A Steely Road to the Fiscal Future

March 5, 2018

Good Morning! In this morning’s eBlog, we consider the Steel City’s long road back to fiscal recovery after 14 years of state fiscal oversight.

Is the Steel City Back? Pittsburgh Mayor Bill Peduto hails: “Pittsburgh is back!” The great American steel city, the subject of our Center’s report years ago, “The Great Challenge Facing America’s Cities,” in which we described the fiscal challenges of Detroit, Chicago, San Bernardino, Calif., Pittsburgh, Providence, R.I. and Baltimore to provide insights for municipalities that may face financial struggles in the future, has emerged from more than a decade of state oversight. The Mayor’s exaltation comes in the wake of Gov. Tom Wolf’s declaration that the Steel City has become the state’s second municipality to emerge from Pennsylvania’s Act 47 program, enabling the Mayor to exult “We are now a city that is financially solvent. We’ve changed our habits and we have safeguards in place to assure we won’t fall into our previous bad habits.” The road back from the precipice of chapter 9 municipal bankruptcy involved laying off nearly 500 employees, including 100 police officers, the closure of recreation centers, and the elimination of key municipal services, including mounted police patrols to saltboxes. The Pennsylvania Intergovernmental Cooperation Authority (ICA), which has been the supervisory authority for the state, has asked the city for $37,000 to help pay off outstanding bills, and is seeking legislative approval to terminate its operations; the authority is also marking this final chapter by taking steps to dissolve itself, ending fourteen years as the state created fiscal oversight agency, together with the Pennsylvania Department of Community and Economic Development to help Pittsburgh avoid chapter 9 municipal bankruptcy—together with the state’s so-called Act 47 coordinators, who, last November, had recommended the city’s release from state oversight since December of 2003). The Authority’s Chair, B.J. Leber, noted: “No. 1, Act 47 is going away: It just doesn’t make sense for us to exist beyond Act 47, either from a logistical standpoint or a community-needs standpoint.”

Exiting state oversight, as we have observed in neighboring New Jersey, is not easily accomplished: the Steel City has been under state oversight ; thus, at least one ICA board member disagrees that Pittsburgh is ready to leave fiscal oversight: Michael Danovitz, the ICA’s longest-serving board member, said the city has not demonstrated a pattern of consistently paying into underfunded employee pension plans, noting: “I don’t believe the work of the ICA is done…This was the first year where they put in enough money to match the outflow of the pensions. One year doesn’t make a pattern.” Last year, Mayor Peduto’s administration had pledged pension payments of $232 million more than state minimums as part of a five-year spending plan approved by the ICA and the state’s Act 47 team. (Under Pennsylvania law, the ICA must remain in place until the later of Act 47 oversight ending or June 30, 2019): Chair Leber said the ICA board has asked the Legislature to amend the law so it can end at the same time as Act 47.

Unlike in the neighboring Garden State, Pittsburgh’s intergovernmental relationship with the state has been much more harmonious: Finance Director Sam Ashbaugh praised the ICA: “We’ve had a very productive and effective working relationship with the new board since they’ve been in place: I think they recognize the financial improvements that the city has enacted.” Yet, even though Pittsburgh is still able to finance its capital budget via its reserve fund, which is in no danger of running out, it still confronts both capital budget and pension challenges, including the priority of finding a long-term solution for dealing with landslides—or, as the Mayor put it: “We came to realize that there were no quick fixes, and we had run out of borrowing room…for us, being in Act 47 for 14 years, meant making difficult decisions to become financially solvent. It definitely had its costs: Our workforce took it on the chin, going without pay raises, and our infrastructure suffered without our ability to borrow,” adding: “We were still in the throes of pension liability.” If anything, the fiscal challenge is made greater by the demographic reality: the city’s population has dropped from 700,000 in 1960 to about 304,000 today.

Measuring State Fiscal Recovery Oversight. Pennsylvania’s fiscal oversight program has shown a mixed picture: the municipality of Aliquippa, just over 21 miles from Pittsburgh, has been under Act 47 for 30 years; it is currently on its sixth recovery program: like Scranton and Chester, which joined in 1992 and 1995, respectively, the success record is mixed, or, as Villanova Professor David Fiorenza put it: “The program was successful for Pittsburgh, especially if I compare it to cities such as Chester.” Approximately 30% of the Act 47 municipalities have been from the Allegheny area.

Pittsburgh’s 2014 fiscal recovery plan had proposed the elimination of operating deficits in the baseline multi-year financial projection, while preserving basic services, in order to avoid the necessity for cash-flow borrowings; the plan also focused on buffering against unanticipated revenue shortfalls or expenditure increases. The fiscal plan sought to gradually reduce the city’s debt in order to: provide greater fiscal capacity to finance daily operations; direct more funding to the city’s capital budget, with priority to roads, bridges, police and fire stations and other core infrastructure; and gradually increase pension fund contributions to actuarially recommended levels. As of the end of 2016, the city’s unassigned fund balance was 17.7% of its operating expenditures, higher than the 16.7% level the Government Finance Officers Association recommends. Pittsburgh two years ago refined its revenue forecasting methods and began subscribing to an external data analytics firm, through which the city receives city and county-level economic indicators including non-farm wages, gross county product, retail sales, and city employment throughout the year. Moody’s rates the city’s general obligation bonds A1. Fitch Ratings and S&P rate them AA-minus and A-plus, respectively. Moody’s unmoodily notes: “Pittsburgh has a favorable credit position, given strong financial results through fiscal 2016.” Or, as the Mayor puts it: “We are now a city that is financially solvent. We’ve changed our habits.”

That does not, however, mean the city’s leaders can rest: the city’s fund balance as a percent of operating revenues (18.4%) falls short of the U.S. median for the rating category (32%), according to Moody’s, although Moody’s reports the fund balance has improved considerably since 2012; nevertheless, the credit rating agency notes that Pittsburgh’s debt and pension liabilities are “somewhat elevated.” The recovery also comes with new fiscal challenges: the Steel City’s police union is demanding the city renegotiate its current agreement, retroactive to 2015, with FOP President Robert Swartzwelder citing a contract provision which authorizes renegotiations in the wake of Act 47 oversight—a factor which the Mayor notes he expects to “happen with all the unions.” That is, recovery brings its own fiscal challenges—including on the capital front—which, for a municipality, like Rome, of hills and rivers, means budgeting for the capital and maintenance costs of some 450 bridges. The Mayor’s proposed FY2018 budget and five-year plan assumes the city would issue $60 million a year in new debt beginning next year to fund capital projects—part of an aggressive fiscal effort to reduce out-year debt service by FY2022 below the 12% target in the debt policy (The Steel City’s debt policy requires contracting with an independent financial advisor when issuing debt; issuing debt only for capital projects included in the capital program; it limits usage of tax revenue anticipation notes; limits its tax-supported debt service to 17% of general fund revenues; and establishes a 10-year goal of reducing this ratio to 12%.)

An Amazonian Fiscal Future? The former steel city has become, today, a center of higher ed: there are ten universities within the city limits, while the University of Pittsburgh Medical Center and Highmark anchor a thriving healthcare industry. Amazon, Google, and Uber, among other companies, have added jobs in the region. Pittsburgh remains in the competition to secure Amazon’s second world headquarters, in no small part in the wake of its focus on arts and culture with a 14-block district which encompasses restaurants, retail shops, art galleries, public parks with art installations and many theaters.


Governing under Takeovers

December 19, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and governing challenges of a city emerging from a quasi-state takeover—and report on continuing, discouraging blocks to Puerto Rico’s fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

The Steep Fiscal Road to Recovery.  The Hartford City Council last week forwarded Mayor Luke Bronin’s request for Tier III state monitoring under the new Municipal Accountability Review Board, the state Board established by §367 of Public Act 17-2  as a State Board  for the purpose of providing technical, financial and other assistance and related accountability for municipalities experiencing various levels of fiscal distress. That board, which met for the first time on December 8th, now could be the key for Hartford to avoid filing for chapter 9 municipal bankruptcy: the Board, chaired by State Treasurer Denise Nappier and Budget Director Benjamin Barnes, is to oversee the city’s budgeting, contracts, and municipal bond transactions. The Council also passed a bond resolution to permit the city to refund all of its outstanding debt obligations. In addition, the Council approved new labor contracts with the City of Hartford Professional Employees Association and the Hartford Police Union that management projects will save Hartford more than $18 million over five years. According to Mayor Bronin, the police labor contract could save the city nearly $2 million this fiscal year; moreover, it calls for long-term structural changes, or, in the Mayor’s words, the agreement “represents another big step toward our goal of fiscal stability,” adding that the employee contracts and state aid were essential to keeping the 123,000-population city out of Chapter 9 municipal bankruptcy—even as Mayor Bronin is also seeking concessions from bondholders. (Insurers Assured Guaranty and Build America Mutual wrap approximately 80% of the city’s outstanding municipal bonds.)

In its new report, “Hartford Weaknesses Not Common,” Fitch Ratings noted that Hartford appears to be fiscally unique in that other Connecticut cities are unlikely to face similar problems, after the company assessed the fiscal outlook of several cities, including Bridgeport, New Haven, and Waterbury—finding that while these municipalities have comparable demographics and fiscal challenges, none is as fiscally in trouble, noting the city’s “rapid run-up” of outstanding debt and unfunded pension liabilities as issues that set it apart from nearby municipalities. Indeed, Hartford Mayor Luke Bronin has threatened the state’s capitol city may file for Chapter 9 bankruptcy protection—a threat which likely assisted in the city’s receipt of an additional $48 million in aid from Connecticut’s FY2018 budget, as well as two recently settled contracts with two labor unions. In addition, Fitch pointed to Hartford’s fiscal reliance on one-time revenue sources, such as the sale of parking garages and other assets, as well as the city’s inability to obtain “significant” union givebacks as factors that augured fiscal challenges compared to other cities in the state which Fitch noted have “substantial flexibility and sound reserves.” Moreover, despite Mayor Luke Bronin’s pressure for labor concessions, only two of the city’s unions have agreed to new contracts—contracts which include pay freezes and other givebacks, albeit two other unions have agreed to pacts offering significant concessions. These changes have enabled Hartford to draw back from the brink of chapter 9 municipal bankruptcy, but still left the city confronting a $65 million deficit this year, and dramatically in debt and facing public pension payment increases—potentially driving Hartford’s annual debt contribution to over $60 million annually—even as it imposes the highest tax rate of any municipality in the state, especially because of its unenviable inability to levy property taxes on more than half the acreage in the city—a city dominated by state office buildings and other tax-exempt properties. These fiscal precipices and challenges have forced the city to prepare to apply for state oversight and begin a restructuring of Hartford’s $600 million in outstanding debt—a stark contrast with the state’s other municipalities, which, as Fitch noted, have achieved greater success in gaining labor concessions, even as they less reliant on state assistance, according to Fitch: “Unlike Hartford, most Connecticut cities have substantial budget flexibility and sound reserves.” In some contrast, Standard & Poor Global Ratings appeared to be in a more generous giving, seasonal spirit: the agency lifted its long-term rating on Hartford’s general obligation bonds to CCC from CC, and removed the ratings from credit watch with negative implications, reflecting its perspective that Hartford’s bond debt is “vulnerable to nonpayment because a default, a distressed exchange, or redemption remains possible without a positive development and potentially favorable business, financial, or economic conditions,” according to S&P analyst Victor Medeiros, who, nevertheless, noted that S&P could either raise or lower its rating on Hartford over the next year, depending on the city’s ability to refinance its outstanding debt, and realize any contract assistance support from the state. Thus, it has been unsurprising that Mayor Bronin has been insisting that bondholder concessions are essential to the city’s recovery.

Fitch made another key observation: many Connecticut local governments lack the same practical revenue constraints as Hartford due to stronger demographics, less reliance on state aid, and lower property tax rates. (Hartford’s mill rate is by far the state’s highest at 74.29.), noting: “In a state with an abundance of high-wealth cities and towns, Hartford continues to be challenged by poverty and blight,” contrasting the city with New Haven, Waterbury, Bridgeport, and New Britain‒all of which Fitch noted had successfully negotiated union concession on healthcare and pension-related costs, so that, as Fitch Director Kevin Dolan noted: “Their ability to raise revenues is not as constrained as Hartford’s and their overall expenditure flexibility is stronger.” said Fitch director Kevin Dolan. (Fitch rates New Haven and New Britain with A-minuses, and A and AA-minus respectively to Bridgeport and Waterbury.) State Senator L. Scott Frantz (R-Greenwich) noted: “I hate to say it, but it’s gotten so desperate in so many cases with the municipalities that they really need to be able to have the power go in there and open up contracts–not maybe not even renegotiate them–and just set the terms for the next three to five years, or longer, to make sure that each one of these cities is back on a sustainable track: The costs are smothering them, and their revenue situation has gotten worse, because people don’t necessary want to live in those cities as they start to deteriorate even further.”

Fiscal & Physical Storm Recovery. Just as on the mainland, municipalities in Puerto Rico assumed the first responder responsibilities in Puerto Rico in reaction to Hurricane Maria; however, the storm revealed the many challenges and obstacles faced—and ongoing—for Mayors (Alcaldes) to meet the needs of their people—including laws or decrees which limit their powers or scope of authority, state economic responsibilities which reduce their economic resources, and legislation which fails to recognize inadequate municipal fiscal resources and capacity. Thus, in the wake of the fiscal and physical devastation, Puerto Rico Senator Thomas Rivera Schatz, the fourteenth and sixteenth President of the Senate of Puerto Rico, is leading efforts to grant some mayors a greater degree of independence to operate and manage the finances of municipalities. He is proposing, effectively, to elevate municipal autonomy to a constitutional rank—a level which he believes should have been granted to City Councils by law, noting that with such a change, municipios “would not have to wait, as they had to wait, for federal and state agencies to handle issues that no one better than they would have handled. They would have the faculty, the responsibility, and the resources to do so…In emergencies, something that cannot be lost is time. Then and before the circumstances that the communications from the capital to the municipalities were practically zero, that shows you that, at a local level, they must have the faculty, the tools, and the resources.”

The Senate President’s proposal arose during exchanges between the Senate and Mayors, conversations which have resulted previously in a series of legislative measures, in what the Senate leader acknowledged to be a complex process, but a track which the Senator stated would, after consultation, be the result of consensus with Mayors of both political parties—providing via the Law of Autonomous Municipalities, “Puerto Rico’s municipalities a scope of action free of interference on the part of the State, even as it reformed a structure of government, to be efficient in collections.” (To date, 12 of Puerto Rico’s 78 municipalities have achieved the highest level of hierarchy granted by the Autonomous Municipalities Law.)

In a sense, not so different from the state/local strains in the 50 states, one of the greatest complaints by Puerto Rico’s Mayors has been over the economic burdens—or unfunded mandates—Puerto Rico has imposed on the municipios, as well as the decrees which establish contracts with foreign companies and grant them tax benefits, exemptions, and incentives—all state actions taken without municipal consultation—thereby, enabling businesses to avoid the payment of patents and municipal taxes, and undermining municipal collections—or, as the Senate President put it: “The reality of the case is that, for 12 to 16 years, governments have been legislating to nourish the State with economic resources.”  Currently, Puerto Rico’s municipalities contribute $116 million for the redemption of state debt, another $ 160 million for Puerto Rico’s Retirement System, and an additional $ 169 million to subsidize the Government Health Plan. Again, as the Senator noted: “If there are municipal governments that have a structure capable of raising their finances, of providing their services…the State does not have to intervene with them, taxing their resources.” Sen. Schatz noted that his proposal does not include eliminating municipalities; he confirmed that the governing challenge is to realize a “model” of interaction between the municipalities and the state—and that “the citizen has in his municipal environment everything he needs to be able to live happily and have quality of life. The end of the road is that. If it’s called county, province, or whatever you want to call it; the name does not do the thing, it’s the concept.” He asserted he was not proposing to “reward” municipalities, but rather to focus on establishing collaboration agreements through which there could be shared administrative tasks—in a way to not only achieve efficiencies, but also provide greater authority and ability for Puerto Rico’s municipalities to access funds free of intermediaries, noting: “The mayors did an exceptional job (during the emergency), and, practically without resources, had to come to the rescue of their citizens, open access, help sick people, cause the distribution of supplies with logic and speed…the passage of hurricanes rules out the idea of ​​eliminating municipalities.”

Thus, he affirmed that those municipalities which have achieved the maximum hierarchy of autonomy would have total independence, while the other municipalities would remain subject to the actions of the Puerto Rican government until they manage to establish fiscal sustainability—all as part of what he was outlining as a path to greater municipal autonomy, arguing that each of these changes implied the island’s municipalities need to make fiscal and governing adjustments: they have to watch over their finances and make sure they have the resources to meet their payroll, even as he acknowledged that repairing the finances in battered municipalities economically will take time, and said that, for this, the project will include some scales and grace periods to attain that fiscal solvency, noting: “The legislation we can approve, but, to get to the point where we would like to be, it will take years.”

For the president of the Association of Mayors, Rolando Ortiz, who has served as the Mayor of Cayey for a decade, after previously serving as Member of the Puerto Rico House of Representatives from 1993 to 1997, and being reelected in 2012 with 73.29% of the votes–the largest margin of victory for any mayor in that election, the assistance provided by the municipalities to the central government to face the crisis that the country is going through is the best way to see the urgency of empowering the municipalities via this legislation—or, as he put it: “If it were not for the municipalities, I assure you that the crisis would be monumental. We have been patrolling rural roads to ensure there are no trees on the road that impede the mobility of the family.” Mayor Ortiz agreed that the proposal includes hierarchy levels, so that municipal executives comply with minimum responsibilities and mandates which allow them to reach the maximum level: “It can be a strategy to prioritize the process from the perspective of land management, but it cannot take as an only category the element of the organization of the territory, but also the efficiency in public performance, economic capacity, efficiency in the service,” adding he has not heard “any Mayor in opposition to that proposal.” His colleague, Bayamón Mayor Ramón Luis Rivera Cruz, was more reserved when addressing the issue. Although he had no objections to the establishment of the project or to what has been proposed, he indicated that there were other mechanisms to prevent state governments from harming the municipalities that reached the maximum level of hierarchy—as well as other issues which must be addressed, such as the limitation on the collection of patents and the contribution on property. 

Senate President Rivera Schatz indicated the Senate is working on several amendments to the Autonomous Municipalities Law, and that some have already been established or approved, as a preamble to what will be the final project, noting: “We are going to discuss it with all the municipal governments to achieve a consensus project of what the procedure and the route will be.”

In response to a query whether the PROMESA Board could interfere, he noted that every government operation has a fiscal impact, so that he was seeking to create a positive: “It proposes efficiency, capacity to generate more collections, so who could oppose that?” Maybe, the Board. To me, honestly, I do not care in the least what anyone on the Board thinks.” Asked what would happen if the PROMESA Board proposed for the elimination of municipalities, he noted that the Board can say what they want and express what they want, but they will not eliminate municipal governments, they will not achieve it, because in Puerto Rico that would be untenable.

Unreform? Even as Puerto Rico’s state and local leaders are grappling with fiscal governance issues and recovering from the massive hurricane with far less fiscal and physical assistance than the federal government provided to Houston and Florida, there are growing apprehensions about disparities in the final tax “reform” legislation scheduled for a vote as early as today in the U.S. House of Representatives—concerns that the legislation might impose a new tax on Puerto Rico and other U.S. territories, with non-voting Rep. Jennifer González Colón (Puerto Rico) expressing apprehension that bill will impose a 12.5% tax on intangible property imported from foreign countries—and that, under the legislation, Puerto Rico and other U.S. territories would be treated as foreign countries. El Vocero, last Friday, on its news website reported that Rep. González Colón (R-P.R.) said the planned tax bill treated Puerto Rico like a colony: the taxed intangible assets would include items such trademarks and patents generated abroad, tweeting that “The tax reform benefits domestic, not foreign companies…While we are a colony, there will be more legislation like this passed…Unfair taxes show a lack of commitment and consistency from leadership in Congress; showing true hypocrisy.” The Federal Affairs Administration of Puerto Rico last Friday released a statement calling for the tax bill to be changed and for additional aid to recover from Hurricane Maria, noting the conference report could “destroy 75,000 jobs and wipe out a third of [Puerto Rico’s] tax base.” Howard Cure, director of municipal bond research at Evercore, noted that for Puerto Rico, still trying to recover from Hurricane Maria, and with a 10.6% unemployment rate: “Obviously, any tax law change that makes Puerto Rico less competitive for certain industries to expand or remain on the island is a negative for bondholders who really need the economy to stabilize and grow in order to help in their debt recovery.” Similarly, Cumberland Advisors portfolio manager and analyst Shawn Burgess said: “My understanding is that this would impact foreign corporations operating on the island and not necessarily U.S. companies. However, it is a travesty for Congress to treat Puerto Rico as essentially a foreign entity at a time when they need all the assistance they can get. Those are U.S. citizens and deserve to be treated as equals…Leave it to Congress to shoot themselves in the foot: They had voiced their support for helping the commonwealth financially, and they hit them with tax reform terms that could be a detriment to their long-term economic health.” Similarly, Ted Hampton of Moody’s noted: “In view of Puerto Rico’s economic fragility, which was exacerbated by Hurricane Maria, new federal taxes on businesses there would only serve as additional barriers potentially blocking path to recovery. In creating the [PROMESA] oversight board, the federal government declared its intention to restore economic growth in Puerto Rico. New taxes on the island would be at odds with that mission.”

  • 936. More than a decade ago, former House Speaker Newt Gingrich (R-Ga.) reached an agreement with former President Bill Clinton to allow the phasing out of section 936, the tax provision with permitted U.S. corporations to pay reduced corporate income taxes on income derived from Puerto Rico—a provision allowed to expire in 2006—after which the U.S. territory’s economy has contracted in all but one year—a tax extinguishment at which m any economists describe as the trigger for the subsequent fiscal and economic decline of Puerto Rico. Thus, as part of the new PROMESA statute, §409, in establishing an eight Congressional-member Congressional Task Force on Economic Growth in Puerto Rico, laid the foundation for the report released one year ago, in which the section addressing the federal tax treatment of Puerto Rico, noted: “The task force believes that Puerto Rico is too often relegated to an afterthought in Congressional deliberations over federal business tax reform legislation. The Task Force recommends that Congress make Puerto Rico integral to any future deliberations over tax reform legislation….The Task Force recommends that Congress continue to be mindful of the fact that Puerto Rico and the other territories are U.S. jurisdictions, home to U.S. citizens or nationals, and that jobs in Puerto Rico and the other territories are American jobs.” Third, the task force said it was open to Congress providing companies that invest in Puerto Rico “more competitive tax treatment.” Thus it was last week that Governor Ricardo Rosselló tweeted that people should read the Congressional leadership’s “OWN guidelines on the task force report. Three main points, did not follow a single one.” The tweet recognizes there are no provisions in the legislation awaiting the President’s signature this week to soften the impact of the new modified territorial tax system—a system which will treat Puerto Rico as a foreign country, rather than an integral part of the United States, a change which Rep. Jose Serrano (D-N.Y.) this week predicted would act as a “a devastating blow to Puerto Rico’s economic recovery…Thousands more businesses will have to leave the island, forcing thousands Puerto Ricans to lose their jobs and leave the island.” Indeed, adding fiscal insult to injury, House Ways and Means Committee Chair Kevin Brady (R-Tx.) admitted that the “opportunity zone” provision in the House version of tax reform authored by Resident Commissioner Jenniffer Gonzalez, Puerto Rico’s nonvoting member of the House of Representatives, to make Puerto Rico eligible for designation as a new “opportunity zone” that would receive favorable tax treatment, was stripped out because it would have violated the Senate’s Byrd Rule, the parliamentary rule barring consideration of non-germane provisions from qualifying for passage by a simple majority vote instead of a 60-vote super-majority. Adding still further fiscal insult to injury, the latest installment of emergency funding for recovery from hurricanes which hammered Puerto Rico, the U.S. Virgin Islands, Florida, and Houston had been expected this month; however, those fiscal measures have been deferred to next year in the rush to complete the tax/deficit legislation and reach an agreement to avoid a federal government shutdown this week. (The Opportunity Zone proposal was included in the Senate version of tax reform, adopted from a bipartisan proposal by Senators Tim Scott (R-S.C.) and Cory Booker (D-N.J.) which would defer federal capital gains taxes on investments in qualifying low-income communities—under which all of Puerto Rico could, theoretically, have qualified as one of a limited number of jurisdictions. As the ever insightful Tracy Gordon of the Tax Policy Center had noted: part of the motivation for the opportunity zone designation had been to stem the migration of residents, which has accelerated since Hurricane Maria areas getting the designation throughout the United States. To qualify, the area must have “mutually reinforcing state, local, or private economic development initiatives to attract investment and foster startup activity,” and must “have demonstrated success in geographically targeted development programs such as promise zones, the new markets tax credit, empowerment zones, and renewal communities; and have recently experienced significant layoffs due to business closures or relocations.” Thus, Ms. Gordon notes: “There’s a concern you are basically taking away an incentive to be in Puerto Rico which is this foreign corporation status.” The tax conference report simply ignores the recommendation last year by the bipartisan Congressional Task Force on Economic Growth in Puerto Rico to “make Puerto Rico integral to any future deliberations over tax reform,” not acting on the recommendation for a permanent extension of a rum cover-over payment to Puerto Rico and the U.S. Virgin Islands the revenues of which have been used by the territories to pay for local government operations; last year’s Congressional report had warned that “Failure to extend the provision will cause harm to Puerto Rico’s (and the U.S. Virgin Islands’) fiscal condition at a time when it is already in peril.’’ Similarly, the conference report includes no provisions addressing the task force’s recommendation that the federal child tax credit include the first and second children of families living in Puerto Rico, not just the third as specified under current law.