January 23, 2019
Good Morning! In this morning’s eBlog, we report on the potential adverse fiscal impacts on recovering municipalities from the ongoing federal shutdown, before journeying west to assess the potential municipal impact in California of a major public utility’s insolvency, before considering the views of Presidential candidate Sen. Elizabeth Warren (D-Mass.) in her visit to the U.S. territory of Puerto Rico.
Could Washington, D.C. Political Dysfunction Set Detroit Back? The gifted editorial writer of the Detroit News, Daniel Howes, writing about the auto executives who gathered in Detroit last week for the annual auto show, noted: “You could detect a common, if muted, complaint: Washington is weighing on the industry and its outlook. That could become a real problem this year, nearly a decade after two of this town’s automakers emerged from bankruptcy to jumpstart their long road back to respectability. Uncertainty looms.” He wrote that auto executives from the Motor City to Guangzhou used the Detroit auto show to “politely lament serial dysfunction in President Donald Trump’s Washington, confirming the honeymoon between Detroit and the White House is long since over. The confusion, exacerbated by the longest government shutdown in American history, is complicating decision-making, delaying investment and undermining the stability business craves, a pre-condition to making billion-dollar bets on plants, products, and people,” warning it could adversely affect the city’s recovering economy. He noted that the University of Michigan’s closely watched consumer sentiment index late last week reported its largest drop since Trump became President: the author, economist Richard Curtin, had written: “The decline was primarily focused on prospects for the domestic economy, with the year-ahead outlook for the national economy judged the worst since mid-2014…The loss was due to a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies.” He appeared to be reflecting the nearly 50% decline in CEO confidence in the global and U.S. economy—both issues of great import to the Motor City.
With tariff and trade tensions slowing the world’s largest economies, Mr. Howes noted that President Trump’s threat to levy 25% tariffs on foreign-made vehicles bound for the U.S. (and to leave in place tariffs on foreign steel and aluminum) are unnerving both domestic and foreign automakers—writing that China’s GAC Motor said last week it is delaying plans to enter the rich U.S. market by roughly a year, citing the proposed Trump tariffs. But he also noted that the federal shutdown means that Chrysler has been unable to receive its EPA-mandated emissions certification for its redesigned Ram 3500 heavy-duty pickup—an ominous omen for jobs in one of the world’s most auto-related economies. In a city which is relatively unique in its relatively significant reliance on income taxes, the federal shutdown could be slamming the brakes on the city’s remarkable recovery from the nation’s largest ever chapter 9 municipal bankruptcy.
He noted, further, that Ford’s executive Chairman, Bill Ford, in an interview during the auto show, warned: “There’s very little getting accomplished…That makes it hard for businesses to operate. Not just Ford, but any business, because we make decisions and they are billion-dollar decisions-plus… and we’re doing it now kind of flying blind.”
Robbing from Pedro to Pay Paul? On the left Coast, there are questions with regard to whether the pending chapter 11 bankruptcy of investor-owned Pacific Gas & Electric Corp. will have fiscal implications for the golden state or its cities and counties. Such a bankruptcy, coming in the wake of the firm’s estimated $30 billion in legal liability stemming from the state’s deadly wild fires, could also have severe fiscal implications for the state’s local governments—as it would adversely affect the company’s capacity to pay property taxes to the counties in which it operates, in addition to assessing whether it would make payments on its bond debt. Indeed, Fitch Ratings has already downgraded PG&E’s long-term issuer default rating to C from BBB-minus after the company this week announced it planned to restructure its debts through bankruptcy. Moody’s has moodily downgraded PG&E to Caa3 from Ba3, while Standard and Poor’s Global Ratings had downgraded PG&E five notches to B a week before the bankruptcy announcement—a downgrading which it dropped further after PGE missed a $21.6 million interest payment on its $800 million 5.4% senior notes maturing in January of 2040: There is a 30-day grace period, before default is triggered: PG&E has issued close to a billion dollars in bank-backed municipal bond debt through state conduit issuers, the California Pollution Control Authority, and the California Infrastructure & Economic Development Bank.
Fitch Ratings wrote that the State of California, local governments, and the public-owned credits may withstand the stress from PG&E’s bankruptcy, because the utility will probably continue to operate as it did when it went through a Chapter 11 bankruptcy restructuring in the early 2000s after it was caught up in a power supply crisis, with Senior Director Kathy Masterson noting: “Our assumption is that they will continue to provide service, just as they did when they were in bankruptcy from 2001 to 2004.” (PG&E provides power to about 16 million gas and electric customers in northern and central California and is among the largest taxpayers in several cities and counties that Fitch rates.) PG&E made property tax payments totaling $462 million to 50 California counties in FY2018, according to S&P.
Let the Presidential Debate Commence! Sen. Elizabeth Warren (D.-Mass.), an announced Presidential candidate, in San Juan as part of a visit to the U.S. territory of Puerto Rico, where she denounced the “cruelty” of the federal government’s treatment of Puerto Rico, said: “I’m here again to talk about the dignity and respect that this island deserves of our government, and the cruelty with which it has been treated: When the government no longer works for the people; when the government only works for the rich and powerful; we have to call it what it is: corruption, simple and simple. We need to make a change.” She told her audience she is pushing an anti-corruption law in Congress, and described it as “the most comprehensive” since the Watergate scandal: her proposed legislation would end lobbying as it has been known up until now and would prohibit lobbyists from donating money to elected officials. It would also prevent Members of Congress or the Cabinet from becoming lobbyists, or, as she had told students at the University of Puerto Rico: “The goal is to overcome the influence of money in the government,” reminding the attendees that she had come to Puerto Rico in 2015 and then, almost a year ago, to witness the recovery efforts in the wake of Hurricanes Irma and María—and deploring that Puerto Ricans still suffer the consequences of both hurricanes, noting: “Puerto Rico has not been treated with respect…“We’re not going to let anyone sabotage the recovery of Puerto Rico.” Referring to the territory’s accrued $70 billion of public debt; instead, she said, the PROMESA Act had been signed into law to benefit the “vulture funds” of Wall Street and not Puerto Ricans—and that Congress had denied Puerto Rico the possibility of filing for something like chapter 9 municipal bankruptcy—instead enacting the PROMESA statute—which she had opposed. Thus, she stated: “We must counterattack. It is time to show the people of Puerto Rico some respect,” adding that such r-e-s—e-c-t should begin by addressing the status of the island. She said she would support any decision the people make, including statehood, adding she favors the adoption of a quasi-Marshall Plan. She criticized FEMA’s responses to Hurricanes Irma and Maria, and said that FEMA Administrator Brock Long must resign or be fired, describing his relief efforts as “negligent,” closing by noting: “The experience of Puerto Rico in recent years reflects the worst of what has happened in Washington: a government that works for the big and powerful, for no one else.”