Great weather, bad finances
One of the last times I wrote about Puerto Rico, the island territory appeared headed in a good direction – it had completed a successful bond sale and Gov. Alejandro Garcia Padilla had submitted the first balanced budget in more than a decade. But it takes more than cash and budget cuts to fix an economy. An analysis by Moody’s this week documents the territory’s continued budget struggles. Moody’s reports that as of the end of 2014, the Government Development Bank’s (GDB) net cash had declined by about $460 million, or a whopping 30 percent, from a month earlier. The GDB is unique to Puerto Rico and essentially acts as the territory's banking institution. “The decline to $1.09 billion -- 17 percent below the GDB’s October liquidity projection -- underscores the continually growing liquidity pressures that the GDB and the Commonwealth of Puerto Rico, for which GDB serves as fiscal agent and fund repository, face,” Moody’s Jan. 23 analysis said.
And as for that balanced budget? For the first six months of the fiscal year, Puerto Rico’s revenues aren't hitting the mark: So far, the territory is falling 2.5 percent, or $96.5 million, below forecast. This makes it more likely the government will have to draw on the GDB’s cash to help meet its obligations, “an increasingly tenuous position given the GDB's own liquidity issues,” Moody’s said. A planned refinancing of about $2 billion in debt is key. Moody’s said that transaction would at least position the GDB to support the central government's cash needs and hopefully accommodate an increase in its own debt service, which jumps to $876 million in fiscal 2016 from $481 million this year.
Is the rise of the city for real?
As population has declined in cities, one of the toughest finance problems for metropolitan centers has been how to keep paying for services for the swelled population during the day while taking in revenue from far fewer people on the whole. For example, Washington, D.C.’s daytime population swells well past 1 million people but the city only has about 640,000 residents.
However, recent years have marked a turnaround. For the first time in decades, the rate of population growth in some of America’s largest cities is outpacing suburban growth. This also means cities are enjoying growth in property values and government revenues -- both which help boost city credit quality. A paper released this week by Wells Fargo’s research team notes that 19 of the nation’s 50 largest cities showed gains in property values between 2010 and 2013 despite property value declines elsewhere in the country.
But will the trend last? The paper concluded that some metropolitan areas are really seeing a short-term population shift to the urban cores while others (likely ones that have growing knowledge-based economies) may be enjoying a long-term population renaissance. Research has shown that 35-to-44-year-olds with college degrees are flocking to places like San Francisco, Seattle, Austin, Portland and Washington D.C., “perhaps pointing to the possibility that the age group in their child-rearing years are choosing to remain in certain cities,” the Well Fargo paper said. Still, the biggest factors for whether this population group stays will be the ease of obtaining a mortgage, commute time (and cost of commute), mass transportation, and quality of schools, the paper said. In other words, the next decade should revel which way these young urban families are trending. Happy waiting.
Opening the books (some more)
The Municipal Securities Rulemaking Board is urging the SEC to take a hard look at the current disclosure requirements in the municipal securities market with an eye toward the increasing practice of bank borrowing by government issuers. Currently, governments are not required to immediately disclose their direct borrowing deals with banks although some use the MSRB’s online reporting database to do so anyway. The MSRB’s letter encourages the Securities and Exchange Commission to look to its disclosure standards for the corporate market as a precedent for governments' disclosure of alternate financing deals like bank loans.
“The MSRB believes that the availability of timely disclosure of additional debt in any form and debt-like obligations is essential to foster market transparency and to ensure a fair and efficient municipal market,” the letter said.