August 16, 2019
Good Morning! In this morning’s eBlog, we consider the ongoing governance challenges as Detroit continues to recover from its chapter 9 municipal bankruptcy, as we consider the role of surrounding Wayne County; then we head for the sunny Caribbean to assess the challenge of succession in the wake of an ousted Governor.
Forgiving Delinquency? Wayne County, Michigan is considering forgiving the delinquent tax bills of low income Detroit homeowners under a new program; however, that consideration is complicated by the County’s chief debt collector, who, last week, said not only that he was opposed to the idea, but also that it might be illegal. The new program, the Quiet Title Exemption Program, would have low-income Detroiters give temporary ownership of their homes to the Wayne County Land Bank, which, in turn, would then file a court case to erase the debt and return the homes to their owners. However, a key obstacle is whether such a practice would be legal: the land bank’s staff members said they have an opinion from Wayne County lawyers who blessed the idea; however, County Treasurer and Land Bank Chair Eric Sabree noted he does not believe judges can erase the debt. At a land bank board meeting last week, Treasurer Sabree reported he had consulted with attorneys, including those who work with land banks and other experts, noting: “Not one of them have any support for something like this: ‘The judge cannot extinguish taxes.’” The goal is to help struggling owners keep their homes, giving them a “fresh start,” according to Wayne County Land Bank Executive Director Daniel Rosenbaum. The good gnus, this year, is that foreclosures are down 5%; however, close to 34,000 properties are on repayment plans, according to the Treasurer’s office. Low-income Detroiters who qualify do not have to pay property taxes; however, unsurprisingly, critics have argued the yearly application process for the property tax exemption is cumbersome and many Detroiters apparently are unaware of the option and opportunity. To qualify, a household income of a family of four must fall below $26,104. Detroit would be the only city in the Wayne County to qualify currently, because it is alone in giving a 100% poverty tax exemption.
Under the proposal, owners who currently have a tax exemption, would be forgiven for past years in which they have obligations, with Wayne County accepting that they would have qualified in the past. If approved this year, the land bank hopes to start with about 80-90 homes, which officials estimated would mean erasing approximately $150,000 in debt: it would cost owners $500 to file to quiet title. The land bank Board last Thursday tabled the proposal; the Board hopes to call a special meeting in the next few weeks for further discussion. Chair Sabree had other concerns: he has argued that other taxing jurisdictions, such as the Detroit Public School District and library, were not consulted. In addition, he questioned whether Wayne County would be required to provide refunds to low-income owners who had the exemption, but whowere able to pay their past due tax bills.
For his part, County Executive Warren Evans is supportive: he noted: “We think it’s a good avenue to help some residents break the poverty cycle and keep them in their homes.” Director Rosenbaum added that this is a temporary program focused on assisting homeowners until the Michigan Legislature changes the law to allow retroactive tax exemptions—albeit, as the proposal has stalled in recent years, it is unclear whether this might not be an impossible dream; moreover, the City of Detroit, a key player, has yet to weigh in: a spokesperson for Mayor Mike Duggan said they were reviewing the Quiet Title Exemption Program and a possible retroactive tax exemption, with office spokesperson John Roach noting: “We are committed to reducing the financial burden on these individuals in order to keep them in their homes and are working hard to develop the best solution.” Most of the Census Tracts in Detroit, especially those with lower life expectancies, have more than 28 percent of the population living at or below the poverty line. Specifically, there are three census tracts in Detroit where the average life expectancy is between 62 and 65 and the percentage of the population living below the poverty line ranges from about 29-100 percent.
The Challenge of Succession. According to Puerto Rican folk history, Pateco buried the dead from Hurricane San Ciriaco, which savaged Puerto Rico one hundred twenty years ago. At the beginning of this month, Teofilo Torres, dressed as a gravedigger, said: “I already buried Ricky Rosselló…This is the coffin for Wanda,” referring to ousted Gov. Ricardo Rosselló. Former Justice Secretary Wanda Vázquez was, theoretically, next in line, but then, at the end of July, as we have noted, the former Governor nominated Pedro Pierluisi. The removal of the former Governor could prove cathartic, but Puerto Rico confronts both governance and economic challenges: it has suffered from years of economic mismanagement, a bloated public sector, and a 44.9% poverty level—more than thrice the national average. Moreover, the inadequate and discriminatory federal response to Hurricane Maria exacerbated its fiscal and physical challenges: it sparked sparking mass emigration to the mainland, leaving an older and poorer U.S. population behind. The government debt, which exceeds $120billion, including pension liabilities, is suffocating. The PROMESA Oversight Board has completed two deals to restructure some of the debt this year.
Now the ouster of former Governor Rosselló’s departure has focused attention on one of Puerto Rico’s most significant problems: corruption, which has been endemic for generations. Politicians on both sides offer sweetheart deals to their friends in business, which in turn generates the money needed to get elected. Or, as economist José Villamil put it: “The political system basically created an institutional infrastructure that promotes behavior which will lead to corruption sooner or later.”
Last month, the FBI arrested six individuals, including two members of the Rosselló administration, for directing $15.5m to favored businessmen. Douglas Leff, head of the San Juan division of the FBI, told Radio Isla: “It’s going to be a very busy summer for us.” A week later the Centre of Investigative Journalism, which originally published the leaked messages that led to the Governor’s downfall, reported that three of his associates, Elías Sánchez, Carlos Bermúdez, and Edwin Miranda, had benefited in various ways from their friendship with the former Governor. All three deny wrongdoing.
Now, with the swearing-in of its third governor in two weeks, Puerto Rico has now been tasked with learning to move forward in the aftermath of #RickyLeaks, the July 13th publication of 889 pages worth of text by the Puerto Rico Center for Investigative Journalism, in which then-governor Ricardo Rosselló mocked the island, Puerto Rican celebrities, and fellow politicians—leaks which led to twelve days of protest and the former Governor’s resignation, albeit, as Archbishop Roberto Octavio González Nieves of San Juan noted: “What pressured Governor Rosselló to step down was the result of a build-up of many years of frustration, difficulties, especially corruption within the government…The government was out of touch with the real needs of the people, especially after Hurricane Maria.” he said, describing the leaked chats as the detonator that set off an explosion of frustration, anger and marches. The former Governor’s administration at the time included Secretary of State of Puerto Rico Pedro Pierluisi, who assumed the role of Governor from August 2 until the territory’s Supreme Court ruled determined his being sworn into office unconstitutional on August 7. As a result, the former Secretary of Justice, Wanda Vázquez, was instituted as Governor immediately following Mr. Pierluisi’s resignation on that same day.
The governing challenge now will be to work to dismantle the system of patronage which has built up over years. Apart from the practice of favoring allies with government contracts, politicians have a habit of replacing officials across the government machinery with their own cronies every time there is a transfer of power. That leads a loss of expertise and experience each time. It will be further complicated by the query on the streets of San Juan: ‘Quien es encargado?” [Who is in charge?]. Is it the newly elected Governor, the 1st U.S. Circuit Court of Appeals, the PROMESA Oversight Board—which, early last month filed an “adversary proceeding” over unauthorized spending and a recently adopted law, Act 29, allowing the municipalities to not make retiree health care and pension contributions. When he signed Act 29, Gov. Ricardo Rosselló said the central government would make these payments for the municipalities. He said the law was a way to relieve financial pressure on the municipal governments.
Puerto Rico Oversight Board lawyer Martin Bienenstock said a law’s passage aimed at helping municipios contravened the PROMESDA Board’s authority on debt—in response to which, last month, through his legal representative, former Gov. Rosselló filed a motion to dismiss the Board’s case. Peter Friedman, the lawyer representing the side of the Governor and the other defendant, the Puerto Rico Fiscal Agency and Financial Advisory Authority, described the situation as one which has “been a crazy two weeks.” Under pressure from members of his party and from demonstrators, in the last few weeks former Gov. Rosselló resigned and had Pedro Pierluisi sworn in as his replacement; however, a few days later, the Puerto Rico Supreme Court declared Mr. Pierluisi’s selection invalid; since then the former Governor’s Secretary of Justice, Wanda Vázquez Garced, has become Governor.
Meanwhile, in response to the unrest in Puerto Rico’s government, Judge Laura Taylor Swain agreed to postpone the motion-to-dismiss hearing twice; however, she rejected a motion to do so a third time. Mr. Friedman, in a filing with the court last week seeking a postponement of the hearing, noted: “It is vital that Governor Vázquez be permitted to provide her guidance on Act 29 and the other aspects of the litigation regarding alleged patterns and practices of the office of the governor of Puerto Rico…Defendants have serious concerns that proceeding with the hearing on August 15 does not provide them with an appropriate amount of time to fully discuss and evaluate the significant legal and public policy issues at stake here, formulate their positions of them, and engage with the Oversight Board if they believe it is appropriate to do so.” However, Judge Swain issued a ruling that said despite the need for Vázquez Garced to review the case, it was best to avoid further delays in the case.
Meanwhile, last Thursday, PROMESA Board Chairman José Carríon and Executive Director Natalie Jaresko met with the new Governor in what appeared to be an effort to establish better relations.
Then, in the courtroom at the end of last week, the PROMESA Board’s attorney, Martin Bienenstock, argued over the issue with regard to whether sections of the Puerto Rico Oversight, Management, and Economic Stability Act authorized the local government’s actions and the Board’s attempt to overturn them: the issue involved whether the Board was seeking to invoke an an overly broad interpretation of section 204 of the PROMESA statute, which bars the local government from issuing or otherwise modifying debt without the Oversight Board’s authorization, to nullify Act 29. He also argued that the Board’s use of section 204 was inappropriate, because it allows local budgetary officials to “certify” laws as long as they are not “significantly” inconsistent with the fiscal plan. Writer Eric Friedman is of the view that the Board lacks the statutory right to challenge Act 29; however, Judge Swain pointed to a PROMESA section which she said prohibited the local government from doing anything inconsistent with a fiscal plan, asking, rhetorically, if the Governor “could blow an enormous hole” in the budget as long as he or she certified it to be consistent with the fiscal plan? Attorney Bienenstock said Law 106 from 2017 had, among other things, directed the municipal governments to send pension and retiree health contributions to the central government so the central government would use them for those purposes. (Former Governor Rosselló signed Act 29 this summer, amending Law 29 on the issue of the municipal transfers. Effectively, in Act 29, the central government had altered a debt the local governments had owed to it, Mr. Bienenstock said. PROMESA section 2017 bars the local government from altering debt, he added. The PROMESA Board has challenged two dozen resolutions appropriating funds for expenditures not in the board-approved budget. Mr. Bienenstock said that PROMESA section 204(c)(2) was aimed at preventing the local government from “reprogramming” money without first obtaining PROMESA Board approval, adding that through PROMESA section 205(a), the Board had authority to address aspects of government policy beyond the issue of their consistency with the fiscal plan.
Judge Swain said she would take the lawyers’ arguments under advisement and would later release her decision.