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Puerto Rico: Seeking Self-Preservation

The leadership of Puerto Rico attended a series of events over the past two weeks in Washington, D.C.

Tops on the list of dignitaries was Governor Ricardo Rosselló, who attended the National Governors Association  and stayed in DC for the U.S. Senate hearings on the Territories.

Gov. Rosselló said he wanted to meet with President Donald Trump ahead of the National Governors Association (NGA) conference in Washington, but said the White House declined his request without offering a specific reason. Gov. Rosselló sought to put a focus on relief efforts in the U.S. territory, saying his top concern was the sluggishness of FEMA disbursements.

"[The Federal Emergency Management Agency] has been slow, they've put obstacles in Puerto Rico that they haven't placed anywhere else in the United States, and it has delayed our recovery significantly," he said.

The Trump Administration officials denied the request  was refused, insisting a parlay was suggested with HUD Secretary Ben Carson and Federal Emergency Management Agency (FEMA) Director Brock Long.

While attending the NGA, Gov. Rosselló told reporters that 2020 presidential candidates need to be clear on their positions on Puerto Rico statehood before they campaign on the Island.

"What I want to hear everybody talk about," Reuters reported Gov. Rosselló saying, "is their stance on the equality of U.S. citizens in Puerto Rico? It should be a yes or no answer. There should be no room for wiggle."

The Governor explained that Puerto Rico can not achieve equality without statehood. Supreme Court decisions in the 20th century set the legal precedent that allows Congress to treat Puerto Rico differently from States. For example, Puerto Rico workers pay FICA taxes at the same rate as people living in states, but receive less funding for Medicare. Inequity of this kind is legal as long as Puerto Rico remains a territory.

 

 

S&P on Illinois

The Wall Street Journal published an article in December 2018 about how municipal bond issuers are opting for a single rating.  Municipal Market Analytics (MMA) provided the data for the story.

Roughly 25% of the dollar value of all municipal debt issued this year carried a single grade from one of the major ratings firms, according to Municipal Market Analytics data as of Oct. 3. The cities and counties that relied on only one rating gravitated to a particular rating agency more than others: S&P Global. Nearly 65% of the deals with one rating were evaluated by S&P, compared with 34% for Moody’s and 1% for Fitch, according to the Municipal Market Analytics data.  Why did the cities select S&P?  Issuers were, perhaps, a bit coy and simply expressed contentment with the one rating by S&P.   However, Matt Fabian at MMA shined the spotlight on a credit criteria factor that produced higher ratings at S&P: Pensions. Moody’s and Fitch impose their own calculations for pension liabilities, while S&P relies more on government-provided projections.  The difference in criteria could be the source of the S&P ratings being a half-grade higher.

So, when S&P recently reported on Illinois' rating, SRG took a good look at the credit criteria.  More specifically, SRG  was concerned about the role that Illinois' pension funding impacted the analysis.

 

 

The Importance of Confidence: US Debt Crisis Looms

— Dr. Scott B. MacDonald

The Organization for Economic Cooperation and Development (OECD) recently released its annual Sovereign Borrowing Outlook for OECD Countries.

You may well ask yourself: Why would any self-respecting muni bond professional care?  The answer is events happening on the global stage can have major impacts on Main Street USA.

The OECD is decidedly worth a look, especially at a time when the global economic engine is beginning to make sputtering noises. There are three major items that stand out in the report: (1) OECD sovereigns as a group need to sell more than $11 trillion to the markets in 2019; (2) the central government marketable debt-to-GDP ratio is projected to remain constant in 2019; and (3) while government funding needs in the wake of the financial crisis increased in most OECD countries, the recent further increase is confined to a few countries, particularly the United States. Indeed, in early February the U.S. government announced that federal debt reached $22 trillion — a record.

Thus far, U.S. economic growth has kept markets afloat. We do not see a recession in 2019, and the current economic expansion is one of the longest in history. Indeed, the Trump administration has rolled the dice on making economic growth strong and long-lasting enough to help bring the debt back to more sustainable levels. This takes us back to the OECD report; a nagging question remains – will the virtuous cycle of growth and higher tax revenues related to that growth be able to stabilize and then reduce the growing ocean of U.S. red ink, while maintaining investor confidence?

 

 

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Jim Kolb, staff director, U.S. House Transportation Committee and John Drake, Office of the Assistant Secretary for Policy, Department of Transportation, met with the County Executive Board to discuss continued funding.

Mr. Drake provided an overview of Transportation issues, particularly the need to repair and maintain the nation's roads and bridges. While the Administration has made infrastructure a major focus in the past month, Mr. Drake could not provide any details on specific measures. "We have been working non-stop on the President's Budget," he said. "The simple fact is people are not driving as much as they used to. So, the gas tax that funds the Transportation Fund is running  out.  No one on Capitol Hill is going to propose raising the Federal gas tax so the Congressional Budget Office has release projections that indicate the Trust Fund will start running out of money during the summer."

 

 

Most metropolitan area median home prices, impacted by distressed sales, trended down in the fourth quarter from a year earlier. At the same time, existing-home sales rose in only six states from the fourth quarter of 2007, according to the latest survey by the National Association of Realtors (NAR).

In the fourth quarter, 134 out of 153 metropolitan statistical areas showed declines in median existing single-family home prices from the same period in 2007, pulled down by active sales at the lower end that were driven by foreclosures. One area was unchanged and 18 metros reported price gains. NAR’s track of metro area home prices dates back to 1979.

Distressed sales – foreclosures and short sales – accounted for 45 percent of transactions in the fourth quarter, dragging down the national median existing single-family price to $180,100, which is 12.4 percent below the fourth quarter of 2007 when conditions were more balanced; the median is where half sold for more and half sold for less.

 

 

 

 

 

Pension obligation bonds have returned to the public finance landscape.  It's been a while.  So, Smith's Research & Ratings invited  Steve Wood, director at Citigroup, to provide Regulars with a refresher course at the Southern Regional Public Finance Conference.

Mr. Wood highlighted several reasons why pension obligation bonds (POBs) have returned to the public finance landscape: Rapid unfunded liability growth; Investment Losses; Early Retirement Incentives; Greater Longevity; Low taxable Interest rates.

The real trick to understanding POBs is the "UAAL" – Unfunded Actuarial Accrued Liability. Pension fund actuaries project benefit payments, contributions and investment returns. A gap between the accrued liabilities and the actuarial value of the assets is the UAAL.

 

 

 

 

 

 

Always a sensitive subject among banker and issuers, Moody's decision to provide unsolicited ratings on several deals, including the Long Island Lighting Company Project, has underscored a growing difference of opinions in the rating community.

"I think Moody's is starting to feel the heat," said a director of research at a sellside firm. "They are not being selected by issuers and public finance bankers, so Moody's is publishing the ratings without being paid." A senior credit officer at a buyside firm said, "I appreciate Moody's publishing its ratings because I find the additional information is often useful in assessing credit quality."

While the temptation is to assume battlelines are being clearly drawn between sellside and buyside professionals, Smith's found supporters for S&P and Moody's across the entire spectrum.

 

March 11, 2019, Vol. XXVII, Issue 4  Municipal Edition

 

The Global Economic Doctor

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February 18, 2019

 

The Week Ahead

Summary: While it will be a slow week for economic data, the trade front is active. Considering the relatively positive momentum in global equity and credit markets, investors have built in positive outcomes for major trade issues – at least for now. But trade deals are notoriously difficult to conclude, as we are seeing with Brexit and Sino-American trade negotiations. Moreover, the Trump administration appears to be considering opening a new front in the trade wars, this time with the European Union and Japan over autos. Considering the backdrop to slower economic growth in Japan and the European Union, a new trade war could not come at a worse time, while it could also dilute any U.S. and European convergence on trade policy vis-à-vis China. Moreover, there are still some loose ends concerning the USMCA (updated NAFTA), such as the need for the national legislative bodies of Canada, Mexico and the U.S. to pass the treaty into law. The U.S. Congress does not seem to be in any hurry in passing the USMCA, which could complicate getting a Sino-American trade agreement from being implemented. We see markets geared to the upside, but as the calendar moves, trade will weigh more heavily on investor sentiment. Investors could continue to look to cash as a safe haven until some of the dust begins to settle.

 

 

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