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A little more breathing room

Puerto Rico can finally mark a notch in the win column this week because the financially beleaguered territory’s main power company announced a key restructuring deal. The deal was with the so-called Ad Hoc creditor group, which holds about 35 percent of the electric power utility’s $9 billion in outstanding debt. The utility, called PREPA, will essentially trade in its outstanding bonds for new ones at a lower cost. The bondholders, who are uninsured, will get 85 percent of their existing bond claims, according to a Sept. 2 statement from the utility. PREPA is still working on a deal with insured bondholders, which hold about 29 percent of the utility’s debt.

While this week’s deal represents just a portion of Puerto Rico’s roughly $72 billion debt problem, it’s a significant deal for a territory that can’t declare bankruptcy but also can’t pay its bills. Last month, Puerto Rico’s Public Finance Corporation defaulted on a debt payment, a first for the Commonwealth. Puerto Rico is due to complete a fiscal reform plan on Sept. 8.

Melba Acosta-Febo, president of Puerto Rico’s Government Development Bank, called the deal an example of the “promising results” that can happen when the government and creditors work together. “By engaging in a continuous and constructive dialogue, the Ad Hoc Group and PREPA have arrived at an agreement” that requires compromises from both sides and should “contribute to the Commonwealth's ongoing economic recovery,” he said in a statement.

Still, a lot of skepticism remains. Moody’s Investors Service views such “distressed exchange” transactions (where borrowers offer their creditors lower-priced securities in exchange for the current debt) as a default because bondholders aren’t getting all of their promised returns. In a comment released following the deal, Moody’s said it believes similar transactions for PREPA bondholders “are imminent.”

Government finance overhaul

The Government Accounting Standards Board (GASB), which sets standards for how state and local governments report their finances, announced this week that it’s considering changing how governments present financial reports.

Of note, the GASB says it wants to add a little more uniformity and meaning to the “MD&A” section of annual reports. This section, Management Discussion & Analysis, appears at the beginning of Comprehensive Annual Financial Reports (CAFRs) and is meant to be a more readable summary of the report. It’s supposed to highlight the key points and contain basic facts about the government, its economy and population. That way, the lay-person (because who doesn’t love perusing a good CAFR?) can come away with a basic understanding of the government’s finances. The MD&A section varies wildly from report to report. It’s up to the government to decide what to include in that section.

The board also said it wants to explore ways to make more consistent the way budgetary information is presented in annual reports. And underlying all its proposals is a goal to “reduce the complexity of financial statements, which could positively impact the timeliness of governmental financial reporting.”

Indecision in Illinois

Moody’s had a message to Illinois lawmakers this week as the Prairie State enters month three of its fiscal year without a budget: Keep your eye on the ball -- not the clock. The length of the budget standoff isn’t necessarily worrying Moody’s -- yet. The extended impasse is simply “symptomatic of the state’s severe fiscal challenges,” Moody’s said. The more important thing in the eyes of the rating agency is that lawmakers address the state’s burdensome long-term liabilities and its pesky habit of spending more than it receives in revenues en route to an agreement on fiscal 2016’s spending plan. Another year of papering over the problem with one-time fixes will weaken the state’s credit rating.

The problems are deep -- 24 cents out of every dollar spent from Illinois’ general fund is slated for retiree benefit this year. Previous lawmakers have tried and failed to cut benefits for retirees -- two court rulings have struck down attempts to cut pensions and retiree health-care benefits. The state faces a $5 billion budget deficit this year, one that Moody’s warns is shifting from projected to real the farther Illinois ventures into its fiscal year without a budget. The agency suggests a “possible approach to eliminating the deficit would be a combination of expenditure cuts and reversing some of the year’s income tax reductions.” But the analysis also notes that Gov. Bruce Rauner has tried to exact concessions like a property tax cap and changes to worker compensation in exchange for any tax increase. Such proposals in a Democrat-led legislature are practically dead on arrival.

Moody’s said it already incorporates Illinois’ budget weakness into its credit rating. But it did so with a warning: “Illinois has had late budgets before,” the analysis said. “This time, the Republican governor's struggles to reach agreement with the legislature's strong Democrat majorities have not yet strained the state's finances, but that will change if an accord is not reached soon."