As we enter 2019, portfolio manager Matt Buscone discusses what’s top of mind in the muni market for our investment team.
- Credit fundamentals remain sound entering 2016, but the trend of improvement that has characterized the last several years is slowing.
- With 5 percent unemployment, rising wages/salaries and home prices approaching pre-recession levels, the economy is acting to bolster municipal bonds -- notwithstanding a very slow start to the financial markets in 2016.
- Underfunded pension obligations will continue to pose challenges to municipal issuers.
- Despite many tailwinds, Puerto Rico, San Bernardino, Stockton and Chicago remain a risk to the market.
- The slow trend of credit improvement coupled with the historically tight credit spreads for A-rated state and local government debt suggests that there will be limited relative-value opportunity in A-rated general obligation and appropriation-backed debt.
Muni Market to Begin 2016: Stable, but More Delicate Than Appreciated
Entering 2016, municipal credit fundamentals are broadly consistent with those entering 2015: stable but vulnerable to an economic shock. Like last year, the economy is growing modestly, transportation and revenue credits are benefiting, and most state and local issuers are exhibiting a stronger ability to meet debt obligations. Additionally, there are signs that willingness-to-pay has improved a bit, and the recent drop in oil prices is a net plus for the market. Near-term federal risks are also subdued relative to prior years, and a case to be heard at the U.S. Supreme Court could alter government-employee relations for the benefit of creditors.
Still, the market’s credit resilience is weaker than before the recession. The pace of credit improvement has slowed, and key drivers of credit quality like delayed infrastructure maintenance and rising pension costs show few signs of abating. Pension risks, in particular, may drive movement in credit spreads over the next 12 months as investors digest newly available pension disclosures. The distressed corner of the market—including Puerto Rico—continues to threaten negative precedents for investors. Developments in Chicago, the State of Illinois, New Jersey and Pennsylvania highlight issuers’ credit vulnerabilities. Finally, over the long term, the federal government’s fiscal condition remains negative for municipal credit.
The stable but vulnerable credit environment for state and local governments, in particular, suggests that investors may find limited relative value opportunities in A-rated GO and appropriation-backed securities.
The growing U.S. economy. Consistent with last year, the economy is a tailwind for municipal credit quality. Entering 2016, the U.S. unemployment rate was 5%. Wages and salaries were up nearly 4% on a year-over-year basis, and home prices were nearing their pre-recession peak, enhancing tax collections. State and local personal income tax collections were up 9.9% on a year-over-year basis in September 2015, and property tax collections were up almost 8%.
Strong backdrop for transportation credits. Sustained economic health generally supports transportation bonds. Better employment numbers buoy business and leisure travel as well as shipping. Toll roads, airports and ports have benefitted in the recent expansion. Moody’s expects 2016 airline enplanement growth of 4%, and U.S. toll road revenue growth of nearly 6%.
Positive trends in revenue credits. Revenue sectors also benefit from a growing economy. As Figure 1 illustrates, liquidity and debt service coverage have broadly improved over the past several years across major revenue sectors, including hospitals, electric utilities, and water and sewer systems.
The data suggest that economic growth has largely offset key risks facing the electric, water-sewer and hospital sectors. These include renewable energy mandates for electric utilities, drought risk for water utilities and implementation of the Affordable Care Act (ACA) for hospitals. As we have outlined in previous work, each of these risks is material, but manageable, in most cases. The EPA’s new Clean Power Plan should materially impact only utilities overly dependent on coal in the immediate term (see podcast, EPA’s Clean Power Plan, August 28, 2015). Drought is typically a long-term problem that can be addressed through strong management and intergovernmental cooperation (see Water & Sewer Utilities: Risks not Yet a Drain on Credit Quality, October 2014). Additionally, the ACA has, to date, been generally positive for hospital credit fundamentals by expanding coverage and reducing hospitals’ bad debt expense (see Affordable Care Act Implementation Begins, September 2013).
Solid fundamentals in state and local governments. Most state and local governments also exhibit sound credit fundamentals. State and local government debt comprises 16% of U.S. gross domestic product, down from over 19% in 2010. Local government reserves are up roughly 8% since fiscal 2009, and the municipal default rate is at its lowest level in six years.
Increasing willingness-to-pay from muni issuers. The low default rate reflects, in part, a modest uptick in issuers’ willingness to honor debt obligations. In 2015, Michigan lawmakers sought non-Chapter 9 solutions for Wayne County and Detroit Public Schools while Chicago officials enacted a large property tax increase, terminated interest rate swaps and converted riskier variable rate debt into more predictable fixed rate bonds. In California and New Jersey, legislation was passed to secure certain local debt with statutory liens, and three other states considered similar legislation. Given ongoing pension and infrastructure challenges (discussed below), more states are likely to consider similar legislation. Investors are placing more emphasis on legal security in the municipal market precisely to insulate their interests from risks that impact the general operating budget (see The Changing Status of Statutory Liens, November 2015).
Falling oil prices benefiting some pockets of the market. Low oil prices are unlikely to impact municipal credit significantly in 2016.
Since mid-June 2014, oil prices have declined by almost 72% from $107 to $30 per barrel. The drop in prices has pressured economies in oil- and natural gas-producing regions, including those in Alaska, Oklahoma, Louisiana, Wyoming, West Virginia and North Dakota. As Figure 2 illustrates, private payroll employment has declined in major oil producing states.
Issuers exposed to oil price shocks typically hold outsized reserves and exhibit modest debt burdens.
However, most issuers are well shielded from oil-related stress. Issuers exposed to oil price shocks typically hold outsized reserves and exhibit modest debt burdens. For example, general fund reserves in the Texas cities of Midland and Odessa are 71% and 64% of expenditures, respectively, and oil-reliant North Dakota’s debt burden is a low 0.2% of gross state product. Low prices are, in fact, a boon for most issuers, reducing annual maintenance costs for police, fire and public works fleets. Also, transportation credits generally benefit from falling oil prices. As more people travel, bonds backed by per gallon motor fuel taxes, tolls and/or airport revenues tend to do well.
Limited Federal risks. Federal policy risks are likely to be limited in 2016 relative to prior years. This is true for at least three reasons.
- First, congressional gridlock shows signs of modestly waning. In 2015, Congress passed, and the president signed, previously contentious legislation to: (a) end the “doc” fix, (b) raise the debt limit through early 2017, (c) substantially unwind sequestration cuts through fiscal 2017 and (d) make permanent several “tax-extenders”.
- Second, Congress also passed legislation in 2015 that extends the Highway Trust Fund’s (HTF) solvency for another five years. This was the first five-year HTF bill since 1988, and it is significantly credit-positive for GARVEE bonds, which are secured, at least in part, by federal grants from the HTF.
- Third, congressional action on key fiscal matters in 2015 ensures that Congress will avoid a government shutdown or debt ceiling fight in 2016. It also reduces the risk of significant tax reform legislation over the near term. Tax risk may increase a bit in the second half of 2016 as each party’s presidential candidate stakes out a position on tax policy, but it is too soon to gauge the extent of this risk. We note only that (a) Republican candidates almost uniformly support a flatter tax code that, if pursued, would likely involve a reconsideration of the municipal tax exemption and (b) Democrats generally support higher federal income tax rates and more federal involvement in infrastructure finance. Notably, Hillary Clinton’s proposed infrastructure plan would include a federal infrastructure bank that would administer a renewed Build America Bonds program.
Ruling on public sector union dues my lead to rating upgrades, over the long-term. In the first half of 2016, the U.S. Supreme Court may effectively establish a right-to-work law for state and local public employees throughout the U.S. in Friedrichs v. California Teachers Association. Such a decision could, over time, reduce the number of state and local employees covered by collective bargaining agreements (CBAs) and as a result improve bond ratings in a handful of cases.
Though CBAs themselves have neither a positive nor negative credit impact, inflexible collective bargaining agreements have exacerbated recent cases of municipal distress (e.g., San Bernardino, Stockton, Detroit, Vallejo, etc.). States have sought to suspend such deals during fiscal crises, typically for the benefit of creditors.
Rating agencies also now explicitly consider restrictive CBA provisions when assessing credit quality. Fitch Ratings’ newly proposed tax-supported rating criteria favors issuers “where management has full control over compensation and work rules.” Moody’s has begun emphasizing the credit benefits of public sector right-to-work laws more often as well.
As Table 1 illustrates, a state’s right-to-work status is highly correlated with the incidence of public sector collective bargaining agreements. The precise outcome of Friedrichs is uncertain, but based on the court’s recent decision in Harris v. Quinn (2014), there are likely at least four votes in support of a decision that would result in a right-to-work rubric for state and local government employment.
Pace of credit improvement is slowing. Entering 2016, upward credit momentum was waning. As the graphs below suggest, there is little additional room for improvement. Outstanding state and local debt has mostly stabilized at around 16% of U.S. GDP. An unprecedented 82% of city finance officials report that they “are better able to meet their fiscal needs,” and reserves appear to have stabilized. As mentioned above, the default rate is also very low.
The new equilibrium for state and local credit fundamentals is weaker than prior to the recession. State and local government structural deficits have settled at -0.9% of U.S. GDP for six consecutive quarters after bottoming out at -1.9% in 2009 (Figure 6). In addition, the country’s economic growth is not as broad-based as it used to be. Only 20 of the nation’s 382 metro areas reported positive real GDP growth of at least 3% in 2014, down from 215 in 2004. Moreover, as we discussed in last year’s credit outlook, state and local revenue volatility has increased.
Costs likely to rise on account of delayed infrastructure maintenance. The cost of repairing essential infrastructure is one reason for state and local governments’ structural deficits. As Figure 7 illustrates, infrastructure continues to age across major credit sectors. Many issuers have purchased today’s lower debt levels and improved reserves, in part, with tomorrow’s infrastructure dollars. This is likely to prove an expensive strategy. Standard & Poor’s estimates that if every U.S. state financed its “infrastructure gap” with tax-supported debt, overall state debt ratios would increase from their 2014 level of 2.9% of U.S. GDP to 7.6% in 2020. In our view, this estimate is a bit aggressive, but it nonetheless underscores that delayed maintenance is a material credit issue. Growing infrastructure needs will likely be financed by (a) increased debt issuance, (b) privatization, (c) higher user fees and taxes, (d) budget cuts for non-transportation priorities or (e) possibly more federal aid (e.g., like this year’s five-year extension of the Highway Trust Fund). The first four approaches could prove politically contentious and negatively impact credit fundamentals to varying degrees.
Many issuers have purchased today’s lower debt levels and improved reserves, in part, with tomorrow’s infrastructure dollars.
High pension debts. Underfunded pension plans continue to challenge municipal issuers. As Figure 8 indicates, pension and retiree healthcare costs continue to absorb a growing share of local expenses. We expect no material change in this trend over the next several years for a variety of reasons.
- In some states, courts continue to establish very high thresholds to reform pension benefits. In May 2015, the Illinois Supreme Court ruled that public pension benefits, including cost-of-living adjustments (COLAs), are essentially guaranteed by the state’s constitution. The Oregon Supreme Court ruled in a similar fashion when it overturned part of that state’s 2013 pension reform bill. The Illinois case is likely to extend to Chicago’s recent municipal employee pension reform and other municipal reforms in Illinois, if challenged.
- Outside of court, some issuers are having trouble keeping in place recently enacted pension reforms. Recent events in California underscore the challenge. In December, Los Angeles rolled back its 2012 pension reform under threat of a union lawsuit. San Diego’s voter-initiated pension changes were overturned by the California Public Employment Relations Board.
- More public pension plans are lowering their assumed investment rate of return. As Figure 9 demonstrates, public plans are preparing for an era of lower asset returns. Lower return assumptions will compel higher annual contributions from state and local employers, which may lead to additional budget pressure in some cases.
- Nonetheless, return assumptions likely remain too high. The median public pension plan continues to assume investment returns of 7.8% annually, but this contrasts with many respected money managers who expect far lower returns. BCA Research (the Bank Credit Analyst) expects a balanced portfolio to produce a nominal return of only 4.4% per year over the next decade.
- New pension disclosures required by the Government Accounting Standards Board (GASB) may alter investor perceptions of pension risk over the next few years. With a few adjustments to the new disclosures, analysts can, for the first time, compare issuers’ pension debts on an apples-to-apples basis. Also, the new disclosures provide more clarity about the pension burdens facing school districts and other political subdivisions participating in state-administered multi-employer pension plans. We expect the new disclosures to color rating agency and investor attitudes about pension risks in some cases. This could cause an uptick in ratings dispersion and pricing weakness for some credits.
- Over time, the new pension disclosures may induce issuers to fund liabilities more aggressively. When GASB’s last update to pension disclosure standards was implemented in 1994, the additional transparency provided further incentive for state and local governments to fund pension obligations with more discipline, even though the disclosures themselves mandated no formal approach to funding.
We continue to expect that most state and local issuers will ably manage their pension challenges. Pension costs remain affordable for most issuers, and even if asset returns fall short of expectations over the next decade, consistent employer contributions should ensure plan solvency in most cases. Still, pension risk is unlikely to abate anytime soon. Pension liabilities are hard to measure, politically sensitive and inject a material amount of uncertainty into credit assessments.
Pension liabilities are hard to measure, politically sensitive.
Distressed credits remain under heavy scrutiny. A handful of issuers remain a risk to the market insofar as they threaten to create new legal precedents or alter long-standing repayment norms. They include:
- Puerto Rico. The outcome of Puerto Rico’s ongoing debt crisis is highly uncertain. However, no large default is expected until July, when the commonwealth owes upwards of $1.9 billion across a variety of debt instruments. That includes approximately $780 million in general obligation bond payments. Absent negotiated agreements with creditors or a congressional solution at that time, a sizable default may ensue. Whatever course is taken, market participants are mostly concerned with (a) how Puerto Rico treats its GO bondholders relative to its COFINA creditors and (b) whether any new bankruptcy or control board approach is applicable to a state in a future debt crisis.
There is a good chance that Congress will act before July. House Speaker Paul Ryan has set an end of March deadline for a “responsible solution” to the issue. Based on a review of the latest proposals, a solution is likely to include some or all of the following: (a) additional aid for Puerto Rico, (b) a mechanism by which Puerto Rico can restructure some of its debt (Chapter 9 or otherwise) and access financing, and (c) significantly more oversight of Puerto Rico’s finances. Congress may also create a financing corporation akin to New York City’s Municipal Assistance Corporation in the 1970s. The administration’s proposal, which includes a restructuring of all of Puerto Rico’s debt and a bankruptcy regime for federal territories, seems unlikely for the time being.
A brief summary of the latest legislation is below.
- San Bernardino. San Bernardino’s plan of adjustment continues to include a substantial impairment of the city’s pension obligation bonds. Roughly $50 million is owed on the bonds, and the city’s latest plan would pay only $640,000 of that amount over 20 years. The market will be watching closely to see whether the court permits this impairment given that San Bernardino is paying other unsecured creditors (e.g., CalPERS) 100% of their claims and can arguably afford more.
- Stockton. A bankruptcy appeals court recently made clear that Stockton was within its rights when it classified certain unsecured bonds in the same class as its retiree healthcare claims. The ruling increases the likelihood that unsecured bondholders will be grouped with disparate creditors in future instances of distress. Grouping disparate creditors in the same class in a bankruptcy enables a municipality to reduce recoveries by sidestepping cumbersome cram down rules. In Stockton’s case, retiree healthcare creditors out-voted bondholders to approve a recovery value that bondholders believed was low.
So what is life after bankruptcy? Though each credit above has a prolonged recovery ahead of it, recently bankrupt municipalities show some signs of improvement. Continued credit amelioration among these issuers may convince other municipalities that bond defaults are survivable events. Since December 2011, home prices in Vallejo, Stockton and San Bernardino are up 94%, 80% and 79%, respectively. Detroit’s water and sewer system spinoff refinanced old water and sewer revenue bonds for a savings of $38 million in December 2015. The deal was significantly oversubscribed.
Headline risks loom from major themes in the marketplace. Credit weakness in Atlantic City and Detroit’s public school system—and to a much lesser extent in Chicago—are likely to keep default and bankruptcy worries in investors’ minds in 2016. Pension and delayed infrastructure problems characterize credit stress at the state level, including in Illinois, New Jersey and Pennsylvania.
U.S. Federal government budgeting quandaries. Despite our rosier view of federal risks this year, the federal government’s long-term financial trajectory remains unsustainable. In its latest budget projections, the Congressional Budget Office expects federal deficits to begin increasing again in fiscal 2018. This estimate excludes $680 billion (over ten years) in new deficit spending enacted as part of the above mentioned legislation. As we discussed last year (see: 2015 Credit Outlook), states are more reliant today on federal revenues than in the past. Over time, the federal government may be forced to reduce spending on Medicaid, transportation, education and other priorities. Alternatively, future efforts to balance the federal budget could crowd out the ability of state and local governments to raise revenue. This would be a credit negative for states, local governments and non-profit issuers.
Limited Opportunities in A-Rated Bonds
The slow trend of credit improvement coupled with historically tight credit spreads for state and local government A-rated debt suggests that there will be limited relative-value opportunity in A-rated general obligation and appropriation-backed bonds.
As Figure 10 illustrates, A-rated credit spreads are at their lowest level since the recession. A-rated bonds are likely to underperform in either of two scenarios: (1) Interest rates rise and the spread between A- and AAA-rated bonds increases, or (2) the economy deteriorates and credit risk takes on more importance (or both). In the latter scenario, local governments with pension- and infrastructure-related risks seem most vulnerable. These issuers are also most likely to have had their bond ratings raised via recalibration in in 2010. As we have outlined in previous work, the credit characteristics of A-rated local government bonds are not as strong as they once were (see: Credit Strategy for the Second Half of 2013: Finding Value in A-rated Bonds, June 2013). By contrast, if the economy performs as expected, it seems unlikely that A-rated spreads will fall much further.
In the A-rated space, we remain more comfortable with issuers better insulated from political risk. If spreads widen during the year, we would consider taking advantage where appropriate.
Conclusion: Favorable Trends Continue, But Credit Selection Important
Credit fundamentals remain sound entering 2016, but the trend of credit improvement that has characterized the last several years is slowing. While key credit metrics like reserves and debt levels are now significantly better than they were prior to the last recession, the overall health of U.S. state and local governments remains strained. Collective state and local government structural deficits persist and fewer metro areas are growing as fast as they were. Pension and infrastructure costs are two major drivers of these deficits, and they are likely to continue to pressure budgets for the foreseeable future. In this environment, we remain cautious about investing in A-rated bonds at current valuations, especially A-rated GO and appropriation credits.
 In Friedrichs v. California Teachers Association, the Supreme Court will consider whether states can compel public employees to pay union dues associated with collective bargaining costs. The case could effectively create a right-to-work law for public sector employment throughout the country.
 For wages, see the Bureau of Labor Statistics’ quarterly National Compensation Survey. For home prices, see the Federal Housing Finance Agency House Price Index, October 2015. According to the FHFA monthly purchase-only index, home prices are back to their pre-recession peak. However, other indices, like Case-Shiller, report levels slightly below the pre-recession peak.
 Moody’s Investors Service, U.S. Public Finance Outlooks, December 11, 2015.
 Fitch Ratings, ACA Drives Uncompensated Care Lower – Benefit to Hospitals, January 6, 2015.
 Federal Reserve, Flow of Funds, Table Z. 212, December 2015.
 Based on the median general fund balance ratio, as reported by Merritt Research Services, for 1,000+ cities and counties with a population in excess of 20,000 residents, fiscal 2009 to fiscal 2014.
 There were only 54 defaults across all market sectors in 2015 and no local GO defaults. Data from Municipal Market Analytics, through December 18, 2015.
 Devitt, Caitlin, “Wayne County Consent Decree Features Debt, Labor Requirements,” The Bond Buyer, August 11, 2015, and Moody’s Investors Service, Chicago’s Wastewater Revenue Bonds Now 100% Fixed Rate, a Credit Positive, October 20, 2105.
 Breckinridge,The Changing Status of Statutory Liens, November 2015. Available at: http://www.breckinridge.com/insights/whitepapers.html?year=2015.
 West Texas Intermediate (WTI) crude prices, U.S. Energy Information Administration and Federal Reserve Bank of St. Louis, June 2015 through January 2016.
 Midland and Odessa’s fiscal 2014 comprehensive annual financial reports.
 National League of Cities, City Fiscal Conditions 2015, p. 5, Fall 2015.
 The “doc fix” refers to Congress’ annual vote to increase baseline Medicare reimbursements to physicians.
 Center on Budget and Policy Priorities, Greenstein: Budget Deal, Though Imperfect, Represents Significant Accomplishment and Merits Support, October 27, 2015 and Greenstein: Assessing the Tax Provisions of the Bipartisan Budget and Tax Deals, December 16, 2015. See, also, Fixing America’s Surface Transportation (FAST) Act, and Demko, Paul, “CBO’s take on doc-fix bill unlikely to derail it,” Modern Healthcare, March 25, 2015.
 See: https://www.hillaryclinton.com/briefing/factsheets/2015/11/30/clinton-infrastructure-plan-builds-tomorrows-economy-today/.
 At issue in Friedrichs is whether there is a distinction between union dues that finance political activities and union dues that support non-political activities (such as the costs associated with negotiating collective bargaining agreements). Under current law, states can mandate contributions to unions from non-members to pay for costs associated with non-political activities such as negotiating collective bargaining agreements. However, if the court rules that all union dues are, de facto, political in nature, then current law in some states may unconstitutionally abridge non-members’ free speech rights. (see pp. 14-16 of the writ of certiorari, available at: http://www.scotusblog.com/case-files/cases/friedrichs-v-california-teachers-association/). Effectively, all state and local public-employee union membership would be voluntary. This is the experience of private sector employees in right-to-work states.
 For example, see Michigan’s Act 436 and Mich. Comp. Laws §141.1636(9).
 Fitch Ratings, Exposure Draft: U.S. Tax-Supported Rating Criteria, p. 13, September 2015.
 For example, in its recent rating for Richland, South Carolina’s general obligation bonds Series 2015A, Moody’s analysts wrote that “Richland County has a long history of strong management with prudent practices, which includes formalized policies. South Carolina counties have an institutional framework score of "Aa," or strong … Additionally, as a right to work state, South Carolina school districts have strong expenditure-cutting flexibility (emphasis added).”
 Although we are in general agreement with the rating agencies that managerial flexibility is broader in right-to-work states, there is limited empirical evidence to suggest that intransigent unions or restrictive collective bargaining agreements lead to bond defaults. As we outlined in Perspective on the Chicago Public School Teacher’s Strike, Municipal Labor relations & Implications for Investors (September 2012), today’s public sector labor practices are an outcrop of the often fractious relationship between governments and their employees. In some cases, collective bargaining agreements can serve to bring order to the budget process and day-to-day operations. In addition, there are plenty of examples in which a highly unionized issuer exhibits sound credit quality. For example, New York State has a highly unionized public sector workforce, but its pension plan is well funded, and Moody’s Investors Service has upgraded its bond rating by two notches since the economic downturn (to Aa1, currently). By contrast, credit quality has eroded in Louisiana, a state with relatively low union penetration in the public sector.
 Bureau of Economic Analysis GDP data and NIPA Table 3.3 “State and Local Government Current Receipts and Expenses,” December 2015. The term “structural deficit” refers to the difference between current receipt and current expenses. The BEA expense figures include the cost of depreciation and pension and OPEB contributions.
 Bureau of Economic Analysis regional GDP data. Note that only 280 of the metro areas reported any positive real growth compared to 347 in 2004.
 Credit Outlook 2015.
 Standard & Poor’s, U.S. State Debt Levels May be More Sustainable Than the Condition of the Nation’s Infrastructure, October 19, 2015.
 Note, however, that some issuers may benefit in 2016 from employing a five-year smoothing strategy for contributions. For these issuers, stock market losses experienced in 2009 are no longer being smoothed-in. This should result in modestly lower contribution rates for some issuers.
 In re Pension Reform Litigation, 2015 IL 118585.
 Moro v. State of Oregon, SO61452, April 30, 2015. In the Oregon case, the court determined that COLA benefits were contractual in nature, and thus, required a very strong justification to impair. This contrasts with the Illinois case, which established that pension benefits cannot be impaired under either a contracts clause analysis or under the plain language of the state constitution which prohibits any impairment or diminishment of benefits and is suggestive of a guarantee regardless of the presence of a contract.
 Chicago’s municipal employee pension plan was reformed under P.A. 98-641. A district court judge ruled in July 2015 that reform violated the Illinois constitution, and the city has appealed the case to the Supreme Court.
 Webster, Keeley, “Los Angeles Ross Back Pension Reductions,” The Bond Buyer, December 8, 2015.
 State of California decision of the Public Employment Relations Board, PERB Decision No. 2464-M, December 28, 2015.
 Boston College Center for Retirement Research, Public Plans Database, 2013 and 2014.
 BCA Research, Stuck in a Rut, January 2016. The term “balanced portfolio” includes a mix of 65% stocks and 35% bonds — this is more-or-less on par with the asset mix in many public pension plans.
 GASB statements 67 and 68.
 GASB statements 25 and 27.
 Marxauch, Sergio, The Endgame: An Analysis of Puerto Rico’s Debt Structure and the Arguments in Favor of Chapter 9, Center for a New Economy, December 9, 2015.
 Plan for the Adjustment of Debts of the City of San Bernardino, California, May 29, 2015. Available at: http://www.wsj.com/articles/judge-rejects-san-bernardinos-bankruptcy-proposal-1450966499.
 Chapter 9 plan confirmation requires no unfair discrimination in a cram down situation. The pension obligation bonds (POBs) are on parity with San Bernardino’s pensioners. Can pensioners receive 100% of their claim while pari passu bondholders receive just over 1%? Judge Meredith Jury has asked the city to better justify why its proposed impairment of its POBs is reasonable. See: Stech, Katy, “Judge Rejects San Bernardino’s Bankruptcy Proposal,” Wall Street Journal, December 24, 2015.
 In re: City of Stockton, Bk. No. 12-32118-CMK, December 11, 2015.
 Based on median home prices per Zillow.com.
 Turk, John, “Bondholders OK Detroit debt transfer of $4 billion to Great Lakes Water Authority,” The Oakland Press, December 4, 2015.
 CBO analysis of HR 2029, as cleared for the president’s signature, December 18, 2015. Available at: https://www.cbo.gov/publication/51098.
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