Puerto Rico (Sort of) Declares Bankruptcy
Puerto Rico declared a form of bankruptcy protection this week that puts it in uncharted territory for U.S. governments and municipal finance.As a territory, Puerto Rico is not eligible to file for Chapter 9 protection. But thanks to the Puerto Rico Oversight, Management and Economic Stability Act, it has a similar option available to it: Title III protection.
The act, which was passed by Congress and went into effect last July, put a temporary moratorium on litigation regarding Puerto Rico’s more than $70 billion in bond debt and created a seven-member financial oversight board with final say over the commonwealth’s finance decisions. The litigation moratorium was lifted on May 1, and with creditor negotiations going nowhere, the government is allowed to file debt restructuring petitions in federal court.
The Takeaway: Puerto Rico has been in a financial downward spiral for years. When it first started defaulting on debt, there were concerns that it could have a negative ripple effect on the municipal market. As it turns out, those concerns have not been justified. So, while this latest move by the commonwealth is a great concern for anyone with money tied up in Puerto Rico, there have been few concerns that the event will cast a shadow over other U.S. governments now issuing bonds.
The crisis in Puerto Rico, however, is already having a ripple effect on the mainland as residents are fleeing the island to find jobs. In Florida, the Puerto Rican population increased by nearly one-fifth in Orange County and nearly one-third in Hillsborough County. The growth is putting pressure on schools, which are increasing their budgets to accommodate the influx of children.
Did Congress Just Kill State-Run Retirement Programs?
The U.S. Senate on Thursday narrowly approved a resolution that overturns an Obama-era rule that cleared the way for states to create retirement programs for private-sector workers who don't have one through their employer.Secure Choice or Work-and-Save programs were targeted by Wall Street firms and the U.S. Chamber of Commerce because the U.S. Department of Labor rule absolved state programs from providing workers the same legal protections that employer-sponsored 401(k) plans are required to have. “It would be patently unfair to give these government-run plans a competitive advantage by waiving regulatory restrictions,” said Paul Dougherty, president of the National Association of Insurance and Financial Advisors President Paul Dougherty, in a statement.
The Takeaway: So what happens now? It goes to President Trump, who has said he will sign it. But more important, many worry that these programs are now vulnerable to a legal challenge. Still, several states created and approved their programs before the Labor Department ruling last fall. For that reason, many believe these states have legal footing to move forward.
“After having consulted with legislative leaders and the Office of the Attorney General, I am convinced that while Congress has dealt Californians a setback, it is not enough to push us off of our moral and legal high ground,” California State Treasurer John Chiang said in a statement.
Along with California, Oregon State Treasurer Tobias Read has also vowed to push ahead, saying his state will still launch its pilot program on July 1. Washington state, which was slated to open its program later this year, has not said what it plans to do yet. The AARP says it is working with Oregon as well as California, Connecticut, Illinois and Maryland to help them continue with their programs.
Demys’TIF’ying Tax Incentives
Data on the world of government tax incentives will be a little richer thanks to a clarification from the Governmental Accounting Standard Board, which sought to clear up ambiguity regarding reporting on tax increment financing projects, or TIFs. Governments wanted to know if the board’s new rule requiring them to report tax incentives as forgone revenue also applied to TIFs. For the most part, the board said this week that they do.TIFs help subsidize development by taking the additional property tax revenue the project generates and putting it back into the development. There are three ways to do this: 1) The developer pays the taxes then is awarded a tax rebate by the government; 2) the government incrementally awards the back taxes to the developer after meeting specific development and jobs goals; and 3) the government uses the tax revenue generated by the development to pay back bonds that financed the project.
The first two, the accounting board said, have to be reported as lost property tax revenue. The third does not.
The Takeaway: Good Jobs First, which tracks government tax incentives, said the clarification bodes well for it and other sunshine groups that want more disclosure about what governments give up to woo corporations. Greg LeRoy, the group’s executive director, told Governing this week that Midwestern and Western states make heavy use of this type of financing. “Until California canceled [the practice], they were TIF-ing $6 billion a year in property tax revenue,” he said.
Because the clarification applies only to future fiscal years, governments might not include TIFs when they issue their fiscal 2017 reports later this year. “It means we’ll see an uneven quality of data,” LeRoy says. “But we expected the first year to be bumpy.”
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