How effective was Illinois’ pension reform?

The state of Illinois had two milestone events recently. The legislature passed a long-awaited pension reform and the state treasurer issued $350 million of taxable general obligation (GO) bonds. The Bond Buyer reported on the GO offering:

The yields ranged from 0.75 percent on the short end to 5.65 percent on the long end. The two-year maturities priced at a yield of 1.28 percent, 95 basis points above a Treasury rate of .33 percent. The spread on the state’s final 2038 maturity was about 175 basis points more than the 30-year Treasury rate of 3.90 percent Thursday.

Thomson Reuters Municipal Market Monitor’s Dan Berger wrote in a December 10 commentary about Illinois GO bonds:

Hopefully, MMD clients have learned some lessons during the past few years. One of these lessons is that spreads are a leading indicator of credit.

(A3/A-/A-) State of Illinois General Obligation bonds are a perfect example of this phenomenon. Last week the Illinois legislature passed a bill designed to alleviate the ‘Prairie State’s’ pension liabilities which are estimated to be $100bln. Reuters reports this bill as a ‘landmark.’

The ‘new stable’ for local governments

Moody’s Ratings made a big sector call last week in its U.S. Public Finance outlook:

Moody’s Investors Service has revised its outlook for the US local governments to stable from negative as housing markets continue to stabilize, municipalities’ fund balances remain stable, and cities and school districts modify their expenses.

Moody’s has held a negative outlook on local governments for five years, so the outlook change was a big one. But it had some caveats:

A focus on infrastructure in the U.K.

The United Kingdom created an independent group, U.K. Infrastructure, to track, coordinate and promote infrastructure investment in the country. It announced its latest plan last week:

A new national infrastructure plan containing information on over £375 billion [$616 billion] of planned public and private sector infrastructure investment has been announced by the government.

The plan sets out investment for energy, transport, flood defense, waste, water and communications infrastructure up to 2030 and beyond.

A note to New York Fed President William Dudley

Dear President Dudley:

Although it is a longstanding policy of the Federal Reserve not to intervene in the finances of state and local governments, it may be time to reconsider this policy in the case of Puerto Rico. A member of your board of directors, Richard Carrión the CEO and Chairman of Banco Popular de Puerto Rico, wrote to The Economist about the state of Puerto Rico’s finances:

You said that the effect on economic activity by new levies on businesses would negate half of the expected increase in revenues, but you overlooked easily available data showing that net government revenues were $350 million during the first fourth months of the current fiscal year, $120 million higher than forecast.

Mr. Carrión is correct about Puerto Rico’s success in increasing tax collections, but its economy continues to contract. From Reuters:

‘Deal of the year’ for a public private partnership

The Bond Buyer has awarded its annual top prize for a muniland deal to a public private partnership (P3) that contracted with the Indiana Finance Authority to build the East End span of the Ohio River Bridges Project:

The Indiana Finance Authority won The Bond Buyer‘s 12th annual Deal of the Year award Thursday night for its Ohio River Bridges East End Crossing Project.

The public-private partnership was funded through the sale of around $675 million of tax-exempt private activity bonds, including $195 million of milestone PABs, a new security type that can serve as a template for other P3 concessions.

Reforming Pennsylvania’s distressed municipalities

I met a muniland superstar, Pennsylvania State Senator John Eichelberger, in Philadelphia while taping a final segment on distressed municipalities for Pennsylvania Cable News (PCN). The series, hosted by PCN’s Corinna Vecsey Wilson, brought together municipal officials, state legislators and policy experts to examine the condition of the state’s distressed communities and look at what solutions might be available.

State Senator Eichelberger, a Republican, chairs the Local Government Committee. He has dived into some of the most vital areas of state oversight. A state law, Act 47, takes distressed municipalities under partial state control. The law is over 20 years old, however, and has lost its effectiveness. Of 27 municipal units that have entered the program, only seven have exited. Pittsburgh, for example, has remained under Act 47 supervision for over 20 years. Eichelberger has legislation to reform and strengthen Act 47. From the Altoona Mirror:

‘A major change that we hope will happen would be a five-year limit on a community staying in Act 47. This was never intended for communities to stay in it for decades. We are stressing an early intervention program to help them to get in and out,’ Sen. John H. Eichelberger Jr., R-Blair, told members of the Blair County Chamber of Commerce Breakfast Club Thursday at The Casino at Lakemont Park.

The market reaction to Detroit’s bankruptcy ruling

Fitch Ratings managing director Amy Laskey talked to Fox Business about how Detroit is a unique story in muniland. Fitch published a research note on the bankruptcy ruling and concluded that Detroit’s ruling would not lead to a “spate” of local bankruptcies in Michigan:

Although the judge ruled that pensions could be adjusted, Fitch does not believe the ruling grants Detroit’s emergency manager unlimited freedom to adjust these obligations. The city must submit a plan of adjustment to the bankruptcy court, which must be deemed ‘fair and equitable’ by the presiding judge. The emergency manager expects to submit the plan to the court by year-end. Fitch does not believe that the judge’s decision on pensions will lead to a spate of additional bankruptcy filings in Michigan.

The New York Times, on the other hand, suggested that the Detroit’s ruling could impact other cities:

Detroit is eligible for bankruptcy – How it happened

Detroit was ruled eligible for Chapter 9 bankruptcy protection on Tuesday. Twitter coverage of the federal eligibility hearing tracked the history. Here are the highlights:

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.

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.

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