The Absences of Fiscal Balances

May 4, 2018

Good Morning! In this morning’s eBlog, we note the deepening road towards insolvency of the Harvey, Illinois; then we turn south to consider the potential adverse municipal fiscal impacts were the State of Georgia to enable the de-annexation of the small city of Stockbridge. Finally, we journey back to Puerto Rico, where House Natural Resources Committee Chair Rob Bishop is headed for a first-hand assessment of the ongoing fiscal and physical challenges and federal emergency assistance still needed. 

An Absence of Fiscal Balance? In the Land of Lincoln, Illinois, where the state’s courts have heard requests for municipal bankruptcy relief; but where chapter 9 municipal bankruptcy is not authorized; relief appears only to have been granted when not challenged. Under 65 Illinois Comp. Statute 5/8-5-1, smaller municipalities may, if not home rule jurisdictions, seek judicial relief. Under the state’s Local Government Financial Planning and Supervision Act (50 Ill. Comp. Stat. 3200) a municipality with a population under 25,000 suffering a “fiscal emergency” may, after securing a two-thirds vote of the governing body, petition the state to establish a financial planning and supervision commission to address such “fiscal emergency.” Ironically, Harvey, with a population of 25,282, just exceeds that level—some 1,052 Illinois municipalities have less than 25,000 residents. Now, with the municipality unable to meet its police and fire pensions, Illinois Comptroller Susana Mendoza is holding up more than $1 million in state funds the town is owed—under Illinois statutes which authorize the state to withhold tax revenues a municipality is slated to receive if it does not make the required payments into its police and firefighter pensions: the funds withheld go right into the pension fund instead of town services—which, in the case of Harvey, amount to about $1.4 million, leading to, as we have previously noted, the town’s announcement that it will lay off nearly half of its police and fire department. Making the fiscal situation more dire, the city’s Mayor, Eric Kellogg, has been banned for life from the municipal bond market for misleading investors; the municipality appears to be in a chronic pattern of underfunding its public safety pension funds, even as its operating budget chronically spends more than the revenues it brings in. Ergo, as we have written, under Illinois’ Public Act 96-1495, the Comptroller may be compelled to withhold state tax revenues, which would traditionally be in order to ensure pension payments are made to a municipality which has failed to make full pension payments for years.

In a situation which risks compromising public health and safety, Harvey has laid off nearly half its police and fire force—even as it has warned it might not be able to make payroll—especially with inadequate municipal fiscal resources now being rerouted to oppose the state actions in court.

It being Illinois—and an election year—Gov. Bruce Rauner has been uncharacteristically silent about the brewing fiscal catastrophe. The godfather of chapter 9 municipal bankruptcy, Jim Spiotto, has joined with the exceptional Chicago Civic Federation in drafting legislation, the Local Government Protection Authority, which includes a provision to:

  • establish an oversight board,
  • set up a clear procedure for dealing with a stressed city, and
  • allow filing for Chapter 9 municipal bankruptcy. (Legislation which has, to date, gained no traction in the legislature.)

Harvey Town Attorney Bob Fioretti reports: “We are going to find some solution, if possible,” signaling that the municipality was still negotiating with its police and fire pension funds, but warning that, if those discussions falter:  “Layoffs will occur. But the safety of the population is key, and that will continue.”

Mayhap ironically, Illinois adopted its pension law eight years ago as a way to ensure smaller municipalities would stop shorting their pension fund contributions—provisions upheld the week when a judge affirmed that the Illinois comptroller was within the state law to withhold the revenue. Thus, while the Comptroller’s Office issued a statement that it “does not want to see any Harvey employees harmed or any Harvey residents put at risk…the law does not give the Comptroller discretion in this case: The Comptroller’s Office is obligated to follow the law. This dispute is between the retired Harvey police officers’ pension fund and the city of Harvey.”

Nor does Harvey appear to be an isolated case: According to an analysis by Amanda Kass, a researcher at the University of Chicago, there are 74 police or fire pension funds in Illinois municipalities with similar unfunded pension liabilities—leading Chicago Civic Federation President Laurence Msall to note: “If they ignore the law and don’t make the contribution as Harvey has, then yes, those municipalities all around the state have ability to seek an intercept of state revenues that would otherwise come to the municipality.”

The complicating factor for Harvey is, however, not just that it has had years of decline and corruption in government, but also with declining assessed property values and very high property taxes, the municipality has a shrinking set of fiscal options—or, as Mr. Fioretti puts it: “We have an aging population, a declining population, a fixed-income population, and our revenues aren’t even being collected from the real estate taxes. We’re below 50 percent for the year on those collections,” noting that the delinquent real estate tax money is costing the town $12 million this year.”

Uneasy Fiscal Options. While Mr. Msall notes that the State of Illinois helped create the fiscal mess by setting up the pension funds and setting all of the pension levels; now, he notes, Illinois must either dissolve Harvey’s pension into the state fund, or put together an emergency financial team to sort through the wreckage of this and other distressed towns—adding: “Let’s create a board that could be independent with real financial expertise to guide these local governments, not to push them into [municipal] bankruptcy: The best path forward for Harvey is independent oversight that could sort out why they’re not making their financial reports on a regular basis.”

The Cost of Municipal Annexation. Municipalities across Georgia could face higher borrowing costs if the state government enables the “de-annexation” of about half of one small city, that city being Stockbridge, one settled in 1829 when the Concord Methodist Church was organized near present-day Old Stagecoach Road—and, especially, when Stockbridge was granted a post office on April 5, 1847, named for a traveling professor, Levi Stockbridge, who had passed through the area many times before the post office was built. Albeit that heritage remains a matter of some dispute: others contend that the city was named after Thomas Stock, who was State Surveyor and the Georgia State President in the 1820s. The small municipality was incorporated as a town in 1895 and, subsequently, as a city on August 6, 1920. Now, however, more change might be on the way, especially if Georgia Governor Nathan Deal signs into law Senate bills 262 and 263—bills which, if enacted, would de-annex just over half of Stockbridge’s assessable residential and commercial property. Why? Because proposed SB 263, an Act to incorporate the City of Eagles Landing, provide a charter for the City of Eagles Landing; provide for a referendum; provide for transition of powers and duties; provide for community improvement districts; and repeal conflicting laws would effectively have disconcerting fiscal impacts on City Hall in Stockbridge, which was financed with municipal revenue bonds. Neither of the two bills apportions the revenues involved between the to-be two entities—a requirement which, according to some legal experts, is based upon precedent-setting court cases before the U.S. Supreme Court and Georgia when the boundaries of a governmental entity are changed.

Thus, unsurprisingly, during the Georgia Municipal Association’s Georgia Cities Week last week, Stockbridge officials and representatives of the Eagle’s Landing effort held separate meetings with Gov. Deal.  Stockbridge City Attorney Michael Williams described their session as “very productive: The Governor said he would consider the series of points we made…I’m certainly taking him at his word that he will.” Nevertheless, the municipality is hedging its fiscal bets: it has hired three outside law firms to challenge the laws if Gov. Deal approves them.

Should that happen, however, the much reduced City if Stockbridge would still would be obligated to pay off about $13.02 million of privately placed Urban Redevelopment Agency lease-revenue bonds, and $1.5 million of water and sewer notes issued through the Georgia Environmental Facilities Authority—municipal bonds owned by Capitol One Public Funding LLC. Unsurprisingly, the Romulus and Remus of Eagles Landing have expressed no eagerness to help make those payments: sharing only goes so far. The lease-revenue bonds, issued in 2005 and 2006 for projects including funding to purchase land and build city hall, backed by general fund revenues and the city’s taxing power, if needed, even though the city does not currently impose a property tax.

Also unsurprisingly, Jim Spiotto’s firm, Chapman and Cutler LLP, which represents Capital One, wrote to the city a day after the General Assembly ended its session last month, warning it could face potential litigation: “SB 262 and SB 263 infringe Capital One’s constitutional rights under the contracts clause of the U.S. Constitution and the Georgia Constitution by taking away a significant source of the security and source of repayment for the bonds that was contractually bargained for by the bondholders,” Chapman and Cutler partner Laura Appleby wrote to the City Attorney. Unless the bonds are properly apportioned between Stockbridge and Eagle’s Landing, and the [municipal] bondholders have the benefit of the full security that they were originally promised, Ms. Appleby wrote, “We have serious concerns regarding the ability of [Stockbridge] to continue to pay debt service on the bonds because it will have lost a large portion of its ad valorem tax base.”

Jonathan Lewis, Capital One Public Funding’s president, has written to Gov. Deal also requesting a meeting, writing: “The failure of SB 262 and SB 263 to provide for the apportionment of the [municipal] bonds between the City of Stockbridge and, if formed, the City of Eagle’s Landing, is not only an inequitable result for the City of Stockbridge, it is an infringement on Capital One’s constitutional rights under the contracts clause of the U.S. Constitution and the Georgia Constitution, as it removes a significant portion of the security and source of repayment for the bonds…Capital One has come to trust that the State of Georgia will take those actions required to maintain, preserve, and protect the pledges made by its municipalities to their bondholders…Permitting SB 262 and SB 263 to become law would no longer allow us to rely in the State of Georgia [based] on the bedrock public finance principle of non-impairment,” adding that such a “de-annexation” would impair Capital One’s municipal bonds and “create new, unprecedented risks for existing holders and prospective purchasers of State of Georgia local debt.” Mr. Lewis last week also communicated to Georgia Municipal Association Executive Director Larry Hanson, whose organization is made up of 521 municipalities, that if enacted, the de-annexation would require all lenders to Georgia municipalities to “consider, and price in, the potential loss of security from future de-annexations,” because the legislation does not apportion Stockbridge’s outstanding debt: “GMA’s members would bear the burden of this new, Georgia-specific risk in the form of higher interest costs: “The uncertainty created by such a shift sets a dangerous precedent and could produce additional negative unintended consequences as lenders consider municipal financing opportunities within the state.”

Who’s on First? Chairman Rob Bishop (R-Utah) of the House Natural Resources Committee, the committee of jurisdiction for U.S. territories, yesterday confirmed he would got to Puerto Rico to meet with island leaders to assess the recovery in the wake of Hurricane Maria’s devastation, noting: “This trip will allow me to better understand the ongoing challenges and the emergency assistance that is still needed.” He is scheduled to meet with Puerto Rico’s non-voting Member of Congress, Jenniffer Gonzalez, as well as Chairman Jose Carrion of the PROMESA Board as part of an effort the Chairman described as a “first hand look at recovery efforts,” pointing out that, in his view, it would be irresponsible for Governor Rosselló, who apparently the Chairman had not advised of his visit, not to implement the government reforms ordered by the PROMESA oversight board—making clear the fiscal gulf between the two leaders, with the Governor observing that Chairman Bishop, with his demands in favor of a dialogue with creditors, seems to be supporting the causes of the territory’s municipal bondholders over the U.S. citizens of Puerto Rico.

Unlike chapter 9 municipal bankruptcy, wherein state laws create a process—where permitted—for a municipality; there are many fiscal chefs in the kitchen in Puerto Rico, with growing questions with regard to the limits of their respective legal authority under the PROMESA law. A key issue, the final decision with regard to the implementation of cuts to the pension system and the labor reform may yet take a few months. The fiscal stakes, however, especially on an island where there has been a steady stream of college graduates and young professionals moving to the mainland—leaving behind  disproportionate number of older, retired Puerto Ricans, increasingly creates a greater and greater fiscal imbalance. That is now front and center in the wake of the Board’s proposed 10 percent average reduction in pensions—a proposal Gov. Rosselló has rejected, but, as one commentator noted, it is the Board which holds all the cards. The challenge is in interpreting the PROMESA Board’s authority to use its fiscal plans to provide “adequate funding” to Puerto Rico’s public pension systems: under the proposed fiscal plan, the Board cut in pensions would not begin until FY2020—giving time for the PROMESA Board to submit to U.S. Judge Laura Taylor Swain a quasi-plan of chapter 9 debt plan of debt adjustment by the end of this year.

It is not that the Governor believes pension should be off the table—after all, he had recommended a 6% reduction last year; thus, there remains some chance that the government and the Board could reach an agreement and avoid the heavy costs of fighting the fiscal issues out before Judge Swain. Indeed, as we saw in San Bernardino, those back door negotiations between the government and creditors can save an awful lot in lawyers’ fees—or, as former U.S. Bankruptcy Judge Gerardo Carlo-Altier put it: “The ideal thing would be for the Board, the government, and the groups of creditors to reach an agreement in advance and go together to court.”

A key sticking point appears to be the Board’s insistence of labor reforms: under its proposed plan, the Puerto Rico Legislature should approve the labor reform by the end of this month, so that the seven-day reduction for vacation and sick leave would take effect immediately. The elimination of the protections against unjustified dismissal, the mandatory Christmas bonus, and work requirements for the Nutrition Assistance Program (NAP) are proposed for next January—with the PROMESA Board estimating that, absent the enactment of such labor reforms, including: such as employment at will, reductions in sick and vacation leaves, and non-mandatory Christmas bonus; the government of Puerto Rico would stop receiving $330 million within the next five years. They estimate another $ 185 million to cuts in pensions—all of which has led the PROMESA Board to project that, absent the adoption of the reforms proposed in the five-year fiscal plan, Puerto Rico’s economic growth and capacity to finance its public debt service would fail.

Who Will Govern? Are there too many fiscal cooks in the kitchen? In Central Falls, Rhode Island: there was one individual in charge of steering the small city, aka Chocolateville, out of bankruptcy. Similarly, in Detroit, Governor Snyder named Kevyn Orr as Emergency Manager—effectively suspending the governance authority of the Mayor and Council during the pendency of the city’s chapter 9 proceedings until U.S. Bankruptcy Judge Steven Rhodes approved Detroit’s plan of debt adjustment. Yet, in Puerto Rico—a territory which is neither a state, nor a municipality; there are a multiplicity of actors—including, now, Chairman Bishop, the Governor, the Legislature, and the PROMESA Board—a Board which Constitutionalist Professor Carlos Ramos González of the Inter-American University Law School believes, even given the power conferred upon it by Congress over Puerto Rico’s elected government, is uncertain with regard to its own authority to implement the structural reforms it favors—or, as he has noted: “Nobody wants to be blamed for cutting pensions: in all the chapter 9 municipal bankruptcy cases, there were pension reductions,” adding that, as we saw especially in the case of Detroit, the issue of equity is challenging: how to make those cuts without plunging many retirees into poverty—a problem of even greater resonance on an island experiencing an outflow of its young professionals, so that the demography already risks insufficient revenues to meet a clearly growing demand.  

Then there is a second challenge: while PROMESA appears clear in its grant of authority to the Board to certify the fiscal plan, it appears to lack any authority to implement it on its own. Unlike Central Falls, Detroit, San Bernardino, or other chapter 9 plans of debt adjustment approved by U.S. Bankruptcy Courts; the current PROMESA statute does not authorize a federal court to control Puerto Rico’s legislative process: there is a separation of powers issue.  Nevertheless, in the wake of the approval of the fiscal plan, the PROMESA Board is trying: it has submitted a preliminary labor reform draft to the Puerto Rico Legislature, where Senate President Thomas Rivera Schatz has invited PROMESA President José Carrión III to defend the proposed changes and cuts—an invitation, however, which has not been accepted.  

Former Governor Aníbal Acevedo Vilá, who lectures for a Separation of Powers class at the Law School of the University of Puerto Rico, finds it self-evident that the Legislature will not give way to the Boards proposed labor reforms, noting: “I think the Board has a very weak case in terms of imposing the labor reform. It has a better case in other measures, because they are directly tied to Puerto Rico’s fiscal crisis.” Similarly, Governor Rosselló usually quotes §205 of the PROMESA Act, which refers to the fact that the Board can make “recommendations to the Governor or the Legislature on actions the territorial government may take to ensure compliance with the Fiscal Plan, or to otherwise promote the financial stability, economic growth, management responsibility, and service delivery efficiency of the territorial government.” While Carlo Altieri adds to the debate §108, which, regarding the general powers of the Board, warns that: “Neither the Governor nor the Legislature may— (1) exercise any control, supervision, oversight, or review over the Oversight Board or its activities; or (2) enact, implement, or enforce any statute, resolution, policy, or rule that would impair or defeat the purposes of this Act, as determined by the Oversight Board.”

Indeed, an attorney for the Governor, Richard Cooper of Cleary Gottlieb, noted: “Congress did not grant the Board the power to pass laws or appoint or replace government officials…it left the government of Puerto Rico the capacity and responsibility to make the law (as long as it is consistent with the adopted fiscal plan and adjustment fiscal plan) and manage the government, with all that it entails.” Indeed, in an earlier ‘who’s in charge dispute,’ when the PROMESA Board tried to appoint a trustee to monitor the Puerto Rico Electric Power Authority (PREPA), alleging that PROMESA recognizes it as representative of the “debtor,” Judge Swain stated that no section of the PROMESA law granted the Board power with regard to the “the implementation of those (fiscal) plans and budgets,” instead comparing the statute Congress adopted in the 1990’s creating a fiscal control board over Washington, D.C. with PROMESA. She concluded that the Board has the task of establishing the “rails” for the “territorial government” to move “towards credibility and fiscal responsibility.” Indeed, the Congressional Record appears to make no reference to the power of the Board to impose structural governmental reforms—just as Congress lacks any authority to impose such on a state—especially in a nation where it was the states which created the nation, rather than vice versa. Rather, the Congressional debate on Puerto Rico reflected an emphasis on the power of the PROMESA Board to restructure the debt, which is the main burden of Puerto Rico—and, in Congress, Republicans and Democrats have expressed no interest in amending the act, either to strengthen or soften the powers of the Board.

For his part, Chairman Bishop believes that the act allows the Board to implement structural reforms and that it would be an irresponsible attitude of the Puerto Rican government to block them. That indicates there could well be intriguing fiscal and governmental discussions this weekend—albeit it seems most certain that, as Gov. Rosselló has made clear: “We are not going to allow an imposed Board to dictate the public policy of Puerto Rico.”

Notwithstanding their differences over the extent of the powers of the PROMESA Board, Gov. Rosselló and the Board are not at complete odds: they appear to have made common cause before regarding the case of Aurelius investment group and the Electrical Industry and Irrigation Workers Union, the main union of PREPA, to defend the constitutionality of the appointment of the Board members, because six of the seven were proposed by the Congressional leadership; rather, Gov. Rosselló’s administration has limited itself to challenging actions of the Board, not its existence—even as one of his predecessors, former Governor Acevedo Vilá, noting that, even under the colonial situation and the doctrine of Insular Cases decided a century ago by the U.S. Supreme Court, which has repeatedly validated the so-called “plenary powers” of Congress in Puerto Rico, the government of Puerto Rico must challenge the existence of the Board as a violation of the U.S. Constitution under the theory that “to the extent that Board has executive and legislative powers, even under the Insular Cases, it is unconstitutional,” adding that: “Even when organizing the territories, Congress has to guarantee a minimum system of separation of powers.”

The Puerto Rico Debt Tango. While the PROMESA Oversight Board and Gov. Rosselló are engaged in a complicated dance over future debt payments and policy, their complicated dance steps are not dissimilar: In successive versions of a fiscal plan that the Governor submitted to the Board in January, February, March, and last month; the Governor said the amount of debt Puerto Rico should carry should be determined through a comparison with debt medians in the 50 mainland states—quite similar to the Board’s certified plan.  Like the Governor’s proposed fiscal plans, the board certified plan has a comparison to the medians for the 50 states and to the 10 states with the highest levels of four measures of debt. The Board certified plan stated: “The implied debt capacity and expected growth in debt capacity in debt capacity must be sufficient to cover both the payments due on the restructured debt, and all payments due on future new money borrowings.” Accordingly, the aggregate debt service due on all fixed payment debt issued in the restructuring of the government’s existing tax-supported debt should be capped at a maximum annual debt service level: “The cap would be derived from the U.S. state rating metrics, and specifically what Moody’s [Investors Service] calls the ‘Debt Service Ratio.’” (The debt service ratio is defined as ratio of total debt payments due in a year divided by a state-government’s own source revenues.)

Under such a construct, it would appear that Puerto Rico could pay about $19 billion of the roughly $45 billion that the central government and its closely related lending entities owe, according to the plan’s exhibit 26. In the same exhibit, the PROMESA Board alternately suggests that one should use an average of a set of four measures of debt capacity and not just own-source revenues. Using this composite measure would mean that Puerto Rico should pay back about $10.7 billion in outstanding debt. But the Board plan notes this would be optimistic for a promised level of payments, rather, it reports, the fixed amount committed to should be cut by 10% to 30% to allow for “implementation risk.” It suggest that 20% should be used and the coupon be adjusted to 5%. These would lead to Puerto Rico committing to pay 19% of its debt—adding: “Any additional cash flow above the maximum annual debt service cap applied to the restructured fixed payment debt that is generated over the long-term from successful implementation of the new fiscal plan could be dedicated to a combination of contingent ‘growth bond’ payments to legacy bond creditors, debt service due on future new money borrowings needed to fund Puerto Rico’s infrastructure investments, and additional ‘PayGo’ capital investment to reduce the government’s historically out-size reliance on borrowing to fund its needs, among other purposes.”

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Human, Fiscal, & Physical Challenges

April 20, 2018

Good Morning! In this morning’s eBlog, we return to Flint, Michigan to assess its human and fiscal challenges in the wake of its exit from state receivership; then we return to Puerto Rico, a territory plunged once again into darkness and an exorbitant and costly set of fiscal overseers. 

Out Like Flint. Serious fiscal challenges remain for Flint, Michigan, after its exit from state financial receivership. Those challenges include employee retirement funding and the aging, corroded pipes that caused its drinking water crisis, according to Mary Schulz, associate director for Michigan State University’s Extension Center for Local Government Finance and Policy. In the public pension challenge, Michigan’s statute enacted last year mandates that the state’s municipalities report underfunded retirement benefits. That meant, in the wake of Flint’s reporting that it had only funded its pension at 37%–with nothing set aside for its other OPEB benefits, combined with the estimated $600 million to finance the infrastructure repair of its aging water infrastructure, Director Schulz added the small city is also confronted by a serious problem with its public schools—describing the city’s fiscal ills as “Michigan’s Puerto Rico,” adding it would “remain Michigan’s Puerto Rico until the state decides Flint is part of Michigan.”

Michigan Municipal League Director Dan Gilmartin notes that Flint is making better decisions financially, but still suffers from state funding cuts. He observed that Flint’s leaders are making better decisions fiscally—that they have put together a more realistic budget than before its elected leaders were preempted by state imposed emergency managers, noting: “The biggest problem Flint faces now is what all cities in Michigan face, and that is the state’s system of municipal financing, which simply doesn’t work.”

Perhaps in recognition of that, Michigan State Treasurer Nick Khouri, on April 10th announced the end of state-imposed receivership under Michigan’s Local Financial Stability and Choice Act, and he dissolved the Flint Receivership Transition Advisory Board. Treasurer Khouri also signed a resolution repealing all remaining emergency manager orders, noting: “Removing all emergency manager orders gives the City of Flint a fresh start without any lingering restrictions.” Concurrently, Michigan Governor Rick Snyder, in an email, wrote: “Under the state’s emergency manager law, emergency managers were put in place in a number of cities facing financial emergencies to ensure residents were protected and their local governments’ fiscal problems were addressed: This process has worked well for the state’s struggling cities, helping to restore financial stability and put them on a path toward long-term success. Flint’s recent exit from receivership marks the end of emergency management for cities in Michigan and a new chapter in the state’s continued comeback.” Indeed, the state action means that Detroit is the only Michigan municipality city still under a form of state oversight, albeit Benton Harbor Area Schools, Pontiac Public Schools, Highland Park School District, and the Muskegon Heights school district remain under state oversight.

The nation’s preeminent chapter 9 municipal bankruptcy expert Jim Spiotto notes that a financial emergency manager is supposed to get a struggling municipality back to a balanced budget, to find a means to increase revenue, to cut unnecessary expenses, and to keep essential services at an acceptable level:  “To the degree that they achieve that, then you want to continue with best practices: If they don’t accomplish that, then even if you return the city back to Mayor and City Council, then they have to do it: Someone has to come up with viable sustainable recovery plan, not just treading water.”

From his perspective, Director Gilmartin notes: “Flint has more realistic numbers in place, especially when it comes to revenues. I think that is the most important thing the city has accomplished from a nuts and bolts standpoint…The negative side of it is the system in which they are working under just doesn’t work for them or any communities in the state. In some cases making all the right decisions at the local level still doesn’t get to where you need to get to, and it will require a change in the state law.” Referencing last year’s Michigan Municipal League report which estimated the state’s municipalities had been shortchanged to the tune of $8 billion since 2002, Director Gilmartin noted: “A lot of the fiscal pressures that Flint and other cities in Michigan find themselves in are there by state actions.” No doubt, he was referencing the nearly $55 million in reduced state aid to Flint by 2014—as the state moved to pare revenue sharing—the state’s fiscal assistance program to provide assistance based upon population and fiscal need—funds which, had they been provided, would have sufficed to not only balance the city’s budget, but also cut sharply into its capital debts—enhancing its credit quality. Indeed, it was the state’s Emergency Manager program that voters repealed six years ago after devastating decisions had plunged Flint into not just dire fiscal straits, but also the fateful decision to change its public drinking water source—a decision poisoning children, and the city’s fisc by decimating its assessed property values. During those desperate human and fiscal times, local elected leaders were preempted—even as two of the gubernatorially named Emergency Managers were charged with criminal wrongdoing in relation to the city’s lead contamination crisis and ensuing Legionnaire’s disease outbreak which claimed 12 lives in the wake of the fateful decision to  change Flint’s water source to the Flint River in April of 2014. Now, as Director Schulz notes: “Until we come up with other solutions that aren’t really punitive in nature and leave communities like Flint vulnerable as repeat customer for emergency management law, these communities will remain in financial and service delivery purgatory indefinitely.”

Director Schulz notes a more profound threat to municipal fiscal equity: she has identified at least 93 Michigan municipalities with a taxable value per capita under $20,000, describing that as a “good indicator” for which municipalities in the state are prime candidates for finding themselves under a gubernatorially imposed Emergency Manager, in addition to 32 other municipalities in the state which  are either deemed service insolvent or on the verge of service insolvency. Flint’s taxable value per capita of $7575 comes in as the second lowest behind St. Louis, Michigan, which has a taxable value of $6733. Ms. Schulz defines such insolvency as the level below which a municipality is likely unable to fiscally provide “a basic level of services a city need to provide to its residents.” Indeed, a report released by Treasurer Khouri’s office has identified nearly 25% of the state’s local units of government as having an underfunded pension plan, retirement health care plan, or both—an issue which, as we have noted in the eGnus, comes after the State, last December enacted legislation creating thresholds on pensions and OPEB which all municipalities must meet in order to be considered funded at a viable level, meaning OPEB liabilities must be at least 40% funded, and pensions 60% funded. While the Treasurer may grant waivers, such granting is premised on plans approved to remedy the underfunding—failure to do so could trigger oversight by a three-member Michigan Stability Board appointed by the Governor. As Director Schulz notes: “The winds here are blowing such that the municipality stability board is going to be up and running soon, and there will be an effort to give that board emergency manager powers…That means they can break contacts, they can sell assets…whatever it needs to put money in the OPEB.” But in the face of such preemption—preemption which, after all, had caused such human and fiscal damage to Detroit, Detroit’s public schools, and to the City of Flint; Director Gilmartin notes: “Getting the community back to zero is the easy part and is just a function of budgeting, but having it function and provide services is harder: I would say that a lot of the support for emergency management by the state has dwindled based on the experience over the last several years.”

A Storm of Leaders. If the human health and safety, and fiscal challenges created by state oversight in Michigan give one pause; the multiplicity—and cost—of the many overseers of Puerto Rico and its future by the inequitable storm response by Congress and the Trump Administration—and by the costly “who’s on first…” sets of conflicting fiscal overseers could experience at least some level of greater clarity today, as the PROMESA Board releases its proposed fiscal plans it intends to certify, including the maintenance of its mandate to the federal court for an average public pension cut of 10 percent—after having kept under advisement the concerns of Governor Ricardo Rosselló the inclusion in the revised fiscal, quasi chapter 9 plan of debt adjustment immediate reductions in sick and vacation leave.

Thus, it appears U.S. Judge Laura Taylor Swain will consider a proposed adjustment plan to reduce public pensions later this year which would total savings of as much as nearly $1.45 billion over the next five years—a level below the PROMESA Board’s proposed $1.58 million—but massive when put in the context that the current average public pension on the island is roughly $1,100 a month, but more than 38,000 retired government employees receive only $500, because of the type of job they had and the number of years worked.

Thus, there are fiscal and human dilemmas—and governance challenges: even though the PROMESA law authorizes the restructuring of retirement systems, it is unclear whether the Congressionally-created Board has the authority to impose such a significant, unfunded federal mandate on the government of Puerto Rico, including labor reforms, and restrictions of vacation and sick leaves. Last year, Governor Rosselló agreed to a reduction in pensions for government retirees, but then his aim was to propose cuts of 6 percent.

At the moment, he is against it. A few weeks ago, after negotiations with the Board, Governor Rosselló proposed a labor reform similar to the one he negotiated with members of the Board, with differences on how to balance it with an increase in the minimum wage and when to put it in into effect—a proposal he subsequently withdrew after the PROMESA Board mandated that the labor reform be in full force in January 2019, instead of phasing it in over next three years, and conditioning the increase from $7.25 to $8.25 per hour in the minimum wage to the increase in labor participation rates—proposals which, in any event, made clear the “too many leaders” governance challenges—as these were proposals with little chance of approval by the Puerto Rican House. That is, for the Governor, there is not only a federal judge, and a PROMESA Board, but also his own legislature elected by Puerto Ricans—not appointed by non-Puerto Ricans. (Under the PROMESA Law, which also created the territorial judicial system to restructure the public debt of Puerto Rico, the PROMESA Board also has power over the local government until four consecutive balanced budgets and medium and long-term access to the financial markets are achieved. Thus, as the ever insightful Gregory Makoff of the Center for International Governance Innovation—and former U.S. Treasury Advisor put it: “While the lack of cooperation with the Board may be good in political terms in the short-term, it simply delays the return of confidence and extends the time it will take for the Oversight Board to leave the island.” Thus, he has recommended the Board and Gov. Rosselló propose to Judge Swain a cut from $45 billion to $6 billion of the public debt backed by taxes, with a payment of only 13.6 cents per each dollar owed, with the aim of equating it with the average that the states have. All of this has been complicated this week by the blackout Wednesday, before the Puerto Rico Electric Power Authority, PREPA, yesterday announced it had restored power to some 870,000 customers.

As in  Central Falls, Rhode Island, and in Detroit, in their respective chapter 9 bankruptcies, the issue and debate on pensions appears to be a matter which will be settled or resolved by the court—not the parties or Board. While the Board has the power to propose a reform in the retirement systems, it appears to lack the administrative or legislative mechanisms to implement a labor reform. The marvelous Puerto Rican daily newspaper, El Nuevo Día asked one of the PROMESA Board sources if it were possible for the Board to go to Court and demand the implementation of a labor reform in case the Governor does not propose such legislation—the response to which was such a probability was “low.” Concurrently, an advisor to House Natural Resources Committee Chairman Rob Bishop (R-Utah) with regard to proposing legislation to address the issue receive a doubtful response, albeit an official in the Chairman’s office said recently that if the Rosselló administration does not implement the labor reforms proposed by the PROMESA Board, the option for the Board would be to further reduce the expenses of the government of Puerto Rico. Put another way, Carlos Ramos González, Professor of Constitutional Law at the Interamerican University of Puerto Rico, is of the view that, notwithstanding the impasse, “in one way or another, the Board will end up imposing its criteria. How it will do it remains to be seen.”

Physical, Not Fiscal—But Fiscal Storms.  Amid the governance and fiscal storm, a physical storm in the form of am island-wide blackout hit Puerto Rico Wednesday after an excavator accidentally downed a transmission line, contributing to the ongoing physical and fiscal challenge to repair an increasingly unstable power grid nearly seven months after Hurricane Maria. More than 1.4 million homes and businesses lost power, marking the second major outage in less than a week, with the previous one affecting some 840,000 customers. PREPA estimated it would take 24 to 36 hours to restore power to all customers—it is focusing first on re-establishing service for hospitals, water pumping systems, the main airport in San Juan and other critical facilities. The physical blackout came as the PROMESA Board has placed PREPA, a public monopoly with $9 billion of debt, in the equivalent of its own quasi chapter 9 bankruptcy, in an effort to help advance plans to modernize the utility and transform it into a regulated private utility—after, last January, Gov. Ricardo Rosselló announced plans to put the utility up for sale.

Several large power outages have hit Puerto Rico in recent months, but Wednesday was the first time since Hurricane Maria that the U.S. territory has experienced a full island-wide blackout. Officials said restoring power to hospitals, airports, banking centers and water pumping systems was their priority. Following that would be businesses and then homes. By late that day, power had returned to several hospitals and at least five of the island’s 78 municipalities. Federal officials who testified before Congress last week said they expect to have a plan by June on how to strengthen and stabilize Puerto Rico’s power grid, noting that up to 75% of distribution lines were damaged by high winds and flooding. Meanwhile, the U.S. Army Corps of Engineers, which is overseeing the federal power restoration efforts, said it hopes to have the entire island fully restored by next month: some 40,000 power customers still remain without normal electrical service as a result of the hurricane. The new blackout occurred as Puerto Rico legislators debate a bill that would privatize the island’s power company, which is $14 billion in debt and relies on infrastructure nearly three times older than the industry average.

 

The Once & Future Puerto Rico?

April 17, 2018

Good Morning! In this morning’s eBlog, we try to assess the fiscal and future governance options for Puerto Rico: will it become a second class state? A nation? Or, at long last, an integral part of the nation? And governance: who is in charge of its governance?

Before Hurricane Maria wracked its terrible human, fiscal, and physical toll; more than 50% of Americans knew not that Puerto Ricans were U.S. citizens. Still, today, some six months after the disaster, more than 50,000 have no electricity. The fiscal and physical toll on low-income Americans on the island has been especially harsh: of the nearly 1.2 million applications to FEMA for assistance to help fix damaged homes, nearly 60% have been rejected: FEMA provided no assistance, citing the lack of lack of title deeds or because the edifices in need were constructed on stolen land or in contravention of building codes. That is to write that this exceptionally powerful storm took a grievous toll not just on life and limb, but especially on the local and state economy, destroying an estimated 80% of Puerto Rico’s agricultural crop, including coffee and banana plantations—where regrowing is projected to take years. The super storm devastated 20% of businesses—today an estimated 10,000 firms remain closed. Discouragingly, the government forecasts output will shrink by another 11% in the year to June 2018.

It might be, ojala que si (one hopes) that a burst of growth will ensue, with estimates of as much as 8% next year, in no small part thanks to federal recovery assistance and as much as $20 billion in private-insurance payments—as well as Puerto Ricans dipping into their own savings to make repairs to their own homes and businesses. Yet, even those positive signs can appear to pale against the scope of the physical misery: by one estimate, Puerto Rico and the U.S. Virgin Islands will lose nearly $48 billion in output—and employment equivalent to 332,000 people working for a year. Of perhaps longer term fiscal concern are the estimated thousands of Puerto Ricans who left the island for Florida and other points on the mainland—disproportionately those better educated and with greater fiscal resources—leaving behind older and poorer Americans, and a greater physical and fiscal burden for Puerto Rico’s government.

The massive storm—and disparate treatment by the Trump administration and Congress—have encumbered Puerto Rico with massive debts, both to its central government and municipalities, but also to its businesses. Encumbered with massive debts—including $70 billion to its municipal bondholders and another $50 billion in public pension liabilities; Governor Ricardo Rosselló’s administration is making deep cuts: prior to the massive storm, the government had been committed to slashing funding to its local governments by $175 million, closing 184 schools, and cutting public pensions—pensions which, at just over $1,000 are not especially generous. Now, that task will be eased, provided the PROMESA oversight Board approves, to moderate the proposed cuts in services in order to do less harm the reviving economy.

Assisted by federal tax incentives, Puerto Rico’s economic model was for decades based on manufacturing, especially of pharmaceuticals. However, what Congress can bestow; it can take away. Thus it was that over the last decade, Congress steadily eroded economic incentives—Congressional actions which contributed to the territory’s massive debt crisis, and contributing to the World Bank dropping Puerto Rico 58 places in its ranking compared to the mainland with regard to the ease of doing business.

The havoc wreaked by Maria could be especially creative for the island’s private sector, which represents a chronically missed opportunity. Puerto Rico, for all its problems, is a beautiful tropical island, with white-sanded beaches, rainforest, fascinating history, lovely colonial buildings and a vibrant mix of Latin-American and European culture. Yet, with 3.5 million visitors a year, its tourism industry is less than half the size of Hawaii’s. It has an excellent climate for growing coffee and other highly marketable products, yet its agriculture sector is inefficient and tiny. The island has a well-educated, bilingual middle-class, including a surfeit of engineers, trained at the well-regarded University of Puerto Rico for the manufacturing industry, and cheap to hire. But in the wake of the departing multinationals, they are also leaving. Isabel Rullán, a 20-something former migrant, who has returned to the island from Washington to try to improve linkages to the diaspora, estimates that half her university classmates are on the mainland.

Quien Es Encargado? (Who is in charge?) Unlike a normal chapter 9 municipal bankruptcy proceeding, the process created by Congress under the PROMESA law created a distinct governance model—one which does create a quasi emergency manager, but here in the form of a board, the PROMESA Board, which, today, will submit its proposed fiscal plan, or quasi plan of debt adjustment to U.S. Judge Laura Swain Taylor; it will maintain its requirement to propose the reduction of the public pensions of Puerto Ricans by an average of 10 percent. Until last weekend, the PROMESA Board had kept under review the complaints to Governor Ricardo Rosselló with regard to the inclusion in its revised fiscal plan of the central government the base of a labor reform which, among other proposals, calls for the immediate reduction in vacation and sick leaves from 15 to 7 days for workers of private companies, according to two sources close to the Board. Under the fiscal plan proposed by the Governor Rosselló, the cuts would reach $1.45 billion in five years. The PROMESA Board has requested that they total $1.58 million by June of 2023. The proposal, unsurprisingly, has raised questions with regard to whether the Congress has the authority to impose on the government of Puerto Rico a reform of its labor laws—any more than its inability under our form of federalism to dictate changes in any state’s retirement systems—contracts which are inherent in state constitutions.

Pension reductions in chapter 9 cases, because they involve contracts, are difficult, as contracts are protected under state constitutions—moreover, as we saw in Detroit’s plan of debt adjustment approved by now retired U.S. Bankruptcy Judge Steven Rhodes, the court wanted to ensure that any such reductions would not subject the retiree to income below the federal poverty level—a level which, Puerto Rico Governor Ricardo Rossello told Reuters, in an interview this past week, “many retirees are already under,” as he warned  that any further pension cuts could “cast them out and challenge their livelihood.” That is, in the U.S. territory struggling with a 45 percent poverty rate and unemployment more than double the U.S. national average, the fiscal challenge of how to restructure nearly $70 billion in debt, where public pensions, which owe $45 billion in benefits, are also virtually insolvent, makes the challenges which had confronted Judge Rhodes pale in comparison.  Moreover, with the current pensions already virtually insolvent, paying pension benefits out of Puerto Rico’s general fund, on a pay-as-you-go basis, could cost the virtually bankrupt Puerto Rico $1.5 billion a year. The PROMESA Board has recommended that Gov. Rossello reduce pensions by 10 percent.  

For their part, the island’s pensioners have formed a negotiating committee, advised by Robert Gordon, an attorney who advised retirees in Detroit’s chapter 9 municipal bankruptcy, as well as Hector Mayol, the former administrator of Puerto Rico’s public pensions. The fiscal challenge in Puerto Rico, however, promises to be more stiff than Detroit—or, as Moody’s put it: Puerto Rico’s “unusual circumstances mean that it will not conform exactly” to recent public bankruptcies, in which “judges reduced creditor claims far more than amounts owed to pensioners.” Moreover, the scope or size of Puerto Rico’s public pension chasm is exacerbated by the ongoing emigration of young professionals from Puerto Rico to the mainland—making it almost like an increasingly unbalanced teeter totter.  The U.S. territory’s largest public pension, the Employee Retirement System (ERS), which covers nearly 100,000 retirees, is projected to run out of cash this year: it is confronted by a double fiscal whammy: in addition to paying retiree benefits, ERS owes some $3.1 billion to repay debts on municipal bonds it issued in 2008—bonds issued to finance Puerto Rico’s public pension obligations. Last year, Governor Rosselló had agreed to a reduction in pensions for government retirees, indicating a willingness to seek as much as a 6% reduction. That appears not, however, to be something he currently supports.

A few weeks ago, in the wake of negotiations with the PROMESA Board, Governor Rosselló proposed a labor reform similar to the one he negotiated with members of the Board, with differences with regard to how to balance it with an increase in the minimum wage and when to implement such changes. The Governor, however, withdrew the proposal when the Board required that the labor reform be in full force by next January, instead of applying it gradually over the next three years, and conditioned the increase from $ 7.25 to $ 8.25 per hour in the minimum wage to the increase in labor participation rates. It seems the PROMESA Board is intent upon labor reform as an essential element for future economic growth.

The Challenge of “Shared” Governance. Unlike in Central Falls, San Bernardino, Detroit, Jefferson County, or other chapter 9 cases where state enacted chapter 9 statutes prescribed governance through the process, the PROMESA statute created a territorial judicial system to restructure Puerto Rico’s public debt, creating a Board empowered to reign until four consecutive balanced budgets and medium and long-term access to the financial markets are achieved—or, as our colleague and expert, Gregory Makoff, of the Center for International Governance Innovation, who worked for a year as an advisor to the Department of Treasury in the Puerto Rican case, put it: “While the lack of cooperation with the Board may be good in political terms in the short-term, it simply delays the return of confidence and extends the time it will take for the Oversight Board to leave the island.” Mr. Makoff has recommended the Board and Gov. Rosselló propose to Judge Swain a cut of from $45 down to $6 billion of the public debt backed by taxes, with a payment of only 13.6 cents per each dollar owed, with the intent of equating it with the average that the states have. His suggestion comes as the Board aims to disclose its plans as early as this evening in advance of its scheduled sessions at the end of the week at the San Juan Convention Center, where, Thursday, the Board wants to certify Puerto Rico’s and PREPA’s proposed plans, and then, Friday, vote on the plans of the other public corporations: the Aqueducts and Sewers Authority (PRASA), the Highways and Transportation Authority (PRHTA), the Government Development Bank, the University of Puerto Rico (UPR) and the Cooperatives Supervision & Insurance Corporation (COSSEC).

Fiscal Balancing. The PROMESA law authorizes the Board the power to impose a fiscal plan and propose to Judge Swain a quasi plan of debt adjustment, as under chapter 9, on behalf of the government, much as in a chapter 9 plan of debt adjustment‒albeit the PROMESA statute does not grant the Board the power to enact laws or appoint or replace government officials. The Congressional act retained for the government of Puerto Rico the capacity and responsibility to enact laws consistent with the fiscal plan and the fiscal adjustment plan, as well as, obviously, to operate the government.

The Promise & Unpromise of PROMESA: Who Is Encargado II? Unlike in a, dare one write “traditional” chapter 9 municipal bankruptcy, where state enacted legislation defines governing authority in the interim before a municipality receives approval of its plan of debt adjustment to exit municipal bankruptcy, the Congressional PROMESA statute has left blurred the balance—or really imbalance—of authority between the power of the Board to approve a budget and fiscal plans, with its possible lack of authority to implement reforms, such as changes to federal regulations it promotes. An adviser to House Natural Resources Committee Chairman Rob Bishop ((R-Utah) recently noted that if the Rosselló administration does not implement the labor reform proposed by the PROMESA Board, the option for the Board would be to further reduce the expenses of the government of Puerto Rico—or, as Constitutional Law Professor Carlos Ramos González, at the Interamerican University of Puerto Rico, describes it, notwithstanding the impasse, “in one way or another, the Board will end up imposing its criteria. How it will do it remains to be seen.” An adviser to Chair Bishop said recently that if Gov. Rosselló’s administration does not implement the labor reform proposed by the Board, the option for the PROMESA Board would be to further reduce the expenses of the government of Puerto Rico—or, as Professor González put it: “In one way or another, the Board will end up imposing its criteria. How it will do it remains to be seen.”

The Uncertain State of the State. An ongoing challenge to full recovery for Puerto Rico is its uncertain status—a challenge that has marked it from its beginning: in February of 1917, during debate on the Senate floor of HR 9533 to provide for a civil government for Puerto Rico, when Sen. James Wadsworth (R-N.Y) inquired of Senate sponsor John F. Shafroth of Colorado whether it would “provide woman suffrage in Puerto Rico?” Sen. Shafroth made clear his intent that the eligibility of voters in Puerto Rico—as in other states—“may be prescribed by the Legislature of Puerto Rico.” That debate, more than a century ago, lingers as what some have described as “the albatross hanging around the island’s neck: the uncertainty over its status.” Is it a state? A country? Or some lesser form of government?  Even though thousands of Puerto Ricans have fought and died serving their country in World Wars I and II, in Vietnam and Afghanistan, Puerto Rico has never been treated as a state—and its own citizens have been unable to decide themselves whether they wish to support statehood.

Some believe Puerto Rico will become a state eventually. But to get there, especially without risking a violent nationalist repulse, Puerto Rico needs to understand what the federal requirements and barriers will be—and what the promise of PROMESA really will mean. And, as they used to say in Rome: tempus fugit. Time is running out: for, absent economic and fiscal recovery soon, the flood of emigration of young Americans from Puerto Rico will become a brain-drain boding a demographic death-spiral, leaving the island with too few taxpayers to cover its more rapidly growing health care costs for an aged population.

April 3, 2018

Good Morning! In this morning’s eBlog, we consider the challenges of governance in insolvency. Who is in charge of steering a municipality, county, or U.S. territory out of insolvency? How? How do we understand and assess the status of the ongoing quasi chapter 9 municipal bankruptcy PROMESA deliberations in the U.S. territory of Puerto Rico. Then we head north to assess the difficult fiscal balancing challenges in Connecticut.

Governance in Insolvency.  Because, in our country, it was the states which created the federal government, making the U.S. unique in the world; chapter 9 municipal bankruptcy is only, in this country, an option in states which have enacted state legislation to authorize municipal bankruptcy. Thus, unsurprisingly, the process is quite different in the minority of states which have authorized municipal bankruptcy. In some states, such as Rhode Island and Michigan, for instance, the Governor has a vital role in which she or he is granted authority to name an emergency manager–a quasi-dictator to assume governmental and fiscal authority, usurping that of the respective city or county’s elected officials. That is what happened in the cases of Detroit and Central Falls, Rhode Island, where, in each instance, all authority was stripped from the respective Mayors and Councils pending a U.S. Bankruptcy Court’s approval of respective plans of debt adjustment, allowing the respective jurisdictions to emerge from municipal bankruptcy. Thus, in the case of those two municipalities, the state law preempted the governing authority of the respective Mayors and Councils.

That was not the case, however, in Jefferson County, Alabama–a municipal bankruptcy precipitated by the state’s refusal to allow the County to raise its own taxes. Nor was it the case in the instances of Stockton or San Bernardino, California: two chapter 9 cases where the State of California played virtually no role. 

Thus, the question with regard to governance in the event of a default or municipal bankruptcy is a product of our country’s unique form of federalism.

In the case of Puerto Rico, the U.S. territory created under the Jones-Shafroth Act, however, the issue falls under Rod Sterling’s Twilight Zone–as Puerto Rico is neither a municipality, nor a state: a legal status which has perplexed Congress, and now appears to plague the author of the PROMESA law, House Natural Resources Committee Chair Rob Bishop (R-Utah) with regard to who, exactly, has governing or governance authority in Puerto Rico during its quasi-chapter 9 bankruptcy process: is it Puerto Rico’s elected Governor and legislature? Is it the PROMESA Board imposed by the U.S. Congress? Is it U.S. Judge Laura Swain, presiding over the quasi-chapter 9 bankruptcy trial in New York City? 

Chairman Bishop has defended the PROMESA’s Board’s authority to preempt the Governor and Legislature’s ruling and governance authority, stressing that the federal statute gave the Board the power to promote “structural reforms” and fiscal authority, writing to Board Chair Jose Carrion: “It has been delegated a statutory duty to order any reforms–fiscal or structural–to the government of Puerto Rico to ensure compliance with the purpose of PROMESA, as he demanded the federally named Board use its power to make a transparent assessment of the economic impact of Hurricanes Irma and Maria on Puerto Rico’s fiscal conditions–and to ensure that the relative legal priorities and liens of Puerto Rico’s public debt are respected–leaving murky whether he intended that to mean municipal bonholders and other lien holders living far away from Puerto Rico ought to have a priority over U.S. citizens of Puerto Rico still trying to recover from violent hurricanes which received far less in federal response aid than the City of Houston–even appearing to link his demands for reforms to the continuity of that more limited federal storm recovery assistance to compliance with his insistence that there be greater “accountability, goodwill, and cooperation from the government of Puerto Rico…” Indeed, it seems ironic that a key Chairman of the U.S. Congress, which has voted to create the greatest national debt in the history of the United States, would insist upon a quite different standard of accountability for Puerto Rico than for his own colleagues.

It seems that the federal appeals court, which may soon consider an appeal of Judge Swain’s opinion with regard to Puerto Rico’s Highway and Transportation Authority not to be mandated to make payments on its special revenue debt during said authority’s own insolvency, could help Puerto Rico: a positive decision would give Puerto Rico access to special revenues during the pendency of its proceedings in the quasi-chapter 9 case before Judge Swain.

Stabilizing the Ship of State. Farther north in Connecticut, progressive Democrats at the end of last week pressed in the General Assembly against Connecticut’s new fiscal stability panel, charging its recommendations shortchange key priorities, such as poorer municipalities, education and social services—even as the leaders of the Commission on Fiscal Stability and Economic Growth conceded they were limited by severe time constraints. Nevertheless, Co-Chairs Robert Patricelli and Jim Smith asserted the best way to invest in all of these priorities would be to end the cycle of state budget deficits and jump-start a lagging state economy. The co-chairs aired their perspectives at a marathon public hearing in the Hall of the House, answering questions from members of four legislative committees: Appropriations; Commerce; Finance, Revenue and Bonding; and Planning and Development—where Rep. Robyn Porter (D-New Haven) charged: “I’m only seeing sacrifice from the same people over and over again,” stating she was increasingly concerned about growing income inequality, asking: “When do we strike a balance?” Indeed, New York and Connecticut, with the wealthiest 1 percent of households in those states earning more than 40 times the average annual income of the bottom 99 percent, demonstrate the governance and fiscal challenge of that trend. In its report, the 14-member Commission made a wide array of recommendations centered on a major redistribution of state taxes—primarily reducing income tax rates across the board, while boosting the sales and corporation levies. Ironically, however, because the wealthy pay the majority of state income taxes, the proposed changes would disproportionately accrue to the benefit of the state’s highest income residents—in effect mirroring the federal tax reform, leading Rep. Porter to question why the Commission made such recommendations, including another to do away immediately with the estate tax on estates valued at more than $2 million, but gradually phase in an increase to the minimum wage over the next four years.  From a municipal perspective, Rep. James Albis (D-East Haven), cited a 2014 state tax incidence report showing that Connecticut’s heavy reliance on property taxes to fund municipal government “is incredibly regressive,” noting it has the effect of shifting a huge burden onto lower-middle- and low-income households—even as the report found that households earning less than $48,000 per year effectively pay nearly one-quarter of their annual income to cover state and local taxes. Rep. Brandon McGee (D-Hartford), the Vice Chair of the legislature’s Black and Puerto Rican Caucus, said the Committee’s recommendations lack bold ideas on how to revitalize Connecticut’s poor urban centers—with his concerns mirrored by Rep. Toni E. Walker (D-New Haven), Chair of the House Appropriations Committee, who warned she fears a commission proposal to cut $1 billion from the state’s nearly $20 billion annual operating budget would inevitably reduce municipal aid, especially to the state’s cities. Co-Chair Patricelli appeared to concur, noting: “Candidly, I would agree we came up a little short on the cities,” adding that the high property tax rates in Hartford and other urban centers hinder economic growth: “They really are fighting with one or more hands tied behind their backs.”

The ongoing discussion comes amidst the state’s fiscal commitment to assume responsibility to pay for Hartford’s general obligation debt service payments, more than $50 million annually—a fiscal commitment which understandably is creating equity questions for other municipalities in the state confronted by fiscal challenges. Like a teeter-totter, balancing fiscal needs in a state where the state itself has a ways to go to balance its own budget creates a test of fiscal and moral courage.

What Are the Fiscal Conditions & Promises of Recovery?

March 30, 2018

Good Morning! In this morning’s eBlog, we consider the potential impact of urban school leadership; then we try to assess the equity of federal responses to hurricanes, before trying to understand and assess the status of the ongoing quasi chapter 9 municipal bankruptcy PROMESA deliberations in the U.S. territory of Puerto Rico.

Schooled in Municipal Finance? As we wrote, years ago, in our studies on Central Falls, Detroit, San Bernardino, and Chicago; schools matter: they determine whether families with kids will want to live in a central city—raising the issue, who ought to be setting the policies for such schools. In its report, five years ago, the Center for American Progress report cited several school districts like Chicago, Philadelphia, Baltimore—but not Detroit, were examples of municipalities where mayoral governance of public schools has had some measure of success in improving the achievement gap for students, or, as the Center noted: “Governance constitutes a structural barrier to academic and management improvement in too many large urban districts, where turf battles and political squabbles involving school leaders and an array of stakeholders have for too long taken energy and focus away from the core mission of education.” In the case of Detroit, of course, the issue was further addled by the largest municipal bankruptcy in the nation’s history and the state takeover of the Motor City’s schools.

Thus, interestingly, the report stated “mayoral accountability aims to address the governing challenges in urban districts by making a single office responsible for the performance of the city’s public schools. Citywide priorities such as reducing the achievement gap receive more focused attention.” In fact, many cities and counties have independent school boards—and there was certainly little shining evidence that the state takeover in Detroit was a paradigm; rather it appeared to lead to the creation of a quasi apartheid system under which charter schools competed with public schools to the detriment of the latter.

In its report, the Center finds: “[T]he only problem is this belief about mayoral control of schools has not worked well for Detroit. It has done just the opposite since the 1999 state takeover of the schools under former Gov. John Engler, which allowed for the mayor of Detroit to make some appointments to the school board. Since the state took over governance of the schools, when it was in a surplus, the district has been on a downward spiral with each year returning ballooning deficits under rotating state-appointed emergency managers. The district lost thousands of students to suburban schools as corruption and graft also became a hallmark of a system that took away resources that were meant to educate the city’s kids. Such history is what informs the resistance to outside involvement with the new Detroit Public Schools Community District that is now under an elected board with Superintendent Nikolai Vitti. His leadership is being received as a breath of fresh air as he implements needed reforms. That is what is now fueling skepticism and reservation about Mayor Mike Duggan’s bus loop initiative to help stem the tide of some 30,000 Detroit students he says attend schools in the suburbs.” Because of the critical importance to Detroit of income taxes, Mayor Duggan has always had a high priority of sending a message to families about the quality of the Motor City’s schools.  Superintendent Vitti noted that previous policies had “favored charter schools over traditional public schools.” Superintendent Vitti said he believes this issue is less about mayoral control than the Mayor Duggan’s leadership efforts to entice families with children back to the city, adding that he is not really concerned about mayoral control of the schools, noting: “I have no evidence or belief that the mayor is interested in running schools…I honestly believe the Mayor’s intent is to recruit students back to the city.”

Double Standards? The Capitol Hill newspaper, Politico, this week published an in-depth analysis of the seeming discriminatory responses to the federal responses to the savage hurricanes which struck Houston and Puerto Rico., reporting that while no two hurricanes are exactly alike, here, nine days after the respective hurricanes struck, “FEMA had approved $141.8 million in individual assistance to Hurricane Harvey victims, versus just $6.2 million for Hurricane Maria victims,” adding that the difference in response personnel mirrored the discriminatory responses, reporting there were 30,000 responders in Houston versus 10,000 in Puerto Rico, adding: “No two hurricanes are alike, and Harvey and Maria were vastly different storms that struck areas with vastly different financial, geographic and political situations. But a comparison of government statistics relating to the two recovery efforts strongly supports the views of disaster-recovery experts that FEMA and the Trump administration exerted a faster, and initially greater, effort in Texas, even though the damage in Puerto Rico exceeded that in Houston: Within six days of Hurricane Harvey, U.S. Northern Command had deployed 73 helicopters over Houston, which are critical for saving victims and delivering emergency supplies. It took at least three weeks after Maria before it had more than 70 helicopters flying above Puerto Rico; nine days after the respective hurricanes, FEMA had approved $141.8 million in individual assistance to Harvey victims, versus just $6.2 million for Maria victims. The periodical reported that it took just 10 days for FEMA to approve permanent disaster work for Texas, but 43 days for the Commonwealth of Puerto Rico.  Politico, in an ominous portion of its reporting, notes: “[P]residential leadership plays a larger role. But as the administration moves to rebuild Texas and Puerto Rico, the contrast in the Trump administration’s responses to Harvey and Maria is taking on new dimensions. The federal government has already begun funding projects to help make permanent repairs to Texas infrastructure. But, in Puerto Rico, that funding has yet to start, as local officials continue to negotiate the details of an experimental funding system that the island agreed to adopt after a long, contentious discussion with Trump’s Office of Management and Budget. The report also notes: “Seventy-eight days after the two hurricanes, FEMA had received 18 percent more applications from victims of Maria than from victims of Harvey, but had approved 13 percent more applicants from Harvey than from Maria. At the time, 39 percent of applicants from Harvey had been approved compared with just 28 percent of applicants from Maria.”

Finally, the report notes that, as of last week,  six months after Hurricane Harvey, Texas was already receiving federal dollars from FEMA for more than a dozen permanent projects to repair schools, roads, and other public infrastructure which were damaged by the storm, while in Puerto Rico, FEMA has, so far, “not funded a single dollar for similar permanent work projects.”

Elected versus Unelected Governance. Puerto Rico Gov. Ricardo Rosselló yesterday reported he was rejecting the PROMESA Oversight Board’s “illegal” demands for labor law reforms and a 10% cut in pension outlays, stating: “The Board pretends to dictate the public policy of the government, and that, aside from being illegal, is unacceptable.” Gov. Rosselló was responding to demand letters from the Board for changes to the fiscal plans he had submitted, along with the Puerto Rico Electric Power Authority, and the Puerto Rico Aqueduct and Sewer Authority earlier this month. Gov. Rosselló noted that §205 of the PROMESA statute allows the Board to make public policy recommendations, but not to set policy, adding that the PROMESA Board’s proposed mandates would make it “practically impossible” to increase Puerto Rico’s minimum wage, as he contemplated the Board’s demand of a $1.58 billion cut in government expenditures, nearly 10% more than he had proposed, and adding he would be “tenaz” (tenacious) in opposing the proposed 10% cut in public pension outlays demanded by the PROMESA Board—with the political friction reflecting governing apprehension about the potential impact on employment at a time when Puerto Rico’s unemployment rate is more than 300% higher than on the mainland—and, because of perceptions that such decisions ought to be reflective of the will of the island’s voters and taxpayers, rather than an outside board.

Who’s on First? The governance challenge in Puerto Rico involves federalism: yesterday, House Natural Resources Committee Chair Rob Bishop (R-Utah), criticized the Puerto Rico Oversight Board and the Governor over their failure to engage with bondholders in restructuring the Commonwealth’s debt, writing to PROMESA Board Chairman José Carrión: “The Committee has been unsatisfied with the implementation of PROMESA and the lack of respect for Congressional requirements of the fiscal plan…And now, due to intentional misinterpretations of the statute, the promise we made to Puerto Rico may take decades to fulfill,” adding he had become “frustrated” with the Board’s unwillingness to engage in dialogue and reach consensual restructuring agreements with creditors: he noted that both the Rosselló administration and the PROMESA Board must show “much greater degrees of transparency, accountability, goodwill and cooperation,”  amid seemingly growing apprehensions on his part that Puerto Rico government costs will increase, even as its population is projected to decline, and that he was becoming increasingly concerned with the “extreme amount” being spent on Title III bankruptcy litigation. He said that Board should make sure it is the sole legal representative of Puerto Rico in these cases—and asked that the PROMESA Board define what constitutes “essential public services” in Puerto Rico: “I ask that you adhere to the mandates of PROMESA and work closely with creditors and the Puerto Rican government as you finalize and certify the fiscal plans…“My committee will be monitoring your actions closely; and as we near the two-year anniversary of the passage of PROMESA, an oversight hearing on the status of achieving PROMESA’s goals will likely be merited.”

For its part, the PROMESA Oversight Board has rejected fiscal plans presented by Gov. Ricardo Rosselló and the island’s two public authorities and has demanded the territory reduce public pensions by 10% , writing, this week, three letters outlining its demands for changes in fiscal plans submitted this month by the central government, Puerto Rico Electric Power Authority, and Puerto Rico Aqueduct and Sewer Authority. Under the PROMESA statute, the federal court overseeing the quasi-chapter 9 municipal bankruptcy is mandated to accept the fiscal plans, including their allotments for debt—plans which the PROMESA Board has demanded, as revised, be submitted by 5 p.m. next Thursday. The Board is directed there should be no benefit reductions for those making less than $1,000 per month from a combination of their Social Security benefits and retirement plans and that employees should be shifted from a defined-benefit plan to a defined-contribution plan by July 1st of next year; it directed that police, teachers, and judges under age 40 should be enrolled in Social Security and their pension contributions be lowered by the amount of their Social Security contribution, directing this for the PREPA, PRASA, Teachers, Employees, and Judiciary retirement systems. In its letter concerning the central government, the PROMESA Board directed Gov. Rosselló to make many changes: some require more information; some are “structural” changes focused on reforming laws to make the economy more vibrant; at least one adds revenues without requiring a greater burden; and many of them require greater tax burdens, or assume lower tax revenues or higher expenditures—noting that any final plan, to be approved, should aim at achieving a total $5.66 billion in agency efficiency savings through FY2023, but that Puerto Rico’s oil taxes should be kept constant rather than adjusted each year.

The Board directed that a single Office of the CFO should be created to oversee the Department of the Treasury, Office of Management and Budget, Office of Administration and Transformation of Human Resources, General Services Administration, and Fiscal Agency and Financial Advisory Authority—adding that Puerto Rico will be mandated to convert to legally at-will employment by the end of this year, reduce mandatory vacation and sick leave to a total of 14 days immediately, and add a work requirement for the Nutritional Assistance Program by no later than Jan. 1st, 2021—and that any increase in the minimum wage to $8.25 must be linked to conditions—and, for Puerto Ricans 25 or younger, such an increase would only be permitted if and when Puerto Rico eliminated the current mandatory Christmas bonus for employers.

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.