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Crisis (Temporarily) Averted
Puerto Rico avoided a historic second default this week after it made a much-anticipated debt payment on Dec. 1. Many observers had been skeptical of the financially troubled territory’s ability to meet the $354 million payment as the island’s Public Finance Authority defaulted on a debt payment earlier this year. But this week’s payment doesn't mean Puerto Rico’s sinking financial ship has found a way to plug its hole. The December payment by the Government Development Bank -- Puerto Rico’s main financier -- was key because it was legally guaranteed by the commonwealth and creditors could have sued if Puerto Rico defaulted. After the bank made the payment, it issued a statement saying the government would from now on essentially only fulfill the debt payments it needs to make in order to avoid lawsuits. Now essentially operating hand-to-mouth, the bank said it also planned to take revenue intended to pay non-general obligation bonds and instead use the money to fund basic government services.
“Pursuant to the [governor's] Executive Order,” the statement said, “certain available revenues that have been budgeted to pay debt service on the debt of certain public corporations may be redirected, pursuant to constitutional requirements, to pay ‘public debt.’”
Moody’s Investors Service, which had anticipated a default this week, said the order to redirect revenues that were intended to pay non-GO bonds “underscores the severity of the commonwealth’s liquidity issues.” Puerto Rico now must make $945 million in total bond payments on Jan. 1, including $363 million in general obligation debt service. “We continue to view default as likely on future commonwealth debt payments,” said Moody’s Vice President Ted Hampton.
Puerto Rico has been in a recession for nearly a decade and it has racked up debt of about $72 billion. It has less than $1 billion in cash -- far less than it needs to run the government and its credit rating is well into junk bond territory. President Obama’s administration is pushing a proposal that would allow the island, which can’t declare bankruptcy, to restructure its debt. But that plan is meeting mixed reviews in Congress.
Michigan’s public schools are under increasing financial pressure due to deteriorating state aid, declining enrollment and growing pension liabilities. Over the past six years, Moody’s has downgraded 150 of 206 school districts and this week released a report detailing their continued fiscal challenges and credit pressures. About one-third of the rating agency’s downgrades have occurred in this fiscal year alone. Moody’s said it expects that number to climb in the final half of the year ending on June 30.
The financial pressure means that districts’ general fund balances (how much money they have in reserves after expenses) are declining steadily. Nearly all of the school districts downgraded so far this fiscal year have experienced a median decline of 45 percent of general fund reserves over the last five years, according to Moody’s. Meanwhile, per-pupil state funding remains barely above the fiscal 2009 level. Michigan has a property tax cap and as declining property values during the housing crisis of the last decade made significant dents in property tax collection across the state, school funding stagnated. Another factor is enrollment, which has fallen by 12 percent across the state over the past decade, largely due to competition from charter schools and Michigan’s “Schools of Choice” program.
Districts have limited financial flexibility so they’ve cut where they can -- primarily personnel. Many have laid off as many employees as they feel they can without impacting services to the point where it drives enrollment lower. Bargaining groups have also made concessions and over the past several years, it has been common for districts to freeze, or even reduce, both salary and benefits. Some bargaining groups have accepted salary reductions up to 10 percent or greater, according to the report.
Steady as She Goes
Fitch Ratings says its outlooks on all 50 states are stable going into 2016, the first time that has happened since the Great Recession. Still, contentious budgeting sessions -- Illinois and Pennsylvania still don’t have budget agreements -- don’t bode well for the next fiscal year. “That dynamic seems likely to continue for reasons both ideological and practical,” Fitch said. “Budget managers face ongoing demands for additional spending on one side and tax relief on the other and the pace of revenue growth is insufficient to satisfy all.”
Aside from ideologically divided states, oil and natural gas states will also likely have difficult policy debates. But in Oklahoma, which is anticipating less revenue this year than it budgeted for, Treasurer Ken Miller said the state’s financial woes aren’t entirely a low revenue issue. In his monthly column, he lamented the state’s practice of using one-time revenues to shore up budget gaps in recent years. “Oklahoma’s economy has expanded for the last several years, yet more than $1 billion in nonrecurring revenues have been tapped during that period to spend more than the certified amount,” he said. “Using such large amounts of alternative revenues to prop up the state budget is de facto admittance by policymakers that there is insufficient revenue to fund their desired level of government spending.”