The Week in Public Finance: Showdown in Puerto Rico, 'Pay For Success' Veto and Alaska's Oil Overhaul
A roundup of money (and other) news governments can use.
For previous editions of The Week in Public Finance column, click here.
Decision Time in Puerto Rico
Puerto Rico is facing another potential default in about a week as it has a $355 million debt payment due on Dec. 1. The troubled territory defaulted for the first time ever back in August when the government’s Public Finance Corporation didn’t meet a $58 million debt payment. This time, the Government Development Bank (which is Puerto Rico’s main financier) is the one in trouble.
The GDB announced that it is meeting with bondholders who hold the majority of Puerto Rico’s debt on Friday, Nov. 20 in New York. The meeting is not open to the public, although a statement issued by the GDB said they would be discussing a previously announced restructuring plan. That plan seeks to adjust the territory’s debt in a way that maximizes creditors’ recovery while "preserving the government’s ability to serve its citizens."
It’s hard to be hopeful that Puerto Rico will find a sustainable solution to its problem in the near future since lately the territory seems to just lurching now from one disaster to the next. It has been in a recession for nearly a decade and it has racked up debt of about $72 billion. It has less than $1 billion in cash -- far less than it needs to run the government. Earlier this month, Moody’s Investor Service issued a statement predicting the island would default on at least some of its debt due Dec. 1. Puerto Rico’s credit rating is already well into junk bond territory.
Christie Skeptical of Cost to ‘Pay for Success’
New Jersey Gov. Chris Christie recently vetoed a bill that would have created a fund to promote Pay for Success (PFS) programs in the state. Called the “New Jersey Social Innovation Act,” the bill would have created a five-year social innovation loan program in the New Jersey Economic Development Authority to promote preventive health service programs. The fund would have been used for things like guaranteeing loans made by private financiers and paying for expenses related to the administration of the loan guarantees. (PFS programs seek private financing to fund preventative government programs. The financiers are paid back only if the program achieves the desired result.)
Christie didn't nix the entire bill but he did gut key parts and instructed staff to consider ways to use existing resources to accomplish the same goal. He noted that the fiscal note accompanying the bill was inconclusive about how much the program would cost (or save) the state. While noting the “possibility for cost savings through more efficient health care provision,” the note went on to say that the details of the loan and loan guarantee agreements “will be significant factors in determining whether those cost savings may be realized.”
In his veto, Christie said the finances were too vague. “While I agree that preventative health services are a valuable piece of the State’s overall healthcare picture, I am concerned that establishing such a new financial structure requires further consideration before enactment,” his letter said. “There have been mixed results concerning the true benefits of these programs in extensive studies conducted by the most respected experts.” Indeed, PFS is still a nascent idea with just two projects in five years yielding results: one is working, and one didn't.
Alaska Gov. Bill Walker is moving forward with a rescue plan for the state’s finances that would convert the state’s Permanent Fund into an endowment that absorbs oil income and generates billions of dollars in annual revenue for the state’s treasury. The state’s $52 billion Permanent Fund was created via a constitutional amendment in the 1970s and automatically receives about one-quarter of the state's oil revenue each year. It's used solely to pay out annual dividends to residents and payments have averaged $1,400 for the past decade. The shift into one large endowment that the state government can access would reduce the resident payments to about $1,000, the governor’s office estimates.
More than any other state, Alaska’s budget has been hammered by the drop in oil prices. The state relies on oil revenues to fund nearly all of its operations. Last year it withdrew $2.7 billion out of its savings to close a budget gap and for this year’s budget Walker relied on a similarly large withdrawal. His staff estimates that by moving all oil revenues into an interest-bearing endowment fund and withdrawing annually from that fund, the state would become less reliant on oil. His office estimates the fund would early about $3 billion in annual interest -- a little larger than the amount the state withdrew from savings in the past two budgets.
But it doesn't hurt to double check. This week the administration said it had issued an RFP asking financial consultants to vet Walker’s plan. It seems the governor’s office wants as solid backing as it can get on a proposal that would overhaul the state’s financial structure. Jerry Burnett, deputy revenue commissioner, told the Alaska Dispatch consultants would “vet our models, look at what we’ve done and what our assumptions are, and assuming that we go forward with this and that everything works out, be available to explain to the legislature that the Walker administration is telling you the truth.”