Post Municipal Bankruptcy Futures

September 21, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

Is There Second Class U.S. Citizenship?

eBlog

September 18, 2018

Good Morning! In this morning’s eBlog, we report on the dismissal by the Trump administration for self-government in Puerto Rico, and await today’s PROMESA Board oversight hearing. We also examine pro-active efforts by the government to reduce future hurricane vulnerability on the island.   

Is There A Second Class U.S. Citizenship? The Trump administration has dismissed complaints filed by pro-statehood supporters, emphasizing that nothing prevents anyone from Puerto Rico who wishes to participate in the electoral process from moving to the mainland—with Kevin Sullivan, the Deputy Chief of Mission for the U.S. to the Organization of American States coming in response to complaints filed 12 years ago by former Governor Pedro Rossello and attorney Gregorio Igartua.  The complains are to be considered October 5th at an Inter-American Commission on Human Rights public hearing, as part of the 169th session of the OAS autonomous body, at the University of Colorado. According to Deputy Chief Sullivan’s communication with IACHR Executive Director, Paulo Abrao,  nothing in the American Declaration (of Human Rights) suggests that OAS member states cannot maintain federal systems in which their citizens participation in local and federal elections is determined by their residence or the state of the federal entity where they reside. Mr. Sullivan asserted that Puerto Rico’s current political status is not inconsistent with the American Declaration of Human Rights, and he defended the quasi-colonial position by arguing that it allows a limited participation, because Puerto Ricans can participate in voting in Presidential primaries, and they have the right to elect a non-voting Member to Congress. Mr. Sullivan went on to note that although Puerto Rico does not have state sovereignty, he claimed it has a “distinctive, in fact exceptional, status” with a “broad base of self-government.” Just over a year ago, Puerto Ricans, by referendum, voted for statehood for the first time on June 11, 2017, effectively initiating what Mr. Sullivan deemed a “political process,” the outcome of which, he said, “cannot be predicted by the United States,” even as he admitted that other territories’ petitions have been accepted. He added that Puerto Rican residents, who are U.S. citizens, are also free to move to any state, if they wish.

Proactive Shelter from the Next Storm. Luis Burdiel Agudo, Puerto Rico’s President of the state-owned Economic Development Bank, has recommended making aid to homeowners rebuilding after Hurricane Maria contingent on their relocating out of flood-prone areas, with the President of the state-owned Economic Development Bank, warning: “We need to move families to a safe place.”  Most local governments give homeowners the choice between raising their house or taking a buyout to move somewhere safer; however, elevating one’s home costs around $44,000, according to government estimates—an especially high bar in Puerto Rico, where the median income is $20,078, and the poverty rate is 43.5%‒the median home value is about $100,000. Those who remain in flood-prone areas also require flood insurance, which is difficult to obtain given the low-income rate in the Commonwealth. Nevertheless, Puerto Rico is withholding aid entirely unless residents move. 

Federal Assistance & Hard Choices. The federal government is expected to provide $20 billion in federal funding to rebuild after Hurricanes Irma and Maria, and to better prepare for future storms—creating an almost Scylla versus Charybdis choice: thousands of the more than 100,000 homeowners on the island will have to choose between staying in their current property or rebuilding their homes. 

Could There Be Promise in PROMESA? The PROMESA Oversight Board is soliciting feedback on its report on the causes and development of Puerto Rico’s debt crisis, the Board’s Special Claims Committee set to “pursue claims from the results” of a debt investigation, and a hearing set for today in San Juan—a hearing which will be streamed live on the Board’s website—with audio available in both English and Spanish. Board members Andrew Biggs, Arthur González, Ana Matosantos, and David Skeel are on the Special Claims Committee. The debt report includes a section which lays out numerous ways Puerto Rico’s municipal bonds and the steps that led to their issuance may have run afoul of laws and regulations. One issue which might or might not be addressed will be with regard to federal allocations promised to Puerto Rico to mitigate the devastation caused by Hurricane Maria—some $41 billion, especially because authorities estimate that less than a quarter of those funds have, in fact, been disbursed. Moreover, the promised, but unreceived amount appears to be less than half the projected level of $100 billion needed to complete reconstruction. According to the data offered by the US government and Puerto Rico, Puerto Rico’s El Nuevo Día has only been able to detail disbursements of approximately $7.640 billion to government entities, businesses, and families in Puerto Rico. Omar Marrero, the Director of the Central Recovery and Reconstruction Office (CRRO), noted: “The reimbursement process has been really hard, particularly when FEMA has imposed some requirements on us as if we were a risk jurisdiction, when we were not declared so.” At the same time, the government of Puerto Rico has not managed yet to get funds flowing from the permanent project program under §428 of the Stafford Act, which will guide most repairs and new constructions. Director Marrero argues that the continued “discriminatory treatment” is an example of Puerto Rico’s lack of political power due to its territorial status. If anything, in the wake of the Whitefish scandal, attention on the management of emergency funds has increased, and, as recently as last weekend, President Trump fanned the idea that the government of Puerto Rico is one of the most corrupt in the country.

To date, the bulk of the federal assistance has come via Congressional resolutions, with the distribution mainly through HUD, FEMA, and the Department of Health and Human Services: half of the allocations were made through the CDBG Disaster Recovery program; however, not even the first $1.5 billion has been made available—funds which were to be allocated last month to assist with the reconstruction of houses destroyed or damaged by the hurricane. Director Marrero noted: “It is still necessary to sign the agreement between HUD and the Puerto Rico Department of Housing. Without that contract, the funds cannot be disbursed,” adding that second part of the CDBG-DR package, which would reach $ 8.2 billion, will not arrive until next year, which would delay its impact on the economy and the development of infrastructure projects. He added that the funds are more important, especially because FEMA did not approve granting federal assistance for permanent reconstruction work, “based on having a bad experience with that program.” The wait may be understood as especially stressful, because the potential aid package from Congress includes nearly $2 billion in CDBG funding which must be used to rebuild the power grid. With the hurricane season still vicious, there are obvious fears at the delay. Thus, Puerto Rico is pressing to reactivate exemptions in the payment of part of the cost for debris removal and taking emergency measures in the face of a natural disaster. The disaster has also re-demonstrated a double standard: in the Lone Star State, Texas, where Hurricane Harvey caused $125 billion in damage, according to the National Hurricane Center, FEMA claimed it provided $13.820 billion in “the pockets of survivors” via federal and state grants, and flood insurance programs ($ 8.8 billion). In Puerto Rico, however, the percentage of homes with FEMA insurance is minimal.

Stormy Fiscal Warnings. Moody’s has warned that a “large part of the money (FEMA assistance) will not remain on the island,” a fiscal storm warning which could undercut Puerto Rico’s expectations of 2019 6.5% economic growth. Some of that projection assumes the government will be able to efficiently take advantage of the $4.8 billion in extra Medicaid assistance it received—funds which can be used until next September without a local match. Nevertheless, Puerto Rico must plan on the resumption of its contribution to the Mi Salud plan—a plan which will be complicated by the apprehension that Medicaid emergency funds may run out during in FY2020—an exhaustion which could carry a price tag of as much as $1 billion.

Has There Been a Double Standard? In the wake of Hurricane Katrina, which sent a number of us from Arlington County, Virginia hurtling to Mississippi to try to assist in rebuilding, and which leveraged Congress to name a bipartisan committee, a mere seventeen days after the storm struck, to investigate the Bush Administration’s response to the storm, with, in the Senate, twenty-two FEMA oversight hearings in six months—and within eight months, the release of 500-plus-page investigations into the Bush administration’s handling of the crisis—investigations with dozens of recommendations for reform; there has been no comparable reaction from this Congress to a storm which caused a much greater loss of American lives—nearly 70% more. The U.S. Senate Homeland Security and Governmental Affairs Committee, which oversees FEMA, has held just two hearings; neither the House nor the Senate has issued any major reports. Hurricane Maria, according to George Washington University’s report, killed an estimated 2,975 Americans in Puerto Rico—an estimate which, last week, the President claimed was a fake number. Or, as Irwin Redlener, the Director of the National Center for Disaster Preparedness at Columbia University put it: “Puerto Rico is getting far less attention, in spite of it being one of the worst disasters in modern American history, than Katrina, and far less attention than we got for Superstorm Sandy…From the beginning, the handling of Maria’s consequences both from the White House and Congress has been abysmally inadequate.” Indeed, in the immediate aftermath of Katrina’s Gulf Coast devastation, House GOP leaders called for an investigation; they created a select committee to investigate the storm. That committee held nine public hearings; it reviewed more than 500,000 pages of documents, according to the 582-page report, titled “A Failure of Initiative,” which was released less than six months after Katrina struck. The Senate conducted its own investigation into the Bush administration’s response to Katrina, with the Senate Committee on Government Affairs holding nearly two dozen hearings with 85 witnesses; the Committee reviewed over 838,000 pages of documents; it heard testimony from 325 persons involved in the response. Many of the hearings focused on narrow issues, such as search-and-rescue efforts after the storm. In this Congress, in contrast, the House Oversight and Government Reform Committee has held two hearings related to the 2017 hurricane season, and it has reviewed more than 17,000 documents.  Last week, Ranking House Oversight Committee Member Elijah Cummings (D-Md.) released a report complaining about a lack of hearings and responsible oversight—a report which might have triggered Chairman Tray Gowdy (R-S.C), Chairman of the House Committee on Oversight and Government Reform, to FEMA to request all communications from 13 FEMA officials related to 10 different aspects of FEMA’s response to the storm, including the lack of qualified personnel, wiring issues with the electrical system and problems with existing disaster plans. It was just the second letter requesting information about FEMA sent by the committee and the first since Oct. 11, 2017.

Can There Be Too Many Local Governments?

August 8, 2018

Good Morning! In this morning’s eBlog, we consider the fiscal and governing challenges confronting Puerto Rico’s municipalities or municipios—and a federal court’s dismissal of Puerto Rico’s suit challenging the preemption of its governing authority.

Can there be Too Many Local Governments? Puerto Rico Governor Ricardo Rosselló Nevares has stressed that the model of autonomous municipios has failed, because too many lack the fiscal capacity to implement their basic functions without the territory’s help. Instead, he believes that the municipal model must be changed to one where the equivalent of counties are in charge of providing services which are now provided by the territory and municipios, noting in a recent interview: “I know it’s a difficult initiative, but there has to be a conversation about what the future of local government is going to be. We had talked about establishing a counties system in Puerto Rico, and I think we need to have this conversation…The model of autonomous municipalities was a very nice one, but by not having total independence, it never truly showed as it should be.” Indeed, the debate is not new—either on the mainland, where, nearly a century ago, Farrington Carpenter, Colorado’s first Director of the Interior Department’s Grazing Service noted, at a time when there were 20 Colorado counties with populations under 5,000 and three with only 1,000: “How can such small counties afford the cost of a complete county government? So, the Governor noted: “I think there is an opportunity for the counties model…I have my ideas, but I think we depend a lot on local leadership, so that this can be achieved. I think our society understands that they can work under this model.”

Puerto Rico has 78 incorporated cities and towns—each municipio is governed under the Autonomous Municipalities Act of 1991, which establishes that each jurisdiction must have a strong mayor and municipal council or legislature—and each Council must be unicameral with its size determined by the population. Municipios with populations in excess of 50,000 are defined as incorporated cities; those with fewer are defined as towns—which rely on adjacent or nearby municipios to provide certain public services. San Juan, the capital, is home to about 400,000, while Culebra is the smallest municipio, with around 1,800.

The concept of governance change is not new: the Governor had already proposed it to the PROMESA Oversight Board. Likewise, it was a topic of debate under the administration of his predecessor, former Governor Alejandro García Padilla, albeit his administration only published a report which suggested options, such as: the consolidation of municipalities, the creation of counties, or groups of municipalities which could create consortiums made up of mergers with departments of nearby municipios—or, as the Governor put it: “I think there is an opportunity for the counties model…I have my ideas, but I think we depend a lot on local leadership so that this can be achieved. I think our society understands that they can work under this model.”

Unsurprisingly, however, the very idea of altering municipal authority has stirred up a veritable hornets’ nest. Just mentioning the idea of altering municipalities’ authority provokes a negative reaction from the mayors. Both the president of the Mayors Federation, Carlos Molina Rodriguez of Arecibo, and that of the Mayors Association, Rolando Ortiz, the Mayor of Cayey, have expressed their opposition to any consolidation: Mayor Ortiz argues that counties would bring additional expenses and an unnecessary layer of government bureaucracy, insisting that Mayors are the elected officials closest to the people, so their functions should not be limited. In contrast, Mayor Molina, from the New Progressive Party (NPP), while also opposed to the elimination or consolidation of municipalities, indicates that the Mayors Federation has created a committee to evaluate options to reform municipal structures, stressing that the intent is to make recommendations. He notes that he personally prefers that each municipio reach agreement to merge specific departments so that savings can be generated—in effect creating a consortium—a legal option available to municipios in Puerto Rico which has been available for decades, but which have been rarely used. Very few were created to merge tasks of departments of two different municipalities: since such consortia were authorized in 2012, when the Autonomous Municipalities Act was amended to facilitate the creation of these inter-municipal structures, such consortiums were established to manage the permit systems of Comerío, Barranquitas, and Aibonito; another was established for public roads maintenance in Villalba, Juana Díaz, Comerío, and Barranquitas.

Mayor Molina noted: “It would be necessary to analyze what is the best thing for Puerto Rico. I’m not in favor of letting municipal employees go. If you ask the mayors, nobody is in favor of that…I do not agree with the elimination of municipalities or mayoralties.” Similarly, Mayor Ortiz added: “I believe it’s a wrong vision. The municipal governments are the closest to needs and the people’s pain.”

Nevertheless, Gov. Rosselló emphasized that municipalities are in a precarious financial situation, so the local governance model must be revised to improve the government’s fiscal health and the quality of services received to the people, stressing that the model of autonomous municipalities in Puerto Rico has failed, because many municipalities lack the requisite fiscal capacity to implement their basic functions without the quasi-state government’s assistance. Nevertheless, he reaffirmed his view that the municipal model must be changed to one where counties are in charge of providing services which are now in the hands of municipalities and the Commonwealth, noting: “I know it’s a difficult initiative, but there has to be a conversation about what the future of local government is going to be. We had talked about establishing a counties system in Puerto Rico, and I think we need to have this conversation…The model of autonomous municipalities was a very nice one, but by not having total independence, it never truly showed as it should be.”

The Governor’s proposal is not new—it is one he included in his proposed fiscal plan, which was finally certified by the PROMESA Oversight Board last April. Nor is the issue new: the concept of changing municipal structures also was debated during the previous administration of Gov. Alejandro García Padilla; however, the concept never went beyond the publication of a report which suggested options, such as: the consolidation of municipalities, the creation of counties, or the option for groups of municipalities to create consortiums between different municipios’ departments—or, as the Governor put it: “I think there is an opportunity for the counties model…I have my ideas, but I think we depend a lot on local leadership so that this can be achieved. I think our society understands that they can work under this model.”

Nevertheless, any suggestion to curtail or limit the authority of municipios has drawn, as we noted above, a strong, adverse reaction from Mayors, with Mayor Molina emphasizing that mayors are the elected officials closest to the people, so their functions should not be limited; nevertheless, ha has indicated that, currently, the Mayors Federation has created a committee to evaluate options to reform municipal structures, stressing that the idea is to make recommendations—noting that, personally, he would opt for a consortium model, under which each municipality reaches agreements to merge specific departments so that savings could be generated. This is not a new model, but one which, despite being available, has seen few takers: since 2012, when the Autonomous Municipalities Act was amended to facilitate the creation of these kinds of inter-municipal structures, such consortia have been established to manage the permit systems of Comerío, Barranquitas, and Aibonito—and similar structures have been agreed to for public roads maintenance in Villalba, Juana Díaz, Comerío, and Barranquitas.

Nevertheless, as Mayors’ Federation President Molina noted: “It would be necessary to analyze what is the best thing for Puerto Rico. I’m not in favor of letting municipal employees go. If you ask the mayors, nobody is in favor of that…I do not agree with the elimination of municipalities or mayoralties.” His counterpart, Mayor Ortiz, echoed the apprehension: “I believe it’s a wrong vision. The municipal governments are the closest to needs and people’s pain.”

Governor Rosselló, however, emphasizes that the island’s municipios are in a precarious fiscal situation; ergo, he believes the governance must be revised to address not only Puerto Rico’s fiscal health, but also quality of public services received by the people.

Quien Es Encargado? U.S. Title III Judge Laura Taylor Swain yesterday dismissed a suit by Governor Ricardo Rosselló Nevares and Puerto Rico legislators challenging the authority of the PROMESA Oversight Board to impose to impose a fiscal plan and related budget, granting the Board’s motion to dismiss the U.S. territory’s claim that the Board had encroached on the Legislature’s authority by refusing to certify its budget, instead certifying a new fiscal plan with reduced appropriations. The legislators had sought to have the Judge rule the Board’s actions as “non-compelling recommendations.” PROMESA Board Chair Jose Carrion welcomed the decision in a statement: “There can be no doubt that the fiscal year 2019 budget certified by the Oversight Board is the only one and must be enforced,” adding that now the Board needs to focus on “implementing critical reforms, resolving the crushing debt crisis, and transforming the island’s economy.” He promised to announce steps in the coming weeks to increase public-sector efficiency and economic improvements, while working with creditors on debt restructuring.

After the court released its decision, Governor Rosselló released a statement vowing to disobey Judge Swain’s order, stating that: “The federal court ruling states that our public employees won’t receive their deserved Christmas bonus unless the government takes unjustified, draconian measures against our very own employees, which include massive layoffs. We are adamantly opposed and will not comply with the decision.”

Judge Swain wrote: “PROMESA is an awkward power-sharing arrangement…The power bestowed on the Oversight Board by section 205(b)(1)(K) of PROMESA allows the Oversight Board to make binding policy choices for the Commonwealth.” Nevertheless, she noted, this does not “render the elected Governor irrelevant or toothless.” She wrote that the Governor is required to start the process of putting together a budget—and that he has the right to publicly object to fiscal plan provisions, defining that to grant the Commonwealth some ability to obstruct the implementation of PROMESA Board-ordered policy, holding that the Board had power over the “reprogramming” or control of Puerto Rico departmental unspent funds, and writing that the PROMESA Board could include mandatory “policy” statutes in its fiscal plans even if the Governor deemed them unacceptable; however, Judge Swain said she would not rule against the PROMESA Board’s efforts to consolidate government agencies, eliminate the Christmas bonus, impose a hiring freeze, standardize healthcare provided to government employees, nor prohibit future liquidation of sick and vacation days. In an intriguing part of her decision, Judge Swain wrote that the Oversight Board had asserted it was not mandating the Governor to take these actions; rather the Board was cutting the budget with the assumption that these matters would be addressed, and noting that under PROMESA, the Board has the right to impose a budget on the government of Puerto Rica—comparable in many senses to the preemptive governing and budget authority granted to emergency managers in chapter 9 municipal bankruptcies in a number of states. At the same time, Judge Swain concurred with Gov. Rosselló on his claim that the Board was using planks of its approved budget to write Puerto Rico law concerning budgetary matters—steps which Judge Swain wrote appeared to go beyond the authority Congress granted to the Oversight Board.

Under the current PROMESA fiscal plan, one provision provides that, “If, after the third fiscal quarter of any fiscal year, there remains unrealized agency efficiency savings for any grouping relative to the projected agency efficiency savings in the new fiscal plan for the applicable fiscal year, the Oversight Board will automatically reduce the budget for the corresponding grouping for the following fiscal year in the amount equal to the unrealized agency efficiency savings.” However, Judge Swain determined this interpretation contravened the intent of the PROMESA statute to make any final fiscal decisions as interactive, rather than preemptive, albeit, under her ruling, her grant of final fiscal authority to the Board would appear to render any such guidance largely an empty governing promise.

Unsurprisingly, Governor Rosselló responded to her decision by stating: “This ruling is further proof of Puerto Rico’s colonial status and our lack of self-government. We must put an end to this undignified relationship that allows Congress to discriminate against us and take actions without our consent which are detrimental to our island.” He added that while his government would consider options to appeal Judge Swain’s decision, his government would “keep looking for ways to work with the Oversight Board, so that we avoid harsh, draconian measures that would be detrimental to our people.” In his own statement, PROMESA Chair José Carríon stated: “In the coming days and weeks, the Board expects the government to deliver material progress on reforms to increase public sector efficiency and transparency, and make Puerto Rico’s economy more competitive and attractive for businesses and investors…At the same time, we will continue to pursue plans of adjustment with creditors to achieve debt restructurings and a return to the capital markets.”

Is PROMESA Unpromising?

July 23, 2018

Good Morning! In this morning’s eBlog, we consider whether the PROMESA statute might be unconstitutional.

Tug of Governance War. This week, Judge Judith Dein will be challenged with the task of resolving the controversy between the government of Puerto Rico and the PROMESA Board over the budget. Judge Dein, a federal magistrate judge from the district of Massachusetts, has been designated to assist Judge Laura Taylor Swain in Puerto Rico’s Title III bankruptcy proceedings—as, according to an order by Chief U.S. District Court Judge Aida Delgado last month, her charge will be to “hold court and perform any and all judicial duties,” as needed, in relation to the Commonwealth’s Title III cases, with his order coming because of the unavailability of magistrate judges in the District of Puerto Rico, citing a statute which permits Chief judges to assign magistrate judges to temporarily perform judicial duties in a district other than the judicial district for which they have been appointed. Her test will come the day after tomorrow, when the Fiscal Agency and Financial Advisory Authority (FAFAA) will try to convince Judge Dein that the budget to be implemented for the current year is the one approved and signed by Governor Ricardo Rosselló Nevares earlier this month, marking the first formal complaint filed by the Governor against the PROMESA Oversight Board. The challenge now joins a long litigation line of more than 75 lawsuits filed against the government or the Board—all questioning the scope of the PROMESA law.

While, to date, the bulk of such challenges have come from municipal bondholders and municipal bond insurers, this new legal avenue emerges from the elected officials of Puerto Rico, who, in light of PROMESA, would be called upon to execute the dual mandate granted to the Board. In these cases, several parties have already received denials from Court. Last week, for instance, Judge Dein denied a request from the Puerto Rican Association of University Professors of the University of Puerto Rico in Mayagüez to intervene in the litigation between the government and the PROMESA Board—which had asked for dismissal, alleging that it acts in accordance with the powers conferred by the federal statute. Likewise, in the related suit filed by Puerto Rico Senate President Thomas Rivera Schatz and House Majority Leader Carlos “Johnny” Méndez (R-Fajardo) against the Board, Judge Dein, to whom Judge Laura Taylor Swain entrusted to resolve the controversy, denied the request.

The suit raises grave constitutional and governance questions relating to the kinds of principles of self-government upon which our nation was founded, as well as the stark difficulty of somehow applying chapter 9 municipal bankruptcy to a U.S. territory—that is, a statute which only permits such a filing if authorized by a state. Constitutionalist Carlos I. Gorrín Peralta and former Judge President of the Bankruptcy Court in Puerto Rico Gerardo Carlo Altieri, nevertheless, believe it unlikely that the statute will be declared unconstitutional. Professor Gorrín Peralta, of the Inter-American School of Law believes it is unlikely that Judge Swain would declare the statute unconstitutional, a statute which, after all, created her special position, appointed by the Associate Justice of the Supreme Court of the United States. He explained that the Supreme Court pronouncements about Puerto Rico two years ago only served as a message to the U.S. Congress to take action regarding Puerto Rico, and the actions of that legislature have not been different from what they have been done for more than a century, noting: “Puerto Rico does not even have sovereignty to accuse a person of drug dealing, who has already been prosecuted by federal authorities, and then, the second message was the declaration of unconstitutionality of the Debt Restructuring Law,” referencing the cases Puerto Rico v . Sánchez Valle and Puerto Rico v. Franklin California Tax-Free Trust. Mayhap ironically, Prof. Peralta, in the case of the institutional funds which had successfully challenged the Debt Enforcement and Recovery Act (which was approved by the Puerto Rican government in 2014), he recalled came the same day on which the U.S. Senate was to vote on PROMESA, archly noting: “The Congress has exercised its colonial strength,” adding that now, the dispute between the PROMESA Board and the government is the result of the “conceptual ambiguity” under which Puerto Rico has suffered for decades. Rather, he is of the view that PROMESA, rather than a vehicle intended to help restructure the U.S. territory’s debt, actually is a statute designed to protect the economic interests of the United States, contain the effect that the Puerto Rican debt would have in the municipal bond market, and rid the federal government of any responsibility for the debt issued by a territory that was authorized to do so by Congress.

Meanwhile, Carlo Altieri considered that the allegations of Rosselló Nevares and legislative presidents regarding a possible usurpation of powers are of great importance. The same, he added, applies to the case of Aurelius Capital Management, which alleges that the body created by PROMESA is null because its members were not appointed with the consent of the Senate as dictated by the US Constitution.

However, according to the former Judge President of the Bankruptcy Court in Puerto Rico, the backdrop to settle the dispute between Gov. Rosselló Nevares, the Legislature, and the Board is not a purely civil or a constitutional rights claim case, but the procedures provided by the federal Bankruptcy Code and which are oriented to pragmatism and the rapid resolution of monetary disputes: “In Bankruptcy Courts, fast, practical, technical, and efficient processes are sought. Of course, PROMESA is a special law, it is not chapter 9 or chapter 11; it is a very special law and, definitively, attacks on constitutionality are not usual in traditional bankruptcies cases, either municipalities or Chapter 11 cases,” adding: “These constitutional arguments are very important, but they have the effect of delaying cases and resolving cases, they  confuse and add excessive costs,” opining that Judge Swain’s recent ruling in the Aurelius case points to Gov. Rosselló Nevares and the Legislature having little likelihood of prevailing, after her refusal to dismiss the request of Title III as requested by the investment fund, because Puerto Rico is a U.S. territory and, as such, Congress “can thus amend the acts of a territorial legislature, abrogate laws of territorial legislatures, and exercise full and complete legislative authority over the people of the Territories and all the departments of the territorial governments.’” That is, he believes that, for Jude Swain, the PROMESA Board is an entity of the Commonwealth, and, therefore, U.S. Senate confirmation for its members is not required. He adds that, in his opinion, “I would not be surprised if the Court ruled against the Legislature and the government,” noting that, to date, it seems that what Judge Swain perceives PROMESA as granting the Board authority to approve fiscal plans and budgets; however, he made it clear that, in the future, especially for the confirmation process of the quasi plan of debt adjustment, the scope of the Board on the fiscal plan could change. He added that while Judge Swain appears to believe the Board is a territorial government agency, U.S. Court of Federal Claims Judge Susan Braden has concluded otherwise in the lawsuit filed by Oaktree Capital Management, Glendon Capital, and others. (That lawsuit, which is on hold until the constitutional challenges filed by Aurelius are resolved, Judge Braden found that the Board is a federal agency and therefore, its actions are in themselves, the actions of the United States.)

Voz de la Gente (Voice of the People). Mr. Peralta appears to be of the view that, as PROMESA begins to have an effect on the citizens’ of Puerto Rico’s wallets and pocket books, there will be increasing dissatisfaction with the Board in Puerto Rico, noting that if the court were to rule in favor of Gov. Rosselló Nevares’ government and defined the powers of the Board, “the truth is that the body created by Congress will continue to have ‘gigantic’ powers to impose its criteria on the government of Puerto Rico.

A Tale of Two Cities

July 3, 2018

Good Morning! In this morning’s eBlog, we consider a tale of two cities connected by geography and history, but divided by a fiscal chasm.

A Fiscal Dividing Line. Mayor Kevin Mumpower was reelected in a unanimous Council vote, Tuesday, to serve a second, consecutive term as Mayor of Bristol, Virginia, an independent, border municipality in southern Virginia of just over 17,000, where, on Thursday, the Council has scheduled a work session to complete its review of applicants for boards and commissions. The Council’s first regularly scheduled meeting is scheduled for next Tuesday. The city is twinned with its neighbor, Bristol, Tennessee, which has a larger population of over 27,000. The twin cities’ heritage dates back more than 250 years to when Evan Shelby came to the area in 1766—an area once inhabited by Cherokee Indians. At first, Mr. Shelby had settled his family at Big Camp Meet—the current day site of the twin border cities, but a site then which Shelby had renamed Sapling Grove, where he built a in 1774 on a hill overlooking what is today downtown Bristol, but which was then a key stop on an expanding nation’s road West for early American explorers such as Daniel Boone and George Rogers Clark—a fort known as Shelby’s Station. Nearly a century later, in 1853, Joseph Anderson, when surveyors projected a junction of two railroad lines at the Virginia-Tennessee state line, Reverend James King conveyed much of his acreage to his son-in-law, Joseph R. Anderson, who then laid out the original town of Bristol, Tennessee/Virginia. About that time, Samuel Goodson, who owned land adjoining the original town of Bristol at the Virginia-Tennessee border, with Beaver Creek serving as the dividing line between the two colonies, began a development known as Goodsonville; however, he was unable to incorporate Bristol across the state lines of Tennessee and Virginia. Three years later, in 1856, Goodsonville and the original Bristol, Virginia were merged to form the composite town of Goodson, Virginia—the very year when the Virginia and Tennessee Railroads reached the cities, with, ergo, two depots, one in Bristol, Tennessee, and the other in Goodson, Virginia; albeit the depot located in Goodson continued to be referred to as Bristol, Virginia. Thirty-four years later, Goodson, Virginia once again took the name Bristol. In 1998, Congress declared Bristol the “Birthplace of Country Music,” in recognition of its contributions to early country music recordings and influence.

Contiguous to the Virginia Bristol is Tennessee, Bristol, with a slightly greater population of around 25,000, has a median income for a household in the city just over $30,039. Nevertheless, despite their abutments, the twin municipalities have starkly different fiscal situations—with the southern twin in Tennessee in fiscal health, but its northern Virginia twin in a near fiscal crisis, seemingly overwhelmed with debt—even after assistance from the Commonwealth of Virginia helped avert deep cuts in funding for the municipality’s public schools. At present, it appears that interest payments by the city are on a course to consume as much as a quarter of the city’s operating budget—or, as City Manager Randall Eads put it: “We’re about as low as you can go and not have cuts to services…We are truly rebuilding this city from the foundation up.”

While the Commonwealth of Virginia does not specifically authorize chapter 9 municipal bankruptcy, the state’s courts, six years ago, ruled that “local governing bodies have only those powers expressly granted, those necessarily or fairly implied from expressly granted powers, and those that are essential and indispensable” (see Sinclair v. New Cingular Wireless PCS, 283 Va. 567,576 (Va. 2012), the state’s Dillon Rule compounds the fiscal quandary, providing that if “[T]here is a reasonable doubt about whether legislative power exists, the doubt must be resolved against the local governing body.”

Nevertheless, as the Commonwealth’s Auditor of Public Accounts, Martha Mavredes notes: “The state takes great pride in fiscal soundness and when localities start to falter, that reflects poorly on the state.” Indeed, as we have previously noted, the Commonwealth, two years ago, as Petersburg teetered on the verge of insolvency, had tasked Ms. Mavredes to develop a municipal fiscal early-warning system—a system which, in its first report, put Bristol, along with Petersburg, at the head.

Manager Eads noted: “One of the biggest things we have to overcome as a city is our demographics,” referring to the fiscal challenge in a municipality where nearly a quarter of its residents are in poverty, with more than 40% on some of government assistance, and more than 80% of its school population eligible. That is, it has become clear to Mr. Eads that a new fiscal approach will be necessary.

A Tale of Two Cities. In one area where distinguishing one Bristol from another is enabled by small brass plaques embedded down the center line of State Street which have “Tennessee” on one side and “Virginia” on the other, the twin, bi-state municipalities share a library and an emergency dispatch system; they have connected water systems, and they share payments for the electric bills to finance the neon signs over State Street, which read: “A good place to live.” The twin cities’ city halls are just blocks apart.

However, as we know, looks can be deceiving. Here, the issue of waste appears to have precipitated the fiscal parting of ways: the Virginia Bristol’s old landfill reached capacity about two decades ago; so the municipality opted to construct a new one in a 20-acre limestone pit—one in which the walls were porous. In order to prevent seepage of dangerous chemicals, the city had to purchase a new lining for the landfill walls nearly every other year‒at a cost of $1.2 million each time. That meant, with fees insufficient to cover operating and maintenance costs, the municipality was adding to its debt: currently, Bristol is trying to finance more than $30 million in debt from the landfill, forcing the city to write off $22 million siphoned from the general fund to cover expenses.

Even as unanticipated expenses have soared, the city’s tax base has eroded, hard hit by the collapse of the coal industry, especially in the wake of one of the nation’s largest coal companies, Alpha Natural Resources, headquartered in the city, filing for bankruptcy twelve years ago—at almost the same time as Ball Corp. moved its metal lid-making plant to Mexico. A commercial area developed just off I-81 in the 1990s began to sour. The combination appeared to contribute to the consequent closure of Bristol Mall.

Looking for a fiscal and commercial recovery, the city’s leaders opted to try to enter the commercial real estate business, creating The Falls, intended to be a $260 million hub of restaurants and shops—albeit without, mayhap, closely examining how such a commercial development would be affected by an even larger such development in adjacent Tennessee—where the Tennessee General Assembly had enacted legislation intended to assist its border cities compete with rivals in other states. Because the Volunteer State has no personal income tax, but it has sales tax of up to 9.75%, or nearly double Virginia’s, the difference appears to have been an important factor in providing incentives for those who reside near the border between the two states to opt to reside in Tennessee, but shop in Virginia. The new law allowed developers who built retail within 15 miles of a border to recoup some of the sales and use tax, making projects more attractive.

That led one entrepreneur, Steve Johnson to purchase a 200-acre piece of property, valued at close to $250 million, called The Pinnacle, a complex made up of a million square feet of shops and restaurants, anchored by a Bass Pro Shop, CarMax, Marshalls, and a Belk department store. Unsurprisingly, local Bristol, Virginia officials asked Mr. Johnson to consider developing The Falls instead, pressing the Virginia Legislature to enact provisions for sales and use tax revenue rebates for project developers. In the meantime, Mr. Johnson decided developing the site would be too expensive to level and grade, the roads were too small, and the location was just wrong. Undeterred, the city found another developer, so that, today, The Pinnacle counts nearly 70 merchants, while The Falls has fewer than 10. Thus, instead of helping the city deal with its landfill debt burden, The Falls has significantly added to the fiscal quandary, adding nearly $48 million to the city’s debt—and its political dissatisfaction.

Indeed, unsurprisingly, voters tossed all five Councilmembers from office, electing a slate which included two write-in candidates—and a Council which, early last year, hired a new City Attorney, Randall Eads, who had been a criminal defense attorney, perhaps a key factor in a region which has experienced a plague of methamphetamines and prescription drug abuse. Within six months, the Council removed the then city manager and asked Mr. Eads to step in—perhaps a step that opened his eyes to how grave the city’s physical and fiscal challenges were. In a city beset by such serious drug abuse, one of his first challenges was where to host the perpetrators: the city’s jail, after all, had a capacity of 67 inmates, but, in March, 240 prisoners: the escalating drug crisis meant overcrowding in the municipal jail, and unanticipated costs for those who could not be squeezed in at a regional holding facility at a cost of $38 per inmate per day.

That forced Mr. Eads to see if he could find a way to reduce the inmate population, leading him to propose an alternative punishment program for nonviolent offenders, one which would help them find work and subject them to regular drug testing. Simultaneously, Mr. Eads has been replacing city department heads and working to build morale; he has even been paying for staff picnics out of his pocket. However, it seems as if he has been trying to climb out of a sand hole: absent fiscal changes, the municipality anticipates it will soon face a $2.4 million annual shortfall in debt service payments.

But just on the other side of the state line, in another Bristol City Hall (Tennessee), Bristol City Manager Bill Sorah, who has previous experience in the Virginia Bristol, notes the legal distinctions, especially the differences in the constitutional status of each city: The Commonwealth of Virginia is the only state in which municipalities are independent entities: they are not incorporated as art of the surrounding county. In contrast, Tennessee’s Bristol is a unit of the surrounding Sullivan County: ergo, it faces no problem with inmate overcrowding, no criminal courts to finance, no jail, and no public school system. It has the legal authority denied its counterpart to annex land—authority unavailable on the other side of the border, where Virginia has had a moratorium on annexation for nearly four decades—one the General Assembly recently extended to 2024.

Searching for fiscal solutions. Earlier this year, Virginia Auditor Mavredes granted Bristol $100,000 to hire a consultant to help determine potential fiscal solutions—help which Manager Eads is sure to appreciate—or, as he put it: “We’re in it…so now we’ve got to fix it.” Thus, the city has jacked up fees at the landfill and is pressing ahead with The Falls, and is focusing on putting together a fiscal blueprint to pay down debt and build cash reserves. Indeed, rather than let his city go to pot, he is even entertaining the potential lease from local investors to purchase the shuttered Bristol Mall: the investors are interested in financing a local start-up, Dharma Pharmaceuticals, which wants to convert the vast facility into an operation producing cannabidiol, the marijuana derivative which the Commonwealth Virginia recently approved for treating certain illnesses—meaning the abandoned Penney and Belk buildings could go to pot.

With city’s fiscal year beginning at the end of this week, city leaders have been looking ahead: Mayor Kevin Mumpower outlined his short-term priorities at the beginning of this week’s City Council meeting, and City Manager Randy Eads reported he had an agenda, but would defer presenting it until after the meeting. Mayor Mumpower said many of his goals focus on the city’s long-term fiscal fortunes: “We don’t want the city to ever get to the place it got two years ago. We want it stable and moving forward, so we’re going to look at the charter, see what we can do to refine it and maybe present a few things to the state legislature to draft for us to solidify the city’s financial footing…We know future Councils can undo what we do, but, the way I look at it, that’s on them. Our responsibility is to try to do the right thing.”

The Mayor noted that this could turn out to be a lengthy, detailed process to determine reasonable thresholds so that, in the future, there would be fiscal strictures on borrowing. He reported that his second priority would be promoting economic development and hiring an economic development coordinator—someone with a focus on attracting new businesses to the city. He described a third priority to develop a program to provide inmates job opportunities in order to reduce recidivism and the city’s expensive jail population, noting: “We want to establish that inmate work release program. That is going to be a home run if Randy [Eads], the Sheriff and the Commonwealth’s Attorney can figure this out: We’ve already had several meetings about how we would train these inmates, get them certified, give them a skill set so they’re employable. That would save the city $500,000 to $750,000 a year—that one goal. If that’s successful, it would be a really big deal for the city.”

A second is completion of a state-funded study of the city’s solid waste landfill operations, with that coming as the Council had just voted to increase residential trash collection by $4 per month in order to help offset operating costs, or, as the Mayor put it: “We need to figure out what we’re going to do with our last big albatross: We’re subsidizing the landfill $500,000 this year—it was $1 million—but we’ve done that at the expense of the community.” Finally, Mayor Mumpower reported his last priority would be to establish restricted funds where funds would be set aside for specific needs, including key capital needs such as a fire truck, a school building fund, and another exclusively to pay down debt service: “We need to have money set aside only for those purchases so we don’t have to worry about where those funds are coming from.”

Ending a State’s Fiscal Emergency Manager Preemption, & Who’s on First in Puerto Rico’s Governance?

July 2, 2018

Good Morning! In this morning’s eBlog, we consider what might be the end of the State of Michigan’s much maligned emergency manager program, before returning to assess the question with regard to whether a governor and legislature or a quasi U.S. bankruptcy court are in charge in Puerto Rico.

Exiting from Municipal Bankruptcy. For the first time in nearly two decades, a state-appointed Emergency Manager governs no municipality or school district in Michigan, after the state released Wayne County’s Highland Park School District in Wayne County from receivership under Michigan’s Local Financial Stability and Choice Act of 2012. Indeed, Michigan Treasurer Nick Khouri reports that Michigan municipalities have worked hard to become financially sound, noting: “Today’s achievement is really about the hard work our communities have accomplished to become financially sound…I commend the efforts of our local units to identify problems and bring together the resources needed to help problem-solve challenging financial conditions.” Under the terms of the release, Highland Park School District’s locally elected school board will oversee the contract for Highland Park Public School Academy and the cooperative agreement with the Detroit Public Schools Community District for the continuing education of students. In addition, the board will manage the repayment of long-term debt obligations. The Highland School District has a quasi-chapter 9 plan of debt adjustment in place to address its $7.5 million general fund deficit, with revenues from property taxes imposed on non-homestead property dedicated to finance outstanding debt, as well as an approved two-year budget. According to financial statements, as of the end of last year’s fiscal year, the District had $2.4 million in general obligation bonds outstanding.

The agreement means the school district, which had been under emergency management since January of 2012, and for which the state-appointed emergency manager had established Highland Park Public School Academy to provide educational services to district students while the school district paid off long-term debt obligations—for which, since 2015, said public school academy has been educating students from pre-kindergarten through eighth grades, and for the scholastic years through high school via a cooperative agreement with the Detroit Public Schools Community District, which has been providing educational services to students from ninth through 12th grades.

Nevertheless, the State of Michigan continues to maintain an oversight role in a limited number of Michigan communities: public school districts in Benton Harbor and Pontiac are operating under a consent agreement with the state, and the Muskegon Heights school district is overseen by a receivership-transition advisory board. The critical fiscal recoveries were marked by April’s exit from state oversight by the City of Flint, after seven years, and then, the following month: Detroit.

Conflicted Fiscal Governance. With the beginning of the new fiscal year, Governor Ricardo Rosselló Nevares still assessing fiscal options, as well as his authority to address the $8.7 billion operating budget imposed yesterday by the PROMESA Oversight Board on the U.S. territory–or, as he put it: “We are evaluating the budget certified by the Fiscal Oversight Board on the U.S. territory. Certainly, the impact on the budget of the three branches of government and municipalities will require additional adjustments that will limit our ability to provide services.” Ramon Rosario, Puerto Rico’s Secretary of Public Affairs, noted:  “The Governor and his cabinet continue to analyze all possible alternatives to the scenario.”

There was no public reaction to the imposed fiscal preemption of elected authority by House President Carlos Johnny Mendez, nor Senate President Thomas Rivera Schatz, respectively, to the budget imposed by the JSF. The Governor indicated, however, that some of the biggest concerns of the Executive are public employees and the payment of the Christmas bonus, as well as the elimination of funds for economic development.

The Board’s proposed budget, interestingly, is greater than that approved by the Legislature; however, it imposes additional cuts of up to $345 million. It does not repeal Law 80-1976, the Law Against Unjustified Dismissal. It does preserve the Christmas bonus for public employees and establish two funds, one of $ 25 million for the University of Puerto Rico, and another of $ 50 million for municipio recovery. PROMESA Board Chair José Carrión, in a written statement, noted: “The course has been drawn, and although it will be a challenge, we cannot afford to deviate. We must all work together.”

Working together would be a challenge—and a question now for Puerto Rico is whether to comply or go to court to preserve, ironically, an approved fiscal budget smaller than that to be imposed by the PROMESA Board: that is, what if the Governor and Legislature were to opt not to implement the unelected PROMESA Board’s proposed budget? One attorney noted: “There would be a confrontation that would generate a controversy in the court, because, then, the Board would have to go to the court and ask it to force the officials to comply with the budget.” Under such a scenario, the unelected fiscal oversight Board would issue a certification of non-compliance, which, were it not to compel the elected government of Puerto Rico to comply, could entail the Board availing itself of the mechanisms in the PROMESA statute preempting Puerto Rico’s governing authority. Independence Party’s Denis Márquez remarked that his “exhortation is not to obey the Fiscal Control Board, but they always tell you that you have to be against the Board, but at the end of the day you look for a reasonable accommodation that always ends up hurting the country.” However, unlike a chapter 9 governance situation, where a federal bankruptcy court assesses a municipality’s plan of debt adjustment, PROMESA allows the Board to establish the budget at its sole discretion. It appears to be virtually a form of colonialism.

As the oversight board had advanced during its approval of the fiscal plan last Friday, the public expenditure scheme contemplates reductions greater than those set in the first version of the document approved by the Legislature: the budgets of some agencies seem to have an increase compared to the current fiscal year, but this is due to the fact that, for the first time, each one was assigned an authorization corresponding to the payment of their employees’ pensions (pay as you go). A spokesperson for the Popular Democratic Party in the House noted: “The vision of the Board is the republican vision, a small government with less participation.” Indeed, the version to be imposed by the Oversight Board contemplates major cuts for the Department of Education, which ended with an allocation for this fiscal year of $2.479 billion, about a 5% cut for what the Legislature had approved, with the deepest cuts coming in payroll and operating expenses, even as the Board added nearly $30 million to “cover services related to the provision of therapies and other services for special education children, and $ 23.8 million for the payment of salary increases to teachers—leading Puerto Rico Senate Education Chair Abel Nazario to note that the PROMESA Board “itself recognizes that these measures must be maintained in the coming years is an achievement that we recognize and appreciate.”

The Board imposed a number of deep cuts, such as the Bureau of the Fire Department, where the Board cut operating expenses of $576,000, as proposed by the Legislature, to $148,000; it slashed just over $1 million for firefighter protection equipment, and cut the police department payroll by $587.1 million, as stipulated in the Legislature’s version, to $ 570.2 million, but the Board retained the proposed $18.8 million for increased police salaries.

Imbalanced Governance? The Board cut funding for the Governor’s office in excess of 10 percent, and funds for the Puerto Rico Legislature by nearly 20 percent; it cut funding for the Puerto Rico Health Department by just under 10 percent.

Can there be Shelter from the Storm? Meanwhile, in a different courtroom, U.S. District Judge Leo T. Sorokin of Massachusetts has ordered that FEMA cannot end its Transitional Sheltering Assistance program until at least midnight tomorrow, granting Puerto Ricans who fled Hurricane Maria’s devastation and have been living in temporary housing on the mainland a very brief reprieve. Christiaan Perez, manager of advocacy and digital strategy for the civil-rights group, LatinoJustice, the national civil-rights group which filed a lawsuit Saturday seeking the restraining order told the court the end of the FEMA assistance would lead to Puerto Rican evacuees being evicted. The temporary restraining order is projected to offer some protection for about 1,744 Puerto Ricans for whom the FEMA transitional assistance was to end Saturday. Judge Sorokin has scheduled a telephone hearing for today.

The outcome will impact many of the families who left Puerto Rico in the wake of the storm for the mainland who have been living in hotels in New York and Florida and those who have been unable to secure affordable housing and are now worried about what happens as FEMA assistance expires—or, as Cynthia Beard, one of the 600 Puerto Rican hurricane survivors living in New York, told NBC News this week: “I don’t know what’s going to happen. The city called me and said there’s a shelter, but there’s no guarantee; they didn’t say everything is going to be OK.” According to Mayor De Blasio’s office, New York City has a program in place to direct transportation from the hotels to the shelters. Once there, families have to find out if they are deemed eligible to register into the city’s shelter system: if accepted, families are assigned to case management and housing assistance services to help them find permanent homes. 

But FEMA has also offered displaced Puerto Ricans the option to return to Puerto Rico, asserting the agency has called more than 1,500 displaced Puerto Ricans to offer to pay for their plane tickets to return to Puerto Rico by yesterday or recommend them ways to look into their respective state’s shelter system. As of June 27, only 145 families had either booked their plane tickets or already returned to Puerto Rico. It appears the majority of displaced Puerto Rican families have opted to remain stateside, even though many do not have a permanent home. The offer came in the wake of four different deadline extensions, during which, under FEMA’s TSA program has housed Puerto Rican hurricane survivors for nearly 9 months. During other disasters, survivors participating in that program were given up to a year and a half—even though officials have said that the program normally lasts 30 days. Nevertheless, FEMA warned it was ending Transitional Sheltering Assistance for survivors of hurricanes Maria, Irma, and Harvey on Saturday, asserting it has spent more than $432 million on survivor lodging as part of the program, and that it has provided rental assistance to more than 25,000 TSA participant families to help them find permanent housing.

“Who’s on First? Who’s in Charge–elected or imposed leaders?

June 22, 2018

Good Morning! In this morning’s eBlog, we consider the physical, fiscal, and mixed governance challenges which must be overcome in Puerto Rico.

Will There Be Luz? Gov. Ricardo Rosselló has signed into law a bill to partially privatize the Puerto Rico Electric Power Authority, potentially affecting the authority’s $8.9 billion in outstanding debt. The new law is intended to provide for the sale of the public utility’s power generation units and make a concession of its transmission and distribution system, according to a statement by the Governor—a concession which could involve a lease arrangement, as was done for Puerto Rico’s main airport. Under the proposed privatization, revenues realized could be utilized to address PREPA’s debt. purchasers would not assume PREPA’s debt; instead the public utility would use proceeds from any sale of a power plant to pay off a portion of the debt, or, as the Governor put it on Wednesday, the money raised could be used, at least in part, to contribute to PREPA’s underfunded public pension system. The new legislation comes in the wake of, last April, the PROMESA Oversight Board’s certification of a fiscal plan which assumed PREPA privatization—but which did not impose assumptions with regard to how the proceeds would be used. Puerto Rico Senate Minority Leader Eduardo Bhatia, an attorney-at-law and the former 15th President of the Puerto Rico Senate—as well as a former Fulbright scholar, noted: “The bill that Governor Rosselló signed today essentially authorizes the Governor to proceed with a ‘market sound[ing]’ and identify any and all potential private sector interest in the development of a new energy system in Puerto Rico,” adding: “Notable is that the bill does not authorize any sale before the Puerto Rico Legislature prepares, within 180 days, a statement of public policy specifically mandating what the new system will look like in 30 years.” Gov. Rosselló noted that Puerto Rico’s Public-Private Partnerships Authority would oversee the potential leasing of the transmission and distribution grid—a process expected to occur over the next year and a half. From a governance perspective, the Governor, PROMESA Oversight Board, and advisory teams plan to form a working group to steer the process.

Quein Es Encargado II? Meanwhile, the seemingly unending governance question with regard to who is in charge appears to be escalating. In putting an end, yesterday, to Puerto Rico’s debate on Law 80-1976, the Law on Unjustified Dismissal, the Puerto Rico Senate not only opened the door to annul the agreement reached by the Executive and the Oversight Board around the budget, but also appeared to intensify the power struggle between Senate President Thomas Rivera Schatz; Governor Ricardo Rosselló Nevares, and the PROMESA Oversight Board. Upon learning the Puerto Rico Senate did not support the repeal of the statute—as demanded by the PROMESA Board, the Governor accused Senate President Schatz of acting to the detriment of Puerto Rico, for political reasons, even as PROMESA Board Chair José Carrión, who, like the Senate President, was in Washington, D.C. yesterday, warned that keeping the labor statute in force would imply reversing the certified tax plan, which includes cuts in vacation leave, days of sickness, and the Christmas bonus, stating: “There is a certified plan. If not (repeal it), we revert to the fiscal plan,” in the wake of his participation at forum sponsored by the Heritage Foundation.

Chair Carrión warned that reversion to the certified fiscal plan would mean at least $300 million in additional budget cuts over the next five years. He noted that the proposed structural reforms seek to “generate economic growth: We have limited powers (to make decisions that boost economic growth), but one of them is the labor area.”

The Board is scheduled to meet a week from today to discuss the upcoming fiscal year budget—scheduled to take effect at the end of next week.

In criticizing the actions of Senate President Rivera Schatz, Gov. Rosselló Nevares said that the upper House leader had opted to “hinder” his administration, and held him responsible for the millions of dollars in cuts that may wreak fiscal harm to the island’s municipios, as well as other governmental entities, noting, in a written statement: “Puerto Rico has just seen how politics is made and not how a future government should be made in times of challenges and difficulties, with this regrettable decision by the President of the Senate. We will follow the path of change and transformation that we have forged; however, this was the time to unite and together to get out of the shameful past we inherited. He chose to hinder, chose to follow the tricks of the past that have put us in this situation: the risk of the loss of billions of dollars for Puerto Rico as a result of restructuring the debt falls on this action. Likewise, the loss of millions of dollars in appropriations for the municipal governments that we had achieved also falls on the President of the Senate. Sen. Rivera Schatz added that he anticipated he would appear before a judicial forum to challenge the powers of the unelected PROMESA Oversight Board to alter Puerto Rico’s budget, noting: “The Senate ends the matter of Law 80. It is not going to repeal Law 80. If it were up to us to go to court to litigate against the Board, I advance that I already talked with lawyers to do so.” (The repeal of Law 80 was a specific condition presented by the Board in exchange for disbursing additional financial aid to municipios, the University of Puerto Rico, and guaranteeing holiday leave and sick days for private sector employees.)

At the same time, during the meeting of the majority caucus of the New Progressive Party, a proposal by Sen. Miguel Romero to ascribe to the Law against discrimination in employment (Law 100-1959) by adding some amendments to Law 80 was defeated  15 -5, with the prevailing majority choosing to defer consideration of the issue during the current session—which ends Monday. Sen. Romero proposed creating a system of fixed payments for dismissals that violate only the Anti-Discrimination Law 100, but insisted on repealing Law 80, which deals with another area of ​​labor law by providing remedies for severance without just cause.

Not unlike in the U.S. Congress, the Puerto Rico House and Senate do not always see ojo to ojo (eye to eye). The House intends to address Puerto Rico’s relationship with the Oversight Board differently, with House President Carlos “Johnny” Méndez stating, yesterday, that he has to study what is the probability of prevailing in a lawsuit with the Oversight Board defense of budget items, adding that he considers the controversy over Law 80 to be over. In response to a question whether the House would join a lawsuit initiated by the Senate to combat the cuts applied by the Board, Senate President Méndez replied: “We have to sit down to see what the arguments are and make a decision: the Promise law has supremacy over everything. It does not even allow us to sue the Oversight Board. We have to see what the arguments are, the legal basis for making a decision. It is not going to be a futile exercise. If we have more than a 50% chance of prevailing, of course we will be there.” He added that, if he opts for litigation, he would challenge the authority and ability of the unelected Oversight Board to establish public policy.

What about Manana? Even as the question of governance proceeded, two PROMESA Board members yesterday concurred with a panel of other experts that an overhaul Puerto Rico’s local labor laws is a key for the territory’s future growth. At a session in Washington, D.C. at the Heritage Foundation, PROMESA Chair Jose Carrion joined Anne Krueger, economics Professor at Johns Hopkins School for Advanced International Studies, and fellow Board Member Andrew Biggs—with their discussion coming on some of the same issues. With Puerto Rico’s elected leaders considering instituting the same at-will employment statutes used in many states, as well as adding more restrictive rules for receiving food stamps and instituting an earned income tax credit to encourage work, the panelists described Puerto Rico’s labor laws as more restrictive than any state—a factor, perhaps, that could help explain the exodus from Puerto Rico of so many better economic opportunities on the mainland. The panelists noted the challenge will be to convince the people of Puerto Rico that a more competitive labor market will produce more jobs, with PROMESA Board member Andrew Biggs, noting that economists predict there would be an additional one percentage point of annual economic growth if the reforms were adopted. PROMESA Board Chair Jose Carrión noted he, as an employer in Puerto Rico, is only too well aware of how “onerous” the labor laws are, adding: “[I]t does not make Puerto Rico competitive with places to where we are losing our population such as Florida.” Employers in Puerto Rico, for instance, are required to give workers 24 hours off after they work 8 hours, said Professor Anne Krueger of Johns Hopkins School for Advanced International Studies, noting that the labor force participation rate is only 38% on Puerto Rico compared to 63% on the mainland, she said. In the end, the PROMESA Board appeared to reach an agreement with the Governor on proposed labor law changes. Now, warns Chair Carrión, if the legislature does not agree, the PROMESA Board will govern in place of Puerto Rico’s elected leaders.