MuniLand

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.

There had been discussion of Puerto Rico issuing another tranche of Cofina bonds that would have a third lien on SUT revenues, but SUT revenues have been coming in lower than projected as the economy contracts. I’ve questioned if there were sufficient revenues to leverage another bond offering on this revenue source. Puerto Rico has since announced it would switch and bring a general obligation bond to market rather than a Cofina offering.

A general obligation offering presents its own problems.

The primary problem is the Constitutional limit on the amount of general obligation debt that can be issued. The Government Development Bank (GDB) describes how Section 2 of Article VI of the Puerto Rico Constitution says debt cannot be issued if the payment of principal and interest on “direct obligations of the Commonwealth” exceeds 15 percent of “average annual revenues raised under the provisions of Commonwealth legislation” for the two previous fiscal years. “Direct obligations of the Commonwealth” are the $11.5 billion in general obligation debt of Puerto Rico.

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.’

Clean homegrown electric energy

There is another big step forward for America’s clean energy revolution. The San Bernardino Sun reports that the Ivanpah solar thermal project has come fully online:

The world’s largest solar thermal electric plant has begun operating its three generating units, which will soon deliver enough clean energy to power more than 140,000 homes in Northern and Southern California, officials said.

‘When this project comes fully online, California will become home to the largest solar thermal electric project in the world, creating stable jobs in a rural community and helping us to meet our goal in curbing the effects of climate change with renewable electricity,’ said Robert Weisenmiller, chairman of the California Energy Commission.

S&P downgrades Puerto Rico: The turning of the wheel

Photo: Puerto Rico Treasury Secretary Melba Acosta (R) and Governor Alejandro Garcia Padilla at a press conference in response to S&P’s downgrade. (Source: Ustream) 

Standard & Poor’s has stepped forward as the first major rater to strip Puerto Rico of its “investment grade” imprimatur. Puerto Rico is now officially speculative-grade credit and the most widely held junk bond in muniland.

Considering the economic fundamentals, the downgrade was inevitable. Economic indicators in Puerto Rico have been plummeting with sales of cement crashing 16 percent last year and gasoline consumption dropping 5.3 percent in the same period. Bank capital in Puerto Rico has declined 4 percent year over year as the commonwealth shakes off lingering problems from the housing bust.

The shadows of muniland

There is a shadowy part of muniland. It is populated by liabilities that are absent from balance sheets and municipal debt that was contracted by circumventing the law.

Muniland’s biggest unknown liabilities are unfunded pensions and retiree health care benefits that until recently were not required to be on issuers’ balance sheets. The information related to these often enormous future expenses had previously only been reported in footnotes. Muniland’s accounting overseer said in 2012:

GASB Chairman Robert H. Attmore. ‘Among other improvements, net pension liabilities will be reported on the balance sheet, providing citizens and other users of these financial reports with a clearer picture of the size and nature of the financial obligations to current and former employees for past services rendered.’

Puerto Rico’s solvency may hang on a potentially unconstitutional corporate tax

Last June, I asked if the U.S. Treasury was bailing out Puerto Rico with an unusual interpretation of the federal tax code. This waiver or exemption allowed U.S. multinationals operating in Puerto Rico to credit taxes that were paid to Puerto Rico on their federal tax bill. The tax, referred to as Act 154, was passed by the Puerto Rico legislature in 2011. It brought in approximately $1.6 billion in 2011.

When preparing its 2014 budget, Puerto Rico had a massive $1.5 billion deficit to fill. The governor had proposed expanding the “sales and use tax” (SUT or Cofina) by 73 percent, but this was met with strong resistance from the business community. The corporate excise tax (Act 154) was raised and part of the budget deficit was filled (an $800 million deficit is still projected for the current fiscal year).

Last week an excellent explanation of the corporate excise tax was published by Martin Sullivan on The Tax Analysts Blog. Sullivan highlighted the tax’s importance at 20 percent of general fund revenues:

Muniland’s marijuana math

Source: ABC 7 News Denver

The sale of marijuana for recreational use was made legal in Colorado starting January 1, and it appears to be a big success. Product and tax revenue numbers are not yet available, but some have predicted that Colorado will bring in an estimated $40 million in tax revenue this year from marijuana sales. USA Today reported anticipated tax revenues of $1.9 billion in five years for Washington State, which legalized recreational use in November:

For consumers, the effective tax rate is 44 percent, according to the Washington Liquor Control Board. The sticker price includes a 25 percent tax on producers and a 25 percent tax on processors plus 25 percent added to the price of the product. Buyers also pay an additional 6.5 percent state sales tax.

The revenue could bring in as much as $1.9 billion in the first five years to go toward a variety of services, including social and health programs, a marijuana use hotline and the Alcohol and Drug Abuse Institute at the University of Washington. The state’s Liquor Control Board will begin issuing permits for marijuana retail locations starting Nov. 18. Under the law, the state can have a maximum of 334 retail locations.

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