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Region will cut amount it borrows

Region will cut amount it borrows.

Threatened with a credit rating downgrade within the next three years that could result in higher lending costs and more burden on taxpayers, York Region is working to cut the amount it borrows over the next decade and beyond.

The region will likely approve its nearly $3 billion 2014 fiscal plan today, but much of the focus throughout this year’s budget process has been on reducing its debt.

York’s debt stands at about $2.26 billion and while credit rating agencies Moody’s Investor Service and Standard and Poor’s recently gave the region Aaa/AAA standing for the 13th consecutive year, the latter firm also revised its outlook from stable to negative, which could be a harbinger of a credit downgrade within the not-too-distant future.

Regional finance committee chairperson and Richmond Hill Mayor Dave Barrow described the move by S&P as a wake-up call.

“I think it’s a big deal,” he said. “As the issuer of the debt, we don’t want to be seen as more of a risk than others.”

Even before S&P revised its outlook, there had been fretting about the size of the region’s debt load. Much of the $2.26-billion figure, around 80 per cent of it, will be recovered through the collection of development charges, Mr. Barrow said, but the fact remains it’s a huge amount of money.

In any case, the region is taking steps to try to reduce the amount of debt it intends to take on, York treasury office director Ed Hankins explained.

To do that, it is employing a three-pronged approach that will reschedule some components of the region’s 10-year capital plan to ensure they’re ready when they are needed rather than years in advance, establish a debt-reduction reserve and put more money aside for asset replacement.

The re-aligning of the capital plan will see certain projects shifted into future 10-year plans, while the latter two initiatives will expand the reserve balances and cut the amount of tax levy-supported debt that will be required, Mr. Hankins said.

If adhered to, Mr. Hankins estimates the new approach will help the region avoid $1.5 billion in debt during the next decade.

York’s debt was projected to exceed $5 billion as of 2020 under its original long-term capital plan, but, as per the new strategy, the revised forecast anticipates the region’s debt won’t reach $4 billion.

At the same time, the region plans to boost its reserve balances from the current $1.6 billion to nearly $4.7 billion by 2023.

Interestingly, while the region’s debt is forecast to climb upward, it is expecting a year-end surplus of $19.1 million on the operating side of the ledger.

The current policy with respect to surpluses, dictates any funds left over from a given year’s operating budget be allotted to cover contingent liability reserves, such as working capital and insurance, then fuel-stabilization, if required, with the remainder assigned to the general capital reserve fund.

Under a proposed policy, future surpluses would be assigned to the aforementioned reserves, such as general capital and others, on an as-needed basis, with the rest being assigned to the new debt-reduction account.

The supplementary tax policy would also change to assign half of the funds collected through it to the asset replacement fund, with the remaining amount dedicated to debt reduction. The operating budget would also list a debt-reduction line item starting at $11.8 million, all to help establish the new fund.

In the past, some have suggested municipalities would do well to avoid taking on debt and, instead, compel the developers to pay the costs of servicing their projects up front.

Mr. Barrow and Mr. Hankins agree that can work on a relatively smaller scale, but isn’t practical at the regional level.

Some of the water and wastewater projects the region builds to serve new growth, for example, come with price tags in the hundreds of millions of dollars, if not more, Mr. Hankins said.

“You’re not building something that will support one subdivision, but hundreds of subdivisions over the next 20 to 30 years,” he said. “Obviously, the cost of doing that is much larger.”

A certain amount of debt is unavoidable in a municipal context and shouldn’t be cause for too much concern as long as there’s a sound plan in place to pay it back, Centre for Urban Research and Land Development professor and director David Amborski explained.

S&P’s revision of its outlook from stable to negative isn’t intended to set off the alarm bells, but it is meant to get the region’s attention.

“That’s an early warning,” he explained. “It’s to get the decisionmakers thinking about doing some things differently.”

It would be a different story if S&P were to downgrade the region’s credit rating, he added.

As it stands, provincial legislation caps what a municipality can borrow, with an annual repayment limit that states total financial obligations can’t exceed 25 per cent of  revenue.

The region, however, has a special arrangement with the province that gives it an additional cost supplement over and above this limit, equating to 80 per cent of the average development charges collected over the previous three years.

Regardless, anything a municipality can do to mitigate debts, be it deferring some projects or exploring public-private partnerships, is a good thing, Mr. Amborski said.

Even so, an increase in development charges isn’t the solution to helping municipalities, such as York Region, diminish their debt, Mr. Amborski said. Ontario has among the highest development charges in the world, so if growth isn’t paying for growth here, it isn’t anywhere, he said.

“You can’t just treat development charges as a bottomless pit,” he said. “They do get passed on to the homeowner at the end of the day.”

Higher development charges also result in higher home prices which, in turn, can lead to a dearth of affordable housing, he added.

That being said, not all growth is created equal, Mr. Amborski continued.

Employment growth pays a relatively hefty development charge in most municipalities, but puts significantly less pressure on municipal services, especially in the recreation and leisure side of things, compared to residential construction, Mr. Amborski said. As a municipality, you want a healthy supply of residential growth coming in, as employers generally follow people, he said, but if a town, city or region is having to constantly approve new housing to pay down the debt accrued from servicing previous residential developments without adequate employment growth occurring that could certainly spell trouble.

“I would argue residential growth does pay for itself if you have employment growth along with it,” Mr. Amborski said. “You need that balance in the assessment between employment and residential.

“You don’t want to be a bedroom community.”

 

Testosterone Pit – Home – Fear and Trembling In Muni Land

Testosterone Pit – Home – Fear and Trembling In Muni Land.

Municipal bond investors, a conservative bunch who want to avoid rollercoaster rides and cliffhangers, are getting frazzled. And they’re bailing out of muni bond funds at record rate, while they still can without losing their shirts. So far this year, they have yanked out $52.8 billion. In the third quarter alone, as yields were soaring on the Fed’s taper cacophony and as bond values were swooning, net outflows from muni funds reached $32 billion, which according to Thomson Reuters, was more than during any whole year.

Muni investors have a lot to be frazzled about. Municipal bonds used to be considered a safe investment – though that may have been propaganda more than anything else. Munis are exempt from federal income taxes, hence their attractiveness to conservative investors in high tax brackets. Munis packaged into bond funds appealed to those looking for a convenient way to spread the risk over numerous municipalities and states. While the Fed was repressing rates, muni bond funds were great deals.

Then came the bankruptcies.

The precursor was Vallejo, CA, a Bay Area city of 115,000 that filed for Chapter 9 bankruptcy protection in 2008 and emerged two years ago. But it’s already struggling again with soaring pension costs that had been left untouched. Jefferson County, which includes Alabama’s largest city, Birmingham, filed in 2011 when it defaulted on $3.1 billion in sewer bonds, the largest municipal bankruptcy at the time [but it’s already issuing new bonds; read….. Municipal Bankruptcy? Why Not! And so The Floodgates Open].

Stockton, CA, filed in June 2012. Mammoth Lakes, CA, filed in July 2012. San Bernardino, CA, filed in August 2012. They were dropping like flies in the “Golden State.” Detroit filed in July this year, crushing all prior records with its debt of up to $20 billion. That’s $28,000 per person for its population of 700,000.

But Detroit is just a fraction of what is skittering toward muni investors: the Commonwealth of Puerto Rico. The poverty rate is 45.6%. Unemployment is 14.7%. The economy has been in recession since 2006. The labor force has shrunk 16% from 1.42 million in 2007 to 1.19 million in October. The number of working people, over the same period, has plunged from 1.8 million to 1.1 million, a breathtaking 39%.

Puerto Rico had a good run for decades as federal tax breaks lured Corporate America to set up shop there. But when these tax breaks were phased out by 2005, the companies went in search for the greener grass elsewhere. To keep splurging, the government embarked on a borrowing binge that left the now lovingly named “Greece of the Caribbean” with nearly $70 billion in debt.

That’s 70% of GDP, and for its population of 3.67 million, about $19,000 per capita, or about $64,000 per working person. And then there is the underfunded pension system. But unlike Detroit, Puerto Rico is struggling to address its problems with unpopular measures, raising all manner of taxes and cutting outlays. Not even the bloated government payrolls have been spared. Too little, too late? Given the enormous poverty rate and long-term shrinking employment, what are the chances that this debt will blow up?

Pretty good, according to Moody’s Investors Service. Last week, it put $52 billion of Puerto Rico’s debt under review for a downgrade – to junk. Moody’s litany of factors: “Failure to access the public debt market with a long-term borrowing, declines in liquidity, financial underperformance in coming months, economic indicators in coming months that point to a further downturn in the economy, inability of government to achieve needed reform of the Teachers’ Retirement System.” This followed a similar move by Fitch Ratings in November.

Alas, Puerto Rico has swaps and debt covenants with collateral and acceleration provisions that kick in when one of the three major credit ratings agencies issues the threatened downgrade. Which “could result in liquidity demands of up to $1 billion,” explained Moody’s analyst Lisa Heller. It would “significantly narrow remaining net liquid assets.”

Now Puerto Rico is under pressure to show that over the next three months or so it can still access the bond markets at a reasonable rate. If not….

Puerto Rico’s debt was a muni bond fund favorite because it’s exempt from state and federal taxes. Now fears of a default on $52 billion or more in debt are cascading through the $3.7 trillion muni market. But Puerto Rico isn’t alone. Numerous municipalities and some states have ventured out on thinner and thinner ice.

Default risks are dark clouds on the distant horizon or remain unimaginable beyond the horizon. And hopes that disaster can be averted by a miracle still rule the day. However, the Fed’s taper cacophony is here and now, and though the Fed is still printing money and buying paper at full speed, the possibility that it might not always do so hangs like a malodorous emanation in the air.

Taper talk and bankruptcies are a toxic mix for munis. Now add the lure of stocks that have become the official risk-free investment vehicle with guaranteed double-digit rates of return for all years to come. So muni-fund investors, tired of losing money, are seeking refuge in stocks. This has pressured munis further. The Bank of America Merrill Lynch master municipal index has dropped 2.8% and, unless a miracle happens, will end the year in the red. A first since 2008. Its index of bonds with maturities of at least 22 years has skidded almost 6% – though the Fed hasn’t even begun to taper.

The Fed’s easy money policies over the decades encouraged borrowing binges by municipalities and states. When the hot air hissed out of history’s greatest credit bubble in 2008, the Fed’s remedy, its ingenious QE and zero-interest-rate policies, blew an even greater credit bubble – kudos! As that credit bubble transitions from full bloom to whatever comes afterwards, the plight of muni bond funds is just the beginning.

The Fed’s policies of dollar destruction took on a sudden virulent form in 1970 – clearly visible against the Swiss Franc. And it’s still going on. When even the Swiss couldn’t handle it anymore, they too jumped into the currency war. Read…. Mother Of All Currency Wars in One Chart: Dollar Vs. Swiss Franc

 

Guest Post: Puerto Rico’s Debt Crisis – Another Domino Keels Over | Zero Hedge

Guest Post: Puerto Rico’s Debt Crisis – Another Domino Keels Over | Zero Hedge. (FULL ARTICLE)

If one looks at various sovereign states, it seemingly doesn’t matter that their public debts continue to rise at a hefty clip. The largest ones are considered to have economies that are big and resilient enough to be able to support the growing debt load. Part of the calculus is no doubt the notion that they contain enough accumulated wealth to allow their governments to confiscate even more of their citizens property and income in order to make good on their debts.

Then there are the small and mid-sized states in the EU that are getting bailed out by their larger brethren, or rather, the tax payers of their larger brethren. However, things are different when the territories or municipalities concerned are considered too small and have no such back-up. Detroit was a recent case in point, and it seems that the US territory of Puerto Rico is the next domino to fall. Here is a recent price chart of the Puerto Rico 20 year bond maturing in 2033, which currently yields 10.6% and trades at 46 cents below par:…

 

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