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Muni Week Review / Preview 10/19/2015

Wednesday, Oct 21, 2015

TREASURY DISCUSSES A PLAN TO AID PUERTO RICO.  CONGRESS HAS OPTIONS TO SOLVE PUERTO RICO CRISIS. CHICAGO BUDGET ENDORSED.

Treasury Discusses Plan to Help Puerto Rico… The Treasury Department is discussing a radical response to the fiscal chaos in Puerto Rico that could involve a broad debt exchange assisted by the federal government. One proposal calls for the federal government to help Puerto Rico collect local tax revenues. An inability to collect all taxes owed is seen as contributing to Puerto Rico’s debt crisis. Tax proceeds would be placed in a “lockbox” overseen by the Treasury and eventually paid out by the Treasury to the holders of a new super bond Puerto Rico would issue in the proposed exchange. Since the Treasury would effectively become the paying agent for the new municipal bonds, the municipal bonds would be more attractive than the municipal bonds that creditors now hold. It would make it easier for Puerto Rico to exchange new debt with creditors who hold bonds devastated in value since the island warned this summer that it could not pay its debts. The proposal has logistical, political and legal challenges, but it may never get off the ground. However, the Puerto Rico crisis is getting more Federal attention.

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Congress’s Menu of Options to Solve Puerto Rico’s Crisis… The White House has made it clear it won’t bail out the Commonwealth and Congress isn’t willing to hand it money to fill this year’s funding gap. Still, lawmakers are trying to put together some solutions for a bill which would help Puerto Rico recover over the long term. Legislation might include: Federal Control Board - Sen. Charles Grassley said such a vehicle is crucial to resist local pressure and implement fiscal reforms such as reducing headcount in the government, which now provides almost a fourth of all jobs on the island. Fiscal control boards were used in similar situations in the District of Columbia and New York City, this option is gaining traction. Federal Loan Guarantee - Puerto Rico’s non-voting member of U.S. Con-gress, Pedro Pierluisi, proposed a bill allowing the feds to guarantee payment on future municipal bonds, arguing this assistance would be similar to that provided to New York in the 1970’s, little chance without federally appointed oversight board. Treat Puerto Rico as State Under U.S. Bankruptcy Law - This option put forward by Pierluisi would give Puerto Rico the option to authorize its municipalities and public agencies to restructure their debt under Chapter 9 protection. The proposal has the backing of top House and Senate Democrats, but no Repub-lican support. Shipping and Labor Costs - Sen. Grassley also said Congress should consider exempting the island from the Jones Act that requires the island to use only American ships, boosting costs. The senator also supports exempting Puerto Ricans from minimum-wage requirements, although such a move would meet with resistance from local residents concerned about their earnings, these options could get bipartisan support. Medicare, Medicaid and Taxes - An all inclusive aid package from Congress might also include more funds for Puerto Rico from Medicare and Medicaid and some changes to the federal corporate tax system benefiting the island’s economy, according to Bloomberg Intelligence analyst Nathan Dean, this option could get bipartisan sup-port. “If there’s going to be any from Congress, its got to have a wide variety of solutions included in there,” Dean said. Gov. Padilla met with Obama administration officials and discussed the economic situation on the island. Senators will have an opportunity to look closely into the Puerto Rican issues this week, when the Senate Energy and Natural Resources Committee holds a hearing on the island’s “economy, debt and options for Congress moving forward.”assistance

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No-Bailout Planned for Puerto Rico… The Obama administration reiterated it has no plans for a tax payer-backed bailout of Puerto Rico. “It would be inaccurate to suggest the Treasury is in talks to undertake any of Puerto Rico’s financial obligations,” a White House spokesman told reporters. “Issuing bonds that are backed by the U.S. would raise questions about whether or not we’re under-taking their financial obligations.”

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Dialogue Continues at PREPA… A critical test for the Common-wealth trying to forge a broader restructuring of $72 billion of debt is PREPA’s restructuring. For the tenth time, municipal bondholders holding 35% of PREPA municipal bonds who agreed to a 15% haircut and line of credit lenders extended forbearance for a week. Higher rates unchanged for three decades sought by bond insurers were approved by the PREPA Board as part of an offer made to municipal bond insurers. Holding out for full recovery bond insurers refused forbearance and continue dialogue.

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Chicago Budget Endorsed… “A much needed step” referring to a record property tax hike. Chicago Civic Federation President testified at a city council public hearing as he endorsed the Mayor’s 2016 budget. Asking aldermen to make laws that end the use of borrowing for short term operating costs, the Civic Federation praised the mayor for taking the Windy City in this direction. Since the investor friendly budget was released, Chicago municipal bond yield spreads have narrowed 50 basis points which could translate to $33 million interest savings on the city’s upcoming $500 million general obligation municipal bonds. City council will vote on October 28.

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Budget Impasse Dims Pennsylva-nia Outlook… In PA the outlook on its credit rating was dropped to negative from stable by Moody’s, which cited a budget stalemate that has lasted for more than 100 days. Continued delay will lead investors to demand higher yields to buy the state’s bonds.

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IL Skips Pension Payment … Four months into the fiscal year, Illinois lawmakers must resolve 2016 budget issues. Illinois will skip $560 million monthly pension fund payment in November and possibly December although it intends to make up missed payments before June 2016. Debt service and pension payments come under a continuing appropriation not requiring an entry in an approved budget. Pension appropriations give the state some flexibility. A top priority on available state revenues is accorded to general obligation municipal bonds.

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Pension Reforms Needed… Although funding levels and contributions to state pensions improved in 2014, retiree growth far outpaces active employees making it harder for public pension plans to meet actuarial requirements. The median state pension had 70% of the assets needed to meet pension benefits: the second straight year of higher pension funding. Thirteen states including Illinois and New Jersey saw funding levels drop. In a stark contrast, active employees roughly doubled retirees in 2008; now that ratio is 1.45 placing additional stress on public pensions sorely needing reform. Michigan, Alaska and Ohio state retirees outnumber current em-ployees.

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Consumer Prices Fall… The Fed faces a greater risk of raising rates too soon versus moving too late. Lackluster consumer spending, inflation and jobs have virtually eliminated the chances of a move this month, maybe even this year. Consumer prices fell 0.2% in September and producer prices which indicate inflation at the wholesale level fell 0.5% in September down 1.1% from a year earlier the largest 12-month decline during this ex-pansion. Retail sales make up two-thirds of total demand for goods and services and rose just 0.1% in September. With only two Fed Committee meetings remaining this year, investors cut the proba-bility of a 2015 rate rise to less than 30% from 60% a month 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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