Whither Federalism?

October 26, 2015. Share on Twitter

Congressional Disinterest in the Complexities of Federalism & Municipal Bankruptcy. Despite White House warnings that only swift Congressional action can avert a string of impending defaults on $73 billion in Puerto Rican debt that could lead to a “humanitarian crisis,” the reaction by the Senate Energy and Natural Resources Committee (the committee of jurisdiction, because it was, formerly, the Committee on Interior and Insular Affairs, ergo the inclusion of Puerto Rico and other U.S. territories under its jurisdiction) was almost nonexistent: only two members of the majority, Chair Lisa Murkowski (R-Alaska) and Sen. John Barrasso (R-Wy.) even made the effort to attend. U.S. Treasury Counselor Antonio Weiss testified last Thursday, formally requesting Congress to act swiftly to provide expanded Chapter 9 municipal bankruptcy protection to both the Commonwealth of Puerto Rico, as well as its public authorities, and to provide other relief. Under the White House plan, in order to gain access to expanded Chapter 9 municipal bankruptcy relief, Puerto Rico would have to agree to federal fiscal oversight. The second part of the plan, Mr. Weiss said, would be for Congress to authorize the creation of an oversight body made up of broad group of stakeholders that would preserve Puerto Rican authority, but would be independent from the territory’s government. In addition, the administration requested that Congress provide funding and authorize technical assistance to help Puerto Rico bring its accounting and disclosure practices into the 21st century, warning that Puerto Rico’s government is on the verge of running out of fiscal resources with which to provide its three and a half million U.S. citizens essential public services. The response from the Committee, however, was—at best—dismissive. Chair Murkowski claimed the Committee lacked accurate enough financial information, and that, even if it had such information, the White House proposal could not be considered without offsetting cuts in other areas of the budget. Indeed, after a relatively brief rounds of questions, she ended the hearing, saying, “I apologize that we can’t give more time to this.” Puerto Rican leaders and many financial and legal experts have been saying for months that the U.S. territory cannot repay the approximately $72 billion it owes to hedge funds, mutual funds, and other investors. Indeed, the economy is in a whirlpool: it is not growing, and tens of thousands of residents are leaving every year for the mainland U.S. to look for work. More than 300,000 have left in the last 10 years. Puerto Rico confronts a public pension debt in excess of $40 billion; its adopted spending cuts and tax increases have failed to stem the rising debt tide. Mayhap unsurprisingly, many investors and owners of Puerto Rican bonds—that is, investors who stand to lose under any debt restructuring–are bitterly opposed to the Administration’s proposals: they claim Puerto Rico can repay all of its debt if it tightens its fiscal belt and privatizes utilities and other government-owned businesses. The complexity of addressing Puerto Rico’s looming insolvency is complicated in that federal municipal bankruptcy, in recognition of dual sovereignty, provides that no mainland municipality may file for municipal bankruptcy without state authorization. Since Puerto Rico is not a state, but rather a territory, not only does Puerto Rico not have access to chapter 9, but nor does it have the requisite authority to authorize access to any of the island’s 87 municipalities. Current negotiations have involved some 18 different municipal debt issuers—so that 20 creditor committees have been created, focused on competing interests.

Late for an Important Date. San Bernardino, last Friday, finally received a letter from its independent audit firm with regard to the accuracy of the accuracy of its financial statements—but not the promised full audit. The delivery, more than a year and a half overdue—and technically still due—was delivered two days after it was last promised, and more than a year and a half after the deadline imposed by the State of California. Deputy City Manager Nita McKay, nevertheless, advised the City Council the audit was “basically what you pay for…It’s the signed letter from the auditors, and what you’re hoping for is an unqualified opinion, which means there’s nothing they need to disclose. Last year there were two comments, and they’re the same comments again, about successor land held for resale…and then, because we’re in bankruptcy, they add a paragraph about that.” The municipality’s audit firm Macias, Gini and O’Connell LLP (MGO), which had promised completion and delivery last week now reports it will “likely” be ready this Wednesday—that is, just six days before November 3rd’s municipal elections. Ms. McKay advised the Mayor and Council the audit firm would be ready to present to the city’s administrators and a selection of elected leaders on the audit committee this Thursday. With the fast approaching municipal election, city staff and auditors have been sparring over responsibility for the audit delay, with the auditing firm falling further behind schedule, even as it sought nearly double its original asking price. The bankrupt city, according to Ms. McKay, has paid about $451,000 of that contract so far, and it is still awaiting its single audit—the audit of federal grants, a key step, as it has held the city hostage for the receipt of $125,000 a month for the San Bernardino Employment and Training Agency from the State of California. The city has scheduled a pre-election day public presentation of the findings in the 2012-13 audit for the Nov. 2 City Council meeting, according to City Clerk Gigi Hanna.

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