States and Counties Looking at Options to Finance Increasing Debt

Jan 28, 2016

States and Counties Looking at Options to Finance Increasing Debt

A lot of attention has been paid, including by those of us at the NY MuniBlog, on the financial difficulties of Detroit and Chicago. More recently, attention has been paid to the ongoing financial difficulties in Puerto Rico where that government recently clawed back funds to make payments of nearly $329 million to holders of general obligations debt which has triggered lawsuits from Ambac Financial Group and Assured Guaranty. As reported recently in the Bond Buyer, Congress passed an omnibus spending bill which did not include provisions regarding potential bankruptcy authority, however, discussions are reportedly continuing which may allow Chapter 9 bankruptcy for Puerto Rico’s public authorities.

Perhaps getting less attention was a recent report from JPMorgan Chase which stated that municipal debt will, in certain instances, be more risky. The broad focus of this report is at the state level where there is over $500 billion in debt outstanding and a recent Bloomberg review of 2015 noted a decline in the sale of municipal notes as state and local governments continue to gain fiscal strength. Neither of these reports included previously issued revenue bonds nor does it include future state obligations for pension and retiree healthcare. Future pension and retiree healthcare obligations for the 50 states may exceed another $1 trillion when amortized over the next 30 years.

Earlier this month, Alaska announced plans to add $1 billion to its planned pension bond issuance. The bond issue, announced in November 2015 as approximately $1.6 billion, was being explored as a means to finance the underfunded pension system. Since November 2015, the price of oil, a major source of revenue to Alaska, has continued to plunge resulting in an estimated two-thirds drop to the state from oil-related tax revenues. Standard & Poor’s in fact cut that state’s credit rating due to the continued low price of oil.

Earlier this week, New Jersey Governor Chris Christie, New Jersey State Senator Stephen M. Sweeney, the state’s highest-ranking Democratic lawmaker, and Atlantic City Mayor Donald A. Guardian announced a five-year plan to restructure Atlantic City’s debt as well as contracts and a consolidation of service to keep the city from seeking bankruptcy protection. The restructuring will need state legislative approvals before it can take effect but would avoid the city from reportedly writing off approximately $40 million of debt.

Nationwide, according to a study published this month by the National Association of Counties, “more than half of oil and gas economies experienced declines in economic output in 2015” and it is not just states and counties that rely on oil revenues that are in need of additional revenue and/or reduced costs as some states have been exploring the sale of municipally-owned buildings to reduce operating costs. For example, Illinois is considering the sale of a 17-story building in Chicago. Georgia is exploring the sale of an office tower in Atlanta on which the state has spent over $115 million for renovation and maintenance. South Carolina has listed state-owned properties for sale. These properties, in states with and without reported fiscal stresses, if actually sold would reduce operating and maintenance costs and place property back on the tax rolls.

If the National Association of Counties study is correct, which concluded that across the four indicators studied (unemployment, jobs, economic output and median home prices) only seven percent of all county economies had recovered to pre-2009 recession levels, then these bond issues and potential state-assisted restructurings are still only just beginning.

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