Muni sweeps: Clouds for pretty Puerto Rico
Happy days may be over in our 51st state. Joan Gralla of Reuters reports:
Puerto Rico’s credit rating might be cut due to its “deeply underfunded” pension system, Moody’s Investors Service said on Tuesday, in a reminder of one of the biggest threats to state and local finances.
Puerto Rico now is rated A3 by Moody’s; about $28 billion of debt issued by the Commonwealth was affected by the warning from the credit agency.
Puerto Rico’s financial problems are not only deep but long-standing. Moody’s cited years of over-estimating revenues, underestimating expenses and relying on deficit borrowing.
Much of Puerto Rico’s debt is widely held throughout the United States because investors do not have to be residents of the Commonwealth to capture its tax-free returns.
The credit agency estimated Puerto Rico’s unfunded pension liability at $24 billion. The Commonwealth also must repay $42 billion of debt backed by taxes. Adding those two liabilities together produces an amount that is seven times the annual budget, Moody’s said, calling this “a combined burden that will exert significant budgetary pressure for many years to come.”
Photo: South view of the Capitol of Puerto Rico building, located in San Juan, Puerto Rico. Wikipedia.
Wyoming climbs to the top rung
Wyoming’s general-obligation debt rating was raised one step by Standard & Poor’s to AAA, the highest investment grade, as the firm cited the state’s “conservative budgeting and forecasting practices.”
Wyoming, the least-populous state, joins 11 others with top credit ratings from S&P. The company said Wyoming’s outlook is stable.
Wyoming’s Powder River Basin holds the largest and least- expensive coal reserves in the U.S. The state provides almost 40 percent of the domestic coal used to generate electricity last year, according to the Interior Department. Governor Matt Mead has said he hopes to attract other industries to the state.
What muni bankruptcy looks like
Excellent article in today’s Wall Street Jouranl about the bankruptcy workout in Vallejo, California. Vallejo filed for Chapter 9 (municipal bankruptcy) on May 23, 2008. So the resolution has been almost 3 years in the making.
Under the plan, city employees will maintain their current pay and no additional jobs will be cut. But health-care benefits will be reduced for Vallejo’s more than 400 city-worker retirees and surviving spouses, with the city contributing about $300 a month to premiums, down from about $1,500 for some retirees. Current pension payouts will remain in place.
In the years leading up to the filing, the city’s expenses grew 11% annually while revenue rose only 3%. Vallejo was also saddled with contracts with its police and fire unions whose salary and benefits took up more than 70% of the city’s $65 million budget.
Those public-safety workers whose pay and benefits make up more than 70% of the city’s general-fund budget of about $65 million this fiscal year, took a big hit from the bankruptcy. The city scaled down its police force from a high of more than 150 officers to 90 today, and it closed three fire stations and cut the number of firefighters to 70 from more than 120. Funding for libraries, recreation centers and a convention center was also reduced.
Original bondholders have emerged from the reorganization unscathed, with the city having either repaid much of this debt or pledged to continue repayment. But Union Bank, owed about $50 million after guaranteeing debt repayment to investors, will receive 40% less than this amount under the settlement.
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