MuniLand

Will Puerto Rico’s contracting economy lead to default?

Justin Vélez-Hagan is the executive director of the National Puerto Rican Chamber of Commerce, a small non-profit not to be mistaken with the much larger Puerto Rico Chamber of Commerce.  Vélez-Hagan argues in a recent Forbes opinion piece that Puerto Rico must default on its debt:

Washington politicos aren’t the only ones instigating a perpetual debt crisis.  Puerto Rico too is experiencing a political stalemate-induced fight for their financial lives that affects not only its 3.7 million residents, but millions of others who have purchased bonds to help finance its government, causing us to wonder if the next logical step is a debt default.

Here is his rationale:

Many experts say Puerto Rico is entering the eighth year of a recession, with at least one who considers it to be in the midst of an all-out depression.  Gustavo Vélez, former economic adviser to the governor, is one such analyst, acknowledging that the economy has been kept afloat by increasing taxes, with little or no effort to fix underlying structural problems.

Though the Puerto Rico Government Development Bank has not published the September Economic Activity Index they have released the component figures of the index for September and October. The numbers are terrible, and indicate that the economy continues to rapidly contract. For example employment has declined 4.7 percent year over year for the July through October period:

Electric energy consumption (MM kWh) is down 6.7 percent year over year for the July through October period and gasoline consumption declined 3.5 percent. Commercial bank capital, the assets necessary to expand lending to boost the economy, declined 4.2 percent and commercial loan activity declined 17 percent.

America’s Thanksgiving

This week we give thanks to those who have worked to ensure a clean and beautiful environment in America. We are fortunate that our air and water is sanitary and safe. It is healthy for us and it has profound economic consequences for the nation.

China recently moved to address its enormous and complex environment problem. From e360 at Yale:

This summer, the [Chinese] Ministry of Environmental Protection released results of air quality studies from 74 cities showing that these urban areas had harmful levels of pollution. Several weeks ago the city of Harbin, population 11 million, was literally shut down as dense pollution reduced visibility to a few meters. Transportation halted, schools closed, and residents of China’s mega-cities were left to wonder whether more of these “airpocalypses” would define China in the 21st century.

Mapping the pension blues

Chris Mier and his team at Loop Capital recently published the 11th Annual Public Pension Funding Review. It is the gold standard for public pension reporting. Mier was onto the pension story well ahead of Meredith Whitney and others, including myself. One thing that is great about Mier’s report is how graphic the pension data is.

Here is a map of the “actuarially required contributions” (ARCs) that states made to their pension plans. Note the numerous blue states that that made 100 percent or more of what was required. Laggard New Jersey, meanwhile, only paid 15 percent of what it was required.

Loop Capital commented:

Thirty one states continue to struggle with making their full Annual Required Contributions (ARC). During periods of budgetary pressure, legislators are tempted to use funds to ‘pay the bills’ instead of paying into pensions. While revenues continued to improve at the state governmental level in 2012, the slow rate of improvement in the economy and the continuing trend of reduced federal support maintained ongoing pressure on state budgets.

Taxing the buzz

Colorado voters approved recreational marijuana sales last November. The infrastructure is now being prepared to begin sales on January 1, 2014. Part of the plan approved by voters is a state tax of 25 percent. Reuters reports:

Under the marijuana tax proposal, a combined 15 percent excise and 10 percent sales tax would be imposed on recreational pot sales, with the first $40 million raised to fund school construction projects.

In Denver, a local ballot measure that would tack an additional 3.5 percent city sales tax on pot shops also appeared headed for passage, by a margin of 69 to 31 percent with roughly a third of votes counted.

The search for real budget numbers

 

I’m not sure anyone in muniland loves numbers more than the members of The National Association of State Budget Officers (NASBO). They are the geek squad who oversees the influx of tax and other government revenues. It’s the daily state money show.

Many state revenue reporting metrics, like the Rockefeller Institute’s, only show state tax collections and do not include other funding sources like federal monies. So it’s often hard to get a complete picture of state fiscal health. NASBO has been collecting state revenue data since 1987 and reports that 2012 saw the first decline in total state revenues. In contrast Rockefeller Institute has been reporting increasing state tax revenues for 13 quarters since 1Q 2010.

NASBO (see chart above) says that fiscal 2012 was a year of transition for states as they continued to emerge from the national recession. State general fund revenues grew 3.6 percent.

Jefferson County’s bankruptcy confirmation hearing

A beautiful thing is happening on Twitter. Local and national reporters are tweeting Chapter 9 municipal bankruptcy hearings as they happen. This is a great service for muniland because there is usually no audio feed at these hearings. Municipal bankruptcies are rare, so each one potentially creates new precedents for those that follow. At the Jefferson County, Alabama hearing to confirm the city’s plan to exit bankruptcy, Kyle Whittemore of the Birmingham News, Katy Stech of the Dow Jones Newswire and Jonathan Hardison of FOX6 WBRC-TV report from the court a day after $1.8 billion of new debt was raised to repay old debt. Bloomberg lays out the back story:

Jefferson County, Alabama, may learn as soon as today whether a federal judge will end its two-year-old bankruptcy by approving $1.5 billion in creditor concessions, the first time since the Great Depression a U.S. municipality has imposed principal losses on bondholders.

“I understand it is somewhat unusual,” U.S. Bankruptcy Judge Thomas Bennett said today of his plan to give an oral ruling from the bench followed by a written order. The county could close on $1.84 billion in new financing by Dec. 3 should the plan win approval following testimony that started today in Birmingham, the county seat.

Michigan’s pension problem

Moody’s Investors has been on a ratings downgrade rampage for Michigan’s school districts. Here is its explanation from the new sector comment report:

A majority of Michigan school districts have realized declines in enrollment over the past decade. Of the 549 public school districts in the state, 425 lost students from 2004 through 2012, with total statewide school enrollment (excluding charter schools) falling by 13.2 percent.

Demographic shifts like the one occurring in Detroit are devastating to municipal budgets. Typically fewer taxpayers have to carry a greater share of the costs of a municipal infrastructure, which rarely shrinks in proportion with population loss. But Michigan has another substantial problem: Its charter schools. From Moody’s again:

Pension underfunding crosses party lines

There is no one-size-fits-all condition for state pensions. The condition of state pensions varies from nearly 100 percent-funded plans in Wisconsin, North Carolina, South Dakota, Washington and New York to less than 55 percent in Kentucky, Connecticut, Rhode Island and Illinois.

The reasons for the funding levels span economic and historical explanations, but do they also touch the political? Are states controlled by Republicans, who are known for fiscal conservatism, harboring better-funded pensions than Democrat-controlled states, which are willing to embrace a broader array of government services?

I mashed up data about legislative control of states with funding levels of pensions plans and how much of the “actuarially required contribution” (ARC) they had made in 2012 (data from Pew page 5):

Did Jefferson County ratings shop?

Jefferson County, Alabama is raising $1.7 billion of new debt to repay $3.1 billion while it is under the protection of the Federal Bankruptcy Court in a Chapter 9 proceeding. A lot of information that normally remains private to the issuer and underwriter has become public.

Barnett Wright, a reporter at the Birmingham News, published the list of fees that are being paid for raising the new debt, including to the credit raters:

Firms and the amounts to be paid on the deal include underwriters Citigroup Global Markets Inc., $4.9 million; Merchant Capital, $1.3 million; and Drexel Hamilton, $568,000, according to the county.

Could the BRIDGE Act be the solution for infrastructure?

New legislation introduced by ten U.S. senators called the BRIDGE Act acknowledges that the likelihood that Congress will increase the gas tax or other infrastructure grants is “bleak.” BRIDGE would create a new form of government sponsored entity (GSE) called the Infrastructure Financing Authority (IFA).

The proposed legislation, led by Virginia Senator Mark Warner, would create an authority that would operate independently of the federal government to make loans and loan guarantees to projects that have sufficient cash flows to repay the loans.

The key provisions of the BRIDGE Act:

·  The BRIDGE Act includes broad eligibility for funding:

Projects would have to be at least $50 million in size, and be of national or regional significance to qualify. Five percent of the Authority’s overall funding would be dedicated to projects in rural regions, and rural projects would be required to be $10 million in size.

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