The Leadership Challenges on the Road to Fiscal and Physical Recovery

September 29, 2017

Good Morning! In today’s Blog, we consider the fiscal, legal, physical, and human challenges to Puerto Rico; Hartford’s steep fiscal challenges; and Detroit’s ongoing road to fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

Fiscal Safety Net? The White House yesterday announced President Trump had agreed to waive the Jones Act, which will temporarily lift shipping restrictions on Puerto Rico and enable the hurricane-ravaged island to receive necessary aid; however, the waiver from the shipping law, which mandates that only American-made and-operated vessels may transport cargo between U.S. ports, will only last for 10 days, after which the equivalent of a 20 percent tax will be reimposed. The delayed U.S. response to the save U.S. citizens compared unfavorably to the response to save and protect foreign citizens in Haiti seven years ago, when the U.S. military mobilized as if it were going to war—with the U.S. military, in less than 24 hours, and before first light, already airborne, on its way to seize control of the main airport in Port-au-Prince. Within two days, the Pentagon had 8,000 American troops en route; within two weeks, 33 U.S. military ships and 22,000 troops had arrived. By contrast, eight days after Hurricane Maria ripped across neighboring Puerto Rico, just 4,400 service members were participating in federal operations to assist the devastated U.S. citizens, according to a briefing by an Army general yesterday, in addition to about 1,000 Coast Guard members.

The seemingly inexplicable delay in waiving the Jones Act—temporarily—was due to opposition of the waiver by the Department of Homeland Security, which had argued that a federal agency may not apply for a waiver unless there is a national defense threat (as, apparently, there might have been in Houston and Florida). Sen. John McCain (R-Az.) has, for years, sought to repeal this discriminatory law: The 1920 Jones Act requires that goods shipped between U.S. ports be carried by vessels 1) built in the U.S., 2) majority-owned by American firms, and 3) crewed by U.S. citizens.

Key House and Senate members, since Monday, had been pressing for a one-year waiver from the rules in order to help accelerate deliveries of food, fuel, medical, and other critical supplies to Puerto Rico, especially with current estimates that Puerto Rico could be without power for six months. On Wednesday, 45 U.S. Senate and House Members had signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement. U.S. Rep. Nydia Velázquez (D.-N.Y.) warned: “If President Trump doesn’t swiftly deploy every available resource that our country has, then he has failed the people of Puerto Rico – and this will become his Katrina.” The temporary suspension of the onerous and discriminatory Jones law came only in the wake of a fierce backlash against the Trump administration for its inexplicable delay in not immediately lifting the federal law for Puerto Rico, especially after it issued a two-week waiver for Texas and Florida in response to Hurricanes Harvey and Irma. Nevertheless, San Juan Mayor Carmen Yulín Cruz praised the administration’s decision: she said it could help bring down the cost of emergency medical and other supplies, as well as vital construction materials by nearly 33 percent. Nevertheless, she warned there are still thousands of containers sitting idle at the ports of San Juan, a problem she blamed on “jurisdictional” and bureaucratic issues.

The belated Presidential action came as Puerto Rico continued to suffer the after effects of Hurricane Maria: Puerto Rico Electric Power Authority Executive Director Ricardo Ramos Rodríguez warned it could take PREPA as much as half a year to restore electricity.

Meanwhile, it appears the PROMESA Oversight Board is ready to revise the amount of debt to be paid in the next nine years. The Board is scheduled to meet today in New York City to revise the March-approved fiscal plan: the current Board fiscal plan specifies there should be enough funds to pay approximately 24% of the debt; however, it appears the Board will have little choice today but to revise every fiscal plan. Clearly none of the previous underlying assumptions can hold, and now the Board will have to await the actions and finding of the Federal Emergency Management Agency, while the Treasury Department will have to work with Puerto Rico to settle on a massive restructuring—or, as Puerto Rico House Representative Rafael Hernández Montañez put it: “We can’t have money spent on corporate lawyers and PowerPoint producing technocrats while funding is needed for immediate reconstruction efforts.” While FEMA has committed to paying for 100 percent of the costs of some work, on others, it is mandating a match of 20% to 25% of the costs for other work—a match which appears out of reach for the most savagely damaged municipalities or municipios—now confronted not just by enormous new capital and operating demands, but also by sharply reduced revenues.

Wednesday morning, the PREPA Bondholders Group offered up to $1.85 billion in debtor in possession loans to the authority. According to the group, part of the package would be a new money loan of up to $1 billion. Another part would be their possible acceptance of an $850 million in DIP notes in exchange for $1 billion in outstanding bonds owed to them—or, as the Group noted: “The new funding would allow PREPA to provide the required matching funds under various grants from the Federal Emergency Management Agency.” In response, PREPA’s Natalie Jaresko said: “We welcome and appreciate the expression of support from creditors…The Board will carefully consider all proposals in coordination with the government, but it is still very early as we begin to navigate a way forward following the catastrophic impact Hurricane Maria had on the island.”

The existing fiscal PREPA plan specifies there should be enough funding to pay about 24% of the debt due over the next decade; that, however, has raised questions with regard to the underlying assumptions of the Board, especially with regard to when FEMA will complete its work on the island.

Rafael Hernández Montañez, a member of Puerto Rico’s House, noted that Hurricane Maria put Puerto Rico’s territory-wide and municipal governments in very difficult financial situations. While FEMA has committed to paying for 100% of the costs of some work, he notes that the federal relief agency is still mandating a government match of 20% to 25% of the costs for other work: “It’s going to be a huge effort to cover that 20% with the government’s unbalanced budget,” adding that the hurricane will also lead to reduced revenues for the local governments.

On Wednesday, 145 U.S. Representatives and Senators signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement–the same day as the PREPA Bondholders Group offer. 

The Category 4 Maria destroyed Puerto Rico’s electrical grid; it left the island desperately short of food, clean water, and fuel—and sufficient shipping options, notwithstanding the claim from the Department of Homeland Security that: “Based on consultation with other federal agencies, DHS’s current assessment is that there is sufficient numbers of U.S.-flagged vessels to move commodities to Puerto Rico.” Thus DHS opposed a waiver of the Jones Act (Under the Jones Act federal cabotage rules, the entry of merchandise into Puerto Rico can only be made on US flag and crew ships – the most expensive fleet in the world.), which has been suspended in past natural disasters, to allow less expensive, foreign-flagged ships bring in aid. Former President George W. Bush suspended the Act after Hurricane Katrina in 2005, and President Barack Obama suspended it after superstorm Sandy in 2012. In a letter to the Department of Homeland Security, Sen. McCain criticized the department for waiving the Jones Act in the wake of hurricanes Harvey and Irma, but not for Puerto Rico. The Senator, who has long sought a repeal of the Jones Act, noted: “It is unacceptable to force the people of Puerto Rico to pay at least twice as much for food, clean drinking water, supplies, and infrastructure due to Jones Act requirements as they work to recover from this disaster: Now, more than ever, it is time to realize the devastating effect of this policy and implement a full repeal of this archaic and burdensome Act.”  Only the Department of Defense may obtain a Jones Act waiver automatically, which it did to move petroleum products from Texas after Hurricane Harvey. The White House is expected to send Congress a request for a funding package for Puerto Rico in the next few weeks, a senior congressional aide said.

The Road to Hartford’s Default. Citing deep cuts to higher education, sharp reductions in aid to distressed communities, and unsound deferrals of public pension payments, Connecticut Gov. Dannel Malloy yesterday made good on his pledge to veto the budget that legislature, earlier this month, had adopted, deeming it: “unbalanced, unsustainable, and unwise,” adding his apprehension that were it to be implemented, it would undermine the state’s long-term fiscal stability and essentially guarantee the City of Hartford’s chapter 9 municipal bankruptcy. His veto came as the Governor and top legislators continued bipartisan talks in an attempt to reach a compromise; however, despite legislative attempts to pass a bill to increase the hospital provider tax to 8 percent, a 25 percent increase over the current level, the legislature will not meet today. In his executive order, the Governor allowed key stated services to remain operating; however, he ordered steep cuts to municipalities and certain social service programs: under his orders, approximately 85 communities would see their education cost sharing grants, the biggest source of state funding for public education in Connecticut, cut to zero next month—no doubt a critical element provoking the Connecticut Council of Small Towns, which represents more than 100 of the state’s smallest communities, to seek an override in a special session the week after next in order to avoid local property tax increases. Nevertheless, Gov. Malloy stood strongly against the Republican plan and a potential override, stating: “This budget adopts changes to the state’s pension plan that are both financially and legally unsound…This budget grabs ‘savings’ today on the false promise of change a decade from now, a promise that cannot be made because no legislature can unilaterally bind a future legislature.” He added his apprehensions that the changes proposed to the state’s pension system could expose Connecticut taxpayers to potentially costly litigation down the road: “Prior administrations and legislatures have, over decades, consistently and dangerously underfunded the state’s pension obligations,’’ a strategy, he noted, which he said has led to crippling debt and limited the state’s ability to invest in transportation, education, and other important initiatives. Nonetheless, Republican leaders urged the Governor to sign the two-year, $40.7 billion budget, saying it makes significant structural changes, such as capping the state’s bonding authority and limiting spending. Fiscally conservative Democrats who bolted to the Republican side had criticized a Democratic budget proposal which had proposed new taxes on vacation homes, monthly cellphone bills, and fantasy sports betting, as well as increased taxes on cigarettes, smokeless tobacco, and hotel room rates.

House Republican leader Themis Klarides (R-Derby) warned she and her colleagues will try to override the veto—a steep challenge, as in Connecticut, that requires a two-thirds vote in each chambers, meaning 101 votes in the House and 24 in the Senate. The crucial Republican amendment passed with 78 votes in the House and 21 in the Senate—well short of the override margin in both chambers. The action came as S&P Global Ratings this week lowered Hartford’s credit rating, writing that its opinion “reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty,” albeit noting that the city could still avoid chapter 9 municipal bankruptcy by restructuring its debts. The agency wrote: “In our view, the potential for a bond restructuring or distressed exchange offering has solidified with the news that both bond insurers are open to supporting such a measure in an effort to head off a bankruptcy filing. Under our criteria, we would consider any distressed offer where the investor receives less value than the promise of the original securities to be tantamount to a default. The mayor’s public statement citing the need to restructure even if the state budget provides necessary short-term funds further supports our view that a restructuring is a virtual certainty.” Hartford’s fiscal plight is, if anything, made more dire by the fiscal crisis of Connecticut, which is still without a budget—and where the Legislature has under consideration a budget proposal from the Governor to slash state aid to the state’s capitol city of Hartford—where the Mayor notes that even were the state to make the payments it owes, Hartford would still be unable to pay its debts—so that S&P dropped the city’s credit rating from B- to C—a four-notch downgrade, writing: “The downgrade to ‘CC’ reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty.”

The Steep Recovery Road. Almost three years after exiting chapter 9 bankruptcy, Detroit is meeting its plan of debt adjustment, but still confronts fiscal challenges to a full return to the municipal market, even as it nears its exit from Michigan state oversight next year. Detroit’s Deputy Chief Financial Officer and City Finance Director, John Hill, this week noted that while the Motor City recognizes that any debt the city plans to issue will still need a security boost from a quality revenue stream and some enhancement, such as a state intercept, Detroit’s plan of debt adjustment did not assume the need for market access in a traditional and predictable way, without added security layers, for at least a decade. That assessment remains true today, as Detroit nears its third anniversary from its exit from the nation’s largest ever municipal bankruptcy. With chapter 9, Mr. Hill adds: “Everything that we have been able to do since exiting bankruptcy has an attached revenue stream to it: You secure it, and bond lawyers agonize over how that will be protected in the unlikely event of another bankruptcy, because everyone has to ask the question now. Then there is a strong intercept mechanism that goes to a trustee like U.S. Bank where the bondholders now know this is absolutely secure.”

Municipal Market Analytics partner Matt Fabian notes that Detroit continues to struggle with challenges which predate its chapter 9 bankruptcy, adding the city is unlikely to regain an ability to access the traditional municipal markets on its own in the near-to-medium term: “They don’t have traditional reliable access where if they need to go to the market, you can predict with certainty that they will and they will be within a generally predictable spread,” adding that reestablishing its presence in the traditional market is important, because it indicates whether bondholders have confidence in the city as a going concern. In fact, Detroit has adopted balanced budgets for two consecutive years; it is on a fiscal path to exiting Michigan Financial Review Commission oversight, and the city ended FY2016 with a $63 million surplus in its general fund; however, Detroit’s four-year fiscal forecast shows an annual growth rate of only about 1%.

The city’s public pension obligations, mayhap the thorniest issue in cobbling together its plan of debt adjustment, are to be met per its economic plan, via a balloon payment.  Mr. Fabian notes that the Motor City’s recovery plan and future revenue growth is complicated by the need to set aside from surpluses an additional $335 million between Fy2016 and Fy2023 to address that significant, unfunded pension liability, worrying that while the plan is “fiscally responsible;” nevertheless, it comes “at the expense of using these funds for reinvestment and service improvement.”

The plan to address pension obligations is aimed at shoring up the city’s long-term fiscal health and Naglick says it shows the city has recognized the need to tackle it. Detroit developed a long-term funding model with the help of actuarial consultant Cheiron, obtained City Council approval for changes to the pension funding ordinance that established the Retiree Protection Trust Fund, and deposited $105 million into this IRS Section 115 Trust. This fund, said Detriot CFO John Naglick, will grow to over $335 million by 2024 and will provide a buffer to increased contributions beginning then. “More importantly, the growing contributions each year from the general fund to the trust will build budget capacity to make the increased contributions in future years,” he said.

Mayor Mike Duggan claimed during his 2016 State of the City speech that consultants who advised the city through bankruptcy had miscalculated the pension deficit by $490 million. Pension woes aren’t the only challenge the city faces. Fabian said that economic development has been limited to the city’s downtown and midtown areas. The rest of Detroit’s neighborhoods haven’t fared so well.

Dan Loepp, the president and CEO of Blue Cross Blue Shield of Michigan, and Gerry Anderson, the Chairman and CEO of DTE Energy, are regarded to be among the important business leaders in Detroit, two key sectors of the Motor City’s economy, who see Detroit’s fiscal and economic trajectory as intertwined with the future of their companies; they  have headquarters in downtown and employ thousands of people including Detroiters—companies which had been making conscious and deliberate investments in the city. Asked recently to offer their perspectives about where Detroit is headed and how to include the many who are left out of the recovery, Mr. Loepp responded: “I’m a native Detroiter, and I lead a company that’s been a business resident of Detroit for nearly 80 years. I remember how uneasy it felt to be in Detroit when the national economy collapsed 10 years ago. It was hard and scary…From then to now, I strongly believe Detroit’s comeback is one of the best stories in America. The downtown is pulsing with growth and action. You’ve got business and residential development that has connected the river to Midtown and is now expanding into neighborhoods.” He added Detroit today is clear of debt and venture capital flowing backed by a city leadership which is “working well together, noting Detroit today is “now positioned to compete and win investment and jobs against any city in the country. All of this is great for Detroit.”

Notwithstanding, he warned that challenges remain: “The bankruptcy, while hard, gave the city’s leadership a clean slate to solve challenges faced by residents. The Mayor and council are working together on issues like lighting, infrastructure, zoning, and demolition…the Mayor, especially, has spent considerable energy advocating for the people of Detroit—doing things like making sure new housing developments hold space for working people of all incomes. This will promote a stronger, more diverse Detroit…Institutional issues, like improving the city’s schools and making neighborhoods safer for city residents, will take time to solve. They will take a constant, steady focus. And they need people within state and local government to work hand-in-hand with people from the neighborhoods to do the tough labor of finding sustainable solutions.” Nevertheless, he cautioned that the Motor City’s recovery is incomplete without participation of the majority: “Detroit can’t truly ‘come back’ if people living in the city are left behind. We need to always make sure there is a focus on people and that we make people a priority. Schools need to be improved. Transit needs to be addressed in a comprehensive way. Employment opportunities and housing need to be part of the master plan.”

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A Human & Fiscal Disaster

September 27, 2017

Good Morning! In today’s second Blog, we consider the fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

President Trump has amended the Puerto Rico Disaster Declaration to provide that the federal government will cover 100%, rather than the usual 75%, of costs for debris removal and emergency protective measures in the wake of the extraordinary human, physical, and fiscal damage wrought—damage surely certain to set back the U.S. territory’s fiscal recovery and efforts under Judge Laura Taylor Swain to work out a quasi-plan of debt adjustment. Puerto Rico faces weeks, if not months, without electric service as utility workers repair power plants and lines that were already falling apart. It faces a potential permanent outflow of residents who can afford to leave—potentially leaving behind a quasi-state with disproportionate numbers of retired, poor, and less educated Americans. Judge Swain yesterday issued an order to indefinitely postpone the Title III PROMESA hearing, which had been scheduled for next Monday: she requested that stakeholders to submit comments by tomorrow with regard to when the hearing should be rescheduled—adding that all subsequent hearings will take place in New York City. Nonetheless, the attorneys representing the Puerto Rico Fiscal Agency and Financial Advisory Authority made clear their desire to move forward with the case as swiftly as possible: “Despite Puerto Rico’s current circumstances, FAFAA desires to move forward with these Title III cases with as little disruption as possible: FAFAA believes that any significant delay in advancing these Title III cases would place a cloud of uncertainty over these proceedings and potentially undermine the progress achieved to date.”

At the same time, elected leaders of the Puerto Rico House and Senate have requested that the PROMESA Oversight Board stop enforcing the fiscal plan’s austerity measures for at least this year and possibly over the next five years; Puerto Rico House President Carlos Méndez Núñez reportedly asked the Oversight Board to suspend all legal proceedings against the Puerto Rico government.

President Trump yesterday announced he will visit Puerto Rico early next week, stating: “The infrastructure was in bad shape, as you know, in Puerto Rico, before the storm…And now, in many cases, it has no infrastructure. So you’re really starting from almost scratch.” The announcement and tweets, far later than announcements, federal assistance, and Presidential visits to Houston and Florida in the wake of their respective hurricane, came in the wake a  series of tweets about Puerto Rico  Monday evening, including a reference to the “billions of dollars … owed to Wall Street and the banks which, sadly, must be dealt with,’’ a tweet which drew criticism from U.S. Senate Minority Leader Chuck Schumer (D-N.Y.), who stated on the Senate floor that raising the debt issue paled “in comparison to the immediate humanitarian crisis that the island faces,” adding: “Puerto Rico needs help from aid workers, not debt collectors from Wall Street: Yes, Puerto Rico needs debt relief, but first they need humanitarian relief. Water. Food. Medicine. Fuel.” He asked that the administration prepare an immediate federal aid request to Congress for a vote by the end of this week, pointedly noting: “The administration submitted a request for aid for Hurricane Harvey less than a week after the storm made landfall: We are rapidly closing in on that same marker for Maria hitting Puerto Rico.” His remarks came as a group of 10 Democratic U.S. Senators yesterday sent a letter Tuesday to Senate Majority Leader Mitch McConnell, R-Ky., and House Speaker Paul Ryan, R-Wis., asking for both chambers to begin “immediate consideration of a supplemental appropriations bill to provide relief for Puerto Rico and the U.S. Virgin Islands in the wake Hurricane Irma and now Hurricane Maria…Specifically, we are asking that additional funds be provided to ensure an adequate balance in FEMA’s Disaster Relief Fund, and Community Development Block Grants for disaster recovery along with other disaster relief accounts be authorized and funded to respond to this catastrophe.’’

According to House Speaker Paul Ryan’s (R-Wis.) office, Congress is likely to act on several pieces of legislation: First up will be a supplemental “to ensure the FEMA disaster relief fund (DRF) has sufficient funds for immediate relief and recovery,” likely early in October, noting that the DRF also funds rebuilding and post-disaster mitigation—albeit that can take years to do. The Speaker’s office also expects the House will be “likely to provide more,” with the Speaker committing that the emerging package will address not just Puerto Rico, but also the U.S. Virgin Islands, as well as remaining needs from the havoc wrought by Hurricanes Harvey and Irma. The Speaker made clear Puerto Rico will get the same kind of help and aid as Texas and Florida, adding: “The bill we passed out of here a couple of weeks again for FEMA equally applies to Puerto Rico.”

All of Puerto Rico, yesterday, remained without power, except for generators being run by hospitals. Officials of the Federal Emergency Management Agency have not yet offered an estimate when power or communication will be restored, but FEMA has identified the supplies needed for power restoration that will be delivered by barge once Puerto Rico’s ports are reopened. That will be a Herculean challenge: catastrophe risk modeling firm AIR Worldwide estimated that more than 85% of the $40 billion to $85 billion in estimated insured industry losses caused by Maria are in Puerto Rico. AIR added that its estimate does not include infrastructure repair and replacement, the cost of hazardous waste cleanup, damage to pleasure boats and other marine craft, damage to levees or uninsured property. Rep. Jenniffer Gonzalez-Colon (R-P.R.), Puerto Rico’s non-voting Representative in Congress has estimated that Hurricane Maria caused at least $25 billion in damage.

Long Term. Former U.S. Treasury official Kent Hiteshew, the Director of the Treasury Department’s Office of State and Local Finance in the Obama administration, said, “In the short-term, Hurricane Maria is likely to produce a severe economic and fiscal shock in Puerto Rico and may further accelerate out-migration off the Island – at least temporarily…Longer term, Maria’s silver lining will likely be significant amounts federal recovery aid that could stimulate Puerto Rico’s economy and rebuild its infrastructure in a way that would not have otherwise been possible absent the hurricane.” Nevertheless, he pointed out that apart from the President’s announcement that FEMA will pick up 100% of certain initial cleanup costs, any rebuilding aid provided by FEMA will likely be accompanied by limitations: “FEMA’s programs are administratively complex, funded on a reimbursement basis and generally project, rather than general fund-based: FEMA only funds repair and rebuilding of damaged facilities–not necessarily the broader capital plan envisioned in PROMESA’s Fiscal Plan. We will have to await more detailed assessments of Maria’s damage before we can fully understand the FEMA rebuilding opportunities.” He made an even more critical point: “Lastly, PROMESA’s Fiscal Plan will likely need to be revisited in light of all of these factors with potentially even fewer available revenues for debt service–at least in the near term: Any adjustments in the Fiscal Plan will impact the current litigation and debt restructuring mediation because, under PROMESA, any Plan of Adjustment must comply with the Fiscal Plan.”

Fiscal & Human Consequences. Florida government officials are taking measures to help Puerto Ricans migrating to that state–estimated in hundred thousand–as a result of Hurricane Maria. Florida State Representative Bob Cortés, the former Deputy Mayor of the Longwood City Commission, estimated a potential influx of 100,000 Puerto Ricans to Florida, noting: “Everyone here in Florida has family in Puerto Rico, and every Puerto Rican has lost something on the Island, those Puerto Ricans are going to come and take refuge with their relatives. Personally, I have seven relatives who are coming to my house.” That is, there is a potential double fiscal whammy: an outflow of those most fiscally and physically able to leave Puerto Rico—leaving behind a more aged, poorer U.S. territory, but a territory now confronting far steeper costs, short-term and long-term with a gravely deteriorated tax base.

Municipal Fiscal & Physical Challenges

September 27, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal, physical, and human challenges to Flint, Michigan.

Visit the project blog: The Municipal Sustainability Project 

In or Out Like Flint? The contamination of Flint’s drinking water, created under a state-imposed emergency manager, forced the city, more than 1200 days ago, to temporarily use the Flint River as a source of drinking water—when the then Flint emergency manager determined not to accept the City of Detroit’s Water and Sewerage Department’s request to reconnect the city’s water supply to Lake Huron, Flint’s original source of drinking water. That prompted Gov. Rick Snyder to appoint a state overseer, so that today, there remain a number of people in Flint still living with gross, brown water that is smelly and still lead-contaminated. In the wake of the state-created disaster, there have been lingering fiscal and physical consequences: the fertility rate in Flint has dropped dramatically; infant death rate has been on the rise. Those consequences, in turn, have fiscal implications: they affect assessed property values. EPA granted Flint $100. In the wake of litigation, a federal judge approved a settlement for $98 million—with the funds intended to fix the pipes that have destroyed the lives of families; the seemingly significant fund, however, is only expected to cover the cost of repairing pipes for about a third of Flint’s citizens. Yesterday, U.S. District Judge David Lawson said he was considering a 30-day extension to Flint’s short-term contract with the Great Lakes Water Authority in order to provide the City of Flint more time to approve a long-term drinking water source—and time is becoming shorter: Flint’s contract with the GLWA is set to expire on Sunday; an extension would allow the water supply to continue for an additional 30 days. Attorneys from Flint and the state have been in mediation trying to resolve their differences regarding the future of Flint’s drinking water, after the Michigan Department of Environmental Quality sued Flint last June, arguing the Flint City Council’s refusal to approve a 30-year agreement with the Great Lakes authority was endangering public health in the wake of a lead-contamination crisis that has largely been blamed on the state itself. The agreement is projected to cost Flint $12.1 million a year, and Michigan has argued that Flint has no feasible alternate water source. Judge Lawson said that extending the contract beyond 30 days could result in further fiscal and governance challenges, noting: “It seems to me that inaction is inviting intervention.” He has scheduled another hearing this afternoon where he wishes to discuss the option of a 30-day extension. The suit here seeks to have the court “declare the City Council’s inaction will result in a violation of applicable” state and federal Safe Drinking Water laws and compel elected officials to enter into the Great Lakes Authority agreement which Flint Mayor Karen Weaver negotiated.

Physical & Fiscal Tempests

September 26, 2017

Good Morning! In today’s Blog, we consider the physical and fiscal threats to Connecticut’s capitol city, and the comparable crime apprehensions which could adversely affect Detroit’s ongoing recovery from the nation’s largest ever municipal bankruptcy, before assessing the equity of the U.S. response to the devastating hurricane in Puerto Rico–and what that might mean to its efforts of physical and fiscal recovery. 

Visit the project blog: The Municipal Sustainability Project 

 

Bleeding Hartford. As the City of Hartford reeled from a violent weekend during which two men were killed just hours apart, city leaders yesterday promised to bring more police to fearful neighborhoods, with Mayor Luke Bronin vowing the police department will continue increased staffing in areas where crime statistics show “a spike in violence or a risk of increased violence.” The Mayor’s vows came, however, at the same time he yesterday warned the holders of the city’s outstanding municipal bonds that Hartford has exhausted its fiscal capacity to levy new or higher taxes‒or to cut its way out of its insolvency: he reiterated that Hartford needs a substantial amount of state funding to avoid a Chapter 9 municipal bankruptcy. In a call with investors, Mayor Bronin detailed the city’s fiscal trauma, as well as its potential chapter 9 considerations—with one person describing the blueprint as relying on the “Detroit timeline as template for success,” referring to Detroit’s initial offer for pennies on the dollar. In this instance, the pre-planned investor call was made in the wake of Assured Guaranty’s public offer to support a refinancing of Hartford’s debt under a new Connecticut state law‒a plan under which the city would realize reduced debt service costs over the next 15 years‒with the remaining costs like a ball and chain extended far into the future, or, as Assured described it: “We believe a consensual agreement among stakeholders offers the city a better path forward than bankruptcy.”

Mayor Bronin, for his part, noted: “I appreciate Assured’s willingness to have constructive discussions…We are interested in long-term solutions that leave the city with a path to sustained solvency and strength.” The statements came as the city is biding time awaiting how much aid it might receive from the state, which itself is struggling, confronting high taxes, falling revenues, $73 billion of pension and debt obligations, and the risk of a greater out-migration of its citizens and businesses, as it is confronted by a $3.5 billion deficit over the next two years, even as its budget is nearly three months overdue. That is, Hartford’s fiscal deterioration has become part of a context of broader credit deterioration in the state—which, in response, appears likely to struggle within a context of worsening local credit quality in Connecticut. Not only is the state likely to make deep cuts to local aid in the current biennium: the state is already assuming that its municipalities will draw down reserves as a result—meaning that the fiscal ripples are likely to adversely the borrowing costs of municipalities throughout the state.

The Dangerous Road to Recovery. The FBI released data yesterday, which found that violent crime in Detroit surged 15.7 percent last year, ranking the city as the nation’s most violent big city, albeit a finding city police officials disputed. Last year, there were 13,705 violent crimes reported—murder, rape, assault, and robbery—more than 10 percent greater than the previous year. Nevertheless, Detroit Police Chief James Craig described the FBI numbers as wrong: he blamed an antiquated software system (CRISNET), which he said caused crimes to be double reported. The system, which was replaced in December, shows a 5 percent reduction in violent crime last year, according to Chief Craig. According to the FBI, Detroit’s rate of 2,047 violent crimes per 100,000 people placed it highest among cities with more than 100,000 residents, higher than St. Louis and Memphis, Tennessee—and seemingly reversing the city’s post chapter 9 implementation of its plan of debt adjustment: violent crime in the Motor City had declined 13% in 2015, making it second in the country behind St. Louis.  According to the FBI report, murders rose in Detroit last year as well: 303 in 2016 from 295 in 2015, up 3 percent, albeit that lagged the national violent crime rate increase, which rose for the second year in a row, up 4.1 percent from last year. Murders in the United States were up by 8.6 percent, according to the FBI data. Thus, notwithstanding the headlines the Windy City, Chicago, has garnered for its rise in murders: 765 in 2016 compared with 478 in 2015, a 60 percent increase, Chicago’s is significantly lower than Detroit’s.

A Double Standard for Puerto Rico? Puerto Rico Gov. Ricardo A. Rosselló yesterday warned the U.S. territory was on the brink of a “humanitarian crisis,” even as U.S. Navy vessels docked in Virginia which could be invaluable in rendering the kinds of critical recovery the federal government provided to communities in Texas and Florida remain docked nearly a week after Hurricane Maria knocked out all of Puerto Rico’s electricity, most of its potable water, and fearful of the collapse of a major dam. The Governor urged Congress to act swiftly to avert a deepening disaster, asking that Puerto Rico be accorded the same treatment as hurricane-ravaged states. Despite the silence from President Trump, the Governor urged Republican leaders in Congress to move swiftly to send more funds, supplies, and relief workers: “Puerto Rico, which is part of the United States, can turn into a humanitarian crisis…To avoid that, recognize that we Puerto Ricans are American citizens; when we speak of a catastrophe, everyone must be treated equally.”

The dire physical situation, moreover, could bode even more dire fiscal consequences: as Gov. Rosselló warned Puerto Ricans are expected to flee in droves to the continental U.S., increasingly leaving behind the old and the poor, aggravating the fiscal hurricane—or, as the Governor put it: “If we want to prevent, for example, a mass exodus, we have to take action. Congress, take note: Take action, permit Puerto Rico to have the necessary resources.”

In the wake of criticism for a lack of public support for Puerto Rico, President Trump yesterday took time from tweeting about the NFL to post a pair of tweets which nevertheless identified the devastating connections between the natural disaster to Puerto Rico’s increasingly desperate fiscal situation, writing that while Florida and Texas were coping well from hurricane damage, “Puerto Rico, which was already suffering from broken infrastructure & massive debt, is in deep trouble,” adding in a subsequent tweet: “…owed to Wall Street and the banks which, sadly, must be dealt with. Food, water and medical are top priorities—and doing well.” Congressional leaders yesterday claimed they were awaiting assessments of the damage in Puerto Rico, as well as a formal disaster request from the Trump administration, before Congress can act; unfortunately, such a request is not expected until early to mid-October, even as House Appropriations Committee Chairman Rodney Frelinghusyen (R-N.J.) issued a statement noting that Puerto Ricans on the island “are entitled to equal treatment under the law.”

FEMA is currently drawing from the same $15.3 billion appropriation approved this month by Congress in response to Hurricane Harvey, which hit Texas, and Hurricane Irma, which hit Florida and damaged Puerto Rico and the United States Virgin Islands. FEMA Director Brock Long, and Thomas P. Bossert, the President’s Homeland Security adviser, were both in Puerto Rico yesterday to assess the damage, with Director Long asserting that the federal government had 10,000 people “working around the clock” to help Puerto Rico. Puerto Ricans can now file damage claims with FEMA, which has sent teams to 10 municipios to go house to house to collect information and pass it on, according to Gov. Rosselló; nevertheless, more than half the territory is without potable water—100 percent is without electricity. All of Puerto Rico’s wastewater and water treatment plants lack electricity.

Some Democrats want Congress to quickly approve a relief bill, but to, at the same time, temporarily forgive Puerto Rico’s loan repayments and remove a requirement that Puerto Rico contribute into the federal emergency pot. Indeed, the physical and fiscal damage to the U.S. Virgin Islands and Puerto Rico, has meant the halt of all PROMESA-related creditor and debtor considerations: in the wake of the storm, and the diversion of all Puerto Rico governmental focus on saving lives, it is unlikely Puerto Rico will be making interest payments on its debts for the foreseeable future: the restoration of vital public utilities to ensure the provision of water and electricity is a much higher priority: there is access to safe drinking water to only a quarter of Puerto Rico’s residents. In the three decades that National Guard Brigadier General Wendul G. Hagler II has served, he described the situations as “about as large a scale damage as I have ever seen.” 

A related fiscal danger could be an accelerating exodus of more educated and skilled Puerto Ricans, likely in the thousands, to leave for the continental U.S., leaving behind a population in need of far greater vital public services, but a deteriorated tax base—with some estimates that such an exodus could be greater than 10%.  

Fiscal & Physical Sustainability in the Face of the Fiercest of Physical & Human Storms

September 22, 2017

Good Morning! In today’s Blog, we consider the physical and fiscal storm threats to Puerto Rico, before finally looking back at post-riot Ferguson, Missouri and its ensuing fiscal state.

Visit the project blog: The Municipal Sustainability Project 

Fiscal & Fiscal Storm. Hurricane Maria, the most powerful storm to make a direct hit on the U.S. Territory of Puerto Rico in almost a century, has devastated—physically and fiscally the island: it knocked out all electricity, deluged muncipios with flash floods and mudslides—with the storm following in the wake of Hurricane Irma. Thousands of residents fled the winds and rain, as Gov. Ricardo Rosselló warned he could not be certain of the storm-worthiness of structures intended to offer shelter. In the capital of San Juan, tree trunks and electricity poles had snapped like twigs, obstructing major highways—that is obstructing those not already flooded. There was widespread devastation in muncipios. Gov. Rosselló estimated there were at least $1 billion in damages to the island—and that was in the wake of the earlier hurricane which Moody’s Investors Service Vice President Richard Donner had stated would damage many of the Puerto Rico Electric Power Authority’s transmission lines, meaning that not only would the public authority be forced to use its little remaining cash on repairs, it would also suffer reduced income from the electrical outages. Bondholders will be ever farther back in the line.

Mayor Félix Delgado of Cataño, on the northern coast, told a San Juan radio station that the storm had destroyed 80 percent of the homes in the Juana Matos neighborhood—fortunately all had been evacuated. FEMA Director Brock Long said that the U.S. Virgin Islands and Puerto Rico had very fragile power systems, thus electricity was expected to remain out for a very long time. Indeed, the storm laid bare Puerto Rico’s fragile infrastructure, exacerbating fiscal and physical challenges—especially for the fiscally insolvent state-owned Puerto Rico Electric Power Authority (PREPA), knocking out all the work PREPA had completed in the wake of the earlier Hurricane Irma—and exacerbating the question with regard to how Puerto Rico, already in quasi chapter 9 bankruptcy, could conceivably finance the requisite comprehensive repairs. Before that, PREPA and the Governor confront the urgent challenge of restoring potable water and electricity: President Elí Díaz Atienza of the Aqueduct and Sewer Authority said that the agency’s communications systems had gone down and that he was unable to check on plants and offices. Puerto Rico’s Emergency Manager Director Abner Gomez’s stated that this would be an unprecedented challenge; President Trump declared Puerto Rico a disaster zone and ordered federal assistance.  

For the U.S. territory already in quasi-bankruptcy, the devastation raised hard questions with regard to how PREPA, especially, will be able to generate revenues to meet its already overwhelmed debts. Even though, as Gov. Rosselló said, Puerto Rico had updated its building codes about six years ago; nevertheless, many traditional dwellings, the Governor said, “had no chance.” Nevertheless, he noted: “There is no hurricane stronger than the people of Puerto Rico.”

Still, even assessing the extent of the damage has been fraught with uncertainty: dozens of the island’s muncipios remained isolated and without communication in the wake of the Category 4 storm with 155 mph winds, forcing the imposition of a 6 p.m. to 6 a.m. curfew imposed by the Governor. Fabulous Matt Fabian of Municipal Market Analytics noted that the damage wrought by Maria could factor into future decisions by the PROMESA control board with regard to what payments might eventually go to Puerto Rico’s municipal bondholders, asking rhetorically: “Why would a court decide ‘yes, investors, you should take more money off the island?” (The PROMESA Board is currently trying to assess what portion of the Puerto Rico’s current obligations to investors or holders in its municipal bonds must be paid.)

How Hard the Road to Recovery Is. Not far from the Missouri courthouse where a white former police officer had been acquitted in the shooting death of a black man, a federal judge said in a hearing that officials in the suburb of Ferguson had made “good progress” since 2014, even as barricades and yellow police tape surrounded the court house, evidence of the protests that have been going on since Jason Stockley was found not guilty in the 2011 shooting death of Anthony Lamar Smith. Actually, per capita income has declined almost 6 percent; yet the mood was more hopeful inside the courtroom of U.S. District Judge Catherine Perry, who is overseeing the federal consent decree struck last year between the City of Ferguson and the U.S. Justice Department related to unconstitutional policing practices which came to light three years ago in the wake of a white police officer shooting and killing an 18-year-old black man, Michael Brown. In the hearing, Jude Volek of the Justice Department’s Civil Rights Division, testified the Justice Department was committed to seeing reforms through in Ferguson, adding that Ferguson had made “good faith” efforts to meet the demands of the consent decree, which, as we had noted at the time, came in the wake of the Justice Department report finding that the city had treated residents as sources of revenue rather than as citizens to be protected.

The court heard further testimony that Ferguson had rescinded ordinances, made “really incredible progress” on its use-of-force policies thanks to Ferguson Police Commander Frank McCall, boosted assistance and support for officers in dealing with the stress of their jobs, taken “really proactive steps” on officer pay, and put in place a new judge who brought a “fresh approach” to the city’s municipal court—a court which, nevertheless, is confronted by a backlog of “thousands of cases,” cases predating Mr. Brown’s 2014 death. The city’s attorney, Apollo Carey, admitted in his testimony that Ferguson had a large backlog of cases, testifying the city needed to prioritize its work on the backlogged boxes of files to determine whether there is “good cause” to continue prosecuting the cases when outstanding arrest warrants could carry significant repercussions for citizens accused of minor violations. Mr. Carey noted Ferguson has 42 police officers and wants to round that number up to 50.

In the hearing, Natashia Tidwell, the court-appointed monitor overseeing the implementation of the consent decree, agreed that the city had made progress on municipal court reform, calling the new municipal judge a “breath of fresh air” who obviously had “empathy” for the individuals appearing before him; however, she testified that thousands of citizens still had warrants out and “could be living in constant fear” that they would be arrested. Judge Perry, at the end of the hearing, said she believed progress is being made. But whether fiscal progress is being made seems to be a different question—one not before the Judge. The city,which, twenty-seven years ago was a middle class suburban enclave north of St. Louis with a population about three-quarters white, by 2000, was roughly split between black and white with an unemployment rate of 5%. That has continued to shift, so that by 2010, the population was two-thirds black, unemployment had exceeded 13%, and the number of residents living in poverty had doubled in a decade. The city’s population has declined by just under 6 percent since 2000; and estimated median income has dropped by nearly 2o%.

 

Physical & Fiscal Storms

September 20, 2017

Good Morning! In today’s Blog, we consider the fiscal challenge confronting the small Virginia municipality of Pound; then we turn to the fiscal and physical storms pounding the U.S. Territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Pound fiscally pounded. The Council of the small Virginia Town of Pound, the original home of former U-2 pilot Gary Powers, with a population under 1,200, where the median income for a household is under $30,000, confronted by an inability to make payroll and pay other bills due has unanimously agreed in an emergency meeting to borrow enough to pay employees, but not any other outstanding obligations. The Mayor and interim Town Manager George Dean advised the Council that resources in the general fund get low about this time every year; this year, he noted, however, the town has experienced some unanticipated expenditures; thus it needed to tap into its line of credit. As factors, Manager Dean identified unbudgeted overtime, especially in the police department, as the single biggest problem.  He added: “I did not budget to have a chief of police and an assistant police chief in the office side by side,” adding the town could not sustain the current level of overtime. In response, Councilman Terry Short said that with eight officers, there should be no need for overtime, asking how the officers are receiving more overtime than is budgeted. The Manager responded: “You have to ask him,” referring to Chief Tony Baker—which unsurprisingly led Councilman Clifton Cauthorne to note that the town manager is in charge of the finances. But Manager Dean was clear: “I’m not telling the Chief of Police how to run his department: You all need to address that.”  But Councilmember Short noted that when four full-time officers are receiving more than 100 hours of overtime, “we’ve got a problem.”  Town clerk and bookkeeper Jenny Carter, however, said the Police Department was not the only position drawing overtime out of the general fund, telling Council her position also is paid through that account, and she logs considerable overtime, because the office is so understaffed. She had four meetings last month, Ms. Carter noted, and it took 23 and a half hours to type up all those minutes. So, how much was budgeted, Councilman Danny Stanley asked. Eight hours, Ms. Dean responded. While there was some discussion that the seasonal financial crush should ease when the town converts to a twice-annually billing cycle, Ms. Carter said she was confident that will resolve matters in the future; however, she also suggested Council consider increasing the town’s line of credit—a suggestion Councilmember Cauthorne was quick to oppose, noting: “I feel that is like giving a drunk more booze,” adding this was not the first year the town has run into this fiscal problem—or, as one of his colleagues added: “[it] just continues to snowball,” overspending every year, robbing Peter to pay Paul, borrowing money it does not have and without a method to pay it back. Asked how much the town has repaid of its original debt, Ms. Dean said the town still owes the bank about $65,000, adding the town has access to roughly $35,000 available of a $100,000 line of credit, while Ms. Carter said the town is negative $24,500 in the general fund, with open payables of almost another $10,000. If the Council is going to put any more on the line of credit, Councilman Cauthorne made clear he wants to revisit automatic spending cuts—reminding his colleagues that Pound had adopted a plan in 2014 to trigger automatic cuts if the town ever reached $55,000 of its line of credit—an action the Council rescinded a year later.

Councilmember Short said the town’s internal controls require use of time cards, and other kinds of time sheets have not been approved, moving to mandate immediately that all employees use time cards as required by Pound’s internal controls policy: he further noted that the town has a budget and has policies and procedures to control operations, adding: “All we have to do is follow it. It’s that simple.” Council unanimously endorsed requiring time cards as per existing policy. Councilmember Short then moved that all overtime require approval of the town manager, including the police force, but Manager Dean immediately objected, stating: “That’s not going to work,” adding he was not going to comply and Council would have to figure out who was going to tell the police chief, adding: “I am not in control of the chief of police’s overtime hours…He works for you…We’ve got a financial problem here and we’ve got to do something about it: the Council is being asked to borrow money to pay for bills which “we are not controlling.” With regard to employees spending more money than is budgeted, he added: “I don’t know of any business that works like that. If they do, it ain’t long before they are out of business…” He noted they are obligating all taxpayers in the town when they sign contracts borrowing money and citizens are financially obligated to repay that money if the town goes under.

Fiscal & Physical Storms. Promesa Oversight Board Executive Director Natalie Jaresko, in an interview with the Bond Buyer, warned that Puerto Rico is confronted by what this morning could be the strongest hurricane to ever hit the U.S. territory, further decimating public utilizes and forcing the virtually insolvent government to rebuild dozens of communities. But she also said she anticipated Puerto Rico’s fiscal ability to make its requisite municipal bond payments should improve after nine years, expressing optimism with regard to Puerto Rico’s future and the PROMESA board’s relationship with the government of Gov. Ricardo Rosselló—albit, she added, the next few years of reform will inevitably be tough: the PROMESA Board does not expect Puerto Rico to return to nominal gross national product growth until FY2022 and inflation-adjusted growth until FY2024, adding that by the end of the next decade, she anticipates Puerto Rico’s economy to be growing, noting: “In the years 11 to 40 there’s bound to be more cash in all the estimates available for debt service: So creditors shouldn’t only focus on the 10 years.” She added that the Board is working on a “plan of adjustment” for the debt, as provided under PROMESA, albeit she was uncertain when the plan would be publicly released. With regard to timing, she said, in the interview, that Judge Swain has said she plans to rule by mid-December on the dispute between the Puerto Rico Sales Tax Financing Corp. (COFINA) and Puerto Rico over the ownership of sales tax proceeds allotted for the former. Once this is done, she noted, Puerto Rico may pay some of the debt due this fiscal year, adding that work on restructuring all of Puerto Rico’s public sector debt is proceeding simultaneously on three tracks: in negotiations, in the private mediation process overseen by Barbara Houser, and in the Title III litigation process overseen by Judge Swain. She added that the PROMESA Board is working with PREPA and parts of Gov. Rosselló’s administration to adopt a new fiscal plan for PREPA, noting that lowering Puerto Rico’s electric rates would be a vital step for enhancing the economy—albeit Hurricane Maria appears to have very different implications.

With regard to the relationship between the PROMESA Board and the Governor, the Director was generally positive, adding she said she was satisfied with government’s progress in releasing financial information to the board, noting that the Rosselló administration is providing the PROMESA board a report comparing budgeted to actual spending department by department, as well as weekly reports on cash and liquidity, adding that Puerto Rico is moving towards better accounting practices.

Interestingly, the Director said the experience she gained from her service as the Minister of Finance for Ukraine from 2014–2016, taught her “implementation is everything.” Last month, she said, a lack of implementation plans had led the PROMESA Board to order Puerto Rico to institute furloughs, noting: “There are governments aplenty that can adopt plans, adopt laws, have full commitment and desire to change but implementation at an agency level in a bureaucracy is extremely difficult: that is the key to success,” adding that she believes the Rosselló administration has been “committed” to the fiscal plan: “If you take the case of right-sizing the government, I have no doubt there is a desire and intent and it is part of the public campaign of the governor to right-size the government. So I don’t think there’s not an alignment in the goal.” Nevertheless, as she put it—and as we have learned from Pound: “[T]he devil will be in the details of the implementation and enforcement of the fiscal plan, and that is the biggest lesson learned [from the Ukraine.]” to execute cuts in an agency, the agency can run out of money eight or nine months into the fiscal year, she said. “Then the agency usually turns to the central government for an additional allocation to continue operations…“There is a general fatigue among creditors [with Puerto Rico’s continuing problems] and I understand that because they have been dealing with these problems for years. But the problems that grew didn’t evolve overnight and didn’t evolve over one year and resolving them is also going to take time.”

It is unclear what level of fiscal planning will be sufficient today as Hurricane Maria, bringing sustained winds of 160 miles per hour (mph) appears relentlessly approaching—with the government insisting its the priority is to save lives, even as it continues to deal with the after effects of Hurricane Irma, which passed tens of miles above the north coast. The National Weather Service warned: “It is catastrophic in every way, winds, rain and storm surge. We are talking about an extremely dangerous event.” Along with winds of 160 mph and even higher gusts, Maria was predicted to bring 12 to 18 inches of rain, and up to 25 inches for isolated areas in Puerto Rico: the storm surge is estimated from 6 to 9 feet, with large breaking waves that could reach 25 feet. Governor Ricardo Rosselló Nevares urged citizens and families to seek save havens to prevent the loss of human lives: “We have not experienced an event of this magnitude in our modern history…An event like this has never happened before. Maria is predicted to be the worst atmospheric event in a century in Puerto Rico, and, if we do not take precautions, we will have loss of lives that we could have avoided.” The Governor noted that yesterday afternoon residents had already begun to move in five communities which are threatened due to their location in flood-prone areas: Juana Matos, in Cataño; Playita, in Salinas; Amelia, in Guaynabo; Islote, in Arecibo, and Palo Seco, in Toa Baja: by yesterday afternoon, there was clearance and authorization for opening 499 shelters, 49 more than for Hurricane Irma: the Gov. noted: “The main goal is to save lives. If you are in a flood area, your life is in danger. If you live in a wooden home, your life is in danger.” Already, from the previous Hurricane Irma 27 municipalities in Puerto Rico have already been declared disaster areas. Thus, even as Maria roars in, there are still many, many customers without power, homeless citizens, houses without walls, trees lying on power lines, and debris accumulated along the roads.

At the request of the Puerto Rican government, President Trump had already authorized a new emergency declaration before the arrival Maria: Puerto Rico FEMA Director Alejandro de la Campa indicated that he had requested more equipment from the US Department of Defense: “We are asking for more ships, and the aircraft carrier (available for the emergency) has moved to be in a safe area… And ships with helicopters that we will use in case of evacuation or search and rescue are still in the area.” Nevertheless, due to the fragility of the infrastructure of the Puerto Rico Electric Power Authority (PREPA), the Governor anticipates Puerto Rico will be without power after the passage of Maria: “No one in Puerto Rico should expect to have power on the days following María. The time it will take us to fix (the damage caused by the hurricane) remains to be seen.” PREPA Executive Director Ricardo Ramos noted that the total recovery of the system after the passage of Hurricane Hugo in 1989 took about six months. One especially cruel threat will be water: Elí Díaz, the Executive Director of the Puerto Rico Aqueduct and Sewer Authority, noted: “If there is damage to large generators, there will be no power generation, therefore, our facilities will not have power to operate,” adding that there are approximately 1,300 generators which received preventive maintenance since the beginning of the hurricane season, but they are not enough for their 4,000 facilities, including pumping stations. By yesterday afternoon, they managed to prepare 110 tanker trucks, more than double those used during Irma, and are already managing imports from the port of Jacksonville in agreement with private companies. He added that since last Sunday, the levels of the Carraízo and La Plata dams have been gradually dropped to about three meters in order to prevent them from having to open the emergency flood gates.

For his part, last evening, President Trump tweeted his support: “Puerto Rico being hit hard by new monster Hurricane. Be careful, our hearts are with you-will be there to help!” The eye of the hurricane passed near or over St. Croix last night, prompting U.S. Virgin Islands Gov. Kenneth Mapp to insist that people remain alert. St. Croix was largely spared the widespread damage caused by Hurricane Irma on the chain’s St. Thomas and St. John islands just two weeks ago; however, this time, the island would experience five hours of hurricane force winds, Mapp warned: “For folks in their homes, I really recommend that you not be in any kind of sleepwear: Make sure you have your shoes on. Make sure you have a jacket around.”

On the Edge of Municipal Fiscal Cliffs

September 20, 2017

Good Morning! In today’s Blog, we consider the upcoming challenge for voters in Detroit—with a Mayoral election around the bend—and the city aspiring to be in the competition for selection by Amazon as its second site. Then we look at the physical and fiscal storm threats to Puerto Rico, before finally looking back at post-riot Ferguson, Missouri.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of a Fiscal State/Local Cliff.  The Latin incantation, “Speramus meliora; resurget cineribus,or, translated: “We hope for better things; it will arise from the ashes,” is Detroit’s motto: it came from a French Roman Catholic priest, Father Gabriel Richard, who was born in France in 1767 and moved to Baltimore in 1792 to teach math. Reassigned to do missionary work, he moved first to Illinois and later to Detroit, where he was the assistant pastor at St. Anne’s Church—a church founded in 1701 and possibly the oldest continuously operating Roman Catholic parish in the U.S. Two hundred twelve years ago, on June 11th, a fire destroyed nearly all of then-Detroit, just weeks before the Michigan Territory was established. Today, nearly three years after the once-great city, the “arsenal of democracy” during World War II and home of the world’s most innovative manufacturers, emerged from the nation’s largest ever chapter 9 bankruptcy, national interest in Detroit has waned: in some ways, it has become a tale of two cities: One a city still mired in poverty and unemployment; one an emerging vibrant metropolis and global self-driving car center. And all this is occurring as the voters prepare to re-elect Mike Duggan—whose most profound achievement has been to raze much of the city, after first being elected in a write-in campaign. But, last month, voters in the primary gave him 68% of the votes—likely foretelling November’s re-election—in a campaign against the son of Coleman Young, Detroit’s first black mayor. Almost more than any other city in the nation, Detroit is not just a city emerging from the ashes, but also a city of profound racial transition: Over the past forty-year, Detroit has undergone a racial transformation: from 70% white in the 1960s to just 10% today. The Detroit News described the Mayor’s self-referral as a “metrics nut:” describing cabinet meeting room as one blanketed in graphs charting the city’s employment, ambulance delivery and crime rates, among other statistics. “The police are going to show up in under 14 minutes; the ambulance is going to show up in under 8 minutes; the grass is going to be cut in the parks every 10 to 12 days—it just is.” The paper notes that: “City employees who do not meet these targets do not last long.”  But, as the city’s emergency manager charged by Gov. Snyder with taking the Motor City into chapter 9 bankruptcy and then out noted to me on that very first morning, the critical distinction between municipal and corporate bankruptcy is to ensure the streetlights, traffic lights, police and fire are working. That has been an ongoing, post-plan of debt adjustment priority, and, the numbers have continued to improve: today police response times are down from an average of 40 minutes to 13.

Mayhap a far greater governance challenge, however, has been to reverse the flight of residents from the city—flight which bequeathed 40,000 abandoned properties—properties which could become havens for crime, paid no property taxes, and adversely affected the assessed values of neighboring properties in one of the nation’s largest—by land area of 139 square miles—a city once the home to 1.8 million—thrice today’s population. Or, as David Schleicher of Yale Law School described the city: it “is just too big,” to accommodate “the expense of providing services.” The Mayor has sought to “right-size,” as it were, by means of razing abandoned homes, in part via the expansion of the Detroit Land Bank, a quasi-governmental authority which now owns 96,000 properties across the city—most of them acquired through foreclosure because of unpaid taxes. Thus, the land bank has succeeded in centralizing the city’s control over abandoned and vacant properties; Detroit has replaced an antiquated registry scattered across 83 data sets, and erased liens and back taxes as a means to facilitate the clearing and demolition or restoration of properties. Since his election, the city has focused on the highest density districts, where the city has demolished 11,900 residential properties. The results indicate that the demolition of a blighted property increases the value of a nearby home by 4.2%, according to one study. And the pace has been unprecedented—indeed, so fast there have been allegations of improper contract awards; there has been a federal investigation; and Michigan’s state housing agency suspended funds for two months, after a state audit found improper controls in place. Land bank officials, including the director of demolitions, have resigned. Mayor Duggan, who has not been a subject of the investigation, blames the mistakes on a desire to increase the pace of demolitions, but acknowledges that regulators were right to rap his knuckles.

Under the program there has been, consequently, a high pace of tax foreclosures—the main pipeline for properties which end up in the land bank’s possession: under Michigan law, owners who do not pay taxes after three years lose their property—properties last comprehensively reassessed decades before market values plummeted, meaning many are set too high. Between 2006 and 2012, median sale prices for city houses fell from $70,000 to $16,200; thus, the owner of a house worth $15,000 could owe $3,000 in property taxes. The state-mandated interest rate on property-tax debt is 18% per year. Thus, an update completed at the beginning of this calendar year should lead to lower bills, but it will not be retroactive; thus, up to 53,000 properties will receive foreclosure notices this autumn. While not every foreclosed property will necessarily end up lost, tax foreclosures, driven by government policy rather than market forces, could force out longtime residents, ironically exacerbating the very problem the Mayor is focused upon: even as the demolition drive has already cost the city’s taxpayers some $162 million, the average back taxes for homes put up for auction are $7,700—much less than the cost of demolition. Or, as Michele Oberholtzer, Director of the Tax Foreclosure Prevention Project puts it: “It’s like an auto-immune disorder: We penalize people for not paying, and then we end up paying more for the punishment.” Nevertheless, Mayor and candidate Duggan believes that at the current pace of demolitions, he can clear the city’s long-standing blight within five years—mayhap paving the way for a smaller but much more vibrant city.

Fiscal Hurricane. With still another hurricane bearing down on Puerto Rico (damages caused by Hurricane Irma are estimated at more than $600 million), a fiscal storm appears in the offing after, yesterday, an agreement among Senate Finance Committee leaders to push this month the reauthorization of the Children’s Health Insurance Program for five years raised doubts about with regard to whether Medicaid funds to stabilize the finances of the Puerto Rican health system could be included in that legislation: according to the agreement between the Chairman, Republican Orrin Hatch (R-Utah), and Ranking Member Ron Wyden (D-Oregon), that program would be refinanced for another five years; however, the agreement did not include funds to close the so-called “abyss” in Medicaid funds, which would reach $ 369 million this fiscal year and then rise to about $ 1.2 billion that has been asked annually for reimbursement under the Affordable Care Act, or, as former Puerto Rico Governor Aníbal Acevedo Vilá, who was representing Gov. Ricardo Rosselló, noted: “From what I’ve been told, we are not included.” His statement came as Gov. Rosselló arrived last night in Washington, D.C. along with former Governors Acevedo Vilá and Alejandro García Padilla to meet with House Minority Leader Nancy Pelosi (D-Ca.), as the Senate Finance Committee hurries to approve the reauthorization of the CHIP program before the law expires at the end of this month. Chairman Hatch, however, has indicated that his intention is that the reauthorization of the program not increase the federal deficit—an intention which could singularly complicate the mission—even as House Speaker Paul Ryan (R-Wis.) earlier this year had told resident commissioner, Jennifer Gonzalez, that CHIP’s reauthorization was the ideal vehicle for legislating new Medicaid allocations, due to the depletion of Affordable Care Act funds in April. (For the current fiscal year, Puerto Rico’s allocation is $172 million. Meanwhile, there are already 12 Puerto Rican municipalities within  the  federally declared disaster zone: the first ones were the municipalities of Vieques and Culebra. Yesterday, Adjuntas, Canóvanas, Carolina, Guaynabo, Juncos, Loíza, Luquillo, Orocovis, Patillas and Utuado were added—with Gov. Rosselló making the announcement yesterday accompanied by FEMA Administrator William Long,  albeit the Governor added: “This does not imply that the list of municipalities is finished, it´s not over. This simply implies that as we receive  information (from the affected municipalities) and we send it to the federal government, then, we are able make these declarations.”

Good Gnus. Puerto Rico’s median household income climbed 7.8% from 2015 to 2016 according to the U.S. Census Bureau American Community Survey statistics, with the survey showing that mean household income was up 2.3% after inflation—a stark contrast with the generally negative economic data coming out of Puerto Rico. For example, Puerto Rico’s economic activity index declined 2.1% in July from a year earlier, according to a report from the Government Development Bank for Puerto Rico: according to the U.S. Bureau of Labor Statistics’ household survey, total employment in August on the island was down 0.25% from a year earlier. According to its survey of workplaces, total employment was down 1.1%. In addition, the American Community Survey showed that net migration to the rest of the United States increased to 67,000 in 2016 from an average of 44,400 per year from 2006 to 2015—that is nearly 50%. Data from the Puerto Rico Ports Authority show that the average net migration was 65,700 per year from 2006 to 2015. The difference may reflect that some Puerto Ricans migrate to countries beside the U.S., according to Mario Marazzi, executive director for the Puerto Rico Statistics Institute.

Coming Back. Moody’s has revised upwards its credit rating for Ferguson, Missouri in the wake of efforts to recover fiscally from the aftermath of a controversial police shooting, the rating agency has revised the city’s outlook on its junk-level Ba3 general obligation rating to positive from negative. The city lost its investment grade rating as it dealt with the aftermath of the August 2014 fatal shooting of Michael Brown, an unarmed African-American, by a white police officer. The shooting led to local protests and a federal probe in the city of about 21,000 just northwest of St. Louis. The city faced rising legal expenses as it dealt with a federal probe into policing and court tactics and then the costs of a settlement, and took a hit on sales and other taxes. The city has also lost a chunk of court-fine related revenue it relied on as the state government cracked down on local government use of fine levies to balance budgets. After spending cuts and other management efforts, the city is expected to begin to shore up its balance sheet as voter approved tax revenues flow into city coffers. “The positive outlook reflects the likelihood the city’s materially improved fiscal condition will continue over the next two years, especially because new taxes implemented during fiscal years 2016 through 2018 will lead to the greater likelihood of operating surpluses and improving reserve levels,” Moody’s noted, as it affirmed the B1 rating on the city’s 2013 certificates of participation and the B2 rating on its 2012 COPs: the upgrade reflects Ferguson’s current fiscal condition in the wake of several years of rapidly declining reserves and uncertainty for further operating declines; it incorporates a moderately sized tax base with a trend of declining assessed valuation, below average resident wealth, and above average yet manageable debt burden. The agency notes that the rating remains challenged by ebbing reserves and the costs of federal consent decree measures which contributed to operating deficits in fiscal 2014 through 2017; the city anticipates a $312,000 deficit for FY 2017, but, with fully phased in, voter approved taxes coming in next year, the FY2018 budget estimates a $48,000 general fund surplus. From a high in fiscal 2013, the general fund balance declined to $3.6 million or 33.5% of revenues from $10.5 million. Reserve levels remain healthy on a relative basis compared to its peer group but the city’s operating flexibility is notably narrower than it has been. The city is working towards meeting milestones and establishing policies as required in its 2016 Department of Justice consent decree. Consent decree annual expenses have declined to $500,000 from projections of $700,000 to $1.5 million. Tax hikes are projected to generate an additional $2.9 million in annual revenue for the general fund in FY2018.