The Challenge of Transitions in Governance in the Wake of a Fiscal Crisis

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eBlog, 7/01/16

In this morning’s eBlog, we consider the state commission approval of a budget for the new, debt-free Detroit Public Schools Community District, and the first steps in governance transition in Puerto Rico—and critical steps underway to ensure essential public services. &, of course, we wish readers a great 4th of July or Julio. 

Getting Ready to Go to School. The Detroit Financial Review Commission yesterday approved the proposed budget for the new, debt-free Detroit school district for FY2017, but not a plan for professional development travel, effectively blessing the $654 million budget proposed for the new Detroit Public Schools Community District by Transition Manager Steven Rhodes, the state-appointed emergency manager and former U.S. Bankruptcy Judge who oversaw Detroit’s municipal bankruptcy. The plan incorporates some of the $150 million in state start-up funding to improve academic programs and better maintain buildings as part of the Michigan legislature’s $617 million bailout package which Gov. Rick Snyder approved last month—the remaining $467 million will be used to retire the debt of the former Detroit Public Schools district. In thanking the members of the Commission, Judge Rhodes noted the Commission “worked expeditiously to approve the budget prior to the first day of the fiscal year for the new Detroit Public Schools Community District. It is a balanced budget based on conservative and realistic assumptions and it reflects enough revenue to pay reasonable expenses,” adding the budget is “a significant milestone” that will help “create a sustainable new school district.” Describing the academic path forward, Judge Rhodes said: “Our focus moving forward will be to support academic innovation, improve student safety and facilities: We have many challenges to overcome as we transition the district from its current governance structure to an elected board. We are on an important mission to ensure the citizens of Detroit have a school system they can trust and in which they can take pride.”

Transition in Governance in a Fiscal Crisis. In the wake of President Obama’s signing the PROMESA legislation to help Puerto Rico restructure its debt, imposing a stay on litigation over payment, Gov. Alejandro Garcia Padilla late yesterday invoked Puerto Rico’s Moratorium Act on the payment of general obligation bonds and obligations of other public entities (Puerto Rico has about $69 billion of public debt outstanding.), opening the door to making partial payments on about $2 billion of debt due today; he also declared a state of emergency at the Puerto Rico Convention Center District Authority, the Employees Retirement System, the Industrial Development Company, and the University of Puerto Rico, to ensure these entities protection from litigation, claiming this protection comes from the Moratorium, Financial Emergency and Rehabilitation Law, which passed in April, and is used by the central government to retain funds necessary for its operation. By invoking the moratorium for these agencies and types of debt, the governor created a mechanism to skip payment on the U.S. territory’s bonds. In an accompanying press release, Gov. Padilla announced the “suspension of payment” on Puerto Rico’s GO debt. The actions had the effect of pushing a record amount of its municipal bonds toward default by declaring a moratorium on debt payments after President Barack Obama signed a law sheltering the island from bondholder lawsuits as it seeks to arrest a financial collapse. The actions mark the first time Puerto Rico has failed to pay on its $13 billion worth of general obligation bonds, bonds which under the Puerto Rico constitution must be covered before other expenses. The territory and its agencies owe about $2 billion on various securities today. The default might effectively mark the governance transition to the financial control board created under the new PROMESA law, albeit it remains uncertain when the White House will make and announce those key appointments. That board of quasi overseers will be involved in the transition as Gov. Padilla seeks to use cash that would otherwise go to investors to avert closing schools, clinics, police and fire stations on an island where nearly half of the 3.5 million residents live in poverty.

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