Disparate Fiscal Solvency Challenges

06/23/17

Good Morning! In this a.m.’s eBlog, we consider the serious municipal fiscal challenges in Ohio, where the decline in coal-fired power has led Adams County auditor David Gifford to warn that if its existing power plants close, the county could be forced to raise its property tax rates at least 500% in order to make its requisite school district bond interest payments. Then we turn to the steep fiscal trials and tribulations of implementing San Bernardino’s post-chapter 9 exit, before finally considering the governing challenges affecting the City of Flint’s physical and fiscal future, and then to the criminal charges related to Flint’s fiscal and moral insolvency. Finally, we turn to the potential for a new fiscal chapter for the nearly insolvent Virginia municipality of Petersburg.

Fiscal Municipal Distress in Coal Country. While President Trump has stressed his commitment to try to protect the U.S. coal industry, less attention has been focused on the municipal fiscal challenges for local elected leaders. For instance, in Adams County, Ohio, where the median income for a household is about $33,000, and where approximately 20% of families fall below the federal poverty line, the county, with a population near 22,000, has been in fiscal emergency for more than two years—making it one of 23 such jurisdictions in the state.  But now its auditor, David Gifford, warns that if its coal-fired power plants close, the county could be forced to raise the property tax by at least 500% in order to make the bond payments on its public school districts debt. (In Ohio, when so designated, the average time a municipality spends in fiscal emergency averages about five years.) Since 1980, when the state auditor was empowered to place municipalities in fiscal emergency, Ohio has declared and released 54 communities—with time spent in fiscal emergency averaging five years, albeit the Village of Manchester in Adams County (approximately 2,000 residents) holds the record for time spent in fiscal emergency — nearly 20 years and still counting. Over the past five years, some 350 coal-fired generating units have closed across the country, according to the Energy Information Administration: closures, which have cost not just jobs, but key tax revenues vital to municipal solvency. It is uncertain whether any actions by the White House could make coal viable as a source of energy generation; it is clear that neither the Trump Administration, nor the State of Ohio appear to have put together fiscal options to address the resulting fiscal challenges. Ohio Municipal League Director Kent Scarrett, in testimony before the Ohio Legislature last February, on behalf of the League’s 733 municipal members, in which close to 90% of Ohio’s citizens live, reminded legislators that “a lack of opportunity to invest in critical infrastructure projects” and “the myriad of challenges that present themselves as a result of the escalating opioid epidemic,” would require “reigniting the relationship between the state and municipalities.” 

Post Municipal Bankruptcy Challenges. San Bernardino Mayor Carey Davis this Wednesday declared the city’s municipal bankruptcy process officially over, noting San Bernardino had come “to the momentous exit from that process,” a five-year process which resulted in the outsourcing of its fire department to San Bernardino County, contracting out waste removal services, and reductions in healthcare benefits for retirees and current employees to lessen the impact on pensions. Mayor Davis noted: “The proceedings guided us through a process of rebuilding and restructuring, and we will continue to rebuild and create systems for successful municipal operations,” as the City Council confronted by what City Manager Mark Scott warned was “without a doubt among the lowest in per capita revenues per capita and in city employees per capita,” yet still confronted by what he described as:  “Among California’s largest cities, San Bernardino is without a doubt among the lowest in government revenues per capita and in city employees per capita…Furthermore, our average household income is low and our poverty rate is high.” Nevertheless, the Council adopted its first post-chapter 9 budget—a budget which is projected to achieve a surplus of $108,000, sufficient to achieve a 15% reserve. To give a perspective on the fiscal challenge, Mr. Scott warned the Mayor and City Council: “Among California’s largest cities, San Bernardino is without a doubt among the lowest in government revenues per capita and in city employees per capita…Furthermore, our average household income is low and our poverty rate is high.” Adding that San Bernardino’s property values and business spending are lower than other cities, contributing to its low revenue, he added: “At the same time, it costs roughly the same to repair a street in Rancho Cucamonga as in San Bernardino: California’s tax system rewards wealth.”

Nevertheless, even though San Bernardino’s plan of debt adjustment calls for minimal revenue growth over the next two decades, he advised that the plan is focused on making the city more attractive. Ergo, he proposed three criteria: 1) urgent safety concerns, including the relocation of City Hall to address unreinforced masonry concerns; 2) restoration of public safety, 30 new police officers, vehicle and safety equipment replacement, radio maintenance, and a violence intervention initiative; 3) greater efficiencies, via information technology upgrades, and economic development and revenue growth—to be met by hiring a transportation planner, associate planner, grant-writing, and consulting. In addition to the operating budget, the manager also focused on the city’s capital budget, proposing significant investment for the next two to three years. Some of these increased costs would be offset by reducing the city’s full-time city employees by about 4%. Nevertheless, the Manager noted: “The community’s momentum is clearly increasing, and we are building internal capacity to address our management challenges…We look forward to the next year and to our collective role in returning this city to a more prosperous condition.”

Under its plan of debt adjustment, San Bernardino began making distributions to creditors this month: Mayor Carey Davis noted: “From the beginning, we understood the time, hard work, sacrifice and commitment it would take for the city to emerge from the bankruptcy process,” in asking the Council to adopt the proposed $160 million operating budget and a $22.6 million capital budget.

Moody Blues. The fiscal challenge of recovering from municipal bankruptcy for the city was highlighted last April when Moody’s Investors Service analysts had warned that the city’s plan of debt adjustment approved by U.S. Bankruptcy Judge Meredith Jury would “lead to a general fund unallocated cash balance of approximately $9.5 million by fiscal 2023, down from a $360 million deficit the city projected in 2013 for the fiscal years 2013-23,” adding, however, that the city still faces hurdles with pensions, public safety, and infrastructure. Noting that San Bernardino’s plan of debt adjustment provided more generous treatment of its pension obligations than its municipal bondholders—some of its unsecured creditors will receive as little as 1% of what they are owed—and the city’s pension obligation bondholders will take the most severe cuts—about 60%–or, as Moody’s moodily noted: “The [court-approved] plan calls for San Bernardino to leave bankruptcy with increased revenues and an improved balance sheet, but the city will retain significant unfunded and rapidly rising pension obligations…Additionally, it will face operational challenges associated with deferred maintenance and potential service shortfalls…which, added to the pension difficulties, increase the probability of continued financial distress and possibly even a return to bankruptcy.”

The glum report added that San Bernardino’s finances put its aging infrastructure at risk, noting the deferral of some $180 million in street repairs and $130 million in deferred facility repairs and improvements, and that the city had failed to inspect 80 percent of its sewer system, adding: “Cities typically rely on financing large capital needs with debt, but this option may no longer exist for San Bernardino…Even if San Bernardino is able to stabilize its finances, the city will still face a material infrastructure challenge.”  Moody’s report added: “Adjusted net pension liability will remain unchanged at $904 million, a figure that dwarfs the projected bankruptcy savings of approximately $350 million.”

Justice for Flint? Michigan Attorney General Bill Schuette has charged Michigan Health and Human Services Director Nick Lyon with involuntary manslaughter and misconduct in office, making the Director the fifth state official, including a former Flint emergency manager and a member of Gov. Rick Snyder’s administration, to be confronted with involuntary manslaughter charges for their alleged roles in the Flint water contamination crisis and ensuing Legionnaire’s disease outbreak which has, to date, claimed 12 lives, noting: “This is about people’s lives and families and kids, and it’s about demonstrating to people across the state—it doesn’t matter who you are, young, old, rich, poor, black, white, north, south, east, west. There is one system of justice, and the rules apply to everybody, whether you’re a big shot or no shot at all.” To date, 12 people have died in the wake of the switch by a state-appointed Emergency Manager of the city’s drinking water supply to the Flint River—a switch which led to an outbreak of Legionnaires’ disease that resulted in those deaths. Flint Mayor Karen Weaver, in response, noted: “We wanted to know who knew what and when they knew it, and we wanted someone to be held accountable. It’s another step toward justice for the people Flint,” adding that: “What happened in Flint was serious: Not only did we have people impacted by lead poisoning, but we had people who died.”

In making his charges, Attorney General Schuette declined to say whether he had subpoenaed Governor Rick Snyder—with the charges coming some 622 days after Gov. Snyder had acknowledged that Flint’s drinking water was tainted with lead—and that the state was liable for the worst water tragedy in Michigan’s history—a tragedy due, in no small part, from the state appointment of an emergency manager to displace the city’s own elected leaders.

The state Attorney General has charged HHS Director Lyon in relation to the individual death of Robert Skidmore, who died Dec. 13, 2015, “as a result of [Mr.] Lyon’s failure to warn the public of the Legionnaires’ outbreak; the court has also received testimony that the Director “participated in obstructing” an independent research team from Wayne State University which was investigating the presence of Legionella bacteria in Flint’s water. In addition, four defendants who have been previously charged, former Flint Emergency Manager Darnell Earley, former Michigan Department of Environmental Quality drinking water Director Liane Shekter-Smith, DEQ drinking water official Stephen Busch, and former City of Flint Water Department manager Howard Croft, each now face additional charges of involuntary manslaughter in Mr. Skidmore’s death—bringing, to date, 15 current or former Michigan or Flint city officials to have been charged.

Attorney General Scheutte, at a press conference, noted: “Involuntary manslaughter is a very serious crime and a very serious charge and holds significant gravity and weight for all involved.” He was joined by Genesee County Prosecutor David Leyton, Flint Water Investigation Special Prosecutor Todd Flood, and Chief Investigator Andrew Arena. (In Michigan, involuntary manslaughter is punishable by up to 15 years in prison and/or a $7,500 fine.) The announcement brings to 51 the number of charges leveled against 15 current and former local and state leaders as a result of the probe during which 180 witnesses have been interviewed—and in the wake of the release this week of an 18-page interim investigation report, which notes: “The Flint Water Crisis caused children to be exposed to lead poisoning, witnessed an outbreak of Legionnaires’ disease resulting in multiple deaths, and created a lack of trust and confidence in the effectiveness of government to solve problems.”

A New City Leader to Take on Near Insolvency. Petersburg, Virginia has hired a new City Manager, Aretha Ferrell-Benavides, just days after consultants charged with the fiscal challenge of extricating the city from the brink of municipal bankruptcy advised the Mayor and Council the municipality needed a $20 million cash infusion to make up a deficit and comply with its own reserve policies: increased taxes, they warned, would not do the trick; rather, in the wake of a decade of imbalanced budgets that drained the city’s rainy day funds, triggered pay cuts, disrupted the regional public utility, and forced steep cuts in public school funding, the city needed a new manager. Indeed, on her first day, Ms. Ferrell-Benavides said: “To have the opportunity to come in and make a difference in a community like this, it’s worth its weight in gold.” The gold might be heavy: her predecessor, William E. Johnson III, was fired last year as the city fiscally foundered—leading Mayor Sam Parham to note: “We’re looking forward to a new beginning, better times for the city of Petersburg.”

Manager Ferrell-Benavides won out in a field of four aspirants, with Mayor Parham noting: “She was definitely head and shoulders above the other candidates…She had clear, precise answers and a 90-day plan of action,” albeit that plan has yet to be shared until after she meets with department heads and residents in order to get a better understanding of the city’s needs. Nevertheless, City Councilman Charles Cuthbert noted: “Her energy and her warm personality and her expressions of commitment to help Petersburg solve its problems stood out…My sense is that she truly views these problems as an opportunity.” In what will mark a fiscal clean slate, Manager Ferrell-Benavides will officially begin on July 10th, alongside a new city Finance Director Blake Rane, and Police Chief Kenneth Miller, who is coming to Petersburg from the Virginia Beach Police Department. She brings considerable governmental experience, including more than 25 years of work in government for the State of Maryland, the Chicago Public Housing Authority, the City of Sunnyvale, Calif.; and Los Alamos, New Mexico—in addition to multiple jobs with the District of Columbia.

 

The Fiscal Imbalances & Human & Fiscal Consequences of Fiscal Distress

06/16/17

Good Morning! In this a.m.’s eBlog, we consider the lessons learned from Flint—lessons not unrelated to the largest municipal bankruptcy in U.S. history in Detroit.

Michigan Attorney General Bill Scheutte, stating “People have died because of the decisions people made, has charged five Michigan state employees with involuntary manslaughter over their actions and involvement with Flint’s lead-contaminated water, including Nick Lyon, the Director of the Michigan Department of Health and Human Services, former Flint Emergency Manager Darnell Earley, former Michigan Department of Environmental Quality Drinking Water Chief Liane Shekter-Smith, state Water Supervisor Stephen Busch, and former Flint Water Department Manager Howard Croft. The quintet is accused of failing to alert the public about an outbreak of Legionnaires’ disease in the Flint area related to its contaminated drinking water—contamination which was suspected in the 12 deaths, Legionnaires’ disease sickening 79 others, and near insolvency of the City of Flint. Mr. Scheutte has not ruled out potential charges against Michigan Governor Rick Snyder, and he announced a new list of charges in a sweeping investigation that has already led to cases against 13 officials

Mayor Karen Weaver, in the wake of the press conference, noted: “It’s terrible what has occurred, but it’s a good day for the people of the city of Flint…We’ve had people die as a result of this water crisis. And for justice to be had is wonderful.”

Attorney General Bill Schuette, at the press conference, stated that the state’s health Director had failed to protect the residents of Flint, resulting in the death of at least one person, 85-year-old Robert Skidmore of Genesee Township. He also charged Michigan’s Chief medical officer, Dr. Eden Wells, with obstruction of justice and lying to a police officer, noting: “People have died because of the decisions people made…There are two types of people in the world: Those who give a damn and those who don’t. This is a case where there has been willful disregard.”

Mr. Scheutte’s charges mark the first time investigators have drawn a direct link between the acts of state government officials in Flint’s water contamination crisis and the deaths of residents which followed. Since 2014, when this city switched water suppliers, partly to save money, the water has been linked to the lead poisoning of children and the deaths of 12 people and 79 other residents of the city sickened by Legionnaires’ disease in 2014-15, which experts have linked to the contaminated water after the city, on the directions of the Governor’s then appointed Emergency Manager, Darnell Earley, switched to Flint River water in April of 2014.

At the press conference, Attorney General Schuette indicated he has not ruled out possible charges against the Governor. His actions came in the wake of his earlier charges of obstruction of justice against Michigan’s chief medical officer, Dr. Eden Wells, charged with obstruction of justice and lying to a police officer, noting: “People have died because of the decisions people made,” so that his actions were critical to the restoration of trust and accountability. “There are two types of people in the world: Those who give a damn and those who don’t. This is a case where there has been willful disregard” for the health and safety of others, Flood said.

The charges against Mr. Earley, the gubernatorially appointed former emergency manager on whose watch the city switched to Flint River water, include false pretenses, conspiracy to commit false pretenses, misconduct in office and willful neglect of duty while in office—charges which a carry a sentence of up to 20 years in prison. Attorney General Schuette noted: “The health crisis in Flint has created a trust crisis in Michigan government.”

Governor Snyder issued a statement of support for Mr. Lyons and Dr. Wells; he appeared critical of the legal process, noting that other state employees had been charged more than a year ago, but had yet to have their cases tried in court: “That is not justice for Flint, nor for those who have been charged.”

The state actions do not address the fundamental underlying fiscal issue of equity—or what Grand Rapids Mayor Rosalynn Bliss notes is the state’s broken state system of funding municipalities, or, as she told her colleagues at the Mackinac Policy Conference the week before last, she had been forced to adopt more local taxes and cut staff in order to make up for consistent cuts in state revenue sharing. Noting a lack of any fiscal bridge to address fiscal disparities, she told her colleagues that even as her city’s population has continued to grow towards the 200,000 mark, it has been forced to cut its staff by 25% since 2005: she reported the city has 100 fewer police officers now than there were 15 years ago—meaning that during Grand Rapids’ budget discussions this year, the city’s voters and taxpayers, to bridge gaps in state funding, agreed to taxes for public safety, streets, and parks. She described this “shift to the local units, because people care about their local services and what’s available to them, because we know that’s what makes cities great. That’s what attracts families to want to live in cities and businesses to move to cities: people want to live in safe neighborhoods. They want to drive on streets where the tires don’t pop from potholes. They want to be able to walk to a park that’s safe where their kids can play on a playground. Where the swimming pool is actually open. Those are decisions we grapple with at the local level every single day. And the decisions being made in Lansing impact every single city, including Grand Rapids…People move to Michigan for the quality of life – but funding issues can impact what services cities are able to provide to residents that they value…Long-term, relying on local taxes to keep up quality of life initiatives isn’t the answer: It’s inequitable, not every city has those resources.”

In Michigan, a municipal financial emergency is defined as a state of receivership. The state’s financial  emergency status, along with the Emergency Financial Manager was first created in in 1988, but replaced in 2011, and then, in 2012, voters replaced that with Public Law 436, the Local Financial Stability and Choice Act, which includes several triggers for a preliminary review:

  • board requesting a review via resolution,
  • local petition of 5 percent of gubernatorial election voters requesting one,
  • creditor’s written request,
  • missed payroll,
  • missed pension payments,
  • deficit-elimination plan breach or lack of such a plan within 30 days after its due day,
  • a legislative request.

The Indelicate Challenge of Restoring Political Authority in the Wake of Municipal Insolvency

Good Morning! In this a.m.’s eBlog, we consider the historic Civil War municipality of Petersburg’s, Virginia’s steps back to solvency and restoration of municipal control, and then to the indelicate imbalance of fiscal power in Puerto Rico—and whether the federal preemption might be causing more fiscal damage to its fiscal future.

Returning to Solvency. The Petersburg, Virginia City Council last night approved its FY2018 budget, a budget which includes outsourcing jobs—with more than a dozen city employees slated to lose their jobs as a result. The new municipal budget includes an increase in water rates—an increase of nearly 15%–an increase the city’s elected officials deemed necessary in order to finance needed repairs, as well as to update its systems for billing and collections—and to cover its past due arrears of $1.9 million. The session came as the Council began discussions with regard to hiring a new city manager and police chief—and whether to beef up is personal property tax enforcement: the city estimates it could be losing as much as $7 million annually from inadequate collection efforts. The actions by the Mayor and Council reflect a restoration of municipal authority in the wake of state intervention.

The Unpromise of PROMESA? Neither the government of Puerto Rico, nor the PROMESA Oversight Board has been able to state how much in municipal bond interest payments will be made for the next fiscal year—even as the gates of the University of Puerto Rico have been locked, depriving the U.S. territory of the jewel in its crown. The University, which has relied upon 30% of its financing from the government—financing critical to Puerto Rico’s hopes to keep its most promising future generation on the island, rather than incentivized to leave for New York City or Miami—increasingly threatening to leave behind an older and less educated population, more dependent on governmental services, but less able to pay taxes. However, as the PROMESA Board struggles over its preemptive decision with regard to what percent of Puerto Rico’s debt obligations to its municipal bondholders should be mandated, (according to the Board’s March approved fiscal plan, the bonds most closely associated with Puerto Rico’s government would pay $404 million in debt service in the coming fiscal year—approximately one-eighth of the $3.28 billion debt service due), the question with regard to investing in Puerto Rico’s fiscal and physical future remains murky—indeed, murky enough that the balance between Puerto Rico’s $404 million in debt service costs versus investments in its future has been left hanging.

Part of the challenge of preemptive governance is, as we perceived in the first instance of the Michigan takeover of Flint, that there can be signal human and fiscal damage to life, property, and fiscal solvency. Thus, the imbalance where the federal takeover under PROMESA, the Act intended to serve as the fiscal guide through FY2026, is to what extent disinvestment in Puerto Rico’s physical infrastructure and its municipalities might aggravate, rather than restore the territory’s solvency and create a fiscal foundation for its future. And that future is at stake—a future where the gates of its premier university are locked, and where demographers report the loss of population of 61,874 in one year—and where last Sunday’s plebiscite witnessed a drop of more than 50% in voter participation, with markedly reduced percentages in Puerto Rico’s 78 municipalities—where participation was 23%, less than a third the level of 1998. Demographer Raúl Figueroa noted: “The population is declining…To give people an idea, from 2015 to 2016, the loss of population was 61, 874,” adding that every year between 1% and 2% of the population is lost. The Mayors of Yauco (a municipality which lost nearly 10% of its population over the last decade) and Ponce, Puerto Rico’s second largest city, known as the City of Lions (population of 194,636), founded in 1692, an important trading and distribution center, as well as a key port of entry—indeed, one of the busiest ports in the Caribbean, which has seen a 9.36% decline in its population—a decline which Mayor Maria Mayita Meléndez, attribute to emigration: Mayor Meléndez notes that since 2006, more than 25,000 Puerto Ricans have left Ponce.

How Does A City Turn Around Its Fiscal Future?

Good Morning! In this a.m.’s eBlog, we consider a state’s response to a municipal fiscal insolvency, before turning to the challenge the Windy City is facing in the virtually politically insolvent State of Illinois, before finally turning to the uncertain political, governing, and fiscal future of East Cleveland, Ohio.  

Addressing Disparate Municipal Fiscal Distress. More than a century ago, Petersburg, Virginia, was a highly industrialized city of 18,000 people—and the hub and supply center for the Confederacy: supplies arrived from all over the South via one of the five railroads or the various plank roads; it was also the last outpost. Today, it is one of the last fiscal outposts, but, mayhap, because of its fiscal distress, set to be a model for the nation and federalism with regard to how the Commonwealth of Virginia—unlike, for instance, Ohio, is responding. More than 53 percent of Virginia’s counties and cities have reported above-average or high fiscal stress, according to a report by the Commission on Local Government. Petersburg, a city grappling with a severe financial crisis, placed third on the state fiscal stress index behind the cities of Emporia and Buena Vista. Del. Lashrecse Aird (D-Petersburg) noted: “Petersburg does have some financial challenges, but they’re actually not unique. There are a lot of counties and localities within the commonwealth right now that are facing similar fiscal distressers.”  

The Virginia Legislature has dropped a proposed study of local government finances in its just completed legislative session, a legislative initiative which co-sponsor Rosalyn Dance (D-Petersburg) had described to her colleagues as necessary, because:  “Currently, there is no statutory authority for the Commission on Local Government to intervene in a fiscally stressed locality, and the state does not currently have any authority to assist a locality financially;” nevertheless, Virginia’s new fiscal year state budget did revive a focus on fiscal stress in Virginia cities and counties. Motivated by the City of Petersburg’s financial crisis, Sen. Emmett Hanger (R-Augusta County), who co-Chairs the Virginia Senate Finance Committee, had filed a bill (SJ 278) to study the fiscal stress of local governments: his bill proposed the creation of a joint subcommittee to review local and state tax systems, as well as reforms to promote economic assistance and cooperation between regions. Under SJ 278, a 15-member joint subcommittee would have reviewed local government and state tax systems, local responsibilities for delivery of state programs, and causes of fiscal stress among local governments. In addition, the study would have been focused on creating financial incentives and reforms to promote increased cooperation among Virginia’s regions. We will have to, however, await developments, as his proposal was rejected in the House Finance Committee, as members deferred consideration of tax reform for next year’s longer session; however, the adopted state budget did incorporate two fiscal stress preventive measures originally introduced in Sen. Hanger’s bill.

Del. Aird had identified the study as a top priority for this session, identifying: “what we as a Commonwealth need to do to put protections into place and allow localities to have tools and resources to prevent this type of challenge from occurring into the future,” noting: “I believe that this legislation will help address fiscal issues that localities are experiencing: ‘Currently, there is no statutory authority for the Commission on Local Government to intervene in a fiscally stressed locality, and the state does not currently have any authority to assist a locality financially.’” In the case of Petersburg, the city received technical assistance from state officials, including cataloging liabilities and obligations, researching problems, and reviewing city funds; however, state intervention could only be triggered by a request from the municipality: the state’s statutes forbid the Commonwealth from imposing reactive measures to an insolvent municipality.

To modify the conditions to enhance the ability of the state to intervene, the proposal set guidelines for state officials to identify and help alleviate signs of financial stress to prevent a more severe fiscal crisis, proposing the creation of a workgroup established by the Auditor of Public Accounts, who would have been responsible to create an early warning system for identifying fiscal stress, taking into consideration such criteria as a local government’s expenditure reports and budget information. In the event such distress was determined, such a local government would be notified and entitled to request a comprehensive review of its finances by the state. After such a review, the state would be responsible to draft an ‘action plan’ detailing: purpose, duration, and the requisite state resources for such intervention; in addition, the governor would be offered the option to channel up to $500,000 from the general fund toward relief efforts for the local government in need. As Del. Aird noted: “It is important to have someone who can speak to first-hand experience dealing with issues of local government fiscal stress: This insight will be essential in forming effective solutions that will be sustainable long-term, adding: “Prior to now, Virginia had no mechanism to track, measure, or address fiscal stress in localities…Petersburg’s situation is not unique, and it is encouraging that proactive measures are now being taken to guard against future issues. This is essential to ensuring that Virginia’s economy remains strong and that all communities can share in our commonwealth’s success.”

What Might Be a City’s Weakest Link? The state initiative comes as the city intends to write off $9 million in uncollected internal debt Petersburg has accumulated over the past 17 years: debt representing loans from Petersburg’s general fund to other city enterprises since 2000 which its leaders now concede they will never collect—or, as former Richmond City Manager—and now consultant for the city Robert Bobb notes: “This is something that the leadership should have addressed between 2000 and last year, but the issue was not being addressed.” As a result, when Petersburg officials receive the city’s financial audit for FY2017, it will show a negative fund balance that will make it even harder to secure financing for capital projects, albeit, it is expected to clear the uncollected debt from the books for the current fiscal year and the upcoming fiscal year—or, as Virginia Finance Director Ric Brown notes: “They’re taking it on the chin in FY2016 by clearing it all out of the books: To me, the most important thing is not how bad ‘16 is—it’s going forward whether FY2017 and FY2018 improve.” With its bond rating downgraded last year to BB with a negative outlook, Petersburg already faces a stiff fiscal challenge in raising capital—the municipality recently experienced an inability to raise capital to purchase police cars and fire equipment—making manifest the connection between public safety and assessed property values.

Nevertheless, Mr. Bobb has promised that this fiscal year will end without an operating deficit and the next one will begin with the first structurally balanced budget in nearly a decade—to which Secretary Brown notes: “It’s going to take some time, but I believe the sense of everyone is he’s making progress.” The Secretary noted that when the Commonwealth acted to come to Petersburg’s assistance last summer, he discovered the municipality had ended the fiscal year with $18.8 million in unpaid bills and $12 million over its operating budget; ergo, he testified the bottom line was “not going to be good” in the city’s FY2016 CAFR; however, Petersburg has worked in phases to pay its bills, reduce its costs, and rebuild its underpersonned, overwhelmed bureaucracy: The city has reduced its unpaid bills to $5.5 million, with the largest remaining obligation a $1.49 million payment to the Virginia Retirement System—a payment the city has agreed to pay by the end of December. The city’s school system has some $1.3 million in debt to its public retirement system due next month for teacher pensions. Nevertheless, in the school of lost and found, Mr. Bobb reports that city employees have scoured “every desk drawer” and discovered an additional $300,000 in unpaid bills, some of them dating back to 2015—unsurprisingly describing it as “[A] mess to clean up things from the past to where we are today.” Petersburg also has a gaping $1.9 million hole in the school system budget, in no small part by making payments this year to last year’s budget, a practice Mr. Bobb notes to be a [mal]practice the city has followed for 10 years—putting the city’s school budget near the minimum required by the Virginia Standards of Quality.

Nevertheless, Petersburg completed the first phase of recovery, focusing on short-term financing concerns, at the end of March. That has allowed it to focus on long-term financing and a fiscal plan, including developing policies for capital improvements, debt, and reserves to ensure financial stability. In the final stage, from July 1 until Mr. Bobb’s contract ends on September 30th, the city will develop five-year financial and capital improvement plans, as well as a budget transition plan, for ongoing financial performance and monitoring—as well as refilling the fiscal architecture via filling critical positions, including a finance director, which Mr. Brown notes, will be critical to filling middle management positions, such as accountants, which are vital to maintain the city’s financial stability: “If they don’t get that in place, there’s a real risk they’ll slide back.”

Petersburg wasn’t even at the top of the list of the most fiscally stressed localities ranked by the Virginia Commission on Local Government in 2014. It was third, behind Emporia and Buena Vista, and just ahead of Martinsville and Covington. “We’re only as strong as our weakest link,” said Sen. Rosalyn R. Dance, D-Petersburg, who served as the city’s mayor from 1992 to 2004. “We’re not the only ones there.”

Whither Chicago? The Windy City, nearly 350 years old, named “Chicago,” based upon a French rendering of the Native American word “shikaakwa,” from the Miami-Illinois language, is today defined by the Census Bureau as the city and suburbs extending into Wisconsin and Indiana; however, it is, today, a city experiencing population decline: last year it lost just under 20,000 residents—and its surrounding state, Illinois, saw its population decline more than any other state: 37,508 people, according to census data released last December. During the Great Recession, families chose to stay in or move to core urban areas, and migration to the suburbs decelerated; however, in the recovery, there is a reverse trend: families are deciding it is time to move back to the suburbs.

Thus, by most estimates, Chicago’s population will continue to decline, with the Chicago Tribune, from a survey of dozens of former residents, reporting the depopulation stems from reactions to: high taxes, the state budget stalemate, crime, the unemployment rate, and weather—with black residents among those leaving in search of safe neighborhoods and prosperity: it seems many are heading to the suburbs and warm-weather states: Chicago lost 181,000 black residents between 2000 and 2010, according to census data. Just under 90,000 Chicagoans left the city and its immediately surrounding suburbs for other states last year, according to an analysis of census data released in March, marking the greatest outflow since at least 1990. It appears that, more than any other city, Chicago has relied upon the increase in Mexican immigrants to offset the decline of its native-born population: during the 1990s, that immigration accounted for most of Chicago’s growth. After 2007, when Mexican-born populations began to fall across the nation’s major metropolitan areas, most cities managed to make up for the loss with the growth of their native populations, but that has not been the case for Chicago (nor Detroit, which, according to census data, realized a decline of 3,541 residents from 2015 to 2016). While Chicago’s changes may be small in context, they could be a harbinger of more losses to come.

As we had noted in our fiscal report on Chicago, Mayor Rahm Emanuel focused on drawing in new businesses, concerned that any perception that assessed property taxes might have to increase—or that schools and crime rates would not improve—would adversely affect companies’ willingness to come to Chicago—meaning an intense focus on confronting fiscal challenges: such as credit quality threats: e.g. avoiding having a disproportionate percent of the city’s budget devoted to long-term pension borrowing obligations instead of critical future investments: the more of its budget the city had to divert to meeting unsustainable pension obligations, the less it would have to address its goal of investments in the city’s infrastructure, schools, and public safety—investments the Mayor believed fundamental to the city’s economic and fiscal future.  We noted a critical change: Investing in the Future: Mayor Emanuel created enterprise funds so that a greater portion of municipal services were not financed through property taxes and the operating budget: some 83 percent of its budget was focused on schools and public safety, in an effort to draw back young families. Nevertheless, amid growing perceptions that Chicago’s cost of living has become too high, rising property taxes, and perceived growth in crime; some are apprehensive Chicago could be at a tipping point: the period in a city’s time when an increasing number of residents believe it is time to leave—or, as one leaver noted: “It’s just sad to see that people have to leave the city to protect their own future cost of living.”

Does East Cleveland Have a Fiscal Future? In the small Ohio municipality of East Cleveland, a city waiting on the State of Ohio for nearly a year to obtain permission to file for chapter 9 municipal bankruptcy, there is an upcoming Mayoral election—an election which could decide whether the city has a fiscal future—and where voters will have to decide among an array of candidates: who might they elect as most likely to turn the fortunes of the City around, and avert its continuing slide towards insolvency? One candidate, who previously served as Chairman of the East Cleveland Audit Committee, noted a report to the Council detailing twenty-four budget appropriations totaling approximately $2,440,076 in unauthorized and questionable expenditures—and that his committee had provided documentation to the Auditor of State’s Office of Local Government Services regarding the hiring of 10 individuals in violation of a Council-mandated hiring freeze, costing the City approximately $408,475 in unauthorized payroll costs, adding: “All told, the Audit Committee uncovered approximately $3,055,351 in illegal and suspicious spending by the Norton Administration…The truth is, as I stated in the beginning, the municipal government of East Cleveland is afflicted with the cancer of corruption that has been allowed to grow because of two main reasons: The first being, the indifference displayed by Ohio and Cuyahoga County government officials who failed in their respective responsibility when confronted with documented facts.  They collectively have turned a blind eye to what was, and is, happening in East Cleveland.  No one wants to get their hands dirty with so-called ‘black politics,’ even if the legal and financial evidence is given to them on a ‘silver platter.’  Personally, I smell the stench of secret political deals which produced a ‘hands off policy.’”

He added that a symptom of what he described as “this cancer” included some “$41, 857, 430 in unwarranted expenses and debt that was generated during the first 3 years of Mayor Norton’s first term as Mayor. I anticipate that whenever an audit is conducted for 2013 thru 2016, the $41 million figure will grow by an additional $25 million to $35 million.” Addressing the unresponsiveness of the State of Ohio, he described the Governor’s Financial Planning and Supervision Commission as a “joke:  It has been wholly unimpressive and has not provided the necessary oversight and forced accountability one would have expected from the Commission at the beginning.  Furthermore, The Commission became tainted when Governor Kasich appointed Helen Forbes Fields to the Commission.  She has a number of personal conflicts of interests that prevent her from being an impartial member of the Commission.  I can recall a conversation I had with the former Commission Chair, Sharon Hanrahan when she admitted to me that the State Government did not have the ‘political will’ to clean up the mess we were trying to get them to address.” He added, that, if elected, in order to bring accountability for the mismanagement of public funds, he would seek assistance from Ohio and federal law enforcement agencies to ensure those responsible for the mismanagement of East Cleveland’s financial resources would be held accountable, estimating that between $5 million and $15 million dollars could be recovered. 

Puerto Rico & Municipal Bankruptcy: a process of pain where “failure is not an option.”

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Good Morning! In this a.m.’s eBlog, we consider the opening under U.S. Judge Laura Swain of the unique, quasi chapter 9 municipal bankruptcy process which opened this week in Puerto Rico, where Judge Swain noted the process “will certainly involve pain,” but that “failure is not an option.”

Getting Ready to Rumble. Judge Swain has combined two major PROMESA Title III filings made earlier this month by Puerto Rican authorities—one for its general obligation debt, and one for debt which is backed by the Puerto Rico’s Commonwealth or COFINA sales tax revenues. Reuters helps explain, writing: “The island’s initial bankruptcy filing on [May 3] included only its central government, which owes some $18 billion in general obligation, or GO debt, backed by its constitution…The COFINA filing [on May 5] will pull in another $17 billion or so in debt under the Title III umbrella. Overall the island’s government and various agencies have a debt load of $74 billion that they cannot repay.” Unsurprisingly, as Bloomberg notes, a sizeable separation between general obligation and COFINA bondholders has already emerged. Judge Swain’s early decision to merge the two filings for administrative purposes appears to denote a small victory for the PROMESA Board, as some COFINA stakeholders had objected (COFINA bondholders were the first to sue the government of Puerto Rico after the freeze on creditor litigation under PROMESA expired at Midnight May 1st.) They accuse Puerto Rico, Governor Ricardo Rossello and other officials of angling to repurpose the tax revenue earmarked to pay COFINA debt.: they argued that COFINA is a separate entity whose assets, in the form of sales tax revenue, are earmarked only for creditors.” The debt here dwarfs any we have seen in Detroit, San Bernardino, etc.: Puerto Rico, according to the PROMESA Board, cannot even meet 25% of its $900 million necessary to service its municipal debt. And, in some sense, that debt—owed to investors in the 50 states, pales compared to the human obligations at home: NPR’s Greg Allen describes: “retirees who are owed pensions; 180 closed public schools, $500 million in cuts proposed for the university here…So lots of pain to come here—and the governor is going to be releasing a budget later this month, which will show a lot more pain coming. Among the things that are going to happen is, I think, big cuts in health care benefits.” He estimated the trial could exceed the duration of Detroit’s chapter 9, taking as many as five years to conclude. Judge Swain will—as Judge Rhodes had to in Detroit, and as was the very hard case in Central Falls, Rhode Island’s municipal bankruptcy‒Puerto Rico’s $49 billion in government pension obligations. But Puerto Rico’s debt is not just fiscal: the island has a poverty rate of 45%–a level dwarfing what we have experienced in previous chapter 9 bankruptcies. The current case may not affect all of these because some are for the employees of semi-autonomous Puerto Rico entities like the Puerto Rico Electric Power Authority. And, the trial here dwarfs the previous largest U.S. municipal bankruptcy in Detroit, where the stakes involved $18 billion in debt, pension obligations, and other OPEB benefits. The pension obligations have been described as liabilities of as much as $45 billion. On the trial’s first day, Judge Swain heard presentations with regard to whether the case should include mediation—and, if so, which parties should be included: that is, she will have a Solomon-like set of choices, choosing between Puerto’s Rico’s citizens, its municipal bondholders, suppliers owed money, pensioners, and government employees. Judge Swain will also hear presentations with regard to whether—and when‒Puerto Rico should be required to submit lists of its creditors and in what manner and how notice to creditors will be made. The PROMESA Oversight Board attorney Martin Bienenstock said he anticipates other Puerto Rico public entities, including the Highways and Transportation Authority, would soon file for Title III later. The considerations in the court will also have to address how some $800 million set aside in Puerto Rico’s certified 10-year fiscal recovery plan will be apportioned between competing claims–including those of constitutionally backed general obligation debt (GO) and sales-tax backed or COFINA bonds.

On the Hard Roads of Fiscal Recovery

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Good Morning! In this a.m.’s eBlog, we consider the growing, remarkable fiscal recoveries in post-bankruptcy Detroit and formerly insolvent Atlantic City, before turning to the U.S. Territory of Puerto Rico as it seeks, along with the oversight PROMESA Board, an alternative to municipal bankruptcy.

Pacing a City’s Economic Recovery. JP Morgan Chairman and Chief Executive Officer yesterday described the city of Detroit’s economic recovery as one which has moved faster than expected—indeed, so much so that the giant financial institution today will announce it is expanding its investment in the city over the next two years, bringing the total effort to $150 million by 2019—some two years ahead of schedule. Mr. Dimon credited the city’s economic progress to strong collaboration between civic, business, and nonprofit leadership, as well as improving economic conditions in the city. If anything, over the last three years, the bank has become an enthusiastic partner in the Motor City’s recovery from the nation’s largest ever chapter 9 municipal bankruptcy via investing more than $107 million in loans and grants to enhance the city’s remarkable progress in implementing its plan of debt adjustment and achieving the goal of complete restoration of its fiscal autonomy. JP Morgan’s investments have included $50 million in community development financing, $25.8 million to revitalize neighborhoods, $15 million for workforce development, $9.5 million for small business expansion, and $6.9 million in additional investments. In addition, Morgan appears to be ready for more, with the bank’s future investments likely to focus on:

  • further revitalizing Detroit’s neighborhoods,
  • strengthening the city’s workforce system, and
  • helping minority-owned small businesses grow.

Indeed, Mr. Dimon noted: “Detroit’s resurgence is a model for what can be accomplished when leaders work together to create economic growth and opportunity…This collaboration allowed us to speed up our investment and extend our commitment over the next two years. Going forward, I hope business, government and nonprofit leaders will see Detroit’s comeback as a shining example of how to put aside differences and work to find meaningful and innovative solutions to our most pressing economic problems.” For his part, Detroit Mayor Mike Duggan called JPMorgan Chase “a true partner” in the city’s work to restore economic growth and opportunity, noting that Morgan’s investments “have enabled thousands of Detroiters to receive training and created new opportunities for entrepreneurs and revitalized neighborhoods. There is more work to do, and I hope our continued partnership will build a thriving economy for all Detroiters.”

Indeed, the giant financial institution has extended its fiscal commitment: it plans to make investments of about $30 million focused on creating livable, inclusive, and sustainable neighborhoods. Officials report that will include preparing residents with the skills needed for high-paying careers and providing small businesses with capital. In addition, JPMorgan Chase officials said they will invest about $13 million re-paid loans paid back into two community development investment funds with which the bank has partnered in the community: Invest Detroit and Capital Impact Partners. This post-municipal bankruptcy investment in Detroit has been key, city officials, report to enabling Detroit to test solutions, adapt programs, and even find models that could be applied to other cities. For instance, the city’s Motor City Mapping project, Detroit’s comprehensive effort to digitize Detroit’s property information and create clear communication channels back and forth between the public, the government, and city service providers, has provided JP Morgan with insights how blight mapping can be applied in other cities to bring community partners together to fight blight—the bank has already shared the mapping technology in Cleveland, Columbus, and Cincinnati.

Is Atlantic City like Dracula? New Jersey State Senator Jim Whelan (D-Northfield), the former Mayor of Atlantic City and previous teacher in the city’s public school system, yesterday noted: “I always say Atlantic City is like Dracula—you can’t kill it, no matter how hard we try.” Indeed, the city’s gleaming casinos are turning profits, and plans have recently been announced to embark upon a $375 million renovation and reopening of the Trump Taj Mahal by Hard Rock casino; Stockton University just broke ground on a satellite campus. A luxury apartment complex, the first to be constructed in Atlantic City in decades, is underway. With upgrades in the city’s credit rating, a city that was on the brink of chapter 9 bankruptcy and taken over by the state is, today, on the road to recovery. The fiscal recovery comes in the wake of a decade which featured a 50 percent drop in the city’s casino revenues, witnessed the closure of nearly half of the casinos, and loss of 10,000 jobs, a loss which triggered a massive spike in home foreclosures—indeed losses which so imperiled the city’s fisc that the state took over the city. But this week, with a new playground ready for when the local elementary school lets out and a reduction in property taxes, there is a note of fiscal optimism. David G. Schwartz, an Atlantic City native, who currently serves as the Director of the Center for Gaming Research at the University of Nevada, Las Vegas, described it this way: “I think we are definitely into the next phase of the city’s history…Atlantic City has faced adversity before, and it has always moved forward–even though it sometimes took a few decades.”

My distinguished colleague, Marc Pfeiffer, the Assistant Director of the Bloustein Local Government Research Center in New Jersey, who, after a brief 37-year career in New Jersey local government administration, and a mere 26 years of service in New Jersey’s Division of Local Government Services, described the remarkable fiscal turnaround this way:

“The state is proceeding with its low-key recovery approach, working hand-in-hand with Mayor Guardian’s administration and the City Councilinsofar as politically feasible, and when not, pushing ahead using the authority in the law.  A few fits and starts with some challenges along the way, but it is a generally forward, positive trajectory. The recent Superior and Appellate decisions affirmed (or until appealed to the Supreme Court) the validity of New Jersey’s authority under the law, which eliminated the uncertainty of the last year. That’s good.  Jeff Chiesa’s team can now work with the city’s administration to make the changes which have long been discussed: reducing costs, modifying service levels and workforce size, in order to meet the city’s needs today given its new and evolving economy.”

In answer to the query what still remains to be addressed, he noted that the hard political issue of payments in lieu of taxes is being challenged by the neighboring County Executive and mayors of surrounding jurisdictions.  He reports that finding a “chunk of money to bring down long-term debt” to enable reductions in the city’s property tax is still a challenge—as is the enduring question with regard to how to address the water authority: how can it be monetized and meet the city’s interest in not losing ownership of it.  

From a governance perspective, he notes that the State of New Jersey had managed to keep all these issues relatively low-key: negotiations have been undertaken far from the public spotlight—mayhap depriving the public of critical information, but, at the same time, facilitating fiscal progress in avoiding the once, seemingly certain municipal bankruptcy.

Importantly, he adds that Atlantic City’s evolving economy cannot be ignored: “We’ve seen new investment and construction; new market rate rentals, South Jersey Gas moving its headquarters to Atlantic City; there is a new Stockton State University campus, and the pending revitalization and reopening of the shuttered Taj Mahal as a Hard Rock casino: “casino gaming revenues are up as we slide into the prime season.” Finally, he writes: “We seem to be getting to the point of ‘right-sizing’ the city, both economically and governmentally…which may be complicated by the pending elections—where the issue will be the upcoming primary battle to determine who will run against Mayor Guardian this fall.

Could There Be Promise in PROMESA? PROMESA Puerto Rico Oversight Board Chair José Carrión has advised the Governor Rosselló that the board has deferred until a week from Monday for either the board approving the Governor’s budget or notifying the Governor of violations and providing a description of corrective actions, writing: “We have received a working draft of the proposed budget, and are reviewing the submission and its completeness…The board will provide the Governor an additional 14 days to amend and improve the submission before it approves it or identifies violations.” The Governor’s working draft has yet to be made public; and constructing it will be perilous: according to the PROMESA board-certified fiscal plan, as of mid-March the Board expects the Governor to add nearly $924 million in revenues and cut $951 million in expenses from Puerto Rico’s All Government Activities budget—changes in a deteriorating economy the equivalent of nearly 10% of the Commonwealth’s budget.

Dr. José G. Caraballo, a professor in the Department of Business Administration at the University of Puerto Rico at Cayey, who also serves as the Director of the Census Information Center at the University, this week provided some perspective—or what he called “conjectures” with regard to the cause of what he called Puerto Rico’s “unsustainable indebtedness,” noting one hypothesis is that a “bloating” government inflated the government payroll, increasing the need to borrow. That perspective is valuable: for instance, he writes: “Even when there is no academic study showing that the payroll is payable or not, the proportion of government employees to the overall population aged 16 and older was lower in 2001 than in 1988, when there were no debt problems. In fact, the ratio of government workers to the population, ages 16-64, in 2013 was 10.3 percent in the U.S. and 11.2 percent in Puerto Rico, reducing the validity of this claim.”

Addressing the hypothesis that reckless and corrupt administrations had caused Puerto Rico’s fiscal and debt crisis, he noted: “I acknowledge that fiscal mismanagement has exacerbated this crisis, but there are studies showing that the (low) quality of administrators was similar from 1975-2000, and there is no evidence that the corruption of the 2000s was worse than the corruption in the 1970s or 1980s, when there was no debt crisis,” adding that “debt (measured in the correct way, either adjusted for inflation or as a share of gross domestic product) actually decreased from over the decade from 1977-1987.”  

Finally, he turned to an underlying issue: the disparate treatment of Puerto Rico created by §936 of the Internal Revenue Code—under which the industrial incentives provided to Puerto Rico were stripped, undercutting the island’s economy and disadvantaging it compared to other Caribbean nations: he noted that the proportion of manufacturing left the U.S. territory without any substitutable economic strategy, reduced government revenues, and increased Puerto Rico’s dependency on external funding—noting that in 1995, manufacturing represented 42% of Puerto Rico’s GDP, creating more than 30% of the local bank deposits and generating 17% of the total direct employment. Thus, he added; “It is far from a coincidence that when the transition period of the §936 ended in 2006, Puerto Rico entered the largest economic depression in more than 100 years. I verified the relationship between this deindustrialization and indebtedness with advanced statistical methods in a recent paper.”

Dr. José G. Caraballo offered that Congress could include Puerto Rico in the Guam-Northern Mariana Islands Visa Waiver Program—a change which he suggested would draw more tourists from Asia; remove the federal navigation acts which force Puerto Ricans to exclusively contract expensive U.S. vessels; implement new industrial policies; or provide parity in the distribution of Medicare and Medicaid assistance.

Solomon’s Choices: Who Will Define Puerto Rico’s Fiscal Future–and How?

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Good Morning! In this a.m.’s eBlog, we consider the growing physical and fiscal breakdown in the U.S. Territory of Puerto Rico as it seeks, along with the oversight PROMESA Board, an alternative to municipal bankruptcy. 

Tropical Fiscal Typhoon. U.S. Supreme Court Chief Justice John Roberts has selected Southern District of New York Judge Laura Taylor Swain, who previously served as a federal bankruptcy Judge for the Eastern District of New York from 1996 until 2000 to preside over Puerto Rico’s PROMESA Title III bankruptcy proceedings—presiding, thus, over a municipal bankruptcy nearly 500% larger than that of Detroit’s–one which will grapple with creating a human and fiscal blueprint for the future of some 3.5 million Americans—and force Judge Swain to grapple with the battle between the citizens of the country and the holders of its debt spread throughout the U.S. (Title III of PROMESA, which is modeled after Chapter 9 of the Municipal Bankruptcy Code and nearly a century of legal precedent, provides a framework for protecting Puerto Rico’s citizens while also respecting the legitimate rights and priorities of creditors.) For example, the recent Chapter 9 restructuring in Detroit sought reasonable accommodations for vulnerable pensioners and respected secured creditors’ rights.

The action came in the wake of Puerto Rico’s announcement last week that it was restructuring a portion of its nearly $73 billion in debt—an action which it was clear almost from the get-go that the requisite two-thirds majority of Puerto Rico’s municipal bondholders would not have supported. (Puerto Rico’s constitution provides that payments to holders of so-called “general obligation” bonds have priority over all other expenditures—even as another group of creditors has first access to revenues from the territory’s sales tax.) More critically, Judge Swain will be presiding over a process affecting the lives and futures of some 3.5 million Americans—nearly 500% greater than the population of Detroit. And while the poverty rate in Detroit was 40%, the surrounding region, especially after the federal bailout of the auto industry, differs signally from Puerto Rico, where the poverty rate is 46.1%–and where there is no surrounding state to address or help finance schools, health care, etc. Indeed, Puerto Rico, in its efforts to address its debt, has cut its health care and public transportation fiscal support; closed schools; and increased sales taxes. With the Bureau of Labor Statistics reporting an unemployment rate of at 12.2%, and, in the wake of last year’s Zika virus, when thousands of workers who were fighting the epidemic were let go from their jobs; the U.S. territory’s fiscal conditions have been exacerbated by the emigration of some of its most able talent—or, as the Pew Research Center has noted:  “More recent Puerto Rican arrivals from the island are also less well off than earlier migrants, with lower household incomes and a greater likelihood of living in poverty.”

For Judge Swain—as was the case in Detroit, Central Falls, San Bernardino, Stockton, etc., a grave challenge in seeking to fashion a plan of debt adjustment will resolve around public pensions. While the state constitutional issues, which complicated—and nearly led to a U.S. Supreme Court federalism challenge—do not appear to be at issue here; nevertheless the human aspect is. Just as former Rhode Island Supreme Court Judge Robert G. Flanders, Jr., who served as Central Falls’ Receiver during that city’s chapter 9 bankruptcy—and told us, with his voice breaking—of the deep pension cuts which he had summarily imposed of as much as 50%—so too Puerto Rico’s public pension funds have been depleted. Thus, it will fall to Judge Swain to seek to balance the desperate human needs on one side versus the demands of municipal bondholders on the other. Finally, the trial over which Judge Swain will preside has an element somewhat distinct from the others we have traced: can she press, as part of this process to fashion a plan of debt adjustment, for measures—likely ones which would have to emanate from Congress—to address the current drain of some of Puerto Rico’s most valuable human resources: taxpayers fleeing to the mainland. Today, Puerto Rico’s population is more than 8% smaller than seven years ago; the territory has been in recession almost continuously for a decade—and Puerto Rico is in the midst of political turmoil: should it change its form of governance: a poll two months’ ago found that 57% support statehood. Indeed, even were Puerto Rico’s voters to vote that way, and even though the 2016 GOP platform backed statehood; it seems most unlikely that in the nation’s increasingly polarized status the majority in the U.S. Congress would agree to any provision which would change the balance of political power in the U.S. Senate.