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Muni Week Review / Preview 3/1/2017

Wednesday, Mar 01, 2017

PR FISCAL PLAN SEES $1.2 BILLION FOR DEBT SERVICE...PUERTO RICO GOV. RESISTS DEEP SPENDING CUTS…SPENDING CUTS LOWER CHICAGO  SCHOOLS BUDGET GAP…NJ TO BOOST PENSION FUNDING BY $2.5 BILLION…

Puerto Rico Fiscal Plan Sees $1.2 Billion for Debt Service… Puerto Rico cuts spending to save $3.8 billion a year. The Oversight Board recommended $4.5 billion in cuts. A fiscal turnaround plan shows about $1.2 billion a year available to service debt, 50% more than an earlier projection by the federally appointed board overseeing the U.S. territory's finances. The plan, which the Island's government released on Wednesday, is meant to serve as a blueprint for Puerto Rico's ascent out of fiscal crisis and as the basis for upcoming restructuring talks with holders of some $70 billion in debt. The government is expecting higher baseline revenues and lower expenses than the board's projection. However, it falls short of some spending cuts recommended by the board, such as on healthcare funding. The 10-year fiscal plan, which Governor Rossello delivered to the board late on Tuesday night, is a requirement of the Federal Puerto Rico rescue legislation, known as PROMESA passed last year. The Island trying to fend off economic catastrophe, is facing a 45% poverty rate and nearly insolvent public pensions and healthcare systems. The plan needs approval by the board, which is under no obligation to rubberstamp it and can develop its own plan. The board has said it wants to approve a plan by March 15. Rossello would save as much as $550 million on health-care and about $89 million in pension spending. While this is below the board's targets, the governor has cited the need to protect Puerto Rico's poorest residents. The board had recommended $1 billion a year in spending cuts to healthcare and $200 million to pensions. Rossello's plan still manages to increase the projected figure available for debt service, to $1.2 billion from the board's figure of $800 million, by using a higher forecast for baseline revenues and a lower one for expenses. According to the plan, a debt restructuring could include creating additional securitized securities, a series of cash flow notes and a structure that ties creditor recoveries to economic growth on the Island. Everything is on the table including suspend-ing principal payments for a period of years.

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Puerto Rico Governor Resists Deep Spending Cuts… The release of the Governor’s plan marks an initial step toward resolving the crisis on the Caribbean Island, which has been mired in recession and has been losing population as residents leave for the U.S. mainland. Puerto Rico borrowed for years to pay bills, waiting for an economic rebound, only to collapse into a record setting series of defaults that began in 2015. The Governor’s plan is clearly trying to satisfy the people of Puerto Rico, not the Oversight Board. The plan favors efforts to increase revenue and restructure government offices, rather than to push the deep cuts recommended by the Oversight Board. The measures set out in the Governor’s plan will not be enough to put Puerto Rico on the path to a turnaround. The plan is most likely an opening salvo from the Governor to the Control Board, in order to begin a discussion and negotiation. The Control Board could take offense to the plan because it ignores the guidance they’ve previously provided. The board said in a statement that it will review the proposal in the coming days. The release of the plan had little immediate impact on Puerto Rico bond prices.

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Bond Insurers Key Role in PR… Bond insurers have a history of working through difficult situations like Puerto Rico to reach outcomes that are better than widely assumed at the outset of negotiations. We feel very strongly that PROMESA does recognize constitutional priorities and contractual liens, which we think is very positive. We are a large enough creditor that although we cannot force any deal, we can definitely stop any deal. And it is our belief that we will pursue our legal remedies to the fullest extent possible, we believe in our contractual rights, in our constitutional priorities that we expect to be somehow recognized, and yet it's a negotiation, and obviously, there's a lot of moving parts right now, as Assured Guaranty CEO said this week that unlike his predecessor, the new PR Governor is realistic about Puerto Rico need for future market access and therefore its need to embrace a more consensual approach with creditors.

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Spending Cuts Lower Chicago Public Schools Budget Gap… Mid-year cuts and legal recourse for funding parity are amongst Chicago Public Schools’ (CPS) ploy to fill a $215 million budget gap. This week CPS approved a revised $5.4 billion operating budget that cuts $104 million of spending from four furlough days with savings of $35 million, $5 million in central administrative cuts, a $46 million reduction in individual school budgets, and $18 million in charter school funding cuts. That leaves Chicago Public Schools with a $129 million hole still to fill. CPS has warned that it will close schools three weeks early and cut summer programs to save $96 million if a timely fix does not become available. In court documents, CPS noted that it will still have access to capital markets to make its $721 million pension payment due June. The moves are the district's latest effort to prod Gov. Bruce Rauner and state lawmakers. A shortened school year would depend on the judges’ decision barring the state from funding disparities combined with a “grand bargain” in Springfield to solve the state's record budget impasse.

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Illinois Budget Talks… The Illinois Senate continued to work on a sweeping proposal to end the state’s record breaking budget impasse. A solution could come soon when lawmakers may vote on some of the most con-troversial portions of the bipartisan effort, including tax hikes and an overhaul of the workers compensation system for employees hurt on the job. Proposals that make it easier for governments to consolidate, a major gambling expansion to bring more money into state coffers and a supplemental budget to send money to universities, social service providers and veteran’s homes were approved by the Senate while an effort to curb pension benefits stalled. Republican Gov. Bruce Rauner has said he could not support an income tax hike unless it came with a permanent property tax freeze. The measure in the Senate has called for a two-year freeze. Action in the Senate is a first step, as the House would have its say before the plan could reach the governor’s desk. Senate President John Cullerton, D-Chicago said, “People just have to understand this is a classic compromise.”

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New Jersey To Boost Pension Funding... Pension funding of $2.5 billion next year comes with New Jersey's fiscal 2018 budget propos-al. Although $650 million higher than this year's pension payment, fiscal 2018 pension funding is still about half the most recent actuarial recommendation for the system, which has a $135.7 billion shortfall after years of increased benefits and skipped or reduced payments. Unveiling a $35.5 billion budget plan, Governor Christie proposed contributing lottery revenue to the pension system for 30 years to reduce unfunded pension liability by $13 billion and increase the pension funded ratio to 64% from 49%. “While the need for real and sustainable long-term reform cannot be understated, addressing the continued compounding of the pension crisis requires a substantial increase in state contributions,” said Gov. Christie. Last December, Christie signed legislation passed by the state senate and assembly to begin making pension payments on a quarterly basis rather than annually to put NJ on track to make full actuarially required pension payments by 2022 and cut the state’s unfunded liability by a projected $4.9 billion over 30 years. NJ’s pension system is the least funded among U.S. states, leading to credit rating downgrades and higher borrowing costs relative to other governments. NJ bonds yield about 1% more than top rated munis. “If implemented correctly, this action would not only increase the value and stability of our pension funds immediately, but it would also please bond investors and credit rating agencies giving confidence to NJ’s public employees.”

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Muni Bond Yields… Long term 30-year U.S. Treasuries taxable bonds yield 3.075%. Comparable “AAA” rated munis yield around 3.10% tax-exempt or about 5.15% taxable equivalent for top tax payers. Approximate tax-exempt 30 year muni bond yields: “AA” munis yield 3.60% “A” rated munis yield 3.80% “BBB” rated munis yield 4.65%.

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