Joseph Krist
Municipal Credit Consultant
ALL GOING WRONG FOR PUERTO RICO
If it had not already, PR’s financial crisis has reached critical mass for sure. The GDB was a source of loads of negative news. First, it announced that the Commonwealth would be unable to meet its required annual financial disclosure by May 1. Then the Bank released a letter to the Legislature which suggested that the Commonwealth would be unable to meet its liquidity requirements at the start of the fiscal year on July 1.
The bank made the warning in a letter made public a day after it was sent to Gov. Alejandro Garcia Padilla and the presidents of the island’s Senate and House of Representatives. “The island’s financial state is extremely uncertain,” the letter said. “A government shutdown would have a devastating impact on the economy, with salary and public service cuts, and a long and painful recovery.”
The letter urged legislators to immediately implement measures to cut costs and balance the budget and that the government needs to approve a five-year plan to help reduce a $73 billion public debt as well as approve sweeping changes to the island’s tax system.
In a number of interviews, David Chafey, president of the bank’s board of directors said once the government does that and presents a balanced budget, then it can be in a better position to issue bonds. “Time is passing, and it’s passing quickly,” he told The Associated Press. “We need to provide investors with some kind of comfort.”
Typically one agency of the government will not write to the rest of the government so openly but the letter was issued amidst negotiations between Gov. Garcia and members of his party who oppose legislation that would impose a 16% value-added tax that he says is needed to help generate more revenue. In the House of Representatives a group of legislators reached a tentative agreement to impose a 14% value-added tax. If passed, the measure would then go to the Senate.
Stunningly, the GDB letter and the Governor’s efforts appear to have been for naught. Earlier in the morning of the the Governor’ s speech the House convened to consider the Governor’s plan to impose a value added tax of VAT as part of his financial reform package. In the session which ran past 3 a.m., the House of Representatives voted down the tax reform bill after failing to secure enough votes from the Popular Democratic Party (PDP) majority. Along with the New Progressive Party minority delegation, six PDP members voted against the measure. The final vote count was 22 in favor and 28 against.
The governor characterized their vote as “irresponsible” and “disloyal,” and the House speaker said that the PDP caucus will seek disciplinary sanctions for the six legislators.
After the vote, Puerto Rico Gov. Alejandro Garcia Padilla unveiled a $9.8 billion operating budget Thursday night in which he pledged to reduce crime, create jobs, boost school attendance and expand the U.S. territory’s tourism sector during a state of the commonwealth address. Padilla said he plans to reduce the island government’s $2.2 billion deficit to $775 million in one year, in part by taxing those who earn $200,000 or more a year or who buy homes valued at $1 million or more. He did not provide details about those taxes. On the sales tax front, Padilla also said that by Dec. 1, he will reduce the 7 percent sales tax to 6.5 percent and continue to exempt items including prescription medicine, books and non-processed foods. Those looking for an austere budget will be disappointed that Padilla promised that overall, more than 40,000 public employees in 28 agencies will see pay increases by next February. Padilla’s proposal is $750 million higher than the current budget, which legislators of the opposition party questioned.
According to recent reports by Bloomberg and Reuters, PREPA bondholders will be granting the utility a 30-day extension on its forbearance agreement, which had been set to expire today. This would be the third extension conceded to the troubled utility after the original March 31 deadline.
PRISON DEBT BACK IN THE SPOTLIGHT
It has always been one of the riskier areas of the high yield market so the news of at least two facilities having debt problems in Texas is not a surprise. One is the now empty Willacy County Correctional Center in Raymondville. One morning late last month, the prisoners rioted. Guards put down the uprising in about five hours, but the destruction was so extensive as to force the closure of the facility leading to all 2,800 inmates being transferred. “Worst scenario, we’ll lose about $2.3 million annually, which is about 23 percent of our income,” said one Willacy County commissioner.
The County counts on the prison as a business generating revenue. The prison’s water and sewer bill is $50,000 a month. Once insurance pays for extensive repairs to the prison, the county needs to fill those beds again as the facility is looked as a way to generate revenue and create jobs. Willacy County built three of them. The Correctional Center was the largest, with a staff of nearly 400. They’re now unemployed.
The County sold bonds, built the prison and hired an operator — Management & Training Corporation (MTC). MTC contracted with the U.S. Bureau of Prisons to incarcerate low-security male immigrants who are serving out sentences for illegal border crossings and aggravated felonies. Many if not most of the private prisons in the Southwest were built to service this “market”. For that service, the federal agency paid MTC to manage the prison. Then MTC paid the county $2.50 per prisoner, per day. But ultimately, it’s the county that’s on the hook for its $63 million debt on the nine-year-old prison.
When the U.S. Bureau of Prisons canceled its contract with Willacy County last week, it explained that the federal inmate population was down, and it didn’t need additional beds. The prison will be in competition with several other facilities for a more scarce “commodity”. Like many private facilities, inmates have complained of bad living conditions and substandard medical care. MTC emphatically disputes this criticism. The company has hired a third party to investigate why the inmates mutinied. Meanwhile, Willacy County plans to cut all non-essentials in its budget — such as plans for a courthouse renovation and a new hurricane shelter.
Elsewhere in Texas, on February 2, 2015, the Trustee, UMB Bank, N.A., for the $42 Million Bondholders has notified the Maverick County Public Facility Corporation that Maverick County failed to make a scheduled $1,415,000 principal payment on Bonds on February 1, 2015, but did make the February 1, 2015 interest payment. Consequently, the Trustee had advised the Maverick County Public Facility Corporation that there are “several events of default have occurred and are continuing under the Indenture.
As is usually the case, all Project Revenues are pledged as security for the Bonds and the County is obligated to cause all Project Revenues to be delivered directly to the Trustee. The County continues to intercept Project Revenues, which constitutes a violation of the County’s obligations under the Lease.The County has then remits funds that it requisitions back for payment of operating expenses. Under the terms of the Lease, all Project Revenues must be delivered directly to the Trustee and are to be used to pay Rental Payment Deposits first, prior to using such revenues to pay Project operating costs and expenses. The County’s failure to deliver intercepted funds to the Trustee for application towards the Rental Payment Deposit caused an Event of Default.
A further complication is the fact that the Corporation had its non-profit corporate charter forfeited in August 28, 2009. The Maverick County Public Facility Corporation continued to enter into many legal agreements regarding the operation, management, and detention of federal prisoners at its Maverick County Detention Center as well as with the $42 Million Bondholders and Trustee, the U.S. Marshal’s Service, financial advisors, legal counsel, and other third party contractors. All of these actions potentially expose Maverick County to significant financial risks and liabilities.
The Maverick County Public Facility Corporation is in negotiations with the $42 Million Bondholders and Trustee in either restructuring the principal and interest payments owed on the debt and/or the forbearance of these payments and recently terminated its long standing financial advisor, Southwestern Capital Markets, Inc., while retaining a new one in First Southwest Capital.
The potential workout is additionally complicated by events associated with ongoing federal corruption investigations of the County. A Maverick County commissioner and former justice of the peace were arrested last week as part of an ongoing bribery investigation in the border city of Eagle Pass that has resulted in arrests bringing the total number of people charged in the ongoing investigation into a bid-rigging and kick-back scheme in Maverick County to 22. Among the others charged are three former county commissioners all of whom have pled guilty.
In Burnet County, a private jail deal will produce significant principal losses for bond holders after the facility is sold to the County. The 587 bed jail has been privately operated until 2014 when the County took it over. The County will pay $14.85 million for the facility while there are some $32,770,000 of bonds outstanding. The jail had been consistently underutilized and had proven to be a less than secure facility after several escapes. County inmates are sufficient to occupy only about 30% of the beds.
WAYNE COUNTY FINANCIAL UPDATE
Earlier this year we reported on the financial woes facing Wayne County which includes the City of Detroit within its borders. This week County Executive Warren Evans unveiled a recovery plan with deep cuts – including wiping out retiree health care – in an effort to avoid bankruptcy. According to Evans, “this plan will prevent bankruptcy even though in some areas we are worse off [than when] Detroit was pre-bankruptcy.” Wayne has just under $700 million of limited-tax general obligation bonds and $302 million of LTGO notes outstanding.
The plan eliminates the county’s $52 million structural deficit but the pension system that’s only 45% funded with a $910 million shortfall and a $200 million, bond-funded jail project in downtown Detroit that the county abandoned half built due to lack of money are not dealt with. Since 2008, the county’s has plugged general fund shortfalls by shifting money from its pooled cash fund. According to the County Executive, the county will not be liquid enough to rely on fund transfers anymore and will be entirely out of money by next summer.
The plan would eliminate health care for future retirees. It would move most employees and some retirees to high-deductible insurance plans and provide retirees with fixed and limited subsidies for the purchase of supplemental insurance, likely under the new federal health care law. That’s similar to what Detroit did in its bankruptcy, shifting retirees to the national exchange. These cuts would save $28.4 million in 2015, with annually increasing savings rising to $49.8 million by 2020.
It raises the retirement age to 62 and reduces future pension benefits by changing the pension multiplier. It increases the number of years used to determine compensation to 10 years from the current three- to five-year equation. All county employees would see 5% salary cuts. The total impact of these cuts would mean $60.3 million in savings for the county, including $53.4 million in the general fund.
In February, Evans blamed the county’s problems on a loss of property tax revenue and “fiscal and managerial mismanagement.” The county receives 60% of its general fund revenue from property taxes, which fell to $289 million by fiscal 2013 from $408 million in fiscal 2008. The plan assumes no increase in property tax revenue until 2018, and then only a $4 million boost.
The problems on the capital side are based in the county issue of $200 million of bonds in 2010 for a new jail, which is supposed to replace the current aging criminal justice facilities. But the county was forced to abandon the project in 2013 when it became too costly, and the county cannot return to the markets for additional financing in its current fiscal condition.
The county lost its last investment-grade ratings shortly after initial comments about the county’s finances in February.
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