States Roles in the Wake of Fiscal and Physical Storms

March 13, 2018

Good Morning! In this morning’s eBlog, we consider the federalism challenges within Puerto Rico, where aid to local governments or muncipios for hurricane recovery appears nearly as derelict as federal aid to the U.S. Territory of Puerto Rico, before trying to untangle the perplexing fiscal challenges of public education in Detroit.

Unpromising? Puerto Rico Governor Ricardo Rosselló yesterday noted that from the “beginning, we (the government of Puerto Rico) have established that this is a time where you have to see the effectiveness of each penny invested. And we are all subject to that crucible,” with his comments coming in reaction a request from 11 conservative organizations demanding, in a letter to Congress, the dismissal of Natalie Jaresko, the Director of the PROMESA Oversight Board. No doubt, part of the concern relates to the exceptional disparity in pay: His claim is based on Ms. Jaresko’s salary of $625,000 per year compared to the median income in Puerto Rico of $19,429, or approximately 60% less than on the mainland. The organizations have also requested that “the basic precepts established in PROMESA‒‒precision, transparency, and the creation of a credible plan for the return of the people of Puerto Rico to the capital markets,” urging Congress to schedule a hearing to determine whether the Board is in compliance with the intent of the PROMESA provisions. The epistle was signed by the 60 Plus Retirement Association, the Taxpayers Protection Alliance, the Frontiers of Freedom, the Market Institute, the Americans for Limited Government, the Center for Freedom and Prosperity, the Independent Women’s Voice, the Consumer Action for a Strong Economy, and the Independent Women’s Forum. There is apprehension that the letter could jeopardize efforts by the New Progressive Party and the Popular Democratic Party to provide an immediate financial injection to Puerto Rico’s municipios to assist in the ongoing fiscal and physical recovery from Hurricane Maria. Senate President Thomas Rivera Schatz, who, last year, was elected to a second term as President of the Senate, thereby becoming the only reelected Senate President during the past 28 years, and the only Senate President ever elected as such to non-consecutive terms, said he would amend the Governor’s proposed legislation to grant immediate and direct financial assistance to the 78 municipal governments, as he was presiding over a public hearing of the Commission on Federal, Political and Economic Relations. The Senate President has identified a $100 million fund to be distributed among all municipios, albeit imposing a cap of $5 million to any recipient, and conditioning the aid, granted as a loan, to be administered by the Financial Advisory Authority and Fiscal Agency of Puerto Rico (Aafaf), the Office of Management and Budget, and the Department of the Treasury to authorize it.

Sen. Schatz asked his colleagues: “Who can deny that all the municipalities had losses? The hurricane devastated the island. Everyone knows that (the damage) exceeds a million dollars. If the governor of Puerto Rico has identified $ 100 million, then we have them. If we have them, I do not think it is appropriate to establish a loan and application mechanism that is a tortuous, long, and uncertain route.” In a public hearing, Rolando Ortiz and Carlos Molina, presidents of the Association and the Federation of Mayors, respectively, insisted that the municipalities should receive an allocation of funds, rather than a loan, arguing the island’s municipios lack the funds to repay the money, with Mayors Lornna Soto of Canovanas, Edwin Garcia of Camuy, and Javier Carrasquillo of Cidra, who reviewed the number of occasions in which they have had to withdraw funds from the municipal coffers to make expenses related to the process of emergency and recovery, even as distributions to the municipios from Puerto Rico’s sales and use tax were reduced.

The La Fortaleza project establishes that the Fiscal Oversight Board will have to approve the disbursement of funds—with the revised proposal coming in the wake of an earlier proposal vetoed by the PROMESA Board, because it was not tied to income and liquidity criteria of the municipios. However, Sen. Schatz argued that in the wake of Hurricane Maria, the Board had authorized the government to redirect $1 billion of the current budget for response and emergency tasks. That is, what is emerging is a consistent issue with regard to governance authority—a difference, moreover, not just between the PROMESA Board and the U.S. territory, but also between the Governor, Puerto Rico House, and Senate—differences potentially jeopardizing the proposed legislation to inject as much as $100 million into the municipal coffers damaged by the Hurricanes Irma and María: Sen. Schatz does not favor the granting of loans to municipalities for up to $5 million to mitigate the effects of hurricanes on their collections, or reductions by patents, taxes or remittances from the Municipal Revenues Collection Center; rather he favors helping municipalities with uniform allocations of $1 million, with his proposal providing that the Department of the Treasury, the Office of Management and Budget, the Fiscal Oversight Board, and the Financial Advisory Authority and Fiscal Agency of Puerto Rico must authorize the loans.

Perhaps unsurprisingly, Puerto Rico House Finance Committee Chair Antonio Soto disagrees: he argues that rather than a formula allocation, each municipio should be required to justify the amount it is requesting, noting: “That justification can be part of the project. It is not to give them $100 million, but to say: ‘I have this situation, the collections have fallen, I continued to provide these services,’” even as he acknowledged that PROMESA Board would have to authorize a project such as the one promoted by Sen. Rivera Schatz. 

Presión. The intergovernmental debate is under pressure as the U.S. territory’s cash position has been determined to be 24% below the pre-Hurricane Maria projection, according to cash flow data from EMMA as of the end of last month, showing increased financial pressure after earlier reports had shown limited deterioration. According to a cash flow summary, Puerto Rico’s primary central government account, the Treasury Single Account, contained $1.56 billion as of three weeks ago; whereas, prior to Hurricane Maria’s devastation, the government had projected that on that date there would be $2.061 billion. Puerto Rico Treasury Secretary Raúl Maldonado Gautier reported that January General Fund revenues were 12.2% below pre-Maria projections, no doubt further complicating the PROMESA Board’s efforts to certify a five-year fiscal plan for Puerto Rico: In the draft submitted last month by the Rosselló administration, the government anticipated sufficient cash flow to finance close to 20% of its debt service; however, according to the Puerto Rico Treasury, General Fund net revenues were down 5.2% in the first seven months of the fiscal year compared with projections, with the largest shortfalls compared to expectations coming from foreign corporation profit taxes ($135.4 million) and sales and use taxes ($80 million): in January, net revenues were 12.2% below projection. According to Treasury Secretary Raúl Maldonado Gautier, income taxes were above expectations, because Hurricane Maria had caused employers to postpone payments for the first few months of the fiscal year.

Let There Be Light! Puerto Rico’s Electric Power Authority (AEE) now projects electricity service will be restored to at least 95% by the end of May, with PREPA interim Director Justo González announcing, moreover, that the public utility will locate solar panels in certain high mountain parts of the island, which, he noted, was “part of what FEMA has in its hands and agrees to do so.”

Schooled on Recovery? On June 8, 2016, Michigan Senate Majority Leader Arlan Meekhof (R-West Olive), in urging his colleagues to vote for a significant bailout of Detroit’s public schools, said the plan would be sufficient to pay off the District’s debt, would provide transition costs for when the district splits into two districts and returns the district to a locally elected school board in January, stating: “This represents a realistic compromise for a path to the future: At the end of the day, our responsibility is to solve the problem…Without legislative action, the Detroit Public Schools would head toward [municipal] bankruptcy, which would cost billions of dollars and cost every student in every district in Michigan.” Yesterday, Jonathan Oosting, writing for the Detroit News, wrote that U.S. Education Secretary Betsy DeVos said Sunday she “does not know if traditional public schools in Michigan have improved since she and others began pushing to open the state up to choice and charter schools. Recent analyses show Michigan students have continually made the least improvement nationally on standardized test scores since 2003, and it is one of only five states where early reading scores have declined over that span.” His article came in the wake of the Secretary’s interview with “60 Minutes,” where she had been pressed on her assertion that traditional public schools in places like Florida improved when students were given more choice to attend different schools, with CBS’s Lesley Stahl asking: “Now, has that happened in Michigan? “We’re in Michigan. This is your home state: “have the public schools in Michigan gotten better?” In response, the Secretary said: “I don’t know. Overall, I, I can’t say overall that they have all gotten better.” Ms. Stahl followed up, telling Secretary DeVos the “whole state is not doing well,” and that “the public schools here are doing worse than they did.” In response, Secretary DeVos said: “Michigan schools need to do better. There is no doubt about it.” Ms. Stahl then asked the Secretary if she has seen the “really bad schools” and attempted to try to figure out what has been happening in them—to which Secretary DeVos responded said she has “not intentionally visited schools that are underperforming.”

The interview resurrected a long-running debate in Michigan, which opened the door to publicly funded charter schools in 1994 and is now a leading state for charter academies; indeed, Detroit today ranks third in the nation for the percentage of students who attend charter schools, according to the National Alliance for Public Charter Schools. (Flint ranks second.) Today, according to a recent Education-Trust Midwest analysis of National Assessment of Education Progress standardized test scores, Michigan students ranked 41st in the country for fourth-grade reading performance in 2015, down from 38th in 2013, and 28th in 2003; in an analysis by University of Michigan Professor Brian A. Jacob, he found that Michigan students were at the bottom of the list when it comes to proficiency growth in the four measures of the exam; according to the NAEP results, in 2015, the average math score of eighth-grade students in Michigan was 278 out of 500, compared with the national average score, 281: the average Michigan score has not significantly changed from 280 in 2013 and 277 in 2000. Professor Jacob’s analysis found that 29% of Michigan students performed at or about the “proficient level” on the NAEP exam in 2015—results not significantly different from the 30% found in 2013, or the 28% recorded in 2000. Secretary DeVos, who had taken the lead in launching the Great Lakes Education Project to lobby for school choice in Michigan, and who has consistently said the government should invest in students, not buildings or institutions, in response to Ms. Stahl’s follow up query: “But what about the kids who are back at the school that’s not working? What about those kids?;” said: “[S]tudies show that when there is a large number of students that opt to go to a different school or different schools, the traditional public schools actually, the results get better, as well.”

Last week, the Detroit Public Schools Community District announced the launch of the 5000 Role Models of Excellence Project for minority males in grades 6 through 12: a project designed to develop a leadership pipeline for young men utilizing school-based and community mentors and role models through various methods of support, including themed weekly meetings, a monthly speaker series, community service projects, and college access support. The Detroit Board of Education members voted 7-0 to launch the 5000 Role Models Project in an effort to “create and develop a pipeline of leadership from within the walls of the District’s schools, describing thus as a proven mentoring program that prepares young men for success, generated by role models in our schools who are supported by male mentors in the community.”


Fiscal Sand Traps & Disparate, Inequitable Responses

March 7, 2018

Good Morning! In this morning’s eBlog, we consider the fiscal sand trap into which the small Virginia municipality of Buena Vista has fallen, before examining the ongoing, disparate physical and fiscal recovery issues in Puerto Rico.

Is the Municipal Fiscal Vista Good? Virginia is somewhat unique in that it does not specifically authorize municipalities to file for chapter 9 municipal bankruptcy; it does, in certain situations, allow for a receiver allow for the appointment of a receiver with respect to revenue bonds (§15.2-4910). Now, the aptly named Buena Vista, Virginia, a small, independent city located in the Blue Ridge Mountains with a population of about 6,650, where, as we have previously written, the issue of non-payments of municipal bond interest on debt issued for its public golf course became an election issue, has, in effect, cone back as a mulligan. This time, the issue involves, again, the municipal golf course, and the issue has re-arisen because of the municipality’s decision not to make the bond payments on a municipally-owned golf course that the new majority on Council oppose as inconsistent with an essential government activity—rejecting a moral obligation pledge on what has become a failed economic development project, as the city’s elected leaders have opted instead to focus—in the wake of the Great Recession—on essential public services, putting the city in a subpar fiscal situation with Vista Links, which was securing the bonds, according to Virginia state records. The company, unsurprisingly, has sued to get the bond payments it had been promised—potentially putting at risk the city’s city hall and other municipal properties which had been put up as collateral. Buena Vista City Attorney Brian Kearney discerns this to be an issue of a moral obligation bond, rather than a general obligation municipal bond, so that “[W]e could not continue to do this and continue to do our core functions.” In the wake of the fiscal imbroglio, the Virginia Commission on Local Government (COLG)—which provides an annual fiscal stress study‒ended up playing a key role in the Petersburg effort in the General Assembly—finding that very poor management had led to an $18 million hole.

Nevertheless, the municipality’s selective payment default on its $9.2 million in lease revenue bonds has driven Municipal Markets Associates to describe the city’s decisions as “perhaps a worst-in-class example of erosion in issuer willingness to pay bondholders. Buena Vista’s default can no longer be blamed on weak local budget or economic conditions; rather, the city is currently choosing neither to pay nor negotiate with bondholders, because the pledged appropriation security permits this to occur. Further, while the commonwealth has applied some pressure to the city by denying it access to state loan funds via the VRA program, Virginia has chosen not to more proactively interfere in city affairs and has made multiple grants to Buena Vista in recent years.” Nevertheless, Buena Vista won the first round in court regarding the bond default, after the court concurred that the city had a moral obligation, but not a full faith and credit obligation. (It is unclear whether there will be an appeal.) While the Commonwealth of Virginia has applied some pressure to the city by denying it access to state loan funds via the VRA program, Virginia has chosen not to more proactively interfere in city affairs and has made multiple grants to Buena Vista in recent years. Two years ago, Buena Vista had made payments toward all other out-standing debt obligations, including $5.5 million in general fund bonds and loans and $7.9 million in revenue bonds; the municipality added $500,000 to its net General Fund net revenues—leaving it in a fiscal sand trap caught between $94 million in obligations towards debt service on its ACA-insured bonds while continuing to growth fund balance.

Here, the municipality’s default triggered negotiations with bond insurer, ACA Financial Guaranty Corp., which led to a forbearance agreement—one on which the city subsequently defaulted—triggering the Commonwealth of Virginia to bar financing backup to the city from the state’s low-cost municipal borrowing pool, lest such borrowing would adversely impact the pool’s credit rating—and thereby drive up capital borrowing costs for cities and counties all across the state. In this instance, the Virginia Resources Authority refused to allow Buena Vista to participate in the Virginia Pooled Financing Program to refinance $9.25 million of water and sewer obligations to lower debt service costs—lest inclusion of such a borrower from the state’s municipal pool would negatively impact the pool’s offering documents—where some pooled infrastructure bonds, backed by the Commonwealth’s moral obligation pledge, are rated double-A by S&P Global Ratings and Moody’s Investors Service.

Seven years ago, the municipality had entered into a five-year forbearance agreement with bond insurer ACA Financial Guaranty Corp.—an agreement which permitted Buena Vista to make 50% of its annual municipal bond payments for five years—an agreement on which Buena Vista defaulted when, two years ago, the City Council voted against inclusion of its FY 2015 budgeted commitment to resume full bond payments. That errant shot triggered UMB Bank NA to file a lawsuit in state court in 2016 in an effort to enforce Buena Vista’s fiscal obligation. In response, the municipality contended the golf course deal was void, because only four of the city’s seven council members had voted on the bond resolution and related agreements—which included selling the city’s interest in its “public places,” arguing that Virginia’s constitution mandates that all seven council members be present to vote on the golf course deal, because the agreement granted a deed of trust lien on city hall, police, and court facilities which were to serve as collateral for the bonds.

The golf course in question, which opened in 2004, never generated sufficient revenue to keep up with loan payments, leading the municipality to default on its $9.2 million bond, which, in turn, led Buena Vista’s municipal bonds insurer, ACA Financial Guaranty Corp., to file suit against the municipality, seeking to have Buena Vista ordered to resume payments—a suit which a federal court last month dismissed, concluding the city was only under a moral obligation, not a legal one, to pay back the loans. Unsurprisingly, ACA has pulled out another club and now ACA plans to appeal the judge’s decision, thereby creating uncertainty with regard to the city’s fiscal solvency—creating uncertainty for the business community. Now, however, it seems that with greater confidence in their judicial outcome, and a key business investment in a number of downtown properties, it appears of developers are starting to pick up on the momentum. Buena Vista Mayor William “Billy” Fitzgerald believes these new potential developments fit perfectly with his goals as the municipality’s newly elected leader: he wants to bring five to seven new businesses and one manufacturer to the area this year. In addition, he said he wants to cut some of the red tape and fees associated with opening businesses, adding that there has been more movement recently than the city’s had in a long time, adding: “In two years, I think Buena Vista will be a different place.”

A year ago, the city filed a motion to dismiss the federal suit for failure to state a claim—a claim on which U.S. District Judge Norman K. Moon held a hearing last Friday—with the municipality arguing that the golf course’s lease-revenue debt is not a general obligation. Therefore, the city appears to be driving at a legal claim it has the right to stop payment on its obligation, asserting: “The city seeks to enforce the express terms of the bonds, under which the city’s obligation to pay rent is subject to annual appropriations by the City Council, and ceases upon a failure of appropriations.” Moreover, pulling another fiscal club from its bag, the city claimed the municipal bonds here are not a debt of the city; rather, the city has told the court that the deed of trust lien for the collateral backing the bonds is void. That is an assertion which ACA, in its motion to dismiss, deemed an improper attempt to litigate the merits of the suit at the pleading stage, noting: “Worse, the city wants this court to rule that the city only has a ‘moral obligation’ to pay its debts, and that [ACA’s] only remedy upon default is to foreclose on a fraction of the collateral pledged by the city and the Public Recreational Facilities Authority of the city of Buena Vista….If adopted, this court will be sending a message to the market that no lender should ever finance public projects in Virginia because municipalities: (a) have unbridled discretion to not repay loans; and (b) can limit the collateral that can be foreclosed upon.” In a statement subsequently, ACA added: “It’s unfortunate that Buena Vista’s elected officials have forced ACA into court after recklessly choosing to have the city default on $9.2 million in debt even though the city has ample funds to make the payments that are owed…This is particularly troubling, because ACA spent years negotiating in good faith after the city claimed financial hardship, and even provided a generous forbearance agreement that reduced payments by 50% starting in 2011. After the city defaulted on that deal in 2014, it offered ACA only pennies on the dollar, while seeking to be absolved of all future burdens of this financing. Left with no reasonable alternative, we must look to the court for an equitable and fair outcome.”

Fiscal Darkness & Despair. More than five months after Hurricane Maria plowed through Puerto Rico, some parts of the island remain in the dark; it remains a long, long way from getting back for businesses: the U.S. territory’s patchwork power grid remains fragile, and hundreds of thousands of Puerto Ricans remain without power. While many have been living in hotels with their expenses covered by FEMA, those reimbursements are nearing expiration—not just in Puerto Rico, but also on the mainland. Today, there are nearly 10,000 Puerto Ricans scattered throughout 37 states and Puerto Rico who have been living in hotels paid by FEMA—aid now on the brink of ending a week from Tuesday. Many of them are poor families, who on the island survived with low wages. Many do not have savings or relatives who can help them or own their homes on the island. Others confront health problems and distrust the medical system on the island or have children with disabilities who need continuous care. Government relief workers have installed 57,000 blue tarps as makeshift roofs on damaged homes across the island. There is no plan for installing permanent roofs. Major intersections in San Juan still lack working traffic lights. More than 10,000 small businesses — nearly 20 percent of the island is total — remain closed. At the upscale Mall of San Juan, two anchor stores — Saks Fifth Avenue and Nordstrom — are shut because of storm damage, although Nordstrom may reopen in a few months. Some hotel workers, cabdrivers and bartenders in San Juan have been living without power since September.

The most optimistic estimate is that Puerto Rico faces a two-year economic recovery. That assumes it can rebuild its power grid, restructure its finances in a court-supervised process and not be struck by another devastating storm. For its part, FEMA reports it has delivered more than $113 million in rental assistance to more than 129,000 Puerto Ricans affected by Maria. Governor Ricardo Roselló has said he has formally requested the federal government to allow families in hotels to stay there until May 14th. That recovery, moreover, is made more difficult by the fiscal circumstances before the storm even struck—when some 45% of the territory’s 3.4 million Americans lived in poverty and more than 16,000 homeowners were facing foreclosure. The size of the human devastation remains stark: more than one million Puerto Ricans applied to FEMA for emergency assistance: less than half have been served. The situation is, as Javier E. Zapata-Rodríguez, the Deputy Director of Economic Development for PathStone Enterprise Center, put it: “This is like the perfect storm of an economic disaster…There is not enough capital flowing, and a lot of small businesses are closing up shop, because they were ailing before the hurricane.” Adding to the dismal situation, even those claims that are being paid have been slow—and 60% have, so far, been denied. Meanwhile, tourism, which accounts for about 6 percent of Puerto Rico’s economy and supports more than 60,000 jobs, is all but gone for this season: nearly a dozen big resorts in and around San Juan are closed, while, many of those which are open and operating are filled not with tourists, but rather with relief workers and government contractors who are permitted discounted rates.

As we have noted, the economy is also suffering from emigration: it is not just the 200,000 residents who have departed to live on the mainland, but also how that has altered the demographics of those who remain—generally older and poorer. As the New York Federal Reserve reported last year, four months before Maria, 36% of Puerto Rico’s small businesses planned to hire more workers and 50% planned to invest in new equipment and technologies—all plans devastated by the storm.

Today, in the wake of such an inadequate federal response, the power situation in the U.S. territory remains dispiriting: at the end of last week, many in San Juan and along the island’s northern coast lost power in the middle of the workday. Indeed, generators are no longer an option for a business: they are a necessity—as they are for homes and hospitals with patients reliant upon vital medical devices. For potential overseas investors, new investments appear to be on hold pending some certainty on Puerto Rico’s electric grid restoration and reliability—and how FHA will act on the current moratorium on home foreclosures—a decision with implications for assessed property values affecting municipios bottom lines. The recovery too awaits the progress of what has been, so far, a slow trickle in response to filed insurance claims: to date, while 299,999 claims have been filed by homeowners and businesses, only $1.7 billion in payouts have been approved, according to the insurance department: much of the federal assistance is being dispensed as grants and loans for which businesses and individuals apply for from FEMA and the Small Business Administration, even as attorneys and community groups report that FEMA has rejected approximately 60% of the 1.1 million household applications it has received—a figure, it should be noted, which FEMA deems misleading, because some rejected applicants had received loans from the Small Business Administration or aid from other agencies. One key reason for the disproportionate rejection rate appears to be the stark difficulty many Puerto Ricans have encountered in proving that they own a home: only 65% of properties in Puerto Rico are officially registered, making this an especially harsh and acute problem affecting families and local governments in small cities and rural areas where there’s a custom of property owners not recording titles to homes.

Governance in Recovering from Severe Physical and Fiscal Distress

March 2, 2018

Good Morning! In this morning’s eBlog, we consider the use of a municipality’s capital assets to get back on its fiscal feet; then we consider the fates, fiscal and physical, for many of Hurricane Maria’s Puerto Rican victims who have emigrated stateside. Are they “invisible Americans”?

Municipal Assets & Fiscal Balancing. In a surprising move, the Petersburg, Virginia City Council has unanimously adopted a motion to opt not to sell the municipality’s public water and wastewater assets, effectively ending a nearly yearlong debate with regard to whether or not to sell their public utility to Aqua Virginia and Virginia American Water, two private providers who had submitted bids in December of 2016—at a time when one of the nation’s oldest cities was on the precipice of insolvency. It would appear the decision was likely affected by several water main breaks and water boil notices in the city last month—forcing legislators and city leaders to act. In the wake of the breaks, Congressman A. Donald McEachin (VA-4) and the Virginia Conservation Network had joined forces to host a roundtable discussion on the dilapidated state of Petersburg’s water infrastructure. Under the successful motion, the Council instructed the City Manager to: 1) reject the offer made by Aqua Virginia; 2) discourage any future offers to purchase Petersburg’s water and wastewater assets; 3) reject the pending unsolicited proposal to purchase Petersburg’s water and wastewater assets. That is, the municipal fiscal and capital policy going forward is to concentrate all available city resources on devising a plan to improve the city’s collection rate—or, as Councilmember Cuthbert put it: “It was a diversion of energy…It diverted the city administration’s energy; it diverted the public’s energy; and it diverted the City Council’s energy.” Councilwoman Annette Smith-Lee noted: “For the citizens, their voice is their voice. We’re on Council because of them, and they did not want us to sell the water.”

Had the city opted to go forward with the proposed privatization and sale, the municipality would have lost control over setting the water rates—an important governance and fiscal issue, as neither the Council, nor many citizens support having a for-profit company to be in charge of the water rates. Previously, several Councilmembers had expressed skepticism about the sale of some of the city’s vital public infrastructure—even as former Richmond City Manager Robert Bobb’s Group, hired to take over the city in lieu of a chapter 9 municipal bankruptcy filing—had repeatedly made pleas to the Council to “open the envelope” and see what Aqua Virginia and Virginia American Water were offering for the system. Councilman Cuthbert noted: “Council realized that for us to sell our water and wastewater assets, it would have taken six affirmative votes, and the votes were not there.”

In the wake of that successful motion, Councilman Cuthbert told his colleagues he saw “no reason to go through another eight months of agony that was going to lead to nowhere.” The decision thus ended a year-long battle—or, as Mayor Sam Parham told his colleagues, Council Members had listened to citizens who were concerned about the sale, control over its water and sewer rates, and it never materialized. Barb Rudolph, one of those citizen leaders, where the citizen group Clean Sweep Petersburg, had questioned the idea from the Robert Bobb Group to privatize, especially after the consultants had departed Petersburg with what they had described as stabilized finances. Yet, even after offers by private companies were rejected, bids still continued to come in: obviously, private, for-profit corporations recognized intrinsic value in the system—and, of course, an opportunity for profit. Indeed, at a roundtable discussion about the city’s water and sewer infrastructure, City Manager Aretha Ferrell-Benavides acknowledged that Petersburg was still being pressured by a private vendor to sell its water and wastewater systems. The fact that Aqua Virginia leaders attended city meetings had not been lost on some residents—one even likened the private vendors to predators. Residents with Clean Sweep Petersburg took photos of empty chairs in the City Council chambers that they say Aqua Virginia executives vacated just after the Council’s vote. Now, city leaders say, energy should be devoted to improving the existing systems. In the past, necessary rate increases that the council approved were never implemented, in part because of turnover within city departments. In addition, billing issues that cost the utility system millions of dollars in recent years ended up slapping some residents with $4,000 bills, and the faulty rollout of a new utility billing system cost taxpayers upward of $1 million more. As recently as last week, some residents at the roundtable said their bills are still volatile. Ferrell-Benavides said a long-term plan to update the city’s infrastructure and improvements to the billing system are necessary and in the works.

For one of the nation’s oldest municipalities—a key city during both the Revolutionary and Civil Wars, a small, majority African-American municipality of just over 32,420, with a median household income of $33,927, where per capita income is about $18,535, and nearly 28% are below the poverty level—the politics of vital access to water matters.

The Physical & Fiscal Costs of Federalism. Physical catastrophes and federal insouciance can wreak terrible fiscal and human costs. In the case of Hurricane Maria, we can see those costs as not just fiscal, but especially in the welfare of our most vulnerable: young children and the elderly. More than 1,800 children have migrated from Puerto Rico and enrolled in Connecticut schools since Hurricane Maria decimated their homeland last September—a human and fiscal consequence of both the devastating physical and fiscal consequences, but also to the difficult fiscal challenges Connecticut is already confronting. Yet, unlike the federal government, Connecticut schools have scrambled to accommodate the new arrivals—most of them non-English speakers, and they have made such human, physical, and fiscal efforts notwithstanding the cash-strapped State of Connecticut. While Congress finally approved a compromise budget bill to provide millions of dollars to help schools care for displaced students (providing the equivalent of $8,500 for each displaced student, $9,000 for each one that is not English-speaking, and $10,000 for disabled students requiring special education); that still left a significant fiscal and physical burden for Connecticut, where State House Majority Leader Matt Ritter (D-Hartford) has set up a working group in the General Assembly to try to provide “one-stop shopping” for displaced Puerto Ricans who need assistance: he notes there “is no question that schools are looking for additional money” to accommodate the influx of unexpected students, many with special needs, and he is “very pleased” Congress finally offered some help. He believes the displaced student funding, part of the budget agreement’s $44 billion hurricane response package, will help. According to the Connecticut Department of Education, there were 1,745 displaced students in Connecticut schools as of mid-February—a slight reduction from the beginning of the year, as some families having opted to return to Puerto Rico or move to other states. Hartford, a city itself in difficult fiscal shape, finds its public schools have taken the bulk of the new arrivals, 376 at last count and 429 at the peak of the migration, followed by Waterbury, New Haven, and New Britain. Yet, while Congress finally provided some aid for displaced students, that aid appears unlikely to help school districts with the children who enroll next year.

Demographically Failing. While, as we noted above, there has been some federal and state aid to displaced children from Puerto Rico, the picture is more grim for Puerto Rico’s elderly: thousands of whom reside in vulnerable conditions outside the radar of government authorities, and too many of whom went hungry and thirsty due to mobility difficulties, or were unable to save their medicines due to the lack of light, without anyone knowing. Indeed, Department of the Family Secretary Glorimar Andújar described the challenge, because, in the wake of the physical destruction, the government lacked vital information with regard to where the most vulnerable were. Secretary Andújar noted the government neither knew where the most vulnerable lived, nor what their particular needs were. Thus, the devastating storm led her to acknowledge: “We have many elderly people in homes that we did not think were going to be in such high concentrations…Urbanizations complete with elderly people who depend on and are nourished by the help given by their neighbors…They are not necessarily under the jurisdiction of the Federal District, because we enter into protection. They are people who live alone and have particular needs, who are supplied by their neighbors: It is important, for future services that develop, to know where each of these populations are located.” That is, unlike children, who could be located via the school system—and could be lifted to accommodating state such as Connecticut, or depart with their families to Florida, Puerto Rico’s most vulnerable Americans were not only left behind, but also largely unaccounted for: as indicated, due to the nature of the services offered, the agency knows about elderly Americans only to the extent that they participate in their programs, such as Nutrition Assistance (PAN), protection services in cases of abuse or the homes of prolonged care—that is less than 3% of Puerto Rico’s nearly 860,000 senior citizens—where 36% live alone. This cohort, described by some as “that population that is most worrisome,” because they are older Americans who reside in the community, but have little support—or, as the Secretary put it: “They are invisible.”

During the most critical phase of the hurricane emergency many institutions did help many who live alone in their homes, offering food or extending electricity via long extension cords, those private efforts were far from sufficient for what is nearly a quarter of the population: In 2016, more than 23.5% of Puerto Ricans were 60 or older—compared to just 19.4% in 2011. It is almost like a teeter-totter, only where it is becoming increasingly fiscally and demographically imbalanced. Now, in the wake of the hurricane, and especially after the wave of immigration to the mainland by children and college-educated Puerto Ricans, estimates are that, by the next census, citizens over 65 will reach 30% of the population.  

To tend to these older Americans after Maria, Puerto Rico actually developed alternate methods of operation, especially because reliance on telephone communication was often impossible—the government sought to provide more personal contact and identify areas of what it deemed “high concentration,” utilizing contributions from organizations such as AARP to provide services. José Acarón, Puerto Rico’s AARP chapter president, stressed that there is “this older adult population, isolated, without a support network, living alone and mostly female, and they do not know where they are…We have to make a municipal census of needs and create community support mechanisms. Then we have to talk about different models of people supporting people, that work strategically and that is part of a plan.”

With estimates that 46.1% of Puerto Ricans live below the federal poverty level, Secretary Andújar said the Department had commissioned a study to verify socioeconomic changes, especially after Hurricane Maria, to the University of Puerto Rico, noting: “We hope to have a more up-to-date visibility of what the percentages are, what is going to throw us, what are the populations that are in those levels of poverty, and, obviously, how aligned our programs are towards services towards each one of those populations that results from the study.” She noted she was unable at present to be certain when that information would be ready. However, in the wake of Hurricane Maria, and by the end of last year, there were 35,000 new applicants for nutritional assistance. Demographer Judith Rodríguez reports that, taking into account only the difficulties brought by the emergency, she can say that the number of poor people on the island has increased: the most recent figures, from 2016, indicated that, in 30 municipios, 50% of the population lived in poverty, and that in six other towns, the figure reached 60%, adding: “Today, more than ever, families need the services offered by the government of Puerto Rico to respond to the changing needs of the people.”

What about the Youngest? Secretary Andújar reported her staff is aware of the possibility of an increase in the incidence of child abuse: “It is a reality for which we have been preparing. We are active with prevention mechanisms. After a phenomenon like the one suffered by the country, after months, it is expected that these indicators tend to increase.” Her agency noted that in the referrals from the last calendar quarter of 2017 of possible cases of abuse, the totals increased month after month, albeit they were below the records of the same period of the previous year. Due to the U.S. territory’s fiscal distress or quasi chapter 9 bankruptcy, her agency has taken a $605 million cut, with Gov. Ricardo Rosselló advising her: “You do not need more,” even as Larry Emil Alicea, president of the College of Social Work Professionals, notes: “Those who stay and cannot leave (from Puerto Rico), increase social stressors and may be associated with suicide rates: In the case of parents, protective capacities diminish and cases of child and adolescent abuse increase.”


The Steep & Winding Road Out of Municipal Bankruptcy and State Oversight

February 26, 2018

Good Morning! In this morning’s eBlog, we consider the hard road out of chapter 9 municipal bankruptcy and state oversight.

Motor City Races to Earn the Checkered Flag. Detroit Mayor Mike Duggan last Friday presented his proposed annual budget to the City Council, informing Councilmembers that, if approved, his $2 billion budget would be the keystone for formal exit from Michigan state oversight: that is, he advised he believed it would lay the ground work for ending the Financial Review Commission created in the wake of the city’s chapter 9 municipal bankruptcy: “Once we get this budget passed, we have the opportunity to get out from active state oversight…I don’t have enough good things to say about how the administration and Council has worked together.” As we had noted last month, Michigan Treasurer Nick Khouri, the Chair of the state oversight commission, made clear that the trigger to such an exit would be for the city to post its third straight budget surplus—with the Treasurer noting: “I think everyone, including me, has just been impressed with the progress that’s been made in the city of Detroit, both financially and operationally.”

For Detroit to fully emerge from the nation’s largest ever municipal bankruptcy, it must both comply with the provisions of the federal chapter 9 bankruptcy code, which provides that the debtor must file a plan (11 U.S.C. §941); neither creditors nor the U.S. Bankruptcy Court may control the affairs of a municipality indirectly through the mechanism of proposing a plan of adjustment of a municipality’s debts that would in effect determine the municipality’s future tax and/or spending decisions: the standards for plan confirmation in municipal bankruptcy cases are a combination of the statutory requirements of 11 U.S.C. §943(b) and portions of 11 U.S.C. §129. Key confirmation standards provide that the federal bankruptcy court must confirm a plan if the following conditions are met: the plan complies with the provisions of title 11 made applicable by sections 103(e) and 901;the plan complies with the provisions of chapter 9; all amounts to be paid by the debtor or by any person for services or expenses in the case or incident to the plan have been fully disclosed and are reasonable; the debtor is not prohibited by law from taking any action necessary to carry out the plan; except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that on the effective date of the plan, each holder of a claim of a kind specified in section 507(a)(1) will receive on account of such claim cash equal to the allowed amount of such claim; any regulatory or electoral approval necessary under applicable non-bankruptcy law in order to carry out any provision of the plan has been obtained, or such provision is expressly conditioned on such approval; and the plan is in the best interests of creditors and is feasible.

Unlike in a non-municipal corporate bankruptcy (chapter 11), where the requirement that the plan be in the “best interests of creditors,” means in the “best interest of creditors” if creditors would receive as much under the plan as they would if the debtor were liquidated; under chapter 9, because, as one can appreciate, the option of Detroit to sell its streets, ambulances, and other publicly owned municipal assets is simply not an option, in municipal bankruptcy, the “best interests of creditors” test has generally been interpreted to mean that the plan must be better than other alternatives available to the creditors. It is not, in a sense, different from a Solomon’s Choice (Kings 3:16-28): that is, in lieu of the alternative to municipal chapter 9 bankruptcy of permitting each and every creditor to fend for itself, the federal bankruptcy court instead seeks to interpret what is in the “best interests of creditors” as a means to balance a reasonable effort by the municipality against the obligations it has to its retirees, municipal duties, service obligations, and its creditors—albeit, of course, leaving the door open for unhappy parties to object to confirmation, (see, viz. 11 U.S.C. §§ 901(a), 943, 1109, 1128(b)). The statute provides that a city or municipality may exit after a municipal debtor receives a discharge in a chapter 9 case after: (1) confirmation of the plan; (2) deposit by the debtor of any consideration to be distributed under the plan with the disbursing agent appointed by the court; and (3) a determination by the court that securities deposited with the disbursing agent will constitute valid legal obligations of the debtor and that any provision made to pay or secure payment of such obligations is valid. (11 U.S.C. §944(b)). Thus, the discharge is conditioned not only upon confirmation, but also upon deposit of the consideration to be distributed under the plan and a court determination of the validity of securities to be issued. (The Financial Review Commission is responsible for oversight of the City of Detroit and the Detroit Public Schools Community District, pursuant to the Michigan Financial Review Commission Act (Public Act 181 of 2014); it ensures both are meeting statutory requirements, reviews and approves their budgets, and establishes programs and requirements for prudent fiscal management, among other roles and responsibilities.)

As part of Detroit’s approved plan of debt adjustment, the State of Michigan mandated the appointment of a financial review commission to oversee the Motor City’s finances, including budgets, contracts, and collective bargaining agreements with municipal employees—a commission, ergo, which Mayor Duggan, last Friday, made clear would not simply disappear in a puff of smoke, but rather go into a “dormancy period: They do continue to review our finances, and if we in the future run a deficit, they come back to life, and it takes another three years before we can move them out.”

Mayor Duggan’s proposed budget includes an $8 million boost to Detroit’s Police Department budget—enough to hire 141 new full-time positions. With the increase, the Mayor noted, the city will be able to expand its Project Greenlight and Ceasefire programs—adding that the Motor City had struggled to fill police department vacancies until about two years ago when the City Council passed a new contract. Detroit had improved from its last place ranking in violent crime in 2014, moving up to second worst in 2015, vis-à-vis rates per resident in cities with 50,000 or more people: in 2014, Detroit had recorded 13,616 violent crimes, for a rate of about 994 incidents per 50,000 people, declining to 11,846 violent crimes in 2015, and to a violent crime rate of about 880. Since then, the city has been able to hire 500 new officers, albeit, as the Mayor noted: “This city is not nearly where it needs to be for safety.”  Additionally, Mayor Duggan said his budget allows Detroit to double the rate of commercial demolitions with a goal of having all “unsalvageable” buildings on major streets razed by 2019. That would put the city on track for cleaning up its commercial corridors, he added. The budget allocates $100 million of the unassigned fund balance to blight remediation and capital projects, which is double the resources allocated last fiscal year. Other budget plans include more funding for summer jobs programs and Detroit At Work; neighborhood redevelopment plans for areas such as Delray, Osborn, Cody Rouge, and East English Village; and boosting animal control so it can operate seven days a week.

The $2 billion budget dedicates $1 billion to the city’s general fund. Chief Financial Officer John Hill said it is able to maintain its $62.3 million budget reserve, which exceeds the $53.6 million requirementCouncilman Scott Benson said the Mayor presented a “conservative fiscal budget” which allows Detroit to live within its means. The Councilmember said prior to the meeting that he had hoped the budget would address funding for poverty and neighborhood revitalization. However, council members received the budget 20 minutes before the meeting and Councilmember Benson said he needed more time to review it. “We’re seeing some good things,” he said of Mayor Duggan’s proposals, “But I want to dig into the numbers and actually go through it with a fine-tooth comb.” Officials say city council has until March 9 to approve the budget.

That early checkered flag for the Motor City ought to help salve the city’s reputational wounds in the wake of the KO administered to the city’s bid to host Amazon. Indeed, as Quicken Loans Chairman Dan Gilbert wrote, it was Detroit’s negative reputation, not a lack of talent which knocked it out of the running for an Amazon headquarters, as he tweeted to the 60-plus member bid committee who crafted Detroit’s bid: “We are all disappointed,” referring to the city’s failed bid to make the cut for the top 20 finalists. Nevertheless, Mr. Gilbert urged members not to accept the “conventional belief” that Detroit had fallen short because of its challenges with regional transportation and attracting talent; rather, he wrote, the “elephant in the room” was the nasty reputation associated with the post-bankruptcy city’s 50-plus years of decline: “Old, negative reputations do not die easily. I believe this is the single largest obstacle that we face…Outstanding state-of-the-art videos, well-packaged and eye-catching proposals, complex and generous tax incentives, and highly compelling and improving metrics cannot, nor will not overcome the strong negative connotations that the Detroit brand still needs to conquer.” Regional leaders had been informed that Detroit’s bid had failed to move on because of inadequate mass transit and questionable ability to attract talent.

As part of Detroit’s approved plan of debt adjustment, the State of Michigan mandated the appointment of a financial review commission to oversee the Motor City’s finances, including budgets, contracts, and collective bargaining agreements with municipal employees—a commission, ergo, which Mayor Duggan, last Friday, made clear would not simply disappear in a puff of smoke, but rather go into a “dormancy period: They do continue to review our finances, and if we in the future run a deficit, they come back to life, and it takes another three years before we can move them out.”

Mayor Duggan’s proposed budget includes an $8 million boost to Detroit’s Police Department budget—enough to hire 141 new full-time positions. With the increase, the Mayor noted, the city will be able to expand its Project Greenlight and Ceasefire programs—adding that the Motor City had struggled to fill police department vacancies until about two years ago when the City Council passed a new contract. Detroit had improved for its last place raking in violent crime in 2014, moving up to second worst in 2015, vis-à-vis rates per resident in cities with 50,000 or more people: in 2014, Detroit had recorded 13,616 violent crimes, for a rate of about 994 incidents per 50,000 people, declining 11,846 violent crimes in 2015, and to a violent crime rate of about 880. Since then, the city has been able to hire 500 new officers, albeit, as the Mayor noted: “This city is not nearly where it needs to be for safety.”  Additionally, Mayor Duggan said his budget allows Detroit to double the rate of commercial demolitions with a goal of having all “unsalvageable” buildings on major streets razed by 2019. That would put the city on track for cleaning up its commercial corridors, he said. The budget allocates $100 million of the unassigned fund balance to blight remediation and capital projects, which is double the money allocated last fiscal year. Other budget plans include more funding for summer jobs programs and Detroit At Work; neighborhood redevelopment plans for areas such as Delray, Osborn, Cody Rouge and East English Village, and boosting animal control so it can operate seven days a week. 

The $2 billion budget dedicates $1 billion to the city’s general fund. Chief Financial Officer John Hill said Detroit is able to maintain its $62.3 million budget reserve, which exceeds the $53.6 million requirementCouncilman Scott Benson said the mayor presented a “conservative fiscal budget” that allows Detroit to live within its means, having said, prior to the meeting, that he hoped the budget would address funding for poverty and neighborhood revitalization. However, council members received the budget 20 minutes before the meeting and Councilmember Benson said he needed more time to review it. “We’re seeing some good things,” he said of Mayor Duggan’s proposals. “But I want to dig into the numbers and actually go through it with a fine-tooth comb.” Officials say city council has until March 9 to approve the budget.


Municipal Fiscal & Professional Erosion in Puerto Rico

February 20, 2018

Good Morning! In this morning’s eBlog, we consider the municipal fiscal threats to Puerto Rico’s municipios or municipalities, before turning to the continuing threats to the island’s future of its “brain drain” through the emigration of an increasing number of some of the island’s young professionals.

Severe Revenue Erosion. Since the last revenue quarter, Puerto Rico’s 78 municipios—cities and towns governed under Puerto Rico’s Autonomous Municipalities Act of 1991, which establishes that every municipality (those with populations in excess of 50,000 are designated as incorporated—those with less as incorporated towns: cities provision their own services, while towns typically depend on nearby cities for certain services) and must have a strong mayor form of government with a municipal legislature. All have experienced a consistent undermining of revenues: according to the most recent estimates, that includes a reduction of $56 million which will be reflected this fiscal year relating to the payment of movable and immovable property taxes, with the increasing losses related to business closures and the mass exodus of Puerto Ricans to the mainland, even as the capital and operating costs imposed in the wake of Hurricane Maria have left, in their wake, a fiscal hurricane of their own with, likely, long-term fiscal consequences. Some estimate that the losses related to property taxes have been as much as $55 million just in the last fiscal quarter, according to Javier Carrasquillo, President of the Governing Board of the Municipal Revenue Collection Center (CRIM), and the current Mayor of Cidra, a municipio known as La Ciudad de la Eterna, or the City of Eternal Spring.

CRIM is itself governed by a board composed of the President of GDB, the Commissioner of Municipal Affairs, and seven mayors of municipios: those elected mayors hold office for a term of four years (and not more than two consecutive terms) and until their successors have been appointed. CRIM’s principal offices are located at State Road 1, Km. 17.2, San Juan, Puerto Rico 00926. In addition, CRIM operates nine regional centers located in the municipalities of Aguadilla, Arecibo, Bayamón, Caguas, Carolina, Humacao, Mayagüez, Ponce, and San Juan.

CRIM estimated revenues for this fiscal year at $827,148,824 after the discount of the municipal Special Additional Contributions funds for the repayment of municipalities debts and the 5% for CRIM operational expenses. (Revenues of the municipalities of Puerto Rico are principally derived from ad valorem property taxes and Commonwealth contributions: Act No. 83 authorizes municipalities to impose the following property taxes: the Special Additional Tax, without limitation as to rate or amount, which as mentioned above is available primarily for the payment of a municipality’s general obligation debt; and a basic property tax to fund operating expenses up to a maximum amount of 6% of the assessed valuation on all real property within such municipality and up to a maximum amount of 4% of the assessed valuation on all personal property within such municipality (collectively, the “Basic Tax”)). Act No. 83 also continued in effect a special property tax imposed by the government of 1.03% of the assessed valuation of all real and personal property within Puerto Rico (other than exempted property) (the “Special Tax”) for the exclusive purpose of servicing the government’s general obligation debt. A portion of the Basic Tax levied by a municipality may be transferred to other municipalities by virtue of the operation of the Matching Fund.) In addition, under Act No. 64, each municipality is required to levy the Special Additional Tax in such amounts as shall be required for the payment of its general obligation municipal bonds and notes; principal of and interest on all general obligation municipal bonds and notes and on all municipal notes issued in anticipation of the issuance of general obligation bonds also constitute a first lien on the municipality’s Basic Tax. Accordingly, the municipality’s Basic Tax would be available to make debt service payments on general obligation municipal bonds and notes to the extent that the Special Additional Tax, together with moneys on deposit in the municipality’s Redemption Fund, are not sufficient to cover such debt service. Similarly, Act No. 83 provides for an exemption from the Special Additional Tax and Basic Tax on the first $15,000 of assessed valuation of primary personal residences of individuals (the so-called “$15,000 Real Property Exemption”) and an exemption from personal property taxes on the first $50,000 of assessed valuation of property owned by businesses that have gross revenues of less than $150,000 per annum (the “$50,000 Personal Property Exemption”). Recognizing the importance of the real and personal property tax for the fiscal requirements of the municipalities, the government makes annual appropriations to the municipalities from its General Fund as compensation for the amount of the revenues foregone owing to these exemptions. However, under Act No. 83, such appropriations will not be provided to cover any amount of property taxes, which any municipality elects to forgive for primary personal residences registered for the first time after January 1, 1992, and personal property of certain businesses registered for the first time after July 1, 1991.

Acts 83 and 80, which the Legislature approved in 1991, also provide for the following central government contributions to the municipalities: 2.50% of the net internal revenues of the General Fund for fiscal year 2004-2005 and thereafter; 35% of the annual net revenues derived from the operation of the additional lottery system created by Act No. 10, of the Legislature of Puerto Rico (approved in 1989). There are also so-called “Designated Commonwealth Contributions,” which provide an annual amount from the central governments’s General Fund to compensate the municipalities for the $15,000 Real Property Exemption and the $50,000 Personal Property Exemption; and an annual amount from the Commonwealth’s General Fund to compensate the municipalities for the exemption of 0.20% of the assessed valuation of all taxable property within the municipalities (the amounts in the clauses, with the exception of the annual contributions from the Commonwealth as compensation to the municipalities for the Special Additional Tax portions of the $15,000 Real Property Exemption and the $50,000 Personal Property Exemption (defined as the “Commonwealth Contributions”). Act 80, for its part, established the Municipal Matching Fund, into which CRIM is required to deposit with GDB the total amount collected on account of Basic Taxes and the Commonwealth Contributions. Certain funds in the Matching Fund (the “Equalization Moneys”) are available to CRIM in order to guaranty that each municipality will receive revenues in an amount at least equivalent to that received from Equalization Moneys in the previous fiscal year. The Equalization Moneys are comprised of: the Designated Commonwealth Contributions; and a portion of the Basic Tax equal to 1% of the assessed value of personal property and 3% of the assessed value of real property collected by each municipality (the “Designated Basic Tax”)—with all All Equalization funds distributed to the municipalities as follows: first, as may be required so that each municipality receives at least the same amount of aggregate revenues received during the previous fiscal year on account of Equalization Moneys, using first the Designated Commonwealth Contributions, and then, to the extent necessary, the Designated Basic Tax (it has never been necessary to use the Designated Basic Tax to perform such equalization); second, Designated Basic Taxes remaining in the Equalization Moneys are allocated to the municipalities in proportion to the amount by which revenues from their Basic Taxes in such fiscal year exceed their revenues from Basic Taxes in the previous fiscal year; and third, to all municipalities based on certain economic and demographic criteria specified in Act No. 80. The remaining Matching Fund moneys are returned to the municipalities whose Basic Tax levies gave rise to such remaining moneys, and are used, with their other revenues, to meet operating expenses. (Prior to July 1, 1993, the Secretary of the Treasury collected all municipal taxes upon real and personal property, including intangible property) in each municipality; since July 1, 1993, and pursuant to Act No. 80, CRIM has undertaken all of the Secretary of the Treasury’s responsibilities relating to the collection and distribution of such taxes. CRIM is responsible for the appraisal, assessment, notice of imposition, and collection of all municipal property taxes. All property taxes collected by CRIM are deposited at GDB, which acts as fiscal agent to the government and its municipalities. Real property is assessed by CRIM and personal property is self-assessed. These assessment values have not been adjusted to reflect the various applicable real property and personal property exemptions, such as those described under Municipal Revenues above and other exemptions granted under Puerto Rico tax incentives laws. As mentioned above, no real property reassessment has been made in Puerto Rico since 1958. All real property taxes are assessed on the basis of the replacement cost of the related real property in fiscal year 1957-58 values, regardless of when such property was constructed.

Unsheltered from the Storm. For some municipios, the cut in their remittances in the wake of Hurricane Maria reached as much as $6 million, as is the case of San Juan; however, in percentage terms, the most affected were Guayanilla and Manatí, with a reduction of 11.7% and 11.4%, respectively—meaning those municipios were forced to make signal fiscal adjustments even as expenses were swiftly rising. Indeed, as Mr. Carrasquillo had already warned, there would be a $30 million reduction from lotteries, even as collections between July and December were projected to be down by 15%. And even that amount has been assessed as only a start: In addition to the $ 56 million, municipios will have to deduct the money they have stopped receiving due to the elimination of the Sales and Use Tax on processed foods approved by the government in the wake of Hurricane Maria—as well as the exemption of the SUT collection for small businesses, with sales volumes for less than a million dollars, which was applied between November 20 and December 31. (Usually that 1% of SUT goes to municipalities to be used for essential services, such as garbage collection.) Mr. Carrasquillo said that the impact of the SUT exemption will not be measurable until they receive the Municipal Finance Corporation report; nor will the reduction which municipalities will have in their public coffers from the licenses payment: “Businesses file the license form once the economic activity year passed, so that will not be defined until January of 2019. We can only speculate now,” he added—with his own municipio having experienced the closure of some 123 businesses in the wake of the storm.

The current budget of Caguas, a municipio of about 142,000, is $ 92 million, an amount which reflects a reduction of $26,000 in the wake of rental space declines, as well as business related income losses and a court loss after an anticipated gain from a municipal initiative imposed on businesses which generated more than $3 million annually was struck down by the courts. In the municipio, some 25% of the nearly 5,000 shops remain closed, meaning, as the Mayor worries: “I cannot guarantee essential services for the population if the funds we need do not come.” The president of the Mayors Federation, Carlos Molina, estimated the direct impact in his municipality, Arecibo, to be $5 million, including the 20% in CRIM reduction. Thus, he reflects, municipios have no choice but to reduce operational expenses and establish consortiums to provide services to achieve lower costs: “We have to be realistic about how the island lives today, but we have to look for options and not wait for a miracle to happen.”

Mayor Rolando Ortiz of Cayey adds that the urgency of the municipalities is no longer limited to furloughs, but to shutdowns and closings: “There is no way out, because the municipal institution is misunderstood by the Governor. They see how effective we were before, during and after the hurricane, but now, when apparently that crisis has already passed and we say ‘we want to help,’ they are not there.” In his city, the CRIM reduction will be $700,000: “When they reduce money for municipalities, they are taking money from the most needy people of the island. Poverty is increasing.” But hope for a turnaround, in the wake of the PROMESA Board’s non-certification of Senate Bill 774 which would create a $100 million Municipal Recovery Fund, has been dashed.

Undercutting Hopes for a Recovery from the Storm. In the aftermath of Hurricane Maria, Florida Hospital, which operates 26 hospitals throughout the Gator state, the hospital has recruited as many as 45 health care professionals from Puerto Rico, including nurses, medical technologists, and nutrition specialists. With a mainland nursing shortage and an aging U.S. population, which is fueling demand for health care services, estimates are that the U.S. will need to produce over one million new registered nurses by 2022 to fill newly created jobs and replace a legion of soon-to-be retirees, meaning, that Florida, the premier retiree state in the nation, commenced an international recruitment program for nurses a decade ago, but, in recent years, has looked increasingly at Puerto as one of its most promising pipelines for talent. Prior to Hurricane Maria, about 3% of Florida Hospital’s nurses came from Puerto Rico as a growing number of its residents migrated to the U.S. to escape the economic problems plaguing the island; however, that percentage is expected to double; in fact, Florida Hospital has even developed an outreach program, partnering with community groups to find and help healthcare professionals from Puerto Rico find jobs. The hospital also fast tracks the hiring process: interviews, applications, as well as getting the state requirements for nursing are all expedited. In nearby Missouri, CoxHealth, a nonprofit regional healthcare system operating six hospitals and 80 clinics, initiated a nurse recruitment effort in Puerto Rico last spring, describing recruitment as an easier option compared to other countries because of work visa, language, and other issues. For nursing professionals from Puerto Rico, where pay can be $14.15 an hour, long shifts, and attending to as many as 15 patients at a time because of hospital was understaffing, the move to Florida would seem almost a no-brainer: the pay in Florida is $25.71 per hour—and the case load far lower. Mary Perrone, the international recruiter for Florida Hospital, said 20 more nurses from Puerto Rico will finish training and be on staff in the coming weeks; CoxHealth sent a recruiting team to Puerto Rico last weekend for on-site interviews with nursing candidates. If all goes well, it hopes to hire 30 more nurses soon.


Let there Be Light & Emergency Relief

February 12, 2018

Good Morning! In today’s Blog, we consider the courtroom efforts to secure emergency relief so that electric service is not disrupted in Puerto Rico—threatening critical services and the island’s only hopes for recovery from its quasi chapter 9 municipal bankruptcy.

Dark Fiscal Imbalances.  U.S. District Judge Laura Taylor Swain last night rejected a motion filed by the PROMESA Oversight Board for the central government to grant an emergency loan to the Electric Power Authority (PREPA), indicating that the federal agency failed to demonstrate the need for this financing although there is an immediate need for liquidity, albeit, she indicated the Board may file a new amended motion requesting a lesser amount and make adjustments to clarify the payment priority that financing will have without affecting the rights of the creditors—with her ruling coming down in the wake of a six and a half hour hearing at which the court was unconvinced of their respective arguments that PREPA needed the nearly $1 billion it had requested in its initial motion. Judge Swain indicated that any new financing requested should not exceed about $ 300 million—telling the court: “The lights cannot be turned off in Puerto Rico,” as she advised the parties she will need a clearer understanding of the priorities for any new financing. She made that ruling notwithstanding the warning from PREPA financial advisor Todd Filsinger, who advised the court that if a loan were not received as soon as possible, PREPA would be forced to activate its emergency plan to begin the cessation of operations and an eventual suspension of electric service.

The courtroom drama came as the Chief Financial Advisor of the Electric Power Authority (AEE), Todd Filsinger, yesterday indicated that the public corporation intends to implement an emergency plan starting today which could lead to the suspension of its employees as well as disruption of the operations of its generating plants—actions which would force the “rationing” of electric services, likely plunging homes, businesses, and industries into darkness” an emergency loan from the central government.  Mr. Filsinger made clear that should the plan be triggered, there would be a warning, as early as this morning, followed by a rolling suspension of operations, and a gradual suspension of employees; services to hospitals, police stations, firefighters, and gas stations would continue.

PREPA is seeking a loan of as much as $1.3 billion—a request the Board did not reject out of hand, but rather indicated a lesser amount of as much as $1 billion might be considered. In principle, the loan would be around $ 1,300 million, but last night the Board of Fiscal Supervision (JSF), acting on behalf of the government and the AEE, modified its request to about $ 1,000 million. There is urgency: Mr. Filsinger warned that unless PREPA receives an emergency loan by this weekend, the utility would only be able to maintain its operations for several additional weeks, after which it would no longer even be able to pay for the fuel it needs to generate electricity, testifying: “If we do not have the loan, and we do not receive the cash, we could be implementing the contingency measures on Saturday.”

Earlier in the hearing, Joseph Davis, the lawyer representing the Financial Advisory Authority and Fiscal Agency, warned of the fiscal cliff the agency faces, advising the panel it has delayed payments to suppliers as much as possible in an effort to preserve as much of its funds as possible, in attempt to render the cash they have available, but that there will be little option but to trigger additional contingencies, such as rationing services, partly because fuel suppliers have already threatened to halt service. The power authority’s emergency plan would be enforced even as some 400,000 subscribers remain without power, and after approximately 1.1 million subscribers had already experienced the longest interruption of electric service in Puerto Rico’s history in the immediate wake of Hurricane Maria. The threat to human life and safety came as the respective parties in the New York City courtroom—parties representing the Board, bondholders, and Puerto Rico, as well as insurers continued to file motions.

As if these human risks were insufficient, Judge Swain has also been confronted with arguments from contractors, such as ARC, Lord Electric, and Whitefish Holdings, who claim that PREPA must meet its payment obligations for restoration of the electricity grid after Hurricane Maria, as well as bondholders—who, for the most part, live far, far from Puerto Rico, but are seeking compensation for impairment of the rights of municipal bondholders.

The Board, at the end of last month, alleging that PREPA faces losses in excess of $1 billion, had requested Judge Swain to approve a post-requisition loan for the public utility—a loan critical to . According to the motion issued by the JSF, seeking a super priority, as PREPA sought the fiscal and physical capacity to insure its operations until the end of the fiscal year and avoid closing operations this month—in effect, asking the court to provide a super priority of payment to the central government.

Yesterday, in a last-ditch effort to assist the power authority, the Ad Hoc-AEE group and the insurance company, Syncora, which guarantee part of the public corporation’s debt, presented a new financing proposal, a proposal which the oversight Board rejected outright, noting: “The notification of the group of bondholders of the ESA is not a valid proposal and does not have a strong reason to deny the motion for post-petition financing for the PREPA.”


Stop & Start Federal Governance, and Abandoning Puerto Rico


February 9, 2017

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

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

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

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

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

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

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

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