The Exceptional Challenges of Governance in Transition in the Wake of near insolvency.


July 30, 2019

Good Morning! In this morning’s eBlog, we consider the ongoing fiscal challenges to one of the nation’s oldest cities, Petersburg, Virginia, before veering south to assess the growing governance challenge of filling the Gubernatorial vacancy in Puerto Rico.  

The Steep Road of Fiscal Recovery. Petersburg, Virginia, one of the nation’s older municipalities—and one which neared insolvency—has found the fiscal path to recovery uneasy. Last Saturday afternoon, Del. Lashrecse Aird (D-Petersburg) was asked, pointedly, about its current fiscal situation: “What is the state’s opinion about Petersburg’s finances?” Before she answered, Delegate Aird laughed and said, “I like a blunt questioner.” Then she responded: “The state is still very concerned about the progress the city is making.” But In Virginia, she added, state government does not just automatically step in and take over a local ledger; instead, the locality has to make a formal request for assistance from the state Auditor of Public Accounts, and Delegate Aird said even though the state has offered, the official request from Petersburg has not come in, to her knowledge. The fiscal dilemma is complex, because the Commonwealth does not specifically authorize municipal entities to file for chapter 9 municipal bankruptcy, albeit, in certain situations, the Commonwealth law allows for the appointment of a receiver with respect to revenue bonds. Nevertheless, there is no question but that the municipality is in some dire, ongoing, fiscal straits: according to the APA’s web site, Petersburg has not submitted an annual comprehensive financial (CAFR) report to the state since 2017. (These reports are due on Nov. 30 of each year.) Nevertheless, as Delegate Aird noted: “I believe fully that the state is paying close attention,” with her statement coming at the first of several “listening sessions” she has scheduled for the 63rd House District.

About 35 people turned out for Saturday’s session, and Del. Aird’s prediction about what to expect rang mostly true. In addition to the question with regard to Petersburg’s fiscal stress and state perception, she also fielded a question with regard to a rumor that the Robert Bobb Group, which temporarily took over management of municipal operations in 2016 in an effort to turn Petersburg’s finances around, might be coming back: she responded she had not heard anything about a possible return. Another question raised during Saturday’s session involved low-income families’ accessibility to school textbooks—a query in which the citizen told Delegate Aird that children were not being allowed to bring textbooks home with them, and many of those families could not afford internet access, which is driving so many educational initiatives. Del Aird responded: “That has not been brought to my attention.”

Petersburg is a municipality of over 32,000, with nearly 80 percent black of African American. The median income for a household in the city was $33,927, and the median income for a family was $40,300; males had a median income of $30,295 versus $23,246 for females: the per capita income is just under $19,000—with nearly a quarter of the population below the federal poverty level, including 27.1% of those under age 18 and 15.8% of those age 65 or over.

The Exceptional Challenge of Political and Fiscal Recovery from Virtual Municipal Bankruptcy. Far south of Petersburg, in Puerto Rico, the U.S. territory is mired in fiscal and governance turmoil, clearly making more challenging efforts to proceed with a permanent, long-term restructuring of Puerto Rico’s debt while the Commonwealth government is in turmoil and island-wide protests continue. The situation is, if anything, further complicated by the welter of fiscal overseers, some with serious conflicts of interest. The Governor has submitted his resignation, there are serious legal challenges pending with regard to the governance legitimacy and authority of the Congressionally imposed PROMESA oversight Board: absent an elected Governor in place, long-term debt or operational restructurings could be seen as lacking the consent of the Puerto Rican people and may face heightened political and popular disfavor in the years to come.

And, it appears, no one is eager to fill the empty governance post at the top: the woman in line to become Governor of Puerto Rico said Sunday that she does not want the position; she hopes disgraced Gov. Ricardo Rosselló appoints a Secretary of State who would then serve as his successor upon the effective date of his resignation. The slot for the Secretary of State has been vacant since Luis Rivera Marín, also involved in the controversy, quit days before the Governor did. That left Justice Secretary Wanda Vázquez next in line; however, she tweeted her apprehensions: “I reiterate, I have no interest in occupying the position of Governor: I hope that the Governor identifies and submits a candidate for the position of Secretary of State before August 2 and I have told him so.” It appears her apprehensions are well grounded: she has been investigated for claims of favoring family members in a possibly criminal dispute, although officials found insufficient evidence to go forward. She has also has been accused of dragging her feet on investigations such as questionable licensing of medical marijuana clinics; however, the greatest questions have been with regard to governmental corruption with regard to recovery from Hurricane Maria after it slammed the island two years ago—and from which, recovery remains spotty: many in Puerto Rico to know what happened to the relief funds, accusing Secretary Vázquez of showing little interest in finding out.

So Who’s up to Bat? The seeming disinterest of Secretary Vázquez appears to reflect growing divisions within Gov. Rosselló’s powerful, pro-statehood New Progressive Party. With Gov. Rosselló having recently resigned and delegating the reins to Senate President Thomas Rivera Schatz to serve in an acting capacity, some believe that the Senate President is interested in the Governor’s position. If no Secretary of State is named, the next in line would be Treasury Secretary Francisco Parés; however, because the Secretary is only 31, he is too young to be eligible. Next in the governance line of succession would be Secretary Eligio Hernández, who rose to that post in April, when his predecessor was forced to resign amid corruption charges. The next few days are likely to see a power struggle play out within the party, according to Victor Suarez, who was Puerto Rico’s the 24th Secretary of State, as well as the current Executive Director of the Puerto Rico Convention Center District Authority—and who, prior to his current position, served in various roles in public service, including as executive director of the Puerto Rico Port Authority, as Secretary of Consumer Affairs—and as Deputy Mayor of Carolina, and as the territory’s Chief of Staff. Mr. Suárez noted: “I think there are negotiations going on and they are regrouping: She was supposed to be part of a smooth transition, but this make me wonder if the Governor was outmaneuvered.”

The Governance Challenges in the Wake of Impeachment or Resignations


July 29, 2019

Good Morning! In this morning’s eBlog, we consider the grave governance challenges in the U.S. territory of Puerto Rico, where former Gov. Ricardo Rosselló has resigned, raising discussions with regard to governance changes in this U.S. territory which is in the Rod Serling Twilight Zone between a municipality and a state—and between its own Governor and Legislature, a federal circuit court, and a Congressionally-appointed financial control board.

Puerto Rico is in a political crisis in the wake of the fall of Ricardo Rosselló Nevares, a fall encumbered via the leaks of profane and offensive chats, corruption charges in his administration, and massive protests that made his resignation unavoidable. Instead of a meteorlogical storm, however, this political and governance hurricane raises the debate on the possibility of amendments to the Constitution and the political system; it raises the debate about what the next reforms should be. Indeed, in the last few days, the Puerto Rico legislative assembly received proposals to create the Lieutenant Governor position and authorize the possibility of a recall referendum to provide a governance route for citizens’ discontent in the middle, after all, of a four-year term. Professor Carlos Ramos González of the Inter-American University Law School, believes it would make sense to start a discussion with regard to the desirability of implementing constitutional or electoral reforms—albeit warning that proposals for constitutional amendments should not be considered only to resolve immediate situations or temporary concerns; rather, he appears to be of the view that there should be consideration of a Constitutional Assembly. Interestingly, former Governor Aníbal Acevedo Vilá, who earlier this year, in his book Separation of powers in Puerto Rico: Between Theory and Practice, “There has to be a Constitutional (Assembly),” agreed. The book outlined a series of proposals, including the creation of the Lieutenant Governor position, whose name would be included on the ballot in future elections, establishing a second voting round and separating legislative and governor elections.

Last Thursday, House Speaker Carlos “Johnny” Méndez filed a resolution in favor of a special referendum, to be held before the end of the year, to amend the Puerto Rican Constitution through of the creation of the Lieutenant Governor position. According to Speaker Méndez’s proposal, one of the New Progressive Party vice-presidents, the Lieutenant Governor, a running mate on the ballot whose tasks would be delegated by the Governor. The former Governor believes the Lieutenant Governor should assume the duties of the Secretary of State, who “is a decorative figure” in Puerto Rico.

Those who criticize the proposal, however, note that, just as former Secretary of State Luis Rivera Marín was part of the profanity-laced chat and had to resign, a Lieutenant Governor in the Rosselló Nevares administration would very likely have been a knowing participant in the ungubernatorial behavior which triggered the massive and historic demonstrations leading to the Governor’s resignation.

That is, there appears to be an emerging consensus that, regardless of whether a Lieutenant Governor position is created, there needs to be a review of the governance process with regard to a line of succession. The Puerto Rican Constitution provides that “when a vacancy occurs in the office of Governor, caused by death, resignation, removal, total and permanent incapacity, or any other absolute disability, said office shall devolve upon the Secretary of State, who shall hold it for the rest of the term and until a new Governor has been elected and qualifies. In the event that vacancies exist at the same time in both the office of Governor and that of Secretary of State, the law shall provide which of the Secretaries shall serve as Governor.”

Under Puerto Rican law, after the Secretary of State, the succession goes to the Secretaries of Justice, Treasury, Education, Labor, Transportation and Public Works, Economic Development, and Commerce, Health and Agriculture. Without a Secretary of State, Justice Secretary Wanda Vázquez Garced, who appears to be in governance crosshairs for her work and her sharp disagreements with Senate President Thomas Rivera Schatz, who is also seemingly focused his own efforts to replace the departed Gov. Rosselló Nevares, according to several sources, whomever is selected would become the next Governor of Puerto Rico at the end of this week; if there were no Secretary of State by Friday, or, if, for some reason, Senate President Vázquez Garced would step aside, Treasury Secretary Francisco Parés would be unable to occupy the position, because he is only 31 years old: the minimum age to serve as Governor is 35. Puerto Rican Independence Party (PIP) Senator and Secretary-General Juan Dalmau has suggested the option of a special election.

Popular Democratic Party (PPD) President Senator Aníbal José Torres welcomed the discussion with regard to the creation of a Lieutenant Governor position; however, he warned they “must be very careful when making proposals as a result of the situation we lived in the past few days, because what happened has not been a constitutional crisis, it has been a political crisis.” Nevertheless, he favors an amendment of the Constitution to impose limits on the terms of elected officials. Sen. Majority Leader Carmelo Ríos Santiago, who began his legal career as a legal aide of the Commissioner of Municipal Affairs, and Director of the Lawsuit Division of the Corporation of State Insurance Fund, commenced his political career in 1999, when he ran for Guaynabo’s Legislative Assembly, where he was elected Majority Speaker; five years later, he was elected as Senator for the District of Bayamon, where he presided over the Municipal and Financial Affairs Commission. In November of 2008, he was reelected for a second term: he presided over the Government Commission, and he was Vice-president of the Commission of Municipal Affairs, Secretary of the Commission of Public Safety and Judicial Affairs, Consumer Affairs and Public Corporations during his first years. He was reelected in 2012 and 2016, and he is Chair of the Commission of Rules and Calendars. Last year, he was selected to be President of the National Hispanic Caucus of State Legislators.

The Majority Leader said the political crisis generated by the Rosselló Nevares administration “is a good opportunity to review several things,” but he believes that the PNP government will just limit itself this year to promoting a referendum to create the Lieutenant Governor position; nevertheless, he also believes it is important to better define how to implement the impeachment process or removal of a Governor, noting: “It is a political process, and it must be clear that a just cause is enough to start it.”

In this Twilight Zone of governance between a state and a municipality, the process of elections is in question. Since its creation, the Citizens Victory Movement has been promoting changes in the electoral system to allow partisan alliances, a second round of elections, and a recall referendum. Part of the challenge, it seems, is that in a multi-party system, it is possible to be elected with less than 50% of the vote; thus, absent a second round, one can be elected by a very anemic mandate—or, as one spokesperson for the Movement noted, absent a second round, many feel inclined to vote “for the least bad option,” noting his belief that if there were two voting rounds, voters would be more inclined to vote consciously in the first one. With regard to party alliances, he argued that it is unheard of that they are prohibited. Meanwhile, former Gov. Acevedo Vilá believes that under the U.S. Constitution, the prohibition of formal partisan alliances “violates the right of association.” From his governance perspective, Senator Dalmau said that the law should not limit “the electoral expression and freedom of association of individuals,” while Representative Manuel Natal Albelo has filed a bill in the House proposing to amend the Constitution to allow recall referendums.

Election Finance. The governance issues and debate have also raised the issue with regard to limiting private party funding. Senator Ríos Santiago is also attracted to pressing for public funding over private contributions, as it appears a growing number of citizens view private funds are a source of corruption. They are the mechanism big donors use to contribute to parties and parties (like a government) return the favor to them. Under federal regulations, there are some restrictions, especially in the wake of the Citizens United Supreme Court ruling that independent election expenses by corporations and unions are protected by the U.S. Constitution First Amendment and should not be subject to government restrictions.

With the Legislature set to reconvene on August 19th, partisan alliances or a recall referendum will not be on the legislative majority’s agenda. Sen. Ríos Santiago expects the Senate to resume the debate on the electoral reform, but appears doubtful there will be any review with regard to partisan alliances: “If a person wants to vote off party lines, they can do it;” however, the law does not allow, for example, the same person to appear on the ballot of more than one political party, in contrast to what is permitted in states. With regard to the recall referendum, Sen. Ríos argued that it creates “instability” and that the four-year electoral period “is not a very long term,” adding that one of the changes that could be discussed is the elimination of the requirement to present endorsements for a person to run for an elective position.

Former Gov. Acevedo Vilá said the experience with the Rosselló Nevares administration should promote a reform to the concept of professional service contracts and establish a strict process of public information about lobbying. On the one hand, he noted irregularities such as lobbyist Elías Sánchez, a close friend of the outgoing Governor, representing Rosselló Nevares on the Transition Committee and before the PROMESA Oversight Board while he had contracts that could have represented clear conflicts with his duties. He also advocated for Puerto Rico to approve a statute such as the federal Hatch Act, which imposes strong limits on the political activities of public officials, and he criticized the recent practice that has allowed agency heads, such as former Education Secretary Julia Keleher, to have contracts, which allowed the former official, now accused of corruption, to earn $250,000 annually, more than double the salary paid for that position.

The Challenge of Gubernatorial Succession & Abdication

July 24, 2019

Good Morning! In this morning’s eBlog, we consider the grave governance challenges in the U.S. territory of Puerto Rico, where the streets have been inundated with hundreds of thousands of American citizens marching to urge the removal of Gov. Ricardo Rosselló, exacerbating the governance challenges in this federalism twilight zone of an entity which is neither a municipality, nor a state—and is in a governance maze between a quasi-federal bankruptcy court, a discredited Governor, and without access to an orderly kind of legal process from which to right itself.

Hundreds of thousands rallied yesterday against Puerto Rico Governor Ricardo Rosselló to demand his resignation in what has, to date, been the most overwhelming demonstration yet against him: tens of thousands of citizens took over the Hato Rey sector of San Juan: the massive rally marked the tenth straight day of protests since the leak of private texts in which Governor Rosselló and close aides wrote sexist and homophobic comments aimed at other politicians, journalists, and everyday citizens, as well as mocking remarks about the horrendous death toll of hurricane Maria on the U.S. territory, recently deceased figures like Puerto Rico independence leader Carlos Gallisá, and the management of dead bodies at the state-run forensic science facility: the explosive 889-page document, which included explicit conversations made through the messaging app Telegram from November of 2018 to last January, also includes possible instances of illegal activity, mostly related to the use of public resources for partisan purposes and to discredit political opponents. The massive march walked up the ramp to a stretch of the Las Américas highway, the City of San Juan’s main thoroughfare, eventually shutting down traffic in both directions. Even a downpour failed to dampen the spirits of the thousands of people in attendance: some crowd estimates have ranged from 200,000 to half a million participants, with many of them wearing shirts reading “Ricky resign” and carrying signs condemning some of the most offensive comments in the Telegram chat.

Perhaps giving a sense of how overwhelming the pressure has become, even though the march and demonstration featured several labor unions and activist groups, no single entity could be credited as the main organizer behind the event: instead, citizens were convened through social media mostly in a grassroots fashion, aided by the influence of music stars like Ricky Martin, Residente, and Bad Bunny, as well as other celebrities, among others. Later in the day, urban music star and aptly named Daddy Yankee made an appearance in front of the Governor’s residence, La Fortaleza, in Old San Juan, also demanding Governor Rosselló’s resignation. Rolando Emmanuelli, an attorney representing the local electric utility’s labor union, said the demonstration appeared to “be the largest in our history,” eclipsing other sizable rallies such as the one demanding the Navy’s exit from the island municipality of Vieques in 2000.

The breadth and size of the crowds in recent days have cast even more questions with regard to the viability of Gov. Rosselló’s political future, albeit without offering any clear governance path forward: as a growing chorus of prominent figures call for his resignation, including leaders from the Governor’s own New Progressive Party (NPP), which has been advocating statehood. In addition, on the U.S. mainland, several members of Congress, as well as Democratic Presidential primary candidates have also asked for Gov. Rosselló to step down.

On Sunday, the Governor announced he would no longer seek reelection next year, and submitted his resignation as president of the NPP; however, he remained steadfast with regard to finishing his current term as Governor, adding that he welcomed a possible impeachment process, something the Puerto Rico Legislature signaled has already begun. Moreover, key figures in his administration are already abandoning the ship of state: his press secretary, Denisse Pérez, and Government Development Bank Executive Director Gerardo Portela. Further compounding Gov. Rosselló’s problems, the Governor gave an afternoon interview to Fox News anchor Shepard Smith that was tense at times and, in others, appeared to go off the rails. In one instance, Mr. Smith asked Gov. Rosselló to name one of his supporters, a question which apparently caught the Governor by surprise: after much stalling by the Governor and Mr. Smith’s repeated pressing, Gov. Rosselló suggested one: the Mayor or Alcalde of San Sebastián, Mayor Javier Jiménez—who, less than an hour later, denied he supported Gov. Rosselló and called for an impeachment process of the Governor.

This morning, sources in Puerto Rico are predicting the Governor’s resignation could occur at any moment, with sources noting that Justice Secretary Wanda Vázquez spent an hour with the Governor late yesterday—with speculation growing she would become the acting Governor per the provisions of Puerto Rico’s Constitution.

The Challenge of Governance in Bankruptcy

Good Morning! In this morning’s eBlog, we consider the governance challenges in the U.S. territory of Puerto Rico, where the streets are in flames in San Juan in the wake of the leak of hundreds of pages of texts featuring sexist and homophobic remarks between Gov. Rosselló and his executive team, as well as possible instances of illegal activities designed to shift the public narrative and discredit opponents. Puerto Riconeither a state nor a municipality—and currently fiscally overseen by both a federally appointed control board, as well as a Governor and Legislature, and the 1st U.S. Circuit Court of Appeals, in the wake of federal arrests of top members in Gov. Rosselló’s cabinet, including former Education Secretary Julia Keleher—on corruption charges, and public accusations of wrongdoing from the son of Raúl Maldonado, a former Treasury Secretary who had been ousted after he spoke out about an “institutionalized mafia” within the agency.  Puerto Rico, in the Twilight Zone between a state and a municipality, has found itself in a political situation not unlike that which led to the resignation of former President Richard Nixon—a resignation likely coming lest Congress would proceed at the time to impeach him. But, in Puerto Rico, the role of the U.S. Congress, the federal courts, and the American citizens of this U.S. territory is breaking new ground.

Puerto Rico’s non-voting delegate to Congress, Jenniffer Gonzalez, has recommended that Thomas Rivera Schatz serve as interim president of Puerto Rico’s New Progressive Party—and she has reaffirmed that Gov. Ricardo Rossello Nevares must resign—recommending that Thomas Rivera Schatz be designated as the interim president of the New Progressive Party, adding that, because of her role as Puerto Rico’s Resident Commissioner in Washington, D.C., she views her presence in the nation’s capitol as vital to “restore credibility and confidence in the island,” adding that, in the wake of the Governor’s decision to hand over the presidency of the New Progressive Party and rule out the possibility of seeking reelection, Puerto Rico Senate President Rivera Schatz must serve as the interim Senate President. At a time when space is open for the PNP party to find a new candidate for governor, Rep. Gonzalez said noted: “I will be available and ready to help and take on the challenge that my party and Puerto Rico entrusts to me.”

Meanwhile, the Governor’s former Treasury Secretary has made allegations of corruption, two, former senior members of his administration have been indicted on federal charges—and almost 900 pages of most inappropriate, vulgar texts between the Governor and his aides have now titillated the local media; nevertheless, the Governor has, so far, defied demands that he step down, albeit, in a video message, he said he would resign as the statehood party leader, noting: “The priority should be the people of Puerto Rico…So all my time should be destined to fulfilling the responsibilities I assumed as Governor. I left aside any personal interest by desisting in my aspiration to be re-elected as governor next year.”

From a governance perspective for this U.S. territory which is somewhere in the governing twilight zone between a state and a municipality—and which is caught in a web of oversight by the 1st U.S. Court of Appeals and a federally imposed Oversight Board—there are many, many players, but no clear line of authority. In a chapter 9 municipal bankruptcy, as we have seen in Detroit and Central Falls, Rhode Island, the ability of a Kevyn Orr, selected as the Emergency Manager for the Motor City, and given all governing authority until a U.S. bankruptcy court approved a plan of debt adjustment, the action ensured there was no disruption of essential services, especially street lights, traffic lights, and 9-1-1 responses. The danger in Puerto Rico is there is no such simple line of authority.

Governance at Risk: What to Do?


July 19, 2019

Good Morning! In this morning’s eBlog, we consider the governance challenges in the U.S. territory of Puerto Rico, where the streets are in flames in San Juan in the wake of the leak of hundreds of pages of texts featuring sexist and homophobic remarks between Gov. Rosselló and his executive team, as well as possible instances of illegal activities designed to shift the public narrative and discredit opponentscitizens are protesting in the wake of a tense couple of weeks in the territory in the wake of federal arrests of top members in Gov. Rosselló’s cabinet, including former Education Secretary Julia Keleher—on corruption charges, and public accusations of wrongdoing from the son of Raúl Maldonado, a former Treasury Secretary who had been ousted after he spoke out about an “institutionalized mafia” within the agency.  How does one put Humpty-Dumpty back together again amid a seemingly dysfunctional government with ongoing legal challenges with regard to the quasi-municipal bankruptcy in the U.S. territory of Puerto Rico—where an un-elected board and a federal judge appear to carry more governance authority than the elected leaders of these American citizens and taxpayers

As of last night, more than 221,000 people have signed a petition for Governor Ricardo Rosselló to resign his position, with the petition coming amid the debacle in his government in the wake of federal accusations of corruption against two former high officials of his cabinet, as well as the unveiling of a scandalous chat that the first executive had with his closest advisers. One organization, wrote: “We demand the resignation of the Governor of Puerto Rico, Ricardo Rosselló Nevarez, for his incompetence and lack of maturity to govern, and for the continuous accusations of corruption in the highest spheres of his cabinet,” adding: “It’s sad to see the embarrassing arrests of officials who were supposed to work on behalf of a town that only takes a short time after being hit by a hurricane with devastating results that we all know; it is a mixture of sadness and outrage at the see that many Puerto Rican brothers still live under an awful and in subhuman conditions, where too many often go to sleep without even taking a bite of food.” Thousands of Americans marched yesterday from the Capitol to La Fortaleza in a massive demonstration in which they asked for the Governor’s resignation; dozens of political leaders, artists, religious and private companies have demanded his resignation.  

Tom Sanzillo, the Director of Finance at the Institute for Energy Economics and Financial Analysis, who has 30 years of experience in public and private finance, including as a first deputy comptroller of New York State, where he held oversight over a $156 billion pension fund and $200 billion in municipal bond programs, noted that Puerto Rico’s economic recovery has been set back by the taint of criminality at the highest levels of government, albeit insisting the U.S. territory’s recovery must proceed—as the growing perception is that Governor Rosselló’s betrayal of his public responsibilities has shaken the already vulnerable public and market confidence in Puerto Rico’s fiscal and governance future: all contractors and partners involved with Puerto Rico are now seen as suspect. Mr. Sanzillo believes all those involved in governance on the island should be called before a team of independent experts headed by the Puerto Rico Financial Oversight and Management Board (PROMESA and include independent, skilled, prominent public leaders. The purpose of this review would be to establish the degree to which companies now doing business with Puerto Rican government agencies received their contracts based on a fair process, are performing real services for fair compensation, and are free from corrupt ties to government officials or other people with influence in the government. The review should especially focus on the larger contractors: Citibank, Filsinger Energy Partners, Rothschild, law firms, accountants, financial advisors, builders and others—recommending that real performers with real credentials should remain; those determined to have been corrupted should be terminated. He believes the status of some contractors may be unclear: if they are retained, they should be monitored. The review team should only accept verbal and written statements from company principals and counsel; false statements made during this process should result in immediate referral of the company and its representatives for criminal prosecution. While he believes a new Governor may change policy priorities, the Governor and the public need to know immediately that all the firms with major government contracts owe their allegiance to the people of Puerto Rico.

The potential fall of the Rosselló administration comes at an unpropitious time: major contracts are in the works, as well as an $8 billion debt restructuring for the Puerto Rico Electric Power Authority; thus, it would seem there is sufficient evidence to put current court proceedings on hold, as well as any steps to close the debt restructuring process under the proposed Restructuring Support Agreement. Until the Governor’s status is settled, there should be a moratorium on any further steps to award a contract for the operator of PREPA’s transmission and distribution systems until there is a thorough independent investigation of the process to date.

The chapter 9 municipal bankruptcy in Stockton, California involved suspect behavior by elected officials—as did the nation’s largest ever municipal bankruptcy in Detroit. Puerto Rico is not a municipality; it is not a state: it is in a governmental Twilight Zone: but perhaps these tragic events open the door to not just fiscal reform in the ongoing quasi-plan of debt adjustment process, but also for Puerto Rico’s people to insist upon a new Governor—and the adoption of new ethics laws. Instead of having the PROMESA Board, where there is a perception of conflicts of interest, seek to preempt governance authority, usurp the authority of elected leaders, recommend a time period for the American citizens of Puerto Rico to make and act on decisions with regard to what kind of government they will support—and what accountability is appropriate.  

A critical role of chapter 9, whether in Central Falls, Rhode Island, Detroit, Stockton, etc. is to lift the terrible burden of debt—in the case of Puerto Rico, some $72 billion in old debt—a legacy of debt that has attracted bond investors seeking high tax-exempt interest rates, but incentivized a seeming generation of young Puerto Ricans to leave for the mainland. What this would suggest is that no creditor should be paid anything by Puerto Rico until all litigation is resolved, adjudicated, or settlements are made regarding culpability of the vast swarm of financial advisors who have collected large fees for Wall Street firms while pushing Puerto Rico to issue more and more municipal debt at higher and higher interest rates—debt that can never be paid off.

Last Friday, the PROMESA Board Chair, noted that the recent corruption and other scandals would adversely impact Puerto Rico’s physical and fiscal recovery—and the perception of its capacity to self-govern; nevertheless, despite recognizing the gravity of the situation, the Oversight Board has made no indication that it will adjust its actions accordingly. The Board is still rushing through the quasi bankruptcy court system to get the Puerto Rico Electric Power Authority’s (PREPA) debt restructuring agreement approved. Earlier this month, the Board filed a motion and supporting testimony with the court requesting that the judge grant a narrow approval of the debt restructuring agreement on procedural grounds and leave it to the Puerto Rican Legislature and Energy Bureau to approve the associated (and substantial) increase in electricity rates.

Indeed, there is the appearance that the Board is seeking to limit the scope of the court’s authority to exclude economic issues, such as the impact of higher electricity rates on the U.S. territory’s economy, whether the citizens of Puerto Rico can actually afford to pay back the mountain of debt, and what will happen to the electrical system if they cannot. At the end of the day, pushing a bond deal that drives the electrical system back into financial ruin serves no one, except the bankruptcy lawyers and richly compensated consultants involved.

There is also the question, raised by the FOMB itself in a different venue, of how much of the debt that is covered by the restructuring agreement was legally issued. In a lawsuit against some of PREPA’s oil suppliers and fuel testing laboratories, the FOMB alleges that PREPA was insolvent in 2011. Yet the FOMB has made no move to argue that the $1.3 billion in debt incurred by PREPA after 2011 was issued fraudulently. Instead, it is rushing to close a debt deal that will lock Puerto Ricans into paying off that debt for the next 47 years.

Self-Governance at Risk

July 17, 2019

Good Morning! In this morning’s eBlog, we consider the governance challenges when elected leaders behave in unacceptable and illegal ways: Are there consequences? Might this behavior jeopardize Puerto Rico’s chances for statehood? Might it adversely affect Puerto Rico’s chances for emerging from federal oversight? 

Governance Burning. Old San Juan was in flames Monday night, when thousands of residents protested in its streets to demand the resignation of Governor Ricardo Rosselló—with the demands coming on the third day after the leak of hundreds of pages of texts featuring sexist and homophobic remarks between Gov. Rosselló and his executive team, as well as possible instances of illegal activities designed to shift the public narrative and discredit opponents. The march came in the wake of a tense couple of weeks in the territory in the wake of federal arrests of top members in Gov. Rosselló’s cabinet, including former Education Secretary Julia Keleher—on corruption charges, and public accusations of wrongdoing from the son of Raúl Maldonado, a former Treasury Secretary who had been ousted after he spoke out about an “institutionalized mafia” within the agency.

Nevertheless, notwithstanding the public pressure, Gov. Rosselló has remained steadfast in keeping his position as Governor and as President of the pro-statehood New Progressive Party (NPP). Similarly, the Governor has, apparently, given no consideration to abandoning his re-election campaign.  Although demonstrations began peacefully, with a march which started around 5:00 p.m., the situation turned more violent later at the gates of the Governor’s mansion, known as La Fortaleza, with protesters throwing objects at heavily armed security guards—efforts that drew tear gas canisters. Even though police claimed some of the tear gas canisters were thrown by protesters, it later turned out that several such canisters were of a make that is only sold to government agencies.  Police Commissioner Henry Escalera commented: “Throwing bricks and cherry bombs, that is not a democracy. We are ready to defend this democracy to the last drop of blood.” In total, five people were arrested, and 21 officials were injured, according to the Police Department.

Yesterday morning, groups of volunteers began to paint over graffiti signs strewn all over the buildings in the streets and blocks surrounding La Fortaleza, calling for Gov. Rosselló’s resignation. Demonstrations in the capital are expected to keep drawing large crowds throughout the week, especially today, when entertainers Bad Bunny and Residente are scheduled to show up and protest.

In his first response, Monday, Gov. Rosselló, in his first interview with a media outlet, on local FM radio station Z93, featured Gary Rodríguez, a former representative of the New Progressive Party, as one of the interviewers, a fact that raised many eyebrows. It seems that Mr. Rodríguez’s name has also appeared on an infamous 889-page chat document, where he is described as a figure friendly to the administration. Further complicating matters, Gov. Rosselló’s security personnel blocked Mayra López Mulero, Mr. Maldonado’s attorney and a moderator in the same radio program, from entering the studio during the broadcast. At a press conference yesterday, Gov. Rosselló said that “an internal legal team” analyzed the chat document and found no evidence of wrongdoing; however, he refused to show the results to reporters.

Notwithstanding the demonstrations and disclosure of his behavior, Gov. Rosselló vowed to remain in office—even as that office appears to be in peril: over the past week, two former high-ranking officials in his administration have been indicted on corruption charges, other top officials resigned, and there have been leaks vulgar messages between the Governor and others. Nevertheless, at a press conference yesterday, the Governor noted: “My responsibility, and I feel it is a great responsibility…is to continue working…My message to the people of Puerto Rico is that we will make changes. Of that there is no doubt.”

It is difficult, however, to imagine worse timing for Puerto Rican hopes to emerge from its quasi-chapter 9 municipal bankruptcy and governance oversight by the PROMESA Oversight Board—which is nearing completion of a proposal to restructure terms to end Puerto Rico’s its court-supervised bankruptcy. The events, too, could threaten promised tens of billions of dollars in federal aid for repairs to infrastructure damaged by the hurricane. Indeed, yesterday, White House spokesperson Judd Deere said: “The unfortunate events of the past week in Puerto Rico prove the President’s concerns about mismanagement, politicization, and corruption have been valid.” The Governor, last Saturday, announced that his Chief Financial Officer, Christian Sobrino, and Secretary of State Luis G. Rivera Marín would step down in the wake of their participation in a private discussion liberally laced with profanities to describe an ex-New York City official and the PROMESA Oversight Board. Nevertheless, the Governor, for his part, noted that corruption is an ill that exists in many jurisdictions in the U.S. and that he is seeking to root it out: “I just hope we can have a serious conversation about what we’re doing to battle it, as opposed to just pointing fingers.” What is different is that those asking him to step down are no longer just residents of Pennsylvania Avenue in Washington, D.C., but thousands of Puerto Ricans calling for him to step down. Gov. Rosselló subsequently released a statement saying he would let go members of his administration who participated in the chat on a messaging system used by government officials, and he apologized for his comments, reporting he had been working 18-hour days and releasing tensions when he called former New York City Council Speaker Melissa Mark-Viverito a puta, (whore in Spanish) and told the PROMESA Oversight Board it could “go f**k yourself,” followed by a string of emojis with the middle finger raised.

In the wake of these events, Justice Secretary Wanda Vázquez announced she was appointing a special task force to determine whether any laws were broken regarding the chat and comments made—even as the Governor said he would not resign, with these events coming just days after the FBI had arrested former Puerto Rico Secretary of Education Julia Keleher and five others on charges of steering federal money to unqualified, politically connected contractors. According to officials, the alleged fraud involves $15.5 million worth of federal funding issued between 2017 and 2019: they reported $13 million was spent by Puerto Rico’s Department of Education during the time Ms. Keleher was Secretary and another $2.5 million spent by Ángela Ávila Marrero when she was Director of Puerto Rico’s Health Insurance Administration. Ávila Marrero was charged along with businessmen Fernando Scherrer-Caillet and Alberto Velázquez-Piñol, and education contractors Glenda E. Ponce-Mendoza and Mayra Ponce-Mendoza, who are sisters. Officials did report there was no evidence that former Secretary Keleher or Director Ávila-Marrero had personally benefited from the scheme.

Governance Structural Crisis? Professor Charles Venator-Santiago of the University of Connecticut noted that Gov. Rosselló’s “days appear to be numbered;” however, because the Secretary of State is among those who resigned and the official designated by law to succeed Gov. Rosselló if he were to step down, “there is a potential constitutional crisis in replacing him.” Yesterday, Gov. Rosselló said that his comments in the leaked messages—published by Puerto Rico’s Center for Investigative Journalism—were inappropriate and repeated his apologies for them; however, he claimed that an internal review that he ordered—but which he has refused to release—determined that he had not broken any laws: “I haven’t committed an illegal act, and I haven’t committed a corrupt act;” rather, he said: “I committed improper acts.”

Governance at Risk. It is not just the Governor who is at risk, but the U.S. territory’s self-governance which is now in jeopardy. In the wake of the indictments, members of the House in Washington are discussing the imposition of additional financial controls and transparency measures in block-grant legislation providing roughly $3 billion a year for Puerto Rico’s Medicaid program through 2023, while, in Puerto Rico, many elected leaders are urging the Governor to resign; however, the Governor yesterday said he had decided to remain in place after a period of introspection, citing an array of accomplishments, from lowering the unemployment rate to developing new industries. Reminiscent in some ways with the difficult governance path leading to former U.S. President Richard Nixon’s torturous road to resignation, Gov. Rosselló said he felt a responsibility to continue pursuing his administration’s agenda, and that he was evaluating candidates to fill the openings in his administration and would unveil new initiatives to increase transparency and combat corruption.

R-O-L-A-I-D-S for the PROMESA Oversight Board?

July 8, 2019

Good Morning! In this morning’s eBlog, we consider the governance and ongoing legal challenges with regard to whether ethical challenges when elected and appointed state leaders make decisions that potentially endanger lives: Are there consequences? Then we note the stunning fiscal turnaround in the U.S. territory of Puerto Rico. Maybe the quasi plan of debt resolution is contributing to a remarkable fiscal success.

Waiting for Godot in Puerto Rico? While waiting for the U.S. Supreme Court to hold a hearing on the case in October, the U.S. 1st Circuit Court of Appeals has given the PROMESA Oversight Board relief by extending its terms of appointment, which allows the Board to continue in its role in the debt restructuring process and to impose budgets on the U.S. territory’s elected government—an extension which appears to have discouraged the Senate acting this month on the appointments made by President Trump, since the Supreme Court is not expected to consider the case until at least October, whereas the President’s  request was to confirm the current members to serve their term, which expires on August 30. Javier Ortiz, the Executive Director of and a former member of President Trump’s transition team noted: “It is up to the Senate to decide whether it is prudent to continue with the confirmation process or wait for the Supreme Court to decide. It would be important for the Senate to be ready to act regardless of the Supreme Court’s decision.” In a brief order the 1st Circuit indicated that it has accepted the Board’s motion to extend the stay until the U.S. Supreme Court reviews the constitutionality of the appointments and whether the decisions made by its members are valid if the unconstitutionality were to be affirmed—written arguments are anticipated by the last week of the month.

In its February 15 decision, the First Circuit declared the appointments of the current Board members were unconstitutional because they are U.S principal officers who should have been appointed by the President and confirmed by the Senate. Six of the seven Board members were appointed by former President Barack Obama based on a list of candidates recommended by Congressional leaders. None was confirmed by the Senate. As it is, the current Board, ergo, will continue unless and until the U.S. Supreme Court rules otherwise. According to Amy Howe in a post on the SCOTUSblog website, by accepting all the petitions for certiorari, the Supreme Court agreed not only to review the constitutionality of the appointments but also whether the board’s decisions since its appointment are valid, which the First Circuit found.