In this morning’s eBlog, we consider yesterday’s day-long session on Puerto Rico in New York City; we then turn to the uncanny Jim Spiotto’s related and invaluable insights into the newly enacted, but unimplemented PROMESA legislation; then we consider the failure in New Jersey to offer the state’s voters an opportunity in November to address either the state’s long term inability to address either its public pension liabilities or deteriorating public infrastructure; then we look at neighborhood initiatives emerging in Detroit; and, finally, the criminal activities which have exposed Opa-locka, Florida to potential municipal bankruptcy or dissolution.
Puerto Rico: What’s Next? Greg David, the marvelous Director of the Business & Economics Reporting Program at the CUNY Graduate School of Journalism and head of the school’s Ravitch Fiscal Reporting Program, yesterday hosted what has become an annual session on Puerto Rico: with the June 30 passage of the PROMESA debt restructuring bill—and, as we await the appointment of the PROMESA Board, the Ravitch Fiscal Reporting Program at the CUNY Graduate School of Journalism (with the ever tireless Mr. Ravitch very much present and participating). The event took an entire day to examine what is happening now to the U.S. territory as part of a special one-day conference for reporters and editors: the issues covered included: The basics: All you need to know about the Puerto Rico Oversight, Management and Economic Stability Act; Debt restructuring and the bond market: Possible debt scenarios and the impact on the future of the bond market; Government and politics in Puerto Rico with a control board; and The Economy: an Update and implications—obviously too much for this participant and presenter to even pretend to encapsulate in this a.m.’s eBlog. The different panels were not just dynamic, but demonstrated the vast differences in perspectives—including one presenter deeming PROMESA “a useless exercise.” The presentation by the N.Y. Federal Reserve (Restoring Economic Growth in Puerto Rico: Introduction to the Series) by Messieurs Andrew Haughwout, Hunter Clark, and Giacomo De Giorgi of the New York Federal Reserve was a double bonus in that it offered rich new resources—and their new blog, Liberty Street Economics—which features posts on options for addressing the U.S. Territory’s fiscal challenges—for scholars and eBlog readers since their post on options for addressing its fiscal problems, which features insight and analysis from economists working at the intersection of research and policy began appearing last fall—posts which have been a follow-up to not only the session we co-hosted with the N.Y. Fed, but also a series of analyses, starting with a 2012 report that detailed the economic challenges facing the Commonwealth. In most of this work, the three Fed musketeers have focused on how policymakers could help to address the immediate issues facing Puerto Rico and its people. It has been especially invaluable because of this new set of Blogs they have put together.
In the wake of Puerto Rico’s skipping payment on nearly $1 billion to municipal bondholders on July 1st, including some $780 million of principal and interest on general obligation bonds—the largest municipal default ever in the $3.7 trillion municipal-bond market and the first time a state-level borrower has ever failed to pay on its direct debt since the 1930s, yesterday’s event was clearly timely. It came as Cleary Gottlieb, Puerto Rico’s legal adviser is seeking to reduce a $70 billion debt load, and participating in discussions with U.S. Treasury staff, Commonwealth leaders, and creditors with regard to how to restructure the U.S. territory’s debt—as Puerto Rico is not authorized to file for chapter 9 municipal bankruptcy. It comes for a U.S. territory with a poverty rate in excess of 50 percent for its children—and faced with discriminatory federal policies. Thus, every day of delay in appointing the PROMESA board to address Puerto Rico’s debt, revenue mix, expenses or budget, and its public pensions will make the steep climb out of insolvency in a non-chapter 9 eligible world that much more challenging.
Implication for Municipal Bankruptcy. Ironically, our session yesterday came at the same time as the godfather of chapter 9 municipal bankruptcy, Jim Spiotto, yesterday described PROMESA as “unique in our justice system:” it is the first law in U.S. history that carves out a period outside of bankruptcy for bondholders to negotiate terms of a restructuring (referencing Title VI, §601(j)), which addresses how municipal bondholders can agree to modify their own bond terms and provides that holders of at least two-thirds of each bond pool’s principals who vote must approve the modification and holders of at least 50% of total principal outstanding in each pool must approve it. Under the new federal law, every municipal bond issuer has at least one pool of bonds, and these bonds are divided into different pools if they have different priorities or security features. Mr. Spiotto added that, under the Trust Indenture Act, which normally applies to municipal bonds, 100 percent of bondholders must agree to changes in certain terms such as principal, interest, and maturity; however, he notes, PROMESA, trumps (not an intended pun) the Trust Indenture Act with regards to Puerto Rico bonds.
In a Chapter 11 bankruptcy (available to both corporations and individuals), at least two-thirds of the holders of the debt by amount and half by number of holders must vote to accept a restructuring offer before the resolution can be accepted. But as Mr. Spiotto notes in describing the distinction from Chapter 11, that chapter involves a consideration of all of a creditor’s debts under a court-supervised process. In contrast, PROMESA extends this negotiation and voting process to those negotiating a particular class or classes of debts and does so outside of a process overseen by a federal court. One key distinction is that an issuer’s public pension holders or suppliers owed money are ineligible under PROMESA to reach a collectively negotiated solution, albeit, he notes, they could be affected by the federal court-supervised process in the law’s Title III. Interestingly, the Wizard of Municipal Bankruptcy notes that the new law’s Title VI had its origin in the terms found in foreign sovereign debt: these bonds allow bondholders to vote to change the fundamental bond terms. He added that the new law’s Title III (affecting restructuring) is basically a substitute for Chapter 9 municipal bankruptcy—except, unlike in Detroit, San Bernardino, etc., the new law provides for an oversight board. Mr. Spiotto, however, believes the new law’s Title VI is not just a break from the traditional municipal bankruptcy law, but also the provision which will prove most controversial—in large measure because it could be interpreted to provide for the retroactive modification of existing contractual rights—and do that via a process not under federal court oversight, much less the protections which the federal bankruptcy code provides to dissenting class members, including the requirement that the debtor demonstrate that the various legal standards for confirmation contained in the Bankruptcy Code are met, and with review by the federal district court only to determine if the modification is “manifestly inconsistent” with the act. Mr. Spiotto notes that because PROMESA requires 50 percent of the holders of outstanding par to vote in favor of a modification of terms—in contrast to chapter 9 municipal bankruptcy under which it is, instead, 50 percent of the votes of those who vote, it may prove a greater challenge to agree upon a voted-upon modification.
Governance & An Appealing Outcome? As in Chapter 9, where there were appeals in the Detroit and Stockton municipal bankruptcies, appeals to the 6th and 9th U.S. Circuit Courts of Appeal (never acted upon), the new PROMESA Act similarly permits appeals; the key difference from the Jefferson County, Detroit, and San Bernardino cases is that Puerto Rico’s case, because it will proceed under the new PROMESA statute, is already in the U.S. district court with only the right to appeal decisions to the circuit court. As the Chicago wizard Mr. Spiotto notes, however, under PROMESA, if a federal court becomes involved in a bankruptcy process, the court’s jurisdiction is to be limited to deciding on debt matters, according to Title III, §305, which, he adds, is similar to §904 of Chapter 9: which allows states to retain some sovereignty from the federal government in the bankruptcy process of their municipalities. Under PROMESA, that sovereignty is granted to the oversight board.
Out of Trust? Unlike the federal government, states and local governments have two kinds of budgets—operating and long-term, with the latter critical not just to infrastructure investment, but also to public pensions. But now New Jersey State Senate President Stephen M. Sweeney (D-West Deptford) has acted to prevent a measure from being considered by fellow senators for acting by the deadline for approving a constitutional amendment on the November ballot—a constitutional amendment guaranteeing quarterly state payments to the $71.5 billion New Jersey Pension Fund–a situation which has been complicated by a political battle that had little to do with pension benefits—and which appears to have pitted two critical long-term issues against each other: a nearly empty transportation trust fund and a nearly empty state pension promise. Moreover, the issue has been further complicated by last week’s request by Senate President Sweeney to top federal and state law enforcement officials to investigate what he termed coercion of legislators by leaders of public employee unions seeking voter approval of the proposed plan to require scheduled payments to the state pension system—threats which U.S. Attorney Paul Fishman deemed ones which “clearly cross the line from lobbying to attempted bribery and conspiracy…Essentially, [the New Jersey Education Association] has put members of the New Jersey State Senate in the position of tying specific official action to the receipt of a campaign contribution.” On the surface (not a pun), the amendment’s passage, one which requires a majority of votes in both houses of the Legislature, seemed likely. (The Democratic-controlled Assembly approved the proposal in June.) President Sweeney was the author of the Senate version, and there was sufficient support in the Democratic-controlled Senate. Moreover, Gov. Chris Christie, who bitterly opposed the idea, is prohibited by law from vetoing constitutional amendment legislation. However, what is simple in making legislative spaghetti is never what it seems: here the proposal has become ensnared in a dispute between the Legislature and the governor over financing the State Transportation Trust Fund, whose appropriations expired at the end of last June. So Democratic legislators have sought to raise the state gas tax to replenish the transportation fund; Gov. Christie and GOP legislators wanted tax cuts to offset the higher gas taxes.
Because the Governor can veto spending bills, President Sweeney wished to make sure he had veto-proof margins in both houses for any gas-tax and tax-cut package prior to allowing a vote on the constitutional amendment. However, he was unable to achieve that goal, so the transportation fund financing remains on empty, and the pension proposal is dead for this year—leading the Senate President to note: “With a resolution to the Transportation Trust Fund crisis — and a full accounting of how much future tax cuts will cost — it would have been too easy for opponents to argue that the state could not afford to pass the pension amendment…The pension amendment would have been doomed to defeat, and that would have given carte blanche to current and future governors to slash pension payments.” Nevertheless, because the Assembly has approved the measure, President Sweeney said the Senate could vote on the proposal any time during the current legislative session which ends in January to place the amendment on the November 2017 ballot: “If the proposed amendment was voted down this November, we would have to wait at least three years to put it on the ballot again, according to the New Jersey Constitution.” The public sector unions had pushed for the amendment after Gov. Chris Christie chose not to make the full contributions into the public-employee pension system—notwithstanding the New Jersey Supreme Court’s June decision, which upheld the suspension of cost-of-living adjustments to retiree pension benefits.
What Grade for this Governance or Tickled Pink? Detroit leaders are seeking designs to revive Detroit’s neighborhood main streets—even as they are also hoping to ease bureaucratic blocks which can interfere—asking urban planners, architects, preservationists, and designers to contribute to “Pink Zoning Detroit,” an initiative that sets out to transform the city’s complex land use rules and speed new development in its commercial corridors by reducing red tape. The project, which is being funded by a $75,000 grant through the John S. and James L. Knight Foundation, is to boast three multidisciplinary teams put together visions for walkable, mixed-use activity in three commercial sites in the Motor City; subsequently, the concepts will be tested against Detroit’s zoning ordinance and building code in order to determine what roadblocks exist and to identify strategies for reforms—or, as Maurice Cox, Director of the city’s Planning and Development Department, puts it: “For us, it’s just kind of crazy that the urban life that we want is actually inhibited or stymied by the very rules that are supposed to enable them to happen…We turn this upside down and say: ‘Let’s visualize the reality of this urban life that we want. Let’s look at where our current regulations don’t allow it and let’s just change the rules.’ This process will get us that.” With the process intended to select winners by the end of next month—after which the selectees will have six months in which to engage in research, design, and analysis; pilot “pink zones” could be identified as early as next summer, so that Detroit could test relaxed rules within certain boundaries—a process which could well serve as a model for other cities—and continue to herald post-municipal bankruptcy Detroit as, according to the Wall Street Journal, one of five cities “leading the way in urban innovation.” Some of this stems from Mayor Mike Duggan’s focus on “20-minute neighborhoods,” i.e. ones which allow residents to walk or bike to get everyday necessities.
Stick ‘em Up. In insolvent Opa-locka, Florida, the city’s assistant director of public works—in the wake of a three-year FBI investigation—has been charged in the first federal corruption case brought by prosecutors after a three-year FBI investigation into alleged bribery schemes at the highest levels of the municipal government. Gregory Harris, who resigned this week as assistant director of public works, is accused of conspiring with a city commissioner, city manager, and other employees to extort thousands of dollars in cash payments from Opa-locka business owners seeking occupational licenses, water connections, and other permits. It appears that Mr. Harris is cooperating with the U.S. attorney’s office and the FBI in the growing federal corruption probe: he is expected to plead guilty to a conspiracy; Mr. Harris is also pastor of an Opa-locka church and leads Bible studies. Now he had agreed to help FBI agents with their investigation commenced last March, when authorities led a dramatic raid on the city to seize public records, financial documents, and other evidence. He is accused of conspiring with “Public Official A” and “Public Official B” in the bribery scheme from March 2014 to March 10, 2016, the day of the raid—and, it appears, one of a party of top city officials involved in shaking down business owners who were working undercover for the FBI in a series of backroom bribes recorded on video. The FBI investigation is among the largest corruption probes in South Florida history—and one which appears likely to involve other elected and appointed city officials. According to information filed in federal court, Mr. Harris conspired with Public Official A, Public Official B and other government employees “to unlawfully enrich themselves by using their official positions and authority within the city of Opa-locka to solicit, demand and obtain payments and other things of value from businesses and individuals in exchange for taking official actions to assist and benefit [them].” Public Official A solicited and obtained “illegal payments” from businesses and individuals who were seeking occupational licenses and other permits for their properties in 2014 and 2015. In exchange for cash bribes, Mr. Santiago directed Mr. Harris and other Opa-locka employees to take care of the requests for occupational licenses, water connections, zoning benefits, and code enforcement violations.