Preparing for a Shutdown of the Federal Government

December 21, 2018

Good Morning! In this morning’s eBlog, we report on what a potential federal government shutdown might augur for the nation’s state and local leaders.

Any hope to avoid a closure of the federal government or at least delay it until February fell apart last night in the wake of the House adding an amendment to increase the federal deficit and national debt by $5 billion—a proposal unacceptable to the U.S. Senate. That means that with the expiration tonight of the second FY2019 continuing resolution, which funds the portion of federal spending not covered by full-year spending bills enacted earlier this year—expires at midnight, triggering a likely federal government shutdown, an option not available to city and county leaders, but which will have implications and costs with regard to their ability to operate federal grant programs in the absence of current funding. The wonderful Federal Funds Information for the States has provided a useful guide for state and local elected leaders with regard to some of the potential ramifications, with most discretionary grant programs covered by the Continuing Resolution adversely impacted, because no new funding would be available after midnight tonight. Key programs impacted would include: Clean Water, Drinking Water, Emergency Food and Shelter Grants, Homeland Security, Urban Area Security Initiative, Public Transit Security Assistance, Firefighter Assistance Grants, CDBG, Housing for the Elderly, virtually all Justice Department grants to state and local governments, as well as virtually all major air, highway, and public transportation programs.

Funding for most so-called mandatory or entitlement programs not subject to annual appropriations will not be affected; with, however, two key exceptions: Temporary Assistance for Needy Families (TANF) and the matching share of the Child Care and Development Fund.

As we have previously noted, some programs critical to human health and safety will not close, including CDBG, HOME, FEMA Emergency Disaster payments, and the National Instant Criminal Background Check System.

The following questions may help local and state leaders determine how individual programs affecting your governments and programs affecting your constituents might be affected: 1) Is it a mandatory program that bypasses the Congressional appropriations process? If so, funding for such programs is automatically available; however, programs could be affected by reduced federal staffing.

Examples of mandatory programs for which funding would automatically be available include:

• Boating Safety

• Federal Aid in Wildlife Restoration and Sport Fish Restoration

• Mineral Leasing

The major exception is funding for Temporary Assistance for Needy Families (TANF) and the mandatory/matching portion of the Child Care and Development Fund (CCDF). While these programs are funded outside of appropriations bills, they were extended with the most recent Continuing Resolution, but expire tonight at midnight. As a result, no new funding would be available without another extension, although states may use prior-year or non-federal funds. These are the only Department of Health and Human Services [HHS] programs that would be affected by a shutdown, because the Labor-HHS-Education appropriations bill has full-year funding.

Is the program affecting your state/county/city. public school district a mandatory program funded in appropriations acts? Typically, these programs do not have access to new funding during a federal shutdown, but most programs in this category have already received full year funding. Many mandatory nutrition programs are funded in appropriations bills, but the Department of Agriculture’s (USDA) contingency plan indicates that these programs would continue during a funding lapse using existing budget authority, specifically citing the Supplemental Nutrition Assistance Program (SNAP), Child Nutrition programs, and the Senior Farmers Market program, as well as the discretionary-funded Special Supplemental Nutrition Program for Women, Infants and Children (WIC).

As a general rule, a program funded by sources other than annual appropriations acts may continue to operate programs—including making payments—if those programs have funding sources outside of annual appropriations. In addition to mandatory programs, programs which are funded by contract authority, such as the federal Highway Trust Fund, would continue during a lapse in appropriations; but, funding for federal transit programs will be suspended, because appropriations will not be available to finance the salaries of staff responsible for payments.

The shutdown is not supposed to adversely affect programs which affect human safety or the protection of property, including:

  • essential housing and emergency services for homeless persons and persons with AIDS (homeless assistance grants, supportive housing for veterans, and Housing for Persons with AIDS; CDBG; HOME Investment Partnerships, and Lead Hazard Control and Healthy Homes, in certain cases;
  • Abandoned Mine Lands Emergency Program, the National Instant Criminal Background Check System, and FEMA disaster payments.

State and local leaders will need to assess whether a program has prior-year federal funds available: if that is the case, federal regulations may allow the use of unspent funds for obligations incurred in the current federal fiscal year; many discretionary programs fall into this category: for example:

  • Most Department of Justice grants may continue as long as sufficient funds remain.
  • Funding for Department of Homeland Security grants are available for multiple years. Moreover, most grants are not awarded until well into the fiscal year, and some—such as the Homeland Security Grant Program—have project periods which begin late in the fiscal year.
  • Many Environmental Protection Agency programs have periods of performance which are set when funds are awarded, and some allow for extensions.

Cities, counties, and states may spend down grant funds during a shutdown to meet matching or maintenance of effort (MOE) requirements, unless Congress specifies otherwise.

Snag Risk? There is a potential snag: if the federal government is not operating, many critical staff will not be present to process grants, or otherwise provide assistance, process checks/payments, approve actions, etc. While many federal agencies specifically indicate in their contingency plans that payments of non-lapsed funds would continue to be processed, the Environmental Protection Agency staff would not be available to make payments, so only grant recipients utilizing the Automated Standard Application Payment (ASAP) system will be able to make draw-downs. The Department of Homeland Security reports that agencies may continue to disburse funds from non-lapsed funding sources; however, the Department also specifies that it will stop all financial system operations, including payment processing, except from exempt activities. will be operational during a shutdown, including the contact center. If an application deadline falls during the shutdown, agencies could issue an extension.

What Does It Mean to be in like Flint?


December 19, 2018

Good Morning! In this morning’s eBlog, we report on the physical and fiscal challenges to a municipality to recover from a state-caused physical and physical crisis? 

Out Like Flint? In a city where 41.2 percent of the residents live in poverty, the annual family median income is $26,300, and where utility rates are among the highest in the country, water and sewer bills create an ever-present burden for Flint’s 99,000 residents. Citizens have had to borrow hefty sums to keep their service from being shut off, and sometimes illegally turn the water back on themselves, fearing that Child Protective Services might remove children from a home without working taps and toilets. In Flint, the city’s fiscal crisis preceded, but set the stage for the lead-contamination drinking water crisis that has exposed most of the city’s 9,000 children to the potent neurotoxin, which is linked with reduced IQ, behavioral problems, and kidney damage. The city’s physical and fiscal challenges are intertwined: Flint’s problems include crumbling infrastructure and a dwindling tax base, which have led the city to rely increasingly on its water and sewer revenue to keep its coffers afloat. The moves have helped drive water rates in Flint to the highest in the country, averaging $75.84 a month, according to a report from the nonprofit group Food & Water Watch. Total utility bills, including sewer service, are about twice that.

Now, in the wake of trials and intergovernmental challenges, and stalwart pressure from Flint Mayor Karen Weaver, is making clear her city’s readiness to assume full control of its drinking water system: the City of Flint and the Michigan Department of Environmental Quality have reached an agreement to create a schedule for the state to gradually draw back, especially in the wake of Mayor Karen Weaver’s FAST Start program, which began two years ago in March: crews from area companies have completed excavation at 19,364 homes. As of last April, 10,581 homes had been checked. According to reports from contractors, crews have identified copper service lines at a total of 8,964 homes, 1,567 homes have been identified as having lead and/or galvanized service lines. That means, to date, service lines to 7,795 homes have been identified as lead and/or galvanized and have been replaced, including 1,567 homes found this year. The efforts are a part of Mayor Weaver’s plan to determine if water service lines are made of copper, and replace service lines made of lead and galvanized steel. She has been determined to restore safe, clean drinking water to Flint residents.

The road back to solvency in the wake of the end of a state takeover via the appointment of an imposed emergency manager, who, notwithstanding the state’s role in creating the health crisis, current Chief Financial Officer Hughey Newsome credits with helping the small city to get its financial house in order; nevertheless, CFO Newsome said Flint’s fiscal future remains uncertain, an uncertainty that could potentially be magnified by the city’s drinking water crisis that resulted from a series of decisions made while the city was under state imposed emergency management: “The after-effects of the water crisis–including the dark cloud of the financials–will be here for some time to come…We’re not out of the woods yet, but I don’t think emergency management can help us moving forward.” Indeed, the lead in the city’s drinking water struck just as the city was striving to recover from massive job and population losses following years of disinvestment by General Motors. Nevertheless, the city amended its budget procedures and modified both its pension liabilities and post-retirement health care benefits, managing to stay out of filing for chapter 9 municipal bankruptcy.

By the end of FY2010, the City’s annual deficit had grown to nearly $15 million, according to the state; state officials accused the city’s leaders of failing to stick with its previous deficit elimination plans and going further into the red—a deficit which grew nearly 25% by the following year when the state usurped local authority via the appointment of an emergency manager—one who created a strategic plan, a five-year financial projection, fund balance reserves, including a budget stabilization fund and mandated the funding of post-retirement healthcare and pension benefits. Nevertheless, it seems there are indelible physical and fiscal omens of fiscal distress. Mayor Karen Weaver’s proposed budget for 2018-19 plans for a more than $276,000 general fund surplus; however, those projections point to a more than $1.75 million potential deficit in 2019-2020—a deficit projected to grow to more than $8 million by 2022-23.

The Council began, notwithstanding that deficit, to discuss nearly $1 million in upgrades to Flint’s water pollution control facilities, road construction, and its biennial budget. A key issue, water, remains a central focus: Flint’s existing water pumps, valves and check valves in the east pumping station are old, outdated, and in urgent need of replacement, according to a Flint utility maintenance supervisor John Florshinger, who notes such improvements “will increase reliability and reduce operational and maintenance costs: they are guaranteed not to clog and will prevent sewage backups into basements.” But finding the resources will be a challenge in a city where its reputation gained in the wake of the drinking water crisis has led to falling assessed property values, in no small part attributable to its high crime rate—and the fear for families which might be considering moving to the city, which is experiencing a steady, declining school population, but one of the highest crime rates in the nation for a city of its size.

A key goal, thus, for Flint, is to have all of its lead-tainted service lines replaced by the end of next year—something vital to restoring trust in its leaders—but a massive challenge, which will require excavation of some 18,313 galvanized or lead pipes—an effort for which the finish line is set for late next year—a fiscal and physical challenge which Flint officials have hailed as the most ambitious timeline to replace pipes in the nation (a similar program in the state capitol of Lansing took 12 years).

Science & Governance, & Trust. Despite all, city residents are still advised against using Flint’s tap water even though testing has shown lead levels have receded below federal action standards for about two years: experts have recommended against letting residents resume drinking Flint’s tap water until after all of the corrosion-weakened lead and iron water service lines are replaced. In an intergovernmental fiscal and physical crisis which led Michigan Attorney General Bill Schuette to file criminal charges against members of Gov. Rick Snyder’s administration, including involuntary manslaughter, and water regulators with the state’s Department of Environmental Quality; two state impose emergency managers appointed by Gov. Snyder have also been criminally charged. That is, the city’s water crisis has led to political trust erosion and an increased lack of trust of government officials and even water quality experts that some Flint officials said may take a generation or two to fix.

One of the most critical persons to alleviating the severe threat to the city’s children, Virginia Tech water expert Marc Edwards, described the pipe excavation and replacement as a “monumental achievement for the city of Flint and state of Michigan,” adding: “That said, it is unrealistic to expect that achieving this milestone will win hearts, minds, or trust.” That was a comment with which Mayor Weaver concurred: “Since 2014 the residents have struggled with…not being able to trust the water and the government, understandably.”

Mapping a Plan of a Post-Chapter 9 Skyline


December 13, 2018

Good Morning! In this morning’s eBlog, we report on the physical and fiscal challenges to Michigan Gov. Rick Snyder’s lead replacement and drinking water regulations in the wake of the Flint drinking water crisis, and then we peer south to Detroit, where the recovery has now reached a point when leaders are battling over the future character of Detroit’s downtown. 

Out Like Flint? A coalition of municipal water agencies have sued in state court in Michigan: they are seeking to invalidate what they deem Governor Rick Snyder’s “incomplete and arbitrary rules” with regard to lead pipe replacement and lead drinking water regulations prompted by the Flint water crisis. Many consider the state’s lead rules to be the strictest in the nation: they would drop the “action level” for lead in drinking water from the current federal limit of 15 parts per billion to 12 ppb by 2025. The administrative rules also give municipalities two decades in which to replace an estimated 500,000-plus lead service lines in a state, the third highest number in the country. That has raised two issues: how to finance the cost, and who will pay? But before there, there is a legal challenge from a coalition of Detroit area water agencies, who, earlier this week, filed suit in the Michigan Court of Claims, asserting that the proposed rules “impermissibly compromise water suppliers’ ability to remove lead lines to protect the public from exposure to a wide range of other contaminants in drinking water.,” and that the rules would also violate the Michigan Constitution by mandating that local governments bear the fiscal responsibility to replace private service lines. 

The coalition, composed of the Detroit Water and Sewerage Department (DSW), the Oakland County Water Resources, Commissioner Jim Nash, the Great Lakes Water Authority, and the City of Livonia, is seeking to halt the revised lead and copper water rules which the Michigan Department of Environmental Quality (MDEQ) began implementing last June. The suit charges: “MDEQ launched the stakeholder engagement process in July 2017 accompanied by an announcement that the Rules would have to be finalized by the end of the year…This abbreviated timeline limited plaintiffs’ ability to work through the numerous practical and legal complexities involved in implementing the rules which require the digging up of infrastructure on an estimated 500,000 residential properties.”

It was not as if the issuance came as a surprise, so, unsurprisingly, defenders had already attacked, arguing it is wrong to oppose the state as it seeks to prevent another Flint water situation, or as HopCat and Grand Rapids Brewing Company founder Mark Sellers put it: “My business relies on fresh clean water as the main ingredient in our product. Without clean water, we can’t serve beer, and without beer—we have no business.” But the cost, estimated at $2.5 billion to replace both the public and private portions of lead service lines by local agencies, and, as the suit notes: “Without any known funding from the State,’ will necessitate the digging up of service lines on private property, which could well lead to lawsuits by ratepayers against local agencies, with defenders arguing there would be violations of the Constitution and Michigan laws. In addition, local agencies have accused the Snyder administration of acting before EPA completed a study of whether lowering the lead action standard to 12 parts per billion or the originally proposed 10 parts per billion would actually benefit the health of residents: “MDEQ has not provided an explanation for why it changed the lead action level before the EPA completed its study; what information it studied and considered in doing so; and why it abandoned its initial proposed action level of 10 ppb for 12 ppb?” Detroit Water & Sewer Director Gary Brown said his agency is a “leader in our state in replacing lead service lines to reduce the risk of lead in drinking water;” now, however, he is concerned the new rules will drive up costs too much for consumers—0mayhap especially in a city where 34.5% of the citizens fall below the federal poverty level—and where there are an estimated 125,000 lead service lines, the court filing states. Thus, unsurprisingly, DWS Director Brown notes: “We support what the revised Michigan Lead and Copper Rule intends to accomplish. Our concern is the unfunded mandate as written violates the Michigan Constitution: Not only that, but it also may make Detroit residents face double-digit rate increases, puts other public health projects at risk by diverting an estimated $40 million annually from water and sewer main infrastructure repairs, and requires an unrealistic time frame.”

The coalition of local governments and water utilities deem the water regulations an overreaction to the lead contamination in Flint. Officials with the Southeast Michigan Council of Governments, which represents municipalities across seven Detroit-area counties, question the necessity and cost effectiveness of a plan to mandate each system to replace, on average, 5% of its lead service pipes per year over 20 years starting no later than 2021. Engineer Kelly Karll of the COG notes the replacements would be done even if lead were “not an issue, even when the sampling says it’s not an issue.” Even though the Great Lake authority’s system has no lead service lines, officials said its member communities do; thus they have joined the lawsuit to ensure its member communities “have a seat at the table in the discussion of amendments to the rules: One of GLWA’s top priorities is the protection of public health and safety. As such, it supports aggressive action against exposure to lead, as well as other emerging contaminants of concern…However, the Authority believes that any changes to rules and regulations governing these contaminants must be done in a manner that is thoughtful and consistent with the law.”

Shaping a City’s Future. While Detroit, under its municipal bankruptcy chapter 9 plan of debt adjustment has constructed a remarkable fiscal recovery from the largest municipal bankruptcy in the nation’s history, the physical part of building a new future has been more trying: now the old Detroit Saturday Night building has emerged as the latest flash point in what has been shaping up as a battle over the future character of Motor City’s downtown. With building owner Emmett Moten Jr. initiating plans to demolish the building and create a parking structure in order to pay back a loan from the Detroit pension fund, historic preservationists are pressing for the city to intervene to halt the demolition—with the parties set to confront each other next week when the Historic District Commission discusses the possible demolition: because the building is adjacent to the Fort Shelby Hotel, which has been designated—and which Mr. Moten also owns, the Commission must give its opinion with regard to any proposed alterations, albeit the governing process in the wake of any such assessment is unclear.

Last August, in the wake of news that a demolition company contracted by Mr. Moten had attempted to pull a demolition permit—a request denied and flagged because of the proximity to the Fort Shelby, activists wrote to Detroit City Clerk Janice Winfrey and the City Council requesting a historic review of the building and a temporary historic designation to stop a possible demolition—a request which has been awaiting next month’s return from the Yuletide Council recess; ergo the building remains unprotected. Once Mr. Moten fulfills the requirement of presenting his plan before the HDC, a demo can likely be pulled.  

A statement issued by the City notes: “The Commission’s recommendation is strictly advisory and speaks only to the demolition’s potential to affect the adjacent designated local historic district (the Fort Shelby hotel).”

Here, preservationists contend the 1914 building is an important marker of the Motor City’s history—a kind of Aretha Franklin; moreover, they believe Detroit does not need more parking lots. However, Mr. Moten, served as former Mayor Coleman Young’s so called “development czar” from 1979 to 1988 and  who purchased the building in 2007 (mayhap, ironically, the same year he purchased and rehabbed the neighboring Fort Shelby with a loan from the Detroit Pension Fund), maintains that parking has always been his plan for the Fort Shelby development. It was just that the recession undercut his ability to act earlier, so that, now, he describes the current demolition efforts as “punishment…This is using historic preservation to punish people.” Eleven years ago, Mr. Moten took on the Fort Shelby project with the purchase of three neighboring properties: the hotel, which has been an “historic district” since 2004; the old Detroit Saturday Night building, and a surface parking lot: all three properties were purchased with a loan from the Detroit Pension Fund. Now he believes that the need for parking has become more urgent as there has been more a struggle to pay back the pension fund. Indeed, two years ago, with approval from the board of trustees of the pension board, Mr. Moten and his partners began to sell some of the units within the Fort Shelby as condos to recoup funds. However, he asserts that selling the condos has become more difficult without corresponding parking, adding: “It’s not like we’re putting the lot in there for hockey and football fans,” adding that city officials had sought to offer a compromise, offering a parking lot option two blocks away. But he believes this would be unreasonable for condo purchasers and would bring down the value of the units: “This takes care of the customers…I was supposed to be doing this a while back. We need parking for our customers. The value of the property would go down (with parking two blocks away), and the lender, the General Retirement Pension Fund, does not get its needed payoff. They’ve been fair, so I want to be fair to them,” adding that the pushback from preservationists is, in his view, unreasonable, specifically since he has done so much work to maintain and rehab the Fort Shelby hotel—or, as he put it: “I don’t go around knocking down buildings; we save buildings. Don’t we get credit?” He added that if historic preservationists want the Detroit Saturday Night building, they could purchase it from him. Then Rachel Partain, a spokesperson for the retirement fund, stated, referring to the building: “It was the General Retirement System of City of Detroit’s understanding that the building at 550 would become parking,” adding that the current principal balance on the Fort Shelby Residential LLC loan, on Sept. 30, was $5,875,548, noting the “lender is current on its terms…As each condo is sold, the borrower is making a significant payment toward the principal.”

A municipal bankruptcy’s plan of debt adjustment focuses on a step-by-step plan to restoring fiscal balances, as opposed to physical balances that will define a city’s skyline for the future—one which, in Detroit—many hope will not be composed of “unattractive surface parking.” But for a city, nearly deserted and empty when I walked to the Governor’s Detroit office on the first day of the city’s historic chapter 9 bankruptcy, the challenge now is how vibrant should a rebuilt downtown be, and, as Mr. Grunow puts it: “There are more parking spaces downtown today than at any other point in the history of the city…It only underscores the need for us to adopt some clearheaded policies around managing parking downtown.”

Challenging Fiscal Odds?

December 11, 2018

Good Morning! In this morning’s eBlog, we report on the fiscal challenges of doing something the federal government no longer is able to do: balance budgets—first considering the leadership efforts in Multnomah County, Oregon, before looking east to the Platte County, Missouri, which appears to be on the precipice of a default, and, finally, heading south to Puerto Rico to warm up from this week’s bitter chills on the mainland.

Challenging the Governing Odds. Multnomah County, Oregon, 264 years old, in the eastern part of Washington, was where County commissioners met for the first time on January 17, 1855. The county, named after the Chinookan word for the “lower river,” referring to where the Oregon City Falls splash toward the Columbia River, gained its political makeup after, nearly a century ago, in 1924, the county’s three commissioners were indicted and recalled by voters “in response to ‘gross irregularities’ in the award of contracts for construction of the Burnside and Ross Island bridges,” since these bridges had been supported by the Klu Klux Clan. Today, the County’s five-year General Fund forecast contains a challenging paradox for the upcoming FY2020 budget and beyond: while the Portland metropolitan area’s economy remains robust, and local unemployment remains at low levels, the County will be unable to cover the cost of current General Fund services in the coming years—seemingly due to fast-growing labor costs and revenue growth hobbled by the structure of its property tax system. In its upcoming FY2020 budget, County, County General Fund resources will be $5.9 million, a level just over 1% short of covering the cost just to maintain current service levels; costs are projected to continue to outpace revenue growth by $5 million to $10 million per year in the following years: that means that over the next five years, as a result of this structural deficit, the County’s leaders will need to find $35 million in new revenue, make ongoing program reductions, or find some combination of the two: the onerous fiscal and governing challenge will to come up with the equivalent of cuts and new tax revenues to equate roughly 5 percent of its current General Fund operating expenditures.

It appears this growing deficit is driven by a fundamental mismatch between the County’s major revenue sources and cost drivers: on the revenue side, constitutional property tax limits and the plateauing of our economically sensitive revenues (business income taxes and motor vehicle rental taxes) result in slower, but steady, revenue growth. At the same time, rapid growth in housing and energy prices have driven up inflation, which has translated to a higher cost-of-living adjustment: the County’s 6.6% labor cost growth for FY2020 is driven by an estimated 4.0% COLA, higher public pension costs (an increase of 2.2% of payroll), and labor contracts settling above the status quo.  If there is some good gnus, it is that there appear to be fewer fiscal uncertainties for FY2020, because nearly all of the County’s open labor contracts have been settled, and funding has been secured for the County’s major facility projects. With the midterm elections behind it, there appear to be fewer potential state ballot measures in play. Over the longer term, the County faces a two-fold challenge in preparing its FY2020 budget: the first will be closing the $5.9 General Fund deficit while maintaining critical services for its residents; the second will be maintaining financial resilience as the County’s leaders prepare for a potential next recession and addresses its growing structural deficit.

Attention Yuletide Shoppers: Shopping for Fiscal Fallout? Platte County, Missouri, a county of nearly 90,000 named for the Platte River, and organized in 1838, has been shopping for fiscal trouble: it seems the Zona Rosa shopping center bonds the County issued have become the subject of a lawsuit to determine which party will be held responsible for the fiscal shortfalls in the wake of the County’s failure to make a payment on the Zona Rosa bonds. Last week, Moody’s moodily downgraded unrelated municipal bonds, including Platte County’s Neighborhood Improvement District bonds and the Special Obligation Refunding and Improvement Building bonds. The issue relates to the shopping center’s continued failure to generate enough sales tax revenues to retire bonds, creating a payment shortfall. Although the shopping center’s previous owner, Olshan Properties, traditionally paid the difference, the new owner, Trademark Property Co. of Fort Worth, Texas, has made clear it is not obligated to cover revenue shortfalls. The bond trustee, UMB Bank, has argued that the County should make up the difference. Unsurprisingly, however, Platte County asserts it is not legally obligated to pay; indeed, last month, the County filed a petition seeking a declaration of its legal obligation. A bench trial is scheduled for May 24. For County leaders, the issue involves potential risk for its taxpayers. Here, the private activity municipal bonds, issued to finance for private-use parking garages in the shopping center, are essentially a private loan to benefit a commercial enterprise, so that, unsurprisingly, the County is less than eager to picking up the tab for a private enterprise which is seeking to walk away from its fiscal obligations. But a default could have fiscal repercussions for the County, which appears to be left holding the proverbial bag: it appears to be at risk of default should it opt not to make a bond payment on the shopping development—a payment due on Zona Rosa’s parking garages which was due at the beginning of the month—two days later, Platte County Circuit Court Judge James Van Amburg issued an order that Platte County must set aside $763,390 in a reserve fund until conclusion of the pending lawsuit. Thus, even though Commissioners have said they had not decided if they would cover the payments, and that they were unlikely to without a long-range plan; the matter now lies in the judicial realm. At the end of last week, Judge Van Amburg denied a motion filed by UMB Bank, the trustee for the bonds, seeking an injunction to require the county to pay the 2018 shortfalls on the Zona Rosa Bonds. Early last month, the county filed a petition seeking a declaration from the circuit court regarding the legality of a demand that the county repay bonds issued in 2007 for infrastructure at Zona Rosa. Judge Van Amburg set this matter for a bench trial next May 24th—where Platte County appears certain to assert that, contrary to the trustee’s demand, it has no obligation to make payment on the bonds. Because the bonds issued for Zona Rosa are revenue bonds, the sole source of funding for repayment comes from a 1 percent sales tax within Zona Rosa. The County has also asserted that the trustee’s demand is inconsistent with the Missouri Constitution, which prevents the county from incurring debt without taxpayer approval. According to the lawsuit, the Platte County Commission has sole discretion on whether to appropriate and use taxpayer funds to pay the bonds.  For now, the payment shortfall was covered by the trustee itself from a reserve fund. Tax collections to finance the bonds in Zona Rosa have come up short every year, but former ownership covered the shortfall until last year. Two months ago, the County received notice from the bond trustee that revenues to make the bond payment were short more than $1 million.

The issue for the County’s leaders, who under the misimpression that the county is not legally obligated to provide fiscal/financial assistance to the shopping center, is what the fiscal implications might be: at issue is that the Zona Rosa was financed in reliance on the issuance of municipal bonds which were to be financed via dedicated tax revenue from the development. But the project had the misfortune of opening in the middle of the Great Recession and has struggled with high vacancy rates for years. Tax revenue has consistently fallen short of expectations. After all, an empty shopping center not only imposes greater police costs, but also sharply reduced sales and use, and property tax revenues. Unsurprisingly, County officials argue that taxpayers should not be stuck with the tab. But municipal bond guru Matt Fabian warns that it will now be more expensive for the County to issue municipal bonds, because of the likely difficulty in finding purchasers of its debt, where that debt repayment depends on an annual appropriation from the government, or, as Mr. Fabian put it: “It hardly seems worth it when just restructuring the debt could have been an easy fix…From an economic development perspective, you’re now a non-investment grade county walking away from a bond. It’s hard to talk companies into moving there if that’s your debt profile.” For the County leaders, it seems clear that Santa is unlikely to step in and add something to their stockings: instead, a lump of proverbial coal appears likely—in the form of Platte County Circuit Court Judge James Van Amburg’s order that the County must set aside $763,390 in a reserve fund until conclusion of the pending lawsuit.  (Tax collections in Zona Rosa have underperformed every year, but the previous ownership covered the shortfall until last year—leading up to last October’s notice from the bond trustee that revenues to make the bond payment were short more than $1 million.) Like a lump of coal, the credit rating agencies have reduced the county’s credit rating: since the suit was filed last month, S&P has reduced Platte County’s bonds to junk rating.

Feliz Navidad? In the wake of the offering of a resolution in Congress by the Hispanic Caucus to reject the antiquated cabotage laws of the 1920 Jones Act, with the resolution noting said regulations are detrimental “to the development and economic well-being of the United States,” particularly for Puerto Rico, Alaska, and Hawaii; the Puerto Rico House of Representatives might consider acting on a measure to insist upon Congressional action, with the issue raised and ratified at a meeting of Hispanic leaders in San Diego last Saturday. As adopted, the resolution calls on President Trump and the Congress to promote to repeal of the statute, with the resolution reading: “According to a report published by the U.S. Commission on International Trade, it is estimated that the Jones Act causes between $50 million and $150 million in combined annual economic damages to the residents of Alaska, Hawaii, and Puerto Rico.” Under the federal rules of cabotage, the transport of maritime cargo between the mainland and Puerto Rico must be on ships that are built, owned by, flagged, and personed by an American crew. Jose Aponte, of the New Progressive Party, noted: “The imposition of the Jones Act (which does not apply to other jurisdictions in the Caribbean) on Puerto Rico has a devastating effect on the price paid to bring goods such as basic necessities, food, and even fuel.” To date, however, a cabal of ship-owners, with the support of House and Senate Republicans, and unions, supported by the Democrats, has prevented any progress in Congress in favor of eliminating or softening the federal cabotage rules. The government of Puerto Rico has indicated that it plans to present a proposal to the Trump administration in an effort to achieve a temporary administrative exemption which would allow the transportation of natural gas on foreign ships between U.S. ports and Puerto Rico. The efforts came as, last week, in the wake of a forum sponsored by the Cato Institute on federal cabotage rules, the arguments in favor of the Jones Act of 1920 were questioned: American Enterprise Institute economist Desmond Lachman noted: “Exempting Puerto Rico from the Jones Act would help the island substantially reduce the cost of its imports.”

Regalitos? Puerto Rico Gov. Ricardo Rosselló has signed legislation to overhaul Puerto Rico’s tax laws in a bid to attract foreign investment and help workers and some business owners as part of an effort to end a 12-year recession. The new provision creates an earned income tax credit, reduces a sales tax on prepared food, and eliminates a business-to-business tax for small to medium companies; according to officials, the new legislation represents nearly $2 billion in tax relief at a time when the U.S. territory is struggling to recover from Hurricane Maria and restructure a portion of its more than $70 billion public debt load. According to the Governor, the earned income tax credit will result in benefits ranging from $300 to $2,000 for each worker, representing a total of $200 million in annual savings. He also said an 11.5 percent sales tax on processed food will drop to 7 percent starting in October 2019. The legislation eliminates a business-to-business tax for businesses which generate $200,000 or less a year, representing $79 million in savings in five years, according to the Governor; while Treasury Secretary Teresa Fuentes noted that nearly 80 percent of businesses in Puerto Rico will benefit from that measure, adding that the new law reduces the tax rate for corporations from 39 percent to 37.5 percent—or, as she put it: “Today marks an important day for maintaining Puerto Rico’s competitiveness.” The measure also legalizes tens of thousands of slot machines, but also limits the number of machines owned, with legislators estimating they will generate at least $160 million a year. Up to $40 million of that revenue will go to the government’s general fund, with the remaining funds directed to help municipios and police officers.

Could the Grinch Steal Christmas? However, PROMESA Board Executive Director Natalie Jaresko has repeatedly said the U.S. territory needs a much broader tax reform to improve revenue collection and promote economic development. In addition, she asserted that the PROMESA Board also is concerned that the government and legislature have not proved that the changes will not “cannibalize,” a concern apparently shared by Antonio Fernos, a Puerto Rico economics and finance professor, who questioned the effectiveness of the new law, which appears to generate less overall revenue: “It doesn’t make sense: Why are they doing this, especially on an island that is insolvent and needs more sources of revenue?” Professor Fernos also argued that the earned income tax credit is insufficient to lure people out of the informal economy: “I don’t foresee anyone abandoning tax evasion schemes.”

Double Fiscal Standards? While Gov. Ricardo Rosselló said the new tax reform would provide $2 billion in tax relief to Puerto Rico’s taxpayers while cracking down on tax evasion, the PROMESA Oversight Board promptly released a statement questioning whether the reform would be revenue neutral—a term unknown any longer by the Trump White House or Congress. Instead, the PROMESA Board demanded that Gov. Nevares Rosselló certify the fiscal plan complies with the overseers’ plan by next Wednesday the 19th. The Governor put forth the plan, asserting it would be “fiscally neutral,” unlike the plan proposed by House Ways and Means Committee Chair Kevin Brady (D-Tx.). As proposed, the tax bill would provide for an earned income tax credit, reduction of individual and corporate tax rates, lowering of the sales and use tax rate for prepared foods, and elimination of the business to business tax for businesses with annual gross sales under $200,000—or, as the Governor described it: “We have reduced government’s operating expenses by nearly 22 percent when compared with the expenses of 2016…These fiscal responsibility actions allow us today to present this reform that is fiscally neutral and every dollar that is granted to the people has a source of repayment.” If the Legislature approves, the new tax credit would provide annual payments to low-income workers of between $300 and $2,000, depending on their income and number of dependents, and the sales and use tax rate on prepared foods would be reduced more than one-third to 7% from 11.5%, while the corporate tax rate would drop to 37.5% from 39%; individuals would be given a credit equal to 5% of their tax bill, the changes would be adjusted to reduce tax evasion and deduction abuses. Perhaps taking a page from Atlantic City, the plan would make legal video lottery machines—and taxes on such activities, with half the new tax revenues derived dedicated to support police pensions, 45% to support municipios’ finance health care insurance, and 5% to cover the administration costs for the video lottery machines. Puerto Rico Office of Budget and Management spokeswoman Iliana Rivera Deliz noted: “The tax reform has an average cost of $250 million per year for a total of over $1.09 billion in 5 years, without considering the earned income tax, which grants another $1 billion to eligible taxpayers [in the same period].”

Could Last November’s Elections Help Clear the Path for Restoration of Puerto Rico’s Fiscal and Governance?

December 10, 2018

Good Morning! In this morning’s eBlog, we report on unsettling apprehensions with regard to impressions that the White House is interfering with fiscal and physical recovery efforts in Puerto Rico.

Equal TreatmentIn a letter to Office of Management and Budget Director Mick Mulvaney, U.S. Senate Minority Leader Charles Schumer (D-NY) and Ranking Senate Appropriations Committee Member Sen. Patrick Leahy (D-Vt.) at the end of last month insisted upon disbursement of CDBG funds for disaster assistance to Puerto Rico, and that new resources be allocated to match FEMA assistance for the collection of debris and emergency measures, with Sen. Schumer writing: “Due to excessive delays in the administration of the CDBG-DR program, those funds are still unavailable.” Although HUD Secretary Ben Carson had flown to San Juan when he commemorated the first anniversary of Hurricane Maria to announce the agreement which was understood to provide for the disbursement of the first $1.5 billion in CDBG-DR funds for the reconstruction of the island, until this end of week, not a single penny had been delivered. Governor Ricardo Rossello Nevares had hoped that first installment would began to be disbursed last month, in the wake of, in October, Puerto Rico Secretary of Housing Fernando Gil Enseñat had been advised the rules of implementation and eligibility of the funds would be issued. Thus, Minority Leader Schumer was requesting the OMB Director to accelerate the notifications that are required to deliver the funds. There was some pre-Christmas hope that, in the wake of reports that President Trump had asked the Republican leaders of the House and Senate Congressional Appropriations committees that, in the new funds to mitigate natural disasters of 2018, resources for Puerto Rico would be included. However, Senators Schumer and Leahy believe that OMB has pressed for decisions to reduce the levels of assistance. OMB Director Nick Mulvaney was warned: “You cannot argue that additional resources are unnecessary for the recovery of Puerto Rico, because they have not yet used the resources already allocated, when you are the main factor that prevents federal resources from being available and used in an immediate term for the efforts of permanent recovery.” The letter noted their apprehension that Governor Rossello Nevares had been pressed not to seek an exemption from FEMA’s matching funds requirement in the areas related to reimbursement for funds to remove debris and other emergency tasks. That matching requirement of 25% could represent a cost of hundreds of millions of dollars to Puerto Rico’s government—or, as the two Senators had noted: “It is fundamental that the recovery phase of this disaster has a sense of urgency, that it surpasses the speed of the typical bureaucracy and there is solidarity with the unique challenges that Puerto Rico faces.” Rather, in their letter, they encouraged the President to collaborate with them in the drafting of language to ensure that the next funds that are allocated related to the reconstruction of Puerto Rico will not be used, directly or indirectly, to finance the territory’s public debt.

Too Many Cooks in the Fiscal Kitchen? 34 Members of Congress last week wrote a letter calling on PROMESA Board to rethink its policies and practices with regards to the restructuring of Puerto Rico’s debt and to align them with PROMESA’s mission—a mission they believe is focused upon ensuring the funding of essential public services, providing for a debt burden which is sustainable, and allowing for investments necessary to promote growth. Indeed, with a new Congress set to convene in January, the epistle appeared focused upon putting the Board on notice that its austerity measures as reflected in its current Fiscal Plan for Puerto Rico are causing undue hardship on the general population, while at the same time aggressively pursuing payment for its creditors and incurring in operational costs upwards of $1.5 billion in a five-year period.

The letter comes at a pivotal moment in a fiscal and governance situation in which there appear to be too many cooks in Puerto Rico’s kitchen: a federal Judge, the PROMESA Board, the elected Governor, and Puerto Rico Legislature—not to mention the President and a new Congress. Thus, with the current PROMESA rotation of the Board ending next summer—a time when said members could be re-appointed or replaced—or take a bow, because their task had been completed, under the statute, wherein two members of the board are selected by the Majority in the House, one by the minority; two by the Senate majority, one selected by the Senate Minority of the Senate, and one by the President. Thus, there can be little question but that there will be a change—but the change could also be affected by pending litigation in the First U.S. Court of Appeals, where the selection process itself is currently under constitutional challenge, by both Republicans and Democrats, for noncompliance with the appointment clause. Thus, there appears little doubt that this seeming vestige of colonialism will be revisited—mayhap leading to changes to the Jones-Shafroth Act. Incoming Chairman of the House Natural Resources Committee Rep. Raúl Grijalva (D-Az.) has publicly stated that his focus will be on economic development, not on the island’s sovereignty or political status.

PROMESA is a limited, temporary measure aiming to stabilize the current economic crisis. It fails to confront the underlying political conditions that created the circumstances for the collapse of the Government of Puerto Rico. From a political perspective the FOMB embodies the limitations and insufficiency of the current territorial model. Political problems require political solutions.  

In a sense, PROMESA appeared to be similar to a chapter 9 municipal bankruptcy process to produce a plan of debt adjustment; however, it provided too many overseers—raising not only difficulties in settling on a single plan of debt adjustment, but also significantly taking away fiscal resources which could have accelerated Puerto Rico’s physical and fiscal recovery—and put in place a plan to address the ongoing out-migration of Puerto Rico’s young and educated citizens.  In effect, Congress and the White House have put Puerto Rico in a modern-day Twilight Zone: it is not a state; it is not a municipality. Some describe the federal tax treatment of Puerto Rico as a foreign, rather than U.S. jurisdiction, for instance, as justified under the Supreme Court’s insular cases, which classify it as an unincorporated territory—a status which not only does not exist in the U.S. Constitution, but also treats Puerto Ricans as second class citizens—or, as law Professor Andrés L. Córdova  of the Inter American University of Puerto Rico put it: “It is highly suspect for 34 members of Congress to call the PROMESA Board to account for its performance, with its clear class struggle undertones, while at the same time failing to address the political status that created the conditions for PROMESA and the FOMB in the first place.”

Legal Challenges to State & Local Governance

December 7, 2018

Good Morning! In this morning’s eBlog, we report on unsettling apprehensions about the fiscal momentum in New Jersey’s Atlantic City, where the seaside city, emerging from a state fiscal takeover, finds its Mayor under federal scrutiny.  Then we head West to Flint, Michigan, as it continues to struggle with the physical and fiscal challenges of the lead contamination in its drinking water. Finally, we seek to bask in the Caribbean, where a most fundamental challenge of federalism appears to be reaching a head.

Challenging the Governing Odds. In the wake, this week, of a non-betting, non-professional fight, Atlantic City Mayor Frank Gilliam, as he closes out his first year in office at a time when the city has fiscal momentum at its back; the Mayor, two days after becoming involved in a fight outside a casino nightclub, has filed the state for the 2021 Democratic primary. His governmental leadership could be threatened after this week’s raid by federal investigators—raising serious obstacles to his odds. Jeffrey S. Freeman, a tax attorney with Freeman Tax Law, which has offices in 15 states, including New Jersey, said that by the time federal authorities come to someone’s front door with a search warrant — as they did with Gilliam — a positive outcome is unlikely. Authorities so far have provided no indication what they were looking for at the Mayor’s residence, but investigators left the home with several cardboard boxes and computer equipment. The raid involved investigators from the FBI and the IRS’ Criminal Investigation Division.

The raid, coming at a time when Atlantic City Councilmember At-Large Councilman Jeffree Fauntleroy II is also facing potential criminal charges related to roles in a fight captured on surveillance cameras last month outside Haven Nightclub, means the pair of elected officials are scheduled to make a first appearance in North Wildwood Municipal Court on Tuesday in response to citizen complaints filed for simple assault and harassment, both of which are disorderly persons offenses. For the city, the Mayor could be in legal and re-election jeopardy—jeopardy beginning with a potential recall petition effort.

The Atlantic City Democratic Committee formally adopted a resolution earlier this month denouncing Mayor Gilliam and Councilmember Fauntleroy for their role in the nightclub incident. In Atlantic City, which has a well-documented history of political corruption and criminality, the public perception of guilt could outweigh the reality of the situation, according to John Weingart, the Associate Director of Rutgers University’s Eagleton Institute of Politics and director of the institute’s Center on the America Governor. Mr. Weingart notes: “Even if the Mayor is exonerated, the past slows down political momentum…At a time when Atlantic City begins to show signs of a resurgence, this looks like more of the same old, same old to a lot of people,” he said. “It’s caused serious damage to the city and its image…It’s the last thing the city needed right now.” The timing could hardly be less portentious—coming after the city had worked its way out of state fiscal oversite and seen its credit rating soar from a CCC to a B in October. As our brilliant colleague Marc Pfeiffer, the Assistant Director of the Bloustein Local Government Research Center at Rutgers University put it: “These are self-inflicted reminders of the value that state oversight and engagement brings to the city.” Moody’s spokesman David Jacobson said, “We don’t see a credit impact at this juncture,” when asked about legal uncertainty with Atlantic City’s mayor, but the stability and leadership in governance—especially during the critical period of implementing a quasi-plan of debt adjustment and attempting to display that a state takeover is unnecessary hardly seems consistent with these new events.

In like Flint? Flint officials this week report the city is a year ahead of schedule in tackling a court-mandated order to address lead service lines as the city seeks to recover from its contaminated water and fiscal crises. But some of those efforts could be in jeopardy after an environmental group has sued, seeking to modify the accomplishment—adding new legal costs for the fiscally stressed municipality, but also a harsh blow after the city reported checking more than 18,000 service lines, and replacing 7,700. Mayor Karen Weaver said there are between 10,000 and 12,000 more to check, and officials have dealt with those deemed the highest priority, describing this as a “huge step toward” in the city’s efforts to move “from crisis to recovery,” albeit she cautioned residents to keep drinking bottled or filtered water until all construction work is done and tests have been completed, stating: “Getting the poison out—that was my first priority.”

Nevertheless, the city could now be confronted by an expensive legal challenge from the Natural Resources Defense Council, which is part of a lawsuit over the lead issue: the NRDC claims the city ha not prioritized homes most likely to have lead and galvanized steel pipes. It adds thousands of the excavated pipes have been copper. A landmark legal settlement reached early last year calls for fully removing the lead pipes by the end of next year. “The city has announced it has dug 18,000 holes in the city of Flint, but it has not replaced all the lead and galvanized pipes,” NRDC attorney Sarah Tallman told The Associated Press. “The city is in violation of the … settlement.” The environmental group and others who sued have previously accused Flint of ignoring requirements that allow monitoring of whether the court-ordered deal is being followed. Flint ran into extraordinary trouble when emergency managers appointed by Gov. Rick Snyder put the city on water from the Flint River in 2014 while a pipeline was being built to Lake Huron. The corrosive water was not properly treated due to an incorrect reading of federal regulations by state regulators, and lead leached from old plumbing into homes and led to elevated levels of the toxin in children.

Quien Es El Jefe? In the U.S. territory of Puerto Rico, the PROMESA Oversight Board and Gov. Ricardo Rosselló are continuing to struggle with regard to the Governor’s compliance with the unelected Board’s fiscal plan and approved budget. The Board, Monday, sent a letter to the Governor Monday writing that unless the Governor begins to obey the Board’s demands immediately, the Board would have to “take action to enforce compliance,” apparently referring to a lawsuit. Unsurprisingly, Puerto Rico Fiscal Agency and Financial Advisory Authority Executive Director Christian Sobrino Vega asserted that the PROMESA Board’s understanding of the law was wrong. Indeed, Puerto Rico’s non-voting representative to the Board, released a statement saying the Governor’s administration disagreed with the Board and would release a more detailed response later this week: “Recall the numerous instances where the Oversight Board has proven not to have a perfect criterion…This is one of them.” In the PROMESA Board’s epistle to the Governor, the Board wrote that the Governor was not complying with three mandates of the Puerto Rico Oversight, Management, and Economic Stability Act: First the Board said section 204(b)(4) requires that certain proposed rules, regulations, and executive orders from the Governor must be reviewed first by the Board for consistency with the PROMESA fiscal plan, noting: “In the last month, you have signed three executive orders…which pertain to employee compensation or benefits, and therefore are subject to the policy…Moreover, each of these executive orders increased employee compensation or benefits.” The Board added: “In none of the cases did the Governor seek prior approval from the Board. The Board also complained that Gov. Rosselló had failed to meet a requirement to submit, no later than seven days after laws are approved, an estimation of their impact on revenues and expenditures, and a statement as to their consistency with the fiscal plan. (Since late August, the Governor has signed nearly 100 laws, none of which, according to the Board, had been submitted for review. Finally, the Board charged that section 203(a) requires the Governor to provide, no later than 15 days after the end of each quarter, a report describing how actual revenue and spending have diverged from the budgeted numbers and any other information the Board requests, asserting this had not happened the electric power authority, aqueduct and sewer authority, University of Puerto Rico, or the highways and transportation authority, adding: “These mandates in PROMESA are not optional…The Oversight Board ask you to comply with each of them immediately so that the Oversight Board does not have to take action to enforce compliance.” The Governor’s spokesperson responded: “We are evaluating the Oversight Board’s allegations in its letter and we will be meeting with the Secretary of the Treasury and other government officials to prepare a formal response to the Oversight Board…The government has followed the guidelines issued by the entity when publishing the balance of government accounts and other related reports. In addition, submitting the laws and other administrative documentation of the government for the prior evaluation of the board would render the government inoperative given the amount of administrative determinations that are made daily and that is not the purpose” of PROMESA.

Quien Es Encargado? [Who is in charge?] Two prominent observers of a court hearing this week have reported that the court appears to be leaning towards overturning appointment of the PROMESA Puerto Rico Oversight Board. At a hearing at the beginning of the week on an appeal of a July ruling from Title III Puerto Rico bankruptcy Judge Laura Taylor Swain, the U.S. 1st Circuit Court of Appeals heard arguments from a hedge fund, a Puerto Rico union, and a bond insurer; Puerto Rico House Minority Leader Rafael Hernandez Montañez said he thought the appeals court judges would rule the Oversight Board was unconstitutionally appointed. The arguments related to the Appointments Clause of the U.S. Constitution, with the challenge to the method of appointment that PROMESA specified for the board—a decision which would result in ending the Title III proceedings, as well as the PROMESA Board’s preemptive authority over the Puerto Rico government. The issue relates to the provision of the U.S. Constitution, Section 2, which provides that the President of the United States will appoint “officers of the United States” with the advice and consent of the U.S. Senate. The process Congress used to create the PROMESA Board and governing Authority is inconsistent: rather, Senate Majority Leader Mitch McConnell named two members; the House Speaker named two members; the Senate and House minority leaders each named one member; and the President named one member. In this case, should the plaintiffs prevail, President Trump could be granted authority to name all seven members and then seek the approval of a Republican-majority Senate. For her part, PROMESA Oversight Board Executive Director Natalie Jaresko said, “Judge [Laura Taylor] Swain’s thorough and well-reasoned decision earlier this year ruled that Congress was not constrained by the Appointments Clause of the U.S. Constitution when creating the Oversight Board. We are confident that the Court of Appeals will affirm the constitutionality of the appointment of the Oversight Board as established by Congress under PROMESA.”

It is, however, uncertain what the fiscal and governance outcome might be if the appeals court judges overturn Judge Swain’s decision; all the actions of the board, including putting much of Puerto Rico’s debt into bankruptcy could be declared immediately invalid. The stay on debt-related litigation connected with the bankruptcy could be immediately lifted. The Board’s approved budgets and fiscal plans could be rendered instantly without force; the already approved Government Development Bank for Puerto Rico debt deal and the nearing-approval Puerto Rico Sales Tax Financing Corp. (COFINA) deals could be scuttled. So far, however, there seems to have been precious little discussion about declaring victory and returning governance to Puerto Rico—which, if one thinks about—is demonstrating far more balanced budgeting than either the President or U.S. Congress.

The Challenging Road of Fiscal Recovery

December 5, 2018

Good Morning! In this morning’s eBlog, we report on the long out of the nation’s deepest ever chapter 9 municipal bankruptcy, before turning to the challenging governance issues as the U.S. territory of Puerto Rico begins its own steps to emerge for quasi-colonial fiscal oversight.  

Driving Back to the Motor City Municipal Market. Detroit’s motored back to the municipal bond market yesterday for the first time since its historic municipal bankruptcy, selling some $135 million in municipal bonds, the first sale of bonds backed only by the city’s promise to repay since it filed for chapter 9 municipal bankruptcy five years ago. The city’s timing this time was great: conditions allowed Detroit to secure lower interest rates than initially expected, leaving it paying even less than some borrowers which have not reneged on their debts. The municipal bonds here were priced with yields ranging from 3.36% on a 2020 maturity to 4.95% on the 20-year bonds. The timing also enabled the city to increase the level of its issuance from $111 million to $135 million, an indication of strong demand—or, as Kathleen McNamara of UBS noted: “It’s a perfect recipe to come to market…“They should be very, very happy.” Indeed, it appears that muni investor respect for the manner in which the city has carried out its plan of debt adjustment has fostered fiscal trust and respect: the Motor City’s 5-year bonds carried an interest rate of 3.91%–which was lower than the Windy City’s 4.6%. Not only was that a credit to the Mayor and Council, but it had been foreshadowed by Moody’s Investors Service, which, last May announced an upgrade of the city’s issuer rating and outlook, attributing the debt rating change to downtown Detroit’s surge in employment and tax revenue thanks to the city attraction of higher income residents and large-scale developments. Since 2014, Detroit’s credit rating has gone from B3, to Ba3 stable, which is considered a stable outlook. Mayhap more importantly, the Mayor and City Council have now presided over four consecutive years of balanced budgets while crafting a fiscal plan to stave off a potential fiscal setback by addressing looming pension obligations.

Driving to the Future. Even as the city is recovering remarkably from the nation’s largest municipal bankruptcy in U.S. history, it is racing towards a future—one, interestingly, if not unsurprisingly, based on the automobile industry, as Ford is making use of century old ceiling tiles and utilizing a water-shedding membrane and 3-D modeling techniques for an elaborate redevelopment of Michigan Central Station: work commenced this week on the $350 million project at the depot in the Corktown neighborhood, where the 105-year-old train station is the centerpiece of the Dearborn-based automaker’s planned $740 million mobility-focused campus around Michigan Avenue. Yesterday, Ford and its contractors outlined plans for a three-phase project that will commence with the stabilization, winterization, and drying out of the 505,000-square-foot building, whose architectural details are damaged by every freeze-thaw cycle. It has been vacant and open to the elements since closing in 1988. Phase two involves replacing mechanical and electrical systems and restoring exterior masonry. The final phase entails finishing and restoring the interior.

Last July, CFO John Hill had projected an FY18 surplus of $44 million—a projection which turned out to be deliciously pessimistic: Detroit ended its FY2017 fiscal year with a $53.8 million general fund operating surplus, and revenues exceeding expenditures by $108.6 million. In the 2016 fiscal year, the surplus was $63 million, and it was $71 million for 2015. The city, which is relatively unique in its reliance on income taxes, realized income tax revenue increases of 15% in the last four years; property tax revenues soared, climbing in the most recent fiscal year by more than 80%.

The Cost of Recovery. As part of Puerto Rico’s quasi-chapter 9 recovery—a recovery transfixed between a Congressionally-appointed oversight board and its own self-governance, not to mention a federal judge, reductions in fiscal assistance to the islands municipal governments appears to have adversely affected public safety, especially in smaller muncipios, where mayors have had few options but to cut police departments. Indeed, the cut of some $350 million which Puerto Rico had authorized to compensate the revenues that the municipalities could not raise in property taxes due to an exemption that applies to most of the houses on the island, has forced smaller muncipios to reduce their workforce of municipal guards, frozen squares, reduced shifts of work, and avoid filling vacancies. Or, as Mayor Orlando Ortiz, the President of Puerto Rico’s Association of Mayors and Mayor of Cayey, La Ciudad del Torito, or town of the little bull, put it: “This is happening in all the municipalities, the popular ones, and the penepés. We are all in the same.” In his ciudad, also known as the City of Fog, one of the nation’s oldest (founded in 1773), the workforce of 25 municipal guards was reduced to 15, because he ran out of fiscal resources—or, as he put it: “This fiscal crisis induced by the central government has not taken into account that municipalities are the government closest to the people, and has not realized that when municipalities do these tasks, everything is cheaper and more efficient.” (Cayey has 46,071 inhabitants, according to the most recent data from the 2016 Census Community Survey Estimates.)

For his part, Carlos Molina, the president of the Federation of Municipalities, which brings together the municipal chiefs of the New Progressive Party, and Mayor of Arecibo, agreed that municipalities face a great fiscal challenge with these cuts, even though federal appropriations have arrived from FEMA, reconstruction funds, and insurance payments. Mayor Molina said that in that municipality he had 130 municipal police officers; now he has 70, and he is worried he does not have the resources to fill the vacancies which have arisen from troops who retired, went to work in places with better pay, or who resigned, because they moved to the mainland. To compensate for the lack of uniformed personnel, Mayor Molina has opted for the installation of security cameras to protect his city’s 91,096 inhabitants, noting: “This is in all the municipalities and some are having a worse time,” he said while noting, even as Puerto Rico has imposed these reductions, Puerto Rico’s municipalities have been hit with unfunded mandates to contribute to the employee retirement system, continue payments to cover the Health Reform, and the Municipal Revenue Collection Center, noting: “I am paying to withdraw $ 300,000 a month, which is practically my budget for the municipal payroll.”

On the other hand, Mayor Jose Santiago of Comerío, a small central city of just over 20,000, believes that the massacre registered in his municipality at the beginning of the year, in which five people died violently, had to do with the reduction of municipal guards because of the funding cuts; in Comerío, there are eight municipal guards, and they are so few, that the municipality has had to eliminate shifts, meaning that, in the early hours, there are no police officers—or, as the Mayor put it: “I came to have 15 guards. This reduction is reflected in an absence of police officers in sports facilities and public areas…When they remove the other half of the funds, we will be inoperative and that will be a humanitarian crisis.” His colleague, Mayor Clemente Agosto of Toa Alta, whose city has 30 municipal police out of a total of 57, to serve a municipality of 74,467, said: “We are playing tripe hearts and to compensate for the lack of sufficient security, in some places, citizens are doing their own surveillance…But I am worried about a tragedy happening, because civilians do not have the training of a police officer.In addition, it is worrisome to know that in Puerto Rico, the number of people who are obtaining permission to carry weapons is increasing and that citizens are taking security into their hands.

El Camino Duro

December 4, 2018

Good Morning! In this morning’s eBlog, we report on the long and steep road to fiscal and physical recovery in Puerto Rico.  

In the midst of Puerto Rico debates about austerity and restructuring its municipal bond debts, Puerto Rico’s central government bank account balance rose to $3.6 billion by the middle of last month, with the Puerto Rico Department of the Treasury reporting that figure was nearly 33% greater than last May 4th, and that the $2.65 billion on May 4 was, itself, $211 million more than the government had anticipated in early July 2017, despite the hurricane devastation of September 2017. Nevertheless, modest single-story houses remain badly damaged, with mold on the walls and leaking roofs, too many of which remain boarded up. Still today, nearly 40% of Puerto Ricans over 65 live below the poverty line; the median household income is $19,000 a year. Nevertheless, in the wake of a year of fiscal and physical hardship, the U.S. territory seems to have turned the corner. By the end of October, the PROMESA Oversight Board had raised its forecast for economic growth, and filed a plan in court to restructure roughly $17.5bn in municipal bonds issued by the Puerto Rico Sales Tax Financing Corporation, and a federal court has approved the board’s restructuring of Puerto Rico’s Government Development Bank, which lends to the central and municipal governments. On the private side, by the end of the second quarter, companies in Puerto Rico had announced investments of $360 million, and the creation of more than 6,700 jobs, compared with $48m and 1,200 jobs in all of last year. In October, the official unemployment rate dropped to 8.3%, the lowest in more than 70 years. Puerto Rico’s critical infrastructure—electricity, water, telecommunications, schools and hospitals—is functioning again, according to the Center for a New Economy, and Brad Dean of Discover Puerto Rico, a marketing board, reports that nearly 90% of hotels are open.

Even if late and miserly compared to responses in the continental U.S., FEMA has since provided some $4bn to Puerto Rican citizens, either directly to rebuild their homes or in the form of Small Business Administration loans, according to Mike Byrne, who runs FEMA’s efforts on the island, who remembers that at the peak of the hurricane, there were 19,000 soldiers working there in desperate efforts—or, as he put it: “The real villain was 30 inches of rain and winds of 180mph…Maria pushed our limits.” Now, with its economy increasingly competitive, the chances of Puerto Rico paying off its nearly $120 billion in accumulated debt have improved, albeit economist Joe Stiglitz writes that the U.S. territory will still need to write off up to 70% of its debt.

Hard times, moreover, remain. Puerto Rico’s public servants are faced with an average salary reduction of $4,200 annually in employer contributions to health care, as part of the territory’s quasi plan of debt adjustment, with the level determined for a working family from the median employer contribution to the medical plans of 105,000 public employees, not counting teachers and police. According to the six union organizations, the employer contribution varies between $100 and $800 monthly by employee. That is, under the PROMESA Board’s plan, there will be reductions and standardization of the employer contributions of all public workers to $125 per month—a level the equivalent to a global cut of approximately $ 428 million in medical services, according to figures provided by union leaders; albeit, that is assuming that workers who suffer from chronic or catastrophic illnesses will retain their employer contribution unaltered, according to last year’s enacted Law 26. (The change to the benefits of the medical plan would be the most recent cut of a series of measures promoted by Law 26, including the Christmas bonus, the payment of overtime, and the liquidation of days due to sickness and vacations. In its explanatory statement, Gov. Rossello Nevares’ administration stressed its interest in mitigating the disparity in marginal benefits between employees of public corporations ($10,840 per employee) and the central government ($2,523 per employee). According to the PROMESA Board, if only the cuts to central government employees are taken into account, the decrease would be $28 million, while union representatives appear to be of the view that the cut to their medical plan will entail an “automatic reduction to their salary,” since the worker will have to pay the difference in order to maintain the same medical coverage. Economist Heriberto Martinez asserted that if the workers decide to increase their individual contribution to the medical plan to correct the adverse potential impact on access to comprehensive access to health care services, there will be a collateral impact on the gross product of Puerto Rico.

Thus, the union group is proposing that, instead of unilaterally reducing the contribution to all equally, each employer should open her or his books and negotiate with the unions according to their financial situation, according to spokesperson Francisco Reyes of the Puerto Rican Central Workers, with his statement coming as the government postponed an Aafaf administrative order for this cut to take effect on April Fool’s Day, rather than as it was originally scheduled for January. In response, Juan Cortés Valle, a spokesman of the Puerto Rican Workers Federation, interpreted this measure as a violation of collective agreements, several of which are in force until 2021. Some unions such as the Union of Workers of the Electrical Industry and Irrigation and the Union of Employees of the State Insurance Fund Corporation have challenged the constitutionality of PROMESA for this reason.