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Muni Week Review / Preview 3/07/2016

Monday, Mar 07, 2016

U.S. REP. ROB BISHOP PREPARES PUERTO RICO LEADERS FOR FEDERAL CONTROL BOARD. CHICAGO SCHOOLS (CPS) BONDHOLDERS LOOK FOR REFORM. U.S. SUPREME COURT SLAMS NJ PENSIONERS.

House Committee Chair Prepares Puerto Rico Leaders for Federal Control Board… The chairman of the Committee on Natural Resources of the U.S. House of Representatives Rep. Rob Bishop met with Puerto Rico leaders on Friday and Saturday in San Juan. Bishop held separate meetings with Governor  Padilla, House Leader Perello, Senate President Bhatia and other Puerto Rico leaders laying the groundwork for what some have called the “Federal Authority for the Fiscal Stability of Puerto Rico Act.”.The items discussed were proposals for economic development such as excluding Puerto Rico from Cabotage laws, amend the IRS Code of the United States to attract investment by foreign companies, a mechanism for restructuring a portion of the debt by collective agreement, and a Federal Fiscal Control Board. Several other areas were also discussed including the island’s pension program, an energy component, a lower minimum wage and fair treatment in regard to medicare and medicaid funding. There is very little support in the U.S. Legislature to grant the island broad bankruptcy power under Chapter 9 of the U.S. Bankruptcy Code. Congressman Bishop did not go into specific details on exactly what will or will not be included in the measure, he talked more of the process and dates. The bill under the authorship of Bishop’s committee has a deadline of March 31. Bondholders have become confident they will be treated fairly because regaining market access is slated to be a priority of the Fiscal Control Board.

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PREPA Update… “We look forward to working closely with PREPA leadership on the necessary documentation and other important steps to implement the revitalization, including the required timely approvals of the Energy Commission, a satisfactory court validation proceeding, and the return of the PREPA debt structure to investment grade ratings,” said creditors as they agreed to give PREPA until March 22 to work on its petition to implement a new customer fee, called a securitization charge. The Puerto Rico Energy Commission expects to complete a review of the new securitization charge within the 75-day time frame set by the PREPA Revitalization Act


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Chicago Public Schools (CPS) Bondholders Look for Reform… Questions on how junk-rated CPS could reform its finances are in the spotlight. Chicago Teachers Union (CTU) and CPS are still deadlocked over a new labor contract. The last contract expired in June last year, and in February the union voted to reject an offer from the district. CPS has taken progressive steps to reign in demanding unions: this week the CPS CEO ordered a three day furlough saving $30 million and laid off 62 school staff including 17 teachers in addition to making unprecedented mid-year budget cuts of over $182 million this year and $335 million annualized. The Illinois House overwhelmingly passed a bill by a 110-4 vote to replace the appointed Board of Education. Governor Rauner supports a different bill that would “lead to the creation of an elected school board for Chicago Public Schools” and allow for the Illinois State Board of Education to take over CPS, a measure opposed by Mayor Emanuel and the CTU.  Illinois’ State Board, stocked with the Governor’s appointees, is expected to declare Chicago’s school system in “financial difficulty” as early as April under an Illinois law authorizing state takeovers of distressed school systems. To determine if a ‘financial difficulty’ exists at CPS, the board has sought detailed information on CPS finances, projections and contracts. The Governor asserts a ‘financial difficulty’ designation allows the state to oversee future CPS borrowing while Chicago Schools’ administration con-tends that schools serving populations more than 500,000 are exempt from bond oversight under the School Finance Authority Act. Shortterm credit lines and the district's recent $725 million municipal bond sale will allow the district to stay current through the fiscal year, but it needs to line up fiscal 2017 credit lines. Mayor Emanuel is looking for another property tax hike to generate $170 million to $200 million of new revenue to help cover pension payments. Stating that the Illinois State Board of Ed has not ever chosen to block bond offerings, the Governor said, “I hope that never becomes necessary, but we've got to be able to take action and step in.” CPS general obligation debt service, which is secured by pledged state aid, is funded through March 2017. Muncipal bondholders are looking for durable structural reforms that bring the nation’s third largest school district to a path of sustainable finances.

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U.S. Supreme Court Slams New Jersey Pensioners… The U.S. Supreme Court left intact a ruling that let NJ Governor Chris Christie skip a $1.6 billion payment to the state’s pension funds, rejecting appeals by state workers and their labor unions. Unions argued that NJ unconstitutionally reneged on a contractual obligation to make annual payments to the pension fund. Turning away the appeals, The U.S. Supreme Court backed the state and Governor Christie. NJ faces a budget shortfall of $83 billion built up over a decade of lower than required contributions to ease budget spending and taxes. Without pension reform, the Garden State’s primary pension fund may run out of money by 2024. The Governor’s office said, “We're heartened by the U.S. Supreme Court's decision today.”

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Wayne County Poised For Stabil-ity… Wayne County could emerge from financial emergency later this year after wiping out $829 million unfunded health care liabilities, a $82 million accumulated deficit and $52 million structural deficit, county executive Warren Evans stated at his first State of the County address. “We will not need an emergency manager, and we will not go into bankruptcy,” Evans credited retirees and employees for a fair agreement to stabilize the county’s finances. After wielding higher leverage on unions to cut labor entitlements, the county could balance its $1.5 billion budget for the first time in eight years. Near term fiscal challenges have diminished for the junk rated county. Recognizing substantial cuts in retirement liabilities and operating expenses, Moody’s upgraded the outlook for the county from negative to stable.

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Muni Prices Attractive… Tax-exempt municipal bond prices are attractive relative to taxable Treasuries.  The 1.76% yield on benchmark 10-year munis compares with 1.73% on similar maturity taxable Treasuries. The ratio is a measure of relative value between the asset classes. It climbed to 101% on Monday, the highest since October, signaling that tax free bonds are cheap relative to their federal counterparts. Investors who don’t benefit from tax exempt interest will occasionally cross over and add munis when their absolute yields increase. Over the past 10 years, the ratio has averaged 97.6%. The muni bond market has seen positive money inflows for 22 straight weeks, the longest stretch since December 2014.

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BlackRock, Citi Say Buy Munis… Just weeks removed from the lowest muni bond yields in 50 years, BlackRock Inc. and Citigroup Inc. are imploring investors to buy. Their recommendation stems from a con-fluence of factors, ranging from depressed yield levels worldwide to an imbalance of supply and demand in $3.7 trillion muni market. Now might be the best chance to buy tax municipal exempt debt, according to the head of muni strategy at Citigroup in New York. “This year, we expect that the cheapness could be relatively short-lived and we strongly recommend that investors utilize this temporary cheapness as buying opportunities before yields plummet again.” BlackRock, the world’s largest money manager, shares Citi’s view of taking advantage of increased yields. Supply is building in the coming weeks, making it tougher for states and cities to borrow at current levels. They may have to offer investors better deals.

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

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