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Muni Week Review / Preview 1/25/2016

Monday, Jan 25, 2016

PREPA DEBT PLAN EXPIRES AS NEGOTIATIONS CONTINUE. U.S. HOUSE PANEL SETS PUERTO RICO OVERSIGHT HEARING. CHICAGO G.O. AND CHICAGO PUBLIC SCHOOLS G.O CREDIT DISPARITIES.

PREPA Debt Plan Expires… Puerto Rico’s main electricity provider and its municipal bondholders are continuing negotiations to restructure almost $9 billion in debt after failing to meet a deadline Friday that caused a tentative pact reached last month to be terminated. The restructuring support agreement between the Puerto Rico Electric Power Authority (PREPA) and its creditors expired after lawmakers failed to pass legislation by Friday to enable PREPA, as the agency’s known, to lower its obligations and implement a new customer surcharge. In a sign of progress, banks who finance its fuel purchases and the utility entered into  a forbearance agreement on Sunday that keeps their negotiations out of court through Feb. 12. Before Friday’s deadline, PREPA asked creditors to delay that end date to Feb 12. Investors weren’t willing to extend unless an agreement to lend PREPA $115 million through a bond sale was contin-gent upon the island’s energy commission approving the new customer surcharge that would insure that investors would be repaid. PREPA rejected that proposed change. By holding the $115 million captive creditors may have adequate leverage to force PREPA to become more serious about deadlines.

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U.S. House Panel Sets Puerto Rico Oversight Hearing… A U.S. House subcommittee with territorial jurisdiction will meet on Feb. 2 to hear comments on the need to establish a “Puerto Rico Financial Stability and Economic Authority”. Democrats want to disregard contract law and the fact Puerto Rico issued debt not subject to Chapter 9 bankruptcy law, they want to ignore the laws and allow restructuring under Chapter 9. Republicans support giving a federal control board oversight of the island’s finances along with federal aid. Republicans believe it is important to assure investors Puerto Rico  will not face the same financial problems in the future. Sen. Grassley chair of Senate Judiciary Cmte said “we can’t move until we get some sort of compromise”.

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Credit Differences - Chicago General Ob-ligation vs. Chicago Public Schools G.O… Both Chicago GO rated ‘Ba1/BBB+’ and Chicago Public Schools GO (CPS) rated ‘B1/B+’ have a coterminous tax base, share governance ties and need pension reform. However, credit differences exist with respect to (i) Pensions: Chicago has executed a $550 million property tax hike to fund a higher pension bill – Chicago pensions are 36% funded;  CPS has neither secured the $480 million state aid to fund pensions nor does it have the required contribution from teachers – CPS pensions are 53% funded. (ii) Structural Balance: In FY16 Chicago closed a $233 million budget gap with recurring revenues; CPS faces uncertainty about $480 million state aid required to close a $1.1 billion budget gap. (iii) Debt Structure: Chicago is likely to eliminate all variable rate debt this year and it plans to end ‘scoop and toss’ by 2019; CPS has $1.1 billion or 18% of its debt load in variable rate mode. (iv) Reserves: Chicago has healthy reserves over $700 million; CPS reserves  in fiscal 15 are expected to be $254 million and estimated to be fully depleted by 2017 per Fitch. Relative to Chicago, the above factors have contributed to diminished liquidity for CPS which requires increasing levels of short term borrowing to finance ongoing operations. Ask your account executive for the GMS ‘Special Report’ update on all Chicago related debt.

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State Takeover of Chicago Pub-lic Schools (CPS) Dismissed… “Instead of offering a reckless smokescreen that distracts from the real financial problems facing CPS, the Governor should pass a state budget that treats CPS students equally with the rest of the state,” said the chief executive officer of Chicago Public Schools after Governor Rauner outlined a proposal to allow a state takeover of CPS. Bankruptcy is currently not an option for Illinois local governments. Governor Rauner, who has been at odds for months with the legislature over the state budget, has said he won’t bail out the schools unless Mayor Rahm Emanuel supports limits on unions or other proposals he’s seeking to enact. Mayor Emanuel immediately dismissed the proposal as nothing more than a distraction and his office stated, “Giving control of our children’s future to a governor who can’t pass his own budget, who is racking up billions in unpaid bills, and who is crippling higher education across the state makes zero sense.”

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Political Differences in Illinois… Political bickering that's driven the almost seven-month-old budget impasse in Illinois spilled into the public pension arena Thursday, leaving the state no closer to easing a fiscal burden that's saddled it with the lowest bond ratings of any state. Governor Rauner put his support behind a Senate Democratic pension plan as he believed that with some changes the plan could withstand the state’s constitutional protection for pensions. The plan would trim $1 billion off the state’s pension contributions approx. $7.8 billion in 2017. But the plan’s lead author Democratic Senate President John Cullerton quickly threw cold water on any changes. The disagreement is on collective bargaining powers. The Governor along with Republicans are pushing for curbs on unions’ collective bargain-ing power which Democrats oppose.

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Atlantic City Calls Emergency Meeting… After Governor Christie rejected an Atlantic City financial rescue package last week that had been approved by the state legislature, city officials have called an emergency meeting to discuss bankruptcy. Just last week Atlantic City Emergency Manager Kevin Lavin released a report which showed the City's cash flow would run out by early April if a rescue package is not implemented. The proposed aid package would have reallocated New Jersey's casino alternative tax to pay debt service on Atlantic City-issued municipal bonds, directed $60 million in funding directed to the city's marketing arm, the Atlantic City Alliance for 2015 and 2016 and enabled the city’s eight remaining casinos to pay $120 million annually over 15 years under a payment-in-lieu of taxes program instead of property tax. The Mayor said, "With the veto of the Atlantic City PILOT bill earlier this week by Governor Chris Christie, the City of Atlantic City has been left with no other option but to explore bankruptcy.” A bankruptcy filing would require the approval of the state’s local finance board. Senate President Steve Sweeney has been talking to Governor Christie about completely taking over manage-ment of the City’s finances. The state already has sway over City finances through an emergency manager appointed a year ago. A bankruptcy filing, should it come to that, would be an unwelcomed em-barrassment for Christie’s Presiden-tial campaign.

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NJ Ratings Hinge on Pension Reform… If New Jersey loses a looming court case in the State Supreme Court that placed a freeze on cost-of-living-adjustments; it would increase unfunded liabilities by 33% from $40 billion to $53 billion.  An adverse court ruling could weaken NJ credit rating. In February 2015 a Governor appointed study commission recommended freezing existing pension plans and shifting to a cash balance defined benefit plan. If the study commissions recommendations were enacted it would improve NJ’s credit profile due to lower long term pension liabilities that help restore structural balance, said Moody’s showing Christie Administration’s efforts to reform pension in positive light.

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California Budget Bodes Well, Fitch… The governor continues his policy of restraining growth in ongoing spending while paying down long term liabilities and funding the rainy day fund in California’s proposed budget for fiscal 2017. This approach contributed to multiple ratings upgrades in recent years for the once financial beleaguered Golden State. Fitch believes the budget is prudent and bodes well for fiscal stability in light of the state’s volatile revenue stream and the possibility of future economic downturn as it assumes solid economic growth in 2016 and 2017.

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Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.

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