The Week in Public Finance: Bad Weather, a Junk Sale and Two Thumbs Up from the Street
This week's roundup of money (and other) news governments can use.
This week's roundup of money (and other) news that governments can use touches on the quiet municipal bond market, Puerto Rico's bond sale and more.
Staying home with Netflix and a cup o’ hot chocolate
Bad weather usually means bad news for retailers (who wants to go outside in that mess?), but it also slows down finance markets as well. Apparently, even though going to the municipal market doesn’t actually require anyone to leave home, Mother Nature can still have a chilling effect. Pun intended.
That means that for most of February, as winter storms have ravaged much of the East (including a legitimate one-third-inch sheet of ice thanks to the storm in Atlanta), the municipal market has seen a dearth of new deals. So, because of the lack of supply, the demand is higher for what is there.
Translation: it’s an issuers market! According to this analysis by Municipal Market Advisors, if current rates hold or at least remain stable, it could help lower-rated issuers access some lending capital.
Officials from Puerto Rico's Government Development Bank held a conference call last week with investors announcing its anticipated $3 billion bond sale will be scheduled some time in March. The commonwealth is going through with the offering even as its General Obligation rating has been downgraded by all three rating agencies to junk status (below investment grade).
During the call, finance and economic development officials outlined the beleaguered government’s work so far in tryign to regain its financial footing. According to their projections, Puerto Rico will balance its budget by the 2015 fiscal year. It should be noted that proceeds from the upcoming bond sale will go toward balancing the island government’s budget and restructuring its debt. Additionally, government officials said they would have to make more cuts in the future to hit their 2015 target. Details in that area, sadly, were light. “We understand the financial community is deeply interested how CW plans to meet [that] commitment,” director of the Office of Management and Budget Carlos Rivas said during the call. “For legal reasons we are not in a position to detail [how] at this time.”
Nobody like conflict. Least of all, ratings agencies.
News of a settlement between Rhode Island and pensioners suing over the state’s comprehensive pension reform has been met with smiles from at least one ratings agency. Fitch has issued a note analyzing the financial components of the settlement, concluding that it preserves most (94 percent) of the initial reduction in Rhode Island’s unfunded pension liability provided for in its pension legislation. If approved, the agreement means that government contributions to the pension systems increase by 5 percent to $509.9 million (4.7 percent for the state to $292.8 million and 5.4 percent for participating locals to $217.1 million), according to Fitch. The agreement “will also modestly weaken the funded ratios for the various plans, but they will remain significantly improved compared to” the period before the pension reform was enacted, the agency concluded.
The unions will vote on the proposal over the next several months and the state legislature is expected to take up the agreement in May. The state's retirement board has already approved the settlement.
Michigan is makin’ it rain
After years of cutbacks, Michigan is pumping money into its Economic Vitality Incentive Program (EVIP), which provides state aid to municipalities. Moody’s Investors Service says that’s a good thing. Gov. Rick Snyder’s proposed fiscal 2015 budget increases municipal statutory revenue sharing by a whopping 15 percent and establishes a $10 million emergency reserve fund for distressed school districts.
Two of the EVIP’s primary objectives are delivering funding to distressed municipalities and rewarding those that meet certain standards of best practices. Municipalities that have among the state’s highest unemployment rates or violent crime rates or communities that have a state-approved deficit elimination plan would receive proportionately greater aid.
So, because we can’t seem to go a week without mentioning Detroit, let’s break out the specifics. According to Moody’s, Motown would receive $121 million in EVIP aid, a full 11 percent of its current general fund budget. Other distressed municipalities would see proportionally similar boosts: Flint would get $6 million (11 percent) and Pontiac would draw $4 million (11 percent).