 30 report.

Historical Premium

Even so, issuers associated with distressed situations typically have to pay up, and that’s what Merritt Research Services expects.

“It’s just a historical premium that they’ll have to pay because of their association with Chicago,” said Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services, which analyzes municipal finance. “It may end up for a yield investor more attractive than an average airport.”

That wasn’t the case with Michigan’s Wayne County Airport Authority, which runs the airport serving once-bankrupt Detroit. The authority wasn’t penalized when it sold about $522 million last month despite the county’s fiscal distress. Wayne is in a consent agreement with the state because of its ongoing budget deficit.

Airliner Hub

S&P raised its outlook on O’Hare general revenue bonds last month by one level to A, five steps above junk and two levels higher than its rating on the city’s GO debt. The credit rater cited the airport’s high traffic. Fitch Ratings assigned an A- ranking to the debt, four steps above junk, and notes the airport general revenue bonds are secured by a first lien on airport net revenues.

O’Hare is a hub for American Airlines Group Inc. and United Continental Holdings Inc., the largest carriers. The airport is the biggest worldwide when measured by operations, according to bond documents. In 2014, O’Hare had the busiest airport measured by flight operations, according to FAA data.

Municipal airport bonds have climbed 2.2 percent this year, compared to a 1.8 percent gain in the broader market, according to Bank of America Merrill Lynch data. Crude-oil prices have tumbled 8.6 percent in 2015, and sliding fuel costs have benefited municipal airports in particular, Janney Fixed Income Strategy said in an Oct. 5 report.

Chicago is expecting more than $150 million in present-value savings from the refinancing with interest rates near generational lows, said Molly Poppe, a city spokeswoman.

O’Hare’s capital projects have shown progress and been within budget, according to bond documents. Three of four runways and one runway extension for the O’Hare modernization project are complete as of this month. Airfield improvements funded by the 2015 bonds include installation of runway status lights, maintenance of terminals, and fixes to roadways.

“Airport debt has had a strong bid from investors looking for income, and that should certainly benefit the pricing on this Chicago transaction,” said Gabe Diederich, a Menomonee Falls, Wisconsin-based money manager at Wells Fargo Asset Management, which holds some O’Hare’s bonds among its $39 billion of munis, and is considering buying the deal. “The essential nature of the airport and the size of it are going to overwhelm any bias against the city of Chicago.”

Bloomberg News

by Elizabeth Campbell

October 6, 2015

Puerto Rico wouldn’t be able to repay the $5.5 billion of principal and interest due on its general-obligation bonds in the next five years even if the commonwealth diverted sales-tax revenue pledged to cover payments elsewhere, according to Barclays Plc.

The general obligations due through fiscal 2020 surpasses the $4.2 billion of revenue, including sales-tax receipts, that commonwealth officials calculate Puerto Rico will have to pay down central government and some agency debt during that period, Mikhail Foux, a municipal-debt strategist at Barclays in New York wrote in a report Wednesday. The island’s sales-tax collections repay bonds, known as Cofina because of their Spanish acronym, that are backed by that revenue stream.

“Even if Cofina’s cash flow stream is invaded, there would still not be enough value to fully cover principal and interest for GOs and commonwealth guaranteed debt in fiscal year 2016 through fiscal year 2020,” Foux wrote in the report. “This suggests that some type of haircut would be needed,” over those five years, he wrote.

Puerto Rico officials haven’t said that they plan to redirect, or “claw back,” sales-tax collections to pay down general-obligation debt before Cofina bonds. The island’s constitution states that general-obligations must be repaid before other expenses. The commonwealth on Sept. 25 said it would take into account the constitutional priority given to general-obligation bonds as it seeks to restructure $73 billion of debt.

Prices on some Cofina debt would fall if the government uses the sales-tax receipts to repay general obligations first, Foux said. Subordinate Cofinas, which are repaid after senior-lien sales-tax bonds, would drop in value, he said.

“If Cofina is pierced, subs would be severely affected, allowing for more downside even at current depressed levels,” Foux wrote.

Subordinate Cofinas maturing August 2039 traded Wednesday at an average price of 44.5 cents on the dollar, to yield of 12.9 percent, data compiled by Bloomberg show.

Puerto Rico had $13 billion of general obligation debt and $15 billion of sales-tax bonds, as of March 31.
Commonwealth general obligations sold in March 2014 and maturing July 2035 traded Wednesday at an average price of 75.3 cents on the dollar for a yield of 11.1 percent, according to data compiled by Bloomberg.

Bloomberg

by Michelle Kaske

October 7, 2015 — 2:35 PM PDT Updated on October 8, 2015 — 6:20 AM PDT

To Wall Street, the scandals engulfing the Port Authority of New York & New Jersey are nothing but noise.

As the agency sold $2 billion of bonds Thursday, its biggest offering since 2012, investors weren’t focused on the federal and state investigations that spurred the resignation of United Continental Holdings Inc.’s chief executive officer and tarnished Governor Chris Christie’s presidential bid. Instead, they looked at a near monopoly on getting into New York that brings in more than $12 million a day.

The upheaval at the agency may even have a financial upside: It’s searching for a CEO to replace the two top officials who were hired by political appointment and faces pressure to improve its management of the region’s bridges, tunnels and airports.

“They certainly have a lot of work to do,” said Howard Cure, head of municipal research in New York at Evercore Wealth Management, which oversees $6 billion. “But the hope is that this additional scrutiny will make the organization more transparent and better able to provide for its core mission.”

The Port Authority’s bonds have the fourth-highest rating from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings with a stable outlook, indicating no changes are imminent. The agency’s 10-year tax-exempt bonds were sold at yields of 2.33 percent, or 0.25 percentage point more than top-rated munis, according to data compiled by Bloomberg.

The Port Authority receives revenue from almost everyone who comes to the biggest U.S. city, as well as from cargo ships. It runs a commuter train, bridges and tunnels connecting New York and New Jersey, the world’s busiest bus depot in Manhattan, marine terminals, and the region’s three major airports — John F. Kennedy International, LaGuardia, and Newark Liberty International. It also owns the World Trade Center site.

Major Projects

Even with a constant stream of revenue, the Port Authority is facing financial challenges in the coming decades. In addition to its usual upkeep, the agency is moving to replace its bus terminal, which may cost $10 billion, as well as a bottleneck-prone rail tunnel under the Hudson River. Christie and New York Governor Andrew Cuomo want the federal government to pay half of the $20 billion cost of the tunnel.

The agency’s current operating results have been on the upswing. Operating revenue rose 8 percent to $2.3 billion during the first six months of the year, according to Moody’s, as New York’s strong economy fueled an increase in plane travel. At the same time, its operating expenses climbed by 1.3 percent to $1.4 billion.

The agency’s finances stand in contrast to the agency’s battered political reputation. In May, former Deputy Executive Director Bill Baroni and former Christie aide Bridget Kelly were indicted for snarling traffic leading onto the George Washington Bridge in 2013 to punish a New Jersey mayor who didn’t back Christie’s re-election. David Wildstein, a former Christie ally at the agency, pleaded guilty to participating in the scheme. Baroni and Kelly are fighting the charges.

Widening Investigation

Last month, United CEO Jeff Smisek stepped down amid an investigation into whether the airline ran a money-losing flight from Newark, New Jersey, to South Carolina, where former authority Chairman David Samson had a vacation home, in an effort to secure funding for projects. Prosecutors haven’t alleged wrongdoing.

The Securities and Exchange Commission, which polices fraud in the municipal-bond market, is also investigating the agency’s disclosures to investors.

The Port Authority’s finances show that the management turmoil hasn’t hurt its operations, said Dan Solender, head of municipal debt at Lord Abbett & Co. in Jersey City, New Jersey. In an Oct. 6 report, S&P said the agency has kept expenses below its target during the first eight months of the year while revenue exceeded forecasts.

“We really care about the finances and how much leverage they’re taking on, how they’re controlling expenses and things like that,” said Solender, who owns some agency bonds. “For us, those are the bigger issues than the political headlines.”

Bloomberg

by Romy Varghese

October 7, 2015 — 9:01 PM PDT Updated on October 8, 2015 — 11:17 AM PDT

Investors added the most money to municipal-bond mutual funds since January in the past week as state and local government bond yields fell to the lowest level in five months.

Individuals poured $714 million into muni funds in the week through Wednesday, Lipper US Fund Flows data show, marking the second inflow in three weeks. Those funds investing in the longest-dated debt fared the best, capturing $685 million of the cash, as the Federal Reserve continued its almost decade-long policy of keeping borrowing costs close to zero.

Benchmark 10-year munis yield 2.09 percent, close to the lowest level since April, data compiled by Bloomberg show. That’s pushed the return on state and local debt to 1.9 percent this year, better than the 1.6 percent gain for Treasuries and 0.1 percent for investment-grade corporate securities, Bank of America Merrill Lynch data show.

In the four weeks through Sept. 16, the day before the Federal Open Market Committee released its policy statement leaving its benchmark rate unchanged, individuals withdrew $1.4 billion from muni mutual funds, Lipper data show.

Bloomberg

by Brian Chappatta

October 8, 2015 — 2:49 PM PDT Updated on October 9, 2015 — 6:39 AM PDT

Taylor Riggs, a contributor to Bloomberg Briefs, talks with reporter Joe Mysak about this week’s municipal market news.

Watch the video.

October 8, 2015

As Detroit continues a journey toward economic recovery, the housing market in many parts of the city remains a serious challenge. In particular, mortgage activity is stuck at historically low levels, even as jobs and investment continue to grow throughout the city and the region. What steps—policies, programs, and products—should we take to stabilize and improve the homebuying market while ensuring affordable options for homeowners and renters alike?

Continue reading.

The state with the richest population may not have enough money in its own pockets.

Connecticut has roughly half of what it needs to pay future retirement benefits for its workers, meaning the home to scores of hedge funds and some of the country’s wealthiest towns is wrestling with financial distress rivaling that of Kentucky or Illinois.

Some investors concerned about the size of Connecticut’s pension hole are backing away from bonds issued by the Constitution State or demanding bigger rewards to hold them. Investors in some Connecticut state bonds now get a premium of about half a percentage point above benchmark bonds from other states, up from 0.28 percentage point a year ago, according to Thomson Reuters Municipal Market Data. Only four other U.S. states are now priced as riskier bets.

Still, some in the state say Connecticut’s affluence is making it difficult to overcome complacency about fiscal problems. Yields on the state’s debt would be even higher and budget problems would be worse if not for a deep pool of wealthy in-state investors willing to gobble up Connecticut’s tax-deductible debt, according to analysts.

“There’s almost limitless money to buy Connecticut bonds,” said Matt Fabian of research firm Municipal Market Analytics. Investors “are getting less of a risk premium than I think you deserve because of the high demand created by the wealth of the taxpayers in the state,” added Paul Mansour, head of municipal research at Hartford, Conn.-based Conning.

Connecticut’s surprising pension predicament shows how even the wealthiest parts of the U.S. are struggling to keep pace with ballooning retirement obligations that now amount to $1 trillion nationally.

Connecticut’s unfunded pension liabilities more than doubled over the past decade to $26 billion as the state’s retirement system reeled from inadequate state contributions, a subpar investment record and longer lifespans for its retirees.

The state, boosted by wealth concentrated in towns such as Greenwich and New Canaan, has a per capita income of $64,864, the highest in the U.S., according to a Fitch Ratings analysis of Bureau of Economic Analysis data. But the state still finished the fiscal year ended June 30 in the red as tax revenues fell below expectations, and has projected annual deficits of $650 million or more after its current two-year budget cycle ends, according to a report by the state’s Office of Fiscal Analysis.

The state’s pension problems represent “a ticking time bomb,” said State Sen. L. Scott Frantz, a Republican whose district includes the wealthiest section of the state. He is worried residents will leave and Connecticut will “end up as another Detroit,” a city that filed for bankruptcy protection in 2013, absent more dramatic changes.

Some Connecticut officials and union leaders said they are unfazed by the pension problems and pledge to reverse the deficit in the coming decades. Their strategy hinges partly on predictions the various state retirement systems will be able to earn 8% or more annually, a goal that is more optimistic than most public pensions across the U.S. The average target for all state plans is 7.68%, according to the National Association of State Retirement Administrators.

“The truth of the matter is that the state of Connecticut can afford to make up the difference over time,” said Dan Livingston, a Hartford-based labor attorney who has negotiated on behalf of the state’s public workers for decades.

Connecticut’s pension gap developed as a result of decisions made over decades to scrimp on payments when the economy sputtered and to cut taxes, according to state leaders and public-finance experts. And there is a quirk: Connecticut officials contributed almost no money to the state’s various public pensions from the late 1930s until the early 1980s, meaning little had been saved up because the state had chosen not to prefund the retirement system for future payouts.

The smaller base of assets hurt Connecticut during the 1990s when a run up in the stock market pushed most pensions around the U.S. to fully funded status—meaning they had more assets than liabilities, according to Gregory Mennis, director of Pew Charitable Trusts’ public-sector retirement-systems project. Connecticut’s ratio of assets to liabilities, meanwhile, was just 72% in 2001, according to Pew, which tracks pension-fund finances.

Furthermore, according to the Center for Retirement Research at Boston College, Connecticut’s annual investing returns have trailed the national average by a full percentage point since 2000, because of a heavy allocation to stocks that inflicted deep losses first during the dot-com bust and then the 2008 financial crisis. Connecticut pensions eventually shifted some bets to nontraditional investments, like hedge funds, but those produced lower returns as the equity markets rallied in recent years.

Connecticut only has 51.9% of the assets it needs to pay future obligations to workers, lower than all states except for Illinois and Kentucky, according to the National Association of State Retirement Administrators.

Connecticut has scaled back pension benefits in recent years, reducing cost-of-living adjustments for retirees and pledging to make the appropriate annual payments to fully fund the system by 2032. State officials have raised taxes twice since 2011 as a way of covering some liabilities, reduced its workforce by more than 3% and held back on deeper spending on education and local aid.

Connecticut now allocates 10% of its budget to paying down unfunded pension obligations, up from about 7% four years ago, according to Connecticut Office of Policy and Management Secretary Ben Barnes, who oversees the budget.

“We have plenty of resources to address whatever shortfalls, or whatever fiscal crisis might develop in the short run,” Mr. Barnes said.

But there are signs that the pressure on Connecticut could intensify absent deeper changes. Standard & Poor’s Ratings Services lowered the outlook on Connecticut’s bonds in March to negative from stable, meaning they could be downgraded from their current double-A rating. Moody’s Investors Service already has placed Connecticut among the lowest-rated states. And Fitch Ratings, although it removed Connecticut’s negative outlook in July, warned the state has a “narrow margin of flexibility.”

States rarely default and generally carry higher ratings as a result. Moody’s, which changed the way it calculates pension costs two years ago, has been more aggressive at downgrading states and cities with sizable unfunded obligations, while S&P and Fitch have generally taken a more optimistic view.

Fredrena deGraffenreaidt, a 61-year-old state retiree from East Hartford, is worried about whether future benefit cuts would force her to sell her house and move to a cheaper state, she said.

“Everyone sees us as this very wealthy state and yet our pension isn’t 100% funded,” Ms. deGraffenreaidt said. “How is that possible?”

THE WALL STREET JOURNAL

By AARON KURILOFF and TIMOTHY W. MARTIN

Updated Oct. 5, 2015 12:36 p.m. ET

Write to Aaron Kuriloff at aaron.kuriloff@wsj.com and Timothy W. Martin at timothy.martin@wsj.com

Puerto Rico’s main electric provider won a two-week extension from bondholders to negotiate how to restructure $8.3 billion of debt.

Investors holding about 35 percent of the utility’s debt and its fuel lenders agreed to delay until Oct. 15 the expiration date on an agreement that was set to end Thursday, Lisa Donahue, the power provider’s chief restructuring officer, said in a statement. The contract, called a forbearance agreement, keeps discussions out of court. The parties first signed the accord in August 2014. It is the ninth extension.

Puerto Rico Electric Power Authority, known as Prepa, and the bondholder group on Sept. 1 reached a tentative agreement that would require investors to take losses of about 15 percent in a debt exchange. Bond insurers Assured Guarantee Ltd., Syncora Guarantee Inc. and MBIA Inc. have balked at the plan and declined to continue the forbearance.

“We continue to work with the monolines in an effort to reach a consensual agreement on terms that would be beneficial to all parties involved,” Donahue said.

Below Proposal

A Prepa restructuring would be the largest-ever in the $3.6 trillion municipal-bond market. Puerto Rico and its agencies, including Prepa, owe about $73 billion after years of borrowing to delay debt payments and fill budget deficits. The utility restructuring is the first step toward Puerto Rico’s goal to lower its debt burden.

Prepa bonds maturing July 2040 traded Friday at an average of 59.2 cents on the dollar, according to data compiled by Bloomberg. That’s higher than an average 53.5 cents on Aug. 28, the last time the bonds traded before the Sept. 1 agreement. But that’s still lower than the 85 cents that bondholders would receive in a proposed debt exchange.

The bonds yielded 9.59 percent.

Bloomberg News

by Michelle Kaske

October 1, 2015 — 3:46 PM PDT Updated on October 2, 2015 — 9:32 AM PDT

Taylor Riggs, a contributor to Bloomberg Briefs, talks with reporter Brian Chappatta about this week’s municipal market news.

Watch the video.

October 1, 2015

Top Senate Republicans showed no intention of acting soon to rescue Puerto Rico from its escalating financial crisis, saying there’s no easy way for the federal government to steady the Caribbean island pushed to the brink by $73 billion of debt.

Republicans who lead both chambers of Congress have signaled little urgency in aiding Puerto Rico, and the White House has made it clear it won’t bail out the commonwealth. The reticence was on display Tuesday at a Senate Finance Committee hearing, the first in Congress since Governor Alejandro Garcia Padilla said the island can’t afford to repay what it’s borrowed.

While Puerto Rico officials are pushing for more funding for some federal programs, Senator Orrin Hatch of Utah, the chairman of the finance committee, expressed skepticism that additional money would be sufficient. He noted that it’s received billions in additional federal funds since 2009.

“Even with those boosts in federal funding and the related increases in commonwealth spending, all we see is added commonwealth debt,” he said at a hearing in Washington Tuesday.

Providing more money for health-care programs, for example, “would necessarily mean reduced funding for other priorities, increased taxes, or even more federal debt,” he said. “That is the unpleasant budget arithmetic that we face. There are no easy answers.”

The commonwealth of 3.5 million people is teetering because of years of borrowing to cover budget shortfalls as the economy stumbled and residents left for the U.S. mainland. Garcia Padilla is seeking to postpone or reduce the government’s debt bills, moving the island toward what would be the biggest restructuring ever in the $3.6 trillion municipal-bond market.

Senator Charles Grassley, the Iowa Republican who chairs the judiciary committee, during the hearing stopped short of endorsing legislation Puerto Rico is seeking that would allow its publicly owned corporations, such as the power company, to file for bankruptcy, as U.S. cities can.

Instead, he recommended exempting Puerto Rico from the minimum wage and shipping laws that drive up the cost of goods. He also suggested setting up a federal board to oversee its finances, though he said any Congressional steps would depend on whether Puerto Rico moved to eliminate deficits at the root of the crisis.

“Congressional help without meaningful reform by the Puerto Rican government won’t work,” Grassley said at the hearing.

The commonwealth is rapidly draining its cash. Unless it can raise money in the capital markets, it could run out of money by the end of the year, just before a large payment is due on its general-obligation bonds, Government Development Bank President Melba Acosta said.

She told the senators that “federal action is essential,” including giving it the same access to the Medicaid and Medicare health-care programs that states have and extending municipal bankruptcy access to the island.

“Puerto Rico has passed the tipping point and faces an immediate liquidity crisis,” she said. That’s “threatening the ability of the government to continue to provide essential services to its residents and to pay its debts when due.”

In addition to approximately $73 billion of public debt, Acosta said Puerto Rico has a $45 billion shortfall in its workers’ retirement system that’s threatening to put more strain on the budget.

Bankruptcy Bill

Puerto Rico, which has already defaulted on some bonds, wants Congress to approve the legislation giving some entities access to Chapter 9 bankruptcy protection. That could avoid a protracted legal fight by allowing the government to restructure some debt in court, rather than through individual negotiations. That bill has yet to advance for lack of Republican support.

With bonds sold through more than a dozen agencies, Puerto Rico has yet to say which securities could be affected and by how much, which has left investors speculating about the scale of losses they may be asked to take. The administration plans to ask investors to exchange their bonds for new debt with lower interest rates or longer maturities. Such a plan may come in the next few weeks.

Going Alone

During the hearing, Puerto Rico’s representative in Congress, Pedro Pierluisi, said lawmakers should end the disparate treatment that applies to the island with respect to federal programs.

“Any notion that the territory alone got itself into this situation and the territory alone must extricate itself from this situation is totally false,” he said. “The truth is that the federal government bears tremendous responsibility for the crisis in Puerto Rico, and so Congress and the president must be part of any solution.”

Bloomberg News

by Kasia Klimasinska

September 29, 2015 — 7:13 AM PDT Updated on September 29, 2015 — 11:39 AM PDT

As Congress races to avert a government shutdown, what may be a more prolonged political fight over the budget is dragging on in the state capital 120 miles (193 kilometers) to the north.

In Harrisburg, Pennsylvania, the state government is almost three months into the fiscal year without an agreement on what it can spend because of a divide between the Republican-led legislature and Governor Tom Wolf, a Democrat. At least two school districts say they may soon have to close. Some debt has been downgraded. And investors have pushed yields on the Keystone State’s bonds close to recent highs over top-rated securities, a measure of the perceived risk.

Pennsylvania is the only state aside from Illinois that’s still locked in a stalemate over the budget, a standoff reminiscent of those that once played out in statehouses around the nation after the recession. While public finances have recovered along with the economy, Pennsylvania lawmakers are contending with a $53 billion pension-fund shortfall that’s threatening to hit the state with rising bills, as well as pressure to steer more money into schools.

As a result, investors are demanding yields on 10-year Pennsylvania bonds of 2.71 percent, 0.56 percentage point more than AAA municipal securities, according to data compiled by Bloomberg. That’s just shy of the 0.61 percentage point reached in June, which was the highest since the data began in 2013. Only Illinois and New Jersey, which have even larger pension shortfalls, pay more, according to data on 20 states.

“Pennsylvania is not in as bad a situation as New Jersey or Illinois,” said Scott McGough, director of fixed income for Glenmede Trust Co. in Philadelphia, who is reducing his holdings of Pennsylvania debt. “But clearly, the trend is poor at this point.”

The legislature took a step to temporarily ease the crunch last week, when it passed a budget to provide about four months of funding to schools and other agencies. Wolf, who took office in January, rejected it on Tuesday, saying he wants a comprehensive spending plan.

“The citizens of Pennsylvania want more than half measures, and they deserve better than the status quo,” Wolf said in his veto message to the legislature. The temporary budget locks in human services cuts and is “an avoidance maneuver that fails to adequately fund education.”

Pension Politics

Since March, Wolf and Republicans have been at loggerheads over how to shore up the retirement system, which has less than two-thirds of the assets needed to cover the benefits promised to about 700,000 employees. Wolf vetoed a Republican bill that would have put new workers into defined-contribution plans similar to 401(k)s. He wants to sell $3 billion of debt to inject cash into the retirement system to make up for years of shortchanging it.

Republicans have also balked at his proposal to implement a new tax on natural-gas drillers and raise levies on income and retail sales to fund schools.

The effects are starting to be felt beyond the capital. This month, Moody’s Investors Service lowered the credit ratings of schools that sell bonds through a program that diverts state aid to investors if the districts default. The credit rater said the lack of a budget has cast uncertainty over the funding, heightening the risks to bondholders. Standard & Poor’s has put the districts’ ratings on watch, a first step toward a downgrade.

School Closings

School districts in Carbondale, in the northern part of the state, and to the west in Erie, have warned that they may temporarily close without funds if the budget impasse continues. By October, 41 school districts may see “significant cash-flow difficulties,” according to a senate Republican committee memo. Another 120 would be added to the list by December.

By next month, school districts would be running without more than $3 billion in state aid that was anticipated for the year, according to the Pennsylvania Association of School Business Officials. Administrators have been tapping reserves and lines of credit to compensate, the Harrisburg-based group said.

Schools have borrowed at least $347 million so far and may run up an additional $122 million of debt in October to keep classrooms open, State Auditor General Eugene DePasquale said Tuesday.

Some are pushing down the pain to charter schools. About 24 school districts have eliminated or reduced payments to charter schools, said Tim Eller, executive director of the Keystone Alliance for Public Charter Schools.

Pennsylvania is graded two steps below the state average, in part because of the deficit in its retirement system. S&P and Fitch Ratings cut the state last year to AA-, the fourth-highest level. Moody’s grades Pennsylvania Aa3, the same rank.

Glenmede’s McGough said investors may continue to demand higher yield premiums if the Pennsylvania’s leaders don’t repair the government’s finances.

“You have to address the budget as is, given the revenue coming in, and really right-size your budget,” he said.

Bloomberg News

by Romy Varghese

September 28, 2015 — 9:01 PM PDT Updated on September 29, 2015 — 9:25 AM PDT

The Ohio Police and Fire Pension Fund volunteered to put its spending records online as part of a partnership with State Treasurer Josh Mandel’s online checkbook program.

The announcement comes exactly a week after Mandel criticized the Ohio Public Employees Retirement System for not joining his initiative, which can be accessed at OhioCheckbook.com.

Mandel accused OPERS of trying to hide information from the public, which OPERS officials quickly denied.

“The executive director of OPERS feels that taxpayers do not have a right to see this information and she’s just flat out wrong,” Mandel said today during a press call. “It’s dumfounding that they still refuse to volunteer to put their finances online.”

OPERS officials have continued to say they support transparency, as evidenced by “extensive financial information” provided on their own website.

“It’s disappointing to be continually mischaracterized by the treasurer of state,” said Julie Graham-Price, a media representative from OPERS. “We intend to evaluate the online checkbook initiative; unfortunately, it’s not on the treasurer’s timeline.”

OPERS and Mandel have a history of disagreement. The two sides have clashed over who should control where the multibillion-dollar pension fund’s resources should be invested among other disagreements over reforms.

The police and fire fund is the first pension fund in the United States, according to Mandel, to volunteer to put their financial information online.

“We see no reason why our members as taxpayers should not be able to see what vendors we use, what services we use, what consultants we use, how much we’re paying for our paperclips and pencils, things like that,” said John Gallagher, executive director of the fund. Gallagher added that confidential information would not be put on the website.

The pension fund joins more than 100 state and local government entities that have volunteered to put their spending habits online.

“Obviously we’re a huge fan of the local government stuff … but it really is important for the pension funds to step it up,” said Greg Lawson of the Buckeye Institute, a Columbus-based free market think tank. “It’s just a great example of good government.”

Mandel’s initiative helped the state jump from No. 46 to No. 1 on a U.S. Public Interest Research Group list of transparent states providing online access to government spending.

BY TRIBUNE NEWS SERVICE | OCTOBER 2, 2015

By Dina Berliner

(c)2015 The Columbus Dispatch

In this week’s Extra Credit, ratings analysts Anna Uboytseva and Michael Furla discuss what spurred our rating actions on Garden City Schools, Michigan, and the Town of Lawrence, Wisconsin.

Listen to the Podcast.

Oct. 2, 2015

Prices in the $3.6 trillion municipal-bond market are the cheapest in five weeks relative to Treasuries after U.S. payrolls rose less than projected in September, spurring a rally in federal government debt on signs the global slowdown is affecting the world’s largest economy.

Benchmark 10-year munis yield 2.09 percent, compared with 1.92 percent on similar-maturity Treasuries, data compiled by Bloomberg show. The ratio is a measure of relative value between the asset classes. It reached 109 percent Friday, the highest since August, signaling that tax-free bonds are cheap relative to their federal counterparts.

Ten-year Treasury yields plunged 0.11 percentage point after a Labor Department report showed the U.S. added 142,000 jobs, lower than the median forecast of 201,000 from a Bloomberg survey of 96 economists. Weakening foreign markets, a stronger dollar and lower oil prices raise the risk that employers will hold off on adding workers.

Munis rallied to a smaller degree. As prices rose, the yields on both 10-year and 30-year AAA bonds fell 0.02 percentage point to the lowest since April, data compiled by Bloomberg show.
The 10-year muni-Treasury ratio was as low as 94 percent in July. Over the past decade, the figure has averaged 97 percent.

Bloomberg News

by Brian Chappatta

October 2, 2015 — 6:49 AM PDT

Municipal bond sales in the U.S. are set to increase in the next month by the most since March, while the amount of redemptions and maturing debt falls.

States and localities plan to issue $15.3 billion of bonds over the next 30 days, according to data compiled by Bloomberg. A week ago, the calendar showed $12.1 billion planned for the coming month. Supply figures exclude derivatives and variable-rate debt. Some municipalities set their deals less than a month before borrowing.

Port Authority of New York and New Jersey plans to sell $2 billion of bonds to refund older securities, Chicago O’Hare International Airport has scheduled $2 billion of mostly refunding debt, Texas Water Development Board will offer $862 million and California will bring $446 million to market.

Municipalities have announced $8.3 billion of redemptions and an additional $8.4 billion of debt matures in the next 30 days, compared with the $25.1 billion total that was scheduled a week ago.

Issuers from New York have the most debt coming due with $2.03 billion, followed by California at $1.16 billion and New Jersey with $602 million. New York City Transitional Finance Authority has the biggest amount of securities maturing, with $916 million.

The $3.6 trillion municipal market shrank by 4 percent in 2014. This year, maturities are poised to drop 38 percent to $176 billion from the 2014 levels.

Investors added $628 million to mutual funds that target municipal securities in the week ended Sept. 23, compared with a reduction of $589 million in the previous period, according to Investment Company Institute data compiled by Bloomberg.

Exchange-traded funds that buy municipal debt increased by $243 million last week, boosting the value of the ETFs 1.4 percent to $17.6 billion.

State and local debt maturing in 10 years now yields 103.873 percent of Treasuries, compared with 103.631 percent in the previous session and the 200-day moving average of 102.526 percent, Bloomberg data show.

Bonds of Tennessee and Michigan had the best performance over the past year compared with the average yield of AAA rated 10-year securities, the data shows. Yields on Tennessee’s securities narrowed 16 basis points to 2.00 percent while Michigan’s declined 9 basis points to 2.30 percent. Puerto Rico and Illinois handed investors the worst results. The yield gap on Puerto Rico bonds widened 72 to 10.69 percent and Illinois’s rose 22 basis points to 3.92 percent.

Bloomberg News

by Kenneth Kohn and Luis Daniel Palacios

October 5, 2015 — 4:36 AM PDT Updated on October 5, 2015 — 8:21 AM PDT

Downtowns are back in demand. After decades of urban sprawl—and the long commutes, high infrastructure and housing costs, and loss of open spaces that accompany it—Californians are ready for something different. It’s fair to say that there is a growing consensus among the state’s civic leaders that vibrant, walkable communities will be a vital part of sustaining the economy and improving our quality of life.

The question is, how to pay for it?

While market demand for walkable urban places is climbing rapidly—prompting new interest in infill development—this demand has not been supported by reinvestment in the critical infrastructure that denser neighborhoods demand. Nor have communities had access to all the planning and financing tools they need to move ahead quickly with infill projects.

Until now, that is. With the governor’s signature last week on a package of legislation that will expand local governments’ infrastructure financing powers, civic leaders now have at their fingertips everything they need to begin making investments in projects from transit stations and housing to next-generation water facilities.

On the financing side, the new Enhanced Infrastructure Financing Districts may offer the most exciting possibilities. The California Economic Summit has been working over the last year to strengthen these powers, highlighting how they work and identifying the types of projects that could benefit from them. Mark Pisano, co-lead of the Summit Infrastructure Action Team and professor of the practice of public administration at the USC Sol Price School of Public Policy, recently said the new authority had the “potential to be one of [California’s] most significant innovations in public finance over the last decade.”

Now, it is time to spread the word—and show every community in California how they could benefit from this new authority. That’s why Crowdbrite, a longtime partner of the Summit with a strong track record of expanding civic engagement around public projects, has created a new interactive website for these enhanced districts: www.eifdistricts.com.

Designed for city leaders and residents alike, the site provides details on the new statute, summarizing what types of projects communities can finance with these new authorities and providing short videos with frequently asked questions about the new powers. (No, they’re not quite the same as redevelopment).

The site’s Infill Score tool also offers a survey that allows users to assess their own community’s infrastructure needs, to consider what types of projects could earn community support, and to think about how they might be able to deploy these new financing tools to revitalize their neighborhoods and support infill development. This infill-readiness assessment, which calculates a score based upon a community’s record of using 30 unique strategies for incentivizing infill development, builds on the work of the U.S. Environmental Protection Agency and was developed in partnership with the Local Government Commission and a group of city managers and national advisers.

While several major California cities are making plans to use their new EIFD authority (including Los Angeles, Sacramento, and San Jose), Crowdbrite’s new online tool is already beginning to increase awareness of its potential for infill development. Since the website was launched ten days ago, 11 California cities have already completed the survey. Internationally, nearly 1,500 cities have signed up, with 50 cities taking action on this first step to community revitalization.

Now, it’s your turn.

Take a moment to calculate your city’s Infill Score to gauge your community’s readiness for new infill development—and then use the online tool to establish priority projects and identify how to leverage public investment your community’s infrastructure projects require.

After that, it may be time to reach out to your city’s leaders—and to start reinvesting in your community and building a brighter future.

SEPTEMBER 30, 2015 BY DARIN DINSMORE

Darin Dinsmore is the CEO of Crowdbrite. An urban planner and landscape architect with over 15 years experience in community-based planning and design, Dinsmore is also a member of the Summit Infrastructure Action Team.

“Everyone in the financial markets – including issuers of new debt – is focused on the prospect of the Fed raising rates in September; we’re seeing that reflected in the CUSIP data,” said Richard Peterson, Senior Director of Global Markets Intelligence, S&P Capital IQ. “The combination of increased market volatility and uncertainty around interest rates has created a perfect storm for a slowdown in new issuance. The question now is: how long will it last?”

Read the Press Release.

September 15, 2015

CHICAGO — Chicago is poised to issue more than $2.7 billion of debt amid warnings that its core credit ratings could be downgraded depending on the outcome of the city’s fiscal 2016 budget.

Both Standard & Poor’s and Fitch Ratings said this week they could downgrade Chicago’s BBB-plus general obligation ratings if the city does not adequately address escalating pension payments.

“If the final budget that is adopted by the end of the calendar year fails to cover the larger pension payments with an identifiable and reliable revenue source, it would likely strain the rating, potentially resulting in the rating being lowered by multiple notches,” S&P said in a report.

Fitch Ratings said Chicago risks a downgrade if it fails to put pension payments on a solid funding path or raids budget reserves. Moody’s Investors Service, which dropped Chicago’s rating to junk in May, withheld comment until a final budget is enacted.

Mayor Rahm Emanuel proposed a budget on Tuesday that includes the biggest-ever city property tax hike to cover increased contributions to public safety worker pensions.

To make the $543 million tax hike, phased in through 2018, palatable to city aldermen, Emanuel is seeking an expanded tax exemption in the Illinois Legislature to shield homes valued at $250,000 or less from the increase. His budget also counts on enactment of a bill that spreads out the city’s police and fire pension payments.

Additionally, Chicago is betting the Illinois Supreme Court will uphold the constitutionality of a state law aimed at shoring up the sagging finances of its municipal and laborers’ retirement systems, partly through benefit cuts.

S&P said that given these “uncertainties,” it expects city officials to consider contingency plans for addressing a $20 billion unfunded pension liability.

At a press conference on Thursday, Emanuel said the city is “on strong ground” with its legislative efforts.

Earlier, the city council gave final approval to the sale of up to $500 million of general obligation bonds in a deal that will push out payments on $225 million of outstanding debt and refund the rest for possible savings.

Aldermen also approved up to $2 billion of new and refunding O’Hare Airport revenue bonds and up to $225 million of sewer bonds, including $125 million to end interest-rate swap agreements. The airport and sewer bonds are expected to price in October, with the GO bonds selling in the coming months, a city spokeswoman said.

By REUTERS

SEPT. 24, 2015, 3:33 P.M. E.D.T.

(Reporting By Karen Pierog; Editing by David Gregorio)

CHICAGO — Mayor Rahm Emanuel is proposing a historic property tax increase, while expanding fees on trash collection and taxi rides under a plan to confront a growing fiscal crisis in the nation’s third largest city.

The proposal comes months into the second term of Mr. Emanuel, a former congressman and chief of staff to President Barack Obama, as he runs out of options to address ballooning pension costs that are coming due.

During his first term, the mayor focused on trying to gain concessions from city workers and retirees, but was stymied by the courts and organized labor.

Mr. Emanuel’s plan would raise an additional $544 million from property taxes alone phased in over four years under what is being described as the largest tax rise in city history. He also proposes raising additional revenue by taxing e-cigarettes, expanding fees on garbage pickup, and adding fees on taxi and ride-sharing services.

“As we continue to grow our economy, create jobs and attract families and business to Chicago, our fiscal challenges are blocking our path,” Mr. Emanuel said in a statement.

Details of the proposal were released by the Emanuel administration Monday ahead of his budget address to the city council on Tuesday.

Parts of the plan leaked in recent weeks have faced pushback from some aldermen and public rebuke at hearings. Many have voiced concerns about the cost to working families.

“We must ask the very wealthy and big corporations to pay their fair share in taxes so we can finally fix our structural deficit and get on track to fiscal sanity,” said Alderman Leslie Hairston, who is among the council members pushing for tax rebates for working families and changes in how commercial buildings are taxed.

The Emanuel administration said it would seek changes in state law to protect those who own homes valued at $250,000 or less from the brunt of the tax increase.

The proposal comes as Mr. Emanuel looks to keep Chicago from becoming an increasing outlier among U.S. cities. The Midwest hub faces many of the challenges that other aging cities are experiencing, from population declines to crumbling infrastructure.

But sharply rising municipal pension costs and mounting state fiscal problems have helped set Chicago apart. Moody’s Investors Service dropped the city’s credit rating to junk earlier this year.

Mr. Emanuel’s proposal includes cost savings from eliminating vacant positions to redesigning how streets are swept, but largely relies on new revenue to confront its fiscal problems.

The property-tax boost would go to pay for a $550 million increase in pension costs for police officers and firefighters required by the state to ensure their retirement systems remain solvent. The Emanuel administration is lobbying the state to allow the hike to be phased in over time, matching the property-tax-increase schedule.

Administration officials said the mayor has few options.

During his first term, Mr. Emanuel had focused on reaching agreements with city workers to lower pension expenses by reducing cost of living increases and requiring current employee to increase their contributions. But a court ruling in July derailed such efforts, saying the city couldn’t change already promised retirement benefits.

Monday’s proposal is separate from the Chicago school district’s budget, which isn’t funded through the school year and is counting on help from the state.

THE WALL STREET JOURNAL

By MARK PETERS

Updated Sept. 21, 2015 8:07 p.m. ET

Write to Mark Peters at mark.peters@wsj.com

Puerto Rico’s pledge to take the constitutional priority of its general-obligation bonds in consideration is seen as a message that the commonwealth is willing to work with investors as debt restructuring talks begin.

“It’s an important step for them just to reinforce that there are rules and that they know that there are rules and that they’re going to be trying to work around them with bondholders,” said Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics. “Maybe that works, maybe it doesn’t.”

Administration officials tasked with reducing the island’s debt load or suspending debt-service payments met Thursday with Governor Alejandro Garcia Padilla and lawmakers to develop guidelines for a potential voluntary exchange of existing debt for new bonds with possible security improvements, according to a document released late Thursday. Those principles include seeking to take into account the priorities of the debt that creditors hold.

Puerto Rico has $13 billion of general-obligation debt outstanding, which the island’s constitution stipulates must be repaid first. Other securities are backed by specific revenues and lack that protection. Acknowledging that it would seek to respect the constitutional priority of its general obligations may help Puerto Rico in the future when it looks to borrow through the capital markets, said Fabian.

Puerto Rico’s government and its advisers said on Sept. 9 that a proposal to pare the commonwealth’s debt would be released in a few weeks. The government plans to start meeting with investors by mid-October to begin negotiations.

Puerto Rico has already initiated talks with advisers to bondholders of Government Development Bank debt, seeking to potentially exchange those obligations for new securities. About $336 million of GDB debt matures Dec. 1.

Here’s a list of the island’s biggest bond issuers, how much long-term debt they have, and when major monthly payments are due, according to data compiled by Bloomberg.

General-obligations: $13 billion. The debt backed by the commonwealth’s full faith and credit. The island’s constitution says general obligations must be repaid before other expenses. Puerto Rico owes $357 million of interest in January and an additional $805 million of principal and interest is due July 1.

Puerto Rico Sales Tax Financing Corp.: $15.2 billion. The bonds, known by the Spanish acronym Cofinas, are repaid from dedicated sales-tax revenue. A $6.2 billion portion of the debt, called senior-lien, is repaid first. The remaining $9 billion, called subordinate-lien, get second dibs. After paying $12.5 million of principal and interest in August, $1.2 million of interest is due in November, February and again in May.

Puerto Rico Electric Power Authority: $8.3 billion. Prepa, as it’s called, is the island’s main supplier of electricity and repays the debt from what it charges customers. The utility owes $196 million of interest in January and $420 million of principal and interest July 1.

Puerto Rico Government Development Bank: $5.1 billion. The GDB lends to the commonwealth and its localities. When those loans are repaid, the bank can pay off its debt. The GDB is seeking to restructure its obligations through a debt exchange. The bank owes $354 million in December and $422 million in May.

Puerto Rico Highways & Transportation Authority: $4.7 billion. The highway agency repays its debt with gas-tax revenue. It owes $106 million of interest in January and $220.7 million of principal and interest in July.

Puerto Rico Public Buildings Authority: $4.1 billion. The PBA bonds are repaid with lease revenue from public agencies and departments of the commonwealth. The agency owes $102.4 million of interest in January and $207.6 million of principal and interest in July.

Puerto Rico Aqueduct & Sewer Authority: $4 billion. The utility, called Prasa, supplies most of the island’s water. The debt is repaid from water rates charged to customers. The water agency owes $86.5 million of interest in January and $135.1 million of principal and interest in July.

Puerto Rico Pension-Obligation Bonds: $2.9 billion. The taxable debt was sold to bolster the island’s main pension fund. The bonds are repaid from contributions that the commonwealth and municipalities make to the retirement system. The next maturity is July 2023 and the system pays $13.9 million of interest every month in this budget year.

Puerto Rico Infrastructure Financing Authority: $1.9 billion. Called Prifa, the agency has sold the island’s rum-tax bonds. These are securities repaid from federal excise taxes on rum made in Puerto Rico. Prifa owes $37.2 million of interest in January and $77.8 million of principal and interest in July.

Puerto Rico Public Finance Corp.: $1.09 billion. The PFC bonds are repaid with money appropriated by the legislature. The agency defaulted on its Aug. 3 and Sept. 1 debt-service payments because the legislature failed to allocate the funds. It owes interest every month, the largest being a $24 million payment in February.

Bloomberg News

by Michelle Kaske

September 25, 2015 — 12:59 PM PDT

Taylor Riggs, an editor at Bloomberg Brief, talks with reporter Kate Smith about this week’s municipal market news.

Watch the video.

September 24, 2015

Puerto Rico’s $72 billion debt burden overshadows another financial threat to the Caribbean island: a government workers pension fund that’s set to go broke in five years.

As Governor Alejandro Garcia Padilla prepares to push for bondholders to renegotiate debts he says the commonwealth can’t afford, he’s also contending with an estimated $30 billion shortfall in the Employees Retirement System. The pension, which covers 119,975 employees, as of June 2014 had just 0.7 percent of the assets needed to pay all the benefits that had been promised, a level unheard of among U.S. states.

If not fixed, the depleted fund could jeopardize a fiscal recovery by foisting soaring bills onto the cash-strapped government even if investors agree to reduce the island’s debt. The system is poised to run out of money by 2020, which would leave the government on the hook for more than $2 billion in benefit payments the next year alone, according to Moody’s Investor’s Service. That’s equal to about one-fourth of this year’s general-fund revenue.

“As Puerto Rico shoulders that burden of paying for pension benefits outright, that’s obviously going to cripple their budget,” said Ted Hampton, a Moody’s analyst in New York.

Crisis Builds

The debt crisis gripping the island, with a population of 3.5 million, is the outcome of years of borrowing to pay bills while the economy stumbled and residents left for the U.S. mainland. In August, Puerto Rico defaulted on some bonds for the first time, and Garcia Padilla has said that reducing its debt is crucial to the island’s economic recovery.

His administration and outside advisers on Sept. 9 released a plan to repair the island’s finances, which included closing schools and reducing benefits to the poor. It also envisions making increased pension payments that have been delayed because the government hasn’t had the money.

“We believe this plan addresses the system’s needs and assures pensioners and participants that their benefits will be paid,” Pedro Ortiz Cortes, administrator for the retirement system, said in an e-mail Thursday.

Workers’ Doubts

Puerto Rico’s failure so far to address its long-building pension shortfall has fostered anxiety among workers, who are concerned that their benefits will be reduced amid competing demands from creditors. “A reduction in benefits would be horrible,” said Eduard Rodriguez Santiago, a 38-year old firefighter. “Things are getting more expensive.”

Garcia Padilla, in a speech after the release of the fiscal plan, said that workers have already sacrificed enough. In 2013, the government raised the retirement age, increased employee contributions and reduced or eliminated retiree bonuses.

“Solving the pension problem is almost tougher than debt because people will take to the streets if you start seeing pension checks quit going out,” said Tom Schuette, co-head of credit research at Solana Beach, California-based Gurtin Fixed Income Management LLC, which manages $9.6 billion of municipal securities. “It’s almost much easier to anger investors on the mainland as opposed to residents who can vote you out of office.”

Current and prior administrations have implemented changes to improve the pension system, including by closing it to new employees and offering them annuities instead. To give it cash to invest, it sold $2.9 billion of bonds in 2008, just before the credit crisis caused stock prices to plunge. The system is now obligated to repay the securities, which have tumbled in value amid doubts about its ability to do so.

As Puerto Rico has cut the number of workers on its payrolls, there are fewer paying into the retirement system. The island had 116,000 central-government employees in May 2015, down 27 percent from seven years earlier, according to the report by the government and its advisers.

While new employees haven’t been eligible for traditional fixed-benefit pensions since 2000, the step didn’t stop Puerto Rico’s growing liabilities. The new employees, called System 2000 participants, will receive an annuity instead. Their contributions are being used by the pension system to meet its obligations.

New Liabilities

“They’re using these payments to shore up their existing defined-benefit plan,” said Hampton, the Moody’s analyst. “Their defined-contribution plan isn’t really taking hold. It’s just creating new liabilities for the central government.”

Puerto Rico is facing more immediate concerns because it may be short of cash as soon as November. That may leave it forced to choose between paying workers and retirees or bondholders, with $357 million of interest on its general obligations due Jan. 1.

“If the government has to decide between making a big general-obligation payment in January or making sure they have enough for payroll or for pensioners in December, I think they’re going to go with the pensioners or payroll,” Sergio Marxuach, public-policy director at the Center for a New Economy, a research group in San Juan. “You’re not going to send government workers home without money during Christmastime.”

Bloomberg News

by Michelle Kaske

September 24, 2015 — 9:01 PM PDT Updated on September 25, 2015 — 5:33 AM PDT

Puerto Rico’s main power utility reached a tentative agreement with lenders on fuel purchases that would reduce interest rates on $700 million of debt that has already matured and extend repayment for at least six years.

The Puerto Rico Electric Power Authority and lenders including a unit of Bank of Nova Scotia and Solus Alternative Asset Management agreed to convert the debt, which matured in 2014, into six-year term loans with a 5.75 percent interest rate or exchange all or part of the principal due under existing credit agreements for new bonds. The securitized debt would include a 15 percent principal reduction and a five-year moratorium on payments.

The principal reduction is equal to the amount accepted by holders of about 35 percent of its $8.3 billion in bonds earlier this month. The utility, known as Prepa, is still in talks with tax-exempt bond insurers in what would be the largest-ever restructuring in the $3.6 trillion municipal-bond market.

The utility restructuring is the first step toward Puerto Rico’s goal to lower its debt burden.

“The terms for those lenders are very attractive in this agreement, but the total amount is small and Prepa needs access to fresh fuel financing,” said Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics.

The tentative pact comes a year after the fuel lenders entered a forbearance agreement, where they pledged to not file suit against Prepa while the debt talks were ongoing. That accord was set to expire Sept. 25.

Bond Insurers

“The best path forward for Prepa, as well as the creditors, involves sharing the burden among all stakeholders. We continue to negotiate with our monoline bond insurers in an effort to reach agreement that will allow Prepa to continue to implement its transformation,” said Lisa Donahue, Prepa’s chief restructuring officer, said in a statement Tuesday.

Prepa owed Scotiabank de Puerto Rico about $550 million as of August 2014, according to the forbearance agreement. The utility owed another $146 million to Citigroup Inc. as of that period. Solus bought that loan from Citigroup earlier this year. The agreement would lower interest rates to 5.75 percent from 7.25 percent, according to Prepa’s statement.

“We are pleased that the syndicate of fuel-line lenders and Prepa have reached a mutually beneficial agreement in principle to support Prepa’s ongoing operational transformation,” Marcelo Gomez-Wiuckstern, a spokesman for Scotiabank, said in an e-mail.

Solus declined to comment through Julia Kosygina, a representative at Abernathy MacGregor Group Inc.
Bond insurers including Assured Guarantee Ltd. and Syncora Guarantee Inc. declined to extend their forbearance contract beyond Sept. 18. MBIA Inc. dropped out of the forbearance earlier this month. An accord with bondholders will expire Oct. 1 unless the parties extend it.

Bloomberg News

by Michelle Kaske

September 22, 2015 — 1:27 PM PDT Updated on September 22, 2015 — 2:43 PM PDT

Puerto Rico’s five-year budget deficit leans closer to the commonwealth’s $14 billion forecast rather than a Morgan Stanley estimate that cuts that figure by more than half, according to BlackRock Inc.’s Peter Hayes.

Commonwealth officials and their advisers, called the Working Group, unveiled on Sept. 9 a five-year fiscal and economic growth plan that projects the island’s budget will be short $14 billion because of increasing health-care expenses and retirement costs. The report’s base-case scenario estimates the island’s gross national product will decline by one percent and may increase by as much as 2 percent in a high-growth scenario, according to the plan.

One Morgan Stanley scenario takes a different view. Puerto Rico has overestimated its funding gap, according to a presentation distributed Sept. 11 by Ryan Brady, an analyst on Morgan Stanley’s municipal-debt trading desk in New York. The bank estimates a $5.57 billion deficit through fiscal 2020, according to the report. Yet that forecast may be too low, Hayes said Tuesday on Bloomberg Television.

“We’re on the higher side,” said Hayes, who helps oversee $116 billion as head of municipal debt, including Puerto Rico securities, at New York-based BlackRock. “We think some of the economic assumptions are well founded,” Hayes said about the Working Group’s estimates.

How to best gauge Puerto Rico’s estimates are even in dispute within Morgan Stanley. Research analysts led by Michael Zezas, who work separately from the trading desk, put out a note the day before Brady’s presentation stating that “we could not patch together a budget baseline with a strong enough degree of confidence.”

Puerto Rico and its agencies owe $72 billion. Officials plan to offer investors a debt-restructuring proposal in the next few weeks after saying the commonwealth will only have $5 billion in the next five years to repay $18 billion of principal and interest coming due. Governor Alejandro Garcia Padilla in June said Puerto Rico and its localities were unable to repay all of its obligations on time and in full.

The Working Group’s five-year plan follows a report compiled by former International Monetary Fund economists led by Anne Krueger and commissioned by Puerto Rico. The Krueger report calculates a five-year deficit of $9.6 billion.

“When you look at the economy of Puerto Rico, there’s a lot of reforms that need to take place,” Hayes said. “And if they don’t, it’s likely that deficit is going to be higher rather than smaller.”

Bloomberg News

by Michelle Kaske

September 22, 2015 — 11:48 AM PDT Updated on September 22, 2015 — 12:32 PM PDT

Goldman Sachs Group Inc. is extending the life of some debt that financed its downtown Manhattan headquarters.

The New York Liberty Development Corp. plans to issue $22 million of tax-free debt on behalf of a Goldman Sachs subsidiary that funded construction of the firm’s 1.9 million-square-foot building at 200 West Street. The 20-year bonds will be tacked onto its outstanding $1.24 billion of securities due in 2035 that were sold 10 years ago. Proceeds will pay off owners of obligations that mature Oct. 1, according to offering documents.

The New York agency, which was created to spur development after the terrorist attacks on Sept. 11, 2001, is an example of conduit agencies across the U.S. that give companies access to the tax-exempt securities market to reduce interest costs. Goldman Sachs initially borrowed about $1.3 billion in 2005 through the Liberty Bond program, which was projected to save it at least $100 million over the life of the debt.

Trade Center

“This is a relatively small chunk of the deal that’s coming due and to try to re-market that separately can be difficult,” Jonathan Beyer, senior legal counsel at Empire State Development, said at a Sept. 1 meeting. The Liberty Development Corporation is a subsidiary of the firm. “The idea is to extend the maturity and consolidate it in a larger package for sale.”

Others who have tapped the public corporation for financing include developer Larry Silverstein, who sold $1.6 billion of tax-exempt bonds last year to finance the construction of 3 World Trade Center, and Bank of America Corp., which borrowed for its tower across from Bryant Park in midtown Manhattan.

The new bonds for Goldman Sachs are considered a second tranche of the 2005 borrowing and will carry the same 5.25 percent interest rate as the 2035 debt. The securities could still be priced at a lower yield. Municipal debt due in two decades yield 0.6 percentage point less than 10 years ago, Bond Buyer data show.

While a security reopening is common in the U.S. Treasury market, it’s rare in the $3.6 trillion municipal market. In such a transaction, a borrower sells an extra portion of previously issued debt with the same maturity and interest rate, even though it comes to market later at a different price.

The bonds have the same ratings as Goldman Sachs, which guarantees the debt service payments of its subsidiary. Moody’s Investors Service has the debt at A3, four steps above speculative grade and equivalent to the A- rank from Standard and Poor’s.

Tiffany Galvin, a spokeswoman in New York for Goldman Sachs, declined to comment on the deal beyond the offering statement.

Bloomberg News

by Brian Chappatta

September 22, 2015 — 9:07 AM PDT Updated on September 22, 2015 — 1:38 PM PDT

BlackRock Municipal Bond Head Peter Hayes discusses municipal bonds and Puerto Rico’s debt. Bloomberg’s Kate Smith also reports on “Bloomberg Markets.”

Watch the video.

September 22, 2015

Chicagoans are bracing for the biggest property tax increase in the city’s history as Mayor Rahm Emanuel contends with a budget shortfall and soaring retirement bills that have sent its credit rating tumbling.

Emanuel, a Democrat, on Tuesday proposed raising property taxes by $588 million over the next four years. That would inject cash into the city as it faces a $426 million deficit and a pension-plan debt that’s grown to $20 billion, more than $7,000 for each resident.

The tax increase would mark one of the biggest steps yet by Emanuel to shore up the finances of the third-largest U.S. city, which is under pressure from Wall Street as investors demand higher yields to buy its securities. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have all downgraded Chicago this year, giving it the lowest rating of any big U.S. city except for once-bankrupt Detroit.

“Our greatest financial challenge today is the exploding cost of unpaid pensions,” Emanuel said during his budget speech, which ended with a standing ovation from the packed city council chamber. “It’s a dark cloud that hangs over the rest of our city’s finances.”

“The bill is due today,” Emanuel said. Without the new revenue, the city would need to lay off 2,500 police officers, close 48 fire stations and cut 2,000 firefighting jobs to cover pensions costs, he said.

Welcomed Move

The prospect of higher taxes has been welcomed by investors. Federally tax-exempt Chicago bonds maturing in 2035 traded Tuesday for an average of 94.6 cents on the dollar, up from 88.7 cents on Aug. 27. That lowered the yield to 5.5 percent, about 2.5 percentage points more than top-rated debt, according to data compiled by Bloomberg.

“This is not kicking the can down the road,” said Paul Mansour, head of municipal research in Hartford, Connecticut, at Conning, which holds Chicago debt among its $11 billion of municipal securities. “We’re actually going to do something here that is going to sting. We’re moving from gamesmanship to action steps.”

The financial squeeze on Chicago emerged after officials shortchanged the pension funds by more than $7 billion over the past decade, freeing up cash for other uses. That’s caused the projected retirement bill to swell to about $1 billion next year, more than doubling since 2014, as it makes up for years of failing to set aside enough to cover pension checks for police officers, firefighters and other city employees.

The move to raise taxes, which needs the approval of the city council, is a shift for Emanuel, who won re-election in April after touting his record of not lifting property, gas or sales taxes. In May, Moody’s cut Chicago’s bonds to junk, saddling the city with higher interest bills as it refinanced debt.

“I think that public service requires people to display courage and to take tough votes,” Alderman Edward Burke, chairman of the finance committee told reporters after Emanuel’s address. “This is going to be a tough vote.”

The property tax hike, which will be used for pensions, will start with a $318 million increase in 2015 followed by an additional $109 million in 2016, $53 million in 2017 and $63 million in 2018. A $45 million special real-estate levy that state lawmakers approved in 2003 would also be enacted to ease overcrowding at schools.

“It’s a good faith example of what Chicago needs to kind of right their ship and improve their finances,” said Alan Schankel, a managing director at Janney Montgomery Scott LLC in Philadelphia. “It’s not going to solve all the problems of the world, but they’re taking the right steps and that’s important.”

Chicago’s next annual pension payment will jump 10 percent $976 million, according to an annual financial analysis released July 31. That’s on top of the $549 million it still owes to police and firefighter retirement funds for this year. While state lawmakers approved lowering this year’s payment to $328 million, Republican Governor Bruce Rauner has yet to sign it.

The city is also fighting a court challenge to its effort to cut some employee benefits and require them to pay more into the retirement system. A state judge in July ruled that the steps are illegal, siding with the workers.

Business Opposition

The tax-increase plan has already drawn some opposition from businesses. The burden may fall largely on commercial property owners, said Ron Tabaczynski, director of government affairs for the Building Owners and Managers Association of Chicago. Emanuel wants to exempt owners of homes valued at $250,000 or less from the hike.

“Businesses start rapidly approaching that tipping point where it’s just not worth doing business here,” Tabaczynski said.

The fiscal pain is being shared in other ways. Residents who don’t already pay for garbage pick-up will have to pay $9.50 a month for refuse collection, generating about $62.7 million, according to Emanuel’s proposal. He’s also pitching higher fees on taxis and ride-hailing services like Uber Technolgies Inc. to produce about $48.6 million.

This tax increase is welcome step toward dealing with Chicago’s financial strains, said Dan Heckman, senior fixed-income strategist in Kansas City, Missouri, at U.S. Bank Wealth Management, which oversees about $127 billion of bonds.

“Doing nothing is not going to solve it, and doing only a little will only prolong this,” said Heckman, whose firm doesn’t hold Chicago debt. “That’s a concern on a lot of investors’ minds.”

Bloomberg News

by Elizabeth Campbell

September 21, 2015 — 3:46 PM PDT Updated on September 22, 2015 — 10:36 AM PDT

A new public private partnership (“P3″ or “PPP”) is coming to PortMiami. Royal Caribbean Cruises, LTD (“RCCL”) seeks to design, build, finance, operate, and maintain a new cruise terminal in the northeast section of the Port. RCCL’s plans have been preliminarily memorialized in a non-binding Memorandum of Understanding that was approved at this Wednesday’s Miami-Dade County Commission meeting. Subsequent Commission approvals will be needed for the binding deal documents and agreements.

Typical of a P3, RCCL will do more than simply enter into a ground lease for space in a terminal. It will share the risk of designing, constructing, operating, and most importantly to the Port, financing the terminal. The maintenance responsibilities will be split between maintenance of the leasehold improvements by RCCL and maintenance of the common areas outside the leased premises by the County, satisfying the remaining “M” element in the DBFOM (design, build, finance, operate, maintain) acronym that is used to characterize a P3.

The P3 with RCCL comes after the successful completion of the Port Tunnel P3 that has garnered a visit and praise from President Obama who extolled it as an example of the kind of P3 that should be used around the country to modernize aging transportation infrastructure. The $1 billion P3 was built because it was expected to divert vehicles from and reduce congestion in Downtown Miami and reduce travel time to and from the Port. In less than a year, the Port Tunnel met and even exceeded many expectations.

The Port Tunnel P3 was structured as an availability payment-based concession agreement. With this financing structure, the private-sector partner constructs, operates, and maintains the facility with its own funds, and the public agency (in the case of the Port Tunnel, Florida Department of Transportation) makes payments to its partner based on the project’s availability for use by the public. The public agency bears risks pertaining to the demand for the facility because the amount it pays to the private sector party does not change even if the project is not used to the extent anticipated, though the availability fee may be offset with user fees received from public use of the project or facility. The risk for the private party includes the fact that this fee structure relies on the public budget, which may be subject to budgetary conditions and constraints and political pressure. There are also risks pertaining to delays, repairs, and increased costs that could lead to the private-sector partner missing key deadlines or taking the project out of service, which would lead to penalties for unavailability.

PortMiami is likely to also have new commercial development on its southwest corner given the interest that has been expressed by several groups, including one whose request for waiver of a competitive process was rejected. As Miami-Dade County continues to make strides in financing projects and providing solutions to infrastructure problems with P3s, it can look to the success at the Port as assurance that P3s can do well in Miami-Dade County.

© 2015 Bilzin Sumberg Baena Price & Axelrod LLP

posted on: Monday, September 21, 2015

The National Law Review

In this week’s Extra Credit segment, Director Bianca Gaytan-Burrell discusses what prompted our recent rating action on New Mexico State University.

Listen to the podcast.

Sep. 25, 2015

Chicago is facing its biggest tax increase in memory, to raise money for pension payments. Illinois is stymied by a $110 billion pension shortfall. In New Jersey, public workers are in court over a failed pension deal. From Pennsylvania to California, pensions costs are crowding out aid for public education.

But even as pensions keep squeezing budgets and setting off court battles around the country, Rhode Island, America’s smallest state, appears to have found its way out of the quagmire. Its governor, Gina M. Raimondo, has finished a four-year pension overhaul without raising taxes or issuing risky pension-obligation bonds. Union leaders who fought her at first ultimately negotiated the terms, deciding that a court fight over her plan might do more harm than good.

“Raimondo had the highest hill to climb,” said Daniel DiSalvo, a senior fellow at the Manhattan Institute who has been comparing different states’ efforts to rein in pension costs. Her initiative was among the most ambitious, he said, and she started “from what was, in many respects, the weakest institutional position.”

Her experience, Mr. DiSalvo and others say, could be a case study for other states and municipalities struggling with pensions and other long-term obligations that cost much more than expected. And the timing could hardly be more critical, given predictions that the fiscal health of state and local governments is likely to remain under stress for years as the population ages.

“We may be entering a new fiscal ice age,” a long period when demographic forces will make financing cities and states even harder than it is now, Mr. DiSalvo said.

That is not to say everyone is happy with the result. To the contrary, bitterness remains in Rhode Island, where public retirees’ annual increases have been suspended, and public workers have had to trade in part of their defined-benefit pension plan for a 401(k)-style benefit, where they must bear investment risk.

“No other entity would get away with what the State of Rhode Island is doing to their retirees,” said Louise Bright, a retired state financial manager, who had wanted a trial to resolve key legal issues. “A contract is a contract, even when that contract involves senior citizens.”

Ms. Raimondo, who started her battle as state treasurer, faced obstacles not unlike those confronting Mayor Rahm Emanuel of Chicago: entrenched political machinery, powerful unions, a decades-old practice of promising rich pensions without setting aside enough money to pay them, truculent taxpayers, record numbers of retirees and an all-enveloping fog of discredited numbers. Both are Democrats in blue states. Both had to deal with “mature” pension systems that were paying out more in benefits than they were receiving in contributions, a situation that can quickly become unmanageable.

But Ms. Raimondo was able to revamp her state’s pension system, keeping some of the traditional structure while lowering the cost, and surviving lawsuits by workers and retirees who called her moves unconstitutional.

Mr. Emanuel’s attempts to rein in pension costs, in contrast, have been thrown out by a judge, leading to his appeal this week for a big tax increase.

“Our greatest financial challenge today is the exploding cost of our unpaid pensions,” he told the Chicago City Council on Tuesday. “It is a big dark cloud that hangs over the rest of our city’s finances.” Without raising taxes, he warned, Chicago will have to finance its pension promises by laying off thousands of police officers and firefighters, ending rat-control programs and letting street repairs lapse, among other cost-cutting measures.

“Our city would become unlivable,” he said.

That is the bullet Ms. Raimondo has dodged. A former venture capitalist and Rhodes Scholar with an economics degree from Harvard, she could see early on that her state’s cheery pension disclosures were papering over a crisis.

Ms. Raimondo was also willing to rest her case for a pension makeover on a contrarian interpretation of the law and hold firm when the unions sued.

“We thought we had a good case,” she said, “but most important, I knew I couldn’t be afraid of a potential lawsuit.”

Ms. Raimondo also had a quirk of the law on her side. In most states, lawmakers or the courts have taken steps to make public pension systems creatures of contract law, as opposed to mere creatures of statute. This may sound obscure, but the difference is critical. Statutes are relatively easy to change — lawmakers just amend the law. But states that want to tear up pension contracts face an uphill fight, because of a clause in the United States Constitution that bars them from enacting any law that retroactively impairs contract rights.

The clause dates to post-Revolutionary America, when the framers wanted to stop the states from giving themselves debt relief. Since then, similar clauses have been added to state constitutions as well. And over the last century, many states have extended the contract clause to cover their pension systems.

But in Rhode Island, Ms. Raimondo said, lawmakers never got around to making the state pension system contractual. “In every state it’s different, but in Rhode Island, the whole pension system is set out in statute.”

Unions disputed that, but Ms. Raimondo forged ahead based on her conviction. That gave her a big tactical advantage: All she had to do was persuade the state legislature to amend the pension law, something it had already done many times.

Compare that with Mr. Emanuel’s predicament.

Unlike Rhode Island, Illinois did make public pensions contractual. Its constitution bars cities like Chicago from imposing pension cuts on their workers.

So while Ms. Raimondo was able to move toward her statutory goal in Rhode Island, Mr. Emanuel has been left haggling with 33 unions in Chicago, trying to find common ground for a makeover that would shrink pensions but fund them properly.

Eventually, he did get buy-in from all but three unions and from state lawmakers in Springfield. The city even programmed pension changes into its computers. But then the deal fell apart, when a small number of holdouts won an injunction. Chicago was ordered to wait for the State Supreme Court to decide the constitutionality of a separate pension overhaul by the state. The court found it unconstitutional and not long after that, a Cook County judge said the ruling was binding on Chicago, too.

And that is why Mr. Emanuel is calling for a big tax increase.

For Ms. Raimondo, persuading the state legislature to do radical pension surgery was a matter of explaining the depths of the problems. She began a series of town hall meetings, where she said that the state had promised its workers far more than it could deliver. The mismatch was so big that if the pension system collapsed, it could take the state down with it, she warned.

And then, in the middle of her road show, the small city of Central Falls went bankrupt. It had never joined the state pension system, preferring to run its own plan, and now its pension fund for police officers and firefighters had run completely out of money. The pensions of retirees, some elderly and infirm, were cut sharply.

“You’d see them interviewed on the nightly news,” Ms. Raimondo recalled. “These were guys who did everything right. They followed all the rules, and then their city went bankrupt and their pensions were cut in half.”

That was a persuasive moment for lawmakers. In November 2011, Gov. Lincoln Chafee called the legislature into special session. Amendments to the pension law passed overwhelmingly, allowing cuts to be made.

Unions and retiree groups sued, and the judge hearing the dispute, Sarah Taft-Carter, said early on that unlike Ms. Raimondo, she saw an “implicit contract” protecting public pensions in Rhode Island. But that was not the end of it. Contract jurisprudence still gives a state some wiggle room to unilaterally impair contracts, under narrow circumstances and with close judicial supervision.

Judge Taft-Carter ordered the state and the unions to try to resolve their disputes in mediation, warning that if they failed, there would be a jury trial.

Confidential talks began, but in the meantime, the state was permitted to carry out the changes.

A settlement finally emerged this year, which, among other things, gave one-time payments to current retirees, to soften the blow of losing their cost-of-living adjustments. Judge Taft-Carter held a “fairness hearing,” giving those affected a chance to sound off. Many expressed anger. But one union leader, Robert Walsh of the National Education Association of Rhode Island, said that after much soul-searching he had decided to support the settlement as the best deal for his 7,500 members.

A settlement, he said, “can be fair and heartbreaking at the same time.”

THE NEW YORK TIMES

By MARY WILLIAMS WALSH

SEPT. 25, 2015

Next week’s sale of $6.9 billion of bonds and notes in the U.S. municipal market will feature hefty debt offerings from two states, according to Thomson Reuters estimates on Friday.

Washington state tops the week’s calendar at $944 million.

This includes $497.8 million of general obligation bonds it is offering via competitive bid in part on Wednesday and through Bank of America Merrill Lynch in part on Monday. Those bonds carry serial maturities from 2016 through 2040, according to the preliminary official statement.

The state will also competitively sell nearly $192 million of motor fuel tax GO bonds due from 2016 through 2040, $60.7 million of taxable GO bonds maturing from 2016 through 2021, and $193.7 million of GO refunding bonds maturing from 2016 through 2024.

The bonds are rated AA-plus by Standard & Poor’s and Fitch Ratings, and Aa1 by Moody’s Investors Service.

Connecticut will sell $840 million of new and refunding special tax obligation bonds for transportation infrastructure through lead underwriter RBC Capital Markets. The deal is structured with $700 million of new bonds with serial maturities from 2016 through 2035 and $140 million of refunding bonds maturing from 2018 through 2027, according to the preliminary official statement.

Moody’s rated the bonds Aa3, and Fitch rated them AA.

Meanwhile, flows into U.S. municipal bond funds turned positive in the latest week after four straight weeks of outflows, according to Lipper.

Net inflows totaled $231 million in the week ended on Sept. 23, the most since the week ended on April 29.

REUTERS

Sep 25, 2015

(Reporting by Karen Pierog; Editing by Lisa Von Ahn)

WASHINGTON – The Senate Finance Committee will hold a hearing on Sept. 29 to discuss the “dire financial situation” in Puerto Rico, committee chair Sen. Orrin Hatch, R-Utah, said Tuesday.

The situation “facing Puerto Rico’s economy and its citizens underscores the alarming consequences of crippling debt,” Hatch said. “With outstanding debt greater than its economic output, the territory faces default unless a responsible long-term fiscal path forward is found.”

The committee has not announced witnesses for the hearing, but Resident Commissioner Pedro Pierluisi, D-PR announced that he has been invited to testify. Gov. Alejandro Garcia Padilla, a Democrat, has also been invited to testify, according to Pierluisi, who said he expects the governor to send a representative.

Hatch said members of the Finance Committee will “have the opportunity to explore how the territory manages its finances and government-backed borrowing entities as well as the interplay between federal entitlement and tax programs and Puerto Rico.”

In addition to chairing the Finance Committee, Hatch also sits on the Senate Judiciary Committee, where a bill to extend Chapter 9 bankruptcy protection to Puerto Rico authorities and municipalities has not moved since it was introduced July 15.That bill was introduced by Sens. Richard Blumenthal, D-Conn., and Chuck Schumer, D-N.Y.

A companion bill introduced in February by Pierluisi, has similarly remained stagnant in the House Judiciary Committee.

Sen. Chuck Grassley, R-Iowa, and Rep. Bob Goodlatte, R-Va., who chair the two committees, have said they do not intend to advance the bills unless other avenues are considered.

While the Obama administration and others, are pushing for Congress to extend bankruptcy protections to the territory, groups such as 60 Plus Association, a seniors’ advocacy organization, want to see the creation of a federal financial control board.

Puerto Rico continues to struggle with $71 billion in public debt. Gov. Alejandro Garcia Padilla has repeatedly said the debt is not payable without restructuring. Officials on the island recently made numerous suggestions for remedying the situation in the form of an economic growth plan a government working group released Sept. 9. The plan incorporates stimulus measures, spending cuts, fiscal reforms and the creation of a local financial control board.

THE BOND BUYER

BY JACK CASEY

SEP 22, 2015 6:06pm ET

Puerto Rico’s main electricity provider failed to extend a contract with its bond insurers that has given the power company time to negotiate a way to restructure its $8.3 billion of debt.

The Electric Power Authority’s failure to extend the forbearance agreement with the insurers marks a setback for the utility, which earlier this month struck a tentative deal with some of its bondholders to reduce its debt load. Insurers that guarantee $2.5 billion of the utility’s debt balked at extending the talks. The forbearance keeps negotiations outside of court.

The bond insurers “are trying to apply more pressure on Prepa,” Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics, said in a telephone interview Saturday. “Now they have the ability to exercise remedies. They could look now to forming a bondholder committee to try and impose a receiver and raise rates.”

Bondholders agreed to extend the forbearance contract to Oct. 1, while fuel-line lenders pushed the expiration deadline to Sept. 25. The agreement was set to expire late Friday night. The power provider will continue negotiations with its bond insurers even without a forbearance agreement, Lisa Donahue, Prepa’s chief restructuring officer, said in a statement Saturday.

Making Progress

“We are making progress and will continue working towards a consensual resolution that benefits Prepa and all of its stakeholders,” Donahue said in the statement.

A Prepa restructuring would be the largest ever in the $3.5 trillion municipal-bond market, surpassing Detroit’s record bankruptcy in July 2013. Puerto Rico and its agencies owe $72 billion. Commonwealth officials plan to offer investors a debt-restructuring proposal in the next few weeks that’s separate from Prepa’s negotiations and would reduce the government’s obligations and delay payments to bondholders.
The utility, bondholders, banks and insurers have repeatedly extended the forbearance agreement, which was first signed in August 2014.

Assured Guaranty Ltd. and Syncora Guarantee Inc. declined to extend that accord beyond Friday. MBIA Inc. dropped out of the forbearance earlier this month. National Public Finance Guarantee Corp., an MBIA unit that insures Prepa debt, filed a petition Thursday to the island’s energy commission, asking it to temporarily add at least 4.2 cents per kilowatt hour to the agency’s base electricity rate so Prepa can repay its bonds, according to a copy of the request provided by the commission.

Exercise Authority

“While National is continuing its discussions with Prepa in good faith to accomplish a consensual restructuring of Prepa, National has petitioned the Puerto Rico Energy Commission to exercise its statutory authority to impose a modest and temporary rate increase and to impose deadlines for the completion of Prepa’s rate case,” Greg Diamond, a spokesman for MBIA, said in a statement.

The expiration with the insurers may imperil the tentative agreement that Prepa and some of its bondholders reached on Sept. 1 that would require investors to take losses of about 15 percent in a debt exchange.
Ashweeta Durani, a spokeswoman for Assured, and Michael Corbally, a spokesman at Syncora Guarantee Inc., didn’t immediately respond to e-mails. Dan Zacchei, a representative in New York at Sloane & Co. for the forbearing bondholders, declined to comment.

Bloomberg News

by Michelle Kaske

September 19, 2015 — 9:19 AM PDT Updated on September 19, 2015 — 10:48 AM PDT

​Orrick, Herrington & Sutcliffe LLP represented KentuckyWired Operations Company, LLC, indirectly owned by Macquarie Infrastructure Developments, LLC, First Solutions LLC and Ledcor US Ventures Inc., as bond counsel in the US$300 million financing of a high-speed, open access, middle-mile fiber optic network with excess capacity with the Commonwealth of Kentucky. The project, which is expected to be completed in 2018, will add over 3,200 miles of fiber optic cable statewide.

Kentucky currently ranks 46th in the U.S. in terms of broadband availability, and approximately 23% of the state’s population (mostly located in rural areas) has no broadband access at all. The statewide fiber optic network will make high-speed internet accessible throughout Kentucky’s 120 counties by 2018, including 1,098 government and public facilities such as academic institutions, public libraries and governmental agencies, with the excess capacity to be made available through wholesale access to local Internet service providers who can extend fiber to homes and businesses. The project is a first of its kind in the U.S. in that it involves an underground fiber optic cable for part of the system, and was financed using a unique tax exempt structure that was designed by Orrick’s Tax Group. In particular, the structure eased regulatory hurdles which enabled a statewide project to be completed in a short time frame.

“We are thrilled to handle such a unique and groundbreaking transaction,” said Dan Mathews, partner and co-Head of Orrick’s Energy & Infrastructure Group, who led the infrastructure team. “This project is expected to significantly improve Kentucky’s education, health access and economy through increased connectivity to high speed internet, and we hope it will set precedent for improvement of telecommunications networks in additional states.”

“This deal was successful due to the cross-practice support of our Tax, Energy & Infrastructure and Public Finance Groups,” said Chas Cardall, partner and Chair of Orrick’s Tax Group and a member of the Public Finance group, who led the tax aspects of the transaction. “We were able to leverage the expertise of our lawyers in each of these areas to create a unique tax exempt structure, which was a key aspect of the transaction.”

In addition to Dan and Chas, the team was comprised of Ken Schuhmacher, Susan Long, Benjamin Bass and Walter Alarkon of the Energy & Infrastructure Group, Sarah Rackoff, Marc Bauer and Jennifer Grew of the Public Finance Group and Greg Riddle, Wolfram Pohl, George Wolf and Ashley Rodriguez of the Tax Group.

About Orrick

Orrick is a leading global law firm focused on counseling companies in the Energy & Infrastructure, Finance and Tech sectors. The firm’s client work is divided equally between transactional advice and litigation. Law360 recognizes Orrick among the “Global 20” law firms and named the firm a “Technology Practice Group of the Year” in 2014. The firm’s platform includes offices across the US and in the UK, France, Switzerland, Germany, Italy, Belgium, Russia, China and Japan. The firm also has an affiliated office in Abidjan, Cote d’Ivoire. Financial Times consistently recognizes Orrick among the 10 most innovative North American firms, and BTI Consulting recently named Orrick to its Client Service All Star List.

Contact

For more information, please contact us by e-mail pr@orrick.com or by phone: Ashley Laputka at (415) 773-5725 in San Francisco or Adi Weisman at (212) 506-5122 in New York.

09-16-2015

After Congress’s deadline to block President Barack Obama’s nuclear deal with Iran expired Thursday, Republicans are taking the fight to the states by vowing to preserve local sanctions.

Thirty states and the District of Columbia restrict investments by pensions and public entities in companies doing business in the country, according to the group United Against Nuclear Iran. Fifteen Republican U.S. governors, including four presidential candidates, last week sent a letter to Obama saying they would fight to keep their constraints if the administration lifts its nuclear-related sanctions.

A new nonprofit, Defund Iran, is also seeking state constitutional amendments next year that would mandate divestment. Florida alone has withdrawn more than $1.1 billion since 2007 from companies involved with Iran including Royal Dutch Shell Plc, Cnooc Ltd., and Daelim Industrial Co., according to Chief Financial Officer Jeff Atwater.

Republicans say Obama’s agreement won’t prevent nuclear proliferation, and will unleash Iran’s economy and its ability to support terrorism. Focusing on states gives the party another angle of attack.

“It enables them to take a stand against President Obama and, in the bargain, take a stand for the rights of the states,” said Jack Pitney, a political science professor at Claremont McKenna College near Los Angeles.

The lifting of federal sanctions would allow a few U.S. aerospace companies to seek business in Iran, such as Boeing Co. and General Electric Co., according to a report from Bloomberg Intelligence. Overseas firms including Shell and BP Plc also could seek business there, it said. States shouldn’t help, said Sarah Steelman, chairwoman of Defund Iran and a former Republican candidate for U.S. Senate in Missouri.

The governors, including presidential aspirants Bobby Jindal of Louisiana, New Jersey’s Chris Christie, John Kasich of Ohio and Wisconsin’s Scott Walker, point to a provision in the deal that says the federal government will “actively encourage” state and local officials to “take into account” U.S. policy lifting some sanctions.

“We intend to ensure that the various state-level sanctions that are now in effect remain in effect,” the governors said in their Sept. 8 letter.

BY TRIBUNE NEWS SERVICE | SEPTEMBER 18, 2015

By Mark Niquette

With assistance from Darrell Preston in Dallas.

Illinois’s budget stalemate is leading investors to demand higher yields to lend to its towns and villages, causing bond sales to tumble while borrowers outside the state rush to capture the lowest interest rates in a generation.

The drop in issuance this year stands in contrast to the rest of the $3.6 trillion U.S. municipal market, where bond offerings are on pace to reach the highest level since at least 2002, according to data compiled by Bloomberg. Illinois is one of only five states where they’ve fallen: issuers have sold $8.4 billion of debt through Sept. 11, down from $9.9 billion a year earlier. It’s the biggest decline nationwide.

When municipalities do borrow, investors are requiring higher yields because of the association with the state, said Tim McGregor, head of municipals at Northern Trust Corp. in Chicago.

Illinois, with the lowest credit rating of any state, has been without a budget since the year began on July 1 because of a political standoff. That’s forcing Illinois to leave some bills unpaid and casting doubt over how it will close a $6.2 billion shortfall.

“You’re definitely getting a little extra yield as an investor, even in credits that may not have a direct link to the state,” said McGregor, who oversees $27 billion of state and local government securities.

The financial pressure on the local governments has been underscored by Chicago, whose credit rating was cut to junk by Moody’s Investors Service in May because of the soaring bills the city faces from its underfunded employee pension funds. It isn’t alone: Half of the state’s local retirement systems have less than 60 percent of the assets needed to cover all the benefits due as workers retire, according to a commission created by the legislature.

Bond buyers will have their choice of two large deals from the state this week. The Metropolitan Pier and Exposition Authority, which runs Chicago’s convention center, is selling $223 million of bonds Wednesday.

OSF Healthcare System, a hospital operator, plans to offer $368 million of tax-free debt through the Illinois Finance Authority on Thursday.

McGregor said Illinois hospitals are being penalized for the state’s crisis.

“Health-care bonds in Illinois are probably trading 25 to 50 basis points cheaper, just because of the situation in Illinois, than they would be otherwise,” said McGregor.

There’s no sign of a resolution to the budget impasse, which has lasted longer than any in the state’s history, according to the Civic Federation, a Chicago-based research group. Republican Governor Bruce Rauner and the Democrat-led legislature can’t agree on how to fix a deficit left after temporary tax increases expired.

Illinois’s bills are piling up without a budget, with the unpaid tab set to reach $8.5 billion by the end of the year from $5.5 billion in August, state comptroller Leslie Geissler Munger said last week. The state is paying about 90 percent of what it owes even during the standoff, she said.

The budget delay has already dealt a blow to the Metropolitan Pier and Exposition Authority, which was unable to make a deposit into its debt-payment fund in July because lawmakers hadn’t appropriated the money.

While lawmakers approved the funds last month, the lapse caused Standard & Poor’s to lower the authority’s rating seven steps from AAA to BBB+, three ranks above junk.

OSF, which operates 10 Illinois hospitals, hasn’t felt a direct impact yet, said Dan Baker, its executive director of Treasury services. Proceeds from its sale will be used in part to finance construction and renovation at medical centers in Bloomington, Peoria and Rockford, offering documents show.

“Most of the investors we talk to understand the situation,” said Baker. “There’s been a little delay in payment at times, though it’s not too far behind right now — although it may be without the budget being approved.”

Catherine Kelly, a spokeswoman for Rauner, declined to comment on the increasing borrowing costs for Illinois agencies and municipalities. She said on Sept. 2 that the state was “being cautious about bond sales” and plans to issue some debt this year, though it hasn’t announced any details. Illinois 10-year general obligations yield 1.94 percentage points more than benchmark munis, near the most since late 2013, Bloomberg data show.

Investors penalized local borrowers even before the new fiscal year began as Illinois lawmakers dueled over the budget deficit. A school district in Rockford, 88 miles (142 kilometers) west of Chicago, issued $40 million of debt in February, with 20-year bonds priced to yield 4.17 percent, Bloomberg data show. That compared with a 3.21 percent rate on an index of similarly rated AA bonds.

Lake County, which borders Chicago’s home county to the north, sold $90 million of top-rated general obligations in June. The portion due in about 30 years priced to yield 4.05 percent, compared with 3.43 percent for an index of top-rated municipals.

“Some of their headlines have caused Illinois spreads outside of the state and Chicago to widen out, and there are a lot of very strong municipalities within the state of Illinois,” said Rick Taormina, head of municipal strategies at J.P. Morgan Asset Management, which oversees $56 billion in state and local debt.

“We’re looking to take advantage of that widening if it occurs.”

Bloomberg News

by Brian Chappatta

September 14, 2015 — 9:01 PM PDT Updated on September 15, 2015 — 5:55 AM PDT

Chicago’s Metropolitan Pier and Exposition Authority, which runs the nation’s largest convention center, is discovering the price of Illinois’s political paralysis.

The authority sold about $220 million of federally tax-exempt securities Wednesday for yields of as much as 6 percent, according to preliminary data compiled by Bloomberg. Thirty-year bonds are being offered at 4.87 percent, about 1.6 percentage points more than top-rated securities.

It’s the agency’s first offering since skipping a July payment into its debt-service fund because lawmakers and Governor Bruce Rauner didn’t appropriate the money amid a deadlock over the budget. As a result, Standard & Poor’s slashed the authority’s rating by seven steps from AAA to BBB+, three grades above junk.

The lapse highlighted the risk to investors from bonds with debt bills that depend upon the approval of lawmakers. While Rauner signed a bill last month to free up tax money for Met Pier, the agency’s bonds haven’t rebounded from the rout that followed the missed deposit.

“The downgrade, which resulted from the budget impasse, hurt them in terms of interest costs,” said Alan Schankel, a managing director at Janney Montgomery Scott LLC in Philadelphia. “Investors realize probably it’s a lot better than a BBB credit, but because of what’s happened and because of the appropriation nature, it’s a BBB and not much you can do.”

Met Pier is among borrowers most affected by the impasse between the Republican governor and the Democrat-led legislature that’s left Illinois without a budget for more than two months. The failure had led investors to push the difference between Illinois bond yields and top-rated debt near a record high.

Met Pier bonds maturing in 2050, its most actively exchanged securities, traded for an average of 100 cents on the dollar Wednesday, down from $1.02 on Aug. 4, the day before the rating cut. That’s pushed the yield up about half a percentage point to 5 percent.

The securities offering is the authority’s first since 2012, according to data compiled by Bloomberg, and illustrated how it’s being penalized by investors. In 2012, its 30-year bonds were sold for yields as low as of 4.15 percent, about a percentage point more than top-rated debt at the time. That gap swelled to 1.6 percentage point Wednesday.

The proceeds will help pay for the construction of a 40-story hotel and refinance debt, bond documents show. The securities included zero-coupon bonds, which were offered at a top yield of 6 percent for those maturing in 2052.

“This transaction will lock up the financing” for the authority’s projects, said Richard Oldshue, Met Pier’s chief financial officer. He declined to comment on what kind of reception he’s expecting for the deal.

Fitch Ratings gave the bonds a BBB+ rating, three steps above junk, with a negative outlook. The company said Met Pier’s ability to make “full and timely” debt service depends on the Illinois General Assembly to appropriate the revenue, which ties the authority’s credit to Illinois, the worst-rated state in the nation.

Met Pier never missed any interest or principal payments to investors and the agency now has the authority to tap tax money to cover its debts. The bonds are backed by authority taxes and state sales taxes. The authority taxes, which includes levies on hotels, reached $140.2 million in 2015, up 42 percent from 2010, bond documents show.

“This is still a solid credit backed by the economic activity in the city of Chicago in terms of sales taxes and hotel taxes — and all our indications are that business is booming in Chicago,” said Paul Mansour, head of municipal research in Hartford, Connecticut, at Conning, which oversees $11 billion in state and local-government securities, including those sold by Met Pier. “It creates a buying opportunity for people willing to take the longer view.”

Bloomberg News

by Elizabeth Campbell

September 16, 2015 — 12:00 AM PDT Updated on September 16, 2015 — 1:55 PM PDT

Pennsylvania is facing rising penalties from investors as Democratic Governor Tom Wolf plans to veto a temporary budget being advanced by Republican legislators, promising to prolong a political impasse that’s left the state without a spending plan for more than two months.

The state’s 10-year bonds yield about 2.87 percent, about 0.59 percentage point more than benchmark municipal debt, according to data compiled by Bloomberg. That’s approaching the 0.61 percentage point reached in July, which was the highest since the data begin in 2013.

“Each week and each month where they don’t have a budget, that concern will increase,” said Alan Schankel, a managing director at Janney Montgomery Scott LLC in Philadelphia. “They’re playing a game of chicken.”

Pennsylvania has been operating without a spending plan for the year that began in July because the Republican-led legislature and first-term governor have remained at loggerheads over proposed tax increases and overhauls to the public employee pension system.

The uncertainty led Moody’s Investors Service last week to downgrade schools that issue debt through a state program that diverts aid to investors when needed.

The Pennsylvania Senate on Thursday is set to vote on a short-term budget that would provide state and federal funds to alleviate pressures on school districts and social service agencies.

Wolf told reporters Wednesday that he would veto the temporary spending plan because he wants them to consider his proposals for the full budget and concessions on the retirement system. He said the failure to compromise and balance the budget could imperil Pennsylvania’s credit rating.

“We’re going to continue to have the credit downgrades we’ve had because we’re not doing anything else differently than we’ve done,” Wolf said. “It’s status quo.”

The state’s $53 billion unfunded pension liability has weighed on its bonds. The Keystone State is paying more to borrow than any other state except Illinois and New Jersey, according to data on 20 major states compiled by Bloomberg.

Standard & Poor’s and Fitch Ratings cut Pennsylvania’s rating last year to AA-, the fourth-highest level, citing the pension burden. Moody’s grades Pennsylvania Aa3, also the fourth-highest rank.

Bloomberg News

by Romy Varghese

September 17, 2015 — 9:59 AM PDT

Taylor Riggs, an editor at Bloomberg Brief, talks with reporter Kate Smith about this week’s municipal market news.

Watch the video.

September 17, 2015

The debt-restructuring agreement Puerto Rico’s main electric utility unveiled with great fanfare at the start of the month is turning out to be far from a done deal.

The Puerto Rico Electric Power Authority, known as Prepa, still needs to come to terms with about two-thirds of creditors, including bond-insurance companies, or the agreement falls apart. An accord that keeps the negotiations out of court expires late Friday. All forbearing creditors except insurer MBIA Inc. are part of that contract, called a forbearance agreement.

“They still have to do quite a bit of work,” said Mikhail Foux, a municipal-debt strategist at Barclays Plc in New York. “They have only about a third of the people on board. We’re talking about monolines and bond funds that effectively bought at par.”

The utility reached a tentative agreement on Sept. 1 with bondholders including OppenheimerFunds Inc., Franklin Advisers Inc., BlueMountain Capital Management and Goldman Sachs Group Inc. Investors agreed to take losses of about 15 percent under a debt exchange. Prepa, which has about $8.3 billion in debt, has been negotiating with creditors for over a year after saying it needed to reduce its obligations.

Some bondholders bought Prepa securities for as low as 33 cents on the dollar, giving them room to accept less than par. Bond insurers would have to make investors whole on any deferred payments or potential haircuts, making them less inclined to accept concessions, Foux said.

Forbearance Agreement

A Prepa restructuring would be the biggest ever in the $3.6 trillion municipal-bond market, surpassing Detroit’s record bankruptcy filing in July 2013. The utility, which relies mainly on oil to produce electricity, is the largest U.S. public power provider, with 1.47 million customers and $4.68 billion in electric revenue in 2013, according to the American Public Power Association.

The utility has asked creditors to extend the forbearance agreement by two weeks, according to two people with direct knowledge who asked for anonymity because the talks are private. It first signed the pact in August 2014 with bondholders, banks and insurers after the agency used its capital budget to pay for fuel. Its been extended seven times.

Bond insurers Assured Guaranty and MBIA last week offered a proposal that doesn’t include exchanging insured Prepa debt at a discount, according to a person with direct knowledge of the proposal. That would fit into the tentative plan with forbearing bondholders, the person said, without elaborating. Prepa has yet to respond to the proposal, the person said.

Greg Diamond, a spokesman for MBIA, Ashweeta Durani, a spokeswoman for Assured, and Michael Corbally a spokesman at Syncora Guarantee Inc. declined to comment.

Jose Echevarria, a spokesman in San Juan for Prepa, and Jenni Main, chief financial officer at Millstein & Co., an adviser on the utility’s restructuring, declined to comment.

Governor Alejandro Garcia Padilla visited Washington this week as the island seeks to reduce its $72 billion debt load and delay payments to bondholders. A commonwealth agency, the Public Finance Corp., defaulted in August and September on debt payments, the first for a Puerto Rico entity. The administration plans to give commonwealth investors a debt-restructuring offer in a few weeks, after saying the government has only an estimated $5 billion to repay $18 billion of principal and interest coming due in the next five years.

After meeting with Garcia Padilla Thursday, U.S. Treasury Secretary Jacob J. Lew reiterated his support for legislation in Congress that would allow some Puerto Rico public corporations to file for bankruptcy.

“Given the commonwealth’s projection that it will exhaust its liquidity later this year, Congress must act now to provide Puerto Rico with access to a restructuring regime,” Lew said in a statement Thursday.

“Without federal legislation, a resolution across Puerto Rico’s financial liabilities would likely be difficult, protracted, and costly.”

Prepa bond prices show the difficulty the utility faces in reaching an agreement with creditors, Foux said.
Bonds maturing July 2040 traded Thursday at an average 60.1 cents on the dollar, according to data compiled by Bloomberg. That’s higher than an average 53.5 cents on Aug. 28, the last time the bonds traded before the Sept. 1 agreement. But that’s still lower than the 85 cents that bondholders would receive in a proposed debt exchange.

Legacy Debt

“One of the reasons they’re trading substantially lower is that there’s still quite a bit of an execution risk,” Foux said.

Puerto Rico may ask holders of its general-obligation bonds and sales-tax debt, called Cofina, to take losses, and Prepa could again look to its investors if the proposed debt-exchange fails to improve the utility’s finances, Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics, wrote in a Sept. 14 report. That plan would swap existing bonds for new securitized debt repaid with a utility-customer surcharge.

“There is reasonably a risk that the commonwealth and/or Prepa would entertain a similar path should Prepa’s restructuring fail to be enough to achieve fiscal solvency,” Fabian said.

Investors who haven’t participated in the forbearance, such as individual bondholders and some municipal-bond funds, would also need to exchange their securities for new bonds, leaving no more than $700 million of legacy debt remaining, according to the agreement.

MBIA’s National Public Finance Guarantee Corp. insures about $1.4 billion of Prepa debt, while Assured Guaranty backs $904 million, according forbearance documents. Syncora Guarantee Inc. insures $197 million.

Those firms must also take into consideration their exposure across all Puerto Rico securities. Assured guarantees $6.2 billion of Puerto Rico debt through 2047, as of June 30. National insures $4.5 billion through 2046, as of June 30.

“If monolines agree to some haircuts here, what would that mean for them with the rest of the bond stack?” Foux said.

Puerto Rico securities have lost 7.2 percent this year through Sept. 17, according to S&P Dow Jones Indices. The broader muni market has gained 0.9 percent.

Bloomberg News

by Michelle Kaske

September 17, 2015 — 3:47 PM PDT Updated on September 18, 2015 — 8:13 AM PDT

Fitch Ratings-New York-15 September 2015: California’s public power utilities could face additional financial pressure over the medium to long term following the state legislature’s passage of SB 350, Fitch Ratings says. The Clean Energy and Pollution Reduction Act of 2015 includes a number of provisions that are expected to increase direct costs for public power utilities. The bill’s more notable provisions include an increase of the state’s renewable portfolio standard (RPS) to 50% by 2030 and additional efficiency and conservation programs. Utilities have already begun to transition their power supplies toward lower emission resources due to other state regulations, including a RPS of 33% by 2020.

Fitch expects compliance with the more stringent environmental regulation will require the state’s public power utilities to transition an even greater portion of their power supply to less flexible and potentially more costly renewable energy. Rate flexibility and the ability to preserve financial metrics in the face of these regulatory changes will be fundamental to maintaining long-term credit quality.

The higher RPS requirement will be phased in over a 10-year period, with utilities mandated to reach interim targets of 40% by 2024, 45% by 2027 and 50% by the end of 2030. This significant increase in renewable energy will push public power utilities to identify and acquire resources that are generally more expensive and less flexible than thermal resources. Positively, the bill allows for the indefinite banking of certain resources beginning in 2021, which will allow those utilities that exceed their annual target to roll over credits toward future compliance years.

SB 350 is expected to be signed into law as the bill conforms in large part to the governor’s previously stated objectives of raising the RPS to 50% and reducing greenhouse gas emissions to 40% below 1990 levels by 2030.

Contact:

Matthew Reilly, CFA
Director
U.S. Public Finance
+1 415 732-7572
650 California Street
San Francisco, CA

Rob Rowan
Senior Director
Fitch Wire
+1 212 908-9159
33 Whitehall Street
New York, NY

Detroit’s schools are paying a hefty penalty for persistent financial woes as the district taps the tax-exempt debt market in the wake of the city’s record bankruptcy.

The $121 million in notes maturing in August being sold through the Michigan Finance Authority were priced to yield 5.75 percent, according to preliminary data compiled by Bloomberg. That’s about 5.5 percentage points more than one-year benchmark municipal bonds.

“The market pricing is just reflective of many buyers’ uncertainty regarding the legal standing of this type of security package for a name that has suffered so much fundamentally in recent decades,” said Gabe Diederich, a Menomonee Falls, Wisconsin-based money manager at Wells Capital, which manages about $39 billion of municipals, including some Michigan school holdings.

The proceeds of the deal will refinance debt to help cover the district’s budget deficit, according to bond documents. The district, which has been run by a state-appointed manager since 2009, is in Wayne County, which entered into a consent pact with the state last month to try to mend its own spiraling finances.

Michelle Zdrodowski, a spokeswoman for the schools, said in an e-mail that the district was not going to make any comment during the pricing period.

Detroit Public Schools’ financial problems mirror a shrinking population, a trend that has contributed to slumping enrollment. The “severe declines” in the number of students enrolled at Detroit schools has limited state aid available for debt payments, according to Standard & Poor’s, which rates the notes SP-3, its lowest short-term grade. The schools saw average annual enrollment declines of more than 12 percent from 2007 to 2012, according to S&P.

In May, the Michigan Finance Authority sold $82.8 million of notes maturing in June 2016 at a yield of 4.75 percent.

The district is behind on its pension payments by about $92 million, bond documents show. The state’s office of retirement systems can ask the Michigan treasurer to intercept state aid to the schools to get the funds. While the director of the pension system has said that he doesn’t plan to do that as long as the district sticks to its plan to make payments in October, the pension costs remain a drag on school finances.

The state is working to ease the district’s fiscal woes. In April, Gov. Rick Snyder proposed a restructuring of the school system into two parts. One district would be charged with paying off the $483 million of operating debt using an existing property tax, and the other would be tasked with educating students and collecting state aid funds, according to bond documents. Legislation on the plan is expected to be introduced in the coming months, according to bond documents dated Sept. 4.

“Ultimately there just doesn’t appear to be a near-term catalyst for boosting enrollment and changing the trajectory of the trends of Detroit public schools itself,” said Diederich, who passed on the note sale Thursday.

Bloomberg News

By Elizabeth Campbell

September 11, 2015

NEW YORK (Standard & Poor’s) Sept. 9, 2015–Standard & Poor’s Ratings Services today said its ratings, including its ‘AA-‘ general obligation (GO) rating, on the State of Pennsylvania are unchanged despite the lack of an enacted budget for fiscal 2016. As we noted in our report in “Late State Budgets: Summer Cliffhangers No One Wants To See,” published on June 4, 2015, on RatingsDirect, most state governments exhibit a strong commitment to debt repayment and have demonstrated willingness to honor their obligations even in the absence of a budget, in our view. This commitment could take different shapes or modalities, but whether it is a continuing resolution, a standing appropriation or some other method, the intended outcome is the same: to ensure full and timely payment of debt service.

Two months into fiscal 2016, Pennsylvania’s lawmakers have yet to agree on a budget. Negotiations have continued as lawmakers try to reach an agreement on pension reform and education funding, without which budget passage is unlikely. From a credit standpoint, Pennsylvania’s constitution provides that if sufficient funds are not appropriated for timely payment of all commonwealth general obligation (GO) bond debt service, the treasurer shall set apart from the first revenues thereafter a sum sufficient to pay principal and interest on the debt. As such, GO debt has a priority lien on state revenues and is paid even in the absence of a budget. Pennsylvania, which is no stranger to late budgets, typically schedules its non-GO debt to mature in December and June, with a few exceptions, which the state has currently addressed.

These include debt issued by the Pennsylvania Economic Development Financing Authority (PEDFA), lease revenue bonds, and certificates of participation (COPs). On Sept. 1, the state paid its debt service on PEDFA’s series 2012 bonds for the Forum Place. The state made lease payments prior to the end of the previous fiscal year that were sufficient to cover debt service on Sept. 1, 2015. Philadelphia Regional Port Authority’s lease revenue debt (series 2008), also due Sept. 1, was paid with proceeds from a loan to the Pennsylvania Department of Transportation from the state’s Motor License Fund. Payments for debt service on COPs issued by the Department of Human Services (DHS) come due on Oct. 1 and are included in payments made to DHS to keep the facilities operating in order to ensure the health, safety, and welfare of its citizens. The state has also indicated that the payments for the Pittsburgh and Allegheny County Sports and Exhibition Authority, series 2010 lease revenue bonds will be made from the commonwealth’s Gaming Economic Development Tourism Fund and are not subject to appropriation.

In the absence of a budget, there are no state aid payments that flow to Pennsylvania’s school districts (see “Pennsylvania School District Ratings Based On State Aid Intercept Program Put On Watch Negative on Budget Delay,” published Sept. 4, 2015).We believe that the lack of funding for school districts could translate into increased pressure on lawmakers and provide an incentive for them to reach budget consensus over the next couple of months. We will continue to monitor the state’s ongoing budget deliberations to determine what impact, if any, the protracted budget negotiations have on Pennsylvania’s credit quality.

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.

Primary Credit Analyst: John A Sugden, New York (1) 212-438-1678;
john.sugden@standardandpoors.com

Secondary Contact: Robin L Prunty, New York (1) 212-438-2081;
robin.prunty@standardandpoors.com

The new Partnership for Public Facilities and Infrastructure Act allows state and local agencies to expand their pursuit of public-private partnerships beyond the highway and water reservoir P3s already being conducted in Georgia. The law authorizes agencies to pursue P3s to build and maintain public buildings and for other types of transportation and water-related projects. This breakthrough will increase state and local agencies’ ability to undertake projects they might otherwise lack the financing or construction expertise to pursue.

To help state and local officials and developers understand and use the law to procure such projects, NCPPP and the American Council of Engineering Companies of Georgia will co-host a one-day event, The Future of P3s in Georgia, on Sept. 24 in Atlanta. During the event, experts will discuss how P3s are conducted, what types can be pursued under the new law and how successful projects in Georgia and other states have been carried out.

To set the stage for this meeting, P3 Digest asked several experts who will speak at the conference to describe the new law and the ways it will influence how agencies and private developers negotiate P3s in Georgia.

The new law, signed May 5 by Gov. Nathan Deal, allows “qualifying projects,” to be pursued as P3s, a term that is defined broadly as those that meet a public purpose or need, explained Brad Nowak, a partner at Morris, Manning & Martin, LLP. Previously, only transportation projects — chiefly highways — and university campus housing could be built through such partnerships. The new law expands the types of P3s that can be negotiated to include various types of public buildings, many different transportation, water, wastewater and stormwater projects, and solid waste facilities, he added.

Georgia already has some experience in public building P3s. Corvias Campus Living negotiated a partnership with the University System of Georgia in 2014 to build, manage and maintain student housing at multiple locations. “The partnership is reportedly the first time that a state system has privatized student housing across a portfolio of campuses,” Nowak noted.

However, the new law will greatly streamline the negotiating process for conducting such projects and other types of P3 projects, noted Michael Sullivan, president and CEO of ACEC Georgia. Before the new law took effect, Georgia did not permit state or local agencies to negotiate non-highway P3s directly with private firms. The University of Georgia System project required involving a private real estate foundation in the project to generate financing and a separate county development authority to provide bond financing. “It’s a very convoluted process. The new law provides a clear, transparent process for agencies in Georgia to use P3s for almost any kind of public infrastructure,” said Sullivan.

The law establishes a statutory framework for P3s and a committee that will craft optional procurement guidelines for localities. This adds transparency and consistency to the procurement process, commented Robert Fortson, a partner at McGuireWoods LLP, which worked hard to win passage of the legislation. “The lack of these support mechanisms created barriers to entry for both public and private sector participants,” he said.

The 10-member Partnership for Public Facilities and Infrastructure Act Guidelines Committee will prepare model guidelines local governments can use to receive and consider unsolicited project proposals, although these governments can choose to develop their own. However, locally developed guidelines must cover certain details, such as time frames for receiving and processing the proposals, how proposal financial review and analysis will be conducted, and procedures for reviewing and considering competing proposals, Nowak explained. The model guidelines committee recently was appointed and expects to issue the guidelines by July 1, 2016, he added.

The new opportunity to develop many types of infrastructure P3s makes this an excellent time for state and local agencies to learn more about this procurement option, these experts say.

Discussing these types of projects with officials who already have conducted them in Georgia is a good way to get up to speed, Nowak advised.

Valuable lessons also could be learned through a study of the types of partnerships that have been conducted in Virginia, Florida and Texas, all of which have P3 laws similar to Georgia’s.

“The success of Virginia’s P3 law offers a great model for the types of projects that are possible — everything from wastewater treatment facilities to aquatic centers to parking decks. The model guidelines committee should also serve as a great resource to educate local cities, counties and school districts about best practices in P3 procurement,” said Fortson.

“Many outside consultants, such as engineers, attorneys and other advisors who often represent the public sector on P3 projects can also help explain the ins and outs of the new law, its application to developing projects and ways to properly procure, structure and document them,” said Nowak.

Sullivan believes that the insights that will be shared about the new law and successful case studies discussed during the event will help attendees quickly get up to speed on P3s.

“I am very excited about this year’s P3 Summit and hope that many state and local government officials — as well as private firms — will attend and find out how to use Georgia’s new P3 law as another tool in the toolbox for providing all kinds of public infrastructure in a new way,” he said.

The Future of P3s in Georgia will be held at the Georgia International Convention Center, adjacent to Hartsfield-Jackson Atlanta International Airport. For more details, including registration information, visit the event website.

NCPPP

By Editor September 10, 2015

A long-awaited plan that addresses Puerto Rico’s $72 billion debt load will include projections of how much debt-service the island can pay over the next five years, according to a person with direct knowledge of the proposal.

Governor Alejandro Garcia Padilla is set to receive from his top officials and outside restructuring advisers on Tuesday what is being called by his administration as an economic recovery and debt-adjustment plan, or the Working Group plan. The governor plans to release the proposal publicly on Wednesday, Victor Suarez, his chief of staff, said in a statement.

That report will include annual revenue and expenditure projections for the next five years after taking into account proposed spending reductions and measures to boost revenue collection rates, according to the person, who asked for anonymity because the discussions are private.

Those calculations won’t include annual principal and interest costs, so the gap between estimated revenue and anticipated spending, what the report will call a “primary surplus,” will indicate how much Puerto Rico can afford to pay for debt service every year, the person said. The person declined to say what the primary surplus would be.

“This is really just the beginning of a new stage, but this stage still could last years,” said Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics. “You have different sets of buyers, all with different expectations for their recovery and all with different willingness to negotiate on price.”

Barbara Morgan, who represents the Government Development Bank at SKDKnickerbocker in New York, said Monday that the bank didn’t have a comment at this time. Betsy Nazario, a spokeswoman in San Juan for the GDB, and Jesus Manuel Ortiz, a spokesman in San Juan for the governor, didn’t immediately respond to e-mails.

In a statement e-mailed to reporters Tuesday, Suarez said Garcia Padilla will be presented with the plan during the afternoon and has instructed his advisers to make it public Wednesday.

“This plan is an indispensable element to put Puerto Rico on track toward economic growth, to face fiscal challenges and bring back social well being for Puerto Ricans,” he said.

The commonwealth and its agencies pay about $4 billion each year in debt service, not including principal and interest costs for the Electric Power Authority and the Aqueduct and Sewer Authority, the person said. A Puerto Rico agency, the Public Finance Corp., missed a Sept. 1 interest payment, according to a filing with the Municipal Securities Rulemaking Board. It’s the second skipped payment for the agency after failing to pay $58 million of principal and interest Aug. 3 because lawmakers didn’t allocate the funds in a budget crunch.

Garcia Padilla in June directed his administration to evaluate the island’s obligations and said the commonwealth was unable to repay all of its debt on time and in full and would seek to delay debt payments “for a number of years.”

The Working Group plan follows a Sept. 1 tentative agreement the Electric Power Authority reached with some of its bondholders that would offer investors 85 percent of the value of the bonds they hold through a debt exchange.

Puerto Rico bonds rallied last week following the tentative agreement struck with holders of about 35 percent of the electric debt. General obligations with an 8 percent coupon and maturing July 2035 traded Friday at an average price of 76 cents on the dollar, up from a record-low 66.6 cents on June 30, according to data compiled by Bloomberg. It was the highest since June 26, the last trading day before Garcia Padilla said the commonwealth’s debt was unpayable and directed officials to work on a plan to ease debt payments.

Commonwealth securities gained 3.95 percent last week, the biggest advance for the period since October 2008, according to S&P Dow Jones Indices. Puerto Rico debt has still dropped in value this year, losing 7.2 percent through Sept. 4 compared with a one percent gain for the broader municipal-bond market.

A Puerto Rico restructuring would be the largest in the $3.6 trillion municipal-bond market, surpassing Detroit’s record bankruptcy filing in July 2013 that involved about $8 billion of bonded debt. Along with $72 billion of debt, Puerto Rico’s largest pension fund has only 0.7 percent of assets to cover $30.2 billion of projected costs, according to financial documents. It’s the worst-funded among U.S. state retirement plans and stands to deplete its assets by 2020, according to Moody’s Investors Service.

Bloomberg News

by Michelle Kaske

September 7, 2015 — 9:00 PM PDT Updated on September 8, 2015 — 7:21 AM PDT

Municipal bond sales in the U.S. are set to increase in the next month while the amount of redemptions and maturing debt falls.

States and localities plan to issue $10.2 billion of bonds over the next 30 days, according to data compiled by Bloomberg. A week ago, the calendar showed $8.8 billion planned for the coming month. Supply figures exclude derivatives and variable-rate debt. Some municipalities set their deals less than a month before borrowing.

North Texas Tollway Authority plans to sell $750 million of bonds, Illinois Finance Authority has scheduled $468 million, Austin, Texas, will offer $293 million and Lee Memorial Health System, Florida will bring $277 million to market.

Municipalities have announced $11.1 billion of redemptions and an additional $12.9 billion of debt matures in the next 30 days, compared with the $25.8 billion total that was scheduled a week ago.

Issuers from Florida have the most debt coming due with $1.79 billion, followed by California at $1.17 billion and New York with $1.16 billion. Washington, D.C. has the biggest amount of securities maturing, with $413 million.

The $3.6 trillion municipal market shrank by 4 percent in 2014. This year, maturities are poised to drop 38 percent to $176 billion from the 2014 levels.

Investors removed $715 million from mutual funds that target municipal securities in the week ended August 26, compared with an increase of $50 million in the previous period, according to Investment Company Institute data compiled by Bloomberg.

Exchange-traded funds that buy municipal debt fell by $100.3 million last week, reducing the value of the ETFs by 0.58 percent to $17.2 billion.

State and local debt maturing in 10 years now yields 105.209 percent of Treasuries, compared with 104.213 percent in the previous session and the 200-day moving average of 101.835 percent, Bloomberg data show.

Bonds of Tennessee and Michigan had the best performance over the past year compared with the average yield of AAA rated 10-year securities, the data shows. Yields on Tennessee’s securities narrowed 15 basis points to 2.15 percent while Michigan’s declined 6 basis points to 2.46 percent. Puerto Rico and Illinois handed investors the worst results. The yield gap on Puerto Rico bonds widened 110 to 11 percent and Illinois’s rose 40 basis points to 4.20 percent.

Bloomberg News

by Kenneth Kohn

September 8, 2015 — 4:32 AM PDT

Puerto Rico Governor Alejandro Garcia Padilla wants bondholders to accept less than they’re owed to help the island dig out from its fiscal crisis. Few may be willing to go along, according to Moody’s Investors Service.

The governor’s advisers said in a report released Wednesday that the commonwealth should ask investors to voluntarily exchange their bonds for new securities, which would allow it to cut debt payments. Such a restructuring plan will be released in a few weeks, said Jim Millstein, chief executive officer of Millstein & Co., which is advising the government.

“It is unlikely that holders of the many Puerto Rico bonds will agree to forgo or defer substantial sums of promised principal and interest,” Moody’s analyst Ted Hampton said in a statement after the report’s release. “There is a high probability of protracted litigation, particularly on the part of investors holding general obligation or other securities with strong legal protections.”

The expected bondholder response shows the difficulty Puerto Rico faces as it embarks on a restructuring unprecedented in the $3.6 trillion municipal market. Puerto Rico general-obligation bonds are protected by the commonwealth constitution and others are backed by dedicated revenues, which may lead some investors to challenge the island in court.

The commonwealth has already clashed with bondholders over the issue. When Garcia Padilla signed a law that would’ve helped its public corporations reorganize, the mutual-fund companies OppenheimerFunds Inc. and Franklin Resources Inc. persuaded a federal judge in San Juan to throw out the act.

Detroit’s $18 billion bankruptcy illustrates the difficulty of getting investors to part with their bonds. Seeking to cut its interest bills, the city offered to buy back $5.2 billion of water and sewer debt, with most investors receiving more than 100 cents on the dollar. Only 28 percent of the securities were ultimately sold back.

Puerto Rico says it has $13 billion less than it needs to cover debt payments over the next five years, even after taking into account proposed spending cuts and measures to raise revenue. That estimate excludes the electric and water utilities.

Island officials haven’t indicated what terms may be offered to owners of its various classes of debt. Moody’s, which projects that some investors may recoup as little as 35 cents on the dollar, said signs of steeper losses would lead to further rating cuts.

Bloomberg News

by Michelle Kaske and Brian Chappatta

September 9, 2015 — 11:33 AM PDT

Puerto Rico may have to begin taking revenue that repays highway debt to help the struggling commonwealth pay for its general-obligation bonds as soon as this budget year, according to Height Securities.

The Caribbean island, which says it’s short $13 billion needed for bond payments in the next five years, must pay investors $1.1 billion this year on general-obligation debt guaranteed by its constitution. That pledge has been increasingly called into question. Standard & Poor’s dropped Puerto Rico’s rating to CC, the third-worst grade, saying in a report late Thursday that all of its tax-backed debt is highly vulnerable to default.

Facing potential cash shortfalls as soon as November, Puerto Rico may use petroleum and gasoline taxes that fund its highway-agency’s debt, raising the risk of a default on the securities, Daniel Hanson, an analyst at Height, a Washington-based broker dealer, said Thursday on a conference call with clients.

“It seems reasonable to expect that considerable amounts of cash are about to be clawed back from corporations to help cover general-obligation debt service,” Hanson said.

Governor Alejandro Garcia Padilla on Wednesday released a report showing that Puerto Rico has only $5 billion available to cover $18 billion of principal and interest payments in the next five years. The government also projected that it may run out of cash by the end of 2015 and will have a $500 million shortfall when the fiscal year ends in June, right before an $805 million payment to general obligation bondholders is due July 1.

Puerto Rico said in a May 7 quarterly report that it could resort to emergency measures to cover its debt bills, including taking “taxes or other revenues previously assigned by law to certain public corporations to secure their indebtedness.” Its Public Finance Corp. defaulted on debt-service payments in August and September after lawmakers failed to allocated funds.

Puerto Rico’s highway bonds carry higher yields than other commonwealth securities, reflecting the risk. Debt maturing in 2028 last traded for an average of 13 cents on the dollar on Aug. 28 to yield 42 percent. That’s almost four times the yield on Puerto Rico’s most frequently traded general obligations.

Taxes on gasoline and petroleum products that Puerto Rico allocates to its highways agency for debt service are considered “available commonwealth resources,” according to bond documents. The island’s constitution requires that the government use such revenue to pay general obligations if needed. The island has about $4.7 billion of highway bonds outstanding, according to the May 7 report.

Puerto Rico has about $541 million of mostly petroleum and gas taxes dedicated to highway bonds that it could use in the fiscal year ending June 30, Hanson said. Another $290 million from a petroleum-tax increase implemented last year and not currently pegged to specific debt is also available.

“In accordance with the constitution of Puerto Rico, the proceeds of such taxes and license fees are subject to being applied first to the payment of general obligation debt of and debt guaranteed by the commonwealth,” according to bond documents.

Tolls and other fees from the authority aren’t subject to a so-called clawback. Documents from Puerto Rico’s most recent highway bond sale in 2010 highlighted that it never had to use appropriated money to pay general obligations.

Investors who bought debt knowing they have priority over other bondholders will probably assert their rights in court, Moody’s Investors Service said Thursday in a report. The credit rater maintained its projected recovery rate of 65 percent to 80 percent for general obligations. Highway securities may recoup just 35 percent to 65 percent.

To ease the budget shortfall, the administration may consolidate 135 schools, reduce public-worker overtime, cut government subsidies and end corporate-tax loopholes, according to the report Wednesday. Puerto Rico lawmakers may also want to use the $680 million of annual sales-tax revenue that goes straight to repaying other bonds, called Cofina by their Spanish acronym, Hanson said.

“That may make Cofina much more at risk than people think,” Hanson said.

Puerto Rico’s $15 billion of Cofina bonds have stronger protections than the highway debt. The first $680 million of sales-tax collections are sent to a trustee to pay bondholders, with the rest put into the general fund, Hanson said. Puerto Rico law protects the portion that’s sent to the trustee from being used by the government, according to bond documents.

General obligation investors are likely to challenge that law in court by claiming that their payments have priority under the constitution, Howard Sitzer, senior municipal analyst at CreditSights Inc., said in a conference call with clients on Thursday.

“We think that the legal opinions behind the sales-tax financing corporation debt are subject to dispute and likely to be the subject of litigation going forward,” Sitzer said. General obligations “are to be paid by the first revenues received by the government, which implies that any tax revenues would be available.”

Bloomberg News

by Michelle Kaske and Brian Chappatta

September 10, 2015 — 11:45 AM PDT Updated on September 10, 2015 — 2:58 PM PDT

Puerto Rico’s attempt at a sovereign-like debt restructuring without complete lawmaking authority is likely to fall short in the absence of intervention by U.S. political leaders, according to Morgan Stanley.
“We doubt Puerto Rico’s ability to execute this style of restructuring without U.S. Congressional action, keeping us from adopting a clearly bullish position,” Michael Zezas, chief municipal strategist at Morgan Stanley in New York, wrote in a report dated Sept. 10.

Puerto Rico’s fiscal crisis should spur Congress to help the island negotiate with its creditors, either by implementing a fiscal control board at the federal level or allowing some public corporations to file for Chapter 9 bankruptcy projection, Morgan Stanley said. Unlike cities and municipalities of U.S. states, the island’s localities cannot access Chapter 9.

Governor Alejandro Garcia Padilla’s administration on Wednesday unveiled a proposal that estimates Puerto Rico will have only $5 billion of available funds to repay $18 billion of debt-service costs over the next five years. The commonwealth may seek to defer principal payments for several years on some of its $72 billion debt burden.

It’s unclear whether general-obligation bondholders will be offered smaller losses than owners of Puerto Rico’s sales-tax supported debt under a restructuring, Morgan Stanley said. The island’s constitution stipulates that general-obligations must be paid before other expenses. The revenue bonds, known as Cofina, are repaid from dedicated sales-tax revenue.

If general-obligation bonds are treated senior in repayment, then bondholders would receive a internal rate of return of 8 percent on debt that carries an 8 percent coupon and 6.6 percent on debt with a 5 percent coupon, Zezas wrote. The recovery rates will be lower if sales-tax bonds get first payment, he said.

General obligations with an 8 percent coupon and maturing July 2035 traded Friday at 73.1 cents on the dollar, down from an average 75.5 cents on Sept. 8, the day before the plan was released, according to data compiled by Bloomberg. The yield was 11.5 percent.

“There’s a good argument to be made that general obligations appear fairly valued, particularly considering that the lower end of expected internal rate of returns would rise with greater austerity,” Zezas wrote. “Yet, these reports imply that Puerto Rico can execute an effective sovereign-style restructuring in a timely manner, something we dispute.”

Bloomberg News

Michelle Kaske

September 11, 2015 — 10:56 AM PDT

Taylor Riggs, an editor at Bloomberg Brief, talks with Joe Mysak about this week’s municipal market news.

Watch the video.

September 10, 2015

Puerto Rico’s proposed restructuring plan brings the U.S. commonwealth one step closer to a long-awaited showdown with the investors who are being asked to take losses on the island’s $72 billion in debt.

The five-year plan released Wednesday is light on specifics, analysts said, but investors agree it clearly could affect the island’s general obligation bonds, which are protected by its constitution, as well as its sales tax-backed debt.

Several investors and analysts said the proposal didn’t provide enough detail about how much debt the island wants to cut, what form such cuts may take or which bonds might be affected. Some said it relies too much on future actions by lawmakers in Washington and San Juan and successful negotiations with bondholders and other stakeholders.

“I don’t see anything to work with at this point,” said Daniel Solender, head of the municipal bond group at Lord Abbett & Co., which manages about $17 billion in tax-exempt debt, including some from Puerto Rico. “Now they have to speak up and say what it is they really want.”

The plan doesn’t include specific estimates of losses on Puerto Rican debt, though prices for some bonds fell after its release. Some general obligation bonds maturing in 2035 traded Wednesday at around 74 cents on the dollar, down from about 76 cents Tuesday.

The product of a working group appointed by Gov. Alejandro Garcia Padilla, who in June called the island’s debts unpayable, the plan says that even if all proposed structural changes are adopted by policy makers, the commonwealth will still fall billions short of securing the amount it needs to pay bondholders in the next five years.

Those proposals seek to reduce a $28 billion financing gap over the next five years by adjusting taxes, reducing government spending, revamping welfare and the minimum wage, consolidating public schools, and creating a control board to ensure such changes are implemented.

“The key finding of this plan is that even if we implemented all the measures contained in it, they wouldn’t be enough to achieve the necessary balance,” the governor said in a televised address Wednesday. “The massive public debt of Puerto Rico is an impediment to growth. It is time for the creditors to come to the table and share the burden of the sacrifices.”

The plan has been awaited by investors, who are bracing for losses amid falling bond prices and a growing fiscal crisis, and who have wanted to see new structural changes before lending Puerto Rico any more money. The commonwealth has often borrowed to fund deficits during a decade of economic stagnation and population declines, and officials say it is rapidly running out of cash for operations. A government agency defaulted on a $58 million payment last month.

That makes the island the latest trouble spot in the market for U.S. municipal debt, which has been rocked in recent years by large bankruptcies in Detroit and Jefferson County, Alabama. Puerto Rico bonds are widely held by individuals and mutual funds around the U.S. because of their tax advantages.

Ted Hampton, vice president at Moody’s Investors Service, said the recommended changes will pose political challenges and likely prompt contentious negotiations with bondholders, with a high probability of “protracted litigation, particularly on the part of investors holding general obligation or other securities with strong legal protections.”

Officials say investors have begun organizing themselves into groups based on the type of bonds they own, and the government will begin talks with each group over the next several weeks.

The plan comes after one agreement was struck with commonwealth bondholders. The Puerto Rico Electric Power Authority, known as Prepa, last week reached an accord with its bondholders that would give them 85% of the face value of their junk-rated bonds in exchange for new securities designed to get investment-grade ratings. Prepa, which owes about $9 billion, is still negotiating with other creditors.

The plan also seeks help from the U.S. government, asking Congress to allow some Puerto Rico government entities to access bankruptcy protections. The commonwealth is currently barred from granting its agencies access to that legal process and officials say the lack of a framework is a significant obstacle to the restructuring effort.

The federal government should also reconsider the island’s relatively high minimum wage for young workers or exempting the island from the Jones Act shipping law—a move that could help reduce the cost of transporting goods, a summary of the plan said. Federal help is also needed to stave off a growing health-care crisis, by equalizing the funds Puerto Rico receives relative to U.S. states, it said.

Joseph Rosenblum, director of municipal credit research at AllianceBernstein, said the report includes serious measures to adjust the island’s budget and policy but lacks important details for investors, such as the engines of economic growth, the powers of the control board, or how the island will treat its constitutionally protected general obligation bonds versus its sales-tax debt.

“I am not sure that this report has moved the process along to any great extent, which may only come when they sit down with bondholders,” he said.

THE WALL STREET JOURNAL

By AARON KURILOFF

Updated Sept. 9, 2015 4:07 p.m. ET

—Leslie Josephs contributed to this article.

Write to Aaron Kuriloff at aaron.kuriloff@wsj.com

NEW YORK/SAN JUAN — Puerto Rico’s new plan to haul itself out of a huge financial hole is long on ifs and buts and short on confident predictions.

Faced with the prospect that its cash will run out within months, the Caribbean island is proposing numerous measures that require support from its divided legislature, action from a U.S. Congress that may not be supportive, and the willingness of a wide range of bondholders to take losses.

It calls for spending cuts that would hit the U.S. territory’s population and a restructuring of its debt that would hurt mom-and-pop investors, as well as U.S. funds. There would also be extensions of excise taxes.

The proposals are all an attempt to close a projected $28 billion funding gap between 2016-2020 as it struggles with a $72 billion debt burden.

Some experts on municipal restructurings said the proposals from a working group established by the Puerto Rican government should force creditors to deal with a clearly worsening situation.

“I sincerely hope that the bondholders will see this report for what it is – a wake up call to come to the table,” said Steven Rhodes, who handled the Detroit bankruptcy when he was a judge, and has been hired to advise Puerto Rico. “I don’t see a way in which bondholders could be made whole.”

But coming only 14 months before Puerto Rico Governor Alejandro Garcia Padilla is up for re-election, and given there is a skeptical Republican-controlled U.S. Congress, the plan is likely to encounter major political obstacles.

“Anything that is perceived by the populace as something that’s taking away rights is going to be difficult to implement on a pre-election cycle,” said Jose Perez-Riera, former secretary of economic development and commerce under former governor Luis Fortuno, and now an advisor at a private economic development group in Puerto Rico.

Devised by Puerto Rico officials and advisors, the plan was based on an influential report, released in June, penned by former International Monetary Fund economists who proposed sweeping cuts and reforms in an attempt to reinvigorate growth.

Showing some signs of the challenges to get to even this point, Garcia Padilla said the plan was appropriately light in two areas: new taxes on the population and demands for sacrifices from workers.

Garcia Padilla presented the plan as the “beginning of a negotiation” with creditors that would result in a “major humanitarian crisis” if a deal wasn’t reached.

“It’s not going to be easy,” said Andrew Wolfe, one of the former IMF economists who wrote the earlier report. “There are so many moving parts here – you are requesting actions from the Federal Government and the creditors.”

FACING A HAIRCUT

Puerto Rico is likely to face an uphill battle with investors as it tries to cut debt, particularly general obligation bonds. They are seen as sacrosanct in the municipal bond market and viewed as having the best protection in a restructuring.

“The debt restructuring is going to be the most difficult, I think, just because you’re asking bondholders to accept less than they thought they were going to get,” said Peter Hayes, head of asset manager BlackRock’s Municipal Bonds Group, which owns various non-government Puerto Rico bonds.

Bondholders are facing a significant haircut on their debt – the working group who devised the plan said only around $5 billion is available to pay principal and interest on the $18 billion of debt coming due in the coming five years. If the government gets its way, the difference is most likely to come from a loss of both interest payments and delayed payments of principal.

That could lead to protracted litigation if some bondholder factions choose to fight.

“In litigation or a negotiation, there will be requests to do more, to cough up more money and yet I do think it’s a fair statement to say that a very high debt burden absolutely has a negative impact on the economy and if you sit back and just continue with austerity it gets worse,” said John Miller, co-head of fixed income for Nuveen Asset Management, which holds $300 million in par value of Puerto Rico bonds which are either insured or non-governmental obligations.

Unlike U.S. municipalities, Puerto Rico cannot seek federal bankruptcy protection under Chapter 9. That makes a restructuring much more complicated than faced the city of Detroit, for example, when it filed for bankruptcy in 2013. Puerto Rico has argued that it needs access to Chapter 9 but bills seeking to allow it have stalled in Congress.

“Chapter 9 provides a focus, a mechanism, an urgency, and a supervision that’s lacking without it,” said Rhodes.

PROTESTS PLANNED

One alternative is a financial control board, proposed in Wednesday’s plan. That board would be selected by the Governor from among nominees chosen by interested parties, the working group said.

However, U.S. lawmakers may come up with an alternative plan for a board. “That may be a contentious issue,” said Wolfe.

Miller said getting all the reforms passed would be a “long shot” with the U.S. presidential election and the Puerto Rico election both coming up in 2016.

One measure proposes bringing in an Economic Activity Tax Credit, designed as a replacement for tax preferences for manufacturers from the U.S. mainland, which were phased out by 2006. Those had helped the island become a manufacturing hub, particularly for pharmaceutical companies.

“It’s not necessarily sustainable,” said Wolfe of the proposal for the new tax credit. “Maybe this government on a chance enacts it but a future one could take it away and then you’re back to where you are.”

Opposition to the plan by labor unions could be a hurdle. The plan calls for a two percent annual attrition rate for public employees, reductions in vacation and sick leave, and potential cuts to teacher pensions. Proposed reductions in the budgets for schools and the island’s university may also trigger action by teachers, professors and students.

Already, at least one labor group is planning protests. The Coordinadora Sindical, a collective of labor unions in Puerto Rico, announced on its Facebook page it will hold protests on Friday in San Juan, the island’s capital, “in order to stop the so-called fiscal adjustment plan.”

“I’m sure unions will oppose this very actively,” said Francisco Cimadevilla, a San Juan consultant and head of communications firm Forculus.

The island’s university may also see student protests.

“I’m already hearing talk about (protests), and I think most likely there will be, once the public gets the information and can digest it,” said Mario Maura Perez, a finance professor at the university’s Rio Piedras campus.

By REUTERS

SEPT. 10, 2015, 12:12 A.M. E.D.T.

(Reporting by Megan Davies and Jessica DiNapoli in New York and Nick Brown in San Juan; Editing by Martin Howell)

A Texas law establishing a center to help government agencies select projects to be developed through public-private partnerships took effect Sept. 1.

HB 2475, signed into law by Gov. Greg Abbott on June 19, established the Center for Alternative Finance and Procurement within the Texas Facilities Commission, which will consult with government agencies regarding best practices for procuring and financing qualifying projects. The center also will assist agencies “in the receipt of proposals, negotiation of interim and comprehensive agreements and management of qualifying projects.”

The law could spur municipalities and public agencies with tight budgets to look to the private sector for financing and management services and state and local governments could use it to help address infrastructure needs, such as vital water projects, noted law firm Vinson & Elkins LLP in a blog post.

“With Texas’ demand for water on the rise, coupled with projected population and economic growth, the bill is an important step toward meeting emerging challenges to the state’s water security,” the law firm wrote.

The center will be required to arrange for an architect, professional engineer or registered municipal advisor to advise agencies about a P3’s costs and benefits. For construction or renovation projects with an estimated cost of less than $5 million, these advisory services can be provided by qualified agency employees. More costly projects must be evaluated by an independent expert.

The law also allows the agency procuring the project to charge a “reasonable” fee to cover the costs of the center’s project review and consultation services.

HB 2475 places a notable exception on the types of P3s that developers can pursue by eliminating an agency’s option to consider unsolicited proposals, Christopher Lloyd of McGuireWoods Consulting LLC pointed out during a session at NCPPP’s 2015 P3 Connect conference.

The new law adds to the level of P3 oversight some agencies already exert. Both the state’s facilities commission and its department of transportation have adopted guidelines on project application requirements, review criteria and evaluation processes. El Paso, San Antonio, Dallas and Houston have established similar guidance,

These requirements, while adding steps to those that agencies already follow to pursue P3s, also signal the state’s willingness to a growing variety of such projects, Vinson & Elkins argues.

“By enacting House bill 2475, the Texas Legislature sent a strong signal that it is open to private involvement in infrastructure financing and delivery across a wide range of sectors,” the firm wrote.

NCPPP

By Editor September 3, 2015

Hillview, Kentucky, the first city to file for bankruptcy since Detroit, may struggle to prove it’s insolvent and in need of court protection, Moody’s Investors Service said.

Because of an $11.4 million legal judgment to a local company, Hillview filed for protection Aug. 20. The locality of about 8,000 people has about $13.8 million in debt, compared with revenue of $2.5 million in the 2014 fiscal year. Though the burden seems insurmountable, Hillview under Kentucky law can issue bonds to cover losses in legal judgments and pay off the resolution over the course of a decade, Moody’s analyst Nathan Phelps said Monday in a report.

The local company, Truck America Training LLC, has indicated it may fight the city’s bankruptcy by asking the judge overseeing the case for permission to interview city officials under oath and for access to internal city financial documents. Should Truck America or another creditor convince U.S. Bankruptcy Judge Alan Stout in Louisville that the city isn’t eligible to remain under court protection, the case would be dismissed and the company free to try to collect the judgment.

Hillview’s plight parallels that of Mammoth Lakes, California, a ski resort community of 8,200 near Yosemite National Park that filed for bankruptcy in 2012 because of a $43 million development lawsuit, Moody’s said. The locality exited Chapter 9 after about four months because it reached a settlement with the land-acquisition company.

Tax Increase

Hillview, which hasn’t defaulted on its general-obligation bonds, also has room to increase taxes on wages, business profits and property, Moody’s said. Kentucky courts have said municipalities can raise levies above the maximum rate to repay debt backed by their full faith and credit, according to Moody’s.

After filing a Chapter 9 petition, a municipality automatically gains temporary protection from creditors. Unlike in corporate bankruptcies filed under Chapter 11, the city or county can’t proceed with its restructuring case until it convinces a judge it’s eligible to remain under court protection, in part by showing it isn’t paying debts as they come due.

In Aug. 28 court filings, the city claimed it was eligible because it lost the court case to Truck America. The case, which is related to a land sale, led to a judgment for the company of $11.4 million plus annual interest of 12 percent.

The city claimed it tried unsuccessfully to negotiate with creditors before filing for bankruptcy.

The case is In re City of Hillview, Kentucky, 15-32679, U.S. Bankruptcy Court, Western District of Kentucky (Louisville).

Bloomberg News

by Steven Church and Brian Chappatta

August 31, 2015 — 7:45 AM PDT Updated on August 31, 2015 — 9:12 AM PDT

Chicago Mayor Rahm Emanuel is preparing to press for a property-tax increase of about $500 million to shore up police and firefighter pensions that threaten the city’s solvency, the Chicago Tribune reported.

The proposal will be part of Emanuel’s Sept. 22 spending plan for the budget year beginning Jan. 1, the newspaper reported. The increase, expected for months, would be the centerpiece of a budget that is $426 million out of balance.

When asked how difficult it will be to raise real-estate levies, Emanuel expressed confidence on Thursday that such an increase specifically to fund public-safety workers’ pensions would pass the city council.
“We’re going to do it in a fair and progressive way,” Emanuel told reporters. “If you’re asking me, do I believe we’ll get it done, the short answer is yes because I actually believe aldermen are up to the task of charting a new course for Chicago’s future.”

Chicago needs to pay down a $20 billion debt to its retirement funds that’s left it with a lower credit rating than any big U.S. city except Detroit, which went through a record bankruptcy.

“It serves as a clear demonstration of Chicago’s willingness to make the difficult but necessary decisions,” Ty Schoback, a senior analyst in Minneapolis at Columbia Threadneedle Investments, said in an e-mail. The company manages about $30 billion in municipal bonds, including some Chicago debt.

Reckoning Day

The city faces a reckoning after years of failing to save enough to pay the benefits it promised employees. Over the past decade, Chicago has put $7.3 billion less into the pension funds than actuaries recommended. Its next annual pension payment is projected to jump 10 percent, to $976 million.

Chicago’s effort to reduce its liabilities hit an obstacle in July, when a judge ruled the benefits cuts it sought were illegal. The city will appeal to the Illinois Supreme Court, which in May threw out a pension overhaul adopted by the state, saying workers’ pensions are protected.

The challenges and subsequent credit downgrades have spurred a drop in the price of Chicago bonds. A portion of $44.9 million of federally tax-exempt securities maturing in 2033 traded Thursday at an average of 91.8 cents on the dollar. That’s down from $1.01 when it was first offered in 2014. The yield averaged 6 percent Thursday, 3.2 percentage points more than benchmark debt.

Bloomberg News

by Tim Jones and Elizabeth Campbell

September 3, 2015 — 7:03 AM PDT Updated on September 3, 2015 — 1:45 PM PDT

For bond insurers, Puerto Rico’s balloon payments on debt that puts off interest bills for decades is a billion-dollar asterisk.

With Governor Alejandro Garcia Padilla set to receive a plan as soon as next week to restructure $72 billion of debt, the commonwealth’s capital appreciation bonds, which were first sold for pennies on the dollar because they don’t pay interest until maturity, threaten to saddle Ambac Financial Group Inc. and MBIA Inc. with swelling liabilities.

The companies typically use the price at which the bonds were issued when disclosing the potential payouts they face. Once interest is included, Ambac says its Puerto Rico exposure jumps to much as $10.5 billion from $2.4 billion. For MBIA’s National Public Finance Guarantee Corp., it more than doubles to about $10.5 billion.

“The difference between principal at issuance and the amount due at maturity is enormous” on capital-appreciation bonds, said Tamara Lowin, director of research at Rye Brook, New York-based Belle Haven Investments, which oversees $3 billion in munis. “Ignoring the accreted value is irresponsible.”

Bond insurers, which agree to make interest and principal payments if an issuer defaults, are among those with the most at stake as Puerto Rico is pushed to the financial brink. Years of borrowing caught up to the island as the economy languished and residents moved out. The territory defaulted last month for the first time, when it made just a fraction of a payment due on uninsured securities sold by one of its agencies, and Garcia Padilla’s advisers are scheduled to present a debt-adjustment plan on Sept. 8.

Shares of Ambac, MBIA and rival Assured Guaranty Ltd., which tumbled as the commonwealth veered toward default, rose this week after Puerto Rico’s electric company struck an agreement that left investors facing smaller losses than some analysts had predicted. Puerto Rico’s bonds also climbed amid speculation that the government will be able to reach other such deals.

Island officials have yet to say how much of their debt they’ll seek to cut, or which securities may be affected. Some investors have snapped up insured Puerto Rico securities, confident that insurers have enough to cover any defaults.

Assured, which insures $9.1 billion of commonwealth debt as measured by principal and interest, has $12.6 billion in claims-paying resources, according to company filings. Ambac has $8.8 billion to meet obligations and National has $4.9 billion, company disclosures show.

National and Ambac say they’re confident in their ability to weather a Puerto Rico restructuring, and the biggest balloon payments faced by the commonwealth won’t come due for decades. Assured says its $72 million exposure to capital-appreciation bonds is minimal.

MBIA is rated AA-, the fourth-highest grade, from Standard & Poor’s, which ranks Assured AA, one step higher. Ambac isn’t rated by S&P.

Those rankings are based on their ability to pay debt service on the island securities they insure for the next four years, said David Veno, an analyst at S&P in New York. The largest portions of Puerto Rico’s capital appreciation bonds, or CABs, don’t factor into that calculation because they don’t mature in that time.

Ambac guarantees at least $7.3 billion of Puerto Rico’s payments on CABs, most of which are backed by sales taxes and aren’t due until 2047. National has more than $4 billion.

MBIA began including the full debt-service total along with the par amount in its last two quarterly reports, which reflect its exposure to CABs. Adam Bergonzi, National’s chief risk officer, said the bonds, known by the Spanish acronym Cofina, are backed by a top claim on sales taxes that are sufficient to cover the debt payments.

“We are comfortable with our Cofina exposure,” he said in a statement. Though CAB payments may seem large, “collection levels exceed amounts necessary to service all senior debt in future years.”

Ambac discloses its exposure to Puerto Rico interest payments on its web site, though its most recent quarterly filing includes only a tally based on the amount of bonds outstanding.

“You need some sort of consistent basis to disclose your par exposure in your portfolio, and that’s a metric over time that investors have found valuable in assessing the guarantors and their risk,” David Trick, chief financial officer of Ambac, said in an interview. “It’s hard to make everything perfectly apples-to-apples without making disclosures extremely complex and potentially confusing.”

CABs have drawn scrutiny in states including California, Michigan and Texas because of the financial squeeze the securities put on local governments when they come due. All three have banned or limited the ability of officials to sell them.

Texas’s bill, which took effect Sept. 1 and restricts CAB maturities to 20 years, is a credit positive for the state’s school districts because they will have more stable debt burdens, Moody’s Investors Service said Thursday in a report.

In 2007, Puerto Rico issued Cofina bonds backed by Ambac due in August 2054 that netted the commonwealth $701 million up front, data compiled by Bloomberg show. As the debt matures, investors are supposed to receive about 10 times that amount.

The securities have traded at about 6.8 cents on the dollar over the past month, compared with 9.2 cents when they were issued. Usually zero-coupon bonds increase in price as they get closer to maturity.

“The biggest risk for National and Ambac is Cofina,” said Bill Bonawitz, director of municipal research in Philadelphia at PNC Capital Advisors. Because of the CABs, “they would ultimately owe enormous numbers.”

Bloomberg News

by Brian Chappatta

September 3, 2015 — 9:01 PM PDT Updated on September 4, 2015 — 6:02 AM PDT

Puerto Rico’s power authority said Wednesday that it agreed on a debt restructuring plan with a group of bondholders, in what officials painted as an important step in the island commonwealth’s efforts to improve its finances.

The deal, after months of talks between the Puerto Rico Electric Power Authority and a group of mutual-fund companies and hedge funds, could pave the way for similar agreements between investors and the island’s struggling public agencies, analysts said.

The Government Development Bank, the island government’s fiscal agent, is already laying the groundwork for negotiations with investors who own some of its bonds. Some Puerto Rico bonds rallied as much as 23% on news of the power utility’s deal, though they continued to trade at a deep discount to par value.

The bondholders who reached the agreement with the power authority, such as Franklin Resources Inc., OppenheimerFunds and hedge funds including BlueMountain Capital Management LLC and Marathon Asset Management, are slated to receive 85% of the face value of their bonds in exchange for new securities that will be designed to carry investment-grade ratings. Bonds from the authority, which has about $9 billion in debt, are currently rated junk.

The agreement “sends a positive message to the market that there is a way to get a consensual deal that is equitable for both parties,” said Lisa Donahue, chief restructuring officer for the authority. The power utility released a term sheet outlining the framework of the plan, though the parties still have to prepare a more formal agreement.

Puerto Rico has been struggling with a sluggish economy and high unemployment for years. The situation prompted Gov. Alejandro García Padilla in June to call the island’s $72 billion in debt unpayable, and he has directed a group of government officials to produce a broader fiscal adjustment plan for the island. Its financial troubles are the latest to hit the usually quiet market for municipal bonds, which has been rattled in recent years by large bankruptcies in Detroit and Jefferson County, Ala.

The deal gives the power authority “a fresh start and financial flexibility, with bondholders providing meaningful sacrifices to make that happen,” Stephen Spencer of Houlihan Lokey, the bondholders’ financial adviser, said in a statement. He said the bondholders will work “to finalize these steps and complete the transaction as quickly as possible.”

The restructuring agreement is still contingent on several factors, including obtaining legislative authority for certain aspects of the agreement, underscoring the complexity of the challenges Puerto Rico faces in reducing its debt. Bond insurance companies, including Assured Guaranty Ltd. and MBIA Inc., and other lenders haven’t agreed to the restructuring deal, though the power authority said in a statement that it will continue to negotiate with those parties.

“We have a strong track record of protecting our economic interest related to credits in financial distress and are continuing to negotiate in good faith,” said Robert Tucker, head of investor relations and communications at Assured, in a statement.

Most of the power authority’s creditors also agreed to extend a so-called forbearance agreement until Sept. 18, in which they agree not to exercise certain remedies. MBIA unit National Public Finance Guarantee Corp., however, didn’t extend the agreement. A spokesman for National declined to comment on why the insurer didn’t extend, or whether any action would be taken.

“There’s a lot of detail still to be worked out,” said Rick Donner, senior credit officer at Moody’s Investors Service. Still, the fact the forbearance agreement was extended suggests “the negotiations have reached a critical stage,” he said.

Bonds from the power authority rallied after the deal, reflecting the mood among some investors that the bondholder losses were less severe than expected. On Wednesday, a 2026 bond from the utility traded at 67.25 cents on the dollar, up from 54.57 cents on Monday, a 23% gain, according the Electronic Municipal Market Access website.

Not all investors were buying.

“I still have a lot of questions, and I’m not willing to jump into purchasing anything yet,” said Howard Cure, director of municipal research at Evercore Wealth Management, which oversees $6 billion and doesn’t own any bonds from the power authority.

According to the restructuring plan, bondholders will have the option to receive two types of securities in exchange for their existing bonds, with one carrying interest rates as high as 4.75% and the other as high as 5.5%. The first set of bonds will pay interest for the first five years, but the group of higher-rate bonds will defer interest payments during that time. The bonds will be scheduled to mature in 2043, according to the term sheet.

All investors who own uninsured bonds from the power authority will have the opportunity to participate in the exchange. The bondholder group that led the talks also agreed to discuss providing financing so the authority could offer cash to other investors who don’t want the new bonds. An offering price hasn’t yet been worked out.

The agreement is forecast to reduce the authority’s debt principal by about $670 million and save more than $700 million in principal and interest payments over the next five years.

THE WALL STREET JOURNAL

By MIKE CHERNEY

Updated Sept. 2, 2015 5:35 p.m. ET

Write to Mike Cherney at mike.cherney@wsj.com

Chicago Mayor Rahm Emanuel sat on a stage at a community college gymnasium for nearly two hours as residents stepped up to the microphone to plead for more money for buses, schools and programs for the mentally ill.
The mayor jotted notes as the crowd erupted into angry chants and jeers. Then he explained there was little extra cash to be had. “We have a budget deficit and then pension payments,” Emanuel, a Democrat, said at the end of the meeting Monday at Malcolm X College. “We have changes we’re going to have to make.”

Chicago is facing a $426 million budget shortfall next year and needs to pay down a $20 billion debt to its workers’ retirement funds that’s left it with a lower credit rating than any big U.S. city except Detroit.

After its bond prices tumbled this year when investors demanded higher premiums to lend to the third-largest city, Emanuel is under growing pressure to stanch the fiscal bleeding by raising taxes, cutting spending and putting more into a pension system the city has shortchanged for years. He’s set to release a spending plan on Sept. 22.

“Chicago is really at a crucial point here,” said Ty Schoback, a senior analyst in Minneapolis at Columbia Threadneedle Investments, which manages about $30 billion in municipal bonds, including some Chicago debt. “It’s going to be within Chicago’s control to demonstrate to the market that they have the willingness to make the difficult but necessary fiscal decisions.”

While Chicago’s economy recovers, the population grows and its tax revenue rebounds from the toll of the recession, the city is facing a fiscal reckoning from years of failing to save enough to pay the benefits it promised employees. Over the past decade, Chicago has put $7.3 billion less into the pension funds than actuaries recommended, which is pushing up its bills. The city’s next annual pension payment is projected to jump to $976 million, an increase of 10 percent.

The mounting debt led Moody’s Investors Service to lower its rating on Chicago’s $8.1 billion of general obligations by two steps to Ba1 in May. Standard & Poor’s and Fitch Ratings followed by downgrading the city to BBB+, three levels above speculative grade.

The downgrades have caused the price of Chicago bonds to tumble. A portion of $58.5 million of taxable securities maturing in 2033 traded Tuesday at an average of 88.6 cents on the dollar, down from 99.7 cents on April 30.

That pushed the yield to 6.3 percent, 3.6 percentage points more than benchmark debt. That gap is up from 2.5 percentage points at the end of April.

When Chicago sold bonds in July, investors demanded yields of 5.67 percent on 20-year federally tax-exempt securities, about 2.5 percentage points more than benchmark municipal debt.

“Their big issue continues to be their long-term liability in the form of pension obligations,” said Peter Hayes, the head of municipal bonds for New York-based BlackRock Inc., which oversees $116 billion of the securities. He said the firm isn’t adding to its Chicago holdings. “How they build some of the elements of that into the budget is going to be very, very critical. If they truly address this liability from the revenue standpoint and that becomes credible, the bonds would have the ability at improve.”

Chicago’s effort to reduce its pension liabilities hit an obstacle in July, when a judge ruled the benefits cuts it sought to implement were illegal. The city will appeal the decision to the Illinois Supreme Court, which in May threw out a pension overhaul adopted by the state, saying workers’ pensions are protected.

On top of next year’s deficit, the city still hasn’t come up with the $549 million it needs to put into its police and firefighter funds this year. While Illinois’s Democrat-led legislature passed a plan to lower that payment to $328 million, Republican Governor Bruce Rauner has yet to sign it.

Emanuel, who took office in 2011, hasn’t raised property, gas or sales taxes. During his reelection campaign this year, he said an increase to real-estate taxes, which generated $824 million last year, would be a last resort.

As the mayor entered the town hall meeting Monday, he was met with the chant “Rahm don’t care” by those angered at neighborhood school closings. Over almost two hours, he listened as residents suggested boosting taxes on liquor, regulating ride-hailing companies such as Uber Technologies Inc., taxing trades at Chicago’s options and commodities exchanges, and suing banks to recoup fees the city had to pay to back out of derivative trades after its credit rating was cut.

Wilhemenia Taylor, 58, who owns a home in the city, said she’s concerned about what the budget will bring.
“I’m worried about cuts to the public school system, and higher taxes,” Taylor, a teacher’s assistant, said in an interview while sitting on red bleachers. “And the neighborhoods are going down.”

Despite the difficulty, it’s important for Chicago to demonstrate to investors and credit-rating companies that it’s taking strides to meet long-term obligations that have been neglected for years, said Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services, which analyzes municipal finance.

“They’ve got to come up with a plan to show some willingness to pay,” Ciccarone said. “We need to show the city’s ability to tap that economic base that it has.”

Bloomberg

Elizabeth Campbell

September 1, 2015 — 9:00 PM PDT Updated on September 2, 2015 — 8:25 AM PDT

The Vanguard Group Inc. was playing catch up when it was getting ready to launch its first municipal bond index fund in 2010.

Its competitors had already successfully brought similar products to the market, including State Street Global Advisors and BlackRock’s iShares. Those issuers, who at the time had substantially larger ETF businesses than Vanguard, offered a suite of muni-bond products with more than $2 billion in assets apiece.

But Vanguard was forced to call off its launch. The December 2010 prediction by the analyst Meredith Whitney on “60 Minutes” — that bonds issued by U.S. cities and states would see billions in defaults — worsened the mood of investors shell-shocked by the financial crisis. A fund launch then could have been catastrophic, according to Christopher W. Alwine, the head of Vanguard’s municipal bond group.

“People thought munis were the next shoe to drop,” Mr. Alwine said. “There were heavy outflows in the muni market at the time. It wouldn’t get any interest or it’d get redemptions, and it would make it difficult to produce tight ‘tracking’ in the product,” capable of successfully matching the returns of its benchmark.

Five years later, Vanguard, now the top mutual fund company and No. 2 ETF shop behind iShares, is hoping that this time is different.

The Vanguard Tax-Exempt Bond Index Fund (VTEBX), launched Monday, is the mutual fund industry’s first passive municipal bond fund, according to Nadine Youssef, a spokeswoman for fund researcher Morningstar Inc. But its ETF counterpart, which Vanguard now runs under the ticker VTEB, will be going head to head with deeply entrenched competitors.

The top product, managed by BlackRock Inc., is a colossus: The iShares National AMT-Free Muni Bond ETF (MUB) manages more than $5.2 billion.

The Vanguard product is the cheapest fund of its kind, with annual expenses of 0.12% for both the ETF and the lowest-cost mutual-fund share class.

Mr. Alwine said that expense ratio will allow the funds to top the performance of its competitors, including the comparable iShares product. A BlackRock spokeswoman declined to comment.

They’re launching the fund into a much healthier market, analysts said, with many cities and states displaying stronger financial conditions and refinancing their debts at lower rates in the past several years. But it’s also potentially an environment of rising interest rates, which to some degree will erode the value of bonds.

The S&P National AMT-Free Municipal Bond Index, tracked by the Vanguard and iShares products, focuses on investment-grade bonds exempt from U.S. federal taxes and excludes the troubled U.S. territory Puerto Rico, which has been purchased by a number of municipal bond mutual funds. The index has averaged a 2.4% return over each of the last three years, or 3.7% each of the last five.

Over five years, 45% of active fund managers have topped the return of that index, according to Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ.

Like many bond index funds, this product looks to match the returns of its index not through buying every underlying bond but by “sampling,” using the assets they have to buy a representative group that matches the characteristics of the bonds in the index.

“While investors should expect that this product should be performing closely in line with the S&P index and should perform close from an ETF perspective to MUB, which tracks the same index, there will be some slight deviation in performance and how well it tracks the benchmark,” particularly before the fund reaches a critical mass of assets, Mr. Rosenbluth said.

“Especially in a world of soon-to-be-rising interest rates, that should make it harder for bond funds to perform as well as they have historically,” he added. “By shaving off the expense ratio, that increases the likelihood of stronger performance.”

Investment News

By Trevor Hunnicutt

Aug 27, 2015 @ 12:52 pm

Investors will be watching Puerto Rico this weekend for details of a restructuring plan for its $72 billion debt load, as government officials face a Sunday deadline to deliver a draft of the plan to the governor.

The deadline kicks off what could be a busy week for the struggling island commonwealth, which defaulted on bonds from one of its public agencies earlier this month. Under previous agreements, the Puerto Rico Electric Power Authority, bondholders and other creditors are facing a Tuesday cutoff to shake hands on a restructuring program for the electric utility.

It isn’t clear whether the government will release a draft version of its broader restructuring plan on Sunday, and analysts caution that any draft will likely be subject to heavy revisions. Daniel Hanson, an analyst at Height Securities, estimated in a recent research note that it could be up to two weeks before the full plan is officially released.

Earlier this week, Puerto Rican newspapers reported on some details of the proposed plan. The reports implied that Puerto Rico is “still intending to deeply haircut bondholders of many (or most) Puerto Rican bonds,” meaning investors could face significant losses, Mr. Hanson wrote in his note.

“People are now looking for this report to give more color,” said Bill Black, who helps oversee the $7.2 billion Invesco High Yield Municipal Fund.

Some Puerto Rico bonds have risen in price in recent days, reflecting optimism that investors will soon get a better idea of how the restructuring plan might look. A big chunk of Puerto Rico general-obligation bonds traded at 72.75 cents on Friday, up from 70.5 cents a week earlier, according to the Electronic Municipal Market Access website.

Puerto Rico, whose bonds are widely held by U.S. mutual funds, has been struggling with a lackluster economy and high unemployment for years. In June, Gov. Alejandro Garcia Padilla called the island’s debts unpayable and directed a so-called working group of government officials to develop a draft restructuring plan and present it to him by Sunday.

The deadline comes after Puerto Rico this week further delayed a $750 million bond sale for its water and sewer authority. The sale has been scheduled for the past two weeks, but underwriters haven’t been able to attract enough orders from investors to sell all the bonds, according to people with knowledge of the deal.

Officials have said they don’t anticipate water and sewer bonds taking a hit as part of the restructuring plan, assuming the authority can sell bonds and its financial projections are met. Some investors, however, say the island commonwealth has been sending mixed messages. For example, Puerto Rico recently asked the U.S. Supreme Court to review a decision voiding a law allowing certain government agencies, including the water and sewer authority, to restructure their debts.

“You have one hand out telling people you can’t pay your bills, and you have another hand out hoping to collect money, saying you can pay your bills,” said Hugh McGuirk, head of municipal bonds at T. Rowe Price, which oversees about $22 billion in municipal debt. “The market is asking, which is it?”

The sewer authority planned to use the bulk of the proceeds for improvements to the water and sewer system. But it also planned to use the cash to pay off a $90 million credit line from Banco Popular de Puerto Rico, which comes due on Monday. The authority pledged the “bulk of its cash reserves” as collateral for the loan, according to Fitch Ratings, which gave the planned sewer bonds a junk rating.

THE BOND BUYER

By MIKE CHERNEY

Aug. 28, 2015 5:40 p.m. ET

As New Jersey prepared for its biggest bond sale in more than two years, Governor Chris Christie’s office said a break in rating cuts for the Garden State showed that its finances are on the mend. Bond prices suggest otherwise.

The extra yield investors demand to buy New Jersey bonds instead of top-rated debt is holding close to the highest since at least January 2013. When New Jersey began marketing the $2.2 billion of securities last week, 20-year bonds were offered for a yield of 5.07 percent, more than 2 percentage points above the benchmark, according to three people familiar with the sale who requested anonymity because pricing wasn’t final.

“The state is going to continue to have issues,” said Scott McGough, who helps manage about $3 billion of municipal debt as director of fixed income for Glenmede Trust Co. in Philadelphia and isn’t buying New Jersey bonds. He said officials aren’t “making the adjustments you would want them to do.”

New Jersey has a lower rating than any state except Illinois after nine downgrades since Christie took office in January 2010 and vowed to repair a government battered by the recession and squeezed by swelling shortfalls in its pension funds. That deficit, now $83 billion, has continued to grow despite a cut to benefits, as the slow recovery left Christie without money needed to make up for years of shortchanging the retirement system.

Ratings Respite

While New Jersey’s bond yields have climbed relative to other securities, they’re still less than they were in 2013 as municipal borrowing costs hover at a five-decade low.

New Jersey Assistant Treasurer Steven Petrecca said yield penalties have risen because of heightened investor scrutiny brought on by the fiscal struggles of Puerto Rico and Chicago.

“The bottom line here is that we believe that our bonds will be received because we always pay our debt,” he said.

The state won a respite from the cuts to its rating ahead of the sale Tuesday by its Economic Development Authority, which is raising money to refinance debt and fund school construction. It’s New Jersey’s biggest securities offering since January 2013, Petrecca said.

Fitch Ratings on Aug. 18 changed the outlook on New Jersey to stable from negative, signaling that the state won’t be downgraded again soon. The New York-based company said conservative revenue forecasts reduce the risk of another late-year budget deficit like those that have “plagued the state in recent years.”

‘Continued Progress’

Christie, who is campaigning for the Republican presidential nomination as a politician who cleaned up a fiscal mess he inherited, seized on the assessment.

The report from Fitch recognizes Christie’s “continued progress in responsibly managing the state’s finances by cutting discretionary spending, increasing reserves, and conservatively forecasting revenue,” his office said in a statement.

The administration also drew on a less sanguine assessment from Moody’s Investors Service, which said New Jersey’s rating could be reduced again if the pension strains worsen, to make the case for further benefit cuts. “The problem is the unwillingness of Democrats in the legislature to come to the table and fix a broken system,” his office said.

Assemblyman Gary Schaer, a Democrat who chairs the house’s budget committee, said Christie has continued to shortchange the retirement system and failed to put needed money into schools and infrastructure.

Festering Wounds

“All of these problems remain and they are, at best, festering wounds with little or no triage going on,” Schaer said. “There’s no long-term plan to confront any of the fiscal issues facing the state.”

The pension-system deficit may widen because Christie’s administration is contributing $1.3 billion to it this year, less than half the $3.1 billion set by a 2011 law he signed that sought to make up for years of underfunding. He used the money to cover the government’s bills when tax collections fell short of forecasts.

Fitch and Standard & Poor’s grade New Jersey debt A, the sixth-highest level, while Moody’s places it in the same rank at A2.

“There’s been no success really in terms of dealing with the liability side of the equation,” said Paul Brennan, a money manager in Chicago at Nuveen Asset Management, which oversees about $100 billion of munis. “We’re now at the point where it’s becoming critical.”

Market’s View

His view is reflected in the bond market. Ten-year New Jersey debt yields 3.2 percent, or 0.96 percentage point more than benchmark tax-exempt munis. That’s close to the record high touched in July, according to data compiled by Bloomberg. The data begin in January 2013.

Investors have also demanded a higher premium to buy bonds sold by the economic development authority, which are rated one step below the state’s general obligations. Securities due December 2016 traded Monday for a yield of 1.5 percent, about 1.16 percentage points over benchmark munis. That’s higher than the average of 1.1 percentage point since March.

Bloomberg

Romy Varghese and Terrence Dopp

August 23, 2015

California is once again the Golden State in the eyes of municipal-debt investors.

Bonds of the state, which was so strapped after the recession that it took to issuing IOUs and drew comparisons to Greece, are the best performers in the $3.6 trillion tax-exempt market this year after the obligations of Michigan. Investors are even willing to accept yields lower than benchmark indexes on the state’s short-maturity debt, data compiled by Bloomberg show.

California plans to take advantage of the renewed faith in its finances by selling $1.9 billion in general obligations this week in the first offering of the securities since Standard & Poor’s raised the state’s credit rating to its highest level in 14 years. California’s economy is expanding faster than the nation’s, in part because of the technology-industry boom.

“The state of California has done a very nice job as far as improving its fiscal situation,” said Greg Kaplan, director of fixed income in San Francisco at City National Bank’s Rochdale unit, which manages $4.4 billion in munis. “Five years ago, people didn’t want that paper. That fear is gone.”

In July, S&P lifted the state’s rating to AA-, its fourth-highest level, and pointed to passage of a budget that directed money to a rainy-day fund approved by voters in November. The fund, which requires the state to save a portion of capital-gains taxes, helps cushion the state when receipts fall, the company said.

Credit Environment

“It was important to see them enact a budget that represented an extension of their recent approach to their fiscal policy, which has been to emphasize structural alignment between the ongoing revenues and recurring expenditures,” Gabriel Petek, a San Francisco-based S&P analyst, said Monday.

Investors have also liked how California under Governor Jerry Brown has notched budget surpluses after more than $100 billion of cumulative deficits from 2000 through 2010.

“Governor Brown has put the fiscal house in order,” said Ben Woo, senior municipal analyst at Columbia Threadneedle Investments, which manages about $30 billion in local debt. “Compared to the chaotic political environment we’re seeing in New Jersey and Illinois, California is a much better credit environment than some other states.”

Penalty Declines

Investors are demanding about 0.18 percentage point over top-rated debt to own 10-year California securities, close to the 0.17 percentage point low since 2013, according to data compiled by Bloomberg. That’s down from a peak of about 1.7 percentage points in 2009, when the state resorted to IOUs to pay bills.

That’s also better than the 0.52 percentage point for debt issued by Pennsylvania, which has the same investment-grade ratings from S&P and Moody’s Investors Service.

If mutual-fund flows remain consistent, it’s a “pretty easy case to make” that California spreads can go to 0.1 percentage point this year, Kaplan said.

That level was seen in 2006 and 2007, before deficits for the nation’s most indebted state soared amid the recession and sparked comparisons to Greece, which recently received its third bailout since 2010 from European authorities to repay creditors.

Capital Projects

California is selling bonds mostly to refinance debt and to fund capital projects such as roads and public buildings.

“We have to take advantage of our recent credit upgrades, and I encourage individual and institutional investors to get behind California and help us make this sale a success,” State Treasurer John Chiang said in a statement.

On Tuesday, when individual investors had a chance to order the securities, 10-year bonds were being marketed at a yield of 2.38 percent, according to a person familiar with the sale who requested anonymity because pricing wasn’t final. That compares with 2.21 percent for top-rated munis. Final prices will be set Wednesday.

The size of the deal might “take some digestion” and may prevent the state from testing new lows for yields, said Woo, the analyst at Columbia Threadneedle.

Adrian Van Poppel, who helps run a California fund for Wells Capital Management in San Francisco, said he would want risk premiums above those seen on existing bonds before buying.

“It’ll just come down to pricing for us,” he said. “You’re not getting much” in extra yield for debt maturing under five years.

Investors are demanding 0.57 percent to own California two-year bonds, less than the 0.6 percent for benchmark munis, according to data compiled by Bloomberg.

“We’ll definitely be following it,” Van Poppel said. “They’ve been moving in the right direction.”

Bloomberg

Romy Varghese

August 24, 2015

The New Jersey Economic Development Authority sold $2.2 billion of bonds at yields that were more than 2 percentage points higher than benchmark tax-exempt securities in the state’s biggest debt sale since 2013.

The bond offering shows the penalty New Jersey is paying to borrow as it faces financial pressure from an $83 billion deficit in its employee-retirement system, which state leaders have shortchanged for years. The escalating bills to the pension funds have left New Jersey with the second-lowest credit rating among states after Illinois.

“Unless the state can show that it can make long-standing strides in its pension and health-care obligations, the state should be prepared to be penalized when it brings new issues to market,” said Neil Klein, senior managing director in New York at Carret Asset Management, which oversees $750 million of municipal debt. Carret didn’t buy any of the bonds.

Yields ranged from 3.24 percent for a bond maturing in 2019 to 5.1 percent for a 2040 security, according to data compiled by Bloomberg. Bank of America Merrill Lynch was the lead underwriter of the sale.

The 10-year securities were priced at 4.37 percent, compared with 2.21 percent yield on comparable top-rated debt. The $401.9 million in taxable bonds carried yields from 3.38 percent for 2017 securities to 4.45 percent for five-year bonds, the data show.

School Bonds

New Jersey ended up paying more in 10 years than A rated Guam, which sold comparable maturity debt Tuesday at a yield of 3.14 percent. Cobb County, Georgia’s top-rated taxable bonds, also priced Tuesday, yielded 3.25 percent in 10 years.

Proceeds for the New Jersey issue will fund school construction costs, refinance debt and terminate derivative contracts. The bonds are rated A3 by Moody’s Investors Service, the company’s seventh-highest investment grade.

The deal accomplished the state’s goals, and its true interest cost is 4.58 percent, said Christopher Santarelli, a spokesman for the Treasury Department.

“The offering saw widespread market acceptance with $450 million retail orders from mom and pops to some of the largest institutional municipal investors in the country,” Santarelli said by e-mail.

Bloomberg

Romy Varghese

August 25, 2015

Puerto Rico isn’t giving up hope just yet that it can sell $750 million in water bonds while moving toward a debt-restructuring plan that may leave some investors with significant losses.

After initially announcing a sale date last week for the island’s Aqueduct & Sewer Authority issue, the sale was pushed back to a day-to-day status as investors demanded higher yields and more protection against the risk of the bonds being caught up in a reorganization proposal that may be released as soon as next week. The offering has remained in limbo since.

“We are not expecting to price this week since some investor’s requested, and we have agreed, to wait until after Sept. 1,” Alberto Lazaro, the water utility’s executive director, said in an e-mail Thursday. “There is not a set date, but rather we will evaluate and determine the appropriate timing, but are expecting it would be in early September.”

The water authority, know as Prasa, anticipates that investors should be able to make more informed decisions after Puerto Rico officials deliver the debt-restructuring proposal and the island’s electric utility also unveils a turnaround plan on Sept. 1, Lazaro said.

Investors aren’t convinced. While Puerto Rico officials tried Monday to assure would-be buyers that the water utility doesn’t need to restructure its debt, the commonwealth last week petitioned the U.S. Supreme Court to reinstate a law that would allow some public corporations, including Prasa, to negotiate with bondholders to reduce what they owe.

“I’d be shocked if they get the deal done,” said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which manages $3 billion of municipal securities, including Puerto Rico debt. “Unless there’s some big change between now and then, they’re still looking at empty pockets for their debt.”

Prasa had already increased the preliminary yield to 10 percent last week from an earlier offer of 9.5 percent, according to two people familiar with the sale who requested anonymity because pricing wasn’t final. That’s more than three times the 3.16 percent yield on benchmark 30-year municipal bonds, according to data compiled by Bloomberg.

Sale proceeds would help repay a $90 million bank loan with Banco Popular that expires Aug. 31. Prasa is negotiating with the bank and other financial institutions, Lazaro said.

“They’ve exhausted the traditional municipal buyer and now they’ve lost the bulk of the hedge fund industry,” Dalton said.

Bloomberg

Michelle Kaske

August 26, 2015

When Matt Wisdom tried to round up investors for his three-D modeling company after Hurricane Katrina hit, people scoffed.

“They treated us like we were part of the developing world,” said Wisdom, 43, chief executive officer of TurboSquid, which was founded before the storm. “The response we often got was, ‘We’ll invest in New Orleans, but we’ll treat it like it is Estonia.”’

Today venture-capital funds with more than $1 billion are lining up to provide money for entrepreneurs, and philanthropies, including the John D. and Catherine T. MacArthur Foundation, are providing grants for city projects.

“It’s a sea change,” Wisdom said. “We’ve become trendy.”

New Orleans has rebounded from the costliest natural disaster in U.S. history, as tourists and tax collections near pre-storm levels and property values rise to new peaks. Beyond the determination of residents to return, recovery has been driven by billions of dollars in federal investment, including an improved levy system, state aid for local governments, loans to help businesses rebuild and bond ratings that top those before the storm.

“The city was literally under water for three weeks, so there were a lot of doubts,” said Adrienne Slack, vice president in the New Orleans branch of the Federal Reserve Bank of Atlanta. “Now there is a focus on how the city can better position itself for the future.”

Rising Graduation Rates

The school system is being rebuilt with funds that include $1.8 billion from the Federal Emergency Management Agency. Graduation rates have risen to 73 percent in 2013-2014 from 54 percent in 2003-2004, and the percentage of students who are proficient on all state tests for all grades increased to 62 percent from 35 percent.

The city has repaired infrastructure, even though fixing all the streets will cost an estimated $9 billion. The Superdome — which sheltered thousands during the storm — has been renovated and now carries the Mercedes-Benz name. A new veterans’ hospital is scheduled to open in December 2016, and the new $1.1 billion University Medical Center New Orleans was designed with its emergency department and other mission-critical elements 21 feet above base flood elevation.

“Our vision is to make New Orleans a premier national and international health-care destination,” said Michael Hecht, president of Greater New Orleans Inc., which promotes economic development. Part of that plan is a 1,500-acre district focused on biosciences research and medical care that will create an estimated 34,000 jobs.

“If adversity is the mother of invention, then Katrina was the biggest mother of all,” Hecht said.
President Barack Obama is visiting the city today, to celebrate its progress but also note its continuing economic inequality, according to the White House.

80 Percent Submerged

The Category 5 storm hit Louisiana and Mississippi on Aug. 29, 2005, with maximum winds of 125 miles an hour, according to the National Hurricane Center. Water surged as much as 28 feet above normal tide levels and destroyed levies designed to protect the city, which lies mostly below sea level. Floods covered 80 percent of New Orleans, and hundreds of thousands of the city’s 455,000 residents eventually fled; by 2006 only 211,000 remained.

The day after the storm, Standard & Poor’s warned it was reviewing ratings for the city and other local and state governments, which had about $8 billion of debt outstanding. Similar announcements followed from Fitch Ratings and Moody’s Investors Service.

Rating analysts had no way to predict when or how quickly the people and the tax bases would return, said Steve Murray, senior director with Fitch.

“This had never happened before to an American city,” Murray said. “It was so unprecedented to have such a dislocation of the population.”

State Treasurer John Neely Kennedy pushed the state to approve about $200 million in borrowing for local governments to cover service on outstanding debt until their tax revenues recovered, along with additional matching funds. The money was instrumental in helping many avoid default, he said.

Opportunity Bonds

The state also approved most of the $7.8 billion of so-called Gulf Opportunity Zone bonds, passed by Congress, to help rebuild low-income housing and facilities for businesses. Billions more flowed in through grants from FEMA, the Department of Housing and Urban Development, and government and private insurance.

New Orleans has worked its way back up to investment grade after Moody’s and S&P cut its credit ratings to junk; the main drivers have been reduced deficits and higher tax revenue. In March, S&P raised its rating to A- from BBB+ when Katrina struck. Moody’s rating now is A3, compared with Baa1 when the storm hit; it said in an Aug. 24 report that the city is financially and structurally better prepared for storms than before 2005.

The New Orleans Aviation Board sold $565 million in debt earlier this year primarily to fund construction of a new terminal at Louis Armstrong New Orleans International Airport. It will generate an estimated 21 percent increase in spending and support about 11,000 new jobs in the metro area, according to an economic-impact report released last year.

Challenges remain, including some that pre-date Katrina. The recovery has been uneven, with neighborhoods including the flood-ravaged Ninth Ward not coming back as quickly as others. Poverty and joblessness persist, especially among the black population. And crime continues to be a problem, although it is lower than it was in the 1990s.

Business Startups

Even so, business startups in metro New Orleans have outpaced those for the U.S. in the years since Katrina. The three-year-average was 471 per 100,000 adult population as of 2012, compared with 288 nationwide, according to a report by The Data Center, which compiles statistics about greater New Orleans and southeast Louisiana.

Three years after the storm, Patrick Comer relocated to the city from Los Angeles at the request of his wife, a New Orleans native.

“We made the decision to move there so we could contribute,” said Comer, 41, who started an online survey and data company in 2010. Lucid Corp. now employs more than 80 people and plans to open a London office this fall.

By 2014, the most recent year for which data are available, the population had rebounded to 384,000, and the value of real estate had risen 56 percent compared with 2005. Retail sales totaled a record $6.5 billion, and 9.5 million visitors came to the city, the second highest since a record 10.1 million in 2004.

New Orleans received a MacArthur grant to reduce incarceration rates in its jails that could provide as much as $2 million for implementation. It also is among the first municipalities to participate in “What Works Cities Initiative,” a program to help enhance the use of data to improve residents’ lives from Bloomberg Philanthropies, established by Michael Bloomberg, majority shareholder in Bloomberg News parent Bloomberg LP.

“I thought it would take 20 years to get back to where we were,” said TurboSquid’s Wisdom, who helps entrepreneurs raise capital as a board member of the New Orleans Startup Fund. “Instead we’ve moved ahead.”

Bloomberg

Darrell Preston

August 26, 2015

Republican Governor Bruce Rauner and Democratic House Speaker Michael Madigan, two of the most powerful politicians in Illinois, have been trying to outlast one another in a dispute that for two months has left the nation’s lowest-rated state without a budget.

Illinois muddles through. Government employees get paid, thanks to court orders. Children go to school, thanks to Rauner’s signing an education-funding bill. The state fair went on last week as scheduled and the governor signed a bill Aug. 14 designating pumpkin as the official pie.

The veneer of normalcy belies what Madigan terms an “epic struggle” with the venture capitalist-turned-politician. At stake are further credit downgrades for Illinois, and increased stress for Chicago and its schools, which are seeking relief from the state — relief delayed by the impasse.

“We’re all a bunch of idiots,” said Representative Jack Franks, a Democrat from the northern Illinois town of Woodstock.

“Just because Bruce Rauner says ‘Republicans need to do this,’ and Speaker Madigan says ‘Democrats need to do that,’ doesn’t mean we have to listen to them,” Franks said.

Yet Republicans line up behind Rauner, who insists on labor, tax and regulatory changes, and Democrats follow Madigan, who says the budget must be passed and revenue raised. There is no hint of a break in the impasse. Bondholders get paid, although many state vendors are getting stiffed to the tune of at least $3.5 billion.

Rauner, a first-time officeholder, is also Illinois’s first Republican governor in a dozen years.

Campaigning on a pledge to shake up the government, a $62 billion enterprise, he has repeatedly challenged Democrats who hold veto-proof legislative majorities.

“I was elected by millions of people; he’s been elected by 17,000 people,” Rauner told a crowd at the Illinois State Fair last week, referring to Madigan. “Why is he there blocking what we need to do to reform and improve our great state?”

Rauner’s confrontational strategy isn’t meant to solve the budget standoff, said Doug Whitley, the former president of the Illinois Chamber of Commerce.

“The real story is how much of this whole exercise is posturing for the 2016 election,” he said. “This thing could drag out until after next year’s March primary.”

In the tumultuous Midwest, Republican governors like Wisconsin’s Scott Walker, Michigan’s Rick Snyder and former Indiana Governor Mitch Daniels have prevailed in battles with organized labor, the Democrats’ traditional support group. Rauner, who cites those governors as role models, wants to do the same in reliably blue Illinois.

David Yepsen, director of the Paul Simon Public Policy Institute at Southern Illinois University, said Rauner has misunderstood why he won election.

“He didn’t get elected to gut the labor movement,” Yepsen said. “He got elected because people were angry with Pat Quinn,” the previous Democratic governor.

Two Gallants

Madigan’s obduracy hasn’t made him a hero with the electorate, either, Yepsen said.
“Nobody has the high ground with voters, and the people of Illinois say a plague on all their houses,” he said.

When legislative and executive branches go to war over budgets, there are usually immediate consequences. Minnesota’s government shut down in 2011, closing parks and rest stops in the summertime and engendering widespread outrage. It was over in three weeks.

Illinois is living with it. Rauner signed an education aid bill in June, enabling schools to open this month. State employees won court judgments to assure that they get paid. Another court mandated Medicaid payments, and lawmakers cleared the way for more than $5 billion in federal payments to state programs.

“This is a caricature of Illinois and all of its mismanagement,” said James Nowlan, a former Republican legislator who has written about politics and policy in the state. “Nobody’s looking beyond the next month, the next year, or the next 10 or 15 years.”

At some point the consequences will demand attention, said Richard Ciccarone, president and chief executive officer of Merritt Research Services, which analyzes municipal finance. Illinois is spending without regard for a projected $6.2 billion deficit in the current year.

“As we get closer to the calendar year — maybe October — there will be struggles to pay higher education and hospitals and other institutions,” Ciccarone said. “Things could really start to back up then.”

Illinois could also be harmed by budget stress in Chicago and Chicago Public Schools, each of which has asked the state for relief from solvency-threatening pension obligations.

Whitley said local governments’ pain and protests might end the stalemate.

“Right now we’re spending about $4 billion or $5 billion more than we have,” Franks said. “How long does this go? Forever.”

Bloomberg

Tim Jones

August 27, 2015

New York, August 24, 2015 — In the decade since Hurricane Katrina, New Orleans (A3 stable) has improved its fiscal management, rebuilt and bolstered its infrastructure and benefitted from the revitalization of its communities and the tourism industry. At the same time, the city’s rising fixed costs, reliance on the volatile oil and gas sector, and vulnerability to flooding remain credit challenges, says Moody’s Investors Service.

Compared to before the hurricane, New Orleans has improved its fiscal position by focusing on growing revenues, controlling expenses, and building reserves. Better sales tax collections and growth in property taxes have boosted the city’s budget in both 2014 and 2015. New Orleans will also receive $36 million from its settlement with British Petroleum following the Deepwater Horizon oil spill.

The city also received a significant amount of federal aid after the hurricane which, combined with local and state funding, was used to strengthen levees, build new infrastructure and increase the city’s emergency preparedness, according to Moody’s new report “Ten Years After Katrina, New Orleans Better Prepared for Future Storms.”

“The recovery of the local economy is a key stabilizing factor that has driven the city’s recent positive momentum, by bringing people back, rebuilding communities and revitalizing the tourism industry, which is a key source of revenue for the city,” says Andy Hobbs, a Moody’s Assistant Vice President and Analyst.

The city’s taxable property value has grown consistently since the hurricane, the number of conventions and trade shows hosted by the city has increased since the convention center reopened, and new developments such as the recent announcement that Viking Cruises will start operating out of the Port of New Orleans in 2017 are all factors that buoy the city’s credit position.

However, offsetting these positive factors are the city’s rising fixed costs for debt service, pension contributions and retiree healthcare payments, which have increased to $198 million in 2014, from $129 million in 2009.

“The city’s fixed costs exceeds 30% of its operating revenues,” says Hobbs. At the same time, “the city’s contribution to its pension plans fell short by $17.7 million in fiscal year 2014, and annual pension requirements are expected to increase going forward”.

In addition, New Orleans’ dependence on the volatile oil and gas sector, declining employment in the public sector and below-average population growth leave the city trailing other metro areas in the US South in terms of key economic indicators. The city’s population remains roughly 18% below pre-hurricane levels.

New Orleans also has weak liquidity because it used reserves to fill budget gaps during the recession.

Overall, though, the State of Louisiana and the education and transportation sectors have emerged stronger post-Katrina. The state received a significant amount of money in the form of federal aid and insurance proceeds, which provided the liquidity for a post-storm rebuilding boom and helped the state mitigate the effects of the national recession.

The city’s ports emerged relatively unscathed from the hurricane, but nevertheless received federal and state financial support to make up for the decline in cargo and cruise activity following the hurricane. The airport also received aid that has allowed it to expand capacity and attract more flights to more destinations.

And while total university enrollment is still down 15% from pre-Katrina levels, emergency funds helped New Orleans’ universities emerge stronger by allowing them to invest in capital facilities.

Moody’s subscribers can access this report here.

Up against a deadline to reveal its plan to restructure its staggering debt, Puerto Rico has decided not to move ahead with a controversial proposal to borrow an additional $750 million to pay for improvements to its water and sewer authority.

It attributed the decision, made late Monday, to the turmoil in the global markets. But the government also appears to have decided it could not borrow the money — by issuing bonds — at an affordable interest rate.

Just a few days earlier, Puerto Rico petitioned the United States Supreme Court asking for the right to restructure its debt — which has reached $72 billion — under its own quasi-bankruptcy law. Puerto Rico, a United States commonwealth, enacted the law last year because it has no access to the federal bankruptcy courts. But the law was later found unconstitutional and was voided by the courts.

Investors who at one time might have been potential buyers of the water and sewer bonds seemed taken aback by the island’s move, on the one hand, to sell new bonds (and incur new debt) while also telling the Supreme Court that it had to restructure its old debt.

“You could take it on face value and say, ‘Either they’re lying to investors about the bonds being payable, or lying to the Supreme Court about the bonds being unpayable,’ ” said Matt Fabian, a partner at Municipal Market Analytics, a financial research firm. “I see it as a blunder, ultimately, and not anything more heinous, but it really undermines their ability to negotiate.”

Taken together, the steps demonstrate some of the confusion within the government as it faces a Sept. 1 deadline to outline its restructuring plan. A working group, appointed by the governor, has been trying to put a proposal together for several months. But in a signal of political conflicts to come, the island’s main opposition party has dropped out of the group.

“It’s not like we wait till Sept. 1 and then we’ve got a road map to fixing everything,” said Kent Collier, chief of Reorg Research, a firm that monitors Puerto Rican affairs for clients that include hedge funds.

About two months after the restructuring plan is issued, he said, the government is supposed to seek the authorizing legislation, setting off an unpredictable political process.

Eventually, Puerto Rican officials have expressed hopes of resolving their problems through a global debt-for-debt swap, in which the holders of the island’s bonds would turn those in and receive new bonds that would be worth less but be far more likely to be paid off. But the details are sketchy and many other things must happen first.

“Their economy does need to grow, and I don’t disagree that their debt is too high to do all the things they need to do to make their economy grow and provide for the health and welfare of their citizens,” said Gerry Durr, senior municipal credit analyst at Wilmington Trust. “But you know, I think the only way this thing really gets solved is if there’s a strong, independent control board, and I don’t think Congress has the appetite to impose one.”

Until recently, senior Puerto Rican officials had sought to reassure investors that its water and sewer authority, known as Prasa, was a credible borrower.

Puerto Rico announced Prasa’s plans to issue the $750 million of bonds just days after another branch of the government had defaulted on a different group of bonds, but the president of the Government Development Bank, Melba Acosta Febo, said that was not relevant.

It “reflects the individual financial circumstances of the various debt issuers across the commonwealth,” she said.

The bonds that defaulted were issued by the Public Finance Corporation, a small, single-purpose entity that has no power to levy taxes. Its bond-marketing materials warn that investors will have little or no recourse in the event of a default.

Prasa, by contrast, provides essential services and can increase rates, within reason, because it is a monopoly. Prasa’s bondholders have a first claim on that revenue if cash gets tight, and they can bring in a receiver to enforce collections.

In addition, the new Prasa bonds were expected to include such investor-friendly terms as a make-whole agreement, which would discourage Puerto Rico from refinancing them at lower interest rates in the future, if Puerto Rico’s fortunes changed for the better.

“They were within striking distance of settling this deal,” said Stephen Snowder, an associate editor at Reorg Research.

But the deal started to come unglued on Friday, after Puerto Rico filed its petition to the Supreme Court. It sought a review of the legality of its so-called Recovery Act, which tried to create a bankruptcylike restructuring framework for public corporations on the island. Among other things, the petition said that it needed to have a legal framework in case Prasa’s debts have to be restructured.

“That’s not the phrase you want in the middle of a bond deal,” said Mr. Fabian.

On Monday, Prasa filed a statement from Victor Suárez Meléndez, the governor’s chief of staff. “We currently do not contemplate Prasa necessitating a restructuring of its debt,” he said.

But Mr. Suarez also tried to explain why Puerto Rico needed a safe place to restructure: “If any Puerto Rico utility ever needs to restructure its debts, it should be done in a way that is fair not only to their creditors but also to the people such utilities serve.”

The next thing Mr. Snowder knew, he said, the deal was off. He said a colleague called Prasa’s executive president, Alberto Lázaro, Monday evening to find out what was going on.

“Victor Suarez was making nice statements, and then a couple of hours later, we had Lázaro telling us that the deal was delayed, postponed or canceled,” said Mr. Snowder. “No one has explained it to me.”

THE NEW YORK TIMES

By MARY WILLIAMS WALSH

AUG. 25, 2015

Detroit is paying a high price in its return to the $3.6 trillion municipal-bond market for the first time since emerging from a record bankruptcy.

The $245 million of bonds, to be sold Wednesday through the Michigan Finance Authority, have the top claim on city income taxes to ensure investors are repaid. Even so, 14-year debt is being offered at an initial yield of 4.75 percent, according to three people familiar with the sale who requested anonymity because it isn’t final. That’s 2.1 percentage points more than top-rated securities.

“It’s still Detroit,” said Dennis Derby, a portfolio manager in Menomonee Falls, Wisconsin, for Wells Capital Management, which holds the city’s water bonds among its $39 billion of munis. “There’s still concerns of whether or not they can have positive momentum.”

Detroit filed for bankruptcy protection two years ago to escape from debts it couldn’t afford after the population tumbled, tax collections slid and the automobile-industry’s decline left the economy reeling.

That allowed the city to cut $7 billion from its obligations by the time it emerged from bankruptcy in December, an effort to steady the government’s finances and hasten its revival.

Investor Losses

The plan left some general-obligation bondholders recovering as little as 41 percent of what they were owed, according to Moody’s Investors Service. Those losses called into question the long-held assumption that cities would do everything possible to repay securities backed by their full faith and credit.

To persuade investors to lend to the city again, Michigan Governor Rick Snyder signed legislation giving bondholders first claim to the income taxes that will repay the debt sold this week. That led Standard & Poor’s to award the deal an A rating, five steps above junk and nine levels higher than its grade on Detroit’s general obligations.

John Naglick, Detroit’s deputy chief financial officer, marketed the securities during a presentation in New York and in phone calls with investors. He declined to comment on the expected yields ahead of the sale.

“We feel that investors really took the time to understand the security provisions that came with this bond,” said Naglick. “People looked even beyond the bond at the recovery of the city of Detroit.”

Detroit Rebound

Detroit’s leaders have been seeking to revive the city, whose population of about 680,000 as of July 2014 was less than half the peak after the Second World War. There are signs of progress: employment has risen 3 percent over the last four years and income-tax revenue grew 18 percent from 2010 to 2015, according to Moody’s.

The proceeds from this week’s sale will repay a loan from Barclays Plc that helped Detroit emerge from bankruptcy, Naglick said. They will also finance city projects, including upgrades for the fire department’s fleet.

The city’s income-tax collections are strong enough to cover the bonds, S&P said in a statement last month.
While Moody’s wasn’t hired to rate the deal, it said it may have assigned the securities an investment-grade rank even though the city is five levels below that threshold.

Skeptical Investors

The deal isn’t the first for Detroit since it filed for bankruptcy. Michigan’s finance agency sold $185 million of bonds in June 2014 for Detroit’s lighting authority. With investor protections similar to those being offering this week, the 30-year securities sold for a yield of 4.6 percent, in line with an index of revenue bonds with the lowest investment grades, according to data compiled by Bloomberg.

The bankruptcy may deter some would-be buyers, said Dan Solender, who helps manage $17 billion as head of munis at Lord Abbett & Co. in Jersey City, New Jersey. The firm owns some of Detroit’s water and sewer debt.

“The history there is pretty weak considering how they dealt with bondholders with their bankruptcy,” Solender said. “They’ll have market access. It’s just at a cost.”

Bloomberg

Elizabeth Campbell

August 17, 2015 — 9:01 PM PDT

NEW YORK Aug 18 (Reuters) – Puerto Rico postponed until later this week its first bond sale in public markets since it defaulted, investors said on Tuesday, an offering that according to Fitch ratings agency may attract high-yield municipal funds.

According to data company IPREO, the $750 million deal for the Puerto Rico Aqueduct and Sewer Authority (PRASA) was slated to price on Tuesday.

One investor in contact with underwriters, who declined to be named, said they had been told the issue was postponed to Thursday.

“From everything I know now, I don’t think (buying the issue) is a good idea,” that investor said, adding they were concerned about the risk of default.

Lyle Fitterer, head of tax-exempt fixed income at Wells Capital Management, also said that it was his understanding that the release would happen Thursday.

It is meant “just to give investors more time to do their work,” said Fitterer, who said he learned of the postponement from one of the underwriters.

PRASA and Bank of America Merrill Lynch, the lead underwriter for the deal, did not respond to requests for comment on the date of the pricing.

Bloomberg earlier reported the issue’s delay.

High-yield closed-end funds may participate in this week’s PRASA bond sale because of the authority’s stable prices compared to other debt issuers from the island, Fitch Ratings said on Tuesday.

A return of municipal closed-end fund managers to Puerto Rico would be a source of liquidity for the U.S. commonwealth, according to Fitch.

The PRASA bond sale follows a failure by Puerto Rico to make a full payment due on bonds sold by its Public Finance Corp. The partial payment was considered a default by its creditors and ratings agencies, the first by the U.S. territory.

Fitch Ratings on Monday rated Puerto Rico’s planned bond sale ‘CC’, meaning that default of some kind appears probable, and that there are very high levels of credit risk.

S&P, which lowered its rating on PRASA to CCC- in July, said on Tuesday that “events could unfold within the next three months that could expose PRASA to greater restructuring efforts.”

Puerto Rico was scheduled on Monday to conclude its presentations to investors on the bond sale. The island had been conducting presentations since late last week.

By Jessica DiNapoli

(Additional reporting by Megan Davies; Editing by Paul Simao and Alan Crosby)

Aug 19 Detroit’s post-bankruptcy debut in the U.S. municipal bond market on Wednesday resulted in hefty yields for $245 million of bonds.

Tax-exempt bonds totaling $134.7 million were priced at par with a top yield of 4.50 percent in 2029. Nearly $110.3 million of taxable bonds maturing in 2022 were priced at par with a 4.60 percent coupon.

Reuters

(Reporting By Karen Pierog Editing by W Simon)

SAN FRANCISCO (Standard & Poor’s) Aug. 18, 2015–Standard & Poor’s Ratings Services has assigned its ‘AA-‘ long-term rating, and stable outlook, to California’s estimated $1.9 billion of general obligation (GO) bonds, consisting of $550 million in tax-exempt various purpose GO bonds and $1.35 billion in GO refunding bonds.

At the same time, Standard & Poor’s affirmed its ‘AA-‘ long-term ratings and underlying ratings (SPURs) on California’s $76 billion of GO bonds outstanding, as of July 1, 2015. The outlook on all ratings is stable.

Finally, we affirmed the long-term component of the ‘AAA/A-1+’ and ‘AAA/A-2’ ratings on some of the state’s GO variable-rate demand bonds. The long-term component of the ratings is based jointly (assuming low correlation) on that of the obligor, California, and the various letter of credit (LOC) providers. The short-term component of the ratings is based solely on the ratings on the LOC providers.

“California’s finances have been brought into structural alignment,” said Standard & Poor’s credit analyst Gabriel Petek. “Under current conditions, the state’s fiscal structure generates modest operating surpluses that translate to larger projected budget reserves, according to the state Department of Finance’s forecast, than the state has had in recent memory. Still, the state’s tendency for revenue volatility coupled with the lack of an automatic process for midyear corrective budget actions — other than the governor declaring a fiscal emergency — constrain our rating on the state,” added Mr. Petek.

Aided by temporary tax increases and a six-year bull market for equities, California is enjoying an extended period of strong revenue trends. The Department of Finance recently reported that tax collections for fiscal 2015 topped its updated May forecast by 0.6% on a cash basis. Revenue collections look even stronger when compared with the assumptions included in the original fiscal 2015 budget. On that basis, the state controller reports that tax receipts for the year came in $6.8 billion (6.4%) higher than projected at the time of budget enactment. In our view, the state’s stronger credit quality primarily reflects its much improved fiscal position, which lawmakers have engineered with the help of the multi-year revenue rebound.

Municipal bond sales in the U.S. are set to decrease in the next month while the amount of redemptions and maturing debt falls.

States and localities plan to issue $8.7 billion of bonds over the next 30 days, according to data compiled by Bloomberg. A week ago, the calendar showed $10.1 billion planned for the coming month. Supply figures exclude derivatives and variable-rate debt. Some municipalities set their deals less than a month before borrowing.

Puerto Rico Aqueduct and Sewer Authority plans to sell $750 million of bonds, New York State Convention Center Development Corp. has scheduled $640 million, Portland, Oregon, Sewer System will offer $404 million and Illinois Finance Authority will bring $400 million to market.

Municipalities have announced $10.1 billion of redemptions and an additional $17.9 billion of debt matures in the next 30 days, compared with the $29.5 billion total that was scheduled a week ago.

Issuers from Texas have the most debt coming due with $6.12 billion, followed by California at $1.77 billion and New Jersey with $929 million. Texas has the biggest amount of securities maturing, with $5.4 billion.

The $3.6 trillion municipal market shrank by 4 percent in 2014. This year, maturities are poised to drop 38 percent to $176 billion from the 2014 levels.

ETF Flows

Investors removed $106 million from mutual funds that target municipal securities in the week ended Aug. 5, compared with a reduction of $91 million in the previous period, according to Investment Company Institute data compiled by Bloomberg.

Exchange-traded funds that buy municipal debt fell by $10.2 million last week, reducing the value of the ETFs by 0.06 percent to $17.2 billion.

State and local debt maturing in 10 years now yields 103.273 percent of Treasuries, compared with 103.156 percent in the previous session and the 200-day moving average of 101.301 percent, Bloomberg data show.

Bonds of Michigan and California had the best performance over the past year compared with the average yield of AAA rated 10-year securities, the data shows. Yields on Michigan’s securities narrowed 5 basis points to 2.48 percent while California’s declined 1 basis points to 2.48 percent. Puerto Rico and Illinois handed investors the worst results. The yield gap on Puerto Rico bonds widened 137 to 11.14 percent and Illinois’s rose 36 basis points to 4.16 percent.

Bloomberg

Kenneth Kohn

August 17, 2015

Puerto Rico’s water utility may have to pay yields three times higher than top-rated municipal borrowers as it sells $750 million of bonds, the first securities offering from the commonwealth since it defaulted this month.

The island’s Aqueduct and Sewer Authority, called Prasa, is offering 30-year bonds for a preliminary yield of 9.5 percent, according to four people familiar with the sale who asked for anonymity because the deal isn’t final. That compares with yields of 3.1 percent for benchmark securities. The bonds would carry an 8 percent coupon.

The sale comes amid an escalating fiscal crisis for Puerto Rico’s government, which is seeking to restructure its $72 billion of debt and made only part of an interest and principal payment due by one of its agencies on Aug. 3. Prasa bonds maturing in 2042 traded Monday for an average of 69 cents on the dollar for a yield of 8.1 percent.

“They have to come with a pretty deep discount just to be in line with how bonds are trading in the secondary,” said Daniel Solender, who helps manage $17 billion, including Puerto Rico debt, as head of munis at Lord Abbett & Co. in Jersey City, New Jersey.

The Prasa sale is a test of Puerto Rico’s ability to access the capital markets and is the first sale of long-term debt from the island since it issued $3.5 billion of general-obligation bonds in March 2014.

Attracting Buyers

To attract buyers to that sale, which was the largest junk-rated offering ever in the municipal market, the commonwealth issued the securities, which had an 8 percent coupon, for 7 percent less than face value. Hedge funds bought the bulk of the bonds.

Kristen Kaus, a spokeswoman at Bank of America Merrill Lynch, the lead underwriter on the sale, didn’t immediately respond to phone and e-mail messages seeking comment on the pricing.

Puerto Rico securities have been trading at distressed levels for two years on concern that the island of 3.5 million wouldn’t repay its obligations on time and in full. Officials aim to craft a plan by the end of the month for restructuring the government’s debts.

Prasa’s bonds may be sheltered from that proposal. Government Development Bank President Melba Acosta, the island’s top debt official, said the bank doesn’t foresee the water agency reorganizing its obligations.

Bonds’ Backing

Prasa, which had almost $5 billion of bonds and notes as of May 31, plans to raise rates by as much as 4.5 percent annually beginning in fiscal 2018. The utility provides water to 97 percent of the island’s population and wastewater service to more than half. The bonds are repaid with fees on water use.

There should be enough buyers for the sale, even though Puerto Rico is seeking to lower its combined debt load, said David Tawil, co-founder of hedge fund Maglan Capital LP.

“There should be adequate appetite for the deal in order to get it completed,” said Tawil, who manages $80 million in New York. “The entity by all accounts is solvent and is self sufficient, vis a vis cash flow.

With a very robust coupon that you frankly cannot find out of any similar type of issuer, all that together gets you to a conclusion that this is a good investment.”

Bloomberg

Michelle Kaske

August 17, 2015

Illinois Governor Bruce Rauner agreed last week with lawmakers to designate pumpkin the official state pie. Reaching consensus on a budget is proving to be more difficult, and that’s starting to ripple into the bond market.

The Chicago school district’s credit rating was cut to junk on Aug. 14 as it waits on state help to close its deficit. Public university bonds may be downgraded, and securities sold by Chicago’s convention center slid after lawmakers failed to approve a deposit needed for debt bills. Even Rauner said he wouldn’t be surprised if there’s another cut to Illinois’s bond grade, which is already lower than any other state.

“As long as the budget impasse continues, the likelihood of a further downgrade does exist,” said Peter Hayes, who oversees $116 billion, including some Illinois holdings, as head of municipal securities at New York-based BlackRock Inc. The company isn’t buying state bonds amid the impasse.

Illinois has gone 49 days without a spending plan since the fiscal year started July 1 and there’s no end in sight. Rauner, the state’s first Republican governor in 12 years, and the Democrat-led legislature can’t agree on how to fix a $6.2 billion deficit that was left after temporary tax increases expired.

Rauner is calling for limits on the power of unions, changes to business regulations and spending cuts before agreeing to new taxes. Democrats want steeper levies on the highest earners, among other revenue-raising measures.

Unprecedented Standoff

Illinois has had other budgetary jams, such as standoffs in the 1990s between the legislature and Republican Governor Jim Edgar, though none has lasted as long, according to the Civic Federation, a Chicago-based research group.

“There is no recent precedent in Illinois history for operating over two months into the fiscal year without a budget,” Laurence Msall, president of the federation. “In addition to being highly unusual, this extended impasse is also fiscally reckless and expensive.”

Investors have long penalized the state with higher borrowing costs. Yields on 10-year Illinois obligations reached 4.2 percent Tuesday, the highest among the 20 states tracked by Bloomberg. That’s almost 2 percentage points more than top rated debt, near the record high reached in October 2013.

And even without a budget, the state hasn’t been forced into a partial government shutdown. Illinois is paying its employees because of court orders, and money has been set aside for schools. The General Assembly may approve a bill this week, which Rauner said he’ll sign, that releases $5 billion of federal funds for social services.

Credit Ripples

The effects are beginning to be felt beyond the capital. In Chicago, school officials are waiting for the legislature’s help with pension costs that are fueling its own budget shortfall. Because of that gap, Standard & Poor’s on Aug. 14 lowered the district to BB, two steps below investment grade. That followed similar cuts since May by Fitch Ratings and Moody’s.

Investors who bought bonds sold by the Metropolitan Pier and Exposition Authority, which runs the largest convention center in the nation, have also taken a hit. When the budget’s delay prevented tax money from being transfered into its debt-service fund, S&P this month reduced its rating by seven notches. That caused its bonds maturing in 2050 to fall to an average of 100 cents on the dollar Monday from $1.05 on July 30. That pushed the yield up by more than a percentage point to 5.2 percent.

University Outlook

S&P reduced its outlook to negative from stable on some University of Illinois revenue bonds on Aug. 10, citing the lack of a budget and potential for funding cuts.

Illinois politicians are showing little haste in resolving the standoff. This week, Rauner was among those hobnobbing with voters at the state fair in Springfield, the capital, where politicians flock each year to glad-hand supporters, munch corn dogs and take in the agricultural bounty. House Speaker Michael Madigan is scheduled to be there for Democrat Day on Thursday.

“The longer it takes them to put together a final budget agreement, the greater the cost,” said Ralph Martire, executive director of the Center for Tax and Budget Accountability, a Chicago-based research group. “The more they’ll have to raise in taxes, and the more they’ll have to cut in spending.”

Bloomberg

Elizabeth Campbell

August 18, 2015

Detroit found that investors haven’t forgotten the largest municipal bankruptcy in U.S. history.

The city sold $245 million of bonds Wednesday, its first offering since emerging from court protection last year. Tax-exempt securities due in 2029, which have the longest maturity, were priced to yield 4.5 percent, according to preliminary data compiled by Bloomberg. That’s almost 2 percentage points more than top-rated debt, even though the bonds have a secured claim on the city’s income-tax collections.

“They are still, yes, paying the price,” said Michael Johnson, managing partner at Gurtin Fixed Income Management, which oversees $9.5 billion of munis in Solana Beach, California, which doesn’t own the city’s debt and didn’t buy on Wednesday. “The forces that have hampered Detroit up until now are still in place.”

After decades of population loss, shrinking tax revenue and an economy reeling from the fading automobile industry, Detroit filed for Chapter 9 protection from creditors two years ago. The move allowed the city to lower its obligations by $7 billion by the time it exited bankruptcy in December, though it still has a lower credit rating than any other big U.S. city.

To persuade investors to lend to the city again, Governor Rick Snyder signed legislation in April giving bondholders first claim to the income taxes that will repay the new debt, which was sold through the Michigan Finance Authority. That assurance prompted Standard & Poor’s to rate the bonds A, five steps above junk and nine levels higher than its grade on Detroit’s general obligations.

Fresh Scrutiny

Detroit’s bankruptcy increased scrutiny of legal safeguards on municipal bonds, especially those sold by financially distressed local governments. When Detroit adjusted its debts, some general-obligation bondholders recovered just 41 percent of what they were owed, according to Moody’s Investors Service.

S&P still considers Detroit speculative grade and gives the city a B rating, five levels below investment grade, citing its “very weak” economy, management structure and budgetary flexibility.

The city’s income tax collections are strong enough to pay for the bonds. The money that will be deposited in a fund earmarked for debt payments will be about 6.5 times what’s needed, S&P said last month.

Detroit initially offered 14-year tax-exempt debt for a yield of 4.63 percent, according to three people familiar with the sale who requested anonymity as the pricing wasn’t final. Demand allowed underwriters to cut the final yield.

Paying Premium

The federally-taxable portion maturing in 2022 yielded 4.6 percent, according to data compiled by Bloomberg. That’s more than twice 10-year U.S. Treasuries.

“Even though I think they are paying a premium, people are comfortable with the analysis and what the city is offering in terms of the security, the pledge, and where they think the city is going financially,” said Joseph Rosenblum, director of municipal credit research in New York at AllianceBernstein Holding, which manages $32 billion of municipal bonds. His firm put in an offer for some of the new securities.

The proceeds from the sale will repay a loan from Barclays Plc that helped Detroit emerge from bankruptcy. The funds will also finance city projects, including upgrades for the fire department’s fleet.

Bloomberg

Elizabeth Campbell

August 19, 2015

Puerto Rico bonds may become attractive after the junk-rated commonwealth releases a debt-restructuring plan, according to BlackRock Inc.’s head of municipal debt.

Puerto Rico officials are working on a proposal that would reduce its $72 billion debt load or allow the island to temporarily suspend debt-service payments. Governor Alejandro Garcia Padilla expects to receive that plan at the end of the month. Such changes to the debt may push prices on Puerto Rico bonds even lower, creating a potential buying opportunity, Peter Hayes, head of municipal debt at the world’s biggest money manager, said in an interview Thursday on Bloomberg Television.

“We do see another leg down,” Hayes, who helps oversee $116 billion of munis. “And at that point in time we do think it becomes interesting because it’s a governmental entity. They have to continue to provide services.”

Garcia Padilla in June said the commonwealth was unable to repay all of its obligations on time and in full. The Public Finance Corp. Aug. 3 failed to make a full $58 million debt-service payment to investors, the first default for a Puerto Rico entity.

Prasa Sale

The Puerto Rico Aqueduct & Sewer Authority, known as Prasa, was tentatively scheduled sell to $750 million in revenue bonds Thursday. The offering would be the first sale of long-term debt from the island since it issued $3.5 billion of general-obligation bonds in March 2014.

Kristen Kaus, a New York-based spokeswoman for Bank of America Merrill Lynch, the lead underwriter of the sale, and Norma Munoz, a spokeswoman for Prasa in San Juan, didn’t immediately respond to e-mails Thursday on whether the bonds would be priced.

The water utility was offering 30-year bonds on Tuesday for a preliminary yield of 9.5 percent, according to four people familiar with the sale who asked for anonymity because the deal isn’t final. That’s about triple the yield for benchmark securities.

Puerto Rico securities have lost 11.2 percent this year through Aug. 19, the biggest decline for the period since at least 2007, according to S&P Dow Jones Indices.

Bloomberg

Michelle Kaske

August 20, 2015 — 6:01 AM PDT Updated on August 20, 2015 — 10:32 AM PDT

Hillview, Kentucky, population 8,000, found a way to put itself on the map.

The town 13 miles south of Louisville on Thursday became the first city to file for bankruptcy since Detroit did two years ago. It joins an elite, if infamous, club: Only 54 cities, towns and counties have sought court protection from their creditors since 1980, said James Spiotto, managing director at Chapman Strategic Advisors, which advises on financial restructuring. Among them were San Bernardino, California, and Jefferson County, Alabama.

Hillview, which faced legal damages it couldn’t afford, is only the third Chapter 9 filing this year, following an Oklahoma hospital and a special district in California.

As the economy has improved, tax revenues have followed, easing the strain on local governments. Others may have seen Detroit, which emerged from a record-setting municipal bankruptcy in December, as a cautionary tale.

“People saw Detroit — the pain, suffering, uncertainty, expense — and nobody seemed to be getting what they wanted,” Spiotto, a Chicago-based lawyer, said. “It helped motivate governments and creditors to find other solutions.”

Despite a spate of bankruptcies following the recession that ended six years ago, cities and counties rarely turn to federal court to escape from their debts. Even so, in an Aug. 5 report, Moody’s Investors Service said it’s not as taboo as it once was for governments reeling from chronic financial stress.

Contract Dispute

Hillview’s Chapter 9 filing is the outcome of a contract dispute with a local company, Truck America Training, over a land sale. In February, Standard & Poor’s lowered its rating to junk after the city unsuccessfully appealed a court ruling ordering it to pay $11.4 million in damages to the company.

The city last sold bonds in 2010, when it issued $1.4 million of general-obligation debt, according to data compiled by Bloomberg. A $210,000 portion of the securities maturing in 2017 last traded for 90 cents on the dollar on June 24, down from 99.7 cents when they were first offered.

Hillview estimated its liabilities as high as $100 million and assets as high as $10 million, according to the filing in U.S. Bankruptcy Court in Louisville. Truck America is the city’s largest unsecured creditor.
City attorney Tammy Baker called the filing a “very difficult decision” for the city council. The mounting interest from the court judgment is more than $3,700 a day, she said.

“The city really ended up with no choice,” Baker said in an interview. “With the interest accruing at that rate, it’s just really going to be impossible for the city to pay that judgment.”

Bloomberg

Elizabeth Campbell

August 20, 2015

Puerto Rico is running into resistance as the commonwealth tries to sell $750 million in bonds while crafting a debt-restructuring plan that would likely leave some investors with deep losses.

After aiming to price the Puerto Rico Aqueduct & Sewer Authority issue as early as Tuesday, the bond sale is now listed as day-to-day. That’s even after adding bondholder protections and raising the preliminary yield levels to more than three times the level of benchmark securities.

“It’s a pretty difficult thing to try to raise money when out of the other side of your mouth you’re talking default and trying to pass laws that allow you to default,” said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which manages $3 billion of municipal securities, including Puerto Rico debt. He doesn’t plan to buy any of the water bonds.

Puerto Rico raised the ire of investors by defaulting Aug. 3 on a $58 million agency bond payment, saying the legislature hadn’t appropriated the funds and cash was being conserved to provide basic services.

Governor Alejandro Garcia Padilla in June said the island was unable to repay all of its $72 billion debt burden and directed officials to craft a debt-restructuring plan by the end of August that may suspend payments.

Price Talks

“We did not price yesterday in order to provide investors with the time they need to adequately review and analyze the materials so they can make the most informed decision about their potential investment,” Barbara Morgan, who represents the Government Development Bank at SKDKnickerbocker in New York, said in an e-mail.

The bank works on the island’s debt sales. Morgan declined to say when Prasa may sell the bonds.

Underwriters were talking Thursday about preliminary yields of 10 percent on the 30-year securities, up from 9.5 percent earlier in the week, according to two people familiar with the sale who requested anonymity because pricing wasn’t final.

Kristen Kaus, a New York-based spokeswoman for Bank of America Merrill Lynch, the lead underwriter of the sale, declined to comment on when the bonds would be priced. Norma Munoz, a San Juan-based spokeswoman for the water agency, known by the Spanish acronym Prasa, didn’t respond to e-mails.

Acceleration Fee

The utility also made adjustments to the deal that gives investors an acceleration fee in the event of a default and mandates that Prasa raise water rates by as much as 25 percent, if needed, to repay the bonds, according to sale documents.

Prasa needs the proceeds of the bond sale to help repay a $90 million bank loan with Banco Popular that expires Aug. 31. Other monies will finance infrastructure upgrades to help the utility meet clean-water requirements under a settlement agreement with the U.S. Environmental Protection Agency, according to bond documents.

Hedge funds are expected to purchase the bulk of the Prasa bonds, as they did when Puerto Rico sold $3.5 billion of general-obligation debt in March 2014. Buyers of distressed securities have been investing in commonwealth debt for about two years as traditional municipal-bond investors have reduced or eliminated their exposure.

Puerto Rico and its agencies are reeling from years of borrowing to pay bills. The island’s economy has shrunk every year but one since 2006 and is projected to contract 1.2 percent this fiscal year.

Restructuring Plan

The utility provides water to 97 percent of the island’s population and wastewater service to more than half. As residents continue to leave for the U.S. mainland, that has cut into demand for its services. Average monthly customer consumption decreased by about 6 percent in the year that ended in June.

Prasa’s bonds may not undergo a debt restructuring. Government Development Bank President Melba Acosta, the island’s top debt official, said the bank doesn’t foresee the water agency reorganizing its obligations if the debt sale is completed.

Credit-rating companies aren’t so sure. Standard & Poor’s, which rates the utility CCC-, its third-lowest junk grade, may downgrade the agency because “events could unfold within the next three months that could expose Prasa to greater restructuring efforts,” S&P analyst Theodore Chapman wrote in a report Tuesday.

Relative Value

The preliminary 10 percent yield compares with 3.1 percent on benchmark 30-year municipal debt, according to data compiled by Bloomberg. With a proposed 8 percent coupon, that’s equal to a price of about 83 cents on the dollar, the two people said.

That’s more expensive than existing Puerto Rico bonds. General obligation debt sold in March 2014 with an 8 percent coupon and maturing July 2035 traded Friday at an average price of 70.5 cents, for an average yield of 11.9 percent, data compiled by Bloomberg show. Prasa bonds with a 5.25 percent coupon and maturing July 2042 traded Friday at an average price of 63 cents, for a yield of about 8.9 percent.

Adding to the investor reluctance to buy the bonds is concern that this is another example of a commonwealth entity borrowing money to paper-over shortfalls rather than investing in infrastructure to improve long-term finances.

“You still have the same broken-down infrastructure and collections are terrible,” Belle Haven’s Dalton said.

Bloomberg

Michelle Kaske

August 20, 2015

Detroit returned to the municipal-bond market for the first time since the city emerged from bankruptcy, selling $245 million of bonds Wednesday to investors demanding a premium for the securities despite extra protections for bondholders.

The tax-exempt bonds, maturing in 2029, sold through the Michigan Finance Authority, yielded 4.5%, more than a percentage point higher than other single-A rated debt, according to Thomson Reuters Municipal Market Data. The bonds’ safeguards include a first claim on city income taxes, earning an investment-grade rating from Standard & Poor’s Ratings Services, despite the city’s credit rating, which is in junk territory.

The yield premium highlights the challenges Detroit faces with borrowing in the wake of a bankruptcy that left some investors concerned about the financial health of U.S. municipalities and questioning the safety of bonds backed by their full faith and credit.

“The positive is they do have market access; the negative is that they’re paying for it,” said Daniel Solender, head of the municipal bond group at Lord Abbett & Co., which manages about $17 billion in tax-exempt bonds. “There’s demand for yield, and a decent enough portion of the market is willing to focus on the yield and structure of this deal, as opposed to the history.”

The sale included about $135 million of tax-exempt bonds maturing between 2020 and 2029, with yields between 3.4% and 4.5%, and $110 million in taxable debt maturing between 2018 and 2022, yielding 4.6%, according to MMD. The money from the bonds will pay for city services and projects and repay underwriter Barclays PLC for lending which helped Detroit out of bankruptcy.

The income tax provides more than enough money to cover the debt payments, despite the city’s still-weak economy and limited budgetary flexibility, S&P said in a July report. The need for investor protections and premiums shows the city’s access to borrowing remains weaker than for most other issuers.

“We feel Detroit will continue to be challenged to deliver the services residents need and address the backlog of capital and other needs a large city has,” S&P said.

Even with the additional assurances, there is enough uncertainty surrounding Detroit’s recovery to unnerve investors, who remember losses on the city’s debt, said Steven Shachat, who helps manage more than $1 billion of municipal bonds at Alpine Woods Capital Investors.

“When a municipality goes through bankruptcy, it’s hard to jump right back in the pool,” he said.

THE WALL STREET JOURNAL

By AARON KURILOFF

Aug. 19, 2015 2:24 p.m. ET

Write to Aaron Kuriloff at AARON.KURILOFF@wsj.com

WASHINGTON — It is not too early to identify the sleeper case of the last Supreme Court term. In an otherwise minor decision about a municipal sign ordinance, the court in June transformed the First Amendment.

Robert Post, the dean of Yale Law School and an authority on free speech, said the decision was so bold and so sweeping that the Supreme Court could not have thought through its consequences. The decision’s logic, he said, endangered all sorts of laws, including ones that regulate misleading advertising and professional malpractice.

“Effectively,” he said, “this would roll consumer protection back to the 19th century.”

Floyd Abrams, the prominent constitutional lawyer, called the decision a blockbuster and welcomed its expansion of First Amendment rights. The ruling, he said, “provides significantly enhanced protection for free speech while requiring a second look at the constitutionality of aspects of federal and state securities laws, the federal Communications Act and many others.”

Whether viewed with disbelief, alarm or triumph, there is little question that the decision, Reed v. Town of Gilbert, marks an important shift toward treating countless laws that regulate speech with exceptional skepticism.

Though just two months old, the decision has already required lower courts to strike down laws barring panhandling, automated phone calls and “ballot selfies.”

The ordinance in the Reed case discriminated against signs announcing church services in favor of ones promoting political candidates. That distinction was so offensive and so silly that all nine justices agreed that it violated the First Amendment.

It would have been easy to strike down the ordinance under existing First Amendment principles. In a concurrence, Justice Elena Kagan said the ordinance failed even “the laugh test.”

But Justice Clarence Thomas, writing for six justices, used the occasion to announce that lots of laws are now subject to the most searching form of First Amendment review, called strict scrutiny.

Strict scrutiny requires the government to prove that the challenged law is “narrowly tailored to serve compelling state interests.” You can stare at those words as long as you like, but here is what you need to know: Strict scrutiny, like a Civil War stomach wound, is generally fatal.

“When a court applies strict scrutiny in determining whether a law is consistent with the First Amendment,” said Mr. Abrams, who has represented The New York Times, “only the rarest statute survives the examination.”

Laws based on the content of speech, the Supreme Court has long held, must face such scrutiny.

The key move in Justice Thomas’s opinion was the vast expansion of what counts as content-based. The court used to say laws were content-based if they were adopted to suppress speech with which the government disagreed.

Justice Thomas took a different approach. Any law that singles out a topic for regulation, he said, discriminates based on content and is therefore presumptively unconstitutional.

Securities regulation is a topic. Drug labeling is a topic. Consumer protection is a topic.

A recent case illustrates the distinction between the old understanding of content neutrality and the new one.

Last year, the federal appeals court in Chicago upheld an ordinance barring panhandling in parts of Springfield, Ill. The ordinance was not content-based, Judge Frank H. Easterbrook wrote, because it was not concerned with the ideas panhandling conveys. “Springfield,” Judge Easterbrook wrote, “has not meddled with the marketplace of ideas.”

This month, after the Reed decision, the appeals court reversed course and struck down the ordinance.

“The majority opinion in Reed effectively abolishes any distinction between content regulation and subject-matter regulation,” Judge Easterbrook wrote. “Any law distinguishing one kind of speech from another by reference to its meaning now requires a compelling justification.”

That same week, the federal appeals court in Richmond, Va., agreed that Reed had revised the meaning of content neutrality. “Reed has made clear,” the court said, that “the government’s justification or purpose in enacting the law is irrelevant” if it singles out topics for regulation. The court struck down a South Carolina law that barred robocalls on political and commercial topics but not on others.

Last week, a federal judge in New Hampshire relied on Reed to strike down a law that made it illegal to take a picture of a completed election ballot and show it to others, including on social media. The law was meant to combat vote buying and coercion, which were common before the adoption of the secret ballot.

“As in Reed,” Judge Paul Barbadoro wrote, “the law under review is content-based on its face because it restricts speech on the basis of its subject matter.”

In a concurrence in the Reed decision, Justice Stephen G. Breyer suggested that many other laws could be at risk under the majority’s reasoning, including ones concerning exceptions to the confidentiality of medical forms, disclosures on tax returns and signs at petting zoos.

Professor Post said the majority opinion, read literally, would so destabilize First Amendment law that courts might have to start looking for alternative approaches. Perhaps courts will rethink what counts as speech, he said, or perhaps they will water down the potency of strict scrutiny.

“One or the other will have to give,” he said, “or else the scope of Reed’s application would have to be limited.”

In her concurrence, Justice Kagan scratched her head about how a little dispute about church signs could have gotten so big. “I see no reason,” she wrote, “why such an easy case calls for us to cast a constitutional pall on reasonable regulations quite unlike the law before us.”

THE NEW YORK TIMES

By ADAM LIPTAK

AUG. 17, 2015

Municipal bond sales in the U.S. are set to decrease in the next month while the amount of redemptions and maturing debt falls.

States and localities plan to issue $8.7 billion of bonds over the next 30 days, according to data compiled by Bloomberg. A week ago, the calendar showed $10.1 billion planned for the coming month. Supply figures exclude derivatives and variable-rate debt. Some municipalities set their deals less than a month before borrowing.

Puerto Rico Aqueduct and Sewer Authority plans to sell $750 million of bonds, New York State Convention Center Development Corp. has scheduled $640 million, Portland, Oregon, Sewer System will offer $404 million and Illinois Finance Authority will bring $400 million to market.

Municipalities have announced $10.1 billion of redemptions and an additional $17.9 billion of debt matures in the next 30 days, compared with the $29.5 billion total that was scheduled a week ago.

Issuers from Texas have the most debt coming due with $6.12 billion, followed by California at $1.77 billion and New Jersey with $929 million. Texas has the biggest amount of securities maturing, with $5.4 billion.

The $3.6 trillion municipal market shrank by 4 percent in 2014. This year, maturities are poised to drop 38 percent to $176 billion from the 2014 levels.

ETF Flows

Investors removed $106 million from mutual funds that target municipal securities in the week ended Aug. 5, compared with a reduction of $91 million in the previous period, according to Investment Company Institute data compiled by Bloomberg.

Exchange-traded funds that buy municipal debt fell by $10.2 million last week, reducing the value of the ETFs by 0.06 percent to $17.2 billion.

State and local debt maturing in 10 years now yields 103.273 percent of Treasuries, compared with 103.156 percent in the previous session and the 200-day moving average of 101.301 percent, Bloomberg data show.

Bonds of Michigan and California had the best performance over the past year compared with the average yield of AAA rated 10-year securities, the data shows. Yields on Michigan’s securities narrowed 5 basis points to 2.48 percent while California’s declined 1 basis points to 2.48 percent. Puerto Rico and Illinois handed investors the worst results. The yield gap on Puerto Rico bonds widened 137 to 11.14 percent and Illinois’s rose 36 basis points to 4.16 percent.

Bloomberg

Kenneth Kohn

August 17, 2015 — 4:28 AM PDT

Puerto Rico’s main water utility plans to sell $750 million of revenue bonds, the first debt offering from the financially struggling Caribbean island since it defaulted on securities sold by one of its agencies last week.

The deal may price as soon as next week. It will follow the Public Finance Corp.’s failure to make a full bond payment on Aug. 3 and come just weeks before the commonwealth is set to propose a plan for restructuring its $72 billion of debt. Melba Acosta, the island’s top debt chief, doesn’t foresee the water agency reorganizing its obligations in such a move.

The utility’s sale will test Puerto Rico’s ability to access the capital markets. Governor Alejandro Garcia Padilla in June said the U.S. territory can’t afford to repay what it owes as the population falls and the economy struggles to grow. Its bond prices have dropped amid speculation about the scale of the losses facing investors.

“This is going to be a bumpy ride for the commonwealth,” said Joseph Rosenblum, director of municipal credit in New York at AllianceBernstein Holding, which manages $32 billion of municipal bonds, including Puerto Rico securities. He said investors need to consider “what’s the spillover to the value of my bonds?”

AllianceBernstein will determine whether to buy once it sees the prices that are offered, Rosenblum said.

Lower Yields

The Aqueduct and Sewer Authority, called Prasa, will use the proceeds to finance capital improvements to help the water utility comply with environmental regulations. Its debt is repaid with money from customers’ bills.

The yields on Prasa bonds are some of the lowest among the commonwealth’s different agencies, reflecting their relative safety amid the island’s escalating crisis. Bonds maturing July 2042 traded Tuesday at an average 68 cents on the dollar to yield 8.2 percent, less than Puerto Rico’s general obligations, data compiled by Bloomberg show.

The securities have risks and will be initially sold in denominations of $100,000, according to the bond documents. Prasa has been rationing water since May in parts of the island because of a drought, which increases expenses and lowers demand, according to the documents.

Puerto Rico public corporations could also win the power to file for bankruptcy, the bond documents warn. Island officials have been lobbying Congress to allow some agencies to do so.

Default Risk

“If the authority is unable to charge and collect rates that are sufficient to provide for debt service on its bonds and other indebtedness and meet its operating expenses, the authority may be unable to meet its debt and other obligations as they become due,” according to bond documents.

Puerto Rico and its agencies are reeling from years of borrowing to pay bills. Officials plan to present a debt-restructuring proposal by Sept. 1. If Prasa is able to sell the bonds, it won’t need to restructure its debt, Melba Acosta, president of the Government Development Bank and one of the officials crafting the island’s debt proposal, said Tuesday in a statement.

Prasa, which had almost $5 billion of bonds and notes, as of May 31, plans to raise rates by as much as 4.5 percent annually beginning in fiscal 2018.

The utility provides water to 97 percent of the island’s population and wastewater service to more than half. As residents continue to leave for the U.S. mainland, that has cut into demand for its services.

Average monthly customer consumption decreased by about 6 percent in the year that ended in June.

Pitching Deal

Efrain Acosta, the utility’s finance director, will begin meeting with investors this week to discuss the offering, he said in a telephone interview from San Juan.

Some agency bonds have more than three times the revenue needed to cover debt-service and reserves sufficient for a year’s worth of principal payments, he said.

It’s hard to estimate at what coupon and yield the bonds would find enough buyers after the default and with the prospect of some entities gaining access to Chapter 9, said Daniel Solender, who helps manage $17 billion, including Puerto Rico debt, as head of munis at Lord Abbett & Co. in Jersey City, New Jersey.

Whether the firm will participate in the sale depends on the pricing and structure of the deal, Solender said.

“It’s going to have to be an attractive price given the default,” Solender said. “It’s probably the credit that could get the lowest yield right now, but it’s still a test to see what the yield would be and if there are enough buyers.”

Legal Jurisdiction

To sell $3.5 billion of general obligations in March 2014, the debt was priced with an 8 percent coupon at a yield of 8.73 percent, or 93 cents on the dollar.

The Prasa bonds also allow for any legal dispute to occur in a New York state or federal court, rather than in San Juan, according to bond documents. That’s a feature that hedge funds demanded in order to buy the general obligations sold last year.

Bank of America Corp. is the lead underwriter on a the deal, with a syndicate that includes JPMorgan Chase & Co., Popular Securities and Santander Securities.

Puerto Rico securities, including Prasa bonds, have been trading at distressed levels for two years on concern the island wouldn’t repay its debts on time and in full.

Prasa last sold bonds in 2012, Efrain Acosta said. The utility has been working on this borrowing for a year, he said.

“After a tough year for Prasa and Puerto Rico, we finally got the bond document out,” he said. “We have to close this chapter soon.”

Bloomberg

Michelle Kaske

August 11, 2015 — 6:00 AM PDT Updated on August 11, 2015 — 1:11 PM PDT

Legislation Gov. Jerry Brown signed Aug. 11 allows Long Beach, Calif., to combine elements of several types of public-private partnership agreements into a hybrid model to expedite the construction of the city’s new civic center. The project’s new buildings will include a seismically safe city hall, headquarters for the Port of Long Beach and the main city library. A park will be redesigned as well. Transit-oriented mixed-use developments, high-rise condominiums and retail shops also will be built on the almost 16-acre site, the city announced in a press release.

The law places sections of state and case law that apply to lease-leaseback public-private partnerships and design-bid-finance-operate-maintain (DBFOM) P3s into one section of state law that applies specifically to the civic center project. The law reduces the risk of the procurement method being legally challenged because, to date, it has been used only to develop infrastructure projects, not city hall buildings, according to the city.

The law also authorizes the private partner to lease or own all or part of the project for up to 50 years. Under existing law, private leasing or ownership of such projects expires after 35 years, the legislative counsel’s digest of the law says.

The civic center project will create 3,700 jobs construction-related jobs; it also will bring the Port of Long Beach’s headquarters back to the city’s downtown and re-establish its waterfront presence after a year-long, temporary relocation a few miles outside the city, said Lori Ann Guzman, president of the Long Beach Board of Harbor Commissioners.

“Long Beach residents are closer to seeing significant revitalization and modernization in downtown” as a result of the new law, said Sen. Ricardo Lara, the bill’s primary sponsor. “The civic center is at the core of Long Beach and the expansion project will benefit residents for years to come.”

This project has been in the planning stages for some time. Two teams of developers presented proposed plans for the civic center to the city in October. In January, the Long Beach City Council selected a DBFOM team, led by Plenary Group, to negotiate the real estate andP3 terms of the civic center project.

The civic center is not Long Beach’s first P3. The city used this procurement method to build its award-winning courthouse, which opened in 2013.

NCPPP

By Editor August 13, 2015

Wayne County will operate under state oversight and enter into a consent agreement with Michigan, allowing the home county of Detroit to bolster its finances and avoid bankruptcy.

The Wayne County Commission voted 14 to 1 Thursday to approve a consent agreement with the state, Joseph Slezak, a county spokesman said in an e-mail. The pact stops short of Chapter 9 and will allow County Executive Warren Evans to impose pay and benefit cuts. The arrangement, negotiated between Evans and the Michigan treasurer’s office, was delivered to the commissioners for consideration on Tuesday.

The move seeks to improve the county’s cash position, end its $52 million annual deficit and lower pension liabilities for its retirement system that is less than 50 percent funded. Wayne isn’t alone. Three other Michigan municipalities and two school districts are under consent agreements.

Evans has 30 days to continue negotiations with unions before he can demand employment terms. After that, he has the power to enact wage or benefit reductions on the county’s nine unions, which have expired contracts.

“This is a very sad day for Wayne County,” said Gary Woronchak, chairman of the commission.

Under the pact, Wayne officials can’t issue debt or sell county assets valued at more than $50,000 without Treasurer Nick Khouri’s approval.

Jail Bonds

Moody’s Investors Service said in July that the county’s move to seek state help and spending cuts are “credit positive.” Moody’s rates Wayne Ba3, three steps below investment grade, and has noted that a consent agreement would empower local officials. The county has $654 million of long-term general-obligation debt outstanding.

A portion of $143 million outstanding of 10 percent jail bonds traded Thursday at an average of 84.8 cents on the dollar to yield 11.9 percent. That’s down from an average of 96.4 cents on June 17, the day Evans asked the state for a financial emergency declaration. The federally taxable bonds that mature in December 2040 back an unfinished jail that costs the county $14 million a year in debt service.

Bloomberg

by Elizabeth Campbell

August 13, 2015 — 8:20 AM PDT Updated on August 13, 2015 — 9:47 AM PDT

Puerto Rico is approaching an inflection point that may prove to be more challenging than the commonwealth’s decision this month to skip a bond payment for the first time.

After borrowing internally, omitting debt-service payments and slowing tax rebates, the island is at risk of running out of cash to fund day-to-day operations. Puerto Rico must raise $400 million through a bank loan or a sale of short-term securities by November, Victor Suarez, Governor Alejandro Garcia Padilla’s chief of staff, said Aug. 10 in San Juan.

Garcia Padilla’s administration had already alienated creditors before defaulting on $58 million of bonds Aug. 3 by saying they need to restructure a $72 billion debt burden that it can no longer sustain. Puerto Rico appears to be betting that investors will provide access to capital markets again once the commonwealth unveils a debt-restructuring proposal Sept. 1.

“They’re going to have some severe liquidity issues,” said David Hitchcock, a Standard & Poor’s analyst in New York. “Without cash-flow financing, they’re going to have a very difficult time trying to just pay for ongoing operations as well as their upcoming debt payments in the next six months.”

It’s not clear how much operating cash Puerto Rico has on hand. The island’s Government Development Bank, which lends to the commonwealth and its localities, stopped providing monthly updates as of May, when it had $778 million of net liquidity. That was down from $2 billion in October.

Anticipation Notes

Like most U.S. states, Puerto Rico tends to sell tax-and-revenue anticipation notes in the first half of a fiscal year to help finance operating needs before revenue collections pick up.

When the GDB sold short-term debt in October, the last such borrowing for the island, it paid a yield of 7.75 percent for notes that matured in eight months. The discount rate on benchmark six-month U.S. Treasury bills was around 0.05 percent at the time.

Yields on an index of one-year Puerto Rico debt were 39 percent Thursday, more than three times the average of 9.9 percent over the past two years, according to data compiled by Bloomberg. Benchmark one-year municipal debt yields about 0.27 percent.

Mounting Payments

“Whatever little good faith we had has been completely wiped out by this missed payment” by the Public Finance Corp., said Sergio Marxuach, public-policy director at the Center for a New Economy, a research group in San Juan. “And after November, things become a little more unclear.”

Puerto Rico and its agencies face $1.4 billion of principal and interest payments in December and January, including $357 million for general-obligation debt, according to data compiled by Bloomberg.

Borrowing another $400 million may not be enough, Hitchcock said. In fiscal 2015, which ended June 30, the island sold $1.2 billion of short-term debt and still ended the year with a projected budget gap of as much as $740 million.

“Ability to access the market can be important for liquidity purposes,” Hitchcock said. “And we feel right now they have very limited market access, if any.”

Water Bonds

Puerto Rico may test market access as soon as Tuesday. The island’s Aqueduct and Sewer Authority, known by the Spanish acronym Prasa, wants to sell $750 million of bonds to fund capital improvements. While the bonds have a dedicated revenue source in the form of user fees, the agency still anticipates selling the debt at an average interest rate of at least 10 percent. Prasa bonds maturing July 2042 traded Thursday at an average yield of 8.3 percent, or 67.6 cents on the dollar, according to data compiled by Bloomberg.

“It would be amazing if they can get the deal done,” said Matt Dalton, chief executive office of Rye Brook, New York-based Belle Haven Investments, which manages $3 billion of munis, including Puerto Rico. “I’m just not sure who they’re going to sell it to.”

Moody’s assigned a Caa3 rating to the proposed sale Friday, saying exposure to the government’s financial, economic and political risks indicates a heightened loss potential.

Even though Puerto Rico isn’t setting aside cash every month to make the general-obligation debt payment, officials anticipate the island will have the cash flow to pay the January debt bill, Chief of Staff Suarez told reporters in San Juan on Aug. 10.

Selling $400 million of additional tax-and-revenue anticipation notes to outside investors would help finance day-to-day government operations beyond November, Suarez said.

Without additional borrowing, the administration would need to consider unpaid furloughs, additional payment suspensions to suppliers or extending IOUs, Marxuach said. That would force residents and businesses to spend less and banks might actually start reducing the amount of credit they extend to companies with contracting work through the government, he said.

“Obviously that’s going to have a negative ripple effect on the economy,” Marxuach said. “All that matters in the market is the perception, and the perception is Puerto Rico defaulted.”

Bloomberg

by Michelle Kaske

August 13, 2015 — 9:00 PM PDT Updated on August 14, 2015 — 11:42 AM PDT

Municipal bond sales in the U.S. are set to increase in the next month while the amount of redemptions and maturing debt falls.

States and localities plan to issue $10.1 billion of bonds over the next 30 days, according to data compiled by Bloomberg. A week ago, the calendar showed $8.6 billion planned for the coming month. Supply figures exclude derivatives and variable-rate debt. Some municipalities set their deals less than a month before borrowing.

Kansas State Development Finance Authority plans to sell $1.01 billion of bonds, New York State Convention Center Development Corp. has scheduled $640 million, Charlotte, North Carolina Water and Sewer System will offer $463 million and District of Columbia Hospital will bring $382 million to market.

Municipalities have announced $11.4 billion of redemptions and an additional $18.1 billion of debt matures in the next 30 days, compared with the $31.2 billion total that was scheduled a week ago.

Issuers from Texas have the most debt coming due with $7.81 billion, followed by California at $2.07 billion and New Jersey with $910 million. Texas has the biggest amount of securities maturing, with $5.4 billion.

The $3.6 trillion municipal market shrank by 4 percent in 2014. This year, maturities are poised to drop 38 percent to $176 billion from the 2014 levels.

Investors removed $88 million from mutual funds that target municipal securities in the week ended July 29, compared with an increase of $250 million in the previous period, according to Investment Company Institute data compiled by Bloomberg.

Yield Ratios

Exchange-traded funds that buy municipal debt increased by $72.4 million last week, boosting the value of the ETFs 0.42 percent to $17.2 billion.

State and local debt maturing in 10 years now yields 106.083 percent of Treasuries, compared with 103.105 percent in the previous session and the 200-day moving average of 101.035 percent, Bloomberg data show.

Bonds of Michigan and Tennessee had the best performance over the past year compared with the average yield of AAA rated 10-year securities, the data shows. Yields on Michigan’s securities narrowed 3 basis points to 2.55 percent while Tennessee’s declined 2 basis points to 2.33 percent. Puerto Rico and Illinois handed investors the worst results. The yield gap on Puerto Rico bonds widened 129 to 11.05 percent and Illinois’s rose 31 basis points to 4.15 percent.

Bloomberg

Kenneth Kohn

August 10, 2015 — 4:49 AM PDT

CHICAGO — Lawyers for the city of Chicago will appear before the Illinois Supreme Court in November to argue that a law aimed at shoring up two of the city’s financially shaky public pensions is constitutional, according to a Thursday court order.

A Cook County judge had ruled against the law in late July, saying it violates pension protections in the Illinois constitution. The ruling was a setback for Mayor Rahm Emanuel, who has repeatedly said he will not raise taxes without pension reforms.

The Illinois Supreme Court set a calendar for lawyers’ written briefs and oral arguments on Thursday.

Cook County Circuit Court Judge Rita Novak rejected Chicago’s arguments that the 2014 law results in a net benefit because it will save the municipal and laborers’ retirement systems from insolvency and that the law was backed by a majority of affected labor unions.

Novak also took issue with the city’s contention that it was not legally on the hook to pay pensions.

The law requires Chicago and affected workers to make bigger contributions to the pensions and replaces an automatic 3 percent annual cost-of-living increase for retirees with one tied to inflation. Those increases are also skipped in some years.

Pension payments are devouring bigger chunks of budgets for Illinois and Chicago and both face crippling spending cuts or big tax increases if those payments are not reduced. Illinois has the worst-funded pension system among U.S. states and a $105 billion unfunded pension liability, while Chicago’s unfunded liability for its four systems is $20 billion.

Arlene Bohner, a Fitch analyst, said in July that a ruling by the state supreme court tossing out the law “could very well lead to a downgrade.”

Representatives for the nation’s third-largest city and for the union representing city workers were not immediately available for comment.

By REUTERS
AUG. 13, 2015, 4:40 P.M. E.D.T.

(Reporting by Mary Wisniewski; Editing by Lisa Lambert)

Back during the previous Gilded Age, even Mark Twain surrendered. “It is a time when one is filled with vague longings,” he wrote. “When one dreams of flight to peaceful islands in the remote solitudes of the sea, or folds his hands and says, ‘What is the use of struggling, and toiling and worrying anymore? Let us give it all up.’” Were the old gentleman alive today, and if he could see American cities once again falling all over themselves to romance the various plutocrats who own the nation’s sports teams, he might abandon the dream of escaping to those peaceful islands and try to find a way to shoot himself to the moon.

I truly thought we were beyond all of this, but that may be simply because I live in Massachusetts, where, at one time or another, public pressure has saved Fenway Park, and has forced the owner of the New England Patriots to build his own stadium with (mostly) his own money, and, most recently, has caused the city of Boston to rise up and tell the United States Olympic Committee and a host of influential local yahoos to pound sand. I don’t mean to sound haughty, but why in the hell are so many of our fellow citizens such suckers?

Right at the moment, a few familiar scams are being run out in public. Remarkably, the St. Louis Rams are in the middle of several of them, which is odd because the Rams haven’t been central to much of anything since they bolted from Los Angeles. (Along with the Raiders’ departure, this left L.A. without a professional football team and, not coincidentally, left the NFL with a handy cudgel to use every time a city balked at the kind of blackmail that gets stadiums built.) Last week, the Rams got a nice little ruling from a local judge that invalidated a city law requiring a referendum before any public money could be used to build a stadium. This was a big step toward constructing a proposed $1 billion complex, the cost of which would include about $400 million in public money. St. Louis is being knuckled by an owner named Stan Kroenke, who is worth about $6 billion and keeps threatening to move his team to Los Angeles, which also is romancing the Raiders and Chargers.

There are serious proposals to build not one but two stadiums in and around Los Angeles, the metropolitan area of which extends to somewhere east of Mongolia. In Inglewood, Kroenke has proposed to build a stadium with a see-through roof. Meanwhile, down in Carson, there’s been a roiling brawl over a proposed $1.7 billion stadium; in June, a City Council meeting nearly devolved into a fistfight. Both the Raiders and Chargers have been flirting with the Carson proposal, but they are being very coy about it. At another City Council meeting, scheduled to update residents on the progress of the onrushing fiscal calamity, neither team bothered to send a representative. The activity has been so frenzied that even John Oliver on HBO noticed and pronounced himself appalled. “Most new stadiums nowadays,” Oliver marveled, “look like they were designed by a coked-up Willy Wonka.” Welcome to America, big guy.

But nowhere has the scam worked so brilliantly as it has in Milwaukee, where once I watched the Warriors of Al McGuire — and the Bucks of Larry Costello — play basketball in the Milwaukee Arena, which looked like the world’s largest rolltop desk. Both Marquette and the Bucks moved to the Bradley Center — now the BMO Harris Bradley Center — in 1988. It was built in the vain hope of attracting an NHL team. It was financed by the family of Harry Lynde Bradley, who got rich as the cofounder of the Allen-Bradley Company. That wealth also finances a variety of conservative causes and politicians. Which brings us all the way around to a new arena proposal and the guy pushing it the hardest, who also happens to be running for president of the United States.

In April 2014, former U.S. senator Herb Kohl sold the Bucks for $550 million to a pair of hedge-funders named Wesley Edens and Marc Lasry. This was considered at the time to be a wild overpayment for one of the NBA’s fiscal basket cases. The new owners promised to keep the team in Milwaukee and “work toward” the construction of a new downtown arena to replace the Bradley Center, which, after all, was 26 years old at the time and, therefore, by the calculations of the people who want to build new arenas with somebody else’s money, might as well be Angkor Wat. Luckily, just at their moment of direst need, along came a savior with ambitions named Scott Walker.

Having largely succeeded in rolling back more than a century of progressive government in a state where progressive government was long an institution, and having been elected three times in five years, Walker was gearing up for his presidential run. He proposed to use $250 million of public money to build the Bucks a new arena so the team would not leave town. Walker’s political opponents hastened to note this was the exact amount he proposed to cut from the University of Wisconsin system. But the real action came from his erstwhile allies. Conservative legislators went straight up the wall, inveighing against what was obviously a whopping gob of corporate welfare. (They also weren’t thrilled at handing over $250 million to Edens and Lasry, who previously had contributed a lot of money to Democratic campaigns.) For his part, Walker defended the decision and uncorked almost every discredited argument for publicly funded stadiums that anyone has ever made.

He argued that only $80 million would come from the state and that local and county government would cover the rest, as though people lived and paid their taxes in some place called the state, and not in towns or counties. This is the pea-under-the-shells technique. He claimed the state would lose $419 million over the next 20 years if the Bucks left town. Included in these calculations was his estimate of how much revenue would be drained if the Bucks players were no longer paying taxes in Wisconsin, which implies that the players themselves employ accountants who are stupid, drunk, or dead. He then told ABC News that these deals have been good for local economies all over the country. It was about here when actual economists began to throw themselves out of windows. Walker, who is running for president almost wholly on his conservative bona fides, found himself crossways with the Cato Institute.

That this is as noisy a fight as it has become is a promising sign. So, for that matter, is the fact that the Carson City Council nearly came to blows over a stadium proposal. It means the old sales pitches for this snake oil don’t work as well as they used to. Pure civic jingoism doesn’t have that old magic anymore. Citizens generally have gotten wise to the fiscal palaver and fast-talking from the people who want to get into their pockets. They aren’t as easily conned by politicians, and they aren’t as easily flattered by local Babbitts, and they aren’t as easily bamboozled by any unholy combination of the two. Unfortunately, there is still blackmail, and the jury is still out on whether that tactic still works.

It certainly seems to be working in Wisconsin, where Walker is trying to get the ransom money transferred as best he can. It remains to be seen whether it will work on behalf of the St. Louis Rams, or the San Diego Chargers, or the Oakland Raiders, a team that has spent almost its entire history playing Oakland and Los Angeles off each other. The problem the NFL had was not that the Raiders were gaming the system but that the Raiders were gaming the system without permission. They were the functional equivalent of the people who go into casinos and count cards. You can see how it’s supposed to work by watching how Kroenke plays off St. Louis and Los Angeles, and how the Chargers and Raiders play off two proposed stadiums against the cities where they presently play.

In this new Gilded Age, nothing should surprise us anymore. In Wisconsin, where Walker is moving heaven and earth to get a couple of Democratic sugar daddies a new playpen, his campaign named one Michael Grebe to be its chairman. Grebe’s day job is as chairman and CEO of the Bradley Foundation, founded with the same money that once built the Bradley Center, which is obsolete because other money says so. Mark Twain was right. Those peaceful islands look very good right now.

GRANTLAND.COM

by CHARLES P. PIERCE

AUGUST 10, 2015

Municipal bond sales in the U.S. are set to increase in the next month while the amount of redemptions and maturing debt falls.

States and localities plan to issue $10.1 billion of bonds over the next 30 days, according to data compiled by Bloomberg. A week ago, the calendar showed $8.6 billion planned for the coming month. Supply figures exclude derivatives and variable-rate debt. Some municipalities set their deals less than a month before borrowing.

Kansas State Development Finance Authority plans to sell $1.01 billion of bonds, New York State Convention Center Development Corp. has scheduled $640 million, Charlotte, North Carolina Water and Sewer System will offer $463 million and District of Columbia Hospital will bring $382 million to market.

Municipalities have announced $11.4 billion of redemptions and an additional $18.1 billion of debt matures in the next 30 days, compared with the $31.2 billion total that was scheduled a week ago.

Issuers from Texas have the most debt coming due with $7.81 billion, followed by California at $2.07 billion and New Jersey with $910 million. Texas has the biggest amount of securities maturing, with $5.4 billion.

The $3.6 trillion municipal market shrank by 4 percent in 2014. This year, maturities are poised to drop 38 percent to $176 billion from the 2014 levels.

Investors removed $88 million from mutual funds that target municipal securities in the week ended July 29, compared with an increase of $250 million in the previous period, according to Investment Company Institute data compiled by Bloomberg.

Yield Ratios

Exchange-traded funds that buy municipal debt increased by $72.4 million last week, boosting the value of the ETFs 0.42 percent to $17.2 billion.

State and local debt maturing in 10 years now yields 106.083 percent of Treasuries, compared with 103.105 percent in the previous session and the 200-day moving average of 101.035 percent, Bloomberg data show.

Bonds of Michigan and Tennessee had the best performance over the past year compared with the average yield of AAA rated 10-year securities, the data shows. Yields on Michigan’s securities narrowed 3 basis points to 2.55 percent while Tennessee’s declined 2 basis points to 2.33 percent. Puerto Rico and Illinois handed investors the worst results. The yield gap on Puerto Rico bonds widened 129 to 11.05 percent and Illinois’s rose 31 basis points to 4.15 percent.

Bloomberg

Kenneth Kohn

August 10, 2015 — 4:49 AM PDT

With tech workers flooding San Francisco, one-bedroom apartment rents have climbed to $3,500 a month, more than in any other U.S. city. Residents are being priced out. Evictions routinely spark political rallies.

Mayor Ed Lee, under pressure to deal with the soaring cost of living as he runs for re-election, is backing a partial fix: a $310 million debt sale to build affordable housing that will go before voters in November.

It’s the largest housing bond in the city’s history.

San Francisco’s push bucks the national decline in the sale of municipal debt for housing, which was slashed in half to $10.7 billion in 2014 from $20.8 billion a decade earlier. It may revive interest in the bonds as mayors from New York to Seattle seek to add homes for lower-income residents as real- estate prices climb.

“You’re seeing cities looking at a variety of ways to try to accommodate poor people,” said Howard Cure, director of municipal credit research in New York for Evercore Wealth Management LLC, which manages $6 billion. “It’s a big issue in certain areas where places have gentrified or the rental market is such that it’s becoming more unaffordable for working-class people.”

In California, cities and counties need to sell housing debt directly after Gov. Jerry Brown dismantled their redevelopment agencies. Those bonds were repaid with taxes from new projects.

Below AAA

That shift may benefit San Francisco, whose fast-growing economy has left investors willing to accept yields on some securities that are lower than top-rated municipals.

When San Francisco sold $67 million of general obligations on June 23, 10-year securities were priced to yield 2.34 percent. That was less than the 2.37 percent rate on benchmark municipal debt with the same maturity, according to data compiled by Bloomberg. The 20-year bonds yielded 3.62 percent, about half a percentage point more than top-rated debt.

“It’s viewed as a very safe credit to the point where you’re not going to get much yield above the AAA scale,” Cure said. “It’s a high-tax state so there’s a lot of demand for the bonds to begin with, and the city is doing pretty well.”

If approved by two-third of voters, the bonds would be used to advance Lee’s effort to build and renovate 30,000 homes over the next five years. The proceeds would fund the construction of rental units and create a program to help residents, including teachers, buy their first homes.

‘Housing crisis’

A boom among tech startups seeking to become the next Uber Technologies Inc., Facebook Inc. or Spotify Ltd. has drawn thousands of well-paid workers to California’s fourth-largest city, reducing the unemployment rate to 3.5 percent. The influx is fueling higher rents and sparking protests over evictions and affluent condominium developments in working-class neighborhoods.

The median asking price for a San Francisco one-bedroom apartment is $3,500, $400 more than in New York, the second most-expensive city, according to a report this month by Zumper, an online listing service. In June, the median price of a home was $1.14 million.

“San Francisco’s housing crisis demands aggressive action,” Lee, who’s seeking re-election in November, said in a statement. “Housing that is affordable to low- and middle- income families promotes diversity and equity.”

A separate measure on the November ballot would develop affordable housing from little used city properties.

Swaying voters

The bond issue, approved for the ballot by the county Board of Supervisors in July, won’t increase property taxes. San Francisco voters rejected a $250 million affordable-housing plan in 2002 — and another $200 million bond two years later — that included property-tax increases.

If voters approve the latest proposal, the city plans to sell the first of the debt in 2016, said Nadia Sesay, San Francisco’s public-finance director. Revenues from property taxes will be used to repay the 20-year debt, which may include some taxable bonds depending on use, she said.

“The bond will trade great,” said Craig Brothers, a Los Angeles-based money manager at Bel Air Investment Advisors, which oversees $3 billion. “It will trade like any other San Francisco general-obligation bond.”

By: Bloomberg News August 10, 2015 1:25 pm

Kansas will offer $1 billion of taxable pension bonds in the U.S. municipal market next week in a move that could make investors skittish given a recent default on some bonds in Puerto Rico and credit ratings downgrades in Chicago.

Debt service on the bonds is subject to annual appropriation, meaning that Kansas’ legislature must decide each year whether to allot money to make the payments.

Just this week, there was a default on Puerto Rico appropriation-backed bonds, while credit ratings on more than $3 billion of Chicago convention center bonds were severely downgraded because an impasse over Illinois’ fiscal 2016 budget blocked a monthly transfer of tax revenue to the bond trustee.

Alan Schankel, a managing director at Janney Capital Markets, said the combination of pension and appropriation bonds will come at a higher cost to Kansas.

“I think anybody has to take a look at appropriation debt and require a little more yield,” he said.

Meanwhile, the Government Finance Officers Association in January advised states and local governments not to issue pension bonds because they carry “considerable risk.”

The practice, which relies on the assumption that invested proceeds will result in higher returns than the interest cost on the bonds, came under heightened scrutiny particularly in the wake of Detroit’s $1.4 billion issuance that was tied in part to soured interest-rate swaps that helped drive the city to file the biggest-ever municipal bankruptcy in 2013.

Kansas’ deal is the largest on next week’s nearly $5.8 billion calendar of competitive and negotiated municipal bond and note sales.

The state’s fixed-rate bonds will be issued through its development finance authority and will be structured with serial maturities from 2017 through 2030 and term bonds due in 2037 and 2045, according to the preliminary official statement.

A state law limits the bond interest rate to 5 percent. Pricing is scheduled for Monday through senior underwriters Bank of America Merrill Lynch and Wells Fargo Securities.

The bonds are rated Aa3 by Moody’s Investors Service and AA-minus by Standard & Poor’s, which has a negative outlook on the rating due in part to the state’s pension payments falling short of actuarially required levels.

Kansas projects that the bond sale will improve the funded ratio for pensions to 73 percent in 2020 from 59 percent at the end of 2014.

REUTERS

Fri Aug 7, 2015

(Reporting by Karen Pierog in Chicago and Hilary Russ in New York; Editing by Paul Simao)

The Greek crisis is still fresh in our memories but there seems no end to bad news. Unable to repay its huge debt, Puerto Rico has defaulted. The island’s Government Development Bank could pay back only $0.6 million of the $58 million due to its creditors of Public Finance Corporation. The amount was part of the interest on bonds.

Puerto Rico has a hefty debt balance of over $70 billion. Melba Acosta-Febo, President of the Government Development Bank, stated, “the partial payment was made from funds remaining from prior legislative appropriations in respect of the outstanding promissory notes securing the PFC bonds.”

“First Time Defaulter”

While the default is the first time in Puerto Rico’s history, it raises concerns about the economic future of the island as well as the liquidity of the commonwealth. The picture is of widespread gloom as Moody’s sees this as among the first of bigger defaults on commonwealth debt and Standard & Poor’s portends other defaults over the next few months and signs of dismal liquidity. Going by a Reuters report, Puerto Rico had halted monthly deposits to its general obligation redemption fund for a temporary period.

The $58 million in bonds were issued by a subsidiary of the Government Development Bank to procure funds for school construction and the creation of landfills among others. While the government bank financed those projects initially, it prudently shifted the liabilities from its own balance sheet by refinancing them through its subsidiary, the Public Finance Corporation. The bonds were already facing downgrades and moved to the junk territory in March by Moody’s Investors Service and Standard & Poor’s.

The Puerto Rico debt includes approximately $18.6 billion of general-obligation bonds and government-guaranteed debt, $15.2 billion of sales-tax-backed bonds and $24.1 billion of bonds issued by government agencies, like the Puerto Rico Electric Power Authority.

Puerto Rico has been stressed by government debt crisis for several years. The island owed many debt payments on Aug 1, of which it could pay only the interest portion of $58 million.

Way Out for Puerto Rico

The Puerto Rico debt crisis is worse than Detroit’s $20-billion crisis (Detroit filed for bankruptcy two years back) but much lesser than the $350-billion crisis of Greece. However, Puerto Rico cannot file for bankruptcy as the island is not covered under the U.S. Bankruptcy Code. Moreover, it is unlikely that any institution will come for rescue as we saw in the case of the Greek distress where International Monetary Fund came to rescue.

Nonetheless, Puerto Rico intends to restructure its debt with policymakers so that they can work a way out with creditors and investors. Puerto Rico even fears a government shut down if further funds are not raised.

To add to its woes, the residents of Puerto Rico are moving out as high unemployment and economic instability are forcing them to look for survival outside the island. This, in turn, will hit Puerto Rico even harder as it lower the tax base of the island — the major source of revenue for any economy.

According to Morningstar Inc., about half of the U.S. municipal-bond mutual funds have coverage in Puerto Rico. So the island’s default could cause serious damage to the concerned investors, who have already incurred heavy losses after the commonwealth’s credit ratings were downgraded to junk and bond prices collapsed.

Sensing tough times, Monarch Alternative Capital LP, which had invested in commonwealth’s general-obligation bonds, got rid of some. However, the latest crisis will surely act as a dampener to the fortunes New York-based MBIA Inc. and Bermuda based Assured Guaranty Ltd. (AGO – Analyst Report) that are exposed to Puerto Rico

MBIA Inc. has almost twice the exposure of Assured to Puerto Rico’s stressed power authority called Prepa. While the crisis could eat away the statutory capital of MBIA’s National Public Finance Guarantee Corp., about 40% of Assured’s funds will be washed out as together they insure about 20% of the islands through municipal debt as per media reports.

While MBIA Inc. lost 2% in yesterday’s trading, another bond insurer Ambac Financial Group, Inc.’s shares dropped 3.4%.

by Zacks Equity Research

Published on August 04, 2015

CHICAGO (Standard & Poor’s) Aug. 6, 2015–Chicago’s budgetary challenges for fiscal years 2016 to 2018 were highlighted in the release of its annual financial forecast — specifically the hurdles it faces in balancing its budget, even before approaching the issues of its rising debt burden and pension contributions.

We expect that during the next five months, as the mayor progresses with his proposed budget and then what is ultimately adopted by the city council, the city will demonstrate how serious it is about implementing both immediate and far-reaching plans to address the structural cracks in its budget. Given the uncertainty regarding the reform of its police, fire, municipal and laborers plans, we expect city management to consider contingency plans for addressing its pension liabilities, regardless of the outcome for all four of its plans.

In the base case scenario, the city’s operating budget gap for 2016 is $232.6 million; add in its increased pension contributions and debt, and the number rises to $426 million. The corporate fund is not the only fund that contributes to the pensions; the enterprise funds and library fund also pay a share. The forecast factors in an incremental $328 million increase in police and fire pensions, based on the assumption that the city will gain state approval of a phased-in approach to the pension payments rather than the $550 million increase it currently faces, and that the Supreme Court will uphold the city’s reformed municipal and laborers pension plans. In our view, it would be more conservative to assume the $550 million payment. Additionally, the forecast assumes that the city will pay $100 million more in debt service due to the phase out of its “scoop and toss” practice, in which the city made debt payments from refunding bond proceeds rather than from current revenues.

The forecast presents two scenarios in addition to the base case: positive and negative. Even in the positive outlook, with revenues more strongly recovering from the recession than in the base- case scenario, there is still an operating budget gap of $83.0 million in 2017, and it rises to $132.4 million in 2018. In the negative outlook, which assumes stagnant revenues and more accelerated operating expenditure growth, the city faces operating gaps of $577 million in 2017 and $801 million in 2018. The forecast approaches and discusses debt and pension contributions separately and those numbers are not included in the aforementioned figures.

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.

Standard & Poor’s Ratings Services, part of McGraw Hill Financial (NYSE: MHFI), is the world’s leading provider of independent credit risk research and benchmarks. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.

Primary Credit Analyst: Helen Samuelson, Chicago (1) 312-233-7011;
helen.samuelson@standardandpoors.com

Secondary Contact: Jane H Ridley, Chicago (1) 312-233-7012;
jane.ridley@standardandpoors.com

Atlantic City had its debt rating cut deeper into junk by Standard & Poor’s, which said the New Jersey gaming hub has no “clear plan” to address its fiscal woes.

The municipality, which has been run by an emergency manager since January, was reduced three steps to B, the fifth level into junk, and may be lowered further, the ratings company said Monday.

Since Emergency Manager Kevin Lavin released a report in March citing the potential for deferred debt payments and job cuts, there has been no “additional clarity” on how the city can address its $101 million budget deficit and eroding tax base, Timothy Little, an S&P analyst, wrote in a release.

“The lack of clear and implementable reforms to restore fiscal solvency without payment deferrals or debt restructuring remains uncertain as the city continues to operate in a difficult fiscal environment,” he said in the statement.

Bankruptcy protection may be a “potential course of action” if as yet unimplemented solutions are unsuccessful, Little said.

Atlantic City’s finances haven’t changed since May, when it sold securities with an S&P ranking of A-, the fourth-lowest investment grade, Michael Stinson, the city’s revenue and finance director, said Monday. The bonds were issued through a New Jersey program that diverts state aid to debt payments, which lessens the risk to bondholders.

“For a downgrade at this point, it just doesn’t make sense,” he said.

Atlantic City “continues to make progress” in addressing its budget shortfall and longer-term structural deficit, Lavin, the emergency manager, said in an e-mailed statement.

Governor Chris Christie had appointed Lavin to come up with a plan to revive the finances of the city, where four of 12 casinos closed last year. The governor’s move led Moody’s Investors Service and S&P to downgrade Atlantic City because of the risk that a turnaround plan could foist losses on bondholders. Moody’s ranks the city Caa1 with a negative outlook.

Bills that the state legislature passed in June, including a measure that would create payments in lieu of taxes from the the city’s casinos, are part of the financial plan, Stinson said. The legislation still has to be signed by Christie.

Kevin Roberts and Brian Murray, spokesmen for Christie, didn’t immediately return a call and e-mail requesting comment.

Tax-free general obligations due in December 2027 traded Monday with an average yield of 7.26 percent, or about 4.7 percentage points over benchmark munis, data compiled by Bloomberg show.

Bloomberg

by Romy Varghese

August 3, 2015 — 1:17 PM PDT

Puerto Rico’s fiscal crisis reached a turning point this week when one of its agencies, the Public Finance Corp., defaulted on a bond payment for the first time.

Standard & Poor’s said the decision could imperil the government’s ability to borrow money as it risks running out of cash within the next few months. The rating company said more defaults may follow.

Like other municipal borrowers, the island has many types of bonds, sold by different agencies and backed by different funds and legal safeguards.

Here’s a list of the commonwealth’s biggest bond issuers, how much long-term debt they have, and when major monthly payments are due, according to data compiled by Bloomberg. Puerto Rico’s bond payments total about $209 million from September through November before swelling to a combined $1.4 billion in December and January, the data show.

General-obligations: $13 billion. They’re backed by the commonwealth’s full faith and credit. The island’s constitution says general obligations must be repaid before other expenses. Maturity and interest payments are due in July, with the bulk of other interest paid in January.

Puerto Rico Sales Tax Financing Corp.: $15.2 billion. These bonds, called Cofinas, are repaid from dedicated sales-tax revenue. A $6.2 billion portion of the debt, called senior-lien, is repaid first. The remaining $9 billion, called subordinate-lien, get second dibs. Maturity and interest payments are due in August, with the bulk of other interest paid in February.

Puerto Rico Electric Power Authority: $8.3 billion. Prepa, as it’s called, is the island’s main supplier of electricity and repays the debt from what it charges customers. Maturity and interest payments are due in July, with the bulk of other interest paid in January.

Puerto Rico Government Development Bank: $5.1 billion. The GDB lends to the commonwealth and its localities. When those loans are repaid, the bank can pay off its debt. The agency covered debt bills due this month. Its next bond payment is in December.

Puerto Rico Highways & Transportation Authority: $4.7 billion. The highway agency repays its debt with gas-tax revenue. Maturity and interest payments are due in July, with the bulk of other interest paid in January.

Puerto Rico Public Buildings Authority: $4.1 billion. The PBA bonds are repaid with lease revenue from public agencies, departments and instrumentalities of the commonwealth. Maturity and interest payments are due in July, with the bulk of other interest paid in January.

Puerto Rico Aqueduct & Sewer Authority: $4 billion. The utility, called Prasa, supplies most of the island’s water. The debt is repaid from water rates charged to customers. Maturity and interest payments are due in July, with the bulk of other interest paid in January.

Puerto Rico Pension-Obligation Bonds: $2.9 billion. The taxable debt was sold to bolster the island’s main pension fund. The bonds are repaid from contributions that the commonwealth and municipalities make to the retirement system. The next maturity is July 2023.

Puerto Rico Infrastructure Financing Authority: $1.9 billion. Called Prifa, the agency has sold the island’s rum-tax bonds. These are securities repaid from federal excise taxes on rum made in Puerto Rico. Most of Prifa’s bonds mature every July, with additional interest payments in January.

Puerto Rico Public Finance Corp.: $1.09 billion. The PFC bonds are repaid with money appropriated from the legislature. The agency defaulted on its Aug. 1 debt-service payment because the legislature failed to do so. Maturity and interest payments are due in August, with the bulk of other interest paid in February.

Bloomberg

by Michelle Kaske

August 4, 2015

Individuals pulled $308 million from muni funds in the week through Wednesday, Lipper US Fund Flows data show. That’s the largest withdrawal since the period through July 1, during which Puerto Rico Governor Alejandro Garcia Padilla said the U.S. commonwealth can’t afford to pay its debts.

High-yield muni funds, which are the most likely to hold Puerto Rico securities, saw about $58 million of outflows, the most in four weeks. Investors yanked $208 million from funds holding long-term obligations. Despite the withdrawal, muni prices were little changed this week, according to Bloomberg benchmark indexes.

Puerto Rico said Aug. 3 that it paid just $628,000 of the $58 million due on securities sold by its Public Finance Corp. The struggling commonwealth is seeking to restructure its $72 billion of debt, which is widely held because the interest is exempt from federal, state and local income taxes nationwide.

Bloomberg

Brian Chappatta

August 6, 2015 — 2:49 PM PDT

New York, August 06, 2015 — Moody’s Investors Service has reviewed the new restructuring proposal filed by the Puerto Rico Electric Power Authority (PREPA; Caa3 negative), which states that non-forbearing bondholders would recover 65%-70% of the original legal promise in cash, depending on maturity, and which makes default a virtual certainty. The EMMA filing also includes alternative plans filed by PREPA, a bondholder group, and a bond insurers’ group.

Although bondholder recoveries are volatile and hard to predict, recovery expectations play a large role in Moody’s PREPA ratings, and the proposal’s overall recovery rates are in line with Moody’s expectations at PREPA’s current Caa3 rating, which incorporate a recovery range of 65%-80%. Moody’s outlines the proposal for the different bondholders in the new report, “Moody’s Comments on PREPA’s Restructuring Proposal.”

In contrast to non-forbearing bondholders, forbearing bondholders would receive an exchange offer, nominally at par. However, these bondholders could still incur substantial losses because the original promise to pay cash would be replaced with a new security that defers interest and principal and would be subject to the risk that it will not be paid.

PREPA’s forbearing bondholders, which comprise both insured and uninsured bondholders, hold just over 66% of the authority’s $8.1 billion bonds; the uninsured non-forbearing bondholders hold the remainder.

“For the forbearing bondholders, our analysis suggests a mid-range recovery rate of 67%, based on a discount rate of 7.5%” says Rick Donner, a Moody’s Vice President — Senior Credit Officer. “But regardless of the discount rate, we doubt the recovery rate for the forbearing bondholders would be any worse than the 65%-70% cash offer being presented to the non-forbearing bondholders.”

Under PREPA’s plan, the insured legacy bonds would be excluded from any transactions and would remain unchanged. However, the bond insurers could still incur economic losses, as they are being asked to provide a new wrap for up to $1.3 billion with zero compensation, even as they continue to carry the risk associated with the current insurance.

Finally, all of the publicly disclosed proposals, including PREPA’s, call for deferring debt service for at least five years, to fund capital expenditures.

If a restructuring agreement can be reached, a default in the form of a distressed exchange sometime in the next few months is the most likely outcome. The broad consistency of the proposals and counter-proposals indicates ongoing progress, but substantive creditor issues could very well preclude a deal. And even if PREPA can reach an agreement with its creditors, the execution risk will be substantial, particularly in light of the island’s weak economic conditions.

The report is available to subscribers here.

Puerto Rico missed most of a $58 million bond payment Monday, marking the first default by the U.S. commonwealth and escalating its attempt to restructure about $72 billion in debt.

The payment to bondholders is the first skipped since Gov. Alejandro García Padilla in June said the island’s debts were unsustainable and urged negotiations with creditors, which range from individuals to hedge funds.

Analysts said the missed payment isn’t likely to provoke an acute marketwide reaction from investors, many of which have been inching away for the commonwealth for years amid dire economic news.

But the episode is the latest confirmation that Puerto Rico doesn’t have the money to meet all of its coming obligations, said Emily Raimes, vice president at Moody’s Investors Service.

“This is a first in what we believe will be broad defaults on commonwealth debt,” she said.

The Government Development Bank for Puerto Rico said the island’s legislature didn’t set aside money for the appropriation bonds, a decision that reflects “serious concerns about the Commonwealth’s liquidity” and its need to balance paying bondholders with maintaining essential services, according to a news release from the bank. The bank did pay about $628,000 remaining from prior funds.

The nonpayment is another setback for investors in debt from Puerto Rico, which is struggling with a decade of economic stagnation and high unemployment, underscoring the commonwealth’s effort to prioritize payments as it attempts to preserve its cash and avoid a government shutdown.

About half of municipal-bond mutual funds in the U.S. have exposure to Puerto Rico, according to research firm Morningstar Inc.

Those investors have already suffered losses as the commonwealth’s credit ratings fell to junk in recent years and bond prices plummeted.

Some Puerto Rico bonds sold in 2014 traded Monday at about 69.25 cents on the dollar, down from about 73 cents in mid-July, according to Thomson Reuters Municipal Market Data.

The corporation’s missed payment suggests how Puerto Rico may treat different forms of debt going forward, said John Miller, co-head of fixed income at Nuveen Asset Management LLC in Chicago, which manages about $100 billion in tax-exempt bonds. Investors in the appropriation bonds have little recourse because the bonds are backed only by the legislature’s willingness to find the money for them. Other bonds have greater legal protections.

“It is somewhat meaningful that this is their first monetary default,” Mr. Miller said. “However, if people have been paying attention to the plans, this was anticipated, and it doesn’t really change the orchestrated direction that the government’s taking.”

That direction has even some former boosters backing away. Monarch Alternative Capital LP, which at one point had about 5% of its now $5 billion under management invested in the commonwealth’s general-obligation bonds, told investors late last week that it sold off part of the position in recent weeks.

“We believe that the probability of a default scenario has significantly increased and could risk extending the timeline for a resolution to the island’s situation,” co-founder Michael Weinstock and other firm executives wrote to investors in a letter reviewed by The Wall Street Journal.

In particular, he flagged the firm’s discussions with the island’s political leadership. “We ultimately came to the view that the sentiment of Puerto Rico’s leadership had shifted and that they would be unwilling to implement the fiscal reform measures needed to regain the market’s confidence and avoid a potential default,” the letter said.

A group of Puerto Rico policy makers are working on a restructuring plan and scheduled to present their findings at the end of August. Creditors, including mutual funds, hedge funds and other distressed-debt investors, have been splitting into committees based on which bonds they own.

Puerto Rico has said its debt includes about $18.6 billion of general-obligation bonds and government-guaranteed debt, $15.2 billion of sales-tax-backed bonds and $24.1 billion of bonds issued by government agencies, like the Puerto Rico Electric Power Authority, which is already negotiating a restructuring with creditors. Many investors hold bonds across the different sectors, which could recover different amounts in a restructuring.

The restructuring process is uncertain in part because Puerto Rico is neither a U.S. state nor a sovereign nation.

All states are barred from filing for bankruptcy, but cities, such as Detroit, can seek protection under chapter 9 of the U.S. bankruptcy code. Puerto Rico is lobbying the U.S. Congress for a law allowing some of its entities to access chapter 9 protections. Until such a law passes, the island’s leaders must negotiate with creditors without that process.

Matt Fabian, partner at research firm Municipal Market Analytics, Concord, Mass., said that while worries about Puerto Rico have had little impact on the broader market for municipal bonds, a missed payment could spur new selling in other commonwealth debt.

“The Puerto Rico market is huge and diverse,” he said. “You have to presume there will be some knock-on selling.”

THE WALL STREET JOURNAL

By AARON KURILOFF

Aug. 3, 2015 4:30 p.m. ET

—Rob Copeland contributed to this article.

Write to Aaron Kuriloff at AARON.KURILOFF@wsj.com

This week, the Central Puget Sound Regional Transit Authority plans to sell about $923 million of green bonds, which help finance environmentally friendly projects. It would be the world’s largest green-bond issue from a municipal entity, providing a boost to green-bond sales figures that have been tracking below expectations so far this year.

Green bonds have surged in popularity over the last few years, as companies, governments and development banks take advantage of investor demand for securities that are seen as aiding the environment. But this year’s volume of green-bond sales has disappointed some advocates amid concerns about whether projects financed with green bonds are truly “green.”

So far, roughly $19 billion of green bonds have been sold this year, according to a tally from the Climate Bonds Initiative, a nonprofit group based in London. The group, however, forecast $100 billion of new green bond sales this year, a figure that looks unlikely now. Last year, nearly $37 billion of bonds were sold, the most on record.

The Seattle agency, known as Sound Transit, plans to use proceeds from its sale to expand the region’s light-rail system, as well as refinance existing debt used for previous projects. The agency expects to finalize pricing of the bonds on Tuesday.

Brian McCartan, chief financial officer for Sound Transit, said the agency is hoping to diversify its investor base with the new green bonds, as well as promote its sustainability program and deepen the green-bond market.

Unlike some other recent municipal issuers, the agency commissioned a study from research-and-analysis firm Sustainalytics to sign off on the environmental benefits of the agency’s new bonds. Green-bond investors say these outside opinions are useful in determining whether a project is truly environmentally friendly.

In its review, Sustainalytics said Sound Transit “aims to support projects that will provide low-carbon public transit” in the region, reducing greenhouse-gas emissions, and found the green bonds “robust and credible.” The opinion should “really give investors that additional vote of confidence that the moneys will be used for sustainable projects,” Mr. McCartan said. The firm charged a “modest fee” for the review, he said.

The bonds will be repaid from sales-tax collections. They are expected to carry a triple-A rating from Standard & Poor’s Ratings Services, the highest rating available, and a Aa2 rating, the third highest, from Moody’s Investors Service. J.P. Morgan is leading the deal.

THE WALL STREET JOURNAL

By MIKE CHERNEY

Aug 3, 2015

Jails built to profit from an illegal immigration boom are weighing down the finances of rural counties in the U.S. Sunbelt as border apprehensions slow and the federal government orders the release of more migrants.

In Texas, the heart of a jail-building boom over the past decade, nine of 21 counties that created agencies to issue about $1.3 billion in municipal bonds to build privately run correctional facilities largely for migrants have defaulted on their debt. A dozen other facilities from Florida to Louisiana to Arizona, many that housed immigrants, have also defaulted, according to figures from Municipal Market Analytics, a bond-research firm based in Concord, Massachusetts.

The slowdown in border detentions is putting a fiscal strain on counties that rushed to build jails in anticipation that a two-decade boom in immigrant inmates would continue. Municipalities that banked on those facilities for revenue and jobs are desperate to keep them afloat as a glut of beds goes empty and walls gather dust.

“My fear’s always been that this would happen,” said Joel Rodriguez Jr., judge of La Salle County, Texas, about 67 miles (107 kilometers) north of the U.S.-Mexico border, who is overseeing the fate of a distressed detention center. “When this facility was sold to the county, they sold it as a money-making facility that was going to be a great economic boon.”

Almost Empty

Today the 566-bed facility, called the La Salle County Regional Detention Facility, sits almost empty behind thick coils of razor ribbon in tiny Encinal, whose 579 residents barely outnumber prison beds. Another border detention center was destroyed in a riot by prisoners after cost-cutting efforts led to deplorable conditions. Another, on the banks of the Rio Grande River, is slated to close next month after too few inmates walked through the doors to keep up with big debt payments.

“The number of people detained and incarcerated for immigration matters hasn’t kept up with the pace of construction for these new beds,” said Bob Libal, executive director of Grassroots Leadership, an advocacy organization based in Austin, Texas, that opposes private prisons.

The drop-off follows an almost two-decade boom that saw the number of immigrant detainees mushroom, partly as a result of more people crossing into the U.S. and partly due to a get-tough attitude toward illegal border crossers. County jails grew overcrowded.

Good Bet

“The populations were just hanging off the trees,” recalled Michael Harling, executive vice president at Municipal Capital Markets Group Inc., a Dallas firm that co-managed many of the jail bond issuances in Texas.

Prison operators crisscrossed the South pitching rural towns on the purported economic salvation of detention facilities. Under the arrangement, local governments would typically receive daily fees from the federal government based on the number of beds or persons filling them, and private prison operators would get a portion, usually the lion’s share.

For some of the nation’s smallest and most impoverished communities, locking up immigrants seemed like a good bet. To finance their construction, counties issued debt through conduit borrowers, limiting the county’s liability, while allowing projects to be built quickly.

Lease-Purchase

Last year, Texas counties had $709 million in scheduled debt service for so-called lease-purchase obligations, most of which are for jail facilities, up from $273 million in 2000, according to figures from the Texas Bond Review Board.

The increased debt grew right before migration patterns and immigration policy began to shift. Last year, there were 487,000 apprehensions, about the same level as in 1973, compared with a peak of nearly 1.7 million in 2000, according to the U.S. Border Patrol. That’s partly because an improving Mexican economy and drug cartel violence kept fewer people from venturing north.

At the same time, the trend of locking up migrants has eased. More local officials are refusing to detain migrants at the behest of federal immigration officials and the Obama administration recently narrowed the categories of migrants that should be detained.

The number of immigration detainees last year was down 11 percent from 2012, when incarcerations were at an all-time high, according to figures from U.S. Immigration and Customs Enforcement. The average daily population in ICE detention was 31,164 in June, down 16 percent over the same time period a year earlier.

Fewer Detentions

Detentions may continue their downward march. Last month, a federal court rebuked the administration for its policy that jailed a wave of women and children fleeing violence in Central America.

“The system has been built up to be able to house criminal aliens,” said A. J. “Andy” Louderback, past president of the Sheriffs’ Association of Texas. “When all of a sudden at the stroke of a pen those folks are released to live, work and play in our communities, those beds are going to be vacant.”

The Encinal detention center was opened in 2004 after a county corporation issued almost $22 million in revenue bonds. At the time, local residents warned that revenue projections were too rosy.

Leaking Roof

Last winter, the facility’s private operator, Emerald Correctional Management LLC of Shreveport, Louisiana, suddenly pulled out all inmates, said Rodriguez, leaving the county with empty beds, a leaking roof and almost $20 million in debt.

Since then, the county has assumed responsibility for the facility and, in an effort to salvage the 100 jobs tied to the jail, is working with bondholders to get it back up and running.

Bonds issued for the jail that mature in March 2024 traded July 17 at 40 cents on the dollar, to yield about 25 percent, data compiled by Bloomberg show. The securities are down from 70 cents at the start of the year.
In 2006, the Willacy County Local Government Corp. issued its first bonds, totaling $61 million, to build a detention facility. The 3,000-bed facility that featured a collection of white Kevlar domes to house inmates became a source of grievances, from maggots in the food to allegations of sexual abuse.

In February, inmates rioted and destroyed the facility with metal pipes. All 2,800 prisoners were removed from the facility, federal officials canceled their contract and Standard & Poor’s downgraded the debt to junk.

In Maverick County, where the county seat of Eagle Pass sits along the banks of the Rio Grande River, an immigrant detention facility built in 2007 using $43 million in revenue bonds is slated to close this month after failing to service its debt. Officials say they never got the promised prisoners and that the project now looks like a bad deal.

“The amount of the loan that was taken out on this facility was just ridiculously too high,” said Maverick County Commissioner Jerry Morales. “It doesn’t add up.”

Bloomberg

by Lauren Etter

August 2, 2015 — 9:00 PM PDT

Puerto Rico said it won’t make a bond payment due Saturday, putting the commonwealth on a path to default and promising to initiate a clash with creditors as it seeks to renegotiate its $72 billion of debt.

The government doesn’t have the money for the $58 million of principal and interest due on Public Finance Corp. bonds, Victor Suarez, the chief of staff for Governor Alejandro Garcia Padilla said during a press conference Friday in San Juan.

“We cannot make the payment tomorrow because we do not have the funds available,” Suarez told reporters. “This payment will be made as we address how to restructure the government’s debt prospectively.”

The default marks an escalation in the debt crisis that’s been racking the island, where officials are pushing for what may be the biggest restructuring ever in the municipal market. Puerto Rico bond prices have slipped amid speculation that the island won’t be able to repay what it owes as its economy stagnates and residents leave for the U.S. mainland.

“An event like this is significant enough that it could hurt prices for Puerto Rico bonds,” said Richard Larkin, director of credit analysis at Herbert J Sims & Co. in Boca Raton, Florida. “I can’t believe a default on debt with Puerto Rico’s name will go unnoticed.”

Island officials had said that Puerto Rico may skip the payment on the Finance Corp. bonds, which can be made as late as Monday because Aug. 1 is a Saturday. The Finance Corp., which has borrowed to help balance the government’s budget, has about $1 billion of debt outstanding.

No Appropriation

The securities are paid for with money appropriated by the legislature, unlike general-obligation bonds that are protected by the commonwealth’s constitution and have a claim on its tax money. That leaves bondholders with little recourse because the commonwealth hasn’t guaranteed repayment and the legislature isn’t obligated to allocate the funds.

Faced with a budget shortfall, lawmakers didn’t provide the money when they passed the annual spending plan. Island officials said that Puerto Rico’s available cash was limited to funding essential services such as health and safety.

Puerto Rico Government Development Bank President Melba Acosta said in a statement Friday that a separate $169 million debt-service payment for the bank’s bonds will be made.

Shared Sacrifice

Garcia Padilla said in June that the commonwealth cannot pay all of its obligations, following years of borrowing to paper over budget shortfalls, and that bondholders need to share in the sacrifice to help steady the island’s finances. Officials plan to draft a debt-restructuring plan by Sept. 1.

The governor has drawn opposition from investors including OppenheimerFunds Inc., which said it will fight to ensure that the commonwealth repays its debt. A report by three former International Monetary Fund economists, which was commissioned by a group of hedge funds, said the island can balance the budget without a broad debt restructuring.

Puerto Rico’s economy has contracted every year but one since 2006 and is projected to decline by 1.2 percent this year. The island’s population shrunk 7 percent in the past decade. Another 245,000 residents are estimated to leave by 2025 as they seek employment on the U.S. mainland. Puerto Rico’s June jobless rate of 12.6 percent is more than double what it is in the U.S.

Essential Problem

“The essential problem in Puerto Rico is the economy and the outmigration of individuals,” said Phil Fischer, head of municipal research at Bank of America Corp. in New York. “And neither of those seems to be improving.”

While Garcia Padilla surprised investors by pushing for a restructuring, two months after he said it would be a mistake to default, the island’s worsening debt crisis hasn’t rippled through the municipal-bond market. Municipal bonds in July had their strongest return since January as investors recognized that Puerto Rico’s problems are unique.

The commonwealth’s securities have traded at distressed levels for two years. General obligations maturing July 2035 and originally sold in March 2014 at 93 cents on the dollar traded Friday at an average of 69.5 cents on the dollar, according to data compiled by Bloomberg. The average yield was 12.1 percent.

Puerto Rico debt has lost 10.8 percent this year through July 30, the worst for the period since at least 2007, S&P Dow Jones Indices show.

Bloomberg

by Michelle Kaske

July 31, 2015 — 4:46 PM PDT Updated on July 31, 2015 — 6:48 PM PDT

The latest general obligation bond proposal from Chicago Mayor Rahm Emanuel could have the cash-strapped city selling up to $500 million of capital appreciation bonds (CABs), a form of debt that government finance experts say could be costly and risky.

CABs are municipal debt for which payments are deferred until the bonds’ maturity while interest compounds. Emanuel’s administration on Wednesday proposed a refunding of outstanding GO bonds that would give the city the flexibility to issue CABs or the more commonly used current interest bonds for which interest is paid on a periodic basis.

A spokeswoman for Chicago’s finance department said the city has not sold CABs since 2009 and expects to issue current interest bonds for the refunding.

Still, the fact that CABs are listed as an option raised concerns as Chicago struggles with low credit ratings, growing budget deficits and already high borrowing costs.

Richard Ciccarone, president and CEO of Merritt Research Services, said Thursday the move would allow the city to “kick the can down the road” by deferring debt service payments for as long as 40 years.

Laurence Msall, president of the Chicago-based Civic Federation, a government finance watchdog group, called CABs “an extraordinarily expensive form of borrowing.”

“Going into the market and asking creditors to wait 10, 20, 40 years before receiving any payment carries a very stiff premium,” he said.

Emanuel in April announced a plan to clean up the city’s debt practices, including converting variable-rate bonds to fixed-rate and eliminating related interest-rate swaps – a move the Civic Federation applauded, according to Msall.

That plan got fast-tracked after Moody’s Investors Service downgraded Chicago to junk in May triggering $2.2 billion in accelerated debt and fee payments by the city.

A $1.08 billion GO bond sale earlier this month resulted in higher borrowing costs for Chicago than most issuers in the U.S. municipal bond market.

The city, the third largest in the United States by population, is struggling with a projected $430 million fiscal 2016 budget gap. The deficit is due in part to escalating pension payments that include a looming $550 million contribution increase to its public safety workers’ retirement funds.

Msall said he hoped the city council and its new financial analysis office head will take a close look at the bond proposal.

CABs have proved controversial in the past. California in 2013 enacted a law limiting total debt service on the bonds to four times the principal and maturities to a maximum of 25 years. The law also requires CAB deals to allow early repayment of the debt when maturities are longer than 10 years.

The law was sparked in part by reports that a San Diego-area school district’s $105 million of CABs would end up costing nearly $1 billion.

More recently, Puerto Rico’s financially troubled public utility PREPA rejected an offer by bondholders to restructure some of its debt into CABs.

REUTERS

CHICAGO, JULY 30 | BY KAREN PIEROG

(Reporting by Karen Pierog; Editing by Cynthia Osterman)

An average of six Chicagoans have been shot each day this year, up from five in 2014. In its effort to respond to the carnage, the city is hamstrung by obligations to police, the very people it needs to protect the public.

With the second-largest number of sworn officers in the U.S., Chicago is struggling to pay an extra $550 million in pension obligations owed to public-safety workers. That leaves the city with little financial flexibility as homicides have risen more than 18 percent from last year and shootings 17 percent.

“They’re fighting a war on two fronts,” said Richard Ciccarone, president and chief executive officer of Merritt Research Services, which analyzes municipal finance.

Red ink is drowning Democratic Mayor Rahm Emanuel’s budget. The city’s projected 2016 deficit is up 45 percent, to $430 million. The additional pension payments are due next year, and the city has yet to identify money for them. Chicago’s credit rating has been cut to junk because of $20 billion in unfunded retirement obligations.

New York’s increase in homicides is a third of Chicago’s — 5.5 percent through mid-July — yet Mayor Bill de Blasio has proposed adding 1,300 officers to the city’s 34,500-member force, the nation’s largest. Chicago has no such recourse.

Draining Resources

The Policemen’s Annuity and Benefit Fund of Chicago is only 27 percent funded, and beneficiaries outnumber active officers 13,320 to 12,020, according to its 2014 annual report.

“In normal times, they’d be fighting the battle for public safety,” said Ciccarone, who’s based in Chicago. “But with the pensions, so much of their capital will be swept away for services already performed.”

Chicago underfunded its four pensions by $7.3 billion from 2005 to 2014, according to bond documents. The retirement system was 36 percent funded as of December, compared with 61 percent in 2005.

The city suffered another setback Friday when a state court struck down a pension restructuring for municipal workers and laborers because it would force them to accept reduced benefits. The ruling could cost residents hundreds of millions more.

At the same time, legal settlement and judgment costs are soaring, from $82 million in 2011 to $199 million in 2013. About two-thirds is the result of police-related litigation.

Emanuel will submit his 2016 budget in mid-September, a month earlier than normal, to give the city council time to address the pension shortfall. Asked whether the mayor would push for more police officers, Adam Collins, a spokesman, said it “would be premature to discuss specifics.”

Illinois’s Democrat-led legislature passed a plan to lower Chicago’s extra payment next year to its police and fire retirement systems to $330 million from $550 million, but Republican Governor Bruce Rauner has yet to sign the measure.

The higher amount is roughly equal to the annual expense of keeping almost 4,000 cops on the street, the city said in a 2014 report.

Emanuel won re-election in April against Cook County Commissioner Jesus “Chuy” Garcia, who promised to hire 1,000 new officers. The mayor and Police Superintendent Garry McCarthy have resisted hiring in favor of paying current officers overtime. Those costs totaled about $100 million in each of the past three years.
This year’s increase in gun violence isn’t unique to Chicago. The number of homicides has jumped more than 30 percent midway through the year in Milwaukee, St. Louis and Houston.

Yet, Chicago’s slaughter has been incessant. During the Fourth of July weekend, 62 people were shot, nine fatally. One victim, 7-year-old Amari Brown, was killed by a bullet to his chest. Hundreds attended his funeral.

Chicago officials have been sensitive to the city’s image. Emanuel said he expressed his unhappiness to director Spike Lee about his upcoming movie “Chiraq,” which examines gun violence in the city.

“I was clear that I was not happy with the title,” Emanuel told the Chicago Tribune for an April story.
Emanuel and McCarthy point out that the 2014 murder total of 407 was the lowest since the mid-1960s. They blame the proliferation of guns, citing the police recovery of 3,500 illegal firearms this year.

“As much as I am an advocate for better gun-control laws and getting these guns off the street, that’s not going to dramatically reduce the violence,” said Ira Acree, a West Side pastor and chairman of Leaders Network, a community development organization. “There must be more interest and focus on reviving the economic engine here.”

That revival depends, in part, on Chicago stabilizing its fiscal affairs. While officials reject comparisons to formerly bankrupt Detroit, Rauner is blunt.

“Chicago is in deep, deep yogurt,” he said in April.

Violence continues to weigh down city finances. A 13-month-old was killed earlier this month after a shooting suspect fleeing the police ran him down during a chase in a South Side neighborhood. Last week, his mother said she’s suing the city and police.

Bloomberg

by Tim Jones

July 28, 2015 — 2:00 AM PDT

It doesn’t matter if Puerto Rico defaults, at least not to investors in the $3.6 trillion municipal market.
With the island just days away from potentially missing a Public Finance Corp. debt payment, state and local-government bonds are poised for the biggest monthly gain since January, Bank of America Merrill Lynch data show. The securities have returned 0.64 percent in July, outpacing the 0.45 percent increase for the broader U.S. fixed-income market.

Munis overcame a rocky start: After Puerto Rico Governor Alejandro Garcia Padilla said the island can’t afford its $72 billion debt load, individuals yanked $1.2 billion from muni funds in the week ended July 1, Lipper US Fund Flows data show. The money began flowing back in as munis rallied, showing the lack of fallout from the commonwealth’s long-brewing crisis.

“The municipal market is going to prove very resilient in the face of a default on the PFC bonds in Puerto Rico,” said Tom McLoughlin, head of municipal fixed-income at UBS Wealth Management Americas, which oversees $1.1 trillion. Investors have “psychologically ring-fenced Puerto Rico because we’ve been talking about it for two years.”

Solid Footing

For the muni market, the Federal Reserve and overseas turmoil were more powerful than Puerto Rico. State and local debt joined Treasuries in climbing this month on signs the U.S. central bank will raise interest rates gradually and as investors sought a haven from Greece’s debt crisis and China’s stock-market swings.

The monthly rally, munis’ first since March, comes as states and cities gain from rising real-estate prices and a growing economy. State and local tax revenue rose 4.2 percent during the first quarter from the year earlier, according to Census Bureau figures. Only one borrower rated by Moody’s Investors Service has defaulted since 2013.

“The overall municipal market is on solid footing,” Peter Hayes, the head of municipal debt at New York-based BlackRock Inc., the world’s biggest money manager, said in a blog post Thursday. “Creditworthiness is strong and attractive relative yields should continue to draw demand.”

That’s made Puerto Rico an outlier. After years of borrowing to pay bills as its population declined, officials by Sept. 1 may propose the biggest debt restructuring ever in the muni market. The Caribbean island may miss a bond payment for the first time on Aug. 1, when $58 million is due from the Public Finance agency.

Cutting Holdings

Investors had time to prepare. Puerto Rico was cut to junk in early 2014, and mutual funds have been paring their holdings of its bonds. Hedge funds now own more of the securities than mutual funds, according to estimates from Morningstar Inc. and Barclays Plc.

The shift has cushioned the impact as the island’s crisis escalated over the past month.
“The potential for wider market disruption seems fairly muted,” said BlackRock’s Hayes.

Yields on top-rated 10-year munis were 2.28 percent on Thursday, down from 2.38 percent at the start of the month. Seizing on a slide in borrowing costs, states and cities issued $36 billion of debt in July, keeping sales on pace this year to be the most since at least 2003, according to data compiled by Bloomberg.

Weathering Distress

Both are signs that the market is able to weather pockets of distress such as Puerto Rico and Chicago, whose credit rating has tumbled as it contends with soaring bills for its pension funds.

“What the market is getting better at is differentiating those risks,” said Lyle Fitterer, who oversees $38 billion as head of tax-exempt fixed-income at Wells Capital Management in Menomonee Falls, Wisconsin.
By some measures, state and local debt is still cheap.

Ten-year munis yield about the same as similar-maturity Treasuries, compared with 96 percent since the start of 2014, Bloomberg data show. A higher ratio signals state and city debt — which is exempt from federal income taxes — offers greater relative value.

For the highest earners, the yield on AAA 30-year munis is equivalent to about 5.8 percent on a taxable security, Bloomberg data show. Similarly dated corporate debt yields 4.09 percent, while 30-year Treasury bonds yield about 2.94 percent, according to data from Moody’s Investors Service and Bloomberg.

“Muni bonds on a tax-adjusted basis are still by far the best value out there,” said Krishna Memani, chief investment officer at OppenheimerFunds Inc., which oversees $24 billion in state and local-government debt.

Bloomberg

by Brian Chappatta

July 30, 2015 — 9:01 PM PDT Updated on July 31, 2015 — 5:48 AM PDT

Puerto Rico Governor Alejandro Garcia Padilla wants to negotiate with investors to reduce $72 billion of debt he says the island can’t afford.

The U.S. commonwealth has paid bondholders what they’re owed since it was ceded to the U.S. following the Spanish-American War. That may soon change.

Puerto Rico’s Public Finance Corp., which has sold $1 billion of debt, is likely to miss a $58 million payment due on Aug. 1. The bonds are repaid with appropriations allocated by the legislature. Faced with a budget shortfall, lawmakers didn’t provide enough money to service the debt.

While the securities are a small share of the island’s debt costs, failing to pay would be a warning shot to investors that officials aren’t afraid to default.

Here are some of the questions you may have, starting right at the very beginning:

Q: What is a default?

A: Investopedia.com defines default as “the failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment.” Moody’s Investors Service says a missed payment is a default.

Q: What is the Public Finance Corp.?

A: It’s a subsidiary of the Government Development Bank, which works on the island’s debt sales. It was created in 1984 to sell bonds on behalf of the commonwealth and its agencies. Most of the proceeds it has raised were used to balance Puerto Rico’s budget.

Q: Is a default definite?

A: While officials haven’t said for certain whether they’ll pay the interest and principal bill, it’s likely they won’t.

No money was transfered to the trustee in July to make the payment, and Victor Suarez, Garcia Padilla’s chief of staff, said on July 27 that the island doesn’t have the cash.

Investors appear to view a default as a near certain: PFC bonds maturing in 2031 traded on July 30 for 16 cents on the dollar.

Q: What happens if the PFC fails to pay?

A: Bondholders could sue, but they have few remedies. The legislature isn’t legally required to allocate the money. The commonwealth hasn’t guaranteed repayment and the PFC has no power over taxes to raise funds on its own. Nor are bondholders able to demand early repayment in the event of a default.

The PFC has until the end of business on Aug. 3 to make the payment because the first day of August is a Saturday.

Q: What does a default mean for holders of other Puerto Rico bonds?

Analysts and investors say it may cause Puerto Rico securities to lose value by casting doubt on the government’s willingness to pay its other debts. An index of Puerto Rico securities slid this week to a six-year low.

Q: Why won’t Puerto Rico just find the money, given that it’s not expected to default on other debt payments due the same day?

A: Commonwealth officials say the island’s available cash is limited. It’s delayed tax refunds, suspended payments to some suppliers and borrowed from its insurance agencies to help preserve cash to continue making payroll and support essential government services.

The PFC bonds have the weakest legal protections, so the island will suffer fewer pitfalls from a default on those bonds.

Q: Which firms are set to receive interest payments on Aug. 1?

A: OppenheimerFunds Inc., Franklin Resources Inc. and Nuveen Asset Management are among those that held PFC bonds as of June 30.

Q: What is the federal government doing in response to Puerto Rico’s debt crisis?

A: Treasury Secretary Jacob J. Lew said July 29 that there isn’t any discussion of a federal bailout. Lew, the White House and the Federal Reserve have urged Congress to work with commonwealth officials. Bills to allow some Puerto Rico agencies to file for Chapter 9 bankruptcy, introduced in both chambers, haven’t advanced so far because of a lack of support from Republican leaders.

Q: Why can’t Puerto Rico turn to U.S. bankruptcy court to lower its debts, as Detroit and other municipalities have?

A: Like U.S. states, Puerto Rico’s central government isn’t eligible for Chapter 9 bankruptcy protection, nor would it be under the legislation proposed in Congress. However, the bankruptcy code never gave Puerto Rico that option for its agencies or publicly run corporations, either.

Q: How much debt does Puerto Rico have?

A: Puerto Rico and its agencies owe a combined $72 billion. That includes $13 billion of general-obligation debt, which Puerto Rico’s constitution says must be repaid before other expenses, and another $5.5 billion guaranteed by the commonwealth.

There is also $15 billion of debt payable from island sales taxes. Other agencies, such as the Puerto Rico Electric Power Authority, the government power company, have also sold bonds.

Q: Who holds Puerto Rico’s debt?

A: Hedge funds hold almost $22 billion, while local investors on the island have about $20 billion. More than half of U.S. mutual funds that focus on municipal securities have exposure to Puerto Rico debt, for a combined $10 billion.

Q: Why can’t Puerto Rico and its localities repay the entire $72 billion?

A: The commonwealth and its agencies have borrowed for years to paper over budget shortfalls, with the expectation that the economy would improve and the need to keep relying on debt would disappear. It didn’t. Puerto Rico’s economy has declined every year but one since 2006 and, with a population exodus for the U.S. mainland, there’s fewer people around to pay taxes needed to finance the debt.

At the same time, health care and retirement expenses are projected to increase. Its employee-retirement system is also deeply underfunded.

Q: What is Puerto Rico doing now?

A: Island officials are working on a debt-restructuring plan, to be finished by Sept. 1, and a five-year fiscal plan to improve the economy and balance the budget. Officials have said it’s premature to say by how much it will seek to reduce its debt and which securities could be affected.

Bloomberg

by Michelle Kaske

July 31, 2015 — 9:51 AM PDT

Economists working for a group of hedge funds and other firms with major investments in Puerto Rican bonds said Sunday night that the government could solve its debt crisis largely by stepping up tax collections and obtaining additional financing over the next two years.

The message of sustainability is sharply at odds with the recent announcement by Puerto Rico’s governor, Alejandro García Padilla, that the commonwealth’s debt is “unpayable.”

The face value of the territory’s outstanding municipal bonds is about $72 billion. In addition, it has about $40 billion of unfunded pension obligations to public workers on the island, and other unpaid bills. The governor is seeking a moratorium on bond payments.

“There may be an issue of liquidity in the short term,” in Puerto Rico, “but the debt itself, in global terms, is sustainable,” said Claudio Loser, the chief executive of Centennial Group Latin America, which will officially release its report Monday morning. The consulting firm, based in Washington, was hired several months ago by the group of hedge funds and other investment firms to analyze Puerto Rico’s economy and finances.

Mr. Loser said he believed that Puerto Rico would need short-term financing of about $2.5 billion to get through 2016 safely. That amount, he said, would be used to pay the commonwealth’s current overdue bills to vendors, make scheduled payments on existing debt and finance a budget deficit projected to be less than $500 million.

The economists have decades of experience with the International Monetary Fund.

The governor based his analysis on a study by another group of sovereign-debt experts, known as the Krueger Report for its lead author Anne O. Krueger, also an economist with a background at the I.M.F.

As a result of that report, the governor has appointed a high-level task force to work out a five-year program of structural economic changes on the island. Senior economic figures in his administration have said the moratorium might last for five years, or even longer.

In a response to the report Sunday night, Víctor Suárez, chief of staff to Gov. García Padilla said, “The simple fact remains that extreme austerity placed on Puerto Ricans with less than a comprehensive effort from all stakeholders is not a viable solution for an economy already on its knees.”

Mr. Loser said, “We feel that the moratorium is certainly costly and not a good idea.” He called instead for an “orderly and consensual discussion” on ways to resolve the debt obligations.

While the I.M.F. is generally associated with bringing fiscal austerity measures to countries in financial trouble, Mr. Loser said his team was not calling for a lot more belt-tightening on the island.

In a briefing for journalists Sunday night, another economist, Jose Fajgenbaum, said that much of the belt-tightening necessary had already been done.

“The deficit has already been reduced,” he said, adding that the governor’s own analysis also showed that Puerto Rico might even achieve a budget surplus by 2017. The commonwealth has not had a structural budget surplus in more than a decade. Much of its existing debt was incurred by issuing bonds to pay previous debt and to plug budget holes.

The economists also said they were not suggesting that Puerto Rico ought to impose any more tax increases on residents who were already paying the taxes they owe. Mr. Loser said the commonwealth was managing to collect far less of the taxes due than the 50 states, and that it would not have to increase tax rates at all if it could capture what residents are now supposed to be paying.

The advisers also argued that Puerto Rico could improve its finances by allowing for-profit companies to operate its public works. The commonwealth had already contracted with a Mexican firm to operate its largest airport, and turned one of its highways into a toll road.

“If anybody would say that we are promoting fire sales, we are totally against that,” Mr. Loser said. “I want to make that clear.”

The analysts declined to provide details about whether they thought that all of Puerto Rico’s debt was sustainable, or whether the commonwealth ought to default on certain types of debt while continuing to pay other types. Puerto Rico has issued many different types of bonds, including general-obligation bonds and revenue bonds.

“What we have said is there is no need for a general restructuring of debt for the government,” said Mr. Loser. “We are not talking about specific issues.”

He said the complex details of Puerto Rico’s debt structure were outside the scope of the report.

The study was commissioned by a group of hedge funds and other investment firms known as the Ad Hoc Group, which includes Fir Tree Partners, Brigade Capital Management, Monarch Alternative Capital and Davidson Kempner.

The Ad Hoc Group owns about $5.2 billion of debt, mostly general-obligation bonds and other bonds that are guaranteed by the central government.

Hedge funds and other investment firms that own large amounts of Puerto Rico’s debt have been scrambling since the governor announced late last month that he would seek a “negotiated moratorium” on the commonwealth’s debts.

The announcement caught many of these so-called distressed investors by surprise. They had been buying up billions of dollars of the island’s bonds over the last two years at deep discounts, betting that fears about a Puerto Rico default or restructuring were overblown.

Some of them also offered earlier this year to loan Puerto Rico about $2 billion, to help get the commonwealth through another year of its perennial budget shortfalls. But the government declined those offers, saying the terms were too onerous.

The island’s financial problems deepened over the last year, particularly after the commonwealth’s credit ratings fell into junk territory. Many of the mutual funds that had previously held Puerto Rico’s bonds then sold them, and the distressed-debt investors acquired them at prices far below what the sellers initially paid.

They hoped for a profit but so far have suffered losses. Some of their holdings fell by nearly 17 percent in the two days after Mr. García Padilla first discussed a debt moratorium in an interview with The New York Times.

Privately, some hedge fund managers have expressed frustration that Mr. García Padilla’s administration and his army of legal and financial advisers have been able to convince many people that only drastic measures like a broad restructuring can save Puerto Rico.

THE NEW YORK TIMES

By MARY WILLIAMS WALSH and MICHAEL CORKERY

JULY 26, 2015

CHICAGO — A judge on Wednesday denied Chicago’s request to keep a pension reform law in effect while the city appeals a court ruling that voided the law on constitutional grounds.

Cook County Circuit Court Judge Rita Novak, who tossed out the law last Friday, rejected Chicago’s motion to suspend her ruling until the Illinois Supreme Court ultimately decides the law’s fate.

Novak’s latest ruling means that unless the high court temporarily keeps the law in place, the city’s municipal and laborers’ retirement systems must refund higher contributions that the affected workers were required to make since the law took effect on Jan. 1. Retirees who received lower cost-of-living increases mandated by the law would also be owed money.

The law required Chicago and affected workers to increase their pension contributions and replaces an automatic 3 percent annual cost-of-living increase for retirees with one tied to inflation. Those increases are also skipped in some years.

The cash-strapped city is betting that the state supreme court will overturn Novak’s ruling, which rejected Chicago’s argument that the 2014 law results in a net benefit because it will save the retirement systems from insolvency.

The high court in May found public sector workers have iron-clad protection in the Illinois Constitution against pension benefit cuts. That decision came in litigation over a 2013 law that reduced benefits for workers in state retirement systems.

By REUTERS

JULY 29, 2015, 5:58 P.M. E.D.T.

(Reporting By Karen Pierog; Editing by Grant McCool)

NEW YORK — Puerto Rico on Friday made a payment on debt owed by its Government Development Bank, but the U.S. territory may still be short of the funds needed to pay all of its imminent obligations.

“The GDB will make the $169 million payment for the debt service on its bonds today,” GDB President Melba Acosta said in a statement released Friday. A payment on that debt was due to be made Saturday Aug. 1.

Puerto Rico, however, is expected to default on a $58 million payment on Public Finance Corporation (PFC) bonds also due Saturday in what is seen as possibly just the first step in the largest U.S. municipal debt restructuring in history.

Whether Puerto Rico defaults may not be known until Monday. According to PFC documents, a payment falling on a weekend can be made on the next business day, which would be Monday, Aug. 3.

“What could surprise investors is when they actually hear the word ‘default,’ and that a default occurred,” said Lyle Fitterer, head of tax-exempt fixed income at Wells Capital Management, which holds mostly insured Puerto Rico debt.

“The immediate reaction might be a slight sell-off in the marketplace because I think people will start to anticipate, ‘OK, what’s the next series of debt they’re going to default on?'”

Puerto Rico Governor Alejandro Garcia Padilla shocked investors in June when he said the island’s debt, totaling $72 billion, was unpayable and required restructuring.

The possible default on debt due this weekend would mark the first missed debt payment. According to a 2014 bond offering statement, Puerto Rico has never defaulted on the payment of principal or interest of debt.

A non-payment by Puerto Rico would be the most notable since Detroit, which had about $8 billion of bonds, defaulted on $1.45 billion of insured pension bonds before it filed for bankruptcy in 2013.

Victor Suarez, Puerto Rico’s chief of staff, has said the island will do “everything that is possible” to ensure that the $169.6 million Government Development Bank (GDB) debt payment due Aug. 1 is paid.

The commonwealth is expected to send that payment to the trustee on Friday for payment on Monday, a source familiar with the situation said on Friday.

John Miller, co-head of fixed income for Nuveen Asset Management, had said it would be positive for the short term if Puerto Rico made the GDB payment. But he said if it failed to pay, it could be a negative sign for debt such as its general obligation debt.

Suarez said on Monday that the commonwealth did not have the current cash flow to pay the PFC bonds.

“I bought my (PFC) bonds with the anticipation of them defaulting,” said Ben Eiler, managing partner at First Southern Securities in Puerto Rico. “They’re going to restructure in some form or fashion, and I believe that restructure is going to be higher than that level.”

The likelihood of a restructuring is leading investors to wonder how Puerto Rico will prioritize debt payments versus citizens’ needs.

“We’re beginning to discern a … mindset on the island that the government is weighing the interest of investors against the economic interest of the island,” said Thomas McLoughlin, UBS chief investment officer wealth management research.

DEFAULT DEBATE

Suarez told reporters in San Juan on Wednesday that a missed payment would not constitute default. Bond documents state that Puerto Rico’s legislature is not legally bound to appropriate the funds for payment.

However, credit rating agency Standard & Poor’s said it would view non-payment of rated PFC bonds on their due date as a default. Moody’s said it would also consider it a default.

“It (would be) the first failure by the government to pay on a debt to public investors and indicates the weakness of the government’s ability and willingness to pay,” said Timothy Blake, managing director of Moody’s Public Finance Group.

A default could open the door to a fight with investors, although that may be an uphill battle.

“Our reading of the legal documents is that bondholders have very limited remedies,” said David Hitchcock, an analyst at S&P. “Puerto Rico could potentially just ignore the bondholders.”

Officials may give information after a scheduled meeting by a working group created by the governor which was ongoing.

“It’s going to be a long process, a very long, drawn-out process,” said Michael Comes, portfolio manager and vice president of research at Cumberland Advisors in Florida, which holds insured Puerto Rico debt. “It’s kind of like watching the Titanic sink.”

By REUTERS

JULY 31, 2015, 10:49 A.M. E.D.T.

(Additional reporting by Karen Pierog in Chicago and a contributor in San Juan; editing by Clive McKeef and Dan Grebler)

Debt-ridden Puerto Rico faces its next big test in just a few days, when $58 million in bond payments come due — and already the government is mounting a defense against the possibility that it will not have the cash.

Government advisers on the island have been sending memos to the news media over the last several days suggesting that even if the government cannot make the payments, it will not technically be in default — something Puerto Rico is desperately trying to avoid. A default would have enormous legal and financial consequences, putting the United States commonwealth in the uncomfortable company of Greece.

The payments coming due are on so-called moral obligation bonds, which the government can issue without any legal requirement to repay.

Despite the advisories from Puerto Rican officials, however, independent financial experts said even a small nonpayment, whether it is technically a bond default or not, would have major reverberations. Failing to pay the moral obligation debt would taint the credibility of all other types of Puerto Rican debt, they said, which in turn would drive down the value of other bonds and raise the cost of whatever money the commonwealth might still be able to borrow at that point.

“This may be a little bit like ‘beauty is in the eye of the beholder,’ ” said James E. Spiotto, a specialist in Chapter 9 municipal bankruptcy law, who is not advising Puerto Rico or any of its creditors. He said Puerto Rico was correct in saying that it had no legal obligation to pay the bonds. But, he added: “From a bondholder’s perspective, there was a promise to pay, a moral obligation, and that promise was not lived up to.” Therefore, he said, the market would say that Puerto Rico was in default, even if bondholders could not do anything about it.

Moral obligation bonds were created in the 1960s by John N. Mitchell, who later became President Richard Nixon’s attorney general. Mr. Mitchell devised them at the behest of Nelson Rockefeller, who was then governor of New York.

It was the failure of a moral obligation bond in New York in 1975 that ushered in the financial crisis that engulfed the city that year.

Puerto Rico now seems to be veering down a similar path. The commonwealth is facing overall bond-related debts of $72 billion and an estimated $40 billion of unfunded retirement benefits that it owes its public workers. In June, Gov. Alejandro García Padilla began calling the debts “unpayable” and advocating a “negotiated moratorium” on payments.

Since then, a working group created by the governor has been recommending sweeping changes in Puerto Rico’s economy — such as an exemption from the federal minimum wage and lower welfare payments. An investor group issued a report this week that said that the commonwealth could climb out of its crisis by raising its tax collection rate — which it said was lower than the average of any of the 50 states — and obtaining bridge loans for the next two years.

So far, the United States government has declined to come to Puerto Rico’s rescue. Jacob J. Lew, the Treasury secretary, said in a letter on Tuesday to Senator Orrin G. Hatch, chairman of the Senate Finance Committee, that there should be no bailout of Puerto Rico but that its financial situation was “urgent” and Congress should consider some orderly process to restructure the island’s “unsustainable liabilities.” Under current laws, Puerto Rico has no access to federal bankruptcy courts.

Despite the governor’s pronouncement in June, Puerto Rico has continued making bond payments on time, and officials have even said the commonwealth might borrow another $500 million.

“They’re trying to pay their debts, but they don’t have enough cash flow,” Mr. Spiotto said. “It’s like musical chairs. Ultimately, the music is going to stop, and there’s going to be somebody who doesn’t have a chair.”

The official deadline for payment of the $58 million is Aug. 1, a Saturday. If the first nonpayment occurs on Monday, the first business day after the deadline, the losers will be the holders of bonds issued by Puerto Rico’s Public Finance Corporation.

The corporation, created in 1984 to help Puerto Rico finance various governmental activities, has a little more than $1 billion of bonds outstanding. It cannot raise taxes, and instead relies on the legislature to appropriate enough money every year to repay the debts as they come due.

But when the legislature completed the current fiscal year’s budget, no such appropriation was made. As a result, the corporation did not transfer the payment to the trustee who would, in turn, pay the bondholders.

Independent legal experts confirmed that moral obligation bondholders had no way of enforcing their claims. But they stopped short of saying that Puerto Rico would not be in default.

“It is extremely rare for a government to consider not paying” moral obligation bonds, said Timothy Blake, a managing director at Moody’s Investors Service. “Most governments would view that as very negative to their reputation in the capital markets.”

Rhode Island considered not repaying a $75 million moral obligation bond in 2013, after the project being financed — a video game company led by Curt Schilling, the former Boston Red Sox pitcher — went bankrupt. After extensive debate, Rhode Island decided to keep paying the bondholders to protect its credit rating.

States that issue moral obligation bonds often do so because their constitutions strictly limit the issuance of general obligation bonds, which an entity is legally required to repay. Bondholders could, for example, seek a court-ordered tax increase if that was what it took to get their money.

Because the general obligation bond pledge is so powerful, states have also made it hard to issue too many of the bonds. In many states, they cannot be issued without approval by the voters.

That is why Mr. Mitchell came up with the moral obligation bond. At the time he was seeking to help Governor Rockefeller, who was trying to fight the loss of manufacturing jobs by mounting huge building projects and did not want to go through the unpredictable process of letting voters approve general obligation bonds.

Mr. Blake said lawmakers usually take their moral obligation bonds seriously and appropriate the money each year. But in rare cases where they do not, the bondholders have no way of forcing them.

“The losses can be very severe,” he said. Moody’s has assigned the bonds of Puerto Rico’s Public Finance Corporation the rating of Ca, meaning not only that default is likely but also that any recovery will be small. It is Moody’s second-lowest rating.

THE NEW YORK TIMES

By MARY WILLIAMS WALSH

JULY 29, 2015

Puerto Rico is in the throes of a fiscal crisis and Congress appears unwilling to help. House and Senate legislation that would extend Chapter 9 protection to municipalities in Puerto Rico is opposed by the Republican majority, even though it would not cost US taxpayers a penny.

Opposition to the legislation is based in part in a concern for bond investors. Congressman Trent Franks (R-AZ) told Bloomberg Politics that investors relied on the fact that infrastructure investments on the island were protected from the threat of bankruptcy, and that changing the bankruptcy rules in the middle game would be unfair.

However, the history of municipal bonds suggests otherwise. In the late 1920s and early 1930s, thousands of US municipalities defaulted on their bonds. The problem started in Florida, where local governments overbuilt infrastructure. With the onset of the Depression, municipal defaults spread to many other states, with especially high concentrations in North Carolina, New Jersey, Michigan, Ohio and Arkansas.

There was no municipal bankruptcy law at the time, giving rise to uncertainty over creditor rights and complex litigation. In 1934, Congress addressed the situation by adding Chapter 9 to the bankruptcy code, creating a mechanism for municipal debt adjustment. The new law passed by a wide 45-28 margin in the Senate and its enactment was applauded by municipal finance experts.

The idea that the lack a legal bankruptcy mechanism protects bond investors from default risk is clearly refuted by the Depression experience, as well as by the more recent default by Harrisburg, Pennsylvania — a state that explicitly forbid a Chapter 9 filing for the city. In fact, Puerto Rico bonds have been paying substantially higher coupons than US Treasuries for years – despite their favorable tax treatment – suggesting that investors were aware of and demanding compensation for default risk.

Further, the 1934 law changed the rules for municipal bondholders in the 48 states, yet it was welcomed by market participants and almost no one would advocate repealing it today. Although cities in Puerto Rico and other U.S. territories had outstanding bonds at the time, none appear to have been in default, perhaps explaining why the 1934 legislation was not extended to US possessions.

A better criticism of legislation extending Chapter 9 to Puerto Rico is that it is insufficient. If the bill were enacted, the commonwealth government would not be able to declare bankruptcy. Further, as noted bond commentator Kristi Culpepper explains, public corporation debt backed by service charges and other “special revenues” cannot be adjusted in a municipal bankruptcy process, leaving revenue bonds issued by some publicly owned corporations out of the process. But Chapter 9 could be applied to some classes of public corporation debt as well as the obligations of Puerto Rico’s 78 “municipios” (local governments). As I reported in The Bond Buyer earlier this year, a number of these municipios are flat broke and would thus be eligible for the Chapter 9 process.

While Culpepper and congressional Republicans are correct in arguing that Chapter 9 extension is an incomplete solution to Puerto Rico’s debt problem, it is far better than the prevailing alternative of no federal action whatsoever.

It thus appears that the only real reason for not extending Chapter 9 to Puerto Rico is investor protection – but just who are these investors? Much of the commonwealth’s debt has been snapped up by hedge funds at steep discounts. If the funds can compel Puerto Rico public sector entities to service their bonds on time and in full, they will make substantial profits. One out of every five dollars of this profit will go to hedge fund managers, who are taxed at lower capital gains rates. Securities regulations have helped hedge funds and other Wall Street institutions corner the market on Puerto Rico bonds by prohibiting trades of less than $100,000 for any newly issued securities. With this minimum in place, individual investors are effectively barred from buying commonwealth bonds.

Since the source of repayment for government bonds is often tax revenue, Wall Street interests are really trying to maximize their take from taxpayers – and not just taxpayers in Puerto Rico. A very large proportion of Puerto Rico government revenue comes from taxpayers in the fifty states.

Public sector entities in Puerto Rico receive over $7.2 billion in federal grants annually. This amount represents over 10% of the Commonwealth’s GNP and 22% of total government spending. I have uploaded a list of recipient entities and amounts for FY 2013 here.

Further, according to USASpending.gov, the US federal government spent a total of $21.3 billion in Puerto Rico in fiscal year 2014, while the IRS reports that commonwealth residents and corporations contributed just $3.6 billion in federal tax revenue during the same year. The difference between these two figures – net transfers from taxpayers in the fifty states – represents about a quarter of Puerto Rico’s GNP.

Thus, Puerto Rico and its governments derive much of their revenue from US taxpayers. Although federal grants are always made for a specific purpose, government revenues and expenditures are fungible. Governments receiving federal support can shift their own-source revenue away from federally subsidized priorities and towards other purposes – such as enriching hedge fund managers.

By denying the Chapter 9 option to Puerto Rico municipalities and public corporations, congressional Republicans might well be doing a disservice to the middle class taxpayers they claim to represent.

By Marc Joffe, The Fiscal Times

July 28, 2015

Mayor Rahm Emanuel has warned Chicago homeowners that property tax bills could “explode” without budget relief from Springfield. The Chicago Public Schools are facing massive budget cuts that would force hundreds of layoffs. Residents across the city are paying higher fees for water, vehicle stickers, cable TV and more.

But there is one group that looks at Chicago’s financial mess and sees a golden opportunity: the affluent individuals, investment funds and other global companies that buy the city’s debt.

Some city bonds sold this month pay returns on par with what investors earn on lucrative but risky junk bonds sold by distressed oil and gas companies. Unlike corporate bonds, the city’s debt is guaranteed by an unlimited flow of tax dollars from Chicago residents.

The forces making Chicago bonds a hot commodity are as old as the free market. As the risk grows that the city will default on its debt, investors demand higher returns. Some risk-averse buyers avoid Chicago debt altogether.

But to investors who can tolerate the risk of default – or think it is overstated – Chicago bonds can look tantalizingly lucrative.

Those investors are betting that Chicago residents will ultimately shoulder the cost of the city’s massive borrowing, whether by enduring service cuts, by indebting future generations or by paying significantly higher property taxes.

The investment banking arm of the London-based bank Barclays declared in a research report last month that Chicago city bonds “present attractive strategic opportunities,” reasoning that city officials could increase sales and property taxes.

“Even in the worst-case scenario, the median tax bill would have to increase only 15 percent (or $756) to address the pension issue fully next year,” the report said.

Chicago debt is being marketed not only to investors in government bonds but also to some wealthy speculators who more typically gravitate to distressed companies. One analyst told the Tribune he is touting Chicago to his hedge fund clients as an investment less risky than troubled energy companies — and just as profitable.

These investors’ gain is Chicagoans’ loss. This month’s two-part $1.1 billion bond deal will cost the city roughly $150 million more in interest in today’s dollars than if the city still carried the A-level credit rating it had less than two years ago, the Tribune calculated.

Chicago Public Schools is likely to pay similar penalties if it follows through on plans to borrow up to $1.2 billion later this year. Some analysts have been touting CPS bonds as well, noting that while the schools’ financial situation is more dire, the district’s fate is largely dependent on the city that controls it.

Concord, Mass.-based Municipal Market Analytics accurately predicted in April that Chicago school bonds would drop to junk status but encouraged buyers to consider them anyway.

“The situation in the city will compromise the ability to keep quality schools, to keep the streets clean,” said partner Matt Fabian. “But for investors who can stomach the ups and downs that are probably coming for Chicago, (the bonds) give an attractive amount of income.”

The three major debt rating agencies have differing opinions on the city’s future, with Moody’s Investors Service giving the city a junk status rating and a 5 percent chance of defaulting on its loans within three years. Fitch Ratings and Standard & Poor’s maintain a low investment-grade rating of BBB+.

All three agencies cite Chicago’s estimated $20 billion in pension debt, the result of many years in which the city put off paying its full share of worker pensions. A Cook County circuit court judge on Friday struck down Emanuel’s plan to scale back benefits for some city workers.

Chicago has more than $8 billion in outstanding long-term bonds, the result of years of ambitious borrowing that included loans to pay for questionable projects and short-lived expenditures.

The city technically lacks the ability to default on that debt. Illinois, like about half of states, does not allow cities or school districts to declare bankruptcy, and a bill to change that stalled in committee this year.

Still, Chicago’s poor ratings put the city’s debt off limits for some firms. Sarasota, Fla.-based Cumberland Advisors, for example, does not buy debt rated below A.

Some less conservative investors see potential for high returns, especially if they believe the risk of default is overstated.

“Most people think it’s not a triple B credit but it’s really in the single A category,” said Jon Barasch, director of municipal evaluations at New York City-based Interactive Data, a firm that evaluates municipal bonds.

The process that sets interest rates is far from scientific. The bank underwriting the bond sale surveys investors to gauge how much interest they will demand, then works with city or school finance officials to determine what they are willing to pay in interest.

The people reaping the benefits of Chicago and CPS’ high interest payments are mostly individual investors who buy bonds either directly or through funds that invest their money. Bond dealers also buy the debt and resell it to investors.

To help local governments raise money for long-term projects, the federal government doesn’t collect taxes on most municipal bonds. As a result, the bonds appeal particularly to well-off individuals in higher tax brackets who accept low returns in exchange for a chance to preserve their wealth and reduce risk.

The $347 million in tax-exempt bonds Chicago sold July 16 offered investors yields of up to 5.69 percent — almost unheard of for tax-backed debt issued by a city.

Buyers of those bonds stand to earn at least 50 percent more than those who invested in Philadelphia bonds issued this month.

The other part of Chicago’s deal — $743 million in taxable bonds priced July 15 — caused a stir beyond the typical market for government debt.

Because officials wanted to use borrowed money to cover short-lived expenditures and close budget gaps, Chicago had to give up the federal tax exemption and offer yields approaching 8 percent — rates more typical of the corporate sector — to compensate for what investors would lose to taxes.

That put Chicago in the same ballpark as for-profit companies — a group considered far more likely to default — and even then the city’s debt stood out as lucrative. The rate of return on Chicago’s taxable bonds is only slightly lower than the Barclays U.S. corporate high-yield bond index, a benchmark rate of return for companies rated junk status.

“You have a very attractive interest rate for the potential risk,” said Triet Nguyen, a managing director at New York City-based NewOak, an independent research and advisory firm that focuses on corporate and municipal debt.

Nguyen said he recommended Chicago taxable bonds to his hedge funds clients. His reasoning: They could earn returns more typical of junk bonds issued by troubled oil and gas companies — at much lower risk.

“I would take the credit of the city of Chicago over any of the smaller energy companies any day,” said Nguyen, who lives in suburban Lake Forest. “They can certainly go bankrupt at any time, and Chicago at this point doesn’t even have that option.”

The additional $150 million Chicago can expect to pay through 2042 on the bonds issued this month as a result of its deteriorating credit comes on top of a similar penalty on bonds issued in May. That $674 million tax-exempt deal will cost $70 million more — in today’s dollars — over the life of the debt than if the city had maintained the A3 rating from Moody’s Investors Service that it carried as recently as February 2014, according to the Tribune’s calculations. The city’s 2015 budget is $7.3 billion.

Emanuel, who already has increased a variety of city fees, said in a plan released in March while he was running for re-election that “property tax bills will explode next year” in the absence of comprehensive pension relief from the Illinois legislature.

As with other cities, Chicago’s debt contracts pledge that officials will increase property taxes “without limitation” if the city can’t find money elsewhere to make debt payments.

Wells Capital Management, an investment management firm under the umbrella of San Francisco-based Wells Fargo, has increased its investment in debt from the city and CPS over the past year.

“We believe the city has the ability to raise revenue and cut expenses,” said Wells Capital portfolio manager Lyle Fitterer. “If you are a citizen within the city you don’t necessarily want to hear that.”

The Chicago Tribune

July 26, 2015

By Heather Gillers

hgillers@tribpub.com

Twitter @hgillers

Copyright © 2015, Chicago Tribune

The Brearley School is poised to join the borrowing boom among New York City’s elite prep schools.
The all-girls academy, whose alumnae include Caroline Kennedy and actress Kyra Sedgwick, won approval Tuesday from a city agency to sell $50 million of tax-exempt bonds to help finance an expansion on Manhattan’s Upper East Side.

New York’s private schools are moving toward selling record amounts of debt this year as endowments swell and interest rates are at generational lows. They’re replacing decades-old buildings and dangling the latest amenities to draw the children of the wealthiest, mirroring what’s been happening on college campuses. Brearley’s tuition is $43,680 a year.

“Money is available,” said Richard Anderson, president of the New York Building Congress, a construction trade group that’s been tracking spending by schools. “If Columbia and NYU can raise money, then Collegiate and Packer and Brearley and all these other places can raise money, too.”

Bond sales by New York’s private and religious schools may exceed the almost $280 million issued in 2002, the highest on record, according to data compiled by Bloomberg.

Riverdale Country School, Saint Ann’s School and La Scuola d’Italia Guglielmo Marconi have received permission to borrow a total of almost $150 million through Build NYC Resource Corp., the economic-development unit that authorized Brearley’s sale. Ethical Culture Fieldston School and Packer Collegiate Institute have already sold a combined $71.4 million of debt this year.

Half-Century Low

The schools are seizing on municipal borrowing costs holding close to a five-decade low. When Fieldston sold $49.4 million bonds in April, it paid yields of 2.8 percent on 10-year tax-exempt debt, about 0.7 percent more than benchmark securities.

Brearley, founded in 1884, plans to spend $107.5 million to raze three tenements and replace them with an eight-to-10 story facility. The building will house its lower school, science and music departments, an auditorium and a gym, according to its application with the city. With 700 students from kindergarten through the 12th grade, Brearley says it’s outgrown its building on East 83rd Street, which was constructed in 1929 for 440.

“For the past 20 years, Brearley has been thoughtfully searching for the best way to add badly-needed educational space to accommodate its student body,” Rahul Tripathi, the school’s chief financial officer, said in an e-mailed response to questions.

Schools Repay

The prep schools are responsible for repaying investors, who are willing to accept lower yields because the income isn’t taxed. Build NYC receives fees for arranging the sales. It isn’t on the hook if they default.

Like other New York private schools, Brearley has ties to Wall Street. Ellen Jewett, a former Goldman Sachs Group Inc. public finance banker, is president of the board. Other members include Samara Epstein Cohen, head of financial instruments at BlackRock Inc.

In addition to the bond money, Brearley plans to use $37.5 million from a capital campaign and $20 million from its $132.5 million endowment to fund construction, which is projected to start in Feb. 2017.

The school bought three tenements a block away on East End Avenue in May 2010 and will demolish them to make room for the new facility.

In April, Brearley reached a settlement with 15 rent-stabilized tenants who agreed to leave their apartments, said David Rozenholc, a lawyer who represented them. Rozenholc declined to provide the size of the settlement, citing a confidentiality agreement.

“It involved a very substantial amount of money that they were comfortable doing, but they were fair,” Rozenholc said. “The tenants can go on with the rest of their lives and the Brearley School can build the Brearley School.”

Bloomberg

by Martin Z Braun

July 20, 2015 — 9:01 PM PDT Updated on July 21, 2015 — 6:57 AM PDT

As California risked being locked out of the credit markets during the recession, officials sought federal loan guarantees to avert deep spending cuts that threatened to cascade through the biggest U.S. state.
Washington turned them away.

Six years later, as a Puerto Rico agency veers toward a default as soon as Aug. 1, federal officials in the nation’s capital have echoed a refrain heard during recent state and local fiscal crises: Fix the problem on your own.

President Barack Obama’s administration and the Federal Reserve have said it’s up to Congress to decide how to assist the island as it struggles with $72 billion of debt. Yet on Capitol Hill, Puerto Rico’s push to allow some agencies to file for bankruptcy has stalled. Efforts to find a Republican to co-sponsor the legislation haven’t borne fruit.

“Federal authorities seem to be taking the position that the only possible options are the extremes of a bailout or nothing at all,” said Arturo Estrella, a former Federal Reserve Bank of New York economist.

Puerto Rico has been moving toward the largest restructuring ever in the $3.6 trillion municipal-bond market since last month, when Governor Alejandro Garcia Padilla said the commonwealth can’t afford to pay its debts. The securities have tumbled amid speculation over how much investors stand to lose as his administration moves to draw up a restructuring proposal by Sept. 1.

Default Probability

The island may miss a $36.3 million principal payment on Public Finance Corp. bonds due on Aug. 1 because the legislature didn’t allocate the money. Standard & Poor’s called a default on the securities a “virtual certainty,” while Moody’s Investors Service said the probability of a Puerto Rico default is approaching 100 percent. The Puerto Rico Electric Power Authority, the island’s main power provider, is also in talks with creditors over its $9 billion debt load.

Investors shouldn’t expect any new help from Washington, said Daniel Solender, who oversees $17 billion as head of municipal debt at Lord Abbett & Co. in Jersey City, New Jersey.

“There’s no real sign of any move towards helping them other than conversations,” Solender said. “But that’s not solving the problem.”

Federal Help

Puerto Rico has more debt than any state but California and New York from years of borrowing as the economy struggled to grow and residents left for the U.S. mainland. Its bonds are widely held by American investors and mutual funds because they’re exempt from income taxes and pay higher yields than other securities.

Federal intervention wouldn’t be unprecedented. Washington helped to rescue New York in the 1970s, and it put a control board in charge of the District of Columbia’s finances in the 1990s.

So far, the U.S. hasn’t taken a central role. The Treasury Department has been holding discussions with Puerto Rico for more than two years, according to Melba Acosta, president of the Government Development Bank, which works on the island’s debt sales. Treasury officials have pushed the commonwealth to come up with a long-term plan to steady its finances and back giving agencies the power to file for bankruptcy, just as U.S. cities and government-run corporations can.

Ignoring Pleas

Washington has rarely shown interest in rescuing local governments.

Officials declined to provide aid to Jefferson County, Alabama, as soaring debt bills pushed it toward bankruptcy after credit markets seized up. Cities including Philadelphia unsuccessfully sought a share of the bailout money for Wall Street banks, and a 2009 request by then California Treasurer Bill Lockyer for it to backstop short-term debt was rebuffed.

When Detroit’s record bankruptcy threatened to slash workers’ retirement checks, even then U.S. Senator Carl Levin, a Michigan Democrat, said the city shouldn’t receive a bailout.

Estrella, the former New York Fed economist, said the steps Washington has taken so far have done little to help.

The advice “that the White House said the Treasury has shared with Puerto Rico officials over the last year or two has clearly been ineffectual,” he said.

There’s been no will to make helping Puerto Rico a priority in Congress, said Brandon Barford, a partner at Beacon Policy Advisors LLC. He said the Treasury can’t provide a loan guarantee through the Federal Financing Bank without approval from Congress.

Feeling Abandoned

The Obama administration and key Democrats have supported extending Chapter 9 bankruptcy protection to Puerto Rico. The legislation has yet to advance, and Republicans including Representative Darrell Issa have questioned whether changing the law is fair to investors who thought their bonds were exempt from the risk of being adjusted in court.

Alberto Baco Bague, Puerto Rico’s secretary of economic development, told Spain’s El Mundo newspaper that Washington has shown little interest in helping.

“One never loses hope, but they’ve been very negative,” he said in an interview published this week.

“As U.S. citizens, we feel very abandoned by Washington,” he said. “At the highest levels, the United States has more interest in Greece and in Cuba. And neither of those are U.S. territories.”

Bloomberg

by Michelle Kaske & Kasia Klimasinska

July 21, 2015 — 9:01 PM PDT Updated on July 22, 2015 — 7:51 AM PDT

Investors may receive as little as 35 cents on the dollar under a restructuring of Puerto Rico debt if the commonwealth defaults, Moody’s Investors Service said.

Debt sold by the island’s Government Development Bank, Highways and Transportation Authority, Infrastructure Finance Authority and Municipal Finance Authority is among the $26 billion with the lowest recovery rates, Moody’s estimated Wednesday in a report. The debt is ranked Ca, the second-lowest rating from the New York-based company.

“We believe that the probability of default is approaching 100 percent, and that losses given default are substantial,” Moody’s analysts wrote. “Bondholder recoveries will be lowest on securities lacking explicit contractual or other legal protections.”

Investors including BlackRock Inc. and Pacific Investment Management Co. have speculated about bondholder losses in Puerto Rico since Governor Alejandro Garcia Padilla last month called the island’s $72 billion of debt unpayable. Moody’s said the commonwealth could support 60 percent to 65 percent of its net tax-supported debt, assuming no economic rebound.

Holders of debt with stronger safeguards, like general obligations and bonds from the commonwealth’s Electric Power Authority and Aqueduct and Sewer Authority would probably fare better than others, with recoveries of 65 percent to 80 percent, Moody’s said.

The credit rater said its estimates are based on cuts in principal and interest payments of about 40 percent a year through 2023, as the government decides to reduce debt service payments to avoid budget shortfalls.
Bankruptcy alone wouldn’t be enough to dig Puerto Rico out from under its debt burden, Moody’s said.

If Puerto Rico agencies had access to Chapter 9, island officials have said it may apply only to certain public corporations, such as the power utility, water agency and highway authority. Those entities owe about $20 billion combined.

Bloomberg

by Brian Chappatta & Michelle Kaske

July 22, 2015 — 1:33 PM PDT

As Chicago wrestles with rising pension costs, cash-strapped schools and a swelling budget deficit, investors from Pacific Investment Management Co. to Wells Capital Management say they aren’t counting the Windy City out.

Wells Capital is increasing its exposure to the junk-rated metropolis, while Pimco said this week it sees long-term value in the city’s debt. A longer-term perspective may come in handy, with a judge to rule Friday on the legality of an overhaul of two of four city employee-pension programs.

“Our big point is not that the city and its finances are necessarily on a very short-term upward trajectory, but that investors are being paid to be there,” said Gabe Diederich, a Menomonee Falls, Wisconsin-based portfolio manager at Wells Capital, which manages about $39 billion of munis, including $529 million from Chicago. “The city has options longer-term to correct their finances.”

The nation’s third-most populous city had to pay yields approaching 8 percent as part of a $743 million taxable-bond offering last week, putting it in the league of junk issuers such as telephone company CenturyLink Inc. A $346 million tax-exempt portion of the sale yielded as much as 5.7 percent.

Pension Turmoil

Already the worst-rated major city except Detroit, Chicago risks being downgraded again if the pension changes are overturned. Yields on Chicago debt are close to the highs reached after Moody’s Investors Service cut the city’s credit rating to below investment grade in May.

“Despite the fact that we all know that they have their problems, and Chicago politics and Illinois politics are really, really difficult, it’s hard to ignore that kind of embedded yields,” said Jim Colby, chief municipal strategist at Van Eck Global, which bought some of Chicago’s tax-exempt deal last week. “I know the risks.”

Chicago and the state of Illinois are among localities that have shortchanged retirement funds for years. Pensions in the U.S. have $1.4 trillion less than needed to cover promised benefits nationally, according to Federal Reserve figures.

The pension system in Chicago is $20 billion short, and the state of Illinois’s retirement fund has a $111 billion shortfall. Chicago’s retirement system is only 36 percent funded as of December 2014, compared to 61 percent in 2005.

Union Lawsuits

A partial solution was found last year when state lawmakers approved a plan, touted by Mayor Rahm Emanuel’s administration, that restructured the pensions of the laborers and municipal workers. That affects about 60,000 workers. The fix forces employees to pay more with lower benefits while also boosting the city’s contribution. Some unions sued to block the law that went into effect Jan. 1.

Friday’s ruling will decide whether that law is constitutional. The decision is expected to be appealed to the state Supreme Court, which in May unanimously ruled that Illinois couldn’t cut retiree benefits. Four days later, Moody’s cut Chicago’s credit to Ba1, one step below investment grade, saying the decision increased the likelihood that the city’s reform won’t hold up.

“Seeing how the state supreme court ruled earlier in the spring, I don’t expect the decision to go favorably for Chicago,” said Joseph Gankiewicz, an analyst at Blackrock Inc. in Princeton, New Jersey, which oversees $116 billion in municipal debt and owns Chicago bonds. “Now with that said, it might give cover to some of the rating agencies to downgrade the city.”

Chicago’s Viewpoint

If the law is overturned, Chicago’s pensions will be broke in about 10 years, the city’s lawyers have argued.

“An adverse ruling from the circuit court and from the Illinois Supreme Court is just going to make it more difficult for the city of Chicago to extricate itself from its financial difficulties,” said Sarah Wetmore, vice president of the Civic Federation, a watchdog group that has been tracking the city’s finances since 1929.

The city said it could be downgraded again if the court finds the law unconstitutional, according to bond documents for last week’s bond sale.

City officials, including Emanuel, have said the city’s plan “fully complies” with the state constitution since it protects benefits and ensures that the funds will stay solvent.

Payment Jumps

Chicago’s changes didn’t affect the pensions of police officers and firefighters. The city’s payment into their funds will jump by $550 million next year. While the Democrat-led legislature passed a plan to lower that bill, Republican Governor Bruce Rauner has yet to sign it.

Even with its retirement debt, Chicago has the capacity to raise revenue to meet those liabilities, said Matthew Sinni, New York-based vice president and municipal credit research analyst at Pimco, which manages about $40 billion of state and local debt.

“Despite its pension overhang, Chicago remains a dynamic city with sufficient revenue capacity to meet its steep fiscal challenges in the coming years,” Sinni said in the blog post on July 20. Pimco declined to comment beyond the note.

Pressure from pensions is expected to ramp up next year as Chicago owes about $1.1 billion to its retirement funds in 2016 if current law stands. The city is projecting a budget shortfall of $430 million next year, up from $297 million this year, according to bond documents.

It’s hard to believe that Chicago won’t find a solution, whether it’s cutting spending or raising taxes or fees to “rehabilitate their credit profile,” said Van Eck’s Colby, who has about $3 billion in tax-exempt assets across six exchange-traded funds, two of which are high-yield.

Bloomberg

by Elizabeth Campbell

July 22, 2015 — 9:00 PM PDT Updated on July 23, 2015 — 6:56 AM PDT

The Puerto Rico Electric Power Authority said a bondholder proposal to restructure the utility’s debt isn’t achievable because it imposes disproportionate risks on ratepayers and other creditors.

A group representing owners of 40 percent of the securities unveiled a $8.1 billion debt exchange Thursday that would delay payments for several years and give the junk-rated agency $2.5 billion to upgrade power systems. The utility, known as Prepa, has been negotiating with creditors including mutual-fund provider OppenheimerFunds Inc. and hedge fund BlueMountain Capital Management LLC for almost a year on how to overhaul its finances.

The plan “does not provide a path for a successful restructuring,” Yohari Molina, a spokeswoman for Prepa in San Juan, said in a statement. “It does not share the burden.”

Under the plan, debt-service payments would be suspended on existing securities and interest payments reduced by selling new obligations that would be repaid from a surcharge on Prepa’s customers. Delaying principal payments would free up about $2.5 billion through 2025 to upgrade plants and diversify fuel sources for commonwealth’s main electricity provider. A June 1 proposal from Prepa included at least $2.3 billion to rehabilitate facilities on the island, where electricity costs are double those on the U.S. mainland.

LIPA Example

“It almost creates interest-free borrowing for the island’s utility,” Tom Wagner, co-founding partner of hedge fund Knighthead Capital Management, said Thursday during a Bloomberg television interview. Knighthead owns Prepa bonds.

New York’s Long Island Power Authority used a similar financing, Wagner said. Bondholders plan to continue their “constructive” talks with Prepa on the plan, he said.

Assured Guaranty Ltd. also has concerns about the bondholder’s latest plan, although borrowing off of a new fee would help improve the utility, Ashweeta Durani, a spokeswoman for the Bermuda-based bond insurer said in an e-mailed statement.

“While we do not support the recovery plan proposal released last evening by the ad hoc bondholder group, we believe that a properly structured securitization transaction could play an important role in Prepa’s recovery plan,” Durani said.

While such a financing could be the foundation of a long-term plan, “the proposal was developed without consultation with bond insurers and disproportionately impacts our interest,” Kevin Brown, a spokesman at MBIA Inc.’s National Public Finance Guarantee Corp., based in Purchase, New York, said in an e-mail.

The two bond insurers guarantee about $2.4 billion of Prepa debt.

Default Speculation

Puerto Rico and its agencies amassed $72 billion of debt by borrowing to fill budget gaps as the island’s economy has struggled to grow since 2006. Governor Alejandro Garcia Padilla last month said the commonwealth can’t afford to pay its debts, igniting concern it will default. Officials are set to draw up a restructuring proposal by Sept. 1.

The utility in August 2014 signed a contract with investors, banks and bond insurers that keeps negotiations out of court, called a forbearance agreement. Prepa must craft a debt-restructuring plan by Sept. 1 or that accord will expire. The utility avoided defaulting on a July 1 bond payment with the help of a loan from bond insurers.

Forbearance Pact

OppenheimerFunds, the biggest holder of Puerto Rico debt among municipal mutual-fund providers, Franklin Templeton Investments, Angelo Gordon & Co., Knighthead Capital, BlueMountain Capital and units of Goldman Sachs Group Inc. have signed the forbearance pact.

The creditor’s proposal would delay principal payments for an average of 7.8 years and cut the coupons on as much as $5.7 billion to an average rate of 4.1 percent from 5.24 percent. Another $2.4 billion of securities would be sold as capital-appreciation bonds, which would push out principal and interest costs for up to 19 years.

The first tranche of current-interest bonds would be issued at a price of about 150 basis points above benchmark tax-exempt debt and the capital-appreciation bonds would be priced at about 200 basis points above top-rated munis, according to the bondholder plan.

Prepa’s customers would be charged a new fee, with that revenue stream repaying the bonds. Under the plan, Prepa clients would pay an average 24 cents per kilowatt hour compared with the utility’s historical rate of 28 cents. That surcharge may prove to be a tough sell.

“It’s very hard to see how the politicians can line up behind this proposal,” said Daniel Hanson, an analyst at Height Securities, a Washington-based broker dealer, said in a telephone interview.

Prepa bonds maturing July 2042 traded Thursday at an average price of 56.2 cents on the dollar, the highest since June 8 and up from 49 cents Wednesday, data compiled by Bloomberg show. The average yield was 9.6 percent.

Bloomberg

by Michelle Kaske

July 22, 2015 — 9:09 PM PDT Updated on July 23, 2015 — 1:58 PM PDT

New York, July 22, 2015 — Moody’s ratings assume no US federal payment on Puerto Rico’s (Caa3 negative) debt, and any effort by the federal government on the commonwealth’s behalf would have marginal near-term effects, Moody’s Investors Service says in a new report.

“The federal government does not provide states or local governments with extraordinary funds to avert defaults on their debt, in part because doing so would induce other governments to take on unsustainable amounts of debt or engage in reckless fiscal practices,” says Moody’s VP — Senior Credit Officer Ted Hampton in “Frequently Asked Questions About Puerto Rico’s Fiscal and Debt Crisis.”

The FAQ also addresses the challenges Puerto Rico faces in current efforts to introduce Chapter 9 bankruptcy measures under the US bankruptcy code.

“Since Chapter 9 is unlikely to be a viable way to achieve a consolidated restructuring of all the commonwealth’s debt, bankruptcy authorization would not be sufficient by itself to manage Puerto Rico’s current pressures,” says Hampton in the FAQ.

The very high likelihood that Puerto Rico will default and significantly restructure its obligations affecting all of its bondholders to varying degrees, provokes questions about expectations for bondholder recoveries.

“We believe bondholder recoveries will be lowest on securities lacking explicit contractual or other legal protections. These securities consist of those rated Ca, including notes issued by the Government Development Bank for Puerto Rico (GDB, Ca negative) and the commonwealth’s subject-to-appropriation debt,” Hampton says.

Moody’s ratings below investment grade are based on both the probability of default and the expected bondholder loss given default.

The expected debt restructuring will be unusual, consistent with of Puerto Rico’s status as neither an independent nation nor a US state. While similar to US states, Puerto Rico lacks the same legal rights and does not have representation in the US Congress. Unlike Greece (Caa3 on review for downgrade) Puerto Rico cannot turn to a lender of last resort, such as the International Monetary Fund.

The FAQ also address other questions regarding the recent loan by bond insurers to the Puerto Rico Electric Power Authority (PREPA — Caa3 negative), pension assets and the ability of the commonwealth recover fast enough to support its debt.

The report is available to Moody’s subscribers here.

Gov. Rick Snyder on Wednesday declared that Wayne County, home to Detroit, is in a financial emergency, agreeing with the findings of a state-appointed review team. The review team said on Tuesday that it had concluded there was a financial emergency based on the county’s out-of-balance budgets over the last four years and an estimated $1.3 billion unfunded health care liability. The county executive, Warren Evans, requested the review last month, asking the state for a fiscal emergency declaration and a consent agreement to fix problems. Under Michigan law, local governments can choose a consent agreement, emergency manager, neutral evaluation or Chapter 9 municipal bankruptcy to deal with a financial emergency. Detroit went through a similar review process that led to the filing of the biggest-ever American municipal bankruptcy, which the city exited last December after shedding about $7 billion of its $8 billion of debt and obligations.

By REUTERS

JULY 22, 2015

Investors added money to municipal-bond mutual funds for the first time since April, snapping an 11-week streak of outflows, as state and local debt leads a rally in the fixed-income market.

Individuals poured $125 million into muni funds in the week through Wednesday, Lipper US Fund Flows data show. The stretch of withdrawals that began May 6 had been the longest in 18 months. The last inflow was in the week ended April 29.

The $3.6 trillion municipal market has gained 0.6 percent in July, on track for the strongest return since January, Bank of America Merrill Lynch data show. It’s outpacing the rally in U.S. Treasuries and investment-grade corporate debt, which have earned 0.5 percent and 0.3 percent this month, respectively, the data show.

Bond prices have gained amid speculation that the Federal Reserve will begin to raise interest rates at a gradual pace.

Even with the gains, the 2.34 percent yield on benchmark AAA munis compares with 2.25 percent for similar-maturity Treasuries, data compiled by Bloomberg show. The ratio of the two yields, at about 104 percent, is the highest since June 1.

Investors are frequently willing to accept lower yields on municipal bonds because their interest payments are exempt from the federal income tax.

Bloomberg

by Brian Chappatta

July 23, 2015 — 2:14 PM PDT Updated on July 24, 2015 — 6:06 AM PDT

CLEVELAND — The billionaire owner of the Cleveland Cavaliers, Dan Gilbert, is a lucky man. When LeBron James, his transcendent native son, left for Miami, the owner threw an impressive tantrum, going on about “cowardly betrayal.”

Despite that, James felt the tug of home and returned to Cleveland to revive Gilbert’s moribund franchise. In the N.B.A. finals, James resembled a Sherpa as he strapped a depleted team to his back and tried to drag it to the summit.

In the off-season, Gilbert dug his fingers into another pile of money, this one made up of taxpayer dollars. A year earlier, Gilbert and his fellow sports billionaires here — Larry Dolan, who owns the Indians, and Jimmy Haslam, who owns the Browns — had worked together to push through a referendum that extended a countywide “sin tax” on cigarettes, beer and liquor.

Over the next 20 years, taxpayers in Cleveland and Cuyahoga County will sluice $262 million into improvements for the city’s arenas and stadiums. This straitened city has already pumped $800 million into its sports stadiums.

Sweet deals for team owners are a distinguishing feature of pro sports capitalism. Costs are socialized, and profits remain private. Cleveland’s owners argue that this is only just: The stadium and the arena are publicly owned, and like any landlord, the city and the county should look after repairs and improvements.

Their logic does not apply more broadly. The team owners took control of the process of auctioning off naming rights for these public stadiums. The Browns sold their stadium’s rights for $100 million to FirstEnergy Corporation; the Indians will get $58 million over 16 years from Progressive Insurance; Gilbert’s home loan business paid a terrific sum to Gilbert’s team to name the place Quicken Loans Arena.

The owners shared not a penny with the hard-pressed city.

The Cleveland Indians have their hearts set on a new sound system. The Browns’ Haslam — whose truck-stop company, Pilot Flying J, just last year paid a $92 million fine to avoid a federal fraud prosecution — has compiled a list of improvements to be funded out of the public purse.

That sports teams, which are active charitable givers, have an umbilical tie to civic identity is not a fanciful notion. That this means that teams are drivers of economic progress, however, is a hallucination.

When James decided to return to Cleveland, city leaders and a few journalists retailed a narrative about L’Effect LeBron. They estimated that his return would pour many tens of millions of dollars into the city and speed the “Cleveland Renaissance.”

Cleveland has charming, leafy neighborhoods, fine museums and theaters and splendid lake views. More college-educated young adults are moving downtown, and there is indisputably more investment, building cranes and vibrancy to be found in Cleveland than a decade ago. At the same time, in the last month for which figures are available, Cuyahoga County’s job growth rate was 0.0.

The city’s poverty rate hovers near 37 percent, and the infant mortality rate is 13.0 per thousand births, compared with about 4.0 in New York City, which has no shortage of poverty.

Public schools have absorbed cut after cut.

I called George Zeller, who has analyzed the economy here for decades. He declined to talk renaissance, saying no such animal existed. “The theory that all of these sports teams are producing a gigantic boom is completely false,” he said.

Yet sin-tax dollars tumble into the hands of billionaires who employ millionaires.

The day after the end of the N.B.A. finals, I walked into the Cleveland office of Peter Pattakos. An ebullient lawyer, a sports fan and an Akron native, he helped lead the battle against the sin-tax extension. Ask a question, and he’s off at a sprint.

“It’s outrageous that these are public entities and we let these billionaires derive untold profits,” he said. “They kept saying, ‘Keep Cleveland strong,’ with the implied threat that they’d leave town if we didn’t underwrite their stadiums.”

The anti-sin-tax campaign was a peasant crusade. Pattakos’s ragtag band suggested a $3 surcharge on sports tickets. The owners rolled their collective eyes.

“Proposing to punish Cuyahoga County families and sports fans by imposing a new, large ticket tax to pay for major repairs,” the owners complained in a news release, “is terribly flawed.”

A surcharge, they complained, would make it even more difficult for families to buy tickets. That argument has an out-of-body quality, as the owners set the prices. (The Cavaliers will raise ticket prices 15 percent next year, the first such hike in five years.)

The teams’ owners and supporters outspent opponents, $3 million to $30,000. The vote to extend the sin tax, however, was not a blowout. Voters in the city of Cleveland rejected it; suburban voters carried the election.

Pattakos motioned for me to follow him, and we clattered downstairs. He led a walking tour of the Warehouse District. We passed handsome restaurants and bars, and lots of for-rent signs on vacant storefronts. Job losses are like a river eroding the shore.

“You’re telling me we should spend our tax money fixing up stadiums?” he asked, over his shoulder.

The Gateway Economic Development Corporation of Greater Cleveland acts as the landlord for the basketball arena and the Indians’ field. (The Cavaliers and the Indians pay Gateway’s operating expenses, about $3 million per year.) I placed phone calls and sent detailed emails to its executive director, Todd Greathouse. The next peep I hear from that office will be the first.

In editorializing for the sin tax, The Cleveland Plain Dealer argued that the city had a landlord’s responsibility to pay for upkeep. Left unexplained was why the landlord had never tried to renegotiate terms with ever more wealthy teams.

(Note: The Indians offer a sort of exception. They rank next to last in the American League in attendance. The night I attended a game, the crowd had the feel of an extra-large backyard barbecue, and 25 percent of the fans seemed to be rooting for the visiting Chicago Cubs.)

Over the winter, the Cavaliers’ emissaries arrived with a new proposal. They wanted locals to split the cost — in addition to the sin-tax dollars — of overhauling their arena. Adam Silver, the N.B.A. commissioner, added his voice, saying that the league would love to have the All-Star Game in Cleveland, if only its burghers would ante up again for the billionaire owner.

The Cavaliers’ chief executive says the overhaul would add to Cleveland’s “economic momentum.”

To be a wealthy sports owner is to feel no burn of embarrassment.

THE NEW YORK TIMES

JULY 21, 2015

By MICHAEL POWELL

(Bloomberg) — Chicago is paying a price for the $20 billion pension-fund shortfall that pushed it into junk-bond territory.

The nation’s third-most populous city had to pay yields approaching 8 percent as part of a $743 million taxable-bond offering Wednesday. That puts it in the company of issuers such as telephone company CenturyLink Inc., whose $650 million of similar-maturity securities yield 8.53 percent.

Chicago has been stung by rising borrowing costs as Mayor Rahm Emanuel refinanced floating-rate debt over the past two months, seeking to avoid as much as $2.2 billion of penalties triggered when Moody’s Investors Service cut it below investment grade. The May downgrade left the city of 2.7 million with a lower rating than any major U.S. city except for Detroit, a result of years of failing to put enough into its retirement system to cover promised benefits.

“They’ve taken a notch in the right direction by reducing the liquidity threat related to variable-rate debt,” said Richard Ciccarone, chief executive of Chicago-based Merritt Research Services LLC, which analyzes municipal finance. “But the city will pay a price, and deservedly so.”

ADDITIONAL LIABILITIES

Chicago’s pension obligations are rising, increasing pressure on officials to boost property taxes. The city owes an additional $550 million to police and fire funds next year.

Lawmakers approved a plan to reduce that payment, but Governor Bruce Rauner has yet to sign it. Uncertainty around the city’s pension liabilities worsened after the state Supreme Court ruled that Illinois can’t lower retiree benefits, casting doubt on Chicago’s overhaul of its pension system to stem costs.

The taxable issue and a $344 million tax-exempt offering set for Thursday are the last in Emanuel’s plan to convert variable-rate bonds to fixed-rate securities. The floating-rate debt threatened to add to Chicago’s financial pressures because its tumbling credit rating allowed banks to force Chicago to pay it off early, which it couldn’t afford to do.

‘We expect continued positive investor feedback on the City’s reform efforts,” Elizabeth Langsdorf, a city spokeswoman, said in an e-mailed statement.

COURT DECISION

The city’s escalating borrowing costs are a consequence of a financial outlook that has yet to improve, said Paul Mansour, head of municipal research at Conning & Co., which oversees about $11 billion in municipal debt, including Chicago holdings.

He said he’s not going to buy any of the debt.

The Chicago bonds sold Thursday are exempt from the federal income tax, so the yields will be lower than those set Wednesday. The city’s tax-exempt bonds maturing in 2035 last traded for a yield of 5.6 percent, about 2.5 percentage points more than top-rated debt, according to data compiled by Bloomberg.

The latest sale, authorized by the city council on June 17, will also allow Chicago to push some bills into the future, said Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics.

Chicago’s effort to close the gap in its pension funds could be dealt a setback in court as soon as next week, when a judge is to decide whether Emanuel’s overhaul of the pension system is legal. The restructuring, affects about 60,000 municipal employees. Some unions sued to block its implementation.

INVESTOR RISK

If the judge overturns the law, Chicago’s credit rating may be cut further, Fabian said. Chicago could have junk ratings from all four rating companies in the next two years, he said.

“With the risk of them potentially losing more investment grade ratings, buyers can’t be aggressive,” Fabian said.

“There aren’t many speculators who are willing to make a bet on Chicago tightening yet. This is a kind of deal that would price cheaply.”

John Donaldson isn’t among such speculators. Donaldson, who helps manage about $700 million of munis, including Chicago debt, as director of fixed income at Haverford Trust Co. in Radnor, Pennsylvania, said he’s steering clear of the city.

“We’ve shied away from it,” Donaldson said. “It’s all the liabilities, including the pension, current budget. Do I need that headache right now? No, I do not.”

July 16, 2015

An abundance of New York issuance will hit the U.S. municipal bond market next week amid total supply of bonds and notes estimated at $9.48 billion, down from about $10.5 billion this week, according to Thomson Reuters on Friday.

New York State’s Dormitory Authority will offer $1.16 billion of state sales tax revenue bonds through Morgan Stanley. The deal is structured with serial maturities from 2016 through 2025, according to the preliminary official statement (POS). An additional $50 million of bonds will be priced on Thursday via Raymond James & Associates.

Another New York issuer, the Metropolitan Transportation Authority, will sell $500 million of revenue refunding bonds through Siebert Brandford Shank & Co and Morgan Stanley with a retail order period on Wednesday ahead of formal pricing on Thursday.

Moody’s Investors Service last week upgraded MTA’s rating to A1 from A2, citing growing passenger volume and stable finances.

The deal consists of $500 million of fixed-rate bonds with serial and term maturities, $50 million of mandatory tender bonds and $50 million of LIBOR floating rate tender notes, according to the POS.

Citigroup will price $110 million of New York State Environmental Facilities Corporation tax-exempt and taxable revolving funds revenue bonds on Tuesday.

Topping next week’s competitive calendar is a $347 million general obligation bond issue for the Metropolitan Government of Nashville and Davidson County scheduled for Tuesday.

Meanwhile, net outflows from U.S. municipal bond funds decreased to $29.2 million in the week ended on Wednesday from $305.7 million in the previous week, Lipper reported on Thursday. It was the eleventh-straight week of net outflows for the funds.

Flows turned positive for high-yield muni funds with net inflows of $14.5 million posted in the latest week after two weeks of net outflows.

Reuters

(Reporting by Karen Pierog, editing by G Crosse)

July 17, 2015

DALLAS — The House on Wednesday voted 312 to 119 to approve a bill that would extend federal transportation funding through Dec. 18, with an $8.1 billion transfer from general funds to the Highway Trust Fund.

The measure proposed on Monday by Rep. Paul Ryan, R-Wis., chairman of the House Ways and Means Committee, would maintain the flow of reimbursements to states for highway and transit projects through that date.

“We want to get to a long-term, six-year highway bill,” Ryan said during Wednesday’s floor debate. “We’re not going to get there in the next two or three weeks. It’s going to take two or three months.”

The Senate is working on a two-year transportation bill, he said.

Rep. Bill Shuster, R-Pa., chairman of the House Transportation and Infrastructure Committee and co-sponsor of Ryan’s HTF fix, said there’s not enough time to pass a multiyear bill before the current two-month extension ends July 31.

“I believe we can get there, but we can’t get there in the next three weeks,” he said. “We are committed to a six-year bill.”

Lawmakers rejected a proposal by the Democrats to replace the Ryan bill with President Obama’s six-year, $478 billion Grow America Act funded with $240 billion of gasoline and diesel tax revenues and $238 billion from a mandatory 14% tax on overseas corporate earnings. “This bill represents what the House should be taking up today on surface transportation,” said Rep. Peter DeFazio, D-Ore., one of the sponsors of the Obama proposal and the ranking Democrat on the House Transportation and Infrastructure Committee.

The $8.1 billion transferred from the general fund will require a similar amount of offsets over the next 10 years. The offset revenue includes $3.1 billion of airline passenger security fees and $5 billion from enhanced tax compliance.

President Obama reluctantly supports the HTF extension only in the hope that it leads to a long-term bill before the end of the year, the Office of Management and Budget said Wednesday morning in a Statement of Administration Policy.

The need to keep federal transportation reimbursements flowing to states during the busy summer construction season is an “unfortunate reality” created by a series of short-term HTF fixes, OMB said.

The Transportation Department notified state officials earlier this week that federal reimbursements for road and bridge projects could come to an end Aug. 1 without congressional action on the HTF.

“The administration expects that Congress will use this five-month extension to pass a multiyear bill with significant increases in investment to address the system’s maintenance and repair deficit, enhance safety, and lay the foundations for future growth in critical areas like freight movement,” the statement said. “The administration will not support continued failure to make the investments the nation needs.”

The Senate is expected to take up a transportation bill on Thursday, but Majority Leader Sen. Mitch McConnell declined to provide specifics after Tuesday’s weekly Republican caucus. McConnell said he was “fairly optimistic” about a long-term measure.

“There’s a lot of bipartisan enthusiasm for a multiyear highway bill,” he told reporters. “We’ve had some conversations inside our conference about a way to pay for that, and I’ve also had conversations with prominent Democrats that were involved in this issue,” McConnell said. “We’re hoping to be able to come together behind some way to get a multiyear highway bill.” Senate Minority Leader Harry Reid, D-Nev., was unenthusiastic about Ryan’s HTF proposal. “I don’t know what the House is going to do,” he said. “I’ll take a look at it.”

The Senate Environment and Public Works Committee in June unanimously approved a six-year, $277 billion highway-only bill that does not deal with the $100 billion revenue shortfall in the HTF over that span.

Sen. Ted Cruz, R-Texas, a candidate for the Republican nomination for president in 2016, said on Wednesday he would filibuster a transportation bill that includes a provision reauthorizing the Export-Import Bank as McConnell has proposed.

“I’m willing to use any and all procedural tools to stop this corporate welfare and this corruption from being propagated,” Cruz said.

The Bond Buyer

by Jim Watts

JUL 15, 2015 3:21pm ET

Puerto Rico bondholders may receive an average of just 60 cents on the dollar if the commonwealth wins the ability to restructure its $72 billion in obligations, according to BlackRock Inc.’s head of municipal debt.

The Caribbean island and its agencies need to cut their debt to $40 billion, Peter Hayes, who helps oversee about $116 billion of munis at the world’s biggest money manager, said in an interview on Bloomberg Television. That would mean an average recovery of about 60 percent on its securities, which include general-obligation bonds, sales-tax debt and those from its electric utility, he said.

“They have all this debt that they can’t afford,” said Hayes, whose firm held just $28 million of Puerto Rico debt as of May 31, according to Morningstar. “How do you get out of debt? You either grow your way out — they’re not growing — or you restructure. So from the point of view of its citizens, it’s the best outcome.”

Puerto Rico bond prices have tumbled since Governor Alejandro Garcia Padilla last month said the commonwealth can’t afford to pay its debts, raising the specter of an unprecedented restructuring in the $3.6 trillion municipal-bond market.

The Government Development Bank, which lends to the commonwealth and its agencies, said last week it may purchase its notes through cash or exchange the securities at less than par. Standard & Poor’s said Tuesday that it considers such an exchange as a default.

Default Risk

S&P cut the GDB’s rating by one step to CC on the view that a default “is virtually certain,” Brendan Browne, an S&P analyst in New York, wrote in a report.

Puerto Rico and its localities have a history of borrowing to fix budget deficits, racking up more debt than any U.S. state except California and New York. With an economy that has contracted every year but one since 2006, Puerto Rico officials have been building a case for convincing investors to accept less than they are owed.

Puerto Rico officials met with creditors Monday at Citigroup Inc.’s New York headquarters, the first gathering with investors since Garcia Padilla’s comments. Officials said they will evaluate every bond as they work on a recovery plan and haven’t given any details about which securities may be affected.

Recovery Rates

Recovery rates will differ, Hayes said after his television interview. Holders of general obligations may get at least 60 cents on the dollar, he said. Such debt maturing July 2041 changed hands Tuesday at an average price of 61.3 cents on the dollar, the highest since June 26, according to data compiled by Bloomberg.

Sales-tax bonds, called Cofina, that are second in line for repayment may get restructured at below 60 cents on the dollar if the commonwealth chooses to use that revenue stream for other expenses, he said.
They “are likely to get a fairly low recovery,” Hayes said.

Electric Power Authority bonds are trading at levels above what investors may get in a restructuring because the publicly owned electric utility needs to upgrade its plants, Hayes said. Prepa debt maturing July 2028 traded Tuesday at an average 49.1 cents on the dollar, about the same level as the start of the year, Bloomberg data show.

Bloomberg

by Michelle Kaske and Erik Schatzker

July 14, 2015 — 9:29 AM PDT Updated on July 14, 2015 — 1:16 PM PDT

The divide over the outlook for Puerto Rico’s bonds is widening as investors and speculators take sides on the commonwealth’s debt restructuring proposal.

Richard Perry, head of Perry Capital, said Wednesday the commonwealth is in better shape than most people realize. Jeffrey Gundlach, co-founder of DoubleLine Capital, likes the debt at current prices. BlackRock Inc. warned Tuesday that investor risk receiving an average of just 60 cents on the dollar in a reorganization.

Perry, speaking at the CNBC Institutional Investor Delivering Alpha Conference in New York, said that the population has only fallen marginally, and that government debt is about 70 percent of GDP, lower than in many other countries, including Japan.

“It’s often mischaracterized in the U.S. and it’s painted like Detroit,” said Perry, who’s New York-based firm holds Puerto Rico securities, including its Government Development Bank debt.

Puerto Rico and its agencies owe $72 billion after borrowing for years to fix budget deficits. The island’s economy has shrunk every year but one since 2006. Governor Alejandro Garcia Padilla last month directed island officials to create a debt-restructuring plan by Aug. 30 that would delay payments. Garcia Padilla says Puerto Rico cannot pay all of its obligations.

Bearish View

The commonwealth needs to slash its debt load to $40 billion, Peter Hayes, who helps oversee about $116 billion as head of municipal debt at New York-based BlackRock, the world’s biggest money manager, said in an interview Tuesday on Bloomberg Television. That would mean an average recovery of about 60 cents on the dollar on its securities, which include general-obligation bonds, sales-tax debt and those from its electric utility, he said.

“They have all this debt that they can’t afford,” said Hayes, whose firm held just $28 million of Puerto Rico debt as of May 31, according to Morningstar. “How do you get out of debt? You either grow your way out — they’re not growing — or you restructure. So from the point of view of its citizens, it’s the best outcome.”

Recovery rates will differ, Hayes said after his television interview. Holders of general obligations may get at least 60 cents on the dollar, he said. Subordinate sales-tax bonds that are second in line for repayment may get restructured at below 60 cents on the dollar if the commonwealth chooses to use that revenue stream for other expenses, he said.

Returns Forecast

The island’s constitution says the commonwealth must repay general obligation bonds before other expenses. Such debt maturing in July 2041 and carrying an 8 percent coupon traded Wednesday at an average price of 72.6 cents on the dollar, the highest since June 26, before the governor called for a debt-restructuring plan.

OppenheimerFunds Inc., the largest U.S. mutual-fund investor of Puerto Rico securities, said last week that sales-tax collections, unemployment and income growth show the economy is strong enough for the government to repay.

Gundlach said he hopes those bonds “might return par,” if a presidential candidate were to campaign on helping out Puerto Rico. He spoke on CNBC from the conference.

DoubleLine’s $2.24 billion Income Solutions Fund held $45 million of Puerto Rico’s 2041 general obligations, as of May 29, data compiled by Bloomberg show. Its $137 million Multi-Asset Growth Fund held $2.5 million of the same securities, as of June 30.

That debt will need to gain in price for investors to consider negotiating changes in debt payments, Perry said.

“The government obligations that are really in the highest part of the pecking order, they are going to have to trade at par if they’re going to make this restructuring work,” Perry said.

Bloomberg

by Michelle Kaske

July 15, 2015 — 1:21 PM PDT