February 5, 2019
Good Morning! In this morning’s eBlog, we report on the fiscal and future risk to Puerto Rico if the federal Emergency Management Agency (FEMA) makes too hasty a departure.
Fiscal & Physical Hurricane Damages. Puerto Rico Secretary of Education Julia Keleher this week warned that the stability of the island’s public schools could be at risk if FEMA reduces its authorized funding of $1 billion vital for permanent repairs in 64 schools damaged by Hurricane Maria, with Secretary Keleher detailing the potential adverse impact on the US. Territory’s efforts to make permanent improvements in some 64 schools in need of vital repairs. Originally, FEMA estimates had indicated that $ 1.4 billion would be needed to repair the schools; however, FEMA has since cut that estimate by more than 33% to $425 million, even as Secretary Keleher has warned: “The schools are not in good condition, and they have waited more than a year. This is about dignity, they should not be in those conditions.” Indeed, nearly a year and a half after the devastation wrought by Hurricane Maria, there remain classrooms without rooves, cracked windows and walls, windowless rooms in any number of Puerto Rico’s 856 functioning schools. Secretary Keleher explained that the changes in the estimates occurred after FEMA determined that repairs financed with federal funds will not include earthquake-resistant column arrays in some schools, for which about $ 500 million is needed—and that FEMA has determined it will not pay some $500 million for the repair of doors and windows; nor will it fund problems in the schools which were there before the hurricanes struck.
FEMA, for its part, indicated this weekend that they are working with the Department of Education “to identify solutions due to the significant damages caused by Hurricane Maria,” but asserted the “process will not be resolved quickly,” responding to El Nuevo Día: “The funding which is allocated now is not necessarily the final amount, while we work to evaluate all the costs incurred during the reconstruction.” Since last November, information has circulated – which has not been denied by the White House – which indicates that President Donald Trump has opposed the allocation of funds for the reconstruction of the island.
Stateside, Puerto Rico’s non-voting Member of Congress, Resident Commissioner Jenniffer González, expressed surprise with the Secretary’s comments, noting: “She has never requested or notified us of that. I’ve called her to ask her about it and to intervene, but she does not answer my calls, nor has she provided information.” According to FEMA, so far, some $29.7 million have been disbursed to the Department of Education—with the funds corresponding to projects for what is known as Category B, described as immediate repairs that are made to structures to ensure the health and safety of children, teachers, and staff. Secretary Keleher said that $60 million has been set aside for the roof sealing, painting, and fungal removal work to be done in the 856 public schools during the summer, with the reconstruction projects financed under what is known as Category E, tasks eligible for reimbursement, albeit, according to Secretary Keleher, for which the Department of Education would have to first identify the funding sources. Projects which exceed the $1 million, FEMA has warned, “require review of compliance with eligibility requirements, compliance with environmental and historical preservation, and additional evaluation…” FEMA warned: “FEMA can proceed to approve money to reimburse eligible costs related to the disaster only after validating that the applicable eligibility criteria are met.” But FEMA has equally warned that it has the authority to reduce the amount of funds to an applicant if there was prior damage which “does not pose an immediate threat,” or where there is no documentation to justify it, or the hiring procedures do not comply with federal regulations. However, in this instance, it appears that FEMA has not specified its specific grounds for the denial. Secretary Keleher stressed that, although it is common for “negotiations” to be carried out after receiving the initial estimate, the current procedure of FEMA puts the stability of the schools at risk, noting: “I know they are still giving money to Louisiana (for the damages of Hurricane Katrina in 2005), I’m not asking too much…I need to be allowed to attend to everything I understand is necessary for the schools to meet a minimum standard: I am trying to defend our students’ rights to be in a good place, to be in a safe school environment.”
Are Two Jurisdictions Better than One? Meanwhile, on the judicial front, U.S. Judge Laura Taylor Swain has indicated a desire to incorporate small holders of general obligation municipal bonds in the legal process for the PROMESA Oversight Board’s attempt to nullify $6 billion of the bonds, with Judge Swain presiding over the Title III bankruptcy hearing held in New York City, where Unsecured Creditors Committee attorney Luc Despins testified that Puerto Rico general obligation municipal bondholders had adequate representation without retail holders being allowed to form a committee. Last month, the Board had filed an objection to invalidate Puerto Rico’s GO bonds sold in 2012 and 2014, with the PROMESA Board arguing that the debt exceeded Puerto Rico’s constitutional debt limit—arguing to the court that it should invalidate the bonds—in response to which Judge Swain indicated she was leaning towards approving a procedural order proposed by the PROMESA Board and the Unsecured Creditors Committee; she said she would seek proposed revisions to a procedural order before she approved a final order.
In a related development, Swain is near the end of a process to restructure the Puerto Rico Sales Tax Financing Corp. (COFINA) bonds. In the last few months some holders of the COFINA subordinate bonds have come forward to complain that, when a restructuring deal was put together, they had not been invited to participate. Indeed, one of those COFINA subordinate holders, Mr. Peter Hein, appeared before Judge Swain last week as a holder of Puerto Rico general obligation bonds, seeking the court’s action to appoint a committee to represent the retail municipal bondholders—a request which drew an adverse response from Unsecured Creditor Committee attorney Luc Despins, who told Judge Swain that she had ruled earlier in the Title III process that there would not be a committee set up for individual municipal bondholders, adding that the general obligation municipal bond holders were already adequately represented. The proposed order provides that holders of Puerto Rico general obligation bonds would have to file a notice of participation with the court in order to participate in the further legal proceedings—with holders of large blocks of GO bonds offered 35 days after the entry of the procedural order to file the notice of participation. (Holders of smaller lots would be given 50 days.)
Puerto Rican Statehood? With Democrats in the majority in the House of Representatives, Charles Rodriguez, the head of Puerto Rico’s Statehood Commission, has set his sights on Congressional statehood legislation: Mr. Rodríguez, who is the Chairman of the Commission and leader of the Puerto Rico Democratic Party, believes that supporters in Congress will soon introduce legislation which will be referred to the Committee of jurisdiction, the House Natural Resources Committee, where Chairman Raúl Grijalva (D-Ariz.) just so happens to be the co-author of a bill providing for statehood for the District of Columbia—leading Mr. Rodriguez to note: “If you read that piece of legislation, everything it says there, the reasons for D.C. to become a state, fit Puerto Rico perfectly.” Although the Chairman has not previously taken a public position on the issue, in the past he has stated this is an issue which ought to be up to the citizens of Puerto Rico to decide. Indeed, Committee member Rep. Reuben Gallego (D-Az.) noted: “No matter what, the situation with Puerto Rico is not acceptable, and it is incumbent upon us in the Committee to bring something to the Committee…Let us openly debate it, and we can move forward, whatever that looks like.”
Last year, notwithstanding the support of former Chair Rob Bishop (R-Utah), a statehood bill did not gain sufficient support to be reported from the Committee; nevertheless, Chair Grijalva has moved the issue to the full Committee—making it, as Rep. Gallego put it, to being a “top priority…I think when it comes to this issue, it’s not really a progressive issue versus not progressive—I think it has to do with whether you believe Puerto Rico is better off in a statehood situation versus not…But either way, the Committee is where we should have that open debate.”
Currently, statehood supporters control all four major elected positions in Puerto Rico: Governor, resident commissioner, Senate President, and Speaker of the House—with the leaders all elected to those positions. in 2016—that is, in an election which served as a precursor to the 2017 status referendum, where Puerto Ricans voted nearly unanimously (97% of participants) for statehood, albeit, it was a referendum marked, as we have previously noted, by low turnout stemming from an opposition boycott; moreover, the U.S. Justice Department did not sanction the vote. Ironically, that means $2.5 million in federal funds which had been was appropriated to cover the costs of the vote are still available. Thus, Chairman Rodríguez noted: “What we are requesting is that that appropriation that has already been approved is used for a yes/no vote, as was done in Alaska and Hawaii.”
The Statehood Commission—described as a shadow Congressional delegation comprised of three Democrats, three Republicans, and an independent—has the support of Sens. Rick Scott (R-Fla.) and Martin Heinrich (D-N.M.), as well as Resident Commissioner Jennifer González-Colón (R-Puerto Rico), and Rep. Darren Soto (D-Fla.), the first Floridian of Puerto Rican origin to be elected to the House, according to Chairman Rodríguez. The Republican Party platform explicitly endorses statehood—provided there is a valid referendum in Puerto Rico.
The issue, going all the way back to the Jones-Shafroth Act, with regard to the Twilight Zone governance status of Puerto Rico—a status somewhere between a state and territory, has been characterized by some as colonialism—and certainly the discriminatory treatment of Puerto Rico in the wake of the two devastating hurricanes compared to domestic hurricane FEMA responses demonstrated, came after, three years ago, a U.S. Supreme Court erased the distinction between a free associated state and a simple territory of the United States, leading to the enactment of PROMESA and appointment a federal oversight board to oversee Puerto Rico’s quasi-plan of debt adjustment—modelled to some extent after chapter 9 municipal plans of debt adjustment—but, in this case, with many cooks in the kitchen: a federal court, and a federally appointed oversight advisory board to oversee the territory’s finances. Now, mayhap, statehood may be on the horizon: Commissioner Rodriguez notes that what statehood supporters want to see now is quick action by the Natural Resources Committee: “I think Puerto Ricans are tired of happy talk, we want action. And the way to exercise action is to approve a Puerto Rico accession act…We’ll celebrate before or after a yes-no referendum on statehood. I have no fear of that.”
Erasing Municipal Debt. The very fine Wall Street Journal writer, Andrew Scurria, yesterday noted that Puerto Rico won court approval for a restructuring deal that could erase one-third of Puerto Rico’s $18 billion in sales-tax bond debt, a milestone in its quest to fix its broken finances, after U.S. District Judge Laura Taylor Swain confirmed a debt adjustment plan covering the island’s Confina municipal revenue bonds, marking the largest renegotiation yet of the Puerto Rico’s municipal bond and pension obligations. He noted that the write-downs imposed on the Cofina bonds, first issued as rescue financing in 2007, will save Puerto Rico’s government $17 billion in municipal bond interest and principal payments over the coming decades. Moreover, he noted that creditors holding more than $14.5 billion in Cofina debt supported the agreement, which resolves one of what he deemed the “thorniest conflicts in Puerto Rico’s unprecedented, court-supervised [municipal] bankruptcy.” Here, the settlement is tied to a negotiated split of the sales taxes pledged to Cofina, which releases 46% of the funds back to the Puerto Rico government—providing $456 million a year on average that otherwise was earmarked for municipal bondholders. He noted that Judge Swain acknowledged that the settlement “commits substantial portions of Puerto Rico’s scarce revenues to bond payments over a period of decades,” while also slashing claims from bondholders, including individual investors who bought Cofina securities for their retirement. Nevertheless, he wrote that Judge Swain concluded the adjustment plan “is essential to ensure that Puerto Rico is on a path that will restore its access to financial markets as it builds a stronger economy,” adding that the settlement marks the first plan of debt adjustment approved under the quasi-municipal bankruptcy process created by Congress under PROMESA.