The Importance of Bipartisan Leadership in Averting Severe Human & Fiscal Distress

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eBlog, 5/26/16

In this morning’s eBlog, we applaud House Speaker Paul Ryan (R-Wisc.), House Natural Resources Committee Chair Rob Bishop’s (R-Utah), U.S. Treasury Secretary Jacob Lew, and House Minority Leader Nancy Pelosi (D-Ca.) for their leadership roles in contributing to the remarkably swift, bipartisan markup of legislation (PROMESA) to address Puerto Rico’s looming insolvency; and, we continue to follow the seemingly unrelenting challenge in Wayne County to emerge from its fiscal emergency consent agreement.

House Panel Forwards Puerto Rico Legislation. The House Natural Resources Committee yesterday voted 29-10 to send to the full House legislation, HR 5278, to address Puerto Rico’s debt crisis with solid bipartisan support, a strong sign the bill could move quickly through Congress ahead of a potential default by the territory on July 1. As reported, the bill would create a debt-restructuring process and name a seven-member financial control board, not the government elected by Puerto Rico, to determine whether and when to initiate court-supervised debt restructuring, and it would have the power to approve or reject budgets. The board would terminate after Puerto Rico regains the ability to borrow at reasonable interest rates and balances its budget for four consecutive years.to oversee the U.S. territory—not unlike previous control boards in New York City and Washington, D.C.—and similar to the oversight fiscal control board created as part of Detroit’s exit from the largest municipal bankruptcy in American history. The bipartisan vote came despite the strong opposition from some municipal bondholders, hedge funds, and unions: millions of dollars on television advertisements had been expended to defeat it. Chair Rob Bishop (R.- Utah) said he expects majorities of both parties to back the bill when it comes to the House floor when Congress returns the week after next, while in the Senate, Majority Leader Mitch McConnell (R.- Ky.) said Senators were “anxious to take up” whatever the House could pass. The White House supports the measure. The measure was opposed by both labor unions and Puerto Rican elected officials, as well as some House members, who claimed the bill would threaten creditors’ rights and create a potential precedent for distressed states—claims not only inconsistent with the dual sovereignty of the United States, but also because the legislation was done through the territories clause of the U.S. Constitution—or, as David Hammer, co-head of municipal bond portfolio management at Pacific Investment Management Co. put it: “This creates a clear firewall and ring-fences Puerto Rico from the broader muni market,” adding hat, moreover, the debt-restructuring mechanism would require Puerto Rico to cede more power to the federal government, noting: “That’s not something a state or local government would ever seek to do.”

The Committee rejected proposed amendments to delete language limiting Puerto Rico’s minimum wage, ease economic aid to the island, and ban the Federal Reserve from purchasing Puerto Rican bonds or paying down the commonwealth’s debt—as well as amendments focused on Puerto Rico’s constitutionally guaranteed debt. (Roughly $18 billion of the more than $70 billion in Puerto Rican municipal debt is backed by its constitution.) The committee also rejected an amendment from Rep. John Fleming (R-La.) that critics said would not give the board enough flexibility to properly sort out debt repayment priorities according to the Puerto Rican Constitution. The bill cleared committee with one significant change. The adopted amendment from Rep. Garret Graves (R-La.) mandates that no federal money can go to paying down or buying Puerto Rican debt or liability, which could help tamp down Republican fears of a potential bailout.

Pensionary Solvency. Wayne County, Michigan Executive Warren Evans has taken another step in pressing his commitment to take the county surrounding Detroit out of its emergency consent agreement by the end of this year by, yesterday, announcing the County will make an additional $14 million contribution toward its underfunded pension system—a contribution which will be in addition to the $63 million which the County is currently obligated to pay annually into its retirement fund, but falls short of the $19 million county officials originally anticipated they would be able to afford. In FY2014, Wayne’s pension audit revealed some $840.5 million of unfunded pension liabilities. According to Wayne County spokesman James Canning, last December officials determined the County could make a $10 million contribution into the pension fund from funds declared as surplus from its Delinquent Tax Revolving Fund and Property Forfeiture funds; in addition Wayne anticipated it could funnel another $9 million from fund balances—albeit, in the wake of a third-party administered study on its pension system conducted earlier this year, the County determined it would only be able to contribute an additional $4 million from the fund balances. When the County entered into the consent agreement, it faced an accumulated deficit of $82 million, a yearly structural deficit of $52 million, $1.3 billion in unfunded health care liabilities, and a pension fund that was underfunded by nearly $900 million. By last month, according to its CAFR, its FY15 year-ending accumulated deficit of more than $82 million had been eliminated and the books were closed with a $35.7 million unassigned surplus—albeit some $30 million of that was earmarked for specific uses, leaving Wayne County with a surplus of only $5.7 million.

Other key steps involved reductions in other post-employment benefits, where the County achieved reductions of about $850 million in unfunded liabilities—reducing its OPEB liability by 65%, and bringing the county’s pay-as-you-go contribution this year down more than 50 percent from $40.4 million to $17.6 million—savings achieved by switching some retirees to what the county deems more “cost-effective health plans and providing others with need-based stipends to purchase their own insurance.” Absent such changes, Wayne County had warned that the actuarial accrued liability was on track to rise to $1.8 billion.

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