State Oversight & Severe Municipal Distress

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eBlog, 04/24/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenge confronting Detroit: when and how will it emerge from state oversight? Then we spin the tables to see how Atlantic City is faring to see if it might be on the shores of fiscal recovery; before going back to Detroit to assess the math/fiscal challenges of the state created public school district; then, still in Detroit, we try to assess the status of a lingering issue from the city’s historic municipal bankruptcy: access to drinking water for its lowest income families; before visiting Hartford, to try to gauge how the fiscally stressed central city might fare with the Connecticut legislature. Finally, we revisit the small Virginia municipality of Petersburg to witness a very unique kind of municipal finance for a city so close to insolvency but in need of ensuring the provision of vital, lifesaving municipal services. 

Fiscal & Physical Municipal Balancing. Michigan Deputy Treasurer Eric Scorsone is predicting that by “early next year, Detroit will be out of state oversight,” at a time when the city “will be financially stable by all indications and have a significant surplus.” That track will sync with the city’s scheduled emergence from state oversight, albeit apprehension remains with regard to whether the city has budgeted adequately  to set funds aside to anticipate a balloon pension obligation due in 2024. Nevertheless, Mr. Scorsone has deemed the Motor City’s post-bankruptcy transformation “extraordinary,” describing its achievements in meeting its plan of debt adjustment—as well as complying with the Detroit Financial Review Commission—so well that the “city could basically operate on its own.” He noted that the progress has been sufficient to permit the Commission to be in a dormancy state—subject to any, unanticipated deficits emerging. The Deputy Treasurer credited the Motor City’s strong management team under CFO John Hill both for the city’s fiscal progress, but also for his role in keeping an open line of communication with the state oversight board; he also noted the key role of Mayor Mike Duggan’s leadership for improving basic services such as emergency response times and Detroit’s public infrastructure. Nevertheless, Detroit remains subject to the state board’s approval of any contracts, operating or capital budgets, as well as formal revenue estimates—a process which the Deputy Treasurer noted “allows the city to stay on a strong economic path…[t]hese are all critical tools,” he notes, valuable not just to Detroit, but also to other municipalities an counties to help ensure “long term stability.”

On the Shore of Fiscal Recovery. S&P Global Ratings, which last month upgraded Atlantic City’s general obligation bond rating two notches to CCC in the wake of the city’s settlement with the Borgata Casino, a settlement which yielded the city some $93 million in savings, has led to a Moody’s rating upgrade, with the credit rating agency writing that Atlantic City’s proposed FY2017 budget—one which proposes some $35.3 million in proposed cuts, is a step in the right direction for the state taken-over municipality, noting that the city’s fiscal plan incorporates a 14.6% cut in its operating budget—sufficient to save $8 million, via reductions in salaries and benefits for public safety employees, $6 million in debt service costs, and $3 million in administrative expenses. Nevertheless S&P credit analyst Timothy Little cautioned that pending litigation with regard to whether Atlantic City can make proposed police and firefighter cuts could be a fly in the ointment, writing: “In our view, the proposed budget takes significant measures to improve the city’s structural imbalance and may lead to further improved credit quality; however, risks to fiscal recovery remain from pending lawsuits against state action impeding labor contracts.” The city’s proposed $206.3 million budget, indeed, marks the city’s first since the state takeover placed it under the oversight of the New Jersey’s Local Finance Board, with the state preemption giving the Board the authority to alter outstanding debt, as well as municipal contracts. Mr. Little wrote that this year will mark the first fiscal year of the agreed-to payment-in-lieu-of-taxes (PILOT) program for casino gaming properties—a level set at $120 million annually over the next decade—out of which 10.4% will go to Atlantic County. Mr. Little also notes that the budget contains far less state financial support than in previous years, as the $30 million of casino redirected anticipated revenue received in 2015 and 2016 will be cut to $15 million; moreover, the budget includes no state transitional aid—denoting a change or drop of some $26.2 million; some of that, however, will be offset by a $15 million boost from an adjustment to the state Consolidated Municipal Property Tax Relief Act—or, as the analyst wrote: “Long-term fiscal recovery will depend on Atlantic City’s ability to continue to implement fiscal reforms, reduce reliance on nonrecurring revenues, and reduce its long-term liabilities.” Today, New Jersey state aid accounts for 34% of the city’s $206.3 million in budgeted revenue, 31% comes from casino PILOT payments, and 27% from tax revenues. S&P upgraded Atlantic City’s general obligation bond rating two notches to CCC in early March after the Borgata settlement yielded the city $93 million in savings. Moody’s rates Atlantic City debt at Caa3.

Schooled on Bankruptcy. While Detroit, as noted above, has scored high budget marks or grades with the state; the city’s school system remains physically and fiscally below grade. Now, according to the Michigan Department of Education, school officials plan to voluntarily shutter some of the 24 city schools—schools targeted for closure by the state last January, according to State Superintendent Brian Whiston, whose spokesperson, William DiSessa, at a State Board of Education meeting, said:  “Superintendent Whiston doesn’t know which schools, how many schools, or when they may close, but said that they are among the 38 schools threatened for closure by the State Reform Office earlier this year.” Mr. DiSessa added that “the decision to close any schools is the Detroit Public School Community District’s to make.” What that decision will be coming in the wake of the selection of Nikolai Vitti, who last week was selected to lead the Detroit Public Schools Community District. Mr. Vitti, 40, is currently Superintendent of the Duval County Public Schools in Jacksonville, Florida, the 20th largest district in the nation; in the wake of the Detroit board’s decision last week to enter into negotiations with Mr. Vitti for the superintendent’s job, Mr. Vitti described the offer as “humbling and an honor.” The school board also voted, if Mr.Vitti accepts the offer, to ask him to begin next week as a consultant, working with a transition team, before officially commencing on July 1st. The School Board’s decision, after a search began last January, marks the most important decision the board has made during its brief tenure, in the wake of its creation last year and election last November after the Michigan Legislature in June approved $617-million legislation which resolved the debt of Detroit Public Schools via creating the new district, and retaining the old district for the sole purpose if collecting taxes and paying off debt.

The twenty-four schools slated for closure emerged from a list of 38 the State of Michigan had targeted last January—all from schools which have performed in the bottom 5 percent of the state for at least three consecutive years, according to the education department. The Motor City had hoped to avoid any such forced state closures—hoping against hope that by entering last month into partnership negotiations with the Michigan State Superintendent’s office, and working with Eastern Michigan University, the University of Michigan, Michigan State University, and Wayne State University, the four institutions would help set “high but attainable” goals at the 24 Detroit schools to improve academic achievement and decrease chronic absenteeism and teacher vacancies. The idea was that those goals would be evaluated after 18 months and again in 36 months, according to state officials. David Hecker, president of the American Federation of Teachers Michigan, noted that he was not aware which schools might be closing or how many; however, he noted that whatever happens to the teachers of the closing schools would be subject to the collective bargaining agreement with the Detroit Federation of Teachers. “If any schools close, it would absolutely be a labor issue that would be governed by the collective bargaining agreement as to how that will work … (and) where they will go,” Mr. Hecker said. “We very strongly are opposed to any school closing for performance reasons.”

Thirsty. A difficult issue—among many—pressed upon now retired U.S. Bankruptcy Judge Steven Rhodes during Detroit’s chapter 9 municipal bankruptcy came as the Detroit Water and Sewer Department began shutting off water service to some of nearly 18,000 residential customers with delinquent accounts. Slightly less than a year ago, in the wake of numerous battles in Judge Rhodes’ then U.S. bankruptcy courtroom, the issue was again raised: what authority did the city of Detroit have to cut off the delivery of water to the thousands of its customers who were delinquent by more than 90 days? Thus it was that Detroit’s Water and Sewerage Department began shutting off service to customers who had failed to pay their bills—with, at the time, DWSD guesstimating about 20,000 of its customers had defaulted on their payments, and noting that the process of shutting off service to customers with unpaid bills was designed to be equitable and not focused on any particular neighborhood or part of the city—and that the agency was not targeting customers who owed less than a $150 and were only a couple of months behind, noting, instead: “We’re looking for those customers who we’ve repeatedly tried to reach and make contact,” as well as reporting that DWSD was reminding its delinquent customers who were having trouble paying their water bills to contact the department so they may be enrolled in one of its two assistance programs — the WRAP Fund or the “10/30/50” plan. Under the first, the WRAP Fund, customers who were at 150 percent of the poverty level or below could receive up to $1,000 a year in assistance in paying bills, plus up to $1,000 to fix minor plumbing issues leading to high usage. This week, DWSD is reporting it has resumed shutoffs in the wake of sending out notices, adding the department has payment and assistance plans to help those with delinquent accounts avoid losing service. Department Director Gary Brown told the Detroit Free Press that everyone “has a path to not have service interruption.” Indeed, it seems some progress has been achieved: the number of families facing shutoffs is down from 24,000 last April and about 40,000 in April of 2014, according to The Detroit News. In 2014, DWSD disconnected service to more than 30,000 customers due to unpaid bills, prompting protests over its actions. Nonetheless, DWSD began the controversial practice of shutting off water service again this week, this time to some of the nearly 18,000 residential customers with delinquent accounts, in the wake of notices sent out 10 days earlier, according to DWSD Director Gary Brown. Nevertheless, while 17,995 households are subject to having their water turned off, those residents who contact the water department prior to their scheduled shutoffs to make a payment or enter into an assistance plan will avoid being cut off—with experience indicating most do. And, the good gnus is that the number of delinquent accounts is trending down from the 24,302 facing a service interruption last April, according to DWSD. Moreover, this Solomon-like decision of when to shut off water service—since the issue was first so urgently pressed in the U.S. Bankruptcy Court before Judge Rhodes—has gained through experience. DWSD Director Brown reports that once residents are notified, about 90 percent are able to get into a plan and avoid being shut off, and adding that most accounts turned off are restored within 24 hours: “Every residential Detroit customer has a path not to be shut off by asking for assistance or being placed into a payment plan…I’m urging people not to wait until they get a door knocker to come in and ask for assistance to get in a payment plan.” A critical part of the change in how the city deals with shutoffs comes from Detroit’s launch two years ago of its Water Residential Assistance Program, or WRAP, a regional assistance fund created as a component of the Great Lakes Water Authority forged through Detroit’s chapter 9 municipal bankruptcy: a program designed to help qualifying customers in Wayne, Oakland, and Macomb counties who are at or below 150 percent of the federal poverty level—which equates to $36,450 for a family of four—by covering one-third of the cost of their average monthly bill and freezing overdue amounts. Since a year ago, nearly $5 million has been dedicated to the program—a program in which 5,766 Detroit households are enrolled, according to DWSD, with a retention rate for those enrolled in the program of 90 percent. DWSD spokesperson Bryan Peckinpaugh told the Detroit News the department is committed to helping every customer keep her or his water on and that DWSD provides at least three advance notifications encouraging those facing a service interruption to contact the department to make payment arrangements, adding that the outreach and assistance efforts have been successful, with the number of customers facing potential service interruption at less than half of what it was three years ago.

Fiscally Hard in Hartford. Hartford Mayor Luke Bronin has acknowledged his proposed $612.9 FY2018 budget includes a nearly $50 million gap—with proposed expenditures at $600 million, versus revenues of just over $45 million: a fiscal gap noted moodily by four-notch downgrades to the Connecticut city’s general obligation bonds last year from two credit rating agencies, which cited rising debt-service payments, higher required pension contributions, health-care cost inflation, costly legal judgments from years past, and unrealized concessions from most labor unions. Moody’s Investors Service in 2016 lowered Hartford GOs to a junk-level Ba2. S&P Global Ratings knocked the city to BBB from A-plus, keeping it two notches above speculative grade. Thus, Mayor Bronin, a former chief counsel to Gov. Daniel Malloy, has repeated his request for state fiscal assistance, noting: “The City of Hartford has less taxable property than our suburban neighbor, West Hartford. More than half of our property is non-taxable.” In his proposed “essential services only” budget, Mayor Bronin is asking the Court of Common Council to approve an increase of about $60 million, or 11%, over last year’s approved budget—with a deadline for action the end of next month. An increasing challenge is coming from the stressed city’s accumulating debt: approximately $14 million, or 23%, of that increase is due to debt-service payments, while $12 million is for union concessions which did not materialize, according to the Mayor’s office. Gov. Malloy’s proposed biennial budget, currently in debate by state lawmakers, proposes $35 million of aid to Hartford. Unsurprisingly, that level is proving a tough sell to many suburban and downstate legislators. On the other hand, the Mayor appears to be gaining some traction after, last year, gaining an agreement with the Hartford Fire Fighters Association that might save the city $4 million next year: the agreement included changes to pension contributions and benefits, active and retiree health care, and salary schedules. In addition, last month, Hartford’s largest private-sector employers—insurers Aetna Inc., Travelers Cos. and The Hartford—agreed to donate $10 million per year to the city over five years. Nonetheless, rating agencies Moody’s and S&P have criticized the city for limited operating flexibility, weak reserves, narrowing liquidity, and its rising costs of debt service and pension obligations. Gurtin Municipal Bond Management went so far as to deem the city a “slow-motion train wreck,” adding that while the quadruple-notch downgrades had a headline shock effect, the city’s fundamental credit deterioration had been slow and steady. “The price impact of negative headlines and credit rating downgrades can be swift and severe, which begs the question: How should municipal bond investors and their registered investment advisors react?” Gurtin’s Alex Etzkowitz noted, in a commentary. “The only foolproof solution is to avoid credit distress in the first place by leveraging independent credit research and in-depth, ongoing surveillance of municipal obligors.”

Fighting for a City’s Future. The small city of Petersburg. Virginia, is hardly new to the stress of battle. It was there that General Robert E. Lee’s men fought courageously throughout the Overland Campaign, even as Gen. Lee feared he confronted a campaign he feared could not be won, warning his troops—and politicians: “We must destroy this Army of Grant’s before he gets to the James River. If he gets there, it will become a siege, and then it will be a mere question of time.” Yet, even as he wrote, General Ulysses S. Grant’s Army of the Potomac was racing toward the James and Petersburg to wage an attack on the city—a highly industrialized city then of 18,000 people, with supplies arriving from all over the South via one of the five railroads or the various plank roads. Indeed, Petersburg was one of the last outposts: without it, Richmond, and possibly the entire Confederacy, was at risk. Today, the city, because of the city’s subpar credit rating, is at fiscal risk: it has been forced to beg its taxpayers to loan it funds for new emergency vehicles—officials are making a fiscal arrangement with private citizens to front the cost for new emergency vehicles, and offering to put up city hall as collateral for said arrangement, as an assurance to the lenders they will be paid back. The challenge: the police department currently needs 16 new vehicles, at a cost of $614,288; the fire department needs three new trucks, at a cost of $2,145,527. Or, as Interim City Manager Tom Tyrrell notes: “Every single day that a firefighter rolls out on a piece of equipment older than he is, or a police officer responds to an emergency call in a car with 160,000 miles on it, are days we want to avoid…We want to get this equipment as soon as possible.” Interim City Finance Director Nelsie Birch has included in the upcoming fiscal year budget the necessary funds to obtain the equipment—equipment Petersburg normally obtains via lease agreements with vendors, but which now, because of its inability to access municipal credit markets due to its “BB” credit rating with a negative outlook, makes it harder than ever to find any vendor—or, as Manager Tyrrell puts it: “We went out four different times…We solicited four different times to the market, and were unsuccessful in getting any parties to propose.” He added that when soliciting these types of agreements, you solicit “thousands of people.” Notwithstanding that the funds for the vehicles is already set aside in the upcoming budget, city officials have been unable to find anyone willing to enter into a lease agreement with the city because of the city’s financial woes.

Last week, the City Council authorized Mr. Tyrrell to “undertake emergency procurement action” in order for the lease of necessary fire and police vehicles, forcing Mr. Tyrrell and other officials to seek private funds to get the equipment—that is, asking individual citizens who have the financial means to put up money for the fire and police vehicles—or, as Mr. Tyrrell puts it: “We’ve reached out to four people, who are interested and capable,” noting they are property owners in Petersburg who will remain anonymous until the deal is closed, describing it thusly: “[This agreement] is outside the rules, because we couldn’t get a partner inside the rules.” Including in this proposed fiscal arrangement: officials must put up additional collateral, in addition to the cars themselves, and in the form of city-owned property—with the cornerstone of the proposal, as it were, being Petersburg City Hall, or, as Mr. Tyrrell notes: “What they’re looking for is some assurance that no matter what happens, we’re going to pay the note…It’s not a securitization in the financial sense, as much as it is in the emotional sense: they know that the city isn’t going to let it go.” He adds, the proposed financial arrangement will be evaluated in two areas: the interest rate and how fast the deal can close, adding: “Although it’s an emergency procurement, we still want to get the best deal we can.”

Public Trust, Public Safety, & Municipal Fiscal Sustainability: Has the Nation Experienced the Closing of its Chapter on Municipal Bankruptcies?

 

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eBlog, 04/20/17

Good Morning! In this a.m.’s eBlog, we consider the unique and ongoing fiscal and physical challenges confronting Flint, Michigan in the wake of the drinking water crisis spawned by a state-appointed Emergency Manager, before heading far west to assess San Bernardino’s nearing formal exit from chapter 9 municipal bankruptcy—marking the last municipality to exit after the surge which came in the wake of the Great Recession.

Public Trust, Public Safety, & Due Diligence. Flint, Michigan Mayor Karen Weaver has recommended Flint continue obtaining its drinking water via the Detroit Great Lakes Water Authority (GLWA), reversing the position she had taken a year ago in the wake of the lead-contaminated drinking water crisis. Flint returned to the Detroit-area authority which sends water to Flint from Lake Huron in October of 2015 after the discovery that Flint River water was not treated with corrosion control chemicals for 18 months. Mayor Weaver said she believed residents would stick with a plan to draw from a pipeline to Lake Huron which is under construction; however, she said she had re-evaluated that decision as a condition of receiving $100 million in federal funding to address the manmade disaster, noting that switching the city’s water source again might prove too great a risk, and that remaining with Detroit’s water supply from Lake Huron would cost her citizens and businesses less. Last year, Mayor Weaver had stated that the city’s nearly 100,000 residents would stay with a plan to draw from a Karegnondi Water Authority pipeline to Lake Huron—a pipeline which remains under construction, noting, then, that switching water sources would be too risky and could cause needless disruptions for the city’s residents—still apprehensive about public health and safety in the wake of the health problems stemming from the decision by a state-imposed Emergency Manager nearly three years ago to switch and draw drinking water from the Flint River, as an interim source after deciding to switch to the fledgling Genesee County regional system and sever its ties to the Detroit system, now known as the regional Great Lakes Water Authority. Even today, federal, state, and local officials continue to advise Flint residents not to drink the water without a filter even though it complies with federal standards, as the city awaits completion of the replacement of its existing lead service lines—or, as Mayor Weaver put it: “At the end of the day, I believe this is the best decision, because one of the things we wanted to make sure we did was put public health first,” at a press conference attended by county, state, federal and Great Lakes authority officials, adding: “We have to put that above money and everything else. That was what we did. And what didn’t take place last time was public health. We’ve done our due diligence.” The 30-year contract with the Great Lakes authority keeps Flint as a member of the Karegnondi authority—a decision supported by the State of Michigan, EPA, and Genesee County officials, albeit the long-term contract still requires the approval of the Flint City Council and Flint Receivership Transition Advisory Board, a panel appointed by Gov. Rick Snyder charged with monitoring Flint’s fiscal conditions in the wake of the city’s emergence from a state-inflicted Emergency Manager two years ago.

City Councilman Eric Mays this week said he will be asking tough questions when he and his eight other colleagues will be briefed on the plan. There is also a town hall tonight in Flint to take public comments. Councilman Mays notes he is concerned the city may be “giving up ownership” in the new Genesee regional authority, something he opposes, adding he would be closely scrutinizing what he deems a “valuable asset to the city.” Mayor Weaver has said she personally wanted to review the earlier decision in the wake of last month’s receipt from the Environmental Protection Agency of $100 million to assist the city to address and recover from the drinking water disaster that took such a human and fiscal toll. (EPA is mandating that Flint provide a 30-day public comment period.) Mayor Weaver notes she anticipates some opposition, making clear any final decision will depend upon “public feedback and public opinion.” Currently, the city remains under contract to make $7 million in annual municipal bond payments over 28 years to the Karegnondi Water Authority (KWA); however, the Great Lakes authority said it would pay a $7 million “credit” for the KWA debt as long as Flint obligates itself to make its debt service payments. There is, at least so far, no indication with regard to how any such agreement would affect water rates. That matters, because, according to the Census Bureau, the city’s median household income is $7,059, significantly lower than the median Michigan-wide household income, and some $11,750 less than U.S. median household income. The GLWA said Flint customers would save a projected $1.8 million over 30 years compared with non-contractual charges they would have paid otherwise; in return, the Flint area authority would become a back-up system for the Detroit area authority, saving it an estimated $600 million over prior estimates and ensuring Metro Detroit communities would still receive water in the event of an interruption in Great Lakes authority service.

Robert Kaplan, the Chicago-based EPA’s acting regional administrator, said he signed off on the deal because the agency believes it protects the health of residents: “What’s best for public health is to stay on the water that’s currently being provided.” Jeff Wright, the KWA’s chief executive and drain commissioner of Genesee County, said the recommended plan not only would allow Flint to remain with the Genesee regional system, but also to be a back-up water supply, which, he noted, “is critically important to the safety of Flint’s residents who have not had a back-up system since the beginning of the Flint water crisis,” adding: “Whether (or not) Flint ultimately chooses high-quality Lake Huron water delivered through the newly constructed KWA pipeline, the highest quality treated water from Genesee County’s Water Treatment Plant or any other EPA-approved alternative, we will continue to assist Flint residents as they strive to recover from the Flint Water Crisis.” 

Keeping the Detroit system. The Great Lakes Water Authority Has embraced Mayor Weaver’s recommendation, with CEO Sue McCormick noting: “Flint residents can be assured that they will continue to receive water of unquestionable quality, at a significant cost savings.” Michigan Senate Minority Leader Jim Ananich (D-Flint) noted: “It provides us a long-term safe water source that we know is reliable. KWA could do the same thing, but this is an answer to help deal with one of the major parts of it,” adding the recommended move to stay on Detroit area water is “another example of the emergency manager sort of making a short-term terrible decision that’s cost us taxpayers half a billion dollars, if not more.” Emergency managers appointed by Snyder decided with the approval of the Flint City Council to switch to the Flint River water in part to save money. Flint officials said they thought Detroit water system price hikes were too high. For more than a year, the EPA has delayed any switch to KWA because of deficiencies including that the Flint treatment plant is not equipped to properly treat water. Staying with the Great Lakes authority may be an initial tough sell because of the city’s history, Mayor Weaver warned, but she is trying to get residents to move on. A town hall is scheduled for this evening at House of Prayer Missionary Baptist Church in Flint for public feedback. “I can’t change what happened,” Mayor Weaver said. “All I can do is move forward.”

Moody Blues in San Bernardino? As San Bernardino awaits its final judicial blessing from U.S. Bankruptcy Judge Meredith Jury of its plan of debt adjustment to formally exit chapter 9 municipal bankruptcy, Moody’s has issued a short report, noting the city will exit bankruptcy with higher revenues and an improved balance sheet; however, the rating agency notes the city will confront significant operational challenges associated with deferred maintenance and potential service shortfalls—even being so glum as to indicate there is a possibility that, together with the pressure of its public pension liabilities, the city faces continued fiscal pressures and that continued financial distress could increase, so that a return to municipal bankruptcy is possible. Moody’s moody report notes the debt adjustment plan is forcing creditors to bear most of the restructuring challenge, especially as Moody’s analyzes the city’s plan to favor its pension obligations over bonded municipal debt and post-retirement OPEB liabilities. Of course, as we noted early on, the city’s pension liabilities are quite distinct from those of other chapter 9 municipalities, such as Detroit, Central Falls, Rhode Island, and Jefferson County. Under the city’s plan, San Bernardino municipal bondholders are scheduled to receive a major buzz cut—some 45%, even as some other creditors whom we have previously described, are scheduled (and still objecting) to receive as little as a 1% recovery on unsecured claims. Thus, Moody’s concludes that the Southern California city will continue to have to confront rising pension costs and public safety needs. Moody’s adjusted net pension liability will remain unchanged at $904 million, a figure which dwarfs the projected bankruptcy savings of approximately $350 million. The California Public Employees’ Retirement System also recently reduced its discount rate, meaning the city’s already increasing pension contributions will rise even faster. Additionally, Moody’s warns, a failure to invest more in public safety or police could exacerbate already-elevated crime levels. That means the city will likely be confronted by higher capital and operating borrowing costs, noting that, even after municipal debt reductions, the city might find itself unable to fund even 50 percent of its deferred maintenance. 

However, as San Bernardino’s Mayor Davis has noted, the city, in wake of the longest municipal bankruptcy in American history, is poised for growth in the wake of outsourcing fire services to the county and waste removal services to a private contractor, and reaching agreements with city employees, including police officers and retirees, to substantially reduce healthcare OPEB benefits to lessen pension reductions. Indeed, the city’s plan of adjustment agreement on its $56 million in pension obligation bonds—and in significant part with CalPERS—meant its retirees fared better, as Moody’s has noted, than the city’s municipal bondholders to whom San Bernardino committed to pay 40 percent of what they are owed—far more than its early offer of one percent. San Bernardino’s pension bondholders succeeded in wrangling a richer recovery than the city’s opening offer of one percent, but far less than CalPERS, which received a nearly 100 percent recovery. (San Bernardino did not make some $13 million in payments to CalPERS early in the chapter 9 process, but subsequently set up payments to make the public employee pension fund whole.) The city was aided in those efforts in the wake of U.S. Bankruptcy Judge Meredith Jury’s ruling against the argument made by pension bond attorneys: in the wake of the city’s pension bondholders entering into mediation again prior to exit confirmation, substantial agreement was achieved for those bondholders—bondholders whose confidence in the city remains important, especially in the wake of the city’s subsequent issuance of $68 million in water and sewer bonds at competitive interest rates—with the payments to come from the city’s water and sewer revenues, which were not included in the chapter 9 bankruptcy. The proceeds from these municipal bonds were, in fact, issued to provide capital to meet critical needs to facilitate seismic upgrades to San Bernardino’s water reservoirs and funding for the first phase of the Clean Water Factor–Recycled Water Program.

The Challenges of Investing in the Future, or, Can God Work a Miracle?

eBlog, 04/18/17

Good Morning! In this a.m.’s eBlog, we consider the vestige of a most challenging issue during Detroit’s historic bankruptcy: water and sewer fees: how does a municipality balance between its needs and the ability of its lowest income citizens to pay? Then, we look at the same issue—especially because of its regional implications, in the nearly insolvent municipality of Petersburg, Virginia—where, as in many regions, water and sewer services—and costs—have regional dimensions. Finally, we inquire about lingering colonialism in Puerto Rico, where the government is planning a plebiscite so that its citizens can have a voice with regard to the U.S. territory’s future.

Fiscal & Physical Municipal Balancing. The City of Detroit’s Board of Water Commissioners is set to vote on a proposal to scale back a controversial storm water drainage fee in the wake of a backlash from churches and businesses, which have been most unhappy about the newly set $750-per-acre monthly charge—with the Board set to consider an option to reduce the drainage fee to $125 per acre until July, after which it would phase in increases over the next five fiscal years to $677 by July of 2022, according to Gary Brown, the Detroit Water and Sewerage Department [DWSD] Director. The Motor City began imposing the fee in July 2015 on the owners of 22,000 parcels with impervious surfaces such as roofs and parking lots which “were not,” as Director Brown noted, “paying anything at all…This essentially is giving them an opportunity to have five years to build green infrastructure projects and get a credit to permanently reduce their costs.”

The issue comes at a politically critical time, as Mayor Mike Duggan, running this year for re-election, has been confronted by opposition to the fee by Detroit’s politically-influential pastors—or, as Pastor Everett Jennings, of New Providence Baptist Church, put it: “They say it’s not taxation, but to me it’s a way to tax the church.” The Pastor notes the proposed monthly water bill for his northwest side church skyrocketed from $650 per month to $7,500 per month after the city began assessing the storm water drainage fee. Similarly, Phil Cifuentes, owner and CEO of Omaha Automation Inc., a small automotive and military manufacturing supplier near the Detroit-Hamtramck border, reports: “I came into a system that wasn’t charging anyone…And then I came into a system that, two years later, was charging the largest water sewerage rates in the country,” referring to the $15,630 bill he received in 2015—with the assessment dated back several years, leading him to note: “If they come down through this new rate, how does that affect everyone who owes them outstanding charges like the $10,000 I owe?”

Property owners will still owe the water department past-due charges at the higher rate; however, according to Mr. Brown, they will be eligible for relief for the next few years. The new phased-in rate structure going before the city water board will commence at $125 effective April Fool’s Day, double on July 1st, increase to $375 in July of 2018, $500 in July of 2019, and $626 in July of 2020. In July 2021, the per-acre fee will increase to $651, followed by a final hike of $26 in July of 2022. Mr. Brown notes: “By having a longer five-year opportunity to phase in, it gives them an opportunity to better budget for the new cost and also to go out and have a green infrastructure project designed.” He added that DWSD customers who were originally being charged $852 per impervious acre will see their rate gradually reduced to $677 by July of 2022 to match the rate charged to the 22,000 parcels in the new five-year phased-in plan: “This all goes away and everybody goes to one flat rate at the end of five years.”

To address an issue which had been raised before now retired U.S. Bankruptcy Judge Steven Rhodes during Detroit’s chapter 9 bankruptcy, Mr. Brown noted that the water department is going to offer grants of up to $50,000 for half of the cost of water retention projects on the sites of large churches and businesses to reduce the amount of storm water and impervious surfaces, according to Mr. Brown, who noted the city agency has budgeted $5 million for the grants, even as he described the drainage fee as having been “a real deterrent” to his plans to buy an adjoining 2.5-acre parcel and build another 40,000-square-foot manufacturing facility. The drainage fee itself was partly a response to a 2015 class action lawsuit Michigan Warehousing Group LLC brought against both the City of Detroit and DWSD for charging some property owners the $852 per acre monthly fee, while charging others nothing or as little as $20 based on the size of their water meter pipe. Thus, as Mr. Brown this week noted: “We’re trying to settle that lawsuit by getting everyone on to a fairer and equitable rate system by putting them on the same rate.” CEO Cifuentes notes that Omaha Automation is part of the class action lawsuit.

The non-paying customers included industrial parcels, commercial buildings, churches, and residential parcels where Detroiters have purchased vacant side lots and built additional parking spaces, according to Mr. Brown: “Parking lots were a big part of it—and they weren’t getting a bill, because they didn’t have an account.” Churches in Detroit received large bills because of their large parking lots: for instance, Shield of Faith Church has racked up a $65,000 bill with the city water department, because the storm water drainage fee costs the 300-member congregation nearly $5,000 per month, according to Pastor James Jennings, or as Pastor Jennings had warned prior to the rollback: “It’s actually causing us not to be able to meet our expenses, and we’re about to go under unless God works a miracle.”

The drainage fee also was imposed to pay for needed sewer infrastructure upgrades and try to reduce the city’s overall storm water runoff that causes combined sewage water outflows to discharge into the Detroit River and River Rouge in violation of state and federal environmental laws. The U.S. Environmental Protection Agency has mandated Detroit to eliminate all sewage discharges by 2022, according to Mr. Brown. The sewage releases vary depending on heavy rainstorms. Last year, the city released 800 million gallons of combined sewage and storm water, according to DWSD. In 2014, a torrential August rain storm contributed to 6.8 billion gallons of untreated sewage and storm water being released—and widespread basement flooding in the city and northern suburbs.

The Fiscal & Physical Costs of Delay. Unlike the federal government, states, cities, and counties have capital budgets. As we have noted previously, however, failure to properly administer one’s capital budgets can have, as we have noted in the case of Flint, Michigan, signal human physical and fiscal costs—or, as Prince George, Virginia Chairman William A. Robertson Jr. put it, with a case study just across the county line in Petersburg of what can happen if a locality goes too long without upgrading its water systems: “Sorry, but this is something we had to do…We don’t want to end up as a Petersburg or a Flint, Michigan.” Thus, with the vote, the county’s rate for drinking water will increase by 10% and the rate for wastewater will rise by 20% effective July 1st. Prince William Utilities Director Chip England noted that the county had performed a water rate study several years ago which “did call for annual rate increases;” however, he said, this rate increase will be the first in three years and just the second in the past 13 years, noting that, as is the case for most localities, Prince George’s utility system is an “enterprise fund” which is intended to be self-funded through customers’ payments for service. Ergo, he advised: “No general fund tax revenues are used to cover the expenses of the department.” But, as in Detroit, the fee increase did not come without opposition: Joe Galloni, president of the 55-plus neighborhood’s homeowner association, noted that many of the residents there are retired and living on fixed incomes: “A lot of folks over there can’t absorb any more increases.” In response, however, board members cited Petersburg’s financial woes and near insolvency as an object lesson in the need to keep current on infrastructure investments. Indeed, Petersburg officials have acknowledged that the city’s aging water and wastewater system is “on the brink of collapse” and estimate that it will take $97 million to repair the system. Like Prince George, Petersburg had gone many years without a rate increase, causing issues not only for the city, but also the region. Now, the Petersburg City Council has recently approved a 13.4% increase—and slated another increase of 14.3% in the city’s budget for next year—and even set plans providing for additional 15 percent increases in each of the following four years. Thus, Supervisor T.J. Webb noted that Petersburg’s financial crisis last year led the city to fall behind on its payments to the South Central Wastewater Authority, a regional entity which provides wastewater treatment to Prince George, Chesterfield County, Colonial Heights, and Dinwiddie County in addition to Petersburg. Had Petersburg not resumed making its $327,000-a-month payments to the authority, the other member jurisdictions would have been required to make up the shortfall, which would have meant an additional $38,000 that Prince George wastewater customers would have had to pay each month. Indeed, Chairman Robertson noted that Petersburg is considering two offers by for-profit companies, Aqua Virginia and Virginia American Water, to purchase the city’s water system.

Vestiges of American Colonialism. Before dawn this morning, the Puerto Rican House of Representatives passed Senate Bill 427, which amends the U.S. territory’s proposed plebiscite and responds to the demands made by the U.S. Justice Department. The actions came in the wake of the threat by U.S. Acting Deputy Attorney General Dana Boente, who had written to Gov. Ricardo Rosselló that the Justice Department would not notify Congress that it approved the ballot or suggest that Congress release funds to hold the plebiscite and educate voters on it. According to Mr. Boente, the current ballot “is not drafted in a way that ensures that its result will accurately reflect the current popular will of the people of Puerto Rico.” Moreover, the Justice Department has objected to the ballot only offering statehood and “free association/independence” as options; the Justice Department apparently believes that the ballot fails to offer Puerto Ricans the option of continuing in the current territorial status, and has alleged that the ballot statement that only statehood status “guarantees” U.S. citizenship by birth for Puerto Ricans is false, as the current territorial status already does this; the Department is also alleging that the ballot language fails to make clear that a vote for Puerto Rico to have a “free association” with the United States would make Puerto Rico an independent nation and strip Puerto Ricans of their U.S. citizenship.

The Justice Department intervention could also jeopardize the Congressional authorization of some $2.5 million to hold a plebiscite on its status in the United States and to educate its voters. While the authorization imposed no limit on when the funds could be used, it did require that prior to the release of the funds, the Justice Department was to notify Congress that the plebiscite ballot and educational materials were consistent with the laws, Constitution, and policies of the United States. Thus, the amended version (Senate 427) was modified in coordination with the Governor’s office and passed by the Puerto Rico Senate, notwithstanding aggravation with federal interference—a kind of interference virtually unimaginable with any U.S. state. Or, as New Progressive Party Senator Luis Daniel Muñiz Cortés put it: “It’s disgusting what the United States is doing with Puerto Rico. I, totally dissatisfied with the measure, will vote in favor if my Party votes in favor of Party discipline, but totally dissatisfied because it is unworthy for the people.” Nonetheless, Senate President Thomas Rivera Schatz said that this status consultation was a necessary step toward a definitive definition of Puerto Rico’s status, although he made it clear that his preference would be not to include “the colony” in the plebiscite: “We cannot fall into the game of those who do not want to do anything in Puerto Rico and do not want to do anything there, in the United States,” noting it was not an option to maintain the current status that “overwhelms the Puerto Rican people.” Thus, the approved version includes the territorial situation of Puerto Rico, but does not make specific mention of the Commonwealth; nor does the document refer to U.S. citizenship. 

Gov. Ricardo Rosselló and legislators from his pro-statehood New Progressive Party, had agreed to a measure authorizing a status plebiscite with the first vote to take place on June 11th—with that scheduled vote apparently triggering the demands from the Trump administration—demands, in response to which, Gov. Rosselló promised that his government would add remaining as a U.S. territory as an option to the ballot—and adding that the Congressional authorization of the $2.5 million requires that the Department of Justice notify the U.S. Congress at least 45 days prior to the plebiscite—that is, with sufficient time to provide Puerto Rico until this Saturday to authorize funds for the June 11th plebiscite. The Governor said Puerto Rico’s legislature would act swiftly—as, indeed, it has done. Now, the question will be how the changes might impact the tax-status of Puerto Rico’s future bonds, its economy, and whether it might mean Congress would treat Puerto Rico more like a state, which would have significant implications for programs such as Medicaid.  

The Art & Commitment of Municipal Fiscal Recovery

eBlog, 04/11/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery of the city of Flint, Michigan, before heading east to one of the smallest municipalities in America, Central Falls, Rhode Island, as it maintains its epic recovery from chapter 9 municipal bankruptcy, before finally turning south to assess recent developments in Puerto Rico. We note the terrible shooting yesterday at North Park Elementary School in San Bernardino; however, as former San Bernardino School Board Member Judi Penman noted, referring to the police department: “It is one of the most organized and well-prepared police departments around, and they are well prepared for this type of situation.” Indeed, even if sadly, the experience the city’s school police department gained from coordinating with the city’s police department in the wake of the December 2, 2015 terrorist attack appeared to enhance the swift and coordinated response—even as calls came in yesterday from the White House and California Gov. Jerry Brown to offer condolences and aid, according to San Bernardino Mayor Carey Davis.

Could this be a Jewel in the Crown on Flint’s Road to Fiscal Recovery? In most instances of severe municipal fiscal distress or bankruptcy, the situation has been endemic to the municipality; however, as we have noted in Jefferson County, the state can be a proximate cause. Certainly that appears to have been the case in Flint, where the Governor’s appointment of an emergency manager proved to be the proverbial straw that broke the camel’s back at an exceptional cost and risk to human health and safety. The fiscal challenge is, as always, what does it take to recover? In the case of Flint, the city’s hopes appear to depend upon the restoration of one of the small city’s iconic jewels: the historic, downtown Capitol Theatre—where the goal is to restore it to its original glory, dating back to 1928, when it opened as a vaudeville house: it was listed on the National Register of Historic Places in 1985, but has been empty now for more than a decade—indeed, not just empty, but rather scheduled to become still another parking lot. Instead, however, the property will undergo a $37 million renovation to become a 1,600-seat movie palace and performance venue, which will provide 28,000 square feet of ground-floor retail and second-floor office space; an additional performance space will be created in the basement for small-scale workshops, experimental theater, and other performances. Jeremy Piper, chairman of the Cultural Center Corp., a Flint lawyer, will manage the new performing arts venue in the cultural center; he will also serve as co-chair of a committee that is raising the last $4 million of the $37 million needed to bring the theater back to life. The goal and hope is that the renovated theater will, as has been the experience in other cities, such as New York City’s Lincoln Center for the Performing Arts, help serve as a foundation for Flint’s fiscal and physical recovery. The new theater is intended to become the focal point of 12,000, 13,000, or 14,000 people coming into downtown Flint for a performance and then going out for dinner—that is, to benefit and revive a downtown economy. Indeed, already, the venture firm SkyPoint is planning to open a large fine-dining restaurant on the ground floor and mezzanine timed to the rejuvenated theater’s reopening—SkyPoint Ventures being the company co-founded by Phil Hagerman, the CEO of Flint-based Diplomat Pharmacy Inc., and his wife, Jocelyn, whose Hagerman Foundation (the author, here, notes his middle name, derived from his great grandfather, is Hagerman) donated $4 million toward the Capitol’s renovation. In 2016, the Flint-based C.S. Mott Foundation announced a grant of $15 million for the Capitol Theatre project as part of $100 million it pledged to the city in the wake of the water crisis. The project also received $5.5 million from the Michigan Strategic Fund.

The ambitious effort comes as Michigan has paid $12 million to outside attorneys for work related to the Flint drinking water crisis, but out of which nearly 30% has gone to pay criminal and civil defense attorneys hired by Gov. Rick Snyder—an amount expected to climb as the lead poisoning of Flint’s drinking water has proven to be devastating for Flint and its children, but enriching for the state’s legal industry: Jeffrey Swartz, an associate professor at Western Michigan University-Cooley Law School, notes: “It’s a lot of money…I can see $10 million to $15 million being eaten up very quickly.” He added, moreover, that the state is still “on your way up the slope” in terms of mounting legal costs. The approved value of outside legal contracts, not all of which has been spent, is at least $16.6 million, adding that the Michigan Legislature may want to appoint a commission to review the appropriateness of all outside legal bills before they are approved for payment: already, Gov. Rick Snyder’s office has spent a combined $3.35 million for outside criminal and civil defense lawyers; the Michigan Department of Environmental Quality has spent $3.65 million; the Department of Health and Human Services has spent $956,000; and the Treasury Department has spent $35,555, according to figures released to the Free Press. In addition, the state has paid $340,000 to reimburse the City of Flint for some of its civil and criminal legal defense costs related to the drinking water crisis, which a task force appointed by Gov. Snyder has said was mainly brought on by mistakes made at the state level. Yet to be equitably addressed are some $1.3 million in Flint legal costs. Michigan Attorney General Bill Schuette, whose investigation is still ongoing, has charged 13 current or former state and municipal officials, including five from the Dept. of Environmental Quality, the Dept. of Health and Human Safety, the City of Flint, and two former state-appointed emergency managers who ran the city and reported to the state’s Treasury Department; no one, however, from Gov. Snyder’s office has been charged.

The Remarkable Recovery of Chocolateville. Central Falls, Rhode Island Mayor James A. Diossa, the remarkable elected leader who has piloted the fiscal recovery of one of the nation’s smallest cities from chapter 9 municipal bankruptcy, this week noted: “Our efforts and dedication to following fiscally sound budgeting practices are clearly paying off, leaving the City in a strong position. I would like to personally thank the Council and Administrative Financial Officer Len Morganis for their efforts in helping to lead the comeback of this great City.” The Mayor’s ebullient comments came in the wake of credit rating agency Standard and Poor’s rating upgrade for one of the nation’s smallest cities from “BB” to “BBB,” with S&P noting: “Central Falls is operating under a much stronger economic and management environment since emerging from bankruptcy in 2012. The City of Central Falls now has an investment grade credit rating from S&P due to diligently following the post-bankruptcy plan in conjunction with surpassing budgetary projections.”

One of the nation’s smallest municipalities (population of 19,000, city land size of one-square-mile), Central Falls is Rhode Island’s smallest and poorest city—and the site of a George Mason University class project on municipal fiscal distress—and guidebook for municipal leaders. Its post-bankruptcy recovery under Mayor Diossa has demonstrated several years of strong budgetary performance, and has “fully adhered to the established post-bankruptcy plan,” or, as Mayor Diossa put it: “S&P’s latest ratings report is yet another sign of Central Falls’ turnaround from bankruptcy.” Mr. Morganis noted: “The City of Central Falls now has an investment grade credit rating from S&P due to diligently following the post-bankruptcy plan in conjunction with surpassing budgetary projections,” adding that the credit rating agency’s statement expressed confidence that strong budgetary performance will continue post Rhode Island State oversight. S&P, in its upgrade, credited Mayor Diossa’s commitment to sound and transparent fiscal practices, noting the small city has an adequate management environment with improved financial policies and practices under their Financial Management Assessment (FMA) methodology—and that Central Falls exhibited a strong budgetary performance, with an operating surplus in the general fund and break-even operating results at the total governmental fund level in FY2016. Moreover, S&P reported, the former mill town and manufacturer of scrumptious chocolate bars has strong liquidity, with total government available cash at 28.7% of total governmental fund expenditures and 1.9 times governmental debt service, along with a strong institutional framework score. Similarly, Maureen Gurghigian, Managing Director of Hilltop Securities, noted: “A multi-step upgrade of this magnitude is uncommon: this is a tribute to the hard work of the City’s and the Administrative Finance Officer’s adherence to their plan and excellent relationship with State Government.” The remarkable recovery comes as one of the nation’s smallest cities heads towards a formal exit from chapter 9 municipal bankruptcy at the end of FY2017. S&P, in its upgrade, noted the city is operating under a “much stronger economic and management environment,” in the wake of its 2012 exit from municipal bankruptcy, or, as Mayor Diossa, put it: “Obviously we’ve had a lot of conversations with the rating agencies, and I was hoping we’d get an upgrade of at least one notch…When we got the triple upgrade, first, I was surprised and second, it reaffirmed the work that we’re doing. Our bonds are no longer junk. We’re investment level. It’s like getting good news at a health checkup.”  S&P, in its report, noted several years of sound budgeting and full adherence to a six-year post-bankruptcy plan which state-appointed receiver and former Rhode Island Supreme Court Justice Robert Flanders crafted. The hardest part of that recovery, as Judge Flanders noted to us so many years ago in City Hall,was his swift decision to curtail the city’s pension payments—cuts of as much as 55 percent—a statement he made with obvious emotion, recognizing the human costs. (Central Falls is among the approximately one-quarter of Rhode Island municipalities with locally administered pension plans.) Unsurprisingly, Mayor Diossa, maintains he is “fully committed” to the fiscal discipline first imposed by Judge Flanders, noting the municipality had a general fund surplus of 11% of expenditures in FY2016, and adding: “That reserve fund is very important.” He noted Central Falls also expects a surplus for this fiscal year, adding that the city’s expenses are 3% below budget, and that even as the city has reduced the residential property tax rate for the first time in a decade, even as it has earmarked 107% of its annual required contribution to the pension plan and contributed $100,000 toward its future OPEB liability.

The End of an Era? Mayor Diossa, recounting the era of chapter 9 bankruptcies, noted Pennsylvania’s capital, Harrisburg, in 2011; Jefferson County, Alabama; Stockton, Mammoth Lakes and San Bernardino, California; and Detroit: “I think Central Falls is a microcosm of all of them…I followed Detroit and heard all the discussions. They had the same issues that we had…sky-high costs, not budgeting appropriately,” adding his credit and appreciation—most distinctly from California—of the State of Rhode Island’s longstanding involvement: “The state’s been very involved,” commending Governors Lincoln Chafee and Gina Raimondo. Nevertheless, he warns: fiscal challenges remain; indeed, S&P adds: “The city’s debt and contingent liability profile is very weak…We view the pension and other post-employment benefit [OPEB] liabilities as a credit concern given the very low funded ratio and high fixed costs…They are still a concern with wealth metrics and resources that are probably below average for Rhode Island, so that’s a bit of a disadvantage…That adds more importance to the fact that they achieved an investment-grade rating through what I think is pretty good financial management and getting their house in order.” The city’s location, said Diossa, is another means to trumpet the city.

The Uncertainties of Fiscal Challenges. Natalie Jaresko is the newly named Executive Director of the PROMESA federal control board overseeing Puerto Rico’s finances, who previously served during a critical time in Ukraine’s history from 2014 to 2016 as it faced a deep recession, and about whom PROMESA Board Chair Jose Carrion noted: “Ukraine’s situation three years ago, like Puerto Rico’s today, was near catastrophic, but she worked with stakeholders to bring needed reforms that restored confidence, economic vitality and reinvestment in the country and its citizens. That’s exactly what Puerto Rico needs today;” came as Ms. Jaresko yesterday told the Board that with the tools at its disposal, Puerto Rico urgently needs to reduce the fiscal deficit and restructure the public debt, “all at once,” while acknowledging that the austerity measures may cause “things to get worse before they get better.” Her dire warnings came as the U.S. territory’s recovery prospects for the commonwealth’s general obligation and COFINA bonds continued to weaken, and, in the wake of last week’s moody Moody’s dropping of the Commonwealth’s debt ratings to its lowest rating, C, which equates with a less than 35% recovery on defaulted debt. Or, as our respected colleagues at Municipal Market Analytics put it: “[T]he ranges of potential bondholder outcomes are much wider than those, with a materially deeper low-end. For some (or many) of the commonwealth’s most lightly secured bonds (e.g., GDB, PFC, etc.) recoveries could hypothetically dip into the single digits. Further, any low end becomes more likely the longer Puerto Rico’s restructuring takes to achieve as time:

1) Allows progressively more negative economic data to materialize, forcing all parties to adopt more conservative and sustainable projections for future commonwealth revenues;

2) Allows local stakeholder groups—in particular students and workers—to organize and expand nascent protest efforts, further affecting the political center of gravity on the island;

3) Worsens potential entropy in commonwealth legislative outcomes;

4) Frustrates even pro-bondholder policymakers in the US Congress, which has little interest in, or ability to, re-think PROMESA and/or Federal aid compacts with the commonwealth.”

On the other hand, the longer the restructuring process ultimately takes, the more investable will be the security that the island borrows against in the future (whatever that is). So while the industry in general would likely benefit from a faster resolution that removes Puerto Rico from the headlines, the traditional investors who will consider lending to a “fixed” commonwealth should prefer that all parties take their time. Finally, if bleakly, MMA notes: “In our view, reliable projections of bondholder recovery impossible, and we fail to understand how any rating agency with an expected loss methodology can rate Puerto Rico’s bonds at all…Remember that the Governor’s Fiscal Plan, accepted by the Oversight Board, makes available about a quarter of the debt service to be paid on tax-backed debt through 2027, down from about 35% that was in the prior plan that the Board rejected. As we’ve noted before, the severity of the proposal greatly reduces the likelihood that an agreement will be reached with creditors by May 1 (when the stay on litigation ends), not only increasing the prospect of a Title III restructuring (cram down) un-der PROMESA, but also a host of related creditor litigation against the plan itself and board decisions both large and small. The outcomes of even normal litigation risks are inherently unpredictable, but the prospects here for multi-layered, multi-dimensional lawsuits create a problem several orders of magnitude worse than normal.

State and Local Insolvency & Governance Challenges

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eBlog, 03/29/17

Good Morning! In this a.m.’s eBlog, we consider the efforts to recover from the brink of insolvency in the small municipality of Petersburg, Virginia, before considering the legal settlement between the State of Michigan and City of Flint to resolve the city’s state-contaminated water which nearly forced it into municipal insolvency.

On the Precipice of Governing & Municipal Insolvency. Consultants hired to pull the historic Virginia municipality of Petersburg from the brink of municipal bankruptcy this week unveiled an FY2018 fiscal plan they claim would put the city on the path to fiscal stability—addressing what interim City Manager Tom Tyrrell described as: “It’s bad, it’s bad, it’s bad.” With the city’s credit ratings at risk, and uncertainty with regard to whether to sell the city’s utility infrastructure for a cash infusion, former Richmond city manager Robert Bobb’s organization presented the Petersburg City Council with the city’s first structurally balanced spending plan in nearly a decade: the proposed $77 million operating budget would increase spending on public safety and restore 10 percent cuts to municipal employees’ pay, even as it proposes cutting the city’s workforce, deeming it to be bloated and structurally inefficient. The recommendations also propose: restructuring municipal departments, the outsourcing of services that could eliminate up to 12 positions, and the reduction through attrition of more than 70 vacancies.

As offered, the plan also recommends about a 13 percent increase in the city’s current operating budget of $68.4 million, which was amended twice this fiscal year: the $77 million total assumes a $6 million cash infusion labeled on a public presentation as a “revenue event,” referring to a controversial issue dividing the elected leaders versus the consultants: Council members and the Washington, D.C. based firm have been at loggerheads over unsolicited proposals from private companies offering to purchase Petersburg’s public city’s utility system—a challenge, especially because of citizen/taxpayer apprehension about private companies increasing rates for consumers at a time when double-digit rate increases already are on the horizon. That, in turn, has raised governance challenges: Mr. Bobb, for instance, has expressed frustration with the city’s elected leaders’ decision to stall negotiations and study the prospect by committee, noting: “The city is out of time…They’re out of time with what’s needed with respect to the long-term financial health of the city. Time’s up.” Mr. Bobb believes the city cannot cut its way to financial health, or raise tax rates for city residents who themselves are struggling to get by, noting that at $1.35 per $100 of assessed value, the city’s real estate tax rate is currently the highest in the region—and at a potential tipping point, as, according to Census data, nearly half the city’s children live below the poverty line, which is set at $24,600 for a family of four. Moreover, Petersburg’s assessed property values have stagnated for the past five years, according to the credit rating agency Standard & Poor’s, which rated the city with a negative outlook at the end of last year: the lowest of any municipality in the state. (The city ended FY2016 with $18.8 million in unpaid bills and began the new fiscal year $12.5 million over budget. The budget since has been balanced, but debts remain.)

Under Mr. Bobb’s proposed plan, in a city where public safety is already the largest expense in the operating budget, he has proposed increasing police pay, addressing salary compression in the department, and providing for a force of 111 full-time and seven part-time employees. He suggests that should Petersburg not reap a $6 million “revenue event” in FY2018, the operating budget would be about 5 percent above this year’s, and a few million below revenues for fiscal years 2016 and 2015. Mr. Bobb’s consultant, Nelsie Birch, who is serving as Petersburg’s CFO, reports the city’s budget process and the development of the upcoming year’s budget have been thwarted by a lack of administrative infrastructure, noting that in the wake of starting work last October, he walked into a city finance department that had two part-time workers out of seven allocated positions—and a municipality with only $75,000 in its checking account. (Last week, there was approximately $700,000.) Today, Mr. Birch holds one of more than a half-dozen high-profile positions now filled by interim workers and consultants; Petersburg is paying about $80,000 for a Florida-based head hunter to help fill some of the city’s key vacancies, including those for city manager, deputy city manager, police chief, and finance director—with the City Council having voted last week to extend the Bobb Group’s contract through the end of September—at a cost to Petersburg’s city taxpayers of about $520,000.

Nevertheless, the eventual governance decisions remain with the Petersburg City Council, which secured its first opportunity to study the plan this week—a plan which will be explored during more than a half-dozen public meetings planned for the coming weeks: explorations which will define the city’s fiscal future—or address the challenge with regard to whether the city continues on its road to chapter 9 municipal bankruptcy.

The fiscal and governance challenges in this pivotal Civil War city, however, extend beyond its borders—or, as the ever so insightful Neal Menkes, the Director of Fiscal Policy for the Virginia Municipal League notes:  

“Perhaps the unstated theme is that the push for ‘regionalism’ is related not just to changing economic realities but to the state’s outmoded governance and taxation models. Local finances are driven primarily by growth in real estate and local sales, revenues that are not sensitive to a service economy. Sharing service costs with the Commonwealth is another downer. K-12 funding formulae are more focused on limiting the state’s liability than meeting the true costs of education.  That’s why locals overmatch by over $3.0 billion a year the amounts required by the state to access state basic aid funding.”

State Preemption of Municipal Authority & Ensuing Physical, Governing, and Fiscal Distress. U.S. District Judge David Lawson yesterday approved a settlement under which Michigan and the City of Flint have agreed to replace water lines at 18,000 homes under a sweeping agreement to settle a lawsuit over lead-contaminated water in the troubled city—where the lead contamination ensued under the aegis of a state-appointed emergency manager. The agreement sets a 2020 deadline to replace lead or galvanized-steel lines serving Flint homes, and provides that the state and the federal government are mandated to finance the resolution, which could cost nearly $100 million; in addition, it provides for the state to spend another $47 million to replace lead pipes and provide free bottled water—with those funds in addition to $40 million budgeted to address the lead-contamination crisis; Michigan will also set aside $10 million to cover unexpected costs, bringing the total to $97 million.

The lawsuit, filed last year by a coalition of religious, environmental, and civil rights activists, alleged state and city officials were violating the Safe Drinking Water Act—with Flint’s water tainted with lead for at least 18 months, as the city, at the time under a state-imposed emergency manager, tapped the Flint River, but did not treat the water to reduce corrosion. Consequently, lead leached from old pipes and fixtures. Judge Lawson, in approving the settlement, called it “fair and reasonable” and “in the best interests of the citizens of Flint and the state,” adding the federal court would maintain jurisdiction over the case and enforce any disputes with residents. Under the agreement, Michigan will spend an additional $47 million to help ensure safe drinking water in Flint by replacing lead pipes and providing free bottled water, with the state aid in addition to $40 million previously budgeted to address Flint’s widespread lead-contamination crisis and another $10 million to cover unexpected costs, bringing the total to $97 million. The suit, brought last year by a coalition of religious, environmental, and civil rights activists, alleged Flint water was unsafe to drink because state and city officials were violating the Safe Drinking Water Act; the settlement covers a litany of work in Flint, including replacing 18,000 lead and other pipes as well as providing continued bottled water distribution and funding of health care programs for affected residents in the city of nearly 100,000 residents. It targets spending $87 million, with the remaining $10 million saved in reserve. Ergo, if more pipes need to be replaced, the state will make “reasonable efforts” to “secure more money in the legislature,” Judge Lawson wrote, adding that the final resolution would not have been possible but for the involvement of Michigan Governor Rick Snyder. Judge Lawson also wrote that the agreement addresses short and long-term concerns over water issues in Flint.

The settlement comes in the wake of last December’s announcement by Michigan Attorney General Bill Scheutte of charges against two former state-appointed emergency managers of Flint, Mich., and two other former city officials, with the charges linked to the disastrous decision by a former state-appointed emergency manager to switch water sources, ultimately resulting in widespread and dangerous lead contamination. Indeed, the events in Flint played a key role in the revocation of state authority to preempt local control—or Public Act 72, known as the Local Government Fiscal Responsibility Act, which was enacted in 1990, but revised to become the Emergency Manager law under current Gov. Rick Snyder. Michigan State University economist Eric Scorsone described the origin of this state preemption law as one based on the legal precedent that local government is a branch of Michigan’s state government; he noted that Public Act 72 was rarely used in the approximately two decades it was in effect through the administrations of Gov. John Engler and Gov. Jennifer Granholm; however, when current Gov. Rick Snyder took office, one of the first bills that he signed in 2011 was Public Act 4, which Mr. Scorsone described as a “beefed-up” emergency manager law—one which Michigan voters rejected by referendum in 2012, only to see a new bill enacted one month later (PA 436), with the revised version providing that the state, rather than the affected local government paying the salary of the emergency manager. The new law also authorized the local government the authority to vote out the state appointed emergency manager after 18 months; albeit the most controversial change made to PA 436 was that it stipulated that the public could not repeal it. The new version also provided that local Michigan governments be provided four choices with regard to how to proceed once the Governor has declared an “emergency” situation: a municipality can choose between a consent agreement, which keeps local officials in charge–but with constraints, neutral evaluation (somewhat akin to a pre-bankruptcy process), filing for chapter 9 municipal bankruptcy, or suffering the state appointment of an emergency manager. As Mr. Scorsone noted, however, the replacement version did not provide Michigan municipalities with a “true” choice; rather “what you actually find is that a local government can choose a consent agreement, for example, but actually the state Treasurer has to agree that that is the right approach. If they don’t agree, they can force them to go back to one of the other options. So it is a choice, but perhaps a bit of a constrained choice.”

Thus, the liability of the emergency managers and the decisions they made became a major issue in the Flint water crisis—and it undercut the claim that the state could do better than elected local leaders—or, as Mr. Scorsone put it: “The state can take over the local government and run it better and provide the expertise, and that clearly didn’t work in the Flint case. The situation is epically wrong, perhaps, but this is clearly a case of where we have to ask the question: why did it go wrong, and I think it’s a complex answer, but one of the things that needs to be done…we need a better relationship between state and local government.” That has proven to be especially the case in the wake felony charges levied against former state appointed Emergency Managers in Flint of Darnell Earley and Gerald Ambrose, who were each charged with two felonies that carry penalties of up to 20 years—false pretenses and conspiracy to commit false pretenses, in addition to misconduct in office (also a felony) and willful neglect of duty in office, a misdemeanor.

Today, Michigan local governments have four choices in the wake of a gubernatorial declaration of an “emergency” situation: a municipality or county  can choose between a consent agreement, which keeps local officials in charge but with constraints; neutral evaluation, which is like a pre-municipal bankruptcy process;  filing for chapter 9 municipal bankruptcy directly; or suffering the appointment of an emergency manager—albeit, as Mr. Scorsone writes: “The choice is a little constrained, to be truthful about it…If you really carefully read PA 436, what you actually find is that a local government can choose consent agreement, for example, but actually the state Treasurer has to agree that that is the right approach. If they don’t agree, they can force them to go back to one of the other options. So it is a choice, but perhaps a bit of a constrained choice…The law is pretty clear that the emergency manager is acting in a way that does provide some governmental immunity…The emergency manager, if there’s a claim against her or him, has to be defended by the Attorney General. That was fairly new to these new emergency manager laws. The city actually has to pay the legal bills of what the Attorney General incurs, and it’s certainly true that there is a degree of immunity provided to that emergency manager, and I suppose the rationale would be that they want some kind of protection because they are making these difficult decisions. But I think this issue is going to be tested in the Flint case to see how that really plays out.” Then, he noted: “The theory is that the state can do it better…The state can take over the local government and run it better and provide the expertise, and that clearly didn’t work in the Flint case. The situation is especially wrong, perhaps, but this is clearly a case of where we have to ask the question why did it go wrong, and I think it’s a complex answer, but one of the things that needs to be done…we need a better relationship between state and local government.”

Governance Insolvency?

eBlog, 2/10/17

Good Morning! In this a.m.’s eBlog, we consider an increasing governance insolvency in Petersburg, Virginia—a virtually fiscally insolvent municipality, Michigan Governor Rick Snyder’s request to the Michigan legislature for an additional $48 million for the City of Flint, and the efforts of Puerto Rico to adjust itself to the new administration and Congress in Washington, D.C.

Governance Insolvency? Petersburg, Virginia City Council members, at the first council meeting since residents had petitioned a court to remove the Mayor and a Councilmember from office, were confronted with copies of “Robert’s Rules of Order,” and an organizational chart explaining that the voters are in charge. Nonetheless, that was insufficient to prevent the Council from suspending its own rules over complaints from its own members and city residents to allow for a vote to permit the use of taxpayers’ dollars for the hiring of a private lawyer to defend Mayor Samuel Parham and Councilman W. Howard Myers from removal petitions. The move appeared to further inflame tensions between Petersburg’s governing body and the community it serves at a time when the Council has come under fire from good-government advocates and the ACLU of Virginia. The vote followed a brief recess called after Petersburg resident Ron Flock requested to learn when the Council had (publicly) voted to hire an attorney to defend Mayor Parham and Councilmember Myers, noting: “There should be no reason why (the City Attorney) cannot represent the defendants in this hearing…At what point did you as City Council approve this expenditure?” The query came in the wake, at the beginning of this week, of Richmond attorney, James Cornwell, appearing in court to defend the Mayor and Councilmember against allegations of “neglect, misuse of office, and incompetence” that voters from their respective wards had lodged in January in Petersburg Circuit Court. Councilmember Wilson-Smith noted: “This resolution does not say how much this is costing and where the money is coming from, and I would like to know that,” with regard to the proposed resolution in advance of her vote in opposition. Neither the Mayor nor Councilmember recused themselves from voting: each voted on the measure over the dissent of audience members, who at first murmured, then hooted their disapproval at their decision not to recuse themselves from the vote. The petitioners who are seeking to oust the two elected officials have supported their ouster in large part because of their perceptions about not only their roles in the city’s collapse into insolvency, but also allegations with regard to their ethical breaches and violations of open-government law. (Virginia statutes allow for the removal of elected officials for specific reasons, which include certain criminal convictions.)

City Council Ethics, Conduct, & Insolvency. The kerfuffle came as Robert Bobb, the former Richmond City Manager, whom the city hired last October to help address its insolvency, unveiled proposed revisions to the City Council’s rules, including provisions for Councilmembers’ conduct and a detailed explanation of state laws on open records. Mr. Bobb spent time on how those laws applied to public meetings, an issue identified by the ACLU of Virginia last November in an epistle sharply critical of Council practices which the ACLU wrote violated “the spirit of open-government laws.” Mr. Bobb also formally named Joseph Preston, whom the city had retained last October as the new City Attorney, as Petersburg’s official parliamentarian. (In fact, it was in October that Mr. Preston had defended a Council vote to hire the Bobb Group that several registered parliamentarians then said appeared to be in violation of both the Council’s rules at the time and Petersburg’s charter.) Mr. Preston told the Mayor and Council it was too soon to estimate what the cost to the city’s budget and taxpayers would be to defend that Mayor and Councilmember—with the case to commence before Petersburg Circuit Judge Joseph M. Teefey Jr. next week.

Not in like Flint. State of Michigan officials have decided to end the state-funded water subsidies which, since 2014, had helped Flint residents—a city where more than 40 percent of the residents live below the federal poverty level—and where the median household income is $24,862—pay their water bills after the city’s water system became contaminated with lead due to decisions and actions taken by Gov. Rick Snyder’s former appointed Emergency Manager. Word of the abrupt state cutoff spread yesterday in the wake of a senior advisor to the Governor sending a letter to the city’s interim chief financial officer, David Sabuda, that the state credits, which applied to the water portion of Flint utility customers’ accounts, would end at the end of this month: the March billing statement will be the last to include the water usage credits, which were 20 percent for commercial customers and 65 percent for residential. In addition, the state will also no longer provide $1.2 million in monthly funding for the water the city receives from the Great Lakes Water Authority. Flint Mayor Karen Weaver issued a statement expressing concern at the manner and abruptness of the state’s action; nevertheless, she described it as a welcome sign that the city’s water is improving. The Governor’s decision comes after, last December, charges were filed against two of Gov. Snyder’s former appointed state emergency managers for the city—they were accused of misleading the Michigan Department of Treasury into issuing millions in municipal bonds, but then misused the proceeds to finance the construction of a new pipeline and force Flint’s drinking water source to be switched to the contaminated Flint River. The decision also came just ten days after the filing of a $722 million class action lawsuit against the EPA on behalf of more than 1,700 residents impacted by the water crisis. In response to the abrupt state cutoff, however, Mayor Weaver described the Governor’s action as a sign that the city’s water quality had improved—albeit stopping short of saying it was entirely safe: “I am aware that the water quality in the City of Flint is improving and that is a good thing…We knew the state’s assistance with these water-related expenses would come to an end at some point. I just wish we were given more notice so we at City Hall, and the residents, had more time to prepare for the changes.”

Federalism, Governance, & Hegemony. Former Puerto Rico Governor Anibal Acevedo Vilá yesterday brought a message from the Popular Democratic Party (PDP) to U.S. Senate leaders, saying that the New Progressive Party has legislated “another rigged status consultation” to fabricate a majority in favor of statehood, meeting with Sen. Roger Wicker (R-Miss.), an old ally of his collective, and advisors of the Chair Lisa Murkowski (R-Alaska), Chair of the Senate Environment and Natural Resources Committee and Sen. Maria Cantwell (D-Washington). The apparent intention was to begin to build a relationship with Jeff Sessions, whom the U.S. Senate yesterday confirmed as the new U.S. Attorney General. It would be in his newly confirmed capacity that the Attorney General would be in a position to approve a plebiscite’s ballot definitions and educational campaign between statehood and political sovereignty (free association or independence), which the NPP Government has set for this coming June 11th. Mr. Acevedo Vilá noted that by excluding a Commonwealth definition from the consultation, be it sovereign or developed, “a very high percentage of the Puerto Rican population” has been excluded. The former Governor of the U.S. territory is pursuing the presidency of his party; he will face former Representative Héctor Ferrer by the end of the month. He was accompanied by a delegation of legislators from his party, such as Luis Vega Ramos and Brenda López de Arrarás, who have also had their own meetings with Members of Congress concerning status, healthcare, and federal tax incentives for investment in Puerto Rico.

The meetings came as the PROMESA Puerto Rico Oversight Board fired off two letters this month asserting its authority over Puerto Rico’s legislature as its effort to oversee the island’s economy and address the debt crisis have, unsurprisingly, encountered resistance from Puerto Rico’s elected officials. Last week, the PROMESA Board sent a letter to the governor’s representative on the board, Elías Sánchez, asserting that it has many ways it can control the legislature even though Puerto Rico has yet to adopt a fiscal plan, pointing to §207 and §303 of the Puerto Rico Oversight, Management and Economic Stability Act, which address the board’s oversight of the government’s handling of debt. In addition, the board noted §204(a)(1)-(2), which states, “Except to the extent that the oversight board may provide otherwise in its bylaws, rules, and procedures, not later than seven business days after a territorial government duly enacts any law during any fiscal year in which the oversight board is in operation, the Governor shall submit the law to the oversight board.” The federal law adds that such submission is supposed to be accompanied by an independent entity’s estimate of the law’s cost: if the board finds the law inconsistent with the fiscal plan, the board can ask for it to be corrected or blocked. In the PROMESA Board’s epistle of last week, the letter notes that its review of the laws “is independent of the existence of a certified fiscal plan.” Since this PROMESA section is titled “Review of activities to ensure compliance with fiscal plan,” however, this is unclear.

The issue arose even as, this week, the PROMESA Board fired off another missive stating: “We believe that all government entities need to do the utmost to reduce expenses, including those relating to professional service contracts, as soon as possible and as much as possible,” noting the board “is currently focused on the goal of certifying a ten-year fiscal plan for Puerto Rico.” (Puerto Rico Gov. Ricardo Rosselló is supposed to submit a proposed fiscal plan covering government revenues and spending by February 21st—while the PROMESA Board has set a March 15th deadline to certify the plan. Yet the nature of the U.S. hegemony remains at issue: Puerto Rico’s Senate President Thomas Rivera Schatz has threatened to sue the Oversight Board if it attempts to exercise authority over the legislature, according to the El Vocero news website.  

 

 

How Does a Leader Balance Fiscal Versus Human Health & Safety?

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eBlog, 1/24/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal and human health and safety challenges—and fiscal implications—in the City of Flint, as city residents have sued the State of Michigan; then we look east to Ohio, where the question with regard to a similar human and fiscal health related to East Cleveland appears to be worsening with regard to health, fiscal health, and governance. Finally, we peer south to the warm Caribbean, but where the warmth in weather is exceeded by the increasing political heat between the PROMESA oversight board and the new Governor—a challenge with parallels to the fiscal struggle Washington, D.C. underwent nearly two decades ago.

Fighting for Flint’s Fiscal Future. U.S. District Judge David Lawson has described an attempt by Michigan Attorney General Bill Schuette to side with Flint residents in a lawsuit against the state as “superficial posturing,” stating that the AG has created a “troubling ethical issue” that could delay the case that seeks to provide the city with bottled water delivery. In his opinion, Judge Lawson denied Mr. Schuette’s request to file an amicus brief in the case on behalf of “the people of the State of Michigan,” saying the motion is problematic for several reasons, including that assistant attorneys general have already appeared in the case on behalf of state defendants, including Gov. Rick Snyder, writing: “The proposed amicus brief has not introduced any new arguments or offered a perspective that has not been presented by the parties already. Instead, the attorney general has taken a position aligned with the plaintiffs and at odds with other attorneys in his own office…In doing so, he has managed to inject a troubling ethical issue into this lawsuit, potentially complicating adjudication of the serious legal questions before the court, without adding anything of substance.” A spokesperson for the Michigan Attorney General said he would not appeal this ruling, noting that while the attorney general respectfully disagreed with the ruling, “We originally obtained concurrence from all parties prior to filing, and because it failed to include mention of the conflict wall in this case…Attorney General Schuette will continue to fight aggressively for Flint families and remains thankful to the many Flint residents and elected officials who expressed their support of his actions.” The denial came the day before Judge Lawson is to take up an emergency motion in the case: today, Judge Lawson must decide whether and how the State of Michigan and both state and Flint officials should—or must—comply with a largely ignored federal court order requiring door-to-door delivery of bottled water to Flint homes lacking a working water filter.

The legal challenge dates back to last November, when Judge Lawson ordered the state and City of Flint to provide and finance the provision of four cases of bottled water per resident per week if officials cannot prove faucet filters are working to remove harmful lead. That was an order Gov. Snyder’s administration opposed, arguing it is “overbroad,” and one which the city is fiscally unable to meet; indeed, Michigan has filed an emergency motion with the U.S. Sixth Circuit Court of Appeals to block the order, arguing before the court that while the state was not “reluctant “to comply with the order, rather it was confronted by “financial, logistical, and practical difficulties” in doing so. According to state officials, the order would be a five-fold increase over current efforts and require another 137 trucks, hiring at least 150 additional people and “a warehouse so large it is not clear if one even exists in the Flint area” at a cost of more than $11 million per month. In his order at the beginning of last month, Judge Lawson wrote: “The main thrust of the ordered relief is the proper installation and maintenance of tap water filters. For those homes that have properly installed and maintained water filters in place—which is the vast majority of residences, if the state defendants’ witnesses are to be believed—bottled water delivery is not necessary and was not ordered.” While testing shows lead levels in Flint water are on the decline, Flint residents have been instructed to use only filtered or bottled water for consumption, and researchers have encouraged those practices until further notice from state or federal officials: no amount of lead is considered safe.

Does East Cleveland Have a Future? Ohio’s Environmental Protection agency has shut down a waste site in East Cleveland which currently holds an estimated 2 million yards of waste and construction debris, piled up over the past few years by Arco Recycling, declaring it an unpermitted landfill. In the nonce, former East Cleveland Mayor Eric Brewer worked with Auburn Environmental to understand the harm which might already have occurred at a site which features a combination of toxic gas and toxic particles both on the outside and inside of the property—and which appears to have been operating without any legal authority granted by the municipality. The EPA has given Arco Recycling two weeks to clean up or face further actions. Given the small city’s fiscal depletion and insolvency—and the lack of any state response, it would almost appear to be another Flint-like situation, with grave implications for public health and safety, and a fiscal inability by the small city to address on its own—either fiscally or governmentally.

Is there Unpromise in PROMESA? According to Governor Ricardo Rosselló Nevares, it is time for the PROMESA Oversight Board created by the U.S. Congress and former Obama Administration to turn into Puerto Rico’s representative in Washington, D.C., because, otherwise, the various efforts coordinated to strike a fiscal balance and attain socioeconomic development in the U.S. territory will be in vain. The Governor was responding to a lengthy letter from the Board demanding austerity—a demand which appeared to reflect little flexibility with regard to demanding $4.5 billion in spending cuts and/or tax increases per year. While the PROMESA board said it was open with regard to how the Governor achieves that bottom line, the epistle noted: “To be clear, presenting a plan that can achieve at least this level of savings is a pre-requisite to certifying a fiscal plan.”

According to Governor Rosselló Nevares, the delicate state of the island’s public finances, as well as the grave risk of disruption to Puerto Rico’s healthcare services creates what he described as an “unambiguous need” to obtain the federal government’s support in overcoming the crisis, a message that pertains to his administration, but also the Oversight Board—or, as the Governor put it: “The Board has, I believe, that role to fulfill. They need to be the voice for Puerto Rico’s credibility, as did other fiscal boards, like the board in Washington, D.C…For two and a half years, the members of the board in Washington, D.C., using all available financial tools, but were unable to, failed, or attained only marginal improvements. Which is why they had to return to the Capitol to explain two huge faults they had found.” According to Governor Rosselló Nevares, the PROMESA legislation that ordained the oversight board lacked economic development tools critical to the island’s economy and future revenues, and, he added, as with the District of Columbia, where a comparable oversight body was created—that body went back to Congress to ask for fiscal support. But, in addition, the Governor noted, the second element the legislation for D.C. lacked was “equal treatment as a state.”

The Governor was referring to the period nearly three decades ago when the nation’s capitol, Washington, D.C., succumbed to a comparable fiscal crisis which resulted in credit downgrades and the city’s inability to pay its required pension contributions, all while experiencing disruption in public services. In response, Congress intervened by creating an entity similar to the Oversight Board, in 1997, via the National Capital Revitalization Act, a statute which allowed for the transfer of hundreds of programs funded by DC’s administration to the federal government. The act, among other things, had the federal government take over the criminal justice programs and the actuarial deficiencies in the pensions for teachers, police officers, firemen, and judges. In addition, the federal government also increased its contribution to the District’s Medicaid program, from 50% to 70%—changes which, Governor Rosselló Nevares noted, when made, provided for a nation’s capital city that “was able to thrive.” According to the Governor, under PROMESA, “We have a report from that group, which could presumably help our economic development, but it’s not binding and we don’t know what we’re going to do…The Board, like us, should be a spokesperson to our credibility, and they should tell those who put them there (Congress) that Puerto Rico is taking action, and we’re making good progress.” Although the Governor urged the board members to take up a position in favor of the U.S. territory, while PROMESA regulates the pension and public debt payments, the federal entity’s mandate is explicit: restoring fiscal discipline and achieving Puerto Rico’s return to the capital markets under reasonable conditions.

Consequently, Gov. Rosselló Nevares has focused on providing tools for the private sector, enabling the development of infrastructure projects, and ensuring the continuity of certain collections by approving the extension of Act 154 (which created the 4% tax on foreign companies); but he still counsels “there needs to be action from the federal government,” noting: “You may take fiscal measures to check them off the list, but without economic development, it would have a noxious effect, possibly on emigration, on the quality of life for citizens, and the social environment,” as he rejected the Financial Oversight and Management Board for Puerto Rico’s demands for quick and deep austerity measures, deriding the letter from the oversight board as one demanding an “average 79% haircut,” insisting, instead, “We will reflect a fundamental willingness to pay based upon available resources, while satisfying the need for essential services, adequate funding for public pensions and providing a platform for economic growth, all as required by [the Puerto Rico Oversight, Management and Economic Stability Act].”