A Plan of Debt Resolution for Puerto Rico?

September 30, 2019

Good Morning! In this morning’s eBlog, we consider the slow, but seemingly steady progress for the U.S. Territory of Puerto Rico to react and respond to natural disaster threats and to await the proposed quasi plan of debt adjustment from the PROMESA Board.

A Puerto Rico Plan for Debt Restructurings.  Long before Hurricane Maria devastated the U.S. territory of Puerto Rico in 2017, the territory was en route to bankruptcy—yet caught in a fiscal/governance twilight zone, because it is neither a state (states may not file for bankruptcy) nor a municipality (which may, if in one the our states which has specially allowed for such chapter 9 filings.) By 2017, Puerto Rico had amassed a debt of more than $70 billion; it had accumulated billions in more in uncovered pension obligations, and it was subject to faster migration, with hundreds of thousands, including some of its best graduating students, who were leaving for New York and Florida—leaving behind a higher percentage of Americans in poverty, and aging. In response, Congress passed the PROMESA Act, a quasi chapter 9-like process for the U.S. territory to recover. The act created a PROMESA Board—appointed by Congress—to oversee the development and implementation of a quasi-plan of adjustment—something which that Board presented last Friday, when it unveiled a plan intended to reverse that trend and put Puerto Rico on firm fiscal footing for the first time in decades.

The plan proposes a restructuring of some $35 billion in debt held by the territory, and the more than $50 billion in public pension liabilities—a plan not dissimilar in some ways with regard to pensions to the plans of debt adjustment in Detroit and Central Falls, Rhode Island. The plan also proposes that municipal bondholders take steep discounts. Should this quasi plan of debt adjustment gain approval from the court approval, it would reduce the amount Puerto Rico devotes to servicing its debt by about 30 percent to 9 percent of Puerto Rico’s annual revenue.

PROMESA Board Chairman José Carrión said: “Today we have taken a big step to put bankruptcy behind us and start to envision what Puerto Rico’s future looks like under fiscal stability and economic sustainability…Two years after the most severe Hurricane in more than 100 years hit Puerto Rico, after more than a decade of economic decline and fiscal disarray, after tens of thousands of Puerto Ricans left their island to find prosperity elsewhere, we have now reached a turning point.”

Under the proposed fiscal turnaround plan, Puerto Rico’s General Obligation bonds and Public Building Authority tax-exempt municipal bonds issued prior to 2012 would be hit with penalties of 35 percent and 28 percent, respectively. Holders of Employee Retirement System bonds would take an 87 percent reduction, according to the Board. For those holding Puerto Rican debt issued after 2011, debt which has been challenged as unconstitutional because it violated Puerto Rico’s own debt-limit rules, the PROMESA Board has recommended penalties ranging from 42 percent to 65 percent.

Just as, under their respective plans of debt adjustment, Detroit and Central Falls cut pensions to retirees—albeit more like in Detroit, where the cuts were modified so that no retiree would fall below the federal poverty line: thus, under the Board plan, public sector retirees who receive more than $1,200 a month would see their pensions cut by 8.5 percent.

It Aint’ Over Until It’s Over. While the PROMESA Board had reached agreements with a broad swath of bondholders, no white flag has been raised—and more funds will have to be forfeited, likely, to address claims from Wall Street firms with regard to Puerto Rico’s non- or partial payments on its debts, but many of the bondholders are average Puerto Ricans, people who depended on income from the bonds for their retirement. In a national address, Gov. Wanda Vazquez said she was generally opposed to pension cuts; however, she noted that rejecting this plan could incur an even greater risk —including pension reductions of up to 25 percent. She also said the deal would likely be amended repeatedly before it wins final approval. The real kicker, she noted: the proposed agreement would reduce Puerto Rico’s debt obligation by about 65 percent—or, as she put it: “I’m confident that at the end of this process, Puerto Rico will recover its financial autonomy and be on its way to economic recovery.”

Where’s Noah? The critical timing of this quasi plan of chapter 9 debt adjustment became even more clear in the wake of new U.S. Census data finding that, last year, some 133,500 Puerto Ricans left the island for the mainland—likely those most able to afford the move, leaving elderly and poorer Americans behind. Nevertheless, the Census date did include some good gnus: Puerto Rico’s poverty rate fell by 1.3 percentage points in 2018, to 43.1 percent; nevertheless, the new data is staggering: when compared to Mississippi, the poorest state on the U.S. mainland, which had a poverty rate of 19.7 percent.

In its statement, the PROMESA Board noted that in the wake of its appointment in 2016, “Puerto Rico’s government and public corporations…had amassed more than $70 billion in debt they could not pay and owed Puerto Rican retirees over $50 billion in unfunded pension benefits. The Puerto Rico government alone had to spend almost $3 of every $10 dollars in tax revenue just to service its debt.”

Physical & Governance Storms

September 27, 2019

Good Morning! In this morning’s eBlog, we consider the slow, but seemingly steady progress for the U.S. Territory of Puerto Rico to react and respond to natural disaster threats and to await the proposed quasi plan of debt adjustment from the PROMESA Board.

Emergency Declarations. As the storms of the Caribbean can often imperil both the U.S. Virgin Islands and Puerto Rico—often knocking out all electricity—and now worsening due to coastal erosion, a growing issue is how to respond. In Puerto Rico, an emergency declaration for coastal erosion is issued by either a municipio (municipality) or the Bureau of Emergency Management and Disaster Management. To date, the only request to the Puerto Rico to declare an emergency because of coastal erosion has been certified in favor of the Ocean Park urbanization in the capital city of San Juan—as reported yesterday by Puerto Rico’s Secretary of Natural and Environmental Resources, Tania Vázquez Rivera, during a public hearing of the House of Representatives in which she said she has only received a permit application for a mitigation work in that area, acknowledging, at the same time, that she does not have state funds to initiate mitigation work, so any response would depend on federal funds. However, after leaving the hearing, the former legislator and legislative advisor of the Municipio of Arecibo, Héctor Torres Calderón, said that, last year, he made such a request to the Emergency Management and Disaster Management Bureau (NMEAD), but received no response—leading the City Council to proclaim its own emergency declaration—notwithstanding NMEAD’s assertion that it was told that the City Council could make the declaration, they did so too. Secretary Vázquez Rivera explained that emergency declarations are issued by the NMEAD or the municipal emergency management offices, indicating that these have the effect of accelerating any application for permits for mitigation work submitted to the Department of Natural Resources—clarifying to the President of the Commission of Natural Resources and Environmental Affairs, Joel Franqui, that the DRNA only has the power to declare an emergency on a property under the jurisdiction of the agency, such as a beach, a protected area, or a land where a DRNA installation is located—but not to assist in the case of a residence or a community. Drawing a bright line, however, appears to be an increasingly ticklish challenge: according to the DRNA, 60% of the coast has suffered from erosion. During the hearing, it also came to light that Mayor Eric Bachier of Arroyo, a municipio of about 19,600 founded in 1855—and today an emerging pharmaceutical center, has had meetings with the NMEAD and a DRNA geologist to make a second emergency declaration, this time in Punta Guilarte. It was learned that, in that case, the State would be making the emergency declaration to avoid a conflict of interest, since the affected property is municipal.

Governance Storm. There are natural storms, as Puerto Rico has learned all too well—and there are governmental storms for an island which is somewhere in Rod Serling’s Twilight Zone between a state and a city—governed by a Governor and Legislature, but also by a Board named by the U.S. Congress, the Puerto Rico Oversight Board (PROMESA), which is composed of members, a number of whom have greater interest in tax-exempt bonds they own or issue, rather than being Puerto Rican. Now, however, that Board is moving closer to approval of a quasi chapter 9 municipal bankruptcy plan of debt adjustment for about $19 billion of central government bonds, with the PROMESA Board Wednesday claiming it would “address issues related to the debt restructuring of Puerto Rico” at a public meeting, creating the impression that the Board is on the precipice of a vote on a plan that includes nullifying portions of the debt that they have claimed were issued illegally. Last week, PROMESA Board attorney Martin Bienenstock advised Title III bankruptcy Judge Laura Taylor Swain that the PROMESA Board planned to submit the plan by the end of the month. (The Board members generally meet publicly to vote on official documents upon which they have already decided in private to support.) Indeed, as we have previously noted, last June, the PROMESA Board released a plan support agreement which contained contingencies if the U.S. Circuit court agreed with it that certain general obligation and Public Building Authority municipal municipal bonds should be considered invalid and not paid.

According to the plan released last June, if the federal determines that the bonds are invalid and should not be paid off, more funds would be made available for general obligation and Commonwealth-guaranteed public building authority (PBA) municipal bonds issued prior to 2012. In this case, the PBA bonds would get 87.3%. Earlier-issued general obligation municipal bonds would get 83.4%. If the court determined the opposite, however, previously issued PBA bonds would get 75.6%, and the early-issued GOs would receive 68.2%. It remains to be seen how closely the quasi plan of adjustment conforms to the plan support agreement. In all cases in June’s plan support agreement, non-general obligation and non-PBA central government bonds would be hard smote: they would receive only about 9% recoveries. If the PROMESA Board goes ahead with approving a plan of debt adjustment, the Board’s attorneys would submit the plan to the Title III court. The proposed plan of debt adjustment would also address $48.7 billion in pension liabilities.

The emerging plan of debt adjustment appears to ignore concerns expressed earlier this week by ten Members of Congress, who had written to the PROMESA Board, warning that the Board’s “fiscal plan focusses on creating a significant fiscal surplus, prioritizing the demands of Wall Street Vulture Funds over the needs of the Puerto Rican people…The terms of the deal with the creditors are for more generous than what the [Oversight Board’s] own long-term estimates indicate that Puerto Rico needs.

Is There Shelter from the Fiscal Storm?

September 24, 2019

Good Morning! In this morning’s eBlog, we consider the ill winds of fiscal and political fate which can interfere with physical and fiscal recovery.

Hurricane Maria, when it struck the U.S. territory of Puerto Rico two years ago, smashed through the National Guard training base, Camp Santiago; however, and notwithstanding the slow and limited response from FEMA, Camp Santiago emerged from the storm much like the rest of the island: damaged, shocked, but determined to recover against exceptional physical and fiscal odds. So when Maj. Gen. José J. Reyes helped secure $331.5 million for the base from the Pentagon’s prized construction budget, officials believed that, notwithstanding the severity of the hurricane and the slow and limited FEMA response, the funds would serve to rebuild Camp Santiago—meaning, for the first time, an island which regularly sends its men and women to war for the United States would also have a modern, hurricane-proof training ground for its National Guard members. Or at least that seemed a reasonable assumption.

However, early this month, the Pentagon announced that 127 military construction projects approved by Congress would be defunded under emergency authorities to free up $3.6 billion for to partially pay for the President’s proposed border wall. The funding for Camp Santiago was shelved, even though, as Major Reyes said, the National Guard leadership in Washington, D.C. had assured him that Congress would take up the projects again. As Major Reyes put it: “There’s no guarantee in life…Eventually we will die. That’s the only guarantee in life.”

The defunding of the Puerto Rico project comes as the Trump administration considers diverting billions more in military funding to pay for barrier construction along the southern U.S. border next year: the President has pledged to complete nearly 500 miles of new barrier by the 2020 election, a goal that will require a total of $18.4 billion in federal funding through next year by a government deep in debt.

In the case of Camp Santiago, Hurricane Maria damaged or ruined 60 percent of the buildings on the base: workers have already razed the headquarters building and mess halls which the storm devastated. Some National Guardsmen preparing to go to war are training elsewhere, because the storm halved the base’s capacity. One engineering battalion, deploying to Afghanistan next year, trained in North Dakota. Officially, the Trump administration claims 127 projects the Pentagon has defunded for the wall have been “deferred,” rather than canceled. For the projects to proceed, however, Congress must once again appropriate funding for them, a process the administration calls “backfilling.” The U.S. Senate has agreed to authorize a backfill of $3.6 billion worth of projects in its version of the annual defense authorization legislation; however, the House has refused to appropriate funds for projects that Congress has already funded. And, on that list, Puerto Rico has more projects than any other U.S. state or territory or state. Of the $3.6 billion worth of defunded construction projects the Pentagon unveiled this month, $402.6 million, or nearly 12 percent of the funds, had been destined for Puerto Rico. The list includes projects in 23 states, three U.S. territories and 20 countries, and cuts across Republican and Democratic districts.

In addition to taking money from Camp Santiago, the Pentagon also pulled funding from hurricane reconstruction projects for the Puerto Rico National Guard elsewhere on Puerto Rico, and from a project to replace a school for military and civilian children at a Coast Guard base here. Major Reyes said that one of the defunded projects is a hurricane-proof hangar for helicopters, which would guarantee the National Guard has working aircraft to conduct search-and-rescue missions after future storms. Camp Santiago was named for Héctor Santiago-Colón, a U,S. G.I. and native of nearby Salinas who died in the Vietnam War after absorbing the impact of a grenade to save his fellow soldiers: Camp Santiago is a nearly 13,000-acre tropical expanse tucked between the mountains in southern Puerto Rico.

Authority to Appropriate? Beyond the issue of whether a nation so deeply in debt proposing to deepen the debt to finance this proposed wall, Democratic members of the House and Senate lawmakers have expressed concern about setting a precedent in which a President can disregard Congress’s constitutionally mandated power of the purse to wrest funds unilaterally and then force Congress to appropriate more money for projects they already funded. The Senate’s lone Independent, Sen. Angus King (I-Maine), last week said that the border barriers the Pentagon would be diverting funds to finance has nothing to do with supporting troops during a national emergency, as is mandated by the federal law which requires for the Pentagon to redirect funding, describing thusly: “I believe you’ve been given an illegal order,” Sen. King told the President’s proposed nominee to become the next Secretary of the Army at his confirmation hearing: “I think what’s being done here is a gross violation of the Constitution—and the fundamental principles of the Constitution, which is a separation of powers, and the bestowing of the appropriation and spending power on the Congress.”

The Pentagon has asserted it is confident its action is appropriate and legal. Several states and nongovernmental organizations are still challenging the move in courts, which are expected to weigh in later this year. The Trump Administration is relying on an obscure statute in federal law, §2808, which allows the Secretary of Defense, in the event of a national emergency requiring the use of the armed forces, to transfer funding the Department of Defense construction budget without an ok from Congress for projects that support those troops. Lt. Col. Chris Mitchell, a Pentagon spokesperson, said the Defense Department considers the projects in Puerto Rico important and will continue to work with Congress to support them in a bipartisan fashion.

But for Puerto Rico, the diversion means funds for planned construction projects are frozen, including nine new or renovated schools for military children, a day-care center and hurricane recovery efforts. Some of the defunded projects were approved to address safety hazards at military sites. (During his campaign, Mr. Trump had promised Mexico would pay for the wall.)

In determining which construction projects to defund, the Defense Department chose not to take funds from military housing, after the Department faced an outcry over poor conditions at residences for U.S. service members, including instances of black mold, vermin, and lead paint. As a result, all the projects at Camp Santiago have been put on hold, except the $112 million construction of new barracks. Once the barracks are built, however, National Guardsmen staying there will not have proper dining facilities. (Many of the old mess halls were ruined, and their replacements are among the defunded projects that total $219.5 million on base.)

Mayor Karilyn Bonilla Colón of Salinas, where the base is located, said in a statement: “Camp Santiago, located in Salinas, is known to be one of the most important training facilities for our soldiers…Cutting back its funds, knowing it is still suffering from the devastation brought by Hurricane Maria, is completely unjustifiable.”

Since facing criticism for his response to Hurricane Maria, President Trump has suggested that the island is a burden. He alleged that Democrats inflated the hurricane’s death toll “in order to make me look as bad as possible.” Recently, he also suggested trading the U.S. territory for Greenland, tweeting, last month: “Wow! Yet another big storm heading to Puerto Rico. Will it ever end? Congress approved 92 Billion Dollars for Puerto Rico last year, an all time record of its kind for ‘anywhere.’ ” Unsurprisingly, the tweet was incorrect: roughly $43 billion in federal disaster aid has been allocated to Puerto Rico, of which about $14 billion has been disbursed, according to FEMA data.

Seeking Shelter from Physical, Fiscal, & Governing Storms

September 23, 2019

Good Morning! In this morning’s eBlog, we consider apprehensions that the small city of East St. Louis, Illinois could revert back under state oversight, before returning to the stormy seas surrounding Puerto Rico to assess how the stormy politics in Washington, D.C. are threatening to take back vital post-Hurricane Maria fiscal assistance to pay for the President’s proposed border wall with Mexico.

A City at Risk. East St. Louis, Illinois, a small municipality just across the mighty Mississippi from St. Louis, and a municipality which, in 1950, had a population of 82,366, making it the state’s fourth largest, is today a municipality of about 27,000. According to recent census data, the per capita income is approximately $11,169, with about 31.8% of families and 35.1% of the population below the federal poverty level, including 48.6% of those under the age of 18 and 25.2% of those 65 ages and older. The city has the highest murder rate of any city in the nation. Last week, the municipality’s growing pension debt put the city at risk of interception of state funding—potentially making the municipality the fourth in the state to face such interception, after the state Comptroller’s office, last Tuesday, received a request to halt state funds to the city until its makes payments on some $2.2 million owed to its firefighters pension fund—the total amount the city shorted the fund in FY2017 and 2018, according to a letter from the pension fund’s attorneys. Should that come to pass, East St. Louis would become the fourth Illinois municipality to face state funding interception since that remedy first became available to pension systems in 2018, according to a spokesperson for Illinois Comptroller Susana Mendoza. The situation is dire: the East St. Louis Firefighters Pension Fund is only 11% funded, according to the demand letter. Illinois law set the city’s required contributions at more than $3 million for both FY2017 and 2018; however, the city fell short by $2.2 million. Now it has been given 60 days to file a response.

Caught between a Rock & a Hard Place. Even if the municipality challenges the interception, it still is confronted by at least a temporary state funding loss after the 60 days, because the state holds the funds until a dispute such as this is resolved. Illinois has more than 650 local police and firefighter pension funds: each has its own board. Together, those local pensions carry an estimated $63 billion in combined debt. Unsurprisingly, some state leaders have discussed consolidating the funds. So much for efficiency. The state’s largest municipality, in the windy city of Chicago, Mayor Lori Lightfoot requested a state bailout of the city’s $42 billion pension debt, which Gov. J.B. Pritzker last month rejected. Were the state agree to assume responsibility for all local pension systems’ debt, it has been estimated it could raise the state’s total pension debt to close to $200 billion. Indeed, while the pension debt for the five statewide funds is officially estimated at nearly $137 billion, Moody’s has recently moodily estimated the level to be nearly twice that at $240.8 billion—or the equivalent of $18,896 per resident of the state—and that, over the last 19 years, Illinois’ growth in state spending on pension obligations has been over 500%, no doubt helping to explain the steep drop of nearly one-third in state spending on core services.

Up Against a Fiscal & Physical Wall? When Hurricane Maria struck Puerto Rico two years ago, it devastated homes and public infrastructure—and even U.S. facilities, such as a National Guard training base, Camp Santiago, emerged from the storm much like the rest of the island: damaged, shocked and determined to recover against dim economic odds.  So when Major General Jose Reyes helped secure $331.5 million for Camp Santiago via the U.S. Department of Defense construction budget, officials had reason to hope that the funds would not only rebuild Camp Santiago, but also that, for the first time, a U.S. territory which regularly sends its women and men to war for the United States would also receive a modern, hurricane-proof training ground for its guard. But, even if hope springs eternal, it was not to be: early this month, the Pentagon

Weathering a Fiscal and Physical Recovery

September 20, 2019

Good Morning! In this morning’s eBlog, we consider an improving fiscal outlook for the U.S. Territory of Puerto Rico to restructure its debt. We also look at the possibility that Congress could consider ending the expensive and intrusive role of the PROMESA Oversight Board.  

On this, the second anniversary of Hurricane Maria’s devastation of the U.S. Territory Puerto Rico, we find that of the $8.3 billion in redevelopment funds Congress appropriated to assist Puerto Rico with recovery and redevelopment to be disbursed through the Department of Housing and Urban Development, the Trump Administration has distributed less than $2 billion. The Trump Administration recently missed the September 4th deadline to allocate those funds—even as it did meet the same deadlines for California, Texas, Louisiana, Georgia, and the similarly impacted U.S. Virgin Islands. It seems it is only Puerto Rico which is being discriminated against—something which would appear to suggest that more than mere administration incompetence is at work.

Nevertheless, Puerto Rico is and has been at work: the territory’s general fund revenues for July were 18% higher than forecast, giving the quasi-chapter 9 bankrupt commonwealth government a strong first month of its fiscal year: net revenues were $1.046 billion, some $159 million more than forecast in the FY2020 budget approved by the PROMESA Oversight Board and $305 million greater than last year. Of course, those increased revenues are unlikely to al accrue to Puerto Rico’s Treasury—and may prove to be more of a blip than a guarantee of longer term fiscal recovery. To some extent, notwithstanding the inequitable distribution of disaster relief funds, those funds are, after all, one-time; however, there was a one-time distribution. The revenue categories demonstrating the greatest changes included the Act 154 foreign excise tax with $383 million, some $256 million in corporate income taxes with $256 million, and $143 million in individual income taxes. The Act 154 revenues were 53% greater than July of last year—and 10% more than projected; however, last week, U.S. Treasury Secretary Steven Mnuchin advised Gov. Wanda Vázquez that he planned to withdraw a federal credit supporting the Act 154 foreign excise tax, albeit without providing a timeline—adding uncertainty to the government’s ability to make fiscal calculations: those revenues, after all, last year constituted nearly 20 percent of Puerto Rico’s revenues—revenues which consist of taxes, social contributions, grants receivable, and other revenue.

Because Puerto Rico is in a Twilight Zone as a territory, rather than a state, that raises a question with regard to whether Puerto Rico can substitute an income tax on foreign corporate subsidiaries for Act 154 receipts that will still generate sufficient Commonwealth tax receipts while still maintaining the tax advantages for these corporations. That could matter, because corporate income taxes last year grew even more than Act 154 receipts, exceeding the July 2018 sum by 186% or $166 million—or some 66% than projected; individual income taxes rose too, albeit not by the same rate.

An effort to amend the 2016 federal law that established an oversight board for restructuring Puerto Rico’s overwhelming debt burden by insulating essential services from austerity cuts is facing some almost insurmountable political obstacles.

An Important Visitor from the Mainland. Chairman Raul Grijalva (D-Az.) of the House Natural Resources Committee visited Puerto Rico over the weekend and outlined his legislative objectives during a fact-finding tour of Puerto Rico—no doubt as part of his proposal to insulate certain essential services as well as to address complaints by residents and elected officials of the territory that the Puerto Rico Financial Oversight and Management Board has been too aggressive in its protection of municipal bondholders at the expense of the territory—with his visit occurring as the PROMESA Oversight Board is trying to complete the Title III federal debt restructuring sometime next year. House Natural Resources Committee Ranking Member Rob Bishop (R-Utah) noted that enactment of the original PROMESA statute three years ago had been “a very difficult process…There had to be a lot of compromises with a lot of different people, and then to get the Senate and the House to be in agreement,” adding it had been “actually amazing. Not only did we have a majority with both Republicans and Democrats here, but the Senate made no amendments to it.” Ergo, he warned: “To replicate that is going to be extremely difficult, if not impossible.” Thus, unsurprisingly, no timetable has been set for when Chair Grijalva’s bill to go to mark-up.

The Chairman’s draft legislation includes include protections for Puerto Rico’s pensioners, according to Resident Commissioner Jennifer Gonzalez-Colon, who said she supports that measure—or, as she noted to the Bond Buyer, “There are some provisions I am comfortable with,” noting that there is a vital need for a bipartisan working group to finalize the text, or, as she put it: “I think the bill should be of bigger scope and not just random items.” The Chairman’s discussion draft includes the creation of a reconstruction coordinator to oversee the spending of federal aid, a public audit of the Commonwealth’s debt, and the use of federal funding for the Oversight Board to replace funding by the territorial government, with the Chair earlier this week noting his proposed bill remains in discussion draft form and will be considered by the Natural Resources Committee on October 22nd. Rep. Gonzalez-Colon recognizes the bill will only pass if it is modified to gain additional, bipartisan support.

Might There Be Promises from PROMESA? In the nonce, the PROMESA Oversight Board intends to submit a quasi-chapter 9 municipal plan of debt adjustment for Puerto Rico by the end of this month—a plan outlining the level of repayment for as much as $19 billion of municipal bonds which have been in default since 2017. That will, likely be an OK Corral: some eleven hedge funds holding Puerto Rico municipal bond debt are pursuing a lawsuit seeking federal compensation for losses suffered through the quasi chapter 9 debt restructuring: that suit, in the Court of Claims in Washington, D.C., is expected to move forward in January—after the anticipated decision by the U.S. Supreme Court with regard to the constitutionality of the appointment of the PROMESA Oversight Board members without the advice and consent of the U.S. Senate. (That court has scheduled oral arguments for October 15th.). The issue will involve whether the PROMESA Oversight Board acted as an agent of the federal government when it ordered Puerto Rico’s Legislature to effectively end payment of bonds issued for Puerto Rico’s Employee Retirement System.

Seeking Shelter for the Storm. Last week, Gov. Wanda Vázquez Garced led a delegation of Puerto Rican leaders, including powerful Senate President Thomas Rivera Schatz, on a tour of Washington to rally Congressional and Administration allies to speed up the assignation of funds. Gov. Vázquez, a nonpartisan former prosecutor who became Governor in the wake of the resignation of former Gov. Ricardo Rosselló, avoided political rhetoric in her efforts with Trump Administration officials, or, as Puerto Rico Resident Commissioner Jenniffer González-Colón (R) put it: “I have to say the experience was very different…[Gov. Vázquez] arrived touting her record as a Secretary of Justice, as a prosecutor for many years, and how she wants to have accountability, how she wants to do things with transparency,” adding, “Something I liked is that she told all the agencies: ‘Tell me what you want us to put into law, to work on in a specific way so the funds can be disbursed.’” The challenge to be diplomatic came in the face of the Trump Administration where the President has repeatedly called Puerto Rican officials “corrupt,” and, last month, tweeting: “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!”

The Challenge of Post-Chapter 9 Blight Elimination & Efforts to Create a More Workable Plan of Debt Resolution in Puerto Rico

September 18, 2019

Good Morning! In this morning’s eBlog, we consider renewed efforts to eliminate blight in Detroit, as the Motor City prepares to issue debt to finance the capital costs of razing abandoned homes; then we head east to consider the efforts underway in Congress to amend the PROMESA law in a way that might reform the governance and pave the way for something closer to a chapter 9 municipal bankruptcy plan of debt adjustment. ne option Congress might consider to change the Jones-Shafroth Act in a way that might better enable the U.S. Territory of Puerto Rico to restructure its debt.  

Blight Elimination in the Motor City? Detroit Mayor Mike Duggan is pitching a $250 million municipal bond issue for city voters to help eliminate Detroit’s blight by the middle of 2025, with his plan coming as the last of $265 million in federal assistance to raze blighted homes in Detroit winds down, leaving the city at the what the Mayor described as a “halfway point,” with nearly 19,000 more vacant houses to demolish or restore. “We feel like we have an obligation as a city to get every abandoned house out of every neighborhood,” Duggan told The Detroit News. “This is the proposal that will do this. We’re confident this will get the blight finally erased.” The mayor first revealed the concept during a keynote address at the Mackinac Policy Conference in May.  The proposal is expected to be referred to a City Council subcommittee this week for review. The language has to be submitted to the Wayne County Clerk’s Office by mid-December to appear on the March 10 ballot. Mayor Duggan said the 30-year municipal bond would aid the Motor City in tearing down thousands more homes, and, because the city has paid off other municipal bond debts, it believes it can issue the new bonds without raising taxes. 

The city exited bankruptcy in 2014 with a plan to shed $7 billion in debt and invest another $1.7 billion into service upgrades over a decade. Of those funds, about $50 million annually are allocated for blight. According to city officials, Detroit has paid off past general fund bond debt ahead of schedule because revenues have been running higher than projections made during its landmark bankruptcy. This allows the city to seek out the bond for blight reduction without raising taxes above the current tax rate of 9 mills. “We are fully confident that the taxes will never need to go up even if there is a recession or other market change,” Detroit’s Chief Financial Officer Dave Massaron said. “We built this very conservatively to protect taxpayers.”

CFO Massaron said officials are confident the long-term tax rate will not exceed 9 mills. Under state law, the levy has to be set at a level sufficient to pay off the debt. The average taxable value for residential property in Detroit is $19,100, which at 9 mills is $171.90 per year. The city’s financial reserves and its December return to the bond markets capital investment have earned it higher marks among rating agencies, increasing the city’s ability to borrow and at lower rates. 

Nevertheless, Detroit’s borrowing capacity remains limited, and, as Matt Fabian of Municipal Market Analytics put it: the elected leaders of the city must carefully weigh whether a bond for demolition is the best way to commit its taxpayers in the longer term, noting that cities and counties which emerge from chapter 9 municipal bankruptcy have a higher risk of economic backsliding—noting that any county or city emerging from a chapter 9 municipal bankruptcy with fewer assets than it had going in, “needs to be very careful with how it spends: It’s not a typical reason that cities borrow, so it does suggest that maybe the city is not yet ready to act like a traditional city…Cities don’t typically borrow for blight, but cities don’t typically have the blight that Detroit has…It isn’t magic…If you’re spending on one thing, you’re not spending on something else.”

However, CFO Massaron said Detroit has nearly $675 million in capital borrowing capacity for this kind of debt, noting: “After issuing the blight bonds, the city would have nearly $450 million to invest in other capital items throughout the city…We believe that leaves more than enough for the city’s capital needs.”

For his part, Mayor Duggan said he first considered the bond several years ago when the city assumed its first wave of federal Hardest Hit Fund money would be expiring. That assumption, mayhap fortunately for the city, proved overly pessimistic: instead, the federal government approved $175 million more for Detroit’s program.

Unsurprisingly, the Mayor reported he was grateful to the U.S. Treasury Department for allocating funding for five years to attack the city’s blight. But the remaining funds have been allocated, those demolitions are taking place, he said, and “Now, we have to finish the job.”

As part of the proposal, the Mayor will seek support from the City Council to support a plan to allocate an average of $15,000 to $20,000 per house for renovation, when it is determined to be feasible, sparing some of Detroit’s blighted properties from being razed. Detroit The city estimates there are about 7,000 blighted houses that can be saved without a subsidy, but up to another 2,000 others which cannot. 

Councilwoman Raquel Castañeda-López said she is concerned that the bond proposal lacks the funding ability to assess each house for potential, noting, in a statement: “Although blighted, Detroit’s housing stock is still unmatched with its historic homes: Notably, for the homes that must be demolished, there has been no conversation around deconstruction…While a small industry, deconstruction has the potential to employ more people, preserve salvageable architectural materials and to lessen the health and environmental impact of demolition.”

Federal program rules required that blighted houses to be torn down and the effort was limited to neighborhoods that were at least 70% occupied. But under the Detroit’s rules, according to Mayor Duggan, the effort will be able to touch all areas of Detroit and use some of the bond funds to renovate properties, or, as he put it: “Now, without having to deal with the restriction of the federal rules—assuming Council goes along with this, we’re going to have 1,000 to 2,000 houses that we put $20,000 into and we save them…Every chance we can to move a family into a house instead of leaving a hole in the neighborhood, that’s going to be the goal,” as he added that the federal government also took the position that the city could not give a local preference. But now, Detroit also expects to hire more city-based and minority-owned firms.

Council President Pro Tem Mary Sheffield said she wants to ensure voters are educated about the proposal before it reaches the ballot, noting: “I have serious concerns about equity and inclusion with respect to contracts and employment as well as access to opportunity and ownership after demolition.” Demolition today, she added, is not considered construction and is not subject to an executive order that outlines hiring requirements for Detroiters. Her office, she said, is working to change that through a proposed local hiring ordinance: “We must have guarantees that Detroiters benefit from the use of their tax dollars and that the goal is to truly improve the quality of life of residents and not lead to another urban renewal which amounted to urban removal in the past…I firmly believe tearing down homes is not building up neighborhoods.”

Since it launched in spring 2014, Detroit’s controversial demolition program has been the focus of several state and local reviews and a federal criminal probe after concerns were raised in 2015 over rising costs and bidding practices. Indeed, a federal investigation last Spring secured guilty pleas from two men over bid-rigging as part of a lengthy criminal investigation into the demolition program. Moreover, a federal watchdog is in the midst of an audit for the risk of contaminated soil in Detroit and Michigan for federally funded demolition work. But the U.S. Department of Justice has signaled it does not expect to bring additional charges against public officials for wrongdoing in the federal blight aid effort. 

The controversial history of the program, however, could make a bond a tough sell for some voters, Fabian said. “To me, it would make it a harder tax increase to swallow for your average city taxpayer,” he said. “Hopefully they are careful when paying for blight remediation because of the history.” Lifelong southwest Detroit resident Tom Fayz said he’s supportive of plans to further beautify his city. In his neighborhood, there are several abandoned apartment buildings that have attracted squatters and crime. “I would definitely support a bond,” said Fayz, 76, a member of the Springdale Woodmere Block Club. “To bring the money back into neighborhoods instead of dropping it at Downtown Detroit, yes. If there’s a bond available, we need to use it in the neighborhoods.”

During his March budget presentation to council, Duggan noted the city this year is transitioning from a demolition effort controlled by the Detroit Land Bank Authority to a city-administered program. When the federal government set up the Hardest Hit Fund program, it insisted agencies outside city government run them, he noted. In Detroit’s case, Duggan said, that “was a terrible mistake.”

The city has had a procurement department of about 50 people, and it just added about 10 more to handle its demolition efforts, Massaron said. Meanwhile, the land bank had just four employees to execute the massive program when it first began, according to the Mayor, who noted: “They didn’t have the infrastructure to do it, and I pushed them to move faster than they were ready.”  

Since the Spring of 2014, Detroit has razed more than 19,000 structures. Of those, more than 12,000 have come down with federal Hardest Hit Fund dollars, according to the land bank. Going forward, according to Mayor Duggan, the land bank will focus on what it was intended to manage: Detroit’s vacant property—or, as Mayor Duggan put it: “The land bank should have never been in the demolition business…It’s got 90,000 parcels to manage,” adding that if the bond issuance does not proceed, it would likely take the city another decade or more to tear down the remaining houses: “We don’t see an opportunity in Washington, D.C. or Lansing right now to get a new significant chunk of funds. So our reality is this: We either solve the problems ourselves or let it sit until Washington or Lansing helps…We just don’t feel like the problem could wait. I don’t know anybody who doesn’t think we need to spend this kind of money to finish the job.”

Providing a Road Map to Fiscal Recovery? U.S. House Natural Resources Committee Chairman Raul Grijalva (D-Az.) yesterday said he will propose substantial changes to the PROMESA law which currently serves as a guide for the quasi-chapter 9 means to set a plan of debt adjustment. Speaking in San Juan on Sunday as he prepared to return to Washington, D.C. from Puerto Rico, the Chairman said that next month he will present a draft proposal. Among the changes to the current law, the Chairman said he would propose the creation of a reconstruction coordinator to oversee Puerto Rico’s fiscal and physical recovery from 2017’s devastating Hurricane Maria; a public audit of Puerto Rico’s debt; and federal funding for the Oversight Board, whose budget currently comes from Puerto Rico’s government. The Chair added: “Because of the federal funding, it gives Congress and its investigative processes many more entry points for checks and balances.” He added that he will also propose that new language be added to define essential benefits, and that protections be added for education, health care, and pension security.

The Chairman’s comments come after, last week, new Governor Wanda Vazquez spent last week in Washington, DC, meeting with Democratic and Republican leaders and other government officials in an attempt to “restore the credibility” of the island’s government after former Governor Ricardo Rossello’s ouster and a series of scandals. Hostility to the PROMESA Oversight Board was a main theme among the protesters who drove the former Governor from office this past summer.

As part of his changes, Chair Grijalva indicated he will also, in his draft legislation, define essential services and order an audit of Puerto Rico’s debt as part of the PROMESA Act, according to Margarita Varela-Rosa, a staff member in the Committee’s Office of Insular Affairs. Ms. Varela-Rosa added that one proposed amendment would designate pensions, along with education, healthcare, and public safety as essential services. (The FY2019 federal budget for the PROMESA Board totaled $64.75 million.) It appears that Chair Grijalva also wants to legislatively address reconstruction efforts in Puerto Rico in the wake of massive destruction caused by Hurricane Maria in 2017: after hearing from residents during his most recent trip to Puerto Rico, Chairman Grijalva is considering community-based oversight of federal and local efforts.

Finding Shelter from the Fiscal & Governance Storm

September 17, 2019

Good Morning! In this morning’s eBlog, we consider one option Congress might consider to change the Jones-Shafroth Act in a way that might better enable the U.S. Territory of Puerto Rico to restructure its debt.  

Providing a Road Map to Fiscal Recovery? U.S. House Natural Resources Committee Chairman Raul Grijalva (D-Az.) yesterday said he will propose substantial changes to the PROMESA law which currently serves as a guide for the quasi-chapter 9 means to set a plan of debt adjustment. Speaking in San Juan on Sunday as he prepared to return to Washington, D.C. from Puerto Rico, the Chairman said that next month he will present a draft proposal. Among the changes to the current law, the Chairman said he would propose the creation of a reconstruction coordinator to oversee Puerto Rico’s fiscal and physical recovery from 2017’s devastating Hurricane Maria; a public audit of Puerto Rico’s debt; and federal funding for the Oversight Board, whose budget currently comes from Puerto Rico’s government. The Chair added: “Because of the federal funding, it gives Congress and its investigative processes many more entry points for checks and balances.” He added that he will also propose that new language be added to define essential benefits, and that protections be added for education, health care, and pension security.

The Chairman’s comments come after, last week, new Governor Wanda Vazquez spent last week in Washington, DC, meeting with Democratic and Republican leaders and other government officials in an attempt to “restore the credibility” of the island’s government after former Governor Ricardo Rossello’s ouster and a series of scandals. Hostility to the PROMESA Oversight Board was a main theme among the protesters who drove the former Governor from office this past summer.

As part of his changes, Chair Grijalva indicated he will also, in his draft legislation, define essential services and order an audit of Puerto Rico’s debt as part of the PROMESA Act, according to Margarita Varela-Rosa, a staff member in the Committee’s Office of Insular Affairs. Ms. Varela-Rosa added that one proposed amendment would designate pensions, along with education, healthcare, and public safety as essential services. (The FY2019 federal budget for the PROMESA Board totaled $64.75 million.) It appears that Chair Grijalva also wants to legislatively address reconstruction efforts in Puerto Rico in the wake of massive destruction caused by Hurricane Maria in 2017: after  hearing from residents during his most recent trip to Puerto Rico, Chairman Grijalva is considering community-based oversight of federal and local efforts.