The Continuing Challenge of Appointed Versus Elected Governance

May 31, 2019

Good Morning! In this morning’s eBlog, we consider the turbulent waters between the PROMESA unelected Oversight Board and municipios in Puerto Rico, where the Board has cited ten municipios and three Commonwealth authorities related to their alleged failures to transfer $4.5 million from withheld paychecks to employee retirement accounts.  

Unretiring. The action by the Oversight Board marked the most recent effort to preempt the government of Puerto Rico’s governing authority by the unelected appointees of the Board, which also has sought to cut pension payments by 10% as part of its mission to overhaul fiscal management in the territory. The U.S. territory has $49 billion of unfunded pension obligations. According to the PROMESA Board, Puerto Rico’s Act 106-2017 “provides that the head of a government entity that knowingly and without just cause fails to remit employee contributions to their defined contribution account could be subject to significant penalties.” The practice may also violate Title 18 of U.S. Code 666(a)(1)(A); ergo, the Board referred the matter to the Puerto Rico Secretary of Justice Wanda Vázquez Garced, as well as the U.S. Department of Justice.  Secretary Vázquez Garced said she handed the matter to Puerto Rico’s Public Integrity Division and Comptroller Office, tweeting: “If these allegations are correct, it is unacceptable.” The Board has previously charged that some past Puerto Rico governments have failed to make sure that retirement amounts withheld from employee paychecks went to retirement accounts; indeed, PROMESA Board Executive Director Natalie Jaresko noted, in a written statement: “Decades of fiscal mismanagement decimated Puerto Rico’s pension funds…That is why we are extremely concerned about the failure to transfer employee contributions to their individual defined contribution retirement accounts.”

The Board also noted that 15 public corporations and 13 municipios have failed to make their required pay-as-you-go contributions since FY2017 for the current retirees’ pension system: as of last April 30, they had failed to transfer about $340 million to Puerto Rico’s central government, which uses the money to pay retirees’ pensions: the entities that owe the most to the PayGo pension system are the Puerto Rico Aqueduct and Sewer Authority ($67.4 million) and San Juan ($72.4 million), with the total including both failures to transfer the PayGo, as well failure to transfer employee withholdings. Moreover, according to the PROMESA Board, the Puerto Rico Office of Comptroller is among the entities which have failed to transfer PayGo sums to the Commonwealth government—one of the comptroller’s main duties is reviewing other Puerto Rico government entities to ensure they are using government money properly—helping to explain why, since the end of April, the Oversight Board has sought assistance from the Puerto Rico Retirement Board to address the failures to make the PayGo and withholdings transfers.

Quien Es Encargado? Perhaps not content with partial preemption, the PROMESA Board has also submitted its budget for consideration to the local legislature—an action which triggered Gov. Ricardo Rosselló, surrounded by the leaders of the Puerto Rico Senate and House of Representatives, to respond the following day that the legislature would be considering his version of the budget and not that of the Board. In a statement earlier this week, the PROMESA Board reported that its proposed FY 2020 budget is aimed at preparing the fiscal path forward for Puerto Rico to resume making debt payments: in a press conference Executive Director Natalie Jaresko said that the Board’s $9.1 billion budget would contain sufficient resources to produce a surplus in the coming fiscal year; similar spending levels in FY2021 would allow the government to resume paying the central government’s bond obligations, albeit at restructured levels, noting that the FY2020 surplus will be used for paying later year debt payments and pensions. (According to the Puerto Rico October 2016 government-proposed fiscal plan, the central government owed about $2 billion in debt service in FY2020, including general obligation, Public Building Authority, Employees Retirement System, Infrastructure Finance Authority, Public Finance Corp., but excluding Puerto Rico Sales Tax Financing Corp. (COFINA) debt. Director Jaresko also noted that the Board is projecting deficits starting sometime from FY2031 to 2037. Surplus money generated in the fiscal year can be stored away to pay some of the debt in the out years, she said.

Bastante! Puerto Rico’s revenues have been coming in ahead of projections for about a year. The April 2019 revenues were 24% better than what the Puerto Rico Treasury had projected last October: April is the government’s strongest month for revenues, and last month was Puerto Rico’s best month for revenue ever, according to Gov. Ricardo Rosselló.

Local Pension Obligations. While the pension issues appear to be on the upswing, there remain, however, challenges at the local level—for instance, Alcalde, or Mayor Luis Rolan Maldonado of Ciales this week admitted he had failed to transfer all the contributions of the municipal employees to the Administration of the Retirement Systems, as pointed out earlier this week by the PROMESA Board, noting: “I accept the debt. I accept that I have the debt, I have never refused to pay it. (But) I cannot stop paying the employees and Retiro knows that we are making the arrangements.” Ciales is one of the 11 municipios which the Board has referred to the Puerto Rico and U.S. Justice Departments for alleged violations of the law by not transferring the money withheld to their employees to the retirement systems. The fiscal agency also referred to the Metropolitan Bus Authority (AMA), the Maritime Transport Authority (ATM) and the Integrated Transport Authority (ATI). Mayor Rolan Maldonado this week said he had submitted a payment of $271,659 to the retirement systems, albeit without explaining how it was that he ended up remitting nearly double the amount actually owed. Although the funds owed consists of contributions made by municipal employees and, therefore, money that does not correspond directly to the municipality, Mayor Maldonado said he did not pay, because he did not have the funds, explaining the estimates of collections had fallen short, and that the Board did not contact him prior to making the referral and publicly denounce the situation.

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Unbridged Troubled Waters in Michigan & Heated Governance Waters in Puerto Rico

 

May 23, 2019

Good Morning! In this morning’s eBlog, we consider the turbulent water wars between the City of Flint and State of Michigan, and then assessing the heated governance waters in the U.S. territory of Puerto Rico.

The Michigan Supreme Court will hear arguments in a class action lawsuit brought by Flint residents against former Gov. Rick Snyder, state government offices, and former Emergency Managers, per a court order from last Wednesday: the order advised attorneys for the residents of Flint and the state that they will each have 30 minutes to make arguments about the case, which the Michigan Court of Appeals in January 2018 allowed to continue forward in the state Court of Claims. Those courts ruled the case should be allowed to continue despite arguments about timeliness and other issues. A spokesman for the Michigan Attorney General’s Office, which is representing the state, said the new order was being reviewed by the state, which requested the Supreme Court review, while Michael Pitt, an attorney for the Flint residents, said the decision by the Attorney General to excuse herself from participating in the case was proper and bodes well for the residents: “This is a very positive development for us…We are optimistic and hopeful the Supreme Court will affirm.”

Justice Elizabeth Clement, whom Gov. Snyder appointed to the state’s high court, has had her name appear in some emails related to the Flint water crisis as state officials, including members of the Governor’s cabinet, spoke among themselves about Flint water problems, how to address them, and what the state could offer the city to help mitigate issues. At that time, Justice Clement said she was aware of potential conflicts of interest that could come up due to her time working for Gov. Snyder when asked by a reporter whether she would recuse herself from cases involving the Flint water crisis, noting: “I will look at each and every case as they come in and make a decision on whether or not I need to recuse myself.” (She was re-elected last year.) In its order, the state Supreme Court said parties should prepare arguments regarding when the Flint residents’ claims were accrued, whether they are subject to exceptions to the timeline for giving notice of a lawsuit in the Court of Claims, whether Flint residents have a constitutional claim to say their bodily integrity was violated, and what direct harm, if any, was done to Flint residents’ property.

The state has maintained that the January 2016 lawsuit filed against Gov. Snyder, the state environmental and health departments, the City of Flint, and two Flint emergency managers did not comply with a six-month notice requirement pertaining to lawsuits filed in the Court of Claims. The state also argued Emergency Managers appointed by the Governor are not considered state officials. A year ago in January, the Michigan Court of Appeals upheld an earlier Court of Claims decision and denied the state’s motion for summary disposition on those grounds, noting that dismissal of the case on those arguments would be “premature…accepting defendants’ position would require a finding that plaintiffs should have filed suit or provided notice at a time when the state itself claims it had no reason to know that the Flint River water was contaminated.” the Court of Appeals ruled. The filers could be subject to exceptions to the timeline for giving notice based on the potential that the state attempted to fraudulently conceal the damage caused by the Flint water crisis—or, as the lower court noted a year ago last March: Whether plaintiffs can satisfy the exception is a question that involves disputed facts and is subject to further discovery.”

Public Health at Risk in Puerto Rico. The Puerto Rican government is warning the House Committee on Natural Resources that if Congress does not act soon, by next Spring Puerto Rico’s health care system faces collapse, potentially affecting as many as 600,000 Americans: Ángela Ávila, the Executive Director of the Health Insurance Administration, in her testimony, said that Congress must act before September 30, 2019, to prevent catastrophic damage to the island’s health system. Although Medicaid is under the jurisdiction of the House Energy and Commerce Committee, House Natural Resources Committee Chair Raúl Grijalva (D-Az.), stressed that the hearing Will discuss a recurring crisis in other islands. Ms. Avila  projects that Medicaid funds will run out by the end of this calendar year.

Governor Ricardo Rosselló Nevares’ 2019-2020 budget bill assumes $1.643 billion in Medicaid funds to finance the cost of the Government Health Plan (Vital): due to a $4.8 billion emergency allocation in Medicaid funds following Hurricane María, the federal government has financed 100 percent of the services of that program since early 2018; however, as as of October, Puerto Rico will have only $380 million available annually in Medicaid funding, and will be subject to a law that only allows the federal government to fund 55 percent of the cost of the services provided under that program. Director Ávila testified that such a level of federal support for Puerto Rico’s Medicaid program is insustainable, since the funding is projected to “cover only 19%” of the federal funding needed during FY2020 for Medicaid spending. The Governor had PUBLICIDAD

asked Congress to allocate $15.1 billion to Puerto Rico for the next five years, and to raise the federal funding responsibility for Medicaid services to 83 percent. Director Ávila said this funding would give U.S. territory short-term certainty, while Congress works with the government to determine a sustainable, long-term funding mechanism that eliminates inequity in funding and allows them to meet the health needs of the most vulnerable residents. ASES director told El Nuevo Día last week that nearly half of the 1.25 million participants of the Vital plan will be left without medical services if the matching funds are not made available, warning: “(Puerto Rico) can’t take another cut,” stressing that in addition to 600,000 participants that may lose coverage, the government would have to “rethink” whether it can offer dental care and pharmacy services, noting: “A system that doesn’t have those pillars is definitely going to collapse,” not only because of a lack of resources, “but also because of health conditions,” adding that without an annual allocation of at least $1.6 billion in Medicaid funds, Puerto Rico’s fiscal crisis will worsen; there will be more delays in improvements to hospitals, clinics, and other necessary infrastructure; Puerto Rico will continue to “lose more of our medical providers,” and there will be a “mental health crisis.”

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Meanwhile, the PROMESA Board Executive Director Natalie Jaresko sent her statement to the Committee, indicating that “the Commonwealth’s recovery and fulfillment of PROMESA’ s objectives will be significantly aided by the Congress legislating a long-term Medicaid program solution to mitigate the drastic reduction in federal funding for healthcare in Puerto Rico that will happen later this year absent Congressional action,” as she urged Congress to grant Medicaid funding which is “more closely tied to the size and needs of its low-income population.” This came as, last night, Gov. Ricardo Rosselló Nevares’ administration was preparing to send the recommended budget for FY 2020 to the Oversight Board, without including cuts in items such as pensions, the Christmas bonus, and operational expenses that the federal entity requested less than a month ago. This came as, in her letter granting the Governor  an extension until Monday to submit a Budget to the Board, Executive Director Natalie Jaresko warned that she expected to receive a budget document that is consistent with the fiscal plan certified on May 9. Among other things, this would involve adjusting payroll expenses to exclude the Christmas bonus from the budget and limiting the contribution to public employees health plan to $125 per month, except in the case of employees in public corporations with previous health coverage agreements.

Gov. Rosselló Nevares has been warning for more than a month in several forums, including before Congress, that he will not apply unnecessary cuts to the government’s budget, especially after having identified about $ 1.3 billion in savings through different options, even going so far as to warn, last week, that he would even sue the fiscal entity to avoid implementing the pension reform, which would affect about 167,000 public sector retirees. This way, if the Governor’s proposal is rejected by the PROMESA Board, it would likely reopen the questions raised in the wake of an extension granted by the First Circuit Court of Appeals after ruling that the appointments of the PROMESA Board members was unconstitutional. PUBLICIDAD

Yesterday, after an event in Arecibo, Gov. Rosselló Nevares said that the Board set the cap and that the Legislative Assembly and the Governor then define how those resources are used, adding that “lately, the practice has not been like that, and I call the attention to that practice, because they are trying to impose public policy by carrying out their initiatives based on the budget.” The Governor added that he invites the Board to evaluate the budget “we have already submitted to the Legislative Assembly, which they have said is above what should be spent, because the government, at a global level, will be looking for ways to mitigate that part. But, in terms of what and how the priorities will be, they are not the Board’s priorities, they are our priorities, and we are going to take them to the last consequences.”

Which Level of Government Bears Responsibility for Protecting Its Citizens? & How Does Federalism Work in the Case of U.S. Territories?

May 21, 2019

Good Morning! In this morning’s eBlog, we consider the turbulent water wars between the City of Flint and State of Michigan, and then assessing the heated governance waters in the U.S. territory of Puerto Rico.

Not in like Flint. The Sixth Circuit Court of Appeals will not reconsider a request from Flint city officials who claim they should be immune from litigation related to a Flint water crisis lawsuit. Several judges in support of denying the request said it would be inappropriate for the full appellate court to weigh in at this juncture in the case before Flint residents have had time to gather evidence to prove their claims. A three-member panel from the Sixth Circuit Court of Appeals last January ruled that Flint officials should not be dismissed from the case filed by Flint residents Shari Guertin and her child, Diogenes Muse-Cleveland, even though former Michigan Gov. Rick Snyder (R) and several state officials had been dismissed more than a year earlier. Flint officials asked that the full Sixth U.S. Circuit Court of Appeals, not just the three-member panel, hear their arguments for dismissal, but the court denied the request last Thursday in a decision that included concurrent and opposing opinions from the court.  The opinions concurring with the denial cited concerns with regard to judicial overreach, while the dissenting Judges argued the panel had been too permissive in applying a vague Constitutional test to the Flint residents’ claims. The case will return to the federal district court for continued discovery. Nearly two years ago, U.S. District Judge Judith E. Levy dismissed many of the counts charged in Ms. Guertin’s lawsuit, but Judge Levy agreed the “bodily integrity” of Ms. Guertin and her child were violated when city residents were unknowingly exposed to dangerous levels of lead in the city’s drinking water, which officials were aware of but hid from the public. At that time, Judge Levy dismissed counts against Gov. Snyder, the State of Michigan, and several state employees due to governmental immunity.

Last January, as we have previously noted, a three-member Sixth U.S. Circuit Court of Appeals panel ruled the City of Flint, Flint’s emergency managers, and some state environmental employees would not be dismissed from the suit—those employees asked to have their case considered by the full court but were denied a rehearing Thursday.

In a concurring opinion, U.S. Circuit Judge Julia Gibbons wrote claimants should have more time to better develop the facts supporting their claims, not cut short by a decision that would “prematurely attempt to determine which law would apply to those hypothetical facts…That means that, so long as they have pled plausible allegations that would constitute a constitutional violation, they are entitled to discovery.” wrote Gibbons, an appointee of former President George W. Bush. In a second concurring opinion, U.S. Circuit Judge Jeffrey Sutton noted that, currently, Flint claimants “plant the seeds” of two separate theories: one is that local officials “bungled” their responsibilities and accidentally polluted the water; a second theory claims officials “intentionally poisoned Flint’s water supply.” Judge Sutton wrote that it was too early to say which account is correct, but complainants should have time to better support their case in an effort to show officials both violated their constitutional rights and were on notice that they were doing so. At the same time, he cautioned the Flint plaintiffs that “doubt clouds several aspects of the claims that remain in the case” and claimants will be held to a “rigorous standard” if they plan to pursue charges against Flint officials, writing: “Carefully tailored and prompt discovery should answer whether the intentional and reckless poisoning allegations hold up…If not, this case needs to return to the court of public opinion, where one suspects it should have remained all along.” In his dissent, U.S.  Circuit Judge Raymond Kethledge wrote that, while he sympathizes with plaintiffs, the law “leads to a result contrary to the crush of popular opinion,” noting that the complainants’ claim of a Constitutional violation of their substantive due process relies on the “vaguest of Constitutional doctrines and to prove Flint officials are not entitled to qualified immunity, Flint complainants must prove their “bodily integrity” was harmed intentionally, writing that the court’s January opinion expands “substantive due process to reach claims based on negligence rather than intent: Our court’s opinion, in other words, does exactly what the Supreme Court has repeatedly told us not to do.”  

Quien Es Encargado? (Who is in governing charge?) Republican and Democratic Senators yesterday claimed they have reached an agreement on aid for Puerto Rico, moving closer to consensus on a stalled disaster relief package; however, Senate Appropriations Committee Chairman Richard Shelby (R-Ala.) said it was not yet clear whether the President would sign on to the portion of the agreement on Puerto Rico—with the President’s apparent continuing criticism of the U.S. territory’s use of previous aid, and his opposition becoming a major sticking point in the talks. Chairman Shelby met with President Trump and other White House officials yesterday: they spoke about disaster aid, as well as the need to raise the discretionary defense and domestic budget caps in order to avoid sequestration or across-the-board cuts. However, when asked if the President appeared supportive, Chairman Shelby noted: “I don’t believe he said that…The president didn’t say that. That question was not asked. He just wanted to know how close we were,” in response to a question about whether the President would support additional Puerto Rico aid, although Senate Minority Leader Chuck Schumer (D-N.Y.) said the Senators had “come to a conclusion” on negotiations for recovery assistance for the island territory: “I’m glad our Republican friends have finally seen the light and not treated Puerto Rico unfairly so we can move forward with all disaster relief,” while an aide to Chairman Shelby confirmed to reporters that they had wrapped up the Puerto Rico negotiations. The initial Senate GOP bill included $600 million in food stamp aid, but Democrats had argued that fell far short and wanted to amend it to include a requirement for the Department of Housing and Urban Development to release CDBG block grant funding, as well as funds to help Puerto Rico repair damaged water systems. A subsequent GOP offer included an additional $300 million in new HUD rebuilding assistance for Puerto Rico. Asked if the amount of new funding in the final agreement was in line with that amount or if it was more, Chairman Shelby declined to comment; however, he did indicate there was new funding for Puerto Rico, in addition to facilitating Puerto Rico’s ability to provide already appropriated funds—or, as Chairman Shelby noted: “It would streamline the accessibility to money. A lot of it was there. It would be a little more money, but there’s a lot of money there that they could access for infrastructure and everything else.”

Who Is Responsible for Collecting Revenues in your State?

May 10, 2019

Good Morning! In this morning’s eBlog, we consider a quasi-intramural tussle with regard to whom is responsible for collection duties in the Commonwealth of Virginia, before journeying west to put our toe back into the turbulent water wars between the City of Flint and State of Michigan, and then assessing the heated governance waters in the U.S. territory of Puerto Rico, before, finally, examining the changing state of foreclosures in the Motor City.

Who Has Collection Duties in Your State? Claiming the City of Petersburg is trying to “eviscerate” its Treasurer’s office, the Treasurers Association of Virginia is threatening to sue to block a planned reallocation of collection duties between the Treasurer and other city departments. Alan D. Albert, Legislative Counsel for the Treasurers Association of Virginia, wrote to the City Council that if Petersburg moves ahead with that proposed delineation, then the Association would file suit, writing: “Before addressing the legal infirmities of the proposed changes, let me say at the outset how deeply disappointed the Association is by this effort to eviscerate the Treasurer’s office by ordinance, and to do so on precious little notice.” Notwithstanding, the City Council did not appear to be taken aback by the legal threat: the Council on Tuesday evening voted 4-3 to adopt an ordinance change that takes collection of city tax dollars out of the Treasurer’s hands and into the hands of the city manager or her or his designee; the ordinance also makes that collector responsible for all state and local revenues belonging to the city.

In the wake of the vote, Counsel Albert, in an interview, vowed that he plans to go ahead with the lawsuit, calling the reallocation of duties an “an egregious violation of the city charter.”

The Treasurers Association maintains that stripping the City Treasurer of tax-collecting duties is a violation of the city’s charter, which empowers the Petersburg Treasurer to handle all tax-related collections, deeming city oversight problematic, giving the city oversight over a position which, under Virginia code, is elected directly by the citizens of the locality, not by a city appointee. Treasurer Kenneth Pritchett also said he was caught off-guard by the City Council’s action: he asserted he had not been made aware of the planned ordinance vote until he read it in a public notice. His position received support from several other citizens, who asked the Council to delay any action on the ordinance because of short notice on its vote. Many in the audience maintained that the decision is nothing more than a political battle between City Council and Treasurer Pritchett, a former member of the Petersburg City Council prior to being elected Treasurer. Mayor Samuel Parham and others in the city have denied there was any kind of retaliation.

This emerges against a background at the beginning of the year when Petersburg wanted the General Assembly to approve a charter change giving Petersburg greater authority with regard to local tax collections—a change sought, because Virginia law requires that charter changes be approved by the Virginia legislature. In this case, however, the Senate Local Government Committee appeared reluctant to take on the issue, noting it was not the legislators’ job to become involved in day-to-day operations of a locality, much less tinker with the duties of a constitutional officer. The Committee provided the city a week to come up with a solution, and an agreement was reached on legislation that would keep the collection duties with the Treasurer should the city not decide to appoint its own collector. In the House of Delegates, however, that measure died (4-3) in a House committee—even as Ward 1 Councilor Treska Wilson-Smith sought unsuccessfully to delay Council action until the general public could better understand what the ordinance was. Council then voted 4-3 to approve the ordinance. Mr. Albert would not give a definitive date on filing the lawsuit, but vowed it would happen “in the very near future.”

Not in like Flint. Michigan 7th Judicial Court Judge Joseph Farah, who is overseeing a major Flint water case, has declined to dismiss a misdemeanor charge against the State of Michigan’s former Health Director, Nick Lyon, asserting that Michigan court rules prevent him from dismissing a charge of willful neglect of duty at this stage of the case. He said Mr. Lyon can renew his argument after evidence is heard at trial. The former state Health Director has also been charged with involuntary manslaughter in the deaths of two persons who came down with Legionnaires’ disease during the Flint water crisis. Judge Farah plans to decide by June 14 whether those charges and another felony will stick.

Quien Es Encargado? (Who is in governing charge?) In the governance Twilight Zone around the U.S. territory of Puerto Rico, Governor Ricardo Rosselló Nevares has urged he members of the PROMESA Oversight Board not to impose pension reductions on Puerto Rico’s retirees, with his request to Director Natalie Jaresko, who had urged the Governor, municipal leaders, and directors of public corporations to reach an agreement regarding the payment of pensions to the PayGo system—a request coming as, currently, municipios, agencies, and corporations owe at least $ 1 million in PayGo payment, according to the Board. The Governor noted: “Our commitment is to pay those pensions and have those dollars attributed there. Why? We are now going to have a budget model by priority, and one of our priorities will be to guarantee the payment of pensions,” albeit he did not specify how that debt would be paid. He further noted:I take advantage of and I invite the Board, since this is not a matter of greater economic importance, but it becomes an ideological one, that they desist from trying to cut off the pensioners who are the most vulnerable.” There are about 167,000 public pensioners in Puerto Rico: more than half are over the age of 70. On average, they receive approximately $12,000 in annual pension benefits, well below the federal poverty line considering the number of people within a household supported by this modest amount. Most rely on pensions to pay for their basic needs like food and housing, and many support not only themselves, but also their extended families. Because of the economic crisis, an increasing number of pensioners care for their grandchildren and even their elderly parents. For its part, the unelected Board has stated it intends to institute an average pension benefit reduction of 10% in the fast oncoming fiscal year beginning July 1st.

Unsurprisingly, the Governor, as he prepares to release a budget consistent with the PROMESA Board’s quasi-plan of debt adjustment for the oncoming fiscal year, has made clear he intends not to impose any pension reductions. Evercore Municipal Research Director Howard Cure noted that the Legislature and Governor have been consistent in their defense of pension benefits, noting: “This reflects a recognition of the importance of the public sector both as a political constituency as well as the fact that the Commonwealth still has a disproportionately high percentage of the island’s employees in the public sector: Any cut in benefits would, therefore, have a significant negative impact on the economy.”

The proposed/mandated pension cuts are established in the first fiscal plan certified by the Board: in the document, pension cuts of up to 10% are established. Nevertheless, to date, Governor has insisted that there will be no reductions to pensions—reductions which would require new legislation, in any event. One expert in this complex, quasi chapter 9 law, Rolando Emanuelli, noted that the issue of pensions, which is already complex, will become even more complicated, adding that the pensions of Puerto Ricans are “very modest,” but “essential to maintain social security.”

He recalled that when the government chose to create Law 106 of 2017, which gave life to the PayGo, they threw out the country’s retirement systems without any effort to inject funds: “When the debt adjustment plan comes, that the government has to pay the debt, that payment will compete with the payment of pensions that comes out of the General Fund.” Gov. Rosselló Nevares, for his part, reiterated that he already has a draft budget for the next fiscal year, which he has not yet submitted, in which he will give priority to key areas such as security, health, education, and pensions: “We are committed to cutting where we have to cut, but we also have to have the capacity to invest where we want to progress and there are priorities: pensions, education, security, stability of the health system and cuts in operational expenses,” as he reiterated his rejection of Oversight’s efforts to preempt Puerto Rico’s authority, notwithstanding his comment that there are “elements (of the PROMESA law) that have come to help, particularly in the area of ​​restructuring;” however,(the members of the JSF) do more harm when what they try to do is impose on the elected government of Puerto Rico,” noting that, were he in charge, the wise governance action would be to amend the PROMESA statute to “clarify that the Board should not get involved in the daily operation of the government and that they should have mechanisms of transparency and accountability that they do not have today.” The fiscal plan the Puerto Rico Oversight Board plans to approve proposes less funding for paying debt in the next six fiscal years and more in the following 24 fiscal years, than the current certified fiscal plan” Board Executive Director Natalie Jaresko said the plan anticipates a central government surplus of $13.6 billion through fiscal year 2024. The plan anticipates a $19.7 billion surplus through fiscal year 2049, which Director Jaresko said was more than the current plan anticipates, adding that the plan includes a 10% cut in spending on the government’s primary pension system, as did earlier versions of the fiscal plan.

Foreclosing on Motor City Foreclosures? According to a report of the Quicken Loans Community Fund, more than 4,300 families in Detroit avoided losing their homes last year through a program designed to prevent properties from entering a county tax foreclosure auction. The Fund reported that its 2018 Neighbor to Neighbor initiative involved help from 32 community groups and other organizations: it focused on door-to-door outreach to 60,000 families living in tax-delinquent properties. The report demonstrates that 21% of homeowners canvassed were unaware their property was behind on property taxes; more than 60% of people renting tax-delinquent properties were unaware of the home’s tax status. The Neighbor to Neighbor initiative gave residents information about property tax foreclosure, how to connect to resources, and it provided property tax exemption workshops. Quicken Loans Community Fund strategic investments Vice President Laura Grannemann reported the effort is “stabilizing housing in Detroit, preventing future blight, and helping homeowners and occupants find sustainable, long-term solutions for their property tax burdens.”

Governance between a Rock & a Hard Place

May 6, 2019

Good Morning! In this morning’s eBlog, we consider the ongoing governance confusion—and costs—in the inability to grant Puerto Rico the same governance authority as the nation’s states.

Like each state, Puerto Rico has a Governor, and a Legislature. Unlike the 50 states, however, Puerto Rico has a federally-imposed oversight board—PROMESA, which, somewhat like an emergency manager in the minority of states which authorize chapter 9 municipal bankruptcy, has broad authority to preempt the authority of Puerto Rico’s Governor and legislature—a board whose members’ terms were set to expire last night, before President Trump submitted nominations to the U.S. Senate. Indeed, May could be a pivotal month, as the 16th marks the day when the moratorium imposed by the U.S. First Circuit of Appeals begins to count down to the 16th, when the Board’s authority will expire, absent action by Congress—or some extension granted by a federal court. It appears the President’s intention is to nominate the seven current members of the PROMESA Board: José Carrión, Carlos García, Andrew Biggs, David Skeel, Ana Matosantos, Arthur González and José Ramón González.

U.S. Senate Energy and Natural Resources Committee Chair Lisa Murkowski (R-Alaska) said that she intends to follow the regular process of appointments: said procedure will require that President Trump deliver the documents on the appointments, an independent analysis of his advisors, conversations with the candidates, a confirmation hearing, a voting session in committee, and, por fin, a full Senate vote. Given the current Senate schedule, it seems uncertain such a vote will occur, leaving the U.S. territory with Rod Serling in a governance twilight zone: In the wake of a meeting with some of Chair Murkowski’s senior advisers last Thursday, Puerto Rico Popular Party Rep. Luis Vega Ramos said that officials of the Republican majority of the Committee of Energy and Natural Resources recognize that a regular appointment procedure “is not possible” in 10 days.

Nevertheless, notwithstanding the uncertainty, FixPuertoRico.org. Executive Director Javier Ortiz, who was part of the transition committee set up by the President, anticipates the matter will be resolved in one way or another before the expiration of the legal moratorium—or, as he put it: “Everybody understands that something has to happen, on or before May 16, so that the American people and the Puerto Rican people are protected.”

But normal hardly appears to be a likely term for either Puerto Rico or this President. In previous administrations, one or two days after the President has announced an intention to appoint a federal official, the White House confirms its commitment. Sen. Robert Menéndez (D-N.J.), Ranking Member on the Subcommittee on the Western Hemisphere, has indicated that he expects the confirmation process “not to be automatic,” since he wants a weighted evaluation of the candidates and their potential conflicts of interest.

So, Puerto Rico’s fate, it appears, is less in its own hands, and more caught in a maelstrom created by the White House, the PROMESA Oversight Board, and now federal courts, especially after, earlier this year, the decision by the U.S. First Circuit Court of Appeals’ determination that the PROMESA Board made in August of 2016 are unconstitutional—in no small part because those appointees were not confirmed by the Senate. The Board has, therefore, requested the 1st Circuit Court to extend the moratorium until the U.S. Supreme Court decides whether or not to review last February’s decision—with the already exhausted hope such a review decision would be acted upon by last Friday. The Board has indicated that it will now seek approval by the U.S. Supreme Court to extend the moratorium.

In his testimony before the House Natural Resources Committee last week, Puerto Rico Gov. Ricardo Rossello Nevarez testified he was gratified that the President was proposing to end the uncertainty with regard to future of the Oversight Board, carefully avoiding taking a position for or against such appointments. Subsequently, he noted: “I understand that they are trying to tackle a problem of uncertainty. When the court determined that they were unconstitutional appointments, then everyone was like freezing. This (renomination) now allows it to be done in the right way: Now, it is up to Congress to evaluate these people on merit. They have already had more than two years at work, and I hope it can be evaluated in a rigorous way.”  Board Executive Director, Natalie Jaresco, affirmed that if the Board goes out of business on May 16th: “The cases of Title III debt restructuring can be dismissed, which would wreak chaos in the courts and on the island.”

The Phyical, Fiscal, & Governing Challenges of Rcovery

eBlog

May 3, 2019

Good Morning! In this morning’s eBlog, we consider the obstacles to facilitating hurricane recovery assistance to Puerto Rico, before assessing the fiscal and physical status of Flint, Michigan.

Getting Aid to Puerto Rico. Senate Appropriations Chair Richard Shelby (R-Ala.) has offered the Democrats on the Committee proposed language which would accelerate the disbursement of funds to Puerto Rico, albeit with greater supervision and restrictions—but, critically, which would unblock the impasse so far barring Congress from passing legislation to address recent natural disasters. While the Chair has not made public his proposed language, he has shared it with Ranking Member Patrick Leahy (D-Vt.). Chair Shelby’s proposed language would not include new allocations for the U.S. territory in addition to the $600 million in food assistance funds which have not been opposed by the President—and $5 million focused on studying the impact of that nutritional aid. Here, Chairman Shelby’s offer came hours after on the pending disaster allocation project was reportedly briefly discussed at Tuesday’s Oval Office meeting with Senate Minority Leader Chuck Schumer (D-NY) and House Speaker Nancy Pelosi (D.-Ca.)—a meeting called by the President to discuss his newly proposed $2 billion infrastructure plan—a plan for which the proposed $2 billion remains unexplained and unfunded.

The Congressional Democratic Leaders left the session hopeful that there is interest to agree soon with consensus on a path to unblock critical natural disaster relief across the nation—relief to date blocked by the White House due to apparent opposition to any relief to Puerto Rico. There appeared to be some sense that the efforts have achieved progress—or, as one participant noted, in quoting the President: “I’m going to keep out” of this discussion—seemingly meaning he would not object. However, another source from the White House indicated that he understood that President Trump did not say that he would stay out of the discussions, but rather that an agreement must be reached; while Senator Marco Rubio (R-Fla) tweeted that some progress was occurring in bipartisan talks. The House version approved at the beginning of the year includes $600 million in food assistance for Puerto Rico, $25 million to restore the Martín Peña Canal, $5 million to finance a study on the elimination of emergency nutritional assistance in the wake of Hurricane Maria—and restoration of the matching of funds that the government of Puerto Rico has to make in order to obtain the reimbursements of FEMA for the emergency measures. (In the wake of the President’s refusal to grant more funds to Puerto Rico, President Trump accepted that the Senate bill included the allocations related to nutritional assistance, but no other initiative for the island.

The negotiations come as the House is scheduled to pass legislation next week that adds another $3 billion in appropriations to address the March floods in the Midwest—legislation which retains the funds originally ratified for Puerto Rico last January. Indeed, at the White House meeting, the House and Senate Democratic leaders, and the President, agreed to work towards a legislative plan that allocates $ 2 billion to finance improvements to the transportation infrastructure of the United States—albeit without any agreement from whence such funds would come.

Wherefore Restoration of Self-Governance Authority? Meanwhile it appears President Trump plans to nominate the current PROMESA Oversight Board members to serve their terms through the end of August—plans which have gained praise from Democrats in Congress, as it may avert an interruption of the Board’s efforts to bolster the U.S. territory’s economy and fiscal management. The announcement came as the PROMESA Board prepared to launch law suits seeking to claw back payments made on and fees paid for more than $6 billion of Puerto Rico bonds. That is, the ongoing governance quandary with regard to whether a federal circuit court, the unelected oversight board, or the U.S. citizens of Puerto Rico will actually be permitted to decide on the island’s future—a future further confused when, last February, the U.S. 1st Circuit Court of Appeals held in favor of municipal bondholders that the method of appointment of the board, as found in the Puerto Rico Oversight, Management, and Economic Stability Act, was unconstitutional: ergo, for the PROMESA Board to continue to operate beyond May 16th, the court ruled the President must nominate and the Senate confirm the Board members. The President, in a posting to the White House website, noted he intends to nominate the current seven members to serve out their terms. (According to the PROMESA each term is three years, so if the Senate confirms the members, their terms would end on Aug. 31st.)

It is unclear how the U.S. Senate will react—especially in the wake of a White House statement: “Mismanagement, corruption, and neglect continues to hurt the people of Puerto Rico who deserve better from their government…The most important component for future health and growth of Puerto Rico is financial constraint, reduced debt, and structural reforms…The work of the Financial Oversight and Management Board for Puerto Rico is providing the stability and oversight needed to address these chronic issues that will bring hope of a brighter future for Puerto Rico.” Given the exploding debt and deficits under the Trump administration, the statement appears most ironic.

Nevertheless, House Natural Resources Committee Chair Raúl Grijalva (D-Az.) hailed the move: “The President’s decision to nominate the members of the Financial Oversight and Management Board for Puerto Rico for Senate confirmation is welcome. Democrats supported PROMESA largely to enable Puerto Rico to restructure and reduce its debts. If the 1st Circuit’s ruling invalidating the original appointments had not been addressed, the Board would have collapsed and three years of work on debt restructuring would have been wasted….We are close to a final restructuring agreement on the largest remaining block of Puerto Rican debt, and it’s in the interests of the Puerto Rican people to finalize that agreement without interruption,” Chairman Grijalva noted, for his Committee, which oversees Puerto Rico. Similarly, Rep. Nydia Velázquez (D-N.Y) noted: “To essentially start over with new appointments to the Oversight Board would have injected serious uncertainty and chaos into the debt restructuring process…While I support the reappointment of these members to the Board, I will continue holding them to account to ensure they are always acting in the best interest of the people of Puerto Rico…Austerity measures are not the answer for Puerto Rico, and I’ll continue pushing the Board to put ordinary Puerto Ricans before Wall Street creditors and hedge funds.”

The PROMESA Board also released a statement welcoming the President’s announcement, with its statement coming in the wake of its request to the U.S. 1st Circuit Court of Appeals to extend the May 16 deadline for acting as the Board; the PROMESA Board has also filed a petition for certiorari with the U.S. Supreme Court to review the appeals court’s February decision.

Not in Like Flint. Five years on, the Flint water crisis is nowhere near over: the state-caused fiscal and physical emergency devastating lives, assessed property values, and public trust continues. The Flint River courses some 142 miles through mid-Michigan, before a noticeable change occurs as it flows southwest into the city of Flint, where, abruptly, it is marked by concrete slopes, capped with wire fences, flank the water—adjacent to decaying bridge piers protruding from the center of the river. It is almost as if it were a cemetery to mark the five years since the city’s water source switch which, in a decision by a state appointed Emergency Manager—it is, rather, as studies have demonstrated, a municipality with drinking water lead levels nearly twice the amount that is supposed to trigger action under U.S. Environmental Protection Agency standards: That is, it is a municipality where the state action threatens adverse neurological effects in children, including reduced IQ and aggressive behavior; in a 6-month-old weighing 18 pounds, it takes just 12 millionths of an ounce of lead in the child’s bloodstream, about the same as one grain of salt, to exceed the level that the Centers for Disease Control considers a risk for children. That is, for a mother and father—leaving seems a vital goal—but for the municipality, such departures can have devastating implications for assessed property values and income taxes. Perhaps fortunately for the city, its budget only assumes some $4.6 million in property taxes—less than a third of what it anticipates in income taxes; however, therein lies a fiscal risk: while the city’s water system operators report they have significantly reduced lead since 1991, when the U.S. Environmental Protection Agency first adopted a rule that mandates monitoring and treatment to reduce contamination caused by corrosion and other factors related to lead pipes, EPA notified the Governor there remained “serious and ongoing concerns with the safety of Flint’s drinking water system,” including “continuing delays and lack of transparency” in the state’s response. Flint switched back to the Detroit water system three and a half years ago, but public health effects from lead exposure prompted emergency declarations from the state and federal governments in early 2016. The city then launched an aggressive rehabilitation campaign, and, in the past three years, crews have explored 21,298 homes and replaced lead service lines at 8,260. The work should finish in July, according to Jameca Patrick-Singleton, Flint’s Chief Recovery Officer.

The most recent testing of Flint’s drinking water, sourced again from Detroit, marked lead at four parts per billion, well clear of the 15 that requires action. Those results account for a 90th-percentile rating: in other words, 90 percent of the homes comply with the federal standard. Nevertheless, Mayor Karen Weaver notes that tests will continue, and according to Patrick-Singleton, Mayor Weaver will not lift the city’s emergency declaration until the scientific and medical communities clear the drinking water.

Governance: Creating & Responding (or failing to respond) to a Human, Physical, & Fiscal Crisis.  Michigan Attorney General Dana Nessel’s office has fired special prosecutor Todd Flood from the Flint water criminal prosecution team because of documents discovered in a government building, which Michigan Solicitor Fadwa Hammoud confirmed Monday. Here, the special prosecutor’s contract expired on April 16, and he had been advised last week that the state would not be renewing his contract. The Solicitor Mr. Flood’s termination to the recent realization that legal “discovery was not fully and properly pursued from the onset of this investigation.” Last Friday, prosecutors asked a Genesee County judge for a six-month delay in the involuntary manslaughter case against former Michigan Health and Human Services director Nick Lyon after finding a “trove of documents” related to the Flint water crisis in the basement of a state building. (Mr. Flood had been named a special assistant attorney general in the Flint criminal cases after serving as a special prosecutor, serving more than three years: an appointee of former Attorney General Bill Schuette, Mr. Flood’s authority was curbed significantly when Mr. Hammoud was put in charge of the Flint prosecution, and then brought in Wayne County Prosecutor Kym Worthy to help the prosecution team.) Mr. Hammoud noted that Mr. Flood’s departure reflected the department’s commitment “to execute the highest standards” in the Flint prosecutions.

For his part, Mr. Flood noted: “In the time we have spent in Flint, we interviewed over 400 people, reviewed millions of
pages of discovery, and took pleas to advance the investigation: We conducted multiple court hearings and preliminary exams, placed hundreds of exhibits into evidence and successfully bound defendants over for trial. This complex case of official wrong-doing and betrayal of public trust has been prosecuted with the utmost attention to the professional standards that justice demands. I walk away knowing that I gave everything I had to give to this case. The people of Flint deserved nothing less.”

Mr. Flood originally charged 15 people in the Flint prosecutions; he struck plea deals with seven defendants who have pleaded no contest to misdemeanors; he successfully convinced 67th District Court judges to bind over for trial Mr. Lyon and former Chief Medical Executive Eden Wells on criminal charges related to the 2014-15 Legionnaires’ disease outbreak which led to the death of 12 individuals and sickened at least 79 others.

Preliminary exams against former gubernatorially-appointed Flint Emergency Manager Darnell Earley, and Howard Croft, Flint’s former Public Works Director, were recently suspended as the Attorney General’s office continues its review of all of the criminal cases; it remains unclear what connection the recently rediscovered boxes have to Mr. Lyon, who has been charged with involuntary manslaughter in the Legionnaires’ disease outbreak: he is accused of failing to warn the public in a timely manner about the respiratory disease before former Gov. Rick Snyder informed the public about it in mid-January 2016.

Will Justice Be Done? Mayor Weaver, in a statement Monday, noted: “I respect the decision that the Solicitor General has made regarding the changes to the prosecution team. I will continue to voice my desires to have truth, transparency, and justice for Flint residents…I ask that we not get caught up on the changes, but that we continue to keep the focus where it should be, and that is on making the residents whole after such a traumatic experience.”