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Puerto Rico’s aqueduct and sewer authority (PRASA) planned to sell off $750 million in bonds this week but backed out at the last minute, citing the financial turmoil in the markets. Fair enough, but the larger (and truer) reason is that the practically bankrupt island territory probably wouldn’t find any takers in the muni bond market who would charge Puerto Rico an interest rate it could actually afford. “Investor sentiment has deteriorated sharply since the commonwealth’s last public offering almost a year and a half ago,” Ted Hampton, vice president at Moody’s Investors Service said on Aug. 26. “If underwriters can eventually complete the PRASA sale, it may signal a return to some degree of market access that would help maintain liquidity."
In early 2014, when the territory sold $3.5 billion in debt, it had to offer nearly a 9 percent interest rate for its junk-rated debt -- nearly three times the rate of high-grade bonds. The buyers were primarily hedge funds which deal in high-risk, high-yield investments. But that was before Puerto Rico defaulted on a debt payment this summer and Gov. Alejandro García Padilla started talking openly about restructuring debt. These days? With the global markets in turmoil, unscrupulous investors have more options, noted analyst Matt Fabian. PRASA’s “likely lenders -- opportunistic hedge funds -- may well find more attractive opportunities among the carnage in emerging markets,” Fabian wrote in his weekly analysis for Municipal Market Analytics.
Bankruptcy-Free Since 1938
A new Pew Charitable Trusts report on Atlantic City provided a detailed look at New Jersey’s efforts over the past seven decades to keep its cities out of bankruptcy. No municipality in the state has filed for Chapter 9 status since Fort Lee in 1938. Camden came close in 1999, but the state intervened and put up additional money so the city could pay its bills. A handful of states have varying degrees of intervention, but the report noted that New Jersey is unique because it offers money to distressed local governments to help them balance their budgets until cities can restructure their revenue and expenses. The state also is unusual for its dual oversight. One state agency supervises municipal finances while the Department of Education intervenes with troubled school districts.
Atlantic City has struggled for the past decade with declining tax revenues as the casino industry there shrinks. New Jersey installed an emergency manager there earlier this year. The move was a first for the state and initial concerns about the management team’s ties to the Detroit bankruptcy seem to have died off. New Jersey also provided $107 million in transitional money for fiscal year 2016. This is in addition to regular municipal aid, which Pew says provides a sizable revenue boost to local governments to help them control property tax increases. Such regular aid, however, is targeted. “The Christie administration has increased regular aid to distressed governments that demonstrate need and whose actions show a good-faith effort to control expenses and increase their own revenue,” the report said. Camden has received an extra $55 million in regular aid since 2011. Atlantic City this year received a $10 million increase in state aid while its emergency manager has vowed to cut spending by the same amount.
Call Off the Dogs
In another state that watches closely over troubled municipalities, the prognosis for beleaguered Wayne County, Mich., seems to be improving. When last we visited Detroit’s home county, a state review team had declared a state of financial emergency there. The team cited major discrepancies between budgeted expenditures and actual ones in the county’s last four annual financial audits, serious disagreement among officials on how to pay for badly needed jail upgrades and $1.3 billion in health care-related liabilities that are eating up 40 percent of the county’s long-term financial obligations. (Data isn't readily available for localities, but for states, retiree healthcare represents about 28 percent of long-term debt burdens on average.)
But since then the county commissioners and the state have approved a consent agreement that outlines how the county will implement cost-cutting measures and allows for increased state oversight. The agreement has eased the concerns of credit ratings agencies, at least for now. Moody’s called the development a credit positive, citing the state’s larger role and the county’s steady progress toward its goal of saving $53 million -- nearly 10 percent of the general fund budget. Fitch Ratings went further, changing its outlook on Wayne County from negative to stable. The consent agreement will be finalized after the county executive and state treasurer approve.