Is There Shelter from the Storm?

November 20, 2017

Good Morning! In today’s Blog, we consider the deepening Medicaid crisis and Hurricane Maria recovery in the U.S. territory of Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Well I’m living in a foreign country, but I’d bound to cross the line
Beauty walks a razor’s edge, someday I’ll make it mine
If I could only turn back the clock to when God and her were born
“Come in” she said
“I’ll give you shelter from the storm”.

Bob Dylan

Shelter from the Storm & Governing Competency? With this session of Congress entering its final two weeks of the calendar year, Puerto Rico’s Medicaid funding crisis is deepening: Hurricane Maria wrought serious physical and fiscal damage to Puerto Rico’s health-care system; yet, not a dime of the federal disaster relief money has, to date, been earmarked for the island’s Medicaid program. The White House, Friday, belatedly submitted a $44 billion supplemental payment request, noting that the administration was “aware” that Puerto Rico needed Medicaid assistance; however, the Trump Administration put the onus on Congress to act—leaving the annual catchall omnibus appropriations bill as the likely last chance: this Congress is scheduled to adjourn on December 14th.  But with a growing list of “must do” legislation, including the pending tax bill and expiring S-CHIP authorizations, time is short—and the administration’s request is short: In a joint statement, House Energy and Commerce Committee ranking members Frank Pallone Jr. (D-N.J) and Senate Finance Committee ranking member Ron Wyden (D-Or.) called on the Trump Administration to “immediately provide additional funding and extend a one-hundred percent funding match for Medicaid in Puerto Rico and the U.S. Virgin Islands, just as we did in the aftermath of Hurricane Katrina,” with the request coming amid apprehensions that unless Congress acts, federal funds will be exhausted in a matter of months—potentially threating Puerto Rico’s ability to meet its Medicaid obligations: the Puerto Rican government has requested $1.6 billion from Congress and the Trump administration in the wake of the devastating physical and fiscal storm, with Gov. Ricardo Rosselló having, last month, requested $1.6 billion a year over the next five years, writing to Congressional leaders that the “total devastation brought on by these natural disasters has vastly exacerbated the situation and effectively brought the island’s healthcare system to the brink of collapse.” Puerto Rico in 2016 devoted almost $2.5 billion to meet its Medicaid demands—so even the proposed reimbursement would only cover about 60 percent of the projected cost. The urgency comes as the House, earlier this month, passed legislation reauthorizing the CHIP program, including $1 billion annually for Puerto Rico for the next two years, specifically aimed at shoring up the island’s Medicaid program. Nevertheless, despite the progress in the House on CHIP funding, the Senate has yet to moved forward with its version of the legislation—and the version reported by the Senate Finance Committee does not include any funds for Puerto Rico. Should Congress not act, up to 900,000 Puerto Ricans would likely be cut from Medicaid—more than half of total enrollment, according to federal estimates.

Rep. Bruce Westerman, Chair of the House Subcommittee on Oversight & Investigations of the House Natural Resources Committee, last month, had noted, it was “obvious PREPA did not know how to draft a FEMA-compliant contract, nor did PREPA officials adhere to the advice of their own counsel on how to comply: I believe this is precisely why the Oversight Board should be granted more authority. While we understand the sense of urgency for the people of Puerto Rico, oversight and transparency are vital to this recovery process.” House Committee on Natural Resources Chairman Rob Bishop added: “A legacy of dysfunction (at PREPA) has created a competence deficit that threatens the island’s ability to improve conditions for its citizens. Confidence in the utility’s ability to manage contracts and time-sensitive disaster related infrastructure work is long gone.” The Oversight Board announced its plan to appoint Noel Zamot to replace current PREPA leader Ricardo Ramos just a day or two after board members met with Chairman Bishop, according to a Bishop spokesperson. At a Committee on Natural Resources hearing last Wednesday, Chairman Bishop continued to call for more outside control over Gov. Ricardo Rosselló’s government, stating: “The lack of institutional controls…raises grave concerns about the government of Puerto Rico’s ability to competently negotiate, manage, and implement infrastructure projects without significant independent oversight: One of the things that I think we’re walking into here is a tremendous credibility gap, based on Whitefish and other subsequent decisions that are going on here.” (The “Whitefish” to which Chair Bishop was referring was Whitefish Energy, which had been retained by PREPA to help fix Puerto Rico’s electrical grid: observers have questioned the adequacy of the company’s experience, the fact that it is based in the same Montana town as the U.S. Secretary of the Interior, and the rates it is charging to Puerto Rico.)

Prior to the hearing, Gov. Rosselló had released a request to the federal government for $94 billion in medium- and long-term aid for recovery from hurricanes Irma and Maria—a request unlikely to be met—or, as Chairman Rob Bishop “You’re asking for an unprecedented $94 billion: “That’s a lot of money. That’s not going to happen unless people are going to see some changes in the way cooperation is made, and the way that money’s going to be spent.” The Governor’s responses came as—on the other side of the Hill, PREPA Executive Director Ricardo Ramos explained to the U.S. Senate Energy and Natural Resources Committee the process PREPA used to hire Whitefish Energy to repair Puerto Rico’s energy grid. He testified that in the wake of Hurricane Irma (which struck Puerto Rico on September 6th), six private companies submitted offers to PREPA to aid with restoring the grid. All six companies offered similar hourly rates. While only 25% of the island had electrical service immediately after Irma, this service had since improved to 96%.  Immediately after Hurricane Maria hit, Director Ramos testified he had limited communications ability and did not become fully aware of the extent of Maria’s damage to the electrical system for a week. Use of state mutual aid for restoring the grid, he testified, would have required PREPA to provide accommodations, food, communications, and other logistics to the incoming crews, because this was part of the mutual aid policies. Thus, Mr. Ramos noted that in the immediate aftermath of the hurricane, the utility was unable to make such provisions—meaning, ultimately, that he had to choose between using another company that was asking for $25 million up front versus Whitefish, which was willing to be paid when the work was completed. Ergo, Mr. Ramos authorized the use of Whitefish and chose to continue to look for other options. At the start of Wednesday’s Senate Energy and Natural Resources Committee meeting on the hurricanes’ impact on Puerto Rico and the U.S. Virgin Islands, Chairwoman Lisa Murkowski (R.-Alaska), said she thought it made little sense to spend hundreds of millions of dollars of Stafford Act funds to rebuild the electric grid as it had been in Puerto Rico and the Virgin Islands prior to the hurricanes. She said this would only re-erect it only to be later blown down again.

Governance in Puerto Rico. As U.S. Judge Laura Taylor Swain presides over Puerto Rico’s quasi-chapter 9 municipal bankruptcy trial in Puerto Rico, House Natural Resources Committee Chair Rob Bishop (R-Utah) and Rep. Bruce Westerman (R-Ark.) last week issued a statement that the Puerto Rico PROMESA Oversight Board ought to be granted additional legal authority over the Puerto Rico Power Authority (PREPA), with their statement coming just hours after Judge Swain had ruled that the PROMESA Board lacked authority to replace PREPA’s current director. The power authority issue came as Gov. Ricardo Rosselló sought some $17 billion in recovery assistance from the U.S. Senate for Puerto Rico’s beleaguered electric utility system—with his request coming engineer Ricardo Ramos resigned yesterday as PREPA’s Executive Director resigned—a resignation which PREPA’s governing board promptly accepted, voting unanimously to ratify the appointment of engineer Justo González as interim executive director. Mr. González, who has 28 years of service at PREPA and was the director of Generation, was recommended by Governor Rosselló, who noted: “The truth is that there was a series of distractions and there was a decision to go in another direction. This is going to happen and happens in every government,” referencing, in the wake of the devastating Hurricane María, that such challenges include technical failures, selective blackouts, lack of equipment, and hiring of companies with few employees and experience to carry out support tasks. He noted that Mr. Ramos “is a professional who has worked hard, but understands that this is a context that has greatly distracted from what recovery is.”

Failures and Blackouts. Until early yesterday, PREPA had reached 44.7 % of its pre-Maria generation—a level leaving Governor Rossello still frustrated, but stressing that failures also occur because: “it is an old system, which suffered previous damage….I know that it has been questioned why these failures happened, and if there was intervention…When you are lifting a collapsed power system, there will be ups and downs. There is progress; progress is inevitable; and it is being seen very clearly.”

The Electric Challenge Ahead. In the wake of the appointment of Mr. Gonzalez as interim executive director of PREPA, the Governor has commenced a search for a new head, noting: “With this appointment begins a process of evaluating the best available talent, inside and outside  of Puerto Rico, to proceed with an appointment in property of the position of executive director of PREPA: I hope that this process will be completed as quickly as possible, so that the work leading to the rehabilitation of the electrical system throughout the island is not affected, according to the guidelines we have given.” PREPA governing board President Ernesto Sgroi advised the Talent Search Committee of the governing body will be in charge of identifying the new executive director of the public corporation.

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Catalysts to Fiscal Recoveries

November 10, 2017

Good Morning! In today’s Blog, we consider the ongoing challenges to Detroit’s recovery from the nation’s largest ever chapter 9 municipal bankruptcy; the State of Michigan’s winnowing down of municipalities under state oversight; and the ongoing physical and fiscal challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

Reframing the Motor City’s Post Chapter 9 Future. Nolan Finley, a wonderful contributor to the editorial page of the Detroit News, this week noted “elections are a wonderful catalyst for refocusing priorities, as evidenced by the just-completed Detroit mayoral campaign, which moved the city’s comeback conversation away from the downtown development boom and centered it on the uneven progress of the neighborhoods. Never before has such an intense spotlight shown on the places where most Detroit voters actually live.” He attributed some of the credit to the loser in this week’s mayoral election, challenger Coleman Young II, who forced Mayor Mike Duggan to defend his record on improving quality of life in the neighborhoods. He perceptively wrote that while candidate Young’s ugly “Take back the Motherland” rallying cry was dispiriting, it spoke to the governing challenge the newly, re-elected Mayor confronts, writing: “Detroit is not a city united. It must become one. There were too many skirmishes along the racial divide in this mayoral contest. The old city versus suburb story line was replaced by a neighborhood versus downtown narrative, but both are code for black versus white. Four years ago, Duggan’s election as Detroit’s first white mayor in 40 years suggested much of the city was ready to stop looking back at its dark and divisive past and begin focusing on a brighter future.” Now, he wrote, after Mayor Duggan focused his first term on meeting the city’s plan of debt adjustment, and trying to improve the quality of life for residents—and as developers are beginning to add community projects to their downtown portfolios, “too many in the neighborhoods feel as if their lives are not getting better, or at least not fast enough.” Thus, he noted, Mayor Duggan needs to redouble his efforts to restore the city’s residential communities, and push ahead the timetable: “Four years from now, Detroit cannot still be wearing the mantle of America’s most violent city.” He added that while Mayor Duggan has little—too little—authority to address education in Detroit; nevertheless—just as his colleague Rahm Emanuel, the Mayor of Chicago recognized, needs to strongly back Detroit Public School Superintendent Nikolai Vitti’s efforts to rapidly boost the performance of the Detroit Public Schools Community District: it is a key to bringing young families back into the city. And, Mr. Finley wrote, the mayor “must also find a way to connect the neighborhoods to downtown, to instill in all residents a sense of ownership and pride in the rejuvenation of the core city. That means getting way better at inclusion. Downtown’s comeback must be more diverse, and include many more of the people who have grown up and stayed in the city. Encouraging and supporting more African-American entrepreneurs is a great place to begin breaking down the perception that downtown is just for white people: Detroit needs more diversity everywhere in the city, both racial and economic,” referring especially to young millennials who are steeped in social justice and imbued with the obsession to give back that marks their generation. “They are committed Detroiters. And they deserve to be appreciated for their contributions, not made to feel guilty or viewed as a threat to hard-won gains.”

Free, Free at Last. Michigan State officials have released Royal Oak Township, a municipality of about 2,500 just north of Detroit, from its consent agreement: Michigan Treasurer Nick Khouri said the Oakland County municipality has resolved its financial emergency and is ready to emerge from the state oversight imposed since 2014, stating: “I am pleased to see the significant progress Royal Oak Charter Township has made under the consent agreement…Township officials went beyond the agreement and enacted policies that provide the community an opportunity to flourish. I am pleased to say the township is released from its agreement and look forward to working with them as a local partner in the future.” The township’s financial emergency resulted in an assets FY2012 deficit of nearly $541,000. Township Supervisor Donna Squalls noted: “Royal Oak Charter Township is in better shape than ever…The collaboration between state and township has provided an opportunity to enact reforms to ensure our long-term fiscal sustainability.” Treasurer Khouri also said the township was the last Michigan remaining municipality following a consent agreement: Over the last two years, Wayne County, Inkster, and River Rouge were released from consent agreements because of fiscal and financial improvements and operational reforms. The Treasurer noted that today only three communities, Ecorse, Flint, and Hamtramck, remain under state oversight through a Receivership Transition Advisory Board.

Preempting Authority. House Natural Resources Committee Chair Rob Bishop (R—Utah) this week said the PROMESA Oversight Board should be granted even more power to preempt the authority of the government of Puerto Rico, stating: “Today’s testimony will inform the work of Congress to ensure the Oversight Board and federal partners have the tools to coordinate an effective and sustained recovery,” in a written statement after a hearing of the House Committee on Natural Resources: “It is clear that a stronger mechanism will be necessary to align immediate recovery with long-term revitalization and rebuilding.” Chairman Bishop added: “This committee will work to ensure [the Puerto Rico Oversight Board] has the tools to effectively execute that mission and build a path forward for this island and its residents.” The Board was created last year to oversee fiscal management by the island government, which had said more than $70 billion of debt was unpayable under current economic conditions. Since the hurricane, the Board has clashed with the territorial government over leadership at the power utility. During the hearing the board’s Executive Director, Natalie Jaresko, said the ability of Puerto Rico’s government to repay its debt was “gravely worse” than it was before Hurricane Maria, which arrived Sept. 20. By the end of December, the Board plans to complete a 30 year debt sustainability analysis with Puerto Rico’s government, she said: “After the hurricane, it is even more critical that the Board be able to operate quickly and decisively…to avoid uncertainty and lengthy delays in litigation, Congressional reaffirmation of our exercise of our authority is welcome.” On Oct. 27, the board had filed a motion in the Title III bankruptcy case for the Puerto Rico Electric Power Authority (PREPA) seeking the court’s permission to appoint Noel Zamot as the authority’s new leader. The government of Gov. Ricardo Rosselló has made it clear that it intends to challenge this motion. The court is scheduled to hold a hearing on the matter on Monday, November 13th.

In calling for more board power, Chairs Bishop and Jaresko probably were at least partly referring to the struggle over PREPA’s leadership. They may also want the Board’s power augmented in other ways: the Board has already announced that it will be creating five-year fiscal plan for Puerto Rico’s government and for its public authorities this winter. Puerto Rico’s government will have substantial needs for federal aid in the coming years, Ms. Jaresko said. Congress plans to tie this aid to the government following the Board’s fiscal plan and this would be appropriate, she said. “Before the hurricanes, the board was determined that Puerto Rico and its instrumentalities could achieve balanced budgets, work its way through its debt problems, and develop a sustainable economy without federal aid,” Ms. Jaresko said in her written testimony. “That is simply no longer possible. Without unprecedented levels of help from the United States government, the recovery we were planning for will fail.” She also said that over the next 1.75 years Puerto Rico’s government will need federal help closing a gap of between $13 billion and $21 billion for basic services. She added the federal government should change tax laws to benefit the island: “The representatives of the Financial Oversight and Management Board (FOMB) who appeared before the House Committee on Natural Resources insist on jeopardizing the necessary resources for the payment of pensions and job stability,” Gov. Rosselló testified in his written statement, adding to that the testimony of Ms. Jaresko and Mr. Zamot “evidenced ignorance about the recovery process in Puerto Rico, presenting incorrect figures relating to the existing conditions on the island,” adding: “I again invite the FOMB to collaborate so that the government of Puerto Rico, together with the support of the federal government, facilitates the fastest possible recovery of our island.” He noted that such assistance should not depend on the Board “assuming the administrative role” which belongs to the elected government of Puerto Rico.

Sanctioned Discrimination. The endorsement that the House Ways and Means Committee effectively incorporated in its “tax reform” legislation reported out of Committee this week appears to discriminate against Puerto Rico, imposing a tariff on the products which Puerto Rico exports to the mainland—threatening to deal a devastating blow to Puerto Rico’s industrial base at the very moment in time the territory is striving to recover from the already disparate hurricane recovery blows. According to economists Joaquín Villamil: “None of these measures, nor the repatriation of profits, the corporate rate and the 20% tax on imports is positive for the island…The companies are not going to pay a 4% royalty to Puerto Rico and a 20% tax to bring their product to the United States. They will leave the island, especially if the tax rate is lowered there.” Mr. Villamil added: “If that happens, 21% of the income received by the Puerto Rican Treasury is eliminated,” he added, referencing P.L. 154, the statute which established a 4% tax on sales of an operation in Puerto Rico to its parent company in the mainland. In its markup, yesterday, the House Ways and Means Committee left almost intact §4303 which establishes a 20% tariff on all imported goods for resale by companies and businesses in the United States. Moreover, the disposition forces multinationals with operations in places such as the U.S. territory of Puerto Rico to repatriate their income to the U.S. What that means is that the production of drugs, medical devices, and many other goods in Puerto Rico is done on U.S. soil; however, for federal tax purposes, Puerto Rico is deemed an international jurisdiction—or, as economist Luis Benítez notes: “This (House Ways and Means bill) generates greater uncertainty about what the economic future of the island should be: with this, the figure of the controlled foreign corporation (CFC) loses the competitive advantage it had (under §936).” He noted that by reducing the corporate rate to multinationals operating in Puerto Rico, the benefit of giving them tax exemptions at the local level is also reduced, as is the case of Law 73 on Industrial Incentives: via the elimination of §936, Puerto Rico, as a place to do business, went from competing with the continental U.S. to competing with countries such as Singapore and Ireland, adding that now a reduction in the corporate rate would cause Puerto Rico not only to compete with the rest of the world, but with jurisdictions on the mainland: “I think that if I were the Secretary of the Treasury, I would tremble with this situation.”

In Puerto Rico, he estimates manufacturing employs approximately 75,000 people directly—a number which rises to 250,000 when indirect and induced jobs are calculated, adding that even though the manufacturing sector has shrunk in the past years, the productive and contributory base rests on that activity, adding that: “As much as it is said that they do not pay taxes, this sector contributes 33% of the revenues…As long as jobs are lost there, the treasury will erode,” noting that the industrial sector plays such a large role in Puerto Rico’s economy that no other sector of the service economy can counterbalance it. He worries that if Congress fails to address the apparent discrimination, the chances that the PROMESA Board and the government of Puerto Rico can put together an economic recovery plan is minimal: “These are implications for all of Puerto Rico: It is difficult to think about options, because if this is approved, it would be disastrous, because of everything that has happened after Hurricane Maria.”

Last night, the former president of the Association of Certified Public Accountants, Kenneth Rivera Robles, who has been part of several lobbying delegations to Washington, remained relatively optimistic that the project language will be amended.

President Woodrow Wilson signed the Jones-Shafroth Act into law on March 2, 1917, with the law providing U.S. citizenship to Puerto Rico’s citizens, granting civil rights to its people, and separating the Executive, Judicial, and Legislative branches of its government. The statute created a locally elected bicameral legislature with a House and Senate—but retained authority for the Governor and the President of the United States to have the authority to veto any law passed by the legislature. In addition, the statute granted Congress the authority to override any action taken by the Puerto Rico legislature, as well as maintain control over fiscal and economic matters, including mail services, immigration, defense, and other basic governmental matters. 

Post-Chapter 9 Elections–and Post Physical & Fiscal Storms

November 6, 2017

Good Morning! In today’s Blog, we consider yesterday’s election results in municipalities we have followed through their fiscal stress or chapter 9 municipal bankruptcy, including: Flint, and Detroit, in its first Mayoral election since emerging from chapter 9, Then we turn to the historic municipality of Petersburg, Virginia—a municipality which avoided chapter 9 thanks to state intervention. Finally, we consider U.S. District Court Judge Laura Swain’s approval yesterday of an urgent motion from the government of Puerto Rico and the Fiscal Oversight Board (JSF) that requires all federal funds to be allocated for the tasks of assistance and recovery in the wake of Hurricane Maria, removing said funds from possible use in restructuring the U.S. territory’s restructuring of its public debt.

Visit the project blog: The Municipal Sustainability Project 

In Like Flint. Flint Mayor Karen Weaver yesterday prevailed over City Council member Scott Kincaid in a recall election involving 18 candidates, retaining the city’s proposed 30-year agreement with the Detroit water system, with Mayor Weaver prevailing by a 53-32 percent margin, according to the unofficial results. The recall had arisen from a controversy related to the Genesee County’s garbage contract: Mayor Weaver had pressed for an emergency trash collection contract with the former Rizzo Environmental Services in Macomb County over City Council opposition. The controversy arose because a former trash provider, Chuck Rizzo, and his father have reached plea deals with federal prosecutors and are expected to plead guilty this month for their roles in a wide-ranging public corruption scandal in Macomb County—a scandal which has, so far, led to criminal charges against 17 persons. The recall also came amid Mayor Weaver’s ongoing struggle with the Flint City Council with regard to the approval of a 30-year agreement with the Detroit area Great Lakes Water Authority—with City Council opposition arising from apprehension about increased water rates—and in response to last month’s decision by U.S. District Court Judge David Lawson taking the small city to task for failing to act on an April agreement supported by Mayor Weaver, the State of Michigan, and EPA which would have Flint remain on the Detroit area water system. Flint had been supposed to switch to the regional Karegnondi Water Authority; however, Mayor Weaver’s administration rejected that option, because updating of the Flint water treatment facility had been projected to cost more than $68 million and to consume more than three years to complete. The Flint Council had disregarded Judge Lawson’s decision, and approved a two-year extension of service with the Great Lakes Water Authority. Thus, while the prior agreement with the Detroit area water authority had lapsed, Mayor Weaver, the State of Michigan, the Great Lakes Authority, and other supporters have revived the agreement. Last week, the Michigan Department of Environmental Quality had filed an emergency motion asking Judge Lawson to approve giving Mayor Weaver the authority to sign the renewed contract by Election Day, because of the inability of the City Council to act—a request from the state which the Judge rejected; however, he has scheduled a hearing on the motion later this month.

Motor City Victory Lap. Detroit Mayor Duggan was re-elected yesterday by more than a 2-1 margin over challenger State Sen. Coleman A. Young II, son of a former Detroit Mayor. In remarks after the decision, Mayor Duggan  noted: “I have been treated with nothing but warmth and kindness from Detroiters in every neighborhood in the city…I hope that this is the year where we put us-versus-them politics behind us forever because we believe in a one Detroit for all of us.” His opponent, in conceding, claimed he had commenced a movement to help the politically dispossessed: “The campaign might be over, but the passion and values are eternal…We are the voice for the voiceless. We are the hope for the hopeless.” Mayor Duggan, who won a write-in primary campaign in 2013 and then defeated Wayne County Sheriff Benny Napoleon in the general election, thus became the Motor City’s first mayor to serve two terms since Dennis Archer in the 1990’s.  In his campaign, the former CEO of the Detroit Medical Center gained prominent endorsements from city labor unions, clergy, and business groups—he overwhelmed his opponent in fundraising: he secured about $2.2 million; whereas Mr. Young raised just under $39,000. Mayor Duggan, in his victory remarks, noted his campaign had focused on spending “time talking about the vision of what we are going to do in the next four years,” adding: “I thought one of the most profound things President Obama ever said was ‘If you have to divide people in order to get elected, you’ll never be able to govern.’”

In his campaign, Mayor Duggan touted public service improvements under his administration in the wake of the nation’s largest-ever municipal bankruptcy, including new streetlights, improved public safety response, and more dependable bus lines. He said he intends to continue work on building a more unified Detroit—focusing now on a series of efforts to fix up neighborhood corridors, roads, and sidewalks—and stating: “There are haves and have-nots in every city in America. We’re building a city here that it doesn’t matter where you start, you have the opportunity to be successful,” adding that he believe the greatest challenge now confronting Motor City residents will be over automobile insurance reform legislation—referring to legislation rejected by the Michigan House last week, but making clear he does not intend to give up: “We were a lot closer this time than we were two years ago, and we have a plan to get it through the next time: It’s going to be one relationship at a time, one vote at a time, but we’ve already had several meetings with both the medical and the legal community, and I think they realize we were three votes away.” 

The Road Out of State Oversight. The re-election comes at a critical time, as the City expects to have its full municipal fiscal authority restored next spring for the first time since it exited the nation’s largest ever chapter 9 municipal bankruptcy three years ago—challenging the city’s appointed and elected leaders with the task of resuming governance after the end of state oversight—and as the Mayor and Council resume authority over budgets and contracts. With two balanced budgets and an audit of a third expected next May, city leaders anticipate Detroit will be released early next year from the strict financial controls required under the city’s approved plan of debt adjustment—a key issue during the just completed campaign, where both the Mayor and his challenger had proposed plans with regard to how they would fiscally guide the recovering city—and as Michigan Governor Rick Snyder expressed optimism about the city’s ability to manage its finances, telling the Detroit News: “They’ve been hitting those milestones, and I hope they continue to hit them—that’s a good thing for all of us.”

Indeed, the Motor City’s credit rating has been upgraded; its employment rate is up; assessed property values are climbing. In its financial update last month, the city noted economic development in some neighborhoods and Detroit’s downtown, job creation efforts, and growth in multifamily home construction. Nonetheless, the road to recovery will remain not just steep, but also pot-holed: it confronts very large future payments for past borrowing and public pension obligations under the plan of debt adjustment—or, as our colleague Lisa Washburn of Municipal Market Analytics noted: “It really takes the economic environment to cooperate, as well as some very good and focused financial management. Right now, that seems to be all there…Eventually, I suspect there will be another economic downturn and how that affects that region, that’s something outside of their control. But it can’t be outside of their field of vision.”

Petersburg. In one of the most closely watched municipal elections in Virginia, last night, Gloria Person-Brown, the wife of the current embattled City Treasurer Kevin Brown of Petersburg, was trounced by former City Council member Kenneth Pritchett, with Mr. Pritchett winning by a large margin: he captured more than 70 percent of the vote. In his campaign, stating he had been frustrated by the city’s low credit rating, and by the city’s struggles with collecting revenue and timely payment of bills, Mr. Pritchett vowed he would implement policies and standardize internal controls to improve the office’s operations. Likely, in the wake of a Virginia state fiscal report last September—a report which scrutinized eight specific aspects of city governance and fiscal responsibilities—and contained allegations of theft involving Ms. Person-Brown’s husband, City Treasurer Kevin Brown. Some Council members then had called for his resignation, and even Ms. Person-Brown had distanced herself from her husband’s actions during the election, albeit she did not say he had done anything wrong. Rather she ran on a platform of improving the Treasurer’s services, including instituting more checks and balances, and calling for more accountability.

Stepping in to Help Puerto Rico. U.S. District Court Judge Laura Taylor Swain has approved, with various changes, an urgent motion from the government of Puerto Rico and the PROMESA Fiscal Oversight Board which mandates that all federal funds to be allocated to the country for the tasks of assistance and recovery due to the passage of Hurricane Maria may not be claimed in the process of restructuring the public debt, accepting to the request of the Authority for Financial Supervision and Tax Agency and the JSF during the general hearing held in New York City‒in which it emerged that, in part, the order would restrict the use of disaster assistance funds as a condition of the federal government, so that Puerto Rico can receive assistance: the order will establish that the Federal Emergency Management Agency (FEMA) funds for Puerto Rico following in the wake of Hurricane Maria, as well as funds granted by other federal agencies, will be maintained. Judge Swain granted the order after listening to the arguments of Suzanne Uhland, legal representative of AAFAF, as well as lawyers from municipal insurers and the organized group of General Obligations bondholders (GOs), who underscored the need to incorporate into the order transparency criteria and mechanisms to ensure that some entity such as the JSF has influence in how federal funds granted by the government will be used. Matthew J. Troy, the federal government’s representative in the case, told Judge Swain that to include specific language which would give the Puerto Rican government priority in claiming funds that had been misused by state agencies or public corporations in the Island was indispensable for Puerto Rico to receive funds from the federal government: as part of the order, it would be established that, in the event federal funds were misused, it will be up to the central government to claim these funds from the agency or public corporation which received them from the federal government. Judge Swain has scheduled a follow-up hearing for next Wednesday.

During the hearing, an attorney, Marcia Goldstein, pointed out that it is urgent to know what role if any the Junta de Supervisión y Administración Financiera for Puerto Rico (the JSF) will have with regard to the approval of the contracts for the recovery tasks. The PROMESA law establishes, among other things, that the federal agency has the power to review the contracts granted by the Puerto Rican government or the dependencies subject to the control of the JSF. To date, however, it is uncertain whether the JSF has examined or had influence in the process of hiring dozens of companies which would be responsible for multiple tasks, from infrastructure repair to the audit of federal funds. In an interview with the Puerto Rican El Nuevo Día a little over a week ago, House Speaker Paul Ryan (R-Wis.), in the wake of his visit to Puerto Rico, pointed out that the JSF will have a key role in defining the scope of the aid package that Puerto Rico would need and how such resources would be allocated.

The Steep & Ethical Challenges in Roads to Fiscal Recovery

October 17, 2017

Good Morning! In today’s Blog, we consider the ongoing recovery in Detroit from the largest municipal bankruptcy in American history; then we turn to the Constitution State, Connecticut, as the Governor and State Legislature struggle to reach consensus on a budget, before, finally, returning to Petersburg, Virginia to try to reflect on the ethical dimensions of fiscal challenges.

Visit the project blog: The Municipal Sustainability Project 

The Motor City Road to Recovery.  The City of Detroit has issued a request seeking proposals to lead a tender offer and refunding of its financial recovery municipal bonds with the goal of reducing the costs of its debt service, with bids due by the end of next week, all as a continuing part of its chapter 9 plan of debt adjustment. The city has issued $631 million of unsecured B1 and B2 notes and $88 million of unsecured C notes. The bulk of the issuance is intended to secure the requisite capital to pay off various creditors, via so-called term bonds, 30-year municipal debt at a gradually sliding interest rate of 4% for the first two decades, and then 6% over the final decade, as the debt is structured to be interest-only for the first 10 years, before amortizing principal over the remainder of the term, with the city noting: “It is the city’s goal to alleviate the significant escalation of debt service during the period when principal on the B Notes begins to amortize, and that any transaction resulting from this RFP process be executed as early as possible in the first quarter of 2018.” According to Detroit Finance Director John Naglick, “Those bonds are traded very close to par, because people view them as very secure…Those bondholders feel really comfortable because they see the intercept doing what it was designed to do.” The new borrowing is the city’s third since its exit from chapter 9 municipal bankruptcy, with the prior two issued via the Michigan Finance Authority. Last week the city announced plans to utilize the private placement of $125 million in municipal bonds, also through the Michigan Finance Authority, provided the issuance is approved by both the Detroit City Council and the Detroit Financial Review commission, with the bonds proposed to be secured by increased revenues the Motor City is receiving from its share of state gas taxes and vehicle registration fees.

Fiscal TurmoilConnecticut Gov. Dannel Malloy yesterday released his fourth fiscal budget proposal—with the issuance coming as he awaits ongoing efforts by leaders in the state legislature attempting to reach consensus on a two-year state budget, declaring: “This is a lean, no-frills, no-nonsense budget…Our goals were simple in putting this plan together: eliminate unpopular tax increases, incorporate ideas from both parties, and shrink the budget and its accompanying legislation down to their essential parts. It is my sincere hope this document will aid the General Assembly in passing a budget that I can sign into law.” The release came as bipartisan leaders from the state legislature were meeting for the 11th day behind closed doors in a so far unrewarding effort to agree on a budget to bring to the Governor—whose most recent budget offer had removed some of the last-minute revenue ideas included in the Democratic budget proposal. Nevertheless, that offer gained no traction with Republican legislators: it had proposed cuts in social services, security, and clean energy—or, as the Governor described it: “This is a stripped down budget.” Specifically, the Governor had proposed an additional $144 million in spending cuts from the most recent Democratic budget proposal, including: nearly $5 million from tax relief for elderly renters; $5.4 million for statewide marketing through the Department of Economic and Community Development; $292,000 in grants for mental health services; $11.8 million from the Connecticut Home Care Program over two years, and; about $1.8 million from other safety net services. His proposed budget would eliminate the state cellphone tax and a statewide property tax on second homes in Connecticut, as proposed by the Democrats; it also proposes the elimination of the 25 cent fee on ridesharing services, such as Uber and Lyft, and it reduces the amount of money Democrats wanted to take from the Green Bank, which helps fund renewable energy projects. His proposal also recommends cutting about $3.3 million each year from the state legislature’s own budget and eliminates the legislative Commissions for women, children, seniors, and minority communities—commissions which had already been reduced from six to two over the past two years. The Governor’s revised budget proposal would cut the number of security staff at the capitol complex to what it was before the metal detectors were implemented—proposed to achieve savings of about $325,000 annually, and the elimination of the Contracting Standards Board, which the state created a decade ago in response to two government scandals—here for a savings of $257,000.

For the state’s municipalities, the Governor’s offer proposes phasing in an unfunded state mandate that municipalities start picking up the normal cost of the teachers’ pension fund: Connecticut municipalities would be mandated to contribute a total of about $91 million in the first year, and $189 million in the second year of the budget—contributions which would be counted as savings for the state—and would be less steep than Gov. Malloy had initially proposed, but still considerably higher than many municipalities may have expected. Indeed, Betsy Gara, the Executive Director of the Council for Small Towns, described the latest gubernatorial budget proposal as a “Swing and a miss: The revised budget proposal continues to shift teachers’ pension costs to towns in a way that will overwhelm property taxpayers,” adding that if the state decides to go in this direction, they will be forced to take legal action, because requiring towns to pick up millions of dollars in teachers’ pension costs without any ability to manage those costs going forward is ‘simply unfair.’” Moreover, she noted, it violates the 2008 bond covenant.

In his revised new budget changes, Gov. Malloy has proposed cutting the Education Cost Sharing grant, reducing magnet school funding by about $15 million a year, and eliminating ECS funding immediately for 36 communities. The proposal to eliminate the ECS funding would likely encounter not just legislative challenges, but also judicial: it was just a year ago that a Connecticut judge’s sweeping ruling had declared vast portions of the state’s educational system as unconstitutional, when Superior Court Judge Thomas Moukawsher ruled that Connecticut’s state funding mechanism for public schools violated the state’s constitution and ordered the state to come up with a new funding formula—and mandated the state to set up a mandatory standard for high school graduation, overhaul evaluations for public-school teachers, and create new standards for special education in the wake of a lawsuit filed against the state in 2005 by a coalition of cities, local school boards, parents and their children, who had claimed Connecticut did not give all students a minimally adequate and equal education. The plaintiffs had sought to address funding disparities between wealthy and poor school districts.

Nevertheless, in the wake of a week where the state’s Democratic and Republican legislative leaders have been holed up in the state Capitol, without Gov. Malloy, combing, line-by-line, through budget documents; they report they have been discussing ways to not only cover a projected $3.5 billion deficit in a roughly $40 billion two-year budget, but also to make lasting fiscal changes in hopes of stopping what has become a cycle of budget crises in one of the nation’s wealthiest states—or, as House Speaker Joe Aresimowicz, (D-Berlin) put it: “I think what we’ve done over the last few days has been a really good step forward, and I think we’re moving in the right direction,” even as Senate Republican Leader Len Fasano said what the Governor put forward Monday will not pass the legislature: “It is obvious that the governor’s proposal, including his devastating cuts to certain core services and shifting of state expenses onto towns and cities, would not pass the legislature in its current form. Therefore, legislative leaders will continue our efforts to work on a bipartisan budget that can actually pass.”

Getting Schooled on Budgeting & Debt. Even as the Governor and legislature appear to be achieving some progress, the Connecticut Education Association (CEA) is suing the state over Gov. Dannel Malloy’s executive order which cuts $557 million in school funding from 139 municipalities: Connecticut’s largest teachers union has filed an injunction request in Hartford Superior Court, alleging the order violates state law. (The order eliminates education funding in 85 cities and towns and severely cuts funding in another 54 communities.) The suit contends that without a state budget, Gov. Malloy lacks the authority to cut education funding. The municipalities of Torrington, Plainfield, and Brooklyn joined the initial filing. Association President Sheila Cohen noted: “We can’t sit by and watch our public schools dismantled and students and teachers stripped of essential resources…This injunction is the first step toward ensuring that our state lives up to its commitment and constitutional obligations to adequately fund public education.”

Governance in Fiscal Straits? Connecticut Attorney General George Jepsen has questioned the legality of Governor Malloy’s executive order, and Connecticut Senate Republican Leader Len Fasano (R-North Haven) noted: “I think the Governor’s order is in very serious legal trouble.” Nevertheless, the Governor, speaking to reporters at the state capitol, accused the CEA of acting prematurely: “Under normal circumstances, those checks don’t go out until the end of October…Secondarily, they’ll have to handle the issue of the fact that we have a lot less money to spend without a budget than we do with a budget…Their stronger argument might be that we can’t make any payments to communities in the absence of a budget. That one I would be afraid of.”

Municipal Fiscal Ethics? Forensic auditors from PBMares, LLP publicly went over their findings from the forensic audit they conducted into the City of Petersburg, Virginia’s financial books during a special City Council meeting. Even though the audit and its findings were released last week, John Hanson and Mike Garber, who were in charge of the audit for PBMares, provided their report to Council and answered their questions, focusing especially on what they deemed the “ethical tone” of the city government, saying they found much evidence of abuse of city money and city resources: “The perception that employees had was that the ethical tone had not been good for quite some time…The culture led employees to do things they might not otherwise do.” They noted misappropriations of fuel for city vehicles, falsification of overtime hours, vacation/sick leave abuse, use of city property for personal gain including lawn mowers and vehicles for travel, excessive or lavish gifts from vendors, and questionable hiring practices. In response, several Council Members asked whether if some of the employees who admitted to misconduct could be named. Messieurs Garber and Hanson, however, declined to reveal names in public, but said they could discuss it in private with City Manager Aretha Ferrell-Benavides, albeit advising the City Council that the ethical problems seemed to be more “systemic,” rather than individual, adding: “For instance, we looked at fuel data usage…And we could tell just looking at it that it was misused, though it would’ve cost tens of thousands of more dollars to find out who exactly took what.”

In response to apprehensions that the audit was insufficient, the auditors noted that because of the city’s limited budget, the scope of PBMares’ work could only go so far. Former Finance Director Nelsie Birch noted that the audit was tasked with focusing on several “troubling areas,” and that a full forensic audit could have cost much more for a city which had hovered on the brink of chapter 9 municipal bankruptcy. However, Mr. Hanson noted that while the transgressions would have normally fallen under a conflict of interest policy, such was the culture in Petersburg that the city’s employees either did not know, or were allowed to ignore those policies: “When I asked employees what their conflict of interest or gifts and gratuity policy is, people couldn’t answer that question because they didn’t know.”

 

Physical & Fiscal Solvency & the Unremitting Challenges of Water

Good Morning! In this morning’s eBlog, we consider the route to fiscal solvency taken by the small Virginia municipality of Petersburg, the major legal challenges to the physical and fiscal future of Flint; and the ongoing fiscal, legal, physical, and human challenges to Puerto Rico.

Visit the project blog: The Municipal Sustainability Project 

The Road Back to Fiscal Solvency. Forensic auditors earlier this week presented their findings from the audit they conducted into the city of Peters burg’s financial books during a special City Council meeting in the small, historic Virginia City of Petersburg, and answered questions from Council Members. Their key focus was on the “ethical tone” of the city government: they noted they had found much evidence of abuse of city money and city resources: “The perception that employees had was that the ethical tone had not been good for quite some time: The culture led employees to do things they might not otherwise do.” The list of misdeeds included misappropriations of fuel for city vehicles, falsification of overtime hours, vacation/sick leave abuse, use of city property for personal gain including lawn mowers and vehicles for travel, excessive or lavish gifts from vendors, and questionable hiring practices. They added that the ethical problems appeared to be more “systemic” rather than individual, testifying, for instance, that they had examined fuel consumption and “[W]e could tell just looking at it that it was misused, though it would’ve cost tens of thousands of more dollars to find out who exactly took what.” Because of the city’s limited budget, the scope of the auditor’s (PBMares) work could only go so far. Council Members Darrin Hill and Treska Wilson-Smith both expressed sentiments that the audit did not go far enough; however, former Finance Director Nelsie Birch noted that the audit was tasked with focusing on several “troubling areas,” and that a full forensic audit could have cost much more money than the nearly insolvent city had. In fact, the city spent approximately $1 million on turnaround services, with the vast bulk of that amount to the Bobb Group to obtain outside help from the firm led by the former Richmond City Manager in its efforts to pull Petersburg back from the brink of insolvency and scrutinize the cash-strapped government’s books. The city devoted nearly $195,000 to a forensic audit by the firm PBMares. Former Mayor and now City Councilman Howard Myers believes Petersburg’s taxpayers have gotten their money’s worth: “They brought us from the depths of indebtedness…I think the resistance then was mainly misinformed about the nature of how things had gotten to the point they were.” But from the abyss of insolvency, city officials now project Petersburg will have $2 million in savings left over from the fiscal year which ended June 30. To get there, the city has deeply reduced pay for emergency workers, cut funding for public schools, and eliminated programs for children in an effort to close a $12 million hole in the city’s budget—even as those efforts still left the Council confronted by some $18.8 million in past-due bills, as well as litigation over the city’s mounting debts—not to mention growing taxpayer pressure to cease to exist, but rather to dissolve its charter and revert to becoming part of one or more counties. Nevertheless, as Mayor Samuel Parham put it: “We had to take a chance: We were at a point where all the banks were laughing at us, saying: ‘We’re not going to pay you a dime; you couldn’t afford to mail an envelope.’”

Today, it seems that gamble has paid off: the contract with Mr. Bobb’s firm ended last month, and, as Mayor Parham stated: “Look, God bless Robert Bobb…We couldn’t get anyone — nobody wanted to come risk their career to save Petersburg. The storm was so massive, it was sinking all of us, but he told us he had dealt with many storms in his 40-year career.” The appointment of Mr. Bobb, however, was a political gambit which drew the opposition of a “good government group,” Clean Sweep Petersburg, which had helped launch an effort to recall Mr. Myers and Mayor Parham. The issue which created the greatest political discord: privatization of the city’s water and sewer authority.  In an interview this week, Mr. Bobb noted that the city’s future fiscal success will depend largely on the City Council’s ability to be accountable to taxpayers through their own decisions and those of the fresh administration hired in a municipal reset. Critical to that success will be firm municipal oversight of cash flow, strong leadership in the finance department, and a newly created revenue collection department designed to wrest responsibility away from the Treasurer’s office, which, according to Mr. Bobb, was not under the Council’s purview: he added the city’s elected leaders “have a tremendous fiduciary responsibility to perform at a high level on behalf of the city’s taxpayers: I think they have a chance, absolutely. They really have to control spending, though, and be careful.” He added that  of the $10 million the firm calculated it had helped save or bring in through a combination of state money it pursued, savings achieved by restructuring debt, the sale of city assets and other actions: “We’ve given the administration and the City Council a reset and an opportunity to build moving forward: “It really is up to the City Council now.”

Out Like Flint. Thousands of Flint, Michigan’s citizens are still grappling with the effects of the city’s state-caused lead-poisoning drinking water crisis, one occasioned by a gubernatorially appointed Emergency Manager, which has, today, confronted the city with many citizens facing possible tax liens and even foreclosure on their homes due to unpaid water bills: more than 8,000 residents have received notices that past-due water bills—categorized as those left unpaid for six months or more—must be resolved to avoid a lien being placed on their property. The bills in question cover two years: they total more than $5 million in delinquent water and sewer charges, according to the city. The ongoing fiscal and physical stress comes amid an involuntary manslaughter trial after  Federal Judge Judith Levy last June ruled that the conduct of government officials was “so egregious as to shock the conscience,” approving a $97 million settlement from the State of Michigan to replace water lines in at least 18,000 households.

Nevertheless, today, the water in Flint remains unsafe to drink without a filter. Unsurprisingly, in the city, where the estimated median household income in 2015 ($25,342) was more than 10 percent lower than in 2000, and where assessed housing (home/condo) values have dropped by nearly 50 percent to a level 75 percent lower than the statewide average, the city is ensnared in a vicious fiscal quandary: the liens threatened by the city, if implemented, represent the first step in making a claim on an individual’s property, setting off a legal process which could ultimately result in families losing their homes—further depressing assessed property values. And that is in a municipality where the city’s residents face some of the highest water bills in the country.  (To bring some relief, Michigan Gov. Rick Snyder last year approved a $30 million plan to reimburse residents for a portion of payments made since April 2014 on water used for drinking, bathing, and cooking.) That state assistance ended early this year, however, so now the city’s leaders are faced with the grim task of condemnation: once water payments are missed on water or sewer accounts for more than six months, the city’s ordinance requires the Treasurer to transfer the lien to a homeowner’s property tax bill—or, as Mayor Karen Weaver puts it: “We must follow the law…I understand the concerns that have been raised, and I am working to see if any changes or something can be done to help those affected by this, especially given the extraordinary circumstances we have endured due to the water crisis.”

But Flint’s fiscal and physical crisis has become a legal entanglement for the State of Michigan, where, in another courtroom, Michigan Gov. Rick Snyder, whose original appointment of a series of state-appointed emergency managers who ran Flint city government from 2011 until mid-2015, making key decisions related to city’s water system (under former Emergency Manager Darnell Earley, the city changed its water source in what was explained as a cost-saving move, switching from pre-treated water from Lake Huron to raw water from the Flint River—and after which the DEQ did not require the city to treat the water to make it less corrosive to lead pipes and plumbing, causing lead to leach into the water supply).

That decision to preempt the city’s local elected officials had led to the fateful decision to switch the city’s water supply to a contaminated system; while state responsibility appears to be a hot potato—with state leaders not saying who initially opposed issuing a  state emergency over the Flint water crisis. During a preliminary examination this Wednesday, in the criminal case against Nick Lyon, Director of the Michigan Department of Health and Human Services, special prosecutor Todd Flood read from a November 2015 email from Richard Baird, a senior advisor to Gov. Snyder, in which Mr. Baird had written “the ‘boss’ wanted to avoid triggering the emergency, which authorizes the Michigan State Police to coordinate relief efforts and requests for assistance from the federal government.” (Former President Obama signed an emergency declaration for Flint days after Gov. Snyder ultimately requested it, clearing the way for federal assistance to replace damaged lead and galvanized water service lines in the city.) Thus, the ongoing criminal trials in which the State of Michigan and City of Flint employees have been charged with criminal wrongdoing related to the water crisis (of which there are a total of 13 pending in Genesee District Court). In the trial, Corinne Miller, the former head of Disease Control for the State of Michigan, testified in a key court hearing Wednesday that the court must determine if Nick Lyon, the then Director of the Michigan Department of Health and Human Services, must face an involuntary manslaughter charge. (Note, Mr. Lyon, has remained on the job while facing charges of involuntary manslaughter and misconduct in office.)

Indeed, the Michigan courtrooms have become filled: attorneys for 21 law firms have filed a consolidated class-action lawsuit against two engineering firms, Flint officials, and Michigan officials, including Gov. Rick Snyder and former state Treasurer Andy Dillon over Flint’s lead-contaminated water—so egregious that last June, Judith Levy ruled that Flint residents have sufficiently argued that the conduct of government officials “was so egregious as to shock the conscience.” The complaint before her had noted that approximately 100,000 Flint residents “have experienced and will continue to experience serious personal injury and property damage caused by defendents’ deliberate, reckless and negligent misconduct…Defendents caused a public health crisis by exposing (Flint residents) to contaminated water” and “exacerbated the crisis by concealing and misrepresenting its scope, failing to take effective remedial action to eliminate it, and then lying about it to cover up their misconduct.”

The lawsuit, filed on behalf of Flint’s 100,000 residents and other users of its water system, says the defendants acted recklessly and did not respect residents’ due process rights argues that the engineering firms and government officials unconstitutionally did not treat the predominantly black residents of Flint the same as the predominantly white residents of great Genesee County. In late July, a three-judge panel of the 6th U.S. Circuit Court of Appeals allowed plaintiffs in one case before Judge Levy to try to seek relief from Gov. Snyder in the form of compensation for education, medical monitoring and evaluation services for ongoing harm from Flint’s lead-contaminated water. In the other case, the appeals judges dismissed the possibility of seeking penalties for Gov. Snyder, the State of Michigan, the Michigan Department of Environmental Quality, and the Michigan Department of Health and Human Services. All three of the judges, however, wrote that the 11th Amendment gives the state and Snyder immunity against damages sought by private citizens.

Undercutting Sovereignty. President Trump set off a broad sale of Puerto Rico’s municipal bonds this week when he said: “You can say goodbye to that,” referring to the U.S. territory’s $73 billion debt as one option to help Puerto Rico recover from Hurricane Maria in an interview on Fox News during his visit to Puerto Rico—a suggestion which OMB Director Mick Mulvaney discounted just hours later, stating the White House does not intend to become involved in Puerto Rico debt restructuring—debt which, in any case, the President has no unilateral authority to forgive. The President had stated: “We’re going to work something out. We have to look at their whole debt structure. They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out…you can wave goodbye to that,” unsurprisingly leading some to understand that the Trump administration would force municipal bondholders to forgive Puerto Rico’s debt. (The price of Puerto Rico’s municipal bonds, already down in the wake of Hurricane Maria, fell another 31 percent—only recovering in the wake of comments by Office of Management and Budget Director Mulvaney, attempting to backtrack, stating: “I wouldn’t take it word for word with that. I talked to the President about this at some length yesterday as we flew home on Air Force One: The primary focus of the federal effort is to make sure the island is safe and that we’re rebuilding the island,” adding that the federal government would not pay off debts or bail out municipal bondholders: “I think what you heard the President say is that Puerto Rico is going to have to figure out a way to solve its debt problem.”

The White House Wednesday asked Congress to approve $29 billion in additional hurricane relief and municipal debt forgiveness, seeking to help Puerto Rico and the U.S. Virgin Islands, as well as shore up the debt-ridden federal flood insurance program which provides flood insurance to homes and small businesses. The latest request seeks $12.8 billion for the Federal Emergency Management Agency, to stay current with the nearly $200 million a day the agency is spending on recovery work; the request also seeks action by Congress to erase some $16 billion in debt that the National Flood Insurance Program owes to the Treasury: under the White House proposal, premiums for flood insurance would rise, at least for homeowners who could afford to pay more, while private insurers would be encouraged to start writing their own flood insurance.

For the devastated U.S. territory, however, the physical and fiscal destruction has only worsened Puerto Rico’s short and long-term fiscal plight—or, as Gov. Rossello noted: “As far as the comment made about wiping the debt clean, that is the opinion of the President,” noting, carefully, he could not comment further because of the ongoing legal proceedings. Fortunately, in Congress, House Natural Resources Committee Chairman Rob Bishop (R-Utah) is putting together a funding package to aid Puerto Rico, and he said members of his committee and other Representatives were meeting to discuss temporary measures to reduce government rules slowing Puerto Rico’s recovery: his group will examine options for ways to make Puerto Rico’s and the U.S. Virgin Island’s electrical systems more resistant to storms, as well as consider how to improve things in both territories in the short-, medium-, and long-term.

On the Edge of Municipal Fiscal Cliffs

September 20, 2017

Good Morning! In today’s Blog, we consider the upcoming challenge for voters in Detroit—with a Mayoral election around the bend—and the city aspiring to be in the competition for selection by Amazon as its second site. Then we look at the physical and fiscal storm threats to Puerto Rico, before finally looking back at post-riot Ferguson, Missouri.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of a Fiscal State/Local Cliff.  The Latin incantation, “Speramus meliora; resurget cineribus,or, translated: “We hope for better things; it will arise from the ashes,” is Detroit’s motto: it came from a French Roman Catholic priest, Father Gabriel Richard, who was born in France in 1767 and moved to Baltimore in 1792 to teach math. Reassigned to do missionary work, he moved first to Illinois and later to Detroit, where he was the assistant pastor at St. Anne’s Church—a church founded in 1701 and possibly the oldest continuously operating Roman Catholic parish in the U.S. Two hundred twelve years ago, on June 11th, a fire destroyed nearly all of then-Detroit, just weeks before the Michigan Territory was established. Today, nearly three years after the once-great city, the “arsenal of democracy” during World War II and home of the world’s most innovative manufacturers, emerged from the nation’s largest ever chapter 9 bankruptcy, national interest in Detroit has waned: in some ways, it has become a tale of two cities: One a city still mired in poverty and unemployment; one an emerging vibrant metropolis and global self-driving car center. And all this is occurring as the voters prepare to re-elect Mike Duggan—whose most profound achievement has been to raze much of the city, after first being elected in a write-in campaign. But, last month, voters in the primary gave him 68% of the votes—likely foretelling November’s re-election—in a campaign against the son of Coleman Young, Detroit’s first black mayor. Almost more than any other city in the nation, Detroit is not just a city emerging from the ashes, but also a city of profound racial transition: Over the past forty-year, Detroit has undergone a racial transformation: from 70% white in the 1960s to just 10% today. The Detroit News described the Mayor’s self-referral as a “metrics nut:” describing cabinet meeting room as one blanketed in graphs charting the city’s employment, ambulance delivery and crime rates, among other statistics. “The police are going to show up in under 14 minutes; the ambulance is going to show up in under 8 minutes; the grass is going to be cut in the parks every 10 to 12 days—it just is.” The paper notes that: “City employees who do not meet these targets do not last long.”  But, as the city’s emergency manager charged by Gov. Snyder with taking the Motor City into chapter 9 bankruptcy and then out noted to me on that very first morning, the critical distinction between municipal and corporate bankruptcy is to ensure the streetlights, traffic lights, police and fire are working. That has been an ongoing, post-plan of debt adjustment priority, and, the numbers have continued to improve: today police response times are down from an average of 40 minutes to 13.

Mayhap a far greater governance challenge, however, has been to reverse the flight of residents from the city—flight which bequeathed 40,000 abandoned properties—properties which could become havens for crime, paid no property taxes, and adversely affected the assessed values of neighboring properties in one of the nation’s largest—by land area of 139 square miles—a city once the home to 1.8 million—thrice today’s population. Or, as David Schleicher of Yale Law School described the city: it “is just too big,” to accommodate “the expense of providing services.” The Mayor has sought to “right-size,” as it were, by means of razing abandoned homes, in part via the expansion of the Detroit Land Bank, a quasi-governmental authority which now owns 96,000 properties across the city—most of them acquired through foreclosure because of unpaid taxes. Thus, the land bank has succeeded in centralizing the city’s control over abandoned and vacant properties; Detroit has replaced an antiquated registry scattered across 83 data sets, and erased liens and back taxes as a means to facilitate the clearing and demolition or restoration of properties. Since his election, the city has focused on the highest density districts, where the city has demolished 11,900 residential properties. The results indicate that the demolition of a blighted property increases the value of a nearby home by 4.2%, according to one study. And the pace has been unprecedented—indeed, so fast there have been allegations of improper contract awards; there has been a federal investigation; and Michigan’s state housing agency suspended funds for two months, after a state audit found improper controls in place. Land bank officials, including the director of demolitions, have resigned. Mayor Duggan, who has not been a subject of the investigation, blames the mistakes on a desire to increase the pace of demolitions, but acknowledges that regulators were right to rap his knuckles.

Under the program there has been, consequently, a high pace of tax foreclosures—the main pipeline for properties which end up in the land bank’s possession: under Michigan law, owners who do not pay taxes after three years lose their property—properties last comprehensively reassessed decades before market values plummeted, meaning many are set too high. Between 2006 and 2012, median sale prices for city houses fell from $70,000 to $16,200; thus, the owner of a house worth $15,000 could owe $3,000 in property taxes. The state-mandated interest rate on property-tax debt is 18% per year. Thus, an update completed at the beginning of this calendar year should lead to lower bills, but it will not be retroactive; thus, up to 53,000 properties will receive foreclosure notices this autumn. While not every foreclosed property will necessarily end up lost, tax foreclosures, driven by government policy rather than market forces, could force out longtime residents, ironically exacerbating the very problem the Mayor is focused upon: even as the demolition drive has already cost the city’s taxpayers some $162 million, the average back taxes for homes put up for auction are $7,700—much less than the cost of demolition. Or, as Michele Oberholtzer, Director of the Tax Foreclosure Prevention Project puts it: “It’s like an auto-immune disorder: We penalize people for not paying, and then we end up paying more for the punishment.” Nevertheless, Mayor and candidate Duggan believes that at the current pace of demolitions, he can clear the city’s long-standing blight within five years—mayhap paving the way for a smaller but much more vibrant city.

Fiscal Hurricane. With still another hurricane bearing down on Puerto Rico (damages caused by Hurricane Irma are estimated at more than $600 million), a fiscal storm appears in the offing after, yesterday, an agreement among Senate Finance Committee leaders to push this month the reauthorization of the Children’s Health Insurance Program for five years raised doubts about with regard to whether Medicaid funds to stabilize the finances of the Puerto Rican health system could be included in that legislation: according to the agreement between the Chairman, Republican Orrin Hatch (R-Utah), and Ranking Member Ron Wyden (D-Oregon), that program would be refinanced for another five years; however, the agreement did not include funds to close the so-called “abyss” in Medicaid funds, which would reach $ 369 million this fiscal year and then rise to about $ 1.2 billion that has been asked annually for reimbursement under the Affordable Care Act, or, as former Puerto Rico Governor Aníbal Acevedo Vilá, who was representing Gov. Ricardo Rosselló, noted: “From what I’ve been told, we are not included.” His statement came as Gov. Rosselló arrived last night in Washington, D.C. along with former Governors Acevedo Vilá and Alejandro García Padilla to meet with House Minority Leader Nancy Pelosi (D-Ca.), as the Senate Finance Committee hurries to approve the reauthorization of the CHIP program before the law expires at the end of this month. Chairman Hatch, however, has indicated that his intention is that the reauthorization of the program not increase the federal deficit—an intention which could singularly complicate the mission—even as House Speaker Paul Ryan (R-Wis.) earlier this year had told resident commissioner, Jennifer Gonzalez, that CHIP’s reauthorization was the ideal vehicle for legislating new Medicaid allocations, due to the depletion of Affordable Care Act funds in April. (For the current fiscal year, Puerto Rico’s allocation is $172 million. Meanwhile, there are already 12 Puerto Rican municipalities within  the  federally declared disaster zone: the first ones were the municipalities of Vieques and Culebra. Yesterday, Adjuntas, Canóvanas, Carolina, Guaynabo, Juncos, Loíza, Luquillo, Orocovis, Patillas and Utuado were added—with Gov. Rosselló making the announcement yesterday accompanied by FEMA Administrator William Long,  albeit the Governor added: “This does not imply that the list of municipalities is finished, it´s not over. This simply implies that as we receive  information (from the affected municipalities) and we send it to the federal government, then, we are able make these declarations.”

Good Gnus. Puerto Rico’s median household income climbed 7.8% from 2015 to 2016 according to the U.S. Census Bureau American Community Survey statistics, with the survey showing that mean household income was up 2.3% after inflation—a stark contrast with the generally negative economic data coming out of Puerto Rico. For example, Puerto Rico’s economic activity index declined 2.1% in July from a year earlier, according to a report from the Government Development Bank for Puerto Rico: according to the U.S. Bureau of Labor Statistics’ household survey, total employment in August on the island was down 0.25% from a year earlier. According to its survey of workplaces, total employment was down 1.1%. In addition, the American Community Survey showed that net migration to the rest of the United States increased to 67,000 in 2016 from an average of 44,400 per year from 2006 to 2015—that is nearly 50%. Data from the Puerto Rico Ports Authority show that the average net migration was 65,700 per year from 2006 to 2015. The difference may reflect that some Puerto Ricans migrate to countries beside the U.S., according to Mario Marazzi, executive director for the Puerto Rico Statistics Institute.

Coming Back. Moody’s has revised upwards its credit rating for Ferguson, Missouri in the wake of efforts to recover fiscally from the aftermath of a controversial police shooting, the rating agency has revised the city’s outlook on its junk-level Ba3 general obligation rating to positive from negative. The city lost its investment grade rating as it dealt with the aftermath of the August 2014 fatal shooting of Michael Brown, an unarmed African-American, by a white police officer. The shooting led to local protests and a federal probe in the city of about 21,000 just northwest of St. Louis. The city faced rising legal expenses as it dealt with a federal probe into policing and court tactics and then the costs of a settlement, and took a hit on sales and other taxes. The city has also lost a chunk of court-fine related revenue it relied on as the state government cracked down on local government use of fine levies to balance budgets. After spending cuts and other management efforts, the city is expected to begin to shore up its balance sheet as voter approved tax revenues flow into city coffers. “The positive outlook reflects the likelihood the city’s materially improved fiscal condition will continue over the next two years, especially because new taxes implemented during fiscal years 2016 through 2018 will lead to the greater likelihood of operating surpluses and improving reserve levels,” Moody’s noted, as it affirmed the B1 rating on the city’s 2013 certificates of participation and the B2 rating on its 2012 COPs: the upgrade reflects Ferguson’s current fiscal condition in the wake of several years of rapidly declining reserves and uncertainty for further operating declines; it incorporates a moderately sized tax base with a trend of declining assessed valuation, below average resident wealth, and above average yet manageable debt burden. The agency notes that the rating remains challenged by ebbing reserves and the costs of federal consent decree measures which contributed to operating deficits in fiscal 2014 through 2017; the city anticipates a $312,000 deficit for FY 2017, but, with fully phased in, voter approved taxes coming in next year, the FY2018 budget estimates a $48,000 general fund surplus. From a high in fiscal 2013, the general fund balance declined to $3.6 million or 33.5% of revenues from $10.5 million. Reserve levels remain healthy on a relative basis compared to its peer group but the city’s operating flexibility is notably narrower than it has been. The city is working towards meeting milestones and establishing policies as required in its 2016 Department of Justice consent decree. Consent decree annual expenses have declined to $500,000 from projections of $700,000 to $1.5 million. Tax hikes are projected to generate an additional $2.9 million in annual revenue for the general fund in FY2018.

Fiscal & Physical Hurricanes

September 8, 2017

Good Morning! In this a.m.’s Blog, we consider the increasing risk of Hartford going into municipal bankruptcy, the Nutmeg State’s fiscal challenge—and whether the state’s leaders can agree to a bipartisan budget; then we consider some of the anomalies as the Commonwealth of Virginia tests out its new fiscal stress oversight program; finally, we observe that fearful transit of Hurricane Irma, one of the most powerful hurricanes ever recorded, as it roared through the U.S. Territories of the Virgin Islands and Puerto Rico, where we feared for lives and physical and fiscal safety.

Visit the project blog: The Municipal Sustainability Project 

On the Edge of Chapter 9. Hartford Mayor Luke Bronin fired a warning shot across the bow yesterday at the state legislature and Governor Dannel Malloy, notifying the parties the city would be seeking permission to file for chapter 9 municipal bankruptcy if the city is unable to obtain the requisite funds it needs to continue to operate by early November, in a letter also signed by Hartford Treasurer Adam Cloud and Council President Thomas “TJ” Clarke II.  In the state, where Bridgeport filed in 1991 (the case was dismissed the same year), the statute §7-566) provides that a municipality may only file for chapter 9 protection with the express prior written consent of the governor—at which point, if given, the governor must submit a report to the Treasurer and General Assembly. In his sharply worded epistle to Gov. Malloy and House and Senate leaders, Mayor Bronin cautioned: “If the state fails to enact a budget and continues to operate under the governor’s current executive order, the city of Hartford will be unable to meet its financial obligations in approximately 60 days.” Thus, while the state’s budget stalemate constitutes a fiscal threat to many Connecticut cities, it has posed exceptional problems for Hartford: projections show the capital city, facing a $65 million deficit this year, will run into cash-flow issues in November and December, including a $39.2 million end-of-year shortage. The fiscal hurricane came as Gov. Malloy yesterday unveiled new budget proposals intended to restore funding for municipalities and reject major education cuts planned for October 1, as Democrats and Republicans met in an attempt to reach common ground. However, Mayor Bronin warned that the “extraordinary measures” other towns are considering in response to the state’s ongoing budget gridlock—layoffs, cuts to services and drawing from rainy day funds—are actions Hartford has taken already, noting the city last year laid off 40 workers and cut millions from city departments—and dipped into Hartford’s rainy-day fund to help offset deficits. Notwithstanding, the city still had to borrow millions in June to help pay its bills: “For the past year, we have highlighted the urgency of Hartford’s fiscal crisis: The time has come to decide, together, what future we want for our capital city,” he wrote, urging legislators to embrace a “farsighted, collaborative approach” that includes giving Hartford more than the minimum amount of state aid it needs: he has requested at least $40 million more this year. Mayor Bronin also encouraged lawmakers “create a mechanism” to allow Hartford to achieve “fair labor contracts that truly reflect the city’s ability to pay,” and to “join us in insisting that bondholders and other stakeholders participate in the solution: “You could fail to adopt a budget, or write off Hartford’s problem as unsolvable—requiring a Chapter 9 Bankruptcy filing in the coming weeks.” Noting he wants to avoid chapter 9, the Mayor added: “A well-planned bankruptcy is a tool that can be used to address long-term liabilities like debt and pension obligations…“I think there’s a reality that Hartford needs real and major restructuring that could be accomplished in a bankruptcy: “It could be accomplished outside of a bankruptcy, but I think as days go by it becomes more likely that Hartford will be going bankrupt.” If there might be some light at the end of the fiscal tunnel, it was Connecticut House Majority Leader Matthew Ritter’s statement: “I would agree with the mayor that it does not help Hartford to give them well short of what they need, because then they’re just back in a hopeless scenario next spring: The goal is not to put Band-Aids on this. The goal is to try to begin structural reforms… Moody’s, last month, had warned Hartford was rapidly approaching debt repayment deadlines: “the city’s path to fiscal sustainability will likely require debt restructuring along with some combination of labor concessions, other expenditure cuts and new revenues,” with bills coming due for $3.8 million this month, and $26.9 million next month in October. Hartford’s leaders yesterday stressed they want a long-term solution to Hartford’s problems—or, as the Mayor put it; “We’re not interested in patches. We’re not interested in a short-term bailout…We’re not interested in Band-Aids. And we’re not interested in leaving this problem for future legislatures or future mayors…We’re interested in fixing this.”

Nevertheless, the challenge of obtaining state fiscal assistance will be hampered by the state’s own fiscal challenges: Connecticut has operated under Gov. Malloy’s executive orders since July 1, while the state legislature is still working out a biennial budget for FY2018 and 2019—efforts the Governor expects to result in a new compromise budget by today: under his most recent executive order, however, state aid for Hartford is down nearly 25% from last year—leaving the city to confront a nearly $50 million deficit for FY2018 and projecting that to grow to about $83 million next fiscal year. According to Mayor Bronin, one option would be for the state to provide the city with “just enough additional assistance” to avoid short-term liquidity problems without the structural overhaul and the necessary investment to reinvigorate the city—or, as he wrote: “This might be the path of least resistance, but it’s also the path that leads to a less competitive Connecticut,” adding that failure to adopt a budget or writing off Hartford as a lost cause would force a municipal bankruptcy filing. A third option, according to the Mayor, would be a “farsighted, collaborative approach,” which would include reimbursing the city for its disproportionate share of non-taxable property‒or about half of overall property; enable relief for the city in labor contracts; and forcing bondholders and other stakeholders to the table. Thus, he noted, he would prefer an avenue other than municipal bankruptcy.

Is There a Mother Hubbard Problem? Even as Hartford is desperately seeking state aid to avoid filing for bankruptcy, the state has its own serious fiscal challenges: it faces a biennial revenue gap of up to $5 billion, and municipal bond rating agencies have slammed it with six downgrades over the last year and a half. State legislative leaders claim they will have an idea of whether is light at the end of the proverbial tunnel by next week when they will be voting on a partisan or a bipartisan budget next week: Republican legislative leaders have been pressing their Democratic colleagues to make changes they assert would improve future budgets, but do not necessarily make it easier to close the current $3.5 billion budget deficit: most of the changes the Republicans had wanted to make in the state’s relationship with its labor unions foundered in the wake of the $1.57 billion concession package approved in a mostly party line vote. Republican lawmakers insist they have revised their budget proposals to reflect the new labor agreement; however, they are not ready to release them to the public, much less share them with Democratic legislative leaders. Senate President Martin Looney (D-New Haven), said the “significant unanswered question” is how Republican legislators close the gap between their original proposals and the labor agreement: “We hope to get all of these issues resolved, so at least we will know where we stand in relation to each other,” adding there are hopes of a vote in both chambers next week: as of today, there is no certainty with regard to whether the budget would pass, or, as House Speaker Joe Aresimowicz (D-Berlin) noted, it is worth trying to reach a bipartisan deal, “but in the end I don’t know if the differences are too large to overcome,” adding they cannot just pass a budget with the votes in either chamber, because any such budget also must pass muster with the Governor, who has not even been complimentary of his own party’s efforts to put together a budget. Senate Republican President Len Fasano (R-North Haven) said in order for there to be any progress on closing Connecticut’s $3.5 billion budget gap, there first has to be agreement over structural changes, such as a spending and a bonding cap, deeming it “an appetizer to the main meal: “You’ve got to get through this,” before you start talking about the budget numbers. Democratic legislative leaders agreed they share an interest in structural changes, but are not in agreement with how Republican lawmakers want to implement some of them.

Not So Fiscally Rich in Richmond? Or Whoops! Richmond, Virginia—notwithstanding a 25% poverty level, has been in the midst of a building boom; it has reported balancing its budget, and that it holds a savings reserve of $114 million—in addition to which, the state has logged budget surpluses in each of its most recent fiscal years; it currently has an AA rating from the three major credit rating, each of which reports that the former capital of the Confederacy has a modestly growing tax base, manageable municipal debt, and a long-term stable outlook—albeit with disproportionate levels of poverty. Nevertheless, State Auditor Martha S. Mavredes, according to a recent state report distributed within government circles, including the Virginia Municipal League and the Virginia Association of Counties, has cited the municipalities of Richmond and Bristol as failing to meet the minimum standard for financial health:

In the case of Richmond, according to the report, the city scored less than 16 on the test for the past two fiscal years—a score which Auditor Mavredes described as indicating severe stress in her testimony last month before the General Assembly’s Joint Subcommittee on Local Government Fiscal Stress, noting that the test was applied for fiscal years 2014, 2015, and 2016. The fiscal test is based on information contained in annual audited financial reports provided by each locality—except the municipalities of Hopewell and Manassas Park have stopped providing reports—with the fiscal stress rankings based on the results of ten ratios which primarily rely on revenues, expenses, assets, liabilities, and unused savings: the test weighs the level of reserves and a municipality’s ability to meet liabilities without borrowing, raising taxes, or withdrawing from reserves—as well as the extent to which a locality is able to meet the following fiscal year’s obligations without changes to revenues or expenses: Richmond’s score was near 50 in FY2014, but fell below 16 in FY2015  and to 13.7 in FY2016. Thus, even though Virginia has no authority to intervene in local finances, the new fiscal measuring system has created a mechanism to help focus fiscal attention in advance of any serious fiscal crisis.

It turns out the municipality with the biggest red flag, initially known as City A, is Bristol, an independent city of around 18,000—the twin city of Bristol, Tennessee, just across the state line, which runs down the middle of its main street: State Street. Bristol, more than a week ago, acknowledged the city is in communication with the Virginia auditor’s office to determine her audit designated Bristol with a score below 5 on a scale which uses any number below 16 as a sign of potential distress. That audit also showed City B, which fell from a score just below 50 in 2014 to below 14 the next two years, to be state capitol Richmond.

Asked about Richmond’s precipitous fiscal fall under the scale, Auditor Mavredes said that the high score for 2014 was incorrect, because of a keyboard error by her office. Instead of a steep fall, “it’s more of a flat line,” she added. Timely financial reporting has been a consistent concern for the city, which has been late in filing its CAFR for three years, although Richmond Mayor Levar Stoney has vowed to file it on time this year—and the Auditor’s office, which compiles an annual financial report for localities, is still awaiting Richmond’s fy2016 information.

The Virginia Association of Counties confirmed that Richmond County, on the Northern Neck, and Page County, with a slowing population of about 24,000 and county seat is Luray in the northern Shenandoah Valley, were two flagged by the system for what Auditor Mavredes deemed “consistently low scores:” 5.9 in 2014, 8.2 in 2015, and 7.3 last year. Page, as County B, declined from 21 in 2014 to about 15.5 in 2015, and 11.1 in 2016. Dean A. Lynch, the Virginia Association of Counties Executive Director, said both counties are “very aware” of the concerns the auditor raised. Notwithstanding, he noted that VACo believes some differences among localities stem from how they report their financial results: “We’re trying to get a group to meet with (the auditor) so we can all get on the same page,” noting, for example, the initial assessment shows Fairfax and Stafford, both fairly wealthy counties, with relatively low scores. VaCo officials believe that has less to do with their financial condition than how they report school system debt and assets—a contention with which Auditor Mavredes agrees, so she is not concerned by the scores, because she recognizes the local government is reporting the debt, while the school system is showing the assets. She also notes that some localities might show high scores, even though they have small budgets: for example, Nottoway County scored the best among counties in the new system at 98.1 last year, leading the Auditor to note: “Some localities are very debt-averse…Some of it is just the choices they’ve made in regard to the locality. They might not have many resources, but they have managed well with the resources they’ve had.” Vaco Director Lynch notes that the larger issue of fiscal stress for rural localities, such as Richmond County and Page, is the amount of money they are required to pay as their match for state funding of public education and other services, as well as their ability to generate it: “They do feel they are having a tough time in meeting some of their core services: I think if you go back and talk to Page County and Richmond County, they have trouble meeting the match that is required. It’s a state funding issue.”

Peligroso. Cataloged by the National Hurricane Center as an “extremely dangerous: cyclone, Hurricane Irma, slammed its way through northern Puerto Rico, with the Category 5 phenomenon lashing Puerto Rico with sustained maximum winds at 185 mph: by early this morning, the Aqueduct and Sewer Authority confirmed that about 80,000 people have no water—by 10:53 p.m., Irma’s eye was located at latitude 19.4 degrees north and longitude 66.8 degrees west: about 85 miles from San Juan—a half hour after some 22 hospitals had lost power, according to the Director of the State Agency for the Management of Emergencies, Abner Gomez. By yesterday morning, more than a million were without electricity.

The PROMESA fiscal oversight board yesterday reported it was working for the federal government to accelerate assistance to Puerto Rico: Gov. Ricardo Rosselló rejected that claim, stressing that no member of the Board has communicated with him to make himself available: “Yo sé que los mejores intereses de todo el mundo están en el pueblo Puerto Rico”: I know that the best interests of the whole world are in the town of Puerto Rico.  So far I have not had personal communication (with members of the PROMESA Board), but we certainly give the invitation to anyone who wants to collaborate. For its assumption, including the members of the Board.” Board Chair José Carrión told the media that he worked “closely with Governor Rosselló to coordinate support for Puerto Rico after the hurricane, asserting: “We have approached the federal government to activate Title V of PROMESA,” which Mr. Carrión asserted provides authority under Title to speed up assignments after a disaster. Similarly, in a written statement, the Board’s Executive Director, Natalie Jaresko, noted: “We have approached the federal government to activate Title V of PROMESA, which allows the Board to work with agencies to accelerate activation of allocations and loans after a disaster…We expect residents of Puerto Rico to remain safe during hurricane Irma and that any damage to the island due to the hurricane will be minimal.”

Puerto’s Rico’s first recovery focus in the wake of Irma will be on the island of Culebra, with a population of around 1,000. Generally, it appears, the worst fears were not realized: the hurricane (Humacao) spared much of the eastern region of Puerto Rico: there was one tree fall reported—even as there were a reported 500 refugees between the villages of Utuado, Lares, Adjuntas, Jayuya and Ciales.  By 8, last evening, there were approximately 77,000 subscribers without water service, as Irma’s eye passed just north of Puerto Rico—leaving some 868,846 without power—just hours after U.S. Health and Human Services Secretary Tom Price had declared a public health emergency in Puerto Rico and the US Virgin Islands to facilitate the provision of federal services.