The Complex Governing Challenges of Shaping Local Governments

January 1, 2019

Good Morning! In this New Year’s morning’s eBlog, we report on some of the fiscal and governing challenges which shape local governments and states in the U.S. territory of Puerto Rico, as well as the ongoing storm recovery there.

Municipal Policy. As Puerto Rico appears nearly back on its fiscal feet, so that, increasingly, the honor and challenge of governance will begin to revert from a U.S. federal court and a Congressionally-named PROMESA panel, meaning that Puerto Rico Governor Ricardo Gov. Ricardo Rosselló Nevares has been facing increasing pressure from popular mayors and members of the New Progressive Party to define what his municipal policy will be—and, especially, whether he will offer a bill to consolidate municipalities via the creation of counties, an issue which recently resurfaced after the Governor, in a recent radio interview in Ponce, described Puerto Rico’s current municipal structure as “unsustainable,” adding that the model of the counties “would bring significant savings and improve the quality of life of citizens through regionalization.”

Unsurprisingly, the Governor’s proposal has garnered little support—as has traditionally been the case. The issue, indeed, has long been one of political tension—especially in the wake of, more than a century ago, the legislature, under pressure from the U.S. Congress, enacted legislation to consolidate the then 76 municipios into 46—an effort that garnered such opposition that the law, three years later, was repealed. Nevertheless, in the wake of the near bankruptcy of the territory, a new plan had circulated through the Legislature in 2017 to consolidate municipalities as part of the effort to alleviate the government debt crisis—an effort which was also rejected.

Mayor Juan Carlos García Padilla of Coamo, a very small—and very old U.S. municipality (founded in 1579) in the south-central region of Puerto Rico unsurprisingly noted: “I do not favor the counties; it would be to eliminate the municipalities, although, preliminarily, the Governor says no. First of all, you have to define the project to know if it is good or bad. If the project is not presented and the terms are not defined, how the budgets and administrative structures are divided, because we are blind, and every day that goes by it gets worse because the collections go down and the income. Now we lose 20% of the budget in July.” There appears to be especial apprehension by Mayor Coameño and his colleagues by the projected loss in municipal aid of some $350 million under the quasi-plan of debt adjustment fashioned by the PROMESA Oversight Board—a plan which does not include specifics, however, so a federalism struggle on governance has opened—but one which imposes a mandatory deadline for action, but which omits any discussion with regard to the possibility of creating counties, an idea which the Governor has mentioned, indicating that the 78 municipalities could be consolidated in seven counties.

On their side, a number of Mayors have banded together to create a League of Cities on the island, with the hope of achieving fiscal consolidations in some areas: the Alcalde or Mayor of Morovis, Carmen Maldonado, said that the municipalities, both the New Progressive Party and the Popular Democratic Party, have made alliances with each other for years through “consortia, agreements, and the recent creation of the League of Cities,” noting, for example, that the municipios of Comerío, Aibonito, and Barranquitas have a common permitting office. Meanwhile, Caguas, Cayey, Villalba and Salinas have also joined together to grant municipal permits.

Mayor Lorna Soto of Canóvanas reported she is coordinating an alliance between her administration, Loíza, one of the U.S. oldest municipalities, founded under a Spanish edict in the 1600’s after Spain decreed that slaves be sent to the region—which in 1692, was officially declared to be an urban are (due to its population of 100 houses and 1,146 residents), In 1719, Spain officially declared it to be a town. However, it subsequently fell below that threshold before, on August 16, 1970, it was re-established as a municipality and Río Grande to create an office to grant permits. Mayor Soto cautions: “You have to see what the Governor is going to present. We would have to reach a happy medium. We municipalities could give suggestions.”

Her colleague, Mayor Javier Jiménez, of San Sebastion described the creation of counties to be an “error: It is a mistake to be talking now about the implementation of an additional structure between the municipalities and the central government that has a significant cost, which puts at risk the work of thousands of Puerto Ricans who work in the municipalities, since, according to the original approach that spoke of counties, [it would be] financed with $ 100 million of contributions on the property of the municipalities.”

His colleague, Naguabo Mayor Noé Marcano, said that the little information has yet to be provided with regard to how counties would operate, especially as he understands the plan aims to eliminate the posts of mayor, to give way to an executive director who, according to him, “will not attend to the needs of a resident of a municipality as the mayor does.” His colleagues, from Coamo and San Sebastián, pointed out that the counties would exacerbate economic problems, since municipalities are employment centers for thousands of people. Federation of Mayors President Marcano said there is no opening to present legislation that gives way to the counties.

For his part, Senate President Thomas Rivera Schatz has said he does not endorse any legislation to eliminate municipalities. Chamber President Carlos “Johnny” Méndez has previously argued that counties on the mainland are more expensive organizations than city halls, noting: “The municipalities are the ones that solve the day-to-day problems in all our communities. The Governor, in what he is focusing mostly, is in the consolidation of services, but with a tool that is not the correct one. It does not make sense that, in a bankrupt country, you want to make a millionaire structure like the counties.”

Double Standard? Danny Vinik, a writer for Politico, the day after Christmas wrote about the Federal Emergency Management Agency’s (FEMA) failure to, in the wake of the devastating 2017 hurricane season to provide sufficient numbers of personnel or the level of training to handle three destructive storms—an assessment distinct from the President’s, noting that FEMA “nearly exhausted staff for two units of specialized response teams.” Yet, 15 months after Hurricane Maria crashed into Puerto Rico, killing 2,975 Americans, and almost six months after FEMA Politico released its after-action assessment, the agency, Mr. Vinik writes, is lagging significantly behind its targets in training and recruiting; moreover, he adds, “the proportion of the agency’s staff deemed ‘qualified’ for their jobs—based on FEMA’s review of their employment experience, training and performance—is just 62 percent, up from 56 percent before the 2017 hurricane season, but far below its fiscal 2018 target of 88 percent.” He adds that the goals themselves may be outdated: They are based off a 2015 internal force structure review that preceded the major disaster year of 2017.

Politico’s own investigation determined that FEMA had been slow to move personnel and resources to the island after Hurricane Maria, especially compared with the speed with which it responded to Hurricane Harvey in Texas and Hurricane Irma in Florida, noting that FEMA’s force strength peaked in Texas at 3,145 in the immediate wake of Hurricane (just 12 days) Harvey, compared to 71 days after Hurricane Maria blasted into Puerto Rico—where, even at its height–FEMA’s force strength reached only as high 1,200. Mr. Vinik adds that, as a series of General Accounting Office reports indicate, staffing has been a long-term challenge for FEMA. The agency implemented reforms during the Obama administration to attempt to address some of these workforce issues. In 2012, for instance, the agency partnered with AmeriCorps to create a new program — FEMA Corps — to train and equip people ages 18 to 24 to respond to disasters, but notes: “Still, despite these improvements, the agency has had trouble meeting its goals. And with a low unemployment rate and declining interest among Americans in public-sector jobs, FEMA needs to think of new ways to ensure that when a disaster hits, they have the right personnel to respond.”

Who’s on First? Unlike in a chapter 9 municipal bankruptcy where the municipality must present a plan of debt resolution to a federal bankruptcy court, Congress, in creating the quasi-chapter 9 plan for Puerto Rico, a plan which provided for an oversight PROMESA Board and jurisdiction to a federal court, created conflicting governance challenges: a federal court, not a bankruptcy court, became the quasi judge and jury, and a Board wherein appointments were not, under the statute, carefully drawn to bar potential conflicts of interest; Members of Congress have begun to intensify the pressure to explore the risk of a conflict of interest by the PROMESA Board’s main strategic advisory company: on the one hand, with bipartisan support, Rep. Nydia Velasquez (D.-N.Y.) has proposed legislation intended to address a gap left by the PROMESA statute and avoid conflicts of interest of companies related to the restructuring of Puerto Rico’s debt. Rep. Velázquez and Sen. Elizabeth Warren (D.-Mass.) have written to the management of McKinsey, advisor to the PROMESA Board, requesting that, no later than next Tuesday, the company specify whether to notify the Board with regard to any potential conflict: “How do you know that McKinsey employees who do tasks for the Board do not make any decisions on the grounds that their personal retirement savings and those of their colleagues could be directly affected by their work?” The duo released their letter hours after Rep. Velázquez presented the legislation with bipartisan support of the outgoing Chair Rob. Bishop (R-Utah) of the House Committee on Natural Resources and incoming Chair Raúl Grijalva (D.-Ax.).

Thus there has been concern about serious conflicts of interest, especially after, last September, the New York Times had reported that subsidiaries of the main Oversight Board advisory company, McKinsey, owned approximately $20 million in Puerto Rico tax-exempt bonds. Under the Congresswoman’s proposed bill, attorneys, accountants, consultants, agents, and other professionals hired for the process of restructuring the public debt would be mandated to disclose, before the Bankruptcy Trustee Office of the United States Department of Justice, any ties to debtors, creditors, the Oversight Board and employees of the entity, before being able to be compensated. Should a trustee decide that the company did not comply with the disclosure of information or that there may be a conflict of interest, the proposal permits a request to U.S. Judge Laura Taylor Swain, who is overseeing the quasi-chapter 9 municipal bankruptcy trial, not to be paid. As the Congresswoman noted: “The people of Puerto Rico cannot have faith that this Board is putting their (referring to the U.S. citizens of Puerto Rico) interests first if the consultants who help implement the restructuring could benefit from the amount of debt service available under the same tax plans they design.”

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