Motoring Back from Chapter 9 Bankruptcy

March 9, 2018

Good Morning! In this morning’s eBlog, we consider the state of the City of Detroit, the state of the post-state takeover Atlantic City, and the hard to explain delay by the U.S. Treasury of a loan to the U.S. Territory of Puerto Rico.

An Extraordinary Chapter 9 Exit. Detroit Mayor Mike Duggan yesterday described the Motor City as one becoming a “world-class place to put down your roots” and make an impact: “We’re at a time where I think the trajectory is going the right way…We all know what the issues are. We’re no longer talking about streetlights out, getting grass cut in the parks. We’re making progress. We’re not talking all that much about balancing the budget.” His remarks, coming nearly five years after I met with Kevin Orr on the day he had arrived in Detroit at the request of the Governor Rick Snyder to serve as the Emergency Manager and steer the city into and out of chapter 9 municipal bankruptcy, denote how well his plan of debt adjustment as approved by U.S. Bankruptcy Judge Steven Rhodes has worked.

Thus, yesterday, the Mayor touted the Detroit Promise, a city scholarship program which covers college tuition fees for graduates of the city’s school district, as well as boosting a bus “loop” connecting local charter schools, city schools and after-school programs. Maybe of greater import, the Mayor reported that his administration intends to have every vacant, abandoned house demolished, boarded up, or remodeled by next year—adding that last year foreclosures had declined to their lowest level since 2008. Over the last six months, the city has boarded up 5,000 houses, sold 3,000 vacant houses for rehab, razed nearly 14,000 abandoned houses, and sold an estimated 9,000 side lots. The overall architecture of the Motor City’s housing future envisions the preservation of 10,000 affordable housing units and creation of 2,000 new ones over the next five years.

The Mayor touted the success of the city’s Project Green Light program, noting that some 300 businesses have joined the effort, which has realized, over the last three years a 40% in carjackings, a 30% decline in homicides since 2012, and 37% fewer fires, adding that the city intends to expand the Operation Ceasefire program, which has decreased shootings and other crimes, to other police precincts. On the economic front, the Mayor stated that Lear, Microsoft, Adient, and other major enterprises are moving or planning to open sites: over the last four years, more than 25 companies of 100-500 jobs relocated to Detroit. On the public infrastructure radar screen, Mayor Duggan noted plans for $90 million in road improvements are scheduled this year, including plans to expand the Strategic Neighborhood Fund to target seven more areas across the city, add stores, and renovate properties. Nearly two years after Michigan Senate Majority Leader Arlan Meekhof (R-West Olive) shepherded through the legislature a plan to pay off the Detroit School District’s debt, describing it to his colleagues as a “realistic compromise for a path to the future…At the end of the day, our responsibility is to solve the problem: Without legislative action, the Detroit Public Schools would head toward bankruptcy, which would cost billions of dollars and cost every student in every district in Michigan,” the Mayor yesterday noted that a bigger city focus on public schools is the next front in Detroit’s post-bankruptcy turnaround as part of the city’s path to exiting state oversight. He also unveiled a plan to partner with the Detroit Public Schools Community District, describing the recovery of the district as vital to encourage young families to move back into the city, proposing the formation of an education commission on which he would serve, as well as other stakeholders to take on coordinating some city-wide educational initiatives, such as putting out a universal report card on school quality (which he noted would require state support) and coordinating bus routes and extracurricular programs to serve the city’s kids regardless of what schools they attend.

The Mayor, who at the end of last month unveiled a $2 billion balanced budget, noted that once the Council acts upon it, the city would have the opportunity to exit active state oversight: “I expect in April or May, we’re going to see the financial review commission vote to end oversight and return self-determination to the City of Detroit,” adding: “As everybody here knows, the financial review commission doesn’t entirely go away: they go into a dormancy period. If we in the future run a deficit, they come back.”

His proposed budget relies on the use of $100 million of an unassigned fund balance to help increase spending on capital projects, including increased focus on blight remediation, stating he hopes to double the rate of commercial demolition and get rid of every vacant, “unsalvageable” commercial property on major streets by the end of next year—a key goal from the plan he unveiled last October to devote $125 million of bond funds towards the revitalization of Detroit neighborhood commercial corridors, part of the city’s planned $317 million improvements to some 300 miles of roads and thousands of damaged sidewalks—adding that these investments have been made possible from the city’s $ billion general fund thanks to increasing income tax revenues—revenues projected to rise 2.7% for the coming fiscal year and add another $6million to $7 million to the city’s coffers. Indeed, CFO John Hill reported that the budget maintains more than a 5% reserve, and that the city continues to put aside fiscal resources to address the  higher-than-expected pension payments commencing in 2024, the fiscal year in which Detroit officials project they will face annual payments of at least $143 million under the city’s plan of debt adjustment, adding that the retiree protection fund has performed well: “What we believe is that we will not have to make major changes to the fund in order for us to have the money that we need in 2024 to begin payments; In 2016 those returns weren’t so good and have since improved in 2017 and 2018, when they will be higher than the 6.75% return that we expected.” He noted that Detroit is also looking at ways to restructure its debt, because, with its limited tax general obligation bonds scheduled to mature in the next decade, Detroit could be in a position to return to the municipal market and finance its capital projects. Finally, on the public safety front, the Mayor’s budget proposes to provide the Detroit Police Department an $8 million boost, allowing the police department to make an additional 141 new hires.

Taking Bets on Atlantic City. The Atlantic City Council Wednesday approved its FY2019 budget, increasing the tax levy by just under 3%, creating sort of a seesaw pattern to the levy, which three years ago had reached an all-time high of $18.00 per one thousand dollars of valuation, before dropping in each of the last two years. Now Atlantic City’s FY2019 budget proposal shows an increase of $439,754 or 3.06%, with Administrator Lund outlining some of the highlights at this week’s Council session. He reported that over the years, the city’s landfill has been user fee-based ($1 per occupant per month) to be self-sufficient; however, some unforeseen expenses had been incurred which imposed a strain on the landfill’s $900,000 budget. Based on a county population of 14,000, the money generated from the assessment amounts to roughly $168,000 per year, allowing the Cass County Landfill to remain open. However, the financing leaves up to each individual city the decision of fee assessments. Thus, he told the Council: “The Per Capita payment to the landfill accounted for about .35 to .40 cents of the increase.”  Meanwhile, two General Department heads requested budget increases this year and five Department Heads including; the Police Department and Library submitted budgets smaller than the previous year. Noting that he “never advocate(s) for a tax increase,” Mr. Lund stated: “But it is what it is. It was supposed to go up to $16.98 last year and now we are at $16.86, so it’s still less,” adding that the city’s continuous debt remains an anchor to Atlantic City’s credit rating—but that his proposed budget includes a complete debt assumption and plan to deleverage the City over the next ten years.

Unshelter from the Storm. New York Federal Reserve Bank President, the very insightful William Dudley, warns that Puerto Rico should not misinterpret the economic boost from reconstruction following hurricanes that hit it hard last year as a sign of underlying strength: “It’s really important not to be seduced by that strong recovery in the immediate aftermath of the disaster,” as he met with Puerto Rican leaders in San Juan: “We would expect there to be a bounce in 2018 as the construction activity gets underway in earnest,” warning, however, he expects economic growth to slow again in 2019 or 2020: “It’s “important not to misinterpret what it means, because a lot still needs to be done on the fiscal side and the long-term economic development side.”

President Dudley and his team toured densely populated, lower-income, hard hit  San Juan neighborhoods, noting the prevalence of “blue roofs”—temporary roofs overlaid with blue tarps which had been used as temporary cover for the more permanent structures devastated by the hurricanes, leading him to recognize that lots of “construction needs to take place before the next storm season,” a season which starts in just two more months—and a season certain to be complicated by ongoing, persistent, and discriminatory delays in federal aid—delays which U.S. Treasury Secretary Steven Mnuchin blamed on Puerto Rico, stating: “We are not holding this up…We have documents in front of them that [spell out the terms under which] we are prepared to lend,” adding that the Trump Administration has yet to determine whether any of the Treasury loans would ultimately be forgiven in testimony in Washington, D.C. before the House Appropriations Subcommittee on Financial Services and General Government.

Here, the loan in question, a $4.7 billion Community Disaster Loan Congress and the President approved last November to benefit the U.S. territory’s government, public corporations, and municipalities—but where the principal still has not been made available, appears to stem from disagreements with regard to how Puerto Rico would use these funds—questions which the Treasury had not raised with the City of Houston or the State of Florida.  It appears that some of the Treasury’s apprehensions, ironically, relate to Gov. Ricardo Rosselló’s proposed tax cuts in his State of the Commonwealth Speech, in which the Governor announced tax cuts to stimulate growth, pay increases for the police and public school teachers, and where he added his administration would reduce the size of government through consolidation and attrition, with no layoffs, e.g. a stimulus policy not unlike the massive federal tax cuts enacted by President Trump and the U.S. Congress. It seems, for the Treasury, that what is good for the goose is not for the gander.

At the end of last month, Gov. Rosselló sent a letter to Congress concerned that the Treasury was now offering only $2.065 billion, writing that the proposal “imposed restrictions seemingly designed to make it extremely difficult for Puerto Rico to access these funds when it needs federal assistance the most.” This week, Secretary Mnuchin stated: “We are monitoring their cash flows to make sure that they have the necessary funds.” Puerto Rico reports it is asking for changes to the Treasury loan documents; however, Sec. Mnuchin, addressing the possibility of potential loans, noted: “We’re not making any decision today whether they will be forgiven or…won’t be forgiven.” Eric LeCompte, executive director of Jubilee USA, a non-profit devoted to the forgiveness of debt on humanitarian grounds, believes the priority should be to provide assistance for rebuilding as rapidly as possible, noting: “Almost six months after Hurricane Maria, we are still dealing with real human and economic suffering…It seems everyone is trying to work together to get the first installment of financing sent and it needs to be urgently sent.”

Part of the problem—and certainly part of the hope—is that President Dudley might be able to lend his acumen and experience to help. While the Treasury appears to be most concerned about greater Puerto Rico public budget transparency, Mr. Dudley, on the ground there, is more concerned that Puerto Rican leaders not misinterpret the economic boost from reconstruction following the devastating hurricanes as a sign of underlying strength, noting: “It’s really important not to be seduced by that strong recovery in the immediate aftermath of the disaster: We would expect there to be a bounce in 2018 as the construction activity gets underway in earnest,” before the economic growth slows again in 2019 or 2020, adding, ergo, that it was “important not to misinterpret what it means, because a lot still needs to be done on the fiscal side and the long-term economic development side.”


Returning from Municipal Bankruptcy

February 7, 2017

Good Morning! In today’s Blog, we consider the remarkable signs of fiscal recovery from the largest municipal bankruptcy in U.S. history, before returning to consider the ongoing fiscal recovery of Atlantic City, where the chips had been down, but where the city’s elected leaders are demonstrating resiliency.

Taking the Checkered Flag. John Hill, Detroit’s Chief Financial Officer, this week reported the Motor City had realized its first net increase in residential property values in more than 15 years. Although property taxes, unlike in most cities and counties, in Detroit only account for 17.1% of municipal revenues (income taxes bring in 20.4%), the increase marked the first such increase in 16 years—demonstrating not just the fiscal turnaround, but also indicating the city’s revitalization is spreading to more of its neighborhoods. Mr. Hill described it as a “positive sign of the recovery that’s occurring in the city,” and another key step to its emergence from strict state fiscal oversight under the city’s chapter 9 plan of debt adjustment. As Mr. Hill put it: “We do believe that we’ve hit bottom, and we’re now on the way up.” Nevertheless, Mr. Hill was careful to note he does not anticipate significant gains in property tax revenues in the immediate future, rather, as he put it: “[O]ver time, it will certainly have a very positive impact on the city’s revenue.” According to the city, nearly 60 percent of residents will experience a rise of 10 percent or less in assessments this year: the average assessed home value in Detroit is between $20,000 and $50,000. The owner of a home within that range could see an increase in their taxes this year of $22 to $34, according to Alvin Horhn, the city’s chief assessor. Detroit has the seventh highest rate among Michigan municipalities, with a 70.1 mills rate for owner-occupied home in city of Detroit/Detroit school district. Mr. Hill noted that for Detroit properties which show an increase in value this year, the rate will be capped; therefore he projects residents will not experience significant increases except for certain circumstances, such as a property changing hands.

Nevertheless, in the wake of years in which the city’s assessing office had reduced assessments across Detroit to reflect the loss in property values, the valuation or assessment turnaround comes as, in the past decade, the cumulative assessed value of all residential property was $8.4 billion, officials noted Monday: and now it is on the rise: last year, that number was $2.8 billion; this year, the assessed value of Detroit’s 263,000 residential properties rose slightly to $3 billion—or, as Mr. Horhn noted: “For the last 12 to 17 years, we’ve been making massive cuts in the residential (property) class to bring the values in line with the market…It’s been a long ride, but for the first time in a very long time, we see increases in the residential class of property in the city of Detroit.” This year’s assessments come in the wake of a systemic, citywide reassessment of its properties to bring them in line with market value—a reassessment initiated four years ago as part of a state overhaul to bring Detroit’s assessment role into compliance with the General Property Tax Act to ensure all assessments are at one half of the market value and that like properties are uniform. That overhaul imposed a deadline of this August for Detroit to comply with state oversight directives imposed in 2014 in the wake of mismanagement in Detroit’s Assessment Division, widespread over-assessments, and rampant tax delinquencies in the wake of an investigation finding that Detroit was over assessing homes by an average of 65%, based upon an analysis of more than 4,000 appeal decisions by a state tax board. Mr. Hill asserts now that he is confident Detroit’s assessments are fair; better yet, he reports the fixes have led to more residents paying property taxes. Indeed, city officials note that property tax collections increased from an average rate of 69% in 2012-14 to 79 percent in 2015, and 80 percent in 2016; the collection rate for 2017 is projected to be 82%. Mayor Mike Duggan, in a statement at the beginning of the week, noted: “We still have a long way to go to in rebuilding our property values, but the fact that we have halted such a long, steep decline is a significant milestone…This also corresponds with the significant increase in home sale prices we have seen in neighborhoods across the city.”

At the same time, Mr. Horhn notes that Detroit’s commercial properties have increased in value to nearly $3 billion, while industrial properties recovered from a drop last year, rising from $314 million to $513 million. He added that the demolition of blighted homes, as well as improving city services, had contributed to the rise in assessed property values: “It’s perception to a large extent: If people believe things are improving, they’ll invest, and I think that’s what we’re seeing.”

Raking in the Chips? In the wake of a state takeover, and the loss—since 2014, of 11,000 jobs in the region, Atlantic City marked a new step in its fiscal recovery with interviews commencing for the former bankrupt Trump Taj Mahal casino to reopen this summer as a Hard Rock casino resort. Indeed, 1,400 former Taj Mahal employees applied after an invitational event, marking what Hard Rock president Matt Harkness described as the “first brush stroke of the renaissance.” The casino is projected to create more than 3,000 jobs—and to be followed by the re-opening Ocean Resort Casino, which will add thousands of additional jobs. The rising revenues come after, last year, gambling revenue increased for the second consecutive year, marking a remarkable turnaround in the wake of a decade in which five of the city’s 12 casinos shut down, eliminating 11,000 jobs—and, from the fiscal perspective, sharply hurt assessed property values and property tax revenues. New Jersey Casino Control Commission Chair James Plousis noted: “Every single casino won more, and every internet operation reported increased win last year…Total internet win had its fourth straight year of double-digit increases. It shows an industry that is getting stronger and healthier and well-positioned for the future.” In fact, recent figures by the New Jersey Division of Gaming Enforcement show the seven casinos won $2.66 billion in 2017, an increase of 2.2 percent over 2016. Christopher Glaum, Deputy Chief of Financial Investigations for the gaming enforcement division, noted that 2017 was the first year since 2006 when a year-over-year increase in gambling revenue at brick-and-mortar casinos occurred. Moreover, many are betting on the recovery to gain momentum: two of the five casinos which were shuttered in recent years are due to reopen this summer: the Taj—as reported above—under its new ownership, and the Revel, which closed in 2014, will reopen as the Ocean Resort Casino. The fiscal bookies are, however, uncertain about the odds of the reintroduction of two new casinos, apprehensive that that could over saturate the market; however, the rapid increase in internet gaming, which, last year, increased earnings for the casinos by 25 percent appear to demonstrate momentum.  

Now, the fiscal challenge might rest more at the state level, where the new administration of Gov. Phil Murphy, who promised major spending initiatives during his campaign, had been counting on revenue increases from restoring the income tax surcharge on millionaires and legalizing and taxing marijuana. The latter, however, could go up in a proverbial puff of weed—and, in any event, would arrive too late for this year’s Garden State budget. Similarly, the new federal “tax reform” act’s capping on the deduction for state and local taxes will mean increased federal income taxes most for well-off residents of high-tax states such as New Jersey—raising apprehension that a new state surcharge might encourage higher income residents to leave. That effort, however, has been panned by the New Jersey Policy Perspective, which notes: “Policy changes to avoid the new $10,000 cap on state and local tax deductions would mostly benefit New Jersey’s wealthiest families.” New Jersey Senate President Steve Sweeney (D-West Depford) notes: “We don’t have a tax problem in New Jersey. New Jersey collects plenty in taxes. We have a government problem in New Jersey, and it’s called too much of it,” noting he has tasked a panel of fellow state Senators and tax experts to “looking at everything,” including the deduction issue. In addition, he is seriously considering shifting to countywide school districts, where possible, in an effort to reduce costs. Or, as he put it: “There is a lot of money to be saved when you do things differently.” Turning to efforts to restore Atlantic City’s finances, the state Senate President said the city is “doing great;” nevertheless, noting that talk about ending the state takeover is unrealistic: “We can adjust certain things there” and Governor Murphy will select someone new to be in charge. But end the state takeover?  “Absolutely not and it’s legislated for five years.”

It seems ironic that in the city where Donald Trump’s company filed for bankruptcy protection five times for the casinos he owned or operated in the city, he was able to simply walk away from his debts: he argued that he had simply used federal bankruptcy laws to his advantage—demonstrating, starkly, the difference between personal and municipal bankruptcy.

Federal Tax Reform in a Post-Chapter 9 Era

December 4, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges that the pending federal tax “reform” legislation might have for the nation’s city emerging from the largest municipal bankruptcy in American history, before returning to the governance challenges in Puerto Rico.  

Visit the project blog: The Municipal Sustainability Project 

Harming Post Chapter 9 Recovery? As the House and Senate race, this week, to conference on federal tax legislation, the potential fiscal impact on post chapter 9 Detroit provides grim tidings. The proposed changes would eliminate federal tax credits vital to Detroit’s emergency from chapter 9 municipal bankruptcy; the elimination of low-income housing tax credits would reduce financing options for the city: the combination, because it would adversely affect business investment and development, could undercut the pace of the city’s recovery. Most at risk are historic rehabilitation and low income housing tax credits: the House version of the tax “reform” legislation proposes to eliminate historic tax credits—the Senate version would reduce them by 50%; both versions propose the elimination of new market tax credits. The greatest threat is the potential elimination of the Low Income Housing Tax Credit (LITC), proposed by the House, potentially undercutting as much as 40% of the current financing for low income housing in the Motor City. While both the House and Senate versions retain a 9% low income housing tax credit, the credit, as proposed, would limit how much the Michigan State Housing Development Agency may award on an annual basis—putting as much as $280 million at risk. According to the National Housing Conference, the production of low income housing could decline by as much as 50%. The combined impact could leave owners and developers of low income housing with fewer options for rehabilitation—an impact potentially with disproportionate omens for post-chapter 9 municipalities such as Detroit.   

Is There Promise or Democracy in PROMESA? Since the imposition by Congress of the PROMESA, quasi-chapter 9 municipal bankruptcy legislation, under which a board named by former President Obama appointed seven voting members, with Gov. Puerto Rico Governor Ricardo Rosselló serving as an ex officio member, but with no voting rights—there have been singular disparities, including between the harsh fiscal measures imposed on the U.S. territory, measures imposing austerity for Puerto Rico, even as the PROMESA Executive Director receives an annual salary of $625,000—an amount 500% greater than the executive director of Detroit’s chapter 9 bankruptcy oversight board, and some $225,000 more than the President of the United States—with Puerto Rico’s taxpayers footing the tab for what is perceived as an unelected board acting as an autocratic body which threatens to undermine the autonomy of Puerto Rico’s government. Unsurprisingly, the Congressional statute includes few incentives for transparency, much less accountability to the citizens and taxpayers of Puerto Rico. Indeed, when the Center for Investigative Journalism and the Legal Clinic of the Interamerican University Law School, attorneys Judith Berkan, Steven Lausell, Luis José Torres, and Annette Martínez—both in one case before the San Juan Superior Court and in another before federal Judge Jay A. García-Gregory, as well as the Reporter’s Committee for Freedom of the Press submitted an amicus brief seeking clarification with regard to the legal standards of transparency and accountability which should be applied to the board, the PROMESA Board asserted that the right of access to information does not apply to it. 

Governance in Insolvency. As we have followed the different and unique models of chapter 9 and insolvencies from Central Falls, Rhode Island, through San Bernardino, Stockton, Detroit, Jefferson County, etc., it has been respective state laws—or the absence thereof—which have determined the critical role of governance—whether it be guided via a federal bankruptcy court, a state oversight board, in large part determined by the original authority under the U.S. system of governance whereby the states—because they created the federal government—individually determine the eligibility of municipalities to file for chapter 9 municipal bankruptcy. In Puerto Rico, sort of a hybrid, being neither a state, nor a municipality, the issue of governing oversight is paving new ground. Thus, in Puerto Rico, it has opened the question with regard to whether the Governor or Congress ought to have the authority to name an oversight board—a body—whether overseeing the District of Colombia, New York City, Detroit, Central Falls, Atlantic City, etc.—to exercise oversight in the wake of insolvency. Such boards, after all, can protect a jurisdiction from pressures by partisan and outside actors. Moreover, the appointment of experts with both experience and expertise not subject to voters’ understandable angst can empower such appointed—and presumably expert officials, to take on complex fiscal and financial questions, including debt restructuring, access to the municipal markets, and credit.  Moreover, because appointed board members are not affected by elections, they are in a sometimes better position to impose austerity measures—measures which would likely rarely be supported by a majority of voters—or, as former D.C. Mayor Marion Barry said the District of Columbia oversight Board, it “was able to do some things that needed to be done that, politically, I would not do, would not do, would not do,” such as firing 2,000 human-service workers. 

In Puerto Rico—which, after all, is neither a municipality nor a state, the bad gnus is that these governance disparities are certain to continue: indeed, despite the PROMESA Board’s November 27th recommendations, Gov. Rosselló announced he would spend close to $113 million on government employees’ Christmas bonuses-an announcement the PROMESA Board responded to by stating that its members expect “to be consulted during the formulation and prior to the announcement of policies such as this to ensure the Government is upholding the principles of fiscal responsibility.” (Note: it would have to be a challenge for PROMESA Board members to observe the current federal tax bills in the U.S. House and Senate as measured by Congress’ Joint Committee on Taxation and the Congressional Budget Office and believe that Congress is actually exercising “fiscal responsibility.”)

Nevertheless, there might be some help at hand for the U.S. territory: House Ways and Means Committee Chairman Kevin Brady (R-Tx.), in trying to mold in conference with the Senate the pending tax reform legislation, is considering options to avert what top Puerto Rican officials fear could be still another devastating blow to its already tottering economy: both versions would end Puerto Rico’s status as an offshore tax haven for U.S. companies—a devastating potential blow, especially given the current federal Jones Act which imposes such disproportionate shipping costs on Puerto Rico compared to other, competitive Caribbean nations. Now, the Governor, as well as Puerto Rico’s Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s sole nonvoting member of Congress, are warning that Puerto Rico’s slow recovery from Hurricane Maria could suffer an irreparable setback if manufacturers decide to close their factories. Commissioner Gonzalez said 40% of Puerto Rico’s economy relies on manufacturing, with much of that related to pharmaceuticals; ergo, she is worried that any drop in the $2 billion of annual revenue these businesses provide would undercut the economic recovery plan instituted by the PROMESA Board. The Commissioner notes: “Forty percent of the island is living in poverty,” even though the federal child tax credit only applies to a third child for residents of Puerto Rico.

Thus, many eyes in Puerto Rico—and, presumably in the PROMESA Board—are laser focused on the House-Senate tax conference this week, where the House version would extend, for five years, the so-called rum cover which provides an excise tax rebate to Puerto Rico and the U.S. Virgin Islands on locally produced rum—a provision which Republican leaders appear unlikely to retain, albeit, they appear to be amenable to changes which could help reboot the island’s economy. (Puerto Rico produces 77% of the rum consumed in the U.S., according to the Puerto Rico Industrial Development Agency.) In a sense, part of the challenge is that for Puerto Rico, the issue has become whether to focus its lobbying on retaining its quasi-tax haven status. Gov. Rosselló worries that if that status were altered, “companies with a strong presence on the island would be forced to shutter those operations and decamp for the mainland or, worse, a lower-tax country…This would put tens of thousands of U.S. citizens in Puerto Rico out of work and demolish our tax base right as we are trying to rebound from historic storms.” Chairman Brady, after meeting with Commissioner Gonzalez at the end of last week, told reporters the meeting was with regard to “ideas on how best to help Puerto Rico…I know the Senate too has some ideas as well…“Yeah, we’re going to keep working on that.” In conference, the House bill imposes a 20% excise tax on payments by a U.S. company to a foreign subsidiary; the Senate bill proposes a tax ranging from 12.5% to 15.625% on the income of foreign corporations with intangible assets in the U.S. Unsurprisingly, Puerto Rico officials and U.S. businesses operating there describe both the House and Senate versions as putting Puerto Rico at a disadvantage—or, as one official noted: “The companies are asking from exemptions from all of this if Puerto Rico is involved…They want to be exempted from the taxes going forward that would prevent companies from accumulating untaxed profits abroad.” Foreign earnings, which includes revenues earned by corporations operating in Puerto Rico, could be repatriated at a 14% rate if the funds were held in cash and 7% if its illiquid assets under the House bill; the Senate version would tax cash at 10% and illiquid assets at 5%. Companies operating in Puerto Rico would be taxed at the same rate on the mainland of the U.S. and in foreign countries. In addition, the average manufacturing wage is three times lower in Puerto Rico than on the mainland and companies operating there can claim an 80% tax credit for taxes paid to the territorial government, according to officials. Senate Finance Committee Chair Orrin Hatch (R-Utah) noted he wishes to “help Puerto Rico, but not in this tax bill.”

Post-Chapter 9 Elections–and Post Physical & Fiscal Storms

November 6, 2017

Good Morning! In today’s Blog, we consider yesterday’s election results in municipalities we have followed through their fiscal stress or chapter 9 municipal bankruptcy, including: Flint, and Detroit, in its first Mayoral election since emerging from chapter 9, Then we turn to the historic municipality of Petersburg, Virginia—a municipality which avoided chapter 9 thanks to state intervention. Finally, we consider U.S. District Court Judge Laura Swain’s approval yesterday of an urgent motion from the government of Puerto Rico and the Fiscal Oversight Board (JSF) that requires all federal funds to be allocated for the tasks of assistance and recovery in the wake of Hurricane Maria, removing said funds from possible use in restructuring the U.S. territory’s restructuring of its public debt.

Visit the project blog: The Municipal Sustainability Project 

In Like Flint. Flint Mayor Karen Weaver yesterday prevailed over City Council member Scott Kincaid in a recall election involving 18 candidates, retaining the city’s proposed 30-year agreement with the Detroit water system, with Mayor Weaver prevailing by a 53-32 percent margin, according to the unofficial results. The recall had arisen from a controversy related to the Genesee County’s garbage contract: Mayor Weaver had pressed for an emergency trash collection contract with the former Rizzo Environmental Services in Macomb County over City Council opposition. The controversy arose because a former trash provider, Chuck Rizzo, and his father have reached plea deals with federal prosecutors and are expected to plead guilty this month for their roles in a wide-ranging public corruption scandal in Macomb County—a scandal which has, so far, led to criminal charges against 17 persons. The recall also came amid Mayor Weaver’s ongoing struggle with the Flint City Council with regard to the approval of a 30-year agreement with the Detroit area Great Lakes Water Authority—with City Council opposition arising from apprehension about increased water rates—and in response to last month’s decision by U.S. District Court Judge David Lawson taking the small city to task for failing to act on an April agreement supported by Mayor Weaver, the State of Michigan, and EPA which would have Flint remain on the Detroit area water system. Flint had been supposed to switch to the regional Karegnondi Water Authority; however, Mayor Weaver’s administration rejected that option, because updating of the Flint water treatment facility had been projected to cost more than $68 million and to consume more than three years to complete. The Flint Council had disregarded Judge Lawson’s decision, and approved a two-year extension of service with the Great Lakes Water Authority. Thus, while the prior agreement with the Detroit area water authority had lapsed, Mayor Weaver, the State of Michigan, the Great Lakes Authority, and other supporters have revived the agreement. Last week, the Michigan Department of Environmental Quality had filed an emergency motion asking Judge Lawson to approve giving Mayor Weaver the authority to sign the renewed contract by Election Day, because of the inability of the City Council to act—a request from the state which the Judge rejected; however, he has scheduled a hearing on the motion later this month.

Motor City Victory Lap. Detroit Mayor Duggan was re-elected yesterday by more than a 2-1 margin over challenger State Sen. Coleman A. Young II, son of a former Detroit Mayor. In remarks after the decision, Mayor Duggan  noted: “I have been treated with nothing but warmth and kindness from Detroiters in every neighborhood in the city…I hope that this is the year where we put us-versus-them politics behind us forever because we believe in a one Detroit for all of us.” His opponent, in conceding, claimed he had commenced a movement to help the politically dispossessed: “The campaign might be over, but the passion and values are eternal…We are the voice for the voiceless. We are the hope for the hopeless.” Mayor Duggan, who won a write-in primary campaign in 2013 and then defeated Wayne County Sheriff Benny Napoleon in the general election, thus became the Motor City’s first mayor to serve two terms since Dennis Archer in the 1990’s.  In his campaign, the former CEO of the Detroit Medical Center gained prominent endorsements from city labor unions, clergy, and business groups—he overwhelmed his opponent in fundraising: he secured about $2.2 million; whereas Mr. Young raised just under $39,000. Mayor Duggan, in his victory remarks, noted his campaign had focused on spending “time talking about the vision of what we are going to do in the next four years,” adding: “I thought one of the most profound things President Obama ever said was ‘If you have to divide people in order to get elected, you’ll never be able to govern.’”

In his campaign, Mayor Duggan touted public service improvements under his administration in the wake of the nation’s largest-ever municipal bankruptcy, including new streetlights, improved public safety response, and more dependable bus lines. He said he intends to continue work on building a more unified Detroit—focusing now on a series of efforts to fix up neighborhood corridors, roads, and sidewalks—and stating: “There are haves and have-nots in every city in America. We’re building a city here that it doesn’t matter where you start, you have the opportunity to be successful,” adding that he believe the greatest challenge now confronting Motor City residents will be over automobile insurance reform legislation—referring to legislation rejected by the Michigan House last week, but making clear he does not intend to give up: “We were a lot closer this time than we were two years ago, and we have a plan to get it through the next time: It’s going to be one relationship at a time, one vote at a time, but we’ve already had several meetings with both the medical and the legal community, and I think they realize we were three votes away.” 

The Road Out of State Oversight. The re-election comes at a critical time, as the City expects to have its full municipal fiscal authority restored next spring for the first time since it exited the nation’s largest ever chapter 9 municipal bankruptcy three years ago—challenging the city’s appointed and elected leaders with the task of resuming governance after the end of state oversight—and as the Mayor and Council resume authority over budgets and contracts. With two balanced budgets and an audit of a third expected next May, city leaders anticipate Detroit will be released early next year from the strict financial controls required under the city’s approved plan of debt adjustment—a key issue during the just completed campaign, where both the Mayor and his challenger had proposed plans with regard to how they would fiscally guide the recovering city—and as Michigan Governor Rick Snyder expressed optimism about the city’s ability to manage its finances, telling the Detroit News: “They’ve been hitting those milestones, and I hope they continue to hit them—that’s a good thing for all of us.”

Indeed, the Motor City’s credit rating has been upgraded; its employment rate is up; assessed property values are climbing. In its financial update last month, the city noted economic development in some neighborhoods and Detroit’s downtown, job creation efforts, and growth in multifamily home construction. Nonetheless, the road to recovery will remain not just steep, but also pot-holed: it confronts very large future payments for past borrowing and public pension obligations under the plan of debt adjustment—or, as our colleague Lisa Washburn of Municipal Market Analytics noted: “It really takes the economic environment to cooperate, as well as some very good and focused financial management. Right now, that seems to be all there…Eventually, I suspect there will be another economic downturn and how that affects that region, that’s something outside of their control. But it can’t be outside of their field of vision.”

Petersburg. In one of the most closely watched municipal elections in Virginia, last night, Gloria Person-Brown, the wife of the current embattled City Treasurer Kevin Brown of Petersburg, was trounced by former City Council member Kenneth Pritchett, with Mr. Pritchett winning by a large margin: he captured more than 70 percent of the vote. In his campaign, stating he had been frustrated by the city’s low credit rating, and by the city’s struggles with collecting revenue and timely payment of bills, Mr. Pritchett vowed he would implement policies and standardize internal controls to improve the office’s operations. Likely, in the wake of a Virginia state fiscal report last September—a report which scrutinized eight specific aspects of city governance and fiscal responsibilities—and contained allegations of theft involving Ms. Person-Brown’s husband, City Treasurer Kevin Brown. Some Council members then had called for his resignation, and even Ms. Person-Brown had distanced herself from her husband’s actions during the election, albeit she did not say he had done anything wrong. Rather she ran on a platform of improving the Treasurer’s services, including instituting more checks and balances, and calling for more accountability.

Stepping in to Help Puerto Rico. U.S. District Court Judge Laura Taylor Swain has approved, with various changes, an urgent motion from the government of Puerto Rico and the PROMESA Fiscal Oversight Board which mandates that all federal funds to be allocated to the country for the tasks of assistance and recovery due to the passage of Hurricane Maria may not be claimed in the process of restructuring the public debt, accepting to the request of the Authority for Financial Supervision and Tax Agency and the JSF during the general hearing held in New York City‒in which it emerged that, in part, the order would restrict the use of disaster assistance funds as a condition of the federal government, so that Puerto Rico can receive assistance: the order will establish that the Federal Emergency Management Agency (FEMA) funds for Puerto Rico following in the wake of Hurricane Maria, as well as funds granted by other federal agencies, will be maintained. Judge Swain granted the order after listening to the arguments of Suzanne Uhland, legal representative of AAFAF, as well as lawyers from municipal insurers and the organized group of General Obligations bondholders (GOs), who underscored the need to incorporate into the order transparency criteria and mechanisms to ensure that some entity such as the JSF has influence in how federal funds granted by the government will be used. Matthew J. Troy, the federal government’s representative in the case, told Judge Swain that to include specific language which would give the Puerto Rican government priority in claiming funds that had been misused by state agencies or public corporations in the Island was indispensable for Puerto Rico to receive funds from the federal government: as part of the order, it would be established that, in the event federal funds were misused, it will be up to the central government to claim these funds from the agency or public corporation which received them from the federal government. Judge Swain has scheduled a follow-up hearing for next Wednesday.

During the hearing, an attorney, Marcia Goldstein, pointed out that it is urgent to know what role if any the Junta de Supervisión y Administración Financiera for Puerto Rico (the JSF) will have with regard to the approval of the contracts for the recovery tasks. The PROMESA law establishes, among other things, that the federal agency has the power to review the contracts granted by the Puerto Rican government or the dependencies subject to the control of the JSF. To date, however, it is uncertain whether the JSF has examined or had influence in the process of hiring dozens of companies which would be responsible for multiple tasks, from infrastructure repair to the audit of federal funds. In an interview with the Puerto Rican El Nuevo Día a little over a week ago, House Speaker Paul Ryan (R-Wis.), in the wake of his visit to Puerto Rico, pointed out that the JSF will have a key role in defining the scope of the aid package that Puerto Rico would need and how such resources would be allocated.

Human, Physical, & Fiscal Storms

October 3, 2017

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

Visit the project blog: The Municipal Sustainability Project 

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

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

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

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

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

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

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

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


Physical & Fiscal Tempests

September 26, 2017

Good Morning! In today’s Blog, we consider the physical and fiscal threats to Connecticut’s capitol city, and the comparable crime apprehensions which could adversely affect Detroit’s ongoing recovery from the nation’s largest ever municipal bankruptcy, before assessing the equity of the U.S. response to the devastating hurricane in Puerto Rico–and what that might mean to its efforts of physical and fiscal recovery. 

Visit the project blog: The Municipal Sustainability Project 


Bleeding Hartford. As the City of Hartford reeled from a violent weekend during which two men were killed just hours apart, city leaders yesterday promised to bring more police to fearful neighborhoods, with Mayor Luke Bronin vowing the police department will continue increased staffing in areas where crime statistics show “a spike in violence or a risk of increased violence.” The Mayor’s vows came, however, at the same time he yesterday warned the holders of the city’s outstanding municipal bonds that Hartford has exhausted its fiscal capacity to levy new or higher taxes‒or to cut its way out of its insolvency: he reiterated that Hartford needs a substantial amount of state funding to avoid a Chapter 9 municipal bankruptcy. In a call with investors, Mayor Bronin detailed the city’s fiscal trauma, as well as its potential chapter 9 considerations—with one person describing the blueprint as relying on the “Detroit timeline as template for success,” referring to Detroit’s initial offer for pennies on the dollar. In this instance, the pre-planned investor call was made in the wake of Assured Guaranty’s public offer to support a refinancing of Hartford’s debt under a new Connecticut state law‒a plan under which the city would realize reduced debt service costs over the next 15 years‒with the remaining costs like a ball and chain extended far into the future, or, as Assured described it: “We believe a consensual agreement among stakeholders offers the city a better path forward than bankruptcy.”

Mayor Bronin, for his part, noted: “I appreciate Assured’s willingness to have constructive discussions…We are interested in long-term solutions that leave the city with a path to sustained solvency and strength.” The statements came as the city is biding time awaiting how much aid it might receive from the state, which itself is struggling, confronting high taxes, falling revenues, $73 billion of pension and debt obligations, and the risk of a greater out-migration of its citizens and businesses, as it is confronted by a $3.5 billion deficit over the next two years, even as its budget is nearly three months overdue. That is, Hartford’s fiscal deterioration has become part of a context of broader credit deterioration in the state—which, in response, appears likely to struggle within a context of worsening local credit quality in Connecticut. Not only is the state likely to make deep cuts to local aid in the current biennium: the state is already assuming that its municipalities will draw down reserves as a result—meaning that the fiscal ripples are likely to adversely the borrowing costs of municipalities throughout the state.

The Dangerous Road to Recovery. The FBI released data yesterday, which found that violent crime in Detroit surged 15.7 percent last year, ranking the city as the nation’s most violent big city, albeit a finding city police officials disputed. Last year, there were 13,705 violent crimes reported—murder, rape, assault, and robbery—more than 10 percent greater than the previous year. Nevertheless, Detroit Police Chief James Craig described the FBI numbers as wrong: he blamed an antiquated software system (CRISNET), which he said caused crimes to be double reported. The system, which was replaced in December, shows a 5 percent reduction in violent crime last year, according to Chief Craig. According to the FBI, Detroit’s rate of 2,047 violent crimes per 100,000 people placed it highest among cities with more than 100,000 residents, higher than St. Louis and Memphis, Tennessee—and seemingly reversing the city’s post chapter 9 implementation of its plan of debt adjustment: violent crime in the Motor City had declined 13% in 2015, making it second in the country behind St. Louis.  According to the FBI report, murders rose in Detroit last year as well: 303 in 2016 from 295 in 2015, up 3 percent, albeit that lagged the national violent crime rate increase, which rose for the second year in a row, up 4.1 percent from last year. Murders in the United States were up by 8.6 percent, according to the FBI data. Thus, notwithstanding the headlines the Windy City, Chicago, has garnered for its rise in murders: 765 in 2016 compared with 478 in 2015, a 60 percent increase, Chicago’s is significantly lower than Detroit’s.

A Double Standard for Puerto Rico? Puerto Rico Gov. Ricardo A. Rosselló yesterday warned the U.S. territory was on the brink of a “humanitarian crisis,” even as U.S. Navy vessels docked in Virginia which could be invaluable in rendering the kinds of critical recovery the federal government provided to communities in Texas and Florida remain docked nearly a week after Hurricane Maria knocked out all of Puerto Rico’s electricity, most of its potable water, and fearful of the collapse of a major dam. The Governor urged Congress to act swiftly to avert a deepening disaster, asking that Puerto Rico be accorded the same treatment as hurricane-ravaged states. Despite the silence from President Trump, the Governor urged Republican leaders in Congress to move swiftly to send more funds, supplies, and relief workers: “Puerto Rico, which is part of the United States, can turn into a humanitarian crisis…To avoid that, recognize that we Puerto Ricans are American citizens; when we speak of a catastrophe, everyone must be treated equally.”

The dire physical situation, moreover, could bode even more dire fiscal consequences: as Gov. Rosselló warned Puerto Ricans are expected to flee in droves to the continental U.S., increasingly leaving behind the old and the poor, aggravating the fiscal hurricane—or, as the Governor put it: “If we want to prevent, for example, a mass exodus, we have to take action. Congress, take note: Take action, permit Puerto Rico to have the necessary resources.”

In the wake of criticism for a lack of public support for Puerto Rico, President Trump yesterday took time from tweeting about the NFL to post a pair of tweets which nevertheless identified the devastating connections between the natural disaster to Puerto Rico’s increasingly desperate fiscal situation, writing that while Florida and Texas were coping well from hurricane damage, “Puerto Rico, which was already suffering from broken infrastructure & massive debt, is in deep trouble,” adding in a subsequent tweet: “…owed to Wall Street and the banks which, sadly, must be dealt with. Food, water and medical are top priorities—and doing well.” Congressional leaders yesterday claimed they were awaiting assessments of the damage in Puerto Rico, as well as a formal disaster request from the Trump administration, before Congress can act; unfortunately, such a request is not expected until early to mid-October, even as House Appropriations Committee Chairman Rodney Frelinghusyen (R-N.J.) issued a statement noting that Puerto Ricans on the island “are entitled to equal treatment under the law.”

FEMA is currently drawing from the same $15.3 billion appropriation approved this month by Congress in response to Hurricane Harvey, which hit Texas, and Hurricane Irma, which hit Florida and damaged Puerto Rico and the United States Virgin Islands. FEMA Director Brock Long, and Thomas P. Bossert, the President’s Homeland Security adviser, were both in Puerto Rico yesterday to assess the damage, with Director Long asserting that the federal government had 10,000 people “working around the clock” to help Puerto Rico. Puerto Ricans can now file damage claims with FEMA, which has sent teams to 10 municipios to go house to house to collect information and pass it on, according to Gov. Rosselló; nevertheless, more than half the territory is without potable water—100 percent is without electricity. All of Puerto Rico’s wastewater and water treatment plants lack electricity.

Some Democrats want Congress to quickly approve a relief bill, but to, at the same time, temporarily forgive Puerto Rico’s loan repayments and remove a requirement that Puerto Rico contribute into the federal emergency pot. Indeed, the physical and fiscal damage to the U.S. Virgin Islands and Puerto Rico, has meant the halt of all PROMESA-related creditor and debtor considerations: in the wake of the storm, and the diversion of all Puerto Rico governmental focus on saving lives, it is unlikely Puerto Rico will be making interest payments on its debts for the foreseeable future: the restoration of vital public utilities to ensure the provision of water and electricity is a much higher priority: there is access to safe drinking water to only a quarter of Puerto Rico’s residents. In the three decades that National Guard Brigadier General Wendul G. Hagler II has served, he described the situations as “about as large a scale damage as I have ever seen.” 

A related fiscal danger could be an accelerating exodus of more educated and skilled Puerto Ricans, likely in the thousands, to leave for the continental U.S., leaving behind a population in need of far greater vital public services, but a deteriorated tax base—with some estimates that such an exodus could be greater than 10%.  

The Fiscal Straits of Federalism: constitutional, fiscal, and human challenges for state and local leaders.


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Good Morning! In this a.m.’s blog, we consider the dire state of Hartford, Connecticut and the ongoing constitutional and fiscal challenges to the U.S. territory of Puerto Rico.

Fiscal Heart for Hartford? With no state budget in sight, the first day of school looming, Moody’s this week gloomily wondered whether the capitol city can avoid chapter 9 municipal bankruptcy via a path of debt restructuring and labor concessions as it contemplates looming debt payments of $3.8 million next month, and then $26.9 million in tax anticipation note payments in October. Moreover, given the grim state of Connecticut’s own fisc—upon which Hartford relies for half its municipal budget, Halloween could bring more than fiscal ghouls. Its options, moreover, as we have previously noted, are slim: with one fifth of its municipal budget composed of fixed costs, the option of increasing taxes—in a city with the highest tax rates in the state—would risk the loss of key businesses, potentially reducing, rather than increasing vital revenues. Thus, the challenge of meeting increased debt service costs and rising OPEB and pension obligations seem to more and more point to municipal debt restructuring.

If anything, the fiscal challenge is further complicated by the uncertainty on the state front: Connecticut has yet to adopt the budget for the fiscal year that began on July 1st: legislators have been unable to achieve consensus on a new two-year plan the governor will sign to address the state’s own projected $3.5 billion deficit. Indeed, Gov. Daniel P. Malloy’s budget, which proposes shifts of state education aid from wealthier communities to poorer communities, promises difficult negotiations with an uncertain outcome. Patrice McCarthy, the deputy director and general counsel at the Connecticut Association of Boards of Education, warned that while there were previous state budget impasses in 1991 and 2009, this year could be much worse for public school officials: “In those years, while we didn’t have a finalized budget, people had a better idea in each community about how much they’d be receiving: This year, everything is up in the air.”

Fundido. In Latin America, the word fundido can be translated to “dead beat;” while in English, the old expression that one cannot beat a dead horse might seem apt for the challenge confronting U.S. District Judge Laura Taylor Swain, who is presiding over the PROMESA version of a chapter 9 municipal bankruptcy process—a process created under the statute adopted by Congress which Theodore Olson, the former Solicitor General of the United States, this week described in an op-ed to the Wall Street Journal as a law which blatantly violates the Appointments Clause of the U.S Constitution.

Judge Swain this week approved an agreement intended to address creditors’ competing claims with regard to Puerto Rico’s sales tax revenue by the end of this year as part of an effort to resolve an agreement between the island’s two biggest creditor classes, General Obligation bondholders and COFINA bondholders, in part through appointing an agent for each side—agents charged with pursuing the best resolution for their debtor’s estate as a whole, as opposed to advocating for particular creditors of that debtor. (COFINA’s bonds are backed by Puerto Rico’s sales and use tax revenue, unlike Puerto Rico’s General Obligation debt, which carries a constitutional guarantee providing a claim on all of Puerto Rico’s revenues.) Thus, unsurprisingly, Judge Swain had been placed in the position of Solomon: she could threaten to cut the baby in half if the two sides do not reach an agreement by December 15th.  Here, the judicial combatants, who, together, claim to hold approximately half the U.S. territory’s $72 billion in debt, are fighting over which side has the primary claim on sales and use tax revenues.

Separately, Judge Swain this week has held off on responding to a request by creditors of Puerto Rico’s bankrupt power utility, PREPA, to appoint a receiver at the agency, denying a motion by a group of cities and towns to form an official committee in the case, whose attorneys’ fees would be paid by the island’s bankruptcy estate. Judge Swain informed the parties it was unclear whether the municipalities had valid claims against Puerto Rico’s government, a claim which, as we have previously noted, is critical, as Michael Rochelle, an attorney for the muncipios, told the judge his clients are confronted with budget cuts of as much as 50 percent; he plead: “This place will become Greece…We will have municipalities needing to be bankrupted.” Increasingly, too, there are fears that exorbitant legal fees, fees which some experts believe could run to in excess of $1 billion, are coming at the expense of Puerto Rico’s future. In so informing the muncipios, Judge Swain rejected a motion by several municipalities to have a committee representing their interests in Puerto Rico’s Title III case: she said that §1102 of the bankruptcy code allowed committees for creditors or equity security holders, but the municipalities are not the latter, and the municipalities’ principal concerns are not those of being creditors, adding that the municipalities are adequately represented without having their own committee.

The president of the Association of Puerto Rico Mayors, Rolando Ortiz, yesterday made clear the gravity of the fiscal situation, warning that 45 municipalities will be inoperative as early as the close of the fiscal year, under the fiscal plan submitted by Gov. Ricardo Rosselló and certified by the Federal Fiscal Control Board. He noted that the proposal would eliminate a loan of some $350 million, which was granted to municipalities in exchange for exempting public corporations from paying the tax on real property—or, as he stated: “From the fiscal point of view, it leaves us without protection of the judicial apparatus of the country and limits our capacity to serve to the citizens to the extent that they take away resources that we have always used to help the people that we attend in the different cities.”

Indeed, it appears the fiscal impact has already begun to have an effect on the pockets of municipal employees, who have experienced reductions in working hours in 22 municipalities: Arroyo, Toa Alta, Cabo Rojo, Yauco, Las Piedras, Juana Diaz, Comerío, Vieques, Aguadilla, Mayagüez, Toa Baja, Salinas, Adjuntas, Vega Baja, Sabana Grande, Villalba, and Trujillo Alt; five other municipalities had applied the reduction of working hours in previous years. (Ponce, Ciales, Luquillo, Maunabo, and Camuy.) The likely next step, he warned, would be that more municipalities will join the lawsuits filed by the municipalities of San Juan and Caguas—litigation in response to which they said: “The decision of (Judge Swain) what she is going to bring is more cases on the part of the municipalities.” The Mayor of Caguas, a municipality  founded in 1775 of about 150,000 located in the Central Mountain Range, William Miranda Torres, regretted the closure of the judicial door to the municipalities, describing it as a “scenario where they have made decisions, by blow and blow, to make use of our monies without allowing us fair participation,” describing it as “clear discrimination against the municipalities,” noting that the municipalities offer direct services to the citizenry, including  maintenance to infrastructure, health, safety, emergency management, programs to the elderly, garbage collection, cultural programs, fine arts programs and sports programs—adding: “The central government has been stripping municipalities of important resources to provide essential services that will now be very difficult to cover. The humanitarian crisis has come and closing doors give us very few possibilities to fight it from where we can best do it.”

For her part, San Juan Mayor Carmen Yulin Cruz recalled that her municipality continues along the route to sue under PROMESA’s Title VI, even as she praised the management of mayors who filed their appeal by way of Title III: “If the judge (Judge Swain) said it was not for Title III, at least those comrades dared to challenge PROMESA.”