October 21, 2019
Good Morning! In this morning’s eBlog, we consider the FBI investigation of the Mayor of Taylor, Michigan on charges of racketeering, bribery, wire fraud, and money laundering, then we assess the City of Detroit’s efforts to protect its children, before returning to Puerto Rico to assess its status in the U.S. Supreme Court.
Mayoral Integrity? The FBI has subpoenaed documents about Taylor, Michigan Mayor Rick Sollars’ re-election fundraising while investigating the potential charges of racketeering, bribery, wire fraud, and money laundering, according to a grand jury subpoena. It appears investigators are focused on the use of the city-owned Lakes of Taylor golf course from 2016-18 and whether Mayor Sollars’ re-election committee or a third party paid to use the facilities, according to the subpoena.
The subpoena provides new insight into an ongoing corruption investigation which emerged publicly last February when FBI agents raided City Hall, the Mayor’s home and cottage, and the home and office of a city contractor: investigators seized campaign records and $206,493 from Mayor Sollars. Subsequently, they raided the home and business of a second businessperson.
Taylor, a suburb of Detroit, a municipality of just over 63,000 in Wayne County, is the 17th most populous city in Michigan: it was named in honor of former military hero and 12th President of the United States Zachary Taylor. Taylor Township was organized on March 16, 1847 from 24 square miles which had originally been part of Ecorse Township: it is 18 miles southwest of Detroit.
Although the grand jury subpoena was issued last April, it was only revealed this week in the wake of a Freedom of Information Act request—with said requestor subsequently, in an email to the Detroit News, writing: “It is apparent from the newly released federal grand jury subpoenas that Mayor Sollars may be facing multiple federal felonies: The detail contained in the newly released federal grand jury subpoenas seem to indicate that a number of city vendors have been spilling the beans with respect to Mayor Sollars and his campaign fundraisers.”
As of yesterday, prosecutors had not filed any criminal charges since searching the locations, and Mayor Sollars remains in office. It seems the golf course and banquet center has been a frequent setting for Mayor Sollars, who delivered his State of the City address at the facility just two days after the FBI raids. He has, unsurprisingly, professed his innocence. The grand jury subpoena sought documentation related to golf
fundraisers and cigar parties Mayor Sollars’ re-election committee has held at the golf course since 2016. The subpoena here specifically requested copies of checks, credit card documents, and records of any cash payments to the Lakes of Taylor related to the various events.
It seems Mayor Sollars’ election committee has not filed a campaign statement since last year, according to county elections records; a year ago, in October, the
committee reported a $162,382 balance. The campaign has hired the Clark Hill law firm to review campaign finance reports and correct irregularities involving contributions and expenses, according to attorney Michael Pattwell, writing: “Since this summer, the committee has been working with the Michigan Secretary of State to prepare amended campaign finance reports…Once the committee has amended those historic campaign finance reports, it will turn its attention to preparing and filing the more recent reports which had not been filed due to the federal government seizing the underlying records in an unrelated matter.”
During the City Hall search, investigators were seeking records linking the Mayor to property management owner Shady Awad, records involving the Mayor’s personal and campaign finances, as well as his casino activity, according to search warrant records obtained by The Detroit News.
Mayor Sollars was first elected nearly five years ago in the wake of serving two terms on the City Council and a career in private business as a partner of three Romulus-based manufacturing companies. Now, federal prosecutors are seeking to seize his home and vacation chalet in Lenawee County: they have filed liens to have the approximately $600,000 worth of real estate forfeited to the government upon conviction.
Suffer the Little Schoolchildren? When the Detroit public schools opened this year, the Detroit Public Schools Community District took steps to ensure that families were not afraid to send their children to school, regardless of their immigration status. Indeed, the system’s sanctuary policy bars federal immigration authorities, including Immigration and Customs Enforcement, from entering schools without a search warrant and district
personnel from collecting information on students’ immigration status. Compared to other states, Michigan does not have a large immigrant population—approximately seven percent of Michigan’s population is foreign born (compared to about 14 percent nationwide), albeit about 13 percent of the state’s school-age children have at least one immigrant parent. (Over 80 percent of the children of immigrant parents in Michigan are
born in the U.S.) Detroit Public Schools Superintendent Nikolai Vitti noted: “The trauma our kids are dealing with is very real: Every day, they don’t know if mami and papi are going to come home,” as he explained his recent announcement of new guidelines at a community meeting in the wake of highly publicized immigration raids of Mississippi poultry processing plants over the summer, where nearly 700 workers were arrested in
the biggest work site immigration enforcement operation in a single state: the Superintendent noted: “The immigration raids shocked our immigrant community and heightened the fear that already existed due to the positions of the president and his administration on immigration and immigrants in general.”
Recognizing that hundreds of children did not go to school for days after the raids, Superintendent Vitti considered it crucial to delineate the school district’s position: “The community meeting allowed our position to be better understood and empowered students and parents to know we supported and protected them,” at a meeting where he was assisted by Spanish, Arabic, Bengali, and Hmong translators—representing the most common languages spoken in the district. The event came in the wake of an epistle the District sent parents with a clear message: “School personnel have been directed not to allow any officials from Immigration and Customs Enforcement (ICE), U.S. Customs and Border Patrol (CBP) or other federal immigration enforcement agencies access to our school buildings or grounds.” The letter also said that personnel at the campuses had been directed not to provide any federal law enforcement agents with information about students. Protecting the city’s children has mattered, because Michigan has one of the nation’s highest rates of arrests for suspected immigration violations.
Getting Ready to Rumble. The U.S. Supreme Court will hear oral arguments tomorrow on the legitimacy of the debt restructuring being imposed on Puerto Rico by the PROMESA Financial Oversight and Management Board whose members were not confirmed by the U.S. Senate, with the U.S. Chamber of Commerce and the American Civil Liberties Union among the parties which have amicus briefs. A Supreme Court ruling in the case could have a far-reaching impact on the separation of powers between the executive and legislative branches. Likewise, the court’s decision could
invalidate the authority of the PROMESA Oversight Board—with questions for the court to consider related to the original Jones-Shafroth Act creating Puerto Rico as a U.S. territory, as well as reviewing decisions known as the Insular Cases and rule on the constitutional rights of U.S. citizens living in territories outside the 50 states.
The PROMESA Oversight Board had lost an appellate court lawsuit filed by the hedge fund Aurelius Investment and other hedge funds as well a labor union representing utility workers, when the First Circuit of the U.S. Court of Appeals ruled that the
appointment of members of the Oversight Board violated the separation of powers contained in the Appointments Clause of the U.S. Constitution, because former President Barack Obama’s appointees were not first confirmed by the U.S. Senate.
The federal government’s brief wrote that Congress acted, because “Puerto Rico faced the most debilitating fiscal emergency in its history” with the Commonwealth and its instrumentalities loaded with “around $71.5 billion in outstanding debt, more than the
whole annual output of the island’s economy…Their credit ratings had been downgraded to junk, leaving them unable to borrow money on the bond markets…Nor could they get debt relief through the federal or municipal chapter 9 bankruptcy code.” It was because of this “financial catastrophe” and “humanitarian crisis for the more than three million U.S. citizens living in Puerto Rico” that Congress acted. But the PROMESA Oversight Board and the federal government argue that the Appointments Clause does not apply in this case under Article IV of the Constitution, which empowers Congress to admit new states and administer the territories. So the question for the court is whether some
parts of the Constitution, such as the Appointments Clause, do not apply to U.S. territories.
For their part, the utility workers union, Unión de Trabajadores de la Industria Eléctrica y Riego Inc., represents employees of the Puerto Rico Electric Power Authority (PREPA), who, in their amicus brief, wrote that they have been “extremely harmed” by the “profound austerity measures” imposed by the Oversight Board on their salaries, bonuses, pension, and health plans, writing: “The Oversight Board has rushed to finalize as many actions as possible, all while holding an unconstitutional appointment, thus, having no authority to act.”
The appellate court, however, allowed the PROMESA Oversight Board’s previous actions to stand under the so-called de facto officer doctrine as long as a new Board was promptly nominated by the President and confirmed by the U.S. Senate. President Trump has re-nominated all of the current Oversight Board’s members since that ruling;
however, the U.S. Senate has not voted on confirmation.
In its brief, the U.S. Chamber of Commerce argues that the de facto officer doctrine should not be allowed to paper over constitutional errors: “Never before has the court endorsed use of the de facto officer doctrine to excuse structural constitutional errors that go to the core of preserving political accountability and protecting individual liberty,” as the Chamber requests that the case be remanded to the lower courts “unless and until the constitutional violation has been cured.”
The ACLU and its sister chapter in Puerto Rico have asked the Supreme Court not to use the so-called Insular cases to decide whether the members of the Oversight Board required Senate confirmation under the Appointments Clause. The Insular Cases from the early 20th century determined that residents of territories had only some of the protections of the U.S. Constitution: those rulings distinguish between incorporated territories destined for eventual statehood, such as Alaska, and unincorporated territories that were not. “The Insular Cases, which impose a second-class constitutional status on all who live in so-called ‘unincorporated’ territories, explicitly rest on outdated racist assumptions about the inferiority of ‘alien races,’ and depart in unprincipled ways from the fundamental constitutional tenet of limited government,” the ACLU said. Those Supreme Court decisions came under Chief Justice Melville Fuller, who also led the 1896 majority decision in Plessy v. Ferguson which established the “separate but equal doctrine” of racial segregation–albeit, as Rafael Cox Alomar, a Professor of Law at the University of the District of Columbia, who is one of four constitutional scholars who filed an amicus brief, wrote, the professors are asking the Supreme Court to either not use the Insular cases in deciding the case or that those decisions be overruled, describing them to the Bond Buyer as the “consequence of a racist approach: We are saying the Constitution fully applies to Puerto Rico.”
Motor City Assessments? Detroit and Wayne County elected officials are headed back to the state capital in Lansing to seek relief from the Legislature for fines and penalties that low-income homeowners have been assessed for years of unpaid property taxes. Mayor Mike Duggan, Wayne County Executive Warren Evans, and other local officials announced a proposal Wednesday that would lower the monthly payment plans for homeowners who owe back taxes by erasing 6 percent interest penalties and other fines which were added on top of their unpaid tax debts. Under the proposal, individuals earning less than $19,000 a year or a family of four earning less than $28,675 would qualify for the interest and penalties on their back tax bill to be forgiven, Mayor Duggan said: for an average homeowner paying $120 a month in taxes and penalties, the monthly payment would be reduced to $20 for the portion of property taxes which they still owe, according to the Mayor. Officials estimate around 20,000 homeowners in Wayne County who are behind on their taxes may fall under this income cap to qualify for the relief.
There are usually as many as 31,000 homeowners in Wayne County behind on their taxes, according to Detroit CFO Dave Massaron: most of these homeowners entered into payment plans as a result of a 2015 ordinance Mayor Duggan had advocated for which allowed the Wayne County Treasurer’s office to create a repayment plan. The
goal of the proposed relief of fees and penalties is to avert further foreclosures for unpaid taxes — one of the leading causes of abandonment and blight in Detroit’s neighborhoods. Or, as Mayor Duggan put it: “We’ve got to find a way for them to be out and from under this once and for all. And I think all of us should want those 30,000 people to not be living in anxiety over their house.”
State Rep. Wendell Byrd (D-Detroit), plans to sponsor the legislation seeking relief of the penalties, which are set in state law. This legislative effort follows several years of groundwork by housing advocacy groups, as well as the Quicken Loans Community Fund, which has funded door-to-door campaigns to educate low-income residents in Detroit on how they may qualify for an exemption of property taxes. Laura Grannemann, Vice President of strategic investments for the Quicken Loans,Community Fund, said, in a statement: “The city’s announcement today shows a clear commitment to increasing access to exemptions and dramatically simplifying payment plans…Once enacted by the state, this legislation will change the landscape for low-income Detroit homeowners.” The pool of homeowners who could qualify for the proposed relief would amount to “half of the city” residents facing potential foreclosure for unpaid taxes, according to Mayor Duggan, who acknowledged, however, that the proposed fee and interest penalty forgiveness program would not help every homeowner in Detroit who is struggling to pay back taxes and avert foreclosure.
Part of the political challenge is that a conservative, Republican-controlled Legislature is almost surely going to resist granting additional tax debt relief five years after the Legislature created the payment plan. Ergo, Mayor Duggan perceives the very-low income threshold for relief as having the most “realistic chance” of passing: “The easiest thing in the world as a politician is to stand up here and say, ‘I’m for everything, for everyone,’ when you know full well that when you actually get down to it, it’s not likely to get passed…We’ll see. By the time we’re done in Lansing, this will probably get modified. If we get more votes by making it more attractive, we’ll make it more attractive. If we get the votes to pass it by making it less attractive, we’ll make it less attractive.”
Housing & Undercutting Development & Recovery? At a hearing last week, David Woll, Principal Deputy Assistant Secretary for Community Planning and Development at the Department of Housing & Community Development, testified: “All of us at HUD stand shoulder to shoulder with the people of Puerto Rico,” Woll said during the hearing: “At HUD we are committed to the recovery of all Americans whose homes and communities were devastated by natural disasters, and we are steadfast in our stewardship of the funding and trust in us by you in your colleagues in Congress.” Rep. David Price (D-N.C.) noted in response: “HUD did fail to comply with the law.” HUD was supposed to deliver funding notices to 18 states hit by natural disasters by September 4th: the agency, indeed, successfully published all the notices except for the one for Puerto Rico. The notice’s publication would have allowed the territory to begin crafting a plan to help manage the disaster relief funds. Indeed, to date, Puerto Rico has received a third of the nearly $43 billion Congress allocated towards hurricane recovery efforts two years after Maria ravaged the U.S. territory. Indeed, some HUD officials have previously expressed concerns with regard to potential misuse of funds in seeking to explain or justify why the Puerto Rico funds have not been disbursed. Indeed, the Deputy Assistant Secretary defended the delay again at the end of last week by claiming that the delay was caused by alleged corruption and financial irregularities. Deputy Woll also referenced an audit from HUD’s Office of Inspector General into “Puerto Rico’s capacity to manage these funds” and the upcoming appointment of a financial monitor to review the disbursement of the money.
Not Diana Ross, but the Supremes. U.S. Supreme Court Justice Samuel Alito last week inquired: “Are you and your client here just to defend the integrity of the Constitution?…Or would one be excessively cynical to think that something else is involved here, involving money?” His query came in the wake of arguments from Donald Verrilli, for the PROMESA Board; Jeffrey Wall, for the federal government; and Theodore Olson, to whom the judge’s remarks were addressed. Mr. Olson’s client is Aurelius Capital Management, a hedge fund that invests in distressed debt. At stake are some $125 billion in creditor claims. (Aurelius was founded in 2006 by Mark Brodsky, formerly of Elliott Management. Both funds were involved in a fight with Argentina about its bonds five years ago, during which then President Cristina Fernández de Kirchner dubbed Aurelius “vultures.” The firm was among six funds which held out for full repayment. In 2016 they settled favorably and were paid a mere $9.3 billion. Aurelius now is seeking to get the U.S. Supreme Court to declare the Puerto Rico PROMESA Oversight Board unconstitutional, in the hope of improving on its offer to the territory’s creditors of 35-45 cents on the dollar.
The Issue: Under PROMESA, the Puerto Rico Oversight, Management and Economic Stability Act, Congress authorized the appointment of this oversight board to approve Puerto Rico’s budget and supervise its debts–somewhat akin to the chapter 9 municipal bankruptcy process in those states which have authorized municipal bankruptcy. Under PROMESA, then President Barack Obama was to appoint the board members, with no requirement to seek the Senate’s approval—which, according to our Constitution is needed for “officers of the United States.” Aurelius, in its brief, argues that this should cover the PROMESA Board members, and that, ergo, the PROMESA Board is unconstitutional. Indeed, both the Board and Trump Administration argue that the board’s business is “primarily local.” Lower courts, however, had disagreed. The Board was created to oversee bankruptcy proceedings unresolvable by Puerto Rico’s Governor, arguably implying that its powers supersede the Territory’s. But those lower courts also blessed the Board’s actions under the “de facto” doctrine, which allows actions by officials to stand, even if they are found to have been wrongfully appointed.
Last week, the Supreme Court devoted little time on the de facto doctrine; rather it focused on whether the Board acts locally, in the interest of Puerto Rico, or federally, in the interests of all Americans. Remarks from some of the Justices seemed to lean towards the latter—and thus towards Aurelius. Justice Elena Kagan noted: “One option could have been some kind of financial bail-out…(Congress “instead chose an option that had less financial cost for the American people as a whole. Justice Sonia Sotomayor probed the idea that the act gave the PROMESA Board members powers which ordinary local officials did not previously have.
Experts guesstimate the Court will render a decision by July: if it goes Aurelius’s way, it would be a mighty upset—and hugely disruptive for Puerto Rico. Already the PROMESA Board has collected and paid out claims, and issued $12 billion in bonds. Indeed, one federal witness noted: “I have no idea how one unwinds this.” From the hearing, the more conservative justices, who are in a majority, appeared to lean towards finding the Board Members to be Puerto Rican officers. That would appear to be a profound distinction from the intent of the Jones-Shafroth Act: indeed, as Justice Brett Kavanaugh asked of Mr. Olson: “If we conclude that the powers and duties here are primarily local…do you lose?”
But it certainly appears there will be few winners: already the PROMESA Oversight Board has concluded there may less money to pay bondholders than it has projected and Puerto Rico’s $18 billion in bank accounts allows for no additional money to pay bondholders, making those arguments in two documents it made public on the MSRB Electronic Municipal Marketplace Access web site last Thursday night: documents which had been circulated to bondholders over the last 30 days in confidential mediation talks. According to the Oversight Board, lower-than-projected levels of federal aid for reconstruction after Hurricane Maria may reduce economic growth. At the same time, government financial reports since Hurricanes Maria and Irma hit in late summer of 2017 have shown more revenue than either the PROMESA Board or the local Treasury Department had projected. Unsurprisingly, some bondholders have used those reports to urge a more generous settlement.
But the documents raise fiscal and governance doubts–as they make clear there has been a slow pace of disaster aid relief–and a concurrent deterioration of local or municipio government finances–enhancing the prospect that there might have to be quasi-chapter 9 municipal restructuring of the debts of those local governments.”
Professor Robert Chirinko of the U. of Illinois noted: “The Commonwealth Fiscal Plan Risks document does a nice job of discussing the many factors potentially affecting the surplus projections for Puerto Rico…Commonwealth Fiscal Plan Risks” points to several ways the PROMESA Board’s fiscal plan projections for revenue may be overly optimistic. As reactions to economic or political uncertainty, population could decline more quickly than had been projected. Another storm, financial crisis, or health epidemic could also be causes of greater migration.”
Puerto Rico could receive substantially less federal Hurricane Maria and Irma disaster aid than the plan had projected. The PROMESA Board’s “Commonwealth Fiscal Plan Risks” warns there might be a $30 billion shortfall on what it had projected to be $69 billion in aid, adding the FEMA assistance is also being delivered more slowly to the U.S. territory–even as the PROMESA Board said the federal government may also cut its funding of local Medicaid. In its report, the Oversight Board points out that 85% of the exceedance in FY2019 revenues compared with the May fiscal plan came from just four taxes: corporate income taxes, Act 154 foreign corporate excise tax, motor vehicles, and other General Fund revenue, indicating the potential fiscal vulnerability to Puerto Rico, because fiscal patters or experience often find that corporate income tax booms are usually followed by busts,: Puerto Rico is particularly susceptible because much of the corporate income tax revenue comes from just a few corporations.
With regard to structural reforms the report noted: “[T]he government is behind on implementing all of the major structural reforms required to drive economic growth on the island.” Of particular concern are the potential impact of energy and ease-of-doing-business measures. The board estimates the former would contribute $12.9 billion to surplus for fiscal year 2019 to 2049 and the latter would contribute $16.6 billion in that period. In addition, the Board said that its government fiscal measures are at risk. Due to local government inaction there is a possibility of reducing full time equivalent employment by 50% less than the fiscal plan envisions. That would cost Puerto Rico $20.3 billion from fiscal 2019 to fiscal 2049. In addition, the Board has determined that its efforts to curb healthcare costs are imperiled by poor implementation and new federal benefit requirements, noting that, together, these could cost the government $27.8 billion through fiscal 2049.
Mas Pena Adelante? The PROMESA Board’s fiscal plan projects to reduce subsidies to the University of Puerto Rico and municipios; however, a lack of progress in lowering these costs could force the central government to continue these subsidies–a continuation which might cost $16.3 billion through FY2049, with the Board noting that just over one-fifth of municipios rely on Commonwealth government subsidies for at least 40% of their revenue, and 41% rely on these subsidies for at least 30% of their revenue.