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Muni Week Review / Preview 6/22/2015

Monday, Jun 22, 2015

LOW INFLATION TRANSLATES TO GRADUAL RATE INCREASES… PREPA GETS UNTIL JUNE 30… STATE PENSION LIABILITIES GROW…

Rate Increases Will be Gradual…No one was surprised when Yellen stood pat on interest rates last Wednesday.  The Fed cut its forecast for 2015 GDP growth to 1.8%-2% down from 2.3%-2.7% in March and 2.6%-3% in December.  Consumer prices are flat from a year earlier and rose 0.4% in May from last month.  Prices, excluding food and oil rose just 0.1% in May. 

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June 30 Deadline For PREPA…Puerto Rico’s junk-rated power utility won a fifth extension to June 30 on the forbearance agreement that has kept its negotiations with creditors out of court.  Investors and bond insurers have tentatively agreed on a proposal for how they’d be willing to alter terms on the authority’s existing securities.  PREPA faces a $416 million debt-service payment July 1 and is saddled with $9 billion of debt. Insurers cover most of the bonds maturing that day, per data compiled by Bloomberg.  Meanwhile, on Capitol Hill there is rumor of U.S. Treasury buying Government Development Bank (GDB) Notes.  Insurers offering to insure a portion of the $3 billion oil tax issue needed to shore up GDB liquidity carry leverage with Puerto Rico as they seek to enforce favorable bond indenture terms for PREPA bonds.

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How Does State Pension Liability Compare with Debt…Unfunded pension liability, $959 billion in 2013, has grown over 7% each year since 2011 towering over aggregate state debt, $487 billion in 2013 which remained static from prior year growing merely 2.9% and 1.7% in fiscal 2012 and 2011.  Average unfunded actuarial accrued pension liability per capita $3,231 is almost 3x debt per capita $1,347 in 2013.  Given states’ generally strong credit profile and the long-term nature of pension obligations, pension liabilities do not lend immediately to states capacity to fund debt service.  The 50-state average funded ratio is at 71% with a handful of states struggling with lower funded ratios.  Once considered sacrosanct, public employee benefits are under the microscope as lawmakers face the difficult trade-off between maintaining current benefits for both those retired and in the active workforce and restoring services or providing tax relief to taxpayers.  According to the National Conference of State Legislatures (NCSL), between 2009 and 2015, all 50 states and Puerto Rico enacted some type of pension reform. Pension relief through lower contributions buys more time and leverage in negotiations with labor unions.  Longer term, promising only what can be delivered while trimming excess pension benefits brings fiscal benefits.  How states manage these liabilities both annually and in the long term are important credit factors.

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A Better Funded Pension…An example of a state using broad legal authority to reform pension funding challenges is visible in recent legislation in Texas.  Governor Abbott signed a law that increases state employee pension contributions to 9.5% from 7.2% of payroll. Texas also indicated it will increase its contributions to the Employees Retirement System of Texas (ERS) to 10% of payroll from 8% beginning in the fiscal year starting 1 September 2015.  Slowing the pace of unfunded liabilities is credit positive.

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Wayne County Seeks Broader Powers…Wayne County Executive Warren Evans is seeking a consent agreement with Michigan that would give the county more power in negotiations with stakeholders. “I am requesting this consent agreement because the additional authority it can provide the County may be necessary to get the job of fixing the county's finances done." Wayne County, MI Executive Warren Evans is asking for state invention to help tackle the county's fiscal woes.  Since taking office on Jan 1, Evans has taken steps to cut about half the fiscal deficit, the latest being a healthcare benefit settlement with retirees saving $20 million a year.  Wayne County’s pension system is 44% funded.  

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More Unions Curbed…Credit positive for Nevada towns and cities is a new law that protects up to 25% of general fund balances from collective bargaining pursued by unions. The law puts a lid on personnel costs and boosts financial flexibility for muni issuers.  The law authorizes local governments to reopen labor agreements if recurring general fund revenues drop 5% or if general fund balances are narrow in relation to expenses.  Nevada law gives cities the upper hand in labor negotiations dispelling the notion of sacrosanct promises.

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Moody’s Ratings Have Fewer Takers…The latest to back away from Moody’s rating services are Santa Clara Co, CA and Miami-Dade Co, FL following Chicago who described Moody’s overly conservative approach as “irresponsible and premature”.  Since 2008 Moody’s ratings diverge significantly from S&P and Fitch known for a balanced view taking into account the very low default levels among state and local government issuers.  “Our view is that credit quality is generally strong, a position that has been borne out in recent years,” noted S&P.  Noting the divergence, sophisticated investors have stepped back from ratings to seek advice from a Municipal Bond Specialist. Disconnected from reality, out-of-sync Moody’s ratings have fewer takers.

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Chicago Approves $1.1 Billion G.O. Bonds Issue…Chicago City Council approved $1.1 billion of borrowing to bolster the third most-populous U.S. city’s finances to issue general-obligation bonds that convert variable-rate commercial paper into longer-term fixed-rate debt and terminate interest-rate swaps. The move is part of a plan Mayor Rahm Emanuel laid out in April which is now being implemented with success.  As the Windy City seeks relief from a mounting pension deficit, Illinois cut Chicago’s pension contributions 40%.  The City intends to issue fiscal 2016 budget a month early.

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California Ripe For Another Up-Grade…A California accord invites attention of ratings agencies as it follows Governor Brown’s austere spending approach paying off $15 billion deficit bonds sold under former administrations that brings reserves up to $4.6 billion.  After a surge in capital-gains tax revenue and from temporary tax increases voters approved in 2012, $6.7 billion more plowed into the state’s coffers than Brown estimated in January.  S&P had suggested that it could raise the Golden State’s ratings, once the lowest in the nation, if lawmakers support Governor Brown’s budget.

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Texas Economic Engine Keeps Roaring…Thriving businesses in Dallas-Fort Worth, the nation’s fourth largest metro area with nearly 7 million people has a big role in Texas’ growth.  Central location, transportation network and local incentives have drawn corporate relocations and domestic migrants more than most other metros.  “I look out and see hundreds of new rooftops,” the president of Nebraska Furniture Mart in Colony reflects confidence in the region’s growth where local governments have issued high yield bonds to finance new infrastructure to keep up with fast growing population.

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Fiscal Update On States…Despite five consecutive years of budget growth and low inflation, 50-state aggregate general fund revenue are 2.3% lower and spending is 3.2% lower than 2008 pre-recession levels.  Reflecting higher stability mid-year budget cuts have subsided.  Extending the period of fiscal rebuilding, state budgets are to grow modestly in fiscal 2016 with revenues up 3% after growing 3.7% in fiscal 2015 according to NASBO.  States vary in their fiscal health due to a combination of economic, demo­graphic and policy factors.

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Hospitals Continue To Rally…For the first time since 2011, not-for-profit hospitals saw revenue grow faster than expenses.  As a result of stabilizing margins, hospitals issued about $14 billion tax free bonds this year.

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

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