Joseph Krist

Municipal Credit Consultant

FIRST ROUND TO THE UNIONS IN ILLINOIS PENSION FIGHT

A Sangamon County Circuit Court judge in Springfield found that the pension overhaul enacted in December 2013, which reduced some benefits, violated a clause in the State Constitution that makes pensions “an enforceable contractual relationship” that cannot be impaired. The decision was not unexpected nor was the subsequent announcement by the state’s attorney general, Lisa Madigan, that she would appeal the decision to the State Supreme Court.

The core issue to be decided is the meaning of  a provision in the State Constitution that reads: “Membership in any pension or retirement system of the state, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Illinois argued that the constitutional clause was not airtight based on the authority known as their “police power,” which gives them the duty and the legal tools to protect the safety and well-being of their citizens. The state argued that the pension system’s breakdown was pulling money away from other essential services and making it harder for the state to borrow, causing an emergency that justified the use of such powers. In its brief, the State asserted that opponents wanted to elevate pensions “to the status of ‘supercontracts’  that were exempt from the state’s duty to use its policing powers. That premise is without any support, as the text, history and legal precedent surrounding the pension clause all make clear.”

The judge did say in a court hearing on Thursday, that no court had used the “police powers” argument to authorize changes in public pensions. The changes enacted last year tried to save money by raising the retirement age for many public workers and reduced cost-of-living adjustments. As an offset, it also lowered employees’ required contributions toward their pensions and gave the system’s trustees the power to go after the state if it failed to make regular pension contributions, as it often has in the past. The mix of cuts and inducements was designed in the hope of reducing the likelihood of litigation. Over all, the package of changes was said to produce savings of $160 billion over 30 years, but many people questioned that estimate.

Governor-elect Bruce Rauner released a statement after the decision in which he said “Today’s ruling is the first step in a process that should ultimately be decided by the Illinois Supreme Court. It is my hope that the court will take up the case and rule as soon as possible. I look forward to working with the Legislature to craft and implement effective, bipartisan pension reform.”.

UNIVERSITY OF CALIFORNIA REFLECTS NATIONAL FUNDING TRENDS

The University of California Board of Regents gave preliminary approval last Wednesday to a plan to raise tuition 27.6 percent over five years.  Gov. Jerry Brown  has insisted that if the Regents went ahead with the increase, they would get less from Sacramento, not more, and he bolstered his position by appointing two allies this week to vacant seats on the board. Under the plan, undergraduate tuition and fees for California residents would rise from $12,192 a year to as much as $15,560 in 2019-20. Out-of-state students, who now pay more than $35,000 in tuition and fees, could see those charges rise to nearly $45,000. Those figures do not cover room and board, now about $14,000 for all students.

California’s prices are far above the national average of about $9,100 in tuition and fees for public four-year colleges, but below some, including elite public institutions like the University of Michigan and the University of Virginia. And California officials say that with financial aid to low- and middle-income students, more than half of California residents pay no tuition, and that would remain true after the increases. A committee of the board voted 7 to 2 to approve increases of up to 5 percent in each of the next five years. A vote of the full board is expected Thursday and it appeared likely that the plan would pass.

The governor, who sits on the board, asked the Regents to delay voting on the plan until their next meeting in January, and to form a committee to find ways for the university to overhaul the way it does business. Starting during the recession, California cut support for the university system by $1 billion a year, prompting tuition increases of more than 60 percent, after inflation.

Systemwide, state support has rebounded partly in the last two years, and now supplies $2.8 billion of the university system’s nearly $7 billion core operating budget. But as Regents and university trustees noted repeatedly, it remains well below its peak, despite increased costs and enrollment that has grown to more than 230,000 students.

Nationwide, many State governments reduced support for public universities during the recession, driving big tuition increases and drawing criticism from political leaders. In several states, university administrators have frozen tuition, while protesting that they are still underfunded by their states.

Gov. Brown called on the university to look into changes like three-year bachelor’s degrees, concentrating some specialties at specific campuses, raising the number of students admitted as transfers from community colleges, sharply increasing online courses, and giving college credit for work experience. Those ideas are being debated across the country as cost-savers and ways to get more people through college, but many educators see them as an erosion of standards.

Gov. Brown has proposed 4 percent annual increases in state support for the system, but others contend that is not nearly enough. They said that if the state gave more, they would shrink the tuition increase. The governor said he would withhold the 4 percent increase if the regents went ahead with raising tuition.

SMALL VICTORY FOR TOBACCO

In the face of a revolt by townspeople, the Board of Health in Westminster, Mass., voted Wednesday to drop a proposal to ban the sale of all tobacco and nicotine products. The ban would have made the small town in north-central Massachusetts the only place in the country where no one could buy cigarettes, cigars, e-cigarettes and related products. The health board felt it had a moral obligation to restrict young people’s access to tobacco. But at a public hearing a week ago, 500 people attended, almost all of them to protest the proposed ban. The hearing became so raucous that the board ended the proceeding just 20 minutes after it began.

Local citizens said that they did not approve of smoking but saw the ban as an encroachment on civil liberties. They were also worried that it would drive smokers to spend their money elsewhere, hurting the eight merchants in Westminster who sell cigarettes. The board had planned to accept written comments on the proposal until Dec. 1 and then make a decision on whether to impose the ban. But at its regular meeting Wednesday afternoon, the board voted 2 to 1 to rescind the proposal, saying it had already heard the town’s objections loud and clear.

After the aborted public hearing, angry citizens had begun to circulate a petition to hold a recall election of the board members; it was not clear whether that effort would continue after the board’s vote to drop the ban.

CA CASH UPDATE

State Controller John Chiang released his monthly report covering California’s cash balance, receipts and disbursements in October 2014.  Total revenues for the fourth month of Fiscal Year 2014-15 were $6.0 billion, coming in above Budget Act estimates by $662.2 million, or 12.3 percent. For the fiscal year to date (July 1-October 31), total revenues reached $27.9 billion, beating estimates by $1.2 billion, or 4.5 percent.

“Four months into the fiscal year, California’s coffers overflow by $1.2 billion. The news comes on the heels of two other positive developments:  the vote to strengthen California’s rainy-day fund through Proposition 2, and the credit upgrade that followed one day later,” Chiang said. “To further boost California’s credit worthiness and sustain prosperity on a long-term basis, we must next tackle the growing $64 billion unfunded liability stemming from providing health benefits to our retired public workforce. To not only protect taxpayers, but also the retirement security promised to our firefighters, teachers, and other providers of critical public services, we can no longer deny, delay, or equivocate.”

Income tax collections for the month of October came in $363.5 million, or 8.4 percent, above estimates.  Corporate tax revenues came in $303.6 million, or 1,222 percent, above estimates. Sales taxes fell short of estimates by $37.4 million, or 4.1 percent, for the month. As of October 31, the General Fund accumulated outstanding loans of $17.8 billion, which was down $2.6 billion from what the State expected to need by the end of October.  This total was financed by $15.0 billion of borrowing from internal state funds and $2.8 billion of borrowing from banks and other outside investors.

SEC REPORTING DEADLINE LOOMS DECEMBER 1

In yet another attempt to address the municipal market’s well-known disclosure opacity, issuers face a Dec. 1 deadline to report disclosure violations to the Securities and Exchange Commission. In March the Commission launched an initiative, called MCDC, where issuers and underwriters could self-report inaccurate statements in bond documents and receive favorable settlement terms.  By law, issuers must describe in bond sale documents when they did not comply with federal disclosure requirements within the previous five years. It requires issuers to scour documents that were posted before the Municipal Securities Rulemaking Board centralized disclosures on a single web platform. Issuers must also find out if underwriters disclosed violations, including underwriters that may be out of business. Smaller issuers with fewer resources are struggling to figure out if they even have any violations to report. In the last two years, the SEC has charged cities, school districts and a state with failing to disclose required information. The SEC will likely review submissions and issue cease-and-desist orders.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Municipal Credit Consultant

PR MOVING FORWARD ON FINANCINGS

Governor Alejandro García Padilla announced plans to convene a special session of the Legislature.  The session, announced on Friday,  was being called because the House failed to complete consideration of a bill to raise the petroleum excise tax from $9.25 to $15.50 per barrel stalled in the House of Representatives. The levy was increased from $3 last year.

“I would have preferred that the House finish the work of approving this measure during the regular session,” the governor said in a statement. “Unfortunately, they couldn’t finish it because some lawmakers need more time. That’s why I am calling a special session so they can finish their job.”

When the impasse over the tax hike emerged in the House, legislation to give the HTA a short-term injection of up to $45 million for payroll and operational costs was filed and approved by the lower chamber in a session Thursday. The money would come from cigarette taxes and feed a new fund managed by the Government Development Bank. The measure wasn’t taken up by the Senate before the close of the legislative term.

The Government is seeking to assuage market concerns that HTA will follow the Puerto Rico Electric Power Authority in moving to restructure its long-term debt, but government officials insist they are working to resolve the HTA’s fiscal challenges without resorting to the Recovery Act. Officials had recently discussed plans last month to borrow up to $2.5 billion in a bond deal backed by a proposed new hike in the crude oil and petroleum products tax. The issue is now expected to increase to $2.9 billion and the target issuance date has been pushed up to this month instead of early next year.  Legislation also provides additional guarantees and legal protections to investors to make the bond offering more appealing.

Puerto Rico is in talks with four bond insurers to insure at least part of up to $2.9 billion in bonds, the president of the Government Development Bank (GDB) said on Friday. GDB said last month it discussed the legislation with Assured Guaranty Ltd , Ambac Financial Group Inc, National Public Finance Guarantee Corp and FGIC Corp. The four insurers back over 70 percent of certain HTA revenue bonds.

PREPA OVERHAUL TAKES SHAPE

The first clues regarding the Puerto Rico Electric Power Authority’s potential overhaul began to emerge as the first of a series of studies was released on Monday. The report by FTI Consulting covers outstanding receivables, billing and collections, and an analysis of PREPA’s employment of contributions in lieu of taxes on its balance sheet. It said the government utility should cut service to public corporations that aren’t paying their power bills. It also said PREPA should outsource collections on inactive accounts and revamp its general collections methods.

The study marks the first major deadline in the process of restructuring PREPA required under forbearance agreements reached in August between the government utility and certain of its creditors. Under the deal, PREPA brought on a chief restructuring officer from outside the utility. Restructuring expert Lisa Donahue is heading 10-person team from her firm, AlixPartners, with FTI Consulting working alongside.

As part of the forbearance agreements, PREPA has committed to complete a five-year business plan (as required in the new energy reform law) by December 15 and complete a full debt restructuring plan by March 2, 2015 that could impact holders of its roughly $9 billion in debt.

The Recovery Act, a Puerto Rico law enacted last summer with PREPA primarily in mind, provides for public corporations to restructure their debts through a bankruptcy like process in local courts. The law provides two methods to restructure the debt. A Chapter 2 filing would allow public corporations to create plans that postpone or reduce debt service payments with the consent of a majority of creditors. A Chapter 3 filing would allow public corporations go through the local courts if voluntary repayment plans cannot be reached with a majority of creditors.

CONTINUED WEAKNESS IN PR ECONOMIC INDICATORS

The volume of cargo imports into Puerto Rico has declined to a nearly 20-year low amid the continued downturn in the PR economy. 1.7 million cargo containers reached Puerto Rico through San Juan last year, a 12 percent drop from the previous year. That was the lowest since 1994, when 1.5 million containers came in, according to American Association of Port Authorities statistics.

Earlier this month, Horizon Lines announced it is ending  its Puerto Rico operation amid deepening losses and the cloudy outlook for the U.S. territory’s economy. A dockworkers union said the exit will cost 800 jobs. Industry sources say the less crowded playing field could allow rival shippers Sea-Star, Crowley and Trailer Bridge to raise rates in the Puerto Rico trade lane as they seek to buoy their own bottom lines.

Puerto Rico’s trade surplus did improve  by more than 15 percent in fiscal 2014 as exports inched up while imports dropped sharply. Exports were $62.45 billion in fiscal 2014 (ended June 30), essentially flat rom $62.39 billion the previous year, according to Puerto Rico government statistics.

Exports to the United States were up 0.4 percent to $44.83 billion in fiscal 2014. Exports to foreign countries decreased 1.1 percent to $17.31 billion. Exports to the neighboring U.S. Virgin Islands rose 26.3 percent to $294 million. Imports into Puerto Rico from the United States sank by 5.7 percent to $42.47 billion. Foreign imports dropped 1.9 percent to $20.06 billion. Imports from the USVI surged by 20.7 percent to $11 million.

Puerto Rico’s trade balance of $19.98 billion in fiscal 2014 was 15.1 percent wider than the $17.35 billion mark the previous year.

WILL LOWER OIL PRICES ALLOW INCREASED GAS TAXES?

The combination of lower oil prices and fewer miles driven seem to have changed to a small degree the atmosphere for discussions of possible increases in state gas taxes. Much research has been published about the failure of these taxes to reflect inflation, changes in driving habits and fuel efficiency. The reality is that the proportion of fuel costs related to taxes has steadily decreased. State transportation planners have noticed and in at least two states have recently floated the idea of raising state gas taxes as a source of funding for rehabilitation and expansion of bridge and road infrastructure nationally.

Wisconsin seems to be the farthest ahead in this trend. Recently, the state transportation Secretary Mark Gottlieb has proposed a variety of possible funding sources for consideration by the Wisconsin legislature. Gottlieb wants to increase the 32.9-cent-per-gallon gas tax by 5 cents, to 37.9 cents in September 2015. The tax would be linked in part to the wholesale price of gasoline, which would allow it to rise and fall in future years with the price of gas, though it could not fall below 37.9 cents per gallon. A similar change would be made for diesel fuel, raising it by 10 cents a gallon. The higher gas taxes would raise an additional $358 million through June 2017. Gottlieb is asking for more than $1 million to hire a consultant to study for 18 months the feasibility of tolling Wisconsin’s highways and bridges.

In New Jersey, where the fund that supports infrastructure improvements is set to run out of funds for new projects by next summer, some are suggesting extending the state’s sales tax to gasoline. At a hearing earlier this year of the Assembly Transportation, Public Works & Independent Authorities Committee, members discussed a proposal that would apply the 7% state sales tax to gasoline purchases to help raise revenue for infrastructure improvements.

The hearing was part of a series that is examining how to fill the state’s Transportation Trust Fund. Currently, the fund is fed by New Jersey’s gas tax of 14.5 cents per gallon (CPG), state highway tolls and part of the state sales tax levied on non-gasoline purchases. The gas tax has remained at the same level since 1988 and is among the lowest in the country.

The trust fund has spent $1.6 billion this year but most of it has gone to service debt on earlier projects under constitutional requirements. Funds for new projects are expected to run out by July 1, 2015, which is the beginning of fiscal year 2016. One proposed bill  would replace the current gas tax with a 7% tax on gasoline purchases, essentially extending the sales tax to fuel while eliminating the gas tax. Under a sales tax structure, revenues under this setup would vary by the price of gasoline.

Polling has shown that New Jersey residents are becoming less resistant to the idea of a gas tax increase. A recent Rutgers-Eagleton poll noted an eight-point drop from April in the percentage of respondents who opposed increasing the gas tax, to 58%.

 

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Joseph Krist

Municipal Credit Consultant

PR SHORTCHANGES COFINA INVESTORS ON INFORMATION

The recent information call held by the GDB continued the Commonwealth’s trend of coming up short in terms of information for its investors. In this case, it was the discussion of the Commonwealth’s plans to shift the sales tax base supporting its outstanding COFINA debt from a traditional retail sales base to a value added tax base. The intent of the change is to make it more likely that a greater share of economic activity on the island that should be subject to taxation might be more readily captured. This reflects the ongoing reality that a substantial portion of the economy remains “underground”  thereby reducing available revenues for the payment of the island’s most marketable debt.

Moody’s estimates that the tax’s collection rate has historically been about 60 percent. In October 2013, S&P reported that the Commonwealth budgeted a capture rate of 88percent on highly regulated companies and 68 percent for other businesses. Under current conditions, it would take a relatively insubstantial decrease in the annual rate of increase in collections to create a situation in which debt service requirements would exceed available revenues, especially for subordinate debt.

This is an important factor as the island looks for ways to fund its capital needs while it strengthens and reforms its overall fiscal and debt structure. Many have seen COFINA  as the best debt for investors to hold. This makes the proposed change in the method of sales tax generation and collection as would be envisioned of even greater interest. The method itself has actually received a positive reception at least from institutional investors recently quoted in the press.

It makes it all the more puzzling why the Commonwealth would advertise such a proposal with so little detail. To date, no implementing legislation has been proposed or filed so it is impossible to evaluate the likelihood of adoption. In addition to making it harder to value the currently outstanding bonds, the lack of information raises more questions than it answers. The continuation of such practices is one of the great negatives weighing on the credit quality of Commonwealth debt. It is therefore, disappointing to see this practice continue despite a change in administration and changes in leadership at the GDB.

ILLINOIS ACTIONS REMAIN UNCERTAIN AFTER ELECTION

Investors who hoped to get a clue as to whether or not Governor-elect Bruce Rauner would stick to his campaign positions regarding taxes and fiscal policy will have to wait until 2015 for answers. Rauner campaigned on allowing tax raises in the personal and corporate income tax levies in January 2011  scheduled  to expire at the end of this year to do so. Rauner told reporters after the election that he’s had discussions with Democrats and Republicans in the legislature and plans to meet with them to “address our state’s very significant financial problems.”  “I’ll be working very closely with members of the General Assembly to provide both short-term solutions and long-term solutions to fix the financial health of the state.”  It will be important to do so as the State’s cash flow problems are not improving, thereby continuing the need to conserve cash, slow payments to state institutions (e.g., universities) and vendors. Billions of dollars of bills remain unpaid. The state is short of revenue to get itself through the fiscal year ending June 30. Along with a lack of progress on pension reform, the cash situation and fiscal policy uncertainty are more likely than not to lead to additional downgrades until action is taken.  A sign of the potential difficulty in holding up real reform is the well known political difficulties in the State. Immediately on election night these became apparent. Rauner said during his victory speech on Nov. 4, “Just a few minutes ago, I placed two very important phone calls — I called Speaker Madigan,” and “I called President Cullerton, and I said to them, ‘This is an opportunity for us to work together’”. While the anecdote appeared to signal Rauner’s desire for bipartisan cooperation, spokesmen for the speaker said that Rauner and Madigan didn’t speak on election night, and there was no record of any voicemail or call. A spokesman for the Senate President said that while someone from Rauner’s campaign contacted his staff, Rauner and the Senate president didn’t talk. So investors will apparently just have to wait and see. LOUISIANA HIGHLIGHTS MUNI REPORTING ISSUES

Situations keep arising that only reinforce the image of the municipal bond market as one of opaque disclosure. The most recent example is Louisiana. State Treasurer John Kennedy warned this week that the state general fund is running a historically high negative balance through the first four months of the fiscal year. Kennedy said, “I’m concerned.  This negative balance is evidence that we are spending more than we’re taking in.  We’ve been doing it for a while, but this historically large negative balance demonstrates that it’s getting worse,” In fact, the Department of Health and Hospitals just announced that we are already $171 million over budget in our Medicaid program with eight months to go in the fiscal year.”
The end-of-the-month state general fund balance for October was a negative $925 million, forcing the Treasurer’s Office to borrow from other funds in order to maintain cash flow.  This was Louisiana’s negative end-of-the-month state general fund balance for that time period in five years.  The fund balance on October 31 of last year was a negative $657 million.  The end-of-the-month negative general fund balances for October 31 through the prior three years were: $181,531,912.38 (2010), $565,169,822.53 (2011), $476,665,313.52 (2012).

As problematic as these figures may be, the fact that the Governor’s office disputes them so strongly is more so. That office insists that the State has a surplus but this is based on some $300 million of previously unaccounted for funds. These newly discovered monies have supposedly created a deficit. Such a discrepancy would normally be a substantial concern for a corporate borrower in the public debt markets but apparently not so for this municipal borrower.

 

The state does have strong constitutional protections for its general obligation debt but the fact that a payment default may not result does not mean that risk of a growing deficit is accurately or fairly being priced in the market. While Moody’s maintained its Aa2 rating, it cited the dwindling impact of a post-Katrina reconstruction boost; continued budget gaps due to underperforming revenues; and the challenges the state faces in dealing with its large Medicaid caseload and significant unfunded pension liabilities.

 

The state said that it will take until January 2015 to resolve the differing views of its fiscal position.

 

NYPA BENEFITS FROM IMPROVING STATE CREDIT

The New York State Power Authority saw its Moody’s rating upgraded to Aa1. The upgrade reflected the continuation of the Authority’s favorable balance sheet and operating characteristics. These have always been hallmark traits of the Authority as well as the benefits of reliance on the Niagara hydroelectric facilities as core resources for power generation. What has improved is the decreasing reliance by the State of New York for transfers from the Authority to bolster the State’s annual budget position. As the State’s operating fundamentals have improved, the Authority has not had to transfer funds to the State and may actually receive some repayments of prior transfers dating back to 2009. All of this should improve the Authority’s liquidity and help to finance its ongoing capital needs.

 

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

 

Joseph Krist

Municipal Credit Consultant

MIXED ELECTORAL MESSAGE ON PENSIONS

Voters sent mixed messages on their view of pension reform at least in two widely watched votes. Gina Raimondo became the first Democrat elected governor in Rhode Island since 1992 in spite of heavy union discontent with her 2011 backing for changes to Rhode Island’s pension system that raised the retirement age, put workers into 401(k)-type plans and suspended raises for retirees until the system was better funded. She built her campaign around her success at cutting pension costs, while pledging to revive the economy. The pension changes she advocated followed after Central Falls became the state’s first city to go bankrupt, which eventually forced retirees to accept cuts to pension checks. She said the reductions were needed to prevent rising retirement costs from bankrupting other cities and crowding out funding for schools and other programs. The pension changes are forecast to save $4 billion over 20 years. The steps cost her thesupport of the unions, the changes were imposed through legislation instead of negotiation. In Phoenix, AZ voters rejected a ballot measure that would have made Arizona’s capital the largest U.S. city to do away with guaranteed pensions for new public workers.  Nearly  57 percent of voters voted against the proposal to put new non-safetyemployees into 401(k)-style defined contribution plans that rely on individual investment returns. Retirement expenses comprised $218 million, or 22 percent, of Phoenix’s general-fund expenditures through June 2013, up from 11 percent in 2007. Phoenix voters previously approved a measure in March 2013 to increase employee contributions toward pensions and require higher retirement ages. Those changes are projected to save $600 million over 23 years. These events followed the approval of the City of Stockton’s Plan of Adjustment to emerge from bankruptcy which we discuss below.

STOCKTON BANKRUPTCY PLAN APPROVED

Stockton, California, won court approval of its plan to exit bankruptcy on October 30. “This plan, I’m persuaded, is the best that could be done in terms of restructuring the city’s debts,” U.S. Bankruptcy Judge Christopher Klein said at a hearing today in Sacramento, the state capital.

The case has drawn the attention of the municipal market to see whether pensions administered by the California Public Employees’ Retirement System would be protected from cuts. Klein ruled earlier that Calpers doesn’t deserve special protection, the first time the biggest U.S. public pension fund was found vulnerable to cuts in a bankruptcy. The earlier ruling by Klein gave Stockton the opportunity to end the Calpers contract, but it declined to do so because, as the judge said, the workers “would be the real victims.”

Ending the contract with Calpers would have reduced pensions by 60 percent and caused many employees to leave, Marc Levinson, Stockton’s lead bankruptcy attorney, has said. It would have taken years to set up a new pension system, he said. Offsetting the preservation of the pension system was done when  workers agreed to “quite substantial” concessions in pay, which has an indirect effect on pensions, Klein said.

CALPERS was publicly pleased with the end result if not the actual ruling on the pension question. “The city has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future,” Calpers Chief Executive Officer Anne Stausboll said today in a statement. “We will continue to champion the integrity and soundness of public pensions.”

Not all observers were as pleased with the result. Dan Pellissier, president of Sacramento-based California Pension Reform, said Stockton is going forward with “one hand tied behind its back” by choosing not to reduce its pension burden.“Pension obligations have driven many government agencies toward financial insolvency, and Stockton is betting that they can manage their financial future without fixing its unsustainable pension obligations,” he said in a phone interview. “The purpose of bankruptcy is to get a fresh start on your finances.”

Stockton filed for bankruptcy in 2012 after spending too much on downtown improvement projects and seeing its property-tax revenue plunge in the housing crisis. Creditors filed $1.18 billion in claims. The major holdout in the case was Franklin Resources. Under the city’s plan, Calpers will be fully repaid while two Franklin funds will get back only about 1 percent of the unsecured portion of the $36 million they’re owed. Franklin will get full payment on its $4 million secured claim. A lawyer for Franklin, told the judge “We are obviously disappointed by your ruling and we will evaluate our options.”

PR HIGHWAY AUTHORITY FINANCING PLAN UNVEILED

On October 30, the Government Development Bank unveiled a detailed plan to borrow up to $2.5 billion through a bond issue backed by a new hike in the crude oil and petroleum products tax. Legislation enabling the deal was filed on Thursday, substituting a bill that was introduced last June, but never acted upon. House Bill 2212 would increase the excise tax on a barrel of crude oil to $15.50 from $9.25. That tax was increased from $3 just last year.

The $1.9 million loan on the GDB’s books was made to the Puerto Rico Highway & Transportation Authority (HTA), mostly for public works, but market conditions and the public corporation’s own fiscal problems have prevented it from returning to the market to undertake a bond issue to pay off the GDB loan.

House Bill 2212 would transfer a $1.9 billion loan on the GDB’s books which was made to the Puerto Rico Highway & Transportation Authority (HTA)to the Infrastructure Financing Authority (PRIFA) along with the revenue to pay for it to be generated by hikes in the crude oil and petroleum products that were undertaken in June 2013. This tax is expected to generate an additional $178 million per year.

The taxes would be divided as follows: $6.00 per barrel for the PRHTA to cover its operational costs and debt service obligations, $8.25 per barrel for the PRIFA to cover the new debt service from the new proposed bond issue, and $1.25 per barrel to finance the new Integrated Transportation Authority, which would combine the Metropolitan Bus Authority bus services, the ferry services (Maritime Transportation Authority) and the Urban Train system, once their transferred is completed.

The measure explicitly excludes the taxation of crude oil and its by products used by the Puerto Rico Electric Power Authority to generate electricity, as well as those that are exported from Puerto Rico; those used by local refineries and petrochemical companies in the oil refining process; and those used as lubricants or fuel for aircrafts and shipping vessels traveling by air or sea between Puerto Rico and other places; among other exclusions, according to the GDB.

The legislation also provides additional guarantees and legal protections to investors in the proposed new bonds. The Commonwealth has been impacted by downgrades since the enactment last June of the Puerto Rico Public Corporations Debt Compliance & Recovery Act (Recovery Act), which provides a mechanism for a  local bankruptcy-like procedure for most public corporations to restructure their debts. Both GDB and PRIFA are barred from restructuring its debts under the Recovery Act. It has been feared that the  HTA would  follow PREPA in moves to restructure long-term debt, but government officials insist they are working to resolve the public corporation’s fiscal challenges without resorting to the Recovery Act.

Officials also discussed plans for a new tax reform aimed at making the tax simple more just and simplified, while providing sufficient revenue for government operations and promoting economic development. The hope is that the resulting system will feature  streamlining of its numerous deductions, credits and incentives, resulting in a system that will be much easier to enforce. This is seen as an important element in any long-term plan to bolster the competitiveness of the island’s products, workers and businesses. It is expected to increase emphasize on consumption based taxes, while transitioning the island’s 7 percent sales tax into a new value added tax.

The GDB sais that the tax plan has the explicit support of the four bond insurers with the highest exposure to Highway Authority debt.

 

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.