States Roles in the Wake of Fiscal and Physical Storms

March 13, 2018

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

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

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

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

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

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

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

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

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

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

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Federalism obstacles to Puerto Rico’s Fiscal and Physical recovery.

February 28, 2018

Good Morning! In this morning’s eBlog, we consider the federalism obstacles to Puerto Rico’s fiscal and physical recovery.

Puerto Rico’s Obstacles to Recovery. 78 mayors are set to meet today with Governor Ricardo Rossello Nevarez and representatives of the Army Corps of Engineers to discuss the delay in the restoration of the island’s energy system—a meeting at which they intend to present the Governor with other problems they confront in their municipios or municipalities in the wake of the hurricane. Since last November, and only weeks after the goal to restore 95% of power by last Christmas has fallen way short, the government yesterday reported restoration had reached over 84%; however, the figures did not make clear whether that percentage reflected generation or subscribers with electricity. Today’s session is focused on providing the Governor the opportunity to make clear his concern that the Corps has so far not addressed the island’s issues and to receive a full explanation why not and “how to correct the situation that is still serious,” according to Rolando Cruz, the president of the Association of Mayors and first executive of Cayey. Also participating are the Mayor Francisco López López of Barranquitas and William Alicea of Aibonito, said that although their primary claim is the restoration of light, their concerns are broader. The key concern relates to the perceived inability, to date, of help from FEMA—especially with regard to bridges and highways, mental health of affected citizens, and the dire challenges of so many who have lost their homes or suffered unaffordable damages—and who have been unable to prove ownership of their property—or, as Mayors López López put it: “Here in the mountains, we are still going through very difficult situations: sectors without electricity, without drinking water, roads destroyed.” The apprehension is, if anything, worsening: yesterday, Governor Rosselló Nevares denounced the decision by the U.S. Treasury to reduce, without explanation, the amount of initial financing of $4,700 million by more than half to $2,030 million from the line of Congressionally approved credit for Puerto Rico. In his letter to Congressional leaders, the Governor wrote that the U.S. had “effectively blocked access to some $4.7 billion from the CDL (Commercial Driver’s License) program,” urging intervention to avoid “further damage and suffering to the residents of Puerto Rico,” noting that any material interruption of public services would only exacerbate the emigration of its population to the continental United States. He added that the Treasury has imposed conditions incompatible with the purpose of the program, while criticizing that the federal agency has canceled the ability to cancel any CDL issued to Puerto Rico “in clear contravention of the applicable law,” writing that the U.S. territory is approaching spring in the same precarious fiscal situation, with the possibility that the Treasury will cancel federal aid approved by law,” notwithstanding the Financial Advisory Authority and Fiscal Agency’s compliance with each request from Treasury. His epistle noted that despite the immediate cooperation of the agency, the Treasury did not provide the agency with economic terms or other material terms for the CDL program (In an effort to help Puerto Rican citizens relocating to the mainland in the wake of hurricanes Irma and Maria, the Federal Motor Carrier Administration had waived certain requirements in an effort to help them obtain commercial learner’s permits or commercial driver’s licenses: according to the Governor, last January 9th, the Treasury and FEMA had sent a letter to the local government regarding the implementation of a cash balance policy in order to facilitate access the CDL financing—but a letter requesting Puerto Rico to exhaust its own resources before the Treasury and FEMA would provide access to CDL program funds.

Chapter Nueve? Even as Puerto Rico is struggling to address its severe physical challenges, notices with regard to the deadline for filing proofs of claim in Puerto Rico’s five Title III bankruptcy cases are going out this week, as U.S. Judge Laura Taylor Swain had set a Monday deadline for the notices to be delivered. Notwithstanding, and not to be blamed on the mailman, FAFA Executive Director Gerardo Portela Franco reported the notices would start to be sent out this week—with five of the Title III entities having at least $52.5 billion in debt outstanding, in what has now become  the largest quasi municipal bankruptcy in U.S. history: the notices in question will inform creditors that they will have until May 29th to file a proof of claim in the cases. The debt issuers here include: the Commonwealth of Puerto Rico, the Puerto Rico Sales Tax Financing Corp. (COFINA), the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, the Puerto Rico Highways and Transportation Authority, and the Puerto Rico Electric Power Authority. Responding will matter: those who fail to file a timely-filed proof of claim or trustee proof of claim will lose any claim for compensation for their municipal bonds, as well as their rights to vote on any plan of debt adjustment. Indeed, yesterday, PREPA bond trustee U.S. Bank National Association posted a notice to EMMA stating it planned to file a proof of claim on behalf of the bondholders, specifying: “[I]f you believe that you may have separate or additional claims against the Authority other than the claims with respect to principal, interest and other amounts owing on your bonds or have claims against other Title III debtors or other persons or entities concerning your bonds or otherwise, you should consult with your legal professionals regarding those claims and take appropriate action within the applicable time period.”

On the physical, as opposed to the fiscal storm front, in the wake of the U.S.’s worst blackout in American history, the complicated and costly effort for a quasi-chapter 9 entity, major chunks of infrastructure and power restoration appears to have reached a plateau: while most, today, have electricity, it is unclear how much longer those in the dark will have to wait. Jay Field, a spokesman for the U.S. Army Corps of Engineers, notes: “The bulk of the work that is left is the hardest, requiring helicopter support and long commutes to remote, hard-to-access job sites…Weather is also an issue due to rain and heavy winds.” Last week, Puerto Rico’s unified grid-restoration command reported it expects to have 90 to 95% of the territory’s power restored by March 31st: it estimates that the hard-hit municipality of Arecibo will have its electricity restored by mid-April, and the municipality of Caguas by late May. He offered no timeline for other darkened municipios. A critical part of the physical recovery challenge has been the complicated overlapping lines of authority, as well as Puerto Rico’s insolvency: even though the U.S. Army Corps is in charge of overall recovery, PREPA has been in charge of much of the repair work—a Puerto Rican authority which is $9 billion in debt—and which, last week, suffered a fiscal blow when Judge Laura Taylor Swain  rejected its plea for a $550 million loan—leading the utility to respond it would start reducing output at some of its power plants, because it could not afford fuel. In its court filing, the utility stated that the scenario “exacerbated the risk to an already fragile system and leaves it vulnerable to outages and resulting in brownouts on the island.” That work involves nearly 6,000 repair workers now on the island, but where, seemingly on a daily basis, the workers keep finding new problems.

As of last Wednesday, 343,000 electricity customers were without grid power, the lowest number yet: in the wake of the storm, there were nearly 1.6 million customers experiencing a blackout. So, on the one hand, there has been significant progress; however, much of the progress has been followed by drops, as PREPA’s old and fragile grid has occasionally failed and plunged swaths of newly restored customers back into darkness. Most recently, a fire at a substation two weeks ago, for instance, plunged more than 343,000 and much of the capital of San Juan into darkness. Thus it means, still today, that thousands of homes and businesses are running either full or part-time on backup diesel generators—meaning those families or businesses are running generators, forcing them to pay for fuel. For PREPA, the challenge is aggravated by the uncertainty with regard to certainty about how many customers are without grid power: from the onset of Maria until early November, PREPA gave a rough estimate; then it simply stopped trying: the damage to the grid was so extensive that the utility could simply no longer determine  how many of its customers were drawing electricity. It was only near the end of last month that PREPA started reporting its percentage of “normal peak load” which had been restored. Nevertheless, that reporting indicates the percentage of power restored has risen from 19% in early October to almost 84% last week. Yet, even that restoration has been unreliable: even though parts of PREPA’s grid have crashed on numerous occasions during the recovery, only a few of those outages are shown by the data—a deficiency, because power was often restored within hours or days and, ergo, was not captured in the weekly reports.

Another serious challenge has been substations: Puerto Rico has 342 distribution substations, which convert power from transmission to distribution use: improvement has occurred slowly since November, but has been basically flat in 2018: the grid’s 56 transmission substations have seen no improvement since December: these stations step up voltage for long-distance delivery or prepare it for transport along transmission lines of different voltages. Progress is a challenge: Fernando Padilla, a senior PREPA adviser, reported that damage to the substations still offline was so devastating that they need to be rebuilt from the ground up: “A portion of the substations, specifically those that are close to where the eye of the hurricane passed, remain totally destroyed. Those require complete reconstruction (engineering, design, mitigation, etc.)…The PREPA system has points of interconnection that permit energy to be carried through various zones without having to pass by these particular substations: This isn’t the norm, and it augments the risk to the reliability of the system. But in general, it can be done.”