Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

<i>The Week in Public Finance</i>: Broke Puerto Rico, Slow Financial Disclosures and Trouble in Kansas

A roundup of money (and other) news governments can use.

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

Broke in Puerto Rico

Congress stalled this week on legislation that could help Puerto Rico restructure its debts. That leaves the financially strapped U.S. territory continuing to try and piece together agreements with its creditors.

The commonwealth’s next debt payment, which is nearly a half-billion dollars in securities, is due Monday, and it's expected to default. There are reports that Puerto Rico’s main financing arm is negotiating a deal with creditors to pay slightly less than half of what is owed. But even so, credit rating agencies still view such negotiated cuts as a default on debt.

Puerto Rico, however, won't get out of its jam with a series of deals. In total, the territory owes about $70 billion in debt that it can’t pay. 

Congress is considering installing a federal oversight board, among other financial reforms, but lawmakers this week said they don’t expect to move on that legislation until July. Absent a federal oversight board, Puerto Rico is vulnerable to lawsuits from creditors. If that happens, that would likely drag down any restructuring process even further, according to an analysis this week by Moody’s Investors Service.

“As the holders of Puerto Rico’s various security types make competing claims -- perhaps in different courts and with no prevailing restructuring framework -- we would expect an increasingly drawn-out resolution process that lowers the present value of aggregate recoveries,” said Moody’s.

The takeaway: Puerto Rico’s case is significant to the states and other government entities that can’t declare bankruptcy because it provides a glimpse of what debt restructuring looks like without Chapter 9 protection. If you thought the bankruptcy process was long, this doesn’t even compare.

Better Late Than Never? Not So Much.

Think it takes a long time for governments to issue their annual financial reports now? The average government takes about six months to issue its annual audited financial report, according to the Municipal Securities Rulemaking Board (MSRB). But for the city of Lawton, Okla., that’s still too fast.

Last week, the city posted a notice on EMMA, the MSRB’s government financial disclosures database, that said it had changed its annual financial reporting deadline from 180 days to 360 days.

According to the notice, Lawton hadn’t been able to make its six-month deadline for years. Sometimes it would post unaudited financial statements to EMMA while waiting on the final ones. No financial statements have been posted for all of 2015.

One would think such an admission would elicit some kind of negative reaction, writes municipal analyst Matt Fabian in his weekly outlook. But quite the contrary happened: The day following Lawton’s announcement, Standard & Poor’s upgraded their credit rating from A+ to AA‐.

S&P's upgrade shows, according to Fabian, "that many market participants fail to create an incentive for safe sector disclosure timeliness.”

The takeaway: Following a 2012 report by the Securities Exchange Commission (SEC), the municipal market’s lack of quick and uniform financial disclosure practices between issuing governments has come under scrutiny. The SEC has stepped up its monitoring of municipal disclosures in recent years and has reached settlements with Harrisburg, Pa.,; Illinois; and New Jersey for not disclosing damaging financial information. Still, proponents for issuing governments have generally been able to successfully argue that letting governments self-regulate their disclosure practices is the best way to go.

Given that Lawton hasn’t seemed to suffer from its slow disclosures, said Fabian, “It is thus hard to assume issuers will be willing participants in efforts to improve disclosure standards.”

Another Kansas Shortfall

Lest we think ratings agencies are being too lenient, S&P did ding Kansas this week for the state’s impending budget crisis.

As the state approaches the close of its fiscal year on June 30, it is yet again facing a budget shortfall, this time of about $253 million. Kansas has struggled to balance its budget in recent years after income tax cuts starting in 2012 shrunk the state’s revenues.

S&P put the state’s AA credit rating on watch this week, meaning it could face a downgrade if conditions don’t improve. Gov. Sam Brownback has suggested closing the budget gap using proceeds from a tobacco revenue bond sale and shorting its annual pension bill by nearly $100 million.

“We believe both of these options could materially increase the state's structural budget deficit,” S&P warned. Noting that Kansas has already made spending cuts and special funds transfers earlier in the fiscal year, S&P added, “we believe Kansas has essentially no general fund reserves left.”

The takeaway: Kansas isn’t alone in its chronic budget problems. Alaska, Illinois, Louisiana, New Jersey and Pennsylvania have struggled similarly in recent years, albeit for varying reasons. Such a precarious financial position places these states in a dangerous place, considering that the country is nearing seven years into the economic recovery and most economists say the next economic contraction is likely coming in the years ahead. If states can’t balance their budgets in what are supposed to be growth years, they will have even tougher decisions to make when the next recession comes.

Liz Farmer is a former GOVERNING fiscal policy writer.
Special Projects