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.”

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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.

Fiscal Economic Dislocation?

January 22, 2017

Good Morning! In today’s Blog, we consider the ongoing federal and fiscal challenges to fiscal recovery for the U.S. territory of Puerto Rico.

‘Twas in another lifetime, one of toil and blood
When blackness was a virtue the road was full of mud
I came in from the wilderness, a creature void of form
Come in, she said
I’ll give ya shelter from the storm ∞ Bob Dylan

Modern Day Okies. Since Hurricane Maria struck Puerto Rico, nearly 300,000 Puerto Ricans have left their homes and fled to Florida. These Americans have fled to other states too, with New York a key new home. The departures raise a host of fiscal challenges, including: for how much longer will FEMA assistance be available to these U.S. citizens? Are these Americans permanent departees from Puerto Rico? In addition, if so, are they predominantly younger, and higher income?

Under the Federal Emergency Management Agency (FEMA) program, FEMA has provided hotel or lodging assistance to evacuees; however, the duration of that assistance, which has just been extended until March under the FEMA Transitional Shelter Assistance program (not as form of temporary shelter while rebuilding her damaged home in Puerto Rico, remains uncertain: is it a way to relocate and start a new life on the mainland? In the beginning, most of those leaving were elderly, disabled, or in need of critical medical care. But that appears to have changed: today young Puerto Ricans appear to be the primary departees, threatening to compound what we have previously noted to be an historic, migratory wave in the wake of the U.S. territory’s physical and fiscal crisis: mayhap as many as 25 percent of the population will have departed by the end of the decade.

Ironically, especially given President Trump’s attitude towards Puerto Rico, including the disparate response to Puerto Rico compared to Houston and Florida, the disproportionately younger Puerto Ricans coming to the mainland have been sought after—often recruited. Last November, the agency offered to airlift victims of Hurricane Maria to the U.S. mainland to reach temporary housing–a first of its kind for the agency: under the program, the Transitional Shelter Assistance (TSA) program, displaced residents and families who are still living in shelters on Puerto Rico can opt to relocate to housing in Florida and New York. Mike Byrne, a federal coordinating officer for FEMA, said the program is the first time the agency has attempted what it calls an “air bridge,” or a relief operation requiring the transportation of individuals from a disaster area. In most disasters, FEMA pays displaced residents to stay in hotels under the TSA program. In Puerto Rico, the hotels are filled to capacity, so FEMA is turning to the mainland and working with states to find accommodations.

At the same time, because of anticipated labor shortages because of the White House anti-immigration policies, many domestic employers are eager to hire bilingual workers for whom the minimum wage of a U.S. state represents a significant boost in income compared to grim options on Puerto Rico. Likewise, both the federal and Puerto Rican governments have facilitated departures: that is, in the ongoing absence of an equitable or comprehensive recovery plan for Puerto Rico, migration has become a substitute for federal disaster relief and recovery: for the first time ever, FEMA created an “air bridge” and chartered cruise ships to evacuate residents. In the beginning, new arrivals were forced to seek shelter with family members or in homeless shelters; subsequently, such families are being offered hotel stays for up to three months. (Traditionally, FEMA offers temporary shelter to homeowners who have been adversely affected by a disaster while they carry out the arduous task of rebuilding; however, in the case of Hurricane Maria, the process of recovery has been severely undercut by the lack of electricity and running water, and the inability of the federal government to supply even the most basic materials.

The increasing challenge is that, as we have noted before, those Puerto Ricans fleeing destroyed homes, devastated public infrastructure, and a shattered economy, are, disproportionately, those who can afford to leave—and those whose jobs and livelihoods have been washed away. After all, some nearly four months after the hurricanes, many restaurants, stores and offices remain closed: how can one be competitive with operating on generators, operating with reduced personnel serving only FEMA workers, and with massive layoffs? Just last week, Walmart, Puerto Rico’s largest private employer, announced it was closing three of its Sam’s Club stores; pharmaceutical companies, which, today, account for nearly 50% of Puerto Rico’s manufacturing jobs, are rethinking their location in the wake of the implementation of the new federal tax reform law—a law which treats Puerto Rico as a foreign jurisdiction. The new tax law imposes a 12.5% tax on profits derived from intellectual property held in foreign jurisdictions. (The U.S. territory of Puerto Rico is a domestic jurisdiction in U.S. law—except for federal tax purposes.) The pre-existing tax law exempted Puerto Rico residents from paying federal income taxes, a provision which sought to attract investment in manufacturing, something which, prior to the hurricane, accounted for 47% of Puerto Rico’s gross domestic product—more than $48 billion, with the bulk of the incentives encouraging pharmaceuticals and medical devices that generate revenue from patented drugs and technologies.

However, the new federal tax changes were enacted to render offshore operations less profitable, thereby rewarding corporations which opt to relocate back to the U.S. mainland—because, the IRS considers Puerto Rico to be foreign, and because many of the most significant manufacturers on the island are foreign-owned.

Perhaps unsurprisingly, the economic dislocation in Puerto Rico has led to mainland employers recognizing a diamond in the rough—meaning that they have been recruiting Puerto Rican workers to places such as Florida, North Carolina, Georgia, and Kansas: in Texas and Florida, developers hope that Puerto Rican labor will alleviate an expected shortage of construction workers as their own hurricane recovery gets underway. The efforts, piggy-backing on a trend that has accelerated over the last decade, has been focused on teachers, doctors, police officers, nurses, and engineers—exactly the positions most critical for Puerto Rico’s physical and fiscal recovery. But how to compete against Houston—a city where approximately one-third of schoolchildren are native Spanish speakers—and a city which received disproportionately greater federal hurricane assistance? The city’s school districts have already conducting multiple recruitment trips to Puerto Rico. Similarly, the police departments of Dallas, Charlotte, Baltimore, and even the nation’s capitol, Washington, D.C., have all turned to Puerto Rico as they have sought to diversify their departments with more Latino officers. In these instances, the recruiters lure workers with what appear to be high salaries when compared with the depressed incomes of a U.S. territory in physical and fiscal crisis.

Some have noted, moreover, that with the U.S. federal government closed, in no small part due to opposition to extending the DACA or Deferred Action for Childhood Arrivals program, it may be coincidental that the influx of Puerto Ricans to the mainland who were displaced by the storm coincides with the expiration of and, most recently, the end of temporary protected status for Central American and Caribbean migrants who had also fled natural disasters. That is, the combination furloughs, wage cuts, and higher prices for Puerto Rico’s working poor, combined with the massive damage to the island’s public infrastructure and disparate federal response, appears to have contributed to fueling a mass exodus—an exodus, however, of the young and qualified.

Is There Shelter from the Storm?

November 20, 2017

Good Morning! In today’s Blog, we consider the deepening Medicaid crisis and Hurricane Maria recovery in the U.S. territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Well I’m living in a foreign country, but I’d bound to cross the line
Beauty walks a razor’s edge, someday I’ll make it mine
If I could only turn back the clock to when God and her were born
“Come in” she said
“I’ll give you shelter from the storm”.

Bob Dylan

Shelter from the Storm & Governing Competency? With this session of Congress entering its final two weeks of the calendar year, Puerto Rico’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, 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.  But 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 threating Puerto Rico’s ability to meet its Medicaid obligations: the Puerto Rican government has requested $1.6 billion from Congress and the Trump administration in the wake of the devastating physical and fiscal storm, with Gov. Ricardo Rosselló having, last month, requested $1.6 billion a year over the next five years, writing to Congressional leaders that the “total devastation brought on by these natural disasters has vastly exacerbated the situation and effectively brought the island’s healthcare system to the brink of collapse.” Puerto Rico in 2016 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.

Rep. Bruce Westerman, Chair of the House Subcommittee on Oversight & Investigations of the House Natural Resources Committee, last month, had noted, it was “obvious PREPA did not know how to draft a FEMA-compliant contract, nor did PREPA officials adhere to the advice of their own counsel on how to comply: I believe this is precisely why the Oversight Board should be granted more authority. While we understand the sense of urgency for the people of Puerto Rico, oversight and transparency are vital to this recovery process.” House Committee on Natural Resources Chairman Rob Bishop added: “A legacy of dysfunction (at PREPA) has created a competence deficit that threatens the island’s ability to improve conditions for its citizens. Confidence in the utility’s ability to manage contracts and time-sensitive disaster related infrastructure work is long gone.” The Oversight Board announced its plan to appoint Noel Zamot to replace current PREPA leader Ricardo Ramos just a day or two after board members met with Chairman Bishop, according to a Bishop spokesperson. At a Committee on Natural Resources hearing last Wednesday, Chairman Bishop continued to call for more outside control over Gov. Ricardo Rosselló’s government, stating: “The lack of institutional controls…raises grave concerns about the government of Puerto Rico’s ability to competently negotiate, manage, and implement infrastructure projects without significant independent oversight: One of the things that I think we’re walking into here is a tremendous credibility gap, based on Whitefish and other subsequent decisions that are going on here.” (The “Whitefish” to which Chair Bishop was referring was Whitefish Energy, which had been retained by PREPA to help fix Puerto Rico’s electrical grid: observers have questioned the adequacy of the company’s experience, the fact that it is based in the same Montana town as the U.S. Secretary of the Interior, and the rates it is charging to Puerto Rico.)

Prior to the hearing, Gov. Rosselló had released a request to the federal government for $94 billion in medium- and long-term aid for recovery from hurricanes Irma and Maria—a request unlikely to be met—or, as Chairman Rob Bishop “You’re asking for an unprecedented $94 billion: “That’s a lot of money. That’s not going to happen unless people are going to see some changes in the way cooperation is made, and the way that money’s going to be spent.” The Governor’s responses came as—on the other side of the Hill, PREPA Executive Director Ricardo Ramos explained to the U.S. Senate Energy and Natural Resources Committee the process PREPA used to hire Whitefish Energy to repair Puerto Rico’s energy grid. He testified that in the wake of Hurricane Irma (which struck Puerto Rico on September 6th), six private companies submitted offers to PREPA to aid with restoring the grid. All six companies offered similar hourly rates. While only 25% of the island had electrical service immediately after Irma, this service had since improved to 96%.  Immediately after Hurricane Maria hit, Director Ramos testified he had limited communications ability and did not become fully aware of the extent of Maria’s damage to the electrical system for a week. Use of state mutual aid for restoring the grid, he testified, would have required PREPA to provide accommodations, food, communications, and other logistics to the incoming crews, because this was part of the mutual aid policies. Thus, Mr. Ramos noted that in the immediate aftermath of the hurricane, the utility was unable to make such provisions—meaning, ultimately, that he had to choose between using another company that was asking for $25 million up front versus Whitefish, which was willing to be paid when the work was completed. Ergo, Mr. Ramos authorized the use of Whitefish and chose to continue to look for other options. At the start of Wednesday’s Senate Energy and Natural Resources Committee meeting on the hurricanes’ impact on Puerto Rico and the U.S. Virgin Islands, Chairwoman Lisa Murkowski (R.-Alaska), said she thought it made little sense to spend hundreds of millions of dollars of Stafford Act funds to rebuild the electric grid as it had been in Puerto Rico and the Virgin Islands prior to the hurricanes. She said this would only re-erect it only to be later blown down again.

Governance in Puerto Rico. As U.S. Judge Laura Taylor Swain presides over Puerto Rico’s quasi-chapter 9 municipal bankruptcy trial in Puerto Rico, House Natural Resources Committee Chair Rob Bishop (R-Utah) and Rep. Bruce Westerman (R-Ark.) last week issued a statement that the Puerto Rico PROMESA Oversight Board ought to be granted additional legal authority over the Puerto Rico Power Authority (PREPA), with their statement coming just hours after Judge Swain had ruled that the PROMESA Board lacked authority to replace PREPA’s current director. The power authority issue came as Gov. Ricardo Rosselló sought some $17 billion in recovery assistance from the U.S. Senate for Puerto Rico’s beleaguered electric utility system—with his request coming engineer Ricardo Ramos resigned yesterday as PREPA’s Executive Director resigned—a resignation which PREPA’s governing board promptly accepted, voting unanimously to ratify the appointment of engineer Justo González as interim executive director. Mr. González, who has 28 years of service at PREPA and was the director of Generation, was recommended by Governor Rosselló, who noted: “The truth is that there was a series of distractions and there was a decision to go in another direction. This is going to happen and happens in every government,” referencing, in the wake of the devastating Hurricane María, that such challenges include technical failures, selective blackouts, lack of equipment, and hiring of companies with few employees and experience to carry out support tasks. He noted that Mr. Ramos “is a professional who has worked hard, but understands that this is a context that has greatly distracted from what recovery is.”

Failures and Blackouts. Until early yesterday, PREPA had reached 44.7 % of its pre-Maria generation—a level leaving Governor Rossello still frustrated, but stressing that failures also occur because: “it is an old system, which suffered previous damage….I know that it has been questioned why these failures happened, and if there was intervention…When you are lifting a collapsed power system, there will be ups and downs. There is progress; progress is inevitable; and it is being seen very clearly.”

The Electric Challenge Ahead. In the wake of the appointment of Mr. Gonzalez as interim executive director of PREPA, the Governor has commenced a search for a new head, noting: “With this appointment begins a process of evaluating the best available talent, inside and outside  of Puerto Rico, to proceed with an appointment in property of the position of executive director of PREPA: I hope that this process will be completed as quickly as possible, so that the work leading to the rehabilitation of the electrical system throughout the island is not affected, according to the guidelines we have given.” PREPA governing board President Ernesto Sgroi advised the Talent Search Committee of the governing body will be in charge of identifying the new executive director of the public corporation.

The Power of Storms & the Storms of Fiscal Power

October 31, 2017

Good Morning! In today’s Blog, we consider the growing questions with regard to both the federal and Puerto Rican response to the human and fiscal devastation caused by Hurricane Maria–and what the implication’s might be for the U.S. territory’s debt–and governance.

Visit the project blog: The Municipal Sustainability Project 

The Price of Solvency. Almost three weeks after the hiring of Whitefish Energy Holdings created its own storm wave of criticism and investigation claims, both the FBI and the PROMESA oversight board have commenced investigations about PREPA’s decision to award a $300 million contract to a small Montana energy firm, Whitefish Energy Holdings, to rebuild Puerto Rico’s electrical infrastructure—with the PROMESA Oversight Board intending to discuss and approve today a process to review Puerto Rico’s contract—one which Governor Ricardo Rosselló Nevares canceled on Sunday—at a time when only 30% of the U.S. territory’s power has been restored. The issue is anticipated to light up the agenda at the PROMESA Board’s tenth meeting today at the headquarters of the College of Engineers and Surveyors of Puerto Rico, in Hato Rey, under its authority to review and revoke laws which are incompatible with its Fiscal Plan, as well as any contract that the government of Puerto Rico has granted—marking the first time the Congressionally enacted entity will seek to exercise the authority Congress authorized to revoke contracts or laws of the Puerto Rican government. The House Committee on Natural Resources has scheduled hearings over the next three weeks in Washington on the storm recovery and transparency in the reconstruction process—although it remains unclear whether those hearings will closely examine the adverse fiscal, physical, and human costs imposed by the Jones Act on the recovery and loss of lives.  The Committee has not indicated whether it will compare the responses of FEMA in Puerto Rico to its responses in Houston and Florida.

Just after declaring an emergency due to the devastation wrought by Hurricane Maria, Gov. Rosselló Nevares had approved executive order 2018-53 to exempt government agencies from complying with the requirements of law when hiring and purchasing to deal with the ensuing physical disaster—effectively clearing the way to for the Electric Power Authority (AEE) to award a $ 300 million contract to Whitefish Energy-company, which, at the time of its hiring, had only two employees-to repair part of the electrical network devastated by the hurricane. That award, however, caused a governance storm of its own, triggering apprehensions by FEMA, Members of Congress, and now an investigation by the Federal Bureau of Investigation (FBI).

Thus the PROMESA Board holds its first meeting in the wake of the storm’s fiscal and physical devastation, mayhap marking a fiscal storm—albeit, presumably, the Board’s inquiries will examine not just PREPA’s responses, but also compare the responses of FEMA in Puerto Rico compared to its responses in Houston and Florida—that is, the PROMESA Board could question the accountability of FEMA.

As for the fiscal storm, the Oversight Board expects to be briefed on the process underway to reconfigure the Fiscal Plan, as well how the firm Kobre & Kim will investigate Puerto Rico’s debt: according to the report of the firm hired to investigate the reasons for the U.S. territory’s fiscal collapse and the issuance of debt, the first report of the causes of the crisis would take about 200 days: the investigator has already issued an information request to Banco Popular and has identified 79 witnesses who will he instructed to preserve documents.