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.

Getting Schooled on Disaster

December 15, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city emerging from a quasi-state takeover—and report on continuing, discouraging blocks to Puerto Rico’s fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

The Steep Fiscal Road to Recovery. Detroit’s Cerveny – Grandmont neighborhood, where median household income has declined by 5 percent since 2000 and average household incomes are under $38,000—and median home sale prices are just over $51,000, this week was one of 10 areas in the Motor City yesterday was cited in a report, “Reset, Rethink, Rebuild: A Shared Vision of Performing Schools in Quality Buildings for Every Child in Detroit”  a study about neighborhoods, educational opportunity, and the conditions of public school buildings, as one of ten neighborhoods wherein it is nearly impossible to find a quality school. Indeed, the report determined that the problem is deeper than just those 10 neighborhoods: Only 20 percent of the children enrolled in a public school in the city, whether charter or traditional public, are attending a quality school: a discouraging, failing grade with implications for both assessed property values and Detroit’s budget. Chris Uhl, the Executive Director of the eastern region for IFF, which published the study, noted: “The fact that four out of five kids in this city” are not attending a quality school “is pretty horrifying to me…that…should catalyze action.” The report notes that nearly half of the space in school buildings in the city is underutilized. A key recommendation of the report was that greater coordination is needed between leaders of the Detroit Public School System and the authorizers of charter schools—presumably including the current U.S. Secretary of Education. (Currently, only Grand Valley State University and Central Michigan University are authorized to open new charters in the city, but there are a number of other authorizers with schools in the city.)  IFF’s recommendations are similar last week’s report by the Coalition for the Future of Detroit Schoolchildren.

In its report, the IFF identified quality schools using Michigan’s less than clear, but outdated quality schools color-coded accountability system–a system due to be replaced next year: a part of that old system provided for the assignment of five colors, based on how well students achieved academic goals. Of the city’s 178 general education public schools, just 2.4% received the equivalent of an A.  The report makes clear that the steep road back from the nation’s largest municipal bankruptcy requires a greater focus on the next generation’s future: schools good enough to attract families back into the city—attracted by a good school to enroll their children. Today, too few of them exist—or, as the report notes: Detroit needs nearly 70,000 more seats available in quality schools to ensure that every child has access to such a school. Tonya Allen, President and CEO of the Skillman Foundation, which funded the research, noted: “We’re not meeting the demand, which leaves us vulnerable to leakages: for students to leave the city to go to school in the suburbs.”

A Taxing Recovery? Just as Puerto Ricans were treated unequally by the federal response to hurricane devastation compared to Houston and Florida, so too there is apprehension that the tax “reform” legislation nearing completion in Congress—especially as there is growing apprehension that Congress could move towards adopting a territorial tax system for businesses—that is a new tax system which would treat Puerto Rico as a foreign country with respect to the numerous foreign subsidiaries of U.S. corporations which operate there. Puerto Rico Secretary of Economic Development and Commerce Manuel Laboy Rivera is apprehensive that subsidiaries of U.S. corporations which receive favorable treatment under current federal law could find the emerging federal tax reform would impose a new 20 percent federal excise tax on all pharmaceuticals, medical devices, and other products shipped to the mainland—that is a new, discriminatory tax—which would be in addition to the Jones Act provisions which render Puerto Rico unable to compete fairly vis-à-vis other Caribbean competitor nations—even as Puerto Rico is subject to the federal minimum wage and other federal regulations involving workplace safety and environmental protection. Indeed, last December, a bipartisan congressional task force had recommended changes in the tax treatment of the U.S. territory with the Congressional Task Force on Economic Growth writing: “Puerto Rico is too often relegated to an afterthought in Congressional deliberations over federal business tax reform legislation. The task force recommends that Congress make Puerto Rico integral to any future deliberations over tax reform.” Among the recommendations: a modification of the federal child tax credit to include the first and second children of families living in Puerto Rico, not just the third as specified under current law; the report also recommended making permanent the so-called rum cover-over payments to the governments of Puerto Rico and the U.S. Virgin Islands. The task force, however, was divided with regard to whether to fully expand the eligibility of Puerto Rican families for the Earned Income Tax Credit. The report recommended that a domestic business production credit known as Section 199 that has covered Puerto Rico since 2006 should be maintained as long as Section 199 continues. Now, however, that credit has been targeted for elimination in the pending tax reform negotiations as they enter their final hours. Under the discriminatory treatment, for federal tax purposes, Puerto Rico is considered outside the U.S. tax code, even though for virtually all other issues the island is treated as a domestic part of the U.S. For the purposes of federal tax reform, however, Senate Finance Committee Chair Orrin Hatch (R-Utah) said during the Finance Committee’s deliberations that Puerto Rico’s tax issues would be handled in separate legislation. So, it seems that for Hurricane Maria ravaged Puerto Rico, where 20% to 40% of all businesses are at risk of being shuttered in the wake of the hurricane and its ensuing devastation for the economy because of challenges ranging from the lack of electricity to loss of inventory, physical damage to their facilities, business interruption, and lack of capital; the message from Congress is to wait for next year.

House Ways and Means Committee Chairman Kevin Brady (R-Tx.) has informed reporters that he and other lawmakers are considering several options for Puerto Rico—especially in the wake of meeting with Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s non-voting Representative in Congress, to discuss her request to consider making Puerto Rico an economic opportunity zone or empowerment zone—provisions adopted by Congress to abet economic recovery in hard-hit cities and counties. Thus, a change would be to treat Puerto Rico similarly—as if it were, gasp, a part of the United States for federal tax purposes and eligible for the same treatment. Likewise, tax reform could have been a vehicle for Congress to eliminate or reduce the discriminatory 20% excise tax on goods from Puerto Rico—a tax which undercuts Puerto Rico’s ability to compete with Cuba, and other countries in the region.

Even as the tax reform-deficit/debt increase legislation has swiftly moved towards the President’s desk, in New York, U.S. Judge Laura Taylor Swain, presiding over Puerto Rico’s quasi-chapter 9 case, heard from attorneys for the Employees Retirement System and the Puerto Rico Oversight Board—with the critical issue what claims of Puerto Rico’s bondholders are valid. PROMESA Oversight Board attorney Steven Weise said the 2008 Financing Statements governing Puerto Rico’s municipal bonds did not provide bondholders any collateral, arguing that the bondholders’ written arguments quoted from legal rulings about “security agreements,” but that what is allowed in these agreements are not allowed in Financing Statements—adding that the system’s legal name changed in the last several years, but that bondholders had failed to properly follow-up on this development—a failure which meant, at least as he argued, that the system should not be legally obligated to pay interest on the municipal bonds—even as Bruce Bennett, representing bondholders, told Judge Swain the bondholders had a lien on employer contributions, based on multiple commitments, arguing that the 2008 Financing Statements gave the bondholders the lien. He said errors in the document were not of such gravity to merit undercutting to undercut the bondholders’ claims—and adding that the Spanish name of the system had not changed, and that the change in the English name was just a translation change—a change without legal significance. Moreover, he noted, that along with the Financing Statements, a parallel “security agreement” had been created in 2008 and this perfected the lien; further, he argued, the 2015 and 2016 Financing Statements also assured the bondholders’ lien on the employer contributions.

Where Are the Lights? U.S. Army Corps of Engineers Lieutenant General Todd Semonite, the commanding General and Chief Engineer for the Corps reports that Puerto Rico’s electrical grid is unlikely to be fully restored until the end of May, a far more pessimistic timeline that suggested by Puerto Rico Governor Ricardo Rossello, who Wednesday stated he expects Puerto Rico’s electric grid to reach 75 percent of customers by the end of January—and 95 percent by the end of February—and 100 percent by the end of May. Adding to the dissonance, the Puerto Rico Electric Power Authority last month pledged service would reach 95 percent of customers by the end of this month—even though, as of Wednesday, just 61 percent of electricity had been restored.  

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What Municipal Fiscal Items Might Be Found in Stockings?

December 11, 2017

Good Morning! In this a.m.’s Blog, we consider the ongoing and renewed fiscal challenges confronting Connecticut–albeit with some hints that Santa might have paid an early visit and filled some stockings in Hartford; then we observe the still unmet, post-hurricane fiscal and physical storms which have slammed the U.S. territory of Puerto Rico–but where the federal response has been less than anemic.

Visit the project blog: The Municipal Sustainability Project 

Coal in the Fiscal Stocking? Barely weeks after Connecticut Gov. Dannel Malloy signed the state’s FY2018 budget, Connecticut has a new round of fiscal crises—meaning the Governor will have to go back to the fiscal drawing board to come up with a new fiscal plan to address a state deficit of at least $207 million, even as he is confronted by a hurtling insolvency for the state’s special transportation fund: Connecticut statutes mandate the Governor to submit a mitigation plan within 30 days when a shortfall exceeds 1% of the general fund. Ergo, Gov. Malloy alerted bond rating municipal bond rating agencies that the fund, key to back stopping critical transportation projects, could be in the red by the beginning of next summer, noting to reporters: “It’s the same things I’ve been telling you guys for years, that we’ve got do something about the transportation fund: “Revenue is coming in, and was predicted to come in slower in large part because people are buying less gas and gas is cheaper.” His remarks follow by just under three years is then announcement of a 30-year, $100 billion transportation infrastructure program—a program which, however, has scarcely commenced. Now, as the Governor anticipates the state’s budget deficit to rise, given delays in implementing reductions in medical benefits which had been projected to play a key fiscal role in the state’s $41 billion biennial spending plan, the Gov. added: “Unless they’re selling new hats that deliver rabbits, a mitigation plan means there only two things you can do—cut spending, raise revenue, or do a combination of both,” with his comments coming a day after huddling with legislative leaders about the hemorrhaging deficit—just two months after the Governor had signed—four months’ late—and now as Congress is on the precipice of sending the White House a tax cut bill that will signally increase the federal debt and deficit—and impose Medicaid cuts and discombobulate Connecticut’s budget—even if the federal government does not shut down. With the Constitution State on the market to sell $400 million of taxable general obligation bonds and $350 million of GO bond anticipation notes, S&P has been less than optimistic, with analyst David Hitchcock indicating a 33% chance the agency could lower Connecticut’s rating within two years, writing: “The outlook reflects what we believe to be increasing constraints on achieving long-term structural balance, highlighted by Connecticut’s delay in enacting a fiscal 2018-2019 biennial budget.” The rating agency is apprehensive about the state’s above-average debt, high unfunded public pension liabilities, as well as OPEB unfunded post-employment benefit liabilities—all coming at a time of population declines, economic stagnation, and weak reserves. Likewise, Fitch warned Connecticut was a state to flag in the new year: “The state has struggled in recent years with revenues failing far short of projections,” while Municipal Market Analytics indicated it anticipates the new state deficit to trigger aid cuts, cuts which will adversely impact the state’s municipalities, writing: “There is a significant medium-term downside scenario developing for the paper of middle-class and poorer Connecticut towns.” Thus, Gov. Malloy said he expects the General Assembly to reconvene for a special session prior to Christmas, especially due to the potential fiscal impact of the announced CVS takeover of Aetna—the state’s largest employer, based in Hartford, and Stanley Black & Decker’s announcement that it will open a 23,000-square-foot advanced manufacturing center in downtown Hartford—kind of a pre-Christmas good gnus/bad gnus combination. , giving the global tools maker its first presence in the Capital City. Almost as if Santa had left an early fiscal stocking present, the twin developments indicate that Hartford, notwithstanding its fiscal and financial struggles and economic decline, is resilient: a city now at a crossroads, with the addition of more than 1,000 new housing units, the opening of the University of Connecticut’s new campus at the old Hartford Times building.

Build Back Mejor! Puerto Rico Gov. Ricardo Rosselló flew to New York yesterday for fiscal and physical reconstruction meetings, after meetings with Puerto Rico Senate President Thomas Rivera Schatz and House Leader Carlos Méndez, as he sought to reach consensus on a unified strategy and position with Congress and the Trump administration—hoping that President Trump will agree to some special dispensations for the U.S. territory—especially with regard to manufacturing. His voyage comes as the Justice Department has filed a constitutional defense of the Puerto Rico Oversight, Management, and Economic Stability Act, arguing the law gives the federal government flexibility in making appointments to address Puerto Rico’s debt crisis—with the trip coming as the federal government, last week, responded to an August 7th filing by hedge fund Aurelius Capital in the Title III bankruptcy case: PROMESA Oversight Board Executive Director Natalie Jaresko said the board supported the U.S. filing in defense of PROMESA’s constitutionality, noting: “We welcome the United States Solicitor General’s legal arguments in support of PROMESA and the board’s constitutionality…The devastation of Hurricanes Irma and Maria make it even more important to have in place an orderly process for restoring the island’s finances, providing oversight and increasing confidence among residents and businesses while upholding equitable treatment for creditors.” Potentially at stake are the fates of $74 billion in outstanding public sector debt, $49 billion in pensions, and the control not only of Puerto Rico’s government, but also its public corporations: in the complaint, Aurelius said the Title III bankruptcy petition should be dismissed, because its filing was not validly authorized by the validly constituted oversight board: in particular, Aurelius charged that the appointments clause of the U.S. Constitution was breached in appointing the PROMESA board’s members, arguing that, according to the Constitution, all “principal officers” of the United States must be appointed by the President of the United States, and approved by the U.S. Senate. In its August complaint, Aurelius had argued that the board members are “principal officers” of the U.S. In a responding federal brief, the federal government wrote that the PROMESA appointments scheme “is not subject to the Appointments Clause, because the Oversight Board is a component of the territorial government,” noting that Congress enacted PROMESA under the Territory Clause of Article IV of the Constitution, which gives Congress “‘broad latitude to develop innovative approaches to territorial governance,’ Puerto Rico v. Sanchez Valle (2016),” with the U.S. attorneys writing: “The Appointments Clause does not govern the appointment of territorial officers, including members of the Oversight Board, because Congress may legislate for the territories ‘in a manner…that would exceed its powers or at least would be very unusual, in the context of national legislation enacted under other powers delegated to it.’ Palmore v. United States (1973).” The attorneys added that historical practice shows that the “Appointments Clause is inapplicable to the appointment of territorial officers.” (In 1900, Congress passed the Foraker Act, which said that a locally-elected house of representatives should work alongside a governor and 11-member elected council nominated by the President and confirmed by the U.S. Senate. In 1947, the U.S. government gave Puerto Rico the power to also elect a governor.) Ergo, the federal lawyers argued that these local elections are not in conformity with the Appointments Clause, but rather have historically been practiced without challenge. Not dissimilarly, Aurelius Capital had also argued that PROMESA’s appointment mechanism for the Oversight Board also encroached on the U.S. President’s executive authority in violation of the Constitution’s separation of powers: while the statute encouraged the President to pick six of the seven board members from those nominated by Congress, according to the act: “he could have requested the recommendatory lists to be supplemented with additional candidates or nominated his own candidates for Senate confirmation under PROMESA’s appointments structure.”

Will There Ever Be Shelter from the Storm? More than two months after Hurricane Maria devastated Puerto Rico, the U.S. territory, unlike Houston or Florida, has yet to receive any of the $4.9 billion of short-term loans promised in the storm aid package Congress passed at the end of October. Gov. Christian Sobrino, Gov. Rosselló representative on the PROMESA oversight board, confirmed last Friday that no Puerto Rican entity has received any portion of the funds, which were requested for basic functions—with the inexplicable delay raising fear after the Puerto Rican government told the oversight board that the island utility, PREPA, and water utility, PRASA, would run out of money this month—as discussions with the U.S. Treasury and Department of Homeland Security remain unsettled. Puerto Rico has requested $94 billion in federal aid, only a portion of which has been granted, as Members of Congress have raised concerns over how the island’s government will steward billions in federal money—an ironic concern given the current Congressional tax cut proposals projected to add $1.4 trillion to the federal debt, raising questions with regard to not just discrimination, but also a double standard. Puerto Rico Rep. Rafael “Tatito” Hernandez, of Puerto Rico’s House of Representatives, last Wednesday wrote to U.S. Treasury Secretary Steven Mnuchin with regard to the status of the loan package—an epistle to which, at least as of last Friday, he has received no response. Rep. Hernandez noted that Members of Congress still need reassurance that the funds will be well spent, adding that: “A lot of them have some issues.” Whether their issues in any way are comparable to the scale of as much as $100 billion of damage to Puerto Rico, however, or to the challenge to the PROMESA Board as it seeks to unwind the equivalent of the largest chapter 9 municipal bankruptcy in U.S. history is another question. Now Puerto Rico warns it will have to redraw plans for economic reforms. As fabulous Matt Fabian of Municipal Market Analytics noted: “There is a risk that Puerto Rico will use the operating loans and rebuilding dollars as short-term financing to avoid making hard choices in terms of making economic reforms.” As of last Friday, Puerto Rico’s utility, PREPA, was generating only 68% of the power needed and 7% of customers still lacked access to clean water. 

Recovering after a Quasi-State Takeover

December 8, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city emerging from a quasi-state takeover—and report that last night, House Republicans voted 235-193 to pass and send to the Senate a stopgap bill to keep the federal government open for another two weeks, freeing up space to finish both the federal budget for the year that began last October 1st—and to try to craft a conference report on federal tax reform. The House vote now awaits Senate action, where leaders plan to act swiftly to put the bill on President Trump’s desk and avoid a shutdown on Saturday.

.Visit the project blog: The Municipal Sustainability Project 

A Founding Municipality. Petersburg, Virginia—where archaeological excavations have found evidence of a prehistoric Native American settlement dated to 6500 BC, was, when the English first began to settle America, arriving in Virginia in 1607, in a region then occupied by Algonquin speaking early Americans—was founded at a strategic point along the Appomattox River. Nearly four decades later, the Virginia Colony established Fort Henry along the banks of the Appomattox River. The colony established Fort Henry—from which Colonel Abraham Wood sent several famous expeditions in subsequent years to explore points to the west; by 1675, his son-in-law, Peter Jones, who commanded Fort Henry opened the aptly named Peter’s Point trading post. In 1733, the founder of Virginia’s capitol of Richmond, Col. William Boyd, settled on plans for a municipality there—to be called Petersburgh—an appellation the Virginia General Assembly formally incorporated as Petersburg on December 17, 1748.

By the 20th century, the upward growth in one of the nation’s oldest cities peaked—at just over 41,000 residents: by 2010, the population had declined more than 20 percent—and the municipality had a poverty rate of 27.5%, double the statewide average, and nearly 33% greater than in 1999. The city’s largest employer, Brown & Williamson, departed in the mid-1980s. By last year, 100% of Petersburg School District students were eligible for free or reduced price lunch—even as the district lagged behind state graduation rates; the  and the rate of students receiving advanced diplomas. Last year, the city’s violent crime rate was just under twice the U.S. average. By 2014, Petersburg’s violent crime rate of 581 per 100,000 residents was nearly 30% higher than the violent crime rate in Danville—even though, unlike Danville, Petersburg is in the thriving Richmond metropolitan area—and has potential partners in higher education (Virginia State University and Richard Bland College) and philanthropy (Cameron Foundation), as well as a unique concentration of affordable, historic housing. Yet the city’s unassigned General Fund reverses grew from $20.4 million in FY2005 to $35.0 million by FY2014, or 55% of operating expenditures; it has very strong liquidity, with total government available cash equal to 11.5% of total governmental fund expenditures and more than ten times greater than annual debt service payments. Nevertheless, as we have previously noted, a state technical assistance team’s review last year determined that the City had exhausted most of its unrestricted reserves—also noting that in FY 2015, the City’s final budget called for General Fund revenue of $81.4 million and spending of $81.1 million, even as the municipality’s CAFR reported that actual revenue was $77 million, while spending was $82.9 million—leading to a conclusion that, based on General Ledger reports, all funds expenditures exceeded all funds revenue by at least $5.3 million.

Moreover, notwithstanding its string of operating deficits, Petersburg undertook a series of costly, low return economic development investments—purchasing a hotel, supporting a local baseball team, and building a new library—all investments beyond the city’s means. Nevertheless, after a state intervention, after nearly a decade of near insolvency, the city’s most recent Comprehensive Annual Finance Report demonstrates Petersburg is emerging from its fiscal bog—closing FY2017 having collected $73,069,843 in revenues, while spending $65,861,125 in expenditures: meaning the positive $7,208,718 difference nearly eclipsed the $7.7 million deficit which had been carried over from FY2016—unsurprisingly leading Blake Rane, the city’s Finance Director, to note: “We’re really excited about the changes that occurred in 2017: As the new administration, we are super excited that the road we have to go on is starting at a better position than where we thought it would be.” Similarly, Mayor Samuel Parham, at a news conference, noted: “We’re showing outside development that Petersburg is a safe investment…There was a time when people thought we were going to fall into the Appomattox.”

Much of the fiscal recovery credit, as we have previously noted, may be credited in part to strict expenditure practices instituted by the Robert Bobb Group, the turnaround team headed by the former City of Richmond Manager, which ran the city administration from October 2016 until September—where the team found Petersburg had always overestimated revenues, according to former Finance Director Nelsie Birch, so that the fiscal challenge was to get a “handle on spending,” a challenge met via the adoption of a very conservative FY2017 budget with a strong focus on improving Petersburg’s collection practices—including enforcement:  For the first time in several years, the city put delinquent properties up for tax sale—or, as City Manager Aretha Ferrell Benavides put it: “The new billing and collecting office is moving on collecting now: People are realizing that we’re not going to sit and wait.”  The results are significant: Petersburg’s fund balance is nearly at zero after dropping to a negative $7.7 million. Today that balance is a shadow of its former level at negative $143,933, and Manager Benavides notes: “We’re working on building up [the fund balance], because we’ve been very dependent on short-term loans through Revenue Anticipation Notes.”

Other key steps on the city’s road to recovery included selling excess water from the city’s water system, selling pieces of city-owned property, and even selling the city’s water system, or, as Mr. Bobb put it: “Moving forward, the city still needs that liquidity event (that was not intended to be a pun), because a major snowstorm, or a major water line break, sinkhole, etc., those things would be a significant drain on the city, unless it has a major fund balance.” As part of its fiscal diet, Manager Benavides notes Petersburg is still examining options to sell as many as 320 pieces of city-owned property, with the City Council already having approved the disposition of some of these properties over the past several months. The fiscal road, like the city’s history and geography, has been steep, but the fiscal exertions appear to be paying off, as it were.

Fiscal Challenges Under Federal or State Takeovers

December 6, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city still under a state takeover, before heading south to assess the governing and fiscal challenges in a dissimilar, quasi-takeover of the U.S. territory of Puerto Rico.  

Visit the project blog: The Municipal Sustainability Project 

Fiscal, Intergovernmental, & Branches of Government Challenges under a State Takeover. Atlantic City’s Fire Department, which, like the City, remains under the control, as part of the ongoing state takeover, of the state Department of Community Affairs, faces another round of salary cuts as the state continues to cut spending in the municipality: the firefighters are anticipated to realize an 11.3 percent reduction in their salaries effective this Sunday, according to union officials, with the cuts coming just two months after Superior Court Judge Julio Mendez ruled the state had the authority to cut the Department by 15 members, to 180, after next February 15th. Moreover, in the wake of the state’s fiscal action, the state warned further salary cuts were possible, because Atlantic City only had sufficient fiscal resources to fund the department through November 30: Lisa Ryan, a spokesperson for the New Jersey Department of Community Affairs, noted: “While we have made considerable progress in stabilizing Atlantic City, significant work remains in restraining the city’s unsustainable finances…Judge Mendez’s decision requiring 180 firefighters instead of the 148 the state and city believe is sufficient to maintain public safety in Atlantic City resulted in $3.8 million in additional costs.” Over the past couple of years, the size of the city’s Fire Department has continued to shrink: in January, the department had 225 members; currently there are 195. Indeed, over the last seven years, the department has been reduced by 82 members—leading Fire Chief Scott Evans to note that in what would have to be an understatement, the year has been tough on the department, or, as he put it, the cuts and ongoing litigation have been a “distraction” to the firefighters: “It’s tough to keep the focus on your job…What the guys have faced all year have been the toughest challenges.” Ms. Ryan noted: “The state and city refuse to have taxpayers and other city stakeholders shoulder the burden of these costs caused by the fire union, thereby resulting in the salary reduction of firefighters, who are still highly compensated when compared to other city employees…Notably, the police have chosen to mediate and find compromise, and we encourage firefighters to do the same.”

Siguiendo en Disarollo. Puerto Rico currently expects its central government revenues to come in 25% short of budget in this fiscal year. Geraldo Portelo Franco, the Executive Director of the Puerto Rico Fiscal Advisory and Financial Information Authority, advised the PROMESA Oversight Board yesterday, meaning Gov. Ricardo Rosselló and the PROMESA Board will have to address the shortfall as the island government struggles to address not just recovery from the devastation from Hurricane Maria, devastation which received far less of a U.S. response than Houston or Florida, but also left the island with a substantial loss of those who could afford to leave—and who may not return. Now Mr. Portelo Franco is warning that public corporations will be without cash this month, while the General Fund will see a 25 percent drop in revenues this fiscal year: while he did not specify how the central government would help PREPA and PRASA if the disaster loan under FEMA, a loan the final terms of which are still undefined—even as the full restoration of electricity and water services is urgent; Puerto Rico’s two main public corporations on the island, those which provide essential public services, appear to be without fiscal resources with which to cover their operations this month, according to Mr. Portela, when he spoke at the eleventh public meeting of the PROMESA Oversight Board in New York City. He noted that in the case of PREPA (the Puerto Rico Electric Power Authority), which has not yet restored electricity service to most of its customers, the corporation will deplete what is left in its coffers by the end of the week of December 22nd; he anticipates PREPA will finish the calendar year with a cash deficit of $ 224 million. Meanwhile, the Puerto Rico Aqueducts and Sewers Authority (PRASA) is anticipated to end this month with a cash overdraft of about $ 1 million. The twin fiscal perils could, according to Mr. Portela, push Puerto Rico’s general fund into negative territory, because there might be no choice but to assist PREPA and PRASA if Washington does not allocate fiscal resources to Puerto Rico as soon as possible: in total, according to PAFAA, PREPA, and PRASA need $ 883 million of liquidity. Thus, Mr. Portela noted: “Our efforts are focus on obtaining liquidity for PREPA and PRASA through the CDL (Community Disaster Loan).”

If anything, the governance and fiscal challenge has been exacerbated, because the FEMA disaster loan, which was authorized about a month ago, but for which terms have yet to be negotiated, has yet to arrive. While Puerto Rico, as part of governing for contingencies, maintains reserves in case it needs to give liquidity to these quasi-public corporations, or, as he put it: “They (PREPA) have tried to preserve cash by managing the time of payment to suppliers,” in responding to PROMESA Board executive Arthur González, the liquidity crisis in PREPA and PRASA has complicated the governance and fiscal options facing the PROMESA Board as it confronts the challenge of approving a new fiscal plan which, among other things, seeks profound reforms of Puerto Rico’s economic framework and, in turn, will be key to the renegotiation of the debt through the cases of Title III of PROMESA. For one, if Puerto Rico uses General Fund resources, it would likely face further court challenges by Puerto Rico’s creditors—similar to a challenge already underway in the case of the bondholders of the Puerto Rico Sales Tax Financing Corporation (Cofina). (Recently, the insurer Ambac Assurance Corporation and several investment funds have asked U.S. Judge Laura Taylor Swain to investigate how Puerto Rico’s decisions to suspend the collection of the Sales and Use Tax (IVU) will affect that debt. But, with some $700 million owed to its suppliers, Puerto Rico’s central government has no cash options. Notwithstanding the gloomy fiscal portents, Mr. Portela reported better collections in items such as the 4 percent tax, FEMA assistance, and a less severe migration than had been feared; notwithstanding, however, he noted that if the predicted drop of 25 percent in revenues materializes, the General Fund would fall short in this fiscal year by about $ 2.4 billion—ensnaring the government in delaying payments to its suppliers and contractors, as he admitted that, apart from the estimate of accounts payable already recorded (around $ 500 million), there could be up to $ 250 million in additional payments to suppliers which are pending, noting that because “certain systems were inoperative in the immediate aftermath of the hurricane, there was a delay in payments and processing.”

Catch 22. With the PROMESA Board, the most likely bridge to gaining any additional fiscal help from the White House and Congress, thus a critical potential ally to Puerto Rico; the evident frustration by members of the PROMESA Board, combined with the speed with which Congress is moving on federal tax reform—but with virtually no analysis of the potential fiscal impact on Puerto Rico, albeit with a debt dwarfing Puerto Rico’s, the Board appears increasingly caught between a rock and hard place—a place Director Ana Matosantos described as “unacceptable,” adding that, for at least four times, PROMESA Board executives have asked for information on what is owed to government suppliers and contractors, stating: “This issue of not having clear things about accounts payable and the ongoing issue of late payments, at the same time that we are trying to look at what is happening economically in Puerto Rico while you have outstanding balances, is frustrating.” PRMOMESA Executive Andrew Biggs noted: “I have mostly dealt with governments at the state and federal level, but I’ve never seen a government that is so dependent on external consultants.”

The fiscal challenges, indeed, go both ways: as the exchange between the Board and officials of Gov. Ricardo Rosselló Nevares’ administration, the officials sought information and analysis of the potential fiscal impacts on Puerto Rico of the rapidly moving federal tax reform legislation in Congress—legislation, after all, which Congress’ Joint Committee on Taxation has warned will add close to $1.4 trillion to the federal debt.

Federal Tax Reform in a Post-Chapter 9 Era

December 4, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges that the pending federal tax “reform” legislation might have for the nation’s city emerging from the largest municipal bankruptcy in American history, before returning to the governance challenges in Puerto Rico.  

Visit the project blog: The Municipal Sustainability Project 

Harming Post Chapter 9 Recovery? As the House and Senate race, this week, to conference on federal tax legislation, the potential fiscal impact on post chapter 9 Detroit provides grim tidings. The proposed changes would eliminate federal tax credits vital to Detroit’s emergency from chapter 9 municipal bankruptcy; the elimination of low-income housing tax credits would reduce financing options for the city: the combination, because it would adversely affect business investment and development, could undercut the pace of the city’s recovery. Most at risk are historic rehabilitation and low income housing tax credits: the House version of the tax “reform” legislation proposes to eliminate historic tax credits—the Senate version would reduce them by 50%; both versions propose the elimination of new market tax credits. The greatest threat is the potential elimination of the Low Income Housing Tax Credit (LITC), proposed by the House, potentially undercutting as much as 40% of the current financing for low income housing in the Motor City. While both the House and Senate versions retain a 9% low income housing tax credit, the credit, as proposed, would limit how much the Michigan State Housing Development Agency may award on an annual basis—putting as much as $280 million at risk. According to the National Housing Conference, the production of low income housing could decline by as much as 50%. The combined impact could leave owners and developers of low income housing with fewer options for rehabilitation—an impact potentially with disproportionate omens for post-chapter 9 municipalities such as Detroit.   

Is There Promise or Democracy in PROMESA? Since the imposition by Congress of the PROMESA, quasi-chapter 9 municipal bankruptcy legislation, under which a board named by former President Obama appointed seven voting members, with Gov. Puerto Rico Governor Ricardo Rosselló serving as an ex officio member, but with no voting rights—there have been singular disparities, including between the harsh fiscal measures imposed on the U.S. territory, measures imposing austerity for Puerto Rico, even as the PROMESA Executive Director receives an annual salary of $625,000—an amount 500% greater than the executive director of Detroit’s chapter 9 bankruptcy oversight board, and some $225,000 more than the President of the United States—with Puerto Rico’s taxpayers footing the tab for what is perceived as an unelected board acting as an autocratic body which threatens to undermine the autonomy of Puerto Rico’s government. Unsurprisingly, the Congressional statute includes few incentives for transparency, much less accountability to the citizens and taxpayers of Puerto Rico. Indeed, when the Center for Investigative Journalism and the Legal Clinic of the Interamerican University Law School, attorneys Judith Berkan, Steven Lausell, Luis José Torres, and Annette Martínez—both in one case before the San Juan Superior Court and in another before federal Judge Jay A. García-Gregory, as well as the Reporter’s Committee for Freedom of the Press submitted an amicus brief seeking clarification with regard to the legal standards of transparency and accountability which should be applied to the board, the PROMESA Board asserted that the right of access to information does not apply to it. 

Governance in Insolvency. As we have followed the different and unique models of chapter 9 and insolvencies from Central Falls, Rhode Island, through San Bernardino, Stockton, Detroit, Jefferson County, etc., it has been respective state laws—or the absence thereof—which have determined the critical role of governance—whether it be guided via a federal bankruptcy court, a state oversight board, in large part determined by the original authority under the U.S. system of governance whereby the states—because they created the federal government—individually determine the eligibility of municipalities to file for chapter 9 municipal bankruptcy. In Puerto Rico, sort of a hybrid, being neither a state, nor a municipality, the issue of governing oversight is paving new ground. Thus, in Puerto Rico, it has opened the question with regard to whether the Governor or Congress ought to have the authority to name an oversight board—a body—whether overseeing the District of Colombia, New York City, Detroit, Central Falls, Atlantic City, etc.—to exercise oversight in the wake of insolvency. Such boards, after all, can protect a jurisdiction from pressures by partisan and outside actors. Moreover, the appointment of experts with both experience and expertise not subject to voters’ understandable angst can empower such appointed—and presumably expert officials, to take on complex fiscal and financial questions, including debt restructuring, access to the municipal markets, and credit.  Moreover, because appointed board members are not affected by elections, they are in a sometimes better position to impose austerity measures—measures which would likely rarely be supported by a majority of voters—or, as former D.C. Mayor Marion Barry said the District of Columbia oversight Board, it “was able to do some things that needed to be done that, politically, I would not do, would not do, would not do,” such as firing 2,000 human-service workers. 

In Puerto Rico—which, after all, is neither a municipality nor a state, the bad gnus is that these governance disparities are certain to continue: indeed, despite the PROMESA Board’s November 27th recommendations, Gov. Rosselló announced he would spend close to $113 million on government employees’ Christmas bonuses-an announcement the PROMESA Board responded to by stating that its members expect “to be consulted during the formulation and prior to the announcement of policies such as this to ensure the Government is upholding the principles of fiscal responsibility.” (Note: it would have to be a challenge for PROMESA Board members to observe the current federal tax bills in the U.S. House and Senate as measured by Congress’ Joint Committee on Taxation and the Congressional Budget Office and believe that Congress is actually exercising “fiscal responsibility.”)

Nevertheless, there might be some help at hand for the U.S. territory: House Ways and Means Committee Chairman Kevin Brady (R-Tx.), in trying to mold in conference with the Senate the pending tax reform legislation, is considering options to avert what top Puerto Rican officials fear could be still another devastating blow to its already tottering economy: both versions would end Puerto Rico’s status as an offshore tax haven for U.S. companies—a devastating potential blow, especially given the current federal Jones Act which imposes such disproportionate shipping costs on Puerto Rico compared to other, competitive Caribbean nations. Now, the Governor, as well as Puerto Rico’s Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s sole nonvoting member of Congress, are warning that Puerto Rico’s slow recovery from Hurricane Maria could suffer an irreparable setback if manufacturers decide to close their factories. Commissioner Gonzalez said 40% of Puerto Rico’s economy relies on manufacturing, with much of that related to pharmaceuticals; ergo, she is worried that any drop in the $2 billion of annual revenue these businesses provide would undercut the economic recovery plan instituted by the PROMESA Board. The Commissioner notes: “Forty percent of the island is living in poverty,” even though the federal child tax credit only applies to a third child for residents of Puerto Rico.

Thus, many eyes in Puerto Rico—and, presumably in the PROMESA Board—are laser focused on the House-Senate tax conference this week, where the House version would extend, for five years, the so-called rum cover which provides an excise tax rebate to Puerto Rico and the U.S. Virgin Islands on locally produced rum—a provision which Republican leaders appear unlikely to retain, albeit, they appear to be amenable to changes which could help reboot the island’s economy. (Puerto Rico produces 77% of the rum consumed in the U.S., according to the Puerto Rico Industrial Development Agency.) In a sense, part of the challenge is that for Puerto Rico, the issue has become whether to focus its lobbying on retaining its quasi-tax haven status. Gov. Rosselló worries that if that status were altered, “companies with a strong presence on the island would be forced to shutter those operations and decamp for the mainland or, worse, a lower-tax country…This would put tens of thousands of U.S. citizens in Puerto Rico out of work and demolish our tax base right as we are trying to rebound from historic storms.” Chairman Brady, after meeting with Commissioner Gonzalez at the end of last week, told reporters the meeting was with regard to “ideas on how best to help Puerto Rico…I know the Senate too has some ideas as well…“Yeah, we’re going to keep working on that.” In conference, the House bill imposes a 20% excise tax on payments by a U.S. company to a foreign subsidiary; the Senate bill proposes a tax ranging from 12.5% to 15.625% on the income of foreign corporations with intangible assets in the U.S. Unsurprisingly, Puerto Rico officials and U.S. businesses operating there describe both the House and Senate versions as putting Puerto Rico at a disadvantage—or, as one official noted: “The companies are asking from exemptions from all of this if Puerto Rico is involved…They want to be exempted from the taxes going forward that would prevent companies from accumulating untaxed profits abroad.” Foreign earnings, which includes revenues earned by corporations operating in Puerto Rico, could be repatriated at a 14% rate if the funds were held in cash and 7% if its illiquid assets under the House bill; the Senate version would tax cash at 10% and illiquid assets at 5%. Companies operating in Puerto Rico would be taxed at the same rate on the mainland of the U.S. and in foreign countries. In addition, the average manufacturing wage is three times lower in Puerto Rico than on the mainland and companies operating there can claim an 80% tax credit for taxes paid to the territorial government, according to officials. Senate Finance Committee Chair Orrin Hatch (R-Utah) noted he wishes to “help Puerto Rico, but not in this tax bill.”

Governance Amidst Fiscal and Stormy Challenges & Uneven Federalism

December 1, 2017

Good Morning! In today’s Blog, we consider the fiscal and governing challenges in one of the nation’s oldest municipalities, and its remarkable turnaround from verging on becoming the first municipality in Virginia to file for chapter 9 municipal bankruptcy, before veering south to assess what President Trump has described as the U.S. territory of Puerto Rico suffering from “from broken infrastructure and massive debt.” 

Visit the project blog: The Municipal Sustainability Project 

Revolutionary Municipality. Petersburg, Virginia’s City Council, one of the oldest of the nation’s cities, as part of its fiscal recovery, last week had voted 5-2 to request the Virginia Legislature to change the city’s charter in order to transfer the most critical duties of the Treasurer’s Office to a newly-created role of city collector—a position under the Council’s control, as part of its wish list for the newly elected state legislature. Petersburg, an independent city of just over 32,000, is significant for its role in African-American history: it is the site of one of the oldest free black settlements in the state–and the nation.  The unprecedented City Council effort seeks to strip power from an elected office—an office some believe curried some fault for contributing to Petersburg’s near chapter 9 municipal bankruptcy. Ironically, the effort came the same month that voters elected a former Member of the City Council to the office of Treasurer. Councilman Treska Wilson-Smith, who opposed the move, stated: “The citizens just voted in a Treasurer. For us to get rid of that position is a slap in the face to the citizens who put them in there.” Unsurprisingly, State Senator Rosalyn Dance, who for a dozen years has represented the city as part of her district in the Virginia House of Delegates, and who will consider the city’s legislative agenda, said she was concerned. Noting that the newly-elected treasurer has yet to serve a day in office, she added that much of the turmoil had to do with the current Treasurer, so, she said: “I hope [the] Council will take a second look at what they want to do.” Former Councilman and Treasurer-elect Kenneth Pritchett, who declined to comment, ran on a platform of improving the office’s operations by standardizing internal controls and implementing new policies: he urged Petersburg residents to contact lawmakers in a Facebook message posted after the Council took action, calling the decision “a prime example of total disrespect for the citizens’ vote.”

Nevertheless, Council Members who supported the legislative agenda language said it was time for a change, or, as Councilman Darrin Hill noted: “I respect the opinion of the citizens, but still, we believe if we keep on doing the same thing that we have done, then we will keep on getting the same results.” Other Councilmembers felt even better about their votes after the Council received good financial news earlier this week when newly audited reports showed a boost in Petersburg’s reserve funds, increased revenue, and a drop in expenditures—a marked fiscal reversal. In addition, the city’s external auditor provided a clean opinion—a step up from last year’s “modified” opinion—an opinion which had hinted the city had failed to comply with proper accounting principles—and a municipal fiscal year which commenced $19 million in the hole—and $12 million over budget—in response to which the Council raised taxes, cut more than $3 million in funding from the city’s chronically underperforming schools, eliminated a popular youth summer program, and closed cultural sites. Former Richmond City Manager Robert Bobb’s organization—which had been hired to help the city recoup from the verge of chapter 9 municipal bankruptcy, had supported transferring some of the duties of the Treasurer to a city collector position as a means to enhance the city’s ability to improve its tax collections.

Subsequently, late last September, another shoe fell with a 115-page report which examined eight specific aspects of city governance—and found allegations of theft involving current Treasurer Kevin Brown—claims Mr. Brown repeatedly denied, but appeared to contribute to his decision not to run for reelection—an elected which Mr. Pritchett won by a wide margin, winning just over 70 percent.  Nevertheless, Mayor Samuel Parham told his colleagues: “We are treading too thin now to risk someone who is just getting to know the job. We can’t operate as a city of hoping…Now that we are paying our bills and showing growth, there is no need to go back in time and have a situation that we had.” However, some Councilmembers believe they should await more facts with regard to Mr. Brown’s actions, especially with regard to uncollected municipal tax revenues, or, as Councilmember Wilson-Smith put it: “There are some questions which we still have unanswered when it comes to why the taxes were not collected: It appears to me that a lot of the taxes are not being collected, because they are un-collectable,” or, as she noted: Many listed for unpaid taxes were deceased.

David Foley with Robinson, Farmer, Cox Associates, Petersburg’s external auditor, had presented figures before Petersburg residents and the City Council, noting the clean opinion is a substantial improvement from last year, when auditors issued a modified opinion which suggested Petersburg had failed to maintain accounting principles—testifying that the improvement mainly came from the city being able to provide evidence of the status of some of its major financial accounts, such as public utilities. He did recommend that Petersburg strengthen some of its internal controls over the next fiscal year—noting, especially, the reconciliation of the city’s public utility system, which some officials have suggested should be sold to private companies. Indeed, City Manager Aretha Ferrell-Benavides told City Council members that a plan to correct some of the deficiencies will start in January, with monthly updates on corrective actions that she would like to continue to take. The see-saw, key fiscal change of nearly $2 million more than had been projected arose from a combination of increased real estate tax collections, and a $2.5 million reduction in expenditures, mainly came from health and welfare, and non-departmental categories: in total, there was a $7.5 million increase in the city’s chief operating fund. Unsurprisingly, Mr. Foley, in response to Councilmember Charlie Cuthbert, noted: “It was a significant year. There is still a long way to go,” indirectly referencing the city’s commencement of FY2017 $19 million in the hole and $12 million over budget—and with dire threats of legal action over unpaid bills—triggering a tidal wave of legal bills of nearly $1 million—of which about $830,000 went to Mr. Bobb’s group—while the city spent nearly $200,000 on a forensic audit.  Council members received the presentation on the annual financial report with a scant two days prior to the state imposed deadline to submit the report—after, last year, the city was about seven months late in submitting its annual financial report.

Insufficient Shelter from the Fiscal Storm. In the brutal wake of Hurricane Maria, which destroyed about 57,000 homes in Puerto Rico last September and left another 254,000 severely impacted, 50 percent of the U.S. territory’s remaining 3.5 million inhabitants are still without electricity—a lack that has adversely impacted the ability to reconstruct the toll wrought by Maria, not to mention the economy, or loss of those, more than 150,000, who could afford to leave for New York and Florida. Puerto Rico still confronts a lack of drinking water. Governor Ricardo Rosselló had assured that 95% of the island would have electricity by today, but, like too many other promises, that is not to be. An irony is that the recent visit of former President Bill Clinton, who did not come down to toss paper towels, but rather to bring fiscal and physical assistance, may be, at long last, an omen of recovery. It was just 19 days ago that Gov. Roselló appeared before Congress to request some $94 billion to rebuild the U.S. territory—a request unmet, and a request raising questions about the Puerto Rican government’s ability to manage such a vast project, especially in the wake of the $300 million no-bid contract awarded to a small Montana utility company, Whitefish, to restore the territory’s power—an effort House Natural Resources Committee Chair Rob Bishop (R-Utah) described as raising a “credibility gap.” Indeed, in the wake of that decision, Chairman Bishop and others in the Congress have called for the unelected PROMESA Financial Oversight and Management Board, known on the island as “la junta,” to extend its powers to overseeing the rebuilding effort as well—a call which, unsurprisingly, many Puerto Ricans, including pro-statehood Governor Rosselló, see as a further threat to their democratic rights. 

Nevertheless, despite the quasi-takeover threat from Congress, U.S. District Court Judge Laura Taylor Swain has denied the PROMESA Oversight Board’s request to appoint an emergency manager, similar to those appointed by Gov. Rick Snyder in Detroit, or by the former Governor of Rhode Island for Central Falls under their respective authority under state authorizations of chapter 9 municipal bankruptcy. Puerto Rico, because it is not a state, does not have such authority; consequently, Judge Swain has determined the Board does not have the authority to appoint public officials—a holding which Gov. Rosselló responded to by noting that the decision upheld his office’s position about the board’s power, writing: “It is clear that the [board] does not have the power to take full control of the Government or its instrumentalities…[T]he administration and public management of Puerto Rico remains with the democratically elected government.

“Now there’s a wall between us something there’s been lost I took too much for granted got my signals crossed Just to think that it all began on a long-forgotten morn “Come in” she said “I’ll give you shelter from the storm.”

November 28, 2017

Good Morning! In today’s Blog, we consider the fiscal and governing challenges in one of the nation’s founding cities, the ongoing fiscal challenges in Connecticut, where the capital city of Hartford remains on a fiscal precipice, and, finally, the  deepening Medicaid crisis and Hurricane Maria recovery in the U.S. territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Revolutionary Municipality. Six months ago, Richmond, Virginia Mayor Levar Stoney released a promised comprehensive review of his city’s municipal government—that is the government incorporated as a town “to be styled the City of Richmond” in 1742. From those Colonial beginnings, Richmond went on to become a center of activity prior to and during the Revolutionary War: indeed, it was the site of Patrick Henry’s famous speech “Give me liberty or give me death” at the city’s St. John’s Church, which was reported to have inspired the House of Burgesses to pass a resolution to deliver Virginia troops to the Revolutionary War in 1775. It was only in 1782 that Richmond was incorporated as a city—a city which was the capital of the Confederate States of America during the Civil War.  

The findings Mayor Stoney released, compiled by an outside consulting group, were bleak: they detailed excessive bureaucracy, low morale, and micromanagement. This week, Mayor Stoney’s administration is releasing its action plan to begin addressing those problems: the recommendations range from big-picture proposals, such as creating a new city department focused on housing and community development issues, to smaller suggestions, such as a citywide protocol for phone etiquette. Thad Williamson, Mayor Stoney’s chief policy adviser for opportunity described it this way: “We tried to consolidate all these moving parts into one coherent thing, which is a bear, but it’s kind of part one to what it takes to get a handle on changing the organization.”

Mayor Stoney’s administration hired Virginia Commonwealth University’s Wilder School of Government and Public Affairs to conduct the initial review, and the municipality released the 110-page report last May, so that, since then, officials report city staff have been working to convert those recommendations into a plan to be implemented. The report includes both short and long-term recommendations—and Mayor Stoney has already acted to replace several department directors, including the Director of Public Works and the Fire Chief. (The report recommends a goal of filling all remaining leadership positions by the end of next January.) Thus, Mayor Stoney has let go the Directors of Economic Development, Human Resources, Information Technology, and Procurement Services. At the same time, he has empowered, per the report’s recommendations, a team of employees to draw up a variety of proposals to improve communications among departments. The city has even acted to adopt the report’s recommendation to implement a citywide protocol for phone etiquette and “person-to-person etiquette.” On the key issue of municipal finance, Mayor Stony expects to address other recommendations as part of his next budget—to be presented in March—when the key issues he expects to put forward will focus on: procurement, human resources, finance, and information technology.

No doubt, that shift in focus relates to the review’s singling out dysfunction and staffing shortages in some of the city’s departments as adversely affecting nearly every element of city government—such as the report’s findings that it takes the Fire Department months working with procurement to get new shirts for its employees. “Police and public education are always top of mind when it comes to budgets, but if you go that way every year, then it has a negative impact on the organization,” according to Mr. Williamson. The plan also lays out a proposal to create a city department focused on housing and community development which “will be the driving force for public housing transformation, and East End revitalization.” The report also proposes reforms to the city’s funding of nonprofit community groups through annual grants, referred to internally as the city’s non-departmental budget. Organizations such as Sports Backers, the Better Housing Coalition, Venture Richmond, and CultureWorks are among the annual beneficiaries. Chief Administrative Officer Selena Cuffee-Glenn noted that revised funding applications have already been distributed and that, this year, the city will emphasize city goals like housing and poverty, describing them all as “valuable, worthy projects,” albeit, adding: “It’s just a limited amount of resources, so this helps identify targets and priorities for the city.” Finally, to track overall progress on the plan, Mayor Stoney is proposing the creation of a three-person performance management and change division which will report to the CAO to track whether, and presumably how, recommendations are being implemented.

State Municipal Oversight. In Connecticut, Gov. Dannell Malloy has appointed Thomas Hamilton, Scott Jackson, and Jay Nolan to six-year terms on the state’s new Municipal Accountability Review Board: the biennial budget which the Governor signed at the end of October provided for the appointment of an 11-member panel to work with cities and towns on early intervention and technical assistance, if needed, and to help financially distressed municipalities avoid insolvency or bankruptcy in exchange for greater accountability, with the Governor stating: “The state will be poised to intercede early to put struggling local governments on a path to sustainable fiscal health,” even as House Minority Leader Themis Klarides (D-Derby) has called for the General Assembly to reconvene and overturn the municipal aid cuts ordered last week by Gov. Malloy. The Republican leader’s announcement came less than a week after the legislature put the finishing touches on a two-year, $41.3 million budget, which provided Gov. Malloy wide discretion on unilateral cost-cutting which he announced last Friday. Connecticut Senate President Pro Tempore Martin M. Looney (D-New Haven) said that House and Senate leaders, who spent weeks in closed-door discussions to reach the recent bipartisan budget deal, will meet again next week. His counterpart, Senate Republican Leader Len Fasano (R-North Haven) believes Gov. Malloy is over-estimating the deficit so he can order further budget cuts, noting slashing. Leader Derby derided the Governor’s proposed cuts as “clearly intended to punish towns and cities,’’ saying that legislative leaders were under the impression that Gov. Malloy’s savings would come from personnel savings and other line items called Targeted Lapse Savings in the budget—after the Governor, last Friday, announced $880 million in cuts across both state agencies and municipal aid. Leader Klarides stated: “Governor Malloy clearly knew exactly how we intended to achieve the Targeted Savings Lapse…Instead, his recent action shifts more pain onto municipalities and is a blatant disregard for the will of the legislative leaders and the overwhelming majority of legislators who voted for the budget.”  Gov. Malloy yesterday reported that the estimate deficit in the current budget is more than $202 million. If Connecticut Comptroller Kevin Lembo agrees, Gov. Malloy will have to arrange further rescissions to balance the state’s budget—or, as House Speaker Joe Aresimowicz (D-Berlin) put it: “When you look at it in terms of percentages, about 1 percent of the total budget, and consider that we are only four months into the current fiscal year, it is not an unmanageable number…If and when the Governor does need to submit a mitigation plan to the legislature, we stand ready to work with the administration in the coming months to ensure the budget is balanced going forward.”

Leader Fasano said that Gov. Malloy had included some items in his deficit calculation which legislators had not planned to be part of the budget, noting: “I would have hoped Gov. Malloy would have been honest about the size of that deficit and focus on starting a conversation with lawmakers about how we can address these shortfalls together…He is releasing artificially high numbers to trigger the need for a formal deficit mitigation plan, a process that gives him the power to issue his own plan for the budget and make himself relevant. It’s disturbing that Gov. Malloy would purposefully make the state’s finances look worse than they actually are just so he can have a say in how we close the budget shortfall.”

The state political sparring comes as its state capital, Hartford, remains on the fiscal precipice: Hartford received an additional $40 million in the tardy state budget—and Mayor Luke Bronin continues to dicker with the city’s municipal bondholders and labor leaders in his ongoing effort to avoid filing for a chapter 9 municipal bankruptcy, noting: “With this accountability and review board, the state will be poised to intercede early to put struggling local governments on a path to sustainable fiscal health before they are on the brink of a fiscal crisis.” The new state statute mandates that the Governor appoint five members, three of his own choice, one from the recommendation of the American Federation of State, County and Municipal Employees, and the remaining from a joint recommendation of the Connecticut Education Association and the Connecticut branch of the American Federation of Teachers.

Shelter from the Storm & Governing Competency? With, as the Romans used to put it, tempus fugiting, Congress appears poised to increase the $44 billion of disaster assistance proposed by the Trump administration for Puerto Rico, the U.S. Virgin Islands, Texas, and Florida; however, there is recognition and apprehension at the proposed terms by the White House that any such financial aid be subject to a mandate of providing matching funds for a portion of the fiscal assistance—and that Congress enact $59.2 billion in offsetting spending reductions. The White House has recommended that one major piece of the emergency supplemental request, $12 billion for the CDBG Disaster Recovery program, should be awarded states and territories once they “present cost-effective solutions to reducing future disaster risk and lowering the potential cost of future disaster recovery.” More than half of the request is for $25.2 billion for disaster relief administered through the Federal Emergency Management Agency and Small Business Administration. Other pieces include: $4.6 billion for repair or replacement of damaged federal property and equipment and other federal agencies’ recovery costs; $1.2 billion for an education recovery fund; and $1 billion for emergency agricultural assistance.

Sen. Patrick Leahy (D-Vt.) has warned that Puerto Rico will not receive such federal assistance, because the Administration’s proposal “favors states that can provide matching funds,” even as Sen. Leahy observed that thousands of residents of Puerto Rico are abandoning their homes and moving to the mainland, noting: “Much like in the delayed response to Katrina and the people of New Orleans, we are seeing the people of Puerto Rico lose faith that we will help them rebuild.” Senate Minority Leader Chuck Schumer (D-N.Y.) added that the Trump administration’s request is inadequate to address the needs of Puerto Rico, the U.S. Virgin Islands, Florida, and Texas—as well as western states hit by wildfires. Moreover, Leader Schumer added that the Trump Administration’s failure to address “the impending Medicaid funding crisis the islands are facing,” much less to “provide waivers to cost share mandates which are sorely needed due to Puerto Rico and the U.S. Virgin Island’s financial challenges.” The Federal Emergency Management Agency had received just over 1 million applications for disaster assistance as of early last week; the agency has approved more than $180 million under the Individual Assistance Program and $428 million under the Public Assistance program, reporting: “There are over 10,000 federal employees working in Puerto Rico in the response and recovery efforts.”

Nevertheless, with this session of Congress nearing a critical final two weeks of its schedule, the U.S. territory’s Medicaid funding crisis is deepening: Hurricane Maria wrought serious physical and fiscal damage to Puerto Rico’s health-care system; yet, not a dime of the federal disaster relief money has, to date, been earmarked for the island’s Medicaid program. The White House, last Friday, belatedly submitted a $44 billion supplemental payment request, noting that the administration was “aware” that Puerto Rico needed Medicaid assistance; however, the Trump Administration put the onus on Congress to act—leaving the annual catchall omnibus appropriations bill as the likely last chance: this Congress is scheduled to adjourn on December 14th.  However, with a growing list of “must do” legislation, including the pending tax bill and expiring S-CHIP authorizations, time is short—and the administration’s request is short: In a joint statement, House Energy and Commerce Committee ranking members Frank Pallone Jr. (D-N.J) and Senate Finance Committee ranking member Ron Wyden (D-Or.) called on the Trump Administration to “immediately provide additional funding and extend a one-hundred percent funding match for Medicaid in Puerto Rico and the U.S. Virgin Islands, just as we did in the aftermath of Hurricane Katrina,” with the request coming amid apprehensions that unless Congress acts, federal funds will be exhausted in a matter of months—potentially threatening Puerto Rico’s ability to meet its Medicaid obligations. Gov. Ricardo Rosselló, last month, requested $1.6 billion annually over the next five years from Congress and the Trump administration in the wake of the devastating physical and fiscal storm, writing to Congressional leaders that the “total devastation brought on by these natural disasters has vastly exacerbated the situation and effectively brought the territory’s healthcare system to the brink of collapse.” Puerto Rico, last year, devoted almost $2.5 billion to meet its Medicaid demands—so even the proposed reimbursement would only cover about 60 percent of the projected cost. The urgency comes as the House, earlier this month, passed legislation reauthorizing the CHIP program, including $1 billion annually for Puerto Rico for the next two years, specifically aimed at shoring up the island’s Medicaid program. Nevertheless, despite the progress in the House on CHIP funding, the Senate has yet to moved forward with its version of the legislation—and the version reported by the Senate Finance Committee does not include any funds for Puerto Rico. Should Congress not act, up to 900,000 Puerto Ricans would likely be cut from Medicaid—more than half of total enrollment, according to federal estimates.