A Physical & Fiscal Storm of the Ages

May 30, 2018

Good Morning! In this morning’s eBlog, we worry that, based upon a New England Journal of Medicine study, Hurricane Maria caused far greater human and property devastation than official FEMA and other federal reports reported.

The Journal study reported that at least 4,645 people died as a result of Hurricane Maria, a storm which wreaked some $90 billion in damage and its physical and human devastation across Puerto Rico last year—an estimate which far exceeds the federal government’s official death toll of 64—and makes clear that the brief Presidential visit to throw paper towels marked an embarrassing demonstration—one now in even starker contrast to the White House response to Houston. The study found that health-care disruption for the elderly and the loss of basic utility services for the chronically ill had significant impacts across the U.S. territory, leaving disparate and devastating chaos not just to human lives, but also to Puerto Rico’s electrical grid and public infrastructure—meaning some communities or muncipios were completely isolated for weeks amid road closures and communications failures.

Scientists from the Harvard T.H. Chan School of Public Health and Beth Israel Deaconess Medical Center Researchers calculated the number of deaths by surveying nearly 3,300 randomly chosen households across Puerto Rico, comparing the estimated post-hurricane death rate to the mortality rate for previous year: their surveys indicated that the mortality rate was 14.3 deaths per 1,000 residents from Sept. 20 through Dec. 31, 2017, a 62% increase in the mortality rate compared to 2016, or what they termed 4,645 “excess deaths,” writing: “Our results indicate that the official death count of 64 is a substantial underestimate of the true burden of mortality after Hurricane Maria.”

The study criticized Puerto Rico’s methods for counting the dead, as well as the lack of transparency in sharing information, noting it would detract from planning for future natural disasters. The authors called for patients, communities, and doctors to develop contingency plans for natural disasters. Today, more than eight months after the powerful hurricane’s physical and human devastation, Puerto Rico’s slow recovery has been marked by a persistent lack of water, a faltering power grid, and a shortage of essential services. These failures, moreover, on the cusp of the new hurricane season, have exacerbated Puerto Rico’s fiscal challenges.

The study also found that Puerto Rico’s recovery was hindered by numerous systemic failures, as well as what the scientists determined assessed as a complex method for certifying the deaths in San Juan: they noted that the Centers for Disease Control and Prevention reports that deaths can be directly attributed to storms like Maria if they are caused by forces related to the event, from flying debris to loss of medical services; however, in Puerto Rico, such deaths continued for months.

The government of Puerto Rico, notwithstanding the inadequate FEMA response compared to Houston, nevertheless was sharply criticized for its response , especially after initially reporting that only 16 Puerto Ricans had died as a result of the storm—a number which more than doubled by the time of the President’s very brief visit to assess the damage last September: a number which continued to escalate until early last December, at which time authorities 64 had died, an official death toll, which counted those who suffered injuries, were swept away in floodwaters, or were unable to reach hospitals while facing severe medical conditions. The Journal study, however, concludes there were likely thousands more Americans who died in the weeks and months that followed, but who were not counted—raising questions with regard to both the role of FEMA, as well as the manner and integrity of the Puerto Rico government’s protocols for certifying hurricane-related deaths: Gov. Ricardo Rosselló’s administration did not release mortality data immediately after the storm, nor did his administration’s officials provide much information publicly about the process officials were using to enumerate the dead.

However, in the wake of pressure by Congress, as well as statistical analyses from news organizations assessing a much higher death toll, Gov. Rosselló enlisted the assistance of George Washington University experts to review the government’s death certification process, vowing that “regardless of what the death certificate says,” each death would be inspected closely to ensure a correct tally, stating: “This is about more than numbers. These are lives: real people, leaving behind loved ones and families.”

Dean Lynn Goldman of the George Washington University Milken Institute School of Public Health anticipates the university will release an initial report as early as next month: GW’s findings will include the first government-sponsored attempt by researchers and epidemiologists to quantify Hurricane Maria’s deadliness, as experts are assessing statistical mortality data, intending to examine medical records and to interview family members of those who died—with Dean Goldman making clear that death certificates bearing the phrase “natural causes” will require further investigation.

Simultaneously, the Center for Investigative Journalism in Puerto Rico has gone to court in an effort to seek Puerto Rico’s Department of Health and Demographic Registry’s mortality data for the months since last November, the last month for which such information was available. The Puerto Rico Institute of Statistics has also announced it intends to provide an independent death count and use subpoena powers to retrieve the data.

The Chan School researchers reported there are several reasons the death toll in Puerto Rico has been so drastically underestimated, noting that, for every disaster-related death, such passing must be confirmed by the government’s Forensic Sciences Institute, which requires that bodies be sent to San Juan or that a medical examiner travel to the local municipio; consequently, it can be difficult to track indirect deaths from a worsening of chronic conditions due to the storm; moreover, the researchers reported that the government of Puerto Rico stopped sharing mortality data with the public last December, leading them to write: “As the United States prepares for its next hurricane season, it will be critical to review how disaster-related deaths will be counted, in order to mobilize an appropriate response operation and account for the fate of those affected.”

Many families here are awaiting clarity on what happened to their loved ones when “natural causes” became the only explanation. That is what was written on Leon’s death certificate the morning a local law enforcement official brought the document to the family home. The Puerto Rico Department of Justice’s Yamil Juarbe said in a statement it is customary for local officials in these cases to review bodies for any signs of trauma and talk to relatives to learn about the deceased’s medical history. That information is collected and sent to the central office of the Institute of Forensic Sciences.

Meanwhile, even as FEMA is accelerating community disaster loans to help municipios mitigate the loss of income due to natural disasters, the Government of Puerto Rico reaffirmed that, for the time being, it does not anticipate needing the $4.9 loan: last Friday, FEMA announced that the approval of another $39 million in loans from the CDL program for the municipalities of Aguadilla, Cabo Rojo, Canóvanas, Carolina, Manatí, Mayagüez, Peñuelas, and Orocovis—after, last month, approving $53.7 million in CDL loans for 12 other municipalities, including Bayamón, Caguas, Humacao, Juncos, Ponce, Toa Baja, and Trujillo Alto. Thus, to date, FEMA has allocated at least $ 92.8 million for municipios in the U.S. territory, and $371 million for the U.S. Virgin Islands; the $4.9 billion loan passed by Congress to help local municipios mitigate the loss of income has not been available to Governor Ricardo Rosselló Nevares—something due in part, as Puerto Rico Treasury Secretary Raúl Maldonado noted, because the “Rosselló administration Government has consistently had more than $ 2 billion available…The administration has been very successful in lowering operational costs and achieving an increase in collections.” Nevertheless, access to the loan will remain open through March of 2020—access which could prove invaluable in the event of another disaster or a drop in the income of public corporations.

The Imbalances of Governing

May 29, 2018

Good Morning! In this morning’s eBlog, we observe the ongoing demographic exodus from Puerto Rico—and the apparent agreement between the U.S. territory and the PROMESA Oversight Board to modify old work rules.

The Imbalances of Governing. Ramón Rosario Cortés, Puerto Rico’s Secretary of Public Affairs and Public Policy, has announced the repeal of Law 80, stating; “As agreed [to] by Governor Ricardo Rosselló Nevares with the Fiscal Oversight Board, today we are presenting before the Legislative Assembly a measure of Administration to repeal Law 80, and thus give way to the agreement reached, and that removes from the discussion the elimination of the Christmas Bonus and the reduction of days of sickness and vacations of our workers.” He stressed: “We are confident that, as usual, the Legislative Assembly will consider this measure with great responsibility and analyzing the totality of the circumstances and the reality of Puerto Rico today,” adding, the “Governor exercised his responsibility to achieve this agreement that makes it possible to allocate the funds we need to develop the economy and to pay the Christmas bonus for our public employees.” For his part, Puerto Rico Senate President Thomas Rivera Schatz, one of the strongest opponents of the repeal, warned that the repeal of Law 80 seeks to favor various employers of banking, communications, and insurance companies. Nevertheless, Senator Schatz indicated he would be willing to consider it if the Board’s study details the economic benefits of the agreement.

A Demographic Fiscal Wave? Between last September and last February, that critical period in the wake of Hurricanes Irma and María, passenger exodus from Puerto Rico exceeded inflow by some 233,586 persons. In stark contrast, according to data by the U.S. Bureau of Transportation Statistics provided to the Puerto Rico Institute of Statistics, between September of 2016 and February of 2017, there were 3,988 persons arriving in Puerto Rico than departing—albeit it will not be until we have access to newer U.S. Census Bureau information that the most recent emigration data will be forthcoming. Nonetheless, the preliminary data, based on official information, is that some 1,493,180 left the island between September and February, while 1,259,614 arrived—a pattern consistent with counts of outflows between September of 2016 and February of 2017.Similarly, a chart prepared by the Institute of Statistics indicates that the number of passengers who arrived in Puerto Rico between September of 2016 and February of 2017 reached 1,999,726, compared to the 1,995,738 that left the island.

Based on an analysis of data compiled by the Teralytics Company, a cell phone company, which compiled the data, out of the 407,465 residents of Puerto Rico who left Puerto Rico, 359,815 returned between October and February. Interestingly, however, the company also reported that more people have come back to the island than those who travel to the mainland. According to the company, about 150,000 of those who left, in their sample, preferred Florida, with the first six destinations the counties of Orange (34,858), Osceola (22,610), Miami-Dade (15,233), Hillsborough (13,091), Polk (12,262), and Broward (10,580). The other four municipalities that became main destinations for those who left Puerto Rico were: 7,455 to the Bronx, 7,430 to Seminole, Florida; 5,767 to Hampden, Massachusetts, and 5,357 to Philadelphia. Previously, the Center for Puerto Rican Studies had estimated that there may be a total of 135, 592 people who left Puerto Rico between October of 2017 and February 22nd of 2018. Thus, it appears that by the end of this year, the Commonwealth might have experienced a loss of as many as 470,335 residents since 2017, or some 14% of its population, according to the Center for Puerto Rican Studies. In comparison, the Center has indicated that between 2006 and 2016, 525,769 residents of Puerto Rico emigrated to the United States.

There is, to date, no analysis of the impact of this exodus with regard to assessed property values–and the potential fiscal impact on the island municipalities. 

Innovative, but Challenging Paths to Exiting Municipal Bankruptcy

May 25, 2018

Good Morning! In this morning’s eBlog, we observe Detroit’s physical and fiscal progress from the nation’s largest ever chapter 9 municipal bankruptcy, before exploring the seeming good gnus of lower unemployment data from Puerto Rico.

Motor City Upgrade. Moody’s has upgraded Detroit’s issuer rating to the highest level in seven years, awarding the Motor City an upgrade from to Ba3 from B1, with a stable outlook, noting: “The upgrade reflects further improvement in the city’s financial reserves, which has facilitated implementation of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions…The upgrade also considers ongoing economic recovery that is starting to show real dividends to tax collections.” The stable outlook, according to Moody’s, incorporates the Motor City’s high leverage, weak socioeconomic profile, and “volatile nature” of local taxes. Albeit not a credit rating, Detroit likely received another economic and fiscal boost in the wake of President Trump’s actions calling for new tariffs on cars and trucks imported to the U.S., with an estimated additional duty of up to 25% under consideration.

The twin positive developments follow just weeks after the 11-member Detroit Financial Review Commission, created to oversee city finances following its 2013 chapter 9 municipal bankruptcy, voted unanimously to restore Detroit’s authority to approve budgets and contracts without review commission approval, effectively putting Detroit on fiscal and financial probation, with a prerequisite that the restoration of full, quasi home rule powers be that the city implement three straight years of deficit-free budgets—a condition Detroit has complied since 2014, according Detroit Chief Financial Officer John Hill. Or, as Councilmember Janee L. Ayers told the Commission this week: “Not to say that we don’t recognize everything that you’ve brought to the table, but I do recognize that you’re not really gone yet.” The city recorded an FY2018 surplus of $36 million, in the wake of regaining local control over its budget and contract authority, with a projected FY2018 $36 million surplus via increasing property tax revenues and plans that will earmark $335 million by 2024 to address key pension obligations in the city bankruptcy plan of debt adjustment for its two public pension funds. In addition, Moody’s revised Detroit’s outlook to stable from positive—albeit an upgrade which does not apply to any of its current $1.9 billion in outstanding debt, writing that its upgrade reflects an improvement in Detroit’s financial reserves, which have allowed Detroit to implement a funding strategy for its looming pension obligations “that will lessen the budgetary impact of a future spike in required contributions.”

As part of its approved plan of debt adjustment by former U.S. Bankruptcy Judge Steven Rhodes, Detroit must pay $20 million annually through FY2019 to its two pension funds, after which, moreover, contributions will increase significantly beginning in 2024. Moody’s noted: “The stable outlook is based on the city’s strong preparation for challenges ahead including the need to make capital investments and absorb pending spikes to fixed costs…Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments,” adding that the “ongoing economic recovery that is starting to show real dividends to tax collections: Further growth in the city’s reserves and tax base growth to fund capital projects for either the city or its school district could lead to additional upgrades. In contrast, the agency warned that a downgrade could be spurred by slowed or stalled economic recovery, depletion of financial reserves, or growth in Detroit’s debt or pension burden, fixed costs, or capital needs. CFO Hill noted: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position…Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.”

Nevertheless, while the gnus on the ratings front is exhilarating, governing and fiscal challenges remain. A key challenge is the ongoing population hemorrhaging—a hemorrhaging which has slowed to a tenth of its pace over the previous decade, but, according to the Census Bureau’s most recent release, the Bureau determined last week that the city’s population was 673,104 as of last summer, a decline of 2,376 residents, slightly down from last year’s 2,770, even as the metropolitan region continued to grow, as did cities such as Grand Rapids and Lansing, which posted among the largest gains. Nevertheless, Mayor Mike Duggan, after his reelection last November, said his performance should be measured by the milestone of reversing the outflow. He has blamed the city’s schools for the continued losses: “At this point it’s about the schools: We have got to create a city where families want to raise their children and have them go to the schools…There are a whole number of pieces that have gotten better but at the end of the day, I think the ultimate report card is the population going up or going down and our report card isn’t good enough.”

Mayor Duggan added that Detroit utility records show at least 3,000 more homes are occupied than last year; however, it appears to be one- and two-person households who are moving in; families with children are moving out. Nevertheless, researchers believe the overall trend is a marked improvement for Detroit. As we had noted in or report, and other researchers have, the Motor City lost an average of 23,700 annually in the decade from 2000 to 2010; Detroit’s population declined by nearly 1.2 million since its 1950 peak. If anything, moreover, the challenge remains if the city leaders hope to reverse the decades-long exodus: the Southeast Michigan Council of Governments forecasts Detroit will continue to experience further decline through 2024, after which the Council guesstimates Detroit will bottom out at 631,668. 

Nevertheless, Detroit, the nation’s 23rd largest city, is experiencing less of a population loss than a number of other major cities, including Baltimore, St. Louis, Chicago, and Pittsburgh, according to the most recent estimates, or as Mayor Kurt Metzger of Pleasant Ridge, a demographer and director emeritus of Data Driven Detroit put it: “Our decreasing losses should be put up against similar older urban cities, rather than the sprawling, growing cities of the south and west: “I still believe that the population of Detroit may indeed be growing.” (Last year, Detroit issued 27 permits to build single-family homes in the city, according to the Southeast Michigan Conference of Governments–another 911 building permits were issued for multi-family structures, and 60 permits for condominiums. Meanwhile 3,197 houses were razed, while according to the Detroit regional council of governments.

A key appears to be, as Chicago’s Mayor Rahm Emanuel determined in Chicago, the city’s schools. Thus, Mayor Duggan said he hopes the Detroit School Board will approve his bus loop plan as a means to help lure families back into the city proper, noting that many families in the city send their children to schools in the suburbs‒and end up moving there. In his State of the City Address, he said he intended to create a busing system in northwest Detroit to transport children to participating traditional public and charter schools and the Northwest Activities Center. This will be an ongoing governance challenge—as his colleague Mayor Metzger noted: “There’s no lessening of the interest in outlying townships: People are still looking for big houses, big lots with low taxes.” Indeed, even as Detroit continues to witness an ongoing exodus, municipalities in the metropolitan region‒the Townships of Macomb, Canton, Lyon, and Shelby are all growing. 

Detroit Chief Financial Officer John Hill notes: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position: Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.” Thus, in the wake of the State of Michigan’s restoration of governing authority and control of the city’s finances on April 30th, more than three years after its Chapter 9 exit in December of 2014, Detroit now has the power to enter into contracts and enact city budgets without seeking state approval first, albeit, as Moody’s notes: “Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments.”

Motor City Transformation?  In the wake of real estate development firm Bedrock Detroit gaining final approval from the Michigan Strategic Fund for its so-called “transformational” projects in downtown Detroit, the state has approved $618 million in brownfield incentives for the $2.1 billion project, relying in part on some $250 million secured by new brownfield tax credits, enacted last year by the legislature—a development which Mayor Duggan said represents a “major step forward for Detroit and other Michigan cities that are rebuilding: Thanks to this new tool, we will be able to make sure these projects realize their full potential to create thousands of new jobs in our cities.” In what will be the first Michigan to use the Transformational Brownfield Plan tax incentive program, a program using tax-increment financing to capture growth in property tax revenue in a designated area, as well as a construction period income tax capture and use-tax exemption, employee withholding tax capture, and resident income tax capture; the MIThrive program is projected to total $618 million in foregone tax revenue over approximately 30 years. While Bedrock noted that the tax increment financing “will not capture any city of Detroit taxes, and it will have no impact on the Detroit Public Schools Community District,” the plan is intended to support $250 million in municipal bond financing by authorizing the capture of an estimated average of $18.56 million of principal and interest payments annually, primarily supported by state taxes over the next three decades, to repay the bonds, with all tax capture limited to newly created revenues from the development sites themselves: the TIF financing and sales tax exemption will cover approximately 15% of the project costs; Bedrock is responsible for 85% of the total $2.15 billion investment, per the financing package the Detroit City Council approved last November, under which Bedrock’s proposed projects are to include the redevelopment of former J.L. Hudson’s department store site, new construction on a two-block area east of its headquarters downtown, the Book Tower and Book Building, and a 310,000-square-foot addition to the One Campus Martius building Gilbert co-owns with Detroit-based Meridian. Altogether, the projects are estimated to support an estimated 22,000 new jobs, including 15,000 related to the construction and over 7,000 new permanent, high-wage jobs occupying the office, retail, hotel, event and exhibition spaces—all a part of the ongoing development planned as part of Detroit’s plan of debt adjustment.

In an unrelated, but potentially unintended bit of fiscal assistance, President Trump’s new press for tariffs of as much as 25% on cars and trucks imported to the U.S., Detroit might well be a taking a fiscal checkered flag.

Avoiding Risks to Puerto Rico’s Recovery. Yesterday, in testifying before the PROMESA Board, Governor Ricardo Rosselló Nevares  told the members his governing challenge was to “solve problems, and not to see how they get worse,” as he defended the agreement with the Oversight Board—and as he urged the Puerto Rico Legislature to comply with his fiscal plan and repeal what he described as the unjust dismissal law (Law 80), a key item in the certified fiscal plan that the PROMESA Board is reevaluating. That law in question, the Labor Transformation and Flexibility Act, which he had signed last year, represented the first significant and comprehensive labor law reform to occur in Puerto Rico in decades. As enacted, the most significant changes to the labor law include:  

  • Effective date (there is still no cap for employees hired before the effective date);
  • Eliminating the presumption that a termination was without just cause and shifting the burden to the employee to prove the termination was without just cause;
  • Revising the definition of just cause to state that it is a “pattern of performance that is deficient, inefficient, unsatisfactory, poor, tardy, or negligent”;
  • Shortening the statute of limitations for Law 80 claims from three years to one year, and requiring all Law 80 claims filed after the Act’s effective date to have a mandatory settlement hearing within 60 days of the filing of the answer; and
  • Clarifying the standard for constructive discharge to require an employee to prove that the employer’s conduct created a hostile work environment such that the only reasonable thing for the employee to do was resign.

The Act mandates that all Puerto Rico employment laws be applied in a similar fashion to federal employment laws, unless explicitly stated otherwise in the local law. It applies Title VII’s cap on punitive and compensatory damages to damages for discrimination and retaliation claims, and eliminates the mandate for written probationary agreements; it imposes a mandatory probationary period of 12 months for all administrative, executive and professional employees, and a nine-month period for all other employees. It provides a statutory definition for “employment contract,” which specifically excludes the relationship between an employer and independent contractor. The Act also includes a non-rebuttable presumption that an individual is an independent contractor if the individual meets the five-part test in the statute. It modifies the definition of overtime to require overtime pay for work over eight hours in any calendar day instead of eight hours in any 24-hour period, and changes the overtime rate for employees hired after the Act’s effective date to time and one-half their regular rate. (The overtime rate for employees hired prior to the Act remains at two times the employee’s regular rate.). The Act provides for alternative workweek agreements in which employees can work four 10-hour days without being entitled to overtime, but must be paid overtime for hours worked in excess of 10 in one day. The provisions provide that, in order to accrue vacation and sick pay, employees must work a minimum of 130 hours per month; sick leave will accrue at the rate of one day per month—and, to earn a Christmas Bonus, employees must work 1,350 hours between October 1 and September 30 of the following year; employees on disability leave have a right to reinstatement for six months if the employer has 15 or fewer employees; employers with more than 15 employees must provide employees on disability leave with the right to reinstatement for one year, as was required prior to the Act. For employees, the law includes certain enumerated employee rights, including a prohibition against discrimination or retaliation; protection from workplace injuries or illnesses; protection of privacy; timely compensation; and the individual or collective right to sue or file claims for actions arising out of the employment contract.

In his presentation, the Governor suggested that the repeal of the statute would be a vital component to controlling Puerto Rico’s budget, in no small part by granting additional funds to municipalities, granting budgetary increases in multiple government agencies, including the Governor’s Office and the Puerto Rico Federal Affairs Administration (PRFAA), as well as increasing the salary of teachers and the Police. While the Governor proposed no cuts, a preliminary analysis of the document published by the Office of Management and Budget determined that the consolidated budget for FY 2018-19 would total $ 25.323 billion, or 82% lower than the current consolidated budget, as the Governor sought to assure the Board he has achieved some $2 billion in savings, and reduced Puerto Rico’s operating expenses by 22%.

In his presentation to the 18th Puerto Rico Legislative Assembly, the Governor warned that Puerto Rico has an approximate “18-month window” to define its future, taking advantage of an injection of FEMA funds in the wake of Hurricane Maria, as he appeared to challenge them to be part of that transformation, noting: “We have an understanding with the (Board) that allows the approval of a budget that, under the complex and difficult circumstances, benefits Puerto Rico: Ladies and gentlemen legislators: you know everything that is at risk. I already exercised my responsibility, and I fully trust in the commitment you have with Puerto Rico.”

According to Gov. Rosselló Nevares, repealing Law 80, which last year was amended to grant greater flexibility to companies in the process of dismissing workers, would be the first step for what would be a phase of greater economic activity on the island, and would join different measures which have been put into effect to provide Puerto Rico a “stronger” position to renegotiate the terms of its debt, as he contrasted his proposal versus the cuts and austerity warnings proposed by the PROMESA Board, adding that, beginning in August, the Sales and Use Tax on processed food will be reduced, and that tax rates will be reduced without fear of the “restrictions” previously established and imposed by the Board, adding that participants of Mi Salud (My Health) will be able to “choose where they can obtain health services, beyond a region in Puerto Rico,” and that the budget guarantees teachers and the police will receive an increase of $125 per month.

Shifting & Shafting? In his proposed budget, the Governor proposed that municipalities would be compensated for the supposed reduction in the contributions of the General Fund, stating: “Through the agreement, the disbursement of 78 million dollars that this Legislature approved for the municipalities during the current recovery period is secured; the Municipal Economic Development Fund of $50 million per year is created.” Under the administration’s proposed budget, the contribution to municipalities would be about $175.8 million, which would be consistent with the adjustment required for that item in the certified fiscal plan. As a result of the agreement with the Board, municipalities would, therefore, practically receive another $ 128 million. As proposed, Puerto Rico’s government payroll would be reduced for the third consecutive year: for example, payments for public services and those purchased will increase 23% and 16%, respectively; professional services would increase by 40%. Expenses for the Governor’s office would see an increase of 182%.

Ending the Long Delay? The Federal Emergency Management Agency (FEMA) yesterday announced it is accelerating community disaster loans to help Puerto Rico muncipios mitigate the loss of income due to natural disasters, the Government of Puerto Rico reaffirmed that, for the time being, as well as the approval of another $39 million in loans from the CDL program for the municipalities of Aguadilla, Cabo Rojo, Canóvanas, Carolina, Manatí, Mayagüez, Peñuelas, and Orocovis—with the approvals coming in the wake of  last month’s approvals for Bayamón, Caguas, Humacao, Juncos, Ponce, Toa Baja, and Trujillo Alto—meaning that, in total, FEMA has, to date, distributed at least $92.8 million for municipalities on the island and $371 million for the U.S. Virgin Islands, as part of the $4.9 billion loan passed by Congress to help local governments recover. At the same time, the U.S. territory’s Treasury Secretary Raúl Maldonado reported: “The administration (of Puerto Rico) has been very successful in lowering operational costs and achieving an increase in collections.” The new loans will offer access to the Puerto Rican Government through March of 2020, as Secretary Maldonado considers that it may be useful in case of another disaster or a drop in the income of public corporations.

Nevertheless, because Puerto Rico—unlike other U.S. states, is also under the authority of the PROMESA Board, it appears that Gov. Ricardo Rosselló’s budget will have to be revised and may be rejected if proposed labor reforms do not satisfy the Board—with Board Executive Director Natalie Jaresko, in the wake of the Governor’s release of his proposed $8.73 billion general fund budget to the Legislature Tuesday night dictating that the future of the budget is linked to the legislature’s approval of at-will employment. Her statement came after the Governor and the board had announced an agreement on a compromise on reforming labor practices as well as agreeing to other changes in the Board-certified fiscal plan. In exchange for the Board waiving its demands for the abolition of the Christmas bonus and reduction of the island’s mandatory 27 days of vacation and sick leave, Gov. Rosselló agreed to bring at-will employment to the territory by repealing Law 80 from 1976—a concession which Director Jaresko described this agreement as an “accommodation.” Earlier this week, Director Jaresko said that the first step for Gov. Rosselló should be to resubmit a fiscal plan consistent with the new agreement with the Board, followed by a resubmitted budget consistent with the new plan, adding she anticipated these actions should all be completed by the end of June: the agreed-to changes to the fiscal plan are expected to reduce the 30 year surplus to $35 billion from $39 billion in the April certified fiscal plan, according to Director Jaresko, who noted that most of the surplus is expected to be used for debt payment. From the Governor’s perspective, he noted: “The approval of the agreed budget makes it easier for Puerto Rico to be in a stronger position to renegotiate the terms of the debt. We have significantly improved the management and controls over the cash flow of the General Fund. Contrary to the past, there is now visibility on how cash flows in government operations. At present Puerto Rico has robust and reliable cash balances.” Finally, she stated she expected it would take 12 to 18 months for the Board to create a plan of adjustment on the debt and pensions for the central government—a plan which would likely take the Title III bankruptcy court several more months to confirm.

Becoming Positively Moody in Detroit

May 24, 2018

Good Morning! In this morning’s eBlog, we observe Detroit’s physical and fiscal progress from the nation’s largest ever chapter 9 municipal bankruptcy, before exploring the seeming good gnus of lower unemployment data from Puerto Rico.

Motor City Upgrade. Moody’s on Tuesday upgraded Detroit’s issuer rating to the highest level in seven years, awarding the Motor City an upgrade from to Ba3 from B1, with a stable outlook, noting: “The upgrade reflects further improvement in the city’s financial reserves, which has facilitated implementation of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions…The upgrade also considers ongoing economic recovery that is starting to show real dividends to tax collections.” The stable outlook, according to Moody’s, incorporates the Motor City’s high leverage, weak socioeconomic profile, and “volatile nature” of local taxes.  Albeit not a credit rating, Detroit likely received another economic and fiscal boost in the wake of President Trump’s actions calling for new tariffs on cars and trucks imported to the U.S., with an estimated additional duty of up to 25% under consideration.

The twin positive developments follow just weeks after the 11-member Detroit Financial Review Commission, created to oversee city finances following its 2013 chapter 9 municipal bankruptcy, voted unanimously to restore Detroit’s authority to approve budgets and contracts without review commission approval, effectively putting Detroit on fiscal and financial probation, with a prerequisite that the restoration of full, quasi home rule powers be that the city implement three straight years of deficit-free budgets—a condition Detroit has complied since 2014, according Detroit Chief Financial Officer John Hill. Or, as Councilmember Janee L. Ayers told the Commission this week: “Not to say that we don’t recognize everything that you’ve brought to the table, but I do recognize that you’re not really gone yet.” The city recorded an FY2018 surplus of $36 million, in the wake of regaining local control over its budget and contract authority, with a projected FY2018 $36 million surplus via increasing property tax revenues and plans that will earmark $335 million by 2024 to address key pension obligations in the city bankruptcy plan of debt adjustment for its two public pension funds. In addition, Moody’s revised Detroit’s outlook to stable from positive—albeit an upgrade which does not apply to any of its current $1.9 billion in outstanding debt, writing that its upgrade reflects an improvement in Detroit’s financial reserves, which have allowed Detroit to implement a funding strategy for its looming pension obligations “that will lessen the budgetary impact of a future spike in required contributions.”

As part of its approved plan of debt adjustment by retired U.S. Bankruptcy Judge Steven Rhodes, Detroit must pay $20 million annually through FY2019 to its two pension funds, after which, moreover, contributions will increase significantly beginning in 2024. Moody’s noted: “The stable outlook is based on the city’s strong preparation for challenges ahead including the need to make capital investments and absorb pending spikes to fixed costs…Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments,” adding that the “ongoing economic recovery that is starting to show real dividends to tax collections: Further growth in the city’s reserves and tax base growth to fund capital projects for either the city or its school district could lead to additional upgrades. In contrast, however, the agency warned that a downgrade could be spurred by slowed or stalled economic recovery, depletion of financial reserves, or growth in Detroit’s debt or pension burden, fixed costs, or capital needs.

CFO Hill noted: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position…Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.”

Nevertheless, while the gnus on the ratings front is exhilarating, governing and fiscal challenges remain. A key challenge is the ongoing population hemorrhaging—a hemorrhaging which has slowed to a tenth of its pace over the previous decade, but, according to the Census Bureau’s most recent release, which determined last week that the city’s population was 673,104 as of last summer, a decline of 2,376 residents, slightly down from last year’s 2,770, even as the metropolitan region continued to grow, as did cities such as Grand Rapids and Lansing, which posted among the largest gains. Nevertheless, Mayor Mike Duggan, who, after his reelection last November, said his performance should be measured by the milestone of reversing the outflow, has blamed the city’s schools for the continued losses: “At this point it’s about the schools: We have got to create a city where families want to raise their children and have them go to the schools…There are a whole number of pieces that have gotten better but at the end of the day, I think the ultimate report card is the population going up or going down and our report card isn’t good enough.”

Mayor Duggan added that Detroit utility records show at least 3,000 more homes are occupied than last year; however, it appears to be one- and two-person households who are moving in; families with children are moving out. Nevertheless, researchers believe the overall trend is a marked improvement for Detroit. As we had noted in or report, and other researchers have, the Motor City lost an average of 23,700 annually in the decade from 2000 to 2010; Detroit’s population declined by nearly 1.2 million since its 1950 peak. If anything, moreover, the challenge remains if the city leaders hope to reverse the decades-long exodus: the Southeast Michigan Council of Governments forecasts Detroit will continue to experience further decline through 2024, after which the Council guesstimates Detroit will bottom out at 631,668. 

Nevertheless, Detroit, the nation’s 23rd largest city, is experiencing less of a population loss than a number of other major cities, including Baltimore, St. Louis, Chicago, and Pittsburgh, according to the most recent estimates; or as Mayor Kurt Metzger of Pleasant Ridge, a demographer and director emeritus of Data Driven Detroit put it: “Our decreasing losses should be put up against similar older urban cities, rather than the sprawling, growing cities of the south and west: “I still believe that the population of Detroit may indeed be growing.” (Last year, Detroit issued 27 permits to build single-family homes in the city, according to the Southeast Michigan Conference of Governments–another 911 building permits were issued for multi-family structures, and 60 permits for condominiums. Meanwhile 3,197 houses were razed, according to the Detroit regional council of governments.

A key appears to be, as Chicago’s Mayor Rahm Emanuel determined in Chicago, the city’s schools. Thus, Mayor Duggan said he hopes the Detroit School Board will approve his bus loop plan as a means to help lure families back into the city proper, noting that many families in the city send their children to schools in the suburbs‒and end up moving there. In his State of the City Address, he said he intended to create a busing system in northwest Detroit to transport children to participating traditional public and charter schools and the Northwest Activities Center. This will be an ongoing governance challenge—as his colleague Mayor Metzger noted: “There’s no lessening of the interest in outlying townships: People are still looking for big houses, big lots with low taxes.” Indeed, even as Detroit continues to witness an ongoing exodus, municipalities in the metropolitan region‒the Townships of Macomb, Canton, Lyon, and Shelby are all growing.  

Detroit Chief Financial Officer John Hill notes: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position: Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.” Thus, in the wake of the State of Michigan’s restoration of governing authority and control of the city’s finances on April 30th, three years after its Chapter 9 exit in December of 2014, Detroit now has the power to enter into contracts and enact city budgets without seeking state approval first, albeit, as Moody’s notes: “Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments.”

Motor City Transformation?  In the wake of real estate development firm Bedrock Detroit gaining final approval from the Michigan Strategic Fund for its so-called “transformational” projects in downtown Detroit, the stated has approved $618 million in brownfield incentives for the $2.1 billion project, relying in part on some $250 million secured by new brownfield tax credits, enacted last year by the legislature—a development which Mayor Duggan said represents a “major step forward for Detroit and other Michigan cities that are rebuilding: Thanks to this new tool, we will be able to make sure these projects realize their full potential to create thousands of new jobs in our cities.” In what will be the first Michigan municipality to use the Transformational Brownfield Plan tax incentive program, a program using tax-increment financing to capture growth in property tax revenue in a designated area, as well as a construction period income tax capture and use-tax exemption, employee withholding tax capture, and resident income tax capture; the MIThrive program is projected to total $618 million in foregone tax revenue over approximately 30 years. While Bedrock noted that the tax increment financing “will not capture any city of Detroit taxes, and it will have no impact on the Detroit Public Schools Community District,” the plan is intended to support $250 million in municipal bond financing by authorizing the capture of an estimated average of $18.56 million of principal and interest payments annually, primarily supported by state taxes over the next three decades, to repay the bonds, with all tax capture limited to newly created revenues from the development sites themselves: the TIF financing and sales tax exemption will cover approximately 15% of the project costs; Bedrock is responsible for 85% of the total $2.15 billion investment, per the financing package the Detroit City Council approved last November, under which Bedrock’s proposed projects are to include the redevelopment of former J.L. Hudson’s department store site, new construction on a two-block area east of its headquarters downtown, the Book Tower and Book Building, and a 310,000-square-foot addition to the One Campus Martius building Gilbert co-owns with Detroit-based Meridian. Altogether, the projects are estimated to support an estimated 22,000 new jobs, including 15,000 related to the construction and over 7,000 new permanent, high-wage jobs occupying the office, retail, hotel, event and exhibition spaces—all a part of the ongoing development planned as part of Detroit’s plan of debt adjustment.

In an unrelated, but potentially unintended bit of fiscal assistance, President Trump’s new press for tariffs of as much as 25% on cars and trucks imported to the U.S., Detroit might well be a taking a fiscal checkered flag.

Avoiding Risks to Puerto Rico’s Recovery. Yesterday, in testifying before the PROMESA Board, Governor Ricardo Rosselló Nevares  told the members his governing challenge was to “solve problems, and not to see how they get worse,” as he defended the agreement with the Oversight Board—and as he urged the Puerto Rico Legislature to comply with his fiscal plan and repeal what he described as the unjust dismissal law (Law 80), a key item in the certified fiscal plan that the PROMESA Board is reevaluating. That law in question, the Labor Transformation and Flexibility Act, which he had signed last year, represented the first significant and comprehensive labor law reform to occur in Puerto Rico in decades. As enacted, the most significant changes to the labor law include:  

  • effective date (there is still no cap for employees hired before the effective date);
  • Eliminating the presumption that a termination was without just cause and shifting the burden to the employee to prove the termination was without just cause;
  • Revising the definition of just cause to state that it is a “pattern of performance that is deficient, inefficient, unsatisfactory, poor, tardy, or negligent”;
  • Shortening the statute of limitations for Law 80 claims from three years to one year, and requiring all Law 80 claims filed after the Act’s effective date have a mandatory settlement hearing within 60 days of the filing of the answer; and
  • Clarifying the standard for constructive discharge to require an employee to prove that the employer’s conduct created a hostile work environment such that the only reasonable thing for the employee to do was resign.

The Act mandates that all Puerto Rico employment laws be applied in a similar fashion to federal employment laws, unless explicitly stated otherwise in the local law. It applies Title VII’s cap on punitive and compensatory damages to damages for discrimination and retaliation claims, and eliminates the mandate for written probationary agreements; it imposes a mandatory probationary period of 12 months for all administrative, executive and professional employees, and a nine-month period for all other employees. It provides a statutory definition for “employment contract,” which specifically excludes the relationship between an employer and independent contractor. The Act also includes a non-rebuttable presumption that an individual is an independent contractor if the individual meets the five-part test in the statute. It modifies the definition of overtime to require overtime pay for work over eight hours in any calendar day instead of eight hours in any 24-hour period, and changes the overtime rate for employees hired after the Act’s effective date to time and one-half their regular rate. (The overtime rate for employees hired prior to the Act remains at two times the employee’s regular rate.). The Act provides for alternative workweek agreements in which employees can work four 10-hour days without being entitled to overtime, but must be paid overtime for hours worked in excess of 10 in one day. The provisions provide that, in order to accrue vacation and sick pay, employees must work a minimum of 130 hours per month; sick leave will accrue at the rate of one day per month—and, to earn a Christmas Bonus, employees must work 1,350 hours between October 1 and September 30 of the following year; employees on disability leave have a right to reinstatement for six months if the employer has 15 or fewer employees; employers with more than 15 employees must provide employees on disability leave with the right to reinstatement for one year, as was required prior to the Act. For employees, the law includes certain enumerated employee rights, including a prohibition against discrimination or retaliation; protection from workplace injuries or illnesses; protection of privacy; timely compensation; and the individual or collective right to sue or file claims for actions arising out of the employment contract.

In his presentation, the Governor suggested that the repeal of the statute would be a vital component to controlling Puerto Rico’s budget, in no small part by granting additional funds to municipalities, granting budgetary increases in multiple government agencies, including the Governor’s Office and the Puerto Rico Federal Affairs Administration (PRFAA), as well as increasing the salary of teachers and the Police. While the Governor proposed no cuts, a preliminary analysis of the document published by the Office of Management and Budget determined that the consolidated budget for FY 2018-19 would total $25.323 billion, or 82% lower than the current consolidated budget, as the Governor sought to assure the Board he has achieved some $2 billion in savings, and reduced Puerto Rico’s operating expenses by 22%.

In his presentation to the 18th Puerto Rico Legislative Assembly, the Governor warned that Puerto Rico has an approximate “18-month window” to define its future, taking advantage of an injection of FEMA funds in the wake of Hurricane Maria, as he appeared to challenge them to be part of that transformation, noting: “We have an understanding with the (Board) that allows the approval of a budget that, under the complex and difficult circumstances, benefits Puerto Rico: Ladies and gentlemen legislators: you know everything that is at risk. I already exercised my responsibility, and I fully trust in the commitment you have with Puerto Rico.”

According to Gov. Rosselló, repealing Law 80, which last year was amended to grant greater flexibility to companies in the process of dismissing workers, would be the first step for what would be a phase of greater economic activity on the island, and would join different measures which have been put into effect to provide Puerto Rico a “stronger” position to renegotiate the terms of its debt, as he contrasted his proposal versus the cuts and austerity warnings proposed by the PROMESA Board, adding that, beginning in August, the Sales and Use Tax on processed food will be reduced, and that tax rates will be reduced without fear of the “restrictions” previously established and imposed by the Board, adding that participants of Mi Salud (My Health) will be able to “choose where they can obtain health services, beyond a region in Puerto Rico,” and that the budget guarantees teachers and the police will receive an increase of $ 125 per month.

Shifting & Shafting? In his proposed budget, the Governor proposed that municipalities would be compensated for the supposed reduction in the contributions of the General Fund, stating: “Through the agreement, the disbursement of 78 million dollars that this Legislature approved for the municipalities during the current recovery period is secured; the Municipal Economic Development Fund of $50 million per year is created.” Under the administration’s proposed budget, the contribution to municipalities would be about $175.8 million, which would be consistent with the adjustment required for that item in the certified fiscal plan. As a result of the agreement with the Board, municipalities would, therefore, practically receive another $ 128 million. As proposed, Puerto Rico’s government payroll would be reduced for the third consecutive year: for example, payments for public services and those purchased will increase 23% and 16%, respectively; professional services would increase by 40%. Expenses for the Governor’s office would see an increase of 182%.

Unretiring Municipal Fiscal Challenges

May 22, 2018

Good Morning! In this morning’s eBlog, we return to the small municipality of Harvey, Illinois, where an aging population has fiscally sapped the town’s treasury, before exploring the disparate hurricane response treatment for Puerto Rico.

Municipal Pension Insolvency? In the Land of Lincoln, ranked the most financially unstable state in the nation according to a new S.S. News and World Report ranking by McKinsey & Co., some Illinois legislators are considering rolling back enforcement of a 2011 pension delinquency statute to help other Illinois municipalities avoid Harvey’s fiscal and physical dilemma between municipal taxes and public safety (Harvey underpaid its police and fire pensions by $2.9 million in 2016.)—with the efforts in Springfield coming in the wake of state action setting a precedent in retaining tax revenues it had collected to distribute to Harvey, because the small municipality had failed to make its pension payments. Indeed, so far this year, in the wake of the court’s decision withholding tax revenues collected by the state on behalf of Harvey; the Illinois Comptroller, in the wake of a court decision, has withheld more than $1.8 million in tax revenues from Harvey, forcing the city to lay off firefighters and police officers.

In response, State Sen. Napoleon Harris (D-Harvey) has proposed a bill, 40 ILCS 5/4-109, which would defer those tax revenue collections back to 2020; his bill would also create exceptions for distressed communities, such as Harvey, as Sen. Harris reminded his colleagues: “There’s going to be many other municipalities unable to pay these skyrocketing pension costs as well as continue to [provide] the public services that the citizens need and demand,” as he testified before the Illinois Licensed Activities and Pensions Committee, which approved amendments to his bill. The legislative action came as analysts at Wirepoints, an Illinois government watchdog group, have warned that Harvey is not alone—finding there to be more than 200 municipalities at similar risk of state tax withholdings in order to ensure the continuity of pension payments—payments protected under the Illinois Constitution. To date, Danville, the County seat of Vermillion County, a municipality of about 31,600 120 miles south of Chicago; East St. Louis, and Kanakee appear to be in the most desperate fiscal binds. In Danville, the municipality recently adopted a fee, the revenues for which would go directly to finance the municipality’s public pension obligations; Kanakee’s leaders voted to raise taxes.

In response to the fiscal and equity crisis, both Republicans and Democrats in the Illinois Legislature have questioned why there was no state oversight of delinquent municipalities like Harvey; nevertheless, Sen. Harris’ proposed legislation has been reported to the full Illinois Senate—that in a state ranked the most financially unstable in the country by U.S. New and World Report, based upon McKinsey & Company’s 2018 ranking of the nation’s most fiscally unstable states: the report considered credit rating and state public pension liability to rank states on long-term stability; for the near term, the report measured each state’s cash solvency and budget balance. Indeed, Illinois’ public pension debt, currently estimated at $130 billion, but measured as high as $250 billion by Moody’s last summer, was a factor in Moody’s analysis. Even Illinois Gov. Bruce Rauner recognizes the epic scope of the fiscal problem, describing Illinois as the most financially unstable state in the nation.

For Illinois legislators, the fiscal dilemma is made more difficult by what Illinois State Sen. Bill Haine (D-Alton) reminded his colleagues: “We’re gonna see in the paper that the state waives the amounts due, and then they’re going to read that the Aldermen there are getting paid $100,000 a year,” even as he, nevertheless, voted for the bill. (In FY2017, the City of Harvey allocated $240,000 in wages for six aldermen—wages which did not account for public pension contributions and other “fringe benefits” that the budget lists—or, as Michael Moirano, who represents the Harvey Police Pension fund put it: “We cannot continue to do that and hope to resolve these pension issues,” adding that even though negotiations are underway to reach an agreement with the City of Harvey, the proposed “bill will make a mutually agreeable resolution impossible.”

Meanwhile in Springfield, where Illinois Comptroller Susana Mendoza has certified Harvey’s delinquency, a spokesperson noted: “The Comptroller’s Office does not want to see any Harvey employees harmed, or any Harvey residents put at risk…but the law does not give the Comptroller discretion in this case.” Similarly, Sen. Harris told his colleagues: “There’s going to be many other municipalities unable to pay these skyrocketing pension costs as well as continue to [provide] the public services that the citizens need and demand.”

Powering Up? For more than a week, Puerto Rico’s non-voting U.S. Representative Jennifer Gonzalez has been urging  FEMA to extend the contract under which mainland power crews have been helping repair the U.S. territory’s power grid—a request that FEMA has denied, meaning that line restoration crews hired by the U.S. Army Corps of Engineers will work to restore power in Puerto Rico, leaving the rest of the job to crews working for Puerto Rico’s public utility, PREPA, as, eight months after Hurricane Maria’s devastation, as many as 16,000 homes remain without power. With the Corps’ current work force of about 700 line workers scheduled to end their service this Friday, time is running out. Officials for PREPA and the U.S. Army Corps of Engineers, the agency which hired the mainland contractors at FEMA’s request, have reported they expect everyone on the island to have power restored by the end of this month—the day before the official start of the Atlantic hurricane season. However, in her urgent extension request, Rep. Gonzalez expressed doubts that PREPA had the resources to complete the job quickly, writing: “I must urge that there be an extension of the mission that allows agency and contract crews to remain in place to see that the system is 100 percent restored.”

There appear, however, to be some crossed governance wires: Mike Byrne, who is in charge at FEMA of the federal response, wrote last Thursday that his decision not to extend the line restoration contract came “per the direction provided by the Energy Unified Command Group and confirmed by the PREPA Chief Executive Officer,” Walter Higgins. (The Energy Unified Command Group is the multi-agency group coordinating the power restoration effort, comprising FEMA itself, the Army Corps, which reports to FEMA, and PREPA.) In addition, it appears that some of the most challenging work awaits: sites still waiting for power are among the most difficult to reach because of mountainous and forested terrain. They include areas in the municipalities of Arecibo, Caguas, Humacao, and in Yabucoa, the city where Hurricane Maria made its initial, destructive landfall–a municipio founded in October 3, 1793 when Don Manuel Colón de Bonilla and his wife, Catalina Morales Pacheco, donated the lands to the people.

Planning Municipal Debt Adjustment

May 21, 2018

Good Morning! In this morning’s eBlog, we take a fiscal perspective on post-chapter 9 Vallejo, before exploring the seeming good gnus of lower unemployment data from Puerto Rico.

Fiscal Reinvention.  After Vallejo, a waterfront city in Solano County of about 115,000 in California’s Bay Area, filed for chapter 9 municipal bankruptcy, just over a decade ago, on May 17, 2008, claiming it could no longer afford to pay wages and benefits promised to its employees; it appears its chapter 9 plan of debt adjustment has worked. The municipality, which served twice as California’s capital, was the nation’s largest city to file for municipal bankruptcy when it did—a period during which, in the wake of cuts of as much as 40 percent in its police force, and closure of its fire stations, leading to sharp increases in crime—there were, consequently, serious declines in assessed property values.  The municipality’s cash reserves disappeared; it was unable to pay its bills amid falling property tax revenue, soaring costs of employee compensation and pension liabilities, and a consequent surge in foreclosures. Thus, with its official exit, the city will be able to resume its governance—albeit, as Moody’s moodily explained last month, the city’s plan of debt adjustment will bequeath “significant unfunded and rapidly rising pension obligations,” adding that in addition to higher taxes, the city will be confronted by “challenges associated with deferred maintenance and potential service shortfalls.” Further, the credit rating agency noted, the “probability of continued financial distress and possibly even a return to bankruptcy.” Today, median household income in the city is under $40,000, while average municipal employee compensation is over $114,000. The city currently has 17 police sergeants receiving compensation packages which range from $220,000-$469,000—in addition to generous promised retirement pensions.  

Vallejo Assistant City Manager Craig Whittom last week noted that the city had been left to determine its Chapter 9 bankruptcy end date in the wake of U.S. Bankruptcy Judge Michael McManus’ approval of the city’s plan of debt adjustment last August—a key component of that plan being the codification of municipal bond repayment obligations to the city’s largest creditor, Union Bank, a plan approved by the Vallejo City Council three weeks ago, with Mr. Whittom noting that Vallejo’s formal chapter 9 exit is important in tangible ways for the city. For instance, he noted the elimination of real estate agents’ requirement to disclose that the city is in bankruptcy when selling properties, albeit conceding that municipal bankruptcy-deferred lawsuits against the city will now be free to go forward.

Nevertheless, leaving municipal bankruptcy is a fiscal challenge of its own—especially in instances where a municipality’s plan of debt adjustment does not take into account public pension obligations. As Ed Mendel of Calpensions explained: “Vallejo received court approval to exit from bankruptcy last week with a plan that includes a sharp increase in pension payments to CalPERS—the opposite of what many expected when the city declared bankruptcy in May 2008,” a resolution which, left the municipality with a proverbial ball and chain around its ankle because, by 2014, the city was confronted by ballooning public pension liabilities, with CNN reporting that Vallejo’s recent public-safety retirees have annual pension benefits which top $100,000 a year, leading Wallet-Hub to describe Vallejo as the “second least recovered city.”  That is, absent the ability to trim benefits for current employees, there are few options to keep pensions from consuming ever-increasing parts of a municipality’s budget.

Nevertheless, the city’s leaders have demonstrated innovative fiscal grit and determination: it has begun reinventing itself, using technology to fill personnel gaps, rallying residents to volunteer to provide public services, and even offering its voters the chance to decide how their taxes will be used—in return for an increase in the sales tax. Now, for the first time in five years, the city expects to have enough money to address potholes, weeds in public rights of way, etc.  

Lessons Learned. Prior to its chapter 9 filing, Vallejo’s salaries for city employees had ballooned: a number of top officials were making $200,000 or $300,000—enough so that some 80 percent of the city’s budget went toward compensation, even as the city’s credit rating was downgraded to junk status—meaning that, as part of the city’s plan of debt adjustment, the municipality paid only five cents for every dollar it owed to its bondholders, while the city also reduced employees’ pay, health care and other benefits—making it harder to attract key employees.  

That meant, as former Councilmember Marti Brown noted, that for Vallejo to fiscally survive, the city needed to study best practices from around the world and bring some of them to California—an effort which, in retrospect, she said turned “out to be a really positive experience for the city.” Together with former Councilmember Stephanie Gomes, the two elected leaders focused on public safety: they went the neighborhood to neighborhood setting up e-mail groups and social media accounts so residents could, for instance, share pictures of suspicious vehicles and other information: the number of neighborhood watch groups jumped nearly 300% from 15 to 350. Moreover, the City Council worked out an unusual compact with residents: in return for agreeing to a one-penny sales tax increase, projected to generate an additional $9.5 million in revenue, the resident gained the right to vote on how the funds would be used: citizen participatory budgeting—the first in a North American city.

This fiscal and governing innovation—or “ground-up restructuring,” as Karol Denniston, a partner with Squire Patton Boggs LLP notes, has meant that, today, Vallejo is “now routinely one of the top 10 cities where people want to live, which is a huge turn-around from when they entered bankruptcy.” The median listing price in Vallejo had soared to $420,000 by last month from $290,000 in May of 2015, according to realtor.com, crediting city leaders for turning around the relationships with its police and fire employees: “It looks like someone was able to improve those relationships: You have to bring the employees and the taxpayers along at the same time to reach a good consensus on financial goals.” Thus, unsurprisingly, last week, Finance Director Ron Millard presented a structurally balanced $105 million budget to the City Council for the fifth consecutive year—proposing reserves of 17.3%, after a strict fiscal diet of austerity measures in the intervening years composed of cutting police and fire services to the bone, tax increases, and economic development measures.

The Challenging Road to Recovery. Puerto Rico’s unemployment rate slipped below 10% last month for the first time in nearly two decades—albeit the change is more a reflection of emigration than economic improvement. According to the Bureau of Labor Statistics, nonetheless, Puerto Rico’s unemployment rate was 9.9%, its lowest level since it was 9.8% in November of 2000—a rate nearly 50% lower than the Spring of 2009. The BLS reported that the number of residents with jobs declined 1% last month from April of 2017 according to the Bureau’s Current Employment Statistics, and this showed total non-farm employment declining last month by 3.6% from a year earlier, with private sector non-farm employment down 3.3% from a year earlier—denoting a further sign of the fiscal challenges ahead as the U.S. territory restructures its debt. Of concern is who is leaving, as Advantage Business Consulting President Vicente Feliciano noted that the “unemployment rate is down mainly due to emigration: Thus, there are fewer people employed, but as a result of emigration, fewer people are looking for a job; meanwhile, the Puerto Rico economy is being impacted by the start of [hurricane-related] insurance and federal transfers.” Nevertheless, he reported that the Economic Activity Index in March 2018 was up with respect to February 2018: “Cement sales are up over 20% in March 2018 compared to March 2017. While these transfers are only beginning, they are non-recurrent and therefore should not be the basis for debt renegotiation.” However, Inteligencia Económica Chairman Gustavo Vélez noted: “The [labor force] participation rate remains very low…The information that I have is that the labor market is not normalized yet. Nevertheless, key industries like construction and retail are doing well because of the federal recovery funds already deployed into the local economy ($10 billion since October 2017).” According to the most recent economic activity index release (March), the index was down 2.6% from a year earlier; however, this was a rebound from the 19.7% decline in November 2017 from November 2016.

Who’s on First? Confidential conversations between the PROMESA Board and Gov. Ricardo Rosselló Nevares’s administration continued over the past few days without the certainty to reach a balance between the revenues and expenses the Government will have during the upcoming fiscal year—a year commencing in little over a month, on July 1st. Yet, even with the adjustments made by Governor Rosselló, following some of the Board’s mandates, government expenses are proposed for some $8.73 billion, a level some $200 million higher than the revenue certified by the Board. Nevertheless, neither the Board, nor the Fiscal Agency and Financial Advisory Authority (FAFAA) have been willing to discuss the preparation of the new budget or the differences, which have been publicly outlined between the parties. For his part, the Governor has refused to accept the revenue scheme certified by the Board to prepare the budget, instead opting to use the numbers contained in the new Fiscal Plan—while the PROMESA Board has objected that pensions adjustments contained in the Fiscal Plan have not been implemented, nor have their proposed labor reforms been listed.

Some parties have indicated that, as part of the process between the parties, Puerto Rico has promised, as required by the PROMESA Board, to eliminate Law 80, a Puerto Rican law which protects workers from unjust dismissals, in exchange for the allocation of some $100 million to municipalities, as well as an increase in funds for the Legislature, the Governor’s Office, and the Federal Affairs Administration. The see-saw issue at a time of steep cuts in Puerto Rican government services and school closures, including limitations in the Government’s Health Plan, has led Gov. Rosselló Nevares’ administration to criticize the seemingly contradictory fiscal situation in which the PROMESA Board has requested nearly a 33% increase from $60 million to $80 million in the amount it receives to finance its operation and bankruptcy lawsuits of the central government and several public agencies, at the same time, as Rafael Hernández Montañez, spokesman of the Popular Democratic Party minority in the House, expressed the Board does not appear to “think the same about the elimination of workers’ rights,” and at the same time the Governor is looking to increase government investment in Puerto Rico’s future.

Amazonian Recovery

May 18, 2018

Good Morning! In this morning’s eBlog, we take a fiscal perspective on post-chapter 9 Detroit and its income and property taxes; then we dip south to assess the seemingly interminable governing challenge with regard to whom is in charge of restoring fiscal solvency in Puerto Rico.   

The Challenging Road to Recovery. Last January, Detroit failed to make the Amazon cut to make the finalists: Sandy Baruah, president and CEO of the Detroit Regional Chamber, who was on the fateful call, nevertheless described feedback from Amazon, describing the “creativity, the regional collaboration, the quality of the bid document, the international partnership with Windsor, all of that got incredibly high marks,” adding that: “We were good, but we weren’t good enough on the talent front.” The noted urban writer Richard Florida tweeted that he believed Amazon missed the mark on Detroit, if talent was the disqualifying factor—he, after all, early on, had identified Detroit as a sleeper candidate for HQ2, with a top three of greater Washington, D.C.; Chicago; and Toronto, noting that Detroit has more tech workers than many on the list, including Pittsburgh, Indianapolis, and Columbus—and that the city has access to major public research universities, not to mention its international partnership with Windsor, Ontario, in Canada gave the bid an international quality that only Toronto’s bid could match. Indeed, Mr. Florida had suggested that Detroit’s elimination was due to outdated perceptions of the Motor City’s economy, talent, and overall livability.

Nevertheless, Detroit’s near miss—when added to the city’s exit at the end of last month from state fiscal oversight, is a remarkable testament to Detroit, that, less than five years after filing for the largest municipal bankruptcy in American history, came so close to making the cut, so successfully has it overcome the adverse repercussions of nearly six decades of economic decline, disinvestment, and chapter 9 municipal bankruptcy. State officials praised the city for fiscal gains that came quicker than many anticipated after its Chapter 9 exit in December 2014. The city shed $7 billion of its $18 billion in debts during the 18-month bankruptcy. Last year, the city’s income tax take rose by 8%–and assessed property values rose for the first time in nearly two decades.

No doubt the auto industry has played a driving role: in the emerging age of self-driving cars, a recent report by real estate services giant CBRE which evaluated the top 50 U.S. metro areas in the country in terms of tech talent ranked Detroit 21st, ahead of several cities which made the Amazon cut, including Philadelphia, Los Angeles, Pittsburgh, Indianapolis, Nashville, and Miami. Indeed, remarkably, on a percentage basis, Detroit has as many tech jobs in its metro as Washington, D.C., and Boston. The report also found that Detroit’s millennial population with college degrees grew by just under 10% between 2010 and 2015, more than double the national average of 4.6% and equivalent to rates in the Bay Area (9.5%) and Atlanta (9.3%).

Nevertheless, the Motor City continues to face taxing challenges—including a less than effective record, until recently, of collecting income and property taxes it was owed under existing law—and of improving its school system: a vital step if the city is to draw young families with kids back into the city. Moreover, it still needs to reassess its municipal tax policies: its 2.4% income tax is double that paid by non-residents working in the city. That is not exactly a drawing card to relocate from the suburbs.

The Uncertain Promise of PROMESA. While the PROMESA Oversight Board has requested Puerto Rico to amend its recommended budget, Puerto Rico has responded it would prefer to negotiate, because it understands that resorting to the Court “is not an alternative.” Puerto Rico’s Secretary of Public Affairs, Ramón Rosario Cortés, made clear, moreover, that there would be is no change of position with regard to the Board’s demand for reducing pensions or vacation and sick leave, much less eliminating the Christmas bonus. Nevertheless, the Commonwealth appears to be of the view that its differences with the PROMESA Board are “are minimal,” despite the Board’s rejection, last week, of Governor Ricardo Rosselló’s proposed budget—a rejection upon which the Board suggested that cuts in public pensions and the elimination of the mandatory Christmas bonus had not been incorporated. The Board also noted the omission of funds finance Social Security for police officers. Secretary Rosario Cortés noted: “The Governor called to the Board to sit down and review those points they exposed, as long as they do not interfere with the Governor’s public policy. In the coming days, Gov. Rosselló and his team will be responding to each of the Board’s points and providing information that supports each of the Government’s positions: The Government is open to dialogue in order to reach consensus that does not interfere or contravene those public policy positions that the Governor has already expressed; specifically: no cuts in pensions or eliminating the Christmas bonus and reducing sick leave.”

He acknowledged that the dispute could end up in Court, as PROMESA Board Executive Director, Natalie Jaresko, has warned: “Yes, certainly, they have not only resorted to Court in the past, but they have also said it is a possibility. We understand that it is not an alternative, it would delay the fiscal recovery of Puerto Rico and would require investing resources that are scarce at the moment: They made some observations, and we are willing to look at them,” adding that the work teams of the Governor and the Board are communicating and sharing information: “Dialogue continues and, along the way, we hope to reach a consensus that will avoid setbacks and reaching the courts.”

Who Is Governing? Precisely, Director Jaresko also acknowledged that not amending the budget would delay the renegotiation of Puerto Rico’s debt, warning that if the Rosselló administration does not act, the PROMESA Board will proceed to preempt its governance authority and power as provided by the PROMESA law, which authorizes the Board to amend the U.S. territory’s budget and submit its own version to the Legislature for approval—albeit, it rattles one’s fiscal imagination that Puerto Rican legislators could conceivably want to do so.

Nevertheless, the Board has advised Gov. Rosselló that his recommended budget does not reflect what is established in the fiscal plan: regarding the General Fund, the recommended budget represents about $200 million in expenses on the certified income projection; in addition, the budget information does not include public corporations or similar dependencies—meaning that Director Jaresko is of the view that the draft budget omits some 60% of the public spending. Thus, she has threatened that the Governor has until high noon on Tuesday to correct the ‘deficiencies,’ or risk the Board preempting its governing authority.  

Nevertheless, Puerto Rico’s fiscal position appears to be on the upswing: as of last week, revenues were 7% ahead of its July 2017 forecasts; last month’s revenues came in 18% stronger than projected. Notwithstanding the physical and fiscal impact of Hurricane Maria on Puerto Rico’s economy, Puerto Rico’s central bank account, the Treasury Singular Account, held $2.65 billion as of last Friday—some $211 million more than the government had anticipated last July according to information posted on the MSRB’s EMMA.