How Do State & Local Leaders Define Equity & Fairness When a Government Defaults on its Debt?

June 25, 2019

Good Morning! In this morning’s eBlog, we consider the federalism and governance challenge when a government defaults on its debt, not because it is unable to make it, but rather because it does not want to pay. Are there consequences?  Then we head south to assess the pending judicial challenges over the appointments to the PROMESA Board, wonder whether public pensions might be at risk in Puerto Rico, and, finally, we wonder how lessons learned in Detroit, Central Falls, Stockton, and other municipal bankruptcies with regard to public pensions might play out in Puerto Rico. 

Attention Shoppers: Debt & Municipal Debt now on Aisle 7. Platte County, Missouri Circuit Court Judge James Van Amburg has ruled that Platte County, a county of just under 100,000, and home to the Kansas City metro area, was within its rights when it opted, six months ago, not to make payment on a $765,000 municipal bond due for a long-struggling shopping development. In his decision, Judge Van Amburg noted there was “no promise or requirement” for the County to pay the debt on the Zona Rosa retail center, even if the county auditor’s proposed budget included a line item for the payment (which was the case last year). Thus, last December’s deadline passed without any party making the due interest payment related to a parking garage debt in the Zona Rose Shopping Center—an interest payment which came due last December 1st to investors who bought $32 million in municipal bonds in 2007 to provide sufficient down payment to begin construction of a parking garage at Zona Rosa—with the commitment that investors were to be paid over time by sales taxes generated at Zona Rosa. But dreams on aisle 7 or any other do not always come to fruition: here the shopping district has failed to produce sufficient revenue to make payments on its own—leaving open the question who is left holding the bag? Unsurprisingly, Platte County continues to insist its taxpayers are not responsible for making the payment, notwithstanding the County has budgeted the requisite funds to do so. Some describe this as a “moral” obligation, as distinct from a legal obligation. In Platte County’s case, the Zona Rosa municipal bonds were issued by the Platte County Industrial Development Authority to finance parking garages in the shopping center. That is, even though the county was not legally obligated to make up for any shortfalls, the county’s credit rating could be adversely affected because its investors—and credit rating agencies—would normally describe these as “moral obligations,” with the risk that a default by a related government entity—here the Industrial Development Authority—could adversely reflect on the credit worthiness of the County.

The issue, for state and local leaders, can, in a sense, be derived from chapter 9 municipal bankruptcy—that is creating a plan of debt adjustment, even if it not a part of an actual municipal bankruptcy. But that is hard to: does a municipality give all debtors the same percentage? The answer, as we have seen in Detroit, Central Falls, etc. is no. Detroit was sustained in ensuring that no retiree would have her or his pension reduced to a level putting her or him below the federal poverty level. In the Puerto Rico quasi-chapter 9, the First Circuit Court of Appeals held that Puerto Rico was not required while in quasi-chapter 9 bankruptcy to continue paying interest on bonds that are paid back through a special dedicated revenue—a holding that undermined the Don Quixote dreams that special revenue municipal bonds can be safe harbors in a municipal bankruptcy.

In the case of Platte County, Moody’s moodily downgraded the county to junk status. Nevertheless, Todd Graves, an attorney for Platte County, said the ruling in Missouri helped stop what he described as a “bondholder bailout” by the taxpayers, describing it as a “great day for taxpayers—and a firm rebuke to financiers attempting to abuse the public treasury.”

Capitulo in Puerto Rico? Far east of Kansas City, with the U.S. Supreme Court working to wrap up, we await an announcement as early as next week with regard to whether the Justices review the First Circuit’s ruling with regard to the appointments of the PROMESA Oversight Board—the President Trump sent the names of the existing Board: Andrew Biggs, José Carrión, Carlos García, José González, Arthur González, Ana Matosantos, and David Skeel. (It should be noted that “capitulo” translates, in Spanish, to chapter—not to capitulate.) In the wake of completing debt restructurings for Puerto Rico’s sales tax-backed debt and Government Development Bank, the PROMESA Board has said it will soon unveil a core government quasi-chapter 9 plan of debt adjustment plan that includes outstanding general obligation bonds and unfunded pension liabilities. This week, the PROMESA Board filed a request with the First Circuit Court to further extend the period when the current Board members could serve, asking the court to extend the stay until the U.S. Supreme Court can review the case, which the Board has asked high court to do. To explain the President’s nomination, the White House press office said: “Mismanagement, corruption, and neglect continue to hurt the people of Puerto Rico, who deserve better from their government. The future health and growth of Puerto Rico is dependent upon financial constraint, reduced debt, and structural reforms. “Through its work, the Financial Oversight and Management Board for Puerto Rico is providing the stability and oversight needed to address these chronic issues and bring hope for a brighter future.” The press statement omitted any mention of paper towels—and came as his administration still has not provided Puerto Rico $600 million in food stamp aid more than two weeks after the President signed into law the emergency funding. Glorimar Andújar Matos, the Executive Director of the Departamento de la Familia, the Puerto Rico government agency which administers the program, noted that the Commonwealth does not expect to be able to spend the emergency food stamp funding until September, most likely, six months after food stamp cuts began for the more than 1 million island residents who rely on the program. The White House has yet to release any rational explanation for the delay to Puerto Rico’s food stamp aid, where, last March, emergency food stamp assistance money ran out, triggering widespread reductions in benefits, and funding renewal was delayed by several months amid an impasse among federal lawmakers and opposition to additional funding for Puerto Rico from the Trump administration. Further, Puerto Rican officials report they have been unable to gain any information from the Department of Agriculture’s Food and Nutrition Service with regard to what it will take to swiftly secure the food stamp funding. Glorimar Andújar Matos, the Executive Director of the Puerto Rico Departamento de la Familia, noted: “The situation is dire, and we are ready to submit either a plan or an amendment to an existing plan as soon as we get directions from FNS in order to speed up the disbursement of the funds: Given Puerto Rico’s unfair treatment in federal programs, we are pushing to receive and utilize the funds as soon as possible.”

A spokesman for the USDA’s Food and Nutrition Service said the agency has been in contact with Puerto Rico’s government, but that the U.S. territory must first propose a plan for how the aid will be spent and make “required system changes” to its food stamps program. The agency said Puerto Rico’s government must also follow financial management procedures that could not be implemented until after Congress appropriated the new funding. Kevin Concannon, who served in the Department of Agriculture as undersecretary for Food, Nutrition and Consumer Services during the Obama administration, said there is no reason for officials not to be able to approve the aid much more quickly, noting: “It’s normally rapidly approved, because you’re trying to mitigate the impact of hunger and food insecurity…This should be straightforward. It should not take this long. The existing program in Puerto Rico has been there for decades, and the infrastructure is used months in and months out.” Puerto Rico officials have for months demanded the approval of the additional food stamps funding. The food insecurity rate in Puerto Rico is triple that of the mainland — and that was before the hurricane, according to the 2017 American Community Survey of the U.S. Census Bureau: currently, nearly 45 percent of households with children younger than 18 in Puerto Rico depend on food stamps, according to the Instituto Desarollo Juventud, a nonpartisan public policy organization. The emergency food stamp aid allowed Puerto Rico to bring its food stamp benefits roughly in line with those received by mainland U.S. states, but the cuts forced a reduction of about 25 percent for the food stamp benefit, reductions that were in some cases closer to 50 percent.

Pensions at Risk? Christian Sobrino, Puerto Rico’s Executive Director of the Fiscal Agency and Financial Advisory Authority (FAFAA) this week warned that if the PROMESA Oversight Board includes cuts to public pensions in the central government’s plan of debt adjustment they will not pass any legislation leading to the implementation of the plan. His warning came as, on Wednesday, the Board’s lead attorney Martin Bienenstock, announced at a hearing before Judge Laura Taylor that he would be submitting the document within 30 days, adding, before the court, that the quasi plan of debt adjustment will contain the agreements the Board has reached with different creditors, including the Official Committee of Retirees and the Teachers Association—even as the teachers union rejected the agreement with the Board. Sr. Sobrino explained that implementing these adjustments requires the issuance of new municipal bonds (which would be exchanged for the old bonds), which, in turn, would have to be approved by the Legislative Assembly and gain the approval of FAFAA, noting: “That plan implies issuing new debt to replace the old debt. Under state law, you need to legislate to do that kind of transaction, and this servant, as fiscal agent, has to sign. That will not happen. If that plan is tied to a pension adjustment, the plan is not confirmable…There is no middle ground here. If they include changes in retirement, we don’t have anything to talk about (with the PROMESA Board).”

For its part, PROMESA Board spokesman Edward Zayas stressed that for the fiscal entity, the agreements reached with COR and the unions are an integral part of the path toward a plan of debt adjustment getting the territory out of PROMESA Title III processes.

Sr. Sobrino stressed that the Board does not have the authority to replace the Legislative Assembly, nor can it make decisions over Puerto Rico’s public policy; he warned that not even the federal court can force an elected body, such as the Legislature, to adopt any agreement: “A lawmaker’s vote is protected by the First Amendment of the U.S. Constitution…a Legislator’s vote is protected and nothing can be done to impact her or his right to express themselves.” Noting that Stockton’s approved chapter 9 plan of debt adjustment did not mandate a change in the city’s pensions, he noted that the current fiscal plan contains pension adjustments up to a 10 percent reduction in pensions. Since the adjustments are progressive, he said those who receive less money will see proportionally smaller cuts than those who have higher paychecks, adding that, per the most recent agreement between the Board and COR (the official Committee of Retirees) involves an 8 percent reduction in the payroll of retired employees. He argued that actuality, this change does not represent much in fiscal terms since it advances future budget deficiencies in a single year: “Debt restructuring does not require a change in pensions and most creditors do not look at this.” Sr. Sobrino explained that the 10 percent pension cuts proposed by the Board represent savings ranging from $180 million to $200 million annually: adjusting that cut to 8 percent, as would happen with the agreement between the fiscal entity and the Official Retirees Committee, would imply that savings would reach between $100 million and $150 million annually—or, as he put it: “With these aggressive cuts, the difference they have in the Board’s long-term model until 2049, the government’s) operational deficit is just one year forward,” noting that the position of the administration of Gov. Ricardo Rosselló Nevares is not to change public pensions: the government’s position is partly based on the fact that between 2013 and 2014 many of the public employees’ retirement benefits were adjusted so the adjustment they seek in this line has already been done.

Originally, retirement systems in Puerto Rico followed a defined-benefit model: pensions were not calculated based on the employee’s contribution to the system, but on years of service and salaries. Retirees were entitled to pensions that could reach up to 75 percent of the income they earned when they were public active employees. The first major change to the system was in 2000 when employees joining the public service, rather than participating in the old defined benefit system; between 2013 and 2014, there were additional changes legislated for the three main public retirement systems. Those new laws froze the accumulation of benefits for those employees who were still in the old pension system and place them into the defined-contribution system, as retirement savings plans are known. Also, through special laws, some benefits such as summer bonuses and medication were eliminated.

A State of Confusion. Presidential candidate Sen. Bernie Sanders on Monday slammed U.S. Senate Majority Leader Mitch McConnell (R-Ky.) in a tweet with regard to the Leader’s TV comments after Leader McConnell told host Laura Ingraham that House Democrats were all part of a “socialist agenda: They have planned to make the District of Columbia a state that would give them two new Democratic senators, Puerto Rico a state, that would give them two more new Democratic Senators.”

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In or Out Like Flint?

June 20, 2019

Good Morning! In this morning’s eBlog, we consider the rejection by U.S. Supreme Court Justice Sonia Sotomayor of the State of Michigan’s request to block lower court rulings determining that state officials could be found liable with regard to the lead contamination of Flint’s drinking water.

In Like Flint? U.S. Supreme Court Justice Sonia Sotomayor on Friday denied a request from officials of the State of Michigan seeking to have the court to block lower court rulings finding state officials could be sued over lead in the City of Flint’s drinking water supply: state officials were seeking to block lower court rulings which allowed residents to sue over their injuries from lead poisoning. Justice Sonia Sotomayor denied their petition without comment—albeit, Michigan state officials received some good gnus—as federal prosecutors decided to drop criminal charges against them. Eight former state and city officials, including Michigan’s Chief Medical officer had been faced criminal charges for their roles in the water crisis—a crisis in which at least 70 people were sickened by the pollution, and 12 died—and, from a fiscal perspective, a crisis with signal, adverse consequences for assessed property values and income tax revenues. In a statement, Michigan Solicitor General Fadwa Hammoud and Wayne County Prosecutor Kym Worthy said they need a more thorough investigation before proceeding, noting: “Dismissing these cases allows us to move forward according to the non-negotiable requirements of a thorough, methodical, and ethical investigation.” Justice Sotomayor, who handles these types of appeals from this region of the country, received it last Monday and denied the request without explanation Friday.(Liane Shekter-Smith, et al v. Shari Guertin, et al.,#17-1745, June 13, 2019). The four Michigan DEQ officials are:Liane Shekter-Smith, Chief of the DEQ Office of Drinking Water and Municipal Assistance, Stephen Busch, Lansing district coordinator for the MDEQ’s Office of Drinking Water and Municipal Assistance, Michael Prysby, MDEQ district engineer, and Bradley Wurfel, MDEQ Communications Director. Here Ms. Shekter-Smith, Mr. Busch and Mr. Prysby had reached plea deals with Special Prosecutor Todd Flood: they had argued they should not be held liable after Flint residents Shari Guertin and her child, Diogenes Muse-Cleveland, sued. In her suit, Ms. Guertin claims she and her daughter sustained injuries from drinking and bathing in the contaminated water during the Flint water crisis. Two years ago this month, U.S. District Judge Judith E. Levy dismissed many of the counts charged in Ms. Guertin’s lawsuit, but Judge Levy concurred the “bodily integrity” of Ms. Guertin and her child were violated when city residents were unknowingly exposed to dangerous levels of lead in Flint’s drinking water, which officials were aware of but hid from the public.

U.S. Territorial Bankruptcy

June 20, 2019

Good Morning! In this morning’s eBlog, we consider the governing and fiscal challenges for the U.S. territory of Puerto Rico.

President Trump has nominated the existing PROMESA Oversight members to continue in their current positions—with the President’s nomination coming as the PROMESA Board has asked a U.S. Court of Appeals to extend the July 15th deadline for its members to be confirmed—and as the U.S. Supreme Court has agreed to hear a case that could upend the work of the PROMESA Oversight Board. The case in question goes to the heart of federalism: were the Board members’ appointments in violation of the U.S. Constitution. The court below ruled the PROMESA Board’s past decisions could remain in force. The case appears on the road to the U.S. Supreme Court, with arguments scheduled in October.

The issue derives from holders of Puerto Rico municipal bonds held by Aurelius Investment LLC, who are challenging the PROMESA Board’s structure and, thereby, many of its decisions. The case emphasizes the Rod Serling Twilight Zone of this quasi-chapter 9 municipal bankruptcy for a U.S. territory which is neither a municipality, nor a state. Moreover, the costly litigation syphons fiscal resources away from the needs determined by the U.S. territory’s Governor and legislature—with the case scheduled just days after the PROMESA Board and creditors holding $3 billion of commonwealth municipal bonds announced a tentative restructuring agreement which would reduce nearly $18 billion of Puerto Rico debt.

In its decision, the U.S. 1st Circuit held that the PROMESA Board’s members need to be nominated by the President and confirmed by the U.S. Senate to comply with the appointment clause of the U.S. Constitution. The Court also wrote it would neither eliminate the quasi-chapter 9 bankruptcy proceedings, nor categorically invalidate all the PROMESA Board’s actions and decisions, referencing the “de facto officer” doctrine, under which federal courts will not nullify actions taken in good faith by someone whose appointment is later determined to be invalid.

On Tuesday, Chair Lisa Murkowski (R-Alaska) and Ranking Member Joe Manchin (D-W.Va.) of the Senate Energy and Natural resources Committee had released a statement after President Trump formally nominated seven individuals to serve on the PROMESA Board—as seven currently serve on the Board, but are subject to Senate confirmation in the wake of a recent court decision: “We appreciate the President’s decision to nominate these individuals and to ensure the FOMB can continue to function in line with Congressional intent. Once we receive all requisite paperwork for these nominees, we will proceed with the normal, regular order process, starting with a full committee hearing.” That same day, U.S. Senate Majority Leader Mitch McConnell (R-Ky.) argued in a Fox News interview that giving Congressional representation to the millions of Americans who live in Washington, D.C., and Puerto Rico would be “full-bore socialism,” adding: “They plan to make the District of Columbia a state—that’d give them two new Democratic senators—Puerto Rico a state, that would give them two more new Democratic senators.” The action followed an announcement by a U.S. Senate Committee that the confirmation process will not begin for several weeks. In its statement, the PROMESA Board said: “Without such an extension, the oversight Board would be unable to carry out its responsibilities on July 15, which will throw the debt restructuring process into chaos and threaten irreparable damage to the Puerto Rican economy.”

The PROMESA Board, which is overseeing the restructuring of some $120 billion of Puerto Rico debt and pension obligations in this quasi chapter 9 municipal bankruptcy process, has the U.S. First Circuit Court of Appeals to extend the deadline pending a U.S. Supreme Court decision on whether to review the matter, after that court last month the May 16 deadline for the Board’s seven members to be reappointed or replaced to July 15th. Part of the legal issue in question is whether there has been a violation of the U.S. Constitution’s Appointments Clause, because the PROMESA Board members were not confirmed by the Senate. While the appeals court opted not to void actions taken by the PROMESA Board, the ruling created uncertainty with regard to the Board’s authority—and its efforts to restructure Puerto Rico’s debt and pension obligations under a form of bankruptcy filed for the U.S. commonwealth in 2017—efforts which appear to preempt the authority of the Governor of Puerto Rico and its Legislature.

All this is transpiring after, on Tuesday, the White House officially sent nominations for the Board’s current members to the Senate Energy and Natural Resources Committee, which said it expects to receive paperwork for the nominees “within several weeks and will announce a hearing for (the nominations) shortly thereafter.” The nominations here cover only the remainder of the members’ terms, which all end on August 30th. The President sent the Senate the names of the existing board: Andrew Biggs, José Carrión, Carlos García, José González, Arthur González, Ana Matosantos, and David Skeel—of which septet, only Mr. Carrión lives in Puerto Rico.

The Stark Challenges of Adjusting Municipal Debt in an Age of Disparity

June 18, 2019

Good Morning! In this morning’s eBlog, we consider the fiscal challenge confronting the State of Michigan with regard to the small city of Benton Harbor, a municipality which was the site of major riots in 1966 and 2003, before assessing the challenging fiscal and governing options for the U.S. territory of Puerto Rico.

A Plan for Municipal Debt Adjustment—Will the grass grow greener? In Michigan, the fiscal and governance challenge confronting Governor Gretchen Whitmer is what to do about one of the state’s smallest and poorest municipalities, Benton Harbor, a small city in the southwest corner of the state where the population peaked in 1960 at 19,136, but which today is just over 10,000—and a city which was home to riots in 1966 and 2003. The city, founded by Henry C. Morton, Sterne Brunson and Charles Hull, who all now have or have had schools named after them, was mainly swampland bordered by the Paw Paw River, through which a canal was built, hence the “harbor” in the city’s name. The city, according to the 2010 Census, is nearly 90% black—and has a median age of 28.3, and median income of $17,471.

Messieurs Brunson, Morton, and Hull also donated land and solicited subscriptions for construction of the canal, which was completed in 1862. It had long been recognized that a canal would be crucial to the town’s development, both to drain the marsh and to provide a berthing area for ships. The canal, originally 25 feet in width, but expanded to 50 feet in 1868, led to the town’s becoming a shipping and manufacturing center for the region. It is a small municipality where 43.2% of the population had a female householder with no husband present. Thus, it is not a municipality to which fiscal distress is new: nearly a decade ago, former Michigan Governor Jennifer Granholm appointed an Emergency Manager to manage the city—at a time when her team reported to the state that the city’s budgets were “effectively meaningless as a management tool.” Prior to its most recent educational crisis, Benton Harbor did not appear to be on the state’s potential distressed cities list: it has dreams now of bettering its fiscal future by a post-industrial revolution change via transforming a former aluminum smelting company in Benton Harbor into a modern medical marijuana growing and processing facility—and it has the potential provider, NoBo, which has received all necessary approvals: NoBo will initially do business in a 32,000-square-foot building which used to be Harbor Light Metals’ maintenance building: indeed, the business is prequalified by the state, and, earlier this month, Benton Harbor’s planning commission approved recommending to the City Commission the required special use permit. In addition, planning commissioners want to know how making the requested change would affect the 12-year Obsolete Property Rehabilitation District and Obsolete Property Rehabilitation Exemption Certificate City Commissioners approved for the former Harbor Center building last March: said certificate would freeze property taxes for 12 years if it is approved by the state, which is expected to consider the request next month. At a meeting last week, planners heard from the city’s assessor on the situation: after the meeting, Greg Vaughn, CEO and vice president of business development at Cornerstone Alliance. At that special meeting, planners began consideration of a special use permit requested by NoBo Michigan LLC to grow and process medical marijuana at the now-closed Harbor Light Metals, a former aluminum smelting plant at 900 Alreco Road: NoBo Michigan Director Bill Stohler said that on April 25, his company had received prequalification status from the state to open a medical marijuana facility, noting this is part of the process for his company to receive a license for a medical marijuana facility. The next step, he said, is for the Planning Commission to consider a special use permit: NoBo Michigan has applied to Benton Harbor for four medical marijuana licenses: two for Class C growers, one for a processing center, and one for a provisioning center. The company can grow up to 1,500 marijuana plants for each Class C grower’s license it receives. Now Director Stohler said city officials are waiting for a report from their engineering company, Abonmarche, before presenting the proposal to Benton Harbor City Commissioners. City Manager Darwin Watson said previously that City Commissioners will need to vote on the proposal within 45 days of the Planning Commission’s recommendation, which is by mid-July. He added that fixing up the former maintenance building would be just the beginning. On the other side of the 11-acre property, concrete walls are open to the air, noting: “This looks a little bit like Chernobyl now.”

Scholastic Dreams of the Future? Just as the issue of schools in Detroit was a central factor in the nation’s largest chapter 9 municipal bankruptcy in Detroit; now the issue in Benton Harbor revolves around state closure of the only high school in Benton Harbor, or as one writer aptly described it: “The push to ensure that Benton Harbor’s only high school remains open is about the moral character of the current administration in Lansing. It is about demanding that the Governor seriously consider the larger implications of her impending decision over the lives of innocent children instead of a quick fix. It is about education and racial equality, because we are still a society of unequal opportunity.” Nikolai Vitti, Detroit Public School Community District Superintendent, noted: “No evidence that shifting students to districts where they are not wanted solves the problem of children. It provides a quick solution for adults who do not want to be bothered by the burden of inequity. This is an opportunity to demonstrate transformative leadership: Real problems exist in Benton Harbor, but they need to be met with authentic problem solving that respects real issues related to race, class, and a history of inequity. Closing the high school is the easy and wrong answer.”

Gov. Whitmer, when asked about forgiving the high school’s $18 million debt the school owes, responded that was an issue for the Legislature, noting: “I absolutely have to work with the Legislature to get an agreement for whatever the solution is…We don’t have a solution to simply wipe away the debt without a plan for the school. I don’t unilaterally make appropriation decisions.”

Debt Restructuring Outside of Chapter 9. In Puerto Rico, the U.S. territory which is neither a municipality, nor a state, thereby unable to access chapter 9, the PROMESA Oversight Board has reached an agreement with creditors owed $3 billion that sets forth a fiscal path for restructuring $35 billion in debt obligations tied to the central government and scaling back debt payments over the next 30 years by half, with the Board noting the agreement marks an acknowledgment by municipal bondholders “that Puerto Rico’s difficult financial situation requires a meaningful reduction in its debt burden to a sustainable level.” The FY2020 budget which the Oversight Board submitted to the Legislative Assembly includes a $175 million package for legal and financial advisory expenses associated with the litigation of the Puerto Rican quasi chapter 9 bankruptcy cases—an amount similar to what Detroit spent during its 17-month journey into and out of chapter 9 municipal bankruptcy—but meaning that in just one year, Puerto Rican taxpayers will have spent the amount that Detroit invested throughout its chapter 9 process—but the expenditures on legal fees and financial advice are costly: for the current fiscal year, $257 million was set aside for legal fees and financial advice: in total, these two years of litigation will have cost some $411 million in attorneys and financial advisors, or the equivalent to about 10 percent of the annual revenue on income tax, 13 percent of the Sales and Use Tax. According to the current fiscal plan, the expectation is that by 2024, the Puerto Rican government quasi-chapter 9 bankruptcy will have resulted in $1.5 billion in payments, a figure which includes expenses by the PROMESA Board, the Fiscal Agency and Financial Advisory Authority (FAFAA), and the Unsecured Creditors Committee—but the PROMESA Board’s operations and advisory services represent 78 percent of these expenses, with these estimates, included in the most recent version of the government’s fiscal plan, driven by the bills the government received during the quasi-chapter 9 bankruptcy process in FY2018 and 2019, a figure the Board appears to find to be not out of the ordinary if the $64 billion debt is considered, estimating that the U.S. territory spends the equivalent of 1.68 percent in public debt on its legal and financial services associated with PROMESA, or within the range paid in other restructuring processes, such as those in American Airlines, Energy Future Holdings, and the city of Detroit. However, that percentage would be higher if expenses in FAFAA and other entities financed by Puerto Rican taxpayers were to be added to those of the Board—albeit, the indicator does not consider that only five entities that issue debt in Puerto Rico are under the quasi-chapter 9 process in U.S. Judge Laura Taylor Swain’s courtroom, where Judge Swain currently determines the validity of the bills submitted by attorneys involved in litigation through the appointment of attorney Brady Williamson, of Godfrey & Kahn, as fee examiner to review the bills. Indeed, by early last year, Mr. Williamson found duplicity in legal efforts by attorneys participating in PROMESA cases, an issue that has the potential to raise the fees paid by Puerto Rican taxpayers. Similarly, Mr. Williamson warned about too many lawyers attending hearings and that they were asking reimbursements for accommodation and transportation which were more expensive than what is usually charged by service providers, among other issues—triggering Judge Swain to request moderation in the billing of fees—and to impose restrictions: for example, it was established that law firms may only bill up to two attorneys’ fees for each meeting or court hearing.

Former U.S. Bankruptcy Judge Gerardo Carlo recalled that, so far, neither the Board nor FAFAA has questioned the bills of lawyers and financial advisors in court, noting that the only ones who have raised questions are the fee examiner and the court, but none of the parties has faced questioning on the matter. PROMESA Board spokesperson Edward Zayas said that budgeted expenses are mostly tied to litigating bankruptcy lawsuits and noted that they are working to complete these court cases as soon as possible, adding that they will continue to allocate these funds while Puerto Rico remains under PROMESA Title III, and noting the difficulty of determining what would constitute “excessive,” noting that the PROMESA Title III litigation is the largest municipal bankruptcy case in the history of the U.S. municipal bond market and comes from a new statute which has been repeatedly challenged in court, and stressing that the entire process is paid for by Puerto Rican taxpayers. Even the mediation process set by the U.S. court is financed by the Board, which in turn gets receives its funds from Puerto Rican taxpayers.

Unaccountability? Unsurprisingly, Puerto Rico’s legislature is currently in the process of analyzing the document that includes this package, with its assessment of the budget sent by the Board commencing with controversy, because it has $570 million less than the one recommended by Governor Ricardo Rosselló Nevares. The timing, too, especially compared to the Board, is short: by Monday, the Legislature must submit its version of the document to the Board for evaluation. The Board, in turn is expected to accept or reject the legislative version by Friday, and the Governor, meanwhile, will offer his budget message this Sunday.

For her part, PROMESA Executive Director Natalie Jaresko has indicated that the budget can be subject to changes as long it complies comply with the fiscal plan: the legislature will have seven days to modify it and submit a new one to the Board. By June 28th, the process must be complete with the approval of the budget that will direct the revenues and spending of the General Fund for the fiscal year that begins on July 1. The proposed settlement, announced Sunday, covers $18 billion in municipal bonds which were backed with Puerto Rico’s full faith and credit, and the Board responded it would submit a quasi-chapter 9 plan of debt adjustment plan in Puerto Rico’s court-supervised bankruptcy for approval within 30 days, foreshadowing a potential high-stakes battle over repayment terms. However, Gov. Ricardo Rosselló’s top finance adviser, Christian Sobrino, said the government does not support the proposal, because it is premised on a fiscal plan that would cut pension benefits. Under the proposal, general obligation municipal bondholders, whose claims are not in dispute, would receive at least 64 cents on the dollar and potentially more depending on the outcome of the post-bankruptcy litigation, while an attorney representing hedge funds which have signed on to the agreement, said it provides bondholders “the opportunity to realize equitable recoveries based on their relative priority and rights.” Other government claimants, such as suppliers and lower-ranking unsecured creditors, would recover 9 cents on the dollar. Director Jaresko described the negotiations as “tough,” but added: “[W]e are confident we reached the best deal possible for Puerto Rico to move on from decades of incurring debt we could not afford.” The proposal must still be voted on by creditors and approved by the quasi-municipal bankruptcy judge overseeing Puerto Rico’s bankruptcy to take effect. It would reduce principal and interest payments on Puerto Rico’s full-faith-and-credit bonds over the next three decades to $21 billion from $43 billion. Creditors would receive $12 billion in restructured debt and $2 billion in cash. By driving down debt claims, the board is hoping to free up money for investment in dilapidated infrastructure and to entice private capital back to Puerto Rico, which was devastated by two hurricanes in 2017.

Injustice in Flint, but a Quasi Plan of Debt Adjustment Emerges in Puerto Rico

June 14, 2019

Good Flag Day Morning! In this morning’s eBlog, we consider the stunning decision to drop criminal charges in the Flint, Michigan water contamination case, before considering actions taken by the PROMESA Oversight Board which could help Puerto Rico’s fiscal future.

Out like Flint.  Residents of this beleaguered Michigan city yesterday expressed shock and outrage in the wake of a decision to drop criminal charges against eight defendants. There is apprehension no government official will ever be held accountable for the lead contamination of the city’s drinking water, contamination which has adversely affected the city’s fiscal health—and the health of many of the city’s most vulnerable citizens. Michigan Attorney General Dana Nessel’s office said the state was dropping the charges as part of it reboot of the investigation of the actions taken by state leaders—and that the State reserved the right to refile charges later, as well as provide time “to conduct a full and complete investigation,” according to Solicitor General Fadwa Hammoud and Wayne County Prosecutor Kym Worthy, who is assisting in reviewing the Flint prosecutions. The Solicitor General she and Prosecutor Worthy have discovered new information and new persons of interest in the Flint water investigation—with her comments coming in the wake of the discovery of files of documents in the basement of a state building which may have never been reviewed. Now the prosecution team plans to examine additional criminal liability related to all victims of a 2014-15 Legionnaires’ disease outbreak in the Flint region—an outbreak which led to the deaths of at least 12 and sickened another 79 individuals—and which had devastating fiscal consequences for the city’s tax base. Now a Town Hall session is set for two weeks from today where the Solicitor General and Prosecutor Worthy said they plan to address Flint residents about the case dismissals. One of Flint’s State Representatives, Rep. Sheldon Neely (D-Flint) noted that the problem is the court moves have further eroded what already was a huge distrust of government, noting: “At this point, we’re not talking in weeks or months, but in years that have been lost, not in hundreds or thousands, but in millions of dollars that have been wasted…We’ve been told to wait, to be patient, that justice was coming, but where is that justice today? My city is losing faith in our government, and that distrust was justified today when it once again failed them so miserably. How many insults will the people of Flint have to suffer before our pain is taken seriously?”

Nevertheless, Flint Mayor Karen Weaver was more supportive of the Solicitor General’s decision, noting: “I am happy to see that this case is being handled with the seriousness and dogged determination that it should have been handled with from the beginning…The residents of the City of Flint deserve justice; we deserve to have every single person involved investigated. There were millions of documents and a lot of devices that should have been turned over that would have aided in getting the justice that we seek…How can our community regain any trust and respect from all branches of government when all levels failed them, then you allow the people you are prosecuting to decide what evidence they want you to have?”

Investing in the Future. The PROMESA Oversight Board has reached agreement to reduce proposed cuts to government pensions for Puerto Rico retirees in what some describe as a “crucial step” toward presenting a restructuring plan or quasi plan of debt adjustment for the central government’s $25 billion of municipal bonds and loans: a committee of retired Puerto Rican government workers and the Board announced Wednesday they had reached a tentative agreement—one negotiated with the Official Committee of Retirees, which will reduce the maximum pension cut to 8.5% from the 25% proposed by the PROMESA Board’s plan r3eleased last month. The Board’s attorney, Martin Bienenstock, said the pension agreement would be submitted in an overall Plan of Adjustment within 30 days. Inteligencia Económica Chairman Gustavo Vélez described the agreement as very good for pensioners as unsecured creditors; however, he expressed apprehension with regard to the feasibility of the Commonwealth allocating more than $2 billion a year from the General Fund for pensions, noting that if there were higher haircuts for pensions, there would be steep costs to the economy and thus, ultimately, for Commonwealth’s municipal bondholders.

Prior to the PROMESA Board’s announcement, Gov. Ricardo Rosselló through his deputy Christian Sobrino Vega, made clear his opposition to any pension cuts. On Wednesday morning, Sobrino Vega, the Executive Director of Puerto Rico’s Fiscal Agency and Financial Advisory Authority, said that the new deal would hurt more than 65,000 retirees.

Last month, in the PROMESA Board’s certified fiscal plan, the Board had said all those scheduled to receive more than $1,000 per month in pensions would instead see cuts. The new agreement, however, provides that cuts will only affect those receiving more than $1,200 per month—in some ways similar to the plan of debt adjustment in Detroit’s chapter 9 municipal bankruptcy, where the U.S. Bankruptcy Court acted to ensure that no retiree of the city would fall below the federal poverty level. In the old plan in Puerto Rico, those who received Social Security in addition to their pensions may have seen cuts to their pensions if they received as little as $600 per month. The new deal ignores retirees’ Social Security income. Instead, the agreement provides that if Puerto Rico’s economy exceeds financial projections, some of the excess government revenue would go retirees to reduce the cuts’ impact. The agreement would also set up a multibillion-dollar pension reserve fund to help fund pensions in later years, when the Board expects the government to be more pressed for fiscal resources; the agreement also guarantees monthly medical insurance benefits.

In acting, the PROMESA Board said that fiscal and legal constraints forced it to propose cuts to pension benefits and other changes to pensions, noting that in the Puerto Rico Oversight, Management, and Economic Stability Act’s Title III quasi-chapter 9 municipal bankruptcy process, pensioners are considered unsecured creditors and their treatment in a plan of adjustment will have to be approved by the Title III court. Indeed, the day before yesterday, in the wake of the pension reform presentation in San Juan at the Title III omnibus hearing in San Juan, U.S. Judge Laura Taylor Swain said the pension agreement was a significant step for the restructuring. Committee of Retirees’ Chair Miguel Fabre noted: “Although the Committee of Retirees would have preferred no cuts, we believe that significantly worse cuts would have been sought by the [Oversight Board] in the bankruptcy process and that ignoring said reality would have been irresponsible from our part and lethal to our community of retirees.” Under the agreement, 61% of retirees would avoid any cut to their benefits.

The day before yesterday, PROMESA Board attorney Martin Bienenstock said the Board planned to file a central government plan of adjustment with the bankruptcy court within 30 days: this plan would set down how the central government’s debt would be restructured. While a judge would have to approve it, PROMESA provides considerable authority to the Board to determine the plan’s form and little power to the judge to review it. Moreover, at Wednesday’s hearing, the attorney representing FAFAA and the Governor said it was the government’s responsibility to protect the most vulnerable and thus reject any cuts to pensions.

Stormy Governance

June 7, 2019

Good Morning! In this morning’s eBlog, we consider the President’s signing of disaster relief legislation, clearing the way at long last for helping the U.S. territory of Puerto Rico; then we turn to the Trump Administration’s call on the U.S. Supreme Court to review and overturn the U.S. Court of Appeals decision finding the appointments of current members of the PROMESA Oversight Board to be unconstitutional.

Puerto Rican Storm Relief at Long Last? President Trump yesterday signed a $19.1 billion disaster relief bill and took credit for the included aid to Puerto Rico: aid he had opposed for months, causing long delays in getting help not just to Puerto Rico, but also a number of states. As signed into law, the package will provide billions of dollars to areas struggling to recover from wildfires, hurricanes, flooding, and other natural disasters. The President unsurprisingly tweeted a picture of himself holding the legislation and wrote: “Just signed Disaster Aid Bill to help Americans who have been hit by recent catastrophic storms. So important for our GREAT American farmers and ranchers. Help for GA, FL, IA, NE, NC, and CA,” adding: “Puerto Rico should love President Trump. Without me, they would have been shut out!”

The reality is that the areas of the U.S. which suffered the greatest losses of lives and property have been forced to wait months for the assistance because of the President’s opposition to including any relief funding for Puerto Rico: throughout the negotiations, the President accused the Puerto Rican government of mismanaging the aftermath of Hurricane Maria in 2017, and he claimed that the U.S. territory received more money from the government than it had. Puerto Rico Gov. Ricardo Rosselló said he had sought to meet privately with the President to discuss disaster aid, but that President Trump refused. Since January, Gov. Rosselló lobbied hard against the White House’s stonewalling, at one point telling CNN, “If the bully gets close, I’ll punch the bully in the mouth.”

In the awful wake of Hurricane Maria, which Puerto Rico determined killed 3,000 Americans, the Trump administration was criticized for not responding as quickly as it did to Hurricane Harvey in Texas several weeks earlier.

Under the newly signed disaster relief package, Puerto Rico will receive $1 billion in aid, including $600 million for its food stamp program and $300 million in CDBG funds. The package had been delayed for months by internal squabbles among Republicans, a fight over immigration, and, after the Senate passed the bill last month, objections from a handful of House conservatives who prevented the measure from passing while lawmakers were out of town last week for the Memorial Day recess.

The broad disaster relief measure includes $2.4 billion for CDBG block grants to address disasters that have occurred since 2017, $3 billion for the Agriculture Department to cover producers’ losses from those disasters, and $720 million for the Forest Service to repay money spent fighting last year’s wildfires. The measure also will extend the National Flood Insurance Program through Sept. 30, and includes a provision pushed by Senate Majority Leader Mitch McConnell (R-Ky.) to ensure that federal crop insurance will cover industrial hemp.

Quien Es Encargado? The issue in the quasi-chapter 9 municipal bankruptcy of the U.S. Territory of Puerto Rico is who is charged or responsible for governance. In states which have enacted chapter 9 municipal bankruptcy, many have, as in Detroit, and Central Falls, Rhode Island, enabled the appointment of an Emergency Manager until a U.S. Bankruptcy court approves a plan of debt adjustment, clearing the way for elected leaders of that jurisdiction to govern. Puerto Rico, however, is somewhere with Rod Serling in the Twilight Zone between a state and a municipality—thus it has a Governor and legislature, but it also has a fiscal oversight board, the PROMESA Board, appointed by Congress and the President, not the U.S. citizens of Puerto Rico.

With Puerto Rico strongly recovering, the Trump Administration has called upon the U.S. Supreme Court to review and overturn the decision of the First U.S. Circuit Court of Appeals decision declaring the appointments of current members of the PROMESA Board unconstitutional, on the understanding that not doing so would give a blow to the power of Congress to decide how to govern the territories of the United States. In a writ filed the day before yesterday, U.S. Solicitor General Noel Francisco filed a writ of certorari urging the rejection of the First Circuit Court of Appeals decision which concluded that PROMESA members are high-level federal officials, so they must be appointed directly by the President of the United States and confirmed by the Senate, noting: “It has never been understood that the Constitution’s appointment clause applies to territorial officials or restricts the authority of Congress to establish territorial governments.”

The PROMESA Board has argued, the Solicitor General insisted, that maintaining the First Circuit’s decision opens the door to questioning the constitutionality of the Governor of Puerto Rico: “The decision of the appellate court threatens to alter the governmental structure of all the territories of the United States,” he said, noting that the constitutional clause of appointments “does not contain an ‘exception for elections.’”

Tempus Fugit. But the challenge for Alice to get out of Wonderland—or, in this case, for the Trump Administration to succeed in getting the U.S. Supreme Court to review the Circuit Court’s decision is bound by the court’s schedule—which will close at the end of this month. The Solicitor General has urged the U.S. Supreme Court to review the case, on the understanding that the political process initiated by President Trump to appoint current PROMESA officials to complete their three-year term may not be complete by the 16th of July, when the moratorium granted by the appeals forum to the fiscal entity expires. He has expressed concern that the inability to operate the Oversight Board could undermine the island’s fiscal recovery and cause judicial chaos “in which the 32 creditors of the island compete” for the public resources of the island, with “devastating practical consequences.” However, Puerto Rico Attorney General Jose Fuentes noted: “It cannot be said if there will be anything left for schools, the police and fire departments of Puerto Rico, hospitals, courts, shelters, retirees and others who depend on government funds.”

For his part, in defending the PROMESA Board, the Solicitor General has maintained that “no federal official directs or manages” Puerto Rico’s operations—and affirmed that the PROMESA law, which created the Oversight Board to handle the fiscal crisis and the process of debt restructuring, establishes that the citation powers under penalty of contempt of the fiscal entity are granted based on the laws of Puerto Rico. He argued that the 1st Circuit’s ruling was the first time it had been determined that “territorial officials” should be appointed based on the appointments clause, noting: “If Congress had chosen to address the financial crisis not by creating a PROMESA Board, but rather by requiring the Governor and Legislature of Puerto Rico to use its pre-existing powers in a particular manner, the decision would not have transformed the territorial government into a federal agency.” For his part, the Attorney General alluded to the June 9, 2016 decision of the Sanchez Valle case, of June 9, 2016—the same day the U.S. House of Representatives approved the PROMESA statute, to accentuate the colonial situation of Puerto Rico, recalling that the PROMESA law was created under the power of Congress to legislate on territories, based on Article IV of the Constitution of the United States, noting: “The Congress remains as the ‘last source of power’” of the territorial government and its laws, and stressing that the First Circuit’s decision “restricts” the “broad latitude” which Congress had affirmed to “develop innovative approaches to territorial governance,” as, for instance, under the Jones-Shafroth Act.

Perhaps unsurprisingly, Puerto Rico Gov. Ricardo Rosselló, who has not intervened in this case, nor challenged the constitutionality of the Oversight Board, noted: “Nowhere else in the United States, ever, would anyone have the face to present such ridiculous and absurd issues and arguments in terms of trying to compare the constitutionality of what would be the appointments of the Fiscal Oversight Board, which they are a federal entity, and what would be the officials chosen at the state level and elected by the people. I am almost speechless because it is so ridiculous, but it denotes what is a geopolitical black hole in Puerto Rico.”

Physical & Fiscal Risks

Good Morning! In this morning’s eBlog, we consider the governance challenges in the wake of the devastating water contamination crisis affecting Flint, Michigan, where efforts are under way to reach a potential settlement, before considering the grave threats to public health in the U.S. territory of Puerto Rico.  

Out Like Flint. Michigan Gov. Gretchen Whitmer has been working with Michigan Attorney General Dana Nessel regarding a potential settlement in the civil lawsuits against state officials in the wake of the Flint water contamination crisis. AG Nessel has reported that she and the Governor have also spoken with the Majority and Minority Leaders in the Legislature with regard to the ongoing negotiations, with both parties indicating they would like to settle the civil litigation stemming from the lead contamination of Flint’s drinking water that resulted in the wake of the city’s switch under the direction of a gubernatorially appointed emergency manager to the Flint River in April of 2014. The resulting, physically and fiscally devastating damage has led to 79 Flint-related civil lawsuits. Senate Majority Leader Mike Shirkey (R-Branch County, Hillsdale County, and Jackson County) said legislative leaders are involved in exploring how to finance “that final number,” but are not at the actual negotiating table, telling the Detroit News last week: “I’m not of the opinion that the damage people are seeking payment for is real, but the perception is that…Courts I think are lining up to say that there needs to be a settlement, and sometimes you need to put it behind you,” adding that some of the damages alleged in Flint were real, while he is of the opinion that others “were people taking advantage of what happened.” Meanwhile, House Speaker Lee Chatfield (R-Levering) and Senate Minority Leader Jim Ananich (D-Flint) stopped short of confirming their involvement in Flint settlement meetings with the Attorney General, but Speaker Chatfield voiced support for reaching a settlement with affected residents, noting: “I think what happened in Flint was a breakdown of government at all levels, and we need to do all we can to make it right.” Minority Leader Ananich said he too has been encouraged by the progress Attorney General Nessel’s office has made on the criminal cases initiated under Republican former Attorney General Bill Schuette, cases that Leader Ananich said now appear to be “more about a political point” than actual justice, adding that timely justice in Flint in both the civil and criminal cases is important, albeit not as important as “getting it right,” noting: “I’m a citizen who was wronged myself, so I have anger, I have mistrust; I was lied to both as a citizen but also in my capacity” as a lawmaker, he added: “But I also think that dragging this out for too long can continue the wounds that people need to find a way to heal.”

After taking office as the state’s 54th Attorney General in January, Attorney General Nessel reorganized the handling of the Flint criminal cases, firing prosecutor Todd Flood, and placing Michigan Solicitor General Fadwa Hammoud in charge of the case: the Whitmer administration and the Attorney General have indicated that they want to settle the state’s 79 Flint-related civil lawsuits—albeit the negotiations have not been without some obstacles. Indeed, one of the lead attorneys in the civil cases has asked a judge to remove the Attorney General’s office from the all civil litigation because of an alleged conflict of interest—a charge the Attorney General has denied, referring to the potential conflict created when the same assistant Attorneys General now defending former Governor Rick Snyder in the civil case were also appointed to prosecute a state lawsuit against water engineering firms which had worked in Flint. (The motion for disqualification remains pending in Genesee County circuit court.)

The Michigan Attorney General’s office had issued search warrants to seize from storage cell phones, iPads and laptops of more than five dozen state officials active during the Flint water crisis, including state-owned items used by former Gov. Rick Snyder: first reported by the Associated Press, the search warrants issued last month to the Department of Technology, Management and Budget and the Attorney General’s Office sought the devices of 66 current or former state officials, including Gov. Snyder, with Solicitor General Fadwa Hammoud stating the search warrants stemmed in part from the discovery of “substantial potential evidence that was not provided to the original prosecution team” in its investigation of Flint’s lead-contaminated water and a 2014-15 outbreak of Legionnaires’ disease, noting: “The team is currently in the process of obtaining this evidence through a variety of means, including search warrants…The team is also conducting a thorough review of existing and newly received evidence pertaining to the Flint Water Crisis.” Here, the search warrants were issued, in some cases, for items already obtained by former special prosecutor Todd Flood and served on the Solicitor General’s own department, demonstrating the complex governance and political interplay of changing administrations, new investigative leadership, and the challenges of a conflict wall separating the criminal and civil sides of the Flint water crisis litigation. Some of the evidence had already been obtained by the former special prosecutor Flood, but other items were never received by the investigative team, according to Kelly Rossman-McKinney, a spokesperson for the Attorney General’s Office.  A warrant signed on May 19th lists all content from Gov. Snyder’s cell phone, iPad, and computer hard drive collected by the state as the then-Governor prepared to leave office late last year: the document indicated that an iPhone 6 Gov. Snyder previously used had already been searched, with non-privileged information turned over to the Office of Special Counsel. Investigators are also seeking devices used by several former state officials which were encrypted in a way that prevented data extraction in the past, including an iPhone 5s used by ex-Department of Environmental Quality Director Dan Wyant and an iPhone 6 used by ex-Department of Health and Human Services Director Nick Lyon, who is preparing to stand trial on involuntary manslaughter, as well as other charges. The warrant here referenced 33 employees in Gov. Snyder’s office, 22 in the Health Department and 11 in the former Department of Environmental Quality. A second search warrant served on the Attorney General’s Office sought Flint water crisis-related data stored through a service provider named KLDiscovery, including metadata, such as the author field of certain communications, the name of the person who last saved a file, or the dates and times an email was sent and received. (A third warrant was issued the same day to the state Department of Technology, Management and Budget—a warrant asking for mobile devices—including desktop and laptop computers, cell phones and tablets—which had been tagged for forensic review as part of the Flint water investigations from the Governor’s office, the Department of Environmental Quality, and the Michigan Department of Health and Human Services. (Earlier this year, Special Prosecutor Hammoud had asked a judge for a delay in several criminal cases, because investigators had found a “trove” of materials in the basement of a state building which had not been supplied to prosecutors when they had issued previous investigative subpoenas—a request which was not granted for the full time period requested.) The Special Prosecutor fired the former special prosecutor Flood as special prosecutor in April shortly after the discovery of the records, roughly three years into his investigation and prosecution of government officials, including Mr. Lyon and Michigan’s former Chief Medical Executive Eden Wells.

Former Gov. Snyder had become a focus of the special prosecutor’s investigation after a top aide contradicted his testimony before the U.S. House of Representatives Oversight Committee. The former Governor had blamed state Department of Environmental Quality officials for not telling him about lead-contaminated water, maintaining he did not know about Flint’s elevated lead levels until shortly before he announced an action plan in October of 2015; he insisted that he did not learn about an outbreak of deadly Legionnaires’ disease until mid-January of 2016—an outbreak which led to the death of 12 people and sickened dozens of others in Genesee County in 2014-15.

Health Care in Puerto Rico at Grave Risk. Ángela Ávila, Executive Director of Puerto Rico’s Health Insurance Administration (ASES) is scheduled to testify today before the House Committee on Natural Resources that if Congress does not act on time, by next spring Puerto Rico’s health care system will fall over a fiscal cliff that will cause the collapse of services and put nearly 600,000 Americans out of access to medical care, warning that Congress must act before September 30th to prevent catastrophic damage to the U.S. territory’s health system, and to the health and well-being of the people of Puerto Rico. Notwithstanding that Medicaid is under the jurisdiction of the Energy and Commerce Committee, Natural Resources Committee Chair Raúl Grijalva (D-Az.), stressed that today’s hearing will open the debate regarding a recurring crisis in other U.S. territories. In her draft testimony, Director Ávila projects that Medicaid funds are on course to run out by the end of this year; however, Director Ávila had advanced that Medicaid funds,  mainly due to the $526 million pending under the Affordable Care Act (ACA), allocated to Puerto Rico will actually run out in early April, five months before the end of FY2020, two months before the Puerto Rican fiscal year—meaning Puerto Rico’s health care system will reach a fiscal cliff of about $1.2 billion. Governor Ricardo Rosselló Nevares’ FY2019-2020 budget bill counts on $1.643 billion in Medicaid funds to finance the cost of the Government Health Plan (Vital), which is projected to be $2.965 billion. Due to a $4.8 billion emergency allocation in Medicaid funds in the wake of the devastating Hurricane María, the federal government has financed 100 percent of the services of that program since early last year; however, as of October, Puerto Rico will have only $380 million available annually in Medicaid 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 warned that such a level of federal support for Puerto Rico’s Medicaid program is not sustainable, since the funding is projected to “cover only 19 percent” of the federal funding needed during FY2020 for Medicaid spending: Gov. Rosselló Nevares had asked Congress to allocate $15.1 billion to Puerto Rico for the next five years, the equivalent of $3 billion annually, as well as to increase the federal match to 83 percent. Director Ávila noted this would be vital to give Puerto Rico short-term certainty, while Congress works with the federal government—and, presumably, the PROMESA Oversight Board, to agree upon a sustainable long-term funding mechanism that eliminates inequity in funding and allows the government to meet the health needs of the most vulnerable residents: last week, she was quoted in El Nuevo Día stating that nearly half of the 1.25 million participants of the Vital plan will be left without medical services if there are not matching funds, noting: “(Puerto Rico) can’t take another cut,” stressing that in addition to 600,000 participants who may lose coverage, the government would have to “rethink” whether it can offer dental care and pharmacy services, adding: “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.” In her presentation, Director Ávila added 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.”

In a written presentation to the committee, the Executive President of the Puerto Rico Hospital Association, Jaime Plá, also warned of the damage to the health system that continued uncertainty over access to Medicaid funds causes. He said that the uncertainty and financial pressure imposed on Puerto Rico’s hospitals and other providers have made it very difficult to offer attractive and competitive compensation packages to retain the island’s experienced and bilingual medical staff and professionals.

PROMESA Board Executive Director Natalie Jaresko, in her written testimony, added 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.” She urged Congress to grant  Medicaid funding “more closely tied to the size and needs of its low-income population.”

In the nation’s capitol, yesterday afternoon, Washington Resident Commissioner for Puerto Rico, Jenniffer González, hosted a Congressional briefing on the needs of Puerto Rico’s health care system, covering both the potential fiscal collapse in the health care system and the lower rates received by the territory’s Medicare Advantage plans.