Stop & Start Federal Governance, and Abandoning Puerto Rico

eBlog

February 9, 2017

Good Morning! In today’s Blog, we consider the outcome of last night’s deliberations to avoid another federal government shutdown and the nexus between New Jersey’s public pension system and Puerto Rico’s growing foreclosure crisis, and we consider the growing frustration of the Executive Director of the PROMESA Oversight Board with regard to the absence of any real commitment by the Congress.

Dysfunctional Governing & Creating Record Federal Debt. In the wake of still another shutdown of the federal government last night, he U.S. House of Representatives, earlier this morning, voted to approve Senate-passed legislation (71-28), including a sweeping budget deal to increase the national debt, increase federal deficits, and fund the federal government through March 23rd, voting 240-186 to forward the bill to President Trump for his signature. The new, temporary patch for the federal budget will come at a signal cost: it will boost federal spending for both defense and non defense programs by $325 billion over the next two years; it will suspend the debt ceiling for one year; it will give the White House, House, and Senate until March 23rd to write an omnibus spending bill for the remainder of the federal fiscal year and break the pattern of gridlock that has led to five temporary funding patches since last September. As passed, the legislation includes a number of other priorities for both parties, including nearly $90 billion for disaster relief, $6 billion to address the opioid crisis, a four-year extension of the Children’s Health Insurance Program, and more than $7 billion for community health centers. As passed, the agreement includes a massive defense spending increase, and a smaller domestic discretionary increase. The legislation to reopen the federal government—temporarily—is estimated to add as much as $2 trillion to the national debt over the next decade. As passed, the legislation includes $15 billion in tax extenders, restoring nearly three dozen federal tax expenditures which expired at the end of last year, subsidizing owners of racehorses, NASCAR tracks, filmmakers, and railroads—that is, a Congress with the greatest debt and deficits of any in U.S. history already running a $1 trillion-plus annual deficit voted to subsidize businesses and individuals for activities they took in 2017.

Fiscal Imbalances. Meanwhile, in Puerto Rico, PROMESA Board Executive Director Natalie Jaresko stated the Board is making progress towards its goal of restoring the U.S. territory’s fiscal balance and renegotiating its public debt; the just adopted spending agreement this morning by Congress could help: it would allow full Medicaid access to Puerto Rico, laying a foundation to revive the territory’s health system for two years, and lay the foundations for rebuilding its power grid: the provisions, announced by the U.S. Senate leadership, could represent about $ 15 billion in direct allocations, according to Sen. Marco Rubio (R-Fla.); the package which went to the White House this morning Florida), include $ 4.8 billion in Medicaid funds for the island, as an allocation that would represent full access to the program, based on the emergency caused by Hurricane Maria. The bill includes $2 billion for the Puerto Rico Electric Power Authority (PREPA) to rebuild its infrastructure, a critical provision for the island, where, 141 days after Hurricane Maria, 28% of the territory’s citizens remain without power.

In an interview with El Nuevo Día, Director Jaresko stated there had been “measurable” fiscal progress, albeit “small, but important,” as she answered each of the questions regarding performance reported this week by this newspaper, assuring that there are “measurable progresses” that, although “small, are important.” She added, however, that the process of transformation driven by the oversight Board has not moved at the pace she would like; moreover, she said, the role of the Congressionally created entity is not understood either in Puerto Rico or by the Congress or White House; nevertheless, she added, the Board expects to resume the correct course that Puerto Rico needs: “Those who expected the Board to come to govern are disappointed. Those who expected the Board to be in favor of the creditors are not happy; and those who expected the Board to be against the creditors: the reality between what  the enabling law dictates, the powers of the Board and the relationship with the government is, by far, more complex than expectations.” She added: “I wish there was more support from Congress for Puerto Rico: More clarity is needed. The second round of the supplementary aid package to address the disaster is still pending; CHIP and Medicaid funds are still pending. We need more confidence and clarity,” noting fiscal quandary for the Board to be forced to make fiscal decisions without knowing clearly what federal resources Puerto Rico can realistically anticipate.

Her comments came as, this week, the Board advised Ricardo Rosselló that Puerto Rico’s fiscal plans do not comply with PROMESA, giving the government seven days to correct them. Among the requested or demanded changes: an update on the information with regard to the federal funds that Puerto Rico would receive for its recovery. She also made clear she was “disappointed,” because, in the newly enacted federal tax reform, the law does not include provisions to exempt U.S. multinational businesses operating in Puerto Rico from the new taxes on U.S.; nor did the law grant a transition period to counterbalance the impact of that decision on the local economy. She noted the PROMESA Board expects concrete actions by Congress, noting that, last month, the Board had invoked §103 of the PROMESA Law, requesting the transfer of federal employees to address the situation in Puerto Rico, with the request made to the departments of Energy, Agriculture, Commerce, Transportation, Health, Housing, the U.S. Treasury, the General Services Administration, and the Environmental Protection Agency.

Her comments came as the Board’s 18-month anniversary of service nears next month—marking their halfway point. Next month, the members of the Board will have served 18 months in office, that is, half of their term since they accepted the task of restoring the fiscal balance and access of Puerto Rico to the capital markets—a period during which the only voluntary agreement with bondholders of Puerto Rico municipal debt (in the Puerto Rico Electric Power Authority [PREPA]) was rejected, while the liquidation of the Government Development Bank (GDB) was approved. During her tenure, PREPA has exhausted its funding: it could cease operating as early as this month; bondholders this week have returned to Court for the Title III cases, determined to litigate their debts. Thus, to Director Jaresko, the progress of the Board must be measured in light of its dual federal partially funded mandate: fiscal balance and access to the capital market: a charge which she noted, to achieve, would require time and a series of reforms which the Board has just put on the table, in no small part by, this week, sending the Governor the first notices of violations to the PROMESA Law in the fiscal plans—and giving Puerto Rico until Monday, President Lincoln’s birthday, to respond.

Asked whether seven days were enough for the government to make all the changes that the Board has requested, Director Jaresko responded that “Most of the information being requested must be supporting information for the estimates in the plan. I understand the information is available, because, if they are talking about the savings they will achieve, the details of that policy have to be there,” adding that it is the Board’s intent to certify the fiscal plans on February 23rd. She added that the creation of the office of the government’s Chief Financial Officer will allow staff to engage in financial disclosure tasks without being at the mercy of a change of government. Finally, she noted that with the new fiscal plan, Gov. Rosselló had demonstrated a greater commitment towards the structural reforms needed—with those comments coming just as Gov. Rosselló reported that the negotiations to review the fiscal plans are still in place and that he will comply with the submission date imposed by the PROMESA Board.

Nevertheless, while the Director appears upbeat, that confidence is not felt in New Jersey, where members of the state investment council have made clear they would not be comfortable if the pension fund profited from the hardships of Puerto Ricans, warning that in the wake of Hurricane Maria, Puerto Rico is bracing for a mortgage crisis, with many residents now way behind on their payments. Thus, policymakers for New Jersey’s public-employee pension system are trying to make sure investments that were launched here years ago do not aggravate that fiscal and fiscal crisis: members of the New Jersey State Investment Council were recently notified that two private equity funds which the pension system owns have significant stakes in corporations which are pursuing foreclosures on Puerto Rico: the private equity funds are part of the $77.5 billion pension system’s substantial alternative-investment portfolio—and, private equity was a top performer for the system during the 2017 calendar year, according to the latest returns reviewed during the investment council’s public meeting this week: in all, the pension system enjoyed returns totaling nearly 15 percent last year, which more than doubled the 7 percent assumed rate of return. Currently, the federal government has placed a moratorium on most foreclosure proceedings in the wake of the hurricane; however, the moratorium is due to expire next month, creating uncertainty about what that might mean; however, the council members made it clear during a public meeting that they are not comfortable seeing the pension fund profit from the hardships being faced in Puerto Rico, with Chair Tom Byrne noting: “I don’t think any of us are looking to make three extra basis points on this fund by throwing people out of their homes in Puerto Rico.” said Tom Byrne, the panel’s chairman. The issue involves pension system’s ties to the companies pursuing foreclosures in Puerto Rico, ties related to a diversification strategy that the investment council launched more than a decade ago as it sought to protect against major losses that can occur during a market crash. The diversification strategy relies in part on alternative investments, such as hedge funds, venture capital, and private equity—investments which, however, wrest control from state pension decisions compared to some of the more conventional investments that are managed in-house by the Division of Investment, an agency within the New Jersey Department of Treasury. For example, three years ago, the Council was pressed to eliminate a stake in another private-equity firm, JLL Partners, in the wake of information the firm had ties to a Texas-based payday lending firm that was fined after being accused of heavy-handed lending practices—especially as the practice of payday lending is prohibited in New Jersey. Now, with an estimated 90,000 borrowers in Puerto Rico behind on their mortgages as a result of Hurricane Maria, memories of the Hurricane Sandy impact on New Jersey has resurrected memories of the many state citizens who were forced to pay rent for temporary housing and also cover the mortgages on their damaged homes. Jim Baker, from the Private Equity Stakeholder Project, told the council this week that some of the foreclosures were not just conventional mortgages, but also reverse mortgages that have been set up with senior citizens who are required to make property tax and homeowners insurance payments in order to receive payouts, as he urged the panel to get involved in the issue, saying the federal moratorium on foreclosures is “fast approaching” and it’s still not clear what is going to happen once it passes. Mr. Baker said he would like to see the moratorium extended for another year, which is something four U.S. senators, including New Jersey’s Robert Menendez, have asked the federal government to do.

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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.

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.”

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.

Disparate Physical & Fiscal Responses to Municipal Physical & Fiscal Distress

eBlog

January 16, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal and physical challenges of restoring power in hurricane devastated Puerto Rico, which the Trump Administration and Congress have opted to treat in a very different manner than other hurricane devastated municipalities and states.

Prospects for Recovery. Notwithstanding the opposition of his own designated coordinator for the restoration of electric power, Puerto Rico Governor Ricardo Rossello yesterday gave the go-ahead to sign an agreement which will allow Puerto Rico’s muncipios to hire companies and experts to repair the island’s electric distribution lines, with Puerto Rico Secretary of the Interior, William Villafañe, announcing—in the wake of a demonstration by residents of bigger muncipios which remain without electricity since Hurricanes Irma and María passed last September, that the Electric Power Authority (AEE) will sign an agreement with the muncipios to allow them to hire companies to repair power lines. The breakthrough came in the wake of a meeting with the presidents of the Federation and the Association of Mayors, Carlos Molina (Arecibo) and Rolando Ortiz (Cayey), respectively, as well as the Mayor (Alcalde) of Bayamón, Ramón Luis Rivera, and others officials. The agreement, which until yesterday had not been shown to the Mayors, is supposed to have a series of security restrictions; in addition, the agreement is intended to empower the muncipios to offer injury insurance, as well as be eligible for FEMA reimbursement. Secretary Villafañe noted that Governor disagreed with the result of last Monday’s meeting, in which the coordinator designated for the restoration efforts of electric power, Carlos Torres, and the AEE refused to establish an agreement with the municipios out of security concerns.

Thus, among the security conditions the agreement mandates, is that Mayors will be required to establish contracts exclusively with contractors who have specialized equipment and trucks. In a clarification, Secretary Villafañe assured reporters that PREPA retirees may continue to provide services, as is the case of the Pepino Power Authority, an initiative of the Mayor Javier Jiménez of San Sebastian—a muncipio founded in 1752 by Captain Cristóbal González de la Cruz, who among other neighbors, had an interest in converting some cow farms into an agricultural village. The foundation of the town from the religious aspect, was consummated in December 1762 by Mariano Martin, the then Puerto Rico Catholic Bishop: by the beginning, 1700, San Sebastian was a conglomerate of a few cow farms, owned by some residents of the Partido de Aguada. Las Vegas was the former plain site of one of the first cow farms located by the Guatemala riverside at the north; another of those cow farms was Pepinito (today’s downtown), which was a low green mountain with a white calcium carbonate face. From these geographical accidents come the first names of the then new village, albeit one of the oldest municipalities in the United States: Las Vegas del Pepino (Cucumber Fields). Indeed, the permission to found the muncipio was officially given in 1752.

By the beginning of the 19th century, wealthy Spanish families arrived in Pepino, fleeing the revolutions of Venezuela and the Dominican Republic. Subsequently, families from Catalonia and the Basque country in Spain came to Puerto Rico as well as a significant number of isleños (Canary Islanders)—with the isleños taking over the local political power and developing a coffee industry. Much as they did in Nevada, the Basques brought some material progress to the muncipio; in addition, the new resident Basques, in remembrance of their home region and its religious patron, saw the need of upgrading the old traditional Pepino used by the Canary Islanders to the new and “up-dated” San Sebastián—even though, still today, the citizens of San Sebastián are called “pepinianos.” Permission to found the muncipio was officially given in 1752, under the leadership of the founder, Captain Cristóbal González de la Cruz, who sought to convert cattle fincas (ranches/farms) into an agricultural village—with the governmental transformation consummated in December of 1762 by Mariano Martin, the island Catholic bishop at that time. The muncipio grew by the beginning of the 19th century, with the arrival of wealthy Spanish families, fleeing the revolutions of Venezuela and the Dominican Republic. Nearly a century later, several Catalon families from northern Spain and the Canary Islands joined the large number of isleños (Canary Islanders) who had made El Pepino their home—new arrivals who, in the wake of taking over the local political power, developing a coffee industry, and changing the muncipio’s name, in remembrance of their home region and its religious patron, to the new and “up-dated” San Sebastián, notwithstanding that, still today, the citizens of San Sebastián are called “pepinianos.”

For his part, the Mayor Rivera, who had notified the government last September of his interest in collaborating in the restoration of electricity, only learned yesterday that the agreement had been approved; however, the municipal executive of Cayey and President of the Association of Mayors said that as long as they do not see the document, they will not believe it, because, to date, they have neither been allowed to see or sign the document in question: Mayor Ortiz said that during the meeting yesterday, Coordinator Torres again expressed his disagreement with allowing municipalities to collaborate in the restoration of light: “He (Torres) will have control of the materials, will have control of the brigades, control of resources–and that this resource, which is so important in the process of re-energizing the country, says that he does not agree with the Mayors intervening in this process or giving us the agreement to sign…They said that they were going to give us the power to energize the system and work with brigades that we can hire, and that they will give us brigades to work with the municipalities, and they will give us materials, (but) we leave here with nothing in the hand, with a promise of agreement.” Mayor Ortiz explained that in Cayey the muncipio has retirees from PREPA willing to start working, however, absent an agreement, they are not only barred by law from doing so, but also prevented from obtaining protection from the State Insurance Fund Corporation in case of injury to these workers. The Mayor added: “What he (Coordinator Torres) does not know is that in all of our communities and in all of our cities there are people trained with extraordinary resources to work on that system, because they have done it in all the previous events.”  Nevertheless, Mayor Rivera assured that as soon as the document is sent and signed, he has two companies with three brigades ready to work in the Bayamón distribution lines. He estimated that these works can begin today, if the legal division of La Fortaleza advances in the drafting of the agreement with the municipalities.

Unbalanced Politics? The restoration efforts have also been hampered by allegations of partisan discrimination: the number of brigades distributed among the municipalities of the northern region supposedly differed by 480 in the municipalities of the New Progressive Party (PNP) versus 174 in those led by the PPD, according to the President of the Municipal Legislature of Dorado, Carlos Alberto López. However, Secretary Villafañe refuted those data with others: he indicated that among the six municipalities with less than 20% of electric power service restored, five are NPOPs, while among the 35 that already have more than 60% service, 20 are from PPD.

What Would Rod Serling Say? The former host of the Twilight Zone, Rod Serling, who opened each week’s show by saying a “Dimension of sound, a dimension of sight, and dimension of mind: you just crossed over into The Twilight Zone,” seems consistent with Moody’s characteristically moody new report on Puerto Rico’s fiscal plan, writing: “These repeated delays in revising Puerto Rico’s fiscal plan…underscore the economic uncertainties that Puerto Rico faces as a result of post-Maria factors, including surging migration to the U.S. mainland, potentially unsustainable operating conditions for the territory’s manufacturers, and the federal recovery and rebuilding assistance that may fall short of what Puerto Rico needs to prevent lasting and severe damage to its economic base…Together, the growing challenges from these factors may further reduce already low recovery prospects for holders of Puerto Rico’s 17 rated debt types.” The insights, provided by Moody’s senior at least 200,000 Puerto Ricans have left Puerto Rico since Hurricane Maria struck, or about 6% of the pre-Maria population—adding that manufacturing, an important part of Puerto Rico’s economy, has been steadily dropping over the last two decades—and warning that, in the bitter wake of Maria, some manufactures may decide to move to other areas less likely to be hit by future hurricanes. The analysts further warned that the federal government’s new 12.5% excise tax on profits derived from patents and other intangible assets is another negative. Finally, they noted that the amount of federal aid to Puerto Rico in the aftermath of Hurricane Maria will affect Puerto Rico’s trajectory of recovery amid growing doubt and uncertainty whether Gov. Rosselló’s request for $94.4 billion in aid will be honored—especially, with the federal government on the verge of shutting down this week—and its failure, to date—in disbursing any portion of a Congressionally-approved $4.9 billion Community Disaster Loan to Puerto Rico, the U.S. Virgin Islands, and some other jurisdictions hit by recent natural disasters. Last week, Reorg Research reported that Puerto Rico’s debt restructuring and arguments between the U.S. Treasury and Puerto Rico over the latter’s control of the funds has delayed the funds’ release.

If anything, the federal inability to act has been further clouded by unclear governance: last week, Puerto Rico Sen. Minority Leader Eduardo Bhatia, who, during his tenure as Senate President, had been selected as Chair of the Council of State Governments of the Eastern Regional Conference (CSG-ERC) and later elected as President of the National Hispanic Caucus of State Legislators, thereby becoming the first Senate President and the first Puerto Rican to preside over the organization, as well as serve on the Board of the Council of State Government (CSG), National Association of Latino Elected Officials (NALEO) and the National Hispanic Leadership Agenda (NHLA); brought up a different concern about the fiscal plan’s delay: in the new style of Trumpian governance, he tweeted to Gov. Ricardo Rosselló: “This is your great opportunity to regain lost confidence…Make your fiscal plan public today, so that there is no doubt, the people know your proposal and participate in the reconstruction of Puerto Rico,” adding that the people of Puerto Rico deserved a chance to comment prior to the draft’s submission to the PROMESA Oversight Board, tweeting: “In all countries of the world, ideas are discussed before decisions are made, not later…Otherwise, the process is a mockery of the serious people of Puerto Rico who want to contribute to the common good.”

Governance Amidst Fiscal and Stormy Challenges & Uneven Federalism

December 1, 2017

Good Morning! In today’s Blog, we consider the fiscal and governing challenges in one of the nation’s oldest municipalities, and its remarkable turnaround from verging on becoming the first municipality in Virginia to file for chapter 9 municipal bankruptcy, before veering south to assess what President Trump has described as the U.S. territory of Puerto Rico suffering from “from broken infrastructure and massive debt.” 

Visit the project blog: The Municipal Sustainability Project 

Revolutionary Municipality. Petersburg, Virginia’s City Council, one of the oldest of the nation’s cities, as part of its fiscal recovery, last week had voted 5-2 to request the Virginia Legislature to change the city’s charter in order to transfer the most critical duties of the Treasurer’s Office to a newly-created role of city collector—a position under the Council’s control, as part of its wish list for the newly elected state legislature. Petersburg, an independent city of just over 32,000, is significant for its role in African-American history: it is the site of one of the oldest free black settlements in the state–and the nation.  The unprecedented City Council effort seeks to strip power from an elected office—an office some believe curried some fault for contributing to Petersburg’s near chapter 9 municipal bankruptcy. Ironically, the effort came the same month that voters elected a former Member of the City Council to the office of Treasurer. Councilman Treska Wilson-Smith, who opposed the move, stated: “The citizens just voted in a Treasurer. For us to get rid of that position is a slap in the face to the citizens who put them in there.” Unsurprisingly, State Senator Rosalyn Dance, who for a dozen years has represented the city as part of her district in the Virginia House of Delegates, and who will consider the city’s legislative agenda, said she was concerned. Noting that the newly-elected treasurer has yet to serve a day in office, she added that much of the turmoil had to do with the current Treasurer, so, she said: “I hope [the] Council will take a second look at what they want to do.” Former Councilman and Treasurer-elect Kenneth Pritchett, who declined to comment, ran on a platform of improving the office’s operations by standardizing internal controls and implementing new policies: he urged Petersburg residents to contact lawmakers in a Facebook message posted after the Council took action, calling the decision “a prime example of total disrespect for the citizens’ vote.”

Nevertheless, Council Members who supported the legislative agenda language said it was time for a change, or, as Councilman Darrin Hill noted: “I respect the opinion of the citizens, but still, we believe if we keep on doing the same thing that we have done, then we will keep on getting the same results.” Other Councilmembers felt even better about their votes after the Council received good financial news earlier this week when newly audited reports showed a boost in Petersburg’s reserve funds, increased revenue, and a drop in expenditures—a marked fiscal reversal. In addition, the city’s external auditor provided a clean opinion—a step up from last year’s “modified” opinion—an opinion which had hinted the city had failed to comply with proper accounting principles—and a municipal fiscal year which commenced $19 million in the hole—and $12 million over budget—in response to which the Council raised taxes, cut more than $3 million in funding from the city’s chronically underperforming schools, eliminated a popular youth summer program, and closed cultural sites. Former Richmond City Manager Robert Bobb’s organization—which had been hired to help the city recoup from the verge of chapter 9 municipal bankruptcy, had supported transferring some of the duties of the Treasurer to a city collector position as a means to enhance the city’s ability to improve its tax collections.

Subsequently, late last September, another shoe fell with a 115-page report which examined eight specific aspects of city governance—and found allegations of theft involving current Treasurer Kevin Brown—claims Mr. Brown repeatedly denied, but appeared to contribute to his decision not to run for reelection—an elected which Mr. Pritchett won by a wide margin, winning just over 70 percent.  Nevertheless, Mayor Samuel Parham told his colleagues: “We are treading too thin now to risk someone who is just getting to know the job. We can’t operate as a city of hoping…Now that we are paying our bills and showing growth, there is no need to go back in time and have a situation that we had.” However, some Councilmembers believe they should await more facts with regard to Mr. Brown’s actions, especially with regard to uncollected municipal tax revenues, or, as Councilmember Wilson-Smith put it: “There are some questions which we still have unanswered when it comes to why the taxes were not collected: It appears to me that a lot of the taxes are not being collected, because they are un-collectable,” or, as she noted: Many listed for unpaid taxes were deceased.

David Foley with Robinson, Farmer, Cox Associates, Petersburg’s external auditor, had presented figures before Petersburg residents and the City Council, noting the clean opinion is a substantial improvement from last year, when auditors issued a modified opinion which suggested Petersburg had failed to maintain accounting principles—testifying that the improvement mainly came from the city being able to provide evidence of the status of some of its major financial accounts, such as public utilities. He did recommend that Petersburg strengthen some of its internal controls over the next fiscal year—noting, especially, the reconciliation of the city’s public utility system, which some officials have suggested should be sold to private companies. Indeed, City Manager Aretha Ferrell-Benavides told City Council members that a plan to correct some of the deficiencies will start in January, with monthly updates on corrective actions that she would like to continue to take. The see-saw, key fiscal change of nearly $2 million more than had been projected arose from a combination of increased real estate tax collections, and a $2.5 million reduction in expenditures, mainly came from health and welfare, and non-departmental categories: in total, there was a $7.5 million increase in the city’s chief operating fund. Unsurprisingly, Mr. Foley, in response to Councilmember Charlie Cuthbert, noted: “It was a significant year. There is still a long way to go,” indirectly referencing the city’s commencement of FY2017 $19 million in the hole and $12 million over budget—and with dire threats of legal action over unpaid bills—triggering a tidal wave of legal bills of nearly $1 million—of which about $830,000 went to Mr. Bobb’s group—while the city spent nearly $200,000 on a forensic audit.  Council members received the presentation on the annual financial report with a scant two days prior to the state imposed deadline to submit the report—after, last year, the city was about seven months late in submitting its annual financial report.

Insufficient Shelter from the Fiscal Storm. In the brutal wake of Hurricane Maria, which destroyed about 57,000 homes in Puerto Rico last September and left another 254,000 severely impacted, 50 percent of the U.S. territory’s remaining 3.5 million inhabitants are still without electricity—a lack that has adversely impacted the ability to reconstruct the toll wrought by Maria, not to mention the economy, or loss of those, more than 150,000, who could afford to leave for New York and Florida. Puerto Rico still confronts a lack of drinking water. Governor Ricardo Rosselló had assured that 95% of the island would have electricity by today, but, like too many other promises, that is not to be. An irony is that the recent visit of former President Bill Clinton, who did not come down to toss paper towels, but rather to bring fiscal and physical assistance, may be, at long last, an omen of recovery. It was just 19 days ago that Gov. Roselló appeared before Congress to request some $94 billion to rebuild the U.S. territory—a request unmet, and a request raising questions about the Puerto Rican government’s ability to manage such a vast project, especially in the wake of the $300 million no-bid contract awarded to a small Montana utility company, Whitefish, to restore the territory’s power—an effort House Natural Resources Committee Chair Rob Bishop (R-Utah) described as raising a “credibility gap.” Indeed, in the wake of that decision, Chairman Bishop and others in the Congress have called for the unelected PROMESA Financial Oversight and Management Board, known on the island as “la junta,” to extend its powers to overseeing the rebuilding effort as well—a call which, unsurprisingly, many Puerto Ricans, including pro-statehood Governor Rosselló, see as a further threat to their democratic rights. 

Nevertheless, despite the quasi-takeover threat from Congress, U.S. District Court Judge Laura Taylor Swain has denied the PROMESA Oversight Board’s request to appoint an emergency manager, similar to those appointed by Gov. Rick Snyder in Detroit, or by the former Governor of Rhode Island for Central Falls under their respective authority under state authorizations of chapter 9 municipal bankruptcy. Puerto Rico, because it is not a state, does not have such authority; consequently, Judge Swain has determined the Board does not have the authority to appoint public officials—a holding which Gov. Rosselló responded to by noting that the decision upheld his office’s position about the board’s power, writing: “It is clear that the [board] does not have the power to take full control of the Government or its instrumentalities…[T]he administration and public management of Puerto Rico remains with the democratically elected government.

Putting Humpty-Dumpty Back Together Again

November 13, 2017

Good Morning! In today’s Blog, we consider the election results in Atlantic City, where incumbent Mayor Don Guardian was defeated by two-term Democratic City Councilman Frank Gilliam, in a municipality which has been under state intervention since last November.

Visit the project blog: The Municipal Sustainability Project 

Emerging from State Oversight? In New Jersey, voters elected a new Governor, Phil Murphy—and a new Mayor in Atlantic City, potentially paving the way for Atlantic City to emerge from its state takeover. Indeed, prior to his election, candidate Phil Murphy, who was elected over Republican candidate Lt. Gov. Kim Guadagno, had said he would end the state takeover of the city and instead work together with city officials as partners. The election came almost a year after the state takeover of the city—so that in his victory statement, Mayor-elect Frank Gilliam Jr., noted: “This is the beginning of a new era in Atlantic City: For the past 30-40 years Atlantic City has been taking the back seat, and now it is time for us to actually take the front seat.” How this new era will transform the municipality as it emerges from state intervention—and under a new Governor will be a challenge: the former Governor Chris Christie, under whom the state took over Atlantic City; has been replaced by the voters, who elected Philip Murphy, a former Wall Street banker with no experience in office, as the Garden State’s 56th governor—with Gov.-elect Murphy prevailing in a decisive victory to end the two-term reign of Gov. Chris Christie. The twin changes in governance could play a critical role as the city is emerging from its state takeover. The Governor-elect has proposed instituting a millionaire’s tax; he has also called for boosting public pension funding; he has not publicly discussed what he might propose with regard to the state’s current relationship with Atlantic City. Meanwhile, in Atlantic City, where voters turned Mayor Don Guardian out of office after a single, turbulent term, during which five of the city’s famed dozen casinos shut down, and the State of New Jersey seized control of the city’s assets and governing authority—voters selected Atlantic City Councilman and city native Frank Gilliam, who has served as a member of the City Council since 2009 to replace Mayor Guardian, with the Mayor-elect noting: “This is the beginning of a new era in Atlantic City.” Mayor Gilliam, in his first discussion, surrounded by his colleagues selected to fill the three open council-at-large seats, noted: “It’s going to always be about the people: We love Atlantic City: Now it’s time for us to actually take the front seat.” But the challenges ahead for the newly elected Mayor who, during his campaign, had promised the city’s voters would reverse the previous four years of debt and state takeover will not be easy. The Mayor-elect said he wants to focus on shaping up the city’s finances, improving tax rates, and bringing in more development for the city to appeal to people of all ages. In addition, he said he would like to clean up the beach blocks to raise the value of housing—a slight contrast from Mayor Guardian’s platform of taking credit for stabilizing the city’s finances and more interest from investors on new projects coming to the city, such as South Jersey Gas and Stockton University’s city campus: promises and promises which could not be converted to victory. Rounding out the City Council were victories by incumbent council-at-large candidates George Tibbitt and Moisse “Mo” Delgado, and the third at-large seat was won by Jeffrey Fauntleroy II. The Mayor-elect noted he was looking forward to having a “prosperous” relationship with the governor—describing it as it “is going to be a true partnership.”

Mayhap ironically the shuttered Trump Taj Mahal casino will reopen as a Hard Rock casino resort, bringing new life, and potentially new gaming, hotel revenue, and assessed property values; Stockton University is expected to open its Atlantic City satellite campus as part of a project which could also lead to the construction of a new corporate headquarters for South Jersey Gas in a section of the city starved for economic activity. As Brigid Harrison, a political science professor at Montclair State University put it: most people in the region believe Atlantic City has put its worst problems behind it, and are optimistic about a coming wave of development: “Part of Don Guardian’s greatest legacy will be the fact that he believed in and worked for a diversification of the city’s economic base, and, as Mayor, Frank Gilliam certainly will be able to reap some of the credit and benefits for projects initiated in the Guardian administration…Hopefully Mayor Gilliam will take a page from Mayor Guardian and continue the process of attracting a wide variety of businesses and enterprises to Atlantic City, which will only serve to strengthen the city and the region.”

But the new Mayor will also inherit unresolved challenges and problems, including the state’s takeover of Atlantic City, hundreds of millions in debt, the stalled development of a former airport property, and a city economy, which, albeit less dependent on casinos, is still disproportionately affected by their success or failure. And it is the unwinding of the state takeover which could prove the most challenging: The Mayor-elect, in his campaign, said he would commence with an audit of Atlantic City; he vowed to work closely with the incoming administration of Gov.-elect Murphy in what will be a key challenge with regard to how to unwind the state takeover of Atlantic City—a challenge to work across bureaucratic boundaries in a city where numerous state agencies held vast power even before the state takeover—or, as the Mayor-elect put it: “Atlantic City has been working in silos for 30 years: We have to talk to one another.”

S&P Global Ratings analyst David Hitchcock, in the wake of the election results, wrote that while Gov.-elect Murphy will have the support of a Democratic-controlled legislature, he will, nevertheless, be confronted by signal fiscal challenges due to decades of poor budgetary decisions. Mr. Hitchcock wrote that public pension-funding shortfalls under both Republican and Democratic administrations the last two decades have left the Garden State with a heavy pension liability shortfall along with high debt and consistent structural budget deficits, noting: “These impediments will likely constrain the state’s ability to increase funding for local aid or avoid deficits during an economic downturn, regardless of any near-term tax increases or spending cuts…The magnitude of the credit risks facing Governor-Elect Phil Murphy and the newly elected legislature means the state’s long-term credit conditions will remain challenging for the foreseeable future, no matter what policy direction they choose.”