How Does Dual Sovereignty Translate for Municipal Bankruptcy?

November 24, 2015. Share on Twitter

Rebuilding Detroit. After decades of population decline (In 1950, there were 1,849,568 people in Detroit. In 2010, there were 713,777), by the time the Motor City filed for chapter 9 municipal bankruptcy, Detroit was home to an estimated 40,000 abandoned lots and structures: between 1978 and 2007, Detroit lost 67 percent of its business establishments and 80 percent of its manufacturing base. Detroit had lost more than 1 million people since 1950, and the city now has an estimated 80,000 abandoned buildings. Worse, it was those who could afford to leave who did: according to the census, 36 percent of its citizens by the time of its filing with the U.S. bankruptcy court were below the poverty level. Detroit was what the ever so fine writer Billy Hamilton called “either the ghost of a lost time and place in America, or a resource of enormous potential.” Ergo, unsurprisingly, a key goal of the city’s plan of debt adjustment approved by Judge Rhodes is regrow—to bring in talent. Mayor Mike Duggan has made clear the city is welcoming Syrian refugees, noting Detroit can support 50 Syrian families annually for the next three years and is “moving down that road.” Moreover, at least until the attacks in Paris this month, Michigan Governor Rick Snyder was as strongly committed to scouring the globe for talent to help in the city’s recovery, even asking the Obama Administration early last year to use its executive powers to designate 50,000 extra visas to the Detroit metro area for high-skilled immigrants. Citing Detroit’s devastating population loss and the need to jump-start the Motor City economically, Governor Snyder—a former CEO for Gateway Computer and head of a venture capitalist firm—called on his state to “embrace immigration.”

It is noteworthy that in our nation of immigrants, it is Europe which is currently dealing with 4 million Syrian refugees: the continent’s economic juggernaut, Germany, has been most frank about one of the reasons it is accepting a large portion of the Syrians: it has an aging population and needs younger workers to help pay into the pension system that will support their rapidly growing baby boomers in retirement. Detroit, facing far greater economic challenges and severe depopulation, clearly recognizes an economic opportunity. Indeed, Republican attorney Richard McLellan, who served in the Ford and both Bush administrations, and worked for Michigan Republican Governors William Milliken and John Engler this week noted: “We have a city like Detroit that needs human capital, we have agricultural interests that need people to harvest their crops and we have the largest Arab community in the country.” Mayor Duggan, who discussed refugee issues with Obama administration officials last month during a two-day Washington, D.C., trip, said he remains comfortable with the refugee-vetting process, adding Detroit has vacant housing that could accommodate refugees, as well as support agencies and a large Syrian and Middle Eastern community in the surrounding area, adding that all mayors are “conscious of this terrorist threat,” which is “very real.” Nevertheless, he called accepting refugees a “very human issue,” adding providing “refuge” to victims of terror “is what this country is all about: We stand in Detroit prepared to do our share.”

Rethinking Detroit’s Future. An aging America means a growing country of retirees outliving their savings—or outliving projections from their state or local pensions. The pensionary challenges are even harder in cities such as Detroit, which not only found their public pensions devastated by criminal behavior by former city elected leaders, but also, with one third, a poorer third, of a population, that translates into fewer contributions coming in to support a growing sea of retirees. To date, since the city’s emergence from the nation’s largest municipal bankruptcy, and especially due to the path-breaking genius of U.S. Judge Gerald Rosen, the cash flow relief Detroit has achieved, largely due to debt haircuts and suspension of pension contributions, appears to have generated better than expected fiscal outcomes for FY15: preliminary information indicates, sakes alive, a larger than estimated surplus. Nevertheless, potential apprehensions are emerging with regard to its pension situation less than a year after exiting municipal bankruptcy, leading to speculation that the adopted plan of debt adjustment approved by U.S. Bankruptcy Judge Rhodes may prove inadequate, especially with regard to what at least one analysts has described as the city’s “effectively insolvent pension system.” Some guesstimate a pension gap of as much as $80 million in the wake of turning to the use of more current mortality tables and underperforming investment returns, among other issues—with the gap projected to grow to $195 million from its current $114 million by 2024, depending, of course, on how the actual performance varies from projections and expectations. From 2024-2034 the city’s pension contribution is estimated at $1 billion.

Tempus Fugit. In ancient Rome, the Latin expression “time flies,” has come to mean in state and local finance terms, time is running out for fiscal sustainability—and nowhere sooner right now than for Puerto Rico, where the U.S. Commonwealth’s sand will run out next Tuesday, when the Government Development Bank must make its $354 million debt payment—or must decide to default on the debt because of Puerto Rico’s because worsening liquidity situation. It even appears that some of Gov. Padilla’s advisers have been encouraging the Governor to default, sensing that such a fiscal action might force creditors, including hedge funds, to the negotiating table, or might trigger greater urgency from a somnolent U.S. Congress. There appears to be growing understanding that, absent the process created through chapter 9 municipal bankruptcy, there could be scores of lawsuits by creditors—suits which would not only consume years and years of costly litigation and appeals—a process for an island already Boa constrictor squeezed by $72 billion in debt and a stagnant local economy, but leave a defaulted husk which would not be able to make any court ordered payment. Thus, perhaps unsurprisingly, some of the Commonwealth’s key creditors are beginning to indicate interest in a government proposal to overhaul Puerto Rico’s—almost as if we are at the beginning of an outside the court plan of debt adjustment process—all occurring not before a federal bankruptcy court, but rather a unique effort to avoid a default.

By last week, in meetings with advisers to creditor groups, a chief governmental adviser, Jim Millstein, had offered a proposal to exchange Puerto Rico’s current outstanding municipal bonds for new debt—some term it a “superbond”—debt which clearly would alleviate the threat of imminent default for Puerto Rico on its outstanding full faith and credit general obligation bonds—bonds which carry a guarantee in the Puerto Rico constitution stipulating that debt must be repaid before just about any other expense. That offer appears to have opened the door to discussions with as many as six hedge funds and other investment firms which own general obligation bonds in support of some kind of a debt exchange. The exceptionally insightful MMA analysts carefully note that “Such a plan is legally, politically, and operationally problematic; however, hurdles like these have been cleared in previous municipal restructurings, implying that this may be the PR team’s best idea yet,” adding that “Non-adversarial, non-litigious proceedings with bondholders would likely become impossible should [those] defaults occur.”

Hear Ye! The acceleration of the negotiations in Puerto Rico and the U.S. Senate come in the wake of the Supreme Court’s agreement to consider Puerto Rico’s appeal [15-108 Puerto Rico v. Valle, Luis M., et al] of lower court rulings that the U.S. bankruptcy code preempted the territory’s attempt to pass its own restructuring law last summer. The involvement now of the third branch of the federal government raises the issue with regard to what the legal “status” of Puerto Rico is, and what the territory’s legal and constitutional relationship to the United States is, with the certiorari petition to the court noting: “This is the most important case on the constitutional relationship between Puerto Rico and the United States since the establishment of the Commonwealth in 1952.” The specific issue is how the Double Jeopardy clause and the “dual sovereignty” doctrine apply to criminal prosecutions brought against the same defendant in federal court and the Puerto Rico courts: the Double Jeopardy Clause protects against successive prosecutions only by the same sovereign. In our unique constitutional form of dual sovereignty, where States are, ergo, defined as separate sovereigns, the question is whether the Commonwealth of Puerto Rico should be treated similarly to a State for purposes of double jeopardy.

In effect, a key issue is whether Puerto Rico is a distinct sovereign from the national government or still a “territory” of the United States for constitutional purposes, so that when Puerto Rico enacts laws, is it exercising the powers of autonomous self-government, or only the powers that have been delegated to it by Congress. Thus, the courts of Puerto Rico are in essence courts of the United States, Puerto Rico and the United States are “the same” sovereign, and once there has been a federal criminal conviction, a defendant cannot be tried for the same crime in the Puerto Rico courts. On the other side, the argument of the government of Puerto Rico is that the relationship of the United States to Puerto Rico, which the United States took possession of from Spain after the Spanish-American War of 1898, was fundamentally transformed in 1952, when Congress and Puerto Rico entered into a “compact” that created the Commonwealth of Puerto Rico. As a result, Puerto Rico held a Constitutional Convention and adopted its own popularly-ratified Constitution, which the United States Congress and the President approved. Since then, Puerto Rico has been a self-governing entity in much the same way as the States and should be considered a separate “sovereign,” entitled to prosecute criminal defendants under its own laws, for purposes of the Double Jeopardy Clause.

The court’s decision will be a defining moment to determine what Puerto Rico is and what its current and future relationship to the United States is and will be, especially given divided decisions below: the 1st Circuit, which appears to have with the greatest expertise with regard to Puerto Rico issues, has long held that Puerto Rico is a separate sovereign for double jeopardy purposes. The Puerto Rico Supreme Court, in contrast, in the pending case, overruled its prior decisions and held that Puerto Rico is not a distinct sovereign. Stay tuned.

Unpassing Grades & Bad Math Scores. S&P has put the already junk-rated Chicago Public School system under a BB rating, with S&P analyst Jennifer Boyd writing: “The CreditWatch action is based on our view of the board’s lack of progress in meeting the assumptions in its fiscal 2016 budget for Chicago Public Schools.” The CPS budget assumes $480 million of pension help from the seemingly dysfunctional state government, already in a budget lock-down for five months, jeopardizing CPS’s solvency—and now promising further fiscal distress when CPS goes to market to borrow some $1 billion, reportedly as early as January, in the wake the December release of the district’s fiscal 2015 comprehensive annual financial report, which has been delayed in many previous years. In addition to $500 million for ongoing capital projects, CPS hopes to use the new debt in an effort to defer $250 million of principal payments for budget relief, and cover fees to cancel swaps now in default due to its credit deterioration: CPS faces more than $200 million in termination payments to cancel its swap contracts based on recent valuations. While Illinois Gov. Bruce Rauner has offered the idea of the legislature to amend Illinois law so that CPS could file for Chapter 9 municipal bankruptcy, Chicago Mayor Rahm Emanuel and CPS chief Forrest Claypool have dismissed the notion. CPS Chief is pressing for state help, saying such help simply bring Chicago level with other districts throughout the state, noting: “Chicago’s children are 20% of the state’s enrollment, and their families and neighbors provide 20% of the income tax money that funds public education in our state,” but, according to Mr. Claypool, the Chicago district only receives 15%. The district’s $6.4 billion budget relies on $200 million of previously announced cuts, $480 million of state help to make the district’s $688 million teachers’ pension fund payment, $250 million of debt restructuring, $75 million from reserves, $62 million from tax-increment financing surplus revenues, and $80 million in higher property tax revenue to close a billion dollar deficit. There appears to be, after years of one-shot practices and accounting gimmicks, partial pension payment holidays, and shifts in the timing of tax collections, a fiscal recognition: Mr. Claypool notes, referring to CPS: “Frankly, they borrowed money we didn’t have, year after year, because it was better than the alternative — laying off teachers, increasing class sizes and taking resources from the classrooms…With the district at junk-bond status, we’ve run out of one-time tricks. We’re nearing a breaking point. And without a solution, our schools will look very different next semester and next year.”

Federalism, Governance, & Municipal Bankruptcy

November 23, 2015. Share on Twitter

Leadership & Governance—and Contracting Out in Municipal Bankruptcy. San Bernardino’s pursuit of exiting municipal bankruptcy amid changing leadership and an absent state government has witnessed the resumption of an effort that commenced before it even filed for chapter 9 bankruptcy, with the Council voting 6-1 to contract out its waste services–a part of its proposed plan of debt adjustment in bankruptcy: outsourcing or contracting out its trash services. While, in the scope of the challenges to fiscal sustainability, the move might appear small; it displays some finesse and appears to have gained the support of not only the affected 100 employees—who will not lose their jobs, but rather work for Burrtec—the winning bidder, but also provide for a $5 million upfront payment from the corporation to the city and then a steady stream of $2.8 million annually in franchise fees. Who says that cities cannot be part of the emerging, sharing economy? As part of its agreement with the bankrupt city, Burrtec pledged to keep all 72 existing full-time employees, move 28 part-time employees to full time, retain salary levels and benefits, and provide employees a bonus of another $500,000 total (which would be $6,900 per full-time employee if split evenly). An added bonus, from San Bernardino’s perspective: the city projects it will also save some $20 million it would have had to set aside for equipment depreciation.

Offering a Potential Alternative to Municipal Bankruptcy. With Congress seemingly unwilling to consider providing Puerto Rico the option of bankruptcy available to every other corporation in America, the Senate Environment and Public Works Committee, which has jurisdiction over the U.S. territory, is developing a legislative proposal which it believes could help Puerto Rico via what one staffer likened to a federal control board, such as was facilitated for the District of Columbia—albeit, as the Romans would put it, tempus fugit, or the time to act is fast fleeting: ever moody Moody’s credit rating service expects Puerto Rico to default on a portion of a $354 million payment due next week; the Commonwealth has already defaulted on municipal bonds issued by its Public Finance Corp. The potential proposal in Congress comes as the Puerto Rico legislature last week approved legislation to establish a local fiscal adjustment board, whose five members would be appointed by the Governor. Delegate Pedro Pierluisi, Puerto Rico’s non-voting Member of Congress, opposes the concept of a federal board to oversee the territory’s finances: he believes the idea smacks of colonialism—although it appears to have been a successful alternative to municipal bankruptcy in both New York City and Washington, D.C.—and is not all that different than the Financial Review Commission created to oversee Detroit’s recovery from municipal bankruptcy over a decade. Indeed, the emerging concept, successful in D.C. and New York City under the incomparable leadership of former Empire State Lt. Governor Dick Ravitch—as well as consistent with the suggested approach of Senate Judiciary Committee Chair Charles Grassley (R-Iowa)—who will hold a hearing on Puerto Rico on December 1st —the same day the U.S. territory could default on some $355 million in municipal bond payments coming due—to learn “more about the root cause of the problem and discussing possible solutions,” according to his spokesperson, might point towards increasing consensus, even as the Obama Administration’s plan, supported by Congressional Democrats and the Puerto Rican government, focuses on granting Puerto Rico broad municipal bankruptcy powers—seemingly, to date, a non-starter in Congress.

Moreover, any alternatives appear unlikely: Gov. Alejandro Garcia Padilla’s calls for concessions by the island’s municipal bondholders scattered across every state has made little headway. In addition, the territory is experiencing an increasing rate of emigration from the island to the mainland—but an emigration that is leaving behind those in greatest poverty—in effect imposing greater fiscal demands on the government even as its fiscal resources are bleeding faster.

The lead electric guitar player from the Indubitable Equivalents, retired U.S. Bankruptcy Judge Steven Rhodes, who oversaw the bankruptcy trial of Detroit, and who has been in Puerto Rico trying to use his experience and skill to help, in an interview with the Bond Buyer, said Puerto Rico needs to be put on life support and the way to do it would be through municipal bankruptcy—or for the appointment of a central control person or board, preferably designated by the federal government, to spearhead the proceedings in place of Puerto Rico’s Governor and legislature, noting: “It is very tough on the people on the island, it is very tough on existing politicians, but the closest analogy is that when an entity like Detroit or like Puerto Rico goes into bankruptcy, they are on life support…And extraordinary measures have to be taken to assure the survival of the patient,” adding that Puerto Rico’s fiscal sustainability challenges of unpayable bond debt and unfunded pension liabilities closely resembled those of Detroit, where, he stated: “In Detroit, we contracted democracy to a significant extent. When it was over, we handed it back to [city officials] and told them it was their responsibility to make it work…That is what I advocate for Puerto Rico.” Judge Rhodes, in the interview, noted that in every type of bankruptcy case, whether it is corporations, consumers, or municipalities; structural reforms have to be coupled with bankruptcy to help solve whatever problems got the debtor into insolvency in the first place: “There has to be a complete top to bottom review of everything the island does, from water to electricity to tourism to manufacturing to shipping and see where efficiencies can be obtained and where the opportunities are and pursue them with vigor…That is exactly what Detroit and its emergency manager did and it’s working.”

Balancing Essential Public Services & Debt. Judge Rhodes, in his interview, noted that a key element of any plan of debt adjustment involves balancing paying back the debt and providing citizens with essential services: “The advantage of bankruptcy is that people will still continue to get their police, their fire, their emergency medical, their roads, their educations, their power, their water, even though the defaults are taking place.” Now, as Puerto Rico nears a fiscal cliff in the coming days, Judge Rhodes noted that Congress could still make a difference by passing chapter 9 municipal bankruptcy legislation—even if it acted after Puerto Rico had begun defaulting—a key point, with the territory almost certain to default on some of its debt by next Tuesday. Indeed, Plato-like, Judge Rhodes posed the question: “Does there come a time when bankruptcy can’t help? I don’t think so…The conventional wisdom is that the longer an entity that is insolvent waits to file bankruptcy, the more challenging and more expensive the bankruptcy becomes.”

Investing on the Motor City’s Future. Detroit’s two multibillion-dollar pension funds for its employees and retirees are poised to invest funds for the first time since the Motor City emerged from chapter 9 municipal bankruptcy and a public corruption scandal which not only landed its former mayor in prison, but also savaged the pension funds of more than $97 million. Six pension fund officials and businessmen were found guilty of crimes following a corruption trial last year. Now, in the wake of the city’s emergence from the largest municipal bankruptcy in history, the two funds, which control some $5 billion in assets, are preparing to invest assets critical to more than 25,000 retirees, active workers, and beneficiaries—almost all of whom received pension and benefit cuts as part of the city’s approved plan of debt adjustment by Judge Rhodes. The return to the market for the funds comes in the wake not just of a lengthy review of the funds’ investment portfolios and changes made in asset allocation, but also the implementation of new overseers and investment rules incorporated in the plan of debt adjustment to prevent the kinds of bribery and kickback scandals that contributed so significantly to precipitating Detroit’s fiscal collapse.

The city’s General Retirement System, with assets of $2 billion, but liabilities of $3.2 billion, is faced with another problem: the city’s declining population—upsetting the teeter totter, because of the imbalance of greater numbers of retirees un-offset by smaller numbers of employees paying in. Ergo, a key part of the city’s approved plan of debt adjustment is a strategy to reverse the human ebb tide, and bring back more people to live and work in Detroit. One can glean that with 5,389 current active members in its retirement system, but 9,737 retirees. The balance is hardly equal. Thus, there are multiple challenges, including the key steps to ensure and protect the funds: All investments are being overseen by independent committees made up of individuals with finance and investment backgrounds, including members appointed by Gov. Rick Snyder—that is, a new level of oversight—one intended to replace the system that contributed so precipitously to the city’s default: pension fund boards approving investments with, in some cases, friends, acquaintances, and businesspeople who lavished board members with cash, gifts, and free trips to the Caribbean. That means changing investments too: dropping individual real estate investments—important contributors to the corruption scandal. The General Retirement System pension fund is likely to hire multiple firms to oversee the fund’s fixed-income portfolio early next year as part of a broader restructuring.

By the end of November, the Police and Fire Retirement System pension fund, which has assets of $3.3 billion, and liabilities of $4 billion—and a fiercer teeter-totter imbalance of 3,164 active members compared to 9,228 retirees—could hire two firms to manage a $150 million investment in global low-volatility stocks—or 5 percent of the pension fund, aimed at protecting against the kind of losses seen during the 2008 global financial crisis: the Police and Fire Retirement System’s fund investments are being overseen by a nine-member board, the majority of whom were appointed by the state as part of Detroit’s plan of debt adjustment—as well as part of the ongoing effort to eliminate the chance politically connected or bribe-paying business persons could, once again, obtain multi-million-dollar deals from the pension funds, according to officials.

Leadership & Governance in Municipal Bankruptcy

November 20, 2015. Share on Twitter

Leadership & Governance in Municipal Bankruptcy. An important factor in the Detroit, Central Falls, and San Bernardino municipal bankruptcies was the absence of leadership—or, worse, depravity by elected and/or appointed leaders. Lack of accountability to citizens, and lack of a mechanism or means of oversight where the municipal elected leadership has failed, or such leadership has simply become dysfunctional is a severe hurdle in states where such state authorization to file for chapter 9 does not provide any state oversight authority—such as in Michigan, Rhode Island, or other states. Thus it mayhap marked an important turning point this week for San Bernardino’s elected leaders to facilitate the early departure of its City Manager, Allen Parker, who began as manager in February of 2013, so that one might say he has been at the very eye of a most powerful fiscal storm—albeit an expensive remedy for a municipality in bankruptcy: the offered and accepted severance package of nearly a third of one million dollars is, after all, a high price for a bankrupt municipality, and means there will be that much less for the city’s post-bankruptcy rebuilding. Nevertheless, it was a vital step if the city is to be able to regroup and get its fiscal recovery act together.

Indeed, it is interesting to learn of Mr. Parker’s post-departure perspective (he officially departs the city in six weeks, leaving a Twilight Zone interlude), and his perceptions with regard to the issues and challenges he perceives for his city and what San Bernardino’s path forward could be. Yesterday, in an interview with the San Bernardino Sun, he noted that a “lot of people want to hold onto what San Bernardino was when they grew up, and such,” adding, however: “Those days are gone.” Speaking to his governance perspective, he said the city had basically been “run for many years by Mr. Penman,” referring to the long and influential tenure of San Bernardino City Attorney James F. Penman, who, while he was not a member of the City Council, believed that as an elected official it was his role to enter policy debates—a belief, Mr. Parker noted, which contributed, from his perspective, to a lack of professional staff with the ability to manage the city. At the same time. Mr. Parker said he felt that governing dynamic was changing—that there is what he described as a “good core of staff to move forward.”

The process—and the fiscal outcome of the governance process—which led to Mr. Parker’s departure, however, occasioned, unsurprisingly, a less than supportive citizen reaction at a closed session City Council meeting last evening, when the Council members received unhappy feedback with regard to the reports of Mr. Parker’s generous severance package—a package which appeared to be the cause of visible anger of some of the city’s elected leaders, albeit leaders who declined to speak publicly about this week’s turn of events. Nevertheless, one citizen written comment, read aloud at the session by the City Clerk, noted: “Mr. Parker had every opportunity to negotiate a contract at the time he was hired…He and the city agreed that no severance pay was appropriate. I agree. That constitutes a gift of taxpayer money.” The commenter added that while a smaller severance might have been justified because the City Manager had chosen to come to San Bernardino at a time of significant fiscal distress and political dysfunction, the idea of getting rid of Mr. Parker was one that received his enthusiastic endorsement, but on the issue of at what price, the constituent noted: “Do I want to get rid of Parker? Yeah, I agree with you…Do I think we should pay him a dime? No…You’re going to have hell to pay if you give him a penny.”

Offering a Potential Alternative to Municipal Bankruptcy. With Congress seemingly unwilling to consider providing Puerto Rico the option of bankruptcy available to every other corporation in America, the Senate Environment and Public Works Committee, which has jurisdiction over the U.S. territory, is developing a legislative proposal which it believes could help Puerto Rico via what one staffer likened to a federal control board, such as was facilitated for the District of Columbia—albeit, as the Romans would put it, tempus fugit, or the time to act is fast expiring: ever moody Moody’s credit rating service expects Puerto Rico to default on a portion of a $354 million payment due next month; the Commonwealth has already defaulted on municipal bonds issued by its Public Finance Corp. The potential proposal in Congress comes as the Puerto Rico legislature earlier this week approved legislation to establish a local fiscal adjustment board, whose five members would be appointed by the Governor—although Delegate Pedro Pierluisi, Puerto Rico’s non-voting Member of Congress, rejected the idea of a federal board to oversee the territory’s finances, claiming it smacked of colonialism. Nevertheless, the emerging concept, successful in D.C. and New York City under the incomparable leadership of former Empire State Lt. Governor Dick Ravitch—as well as consistent with the suggested approach of Senate Judiciary Committee Chair Charles Grassley (R-Iowa)—who will hold a hearing on Puerto Rico on December 1st to learn “more about the root cause of the problem and discussing possible solutions,” according to his spokesperson, might point towards increasing consensus, even as the Obama Administration’s plan, supported by Congressional Democrats and the Puerto Rican government, focuses on granting Puerto Rico broad municipal bankruptcy powers—seemingly, to date, a non-starter in Congress.

Here Come Da Judges. As Chicago’s attorneys, earlier this week, sought to convince the Illinois Supreme Court that the city’s plan to save its pension program from insolvency does not violate the Illinois Constitution’s protection against reduced benefits, because it ensures there will be, for decades to come, money to keep those checks moving—or as the Windy City’s attorney Stephen Patton put it: “The participants are immeasurably better off with it, than without it”— with, in the second public pension-overhaul case before Illinois’ high court in eight months, Mr. Patton seeking to differentiate his arguments from a separate, landmark pension plan involving state-employee retirement funds which the Illinois Supreme Court has previously rejected; the path to legal success promises to be steep. Attorney Patton testified that shoring up Chicago’s pension accounts ought to trump (no Presidential campaign pun) the benefit reductions for 75,000 Windy city workers and retirees. The challenge: Illinois’ Constitution prohibits a promised pension from being “diminished or impaired,” but the issue before the Justices is a Legislature-endorsed plan which reduces automatic annual pension increases, while requiring a $750 million city property-tax hike over five years to cut down a $19.5 billion deficit in the next four decades. During this week’s oral arguments in the City of Chicago’s appeal of a July lower court ruling which voided the city’s overhaul of its laborers and municipal employees’ funds, the incomparable Matt Fabian of Municipal Market Analytics perhaps best captured the pessimism about the likely outcome and its implications: “Almost no one is optimistic in the market…It comes down to what the city does after.” The ever so wise municipal bankruptcy guru and Chicago resident Jim Spiotto notes: “The presumption is with the lower court so it’s always an uphill battle, but trying to read the tea leaves in oral arguments is always difficult: It will come down to whether the court views the pension clause as absolute or whether there is an ability on behalf of governmental bodies and workers’ representatives to come up with a bargained-for resolution,” adding that the issues and questions raised open the door to a larger, national question with regard to how to balance a state or municipality’s need to meet its obligations without harming its economic viability: “You need a resolution that allows a municipality to meet its obligations in a reasonable way that doesn’t destroy a government’s ability to grow and prosper.”

This Little Piggy Had None. Luzerne County, Pennsylvania leaders report they have insufficient fiscal resources to meet the municipality’s expenses for the remainder of this calendar year—and not even enough to make a December 15th $8 million debt service payment—with the municipality’s director of budget and finance, Brian Swetz, noting the county currently has only about $4 million in its general fund, even as it believes it will need $20 million to fund the government for the rest of the year—the amount to also cover payments to most vendors. Moreover, in order to meet other costs, such as payroll, health insurance, and debt payments – even without paying its vendors, the county would need $16 million. Municipal staff meetings this week made clear that with personnel costs consuming the bulk of the municipality’s budget; nevertheless, even were the county to forego making such payments for the remainder of the year, such cuts would be insufficient to cover the looming debt payment: they would only save about $7.5 million. Indeed, absent municipal bankruptcy, it appears the county’s only fiscal relief option would be to petition the Pennsylvania Court of Common Pleas for authority to borrow funds—a process, especially in the middle of holidays, for which there is little time. Even as the county is scrambling to find fiscal alternatives to stave off insolvency, it is beginning the process to define essential personnel and services—and the alternatives and consequences of a potential default on its Dec. 15th municipal bond payment—a potential default which would, as Mr. Swetz ruefully noted, affect the county’s “2016 tax anticipation note, the 2016 budget process, a lot of things. If you bought bonds in Luzerne County, this sends a message as an investor…It’s not going to send a good message.” The looming insolvency is already forcing a prioritization of the timing and order of vital municipal service shutdowns—especially as the county is legally required to provide some services, such as those provided through the courts, prison, and human services.

Untransparency, Democracy, State Roles, & Municipal Bankruptcy

November 19, 2015. Share on Twitter

Untransparency, Democracy, State Roles, & Municipal Bankruptcy. In the minority of states which permit municipalities to file for chapter 9 municipal bankruptcy, state laws differ considerably with regard to the role of municipal elected leaders—from states such as Michigan and Rhode Island, which confer state authority to name receivers or emergency managers—and bar or remove the municipal elected leaders—to states such as New Jersey with its hybrid system in which the Governor may appoint an emergency manager to “co-govern” with the city’s elected leaders, to states such as Georgia and California, where a municipality’s elected leaders retain full authority, and the state either plays no role (California) or contributes to making fiscal issues worse (Georgia). Thus, in these different municipal bankruptcies across the nation, different governance models have emerged—with those under which local leaders remain in charge demonstrating unique challenges. While Stockton leaders—and the city’s citizens and taxpayers—demonstrated extraordinary resilience in fashioning the city’s successful exit from bankruptcy, San Bernardino’s leaders, in southern California, have raised issues with regard to whether elected leaders might prove unable to actually produce a plan to exit what has become the longest municipal bankruptcy in American history. And it has raised this issue we have examined of the difficult balance—and question—whether elected local leaders who presided as a municipality went into insolvency can be trusted to lead such a municipality back to solvency.

In what has become its record breaking municipal bankruptcy, San Bernardino, yesterday, acted to make a key personnel change—a change acted upon in secret, without transparency, and with likely disruption to its already difficult path to exiting municipal bankruptcy—a change which will now require a critical personnel decision if the city is to be able to fashion a plan of debt adjustment which can gain the approval of U.S. Bankruptcy Judge Meredith Jury. Mayor Carey Davis yesterday called a special, closed-session Council meeting which listed only two agenda items: 1) San Bernardino’s ongoing municipal bankruptcy, and 2) the fate of its city manager—an agenda in which speculation is that the two items were related, as, indeed, it was subsequently disclosed that December 31st will by City Manager Allen Parker’s last day in the wake of Monday’s agreement by the City Council to a modification of his contract under which a year’s severance pay was added in exchange for his resignation, according to reports in the San Bernardino Sun. Nevertheless, notwithstanding that California state law generally requires actions taken during a closed session of the Council to be reported at the end of the session, San Bernardino City Attorney Gary Saenz said there had been no reportable action. Mayor Carey Davis yesterday refused to say whether a vote had been taken to terminate Mr. Parker’s service, adding: “That is not something that I can say.”

The relationship between the Mayor and manager has been fractious—at best: eleven months ago, Mayor Davis requested Mr. Parker’s resignation—a request Mr. Parker rejected, as he could under the city’s charter, under which such a firing or dismissal may only be made with the consent of two-thirds of the City Council—a two-thirds which the Mayor was unable to procure in the wake of last year’s closed-session annual performance review. The inability to gain a two-thirds vote meant that this week’s event was fashioned via a quasi-buyout, under which the San Bernardino City Council agreed to Manager Parker’s offer, made last month, to a severance package under which the bankrupt city would provide him with his full annual salary of $221,976, and benefits for himself and his spouse. This week’s agreement required a modification of the contract to which Mr. Parker and the City Council had agreed to before he began 2013, under which either he or the city could end his employment with 60 days’ notice, and under which he would be ineligible for any severance, but only for any unused leave time. Indeed, last June, the City Council rejected, on a 4-2 vote, an amendment to that agreement under which he would have been entitled to $110,988, or six months’ salary.

Will Gov. Christie’s Long Delayed Actions Help or Harm the Odds of Atlantic City’s Risk of Insolvency?

November 18, 2015. Share on Twitter

Rolling the Odds for Atlantic City’s Fiscal Future: Will Gov. Christie’s Long Delayed Actions Help or Harm the Odds of Atlantic City’s Risk of Insolvency? Moody’s analysts Josellyn Yousef and Orlie Prince provided comments and insights with regard to the so-called “rescue package” of the five bills adopted by the New Jersey legislature, but conditionally vetoed by New Jersey Governor Chris Christie. The bills, aimed at helping Atlantic City not to be forced into municipal bankruptcy, would provide fiscal assistance to help Mayor Don Guardian and the Council to stabilize the city’s finances and restore a fiscal path to sustainability. The long-delayed action by the Governor has, however, instead not only led to a long and costly delay in the restoration of critical revenues and fiscal certainty, but also opened up a proverbial can of worms within the region. Gov.  Christie, taking a brief break from his Presidential campaign, signed one bill, vetoed another, and conditionally vetoed the remaining three—conditionally meaning he would sign them were his amendments or changes to be made.

Gov. Christie signed the bill to grant additional state aid to Atlantic City’s school district; he vetoed the legislation which would have mandated Atlantic City’s casinos to provide health benefits to employees. The two analysts note there “is a reasonable chance the (remaining) three conditionally vetoed bills will be passed by the end of the year, because the Governor’s recommended changes do not seem onerous and the Governor intends on collaborating with the Senate President to iron out the differences,” noting that enactment of these three bills would be invaluable to Atlantic City in terms of enhancing its fiscal liquidity and enhancing the city’s ability to avoid being forced into municipal bankruptcy. The dynamic, if moody, duo, however, further wrote that “passing the bills would not cure the city’s long-term structural deficit. If the bills fail, the city’s liquidity will remain dangerously narrow, and it is likely the city would be insolvent without some other form of financial support.” Mayor Guardian and city staff are confident Atlantic City has enough cash to meet its mid-December debt service obligations of nearly $12 billion—and that even if the disputed, conditionally vetoed bills are not signed into law this year.

State-Local Tension. A key issue, unsurprisingly, involves authority. Thus, the question with regard to whom Atlantic City’s casinos should remit their payments in lieu or PILOT taxes has stirred not just a regional tempest, but also a state-local confrontation: Gov. Christie insists that $30 million of the $150 million in PILOT revenues go directly to the state: they may not pass go, but rather would bypass Atlantic City and go directly to the state—where they would be confined unless and until the city—a city already under quasi-state control under a gubernatorially appointed Emergency Manager—could demonstrate it had a sound fiscal plan. The decidedly moody analysts, however, warn: “Even if Atlantic City received the full funding available under the complete rescue package within the next two years, once the $30 million of additional PILOT revenues and the $30 million of ACA revenues sunset, the City’s expenditures will surpass revenues by $34 million.  The gap will widen further if the city is required to pay on the approximately $150 million of tax appeals it is currently negotiating.” Or, as the dynamic duo write, failure to act on the legislation mean that Atlantic City’s “liquidity will remain dangerously narrow and it is likely the city would be insolvent without some other form of financial support.” The long-delayed actions taken this week by Gov. Christie have created another adverse fiscal impact: they will almost surely force Atlantic City’s state appointed Emergency Manager Kevin Lavin, who had been set to release an update to his fiscal recovery last June, to delay again in order to reflect the latest, long-delayed actions by the Governor. Suffice it to write that it has been hard enough for Mayor Guardian and the Council to seek to govern—or co-govern—with the awkward presence of a Governor-appointed Emergency Manager as sort of a co-Mayor, but now to have still a further, long delayed series of fiscal steps taken by the Governor.

The Odds of Staying out of Municipal Bankruptcy

November 13, 2015. Share on Twitter

Rolling the Die: What Are the Odds of Fiscal Recovery? In the wake of Gov. Christie’s conditional vetoes of the package of bills intended to help Atlantic City avoid the need to seek bankruptcy protection and the threat to essential public services, New Jersey Senate President Stephen Sweeney and Gov. Chris Christie, in a joint statement after the veto, said they would meet soon to “construct a final and fast resolution” to Atlantic City’s economic and fiscal stress—even as the Governor is in a critical point in his quest for the GOP Presidential nomination. The conditionally vetoed key elements of a rescue package approved by the legislature would have allocated $33.5 million in redirected casino taxes to pay off Atlantic City’s municipal bonds—and now leave the beleaguered city facing layoffs by the end of the year as Mayor Guardian and the Council grapple with a continued credit crisis.

The conditional vetoes, however, appear to have stirred up a regional hornet’s nest, even as they put Atlantic City between a rock and a hard place. Atlantic City Councilman Timothy Mancuso said the city is counting on more than $33 million in PILOT funds to balance its 2015 budget, noting: “It’s down to the wire, and now everybody’s throwing in different plans…“We can’t have that.” Chris Filiciello, a spokesman for Atlantic City Mayor Don Guardian, said Mayor Guardian “supports Governor Christie and Senate President leadership on this issue, and is looking forward to legislation being agreed upon and signed into law as soon as possible.” The problem, as one participant noted, is the critical time lost because of the Gov.’s very last minute veto—or as one party noted: “The past 12 months was the time to produce realistic alternative plans — now we need to focus on finishing the job of getting Atlantic City and Atlantic County back on the path to fiscal stability.” Atlantic County Assemblyman Chris Brown yesterday stated he would not vote for a sweeping plan to change the taxes paid by Atlantic City’s casinos, proposing instead an alternative which would increase the casinos’ annual tax bills by about $88 million in 2016 alone while keeping the city’s marketing and development agencies from being gutted. The new plan would, he hopes, replace the proposed legislation, a bill under which casinos would make a collective $120 million payment for 15 years, instead of traditional property-tax payments. The scurry to come up with alternative fiscal options come at the onset of what now could become a challenging state-local standoff, as well as a regional fiscal struggle. Gov. Christie’s conditional vetoes of the so-called PILOT package, even though they would maintain the payment in lieu of taxes or PILOT agreement’s structure, would give the state greater authority and control over the funds the agreement directs to Atlantic City. Thus the 24th hour conditional veto has triggered not only a state-local power struggle, but also a regional tussle.

Atlantic County Executive Dennis Levinson said he agreed that the Casino Redevelopment Authority needed one of the bills, which would have redirected some $25 million to $30 million in casino Investment Alternative Tax (IAT) collections to municipal debt payments, and that the casinos have to be assessed properly: “(The PILOT bill) just prevents the casinos from appealing their taxes for 15 years…It can be simplified. Assess the casinos fairly, correctly, properly.” That is to write that every local government in the region has a stake (bad pun) in the outcome—and the continuing delays in agreeing upon an outcome, because Atlantic City’s fiscal base relies on its casinos—not just for revenues, but also for employment: in addition to property taxes, Atlantic City’s eight casinos pay 9.25 percent in taxes on their gross gambling revenue. The 11th hour action by a Presidentially campaigning Governor now creates fear of risk that virtually all of the casino properties’ revenue streams, including revenue from food, beverage and entertainment operations, and jobs could be at risk. Assemblyman Brown reports that, in 2016 alone, the changes he is proposing would bring in about $11.8 million more receipts from his proposed 1.25 percent investment alternative tax, which funds the Casino Reinvestment Development Authority (CRDA), while his other tax on casino revenue, an 8 percent levy used to help seniors and the disabled in New Jersey, would, he reports, see receipts increase by nearly $76 million. In comparison, the conditionally vetoed PILOT package would have eliminated the $30 million annual budget of the Atlantic City Alliance, the city’s main marketing arm, and virtually defunded the authority, which orchestrates large development projects in Atlantic City, instead using those dollars to pay down Atlantic City’s debt and expenses. Assemblyman Brown, however, asserts that under his proposed pan, increased receipts from casinos could keep the alliance and authority running with $8 million and $10 million in annual funding, respectively. The CRDA could also forward $5 million of its IAT funds to the city as part of a PILOT for properties it owns in the city, and the remainder of, which he estimates would be about $18 million next year, would go to Atlantic City: or, as he put it: “If we are serious about protecting the future of Atlantic County…we need to preserve CRDA to continue to reinvest in nongaming attractions…At the same time, we need to market Atlantic City to ensure our continued growth and success.” The Assemblyman’s plan also calls for deeper county involvement in property assessments and proposes permitting Atlantic County to participate in property tax appeals valued at $10 million or more.

Why Not Tax the Guy Behind the Tree? Steven Scheinthal, General Counsel for Golden Nugget owner Landry’s Inc., presciently reminds folks: “If anyone thinks that they’re going to tax the casinos more than they already are being taxed, then they live in la-la land…And I bet you there’s seven other casino operators that would feel the same way.” In Rome, where the expression was tempus fugit or time is flying, the long delay by Gov. Christie is now on the verge of fiscal consequences, after all: Atlantic City Business Administrator Arch Liston Tuesday, in an epistle, warned that Atlantic City employees in five departments could be facing layoffs by the end of the year: the letter, sent by and first obtained by, went to Atlantic City employees who work in the revenue and finance, health and human services, planning and development, public works departments, and the municipal courts—warning that such layoffs would take effect on Dec. 28. While the Governor delayed months in acting, Atlantic City faces an $11 million debt service payment due in December. That is not a payment that can be put off.

The Road to Recovery from Municipal Bankruptcy

November 12, 2015. Share on Twitter

The Road to Recovery from Municipal Bankruptcy. Jefferson County Commissioner David Carrington has put together a description what he labels “A Post-Bankruptcy Look at Jefferson County, Alabama” for a presentation at a Symposium on Modern Municipal Restructurings for Duke University this week to demonstrate the steps on the road out of what, at the time, was the largest municipal bankruptcy in U.S. history in Alabama’s largest county. Noting the county’s diverse economy, with a GDP ranking it 137th out of 3,134 counties, and its home to the Innovation Depot, the largest business technology incubator in the Southeast, as well as its robust rail and interstate transportation network, he pointed to last year’s 2014 new residential permits (in dollars) greater than 58 of Alabama’s—or some 19.2% of all the state’s 67 counties combined, as well as the balanced budgets the county has adopted each and every year since U.S. Bankruptcy Judge Thomas Bennett approved the municipality’s plan of debt adjustment. He also noted the county’s slimmed payroll: the county today has 1,000 fewer employees than when, 25 months after it emerged from municipal bankruptcy on December 3, 2013, adding the County long-term debt has declined by some $1.5 billion—more than one-third, and that the County has made significant structural changes, including closing an inpatient (not impatient) hospital, sold the nursing home assets, closed all four of its satellite courthouses, and achieved something which must make Chicago Mayor Rahm Emanuel most jealous: a county pension has a funded ratio of 105.6%. He reports that audits, which were three years past due when this Commission took office in 2010, are now actually published ahead of schedule. Mayhap one of the most important accomplishments might be a more constructive relationship with the Alabama Legislature, which has passed a replacement 1‒cent sales tax bill, an action which allows the County to refinance its school construction debt, a key step to providing additional funding for county operations, economic development, schools and community development, in addition to county debt retirement. On the economic recover front, the Commissioner reports that more than 1,300 condominium units are planned or under construction, along with a $30 million mixed use development in Midtown anchored by a 34,000 square foot Publix grocery store—and that new historic building tax credits enacted by the Alabama legislature have elicited more than $200 million in local investments in a metro region now ranked as the Top City for Millennial Entrepreneurs by Thumbtack, in addition to being ranked 6th overall and 5th for economic development potential among the Top 10 mid‒sized North, Central and South American “Cities of the Future.”

A Detroit International 911. Daniel Howes, the gifted Detroit News columnist and associate business editor, wrote a terrific column yesterday about Dovie Maisel, an Israeli architect for a cause called United Hatzalah, a network of trained volunteers in that country which responds to calls for emergency medical care in Israel’s largest cities and across the country — noting that Mr. Maisel is in Detroit as part of an international effort to work with Mayor Mike Duggan to see if the model could be replicated, with Mr. Maisel noting: “We are not coming to take any jobs. We are the community. We are coming to help them:” Detroit and its EMT units are in preliminary discussions with United Hatzalah to see if the Israeli concept, which is scheduled to be launched this month in Jersey City, New Jersey, could also be adapted for the Motor City—an audacious effort which is envisioned to complement, rather than compete with what Mr. Howes describes as Detroit’s “stressed EMT units.” The partnership would train community volunteers. Potentially it would create a cadre of skilled technicians who could apply for EMT openings in Detroit or the metropolitan region—with Mr. Maisel noting, carefully, that Hatzalah volunteers do not replace professional EMT units in Israel; rather, certified according to Israeli national standards, they are, nevertheless, often able to respond to emergencies more quickly, because they are embedded in their communities—so that they are closer. Indeed, the concept has similarities to the remarkable public safety partnership in No. Virginia, where a unique agreement between its local governments ensures that the first 911 response will come from the closest responder—irrespective of jurisdiction—an agreement which can make the difference between life and death—and, secondarily—savings. According to Mr. Maisel, in Israel, volunteers are not paid, and victims are not charged.

As Mr. Howes wrote: “It’s an audacious idea for Detroit, one Mayor Mike Duggan dismissed as fanciful in a city of 139 square miles with a population pushing 700,000 — until he heard the pitch and compared it to the city’s need to improve its response to emergency calls,” noting that in Israel, “a polyglot of ethnicity, religion and intermittent tension effectively bridged by United Hatzalah…a country of less than 8 million, the volunteer organization fields 700 emergency calls a day, carries 3,000 volunteers nationwide, and boasts an average response time of three minutes, even less in more densely populated major cities.” The organization use a fleet of 450 “ambucyles” volunteers use to answer calls, and counts 2,550 volunteer-owned vehicles that are used to augment its rescue fleet, adding: “With a budget of $10 million, all of it privately funded, Hatzalah maintains 40 branches across the country organized into eight districts — its volunteers treat victims regardless of ethnicity, sex or religion, with an ‘ultimate goal to save lives, to take the community and train them at all levels.’” As Mr. Howes writes: “This may be the right cause at the right time for Detroit. It could answer a public need, could ease pressure on EMT units, could teach volunteers from the city’s neighborhoods marketable skills, could tap an entrepreneurial vein in a (Mayor) Duggan administration generally open to alternative solutions, and could be funded by individual private donors and foundations”—especially in a city beset by an emergency response rate being among the lowest in the country. In this fascinating cross border effort, the Detroit Medical Center and Henry Ford Health Systems’ chief of emergency medicine are working with the Mayor’s office to assess the implications of trying to implement this potential international partnership—one which Mr. Howes forthrightly describes as “fraught with legal and medical issues, as well as reassuring union EMTs that the effort is not a back-door gambit to eliminate their jobs.”

Looming Default. The U.S. territory of Puerto Rico could default at the end of the month on at least a portion of its scheduled debt service payments—an event which would constitute its second default, as the island’s liquidity pressures increase: it upcoming fiscal obligations consist primarily of $354.7 million of debt service on notes issued by the Government Development Bank or GDB, which has less incentive to make a payment of $81.4 million in debt service on non-general obligation-backed debt, as the payment pledge does not benefit from constitutional protections. The greater sustainability risk is that the GDB may be forced to default also on the $273.3 million of GDB notes which are backed by Puerto Rico’s full faith and credit general obligation guarantee—a default, after all, which would likely trigger legal action—but an event long foretold: as Puerto Rico, without access to the kind of federal bankruptcy options available to municipalities across the rest of the U.S., but with a seemingly disinterested Congress, will have little option but to not make full faith and credit bond payments that would jeopardize essential government services, consistent with the rapidly approaching reality that “the Commonwealth cannot service all of its debt as currently scheduled.” Puerto Rico’s ability to meet any of its obligations is deteriorating, even as, like Nero, Congress fiddles.

The territory, absent access to external sources of financing, projects a negative $29.8 million cash balance this month, growing to a deficit of $205 million by next month. Even though some recovery is projected in early 2016 with the enactment of emergency liquidity actions, actions which could include utilizing tax revenues currently assigned to one or more government authorities and further delaying tax refunds, Puerto Rico’s November Financial Information and Operating Data cash projection report does not include any availability of funds at the GDB, noting its cash resources “may be fully depleted by the end of calendar year 2015.” Puerto Rico’s inability to sustain sufficient liquidity to meet its operating and debt needs, absent extraordinary measures or outside help or legal recourse, is now expected to lead to additional defaults. Even though, a government aide stated that Puerto Rico will make its scheduled December payment on GO guaranteed GDB debt, such payment will decrease what might be available for an approximately $330 million GO debt service payment due on New Year’s Day: that is, as Bloomberg noted: “While we expect the commonwealth to use all available measures to prevent a default on constitutionally protected debt, it has not been making the monthly sinking fund payments required for the 1 January payment since July 2015. Instead, it will rely on cash on hand in the Treasury’s single cash account to make the debt service payment, though as noted above the projected November and December balances in the fund are negative. The commonwealth is not eligible to file for bankruptcy and the absence of a debt-restructuring framework heightens risks to creditors because it prevents the government from using tools generally available to distressed corporations and some municipalities.” For his part, Puerto Rico Gov. Alejandro García Padilla the day before yesterday warned that if the island’s municipal bondholders do not agree to new terms on their debt, he will choose to pay for the needs of the people before paying the Commonwealth’s creditors: “…if they do not negotiate and force me to choose between creditors and Puerto Ricans, I’m going to pay the Puerto Ricans.’”

Providing Essential Services. Governor Alejandro García Padilla has said he will consider cutting hours for public workers to keep essential governmental services and functions running; he has already closed some schools, delayed tax rebates, and suspended payments to government suppliers. The Obama administration, lacking any constructive Congressional role, has, via the Treasury Department, proposed an assistance package that would sustain the island’s medical system by increasing reimbursement rates for Medicaid, which serves 46 percent of Puerto Ricans and is paid at rates 70 percent lower than in any U.S. state, according to the Puerto Rico Healthcare Crisis Coalition, a group of doctors, hospitals, and insurers. The proposed package would also offer some bankruptcy protections to help the government restructure more than $70 billion in debt—more than any state’s except New York and California. In return, under the proposal, Congress would gain more say over the island’s finances. Congressional leaders, however, report they will not agree to provide either any fiscal assistance—or municipal bankruptcy authority—unless Puerto Rico provides audited financial statements giving a complete picture of its finances, a challenge given that the self-governing U.S. territory missed a self-imposed Oct. 31st deadline for submitting statements from FY2014 and has yet to prepare FY2015 documents. Congress appears to want to impose a different standard than used for states with regard to chapter 9 municipal bankruptcy or other U.S. corporations, with Chairman Charles Grassley (R-Iowa) of the Senate Judiciary Committee claiming he “is waiting for some good-faith effort from Puerto Ricans.”