Fiscal Sand Traps & Disparate, Inequitable Responses

March 7, 2018

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

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

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

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

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

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

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

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

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

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

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


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.”

A Valentine’s Day Message?

St. Valentine’s Day, 2018

Good Morning! In today’s Blog, we consider the continued scrutiny by the PROMESA Board and Puerto Rico’s progress in not just recovering from Hurricane Maria—but also from its quasi chapter 9 municipal bankruptcy. That progress has been achieved through federal assistance, the Board’s vigorous oversight, and, as we note, tax and spending changes undertaken by the government of Puerto Rico.  

Fiscal Imbalances.  While states, cities, and counties operate in regular order, the federal shutdown, far into the federal fiscal year, illustrated the challenge to state and local governments of the unpredictability of federal funding that state and local governments would otherwise count upon. Now, in the wake of Congress’ vote to suspend the national debt ceiling, the package included nearly $100 billion in disaster aid, as well as extend a number of expired tax provisions, including a Jan. 1, 2022 extension of the rum cover-over for Puerto Rico and the U.S. Virgin Islands—an extension projected to generate an estimated $900 million for the two U.S. territories, as well as a related tax provision which would, at long last, allow low-income Puerto Rican muncipios to be treated as qualified opportunity zones: that disaster aid includes $4.9 billion to provide 100% federal funding for Medicaid health services for low-income residents of Puerto Rico and U.S. Virgin Islands for two years and $11 billion of Community Development Block Grants for the two territories, including $2 billion of CDBG money to rebuild Puerto Rico’s electrical grid. Puerto Rico anticipates it will be the recipient of as much as $18 billion—with an option to access a line of credit of as much as $4 billion—albeit, to the extent the territory can continue to demonstrate its lack of liquidity. Those amounts, including $4.8 billion in Medicaid, and $11 billion from HUD, however, are subject to conditions of both the federal government and the PROMESA Board. HUD Deputy Secretary Pamela Hughes Patenaude last week stated HUD would award $1.5 billion to assist in the repair of damaged homes and business structure, while FEMA has already awarded $300 million, half of which is via a loan. In addition, the aid includes $14 million in the Women, Infants & Children (WIC) program assistance. The package provides some $14 million for the Army Corps of Engineers to award contracts to U.S. electric companies to repair the power grid. Importantly, the FEMA funding will provide not just for improvements in the island’s public power system, but also for repairs: Puerto Rico has guestimated it will require $ 94.4 billion to rebuild the island’s public infrastructure.

Puerto Rico’s non-voting Representative in Congress, Jenniffer González, noted the next disaster relief resolution may be discussed in Congress later this Spring—at which point she anticipates the critical focus Will be on Puerto Rico and the U.S. Virgin Islands. She noted: “Speaker Paul Ryan told me that there is going to be a fourth bill on supplementary allocations for Puerto Rico with specific projects for transportation and electric power.” U.S. Senator Marco Rubio (R-Fla.) noted that claims of states such as Florida and Texas were very helpful in recent efforts in favor of funds for Puerto Rico; however, he warned that Congress needs to allocate additional funds for disasters regularly: “There are other places that, by then, will have needs.”

Negocios. Meanwhile, with regard to the fiscal storm, the fiscal amendments Governor Ricardo Rosselló presented to the PROMESA this week presented a more positive outlook for creditors to reach an accumulated surplus of $3,400 million, even as his offer retained virtually unchanged the terms of fiscal measures and severe cuts in government revenues over the next 5 fiscal years. The plan the Governor presented, moreover, did not comply with the requirements to reduce the pensions of government retirees, nor to eliminate additional labor protections for private sector workers, after the notification of violation of the federal PROMESA law—demands calling for a series of amendments, including a 25% reduction in pensions exceeding $1,000 per month (in combination with social insurance), in addition to the elimination of a series of protections for private sector employees. Indeed, in an interview with El Vocero, Gov. Rosselló replied that his administration is neither contemplating reductions to pensions nor including legislation to eliminate the employer’s obligation to pay the Christmas bonus and compensation for unjustified dismissal or to reduce the requirements for vacation leave and sick leave, stating: “We are not contemplating reductions in pensions.” As for eliminating labor protections, the Governor made clear: “We have not included that in the reform of human capital… certainly, it is an area that is important for us to work: how do we raise labor participation in Puerto Rico? How do we encourage them to transition to work? “

The most dramatic modification of the tax plan proposed by Gov. Rossello is the elimination of the aggregate deficit of $3,400 million for the FY2022 budget, since the previous version of its fiscal plan was in default with the objective of eliminating structural deficits: as early as FY2019, he projects the government will achieve a surplus of $750 million, thanks in large part, according to the Governor, to the federal assistance provided by Congress. Even though it had been estimated that the aid to date has reached $16.5 million, Puerto Rican authorities assert only $12,800 million has been incorporated as a result of supplementary allocations in the fiscal plan—allocations related to the FEMA $ 35.3 billion in the public assistance program and $21 billion in private insurance. The Governor noted his administration plans to spend $13 million of disaster recovery funds for Hurricane Maria, enabling, he added, a GDP growth projection of 8.4%. He also noted he expects a reduction in the rate of emigration from Puerto Rico down to 2.4%.

Unsurprisingly, he warned, the most difficult challenge will be what he termed the FY2020 Medicaid fiscal cliff –the year when the current Congressional appropriated funds will be exhausted. To address that abyss, he said the government has intensified cuts to government programs, as well as adopted measures to increase revenues, resulting, he asserted, in a positive or surplus balance of $800 million for FY 2023, noting: “Stabilization (the surplus) continues with other structural measures and impacts that have: the reduction in expenditures by government items and the rightsizing (shrinking) that is being done.” It appears that the $800 million projected surplus was included in the analysis of the sustainability of the public debt, an element which will be considered by the PROMESA quasi-bankruptcy court for the payment arrangement to the creditors—or, as he put it: “The discussion with the creditors will go by Title III, in everything that has not been agreed by Title VI. It is a numerical exercise, without differentiating creditors, about the numbers that reflect the fiscal plan, and that will certainly be part of the elements of judgment…that the judge would use in her determinations.”

The Governor noted that cuts to agencies such as Education, Corrections, Health, as well as across the board via shrinking services and utilizing tighter payroll control have succeeded in increasing revenues by $29 million; nevertheless, he added, because the new revenues failed to meet the anticipated goals, the agency, Mi Salud, will continue to be required to face an FY2022 reduction of some $795.


Fiscal & Physical Imbalances

Lincoln’s Birthday, February 12, 2018

Good Morning! In today’s Blog, we consider the outcome of last week’s actions to avoid another federal government shutdown, we consider the ongoing fiscal and physical plights of Puerto Rico.

Fiscal & Physical Imbalances.  Puerto Rico’s non-voting Member of Congress, Jenniffer Gonzalez, and Gov. Ricardo Rosselló have met with a group of New Progressive Mayors to describe the terms of the new federal assistance under the just passed $16 billion recovery assistance approved by Congress—funds ranging from what Secretary of Public Affairs Ramón Rosario Cortés noted would “range from construction to agriculture programs that will allow each municipality to develop its economy and create jobs.” The Secretary anticipates there will be a second meeting with associate mayors. Naguabo Mayor Noé Marcano said that the allocation of these funds represents “a unique opportunity” to repair and/or build infrastructure projects (including roads and bridges) and housing: “Part of the projects that we-at a given moment-had planned as improvements to the municipalities, we understand that this is the best opportunity.”

That could mean a new fiscal chance for this small muncipio of just over 23,000, one founded on July 15, 1821 near the mouth of the Daguao River—founded with the intent of providing a defense for the region from the Caribe Indians, based upon, 27 years earlier, the request of several influential neighbors of the Spanish Crown: on January 9, 1798, the erection of the Naguabo parish was authorized—but construction did not commence on its church until 1841. The muncipio’s name originated from the cacique and chieftainship named Daguao—as the territory was originally populated by Taíno Indians. Naguabo is also known as Cuna de Grandes Artistas (the birthplace of Great Artists) and Los Enchumbaos, “the Soaked Ones.”

For his part, Mayor William Aliceo of Aibonito, the City of Flowers, with the city’s appellation derived from the Taíno word “Jatibonicu,” the name of a Cacique leader of the region; a name also used to refer to a river in the area—and, in addition, a name used by the tribe of Orocobix. At the same time, there is a legend that tells of a Spanish soldier, Diego Alvarez, who, on May 17, 1615, reached one of the highest peaks in the area: upon taking in the view, he exclaimed: “Ay, que bonito!” The exclamation eventually led to the name of the region. Nearly two centuries later, Pedro Zorascoechea, in 1630, was one of the early Spaniards to settle on the island—apparently establishing one of the first fincas or ranches in the region; however, it was not until 1822, when Don Manuel Veléz presented himself before the government, representing the inhabitants of the area, to request that Aibonito be officially declared a town—a request which then Governor Miguel de la Torre granted on March 13, 1824.

Hurricane Maria’s eye tore through the region’s hills on September 20th: it was especially fierce along the exposed ridgelines, whipping in at a hundred and fifty-five miles an hour: it tore apart wooden houses; along the road leading up to Aibonito from San Juan, normally a two-hour drive, Maria tore a panorama of ruined houses and businesses, toppled and twisted trees, and downed utility poles. Mayor Aliceo said he would like to use part of the recovery funds for agriculture, roads, and electrical infrastructure: “In Aibonito, we have a project submitted to the U.S. Army Corps of Engineers for the canalization of the Aibonito River. And with poultry farming, which was well affected by Hurricane Maria, I’m interested (the funds) will find a way to help Aibonito’s poultry farmers, given the million-dollar losses they’ve had.”

The federal allocation came just prior to Puerto Rico’s resubmission of its revised fiscal plans to the PROMESA oversight Board—plans due today, with Puerto Rico’s representative, Christian Sobrino, simply advising the board that the plans comply with the public policy of the government, noting: “[W]e will comply with the stipulated date for the delivery of the fiscal plans. It has been an intense job, but the government will comply with the appointed time. The plans will continue in accordance with the Governor’s public policy of protecting the most vulnerable and that this document serves as a tool of fiscal responsibility and at the same time a path of long-term socio-economic development for the island.”

Nevertheless, uncertainty reigns, especially in the wake of the federal government shutdown. With last week’s Congressional approval of a package to keeps federal agencies running through March 23rd, the date of certainty has now been pushed off while House and Senate appropriators in Washington, D.C. work on final 2018 spending bills. The package suspends the debt ceiling through March 1, 2019, provides $89.3 billion in disaster aid, and extends a number of expired tax provisions, including a Jan. 1, 2022 extension of the rum cover-over for Puerto Rico and the U.S. Virgin Islands, which is projected to generate an estimated $900 million for the two U.S. territories. In addition, a related tax provision calls for all low-income communities in Puerto Rico to be treated as qualified opportunity zones. The disaster aid includes $4.9 billion to provide 100% federal funding for Medicaid health services for low-income residents of Puerto Rico and  the U.S. Virgin Islands for two years, $11 billion in CDBG block grants for the two territories, including $2 billion of CDBG money to rebuild Puerto Rico’s electrical grid—with Resident Commissioner Gonzalez reporting that, in total, $16.55 billion of the disaster aid is earmarked for Puerto Rico.

With the new allocations to mitigate last year’s natural disasters, the federal government has already authorized just over $140.7 billion within the past six months to be distributed mainly between Texas, Florida, California, Puerto Rico, and the US Virgin Islands—with Puerto Rico’s government projecting its share will be approximately $18 billion, plus access to a credit line of $4 billion—albeit, to access that line, the U.S. territory would be mandated to prove lack of liquidity. Of the total, almost $16 billion will surely go to the island from the funds allocated in the budget bill and to mitigate disasters—provided the territory complies with the conditions of both the federal government and the PROMESA Oversight Board. The projected package includes $4.8 billion for Medicaid and $11 billion for CDBG: last week, HUD Deputy Secretary Pamela Hughes Patenaude announced, during a visit to San Juan, that HUD will award $1.5 billion to help repair damaged houses and businesses. In addition, another $ 300 million, half of which would be allocated as a loan, has been allocated to match the FEMA project’s cost. The package includes $6 billion, funds under the U.S. Army Corps of Engineers, provided to U.S. electric companies to repair the power grid. FEMA has stated, moreover, its intent to grant an additional $13 billion to the island.

Puerto Rico’s Federal Affairs Executive Director, Carlos Mercador, notes that an official damage estimate from federal agencies is still pending; Commissioner González notes that Congress’ next disasters relief resolution may be discussed in Congress between April and May, noting: “Speaker Paul Ryan told me that there is going to be a fourth bill on supplementary allocations for Puerto Rico, with specific projects for transportation and electric power.”


Is There a Checkered Flag to Mark an Exit from Municipal Insolvency?

February 5, 2017

Good Morning! In today’s Blog, we consider: the ongoing challenge for Hartford to keep its fiscal head out of debt waters; efforts to create a municipal recovery fund in Puerto Rico for its beleaguered muncipios; and the uncertain promises of PROMESA.

Taking the Checkered Flag. Hartford city officials are concerned that they cannot find a 30-year-old insurance policy—a policy which could play a key role in any damages or settlement the capitol city would have to pay in a lawsuit filed by a man wrongly imprisoned for murder for two decades—and could weigh in the city’s efforts to regain its fiscal momentum from the brink of chapter 9 municipal bankruptcy. Indeed, the inability to locate the policy has prompted federal Magistrate Judge Joan Margolis to order the city to subpoena insurance companies in an effort to find it. The suit in question, filed seven years ago, against the city and police officials, alleged malicious prosecution, suppression of evidence, and violation of his civil rights. City officials deny the allegations; however, in the seven years since the suit was filed, they have been unable to come up with the policy. His lawyers have been seeking information on the city’s insurance policies since the lawsuit was filed nearly seven years ago—a lawsuit over a murder conviction—which was itself overturned based on new DNA testing that resulted in another man being convicted—so that state officials subsequently awarded the accused $6 million for his wrongful conviction. Now the missing so-called “excess” policy could turn out to be key in the lawsuit, because it would cover any damages or settlement the city would be required or directed by the court to pay above $2 million—the current Hartford liability limit. The City’s insurance carrier, Travelers, has recommended to the city that it notify the carrier of its excess policy about the lawsuit, because of the chance that any award could exceed $2 million—albeit, it remains unclear whether Hartford’s insurance policies in effect in 2011, when the lawsuit in question was filed, would cover any award to him. The litigation and potential fiscal exposure comes at a fiscally unpropitious time in the wake of Moody’s, last week, had just revised upwards the city’s credit rating, lifting its general obligation bond rating from negative to developing, citing last year’s appointment of the Municipal Accountability Review Board (MARB), which had been established by §367 of Public Act 17-2  as well as the statutory provisions contained in §§Section 349 to 376 of the Act for the purpose of providing technical, financial, and other assistance and related accountability for municipalities experiencing various levels of fiscal distress: the Board is made up of 11 members, appointed as follows: Secretary of OPM, or designee, Chairperson; State Treasurer, or designee, Co-chairperson; Five members appointed by the Governor: a municipal finance director; a municipal bond or bankruptcy attorney; a town manager; a member having significant experience representing organized labor from a list of three recommendations by AFSCME; a member having significant experience as a teacher or representing a teacher’s organization selected from a list of three joint recommendations by CEA and AFT-CT. In addition, one member is appointed by the President Pro Tempore of the Senate, one by the Speaker of the House, one by the Minority Leader of the Senate, and one by the Minority Leader of the House of Representatives, each of whom shall have experience in business, finance or municipal management.

The events unfolding in the courtroom occurred as Moody’s had brightened the fiscal outlook for the beleaguered city with its upward revision of the city’s rating from negative, specifically citing the creation of the review board—with its upwards revision reflecting the reduced chances of the city being forced into default or chapter 9, albeit Moody’s hedged its outlook by writing: “[T]here remains a possibility of significant bondholder impairment over the long-term, given the city’s distressed financial condition.” Moody’s has unmoodily noted it might upgrade the city’s fiscal outlook, if

  • the state oversight board designates Hartford as a Tier III municipality and executes a state debt assistance contract;
  • the city develops a long-term financial sustainability plan;
  • completes negotiations with bond insurers and bondholders which generate recovery of at least 80% of principal; and
  • makes timely payments on all debt with expressed commitments to fully honor future obligations.

In the alternative, the rating agency warns that a default on the city’s debt or an indication that bondholder recoveries would fall below 65% of principal in a potential debt restructuring would lead to a further downgrade.

Puerto Rico Municipal Recovery Fund? Governor Ricardo Rosselló is going to try again to get a legislation that creates a $ 100 million Municipal Recovery Fund to help mayors keep their governments afloat after Hurricane Maria shrunk their income. The Governor had planned to send to the Legislature a new version of the bill to establish such fund, in the wake of the PROMESA Board’s veto: in order to comply with the objections made by the Board, the Governor announced that the fund will have “transparent” eligibility requirements to evaluate the fall in municipal revenue collections. His proposal also proposes to create a structure that resembles the federal Community Disaster Loans program–and specify the accounts from which the Treasury Department would finance the aid, with amendments, including that the Fiscal Agency and Financial Advisory Authority (FAFAA) certify the need for the loans, which would be limited to $5 million per muncipio. In the statement issued from his office: “The Governor had submitted a bill for these purposes, which established by law the objective criteria to certify the municipal need. However, during the legislative process modifications were made to the way of allocating the resources of the Municipal Recovery Fund.” Those modifications were discussed by FAFAA with the Oversight Board, in order to ensure its final approval, if the measure is ratified again by the Legislature. (Because it is a bill related to the budget, it requires the approval of the PROMESA Board.) Nevertheless, the Governor appeared confident, stating: “I am confident that this project will be approved quickly and this way it will provide the aid our mayors need for their recovery works as soon as possible,” as he acknowledged the crisis faced by the municipalities, many of which fear being left without liquidity this spring. Thus, he told the PROMESA Board that his revised fiscal plan seeks to postpone “the reduction of the municipal subsidy that the Board originally approved.” For the island’s municipal leaders, that means they will also seek to have access to the line of credit of the FEMA CDL program approved by Congress last October.  According to Mayor Josian Santiago, the former president of the Puerto Rico Association of Mayors,   of Comerio, a municipio of just under 21,000 with an unemployment rate of 13%, located in the center-eastern region of island, more than 40 municipalities may currently lack sufficient fiscal liquidity to operate normally, unless they receive an injection of funds from the federal line of credit or from the local fund which Governor Rosselló is once again trying to create. The Mayor noted that the Municipal Revenue Collection Center has advanced the municipalities’ months of income projections, which it distributes, but which could now be forced to sell old debts in order to meet its obligations for the remainder of the fiscal year. (The island’s mayors have already been provided guidance with regard to how to access a federal line of credit, which must not exceed 25 percent of their budget.) In the case of Comerío, with a budget of around $9 million and, according to the evidence on the loss of income that it can provide, it could be eligible to receive up to about $ 2.25 million.

The Promise of PROMESA? During the meeting of the PROMESA Board in New York City at the end of last week, several experts agreed that hurricane Maria demonstrated the lack of a clear leadership in the Puerto Rican government, creating an inability to make decisions about its energy system, a problem that is still present in the face of the transformation required by the Electric Power Authority (PREPA). Indeed, FEMA Deputy Regional Administrator Asha Trible said that, during the emergency, the high level of bureaucracy in PREPA was a major obstacle, testifying: “It does not work…when you have eight layers to be able to approve something,” adding that in the times of greatest crisis, the bureaucracy added to liquidity problems of the public company, that “could not pay for the materials they ordered.” Administrator Trible, subsequent to the session, that early in the process, FEMA had suggested ideas, such as creating a central command for the emergency, with a single coordinator for PREPA, adding: “We avoided that they thought we were there to take control…We would have established a command structure, we tried to suggest that kind of thing, but we support the process that is there.” The session came as Governor Ricardo Rosselló has proposed to privatize PREPA assets, including the generation of electricity, and as a preamble to the certification of new fiscal plans of the central government and the public corporation—and came hard on the heels of the PROMESA Board’s request to Judge Laura Taylor Swain to allow the central government to lend $ 1.3 billion to PREPA to avoid its financial collapse this month—a request which the majority of the panel’s seventeen experts, noting the challenges the public corporation faces, instead advocated for a strong and independent regulator of the energy system, even as they stressed the need to obtain financing to modernize PREPA.

Too Many Cooks in the Cocina? John Paul Rossi, a historian at Penn State University-Erie, who is an expert on the history of American business, technology, communications, and transportation, argued that  the Governor, the Governing Board of the public corporation, the Oversight Board and the Energy Commission are now in the development of public policy for PREPA—without even mentioning different voices from the nearly insolvent U.S. Congress—that “There are too many people. We are scaring consumers and investors.” His comments came as Nisha Desai, a member of PREPA’s Governing Board, noted that PREPA is close to replacing former Executive Director Ricardo Ramos, with the utility’s governing board vetting several potential hires referred by a consultant tapped to help the utility find its new leader: deeming such a decision critical to PREPA’s recovery from September’s Hurricane Maria. Ms. Desai, an executive of the Texas Renewable Energy Industries Alliance, said that, along with two other “independent” members of the Governing Board, they are poised to select the next PREPA Executive Director, noting that, in order to rejuvenate PREPA, they intend to appoint “the first chief executive officer” disconnected from Puerto Rico’s ‘partisan politics.’


Inconsistent or Biased Federal Fiscal & Physical Recovery Role?

February 1, 2017

Good Morning! In today’s Blog, we consider the inconsistent FEMA response to Puerto Rico’s human, physical, and fiscal challenges.

Post Storm Fiscal & Physical Misery. Less than 24 hours after Puerto Ricans were alarmed to learn that the Federal Emergency Management Agency (FEMA) intended to halt emergency aid shipments of food and water to the devastated U.S. territory, FEMA has announced it is not planning to leave; nor will the federal disaster assistance agency stop handing out crucial supplies; FEMA made clear it intends to continue the distribution of some 46 million liters of water and four million meals and snacks—an amount FEMA believes should be sufficient to allow Puerto Rico to recover—an assessment with which Puerto Rico Secretary of Public Safety and state coordinating officer Hector Pesquera concurred yesterday, after, earlier, making clear Puerto Rico’s emergency management leaders had not been “informed that supplies would stop arriving, nor did the government of Puerto Rico agree with this action.” Nonetheless, the resumption after the inexplicable interruption, still appears insufficient to assess whether the aid which FEMA has stockpiled will suffice: Jorge Pratts, a full-time volunteer with Operation Blessing, who oversees the US nonprofit’s operations in Puerto Rico, noted: “The numbers just don’t add up.” His organization, so far, has distributed 35,000 water filters since Hurricane Maria hit. From a personal perspective, he added: “The cry for help comes from fathers and mothers, people in their 60s, 70s and 80s…It’s a very, very delicate situation that we’re going through. FEMA is not being sensitive at all, and they’re not understanding what’s going on here.”

His perspective was echoed by Mayor Ernesto Irizarry of Utuado, known by its residents as “El Pueblo del Viví,” which was founded in 1739 by Sebastían de Morfi—the pueblo or muncipio’s name is derived from a local Indian Chief Otoao, which means between mountains, reflecting the municipio’s location in Puerto Rico’s Central Mountains. The muncipio has a population of about 33,000 today, spread across 113 square miles—the median age is 38.  The per capita income is what gives one a more acute perspective of the human and fiscal challenges left in Maria’s wake: In 2013, the average per capita income was $7,235—some 30% below Puerto Rico’s average; more than 55% are below the poverty line. It is in the part of Puerto Rico where Hurricane Maria wreaked the greatest human, physical, and fiscal damage, devastating bridges and isolating communities for weeks—leaving the municipality, as Mayor Irizarry describes it‒still very dependent on FEMA’s relief aid, noting that 71% of the 33,000 residents do not have power, and more than 30% do not have clean water. Even though Mayor Irizarry believes his muncipio has enough supplies to last about another week, he fears that if FEMA’s stockpile in Puerto Rico runs out, his municipality would likely face a “humanitarian crisis: Utuado is not in recovery mode…We are still in disaster mode, because we don’t have access to basic services.”


The Stark Challenge of Transferring Governmental Responsibility in the Wake of Devastation


January 31, 2017

Good Morning! In today’s Blog, we consider the abrupt decision to cease emergency federal relief efforts vital to Puerto Rico’s physical and fiscal recovery.

Post Storm Fiscal & Physical Misery. The Federal Emergency Management Agency (FEMA) yesterday announced it will “officially shut off” aid, including supplies of food and water in Puerto Rico this week. To date, the agency has supervised the distribution of more than 30 million gallons of drinking water and 60 million meals to its inhabitants. The Puerto Rico FEMA Director, Alejandro De La Campa, stated: “The reality is that we just need to look around. Supermarkets are open, and things are going back to normal.” In response, Mayor Carmen Maldonado of Morovis, a muncipio in the central mountains which was among Puerto Rico’s most devastated—and where a bridge collapse sequestered thousands of residents from access to FEMA assistance, including food, fuel, water, and medicine. The municipality’s elderly and ailing residents thus lost access to medical treatment. Thus, unsurprisingly, where power is only available to 20 percent of the U.S. citizens, FEMA’s announcement appears premature.

The FEMA announcement appeared to blindside Puerto’s Rico’s leaders and citizens—with the government having stated it was still in talks with FEMA on a timetable for assuming control of food and water distribution. For its part, the federal agency, which deemed its emergency operation the longest sustained distribution of food, fuel, and water in FEMA’s history, including more than $1.6 billion worth of food and more than $361 million worth of water, nevertheless declared all shipments of food and water will officially stop today; FEMA made clear it has stockpiled more than 46 million liters of water, 2 million Meals Ready to Eat, and 2 million snack packs on the ground for distribution if needed, noting: “The commercial supply chain for food and water is re-established, and private suppliers are sufficiently available that FEMA-provided commodities are no longer needed for emergency operations,” while Héctor M. Pesquera, the Secretary of Public Safety for Puerto Rico, who is also the commonwealth’s coordinating officer, said the transition period for local authorities to take over distribution should last at least two weeks: “The Government…is waiting for critical data provided by FEMA in order to determine when the responsibilities should be transferred from FEMA to the Government of Puerto Rico…” a statement seeming to make clear that the abrupt FEMA action was neither coordinated with Puerto Rico: “[W]e were not informed that supplies would stop arriving, nor did the Government of Puerto Rico authorize this action,” albeit noting that conditions “in most areas have improved and many economic indicators are showing that recovery is underway.”

FEMA spokesman William Booher said FEMA would “continue to support any documented needs and will provide supplies to volunteer agencies and other private nonprofit organizations…working with households in rural, outlying areas to address ongoing disaster-related needs as power and water is gradually restored.” The federal disaster relief agency still has about 5,000 personnel in Puerto Rico—and states it is prepared to restart food and water shipments should the need arise. Nevertheless, the abrupt departure, unmentioned in the State of the Union Address last night, came as San Juan Mayor Carmen Yulin Cruz, who was in attendance at the President’s address in Washington last night, reacted to the decision on Twitter, asking in Spanish: “Seriously, are they leaving?…This is the kind of indifference that must be stopped,” adding that some schools outside San Juan still have no water, power, or even supplies of milk; nearly half a million power utility customers remained without electricity as of last week, according to the power authority.

Last month, representatives of Puerto Rico’s Emergency Management Agency and FEMA had met with Mayors across the U.S. territory to assess urgent food and water needs, and yesterday FEMA reported nine regional staging areas which it had established to distribute food and water to Puerto Rico’s 78 muncipios will remain open—an important decision, as many outlying, rural, smaller muncipios still confront serious problems with access to food and water—especially in the more mountainous regions, where many remain without power, potable water, and, in some instances, even main roads. A key concern is for Puerto Rico’s elderly—those increasingly left behind by the exodus of the young and educated to the mainland: these citizens today have to face a drive of 30 to 40 minutes just to get to a store—a pre-Maria drive which used to take 5 to 10 minutes—but which has been much more challenging for seniors who must depend on others for transportation.