The Human & Fiscal Prices of Insolvency

October 20, 2017

Good Morning! In today’s Blog, we consider the spread of Connecticut’s fiscal blues to its municipalities; then we consider the health and fiscal health challenge to Flint; before, finally, observing the seemingly worsening fiscal and human plight of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Price of Solvency. It appears that the City of Hartford would have to restructure its debt to receive the requisite state assistance to keep it out of chapter 9 municipal bankruptcy under the emerging state budget compromise between the Governor and Legislature. Under the terms of the discussions, the State of Connecticut would also guarantee a major refunding of the city’s debt, as well as cover a major share of the city’s debt payments, at least for this fiscal year and next, with House Majority Leader Matt Ritter (D-Hartford) indicating this was part of a bipartisan compromise the legislature recognizes is needed to avert municipal bankruptcy: “This budget gives the city all of the tools it needs to be on a structural path to sustainability…This solution truly is a bipartisan one.” According to the city’s Mayor Luke Bronin, Hartford needs about $40 million annually in new state assistance to avert bankruptcy. The emerging agreement also includes $28 million per year for a new Municipal Accountability Review Board, likely similar to what the Commonwealth of Virginia has used so effectively, to focus on municipalities at risk of fiscal insolvency and to intervene beforehand: approximately $20 million of that $28 million would be earmarked for Hartford. The new state budget would require Hartford to restructure a significant portion of its capital debt, but the state would guarantee this refinancing, an action which—as was the case in Detroit—will help Hartford have access to lower borrowing costs: the agreement also calls for the state to pay $20 million of the city’s annual debt service—at least for this fiscal year and next.

The state actions came as Moody’s Investor Service this week placed ratings of 26 of the state’s municipalities, as well as three of the state’s regional school districts under review for downgrade, citing state aid cuts in the absence of a budget, warning those municipalities and districts face cuts in state funding equal to 100% or more of available fund balance or cash—with those cities most at risk: Hartford (which currently receives 50 percent of its revenues from the state), New Haven, New Britain, West Haven, and Bridgeport. Moody’s was even fiscally moodier, dropping the credit ratings of an additional 25 Connecticut cities and towns, and three other regional school districts, while maintaining the existing negative outlook on the rating of one town. Moody’s list did not, however, include Hartford. The down-gradings come as the state has continued to operate under Executive order in the absence of an approved fiscal budget, now more than a fiscal quarter overdue. Gov. Dannel Malloy, at the beginning of the week, had submitted his fourth FY2018-19 budget to lawmakers, a $41.3 billion spending plan in the wake of his veto last month of the version approved by the legislature, reporting that his most recent fiscal plan would eliminate some revenue proposals, including new taxes on second homes, cell phone surcharges, ridesharing fees, and daily fantasy sports fees—instead, he has proposed an additional $150 million in spending over the biennium, while simplifying the implementor language. According to Moody’s, under the Governor’s new executive order, state aid to local governments will be nearly $1 billion below last year’s level—or, as Moody’s put it: “The current budget impasse highlights the ongoing vulnerability of funding that Connecticut provides to its local governments.” Connecticut traditionally has provided significant funding to its local governments, largely through education cost sharing grants, but also through payments in lieu of taxes and other smaller governmental grants. Connecticut’s GO bond prices have deteriorated with 10-year credit spreads around 80 basis points, well above historical levels, according to Janney Capital Markets Managing Director Alan Schankel: “A state’s fiscal stress tends to flow downstream to local governments, and Connecticut is no exception.” The fiscal irony is that despite the state’s high per capita wealth, the state’s debt, at 9.2% of gross state product, is highest among the states, lagging only behind Illinois.

Not in Like Flint. U.S. District Court Judge David Lawson has ordered Flint’s City Council to choose a long-term water source for the city by Monday after it spent more than three months refusing to make a decision. In his 29-page opinion, he took Flint’s City Council to task for sitting on an April agreement backed by Mayor Karen Weaver, the state and the federal Environmental Protection Agencies that would see the city stay on the Detroit area water system through a new 30-year contract with the Great Lakes Water Authority, writing:. “The failure of leadership, in light of the past crises and manifold warnings related to the Flint water system, is breathtaking.” Judge Lawson’s decision came in response to a suit filed by the Michigan Department of Environmental Quality last June in the wake of the Flint City Council ignoring the state’s deadline for a water supply decision, arguing the delay would “cause an imminent and substantial endangerment to public health in Flint.” The Council, in hearing and filings, had requested more time from the court; however, Judge Lawson wrote that the state had demonstrated potential for “irreparable injury” in Flint and that there was an urgency to act, because the city’s short-term water agreements have expired and the long-term agreement is time sensitive, concluding: “The City Council has not voted on the negotiated agreement, it has not proposed an alternative, and the future of Flint’s fragile water system—its safety, reliability, and financial stability— is in peril…Because of the city’s indecision, the court must issue its ruling.” Judge Lawson’s order likely ensures the City Council will approve the proposed contract with the Great Lakes Authority that it had been resisting though it was negotiated with Mayor Karen Weaver’s approval. The city could choose to risk defying the court order; however, the State of Michigan has warned that tens of millions of dollars in extensive repairs and updates need to be made to the inactive Flint water plant—repairs which would take three and a half years to complete.

The warnings of Wayne State University Professor Nicholas Schroeck with regard to the risk to public health and the financial stability of the water supply system appeared key to persuading Judge Lawson to side with the state and issue a pre-emptive order. The Judge, in early August, had appointed a mediator in an effort to try gain an agreement between the city and the state Dept. of Environmental Quality; however, when the sides were unable to settle, he warned that  extending Flint’s contract with the Detroit area water system beyond 30 days could result in funding problems: “It seems to me that inaction is inviting intervention.” The Weaver administration analyzed various long-term water options for Flint, and the Mayor said Tuesday the Great Lakes agreement “proved to be in the best interest of public health by avoiding another water source switch, which could result in unforeseen issues.” The Michigan DEQ praised Judge Lawson for “recognizing there is no need to wait…and remains committed to working with the City of Flint to implement a plan once a source water determination has been finalized to ensure compliance with the Safe Drinking Water Act.” In its arguments before Judge Lawson, the State of Michigan had warned: “The City Council’s failure to act will result in at least a 55-63% increase in the water rate being charged to Flint residents, create an immediate risk of bankrupting the Flint water fund, will preclude required investment in Flint’s water distribution system, and create another imminent and substantial endangerment to public health in Flint.” That was similar to a statement from a key aide to Gov. Rick Snyder who had warned that stalling the water contract decision was costing the City of Flint an extra $600,000 a month, because it was paying for two sources—Great Lakes, from which it currently gets its treated water, and Karegnondi, from which it contractually would receive water by 2019 to 2020. Under the 30-year agreement with Great Lakes, Flint would no longer have to make payments to Karegnondi.

Unresponsiveness. President Trump last week awarded himself a perfect rating for his response to the hurricane that devastated Puerto Rico: “I would give myself a 10,” he responded when asked by reporters how he would score his efforts, on a one to 10 scale. He told Fox News correspondent Geraldo Rivera that Puerto Rican governments “owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out. You can say goodbye to that.” A comment to which OMB Director Mick Mulvaney noted: “I wouldn’t take it word for word.” Indeed, a week later, Congressional Republicans unveiled a relief plan that would only add to Puerto Rico’s unsustainable debt load. In his meeting this week with Puerto Rico Governor Ricardo Rosselló, who was in Washington to press for federal disaster relief, the President claimed: “We have provided so much, so fast.” Yet, today nearly 80 percent of the island remains without electricity, and almost 30 of the island still does not have access to clean water, according to Puerto Rican government figures.

In contrast with Texas after Hurricane Harvey and Florida after Irma, where thousands of repair workers rushed in to restring power lines, only a few hundred electrical workers from outside Puerto Rico have arrived to help: it was not until last Saturday that the Puerto Rican government said it had the federal funding needed to bring in more workers. That compares to some 5,300 workers from outside the region who converged on coastal Texas in the days after Hurricane Harvey to restore a power loss about a tenth of the size that struck Puerto Rico. Similarly, in Florida, 18,000 outside workers went in after Hurricane Irma knocked out electricity to most of the state last month, according to Florida Power and Light; whereas, in Puerto Rico, the challenge of restoration has fallen on the shoulders of about 900 members of local crews—an outcome industry experts report to be a result of poor planning, a slow response by power officials, and Puerto Rico’s dire fiscal situation—a sharp contrast to the President’s claim that his administration deserved a 10 for its response to the hurricanes which struck Puerto Rico and other parts of the United States.

The U.S. Army Corps of Engineers, charged by FEMA with restoring Puerto Rico’s power, estimated that it needed at least 2,000 additional workers. So far, the Corps has brought only about 200 workers, and most of them were dedicated not to restoring power, but to installing generators at crucial locations. In the wake of major storms, such as Katrina, power companies typically rely on mutual aid agreements to get electricity restored: such outside companies send thousands of workers, and electric companies pay for the service with funds from FEMA. However, providing such assistance to Puerto Rico is not just logistically a greater challenge—but also a discriminatorily greater challenge: the Jones Act—which the President only suspended for ten days—means that the time and cost of shipping comes at a 20% premium.  

The Human Storm. Maria risks accelerating the trend of the last decade of economic decline and depopulation, described as “a slower-moving catastrophe,” which is wreaking a devastating toll: The number of residents had plunged by 11 percent, the economy had shrunk by 15 percent, and the government has become fiscally insolvent. Already ranked among the worst cycles of economic decline and depopulation in postwar American history, the aftermath of Maria threatens an acceleration of residents fleeing en masse: accelerating economic decline and potentially accelerating a vicious cycle. Lyman Stone, an independent migration researcher and economist at the Agriculture Department notes: “We are watching a real live demographic and population collapse on a monumental scale.” At a news conference last week, Gov. Rosselló warned that without significant help, “millions” could leave for the U.S. mainland: You’re not going to get hundreds of thousands of Puerto Ricans moving to the States—you’re going to get millions…You’re going to get millions, creating a devastating demographic shift for us here in Puerto Rico.” Puerto Rico Treasury Secretary Raúl Maldonado has warned, meanwhile, that without more aid, the government could suffer a shutdown by the end of the month.

Today, only about 40 percent of Puerto Ricans in the territory are employed or seeking work—more than 33% below levels on the mainland. The danger, now, is of increased flight—but flight by the young and those with college degrees. After all, with the PROMESA Board charged with fashioning a fiscal plan to pay off more than $70 billion in Puerto Rico’s municipal debt calling for efforts to raise taxes and significant cuts to the government, the Board has predicted continuing shrinkage of the Puerto Rican economy. Thus, there is a real apprehension

As a result, for Washington and Puerto Rican officials planning a recovery, the ongoing exodus poses a multifaceted dilemma. “They’ve got to start from the ground up,” a former U.S. Treasury official said of any new plan for the island. In the short-term, at least, the island is likely to see an economic boost; rebuilding after a hurricane often injects a jolt of spending into local economies. But, according to recent research of 90 years of natural disasters in the United States, published as a National Bureau of Economic Research working paper, major natural disasters also have unfavorable effects: They increase out-migration, lower home prices, and raise poverty rates. Like many on the island, Sergio M. Marxuach, policy director for the Center for a New Economy, a San Juan-based think tank, said a massive federal investment is necessary. “We’re going to need some significant government intervention — essentially a big rescue package, not only to rebuild the economy but get it growing…People are saying, ‘I don’t want my children to grow up in a place where the economy is going to be devastated for the next 10 years.’ If enough people think that way, it’s going to be a self-reinforcing downward spiral.”

In addressing complaints about ongoing struggles on the island, President Trump noted this week that the disaster in Puerto Rico in many ways had begun years ago. Puerto Rico “was in very poor shape before the hurricanes ever hit. Their electrical grid was destroyed before the hurricanes got there. It was in very bad shape, was not working, was in bankruptcy.”

At the Level of a Muncipio. While many have considered the fiscal and physical impact on the U.S. territory of Puerto Rico, fewer have considered the fiscal challenge to Puerto Rico’s municipalities. Consider, for instance, Juncos, one of Puerto Rico’s 78 municipalities: it is located in the eastern central region of the island; it is spread over 9 wards and Juncos Pueblo (the downtown area and the administrative center of the city). The city, one of the oldest in the United States,was founded on the request of Tomas Pizarro on August 2, 1797, having previously been a village which evolved from a small ranch, the Hatillo de los Juncos. Hurricane Maria has changed this municipality forever: more than 1,000 families in Juncos lost it all that unforgettable September 20th, when Hurricane Maria struck. Yet, in a remarkable effort, residents of the La Hormiga sector of Las Piñas neighborhood, in the immediate aftermath of the hurricane, organized to help recover the humble community that is often highlighted by criminal incidents in the area: one of the community leaders of the sector, Wanda Bonilla, highlighted the deed of the trash rescuers: “Thanks to them, they have also relieved the pick up of the rubble.” The city’s community board worked immediately to install a shelter in the neighborhood community center given the circumstances that some 17 families, with between five and seven members each, where the storm tore the roofs off their homes—and most of those homes have single mothers. She noted: “Our president, Ivelisse Esquilín, who also lost everything, is helping us through the Municipality and with other donations.” Juncos Mayor Alfredo Alejandro noted that, in the wake of the storm, crossing arms was not an option for anyone “in the neighborhood” even though many of the 60 families living in the sector experienced the grief of having lost their home: “You have to do it because imagine …right now, look here, I have these pieces of a car to see if I invent a type of small generator to, even be, to turn on a fan.” The Mayor described Maria’s devastation to be of “great proportions:” Out of population of 42,000 people, more than 1,000 lost their homes and a comparable number suffered major damage to their structures; 85% of the city’s residents are still without potable water, while there are few expectations that electricity will soon be restored.

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The Steep & Ethical Challenges in Roads to Fiscal Recovery

October 17, 2017

Good Morning! In today’s Blog, we consider the ongoing recovery in Detroit from the largest municipal bankruptcy in American history; then we turn to the Constitution State, Connecticut, as the Governor and State Legislature struggle to reach consensus on a budget, before, finally, returning to Petersburg, Virginia to try to reflect on the ethical dimensions of fiscal challenges.

Visit the project blog: The Municipal Sustainability Project 

The Motor City Road to Recovery.  The City of Detroit has issued a request seeking proposals to lead a tender offer and refunding of its financial recovery municipal bonds with the goal of reducing the costs of its debt service, with bids due by the end of next week, all as a continuing part of its chapter 9 plan of debt adjustment. The city has issued $631 million of unsecured B1 and B2 notes and $88 million of unsecured C notes. The bulk of the issuance is intended to secure the requisite capital to pay off various creditors, via so-called term bonds, 30-year municipal debt at a gradually sliding interest rate of 4% for the first two decades, and then 6% over the final decade, as the debt is structured to be interest-only for the first 10 years, before amortizing principal over the remainder of the term, with the city noting: “It is the city’s goal to alleviate the significant escalation of debt service during the period when principal on the B Notes begins to amortize, and that any transaction resulting from this RFP process be executed as early as possible in the first quarter of 2018.” According to Detroit Finance Director John Naglick, “Those bonds are traded very close to par, because people view them as very secure…Those bondholders feel really comfortable because they see the intercept doing what it was designed to do.” The new borrowing is the city’s third since its exit from chapter 9 municipal bankruptcy, with the prior two issued via the Michigan Finance Authority. Last week the city announced plans to utilize the private placement of $125 million in municipal bonds, also through the Michigan Finance Authority, provided the issuance is approved by both the Detroit City Council and the Detroit Financial Review commission, with the bonds proposed to be secured by increased revenues the Motor City is receiving from its share of state gas taxes and vehicle registration fees.

Fiscal TurmoilConnecticut Gov. Dannel Malloy yesterday released his fourth fiscal budget proposal—with the issuance coming as he awaits ongoing efforts by leaders in the state legislature attempting to reach consensus on a two-year state budget, declaring: “This is a lean, no-frills, no-nonsense budget…Our goals were simple in putting this plan together: eliminate unpopular tax increases, incorporate ideas from both parties, and shrink the budget and its accompanying legislation down to their essential parts. It is my sincere hope this document will aid the General Assembly in passing a budget that I can sign into law.” The release came as bipartisan leaders from the state legislature were meeting for the 11th day behind closed doors in a so far unrewarding effort to agree on a budget to bring to the Governor—whose most recent budget offer had removed some of the last-minute revenue ideas included in the Democratic budget proposal. Nevertheless, that offer gained no traction with Republican legislators: it had proposed cuts in social services, security, and clean energy—or, as the Governor described it: “This is a stripped down budget.” Specifically, the Governor had proposed an additional $144 million in spending cuts from the most recent Democratic budget proposal, including: nearly $5 million from tax relief for elderly renters; $5.4 million for statewide marketing through the Department of Economic and Community Development; $292,000 in grants for mental health services; $11.8 million from the Connecticut Home Care Program over two years, and; about $1.8 million from other safety net services. His proposed budget would eliminate the state cellphone tax and a statewide property tax on second homes in Connecticut, as proposed by the Democrats; it also proposes the elimination of the 25 cent fee on ridesharing services, such as Uber and Lyft, and it reduces the amount of money Democrats wanted to take from the Green Bank, which helps fund renewable energy projects. His proposal also recommends cutting about $3.3 million each year from the state legislature’s own budget and eliminates the legislative Commissions for women, children, seniors, and minority communities—commissions which had already been reduced from six to two over the past two years. The Governor’s revised budget proposal would cut the number of security staff at the capitol complex to what it was before the metal detectors were implemented—proposed to achieve savings of about $325,000 annually, and the elimination of the Contracting Standards Board, which the state created a decade ago in response to two government scandals—here for a savings of $257,000.

For the state’s municipalities, the Governor’s offer proposes phasing in an unfunded state mandate that municipalities start picking up the normal cost of the teachers’ pension fund: Connecticut municipalities would be mandated to contribute a total of about $91 million in the first year, and $189 million in the second year of the budget—contributions which would be counted as savings for the state—and would be less steep than Gov. Malloy had initially proposed, but still considerably higher than many municipalities may have expected. Indeed, Betsy Gara, the Executive Director of the Council for Small Towns, described the latest gubernatorial budget proposal as a “Swing and a miss: The revised budget proposal continues to shift teachers’ pension costs to towns in a way that will overwhelm property taxpayers,” adding that if the state decides to go in this direction, they will be forced to take legal action, because requiring towns to pick up millions of dollars in teachers’ pension costs without any ability to manage those costs going forward is ‘simply unfair.’” Moreover, she noted, it violates the 2008 bond covenant.

In his revised new budget changes, Gov. Malloy has proposed cutting the Education Cost Sharing grant, reducing magnet school funding by about $15 million a year, and eliminating ECS funding immediately for 36 communities. The proposal to eliminate the ECS funding would likely encounter not just legislative challenges, but also judicial: it was just a year ago that a Connecticut judge’s sweeping ruling had declared vast portions of the state’s educational system as unconstitutional, when Superior Court Judge Thomas Moukawsher ruled that Connecticut’s state funding mechanism for public schools violated the state’s constitution and ordered the state to come up with a new funding formula—and mandated the state to set up a mandatory standard for high school graduation, overhaul evaluations for public-school teachers, and create new standards for special education in the wake of a lawsuit filed against the state in 2005 by a coalition of cities, local school boards, parents and their children, who had claimed Connecticut did not give all students a minimally adequate and equal education. The plaintiffs had sought to address funding disparities between wealthy and poor school districts.

Nevertheless, in the wake of a week where the state’s Democratic and Republican legislative leaders have been holed up in the state Capitol, without Gov. Malloy, combing, line-by-line, through budget documents; they report they have been discussing ways to not only cover a projected $3.5 billion deficit in a roughly $40 billion two-year budget, but also to make lasting fiscal changes in hopes of stopping what has become a cycle of budget crises in one of the nation’s wealthiest states—or, as House Speaker Joe Aresimowicz, (D-Berlin) put it: “I think what we’ve done over the last few days has been a really good step forward, and I think we’re moving in the right direction,” even as Senate Republican Leader Len Fasano said what the Governor put forward Monday will not pass the legislature: “It is obvious that the governor’s proposal, including his devastating cuts to certain core services and shifting of state expenses onto towns and cities, would not pass the legislature in its current form. Therefore, legislative leaders will continue our efforts to work on a bipartisan budget that can actually pass.”

Getting Schooled on Budgeting & Debt. Even as the Governor and legislature appear to be achieving some progress, the Connecticut Education Association (CEA) is suing the state over Gov. Dannel Malloy’s executive order which cuts $557 million in school funding from 139 municipalities: Connecticut’s largest teachers union has filed an injunction request in Hartford Superior Court, alleging the order violates state law. (The order eliminates education funding in 85 cities and towns and severely cuts funding in another 54 communities.) The suit contends that without a state budget, Gov. Malloy lacks the authority to cut education funding. The municipalities of Torrington, Plainfield, and Brooklyn joined the initial filing. Association President Sheila Cohen noted: “We can’t sit by and watch our public schools dismantled and students and teachers stripped of essential resources…This injunction is the first step toward ensuring that our state lives up to its commitment and constitutional obligations to adequately fund public education.”

Governance in Fiscal Straits? Connecticut Attorney General George Jepsen has questioned the legality of Governor Malloy’s executive order, and Connecticut Senate Republican Leader Len Fasano (R-North Haven) noted: “I think the Governor’s order is in very serious legal trouble.” Nevertheless, the Governor, speaking to reporters at the state capitol, accused the CEA of acting prematurely: “Under normal circumstances, those checks don’t go out until the end of October…Secondarily, they’ll have to handle the issue of the fact that we have a lot less money to spend without a budget than we do with a budget…Their stronger argument might be that we can’t make any payments to communities in the absence of a budget. That one I would be afraid of.”

Municipal Fiscal Ethics? Forensic auditors from PBMares, LLP publicly went over their findings from the forensic audit they conducted into the City of Petersburg, Virginia’s financial books during a special City Council meeting. Even though the audit and its findings were released last week, John Hanson and Mike Garber, who were in charge of the audit for PBMares, provided their report to Council and answered their questions, focusing especially on what they deemed the “ethical tone” of the city government, saying they found much evidence of abuse of city money and city resources: “The perception that employees had was that the ethical tone had not been good for quite some time…The culture led employees to do things they might not otherwise do.” They noted misappropriations of fuel for city vehicles, falsification of overtime hours, vacation/sick leave abuse, use of city property for personal gain including lawn mowers and vehicles for travel, excessive or lavish gifts from vendors, and questionable hiring practices. In response, several Council Members asked whether if some of the employees who admitted to misconduct could be named. Messieurs Garber and Hanson, however, declined to reveal names in public, but said they could discuss it in private with City Manager Aretha Ferrell-Benavides, albeit advising the City Council that the ethical problems seemed to be more “systemic,” rather than individual, adding: “For instance, we looked at fuel data usage…And we could tell just looking at it that it was misused, though it would’ve cost tens of thousands of more dollars to find out who exactly took what.”

In response to apprehensions that the audit was insufficient, the auditors noted that because of the city’s limited budget, the scope of PBMares’ work could only go so far. Former Finance Director Nelsie Birch noted that the audit was tasked with focusing on several “troubling areas,” and that a full forensic audit could have cost much more for a city which had hovered on the brink of chapter 9 municipal bankruptcy. However, Mr. Hanson noted that while the transgressions would have normally fallen under a conflict of interest policy, such was the culture in Petersburg that the city’s employees either did not know, or were allowed to ignore those policies: “When I asked employees what their conflict of interest or gifts and gratuity policy is, people couldn’t answer that question because they didn’t know.”

 

Can Congress Uninflict Federally Caused Fiscal & Economic Disparities & Distress?

October 13, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal, legal, physical, and human challenges to Puerto Rico, before heading north to New Jersey where the fiscal and governing strains between Atlantic City and the Garden State continue to fester.

Visit the project blog: The Municipal Sustainability Project 

Physical, Oratorical, & Fiscal Storms. President Trump served notice yesterday that he may pull back federal relief workers from Puerto Rico, effectively threatening to abandon the U.S. territory amid a staggering humanitarian crisis in the aftermath of Hurricane Maria–even as House Speaker Paul Ryan (R-Wis.) goes to Puerto Rico this morning to assess not only the damage, but also how to more effectively respond to a staggering humanitarian crisis in the aftermath of Hurricane Maria. The Speaker will also bear some good news: the House yesterday approved 353-69, a $36.5 billion disaster aid package to help victims struggling to recover from a string of devastating hurricanes and wildfires, sending the aid package to the Senate, which returns from a weeklong recess next week. While the Trump administration requested $29 billion in supplemental spending last week, it asked for additional resources Tuesday night, including $4.9 billion to fund a loan program that Puerto Rico can use to address basic functions such as infrastructure needs. Speaker Ryan noted: “‎We think it’s critical that we pass this legislation this week to get the people the help they need, to support the victims, and also to help the communities still recovering and dealing with the problems with the hurricanes Harvey, Irma, and Maria.” Puerto Rico Governor Ricardo Rosselló had warned Congressional leaders that the U.S. territory is “on the brink of a massive liquidity crisis that will intensify in the immediate future.”

President Trump yesterday claimed that it will be up to Congress how much federal money to appropriate for Puerto Rico, but that relief workers will not stay “forever,” even as, three weeks after Hurricane Maria struck, much of Puerto Rico remains without power, with limited access to clean water, hospitals are running short on medicine, and many businesses remain  closed. The President added:  “We cannot keep FEMA, the Military & the First Responders, who have been amazing (under the most difficult circumstances) in P.R. forever!”

The White House late yesterday issued a statement committing for now “the full force of the U.S. government” to the Puerto Rico recovery, seemingly contradicting the President, who has sought to portray Puerto Rico as in full recovery mode and has voiced frustration with what he considers mismanagement by local leaders. The Governor had warned earlier in the week that the U.S. territory is “on the brink of a massive liquidity crisis that will intensify in the immediate future.” The legislation the House adopted last night allows up to $4.9 billion in direct loans to local governments in a bid to ease Puerto Rico’s fiscal crunch—a vital lifeline, as, absent Congressional action, the territory may not be able to make its payroll or pay vendors by the end of this month.

In contrast, Speaker Ryan said that Puerto Rico must eventually “stand on its own two feet,” but that the federal government needs to continue to respond to the humanitarian crisis: “We’re in the midst of a humanitarian crisis…Yes, we need to make sure that Puerto Rico can begin to stand on its own two feet…But at the moment, there is a humanitarian crisis which has to be attended to, and this is an area where the federal government has a responsibility, and we’re acting on it.”

Rep. Nydia M. Velázquez (D-NY), who was born in Puerto Rico, said in a statement that the President’s “most solemn duty is to protect the safety and the security of the American people. By suggesting he might abdicate this responsibility for our fellow citizens in Puerto Rico, Mr. Trump has called into question his ability to lead. We will not allow the federal government to abandon Puerto Rico in its time of need.” Similarly, Jennifer Hing, a spokeswoman for House Appropriations Committee Chairman Rodney Frelinghuysen (R-N.J.), who will accompany Speaker Ryan today, said that those who live on the island “are American citizens and they deserve the federal assistance they need to recover and rebuild. The Chairman and the Committee fully stand by them in these efforts, and will continue to be at the ready to provide the victims of these devastating hurricanes with the necessary federal resources both now and in the future.” Without Congressional action, the territory may not be able to make its payroll or pay vendors by the end of the month. Unmentioned is whether such contemplated assistance might entail repealing the Jones Act—an act which means the price of goods in Puerto Rico is at least double that in neighboring islands—including the U.S. Virgin Islands. The New York Federal Reserve  found that the Act hurts the Puerto Rican economy—Sen. John McCain (R-Az.) and Rep. Gary Palmer (R-Ala.) have offered legislation to repeal or suspend the law.

President Trump yesterday warned that his administration’s response to hurricane-ravaged Puerto Rico cannot last “forever,” tweeting: “We cannot keep FEMA, the Military & the First Responders, who have been amazing (under the most difficult circumstances) in P.R. forever!” He added that the U.S. territory’s existing debt and infrastructure issues compounded problems. His tweeting came as the House is preparing to consider legislation under which Puerto Rico would receive a $4.9 billion low-interest federal loan to pay its bills through the end of October, as part of a $36.5 billion package. The temporary assistance comes as Moody’s Investors Service has downgraded the Commonwealth of Puerto Rico’s general obligation bonds to Ca from Caa3, in view of the protracted economic and revenue disruptions caused by Hurricane Maria. The President also threatened he may pull back federal relief workers from Puerto Rico, effectively threatening to abandon the U.S. territory amid a staggering humanitarian crisis in the aftermath of Hurricane Maria: he said that relief workers will not stay “forever.” Three weeks after Hurricane Maria made landfall, much of Puerto Rico, an island of 3.4 million Americans, remains without power. Residents struggle to find clean water, hospitals are running short on medicine, and commerce is slow, with many businesses closed.

The lower ratings are aligned with estimates of Puerto Rico’s reduced debt servicing capacity given extensive damage from Hurricane Maria. Puerto Rico faces almost total economic and revenue disruption in the near term and diminished output and revenue probably through the end of the current fiscal year and maybe well into the next. The weaker trajectory will undercut the government’s ability to repay its debt, a matter now being weighed in a bankruptcy-like proceeding authorized by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). For the University of Puerto Rico, the downgrade factors in expected pressure on enrollment-linked revenue and on funding from the Puerto Rican government.

With 155 mile-an-hour winds and a path that cut diagonally across the island, Hurricane Maria was the most destructive storm to hit Puerto Rico in almost 90 years. It knocked out all electric power, destroyed more than 100,000 homes, and ruptured bridges and other public infrastructure. Beyond the disruption of the immediate aftermath, the potential long-term repercussions may be somewhat mixed, however. On one hand, a massive exodus of residents relocating to the mainland, rather than rebuilding on the island, could further erode Puerto Rico’s economic base. Moody’s opined that an infusion of federal relief and rebuilding funds could spur the economic growth and infrastructure replacement that, under normal conditions, has eluded Puerto Rico: “We, nevertheless ,view the economic impact overall as a substantial negative that has weakened the commonwealth’s ability to repay creditors: The negative outlook is consistent with ongoing economic pressures, which will weigh on the commonwealth’s capacity to meet debt and other funding obligations, potentially driving bondholder recovery rates lower as restructuring of the commonwealth’s debt burden unfolds.”

Tens of thousands of islanders left for the U.S. mainland to escape the immediate aftermath of the storm. With conditions back home still grim—approximately 85 percent of residents still lack electricity and 40 percent are without running water, and neither is expected to be fully restored for months—many find themselves scrambling to build new lives away from the island. Particularly in states with large Puerto Rican populations, such as New York, Illinois, Florida, and Connecticut, people are bunking with relatives while trying to find longer-term housing, jobs and schools for their kids.

There have been several major migratory exoduses from Puerto Rico to the mainland over the years, most recently during the past decade when the island’s population shrank by about 10 percent because of a long economic slide that shows no sign of easing anytime soon. Hurricane Maria struck Sept. 20th, and, according to the latest figures from the Puerto Rican government, killed at least 45 people. It also created a new surge that could have lasting demographic effects on Puerto Rico and on the mainland. “I think that we could expect that people who did not plan to stay permanently might do so now,” said Jorge Duany, a professor of anthropology at Florida International University who has long studied migration from the island. Many of those who left are elderly or sick people who fled or were evacuated because of the dangers posed by living on a tropical island with no power or air conditioning and limited water for an indefinite period of time.  It is too early to know exactly how many have departed Puerto Rico for the mainland, but Florida reports more than 20,000 have come to the Seminole state since Oct. 3rd. There were already about 1 million Puerto Ricans in the Sunshine State, second only to New York.

Addressing the urgency of fiscal assistance, House Appropriations Committee Chairman Rodney Frelinghuysen (R-N.J.) stated: “These funds are vital right now, in the near term, to get the aid where it is needed most.” Puerto Rico faces a government shutdown at the end of the month without an infusion of cash, according to Puerto Rico Treasury Secretary Raul Maldonado: the proposed loan provides flexibility for repayment: it allows the Secretary of Homeland Security, in consultation with Treasury Secretary Mnuchin to “determine the terms, conditions, eligible uses, and timing and amount of federal disbursements of loans issued to a territory or possession, and instrumentalities and local governments.”

Gov. Ricardo Rossello Nevares, in his letter at the end of last week to the President, cited “independent damage assessments in the range of $95 billion–approximately 150% of Puerto Rico’s” economy, writing that “financial damages of this magnitude will subject Puerto Rico’s central government, its instrumentalities, and municipal governments to unsustainable cash shortfalls: As a result, in addition to the immediate humanitarian crisis, Puerto Rico is on the brink of a massive liquidity crisis that will intensify in the immediate future.”

Saving Atlantic City. New Jersey Superior Court Judge Julio Mendez has ruled that Atlantic City can cut its Fire Department by 15 members early next year as a cost-saving measure under the Garden State’s Municipal Stabilization and Recovery Act, with his ruling lifting the restriction that any reduction in force must occur through retirements or attrition. Judge Mendez, who in late August had ruled against a state proposal for 50 layoffs, ruled no cuts may take place before February 1st—marking the first legal showdown under New Jersey’s Recovery Act takeover powers under designee Jeffrey Chiesa, which enables the state to alter outstanding municipal contracts. In his decision, Judge Mendez wrote: “Upon careful consideration of the facts and legal arguments, the court is of the view that the plan and timeline for immediate reductions is problematic but it’s not impermissible by the Recovery Act…The court will not restrict the Designee from establishing a plan to reduce the size of the ACFD from the current level of 195 to 180.”  Judge  Mendez ruled the state may exercise its authority; however, the cuts are not allowed until after Feb. 1, according to the ruling: “Upon careful consideration of the facts and legal arguments, the court is of the view that the plan and timeline for immediate reductions is problematic, but it’s not impermissible by the Recovery Act…The court will not restrict the Designee from establishing a plan to reduce the size of the ACFD from the current level of 195 to 180.” In his August ruling, the Judge had written that any reduction in force below 180 members would compromise public safety, and any further reduction would have to come through attrition and retirements. Under this week’s ruling, before the state makes cuts, however, officials must explore other funding to cover lost SAFER Grant funding, allow for additional attrition to take place, and provide fair notice to those who may lose their jobs.

Atlantic City Mayor Don Guardian said he had hoped the state would offer an early retirement incentive—especially after, last August, Gov. Chris Christie had signed a bill allowing the state to offer such an incentive to the city’s police officers, firefighters, and first responders facing layoffs. However, the state has said the offer would not be financially beneficial, leading Mayor Guardian to note: “I am disappointed that the state has pushed forward this motion knowing that the state Senate, Assembly, and the Governor all passed an early retirement bill for just this reason: We could have easily gotten to 180 fighters through these incentives.”

New Jersey Community Affairs spokeswoman Lisa Ryan noted: “We remain disappointed by the court’s insistence on requiring an artificially and unnecessarily high number of firefighters…While the decision to allow a modest reduction in firefighters on Feb. 1, 2018, will provide some budget relief, the city will still be forced to make additional and significant reductions to fire salaries in order to afford paying for 180 firefighters.” (Last January, the Fire Department had 225 members; now there are 195, or, as Judge Mendez wrote: “The plans to reduce the size of the ACFD have evolved from a request to approve a force of 125, resulting in a loss of 100 positions, to the current request to reduce the force to 180, resulting in a loss of 15 positions.” 

Cascading Municipal Insolvencies

October 11, 2017

Good Morning! In today’s Blog, we consider the looming municipal fiscal threat to one of the nation’s oldest municipalities, and the ongoing fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Cascading Insolvency. With questions stirring with regard to the potential impact of a chapter 9 municipal bankruptcy on the City of Hartford, the city’s leaders have called two public meetings to examine its effects on other cities and towns, inviting Kevyn Orr, the mastermind of putting Detroit into chapter 9, and then overseeing the city’s successful plan of debt adjustment; Central Falls, Rhode Island  Mayor James Diossa—where the city filed for chapter 9 the day our class of No. Virginia city and county staff visited its city hall in 2011 (publishing, in the wake of the visit, the “Financial Crisis Tool Kit,”) and Don Graves, senior director of corporate community initiatives at Key Bank. The focus is to better acquaint citizens on what municipal bankruptcy is—and is not, or, as the Mayor put it: “so we can learn from their experiences…As we consider all of our options for putting the city of Hartford on a path to sustainability and strength, it’s essential that our residents are a part of that conversation…We’ve had a number of requests for a more detailed discussion of what [municipal] bankruptcy would mean for our city.” With Connecticut still without a budget, Hartford is confronted not only by its current $65 million deficit and mounting debt, but also accelerating cash flow problems. Mayor Luke Bronin has requested at least $40 million from the state, in addition to the projected $260 million: Connecticut House Democrats have said they would set aside $40 million to $45 million; however, a Republican budget was adopted instead: that plan, vetoed by the Governor, only offered the city $7 million in additional aid. The city’s delegation in the Connecticut Legislature said last week that they oppose chapter 9 municipal bankruptcy, even as they acknowledged but they acknowledged it might be one of the few options left: or, Rep. Brandon McGee (D-Hartford) put it: “It’s been really impossible to reassure people that bankruptcy is not there…it’s there. It’s real.” One of his counterparts, state Sen. Douglas McCrory (D-Hartford), noted: lawmakers “have to get something done very quickly in order to save Hartford.”

Out-Sized Municipal Debt. Puerto Rico, the U.S. Virgin Islands, and Guam all face out-sized debt burdens relative to their gross domestic products, and each of the U.S. territories faces a repayment challenge, the Government Accountability Office found. Susan Irving and David Gootnick of the General Accounting Office, in their new report on Puerto Rico and other U.S. Territories (GAO-18-160), reported that between fiscal years 2005 and 2014, the latest figures available, Puerto Rico’s total public debt outstanding (public debt) nearly doubled from $39.2 billion to $67.8 billion, reaching 66 percent of Gross Domestic Product; despite some revenue growth, Puerto Rico’s net position was negative and declining during the period, reflecting its deteriorating financial position. They wrote that experts pointed to several factors as contributing to Puerto Rico’s high debt levels, and in September 2016 Puerto Rico missed up to $1.5 billion in debt payments. The outcome of the ongoing debt restructuring process will determine future debt repayment. Their report, released last week, details the debt situations of U.S. overseas territories from fiscal years 2005-2015 and provides brief commentary on their outlooks. (There are  five: Puerto Rico, the U.S. Virgin Islands (USVI), Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands. Puerto Rico’s public debt exploded in the decade the report covers, from $39.2 billion to $67.8 billion, reaching 66% of the island’s GDP. Even after some revenue growth in that period, Puerto Rico’s overall financial position deteriorated, leading to its eventual default on billions of dollars of bonds. GAO found that Puerto Rico’s fiscal challenges arose from the following factors: the use of debt to finance regular government operations, poor disclosure leading to investors being unaware of the extent of the fiscal crisis in the territory, the appeal of territorial debt being exempt from federal, state, and local taxation for investors in all states, as well as recession and population decline. Thus, the two authors noted: Puerto Rico’s long-term fiscal trajectory is dependent upon the restructuring process underway through the PROMESA Oversight Board.

Looming Municipal Insolvencies?

October 10, 2017

Good Morning! In today’s Blog, we consider the looming municipal fiscal threat to one of the nation’s oldest municipalities, and the ongoing fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Cascading Insolvency. One of the nation’s oldest municipalities, Scotland, a small Connecticut city founded in 1700, but not incorporated until 1857, still maintains the town meeting as its form of government with a board of selectmen. It is a town with a declining population of fewer than 1,700, where the most recent median income for a household in the town was $56,848, and the median income for a family was $60,147. It is a town today on the edge of insolvency—in a state itself of the verge of insolvency. The town not only has a small population, but also a tiny business community: there is one farm left in the town, a general store, and several home businesses. Contributing to its fiscal challenges: the state owns almost 2,000 acres—a vast space from which the town may not extract property taxes. In the last six years, according to First Selectman Daniel Syme, only one new home has been built, but the property tax base has actually eroded because of a recent revaluation—meaning that today the municipality has one of the 10 highest mill rates in the state. To add to its fiscal challenges, Gov. Malloy’s executive-order budget has eliminated Connecticut’s payment in lieu of taxes program—even as education consumes 81 percent of Scotland’s $5.9 million taxpayer-approved  budget: under Gov. Malloy’s executive order, Scotland’s Education Cost Sharing grant will be cut by 70 percent—from $1.42 million to $426,900. Scotland has $463,000 in its reserve accounts, or about 9 percent of its annual operating budget—meaning that if the Gov. and legislature are unable to resolve the state budget crisis, the town will have to dip into its reserves—or even consider dissolution or chapter 9 bankruptcy. Should the municipality opt for dissolution, however, there is an unclear governmental future. While in some parts of the country, municipalities can disappear and become unincorporated parts of their counties, that is not an option in Connecticut, nor in any New England state, except Maine, where more than 400 settlements, defined as unorganized territories, have no municipal government—ergo, governmental services are provided by the state and the county. Thus it appears that the fiscal fate of this small municipality is very much dependent on resolution of the state budget stalemate—but where part of the state solution is reducing state aid to municipalities.

Connecticut Attorney General George Jepsen has offered a legal opinion which questioned the legality of Gov. Dannel P. Malloy’s plan to administer municipal aid in the absence of a state budget,  he offered the Governor and the legislature one alternative—draft a new state budget. Similarly, Senate Republican leader Len Fasano (R-North Haven), who requested the opinion and has argued the Governor’s plan would overstep his authority, also conceded there may be no plan the Governor could craft—absent a new budget—which would pass legal muster, writing: “We acknowledge the formidable task the Governor faces, in the exercise of his constitutional obligation to take care that the laws are faithfully executed, to maintain the effective operations of state government in the absence of a legislatively enacted budget.” The fiscal challenge: analysts opine state finances, unless adjusted, would run $1.6 billion deficit this fiscal year, with a key reason attributed to surging public retirement benefits and other debt costs, coupled with declining state income tax receipts:  Connecticut is now about 14 weeks into its new fiscal year without an enacted budget—and the fiscal dysfunction has been aggravated by a dispute between Sen. Fasano and Gov. Malloy over the Governor’s plans to handle a program adopted two years ago designed to share sales and use tax receipts with cities and towns: a portion of those funds would go only to communities with high property tax rates to offset revenues they would lose under a related plan to cap taxes on motor vehicles.

Aggravating Fiscal & Human Disparities. The White House has let a 10-day Jones Act shipping waiver expire for Puerto Rico, meaning a significant increase in the cost of providing emergency supplies to the hurricane-ravaged island from U.S. ports, in the wake of a spokesperson for the Department of Homeland Security confirming yesterday that the Jones Act waiver, which expired on Sunday, will not be extended—so that only U.S‒built and‒operated vessels are make cargo shipments between U.S. ports. The repercussions will be fiscal and physical: gasoline and other critical supplies to save American lives will be far more expensive on an island which could be without power for months. The administration had agreed to temporarily lift the Jones Act shipping restrictions for Puerto Rico on September 28th; today, officials have warned that the biggest challenge for relief efforts is getting supplies distributed around Puerto Rico.

Even as President Trump has acted to put more lives and Puerto Rico’s recovery at greater risk, lawmakers in Congress are still pressing to roll back the Jones Act, with efforts led by Sens. John McCain (R-Ariz.) and Mike Lee (R-Utah), the Chairman of the House Water and Power Subcommittee of the Energy and Natural Resources Committee, recently introducing legislation to permanently exempt Puerto Rico from the Jones Act; indeed, at Sen. McCain’s request, the bill has been placed on the Senate calendar under a fast-track procedure that allows it to bypass the normal committee process; it has not, however, been scheduled for any floor time. Sen. McCain stated: “Now that the temporary Jones Act waiver for Puerto Rico has expired, it is more important than ever for Congress to pass my bill to permanently exempt Puerto Rico from this archaic and burdensome law: Until we provide Puerto Rico with long-term relief, the Jones Act will continue to hinder much-needed efforts to help the people of Puerto Rico recover and rebuild from Hurricane Maria.”

The efforts by Sen. McCain and Chairman Lee came as Puerto Rico Gov. Ricardo Rosselló, citing an “unprecedented catastrophe,” urged Congress to provide a significant new influx of money in the near term as Puerto Rico is confronted by what he described as “a massive liquidity crisis:” facing an imminent Medicaid funding crisis, putting nearly one million people at risk of losing their health-care coverage: “[a]bsent extraordinary measures to address the halt in economic activity in Puerto Rico, the humanitarian crisis will deepen, and the unmet basic needs of the American citizens of Puerto Rico will become even greater…Financial damages of this magnitude will subject Puerto Rico’s central government, its instrumentalities, and municipal governments to unsustainable cash shortfalls: As a result, in addition to the immediate humanitarian crisis, Puerto Rico is on the brink of a massive liquidity crisis that will intensify in the immediate future.” Even before Hurricane Maria caused major damage to Puerto Rico’s struggling health-care system, the U.S. territory’s Medicaid program barely had enough funds left to last through the next year; now, however, nearly 900,000 U.S. citizens face the loss of access to Medicaid—more than half of total Puerto Rican enrollment, according to federal estimates: experts predict that unless Congress acts, the federal funding will be exhausted in a matter of months, and, if that happens, Puerto Rico will be responsible for covering all its costs going forward, or, as Edwin Park, Vice President for health policy at the Center on Budget and Policy Priorities notes: “Unless there’s an assurance of stable and sufficient funding…[the health system] is headed toward a collapse.” Nearly half of Puerto Rico’s 3.4 million residents participate in Medicaid; however, because Puerto Rico is a U.S. territory, not a state, Puerto Rico receives only 57 percent of a state’s Medicaid benefits. Under the Affordable Care Act, Puerto Rico received a significant infusion, of about $6.5 billion, to last through FY2019, and, last May, Congress appropriated an additional $300 million. However, those funds were already running low prior to Hurricane Maria, a storm which not only physically and fiscally devastated Puerto Rico and its economy, but also, with the ensuing loss of jobs, meant a critical increase in Medicaid eligibility.

The White House submitted a $29 billion request for disaster assistance; however, none of it was earmarked for Puerto Rico’s Medicaid program. House Energy and Commerce Committee Republicans have proposed giving Puerto Rico an additional $1 billion over the next two years as part of a must-pass bill to fund the Children’s Health Insurance Program (CHIP), with one GOP aide stating the $1 billion is specifically meant to address the Medicaid cliff. Adding more uncertainty: the Senate has not given any indication if it will take up legislation to address Puerto Rico’s Medicaid cliff: The Senate Finance Committee passed its CHIP bill this past week, without any funding for Puerto Rico attached. 

In a three-page letter sent to Congressional leaders, Gov. Ricardo Rosselló is requesting more than $4 billion from various agencies and loan program to “meet the immediate emergency needs of Puerto Rico,” writing that while “We are grateful for the federal emergency assistance that has been provided so far; however, [should aid not be available in a timely manner], “This could lead to an acceleration of the high pace of out-migration of Puerto Rico residents to the U.S. mainland impacting a large number of states as diverse as Florida, Pennsylvania, New Hampshire, Indiana, Wisconsin, Ohio, Texas, and beyond.”

On Puerto Rico’s debt front, with the PROMESA Board at least temporarily relocated to New York City, President Trump has roiled the island’s debt crisis with his suggestion that Puerto Rico’s $73 billion in municipal bond debt load may get erased—or, as he put it: “You can say goodbye to that,” in an interview on Fox News, an interview which appeared to cause a nose dive in the value of Puerto Rico’s municipal bonds, notwithstanding his lack of any authority to unilaterally forgive Puerto Rico’s debt. Indeed, within 24 hours, OMB Budget Director Mick Mulvaney discounted the President’s comments: he said the White House does not intend to become involved in Puerto Rico’s debt restructuring. Indeed, the Trump administration last week sent Congress a request for $29 billion in disaster aid for Puerto Rico, including $16 billion for the government’s flood-insurance program and nearly $13 billion for hurricane relief efforts, according to a White House official. No matter what, however, that debt front looms worse: Gov. Rosselló has warned Puerto Rico could lose up to two months of tax collections as its economic activity is on hold and residents wait for power and basic necessities. Bringing some rational perspective to the issue, House Natural Resource Committee Chair, Rep. Rob Bishop (R-Utah), said the current debt restructuring would proceed under the PROMESA Oversight Board: “Part of the reason to have a board was to have a logical approach [to the debt restructuring]. We need to have this process played out…There’s not going to be one quick panacea to a situation that has developed over a long time…I don’t think it’s time to jump around…when we already have a structure to work with.” Chairman Bishop noted that Hurricane Maria’s devastation would require the board to revise its 10-year fiscal plan, with the goal to achieve a balanced budget pushed back from the current target of FY2019; at the same time, however, Chairman Bishop repeated that the Board must retain its independence from Congress. He also said Congress would consider extending something like the Puerto Rico Oversight, Management, and Economic Stability Act to the U.S. Virgin Islands—an action which would open the door to a debt restructuring for the more than $2 billion in public sector Virgin Islands municipal debt.

The godfather of chapter 9 municipal bankruptcy, Jim Spiotto, noted that it would be Congress, rather than the President, which would pass any municipal bankruptcy legislation, patiently reminding us: “You can’t just use an edict to wipe out debt: If Congress were to wipe out debt, there would be constitutional challenges…Past efforts to repudiate debt debts have had very serious consequences in terms of future access to capital markets and cost of borrowing.” In contrast, if the federal government were to provide something like the Marshall Plan to Puerto Rico, Mr. Spiotto added: the economy could strengthen, and Puerto Rico would be in a position to pay off some its debts.

Human, Physical, & Fiscal Storms

October 3, 2017

Good Morning! In today’s Blog, we consider Connecticut and its capital city’s fiscal road—including the assessment of municipal bankruptcy for Hartford, and then, with the President set to visit today, the fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Road to Municipal Bankruptcy. Connecticut Comptroller Kevin Lembo yesterday said the state, still lacking an FY2018 budget, remains on track to end the year with a deficit of $93.9 million under the provisions of an executive order by the Governor, even as Hartford City Council members yesterday received a legal report about the city’s bleak fiscal situation from advisers hired to explore chapter 9 municipal bankruptcy as one way to restructure Hartford’s fiscal future. An attorney from Greenberg Traurig, the firm hired by Hartford to assess the viability of Chapter 9 bankruptcy protection, and a representative from financial advisory group Rothschild & Co., stressed that even if Hartford were to file for bankruptcy, the city would remain under the leadership and control of elected officials. Greenberg Traurig attorney Maria DiConza advised: “When a municipality files for bankruptcy, a judge, a court, does not take over and run the city: The city continues to run itself during the court-supervised process.” She added that filing for Chapter 9 protection would allow the city to restructure debt and re-open contractual arrangements: “It’s not a process where the court is taking over operations of the city. And that’s something that’s really important to understand.” Moreover, Todd Snyder, a restructuring specialist with Rothschild & Co., stressed that Hartford’s elected leaders would not be superseded by the orders of a federal bankruptcy court, should city leaders opt to take Hartford’s affairs there: “I want to be very, very clear—a federal judge is not going to come in here and say, ‘Oh, you’re overspending in this area, and you should change the way you govern the city of Hartford…That’s not going to happen.”

In response, Councilmember Larry Deutsch asked what would happen if the city “stiffed the bondholders” of a looming $27 million bond payment at the end of this month—in response to which, Mr. Snyder replied that opting not to make that municipal bond payment would be “tantamount to making the decision that you are going to file for bankruptcy.” Ms. DiConza advised that the city’s municipal bondholders could not repossess city property to cover missed payments, but they could take Hartford to court and try to force the city to raise taxes to cover its debts.

Councilwoman Wildaliz Bermudez questioned whether the two attorneys were doing enough to divert the city from bankruptcy “at all costs,” having previously deemed Mayor Luke Bronin’s consideration of municipal bankruptcy “undemocratic.” To that, Ms. DiConza said: “The city is trying to avoid bankruptcy—‘at all costs’ is really a question for you,” referring to the Council: “What is the cost of the city avoiding bankruptcy? Is the cost that people are going with trash all over their lawn, because there’s no trash service? Is the cost that crime is going to go up, because there’s no payments to the police force? Is the cost that taxes go up? That’s the question the city has to decide. What are the costs of avoiding Chapter 9?” Mr. Snyder added that whether or not Hartford files for municipal bankruptcy, the city still needs to address longstanding structural issues with the city’s finances that see it posting deficits and increasing debt year after year: “There’s a need to address all the constituencies about making contributions to this solution: We live in a beautiful city, and people have valuable property. I would think that restructuring our obligations and entering into a new partnership with the state would enhance everybody’s life in the city.”

In a letter to Gov. Dannel P. Malloy, Mr. Lembo said the administration’s spending reduction authority under his executive order should allow him to meet current state savings targets, adding, however, that state spending trends so far, some 7.2 percent higher than the same period last fiscal year, demonstrate that fixed costs (including debt, state employee and teachers retirement and retiree health care) continue to rise, while discretionary spending is forcibly decreasing, writing: “The state’s municipalities, nonprofits and Connecticut residents, including the most vulnerable, depend on discretionary program spending for critical services and to enhance the quality of life…Vital programs that have faced significant cuts include Grants for Substance Abuse Services; Mental Health Service Grants; the Connecticut Home Care Program, Aid to the Disabled; Employment Opportunities; and the Early Care and Education program. He added: “The state’s capacity to meet its spending obligations is impaired by the inability to enact a budget that provides for policy changes that increase revenue. This problem is exacerbated each month as potential sources of additional revenue are foregone due to the absence of necessary changes to the revenue structure,” warning that as the “state enters the second quarter of the fiscal year, even a potential agreement to increase in the hospital tax remains in doubt, even though it would result in higher federal reimbursements. Moreover, ongoing budget uncertainty will slow Connecticut’s economic growth and could ultimately lead to the state and its municipalities receiving downgrades in credit ratings that will cost taxpayers even more…These results do not indicate Connecticut can grow its way out of the current revenue stagnation, especially in light of the state missing it revenue targets in the last two fiscal years.”

Adding to the downbeat state fiscal plight, he reported that preliminary state Department of Labor (DOL) data for August 2017 show that Connecticut lost 3,900 jobs during the month of August to a level of 1,687,200 seasonally adjusted, adding that July’s original preliminary job loss of 600 had been revised down by the Bureau of Labor Statistics to a loss of 1,100. Over the past 12-month period ending in August, the state has posted 6,000 new payroll jobs. During the last period of economic recovery, employment growth averaged over 16,000 annually. 

Physical & Fiscal Mayhem. Some two weeks after Hurricane Maria devastated Puerto Rico, creating a humanitarian crisis, President Trump arrives today to see first-hand the damage, becoming the first President of the United States to make an official visit in the wake of a crisis. The President will meet with Gov. Rosselló Nevares and San Juan Mayor Carmen Yulín Cruz—who had alerted the media about the signal seeming disparities in responding to the human, physical, and fiscal crisis compared to Houston and Florida.

As President Trump visits Puerto Rico today, nearly two weeks after the destruction and havoc created by Hurricane Maria, officials report only 5% of the island has electricity and its schools are not close to reopening. Puerto Rico Secretary of Education Julia Kelleher told CNN on Sunday that some public schools might not resume classes until mid-month because of storm damage, though decisions will be made on a regional basis. The U.S. territory has 1,113 public schools and a student population of 350,000; however, only a small fraction (400) have been assessed for damage; thus, school districts from Florida to Massachusetts are anticipating an influx of Puerto Rican students displaced by the hurricane, so a different kind of relief operation is underway to identify which schools have space and which resources will be needed in the wake of last month’s loss, all across Puerto Rico, of power and communications. Officials hope to reopen some schools by mid-month. Edwin Meléndez, Director of the Center for Puerto Rican Studies at Hunter College in New York, said his conservative estimate is that more than 200,000 children and adults will leave Puerto Rico for the mainland—with his decision coming one day after President Trump took to Twitter to criticize the leadership of Puerto Rican leaders, especially San Juan Mayor Carmen Yulin Cruz and those the President claimed “want everything to be done for them when it should be a community effort.” The inexplicably belated, temporary suspension of the Jones Act has enabled FEMA to expand its delivery of food and water throughout Puerto Rico, though officials stressed that many people still lack the essentials: FEMA has, finally, been able to deliver food and water to all of Puerto Rico’s 79 municipalities; however, FEMA reports that some isolated areas of these municipalities may not have received the commodities, partly because lack of communication systems has hampered distribution efforts. As of late Sunday, there was safe drinking water available to 41% of Puerto Rico; FEMA has installed eleven regional staging areas for food and water distribution; some 5 percent off the island has power, and Gov. Ricardo Rossello reported the Army Corps of Engineers has begun a mission to repair the power grid. Over the next few days, close to a million gallons of gasoline and half a million gallons of diesel fuel will arrive, according to the Governor, who added that just over one-third of Puerto Rico’s residents now have phone service: all landlines are operating, but only about 11% of the cell towers are operational; 51 of 69 hospitals are running in some capacity now, along with 46 of 48 dialysis centers.

Brookings’ Michael O’Hanlon yesterday described the “patriotism, courage, compassion, and grit of the several thousand Coast Guard and other U.S. military personnel belatedly detailed by the White House to respond, writing: “But the overall approach might best be described as a modest response to a disaster: at a time when so many American citizens are suffering, we need to consider a much more massive effort.”

 

The Leadership Challenges on the Road to Fiscal and Physical Recovery

September 29, 2017

Good Morning! In today’s Blog, we consider the fiscal, legal, physical, and human challenges to Puerto Rico; Hartford’s steep fiscal challenges; and Detroit’s ongoing road to fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

Fiscal Safety Net? The White House yesterday announced President Trump had agreed to waive the Jones Act, which will temporarily lift shipping restrictions on Puerto Rico and enable the hurricane-ravaged island to receive necessary aid; however, the waiver from the shipping law, which mandates that only American-made and-operated vessels may transport cargo between U.S. ports, will only last for 10 days, after which the equivalent of a 20 percent tax will be reimposed. The delayed U.S. response to the save U.S. citizens compared unfavorably to the response to save and protect foreign citizens in Haiti seven years ago, when the U.S. military mobilized as if it were going to war—with the U.S. military, in less than 24 hours, and before first light, already airborne, on its way to seize control of the main airport in Port-au-Prince. Within two days, the Pentagon had 8,000 American troops en route; within two weeks, 33 U.S. military ships and 22,000 troops had arrived. By contrast, eight days after Hurricane Maria ripped across neighboring Puerto Rico, just 4,400 service members were participating in federal operations to assist the devastated U.S. citizens, according to a briefing by an Army general yesterday, in addition to about 1,000 Coast Guard members.

The seemingly inexplicable delay in waiving the Jones Act—temporarily—was due to opposition of the waiver by the Department of Homeland Security, which had argued that a federal agency may not apply for a waiver unless there is a national defense threat (as, apparently, there might have been in Houston and Florida). Sen. John McCain (R-Az.) has, for years, sought to repeal this discriminatory law: The 1920 Jones Act requires that goods shipped between U.S. ports be carried by vessels 1) built in the U.S., 2) majority-owned by American firms, and 3) crewed by U.S. citizens.

Key House and Senate members, since Monday, had been pressing for a one-year waiver from the rules in order to help accelerate deliveries of food, fuel, medical, and other critical supplies to Puerto Rico, especially with current estimates that Puerto Rico could be without power for six months. On Wednesday, 45 U.S. Senate and House Members had signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement. U.S. Rep. Nydia Velázquez (D.-N.Y.) warned: “If President Trump doesn’t swiftly deploy every available resource that our country has, then he has failed the people of Puerto Rico – and this will become his Katrina.” The temporary suspension of the onerous and discriminatory Jones law came only in the wake of a fierce backlash against the Trump administration for its inexplicable delay in not immediately lifting the federal law for Puerto Rico, especially after it issued a two-week waiver for Texas and Florida in response to Hurricanes Harvey and Irma. Nevertheless, San Juan Mayor Carmen Yulín Cruz praised the administration’s decision: she said it could help bring down the cost of emergency medical and other supplies, as well as vital construction materials by nearly 33 percent. Nevertheless, she warned there are still thousands of containers sitting idle at the ports of San Juan, a problem she blamed on “jurisdictional” and bureaucratic issues.

The belated Presidential action came as Puerto Rico continued to suffer the after effects of Hurricane Maria: Puerto Rico Electric Power Authority Executive Director Ricardo Ramos Rodríguez warned it could take PREPA as much as half a year to restore electricity.

Meanwhile, it appears the PROMESA Oversight Board is ready to revise the amount of debt to be paid in the next nine years. The Board is scheduled to meet today in New York City to revise the March-approved fiscal plan: the current Board fiscal plan specifies there should be enough funds to pay approximately 24% of the debt; however, it appears the Board will have little choice today but to revise every fiscal plan. Clearly none of the previous underlying assumptions can hold, and now the Board will have to await the actions and finding of the Federal Emergency Management Agency, while the Treasury Department will have to work with Puerto Rico to settle on a massive restructuring—or, as Puerto Rico House Representative Rafael Hernández Montañez put it: “We can’t have money spent on corporate lawyers and PowerPoint producing technocrats while funding is needed for immediate reconstruction efforts.” While FEMA has committed to paying for 100 percent of the costs of some work, on others, it is mandating a match of 20% to 25% of the costs for other work—a match which appears out of reach for the most savagely damaged municipalities or municipios—now confronted not just by enormous new capital and operating demands, but also by sharply reduced revenues.

Wednesday morning, the PREPA Bondholders Group offered up to $1.85 billion in debtor in possession loans to the authority. According to the group, part of the package would be a new money loan of up to $1 billion. Another part would be their possible acceptance of an $850 million in DIP notes in exchange for $1 billion in outstanding bonds owed to them—or, as the Group noted: “The new funding would allow PREPA to provide the required matching funds under various grants from the Federal Emergency Management Agency.” In response, PREPA’s Natalie Jaresko said: “We welcome and appreciate the expression of support from creditors…The Board will carefully consider all proposals in coordination with the government, but it is still very early as we begin to navigate a way forward following the catastrophic impact Hurricane Maria had on the island.”

The existing fiscal PREPA plan specifies there should be enough funding to pay about 24% of the debt due over the next decade; that, however, has raised questions with regard to the underlying assumptions of the Board, especially with regard to when FEMA will complete its work on the island.

Rafael Hernández Montañez, a member of Puerto Rico’s House, noted that Hurricane Maria put Puerto Rico’s territory-wide and municipal governments in very difficult financial situations. While FEMA has committed to paying for 100% of the costs of some work, he notes that the federal relief agency is still mandating a government match of 20% to 25% of the costs for other work: “It’s going to be a huge effort to cover that 20% with the government’s unbalanced budget,” adding that the hurricane will also lead to reduced revenues for the local governments.

On Wednesday, 145 U.S. Representatives and Senators signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement–the same day as the PREPA Bondholders Group offer. 

The Category 4 Maria destroyed Puerto Rico’s electrical grid; it left the island desperately short of food, clean water, and fuel—and sufficient shipping options, notwithstanding the claim from the Department of Homeland Security that: “Based on consultation with other federal agencies, DHS’s current assessment is that there is sufficient numbers of U.S.-flagged vessels to move commodities to Puerto Rico.” Thus DHS opposed a waiver of the Jones Act (Under the Jones Act federal cabotage rules, the entry of merchandise into Puerto Rico can only be made on US flag and crew ships – the most expensive fleet in the world.), which has been suspended in past natural disasters, to allow less expensive, foreign-flagged ships bring in aid. Former President George W. Bush suspended the Act after Hurricane Katrina in 2005, and President Barack Obama suspended it after superstorm Sandy in 2012. In a letter to the Department of Homeland Security, Sen. McCain criticized the department for waiving the Jones Act in the wake of hurricanes Harvey and Irma, but not for Puerto Rico. The Senator, who has long sought a repeal of the Jones Act, noted: “It is unacceptable to force the people of Puerto Rico to pay at least twice as much for food, clean drinking water, supplies, and infrastructure due to Jones Act requirements as they work to recover from this disaster: Now, more than ever, it is time to realize the devastating effect of this policy and implement a full repeal of this archaic and burdensome Act.”  Only the Department of Defense may obtain a Jones Act waiver automatically, which it did to move petroleum products from Texas after Hurricane Harvey. The White House is expected to send Congress a request for a funding package for Puerto Rico in the next few weeks, a senior congressional aide said.

The Road to Hartford’s Default. Citing deep cuts to higher education, sharp reductions in aid to distressed communities, and unsound deferrals of public pension payments, Connecticut Gov. Dannel Malloy yesterday made good on his pledge to veto the budget that legislature, earlier this month, had adopted, deeming it: “unbalanced, unsustainable, and unwise,” adding his apprehension that were it to be implemented, it would undermine the state’s long-term fiscal stability and essentially guarantee the City of Hartford’s chapter 9 municipal bankruptcy. His veto came as the Governor and top legislators continued bipartisan talks in an attempt to reach a compromise; however, despite legislative attempts to pass a bill to increase the hospital provider tax to 8 percent, a 25 percent increase over the current level, the legislature will not meet today. In his executive order, the Governor allowed key stated services to remain operating; however, he ordered steep cuts to municipalities and certain social service programs: under his orders, approximately 85 communities would see their education cost sharing grants, the biggest source of state funding for public education in Connecticut, cut to zero next month—no doubt a critical element provoking the Connecticut Council of Small Towns, which represents more than 100 of the state’s smallest communities, to seek an override in a special session the week after next in order to avoid local property tax increases. Nevertheless, Gov. Malloy stood strongly against the Republican plan and a potential override, stating: “This budget adopts changes to the state’s pension plan that are both financially and legally unsound…This budget grabs ‘savings’ today on the false promise of change a decade from now, a promise that cannot be made because no legislature can unilaterally bind a future legislature.” He added his apprehensions that the changes proposed to the state’s pension system could expose Connecticut taxpayers to potentially costly litigation down the road: “Prior administrations and legislatures have, over decades, consistently and dangerously underfunded the state’s pension obligations,’’ a strategy, he noted, which he said has led to crippling debt and limited the state’s ability to invest in transportation, education, and other important initiatives. Nonetheless, Republican leaders urged the Governor to sign the two-year, $40.7 billion budget, saying it makes significant structural changes, such as capping the state’s bonding authority and limiting spending. Fiscally conservative Democrats who bolted to the Republican side had criticized a Democratic budget proposal which had proposed new taxes on vacation homes, monthly cellphone bills, and fantasy sports betting, as well as increased taxes on cigarettes, smokeless tobacco, and hotel room rates.

House Republican leader Themis Klarides (R-Derby) warned she and her colleagues will try to override the veto—a steep challenge, as in Connecticut, that requires a two-thirds vote in each chambers, meaning 101 votes in the House and 24 in the Senate. The crucial Republican amendment passed with 78 votes in the House and 21 in the Senate—well short of the override margin in both chambers. The action came as S&P Global Ratings this week lowered Hartford’s credit rating, writing that its opinion “reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty,” albeit noting that the city could still avoid chapter 9 municipal bankruptcy by restructuring its debts. The agency wrote: “In our view, the potential for a bond restructuring or distressed exchange offering has solidified with the news that both bond insurers are open to supporting such a measure in an effort to head off a bankruptcy filing. Under our criteria, we would consider any distressed offer where the investor receives less value than the promise of the original securities to be tantamount to a default. The mayor’s public statement citing the need to restructure even if the state budget provides necessary short-term funds further supports our view that a restructuring is a virtual certainty.” Hartford’s fiscal plight is, if anything, made more dire by the fiscal crisis of Connecticut, which is still without a budget—and where the Legislature has under consideration a budget proposal from the Governor to slash state aid to the state’s capitol city of Hartford—where the Mayor notes that even were the state to make the payments it owes, Hartford would still be unable to pay its debts—so that S&P dropped the city’s credit rating from B- to C—a four-notch downgrade, writing: “The downgrade to ‘CC’ reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty.”

The Steep Recovery Road. Almost three years after exiting chapter 9 bankruptcy, Detroit is meeting its plan of debt adjustment, but still confronts fiscal challenges to a full return to the municipal market, even as it nears its exit from Michigan state oversight next year. Detroit’s Deputy Chief Financial Officer and City Finance Director, John Hill, this week noted that while the Motor City recognizes that any debt the city plans to issue will still need a security boost from a quality revenue stream and some enhancement, such as a state intercept, Detroit’s plan of debt adjustment did not assume the need for market access in a traditional and predictable way, without added security layers, for at least a decade. That assessment remains true today, as Detroit nears its third anniversary from its exit from the nation’s largest ever municipal bankruptcy. With chapter 9, Mr. Hill adds: “Everything that we have been able to do since exiting bankruptcy has an attached revenue stream to it: You secure it, and bond lawyers agonize over how that will be protected in the unlikely event of another bankruptcy, because everyone has to ask the question now. Then there is a strong intercept mechanism that goes to a trustee like U.S. Bank where the bondholders now know this is absolutely secure.”

Municipal Market Analytics partner Matt Fabian notes that Detroit continues to struggle with challenges which predate its chapter 9 bankruptcy, adding the city is unlikely to regain an ability to access the traditional municipal markets on its own in the near-to-medium term: “They don’t have traditional reliable access where if they need to go to the market, you can predict with certainty that they will and they will be within a generally predictable spread,” adding that reestablishing its presence in the traditional market is important, because it indicates whether bondholders have confidence in the city as a going concern. In fact, Detroit has adopted balanced budgets for two consecutive years; it is on a fiscal path to exiting Michigan Financial Review Commission oversight, and the city ended FY2016 with a $63 million surplus in its general fund; however, Detroit’s four-year fiscal forecast shows an annual growth rate of only about 1%.

The city’s public pension obligations, mayhap the thorniest issue in cobbling together its plan of debt adjustment, are to be met per its economic plan, via a balloon payment.  Mr. Fabian notes that the Motor City’s recovery plan and future revenue growth is complicated by the need to set aside from surpluses an additional $335 million between Fy2016 and Fy2023 to address that significant, unfunded pension liability, worrying that while the plan is “fiscally responsible;” nevertheless, it comes “at the expense of using these funds for reinvestment and service improvement.”

The plan to address pension obligations is aimed at shoring up the city’s long-term fiscal health and Naglick says it shows the city has recognized the need to tackle it. Detroit developed a long-term funding model with the help of actuarial consultant Cheiron, obtained City Council approval for changes to the pension funding ordinance that established the Retiree Protection Trust Fund, and deposited $105 million into this IRS Section 115 Trust. This fund, said Detriot CFO John Naglick, will grow to over $335 million by 2024 and will provide a buffer to increased contributions beginning then. “More importantly, the growing contributions each year from the general fund to the trust will build budget capacity to make the increased contributions in future years,” he said.

Mayor Mike Duggan claimed during his 2016 State of the City speech that consultants who advised the city through bankruptcy had miscalculated the pension deficit by $490 million. Pension woes aren’t the only challenge the city faces. Fabian said that economic development has been limited to the city’s downtown and midtown areas. The rest of Detroit’s neighborhoods haven’t fared so well.

Dan Loepp, the president and CEO of Blue Cross Blue Shield of Michigan, and Gerry Anderson, the Chairman and CEO of DTE Energy, are regarded to be among the important business leaders in Detroit, two key sectors of the Motor City’s economy, who see Detroit’s fiscal and economic trajectory as intertwined with the future of their companies; they  have headquarters in downtown and employ thousands of people including Detroiters—companies which had been making conscious and deliberate investments in the city. Asked recently to offer their perspectives about where Detroit is headed and how to include the many who are left out of the recovery, Mr. Loepp responded: “I’m a native Detroiter, and I lead a company that’s been a business resident of Detroit for nearly 80 years. I remember how uneasy it felt to be in Detroit when the national economy collapsed 10 years ago. It was hard and scary…From then to now, I strongly believe Detroit’s comeback is one of the best stories in America. The downtown is pulsing with growth and action. You’ve got business and residential development that has connected the river to Midtown and is now expanding into neighborhoods.” He added Detroit today is clear of debt and venture capital flowing backed by a city leadership which is “working well together, noting Detroit today is “now positioned to compete and win investment and jobs against any city in the country. All of this is great for Detroit.”

Notwithstanding, he warned that challenges remain: “The bankruptcy, while hard, gave the city’s leadership a clean slate to solve challenges faced by residents. The Mayor and council are working together on issues like lighting, infrastructure, zoning, and demolition…the Mayor, especially, has spent considerable energy advocating for the people of Detroit—doing things like making sure new housing developments hold space for working people of all incomes. This will promote a stronger, more diverse Detroit…Institutional issues, like improving the city’s schools and making neighborhoods safer for city residents, will take time to solve. They will take a constant, steady focus. And they need people within state and local government to work hand-in-hand with people from the neighborhoods to do the tough labor of finding sustainable solutions.” Nevertheless, he cautioned that the Motor City’s recovery is incomplete without participation of the majority: “Detroit can’t truly ‘come back’ if people living in the city are left behind. We need to always make sure there is a focus on people and that we make people a priority. Schools need to be improved. Transit needs to be addressed in a comprehensive way. Employment opportunities and housing need to be part of the master plan.”