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Muni Week Review / Preview 3/21/2016

Monday, Mar 21, 2016

REPUBLICANS SLAM DEMOCRATS’ PUERTO RICO PROPOSAL. FED CHAIRMAN DIALS BACK PACE OF RATE HIKES. ATLANTIC CITY REFORM BILLS ADVANCE… CHICAGO WATER BOND SALE.

Republicans Slam The Democrats’ Puer-to Rico Proposal As “Unworkable”… Senate Finance Committee Chair Orrin Hatch called Democrats to be more realistic as he termed their proposal “unworkable”. In a lengthy speech on the floor of the Sen-ate, Hatch opposed several proposals from Senate Democrats. Dems say they want to move the goal posts to allow unprecedented and currently illegal broad debt restructuring to favor public pensions. They would  pair with tens of billions of federal funds for Puerto Rico without any sense of from where the funds would come. Hatch said that any congressional solution must be done “in a manner that is fiscally responsible with an eye toward righting the irresponsible course taken by the government of Puerto Rico.” If both Republicans and Democrats are going to come to a consensus, Hatch said several things must happen, starting with serious attempts at consensual debt negotiations between Puerto Rico's government and its creditors. Hatch called the latest proposals as ‘repackaged’ as Democrats were forced to move on after Republicans shelved earlier bills that sought debt relief under Chapter 9. While there are many proposals for the commonwealth currently floating in Congress, a proposal that features a strong oversight board, audited financial statements and voluntary debt restructuring, preferred by many creditors, is expected from the House Natural Resources Committee as Speaker Paul Ryan has set a March 31 deadline for a bipartisan proposal. Discussions for that proposal have centered on welding the Democrats' call for some type of restructuring with Republicans' proposal for a federal over-sight authority. U.S. House Democratic Leader Nancy Pelosi said this week, “We should have a bill pretty soon and I think the Republicans are acting in good faith on this. It would be my hope that we would see something before we leave here on March 24th for Easter recess.” The Republican goals for any legislation are to keep the integrity of the entire municipal bond market intact by not setting any law changing precedent when addressing the island’s debt restructuring. The Fiscal Control Board must establish investor confidence and regain market access and the plan must stimulate economic growth.

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Puerto Rico Year To Date Revenues… General Fund revenues for the year to date period July to February 2016 of  $5.16 billion were $170 million higher than a year ago and $25 million below revised estimates. For the same period sales and use tax revenues of $777 million were $583 million higher than a year ago and $10 million more than revised estimates: boosted sales and use tax revenue is the result of increasing sales and use tax to 10.5% from 6% and a 4% tax on business to business and professional services.


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Fed Dials Back Rate Rise Forecast… Federal Reserve officials dimmed their view of the economy and scaled back forecasts for raising rates this year citing weaker global growth and financial market volatility. The Fed expects the economy to expand 2.2% in 2016 which is 0.2% less than their December projection. The Fed also cut its inflation forecast for this year to 1.2% from 1.6%. Juggling mixed economic signals: a strengthening job market but surpris-ingly weak wage growth, and a resilient U.S. expansion amid global weakness, Fed Chair Janet Yellen said, “Caution is appropriate.” The Federal Open Market Committee kept the target range for the bench-mark federal funds rate at 0.25% to 0.5%. Traders see a 39% chance the Fed will raise rates by June to around 0.625%, according to fu-tures data by Bloomberg. Yields on Treasury securities fell following the Fed’s actions, with the rate on the 10-year note dropping to 1.92%.


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Atlantic City Reform Bills Ad-vance…  New Jersey Senate Backs Atlantic City State Takeover and PILOT Bills. The New Jersey Senate favored a state takeover of Atlantic City allowing the state Local Finance Board to restructure Atlantic City debt, break union contracts and sell city assets over the next five years. The Senate on Monday also passed a measure designed to eliminate costly casino tax appeals. The State Assembly would also need to pass the plan before it heads to Governor Christie’s approval. Not wanting to strip unions’ collective bargaining rights, Assembly Speaker Vincent Prieto has called for a com-promise. Many city officials want state lawmakers to pass just the PILOT bill, which Governor Christie vetoed in recent months asking for labor reforms. Governor Christie stressed that he would sign both the state takeover bill and PILOT bill together, not one without the other noting “If they are changed in any way, I will not.” Despite reservations other democrats including Senate President Stephen Sweeney and former Mayor Jim Whelan support the state takeover, “It's a difficult decision. But we're sent here to make difficult decisions. And this is one we have to make for the betterment of Atlantic City.” As part of its revitalization plan the junk-rated city put on auction its 143-acre airport Bader Field which has been closed for a decade .


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Chicago Water Bond Sale… Chicago’s water utility will issue $700 million bonds to convert all remaining floating-rate debt to fixed rate and terminate risky derivative contracts. The city has exited all of its interest rate swaps tied to general obligation, sales and waste-water debt. “This is another additional step in righting the ship, fixing the fiscal conditions of the city, and making the health of our fiscal picture stronger,” said Mayor Rahm Emanuel noting that the Windy City is not out of the woods. Chicago and its public schools are grappling with pension debt. In October, Emanuel made some progress with boosting pension funding when he pushed through a $543 million property-tax hike, the biggest in city history.


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Chicago Public Schools (CPS) Update… A new report by the Illinois Board of Education finds, Chicago Public Schools are in their worst financial shape since the board started tracking CPS financials. CPS is once again on the state’s “financial watch” list because it relies on deficit spending, borrowing or tapping into reserve funds to keep paying its bills. The Board has four categories of financial health, Recognition, Review, Early Warning and Watch based upon districts’ reserves, deficit spending, borrowing and liquidity. If the school district ever comes up short on its debt payments, the investors who bought CPS’ bonds can rest assured they will get what they are owed straight from Chicago taxpayers as bond contracts trigger a property tax hike for debt service if needed. CPS general ob-ligation bonds are paid from an alternate revenue stream pledged state aid or per pupil education funding CPS gets from the State of Illinois. The backup option- property taxes has never been called upon. In the Chicago Tribune March 17, an analyst noted, “Citizens don’t know the extent to which their own assets are pledged to pay bondholders.” A looming teacher strike on April 1 called ‘illegal’ by CPS CEO Forest Clay-pool thickens tensions running high amid CPS, teachers, students and parents. Full debt service through March 2017 on CPS gen-eral obligation bonds is set aside with bond trustees.

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Pennsylvania Budget Impasse Continues… Pennsylvania’s budget impasse, already at a modern record, continues as the Republican controlled legislature and Demo-cratic Governor Tom Wolf fail to reach consensus in the latest round of negotiations. The Governor said he would veto a no-tax increase $30 billion spending plan approved by the legislature. Governor Wolf wants higher taxes to finance education. The stalemate has put yields on Pennsylvania bonds relative to the top rated benchmarks at a 3 year high.


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