Puerto Rico’s Fiscal & Governing Twilight Zone

August 28, 2018

Good Morning! In this morning’s eBlog, we consider the shaky promise of PROMESA for the U.S. territory of Puerto Rico, an entity somewhat in Rod Serling’s Twilight Zone between a state and a municipality.

A Fiscally Appealing Chapter 9 case? U.S. Representatives Raul Grijalva (D-Az.) and Nydia Velasquez (D-N.Y.) yesterday warned the U.S. First Circuit Court of Appeals that House Natural Resources Committee Chairman Rob Bishop’s (R-Utah) interpretation of the PROMESA statute to be legislation intended to offer special protections to creditors or limit the restructuring of the debt through the judicial route was erroneous, arguing, in an amicus brief in the case brought by AMBAC against Puerto Rico and the PROMESA Oversight Board that “the purpose of PROMESA was not to grant to the creditors of Puerto Rico, including the bondholders, special protections that other municipal creditors do not have, nor to avoid losses to those creditors.” In addition, they argued for rejection of the interpretation that the Congressional statute for the restructuring of the public debt of Puerto Rico by judicial means had been established as the last resort of the Promesa law. Ranking Member Rep. Raul Grijalva (D.-Az.) indicated that the statute simply requires Puerto Rico to make “good faith efforts to achieve a consensus restructuring with creditors” prior to filing a petition through the courts. The two Members noted: “Neither the legislative record, nor the legal text supports an interpretation of PROMESA that gives creditors greater rights than those of a traditional reorganization at the expense of debtors’ rights.”

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Is PROMESA Unpromising?

July 23, 2018

Good Morning! In this morning’s eBlog, we consider whether the PROMESA statute might be unconstitutional.

Tug of Governance War. This week, Judge Judith Dein will be challenged with the task of resolving the controversy between the government of Puerto Rico and the PROMESA Board over the budget. Judge Dein, a federal magistrate judge from the district of Massachusetts, has been designated to assist Judge Laura Taylor Swain in Puerto Rico’s Title III bankruptcy proceedings—as, according to an order by Chief U.S. District Court Judge Aida Delgado last month, her charge will be to “hold court and perform any and all judicial duties,” as needed, in relation to the Commonwealth’s Title III cases, with his order coming because of the unavailability of magistrate judges in the District of Puerto Rico, citing a statute which permits Chief judges to assign magistrate judges to temporarily perform judicial duties in a district other than the judicial district for which they have been appointed. Her test will come the day after tomorrow, when the Fiscal Agency and Financial Advisory Authority (FAFAA) will try to convince Judge Dein that the budget to be implemented for the current year is the one approved and signed by Governor Ricardo Rosselló Nevares earlier this month, marking the first formal complaint filed by the Governor against the PROMESA Oversight Board. The challenge now joins a long litigation line of more than 75 lawsuits filed against the government or the Board—all questioning the scope of the PROMESA law.

While, to date, the bulk of such challenges have come from municipal bondholders and municipal bond insurers, this new legal avenue emerges from the elected officials of Puerto Rico, who, in light of PROMESA, would be called upon to execute the dual mandate granted to the Board. In these cases, several parties have already received denials from Court. Last week, for instance, Judge Dein denied a request from the Puerto Rican Association of University Professors of the University of Puerto Rico in Mayagüez to intervene in the litigation between the government and the PROMESA Board—which had asked for dismissal, alleging that it acts in accordance with the powers conferred by the federal statute. Likewise, in the related suit filed by Puerto Rico Senate President Thomas Rivera Schatz and House Majority Leader Carlos “Johnny” Méndez (R-Fajardo) against the Board, Judge Dein, to whom Judge Laura Taylor Swain entrusted to resolve the controversy, denied the request.

The suit raises grave constitutional and governance questions relating to the kinds of principles of self-government upon which our nation was founded, as well as the stark difficulty of somehow applying chapter 9 municipal bankruptcy to a U.S. territory—that is, a statute which only permits such a filing if authorized by a state. Constitutionalist Carlos I. Gorrín Peralta and former Judge President of the Bankruptcy Court in Puerto Rico Gerardo Carlo Altieri, nevertheless, believe it unlikely that the statute will be declared unconstitutional. Professor Gorrín Peralta, of the Inter-American School of Law believes it is unlikely that Judge Swain would declare the statute unconstitutional, a statute which, after all, created her special position, appointed by the Associate Justice of the Supreme Court of the United States. He explained that the Supreme Court pronouncements about Puerto Rico two years ago only served as a message to the U.S. Congress to take action regarding Puerto Rico, and the actions of that legislature have not been different from what they have been done for more than a century, noting: “Puerto Rico does not even have sovereignty to accuse a person of drug dealing, who has already been prosecuted by federal authorities, and then, the second message was the declaration of unconstitutionality of the Debt Restructuring Law,” referencing the cases Puerto Rico v . Sánchez Valle and Puerto Rico v. Franklin California Tax-Free Trust. Mayhap ironically, Prof. Peralta, in the case of the institutional funds which had successfully challenged the Debt Enforcement and Recovery Act (which was approved by the Puerto Rican government in 2014), he recalled came the same day on which the U.S. Senate was to vote on PROMESA, archly noting: “The Congress has exercised its colonial strength,” adding that now, the dispute between the PROMESA Board and the government is the result of the “conceptual ambiguity” under which Puerto Rico has suffered for decades. Rather, he is of the view that PROMESA, rather than a vehicle intended to help restructure the U.S. territory’s debt, actually is a statute designed to protect the economic interests of the United States, contain the effect that the Puerto Rican debt would have in the municipal bond market, and rid the federal government of any responsibility for the debt issued by a territory that was authorized to do so by Congress.

Meanwhile, Carlo Altieri considered that the allegations of Rosselló Nevares and legislative presidents regarding a possible usurpation of powers are of great importance. The same, he added, applies to the case of Aurelius Capital Management, which alleges that the body created by PROMESA is null because its members were not appointed with the consent of the Senate as dictated by the US Constitution.

However, according to the former Judge President of the Bankruptcy Court in Puerto Rico, the backdrop to settle the dispute between Gov. Rosselló Nevares, the Legislature, and the Board is not a purely civil or a constitutional rights claim case, but the procedures provided by the federal Bankruptcy Code and which are oriented to pragmatism and the rapid resolution of monetary disputes: “In Bankruptcy Courts, fast, practical, technical, and efficient processes are sought. Of course, PROMESA is a special law, it is not chapter 9 or chapter 11; it is a very special law and, definitively, attacks on constitutionality are not usual in traditional bankruptcies cases, either municipalities or Chapter 11 cases,” adding: “These constitutional arguments are very important, but they have the effect of delaying cases and resolving cases, they  confuse and add excessive costs,” opining that Judge Swain’s recent ruling in the Aurelius case points to Gov. Rosselló Nevares and the Legislature having little likelihood of prevailing, after her refusal to dismiss the request of Title III as requested by the investment fund, because Puerto Rico is a U.S. territory and, as such, Congress “can thus amend the acts of a territorial legislature, abrogate laws of territorial legislatures, and exercise full and complete legislative authority over the people of the Territories and all the departments of the territorial governments.’” That is, he believes that, for Jude Swain, the PROMESA Board is an entity of the Commonwealth, and, therefore, U.S. Senate confirmation for its members is not required. He adds that, in his opinion, “I would not be surprised if the Court ruled against the Legislature and the government,” noting that, to date, it seems that what Judge Swain perceives PROMESA as granting the Board authority to approve fiscal plans and budgets; however, he made it clear that, in the future, especially for the confirmation process of the quasi plan of debt adjustment, the scope of the Board on the fiscal plan could change. He added that while Judge Swain appears to believe the Board is a territorial government agency, U.S. Court of Federal Claims Judge Susan Braden has concluded otherwise in the lawsuit filed by Oaktree Capital Management, Glendon Capital, and others. (That lawsuit, which is on hold until the constitutional challenges filed by Aurelius are resolved, Judge Braden found that the Board is a federal agency and therefore, its actions are in themselves, the actions of the United States.)

Voz de la Gente (Voice of the People). Mr. Peralta appears to be of the view that, as PROMESA begins to have an effect on the citizens’ of Puerto Rico’s wallets and pocket books, there will be increasing dissatisfaction with the Board in Puerto Rico, noting that if the court were to rule in favor of Gov. Rosselló Nevares’ government and defined the powers of the Board, “the truth is that the body created by Congress will continue to have ‘gigantic’ powers to impose its criteria on the government of Puerto Rico.

The Tides of Immgration: Are there Fiscal Consequences?

June 25, 2018

Good Morning! In this morning’s eBlog, we consider the tides of emigration as they fiscally challenge the U.S. territory of Puerto Rico.

Today, more than one million Puerto Ricans live in New York City, just under one-third of Puerto Ricans who reside in Puerto Rico, with the likelihood of emigrating from Puerto Rico to Gotham increasing for single Puerto Ricans between the ages of 25 and 29 who have never married, do not own property, and whose income is limited, albeit not to the point of being below the federal poverty level. The majority are men, and the destinations of preference seem to be cities in Florida, New York, or Texas. In theory, about a fifth of those who left will return, judging by the rate of return reported on the immigration side to Puerto Rico. According to the most recent census data, in 2016, some 89,000 left Puerto Rico, a number which appears to indicate a rising trend, albeit, there is some evidence that the pattern might be changing—with that pattern affected by not only destination, but also by the level of academic achievement of those leaving Puerto Rico.

While we await, in December, 2017 emigration data, early indications based upon passenger counts at airports, appear to represent very high migration trends, finding, for instance, that last year, more than 281,000 Puerto Ricans left Puerto Rico than arrived there—an indication of the demographic impact of Hurricane Maria. Demographer Judith Rodríguez wrote in the 2016 Migrant Profile (published last week) that “The recent wave of migration in the last decade exceeds the Great Exodus of 1950-60, which has great impact on the social and economic level.” More recent data, however, indicates this demographic tide may finally be ebbing: during this year’s first month, January, 58,202 more arrived on the island than left, with the patter continuing the next month when there was a net positive inflow of 10, 698—a number which ebbed by March to 1,510—a change estimated to be temporary.

After New York, Florida appears to be the emigration state of choice: currently, around 30% of Puerto Rican emigrants choose a city in Florida, mainly in the central zone. At the same time, Texas is rising as a demographic state of choice. It appears more likely than not that New York City will continue to be a focal point of Puerto Rican emigration, due to cultural and family ties with Puerto Ricans since the migrations of the early twentieth century in the wake of the enactment of the Jones-Shafroth Act. According to the most recently updated Census figures, New York City is in the top three exodus destinations for emigrating Puerto Ricans.

But this is not all one-way traffic: many Puerto Ricans appear to be going home, with the largest such numbers coming from the states of Florida and New York; however, the number returning from the states of Massachusetts, Louisiana, and Washington make up more than half the total.

While it is more difficult to assess who is leaving and who is staying, Census data indicates that 48% of Puerto Ricans living in the D.C. metropolitan area have at least a bachelor’s degree, and, overall, 78% of Puerto Ricans living on the mainland have at least some level of university education, nearly three times the percentage of Puerto Ricans who have moved to Miami. Income wise, Washington, D.C. is the location, which appears to have drawn Puerto Ricans with both the greatest levels of scholastic achievement and the most income: the median household income for Puerto Ricans in the nation’s capital is $87,713. Next, after Washington DC, mainland cities with the highest median income for the Puerto Ricans are Miami ($50,945), Chicago ($47,232) and New Haven ($43,165). The disparity in annual income perhaps demonstrates the lure of emigrating from Puerto Rico, where the median income of a household is around $ 19,977, according to the Census data.

However, for Puerto Ricans leaving for the mainland, nirvana is not guaranteed: in the cities of Springfield and Boston, as well as in Hartford, there are high poverty levels are high for Puerto Ricans: in Springfield, more than one-third of the more than 100,000 Puerto Ricans live below the federal poverty level—a level comparable to the 31% below that level in the Boston metro region, and 26.5% in the Springfield metropolitan area have incomes that place them below the poverty level.  In addition, age is a discriminating factor: in Springfield, almost 50% of Puerto Ricans under the age of 18 live below the poverty line—a figure that compares unfavorably to the 46% of Puerto Ricans in Puerto Rico who fall below the federal poverty line of $12,060 for an individual.

The Prospects and Draws for Emigration. Demographic data with regard to those leaving Puerto Rico finds that the bulk of emigrants worked in 2016 as administrative office staff (6,822), followed by operators of production lines (5,445), vendors (4,870), and food preparers (3,264). According to the date, some 382 desperately needed doctors left—while some 1,376 nursing professionals left the island. Stateside, 82% of the 2.2 million Puerto Ricans who are working on the mainland are employed in the private sector; 4% have their own business. 14% of the jobs occupied by Puerto Ricans are in the government. In Puerto Rico, that figure rises to 22%, according to data from the Census Bureau. On the other hand, most of those who immigrated or returned to Puerto Rico were vendors (1,383) or educators (1,101).

Quien Es Encargado? (Who is in charge?) The Puerto Rico Senate has killed a an agreement between Puerto Rico Gov. Ricardo Rosselló and the PROMESA Oversight Board, potentially escalating the governance conflict with regard to Puerto Rico’s operating budget and the restructuring of the central government’s $51 billion of debt. Last Friday, Puerto Rico Senate President Thomas Rivera Schatz threatened a lawsuit against the Board if it continues to attempt to preempt Puerto Rico’s government in order to impose budget cuts or the repeal of worker protection measures. In a compromise with the Governor, the Board had agreed to maintain Puerto Rico’s mandatory Christmas bonus, vacation and sick day policies in exchange for Gov. Rosselló’s agreement to introduce at-will employment for all employers by repealing a 1976 law, Law 80. The House, at the end of last month, had approved the measure, before the Senate amended it to introduce at-will employment only for employees entering the workforce. Indeed, as we had previously noted, last Thursday, the Senate President had declared the Law 80 repeal to be dead, after speaking with other members of the majority New Progressive Party caucus in the Senate. Moreover, according to a video posted on the El Nuevo Día website, the Senate leader said he had consulted lawyers and was ready to fight in court, if the PROMESA Board seeks to preempt the island’s elected leaders. The power struggle came as the Puerto Rico House has added funding to a budget bill—spending which Puerto Rico House President Carlos Méndez and Treasury Committee President Antonio Soto said they expected the PROMESA Board would reject—relying on the Congressional PROMESA Act granting the Board the right to create and approve its own version of Puerto Rico’s budget—as is, for instance, the current budget. Puerto Rico’s new fiscal budget year begins this Sunday—a date by which, on normal years, like most states, but unlike the federal government, its fiscal year operating budget would normally have been adopted—but, where, last Thursday, PROMESA Board Chair José Carrión, in New York City, stated that if the government opted not to repeal Law 80, the currently certified fiscal plan would operate—a plan which would mandate at-will employment to be introduced by January 1, 2019—a plan which, unsurprisingly, Senate President Rivera Schatz is set to challenge, especially after, on May 9th, Sergio Marxuach, the New Economy Policy Director, testified before the Puerto Rico Senate Committee on Federal, Political, and Economic Relations that repealing Law 80 would be a bad idea, noting that a 2016 International Monetary Fund study showed that in times of economic weakness, eliminating job protections would have had a negative economic impact in the short and medium term, noting: “By triggering a wave of layoffs, reforming employment protections further weakens aggregate demand and delays economic recovery.” Similarly, a 2017 report from the Organization for Economic Cooperation and Development said that in Portugal from 2006 to 2014 “reforms increasing the flexibility of the labor market negatively affect firms’ productivity both in the short- and long-run. A possible explanation is that higher job turnover reduces firms’ incentives to invest in job-specific training and reduce the scope for workers’ specialization.”

In response, Governor Rosselló released a statement: “Puerto Rico has just seen how politics is done and not how a future government should be made in challenging and difficult times, with this regrettable decision by the President of the Senate, Thomas Rivera Schatz.”

Now Senate Finance Committee President Migdalia Padilla is scheduled to meet with the Governor’s fiscal team to discuss the changes which have been included in the joint resolutions that make up the budget for the next fiscal year; he will also  meet with Financial Advisory Authority and Fiscal Agency (Aafaf) Executive Director Raul Maldonado and the Secretary of Finance, Gerardo Portelo—with the Chairman noting: “They are going to have meetings with me so that we can all harmonize what we have observed, what the Board says, and what the Executive establishes.” Chairman Padilla added that he trusts that today will be constituted the conference committee to discuss the House amendments, especially after, at the end of last week, House approval of an FY2019 budget $33.2 million higher than the one presented by PROMESA Board—followed, the next day, by Senate approval, albeit with amendments intended to force a conference committee to settle the differences.

In addition to the perception of preemption, one of the legislature’s greatest reservations with regard to the PROMESA Board’s version of the budget their perception that that version underestimates the revenue estimate is $7,000 million, according to the President of the Finance Commission of the Chamber, Antonio Soto, who noted that the government will close the year with revenues of more than $9,172 million, but the fiscal entity estimates $8,400 million for the next fiscal year, despite the fact that it proposes a growth in the economy of 6.3%.

Senate President Padilla explained that one of the changes that will be introduced to the House version is aimed at addressing the $164,000 reduction for the Independent Special Prosecutor’s Panel Office (OPFEI), advising that he would be subtracting that $164,000 from the additional $2 million that the Chamber allocated in the budget to the Alliance for Alternative Education program. In its version, the Chamber dealt with the cuts contemplated in the PROMESA Board’s proposal for the oversight agencies, such as the Office of Government Ethics, the Office of the Comptroller and the Office of the Citizen Procurator, but left out the Special Prosecutor, noting: “I am not increasing the spending budget; I am simply moving part of an allocation of $2 million,” adding that it is inconsistent with the amendments submitted by the Chamber aimed at ensuring the functioning of the agencies under the Department of Public Safety, such as the Bureau of Emergency Management and Disaster Management, the Emergency Medical Bureau, the Bureau of the Corps of Firemen, and the Bureau of Forensic Sciences—all agencies with regard to which there is heightened concern in the wake of Puerto Rico’s devastating hurricanes and inequitable FEMA responses.  Indeed, Miguel Romero the vice president of the Senate Finance Committee, agreed on the need to assign the necessary funds to the Department of Public Security to ensure its operation: “There is a deficiency of over $40 million that we have to address.” In addition, Senator Padilla indicated the Senate would take a close look at the Board’s proposed $7 million cut to Court Administration, noting: “There is a need for appointment of judges and to maintain diversion programs with the correctional population.” Moreover, Senate President Thomas Rivera Schatz also indicated that the controversy centers on inconsistencies between the budget and the fiscal plan, both presented by the PROMESA Board, explaining, in the wake of discussions, that it had been “established that there is a gap between the approved budget and the fiscal plan: basically, regarding the collections we will have available to cover the budget.” With the session scheduled to end on Saturday, that date falls three days after the limit established by the PROMESA Board to approve the budget, with the Board anticipating that, if Puerto Rico does not comply with the agreement reached with the Governor to repeal the Law Against Unjustified Dismissal (Law 80-1976), it will revert the fiscal plan to the approved one.

Paternal Governance?

June 12, 2018

Good Morning! In this morning’s eBlog, we consider the demographic disparities in the wake of Hurricane Maria in Puerto Rico, before turning to the human and fiscal challenges in the federal courtroom issue of keeping schools open in the face of quasi-municipal bankruptcy; then we view the ongoing governing challenges and wonder when there might be too many cooks in the fiscal kitchen.   

Demographic Devastation. According to new data from the Puerto Rican Demographic Registry, 68% of Puerto Ricans who died between September and December of 2017, during the emergency caused by Hurricanes Irma and María, were over the age of 70. The new data from the Demographic Registry finds that nearly half of the deaths recorded in this period occurred among people who were hospitalized in Puerto Rico. Moreover, the risk of death, according to the data, was higher for men: 54% of the deceased were male, even though males make up only 48% of the island’s current population. The new data also found that deaths attributed to diseases such as Alzheimer’s, diabetes, septicemia, pneumonia, and chronic heart or respiratory conditions showed significant increases in the period which followed the hurricanes—or, as Puerto Rico demographer Judith Rodríguez noted: “This gives us a more specific idea of the health risk that the hurricane brought. That was the only significant factor to cause that increase seen in the data.” Ms. Rodríguez further reported that cases of septicemia doubled between August and September, reporting that this disease, often associated with infections in hospitals, noting: “The highest number of deaths is in hospital patients; however there were high-risk factors among people who were in care homes for the elderly, or who, in the middle of an emergency, were taken to an ER.”

Health and safety—especially for the most vulnerable—appeared to be related not just to damage caused by the hurricanes to the physical hospitals and clinics, but also by the stark disruptions of electricity: diesel supply to keep emergency generators operating, combined with failures in backup systems and telecommunications plagued the provision of vital health care services. Moreover, the issues took long to resolve: even as late as last December, at least two hospital were operating with electric generators. As the Senior Vice President of Operations at San Jorge Children’s Hospital, Domingo Cruz, noted: “It is always a risk (death) when there are patients in ventilators (artificial) and there is an outage.” Perhaps in a hope for the future, the data shows that death among Puerto Rican children due to the storms was less than 1%.

After storm reports also noted that even though tardy, the arrival from the mainland of hospital ships played a vital role: Good Samaritan Hospital Administrator Marilyn Morales reported that, due to their condition, many patients were transferred to the USNS Comfort hospital ship, the U.S. Navy’s largest such ship, as well as to the Medical Centers of Mayagüez and Río Piedras. The USNS Comfort is the largest U.S. Navy floating hospital. This ship and a series of field hospitals were set up in Puerto Rico during the first months that followed Hurricane Maria. Administrator Morales noted: “We understand that deaths (at the Good Samaritan Hospital) were minimal.”

It was not, however, just hospitals which were so adversely impacted: by early last October, access to vital pharmacies due to the loss of electricity and communications contributed to the health care emergency response breakdowns: some pharmacies did not have access to the system they use to process prescriptions; thus, they were only dispensing medicines if a patient paid the full price of the drug. According to the Health Department: “In the case of not having electronic systems for dispensing medications, the pharmacy must provide the medication to the patient and, then, it will have up to 60 days to process it.”

Many health professionals with private practices had to overcome many obstacles to offer services to their patients, mainly due to the lack of power, the impossibility of using some equipment only with a generator, and of billing for medical services. Demographer Rodríguez noted: “There are some conditions whose deterioration could be accelerated by issues associated with the emergency left by the hurricane. Chronic and degenerative diseases were the most affected in this process. These diseases skyrocketed, and many people might have died months later because of issues associated with the hurricane.”

Quien Es Encargado? (Who is in charge?) As we have noted, in chapter 9 municipal bankruptcies—in the minority of states which have authorized them, the state law determines the governance until a plan of debt adjustment is approved by a U.S. Bankruptcy Court. In Puerto Rico, under the PROMESA statute adopted by Congress, there is a hybrid form of governance—a form which has left unclear authority in this governmentally different circumstance where it is not a municipality which is fiscally exhausted, but rather a quasi-state—or, a U.S. territory. Thus, we have a Governor, a legislature, an oversight PROMESA Board imposed by the President and Congress, and a U.S. federal Judge.  It might be that some accommodation in governance is emerging: the PROMESA Board has proposed to the Puerto Rico Legislature that the raising of salaries or disbursement of allocated funds would not be allowed unless quarterly reports are presented and cuts established in the fiscal plan are executed, according to the its modified version submitted to the Legislature. Under the proposal, in order to ensure that the government does not spend more than it receives and complies with the spending cuts to which it committed in its certified fiscal plan, the budget modified by the Oversight Board restricts in a reserve fund the funds which would be used to increase the salaries of teachers and the Police. The Board also established that the government of Puerto Rico is mandated to submit quarterly reports beyond those required by PROMESA before it is authorized to appropriate any funding, with said conditions spelled out in the joint resolutions that the Board has sent to the Legislature as part of the budget certification process. Included in this unfunded mandate is a provision barring the Office of Management and Budget from disbursing funding to fulfill the promise made by Governor Ricardo Rosselló Nevares to increase the salary of teachers and the Police, or to provide Social Security. In addition, the mandate bars the authorization of funding to Puerto Rican agencies absent Board approval.

The Board’s restrictions, adopted in an effort to ensure a balanced budget, in addition to the repeal of the Unjust Dismissal Law (Law 80-1976), which eliminates the statute which provided certain legal remedies to private sector employees, is part of a structural reforms package imposed by the Board as part of its agreement with Gov. Rosselló Nevares to avoid litigation in Court.

Gov. Rosselló’s representative to the PROMESA Board, Christian Sobrino, concurs that it makes sense that the Board has established conditions for granting the monthly increase of $125 to Police and teachers, starting in the upcoming fiscal year, and that these imposed conditions are also subject to the repeal of Law 80, because this move may impact the revenue projection required by the Board. Nevertheless, unsurprisingly, Mr. Sobrino described the Board’s new demands as “complicating” the interaction between Puerto Rico and the PROMESA Board: noting: “But there is a reality: you can provide the benefits (if)  you have the income to budgetary support. If you do not have them, you do not have them: The revenue projection is the key part that makes all these agreements and these other programmatic commitments possible.” Thus he stressed the importance of the Legislature proceeding with the repeal of Law 80: “The effect of not carrying out this repeal would imply a reduction in the budgetary revenues available to the government and make it very difficult to maintain a series of benefits , including that (salary) increase and also the Christmas bonus to public employees: If the agreement can be complied with, there should be no problem moving that allocation (the money for salary increase) to the Public Security umbrella. If that agreement is not maintained, then additional cuts have to be made.”

Nevertheless, the governance situation remains difficult, especially in the wake of the PROMESA Board’s conclusion that, for what it asserted was the second time, Gov. Rosselló’s budget did not comply with PROMESA, and then proceeded to preempt that authority and impose its own adjustments—a fiscal and governance move which would mark the first time that the government of Puerto Rico would have constraints to use its funds. As written, the preemption reads: “The Secretary of Treasury, the treasurer and Executive Directors of each agency or Public Corporation covered by the New Fiscal Plan for Puerto Rico certified by the [PROMESA] Oversight Board, and the Director of the OMB (or their respective successors) shall be responsible for not spending or encumbering during fiscal year 2019 any amount that exceeds the appropriations authorized for such year. This prohibition applies to every appropriation set forth in this Joint Resolution, including appropriations for payroll and related costs. Any violation of this prohibition shall constitute a violation of this Joint Resolution and Act 230-1974.” In addition, in another section of the document, the Board mandated that quarterly reports must be submitted no later than 15 days after the closing of each fiscal quarter and that the Fiscal Agency and Financial Advisory Authority (FAFAA) and the OMB will certify that “no amount” of the Social Security Reserve funds in the Puerto Rico Police Department or the promised increases have been used to cover any expenses.

A Teaching Moment? In the wake of learning about the new conditions established by the PROMESA Board, Grichelle Toledo, the Secretary-General of the Puerto Rico Teachers Association-Local Union, noted that Gov. Rosselló had promised a monthly salary increase of $125 per month “beginning the 2018-2019 school year,” noting that it had been “10 years without a salary increase, and the cost of living has risen, benefits have been reduced and some have even been eliminated.”

Indeed, as we have noted previously, the loss of human capital—teachers, health care professionals, and others, harms the possibility of a sustained economic recovery. That is, the Board’s actions risk that Puerto Rico is in danger of losing one of its most critical assets, its skilled workforce, at a time when the island is in dire need of rebuilding: already teachers are leaving for more secure jobs on the mainland, a predictable outcome after the cash-strapped government announced it would close some 200 schools. Police, thousands of whom called in sick daily last year because they were not being paid overtime, are finding brighter futures in cities eager to find trained, bilingual officers.

An analysis by El Nuevo Día of the Governor’s proposed budget last month after agreement with the PROMESA Board, which focuses on the General Fund determined that the Board made sure to increase its own budget by 7.8%, plus another 3.7% to pay lawyers working in Title III cases, even as it cut FAFAA’s by nearly 10%. The Board met its part of its agreement with the Governor by not touching the Legislature’s budget, authorizing $ 50 million to municipios, and approving $25 million for the University of Puerto Rico (UPR) scholarship fund. However, the Board cut the Budget of the Health Insurance Administration by 41%, and cut the Office of Community Planning and Development by 21%, the State Commission on Elections by nearly 12%; the Police by 4%–and, of all places, the Fire Department by 11%, and the State Agency for Emergency and Disaster Management by 14%–mayhap an ill omen as the new hurricane season has already commenced.

“This is how government should work.”

May 15, 2018

Good Morning! In this morning’s eBlog, we fiscally visit the small municipality of Evans, New York, a town of about 41 square miles in upstate New York which was established in 1821—seventeen years after its first settler arrived, and today home to about 14,000—but a municipality so broke after years of fiscal and financial mismanagement that it lost access to the municipal market in the wake of the withdrawal of its credit rating.

Absence of Fiscal Balance? Evans Town Supervisor Mary K. Hosler has reported that the municipality was unable to secure a loan in the wake of the withdrawal of its credit rating. In her 3rd State of the Town Address, where she advised citizens that “much can be accomplished when politics are checked at the door, and a spirit of cooperation is adopted at all levels of our town government;” she added that it was her hope that citizens would leave with “a sense that our Town is mending and moving ahead with strength and momentum,” as she noted: “By way of brief overview, as many of you are aware, the Town has been faced with numerous challenges over the past two years. Unfortunately, a decade of financial mismanagement came to a head during my first year in office, and we were faced with what turned out to be the worst financial crisis in the history of the Town. There were very few options available as the Town was facing the possibility of insolvency or a control board.”

In New York, a municipality—or its emergency financial control board, may file for chapter 9 municipal bankruptcy: the Empire State’s §§85.80 to 85.90 authorize the state legislature to create a financial control board—something created in September of 1975 for New York City; however, the New York State Constitution also contains certain fiscal limitations on municipal debt—including a limit of 9 percent of the average full valuation of said municipality’s taxable real estate for municipalities with populations under 125,000.

Supervisor Hosler introduced Evans Finance Director Brittany Gloss to present the municipality’s financial accomplishments and the progress being made in terms of economic development and, “most importantly: where we are headed,” reminding constituents that any loans would have been “costly to our residents: financially, in the loss of services, and the loss of local control,” adding:  “It has been said that the definition of insanity is doing the same thing over and over again while expecting different results. Well, we stopped the insanity, which meant we had to identify the problems and take action. Every decision was critical to move the needle in the right direction, and work the Town out of this financial disaster. These decisions were often painstaking and gut‐wrenching, but they were necessary to change the Town’s financial course. They were reviewed from all angles, and made with the taxpayer’s interest and the future of the Town of Evans in the forefront. And these difficult decisions have yielded positive results.” In her introduction, Supervisor Hosler, noting the town’s bond rating had been restored to an A rating, reported: “We’re  definitely on the recovery side of the balance sheet,” with the former bank vice president who played a key role in steering the town toward solvency, telling the audience that the municipality had turned to Erie County for assistance two years ago—or, as Erie County Comptroller Stefan I. Mychajliw recalled, the call came as the town’s payroll and bills were piling up, late at night as he was “on the couch with a horrible flu.” Nevertheless, he stated that he advises every town supervisor to let him know if they ever need anything, adding: “That night I had three or four conference calls with three of my most senior staff.”

Remarkably, by the next morning, he had already helped pull together three possible fiscal plans for the town—with the one which led to the fiscal rescue: an unprecedented $980,000 short-term loan from Erie County.

For her part, Supervisor Hosler knew when she ran for office three years ago that there were financial problems; however, it was not until she took office that she discovered thousands of missing financial transactions, internal audits which had never been completed, and a $2.6 million deficit. The fiscal depths appeared to be the result of the municipality’s debt issued in 2007, when the town had borrowed $12.6 million to install new water lines, hydrants, and a water storage tower. In that transaction, instead of putting those funds into a separate account, as required, the town combined the money with the rest of its municipal funds. Thus, a subsequent New York State audit found that $2 million of those funds were used to cover operating expenses, with the bulk for the municipality’s troubled water operations—putting the municipality on a seemingly unending reliance on tax-anticipation notes to make ends meet—that is, until the ends were at the end—or, as Supervisor Hosler described it: “Not six months into office, I’m thinking ‘Holy Lord, this is a big climb’…We had to keep moving on all fronts.”

A year and a half later, Evans has received an A credit rating from S&P Global Ratings, easing the way for the municipality to issue municipal bonds to finance $5.2 million for a new water tower, with S&P noting: “The stable outlook reflects S&P Global Ratings’ view that Evans has implemented various corrective steps to restore structural balanced operations over the past three audited fiscal years. It also reflects our expectation that the town will likely maintain strong budgetary performance, which will likely support its efforts to eliminate its negative fund balance and rebuild its budgetary flexibility.” Indeed, the town’s current deficit of $320,000 is a shadow of its former $2.6 million—and Supervisor Hosler is hopeful it can be eliminated by the end of the fiscal year—a fiscal accomplishment which could create a fiscal bonus: lower capital borrowing costs on municipal bonds the municipality hopes to issue for its water system.

The $2.6 million deficit is down to $320,000, and now Supervisor Hosler is hopeful it can be erased by the end of this year. In addition, with the credit rating, she is hoping to get a lower rate on water bonds to hopefully lower water rates. As Comptroller Mychajliw put it: “I’m just thrilled for her and the town: This is how government should work.”