Puerto Rico & Greece: A Disparity

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July 6, 2015
Is Puerto Rico at the Tipping Point? Almost like an old hour clock, the sand is running out for Puerto Rico—defaults could occur as early as September—when an exchange of notes may be needed in order to maintain liquidity at the Government Development Bank (GDB) of Puerto Rico. With Puerto Rico running low on cash and Governor Padilla making clear the U.S. territory has no viable option but to restructure its debt, it remains to be seen if the rating agencies or other observers would see any exchange as voluntary. Last month, El Vocero reported that GDB leaders were meeting with investors about possible exchanges of up to $4 billion of GDB notes—an exchange, which, were it to happen—could avert the triggering of such note exchanges in September: the critical challenge, in effect, is to reorganize its debts without access to the U.S. Bankruptcy Courts, so Gov. Padilla has few options but to try and work with the government’s creditors. The government, in the financial report it released last week, at the end of its fiscal year, estimated it would end with a General Fund deficit between $705 million and $740 million, or 7.4 percent. Viewed from the perspective, however, of the report Gov. Padilla released last week, “Puerto Rico – A Way Forward,” which provided a far more comprehensive perspective and analysis, Puerto Rico’s General Fund government deficit in the just-ended fiscal year would be almost $2 billion—meaning the government now believes its FY2014 the General Fund ended with a $1.1 billion deficit—more than 30 percent greater than its initially announced $783 million.

An American Challenge. A swirl of events puts Puerto Rico’s looming insolvency in some context: Greek voters, by a significant margin, yesterday voted to reject the harsh conditions proposed by the European Union as a condition of a bailout. Mayhap ironically, the rejection came almost simultaneously with the award to the CEO’s of federally bailed out Fannie Mae and Freddie Mac CEO’s of annual salaries of $4 million, effective Wednesday. These two quasi federal agencies, which claim to be exempt from most state and local taxes, received a $187 billion federal bailout in 2008 to rescue them from insolvency. In contrast, of course, there has been no federal bailout of Detroit, Vallejo, Jefferson County, or Stockton—nor has one ever been contemplated for either San Bernardino or Puerto Rico. But what can strike one as perhaps odder is to contrast the significant efforts of the European union to reach out and help Greece compared to the seeming disinterest and unwillingness of the U.S. Congress to even provide a judicial process or access to a means to protect the health and safety of the U.S. citizens of Puerto Rico without any bailout. That is, while Europe is offering a conditional bailout to Greece with, admittedly, harsh terms; Puerto Rico has never requested a bailout: what it would like would be a federally, judicially overseen process to ensure continuity in its essential public services and a process overseen by a federal bankruptcy court to adjust its debts. 

Emergency Support. Gov. Rick Snyder last Thursday appointed a team to review Wayne County’s finances, a day after state officials determined the County is in probable financial distress, stating: “The individuals appointed today bring diverse and extensive experience to the review process…And given the county executive’s request for an expedited review, I have directed this review team to work as quickly and efficiently as possible, to establish a solid baseline of facts on the county’s finances and a report which we can collectively work from.” Gov. Snyder said members of the team include: Clarence Stone, director of Legal Affairs for the State Housing Development Authority; Jeffrey Bankowski, chief internal auditor, State Budget Office; Tom Davis, deputy director at the Senate Majority Policy Office; Sharon Madison, owner of design and construction firm Madison International, and Frederick Headen, legal adviser for the Michigan Department of Treasury. Mr. Headen brings experience as a former member of the financial review team for the city of Detroit that was appointed in December 2011. The review team will have up to 60 days to report to Gov. Snyder whether a financial emergency exists in Wayne County—albeit State Treasurer Nick Khouri, a member of the Local Emergency Financial Assistance Loan Board, said he expects the review to be completed within “weeks, not months.” The Michigan Board’s preliminary review found troubling conditions in Wayne, including:
• Deficits in the General Fund began in fiscal year 2008, with a deficit of $10.6 million. Without taking corrective steps, the county is projecting a $171.4 million deficit by fiscal year 2019;
• County officials had not filed an adequate or approved deficit elimination plan with the Department of Treasury since fiscal year 2010. No plan has been submitted for fiscal year 2014, which was due when the audit was submitted in March;
• During the past several years, the county’s taxable property values declined about 24 percent, reducing the amount of property taxes received. Since 2007, General Fund property tax revenues dropped more than $156 million, while total expenditures increased more than $50 million.
• The county’s primary pension plan is 45-percent funded and has a liability of $910.5 million based on the latest actuarial valuation in September 2013. In the past 10 years, the county’s underfunding of its pension plan has accelerated and its unfunded liability has increased to more than 18 times its 2004 balance.

Burning Issues in San Bernardino. The city of San Bernardino’s firefighters—even as the city is in municipal bankruptcy—are scheduled to receive a raise today—nearly a year after the city charter guaranteed it to them. The nearly $500,000 in base pay, overtime, pension, and post-retirement healthcare benefits from the bankrupt city will likely complicate the city’s trial—but reflect a separate reality: the severe drought in California and excessive heat have unleashed two major brush fires, both erupting just before the July 4th celebrations. The larger one, the Lake Fire, has consumed more than 31,000 acres in and around the San Gorgonio wilderness and southeast of Big Bear and has destroyed one home in the Burns Canyon area along with three outbuildings; the other fire threat, the Sterling Fire, came from the base of the hill east of Del Rosa Avenue in the City of San Bernardino. There is no way in putting together a plan of debt adjustment to anticipate the kinds of costly, essential services a city in bankruptcy might be called upon to provide. The fiery situation, however, is further complicated by apprehension by the city’s police union that it has still not received its COLA, which it claims is guaranteed by the same charter section (Please see box below for description of charter requirements.). Nevertheless, the City Council is not scheduled to approve that raise today. For their part, the city’s firefighters, apparently unaware of today’s council schedule, had issued a statement noting: “Judge Jury has made it clear that bankruptcy does not give city leaders license to ignore our Charter. The City’s decision to single out Firefighters for discriminatory treatment was both an inappropriate political act and a violation of law.” City Manager Allen Parker, who apparently was under the impression late last week that public safety units had already received raises, claimed the delay was another casualty of what he said was the fire union’s refusal to negotiate — a step technically required by the city’s charter. Mr. Parker added that he had forgotten about the raises until the firefighters told him at a recent meeting, adding that in most years, San Bernardino approves the salary change several months in August, and then retroactively pays the difference.

Section 186 of the city’s charter sets police and firefighter salaries as the average of 10 California cities with a population between 100,000 and 250,000. Each year, unions representing firefighters and fire management — and their counterparts in the Police Department — strike out the lowest-paying cities in the state, while city negotiators eliminate the highest-paying, until only 10 remain. In practice, that means the 10 cities represent the state average in pay for mid-sized cities. But critics of the charter section — which more than 55 percent of voters chose to retain in 2014, when presented with a ballot measure that would have set public safety salaries by collective bargaining as every other city in the state does — point out that San Bernardino, even before its bankruptcy, had median income far below the average mid-sized city. Among the 10 Southern California cities selected this year are Costa Mesa, Garden Grove, Irvine, Pasadena and Torrance. Collectively, for all of 115 of the city’s fire safety employees (firefighters, paramedic/firefighters, engineers and captains), the salary increase is nearly $258,000, and with overtime and related costs such as pension increases it adds, according to the city, $517,776 to the budget for 2014-15, the fiscal year that ended this week. The percent increase that individual employees will get varies by rank, ranging from 1.84 percent to 3.01 percent, and means monthly pay — before the overtime that tends to form a huge portion of firefighter salaries — begins at $5,679 for the least-experienced firefighters and reaches $9,349 for fire captains. That will be paid retroactively, as though it had gone into effect Aug. 1. No interest is paid.

July 2, 2015
Is Puerto Rico at the Tipping Point? Gov. Alejandro García Padilla of Puerto Rico has made clear the commonwealth cannot pay its full $72 billion in accumulated debt, a position backed up by this week’s report; rather the issue is how to come up with a credible plan to put the island’s finances and economy on sound footing, e.g. how to ensure the continuity of essential services while putting together a credible plan of debt adjustment—but, so far, without either the protection of municipal bankruptcy and its freeze of debts until such a plan is approved by a federal bankruptcy court, or any seeming possibility to come to an agreement with the island’s thousands of creditors. Thus, even though Gov. Padilla has made clear he is prepared to implement even deeper cuts in spending—on top of the 70,000 or nearly 25 percent cut in commonwealth jobs since 2009—he also recognizes that straight insolvency would have significant, life threatening consequences for thousands of his citizens. Thus, he is seeking some understanding from the commonwealth’s lenders, including mutual funds, hedge funds and other investors, to reduce the principal owed on some loans and allow more time to pay back other debts—even as it seems to have become increasingly clear that absent federal action to provide a time out in order for the island’s public corporations, such as its electric utility (PREPA) and highway authority, to restructure their $25 billion in debt in bankruptcy court (as every other corporation in the U.S. can), there is a growing risk to the Commonwealth’s future. To address its $47 billion in debt, the Gov. is asking creditors, voluntarily, to give Puerto Rico more time to pay back interest on its outstanding municipal bonds—bonds held by mutual funds and U.S. citizens in virtually every state in the U.S. With Congress not even in session this week, the Puerto Rico Electric Power Authority, PREPA, averted the most immediate fiscal threat when the public utility made its principal and interest payments on time—and reached agreement to continue negotiations with creditors to restructure its $9 billion of debt. Its bonds rallied. The utility also borrowed $128 million from bond insurers, including Assured Guaranty Ltd., with the provision that it will have to pay that debt back in December—an action that marked the first cliff and key step to avert default—and, maybe, a hint that its negotiations with its creditors may make some progress, not to mention free up some fiscal resources to modernize a public utility whose high electricity costs have left it saddled with unpaid bills. As part of the yesterday’s agreements, PREPA extended a forbearance pact with creditors until Sept. 15th, which will keep discussions out of court: that triggers a September 1st deadline by which the utility must negotiate a plan to overhaul its debts.

Help from the Capitol? Sens. Richard Blumenthal (D-Conn.) and Charles Schumer (D-N.Y) have announced they intend to introduce legislation to grant Chapter 9 bankruptcy authority to public entities in Puerto Rico—a companion bill to pending House legislation, albeit it remains somewhat uncertain whether a Senate version would be modified to give Puerto Rico itself authority to seek municipal bankruptcy. Under current law, unlike every state, Puerto Rico and other U.S. territories lack access to Chapter 9 bankruptcy authority to authorize municipalities to file for chapter 9 bankruptcy—a provision which allows a U.S. bankruptcy court to temporarily effectively freeze such city’s debt obligations to ensure that there is no interruption in essential public and life-saving services while negotiating with all its classes of creditors a plan of debt adjustment which would have to be approved by the federal court. That is, the House version of the bill would, if enacted, permit Puerto Rico to authorize its 147 municipalities access to federal bankruptcy—under whatever mechanisms the territory chose to impose, similar to the 36 states that have so acted; it would not, however, apply to Puerto Rico. Despite the introduction of the House version of the bill—introduced last February—the House Judiciary Committee has demonstrated no interest to date in acting. Its author, Rep. Pierluisi (D-P.R.) yesterday expressed his hope the bill would receive “careful consideration” in the Senate: “H.R. 870 does not require the federal government to spend a single dollar. It would simply grant the government of Puerto Rico a power that all state governments have, namely the ability to authorize one or more of its insolvent public enterprises to work out a path forward with its creditors under the supervision of a federal bankruptcy judge based on federal substantive and procedural law…It is clearly the best course of action for both Puerto Rico and its creditors. The alternative is a legal no-man’s land that benefits neither Puerto Rico nor those who have loaned the territory money.” Sen. Blumenthal responded to Politico that he and Sen. Schumer have received “strong interest” on the bill from both Democrats and Republicans. In perhaps a key change, the White House this week also expressed support for Congressional consideration of granting municipal bankruptcy authority to Puerto Rico, when White House press secretary Josh Earnest Monday told reporters there were “strong merits to having an orderly mechanism for Puerto Rico to manage the financial challenges of its public corporations if needed…We’ve urged Congress to take a close look at this particular issue…A Chapter 9 scenario that would be available to all of the 50 states is not one that’s currently available to Puerto Rico, and that’s something that only Congress can change.”

Emergency Support. Wayne County, one of the nation’s largest counties—and one which encompasses Detroit and other municipalities, as well as the insolvent Detroit Public Schools, and which is projecting a $171.4 million deficit by 2019 absent remedial actions—yesterday received some positive response to its request to the state: Michigan’s three-member Local Emergency Financial Assistance Loan Board approved a resolution of probable financial stress in Wayne County—a finding which triggers Gov. Rick Snyder’s authority to appoint a review team to take a deeper look at county finances. It could also, however, be a first step towards a state takeover or appointment of an emergency manager. The emergency loan board’s declaration is the first step in the process of declaring a financial emergency. Gov. Rick Snyder will now appoint a review team to delve deeper into the county’s finances. The team will then make a recommendation to Gov. Snyder, who will make the final decision. If the Governor agrees to declare a financial emergency, there would be four options for the county: municipal bankruptcy, and/or an emergency manager, a consent agreement, or a neutral evaluator.
The response came in the wake of County Executive Warren Evans’ request two week ago for Michigan to declare a financial emergency in the county; Executive Warren hopes to develop a consent agreement to address Wayne County’s financial crisis—a plan which would surely have repercussions for continuity in Detroit’s implementation of its federally approved plan of debt adjustment. After the Board’s unanimous vote, Michigan State Treasurer Nick Khouri noted that one of Wayne County’s biggest issues is its unfunded pension obligations, emphasizing the importance of speed in the state’s response: “The sooner we can get to solutions, the easier (it will be) for all residents of Wayne County…We want to move as quickly as we can,” adding that he thought it would be “weeks, not months,” before he is able to submit Gov. Snyder with the review team’s finding and recommendations. A spokesperson for Gov. Snyder noted: “We appreciate the hard work of County Executive Evans and his team and their seriousness and diligence in addressing some longstanding financial issues. We stand ready to work with them.” The Michigan loan board, composed of Treasurer Khouri, Mike Zimmer, director of the Michigan Department of Licensing and Regulatory Affairs, and Michigan Budget Director John Roberts, voted after a treasury official read highlights from the state’s final preliminary review report, which cited Wayne County’s unfinished jail, its $4.5 billion in long-term obligations, its failure to file an adequate deficit elimination plan since 2010, and other issues. The county is projecting a $171.4 million deficit by 2019 absent remedial actions. Both the Wayne County Commission and the County Executive’s Office were represented at the session: Dwayne Seals, Wayne’s Chief Fiscal Adviser and budget director, stressed the positives: he testified that the county deficit had increased, but at a lower rate than in the past; he added that the most current data demonstrates that the pension funding level is at 47% rather than 45%, and he predicted that the level would rise to 50% because of changes the county is undertaking—noting: “It’s a huge hole that we’re looking at, but we’re gradually climbing out of it.” Nevertheless, Jay Rising, who was representing the Snyder administration, warned id the positive changes were not “indicative” of a long-term recovery: “I think of some of these legacy cost issues are not something that can be handled without a consent agreement.”

Nevertheless, it was clear that fiscal stress also creates political and intergovernmental stress: Wayne County Commission Chairman Gary Woronchak (D-Dearborn), as he addressed commissioners during their scheduled full board meeting yesterday, noted that the commission submitted comments on the state’s interim report only a few hours before the state issued its final report of the preliminary review, but he was concerned and said that the commission felt the report contained certain financial data that was inaccurate and a “description of certain events that was, in our opinion, incomplete or mischaracterized.” Chairman Woronchak, who issued a revised estimate that the governor could declare a financial emergency within the next two weeks, took issue with claims by the state that the commission had not submitted any evidence or information, which would have caused the Treasury to amend its final report: “Rest assured,” he stated, “that if they had expressed interest in receiving ‘evidence,’ the form of our response would have been different. In any event, I strongly disagree with their conclusion, as we did our best to submit detailed financial and other information, and made extensive legal argument.” In fact, the commission took issue with several of the state’s findings, including a reference to the recent judgment levy facing county property taxpayers, noting that County Executive Evans had vetoed the commission’s attempt to pay the $49 million court judgment in a pension case without assessing the one-time tax. After the commission meeting, Commissioner Raymond Basham, D-Taylor, said that based on the speed of the review “The only way the Commission is going to have a role in this is if it’s a dinner roll.”

Rolling the Dice on a City’s Fiscal Future. Three months after an interim fiscal report urged “shared sacrifice” to turn severely fiscally distressed Atlantic City around, former (and, ergo exceptionally experienced) spokesperson for Detroit Emergency Manager Kevyn Orr, Bill Nowling—now the spokesman for Atlantic City’s emergency manager Kevin Lavin reports that all options remain on the table, noting yesterday that a negotiated solution with Atlantic City stakeholders would be the most ideal way to stabilize the city’s finances. Nevertheless, Mr. Nowling did not rule out a potential municipal bankruptcy filing as the city grapples with a $101 million budget gap, making clear that for Mr. Lavin: “All options are on the table.” Referring to Mr. Lavin’s March 22 report, which included suggestions for the city’s municipal bondholders, such as extending maturities, exploring refinancing opportunities that may reduce interest rates, and rearranging the amortization schedule of bonds to delay principal repayments—and included the appointment of mediators to work with union leadership and casino representatives on possible solutions in an effort to cut city expenses by $10 million this year, Mr. Nowling said: “The March plan the emergency manager put forward was crafted as the best way his team saw to reach a negotiated restructuring of Atlantic City’s financial issues for 2015 and beyond…A mutually agreed to resolution of the city’s financial emergency is the surest and most efficient way to long-term financial stability.” The statements and continued governance stress of having Mayor Guardian and a state-imposed emergency manager thus continues—even as Mayor Guardian and the City Council await to see if Gov. and now announced Presidential candidate Chris Christie will sign the legislation approved by the New Jersey Legislature, which Mayor Guardian cited as vital to Atlantic City’s fiscal sustainability at our session at the New York Federal Reserve, which would reallocate the casino alternative tax to pay debt service on Atlantic City-issued municipal debt: the New Jersey Legislature approved a package of bills on June 25 aimed at stabilizing Atlantic City finances that authorizes casinos to make payments in lieu of taxes over the next 15 years.

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