A roundup of money (and other) news governments can use.
The financial outlook for states and localities over the next few years, simply put, isn’t as rosy as it’s been for the past couple of years. (If you even want to call the last couple of years rosy.)
Last week, we reported that states other than oil-dependent ones are dealing with mid-year spending cuts. Looking ahead, state budget forecasters are expecting tepid sales and income tax revenue growth for both 2016 and 2017. If spending continues to grow faster than revenues, the next few years could be challenging for government budgets.
“States still haven’t made up for a lot of the cutting that got done in the last six to eight years,” said Bill Pound, the executive director of the National Conference of State Legislatures. In particular, states are still trying to restore education funding while implementing higher standards, he said.
The growth in health-care costs also continues to suck money out of budgets. “It’s going to be a real challenge,” Pound said at a Governing conference this week in Washington, D.C. “Not necessarily just in 2017, but in the [following] years.”
Despite the widespread problems, some states continue to take a head-in-the-sand approach. In Pennsylvania, lawmakers still haven’t passed a budget because they can’t agree over how to fix its structural imbalance. The state’s multiple rating downgrades as a result of its budget problems “haven’t sunk in,” said state Rep. Dwight Evans. When governments get downgraded, it costs them more to issue debt. But Evans said lawmakers failed to make that connection. “I don’t think the membership fully understands the cost of that kind of lack of making a decision,” he said.A Vote of Confidence for Muni Bonds
If you are wondering why your finance director is going on and on about some weird thing called “HQLA,” here’s the bottom line: Congress thinks most municipal bonds are a secure investment.
Here’s the backstory: Over a year ago, a new federal rule was put in place requiring banks to have on hand high-quality liquid assets, or HQLAs. These are assets that can be converted to cash quickly in the event of a financial crisis. But that rule excluded muni bonds from the HQLA list.
The basic message was that muni bonds are not as stable of an investment as, say, bonds from the U.S. Treasury. The fear was that, as a result, banks would start reducing their muni bond portfolios and that the drop in demand could make it harder for governments to sell their bonds in the municipal market.
The good news is that on Feb. 1, the House of Representatives passed a bill that forces banking regulators to classify investment-grade municipal bonds as liquid assets. A similar bill is expected to be introduced in the Senate.
“Put simply, our bill requires the federal government to recognize the obvious, that our municipal bonds are some of the safest investments in the world,” Indiana Republican Rep. Luke Messer told Bloomberg News. “We shouldn’t have rules that give preferential treatment to corporate bonds or other countries’ bonds over our own.”A Ukraine-Inspired Idea to Restructure Puerto Rico
Puerto Rico is running out of money and time to fix its massive debt problem. The territory can’t legally declare bankruptcy, but it has already defaulted on debt, its bonds have long been at junk status and it’s basically acting like a bankrupt state.
This week, it released a new proposal to restructure more than half of its $70 billion in outstanding debt. It would divide about $49 billion of existing debt, converting half of that amount into so-called base bonds and the rest into growth bonds.
The base bonds would be paid back starting in January 2018, eventually ramping up to a 5 percent interest rate. Depending on the type of initial debt, bondholders would receive as much as 72 cents on the dollar from base bonds, or as little as 39 cents.
The growth bonds are the tricky part. Those only get paid back in years when the territory’s revenues exceed its current projections. The first payments -- if any -- would only start kicking in after a decade. The growth bond/base bond idea has been used in prior restructurings in Stockton, Calif., and in Ukraine.
Puerto Rico's Secretary of State Victor A. Suarez said in a press release the “proposal is a reflection of our commitment to work with our creditors on a sustainable solution that does not place the burden on one stakeholder group alone.”
That may not convince bondholders, who would suffer a loss of about 46 percent on average under the proposal. “Notably lacking in this report is any proposed adjustment to pension obligations," said municipal analyst Guy LeBas of Janney Scott Montgomery.
Judges in Detroit and Stockton ruled that pensions could be impaired in bankruptcy, but both cities ended up putting most of the financial pain on bondholders. The moves brought criticism from bondholder groups, but Puerto Rico now appears ready to do the same.
It will likely be a big point of contention as the territory seeks to negotiate debt restructuring with its creditors.