MuniLand

Pension tension and getting the job done

Video source: Pennsylvania Senate GOP

My colleague Felix Salmon recently dove into the subject of public pensions and the controversy about National Public Radio accepting funding from pension reform zealot John Arnold. It’s too bad that NPR and its affiliate WNYT were not more transparent about their connection to Arnold. There is a lack of understanding about the condition of public pension systems and how many are in dire financial condition. For example, Salmon wrote:

None of this will be easy: the whole reason why pension obligations started ballooning in the first place was that local governments didn’t have the money to hand out pay raises. So the unions will push back against these ideas: they like any system which makes it easier for them to accrue valuable benefits at negligible up-front cost to the government. But if you want to guarantee vocal opposition which is almost impossible to overcome, then your best way of doing that is to combine or replace these kind of reforms with an attempt to renege on governments’ existing pension obligations.

State and local governments from coast to coast are working to achieve a soft “renege” on existing pension obligations and retiree health benefits owed to 12.9 million active plan participants and 7.8 million retirees. Public unions almost everywhere are lobbying and litigating to preserve their pension benefits. In many cases it’s simply a matter of not having enough cash to pay these obligations at the contractual or legislated levels while also supporting government services. Peter Hayes, Managing Director at Blackrock, wrote:

For states and municipalities, providers of public pension plans, the challenge is balancing near-term budgetary and operating requirements with the long-term liability of funding pension and retiree healthcare benefits. The balancing act was complicated by the financial crisis and ‘Great Recession.’ Not only had it become difficult to arrive at workable budgets, but the pension burden loomed larger as market losses caused pension asset pools to shrink, bringing funded ratios to unhealthy lows.

Public pensions have been straining for four years to make up the massive losses they sustained in the 2008 financial crisis. Pension analysis firm Milliman laid out the aggregate funding versus liabilities for the 100 largest public pension funds:

‘There is no lien, there is no property interest, these creditors are like all others’

A showdown between bond insurers and city attorneys in Detroit’s bankruptcy highlights the level of protection that secured bondholders have in Chapter 9 bankruptcy. Detroit attorneys argued that federal bankruptcy law trumps Michigan state law and that “secured” bonds could be impaired. From Chad Livengood of the Detroit News:

[Bond insurers] Ambac Assurance Corp., Assured Guaranty Municipal Corp. and National Public Finance Guarantee Corp. want [federal bankruptcy judge Stephen] Rhodes to order the city to segregate special property taxes Detroit voters approved for economic development, cultural and recreation projects and public safety facilities and resume paying bondholders the full amount owed.

‘These monies were raised solely for repaying the bonds and no other purpose,’ Guy Neal, attorney for National Public Finance Guarantee, said in court Wednesday.

Puerto Rico partly opens the kimono

Puerto Rico held a long-awaited investor call on Tuesday. In a highly scripted performance, participants delivered statements that accompanied the presentation slide deck. The call lasted one hour and 20 minutes and no questions from attendees were answered. Written questions submitted two weeks prior were addressed. Important issues of government liquidity and the proposed 2015 budget were briefly detailed.

Puerto Rico Governor Alejandro Garcia Padilla, in a pre-recorded talk, opened the call with an update on the commonwealth’s fiscal and economic progress over the last 13 months. He said that he was proud to have acted rapidly to address problems that were created years and possibly decades ago. He said that politics have been put aside.

Government solvency and the Government Development Bank’s (GDB) liquidity are the key focus for investors. Incomplete data made it hard to assess whether sufficient cash flows exist to service short-term liquidity needs and repay additional debt service for a proposed $3 billion dollar general obligation debt offering.

Puerto Rico’s funny labor data

 

The Federal Reserve Bank of New York made a big splash by pre-announcing that the Bureau of Labor Statistics would revise the employment data for Puerto Rico upwards. Here are the revisions that the NY Fed says that the BLS will make:

Oddly the BLS website shows different employment figures for Puerto Rico than what the NY Fed references. The BLS shows Puerto Rico employment as 1.04 million in June 2012 (an unemployment rate of 14.1 percent) versus approximately 1.01 million in June 2013 (an unemployment rate of 13.2  percent). The decrease in the BLS unemployment rate is due to a large shrinkage in the labor force of 40,322 year over year.

Detroit’s hasty plan of adjustment

Having watched six municipal bankruptcies happen before Detroit filed for Chapter 9 protection, it was never clear why Michigan Governor Rick Snyder and Detroit Emergency Manager Keyvn Orr thought that they could conclude court proceedings in only fourteen months. Previous bankruptcies were much smaller and less complex, and each took several years to conclude.

Detroit’s bankruptcy leaders have set an aggressive schedule to resolve difficult elements of the case. Reuters reported:

Detroit will file a plan to adjust its debt with the Bankruptcy Court next week, an attorney representing the city told the judge overseeing the case on Monday.

Puerto Rico’s debt limit

One of the most interesting points that Puerto Rico Governor Alejandro Garcia Padilla made in a speech on Monday after the credit rating downgrades by Standard & Poor’s and Moody’s (Fitch has since also downgraded Puerto Rico to speculative grade) is related to the restructuring of Puerto Rico’s tax code. He said:

In less than a year, propose a new tax structure allowing the best balance between all sectors of the country and promote economic development. These studies include the revaluation of the SUT to explore if it is the best alternative for all, taking into account the debt issued against that source.

SUT is the “sales use tax” that is the repayment source for $15.5 billion of Cofina debt. This debt is generally considered highly secure because of the legislative pledge of SUT revenues.

New York opens its Green Bank

New York’s Governor Andrew Cuomo announced the launch of the state’s Green Bank to provide financing for in-state alternative energy projects. Here is the skinny:

Governor Andrew M. Cuomo today announced the start of business operations for the New York Green Bank, which will work to stimulate private sector financing and accelerate the transition to a more cost-effective, resilient and clean energy system. The largest green bank in the nation, the NY Green Bank is seeking proposals from private-sector lenders, investors and industry participants that facilitate the financing of creditworthy clean-energy projects in New York State.

The proposed financing structures appear to put the Green Bank in the first loss position for some private sector risk:

A plan for Puerto Rico

Puerto Rico’s governor, Alejandro García Padilla, announced a six point plan to restructure the government in light of the credit rating downgrades by Standard & Poor’s and Moody’s.

He opened his speech that was delivered live on Monday:

In these difficult times, I want to speak personally to each citizen, whether in the living room or the balcony of their homes. I want talk about the budget of Puerto Rico, the current situation and how we face it together. It is time to pay bills that others left without paying.

The governor went on to outline six steps the government will take:

1. We will reduce the budget $170 million in current fiscal year. Much of the reduction will be in contracts with agencies. To be clear, we will succeed without employee dismissals.

EMMA is growing up

Welcome to the new, user-friendly version of EMMA, muniland’s free central repository of bond documents, event disclosures, trade data and market statistics. It’s a treasure trove of muniland’s core information and it has been redesigned to be even easier to use and more intuitive (Disclosure: I participated in several rounds of user testing as the new EMMA design was scoped).

Let’s drill down a little. The third choice on the left bar of the homepage says “Browse municipal securities information by issuer.” Click it and you will see this map:

This presents issuers by state. Choose a smaller, less populated state and click through (it will be easier to see the architecture without getting bogged down in a complex issuer like New York or California). I choose Massachusetts because it is an outstanding example of public disclosure related to the state’s debt issuance. Massachusetts’ home page looks like this (below). Documents and trade data for the entire state is aggregated.

Puerto Rico’s liquidity

If you dig a little deeper than what is generally reported on the S&P downgrade of Puerto Rico, a few facts seem to diverge from the conventional story line. The most important relates to the “liquidity” of the Puerto Rico’s government and its fiscal agent the Government Development Bank (GDB).

Puerto Rico officials have made repeated statements about the commonwealth’s liquidity and market access, saying that it has adequate funds to make all repayments required through June 30. They repeated these statements on February 4 in a press release:

‘We are confident that we have the liquidity on hand to satisfy all liquidity needs until the end of the fiscal year, including any cash needs resulting from today’s decision. In addition, the GDB and the Commonwealth of Puerto Rico have been in discussions with parties that have expressed an interest in arranging additional liquidity for the Commonwealth, and the Commonwealth continues to explore such options, including obtaining additional funding, as necessary.’

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