Do Fiscal Control Boards Work?

July 16, 2018

During the July Fourth holiday-shortened week, with very little market activity, I found myself wondering about whether fiscal control or oversight boards work for governments in distress and their investor creditors.

Given ever-changing market conditions and the uniqueness of each distressed situation, it’s hard to draw a single definitive conclusion. Just look at the experiences of the District of Columbia (DC), whose control board provided oversight from 1995 to 2001, and the Commonwealth of Puerto Rico, whose control board known as “Promesa” began in 2016. DC’s path – and its success – may be a model for Puerto Rico to follow in terms of enhanced financial reporting and the brick-by-brick rebuilding of its credit.

DC might be the brightest example of an oversight board, especially considering its last couple weeks. Not only has S&P and Fitch boosted their ratings of the nation’s capital to AA+– just one notch below AAA – but last week we saw Moody’s Investor Services add another upgrade, putting DC fully at Aaa. This is the culmination of years of hard work by the dedicated finance team in DC, including former CFO Natwar Gandhi and current CFO Jeffrey DeWitt. DeWitt has built an incredible team that has instituted best practices around disclosure, like hosting regular bond investor conferences. Given their credit rating upgrade last week, I’m really excited to see what the new ratings do to DC’s pricing when its $517mln general obligations hit the market this week. You can find complete details on the sale, including the POS, on which is the District’s corporate-style dedicated investor platform.

For a guy who’s been in muni’s as long as I have, it’s fascinating to consider how far DC has come since 1995. I can vividly remember back in the in the early ‘90s when DC was facing ballooning budget deficits and had little financial flexibility. It was a toxic situation from a credit perspective.

At the time, it didn’t seem like there were many options to solve all the issues of the government. Lo and behold, with the cooperation of the District and the assistance and guidance of the federal government’s financial oversight control board (known as the “District of Columbia Financial Responsibility and Management Assistance Authority”), there was a solution: a control board that had the power to appoint a CFO that would serve independently from DC, its Mayor and its Council. The control board also instituted a significant increase in DC’s financial disclosure, including new monthly reporting and long-term forecasting. It was not an easy time for the folks in DC, but they stuck to the plan and within a couple of years the District was balancing its budgets and on the way to financial stability.

The changes made were staggering, and both bondholders and creditors were paid. As we all know, credit ratings can be slippery on the way down, and sticky on the way back up. It’s taken years and years, but one look at the current bond rating and it’s clear that both the District’s commitment to financial discipline and its financial disclosure – along with the work of the control board – have put one of the country’s greatest cities on firm footing. Well played, DC.

Here’s a link to a really good refresher of DC’s recovery: The D.C. Revitalization Act: History, Provisions and Promises(PDF)

Buy-Side Investor

BondLink Perspective - Former Muni Buy-Side Investor