Motor City Makes Tracks & Puerto Rico’s Quasi Chapter 9 Municipal Bankruptcy Likewise!

January 31, 2020

Good Morning! In this morning’s eBlog, we consider the ongoing fiscal and physical recovery of Detroit from the largest municipal bankruptcy in U.S. history, before assessing the status of the quasi-municipal bankruptcy in the U.S. Territory of Puerto Rico.

The Railroad of Recovery. On Detroit’s first day of chapter 9 municipal bankruptcy, the clerk at the front desk of the hotel I had just spent the night in warned that it was too dangerous for me to even consider walking to the Governor’s downtown office—this on the day the Motor City filed for the largest chapter 9 municipal bankruptcy in U.S. history. Yet walk I did—a depressing walk through and past abandoned buildings and empty streets, over to Detroit’s former main train station, an abandoned architectural masterpiece appropriate to a city with the world renowned Detroit Institute of Arts, which has one of the largest and most significant art collections in the U.S. The empty train station, designed in the Beaux-Arts style by the same architects who created Grand Central Terminal in New York, has tall columns and vaulted ceilings which offer a hint of its past glory—but which, then—and still today, crumbling, empty of trains and passengers, adorned with graffiti and gaping holes through which sleet, rain, and snow can fall. Mayor Mike Duggan noted: “Michigan Central Station has long been a symbol of Detroit’s vibrancy, and then it became an international symbol of decline.”

But, courtesy of the Ford Motor Company, the station could become a centerpiece of the city’s extraordinary fiscal and physical recovery—one which is projected to transform the station, as well as an adjacent book depository, brass factory, and hosiery factory into a 1.2 million-square-foot transportation innovation district. Moreover, Ford is planning to lease space to companies working on mobility and transportation projects, such as smart vehicles, infrastructure, and parking: the innovation hub will also have shops, restaurants, art, and performance spaces as well as what I could barely find on that first day of bankruptcy: a boutique hotel on the top floors of the 15-story tower rising above the station. Thus, it appears the revitalized station could well be the centerpiece of a profound city core transformation.

Detroit’s plan of debt adjustment designed by then Emergency Manager Kevyn Orr, was, on that first morning, focused on vital public safety: making sure street and traffic lights worked, and 9-1-1 calls received immediate responses. The task in a rare city more dependent upon income than property taxes was how to incentivize families to move into the city.

Thus, both the plan of debt adjustment—with the marvelous adjustment to retain the world-renowned Detroit Institute of Art, as well as the imaginative and extraordinary insights and financial investments of Detroit billionaire Dan Gilbert  and the extraordinary series of investments—especially the acquisition and development of more than 100 properties in Detroit and Cleveland since 2011, have made the city a go-to metropolis—and an emerging U.S. technology hub: Fiat Chrysler has announced a $4.5 billion investment in five Michigan plants, creating about 6,500 jobs in Michigan; Waymo, the self-driving technology company owned by Alphabet, the parent company of Google, opened its first factory in Detroit late last year—in its own way commemorating Ford’s long history in the Motor City, thanks to its Model T, the first affordable mass-produced automobile, which was made at the company’s Piquette Avenue Plant, built in 1904.

Choo Choo! Michigan Central Station opened in 1913, replacing a station which had burned down—a station which by the war years of World War II saw more than 4,000 passengers passed through it each day. In this car manufacturing hub of the country, however, by the end of the war, car travel overtook train travel, contributing to the city’s fiscal foundering—and then the 1967 race riots crushed assessed property values, draining one of the city’s most valuable fiscal resources—and discouraged Michigonians from wanting to live in a rare city more dependent on income than property taxes. Thus, the last trains, operated by Amtrak, departed Michigan Central Station in 1988, after which the station closed and fell into disrepair.

Community Benefits. With trains no longer a centerpiece for the city’s physical and fiscal future, the City Council is considering lower project thresholds to trigger Detroit’s Community Benefits Ordinance, as well as more community meetings and longer agreement review times are among a list of proposed changes to the ordinance that locks in guarantees and other protections for communities. The Detroit City Council’s Legislative Policy Division has offered or proposed a list of 17 items to the community in order to trigger feedback to the City Council as it mulls over changes to a voter-approved ordinance which mandates developers to commit to hiring and other quality-of-life benefits for residents living in the area of proposed large-scale developments. Indeed, the City Council has been working for more than a year to draft possible changes to the ordinance: when Motor City voters passed the ordinance in 2016, it made Detroit the first city in the nation to require developers of large-scale projects to negotiate benefits packages with neighborhoods.

Nevertheless, critics of the new ordinance claim it includes no enforcement mechanisms—thus, the City Council has asked a legislative staff working group to review 62 recommendations during seven, five-hour meetings: it was from that list that the seventeen emerged: the Detroit community benefits ordinance applies to developments which meet at least one of three requirements: 1) if the development project is $75 million or more in value; 2) the project receives $1 million or more in property tax abatements, or 3) receives $1 million or more in value of city land sale or transfer.

When the ordinance is triggered, a Neighborhood Advisory Council is established with residents from the area the development will affect. That group is tasked with negotiating with the developer for benefits including hiring preferences, recreational amenities and funds for home repairs.

Interestingly, a team from Ford, which has its own vital stake in the effort, looked East to New York City—or, as a team member noted: “For this part, we have looked at images from the High Line in New York for inspiration,” referring to the elevated park on the West Side of Manhattan. The auto company, which is helping in the efforts to revitalize Corktown, Detroit’s oldest neighborhood, created by Irish immigrants about one mile west of downtown. Nevetheless, just as a train needs to be connected by tracks, so too connecting the various pockets of development in Detroit remains a challenge.

Not Disconnecting Neighborhoods. Just as a train must be connected to stations, so too Mayor Duggan has been focused on trying to ensure that revitalization efforts benefits all of the city’s residents: that remains a challenge, for while the city’s unemployment rate fell from more than 20 percent a decade ago  to 3.4 percent last November, it is still higher among African-Americans, who make up nearly 80 percent of the city. Moreover, in a city dependent on income tax revenues, Detroit still has one of the highest poverty rates in the nation—more than one-third, which, although reflecting an improvement from the nearly 40 percent of five years ago, remains a serious fiscal challenge.

Thus, finding ways to attract the city’s growing number of visitors and their influx of cash has been a key element of the Motor City’s recovery: some fourteen million visitors came to the area in 2013, according to the Detroit Metro Convention and Visitors Bureau, a number that jumped to nineteen million last year. Detroit has four major-league sports teams, all of which play in the downtown area. There are several arts venues in the downtown district, such as the Detroit Opera House and the Fox Theater, a performing arts center that opened as a movie theater in 1928. Aaron K. Foley, who was Detroit’s “chief storyteller” from 2017 to 2019, said he was “cautiously optimistic” about the city’s progress. His role was created by the mayor as an attempt to diversify the way Detroit was portrayed—noting he had become tired of people arriving in Detroit and “beelining to take photos of the empty buildings and empty train station…Detroiters have a name for that: ‘poverty porn.’”

Putting Puerto Rico’s Local Governments at Risk? An attorney for the PROMESA Board, Martin Bienenstock, has reported that mediation over Puerto Rico’s central government debt is making progress, with his comments coming as Judge Laura Taylor Swain ordered parties involved with the central government debt types to enter into mediation in July. Mr. Bienenstock added it was possible that in the coming month there would be an announcement manifesting mediation progress during a Title III omnibus bankruptcy hearing in the U.S. District Court for Puerto Rico, noting there had been progress in the mediation over Puerto Rico’s central government debt; he also said he hoped the PROMESA Board would make a Title VI bankruptcy filing for the Puerto Rico Industrial Development Company sometime after next month.

Title III of the PROMESA Act lays out a traditional court-supervised bankruptcy process; Title VI lays out a process for creditors to negotiate and approve agreements before the PROMESA Board presents them to the court. In addition, Judge Swain, on Wednesday, ordered some changes to how she will address issues related to municipal revenue bonds, with bonds from the Highways and Transportation Authority, Puerto Rico Infrastructure Finance Authority, and Convention Center District Authority affected. Judge Swain stated that instead of holding a hearing with regard to all revenue bond topics on February 27th, instead there would be a preliminary hearing on March 5 and maybe March 6 and that it would only covers issues of standing and security interest. She noted she wanted a “meet and confer” meeting with parties by February 7th and that she would push back arguments with regard to lifting stays on litigation for the revenue bonds to a date after March 6th.

Rocky Escuela Reopenings

The U.S. Territory of Puerto Rico has re-opened just 20 percent of its public schools this week, after delaying opening nearly three weeks amid ongoing terramotos or earthquakes which have shaken to he southern potions of the island: only 177 schools were certified to open yesterday after engineers inspected them for damage following the 6.4 magnitude earthquake on January 7–a quake which left one person dead and damaged hundreds of properties. Inspectors have been, so far, unable to determine whether some of these schools would be safe and able to withstand another: engineers have inspected 561 of Puerto Rico’s 856 public schools: at least 50 were determined unsafe to reopen, with 240,000 students out of school.

Since the terramoto on January 7th, there have been several aftershocks across the Puerto Rico, including a 5.9 magnitude earthquake on January 11th and a 5.0 magnitude quake that struck last Saturday. (Engineers automatically have to re-inspect schools after any earthquake that is magnitude 3.0 or higher, according to the AP.) The terramoto on January 7th razed the top two floors of a three-story school in Guánica, as engineers reported that 500 public schools in Puerto Rico were built prior to 1987, schools or escualas which fail to meet new construction codes, with officials noting that a plan to retrofit an estimated 756 buildings could cost up to $2.5 billion. 

Gov. Wanda Vazquez yesterday said her administration is trying to find alternative options for students who cannot return to schools, noting that holding classes outside poses problems for educators, including how students would receive meals, not to mention access to bathrooms and transportation.  Puerto Rico Secretary of Education Eligio Hernández said 51 schools are also scheduled to begin classes on February 3rd, telling reporters: “The Department of Education is going to take the time it needs and will take all necessary actions so that parents…feel satisfied.” 

 

Saying no to Flint & Putting Puerto Rico’s Local Governments at Fiscal Risk?

January 29, 2020

Good Morning! In this morning’s eBlog, we consider the exhaustion of still another avenue of relief for the City of Flint from the lead contamination of its drinking water; then we consider the ongoing questions with regard to the slow and seemingly discriminatory emergency response to the earthquakes in the U.S. territory of Puerto Rico.

No Recourse? The U.S. Supreme Court has declined to take a case stemming from the 2014 drinking water lead contamination crisis in Flint, Michigan. Approximately 25,000 people have sued over the crisis, in which a change in the source of the city’s water resulted in lead contamination. The case the Justices turned away without comment yesterday involves a lawsuit against the city and water regulators, most of whom were responsible for making sure federal clean water laws were followed. The lawsuit claims the officials failed to protect residents from a foreseeable risk of harm from exposure to lead. The lawsuit and others like it claim that the public has a constitutional right to “bodily integrity” that was violated. The city and officials have argued they should be immune from being sued, but lower courts have disagreed. The lawsuit and others like it are expected to go forward in lower courts.

Putting Puerto Rico’s Local Governments at Risk? The Trump Administration does not see the need for the new $3.35 billion emergency supplemental appropriations bill for Puerto Rico, which the House could pass and send to the Senate as early as next week. However, according to senior Trump Administration officials, while the House may begin to advance the bill next week, the Trump Administration’s position is that such legislation is not necessary right now, according to a senior Trump administration official, who noted that the federal government already plans to allocate funding for recovery efforts, so that this would “not be the time to rush” additional aid to the U.S. territory. The Trump administration believes that, through the major disaster declaration for 16 municipios, it will be able to channel the assistance the territory needs in the wake of last month’s earthquakes, so the Administration apparently views the effort by Democrats to be a political move by pushing a new emergency spending legislation. However, House Appropriations Committee Chair Nita Lowey (D-N.Y.) has introduced a bill proposing to allocate $3.35 billion to Puerto Rico, including $2 billion in CDBG Disaster Recovery grants, $1.25 billion for road repairs, and $100 million from previous allocations aimed at mitigating the catastrophe caused by Hurricane María to assist with the emergency caused by the earthquakes, which have caused hundreds of millions of dollars in damage and impacted hundreds of structures.

Presidential Campaign Issue? Presidential candidate, former New York City Mayor Michael Bloomberg has unveiled his policy plan—a plan distinct from other candidates, which includes supporting statehood for Puerto Rico. Mr. Bloomberg vows that, if elected, he would push for an independent review and restructuring of the agreements promoted by the PROMESA Board overseeing Puerto Rico’s public finances. Candidate Bloomberg has unveiled a policy plan criticizing the austerity measures that came along with the public debt restructuring process, noting: “Puerto Rico continues to be burdened by a federally-controlled debt restructuring process which has imposed draconian cuts to pensions, civil service pay, the university, and municipal governments that are the backbone of public safety and disaster response,” adding that in his “Mike’s Policy for Puerto Rico,” that a Bloomberg White House agenda would seek to replace “austerity measures with investments for economic growth.”

His proposal also stresses the issue of Puerto Rico’s exceptional poverty rate, currently around 43 percent—or twice that of the poorest mainland state U.S., Mississippi, noting that a Bloomberg Administration would advocate for full access for Puerto Rico to federal programs, such as Medicaid, the Child Tax Credit (CTC), and the Earned Income Tax Credit (EITC): “Mike’s plan provides for an independent audit, overseen by a representative board, of current debt and recent restructuring proposals, and implements a plan for debt relief based on the results.”

The former New York City Mayor suggested he would consult on the issue of statehood status with Puerto Rican voters. Without mentioning recent referendums on the island, which have been contested by the political opposition, the former Mayor said statehood is an alternative that most Puerto Ricans support: “Most Presidential candidates have been too afraid to back it. Not me. I’ll state it clearly: I support statehood for Puerto Rico. And as President, I will work to pass a bill making it a reality, subject to approval by the people of Puerto Rico-who will make the ultimate decision.”

His proposed plan also seeks to ensure a plan to respond and direct federal resources in case of a disaster, as well as a reconstruction plan; he vowed he would also support efforts to transform the power grid, to implement a plan for debt relief, and to use renewable sources and independent regulation.

The Presidential primary in Puerto Rico–with 51 delegates participating in the July Democratic convention in Milwaukee, Wisconsin, is scheduled for March 29th. To date, former Mayor Bloomberg would be the only one who has openly expressed his support for statehood among those considered as leading contenders.

Inequitable Response to Americans at Risk?

Good Morning! In this morning’s eBlog, we consider the ongoing, slow federal response to render physical and fiscal assistance to the growing list of municipios devastated by the series of earthquakes or terramotos which have struck the southern portions of the U.S. territory of Puerto Rico.

Putting Puerto Rico’s Local Governments at Risk?  A warehouse full of undistributed disaster recovery materials from Hurricane Maria appears to mark the latest governance challenge for the U.S. territory, after a private citizen discovered the warehouse, raising critical questions in a place of divided governance—a federally-imposed oversight board (PROMESA) and a Governor and legislature. Caught in the middle, American citizens took to streets to underline their frustration with regard to the ongoing issues of disaster recovery. Unsurprisingly, this latest lay in responding to the disasters, which have continued to impact the island. But, with an unequal response by the federal government compared to comparable disasters stateside, and with Puerto Rico still struggling to recover from three devastating earthquakes and hundreds of continued tremors in the southwest of the island, not to mention the devastation of Hurricane Maria, the Trump administration has added insult to injury by imposing unprecedented conditions or strings on the distribution of long-withheld recovery funds appropriated by Congress more than two years ago in the aftermath of Hurricane Maria—conditions which make it even more difficult and unlikely that the most vulnerable and poor Americans in Puerto Rico will ever be able to rebuild their homes and communities from the lingering damage—or, as one paper noted: “Never has an American jurisdiction been so restricted by the federal government in the use of disaster aid funds.”

Here, the restrictions include giving the authority and power to oversee recovery funds to the PROMESA Board—a board created far away in Washington, D.C. by Congress and the White House to impose fiscal oversight of Puerto Rico’s public debt—that is, a Board with no background or experience with regard to disaster recovery, but which has, nevertheless, imposed restrictive conditions on the use of recovery dollars, and imposed a new set of unfunded federal mandates via the imposition of a whole new system of property registry, disregarding the existence of local property law in Puerto Rico. Moreover, Trump Administration officials, including HUD Secretary Ben Carson, are, once again, arguing that withholding and restricting aid to Puerto Rico is the correct way to avoid the misuse of federal dollars—instead trying to work with and through those elected to serve the U.S. citizens and the local governments, which are the 9-1-1 first responders, and which have, to date, continued to step up to the challenge of supporting earthquake survivors and uncovering irregularities and ineptitude of their local government.

The international disaster recovery organization Oxfam has been working with civil society organizations in Puerto Rico in support of federal legislation to authorize the creation of a Civil Society Task Force as an alternative for the coordination of recovery funds, with a goal of helping Puerto Rico’s local and quasi-state leaders to be in the driver’s seat: fully engaged and empowered, to ensure the federal recovery dollars go to those who need it most.

Is FEMA’s Response to Puerto Rico’s cities and towns fair?

 

January 24, 2020

Good Morning! In this morning’s eBlog, we consider the ongoing, slow federal response to render physical and fiscal assistance to the growing list of municipios devastated by the series of earthquakes or terramotos which have struck the southern portions of the U.S. territory of Puerto Rico.

Putting Puerto Rico’s Local Governments at Risk?  Governor Wanda Vázquez Garced of Puerto Rico is seeking to extend her disaster declaration to 10 additional municipios in Puerto Rico, but her efforts come as to extend the federal assistance is running into a federal government bureaucratic storm, as the Governor has sought extension of the current FEMA help via a Presidential Disaster Aid proclamation to the municipios of Adjuntas, Cabo Rojo, Corozal, Jayuya, Lajas, Lares, Maricao, San Germán, San Sebastián, and Villalba. Her request came in the wake of learning that neighboring municipios of those she had already declared covered-Guánica, Guayanilla, Peñuelas, Ponce, Utuado, and Yauco—had subsequently reported severe damage, leading her to state: “That is why we are requesting to include these municipalities in the major disaster declaration signed by the U.S. President…The purpose is to provide them with the tools to respond to the situation we are facing and that directly affects our citizens.” She filed Puerto Rico’s request with FEMA Administrator, who could extend the disaster declaration, without necessarily requiring the White House participation.

Nevertheless, the Governor’s request could be confronted by a federal bureaucratic storm: FEMA, yesterday stated that in the wake of concerns with regard to what it termed “deficiencies in the distribution of aid to the victims of the earthquakes on the island,” and “given Puerto Rico’s significant history of fiscal irregularities and mismanagement, the federal government will continue to impose stringent fiscal oversight and risk management measures” to ensure that aid reaches those who need it most while protecting U.S. funds to ensure all disaster relief funding and resources are expended in a manner that directly assists the disaster survivors who need them most while protecting the U.S. taxpayers’ investment against the potential for waste, fraud, and abuse.”

FEMA’s apprehensions came as, in the wake of the discovery last weekend by citizens of an emergency warehouse in Ponce, owned by the government, with key supplies which had not been distributed to the victims of this month’s earthquakes.

To date, according to FEMA, the agency has committed $12.8 million to assist Puerto Rico following the January 7th earthquake and the aftershocks that have hit southern municipios and schools. FEMA has reported that, to date, it has provided the Puerto Rican government with 100 generators, 1.1 million liters of water, 20 tanker trucks, 5,000 cots, and nearly 163,000 meals to assist the victims, with an agency spokesperson noting: “The continued federal investment is to ensure Puerto Rico is rebuilt in a manner that is both fiscally sound and resilient against the impacts of future disasters.”

Governance & the Responsibility to Protect Its Citizens

January 21, 2020

Good Morning! In this morning’s eBlog, we consider the issue of “qualified immunity” for state and local leaders, here focusing on Flint, Michigan, before considering the inequitable treatment by HUD of U.S. citizens in the U.S. territory of Puerto Rico.

What Constitutes Safe Drinking Water? The Supreme Court on Tuesday cleared the way for drinking water crisis victims in Michigan to sue state and local government officials in Flint, where, for years, Flint city officials and state regulators have argued that they are protected by “qualified immunity” from being sued for their role in the water contamination crisis, notwithstanding that lower courts have ruled to the contrary. Indeed, in refusing to take earlier challenges involving the lead-tainted water, the Supreme Court has upheld those lower court rulings. Now, as Attorney Michael Pitt, co-lead counsel on the class action lawsuit, which includes thousands of Flint residents suing for damages from the 2014 incident, noted: “It’s time for the people of Flint to start feeling like they are going to get their day in court: This just moves the entire process closer to that day,” adding that his clients have, to date, “been denied justice.” Here the initial suit turned down by the high court was filed four years ago: that suit argued that officials, including then-Gov. Rick Snyder, reacted indifferently to the risk of bodily harm faced by residents when they were exposed to high levels of lead and other contaminants after Flint’s drinking water source was switched to draw from the Flint River in 2014—a switch which was made without properly treating pipes for corrosion, thereby letting lead and bacteria into the city’s drinking water. Last April, U.S. District Judge Judith Levy ruled that Gov. Snyder “was indifferent,” because instead of mitigating the risk of harm caused by the contaminated water, he covered it up. It appeared he had been worried about the political implications of the crisis, as well as about the need to return Flint to Detroit’s water system; however, in public, he denied all knowledge, despite being aware of the developing crisis. As a result, plaintiffs were lured into a “false sense of security.” More than a year later, Flint switched to drawing water from Lake Huron—a switch, however, which was made to too late to prevent a dozen fatalities: during the period that Flint’s tap water was drawn from the Flint River, a Legionnaires disease outbreak occurred, killing at least 12 people and hospitalizing dozens of others. Thus, although government officials initially claimed the water was safe to drink, a year and a half later they admitted it was not; indeed, it was not until late in 2016 that Flint’s water supply finally complied with federal safety standards; nevertheless, Mr. Pitt says it could be another year before an actual trial begins.

Previously, U.S. District Court Judge Judith E. Levy in Ann Arbor, Michigan had ruled that a lawsuit alleging the City of Flint and top state water officials violated Flint residents’ “bodily integrity” by exposing them to lead-contaminated water and hiding the contamination could move forward in court, before, last June, Judge Levy had issued a 101-page opinion granting Flint residents Shari Guertin, her minor child, and Diogenes Muse-Cleveland permission to move forward in the suit against the City of Flint, its former Emergency Managers Darnell Earley and Jerry Ambrose; former Department of Public Works Director Howard Croft; and eight former Michigan Department of Environmental Quality employees, holding that the plaintiffs’ bodily integrity claim could move forward because they were able to plead “that the conduct of many of the individual governmental defendants was so egregious as to shock the conscience and violate plaintiffs’ clearly established fundamental right to bodily integrity…” That claim had alleged the defendants violated the plaintiffs’ right to bodily integrity by knowingly and intentionally exposing them to lead-tainted water and hiding the dangers from them. However, Judge Levy dismissed the claim against Michigan Gov. Rick Snyder, former state DEQ official Patrick Cook, and former Flint water official Michael Glasgow, writing that the claims failed to directly connect them to the lead-in-water poisoning. Judge Levy’s order claimed the plaintiffs failed to show former Gov. Snyder had been directly involved in the decision-making process surrounding the water crisis , as well as failing to demonstrate that Mr. Cook was involved in misleading the public; he granted the plaintiffs permission to move forward with negligence claims against the two engineering firms hired to assess Flint’s water, Veolia North American and Lockwood, Andrews & Newnam, writing the plaintiffs were able to argue the engineering firms should have recognized their services as “necessary for the protection of plaintiffs and their property,” and that residents were “directly and proximately harmed” by their breach of duty. Judge Levy dismissed 12 other counts in the case, including due process, breach of contract. and negligence claims.

Putting Puerto Rico’s Local Governments at Risk?  The designation of “high risk” by the U.S. Department of Housing & Community Development (HUD) for the U.S. territory’s management of the Community Development Block Grant Program (CDBG) has, according to local elected leaders on the island imposed additional fiscal and governing burdens—or, as Alcalde or Mayor Luis Javier Hernández Ortiz of Villalba, a municipio where Hurricane Maria, two years ago last September, triggered numerous landslides, now, in the wake of the quakes, the municipality’s entire electrical system was destroyed.: Villalba’s emergency operations center and an assisted living center were among the many buildings destroyed; now a documentary describes the destruction of infrastructure in Villalba, and how volunteers, community members, the Mayor, and all emergency service personnel worked to save people’s lives; bridges were destroyed, and many areas where vital infrastructure was located were inaccessible. The geography of Villalba made restoring electricity and water services to Villalba extremely challenging. Two years ago, Mayor Hernández discussed other options for electrical power, such as micro-grids, for Villalba, with the Mayor of Hoboken, New Jersey, who reminded him that recovery from such a powerful hurricane would take years. Now the HUD designation means, as Mayor Hernández Ortiz put it: the “municipalities are going to be the most affected.”

Under the plan, the CDBG funds, which are unrelated to the reconstruction work, are to be remitted by Puerto Rico to municipalities with a population of 50,000 or less, with such funds to be used for paving roads, housing rehabilitation, housekeeper services, and direct citizen assistance programs. Last month, however, HUD informed the Puerto Rico Department of Housing, which manages those funds, that it had placed the program in the “high risk” category for failing to comply with applicable laws and regulations, and demonstrating poor performance, meaning, as Aibonito Mayor William Alicea: “That is going to be a problem for municipios…interfering with their ability to serve our citizens.”  Mayor Javier Hernández Ortiz noted that last year, when a number of Mayors flew to Washington, D.C. to urge changes in the administration of HUD programs in Puerto Rico—especially during the federal government shutdown, the federal shutdown had meant that there were mayors who stopped offering vital housing and community development services; Mayor Rosachely Rivera of Gurabo stressed that her municipality received payments in December corresponding to contracts from 2018, noting: “These funds, although regular, are literally the example that HUD uses to disburse those of CDBG-DR (for disaster recovery), which have not yet arrived.” Meanwhile, Puerto Rico’s Assistant Secretary of Strategic Housing Planning, Karen D. Ortiz Tirado, last week wrote that Puerto Rico had communicated to HUD in response to the audit and requested additional time to fully address one of HUD’s allegations, while Mayor Javier Hernández Ortiz reported the mayors had informed Gov. Rosselló Nevares’ administration of their discomfort with the situation and the need to reverse the change in the administrative structure of the CDBG funds. The mayor noted, however: “Nothing happened”

Quien es encargado? (Who is in charge?) Puerto Rico currently has some $70 billion in municipal debt—but it has a dual form of governance: an elected Governor and Legislature, and a federally appointed financial control board (PROMESA)—a board which has an uneasy balance of pressures between non-Puerto Ricans seeking full payment on municipal bond interest payments and an economy in decline. The PROMESA Board, created in 2016 to address the territory’s debt crisis, has leaned toward the conservative prescription of spending cuts and tax increases to restore fiscal discipline, restore growth, and provide for interest payments to bondholders, appears to demonstrate the imbalance between the potential societal costs of austerity in general versus the PROMESA Board’s fiscal plan ;potential impact on the vulnerable population of Puerto Rico in particular, where poverty is about three times the U.S. average. Indeed, at the first public PROMESA Board session, Board Member Andrew Biggs said he had done research showing that the best policy practices for countries struggling with debt are ones which place much more weight on spending cuts than on tax increases. Mr. Biggs, in a paper, “A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked,” which he authored with Kevin Hassett and Matthew Jensen, noted: “The average expenditure share for successful consolidations is 80 percent if inclusive of our calculations and those from [others],” as the co-authors argued that cuts should be focused on government wages and the provision of social transfers, adding that government debt in major industrialized countries should be reduced: beginning first with large public debts and unfunded pensions “imply[ing] a redistribution between current generations and future ones who cannot vote.”

Center for a New Economy Policy Director Sergio Marxuach said that it was difficult to expand an economy while the PROMESA Board is cutting spending and increasing taxes. However, he said there were things that could be done now and more that could be done after structurally balanced budgets had been achieved and the board was gone.

Offering Shelter from the Physical & Fiscal Quakes

January 21, 2020

Good Morning! In this morning’s eBlog, we consider the governing challenges of reversion or surrendering of a municipality’s charter before considering the inequitable treatment by HUD of U.S. citizens in the U.S. territory of Puerto Rico.

Shaking Up Governance. The Trump administration appears to have reversed its policy of treating Puerto Ricans as if they were not Americans: the White House has announced a series of actions, highlighted by President Trump’s declaration of a major disaster, with his announcement coming some 19 days after a series of earthquakes or terramotos began on the southern side of Puerto Rico. The White House action finally freed up assistance to individuals who have been displaced from their homes. The series of earthquakes have also served to draw attention to the slow pace of reconstruction on the island in the wake of the devastation caused by Hurricane Maria in 2017: to date, only $14.9 billion has been disbursed out of the $48.35 billion allocated by Congress since Hurricane Maria, according to a federal government data transparency portal. Last Friday, Gov. Wanda Garced Vazquez said the new grants under the FEMA Individuals and Households Program will provide financial help for necessary expenses, such as temporary housing, home repairs, and other personal needs; and, last Thursday, HUD confirmed it was releasing $8.2 billion in Hurricane Maria aid which had been delayed for months. Both actions by the Trump Administration appeared to come only after bipartisan political pressure from Congress for the administration to act. The Executive Director of Puerto Rico’s federal affairs office in Washington, D.C., Jennifer Storinan, noted: “A major disaster declaration is needed to continue with the recovery.”

The declaration, while not explaining the reasons for the delay, came concurrent with the announcement of the selection of Robert M. Couch to serve as the Federal Financial Monitor to oversee the federal grant administration and disbursement of disaster recovery funds to Puerto Rico and the U.S. Virgin Islands.

The Trump administration had held back its disbursement of disaster aid because of concerns about financial corruption, and, last August, reported its intention to appoint a federal administrator, with HUD Secretary Ben Carson noting that Mr. Couch, a former HUD official, “has an extensive background with decades of private and public sector experience dealing with financial reporting, risk management, and executing the law: “Robert will be an asset in supporting HUD’s mission to continue aiding recovery efforts in Puerto Rico while ensuring that appropriated funds are used in a responsible manner and for their intended purpose.”

The HUD announcement also came with a pledge to publish a Federal Register notice to activate another $8.3 billion in aid in addition to the $8.2 billion, and an original $1.5 billion already disbursed. HUD said the Federal Register notice for the $8.3 billion tranche of funding will contain guidelines for establishing its plan to use long-term mitigation funds under the Community Development Block Grant-Disaster Recovery program, with the Department noting that these guidelines will mandate applicants “to develop thoughtful recovery plans informed by local residents.” Senate Minority Leader Chuck Schumer (D-N.Y.) said the HUD announcement is “not nearly enough: We will continue to fight this administration’s unnecessary bureaucratic barriers from causing any further delay in disbursing these funds to Puerto Rico…We will also continue pushing for the additional appropriated funds which are still senselessly held up: These funds must be put to use as Congress intended: to rebuild the island.”

Separately, the House Appropriations Committee last Thursday announced it intends to approve another round of $3.35 billion in assistance: this new round of disaster aid from Congress will include educational assistance which will be vital for the territory’s kids after the government extended its Christmas holiday winter break for all schools through at least this Wednesday so that buildings can be inspected for structural damage. Through last Thursday engineers had inspected 530 schools and certified them for reopening, according to Puerto Rico’s Federal Affairs Administration office in Washington. Communications and electricity were 99% restored, but the condition of the electrical grid remained fragile. Additionally, there still were 42 shelters operating in 14 municipios which were housing 7,468 people. Although the earthquake damage was concentrated in six municipalities on the southern side of the island, aftershocks and tremors have continued to occur island-wide.