About Frank Shafroth

Frank Shafroth is the former Director of Legislative Affairs and Intergovernmental Relations for the Municipal Securities Rulemaking Board (MSRB). Mr. Shafroth worked with the executive leadership to manage the MSRB's strategic relationships with state, local and the federal government and monitor legislative and congressional activities that affect the municipal bond industry and the authority of the MSRB. He currently serves as the the Director for the Center of State and Local Leadership and Assistant Professor at George Mason University. Mr. Shafroth has more than 30 years of experience on Capitol Hill and representing state and municipal issues before Congress. Previously, he was chief of staff to Congressman Jim Moran (D-VA), advising the Congressman on economic, tax, housing and community development legislative issues. He was also director of government relations for Arlington County, Virginia, and has served as director of state and federal relations at the National Association of Governors and the National League of Cities. Mr. Shafroth was also a Peace Corps volunteer in Liberia and Colombia and, early in his career, served as a congressional aide and staffer on various House and Senate offices and committees.

Undelivered Shelter from the Storm

January 17, 2020

Good Morning! In this morning’s eBlog, we consider the continuing inequitable treatment by HUD of U.S. citizens in the U.S. territory of Puerto Rico.

Shaking Up Governance. House Democratic leaders have proposed a measure to allocate $3.350 billion to help Puerto Rico recover from this month’ terramotos or earthquakes. House Appropriations Committee Chairwoman Nita M. Lowey (D-NY) and Transportation, Housing and Urban Development Appropriations Subcommittee Chairman David Price (D-NC), in a statement yesterday in the wake of a statement from the White House that the Trump administration would no longer delay disaster recovery aid for Puerto Rico, noted: “It’s been 704 days since Congress appropriated disaster recovery funding for Puerto Rico to help our fellow Americans recover from devastating hurricanes. After broken promises, blown deadlines, and the illegal withholding of the Federal Register notice, HUD announced today that Puerto Ricans will finally have the opportunity to access the aid they so desperately need…As appropriators, we have fought for the release of the aid by questioning Secretary Carson, establishing a legal deadline for agency action, conducting an oversight hearing with HUD officials and the Inspector General, and withholding money from the Department in the most recent appropriations bill. It should never have come to this.” Nevertheless, she said: “There are still questions left unanswered, including why this necessary assistance was delayed in the first place. Today’s announcement seems to clear all major hurdles, allowing Puerto Rico to obtain $8.2 billion in unmet needs aid and begin the process of developing an action plan to spend $8.3 billion in additional mitigation resources.” Chair Lowey’s bill, if enacted, would result in $2 billion in CDNG funding, $ 1.250 billion to repair roads, and $100 million for educational needs. Earlier this week, Senate Minority Leader Chuck Schumer (D-N.Y.) joined 33 other Senate Democrats on a letter calling on the Trump administration to approve full aid to Puerto Rico in the wake of a series of earthquakes that have smote the U.S. territory so far this month, with the epistle noting that, in the wake of a particularly strong 6.4-magnitude quake January 7th, “more than one million of our fellow Americans in Puerto Rico were still without power” more than two days later: eight landslides had been recorded, over 2,000 individuals were in shelters including 125 minors, and the island’s communications grid was only 75 percent operational. Many schools have been closed indefinitely and will only be reopened upon inspection…These earthquakes make…even more unconscionable the Department of Housing and Urban Development’s inaction disbursing the $8.3 billion in Community Development Block Grants for Disaster Recovery funding appropriated by the United States Congress for mitigation projects in Puerto Rico.”

In the  nonce, the President has responded to a request from Governor Wanda Vázquez Garced, declaring six municipios as disasters zones eligible for FEMA assistance: Guánica, Guayanilla, Ponce, Peñuelas, Yauco ,and Utuado—albeit assistance upon which the Trump administration has imposed financial controls on Puerto Rico: in order to receive any of this desperately needed assistance, Puerto Rico must submit detailed budgets, ignore its $15-an-hour minimum wage on federally funded projects, and reform record-keeping around real estate properties. HUD reported it would make $8.2 billion available immediately through a credit line while publishing guidelines for Puerto Rico to draw up a plan for $8.3 billion in additional projects focused on mitigating risks from natural disasters—funds here which Congress approved a year ago as part of a $20 billion disaster package after two hurricanes ravaged Puerto Rico in 2017, destroying the power grid and causing thousands of deaths. A HUD official noted: “Now that proper financial safeguards are in place, we can move forward with confidence that these additional disaster recovery funds will reach those who need them the most,” with that statement coming as President Trump has repeatedly criticized Puerto Rico’s leaders as inept and sought to curb the U.S. territory’s access to federal funds, saying it has not properly spent money already received for hurricane recovery, while a spokesperson for the White House Office of Management and Budget said the President “is working to ensure the people of Puerto Rico are getting the funds they need, while also holding the Puerto Rican government accountable to ensure the money is well-spent.”

Unlike federal responses to such disasters in the rest of the United States, here, under the framework, Puerto Rico is mandated to demonstrate progress constructing a database for property registration, addressing the informal record-keeping which historically has been used. Without a proper title to prove they own their homes, many residents whose homes sustained damage have been barred from qualifying for federal grants and loans. The new federal mandates also override a minimum wage rule which had been put in place by former Gov. Ricardo Rosselló. Finally, unsurprisingly, Puerto Rico must also allow the PROMESA oversight board to track cash spent on disaster recovery and make sure the spending aligns with its long-term fiscal plans; critically, none of the grant funds can be used on Puerto Rico’s battered electrical infrastructure, which suffered further damage in the recent earthquakes near the island’s southwest. HUD has earmarked a separate $1.9 billion tranche for power grid improvements but has yet to release the desperately needed funds, much less provide information with regard to when it will—or how many American lives will be put at risk doe to its delays.

Municipal Reversion? & Has There Been Disparate Shelter from the Earthquakes in Puerto Rico?

January 15, 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.

The Politics of Reversion? In a nation where thousands of local governments have reached a demographic tipping point where births exceed deaths, questions are cropping up with regard to how do cities and counties experiencing such tipping points afford the cost of governing. Thus it is in the Commonwealth of Virginia that legislators will consider whether to give Henry County and Martinsville residents the opportunity to vote on reversion during the 2020 legislative session—Martinsville, an independent city of less than 14,000, founded by American Revolutionary War General Joseph Martin. Indeed, Del. Danny Marshall (R-Danville) has introduced three bills in the General Assembly concerning Martinsville’s ability to surrender its city charter and become a town within the county. The Martinsville City Council voted unanimously last month to start the reversion process to address what officials assert is an unsustainable fiscal situation. House Bill 493 would require approval from Henry County voters before the city could revert; HB 492 would mandate approval by Martinsville voters before such a reversion. Currently, both measures are awaiting assignment to a committee in the Virginia House of Delegates.

As months of talking last year led to a unanimous vote by Martinsville City Council to revert to a town, it seems that Martinsville residents were not the only ones paying attention to the process. After all, such a change could have implications for Henry County, including for owners of businesses—or, as one such owner put it: “As business owners, that does mean a lot. You know when you have customers coming in it’s a difference between the two with the county and city.” The owner of the Coffee Cafe Shop in Collinsville said the possibility of Martinsville becoming a town and annexing her area makes her question the future of her shop: “It does make me wonder what’s in store for our business because it does affect it.”

And, of course, any such governance change will involve the Virginia Legislature: indeed, Delegate Daniel Webster Marshall III (R-14th district), made up of Danville and parts of Henry and Pittsylvania Counties), a race car driver and former Danville City Councilmember, has filed three bills regarding reversion: House bill 494 would require more than a simple majority vote to commence the reversion process; House bills 492 and 493 would allow people living in the city and the county to vote on a referendum to decide whether or not they believe the process should be allowed. Delegate Marshall said he sponsored the legislation in an effort to make the reversion issue fairer to all involved. As the Commonwealth law currently stands, the city controls most of the process, so the county has little to no choice in the matter. The Henry County Board of Supervisors submitted a legislative agenda to its state representatives, including Delegate Marshall, last October, asking for county voters to be given a choice, with the Delegate noting: “This is a big issue: If Martinsville says we want to revert, there could be additional cost to Henry County, and who’s going to pick that up? Henry County residents. A contract needs to be between agreeing parties….The citizens of Martinsville should be able to decide whether or not to revert.” (Del. Marshall introduced similar bills to give citizens a reversion vote in 2006 and 2014: the 2006 proposal died in committee, while the 2014 bill changed significantly from start to finish, eliminating any mention of Henry County voters taking part in the reversion process. The final version of the 2014 bill as approved stated, “Any reversion initiated by the Martinsville City Council shall require that each elected member of the City Council vote, unless otherwise prohibited by law, on the motion to initiate the reversion process.”

Will There Be Shelter from the Storm? Multiple strong and damaging terramotos or earthquakes have shaken southern Puerto Rico over the last three weeks, killing one American, causing many serious injuries and collapsed numerous buildings, including a multistory school in the town of Guánica, which, fortunamente, was empty at the time, with the terramotos the most damaging to strike the U.S. territory since 1918: Puerto Rico has been under a state of emergency since January 6th, with a flurry of earthquakes quakes, including onshore and offshore events near the Town of Indios and along Puerto Rico’s southwestern coast. To date, there have been 11 aftershocks.

The Department of Housing and Urban Development (HUD) has been tasked to administer relief, as well as to serve as the financial monitor of the disbursement of some $1 billion in CDBG disaster relief funds—assistance unsurprisingly containing new federal mandates on the territory with regard to the use of $8.285 billion for mitigation projects; however, to date, HUD has been slow: so far, the federal agency has made available just $1.507 billion of a pledged $20.5 IN Community Development Block Grant assistance; and, of that first disbursement, the government of Puerto Rico had only disbursed $ 10.8 million as of the end of last month. Nevertheless, in the wake of this month’s terramotos—and growing pressure from Congress, HUD has announced that the next $1 billion to be provided will come out of a $ 8,221 million item which was authorized eleven months ago—but which, 11 months later, remains undelivered. Indeed, since last September 4th, the U.S. Department of Housing & Urban Development has failed to publish the guidelines on CDBG mitigation funds, affecting a total of $10.3 billion, allocated to Puerto Rico: of those funds, guidelines on their use of some $8,285 million has been promised for inclusion straightaway in the be included in the immediate publication in the Federal Register. The remaining $1.932 billion, the authorization of which has been more delayed, is mandated for implementation of initiatives to rebuild the power grid.

Further complicating and delaying a response, those HUD emergency assistance funds will be subject to another layer of oversight—here from the PROMESA Board, as well as subject to new rules on the registration and ownership of properties—rules or federal mandates awaiting final agreement between FEMA and Puerto Rico before disbursement of funds for permanent reconstruction can go ahead, as per §428 of the Stafford Act—an agreement which was supposed to be finalized last October—and for which no new deadline has been established. The disbursement, which is now expected to be $ 1 billion, and the publication of the guidelines coincide with the appointment of attorney Robert Couch as financial monitor at HUD to control and supervise the management of the CDBG-DR funds.

The speed and efficacy of the HUD response to Puerto Rico, where HUD Secretary Ben Carson, the decorator chief of the President’s Cabinet, has referred to a “history of fiscal embezzlement” and corruption of the Puerto Rican government as a justification for the holdup of the first $1.5 billion in CDBG-DR funds; however, contrary to what HUD appears to have advised Congress, it seems HUD is intent upon awaiting the appointment of a federal monitor before disbursing any additional part of the funds and starting the process on mitigation projects.

Now a senior HUD official, according to the Puerto Rico El Nuevo Día,  yesterday, that now that the entire financial monitor team has been selected, “We can go forward with confidence that these funds earmarked for recovery will arrive to those who need them most.”

HUD, it seems, has not been driven by responsibility, equity, but rather fear of action by Congress, after, last week, the Hispanic Caucus discussed with House Speaker Nancy Pelosi (D-Ca.) the possibility of suing HUD to expedite the delivery of funds. And, Rep. Nydia Velázquez (R-P.R.) stated: “While it is a positive fact that the administration has released the brake that has impeded this assistance, it has been inexorably delayed: Congress approved that assistance to mitigate disasters almost two years ago, and these ongoing delays reflect the administration’s disdain for the people of Puerto Rico,” as she also pressed that President Trump declare municipalities in southern Puerto Rico to be a disaster zone.

On Tuesday, Sec. Carson informed Rep. Velázquez that a HUD official is on his way to Puerto Rico or was already on the Island; that official, Robert Couch, was a legal advisor to HUD during the George W. Bush administration, where HUD officials have indicated there will be a response team of ten to fifteen officials to oversee the ‘proper’ use of CDBG assistance.

Overtaxing a Municipality’s Homeowners?

January 14, 2020

Good Morning! In this morning’s eBlog, we consider taxing challenges in the Motor City.

The Detroit News has reported that Detroit overtaxed homeowners by at least $600 million after it failed to reduce assessed property values accurately in the years following the Great Recession, with the report coming in the wake of the city completing a state-ordered reappraisal of every residential property in 2017 to correct the problem. Nevertheless, the cost of those past mistakes has taken a toll: thousands of the city’s citizens today face foreclosure over back taxes—with that fiscal challenge coming despite the city’s success in poverty reduction and the increase in household median income by 20% since 2015: indeed, recent U.S. Census Bureau estimates today show that poverty in Detroit dropped for the third straight year in 2018 as 45,000 Detroiters moved out of poverty during that time, and Detroit household income grew 20% in three years, almost doubling statewide household income growth during this period.

On the housing front, of more than 63,000 Detroit homes with delinquent debt as of last fall, more than 90% were overtaxed—by an average of at least $3,700—between 2010 and 2016, according to calculations by the News, and the debt owed on about 40,000 of those homes is less than the properties were overtaxed over those seven years; thus, the inflated property tax bills have been an added burden to homeowners in the poorest big city in the nation, and call into question a tax system that has foreclosed on a third of city properties since 2008.

Of the 173,000 homes the News reviewed, more than 92% were, the paper reported, over-assessed between 2010 and 2016, on average, by $3,800, but over 92% were over assessed by twice as much as they should have been—and at least 59,000 properties which were over-assessed and taxed still owe back taxes currently—some $153 million. That creates a quandary for the city’s exceptional recovery from the greatest chapter 9 municipal bankruptcy in U.S. history: how does the city fix this costly over assessment and collection of at least 221 million?

Michigan law requires that assessments reflect a home’s market value—and homeowners may appeal. Similarly, Detroit officials have acknowledged their predecessors failed to fix the over-assessment problem quickly enough. However, Mayor Mike Duggan has stated that he cannot fully correct those past mistakes, in part because current Michigan law does not allow it; moreover, per the city’s plan of debt adjustment, Detroit simply lacks the requisite fiscal resources.

For his part, Mayor Duggan noted: “I think the rates should have come down sooner. But I dealt with what we had and moved as quickly as we could\…Folks had a process by which they could appeal it. Those years are closed. I don’t know any lawful way to go back and say to all the taxpayers of the city who did follow the process, ‘We’re going to raise your taxes to pay the taxes for people who didn’t.’”

Mayor Duggan is pressing the Michigan Legislature to enact mortgage or low-income homeowner relief legislation, which would erase significant portions of their mortgage debt. Alvin Horhn, the city’s Assessor, advised the Detroit News the city was unable to verify the $600 million overtax figure, but did did not reject it.  Median sales of single-family homes citywide and in most ZIP codes were rising between 2010 and 2017, according to ATTOM data. Given that upward trend, the analysis presumes that when the city lowered an assessment in 2017, it was because the city’s assessed valuation was too high, not that the property’s assessed value had declined.

Detroit CFO Massaron, in speaking to the paper, cautioned that, as in all cities, assessed values vary by neighborhood, thus, unsurprisingly, in some neighborhoods there may well have been genuine losses in value over the time period analyzed by The News: properties in those areas could appear in the analysis to have been overtaxed more than they were. Officials also acknowledged they simply lack sufficient records to identify those properties. Gary Evanko, Detroit’s Chief Assessor from 2013 to 2016, called The News analysis a “legitimate way” to measure the past problem, while Michigan State University Professor Mark Skidmore, who was one of the researchers to first identify Detroit’s over-assessment problem, believes the opposite trends of declining taxable values and rising sale prices likely means The News’ method underestimates the problem.

Prior to the Motor City’s municipal bankruptcy, Detroit’s Office of the Assessor simply—and understandably, lacked sufficient qualified staff—and had to balance revenue estimation and collection with the greater realization to the city from income tax revenues. The Michigan State Tax Commission seven years ago assumed oversight of the Assessors’ office and ordered the reappraisal, which took more than two years and cost $5.85 million.

Seeking Shelter from Physical & Fiscal Storms

January 14, 2020

Good Morning! In this morning’s eBlog, we consider the ongoing exceptional health, public safety, physical and fiscal challenges for the Michigan City of Flint and the U.S. Territory of Puerto Rico in the wake of a series of earthquakes—both physical and fiscal, as well as in a federal court in Boston.

Not in Like Flint. A new audit shows pension debt in Flint is in worse condition than what Detroit faced when it entered bankruptcy, but new Flint Mayor Sheldon Neeley said he is confident the cash-strapped city can right its financial course. Indeed, the fiscal challenges in a municipality is exceptional, given that its poverty rate among those who worked full-time for the past 12 months was 9.14%. Among those working part-time, it was 41.08%, and for those that did not work, the poverty rate was 44.07%.  The city has more than $370 million in pension legacy costs, which remain unfunded, or a 30% funding rate, which is worse than the 65% rate that a consultant for Detroit’s Chapter 9 municipal bankruptcy emergency manager calculated in 2013 for Detroit’s General Retirement employees. The Flint audit also uncovered a dozen material findings, significant errors, and financial risks—not to mention questionable accounting practices under former Mayor Karen Weaver’s administration that led to several errors, including miscalculated balances and a lack of internal controls over purchasing cards. On January second, the State of Michigan notified the city it had 30 days to submit a corrective fiscal action plan to address the audit problems and, the next day, advised the city that it was delinquent in submitting a separate report detailing its FY2019 funding levels for pension and retiree health care. 

Mayor Neeley, a former city Councilman and legislator who won his seat in October, plans to comply with the state’s requests and remains optimistic there is a way out of Flint’s financial malaise that avoids the specters of chapter 9 municipal bankruptcy or emergency management that have hung over Flint in recent years, noting; “We are changing the trajectory of the city as it relates to our finances and looking at pathways around those two options.” One of the most difficult challenges is likely to be Flint’s pension debt. Or, as Matt Fabian noted: “Pensions make the medium- and long-term budget situation worse…It complicates other issues that are almost always the cause for bankruptcy: ultimately, the pension is a long-term cost that needs to be covered and it’s going to consume tax increases and budget cuts and state aid.” 

While mismanagement has, no doubt, contributed to the city’s fiscal stress, the real challenge has been to try to stem the egress of those leaving the city—leaving behind those who cannot afford to leave, adversely affecting both income and property tax revenues—so that, after more than a decade of population loss, assessed taxable value decreases, and reductions in state revenue sharing, the fiscal and physical future appears grim.  The city, which was under state emergency management from late 2011 to 2015, when the state began the process of returning local control, emerged, as we have reported, one year ago last April—with the lead contamination in its water compounding the city’s fiscal plight and devastating assessed property values: Flint’s population, as state Senate Minority Leader Jim Ananich (D-Flint) noted, “only compounded Flint’s existing financial issues…The city’s population has declined, drastically shrinking its tax base, so there will continue to be some financial hurt until we have recovered from the crisis and the economy has adapted to the new environment.” Indeed, the city’s population shrank from 111,475 in 2010 to an estimate of nearly 96,000 in 2018, meaning Michigan state revenue sharing declined from $18.9 million in 2014 to $14.1 million in 2018, while taxable assessed values plummeted 40% from 2008 to 2012, according to data in “Michigan’s Great Disinvestment.”

Get the Lead Out! While Flint has received hundreds of millions of state and federal dollars since the lead contamination came to light, and the city is more than halfway through replacing its lead service lines, much of the state aid was limited to water infrastructure while the city’s budget struggled. After Mayor Neeley took office last November, his new hires included new advisers in finance, including economist Eric Scorsone, who came in as a member of Mayor Neeley’s transition team. Mr. Scorsone, the former Michigan Deputy Treasurer and Chief Economist for the state Senate, is an associate professor and Director of the Center for Local Government Finance and Policy at Michigan State University. Ergo, unsurprisingly, the Michigan Department of the Treasury volunteered to help as Mayor Neeley sought to assess and address the city’s dire pension situation—described by the audit manager of the Michigan Treasury Department as “underfunded,” but noting: “We’re aware of the city of Flint’s finances and underfunded retirement benefits: we plan to work with the city as they create their Corrective Action Plan.”

Nevertheless, if past is prologue, this promises to be a governance challenge—or, as Councilmember and Finance Chair Eric Mays told the Detroit News, his job was “to keep the state out” of Flint, referring to the state’s dismal past emergency management. Chair Mays noted he was “ecstatically excited” that Flint had ended its fiscal year with a $24 million fund balance, stating: “This mayor campaigned we were on the verge of bankruptcy…You give me $24 million, and me and my son and my grandkids, we are going to live good.”

But getting to “good” will be a challenge: the city has more than $620 million in unfunded pension and retiree health care costs.  At the end of 2018, 31% of the city’s promised pension was funded, a drop of nearly 20% from 2017, and the equivalent of $372.9 million in unfunded liability, according to the city’s most recent audit: Flint’s liability for retiree benefits such as health care, which is not pre-funded, amounts to $249.8 million, according to the audit report: Flint contributed $23.5 million to its pension plan in 2018, less than half the $50.9 million which was paid to retirees, according to the audit; the projected $17.9 million Flint had to pay in 2018-19 retiree health care costs “is nearly insurmountable for a city in the fragile financial state in which Flint finds itself.” That means Flint will need to increase its contributions to the retirement fund so it reaches funding levels acceptable to the state. (Michigan deems a pension system “underfunded” if it falls below 60% funded: At the end of 2018, Flint had 1,773 retirees and beneficiaries receiving benefits supported by 443 active employees working to earn their own benefits, according to the audit report.) According to Mr. Scorsone: “Because we have so many retirees to current employees, we know we’re going to have address some of the city’s contribution levels…We do expect some substantial increases in the city’s contribution levels going forward to try and make up the difference.”

The city also has a liability of $100 million in bonds for the Karegnondi Water System, which is offset by about $97 million of monthly credits through its water contract with the Detroit area’s Great Lakes Water Authority. 

Other Debts. The audit noted marginal increases in the City of Flint’s income tax revenue and property value: the city ended the 2018-19 fiscal year in late June with a positive balance of $720,000 after spending $52.5 million, according to the audit: Income tax revenue in FY2018-19 was $16 million, up from $15.5 million in 2017-18; Flint’s taxable value of property was $734 million in 2018 compared with $714 million in 2017, according to the audit. Nevertheless, the increase in tax revenue, according to Mr. Scorsone, remains well below where the city was a decade ago: “We should be very clear on this: the City of Flint, given its current cash position, would not be eligible for [chapter 9 municipal] bankruptcy. You pretty much have to be out of cash completely, as Detroit was, to even enter into a bankruptcy conversation.” The audit of Flint’s finances from July 1, 2018 through June 30, 2019 found 12 material conditions within the city, most zeroing in on a lack of financial controls within the city. Thus, understandably, Mayor Neeley noted: “I’m very concerned about the outcomes and what the audit revealed: We’re taking action currently trying to move us beyond the position we are in now.”

Equal Disaster Assistance for a U.S. Territory? Puerto Rico Gov. Wanda Vázquez Garced declared a state of emergency earlier this week in response to the quakes, as did several mayors of Puerto Rico’s 78 municipios. President Trump has since approved emergency federal assistance for the island. It’s unclear what new damage may have been caused by the latest earthquake, but reports from earlier in the week show hundreds of homes were destroyed, as well as a major power plant on the island was so severely damaged that two-thirds of customers, totaling millions, were left without electricity. In Washington, D.C., 56 Members of Congress have asked President Trump to declare Puerto Rico a disaster zone as soon as Governor Wanda Vasquez Garced files a formal request, as a result of the earthquakes that occurred earlier this week, writing: “The people of Puerto Rico need solid assistance in this hour of great need, and it is up to us to help in every possible way. We believe that granting a major disaster declaration for the island would help meet the needs of Puerto Ricans affected by these earthquakes,” said the group of federal lawmakers, led by Puerto Rican Democratic Congressman José Serrano (New York), one of the leaders of the Allocations Committee of the Federal House of Representatives. Lawmakers indicated that the disaster zone declaration would facilitate access to emergency assistance for individuals and the governments of the U.S. territory, warning, in their letter, of the serious damage caused by earthquakes in residences, schools, buildings, and public infrastructure—and noting that the federal government has yet to disburse billions of dollars in emergency assistance promised to Puerto Rico in the wake of the catastrophe caused by Hurricane Maria—writing: This is a time of great distress for the people of Puerto Rico: it is imperative that the federal government provide all the necessary resources to save lives, ensure public health and safety, and help thousands of people recover lost property and jobs,” adding that the terramotos or earthquakes haveaggravated existing problems as a result of hurricanes Irma and Maria…More than two years later, Puerto Rico residents are still recovering from the devastating impacts of these previous natural disasters. Federal assistance was slow at that time and most of the funds allocated by Congress have not yet been disbursed by the Administration. It is our obligation to ensure that this does not happen again and that solid assistance is provided to affected US citizens residing on the island.”

In the wake of the terramotos or earthquakes, which have struck the U.S. territory of Puerto Rico, Presidential candidate and Vermont U.S. Senator Bernie Sanders (I-Vt.), Rep. Nydia Velasquez, and Rep. Alexandria Ocasio-Cortez have demanded that President Trump expedite assistance to the island and declare a disaster in order to expedite FEMA assistance, especially for the electric system—and especially to address the damage wreaked—damage which has had an impact mainly in the south, with the trio noting: “The hurricane (Maria) destroyed the island and today, tens of thousands of people still live under canvas roofs. In recent days, earthquakes have cost millions of dollars in damage, destroyed hundreds of homes, caused massive blackouts and they have forced residents to sleep in homeless shelters due to fear of being buried in their own homes by another earthquake,” as they insisted the President release the funds authorized by Congress after Hurricane Maria and order FEMA to respond to the new emergency on the Island, adding: “Postponing the disbursement of this vital assistance for a longer time, given the humanitarian needs of Puerto Rico, is a scandal.” Concurrently. Puerto Ricans Daron Soto, Ocasio-Cortez and Jose Serrano, urged FEMA interim Administrator Peter Gaynor to assist the government of Puerto Rico to give stability to the electrical system: “It is time for President Trump and his administration to put an end to his personal vendetta against Puerto Rico and use all available resources to help rebuild the island,” with growing apprehension with regard to municipios still without power.

A Legal Appeal. Concurrently, the Puerto Rico Employees Retirement System bondholders have appealed a U.S. District court ruling against them to the U.S. 1st Circuit Court of Appeals in far away, but un-earthquake-hit Boston, after, last Tuesday, U.S. District Court Judge Laura Taylor Swain rejected the bondholders’ motion for her to appoint them as a trustee for the system. The First Circuit Court posted a case opening notice for the appeal, and the municipal bondholders filed a notice of the appeal in the District court. In the case, law firms Jones Day and Delgado & Fernández are representing Andalusian Global Designated Activity Company and about 20 other investment funds holding ERS bonds; and law firms White & Case and Sánchez Pirillo are representing AAA Portfolio Bond Fund and about 20 other investment funds holding ERS bonds. The PROMESA Puerto Rico Oversight Board, the Puerto Rico Fiscal Agency and Financial Advisory Authority, and the Official Committee of Retired Employees of Puerto Rico are the opposing parties. The effort to protect timely debt payments on special revenue bonds is projected to now shift to enacting new state laws in light of Monday’s U.S. Supreme Court announcement it will not consider an appeal of a Puerto Rico case—an announcement which was the first of two involving Puerto Rico expected this month from the busy Supreme Court: the Justices are expected to also release their ruling in a lawsuit begun by Aurelius Investment and other hedge funds which are arguing the court should invalidate all actions taken by the PROMESA Financial Oversight and Management Board for Puerto Rico.

If a majority determine that the Oversight Board created by Congress has a primarily federal role, it could do what the hedge funds want or at least what an appellate court ordered, which is to mandate U.S. Senate confirmation of a new board.  For its part, the PROMESA Board argues that Congress had the authority to establish the board as a primarily local body under Article IV of the U.S. Constitution, which empowers Congress to admit new states and administer the territories. The announcement relates to last March’s decision by the First Circuit Court of Appeals involving the Puerto Rico Highways and Transportation Authority’s special revenue bonds, wherein Assured Guaranty and two other municipal bond insurers petitioned the U.S. Supreme Court to accept an appeal. Bankruptcy attorney John Mudd in San Juan, who represents unsecured creditors in Puerto Rico’s quasi chapter 9 bankruptcy, said he was not surprised by the denial, because only a small fraction of cases are considered. The case law on the protected status of special revenue bonds is, he noted, different from last year’s First Circuit appellate court ruling and that ruling only applies to the appellate court jurisdiction in New England and Puerto Rico, he added. The decision, however, will only have wide implications if another appellate court issues a similar ruling, according to Mr. Mudd.

A Stimulus to Act? With new sessions of state legislatures commencing, the wizard or guru of chapter 9 municipal bankruptcy, Jim Spiotto, suggests this would be an ‘ideal time’ for the introduction of legislation in state legislatures to protect city and county borrowing risks, or, as he put it: “It’s important to have borrowing costs as low as possible because, there’s no justification to having higher borrowing costs,” as he estimated that last March’s ruling by the First Circuit of the U.S. Court of Appeals has increased borrowing costs 20%-25% over the duration of a long term municipal bond, noting: “The First Circuit didn’t take away the validity of the lien…What it did do, is raise the question of timely payment which will possibly lead to lower credit ratings or downgrades of existing bonds which will increase the borrowing costs.” He did note that the appellate court had recognized the authority of states to require payments on special revenue bonds in a bankruptcy, adding that he hopes the National League of Cities, the Government Finance Officers Association, and other groups will use Monday’s Supreme Court announcement as a signal to begin work with state legislatures to enact similar statutes.

The hope that the high court would accept the Puerto Rico case rested on the conflict it created with protections afforded to revenue bonds in other Chapter 9 municipal bankruptcy cases involving the cities of Detroit, Stockton, and San Bernardino, as well as Jefferson County. Mr. Mudd noted that state law can always be changed by federal law, suggesting that a federal law would be the better option than enacting model state statutes. Matthew Fabian, the superb Managing Director of Municipal Market Analytics, in an email at the beginning of this week wrote that although the Puerto Rico case “only directly impacts borrowers within the First Circuit,” the Supreme Court’s decision to not hear an appeal “has given revenue bond issuers nationwide a slightly better reason to file for chapter 9…Municipal investors are being compelled to think about any revenue bond’s connection to a government that might file for bankruptcy and to integrate GO [general obligation bonds] with revenue bond credit analytics: There could be some spread widening for revenue-structure-dependent credits, like Chicago’s STSC, O’Hares, or even the new COFINAs, but this is apt to be slight in the current market.”

The Challenges of Fiscal & Physical Recoveries

January 10, 2020

Good Morning! In this morning’s eBlog, we consider the ongoing exceptional fiscal recovery of Detroit from the nation’s largest ever chapter 9 municipal bankruptcy, before worrying about the fiscal and physical shocks of the earthquake which shook the U.S. Territory of Puerto Rico, with the U.S. territory under partial fiscal oversight by the PROMESA Oversight Board, the hurricane could further complicate fiscal recovery efforts.

Moving Ahead in the Motor City. The City of Detroit, where it is impossible to forget my first morning, July 18, 2103, when I inquired at the desk in the hotel where I was staying for walking directions to the Governor’s Detroit offices—and they told me I could not walk there, warning I would surely be slain if I tried. Yet walk I did to meet with Kevyn Orr, whom Governor Rick Snyder had appointed as Emergency Manager. He was virtually alone at that most early hour, so I asked what the first actions he had taken were. In response, he said he had sent an email to every employee of the city informing them he would be filing for chapter 9 municipal bankruptcy that morning as soon as the court opened, and that he expected each and every employee of the city to report on time; he noted the most critical priorities were to ensure every traffic and street light was working, and that there was an immediate and professional response to every 9-1-1 call. Addressing the unprecedented task of gaining approval of a plan of debt adjustment, he told me, would be a much longer challenge. What was most clear was that, unlike the federal government, a closure of a city or county in the United States is quite simply not an option.

Detroit, a Home Rule city of about 138 square miles, was, under the terms of its plan of debt adjustment, approved by U.S. Judge Steven W. Rhodes, subject to state oversight for no less than 13 years, under Michigan Public Act 181 under the terms of the plan Judge Rhodes confirmed on November 7, 2014, under which the city’s creditors and insurers were expected to absorb losses totaling $7 billion, with creditors receiving between 14 and 75 cents on the dollar, and city retirees receiving significant reductions in their pension payments, modified so that no retiree would fall below the federal poverty level.

Fiscally, the city is relatively unique compared to most U.S. cities in that income taxes, set to bring in $299.4 million for FY19, were more than twice the level of property tax revenues, set at $124.6 million. Thus the decline of unemployed in Detroit from 94,787 in 2009 to 22,112 in 2018 was both a demonstration of the wise and fiscal oversight of both Mr. Orr’s plan of debt adjustment, and the resumed restoration of authority by the Mayor and City Council. The focus on public safety has also played a vital role in the significant corporate tax growth over the last two years—as has the continuing growth in the city’s wagering tax revenues, estimated to reach $186.2 million this year from the city’s adjusted growth receipts. Detroit’s foreclosures have fallen from a record high 9,111 occupied homes in 2015 to 514 last year, representing a 94% drop, city data shows. About 31,000 Detroiters living in their homes are behind on tax debt and Duggan has estimated that more than 60% could meet the income requirements to qualify for the Pay as You Stay program. In looking ahead, or as they might say there, to the high side, the city is looking forward to state-shared recreational marijuana sales tax revenues. This fiscal turnaround has been assisted by the city’s decreasing fiscal obligations to make interest payments on its unlimited tax general obligation bonds backed by the city’s full faith and credit—with said service costs declining from more than $$60 million for FY2020 to $10 million by FY2037.

On the pensionary front, where the plan of debt adjustment had been modified to ensure that no retiree would fall below the federal poverty level, with some $335 million set aside to guarantee such protections, the Motor City, in 2017, enacted a Retiree Protection Fund specifically and exclusively to satisfy its legacy pension obligations.

Mayhap from those first hours of acting to ensure street lights and traffic lights operated, the city, as per its plan of debt adjustment, has installed more than 65,000 new LED streetlights—and razed what it deemed 15,000 “dangerous vacant houses,” houses which I cannot forget from that first morning’s ride into the city from the airport.

Finally, in surely what is a related governance issue, the Detroit City Council has added $30,000 to its budget to provide for additional training for the city’s Board of Ethics.

Seeking Shelter & Recovery from a Terramoto.  Puerto Rico Governor Wanda Vázquez has declared a state of emergency; Wednesday U.S. Health and Human Services Secretary Alex. M. Azar II declared a public health emergency, noting: “We are concerned about potential impacts of this week’s earthquakes on the lives of our fellow citizens in Puerto Rico…We have worked closely with the territory’s health and human services authorities on disaster recovery, and will continue to do everything we can to help ensure the health and well-being of people across the island.” Puerto Rico’s Public Housing Administration predicted it would have sufficient inventory to house citizens who had sustained serious damages to their homes, albeit Administrator William O. Rodríguez Rodríguez, clarified that he cannot be categorical in his statement because, as of this date, the agency does not have an accurate number of how many are without shelter, noting: “We are still doing an ‘assessment’ of, indeed, which people lost their residences because the number of people who are refugees, and, contrary to hurricanes, do not necessarily respond, or are not directly related to their loss of residence.”  The challenge is further complicated because many of these affected Americans who are in shelters or who spend the night in open spaces do so for fear of the damages that earthquakes can cause in their residences, but not all have lost their homes or have serious damages that make their stay in it dangerous. Administrator Rodríguez noted: “Right now we are in a stage of making the discernment of what people actually lost their residence, but we have different options. We have public housing alternatives, we have section 8 vouchers, and I know that HUD is locating section 8 vouchers through the municipalities.” Puerto Rico’s housing administration, the AVP, has 500 vouchers or emergency vouchers available for the Section 8 Program to assist families affected by earthquakes; it also has apartments in some public residential areas, and can distribute vouchers to locate citizens over the age of 62 and veterans who were left homeless. In addition, other units are accessible through programs which are coordinated with the Department of the Family; similarly, there are additional vouchers available via HOME funds which can be issued under the temporary rental assistance program in which rent is paid for a period that can extend for up to two years. Administrator Rodriguez added: “I understand that we can supply much more than a thousand homes among the different options we have. So I understand that of the people who have been taking refuge (about 2,000) we could, in theory, meet the need, everything depends on qualifying for our programs, we have to assess the needs and how many families…At the moment, I don’t see a complication to be able to relocate those families.” In addition, the Administrator noted that once there is a major disaster declaration, other alternatives for relocation will be available through the Federal Emergency Management Agency (FEMA).

Unsurprisingly, to date the AVP does not have the total inventory of the buildings of its property that suffered structural damage or whose accesses were limited by landslides or landslides in the structures. Although there have been multiple tremors and aftershocks during the last weeks, the one with the greatest magnitude, 6.4, occurred on Tuesday morning. Nevertheless, Senor Rodriguez estimated that there are a number of buildings which simply cannot be immediately re-inhabited in the southern region of the country: “We do not foresee major situations or large amounts of relocations in public residences,” adding that the Director of the engineering section of the Public Housing agency, Dante Espinosa, who is a structural engineer, and his team has personally reviewed the public housing complexes in the southern area, noting: “We are primarily addressing projects which our administrators have determined have already been most affected with additional cracks or that residents are a little more concerned.” (The AVP owns 330 public residences.)

Poder. Of signal concern has been the loss of power/electricity, as a power generation plant which provides roughly a quarter of the island’s power has been substantially damaged—marking a major setback to the island’s already fragile electrical grid: the Costa Sur Power Plant, Puerto Rico’s largest, experienced “destruction on a grand scale,” according to José Ortiz, the Executive Director of the Puerto Rico Electric Power Authority at a news conference yesterday: the plant is located in Guayanilla, a southern municipio close to the epicenter of the 6.4-magnitude earthquake. Mr. Ortiz said repairing or replacing the Costa Sur plant could take a year or more. Consequently, the utility is seeking to compensate for that lost power generation by firing up other plants. (The Costa Sur plant, constructed in 1973, is one of four major power stations on the island.) As of midday yesterday, about 50% of Puerto Rico had electricity—up from about one-third Wednesday. Mr. Ortiz reported that power plants will continue to be brought back into service at a rate of about one a day through Sunday. If that schedule holds, power should be restored to the entire U.S. territory by the end of weekend, although he cautioned that the overall system will remain unstable for several weeks until completion of an important job, which predates the earthquakes. The electric utility needs to install a new transformer in one unit of the Aguirre power plant in Salinas, a job that should be completed early next month, he said.

The restoration of power has been complicated by the ongoing restoration in the wake of Hurricane Maria in 2017—restoration for the near chapter 9 municipally bankrupt territory still working to replace toppled power lines and fixing aging power plants—especially after the severity of a storm which cost an estimated 3,000 American lives even as the island was in a quasi-chapter 9 municipal bankruptcy status, and where the Puerto Rico Electric Power Authority has been operating under bankruptcy protection since 2017. And that might not be all: the region has been experiencing hundreds of earthquakes since late December, with the most powerful tremors having occurred earlier this week, killing one person and damaging roads, homes, and infrastructure. Puerto Rico’s emergency management agency yesterday reported its initial estimates showed that around 300 homes suffered some sort of damage.

Seeking Shelter from Fiscal & Physical Storms

January 9, 2020

Good Morning! In this morning’s eBlog, we worry about the 6.5 magnitude earthquake, which yesterday struck Puerto Rico, knocking down homes, churches, and public buildings. With the U.S. territory under partial fiscal oversight by the PROMESA Oversight Board, the hurricane could further complicate fiscal recovery efforts.

The President swiftly approved emergency federal assistance in the wake of the series of earthquakes or terremotos which hit the U.S. territory over the past 10 days, damaging homes and infrastructure, while, in its statement, the White House yesterday announced it had ordered the Federal Emergency Management Agency (FEMA) to provide equipment and resources to respond to the earthquakes—which began at the end of last month with tremors, but intensified, culminating in a tremor measuring 6.0 magnitude on the Richter scale early Tuesday, followed by a series of aftershocks. Puerto Rico Gov. Wanda Vázquez Garced declared a state of emergency, as did several Mayors or alcaldes of Puerto Rico’s 78 municipios.

The PROMESA Oversight Board authorized the disbursement of $260 million of the territory’s emergency fund to address the protection and recovery efforts, and briefed President Trump, with White House spokesperson Judd Deere noting: “Administration officials, including FEMA Administrator Pete Gaynor, have been in touch with the Governor and her team today, and we will continue to monitor the effects and coordinate with Puerto Rico officials.” The FEMA authorization will direct federal assistance to the tune of 75 percent of costs, with the remainder the responsibility of Puerto Rico. The assistance will be a step up from previous FEMA assistance, after, three years ago. In the wake of Hurricane Maria, which devastated the territory, FEMA increased its share of assistance to 0 percent of costs in most emergency projects, and 100 percent in select strategic projects. Nevertheless, the President’s authorization comes as the Trump administration has been slow to release long-term Hurricane Maria reconstruction funds managed by other federal agencies: notably, the Department of Housing and Urban Development is more than four months past a deadline to publish a notice on how it plans to distribute more than $8 billion in allocated funds. Puerto Rico Resident Commissioner Jenniffer González-Colón (R) joined with both of Senators Marco Rubio (R-Fl.) and Rick Scott (R-Fl.) to write the President asking that he order FEMA and HUD to respond: “The localities which are grappling with the effects of the earth tremors are smaller municipalities that do not have the necessary resources to handle the situation alone, and the Puerto Rico local agencies are taxed to their limits by their fiscal condition and the continuing larger recovery effort.”

Nevertheless, there are concerns, as the President’s authorization also comes as his Administration has been slow to release long-term Hurricane Maria reconstruction funds managed by other federal agencies, angering Puerto Ricans, as well as Congressional leaders who had approved the assistance: the Department of Housing and Urban Development is more than four months past a deadline to publish a notice with regard to how it plans to distribute more than $8 billion in allocated funds; thus, Puerto Rico Resident Commissioner Jenniffer González-Colón (R-P.R.) joined with both of Florida Senators Marco Rubio (R-Fl.) and Rick Scott (R-Fl.) to write to the President requesting that he order the federal agencies to respond to respond to the new crisis on the island, writing: “The localities that are grappling with the effects of the earth tremors are smaller municipalities that do not have the necessary resources to handle the situation alone, and the Puerto Rico local agencies are taxed to their limits by their fiscal condition and the continuing larger recovery effort.”

Health and Human Services Secretary Alex Azar a health emergency in Puerto Rico, noting: “We are concerned with the potential impact of the earthquakes on the lives of our fellow Americans in Puerto Rico,” with his statement opening the door so that health centers to have sufficient flexibility in the use of federal funds and the provision of services, Secretary Azar noted, adding that the medical teams of the National Medical System of Disasters and the Commissioned Corps of the U.S. Public Health Service will be directed to ensure equipment and supplies will be available to Puerto Rico authorities: as of yesterday, there were more than 2,000 refugees, after some 300 residences were damaged, as well as schools and other structures; 60% of Puerto Rico was left without power. Per the President’s orders, FEMA is charged with the authority to “identify, mobilize and provide, at its discretion, the necessary equipment and resources to alleviate the impacts of the emergency.”

Seeking Shelter from a Quake

January 7, 2020

Good Morning! In this morning’s eBlog, we worry about the 6.5 magnitude  earthquake which yesterday struck Puerto Rico, knocking down homes, churches, and public buildings.

While the federal government can–and does–shut down, such is not an option for local and state governments–whether in Detroit, Central Falls, Rhode Island, San Bernardino, California, because of municipal chapter 9 insolvency: the first order of business for a local government is to ensure the availability of 9-1-1 emergency responses and public safety.  Thus, this morning, we explore the challenges triggered by yesterday’s earthquake in the U.S. territory of Puerto Rico.     

The quake caused the collapse of the Immaculate Conception church in Guayanilla, as it affected buildings and residences, triggered landslides, and crashed digital platforms, and knocked out electrical services. Governor Wanda Vázquez suspended work in the public sector, except for first responders. The 6.5 magnitude earthquake struck at 3:25 this morning, centering about 3 miles south-southwest of Tallaboa, a small municipio of about 925 on the island’s southern coast. The epicenter was just eight miles south of the barrio of Indios. It was one of the strongest in a series of intermittent quakes over the last week, according to Angel Vazquez, the Emergency Management Director for the southern coastal city of Ponce. Director Vazquez described the quake as “one of the strongest quakes to date since it started shaking on Dec. 28.” Although no injuries or major structural damage were reported in the immediate aftermath of the quake, Director Vasquez said power outages were reported in some parts of the U.S. territory, and residents also reported minor landslides temporarily closing some roads along the southern coast. The previous quakes began around Dec. 28 and have ranged in magnitude from 4.7 to 5.1, according to the Associated Press, with some reportedly knocking goods off supermarket shelves and cracking homes. Mayor Nelson Torres Yordán of Guayanilla reported that a residence collapsed in the Villa del Carmen sector, in the Playa neighborhood, adding that: “There was the family inside the house, two children under 8 and 6 years old and their parents, but there were no injuries. They lost their three cars.” He declared a state of emergency in the Indios neighborhood. Noting: “The declaration gives us an opportunity to make some movements, if we have to make adjustments to the budget, if we had to do emergency projects, relocate families,” reporting that he has been in telephone communication with the Governor Wanda Vázquez Garced. He reported the collapse of one residence, as he said the “Emergency Management team is verifying, house by house,” for injuries or structural damage, and that a shelter has been opened to relocate residents at the Hipólito García school in the Indios neighborhood, which is only one level.

The U.S. Census Bureau has estimated that Puerto Rico’s population grew in FY2019, the first such increase in a decade and a half, with the Bureau reporting the first such increase since 2004, noting the population was about 3,193,694 last July 1, or approximately 0.01% more than the total for July 1, 2018. By comparison, Puerto Rico’s population was 3.83 million in July 1, 2004, according to the Census Bureau—with the updated census projections 2.6% higher than the PROMESA oversight Board had projected in its May FY2019 fiscal plan. Mario Marazzi, an economist the former Executive Director of the Puerto Rico Institute of Statistics. Mr. Marazzi noted: “Post-[Hurricane] Maria return migration was so strong between July 2018 and June 2019 that it apparently broke the historical downward trend in population…The social and demographic forces behind this trend remain firmly in place. So the pause in the reduction will likely prove to be short-lived.” In FY2109, net migration to Puerto Rico was 7,733—a stark reversal compared to the net departures of 123,399 last year—a fiscal year in which there were 7,395 more deaths than births on the island in fiscal 2019, according to the Bureau. Economist Gustavo Vélez, Chair of the consultancy Inteligencia Económica said that the Bureau’s figures for births and deaths are reliable.

Chair Vélez noted that Puerto Rico’s economic conditions have been the prime force affecting migration over the last century. Now, in the wake of the devastating hurricanes and limited FEMA responses, the U.S. territory is recording positive economic growth, growth which appears to be stemming the exodus from the U.S. territory after the hurricane, especially of Puerto Ricans with degrees. Juan Lara, Chief Economist at Puerto Rico consultant Advantage Business Consulting, said this led some to return, with net migration probably flowing to the territory starting around July 2018:  “These figures tend to validate the view that an improvement in the economy can slow or even reverse the population decline…Overall, 2019 was the best year for the economy in a long time, producing the first annual gain in total jobs in many years. Sadly, this is unlikely to be repeated in 2020, so we don’t expect to see another rise in population, albeit small, in the near term.” José Villamil, Chairman of Puerto Rico consultant Estudios Técnicos, noted: “Our estimate in the firm is that by 2025, the population should be 3.0 million. That would mean a net migration of some 25,000 per year from 2019. It may be a bit pessimistic, particularly if the 2020 Census corroborates the 2019 estimate.” Mr. Vélez said Puerto Rico’s economy had slowed since early July, noting he was still working on predictions for this year, but that he thought a growth rate of 1.5% to 2% in the year would be a best-case scenario.