Federal & State Takeovers or Oversight Boards

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eBlog, 6/06/16

In this morning’s eBlog, we prep for an anticipated vote in the U.S. House of Representatives this Thursday on proposed legislation to create a control board for the nearly insolvent U.S. territory of Puerto Rico, and we observe the comparable takeover just announced by Florida Gov. Rick Scott of Opa-Locka.

Decision Time. The U.S. House will take up consideration of the PROMESA (Puerto Rico Oversight, Management, and Economic Stability Act, HR 5278) legislation under a structured rule Thursday. The Congressional Budget Office on Friday described the bill as one which “would create a legal framework for the federal government to oversee the fiscal and budgetary affairs of certain U.S. territories. In particular, the bill would outline procedures under which the governments of such territories and their instrumentalities could establish an oversight board and thus restructure their public debt.” The bill would immediately establish such a board for the Commonwealth of Puerto Rico:

In CBO’s view, and in keeping with guidance specified by the 1967 President’s Commission on Budget Concepts, a control board established under H.R. 5278 should be considered a federal entity largely, because of the extent of federal control involved in its establishment and operations. Because it would be a federal entity, all cash flows related to the board’s administrative costs should be recorded in the federal budget. On that basis, over the 2017-2026 period, CBO estimates that enacting H.R. 5278 would:

• Increase direct spending by $370 million for the board’s administrative costs;
• Increase revenues—from amounts transferred to the oversight board by the government of Puerto Rico to cover the board’s expenses—by $370 million; and
• Have no significant net effect on the federal deficit.

In addition, CBO estimates that completing various reports and administrative requirements specified by the bill would cost about $1 million in 2017; such spending would be subject to the availability of appropriated funds. Pay-as-you-go procedures apply because enacting the legislation would affect direct spending and revenues. CBO estimates that enacting the legislation would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2027.

According to CBO, H.R. 5278 contains intergovernmental and private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA). CBO estimates that the aggregate costs of the mandates on public entities would exceed the annual threshold established in UMRA for intergovernmental mandates ($77 million in 2016, adjusted annually for inflation). Because CBO is uncertain about how claims by creditors would be affected and the amount of losses that would occur as a result of the bill, CBO cannot determine whether the aggregate cost of the mandates on private entities would exceed the annual threshold established in UMRA for private-sector mandates ($154 million in 2016, adjusted annually for inflation).

State Takeover. With Opa-Locka, the small, but growing municipality of just over 16,000 in Florida, on the edge of municipal bankruptcy, and Opa-Locka Commissioner Terence Pinder—who had been scheduled to turn himself in to state prosecutors on corruption charges, killed after driving into a tree, Florida Gov. Rick Scott has declared a financial emergency (order #16-135—Determination of Financial Emergency), providing for, similar to Puerto Rico, a special oversight board to take over the small city’s finances. The city, where estimated median household income has barely changed in more than a decade, is well under half estimated statewide median household income.

The executive order comes just weeks after Miami-Dade County officials sent letters to the Governor warning that the city could be shut down because of gaping budget shortfalls in the millions. Under the order, the state will appoint members of an oversight board to monitor the spending of every city department; the order marks the second time the municipality of 16,000 residents has been placed under an emergency since 2002. It comes as Opa-Locka Commissioner Terence Pinder, who had been scheduled to turn himself in to state prosecutors on corruption charges, was killed after driving into a tree. Under the state order, any local governing decision affecting the municipality’s finances will need state approval. The state takeover order, unlike what happened in Detroit or Central Falls, Rhode Island, came even as the FBI is carrying out a sweeping corruption investigation targeting some of the city’s most prominent leaders, including Mayor Myra Taylor, City Manager David Chiverton, and City Commissioner Luis Santiago. Not since the late Gov. Lawton Chiles ordered a takeover of the city of Miami — with a $68 million shortfall — has a Miami-Dade city captured so much attention over a financial crisis. Just last week, one of the outspoken critics of the city’s handling of the budget, Commissioner Terence Pinder, took his own life by crashing his SUV into a tree.

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