Post Chapter 9 Municipal Bankruptcy Detroit Attempts to Balance Housing versus Revenue Needs

August 29, 2019

Good Morning! In this morning’s eBlog, we consider the physical, fiscal, and governing challenges to post-chapter 9 Detroit, as the Motor City continues to try to balance its revenue needs, but also help families not lose or be forced to abandon their homes.

Under a new program in the city, low-income homeowners can have their delinquent tax bills forgiven under a new program designed to ease the burden for residents struggling to stay in their homes, after the Wayne County Land Bank Authority Board approved an agreement with the Wayne Metropolitan Community Action Agency to coordinate the Quiet Title Exemption Program. Board member, Wayne County Treasurer Eric Sabree, voted against the move while board member Irma Clark-Coleman abstained, with Treasurer Sabree expressing apprehension that the program may be illegal. He said he does not believe judges can erase tax debt, noting, at a special Board meeting; “I think it would be prudent and intelligent to wait for the Attorney General to opine on this matter.”

Land bank staff have said that county lawyers have okayed the program, the goal of which is to offer struggling homeowners a fresh start and to remain in their homes. According to the Treasurer’s Office, nearly 34,000 Wayne County homeowners are on repayment plans. Currently, low-income residents who qualify are relieved of the obligation to pay property taxes—relief easier in Detroit than most municipalities, because the city’s most critical source of revenues is the income tax; however, critics of the yearly property tax exemption application process have argued that many do not realize that the property tax exemption is available and that applying for the exemption is cumbersome. Under the Quiet Title Exemption Program, owners who currently have a property tax exemption would be forgiven for past years on which they have unmet obligations: a family of four qualifies for the tax break if its household income is below $26,104.

Detroit is the only city that qualifies because it is the only one that offers a 100% poverty tax exemption.

Under the program, participants give temporary ownership of their homes to the Wayne County Land Bank, which then would file a court case that would eliminate the debt and return the homes to their owners.It will cost homeowners $500 to file the court case, called a quiet title. Under yesterday’s agreement, there is a provision for input from local boards of review about which properties qualify for the program. In Detroit. (Board of review members are appointed by the City Council.) Board Member Gary Evanko noted: “If the Board of Review adopts a resolution approving the list of properties to go through clean title process indirectly, we’re getting the approval of the governing body and that gives me a lot of confidence.”

The session was convened in an effort to try to get a round of homes ready by the end of this calendar year, which is considered Tax Day. About 100 homes would be included in each round, according to officials. Wayne County Land Bank Executive Director Daniel Rosenbaum said: “We’d like to get started in 2019 to help people who have (property tax exemption) in 2019…We have to talk to our partners and decide if we have time to get this started this fall so that we can finish a round before Tax Day. If yes, we will, and if not, we’ll get started after March board of review meeting in 2020.”

The next step would be for the Wayne Metropolitan Community Action Agency to approve the agreement with the addition of the board of review’s input. The agency had already approved an agreement without the board of review component. The program is considered a stopgap until Lansing lawmakers change the law to allow retroactive property tax exemptions.

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Shelter in the Storm

Jueves, el 29 de Augusto, 2019

Good Morning! In this morning’s eBlog, we consider the physical, fiscal, and Presidential threats to the U.S. Territory of Puerto Rico, which yesterday lashed the island with heavy rains and high winds—but fortunately tropical Storm Dorian spared much of the island; the President did not.

Tropical Storm Dorian slammed into Puerto Rico and the U.S. and British Virgin Islands, testing the region two years after Maria wreaked historic devastation, with maximum sustained winds of 80 miles an hour with even higher gusts, according to the National Hurricane Center, but it spared much of the main island of Puerto Rico; however, it struck Puerto Rico’s islands of Culebra and Vieques, off the eastern coast—albeit not as fiercely as President Trump, who yesterday assailed in a hurricane of tweets that Puerto Rico is one of the “most corrupt places on earth,” even as he defended defending his administration’s disaster relief efforts as Puerto Rico battens down for still another tropical storm, tweeting: “Puerto Rico is one of the most corrupt places on earth. Their political system is broken, and their politicians are either Incompetent or Corrupt. Congress approved Billions of Dollars last time, more than anyplace else has ever gotten, and it is sent to Crooked Pols. No good!” He further tweeted: “And by the way, I’m the best thing that’s ever happened to Puerto Rico!” His tweet hurricane came as Puerto Rican leaders prepared for a direct hit. Late yesterday, the President approved an emergency declaration in order to divert federal assistance to bolster response efforts to the storm. The President added the FEMA would do a “great job” in responding, even as he lashed out that Mayor Carmen Yulín Cruz was “incompetent,” after she said the President should “get out of the way” and let others prepare for storm Dorian.

President Trump’s tweet storm came with a once again inflated claim with regard to the amount of federal assistance the federal government had provided to Puerto Rico in the wake of Hurricane Maria: he asserted that the federal government had provided some $92 billion in aid to the U.S. territory. As of last April, the federal government has provided a small fraction of the President’s claim: FEMA has made available more than $3.7 billion, albeit much of the FEMA assistance appropriated by Congress last year is still stuck in Washington, D.C. While Puerto Rico has been able to use some of the more than $3.7 billion the federal government disbursed through the Federal Emergency Management Agency to finance local government grants during the immediate aftermath of Maria in 2017, most of the funds remain stuck in Washington, D.C. And even the FEMA disaster assistance funds remain threatened: in a letter to acting Homeland Security Secretary Kevin McAleenan, Rep. Lucille Roybal-Allard (D.-Ca.) revealed that the Department of Homeland Security plans to pull $155 million from FEMA’s Disaster Relief Fund to pay for border fencing and facilities along the border with Mexico.

According to National Weather Service meteorologist Roberto García, who is based in San Juan, the territory’s main concern was heavy rainfall, which could cause flooding and landslides, while strong winds were more of a factor for the Puerto Rican islands of Culebra and Vieques.

Gov. Wanda Vázquez, who assumed office earlier this month, at a press conference last night, told residents that the worst of the storm had passed and that it appeared the territory had fared well, including the islands of Culebra and Vieques, adding that the government had been resilient and demonstrated competence in its handling of the storm, describing it as an “extraordinary exercise: the response demonstrated preparation, demonstrated communication among the heads of agencies.”

Puerto Rico’s electrical grid, which had been devastated by Hurricane Maria, thus confronted its most significant challenge since Hurricane Maria. But on the critical front of electricity, José Ortiz, head of the Puerto Rico Electric Power Authority, said the company has an agreement with the American Public Power Association, an organization of utilities, to receive help addressing any problems with the grid: but he said the company has not activated those resources yet, noting that the Puerto Rican island of Culebra has a recently installed backup generator which can provide power to the entire island. Puerto Rico Emergency Management Agency Commissioner Carlos Acevedo said the National Guard was prepared to move food and supplies to affected areas, adding that he had spoken to many of the territory’s mayors or alcaldes, some of whom requested generators, tents, and other equipment; he added that 56 shelters were open across Puerto Rico, and a smattering of residents had begun to show up—and that power and water service largely were functioning normally. Puerto Rico’s ports had been closed, and airlines had canceled most flights. An elevated weather station on Buck Island, just south of St. Thomas, reported a sustained wind of 82 miles an hour and a gust of 111 miles an hour, according to the hurricane center.

Physical & Fiscal Storms in Puerto Rico

August 28, 2019

Good Morning! In this morning’s eBlog, we consider the potential physical and fiscal threats to the U.S. Territory of Puerto Rico, as tropical Storm Dorian is expected to slam the island this afternoon, bringing flooding and potential landslides, but not necessarily prompt FEMA assistance.

While the storm’s wind speeds are not anticipated to approach Category 4, like Hurricane Maria did two years ago, leaving some 2,975 Americans dead, the storm is anticipated to pose serious threats to the island’s fragile and recovering power infrastructure, not to mention flooding: the storm is expected to dump as many as 10 inches of rain in parts of Puerto Rico and the British and US Virgin Islands, according to the National Hurricane Center. After it passes over Puerto Rico, Dorian will be strengthened over warm Atlantic waters; thus, Puerto Rico is bracing for the impact—and all too aware that counting on FEMA would be unwise. The Mayor of Ponce, Mayor Maria “Mayita” Melendez told CNN there are still people with tarps over their homes in the city, which she estimates was hit with $1 billion in damages from Maria. Puerto Rico’s new Governor Wanda Vázquez Garced on Monday declared a state of emergency for the territory and urged people to prepare for the storm, tweeting: “For citizens who do not yet have safe roofs, we will have shelters ready.” The island’s schools are closed today, and about 360 shelters are available with the capacity to shelter up to 48,500; in addition, about 70 hospitals were prepared to handle emergencies. Indeed, the challenge to the territory and its municipios is further exacerbated, as, in the wake of Hurricane Maria, the Department of Housing, the Public Buildings Authority (PBA), the Department of Transportation and Public Works (DTOP, Spanish acronym), the Tren Urbano (Urban Train), and even the University of Puerto Rico keep dozens of facilities closed or waiting for repairs, because they have not been paid their insurance claims, according to an analysis by El Nuevo Día. Some agencies heads said that the wait has been so long that, in some cases, agencies are considering suing insurance companies and in others, insurers have not even made an offer. In the worst cases, the claim was settled for less than half of the insured loss total. Moreover, while, according to official figures, facilities such as the Justice Department in Miramar, schools in Barranquitas and Las Marías, and government centers in Naguabo and Corozal, among others, have yet to reopen since the devastation of Hurricane María; in other places, such as Tren Urbano, stairs and elevators remain out of service and multiple roads lack signs and there still traffic lights to repair—or, as Puerto Rico Housing Secretary Fernando Gil Enseñat noted: “We are seriously evaluating the possibility of suing insurance companies.”

As of last June, data from the Office of the Commissioner of Insurance indicate that agencies, corporations, and municipios had filed 2,290 claims associated with Hurricane María for losses totaling $1.198 billion. Of those, 1,456 claims – or six out of 10 – were closed without insurers paying a cent. Another 711 claims were closed with payments totaling $658 million. According to data from the OCS, in total, home and vehicle owners, businesses and government agencies claimed $8.248 billion from insurers as a result of Hurricane María. In a recent interview, Insurance Commissioner Javier Rivera Ríos said the government is among the list of largest claims. Of the total losses claimed, the government received only 55 percent while businesses received 76 percent and homeowners got 93 percent.

The situation could be more dire for municipios. In Puerto Rico, the Treasury Department Public Insurance Area hires producers to manage the insurance of public agencies and corporations, while municipios hire these professionals directly. Last week, the newspaper, El Nuevo Día, revealed that over the years, partisan political considerations, rather than the expertise to address complex risks, was decisive in the process to hire insurance providers for government agencies—even as sources in the insurance sector argue that agencies have not been able to recover what they lost because of the limited experience and capacity of producers who worked with several government entities.

The island’s Housing Department and Public Housing Administration carries the biggest insurance policy in the government: a policy which covers about $1.7 billion in insured assets—including buildings in the Luis Lloréns Torres housing project with foundations destroyed as a result of the storm, a storm in which virtually all the roofs of the multi-family buildings, are home to thousands of vulnerable Americans, were turned into colanders, with water leaking through walls and electrical pipes. According to one official, the most significant risk to housing could be the tragedy of an unreplaced door, noting: “Not only are the lives of the residents at stake, but the island’s public housing authority—one of the largest in the U.S. could be the most vulnerable in the United States—in part, because the Housing Department has not been able to repair all the damage caused by the 2017 disaster, apparently because of insufficient HUD assistance.

Quien es Encargado? One of the most difficult challenges for Puerto Rico—other than the weather and uneven FEMA response—continues to be who is in charge: is it the new Governor, the PROMESA Oversight Board, or a federal court? U.S. Judge Laura Taylor Swain has reserved her decision with regard to the validity of the statute PL 29-2019, which exempts some municipios from contributing to the “PayGo” public pension system and health care reform. Yesterday, a week after new Governor Wanda Vázquez Garced was sworn in, Judge Swain listened to the proposals presented by Peter Friedman and Martin Bienenstock, lawyers for the Fiscal Agency & Financial Advisory Authority (FAFAA), and the PROMESA Oversight Board, respectively, regarding the lawsuit that FAFAA filed before the forced resignation of former Gov. Ricardo Rosselló Nevares, a suit seeking the repeal of Law 29-2019 and some 23 joint resolutions that allocated funds from budget items corresponding to previous years. Attorney Friedman had a little more than 10 minutes to explain to Judge Swain that the PROMESA Board tried, again, to restrict the government powers when it lacked the authority to do so: the attorney noted: “We have defended Law 29, because it addresses a real problem,” pointing out that if the statute is not implemented, they will have to identify a mechanism to avoid what would be another setback to municipal finances. Mr. Friedman spent a good part of his argument pointing out that PROMESA §204 did not give the Board the power to invalidate a government law, especially if it does not present “a significant inconsistency” with the fiscal plan and the budget, as would be the case of Law 29; he also stressed that under Law 106, FAFAA is not required to charge municipalities an exact amount to pay the pensions of their former employees and that, if the Judge grants the injunction as requested by the Board, such a remedy would have a “broad” scope that would limit the ability to reallocate funds in the budget in the future. Judge Swain, however, did not seem convinced, indicating that she found it “illogical” that under PROMESA, the government would still be allowed to approve laws that defeat the purpose of the federal law.

Mr. Friedman argued that under Law 106, FAFAA is obliged to collect pension contributions from municipalities and that, when Law 29 was signed into law, the government changed the payment of pensions as debt. This acts as a kind of guarantee for the payment to retirees by converting the payment of pensions into a direct obligation of the central government and then, eliminating municipal contributions. Above all, according to attorney Bienenstock, the Board has the authority to request the repeal of state law if it goes against the fiscal plan and the budget, because the powers conferred in the PROMESA statute are equal to or higher than those of the Oversight Board. In what appeared from the PROMESA Board’s previous position, Mr. Bienenstock argued that there is “a myth” surrounding the powers of the fiscal agency and argued that this erroneous understanding comes from a letter Pierluisi sent seeking to explain PROMESA, adding: “He just got it wrong,” referring to former Gov. Pierluisi, who helped draft PROMESA in Congress and, until a few weeks ago was part of the law firm O’Neill & Borges, which collaborates with Bienenstock and the law firm Proskauer Rose advising the PROMESA Board.

Not Chapter 9. Meanwhile, Judge Taylor Swain has rejected a motion by the Governor, indicating her sympathy for the Oversight Board’s arguments that it has the authority to overrule local authorities on financial matters, having released her opinion and order last week in the adversary proceeding in Puerto Rico’s Title III bankruptcy on the PROMESA Board’s filing in early July in the U.S. District Court for Puerto Rico against Gov. Ricardo Rosselló (now substituted with the new Governor Wanda Vázquez Garced) and uerto Rico’s Fiscal Agency and Financial Advisory Authority. In its suit, the Board focused on what it sees as three illegal practices or laws of the former Rosselló administration: first, it objected to Law 29, “Law to Reduce the Administrative Burden of Municipalities,” which ends the municipalities’ responsibility to reimburse the central Puerto Rico government for the pension and health care costs of their retirees, which former Gov. Rosselló signed into law last May. Second, the Board challenged two dozen resolutions appropriating funds for expenditures which were not in the PROMESA Board-approved budget. Third, the Board called for the judge to declare the Governor’s practice of failing to provide laws for Board financial review, complete with cost estimates, within seven days, to be illegal.

In her opinion, Judge Swain indicated her inclination to support the Board on all eight counts. For instance, in the motion to dismiss the suit, the territory had said it had fulfilled the requirements of the PROMESA Act to have an expert government body provide a certification of Law 29’s compliance with the fiscal plan. However, Judge wrote: “Defendants explicitly argue that delivery of any sort of estimate on official agency letterhead, no matter how conclusory or incomplete, with any documents labeled a certification and delivered by the governor attesting that a piece of legislation has no significant impact on a fiscal plan, is effective to insulate the legislation from any challenge by the Oversight Board, whether or not the content of the documents is complete or plausible…Defendants’ position elevates form over substance and is unavailing under the circumstances pleaded in the complaint; it is not consistent with the letter, spirit, or legislative context of the statutory provisions upon which defendants rely.” Judge Swain wrote that the Board has pleaded facts that there is a financial discrepancy between Law 29 and the most recently approved fiscal plan from hundreds of millions of dollars to over $2 billion. The PROMESA Board said that Law 29 and dozens of legislative joint resolutions allocating money from earlier years’ budgets that had not been spent were contrary to PROMESA Section 204(c)(2) that bars the legislature from “reprogramming” funds without prior Board approval, while the defendants had argued that the PROMESA section did not give the Board the right to nullify already enacted legislation and that Law 29 did not “reprogram” funds, but rather just excused local governments from contributing to pensions and health systems. Judge Swain also rejected the defendants’ claim that the Board’s control on reprogramming was only prospective, writing that PROMESA allowed it to look backwards as well; she rejected that Law 29 could not be deemed a reprogramming, saying that the lack of funds to the central government would have a major financial impact on the central government.

August 26, 2019

Good Morning! In this morning’s eBlog, we consider the potential physical and fiscal threats to the City of Flint, Michigan in the wake of its ongoing health and safety threats from the lead in its public water, before turning public pension challenges for Puerto Rico stemming from the challenge of the PROMESA Oversight Board to Puerto Rico’s health care and retirement laws—all potentially further challenged as the hurricane season appears headed Puerto Rico’s way.  

Not in Like Flint. For years, Flint, Michigan has ranked among the nation’s poorest cities: according to recent Census data, the city has a median per capita income of about $16,500, about half the state median. Sixty percent of the city’s children live in poverty. Notwithstanding the municipality’s cratered real estate values, non-homeowner Flintites devote roughly half their income on rent, the highest ratio in the nation. Even as its revenue is blighted; it has a real property blight problem: there are some 20,000 un-maintained properties—properties which do not add to the property tax base, but impose steep public safety costs—as can be perceived due to the city’s growing opioid addiction crisis. As if the cost of public safety were not in enough stress, the city’s violence rates have ranked among the nation’s highest: In 2010 and 2012 Flint suffered nearly 70 homicides; the 2017 tally of 37 was down from 2016 but still ranked as the seventh highest murder rate among U.S.cities with populations over 50,000. Now, adding to the public safety and fiscal challenges, the State of Michigan has found Flint has failed to provide adequate information to the state regarding testing for lead and copper in drinking water, putting it in violation of the Safe Drinking Water Act, according to a notice the state sent Flint officials last week. Parents of children attending Flint schools last week called the condition of school buildings “deplorable,” as they demanded action from the district at a school board meeting.

The city, which has both an income and property tax, demerged from state oversight a year ago last April, after operating under state-led financial receivership from April 30, 2015 to April 10, 2018, which saw the city under an Emergency Manager as the State of Michigan had declared a state of local government financial emergency. The Receivership Transition Advisory Board had the authority to override Council decisions related to financial matters.

Now the city’s schools have been feeling heat from both the weather and the physical deterioration of the buildings. At last week’s Board of Education session, one parent demanded to know how Flint Junior High had actually received a passing grade for its inspection, adding: “I just wanted to let you know you dropped the ball…I appreciate you trying to stand up and remedy these conditions, but it was botched.” Nevertheless, as one parent noted: “There was no clear path on how you were going to correct these discrepancies before the students were allowed to attend,” adding his apprehensions with regard to health conditions and staffing concerns, citing unsanitary restrooms and a need for more social workers and teachers: “Right now, you have the opportunity to change the outlook and the attitude of the city, because we’ve got a lot of parents and students looking outside of the city to grasp and get hold of the better education when they should be looking into the city.”

But the overriding public and fiscal health and safety challenge continues to be water contamination: the Michigan Department of the Environment on August 16th, reported that Flint officials failed to demonstrate that the City had collected enough water samples from “Tier 1” sites—homes with lead service lines—and fell 25 samples short of its 60 sample benchmark, with the letter coming nearly four years after the State of Michigan acknowledged Flint’s drinking water was contaminated with lead. The State has given Flint until the end of this month to respond, and until September 16 to confirm the pipelines it tested were in fact lead service lines. Flint Public Works Director Robert Bincsik accused the state of attempting “to make the city look negligent” with its correspondence, noting that testing was delayed by state directives last March on new sampling methods, noting that while the city is well past the June 30 deadline, it is closing in on meeting the 60 sample benchmark. George Krisztian, the Michigan Assistant Director for Drinking Water and Environmental Health, noted Flint has until September 16th to confirm the pipelines it tested were in fact lead service lines—with his letter coming nearly four years after the State of Michigan acknowledged Flint’s drinking water was contaminated with lead and set off a public health crisis: for more than two years, testing has found the city’s drinking water has had lead levels below the federal action level of 15 parts per billion, but has advised residents against drinking the water until all lead service lines are replaced.

The City is currently in the process of replacing all of its identified 18,300 lead or galvanized steel water lines; as of last December, it had replaced nearly 7,000. It is also bearing the costs of the state mandate to conduct testing every six months of drinking water from at least 60 homes with lead service lines, and advised by the State to use a predictive model to determine homes which might have lead service lines, take water samples from those homes, and then excavate to confirm the home used lead service lines. At least on the human health and public safety front, there is some good news: of the 35 verified samples analyzed by the state, about 90% fell at or below 3 parts per billion for lead, significantly below the federal action of level of 15 ppb and even the state’s new lower threshold of 12 ppb.

The Challenge of Governance & U.S. Territories. President Trump, in the wake of his failed effort to purchase Greenland, has been joking recently about trading Puerto Rico for Greenland. But some Puerto Ricans are the ones who are laughing: many report they would be happy with the trade. A former official told New York Times reporters he heard President Trump joke in a meeting last year about trading Puerto Rico for Greenland in order to get rid of the U.S. territory. But for the U.S. territory, the question of governance is no joke. Now, a suit filed by the PROMESA Oversight Board over a new pension and healthcare funding law will move forward after U.S. District Court Judge Laura Taylor Swain at the end of last week denied Puerto Rico’s motion to dismiss the case. The litigation, which marked the latest skirmish in an ongoing battle between the Board and the government of Puerto Rico over spending priorities, targets a law which transfers hundreds of millions of dollars in municipal pension and healthcare costs to the bankrupt Puerto Rico government. Judge Taylor Swain rejected Puerto Rico’s response that the lawsuit cites faulty claims based on the 2016 federal PROMESA Act, which created the unelected Board and a quasi-chapter 9 municipal  bankruptcy-like process to restructure about $120 billion of Puerto Rico’s debt and pension obligations. Judge Swain ordered the lawsuit to proceed. Here, a portion of the Puerto Rico FY2020 budget passed by Puerto Rico legislature included funding for local pensions and health insurance costs to aid cash-strapped municipalities, despite warnings from the Board that so-called Law 29, which enabled the move, is inconsistent with its fiscal plan. The Board’s lawsuit seeks to void the law, contending it would impair the PROMESA Act by diverting hundreds of millions of dollars Puerto Rico’s government could otherwise use to spur economic growth. Law 29, which was signed into law last May by then-Governor Ricardo Rosselló, will add $311 million in additional government spending in FY2020, and $1.7 billion through FY2024, according to the lawsuit, in which the PROMESA Board sued former Gov. Rosselló and Puerto Rico’s fiscal agency in July. Now, in the wake of former Gov. Rosselló’s resignation, the challenge will fall to new Gov. Wanda Vazquez, Puerto Rico’s former Justice Secretary, who, in the wake of a meeting she held last week with a group of alcaldes or mayors, vowed she will continue to defend the law’s validity, according to Carlos Molina, President of the Mayors Federation.

The new Governor also met with members of PROMESA Board to discuss various fiscal topics, such as Act 29, the public debt’s restructuring and the Puerto Rico Electric Power Authority (PREPA), including Chairman José B. Carrión III, who noted: “There is an openness to talk and look for an alternative that meets the need for fiscal responsibility and the concern of the Governor.”

The Health of Puerto Rico. In a ruling last Thursday, U.S. District Judge Laura Taylor Swain, who is overseeing the in-court proceedings to restructure Puerto Rico’s debt, allowed the Board to continue demanding that municipalities pay into the Health Insurance Administration (ASES by its Spanish acronym) and the pay-as-you-go pension system; former Gov. Ricardo Rosselló had signed Act 29 for the central government to cover those payments, reducing municipalities’ financial burden, to the tune of nearly $320 million the current fiscal year.

Local Governance in Puerto Rico. In the wake of meeting with the new Governor last week, Joe Román, the President of the Associated Mayors of Puerto Rico, which comprises the minority Popular Democratic Party’s (PDP) municipal heads, said the legislation “was created by both the Mayors Federation and the Mayors Association, and the Financial Oversight and Management Board agrees with one part of Act 29 but they don’t agree with the health insurance part and this matter is in court.” Loíza Mayor Julia Nazario said the Governor would seek, along with all the mayors, options to pitch the board, noting: “The commitment is that we will be with [Gov. Vázquez], bringing options, because she clearly let us know that the law has little chance of sustaining itself.” Notwithstanding the governance olive branch, Senor Román warned that the mayors would give Gov. Vázquez “one month to present the results,” adding: “We focused on Act 29 [in the meeting with the Governor], because it’s the sustenance of the municipal governments. It’s important that it is addressed immediately and that this uncertainty does not continue…about what will happen with the municipal government funds…. This way, it will bring calm and stability to the citizenry, who are the ones that receive the essential services directly…In continuing our working relationship with Governor Wanda Vázquez Garced, today we met to discuss items of our ongoing fiscal agenda. We are pleased to have had this, our second meeting with her, as it allows us to continue moving forward towards the objectives set forth in PROMESA to achieve financial stability, fiscal responsibility and renewed access to financial markets for the benefit of the people of Puerto Rico.

August 23, 2019

Good Morning! In this morning’s eBlog, we consider the ongoing governance challenges of Puerto Rico.

Puerto Rico’s new Governor, Gov. Wanda Vázquez Garced, on Wednesday named Puerto Rico Senator Zoé Laboy to serve as her Chief of Staff, and selected Elí Díaz Atienza to serve as the Governor’s representative to the PROMESA Oversight Board, stating: “I’m proud to have Zoé Laboy and Elí Díaz Atienza as part of our team: they are proven professionals who, like me, want the best for Puerto Rico.”  Under Puerto Rico’s quasi state form of government, the Governor Chief of Staff has oversight of all departments except for the Office of Budget and Management and the Planning Board. Sen. Laboy is a member of the pro-statehood party, as is the Governor, and served as the Director of the Puerto Rico Department of Corrections and Rehabilitation . She was elected to the Senate two years ago. After the former Governor’s confidential musings went virile, she was Puerto Rico’s first National Progressive Party Senator to call for his resignation. According to Primera Hora, she denounced what she perceived in the former Governor’s as attacks on women and minorities. In addition, she expressed concern about former Governor Rosselló’s release of confidential information to parties outside the government.

The day after she became Governor, National Progressive Party legislative leaders convened a news conference indicating their support for Resident Commissioner Jenniffer Gonzalez Colón to replace her: they enlisted most of their fellow NPP legislators to sign a statement in favor of Gonzalez Colón. Ms. Laboy worked as the head of the Puerto Rico Department of Correction and Rehabilitation under Gov. Pedro Rosselló González, from early 2005 to early 2009, and, on the Puerto Rico Senate web site, she describes herself as a “defender of vulnerable populations, young people, and women.” In the senate she chairs the Social and Economic Revitalization Committee, and she served as a member of nine other committees. In the Senate, she fought to ban therapies aimed at converting people’s sexual orientation; she also worked against allowing employers to use their religious beliefs in hiring, which some saw as an opening to discriminate against gays.

For the critical role of dealing with the PROMESA Oversight Board, the Governor named Díaz Atienza to be the new non-voting Governor’s representative, replacing Christian Sobrino Vega, who also resigned due to comments he made in the chats. Mr. Díaz Atienza has served as the Executive Director of the Puerto Rico Aqueduct and Sewer Association since February 2017; now he will retain this position but will resign a position on the board of the Puerto Rico Electric Power Authority. That promises to be a challenge, as the Board is neither representative of the people of Puerto Rico, and, unlike an Emergency Manager selected via a chapter 9 municipal bankruptcy, the Board here is represented in significant part of owners of high paying Puerto Rico tax-exempt municipal bonds.

Post Municipal Bankruptcy Challenge in the Motor City & Puerto Rico

August 16, 2019

Good Morning! In this morning’s eBlog, we consider the ongoing governance challenges as Detroit continues to recover from its chapter 9 municipal bankruptcy, as we consider the role of surrounding Wayne County; then we head for the sunny Caribbean to assess the challenge of succession in the wake of an ousted Governor.

Forgiving Delinquency? Wayne County, Michigan is considering forgiving the delinquent tax bills of low income Detroit homeowners under a new program; however, that consideration is complicated by the County’s chief debt collector, who, last week, said not only that he was opposed to the idea, but also that it might be illegal. The new program, the Quiet Title Exemption Program, would have low-income Detroiters give temporary ownership of their homes to the Wayne County Land Bank, which, in turn, would then file a court case to erase the debt and return the homes to their owners. However, a key obstacle is whether such a practice would be legal: the land bank’s staff members said they have an opinion from Wayne County lawyers who blessed the idea; however, County Treasurer and Land Bank Chair Eric Sabree noted he does not believe judges can erase the debt. At a land bank board meeting last week, Treasurer Sabree reported he had consulted with attorneys, including those who work with land banks and other experts, noting: “Not one of them have any support for something like this: ‘The judge cannot extinguish taxes.’” The goal is to help struggling owners keep their homes, giving them a “fresh start,” according to Wayne County Land Bank Executive Director Daniel Rosenbaum. The good gnus, this year, is that foreclosures are down 5%; however, close to 34,000 properties are on repayment plans, according to the Treasurer’s office. Low-income Detroiters who qualify do not have to pay property taxes; however, unsurprisingly, critics have argued the yearly application process for the property tax exemption is cumbersome and many Detroiters apparently are unaware of the option and opportunity. To qualify, a household income of a family of four must fall below $26,104. Detroit would be the only city in the Wayne County to qualify currently, because it is alone in giving a 100% poverty tax exemption. 

Under the proposal, owners who currently have a tax exemption, would be forgiven for past years in which they have obligations, with Wayne County accepting that they would have qualified in the past. If approved this year, the land bank hopes to start with about 80-90 homes, which officials estimated would mean erasing approximately $150,000 in debt: it would cost owners $500 to file to quiet title. The land bank Board last Thursday tabled the proposal; the Board hopes to call a special meeting in the next few weeks for further discussion. Chair Sabree had other concerns: he has argued that other taxing jurisdictions, such as the Detroit Public School District and library, were not consulted. In addition, he questioned whether Wayne County would be required to provide refunds to low-income owners who had the exemption, but whowere able to pay their past due tax bills. 

For his part, County Executive Warren Evans is supportive: he noted: “We think it’s a good avenue to help some residents break the poverty cycle and keep them in their homes.” Director Rosenbaum added that this is a temporary program focused on assisting homeowners until the Michigan Legislature changes the law to allow retroactive tax exemptions—albeit, as the proposal has stalled in recent years, it is unclear whether this might not be an impossible dream; moreover, the City of Detroit, a key player, has yet to weigh in: a spokesperson for Mayor Mike Duggan said they were reviewing the Quiet Title Exemption Program and a possible retroactive tax exemption, with office spokesperson John Roach noting: “We are committed to reducing the financial burden on these individuals in order to keep them in their homes and are working hard to develop the best solution.” Most of the Census Tracts in Detroit, especially those with lower life expectancies, have more than 28 percent of the population living at or below the poverty line. Specifically, there are three census tracts in Detroit where the average life expectancy is between 62 and 65 and the percentage of the population living below the poverty line ranges from about 29-100 percent.

The Challenge of Succession. According to Puerto Rican folk history, Pateco buried the dead from Hurricane San Ciriaco, which savaged Puerto Rico one hundred twenty years ago. At the beginning of this month, Teofilo Torres, dressed as a gravedigger, said: “I already buried Ricky Rosselló…This is the coffin for Wanda,” referring to ousted Gov. Ricardo Rosselló. Former Justice Secretary Wanda Vázquez was, theoretically, next in line, but then, at the end of July, as we have noted, the former Governor nominated Pedro Pierluisi. The removal of the former Governor could prove cathartic, but Puerto Rico confronts both governance and economic challenges: it has suffered from years of economic mismanagement, a bloated public sector, and a 44.9% poverty level—more than thrice the national average. Moreover, the inadequate and discriminatory federal response to Hurricane Maria exacerbated its fiscal and physical challenges: it sparked sparking mass emigration to the mainland, leaving an older and poorer U.S. population behind. The government debt, which exceeds $120billion, including pension liabilities, is suffocating. The PROMESA Oversight Board has completed two deals to restructure some of the debt this year.

Now the ouster of former Governor Rosselló’s departure has focused attention on one of Puerto Rico’s most significant problems: corruption, which has been endemic for generations. Politicians on both sides offer sweetheart deals to their friends in business, which in turn generates the money needed to get elected. Or, as economist José Villamil put it: “The political system basically created an institutional infrastructure that promotes behavior which will lead to corruption sooner or later.”

Last month, the FBI arrested six individuals, including two members of the Rosselló administration, for directing $15.5m to favored businessmen. Douglas Leff, head of the San Juan division of the FBI, told Radio Isla: “It’s going to be a very busy summer for us.” A week later the Centre of Investigative Journalism, which originally published the leaked messages that led to the Governor’s downfall, reported that three of his associates, Elías Sánchez, Carlos Bermúdez, and Edwin Miranda, had benefited in various ways from their friendship with the former Governor. All three deny wrongdoing.

Now, with the swearing-in of its third governor in two weeks, Puerto Rico has now been tasked with learning to move forward in the aftermath of #RickyLeaks, the July 13th publication of 889 pages worth of text by the Puerto Rico Center for Investigative Journalism, in which then-governor Ricardo Rosselló mocked the island, Puerto Rican celebrities, and fellow politicians—leaks which led to twelve days of protest and the former Governor’s resignation, albeit, as Archbishop Roberto Octavio González Nieves of San Juan noted: “What pressured Governor Rosselló to step down was the result of a build-up of many years of frustration, difficulties, especially corruption within the government…The government was out of touch with the real needs of the people, especially after Hurricane Maria.” he said, describing the leaked chats as the detonator that set off an explosion of frustration, anger and marches. The former Governor’s administration at the time included Secretary of State of Puerto Rico Pedro Pierluisi, who assumed the role of Governor from August 2 until the territory’s Supreme Court ruled determined his being sworn into office unconstitutional on August 7. As a result, the former Secretary of Justice, Wanda Vázquez, was instituted as Governor immediately following Mr. Pierluisi’s resignation on that same day. 

The governing challenge now will be to work to dismantle the system of patronage which has built up over years. Apart from the practice of favoring allies with government contracts, politicians have a habit of replacing officials across the government machinery with their own cronies every time there is a transfer of power. That leads a loss of expertise and experience each time. It will be further complicated by the query on the streets of San Juan: ‘Quien es encargado?” [Who is in charge?]. Is it the newly elected Governor, the 1st U.S. Circuit Court of Appeals, the PROMESA Oversight Board—which, early last month filed an “adversary proceeding” over unauthorized spending and a recently adopted law, Act 29, allowing the municipalities to not make retiree health care and pension contributions. When he signed Act 29, Gov. Ricardo Rosselló said the central government would make these payments for the municipalities. He said the law was a way to relieve financial pressure on the municipal governments.

Puerto Rico Oversight Board lawyer Martin Bienenstock said a law’s passage aimed at helping municipios contravened the PROMESDA Board’s authority on debt—in response to which, last month, through his legal representative, former Gov. Rosselló filed a motion to dismiss the Board’s case. Peter Friedman, the lawyer representing the side of the Governor and the other defendant, the Puerto Rico Fiscal Agency and Financial Advisory Authority, described the situation as one which has “been a crazy two weeks.” Under pressure from members of his party and from demonstrators, in the last few weeks former Gov. Rosselló resigned and had Pedro Pierluisi sworn in as his replacement; however, a few days later, the Puerto Rico Supreme Court declared Mr. Pierluisi’s selection invalid; since then the former Governor’s Secretary of Justice, Wanda Vázquez Garced, has become Governor.

Meanwhile, in response to the unrest in Puerto Rico’s government, Judge Laura Taylor Swain agreed to postpone the motion-to-dismiss hearing twice; however, she rejected a motion to do so a third time. Mr. Friedman, in a filing with the court last week seeking a postponement of the hearing, noted: “It is vital that Governor Vázquez be permitted to provide her guidance on Act 29 and the other aspects of the litigation regarding alleged patterns and practices of the office of the governor of Puerto Rico…Defendants have serious concerns that proceeding with the hearing on August 15 does not provide them with an appropriate amount of time to fully discuss and evaluate the significant legal and public policy issues at stake here, formulate their positions of them, and engage with the Oversight Board if they believe it is appropriate to do so.” However, Judge Swain issued a ruling that said despite the need for Vázquez Garced to review the case, it was best to avoid further delays in the case.

Meanwhile, last Thursday, PROMESA Board Chairman José Carríon and Executive Director Natalie Jaresko met with the new Governor in what appeared to be an effort to establish better relations.

Then, in the courtroom at the end of last week, the PROMESA Board’s attorney, Martin Bienenstock, argued over the issue with regard to whether sections of the Puerto Rico Oversight, Management, and Economic Stability Act authorized the local government’s actions and the Board’s attempt to overturn them: the issue involved whether the Board was seeking to invoke an an overly broad interpretation of section 204 of the PROMESA statute, which bars the local government from issuing or otherwise modifying debt without the Oversight Board’s authorization, to nullify Act 29. He also argued that the Board’s use of section 204 was inappropriate, because it allows local budgetary officials to “certify” laws as long as they are not “significantly” inconsistent with the fiscal plan. Writer Eric Friedman is of the view that the Board lacks the statutory right to challenge Act 29; however, Judge Swain pointed to a PROMESA section which she said prohibited the local government from doing anything inconsistent with a fiscal plan, asking, rhetorically, if the Governor “could blow an enormous hole” in the budget as long as he or she certified it to be consistent with the fiscal plan? Attorney Bienenstock said Law 106 from 2017 had, among other things, directed the municipal governments to send pension and retiree health contributions to the central government so the central government would use them for those purposes. (Former Governor Rosselló signed Act 29 this summer, amending Law 29 on the issue of the municipal transfers. Effectively, in Act 29, the central government had altered a debt the local governments had owed to it, Mr. Bienenstock said. PROMESA section 2017 bars the local government from altering debt, he added. The PROMESA Board has challenged two dozen resolutions appropriating funds for expenditures not in the board-approved budget. Mr. Bienenstock said that PROMESA section 204(c)(2) was aimed at preventing the local government from “reprogramming” money without first obtaining PROMESA Board approval, adding that through PROMESA section 205(a), the Board had authority to address aspects of government policy beyond the issue of their consistency with the fiscal plan.

Judge Swain said she would take the lawyers’ arguments under advisement and would later release her decision.

Betting on Atlantic City’s Fiscal Future & Righting the Fiscal Ship in Puerto Rico!

August 16, 2019

Good Morning! In this morning’s eBlog, we consider the challenge in Atlantic City, New Jersey of property taxes before veering south to assess the improving governance and fiscal situation in the U.S. Territory of Puerto Rico with new Governor Wanda Vázquez-Garced settling in and returning some stability.

Betting on the Up & Up. A year after two new casinos, the Hard Rock and Ocean, opened in Atlantic City, the city’s gambling and sports betting revenue is up nearly 8%. According to figures released by the New Jersey Division of Gaming Enforcement Wednesday, the casinos took in $323 million, an increase of 7.8% from one year ago—the date when the city’s two newest casinos began their first full month of operation. The city’s biggest casino, the Borgata, took in nearly $88 million in casino and sports betting revenue, the most it ever had reported in a single month, notching an increase of nearly 15% from a year earlier—and coming during the first full month of operation of a $12 million sports betting and entertainment project the casino opened. The nearby Ocean Casino Resort took in $20.1 million from gamblers last month, nearly a 20% increase from last year, when it was in its first month of operation. Indeed, the casino’s chief marketing officer noted that last month marked the best month in the casino’s history for gross and net slot revenue and hotel occupancy, including the two-plus years it operated as Revel. Together, the figures demonstrated the recovery of Atlantic City’s casino industry—just three years after the Hard Rock’s predecessor, the seemingly aptly named Trump Taj Mahal, shut down, marking the fifth of the 12 Atlantic City casinos that operated in 2014 to go out of business. The re-openings of Taj Mahal as Hard Rock and Revel as Ocean have restored several thousand jobs and boosted casino revenue, even as profits collectively fall for the resort, which now has more competitors than it did just a few years ago.

Nevertheless, as can be the case with any game of risk, the good gnus could be impacted by an obscure provision buried within the casino PILOT (payment in lieu of taxes) law—under which, if Atlantic City’s casinos eclipse $3 billion in total gaming revenue this year, which they are projected to do, the city would receive about $4 million to $5 million less from the industry in 2020—because of a crediting mechanism built into the 2016 legislation: the city would lose about $14 million to $15 million in investment alternative tax funds (IATs), according to Department of Community Affairs spokesperson Lisa Ryan, but that loss would be offset by the gain of about $10 million in additional PILOT funds the city would receive. As we have previously noted, the decade-long PILOT program was intended to stabilize Atlantic City’s finances by temporarily eliminating the volatility of costly tax appeals from the casinos and providing a predictable revenue stream for the city, the county and the school district based on annual gaming revenue; however, the Department, which, under the terms of the quasi-chapter 09 state takeover of the city by the state in 2016, provided that even if PILOT payments were to increase because gaming revenue reached the next fiscal benchmark, the city would experience a net loss because of a crediting concept in the law that holds casino tax payments at 2015 levels: the credit is to be financed with funds from the IATS which the city is statutorily obligated to use for municipal debt service. Last year, Atlantic City received nearly $9.7 million in IAT funds; the FY2019 municipal budget, which has not been formally adopted, anticipates more than $13.8 million from IAT funds; however, if the casino industry meets the $3 billion gaming revenue threshold outlined in the PILOT, Atlantic City will not receive any IAT funds in 2020 or 2021.Ms. Ryan noted: “We are aware of the IAT issue and working with the city, particularly its finance staff, to adapt to its near and long-term impact on the city’s finances, which, as it stands now, is negative in the short-term, but positive 2022 and beyond.”

PILOT bill sponsor Assemblyman Vince Mazzeo (D-Atlantic) said Golden Nugget Atlantic City and Resorts Casino Hotel would not sign on to the voluntary PILOT without the credit provision in the bill responsible for the two-year moratorium on IAT payments to the city, adding that, in his view, the PILOT law did its job, stabilizing Atlantic City government and finances: “We wouldn’t have seen the turnaround with $3 billion in revenue without it,” Mazzeo said. “But I have always said it isn’t perfect. We have a hiccup here, but in 2022 and on the money will be restored.”

Atlantic City Council President Marty Small noted he was aware of the provision in the PILOT legislation and it was one of the reasons he testified last year to the State Legislature about Atlantic City being able to recoup a percentage of sports betting tax revenues. (Governor Phil Murphy, last October, signed legislation providing that host municipalities of sports betting facilities would receive 1.25% of taxes from sports wagering revenue; however, the legislation directed such revenues to go to the Casino Reinvestment Development Authority—not the city. The PILOT law outlines tiers for total gaming revenue generated by the casino industry and resulting pilot or payments in lieu of taxes. Last year, the casino industry reported $2.86 billion in revenue and the PILOT responsibility was $132.6 million: Atlantic City received $70.2 million of that total, while Atlantic County was paid $15.6 million, and the Atlantic City school district received $44.2 million. Two new casino properties and legalized sports betting created additional gaming revenue streams in the second half of 2018. With a full year of nine operational casino properties and sports wagering revenue, the industry is on pace to eclipse the $3 billion threshold in the PILOT bill. The resulting PILOT amount for 2019 is estimated to be roughly $152.6 million. From 2022 to 2026, the final years of the PILOT, the crediting mechanism lapses and Atlantic City would again receive its portion of IAT funds. According to the DCA budget document, the city would receive annual IAT funding of $39.6 million during those years.

The risk in gaming—which, after all, is about betting on risk—could come from internet gaming—which, after all, does not require a physical presence; last year, internet gambling brought in more than $39 million, an increase of nearly 52% from last year. Among internet-only entities, Resorts Digital took in $10.5 million in July, up nearly 169% from a year ago, and Caesars Interactive-NJ won just over $5 million, up nearly 35%. So far this year, the casinos have taken in $1.84 billion, an increase of more than 18% from the same period last year.

Property taxes revenues have risen this year substantially, averaging just over $676.50 on a $150,000 home — even though the city, county and school district all have announced stable budgets. Nevertheless, a loss of property value, and the end of millions of dollars a year in tax-appeal refund credits from the county to the city have conspired to create the situation, according to Atlantic County Tax Administrator Margaret M. Schott—a finding which she noted came as a surprise. The biggest increase is in county taxes, up 20 cents per $100 valuation, or $373.50 on a modest $150,000 home; and it is happening notwithstanding that the city’s share of the county tax burden is decreasing. A loss of $358 million in equalized value from successful tax appeals and sales data adjustments brought the city’s bill for county taxes down to $11.8 million this year, from $13 million in 2018.

A spokesperson for the state Department of Community Affairs, which continues to oversee the city’s finances, last Friday noted it is calling for a joint task force to coordinate and reduce taxes, inviting Atlantic County Executive Dennis Levinson, New Jersey Department of Education Commissioner Lamont Repollet, and the Atlantic City Board of Education to join DCA and city elected officials in the effort. The spokesperson said the municipal tax rate is the only one it has control over, and that the municipal portion of property taxes did not go up. DCA oversight decreased the municipal tax rate by 11.4 percent in 2017, and kept it flat in 2018 and 2019.

Taking Charge of Governance. Puerto Rico’s new Governor Wanda Vázquez finally appeared to be overcoming some of the challenges to her authority this week with key members of the majority New Progressive Party expressing support—support which may grant an individual who has who has never held elected office space in which to focus on the U.S. territory’s lagging efforts to recover from the devastation of Hurricane Maria in 2017, as well as the grinding economic slump and debt crisis which has led to demands for austerity from the PROMESA Oversight Board. On Wednesday, Senate President Thomas Rivera Schatz, who had been viewed as her chief challenger, issued a statement on Facebook backing her and saying: “It’s up to all of us to work for Puerto Rico…The governor will have our collaboration, and I have expressed that personally.”  In an 80-page report the Board released Wednesday, the Board urged the federal government to provide more help to the island’s people and businesses, and asked: 1) the federal government for a long-term funding solution for Medicaid on the island, 2) to change a law to make air cargo cheaper, 3) to expand a child tax credit to Puerto Rico, and 4) to increase federal statistics collection there. Puerto Rico Oversight Board Executive Director Natalie Jaresko touted the progress the board made in restructuring debt in fiscal year 2019.