Puerto Rico officials won an additional three weeks to submit a proposed rate charge to the island’s energy commission, a fee that would repay bonds used to help restructure about $9 billion of debt owed by the government’s power company, Bloomberg News reported yesterday. Creditors for the Puerto Rico Electric Power Authority (PREPA), the island’s main electric provider, agreed to give officials until March 22 to work on their petition to implement a new customer fee, called a securitization charge, said Jose Echevarria, a spokesman for the utility. A January agreement between PREPA, bondholders and bond-insurance companies set that deadline for March 1. A petition for a broader review of PREPA’s rates is now due by April 22. Read more.
Retired Bankruptcy Judge Steven Rhodes says that there is no alternative plan for addressing the debt crisis in Detroit Public Schools, and lawmakers need to act soon to provide the additional cash the district needs to reorganize and pay its debts — a necessity given the district is expected to run out of money this spring, the Detroit Free Press reported today. Judge Rhodes, whom Gov. Rick Snyder officially announced yesterday as the new transition leader for the district, said that pushing for the passage of legislation is a key priority. Also on his list: hiring a superintendent who will oversee academics. Rhodes said that it would be ideal — but he's not sure whether it's necessary — for that person to have an education background. He said he hopes to make the decision by as early as next week.
A suggestion from a U.S. Treasury official to protect Puerto Rico’s pension payments while also seeking cuts from all bondholders may be viewed as the latest sign that politicians favor retirees over investors in cases of municipal distress, Bloomberg News reported yesterday. Treasury Counselor Antonio Weiss said in prepared testimony yesterday that a failure to ensure payments from Puerto Rico’s pension system, which has more than 330,000 beneficiaries and is underfunded by $44 billion, would harm the commonwealth’s residents and damage its economy. Meanwhile, “all creditors must be at the table” to restructure the island’s liabilities to an affordable level, he said. It could “set a dangerous precedent,” said Peter Hayes, head of munis at BlackRock Inc., which oversees $110 billion of the debt. “Pensions are clearly down the capital structure in terms of hierarchy and repayment. So the political side of it is boosting them higher than bondholders.” Read more.
In related news, Puerto Rico's largest mutual fund creditors are urging the cash-strapped island to honor debt owed to creditors of its sales taxing authority, to avoid a ripple effect they say could threaten other restructuring deals on the island, Reuters reported yesterday. Puerto Rico, facing $70 billion in debt, is trying to climb out of economic crisis by reaching consensual restructuring deals with various creditor groups. Among its obligations is about $17 billion in debt owed to creditors of its sales taxing authority (COFINA). In a letter on Wednesday to Puerto Rico's legislators, Franklin Advisers, OppenheimerFunds and the First Puerto Rico Family of Funds said the U.S. territory should protect COFINA debt. The funds have more than $10 billion combined invested in Puerto Rico, including a big stake in COFINA. In a debt restructuring proposal earlier this month, Puerto Rico's advisers proposed cutting various debt, including reducing COFINA debt by about 51 percent. Read more.
Mayor Mike Duggan in his State of the Union address on Tuesday said that city lawyers are looking into litigation against high-paid consultants who underestimated pension debt during the city's bankruptcy case, MLive.com reported yesterday. It was Duggan's third State of the City speech, but his first after running day-to-day operations for a significant amount of time. Duggan took office at the start of 2014, when the city was still in bankruptcy and under control of a state-appointed emergency manager. Emergency management ended in December 2014 after Detroit exited bankruptcy, and while a financial advisory board maintains budget oversight, Duggan controlled city government throughout 2015. Early in the speech, Duggan lamented a costly miscalculation that occurred during the city's bankruptcy case. After a 10-year post-bankruptcy honeymoon period ends in 2024, the city will have to pay $193 million in contributions to the city's old pension systems, far more than the $111 million projected in the bankruptcy plan.
A broad plan being put forward by the Treasury Department to ease Puerto Rico’s financial crisis would put pension payments to retirees ahead of payments to bondholders, the New York Times reported today. The proposal was being driven by evidence that Puerto Rico’s pension system is nearly out of money, leaving retirees who are dependent on it financially vulnerable. “The major problem is, the entire pension system is close to being depleted,” said Antonio Weiss, counselor to Jacob J. Lew, the Treasury secretary. “But 330,000 people depend on it. It’s unfunded, and they have to be protected.” Shielding retirees from pension cuts, the thinking goes, would not only protect thousands of older residents on the island, but it might also encourage younger retirees to stay there, rather than move to the United States mainland in search of new jobs and incomes. Out-migration is considered a prime cause of Puerto Rico’s financial tailspin, because it shrinks the island’s economy, leaving fewer people and fewer dollars to support the crushing debt. Puerto Rico is said to have about $72 billion of financial debt outstanding, most of it in the form of municipal bonds. By some estimates, it has incurred an additional $43 billion in unfunded pension obligations. Read more.
Two House committees will be holding hearings today on Puerto Rico’s debt crisis. The first hearing, entitled “Puerto Rico’s Debt Crisis and Its Impact on the Bond Markets,” will be held by the House Financial Services Subcommittee on Oversight and Investigations, at 10 a.m. ET. The Subcommittee is chaired by Rep. Sean Duffy (R-Wisc.), who is sponsoring H.R. 4199, the “Puerto Rico Financial Stability and Debt Restructuring Choice Act.” The House Natural Resources Committee will also be holding a hearing at 10 a.m. ET entitled “The U.S. Department of the Treasury’s Analysis of the Situation in Puerto Rico.” The Natural Resources Committee is spearheading the effort to draft a bill on Puerto Rico in the coming weeks. The sole witness at this hearing will be Antonio Weiss, counselor to the U.S. Treasury Secretary.
In related news, Puerto Rico's largest mutual fund creditors are urging the cash-strapped island to honor debt owed to creditors of its sales taxing authority, to avoid a ripple effect they say could threaten other restructuring deals on the island, Reuters reported yesterday. Puerto Rico, facing $70 billion in debt, is trying to climb out of economic crisis by reaching consensual restructuring deals with various creditor groups. Among its obligations is about $17 billion in debt owed to creditors of its sales taxing authority (COFINA). In a letter on yesterday to Puerto Rico's legislators, Franklin Advisers, OppenheimerFunds and the First Puerto Rico Family of Funds said the U.S. territory should protect COFINA debt. The funds have more than $10 billion combined invested in Puerto Rico, including a big stake in COFINA. Read more.
Atlantic City Mayor Don Guardian and other city officials vowed on Monday to fight New Jersey's latest takeover bid, accusing state officials of reneging on their promise to work in partnership with local leaders, Dow Jones Daily Bankruptcy Review reported today. Guardian said that the city would be forced to seek bankruptcy protection if state leaders don't negotiate a settlement with the city's largest casino, which has begun withholding tax payments. "We cannot stand here today and accept any bill with the broad, overreaching powers as the one presented to us last week contained," said Guardian, referring to the bill authorizing the takeover. The event underscored the deep divisions between local and state leaders over how best to rescue Atlantic City, which is on track to run out of cash by April 1 or earlier.
Illinois’s quest to take over Chicago’s schools intensified as Governor Bruce Rauner said the state can block the district from borrowing in the municipal-bond market, a claim the nation’s third-largest school system rejects, Bloomberg News reported yesterday. The Illinois State Board of Education is investigating the finances of the district, which is facing projected deficits of $1 billion a year through 2020, and the Republican governor is pushing for legislation to strip the city of its control. The system has routinely relied on bond sales to help cover operating costs and push debt payments further off into the future. “If it determined that any school district was in financial duress, the state board has the right — the legal authority — to block any debt offerings,” Rauner said on Monday. “The state board has not ever chosen to do that for the city of Chicago. I hope that never becomes necessary, but we’ve got to be ready to take action and step in.” The Chicago Board of Education is struggling to avert insolvency after years of borrowing, drawing on its reserves and shortchanging the workers’ pension fund, which is causing its annual retirement payment to soar. With a junk credit rating, the board sold $725 million of bonds this month for yields as high as 8.5 percent, more than twice that demanded from most credit-worthy state and local governments.
Michigan state officials said that Detroit’s public schools have reached their borrowing limit and won’t be able to take on more debt to pay bills when money runs out in April if Michigan lawmakers don’t restructure some of its $2 billion of obligations, Bloomberg News reported today. Though the district has borrowed when it ran out of money before, it has reached the statutory limit of its ability to do that, said Terry Stanton, spokesman for Michigan’s Treasury Department. This month the amount of state aid that’s siphoned off to service debt will jump to roughly what is spent on salaries and benefits, pressuring the district’s ability to pay its bills in April. The district may have to stop paying workers if lawmakers fail to reach an agreement, said Peter Wills, chief of staff to state Senator Goeff Hansen, the Republican sponsor of restructuring legislation.
