Fiscal Challenges Amid Governance Transitions

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eBlog, 12/06/16

Good Morning! In this a.m.’s eBlog, we consider the ongoing health and fiscal challenges of Flint, Michigan as we await the outcome of today’s mayoral recall election in the insolvent municipality of East Cleveland, after which we attempt to update readers on the porous state of Atlantic City’s municipal utility. Then we seek to escape winter by heading south to Puerto Rico—where the combination of changing administrations in both the U.S. and Puerto Rico leave unclear what the fiscal path forward will be if the U.S. territory is to avoid not just fiscal, but also health care insolvency.

Out like Flint. University of Michigan researchers have more than tripled their estimate of the number of water service lines in the small city of Flint which will need to be replaced, nearly quadrupling the number of lead or galvanized steel lines the city has from 8,000 to 29,100—or more than half service lines leading to 55,000 homes and businesses in Flint, according Mayor Karen Weaver, who notes the updated report makes it important that the city move beyond the use of filters and instead move toward wholesale replacement of water lines: “These findings make it even more imperative that the state and federal government step up to pay for replacing lead-tainted service lines.” The figures are daunting: of the municipality’s 29,100 parcels, 17,500 would need full replacement of service lines, while 11,600 would require partial replacement, according to the researchers. The estimate was mandated by EPA to comply with the requirements of the federal Lead and Copper Rule: because the lead in the city’s water supply exceeded the federal action level of 15 parts per billion, the city is mandated to replace more than 2,000 service lines by next June—a physical and fiscal challenge given that Flint’s records describing the location of lead service lines in Flint have proven to be unreliable, and records for some parcels appear to not even exist, according to city officials—meaning that visual inspections, more time-consuming and expensive route—has served as the city’s only means to obtain an accurate assessment of where lead and galvanized steel service lines were installed. Thus, under Mayor Weaver’s initiative, municipal crews continue to replace service lines in neighborhoods most likely to have lead service lines, and where a significant number of young children or seniors live: the Mayor’s goal is to have service lines replaced at 1,000 homes by the end of this month, although the actual number may be fewer if bad weather occurs—weather with this morning’s chilled rain at temperatures just above freezing augurs ill. To help, the state of Michigan has set aside $25 million to pay for pipe replacements through September of next year—estimated to be sufficient to pay for replacing pipes to about 5,000 homes. In addition, Congress is considering an aid package that would bring tens of millions of dollars to Flint which could be used to repair the city’s damaged water system. If the 29,100 figure proves accurate, replacing the other 28,100 service lines could cost at least $140 million. A key element on this health and fiscal challenge could be yesterday’s agreement between U.S. House and Senate leaders on a bipartisan bill to authorize $170 million for Flint and other cities beleaguered by lead in drinking water, and to provide relief to drought-stricken California. A vote on the water-projects bill could take place this week as Congress wraps up its legislative work for the year.

The Utility & Atlantic City. Atlantic City’s utility water authority board members last week raised rates in an effort to cover an unexpected budget hole—but then topped it off by paying themselves a $3,000 per board member, even as the Municipal Utilities Authority (MUA) board approved the 10 percent rate hike for next year, a 20 percent increase over what had been set at last week’s special meeting to cover lost revenue from a contract change with New Jersey American Water. Under the new plan, residential rates would increase to $50 per quarter from $45 last year; nevertheless, the utility’s rates would still rank near the bottom for the region, according to Atlantic County Utilities Authority data. The MUA’s $14.7 million 2017 budget, down just under 10 percent from last year, is scheduled to be adopted on December 21st, according to an authority news release. The increase would appear unlikely to garner much favor in the insolvent city—especially in the wake of the board’s decision to award themselves $3,000 gifts this December “for their dedicated service,” according to a resolution, notwithstanding that the money was supposed to be a parting gift, not a Christmas gift, according to one board member. Board Vice Chairman Gary Hill yesterday claimed the “December 2016” was an error in the resolution’s language. It appears it has been a tradition that MUA Board members are to receive a cash bonus or gift once they leave the board: the authority’s seven board members make $6,000 salaries and can receive benefits, according to public records. Now, however, the Board’s challenge could be complicated by a different kind of fiscal disruption: American Water, a private company which had been considered a potential buyer of the MUA, which had a $1.7 million contract with the MUA, and was the MUA’s top customer, has recently notified the MUA it no longer needs it to provide water; it turns out that capital improvements to its Atlantic County system have increased its water capacity and “in essence eliminated NJAW’s need to purchase water from the ACMUA,” according to the company letter to the authority; instead, American Water wanted to buy 500,000 gallons of water per day, down from the 1.2 million gallons per day it has recently purchased; however, the lower volume would convert the company from a “bulk purchaser” to a “commercial customer,” meaning it would have to pay a $7 million connection charge, according to the letter, so that, according to the company’s statement: “We cannot justify the additional costs the ACMUA’s proposal would have on the company and its customers, since these significant capital investments eliminate the need for New Jersey American Water to purchase additional water.” Ergo, the contract change and its effect on the MUA budget led to the special board meeting where rates were raised—and bonuses were raised; now MUA and American Water are discussing a potential agreement under which the company would only buy water from the MUA in emergency situations, according to Chairman Hill: the MUA could get just $200,000 under such an arrangement. The fiscal and physical situation is, of course, further complicated from a governance perspective as the city’s public water utility has been at the center of debate between Atlantic City and the State of New Jersey—which has just taken over the city. American Water lobbyist Philip Norcross attended a 2015 meeting with city and state officials in which the MUA was discussed. Mr. Norcross’ brother is South Jersey powerbroker George Norcross. Authority officials questioned the timing of the contract change, hinting it was a strategic move by American Water to get the valuable water works, according to the meeting transcript. “They’re putting pressure on,” said Deputy Executive Director Garth Moyle.

Administration Transitions & Puerto Rico. The new PROMESA law to create a quasi-chapter 9 mechanism for the U.S. territory of Puerto Rico will face signal challenges as the governance of both the U.S. and Puerto Rico are in transition to new administrations. Unsurprisingly, President-elect Trump devoted little time to addressing what his position would be with regard to the implementation and administration of the new law. Thus, while Congress and the Treasury Department have put together both a framework and a Board to assist in Puerto Rico’s recovery; whether and how those might be modified or addressed now will depend upon both the incoming administration in Washington and new Governor in Puerto Rico—where the new head of the Senate’s Health Commission, Ángel Chayanne Martínez Santiago, yesterday urgently requested a meeting with House Speaker Paul Ryan (R-Wisc.) to discuss a possible health emergency declaration because of apprehension that all federal health care funds could expire on the island by this summer, writing that the federal health care assistance affects some 1.6 million U.S. citizens: “We need to declare a health emergency in Puerto Rico immediately. We have no doubt that this is a matter of vital importance—nor can there be any question but that this is a matter of vital importance for Congress and the White House.” The letter warns that, without a doubt, the greatest portion of the territory’s existing Affordable Health Care funds will have been spent before the end of this month, noting: “We are urgently requesting this meeting with Speaker Ryan to set out a strategy to avoid having Puerto Ricans losing all access to health care.”

The situation is further complicated as Puerto Rico is going through its own governance transition. Thus, the U.S. territory’s Governor-elect, Ricardo Rosselló, now must determine not only how to coordinate with the PROMESA board, but also how to address Puerto Rico’s budget, debt, and grave health care situation—and how to seek to work with the new Trump administration after reviewing both the numbers in the Commonwealth’s current 10-year fiscal plan submitted last October by outgoing Gov. García Padilla. A critical issue will be Medicaid—an issue on which the outgoing administration had warned Congress “ultimately will have to address Puerto Rico’s inequitable treatment under Medicaid and its need for economic growth incentives.” The pending proposal by the outgoing Administration of President Obama opined that Congress create Medicaid parity between Puerto Rico and the states, and extend certain tax credits to the Commonwealth: this has now become a more urgent issue as Medicaid funding for Puerto Rico is due to expire near the end of 2017, creating what is called a “Medicaid cliff.” And even that challenge can be expected to be further muddied by potential consideration by the incoming Trump Administration to convert Medicaid’s entitlement status to a block grant program to the states. The risk for Puerto Rico in all this would be if it were to fall between the cracks: should that happen, Puerto Rico’s government, where annual health care expenditures are near $2.4 billion annually, the U.S. territory would either have to raise revenues and find ways to cut expenses while providing consistent levels of care or drastically pare healthcare benefits—benefits already significantly lower than to Americans living in the other 50 states, because Puerto Rico’s Medicaid funding is capped, rather than entitled—meaning that, despite disproportionate health care needs, it receives disproportionately less than any of the 50 states.  

Awkward Transition & Fiscal Death Spiral? Puerto Rico Governor-Elect Ricardo Rosselló this weekend declined outgoing Gov. Alejandro García Padilla’s offer to work on a fiscal plan for the federal PROMESA oversight board. Under the PROMESA law, the U.S. territory’s governor is mandated to submit a five-year plan which itemizes steps to bring about fiscal responsibility, regain access to capital markets, fund essential public services, fund provisions, and achieve a sustainable debt burden. Last October, Gov. Padilla indeed presented a 10 year plan to PROMESA’s Oversight Board which noted that Puerto Rico simply could not afford paying down its debt without federal aid, noting that the government would be still $6 billion short for operating expenses over the next decade absent federal help and without paying any debt service. Last month, the PROMESA Oversight Board members indicated they believed substantial cuts to Puerto Rico government spending beyond those included in the outgoing Governor’s plan were necessary—adding that the Board expected a revised version of the plan from Governor Padilla by next week—a demand with which Governor Padilla said he would not cooperate if it meant revising the plan to include additional austerity, noting the island has had enough austerity, so that further budget cuts would only lead to an “economic death spiral.” Thus, last Friday the Governor Padilla sent a letter to Governor-elect Rosselló to invite him to become part of a joint effort to put together a revised fiscal recovery plan. Gov.-elect Rosselló, however, publicly rejected the outgoing Governor’s offer, responding, at least according to El Vocero’s news website, that Governor Padilla had not released sufficient financial data for the incoming Governor to work with him—leaving the incoming Governor little time or opportunity to offer his own plan—and the PROMESA Board is scheduled to certify (or not) the plan set before it by the end of next month.

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