The Balancing of Judicial and Legislative Authority in a Quasi Municipal Bankruptcy

February 26, 2019

Good Morning! In this morning’s eBlog, we report on some of the challenges of governance in the quasi chapter 9 bankruptcy of the U.S. Territory of Puerto Rico, as well as with regard to some of the issues Puerto Rico Governor Ricardo Rosselló was able to raise with President Trump.  

Quien Es Encargado? (Who is entitled to govern?) The First U.S. Circuit Court of Appeals has ruled that Puerto Rican legislators may not challenge a 2019 budget which these elected leaders assert was imposed on the U.S. territory by the unelected members of the PROMESA oversight Board (Aurelius Investment. LLC, et al. v. Commonwealth of Puerto Rico, et al.  Nos. 18-1671, 18-1746, 18-1787, thereby upholding the Congressionally-appointed Board’s authority to develop and certify a quasi-plan of debt adjustment for the Commonwealth, with the court determining the Oversight Board had acted within the powers granted to it under the Puerto Rico Oversight, Management, and Economic Stability Act of 2016 (PROMESA) enacted by Congress. In a statement after the decision, PROMESA Board Executive Director Natalie Jaresko said the Board hopes the decision “will put an end to needless litigation and motivate all branches of the government to focus on PROMESA’s goals of fiscal responsibility and access to capital markets…The Oversight Board continues to operate under its legal mandate and within its fiscal authority, despite inaccurate accusations of overreach…We are determined to do our part to help Puerto Rico recover from its fiscal crisis and to build a sound foundation for sustainable economic growth that improves the lives of the people of Puerto Rico.”

In its decision, the court found that PROMESA “grants the board exclusive authority to certify fiscal plans and territory budgets for Puerto Rico,” affirming a lower court ruling which had dismissed a claim by Puerto Rico’s Legislative Assembly that the PROMESA Board had exceeded its authority. No decision has been made by the Commonwealth with regard to a potential appeal to the U.S. Supreme Court.) Unsurprisingly, the PROMESA Board said it welcomed the decision, which came a week after the same Circuit court had overturned a lower federal court by ruling that the selection of members of the Oversight Board under PROMESA violated the Appointments Clause of the U.S. Constitution, granting, as we have previously noted, the President 90 days in which to nominate seven members to a reconstituted board subject to confirmation by the U.S. Senate. (Six of the current PROMESA Board members were appointed by Republican and Democratic leaders of the U.S. Senate and House with the seventh appointed by former President Obama without any facing a confirmation vote by the full Senate.

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Unequal Governance Treatment

February 25, 2019

Good Morning! In this morning’s eBlog, we report on some of the issues Puerto Rico Governor Ricardo Rosselló was able to raise with President Trump as well issues he discussed at the end of last week with CBS News.  

Governor Ricardo RossellóNevares yesterday affirmed he had been able to convey directly to President Trump at the annual National Governors Association Washington, D.C. meeting with regard to issues pending since the beginning of this year related to the obstacles he believes the federal government has imposed on the process of recovery and reconstruction of Puerto Rico after the Hurricane Maria—asserting that the President said he would be responsive upon his return from his visit, this week, to Hanoi, where he is scheduled to meet with North Korea leader Kim Jong-Un, noting he had had the “opportunity to speak with the President and personally request the meeting to address the slowness of FEMA resources in the recovery work and to state that the obstacles imposed in Puerto Rico are not imposed in other states.” The Governor reported that the President had “promised to take care of the matter once he returns from his trip to Hanoi,” adding that he had also spoken with U.S. Commerce Secretary Wilbur Ross with regard to Puerto Rico’s interest in being linked to “all” the U.S. initiatives which could enhance economic development in the U.S. territory—albeit making clear that the White House had not granted a meeting—a meeting with increasing urgency, because of growing apprehension over the possibility that FEMA funds he has been seeking since January 17th are at risk of being redirected towards financing a border wall with Mexico.  His efforts to go directly to the President came as Puerto Rico currently has pending proposals before Congress to allocate an additional $600 million in food assistance and revive a waiver from FEMA for matching funds for debris removal work and emergency measures related to the impact of Hurricane Maria. The Governor has been especially concerned about the delays in the provision of funds from FEMA which are critical to Puerto Rico’s recovery—and the seeming discrimination with regard to Puerto Rico’s authority and ability to have a meaningful say in either the disbursements or the determination of the estimated costs to repair critical public infrastructure. He is scheduled to testify tomorrow before the Senate Committee on Energy and Natural Resources.

In an interview yesterday, in response to a question about what he regarded as the most pressing issues, he responded: “I think, number one: the speed in which the recovery funding is falling to Puerto Rico, particularly on the FEMA front, is a pressing issue. That has provoked—that we still have some, you know, some emergency-type work that needs to be done that hasn’t fully been resolved, such as blue tarps in different houses and so forth. I think that extension of the $600 million Supplemental Nutrition Assistance (SNAP) is a critical item that we have on the agenda, so that we can get our nutritional needs met. So, we’re pushing the agenda in Congress, so that we can get a (SNAP) relief fund approved. And then, on the longer, you know, on the longer side of that, to change Puerto Rico to SNAP, so that we can have better resources than we have.”

Asked what the territory’s ultimate goal is, the Governor responded: “That’s the ultimate goal. That would be the ultimate goal: Medicaid, Medicaid fix for Puerto Rico. We had a temporary fix with the recovery bill, but that ends up expiring sometime in September. And what we’re looking for is for a permanent fix. This will help us out, at least not only in health care, but also regarding our long-term planning…And then I would say, lastly, is the pressing issue of Puerto Ricans’ inequality—which needs to be solved. We’re a colonial territory, as you know. And we want, with the visibility that Puerto Rico now has, with the truth of the matter that folks are now starting to be aware of the fact that Puerto Ricans are U.S. citizens, we’re part of the United States, and we need to end colonialism once and for all. And we’re going to be pushing for that.”

Then, asked how, in the wake of a referendum which produced no change, Gov. Rosselló reminded the interviewer there had been not one, but two referendums in the past seven years, in each of which voters had chosen statehood, albeit non-binding. The Governor reminded the interviewer: “Congress needs to act in order for us to do this. Now, truth be told, because there was little, you know, I would say, little amplification on the issues of Puerto Rico prior to the storm, you know, those things sort of went under the radar for the broader audience. But now where Puerto Rico has been thrusted upon to the national relevancy stage, and there’s a consciousness to it, I don’t know how anybody that supports equality or equal treatment could be against or could not fight for, you know, the democratic will of the people of Puerto Rico to become a full state of the union.”

Now, with elections looming for Presidential primaries, the Governor believes Puerto Rico has risen from a page seven issue to a top-level issue, noting: “I think it gives us an opportunity to address some of our lagging needs that were sort of  under the radar screen, because there was no amplification on the messaging. So, it is very important. I’m thankful for both candidates. It’s not only that two candidates, Presidential candidates, as soon as they announced, made their first place visits to Puerto Rico. So, that showcases the importance of Puerto Rico. And I would not be surprised—and actually, I would be expecting that other candidates that have already declared and that will declare will visit Puerto Rico promptly.

The Governor went on to note that because Puerto Rico is denied equal representation in the Congress, his government was “hard-pressed to move resources to Puerto Rico. So, that limits our capability of developing our society and our economy,” noting that the root cause of the problem is the disenfranchisement of U.S. citizens: “I mean, it doesn’t make sense that in the 21st century, you have 3.5 million U.S. citizens, 3.3 million U.S. citizens, who do not have the right to vote just because of where they live. Any of these citizens, should they move to the states, would be able to vote; in contrast, a U.S. citizen who moved to Puerto Rico would lose those rights.

The Arc of Recovery from Being Classified as a Distressed Municipality

February 22, 2019

Good Morning! In this morning’s eBlog, we report on the exit by the Pennsylvania third-class city of Farrell from the distressed category into which it had been designated November 12th in 1987.

Pennsylvania Secretary of Community and Economic Development Dennis Davin has announced the termination of the City of Farrell’s status as a distressed municipality under Act 47, making Farrell the 15th municipality to exit Act 47. Farrell was designated as distressed under Act 47 on September 23, 1987, with the determination made after years of increasing deficit, insufficient revenues, and a decrease in the level of municipal services. Once dubbed “The Magic City,” Farrell sprung up practically overnight when a steel mill was constructed in 1901 on a plain bordering the Shenango River near Sharon, Pennsylvania, in what was then part of Hickory Township (now Hermitage). The community was incorporated as the Borough of South Sharon just over a century ago in 1916; its population peaked at over 15,000 in 1920 and its status was elevated to a third-class city in 1932. At that time the residents of the new city elected to take the name of Farrell, after industrialist James A. Farrell.  The mill, which eventually became known as the Roemer Works of the Sharon Steel Corporation, would serve as Farrell’s critical economic lifeblood until 1992, when it was liquidated after filing for bankruptcy—in the wake of which many of its assets were sold at auction to Britain-based Caparo Corporation and later to Swiss steelmaker Duferco, which operates the plant today. But times have always been challenging for the mill city, which the state designated in 1987 as financially distressed under its Act 47 statute. Notwithstanding years of industrial and population decline, Farrell has made progress in rebuilding itself due to new industrial investments on tax abated land and several new housing starts: it is small, with the 2000 Census reporting 6,050—in just over 2,500 households—and the population just over 50% white and 47% black. It is a place tied to the beginnings of the republic, as General George Washington crossed it thrice during his campaign to wrest the United States from England’s grasp, a different kind of Brexit as it were.

In Pennsylvania, any municipality, including boroughs, incorporated towns or townships, cities, and counties may file for chapter 9 municipal bankruptcy—as five have so filed between 1980 and August of 2016, provided any one of three Act 47 conditions are met—and that permission has been given by the Department of Community and Economic Development (DCED), which administers the state’s Municipalities Financial Recovery Act, Act of 1987, P.L. 246, No. 47. Under Act 47, DCED has a responsibility to assist Pennsylvania municipalities which are experiencing severe financial difficulties in order to ensure the health, safety and welfare of their citizens.

Here, Secretary Davin noted: “Farrell’s commitment to rebuilding a strong and vibrant community is exemplary…And it demonstrates that collaboration among the community, the state, businesses, and partners played a key role in achieving Farrell’s goals. For the last 30 years, the state has provided crucial support to the city–but today, we congratulate Farrell for all of their hard work to put this city on the path to financial prosperity,” as he issued a formal determination letter in a ceremony at the Farrell Municipal Building, finding that termination of the city’s distressed status was appropriate under §255.1 of Act 47, based upon a thorough review of the city’s audits, financial data, and the record from a public hearing held in January.

In response, Mayor Olive McKeithan noted: “I am proud to report that after over 30 years, the stigma of being a fiscally distressed community has been lifted off the City of Farrell…My sincere thanks go out to many for their dedication to this cause, including current and past employees, local elected officials, community groups, business owners, residents, and certainly the commonwealth.”

According to the hearing officer’s report, operating deficits have been eliminated and financial conditions demonstrate healthy management practices. In addition, the officer has determined that the municipality now has a consistent series of revenue streams to provide realistic and affordable services to residents, while also meeting its obligations to vendors, creditors and employees. Farrell’s recovery efforts included the consolidation of services through collaboration with other governmental entities; a significant growth in revenues supported by an increase on the collection of taxes and fees; the modernization of payment methods; and the diversification of funding streams. Farrell also made the difficult decision to raise real estate tax rates and resident EIT rates in 2015, which proved to be important steps toward the effort to pave the way for it to exit from its reliance on Act 47-enabled revenues. The city’s recovery efforts included:

  • the consolidation of services through collaboration with other governmental entities;
  • a significant growth in revenues supported by an increase on the collection of taxes and fees; and,
  • the modernization of payment methods; and the diversification of funding streams.

A Municipal Fiscal Uptrend? Farrell is the sixth municipality under the Wolf Administration to recover from distressed status. Prior the Farrell, the City of Pittsburgh had been the most recent community to recover: the steel city exited just a little over one year ago on Lincoln’s birthday. That exit joined Luzerne County; Nanticoke, Luzerne County; and Clairton, Allegheny County; and Altoona, Blair County, which have also exited under Act 47 during the Wolf Administration.

Colonialism & Modern Fiscal Stress

February 18, 2019

Good Morning! In this morning’s eBlog, we report on a key federal court decision finding the current PROMESA Oversight Board members were unconstitutionally appointed, before sailing north along the Atlantic coast to consider the demographic and fiscal challenges confronting one of the nation’s oldest states.

Who’s In Charge? U.S. Circuit Court Judge Juan Rafael Torruella del Valle Sr., the first and, to date, only Hispanic to serve in that court—in a career in which he competed in four Olympics, writing for the United States Court of Appeals for the First Circuit, ruled that the current Puerto Rico Oversight Board members were unconstitutionally appointed and gave President Trump and Congress 90 days to make new appointments to the panel; the court, however, did not invalidate the Oversight Board’ actions, nor the parts of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) not addressing the PROMESA Board appointment process, holding that the current seven members of the Board can continue in that role for up to 90 days, while the President and the Senate name their successors or choose to reappoint them. Aurelius Investments, the plaintiff in the lawsuit, had sought to have the PROMESA Board declared unconstitutional. In what marked the fifth appeal of a decision by U.S. District Judge Laura Taylor Swain, this ruling overturned an earlier opinion she had made upholding the constitutionality of the appointment of the board. (Judge Swain has been at least partially overruled on all five appeals of her Puerto Rico Title III bankruptcy decisions appealed to the First Circuit Court in Boston.) Judge Torruella’s decision will mean that President Trump will now nominate all seven members for the PROMESA Board—and that the U.S. Senate will decide with regard to confirming those named—in contrast to the previous procedure, under which three board members were named by Democrats and four members were named by Republicans.  Under the PROMESA statute, the U.S. Senate Majority Leader and House Speaker each named two members, while their respective counterparts, the House and Senate Minority Leaders, and former President Barack Obama each chose one.

In its decision, the majority found that PROMESA’s appointment procedure for the board was unconstitutional, because it did follow the  Appointments Clause, part of Article II, Section 2, Clause 2 of the U.S., which empowers the President to nominate and, with the advice and consent (confirmation) of the U.S. Senate, appoint public officials. Instead the court here determined PROMESA could survive because of a severability clause in the statute allowing PROMESA to endure even if part of it was found invalid. The Court said that the “de facto officer doctrine is especially appropriate in this case,” and that it allows the Board’s actions up to the present and for the next 90 days to be considered valid. Judge Torruella wrote: “An ancient tool of equity, the de facto officer doctrine ‘confers validity upon acts performed by a person acting under the color of official tile even though it is later discovered that the legality of that person’s appointment … to office is deficient.’ Ryder v. United States, 515 U.S. 179, 180 (1995),” adding: “We fear that awarding to appellants the full extent of their requested relief will have negative consequences for the many, if not thousands, of innocent third parties who have relied on the Board’s action until now.” This was another factor in invoking the de facto officer doctrine. According to PROMESA the board members’ tenure was to have ended in the late summer of 2019, three years after their appointment. The federal government would have had to either name new members or reappoint them at that time. Aurelius Investments, LLC, et al. v. Commonwealth of Puerto Rico, et al. U.S. 1st Circuit Court of Appeals, Nos. 18-1671, 18-1746, 18-1787, February 15, 2019.

In responding to the decision, Puerto Rico Governor Ricardo Rossello opined that the U.S. the First Circuit of Appeals had recognized that the PROMESA Board’s supposed powers were “not conferred by law,” noting: “We will be carefully evaluating the (decision) to anticipate the effects it may have,” adding that when referring to proconsular and imperial powers, the decision of the First Circuit of Appeals had, once again, highlighted what he called the “colonial reality of Puerto Rico: The determination recognizes the fact that the members of the PROMESA Board have tried to adjudicate powers that were not conferred by law. In other words, the Board itself has encouraged this determination by continually seeking to join powers.” The Governor said that his agenda is aimed at “reforming the Government to be more responsive and efficient; establish responsible and sensitive fiscal discipline; restructure the debt of Puerto Rico to sustainable levels, consistent with negotiations in good faith with the creditors; and to culminate the colonial obstacle and achieve equal treatment as American citizens under statehood.”

A State Diet from Debt? Meanwhile, on the much chillier northern Atlantic coast, Connecticut Gov. Ned Lamont (D), the Colonial state’s 89th Governor, mayhap trying to live up to the state’s motto: “He who transplanted sustains,” has proposed reducing Connecticut’s borrowing by 39%, or hundreds of millions of dollars annually. Calling it a “debt diet,” Gov. Lamont told the Waterbury Regional Chamber that such a move could save the state up to $2 billion over a decade, noting: “We cannot put Connecticut’s future on the credit card,” adding that, on Wednesday, when he presents his budget proposal to the General Assembly: “As we get ready to release a budget that will reshape and stabilize Connecticut’s financial future, it is essential we look at our state’s borrowing.” Between 2012 and 2019, the Nutmeg State has averaged about $1.59 billion in municipal bond issuance annually—a level the Governor warned his administration would sharply curtail, aiming to cut that percentage by nearly 40% to $960 million. The Governor’s fiscal math appears to have come from two years’ of credit downgrades and unbalanced budgets by all four bond-rating agencies over the past two years, with the agencies citing budget imbalance and high legacy costs, albeit with only Kroll assigning a negative outlook. Governor said he and the Office of Policy and Management will adjust and restructure the capital budget, which normally includes large-scale projects, such as school construction and other major infrastructure upgrades—adding that this would not affect projects under construction. Gov. Lamont noted the state will continue to make key investments in transportation infrastructure by matching the authorization levels over the last eight years, adding he also intends to request new authorizations for municipal projects to serve as catalysts for growth and a stronger investment in information technology. Moody’s moodily warned that the state is facing a steep road, marked by potholes of demography, a weary tax base, and urban grit—or, as Moody’s moodily put it: “Aging population, limited labor force growth and stagnant tax bases limit economic growth and present long-term challenges for financially challenged cities,” in its recent report examining the municipalities of Hartford, West Haven, Bridgeport, New Haven, New Britain, Waterbury, and Hamden, noting: “These cities have faced several credit challenges in recent years, including negative demographic trends, anemic economic expansion, modest tax base increases, and rising fixed costs.” Indeed, according to Moody’s, Hamden, New Haven, and New Britain have restructured debt to trim debt service payments short-term by increasing payments in the long term. Each but Waterbury and New Haven have eased budgetary pressure by contributing less than the actuarial determined contribution to their pension plans; some have also used fund balances to plug budget gaps. Moody’s added a demographic warning that an aging population, limited labor force growth, and stagnant tax bases could make the fiscal and governing challenge all that much harder.

Fiscal, Physical, & Political Storms

eBlog

February 15, 2019

Good Morning! In this morning’s eBlog, we report on the overnight development with regard to the threatened shutdown of the federal government, before spinning Northeast to Atlantic City to assess a gamble which could threaten the fiscal recovery from near chapter 9 municipal bankruptcy for Atlantic City—and which had triggered a state takeover. Then we wonder whether the inadequate and inequitable FEMA hurricane response to the U.S. territory of Puerto Rico might have left residual fiscal and physical damage. The news comes as, last night, Department of Justice warned the White House that federal courts are likely to block a national emergency declaration to build a wall along the southern border.

Financing the Trump Wall. Senate Majority Leader Mitch McConnell (R-Ky.) last night announced the President intends to bypass Congress by means of declaring a national emergency in order to finance construction Congress has specifically not approved for a border wall between Texas and Mexico—even as he also signs into law legislation to prevent another shutdown of the federal government tonight at midnight—but it is legislation passed by Congress which does not include the amount of funding President Trump wants for a wall. The White House has confirmed President Trump’s plans to declare a national emergency today, with White House Press Secretary Sarah Huckabee Sanders last night stating: “President Trump will sign the government funding bill, and as he has stated before, he will also take other executive action-including a national emergency-to ensure we stop the national security and humanitarian crisis at the border.” Members of the House and Senate, including Republicans, have warned that declaring a national emergency would bring an immediate legal challenge: yesterday Sen. Susan Collins (R-Me.) noted that such an emergency declaration “will be challenged in court and is of dubious constitutionality…It undermines the role of Congress and the appropriations process and it’s just not good policy.”

Can Atlantic City Buck the Odds? Moody’s has warned that an unexpected tax appeal settlement with the Hard Rock Hotel & Casino could adversely impact the city’s ongoing recovery from its state takeover and near chapter 9 municipal bankruptcy. That agreement, announced at the end of last month, covers tax payments for the period between when the former Trump Taj Mahal closed in 2016 and the casino property’s purchase by Hard Rock in 2017. Under the settlement, Atlantic City is expected to pay $4.8 million over four years to the owners of the Hard Rock Hotel & Casino. The good fiscal news for the city is that casino gaming revenue continued to surge last month, with a reported increase of nearly 20 percent according to data released this week by the state:) Atlantic City’s nine casino properties reported $220.6 million in total gaming revenue in January, according to the state Division of Gaming Enforcement, nearly 20 percent higher than January of 2018, when seven operational properties reported $184.3 million in total gaming revenue, with James Plousis, the Chair of the Casino Control Commission noting: “Atlantic City held its own in January, a month when gaming figures have traditionally dropped off in the resort…The figures seem to be a good first chapter for Atlantic City’s 2019 gaming story.” Indeed, last month chalked up the eighth straight month of growth for the Atlantic City casino industry and seventh consecutive month of double-digit percentage increases in total gaming revenue. While gaming revenue notched more than a 50 percent increase statewide, Atlantic City took in more than 33% of the total. Here, under the terms of the settlement, Atlantic City will pay four annual installments of $1.24 million, dating back to FY2010: Moody’s analyst Douglas Goldmacher last month, nevertheless, reported that while Atlantic City set up a tax appeal reserve that had $17.4 million as of 2017, the funds set aside could adversely impact the city’s ability to meet other fiscal obligations, writing: “The settlement is a credit negative for Atlantic City, because it diverts financial resources from other operations, although the amount is fairly modest, covered by a designated reserve and poses a minimal threat to the city’s still-precarious financial position…The settlement should not have the devastating tax base impact on Atlantic City of previous appeals.” He further noted that the Hard Rock settlement took Atlantic City and New Jersey by surprise, since they had maintained that all casino appeals had been completed via the issuance of some $80 million in municipal bonds to cover outstanding appeals. Lisa Ryan, a spokeswoman for New Jersey’s Department of Community Affairs, which, as we have noted, is overseeing the Atlantic City takeover, noted that the Taj Mahal was closed at the time owners filed for a tax appeal and was never in the state’s casino payments-in-lieu-of-taxes program: “Because of the timing of Hard Rock’s purchase of the property and the work that needed to be done to get the casino into the PILOT, the 2017 appeal was not able to be included in the $80 million bond ordinance the city approved in August 2017 to fund other property tax appeals.” Analyst Goldmacher noted that Atlantic City and the state of New Jersey planned for the possibility of paying a nearly $5 million tax settlement by setting up a reserve fund. Indeed, Atlantic City is now planning for a large number of more “routine” tax appeals, but none of the magnitude of Taj Mahal are anticipated—and, Ms. Ryan adds there are no remaining tax appeals for any of the city’s casino properties. That helps to explain Moody’s November upgrade of the city’s general obligation bonds last November to B2 from Caa3, where the credit rating agency cited an improving casino industry and efforts to expand the city’s tax base.

Robbing Pedro to Pay Paul? Yesterday Governor Ricardo Rosselló of Puerto Rico warned that if federal FEMA funding was held back or withdrew disaster relief funds intended for Puerto Rico to finance the border wall between Texas and Mexico, he would sue the President, tweeting: “Now citizens of Puerto Rico and California will pay for the wall? He added: “If that is the case, then we will see in court.” His tweet came as Puerto Rico’s Resident Commissioner in the U.S. Congress, Jenniffer González, in the wake of the White House announcement that the President, in issuing his emergency declaration, will allocate emergency disaster relief funds to finance his proposed of the wall between the United States and Mexico, requested President Trump to “clarify the situation.” Her apprehension is over reports that the President could take as much as $2.5 billion in FEMA funds intended for the Army Corps of Engineers to use for post-hurricane relief and recovery in Puerto Rico, where, still today, tens of thousands of people in Puerto Rico now face water rationing due to increasingly drought-like conditions, even as the island has yet to fully recover. Earlier this week, Gov. Rosselló said that seven of the U.S. territory’s municipalities in the northwest region could be without water for up to 24 hours at a time starting next week, as federal officials have reported that more than 75 percent of Puerto Rico is experiencing abnormally dry conditions and another 8 percent is in a moderate drought—meaning some 220,000 Americans people are experiencing a drought: absent more federal assistance for an actual, rather than manufactured, emergency, more than 1.4 million U.S. citizens in Puerto Rico will face food aid cuts. Moreover, there could be critical health and safety problems if the hurricane inflicted damage to Puerto Rico’s Guajataca reservoir are not fully repaired by May.

Coming Up Against a Wall in Trying to Help Puerto Rico?

February 12, 2019

Good Morning! In this morning’s eBlog, we report on the disparate resources available to U.S. citizens of Puerto Rico to address disasters—here in relation to disparate funding assistance from the Federal Emergency Management Agency (FEMA), which appears to be insisting that, in order to be eligible for federal disaster assistance, residents whose homes were damaged by Hurricane Maria must show they hold title to their properties, with the inequitable treatment coming as Puerto Rico confronts water rationing.

Tens of thousands of U.S. citizens in Puerto Rico will face water rationing due to increasingly dry conditions as Puerto Rico continues to work to recover from Hurricane Maria with less FEMA resources. Federal officials have reported that 76 percent of Puerto Rico is experiencing abnormally dry conditions and another 8 percent is in a moderate drought. They said some 220,000 people are experiencing a drought. Those affected by the water restrictions depend on the Guajataca reservoir, which was damaged by the Category 4 hurricane that hit in September 2017. Officials said improvements to the reservoir will be completed by May and include increased capacity for water storage. Yesterday, Gov. Ricardo Rossello Nevares said that seven municipalities in the northwest region could be without water for up to 24 hours at a time starting next week, as the government announced that a rationing process will soon begin in the northwestern area of ​​Puerto Rico—adding that the municipios of Aguada, Aguadilla, Camuy, Isabela, Moca, Quebradillas, and the Puntas de Rincón neighborhood will have water rationing. These municipalities currently receive drinking water from the Lake Guajataca Reservoir, one of the hardest hit structures by Hurricane Maria in 2017. Now the Governor warns it has become imperative to take precautionary measures due to the deficit in rainfall registered months ago and that could persist until May, according to forecasts, noting: “And of all the municipalities, 46 have experienced an atypical drought, which means that, compared to previous times, (the drought) is much worse. Fifteen municipalities have moderate drought,” adding: It is up to us, as a government, to be as diligent as possible, to offer all the information that is available to us and to have the most robust strategies in the event that events of this nature (less or no precipitation) can occur.”

Immediately, the Mayor Edwin García Feliciano of Camuy, Mayor Heriberto Vélez Vélez of Quebradillas, known asLa Guarida del Pirata,” or the Pirate’s Hideout, as the town, which was founded in 1823, was a former home to an old structure known to have been a hiding place for pirates and their contraband: the town derives its name from the large amount of streams flowing through it, and Isabela Mayor Carlos Delgado Altieri, proposed that rationing should not be extended for 24 hours, with Mayor García Feliciano stating:We are proposing eight-hour rationing,” while his counterparts noted they would be satisfied if the rationing was for 12-hour intervals—with Mayor Delgado Altieri noting: “Because when they say (rationing) of up to 24 hours, they possibly become 48 hours in what the system recovers.” It seems a critical challenge for the municipal elected leaders is that the U.S. Army Corps of Engineers has been drawing too much water from the reservoir as part of its response to the structural damage caused by the hurricane—which repairs Elí Díaz Atienza, the head of the Aqueduct and Sewer Authority, described as critical, because one of the reservoir’s walls had been undermined by the unprecedented deluge: he anticipates repairs will be completed by May—and has committed to convening a session this week with the seven alcaldes or mayors of the affected municipalities, albeit noting that he would “have to take into consideration schools and hospitals.”

Unsurprisingly, the Mayors are apprehensive that the rationing will adversely affect commercial activities in their respective municipalities, while Mayor Feliciano and Mayor José Avilés Santiago of Moca were of the view that their respective villages would not be economically affected, because rationing would not impact all residents, with Mayor Avilés Santiago noting that only 28,000 of its 40,000 residents are affected, because the residents of the Plata and Cerro Gordo neighborhoods have wells, and that some parts of the Naranjo and María neighborhoods also have wells. Mayor García Feliciano noted that in Camuy, only two of its 13 neighborhoods (Piedra Gorda and Puertos), with approximately 4,500 people, will be affected by water rationing. Together, the four mayors said they have already outlined an action plan, which includes the distribution of potable water by tanker trucks, the establishment of oases, and guidelines for citizens and municipal employees to avoid wasting water.

Innovation. In the absence of adequate FEMA assistance, Quebradillas has acquired two 6,500 gallon tanks, while Mayor García Feliciano reported he will investigate meeting with Director Díaz Atienza to see if it would be possible to take water to the Puertos neighborhood from the Quebrada neighborhood filtration plant, and if the same could happen from the Hatillo filter plant to the Piedra Gorda neighborhood. In addition, the seven municipios in the region have agreed upon a water sharing plan involving some 73 tanker trucks for the seven municipalities to share. It is unclear whether this will be a temporary or more permanent issue: Governor Rosselló Nevares warned yesterday that the reservoirs of Cidra and Toa Vaca are under “observation” due to the decrease in their levels. 

Director Díaz Atienza stated he will seek FEMA reimbursement, because “this is all related to the emergency. Any additional expenses that we have to make are going to be happening to FEMA as part of the hurricane’s effect.” The silence from FEMA, to date, however, is not encouraging. Omar Marrero, the Director of the Central Office of Recovery and Reconstruction, reiterated that they have on the agenda the dredging of Puerto Rico’s main reservoirs (Caonillas, La Plata, Carraízo, Dos Bocas and Patillas), stating he is seeking some $900 million from FEMA; however, that request could come up against White House efforts to divert Army Corps of Engineering assistance from Puerto Rico to finance construction of portions of a wall along the U.S. border with Mexico.

The Precipitous Path out of Chapter 9 Municipal Bankruptcy

February 11, 2019

Good Morning! In this morning’s eBlog, we report on the Motor City’s ongoing fiscal recovery from the nation’s largest chapter 9 municipal bankruptcy, as it has succeeded in stabilizing its fiscal situation—even as it is not wholly yet out of the fiscal woods.

Taking the Fiscal Checkered Flag. The Motor City, which exited from state oversight at the end of last April, after Michigan’s Financial Review Commission, set up in 2014 to serve as a fiscal monitor of Detroit, voted unanimously to end its oversight of a city that officials said has been under some form of outside supervision since 1975—a vote which came after Detroit ran three years of budget surpluses—and marked the phenomenal fiscal achievement of eliminating some $7 billion of accumulated debt. No one had anticipated such a swift exit that demonstrated such a reversal of the city’s long economic, fiscal, and population decline that pushed it into a record-setting chapter 9 municipal bankruptcy—or, as Mayor Mike Duggan noted: no one expected Detroit to move out-of-state supervision within three budget years, the soonest time available. The city’s recovery was, indeed, phenomenal according to Mayor Mike Duggan. The scale of the recovery was illustrated by S&P Global Ratings’ upgrade last Thursday to BB-minus from B-plus in recognition of its stabilizing fiscal picture—an upgrade to stable, which still leaves the city three notches away from investment grade. While the upgrade was not small, it marked still another step of recognition of the city’s fiscal turnaround—and the biggest step since, last April, Detroit emerged from ns bonds. The outlook is stable. S&P analyst John Sauter wrote: “The one-notch upgrade to Detroit’s GO rating reflects our view of the city’s stabilizing financial position, whereby we feel it is well situated to absorb increasing pension commitments and scheduled increases in debt service in the coming years, as well as possible revenue setbacks, while still sustaining year-to-year budget balance and very strong reserves.”

The upgrade, while small, is the latest signal of the turnaround afoot for Michigan’s largest city, whose fortunes were once tethered to the automobile industry. Last April, the Commission, created in 2014 to act as a fiscal monitor/overseer of the Motor City, had voted unanimously to end its oversight of a city that officials said has been under some form of outside supervision since 1975—with the vote coming after Detroit achieved three years of budget surpluses—an exit which Mayor Mike Duggan noted was an achievement no one had anticipated: “I don’t think anybody expected us to work together so well: This has been a great collaborative effort.” In a city more dependent on income than property taxes, the city’s income-tax collections rose 8 percent in 2017, while assessed property values rose for the first time in seventeen years. Indeed, Michigan State Treasurer Nick Khouri, in the wake of the vote, noted: “There’s much to do, but much has been accomplished over the last three and a half years: The progress has been nothing but amazing.” Nevertheless, Detroit Chief Financial Officer John Hill, in an interview prior to the Commission vote, noted the Commission will still continue its fiscal reviews, because it will be required to formally waive its oversight annually for the next decade. He also noted that the city may not resume its issuance of general obligation bonds for another two to three years.

Sandy Baruah, President and CEO of the Detroit Regional Chamber, a business group, reported that investment has increased, because the private sector is “voting with their feet” and checkbooks, noting: “When I moved here in 2010, downtown was pretty much dead all the time…Now it’s pretty much vibrant all the time. It’s a pretty significant change.”

While parts of Detroit are thriving, others are still economically depressed and crime-ridden, according to Luther Keith, the Executive Director of Arise Detroit, a neighborhood community group, who noted there are still a “significant number” of residents who feel the progress has not come to their block, because the improvements are not as widespread as they should be—or, as he put it: “We have not recovered…We have not completed the comeback. We are coming back. There are signs of that, but we still have huge, huge issues that we are confronting, but we are moving the needle in the right direction.’’

Steps for Municipal Fiscal Recovery. A key physical and fiscal challenge going forward will be the focus on blight revitalization in neighborhoods abandoned as families left the city for its suburbs—challenged by fear of crime and a dysfunctional public school system. When I was in the city on the morning it filed for the nation’s largest ever chapter 9 municipal bankruptcy, I was warned that trying to walk from my downtown hotel to the Governor’s Detroit offices—a distance of less than a mile—would be too dangerous. It was a walk past abandoned homes and empty buildings, with the abandoned homes a lure for looters. Although the crime rate has decreased, Detroit still ranks as one of the most dangerous cities in the country; notwithstanding the city’s recovery, in a city uniquely dependent on municipal income taxes, more than one-third of the city’s resident (approximately 34.5%) were still below the federal poverty level in 2017—a level, however, which marked a slight decline from the previous year; the child poverty level, however, remained at the exceptional level of 48%–a level with stark implications for the city’s public school system—and for attempting to be a magnet for young suburban families thinking about moving into the city, nearly a 20% decrease. While only a slight change from 35.7% in 2016, the rate is down from about 41% five years ago. Gabe Diederich of Wells Fargo Asset Management, noted: “The city is continuing on a step ladder toward improvement; that is a very good thing for their citizens, and, I think, investors…but the economic conditions in Detroit, while improved, still don’t convey material strength: While the core has gotten better, you still are surrounded by a ring of pretty distressed areas.” But the Dean of chapter 9 municipal bankruptcy, Jim Spiotto, notes Detroit needs to continue its focus and energy on fiscal responsibility: “You’ve got to stay the course: You’ve got to keep fiscal responsibility as a key issue.”

Detroit Mayor Mike Duggan noted: “We believe an improved credit rating is a strong reflection that our strategies to improve the quality of life in Detroit are working: Detroit can provide effective public services to its residents only if city government operates in smart, financially sound ways, and that has been our mission from day one.”

Nevertheless, Mr. Sauter warned that the Motor City still faces substantial short and long-term fiscal challenges credit pressures, noting that stabilization of the population and tax base is key to future budgetary performance and long-term viability, wiring: “In our view, the city has positioned the budget to be able to absorb increasing pension and debt service costs in the near term, while relying on conservative revenue estimates and still remain balanced.” Detroit’s new Chief Financial Officer David Massaron, whom the Mayor appointed in December, as Detroit’s acting CFO, said the city will continue to work to increase its reserves to make strategic investments so that the economic growth that the city has experienced over the last four years continues, noting: “Given our strong liquidity and positive budget results, it’s important we consider increasing our budget reserve, while also continuing to invest in infrastructure and economic development to help grow our local economy,” he said.

In its fiscal report, S&P noted that the Motor City’s strong financial reserves and recent return to the bond markets for capital investment have earned it a credit rating boost, adding that Detroit is positioned to absorb increasing pension commitments and debt service payments as well as possible revenue setbacks while sustaining a balanced budget and funding reserves. His report also cited Detroit’s return last December to the municipal market for its capital borrowing as a “significant stabilizing factor” in its financial trajectory, noting: “Detroit is demonstrating ability to meet its budget demands, while also providing a strong reserve cushion against unexpected events or stagnating revenues…The city is experiencing good economic growth (though mostly centered in the downtown area) and population declines are moderating. At the same time, it continues to post budget surpluses, grow reserves, and meet objectives as defined in its Plan of Adjustment and subsequent planning documents.”

For his part, governing recovery architect Mayor Mike Duggan said the improved rating is a reflection of Detroit’s strategies to improve quality of life in the city, noting: “Detroit can provide effective public services to its residents only if city government operates in smart, financially sound ways, and that has been our mission from day one.”

Part of that “smartness” is reflected by the increasing property tax revenues and plans to accrue some $335 million by 2024 to address looming public pension obligations due to its two pension funds as part of the city’s chapter 9 plan of debt adjustment.

Nevertheless, S&P notes this will not necessarily be a Yellow Brick Road, but rather a road still encumbered by “substantial credit pressures,” noting the city: “operates within a very limited revenue-raising framework that is intricately tied to economic activity. Therefore, continued stabilization of the population and tax base will be key to future budgetary performance and long-term viability: To support this stabilization, the city must continue investing in public infrastructure and economic development initiatives, while also managing increasing annual pension and debt service burdens.” Over the longer term, S&P adds that Detroit’s “very large unfunded pension obligation will continue to grow, and there remains risk that projected funding requirements, starting in FY’2024, could be larger than anticipated.”

Acting CFO Massaron noted: “Given our strong liquidity and positive budget results, it’s important we consider increasing our budget reserve, while also continuing to invest in infrastructure and economic development to help grow our local economy: It’s essential that we take actions like these today in order to help support our long-term financial and economic outlook. I look forward to working with the City Council to consider these efforts.”