March 19, 2015
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Re-entering the Municipal Market in the Wake of Municipal Bankruptcy. Yesterday, the Michigan Senate voted 46-36 to pass and send to the House S160, legislation which would provide holders of bonds issued by Detroit with an intercept and statutory lien on the city’s income tax-backed bonds in anticipation of the city’s first post-bankruptcy bond re-entry this spring. SB 160 would amend the Home Rule City Act to allow a city with a population of more than 600,000 (in effect limiting the bill only to Detroit) to remit all its income tax revenue to a trustee for the benefit of the holders of financial recovery municipal bonds, before releasing any remainder back to Detroit. That is, the legislation would provide bondholders a superior, statutory lien on the city’s income tax revenue until the bonds were paid off. The revenue held in trust would be exempt from being levied, taken, sequestered, or applied toward paying the debts or liabilities of Detroit―other than those expressly specified in the agreement. In her fiscal analysis for the legislature, Michigan Senate fiscal analyst Elizabeth Pratt noted that the lien and intercept could save the city between $2 million and $3 million annually on debt service over the 10-year life of the bonds, adding: “Bond rating agencies have stated that a statutory lien on the income tax revenue pledged to repay the bonds would improve the bond rating and result in lower interest costs.” Should the bill become law, it would mark the Motor City’s first issuance in the public market since its emergence from municipal bankruptcy. As passed by the Senate, the bill would apply to $275 million of income tax-backed municipal bonds which the Motor City privately borrowed from Barclays last December as part of its plan of adjustment exit from Chapter 9 bankruptcy. The bonds, now in a variable-rate mode, are to be resold on the public debt market in a fixed-rate mode within 150 days of the Dec. 10th placement date, unless Barclays grants an extension. The one-day secondary market sale, coming as soon as April, will be similar to a primary offering, with credit ratings from at least two agencies. The $275 million of bonds are the only case in which Detroit has pledged its income tax revenue to a borrowing. The measure is intended to gain an investment-grade rating from at least one major rating agency.
Trying to Create a Sustainable Future. San Bernardino, as part of its ongoing effort to incorporate citizen input, involvement, and participation in shaping both a long-term strategic plan, as well as its plan of debt adjustment by May for the U.S. Bankruptcy Court, held a citizens’ meeting yesterday—which will continue today. Yesterday, the focus was on the challenges and opportunities for the city’s future, including possible solutions. The meeting featured 17 local leaders from various fields who were so-called “official participants,” including elected leaders from San Bernardino, as well as participants from colleges, businesses, and religious organizations. The attendees praised the engagement and emphasis on the positive, which they believe has been generated by and from those meetings. But what also emerged was a recognition that while San Bernardino’s revenue per capita and expenditures per capita are each in line with comparable municipalities in California, the city’s exceptional rate of turnover is not. San Bernardino has experienced a 24 percent annual turnover for executives since 2004, including five city managers, police chiefs, and public works directors. There appeared to be agreement with the assessment of our report [San Bernardino Full Case Study] that the city’s charter is a critical contributor to these problems, creating confusion and a lack of accountability: the responsibilities of the mayor and city manager often conflict; the elected city attorney has unusual power; and the City Council’s role is not well defined. Former Mayor Pat Morris, pointedly asked at the meeting: “Who’s in charge in this city?…That is the base question…I think the time has come for this group to decide we’re simply going to vote out the sucker — eliminate the charter and start again with a modern construct.” In reviewing the results of the survey of the city’s residents, the meeting also disclosed significant concerns: Asked to rate how likely they would be to recommend San Bernardino to a friend, on a scale of 1 to 10 with 10 being the highest, only 1.49% said 10. 31% responded 1. The majority who rated it below 8 were then asked what they would change. The top response was:
- clean streets—77%.
Muncipio or Municipal Fiscal Distress in Puerto Rico. While we have mostly focused on the Commonwealth of Puerto Rico’s desperate fiscal status—and its inability because it is not a state to authorize any of the island’s 78 municipalities to file for federal bankruptcy protection, we have not previously looked at how the Commonwealth’s municipalities are fiscally faring. Now Marc Joffe, a principal consultant at Public Sector Credit Solutions, has completed a preliminary review of recently released audited financial statement data, which, he writes, reveals widespread financial distress, noting that several may require extraordinary financial assistance from the Commonwealth, and raising the apprehension that a significant portion of Puerto Rico’s $4 billion in municipal debt could become a concern for holders of Puerto Rico general obligation bonds. Mr. Joffe scoured financial data obtained by the Centro de Investigación y Política Pública (CIPP), a Puerto Rico-based not-for-profit which operates the government transparency site ABRE Puerto Rico, reporting that the financial statements as well as summary statistics will be posted on ABRE Puerto Rico by late April. (Puerto Rico municipalities file audited financial statements with the federal and Commonwealth governments, and it appears that all 78 Puerto Rican municipalities – including those with less than 10,000 in population – meet the filing threshold. The reports are in English, are presented in accordance with GASB standards, and contain opinions from third party auditors.) According to summary data obtained by CIPP and spot-checked by Mr. Joffe, more than half of Puerto Rico municipalities have negative general fund balances, and few meet the GFOA recommendation for fund balance, i.e. enough to cover two months of spending. San Juan, the capitol, or as it is known there, Municipio de la Ciudad Capital San Juan Bautista, reported a positive general fund balance of $11 million―just over 2% of annual expenditures; however, Mr. Joffe notes that none of these funds are available for discretionary spending. After subtracting the $110 million in Non-spendable and Restricted General Fund balances, San Juan is left with an Assigned and Unassigned General Fund balance of negative $99 million. San Juan recorded general fund revenues of $420 million versus expenditures of $470 million. Ponce, the territory’s fourth largest city, has run substantial deficits during each fiscal year since 2008, accumulating a negative general fund balance of $36 million—a level, Mr. Joffe notes, equivalent to that reported by San Bernardino in the wake of its 2012 bankruptcy filing. Nevertheless, not all Puerto Rico cities are experiencing fiscal distress. Carolina, the third largest city, reported a roughly balanced budget in 2013 and significant unrestricted general fund reserves. Bayamon, the second largest, reported a 2013 surplus and a positive assigned/unassigned general fund balance, but reported a negative unrestricted net position on its government-wide statement of net position. Some smaller municipalities, he writes, reported “alarming results:” Maunabo, a 12,000-resident municipality on Puerto Rico’s southeast coast, as of June 30, 2012, reported a general fund balance of negative $2.9 million—an imbalance, moreover, which worsened to negative $3.5 million as of June 30, 2013. Most of the Maunabo’s revenue comes from the Commonwealth or federal government. In fiscal 2013, the city had total revenues of $14.4 million of which $11.2 million took the form of intergovernmental grants and subsidies. Since the community lacks the ability to support the level of service provided by the local government, spending cuts at either the federal or Commonwealth level could be devastating. The auditor found problems with how Maunabo accounts for its USDA Community Development Block Grants, which, at $1.7 million, is the largest federal grant it receives. The most serious finding was that “the Program did not maintain accurate accounting records of the financial transactions and did not reconcile, the cash account with the quarterly reports submitted to the pass-through-entity (which is OCAM – the Office of Commissioner of Municipal Affairs).” The auditor also gave a qualified opinion of Maunabo’s financial statements because the city does not have “complete, updated and accurate records of [it’s] capital assets.” Footnotes to the financial statements reveal that the city has overdrafts in its bank accounts and that it has missed $400,000 in interest and principal payments on a 2006 Department of Housing and Urban Development loan. These defaults have been covered by OCAM. Several other small municipalities had audit exceptions, negative general fund balances and/or a majority of revenues from intergovernmental sources. Unless Puerto Rico experiences an unexpected turnaround, these municipalities will be unable to service their substantial debts without extraordinary assistance from higher levels of government.