The Fiscal & Governing Challenge of Recovering from Municipal Bankruptcy

April 26, 2019

Good Morning! In this morning’s eBlog, we consider the ongoing fiscal recovery from the brink of municipal bankruptcy and a state takeover of Atlantic City, followed by efforts by the unelected PROMESA Oversight Board to ask the U.S. Supreme Court to overturn the U.S. First Circuit Court’s finding that its members were unconstitutionally appointed. Then we consider White House discussions with regard to the Jones Act—an Act different than the Jones-Shafroth Act—which was signed into law in 1920 to regulate the transportation of maritime cargo between U.S. mainland ports and Puerto Rico, mandating that cargo to the U.S. territory must be done on ships which are owned, have American registration, manufacturing, and crew. (The Jones-Shafroth Act, signed into law by former President Woodrow Wilson on March 2, 1917, made Puerto Rico a U.S. territory, ergo making its citizens U.S. citizens; the Jones Act separated the Executive, Judicial, and Legislative branches of Puerto Rican government, provided civil rights to the individual, and created a locally elected bicameral legislature.)

Spinning the dials on exiting from a State Takeover. New Jersey Governor Phil Murphy plans to leave a state takeover of Atlantic City in place for the full five years that his Republican predecessor envisioned in seizing control of the city, with Lt. Gov. Sheila Oliver stating (no pun), the state would keep the takeover in place through 2021, notwithstanding his campaign, when he campaigned in part on ending the takeover. Lt. Gov. Oliver noted that the law enacted in 2016 “was a 5-year statute,” during a meeting in a community center, adding: “We anticipate the statute will run for a 5-year period,” at the end of which, the Lt. Governor noted, she hoped to demonstrate to the state Legislature that enough has been fixed in Atlantic City to warrant ending the takeover. The state statute, as we have noted, granted the state broad powers, including the right to overturn decisions of the Atlantic City Council, to override, or even to eliminate municipal agencies, and seize and sell assets, including the city’s much-coveted water utility. The state overseers were also authorized to hire or fire workers, break union contracts, and restructure the city’s debt, most of which was done to varying degrees, although no major assets were sold. Atlantic City Mayor Frank Gilliam Jr. said he supports the state’s timetable for ending control, praising a turnaround plan 21-page plan which was developed not only by elected officials, but also by community leaders.

The Governor’s plan calls for reforms in government effectiveness and accountability, job training and economic development, finding new revenue sources, and providing more opportunities for youth. It includes training new workers for casino jobs, helping those with criminal records find and keep employment, and address health issues, including opening a supermarket in the city so residents can buy fresh food locally. Mayor Gilliam responded: “I don’t foresee this plan failing…For so long, folks have believed that Atlantic City could not flourish within its own self. The Debbie Downers of Atlantic City need to jump off that horse,” noting he supports the state’s timetable for ending control, praising a turnaround plan that was developed not only by elected officials but by community leaders—a plan which calls for reforms in government effectiveness and accountability, job training and economic development, finding new revenue sources, and providing more opportunities for youth; it includes training new workers for casino jobs, helping those with criminal records find and keep employment, and address health issues, including opening a supermarket in the city so residents can buy fresh food locally—or, as Mayor Gilliam put it: “I don’t foresee this plan failing…For so long, folks have believed that Atlantic City could not flourish within its own self. The Debbie Downers of Atlantic City need to jump off that horse.”

State officials claim the new plan provides an urban roadmap to develop new business sectors, combat blight, and attack a foreclosure crisis that is the worst in New Jersey. At a press conference Tuesday, Lt. Gov. Sheila Oliver noted the implementation plan, which includes priority projects for 2019, represents another important phase in the state’s new partnership approach with Atlantic City under the five-year state takeover law that took effect in November 2016 under former Governor Chris Christie: “For the past seven months, it has been a labor of collaboration and community engagement as we have sought to chart out a course for Atlantic City and the work that we are all doing on the ground…The collective and collaborative effort to renew Atlantic City has been a consistent theme of the Governor since he took office and it is absolutely producing results.”

The new plan tracks Gov. Murphy’s transition report released last September to provide a fiscal framework for returning the cash-strapped city to local control at the conclusion of the five-year Municipal Stabilization and Recovery Act period in fall 2021. Lt. Gov. Oliver noted that some recommendations from the report have already been achieved, including the implementation of a citywide master plan, providing in-person ethics training to all city employees and all city supervisors taking certified public manager training administered by Rutgers University—or, as she put it: “These successes are changing the narrative in Atlantic City and showing the broader community that the city is a vibrant place where positive things are happening.” Indeed, Mayor Gilliam credited the Governor and Lt. Governor for steering a positive working partnership toward a “collective impact model” following divisive battles under the prior Christie administration, also noting the constructive efforts of attorney Jim Johnson, whom the Governor had appointed last year as Special Counsel to review Atlantic City’s transition to local control, and helped craft the implementation plan: “Jim Johnson has single-handily in my opinion helped shift the mindset, helped the shift the direction and more importantly set the stage for a better Atlantic City,” said Mayor Gilliam of the attorney, who was undersecretary for enforcement at Treasury under Bill Clinton. “We have a lot more work to do, but nevertheless we have a blueprint and an implementation plan that is going to allow us to get there.”

Quien Es Encargado? (Who is in charge?) Sometimes it appears as if the U.S. territory of Puerto Rico is somewhere in the Twilight Zone—neither a state, nor a municipality—governed not just by its own Governor and Legislature, but to some extent by the PROMESA Oversight Board created by Congress, which sometimes acts as if its unelected members have dictatorial governance authority—and bear equal fealty to Puerto Rico’s municipal bondholders as much as the U.S. citizens of Puerto Rico. Now that Board is asking the U.S. Supreme Court to overturn a ruling that deemed its members unconstitutionally appointed, potentially opening the way for President Trump to appoint his own nominees to act as quasi-emergency managers to create and implement a plan of debt recovery, as in chapter 9 municipal bankruptcy. Earlier this week, the Board, in a statement which it filed with the U.S. Supreme Court, challenging a 1st U.S. Circuit Court of Appeals decision last February that said appointments were unconstitutional, since they had not been approved by the U.S. Senate—a decision seemingly driven by a lawsuit from investment firm Aurelius Investment and other creditors. The PROMESA Board is reported to intend to ask the Appeals court to prolong the current stay that prevents the ruling from taking effect. (The current 90-day stay extends through May 16, according to a PROMESA Board spokesperson.) The Board, which was established under the PROMESA statute to act as a quasi-plan of municipal bankruptcy plan of debt adjustment, maintains that its members are exempt from a full vote in the U.S. Senate, because it was created as an entity within the government of Puerto Rico, rather than the U.S. government. The Board itself, somewhat similar to states which have authorized chapter 9 municipal bankruptcy, allowing a Governor to name an emergency manager to temporarily preempt the governing authority of elected municipal and county elected leaders, was named by former President Barack Obama in 2016, who selected the members from a list of candidates supplied by leaders of both political parties in the U.S. House and Senate.

Colonialism? According to a report earlier this week, there has been discussion in the Oval Office about something other than the Mueller Report—the arcane rules of cabotage, or the transport of goods or passengers between two places in the same country by a transport operator from another country—a term which originally applied to shipping along coastal routes, port to port, but now applies to aviation, railways, and road transport. The issue arises currently with regard to the dispensation in cabotage rules that would apply to the transport of natural gas to Puerto Rico: under the Jones Act rules of cabotage, the transportation of maritime cargo between ports of the United States and Puerto Rico must be done on ships which are owned, have American registration, manufacturing and crew: rules which do not apply to neighboring, competing nations in the Caribbean—ergo, putting Puerto Rico at a distinct economic disadvantage. There have been recent reports this could change, with the President reported to be inclined to approve a waiver of cabotage rules to authorize the transportation of natural gas on non-U.S. ships to Puerto Rico and the northeastern United States, according to the Bloomberg news service, which reported the matter was discussed in the Oval Office this Monday—with the discussion arising in the wake (not a pun) of the absence of available U.S.-registered and last December’s request to the Trump Administration for a 10-year waiver, in order to be able to transport natural gas in non-U.S. vessels between the continental mainland and Puerto Rico, albeit Bloomberg also reported the White House assessment is likely broader than the request made by Puerto Rico, adding that at present, there is no consensus within the Trump Administration, but reporting that U.S. Transportation Secretary Elaine Chao and White House trade advisor Peter Navarro have advocated rejecting the waiver, while the President’s Director of the National Economic Council, Larry Kudlow, defended the idea of ​​granting a partial dispensation for the transport of natural gas, noting: “I think it would be a limited dispensation, because boats are being built in Louisiana.”

Earlier this year, the leadership of the U.S. House Committee on Transportation and Infrastructure had urged the Trump administration to reject the request by Puerto Rico to obtain a partial administrative exemption in the cabotage rules, with respect to the transportation of natural gas, with Chair Peter DeFazio (D.-Ore.) writing: We think there is no valid national security reason for granting this waiver,” in an epistle to the Trump Administration. Infrastructure Committee chairman Peter DeFazio (D.-Or.) and Republican spokesman Sam Graves (Missouri), who spearheaded a letter sent to the then Secretary of Homeland Security, Kirsjten Nielsen—and a statement by Republican strategist Mike McKenna, who noted that the 1920 Jones Act is “totally contrary to the President’s energy agenda, mainly because it greatly encourages the importation” of Europe’s diesel and Russian natural gas.

Clawing Back? This week, Judge Laura Taylor Swain, the quasi-chapter 9 federal bankruptcy judge overseeing the completion and approval of a plan of debt adjustment for the U.S. territory, refused to extend a May 2nd deadline for the clawback of Puerto Rico central government bond payments—a ruling which likely complicates the PROMESA Board’s effort to recover payments made on $6 billion of municipal bonds which the Board deems to have been illegally sold—meaning the Board now must act by next week, meaning it will probably be working with an incomplete list of bondholders from whom to claw back the money.(At the beginning of this month, the PROMESA Board had filed a motion to “toll” or delay the statute of limitations deadline for filing the Board’s clawback actions. Unsurprisingly, since then, several parties have filed their positions on the proposal. At Wednesday’s omnibus hearing in the Title III bankruptcy, Edward Weisfelner, Brown Rudnick Chair of the Bankruptcy and Corporate Restructuring Group, said the PROMESA Oversight Board was focusing on the clawback of payments made for the 2012 and 2014 general obligation bonds, adding that the firm has, since being retained as claims counsel for the Board, has been working “diligently” to collect information about the bondholders, adding that the Board’s efforts, while ongoing, were also incomplete. It is only now working to get information on those who have received at least $1 million in interest so far, adding the group was associated with 360,000 payments. It appears the PROMESA Board may choose to file cases only against those who received some figure in excess of $1 million; that information comes as other groups are considering seeking the clawback of Employees Retirement System bonds, Public Building Authority bonds, and possibly earlier GO bonds, Mr. Weisfelner told Judge Swain. The deadline for any court filing for the general obligation municipal bonds is next Thursday. Mr. Weisfelner told Judge Swain that if she were to grant a sustained tolling (or delay in the statute of limitations) the Board might ultimately choose not to file the cases, adding that one factor alone might lead to a plan of adjustment that provided for less payment for these bonds. Judge Swain responded that that tolling is usually done because of circumstances connected with the defendants, as she inquired how the defendants’ behavior contributed to the Board’s request for tolling, prior to asserting she lacked “subject matter jurisdiction” in the case, noting the PROMESA Board had not adequately identified the parties who would be affected by the ruling: she denied the motion without prejudice, likely leaving the door ajar for the PROMESA Board to reintroduce the motion to her in modified form.

Parting Might not Be Such Sorrow. Meanwhile, the PROMESA Board reported it had filed a motion with the First Circuit U.S. Court of Appeals for a stay on its February 15th decision which gave the current Board until May 16th to continue operating without the approval of the U.S. Senate and President Trump—in the wake of its decision that the process the U.S. government had used to appoint the current board, following the Puerto Rico Oversight, Management, and Economic Stability Act, was unconstitutional. (On Tuesday, the Board filed a petition for a writ of certiorari from the U.S. Supreme Court of the appeals court decision.) The filing came as the U.S. Senate awaits President Trump’s recommendations for Senate consideration for the Board—likely a considerable wait, as Senate Majority Leader Mitch McConnell (R.-Ky.) has said that appointing a Board would not be expedited, releasing a statement on Wednesday: “Absent a further stay, the Oversight Board would be forced to cease operations on May 16. Disrupting the Oversight Board’s operations midstream would have immediate and devastating consequences for the Puerto Rican economy and the debt restructuring process that Congress determined was a critical necessity when it enacted PROMESA and created the Oversight Board. In addition, the Oversight Board would be unable to carry out its responsibility of certifying the fiscal year 2020 budgets for the commonwealth and instrumentalities to ensure that they are compliant with the fiscal plans.”

A Tale of Intergovernmental Malfeasance?

April 22, 2019

Good Morning! In this morning’s eBlog, we consider the ongoing judicial proceedings related to the City of Flint’s water contamination—contamination with devastating health and tax impacts.

Federal Liability? U.S. District Judge Linda Parker at the end of last week ruled that a lawsuit Flint residents brought against the government over the city’s water crisis can move forward. In their suit, the residents, two years ago, sued the Environmental Protection Agency for “mishandling” the crisis, arguing that agency officials negligently responded, including by failing to use the agency’s enforcement authority under the Safe Drinking Water Act to intervene, investigate, and warn about the health risks. The federal government, last year, moved to dismiss the suit, with federal attorneys arguing alleged misconduct is exempt from liability under the Federal Tort Claims Act’s discretionary function exception. Judge Parker last Thursday the court will not decide the issue of “ultimate liability,” but that the federal government was not immune from a lawsuit: “(The court) can today state with certainty that the acts leading to the creation of the Flint Water Crisis, alleged to be rooted in lies, recklessness and profound disrespect have and will continue to produce a heinous impact for the people of Flint,” Parker stated in her order (See: Jan Burgess and all 2,959 individuals v. United States of America, Civil Court case No.17-11218, U.S. District Court, Eastern District of Michigan, April 18, 2019.) Judge Parker’s ruling concerns a motion filed by the federal government to dismiss the more than 2,959 people named in a lawsuit alleging the EPA’s negligent response to Flint’s water crisis; the suit alleges EPA officials and employees “negligently responded to the water crisis, including by failing to utilize the agency’s enforcement authority under the Safe Drinking Water Act to intervene, investigate, obtain compliance, and warn Flint residents of the health risks posed by the water.” The federal government’s response to the allegations was asking the court to dismiss the suit for “lack of subject matter jurisdiction;” however, after reviewing the case, Judge Parker stated the court believes the plaintiffs’ facts are good enough to hold the government liable for its response to the Flint Water Crisis.

Flint, the largest municipality in Genesee County, is located along the Flint River, some 66 miles northwest of Detroit, with a population of just over 102,000—making it the state’s seventh largest—located entirely within the County—and, this year, celebrating its 200th birthday. But, as we have noted, over the last six decades, the city has been confronted by a series of fiscal and physical crises, with the onset likely triggered by General Motor’s decision to reduce its workforce in the city from 80,000 in 1978 to 8,000 in 2010—a downsizing which nearly halved the city’s population—and, indirectly, likely contributed to its high crime rates and near insolvency. .

Since the late 1960s, Flint has faced several crises. The city sank into a deep economic depression after GM significantly downsized its workforce in the area from a 1978 high of 80,000 to under 8,000 by 2010. From 1960 to 2010, the population of the city nearly halved from 196,940 to 102,434. Last September, the FBI reported Flint was ranked as the nation’s sixth most violent city among those with a population of 50,000 or more: violent crimes were up 23% compared to 2016 according to the report. The combination of the high crime rates and drinking water contamination likely contributed to the state putting Flint into a state of financial emergency from 2002-2004, and then, again from 2011-2015. But the gravest fiscal threat has come from lead contamination from the city’s drinking water that has had the harshest fiscal and physical impacts.

The litigation is a tale of federalism: the victim is a city inside a county devastated by decisions made by a gubernatorially-imposed governance system of emergency managers, a key step in the nation’s largest chapter 9 municipal bankruptcy, Detroit, where Kevyn Orr, appointed by the Governor, ensured in the very first hours that every traffic and street light, and every 9-1-1 call would receive an immediate response—and where, today, the state no longer has any local government under emergency management—mayhap ending a chapter, which helped us perceive how well it could work, but, as with any quasi-dictatorship, how badly it could fail—and with such awful human and governance impacts. Now, it seems, the state program will be quietly laid to rest, with two of Flint’s former EMs have been criminally charged in connection with the crisis.

However, it was not just the State of Michigan which contributed to the human health and fiscal crisis in Flint, but also the federal government: the Environmental Protection Agency, that is the federal agency charged with the responsibility to serve as a watchdog over state environmental operations and mandated by federal law to take over drinking water systems when a significant public health risk becomes apparent.

The litigation here, on behalf of 5,000 residents of the city, includes, as a plaintiff, Jan Burgess, a former Flint resident who was responsible for first notifying the EPA about the growing water problems nearly five and a half years ago—indeed, just six months after the city began drawing its drinking water from the Flint River after ending a decades-long relationship with Detroit’s system—effectively a state-imposed decision which, in January 0f 2016, the Detroit News reported that Miguel del Toral, an EPA water expert, warned, in an internal memorandum, would create problems—a warning which then led EPA Region 5 Administrator Susan Hedman to seek a legal opinion with regard to whether the EPA could force action that was not completed until November 2015—after the state recognized the crisis; indeed, it was not until January 21, 2016, months after testing had indicated high levels of lead in the water, that the EPA issued an emergency order in the crisis. The agency’s probe into the crisis was announced the same day.

Thus, in her opinion, U.S. District Judge Linda Parker wrote that when passing the Safe Water Drinking Water Act, “Congress intended to leave the primary responsibility for overseeing public water systems with the states,” but “expressly directed the EPA to intervene under specified conditions…The EPA’s failure to warn Flint residents of the severe health risks
the city’s water supply posed to them cannot be justified by any permissible
exercise of policy judgment…Within weeks of the switch to the Flint River, the people of Flint suffered rashes and hair loss.” She noted: “The EPA was well aware that the Flint River was highly corrosive and posed a significant danger of lead leaching out of the city’s lead-based service lines at alarming rates into residents’ homes. The EPA was well aware of the health risks posed by lead exposure, particularly to children and pregnant women…Further, the EPA knew that (the Michigan Department of Environmental Quality) and Flint officials were not warning Flint’s residents that they were being supplied lead-laced water.” Judge Parker also concluded that the residents’ claims about the government negligently responding to citizen complaints are not barred by the Federal Tort Claims Act’s discretionary function exception–or, as she further opined: “… Once the government decided to act, it was required to do so without negligence.”

An EPA Inspector General report released last July found that “management weaknesses” delayed federal intervention in the Flint water crisis after Michigan failed to prevent lead contamination, citing management problems at the EPA and its Region 5 office in Chicago, which oversees Michigan, with inspectors noting that regional managers did not properly address state actions to “disinvest” in safe drinking water requirements dating back to 2010, concluding they were intended to be temporary and not affect public health. The report, based on two years of research and in inquiries, also repeatedly noted the Michigan Department of Environmental Quality holds primary responsibility for ensuring compliance with safe drinking water requirements.

Remarkable Fiscal Recovery: Shelter from Future Storms

April 19, 2019

Good Morning! In this morning’s eBlog, we consider the remarkable recovery of Detroit from the largest chapter 9 municipal bankruptcy in American history, then we ponder a new Brooking’s report on the implications of an Aging workforce on economic growth, before returning to the warm Caribbean waters to assess the quasi-chapter 9 process in Puerto Rico with regard to putting the U.S. territory’s power authority into receivership.

Motor City in First Gear. The City of Detroit has now acted to approve a fourth consecutive balanced budget since exiting from the nation’s largest ever chapter 9 municipal bankruptcy in late 2014—and its first budget since its exit from direct state oversight. Last week, the City Council approved the Motor City’s FY2020 budget, a budget which squirrels away some $45 million in surplus revenue to fund post-bankruptcy pension obligations coming due in five years. Moody’s described the City’s proposed budget as a “credit positive” for years after the city emerged from what was then the largest municipal bankruptcy in U.S. history. Moody’s rated the city’s general obligation bonds Ba3, three notches below investment grade; S&P Global Ratings last February upgraded the city’s general obligation ratings to BB-minus, with its analysts writing: “The credit-positive budget reflects sound financial practices, including conservative revenue assumptions and long-range projections, a significant capital investment and continues to set aside funds for a scheduled pension cost spike in fiscal 2024.” Senior Managing Director Karen Daly at Kroll, who follows the economic conditions and underpinning of the city because of the impact it could have on the development authority’s bonds, said that the budgets presented since exiting the city’s largest ever municipal bankruptcy and the financial improvement made under Mayor Mike Duggan’s administration demonstrate how much headway the city has achieved in a remarkably short time, noting: “It is clear that the city has turned a corner.”

The fiscal turnaround, in the wake of the city’s resuming fiscal responsibility from the state control board last April, appears to reflect Detroit’s meeting the mandates set by the Financial Review Commission as part of its plan of debt adjustment to adopt three consecutive balanced budgets. The fiscal and governmental escape, however, is not complete: the Michigan Financial Review Commission (FRC), which is responsible for oversight not just of the Motor City, but also the Detroit Public Schools Community District, will meet each year over the next decade to determine whether the city should continue to merit local control—with the oversight board scheduled to dissolve if that mandate is met. And, as Moody’s unmoodily noted: “This is the first budget that was done without active FRC oversight, and in that first budget it’s gratifying that Moody’s, within a couple of days, recognized that the budget continued the financial turnaround of the city,” said Dave Massaron, Detroit’s interim Chief Financial Officer: he noted that the goal is to restore the Motor City back to investment grade, albeit adding: “At this point it’s a little too early to tell when that might be.” But in a key point, CFO Massaron said that Detroit has succeeded in nearly doubling the size of its rainy day fund, adding: “Right now we are fairly confident in the strength of our revenues, but we will continue to monitor them, and we are fairly confident that the state and the investment it made in the Grand Bargain agreement as part of the city plan of chapter 9 debt adjustment will continue to fund revenue sharing at the levels it was projected to at the time of the Grand Bargain.” Reflecting the fiscal comeback, Daniel Berger, a senior market analyst with TM3/MMD and Refinitiv, said that since Detroit issued $135 million of unlimited tax general obligation bonds last December, the first such issuance in six years, there has not been a trade for more than $1 million on Detroit general obligation municipal bonds; Detroit has issued other municipal securities supported by a state aid intercept.

Notwithstanding, the road to recovery is steep—or as our respected colleague Tom Kozlik noted: “The city needs to concentrate on building up its tax base: that is a surer road to stability. I know that is much easier to write than to execute.” As Detroit emerged from the largest municipal bankruptcy in 2014, city officials knew they needed to boost collections of income tax—the city’s top source of revenue. Ergo, enhancing tax collection meant finding ways to improve processes and close the tax gap—weighing what might be the appropriate rations of the city’s revenue collections from licensing, construction permits, parcel ownership, real estate evaluations and property tax data. In Detroit, unlike most cities, the city imposes an income tax: The city’s income tax rate is 2.4 percent for residents, 1.2 percent for nonresidents, and 2 percent for corporations.

Thus, to some extent, that recovery will depend upon the recovery of the Detroit school system: because of the city’s reliance, as part of its chapter 9 plan of debt adjustment, bringing back families into the city—a city where the Detroit Public School system’s own physical and fiscal disabilities had contributed to such a dearth of families with children. (Detroit’s top revenue sources are income taxes, wagering taxes from casinos, and state-shared revenue.) Mr. Kozlik noted that the short-term iterative fiscal gains that the Mayor and Council city can make are steps in the right direction: “The key, from a credit or rating perspective, is if they can hold up in the medium to long term,” Kozlik said. “Or, are those gains sustainable? Sustainable gains will let the city to earn upgrades and hopefully keep the higher ratings.” The nation’s dean of chapter 9 bankruptcy, Jim Spiotto, a managing director of Chapman Strategic Advisors, said how Detroit tackles the challenge of economic development beyond the city’s downtown and midtown areas and into its neighborhoods is central to a full recovery. One of the key benefits of growth is that an increased tax base translates into economic gains to support recovery efforts. (Detroit has budgeted to use more than $100 million of assigned fund balance for capital projects and blight remediation in fiscal 2020.) Thus, as Mr. Spiotto put it: “Detroit has to stay the course and constantly be improving on everything that they have done…They have done the initial part coming out into recovery, but now that they are in recovery mode they need to increase the efforts. Businesses don’t move into areas where education and employee population isn’t well-educated for what they need. You need to encourage that by demonstrating it and it is going to take effort and dedication,” a change, he noted, from his experience and expertise, normally comes 10 to 15 years post-bankruptcy.

But change is coming: on the first day the city filed for chapter 9 bankruptcy, I was told at the desk of my downtown hotel, it was too dangerous to walk the one mile from my hotel to the Governor’s Detroit office; today, an influx of affluent residents and large-scale developments has transformed that area: the core downtown, which accounts for just 6% of the city’s population, has added almost 1,000 residents since 2010; the greater downtown area has added about 9,000 residents, according to Moody’s—albeit, that downtown growth has not spread throughout the city: in a report last November, Moody’s estimated Detroit has lost about 35,000 residents since 2010. Nevertheless, as Mr. Spiotto has noted: in the wake of relieving itself of some $7 billion in debt, “[R]emoving urban blight becomes easier when you are in recovery mode after you have gone all the way down…They now have land that can be developed into new businesses, and it can link those new businesses, whether it is manufacturing or high tech, to its community colleges and high schools…They have areas that can be easily turned into areas of economic development because of the blight that is to be removed. They have real potential, but that potential has to be realized and you have to stay the course and you have to keep on going at a greater and greater pace to accomplish what you want.”

Because economies—at all three levels of government—tend to work in cycles, Mr. Spiotto warns that the Motor City needs to expand its recovery beyond downtown, so that, when the next recession comes, liquidity will be a critical issue for Detroit and other cities like it, noting: “The reason why liquidity is a problem for a recovering municipality is because people, if they don’t have the money, can’t move there, and they can’t pay their taxes so you have to be careful that you have the right programs up and that you are continuing your upswing,” adding that the future belongs to cities which invest in business development, particularly high-tech and the “sharing economy: “Those municipalities that do that, they are going to wind up staying in investment grade and those that don’t will drop.” Finally, as we noted above, Detroit’s fiscal future is intertwined with its public schools, where, last week, Detroit Public Schools Community District Superintendent Nikolai Vitti said the district is close to exiting from its parallel state financial oversight after nearly two decades of state control and supervision: the Detroit Public School District has been under the oversight of the Commission since 2016, when Michigan legislators approved a $617 million plan to create the new district to educate students and leave the old district, the Detroit Public Schools, as a legal structure that exists only to pay off debt. Superintendent Vitti said the new district is already eligible to issue municipal securities or debt obligations, complies with state laws regarding local government budgeting, and makes all payments to the state’s school employee retirement system—the three conditions mandated in order to restore local control; the District is also required to approve balanced budgets three years in a row—a goal it is two-thirds of the way in meeting, or, as Superintendent Vitti noted: “The audit will confirm if the district adhered to the budget and remained balanced.”

The Motor City’s FY 2020 budget, approved by the City Council, as Moody’s noted, continues Detroit’s financial recovery, reporting that the city’s $2.1 billion fiscal budget ending June 30, 2020, uses reasonable revenue assumptions, which is critical because the city’s main revenue sources—income taxes and casino wagering taxes—are sensitive to economic trends, adding: “The credit-positive budget reflects sound financial practices, including conservative revenue assumptions and long-range projections, a significant capital investment and continues to set aside funds for a scheduled pension cost spike in fiscal 2024.”

Pensions Ahead. As part of the Motor City’s plan of debt adjustment, the city was relieved of much of its financial pension payment obligations through 2023: commencing in 2024, the city will begin funding a large pension contribution from its general fund for the General Retirement System and the Police and Fire Retirement System: to prepare for that increase in pension costs, the city’s FY2020 budget will increase the city’s irrevocable pension trust by $45 million, from $123 million to $168 million; contributions will be made for three years until the trust reaches $335 million, plus investment income, according to Moody’s—with its report coming as the city has achieved its fourth consecutive balanced budget—and the first budget since the state oversight Financial Review Commission was no longer overseeing that process, or, as acting CFO Massaron put it: “It’s significant that the first budget that was done while the Financial Review was in dormancy was, within a few days of adoption, was recognized by an outside entity as being a positive for the city…The City Council along with the administration took a number of long-range steps in this budget.” In addition to addressing the pension cliff in 2024, the budget also doubles the rainy day fund, according to Mr. Massaron, who added: “In the event there is an economic contraction in the future, the city is in a better position to absorb that without requiring as significant of an immediate change…So the city will have time to appropriately plan for the reduction of revenue an economic contraction could result in.” The 2020 budget targets reserves toward planned capital improvements, blight remediation and risk management—or, as Moody’s reported; “The city’s ability to make greater capital investments from its annual operating budget, including through use of some funds on hand, reflects the strength of its financial operations.” Among planned improvements are investments in information technology equipment and regular vehicle replacement. He added: “We know that there is going to be a need in the future…Everywhere this is a long-term obligation the administration, and City Council is trying to plan ahead to meet that obligation so that it can meet that it can maintain its current level of services and continue to improve on the services that it provides.”

Might Recovery Be on the Way? The U.S. Census Bureau reports that the population of the U.S. Territory of Puerto Rico has declined less than either the Puerto Rico Oversight Board or the Governor had projected from July 1, 2017, to July 1, 2018: the Bureau noted the population on July 1, last year was 3,195,153, down 3.9% from the previous year—a decline attributed in significant part to Hurricane Maria, which savaged Puerto Rico in September 2017, contributing to a decline Puerto Rico’s population in the fiscal year—and a severe fiscal impact, as many of those who left the island were higher income residents who had family or economic opportunities on the mainland, leaving older and lower income residents behind. Indeed, in Board’s most recent approved fiscal plan and in Gov. Rosello’s most recent proposed fiscal plan, which had projected that the fiscal year, which included two major hurricanes in the late summer of 2017, would suffer a 5.06% population decline. The Census estimates that Puerto Rico’s population is down 14.2% since 2010: that decline is attributed to the territory’s decade-long economic contraction. Evercore municipal research Director Howard Cure noted that since the spring of 2017, the Puerto Rico government has been seeking to restructure parts of its government debt, noting: “Of course, any population decline is bad from an economic recovery point of view…Obviously, a smaller decline is better but still is a decline…My larger concern revolves around who is leaving the commonwealth. Many professionals in the health and education areas, for instance, are in great demand on the mainland as many are bilingual. The worry is that middle- and upper-class professionals are leaving the island and would have a disproportionately negative impact on the commonwealth’s economy and recovery.” Moody’s Investors Service vice president Genevieve Nolan added: “The U.S. Census estimate reflects the continued pace of accelerated population loss over the last five years, highlighting the social and economic challenges still facing the commonwealth, especially in the wake of Hurricane Maria.” Indeed, in the

In the PROMESA oversight Board’s October-approved fiscal plan, the Board reported that a weak economy has been a factor in the island’s population loss since 2010, and that its rapidly aging population is a factor in projections for further contractions: “In the long term, the population is projected to continue to decline, but at a rate closer to pre-hurricane trends [of 1 to 2% per year] (leveling off at ~0.8-1.2% decline annually by fiscal year 2035).”

Old Friends: the Challenges to State & Local Leaders of an Aging America; and What to do with a quasi chapter now public utility municipal bankruptcy.


April 12, 2019

Good Morning! In this morning’s eBlog, we consider a new Brooking’s report on the implications of an Aging workforce on economic growth, before returning to the warm Caribbean waters to assess the quasi-chapter 9 process in Puerto Rico with regard to putting the U.S. territory’s power authority into receivership.

Old Friends? Louise Sheiner, the Policy Director of the Hutchins Center on Fiscal and Monetary Policy, the author of this fascinating report, noted that just a decade ago, the share of the population that was 65 or older was only 12.5%, but that today, it has risen to 15%, and, over the next two decades, is projected to rise to 21%. These demographic changes have implications for all three levels of government: we already know the projected date when Social Security will be exhausted—and that neither the White House, nor the Leadership of the House of Representatives nor the Senate has expressed any willingness to examine options to address what is coming—at the federal level, that being: Social Security, which provides public pensions, and Medicare, which provides health insurance to the aged—but it has sharp implications for state and local leaders: if Medicare and Social Security benefits are allowed to lapse, after all, a growing number of impoverished Americans residing in cities, towns, and counties will become dependent upon those levels of government as they become increasingly impoverished. She writes: “[I]t is clear that population aging will eventually require significant adjustments in fiscal policy—either cuts in spending, increases in taxes, or, most likely, some combination of the two,” adding that while demographic change is relatively easy to forecast, it is “possible that some other changes that we have been experiencing in the economy may also be linked to aging— in particular, low-interest rates and lower productivity growth. These too have important consequences for our long-term fiscal outlook. She further notes it is “difficult to find policies to lighten the future burden of aging on the federal budget. Increases in labor force participation can help, but without concomitant cuts in benefits, they are not likely to make a large dent.  Similarly, policies to lower the debt now have only small effects on the changes required in the future, because the interest savings from such policies are small. Measures to improve the efficiency of health spending are one exception—such policies could help address fiscal imbalances without requiring much sacrifice.  Continuing to experiment with payment reforms should be viewed as an important priority for the government, as it has the potential to have very large returns.”

My great grandparents had 75 grandchildren, my grandparents 25, and while we anticipate a few more, we have three. And, our generations have changed: we increasingly our spread among different parts of the country—so the earlier era where families could serve each other as aging affected health and safety, that, too, is changing.

All of this means that with the Administration and Congress seemingly unwilling to address the looming exhaustion of these programs created under former President Roosevelt, cities, towns, and counties that respond to their citizens’ 9-1-1 calls are likely to be on the hook for this onrushing physical and fiscal tsunami.

Luz por el Futuro? In the U.S. Territory of Puerto Rico, Electric Power Authority (PREPA) Executive Director José Ortiz has confirmed that the Puerto Rican utility’s debt restructuring negotiation is, in his translated words, “well underway,” and, amid creditors’ requests to put PREPA into receivership, Director Ortiz reports that an agreement is anticipated “de pronto.” The public utility authority has a $9 billion municipal bond debt, an obligation subject to PROMESA Title III process.  According to documents filed this week before U.S. Judge Laura Taylor Swain, who presides over the quasi-chapter 9 Title III cases, PREPA has reached an agreement with Assured Guaranty, one of the three main municipal insurers, which would allow the corporation to reach a definitive agreement. (Syncora and National Public Finance Guaranty, an affiliate of MBIA, have yet to reach an agreement with the PROMESA Board; however, Assured’s support would ease the process for a considerable percentage of creditors to reach an agreement, at a time when municipal insurers and the Ad Hoc PREPA bondholders group are waiting for the court to decide on a lawsuit to put PREPA under receivership.) Over the last few weeks, the court has dealt with different procedural aspects aimed at deciding on the creditors’ motion to appoint a trustee in PREPA in May. However, in the last two weeks, Assured Guaranty, Syncora, other creditors and the government asked Judge Swain for a two-week extension in the schedule for litigation in order to continue negotiations and reach a definitive restructuring support agreement (RSA). According to the court filing, if finalized, the agreement would resolve the motion for a receiver in PREPA. Syncora joined this request, while NPFG is still considering their course of action. If Judge Swain grants the extension requested, the Board and the Puerto Rican government could continue talks for National and Syncora to also join the deal. (These insurers represent less than 15 percent of PREPA’s debt. Assured Guaranty has more than $3 billion in PREPA bonds.) The creditors’ joint motion states that if PREPA and bondholders reach a final agreement, the parties agree to withdraw the motion for a receiver in the utility. According to the case schedule, bondholders, insurers and the government should present their final arguments on a receiver in PREPA no later than next Friday; the hearing to discuss the receiver motion is set for May 11. 

One of the motions pending before Judge Swain  notes that this case is at a critical point, alleging that the PROMESA Board, PREPA, and the Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA) have engaged in talks to resolve differences over the need for a third party to take control of the corporation: these new motions before Title III court represent the most significant move in PREPA’s debt restructuring since last year, the Board and the government of Puerto Rico signed a preliminary agreement with the public utility’s creditors. Here, PREPA’s debt restructuring was negotiated on three fronts: PREPA had to convince its municipal bondholders; but it must also reach an agreement with financial entities which granted loans to purchase fuel, and with municipal insurers that guarantee part of their bonds. In the same case, the Electric and Irrigation Industry Workers Union have asked the court to appoint an Independent Private Sector Inspector General, instead of a receiver. 

Earlier this week, at the hearing of the House Committee on Natural Resources on PREPA’s recovery and rebuilding, Chairman Raúl Grijalva (D-Az.) said he hopes his Committee will consider and act on legislation next month to ensure that PREPA transformation and privatization process is transparent and incorporates accountability. While acknowledging Congress’ mistrust, José Ortiz, PREPA’s CEO, hopes that any federal legislation aimed at imposing oversight over the power grid transformation process will facilitate the support of the U.S. government, not to impose restrictions.  For Ortiz, from PREPA’s point of view, the creation of some federal authority would make sense only if it breaks the “impasse” around the federal government’s trust in the government of Puerto Rico. 

The Fiscal & Physical Costs & Challenges of Recovery

April 10, 2019

Good Morning! In this morning’s eBlog, we consider whether rolling the proverbial dice by bringing in a casino might be one way to regain a municipality’s fiscal balance; then we look to a noted Civil War municipality not so far away which barely dodged a form of municipal bankruptcy and appears firmly on the road to fiscal recovery, before returning to our old haunt of the Motor City, where an investigation of the city’s Mayor could put some of the city’s progress at risk. Finally, we consider the stalled disaster assistance legislation—transfixed between White House opposition to aid to Puerto Rico—and now a two-week Congressional recess.

Gambling on a Municipality’s Future? Virginia State Senator Bill Stanley (R-Galax and Martinsville, Henry and Patrick County, and the cities of Galax and Martinsville) earlier this week wondered if bringing a casino to Danville would send the wrong message: “When you get a casino in Danville, you are in a sense saying, ‘I give up,’” he said to between 100 and 150 community leaders during the Danville Pittsylvania County Chamber of Commerce’s legislative breakfast.  He noted that the construction of a casino in the city would send the message that Danville is dying—a message, he added, he did not “believe for a second,” noting recent progress in economic development in the region. Danville is an independent city—and a former key center for the Confederate Army—of just over 43,000. The Senator, at the Q & A session, was asked about whether he supports a pending local referendum on whether to bring a casino to Danville, with the question arising in the wake of the General Assembly’s passage of casino legislation, joking: “Don’t give up on the people and make us into an Atlantic City.”  But Delegate Danny Marshall (R-Danville) noted that a casino would not result in Danville getting rid of its economic development office nor turn the Southern Virginia Mega Site at Berry Hill into an empty pasture, adding: “This casino will not stop economic development in Danville,” and noting that his proposed bill would be limited to only one casino.” The Delegate had previously noted that a casino would attract visitors from Greensboro, Raleigh, Durham, Chapel Hill, and Charlotte in North Carolina, as well as Lynchburg, Roanoke, Martinsville, and other localities in Virginia. Municipal officials have expressed support for a casino in Danville, because of the potential tax revenue that could be used to address local needs, including the school system. It appears the virtual chapter 9 municipal bankruptcy and state takeover of Atlantic City was not raised during any of the discussion—a discussion triggered in the wake of Gov. Ralph Northam’s signature on the legislation on March 22nd to permit casinos in the Commonwealth: that statute directs Virginia’s Joint Legislative and Review Commission to conduct a comprehensive study of casino gaming regulations and submit a report by December 1st, and it establishes the framework for a Lottery Board to oversee gaming: it would allow three cities with economic challenges—Danville, Bristol, and Portsmouth—to hold referenda with regard to whether to have a casino. Referenda would also be allowed in Richmond and Norfolk, which have been identified as possible sites for the Pamunkey Indian tribe to establish a casino. The new statute stipulates that a gaming license only be issued for projects with a minimum capital investment of $200 million in land, facilities, infrastructure, equipment, and furnishings—and provides that the legislation must be re-enacted by the General Assembly during its 2020 session, and, if the General Assembly does, sets a series of deadlines.

Sen. Stanley pointed out that a $250 million resort and casino has been proposed at the vacant Bristol Mall in Bristol, Virginia—noting to the crowd that Bristol is dying, hinting seeking to attract a casino signals fiscal desperation: “They need this desperately,” and noting that Danville is attracting industry and jobs, while telling the audience: “We’re different,” reminding the crowd that backers of the Bristol casino knew their plans would stand a better chance of gaining the Legislature’s support if they added Hampton Roads and Danville to their quest.

According to results of a study by Richmond-based Chmura Economics and Analytics last year, a casino resort with a hotel, restaurants, entertainment and convention space would bring a one-time economic impact of about $118.7 million and 182 jobs for renovation and construction of such a resort in Danville; the report noted the project would generate $12.1 million in local taxes in 2022, and $20.3 million by 2028, according to the employment and fiscal impact analysis. By 2022, it would generate 2,534 direct and indirect jobs; by 2028, those numbers would grow to 5,426 direct jobs and 1,408 indirect jobs, with the report claiming it would have a direct and indirect economic impact of $384.8 million in 2022, and grow to $909 million in direct impact—with another $183 million in indirect impact—by 2028.

The Steep Road to Fiscal Recovery. One hundred thirty-nine miles away, in Petersburg, Virginia—a municipality which narrowly averted insolvency, the city is not gambling on its fiscal future, but rather project their fund balance will move further into positive territory after boosting the city’s fund balance—or, as Sean Gorman of the Richmond Times-Dispatch put it: “Petersburg’s rainy day fund is rising five years after it was wiped out amid a financial crisis, according to city estimates unveiled last week with the city’s budget proposal. The $75.8 million budget plan projects that the fund balance—the difference between estimated revenues and expenses—is about $2.6 million this budget year, which ends June 30, and would rise to $3.6 million under the coming budget year,” according to a slide show presentation by City Manager Aretha R. Ferrell-Benavides, who advised the city’s elected leaders that the projections of a rising fund balance are a positive sign for a city which nearly fiscally failed in the past decade when its fund balance collapsed from a positive $15.4 million in the 2010 fiscal year to a $7.7 million deficit by 2016. She reminded the elected leaders that a higher fund balance leads to lower borrowing costs, noting: “The momentum of building the fund balance is there.” But it is an early step—much travail awaits, or, as Manager Ferrell-Benavides noted: there is still a long way to go before the city would have what would be considered a healthy fund balance of $18 million, enough to fund the general fund for three months, but, as her presentation to the Council demonstrated: if Petersburg adheres to a policy of adding $1 million annually to the fund balance, then Petersburg would have a fund balance of $6.6 million by FY2023; her budget proposal calls for increasing spending by 3.2 percent in the general fund, which accounts for the bulk of city services; the property tax rate under the plan would remain the same at $1.35 per $100 of assessed value. Mayor Sam Parham noted that city leaders were mindful that residents are already facing rising water and sewer bills as the city tries to catch up on utility projects deferred during its financial meltdown, telling his colleagues: “I think it’s a good solid plan which is fiscally conservative, which is exactly what we need at this present time…We have massive costs that are increasing.”

He cited a key challenge: a 22 percent rise in the health insurance rates which the city and employees pay, an increase that Manager Ferrell-Benavides reported is driven by the high number of claims put in by an aging municipal workforce—a process which leaves the city facing an additional $420,000 in the cost to provide health insurance to its employees. Her proposed budget sets aside an additional $925,000 in the amount Petersburg pays toward operating Riverside Regional Jail with six other localities. As Chesterfield County sends fewer inmates to the facility, other localities like Petersburg are paying more toward jail operations. But, unlike Chesterfield, Petersburg is sending more inmates to the jail; thus the Mayor said added costs for items as higher payments for Riverside operations limit the city’s ability to put more money into its public school system. (The city manager’s proposed budget increases the amount the city is providing its school system from $9.75 million this year to $10 million in the coming fiscal year.) She advised the Council that school officials wanted an additional $1 million, but noted she could not accommodate that request, telling the elected leaders: “If you look at our budget, there’s just not $1 million available…My heart goes out to them…We just don’t have the money.” The city has proposed giving a $500 stipend to city employees who were employed by the city prior to June 30, 2018. “We weren’t able to do the type of pay increases we wanted to do, so we did this stipend to incentivize the hard work that our employees do year after year,” Mayor Parham said. Councilmember Charlie Cuthbert noted he was still studying the budget, but added he was pleased to hear Manager Ferrell-Benavides’ emphasis on rebuilding the city’s fund balance, albeit expressing apprehension that the city has long failed to pursue policies that would boost median income, noting to his colleagues: “The growth of our real estate revenue stream is stagnant…This is because, for decades, [the] city’s leadership has failed to pursue policies that will raise the city’s median household income. This is unfortunate. Petersburg’s real estate revenue stream is by far our largest revenue stream.” The City Council will hold a public hearing on the budget next Tuesday—and expects to vote on May 7th.

Detroit Demolition Derby? Robert Snell of the Detroit News warned that federal prosecutors at the beginning of this week unsealed criminal charges against two persons accused of accepting hundreds of thousands of dollars’ worth of bribes and rigging bids to demolish homes in the city—a city which has razed 17,260 homes and buildings—with the prosecutors filing their first criminal charges in a long-running investigation of Mayor Mike Duggan’s program to rehabilitate the post-chapter 9 municipality: the charges against two former employees of the contractor, Adamo Group, allege a pattern of corruption involving contractors and dozens of secret payoffs amidst an unprecedented plan to remove thousands of dangerous, blighted structures. To date, Detroit has received nearly $259 million in mostly federal funds over the last six years; it has razed more than 11,000 structures under the federal program; however, questions about whether the funds were misspent have clouded Mayor Duggan’s two terms in office—or, as Wayne State Law Professor Peter Henning noted: “When you have that amount of federal money being thrown around, it’s just so tempting to reach your hand into the till and grab a little for yourself.” The conspiracy dates to January of 2010, prior to the beginning of the federal demolition program and to Mayor Duggan’s election to office. This week’s charges raise uncomfortable memories of the corruption scandal which led to the sentencing of former Mayor Kwame Kilpatrick, who was sentenced in a racketeering and bribery scheme. Now Detroit City Councilman Gabe Leland is awaiting trial in a separate bribery scandal—and this week’s charges against Motor City leaders include: a former employee Adamo Group estimator who later worked for the Detroit Building Authority until 2016: he received $25,500 in payments from an unidentified contractor between 2014 and 2015, according to the government; Anthony DaGuanno, 61, of New Baltimore, a former Adamo Group estimator: he received more than $372,000 in bribes from an unidentified contractor in exchange for helping the contractor receive demolition jobs worth hundreds of thousands of dollars, prosecutors said, adding he had allegedly pocketed bribes from the unidentified contractor on 71 occasions commencing in January 2010, albeit payments which were made without the knowledge of Detroit officials, according to the court filing. Professor Henning has warned: “There will be more…These guys are just the start.”

Detroit’s program, a centerpiece of the Duggan administration, first came under outside scrutiny three and a half years ago amid concerns over bidding practices and spiraling costs—scrutiny at the local, state, and federal level, as well as by a grand jury. The program was suspended by the U.S. Treasury Department in the summer of 2016 to address concerns involving paperwork, billing, and misallocation of funds. It was reinstated two months later. Mayor Duggan recently defended the “vigorous” practices of the city’s program after concerns were also raised over whether some of the dirt used to fill holes following demolitions might have been contaminated.

Serious, Substantial, and Going Nowhere. Sen. Appropriations Committee Chair Richard Shelby (R-Ala.) claimed that Republicans had made a “serious” and “substantial” emergency assistance offer over the weekend, but it had been rejected by Democrats: “We…made a serious, substantial offer over the weekend to them that solved the disaster and they categorically rejected it. So we’re at a standoff at the moment, and we’ll wait and see what they come up [with].” Asked what was in the GOP offer, however, Chairman Shelby declined to comment except to say that it was “serious.” The disaster aid legislation, intended to respond to a recent spate of storms, hurricanes, and wildfires, has been stuck in the Senate since last week, when lawmakers blocked competing proposals from getting the requisite 60 votes needed to move forward. The GOP bill, which Democrats blocked last week, included $600 million for food aid for Puerto Rico; however, a senior Senate Democratic aide told The Hill on Tuesday that the offer from Republicans over the weekend did not guarantee new funding for Puerto Rico much less ensure that funds already allocated to the U.S. territory would be disbursed to Puerto Rico, noting: “Instead, the Republican plan inflates a pot of funding that all disasters can take from and says Puerto Rico is eligible only after it spends the funding that the administration is refusing to release.” The aide added that the GOP offer also does not include funding to help rebuild water systems in Puerto Rico; thus, Puerto Rico has become the key sticking point on the fate of the disaster aid bill, affecting cities, counties, and states across the nation. Senate Democrats are demanding extra help for the territory to conform to the House-passed version; however, Senate Republicans warn that the President Trump will not sign such a bill. Senate Minority Leader Charles Schumer (D-NY) accused his Republicans of applying a “double standard” to Puerto Rico: “We know the House, to their credit, is standing firm…We don’t just say we’ll give food stamps to some, but complete disaster relief to others. That’s wrong, and that hurts American citizens in Puerto Rico and elsewhere.” The impasse appears to have arisen in the wake, last month, of President Trump’s renewed criticism of the U.S. territory and its handling of previous disaster relief money during a closed-door lunch with Republican Senators, leading Sen. John Cornyn (R-Tx.) to note that the entire relief package is in some trouble. Indeed, it appears that Senate negotiations over a disaster relief package have broken down, all but ensuring that Puerto Rico and states, cities, and counties stricken by storms, wildfires, and flooding disasters will be left waiting for emergency aid until after Congress returns from its two-week recess.

The Challenge of Transitions into and out of Municipal Bankruptcy

April 5, 2019

Good Morning! In this morning’s eBlog, we consider the possible completion of its chapter 9 plan of debt adjustment and state oversight before heading south to the ongoing fiscal and governance challenges in the U.S. territory of Puerto Rico, where a federal court, an unelected oversight board, a Governor, and a legislature are beset by challenges in seeking to recover from storm devastation and inequitable federal responses.

Exiting from Municipal Bankruptcy State Oversight. Michigan State Senator Sylvia Santana (D-Detroit) has proposed a number of bills to end state oversight of the City of Detroit’s finances, a condition incorporated in the city’s chapter 9 plan of debt adjustment—or so-called 2014 “Grand Bargain.” The Senator noted: “The time for the so-called ‘Grand Bargain’ has come and gone, and so too should the parameters of that law…the City of Detroit is financially solvent, and it’s time we give back what is owed to the people who made sacrifices for this to happen, especially on their retirement income.” Under the city’s court-approved plan of debt adjustment, the city received $195 million up front and was authorized another $350 million over 20 years to ease its way out of municipal bankruptcy; however, to ensure the Motor City did not resume the practices which caused its filing for municipal bankruptcy in the first place, the Legislature imposed oversight of Detroit’s finances—with such oversight scheduled for two decades. Now, Sen. Santana’s proposed legislation, bills 222 through 226, would formally terminate the oversight after just five years: no longer would city financial decisions be reviewed by a nine-member commission comprised mostly of gubernatorial appointees and chaired by the state treasurer—or, as the Senator put it: “It’s time we started talking about this, and I hope these bills will be the start of a spirited, encouraging discussion on this matter.”

A key part of the plan of debt adjustment involved the city’s public schools—schools in neglected physical and fiscal condition—meaning families were reluctant to even think about moving into the city. Thus, unsurprisingly, two years after Detroit became insolvent, the Detroit school district became the beneficiary of a state bailout itself, subject to many of the same oversight requirements. Sen. Santana’s proposed bills would also end state oversight of the Detroit Public Schools Community District; the legislation would also repeal a provision of state law affecting the city and employee health insurance: that particular law requires municipal employees across the state to contribute specified amounts to their employer-provided health insurance benefits. Municipal governments can exempt their employees from these cost-sharing duties with a two-thirds vote by their governing body, but currently, Detroit is barred; under Sen. Santana’s proposed legislation, that ban would expire.

On the fiscal side, Sen. Santana has also introduced a bill to let large cities, including Detroit, impose a 10 percent amusements tax on tickets to concerts, shows, sporting events, zoos, etc.—with the proceeds open for use to address underfunded police pensions and retiree health insurance benefits. In her press release, the Sen. noted: “The City of Detroit has been through so much this decade, but the integrity and professionalism of those who work at the Detroit Police Department has remained constant…Even when our economic situation was tumultuous, our officers stood strong and worked overtime to protect our communities. The state has repeatedly slashed municipal budgets, so it’s time for Detroit to find a new way to pay for their current and prospective benefits. It’s simply not fair for Detroit taxpayers to foot the bill to train our police officers, only for them to be snatched up and employed elsewhere. We need to protect our taxpayers and the officers who work so hard every day to keep our residents, and communities, safe.”

Nevertheless, her proposal has triggered cautions from the Mackinac Center for Public Policy, where Fiscal Policy Director James Hohman has cautioned legislators with regard to terminating state fiscal oversight, pointing . Among other reasons, he pointed to the 2018 conviction of a former Detroit employee for embezzling from the city. (The employee in question, Masharn Franklin, had worked in Detroit’s audit and payroll department; he was sentenced to 18 months in prison last November 2018 for embezzling $265,000): “There are some positive trends for the city, but Detroit still has an underfunded pension system…Some of its elected officials and managers have been charged with corruption after bankruptcy. I am not sure that state oversight has helped these problems. But its residents deserve a competent and functional government, and lawmakers shouldn’t act like the city’s problems are over.”

Unequal Fiscal Treatment? President Trump has made clear his opposition to providing any more fiscal assistance to the U.S. territory of Puerto Rico; however, Democrats in Congress have made clear they will not agree to a massive bill providing relief for those affected by hurricanes, tornadoes, floods and fires without such assistance—thus a fiscal and governing deadlock becoming clearer in the days since Senate Majority Leader Mitch McConnell (R-Ky.) and Senate Minority Leader Chuck Schumer (D-N.Y.) saw their own bills fail to pass last Tuesday, as the President continued to criticize Puerto Rico and its handling of hurricanes Maria and Irma since they devastated Puerto Rico 2017. Sen. Republic Whip John Thune (R-S.D.), former Municipal League Executive Director, and current Chair of the Commerce Committee’s Subcommittee on Communications, Technology, Innovation, and the Internet, and Chair of the Finance Committee’s Subcommittee on Taxation and IRS Oversight, noted: “I’m not sure anybody gains by a protracted standoff where both sides are pointing fingers: I hope that (Sens.) Schumer and McConnell can sit down and come up with a path forward.” Reaching such a path forward, however, has likely been complicated by an escalation of White House attacks on Puerto Rico: on Monday, President Trump called San Juan Mayor Carmen Yulín Cruz “crazed.” (Mayor Cruz responded on CNN: “The President lives in an alternative world where he tries to pin people against one another.”) The President added fuel to the fire by deeming Puerto Rican elected leaders “grossly incompetent,” describing them as leaders who “spend the money foolishly or corruptly,” and the White House, Thursday, issued a “fact sheet” describing Puerto Rico’s “extensive history of mismanagement and corruption.” The paper added: “Congress does not need to appropriate more funds for the recovery effort in Puerto Rico,” arguing that the U.S. territory has not spent billions of dollars the federal government has already allocated. The President’s efforts to bar assistance to Puerto Rico appear to have wider repercussions: it is holding up Senate Appropriations Committee Chair Richard Shelby’s (R-Ala.) natural disaster relief legislation proposing about $13.5 billion for rebuilding and recovery from natural disasters, including $600 million to pay for nutrition assistance for Puerto Rico, the amount requested by Gov. Ricardo Ricardo Rosselló last November to protect the food stamp benefits of more than one million American citizens, as well as critical disaster relief for flood-ravaged parts of the MidWest.

In voting against the bill, Democrats argued that Chairman Shelby’s relief effort provided insufficient funding for Puerto Rico, because it omitted a variety of measures that were part of the roughly $14.2 billion relief package passed by the House in January—including funds that could be used by Puerto Rico to rebuild water systems and other infrastructure projects. Sen. Patrick Leahy (D-Vt.), the Ranking Member has since offered to add a couple billions dollars for other disasters, including tornadoes that have hit the southeastern United States and flooding in the Midwest, to satisfy Republican concerns—his spokesperson, Jay Tilton, noted: “Our opinion is that it is clear that the President is holding disaster aid to all American communities hostage over a petty, political grudge with the American citizens of Puerto Rico.”

Ayuda?! With White House assistance in doubt, the Squire Patton Boggs Foundation is launching a new fellowship program to help residents get the legal assistance they need: the foundation, which sponsors a number of law students each summer who choose to do public interest fellowships, reported it has placed one student with legal aid services organization Ayuda Legal Puerto Rico and two students with Centro Para Puerto Rico, a nonprofit organization that works to combat poverty by giving people tools to launch or expand businesses. Both organizations are based in San Juan. Foundation President John Oberdorfer noted: “There is huge, huge damage there that is not being tended to…The problems are, from every indication, entrenched and need a great deal of attention. We thought this was a good place and a good way for us to dedicate our talent and our energies.” Here the concept for the fellowship began in last year, when another student from the University of Miami Law School used the foundation’s fellowship program to fund a summer working on legal aid in Puerto Rico. With the help of the foundation’s Dean’s Circle, a group of Deans of 16 law schools around the country that place students in the Squire Foundation’s summer fellowships, put together an inaugural program for 2019: at first, the plan was to place one student with a legal aid organization in Puerto Rico, but it was adjusted to three.
Michael Scharf, dean of the Case Western Reserve University School of Law, said that from the beginning, there was enthusiasm among the law school deans for setting up a program in Puerto Rico, noting: “We were looking for an area where we could collectively be impactful…There’s a lot of concern throughout the U.S. in academia for the situation in Puerto Rico, as there was a few years ago in New Orleans. Major disasters bring major legal challenges, and anything we can do, we want to play a role and help out.”

Legal Quagmire. That assistance could prove invaluable, as thousands of Puerto Ricans are still fining it exceptionally difficult to gain FEMA assistance, because they do not hold the titles to their properties, even if they have lived in them for decades. In Puerto Rico, where property law is derived from Spanish civil law, as opposed to the English common law used, changing the name on a property’s title can be a protracted and expensive process that involves attorneys and sometimes land surveyors and engineers. Indeed, a survey of more than 2,000 people in all but one municipio in Puerto Rico by the title ship clinic at the University of Puerto Rico School of Law found that 49 percent of residents have problems with their titles or lack titles altogether. Yet, without these documents, residents face a difficult time proving ownership of their properties to federal agencies distributing aid to repair homes. Thus Ayuda Legal has been at the forefront of a grassroots coalition that helped draft a sworn declaration affidavit that FEMA is now accepting in lieu of a title, as long as residents can provide other documentation demonstrating that they have been living on the property and paying bills. Indeed, the need for legal help in this arena is so great that even organizations like Centro Para Puerto Rico, which focuses more on entrepreneurial programs, have had to branch out to address it.

Legal, Fiscal, and Human Health Challenges–and Imbalanced Local & State Governance Responsibilities when Human Lives are at Stake


April 5, 2019

Good Morning! In this morning’s eBlog, we consider the legal, fiscal, and human health ongoing governing challenges for Flint, where litigation continues on a case brought by the city’s residents against Michigan officials and the state—and where a judge has determined that the Governor is not entitled to qualified immunity. 

U.S. District Court Judge Judith Levy this week ruled that Flint residents can pursue claims of professional liability and violation of their rights to bodily integrity against the State of Michigan, effectively permitting a major class action suit to move forward with claims against Governor Rick Snyder. Judge Levy’s 128-page decision authorizes new evidence in the case that plaintiff attorneys argue demonstrates Gov. Snyder was aware of significant risks posed by Flint River water as early as April of 2015, but did not inform residents until five months later. The trial involves the consolidation of nine lawsuits against the State of Michigan, the City of Flint, and city and water consultant companies.

Judge Levy had dropped Governor Snyder from the case in the fall of 2018; however, new allegations, if proven true, would show Gov. Snyder was “deliberately indifferent” and demonstrated what she deemed “callous disregard” for the health and safety of Flint residents. Here, the consolidated class-action lawsuit was filed on behalf of Flint residents: it claims personal injury and/or property damage as a result of the city’s water contamination crisis, including those exposed to lead, and at least one resident who died due to possible Legionnaires’ disease. An attorney for the plaintiffs, said they were “pleased with today’s decision in that now Gov. Snyder will be held accountable for his gross misconduct and bad decisions he made towards Flint….Those actions played a large part in causing great harm to the citizens of Flint.”

Judge Levy also rejected motions to dismiss “bodily integrity” claims against former Michigan Treasurer Andy Dillon, several other state officials, as well as former Flint emergency managers Darnell Earley and Gerald Ambrose; she did dismiss claims against some defendants, including former Michigan Health and Human Services Director Nick Lyon, former Department of Environmental Quality Director Dan Wyant, former emergency manager Ed Kurtz, and former Flint Mayor Dayne Walling. (The former Governor has publicly apologized for the Flint water crisis; however, he fought claims against himself and the State of Michigan, noting, just before leaving office as his term limit expired last January that he would “always have issued” with regard to the crisis and how the drinking water switch was handled by what he described as the “so-called” experts who worked for him.

Nonetheless, the amended complaint allowed under the court’s decision alleges that the former Governor failed to act to make a timely intervention in the lead contamination crisis or to warn the public about outbreaks of deadly Legionnaire’s disease—notwithstanding a memorandum in April of 2015 from his Chief of Staff Dennis Muchmore warning that the Flint water issue “continues to be a danger flag” for the administration. Similarly, later that summer, Michigan Director of Urban Initiatives, Harvey Hollins, according to the complaint, spoke “directly to Governor Snyder and advised him of the growing concerns among Flint residents they were being exposed to toxic levels of lead.” Indeed, a month later, in September, Mr. Muchmore emailed the Governor again to warn that officials in Flint were trying to turn childhood lead exposure into “a political football.” It was not, however, until the following October 1 that the Governor publicly acknowledged the Flint water and lead exposure crisis.

The complaint also alleges that Gov. Snyder first learned that Flint residents were at risk of Legionella exposure in December of 2015, but that he did not publicly disclose that risk until declaring a State of Emergency until January 5, 2016; he requested a federal declaration on January 14th, and, finally, publicly warned about the Legionnaires’ disease outbreak on January 16th. (The Legionnaires’ disease outbreaks in Genesee County during 2014 and 2015 killed at least 12 and sickened another 79 people.) Thus, unsurprisingly, the complaint targets the former Governor for alleged “injuries he caused to plaintiffs resulting from his deliberately indifferent deprivation of plaintiffs’ constitutional and civil rights.”

In her decision, Judge Levy deemed the plaintiffs’ claims against Gov. Snyder “plausible” and worthy of additional consideration, and she noted early warnings within the Snyder administration that switching to Flint River water could be a “potential disaster,” writing: “Plaintiffs also plead facts which, when taken as true, show that Governor Snyder was deliberately indifferent,” noting that, based on the evidence presented, it was “reasonable to infer” that Governor Snyder knew residents of Flint were confronted with a substantial risk of serious harm, adding that the plaintiffs “plausibly state[d]” that Gov. Snyder displayed a “callous disregard” for the plaintiffs’ rights to bodily integrity—indeed, viewed as a whole, she noted the allegations plausibly described “conscience shocking.”

Among the named plaintiffs is Elnora Carthan, a 79-year-old Flint resident, who allegedly suffered skin legions, neurological disorders, and other injuries as the result of exposure to toxic water; and Michael Snyder, whose 83-year-old father died in 2015 in the wake of contracting pneumonia caused by exposure to Legionella bacteria. John Snyder’s death was one of two cited in charging former Director Lyon on an involuntary manslaughter charge and other criminal charges. Here, the trial involves a class representing approximately 25,000 Michiganders; however, that number could increase, pending settlement negotiations—negotiations which had stalled under for Gov. Snyder’s administration, but which have taken on new vigor under Gov. Gretchen Whitmer’s administration. It has also been reduced somewhat in scope in the wake of Judge Levy’s decision to reject the plaintiffs’ claims of wealth-based or racial discrimination by Gov. Snyder or other defendants, ruling the evidence did not support the claims.

Judge Levy has also held that Flint residents could file a fourth amended complaint, because they sufficiently alleged that Governor Snyder had been “deliberately indifferent” to the crisis, or, as she wrote: “Considering the seriousness of the potential problem, the widespread reports, and the seniority of the government staff involved, it is reasonable to infer from plaintiffs’ allegations that Governor Snyder was aware of this information…As a result, the Governor possessed sufficient facts from which he could have deduced that plaintiffs faced a substantial risk of serious harm from the Flint River,” adding that, for same reason, Governor Snyder is not entitled to qualified immunity. However, Judge Levy determined that Flint residents are barred from adding claims that the state conspired against them or violated their equal protection rights on the basis of wealth and race discrimination, notwithstanding their claims with regard to the “historic impact of racism in Flint.” Flint residents, similarly, are also barred from adding a claim of gross negligence against the state; Judge Levy noted: “The sheer size and scale of the Flint water crisis makes it difficult for plaintiffs—or anyone—to identify any defendant most legally responsible for the resulting injuries.”

With regard to the plaintiffs’ motion to dismiss, Judge Levy held that the State of Michigan is covered by sovereign immunity, but the former Governor and the City of Flint are not. In addition, former Michigan Treasurer Andy Dillon still faces a 14th Amendment claim regarding the right to bodily integrity: Judge Levy noted: “It is reasonable to believe that (former Treasurer) Dillon was aware of the risks associated with using the Flint River as a water source…Yet despite this knowledge, Dillon helped to develop an interim plan that saw Flint transition to the Flint River.”

In words that which demonstrate the import of integrity in governmental communications, Judge Levy, referring to former Michigan DEQ Communications Director Bradley Wurfel, wrote: “On several occasions as the crisis unfolded, he publicly denied that there was a problem with Flint’s water…He appeared on radio and television to advise listeners that the water was safe to consume and bathe in, and he discredited others who suggested that lead was leaching into Flint’s water.”

Nevertheless, the state defendants prevailed on their motion to dismiss the residents’ “state-created danger” claim, because the court determined such a claim must apply to a group smaller than “the general public.”

Judge Levy did open the door for a potential fourth amended complaint, finding the plaintiffs had sufficiently alleged that Gov. Snyder had been “deliberately indifferent” to the crisis, opining: “Considering the seriousness of the potential problem, the widespread reports, and the seniority of the government staff involved, it is reasonable to infer from plaintiffs’ allegations that Governor Snyder was aware of this information…As a result, the Governor possessed sufficient facts from which he could have deduced that plaintiffs faced a substantial risk of serious harm from the Flint River,” adding that, for the same reason, Gov. Snyder was not entitled to qualified immunity. Simultaneously, the Judge barred residents from adding claims that the government conspired against them or violated their equal protection rights on the basis of wealth and race discrimination, despite their claims about the “historic impact of racism in Flint.” She also nixed adding a claim of gross negligence against the government defendants, noting: “The sheer size and scale of the Flint water crisis makes it difficult for plaintiffs—or anyone—to identify any defendant most legally responsible for the resulting injuries.”

Sovereign Immunity. On the matter of the defendants’ motion to dismiss, Judge Levy ruled that the State of Michigan is covered by sovereign immunity, but former Gov. Snyder and the City of Flint are not. Former Michigan Treasurer Dillon also still faces a 14th Amendment claim regarding the right to bodily integrity, or as Judge Levy noted: “It is reasonable to believe that [Treasurer] Dillon was aware of the risks associated with using the Flint River as a water source…Yet despite this knowledge, Dillon helped to develop an interim plan that saw Flint transition to the Flint River.”

Sovereign Integrity. Judge Levy also address the vital issue of governmental integrity: in addressing the bodily integrity claim against former Michigan Department of Environmental Quality Communications Director Bradley Wurfel, she wrote: “On several occasions as the crisis unfolded, he publicly denied that there was a problem with Flint’s water…He appeared on radio and television to advise listeners that the water was safe to consume and bathe in, and he discredited others who suggested that lead was leaching into Flint’s water.” However, the government defendants prevailed on their motion to dismiss the residents’ “state-created danger” claim, because such a claim must apply to a group smaller than “the general public.” The water-supply consultants were unsuccessful in their attempt to dismiss the professional liability claims, but they did win dismissal of claims of negligence, fraud and infliction of emotional distress.