For previous editions of The Week in Public Finance column, click here.
Not America’s Greece. Yet.
The Puerto Rico and Greece comparisons have been rampant this week as both governments hurdled toward impossible debt deadlines. America’s island territory suffered another credit rating downgrade on June 30, this time from Standard & Poor’s, after Gov. Alejandro Garcia Padilla said it would likely not be able to make its full upcoming debt payments. (All three ratings agencies place Puerto Rico’s rating well into junk territory.) As a commonwealth, Puerto Rico does not have the option of bankruptcy that some American cities do. A default on its debt would start a debt crisis with no clear legal precedent for the government and its creditors.
Puerto Rico successfully made a $415 million bond payment on its electric power authority utility due this week. But it has more bills looming as it reached an agreement with creditors to extend its debt restructuring talks to September. (Two quasi-government agencies -- the Public Finance Corporation and the Government Development Bank (GDB) – have a combined $250 million due over the next month.) Even with the extension of the debt talks, credit ratings agencies are still saying it’s likely the island territory will default on one of its upcoming payments. Skepticism from bondholders had some of the government’s bonds trading at around 69 cents on the dollar Wednesday, the Wall Street Journal reported.
Meanwhile, a report released recently by the GDB identifies a "fast deteriorating" cash flow position and budget gaps in future years that are nearly as big as all of this year’s general fund revenues. The report projects a 2016 budget gap of $3.7 billion, which could increase to $6 billion by 2018. (This year’s general fund revenue is about $9.6 billion.) The report also listed debt restructuring as an important government option. Government officials have been (unsucccessfully) pushing federal legislation in Washington this year that would grant Puerto Rico’s government agencies the ability to declare Chapter 9 status.
Oh how the mighty have fallen
When last we reported on the Federal Funds Information for States’ quarterly Index of State Economic Momentum, North Dakota was still king, despite a slump in oil prices. Well, quips FFIS’ Carol Ryder, “The theme of this update is ‘things change,’ although it sometimes takes a while.” Washington state now tops the list, which reflects three key measures of economic vitality: growth in personal income, employment and population. North Dakota, which has held the top spot more often than not in previous years, sunk all the way down to No. 10. The state maintained the top rating in personal income growth of 6.1 percent, but that represents a slip from the 7.1 percent growth in the previous quarter. Its employment growth has also started to stagnate, with less than a 1 percent increase this quarter. Other oil states saw similar drops in their rankings. Wyoming fell from 32nd to 47th, Alaska from 19th to 48th, and West Virginia fell from 48th to last place.
But what’s perhaps most interesting about this most recent report is the overall tightening of the economy. To rank the states, FFIS averaged measures of the three measures of economic vitality and sets the national average at zero. The report expressed each state’s score as a percentage above or below the national average. At the top spot, Washington is the only state with economic momentum that exceeded the national average by more than 1 percent. Last quarter’s report had five states with a score of more than 1 percent above the average (and North Dakota’s growth was approaching 2 percent above the average). Three states this quarter — West Virginia, Illinois and Kansas — lag by more than 1 percent. Last quarter that total was five states.
More distress in Michigan
Let's end this incredibly uplifting edition of WIPF with news about financially distressed Wayne County, Mich. This week, the state Department of Treasury released its preliminary review of the county’s finances and found the county suffered “probable financial stress.” The finding is significant because it means the governor can appoint a financial review team under the state’s law that addresses distressed municipalities (Public Act 436). Wayne County is Michigan’s most populous county and Detroit – which left municipal bankruptcy last year – is the county seat.
“While county officials have taken some important steps in an effort to remedy the current crisis, the county continues to face significant financial difficulties that must be addressed now,” said State Treasurer Nick Khouri, who chairs the Emergency Loan Board. “Given the issues noted in the final preliminary report, many of which county officials agree with, we feel a finding of probable financial stress is warranted.”
If the review team finds the county is in a state of financial emergency, local officials determine how the crisis is remedied by selecting one of four options: a consent agreement, an emergency manager, neutral evaluation or Chapter 9 bankruptcy. Detroit was slapped with the “probable financial stress” label back in December 2011 and for the next year, the city’s leaders failed to execute a new financial plan. In December 2012, the state enacted a new emergency manager bill — PA 436 — that gave the state more influence and allowed appointed emergency managers to file for Chapter 9 bankruptcy. By the spring of 2013, Gov. Rick Snyder appointed an emergency manager for Detroit; that summer the city filed for bankruptcy.