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.”