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Muni Week Review / Preview 12/14/2015

Monday, Dec 14, 2015

CONGRESS OFFERS HEALTH AID TO PUERTO RICO. MUNI MARKET SET FOR TOP GAINS. FEDERAL RESERVE ENDS ZERO-RATE ERA.

Congress Offers Health Aid to Puerto Rico... U.S. lawmakers agreed to extend health care aid to Puerto Rico as part of a $1.1 trillion ominibus tax and spending bill that they’re racing to approve this week.  It would mark the first step by Congress to help the Commonwealth cope with the island’s debt crisis. The legislation worth about $900 million over 10 years would increase payments to hospitals on the island and provide bonus Medicare payments to doctors and medical facilities that adopt electronic health recordkeeping. The bill’s text didn’t include a provision to grant Puerto Rico agencies access to Chapter 9 bankruptcy that had been sought by the Commonwealth’s governor and non-voting House member, Pedro Pierluisi.

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Hatch Says Enough in Omnibus Bill to Aid Puerto Rico Through February… “We’ve done enough that we think if they can handle it properly they can get through February,” Senate Finance Cmte Chairman Orrin Hatch said in an interview. Hatch said he hopes “in the interim time” between now and February that lawmakers can “work out a solution that will be long-term.” The fate of Puerto Rico has become a political as well as fiscal issue. The territory has as many presidential convention votes as New Hampshire and there are about 1 million Puerto Ricans living in Florida and potentially voting there. If the GOP led Congress fails to help Puerto Rico, it could affect the 2016 presidential outcome in a key swing state. Sens. Orrin Hatch (R-Utah), Lisa Murkowski (R-Alaska) and Charles Grassley (R-Iowa), chairs of the Senate Finance, Energy and Natural Re-sources and Judiciary Committees, on Dec. 9 proposed a bill that would provide about $3 billion in assistance to the territory and cut the employee share of Social Security taxes in half for five years. Democrats and Puerto Rico officials did not embrace the proposed bill. The GOP trio said that there wasn’t enough audited financial information about Puerto Rico’s debt to pass legislation that would address restructuring. Hatch helped make sure the omnibus bill included language giving the Treasury authority to provide technical assistance to Puerto Rico, a way of addressing that concern. “While there is no silver bullet to resolving the growing debt and economic crisis in Puerto Rico, any path forward must impose fiscal restraint and oversight,” Hatch said. “We can now begin the process of improving basic bookkeeping in the territory and end the opacity and lack of transparency in their finances.” Hatch said that the health-care provisions in the budget “are less than desirable. Providing blank checks without oversight or fiscal responsibility is not my preferred approach.” The failed discussions point out the ongoing problem with  Puerto Rico talks in Congress. Democrats tend to believe warnings by Puerto Rico Gov. Padilla and Treasury Department officials that the Commonwealth is in a dire crisis, while Republicans do not, as they await audited financial's not available since 2013.

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Puerto Rico’s Governor Won’t Run for Re-Election in 2016… Governor Alejandro Garcia Padilla said he won’t seek re-election so his administration can focus on reducing the Caribbean island’s $70 billion debt load. “I will be focusing on attending the issues of the government above all and before any of my political aspirations,” Padilla said in a taped broadcast Monday.

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Puerto Rico Recovery Act Update… Puerto Rico faces slim odds in its bid to the Supreme Court to reverse two lower court rulings. One from the 1st Circuit Court, another from a Federal District court in Puerto Rico both affirmed the unconstitutionality of the Recovery Act that would allow Puerto Rico agencies to file bankruptcy. Most likely the Supreme Court will focus on the interpretation of the Bankruptcy Code similar to the 1st Circuit which honed in on the Bankruptcy Code blocking the Recovery Act. The disputed law would affect about $22 billion of Puerto Rico public corporation debt. Puerto Rico will file its brief by Jan 18, with hearings concluded by mid-March. Eight judges will rule by Jun 30, 2016.

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Municipal Market Set for Top Gains… As municipal bonds head toward the strongest returns in the U.S. fixed-income markets this year, investors say the end of near-zero interest rates will do little to knock state and local government debt off its stride. Money has been pouring into the municipal bond market at the fastest pace since January. Defaults are falling for a fifth straight year. State and cities are being aided by an influx of tax revenue, thanks to rising real estate prices and falling unemployment. And the push to lift borrowing costs comes after a years-long refinancing wave may have run its course. Most analysts predict that new bond sales will hold steady or even fall in 2016. “Demand is strong; issuance is low,” said Peter Hayes, who oversees $111 billion as head of munis at New York based BlackRock, the world’s largest money manager. “Our theme for next year is really about maximizing carry, or income, in an environment where rates are fairly benign and don’t rise dramatically.”

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Fed Ends Zero-Rate Era… The Federal Reserve raised interest rates for the first time in almost a decade in a widely telegraphed move while signaling that the pace of subsequent increases will be “gradual” and in line with previous projections. The Federal Open Market Committee unanimously voted to set the new target range for the fed funds rate at 0.25% to 0.5%, up from zero to 0.25% Policy makers separately forecast an appropriate rate of 1.375% at the end of 2016, the same as Sept, implying four quarter-point increases in the target  range next year, based on the median number from 17 officials. “The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the fed funds rate,” the FOMC said. “The actual path of the fed funds rate will   depend on the economic out-look as informed by incoming data.”

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California Redevelopment Muni Bonds… “Property values in California have increased 35% since the RDA dissolution in 2012 and should remain healthy over the near term,” Moody's noted as it has upgraded almost all of the $4.7 billion California tax allocation municipal bonds. 2012 state law which eradicated redevelopment agencies and altered the flow of tax increment revenues triggered mass down-grades to Moody’s ‘Ba1’. Three and a half years of smooth adherence to new funding procedures has resulted in three to five-notch upgrades for California tax allocation bonds: now carrying a median ‘Baa1’ rating.

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Wayne County Progress… Five months after Michigan confirmed a financial emergency in Wayne Co, the county stands to  eliminate an $82 million accumulated deficit and slash a $53 million structural deficit to $3.7 million by the end of this year.  Financial improvements were made after renegotiating contracts with 13 bargaining units, consolidating departments and cutting ineffective development programs.  Early next year plans to finish a stalled jail in downtown Detroit could unfold as county commissioners voted against jail relocation proposals.  Detailing progress made under state oversight County Executive Warren Evans said, “There is absolutely no need for an emergency manager and no need to contemplate bankruptcy anymore.” Wayne County 10% and 9.25% bonds are trading around 100.

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Demand For Long Term Bonds… If history is any guide, longest maturing tax exempt debt are set to outperform.  When the Fed last boosted interest rates from 2004 through 2006, long term muni delivered annual returns of 6.5%, more than triple the gains on short term bonds according to Bank of America Merrill Lynch indices. The tumble in oil prices has not delivered the jolt to consumer spending that many expected last year as commodities such as cop-per and aluminum are getting cheaper with a global slowdown. Import prices are down close to 10% from a year ago, the 16th straight month of decline. Falling short of target, the Fed expects inflation of 1.7% next year. With inflation holding near zero inves-tors are capturing more yield by extending the maturity of their holdings driving up the demand for long bonds while shorter-term debt is lagging behind.

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

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