Bankrupting a State’s Future?

March 14, 2016. Share on Twitter

Keystone Municipal Bankruptcy Schooling. The Commonwealth of Pennsylvania’s state budget dysfunction now could force one of the Keystone’s state’s public school districts into chapter 9 municipal bankruptcy. School Superintendent Scott Deisley, in a letter he posted on the Red Lion School District’s website, noted: “Our cash flow analysis for the remainder of this school year is dire…Unless we take some extraordinary measures right now, the district will likely face bankruptcy by the end of the fiscal year.” The bitter fiscal stalemate between Gov. Tom Wolf and the Pennsylvania legislature has remained deadlocked for over nine months on the state’s FY2016 budget—even as Gov. Wolf approved three-fourths of the spending plan last December, while holding out for an increase in basic education assistance. For those students trying to learn basic math, Superintendent Deisley instructs that the school district has received less than 50 percent of its owed basic education funding from the state—some $9.7 million remains outstanding—leading the Superintendent to recommend the withholding of payments for cyber and charter tuition expenses, effective immediately, to preserve the district’s cash flow. Earlier this month, the Board of School Directors allowed the administration to withhold vendor payments, but now the school will delay all requests for purchases until funds become available, instead focusing first on essential classroom needs, followed by debt service and utilities—with payroll at the tail end, and all other expenses denied. The Superintendent believes that borrowing to cover expenses would entail too much risk, noting: “When a public school district takes a loan out for operational cash shortfalls, those bonds are not transferable from one fiscal year to another…This option is not viable since the repayment of any loan would correspond with the same time frame in which we are at risk for running out of money. The risk associated with taking out a loan and hoping that the state budget impasse will be resolved in time for us to make our repayment is too uncertain.” Red Lion District business manager Tonja Wheeler late last week issued a statement: “Red Lion Area School District is not filing for bankruptcy. We are cutting travel, conferences and other non-essential purchases to survive this budget impasse. This is not just a Red Lion Area School District problem, this is a statewide problem.”

Nevertheless, the virtual state budget shutdown is exacting a cost on the state’s students’ futures: Moody’s last month downgraded three of the state’s school districts and withdrew their enhanced ratings based on the Commonwealth’s pre-default intercept programs, lowering the pre-default enhanced ratings of the Chester Upland, Duquesne City, and Steelton Highspire school districts—credit ratings downgrades that will exact higher borrowing costs—all at the expense of the state’s future leaders—and, increasingly, on the state—where S&P last week placed its AA-minus general obligation rating for Pennsylvania on credit watch with negative implications, in what could be the first of several rating actions against the commonwealth in 2016.

Moody Blues in Atlantic City. The New Jersey Senate Budget and Appropriations Committee last Thursday, in a 9-1 vote with three abstentions, reported a bill, which the full Senate could take up as early as today, to provide authority for the state to take sweeping control of financially struggling Atlantic City in the wake of a tense hearing marked by fierce opposition from local leaders. The bill had the backing of New Jersey Governor Chris Christie, as well as a likely candidate for Gov. Christie’s position in next year’s gubernatorial election, state Senate President Stephen Sweeney (D-Gloucester), the main sponsor of the takeover legislation, who warned his colleagues that time was running out and his bill is needed to help save Atlantic City from municipal bankruptcy — adding that such a bankruptcy could cause a contagion scenario that would hurt the credit rating of municipalities across New Jersey. Sen. Sweeney added: “We need to fix this now…Otherwise, how are we going to pay employees in a month if there are no funds?” Chief Senate sponsor, State Senate President Stephen Sweeney (D-Gloucester), in pushing the state takeover bill, emphasized that the legislation is necessary to prevent municipal bankruptcy by Atlantic City: the proposed legislation would empower the New Jersey Local Finance Board to renegotiate Atlantic City’s outstanding debt and municipal contracts for up to five years, reorganize government operations, consolidate agencies—as well as provide authority to leverage some of the city’s assets, such as the Atlantic City Municipal Water Authority, to gain needed revenue. As Sen. Sweeney described it: “Atlantic City’s fiscal crisis is severe and immediate…The state needs to take a more active role to help prevent a total financial collapse. The intervention will allow the state and the city to work together to accomplish what Atlantic City can’t do on its own.”

Nevertheless, the proposed legislation faces opposition in the Assembly, so the fate of the so-called “Municipal Stabilization and Recovery Act” remains uncertain—especially in the face of opposition by New Jersey Assembly Speaker Vincent Prieto (D-Secaucus), who is opposed to the bill because of the provisions within it which would empower the state to break union contracts for up to a five-year period—or, as Speaker Prieto put it: “The state already has the authority to help Atlantic City avoid financial disaster and collective bargaining rights must not be trampled…I still remain willing to negotiate and have asked all parties to sit down together in the same room, but no one has taken me up on my offer.”

Unsurprisingly, Atlantic City Mayor Don Guardian attended the committee session to express strong opposition to the intervention bill—along with members of the city council, as well as representatives from Atlantic City’s police and fire departments, testifying that the proposed legislation “gives the State the authority to unilaterally terminate collective bargaining agreements, to abolish any City departments and eliminate non-elected positions in the city, and to sell off valuable City-owned assets without consent from the local government or input from City residents…This legislation is a one-sided surrender of our responsibilities as local leaders and deprives the residents of Atlantic City of even the most modest aspects of self-governance and local control.” Mayor Guardian urged the committee instead to only approve a companion bill, “The Casino Property Tax Stabilization Act,” proposed legislation which would allow Atlantic City’s eight casinos to make payments in lieu of taxes over a 10-year period—exempting casinos from Atlantic City’s regular property tax in exchange for PILT payments on a quarterly basis—a bill which was then unanimously adopted—a bill which, however, is similar to one Gov. Christie vetoed earlier this year—and is unlikely to sign. (The Committee subsequently voted unanimously to do so.) In his statement to the Committee, Mayor Guardian testified about the “significant cuts in every department” the city had adopted, describing the proposed legislation as the opposite of a partnership, rather a “license for the state to abolish local government.”

Tick Tock. With Puerto Rico potentially facing insolvency by the end of this month, and House Speaker Paul Ryan (R-Wi.) having set March 29th as the deadline for House action on Puerto Rico legislation, the Puerto Rico House of Representatives late last week passed a bill to help the Puerto Rico Aqueduct and Sewer Authority issue debt, House Bill 2786, legislation which would set up the Corporation for the Revitalization of the Aqueduct and Sewer Authority, and provide the new authority with authority to issue municipal bonds—even as it would prohibit any increase in water and sewer rates over the next three years—in addition to barring any amount in excess of 20 percent of rate revenue to be dedicated to finance capital improvement bonds. Calculation of this 20 percent would not include revenue paying off bonds the corporation sold to refinance existing PRASA bonds. That is, the U.S. territory is not just facing a looming fiscal insolvency, but also a looming infrastructure breakdown: the island’s public utility, PRASA, has been unable to issue new municipal debt, forcing it to halt 55 projects already under construction and to defer commencement of 86 projects in its capital improvement program—even as it has fallen $140 million behind in debt with its suppliers and contractors—leading the utility, last week, to warn it may have to default on certain loans and bonds with the Puerto Rico Infrastructure Finance Authority, the Government Development Bank for Puerto Rico, and the United States Department of Agriculture. In an EMMA posting, PRASA said if HB 2786 did not become law and if it were unable to sell a bond, its board might approve the defaults.

One can see the onset of a vicious cycle: PRASA increased its water rates by 60% in the second half of 2013 with a goal of covering the utility’s operating expenses, debt service, and the provision of reserves through the end of FY2017—all based upon the assumption it would be able to issue a bond to cover capital improvement expenses. But that assumption came before decisions by the Government Development Bank for Puerto Rico and the downgrading of Puerto Rico: meaning PRASA has been unable to sell a municipal bond: it had $4.75 billion of debt outstanding at the end of last year. The crisis has reached such a stage that the Securities and Exchange Commission’s investment management division is now urging bond funds, especially those with exposure to Puerto Rico debt, to monitor and continually update their EMMA disclosures based on the risks associated with their investments. In a statement which can hardly be auspicious for Puerto Rico or PRASA, the SEC division noted: “The division believes that full and accurate information about fund risks, including risks that arise as a result of changing market conditions, is important to investors in mutual funds, exchange traded funds, and other registered investment companies…In the staff’s view, any fund investing in Puerto Rico debt should consider, based on the nature and significance of its investments, whether such disclosure is appropriate.”