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.

How Different and Governance-challenged Fiscal Insolvencies Are for State & Local Leaders

September 13, 2019

Good Morning! In this morning’s eBlog, we consider the fiscal emergency in Davis, California, before assessing the most recent fiscal and physical challenges in the U.S. Territory of Puerto Rico, and then checking back in on the fiscal and governing status of post-chapter 9 Jefferson County, Alabama.

Declaring a Municipal Fiscal Emergency? Davis, California, a municipality of around 65,000 in Yolo County, previously called Davisville before 1907, last week declared a “fiscal emergency” last week, allowing the City Council to hold a special election in March 2020 and place a 1 percent sales tax renewal measure on the ballot—an action made to ensure the municipality avoids the “drastic effects” of interrupted tax collection, but short of filing for chapter 9 municipal bankruptcy. Under California statutory and case law, an “emergency” is an unforeseen situation not of the government’s making and not synonymous with a general public need. Judicial deference is not accorded to local government action founded on a mere declaration of necessity for preservation of public health and welfare. Finally, at least with respect to pension contributions and benefits, the “vested rights doctrine,” which arises from the constitutional protections of the Contracts Clause, establishes an “overriding constitutional proscription” against government action aimed at eliminating or reducing retirement formulae or benefits.

In reaction to being struck with a legal challenge last month, the city has been mandated to switch to district-based voting in time for its next City Council election, forcing the city to push back its election to November of 2020. That could cause an extra dash of fiscal pain, because if the city waits until then to place a sales tax renewal on the ballot, the earliest Davis could start collecting revenue would be April of 2021, meaning the city would miss out on an anticipated $2.2 million in tax revenue when the tax sunsets next December. A report from city staff warned the elected leaders: “This interruption to cash flow will exacerbate the inability to fund City services,” citing services, including public safety, maintenance of city roads, sidewalks and parks, and recreational programs. Under the state’s Constitution, general tax measures must be voted on during regularly scheduled local elections, except when the City Council votes unanimously to declare an emergency. The situation last week appears to mark a significant governance consequence of the city’s decision to move or change to District-based City Council elections—a change prompted by a former Yolo County Supervisor’s demand letter to the city claiming the “insidious, racially polarized nature of the at-large election system” has prevented Asian American and Latino voters from achieving adequate representation.

Under the California Voting Rights Act, at-large elections are prohibited if they discriminate against minority groups by limiting their ability to influence election results. Indeed, it seems that leaders in these suburban cities have frequently argued that district-based elections are incompatible with their communities, citing, citing the lack of majority-minority enclaves which might be buoyed by a district representative; however, to date, no California municipality has successfully defended an at-large voting method when challenged under Golden State’s Voting Rights Act—and some have even paid millions of dollars in settlement fees. Councilmember Lucas Frerichs, as a session, said to his colleagues: “It’s very frustrating that yet again, we’re being forced to do something…in order to not see the city face an adverse impact, we’re having to go and spend money on switching our regularly scheduled election to November for City Council, but, of course, also have this special election in March 2020.” For the city’s current fiscal year, the 1 percent sales tax, first approved in June of 2014, will raise $8.6 million for Davis, representing about 15 percent of the city’s total general fund. A city survey conducted by independent researchers found that 77 percent of respondents would vote yes to a measure renewing the sales tax, according to the staff report. The sales tax renewal measure will be consolidated with other Yolo County and statewide races on the March 3, 2020 election ballot.

A Different Kind of Storm. As Congress enters the last month of the federal fiscal year, one of the key issues pending will be the looming funding expiration for the U.S. Territory of Puerto Rico and other U.S. territories, such as the U.S. Virgin Islands, under the 2018 Bipartisan Budget Act and the Affordable Care Act. For Puerto Rico, this means that beginning on the first day of the new federal fiscal year, October 1st, Puerto Rico would receive only an estimated $366.7 million in Medicaid—a severe reduction in federal Medicaid matching in federal Medicaid matching dollars to cover its 1.6 million U.S. citizens who are Medicaid dependent—nearly half the island’s population. The second class treatment of Puerto Rico has become a grave fiscal impediment to the territory’s fiscal and physical health—and likely continued to the ongoing outflow of those who can afford to leave for the mainland—leaving a more dependent population of Americans behind. One opportunity could be for Congress to act swiftly to pass and send to the President HR 2328, the Community Health Investment, Modernization, and Excellence Act, which includes the Territories Health Care Improvement Act, which would make substantive changes to how Medicaid is administered in U.S. territories such as Puerto Rico. If approved by Congress, H.R. 2328 could go on to provide $12 billion to secure the Medicaid program on the island for four more years. As drafted, the legislation includes robust monitoring mechanisms to ensure strict oversight of federal Medicaid funds: it would authorize the Department of Health and Human Services’ Office of Inspector General to perform audits of all federal Medicaid funding on an annual basis, including work plans to monitor and/or investigate contracting practices related to the Puerto Rico Medicaid program. The Centers for Medicaid & Medicare Services would oversee all contracts awarded utilizing Medicaid funding. Puerto Rico itself would establish a system for tracking amounts paid by the federal government, as well as local matching of Medicaid funds, and would have information available with respect to each quarter. Finally, the Government Accountability Office would issue a report on contracting oversight and approval for the Puerto Rico Medicaid program no later than two years after the date of enactment.

A Municipal Bankruptcy Exit Plan?  The Puerto Rico Oversight Board intends to submit a plan of adjustment for the island’s central government debt by the end of this month, outlining the level of repayment for as much as $19 billion of municipal bonds which have been in bankruptcy since 2017. The Board’s attorney, Martin Bienenstock, told Judge Laura Taylor Swain at this week’s omnibus hearing that the Board is intending to submit its quasi-plan of debt adjustment soon, adding that, under new Governor Wanda Vázquez Garced, relations between the Governor and Oversight Board have been good. Last March, Mr. Bienenstock had said the plan might be submitted by the end of April—giving some idea of how complicated putting a plan of debt adjustment together can be. The timing could be propitious, as the parties to the debt of central government debt and other Puerto Rico entities are now or are soon to be involved in mediation, although it is unclear how the terms of the plan of adjustment will affect the mediation discussion. At this week’s hearing, Unsecured Creditors Committee attorney Luc Despins said his clients would object to the approval of a settlement of municipal bond claims before there was a settlement of other non-bond-related claims against the government of Puerto Rico, asserting his clients were those holding non-municipal bond-related claims. On other topics, Mr. Bienenstock said that PROMESA Board Executive Director Natalie Jaresko and PROMESA Board Chairman José Carríon had held several meetings with Gov. Vázquez Garced since she took office last month: they have discussed several issues on which the Board had disagreed with former Governor Ricardo Rosselló, claiming progress has been achieved on bridging these differences. Puerto Rico Fiscal Agency and Financial Advisory Authority lawyer John Rapisardi said that FAFAA serves under Gov. Vázquez, adding that the Governor is also seeking additional aid from the federal government.

The Steep Challenges of Chapter 9 Recovery. Farther north, in the State of Georgia, there appear to be worries that post-chapter 9 Jefferson County, Alabama could find itself back at some municipal credit risk less than a year in the wake of finally exiting from its chapter 9 municipal bankruptcy. The fear is that the County’s new budget could harm its credit rating—or, as Commission President Jimmie Stephens and former Commissioner David Carrington noted, some provisions in the proposed FY2020 carry signal fiscal risks. President Stephens, for instance, noted: “We’ve been through bankruptcy and understand the pain,” with his words coming last month after the County Commission voted 3-2 vote to adopt a $700 million budget for the new fiscal year beginning at the end of this month. Commissioners Joe Knight, Lashunda Scales, and Sheila Tyson provided the majority. Commission President Jimmie Stephens and Commissioner Steve Ammons, both Republicans, voted against the budget. Commissioner Stephens sought unsuccessfully to send the proposed budget back to committee for further review, noting that although the budget is balanced, he felt there were are measures which violate budget policies adopted by the prior Commission after Jefferson County, under its chapter 9 plan of debt adjustment, exited municipal bankruptcy six years ago. (Commissioners Stephens and Carrington were among the Commissioners who had voted to file for chapter 9 in 2011.) Commissioner Stephens noted: “We’ve been through [municipal] bankruptcy and understand the pain…We were attempting up until this year to establish budget stabilization funds and a catastrophic fund to keep from having to experience a shortage in case of an economic downturn, so this a little unusual to go through this.”

Commissioners Stephens and David Carrington noted they were apprehensive that no funds were appropriated for reserves in the new budget–some $15 million from current-year reserves will be rolled over; the unassigned general fund balance will not be known until the County’s fiscal year ends next week. Commissioners Stephens and Carrington included, as part of the vote, the creation of a $1.25 million fund to assist low-income people on the Jefferson County’s sewer system, in no small part, because both have been apprehensive that, because Alabama’s constitution prohibits municipalities from giving public money to private persons, there could be a court challenge; in addition, they questioned the creation of a new $1.22 million fund to support community entities and events, most of which Commissioner Carrington believes should be financed out of the Board’s discretionary funds. Under the proposed budget, each commissioner will have $225,000 to appropriate for on events and other needs in her or his district; the $2.47 million of which they have been critical represents approximately one-third of one percent of the budget.

Commissioner Carrington noted, in an op ed to the Bond Buyer: “As a citizen of Jefferson County with a lot of blood on the trail to nurse the county back to financial health, I urged the Commission to vote no on the proposed budget and to go back to the drawing board to develop a fiscally disciplined one.” The Commissioner appears to be apprehensive that comments made by Commission President James Stephens and former Commissioner David Carrington have been reckless and could risk undercutting the hard work and dedication made by the County to adopt and implement a plan of debt adjustment, as well as re-establish credibility with Jefferson County citizens and the financial community. Commissioner Scales, who, in her campaign had included a promise to develop a payment assistance program to help county citizens pay their sewer bills, said the Commission appropriated funds which could be used to support a nonprofit entity that has an existing program that provides public utility assistance, which includes the indigent population of Jefferson County on the sanitary sewer system, noting: “There is no county-run program. The Commission has not yet voted on any appropriate entity to administer the funds: “Sanitary sewer services are a matter of public health. Assuring that our citizens have access to basic human services is our duty.”

The eminent scholar and Dean of chapter 9 municipal bankruptcy, Chicago’s Chapman Strategic Advisor Jim Spiotto, reasonably noted that, as a matter of public policy, municipal budgets should be balanced; they should comply with the legal requirements of using funds and tax revenues which are collected: “Obviously, you’re supposed to be a prudent steward of the tax dollars and part of balancing the budget is making sure reserves are needed for capital and other expenditures.” Mr. Spiotto, who had calculated that reserves for Jefferson County’s FY2020 budget would be about 2.1% of the spending plan—and who had who reviewed Commissioner Carrington’s comments complaining about “an unconscionable lack of fiscal discipline” in the FY2020 budget, said Commissioners who approved the budget should take stock of Commissioner Carrington’s views: “I think certainly these are questions raised by someone who was a county Commissioner for eight years: You have to take it seriously, and there may be good answers to these questions, but they are questions that should be answered to make sure certain actions don’t turn out to be missteps which could lead to financial difficulty.”

S&P Global Ratings has reported that income levels in the Jefferson County sewer system service area are 90% of the national average, but that the poverty rate is approaching 20%, with analyst James Breeding last December writing: “Since the county emerged from [municipal] bankruptcy, the County Commissioners increased rates about 7.8% per year through fiscal 2018, as planned, and 3.5% per year for fiscal year 2019.” The most recent sewer rate increase was implemented nearly one year ago—leading Mr. Breeding to note: “Although not yet a significant credit negative, rate affordability is increasingly becoming a concern.”

Commissioner Scales did not answer a question with regard to whether she obtained an attorney’s opinion about the legality of using Jefferson County funds for sewer payment assistance. Commissioner Stephens said that after first exiting chapter 9 municipal bankruptcy in 2013, County Commissioners built up reserves and targeted spending to benefit local residents the most, such as repairing roads and addressing other back-logged capital needs. The Government Finance Officers Association, as a general rule, recommends that governments hold in reserves an amount equal to no less than two months of operating expenses, said GFOA Deputy Executive Director Mike Mucha. “However, GFOA also understands that governments also face different levels of uncertainty and risk related to their revenues and expenses,” said Mucha, who is also director of the Research and Consulting Center. “We would also advise the governments take this into account when determining an appropriate level of reserves.” Jefferson County filed for reorganization in 2011 and emerged from bankruptcy in December 2013 after closing on the issuance of $1.8 billion of 40-year sewer warrants to write down $3.2 billion of old sewer debt, resulting in an overall 40% haircut to bondholders. Attorney Calvin Grigsby appealed the plan of adjustment on behalf of a group of ratepayers, launching a years-long and ultimately unsuccessful process that ended when the U.S. Supreme Court denied his request for a writ of certiorari in March. Mr. Grigsby is continuing to pursue a $1.6 billion proof of claim made by ratepayers in the bankruptcy case, based on an argument that the old sewer warrant proceeds refunded in 2013 were used for private purposes and therefore are unconstitutional and uncollectable.

Commissioner Stephens, who won his third term in November, said he believes certain spending in the upcoming budget should have been dedicated to continue boosting the budget stabilization fund and other reserves “to make sure that during a downturn in the economy that we can still administer government without a disruption of services.”

As adopted, the budget allocates $1.22 million to support nearly two dozen community entities and events, including $200,000 to the annual Magic City Classic. The City of Birmingham is contributing $793,575 to next month’s football game between Montgomery-based Alabama State University and Huntsville-based Alabama Agricultural and Mechanical University. Commissioner Stephens said Jefferson County has not contributed money toward the Magic City Classic during his time in office, but Commissioner Scales said Jefferson County has contributed to the Magic City Classic in the past and that the largest football classic between two historically black colleges and universities in the nation garners more than $22 million in economic impact to Jefferson County and the region, noting: “Taxes generated from the 50,000 room nights alone represent a major funding mechanism for the Birmingham-Jefferson Convention Complex.” Commissioner Scales also said the recently passed budget reflects the Commission’s support for the diverse needs of Jefferson County, and that it includes funding for life-saving storm shelters, programs to remove blight throughout the county, and funds for major capital improvement projects. The budget also assists law enforcement with funding for the Crime Stoppers program as well as the Jefferson County library, “in addition to supporting revenue generators such as the Magic City Classic and others,” she said. Stephens said the county should maintain a good fiscal policy because there are plans to refund about $2 billion of back-loaded outstanding sewer warrants using a 10-year call provision in 2023.

Commissioner Stephens noted the County’s FY2020 budget “is completely contrary to what we’ve done past six years,” adding that the sewer department’s operations have been steady, with revenues exceeding projections and expenses less than anticipated, noting: “We are in good shape with our sewer refunding, and we want to be in a good environment under better creditworthiness to go back to the market.”

For his part, Commissioner Carrington said he had urged the commission last month to delay a decision on the budget in order to give more consideration to apportioning revenues from a 1% sales tax authorized by the Alabama Legislature in 2015: said sales tax enabled the county to refinance $595 million of school warrants; it also established a waterfall for excess sales tax collections after paying debt service on the refunding warrants that includes funding for discretionary use that the Commissioner said was supposed to help build reserves, noting that a minimum of $10 million, or about 5% of the general fund budget, should have been used to fund contingencies and reserves: “I believe this Commission is beginning to move the county toward a slippery slope that could very well lead to a future bankruptcy…“Since my pleas, as well as the formal requests of Commissioners Stephens and Ammons were ignored, I believe this Commission is beginning to move the county toward a slippery slope that could very well lead to a future bankruptcy.” Commissioner Stephens said he plans to request an opinion from the Alabama Attorney General with regard to whether the county can legally spend money on it. Chapter 9 guru Jim Spiotto notes that the issues raised by Commissioner Carrington will be of concern to the municipal bond market, warning that if Jefferson County needs to borrow money, people will want answers to the questions Commissioner Carrington raised: “Everybody wants the best for Jefferson County and would really like them to succeed and overcome the past history of the bankruptcy…So they want to get their numbers right and do it in the right way, because nobody wants them to have financial distress and return to bankruptcy.”

Unsheltered from the Corruption Storm

Good Morning! In this morning’s eBlog, we consider the federal corruption by former top federal FEMA officials responsible for assistance in the wake of the physical and fiscal devastation to the U.S. territory of Puerto Rico by Hurricane Maria.

A Different Kind of Storm. Former top FEMA officials who worked in the U.S. territory of Puerto Rico during its physical recovery from Hurricane Maria have been arrested in a federal corruption investigation which focuses around alleged bribes that secured a $1.8 billion contract to repair Puerto Rico’s damaged electrical grid. Federal authorities have arrested Dr. Ahsha Tribble, FEMA’s Deputy Regional Administrator for FEMA Region II, with oversight for the operational aspects of regional disaster response and recovery, mitigation, and preparedness in New York, New Jersey, Puerto Rico, and the U.S. Virgin Islands, who had been deployed to Puerto Rico following Hurricane Maria as the Power Sector Chief for Response and the Infrastructure Chief for Recovery. Also arrested were Donald Keith Ellison, former President of energy company Cobra Acquisitions and Jovanda Patterson, who worked as Dr. Tribble’s chief of staff. The indictment, which was returned by a federal grand jury in the District of Puerto Rico, lists 15 counts of corruption against Dr. Tribble, Mr. Ellison, and Ms. Patterson. They include charges against Dr. Tribble and Mr. Ellison of conspiracy to commit bribery, honest services wire fraud, and disaster fraud. Dr. Tribble was separately charged with Travel Act violations, while Mr. Ellison was separately charged with making false statements to federal agents. Ms. Patterson, who worked directly under Dr. Tribble and was later hired by Cobra Acquisitions, was charged with committing acts affecting personal financial conflicts of interest and wire fraud. Cobra Acquisitions was the main contractor for the Puerto Rico Electric Power Authority (PREPA) and executed two contracts with the agency for a total value of $1.8 billion, according to the Justice Department. Work completed by Cobra for Puerto Rico’s damaged electrical infrastructure was paid through the Puerto Rico Electric Power Authority by federal funds from FEMA. From October of 2017 to last April, Mr. Ellison provided “things of value” to Dr. Tribble to influence his decisions to award Cobra with restoration work, according to the Justice Department. Prosecutors claimed that Mr. Ellison provided Dr. Tribble with personal helicopter use and use of a credit card and that he secured employment within Cobra for Ms. Patterson. In a statement, U.S. Attorney Rosa Emilia Rodríguez-Vélez said: “These defendants were supposed to come to Puerto Rico to help during the recovery after the devastation suffered from Hurricane María. Instead, they decided to take advantage of the precarious conditions of our electric power grid and engaged in a bribery and honest services wire fraud scheme in order to enrich themselves illegally.” She further added: “All government officials are entrusted with performing their duties honestly and ethically. The charged offenses are reprehensible, more so in light of PREPA’s and Puerto Rico’s fiscal crisis.”

U.S. Rep. Nydia Velázquez (D-N.Y.) noted: “We’ve long known that FEMA’s response to Maria was flawed and inadequate, but we are now learning it may also have been hampered by corruption…I am thankful that the Department of Homeland Security’s Office of Inspector General and the FBI are ferreting out these misdeeds…These charges, related to the island’s beleaguered energy grid, are an appalling insult to the people of Puerto Rico who already endured the longest blackout in American history. If proven, this misuse of funds suggests that, while our fellow citizens on the island were dying from a lack of electricity, private companies stateside were plotting how to illicitly profit at taxpayers’ expense. We must do better by the people of Puerto Rico.” According to federal prosecutor Rosa Emilia Rodríguez Vélez, from October 2017 to April 2019, Dr. Tribble and Mr. Ellison developed an arrangement whereby Mr. Ellison would provide Dr. Tribble with valuable gifts, and, in exchange, Dr, Tribble would use her influence to direct large contracts to Cobra, the main contractor for PREPA doing recovery work following Hurricane Maria. Indeed, Cobra received two contracts totaling $1.8 billion for Hurricane Maria reconstruction. “Work performed under both contracts was paid through the Puerto Rico Electric Power Authority with federal funds from FEMA,” the U.S. Attorney’s Office for Puerto Rico said in a statement.

The federal government approved a set amount for Puerto Rico’s reconstruction, and the use of more than necessary for the electrical system may have drawn money from other potentially worthwhile projects. Much of the federal hurricane reconstruction money has yet to be disbursed.

In Puerto Rico, Dr. Tribble had the titles senior lead and Deputy Director. She reported directly to the federal coordinating officer and was FEMA’s primary leader on the restoration of electrical power. Moreover, according to the U.S. Attorney’s Office, Mr. Ellison provided Dr. Tribble personal helicopter use, hotel accommodations, airfare, personal security services, as well as the use of a credit card.

FEMA released a statement saying: “FEMA’s mission is to help the American people before, during, and after disasters and our mission can only be accomplished by maintaining the public trust and confidence of those we serve. As such, the agency takes allegations of employee misconduct extremely seriously and holds all employees to the highest ethical standards — requiring them to protect government resources and place public service over private gain in everything they do.”

According to the El Nuevo Día news website, at a grand jury held this summer, Foreman Electric’s chief executive officer, Bront Bird, said his company offered its services to PREPA for almost half the cost of that Cobra bid. Yet the contract went to Cobra.

“‘Twas in another lifetime, one of toil and blood When blackness was a virtue the road was full of mud…”

September 6, 2019

Good Morning! In this morning’s eBlog, we consider, as Bob Dylan was wont to sing, about the physical, fiscal, and governing challenges as Storm Dorian bypassed Puerto Rico. 

A Different Kind of Storm. Members of Congress yesterday blasted plans the President announced to seize $402 million in military construction projects in Puerto Rico to divert those funds to pay for his promised border wall, with Rep. Nydia Velázquez (D-NY) stating the “repurposing of these funds will make Puerto Ricans less safe by reducing U.S. military readiness and diverting resources from Puerto Rico’s National Guard.” Here, the amount is part of $3.6 billion in military construction funding the President is proposing to divert by the Department of Defense to finance 175 miles of border wall along the U.S.-Mexico border. Half the funding would be taken from domestic uses affecting other cities, counties, and states; and half from international projects; but Puerto Rico was targeted for the biggest diversion of funds domestically, raising apprehensions the wresting of the funding for the U.S. territory could hamper efforts to rebuild from the devastation and losses of American lives from Hurricane Maria—especially, for instance, projects such as a power substation and a National Guard readiness center. Or, as Rep. Velázquez noted: “Not only will the reprogramming of these funds make Puerto Rico less prepared in the event of disasters, but it would likely harm the local economy by depriving on-island contractors of job-creating opportunities,” describing the President’s actions as “shameful,” adding: “The President intends to steal money from an already impoverished Island to finance his coldhearted persecution of immigrants.” Her colleague, Rep. Jenniffer González-Colon (R-Puerto Rico), Puerto Rico’s non-voting member in Congress, said: “Puerto Rico is an insular jurisdiction that primarily relies on assets maintained on the ground. As we continue evaluating lessons learned by the 2017 hurricane season and the consequences it had on my constituents, we need to allow military units on the island to have the resources they need as they are the first line of defense in the aftermath of any natural or man-made disaster.” Her colleague, Rep. Darren Soto (D-Fla.), told NBC News in an e-mailed statement that President Trump’s plans to put off military construction in Puerto Rico and Florida show that “he is willing to put national security in jeopardy, hurt our troops, and derail disaster recovery, to fund his ineffective, medieval border wall.”

For his part, the President has complained that because Puerto Rico’s elected leaders were insufficiently  grateful for the post-Maria aid the U.S. territory had received—and who had sought to cut the relief funding Puerto Rico will receive in the future—in part by vastly overstating the amount of disaster aid provided to the U.S. territory—claiming it had received $92 billion in aid—far more than the $14 billion Puerto Rico has received—and reportedly privately joked about trading the U.S. territory to Denmark in return for Greenland. Last week, the President tweeted a complaint that then-tropical storm Dorian appeared to be headed to Puerto Rico, “as usual,” adding 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!” In total, the Pentagon, under the President’s order, is redirecting funds for military projects in 23 states, 3 U.S. territories, and 20 foreign countries towards wall construction. Mayhap ironically, it was three years ago this week that President Trump tweeted: “Mexico will pay for the wall—100%!”

Unshelter from the Storm? The effective skimming of FEMA disaster recovery assistance has added to apprehensions uncertainty among Puerto Rican alcaldes or mayors with regard to the impact that the passage of Hurricane Dorian through Florida and Georgia may have on the distribution of Community Development Block Grant for Disaster Recovery Program for Puerto Rico—indeed, since the havoc wrought by Hurricane María, they have not received those funds, or, as Mayor Bernardo “Betito” Márquez of Toa Baja, a muncipio or city of over 88,000, known as La Ciudad Bajo Aguas (the under water city), located in the northern coast, put it: “We have a situation with Hurricane Dorian, a catastrophic phenomenon for Florida. What implications does that have for Puerto Rico’s funds? We don’t know. That is an element of uncertainty, and our fellow citizens can’t live in uncertainty…It is important to work in solidarity, because we are in September, and it is the peak of the hurricane season.”

Yesterday, a group of Mayors from both the New Progressive Party (PNP) and the Popular Democratic Party (PPD) met with Chief of Staff Zoé Laboy to discuss the delay in the release of the nearly $20 billion in CDBG-DR funds allocated to the island. Chief Laboy said: “The Governor (Wanda Vázquez Garced) said it from the beginning, she is looking for results. We know that there are situations with federal funds, particularly with those that have to do with recovery.” As a result of the meeting, they agreed to improve communication channels between the municipal governments and the Housing Department which handles the funds and to analyze the viability for entitlement municipalities, that is municipios with over 50,000 inhabitants, to receive part of those funds directly, under Law 162-2018, which provides for that agency to manage the funds. Caguas Mayor William Miranda Torres added: “That is going to be discussed with Housing: that these CDBG-DR funds reach those municipalities that have the structures and can manage some of these projects at the consortium level.”

CDBG-DR funds have been allocated for the reconstruction and rehabilitation of homes affected by Hurricanes Irma and María: according to government data, there are some 30,000 families living under blue tarps in Puerto Rico. In Caguas, there are about 250 families living in these conditions. Nevertheless, Arecibo Mayor Carlos Molina, leader of the Mayors Federation, which groups PNP mayors, noted: “We haven’t seen a penny yet. As for reconstruction funds, I still don’t know how much we will receive or what the priority will be.” Housing Secretary Fernando Gil Enseñat, through his spokeswoman Leticia Jover, said Puerto Rico has complied with all the dates and HUD mandates, noting: “We are waiting for the grant agreement to be signed, which will give way to the release of the second package and the beginning of some of the programs contained in the amended Action Plan.”

The President of the Mayor’s Association, Mayor José “Joe” Román Abreu of San Lorenzo stressed the importance of improving communication with Housing to also speed up the release of CDBG funds for infrastructure development. Since CDBG funds allocated to municipalities with less than 50,000 inhabitants were first handled by the Office of the Commissioner of Municipal Affairs (OCAM), and later by the Office of Community and Socioeconomic Development, and then by Housing, their distribution was delayed. The governmental changes were sort of a bureaucratic storm, or, as Mayor Abrue described it: “As OCAM was dismantled and then they went to ODSEC, the documents are not available, and this results in Housing having to request municipalities for these documents when they were already submitted,” adding that there is also an alleged disagreement between HUD and the local Housing Department which has prevented the funds from reaching the municipalities: “The funds are in Housing, but authorization is required for them to be released,” in reference to a $25 million package in CDBG funds that would be distributed among some 40 municipalities.

Likely adding to the disparate federal response has been finding a way to make clear to Congress that notwithstanding both the meteorological and fiscal storms, Puerto Rico’s government is working things out in the wake of former Gov. Ricardo Roselló Nevares’ resignation and the arrests of former Education Secretary Julia Keleher and former Executive Director of the Health Insurance Administration (PRHIA) Ángela Ávila. Thus, Ponce Mayor María “Mayita” Meléndez said she would go to Washington D.C. next week, noting: “Obviously, this can’t be delayed anymore, we’ve been waiting for two years.”