The Phyical, Fiscal, & Governing Challenges of Rcovery

eBlog

May 3, 2019

Good Morning! In this morning’s eBlog, we consider the obstacles to facilitating hurricane recovery assistance to Puerto Rico, before assessing the fiscal and physical status of Flint, Michigan.

Getting Aid to Puerto Rico. Senate Appropriations Chair Richard Shelby (R-Ala.) has offered the Democrats on the Committee proposed language which would accelerate the disbursement of funds to Puerto Rico, albeit with greater supervision and restrictions—but, critically, which would unblock the impasse so far barring Congress from passing legislation to address recent natural disasters. While the Chair has not made public his proposed language, he has shared it with Ranking Member Patrick Leahy (D-Vt.). Chair Shelby’s proposed language would not include new allocations for the U.S. territory in addition to the $600 million in food assistance funds which have not been opposed by the President—and $5 million focused on studying the impact of that nutritional aid. Here, Chairman Shelby’s offer came hours after on the pending disaster allocation project was reportedly briefly discussed at Tuesday’s Oval Office meeting with Senate Minority Leader Chuck Schumer (D-NY) and House Speaker Nancy Pelosi (D.-Ca.)—a meeting called by the President to discuss his newly proposed $2 billion infrastructure plan—a plan for which the proposed $2 billion remains unexplained and unfunded.

The Congressional Democratic Leaders left the session hopeful that there is interest to agree soon with consensus on a path to unblock critical natural disaster relief across the nation—relief to date blocked by the White House due to apparent opposition to any relief to Puerto Rico. There appeared to be some sense that the efforts have achieved progress—or, as one participant noted, in quoting the President: “I’m going to keep out” of this discussion—seemingly meaning he would not object. However, another source from the White House indicated that he understood that President Trump did not say that he would stay out of the discussions, but rather that an agreement must be reached; while Senator Marco Rubio (R-Fla) tweeted that some progress was occurring in bipartisan talks. The House version approved at the beginning of the year includes $600 million in food assistance for Puerto Rico, $25 million to restore the Martín Peña Canal, $5 million to finance a study on the elimination of emergency nutritional assistance in the wake of Hurricane Maria—and restoration of the matching of funds that the government of Puerto Rico has to make in order to obtain the reimbursements of FEMA for the emergency measures. (In the wake of the President’s refusal to grant more funds to Puerto Rico, President Trump accepted that the Senate bill included the allocations related to nutritional assistance, but no other initiative for the island.

The negotiations come as the House is scheduled to pass legislation next week that adds another $3 billion in appropriations to address the March floods in the Midwest—legislation which retains the funds originally ratified for Puerto Rico last January. Indeed, at the White House meeting, the House and Senate Democratic leaders, and the President, agreed to work towards a legislative plan that allocates $ 2 billion to finance improvements to the transportation infrastructure of the United States—albeit without any agreement from whence such funds would come.

Wherefore Restoration of Self-Governance Authority? Meanwhile it appears President Trump plans to nominate the current PROMESA Oversight Board members to serve their terms through the end of August—plans which have gained praise from Democrats in Congress, as it may avert an interruption of the Board’s efforts to bolster the U.S. territory’s economy and fiscal management. The announcement came as the PROMESA Board prepared to launch law suits seeking to claw back payments made on and fees paid for more than $6 billion of Puerto Rico bonds. That is, the ongoing governance quandary with regard to whether a federal circuit court, the unelected oversight board, or the U.S. citizens of Puerto Rico will actually be permitted to decide on the island’s future—a future further confused when, last February, the U.S. 1st Circuit Court of Appeals held in favor of municipal bondholders that the method of appointment of the board, as found in the Puerto Rico Oversight, Management, and Economic Stability Act, was unconstitutional: ergo, for the PROMESA Board to continue to operate beyond May 16th, the court ruled the President must nominate and the Senate confirm the Board members. The President, in a posting to the White House website, noted he intends to nominate the current seven members to serve out their terms. (According to the PROMESA each term is three years, so if the Senate confirms the members, their terms would end on Aug. 31st.)

It is unclear how the U.S. Senate will react—especially in the wake of a White House statement: “Mismanagement, corruption, and neglect continues to hurt the people of Puerto Rico who deserve better from their government…The most important component for future health and growth of Puerto Rico is financial constraint, reduced debt, and structural reforms…The work of the Financial Oversight and Management Board for Puerto Rico is providing the stability and oversight needed to address these chronic issues that will bring hope of a brighter future for Puerto Rico.” Given the exploding debt and deficits under the Trump administration, the statement appears most ironic.

Nevertheless, House Natural Resources Committee Chair Raúl Grijalva (D-Az.) hailed the move: “The President’s decision to nominate the members of the Financial Oversight and Management Board for Puerto Rico for Senate confirmation is welcome. Democrats supported PROMESA largely to enable Puerto Rico to restructure and reduce its debts. If the 1st Circuit’s ruling invalidating the original appointments had not been addressed, the Board would have collapsed and three years of work on debt restructuring would have been wasted….We are close to a final restructuring agreement on the largest remaining block of Puerto Rican debt, and it’s in the interests of the Puerto Rican people to finalize that agreement without interruption,” Chairman Grijalva noted, for his Committee, which oversees Puerto Rico. Similarly, Rep. Nydia Velázquez (D-N.Y) noted: “To essentially start over with new appointments to the Oversight Board would have injected serious uncertainty and chaos into the debt restructuring process…While I support the reappointment of these members to the Board, I will continue holding them to account to ensure they are always acting in the best interest of the people of Puerto Rico…Austerity measures are not the answer for Puerto Rico, and I’ll continue pushing the Board to put ordinary Puerto Ricans before Wall Street creditors and hedge funds.”

The PROMESA Board also released a statement welcoming the President’s announcement, with its statement coming in the wake of its request to the U.S. 1st Circuit Court of Appeals to extend the May 16 deadline for acting as the Board; the PROMESA Board has also filed a petition for certiorari with the U.S. Supreme Court to review the appeals court’s February decision.

Not in Like Flint. Five years on, the Flint water crisis is nowhere near over: the state-caused fiscal and physical emergency devastating lives, assessed property values, and public trust continues. The Flint River courses some 142 miles through mid-Michigan, before a noticeable change occurs as it flows southwest into the city of Flint, where, abruptly, it is marked by concrete slopes, capped with wire fences, flank the water—adjacent to decaying bridge piers protruding from the center of the river. It is almost as if it were a cemetery to mark the five years since the city’s water source switch which, in a decision by a state appointed Emergency Manager—it is, rather, as studies have demonstrated, a municipality with drinking water lead levels nearly twice the amount that is supposed to trigger action under U.S. Environmental Protection Agency standards: That is, it is a municipality where the state action threatens adverse neurological effects in children, including reduced IQ and aggressive behavior; in a 6-month-old weighing 18 pounds, it takes just 12 millionths of an ounce of lead in the child’s bloodstream, about the same as one grain of salt, to exceed the level that the Centers for Disease Control considers a risk for children. That is, for a mother and father—leaving seems a vital goal—but for the municipality, such departures can have devastating implications for assessed property values and income taxes. Perhaps fortunately for the city, its budget only assumes some $4.6 million in property taxes—less than a third of what it anticipates in income taxes; however, therein lies a fiscal risk: while the city’s water system operators report they have significantly reduced lead since 1991, when the U.S. Environmental Protection Agency first adopted a rule that mandates monitoring and treatment to reduce contamination caused by corrosion and other factors related to lead pipes, EPA notified the Governor there remained “serious and ongoing concerns with the safety of Flint’s drinking water system,” including “continuing delays and lack of transparency” in the state’s response. Flint switched back to the Detroit water system three and a half years ago, but public health effects from lead exposure prompted emergency declarations from the state and federal governments in early 2016. The city then launched an aggressive rehabilitation campaign, and, in the past three years, crews have explored 21,298 homes and replaced lead service lines at 8,260. The work should finish in July, according to Jameca Patrick-Singleton, Flint’s Chief Recovery Officer.

The most recent testing of Flint’s drinking water, sourced again from Detroit, marked lead at four parts per billion, well clear of the 15 that requires action. Those results account for a 90th-percentile rating: in other words, 90 percent of the homes comply with the federal standard. Nevertheless, Mayor Karen Weaver notes that tests will continue, and according to Patrick-Singleton, Mayor Weaver will not lift the city’s emergency declaration until the scientific and medical communities clear the drinking water.

Governance: Creating & Responding (or failing to respond) to a Human, Physical, & Fiscal Crisis.  Michigan Attorney General Dana Nessel’s office has fired special prosecutor Todd Flood from the Flint water criminal prosecution team because of documents discovered in a government building, which Michigan Solicitor Fadwa Hammoud confirmed Monday. Here, the special prosecutor’s contract expired on April 16, and he had been advised last week that the state would not be renewing his contract. The Solicitor Mr. Flood’s termination to the recent realization that legal “discovery was not fully and properly pursued from the onset of this investigation.” Last Friday, prosecutors asked a Genesee County judge for a six-month delay in the involuntary manslaughter case against former Michigan Health and Human Services director Nick Lyon after finding a “trove of documents” related to the Flint water crisis in the basement of a state building. (Mr. Flood had been named a special assistant attorney general in the Flint criminal cases after serving as a special prosecutor, serving more than three years: an appointee of former Attorney General Bill Schuette, Mr. Flood’s authority was curbed significantly when Mr. Hammoud was put in charge of the Flint prosecution, and then brought in Wayne County Prosecutor Kym Worthy to help the prosecution team.) Mr. Hammoud noted that Mr. Flood’s departure reflected the department’s commitment “to execute the highest standards” in the Flint prosecutions.

For his part, Mr. Flood noted: “In the time we have spent in Flint, we interviewed over 400 people, reviewed millions of
pages of discovery, and took pleas to advance the investigation: We conducted multiple court hearings and preliminary exams, placed hundreds of exhibits into evidence and successfully bound defendants over for trial. This complex case of official wrong-doing and betrayal of public trust has been prosecuted with the utmost attention to the professional standards that justice demands. I walk away knowing that I gave everything I had to give to this case. The people of Flint deserved nothing less.”

Mr. Flood originally charged 15 people in the Flint prosecutions; he struck plea deals with seven defendants who have pleaded no contest to misdemeanors; he successfully convinced 67th District Court judges to bind over for trial Mr. Lyon and former Chief Medical Executive Eden Wells on criminal charges related to the 2014-15 Legionnaires’ disease outbreak which led to the death of 12 individuals and sickened at least 79 others.

Preliminary exams against former gubernatorially-appointed Flint Emergency Manager Darnell Earley, and Howard Croft, Flint’s former Public Works Director, were recently suspended as the Attorney General’s office continues its review of all of the criminal cases; it remains unclear what connection the recently rediscovered boxes have to Mr. Lyon, who has been charged with involuntary manslaughter in the Legionnaires’ disease outbreak: he is accused of failing to warn the public in a timely manner about the respiratory disease before former Gov. Rick Snyder informed the public about it in mid-January 2016.

Will Justice Be Done? Mayor Weaver, in a statement Monday, noted: “I respect the decision that the Solicitor General has made regarding the changes to the prosecution team. I will continue to voice my desires to have truth, transparency, and justice for Flint residents…I ask that we not get caught up on the changes, but that we continue to keep the focus where it should be, and that is on making the residents whole after such a traumatic experience.”

The Challenging Transition in the Wake of a State Takeover

September 25, 2018

Good Morning! In this morning’s eBlog, we report on the likely extension of the Garden State takeover of Atlantic City, because, as one of our most respected and insightful fiscal experts there, Marc Pfeiffer, the Assistant Director of Rutgers University’s Bloustein Local Government Research Center, put it: it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period. That is, Mr. Pfeiffer believes continued state oversight will be a positive for Atlantic City municipal bondholders, because it assures more fiscal discipline will be in place—or, in his own words: “You are going to have ongoing stability while the state is involved…The city will have to show that it can stand on its own.”

The Steep Road to Municipal Fiscal Recovery. In the wake of a release of a new state report, “Atlantic City, Building a Foundation for a Shared Prosperity,” [64-page report]  released by New Jersey Gov. Phil Murphy’s administration, a report recommending continuation of the almost two-year-old state takeover of Atlantic City’s finances, that state governance now appears likely to last a full five years, due to “longstanding challenges” to New Jersey officials, as recommended by the Governor’s office. While the Governor, in his campaign, had, as part of his platform, a commitment to terminate the state takeover of Atlantic City, now, three-quarters of a year after taking office, the Governor appears likely to leave the state takeover in place—indeed, possibly for an additional three years.

The Murphy Administration has released a plan to assist the city to get back on its fiscal feet, a plan which benefited from input from numerous study groups, task forces, and committees, as well as a redirection of some state government funds to youth programs, and a training program for municipal department heads; that plan does not end the takeover; rather the report recommends keeping the takeover in place for the full five years called for under the 2016 law, unless signal fiscal and financial improvement is put in place before then, including the significant reduction or total elimination of Atlantic City’s reliance on state aid—or, as Gov. Murphy put it: “We had a pretty clear-eyed sense of what the challenge was…That doesn’t mean Atlantic City doesn’t need the state, that the state won’t continue to stay the course and be a partner. We’re not going away; we’re going to go out and executive this plan.”

Under New Jersey’s state takeover law gave the state broad powers, including the right to overturn decisions of the city council, override or even abolish city agencies and seize and sell assets, including Atlantic City’s much-coveted water utility. The statue empowers state overseers, in addition, to hire or fire workers, break union contracts, and restructure Atlantic City’s debt, most of which was done to varying degrees, although no major assets have been sold off.

What Is the City’s Perspective? Atlantic City Mayor Frank Gilliam has conceded the uncomfortable governance challenge under the takeover, which was initiated in November of 2016 by former Governor Chris Christie, but he notes that Gov. Murphy’s administration has been willing to listen to concerns and work with city officials, even as it has retained the final governing say-so.

How Can a State Transition Governance Back to a City? Unlike under a chapter 9 municipal bankruptcy, where a federal bankruptcy court has the final say in approving (or not) a plan of debt adjustment under which governance authority reverts back to a municipality’s elected leaders, a state takeover lacks a Betty Crocker cookbook set of instructions. Gov. Murphy’s quasi-emergency manager, Jim Johnson, whom the Governor named to review Atlantic City’s transition back to local control, said the state administration should remain in place for an additional three years, unless Atlantic City’s reliance on state aid has been “substantially reduced or eliminated” and that its municipal workforce is on “solid footing.”  Under the provisions of the state takeover, enacted shortly after Atlantic City nearly defaulted on its municipal bond debt, the state was empowered to alter outstanding debt and municipal contracts—or, as Mr. Johnson wrote: “Atlantic City has a set of fiscal, operational, economic and social challenges that will only be resolved with significant direction from, and partnership with the State.”

Focus on the Fiscal Future. Mr. Pfeiffer said it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period, adding that the continued state oversight will be a positive for Atlantic City municipal bondholders, because it will assure greater fiscal discipline will be in place, or, as he put it: “You are going to have ongoing stability while the state is involved: The city will have to show that it can stand on its own.”

The report outlines a series of recommendations such, as:

  • the importance of diversifying Atlantic City’s economy beyond casinos,
  • providing increased training for senior municipal workers, and
  • purchasing data that can better track city services.

Mr. Johnson also urged Atlantic City to redirect Casino Reinvestment Development Authority funds into new development projects and toward providing increased financial support for youth programming.

Transitioning Back to Local Control. Atlantic City Mayor Frank Gilliam noted: “The citizens of Atlantic City deserve to have their local elected officials control their destiny…I am very optimistic that this is a huge step in the right direction for Atlantic City and its future.” Mr. Johnson, who was a primary challenger to the Gov. two years ago, was named after that election as a special counsel to review the state’s oversight of Atlantic City—and he came somewhat prepared thanks to his previous service as a U.S. Treasury Undersecretary for enforcement under former President Bill Clinton.

Gov. Murphy, who had been critical of the state takeover during his gubernatorial campaign, and who had criticized former Gov. Chris Christie’s administration for implementing it without support from former Mayor Donald Guardian, noted: “This is a community that needs the state’s help as a partner, not as a big-footing jamming down, taking away—you know, taxation without representation,” adding: “That doesn’t mean that Atlantic City doesn’t need the state, that the state isn’t going to stay the course and be a partner.” The Governor, soon after assuming office, had removed former Gov. Christie’s designated takeover manager Jeffrey Chiesa as the state designee to oversee the state role in Atlantic City. It should be noted, as we have previously, that Mr. Chiesa forged a number of settlements on owed casino property tax appeals and effected a $56 million reduction in Atlantic City’s FY2017 budget. All of which brings us back to the wary fiscal trepidation of Mr. Pfeiffer, because Atlantic City’s debt is still in the high risk range so favored by some casino players in the city: a CCC-plus from S&P Global Ratings and Caa3 from Moody’s Investors Service.

Post Municipal Bankruptcy Futures

September 21, 2018

Good Morning! In this morning’s eBlog, we report on the unsafe conditions of Detroit’s public schools, and dismissal by the Trump administration for self-government in Puerto Rico, and, a year after Hurricane Maria’s devastating strike on Puerto Rico and underwhelming federal response, the U.S. territory’s continued inequitable status.  Unlike in corporate bankruptcies, in municipal bankruptcies, the challenge is not how to walk away from accumulated debts, but rather how to fiscally resolve them.  

Detroit’s Future? In Detroit, where, last week, organizations gathered at the Marygrove College campus to announce a new cradle-to-career educational partnership, including a state-of-the-art early childhood education center, a new K-12 school, and the introduction of an innovative teacher education training modeled after hospital residency programs; Superintendent Nikolai Vitti has announced the closure of thirty-three more schools because of high levels of copper and/or lead, bringing the total number of schools with tainted water to 57 buildings. The Superintendent’s warning noted: “Of the results just received, 33 of 52 schools have one or more water sources with elevated levels of copper and/or lead…This means that 57 of 86 schools where test results have been provided have one or more water sources with elevated levels of copper and/or lead (this does not include the previous 10 Di-Hydro schools where copper and/or lead was detected).” He added the results were incomplete: the district is still awaiting results for 17 schools. He noted: “As you know, drinking water in these schools was discontinued as we await water test results for all schools. Although the kitchen water has only been turned off in schools where levels were determined high, we have been using bottled water to clean food in all schools: As a reminder, we have not used water to cook food in our kitchens for some time and instead have delivered pre-cooked meals to students. We plan to install filters for kitchen sinks to remedy challenges in kitchens.” Last week, the Superintendent, in a state hyper aware of the physical and fiscal threats of contaminated or unsafe water, that a $2 million water station system would address water quality issues, and School Board Member Deborah Hunter-Harvill confirmed, in the wake of the tests: “We completed our community meeting, and we’ve taken down recommendations and suggestions to make certain our kids are safe.” But who will finance the corrections is unclear: School Board member LaMar Lemmons said he supports spending $2 million to fix the water problems, and he continues to blame the state for neglecting school buildings during a decade of state control, which ended in 2017: “Under the $2 billion (spent) for new school construction and renovation, they did a terrible job. There is no excuse for these schools to not have been maintained.” Supt. Vitti said the most practical, long-term, safest solution for water quality problems inside the schools would be water hydration stations in every building, system currently in use in Flint, Royal Oak, Birmingham and in Baltimore, he noted, adding, in an email earlier this week: “Moving forward, we will continue to use water coolers district-wide and are actively working through the bid processes to make a recommendation to the board for the use of hydration stations. This will occur within the next couple of weeks. The hydration stations would be installed in all schools by next school year and replace the need for water coolers.”

The health apprehension came in the wake of, just days before the first day of class at the beginning of this month, the Superintendents’ decision to shut off drinking water inside all 106 school buildings after finding, in an initial check at 6 schools, high levels of copper and/or lead. The checks themselves are costly: they require stations in every school, one per every 100 students, with a resulting tab of $2 million, after taking into account stations in faculty rooms and gymnasiums, according to Supt. Vitti, who stated he intends to provide information to the Detroit School Board to consider next month, noting that, if the funds are approved, the system could be installed in the next school year. The delay comes at a physical and fiscal cost: the school district is spending $200,000 on bottled water and water coolers for the next several months, with Supt. Vitti reporting the cause of the water contamination is likely the result of the aging of the system’s public infrastructure, as well as older plumbing systems, warning that lower usage of water due to smaller enrollment sizes can lead to copper and lead buildup. Because DPS’ schools were built for use by thousands of students, the sharp decline in attendance has adverse effects, and, as the Superintendent noted: “The reality is our schools are vastly different: some are new, some are old. Some have outdated systems, some have outdated sinks and plumbing,” adding he had consulted with the Governor’s office, the Michigan Departments of Environmental Health, as well as Dr. Mona Hanna-Attisha, whose critical leadership exposed the Flint lead water crisis, noting: “They have provided lessons on Flint. They gave the recommendation for me to think about piping in general and a long-term solution.”

Despite the tragedy and ongoing Flint related litigation, Michigan has no rules mandating that public school districts test for lead in their water supply. That means, according to the Superintendent, that there are even newer schools built within the last decade which have water-quality issues, noting these problems could be blamed on inadequate piping or non-code compliant piping, adding he had i initiated water testing of DPS’ 106 school buildings last spring, with the testing evaluating all water sources, from sinks to drinking fountains—but learning that the actual source of the contamination remains uncertain—albeit the school system’s widespread infrastructure problems are likely causes: last June, a district report said it would cost $500 million to repair its buildings. The district has said it needs $29.86 million to repair or replace plumbing, according to the facilities report, not related to the current water problems.

Physical & Fiscal Recoveries. Maria was the worst storm to hit Puerto Rico in nearly a century: nearly 3,000 Americans lost their lives, according to a study commissioned by the Puerto Rican government. The storm devastated the economy: thousands of small businesses have been shuttered; some big businesses are leaving, and, in a demographic omen, the exodus of the young, productive population has accelerated. Over the last year, the island’s economy has contracted by 7.6%, according to the latest fiscal plan prepared for PROMESA Board. 

American Inequality. Puerto Rico Gov. Ricardo Rosselló this week asked President Trump to recognize that “Puerto Rico’s territorial status is discriminatory and allows for the unequal treatment of natural-born U.S. citizens.” In his letter to the President, coming one year in the wake of the devastating fiscal and physical impact of Hurricane Maria, the Governor wrote that Puerto Rico’s territorial status had negatively affected post-Maria recovery efforts, noting: “As we revisit all that we have been through in the last year, one thing has not changed and remains the biggest impediment for Puerto Rico’s full and prosperous recovery: the inequalities Puerto Rico faces as the oldest, most populous colony in the world.”

Gov. Rosselló, who campaigned on the promise of promoting statehood for Puerto Rico, added in his letter that FEMA’s bureaucratic processes—processes in which Puerto Rico has no say—had worked to delay disaster recovery, writing: “The ongoing and historic inequalities resulting from Puerto Rico’s territorial status have been exacerbated by a series of decisions by the federal government that have slowed our post-disaster recovery, compared to what has happened in other jurisdictions stateside.” He requested that the President reconsider a State Department request to dismiss a case in the Inter-American Commission on Human Rights with regard to the U.S.’ international responsibility regarding Puerto Rico’s status—a case in which the Commission is investigating complaints that the United States is violating the human rights of its citizens in Puerto Rico, because they lack the same political rights as other U.S. citizens, including the right to vote for President unless they relocate to one of the states or the District of Columbia, and, because they have no voting representation in the Congress. The Governor added he felt “compelled to respectfully address the most egregious errors in a [State Department] missive,” which sought to dismiss Puerto Rico’s concerns, noting, especially, the Department’s reference to Puerto Rico as a “self-governing territory,” rather than what the Governor believes is really a “territorial colony,” noting that defining Puerto Rico as self-governing “ignores that Congress often uses its plenary powers over the territory to impose a multitude of federal laws without the Commonwealth’s residents having any voting representation in the U.S. Senate and only a single Resident Commissioner in the U.S. House of Representatives, who cannot vote on the floor of that chamber.” He also disputed the State Department’s assertion that Puerto Ricans are not “banned” from voting for President, writing: “[T]he only way for U.S. citizens from Puerto Rico to vote in such an election and be counted is to leave Puerto Rico. If that is not a ban, then what is?” He further wrote that the current governance upholds an “inherently racist logic that deem the people of Puerto Rico as inferior and unable to fully participate in the institutions of democratic governance.”

The letter also touches on two referenda which statehood supporters have won in Puerto Rico, but that have not been deemed official results by the Department of Justice. The most recent, in 2017, was boycotted by local opposition parties, and the ballot never received final DOJ approval.  While that referendum only had a 23% participation rate, the pro statehood vote was an overwhelming 97%.

Gov. Rosselló added his apprehension in the wake of the U.S. Justice Department’s non-approval of Puerto Rico’s 2017 referendum, noting that “after the legislature even amended the format of the vote to meet the recommendations of the U.S. Justice Department,” the Trump administration had nevertheless “failed” to certify the ballot. Thus, he noted that asking an international body to dismiss its complaint was tantamount to asking it to “turn a blind eye to an inconvenient truth, that Puerto Rico remains the unfinished business of American democracy.” Finally, Gov. Rosselló ended his letter with an appeal to President Trump’s leadership, asking him to “work together to abolish this century old territorial-colonialism once and for all: Statehood for Puerto Rico is not only about realizing Puerto Rico’s full potential. It is about America living up to its most noble values by creating a more perfect Union.” (The Trump Administration has advised the Inter-American Commission on Human Rights (IACHR) that if Puerto Ricans want to vote for President, nothing prevents the government of Puerto Rico from calling for a referendum to determine the position of its residents regarding candidates for the U.S. Presidency—a referendum which, however, would be symbolic.)

The apparent position of the Trump Administration reflects its views that Puerto Ricans, in addition to being able to participate in Presidential primary elections, they may also, according to Kevin Sullivan, the U.S. Deputy Representative to the Organization of American States (OAS), organize and vote in presidential elections. Thus the U.S. representative asked the inter-American tribunal to dismiss the independent complaints filed by lawyer Gregorio Igartua and former governor Pedro Rossello alleging that the lack of participation of Puerto Rico’s residents in Presidential and Congressional elections represents a violation of their human and civil rights. Secretary Sullivan, who asserted that the government of Puerto Rico maintains a “broad” self-government, in a recently disclosed communication from the end of last June, maintained that within the colonial relationship with the U.S. territory, there are some electoral processes related to the federal government. Within this group of electoral processes, he thus sought to highlight as significant the ability for Puerto Ricans to vote in those for presidential primaries, as well as for its non-voting delegate in the U.S. House of Representatives.  Nevertheless, Secretary Sullivan recognized Puerto Ricans’ first vote in favor of statehood via the June 2017 plebiscite, describing that vote as having launched a process of requesting statehood before Congress, which outcome the “United States cannot predict.”

Puerto Rico Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s non-voting Member of Congress, said she would have preferred the recognition of the undemocratic nature of the territorial status, and that statehood remains as “the only viable political status with a relationship with the United States, not territorial and not colonial.”

Puerto Rico Progressive Party representative Jose Aponte noted that it seemed unfortunate “at this point” that the federal government intends to develop some theory with regard to Puerto Rico’s self-government, especially in the wake of enacting the PROMESA law, thereby imposing the PROMESA Board, likening it to colonialism, and emphasizing what he views as Secretary Sullivan’s specious claim in which he advises Puerto Rican leaders that Puerto Ricans, “if they wish…are also free to move to any state,” noting: “It is hypocritical to hide the fact that they have a regime in which we cannot govern with the faculties and minimum rights that any human being deserves.”

Promising Good Gnus? Even if perceived by many Puerto Ricans as colonial overseers, the PROMESA Board, acting in a quasi-Emergency Manager role, such as Kevyn Orr did in putting together and managing the plan of debt adjustment for Detroit, is offering some hope for fiscal promise, as the Board is poised to lift its fiscal forecast and predicting a budget surplus in the wake of the recovery from the devastating Hurricane Maria, predicting a cumulative surplus, prior to debt payments, of in excess of $20 billion through 2058, or 500% greater than its quasi plan of debt adjustment certified by the PROMESA Board last June. PROMESA Board Executive Director has indicated that plan will be certified “in the coming weeks,” adding: “The changes in the fiscal plan will come from new data in actual FY18 revenue and expense figures, budget to actuals, and disaster spending.” Earlier last summer, the PROMESA Board, in certifying the most recent fiscal plan, had estimated that Puerto Rico would have a cumulative surplus of about $4 billion over the next four decades; the new projection, incorporating higher than expected disaster aid and tax receipts, would lift that projection to more than $20 billion.

The End of State Usurpation of Local Elected Authority? Uneasy shelter from the Fiscal and Physical Storms?

August 31, 2018

Good Morning! In this morning’s eBlog, we consider the end of the State of Michigan to usurp local authority via the appointment of an Emergency Manager, the safety of school drinking water has become an issue in Detroit—especially after Flint, and we consider the extraordinary revisions in the projected Hurricane Maria death toll in Puerto Rica—and the White House response.

Protecting a City’s Children. Detroit Public School Superintendent Nikolai P. Vitti has directed turning off drinking water across the district’s 106 schools  in the wake of after discovering higher-than-acceptable levels of copper and lead in some facilities, with Superintendent Vitti noting his decision came out of caution “until a deeper and broader analysis can be conducted to determine the long-term solutions for all schools.” he said in a statement. Test results found elevated levels of lead or copper in 16 out of 24 schools which were recently tested. Supt. Vitti stated: “Although we have no evidence that there are elevated levels of copper or lead in our other schools where we are awaiting test results, out of an abundance of caution and concern for the safety of our students and employees.” His actions, no doubt affected by fiscal and water contamination in Flint, came even as Detroit officials and the Great Lakes Water Authority sought to assure residents that water provided by the authority is safe to drink: they pointed to the city’s aging infrastructure as the problem.  Superintendent Vitti said he will be creating a task force to determine the cause of the elevated levels and solutions, noting he had initiated water testing of all 106 school buildings last spring to ensure the safety of students and employees. Water at 18 schools had been previously shut off. He added: “This was not required by federal, state, or city law or mandate: This testing, unlike previous testing, evaluated all water sources from sinks to drinking fountains.” The District does not plan to test students: a spokesperson for the school system noted: “Dr. Vitti said…he has no evidence at all that children have been impacted from a health standpoint.”

Fiscal & Physical Challenges: Earlier this summer, Supt. Vitti released details from a facilities review which had determined the school district would need to spend $500 million now to fix the deteriorating conditions of its schools—an effort for the system projected to cost as much as $1.4 billion if there is a failure to act swiftly, with the Administrator pointing to the failure by former state-appointed emergency managers to make the right investments in facilities while the system was preempted of authority and state-appointed emergency managers from 2009 to 2016 failed to make the right investments, sending what Dr. Vitti described as “the message to students, parents and employees that we really don’t care about public education in Detroit, that we allow for second-class citizenry in Detroit.” The remarks raised anew questions with regard to Michigan’s governance by means of gubernatorially chosen Emergency Managers.  

Superindent Vitti said he had notified Mayor Mike Duggan of his decision to shut off the drinking water, and a spokesperson, John Roach, noted: Mayor is “fully supportive” of the approach Supt. Vitti has taken, adding: “We will be supporting Dr. Vitti in an advisory capacity through the health department and the DWSD (Detroit Water and Sewerage Department) has offered to partner with the district on any follow-up testing that needs to be done.” At the same time, the Great Lakes Water Authority issued a statement in an effort to assure “residents and customers of GLWA’s regional system that they are not affected by the lead and copper issues,” noting: “Aging school infrastructure (i.e. plumbing) is the reason for the precautionary measure of providing bottled water,” adding water treated by the authority meets and surpasses all federal and state regulations, albeit adding: “A task force will be formed consisting of engineering and water quality experts” to will help the district “understand the cause and identify solutions.” (Initial results this past week showed elevated levels of copper, lead or both at one or more water sources in 16 of 24 school buildings, according to the statement. Water bottles will be provided at the schools until water coolers arrive. The district also found water-quality issues in some schools in 2016.)

The incident in Detroit raises a host of fiscal and governance issues—especially in the wake of the tragedy in upstate Flint—with, in both cases, the state’s history of appointing Emergency Managers to preempt the authority of local elected leaders. In the case of DPS, Dr. Vitti has contacted the Mayor, the Governor, and a task force of engineers and water experts to understand the cause and possible solutions; Superintendent Nikolai P. Vitti opted to close the water taps out of caution “until a deeper and broader analysis can be conducted to determine the long-term solutions for all schools,” with the decision coming just days before the school district’s 106 schools are scheduled to open next Tuesday. (Water bottles will be provided at the schools until water coolers arrive.) Water officials have blamed aging infrastructure as the cause of the public safety threat. Now Dr. Vitti has asked Mike Duggan and Gov. Rick Snyder to convene a task force of engineers and water experts to determine the cause of the elevated lead and copper levels, and to propose solutions. 

Importantly, it seems the public safety risk is limited to Detroit’s public schools: water officials released a statement Wednesday assuring residents and customers of the Great Lakes Water Authority and the Detroit Water and Sewerage Department that they are not affected by the lead and copper issues at the school district, noting: “Aging school infrastructure (i.e. plumbing) is the reason for the precautionary measure of providing bottled water…The water at GLWA’s treatment plants is tested hourly, and DWSD has no lead service lines connected to any DPSCD building. The drinking water is of unquestionable quality.”

Nevertheless, the threat to public safety—combined with the heartbreaking, long-term threats to Flint’s children from that city’s public water contamination—could add further challenges to Detroit’s recovery from the nation’s largest-ever chapter 9 municipal bankruptcy: a critical part of the city’s plan of debt adjustment was to address its vast amassment of abandoned houses by enticing young families with children to move from the suburbs back into the city—an effort which had to rely on a perception of the quality and safety of its public schools. Now, for a system itself recovering from bankruptcy, DPS faces a bill of at least $500 million to repair its buildings: approximately 25% of the system’s school buildings are in unsatisfactory condition and another 20%are in poor condition, according to the report. The district noted nearly $223 million of high-priority repairs involving elevators and lifts, energy supply, heating and cooling systems, sprinklers, standpipes, electrical service and distribution, lighting, wiring, communications, security system, local area networking, public address and intercoms, emergency lights and plumbing fixtures.

Mayor Duggan’s office and the Detroit Health Department Wednesday issued a joint statement supporting “the approach Dr. Vitti has taken to test all water sources within DPS schools and to provide bottled water until the district can implement a plan to ensure that all water is safe for use,” noting: “We will be supporting Dr. Vitti in an advisory capacity through the health department and the DWSD has offered to partner with the district on any follow-up testing that needs to be done. We also will be reaching out to our charter operators in the coming days to work with them on a possible similar testing strategy to the voluntary one Dr. Vitti has implemented.”

Restoring Municipal Authority. Mayhap it is ironic that Michigan’s relatively rare authority for the Governor to appoint an emergency manager to preempt local elected authority reflects the uneven results of the program—a program I well remember from meeting with Kevyn Orr, whom Gov. Rick Snyder had appointed as Emergency Manager  (EM) to preempt all governing authority of Detroit’s Mayor and Council, at the Governor’s office in Detroit on the first day the city entered the largest municipal bankruptcy in U.S. history—and after the grievous failure of a previous gubernatorially-appointed Emergency Manager to help the Motor City. The very concept of state authority to appoint a quasi dictator and to preempt any authority of local leaders elected by the citizens, after all, feels un-American.

Yet, from that very first moment, Mr. Orr had acted to ensure there was no disruption in 9-1-1 responses—and that every traffic and street light worked. Unlike the experience under an Emergency Manager in Flint, Mr. Orr was intently focused on getting Detroit back on its fiscal and physical feet—and restoring elected leadership to today’s grieving city.

Now, as of this week, Michigan no longer has any local government under a state appointed emergency manager—and observers are under the impression the state program to preempt local authority may be quietly laid to rest. It has, after all, been a program of preemption of local democracy with untoward results: while it proved invaluable in Detroit, it has proven fiscally and physically grievous in Flint, where it has been blamed for contributing to Flint’s water contamination crisis. Indeed, two of Flint’s former EMs have been criminally charged in connection with the crisis. Their failures—at a cost of human lives, appears to have put the future of state pre-emption of local governing authority—may well make state officials leery of stepping in to usurp control a local government, even as some municipal market participants and others see state oversight programs as a positive credit feature. The last municipality in Michigan to be put under a state-imposed emergency manager was Lincoln Park—an imposition which ended three years ago. Michigan Treasury spokesperson Ron Leix noted: “Each situation that led to the financial emergency is unique, so I can’t give a broad-brush assessment about how the law will be used in the future…For the first time in 18 years, no Michigan municipality or school district is under state financial oversight through an emergency manager. This is really about the hard work our local units of government have achieved to identify problems and bring together the resources needed to problem-solve challenging financial conditions.”

In Michigan, the emergency manager program was authorized twenty-eight years ago, granting the governor authority to appoint a manager with extensive powers over a troubled municipality or school district. By 2012, Michigan voters repealed the emergency manager program in a referendum; notwithstanding, one month later Gov. Snyder and legislators re-adopted a similar intervention program—under which local governments could opt among three new options in addition to the appointment of an emergency manager who reports directly to the Governor: chapter 9 municipal bankruptcy, mediation, or a consent agreement between the state and the city to permit local elected officials to balance their budget on their own. (In Michigan, municipalities which exit emergency management remain under the oversight of a receivership transition advisory board while executive powers are slowly restored to elected mayors and city councils.)

The state intervention/takeover program had mixed success, according to Michigan State University economist Eric Scorsone, who noted: “In some cases it’s worked well, like Allen Park where the situation was pretty clear-cut and the solution was pretty clear as to what needed to be done.” (Allen Park regained full local control of its operations and finances in February of 2017 after nearly four years of state oversight. Last June, S&P Global Ratings upgraded the city to investment-grade BBB-plus from junk-level BB, crediting strong budgetary performance and financial flexibility more than 12 months after exiting state oversight. But the appointment, in Flint, of emergency managers demonstrated the obverse: the small city had four emergency managers: Ed Kurtz, Mike Brown, Darnell Earley, and Gerald Ambrose—where the latter two today are confronted by charges of criminal wrongdoing stemming from the lead contamination crisis and ensuing Legionnaire’s disease outbreak that claimed 12 lives. It was the gubernatorially appointed Mr. Earley who oversaw the decision to change Flint’s water source to the Flint River in April 2014 as the city awaited completion of a new pipeline—a decision with fatal human and fiscal consequences. Indeed, two years ago, Gov. Snyder named a task force to investigate the Flint crisis and review the Emergency Manager law—a review which recommended the Governor consider alternatives to the current approach that would engage local elected officials. (No action has been taken to change the law.)

Because only a minority of states have authorized chapter 9 municipal bankruptcy, there is no uniform state role with regard to city or county severe fiscal distress and bankruptcy. Jane Ridley, senior director in the U.S. public finance government group at S&P Global Ratings and sector lead for local governments, has noted that state oversight is considered as part of the rating agency’s local GO criteria: “We do think that having a state that has oversight, especially if it’s a proven mechanism, can be very helpful for struggling entities…If they ended oversight entirely it would likely have an impact on the institutional framework scores and their sub scores.” A Moody’s analyst, Andrew Van Dyck Dobos, noted: “While an EM is in most cases is a last option, the ability for it to implement some policies and procedures is going to be typically viewed, at least at the onset, as a credit positive.”

Ending Shelter from the Storm. U.S. District Judge Timothy Hillman yesterday ruled that temporary housing given to hundreds of Puerto Ricans displaced by Hurricane Maria will end next month, meaning Puerto Ricans will be forced to check out of temporary housing provided by Federal Emergency Management Agency (FEMA) as part of the agency’s Transitional Sheltering Assistance (TSA) program. Judge Hillman, in his decision, wrote: I strongly recommend the parties get together to find temporary housing, or other assistance to the Plaintiffs and other members of the class prior to that date,” with his decision coming the same week Puerto Rico updated its official death toll from Maria to 2,975, a vast increase from the original count of 64. Judge Hillman’s decision also comes about two months after a national civil-rights group filed a lawsuit which had sought a restraining order to block FEMA from ending the program. The group, LatinoJustice, argued in the suit that it would lead to families’ evictions. It also came as, two days ago, President Trump met with reporters to respond to questions with regard to the mounting death toll—a session in which the President told the reporters: “I think we did a fantastic job in Puerto Rico.” Some 1,744 Puerto Rican adults and children were in the FEMA program when the lawsuit was filed. U.S. District Judge Leo T. Sorokin temporarily extended the program to the end of last July, and subsequently extended it until today—and then, once more, to September 14th.

Now, the White House is responding to a new estimate which increases the number by about 33% more to 2,975 after an independent study. White House spokeswoman Sarah Huckabee Sanders claimed in a statement that the back-to-back hurricanes which hit last year prompted “the largest domestic disaster response mission in history.” She added that President Donald Trump “remains proud of all of the work the Federal family undertook to help our fellow citizens in Puerto Rico.” She also says the federal government “will continue to be supportive” of Gov. Ricardo Rossello’s accountability efforts and says “the American people, including those grieving the loss of a loved one, deserve no less.” The new estimate of 2,975 dead in the six months after Maria devastated the island in September 2017 was made by researchers with the Milken Institute School of Public Health at George Washington University. It was released Tuesday.

Popping the Cork in Corktown?

August 14, 2018

Good Morning! In this morning’s eBlog, we consider some of the fiscal and physical challenges and changes to one of Detroit’s oldest neighborhoods, Corktown, before venturing to the warm Caribbean waters to witness incipient signs of fiscal and physical revival in Puerto Rico.

Motor City Revitalization. The City of Detroit, first settled in 1701 by French colonists, was the first European settlement above tidewater in North America, founded as a New France fur trading post, before becoming, by 1920, a world-class industrial powerhouse and the fourth-largest U.S. city. One might describe it as a unique municipal center of nations, as the first Europeans to settle there were French traders and colonists from the colony of La Loisiane, today’s New Orleans—traders who were forced to vie with the powerful Five Nations of the League of the Iroquois—setting the stage for what became the Beaver Wars in the 17th century. The greater Detroit metropolitan region of those times flourished as a center of the nation’s fur trade, so that the Crown’s administration of New France offered free land to colonists as a means to attract families to the region—a perennial challenge, and one of the city’s greatest fiscal challenges today. It was in late 1760 that Fort Detroit was surrendered to the British, in the wake of the fall of Quebec—so that control not just of the Detroit region, but of all French territory east of the Mississippi River, was formally transferred to England via the 1763 Treaty of Paris. By 1760, a British census counted 2,000 hardy souls in the city in the wake of the Seven Years’ War—a head count which, as would happen in this century, dropped 30% by 1773, a decade after the English had reserved the territory, under the Royal Proclamation Act of 1763 for the Indians—land eleven years later transferred to Quebec. In a census taken during the American Revolution, Detroit’s population had soared to 2,144, making the city the third-largest city in the Province of Quebec.

Today, Corktown is the oldest surviving neighborhood in Detroit, with the neighborhood named for its early Irish immigrants, who by the early 1850s, made up half of the residents of the 8th Ward (which contained Corktown), but it is a part of the city which has been reduced in size over the years by dint of numerous urban renewal projects, the construction of light industrial facilities, and the construction of the Lodge Freeway. What remains of the residential section is listed on the National Register of Historic Places. It is a neighborhood slated for change in this time of radical changes wrought by the emergence of the self-driving car era—so the Ford Motor Co.’s plans to renovate the historic Michigan Central Depot has raised apprehensions with regard to the potential impact such a large-scale project could have on the area and surrounding neighborhoods with regard to affordability and diversity—enough of a concern that Detroit’s leaders and officials have commenced what is to be a yearlong process to gather feedback from the community regarding the future of the neighborhood. That municipal effort is coming in tandem with a separate effort by Ford to collect input on its proposed plans to revitalize its iconic 100-plus-year-old historic building.

Officials with the city and Ford say they are committed to working with the community as they navigate their plans. The company, on June 20th, had announced its intentions to purchase the abandoned Michigan Central Station, a hulk of a building just blocks from where Kevyn Orr had his office on his first day as the City’s Emergency Manager charged with taking Detroit into the nation’s largest ever chapter 9 municipal bankruptcy—and fashioning a plan of adjustment to be approved by the U.S. Bankruptcy Court. That 18-story building, which starred as a set piece for the flick Batman v. Superman, has been described as representing a “deep, complex wound…a physical reminder of what the city was, and what it many thought it would never be again.”

Simultaneously, the city is seeking to create a strategic framework for the Greater Corktown neighborhood to address the area’s potential for growth, even as it seeks to preserve its heritage and integrity, officials say—a framework which is to detail both a short-term implementation plans and long-term goals for the neighborhood’s development: Detroit’s Planning and Development Department expects, before the month is out, an RFP for a consultant to conduct a series of community meetings in Greater Corktown, with said selection to be announced by the end of next month: the study itself is projected to lead to a recommendations of a final framework in a year.

Not Self-Driving. The city’s plans for Greater Corktown, just one of the city neighborhoods in various stages of planning, was in the planning stage prior to Ford’s depot announcement, creating some governing challenges, or, as John Sivills, the project manager with Detroit’s Planning and Development Department, put it: “The Ford announcement certainly does add a great sense of urgency to it so we can have a plan in place rather than tail-wagging-dog scenario.” That is, as he added: “That the city can have a plan in place such as bring in Ford and provide for inclusionary growth.” Similarly, his colleague, Steve Lewis, central design director for Planning and Development, noted that Detroit’s plan will craft “a vision for the future of the neighborhood that either by optics or by reality is not seen as being dictated by Ford.” Their study is expected to address challenges and opportunities for a number of issues, including zoning, landscape, historic preservation, and housing development.

Will They Drive in Tandem or Self-Drive? Ford is planning to create a 1.2 million-square-foot campus with its anchor at the Michigan Central Depot, with plans to occupy the depot by 2022: the project will include the Grand Hall, which will be open to the public, along with retail space: the 18-story tower will have office space as well as residential space on the top two floors. In addition, Ford intends to develop other buildings on the campus, including the former Detroit Public Schools Book Depository, where Ford plans to house its autonomous vehicle business on the Corktown campus. Ford is, at the same time, seeking community engagement for its Corktown expansion, with the company asserting: “Detroit and Corktown, North Corktown, there’s opportunity and so much potential, and they’re already doing such amazing work that Ford can really just be a platform to shed a light on the work that they’re doing…Maybe help them scale.”

Indeed, scale, as in any city, is an issue: because of the large-scale of the project, it falls under the city’s Community Benefits Ordinance, one approved by Detroit voters in November of 2016, which targets developments worth at least $75 million, if the development gets $1 million or more in property tax abatements or $1 million or more in value of city property sale or transfer: under said ordinance, a neighborhood advisory council is assembled to provide feedback in meetings during the ensuing two months, with the advisory council subsequently working with Ford to create a community benefits agreement.

To date, Detroit City Council President Brenda Jones has selected Hubbard-Richard resident Aliyah Sabree, a Judge in the 36th District Court; City Councilwoman Janee Ayers chose Sheila Cockrel, a Corktown resident and former Councilwoman. The community elected Jerry Paffendorf, co-owner of Loveland Technologies, and Heather McKeon, an interior designer with Patrick Thompson Design. The Detroit Planning and Development Department will name four appointees, and City Councilwoman Raquel Castañeda-López will name one appointee.

Concurrently, Ford has feedback boards and comment boxes in its Ford Resource and Engagement Center, where questions posed include: “Where do you go to get ___ in your neighborhood (nails, hair, dry cleaning, etc.?); What are the top three things you want to see changed in your neighborhood?”; and “Who is an unsung hero, organization and/or business in your neighborhood?” The company reports that it has already received feedback from excitement to issues of apprehension on issues ranging from housing, to jobs, to traffic, and to culture,” adding: “We really love that the community values the diversity of the neighborhoods from Corktown, North Corktown, and Southwest Detroit. We’re really understanding the importance of that. We’re also understanding the importance of workforce. Recognizing that there’s not only potential construction jobs, but also long-term what are some ways we can build a pipeline or clear pathways for some of the other jobs that may be available in the future. Technology jobs, things of that nature. Jobs around (electric and autonomous vehicles.).”

Some have criticized aspects of the Community Benefits Ordinance and the Neighborhood Advisory Council process. Alina Johnson, a resident of the nearby Hubbard-Richard neighborhood, which will also be impacted by Ford’s project, said she feels residents should be trained in advance on advisory council work in order to be most effective on a tight timeline—or, as she put it: “Right now, the main concern is making sure that the folks who have been selected will be able to be inclusive and able to communicate to the public and serve everyone and not necessarily their community in terms when they’re discussing benefits by those impacted by the train station development.”

Blowing Fiscally Back. Despite a double fiscal and physical whammy of hurricanes, and being in the beginning of this year’s hurricane season, Puerto Rico FY’2017 General Fund revenue came in 1.5% higher than budgeted: total revenue was $9.31. Puerto Rico Secretary of Treasury Teresita Fuentes noted: “The level and behavior of tax collections during the past fiscal year in comparison with other years is considered unusual due to the economic effect of hurricanes passing through the island.” That is a sharp fiscal blowback to FAFAA Executive Director Gerardo Portela Franco’s warning last December 5th that he expected Puerto Rico’s fiscal year General Fund revenues to be 25% less than budgeted.  Secretary Fuentes reported that unexpectedly high revenues from April to June had allowed the government to exceed the budgeted number, while Puerto Rico Secretary of the Interior Raul Maldonado noted: “To a large extent the [revenue] increase is attributed to the temporary economic activity of companies associated with recovery tasks and the flow of insurer and federal government money after the hurricanes.” He noted that the greatest increase was derived from the island’s corporate income tax—some $260 million; however, Puerto Rico’s sales and use tax revenues returned $26 million less than projections from the start of the year. Secretary Fuentes said that many businesses had either been closed or had operated partially in the weeks following Hurricane Maria and that in the period the sales tax on restaurant food was temporarily eliminated; however, the sales and use tax revenue rebounded in the last quarter, with Secretary Fuentes pointing in particular to hardware stores and department store sales.

Back to Escuela.  Puerto Rico Governor Ricardo Rosselló Nevares has announced the territory will provide more than 2,000 regular slots to temporary teachers—a step by which he hopes to alleviate the recurring challenge of recruiting educators at each school start—as teachers are often attracted to more generous salaries and benefits on the mainland.  His stated goal is for these educators to be recruited under 10-month contracts by September:We are going to make an effort to convert thousands of temporary places in permanent seats in the education system.” The Governor noted that his action is intended to make it possible to clarify the system and end current uncertainties which have left teachers in the dark with regard to whether she or he still has a job—an apprehension not just of teachers, but also parents, who are confronting their own choices with September looming.

Two years ago, in the midst of an election year, the Governor acted to convert some 1,519 temporary teachers to become full-time employees, noting, then: “You have teachers who were not sure, and now they are going to have certainty, and you have a school system that did not have visibility, now we are building that visibility,” adding that, in his view, this governing decision would not have an adverse impact on Puerto Rico’s budget—and, ergo, not trigger PROMESA Oversight Board fiscal preemption: “If there is any philosophical consideration that they may have, that is another thing. For us, it gives certainty to the system, particularly in the area of needs that we are going to have to supply.” The Governor explained that the measure was possible thanks to two fundamental actions: the creation of an electronic platform which has facilitated the ability of Education Secretary Julia Keleher to assess where staff is needed, especially with regard to what levels and subjects: that is, via the human resources platform, the Secretary can assess, as the Governor noted, the educational organization of each campus, including how many teachers are transient and what subjects they teach. This could be a valuable fiscal step, because online registration will facilitate the ability to confirm the number and location of students—a critical step for the completion of the school consolidation process.

Sec. Keleher has explained that the system will take into account, first, the educators who occupy places where recruitment has proved difficult, such as Special Education, English, and Math—noting the human and fiscal challenges: “You have to honor the transient teacher. It does not seem fair or correct in terms of the reality we want to offer. This is not a good deal for a person who is giving 100% for their students: The Secretary noted the determination is aligned with the anticipated tax revenues. Her request, this year, is for over 5,500 transitory positions—or, as she notes: “The idea is to have the teachers ready for the start of classes, the week before they know where they are going.” Puerto Rico’s statute 85-2018, the Law on Educational Reform “establishes that the Department, in areas of difficult recruitment such as teachers of English, Mathematics, Physics and Chemistry, will promote the permanence of the same within the term of one year, if fiscal availability of the square and of being the same vacancy.”

The Human Costs of Misgovernance

August 7, 2018

Good Morning! In this morning’s eBlog, we consider the awful physical, fiscal, and human challenges of municipal governance.

Human Costs of Misgovernance. In the ongoing trial in the Flint water case, Genesee District Judge William Crawford yesterday heard oral arguments in the case of Dr. Eden Wells, the state’s chief medical executive. Judge Crawford said he will make his decision only after all transcripts are completed and after attorneys are given seven days to file additional briefs with the court, meaning that Dr. Wells will likely have to wait several weeks before she learns whether or not she will have to stand trial on charges, including involuntary manslaughter, related to the Flint drinking water crisis—a trial where she faces charges of manslaughter, related to the Flint water crisis. Yesterday, Special prosecutor Todd Flood told Judge Crawford that Dr. Wells had a duty under Michigan state law to warn the public of Legionnaires’ outbreaks in the area during the 17 months that the City of Flint used the Flint River as its source of water—a source turned to under the direction of a state-appointed emergency manager, rather than the city’s elected leaders. The trial proceeded in the wake of the dismissal of Michigan Gov. Rick Snyder from the suit after, last Wednesday, U.S. District Judge Judith Levy had ruled that the suit filed on behalf of residents and businesses did not claim that Gov. Rick Snyder was aware of risks when the city switched to Flint River water in 2014—unlike other defendants who testified they knew and disregarded the hazards involved. The pending case is over claims filed on behalf of 12 Flint residents and three businesses: it names twenty-seven defendants, including state and local agencies and officials. The plaintiffs are asking the Court to establish a Flint Victims Compensation Fund, providing the affected Flint residents with medical and financial assistance. Should the state lose, such a decision could pose a financial burden for the recently upgraded state’s credit rating. Moreover, such a decision could have adverse implications for Michigan’s Emergency Manager law for distressed local governments.

Special Prosecutor Todd Flood testified: “The defendant neglected or refused to perform that duty. She knew about it…it was reasonably foreseeable that someone was going to get sick‒that someone was going to get harmed,” arguing that state officials, four of whom face criminal charges related to the Flint water contamination, and Dr. Wells, in particular, was required by her official position to halt the flow of the contaminated water she knew could create a threat.  

The arguments deemed Dr. Wells a hero during the water emergency, in no small part because of her giving credence to the work of Dr. Mona Hanna-Attisha, the Hurley Medical Center pediatrician who had studied the blood levels of Flint’s children—and concluded that the percentage of elevated blood levels doubled in the wake of the state decision to change the source of the city’s drinking water. Dr. Wells, Michigan Department of Health and Human Services Director Nick Lyon, and Gov. Snyder ultimately provided public notice of the outbreaks of Legionnaire’s disease in the city related to the Flint water contamination; however, that notice was not given until January of 2016—long after the fatal damage to human health had occurred—and months after the city’s reliance on the contaminated water source had ceased—reliance which resulted in at least 10 deaths—or, as we previously noted, U.S. Judge Judith Levy’s opinion finding that “some government officials disregarded the risk the water posed, denied the increasingly clear threat the public faced, protected themselves with bottled water, and rejected solutions that would have ended the crisis sooner.  

The human health and safety crisis arose from a governing issue: the State of Michigan’s reliance on substituting state appointed emergency managers over municipal elected leaders. Thus, Gov. Ric Snyder, named Darnell Earley as Flint’s emergency manager—displacing the city’s Mayor and City Council—in September of 2013—at a time, according to some to the document before the court in which the plaintiffs allege the defendants knew, prior to the fatal drinking water switch, that the Flint River had been was professionally evaluated and rejected as a drinking water source, with the decision to source water from the Flint River made on April 25, 2014, after the city’s contract with Detroit to receive Lake Huron water ended and the city was awaiting the completion of the new Karegnondi water pipeline—a $285 million pipeline to provide Lake Huron water to Flint and Genesee County. Flint has since entered into a long-term primary water agreement with the Great Lakes Water Authority. (Two and a half years ago, Mr. Earley was one of fourteen officials named as defendants in a class action lawsuit brought in federal court by Flint residents, a complaint alleging that “Defendant’s conduct in exposing Flint’s residents to toxic water was so egregious and so outrageous that it shocks the conscience,” and that: “For more than 18 months, state and local government officials ignored irrefutable evidence that the water pumped from the Flint River exposed (users) to extreme toxicity.” The suit also named Michigan Gov. Rick Snyder, former Flint Mayor Dayne Walling, and former Flint Emergency Manager Jerry Ambrose.

Fiscal, Physical, & Human Challenges of Municipal Governance

August 6, 2018

Good Morning! In this morning’s eBlog, we consider the awful physical, fiscal, and human challenges of municipal governance.  

An Enduring State of Emergency. Governor Rick Snyder of Michigan was in West Michigan yesterday morning: he was touring a water system construction site in Parchment, a municipality in Kalamazoo County of less than 2,000. The construction here includes a new pressure reduction system, which will allow Parchment to transition to the City of Kalamazoo water system. The city’s water supply is being flushed out, and the city of Kalamazoo will provide water to Parchment and Cooper Township residents. The transition, raising eerie memories of a previous transfer by the Governor in Flint, comes in the wake of finding that water in Parchment was contaminated with man-made chemicals called perfluoroalkyl and polyfluoroalkyl substances (PFAS). City residents were warned to stop using the water due to the contamination on July 26th, after water tests showed the PFAS level in Parchment was 20 times higher than the EPA recommended amount of 70 parts per trillion. A local state of emergency has been set for Parchment, and neighboring Cooper Township, after, just last week, Gov. Snyder declared a state of emergency for Kalamazoo County.

Fear for children—fear that the impact of Flint’s lead-tainted water could last decades—and distrust in the state and local governance to make decisions affecting children whose development could be hurt, is, unsurprisingly causing generations of residents to lose trust in government. It is, of course, at the same time tainting the assessed property values of homes in cities in Michigan so adversely affected for decades to come by state-imposed emergency managers. What parents would wish to move to a municipality knowing the drinking water would have long-term devastating consequences for their child?

What are the fiscal challenges for municipal elected leaders—especially in a state where the long-term physical and fiscal damages were wrought by state-imposed emergency managers? What do the long-term health effects for children exposed to the lead-tainted water mean for a municipality with regard to legal vulnerability and to financing a long-term recovery? At a conference at the end of last week, Detroit News reporter Leonard Fleming noted: “They don’t trust government officials: It could take a generation or two for residents to trust the city and state again and its water.”

At the conference, Dr. Lawrence Reynolds, who was on the Governor’s Flint task force, said some health officials have tried to minimize the effects of the water on residents; nevertheless, he warned there are babies who drank lead-tainted formula for six to nine months who could experience serious disabilities later in life: “It was a civil rights crisis, a human rights crisis, an environmental racism, and there is no excuse for what was done.” Moreover, there appears little end in sight: Cynthia Lindsey, an attorney representing Flint residents in a class-action lawsuit, said it could take three to four years for the legal process to play out. That is, Flint is held hostage by decisions imposed upon it by a state-imposed emergency manager, and now the question of who will finance—and how long will it take to replace all the city’s pipes, provide it access to safe and affordable drinking water, and long-term health care appear to be decisions to be made in a courtroom.

The fateful decision that led to the lead water contamination was not a municipal decision, but rather one made by the state in 2011 via a state imposed emergency manager, Darnell Earley. That was a decision which led to the finding that hundreds of children have since been diagnosed with lead poisoning; a dozen Flint residents have died of Legionella from drinking river water. Today, some 15 state public employees have been indicted by Michigan Attorney General Bill Schuette for their roles in the water crisis—indictments on charges ranging from obstructing an investigation to involuntary manslaughter.

Now Attorney General Schuette is running to replace the term-limited Governor Rick Snyder. Some in the state claim the candidate is using the Flint charges to “make himself look like a hero.” In the Democratic gubernatorial primary, ex-state Senator Gretchen Whitmer (D-Lansing) has released a plan to speed the replacement of lead pipes, while former Detroit health director Abdul El-Sayed received the endorsement of “Little Miss Flint,” the student whose letter brought former President Barack Obama to the community.

Former Flint Mayor Dayne Walling, who lost his first race for that position in 2009 to a car dealer named Don Williamson, but, when former Mayor Williamson resigned to avoid a recall for lying about the city’s budget deficit, was elected in a special election to replace him: he was elected after promising “to transform Flint into a sustainable 21st-century city with new jobs, safe neighborhoods, great schools and opportunity for all.” Candidate Walling reports that his own trust in government is lower than it was prior to the city’s drinking water contamination; now he claims he wants to take the hard lessons he has learned to the place he sees as the major source of Flint’s problems: the state capitol in Lansing.

Representation could matter: over the last four decades, assessed property values fell more than 40 percent—and with them property tax receipts. That led to, after the city’s police union’s refusal to accept pay cuts, laying off a third of the police force—meaning that for a period of time, the city, with about 100,000 residents, was sometimes able to put only six officers on the street at one time. Unsurprisingly, murders nearly doubled between 2009 and 2010—a year when Flint had the nation’s highest murder rate—and the year when Gov. Ric Snyder announced he was appointing an emergency manager, Ed Kurz, to preempt local control and authority in an effort to eliminate the city’s $10 million general fund deficit. Just prior to that preemption of local authority, the Flint City Council had endorsed a plan to detach the city from the Detroit water system, due to what the Council believed to be unaffordable rates, and join the new Karegnondi Water Authority, which planned to build a pipeline from Lake Huron. Mr. Kurtz authorized an engineering study to prepare the city’s water treatment plant to process Flint River water instead. A sequential state-appointed Emergency Manager, Darnell Earley, implemented the changeover—a fateful decision with precipitous health and human safety and fiscal consequences. Mr. Earley has been charged with false pretenses, conspiracy, willful neglect of duty, misconduct in office, and involuntary manslaughter—charges which will be aired next Monday at a hearing, where he is likely to maintain That the City Council had decided to draw from the Flint River until the new pipeline was completed, and that he was, therefore, only executing their orders. (Mr. Kurz, who has not been charged, has previously testified before Congress that his responsibility was “strictly finance,” thus, he bore no responsibility to ensure “safe drinking water.”

Today, Mr. Walling, currently working as a public policy consultant for Michigan State University, notes he believes there ought to be changes in the relationship between Flint and the State of Michigan, noting: “The distress of Michigan’s cities, starting with Detroit and Flint, is a direct result of policies made in Lansing,” adding: “The only good news is that policy changes at the state level can help restore Michigan’s once-great cities.”

According to a Michigan State University 2015 study: “Beyond State Takeovers: Reconsidering the Role of State Government in Local Financial Distress, with Important Lessons for Michigan and its Embattled Cities,” by Joshua Sapotichne, Erika Rosebrook, Eric A. Scorsone, Danielle Kaminski, Mary Doidge, and Traci Taylor; the State of Michigan has the second-most stringent local taxation limits in the nation—limits which impose what they term “tremendous pressure on local lawmakers’ ability to generate critical revenue.” The fiscal pressure on the state’s local governments has been intensified by decisions to divert revenue sharing, the former program intended to address fiscal disparities, to instead enable state tax cuts. The decision disproportionately impacted the state’s most fiscally challenged municipalities: Flint’s loss was $54 million; Detroit lost $200 million, contributing to its 2013 chapter 9 municipal bankruptcy. Indeed, the state decision indirectly contributed to state imposition of nine emergency managers.

Thus, unsurprisingly, former Mayor Walling has a list of the new policies he wants to enact as a state representative: Allow cities to charge commuters the same income tax rate as residents (instead of just half); broaden the sales and use tax to services; provide state pension retirement assistance. This would have especial import for Flint, where the city’s taxpayers are currently financing the pensions of employees who worked for the city when it had 200,000 residents—pension payments now consuming, he says, a quarter of the city’s budget.

Trust & Intergovernmental Tensions. By candidate Walling’s own admission, throughout most of Flint’s drinking water crisis, he believed assurances from the Environmental Protection Agency and the Michigan Department of Environmental Quality that Flint’s water met safe drinking standards. When residents confronted him with discolored, foul-smelling water, he said: “I thought that water had come out of their tap because of a failure in the system at their house or near the house,” adding that it was not until three years ago when, in the wake of listening to Dr. Mona Hanna-Attisha describe her discovery that Flint children were showing elevated levels of lead in their blood, did he finally realize the city’s entire water system was tainted, asserting that it was at that moment in time that he ordered the city to issue a lead advisory, advising mothers not to mix hot tap water with formula, and for all residents to filter their water and flush it for five minutes. (In her recent memoir, What the Eyes Don’t See, Dr. Hanna-Attisha devotes an entire chapter to her meeting with Mr. Walling, criticizing him for opting out of joining her news conference on lead levels, because he was more concerned about traveling to Washington to meet Pope Francis.)

Candidate Walling’s campaign flyers assert: “My priorities are roads, schools, jobs.” they declare. As he challenges incumbent Mayor Karen Weaver, he says most voters he interacts with want to talk about the shabby state of Michigan’s roads or the excessive auto insurance rates paid by residents of Flint and Detroit. But, it appears, he is willing to support repeal of Michigan’s Emergency Manager law—a concept which journalist Anna Clark notes, in The Poisoned City, her new history of the water crisis: “The idea of emergency management is that an outside official who is not constrained by local politics or the prospect of a reelection bid will be able to better make the difficult decisions necessary to get a struggling city or school district back on solid ground.” But in Flint, emergency managers made decisions based on saving money, not the health and safety of the citizens with whose well-being they had been entrusted. Candidate Walling, in retrospect, notes: “I wish that I had never been part of any of it: “This has all happened to a community that I deeply love, and it is motivating me to make sure policy changes are made to make sure this never happens again.”