Governance in the Face of Fiscal Insolvency

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eBlog, 1/05/17

Good Morning! In this a.m.’s eBlog, we consider the political challenges encumbering the virtually insolvent, historic municipality of Petersburg, Virginia, before turning to the growing judicial disputes with regard to the respective rights and authority of municipal bondholders in Puerto Rico, even as the new administration of Governor Ricardo Rosselló has taken office and the PROMESA oversight board is attempting to get its arms around a long-term fiscal path to resolution.

The Right Fiscal & Governance Direction. Petersburg, Virginia’s City Council Tuesday voted 4-3 to elevate current Vice Mayor Samuel Parham to the position of Mayor—with the action coming amidst critics who have called for the criminal prosecution of the ousted incumbent W. Howard Myers, who had said last week he planned to run for another term—a declaration which appeared to accelerate maneuvering among his colleagues who are seeking to avoid more unrest from citizens unhappy with the city’s decline into near municipal bankruptcy last year. Nevertheless, when the clerk called the question, Mayor Myers nominated Vice Mayor Parham, later describing his action as a step towards much-needed continuity for the city at a critical time, adding that the dissent from his fellow Council members Treska Wilson-Smith, John Hart, and Annette Smith Lee was “horrific” at a time when the city needs to come together to address critical fiscal challenges. He noted: “This reflects poorly on all of us and hurts future opportunities.” The Council selected John Hart to be vice mayor. Both roles are largely ceremonial, but symbolic at a time when Petersburg has been battered by financial challenges. Indeed, good government advocates with the group Clean Sweep Petersburg have been targeting incumbents for removal from office, actively petitioning for their ouster. Nevertheless, new Mayor Parham pledged more transparency during his two-year tenure as mayor and fewer of the type of last-minute special meetings that had evoked such condemnation last November from the American Civil Liberties Union of Virginia. In addition, an organization spokesman has also criticized the city for holding the meeting at noon on a workday at a time when its governance has come under increased scrutiny. In response, council members voted to change the timing of organizational meetings to the half-hour preceding the first city council meeting in odd-numbered years.

Former Mayor Myers told his colleagues that the new designee, Mayor Parham, who is in his first four-year term on the council, has all the experience he needs to take the city to the next level: “He was my right-hand man for the last two years…I have every confidence in his ability to lead the city forward.” Nevertheless, the governance challenge looms: the city began its current fiscal year some $19 million in arrears and $12 million over budget, voting to slash employees’ pay, strip millions from the budget of the struggling public schools, and eliminate a youth summer program in order to try to balance the budget; meanwhile, the city’s credit rating tanked, and municipal workers fled to find other work, or, as new Mayor Parham put it: “Our locality was the first in the state to go through financial issues like we have.” In addition, late last year, the council voted to hire a turnaround team for $350,000 to take a short-term contract to try to bring the budget back above water and stabilize municipal operations. The contract expires in some eight weeks, but appears to have been instrumental in disentangling the layers of structural financial and fiscal problems that forced the city into insolvency—as well as helping to secure much-needed short-term financing for the city last month, or, as Mayor Parham described it: “In 2016, the government of Petersburg was supposed to be shut down, but we avoided that…We are moving in the right direction.”

Trying to Unpromise PROMESA? Meanwhile, in a letter to the PROMESA board, on behalf of Governor Ricardo Rosselló, the U.S. territory of Puerto Rico requested an extension of the January 15th deadline to prepare and submit its revised fiscal plan to the PROMESA board, seeking a 45 day extension—in order to ensure a credible plan which could return Puerto Rico to “fiscal responsibility within a decade.”  

Puerto Rico creditors presented arguments in federal court in Boston in an effort to lift a stay related to litigation over the U.S. territory’s debt. The courtroom request, in effect, seeks to challenge the provisions in the newly enacted federal legislation which imposed a stay on such suits in order to provide both Puerto Rico and the PROMESA oversight board with more time to put together a broad debt restructuring plan. The current stay is scheduled to expire next month on the Ides of February, with the possibility of an extension of 60 or 75 days or until the Oversight Board opts to file a petition to commence debt-adjustment proceedings, if that date is earlier. But complicating the promise of PROMESA has been this parallel process by some municipal bondholders and bond insurers in suing Puerto Rico—where a new Governor is just getting his administration underway. The new effort comes after last year’s U.S. District court ruling in two decisions concerning several cases that the stay should continue. That decision is now subject of an appeal in the U.S. First Circuit Court of Appeals, with the challenge asserting the burden of proof should be imposed upon Puerto Rico that any stay would not cause harm to bondholders, and arguing that the lower court’s decision should be overturned, because it had failed to hold an evidentiary hearing. For its part, the PROMESA Oversight Board has filed an amicus brief arguing in favor of continuing the stay, writing: “There can be no dispute that the amounts due will be paid during the pendency of the PROMESA stay, and the appellants will, therefore, suffer no material harm during the pendency of the stay.” Meanwhile, in its brief, the Commonwealth of Puerto Rico wrote: “It is not even clear how the stay is causing appellants any concrete injury, let alone the kind of substantial injury that would justify lifting a stay designed to help abate an unprecedented fiscal crisis affecting the health, safety, and welfare of millions of individuals.”

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