Puerto Rico

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The Week in Public Finance: Bankruptcy Looms in Hartford, Worries About the Sales Tax and Puerto Rico's Many Defaults

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BY  | AUGUST 11, 2017
Hartford Mayor Luke Bronin (AP/Jessica Hill)

Bankruptcy Is On the Table in Hartford

Over the past several months, the shadow of a potential bankruptcy has loomed large over Connecticut’s capital city. Hartford is struggling to close a $50 million budget hole -- nearly 10 percent of its spending -- and has stagnant revenues. As a result, it has been downgraded into junk status.

Hartford officials have already cut the budget to the bone, and with one of the highest property tax rates in the state, Mayor Luke Bronin says he won't raise them more. So now the question is, will the financially beleaguered state -- which already pays for half of the city's budget -- step in with more aid? Connecticut, which is facing a two-year, $3.5 billion deficit, has yet to pass a budget more than one month into the fiscal year.

Meanwhile, the city is likely trying to restructure its debt with bondholders. But if that is unsuccessful, it could seek permission from Gov. Dannel Malloy to file for Chapter 9 bankruptcy. Either way, things are coming to a head with a $3.8 million debt payment due in September and another $26.9 million payment deadline in October.

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The Week in Public Finance: Alaska Avoids Its Problems, More Health-Care Pain and Municipal Defaults Are Up

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BY  | JUNE 30, 2017The Alaska State Capitol in Juneau
The Alaska State Capitol, right, sits near the water in Juneau. (Flickr/Jasperdo)

Alaska Avoids Fixing Its Budget Problem (Again)

Facing a $2.5 billion budget gap, Alaska lawmakers have sent Gov. Bill Walker a budget that once again relies on one-time fixes and a massive withdrawal from the state’s rainy day fund.

Walker had proposed a compromise fiscal package that included a combination of revenue-raising measures and spending cuts, reforms to the state’s oil and gas tax credit program, modifications to the income tax, and reductions to residents’ annual dividend payments from the state's Permanent Fund. Instead, the $4.1 billion general fund spending plan passed by lawmakers caps Permanent Fund payments to $1,100 and relies on a $2.4 billion withdrawal from the state’s once-robust rainy day fund.

Walker has repeatedly warned lawmakers that they can't keep relying on the state’s reserves to fund its annual spending plans. But lawmakers have consistently done so anyway, making multibillion-dollar withdrawals for the past three budgets.

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The Week in Public Finance: Puerto Rico's Quasi-Bankruptcy, Congress Meddles With State Retirement Plans and More

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BY  | MAY 5, 2017

Puerto Rico (Sort of) Declares Bankruptcy

Puerto Rico declared a form of bankruptcy protection this week that puts it in uncharted territory for U.S. governments and municipal finance.

As a territory, Puerto Rico is not eligible to file for Chapter 9 protection. But thanks to the Puerto Rico Oversight, Management and Economic Stability Act, it has a similar option available to it: Title III protection.

The act, which was passed by Congress and went into effect last July, put a temporary moratorium on litigation regarding Puerto Rico’s more than $70 billion in bond debt and created a seven-member financial oversight board with final say over the commonwealth’s finance decisions. The litigation moratorium was lifted on May 1, and with creditor negotiations going nowhere, the government is allowed to file debt restructuring petitions in federal court.

The Takeaway: Puerto Rico has been in a financial downward spiral for years. When it first started defaulting on debt, there were concerns that it could have a negative ripple effect on the municipal market. As it turns out, those concerns have not been justified. So, while this latest move by the commonwealth is a great concern for anyone with money tied up in Puerto Rico, there have been few concerns that the event will cast a shadow over other U.S. governments now issuing bonds.

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Puerto Rico's Warning for States, Cities: You Might Be Next

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Gov. Alejandro Garcia Padilla said the island's rescue might simply be a harbinger of things to come on the mainland.
BY  | JULY 14, 2016

President Obama recently signed into law a highly anticipated -- and much debated -- rescue bill for debt-laden Puerto Rico. While the bill has its detractors, it marks a positive step toward the promise of recovery for the island. But the bill's impact could go far beyond the commonwealth's shores.

Puerto Rico, like states and many cities, can't legally declare bankruptcy. Saddled with $70 billion in debt, Gov. Alejandro Garcia Padilla's administration has spent the last few years unsuccessfully trying to reach an agreement with creditors. During that time, the commonwealth watched its tax base decline as residents fled stateside and Puerto Rican government entities defaulted on debt.

That's what life without bankruptcy protection is like for governments, Padilla said this week in a speech at the Brookings Institution in Washington, D.C. He went on to suggest that Puerto Rico, with its smaller economy and population size, might simply be farther along on a path other U.S. governments are also traveling. "We are only ahead of the curve -- the curve that looms for many states and municipalities," he said. "We are forced to try the route that others have not tried before, to knock on the doors that others may need to approach in the not-so-distant future."

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The Week in Public Finance: Rescuing Puerto Rico, Brexit Fallout and Minimum-Wage Trends

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A roundup of money (and other) news governments can use.
BY  | JULY 1, 2016

Puerto Rico’s New Path

Congress this week has reached an agreement on a rescue bill for Puerto Rico. The troubled territory is set to default for a third time over the past year on a debt payment due today. The legislation, which was signed by President Obama Thursday, follows a long-running debate about whether Congress should intervene at all.

The bill, called the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, passed the House of Representatives earlier this month and the Senate on Wednesday. The legislation would allow the island a path to restructure its more than $70 billion in debt while installing a financial control board to govern its finances. It was modeled after similar legislation for Washington, D.C., whose finances were also subject to a control board two decades ago.

The Takeaway: The legislation won’t stop Puerto Rico from defaulting on its $2 billion debt payment Friday. But the fact that it now has a path to solvency -- however murky and long -- delivers a message of certainty to municipal market investors. To be sure, investors will take a hit and Puerto Rico’s officials will lose immediate control of the island’s financial future. But the process will be far more orderly than it has been in the past year or so. Litigation promised “to be endless and to consume scarce resources of the beleaguered commonwealth’s government," former New York Lt. Gov. Richard Ravitch pointed out in an op-ed this week

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The Week in Public Finance: What Brexit Means for Muni Bonds, Pension Projections and More

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A roundup of money (and other) news governments can use.
BY  | JUNE 24, 2016

What Brexit Means for the Municipal Bond Market

On Thursday, Britain voters shocked the world by deciding to exit the European Union in a vote that became known as "Brexit," a combination of Britain and exit. The result, which prompted Prime Minister David Cameron to say he will step down in the coming months, has implications for global financial markets, which in turn can affect the U.S. municipal market.

Even before the results of the vote were in, the uncertainty of the outcome was affecting markets everywhere. Global stocks and some corporate bonds had slumped while demand for traditionally safer assets like U.S. Treasuries and municipal bonds had “soared,” according to Ivan Gulich, senior vice president of the financial firm Loop Capital Markets.

This increased demand for municipal bonds has driven down interest rates, which is good for governments looking to borrow money. For example, the interest rate on a 30-year Treasury bond is currently lower than it was even in the wake of the Lehman Brothers' 2008 bankruptcy that roiled the corporate market and drove demand toward government securities.

“What was initially seen as an issue for Europe has rattled markets around the world,” wrote Gulich this week in an analysis.

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How Zika Could Infect the Municipal Bond Market

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Even if an area has no cases of the virus, it could feel a financial impact.
BY  | MAY 27, 2016

When you walk through Atlanta's Hartsfield-Jackson International Airport, it’s hard to ignore the solemn warnings that the city could be an entry point for the Zika virus into the United States.

Everywhere, large signs picturing a menacing mosquito warn travelers: “Don’t let this bad bug bite you.” Other signs warn pregnant travelers about a Zika health advisory. Last month, airport concessionaires began selling insect repellent with the recommended level of DEET to keep mosquitoes at bay.

But there are also financial implications of Atlanta’s status as a gateway to Central and South American travel, and for other cities like it. According to a new report by the investment firm, Loop Capital Markets, the Zika virus could make it more expensive for some municipalities to borrow money.

That's because similar to natural disasters, a virus outbreak has the potential to overwhelm local and state health departments. In 2005, Hurricane Katrina "demonstrated the enormous capacity of governments to botch disaster relief efforts,” said Chris Mier, the report's author. Since then, research has shown that a region's susceptibility to disasters now plays a role in their municipal interest rates. For example, a study of California's more earthquake-prone cities found that they paid a higher interest rate on their bonds following Hurricane Katrina.

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The Week in Public Finance: Broke Puerto Rico, Slow Financial Disclosures and Trouble in Kansas

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A roundup of money (and other) news governments can use.
BY  | APRIL 29, 2016

Broke in Puerto Rico

Congress stalled this week on legislation that could help Puerto Rico restructure its debts. That leaves the financially strapped U.S. territory continuing to try and piece together agreements with its creditors.

The commonwealth’s next debt payment, which is nearly a half-billion dollars in securities, is due Monday, and it's expected to default. There are reports that Puerto Rico’s main financing arm is negotiating a deal with creditors to pay slightly less than half of what is owed. But even so, credit rating agencies still view such negotiated cuts as a default on debt.

Puerto Rico, however, won't get out of its jam with a series of deals. In total, the territory owes about $70 billion in debt that it can’t pay.

Congress is considering installing a federal oversight board, among other financial reforms, but lawmakers this week said they don’t expect to move on that legislation until July. Absent a federal oversight board, Puerto Rico is vulnerable to lawsuits from creditors. If that happens, that would likely drag down any restructuring process even further, according to an analysis this week by Moody’s Investors Service.

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The Week in Public Finance: Puerto Rico Drama and a Corn-y Kind of Tax Credit

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A roundup of money (and other) news governments can use.
BY  | APRIL 15, 2016

Beyond the Numbers in Puerto Rico

The drama over whether Congress should allow financially strapped Puerto Rico to restructure its debts has kicked up a notch after the recent announcement that the territory’s main financier was putting a moratorium on paying its debt, among other things. This week, a group called Main Street Bondholders launched an ad campaign calling the proposed federal legislation a “bailout” that “removes any incentive for Puerto Rico to remain at the table with bondholders.” The group says it represents the interest of retiree investors.

In response, House Speaker Paul Ryan issued a lengthy statement charging that “big-money interest groups on Wall Street” were dumping “a lot of money toward sabotaging this legislation in order to force a last-minute bailout upon Puerto Rico.” That would put U.S. taxpayers on the hook for creditors’ “bad loans,” Ryan said, which is what Congress is trying to avoid.

Anytime someone mentions “big-money interest groups on Wall Street,” it can be tempting to assume they're referring to Republican mega-donors Charles and David Koch. In this case, that's correct: The Main Street Bondholders were formed by the 60 Plus Association, a conservative small-government group that spent millions in the 2012 and 2014 election cycles to help elect conservative or Tea Party candidates. Much of its funding came from conservative groups with ties to the Koch Brothers. The group has been quiet until recently and no information is readily available yet on its funding and expenses this election cycle.

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The Week in Public Finance: States Dare Online Retailers to Sue, a Local Government Shutdown Threat and More

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A roundup of money (and other) news governments can use.
BY  | FEBRUARY 26, 2016

Don't Like It? Sue Me

Tired of waiting for Congress to approve a tax on Internet sales, more than a dozen states -- including Alabama, South Dakota and Utah -- are moving to pass bills or change regulations in ways that deliberately invite lawsuits from Internet retailers. The goal? Landing the issue before the U.S. Supreme Court.

Alabama, for its part, will start enforcing an old law it says allows it to tax out-of-state sellers. The state will audit companies that don’t file returns.

“We’re confident that some remote sellers will not comply and therefore it will lead to litigation,” Alabama Deputy Revenue Commissioner Joe Garrett told The Wall Street Journal. “We have been very open about what we’re doing.”

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The Week in Public Finance: Contradictory Pension Reports, Brewing Pension Battles and Recession Worries

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A roundup of money (and other) news governments can use.
BY  | FEBRUARY 12, 2016

Contradictory Pension Reports

Two groups published studies this week looking at whether traditional pensions or 401(k) plans are better for teachers and came up with … exactly opposite conclusions.The University of California at Berkeley looked at the state’s teacher pension system (CalSTRS) and found that for the “vast majority” of California teachers (six out of seven), a defined-benefit pension provides more secure retirement income than a 401(k)-style plan.

The study also concluded that pensions reduce teacher turnover, “which is better for students, reduces costly and time-consuming training, and increases teacher effectiveness.” It portrayed 401(k) and cash balance plans as bad for teachers because they place more risk on the retiree as their final benefit is not defined. Such plans also decrease the incentive for early and mid-career teachers to stay on the job, the report said.

Separately, TeacherPensions.org ran an analysis of teacher pensions in Illinois. It found that traditional pensions are not a good deal for teachers because they disproportionately favor those who stick around for 30 or 35 years, “at the expense of everyone else.

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The Week in Public Finance: A Muni Bond Victory in Congress and a Ukraine-Inspired Idea to Restructure Puerto Rico

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A roundup of money (and other) news governments can use.
BY  | FEBRUARY 5, 2016

Preparing -- or Not -- for a Slowdown

The financial outlook for states and localities over the next few years, simply put, isn’t as rosy as it’s been for the past couple of years. (If you even want to call the last couple of years rosy.)

Last week, we reported that states other than oil-dependent ones are dealing with mid-year spending cuts. Looking ahead, state budget forecasters are expecting tepid sales and income tax revenue growth for both 2016 and 2017. If spending continues to grow faster than revenues, the next few years could be challenging for government budgets.

“States still haven’t made up for a lot of the cutting that got done in the last six to eight years,” said Bill Pound, the executive director of the National Conference of State Legislatures. In particular, states are still trying to restore education funding while implementing higher standards, he said.