%1

Top officials in Illinois Gov. Bruce Rauner's administration warned of the imminent shutdown of hundreds of transportation projects even though the state is selling bonds on Thursday to fund road, bridge and mass transit work, Reuters reported today. The odd timing of the announcement on the eve of the state bond issue handed Rauner's Democratic rivals in the state legislature fodder to question whether the first-term governor was deliberately acting to drive up Illinois' borrowing costs. Illinois Department of Transportation Secretary Randall Blankenhorn told reporters in the state capitol in Springfield that 800 projects totaling $2 billion will be shuttered if the legislature does not approve the governor's temporary budget plan. The state is selling $550 million of general obligation bonds in the U.S. municipal market with $530 million of the proceeds earmarked for mass transit and road construction. Illinois has been dependent on court orders and a muddle of ongoing and stopgap appropriations to continue operating, and lawmakers have not yet reached any agreement on a spending plan for the fiscal year that begins July 1.

Detroit would sell its first general obligation bonds since exiting bankruptcy in December 2014 under a proposal to refund up to $660 million of outstanding bonds, Reuters reported yesterday. The city council sent the plan to refund up to $275 million of unlimited tax GO bonds sold in 2014 and up to $385 million of limited tax GO bonds sold in 2010 and 2012 to its Budget, Finance and Audit Committee for consideration. The outstanding bonds were issued through the Michigan Finance Authority and backed by the city's share of distributable state aid payments. Ten and 30-year yields on Municipal Market Data's benchmark triple-A scale are at or near all-time lows, driven by big investor demand for debt sold by states, cities, schools and other municipal issuers. If the GO bond refundings are approved by the city council committee, the measures would head for a full-council vote on June 21. The issuance also needs approval from the Detroit Financial Review Commission, the city's post-bankruptcy oversight board, which meets on June 27.

 

Bipartisan legislation that creates a federal oversight board to prevent Puerto Rico from falling into an economic abyss may have the added benefit of putting some distance between congressional Republicans and Donald Trump, their party's presumptive presidential nominee, whose mercurial outbursts attacking immigrants repulse many Latin American citizens, according to an editorial today from The Philadelphia Inquirer. Puerto Rico's fiscal issues sound similar to the problems that led Harrisburg to file for bankruptcy in 2011. Puerto Rico, however, isn't a municipality, which means bankruptcy laws aren't applicable to the territory. But it isn't an independent country, either, which means it can't seek aid from the International Monetary Fund. The House bill gives the U.S. territory the ability to restructure its debt and creates an oversight board appointed by the president and Congress, which will have the authority to audit the government's books and enforce balanced budgets. No bailout money is involved; the oversight board's costs will be covered by the Puerto Rican government over 10 years.

 

ABI will be holding a media webinar today at 1:30 p.m. ET featuring Professor Stephen Lubben discussing the Supreme Court’s ruling in Puerto Rico v. Franklin California Tax-Free Trust with ABI Editor-at-Large Bill Rochelle. There are still some limited slots available for ABI members to listen and participate on the webinar. Click here to register.

Majority Leader Mitch McConnell (R-Ky.) said that the Senate will consider a rescue package to ease Puerto Rico's financial crisis before the U.S. territory's $2 billion payment to creditors is due July 1, the Associated Press reported today. The House overwhelmingly passed legislation to create a new control board and restructure some of Puerto Rico's $70 billion debt last week. The Senate is expected to take up the same bill "sometime before the end of the month," McConnell told reporters yesterday. Some senators have opposed the legislation, though, and that opposition could slow passage. Sen. Bob Menendez (D-N.J.) has spoken out strongly against the House bill, saying that the control board would take away the rights of ordinary Puerto Ricans and has colonialist overtones. He said he is hoping to try and amend the House bill when the Senate debates it. Some Republicans have expressed concerns that it could serve as a precedent for financially stressed states. Sen. Orrin Hatch (R-Utah), chairman of the Finance Committee, said that he doesn't like the House legislation but acknowledged that "I think I'm going to have to" support it.

Yesterday, in Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust, the U.S. Supreme Court took away the last existing option for Puerto Rico to restructure its debt, unless Congress steps in, according to a commentary by Prof. Charles Tabb of the University of Illinois College of Law. The Court, by a 5-2 vote, with Justice Thomas writing the majority opinion, struck down the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (“Recovery Act”), a law enacted in 2014 to enable Puerto Rico’s public corporations to restructure their debt. The Court held that Puerto Rico’s Recovery Act was preempted by § 903 of chapter 9 of the Bankruptcy Code – even though Puerto Rico is explicitly excluded from authorizing its municipalities to seek chapter 9 eligibility. Puerto Rico’s extreme fiscal crisis has been front-page news, with the Commonwealth owing over $70 billion in debt, $2 billion of which must be paid in less than three weeks, on July 1. The reality is that Puerto Rico has no apparent way to pay that debt. It almost certainly will default, with possibly severe consequences for its citizens, unless some form of debt restructuring is authorized. Just last week, the House of Representatives passed a rescue bill, known by its acronym as PROMESA (the Puerto Rico Oversight, Management, and Economic Stability Act), which has now gone to the Senate for consideration. After yesterday's Supreme Court opinion, that rescue bill is, as of now, the only hope for the essentially bankrupt Commonwealth.

 

Creditors for Puerto Rico’s main electricity provider are reviewing a proposal from the utility that would help the agency avoid a $420 million bond default on July 1, according to three people with direct knowledge of the plan, Bloomberg reported yesterday. The Puerto Rico Electric Power Authority is in private talks with investors owning about 35 percent of the agency’s securities and bond insurance companies to free up cash needed to make the principal and interest payments. The transaction would be similar to one reached before a Jan. 1 payment, where creditors agreed to buy new securities that mature in 2019. The government-owned utility, called Prepa, reached an agreement in December with hedge funds and mutual funds, known as the Ad-Hoc Group and insurers MBIA Inc. and Assured Guaranty Ltd., to restructure $9 billion in debt. The agreement was the first reached between a commonwealth entity and creditors as it seeks to reduce its $70 billion debt burden.

The U.S. Supreme Court ruled that Puerto Rico cannot adopt its own legislation to restructure its crushing debt burden because of a 1984 federal bankruptcy provision that bars the commonwealth from using chapter 9, The Washington Post reported yesterday. The 5-to-2 majority decision, written by Justice Clarence Thomas, is a blow to the Puerto Rican government and supports arguments by major holders of bonds issued by Puerto Rico’s government, agencies and utilities. Justice Sonia Sotomayor dissented and was joined by Justice Ruth Bader Ginsburg. “The plain text of the Bankruptcy Code begins and ends our analysis,” Thomas wrote, adding that the “unambiguous language” of the bankruptcy measure pre-empts any effort by Puerto Rico to fashion its own bankruptcy process. The decision leaves any rescue plan for Puerto Rico in the hands of Congress. The House and the Treasury Department have been debating ways to help the territory, which faces certain default on a portion of about $2 billion in payments due July 1.

 

Jacksonville, Fla., Mayor Lenny Curry has used nothing short of end-of-days prophesying in his push for voters to support a first-of-its kind sales tax to help pay down the city's $2.8 billion pension debt — even invoking the specter of large-scale municipal failure akin to Detroit's 2013 bankruptcy, the Tampa Bay Times reported yesterday. However, economic data, city budget numbers and outside analysis of the city's financial condition muddy the fateful choice Curry created for voters on the Aug. 30 ballot. He says his plan — a half-cent sales tax that would begin in 2030 and would pay off the city's pension debt over time — will alleviate a burden that has left the city "on the cusp of falling off a financial cliff." There is little empirical evidence to suggest the city is on the brink of financial disaster or that the local economy suffers from widespread systemic problems that could lead to a Detroit-like meltdown, no matter what voters decide this summer. It is undeniable that Jacksonville's climbing annual pension costs, projected to reach $280 million next year, are suffocating the city's budget and its ability to provide residents with robust basic services like police protection. Addressing pension costs have for years been a bipartisan top priority, particularly as community problems like crime, juvenile justice, aging infrastructure and underfunded parks and libraries persist. Jacksonville's pension costs far exceed those of its peer cities.