Getting Schooled on Fiscal Challenges

June 19, 2018

Good Morning! In this morning’s eBlog, we consider the fiscal challenge in the Connecticut legislature with how to get the state’s capitol city back on its feet, before turning, as the new hurricane season gets underway, to assess the Detroit-kinds of challenges to a public school system when so many families are leaving.

Recovering from Near Municipal Bankruptcy. With the new fiscal year fast approaching, Connecticut Governor Gov. Dannel P. Malloy vetoed bi-partisan legislation last Thursday which would have changed how the state board overseeing Hartford’s finances would have operated, and which would have required the continued financial support of Hartford for five years, but would allow the state to reduce other municipal aid to Hartford in the sixth year if the city failed to meet its obligations. The proposed legislation did not modify the debt assistance agreement signed by state Treasurer Denise Nappier and the provision which required the state to pay off the entire principal of Hartford’s bonded debt over the next 20 to 30 years, under which the state will make about $40 million in annual payments on the debt—all steps taken in the wake of the city’s teetering, last year, on the edge of municipal bankruptcy—when the state intervened to take on the city’s debt through the Municipal Accountability Review Board—a step, in retrospect, which has helped the city begin to rebalance its finances. However, it appears the city needs more time.

Republican legislators believed they should have been allowed to lower other municipal aid to Hartford in order to account for the obligations elsewhere in the budget, but the legislation Gov. Malloy vetoed sought to delay those types of decisions for at least five years. The Governor, however, noted: “The legislature may elect to offset contract assistance to Hartford in the future, and must approve state aid amounts for all communities; but it makes little sense to make an out year reduction without giving the program the opportunity to see results before imposing what amounts to a sanction.” In contrast, Senate Republican President Len Fasano (R-Wallingford) said the veto “demonstrates the Governor’s arrogance and lack of respect for taxpayer dollars,” adding: “Once again, when it comes to support for the city of Hartford, Gov. Malloy completely dismisses the intent and the voice of the legislature: this veto practically ensures a rough road ahead for Hartford, because, absent this fix, the legislature probably won’t be willing to help Hartford in the future.”

In his veto message—legislation which had gained bipartisan support, and which would have modified the $534 million bailout the legislature had approved last year in order to help the city it avoid filing for chapter 9 municipal bankruptcy, the Governor wrote that Senate Bill 528, an Act Concerning State Contract Assistance Provide to Certain Municipalities, would make “significant, detrimental impacts to the new Account Review Board and its operations,” noting that the changes to the Hartford bailout were “a reflection of indignation on the part of some legislators,” who were upset that the Municipal Accountability Review Board “exercised its statutory authority in coming to the aid of our capital city.” Instead, he told legislators, it is critical for the state to have “a viable mechanism in place to allow it to intervene in the case of other troubled municipalities in a way that is both effective and that holds those municipalities highly accountable.” He noted that the Municipal Accountability Review Board works; ergo there was no reason for the legislature to seek to change it at this point in time.

The vetoed measure had been passed in the House 105-45, with all Republicans voting in favor, but more than half of the House Democrats rejected the proposal, arguing that five years was insufficient to assist Hartford with its financial difficulties—even as opponents insisted the bailout was a “major misunderstanding,” because they had understood they were voting only for a two-year bailout, not a long-term $500 million deal that stretched into the future. Now, it will be, unlike in neighboring New Jersey, the legislature’s budget and tax committees which would need to vote on any future financial bailout, with a series of fiscal trip wires if any municipality were seeking an agreement similar to the one which was approved last year for Hartford. For his part, Senate Republican Leader Len Fasano (R-North Haven) noted: “This veto demonstrates the Governor’s arrogance and lack of respect for taxpayer dollars: once again, when it comes to support for the city of Hartford, Gov. Malloy completely dismisses the intent and the voice of the legislature. This veto practically ensures a rough road ahead for Hartford, because absent this fix, the Legislature probably won’t be willing to help Hartford in the future…This bill was the result of extensive bipartisan negotiations, supported by the Hartford delegation and the Mayor of Hartford: it defines what state assistance Hartford will be receiving and also puts into place needed protections to ensure taxpayer dollars are not squandered.’’

His counterpart, Senate President Pro Tem Martin Looney (D-New Haven) said no final decisions have been made with regard to whether the Senate would override the two latest vetoes, noting: “We will review the Governor’s veto messages and consult with our caucus members in order to determine any next steps the caucus may want to take.’’ A veto-override session is slated for Monday, because a little-known provision in the state Constitution provides that all veto sessions must be held on a Monday. House Speaker Joe Aresimowicz (D-Berlin) said the House, where the measure had passed 105-45, is pushing to override at least two vetoes, while final decisions have not been revealed on the other five vetoes.

A key niggle is a growing recognition that whatever final legislation is signed into law will, in effect, create a fiscal blueprint: thus the legislature has adopted a bill to clarify the process for the state’s municipalities in the future, under which the legislature’s budget and tax committees would need to vote on any future fiscal rescues, in advance, with a series of financial trip wires if any municipality were seeking an agreement similar to the one which had been approved last year for Hartford.

A veto-override session is scheduled for Monday, June 25, because a little-known provision in the state Constitution says that all veto sessions must be held on a Monday. House Speaker Joe Aresimowicz of Berlin said the House is pushing to override at least two vetoes, while final decisions have not been revealed on the other five vetoes.

El Fin. Puerto Rico’s legislature is nearing the end of its regular session—even as the new hurricane season is opening its season, so the gale budgetary challenges are anticipated to dominate its closing days—with the key issues being approval of the new year’s fiscal budget and repeal of the island’s Unjustified Dismissal Law (Law 80-1976). The focus, this week, will be on getting revenues for FY2019, some $9.1 billion—or some $700 million greater than the amount proposed by the PROMESA Oversight Board, promising a fierce legislative battle. Víctor Parés, president of the Commission for Economic Development, Planning, Telecommunications, Energy and Public-Private Partnerships, and president of the Finance Committee, Antonio Soto,  had indicated they would meet this week with personnel from the Department of the Treasury to define how the income estimates included in the Board’s proposal will be readjusted. Mr. Parés noted:Government revenues have increased this fiscal year; it is new money; it has to be allocated; and it is part of what is going to be negotiated and agreed with the Executive,” identifying key priorities as education, health, and safety.

The first in that list is, perhaps, of greatest apprehension, with the Department of Education facing a cut of $191.5 million—a cut of such severity that as many as eight programs could be put at risk, including special education, where the proposed cut would be $78.2 million. The Board has also recommended a cut of $16.1 million to the Department of Health, and just under $50 million to the Department of Public Security—that is, a reduction which would likely mean laying off as many as 1,300 police officers. That sets up a challenge, this week, with the Puerto Rico House, on Thursday, scheduled to act on the budget.

The regular session will defer to a special session consideration of the Incentive Code, described as a “very technical document,” which could be approved in July during an extraordinary session that Governor Ricardo Roselló Nevares would convene. With regard to the version of pending legislation to repeal the House-passed Law 80, the future is uncertain: Senate President Thomas Rivera Schatz announced the Senate would not agree to the amendments.  

A New Civil Code? Rep. Maria Milagros Charbonier is expected to introduce a proposed, renewed Civil Code, with debate deferred to August on the proposal—a comprehensive document dealing with family, persons, royals, obligations, contracts, and successions, but which does not address the issues of surrogate motherhood, domestic partnerships, and the minimum age. It proposes to increase the age to marry from 14 to 18 years, and limit marriages to the third degree of consanguinity. It would maintain the grounds for divorce for cruel treatment, adultery, as well as those of mutual consent and irreparable rupture. The new proposals come in the wake of four years of evaluation of the Civil Code.

Dying Communities? Verónica Dávila, a second-grade teacher at Pasom Palmas, in rural Puerto Rico, yesterday noted that a “community without a school…is a vacant community: It’s actually a dead community.” Pasom Palmas, located in Utuado in the central mountains of the island, is, in land area, the third-largest municipality in Puerto Rico (after Arecibo and Ponce): it has a population over 35,000 spread over 24 wards. The community derives its name from the Taíno word Otoao, which translates as “between mountains.” It is also known as La Ciudad del Vivi, because of the river which runs through it. It is the 11th oldest municipality in Puerto Rico—founded two hundred seventy-nine years ago. Her school has been teaching children for more than  70 years, but it closed its doors forever this month—one of some nearly 300 in Puerto Rico which are shutting down permanently this summer in the wake of Hurricane Maria’s devastation: it smote Utuado especially hard. It took two months to reopen Paso Palmas after the storm, and the school remained without water and had only limited electricity from a generator, which took the Federal Emergency Management Agency seven months to provide. The school’s population fell to 55, as about a dozen students and their families left the area after Maria.

In April, the government listed 283 schools for permanent closure—subsequently granting relief to 18, a number further revised after a court, last week, ordered a halt to the closure of still nine others. Whatever the final number, the school math paints a grim fiscal and demographic picture. After spending cuts for public education of about $1.5 billion over the last six years, and school closures forcing relocation of about 60,000 students—and the new laws providing vouchers for students to attend private schools and paving the way for charter schools, one can sense the physical challenges ahead. In Paso Palmas, kids, no longer able to attend school there, are confronted with the closest school being a forty minute drive along difficult roads—and that is without counting the walk several students make each morning to reach a road passable by car—or that some families simply do not have cars or money for gasoline. It, of course, renders futile concepts of parents’ days or PTA participation.

Whose Math? The income estimate for the next fiscal year could be readjusted by the PROMESA Board to reflect an increase that would have a direct impact on the coffers of countless agencies, in response to issues such as this which have been raised in three days of public hearings with regard to how the proposed cuts by the Board will impact Puerto Rico. A key issue at the top of the list is the $78 million decrease in the budget dedicated to the Special Education Program of the Department of Education. Representative Antonio Soto said that in a meeting with the technical staff of the PROMESA Board, he told them that the income of this fiscal year should reach $9,100 million. In his opinion, it made “no sense” that the estimated income of the U.S. territory for the upcoming fiscal year would decline by $700 million when the government projects estimated economic growth, benefitting from the injection of federal assistance to provide a 6.3% boost to the economy—or, as he put it: “It’s simple math: They tell me that the estimated income they have is what we provided, so we have to validate the information.”

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