Physical & Fiscal Recovery

                                      October 30, 2018

Good Morning! In this morning’s eBlog, we report on the status of Puerto Rico’s fiscal recovery from quasi Chapter 9 municipal bankruptcy.

The PROMESA Oversight Board is exploring taking legal action connected to Puerto Rico’s sale of municipal bonds and notes over the years: the Board released a request for proposals for law firms and lawyers to look into the possibility of legal actions on the debt of Puerto Rico and its instrumentalities, with the Dean of chapter 9 municipal bankruptcy, Jim Spiotto, noting that by the Commonwealth of Puerto Rico to recover would likely be taken as part of the Title III bankruptcy. Scott Silver, a managing partner of a Florida law firm, old the Bond Buyer that the five year statute of limitations on most claims would constitute a major hurdle, but that “creative arguments could be made as to when fraudulent actions were discovered” and that this discovery date would be important in determining the timing of the statute of limitations. No doubt the issue stems from last August’s release by the PROMESA Board of the Kobre & Kim report on the origins of Puerto Rico’s debt—a report which indicated there were many possible illegalities in the issuing of the debt, but that the five years statute of limitations had passed for most possible prosecutions stemming from debt agreements—with one exception, a general obligation 2014 sale, which the SEC has said it will not pursue. Mr. Silver noted: “While Puerto Rico bears a lot of responsibility, governments and municipalities rely on Wall Street professionals to guide them in fiscally responsible practices…In Puerto Rico, the government was consistently advised to issue more debt allowing the banks to earn millions in fees.”  

Fitch Ratings said the timing of its Puerto Rico actions “reflected Fitch’s opinion of the issuers’ ongoing credit deterioration.” Mr. Silver noted that Puerto Rico’s breach of contract statute of limitation is 15 years and this may be used, while Mr. Spiotto said hiring a claim counsel was a “double check” on Kobre & Kim’s report, noting there might have been two firms in order to assure adequate knowledge of all the relevant laws—with the laws in question including not just Puerto Rico, but also federal and New York State statutes, because some bond sales were done under these laws. If the Board takes an action on behalf of Puerto Rico’s local government, it is likely to be as an adversary proceeding in the Title III bankruptcy, according to Mr. Spiotto.

Congressional Fact Finding. Last week, nearly fifteen officials from the U.S. House Appropriations Committees convened meetings in Puerto Rico as part of a post-Maria fact-finding trip, with the key focus on non-governmental groups, power grid challenges and housing. The delegation included staff from the House and Senate Appropriations Committee, who, by the end of this year, intend to draft a  new additional supplemental appropriation bill to address ongoing hurricane recovery following Hurricanes Florence and Michael—with the staff scheduled to meet with Governor Ricardo Rosselló, PREPA Executive Director José Ortiz, the President of PREPA Governing Board Elí Diaz, and Housing Secretary Fernando Gil Enseñat. In addition, the delegation will meet with Senate Vice President Larry Seilhamer, Popular Democratic Party spokesperson Senator Eduardo Bhatia, as well as academics and private organizations. Importantly, they will also make visits to municipios such as Altos del Cabro, in Santurce; Vietnam, in Guaynabo; Coqui Solar, in Salinas; and the Mariana Mutual Support Project, in Humacao. The sessions are expected to include professors from the National Institute of Island Energy and Sustainability, such as Lionel Orama and Marla Pérez, from the University of Puerto Rico at Mayaguez, and Criseida Navarro, from the University of Puerto Rico Planning School—with Rosanna Torres, the Director of the Washington office for the Center for a New Economy noting: “They wanted to have a perspective of what is affecting communities.”

Puerto Rico Housing Secretary Gil Enseñat said that, during the meeting, the conversation focused on finding about planning and controls regarding the promised allocations, such as the $20 billion that the Island must obtain through the Community Development Block Grant Disaster Recovery Program, adding: “It was a very good and productive meeting,” adding that the group of Congressional staff subsequently visited the U.S. Virgin Islands, before returning to Puerto Rico, where they subsequently met with the Executive Director of the Puerto Rico Ports Authority Anthony Maceira. The meetings will be completed before Congress reopens after next week’s mid-term elections on November 13th—albeit, Congress has only 18 days in the remainder of this session—with a daunting workload.

Are Property Tax Revenues Falling? Is PROMESA Promising?

October 26, 2018

Good Morning! In this morning’s eBlog, we report on the implications of falling home sales, the status of Puerto Rico’s fiscal recovery from quasi Chapter 9 municipal bankruptcy, and the price of municipal dishonesty.

Are Property Tax Revenues at Risk? According to the Census Bureau’s most recent Annual Surveys of State and Local Government Finance data, which provides a comprehensive picture of the funding sources of state and local government revenues, there are remarkable differences from one state to the next with regard to the levying of taxes and fees, albeit, states and local governments tend to obtain the largest portion of tax revenues from property taxes: in FY2010, 35% came from property taxes, and, of that, local government tax revenues tend to be mainly funded by property taxes—in 2010, local government obtained just over 75 percent of their 2010 tax revenues from property taxes. Thus, new data from the Commerce Department reports that sales of new homes in the U.S. slumped for the fourth-consecutive month as inventories swelled to the highest level in years, strongly hinting that the housing market is falling deeper into a weak stretch: purchases of newly built single-family homes—a relatively narrow slice of all U.S. home sales—fell 5.5% to a seasonally adjusted annual rate of 553,000 in September. Virtually all parts of the country realized declines in new-home sales last month, with the West experiencing the largest monthly drop since the end of last year. Conversely, inventory rose to a 7.1 months’ supply, the highest level since March 2011—or, as Nationwide Senior Economist Ben Ayers puts it: “While job and income gains remain solid, rising prices and mortgage rates have decreased affordability for some homebuyers and appear to be reducing housing demand on the margins.” Sales of previously owned homes fell 3.4% in September from the previous month, continuing the longest slump for such sales in four years. Because property taxes are based upon assessed property values, city, county, and public school district leaders could now be confronted by trying fiscal challenges: raising property tax rates, or cutting services.

Unpromising PROMESA? Just two days after having certified a new Fiscal Plan or quasi plan of debt adjustment for Puerto Rico, the PROMESA Oversight Board has launched a platform on the internet to ensure that the government implements the document with which, it is alleged, the budget imbalance suffered by Puerto Rico has been corrected. The compliance portal, unveiled last night, will be the tool used by Board Executive Director Natalie Jaresko as a means of ensuring that Gov. Ricardo Rosselló Nevares’ administration complies with the Government’s five-year fiscal quasi plan of debt adjustment, the five-year plan the Board approved last Tuesday, notwithstanding the warnings of the government representative before that body, Christian Sobrino Vega, who said that the approved plan is not enforceable, as well as the multiple criticisms from politicians and citizens. The document notes: “The full implementation of certified fiscal plans is necessary to place Puerto Rico on track to achieve the objectives set forth in (the federal law) PROMESA.”

The portal is structured in two parts: One seeks to establish if the government has presented the necessary strategies to enforce the Fiscal Plan, with the analytics portion noting that, to date, the Board had received some 89 implementation plans, while another 40 remain pending. (The system allows verification of compliance by each government agency, as well as the Senate, the House of Representatives and the Judicial Branch.) The second section of the portal seeks to document whether the government of Puerto Rico is in compliance with the presentation of financial reports, such as liquidity reports, pension payments, and a comparison between projected and current expenditures. The portal, last night, indicated last night that 77% of the required reports had been filed. In addition, this week, Director Jaresko said that the Board has followed up on 128 measures related to the operational changes that the government of Puerto Rico should execute, including from the closure of schools, simplifying the hiring processes, and developing mechanisms to consolidate administrative operations—reporting that of that total, only about four initiatives were in progress.

Unsurprisingly, there has been less than an eager response to the orders of unelected, non-Puerto Rican overseers: on Tuesday, after the Board certified its new formula for government expenses, Gov. Rosselló Nevares anticipated it would not implement the Board’s prescription, arguing it constituted an unnecessary dose of “austerity,” especially in light of the island’s economic improvement .

For Puerto Rico’s municipal bondholders, the PROMESA Oversight Board’s delivery of its long-term quasi plan of debt adjustment received less than an enthusiastic response—with the approve plan projecting that any central Puerto Rico government annual surplus available for paying debt will disappear in FY2034—and that is if there are no hitches in the implementation of the plan—much less super hurricanes unaccounted for in the plan. Under the proposed plan, the PROMESA Board expects no fiscal resources for meeting debt obligations other than that of the Puerto Rico Sales Tax Financing Corp. Mayhap unsurprisingly, PROMESA Oversight Board member Ana Matosantos said she did not like the Board’s fiscal plan, but would vote for it anyway. Three board members lamented that Puerto Rico’s legislature had failed to initiate structural reforms the Board members, who are not residents of Puerto Rico, believe would lead to greater economic growth, including an effort to improve Puerto Rico’s labor participation rate by, in particular, passing an at-will employment law. Board member Andrew Biggs said if the local government adopted additional structural reforms beyond the Board’s capacity to impose, Puerto Rico could add 1% economic growth a year. Board member Ana Matosantos said that she did not like the fiscal plan, objecting that it neither bridges the budget gap, nor would restore growth; in addition, she objected its cuts were too deep to social services and was too optimistic about generating federal aid. Nevertheless, Ms. Matosantos said she would vote for the plan, “because it is foundational to the restructuring process and the development of a new budget.” Interestingly, Christian Sobrino, Gov. Ricardo Rosselló’s non-voting member of the Board, responded to the criticism of Mr. Biggs and Ms. Matosantos by saying he was unsure why they were being so “grim,” noting the government is doing well in terms of revenues and restructuring the government and debt. Equally interesting, the Board continued to adhere to the position that debt levels of U.S. states, rather than levels of surplus, should be the primary guides to the amount of debt the central government should pay—leading PROMESA Board Executive Director Natalie Jaresko to note that the implied net tax capacity for FY2018 to 2023 for the central government would be $12.5 billion based the top 10 states for indebtedness or $4.2 billion based on the average of all 50 states. These are figures for total outstanding debt and not debt service levels.

Gambling on the Road to Recovery: What Does it Take to Emerge from State Oversight? & What Might it Take to Emerge from PROMESA Board Oversight?

October 23, 2018

Good Morning! In this morning’s eBlog, we report on Atlantic City’s continued emergence from state fiscal oversight and near municipal bankruptcy, before journeying south to report on Puerto Rico’s similar, ongoing efforts to emerge from PROMESA Board oversight.

The Path to Recovery from State Oversight. Casino, is an Italian fishing card game dating back since 1797 for two, three, four (possibly in two partnerships), or even theoretically five players. It is the only one to have penetrated the English-speaking world. First recorded in 1797, it seems to have been heavily modified, and, in Atlantic City, seeking to emerge from a state takeover, part of the fiscal issue will be the impact on the fiscal recovery of the opening of two new casino properties last summer—and resolving outstanding casino tax appeals. That resolution has worked to lift the City’s municipal bond rating up to the single-B category for the first time in nearly three years, after S&P Global Ratings upgraded Atlantic City’s general obligation bonds to B from CCC-plus late Tuesday, noting a series of improvements accomplished under state oversight, with the upgrade the rating agency’s fifth since its nadir in 2016 as the city hovered on the edge of bankruptcy. The upgrade, too, reflects, according to its analyst Timothy Little, commenting on the decision three weeks ago by Gov. Phil Murphy to continue the state’s oversight of the city’s finances through at least the fall of 2021 under the New Jersey Municipal Stabilization and Recovery Act, with Mr. Little adding: “The upgrade reflects our opinion of the city’s improved operating environment and structural financial improvement following settlement of outstanding tax appeals and continuation of extensive state oversight.” Unsurprisingly, spokesperson Lisa Ryan of the state’s Dept. of Community Affairs, the state agency responsible for managing the state takeover, expressed gratitude for the recognition: “We are enthusiastic about the S&P upgrade, because it demonstrates the hard work being done by Atlantic City and the State is moving the city in a positive direction…Over the last nine months, the city and state have worked collaboratively to find creative solutions to pay Atlantic City’s deferred pension and healthcare contributions and to maintain essential services without significantly increasing the city budget.”

S&P, in its fiscal review, noted that since S&P’s last Atlantic City review, the city achieved permanent financing of its deferred 2015 state pension and healthcare contributions via through a $49.2 million municipal bond sale last April; but the rating agency also credited Atlantic City officials for implementing a 10-year payment-in-lieu-of-taxes program for casino gambling properties and adopting a $225.3 million FY2018 budget which contains less reliance on non-traditional state aid—or, as S&P put it: “The stable outlook reflects our opinion we expect the city to maintain and continue to improve financial performance, increase reserve levels and sustain improved liquidity, while political risk associated with payment of debt service and structural reforms has improved, further lending support to future stability.” Atlantic City Mayor Gilliam noted: “Atlantic City is at a turning point, because we now have a robust road map for the city’s revitalization: As I look around the room and see so many leaders ready to work with the city, I am optimistic for our future. This is an opportunity to try new things to move Atlantic City forward.”

Gambling on the Fiscal Odds? Even before the opening of two casino properties at the beginning of last June, there appeared to be little consensus among industry experts with regard to what their overall impact would be on the existing gaming market: some believed the new properties, the Hard Rock Hotel & Casino Atlantic City and Ocean Resort Casino, would cannibalize the existing seven casinos’ customers, while others were of the mind that more offerings would expand the market. Last month’s casino revenue numbers did little to resolve the issue. Fairleigh Dickenson U. adjunct Professor Bob Ambrose, who focuses om casino management, believes a new competitive environment has been created with the new companies, noting: “Their entry has contributed and broadened the marketplace, not just in gaming, but all areas of hospitality…Tourism benefits by expanding visitors’ options among all properties in Atlantic City, which is so important for marketing the city as a destination.”

Indeed, total gaming revenue in the city, including the new sports gaming, have increased the Atlantic City gaming market: total gaming revenue for last July, August, and September increased by some $123.5 million or 16.5% over last summer. The introduction of internet gaming has also been a revenue gusher: for the selected three months in 2017, internet gaming generated $62.3 million; this year, revenue generated from internet gaming increased $14.2 million, or 22.8%, industrywide. Or, as Rummy Pandit, the Executive Director of the Lloyd D. Levenson Institute of Gaming, Hospitality and Tourism at Stockton University, put it: the revenue figures, coupled with summer transportation data from the South Jersey Transportation Authority, reflect a “very healthy” increase for the market; he added: “In addition to that, what we don’t know yet are the non-gaming numbers,” which he added the New Jersey Division of Gaming Enforcement will release next month, adding: “Those are going to be significantly higher as well, I anticipate, for the third quarter (of 2018) because we’ve increased the number of restaurants, we’ve increased the entertainment, increased the lodging. None of those numbers are reflected in (casino revenue) increase.”

But, as is the nature of gambling, wins or gains are offset by losses—or, as Tony Marino, a local industry analyst put it: because the new entries produced a 20 to 30% increase in the market, he believes it is clear that casino win—total gaming revenue less internet and sports wagering—had decreased since the Hard Rock and Ocean Resort opened, noting that, absent huge increases in internet gaming revenue by Golden Nugget and Resorts Casino Hotel, all seven of the existing casino properties have experienced revenue declines over the three-month period—or, as he put it: “Another way of saying this is that even in the summer months, Hard Rock and Ocean Resort mostly cannibalized the pre-existing brick and mortar market, not expanded it to any great degree…That trend unfortunately may worsen in coming months as we move into the shoulder and winter seasons.” In addition, he warned that another market rightsizing is likely once nearby states, such as New York and Pennsylvania, finalize internet and sports gambling options. Thus, he added: “Most (Atlantic City casinos) will survive by reducing costs through reducing current high levels of employee numbers as low labor-intensive online gaming and sports wagering captures an increasing percentage of total industry gaming revenues…But I also project that the recent boost in visitor numbers will be adversely affected by the twin effects of the trend toward online casino gambling and sports wagering, as well as by competition for visitors from nearby states. Atlantic City will always have strong summer seasons and year-round weekend tourism but not enough to keep all current nine casinos producing positive bottom-line profits.”

Nonetheless, Professor Ambrose believes Atlantic City can thrive if it continues to capitalize on the growth of internet gaming and sports betting: “I look at this past summer as a time of Atlantic City in transition…We need a good year-over-year review, as all properties both new and existing tweak all their options, and adjust their properties to accommodate the new product of sports betting…Moving forward, the Atlantic City market has the potential for continued growth in both gaming and non-gaming as long as there is a balance of marketing and loyalty programs that are realistic.”

Trying to Balance the Cost versus Benefits of Tax Reform. The Puerto Rico Legislature and Executive branch appear to be considering, again, the concept of cutting industrial incentives and tax credits to save money and cover a large part of the $209 million shortfall projected from the current tax reform proposal.  That proposal does not imply that the Legislature will finally give way to the creation of the so-called Incentive Code, which has remained in a kind of legislative Twilight Zone since last June, and which, to date, appears to lack the requisite number of votes in the legislature to pass. The tax  bill, developed mainly by the Department of Economic Development and Commerce, in addition to proposing fiscal incentives in a single statute, includes a series of performance metrics and provides for government investment in different industrial sectors to be limited. Nevertheless, according to Puerto Rico Treasury Secretary Teresita Fuentes, the pending proposal now also proposes a limit on the amount of fiscal stimulus the government may invest annually to encourage an industrial sector, stating: “I do not know if there is enough time to approve the Incentive Code. It’s quite possible that we will end up reviewing the caps of each incentive. We are analyzing all of them.”

If anything, the taxing challenge confronts another obstacle: private sector leaders look on cuts in tax incentives with suspicion. Originally, the fiscal plan certified by the PROMESA Oversight Board, based on the Incentive Code proposal, imposed cuts on investments in agriculture, the film industry, tourism, manufacturing, rum, and hospitals, among other economic sectors—proposed cuts which drew the opposition of a large part of the local business community. Sec. Fuentes did not specify how much in appropriations will be cut via the proposed caps, stating that the issue would be resolved in the wake of studying the economic effect of each possible change in the laws that promote several industrial activities. Moreover, she added, this would not be the only initiative to reach the level of revenues of recent years, as required by the PROMESA Board; there will also be rate adjustments of different taxes to ensure compliance with the budget neutrality of the reform in government revenues. Similarly, House Finance Committee Chair Antonio Soto has noted there would be less corporate tax relief than initially proposed by Governor Ricardo Rosselló Nevares, stating: “We are reviewing all the laws, and we are in conversations with (the Department of) Economic Development and the Legislature. There are laws with high caps that do not necessarily have the highest ‘return of investment.’”

The tax discussion has, unsurprisingly, left the business community non-plused: Puerto Rico Chamber of Commerce President Kenneth Rivera Robles warned that just the rumor that tax incentives will be modified can stop or discourage investments in Puerto Rico: “It can stop economic activity. Instability can have the effect of losing investment.” His counterpart, Rodrigo Masses, President of the Manufacturers Association, stressed that reducing corporate welfare programs in order to lower income taxes has a fundamental problem; he fears it would discourage production, but encourage consumption, noting that, with the reform, companies in areas such as manufacturing, where products that generate capital or wealth are created, would have fewer resources to operate and would be in a worse position in terms of competitiveness. In contrast, trade, which is where the money is spent, would be encouraged as taxes on income and consumption would be reduced—or, as he put it: “And production is what allows us to develop the wealth so that the island can consume…I would be very sad that something like this would be approved at the expense of the productive sectors of Puerto Rico,” stressing that currently the production by Puerto Rico’s manufacturers generates much more than the 30% of the net income of the General Fund.

Modifying Puerto Rico’s Property Tax. The proposed elimination of the portion of the island’s property tax which applies to inventories and those initiatives associated with the video lottery, as recently agreed at a meeting between the Executive branch and House and Senate leaders, is, nevertheless, not included, but rather still under consideration—or, as Sec. Fuentes noted: “(The video lottery) is not being considered in numbers,” referring to one of the main House proposals to bring in more revenues to the Treasury. Nevertheless, the lottery issue appears to be a difficult issue creating disagreements not just in New Jersey, but now between the Governor, House, and Senate, because the parties have been unable to achieve consensus on how to allocate the projected revenues: House President Carlos “Johnny” Méndez wanted to use the funds to cover what municipalities would not receive by eliminating the tax on inventory. Senate President Thomas Rivera Schatz supports using the funds to finance the mandatory municipal contribution to the Government Health Plan, now called Vital, while the Governor has supported directing the funds to finance the Christmas bonus for public employees. The House insists that the legalization of video lottery prizes should be included in the reform, said Soto. The elimination of the tax on inventories, meanwhile, would be worked on in a separate bill. Chairman Soto notes: “We are working on several alternatives to address the issue in a separate bill.”

Nevertheless, the different sides appear to be making progress: Gov. Rosselló Nevares’ original proposal reduced income tax rates for individuals and corporations, lowered Sales and Use tax rates on prepared foods and business transactions, and establishment of a work credit.  If the tax reform were approved, the sales and use tax on prepared foods would be 8.5%: the goal is to eventually lower it to 1.5%. In the meantime, the goal is to eliminate the business-to-business sales and use tax within three years.

In theory, the reform will increase taxes on those who are self-employed and small businesses which do not have to submit financial statements with their returns. This would be achieved by requiring evidence or certifications associated with the deductions that, usually, these taxpayers claimed in the returns. If a taxpayer does not want or cannot justify his or her deductions, she or he could benefit from an alternate calculation of their tax burden based on the gross sales of his company.

Car 54 Where Are You?

October 17, 2018

Good Morning! In this morning’s eBlog, we report on an issue of concern to every city and county in the nation: what requirements prevail with regard to the use of lights and sirens in responding to a 9-1-1 call? The issue, arising in Detroit, where, in its first moments of entering the nation’s largest ever chapter 9 municipal bankruptcy, the first instructions from Emergency Manager Kevyn Orr, freshly arrived from the Washington, D.C. metropolitan area, to all employees were: they were to report on—on time—and that the most critical services were to insure prompt responses to any 911 calls—and that every traffic and street light be operating. Interestingly, now in the Motor City, there is debate about a revised city fire code policy, one which permits some responses to be provided without either sirens or flashing lights.

Car 54 Where Are You? The city implemented the new policy last month: it applies to all fire personnel. It classifies 9-1-1 responses for fire personnel into two codes: one for emergent runs, while the other is for non-life threatening calls. Previously, as on the city’s first hours in municipal bankruptcy, crews previously responded to all calls with lights and sirens; however, now Fire Commissioner Eric Jones believes that disregard of traffic signals and speed limits with lights and sirens activated on non-urgent dispatches is not only unnecessary, but is dangerous. Thus the new strategy is aimed at providing dispatchers and fire department personnel discretion on when to use lights and sirens—or, as Commissioner Jones put it: “My job as Detroit Fire Commissioner is to make sure we’re protecting property and saving lives: We cannot do that if every time we get a run, we go lights and sirens. It’s foolish, and someone will get killed. The policy is tight, and it is good, and it makes sense. And we’re going to save firefighters’ and citizens’ lives and reduce accidents because of it.”

Under the new protocols, Code 1 responses, which require lights and sirens, include urgent or life-threatening emergencies, such as structure and automobile fires, large grass fires with a threat of exposure, dumpster fires, fires inside a structure, and mutual aid calls. Code 2 responses require “immediate attention,” but lights and sirens are not necessary, meaning that the first arriving companies can invoke a “go-easy” directive, so that other crews can arrive safely. These calls include smoke outside a structure, odor or carbon monoxide calls inside a structure with no signs of sickness, downed wires without fire, and other calls with no life threat or illness. Code 3 applies to Detroit’s EMS: it is issued for non-life threatening emergencies. In those cases, units must comply with state and local traffic laws.

Commissioner Jones describes the change as marking the city’s “time to move this department into the 21st century. This is happening all across the nation…It was the right thing to do, and I completely, wholeheartedly stand by it.”

Unsurprisingly, the proposed change has caused its own firestorm—not just in the city, but also in the Michigan Legislature. Mike Nevin, President of the Detroit firefighter union, warns the new policy leaves too much room for error: it could cause firefighters to be under-prepared to handle more critical cases. He testified before the Detroit City Council this week to demand the new protocol “go away,” testifying: “The firefighters and the medics in the field know that there’s no crystal ball in central office, and something that may sound non-emergent on the phone could be very emergent: what they are doing right now is something I’m not going to take a pass on.” Mr. Nevin noted “hundreds” of calls have been improperly coded since the policy first took effect in late August; he and contends it is a move by the city to skew data: “What the city is trying to do right now is put a square peg into a round hole and manipulate data so that they can go publicly with good numbers…This isn’t about money, pension, wages, or health care; this is about providing adequate service to the public that we swore to protect.”

Meanwhile, in Ann Arbor, Democratic state Reps. LaTanya Garrett, Tenisha Yancey, Sherry Gay-Dagnogo, Leslie Love, and Stephanie Chang joined earlier this week with Detroit’s fire union leadership Monday for a news conference to address their apprehensions over the new policy, with the union describing it as creating a “public safety nightmare.” Detroit Caucus Chair in the state legislature, Michigan Representative Gay-Dagnogo, stated: “We are standing united to speak toward safety precautions that need to be taken to ensure that all Detroit residents are safe,” telling reporters the delegation has been informed of the code changes which “put our residents in harm’s way,” adding that: “As citizens of this city, we’re pushing back against that: We want to make sure that reforms put residents first.”

Earlier this month, Detroit Fire Fighter Association President Mike Nevin called for an administrative shakeup in the fire department and for the policy to be canceled as he stood by a west side resident who lost her rental home to an electrical fire which had been mistakenly dispatched as a lower-priority run. Rep. Garrett, herself a former EMT, described the change as a “grave concern” about public safety: “No lights and no siren, how does the public identify that there is a true emergency?…Unless they are truly educated…we are presenting grave danger, not just to this community, but to the city and also the state.”

Chief Jones reiterated in a Friday bulletin to the department that the policy is based on national best practices; however, the fire union countered that the city has failed to provide supporting documents to prove that, and Chief Jones has admitted there have been some dispatch errors since the new code system went into place; nevertheless, he has maintained that the department will not scrap the policy. But a little over a week ago, he did amend it, stating that firefighters will now respond with lights and sirens to all calls for residential and commercial fire alarms, carbon monoxide and downed wires. The emergent, or Code 1, classification for those runs is a shift from the original policy language. Formerly crews were responding with a lower priority, or Code 2, unless smoke was visible for fire alarm calls, wires were sparking or arcing for downed lines, and if there were signs of illness or injury for carbon monoxide runs. Then, on Friday, in a bulletin, he disputed claims from the union that Chief Jones contends have been “false and misleading,” writing that staff in the Fire Department’s central office and those taking the emergency calls “recognize the policy as placing structure around dispatching procedures, with a Department spokesperson stating that “the only personnel who have ever had access to dispatch terminals are the personnel in central communications and only while they are on active duty: no other department personnel ever have had access to that data due to HIPAA privacy reasons.”

Commissioner Jones, in his bulletin, also contends that firefighters, no matter the code, are responding to all calls with a sense of urgency. The policy, the Commissioner explained, is designed to “modernize and professionalize” the department.

The 9/11 Incident Commander at the Pentagon, the then Deputy Fire Chief of Arlington County, noted the “Commissioner is absolutely right with both the policy and its use across the country.  In Arlington we have been doing such response for decades; we even transport patients with non-life threatening illnesses and injuries to the hospital, non-emergency.  If you want further evidence, talk to police departments who “respond” non-emergency for the majority of their incidents.  The Commissioner is right when he observes that he is focused on community safety and there is no question that in too many cases, emergency response adds to community risk.  Lights and siren are not always vital to delivering essential services and their use reduces time, in most instances, on the margins.  Emergency service leaders have a responsibility to weigh the risk in all their activities.”

Stopping Air Discrimination

October 12, 2018

Good Morning! In this morning’s eBlog, we report on the potential for Congress to exempt Puerto Rico from air cabotage laws, and then we consider the decision this week with regard to the boost in Social Security benefits.

Air Discrimination. The current federal Air cabotage law (§49 U.S.C. 41703) prohibits the transportation of persons, property, or mail for compensation or hire between points of the U.S. in a foreign civil aircraft, with the term “foreign civil aircraft” including all aircraft which are not of U.S. registration, except those foreign-registered aircraft leased or chartered to a U.S. air carrier and operated under the authority of regulations issued by the Department of Transportation, as provided for in 14 CFR 121.153, and those aircraft used exclusively in the service of any government. The term “foreign civil aircraft” includes all aircraft, which are not of U.S. registration, except those foreign-registered aircraft leased or chartered to a U.S. air carrier and operated under the authority of regulations issued by the Department of Transportation. The law, therefore, discriminates against Puerto Rico, leading some to request the General Accounting Office to assess the viability of exempting Puerto Rico from air cabotage laws, especially with regard to how that might promote the U.S. territory’s productivity and competitiveness via a waiver of the Jones Act. Thus, Puerto Rico’s non-voting Member of Congress Jennifer González, has requested the GAO to complete the task by next October, including an analysis of the existing air services at an international level and to identify the most active routes, with the largest cargo capacity. Similarly, her request seeks to identify those airlines which operate in the regions with the largest movement of goods and those with freight cargo from or to the mainland. Tax on air cargo transfers is one factor which increases costs in Puerto Rico, so the request also seeks to assess what the economic impact of its elimination or reduction would be, and requests an analysis of the impact of authorizing access to air cargo on passenger aircraft, as well as the transfer of international passengers using Puerto Rico as a bridge. The request asks the GAO to assess the impact of the creation of a transportation and air freight hub on the island, with the concept that such a waiver would be invaluable towards job creation. Moreover, there is a precedent, as the State of Alaska has previously been granted an air cabotage waiver, and, the proposal here would not propose changes to the discriminatory Jones Act, which includes maritime cabotage regulations, the component which includes most of the cargo to the island.

In the case of Alaska, Congress granted the waiver in the wake of recognizing that trade in Alaska was affected, because it did not share borders with any of the other 49 states—and the action worked: it produced greater efficiency in global trade with Alaska as a gateway, much as Puerto Rico could similarly serve as a gateway for U.S. trade in the Caribbean. The Jones Act, as the Merchant Marine Act of 1920 is known, places additional regulations and requirements on ships, which travel between U.S. ports—thereby raising the cost of shipping: every U.S. territory—except Puerto Rico—has been exempted from it, but Puerto Rico remains under its scope. A resolution pending estimates that the “Jones Act costs the Puerto Rican economy hundreds of millions of dollars every year, and in 2010 alone cost $537 million.” Indeed, those discriminatory costs were a critical factor in President Trump’s decision to issue a 10-day waiver from the statute in the wake of the devastating Hurricane Maria last year—or, as a report from the New York Bar Association notes: “The Jones Act raises the price of energy on the island at a time when Puerto Rican families are suffering through an energy crisis, and it raises the price of food when over 44% of the island is living in poverty.” The report, which was written in a partnership between the New York State Bar Association and the New York City Bar Association, adds; “Because of these substantial costs, a wide range of voices, on a bipartisan basis, have consistently requested that Puerto Rico be exempted from the pressed for by Puerto Rico’s non-voting Member of Congress Jennifer González, directs the GAO to complete the task by next October, including an analysis of the existing air services at an international level and to identify the most active routes, with the largest cargo capacity. Similarly, it seeks to identify those airlines, which operate in the regions with the largest movement of goods and those with freight cargo from or to the mainland. Tax on air cargo transfers is one factor which increases costs in Puerto Rico, so the request also seeks to assess what the economic impact of its elimination or reduction would be, and requests an analysis of the impact of authorizing access to air cargo on passenger aircraft, as well as the transfer of international passengers using Puerto Rico as a bridge. 

Aging Security. Tens of millions of Social Security recipients and other retirees will be receiving a 2.8 percent boost in benefits next year as inflation edges higher, marking the biggest increase most retired baby boomers have received: in the wake of a stretch of low inflation, the 2019 cost-of-living adjustment will be the highest in seven years, amounting to $39 a month for the average retired worker, according to estimates released by the Social Security Administration: in our country with an aging population, the COLA adjustment will affect household budgets for about one in five Americans, including Social Security beneficiaries, disabled veterans, and federal retirees—or approximately 70 million of us. Moreover, unlike most private pensions, Social Security has featured inflation protection since 1975. Beneficiaries also gain from compounding since COLAs become part of their underlying benefit, the base for future cost-of-living increases. The increases, of course, do not come for free: they both increase the federal deficit and add to the growing interest on the national debt; they also remind us that with a reducing base, the date when there will be insufficient contributions coming in to meet the entitlement costs of making these payments is coming closer—and that the longer the President and Congress wait to act, the more costly it will be. Thus, unsurprisingly, some are seeking to change the law and reduce or modify the COLA, where the estimated average monthly Social Security payment for a retired worker will be $1,461 a month next year. Or, as policy analyst Mary Johnson, of the nonpartisan Senior Citizens League notes: “For more recent retirees, the 2019 COLA will be the largest increase they have gotten to date.” However, size is relative to the perspective of recipients, especially as Medicare costs are rising, and there are apprehensions about rising Medicare Part B premiums: for some seniors, health care costs alone can consume one-third of their income. Now, with this generation of Americans realizing longer lifespans, but a smaller generation behind us; neither the President, nor Congress appear eager to address the looming fiscal cliff ahead.

By law, the COLA is based on a broad index of consumer prices. Advocates for seniors claim the general index does not accurately capture the rising prices they face, especially for health care and housing. They want the government to switch to an index that reflects the spending patterns of older people. “What the COLA should be based on is still a very real issue,” said William Arnone, CEO of the National Academy of Social Insurance, a research organization not involved in lobbying. “Older people spend their money in categories that are going up at a higher rate than overall inflation.” The COLA is currently based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, which measures price changes for food, housing, clothing, transportation, energy, medical care, recreation and education. Advocates for the elderly would prefer the CPI-E, an experimental measure from the government that reflects costs for households headed by a person age 62 or older. It usually outpaces general inflation, though not always. COLAs can be small or zero, as was the case in several recent years.

Social Security faces its own long-term financial problems and will not be able to pay full benefits starting in 2034. Social Security is financed by a 12.4 percent tax on wages, with half paid by workers and the other half paid by employers. Next year, the maximum amount of earnings subject to the Social Security tax will increase from $128,400 to $132,900. About 177 million workers pay Social Security taxes. Of those, nearly 12 million workers will pay more in taxes because of the increase in taxable wages, according to the Social Security Administration. In addition to retirees, other Social Security beneficiaries include disabled workers and surviving spouses and children. Low-income disabled and elderly people receiving Supplemental Security Income also get a COLA.

The Governance Responsibility to Protect a City’s Children

October 10, 2018

Good Morning! In this morning’s eBlog, we report on the physical and fiscal challenges of the Detroit Public Schools, before zooming south to assess whether the complex municipal financing in Puerto Rico’s recovery has perhaps exacerbated the U.S. territory’s debt challenges.

Protecting a City’s Children. A key challenge in Detroit’s plan of debt adjustment from the nation’s largest chapter 9 municipal bankruptcy was restoring trust in its public schools—a critical step if families with kids were going to move from the suburbs into the emptied city. That, of course, required making the schools not just trustworthy places for learning, but also safe—and not just safe from a gang perspective, but especially here from water contamination—Flint, not so far away, after all, is on many parents’ minds. Thus, the school district is developing plans to make drinking water safe inside its buildings, especially after a review of testing data shows one school had more than 54 times the allowable amount of lead under federal law, while another exceeded the regulated copper level by nearly 30 times. The Detroit News reviewed hundreds of pages of water reports for 57 buildings which tested for elevated levels of lead and/or copper in the water to provide a detailed look how excessive the metal levels were in the most elevated sources.

The News effort comes as Detroit Public School Superintendent Nikolai Vitti noted: “‎We discontinued the use of drinking water when concerns were identified without any legal requirement to do so, and hydration stations will ensure there is no lead or copper in all water consumed by students and staff, with the Superintendent yesterday reported the system expects to spend nearly $3.8 million enacting a long-term solution to widespread lead and copper contamination in students’ drinking water, with the cost including $741,939 to install 818 hydration stations and filters, $750,000 for water coolers until completed installation of the stations in the summer of 2019, $539,880 for environmental remediation costs, $1.2 million for maintenance services, and $282,000 for facilities maintenance—a tab unanimously approved yesterday by the Detroit Community Schools Board, with long-term plan to get drinking water flowing again inside the 106 Detroit schools after faucets were turned off ahead of the school year. The announcement followed Monday’s by Supt. Vitti, when he reported that he and the school board will reveal corporate funders for some $2 million in hydration stations he wants to install across the district.

The need, as the survey revealed, is urgent: among the elevated levels reported by the Detroit Public School District includes a kitchen faucet inside Mason Elementary-Middle School which had more than 54 times the amount of lead permitted the Safe Drinking Water Act; a drinking fountain inside Mark Twain School for Scholars was tested at more than 53 times the federal threshold; a drinking fountain on the first floor near the kitchen of Bethune Elementary-Middle School that had copper levels at nearly 30 times the permissible level—even as DPS officials still await the test results of 17 more buildings. Nevertheless, from the results so far, there is a failing grade: more than half of the 106 schools inside Michigan’s largest school district have contaminated water. Indeed, with EPA recommending lead limits of 15 micrograms per liter or 15 part per billion, water samples at Mason found extreme elevations of lead at Mason, Twain, Davis Aerospace Technical, and Bagley, and extreme levels of copper at Bethune Academy of the Americas elementary-middle school and Western International. Unsurprisingly, public health and water safety experts report that schools should use a tougher standard for lead levels, and nationally recognized Virginia Tech water expert Marc Edwards said: “Those are not good. There is no doubt there are worrisome lead levels: Whenever you take hundreds of thousands of samples in a school, you are going to get some results that are shockingly high.” At a Board of Education meeting last month, Superintendent Vitti said the most practical, long-term, and safest solution for water quality problems inside the schools would be to provide water hydration stations in every building—systems currently used in public school districts, including in Flint, Royal Oak, and Birmingham, as well as Baltimore: these stations, in addition to cooling water, more importantly remove copper, lead, and other contaminants.

Drinking water screening reports demonstrate that water was collected at some schools in April and others in August, with school district officials reporting sampling began in the district in the spring and continued through last August. In September, Superintendent Vitti said that DPS, through its environmental consulting firm, ATC Group, is following EPA protocol for collecting water samples, adding: “If testing occurred at a school after the regular school year, then it was done during summer school, where nearly 80 of our schools were offering classes,” adding that many of the schools with high levels had already identified for concern two years ago—and that those were the first group of schools to move to water coolers. Supt. Vitti initiated water testing of the 106 school buildings in May and August after initial tests results found that 16 schools showed high levels of copper and/or lead. Another eight tested for elevated levels in the spring after they were identified with concerns in 2016. Last month, the DPS District received more test results, which found an 33 additional schools with elevated contaminant levels, bringing the total number of schools with tainted water to 57 in a District already overwhelmed by some $500 million in building repair needs; moreover, the bad gnus could worsen: the total number of schools with high levels could increase as school officials await more test results on another 17 schools.

Dr. Mona Hanna-Attisha, noted for her expertise in Flint, who is a pediatrician and public health expert, concurred that Detroit’s policymakers need to set a much more aggressive limit on allowable amounts of lead in schools. In addition, Michigan Department of Environmental Quality’s school sampling guidance recommends that schools address fixtures which measure above 5 micrograms per liter, the same EPA standard as bottled water, according to Dr. Hanna-Attisha; the American Academy of Pediatrics recommends an action level of just 1 microgram per liter for drinking water in child care facilities and schools. Thus, as Dr. Hanna-Attisha warns: “This should be the District’s action level,” in a letter she co-authored with Elin Betanzo, founder of Safe Water Engineering, a consulting firm—a letter with which Superintendent Vitti said he agrees.

Dr. Hanna-Attisha, who witnessed lead levels in some Flint homes reach 22,000 micrograms per liter, said U.S. EPA school sampling guidance encourages schools to sample every drinking water tap a single time unless lead is detected at greater than 20 micrograms per liter, noting: “One low single tap sample is not sufficient to clear a tap as a potential source of lead, because lead release is sporadic.” Her words come with the benefit of her experience and practice as an associate Professor of Pediatrics at the Michigan State University College of Human Medicine, as well as Director of the MSU-Hurley Children’s Hospital Pediatric Public Health Initiative. She adds: “It is not appropriate to use a single low sample that was taken as a follow-up to a high sample to conclude that a drinking tap is ‘safe to drink,’ although this is how many schools have interpreted sampling data.” Dr. Joneigh Khaldun, the Director and Health Officer for the Detroit Health Department, said she recommends parents of children 6 and younger be tested for blood lead levels, because of the Motor City’s history of elevated levels for children, which has been primarily due to lead paint in homes, adding that the elevated rates in the tests were concerning: “I think, broadly speaking, I support Dr. Vitti in testing every water source in every school…For any school that comes back with elevated lead levels, the actual reasons for that school is not clear. It can be the infrastructure or the drinking fountain. Providing bottled water and other sources is the right thing to do.”

According to Michigan health officials, children are at higher risk of harm from lead, because their developing brains and nervous systems are more sensitive. Lead can cause health problems for children, including learning problems, behavior problems including hyperactivity, a lower IQ, slowed growth and development and hearing and speech problems. That risk is not just physical, but also fiscal: A key part of Detroit’s chapter 9 plan of debt adjustment approved by the U.S. Judge Steven Rhodes was its focus on the importance of provisions to give incentives for families to move back to the Motor City‒a difficult parental choice in the wake of, four years ago, the Detroit News investigation which reported that nearly 500 Detroit children had died in homicides since 2000.

Notwithstanding the terrible health tragedy in Flint, Michigan has no rules mandating the state’s school districts to test for lead in their water supply, according to the Michigan Department of Environmental Quality. According to the GAO, at least eight states require schools to test for lead, and many others assist with voluntary testing. Dr. Khaldun said she supports creating a state law to mandate testing of water sources inside schools—a proposal which would entail substantial costs, creating the query: who will pay—and how?

According to Tiffany Brown, a spokesperson for the Michigan Department of Environmental Quality, the Department supports any schools which wish to test, and the Department can offer technical assistance and general information on sampling, result interpretation, and recommended remedial actions in the event of elevated lead and/or copper results, adding that there are fiscal resources “available through the Michigan Department of Education,” and that the Michigan Department of Environmental Quality is providing information and guidance on best management practices for drinking water in schools to protect the health of students and staff.” In the meantime, the Detroit Public School District is spending $200,000 on bottled water and water coolers for the next several months, with the cost to have stations in every school, one for every 100 students, projected to be $2 million, with Dr. Vitti noting the goal is to deliver clean water, not replace the pipes, or as he put it: “We are not looking to replace the plumbing. The stations address the issue of older plumbing along with weekly flushing.”  

Unequal Treatment? The Financial Oversight and Management Board in Puerto Rico reports that over reliance on outside consultants with conflicts of interest and the failure to invest in a competent workforce have imposed huge costs on and severely weakened the Puerto Rico Electric Power Authority (PREPA) and other Puerto Rico government agencies, with the report including an entire chapter just on interest rate swap agreements, a complicated and high risk investment which, it estimates, has cost Puerto Rican government entities nearly $1.1 billion when they repeatedly bet the wrong way on interest rate movements—meaning that, instead of these investments reducing Puerto Rico’s debt, government entities, including PREPA, had to take on more debt to pay for the losses. It appears that the swaps, a novel means of transactions to Puerto Rico’s Government Development Bank (GDB), where officials made these interest rate bets, or, as the report found, many of the GDB Board members who were required to approve the swap transactions, “were not familiar with the mechanics and risks associated with swaps. Many told us outright they could not describe how a swap worked. Instead, the GDB Board members told us they relied on the advice presented to them by the swap advisor.” That appears to denote that the GDB board members effectively ceded control over their investments in these very risky financial instruments to a third-party swap advisor—an advisor  that earned, and will garner fees for as long as the government of Puerto Rico continued to invest in the swaps, regardless of the outcome—an outcome in this case which entailed enormous losses. Moreover, the report demonstrated that, more generally, as the financial condition of Puerto Rico deteriorated, the deals became more complex and less transparent. An example of the utility PREPA’s overreliance on an outside restructuring advisor, AlixPartners, to lead PREPA’s debt restructuring negotiations with its municipal bondholders, as well as developing PREPA’s business plan and savings initiatives, revealed that PREPA paid Alix Partners $45 million in fees for a debt restructuring deal which was ultimately rejected by the PROMESA Oversight Board, which found the proposed financial agreement called for PREPA to pay more debt than the economy of Puerto Rico could support, and as the Puerto Rico Energy Commission found that the review lacked appropriate due diligence over the ongoing fees for legal counsel, financial advisors, and underwriters that would have accrued had the PREPA restructuring deal moved forward: the Commission specifically noted that the restructuring team charged with ensuring the reasonableness of advisor fees “includes the very advisors whose fees are in question…that is not the arm’s-length relationship necessary to protect consumers from excess fees.”

Investment in Good Governance. For elected state and local leaders, over reliance on consultants can go hand-in-hand with a failure to invest in the technical capacity and expertise of government staff. As noted by a Kobre & Kim report prepared on the evolving fiscal situation in Puerto Rico, PREPA has suffered over the years from a high degree of political interference, including the appointment of hundreds of political appointees to managerial and technical positions without regard for qualifications—appointments which appear to have not only cost considerably from a fiscal perspective, but also weakened the managerial competence of the agency. However, instead of recognizing this reality and implementing labor reforms designed to sharply curtail the influence of political appointees within the agency, the PROMESA Board has instead sought an across-the-board salary freeze and benefit cuts, even as the Board recognizes that PREPA has lost 30% of its workforce since 2012 and has severe shortages of skilled workers in key areas—and that it has developed no plan for workforce training and development, effectively seeming to force PREPA to continue to depend on consultants, rather than build its own expertise.

A Human Rights Perspective on Puerto Rico’s Fiscal and Physical Future

October 5, 2018

Good Morning! In this morning’s eBlog, we report on the consideration by the Inter-American Commission on Human Rights with regard to perspectives on statehood—and whether the federal government is violating human rights in the U.S. territory created by the Jones-Shafroth Act.

Unequal Treatment? The United States, today, at the Inter-American Commission on Human Rights (IACHR), meeting at the University of Colorado in Boulder, will defend itself from the denunciations of statesmen sectors who charge that the lack of voting rights for Puerto Ricans, who are U.S. citizens, represents a violation of human and civil rights. In a way, that seems ironic, as the co-author of the Jones-Shafroth Act, as Governor of Colorado, before serving in the U.S. Senate, kicked the issue off, performing—in a three-piece suit—the opening kickoff in a game at Folsom Field in Boulder in a game between the U. of Colorado and the Colorado School of Mines, prior to being elected to the U.S. Senate, where he co-authored the Jones-Shafroth Act—the issue under heated debate today, where the U.S. mission to the OAS, will seek to defend against a charge filed by statespersons who are seeking censure against the U.S. for denying Puerto Ricans who live in Puerto Rico equal rights to vote and be represented in Congress—and in the electoral college. Former Gov. Pedro Rosselló Rossello and attorney Gregorio Igartúa is representing Puerto Rico. The U.S. alternate representative to the Organization of American States, Kevin Sullivan, has been requesting—in writing—since last June, the dismissal of the complaints—complaints some of which date back to 2006—which were not even admitted for consideration until last Spring, noting that the current status violates the U.S. Declaration of Human Rights. The Trump Administration response is that, under the current territorial status, Puerto Rico “has a distinctive status, in fact exceptional,” with a “broad base of self-government.” The Administration also asserts that Puerto Rico has a limited participation in federal processes, through the Presidential primaries and the election of a non-voting Representative in Congress. Attorney Orlando Vidal, who has represented former Governor Rosselló González in this process, today’s will help educate about the lack of political rights under the current territorial status, or, as he put it: “Sometimes, it is necessary that someone from the outside, as the Commission is here, and with an independent and objective point of view, clarify situations that for many, for so long plunged into this issue, it is perhaps difficult to perceive clearly,” adding, there is an easily available “friendly solution:” to direct the admission of Puerto Rico as a state. Today’s Commission session will be chaired by Margarette May Macaulay of Trinidad and Tobago.

More than a decade ago, under the George W. Bush administration, Kein Marshall, the Administration’s Director of the Justice Department’s Legal Office, appearing before the House Subcommittee on Insular Affairs, had recommended calling a referendum: “territory yes or no,” followed by, if the current status was rejected, a consultation to determine whether a governing path forward would be statehood or independence—with Mr. Marshall defending, in his testimony, the report of the Working Group of the White House which, among other things, affirmed in 2005 that the power of the Congress is so broad that, if it wanted, it has the authority to cede the island to another country.

From an international governance perspective, in the international forum, it was two years ago that, in an explanatory vote, in October of 2016, the Obama administration supported a U.N. resolution in favor of self-determination and independence; shortly before, however, on June 30, 2016, President Obama had signed the PROMESA, a statute roughly modeled after chapter 9 municipal bankruptcy, except that, in imposing both a financial control board and a judicial process, the outcome, as we have seen, has been a ‘who’s on first, what’s on second’ process—with prohibitive fiscal costs, even as it creates the appearance of a denial of democracy for the U.S. citizens in Puerto Rico. It was 15 years ago that the IACHR determined, in analyzing a complaint filed by a civic group, that nations “cannot invoke their domestic, constitutional, or other laws to justify the lack of compliance with their international obligations.”

El Otro Lado. The other side, as it were, of the Jones‒Shafroth Act, was the Jones Act—an act sponsored by the co-author at the behest of the U.S. shipping industry which has vastly compromised the ability to provide assistance towards Puerto Rico’s recovery from Hurricane Maria—assistance desperately needed for this territory where an estimated 8,000 small businesses still remain shuttered—representing about 10% of the total according to the island’s Urban Retailers Association—and continues to undercut hopes for fiscal and economic recovery. The Jones Act, strongly lobbied for by the domestic shipping industry, mandates that  transportation of goods between two U.S. ports must be carried out by a vessel which was built in the U.S. and operated primarily by U.S. citizens—meaning the cost of materials to help the island recover cost far more than for other, nearby Caribbean nations—and meaning that millions of Americans, including Puerto Ricans following Hurricane Maria last year, are paying hugely inflated prices for gasoline and other consumer products which are vital to recovery—and to equity. The act mandates that carrying goods shipped in U.S. waters between U.S. ports to be U.S.-built, U.S.-registered, U.S.-owned, and manned by crews, at least 75% of whom are U.S. citizens. Mark J. Perry, a scholar at the American Enterprise Institute and Professor of Economics at the University of Michigan this week noted: “Because of this absurd, antiquated protectionism, it’s now twice as expensive to ship critical goods – fuel, food and building supplies, among other things – from the U.S. mainland to Puerto Rico, as it is to ship from any other foreign port in the world. Just the major damage done to Puerto Rico from the Jones Act is enough reason to tell us that now is the time – past due time – to repeal the anti-consumer Jones Act.”

As Arian Campo Flores and Andrew Scurria of Dow Jones last week pointed out, in Puerto Rica’s fiscal year which ended last June, the island’s economy had contracted by 7.6%. An estimated 8,000 small businesses remain shuttered; Teva Pharmacuticals has announced it will close a manufacturing plant in the municipio of Manati—and, manufacturing employment has decreased by 35%. More fiscally depressing: the Puerto Rico government is now projecting that its population will decline by 12% over the next five years—as an increasing number of young, educated, and trained citizens move to the mainland, leaving behind an older, poorer population.

In the Wake of the Storm

October 2, 2018

Good Morning! In this morning’s eBlog, we report on the recent one-year anniversary of Hurricane Maria’s fiscal and human destruction in Puerto Rico, trying to learn from the incredible New York Fed experts about the fiscal and physical recoveries, before journeying north to assess the state of Atlantic City’s fiscal recovery in the wake of its state takeover. Then we swing south (again) to assess the serious and fiscally challenging costs of ongoing racial segregation in the St. Louis metropolitan region.

Un Ano Duro. Jason Bram and Joelle Scally of the exceptional Liberty Street Economics team at the New York Federal Reserve, writing about the U.S. Territory’s year of hardship in the wake of Hurricane Maria nearly one year ago, described the most destructive storm to slam Puerto Rico in 90 years. They wrote that: “Maria, combined with Hurricane Irma, which had glanced the island about two weeks prior, is estimated to have caused nearly 3,000 deaths and tens of billions of dollars of physical damage. Millions went without power for weeks, in most cases months. Basic services—water, sewage, telecommunications, medical care, schools—suffered massive disruptions. While it is difficult to assign a cost to all the suffering endured by Puerto Rico’s population, we can now at least get a better read on the economic effect of the storms.” In their marvelous post, the dynamic duo examined a few key economic indicators in an effort to gauge the adverse effects of the storms and the extent of the subsequent rebound—not just for Puerto Rico, but also for its various geographic areas and industry sectors. In addition, they examined data from the New York Fed Consumer Credit Panel to assess how well households held up financially and what effects the home mortgage foreclosure and payment moratoria had, noting that, overall, even when the hurricanes struck, the island’s economy had already been “struggling with a decade-long slump and a fiscal crisis.” Thus, they noted that from the outset, the hurricanes “exacerbated a complex pre-existing problem: a population, economy, and tax base that were all in decline.” They estimated that in last year’s fourth quarter, nearly 200,000 Puerto Ricans left Puerto Rico for the mainland—noting that, according to the Puerto Rico Institute of Statistics, about 72,000 had returned by last April—leading them to guesstimate that, as of last June, about 100,000 had returned. They guesstimate a net decline at 100,000—still a 3 percent drop in the population, which had already fallen by about 12 percent (500,000) since peaking in 2005, writing: “Over the years, Puerto Rico’s population loss has contributed to a feedback loop: a lack of economic opportunity and jobs spurs out-migration, which further undermines the island’s economic prospects. Even before the storm, private-sector employment had contracted by about 12 percent since 2005. In the month after Maria, it tumbled another 7 percent…but it has since recovered significantly: as of August 2018, private-sector employment had rebounded by 5 percent from the post-storm trough and was down 2 percent from its pre-storm levels—still a “sizable drop,” but considerably less than the decline seen after some similar disasters.

With regard to overall wage and salary income, which they describe as an even more telling measure of economic vitality than employment, they wrote that those two factors took a much bigger hit than employment during and right after the storm, albeit, they found, income has since rebounded more substantially, reaching new highs early this year: average wage and salary income for these job-holders was up about 7 percent—more than 5 percentage points above the 1.6 percent rise in the CPI. However, while they found that overall employment has reversed much of its steep initial post-hurricane drop, they wrote that some regions and industry sectors have fared much worse than others, noting that, in terms of industries, the post-Maria trends have largely, but not entirely, followed typical patterns after major natural disasters. Thus they determined that the leisure and hospitality industry was one of the hardest hit‒and has been one of the slowest to recover—especially the accommodation segment, where employment plunged more than 20%—unsurprising, in that there has been such a marked decline in tourism; but they found that retail trade employment has also been hit very hard, as have education and health care services. Given the awesome storm destruction, they did find that construction employment has surged nearly 25 percent since Hurricane Maria struck—and, mayhap more surprising, professional and business services, where there has been sturdy job creation since the hurricanes—particularly in waste management and remediation.

In examining income and salary climbs, the dynamic duo determined that the main contributing factor to be the construction industry, where average pay per worker soared more than 50 percent in the first quarter from a year earlier—writing that even though construction represents only about 4 percent of private-sector employment, that surge was sufficient to raise the average substantially—especially compared to other jobs. Large, average pay outside the construction sector was still up moderately in early 2018.

Nevertheless, in assessing whether Puerto Rican workers are really better off this year than before Maria, outside of construction workers, they found that construction jobs may be going to non-Puerto Ricans: relief and rescue workers from the mainland; they also determined that there are fewer jobs in lower-wage sectors, such as restaurants and retailers, and more jobs in higher-paying industries like professional and business services—meaning there “would appear to be fewer job opportunities for many of the more vulnerable low- to moderate-income Puerto Ricans.”

They noted that local employment data, as of the end of last March, finds a “very mixed picture of the recovery:” whereas San Juan had recovered from almost all of its post-hurricane job losses by last March, nearby municipios were not far behind; however, results for other cities were mixed: they noted that Ponce, Caguas, and Mayaguez had all sustained steep job losses right after Hurricane Maria, but that Ponce’s job count had rebounded almost fully by March, whereas Mayaguez experienced partial recovery. In nearby Vieques, they reported that, as of last March, employment was still down about 40%, and that in the interior, about 20%. They wrote that it was too early to be able to assess what the resulting population changes are for the more isolated municipios.

The authors also examined mortgage payment and foreclosure moratoria impacts from the super storm in the territory, where all real property is subject to taxation, except for property which serves as a primary residence and is valued at less than $150,000, because, in the wake of the storm, a key concern had been that many homeowners would fall behind on their mortgages and possibly face foreclosure. The authors discovered some good gnus: because a number of temporary policies were implemented to provide ill-fated homeowners time to recover, including forbearance on mortgage payments, as well as a suspension of late fees and credit reporting, and a potential loan modification to avoid a big jump in payments when the forbearance ends, in addition to a moratorium on new foreclosures; those governmental actions appeared to achieve their intended aims.

Using the New York Fed Credit Panel data set, constructed from Equifax credit report data which offers insight into mortgage balances and payment behavior, both in Puerto Rico and on the mainland, they determined that, because the moratoria prevented the reporting of delinquencies for participating mortgages on credit reports, mortgage delinquency has been “muted in Puerto Rico, dropping substantially before returning roughly to the pre-storm trend. The foreclosure moratorium had the intended effect of stopping foreclosure starts: new foreclosures on credit reports went to nearly zero in the quarters after the storm, before a small uptick in the second quarter of 2018,” estimating that the total value of payments skipped during the three quarters following the storm was “at least $335 million, which we interpret as a short-term loan to mortgage-holders. Guidance on how these skipped payments will be handled has varied by lender and loan type, but a mortgage modification or a smaller second loan to be paid over the term of the mortgage are likely treatments.” Thus, the Fed noted it believed these moratoria appear to have achieved their intended effects. Nevertheless, and notwithstanding that achievement, they did not feel confident that the territory’s economy is out of the woods, writing: “First, the fiscal, economic, and infrastructure problems that were so prevalent before the hurricanes still loom. Second, much of the recent rebound in economic activity is being driven by federal aid, insurance payouts, and massive reconstruction activity—stimulus that is likely to continue for a while, but not indefinitely. Still, some credit for the economic rebound must go to the people of Puerto Rico, who have shown tremendous fortitude during this incredibly difficult year. We will continue to monitor developments across the various sectors on the island in the coming months; stay tuned to this blog for a more detailed picture of Puerto Rico’s household debt situation.”

No Longer Rolling the Die for Atlantic City’s Fiscal Future. In the wake of a release by New Jersey Governor Phil Murphy’s administration of a 64-page report recommending continued state oversight and control of Atlantic City’s fiscal future through the fall of 2021 of the state Municipal Stabilization and Recovery Act, a report which Moody’s deemed a  credit positive,  with Moody analyst Douglas Goldmacher writing that State control has had a strong, positive impact on Atlantic City’s financial position, “which remains weak,” adding: “Without continued state oversight, the city’s ability to continue making substantial fiscal improvements is dubious.” Mr. Goldmacher noted that under state intervention, Atlantic City resolved long-standing tax appeals by casinos and reduced the city’s number of employees—affecting both its payroll and long-term public pension liabilities. At the same time, the state also reduced the city’s transitional aid and increased its Consolidated Municipal Property Tax Relief Act revenue, which Mr. Goldmacher said would create greater reliability with state funding and a more predictable revenue stream.

The Garden State’s five-year quasi-takeover under its Municipal Stabilization and Recovery Act began in November 2016 under former Gov. Chris Christie, just after Atlantic City nearly defaulted on its debt and appeared on the verge of chapter 9 municipal bankruptcy, and is scheduled to endure through . Now, this thorough and comprehensive report focuses on a framework for moving forward—a framework providing a direction for the city, where success will be measured by focusing on the details and establishing processes to move forward—and to effectively implement.  Among key recommendations:

  • Frameworks need to be reinforced for the structure to be operational. The multi-party nature of the proposed coordinating structures requires strong, consistent leadership and attention to project management to make sure the different groups move forward, have meetings, and communicate regularly. They will also need to efficiently resolve the inevitable differences and turf disputes.
  • Because the plan involves so many parties, time and attention must first be paid to get them to the right tables and gain consensus on the plan; or agree on modifications consistent with the themes. Participants must be “on the island” or otherwise engaged in some manner.
  • The proposed ExecCouncil must regularly meet and its members spend the time and attention necessary to execute the plans. It must establish clear, efficient and timely decision-making and dispute resolution processes. Staff must be assigned to manage coordination and reporting on all the different efforts.
  • Breaking down silos and coordinating across multiple parties requires time and attention. The parties must make the necessary resource commitments for the effort to succeed. Slacking should not be tolerated and be promptly addressed by appropriate leaders. Maintaining momentum is critical, especially after the first rosy blush of initial meetings. The report could not address the historic and underlying challenge of the City: the need for the City’s political infrastructure; the parties, ward leaders, factions, civic associations, and political influencers to come together and align themselves to ensure that the plans are executed. Turf, power, and personality differences must be put aside or compromised if the efforts are to succeed. That will take commitment and expenditure of political and social capital to align these disparate groups.

Moody analyst Douglas Goldmacher wrote: “State control has had a strong, positive impact on the city’s financial position, which remains weak: without continued state oversight, the city’s ability to continue making substantial fiscal improvements is dubious.” Mr. Goldmacher noted that under state intervention, Atlantic City resolved long-standing tax appeals by casinos and reduced its total number of employees—even as New Jersey reduced the city’s transitional aid and increased its Consolidated Municipal Property Tax Relief Act revenue, actions which Mr. Goldmacher wrote would create greater reliability of state funding, as well as a more predictable revenue stream. He noted that, notwithstanding a surge in net cash and an improving reserves under state control, the city’s adjusted fund balance is still near zero. Atlantic City did receive a $108 million lift in 2017 thanks to tax appeal settlements with its casinos. The city’s quasi emergency manager appointed by the Governor, Jim Johnson, laid out a long-term fiscal future in the state’s report—a report which included recommended changes to municipal governance and developing a master plan for redevelopment—one recommending the city diversify its local economy beyond casino gambling.

With regard to revenues and taxation, Mr. Goldmacher urged a focus on the city’s “decimated tax base” and the fact that New Jersey’s Casino Reinvestment Development Authority has partial jurisdiction over many properties which could be developed, adding that he believed ongoing state involvement would make it “far more likely” that Atlantic City and the Authority could coordinate redevelopment efforts. The city, which currently has some $223.6 million of outstanding municipal bond debt, is rated Caa3 by Moody’s with a positive outlook, and CCC-plus with a stable outlook by S&P Global Ratings. Mr. Goldmacher noted: “While the continued oversight is a credit positive, the city is far from being financially secure…The report, which has received preliminary approval from the Governor and is being reviewed in detail, lays out a strong vision for the future. But the devil is in the details, and it remains for the city, state, and CRDA to demonstrate that they can turn this vision into a sound plan.”

The Fiscal Arch. The City of St. Louis has issued FY2018 construction permits for projects valued at $1.14 billion, levels setting a new high; indeed, In FY 2018, St. Louis issued 5,396 building permits for projects totaling $1,142,040,378 in value, a $528 million increase over the previous fiscal year, or, as Mayor Lyda Krewson noted: “These numbers are very encouraging. It shows that developers, investors, and business leaders are bullish on St. Louis…It’s exciting to see that attitude reflected in not just in words, but in actions.  I love seeing all the construction dumpsters around town.” The building permits issued include new construction and rehabs of both residential and commercial property, in addition to smaller permits for alterations or additions. The FY2018 permits also reflect some major projects underway, including the new St. Louis University hospital campus, Ballpark Village Phase II, and St. Louis Community College’s new Center for Nursing and Health Sciences. In addition, large-scale construction projects, and small- and medium-scale rehabs have also been a significant source of development over the past year: of the 7,322 housing units issued permits, 86% are located in rehabilitated buildings. Moreover, development has not been limited to the central corridor: 17 wards across the city exceeded the total building permit value compared to the previous fiscal year.

Nevertheless, not all has changed since the National Governors Association, long ago, convened for its annual meeting there: both in and beyond its city limits, there remain signs of economic decline and ongoing racial segregation: opportunities for the city’s predominantly African-American residents appear grim: while gangs appear not to be especially a problem, drugs and gun violence are. Last weekend, six citizens were slain; nevertheless, while FBI statistics show the national rate of violent crime fell by 0.9% last year, and the murder rate declined by 1.4%, St. Louis last year experienced 205 homicides—the highest murder rate of any big city in the U.S.—more challenging for its leaders: almost all of the city’s homicides take place in just a few neighborhoods: a police plot via a heat map of crimes in St Louis finds clusters of glowing red dots which demonstrate that murders typically occur close to each other, in the same distressed streets in the north. While that would seem to suggest an ability to provide a more focused and efficient response, the city’s Commander of Investigative Services, Major Mary Warnecke, notes: “We do have a homicide rate we’d love to see smaller,” but she describes a host of fiscal and physical obstacles, including: lack of staff, long-running social and economic hardships, use of drugs, and overly lax gun laws, as well as criminals who skip over the Mississippi River to nearby Illinois—which make improvements intensely difficult. She reports that her detectives clear only a dismal 52% of their murder cases, a slight gain on the past few years—in part because they rely heavily on the co-operation of witnesses, who may, unsurprisingly, not be forthcoming. Major Warnecke said her overworked 33 homicide detectives officially have 4.8 cases each, but low clearances mean cases, like bodies, pile up.

Three years ago, the headquarters created a “real time crime center”, a collection of screens to relay images from cameras all over the city, letting police monitor for trouble. Pictures are matched with reports from Shotspotter—lots of microphones in public places which record sounds of gunshots. These are instantly analyzed, letting police know precisely where and what type of weapons are in use. Police would like access to drones for better aerial footage; however, local regulations do not permit them.

Not Fiscally Petering Out. Standard & Poor’s has raised Petersburg, Virginia’s credit rating from a BB to BB+–with a positive outlook, marking the second consecutive year in the historic municipality’s fiscal recovery from near chapter 9 municipal bankruptcy. S&P’s Timothy Barrett and Nora Wittstruck, after, last year, receiving a special tour, outlining the various economic opportunities and challenges within the city, this year followed up with a conference call, where, as Mr. Barrett put it: “We go through an economic update, a capital plan update, a debt update, a managerial update, and a policy practice update. I think in particular with [Petersburg], we concentrated on detailed updates on the financial progress.” Thus the S&P dynamic duo noted that a large part of S&P’s decision to raise Petersburg’s credit rating came from the city’s improved fund balance, with Mr. Barrett noting: “From our standpoint, usually the higher the reserves, the better the budgetary flexibility.” Petersburg, which came closer to filing for chapter 9 municipal bankruptcy than any other municipality in the Commonwealth, has budgeted fiscal resources to continue rebuilding the fund balance; it has set a goal of building the balance back up to equal 10% of the city’s general fund—demonstrating, as Mr. Barrett put it: “One of the reasons why we continue to have a positive outlook on the city is in part because they have set those goals and outlines for themselves,” adding that the city’s actions to clear out its backlog of unpaid bills was a contributing factor to the rating upgrade—or, as Ms. Wittstruck noted: “They have essentially caught up in all those past due obligations…We regarded that as a big step in the right direction.”

Nevertheless, Petersburg still has a fiscal ways to go—its credit rating is still below investment grade, and Ms. Wittstruck and Mr. Barrett said that the city would have to remain diligent when managing finances in order for the rating to keep getting raised, with S&P noting there is a one-in-three chance the city’s rating could be raised again in the next two years: Mr. Barrett said S&P will review the rating again next year, noting there will likely be a focus on the city’s fiscal weaknesses, including weak budgetary flexibility, weak debt and contingent liability profile, and historically weak management. Nevertheless, the report found the city to sport a “strong institutional framework score” and that it had demonstrated “adequate budgetary performance,” adding that the city’s proximity to Fort Lee and Richmond was “generating significant economic activity.” Going forward, Mr. Barrett cited the city’s “economic metrics,” such as its high tax rate and relatively low-income level, as challenges city administrations will face as they not only try to achieve financial stability, but improve the overall health of the locality.

A Physical & Fiscal Bridge to the Motor City’s Fiscal & Physical Future


October 1, 2018

Good Morning! In this morning’s eBlog, we report on the commencement this week of a new international bridge connecting Detroit to Canada–a bridge no longer too far.

Not a Bridge Too Far. Construction of the Gordie Howe International Bridge connecting Detroit to Canada is scheduled to begin Friday, with a projected completion in six years at a cost of $4.4 billion. The bridge will be jointly owned by the State of Michigan and Canada, with Canada fronting the funding, and Michigan paying its share via tolls collected on the U.S. terminus over the next few decades. CEO Windsor-Detroit Authority CEO Bryce Phillips described the new bridge as one which will be a “stunning addition to the Windsor and Detroit shared skyline.” The 1.5-mile span will be the longest cable-stayed bridge in North America—likely adding to what is already the busiest U.S.-Canada commercial crossing. The opening will mark the final public victory over the Moroun family, which owns the Ambassador Bridge—and which has long fought—and even requested support from President Trump—to bar the publicly funded project, not set to become one of the most vital pieces of infrastructure between the United States and Canada.

Canada is the largest market for U.S. exports, taking in 15 percent of American goods and services worth $337 billion annually, according to the U.S State Department. Together the quasi twin cities of Detroit and Windsor constitute the busiest trade crossing along the U.S.-Canada border, with more than one-fourth of all goods exchanged between the countries crossing the Detroit River to get to its final destination. On average, 7,000 trucks daily cross the Detroit River. It is the busiest link in the North American auto industry whose supply chains span both countries.

Notwithstanding this week’s commencement of construction, the Moroun family will continue to fight the project, adding to the twenty-five legal challenges they have already made—all rejected, as was a 2012 Michigan ballot measure, to which the Morouns devoted an estimated $50 million—a portion of which was to purchase a commercial on Fox News, urging President Trump to revoke the permit to build the publicly owned bridge based on The President’s “America First” policies.

The new bridge, expected to open by 2020, is expected to make the Motor City an international freight hub—or, as some note, it will define a new reawakening of a city which has emerged from the largest chapter 9 municipal bankruptcy in American history. The six-lane bridge will add to the nearby Ambassador Bridge’s four lanes, allowing trucks access to a streamlined route at the Canadian side and creating more logistics opportunities in both nations due to more direct access to rail, highway, and air transportation. As part of the project, there will also be two state-of-the-art customs centers, with the opportunity to attract more private investment on both sides of the border.

To date, land acquisition in Canada is nearly complete: about 130 acres in Windsor, southwest of the Ambassador Bridge, will be used for the largest Canadian Port of Entry along the U.S. border. Meanwhile, on the U.S. side, acquisition is underway for the 300 houses and 45 businesses located within the 145 acres in southwest Detroit, which will be used for inspection facilities for both inbound and outbound vehicles at the U.S. Port of Entry. Also included in the Detroit portion of the project is a new I-75 interchange which will include four new crossing road bridges, five new pedestrian bridges, four long bridges crossing the railway and connecting I-75 to the US Port of Entry, and service roads and local road improvements.

Among the issues and details to be included in the RFP are the community benefits expected for the Delray neighborhood in Detroit as the host community for the project—benefits which will matter, because, according to Assistant Professor of Urban and Regional Planning Zeenat Kotval-Karamchandani at Michigan State University, while pockets of Detroit are experiencing economic growth, Delray is not among them; rather, he notes, the neighborhood, near downtown, and south of Mexicantown, is “completely surrounded by industry.” Nevertheless, the Professor notes, about 2,500 people make it home—and, of those, about one-third of the households are in poverty.

Thus, this could be a unique moment of not just physical connections and public infrastructure, but also neighborhood recovery—after all, the value of freight traveling between the U.S. and Canada fell to $575.2 billion in 2015, a 12.6% drop, according to the U.S. Department of Transportation; yet about $69.1 billion came through Michigan, the most of any state. Data also shows that trucks carried the most freight to and from Canada, at 58.3%, while rail accounted for 15.7%. Unsurprisingly, the most common freight is auto-related: vehicles and vehicle parts.