MuniLand

Puerto Rico government stumbles on teacher pension reform

The Puerto Rico government encountered a stumbling block in its efforts to right a sinking fiscal ship on Friday when its Supreme Court ruled that legislation amending the teacher’s pension system was unconstitutional. Reuters reports:

The Puerto Rico Supreme Court on Friday struck down a recently enacted overhaul of teachers’ pensions, dealing a major blow to efforts to fix the Caribbean island’s crumbling economy and budget.

Five of the court’s nine members determined that significant portions of the reform law were unconstitutional. Three judges dissented and one recused himself.

The ruling stated that the reform plan, known as Law 160, ‘substantially diminishes’ the ‘contractual rights of the petitioners in terms of their retirement plan.’

Government affairs law firm Politank, in a note to clients, wrote in more detail about the basis of the Supreme Court ruling:

The Puerto Rico corporate tax question

The Government Accountability Office published a report estimating the economic advantages and costs Puerto Rico would have if it enters statehood. The biggest cost would be that Puerto Rico citizens would be required to pay federal income tax on their domestic earnings. Currently they pay federal income tax on income they earn outside of Puerto Rico.

The GAO estimates that If Puerto Rico had been a state in 2010, the estimated income tax paid by individual taxpayers would have ranged from $ 2.2 to $ 2.3 billion. The report also estimates changes in federal entitlement benefits that would flow to the island. In many cases there would be additional federal funds for the island.

The critical piece of the puzzle would be the change in income taxes for Puerto Rico corporations and subsidiaries of U.S. corporations that do business on the island. These corporations are a big contributor to Puerto Rico general fund revenues. Puerto Rico corporations are currently treated as foreign corporations under U.S. tax law. Here is what the report says (page 115):

Is muniland doping the data?

Puerto Rico and New Jersey may have played with the numbers recently to put a better gloss on their weak finances. They seem to be “doping” the data.

For example, Puerto Rico (with assistance from the Bureau of Labor Statistics) has revised six years of employment data to cast a positive upward revision to its economy. This had spillover effects on the broad economic measures of the island. From Puerto Rico’s Government Development Bank:

The payroll employment benchmark revision not only impacted the average level of payroll employment, it also changed its average growth rate for previous years.

Puerto Rico wants to return to the market for another $2 billion

I talked with Erin Ade of RT about Detroit and Puerto Rico. The interview starts at 3:40.

Meanwhile, on Thursday Caribbean Business reported that Puerto Rico intends to return soon to the market to borrow another $2 billion.

The government is planning a $1.5 billion deal through its Sales Tax Financing Corp (Cofina by its Spanish acronym) and a $500 million deal through its new Municipal Financing Corp (Cofim by its Spanish acronym) financing vehicle, according to Caribbean Business sources.

Puerto Rico’s local Chapter 9

Senate Bill 993 was recently proposed in the Puerto Rico Senate to create a mechanism for public corporations to be restructured. Since Puerto Rico is a commonwealth of the United States, it is excluded from Chapter 9 municipal bankruptcy code. There is currently no legal framework for a reorganization of liabilities. The legislation would establish such a framework.

Late Friday night (9:30 pm EST) the government issued a statement denying that they had any involvement in drafting the legislation:

In response to market speculation regarding Senate Bill 993, filed yesterday in the Puerto Rico Senate, which seeks to establish a legal mechanism to restructure the public debt of the Commonwealth’s public corporations, the Government Development Bank for Puerto Rico (GDB) and the Treasury Department wish to clarify that neither the GDB nor the Executive Branch proposed, reviewed, authorized or were in any way involved in the drafting or formulation of this legislation.

Puerto Rico’s local Chapter 9, a good start

This is a guest post by Puerto Rico attorney John Mudd. He writes about the new legislation filed in the Puerto Rico Legislative Assembly to allow the restructuring of public corporations.

Yesterday, Senators Nadal Power and Rosa Rodríguez filed a proposed act by which PR’s public corporations could reorganize its debts or even liquidate themselves. Essentially a local Bankruptcy Chapter 9. Both should be congratulated for having the moral fortitude to admit this must be considered. The preamble correctly indicates that state law may regulate those areas where Federal Bankruptcy law is silent or those entities excluded from the Bankruptcy Code, such as insurance companies or Puerto Rico’s municipalities and public corporations, expressly excluded via 11 U.S.C. § 101 (52). Moreover, the liquidation procedure of the P.R. Civil Code, Articles 1811-29, 31 L.P.R.A.  §§ 5171-5214 is totally obsolete since it dates back to the 19th Century.  In addition, the Preamble to this Act states that it is obsolete, making this a special law that preempts the more general law of the Civil Code.

The piece is a good start but lacks many of the necessary statutes that makes the Federal Bankruptcy Code a unique tool. Moreover, it should include the island’s municipalities, most of which are insolvent. In addition, it would make some sense for the law to require that some of the Commonwealth Courts be set for this type of procedure which will elicit massive litigation once it is started. Also, its judges should be especially trained in bankruptcy and dispute resolution since at this time the Puerto Rico bench is devoid of such knowledge. Now I will go to the specific areas that need to be added to the law. For your reference, I include English and Spanish versions but the statute states that the English version will prevail in case of doubt.

Puerto Rico after financing

Puerto Rico brought its long awaited bond offering to market last Tuesday for $3.5 billion, the full amount that was authorized by the Legislative Assembly. Underwriters had talked about the deal as $3 billion, but it seemed obvious given the liquidity needs of the Government Development Bank that it would be upsized it to the full legislatively authorized limit. The bond was structured to mature in 2035 with a 2020 par call.

The deal was priced with an original issue discount of $93 and an initial offering yield of 8.727 percent. This yield was approximately 95 basis points more than secondary market trading for Puerto Rico 2035 general obligation maturity, but in line with with secondary market yield for the bond’s single call par maturity of 2020, according to Thomson Reuters Municipal Market Data.

Puerto Rico’s yield curve has been inverted for several months and the deal seems to have been priced to its par call in 2020, which was trading with a higher yield than 2035 maturities. Reuters reports:

New bonds in the time of the inverted yield curve

Just a few more data points on the upcoming $3 billion Puerto Rico general obligation sale expected to price on Tuesday, March 11. Note the yield curve remains inverted and likely will offer some very high yields to investors lucky enough to win bonds maturing in 2022 through 2025 (red box marks the maturities listed in the tentative sinking fund schedule below).

Here is the most recent preliminary official statement (March 6, 2014).

Here is the tentative sinking fund schedule:

The dollar amounts of the use of proceeds has not been detailed yet, but here are the broad uses (page 23):

An important part of the use of proceeds is repaying some of the deal underwriters for various short term financings and swap termination payments to Morgan Stanley, Goldman Sachs and Bank of America Merrill Lynch (page 23-24):

Puerto Rico’s perfect storm

 

Two critical documents related to Puerto Rico’s upcoming $3.5 billion general obligation bond offering have been released: A draft of the preliminary official statement (POS) for the general obligation bond underwriting and a special liquidity update from the Government Development Bank (GDB).

Both documents contain new financial information and a laundry list of risks for potential bondholders. Citi has published a special focus report on the upcoming GO bond offering. Raise the starting gun; the race will begin soon.

Puerto Rico Senate approves $3.5 billion general obligation issuance

The Puerto Rico Senate followed the House and approved the authorization of $3.5 billion of new general obligation bonds. Included in the approved legislation is language that allows bond anticipation notes to be issued. The legislation allows for the new debt to:

1. Pay or refinance debt and other obligations of the Commonwealth of Puerto Rico,

2. Repay or refinance debt and other obligations of any public corporation with the purpose of covering or fund a portion of the deficit of the Commonwealth of Puerto Rico, 3. Repay or refinance obligations incurred by the Commonwealth of Puerto Rico on ancillary contracts to bonds Commonwealth of Puerto Rico issued, refinanced or paid,

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