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Muni Week Review / Preview 4/18/2016

Monday, Apr 18, 2016

PUERTO RICO STABILITY ACT STALLED IN HOUSE BY POLITICAL POSITIONING. EVENTUALLY CONGRESS WILL ACT. STATE TAKEOVER KEY ISSUE FOR ATLANTIC CITY. CHICAGO PENSIONS ON RADAR.

The Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) is Stalled By Political Positioning…“This legislation needs bipartisan support, but members need time to understand the com-plexity of the issue and the ramifications of any proposed changes,” said House Cmte chair Rob Bishop.  The markup of the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, slated to begin last Thursday in the House Committee on Natural Resources was delayed. Top Republicans including Speaker Ryan insist the bill is not a U.S. taxpayer funded bailout.  Both Republican and Democrat leaders recognize that a media campaign by certain groups including the Center for Individual Freedom, Heritage Foundation and Sunlight Foundation that call the bill a ‘Super Chapter 9’ are “not even factual”. Democrats complain the oversight that Republicans want to enforce on Puerto Rico in return for relief is too harsh. Specific differences remain over the powers of a proposed federal oversight board such as: the processes for restructuring the territory’s debt, a timetable for when a moratorium on creditor lawsuits would expire, and efforts by Republicans to let Puerto Rico lower its minimum wage.  Although the current bill does not have enough votes to reach the floor, House Speaker Paul Ryan and top House Democrat Nancy Pelosi expect to be able to work out their differences on the bill to help address Puerto Rico’s debt crisis, albeit not this week, the time frame for which Republicans were originally aiming. Upcoming GDB debt service payment of $422 million on May 1st is a ticking clock for lawmakers to act.  Engaged with the issue, Treasury official Antonio Weiss is concerned that the ‘Consensual/Collective Action’ clause lan-guage of the bill could make restructuring difficult. The White House said, “Only bipartisan congressional action can end this crisis, and we encourage members to continue to work to improve this bill and to act without delay.”

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Eventually U.S. Congress Will Act… Top Republican and Democrat leaders urge bi-partisan agreement on the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). The folly of the new local Puerto Rico laws is self-evident. Barring PREPA, the administration has given little attention to bondholders offers instead they laid out unrealistic proposals as pressure tactics. Without swift federal over-sight, legal action from creditors is imminent. U.S. legislative delays alongside brash new Puerto Rico laws threaten the May 1st GDB debt service payment as the island’s lender of last resort hashes out a deal with bondholders. The Commonwealth has further pushed off its promise to deliver the one year overdue Fiscal 2014 audit for suspicious reasons.  There is no excuse for Congress not to act on a framework of consensual debt restructuring governed by an independent federal oversight board. In our opinion, Congress will eventually forge a path forward for the island’s economic revitalization via the territorial powers act.

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Latest Puerto Rico Debt Exchange Gets Cold Shoulder From Bondholders… After investors shunned an earlier offer, Puerto Rico revised terms of a debt exchange. The latest offer would cut Puerto Rico’s $49.3 billion tax-supported debt to between $32.6 billion and $37.4 billion. The exchange proposal appears to offer bondholders the following combinations: G.O. bond- holders would receive 80% interest bearing bonds and 20% zero interest bonds; the exchange offer for COFINA bonds: 57% interest bear-ing bonds and 43% zero interest bonds. Most other bonds would be exchanged for 50% interest bearing and 50% zero interest bonds. The plan allows Puerto Rico to allot $1.85 billion on annual debt service. The Island’s residents would also have the option to receive a local bond that would have a long-dated maturity and pay 2% interest through its life. “This latest proposal, which was not received well by bondholders, reinforces the need for a workable U.S. legislative solution underpinned by restructuring jurisprudence, respect of property rights and a true strategy for restoring Island growth,” said an advisor to COFINA bondholders.

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Atlantic City, State Takeover is Key Issue…The Assembly judicia-ry committee unanimously approved a measure that gives the city up to two years before a full state takeover in exchange for city government meeting financial benchmarks. This bill, sponsored by Assembly Speaker Vincent Prieto would allow casinos to make payments in lieu of taxes, like the Sweeney and Christie measure. But unlike that legislation, the measure sets up a five-person committee consisting of three Christie officials and two city officials that would set financial benchmarks At-lantic City must meet. If after two years, the city doesn't meet those benchmarks, then the state would be given most of the authority to do most of what's in the Senate bill. Governor Christie wants an immediate state takeover.  Senate President Sweeney proposed an amendment asking for 130 days before a state takeover. Meanwhile, Atlantic City averted an unprecedented shutdown of non-essential services after City Council voted unanimously to stretch the time between employee paychecks to keep the community solvent to June. While the city made April 1st bond payments, its May and June payments are being doubted by S&P and Moody’s.

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Chicago Pensions on the Radar… Investors and analysts are watching closely as the city’s pension woes drive its credit. Chicago has slated $3.2 billion of new bonds this year including $600 million general obligation bonds, $700 million water revenue bonds, $400 million Midway international airport revenue bonds, $200 million sales tax bonds and $600 million wastewater revenue bonds.  With $20 billion of unfunded obligation, Chicago’s four pension funds are just 34% funded. Meanwhile, the clock is ticking on the fate of Mayor Emanuel’s proposal known as Senate Bill 777 to trim $220 million off the city’s contribution to police and fire pensions. While the city awaits decisions from Springfield, it made a draw of $220 million from the city’s short term credit line to meet a funding deadline; the remainder of the $550 million tax spike is being covered by an unprecedented tax hike that brings in $543 million phased in over four years. According to Moody’s, Chicago has flexibility on expenditures and revenue, signaling there are op-tions available to incorporate higher contributions over the longer-term.

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Property Owners Would See a Tax Hike if Chicago Public Schools (CPS) Misses a Debt Payment… If the Chicago 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. The school district’s bond contracts include a little known provision that would trigger a property tax increase if CPS fails to pay bondholders. The county clerk would deliver that additional revenue directly to the paying agent bank, much the way a creditor might garnish an individual’s wages. As an example: If the school district was unable to make last year’s debt payment in February 2015, this years’s taxes would have increased by $725 for the owner of a $250,000 home, according to calculations per-formed by the Cook County clerk’s office in response to Tribune questions. If CPS had come up $200 million short last year, the same homeowner would have paid an ad-ditional $188.  State law limits CPS’ ability  to raise property taxes, but that cap applies only to taxes collected for operating revenues, the money the district uses to run the schools. The tax cap specifically exempts taxes collected for debt service, so there is no limit on the amount of money CPS can collect to pay bondholders. CPS is scheduled to set aside money for its next debt payment, an expected $540 million in February 2017.

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Wayne County Turns Around - Reports Surplus… Reversing eight years of deficits, Wayne County, MI finished fiscal 2015 with a $5.7 mil-lion surplus.  State oversight, which began in August 2015, led the coun-ty to trim retiree benefits, payrolls, unfunded pension liabilities and other operating costs. County Executive Warren Evans said, “Having a surplus for the first time in eight years is a significant achievement when you consider the financial challenges we faced just a year ago.”

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

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