The Trials & Tribulations of Municipal Bankruptcy

March 29, 2019

Good Morning! In this morning’s eBlog, we consider Detroit’s acquisition of nearly 15 acres from the Great Lakes Water Authority in order to significantly expand space for the manufacture of Fiat Chrysler automobiles—an expansion which could cap the city’s remarkable turnaround from chapter 9 municipal bankruptcy, before reflecting on the President’s growing opposition to any further fiscal and disaster relief assistance to the U.S. territory of Puerto Rico, amid increasing legal questions with regard to the status of the appointed, but un-elected PROMESA Board.  

Driving to a non-Chapter 9 Future. The City of Detroit will acquire 14.45 acres of leased land from the Great Lakes Water Authority in its effort to deliver 200 acres to Fiat Chrysler Automobiles NV for its $2.5 billion plant expansion on the city’s east side. According to a purchase agreement, the Detroit Brownfield Redevelopment Authority will purchase for $1 million the property at 11900 Freud and 11900 Jefferson: here the agreement includes an easement for the regional water system to have access to operate the Conner Creek combined sewer overflow facility. The Authority’s Board Wednesday afternoon finalized the purchase. Due to a regional sewage disposal system lease agreement, the Great Lakes Water Authority has the right to sell and receive proceeds from the sale of the property if it is no longer needed. Under the agreement, the Detroit Water and Sewerage Department also stands to receive at least 40 percent of the proceeds since it still owns the property, but leases the facility, according to spokesman Bryan Peckinpaugh: the funds are slated to go toward the sewerage department’s general fund and help its infrastructure and sewer improvements.

The Authority approved the sale at its March 13th board meeting—after an inspection within the next 180 days. The property is near the Fiat Chrysler’s Jefferson North Assembly Plant. In maybe a hint of the city’s return to being an epicenter of the U.S. auto industry, Fiat plans to invest $2.5 million in expanding its Mack Avenue facilities and $900 million investment in the Jefferson North Assembly Plant on Conner Street. The moves come after, last fall, the Detroit Brownfield Redevelopment Authority Board approved initial steps in the city’s request for assistance in assembling land to establish market-ready industrial sites in the city. The Redevelopment Authority received $10 million in initial funds from the city from its chapter 9 plan of debt adjustment funds to acquire properties and conduct environmental testing. As of Wednesday, Detroit had one month left, until April 27th, to acquire 200 acres of land and secure City Council approval for the development.

Too Many Fiscal Chefs in the Kitchen? A delegation from the U.S. House of Representatives Natural Resource Committee is concluding its visit and sessions with a meeting with the PROMESA Oversight Board—where one of the issues to be discussed relates to obtaining information with regard to former Revitalization Coordinator Noel Zamot’s allegations regarding the U.S. Territory’s alleged boycott of his efforts. Yesterday, Puerto Rico’s 20th Resident Commissioner and non-voting Member of Congress, Jenniffer González, acknowledged that the meeting with the PROMESA Board was an opportunity to find out what the members of the Board understood with regard to Coordinator Zamot’s allegations. She noted that House Committee on Natural Resources has not only jurisdiction with regard to the allegations, because of its oversight responsibilities, but also because of its concern with regard to how the federal statute’s Title V, the title governing the tasks of the Revitalization Coordinator, have worked.

However, González said that Coordinator Zamot’s priority should be to immediately take the evidence he may have with regard to illegal actions from government officials regarding infrastructure investment projects to the Federal Bureau of Investigation. Natural Resources Committee Chair Raúl Grijalva (D-Az.) told El Nuevo Día that his advisors had commenced discussions with Mr. Zamot, who believes that there were possibilities to launch projects for about $ 3 billion; however, by the time he left his position, only one project had been designated critical with a $25 million investment—or, as Congresswoman Nydia Velázquez (D-NY), the first Puerto Rican woman to be elected to Congress, noted: “These are serious allegations.” She indicated that if the Committee finds evidence of corruption, Mr. Zamot must take “it to the Department of Justice and the FBI.”

The Congressional delegation was scheduled to meet with Gov. Ricardo Rosselló Nevares this morning, where Rep. Rubén Gallego (D-Az.) said he would ask the PROMESA Board about what they will do to ensure that “the funds we are allocating (from Congress) move faster” for Puerto Rico’s recovery and “what their plan to contribute to economic development is,” as he noted: “They are treating the island and its elected representatives as if they were children, rather than a government elected by the people.” Indeed, the Congressional visitor emerged from their sessions with agreement they will support efforts in Congress to review the powers of the PROMESA Board—or, as Rep. Gallego noted, Puerto Rico’s elected government should have “more power” over the future of the U.S. territory, even if it is not feasible to eliminate the Board.

Their visit to Puerto Rico comes as a bipartisan group of Members of Congress has introduced a bill that would make Puerto Rico the 51st U.S. state—a proposal opposed by President Trump, and comes as a fight over aid for Puerto Rico is threatening to derail a disaster relief bill in Congress, where the Senate is working its way through a package to provide recovery assistance for a recent spate of hurricanes, storms, and wildfires—forcing hard balancing questions, as Congress and the White House are debating when, if, or how much aid Congress and the administration will be able to agree upon. Moreover, the discussion came as the President has sparked a political firestorm for his criticism of Puerto Rico’s handling of previous disaster funds during a private lunch this week with GOP senators. Senate Appropriations Chairman Richard Shelby (R-Ala.) was blunt when asked about the President’s comments: “Let me tell you what, Puerto Rico doesn’t have a sterling record, and a lot of states don’t either, but Puerto Rico has not a good record on handling a lot of money … and that’s what the President is raising.” The President has repeatedly criticized Puerto Rico, which was devastated by back-to-back hurricanes in 2017. Governor Ricardo Rosselló called his latest comments from the GOP lunch “irresponsible, regrettable and, above all, unjustified.”

With the Senate not in session today, Senate Democrats next week thus may opt to block legislation proposed by their Republican counterparts that would allocate billions of dollars for disaster recovery across the country, but an amount they consider insufficient with regard to more aid to Puerto Rico’s slow efforts to recover from a pair of devastating hurricanes more than a year ago. The impasse ahead of votes early next week appears to have emphasized the governance twilight zone in which Puerto Rico falls: it is neither a state, not a municipality: it cannot file for chapter 9 municipal bankruptcy. Thus the Congressional debate, and seeming inequitable treatment for Puerto Rico—appears to reviving efforts in Puerto Rico to become a state—indeed, yesterday, lawmakers introduced a measure to make Puerto Rico the 51st state.

The stormy back and forth appears to have contributed to increasing demands by Democrats for changes to the Senate GOP disaster aid funding bill: they are threatening to block it from getting the 60 votes needed to invoke cloture to overcome a filibuster, with a senior Senate Democratic aide noting there were three options that would allow the disaster aid bill to receive the requisite 60 votes needed to pass the Senate in the wake of the President’s: pass the House-passed emergency supplemental, amend the GOP proposal to include priorities from Democrats, or pass a shell bill to allow for the House and Senate to kick the issue to a House-Senate conference committee. Sen. Deputy Minority Leader Dick Durbin (D-Ill.) described the Puerto Rico provisions as a “sticking point” on the negotiations over the broader disaster relief bill; asked if Democrats would vote against the legislation if the amount of aid for Puerto Rico is reduced compared to the House bill, Sen. Durbin responded, “Many of us will.”

Whatever the Senate agrees to will go to conference with the House, which passed a disaster recovery bill earlier this year. The Senate version includes $600 million for food stamp aid in Puerto Rico, a level which Democrats argue is insufficient: Ranking Senate Appropriations Committee Member Patrick Leahy (D-Vt.) introduced an amendment to the Chairman’s proposal to include a handful of additional provisions, including requiring the Department of Housing and Urban Development to release block-grant funding and funding to help Puerto Rico repair damaged water systems; however, in his statement on the Senate floor, he told his colleagues: “Unfortunately, it appears that the President will not accept even this reasonable offer. Instead, he will endanger the entire disaster package, because he wants to pick winners and losers. He wants to decide who gets assistance in the wake of disasters based on his own arbitrary standards and political grudges. This is unacceptable.”

Whatever happens, tempus fugit, as the Romans would say: time is flying, with Congress poised to depart at the end of next week for its two-week Easter recess.

Who’s in Charge of Governance? Are There Too Many Fiscal Chefs in the Kitchen? While the PROMESA statute took some of its bearings from chapter 9 municipal bankruptcy, because Puerto Rico is neither a state nor a municipality; that law led to the appointment of the PROMESA Oversight Board, but without the clear authority described in various state laws with regard to plan of debt adjustment quasi-commander—the role, for instance, which Kevyn Orr played in Detroit, where he effectively suspended the authority of the Mayor and City Council until a U.S. Bankruptcy Court approved a plan of debt adjustment. Thus, in Puerto Rico, we have a Governor, legislature, a court, and a Congressionally-appointed Board—where a U.S. Court of Appeals has now ruled that a Puerto Rico bankruptcy judge’s decision that payment of special revenue bonds in municipal bankruptcies is voluntary rather than mandatory, and where the U.S. First Circuit Court of Appeals has affirmed two major U.S. District court decisions that found creditors of Puerto Rico cannot force the U.S. territory’s government and agencies to set aside funds or make payments on special revenue bonds during its landmark restructuring.

In Governing: How Does Oversight Work in cases of default or bankruptcy?

March 22, 2019

Good Morning! In this morning’s eBlog, we consider unlikely appeal of former, convicted Detroit Mayor Kwame Kilpatrick from his long-term federal prison sentence; then we consider the fiscal challenge of growing poverty in Michigan, where nearly 1.7 million households in 2017 earned less than what they needed to make ends meet; finally, we return to the battle between the elected leaders of Puerto Rico versus the appointed, but unelected PROMESA Board.  

U.S. District Judge Nancy Edmonds this week refused to set aside the 28-year prison sentence she gave to former Detroit Mayor Kwame Kilpatrick six years ago; the former Mayor had argued the prison sentence should have been vacated because of incorrect jury instructions, impermissible hearsay, and because his defense attorney had a conflict of interest. The court noted that his motion to vacate the sentence failed to raise some of those issues in an earlier appeal and that he had been unable to demonstrate his trial had any of the claimed errors. Indeed, in her opinion, Judge Edmunds wrote: “Nor can defendant show actual innocence: As this court has previously discussed at length, the evidence at trial weighed heavily in support of the verdicts of guilt against defendant.” The rejection is likely to mark the former, corrupt Mayor’s last chance to avoid his full sentence—a sentence of equal duration to the nation’s longest other such corruption sentence—the sentence handed down to former Cuyahoga County Commissioner Jimmy Dimora. In this case, the former Mayor was convicted of running a criminal enterprise out of City Hall that included steering rigged water and sewer contracts to his friend Bobby Ferguson. In the corruption probe in Cuyahoga County, former Commissioner Dimora was imprisoned for the longest sentence out of more than 70 government officials, employees, contractors, and business people convicted in a wide-ranging Cuyahoga County corruption probe—with the sentencing judge noting: “He repeatedly solicited and received bribes in exchange for official acts, and pressured other public officials to take official action in furtherance of these bribery schemes.”

Judge Edmonds’ order came in the wake of previous failed attempts to have the conviction overturned by the 6th U.S. Circuit Court of Appeals or to gain a hearing before the U.S. Supreme Court. The former Mayor has also filed a petition for commutation — a reduction of his sentence — but he does not appear to meet the U.S. Justice Department’s standards for considering clemency: he is ineligible for a pardon under the Department’s guidelines, because he is still serving a prison sentence: he has served only five years of his 28-year sentence. People granted commutations have typically served at least half of their sentences, according to legal experts in the clemency process. Grounds for commutation traditionally include disparity or “undue severity” of sentence, critical illness, or old age, or meritorious service rendered to the government, according to the Justice Department. The former Mayor has long maintained his innocence; it is rare that the Office of the Pardon Attorney grants clemency for convicts who have not accepted responsibility for their crimes, according to experts. The former Mayor has also sought clemency from President Trump; however, but he doesn’t appear to meet the Justice Department’s standards for considering a reduction of his prison sentence.

Losing in a Growing Economy. Notwithstanding the relatively strong U.S. economy and the recovery of the auto industry, the working poor population of Michigan is growing, with, in 2017, nearly 1.7 million Michigan households earning earned less than what they need to make ends meet, according report released by Michigan Association of United Way, which noted that health care and child care costs dominate budgets, and that, notwithstanding the ongoing economic expansion, the state’s working poor population is growing. The report points to the change in employment in the state, with the fastest growing segment of households earning less than what they need to make ends meet, a result of the fastest-growing jobs in Michigan being low-skilled and low-wage and increasing costs of living—adding that Michigan’s population of employed workers who are unable to afford the basic needs of housing, child care, transportation, health care, technology, and food—deemed ALICE workers (asset-limited, income-constrained, employed) are those earning below the average cost to cover basic expenses, which the United Way defined as $61,272 a year for a family of four and $21,036 for a single adult. In Michigan, Michigan, ALICE workers and those living below the federal poverty line ($14,380 a year for an individual and $25,750 a year for a family of four) had increased to 43 percent of households in 2017 from 40 percent of households in 2010, according to the report. The United Way reported the key factors impoverishing Michigan’s population are low minimum wages, health care costs and taxes (or lack of tax credits), which spiked 98 percent and 83 percent monthly between 2010 and 2017, according to the report. The tax increase, according to the report, is caused by higher prices for all other categories and higher relative earnings needed to cover expenses. The biggest cost remains child care, which averaged $1,122 monthly in 2017 for a family of four. For health care in the state, the key factor has been an average 59 percent increase in out-of-pocket costs, as well as the addition of the Affordable Care Act penalty for not purchasing health insurance. Thus, even though the state expanded Medicaid coverage in April of 2014, the Medicaid eligibility cutoff remains only 138 percent of the federal poverty level. Thus, it appears more and more are caught between an economic rock and a hard place: even though there appear to be many job opportunities, more than six out of every ten jobs in the state pay less than $20 per hour, with nearly two-thirds of those paying less than $15 per hour, according to data gathered for the report from the Bureau of Labor Statistics: the greatest jobs gains in Michigan between 2010 and 2017 were in occupations that paid between $9.43 per hour and $15.91 per hour. The study notes that while retail jobs increased 12 percent between 2010 and 2017, wages only rose 5 percent; assembly and fabricator jobs grew 64 percent between 2010 and 2017, however, wages declined 1 percent over the same period, according to the study. The study reports that the low-wage problem is the biggest challenge in metro Detroit: in Wayne County, 683,986 households, or 56 percent of all households in the county, were considered in the ALICE category or below the poverty line in 2017, compared to the suburban, surrounding Macomb and Oakland counties, where the corresponding figures were 39 percent and 32 percent, respectively. The report further found that, demographically, baby boomers are falling into the ALICE category at a greater rate than any other age group: between 2010 and 2017, working poor households where the primary earner was 65 years or older grew by 17 percent.

While all races experienced increases in the working poor population, Hispanic and Asian households became poorer between 2010 and 2017, with increases below the ALICE threshold growing 28 percent among the Hispanic population and 43 percent among the Asian population in Michigan.

The Michigan Association of United Ways has recommended raising the child-care subsidy cap as one way to offer relief. Three years ago, the state had the nation’s lowest income-eligibility level; then, last year, Gov. Rick Snyder increased the eligibility from 125 percent of the poverty line to 130 percent. But the gap seems especially critical for the state’s youngest, because the Legislature’s inaction with regard to lifting the subsidy cap up as costs increase, has translated into fewer families being eligible for child care assistance: a decade ago, Michigan provided child care subsidies to 57,268 families, according to data from the Michigan League for Public Policy, but, by January of 2016, that number had declined nearly 60 percent to only 17,047.

Unelected & Unaccountable? In attempting to create a quasi-chapter 9 municipal bankruptcy statute so that Puerto Rico could emerge from its virtual insolvency, Congress looked to chapter 9 municipal bankruptcy—a unique federal statute which is only available to municipalities in states which have authorized chapter 9—a minority of states. Chapter 9 has, indeed, proved to work, mayhap demonstrating that the nine long years put into getting it enacted were worth it—especially if one considers Detroit, San Bernardino, Central Falls, Rhode Island, and other municipalities which have recovered and not looked back. No doubt Detroit, especially, appeared to be a focus for Congress—a situation where the then-Governor appointed an Emergency Manager to juggle ensuring there would be no disruption whatsoever to vital 9-1-1 or traffic and street light services, while negotiating with municipal bondholders, retirees, employees, and a myriad of other parties to fashion a plan of debt adjustment.

Thus, Congress created the PROMESA Oversight Board to serve as a quasi-Emergency Manager, but, Puerto Rico, a U.S. territory, not a municipality, has a Governor and legislature—that is, it is, in governance terms—somewhere in the Twilight Zone between a state (which may not file for bankruptcy) and a municipality, which may if authorized by a state, something which, therefore, is available in less than half the states.

The PROMESA statute, thus, enabled a Congressionally appointed, unelected Board, to serve as a quasi-emergency manager, with seeming dictatorial power over a Governor and Legislature, subject to a federal court. That Board, as we have observed, appears to be unaccountable to any citizens; it is subject to some U.S. federal court review—and, theoretically, to Congressional oversight.

Unsurprisingly, this has created stress—as can be readily observed by the recent PROMESA Board’s escalation of its efforts to preempt the Governor and Puerto Rico Legislature’s authority: the PROMESA Board has issued an eight-page list of shortcomings with regard to Gov. Ricardo Rosselló’s most recent quasi-plan of debt adjustment—a demand in response to which the Governor’s office has responded: Puerto Rican public policy will be determined by the Puerto Rican people. The statement came after, last Friday, PROMESA Board Executive Director wrote: “The Oversight Board has determined that the proposed plan requires significant revisions and additional supporting information before the Oversight Board can certify it as compliant with the requirements of [the Puerto Rico Oversight, Management, and Economic Stability Act].” In her epistle, Director Jaresko broke up her calls for changes and additions to the Governor’s fiscal plan into six categories: macroeconomic projections, baseline revenue projections, baseline expenditure projections, structural reforms, fiscal measures, and other miscellaneous measures—noting, in that last category, she had determined that Gov. Rosselló’s baseline projections with regard to tax reforms enacted in December which modifies projections for corporate, personal, and sales and use tax revenues, fails to include those new projections and is overly pessimistic with regard to total disaster assistance funding. Unsurprisingly, her criticisms are silent with regard to the gaping disparities if FEMA assistance for Puerto Rico compared to comparable storm disasters on the mainland. With regard to the plan’s baseline revenue projections, she noted that Puerto Rico had enacted tax reforms in December that changes projections for corporate, personal, and sales and use taxes; but she wrote that the Governor’s fiscal plan fails to include those new projections—adding that Gov. Rosselló was directed to eliminate $1 billion in annual funding starting in FY2021, because the funding is not currently approved, adding that baseline pension expenses in the Governor’s plan are $1.4 billion lower than in the current fiscal plan without sufficient explanation.

With regard to labor reforms in Puerto Rico enacted by the legislature and signed into law by the Governor, Ms. Jaresko wrote that the Governor’s estimate of the impact of labor reforms was too optimistic, noting that because these reforms were occurring at a slower pace than the unelected Board wanted, any benefits should be pushed back four years from FY2021 to FY2025—and that the PROMESA Board’s measures to reduce total personnel spending (freezing payroll, introducing uniform healthcare benefits, and ending the Christmas Bonus) must be reinserted in the plan. Finally, Director Jaresko noted that the quasi plan of debt adjustment omits the PROMESA Board’s pension reforms—demanding: “A freeze on benefit accruals and a net reduction to applicable pension benefits must be incorporated,” adding the plan includes Social Security benefits for some it should not, but fails to include it for others that it should.

Fiscal Agency and Financial Advisory Authority Executive Director Christian Sobrino Vega responded to the harsh fiscal and governance criticism: “From the outset, we categorically reject the characterization that our proposal does not comply with the law: The public policy of the government of Puerto Rico continues to and will continue to be established by the elected government of the Puerto Rican people.”

Director Jaresko has asked the Governor to submit a revised plan by noon today.

The Road to Recovery for one of the Nation’s Most Historic Cities

March 20, 2019

Good Morning! In this morning’s eBlog, we consider the fiscal and physical challenge of fiscal challenges related to health outcomes—outcomes which appear to demonstrate the ongoing fiscal disparities in the Commonwealth of Virginia.

For the second year in a row and the fifth time in nine years, Petersburg, Virginia, one of the nation’s oldest municipalities, or, as it is classified in Virginia, an independent city, has placed last in the state in terms of health outcomes. The city, which, at its inception, was the final destination on the Upper Appomattox Canal Navigation System, making it a strategic location not just for transportation and commercial activities, but also as a site to protect river traffic—making it by 1645 a vital site just 21 miles from the state capitol in Richmond. Indeed, upon the order of the Virginia House of Burgesses, Fort Henry was constructed there in 1645 to protect river traffic. By the time of the Civil War, because of its strategic railroad network, it was perceived as key to Gen. Ulysses Grant’s plans to take the Confederacy. The city is also a cornerstone of American history because of its key role in African-American history: Petersburg had one of the oldest free black settlement in Virginia, and two of the city’s Baptist churches, founded in the 18th century, were leaders in the national Civil Rights efforts of the1950s-1960s.Today, Petersburg remains a transportation hub, with the network of area highways including Interstate Highways 85, 95, and U.S. Route highways, as well as hosting transportation centers for the CSX and Norfolk Southern rail systems.  According to the 2010 Census, the city of just over 32,000 is nearly 80% black, and median family income is around $40,300.

Now, according to the 2019 County Health Rankings & Roadmaps report, the city is ranked last in the state in the report—one put together and issued annually by the Robert Wood Johnson Foundation and the University of Wisconsin Population Health Institute, which pulls together health and social data to assess which factors influence a community’s health, including access to affordable housing, uninsured rates, and behavior trends—or, as Dr. Leslie Hogland, the Virginia Department of Health Director for the Division of Population Health Data put it: “It’s a really great annual tool to get communities talking and evaluating what they’re doing or not doing…The majority of the communities are increasingly looking at social determinants of health.” In this report, housing was a main focus of the report’s analysis of health disparities across the nation, including those related to race, socio-economic status, and geography. The report found in Virginia that some 13% of households have a severe housing cost burden (the report defines that as households which spend more than half of their income on housing), but notes that 20% of African-American households experience high housing costs, double the percentage of white residents; approximately 25% of Petersburg residents are confronted by a severe housing cost burden, nearly double the statewide average of 13%.

But it is fiscal health, in a state which does not specifically authorize chapter 9 municipal bankruptcy, but does impose a bar on the issuance of debt in excess of 10% of assessed valuation that is a concern. Petersburg continues to be a municipality struggling to recover from the grips of financial crisis, leading it, last year, to hire a new City Manager in the wake of receiving a report from consultants charged with turning around the city’s finances—consultants who advised the City Council the city needed a $20 million cash infusion to make up a deficit and comply with its own reserve policies—and recommended a $73 million proposed operating budget that emphasized public safety, more funding for chronically underperforming schools, and cuts to city departments, all coming, as we have previously noted, in the wake of the firing of former Manager William E. Johnson III, who was fired after the depth of Petersburg’s fiscal tribulations and near state takeover. Now, under new management, new City Manager Ferrell-Benavides reports that major goals within her proposed budget include building up the reserve, reducing reliance on grant funding, and being conservative with estimates: the budget proposal, which represents a $1.1 million decrease from the FY2018 amended budget, calls for increasing the reserve to $950,000.

The change in the fiscal imbalance mean that the city’s reserves are no longer in the negative; more revenue has been collected this budget year than expected, and Petersburg’s municipal bond rating has been upgraded from junk bond status. Key to this uplifting fiscal and rating news appears to have been the instructions from Council to department directors to trim their expenses by 10%, but could not cut salaries—an instruction which appears to have achieved a roughly $800,000 drop in general government expenses to $6.3 million, even as the budget provides more than a 16% increase for public safety, a key measure after previous austerity measures led to an exodus of public safety workers to surrounding counties.

The new budget also looks to the city’s future: Petersburg’s schools would also receive more money under the proposal. The school division would receive $9.7 million, up from the $9.4 million in the current budget—or, as Manager Ferrell-Benavides noted: “This is a big step for us. And that was part of the priorities. Our goal is to annually increase our investment in the school system.” Health care costs will prove to be a challenge going forward, she said, noting that the city underestimated health care costs in the current budget by $750,000.

To Privatize or Not to Privatize. In a separate fiscal decision, city officials anticipate a bump in revenues for the public utilities fund, after, earlier this year, the City Council approved a resolution that instructed the City Manager to reject offers by private companies to purchase the city’s water and wastewater assets. Manager Ferrell-Benavides said the city plans to hire additional part-time staff to help with collections, all, she notes, as part of a long-term plan to update the city’s infrastructure and improve the billing system are necessary and in the works.

The Road to Recovery. It was just a year ago, as we have reported, that the Robert Bobb Group—the Washington-based consultants headed by the former City Manager of Richmond—was hired to pull Petersburg from the brink of insolvency—unveiled a budget proposal that the group reported would put the city on the path to recovery, as it worked with the city on the first balanced budget in nearly a decade. The $77 million operating budget boosted spending on public safety and restored 10 percent cuts to municipal workers’ pay while shrinking a workforce that the consultants asserted was bloated and structurally inefficient. That budget kept school funding flat.

The consultants are scheduled to be back in Petersburg later this week and will submit an updated report in the coming weeks. City Council members, who have the final say on the budget, will drill down into the details over the next two months through work sessions and a round of community meetings.

Overturning a National Emergency & Turning the Fiscal Page in Puerto Rico

March 15, 2019

 Good Morning! In this morning’s eBlog, we consider the stunning vote late yesterday to overturn the President’s declaration of a National Emergency, and the convening of the U.S. House Committee on Natural Resources by Chair Raul Grijalva (D-Arizona) for an unprecedented set of Congressional hearings in Puerto Rico, before, finally, wondering if there might ever be an end to Jefferson County, Alabama’s chapter 9 travails. 

No National Emergency. The Senate late yesterday delivered a stunning, bipartisan rebuke to President Trump when it voted 59-41 to overturn the President’s national emergency declaration and approve a House passed-resolution to block President Trump from funding his border wall without Congressional approval—a step more likely than not to trigger the first veto of the Trump Presidency, with the President, shortly after the bipartisan vote, tweeting: “I look forward to VETOING the just passed Democrat inspired Resolution which would OPEN BORDERS while increasing Crime, Drugs, and Trafficking in our Country,” as he urged Republicans to stand with him ahead of the vote, tweeting “a vote for today’s resolution by Republican Senators is a vote for Nancy Pelosi, Crime, and the Open Border Democrats!” Senate Republicans had urged the President not to declare a national emergency to fund his border wall during the historic 35-day government shutdown. The veto, indeed, could be followed by a second, as the President has also threatened a veto of separate, bipartisan Senate approval of legislation to scale back the U.S. role in the Saudi-led coalition in Yemen’s bloody civil war. In a statement, Sen. Mitt Romney (R-Utah) described yesterday’s vote on the House resolution of disapproval as “a vote for the Constitution and for the balance of powers that is at its core,” adding: “I am seriously concerned that overreach by the Executive Branch is an invitation to further expansion and abuse by future President.”

Congress Goes to Puerto Rico! House Natural Resources Committee Chair Raul Grijalva (D-Az.),  whose father was a migrant worker from Mexico who entered the United States in 1945 through the Bracero Program, has commended four days of meetings in Puerto Rico, insisting his Committee bears a responsibility and priority to review Puerto Rico’s recovery process, especially in the wake of Hurricane Maria, but also to better understand the legal hurricane of the PROMESA law, with special emphasis on the austerity measures imposed by the PROMESA Board. Puerto Rico Resident Commissioner Jenniffer Gonzalez, the territory’s non-voting Representative in Congress, Wednesday said that in a recent meeting Chair Grijalva had guaranteed a future status hearing after she presented her pro-statehood proposal, she warned that his support is not yet a firm commitment. Nevertheless, Chair Grijalva noted: “I would like there to be a guarantee,” albeit adding: “I do not see it as an emergency” to address the debate on the political future of Puerto Rico. The Chairman was joined by five of his colleagues, including Ranking Member Rob Bishop (R-Utah), and Rep. Grijalva, Nydia Velázquez (New York), and Darren Soto (Florida), and the delegate of the Northern Mariana Islands, Gregorio Sablan. The resident commissioner in Washington, Jenniffer González, advanced her trip and arrived last night in San Juan. A seventh member, Rep. Rubén Gallego (D-Az.) is also scheduled to join the group, with the Congressman noting: “We want to make sure we have all the information we need to help improve the situation in Puerto Rico,” adding that although the priority is the recovery, he believes there should be a “debate about the status” of the U.S. territory. The Committee will hold both a public hearing, and convene a session with Federal Emergency Management Administration (FEMA) officials. Chair Grijalva has been particularly interested in hearing from citizens about the impacts of the austerity measures imposed by the PROMESA Board, especially after the hurricane, noting: “We want to hear closely how people are living, adding he has an interest in modifying the preemptive powers of the Board. Indeed, his colleague on the other body, Sen. Robert Menendez (D-N.J.), the Ranking Member of the Senate Foreign Relations Committee and of the Subcommittee on the Western Hemisphere, Transnational Crime, Civilian Security, Democracy, Human Rights, and Global Women’s Issues praised Chair Grijalva’s interest in revising the PROMESA statute: “Our opportunities to do something arise if the House acts.”

San Juan Mayor Carmen Yulin Cruz Soto, who had assisted in organizing the session, where some 50 speakers were scheduled to address as many as 6,000, described the event as “historic.” But while historic, the session is almost certain to be political; indeed, leaders of the Puerto Rico Independence Party, Juan Dalmau and Dennis Márquez, are likely to demand that appending plebiscite petition be urgently addressed—a petition in favor of ending Puerto Rico’s territorial status and restoring what he deemed the “the inalienable right to self-determination of the people of Puerto Rico.” The Mayor noted in any discussion of the PROMESA law, it was “almost impossible” not to speak of the “colonialism” facing the island. On Monday, the delegation will meet with the Directors of the Electric Power Authority, but Mayor Cruz has also scheduled a session with non-profit organizations, followed, on Sunday, by a luncheon with 16 Mayors.

Key sessions will take place Monday, when the delegation is scheduled to meet both with Gov. Ricardo Rosello Nevarez and the PROMESA Oversight Board. Rep. Bishop indicated that the proposed session with the legislators could be “the most important.”

One issue certain to be raised with the bipartisan delegation will be the refusal, to date, by the Senate to act on food assistance, forcing Puerto Rico to start reducing such assistance to more than 675,000 residents, residents still struggling in the wake of Hurricane Maria, which struck in 2017. While the House of Representatives has already passed funding for food aid and other needs, the U.S. Senate has yet to act. In the wake of the hurricane, Puerto Rico has been given increased food stamp allotments—but that increase has not fully levelled the playing field with states: the $600 million in additional aid being proposed by Sen. David Perdue (R-Ga.)—an amount President Trump has now reportedly agreed to after his administration called it “expensive and unnecessary” when it was a Democratic proposal—would only fund the food assistance program through September.

Puerto Rico Chapter 9? The PROMESA Board’s chief debt restructuring official, Martin Bienenstock, has indicated the Board may submit a quasi-chapter 9 plan of debt adjustment by the end of next month—a plan which would propose the process for repayment of as much as $19 billion in municipal bond debt and would be presented at a Title III bankruptcy hearing in New York, as the Board continues to struggle with completing a plan of debt adjustment, but indicating such a plan might mean cuts of as much as 75% for bondholders. Rumors of the emerging debt plan came in the wake of a restructuring of Puerto Rico Sales Tax Financing Corp. (COFINA) bonds, which offered recoveries of 56 cents to subordinate holders and 93 cents for investors in senior bonds; the plan is anticipated to fully address Puerto Rico’s general obligation debt, which, two years ago last February, totaled $13.3 billion. The proposed amount could also address the debt of the Public Building Authority, Public Finance Corp., Convention Center District Authority, and Industrial Development Company. These four entities were owed a total of $5.9 billion as of February of 2017.

The Last Chapter for Jefferson County’s Don Quixote? The U.S. Supreme Court has denied Attorney Calvin Grigsby’s request for a writ of certiorari in the chapter 9 municipal bankruptcy case of Jefferson County, Alabama; Mr. Grigsby, last August 16th, had filed for a writ asking for a review of the Eleventh U.S. Circuit s Court of Appeals’ ruling, which upheld the County’s argument that the concept of “equitable mootness” applied to its chapter 9 plan of debt adjustment, meaning that the County’s plan, which culminated with the issuance of $1.8 billion of 40-year sewer warrants to write down $3.2 billion of old sewer debt in 2013, could not be unwound—a decision which overturned a lower court order in an appeal Mr. Grigsby had filed—but the writ request for which the U.S. Supreme Court has summarily denied.

Notwithstanding, mayhap seeking Don Quixote status, Mr. Grigsby has indicated he will mow turn his attention to adversary proceedings that were filed during the original municipal bankruptcy, noting: “Now we will have to notice hearings on appeals of the adversary proceedings.” In one case, Mr. Grigsby is representing a group of elected and local officials who claimed that they were overcharged more than $1.6 billion on sewer warrants and related swaps because of corruption and violations of the Alabama State constitution. The plaintiffs are ratepayers of Jefferson County’s sewer system. (The County filed for chapter 9 in November of 2011 stating that it had $4.2 billion of debt—of which $3.1 billion in proceeds had been issued to finance work on the county’s sewer system. Mr. Grigsby, in one court filing, said the “plaintiffs have suffered an immediate injury to their property values and future available disposable income to satisfy payments exacted by the county to pay the indenture trustee for the unlawfully implemented swap warrant financings.” The adversary case is a complaint that seeks relief from the payment of the alleged overcharges.

Are U.S. Territories in Rod Serling’s Twilight Zone? Should Foreign Nation’s Be Given Federal Trade Preference, but not the U.S. Territory of Puerto Rico?

March 12, 2019

Good Morning! In this morning’s eBlog, we consider Congressional efforts to repeal the cabotage rules in order to give Puerto Rico the same treatment as any other coastal state.

Senator Mike Lee (R-Utah), Chairman of the Senate Water and Power Subcommittee of the Energy and Natural Resources Committee, at the end of last week introduced the Open America’s Water Act of 2019, proposed legislation to repeal the Jones Act and allow all qualified vessels to engage in domestic trade between U.S. ports, noting in his introduction of the bill: “Restricting trade between U.S. ports is a huge loss for American consumers and producers. It is long past time to repeal the Jones Act entirely so that Alaskans, Hawaiians, and Puerto Ricans aren’t forced to pay higher prices for imported goods—and so they rapidly receive the help they need in the wake of natural disasters.” The law in question, the Merchant Marine Act (more widely known as the Jones Act), which was enacted in 1920, requires all goods transported by water between U.S. ports to be carried on a vessel constructed in the U.S., registered in the U.S., owned by U.S. citizens, and crewed primarily by U.S. citizens. The Cato Institute estimates that after accounting for the inflated costs of transportation and infrastructure, the forgone wages and output, the lost domestic and foreign business revenue, and the monetized environmental toll the annual cost of the Jones Act is in the tens of billions of dollars—a figure which does not even include the annual administration and oversight costs of the law. Effectively, if enacted, the Senator noted it would repeal cabotage rules.

In introducing the bill, the Chairman reported in a press release that his legislation would allow any qualified vessel to transport cargo between ports under the U.S. flag. Under the existing cabotage rules, part of the 1920 Jones Act, the transportation of maritime cargo between the continental U.S. and Puerto Rico is mandated to be on U.S. owned, flag, construction and crew ships.  At a Senate Commerce Committee hearing last Wednesday, Chairman Roger Wicker (R-Miss.) and Ranking Member Maria Cantwell (D-Wash.) had presented a united front to oppose any what they seemed to describe as “degradation to the nation’s maritime cabotage law,” referring to the Jones Act, with their comments coming just weeks after Puerto Rico Gov. Ricardo Rosselló had requested a 10-year Jones Act waiver from the Trump administration, stating its necessity to develop a liquefied natural gas delivery system to the U.S. territory—a request the White House has yet to decide upon. The current law effectively discriminates against Puerto Rico by imposing rules and costs which do not apply to other nations in the Caribbean—but which, unsurprisingly, retains, therefore, very strong support from monopoly U.S. shippers. Indeed, a bipartisan group of Senators and Members of the House recently wrote to the President, advising him not to erode the Jones Act—a group opposing treating Puerto Rico as part of the U.S. Sen. Wicker, at his “State of the American Maritime Industry hearing, noted: “This is a fight that the Administration doesn’t need to have with folks that create American jobs.” The hearing came as the government of Puerto Rico has pending a partial administrative exemption before the federal government to transport during the next decade Natural Gas in non-US ships.

In his testimony, Thomas Allegretti, President and CEO of the American Waterways Operators, told the Committee that the Jones Act is “foundational” to the U.S. tugboat, towboat, and barge industry, adding that as the Jones Act reaches its 100th anniversary next year, that anti-Jones Act proponents have stated the law “must be a relic. I would say it’s more important today,” adding that the Jones Act provides a system in which “allegiances [to U.S. national security] are clear” and “transferring that to foreign assets and crews with no allegiances is absolutely absurd to me.” Mr. Allegretti did not explain to the Committee why U.S. citizens in Puerto Rico should have to pay subsidies for shipped goods that do not apply to other nations in the Caribbean.

Quien Es Encargado? With Puerto Rico, a U.S. territory, somewhere in a legal Twilight Zone between a municipality and a state, the Unión de Trabajadores de la Industria Eléctrica y Riego states it will seek a review by the U.S. Supreme Court of its challenge to the Puerto Rico Oversight Board’s decisions. It will be joined by a municipal bond insurer, and a hedge fund, which have filed three different suits using similar arguments, arguing that the Appointments Clause of the U.S. Constitution (part of Article II, Section 2, Clause 2 of the U.S. Constitution, which empowers the President of the United States to nominate and, with the advice and consent (confirmation) of the U.S. Senate, to appoint public officials) was illegally ignored in the appointment of the PROMESA Board’s members. Because of this, they said a court should declare the PROMESA Board’s decisions void. A year ago last July, U.S. District Court Judge Laura Taylor Swain, who has served as a the quasi-chapter 9 municipal bankruptcy judge, ruled against the first of these challenges, filed by Aurelius Investments; Judge Swain ultimately ruled against the other two challenges. Then, as we have previously noted, last month, the 1st U.S. Circuit Court for Appeals released a decision relating to the trio of suits, partially reversing Judge Swain’s decision, holding that the appointments were unconstitutional and that appointments to the PROMESA Board would have to be done via Presidential appointment and U.S. Senate confirmation, albeit, the court decided it would allow the current PROMESA Board’s actions to stay under the de facto officer doctrine—and that it would permit current PROMESA board members to operate for 90 days.

Then, on the first of this month, the union petitioned the appeals court’s six active judges to consider its arguments, instead of just the original three judges. On Thursday five of the appeals court judges declined to conduct the review, and the sixth recused himself—in the wake of which, last week, the Electric and Irrigation Industry Workers Union (UTIER) seemed to derail the Oversight Board legal strategy, when the union requested the Boston First Circuit Court of Appeals to invalidate the actions taken by that federal agency and to end its operations immediately, with Rolando Emmanuelli and Jessica Méndez Colberg, lawyers representing the union, filing a motion for reconsideration before the Boston First Circuit Court of Appeals—with their motion stating the PROMESA Board had acted in bad faith by continuing to make decisions on budgetary matters and debt restructuring, when they knew that the union and other claimants were questioning its legality; indeed, UTIER President Ángel Figueroa Jaramillo said his union will seek review by the Supreme Court. This sets up a unique federalism challenge: while the union is seeking to get the U,S. Supreme Court to rule that the PROMESA Board’s decisions going back to at least August 2017 are outside its legal authority—and, therefore, void, the PROMESA Board is seeking to get its appointment procedures be declared constitutional.

The Appeals Court for the First District, based in the John Joseph Moakley Federal Courthouse in Boston, also sits for one week each March and November at the Jose V. Toledo Federal Building and U.S. Courthouse in Old San Juan, Puerto Rico, last week rejected a request for a full panel review of a legal challenge to the PROMESA Puerto Rico Oversight Board—a request which arose after a union for the Puerto Rico Electric Power Authority had petitioned on March 1st for the review of a court decision made by court—and after three federal judges had, last month, announced a split decision on the union’s challenge and two other related legal challenges to the PROMESA Board—with the trio of legal challenges based on the Appointment’s Clause of the U.S. Constitution. The litigants had argued that appointment procedures for the PROMESA Board, as provided under the statute, were inconsistent with the Constitution. In the mid-February ruling the three judges ruled that the current members were unconstitutionally appointed and gave the U.S. president and Senate 90 days to make new appointments to the panel. The court didn’t invalidate the board’s actions. Instead, they invoked the de facto officer doctrine which they said allowed them to declare the board’s actions legally valid even though the board members hadn’t been properly selected. On March 1 the union, Unión de Trabajadores de la Industria Eléctrica y Riego, petitioned for the court’s six active judges to hear the arguments, rather than just the three judges. The union asked for the six judges to find that the board’s actions going back to Aug. 7, 2017 were illegitimate and void. On Thursday the court announced that a majority of the voting judges had voted to not consider the case again. It said that five of its six judges had participated in the vote. One judge who was not a member of the original panel, David Barron, recused himself from the vote. The board has said it plans to seek U.S. Supreme Court review. The Supreme Court accepts less than 1% of the cases brought to it for review. In its mid-February decision, the court said the board members could continue to operate in their current roles for 90 days.

Learning from a Past Recession how to Fiscally Protect Municipalities from the Next Recession

March 8, 2019

 Good Morning! In this morning’s eBlog, we consider the lingering, municipal fiscal challenges left over from the Great Recession in Michigan.

Michigan Municipal League Executive Director and CEO Dan Gilmartin has issued a statement in the wake of Governor Gretchen Whitmer’s just-released budget proposal, calling it a “comprehensive, bold first step toward addressing a number of problems that have long confronted the state: It provides new and sustainable investment in our broken transportation system, particularly in areas where most Michiganders live, work, and play. It begins to reverse years of underfunding of revenue sharing, helping our communities maintain public safety and competing with other states in attracting residents. It boosts the Earned Income Tax Credit, a proven poverty-fighting, economy-growing policy for urban and rural communities. It supports cradle to grave education opportunities, ensuring we have the skills needed to fill jobs today and in the future.” Noting that the budget proposal is what he called “an important acknowledgment of the need to invest in community infrastructure, which is the backbone of economic growth and a key to attracting and retaining talent,” he described the budget proposal as one that highlighted “the priorities of Michigan’s communities.”

Michigan emerged from the Great Recession a decade ago, but that emergence left many cash-strapped municipalities behind: they still confront fiscal threats which he warned, because of property tax laws, have prevented them from fully benefiting from the national economic rebound, noting that in Michigan, local governments rely on property tax revenue to provide essential services and maintain infrastructure, but taxable property values declined precipitously during the Great Recession and remain below 2008 levels in more than 700 of Michigan’s cities, townships, and villages, according to Michigan Treasury data—due, according to fiscal experts, at least in significant part to 1994’s Proposal A, which mandated a cap on the annual growth in taxable property values at the rate of inflation or 5 percent, whichever is less, to protect property owners from runaway tax increases during a boom economy. While that served the goal of protecting homeowners when the economy was prospering, it did the obverse when it was falling—or, as Hazel Park City Manager Ed Klobucher put it, Proposal A, which also ended so-called millage rate “roll-ups,” increases which had been allowed for municipalities with property values growing slower than inflation, the result, Mr. Klobucher noted had been a “disaster.” By 2017, assessed taxable values in the Oakland County community remained 48 percent below their 2008 level, even though market values had increased.

It appears those municipal fiscal concerns are being heard: Michigan Senate Majority Leader Mike Shirkey (R-Clarkdale) noted: “I think we have evidence to suggest that Proposal A has performed marvelously for its one intent of holding back the runaway increases in property taxes…But when it was passed, nobody anticipated 10 years or more of regressive degradation of property values, and the effect that has had, I think, is measurable;” nevertheless, the Leader made clear that a review by the legislature of Proposal A in no way suggested a commitment by the Legislature to act; he did note it would trigger oversight.” His counterpart, Sen. Minority Jim Ananich (D-Flint) described the state’s school funding system that was also overhauled by the 1994 initiative as “flawed then, and I think it’s still flawed,” noting: “I don’t have the answer of what it is we should be doing, but I know we’ve created a situation where our schools are continually under-funded…and our cities are struggling to make it.” (Proposal A raised the state sales tax rate from 4 percent to 6 percent and created a new state education tax to support schools, which had been funded primarily through local property tax revenues until legislative repeal in 1993. It also authorized charter schools and created so-called “schools of choice.”

But recessions can be a double fiscal whammy: jobs and income—and homes—are lost, and, for cities like Flint and Detroit, assessed property values are hurt: As of 2017, taxable property values in Detroit remained $3.7 billion below 2008 levels, according to Michigan Department of Treasury data: assessed values were down $1.3 billion in Warren, $1.3 billion in Southfield, $1.2 billion in Dearborn, $1.2 billion in Farmington Hills, $1.1 billion in Livonia, and $1 billion in Sterling Heights. But on a per-dollar basis, data shows that industrial communities in the Metro Detroit region were the hardest fiscally affected. The Michigan Municipal League’s ever insightful Deputy Director Tony Minghine noted: “We had some communities lose more than 50 percent of their taxable value…and now (growth) is limited by inflation or 5 percent, so you never get back to where you were.”

Under Proposal A, the taxable value of a property parcel resets once it is sold to roughly half the property’s cash value. But the separate Headlee Amendment of 1978 forces local millage rates to automatically roll back when taxable values increase. Or, as Manager Kloucher put it, for many longtime owners, property taxes are significantly lower today than they would be if not for the Great Recession, but the loss in taxable values and resulting collections has “created a very dire situation for local units of government.” For instance, in Hazel Park, a municipality of about 15,500 where the per capita income is under $20,000 and 10 percent of families fall below the federal poverty level, the city generated about $5.5 million in property tax revenues in 2018, down from $7.7 million in 2010—just under a 50% decline, forcing the city to city cut services and staff in order to avoid either going under state emergency management or filing for chapter 9 municipal bankruptcy, and because the municipality’s voters approved three separate millage increases between 2011 and 2015. Thus, as the Manager notes: “The expenses that are causing pressure for cities are expenses that are usually rising faster than the rate of inflation—especially pension costs, health care, and repairing aging infrastructure.” Similarly, plummeting property values contributed to a financial crisis in Ecorse, a municipality of about 9,500, where the population fell nearly 20 percent over a decade—and which the state took over from 2009 to 2017. And, as of 2017, taxable values in the Wayne County community remained 61 percent lower than 2008 but are beginning to rebound, according to City Assessor Gary Evanko, who told the Detroit News: “When the tax base shrunk pursuant to the financial meltdown, every community was grasping for whatever they could do to keep the door open and keep employees on the payroll,” adding that former Emergency Manager Joyce Parker spearheaded millage increases and a special assessment to general new revenue, but the resulting rates “could be considered burdensome for the taxpayers.”

Indeed, total taxable property values across the state declined from $363 billion in 2008 to $316 billion in 2012. Since then, they have recovered slightly to $327 billion by 2016, but with growth in assessments limited by 5 percent per year, unless a property is sold, the road back to full fiscal recover is restrained; indeed, according to the Treasury, in some Michigan communities, inflation-adjusted taxable values are lower than they were in 2000, posing what the Treasury last year deemed a “significant risk to their fiscal health,” with Michigan Deputy Treasurer Jeff Guiloyle testifying last week before the Legislature that property taxes are the “800-pound gorilla” for Michigan local governments and their primary funding source: across the state, property tax collections peaked at $14.2 billion in 2008, dropped during the 2008 housing market crash and were only at $14 billion as of 2018—adjusted for inflation, collections remain down about $1.5 billion, according to state Treasury—or, as Deputy Treasurer Guilfoyle testified to the Michigan House Tax Policy Committee, Michigan’s state restrictions “keep your property taxes from growing,” but at the price of imposing “significant pressure on local governments.”

In a fiscal wrinkle, the state’s Headlee amendment does not restrict property tax growth from new construction; it has a lesser impact on suburban communities with vacant land for housing subdivisions, meaning the adverse effect is more severe in older communities that are fully built out—for instance, taxable assessed property values in Ann Arbor rose by $597 million between 2008 and 2017, a 12 percent increase, according to the Treasury, but values in Huron County’s Chandler Township went up by 384 percent.

The different fiscal/taxing outcomes in the wake of the sharp reduction in taxable property values during the Great Recession was magnified many believe by former Gov. Jennifer Granholm’s cuts to state revenue sharing payments, which are another primary source of funding for local governments. (Twenty-three cities, including Detroit, also levy a local income tax—indeed, in Detroit, it has been the most critical revenue source.) By 2016, state revenue sharing payments were 20 percent below their high water mark of 2002, according to the Michigan Treasury—a fiscal “double whammy” as Manager Klobucher put it, noting: “We cut as much as we could until we couldn’t cut anymore….We have far fewer employees now in 2019 than when I took over in 2002.” He cautioned: “There’s only so much you can cut and still be able to provide vital municipal services.”

Michael LaFaive, Senior Director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy is suggesting tax and fiscal reforms, recommending the Legislature approach Proposal A reform talks with caution and prioritize spending reforms over tax increases, noting: “There’s another side to the local government coin, and that’s the local citizen.” Prior to passage of Proposal A, he noted: “I recall very distinctly the outcry over property tax hikes that seemed to cause people to put their homes up for sale simply because they couldn’t afford it anymore.”

Dr. Gary Wolfram, who holds the William E. Simon Chair of Professor in Economics and Public Policy and is their Director of the Economics Program, as well as a Professor of Political Economy, noted that Michigan officials could improve Proposal A by allowing property tax values to fully rebound in the aftermath of a decline while retaining the cap in growth years, noting: “That’s what I would do, but it’s unfortunate that it’s in the Constitution, because it makes it a little bit harder.” (Revising the law itself would require voter approval.) Mr. Minghine said the state legislature could amend Proposal A or Headlee implementation laws without the need for another statewide vote in a way that would “stay true to the intent of voters” who wanted to prevent runaway property tax growth, adding the Legislature could exclude from Headlee calculations what he described as the “popped up value” which occurs when a property is sold, which would allow those gains to “benefit your community, so they could provide services, parks and infrastructure.” He added that the Legislature could also allow Headlee millage rates to both roll up and down, suggesting: “This wouldn’t change anyone’s taxes today, but in another recession, and you see values growing at less than the rate of inflation, your millage rate could go back up to negate that,” adding: “There are just a couple minor fixes that would absolutely provide a different recession protection and allow us to really track with the economy in a much more realistic way: I think any tax system at any state in the country has to do that, or it won’t work. And we’ve built one that doesn’t do that.”

Chapter 9 Municipal Bankruptcy: Exiting Municipal Bankruptcy Leaves Lingering Challenges and Hard Leadership Choices

March 6, 2019

Good Morning! In this morning’s eBlog, we consider the linger fiscal, physical, and political challenges involved in a municipality’s chapter 9 municipal bankruptcy plan of debt adjustment implementation—here focusing on Jefferson County, Alabama.

The Long & Steep Road to Exiting Municipal Bankruptcy. In early June of 2013, the Jefferson County Commission in Alabama approved a plan debt adjustment to exit its municipal bankruptcy—a plan which had garnered the support of JP Morgan, municipal bond insurers, and seven hedge funds representing about $2.4 billion, or 78%, of the county’s outstanding sewer debt, according to Commissioner Jimmie Stephens. The municipal bankruptcy of Georgia’s largest county stemmed from poor attempts to finance the court-ordered rebuilding of its out-of-date sewer system. It was, at the time, a staggering filing. But fiscal detritus being what it is, some of the system’s bondholders had refused to give up and accept the U.S. Bankruptcy Court’s decision. Now, it seems certain, they will have little choice: the U.S. Supreme Court on Monday declined to hear the Jefferson County sewer ratepayers’ appeal of an Eleventh Circuit finding that equitable mootness barred their challenge to their county’s exit plan.

But exiting municipal bankruptcy, even with a federal bankruptcy court’s approval of a plan of adjustment, is still a steep fiscal challenge. In Jefferson County, it has been not just rocky, but, in its own way, smelly: in January, Jefferson County Commissioners had a lengthy discussion during their committee meeting with regard to setting a town hall meeting to focus on rising sewer rates as a result of the county’s municipal bankruptcy, with Commissioner Lashunda Scales noting ongoing concerns about the ensuing sewer rates—or, as she put it to her colleagues: “We know that the rates are going to be going up…I perceive that many members of the public don’t know why the sewer rate is steadily increasing. I know that from being out there winning votes to get me here today.” Former Birmingham City Councilmember Sheila Tyson noted: “I cannot let Miss Smith at the age of 99 let her water get cut off. Not this year. It will not happen. I’m very concerned about the sewer bill. I’m not out trying to destroy the county because if I do that, I’m destroying myself.” Commissioner Scales and Ms. Tyson asserted that their districts had felt the effects of Jefferson County’s municipal bankruptcy more greatly than the districts of their fellow Commissioners—meaning those Commissioners appear to have been less sympathetic to complaints about rising sewage bills. Indeed, Commission President Jimmie Stephens said that Commissioner Scales and Ms. Tyson had been adversaries to the County’s decision to enter chapter bankruptcy to escape the debt it faced from variable rate financing, auction, and bond swaps done to generate revenue for improving the county’s sewer system; thus, he said, if county money is spent, the town hall must present the County’s position: “We want to make sure if we’re spending county dollars to inform the public, that we’re all on the same accord…You have a good understanding now that the rate increases represent operation and maintenance, capital expenditures and debt service,” adding that those increases are fixed through 2023, something he advised was critical to avoid the County being forced to issue more debt: “That’s what we need to make all of our ratepayers aware of, that the plan is in place and the plan is working…I’ve said that 14 hundred times and I’ll repeat it anytime you get ready.”

The issue or challenge is how to help ratepayers understand what appear to be disproportionately high sewer bills—or, as Commissioner Scales noted: “I think it would be beneficial to all of us to know since we speak of transparency, how we inherited the problem, what are we doing about the problem,” adding: “Commissioner Tyson and I were (averse) to the bankruptcy, because it heavily impacted our districts, and there are a majority of people who can’t pay for it…I understand that we represent the County, and she does, too, but we still represent the same constituents. We want to make sure that as much as possible that lies within us, it is communicated by this commission.”

Rod Serling’s Twilight Zone of of Puerto Rico’s Municipal Bankruptcy

March 4, 2019

Good Morning! In this morning’s eBlog, we consider again the legality of quasi U.S. Bankruptcy Court created under the PROMESA law and whether the appointment of that Board met the requirements of the U.S. Constitution.

Was the Promise of PROMESA Constitutional? The Jones-Shafroth Act, signed into law just over one hundred two years ago, by President Woodrow Wilson, gave Puerto Ricans U.S. citizenship; it separated the Executive, Judicial, and Legislative branches of Puerto Rico’ government; provided civil rights to the individual; and created a locally elected bicameral legislature. That is, it creature a governing entity somewhere between a state and a municipality in a nation where states may not file for bankruptcy, but cities and counties, where authorized by state law, may. In enacting the PROMESA law, Congress sought to create a quasi-chapter 9 municipal bankruptcy process whereby Puerto Rico could reorganize its debt, in a manner not dissimilar from Detroit or Central Falls, Rhode Island. However, instead of an Emergency Manager, appointed, for instance, to oversee the adoptions of plans of debt adjustment so that Detroit and Central Falls could exit bankruptcy before a U.S. Bankruptcy Court, the PROMESA statute sought to create a mechanism to facilitate the territory’s fiscal recovery—but one which involved the appointment of an entire board, the PROMESA Board—a creation which, in some ways, could be perceived as something Rod Serling would have created for one of his Twilight Zone segments in the difficult challenge to address a government’s insolvency for the territory which falls somewhere between a state and municipality.

But that action by the former President and Congress has now been upset by a recent U.S. Appeals Court ruling which found Puerto Rico’s federally created PROMESA fiscal oversight board was unconstitutionally appointed—a ruling which the PROMESA Board has vowed to appeal to the Supreme Court, adding that it will also challenge the 1st Circuit U.S. Court of Appeals’ decision to set a 90-day period to allow President Trump and the Senate to constitutionally validate the Constitutionality of appointments or reconstitute the Board.

In its opinion, the court held that the PROMESA Oversight Board members are principal U.S. officers; ergo, they should have been appointed by the President “with the advice and consent of the Senate.” Rather, the court determined that the PROMESA Board had been established “as an entity within the government of Puerto Rico, and not the federal government” and that the U.S. Constitution’s Appointments Clause does not apply to its members. U.S. District Court Judge Laura Taylor Swain, who is presiding, last July had ruled that the appointment of the Board’s members did not violate the U.S. Constitution.

Unsurprisingly, the Board, for its part, in a statement noted: “PROMESA’s appointment process has established a bipartisan board, ensuring balanced decisions to help Puerto Rico recover and prosper,” noting a majority (of said Board) had voted for the appeal before the court in this case which was filed by creditors of Puerto Rico, including Aurelius Investment LLC and bond insurer Assured Guaranty Corp, which also sought a dismissal of Puerto Rico’s Title III bankruptcy cases—an effort the Appeals Court rejected.

The Court’s decision has, unsurprisingly, opened a discussion which, until recently, had appeared to be closed: Might this decision serve as a stimulus for Congress (and the President) to amend the statute? The timing, coming as the Board has announced it will appeal to the U.S. Supreme Court of the First Circuit’s decision, could serve as an opportunity for Congress to amend the PROMESA statute. Indeed, a spokesman of the New Progressive Party in the Puerto Rico Senate, Carmelo Ríos, and the spokesperson of the Popular Democratic Party in the House of Representatives, Rafael “Tatito” Hernández, hope that the judicial uncertainty and conflicting opinions could serve to stimulate the debate on his proposal to replace the Oversight Board with a federal receiver or monitor, noting: “Everyone agrees that the Board does not work…After the decision of the 1st Circuit Court and with a term as close as August for the replacement of the Oversight Board Members, it is looking at the matter differently,” Senator Ríos said.

Meanwhile, the view in Congress on an issue with conflicting oversight is unclear: House Natural Resources Chairman Raúl Grijalva (D-Az.), who has expressed interest in moderating the power and authority of the PROMESA Oversight Board, felt that the court ruling would not entail a substantial reassessment of PROMESA; however, his counterpart, Senate Energy and Natural Resources Committee Chair Lisa Murkowski (R-Alaska) said that if amendments were to be made to the law, she would address the matter; however, she emphasized that any action by Congress requires a final and firm judicial decision—as well as some clear understanding the position of the Trump Administration with regard to the confirmation of the current Board members.

Since the beginning of the year, senores Ríos and Hernández have promoted their proposal to amend PROMESA so that a monitor would replace the Oversight Board, with such monitor appointed by the U.S. Treasury—a monitor with less capacity to preempt the authority of Puerto Rico’s elected leaders, and modeled more like some states have provided to help municipalities put together chapter 9 plans of debt adjustment. They appear to be of the view that their positions are consistent with those of the administration of Governor Ricardo Rosselló Nevares, who last week proposed to the U.S. Senate Energy and Natural Resources Committee his concerns that the PROMESA Oversight Board violates the spirit of Congress’s adoption of the PROMESA law by allowing for the Board’s interference in matters of “public politics.”

His apprehensions, unsurprisingly, are not reflected in the pending litigation before either U.S. Judge Laura Taylor Swain, or the First U.S. Circuit Court of Appeals in Boston, which, in a recent decision, explicitly recognized the authority of the Oversight Board to preempt Puerto Rico’s fiscal governance authority; indeed, to date, the only authority the courts have imposed on the Ovesight Board has been to stop the attempt to appoint the outgoing official of Revitalization, Noel Zamot, as trustee of Puerto Rico’s Electric Power Authority (AEE). In an interview with El Nuevo Día, spokesperson Hernández explained that a key issue of the proposal he developed with Senor Ríos is that the PROMESA Oversight Board would no longer be the government’s representative in the territory’s quasi chapter 9 bankruptcy proceedings: under their proposal, interestingly, this function would pass to the local level: they propose to strip away the veto power of the PROMESA Board over measures that do not comport with the provisions of the current fiscal plan—and restore many of the powers lost to the local government with the approval of the PROMESA law in 2016.

Their position, however, have not gained the explicit support of Puerto Rico’s the resident commissioner in the U.S. House of Representatives, Jenniffer González; who stated: “Any version of a federal entity that usurps the constitutional powers of the different branches of  government will not have my support. All those wrongs only reflect our colonial condition. The political and economic equality pursued by statehood frees us from invented structures that instead of accelerating our development only limit our potential.”

A Matter of Public Debt. An important issue and concern has been raised by Christian Sobrino Rios, Puerto Rico’s Director of the Financial Advisory Authority and Fiscal Agency (Aafaf), who worries what the possible changes to PROMESA might augur for advanced work in the management of Puerto Rico’s public debt, noting that the last two years in Puerto Rico have been “historic” since with the restructuring of the U.S. territory’s debt of the Government Development Bank (GDB) and the Corporation of the Interest-earning Fund (Cofina) had eliminated more than 10% of what Puerto Rico owed to its creditors. Indeed, he is of the view that Cofina’s debt is the only one which, up to now, has been able to restructure under the PROMESA process established in Title III—provisions important to resolve the credits issued by the central government as bonds of general obligations and the loans taken by the AEE, the Highway and Transportation Authority (ACT), and the Administration of the Retirement Systems; or, as he put it: “What is approved has to be prospective.” However, there are apprehensions that these proposals could go against the intent of the PROMESA statute and the creation of the PROMESA Oversight Board, according to the economist Antonio Fernós Sagebien: The spirit of the JSF seeks to remove from the hands of the politicians issues they have been unable to resolve. Those responsible for the crisis are the same politicians who worked only to be reelected instead of channeling the best practices to straighten out the finances. They are still playing politics and want to continue doing the same as always without solving the problems.” For his part, Rep. Hernández argues that the ineffectiveness of the Oversight Board is that it lacks the legitimacy provided by the democratic process—or, as he put it: “If I do not agree with the JSF, I cannot vote against it in the elections,” adding that although the political parties “have (a) problem of credibility for politicking,” the truth is that the JSF is considered “illegitimate.”

Mario Negrón Portillo, an expert in Public Administration, referring to Judge Juan R. Torruella’s U.S. First Circuit decision declaring the appointments of the current members of the PROMESA Oversight Board as unconstitutional because they did not have the advice and consent of the U.S. Senate, said:  “We would go from a Board appointed in Washington to a supervisor of the governor appointed by Washington. They are looking for a way out of the Board, and we have something less embarrassing or less bad, but it is going back to the Foraker Law era with someone to tell us how to do things and what they think is that instead of having seven people [we] would have only one,” stressing that none of the underlying problems are addressed with the proposal, since neither the Puerto Rican government would obtain under the current scenario the powers that could take the country out of its quasi municipal bankruptcy—indeed, noting that since 2016, the government of Puerto Rico barely makes payments associated with its public debt. 

The nation’s most experienced and venerable municipal bankruptcy expert Jim Spiotto noted that “a very uphill battle,” awaits, noting that it is difficult to argue the PROMESA Board members did not have reason to believe they were rightfully appointed and thus operating in good faith. He further noted that the U.S. District Court judge had considered the arguments of the appellants and concluded they were wrong and that the Board had been appointed legally. Further, he said: if the full panel of Circuit Court judges were to side with the union, “it would be hard to unscramble the egg” of all the actions that have taken place since August 2017.

The State of the Motor City, and Who’s on First in Puderto Rico?

March 1, 2019

Good Morning! In this morning’s eBlog, we return to the Motor City as Mayor Mike Duggan is set to present his sixth State of the City address, before examining the decision by the PROMESA Board to declare void two dozen local government expenditure resolutions dating back to early last year.

State of the Motor City. Detroit Mayor Mike Duggan is scheduled to deliver his sixth State of the City speech on Tuesday—an invitation only presentation, but which will be broadcast live. This will be a speech to a far different Motor City than when he was first elected after the nation’s largest ever chapter 9 municipal bankruptcy, when it was an empty and dangerous place, where the municipal government had all but crumbled in the wake of a depopulation that saw the city go from over 2 million residents to around 700,000. But, out of that ruin, during this period of the late 2000s to the early 2010s, steep real estate discounts opened the way for artists and entrepreneurs to buy houses and commercial buildings at deep discounts—a legendary scenario which led The New York Times to publish an article titled “Last Stop on the L Train: Detroit,” in 2015. Today, the stark streets with abandoned homes is one with vibrant music, arts, food, and design scenes in the city. So, five years after its emergence via its plan of debt resolution approved by the U.S. bankruptcy court, the $500 homes purchased via auctions on those dark, abandoned landscapes are a memory of the past: developers and speculators have bought up much of the land around the city center, with Dan Gilbert’s Bedrock Ventures owning almost 95 percent of the downtown area. Today, this area, too dangerous to walk alone in on the day Detroit filed for chapter 9, seems closer to resembling a street in downtown Chicago, with high-end boutiques and chains like Warby Parker and Luluman. In other neighborhoods, such as the more industrial Milwaukee Junction, near the Russell Industrial Center—an icon of gritty urban reuse—land and property have been claimed by those waiting to sell or develop it. Indeed, the re-elected Mayor has mostly focused on rebuilding neighborhoods, job training, and affordable housing during his time leading the city.

Last year, in his State of the City address, Mayor Duggan detailed plans for new partnerships with Detroit schools in an effort to improve education: he emphasized the city’s youth have been among the most forgotten in the last decade, touting the Detroit Promise, a scholarship that covers college tuition and fees for graduates of the Detroit’s school district. The Mayor also said his goal has been to ensure that Detroit residents are the first to be considered for new jobs—jobs more available now has the Motor City’s economy has been boosted by banks, industrial companies and major corporations opening facilities in recent years.

But now a different kind of challenge in this emerging economy of Uber and self-driving cars is emerging: after long runs of expanding sales and growing profit, Detroit, the nation’s automobile manufacturing center, is slowing down—or, as Morgan Stanley, in a note at the end of last week put it: “[E]conomic growth, comparatively cheap consumer credit and profit margins achieved, and largely sustained, historically high levels on the back of what looks to be the greatest cyclical auto demand rally on record…In our opinion, the low valuation multiples embedded in auto share prices is just the market’s way of saying: ‘Hey… it’s been a nice run. It can’t last. And it’s OK.’” The comments came as the automakers prices on new vehicles hit an all-time high for January at $32,274, according to Morgan Stanley calculations, but dealer inventories also hit an all-time high in January, 35 percent higher than January of 2009 and 97 percent higher than 2010 levels).”

As the brilliant Detroit News editor Daniel Howes wonders: “Can that be sustained, especially if credit becomes more costly?” adding that “In Old Detroit, that would portend disaster, because Old Detroit leadership would be dithering as the 10-year-old party still rages. In New Detroit, leadership appears more sensitive to conditions, because it’s determined to avoid the denial that tipped two of three of them into ignominious bankruptcy.” Nevertheless, he noted, the changes are one reason why General Motors is moving to close assembly plants in Detroit, Lordstown, and Oshawa, Ontario; why Ford Motor Co. is restructuring its global product development processes and lineups; and why FCA is planning to invest $4.5 billion in southeast Michigan and create 6,500 jobs to grow its Jeep and Ram brands—or, as he wrote: “The common denominator is a race to seize whatever growth opportunities exist. Foreign markets from Europe to China and South America are proving challenging and costly, exacerbated by trade tensions courtesy of President Donald Trump. And new Silicon Valley rivals are opening an all-new competitive front that demands innovation and speed.” That is, just like Winter creates pot holes seemingly deep enough to see China, so too, dependence on the auto market is creating speed bumps for the city’s economic and fiscal future—or, as he wrote: “Hewing to old business models—i.e., old plants assembling vehicles fewer people want—is a recipe for going out of business.

Unelected Preemption I. Meanwhile, in the much warmer waters surrounding Puerto Rico, the unelected PROMESA Oversight Board has declared void 24 local government expenditure resolutions dating back to early 2018—even as the Board itself is it awaits an appeal to the U.S. Supreme Court to determine  if in fact its members are principal officers of the federal government as the First Circuit of Appeals has concluded—after, nearly two weeks ago, the 1st U.S. Circuit of Appeals overturned a ruling by Judge Laura Taylor Swain that the process created for the appointment of members to the PROMESA Board violated the U.S. Constitution, because the members were not appointed with the advice and consent of the U.S. Senate—effectively pulling the rug of authority out from under the proverbial feet of the Board—albeit, granting the President and Congress a period of 90 days to act.

Unelected Preemption II. The PROMESA Board, meanwhile, has declared void 24 local government expenditure resolutions dating back to early 2018, leading a representative of Governor Rosselló to immediately complain that the resolutions had been legally adopted. PROMESA Board Executive Director Natalie Jaresko announced the decision last Wednesday in a letter to Gov. Rosselló. Christian Sobrino, the Governor’s non-voting representative to the PROMESA Board, asserted that the Board was vacating legal expenditures—after Director Jaresko had asserted: “None of the appropriations or reprogrammings contained in these joint resolutions is contemplated by the certified budget for the commonwealth for fiscal year 2018 or 2019, nor were they approved by the Oversight Board.” Indeed, in her epistle, Director Jaresko wrote that the PROMESA statute gave the Board the authority to vacate or preempt local government spending measures inconsistent with the Board-certified budget. In a second Board complaint, Director Jaresko said that some of the resolutions were enacted nearly a year before submission for review by the Board. Sounding almost like a dictator, Ms. Jaresko noted: “As we have repeatedly reminded you, section 204(a) of PROMESA requires the Governor to submit enacted laws to the Oversight Board no later than seven business days after enactment,” adding that the 24 resolutions add up to over $30 million in spending by her estimates.

In response, Mr. Sobrino noted: “These resolutions were approved as provided by the applicable law and were submitted to the [Board], as requested…The resolutions were presented together with a certification of compliance with the budget and the fiscal plan as required by the PROMESA law.”

A Board spokesperson said the first sentence was false, because the resolutions were submitted to the board as much as 11 months after they were adopted, whereas he claimed the PROMESA statute and the Board require they be submitted to the Board no later than seven days after their adoption; he added that the second sentence was false, because the resolutions are outside the General Fund: most of them reallocate unused funds from previous years for new purposes outside the General Fund. He asserted that PROMESA, the current year’s adopted budget, and federal court decisions all prohibit the local government from doing this without the Board’s approval—in this case, resolutions providing capital assistance from municipios still working to recover infrastructure from Hurricane Maria.