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.”