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Muni Week Review / Preview 2/22/2016

Monday, Feb 22, 2016

PUERTO RICO SOLIDIFIES NEED FOR FEDERAL CONTROL BOARD. CHICAGO PUBLIC SCHOOLS FUNDS DEBT SERVICE FOR NEXT YEAR. MUNIS: HIGH DEMAND, LIGHT SUPPLY, WIDER CREDIT SPREADS.

Puerto Rico Solidifies Need For Federal Control… The need for a federal financial control board was amplified after Puerto Rico released a draft unaudited version of fiscal 2014 finances, the audit is 10 months over-due. Investors disregarded the feeble distress call as more posturing with bondholders. Seeking help from Congress, the Common-wealth creates ‘substantial doubt’ as to the government’s ability to continue as a going concern. In a so called financial crisis it is unbelievable that higher operating expenses and liabilities are what led to a spike of $2.5 billion in government operating deficits and $300 million in the general fund deficit in fiscal 2014 from a year earlier. “The government has not felt the crisis, this is a party,” economist Antonio Rosado complained at a Puerto Rico Chamber of Commerce event, stating the root of the problem is not debt, but government mismanagement and inaction.  Investors may sue the commonwealth if it defaults on its direct debt; the government says it has avoided default on General Obligation by raiding tax money earmarked for other bonds. Three bond insurers are already suing Puerto Rico for redirecting funds dedicated to agency bonds. Puerto Rico’s failed effort to provide an audit to Congress and its soaring government expenses are signs of mismanagement by the Governor. Congress will take what looks like a planned default strategy into consideration as it debates whether to allow the commonwealth to restructure any of its debt. There is little doubt Congress will implement a Federal Control Board to oversee the island’s spending and borrowing plans.

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Puerto  Rico Revenue Update… Fiscal 2016 year to date revenues totaled $4.57 billion, a year over year increase of $111.6 million. However, revenues were $183 million below estimates included in the $9.8 billion FY 2016 budget. The 2016 budget is $300 million higher than the 2015 budget. Obviously austerity is not an objective. Sales and Use taxes year to date totaled $1.36 billion compared to $832 million for the same period last year, an increase of $525 million. COFINA municipal bond debt service for the year ($696 million) is completely funded.


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Senate Will Play ‘King Maker’ for Puerto Rico Debt Relief… Republican Senators Charles Grassley, Orrin Hatch and Lisa Murkowski likely have the most sway as to whether Puerto Rico gets some form of re-structuring relief. They have thus far rejected it, proposing instead aid and oversight, but that tide may be turning. On Jan. 21, Grassley said that the island could receive a “variation” of Chapter 9. On Feb. 10, Hatch said he may propose another bill. If this measure includes debt restructuring in order to pass, Grassley and Murkowski will also need to approve it. Some have suggested a restructuring mechanism that includes all debt other than General Obligation and COFINA debt.

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Chicago Public Schools (CPS) Debt Service Pre-funded Through March 2017… Pre-funding debt service on general obligation bonds through March 2017 is credit positive for junk rated Chicago Public Schools. Bond trustees received a deposit of $268 million on February 12 from pledged state aid. If the district had not made a full deposit, needed funds for debt service would be placed on the tax rolls of Chicago residents to cover the CPS debt service payments. Historically, the district has not levied property taxes for CPS general obligation debt service. A recent $725 million bond sale helped the school district to push out a portion of bonds matur-ing in the near term. To ease the significant budgetary and liquidity challenges faced by Chicago Public Schools, the district has cut $335 million in annual expenses by work-force reductions and having teachers pay their share of pension contribu-tions. With Illinois Governor Rauner intent on labor reform, negotiations with teachers are currently in medi-ation and CPS finances and contracts are under state probe.

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Demand For Munis Amid Light Supply… Individuals poured over $700 million into municipal bonds last week the 20th straight week of net cash inflows and the longest streak since December 2014. The continued demand from investors pushed the 10-year yield down to a more than three-year low of 1.57% last week. Issuers lightened supply this week to $6 billion from last weeks $8.9 billion, further spurring demand.

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Credit Spreads Widen… With investors shunning risk, not all securities have benefited equally from the rally. The yield difference between 10-year bonds rated ‘BBB’, the lowest tier of investment grade ratings, and ‘AAA’ debt last week reached 1.06 percentage points, the widest since November, Bloomberg data showed. The spread between ‘A’ rated revenue municipal bonds and top rated debt hit 0.64 percentage point, the widest since August 2014. There is tremendous value in the muni market for well informed investors who understand the difference between perceived risk and actual risk. One reason for the credit spread imbalance among the tiers of investment grade rated bonds may be investor concern over how holders of Puerto Rico G.O. and dedicated revenue bonds will be treated as a result of the Puerto Rico Governor’s tailored financial mess.

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Illinois Budget Stand-Off… “Either you give the executive branch the authority to cut spending to live within our revenues, or we agree together on economic and govern-mental reforms to accompany a negotiated balance of spending reductions and revenue that ensures Illinois can be both compassionate and competitive,” Governor Rauner told lawmakers as he released his fiscal 2017 budget without a spend-ing plan for fiscal 2016. A patch-work of continuing appropriations, court orders and consent decrees have the state on pace to outspend revenue by $5 to $7 billion for fiscal 2016. Its backlog of bills could reach $26 billion by fiscal 2019 per current revenue spending trends. If lawmakers don’t agree to make structural changes that Democrats have rejected for months, Governor Rauner wants to get the authority from the legislature to make the cuts himself as he reiterated his call for structur-al changes to state government. The political impasse has made Illinois the lowest rated U.S. State. (BAA1/A-)

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Lawmakers Unveil New Plan for Atlantic City… The new state take-over measure is called the Municipal Stabilization and Recovery Act, an ‘intervention’ and a ‘cooperative working agreement’ between the State of New Jersey and Atlantic City. The proposal gives the director of the Local Finance Board the ability to restructure municipal debt, sell new bonds, sell city assets, dissolve city agencies, alter or terminate union contracts as well as the power to hire and fire for five years. At the center of the debate on creating more revenues for the city is its water utility. The water utility’s head wants it to remain independent with a $100 million injection from a private partner. The Mayor thinks the city could earn $4 million annually by streamlining operations and keeping control of the utility under the city and state emergency manager. The state take-over measure gives the city one year  to show it can monetize the water utility before opening it up to sale or lease. Sponsor of the measure, NJ Senate President said, “The intervention plan will enable the state and the city to work together to accomplish what Atlantic City can’t do on its own. The state has to take a more direct role with more effective solutions”. A companion piece of legislation, also introduced Wednesday, outlined a nine-year payment plan in lieu of property taxes for the city’s casinos to stabilize revenue for a city that has been slammed by property-tax appeals and is on track to run out of cash by April 1 or earlier. This legislation prevents city officials from seeking bankruptcy protection.

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

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