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By James E. Spiotto

On January 14, 2019, the Financial Oversight and Management Board, acting through its Special Claims Committee and the Official Committee of Unsecured Creditors, filed an objection to the validity and enforceability of more than $6 billion of the Commonwealth of Puerto Rico’s General Obligation Bonds.  The purported reason for the invalidity was the asserted violation of the Commonwealth’s Constitutional Debt Service Limit found in Article VI, Section 2 of the Puerto Rico Constitution, as amended in 1961, which provides that direct obligations of the Commonwealth “shall not exceed 15% of the average of the total amount of annual revenues…” (“G.O. Debt Limit”).  This claim of invalidity was asserted long after the issuance of the General Obligation Bonds, in which the Commonwealth and its professional represented that the Bonds complied with the Constitution and laws of Puerto Rico and were a valid, binding and enforceable obligation, and released to the market a calculation of compliance of the issuance with the G.O. Debt Limit.  In addition, there also is a claim by the objecting parties that issuance of the $6 billion of General Obligation Bond Debt violated the Balanced Budget Clause of the Puerto Rico Constitution, Article VI, Section 7 providing “the appropriation made for any fiscal year shall not exceed total revenues including available surplus estimated unless the imposition of taxes sufficient to cover said appropriation is provided by law” (“Balanced Budget Clause”).  These claims of invalidity when carefully reviewed from a historic perspective should be rejected.

Repudiation or claims of the invalidity of previously issued general obligation bonds by states or even local governments historically have never been viewed by the market as an acceptable or respectable position for an issuer who had earlier represented, through its statements and its agents, that the bonds were valid and in compliance with the law.  Generally, constitutional debt limits or balanced budget requirements are guide posts for the governmental issuer in conjunction with bond counsel prior to actual issuance to determine whether such debt can and should be incurred.  These provisions were not intended to create an artifice that clever government issuers could spring on unsuspecting good faith bond purchasers who had no prior notice of any defect and in fact were told at issuance there were no compliance problems with the constitution and law of the government.  Nevertheless, efforts by states and local governments to repudiate or invalidate debt after its issuance contrary to what they represented to induce the purchase of bond debt by good faith purchasers are not new.  Such attempts to invalidate or repudiate state and local government debt in the United States first took place in the 1800’s.  The lessons learned from those unfortunate efforts should not be forgotten and are instructive as to the current attempts of Puerto Rico to invalidate certain of its G.O. Debt.

History of Repudiation

In the aftermath of the panic of 1837 and the need for states to borrow to pay for transportation improvements in the North (given the success of the Erie Canal) and for banking services in the South, 19 out of 26 states and two territories borrowed money for economic growth.  By the 1840’s, eight states and one territory defaulted on those borrowings and repudiated those debt obligations.  Those issuers that repudiated the debt then experienced either an inability to borrow additional funds or, if they could obtain financing for needed governmental improvements and services, suffered the imposition of a 32%+ yield.  By the late 1840’s, seven of the eight states had renounced their repudiation and resumed payment on the debt in order to obtain market access at a lower cost.  The state and one territory that were left repudiating their debt struggled for over a decade to obtain funds, let alone at a reasonable cost.

After the Civil War, in response to suggestions that the government should discount the cost of war debt by paying it in greenbacks as a devalued currency, President Grant, in the spirit of Washington and Hamilton eighty years earlier, chose to protect national honor.  He stated every dollar of the government indebtedness should be paid in gold.  Unfortunately, such was not the fate of the failed confederate government’s war debt.  By means of the 14th Amendment, debt incurred in aid of insurrection was deemed illegal and void.



Worried About Public Pensions? Counties Often Have Lower Burdens

Counties Often Underappreciated Despite Generally Improving Fund Balances and Lower Debt and Pension Liabilities

By Richard A. Ciccarone

County governments are generally a good place to start your search for governments with positive financial conditions as well as lower pension and debt liabilities.  Since the Great Recession and Credit Crisis, counties have shown improving general fund balances,  lower debt and better pension funding ratios.   These strengths often get overlooked by public finance critics as well as anxious municipal bond investors that are rightfully concerned about the potential retirement burdens impacting many states and cities.

General Fund Balance Trend

One of the best measures to assess operating reserves is to take a look at the general fund balance in comparison to annual expenditures.  For fiscal year 2017,  the median general fund balance to expenditures was 38.9% based on a sample of  1,107 U.S. counties by Merritt Research Services, LLC,  an independent municipal bond data and research company.  As shown in the table below,  the total fund balance ratio is about 10% higher in 2017 than it was in 2009.  based on Comprehensive Annual Financial Report audits collected by Merritt Research.

county fund balance trend

National median and trend of County Fund Balances to Expenditures; Source: Merritt Research Services, LLC

Available Fund Balance

The portion of the fund balances that is available for future spending and reserves is defined by the Governmental Accounting Standards Board as the assigned or unassigned fund balance.  The assigned designation refers to balances that are legally designated by statute, resolution or indenture while the unassigned refers to the portion that is totally uncommitted.   Converted into a narrower fund balance ratio,  this figure is also running on a positive high note.

Most counties have a comfortable margin, providing them with reserves and room to maneuver as evidenced by ….

To Read Full Article and Charts, Click Here


Fiscal Year 2017 Municipal Bond Audit Times Are Still Too Slow

Municipal Bond Audit Times Show Slight Improvement Since 2015 But Most Still Late to the Table  —  The County, State and City Sectors are the Least Timely

By Richard A. Ciccarone

Municipal bond analysts and investors are accustomed to waiting a lot longer for municipal bond financial audits to be completed after the close of the fiscal year than they would on a corporate bond.   While public corporations are required to file an annual audit within 60 to 90 days after the close of the year, municipal bond borrowers often finish their audited annual reports in close to twice that time and a large number take even much longer.

While investors need the audit documents for credit evaluation and securities pricing purposes, they are not the only stakeholders that have a need to see timely audited financial reports. Governing boards associated with public bodies and not-for-profit organizations need to review the audits in order to fulfill their duty for proper oversight.  Like municipal bond analysts and investors, they are better able to respond to issues disclosed in an audit if the documents are timelier.  Although this issue has been lingering for decades,  the time it takes to complete and sign an audit after the fiscal year has been completed hasn’t changed much over the last ten years.

For Full Article, click here



Featured Municipal Bond Issue:  –  Indianapolis Local Public Improvement Bond Bank to Issue $610.5 Million Justice Campus Bonds for Courthouse & Jail Complex 

Our featured new issue municipal bond of the week is the Indianapolis Public Improvement Bond Bank, which is scheduled to bring to market an estimated $610.5 million Community Justice Campus bond issue. The bonds will be used to finance the purchase of a lease rental revenue bond issue  issued by the Indianapolis-Marion County Building Authority.   The Bond Bank will market the Community Justice Campus Bonds as a public offering by a negotiated sale scheduled for the week of March 18, 2019.

The Bonds

In a relatively complicated financing arrangement, but not unusual under Indiana law,  the Indianapolis Public Improvement Bond Bank will purchase the  Indianapolis Public Improvement Bond Bank Community Justice Campus Bonds (Courthouse and Jail Project) Bonds, Series 2019 ,  which is a qualified obligation bond issue from the Indianapolis-Marion County Building Authority.  The Building Authority will lease the Project to the City of Indianapolis and Marion County through separate leases.  Under Indiana law, the financing of this type of lease obligation are subject to abatement if the project is not available for occupancy by not annual appropriation.

The City and County are positioned to enter into the leases with the Building Authority to finance the Courthouse and Jail project by virtue of  a November 2018 Resolution adopted by the City-County Council of Indianapolis and Marion County in November 2018.   The lease term and lease payments are structured by the City-County resolution to not exceed 40 years beginning once the Courthouse Jail Project is complete and ready for occupancy.

Bond proceeds for the Series A Bonds will be used to purchase the qualified obligations of the Indianapolis-Marion County  Building Authority,  refund certain Indianapolis Local Public Improvement Bond Bank Notes, fund a Bond Bank debt service reserve fund and a Revenue Stabilization Fund, provide capitalized interest and pay costs of issuance.  The capitalized interest account is designed to pay interest through April 1, 2022.

For the full article with a statistical snapshot of financial measures, click here.

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