Unretiring Municipal Fiscal Challenges

May 22, 2018

Good Morning! In this morning’s eBlog, we return to the small municipality of Harvey, Illinois, where an aging population has fiscally sapped the town’s treasury, before exploring the disparate hurricane response treatment for Puerto Rico.

Municipal Pension Insolvency? In the Land of Lincoln, ranked the most financially unstable state in the nation according to a new S.S. News and World Report ranking by McKinsey & Co., some Illinois legislators are considering rolling back enforcement of a 2011 pension delinquency statute to help other Illinois municipalities avoid Harvey’s fiscal and physical dilemma between municipal taxes and public safety (Harvey underpaid its police and fire pensions by $2.9 million in 2016.)—with the efforts in Springfield coming in the wake of state action setting a precedent in retaining tax revenues it had collected to distribute to Harvey, because the small municipality had failed to make its pension payments. Indeed, so far this year, in the wake of the court’s decision withholding tax revenues collected by the state on behalf of Harvey; the Illinois Comptroller, in the wake of a court decision, has withheld more than $1.8 million in tax revenues from Harvey, forcing the city to lay off firefighters and police officers.

In response, State Sen. Napoleon Harris (D-Harvey) has proposed a bill, 40 ILCS 5/4-109, which would defer those tax revenue collections back to 2020; his bill would also create exceptions for distressed communities, such as Harvey, as Sen. Harris reminded his colleagues: “There’s going to be many other municipalities unable to pay these skyrocketing pension costs as well as continue to [provide] the public services that the citizens need and demand,” as he testified before the Illinois Licensed Activities and Pensions Committee, which approved amendments to his bill. The legislative action came as analysts at Wirepoints, an Illinois government watchdog group, have warned that Harvey is not alone—finding there to be more than 200 municipalities at similar risk of state tax withholdings in order to ensure the continuity of pension payments—payments protected under the Illinois Constitution. To date, Danville, the County seat of Vermillion County, a municipality of about 31,600 120 miles south of Chicago; East St. Louis, and Kanakee appear to be in the most desperate fiscal binds. In Danville, the municipality recently adopted a fee, the revenues for which would go directly to finance the municipality’s public pension obligations; Kanakee’s leaders voted to raise taxes.

In response to the fiscal and equity crisis, both Republicans and Democrats in the Illinois Legislature have questioned why there was no state oversight of delinquent municipalities like Harvey; nevertheless, Sen. Harris’ proposed legislation has been reported to the full Illinois Senate—that in a state ranked the most financially unstable in the country by U.S. New and World Report, based upon McKinsey & Company’s 2018 ranking of the nation’s most fiscally unstable states: the report considered credit rating and state public pension liability to rank states on long-term stability; for the near term, the report measured each state’s cash solvency and budget balance. Indeed, Illinois’ public pension debt, currently estimated at $130 billion, but measured as high as $250 billion by Moody’s last summer, was a factor in Moody’s analysis. Even Illinois Gov. Bruce Rauner recognizes the epic scope of the fiscal problem, describing Illinois as the most financially unstable state in the nation.

For Illinois legislators, the fiscal dilemma is made more difficult by what Illinois State Sen. Bill Haine (D-Alton) reminded his colleagues: “We’re gonna see in the paper that the state waives the amounts due, and then they’re going to read that the Aldermen there are getting paid $100,000 a year,” even as he, nevertheless, voted for the bill. (In FY2017, the City of Harvey allocated $240,000 in wages for six aldermen—wages which did not account for public pension contributions and other “fringe benefits” that the budget lists—or, as Michael Moirano, who represents the Harvey Police Pension fund put it: “We cannot continue to do that and hope to resolve these pension issues,” adding that even though negotiations are underway to reach an agreement with the City of Harvey, the proposed “bill will make a mutually agreeable resolution impossible.”

Meanwhile in Springfield, where Illinois Comptroller Susana Mendoza has certified Harvey’s delinquency, a spokesperson noted: “The Comptroller’s Office does not want to see any Harvey employees harmed, or any Harvey residents put at risk…but the law does not give the Comptroller discretion in this case.” Similarly, Sen. Harris told his colleagues: “There’s going to be many other municipalities unable to pay these skyrocketing pension costs as well as continue to [provide] the public services that the citizens need and demand.”

Powering Up? For more than a week, Puerto Rico’s non-voting U.S. Representative Jennifer Gonzalez has been urging  FEMA to extend the contract under which mainland power crews have been helping repair the U.S. territory’s power grid—a request that FEMA has denied, meaning that line restoration crews hired by the U.S. Army Corps of Engineers will work to restore power in Puerto Rico, leaving the rest of the job to crews working for Puerto Rico’s public utility, PREPA, as, eight months after Hurricane Maria’s devastation, as many as 16,000 homes remain without power. With the Corps’ current work force of about 700 line workers scheduled to end their service this Friday, time is running out. Officials for PREPA and the U.S. Army Corps of Engineers, the agency which hired the mainland contractors at FEMA’s request, have reported they expect everyone on the island to have power restored by the end of this month—the day before the official start of the Atlantic hurricane season. However, in her urgent extension request, Rep. Gonzalez expressed doubts that PREPA had the resources to complete the job quickly, writing: “I must urge that there be an extension of the mission that allows agency and contract crews to remain in place to see that the system is 100 percent restored.”

There appear, however, to be some crossed governance wires: Mike Byrne, who is in charge at FEMA of the federal response, wrote last Thursday that his decision not to extend the line restoration contract came “per the direction provided by the Energy Unified Command Group and confirmed by the PREPA Chief Executive Officer,” Walter Higgins. (The Energy Unified Command Group is the multi-agency group coordinating the power restoration effort, comprising FEMA itself, the Army Corps, which reports to FEMA, and PREPA.) In addition, it appears that some of the most challenging work awaits: sites still waiting for power are among the most difficult to reach because of mountainous and forested terrain. They include areas in the municipalities of Arecibo, Caguas, Humacao, and in Yabucoa, the city where Hurricane Maria made its initial, destructive landfall–a municipio founded in October 3, 1793 when Don Manuel Colón de Bonilla and his wife, Catalina Morales Pacheco, donated the lands to the people.

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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.

Federalism obstacles to Puerto Rico’s Fiscal and Physical recovery.

February 28, 2018

Good Morning! In this morning’s eBlog, we consider the federalism obstacles to Puerto Rico’s fiscal and physical recovery.

Puerto Rico’s Obstacles to Recovery. 78 mayors are set to meet today with Governor Ricardo Rossello Nevarez and representatives of the Army Corps of Engineers to discuss the delay in the restoration of the island’s energy system—a meeting at which they intend to present the Governor with other problems they confront in their municipios or municipalities in the wake of the hurricane. Since last November, and only weeks after the goal to restore 95% of power by last Christmas has fallen way short, the government yesterday reported restoration had reached over 84%; however, the figures did not make clear whether that percentage reflected generation or subscribers with electricity. Today’s session is focused on providing the Governor the opportunity to make clear his concern that the Corps has so far not addressed the island’s issues and to receive a full explanation why not and “how to correct the situation that is still serious,” according to Rolando Cruz, the president of the Association of Mayors and first executive of Cayey. Also participating are the Mayor Francisco López López of Barranquitas and William Alicea of Aibonito, said that although their primary claim is the restoration of light, their concerns are broader. The key concern relates to the perceived inability, to date, of help from FEMA—especially with regard to bridges and highways, mental health of affected citizens, and the dire challenges of so many who have lost their homes or suffered unaffordable damages—and who have been unable to prove ownership of their property—or, as Mayors López López put it: “Here in the mountains, we are still going through very difficult situations: sectors without electricity, without drinking water, roads destroyed.” The apprehension is, if anything, worsening: yesterday, Governor Rosselló Nevares denounced the decision by the U.S. Treasury to reduce, without explanation, the amount of initial financing of $4,700 million by more than half to $2,030 million from the line of Congressionally approved credit for Puerto Rico. In his letter to Congressional leaders, the Governor wrote that the U.S. had “effectively blocked access to some $4.7 billion from the CDL (Commercial Driver’s License) program,” urging intervention to avoid “further damage and suffering to the residents of Puerto Rico,” noting that any material interruption of public services would only exacerbate the emigration of its population to the continental United States. He added that the Treasury has imposed conditions incompatible with the purpose of the program, while criticizing that the federal agency has canceled the ability to cancel any CDL issued to Puerto Rico “in clear contravention of the applicable law,” writing that the U.S. territory is approaching spring in the same precarious fiscal situation, with the possibility that the Treasury will cancel federal aid approved by law,” notwithstanding the Financial Advisory Authority and Fiscal Agency’s compliance with each request from Treasury. His epistle noted that despite the immediate cooperation of the agency, the Treasury did not provide the agency with economic terms or other material terms for the CDL program (In an effort to help Puerto Rican citizens relocating to the mainland in the wake of hurricanes Irma and Maria, the Federal Motor Carrier Administration had waived certain requirements in an effort to help them obtain commercial learner’s permits or commercial driver’s licenses: according to the Governor, last January 9th, the Treasury and FEMA had sent a letter to the local government regarding the implementation of a cash balance policy in order to facilitate access the CDL financing—but a letter requesting Puerto Rico to exhaust its own resources before the Treasury and FEMA would provide access to CDL program funds.

Chapter Nueve? Even as Puerto Rico is struggling to address its severe physical challenges, notices with regard to the deadline for filing proofs of claim in Puerto Rico’s five Title III bankruptcy cases are going out this week, as U.S. Judge Laura Taylor Swain had set a Monday deadline for the notices to be delivered. Notwithstanding, and not to be blamed on the mailman, FAFA Executive Director Gerardo Portela Franco reported the notices would start to be sent out this week—with five of the Title III entities having at least $52.5 billion in debt outstanding, in what has now become  the largest quasi municipal bankruptcy in U.S. history: the notices in question will inform creditors that they will have until May 29th to file a proof of claim in the cases. The debt issuers here include: the Commonwealth of Puerto Rico, the Puerto Rico Sales Tax Financing Corp. (COFINA), the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, the Puerto Rico Highways and Transportation Authority, and the Puerto Rico Electric Power Authority. Responding will matter: those who fail to file a timely-filed proof of claim or trustee proof of claim will lose any claim for compensation for their municipal bonds, as well as their rights to vote on any plan of debt adjustment. Indeed, yesterday, PREPA bond trustee U.S. Bank National Association posted a notice to EMMA stating it planned to file a proof of claim on behalf of the bondholders, specifying: “[I]f you believe that you may have separate or additional claims against the Authority other than the claims with respect to principal, interest and other amounts owing on your bonds or have claims against other Title III debtors or other persons or entities concerning your bonds or otherwise, you should consult with your legal professionals regarding those claims and take appropriate action within the applicable time period.”

On the physical, as opposed to the fiscal storm front, in the wake of the U.S.’s worst blackout in American history, the complicated and costly effort for a quasi-chapter 9 entity, major chunks of infrastructure and power restoration appears to have reached a plateau: while most, today, have electricity, it is unclear how much longer those in the dark will have to wait. Jay Field, a spokesman for the U.S. Army Corps of Engineers, notes: “The bulk of the work that is left is the hardest, requiring helicopter support and long commutes to remote, hard-to-access job sites…Weather is also an issue due to rain and heavy winds.” Last week, Puerto Rico’s unified grid-restoration command reported it expects to have 90 to 95% of the territory’s power restored by March 31st: it estimates that the hard-hit municipality of Arecibo will have its electricity restored by mid-April, and the municipality of Caguas by late May. He offered no timeline for other darkened municipios. A critical part of the physical recovery challenge has been the complicated overlapping lines of authority, as well as Puerto Rico’s insolvency: even though the U.S. Army Corps is in charge of overall recovery, PREPA has been in charge of much of the repair work—a Puerto Rican authority which is $9 billion in debt—and which, last week, suffered a fiscal blow when Judge Laura Taylor Swain  rejected its plea for a $550 million loan—leading the utility to respond it would start reducing output at some of its power plants, because it could not afford fuel. In its court filing, the utility stated that the scenario “exacerbated the risk to an already fragile system and leaves it vulnerable to outages and resulting in brownouts on the island.” That work involves nearly 6,000 repair workers now on the island, but where, seemingly on a daily basis, the workers keep finding new problems.

As of last Wednesday, 343,000 electricity customers were without grid power, the lowest number yet: in the wake of the storm, there were nearly 1.6 million customers experiencing a blackout. So, on the one hand, there has been significant progress; however, much of the progress has been followed by drops, as PREPA’s old and fragile grid has occasionally failed and plunged swaths of newly restored customers back into darkness. Most recently, a fire at a substation two weeks ago, for instance, plunged more than 343,000 and much of the capital of San Juan into darkness. Thus it means, still today, that thousands of homes and businesses are running either full or part-time on backup diesel generators—meaning those families or businesses are running generators, forcing them to pay for fuel. For PREPA, the challenge is aggravated by the uncertainty with regard to certainty about how many customers are without grid power: from the onset of Maria until early November, PREPA gave a rough estimate; then it simply stopped trying: the damage to the grid was so extensive that the utility could simply no longer determine  how many of its customers were drawing electricity. It was only near the end of last month that PREPA started reporting its percentage of “normal peak load” which had been restored. Nevertheless, that reporting indicates the percentage of power restored has risen from 19% in early October to almost 84% last week. Yet, even that restoration has been unreliable: even though parts of PREPA’s grid have crashed on numerous occasions during the recovery, only a few of those outages are shown by the data—a deficiency, because power was often restored within hours or days and, ergo, was not captured in the weekly reports.

Another serious challenge has been substations: Puerto Rico has 342 distribution substations, which convert power from transmission to distribution use: improvement has occurred slowly since November, but has been basically flat in 2018: the grid’s 56 transmission substations have seen no improvement since December: these stations step up voltage for long-distance delivery or prepare it for transport along transmission lines of different voltages. Progress is a challenge: Fernando Padilla, a senior PREPA adviser, reported that damage to the substations still offline was so devastating that they need to be rebuilt from the ground up: “A portion of the substations, specifically those that are close to where the eye of the hurricane passed, remain totally destroyed. Those require complete reconstruction (engineering, design, mitigation, etc.)…The PREPA system has points of interconnection that permit energy to be carried through various zones without having to pass by these particular substations: This isn’t the norm, and it augments the risk to the reliability of the system. But in general, it can be done.”

Let there Be Light & Emergency Relief

February 12, 2018

Good Morning! In today’s Blog, we consider the courtroom efforts to secure emergency relief so that electric service is not disrupted in Puerto Rico—threatening critical services and the island’s only hopes for recovery from its quasi chapter 9 municipal bankruptcy.

Dark Fiscal Imbalances.  U.S. District Judge Laura Taylor Swain last night rejected a motion filed by the PROMESA Oversight Board for the central government to grant an emergency loan to the Electric Power Authority (PREPA), indicating that the federal agency failed to demonstrate the need for this financing although there is an immediate need for liquidity, albeit, she indicated the Board may file a new amended motion requesting a lesser amount and make adjustments to clarify the payment priority that financing will have without affecting the rights of the creditors—with her ruling coming down in the wake of a six and a half hour hearing at which the court was unconvinced of their respective arguments that PREPA needed the nearly $1 billion it had requested in its initial motion. Judge Swain indicated that any new financing requested should not exceed about $ 300 million—telling the court: “The lights cannot be turned off in Puerto Rico,” as she advised the parties she will need a clearer understanding of the priorities for any new financing. She made that ruling notwithstanding the warning from PREPA financial advisor Todd Filsinger, who advised the court that if a loan were not received as soon as possible, PREPA would be forced to activate its emergency plan to begin the cessation of operations and an eventual suspension of electric service.

The courtroom drama came as the Chief Financial Advisor of the Electric Power Authority (AEE), Todd Filsinger, yesterday indicated that the public corporation intends to implement an emergency plan starting today which could lead to the suspension of its employees as well as disruption of the operations of its generating plants—actions which would force the “rationing” of electric services, likely plunging homes, businesses, and industries into darkness” an emergency loan from the central government.  Mr. Filsinger made clear that should the plan be triggered, there would be a warning, as early as this morning, followed by a rolling suspension of operations, and a gradual suspension of employees; services to hospitals, police stations, firefighters, and gas stations would continue.

PREPA is seeking a loan of as much as $1.3 billion—a request the Board did not reject out of hand, but rather indicated a lesser amount of as much as $1 billion might be considered. In principle, the loan would be around $ 1,300 million, but last night the Board of Fiscal Supervision (JSF), acting on behalf of the government and the AEE, modified its request to about $ 1,000 million. There is urgency: Mr. Filsinger warned that unless PREPA receives an emergency loan by this weekend, the utility would only be able to maintain its operations for several additional weeks, after which it would no longer even be able to pay for the fuel it needs to generate electricity, testifying: “If we do not have the loan, and we do not receive the cash, we could be implementing the contingency measures on Saturday.”

Earlier in the hearing, Joseph Davis, the lawyer representing the Financial Advisory Authority and Fiscal Agency, warned of the fiscal cliff the agency faces, advising the panel it has delayed payments to suppliers as much as possible in an effort to preserve as much of its funds as possible, in attempt to render the cash they have available, but that there will be little option but to trigger additional contingencies, such as rationing services, partly because fuel suppliers have already threatened to halt service. The power authority’s emergency plan would be enforced even as some 400,000 subscribers remain without power, and after approximately 1.1 million subscribers had already experienced the longest interruption of electric service in Puerto Rico’s history in the immediate wake of Hurricane Maria. The threat to human life and safety came as the respective parties in the New York City courtroom—parties representing the Board, bondholders, and Puerto Rico, as well as insurers continued to file motions.

As if these human risks were insufficient, Judge Swain has also been confronted with arguments from contractors, such as ARC, Lord Electric, and Whitefish Holdings, who claim that PREPA must meet its payment obligations for restoration of the electricity grid after Hurricane Maria, as well as bondholders—who, for the most part, live far, far from Puerto Rico, but are seeking compensation for impairment of the rights of municipal bondholders.

The Board, at the end of last month, alleging that PREPA faces losses in excess of $1 billion, had requested Judge Swain to approve a post-requisition loan for the public utility—a loan critical to . According to the motion issued by the JSF, seeking a super priority, as PREPA sought the fiscal and physical capacity to insure its operations until the end of the fiscal year and avoid closing operations this month—in effect, asking the court to provide a super priority of payment to the central government.

Yesterday, in a last-ditch effort to assist the power authority, the Ad Hoc-AEE group and the insurance company, Syncora, which guarantee part of the public corporation’s debt, presented a new financing proposal, a proposal which the oversight Board rejected outright, noting: “The notification of the group of bondholders of the ESA is not a valid proposal and does not have a strong reason to deny the motion for post-petition financing for the PREPA.”

Unequal and/or Inequitable Fiscal & Physical Responses

January 29, 2017

Good Morning! In today’s Blog, we consider the seemingly unending physical and fiscal challenges to Puerto Rico’s fiscal and   physical recovery.

Post Storm Fiscal & Physical Misery. Puerto Rico Gov. Ricardo Rosselló’s proposed privatization of the Puerto Rico Electric Power Authority faces opposition from local political leaders; thus, it may prove to be a tough sell to potential investors: the proposal, which the Governor has presented to privatize PREPA, the public utility burdened with some $8.2 billion of municipal bond debt—and the utility which the PROMESA Oversight Board has put into a Title III bankruptcy process, creating potential hurdles for any plan to alter its ownership, notwithstanding that Board members have expressed support for the idea. For his part, Puerto Rico House Minority Leader Rafael Hernández Montañez said he thought Governor Rosselló was seeking to distract people from his problems with his PREPA privatization proposal: “It’s a way of taking off the heat, on the re-energization of the houses and stores.” That is to write that the Gov. understands that neither the Puerto Rico House nor Senate will approve his proposal—so, Minority Leader Montañez asserts he is just posturing for public support, he said. Members of Gov. Rosselló’s own party in the legislature; moreover, appear to be opposed. Nevertheless, as part of the Title III PROMESA quasi-chapter 9 bankruptcy, parts of the utility appear certain candidates for sale–albeit, this would be a decision made by Judge Laura Taylor Swain—not Governor Rosselló.  

Moreover, there is apprehension that the Governor’s governance proposal would be unlikely to generate any support from investors, either: Tom Sanzillo, Director of Finance at the Institute for Energy Economics and Financial Analysis, noted: “We fail to see how any investor would put money into Puerto Rico with a regulatory system like that proposed by Gov. Rosselló: “He appoints and can fire board members at will. Under the current system, board members have staggered, fixed terms, and can only be fired for cause…This means the whim of every new Governor sets rules and contracts. This makes energy investing highly risky, contracts uncertain, and a politicized investment environment.” Indeed, Tomás Torres, Project Director at the Institute for Competitiveness and Sustainable Economy, believes the Puerto Rico Energy Commission’s oversight should be strengthened, and it should implement any transformation of PREPA.

Jose Rossi Coughlin, Chairman of the Institute for Competitiveness and Sustainable Economy has expressed apprehension about any interruption of key regulatory processes, much less permitting each new Governor to select all commission members when she or he assumes elected office—noting that is not only contrary to widely prevailing mainland U.S. practice, but also likely legally incompatible with Title V of PROMESA. For his part, Mr. Torres notes that with the Governor’s submission, last week, of a bill to eliminate the Energy Commission and substitute in its place a Public Service Commission (which would merge Telecom, Transportation & Public Services, and the Energy Commission), the “The three commissions/boards that are to be merged in this new body add to 15 commissioners, but the new boards will only be of three members…“The recently proposed Energy Commission reorganization and consolidation with other public service regulation would be a huge step backward.”

Moody’s Investor Service was not quite as pessimistic, writing: “The [proposed] privatization itself is positive, because it is another source of capital to help solve PREPA’s fiscal problems; however, there are still challenges; including negotiating a price in an environment of declining Puerto Rico population, investing in rebuilding aging infrastructure, and how PREPA’s pension liability will be handled. The 18-month timeline appears quite aggressive.” For its part, the PREPA Bondholders Group said they would support a “private operator” to “immediately” take over operations, subject to the Puerto Rico Energy Commission oversight. Indeed, in statement sent out by Gov. Rosselló’s office, some representatives of Puerto Rico’s business community indicated their support for the proposal, with Nelson Ramírez of the United Center of Retailers, noting: “The announced changes will allow Puerto Rico to become a competitive jurisdiction, ending a monopoly that discourages investment and the creation of jobs,” albeit, as Puerto Rico Senate Minority Leader Eduardo Bhatia Gautier said, the proposal was a step in the right direction but that “the devil is in the details.”  Leader Bhatia-Gautier, a co-founder and former editor of the Stanford Journal of Law and Policy, with previous service as a law clerk at the U.S. Court of Appeals for the First Circuit in Boston, as well as Chief of Staff for the resident Commissioner of Puerto Rico in the U.S. Congress, is the 15th president of the Senate of Puerto Rico, where he has focused on the U.S. Territory’s fiscal system and authored a comprehensive energy reform law. Now, he asserts that Puerto Rico’s electrical system should be decentralized into 20 to 25 micro grids, and believes that, with federal assistance, Puerto Rico should try for widespread installation of solar panels on rooftops. Nevertheless, as he notes: even though the Governor and the Puerto Rico legislature will privatize PREPA, the reality is that Judge Swain will have to be involved.

Power to the Muncipio? Jayuya Mayor Jorge L. González Otero, a muncipio founded in 1911, at a time it featured a population of around 9,000, was certain that power would be restored to close to 10,000 residents of his northwest coast municipality of around 88,000, on Saturday. Some 35% of residents in Arecibo do not currently have electricity, he reported, albeit, he said he had received word from PREPA that one of the region’s substations, Charco Hondo, would receive a generator from the U.S. Army Corps of Engineers to power a temporary micro grid while repairs on the substation continue. The muncipio, which, at its founding, was separated from the larger cities of the coasts with little to no communication: it was the site of the Jayuya uprising in 1950, in which the Nationalists commenced a revolt against the U.S. Government, when a social worker, Doris Torresola, and her cousins led the group into the town square and gave a speech, declaring Puerto Rico an independent republic. Subsequently, the police station was attacked, telephone lines cut, and the post office burned to the ground. The Nationalists held the town for three days, until it was bombed by U.S. planes, which were supporting a ground attack by the Puerto Rican National Guard. Even though an extensive part of the town was destroyed, however, news of the bombing was not reported outside of Puerto Rico. Today, unsurprisingly, the Mayor notes: “Four months is way too much time for people in Puerto Rico to not have energy. All of us, the representatives, the mayors, the people, the senators, have to raise our voices to get things done.”

In fact, last month, he had reached an agreement with PREPA to temporarily restore power by means of the micro grid: last Saturday, the Mayor planned to tour the substation with PREPA’s interim director, Justo González, as the generator was being installed. However, in another example of the dysfunction which has plagued Puerto Rico’s recovery, there was no sign of the generator, nor even PREPA’s interim director at the Charco Hondo substation—meaning thousands of Arecibo’s residents remained in darkness, just like nearly one-third of all Puerto Ricans: more than one million U.S. citizens—darkness wherein there is no remote contemplation of when power might be restored: a spokesperson for PREPA told BuzzFeed News that the U.S. Army Corps of Engineers was overseeing the project and providing the generator. A Corps spokesperson indicated that after a second inspection of the site, the Corps had determined there was too much damage to the nearby power lines to allow the generator to be safely switched on as planned; rather, he said contractors will “begin installing” the generator over the weekend, but that it will not become operational, albeit the Corps is unable to provide “definitive time” when it will.

Renogiaciones. The Fiscal Agency and Financial Advisory Authority reports that Puerto Rico’s decision to renegotiate its public debt will cost at least $ 800 million over five years, with FAFAA, relying on an expensive cadre of attorneys, consultants, and financial advisors who have been recruited as part of an effort to cobble together a quasi-plan of debt adjustment which would reduce more than $ 70 billion owed to  Puerto Rico’s bondholders—now the cadre has to translate its fiscal algorithms before Judge Swain’s courtroom. The document, however, fails to specify whether the plan incorporates the budget for either FAFAA or the PROMESA Oversight Board, much less the vast array of advisors and lawyers who have participated in voluntary negotiations, as in the case of the Government Development Bank (GDB)—not exactly as propitious beginning as, for the first time, there is to be an assessment of the actual costs of reducing or cancelling bondholders’ debts, albeit, already, some early estimates are that such costs could exceed $1 billion—the portion of which would redound to U.S. citizens of Puerto Rico, where, in comparison to the different mainland states, Puerto Rico falls far below the poorest mainland state, with 45% of its population living below the poverty line, would be most limited. Nevertheless, despite the seemingly endless process, and despite the PROMESA oversight, or quasi-chapter 9 plan of debt adjustment, there has been as yet, no agreement with any key creditor. Rather, in what many in Puerto Rico would deem noticias falsas, President Trump, last November, reported Puerto Rico was “doing well” and “it’s healing, and it’s getting better, and we’re getting them power, and all of the things that they have to have.” That was in sharp contrast with reality—or, as District Representative José “Memo” González Mercado, of Arecibo put it: “The reality is that we are U.S. citizens, but Donald Trump treats us as second-class citizens.”

Calming the Fiscal Waters

eBlog

January 24, 2017

Good Morning! In today’s Blog, we consider the physical, governance, and fiscal challenges confronted—and overcome, by the City of Flint, Michigan.

Restoring Fiscal Municipal Authority. For the first time in seven years, Flint, Michigan local officials are in control of the city’s daily finances and government decisions after, on Monday, Michigan Treasurer Nick Khouri signed off on a recommendation from Flint’s Receivership Transition Advisory Board (RTAB), the state-appointed board overseeing Flint’s fiscal recovery-to grant Mayor Karen Weaver and the Council greater authority in daily decision-making. Michigan Governor Rick Snyder, seven years ago, preempted local governance and fiscal authority after concurring with a state review panel that there was a “local government financial emergency” in Flint, and that an emergency financial manager should be appointed to oversee the city’s affairs. The Governor ultimately appointed four emergency managers to run the city from 2011 until 2015–two of whom were subsequently charged with criminal wrongdoing related to their roles in the Flint water crisis. In declaring the financial emergency in Flint, state officials said city leaders had failed to fix a structural deficit and criticized city officials for not moving with the degree of urgency required considering the seriousness of the city’s financial problems.

Notwithstanding, the State of Michigan retains authority with regard to certain fiscal and budgetary issues, including approval of the municipality’s budget, requests to issue debt, and collective bargaining agreements. Treasurer Khouri noted:  “Today is an important day for our shared goal of moving Flint forward…Thanks to the progress city leaders have made, this is an appropriate time for the Mayor and City Council to assume greater responsibility for day-to-day operations and finances.” Mayor Weaver noted: “This is an exciting development for the city of Flint…We have been waiting for this for years,” adding the state action will bring the city a step closer to its ultimate goal of home rule through rescinding Michigan’s Emergency Order 20, which mandated that resolutions approved by both Mayor Weaver and the City Council receive the state board’s approval before going into effect.

Mayor Weaver, in the wake of the long saga in which a state-imposed emergency manager had led to a massive physical and fiscal crisis, said she has hopes for the city and state to “officially divorce” by the end of this year, noting that with the appointment of CFO Hughey Newsome last  year, the newly elected City Council, and approval of a 30-year contract with the Great Lakes Water Authority; Flint is both more fiscally and physically solvent: the new water contract is projected to save Flint as much as $9 million by providing a more favorable rate—an important consideration  with GLWA and addresses $7 million in debt service payments the city is currently obligated to pay on bonds issued to finance the Karegnondi Water Authority pipeline under construction.

The city of just over 100,000, with a majority minority population where just under 30 percent of the families have a female head of household, and where 33.9 percent of all households were made up of individuals and just under 10 percent had someone living alone who was 65 years of age or older, finances its budget via a 1 percent income tax on residents and 0.5 percent on non-residents: it has a strong Mayor-council form of government. It has operated under at least four charters, beginning in 1855: its current charter provides for a strong Mayor form of government—albeit one which has instituted the appointment of an Ombudsperson; the City Council is composed of members elected from Flint’s nine wards.

In the wake of ending its water contract with Detroit via a state-appointed emergency manager, its travails—physical and fiscal were triggered: the state appointed  emergency manager shifted to Flint River water as the city awaited completion of a new KWA pipeline—but that emergency manager failed to ensure safe drinking water as part of the switch—a failure which, as we have noted, led to the contamination crisis which poisoned not just the city’s drinking water, but also its fiscal stability—leading to nearly eight years of a state takeover in the wake of Gov. Rick Snyder’s 2011 declaration of a financial emergency within the city.

Even though Gov. Snyder declared an end to Flint’s financial emergency on April 29, 2015, the RTAB, which is appointed by the Governor, had continued to review financial decisions in the city. Discussions with regard to planning the RTAB’s departure from Flint began last August as part of an annual report from the Michigan Treasury Department mandated for Michigan municipalities operating under financial receivership. Thus, Treasurer Khouri’s signature was the final stamp of approval needed to thrust the RTAB unanimous suggestion of January 11th into immediate action, repealing an order mandating that the State of Michigan review all decisions made by the Mayor and Council—and ending a long and traumatic state takeover which caused immense human physical and municipal devastation. It marked the final step from the city’s emergence two years ago in April from the control of a state-imposed emergency manager to home rule order under the guidance of a the state-imposed Board—a board devised with the aim of ensuring a smooth transition by maintaining the measures prescribed upon the emergency manager’s exit. Here, as we have previously noted, the Emergency Manager was appointed by the Governor under Public Act 436 to preempt local elected leadership and to bring long-term financial stability back to the city by addressing any and all issues which had threatened the Flint’s fiscal solvency—but which, instead, first led to greater fiscal stress, and, more critically, to physical harm and danger to Flint’s citizens, thereby jeopardizing the very fiscal help which the state purported to want. Four different individuals served as emergency manager from December 2011 to April 2015: in order, they were Michael K. Brown, Edward J. Kurtz, Darnell Earley, and Gerald Ambrose.

The action repealed Emergency Manager Order No. 20, an order imposed by former Flint Emergency Manager Jerry Ambrose in his final days with the city—an order which mandated resolutions approved by both the Mayor and City Council in order to receive the Advisory Board’s approval, prior to going into effect. as Mayor Weaver put it, the step was a “welcome end to an arranged marriage,” adding: “We are so thankful‒and I’m speaking on behalf of the proud, great city of Flint: the RTAB has been in place for several years now, and one of the things it did represent is that the city was in turmoil and financial distress. And I know over the past two years we have been fiscally responsible… I think it’s absolutely time, and time for the locally elected officials to run the city, and we’ve been anxiously ready to do so….this feels like a welcome way to end an arranged marriage.”

Mayor Weaver noted that the appointment of Hughey Newsome as Flint’s interim chief financial officer, combined with the city’s new Council members and approval of a 30-year contract with the Great Lakes Water Authority, has helped to move Flint in a fiscally and financially solvent direction.

Restructuring, Refinancing, & Repowering in the Wake of a Quasi Municipal Bankruptcy

January 23, 2017

Good Morning! In today’s Blog, we consider the fiscal challenges to the U.S. Territory of Puerto Rico in restructuring and rebuilding its public infrastructure.

Puerto Rico Governor Ricardo Rosselló yesterday announced he will privatize the state Electric Power Authority (AEE), stating: “ESA will cease to exist as it currently operates, and during the next few days the process will start where ESA assets will be sold to companies that will transform the generation system into a modern, efficient and less expensive one for the people.” The Governor’s announcement came at a time when almost half a million users of the system are still without service some 124 days after Hurricane Maria’s stormy passage. 

The privatization of the PREPA has been a priority objective of the Government and the PROMESA Fiscal Supervision Board—indeed, last August, before hurricanes Irma and Maria struck Puerto Rico, Chairman José Carrión, had assured that the privatization would be carried out as soon as possible. Indeed,the Board would have to approve any privatization—and, it seems likely that U.S. District Court Judge Laura Taylor Swain might well have some oversight as the Governor develops the first phase—drafting legislation, and then defining the public procurement process. The Governor, in what appears to be an effort to “kill two birds with one stone,” has also described the sale as one where proceeds would be used to help meet public pension obligations.

In his announcement, Gov. Rosselló explained that the process will take 18 months and will be carried out in three phases: “In the first one, the legal framework will be defined through legislation, the market will be assessed, and the call will be opened for companies interested in participating.” He said that in the second step, bids be received and evaluated; and in the third, the terms of the awarding and hiring of the selected company will be negotiated. In making his announcement, the Governor assured that Puerto Rico’s electrical system is 28 years older than the average for the industry in the U.S., noting: “PREPA has become a heavy burden for our people, who today are hostage to their poor service and high cost, what we know today as PREPA does not work and cannot continue to operate like this.” 

Unsurprisingly, his pronouncement was criticized by different authorities: Independence Party Senator Juan Dalmau described his announcement as a “manipulation” to justify the lack of energy on the island since the hurricane. Mayor Carmen Maldonado of Morovis, a city of some 27,000 founded in 1817, and the island’s only municipality which was not devastated by the 1853 cholera epidemic—a devastation remembered both by your scribe who had cholera in Colombia, but also an event which led to what, today, has become a common expression: “La isla menos Morovis,” [all the island but Morovis]—a phrase believed by most Puerto Ricans to have a negative connotation against moroveños. Morovis Mayor Carmen Maldonado responded that the Governor’s announcement does not offer solutions for those who still do not have service in their homes and businesses, stating: “People are still waiting for a service restoration plan.” 

For her part, San Juan Mayor Carmen Yulin Cruz, known for her criticisms of the Trump administration’s response to Puerto Rico after Hurricane Maria, spoke out against the proposal, noting: on her official Twitter account, that PREPA’s privatization would put the Commonwealth’s economic development into “private hands,” and that the power authority will begin to “serve other interests,” describing it as a “clear” strategy to “create chaos at a time when citizens are in need in order to sell something as positive that will be negative in the long run.” The malingering situation, however, is, according to the most recent report from the U.S. Department of Energy, that some 36% of PREPA customers are still without power four months after Maria caused widespread devastation on the island.