A Hole in Puerto Rico’s Fiscal Safety Net: Should Congress Amend Chapter 9 Municipal Bankruptcy?

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Good Morning! In this a.m.’s eBlog, we consider the growing physical and fiscal breakdown in the U.S. Territory of Puerto Rico as it seeks, along with the oversight PROMESA Board, an alternative to municipal bankruptcy—but we especially focus on the fiscal plight of the territory’s many, many municipalities—or muncipios, which, because Puerto Rico is not a state, do not have access to chapter 9 municipal bankruptcy .   

Tropical Fiscal Typhoon. When former President Ronald Reagan signed Public Law 100-597, legislation authorizing municipal into law 29 years ago, no one was contemplating a U.S. territory, such as Puerto Rico—so that the federal statute, in coherence and compliance with the concepts of dual sovereignty, which served as the unique foundation of the nation, provided that a city, county, or other municipality could only file for chapter 9 if authorized by state law—something a majority of states have not authorized. Unsurprisingly, none of us contemplated or thought about U.S. territories, such as Puerto Rico, Guam, etc.: Puerto Rico is to be considered a state for purposes of the bankruptcy code, except that, unlike a state, it may not authorize its municipalities (and by extension, its utilities) to resolve debts under Chapter 9 of the code. Ergo, no municipio in Puerto Rico has access to a U.S. bankruptcy court, even as 36 of the island’s 78 muncipios have negative budget balances; 46% are experiencing fiscal distress. Their combined total debt is $3.8 billion. In total, the combined debt borne by Puerto Rico’s municipalities is about 5.5% of Puerto Rico’s outstanding debt.  

The fiscal plight of Puerto Rico’s municipalities has also been affected by the territory’s dismal fiscal condition: From 2000 to 2010, the population of Puerto Rico decreased, the first such decrease in census history for Puerto Rico, declining by 2.2%; but that seemingly small percentage obscures a harsher reality: it is the young and talented who are emigrating to Miami, New York City, and other parts on the mainland, leaving behind a declining and aging population—e.g. a population less able to pay taxes, but far more dependent on governmental assistance. At the same time, Puerto Rico’s investment in its human infrastructure has contributed to the economy’s decline: especially the disinvestment in its human infrastructure: a public teacher’s base salary starts at $24,000—even as the salary for a legislative advisor for Puerto Rico starts at $74,000. That is, if Puerto Rico’s youngest generation is to be its foundation for its future—and if its leaders are critical to local fiscal and governing leadership in a quasi-state where 36 of the island’s 78 municipalities, or just under half, are in fiscal distress—but, combined, have outstanding debt of about $3.8 billion; something will have to give. These municipalities, moreover, unlike Detroit, or San Bernardino, or Central Falls, have no recourse to municipal bankruptcy: they are in a fiscal Twilight Zone. (Puerto Rico has a negative real growth rate; per capita income in 2010 was estimated at $16,300; 46.1% of the territory’s population is in poverty, according to the most recent 2106 estimate; but that poverty is harsher outside of San Juan.) A declining and aging population adversely affects economic output—indeed, as former Detroit Emergency Manager Kevyn Orr who steered the city out of the largest municipal bankruptcy in U.S. history recognized, the key to its plan of debt adjustment was restoring its economic viability.

U.S. Supreme Court Justice Sonia Sotomayor, who is of Puerto Rican descent, has indicated there should be a more favorable interpretation of the law to make the system fairer to Puerto Rico: to allow the Commonwealth of Puerto Rico to create its own emergency municipal bankruptcy measures—something, however, which only Congress and the Trump administration could facilitate. It seems clear that Justice Sotomayor does believe Puerto Rico ought to be considered the equivalent of a state, i.e. empowered to create its own bankruptcy laws. However, as the First Circuit Court of Appeals has interpreted, Puerto Rico is barred from enacting its own bankruptcy laws: it is treated as a state—in a country of dual federalism wherein the federal government, consequently, has no authority to authorize state access to bankruptcy protection.

On the Brink of Governmental Bankruptcy

Good Morning! In this a.m.’s eBlog, we consider the unique federalism and fiscal challenges confronting Puerto Rico—a U.S. territory in the Rod Serling Twilight Zone between a state and a municipality. 

Mayday. With a May Day midnight deadline looming under the PROMESA law, the PROMESA Oversight Board, meeting in New York City, officially put on the table the possibility of using the PROMESA Title III judicial bankruptcy mechanism as a chapter 9-like mechanism to initiate the use of judicial proceedings to allow the U.S. territory access to the use of quasi-judicial proceedings to allow Puerto Rico to escape from some $70 billion of debt, adopting a resolution permitting such a fateful decision today in an executive meeting, without the need for a public meeting, using the mechanism contemplated under Title III of PROMESA. At its New York City session, the PROMESA Board resolution adopted this weekend, provides that “[B]etween the closing of this session and the opening of the next public meeting, the Board may consider in executive session any matters that it is authorized to consider under PROMESA,” in the wake of the adoption of the fiscal plans of four Puerto Rican public corporations, three of them with important amendments aimed at revising rates and examining models of privatization. Now, in order to bring the Board’s debt restructuring proposal before a judge, who must be appointed by the presiding Justice of the US Supreme Court, five of the seven Board members have to vote in favor of a restructuring.

At a press conference, PROMESA board Chairman José Carrión III stated: “We reserve the right to deal with any presentation of a resource or certification in an executive session;” however, he avoided commenting on what would happen if May 2nd arrives and the Government of Puerto Rico has not reached an agreement with its creditors—with a critical focus on the U.S. territory’s main investment funds via general obligation bonds, those which have preference under Puerto Rico’s Constitution, and the Corporation of the Appealing Interest Fund (Cofina). Thus, while the Government of Puerto Rico has been hoping to achieve an extrajudicial agreement with its main creditors which would have allowed it to continue debt discussions after today, that option appears to have died. For his part, Chair Carrión, meanwhile, hoped that any decision to go to federal court to ask for the creation of a territorial bankruptcy court. He said he hoped that any restructuring of Puerto Rico’s general obligation debt would gain the support of Gov. Ricardo Rosselló’s administration: “We want to be aligned with the government, and I think they have been able to see that the work has been done together. The government has raised its fiscal plans, we have contemplated changes, made suggestions and the government has welcomed them.”

The Mayday deadline marks the expiration of a moratorium on the judicial litigation for collection of the debt of the Government of Puerto Rico, which has served as a shield for the U.S. territory’s authorities since last June 30th, thus, as in a chapter 9 municipal bankruptcy, serving to prevent claims from jeopardizing essential public services. Unsurprisingly, neither the members of the PROMESA Oversight Board, nor the government of Governor Ricardo Rosselló has wanted to declare how ready they are to bring debt restructuring cases to the courts. Under a unique mechanism, the members of the PROMESA Board will be able to vote today by e-mail, as the authorizing resolution reads: “Between the adjournment of this meeting and the opening of the next public meeting, the Board may consider in an executive meeting any matters that it is authorized to consider under PROMESA,” referencing the resolution, which was the first agreement ratified at this weekend’s PROMESA Board meeting in New York, where the Board adopted the tax plans of four public corporations, three of them with major amendments focused on revising rates and examining privatization models. In order to bring the debt restructuring proposal before a judge, per the unique process described above, five of the seven members of the Board must vote in favor thereof. PROMESA Board Chair José Carrión III noted the Board reserves “the right to deal with any appeal or certification, at an executive meeting.”  At the very least, the Government of Puerto Rico hopes to reach an extra-judicial settlement with its major creditors that enables continuation of talks after today–without being sued—notwithstanding how difficult it would be to adopt any agreement which would prevent judicial actions by other holders of Puerto Rico’s municipal bonds. (Note: the key focus has been with regard to the U.S. territory’s main investment funds which hold general obligation bonds, which have a preferred status according to Puerto Rico’s Constitution, and the Sales Tax Financing Corporation (COFINA)).

For his part, Chair Carrión has hoped that any decision to resort to the federal court to request the creation of a territorial federal bankruptcy court would have the support of Gov. Rosselló’s administration, noting: “We’re trying to do our best and trying to do the right thing by all the stakeholders and the people of Puerto Rico.” The Chairman told reporters after the meeting. “It’s a very difficult situation. These folks have lent Puerto Rico money, and we are where we are, and it’s not a situation where we don’t understand…We want to be aligned with the government, and I believe you have seen that these efforts have been made jointly.  The government has proposed its fiscal plans; we have contemplated changes, made suggestions; and the government has accepted them.” The extraordinary federalism here led Elías Sánchez, Gov. Rosselló’s representative before the PROMESA Board, to assert that the PROMESA Board should act on the basis of a debt adjustment requested by the head of a dependency. That is, the PROMESA statute, unsurprisingly, did not specifically specify whether the PROMESA Board is obligated to have Puerto Rico’s support. Chair Carrión, over the weekend, said that the U.S. Treasury Department had discarded the idea that Congress may be entertaining any amendment to postpone the possibility of using the judicial bankruptcy mechanism contemplated in PROMESA—with the statement coming as some conservatives in Congress have been distributing a potential amendment to the next omnibus bill set to be considered before the end of this week, which would allow blocking the territorial bankruptcy mechanism—apparently backed by groups of creditors of the Government of Puerto Rico.

Legal Deadline. The decision comes with tonight’s expiration of a legal stay which has sheltered Puerto Rico from lawsuits filed by its municipal bondholders after a series of escalating defaults, and in the wake of making little meaningful headway in negotiations with creditors, leading, seemingly intractably to the courts—as was the case in Detroit, Stockton, Jefferson County, Central Falls, and San Bernardino—and marks the end of a last gap effort by some of the U.S territory’s general obligation bondholders to achieve a “consensual solution that is based on a credible financial forecast and that avoids the free fall Title III that the Oversight Board seems intent on imposing.” Indeed, as late as Saturday, Gerardo Portela Franco, the Executive Director of Puerto Rico’s Fiscal Agency and Financial Advisory Authority, said Puerto Rico was committed to reaching a consensual resolution with its creditors, noting the territory’s proposal was “intended to maximize returns to its creditors in a manner consistent with Puerto Rico’s goals for economic growth equitably,” and adding: “The government anticipates the discussions to continue over the coming weeks.” He was discussing an offer to repay general-obligation bondholders as much as $10.25 billion of the $13.2 billion they are owed, according to the proposal, and that sales tax bondholders would receive as much as $10.2 billion of $17.6 billion of sales tax bonds. Under said proposal, investors would exchange their existing municipal securities for two different types of debt: tax-exempt senior bonds with a constitutional priority maturing in 30 years, and cash-flow bonds that would be repaid after the senior securities, depending on the commonwealth’s liquidity. That proposal would have meant providing g.o. bondholders a recovery range of as little as 52%. Nonetheless, Puerto Rico bondholders had rejected Governor Rossello’s debt-restructuring proposal days before today’s deadline—effectively triggering the PROMESA provision.  

In a separate but related action, the PROMESA Board approved winding down Puerto Rico’s government development bank, which financed public works on the island until it defaulted during the crisis. Elias Sanchez, Governor Ricardo Rossello’s PROMESA representative stated: This will provide a viable path for an orderly process for the Government Development Bank with the least impact for stakeholders involved.”

Meanwhile in the Nation’s Capital. With Congress in OT after failing to act by last Friday, Congressional negotiations over including healthcare funding for Puerto Rico may have been stymied in the pending Continuing Resolution (CR) in the wake of President Trump’s tweet denouncing the idea; nevertheless, there appear still to be efforts in Washington to negotiate health care assistance in return for Puerto Rico’s agreement to a temporary hold on any use of bankruptcy-like provisions available under PROMESA. In the negotiations, Democrats in the House and Senate had been pushing to get Medicaid funding for Puerto Rico included in the CR, with some indications that Republican leaders have agreed that some type of Medicaid funding is needed for the Commonwealth—which is expected to exhaust its Medicaid funding under the Affordable Care Act by the end of the year, putting a huge strain on its ability to provide healthcare to its citizens—deemed a “Medicaid cliff” by Gov. Ricardo Rosselló, who, over the weekend noted: “This is not a bailout…This is what was allotted to Puerto Rico in the first place and is what is needed for us to have a runway in the next year so we can execute certain changes to our health industry.”

However, in a pair of tweets, President Trump blasted the possibility of Medicaid funding for Puerto Rico in a continuing resolution; he also took the opposite view in a pair of tweets late Wednesday and early Thursday last week which linked Democrats’ calls for funding help in Puerto Rico with insurer subsidies under Obamacare, writing: “Democrats are trying to bail out insurance companies from disastrous #ObamaCare, and Puerto Rico with your tax dollars. Sad!” The next day he tweeted: “The Democrats want to shut government if we don’t bail out Puerto Rico and give billions to their insurance companies for OCare failure. NO!” Thus, with Congress in overtime this week, the extra time could provide Congress more time to debate a potential agreement which would delay the Commonwealth’s ability to seek in-court restructuring of its debts in exchange for the Medicaid funding—albeit, the clock, as noted above, expires today.  

Governing Challenges of Federalism & Severe Fiscal Distress

eBlog, 1/20/17

Good Morning! In this a.m.’s eBlog, we consider the deteriorating municipal fiscal conditions in Connecticut’s central cities, a new twist in New Jersey’s usurpation of municipal governance in Atlantic City, and the ongoing challenges in Puerto Rico where the PROMESA Board has provided new Governor Ricardo Rosselló Nevares additional time to submit a new fiscal plan—albeit a plan potentially complicated by a court ruling, as well as uncertainty with regard to potential changes in direction from Washington where, later this morning, a new Trump Administration takes the reins of power in Washington, D.C.  

Can Connecticut Help to Avert Municipal Bankruptcies? Gov. Daniel Malloy, in his State of the State address this month, stated he wanted to “ensure that no Connecticut city or town will need to explore the avoidable path of [municipal] bankruptcy,” indicating he would be working on an initiative involving statewide restructuring of local aid, especially for schools. His remarks seemed to parallel a new report, “Connecticut’s Broken Cities,” by Stephen Eide of the Manhattan Institute, in which he wrote: “State government is almost certainly going to have to get involved in the case of Hartford…Hartford may need a bailout to restore solvency.” However, the new report also examined the fiscal challenge of three other of the state’s central cities: Bridgeport, New Haven, and Waterbury—cities confronted by nearly $5 billion in OPEB and public pension obligations, estimating their combined annual OPEB liabilities at $120 million, and their unfunded pension liability to be $2.7 billion. The report paints a fiscal picture of municipalities which have the highest property taxes in the state—and the highest per capita municipal debt. Indeed, the rating agencies awarded Hartford two four-notch downgrades last year: Moody’s reduced the city’s rating to junk-level, putting it in the lowest one percent credit rating of all municipalities—even as it cited the city as at risk of further downgrades “over the medium term,” with its analysts noting that: “For the time being, Waterbury, and Bridgeport, and most likely also New Haven, can continue to muddle through without the need for extraordinary support from the state…[but] the same cannot be said for Hartford.” Hartford faces a $48 million gap on a $270 million budget, notwithstanding the steep budget cuts and layoffs the city undertook last year. The city appears to be on the wrong fiscal end of a teeter-totter: its reserves sagged 34% from FY2006 to FY2015; while its debt per capita escalated 78% over the same period, according to the report. Or, as Mayor Luke Bronin describes it: “The city used every trick up its sleeve to try to keep the lights on…I think all of those were mistakes, but in a big sense they’re a symptom of the problem, not the problem itself.” Gov. Malloy attributes the city’s property tax as the key fiscal contributor, whilst Mayor Bronin, the Governor’s former Chief Counsel, has pressed, as we have previously noted, for a regional solution—one that might, for instance, mirror some of the innovative fiscal, regional efforts in the St. Paul-Minneapolis and Denver metro areas. Mayor Bronin believes that a municipal fiscal partnership could include shared services or revising state formulas for education and health funding—a proposal that in some ways fits Connecticut Superior Court Judge Thomas Moukawsher’s order last fall directing the state to revise its state aid to education formula to better serve students in low-income municipalities—an order which Connecticut Attorney General George Jepsen is currently appealing. For his part, Gov. Malloy said a fairer distribution of Connecticut’s state aid to local governments could provide an important lifeline to avert chapter 9 bankruptcies—but that any such aid would mean the state would “play a more active role in helping less-affluent communities – in helping higher-taxed communities – part of that role will be holding local political leadership and stakeholders to substantially higher standards and greater accountability than they’ve been held to in the past: We should do it so that increased aid doesn’t simply mean more spending on local government.”

A Bridge to Local Experience. The New Jersey Department of Community Affairs has hired Atlantic City business administrator Jason Holt to assist in its state takeover of the distressed city, in this case adding a key individual who has worked under Mayor Donald Guardian for the last two years: Mr. Holt is charged with assisting the Department’s Division of Local Government Services in taking on the virtually insolvent city’s fiscal. He seems very well equipped, having served previously as Mayor Guardian’s solicitor, before serving as the city’s business administrator. Indeed, Mayor Guardian yesterday noted: “Over the past three years, Jason Holt has been an integral part of my team…When I originally selected him as my solicitor and then as my business administrator, I did so because of his extreme intellect and professionalism. Obviously, the State sees the same thing in Mr. Holt.” The transition is likely enhanced, because Mr. Holt has worked closely over the last two months with Local Government Services Director Tim Cunningham and Jeffrey Chiesa, the state’s designee in charge of Atlantic City financial matters. Department of Community Affairs spokesperson Lisa Ryan noted: “Mr. Holt’s hire by DLGS formalizes the work he has been doing in practice for the last two months…Mr. Holt will leave the City’s business administrator position, although the work he will do for DLGS will largely be the same as what he is doing now.” She added that Mr. Holt will continue working out of City Hall with his official first day with the DLGS set for next Monday. The state decision, however, has not been met with uniform approval: Assemblyman Chris Brown (R-Atlantic), who has been critical of the state for not producing its own fiscal recovery plan after rejecting the city’s, noted the lack of state transparency: “Without a transparent plan, even if they laid all the state’s experts end to end, they’d still never reach a solution.” In contrast, Mayor Don Guardian, who, in a statement said Mr. Holt has been an integral part of his team, added: “When I originally selected him as my solicitor, and then again as my business administrator, I did so because of his extreme intellect and professionalism. Obviously, the state sees the same thing in Mr. Holt…I look forward to working with him in his new capacity.” Indeed, Mr. Holt brings considerable experience, having previously served as corporation counsel for East Orange, Essex County, where, he provided legal counsel to both the Mayor and City Council, oversaw the complete spectrum of that city’s legal affairs, and played a key role in revamping its public-safety initiatives.

Is There Promise in PROMESA? Just as Puerto Rico enters its 12th year of economic depression, the PROMESA Oversight Board has informed new Governor Ricardo Rosselló Nevares that the Board is willing to grant additional time for the submission of a new fiscal plan—provided the Governor is willing to lay off public employees, reduce the pensions of thousands of retirees, make budget cuts for the University of Puerto Rico and Mi Salud, and extract an additional $1.5 billion from the pockets of corporations and individuals. In addition, the Board indicated it would be willing to extend the stay on litigation provided by PROMESA until May 1st, if Gov. Rosselló Nevares’s administration presents a plan to renegotiate Puerto Rico’ public debt. According to the calculations provided by the Board, this could mean an adjustment of $3 billion to the debt service, with the proposals gleaned from a 14-page letter, which appeared to be a warning to the new Governor that he must balance the budget in the next two fiscal years, and that the proposals for adjustments in public expenditures are “prerequisites” for the Board to certify any plan submitted. In response, Puerto Rico’s representative to the Board, Elías Sánchez Sifonte, immediately stated that Gov. Rosselló Nevares’s administration will seek to meet the Board’s conditions. He also assured that there are other mechanisms to balance the budget and close the fiscal gap—a gap the Oversight Board estimates at nearly $7.6 billion. In its letter, the Board advised the new Governor that his team could submit a new fiscal plan by the end of February, and that the document should be approved by March 15th—all subject to the Governor agreeing to balance the budget with a “one and done” approach, with “no discussion or consideration of short-term liquidity loans or near-term financings,” despite the contention by Gov. Rosselló Nevares and his team that such financing are a prerequisite in order to avoid a government shutdown. The stiff challenges, which the new Governor’s administration agreed were not so different from its own preliminary forecasts, were, nevertheless, perceived as “dramatic,” albeit key to avoid “the total collapse” of the government, blaming the previous Gov. Alejandro García Padilla’s administration’s “unwillingness to cooperate, [and] wasting time in presenting a fiscal plan that did not meet the requirements.”

The Board’s orders will affect not only Puerto Rico’s public employees, government pensioners, and foreign corporations and their tax liabilities, but also holders of Puerto Rican municipal bonds: those bondholders, in every state, could realize a reduction of as much as 80% of the annual payments that Puerto Rico must make—through different issuers—over the next two years. Sacrifices, it appears, will be widespread: the Board also proposed that Gov. Rosselló cut 23% in payroll expenses (about $900 million), which would imply a reduction in the number of public sector employees, an indicator that is already at a historical low; reduced public pensions by 10 percent—in a “progressive manner,” eliminated 100 percent of the subsidies to municipalities (about $400 million), which would be offset by a revision to property taxes, and higher payments by beneficiaries of Puerto Rico’s healthcare plan, all as part of Board recommendations that could, if implemented, save the U.S. territory as much as $1 billion. The Board added it believed the University of Puerto Rico could cut $300 million (27%) from its budget if it hiked tuitions. if it increased the amount of services among students and faculty members, raised the tuition to those who could afford it, and promoted the arrival of international and continental students to take courses in the institution.

The Board noted that to close Puerto Rico’s budget gap, Gov. Rosselló Nevares’s administration would have to meet with Puerto Rico’s municipal bondholders to make voluntary debt renegotiations through Title VI of PROMESA; albeit negotiations with the creditors would not necessarily take place in good terms: according to the numbers the Board released yesterday, the series of cutbacks and changes in the government would, on their own, be insufficient; ergo bondholders—including thousands of Puerto Rican individuals—will have to accept a cut in the debt service, which could amount to $3 billion.

But Here Come da Judge. Yet even as the PROMESA Board and the new Governor were seeking to come to terms with steps critical to fiscal recovery, the third branch of government stepped into the fiscal fray when U.S. District Judge Francisco Besosa handed a victory to holders of Puerto Rico Employment Retirement System (ERS) bonds, marking one of municipal bondholders’ first legal victories since Puerto Rico began defaulting on municipal bond interest payments about a year ago. Judge Besosa has ordered ERS to shift incoming employers’ contributions from its operating account to a segregated account at Banco Popular de Puerto Rico, directing that such funds remain in the segregated account until all parties agree on a different approach or the court orders the money to be moved out of the account. ERS had $3.1 billion in municipal bond debt outstanding as of July 2, 2016, according to the Puerto Rico government—none of it insured; all of it taxable. Normally, Puerto Rico government employers make employer contributions to support the payment of senior pension funding bonds; last year, as part of Puerto Rico’s emergency order 2016-31 in which it declared the ERS was in an emergency, the obligation of the ERS to transfer employer contributions to the bond trustee was suspended. Last November, Judge Besosa ruled against the plaintiffs in the case concerning the ERS bonds. Simultaneously, he had ruled against several other bondholder plaintiffs in other cases—leading some of the municipal bondholders to appeal to the United States Court of Appeals for the First Circuit—which, last week, generally concurred with Judge Besosa’s opinion (see Peaje Investments, LLC v. Alejandro Garcia-Padilla et al, 4th U.S. Court of Appeals, #16-2431, January 11, 2017), affirming the continued stay on bondholder litigation stemming from the Puerto Rico Oversight, Management, and Economic Stability Act in several cases, albeit ordering Judge Besosa to hold a hearing for the arguments of the lead plaintiff, Altair Global Credit Opportunities Fund, and its co-plaintiffs, with the court writing: “We note that the Altair movants’ request for adequate protection here appears to be quite modest. They ask only that the employer contributions collected during the PROMESA stay be placed ‘in an account established for the benefit of movants.’ In light of ERS’s representation that it is not currently spending the funds, but instead simply holding them in an operating account, this solution seems to be a sensible one.” Thus, this week, Judge Besosa ordered such a segregated account to be set up and that all funds not transferred since the start of the PROMESA litigation stay be deposited in the account within five business days; Judge Besosa also ordered that in the future the ERS should transfer the employer contributions to the segregated account no later than the end of each month, noting that the segregated account will be “for the benefit of the holders of the ERS bonds,” adding, moreover, that said funds will simply sit in the account until a court orders otherwise, although he noted it would not preclude the ERS from transferring the employer contributions to the bond trustee for payment of the bonds, as would normally be the case.

Emerging from Municipal Bankruptcy: a Rough Ride

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eBlog, 1/04/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenges for the U.S. city emerging from the nation’s largest ever municipal bankruptcy, Detroit; then we veer into the warm Caribbean waters to observe the first days of the new administration of Gov. Ricardo Rosselló in Puerto Rico—where his new administration must adjust to coming to terms with its own PROMESA oversight board.

A New Detroit? The city emerging from the largest ever municipal bankruptcy is witnessing a string of major construction projects, from a massive hockey arena and street car line downtown to the resurrection of the Wayne County jail project: changes which will reshape the Motor City’s downtown in 2017—a level of activity and investment which seemed most improbable as the city shrunk and then dissolved into chapter 9 municipal bankruptcy. Today, the construction detours and closed sidewalks seem to offer a welcome sign of a new era for many who live and work near downtown. According to recent statistics, office vacancies in the downtown area are at their lowest point in a decade, and now the addition of the city’s new rail line could open demand in the New Center area, as well as increase demand for office space in neighborhoods near downtown such as Corktown and Eastern Market. Notwithstanding, the Detroit Financial Review Board, created as part of Detroit’s plan of debt adjustment to secure the U.S. bankruptcy court’s approval to exit bankruptcy, in its most recent oversight report, noted that the city continues to confront an unexpected gap in its public pension obligations and the absence of a long-term economic plan, reporting in its fourth annual report that could leave the city vulnerable to further fiscal challenges.(The next certification is due by October 1, 2017: under the plan of debt adjustment stipulations, the review board is charged with reviewing and approving annual four-year financial plans.) Both previous such plans have been approved. The most recent plan, submitted at the end of November, projects a general fund surplus of at least $41 million for FY2016, based on budget projections; Detroit expects to finish the current fiscal year with a general fund surplus of about $30 million. Nevertheless, the city faces a double-barreled fiscal challenge: its public pension liabilities and high costs of borrowing. Because its junk territory credit ratings from Moody’s and S&P, Detroit is forced it to pay disproportionately higher interest rates on its bonds.

With regard to its pension liabilities, where Detroit’s plan of debt adjustment approved by now retired U.S. Bankruptcy Judge Steven Rhodes left intact public safety monthly checks, but imposed a 4.5% cut on general employees—and reduced or eliminated post-retirement (OPEB) benefits, as part of a mechanism to address some $1.8 billion in post-retirement obligations, the approved plan nevertheless suspended the COLa’s only until 2024—so a longer term liability of what was originally projected to be $111 million pends. (Indeed, the city’s pension agreement withstood a challenge last Fall when a federal appeals court ruled in favor of Detroit in a lawsuit by city retirees whose pensions were cut as part of the city’s approved plan of debt adjustment, after some retirees had sued, claiming they deserved the pension which was promised before the city filed for bankruptcy in 2013, with U.S. Judge Alice Batchelder of the 6th Circuit Court of Appeals noting it was “not a close call.”)

But, as Shakespeare would put it: ‘There’s the rub.” Detroit’s actuaries, in their 2015 actuarial valuation reports, projected the liability in FY2024 and beyond to be nearly $200 million, based upon a thirty year amortization, with level principal payments and declining interest payments; however, as we have previously noted, those estimates were based upon optimistic estimates of assumed rates of return of 6.75 percent. In response, Detroit set aside $20 million from this year’s FY2016 fund balance, $10 million from its FY2016 budgeted contingency fund, and added an additional $10 million for each of the next three fiscal years—or, as Detroit Finance Director John Naglick told the Bond Buyer: “The city has six fiscal years to make an impact and close the gap on the [pension] underfunding. We don’t want to create such a cliff in 2024 where there is a big budget shock…The reality is to find those kind of monies over the next six fiscal years will cause some tradeoff in services.” Director Naglick added that last month Detroit completed an updated decade-long plan to update its approved plan of debt adjustment, adding: “The 10-year model will show the FRC that this incremental funding can be folded into the budget, but we aren’t naïve, it will also create some disruption in services to accommodate that…Think of it as a master plan on how we are going to make this stable.” Nevertheless, Mr. Naglick’s challenge will be hard: Moody’s last summer warned that the city’s “very weak economic profile” makes it susceptible to future downturns and population loss—threatening its ability “to meet its requirement to resume pension funding obligations in fiscal 2024.” Detroit’s next deadline looms: The City must submit its FY18-FY21 Four-Year Financial Plan to the Financial Review Commission by the statutory deadline of March 23rd.

Puerto Rico: A New Chapter? The new Governor of Puerto Rico, Ricardo Rosselló, yesterday, in the wake of his swearing in, acted straightaway on his first day in office to cut government spending and revenues, amid greater urgency to take steps to avoid a massive out-migration and end ten years of economic recession, and increase efforts to stem vital population losses which in 2013 alone witnessed some 74,000 Puerto Ricans leave the island. The new governor has already signed five executive orders, cutting annual agency spending by 20 percent, encouraging asset privatization, and proposing a zero based budgeting standard. Efforts like these, if actually implemented (a crippling risk in the context of historical Puerto Rico governance), could represent strides towards achieving fiscal solvency and help lay the groundwork for economic recovery. Governor Rosselló directed his agency heads to implement zero-based budgeting, under which agency heads start with a $0 and only adds to it when they can provide a justification for particular programs. Gov. Rosselló also created a Federal Opportunity Center attached to the governor’s office. The center will provide technical and compliance assistance to the office to make programs eligible for federal funds. For the new Governor, the three keys to recovery appear to be: how to revive the economy, fix the territory’s fiscal situation, and address the public debt.

The key, many believe, would be to opt for Title VI of the new PROMESA law, the voluntary restructuring portion. A growing concern is to create job opportunities—with one leader noting: “Many will leave if they cannot find jobs to search off the island for a better quality of life: our cities have to be habitable and safe…it has to be a place where the world wants to come to live…” Governor Rosselló also signed six executive orders, directing his department heads to cut 10 percent in spending from the current budget and to reduce the allocations for professional services by a similar amount—with even deeper cuts in other hiring; he imposed a freeze on new hires, noting: “We do not come to merely administer an archaic and ineffective scaffolding: Ours will be a transformational government.” Nevertheless, his task could be frustrated by the Puerto Rico House, where, yesterday, El Vocero reported that Puerto Rico House of Representatives President Carlos Méndez Núñez had told the newspaper last weekend that the legislature would cut Puerto Rico’s sales and use tax rate and the oil tax rate, reversing steps by the prior governor and legislature over the last four years. Governor Rosselló also pledged to work with the PROMESA Oversight Board in a collaborative way, as he departed the island to meet with members of the new Congress in Washington, D.C., where he planned to lobby for statehood for the U.S. territory.

With new administrations in San Juan and Washington, Gov. Rosselló will also have to work out a relationship with the PROMESA board, as the absence of cash to pay debt service, combined with the current payment moratoriums and federal stay on bondholder litigation appear destined to be extended deep into the year, albeit some anticipate that under the incoming Trump administration, one which will have much closer ties to creditor groups than the outgoing Obama administration, could lead to efforts to restart formal bondholder negotiations—negotiations which could become a vehicle by means of which creditors would increase their investment in Puerto Rico risks, by means of new loans and/or partial restructuring of liabilities in ex-change for a settlement which would be intended to improve long term municipal bond-holder recoveries and, most critically, work to enhance the price evaluations of Puerto Rico’s general obligation municipal bonds. Nevertheless, the territory’s structural, long-term budget deficit of nearly $70 billion over the next decade risks crowding out any medium-term payment of debt service absent serious spending reform as well as public pension reform—especially because of the ongoing outflow of young persons seeking better economic opportunities on the mainland.

Leaving Municipal Bankruptcy: Such Sweet Sorrow

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eBlog, 1/03/17

Good Morning! Happy New Year! In this a.m.’s eBlog, we consider the next—and final—steps for the City of San Bernardino to exit the nation’s longest in U.S. history municipal bankruptcy, then we consider the underlying fiscal strengths that could be critical to Atlantic City’s emergence from state control and back to solvency. Finally, we try to assess whether one of President Obama’s final laws—expanding Petersburg’s national park—might help the fiscally ailing municipality, before finally comparing and contrasting the fiscal dilemmas of two U.S. territories: Puerto Rico and Guam.

Leaving Chapter 9. In just over three weeks, San Bernardino could receive its exit clearance from U.S. Bankruptcy Judge Meredith Jury from the longest chapter 9 municipal bankruptcy in U.S. history. That will reduce court-related costs and burdens to the city; the real issue will be with regard to how it implements its plan of debt adjustment, with Mayor Carey Davis noting: “The city is poised and setting the stage for quite a bit of continued growth and improvements for 2017.” But, in the wake of the long bankruptcy, the new city which emerges will be different: it will have a new charter as soon as California Secretary of State Alex Padilla confirms the city’s election results, clearing the path for the city to begin implementing a new charter much more similar to those of other, successful cities—changes such as moving to a system where the City Council votes with the Mayor to set policy which is then implemented by the city manager. That change will take effect immediately; other changes will need to be implemented by the City Council approving changes to the municipal code. For her part, Judge Jury noted the city’s plan of debt resolution did not hinge on the charter approval; nevertheless, she praised the outcome: “(City officials) successfully amended their charter, which will give them modern-day, real-life flexibility in making decisions that need to be made…There was too much political power and not enough management under their charter, to be frank, compared to most cities in California.”

There were other critical steps to this longest-ever plan to exit municipal bankruptcy, including: catching up on audits for the first time since 2010, the city caught up on its audits, perhaps allowing it to operate in 2017 under less suspicion and with eligibility for more state and federal grants; significant outsourcing, especially with the transfer of the 137-year old Fire Department to county control; redevelopment at the Carousel Mall, and attempts to alleviate homelessness; albeit Mayor Carey Davis notes: “As you can see, there’s a full plate ahead of us in 2017…I’m sure there will be some unexpected needs that will be in place with a stronger city hall, a city hall that is doing a much better job with our financial reporting, but I think that with the changes of 2016 we’ll have a strong front to show investors.”

Spinning the Wheel of Misfortune. A key challenge for Atlantic City—and the State of New Jersey, which has assumed control over the city, relates to casinos: how to emerge from over reliance on gambling, which produces some 67 percent of the city’s revenues. Despite losing half its value in Atlantic City over the past decade, the gaming industry appears to remain a critical component of Atlantic City’s future. Notwithstanding the multiple bankruptcies of former casino owner and now President-elect Donald Trump in the fabled city, the industry still represents a more than $3.7 billion economy: in 2015, the casino industry totaled revenues of $3.7 billion, $2.4 billion of which was from gambling, according to New Jersey state figures. Through the first nine months of last year, there was $2.8 billion in total revenue. Ironically, the impact of Trump Taj Mahal Casino Resort’s closing in October remains to be determined. Still, as seemingly mouth-watering as such revenues would appear to be, they contrast with the more than double $5.2 billion in casino revenues from a decade ago—since then competition from outside the market has contributed to the closing of five casinos since 2014. So it seems to be a positive sign that over the past couple of years, Atlantic City properties increased their non-gaming attractions, with the increase in non-gaming attractions demonstrating a steady growth in non-gaming revenue. Indeed, between 2012 and last year, non-gaming revenue nearly quadrupled from $252 million to more than $998 million, according to state records.

A Fiscal Battlefield. President Obama has signed into law new federal legislation for a major expansion of Petersburg National Battlefield: the battlefield commemorates the Civil War’s longest battlefield conflict, marked by bursts of bloody trench warfare spanning some 10 months from 1864 to 1865. The new law, however, does not pay for the addition of more than 7,000 acres to the existing 2,700 acres of rolling hills, earthworks, and siege lines already under protection at Petersburg. Supporters of the new law say the larger boundary would not only protect historic sites from commercial development, but also give park visitors a more comprehensive understanding of the Petersburg campaign, which left tens of thousands of men dead. According to National Park Service figures, the park draws approximately 200,000 visitors a year, far fewer than such higher-profile sites as Gettysburg in Pennsylvania, with more than 1 million tourists annually. Nevertheless, the park has proved key to the area economy, bringing in some $10 million a year. Officials hope expanding the battlefield’s protected footprint would bring in even more visitors. However, the newly enacted legislation does not include any new funding.

The land changes come as the City of Petersburg, trying to unwind nearly $19 million in unpaid obligations, having reduced its employees’ pay and experienced the repossession of its firefighting equipment, is trying to determine how the federal changes might affect its fiscal distress. Today, according to National Park Service figures, the park draws about 200,000 visitors a year. Notwithstanding, the Petersburg park plays a key role in the regional economy, bringing in some $10 million a year. Thus, officials hope expanding the battlefield’s protected footprint would bring in even more visitors—visitors who might help enhance the city’s tax base. That might happen, as the Park Service’s first priority is expected to focus on the acquisition of still more private property and most vulnerable to commercial development. While that would risk creating a fiscal issue due to foregone property tax revenues, it might have the counter impact of raising the assessed values of property within the city limits—and create a means to help the city grapple with nearly $19 million in unpaid obligations.

Are Fiscal Crises Contagious? A question has arisen whether the promise of the newly enacted PROMESA law to provide a quasi-municipal bankruptcy mechanism for the U.S. territory of Puerto Rico to address its fiscal meltdown might be contagious for the territory’s U.S. counterpart Guam, where Fitch Ratings has cut Guam’s business-tax revenue bonds to junk, noting that PROMESA “fundamentally” alters the premise used to rate debt issued by U.S. territorial governments. Even though Guam is nearly 10,000 miles away from Puerto Rico, analysts claim the new Congressional law has set a precedent which could let other U.S. territories escape from obligations to their municipal bondholders. In contrast, S&P Global Ratings analyst Paul Dyson maintains an A rating for Guam—a rating which he notes reflects the territory’s ability to pay investors, adding that the new federal PROMESA law “currently applies only to Puerto Rico.” Indeed, Mr. Dyson points out that: “We have no indication that Guam is going to do something similar to PROMESA.” S&P reports that Guam’s economic outlook is stable: the territory is host to U.S. Air Force and Navy bases, and its economy likely to benefit from U.S. plans to expand its military operations on the island, which is the closest U.S. territory to potential hot spots in Asia. In contrast, however, Guam has not adopted a balanced budget; it has rising pension liabilities, and growing debt—debt of some $3.2 billion in obligations for a population of about 165,700, according to data compiled by Bloomberg.

Double Transitions & The Challenges of Fiscal Governance

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eBlog, 12/14/16

Good Morning! In this a.m.’s eBlog, we consider the dual transition periods for the U.S. and Puerto Rican governments as they change administrations in the midst of Puerto Rico’s insolvency. President-elect Trump has devoted little focus on the U.S. territory’s fiscal and health care crisis—and governance on the island is about to change too in the wake of the election last month of Governor-elect Ricky Rossello, who won with 41% of the vote in a four-way race.

Puerto Rico Governor Alejandro García Padilla, who has 18 days left in office, yesterday affirmed that it will require creativity to pull Puerto Rico out of its fiscal and political crisis—and that it would also mean the territory must file for restructuring as soon as possible. He added that the federal government would have to be a critical partner if the commonwealth is to resolve its fiscal crisis. He noted that even though the new PROMESA law offered the island a legal structure to restructure its public debt, he noted that the new federal statute “interfiere con la Constitución de Puerto Rico al extremo de que permite una junta no electa imponer un plan fiscal y controlar los presupuestos bajo ese plan”—that is that the PROMESA law provided for an unelected group to impose its authority, adding that even though the U.S. Supreme Court had recognized the “political reality and the changed law” in the territory, he  noted that for many in Puerto Ricans, PROMESA has created an unconstitutional intrusion. Thus, he urged that “no crisis should go to waste,” so that an important part of any fiscal solution will hinge on the commonwealth filing for restructuring “now;” because, he warned: “The chaos of costly, protracted litigation that would ensue if the commonwealth does not seek restructuring can easily be avoided with swift, decisive action within the next two months,” referring to the expiration of the stay on litigation” imposed by PROMESA until Feb. 15th, at which point, he added: the “commonwealth will face a cash deficit of over $3 billion that would likely force a government shutdown…There should be no excuse to force Puerto Rico to depression economics.”

He insisted on the importance of Congress and the Administration’s commitment of economic assistance—including equal treatment of Puerto Ricans with regard to Medicare and Medicaid. The Governor’s remarks came as a double transition is underway—both in Washington, D.C. and in Puerto Rico—and where the incoming Trump Administration has, so far, been silent with regard to PROMESA’s implementation and next steps—and as the current PROMSEA oversight board is currently reviewing Puerto Rico’s fiscal plan in order to determine whether and how to file debt restructuring petitions on behalf of the territory and its entities in federal district court if voluntary negotiations with the islands creditors fail.

Fiscal Challenges Amid Governance Transitions

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eBlog, 12/06/16

Good Morning! In this a.m.’s eBlog, we consider the ongoing health and fiscal challenges of Flint, Michigan as we await the outcome of today’s mayoral recall election in the insolvent municipality of East Cleveland, after which we attempt to update readers on the porous state of Atlantic City’s municipal utility. Then we seek to escape winter by heading south to Puerto Rico—where the combination of changing administrations in both the U.S. and Puerto Rico leave unclear what the fiscal path forward will be if the U.S. territory is to avoid not just fiscal, but also health care insolvency.

Out like Flint. University of Michigan researchers have more than tripled their estimate of the number of water service lines in the small city of Flint which will need to be replaced, nearly quadrupling the number of lead or galvanized steel lines the city has from 8,000 to 29,100—or more than half service lines leading to 55,000 homes and businesses in Flint, according Mayor Karen Weaver, who notes the updated report makes it important that the city move beyond the use of filters and instead move toward wholesale replacement of water lines: “These findings make it even more imperative that the state and federal government step up to pay for replacing lead-tainted service lines.” The figures are daunting: of the municipality’s 29,100 parcels, 17,500 would need full replacement of service lines, while 11,600 would require partial replacement, according to the researchers. The estimate was mandated by EPA to comply with the requirements of the federal Lead and Copper Rule: because the lead in the city’s water supply exceeded the federal action level of 15 parts per billion, the city is mandated to replace more than 2,000 service lines by next June—a physical and fiscal challenge given that Flint’s records describing the location of lead service lines in Flint have proven to be unreliable, and records for some parcels appear to not even exist, according to city officials—meaning that visual inspections, more time-consuming and expensive route—has served as the city’s only means to obtain an accurate assessment of where lead and galvanized steel service lines were installed. Thus, under Mayor Weaver’s initiative, municipal crews continue to replace service lines in neighborhoods most likely to have lead service lines, and where a significant number of young children or seniors live: the Mayor’s goal is to have service lines replaced at 1,000 homes by the end of this month, although the actual number may be fewer if bad weather occurs—weather with this morning’s chilled rain at temperatures just above freezing augurs ill. To help, the state of Michigan has set aside $25 million to pay for pipe replacements through September of next year—estimated to be sufficient to pay for replacing pipes to about 5,000 homes. In addition, Congress is considering an aid package that would bring tens of millions of dollars to Flint which could be used to repair the city’s damaged water system. If the 29,100 figure proves accurate, replacing the other 28,100 service lines could cost at least $140 million. A key element on this health and fiscal challenge could be yesterday’s agreement between U.S. House and Senate leaders on a bipartisan bill to authorize $170 million for Flint and other cities beleaguered by lead in drinking water, and to provide relief to drought-stricken California. A vote on the water-projects bill could take place this week as Congress wraps up its legislative work for the year.

The Utility & Atlantic City. Atlantic City’s utility water authority board members last week raised rates in an effort to cover an unexpected budget hole—but then topped it off by paying themselves a $3,000 per board member, even as the Municipal Utilities Authority (MUA) board approved the 10 percent rate hike for next year, a 20 percent increase over what had been set at last week’s special meeting to cover lost revenue from a contract change with New Jersey American Water. Under the new plan, residential rates would increase to $50 per quarter from $45 last year; nevertheless, the utility’s rates would still rank near the bottom for the region, according to Atlantic County Utilities Authority data. The MUA’s $14.7 million 2017 budget, down just under 10 percent from last year, is scheduled to be adopted on December 21st, according to an authority news release. The increase would appear unlikely to garner much favor in the insolvent city—especially in the wake of the board’s decision to award themselves $3,000 gifts this December “for their dedicated service,” according to a resolution, notwithstanding that the money was supposed to be a parting gift, not a Christmas gift, according to one board member. Board Vice Chairman Gary Hill yesterday claimed the “December 2016” was an error in the resolution’s language. It appears it has been a tradition that MUA Board members are to receive a cash bonus or gift once they leave the board: the authority’s seven board members make $6,000 salaries and can receive benefits, according to public records. Now, however, the Board’s challenge could be complicated by a different kind of fiscal disruption: American Water, a private company which had been considered a potential buyer of the MUA, which had a $1.7 million contract with the MUA, and was the MUA’s top customer, has recently notified the MUA it no longer needs it to provide water; it turns out that capital improvements to its Atlantic County system have increased its water capacity and “in essence eliminated NJAW’s need to purchase water from the ACMUA,” according to the company letter to the authority; instead, American Water wanted to buy 500,000 gallons of water per day, down from the 1.2 million gallons per day it has recently purchased; however, the lower volume would convert the company from a “bulk purchaser” to a “commercial customer,” meaning it would have to pay a $7 million connection charge, according to the letter, so that, according to the company’s statement: “We cannot justify the additional costs the ACMUA’s proposal would have on the company and its customers, since these significant capital investments eliminate the need for New Jersey American Water to purchase additional water.” Ergo, the contract change and its effect on the MUA budget led to the special board meeting where rates were raised—and bonuses were raised; now MUA and American Water are discussing a potential agreement under which the company would only buy water from the MUA in emergency situations, according to Chairman Hill: the MUA could get just $200,000 under such an arrangement. The fiscal and physical situation is, of course, further complicated from a governance perspective as the city’s public water utility has been at the center of debate between Atlantic City and the State of New Jersey—which has just taken over the city. American Water lobbyist Philip Norcross attended a 2015 meeting with city and state officials in which the MUA was discussed. Mr. Norcross’ brother is South Jersey powerbroker George Norcross. Authority officials questioned the timing of the contract change, hinting it was a strategic move by American Water to get the valuable water works, according to the meeting transcript. “They’re putting pressure on,” said Deputy Executive Director Garth Moyle.

Administration Transitions & Puerto Rico. The new PROMESA law to create a quasi-chapter 9 mechanism for the U.S. territory of Puerto Rico will face signal challenges as the governance of both the U.S. and Puerto Rico are in transition to new administrations. Unsurprisingly, President-elect Trump devoted little time to addressing what his position would be with regard to the implementation and administration of the new law. Thus, while Congress and the Treasury Department have put together both a framework and a Board to assist in Puerto Rico’s recovery; whether and how those might be modified or addressed now will depend upon both the incoming administration in Washington and new Governor in Puerto Rico—where the new head of the Senate’s Health Commission, Ángel Chayanne Martínez Santiago, yesterday urgently requested a meeting with House Speaker Paul Ryan (R-Wisc.) to discuss a possible health emergency declaration because of apprehension that all federal health care funds could expire on the island by this summer, writing that the federal health care assistance affects some 1.6 million U.S. citizens: “We need to declare a health emergency in Puerto Rico immediately. We have no doubt that this is a matter of vital importance—nor can there be any question but that this is a matter of vital importance for Congress and the White House.” The letter warns that, without a doubt, the greatest portion of the territory’s existing Affordable Health Care funds will have been spent before the end of this month, noting: “We are urgently requesting this meeting with Speaker Ryan to set out a strategy to avoid having Puerto Ricans losing all access to health care.”

The situation is further complicated as Puerto Rico is going through its own governance transition. Thus, the U.S. territory’s Governor-elect, Ricardo Rosselló, now must determine not only how to coordinate with the PROMESA board, but also how to address Puerto Rico’s budget, debt, and grave health care situation—and how to seek to work with the new Trump administration after reviewing both the numbers in the Commonwealth’s current 10-year fiscal plan submitted last October by outgoing Gov. García Padilla. A critical issue will be Medicaid—an issue on which the outgoing administration had warned Congress “ultimately will have to address Puerto Rico’s inequitable treatment under Medicaid and its need for economic growth incentives.” The pending proposal by the outgoing Administration of President Obama opined that Congress create Medicaid parity between Puerto Rico and the states, and extend certain tax credits to the Commonwealth: this has now become a more urgent issue as Medicaid funding for Puerto Rico is due to expire near the end of 2017, creating what is called a “Medicaid cliff.” And even that challenge can be expected to be further muddied by potential consideration by the incoming Trump Administration to convert Medicaid’s entitlement status to a block grant program to the states. The risk for Puerto Rico in all this would be if it were to fall between the cracks: should that happen, Puerto Rico’s government, where annual health care expenditures are near $2.4 billion annually, the U.S. territory would either have to raise revenues and find ways to cut expenses while providing consistent levels of care or drastically pare healthcare benefits—benefits already significantly lower than to Americans living in the other 50 states, because Puerto Rico’s Medicaid funding is capped, rather than entitled—meaning that, despite disproportionate health care needs, it receives disproportionately less than any of the 50 states.  

Awkward Transition & Fiscal Death Spiral? Puerto Rico Governor-Elect Ricardo Rosselló this weekend declined outgoing Gov. Alejandro García Padilla’s offer to work on a fiscal plan for the federal PROMESA oversight board. Under the PROMESA law, the U.S. territory’s governor is mandated to submit a five-year plan which itemizes steps to bring about fiscal responsibility, regain access to capital markets, fund essential public services, fund provisions, and achieve a sustainable debt burden. Last October, Gov. Padilla indeed presented a 10 year plan to PROMESA’s Oversight Board which noted that Puerto Rico simply could not afford paying down its debt without federal aid, noting that the government would be still $6 billion short for operating expenses over the next decade absent federal help and without paying any debt service. Last month, the PROMESA Oversight Board members indicated they believed substantial cuts to Puerto Rico government spending beyond those included in the outgoing Governor’s plan were necessary—adding that the Board expected a revised version of the plan from Governor Padilla by next week—a demand with which Governor Padilla said he would not cooperate if it meant revising the plan to include additional austerity, noting the island has had enough austerity, so that further budget cuts would only lead to an “economic death spiral.” Thus, last Friday the Governor Padilla sent a letter to Governor-elect Rosselló to invite him to become part of a joint effort to put together a revised fiscal recovery plan. Gov.-elect Rosselló, however, publicly rejected the outgoing Governor’s offer, responding, at least according to El Vocero’s news website, that Governor Padilla had not released sufficient financial data for the incoming Governor to work with him—leaving the incoming Governor little time or opportunity to offer his own plan—and the PROMESA Board is scheduled to certify (or not) the plan set before it by the end of next month.