Climate & Political Change ahead for Puerto Rico, & How might GM Downsizing impact the post chapter 9 Motor City?

November 28, 2018

Good Morning! In this morning’s eBlog, we wonder what rising Caribbean sea levels might augur for Puerto Rico’s fiscal future? Then we drive north to assess whether General Motor’s CEO or the nation’s CIC might have a better perspective with regard to Detroit’s fiscal future in the wake of the largest chapter 9 municipal bankruptcy in U.S. history.

Physical & Fiscal Challenges. The fourth annual National Climate Assessment has reported that thousands of Puerto Rico’s coastal structures are vulnerable to future increases in sea levels: a report with signal fiscal and physical threats, especially in the U.S. territory where nearly 8,000 structure are in the territory’s low-lying areas. The report warns of threats to drinking water and sanitation pipelines, which are at risk from an increase in sea level of 1.6 feet—and, according to the report, should the rise reach 6.5 feet, there would be a threat to more than 50,000 structures, resulting in approximately $11.8 billion in losses.

The nearly 17,000-page Assessment, mandated by Congress, was prepared by 13 federal agencies: it lays out the impact of climate change on the U.S. by the end of the century. Under the report’s “Intermediate-High to Extreme scenarios,” the Commonwealth is projected to lose 3.6% of total coastal land, directly impacting those critical infrastructures. On an island where some 62% of the population resides in some 44 muncipios in coastal areas, the rising sea level could adversely impact more than one million housing units—even as the Commonwealth is still unfully recovered from the devastating physical and fiscal impact of last year’s Hurricane Maria. Indeed, last summer, the U.S. territory submitted a report to Congress requesting $139 billion as the amount it needs to recover, making it one of the most expensive hurricanes in U.S. history. Mayhap adding insult to fiscal and physical injury, the new report predicts that rising sea temperatures in the region will only increase the maximum intensity of hurricanes by the end of the century.

In response, the U.S. Fish and Wildlife Service and the Puerto Rico’s Department of Natural and Environmental Resources have commissioned various wetland and dune restoration project along the sensitive, coastal areas as a “non-constructional” solution to help reduce both coastal flooding and erosion.

The challenge the report poses is how to finance not just the physical devastation, but also the fiscal detritus. Puerto Rico’s 2006 Contributive Justice Law 117 established a sales and use tax with a 5.5% rate at the state level and an optional 1.5% rate at municipal level, known as the Impuesto sobre Ventas y Uso, or, more simply, the IVU—a statute which was amended the following year under Law 80, which made the tax mandatory for all municipalities of the island and modified the tax rates to 6% at the state level and 1% at the municipal level—so that, by 2006, more than 30 municipios had enacted sales tax ordinances, usually by copying the ordinance of Caguas. By the middle of 2006, more than 30 municipalities had enacted sales and uses taxes on the island. Three years ago, on July 1, the sales tax rate was increased to 11.5%, in response to the physical and fiscal devastation: that revised tax contributes 1% to the municipality and 10.5% to the Commonwealth.

A Revised Jones-Shafroth Act? Chair Rob Bishop (R-Utah) of the House Natural Resources Committee has written to Acting U.S. Attorney General Matthew Whitaker to urge assistance in “certifying a plebiscite that will allow for the resolution of Puerto Rico’s century-old territorial status.” He believes Puerto Ricans ought to be granted the opportunity for a simple up or down vote on statehood. His proposal was echoed by Puerto Rico Senate President Rivera Schartz and House Speaker Carlos Méndez, who wrote to Gov. Ricardo Rosselló to propose, why not a simple, up or down vote: “Statehood: Yes or No?” Such a vote could, after all, eliminate the confusing governance wherein Puerto Rico appears to be entrapped between a federal court and the PROMESA oversight Board.

Leaders of Puerto Rico’s local parties have said that statehood would have a significant impact on the island’s economy, though whether they say it would be positive or negative depends on whether they are members of the pro-statehood New Progressive Party. (Gov. Rosselló and Resident Commissioner Jennifer Gonzalez Colón are members of the New Progressive Party.) This proposal would not be a precedent: Puerto Ricans have experienced several plebiscites on the island’s status since World War II, with the most recent ones in 2012 and 2017. In these 61% and 97%, respectively, of those voting on the statehood questions voted in favor of it. Nevertheless, the primary opposition party, the Popular Democratic Party (PDP), is of the opinion that the wording on both ballots was created without their input by New Progressive Party governors and was unfair. Both the PDP and the Puerto Rico Independence Party urged their followers to boycott the 2017 referendum, saying its language was unfair. Similarly, the U.S. Justice Department declined to provide congressionally approved financial support for the 2017 referendum, citing needs to change the referendum’s language. In their letter to Puerto Rico’s leaders, the Congressional self-deemed overseers wrote: “Puerto Rico’s territorial and unequal status has been a substantial factor in many of the island’s economic and budgetary challenges, and as such we should do everything needed to prevent its continuation.”

That is, in a sense, in the wake of the failure of the last two plebiscites to lead to federal action, according to Puerto Rico House Minority Leader Rafael Hernández Montañez, whose PDP party, which supports continuing the current “commonwealth” status, a status which in PROMESA the U.S. Congress treated as U.S. territorial status.

Cambio? With a new Congress—and a new majority in the House, there might be an opportunity for a reconsideration by Congress of its relationship with Puerto Rico and the future of PROMESA.

Motor City Transformation. Daniel Howes, the very fine editorial writer for the Detroit News, yesterday wrote: “The continuing transformation of General Motors Co. is reaching the most pitiless stage this town has seen since the industry’s epic bankruptcies nearly a decade ago…On the first day back to work from the Thanksgiving holiday, the Detroit automaker confirmed plans to cut its salaried workforce by 15 percent, to dump most of its car models, and to idle five plants in three states, two countries and its hometown.” He described the actions as an “unambiguous expression of CEO Mary Barra’s belief that good leadership reacts to problems when they surface lest they get worse with time” for a company in the throes of trying to adjust to the developing and testing next-generation mobility technology—and “overturning a status quo re-established after GM’s bankruptcy.”

His remarks came too in the wake of President Donald Trump’s telling the Wall Street Journal that GM “better damn well open a new plant there (in Ohio) very quickly.” Mr. Howes noted that with each new action in GM’s years-long transformation, “the automaker’s CEO demonstrates a steel spine and business acumen that looks determined to make tough calls her predecessors generally avoided until external conditions left them no choice…Not Barra. Despite accurate criticism that GM benefited from taxpayer-funded bailouts and a federally induced bankruptcy, her leadership team is moving ahead with a restructuring intended to leave the automaker leaner, younger, more profitable and more intensely focused on driving profits higher to invest in the Auto 2.0 spaces of mobility, autonomy, and electrification.

And, he added: “Fat profits coming from one country are not enough to support a rapidly changing business model steeped in advanced technology. GM makes and sells more vehicles in China than it does in the United States, a trend now several years old and unlikely to change.”  That is, the actions detailed yesterday by CEO Barra in deeming four U.S. plants “unallocated” for production—or potentially at risk of closure in next fall’s talks—negotiations in which each of the targeted plants is scheduled to end production before the union contract expires next September, there are fiscal issues not just for the Trump administration, but also for the Motor City’s fiscal future. (The plants in Michigan, Ohio, and Maryland are not closing—at least not yet. Until their fates are decided under terms of the national GM-UAW contract, most likely in next fall’s bargaining, they will complete scheduled production before moving into “idled” status.)

Mr. Howes notes: “Equally problematic is the President of the United States. His elevation to the Oval Office nearly two years ago was powered by voters in the industrial heartland states of Michigan and Ohio, in part because of his campaign promises that auto jobs would be returned to their rightful home.” But he adds: “Not exactly. And his trade wars with China and the European Union, as well as tariffs on foreign-made steel and aluminum, are driving commodity costs higher, intensifying the headwinds buffeting GM and its industry rivals. Increasing the pressure, as Trump did Monday with a vow to increase existing 10 percent tariffs on Chinese goods to 25 percent, doesn’t help.”

He likens this as the onset of what is “likely to be a multi-part, months-long dance to chart the future of the industry: between auto CEOs pushing for competitive advantage and union leaders eager to preserve what their members have; between automakers and a president who thinks he understands their business and issues the kind of demands that should come from shareholders, not politicians.” Then he notes: “The continuing transformation of General Motors Co. is reaching the most pitiless stage this town has seen since the industry’s epic bankruptcies nearly a decade ago…On the first day back to work from the Thanksgiving holiday, the Detroit automaker confirmed plans to cut its salaried workforce by 15 percent, to dump most of its car models, and to idle five plants in three states, two countries and its hometown.” He describes Ms. Barra’s Barra’s belief that “good leadership reacts to problems when they surface lest they get worse with time,” especially with regard to “overturning a status quo re-established after GM’s bankruptcy.”

Mr. Howes writes that whether the ‘wrong person’ turns out to be President Trump or CEO Barra remains to be seen, but notes that with “each new action in GM’s years-long transformation, the automaker’s CEO demonstrates a steel spine and business acumen that looks determined to make tough calls her predecessors generally avoided until external conditions left them no choice…Not Barra. Despite accurate criticism that GM benefited from taxpayer-funded bailouts and a federally induced bankruptcy, her leadership team is moving ahead with a restructuring intended to leave the automaker leaner, younger, more profitable, and more intensely focused on driving profits higher to invest in the Auto 2.0 spaces of mobility, autonomy and electrification.”

Mr. Howes notes that the “President’s trade wars with China and the European Union, as well as tariffs on foreign-made steel and aluminum, are driving commodity costs higher, intensifying the headwinds buffeting GM and its industry rivals. Increasing the pressure, as Trump did Monday with a vow to increase existing 10 percent tariffs on Chinese goods to 25 percent, doesn’t help: This is the beginning of what’s likely to be a multi-part, months-long dance to chart the future of the industry: between auto CEOs pushing for competitive advantage and union leaders eager to preserve what their members have; between automakers and a president who thinks he understands their business and issues the kind of demands that should come from shareholders, not politicians…If Barra’s latest moves demonstrate anything, it’s that she and her team know who they work for—and it’s not the President of the United States.”

Fiscal Steering for Road Bumps Ahead

November 27, 2018

Good Morning! In this morning’s eBlog, we wonder what the General Motors decision to eliminate as many as 14,800 positions might mean, fiscally, for the Motor City.

Dropping a Fiscal Gear? General Motors has announced some of the details of its most significant downsizing since its bankruptcy a decade ago. Mayhap, ironically, if not certainly discouragingly, the announcement came as the continuing transformation of General Motors Co. is reaching the most pitiless stage Detroit has experienced since the industry’s epic bankruptcies nearly a decade ago. Last week, on the first day back to work from the Thanksgiving holiday, G.M. confirmed plans to cut its salaried workforce by 15 percent, to eliminate most of its car models, and to idle five plants in three states, two countries, and Detroit, its hometown. The announcement seems to recognize that the market’s rotation out of traditional cars into self-driving cars, combined with the enormous capital requirements for developing and testing next-generation mobility technology, and it appears to have disrupted the status quo re-established after General Motor’s chapter 11 bankruptcy, auguring fewer union plants building more high-margin vehicles.

Chain Reaction? General Motor’s new restructuring, moreover, appears likely to increase pressure on nearby Ford Motor Co. to detail its own workout plans, eliminating as many as 20,000 jobs—even as the industry is on pins and axles awaiting next year’s national contract talks with the United Auto Workers—negotiations with regard to the future of at least four U.S. plants—a fate GM appears determined to make to avoid bankruptcy. CEO Mary Barra has been adroitly steering the corporation through its years-long transformation, seeking to make critical decisions to avoid a chapter 11 bankruptcy. Indeed, despite accurate criticism that General Motors benefited from taxpayer-funded bailouts and a federally induced bankruptcy, her leadership team is moving ahead with a restructuring intended to leave General Motors leaner, younger, more profitable, and more intensely focused on driving profits higher to invest in the Auto 2.0 spaces of mobility, autonomy, and electrification—or, as David Kudla, the chief investment strategist of Mainstay Capital Management put it: “This is not a surprise: “Mary Barra is moving quickly to restructure the company for both a cyclical downturn in the industry and a secular change in the industry.”

Steering towards a Brighter Fiscal Future? Nevertheless, road ahead for both General Motors and the City of Detroit will be fiscally challenging, including not just dealing with the United Auto Workers, but also the Trump White House: by deeming its four U.S. plants “unallocated” for production, General Motors appears to be seeking to exert maximum leverage over national bargainers in next fall’s negotiations: each of the targeted plants is scheduled to end production prior to the expiration of the union contract next September: the plants in Michigan, Ohio, and Maryland are not closing, or at least until their respective fates are decided under terms of the national GM-UAW contract. The situation, if anything, is complicated by President Trump, whose companies have filed for Chapter 11 bankruptcy protection, which, like Chapter 9 municipal bankruptcy, means a corporation can remain in business while erasing away many of its debts, six such bankruptcies.

The fiscal situation is further complicated, politically, as the next Presidential election looms: President Trump’s road to the White House was driven, in large part, by voters in the industrial heartland states of Michigan and Ohio; in his campaign, he promised that auto jobs would be returned to their rightful home; however, since taking office, his trade wars with China and the European Union, as well as tariffs on foreign-made steel and aluminum, appear to have driven commodity costs higher, exacerbating the fiscal challenges to General Motors, Ford, etc. If anything, the fiscal road could steepen now that the President this week vowed to increase existing 10 percent tariffs on Chinese goods to 25 percent. Such a vow could create new hurdles to the future of the U.S. auto industry—and, thereby, the fiscal road ahead for the Motor City—or, as the Detroit News described the road ahead: “The continuing transformation of General Motors Co. is reaching the most pitiless stage this town has seen since the industry’s epic bankruptcies nearly a decade ago,” as the company confirmed, on the first day back to work from the Thanksgiving holiday, plans to cut its salaried workforce by 15 percent, to eliminate most of its car models, as well as to idle five plants in three states, two countries, and the City of Detroit. Maybe it will become the unMotor City.

The News put it this way: “Change is here. The market’s rotation out of traditional cars, combined with the enormous capital requirements for developing and testing next-generation mobility technology, is overturning a status quo re-established after GM’s bankruptcy. The result is likely to be fewer union plants building more high-margin vehicles. Thus, even though the President told the Wall Street Journal: “They better damn well open a new plant there very quickly,” CEO Barra, not unlike former Detroit Emergency Manager Kevyn Orr, is steering her corporation towards its own transformation: notwithstanding accurate criticisms that GM benefited from taxpayer-funded bailouts and a federally induced bankruptcy, her leadership team is moving ahead with a restructuring intended to leave General Motors leaner, younger, more profitable, and more intensely focused on driving profits higher to invest in the Auto 2.0 spaces of mobility, autonomy, and electrification.

CEO Barra also recognizes that which the White House seems not to: generous profits in today’s global economy coming from one country are not enough to support a rapidly changing business model steeped in advanced technology. Indeed, today, General Motors sells more vehicles in China than it does in the U.S., a trend now several years old and unlikely to change; moreover, GM is doubling-down on what it calls its “growth” plants for trucks and SUVs, an action with certain implications for traditional car plants and their hourly workers which have, heretofore, been such a fiscal mainstay for the Motor City, where, now, six car models will cease production by the end of next year—including the Chevrolet Volt, the gas-electric hybrid midwifed when the Obama auto task force was calling the shots inside GM’s Renaissance Center headquarters. In steering this new fiscal course, CEO Barra—and Detroit—appear to be driving towards a bumper car rendez-vous with President Trump on at least two fronts: the Trump White House and the UAW’s Solidarity House. By deeming four U.S. plants “unallocated” for production, General Motors is, effectively, seeking to exert maximum leverage over national bargainers in next year’s talks: each of the targeted plants is scheduled to end production before the union contract expires next September, putting their futures in real doubt—and raising any number of fiscal challenges for the City of Detroit.

Jon Gabrielsen, a market economist and advisor for both auto manufacturers and auto suppliers, notes: “Anyone who thought (President Donald) Trump could save their jobs was delusional. No person, whether Trump or not, had any more chance of reversing rapidly changing trends than to swim up Niagara Falls…Corporations don’t enjoy doing this and their investors don’t enjoy the huge costs to do so. But it sure beats not doing it and going out of business.” He noted that General Motors timing goes to strategy, stating that there is a financial advantage to announcing big cuts before New Year’s Eve, as well as a bookkeeping strategy that benefits investor relations and allows the company to claim certain losses and later revise and claim certain gains. He estimates the unemployment impact of the direct Detroit salaried job cuts for the metro area could raise unemployment by a little over 1 percent, and, with the multiplier impact, that could add as much as 4 to 5 points to the metro unemployment rate, which was 4 percent in October 2018—or, as he put it: “In the last cycle, unemployment went from 4.5 percent in January 2001 to 16.4 percent in June 2009…So rising from 4 percent to 8 or 9 percent unemployment is well within reason.”

Fiscal Chestnuts Roasting on an Open Fire?

November 20, 2018

Good Morning! In this morning’s eBlog, as we await the first aroma of turkey basting, we consider the deepening pension abyss confronting the Land of Lincoln, the State of Illinois, before rolling the die in our continuing efforts to consider Atlantic City’s remarkable recovery from near municipal bankruptcy.  

Digging Deeper. Unlike municipalities, states may not file for bankruptcy, but that does not mean they cannot become insolvent, a fiscal place wherein Illinois is nearing with a state budget chasm not only nearing $1 billion, but confronting the potential of escalating to $3 billion, and on the red-brick road to $23.7 billion according to a grim budget forecast laid out by the outgoing administration of Gov. Bruce Rauner. State Land of Lincoln’s public pension scheme was introduced more than a century ago; 69 years ago the Illinois Public Employees’ Pension Laws Commission published a report highlighting the “tremendous, ever-increasing, disproportionate” unfunded liabilities the pension plans were confronted by‒and the deficits that were being created. A 1959 report by the Illinois Public Employees’ Pension Laws Commission wrote that unfunded pension liabilities were increasing “for the most part from the inadequacy of government contributions in the prior years.”

The state’s first attempt to address its challenge of unfunded constitutional obligations led to revising the Illinois Constitution, eleven years later, when the state adopted Article XIII, Section 5, of the Illinois Constitution, which granted extraordinary protection to employees who collect public pensions: the provision mandates that the state fulfill its public pension obligations as they become due; and treat its public pensions as “contracts: Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Notwithstanding, as we have noted before, that is a constitutional provision which appears to have received less than meaningful compliance: Governors and Legislators of both parties have repeatedly skipped required contributions, or contributed less annually than they should have, or have borrowed from the funds to finance other projects or employee salary increases. Unsurprisingly, the borrowing from Peter to pay Paul has increased the state’s inability to address constitutionally mandated public pension mandates. Indeed, by 2012, Illinois public pension debt reached $96 billion, according to the governor’s budget office. The following year, former Gov. Pat Quinn signed what was considered a landmark pension bill, Public Act 98-599, into law. The new revisions included a number of provisions intended to reduce annuity benefits; however,  the state Supreme Court unanimously found the new band-aid to be unconstitutional, writing: “[T]here is simply no way that the annuity reduction provisions in Public Act 98-599 can be reconciled with the rights and protections established by the people of Illinois when they ratified the Illinois Constitution of 1970 and its pension protection clause,” rejection the State’s arguments that it was confronted by a grave “financial emergency” as a result of its unpaid pension obligations and was, therefore, unable to meet the provisions of the pension protection clause. The Court rejected this argument holding that a mere unanticipated exigency did not warrant disregarding constitutional provisions, writing that “if something qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the State’s pension or retirement systems, it cannot be diminished or impaired.”

Hope Springs Eternal. A new report from the Illinois Economic and Fiscal Policy [ Economic and Fiscal Policy Report] notes: “The projections used for fiscal year 2019 assume optimistic growth in revenues under existing law and the five subsequent fiscal years are driven by the pessimistic economic forecast scenario, increases in pension payments, projected debt service amounts, and moderate increases in other spending,” according to the Illinois Economic and Fiscal Policy Report published Friday by the Governor’s Office of Management and Budget. Crain’s editors are more focused: they recently opined: “The ultimate solution may involve a constitutional amendment—a politically risky maneuver, but one that no longer seems unfeasible now.” Even William Daley, Chicago mayoral candidate has stated that an amendment is “always a possibility.”

Playing the Fiddle while Pensions Obligations Burn? Of course, if the Governor and Legislature really wanted to address the fiscal chasm, they could adjust the rates on pension contributions to match what would be authorized under proposed reforms—a key step which would, at the very least, create a path to stop the current underfunding of public pension unfunded liabilities. What makes the governing challenge so difficult is the added challenge that Illinois’ pension protection clause applies to all 671 statewide and municipal pensions in the Land of Lincoln—but, because they are different, there is no one-size-fits all potential fiscal remedy. The challenge is that, unlike the federal government, states have operating budgets, capital budgets, and public pension obligations—which, being contractual in nature, spur state constitutional obligations. And, unlike the White House and Congress, as the National Conference of State Legislatures notes: “Requirements that states balance their budgets are often said to be a major difference between state and federal budgeting. State officials certainly take an obligation to balance the budget seriously, and in the debate over a federal balanced budget in the early- and mid-1990s, much of the discussion centered on the states with balanced budgets. All the states, except Vermont, have a legal requirement of a balanced budget. Some are constitutional, some are statutory, and some have been derived by judicial decision from constitutional provisions about state indebtedness that do not, on their face, call for a balanced budget. The General Accounting Office has commented that ‘some balanced budget requirements are based on interpretations of state constitutions and statutes rather than on an explicit statement that the state must have a balanced budget.’”

Notwithstanding, Illinois’ deficit could triple from its current $1 billion to $3 billion, pushing up the accruing state liabilities in excess of $23.7 billion under a recent forecast from the near-lame duck administration of Gov. Rauner, whose office of Economic Policy and Fiscal Policy Report last Friday noted: “The projections used for FY2019 assume optimistic growth in revenues under existing law and the five subsequent fiscal years are driven by the pessimistic economic forecast scenario, increases in pension payments, projected debt service amounts, and moderate increases in other spending…All projections assume no significant reforms or spending controls aside from what is in current statute.”

Parting Could Be Such Unsweet Sorrow. Incoming Illinois Gov. J.B. Pritzker, who defeated Gov. Rauner this month, hopes to puff up state revenues via the legalization of pot, expansion of gambling, and asking voters, next year, to approve a shift to a graduated income tax from a flat tax. That puff will have to be mighty: revisions to revenues and expenses in the current-year fiscal 2019 $38.5 billion general fund will result in a $546 million deficit, according to the report said.

Various changes include the loss of a potential $300 million from the long-stalled sale of the state’s downtown Chicago office building. Debt service of $33 million expected on borrowing to fund pension buyouts is no longer necessary, but $118 million is being transferred to cover outstanding debt payments—but that is likely to prove insufficient: the Illinois Labor Relations Board has ordered the state to pay them a not yet finalized amount—albeit there are state estimates of a potential liability of as much as $500 million—and that number does not include the status of pension buyout savings, where an early buyout program for three of the state’s five pension funds is in the early stages of implementation. According to the report: “These programs are projected to result in general fund savings for the state of approximately $400 million, but the state can provide no assurance as to the amount of savings actually realized from the implementation of such programs.” Indeed, if anything, the five-year fiscal forecast is gloomier: it warns of deficits of $2.5 billion in FY2020 and as much as $3 billion annually in the next four years—that is annual deficits in addition to Illinois’ current backlog, with the total projected to be as much as $23.7 billion by FY2024. Ergo, the report warns: “Options must be considered for implementing structural reforms, imposing spending reductions, and enhancing revenues to balance the state’s budget and resolve the budget shortfalls projected in this report.”

While public pension contributions are projected to grow nearly 25% by 2024, the state will be focusing on a learning budget curve as it is forced to meet rising public education and health care costs—both rising at faster-than-inflation rates: education spending rises to $12.1 billion in FY2024 from $10.2 billion this year, while healthcare costs rise to $9 billion from $7.9 billion this year. The state’s debt service on up to $1 billion of general obligation borrowing that would cover the costs of the state buyouts is estimated at between $90 million and $100 million annually between FY2020 and 2024. The report puts interest costs for FY2019 at $419 million on the backlog of state employees’ group health insurance program bills.

Timeliness & Headaches. The report should be painful if invaluable as Gov.-elect Pritzker’s budget and innovation transition working committee is set to meet for the first time this week. The fiscal team, led by former state Comptroller Dan Hynes, includes members such as the windy city’s CFO and the city’s Treasurer, as well as the leaders of two local civic research organizations. Crafting a balanced FY2020 budget is a top priority.

Betting on a Municipality’s Future? Our esteemed colleagues at Municipal Market Analytics report good gnus from New Jersey, where they write that aggregate gaming revenues for the state’s casino industry are up 5.3% in 2018; however, reminding us that the house always wins, they warn that “below the top line numbers, there seems to be evidence suggesting that the recent openings of two new casinos in Atlantic City are succeeding by cannibalizing revenues from the established venues,” writing that pure casino revenue, i.e. excluding internet gambling and sports betting, was up only 2.5%‒and only one of the seven legacy casinos, Golden Nugget, posted a year-to-date gain of 2.6%. The other six experienced losses ranging from -2.4% at the Tropicana to -14.6% at Caesars. Should the trend continue and lead to the shuttering (again) of facilities, it would be a setback in the redevelopment efforts of the city. But it is in the New Jersey cloud from which the good gnus rolls: they report that internet gaming continues to post strong gains, up 18.9% year-to-date. Notwithstanding the potential trouble that gambling away from the casinos can have on bricks and mortar operations and for the fiscal health of Atlantic City, they report that growth in internet gambling is worth more to the state—in terms of gaming revenues, because of the higher tax rate on internet gambling. So far this year, internet gambling has contributed more incremental tax growth to the state than in-house gambling (approximately $6M vs. $4M). Sports bettors also seem to prefer online betting. Last month, online activity accounted for about 67% of betting. Since the inception of sports betting in June of this year, on-site and on-line activity has contributed about $5.5M in taxes to the state.

Weighing Public Pension Obligations versus Fiscal Solvency

November 19, 2018

Good Morning! In this morning’s eBlog, as we await the first frosty breath of Winter, we consider the challenge to the Commonwealth of Puerto Rico with regard to the question whether the U.S. territory has protected its retirees.  

Unprotecting the Future? The American Federation of Teachers (AFT) and the American Federation of State, County & Municipal Employees (AFSCME) have filed a suit against the PROMESA Board and the Commonwealth charging violations of a law intended to safeguard the pensions of its public-sector workers who have been unable to invest the more than $300 million they contributed to a new retirement plan. The suits assert the undynamic duo have failed to put the pension deposits for tens of thousands of public pension deposits into proper accounts; asserting they have, instead, “stashed” the money in non-interest bearing accounts at a scandal-plagued bank, Banco Popular—a financial institution which the PROMESA Board report noted several had been involved in a number of scandals. In their complaint, they charged that the Commonwealth’s management of public pension contributions blatantly violates Law 106, a law passed last year to fix Puerto Rico’s public pension system, which has been “left in ruin by years of government mismanagement.” Law 106 mandated that public pension contributions, which consist solely of an automatically deducted slice of public employees’ monthly salaries, were to be deposited into segregated investment accounts by last December in order to help workers save for retirement. Said deposits, according to the union, have not been made; instead the union charges some $316 million has been deposited into non-interest bearing accounts at Banco Popular—or what, no doubt, they believe to be Banco Unpopular—or, as they have charged: “Buoyed by these unlawful and virtually cost-free deposits of hundreds of millions of dollars of public employee money, Banco Popular has posted record profits,” with their suit comparing seizing employees’ funds without proper investment to hiding them under a mattress: “During the time that the government has been stashing these hundreds of millions of dollars of its public servants’ own money with Banco Popular, public employees and retirees have missed out on historically-high stock market returns.” The two are seeking a declaration that Puerto Rico has violated Law 106, as well as an injunction that would force the government to establish the individual pension accounts, suing on grounds of breach of fiduciary duty and unjust enrichment. They are seeking monetary damages tied to the interest public employees have been forced to forgo because of the government’s alleged mismanagement of their funds. The statute, Law 106, enacted in May last year, just months after Puerto Rico filed for a type of quasi-chapter 9 municipal bankruptcy under the Puerto Rico Oversight, Management and Economic Stability Act, provides that Puerto Rico “cannot allow the poor performance of ministerial duties to jeopardize the dignified retirement of thousands of public employees,” charging: “But no sooner had Law 106 gone into effect than the Commonwealth, Retirement Board and FAFAA—with the active involvement and approval of Banco Popular, and without being held to account at all by the PROMESA Oversight Board—betrayed the statute’s lofty purposes and returned to the well-worn path of breaching their fiduciary duties and violating employee pension rights.” (Law 106 contained an initial deadline to establish individual pension accounts of December 2017; the law provides that deadline could only be extended “for a reasonable time” by a resolution from AAFAF; now, however, the unions assert the Commonwealth does not currently plan to finish setting up the accounts until December of 2019, writing: “It has become painfully clear that the Commonwealth, AAFAF, and the Retirement Board have no intention of complying with Law 106 in any reasonable time frame…In violation of the plain requirements of Law 106, and in violation of their fiduciary duties to the employees and retirees whose funds they hold in trust, these Defendants have preferred the interests of Banco Popular and Puerto Rico’s financial creditors and … pushed its public servants to the back of the line.” [American Federation of Teachers et al. v. The Commonwealth of Puerto Rico et al., No.18-00134, in U.S. District Court for the District of Puerto Rico.]

The new litigation joins a long line of cases involved—and imposing even greater costs—on the efforts to address the accumulated $120 billion in debt and unfunded public pension obligations in a quasi—chapter 9 municipal bankruptcy proceeding filed in the U.S. District Court in San Juan, as the fiscal and governance struggle to restructure Puerto Rico’s $120 billion of debt and pension obligations goes on, and as the AFT and AFSCME point to Law 106 as a statute which mandates wage deductions from workers participating in a new retirement plan to be placed into segregated employee-controlled, 401(k)-style accounts that they asserted have not been created, claiming that while workers’ contributions totaled $316 million as of July 31st, employees have been unable to invest the money, missing out on “historically high stock market returns: For all intents and purposes, the Commonwealth is seizing employees’ own funds and hiding them under a mattress‒in this case, upon information and belief, government bank accounts at Banco Popular earning virtually zero interest.” The suit seeks to have the court  find the defendants in violation of Law 106 and of their fiduciary duties, and, therefore, to mandate the creation of accessible retirement accounts by yearend; it also seeks an undetermined amount of compensation for lost investment income. Defendants in the suit include Banco Popular, Governor Ricardo Rosselló Nevare, the CFO, Treasurer, fiscal and financial advisory authority, retirement board, as well as the PROMESA Board. Perhaps ironically, the suit charges that the PROMESA Board failed to mandate that the Commonwealth government comply with the PROMESA law—albeit, in a statement, PROMESA Board Executive Director Natalie Jaresko stated: “We agree the government of Puerto Rico should set up the defined contribution accounts as soon as possible; however, we won’t comment on the lawsuit at this time.”

The Exceptional Recovery Challenges in the Wake of the Nation’s Largest Chapter 9 Municipal Bankruptcy

November 16, 2018

Good Morning! In this morning’s eBlog, we consider the seemingly unending fiscal challenge to fully come back from the nation’s largest ever chapter 9 municipal bankruptcy, then, we try to escape the early Winter blast by seeking el sol in Puerto Rico, where Governor Ricardo Rosselló Nevares is poised to sign a tax reform bill into law.  

Moody Blues. Gov. Rick Snyder made a last-minute, personal appeal to keep Flint connected to the Detroit water system before it began using the Flint River for drinking water, former Flint Mayor Dayne Walling testified in Genesee District Court this week, telling Judge Jennifer Manley that the Governor had met privately with him and former Flint Emergency Manager Ed Kurtz in Detroit early in 2013, asking them to give Detroit the opportunity to make a best and final offer for a long-term water contract. That meeting came just days before the Mr. Kurtz, with Mayor Walling’s support, pushed ahead instead with plans to buy into the Karegnondi Water Authority (KWA) pipeline project to Lake Huron. The former Mayor has stated that he did not know emergency managers in Flint would go on to make separate decisions—decisions which led to the city using the Flint River as its source of drinking water until the KWA pipeline was put into service. He went on to testify that he alone had made the decision to use Flint River water, as he testified in preliminary examinations for four current and former officials with the Michigan Department of Environmental Quality. While Detroit’s best and final offer was known prior to Flint’s purchase of the Karegnondi water, the Governor’s involvement had not previously been acknowledged. However, under questioning by one of the Michigan Department of Environmental Quality defendants, Mr. Walling responded he had been involved in meetings prior to the City of Flint’s fatal decision—meetings which involved state officials, including Gov. Snyder—with the additional disclosures that Gov. Snyder had taken Mayor Walling and Emergency Manager Kurtz alone into a side room to ask that they consider remaining with Detroit, with the former Mayor testifying that Emergency Manager Kurtz, with the support of the Michigan Treasury Department, alone had the authority to act on behalf of the City of Flint—not the Mayor or other elected municipal leaders. By April of 2013, former Michigan State Treasurer Andy Dillon had approved the fateful go ahead.

Part of the reasoning appeared to be fiscal: if the City of Flint used the Flint River, the assumption was that would provide the city with millions of dollars during the construction of the Karegnondi line. Instead, it triggered a human and fiscal crisis for the City of Flint, Mr. Walling testified this week, telling the court Tuesday that he only learned of Flint’s plans to use the Flint River when he reviewed a new budget for the coming fiscal year and found no funding to continue water purchases from Detroit. From April of 2014 to October of the following year, Flint attempted to treat the river water; however, it encountered unacceptable levels of bacteria, lead, as well as chlorination byproducts. For the next year and a half, Flint sought in vain to address the bacteria, lead, and byproducts—even as Flint sought, repeatedly, for $30 million from the state—with Mr. Walling reminding the court the city had been effectively taken over by the State of Michigan via the imposition of an Emergency Manager.

Last month, residents and businesses affected by the lead-contaminated water crisis in Flint had asked a judge to reinstate Republican Gov. Rick Snyder and other Michigan officials as defendants in a class-action lawsuit, claiming that the Governor and his staff knew about health risks for months before making an official announcement: “The citizens of Flint were both forgotten and mistreated by those involved in the Flint water disaster. To this day, residents continue to suffer because of the reckless decisions of senior state and local officials.”

Not Just Like Flint. While we have noted the extraordinary fiscal recovery by Detroit from the largest chapter 9 municipal bankruptcy in U.S. history, the recovery is incomplete, and the Detroit Public Schools—the critical draw if families are to be encouraged to move from the suburbs into the city and fill its still vast areas of emptiness, Detroit will have to address its own grave drinking water issues. As Sarah Maslin Nir of the New York Times wrote this week: “For a year now, Marcel Clark, a Detroit police officer and father of three, has been filling a 50-gallon drum each week with purified water for his family to drink. Ever since he heard about the water contamination crisis in Flint, Mich., an hour’s drive away, he hasn’t trusted the aging copper and steel pipes in his house. He’s been talking to contractors about replacing them, and hopes to get the work done in the next few months. ‘As a responsible parent, I said to myself, let me go ahead and secure my family,’ said Mr. Clark, 48.” The issue, as we have previously noted, is in the Detroit Public Schools, where the water fountains in all 106 schools run by the Detroit Public Schools Community District have been dry since classes began last  August, and where the Superintendent ordered them shut off as a pre-emptive measure, after testing revealed elevated levels of copper and lead in drinking water at some schools. In the wake of completing checks at 86 of the schools last month, officials announced that 57 of them had lead or copper levels exceeding EPA safety levels—checks which had been occurring after the tragedy of Flint had prompted Detroit officials to start testing school water supplies in 2016, or as DPS Superintendent Nikolai Vitti put it: “We are talking about Detroit now because we proactively tested all water sources, and defined the problem with a solution…I think large urban areas around the country have infrastructure as outdated as ours is, and they don’t know if there is lead or copper in the water because they are not testing it.” (Based on Detroit’s experience, Dr. Vitti has called for a nationwide requirement for water testing in schools; there is no such rule now.)

In the wake of the Flint crisis, the Michigan Department of Health and Human Services began testing children for elevated lead levels, finding, two years ago, higher levels of lead in children under the age of 6 than in any Michigan county—nearly 9 percent, compared with a statewide average of less than 4 percent. While Detroit officials and water quality experts believe the issue may simply be aging pipes—aging which, because pipe joints and other plumbing components often contain metals which can leach into the water over time, and where the cost of ripping out and replacing in a system which is just emerging from its own insolvency and emergency manager oversight, man, as DPS Superintendent Dr. Vitti put it: “This is troubling for Detroiters, because it’s just a long list of examples where it feels as if people are treated as if they are second-class citizens,” adding: “We tested and were transparent, and so the focus is on us.”

Now Detroit officials believe a $3 million project to put filtration systems in every school, financed mostly by philanthropic donations, which will provide for the installation of the first of 800 new “hydration stations,” will help—albeit not for parents who fear their children have already been exposed—or for city leaders who are worried these stories could discourage families from wanting to move into the city.

Motor City Hangover? Moody’s, moodily, at the end of last week, noted that, notwithstanding the influx of “affluent residents and large scale developments,” the Motor City is still characterized by “High debt and pension burden,” with the “citywide population declining and per capita income just slightly over half the national per capita income.” Even though the city is far less dependent on property taxes than most cities, the rating agency described the property tax as remaining “weak.”  That is, notwithstanding the sparkling revival of a downtown too dangerous to walk around the block on the morning Kevyn Orr filed with the U.S. Bankruptcy Court, Moody’s noted the road back to full fiscal health is arduous. Indeed, even as the downtown, empty after dark on that first night in municipal bankruptcy, is now home to 10,000 new residents; however, Detroit’s population has continued to ebb: Moody’s wrote that more than 35,000 have exited, noting that the fiscal and governing challenge is not the then vacant and dangerous, but now vibrant downtown, but rather other parts of the city. Nevertheless, Moody’s remained upbeat, writing: “The trends, coupled with savings achieved through bankruptcy, have led to marked improvement in the Motor City’s financial position and credit quality.”

Detroit Chief Financial Officer John Hill noted the implementation of the city’s plan of debt adjustment has been a “work in progress: the city is coming back from a very hard bankruptcy, and everyone is actually surprised that we’re as far along as we are in getting out of oversight and making improvements in our credit rating that we have over the years.” The greater downtown area has experienced a 28 percent increase, or about 9,000 residents; however, that core downtown area makes up only seven of Detroit’s 143 square miles. It appears that there continues to be an exodus overall from the city. Moody’s believes that, thanks to numerous businesses relocating to the city, growth downtown will likely to continue fueling rising income tax collections—in a relatively rare municipality in that income tax revenues are a key municipal revenue source, and the city’s economy appears poised to benefit from its two most prominent redevelopment projects: Ford Motor Co.’s $740 million plan to redevelop the Michigan Central Depot and several nearby properties in Corktown, and Bedrock’s $1 billion development on the former site of Hudson’s store in downtown.

Moody’s also noted the city’s: Strategic Neighborhoods Fund, service improvements, blight remediation, and providing economic development and business incentives—or, as CFO Hill put it: he believes the Strategic Neighborhoods Fund will “bear a significant amount of fruit.” Through the fund, Detroit expects to invest more than $100 million, from a combination of financing through city, state and philanthropic arms, into 10 neighborhoods to improve redevelop parks, strengthen commercial corridors and rehabilitate housing, or, as he added: “The city is moving forward very well and making its own investment, but I think the larger community, both the business community and the philanthropic community, is making huge investments in the future of the city that impact neighborhoods as well.”

Moody’s was more moody with regard to the Detroit Public School Community District and its inability to address its capital needs. Even though DPS received a $617 million state aid package in 2016, it continues to experience elevated lead and copper drinking water levels in schools and other public in buildings, and it lacks the resources to address significant capital needs, even as DPS confronts more than $500 million in critical school repairs—or, as Moody’s put it: “Absent state support, or sizable philanthropic donations, the deteriorating facilities could become an increasing drag on the city’s revitalization efforts,” while CFO Hill added: “What we have been able to do in the past, the city has taken vacant school buildings and helped to remove them as blighted areas…That’s helped the school system to not have to maintain some of those vacant properties. So the city has been able to help.”

Mayhap ironically, the new report came just as departing Gov. Rick Snyder, speaking at a Detroit Economic Club meeting, spoke of the “absolutely incredible” progress Detroit has made since emerging from chapter 9 municipal bankruptcy. Now, with Governor-elect Gretchen Whitmer set to take the reins, it is not so clear the city is fully out of the fiscal woods: its property tax revenues remain weak, because, as Moody’s found, the “comeback” has yet to reach Detroit’s vast neighborhoods, so that: “Detroit is left with a combustible brew: a reliance on volatile revenue sources and growing fixed costs.” Nevertheless, the resolute CFO notes: the “property tax base is trending upward after a citywide reassessment lowered values to be more in line with market prices: “The city has turned the corner on the population declines of the past.” On the troubled public pension front, Moody’s found that the Duggan administration is working to address the looming resumption of normal pension payments in 2024, when the annual cost is estimated to be more than $143 million—that will be the year when the $816 million in “grand bargain” contributions to the city’s retirees from the state and philanthropic foundations expire. Having gained an okay from the Mayor and Council, CFO Hill has established a trust fund to store some $335 million over eight years in order to try and sustain pension promises.

Nevertheless, the city’s schools appear to be the most daunting fiscal challenge: Moody’s noted DPS “could also become a major drag on revitalization beyond downtown,” apprehensive about the unsustainability of downtown redevelopment absent quality public schools for workers filling once-vacant office space—a severe physical and fiscal challenge in a municipality where its reorganized public school district has no ability to issue debt to fix more than $500 million in capital improvement needs for more than 100 occupied school buildings spanning 10 million square feet, because the state DPS bailout bars DPS from accumulating any new capital debt until 2040.

Nevertheless, CFO Hill reminds us that the city’s municipal bond sale will mark the first time Detroit has entered the capital markets without the direct assistance of the State of Michigan since prior to state emergency financial intervention began in 2012.

Reforma de Impuestos. Governor Ricardo Rosselló Nevares of Puerto Rico will sign the tax reform bill into law, although there is still no certainty with regard to whether the PROMESA Oversight Board will endorse the law, because of the Board’s apprehensions related to the inclusion of amendments that would legalize slot machines outside casinos. Nevertheless, Gov. Rosselló Nevares, at a press conference, stated: “I’m going to sign it, because it’s a programmatic commitment,” adding that if the PROMESA Board does not endorse the bill, “those who make decisions in the government” must then focus on working on an initiative that can be approved by the body created by U.S. Congress. The Governor stressed that all the basic elements of the tax reform bill have the endorsement of La Fortaleza, the Legislature, and the Board. Credit for work, reduction of the tax on prepared foods and transactions between businesses (B2B) as well as reductions on income tax for corporations and individuals are among those “pillars.” These reductions in income taxes will not apply in the same way for those who are self-employed and small and medium businesses. The Governor indicated that the only element that causes doubts is that with regard to the impact that the legalization of the slot machines outside casinos would be with regard to the collections of the central government and public corporations. Specifically, the PROMESA Board has requested studies that certify that the legalization of these machines will not cannibalize the government’s collections, noting: “If there is an objection to the slot machines issue, I am sure that we who make decisions will sit at the table and, without rejecting other considerations, the issue (slot machines) can be considered at another time, so we can focus on the benefits (of the tax reform) now…if there is no objection to the slot machines, we will have a quick positive effect on the economy.”

The Unending Challenge of Municipal Bankruptcy Recovery

November 13, 2018

Good Morning! In this morning’s eBlog, we consider the seemingly unending fiscal challenge to fully come back from the nation’s largest ever chapter 9 municipal bankruptcy.

Moody Reds. No one ever wrote that the road back to fiscal recovery from the nation’s largest ever chapter 9 municipal bankruptcy would be easy, so even as the downtown, too dangerous to walk alone in when the National League of Cities held its annual Congress of Cities there decades ago, and where, on the very day that Kevyn Orr filed with the U.S. Bankruptcy Court, my downtown hotel warned me against walking the one mile from the hotel to the Governor’s Detroit offices to meet with Mr. Orr, the city’s recovery has been unprecedented. Nevertheless, outside of the gleaming downtown, the challenge of recovery continues to be marked by, as Moody’s puts it: “High debt and pension burden,” with the rating agency adding that “Citywide population is declining and per-capita income is just above 52 percent of the nation, and the property tax base remains weak.” While Detroit, unlike most U.S. cities, primarily relies upon income taxes more than property taxes, Moody’s, in its new fiscal report, reminds us that while the new downtown is a show piece, marked, as Moody’s notes, by an “influx of affluent residents (10,000 new residents, too) and large-scale developments,” the Motor City has experienced a net loss of 35,000 residents.

The new moody report emerged just hours before Gov. Rick Snyder, speaking at the Detroit Economic Club, touted the “absolutely incredible” progress Detroit has made since emerging from bankruptcy. That is, with the state having elected a new Governor, Gov.-elect Gretchen Whitmer, the recovery still has a ways to go. On the positive side, Ford Motor Co. has commenced construction on an self-driving car campus in the downtown area expected to employ 5,000, and billionaire Dan Gilbert is erecting a new, gleaming downtown skyscraper—both critical in a city which relies more on income than property taxes; nevertheless, Moody’s notes that property tax revenue “remains weak” outside of the 7.2 square miles of greater downtown; ergo, Moody’s analysts reflected that the much heralded “comeback” has yet to extend much beyond the downtown to its neighborhoods—neighborhoods with still too many vacant and boarded up homes—or, as Moody’s found: “Detroit is left with a combustible brew: a reliance on volatile revenue sources and growing fixed costs.”

Nevertheless, Detroit Chief Financial Officer John Hill described the city’s property tax base as “trending upward” in the wake of a citywide reassessment which lowered values to be more in line with market prices; he noted that Detroit “has turned the corner on the population declines of the past.” Moody’s, indeed, notes that Mayor Duggan is working to address the looming resumption of normal pension payments in 2024, as provided for in the city’s plan of debt adjustment—meaning there is a looming obligation of as much as $143 million after the so-called “grand bargain” which capped that plan of debt adjustment approved by U.S. Bankruptcy Judge Steven Rhodes. The $816 million derived from said bargain were vital in not only ensuring that no Detroit retiree fall below the federal poverty level, but also to offer the Motor City a much-needed decade-long reprieve from making such payments. Thus, with approval from the City Council, Mr. Hill has established a trust fund to amass some $335 million over eight years in order to recover its capacity to meet future public pension obligations.

Getting Schooled on Debt. Moody’s reserved its direst warnings for the Detroit Public Schools Community District, which Gov. Snyder and the Michigan Legislature rescued from the brink of its own, separate chapter 9 municipal bankruptcy filing after the system’s financial collapse in June of 2016, with Moody’s noting: “The (public) school district could also become a major drag on revitalization beyond downtown.” The instructive apprehension reflected the credit rating agency’s apprehensions that the rapidly mushrooming residential population growth in the Motor City’s greater downtown will be unable to sustain itself absent quality public schools—indeed, the very concern which led Chicago to focus on quality public schools in order to incentivize young families with children to move into the city. In Detroit, there is a school math problem: the city’s reorganized school district has no ability to borrow capital to finance the more than $500 million in capital improvement needs for more than 100 occupied school buildings spanning 10 million square feet. The Michigan Legislature’s $617 million bailout of the District’s operating ledger blocks the District from accumulating any new capital debt until 2040, with the system’s existing 13 mills for capital improvements dedicated to paying $1.63 billion in old debt from eight capital municipal bond issues between 1998 and 2010.

The moody Moody’s report came out ahead of Detroit’s planned sale of $115 million of general obligation bonds, bonds to which Moody’s has assigned a Ba3 credit rating: Detroit plans to sell the bonds to finance a series of capital improvement projects at the DDOT Coolidge bus terminal, neighborhood parks, the Charles H. Wright Museum of African-American History, and Aretha Franklin Park (formerly Chene Park), according to a memo sent Oct. 22 to City Council members. In addition, the proceeds will also be devoted to finance economic development projects and an expansion of the greenlight crime-monitoring camera systems at businesses across the city. CFO Hill noted the municipal bond sale will mark the first time Detroit has entered the capital markets without the direct assistance of the State of Michigan since prior to state emergency financial intervention began in six years ago, adding that Motor City officials are meeting with prospective investors the week after Thanksgiving, and telling Crain’s: “People will be banking on the city’s future and the fact that we’re back in the market.”

Could Physical & Fiscal Recovery Be at Hand?

November 9, 2018

Good Morning! In this morning’s election eBlog, with time still remaining before the end of the Caribbean hurricane season, we consider the stormy relationship and history between Puerto Rico and FEMA—especially as that might affect Puerto Rico’s 78 muncipios.

Emergency Fiscal & Physical Plans. Only a month before the end of the hurricane season, the government of Puerto Rico and the Federal Emergency Management Agency (FEMA) still keep the state emergency plan and the Strategic Plan “under review.” So far, the emergency plans of the 78 municipalities, which must be certified by the State Agency for Emergency and Disaster Management, are not ready. Even so, FEMA and the government claim to be ready to face any severe weather event.

Region II FEMA Director of Operational Planning Jesús Cuartas stated: “Currently, we are finishing the part that has to do with the hurricane annex for Puerto Rico. It will contain the tsunami and earthquakes elements. It’s an ongoing process.” (Region II is like a jigsaw puzzle: it includes Puerto Rico, New York, New Jersey, and the Virgin Islands.) Director Cuartas added: “From FEMA’s point of view, we are working with our documents, and the State provided us with theirs. However, we continue to refine that document in terms of the more complex aspects, broader strategies of possible variations of hurricanes that may come.”

Since September, El Nuevo Día has been requesting unsuccessfully the Strategic Plan developed by FEMA and the state plan, which must also be reviewed by FEMA. Director Cuartas, in an interview, noted: “We do not publish the whole plan until all its components are ready. For us, the goal is (to finish it) by the end of the year…The issue is not rushing to have something, but doing something that is in tune with current changes.” In addition, he clarified that the Strategic Plan is used for training exercises, and was put into effect when Hurricane Beryl represented a threat to the territory.

The NMEAD Commissioner, Carlos Acevedo, expressed himself in a similar manner: “Our plan has been ready since the end of July. It will have monthly changes; we will continue refining it.” He sent a copy of an October 2018 version of the state emergency management plan, a 236-page document, although Commissioner Acevedo acknowledged that he is missing some plans which remain incomplete: “Now, we are working with the distribution (plan), which is being completed. The only thing is that I requested some changes regarding two warehouses which are being acquired. The (plan) of mass aid is being translated from English to Spanish because FEMA developed it with our personnel.” In addition, he assured: “We are working on the government’s operational continuity plan…That is being done here with FEMA personnel. The Agency’s communications plan is being developed with everything that’s new. These plans are being worked on at the same time, some are more advanced than others. Here, a hurricane can come now and I am ready.” However, the former director of Emergency Management, Ángel Crespo, said that “if the plan is ready, it must be ready with all its annexes…It’s elementary.”

With regard to muncipios’ emergency plans, Commissioner Acevedo acknowledged that they are not ready: “We received that of the municipalities…I’m reviewing it with a task force,” he added, anticipating that over the next fortnight he will meet with the mayors and their respective Emergency Managers to discuss the plans. (FEMA does not certify the municipalities emergency plans, but reviews them to assess whether they are consistent with the state and Strategic plans.) The Commissioner added he would have to “check with FEMA when they can review them and add the information I’m asking for. I’m making it more comprehensive.” He noted that the muncipios “currently” have a plan which they can execute if there is a hurricane.

From the critical municipal perspective, the mayors have reported that they have plans, but stressed that the duty of NMEAD is to certify the documents submitted, which is necessary to receive FEMA funds in case of catastrophes. Mayor Isidro Negrón of San Germán noted: “We handled it just like the other time with María: with experience. The government was not going to be prepared, but municipalities were,” while Mayor William Alicea of Aibonito, a small town founded in the mountain region in 1630, reported that he submitted his plan on September 7, but is “still awaiting approval.”

Fiscal Momentum? Wednesday, in court, the PROMESA Oversight Board stated its intention to achieve as many agreements as possible to renegotiate the U.S. territory’s debt, while maintaining its warning that the so-called tax reform cannot affect the Treasury revenues. The Board’s legal advisor, Martin Bienenstock, told Judge Laura Taylor Swain that the federal entity expects the quasi chapter 9 plan of debt adjustment of the Puerto Rico Sales Tax Financing Corporation (COFINA) assumes court approval by next year. In addition, Mr. Bienenstock revealed that, to date, the PROMESA Board has initiated talks or is in negotiations with creditors of other utilities which are not part of the bankruptcy process, such as the Puerto Rico Public Buildings Authority and the Aqueduct and Sewer Authority (PRASA). He said that he anticipated that debts, such as that of the University of Puerto Rico, could be addressed under PROMESA’s Title VI, noting that: “If nothing bad happens, we hope that the COFINA plan can be confirmed by January 2019.” Mr. Bienenstock’s comments regarding Puerto Rico’s debt renegotiation process occurred one day after Judge Swain had approved the qualified plan to renegotiate the Government Development Bank debt through Title VI of PROMESA. Indeed, after describing the court’s endorsement of the GDB qualified modification as “a big step,” Mr. Bienenstock indicated that the next transaction that may be submitted to court would be the Electric Power Authority (PREPA) case, as he provided assurances that the legal matters are moving “in parallel.” According to Mr. Bienenstock, PREPA owes about $147 million on a loan to the General Fund and is making payments as per its agreement. In addition, he explained the PROMESA Board is in negotiations those creditors who, last summer, had signed a Restructuring Support Agreement, as well as with municipal insurers that guarantee that debt.

At the same time, in explaining and responding to the request of qualifications process for private generation that the government recently announced, Mr. Bienenstock assured that PREPA privatization is also progressing. If the GDB restructuring is completed, the COFINA adjustment plan is approved, and an understanding is reached with regard to PREPA; the PROMESA Board would renegotiate most of the $45 billion of the Puerto Rican public debt which is currently in court, whether under PROMESA Title III or Title VI, which provides for voluntary agreements.

This all comes as the PROMESA clock is beginning to wind down: the PROMESA Board members complete their term next September, unless, of course, the new Congress, after it is sworn in and begins its new term next January, opts to make changes with either the PROMESA Board, or the underlying statute.

PROMESA Board Executive Director Natalie Jaresko noted: “The Court’s approval represents a major milestone in the restructuring of Puerto Rico’s debt obligations…We congratulate the government of Puerto Rico for their effort and look forward to our continued efforts to achieve other consensual deals.” The agreement marked the first time Judge Swain has approved a debt restructuring for a commonwealth entity. Puerto Rico is seeking to reduce most of its $74 billion of debt. The federal board has filed documents to the court seeking a write down of the island’s sales-tax bonds. Officials are also working on restructuring Puerto Rico’s general obligations and debt sold by its main electric utility.

The bank served as a fiscal adviser to the territory’s government. It also allowed Puerto Rico to rack up debt by extending loans to cover the commonwealth’s operating expenses. Under the provisions, municipal bondholders would receive 55 cents on the dollar for new bonds with an interest rate of 7.5 percent. GDB bonds maturing in 2023 traded Tuesday at an average price of at 48.5 cents on the dollar, according to data compiled by Bloomberg.