The Week in Public Finance: Rescuing Puerto Rico, Brexit Fallout and Minimum-Wage Trends

A roundup of money (and other) news governments can use.
by | July 1, 2016

For previous editions of "The Week in Public Finance," click here.

Puerto Rico’s New Path

Congress this week has reached an agreement on a rescue bill for Puerto Rico. The troubled territory is set to default for a third time over the past year on a debt payment due today. The legislation, which was signed by President Obama Thursday, follows a long-running debate about whether Congress should intervene at all.

The bill, called the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, passed the House of Representatives earlier this month and the Senate on Wednesday. The legislation would allow the island a path to restructure its more than $70 billion in debt while installing a financial control board to govern its finances. It was modeled after similar legislation for Washington, D.C., whose finances were also subject to a control board two decades ago.

The Takeaway: The legislation won’t stop Puerto Rico from defaulting on its $2 billion debt payment Friday. But the fact that it now has a path to solvency -- however murky and long -- delivers a message of certainty to municipal market investors. To be sure, investors will take a hit and Puerto Rico’s officials will lose immediate control of the island’s financial future. But the process will be far more orderly than it has been in the past year or so. Litigation promised “to be endless and to consume scarce resources of the beleaguered commonwealth’s government," former New York Lt. Gov. Richard Ravitch pointed out in an op-ed this week.

Ravitch, who was involved in an advisory role with Detroit’s bankruptcy and has a similar role in Puerto Rico, also noted that many Democrats and labor leaders decried Michigan’s emergency manager system when Detroit was taken over. But now many say the position helped Detroit restructure its debt in remarkably quick fashion.

“Had the protests succeeded, Detroit would not be going through the recovery that is now occurring,” Ravitch wrote in The Wall Street Journal. “There would only have been litigation, social unrest, population decline and continued disinvestment.”

Brexit Could Make Things Worse for State Finances

Massachusetts announced this week that it's looking at a budget shortfall of up to $1 billion for the fiscal year that begins today. The missed projections are mainly due to income tax revenue -- which includes investment earnings -- being lower than expected. And thanks to the United Kingdom’s vote to leave the European Union, an event dubbed “Brexit,” the financial market turmoil has only caused more potential losses for investors.

Tax revenue for fiscal 2017 is expected to be $650 million to $950 million less than anticipated, according to Gov. Charlie Baker. Those assumptions, he added, are being made under “the notion that Brexit falls into the category of an unknown.”

The Takeaway: Massachusetts isn’t the only state dealing with less income tax revenue than expected, mainly due to turbulent financial markets over the past year. California, Connecticut, New Jersey and Pennsylvania also announced declines in actual or projected income tax receipts. As fallout from Brexit continues to create uncertainty in global financial markets, states that rely more on capital gains income will have to adjust their pictures accordingly.

States Ahead of Feds on Minimum Wage

Raising the federal minimum wage to $15 an hour has been a big topic in the presidential primary contests this year. A new analysis shows that most states will likely raise wages to $15 long before Congress ever acts.

Already, minimum-wage levels in 28 states and the District of Columbia exceed the federal minimum wage of $7.25 an hour. In 11 of those places, notes the Federal Funds Information for States (FFIS), the minimum wage is slated to increase under existing legislation. And in 16 of those jurisdictions, the minimum wage is indexed to inflation.

Additionally, cost of living plays a factor in state minimum wages. Among the 16 states with above-average living costs determined by FFIS, all but New Hampshire and Virginia have state minimum wages that exceed the national average.

The Takeaway: The breakdown shows that in all likelihood, a $15 an hour minimum wage will hit most states before the feds make it the law of the land. Already, three places have legislated increases to a $15 hourly minimum: California in 2022, D.C. in 2020, and New York in 2019. “The states with the highest costs of living tend to be those with the highest minimum wages, which in many places are scheduled to increase, and also are indexed to reflect increases in consumer prices,” FFIS said.