Fiscal Surgery to Restore Stability & Accountability

March 20, 2018

Good Morning! In this morning’s eBlog, we consider options for addressing serious fiscal challenges in Connecticut, before journeying to the U.S. territory of Puerto Rico, where we try to assess whether there might be too many fiscal cooks in the kitchen.

The State of the Constitution State. In the wake of the unveiling of a series of diverse and likely fiscally painful recommendations, the Connecticut Commission on Fiscal Stability and Economic Growth has challenged the state’s legislature to adopt the proposal. Moreover, the Connecticut Conference of Municipalities, notwithstanding that full adoption could jeopardize state aid to local governments in the state, endorsed the full report, finding it would offer more long-term benefits for the state and its municipalities. The Commission report recommendations focused on new long-term benefits for the state and its communities, with its recommendations focused on new revenue-raising options for cities and towns and collective bargaining changes which could prove to be vital reforms which could more than offset the steep reduction in the state budget. The Conference’s Executive Director Joe DeLong noted: “Connecticut has long been the land of steady habits, but the precarious fiscal condition that still plagues the state budget demands that Connecticut change key core public policies—now,” adding the Commission report echoes many of the recommendations the Conference proposed to state legislators just one year ago: “We can wait no longer for substantive change that will set the state on a sustainable economic path that will benefit hard-pressed residents and businesses.”

The 14-member Commission, which was created last October as part of the new state budget, was charged with the task of helping to navigate Connecticut through one of its worst fiscal crises in modern history: the state not only lagged the majority of states in recovering from the great Recession, but also is confronted by surging public retirement benefit costs tied to more than 70 years of inadequate contributions—creating a fiscal challenge projected to place unprecedented pressure on state finances for at least the next 15 years.

Unsurprisingly, the growing costs of financing retirement pensions of post-retirement health care benefits has acted like a python in squeezing aid to the state’s cities and towns. Thus, the Conference found some solace from the commission recommendations, which might grant greater fiscal flexibility to the state’s communities to manage their own budgets and programs. Among the key recommendations: 

  • Authorizing municipal coalitions to add one-half of 1 percentage point to the sales tax rate to fund regional services and diversify local budgets that rely excessively on property taxes.
  • Allowing regional coalitions of municipalities to raise supplemental taxes for capital projects by special referendum.
  • Allowing communities, through regional councils of government, to charge fees on nonprofit colleges and hospitals, which currently are exempt from local property taxation.
  • Permitting towns to increase fees for use of the public rights of way, storm water fees, hotels, car rentals, restaurants, and other services.
  • Urging the state to increase the grants it already provides to restore some of the funds communities lose because state property is exempt from local taxation.

The fiscal stability panel also proposed several changes to collective bargaining, which could help the state’s local governments, including:

  • Allowing communities to use non-union labor on rehabilitation projects costing less than $1 million;
  • Providing communities with a single, neutral arbitrator for labor negotiations;
  • And exempting a city or town’s emergency budget reserve from being used to pay for labor contract settlements.

The Commission’s recommendation that the Legislature reduce the state annual operating budget approximately 5%, or about $1 billion per year left unclear what areas would be targeted, albeit the co-Chairs said that recommendation is not intended to target the nearly $3 billion Connecticut spends annually on major statutory grants to cities and towns; rather, their intent appears to be that the Legislature could achieve these savings via privatizing more services, seeking other efficiencies, and trimming labor costs wherever possible. The Connecticut Business and Industry Association and other business leaders have been urging lawmakers to revisit six reports prepared in 2010 and 2011 by a business coalition known as The CT Institute for the 21st Century. The coalition outlined strategies to cut state spending by hundreds of millions of dollars in total spread across several areas, including reductions in public-sector benefits. These strategies, many of which would take several years, also involved prisons, long-term health care, public-sector benefits, and use of technology to deliver public services. Nevertheless, a number of state legislators questioned the reality of a $1 billion reduction, given that nearly two-thirds of the state budget involves retirement obligations, payments on bonded debt, Medicaid, and other largely fixed costs, without constraining aid to cities and towns.

A Consulting Estado de Emergencia? (State of Emergency) Puerto Rico’s Executive and Legislative branches, during the Hurricane Maria state of emergency, agreed to 1,408 consulting and professional contracts totaling $ 70.1 million, according to an analysis of El Nuevo Día. That effectively translates into approximately 16 contractual agreements for each of the 88 days in which 3.5 million Puerto Ricans were almost in survival mode in the wake of last September’s hurricane—all contracts which were subject to the scrutiny of the Chamber and the Senate of Puerto Rico, as well as the PROMESA Oversight Board with regard to any contract which exceeded $10 million. It appears that nearly half of the consulting and professional services agreements agreed upon during the emergency period registered with the Office of the Comptroller were given mainly to individuals and several dozen firms which provide services to the government under an “administrative consulting” agreement and services: agreements totaling $24 million, with the largest contracts provided via three amendments to agreements of the Department of Health and the Special Program of Supplementary Nutrition for Pregnant, Lactating, Postpartum, Infants and Children from 1 to 5 years old (WIC) with the company to ManPower for temporary employment services. In addition, there is a $ 3.1 million contract from the Office of Management and Budget (OGP) with Deloitte & Touche for financial consulting—which has subsequently signed another contract with the office which will be in charge of administering the federal funds Puerto Rico receives for recovery from Hurricane Maria. Meanwhile, the firm KPMG received an amendment to a contract with the Public-Private Partnerships Authority (AAPP) of $ 947,189. Based on data from the Comptroller, during the emergency, when it was known that the agencies and schools were not operating properly and the courts recessed their work substantially, the agencies also granted 123 contracts for “legal consulting” and “legal services” for $ 4.6 million—with another 31 contracts valued at $2.6 million to accounting firms.  The list of administrative consultants also includes several contracts with amounts close to $1 million, with some of the largest granted by the Bureau for Emergency Management and Disaster Management to the firms Consul-Tech Caribe and DCMC LLC for $ 900,000 each.


Governance in Recovering from Severe Physical and Fiscal Distress

March 2, 2018

Good Morning! In this morning’s eBlog, we consider the use of a municipality’s capital assets to get back on its fiscal feet; then we consider the fates, fiscal and physical, for many of Hurricane Maria’s Puerto Rican victims who have emigrated stateside. Are they “invisible Americans”?

Municipal Assets & Fiscal Balancing. In a surprising move, the Petersburg, Virginia City Council has unanimously adopted a motion to opt not to sell the municipality’s public water and wastewater assets, effectively ending a nearly yearlong debate with regard to whether or not to sell their public utility to Aqua Virginia and Virginia American Water, two private providers who had submitted bids in December of 2016—at a time when one of the nation’s oldest cities was on the precipice of insolvency. It would appear the decision was likely affected by several water main breaks and water boil notices in the city last month—forcing legislators and city leaders to act. In the wake of the breaks, Congressman A. Donald McEachin (VA-4) and the Virginia Conservation Network had joined forces to host a roundtable discussion on the dilapidated state of Petersburg’s water infrastructure. Under the successful motion, the Council instructed the City Manager to: 1) reject the offer made by Aqua Virginia; 2) discourage any future offers to purchase Petersburg’s water and wastewater assets; 3) reject the pending unsolicited proposal to purchase Petersburg’s water and wastewater assets. That is, the municipal fiscal and capital policy going forward is to concentrate all available city resources on devising a plan to improve the city’s collection rate—or, as Councilmember Cuthbert put it: “It was a diversion of energy…It diverted the city administration’s energy; it diverted the public’s energy; and it diverted the City Council’s energy.” Councilwoman Annette Smith-Lee noted: “For the citizens, their voice is their voice. We’re on Council because of them, and they did not want us to sell the water.”

Had the city opted to go forward with the proposed privatization and sale, the municipality would have lost control over setting the water rates—an important governance and fiscal issue, as neither the Council, nor many citizens support having a for-profit company to be in charge of the water rates. Previously, several Councilmembers had expressed skepticism about the sale of some of the city’s vital public infrastructure—even as former Richmond City Manager Robert Bobb’s Group, hired to take over the city in lieu of a chapter 9 municipal bankruptcy filing—had repeatedly made pleas to the Council to “open the envelope” and see what Aqua Virginia and Virginia American Water were offering for the system. Councilman Cuthbert noted: “Council realized that for us to sell our water and wastewater assets, it would have taken six affirmative votes, and the votes were not there.”

In the wake of that successful motion, Councilman Cuthbert told his colleagues he saw “no reason to go through another eight months of agony that was going to lead to nowhere.” The decision thus ended a year-long battle—or, as Mayor Sam Parham told his colleagues, Council Members had listened to citizens who were concerned about the sale, control over its water and sewer rates, and it never materialized. Barb Rudolph, one of those citizen leaders, where the citizen group Clean Sweep Petersburg, had questioned the idea from the Robert Bobb Group to privatize, especially after the consultants had departed Petersburg with what they had described as stabilized finances. Yet, even after offers by private companies were rejected, bids still continued to come in: obviously, private, for-profit corporations recognized intrinsic value in the system—and, of course, an opportunity for profit. Indeed, at a roundtable discussion about the city’s water and sewer infrastructure, City Manager Aretha Ferrell-Benavides acknowledged that Petersburg was still being pressured by a private vendor to sell its water and wastewater systems. The fact that Aqua Virginia leaders attended city meetings had not been lost on some residents—one even likened the private vendors to predators. Residents with Clean Sweep Petersburg took photos of empty chairs in the City Council chambers that they say Aqua Virginia executives vacated just after the Council’s vote. Now, city leaders say, energy should be devoted to improving the existing systems. In the past, necessary rate increases that the council approved were never implemented, in part because of turnover within city departments. In addition, billing issues that cost the utility system millions of dollars in recent years ended up slapping some residents with $4,000 bills, and the faulty rollout of a new utility billing system cost taxpayers upward of $1 million more. As recently as last week, some residents at the roundtable said their bills are still volatile. Ferrell-Benavides said a long-term plan to update the city’s infrastructure and improvements to the billing system are necessary and in the works.

For one of the nation’s oldest municipalities—a key city during both the Revolutionary and Civil Wars, a small, majority African-American municipality of just over 32,420, with a median household income of $33,927, where per capita income is about $18,535, and nearly 28% are below the poverty level—the politics of vital access to water matters.

The Physical & Fiscal Costs of Federalism. Physical catastrophes and federal insouciance can wreak terrible fiscal and human costs. In the case of Hurricane Maria, we can see those costs as not just fiscal, but especially in the welfare of our most vulnerable: young children and the elderly. More than 1,800 children have migrated from Puerto Rico and enrolled in Connecticut schools since Hurricane Maria decimated their homeland last September—a human and fiscal consequence of both the devastating physical and fiscal consequences, but also to the difficult fiscal challenges Connecticut is already confronting. Yet, unlike the federal government, Connecticut schools have scrambled to accommodate the new arrivals—most of them non-English speakers, and they have made such human, physical, and fiscal efforts notwithstanding the cash-strapped State of Connecticut. While Congress finally approved a compromise budget bill to provide millions of dollars to help schools care for displaced students (providing the equivalent of $8,500 for each displaced student, $9,000 for each one that is not English-speaking, and $10,000 for disabled students requiring special education); that still left a significant fiscal and physical burden for Connecticut, where State House Majority Leader Matt Ritter (D-Hartford) has set up a working group in the General Assembly to try to provide “one-stop shopping” for displaced Puerto Ricans who need assistance: he notes there “is no question that schools are looking for additional money” to accommodate the influx of unexpected students, many with special needs, and he is “very pleased” Congress finally offered some help. He believes the displaced student funding, part of the budget agreement’s $44 billion hurricane response package, will help. According to the Connecticut Department of Education, there were 1,745 displaced students in Connecticut schools as of mid-February—a slight reduction from the beginning of the year, as some families having opted to return to Puerto Rico or move to other states. Hartford, a city itself in difficult fiscal shape, finds its public schools have taken the bulk of the new arrivals, 376 at last count and 429 at the peak of the migration, followed by Waterbury, New Haven, and New Britain. Yet, while Congress finally provided some aid for displaced students, that aid appears unlikely to help school districts with the children who enroll next year.

Demographically Failing. While, as we noted above, there has been some federal and state aid to displaced children from Puerto Rico, the picture is more grim for Puerto Rico’s elderly: thousands of whom reside in vulnerable conditions outside the radar of government authorities, and too many of whom went hungry and thirsty due to mobility difficulties, or were unable to save their medicines due to the lack of light, without anyone knowing. Indeed, Department of the Family Secretary Glorimar Andújar described the challenge, because, in the wake of the physical destruction, the government lacked vital information with regard to where the most vulnerable were. Secretary Andújar noted the government neither knew where the most vulnerable lived, nor what their particular needs were. Thus, the devastating storm led her to acknowledge: “We have many elderly people in homes that we did not think were going to be in such high concentrations…Urbanizations complete with elderly people who depend on and are nourished by the help given by their neighbors…They are not necessarily under the jurisdiction of the Federal District, because we enter into protection. They are people who live alone and have particular needs, who are supplied by their neighbors: It is important, for future services that develop, to know where each of these populations are located.” That is, unlike children, who could be located via the school system—and could be lifted to accommodating state such as Connecticut, or depart with their families to Florida, Puerto Rico’s most vulnerable Americans were not only left behind, but also largely unaccounted for: as indicated, due to the nature of the services offered, the agency knows about elderly Americans only to the extent that they participate in their programs, such as Nutrition Assistance (PAN), protection services in cases of abuse or the homes of prolonged care—that is less than 3% of Puerto Rico’s nearly 860,000 senior citizens—where 36% live alone. This cohort, described by some as “that population that is most worrisome,” because they are older Americans who reside in the community, but have little support—or, as the Secretary put it: “They are invisible.”

During the most critical phase of the hurricane emergency many institutions did help many who live alone in their homes, offering food or extending electricity via long extension cords, those private efforts were far from sufficient for what is nearly a quarter of the population: In 2016, more than 23.5% of Puerto Ricans were 60 or older—compared to just 19.4% in 2011. It is almost like a teeter-totter, only where it is becoming increasingly fiscally and demographically imbalanced. Now, in the wake of the hurricane, and especially after the wave of immigration to the mainland by children and college-educated Puerto Ricans, estimates are that, by the next census, citizens over 65 will reach 30% of the population.  

To tend to these older Americans after Maria, Puerto Rico actually developed alternate methods of operation, especially because reliance on telephone communication was often impossible—the government sought to provide more personal contact and identify areas of what it deemed “high concentration,” utilizing contributions from organizations such as AARP to provide services. José Acarón, Puerto Rico’s AARP chapter president, stressed that there is “this older adult population, isolated, without a support network, living alone and mostly female, and they do not know where they are…We have to make a municipal census of needs and create community support mechanisms. Then we have to talk about different models of people supporting people, that work strategically and that is part of a plan.”

With estimates that 46.1% of Puerto Ricans live below the federal poverty level, Secretary Andújar said the Department had commissioned a study to verify socioeconomic changes, especially after Hurricane Maria, to the University of Puerto Rico, noting: “We hope to have a more up-to-date visibility of what the percentages are, what is going to throw us, what are the populations that are in those levels of poverty, and, obviously, how aligned our programs are towards services towards each one of those populations that results from the study.” She noted she was unable at present to be certain when that information would be ready. However, in the wake of Hurricane Maria, and by the end of last year, there were 35,000 new applicants for nutritional assistance. Demographer Judith Rodríguez reports that, taking into account only the difficulties brought by the emergency, she can say that the number of poor people on the island has increased: the most recent figures, from 2016, indicated that, in 30 municipios, 50% of the population lived in poverty, and that in six other towns, the figure reached 60%, adding: “Today, more than ever, families need the services offered by the government of Puerto Rico to respond to the changing needs of the people.”

What about the Youngest? Secretary Andújar reported her staff is aware of the possibility of an increase in the incidence of child abuse: “It is a reality for which we have been preparing. We are active with prevention mechanisms. After a phenomenon like the one suffered by the country, after months, it is expected that these indicators tend to increase.” Her agency noted that in the referrals from the last calendar quarter of 2017 of possible cases of abuse, the totals increased month after month, albeit they were below the records of the same period of the previous year. Due to the U.S. territory’s fiscal distress or quasi chapter 9 bankruptcy, her agency has taken a $605 million cut, with Gov. Ricardo Rosselló advising her: “You do not need more,” even as Larry Emil Alicea, president of the College of Social Work Professionals, notes: “Those who stay and cannot leave (from Puerto Rico), increase social stressors and may be associated with suicide rates: In the case of parents, protective capacities diminish and cases of child and adolescent abuse increase.”

Is There a Checkered Flag to Mark an Exit from Municipal Insolvency?

February 5, 2017

Good Morning! In today’s Blog, we consider: the ongoing challenge for Hartford to keep its fiscal head out of debt waters; efforts to create a municipal recovery fund in Puerto Rico for its beleaguered muncipios; and the uncertain promises of PROMESA.

Taking the Checkered Flag. Hartford city officials are concerned that they cannot find a 30-year-old insurance policy—a policy which could play a key role in any damages or settlement the capitol city would have to pay in a lawsuit filed by a man wrongly imprisoned for murder for two decades—and could weigh in the city’s efforts to regain its fiscal momentum from the brink of chapter 9 municipal bankruptcy. Indeed, the inability to locate the policy has prompted federal Magistrate Judge Joan Margolis to order the city to subpoena insurance companies in an effort to find it. The suit in question, filed seven years ago, against the city and police officials, alleged malicious prosecution, suppression of evidence, and violation of his civil rights. City officials deny the allegations; however, in the seven years since the suit was filed, they have been unable to come up with the policy. His lawyers have been seeking information on the city’s insurance policies since the lawsuit was filed nearly seven years ago—a lawsuit over a murder conviction—which was itself overturned based on new DNA testing that resulted in another man being convicted—so that state officials subsequently awarded the accused $6 million for his wrongful conviction. Now the missing so-called “excess” policy could turn out to be key in the lawsuit, because it would cover any damages or settlement the city would be required or directed by the court to pay above $2 million—the current Hartford liability limit. The City’s insurance carrier, Travelers, has recommended to the city that it notify the carrier of its excess policy about the lawsuit, because of the chance that any award could exceed $2 million—albeit, it remains unclear whether Hartford’s insurance policies in effect in 2011, when the lawsuit in question was filed, would cover any award to him. The litigation and potential fiscal exposure comes at a fiscally unpropitious time in the wake of Moody’s, last week, had just revised upwards the city’s credit rating, lifting its general obligation bond rating from negative to developing, citing last year’s appointment of the Municipal Accountability Review Board (MARB), which had been established by §367 of Public Act 17-2  as well as the statutory provisions contained in §§Section 349 to 376 of the Act for the purpose of providing technical, financial, and other assistance and related accountability for municipalities experiencing various levels of fiscal distress: the Board is made up of 11 members, appointed as follows: Secretary of OPM, or designee, Chairperson; State Treasurer, or designee, Co-chairperson; Five members appointed by the Governor: a municipal finance director; a municipal bond or bankruptcy attorney; a town manager; a member having significant experience representing organized labor from a list of three recommendations by AFSCME; a member having significant experience as a teacher or representing a teacher’s organization selected from a list of three joint recommendations by CEA and AFT-CT. In addition, one member is appointed by the President Pro Tempore of the Senate, one by the Speaker of the House, one by the Minority Leader of the Senate, and one by the Minority Leader of the House of Representatives, each of whom shall have experience in business, finance or municipal management.

The events unfolding in the courtroom occurred as Moody’s had brightened the fiscal outlook for the beleaguered city with its upward revision of the city’s rating from negative, specifically citing the creation of the review board—with its upwards revision reflecting the reduced chances of the city being forced into default or chapter 9, albeit Moody’s hedged its outlook by writing: “[T]here remains a possibility of significant bondholder impairment over the long-term, given the city’s distressed financial condition.” Moody’s has unmoodily noted it might upgrade the city’s fiscal outlook, if

  • the state oversight board designates Hartford as a Tier III municipality and executes a state debt assistance contract;
  • the city develops a long-term financial sustainability plan;
  • completes negotiations with bond insurers and bondholders which generate recovery of at least 80% of principal; and
  • makes timely payments on all debt with expressed commitments to fully honor future obligations.

In the alternative, the rating agency warns that a default on the city’s debt or an indication that bondholder recoveries would fall below 65% of principal in a potential debt restructuring would lead to a further downgrade.

Puerto Rico Municipal Recovery Fund? Governor Ricardo Rosselló is going to try again to get a legislation that creates a $ 100 million Municipal Recovery Fund to help mayors keep their governments afloat after Hurricane Maria shrunk their income. The Governor had planned to send to the Legislature a new version of the bill to establish such fund, in the wake of the PROMESA Board’s veto: in order to comply with the objections made by the Board, the Governor announced that the fund will have “transparent” eligibility requirements to evaluate the fall in municipal revenue collections. His proposal also proposes to create a structure that resembles the federal Community Disaster Loans program–and specify the accounts from which the Treasury Department would finance the aid, with amendments, including that the Fiscal Agency and Financial Advisory Authority (FAFAA) certify the need for the loans, which would be limited to $5 million per muncipio. In the statement issued from his office: “The Governor had submitted a bill for these purposes, which established by law the objective criteria to certify the municipal need. However, during the legislative process modifications were made to the way of allocating the resources of the Municipal Recovery Fund.” Those modifications were discussed by FAFAA with the Oversight Board, in order to ensure its final approval, if the measure is ratified again by the Legislature. (Because it is a bill related to the budget, it requires the approval of the PROMESA Board.) Nevertheless, the Governor appeared confident, stating: “I am confident that this project will be approved quickly and this way it will provide the aid our mayors need for their recovery works as soon as possible,” as he acknowledged the crisis faced by the municipalities, many of which fear being left without liquidity this spring. Thus, he told the PROMESA Board that his revised fiscal plan seeks to postpone “the reduction of the municipal subsidy that the Board originally approved.” For the island’s municipal leaders, that means they will also seek to have access to the line of credit of the FEMA CDL program approved by Congress last October.  According to Mayor Josian Santiago, the former president of the Puerto Rico Association of Mayors,   of Comerio, a municipio of just under 21,000 with an unemployment rate of 13%, located in the center-eastern region of island, more than 40 municipalities may currently lack sufficient fiscal liquidity to operate normally, unless they receive an injection of funds from the federal line of credit or from the local fund which Governor Rosselló is once again trying to create. The Mayor noted that the Municipal Revenue Collection Center has advanced the municipalities’ months of income projections, which it distributes, but which could now be forced to sell old debts in order to meet its obligations for the remainder of the fiscal year. (The island’s mayors have already been provided guidance with regard to how to access a federal line of credit, which must not exceed 25 percent of their budget.) In the case of Comerío, with a budget of around $9 million and, according to the evidence on the loss of income that it can provide, it could be eligible to receive up to about $ 2.25 million.

The Promise of PROMESA? During the meeting of the PROMESA Board in New York City at the end of last week, several experts agreed that hurricane Maria demonstrated the lack of a clear leadership in the Puerto Rican government, creating an inability to make decisions about its energy system, a problem that is still present in the face of the transformation required by the Electric Power Authority (PREPA). Indeed, FEMA Deputy Regional Administrator Asha Trible said that, during the emergency, the high level of bureaucracy in PREPA was a major obstacle, testifying: “It does not work…when you have eight layers to be able to approve something,” adding that in the times of greatest crisis, the bureaucracy added to liquidity problems of the public company, that “could not pay for the materials they ordered.” Administrator Trible, subsequent to the session, that early in the process, FEMA had suggested ideas, such as creating a central command for the emergency, with a single coordinator for PREPA, adding: “We avoided that they thought we were there to take control…We would have established a command structure, we tried to suggest that kind of thing, but we support the process that is there.” The session came as Governor Ricardo Rosselló has proposed to privatize PREPA assets, including the generation of electricity, and as a preamble to the certification of new fiscal plans of the central government and the public corporation—and came hard on the heels of the PROMESA Board’s request to Judge Laura Taylor Swain to allow the central government to lend $ 1.3 billion to PREPA to avoid its financial collapse this month—a request which the majority of the panel’s seventeen experts, noting the challenges the public corporation faces, instead advocated for a strong and independent regulator of the energy system, even as they stressed the need to obtain financing to modernize PREPA.

Too Many Cooks in the Cocina? John Paul Rossi, a historian at Penn State University-Erie, who is an expert on the history of American business, technology, communications, and transportation, argued that  the Governor, the Governing Board of the public corporation, the Oversight Board and the Energy Commission are now in the development of public policy for PREPA—without even mentioning different voices from the nearly insolvent U.S. Congress—that “There are too many people. We are scaring consumers and investors.” His comments came as Nisha Desai, a member of PREPA’s Governing Board, noted that PREPA is close to replacing former Executive Director Ricardo Ramos, with the utility’s governing board vetting several potential hires referred by a consultant tapped to help the utility find its new leader: deeming such a decision critical to PREPA’s recovery from September’s Hurricane Maria. Ms. Desai, an executive of the Texas Renewable Energy Industries Alliance, said that, along with two other “independent” members of the Governing Board, they are poised to select the next PREPA Executive Director, noting that, in order to rejuvenate PREPA, they intend to appoint “the first chief executive officer” disconnected from Puerto Rico’s ‘partisan politics.’

Governing under Takeovers

December 19, 2017

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

Visit the project blog: The Municipal Sustainability Project 

The Steep Fiscal Road to Recovery.  The Hartford City Council last week forwarded Mayor Luke Bronin’s request for Tier III state monitoring under the new Municipal Accountability Review Board, the state Board established by §367 of Public Act 17-2  as a State Board  for the purpose of providing technical, financial and other assistance and related accountability for municipalities experiencing various levels of fiscal distress. That board, which met for the first time on December 8th, now could be the key for Hartford to avoid filing for chapter 9 municipal bankruptcy: the Board, chaired by State Treasurer Denise Nappier and Budget Director Benjamin Barnes, is to oversee the city’s budgeting, contracts, and municipal bond transactions. The Council also passed a bond resolution to permit the city to refund all of its outstanding debt obligations. In addition, the Council approved new labor contracts with the City of Hartford Professional Employees Association and the Hartford Police Union that management projects will save Hartford more than $18 million over five years. According to Mayor Bronin, the police labor contract could save the city nearly $2 million this fiscal year; moreover, it calls for long-term structural changes, or, in the Mayor’s words, the agreement “represents another big step toward our goal of fiscal stability,” adding that the employee contracts and state aid were essential to keeping the 123,000-population city out of Chapter 9 municipal bankruptcy—even as Mayor Bronin is also seeking concessions from bondholders. (Insurers Assured Guaranty and Build America Mutual wrap approximately 80% of the city’s outstanding municipal bonds.)

In its new report, “Hartford Weaknesses Not Common,” Fitch Ratings noted that Hartford appears to be fiscally unique in that other Connecticut cities are unlikely to face similar problems, after the company assessed the fiscal outlook of several cities, including Bridgeport, New Haven, and Waterbury—finding that while these municipalities have comparable demographics and fiscal challenges, none is as fiscally in trouble, noting the city’s “rapid run-up” of outstanding debt and unfunded pension liabilities as issues that set it apart from nearby municipalities. Indeed, Hartford Mayor Luke Bronin has threatened the state’s capitol city may file for Chapter 9 bankruptcy protection—a threat which likely assisted in the city’s receipt of an additional $48 million in aid from Connecticut’s FY2018 budget, as well as two recently settled contracts with two labor unions. In addition, Fitch pointed to Hartford’s fiscal reliance on one-time revenue sources, such as the sale of parking garages and other assets, as well as the city’s inability to obtain “significant” union givebacks as factors that augured fiscal challenges compared to other cities in the state which Fitch noted have “substantial flexibility and sound reserves.” Moreover, despite Mayor Luke Bronin’s pressure for labor concessions, only two of the city’s unions have agreed to new contracts—contracts which include pay freezes and other givebacks, albeit two other unions have agreed to pacts offering significant concessions. These changes have enabled Hartford to draw back from the brink of chapter 9 municipal bankruptcy, but still left the city confronting a $65 million deficit this year, and dramatically in debt and facing public pension payment increases—potentially driving Hartford’s annual debt contribution to over $60 million annually—even as it imposes the highest tax rate of any municipality in the state, especially because of its unenviable inability to levy property taxes on more than half the acreage in the city—a city dominated by state office buildings and other tax-exempt properties. These fiscal precipices and challenges have forced the city to prepare to apply for state oversight and begin a restructuring of Hartford’s $600 million in outstanding debt—a stark contrast with the state’s other municipalities, which, as Fitch noted, have achieved greater success in gaining labor concessions, even as they less reliant on state assistance, according to Fitch: “Unlike Hartford, most Connecticut cities have substantial budget flexibility and sound reserves.” In some contrast, Standard & Poor Global Ratings appeared to be in a more generous giving, seasonal spirit: the agency lifted its long-term rating on Hartford’s general obligation bonds to CCC from CC, and removed the ratings from credit watch with negative implications, reflecting its perspective that Hartford’s bond debt is “vulnerable to nonpayment because a default, a distressed exchange, or redemption remains possible without a positive development and potentially favorable business, financial, or economic conditions,” according to S&P analyst Victor Medeiros, who, nevertheless, noted that S&P could either raise or lower its rating on Hartford over the next year, depending on the city’s ability to refinance its outstanding debt, and realize any contract assistance support from the state. Thus, it has been unsurprising that Mayor Bronin has been insisting that bondholder concessions are essential to the city’s recovery.

Fitch made another key observation: many Connecticut local governments lack the same practical revenue constraints as Hartford due to stronger demographics, less reliance on state aid, and lower property tax rates. (Hartford’s mill rate is by far the state’s highest at 74.29.), noting: “In a state with an abundance of high-wealth cities and towns, Hartford continues to be challenged by poverty and blight,” contrasting the city with New Haven, Waterbury, Bridgeport, and New Britain‒all of which Fitch noted had successfully negotiated union concession on healthcare and pension-related costs, so that, as Fitch Director Kevin Dolan noted: “Their ability to raise revenues is not as constrained as Hartford’s and their overall expenditure flexibility is stronger.” said Fitch director Kevin Dolan. (Fitch rates New Haven and New Britain with A-minuses, and A and AA-minus respectively to Bridgeport and Waterbury.) State Senator L. Scott Frantz (R-Greenwich) noted: “I hate to say it, but it’s gotten so desperate in so many cases with the municipalities that they really need to be able to have the power go in there and open up contracts–not maybe not even renegotiate them–and just set the terms for the next three to five years, or longer, to make sure that each one of these cities is back on a sustainable track: The costs are smothering them, and their revenue situation has gotten worse, because people don’t necessary want to live in those cities as they start to deteriorate even further.”

Fiscal & Physical Storm Recovery. Just as on the mainland, municipalities in Puerto Rico assumed the first responder responsibilities in Puerto Rico in reaction to Hurricane Maria; however, the storm revealed the many challenges and obstacles faced—and ongoing—for Mayors (Alcaldes) to meet the needs of their people—including laws or decrees which limit their powers or scope of authority, state economic responsibilities which reduce their economic resources, and legislation which fails to recognize inadequate municipal fiscal resources and capacity. Thus, in the wake of the fiscal and physical devastation, Puerto Rico Senator Thomas Rivera Schatz, the fourteenth and sixteenth President of the Senate of Puerto Rico, is leading efforts to grant some mayors a greater degree of independence to operate and manage the finances of municipalities. He is proposing, effectively, to elevate municipal autonomy to a constitutional rank—a level which he believes should have been granted to City Councils by law, noting that with such a change, municipios “would not have to wait, as they had to wait, for federal and state agencies to handle issues that no one better than they would have handled. They would have the faculty, the responsibility, and the resources to do so…In emergencies, something that cannot be lost is time. Then and before the circumstances that the communications from the capital to the municipalities were practically zero, that shows you that, at a local level, they must have the faculty, the tools, and the resources.”

The Senate President’s proposal arose during exchanges between the Senate and Mayors, conversations which have resulted previously in a series of legislative measures, in what the Senate leader acknowledged to be a complex process, but a track which the Senator stated would, after consultation, be the result of consensus with Mayors of both political parties—providing via the Law of Autonomous Municipalities, “Puerto Rico’s municipalities a scope of action free of interference on the part of the State, even as it reformed a structure of government, to be efficient in collections.” (To date, 12 of Puerto Rico’s 78 municipalities have achieved the highest level of hierarchy granted by the Autonomous Municipalities Law.)

In a sense, not so different from the state/local strains in the 50 states, one of the greatest complaints by Puerto Rico’s Mayors has been over the economic burdens—or unfunded mandates—Puerto Rico has imposed on the municipios, as well as the decrees which establish contracts with foreign companies and grant them tax benefits, exemptions, and incentives—all state actions taken without municipal consultation—thereby, enabling businesses to avoid the payment of patents and municipal taxes, and undermining municipal collections—or, as the Senate President put it: “The reality of the case is that, for 12 to 16 years, governments have been legislating to nourish the State with economic resources.”  Currently, Puerto Rico’s municipalities contribute $116 million for the redemption of state debt, another $ 160 million for Puerto Rico’s Retirement System, and an additional $ 169 million to subsidize the Government Health Plan. Again, as the Senator noted: “If there are municipal governments that have a structure capable of raising their finances, of providing their services…the State does not have to intervene with them, taxing their resources.” Sen. Schatz noted that his proposal does not include eliminating municipalities; he confirmed that the governing challenge is to realize a “model” of interaction between the municipalities and the state—and that “the citizen has in his municipal environment everything he needs to be able to live happily and have quality of life. The end of the road is that. If it’s called county, province, or whatever you want to call it; the name does not do the thing, it’s the concept.” He asserted he was not proposing to “reward” municipalities, but rather to focus on establishing collaboration agreements through which there could be shared administrative tasks—in a way to not only achieve efficiencies, but also provide greater authority and ability for Puerto Rico’s municipalities to access funds free of intermediaries, noting: “The mayors did an exceptional job (during the emergency), and, practically without resources, had to come to the rescue of their citizens, open access, help sick people, cause the distribution of supplies with logic and speed…the passage of hurricanes rules out the idea of ​​eliminating municipalities.”

Thus, he affirmed that those municipalities which have achieved the maximum hierarchy of autonomy would have total independence, while the other municipalities would remain subject to the actions of the Puerto Rican government until they manage to establish fiscal sustainability—all as part of what he was outlining as a path to greater municipal autonomy, arguing that each of these changes implied the island’s municipalities need to make fiscal and governing adjustments: they have to watch over their finances and make sure they have the resources to meet their payroll, even as he acknowledged that repairing the finances in battered municipalities economically will take time, and said that, for this, the project will include some scales and grace periods to attain that fiscal solvency, noting: “The legislation we can approve, but, to get to the point where we would like to be, it will take years.”

For the president of the Association of Mayors, Rolando Ortiz, who has served as the Mayor of Cayey for a decade, after previously serving as Member of the Puerto Rico House of Representatives from 1993 to 1997, and being reelected in 2012 with 73.29% of the votes–the largest margin of victory for any mayor in that election, the assistance provided by the municipalities to the central government to face the crisis that the country is going through is the best way to see the urgency of empowering the municipalities via this legislation—or, as he put it: “If it were not for the municipalities, I assure you that the crisis would be monumental. We have been patrolling rural roads to ensure there are no trees on the road that impede the mobility of the family.” Mayor Ortiz agreed that the proposal includes hierarchy levels, so that municipal executives comply with minimum responsibilities and mandates which allow them to reach the maximum level: “It can be a strategy to prioritize the process from the perspective of land management, but it cannot take as an only category the element of the organization of the territory, but also the efficiency in public performance, economic capacity, efficiency in the service,” adding he has not heard “any Mayor in opposition to that proposal.” His colleague, Bayamón Mayor Ramón Luis Rivera Cruz, was more reserved when addressing the issue. Although he had no objections to the establishment of the project or to what has been proposed, he indicated that there were other mechanisms to prevent state governments from harming the municipalities that reached the maximum level of hierarchy—as well as other issues which must be addressed, such as the limitation on the collection of patents and the contribution on property. 

Senate President Rivera Schatz indicated the Senate is working on several amendments to the Autonomous Municipalities Law, and that some have already been established or approved, as a preamble to what will be the final project, noting: “We are going to discuss it with all the municipal governments to achieve a consensus project of what the procedure and the route will be.”

In response to a query whether the PROMESA Board could interfere, he noted that every government operation has a fiscal impact, so that he was seeking to create a positive: “It proposes efficiency, capacity to generate more collections, so who could oppose that?” Maybe, the Board. To me, honestly, I do not care in the least what anyone on the Board thinks.” Asked what would happen if the PROMESA Board proposed for the elimination of municipalities, he noted that the Board can say what they want and express what they want, but they will not eliminate municipal governments, they will not achieve it, because in Puerto Rico that would be untenable.

Unreform? Even as Puerto Rico’s state and local leaders are grappling with fiscal governance issues and recovering from the massive hurricane with far less fiscal and physical assistance than the federal government provided to Houston and Florida, there are growing apprehensions about disparities in the final tax “reform” legislation scheduled for a vote as early as today in the U.S. House of Representatives—concerns that the legislation might impose a new tax on Puerto Rico and other U.S. territories, with non-voting Rep. Jennifer González Colón (Puerto Rico) expressing apprehension that bill will impose a 12.5% tax on intangible property imported from foreign countries—and that, under the legislation, Puerto Rico and other U.S. territories would be treated as foreign countries. El Vocero, last Friday, on its news website reported that Rep. González Colón (R-P.R.) said the planned tax bill treated Puerto Rico like a colony: the taxed intangible assets would include items such trademarks and patents generated abroad, tweeting that “The tax reform benefits domestic, not foreign companies…While we are a colony, there will be more legislation like this passed…Unfair taxes show a lack of commitment and consistency from leadership in Congress; showing true hypocrisy.” The Federal Affairs Administration of Puerto Rico last Friday released a statement calling for the tax bill to be changed and for additional aid to recover from Hurricane Maria, noting the conference report could “destroy 75,000 jobs and wipe out a third of [Puerto Rico’s] tax base.” Howard Cure, director of municipal bond research at Evercore, noted that for Puerto Rico, still trying to recover from Hurricane Maria, and with a 10.6% unemployment rate: “Obviously, any tax law change that makes Puerto Rico less competitive for certain industries to expand or remain on the island is a negative for bondholders who really need the economy to stabilize and grow in order to help in their debt recovery.” Similarly, Cumberland Advisors portfolio manager and analyst Shawn Burgess said: “My understanding is that this would impact foreign corporations operating on the island and not necessarily U.S. companies. However, it is a travesty for Congress to treat Puerto Rico as essentially a foreign entity at a time when they need all the assistance they can get. Those are U.S. citizens and deserve to be treated as equals…Leave it to Congress to shoot themselves in the foot: They had voiced their support for helping the commonwealth financially, and they hit them with tax reform terms that could be a detriment to their long-term economic health.” Similarly, Ted Hampton of Moody’s noted: “In view of Puerto Rico’s economic fragility, which was exacerbated by Hurricane Maria, new federal taxes on businesses there would only serve as additional barriers potentially blocking path to recovery. In creating the [PROMESA] oversight board, the federal government declared its intention to restore economic growth in Puerto Rico. New taxes on the island would be at odds with that mission.”

  • 936. More than a decade ago, former House Speaker Newt Gingrich (R-Ga.) reached an agreement with former President Bill Clinton to allow the phasing out of section 936, the tax provision with permitted U.S. corporations to pay reduced corporate income taxes on income derived from Puerto Rico—a provision allowed to expire in 2006—after which the U.S. territory’s economy has contracted in all but one year—a tax extinguishment at which m any economists describe as the trigger for the subsequent fiscal and economic decline of Puerto Rico. Thus, as part of the new PROMESA statute, §409, in establishing an eight Congressional-member Congressional Task Force on Economic Growth in Puerto Rico, laid the foundation for the report released one year ago, in which the section addressing the federal tax treatment of Puerto Rico, noted: “The task force believes that Puerto Rico is too often relegated to an afterthought in Congressional deliberations over federal business tax reform legislation. The Task Force recommends that Congress make Puerto Rico integral to any future deliberations over tax reform legislation….The Task Force recommends that Congress continue to be mindful of the fact that Puerto Rico and the other territories are U.S. jurisdictions, home to U.S. citizens or nationals, and that jobs in Puerto Rico and the other territories are American jobs.” Third, the task force said it was open to Congress providing companies that invest in Puerto Rico “more competitive tax treatment.” Thus it was last week that Governor Ricardo Rosselló tweeted that people should read the Congressional leadership’s “OWN guidelines on the task force report. Three main points, did not follow a single one.” The tweet recognizes there are no provisions in the legislation awaiting the President’s signature this week to soften the impact of the new modified territorial tax system—a system which will treat Puerto Rico as a foreign country, rather than an integral part of the United States, a change which Rep. Jose Serrano (D-N.Y.) this week predicted would act as a “a devastating blow to Puerto Rico’s economic recovery…Thousands more businesses will have to leave the island, forcing thousands Puerto Ricans to lose their jobs and leave the island.” Indeed, adding fiscal insult to injury, House Ways and Means Committee Chair Kevin Brady (R-Tx.) admitted that the “opportunity zone” provision in the House version of tax reform authored by Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s nonvoting member of the House of Representatives, to make Puerto Rico eligible for designation as a new “opportunity zone” that would receive favorable tax treatment, was stripped out because it would have violated the Senate’s Byrd Rule, the parliamentary rule barring consideration of non-germane provisions from qualifying for passage by a simple majority vote instead of a 60-vote super-majority. Adding still further fiscal insult to injury, the latest installment of emergency funding for recovery from hurricanes which hammered Puerto Rico, the U.S. Virgin Islands, Florida, and Houston had been expected this month; however, those fiscal measures have been deferred to next year in the rush to complete the tax/deficit legislation and reach an agreement to avoid a federal government shutdown this week. (The Opportunity Zone proposal was included in the Senate version of tax reform, adopted from a bipartisan proposal by Senators Tim Scott (R-S.C.) and Cory Booker (D-N.J.) which would defer federal capital gains taxes on investments in qualifying low-income communities—under which all of Puerto Rico could, theoretically, have qualified as one of a limited number of jurisdictions. As the ever insightful Tracy Gordon of the Tax Policy Center had noted: part of the motivation for the opportunity zone designation had been to stem the migration of residents, which has accelerated since Hurricane Maria areas getting the designation throughout the United States. To qualify, the area must have “mutually reinforcing state, local, or private economic development initiatives to attract investment and foster startup activity,” and must “have demonstrated success in geographically targeted development programs such as promise zones, the new markets tax credit, empowerment zones, and renewal communities; and have recently experienced significant layoffs due to business closures or relocations.” Thus, Ms. Gordon notes: “There’s a concern you are basically taking away an incentive to be in Puerto Rico which is this foreign corporation status.” The tax conference report simply ignores the recommendation last year by the bipartisan Congressional Task Force on Economic Growth in Puerto Rico to “make Puerto Rico integral to any future deliberations over tax reform,” not acting on the recommendation for a permanent extension of a rum cover-over payment to Puerto Rico and the U.S. Virgin Islands the revenues of which have been used by the territories to pay for local government operations; last year’s Congressional report had warned that “Failure to extend the provision will cause harm to Puerto Rico’s (and the U.S. Virgin Islands’) fiscal condition at a time when it is already in peril.’’ Similarly, the conference report includes no provisions addressing the task force’s recommendation that the federal child tax credit include the first and second children of families living in Puerto Rico, not just the third as specified under current law.

What Municipal Fiscal Items Might Be Found in Stockings?

December 11, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

November 28, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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

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

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

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

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

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

Fiscal & Physical Storm Recoveries

October 30, 2017

Good Morning! In today’s Blog, we consider, again, the spread of Connecticut’s fiscal blues to its municipalities; then, we observe the lengthening fiscal and human plight of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Price of Solvency. Ending months of fiscal frustration, the Connecticut House of Representatives late Thursday provided its strong, bipartisan endorsement (126-23) to two-year, $41 billion state budget which closes a gaping deficit, rejects large-scale tax increases, and seeks to bolster the state’s future fiscal stability. Notwithstanding, S&P Global Ratings, the following day, issued its own fiscal storm warnings that it is a budget which will still leave the state’s municipalities at fiscal risk. Governor Dannell Molloy has not yet said if or when he might sign that budget into state law; however, because it passed both Houses by veto-proof margins, the question is no longer “if,” but rather: what will it mean for the state’s municipalities? Thus, S&P warned:  “We note that virtually all local governments will see some reductions to state aid, while only a few—typically those with the greatest economic challenges—will see flat year-over-year state aid.” Similarly, Conn. House Majority Leader Matt Ritter (D-Hartford) told his colleagues: “We’re at the end of a journey: This budget offers needed reforms, but also some immediate comfort that is so needed by a lot of our residents and our towns…In the darkest of days…we found a way to pull through.”

As adopted, the budget bill provides financial assistance to eastern Connecticut homeowners dealing with crumbling foundations, reduced funding for UConn, offers $40 million to help the City of Hartford avoid filing for Chapter 9 municipal bankruptcy. The Connecticut Conference of Municipalities Executive Director Joe DeLong, in the League’s initial analysis of the municipal impact of the bipartisan budget agreement, noted: “Municipal leaders acknowledge the difficult choices made by state leaders in forging this bipartisan budget agreement and the impact they have on the lives of Connecticut residents: The actions taken by State leaders to support cities and towns protects the interests of residents and businesses across the state and for that we are grateful.” With the State facing a $5 billion biennial budget deficit, the state budget agreement spares towns and cities from the draconian cuts set to roll out under the Governor’s Executive Order and includes many significant structural reforms that municipalities have been advocating for years. Mr. DeLong added that the final budget agreement provides for numerous municipal reforms sought by the League last January in its groundbreaking public policy initiative, “This Report Is Different.”  

Connecticut House Speaker Joe Aresimowicz noted: “Leaders do things that are maybe not in their best interests, or may be against their own beliefs, in an effort to do what’s right. And I think that was done,’’ as Rep. Toni Walker (D-New Haven), Co-Chairwoman of the appropriations committee, described the bill as a significant step toward closing a $3.5 billion deficit over the next two years and righting the state’s wobbly finances for decades to come: “I want everybody to understand we must recalibrate the financial future of Connecticut, for our families and for our businesses and this budget begins that process.’’

As adopted, the budget does not increase income or sales tax rates, although it raises hundreds of millions of dollars in revenue via an assortment of smaller measures, such as higher taxes on cigarettes, a $10 surcharge on motor vehicle registrations to support parks, and new fees on ride-sharing companies, such as Uber. On the other hand, the final agreement rolled back proposed taxes on cellphone plans, second homes, and restaurant meals. In the end, small tax increases represent just .85 percent of the budget; fee hikes constituted an even smaller contribution .11%. On the revenue side, the new budget proposes the elimination of a property tax credit for many middle-income homeowners, raises the cigarette tax, and sweeps $64 million from a clean energy fund.

In the wake of the passage, S&P Global Ratings indicated it would review the state’s municipal bond rating, but noted the municipal impact, citing the $31.4 million cut to the Education Cost Sharing Grant, the primary state grant which goes to cities and towns to help operate their schools—albeit, the cut is to be nearly fully restored next year, and distributed using an updated formula which more heavily favors the state’s lowest-performing school districts. The adopted budget also rejected Gov. Malloy’s proposal to mandate that the state’s cities and towns assume some fiscal share of the state’s soaring contributions to the teachers’ pension fund. Nevertheless, the budget was less generous to municipalities on the revenue front: the 2015 state plan to share sales tax receipts with cities and towns is all but eliminated in this budget, which officially ends the diversion of these receipts into a special account: the last remnants of a program which was supposed to distribute more than $300 million per year in sales tax receipts are: A “municipal transition grant” worth $13 million in FY 2017 and $15 million for next year. Similarly axed: a $36.5 million payment this year to offset a portion of the funds communities with high property tax rates lose because of a state-imposed cap on motor vehicle taxes: the new budget would cut $19 million in each year from grants that reimburse communities for taxes they cannot collect on exempt property owned by the state and by private colleges, hospitals and other nonprofit entities.

The adopted budget, however, from a municipal perspective, proposes to revise the prevailing wage and binding arbitration systems: municipalities would have greater flexibility to launch more publicly financed capital projects without having to pay union-level construction wages, and arbiters would have more options when ruling on wage and other contract issues involving municipalities and their employees.

Nevertheless, S&P noted: “Since new state revenue measures would have less than a year to be collected, this may leave the state without the available resources to fully appropriate for these (municipal grants),” adding: “The length of the budget impasse underscores the state’s struggling financial health.” The rating agency last month had already placed nine Connecticut municipalities and one school district on a “negative” credit watch, warning it could lead to a rating downgrade within 90 days unless their fiscal outlook improves, citing the uncertainty of Connecticut’s ability to maintain existing levels of municipal aid, reinforcing Moody’s moody outlook earlier this month when it warned that the state actions could lead to lower bond ratings for 51 municipalities and six regional school districts, placing ratings for 26 cities and towns and three regional school districts under review for downgrade, and assigning negative outlooks to an additional 25 municipalities and three more regional school districts. For its part, S&P warned: “In the end, if state fiscal pressures persist, all local governments in Connecticut will continue to be affected…and the degree of credit deterioration will depend on each government’s level [of] budgetary reserves and ability to adapt.”

Underpowered. House Natural Resources Committee Chairman Rob Bishop (R-Utah) said he does not want to “come to conclusions” before he has all the information regarding the controversial $300 million contract of the Montana-based company, Whitefish Energy Holdings, with the Puerto Rico Electric Power Authority (PREPA); nevertheless, Chairman Bishop has given PREPA Chairman Ricardo Ramos until this Thursday to submit a series of documents related to the contract with the company—a company whose largest project prior to Hurricane Maria was $ 1.3 million in the state of Arizona—especially in the wake of the contract award here made without bidding—ergo triggering a series of questions and requests for investigations by the Office of  Inspector General and from the Government Accountability Office (GAO). Chairman Bishop was part of the Congressional delegation with House Majority Leader Kevin McCarthy (R-Ca.) and Deputy Minority Leader Steny Hoyer (D-Md.), as well as Puerto Rico resident Commissioner in Washington, D.C., Jennifer González. House Speaker Paul Ryan ((R-Wis.) who had earlier visited the town of Utuado, known as “El Pueblo del Viví,’ which was founded in 1739 by Sebastían de Morfi, and derives its name from a local Indian Chief Otoao, which means between the mountains, to see first-hand the devastation caused by Hurricane Maria—in the wake of which he noted: “Our committee, like other groups, will investigate and we will know what is behind the Whitefish contract. I do not know enough right now to come to a conclusion against or in favor, but that’s the idea, to know the details and how it happened.”

The Chairman was not alone: the Federal Agency for Emergency Management (FEMA) has released a statement making clear that agency’s concerns about certain aspects of the contract, including an absence of certainty that some prices were even “reasonable,” in apparent reference to the hourly pay of some employees of the company. FEMA also warned that entities that fail to meet FEMA requirements may not see their expenses reimbursed. Nevertheless, Chairman Bishop said he will not “let” any concern of FEMA “get in the way…FEMA will do its job,” he insisted when asked if he was worried that FEMA would not reimburse the Puerto Rico government for payments to Whitefish. (Last night, Governor Ricardo Rosselló Nevares confirmed that he was about to receive a report he had requested from the Office of Management and Budget about the contract.).

Chairman Bishop noted that, as a result of the destruction caused by Hurricane Maria, he is considering possible changes to the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), albeit, when asked about specific changes, he limited himself to saying that the Oversight Board “does not need more authority;” rather, he said, the focus now needs to be on the provision of power and drinking water. Asked by Majority Leader McCarthy whether the devastation he had witnessed makes him think that the aid mechanism for Puerto Rico should change, he answered that “a lot of infrastructure is needed, and we have to lift the electrical system…I spoke with (Minority Leader) Steny Hoyer. I do not think it would be the best use of taxpayers’ money to build the same grid that we had. We need a 21st century one that is more efficient and effective and we can do it with more transparency,” albeit he was unclear what he meant by transparency. Rep. Hoyer noted: “We know there is an urgency,”  adding the delegation needed to all go back to Washington, D.C. to work together, but “we need an urgency to fix the electrical system and for power to reach the whole island. Governor Rosselló Nevares, who accompanied them on the tour, has said that if the quality of life in Puerto Rico does not reach what it should be: “People will be disappointed, and they will leave.”