The Phyical, Fiscal, & Governing Challenges of Rcovery

eBlog

May 3, 2019

Good Morning! In this morning’s eBlog, we consider the obstacles to facilitating hurricane recovery assistance to Puerto Rico, before assessing the fiscal and physical status of Flint, Michigan.

Getting Aid to Puerto Rico. Senate Appropriations Chair Richard Shelby (R-Ala.) has offered the Democrats on the Committee proposed language which would accelerate the disbursement of funds to Puerto Rico, albeit with greater supervision and restrictions—but, critically, which would unblock the impasse so far barring Congress from passing legislation to address recent natural disasters. While the Chair has not made public his proposed language, he has shared it with Ranking Member Patrick Leahy (D-Vt.). Chair Shelby’s proposed language would not include new allocations for the U.S. territory in addition to the $600 million in food assistance funds which have not been opposed by the President—and $5 million focused on studying the impact of that nutritional aid. Here, Chairman Shelby’s offer came hours after on the pending disaster allocation project was reportedly briefly discussed at Tuesday’s Oval Office meeting with Senate Minority Leader Chuck Schumer (D-NY) and House Speaker Nancy Pelosi (D.-Ca.)—a meeting called by the President to discuss his newly proposed $2 billion infrastructure plan—a plan for which the proposed $2 billion remains unexplained and unfunded.

The Congressional Democratic Leaders left the session hopeful that there is interest to agree soon with consensus on a path to unblock critical natural disaster relief across the nation—relief to date blocked by the White House due to apparent opposition to any relief to Puerto Rico. There appeared to be some sense that the efforts have achieved progress—or, as one participant noted, in quoting the President: “I’m going to keep out” of this discussion—seemingly meaning he would not object. However, another source from the White House indicated that he understood that President Trump did not say that he would stay out of the discussions, but rather that an agreement must be reached; while Senator Marco Rubio (R-Fla) tweeted that some progress was occurring in bipartisan talks. The House version approved at the beginning of the year includes $600 million in food assistance for Puerto Rico, $25 million to restore the Martín Peña Canal, $5 million to finance a study on the elimination of emergency nutritional assistance in the wake of Hurricane Maria—and restoration of the matching of funds that the government of Puerto Rico has to make in order to obtain the reimbursements of FEMA for the emergency measures. (In the wake of the President’s refusal to grant more funds to Puerto Rico, President Trump accepted that the Senate bill included the allocations related to nutritional assistance, but no other initiative for the island.

The negotiations come as the House is scheduled to pass legislation next week that adds another $3 billion in appropriations to address the March floods in the Midwest—legislation which retains the funds originally ratified for Puerto Rico last January. Indeed, at the White House meeting, the House and Senate Democratic leaders, and the President, agreed to work towards a legislative plan that allocates $ 2 billion to finance improvements to the transportation infrastructure of the United States—albeit without any agreement from whence such funds would come.

Wherefore Restoration of Self-Governance Authority? Meanwhile it appears President Trump plans to nominate the current PROMESA Oversight Board members to serve their terms through the end of August—plans which have gained praise from Democrats in Congress, as it may avert an interruption of the Board’s efforts to bolster the U.S. territory’s economy and fiscal management. The announcement came as the PROMESA Board prepared to launch law suits seeking to claw back payments made on and fees paid for more than $6 billion of Puerto Rico bonds. That is, the ongoing governance quandary with regard to whether a federal circuit court, the unelected oversight board, or the U.S. citizens of Puerto Rico will actually be permitted to decide on the island’s future—a future further confused when, last February, the U.S. 1st Circuit Court of Appeals held in favor of municipal bondholders that the method of appointment of the board, as found in the Puerto Rico Oversight, Management, and Economic Stability Act, was unconstitutional: ergo, for the PROMESA Board to continue to operate beyond May 16th, the court ruled the President must nominate and the Senate confirm the Board members. The President, in a posting to the White House website, noted he intends to nominate the current seven members to serve out their terms. (According to the PROMESA each term is three years, so if the Senate confirms the members, their terms would end on Aug. 31st.)

It is unclear how the U.S. Senate will react—especially in the wake of a White House statement: “Mismanagement, corruption, and neglect continues to hurt the people of Puerto Rico who deserve better from their government…The most important component for future health and growth of Puerto Rico is financial constraint, reduced debt, and structural reforms…The work of the Financial Oversight and Management Board for Puerto Rico is providing the stability and oversight needed to address these chronic issues that will bring hope of a brighter future for Puerto Rico.” Given the exploding debt and deficits under the Trump administration, the statement appears most ironic.

Nevertheless, House Natural Resources Committee Chair Raúl Grijalva (D-Az.) hailed the move: “The President’s decision to nominate the members of the Financial Oversight and Management Board for Puerto Rico for Senate confirmation is welcome. Democrats supported PROMESA largely to enable Puerto Rico to restructure and reduce its debts. If the 1st Circuit’s ruling invalidating the original appointments had not been addressed, the Board would have collapsed and three years of work on debt restructuring would have been wasted….We are close to a final restructuring agreement on the largest remaining block of Puerto Rican debt, and it’s in the interests of the Puerto Rican people to finalize that agreement without interruption,” Chairman Grijalva noted, for his Committee, which oversees Puerto Rico. Similarly, Rep. Nydia Velázquez (D-N.Y) noted: “To essentially start over with new appointments to the Oversight Board would have injected serious uncertainty and chaos into the debt restructuring process…While I support the reappointment of these members to the Board, I will continue holding them to account to ensure they are always acting in the best interest of the people of Puerto Rico…Austerity measures are not the answer for Puerto Rico, and I’ll continue pushing the Board to put ordinary Puerto Ricans before Wall Street creditors and hedge funds.”

The PROMESA Board also released a statement welcoming the President’s announcement, with its statement coming in the wake of its request to the U.S. 1st Circuit Court of Appeals to extend the May 16 deadline for acting as the Board; the PROMESA Board has also filed a petition for certiorari with the U.S. Supreme Court to review the appeals court’s February decision.

Not in Like Flint. Five years on, the Flint water crisis is nowhere near over: the state-caused fiscal and physical emergency devastating lives, assessed property values, and public trust continues. The Flint River courses some 142 miles through mid-Michigan, before a noticeable change occurs as it flows southwest into the city of Flint, where, abruptly, it is marked by concrete slopes, capped with wire fences, flank the water—adjacent to decaying bridge piers protruding from the center of the river. It is almost as if it were a cemetery to mark the five years since the city’s water source switch which, in a decision by a state appointed Emergency Manager—it is, rather, as studies have demonstrated, a municipality with drinking water lead levels nearly twice the amount that is supposed to trigger action under U.S. Environmental Protection Agency standards: That is, it is a municipality where the state action threatens adverse neurological effects in children, including reduced IQ and aggressive behavior; in a 6-month-old weighing 18 pounds, it takes just 12 millionths of an ounce of lead in the child’s bloodstream, about the same as one grain of salt, to exceed the level that the Centers for Disease Control considers a risk for children. That is, for a mother and father—leaving seems a vital goal—but for the municipality, such departures can have devastating implications for assessed property values and income taxes. Perhaps fortunately for the city, its budget only assumes some $4.6 million in property taxes—less than a third of what it anticipates in income taxes; however, therein lies a fiscal risk: while the city’s water system operators report they have significantly reduced lead since 1991, when the U.S. Environmental Protection Agency first adopted a rule that mandates monitoring and treatment to reduce contamination caused by corrosion and other factors related to lead pipes, EPA notified the Governor there remained “serious and ongoing concerns with the safety of Flint’s drinking water system,” including “continuing delays and lack of transparency” in the state’s response. Flint switched back to the Detroit water system three and a half years ago, but public health effects from lead exposure prompted emergency declarations from the state and federal governments in early 2016. The city then launched an aggressive rehabilitation campaign, and, in the past three years, crews have explored 21,298 homes and replaced lead service lines at 8,260. The work should finish in July, according to Jameca Patrick-Singleton, Flint’s Chief Recovery Officer.

The most recent testing of Flint’s drinking water, sourced again from Detroit, marked lead at four parts per billion, well clear of the 15 that requires action. Those results account for a 90th-percentile rating: in other words, 90 percent of the homes comply with the federal standard. Nevertheless, Mayor Karen Weaver notes that tests will continue, and according to Patrick-Singleton, Mayor Weaver will not lift the city’s emergency declaration until the scientific and medical communities clear the drinking water.

Governance: Creating & Responding (or failing to respond) to a Human, Physical, & Fiscal Crisis.  Michigan Attorney General Dana Nessel’s office has fired special prosecutor Todd Flood from the Flint water criminal prosecution team because of documents discovered in a government building, which Michigan Solicitor Fadwa Hammoud confirmed Monday. Here, the special prosecutor’s contract expired on April 16, and he had been advised last week that the state would not be renewing his contract. The Solicitor Mr. Flood’s termination to the recent realization that legal “discovery was not fully and properly pursued from the onset of this investigation.” Last Friday, prosecutors asked a Genesee County judge for a six-month delay in the involuntary manslaughter case against former Michigan Health and Human Services director Nick Lyon after finding a “trove of documents” related to the Flint water crisis in the basement of a state building. (Mr. Flood had been named a special assistant attorney general in the Flint criminal cases after serving as a special prosecutor, serving more than three years: an appointee of former Attorney General Bill Schuette, Mr. Flood’s authority was curbed significantly when Mr. Hammoud was put in charge of the Flint prosecution, and then brought in Wayne County Prosecutor Kym Worthy to help the prosecution team.) Mr. Hammoud noted that Mr. Flood’s departure reflected the department’s commitment “to execute the highest standards” in the Flint prosecutions.

For his part, Mr. Flood noted: “In the time we have spent in Flint, we interviewed over 400 people, reviewed millions of
pages of discovery, and took pleas to advance the investigation: We conducted multiple court hearings and preliminary exams, placed hundreds of exhibits into evidence and successfully bound defendants over for trial. This complex case of official wrong-doing and betrayal of public trust has been prosecuted with the utmost attention to the professional standards that justice demands. I walk away knowing that I gave everything I had to give to this case. The people of Flint deserved nothing less.”

Mr. Flood originally charged 15 people in the Flint prosecutions; he struck plea deals with seven defendants who have pleaded no contest to misdemeanors; he successfully convinced 67th District Court judges to bind over for trial Mr. Lyon and former Chief Medical Executive Eden Wells on criminal charges related to the 2014-15 Legionnaires’ disease outbreak which led to the death of 12 individuals and sickened at least 79 others.

Preliminary exams against former gubernatorially-appointed Flint Emergency Manager Darnell Earley, and Howard Croft, Flint’s former Public Works Director, were recently suspended as the Attorney General’s office continues its review of all of the criminal cases; it remains unclear what connection the recently rediscovered boxes have to Mr. Lyon, who has been charged with involuntary manslaughter in the Legionnaires’ disease outbreak: he is accused of failing to warn the public in a timely manner about the respiratory disease before former Gov. Rick Snyder informed the public about it in mid-January 2016.

Will Justice Be Done? Mayor Weaver, in a statement Monday, noted: “I respect the decision that the Solicitor General has made regarding the changes to the prosecution team. I will continue to voice my desires to have truth, transparency, and justice for Flint residents…I ask that we not get caught up on the changes, but that we continue to keep the focus where it should be, and that is on making the residents whole after such a traumatic experience.”

The Challenging Transition in the Wake of a State Takeover

September 25, 2018

Good Morning! In this morning’s eBlog, we report on the likely extension of the Garden State takeover of Atlantic City, because, as one of our most respected and insightful fiscal experts there, Marc Pfeiffer, the Assistant Director of Rutgers University’s Bloustein Local Government Research Center, put it: it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period. That is, Mr. Pfeiffer believes continued state oversight will be a positive for Atlantic City municipal bondholders, because it assures more fiscal discipline will be in place—or, in his own words: “You are going to have ongoing stability while the state is involved…The city will have to show that it can stand on its own.”

The Steep Road to Municipal Fiscal Recovery. In the wake of a release of a new state report, “Atlantic City, Building a Foundation for a Shared Prosperity,” [64-page report]  released by New Jersey Gov. Phil Murphy’s administration, a report recommending continuation of the almost two-year-old state takeover of Atlantic City’s finances, that state governance now appears likely to last a full five years, due to “longstanding challenges” to New Jersey officials, as recommended by the Governor’s office. While the Governor, in his campaign, had, as part of his platform, a commitment to terminate the state takeover of Atlantic City, now, three-quarters of a year after taking office, the Governor appears likely to leave the state takeover in place—indeed, possibly for an additional three years.

The Murphy Administration has released a plan to assist the city to get back on its fiscal feet, a plan which benefited from input from numerous study groups, task forces, and committees, as well as a redirection of some state government funds to youth programs, and a training program for municipal department heads; that plan does not end the takeover; rather the report recommends keeping the takeover in place for the full five years called for under the 2016 law, unless signal fiscal and financial improvement is put in place before then, including the significant reduction or total elimination of Atlantic City’s reliance on state aid—or, as Gov. Murphy put it: “We had a pretty clear-eyed sense of what the challenge was…That doesn’t mean Atlantic City doesn’t need the state, that the state won’t continue to stay the course and be a partner. We’re not going away; we’re going to go out and executive this plan.”

Under New Jersey’s state takeover law gave the state broad powers, including the right to overturn decisions of the city council, override or even abolish city agencies and seize and sell assets, including Atlantic City’s much-coveted water utility. The statue empowers state overseers, in addition, to hire or fire workers, break union contracts, and restructure Atlantic City’s debt, most of which was done to varying degrees, although no major assets have been sold off.

What Is the City’s Perspective? Atlantic City Mayor Frank Gilliam has conceded the uncomfortable governance challenge under the takeover, which was initiated in November of 2016 by former Governor Chris Christie, but he notes that Gov. Murphy’s administration has been willing to listen to concerns and work with city officials, even as it has retained the final governing say-so.

How Can a State Transition Governance Back to a City? Unlike under a chapter 9 municipal bankruptcy, where a federal bankruptcy court has the final say in approving (or not) a plan of debt adjustment under which governance authority reverts back to a municipality’s elected leaders, a state takeover lacks a Betty Crocker cookbook set of instructions. Gov. Murphy’s quasi-emergency manager, Jim Johnson, whom the Governor named to review Atlantic City’s transition back to local control, said the state administration should remain in place for an additional three years, unless Atlantic City’s reliance on state aid has been “substantially reduced or eliminated” and that its municipal workforce is on “solid footing.”  Under the provisions of the state takeover, enacted shortly after Atlantic City nearly defaulted on its municipal bond debt, the state was empowered to alter outstanding debt and municipal contracts—or, as Mr. Johnson wrote: “Atlantic City has a set of fiscal, operational, economic and social challenges that will only be resolved with significant direction from, and partnership with the State.”

Focus on the Fiscal Future. Mr. Pfeiffer said it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period, adding that the continued state oversight will be a positive for Atlantic City municipal bondholders, because it will assure greater fiscal discipline will be in place, or, as he put it: “You are going to have ongoing stability while the state is involved: The city will have to show that it can stand on its own.”

The report outlines a series of recommendations such, as:

  • the importance of diversifying Atlantic City’s economy beyond casinos,
  • providing increased training for senior municipal workers, and
  • purchasing data that can better track city services.

Mr. Johnson also urged Atlantic City to redirect Casino Reinvestment Development Authority funds into new development projects and toward providing increased financial support for youth programming.

Transitioning Back to Local Control. Atlantic City Mayor Frank Gilliam noted: “The citizens of Atlantic City deserve to have their local elected officials control their destiny…I am very optimistic that this is a huge step in the right direction for Atlantic City and its future.” Mr. Johnson, who was a primary challenger to the Gov. two years ago, was named after that election as a special counsel to review the state’s oversight of Atlantic City—and he came somewhat prepared thanks to his previous service as a U.S. Treasury Undersecretary for enforcement under former President Bill Clinton.

Gov. Murphy, who had been critical of the state takeover during his gubernatorial campaign, and who had criticized former Gov. Chris Christie’s administration for implementing it without support from former Mayor Donald Guardian, noted: “This is a community that needs the state’s help as a partner, not as a big-footing jamming down, taking away—you know, taxation without representation,” adding: “That doesn’t mean that Atlantic City doesn’t need the state, that the state isn’t going to stay the course and be a partner.” The Governor, soon after assuming office, had removed former Gov. Christie’s designated takeover manager Jeffrey Chiesa as the state designee to oversee the state role in Atlantic City. It should be noted, as we have previously, that Mr. Chiesa forged a number of settlements on owed casino property tax appeals and effected a $56 million reduction in Atlantic City’s FY2017 budget. All of which brings us back to the wary fiscal trepidation of Mr. Pfeiffer, because Atlantic City’s debt is still in the high risk range so favored by some casino players in the city: a CCC-plus from S&P Global Ratings and Caa3 from Moody’s Investors Service.

Taking Stock in Stockton!

eBlog

September 7, 2018

Good Morning! In this morning’s eBlog, we consider the remarkable fiscal success of the implementation of Stockton’s plan of debt adjustment, before crossing over Tropical Storm Florence to the equally stormy demands of the PROMESA Board to the Commonwealth of Puerto Rico’s Governor Ricardo Rosselló to make major changes to his fiscal blueprint for the territory’s quasi plan of debt adjustment.

Taking Positive Stock in Stockton. Stockton, California, a now post-chapter 9 municipality, which was founded by Captain Charles Maria Weber in 1849 after his acquisition of Rancho Campo de los Francese, was the first community in California to have a name not of Spanish or Native American origin. The city, with a population just under 350,000, making it the state’s 13th largest, was named an All-America City in 1999, 2004, 2015, and again last year. It is also one of the cities we focused upon as part of our chapter 9 municipal bankruptcy analyses, after, a decade ago, it became the second largest city in the United States to file for chapter 9 municipal bankruptcy protection—a petition which was successful when, three years ago last February, the U.S. Bankruptcy Court approved its plan of debt adjustment. This week, S&P upgraded the city’s credit rating to “positive,” with CFO Matt Paulin noting the upgrade reflected the health and strength of the city’s general fund—after, last summer, the City Council approved the FY2018-19 budget, which anticipates $229.6 million in general fund revenues, versus $220.6 million in expenditures—with S&P, last month, noting its rating action “reflects our view of the city’s sustained strong-to-very strong financial performance, sustained very strong budgetary flexibility, and institutionalized integration of a revised reserve policy into its last three budget cycles.”   S&P analyst Chris Morgan noted: “What we’re seeing is a pretty good record of discipline in terms of spending and having a long-term view…“We’re increasingly confident they’re going to continue to meet their obligations,” adding that, over the last three budget cycles, Stockton has adopted a 20-year plan and built up its reserves. Stockton CFO Matt Paulin described the four-notch upgrade as unusual; he said it marked a reflection of the city’s fiscal discipline and improvement: “It’s really an affirmation of the things we’ve instituted here at the city so we can maintain fiscal sustainability.” The rating here, on some $9.4 million of lease revenue bonds, backed by the city’s general fund, had been originally issued in 1999 to finance a police administration building; they were refunded in 2006.

While the new fiscal upgrade reflects key progress, the city still confronts challenges to return to investment grade status: its economy remains weak, and, according to S&P, the city continues to fester under a significant public pension obligation, so that, as analyst Morgan put it: “How they handle the next recession is the big question.” And that, CFO Paulin, notes, is a challenge in that the city is not yet, fiscally, where it needs to be. nevertheless, he believes the policies it has enacted will get it there, noting: “I think if we continue to sustain what we’re doing, I’m pretty confident we’ll get to that investment grade next time around,” noting that the rating reflected the city’s strong-to very strong financial performance, sustained very strong budget flexibility, and “institutionalized integration of a revised reserve policy into the last three budget cycles,” adding that since the city’s emergence from chapter 9 municipal bankruptcy, the city has only issued two refundings. Now a $150 million sewer plant renovation could become the trigger for Stockton’s first post-chapter 9 municipal bonds if it is unable to secure sufficient grant funding from Uncle Sam or the State by next spring.

Mandating Mandate Retention. Without having been signed into law, the Puerto Rico Senate’s proposal to relieve municipios from the mandate to contribute to Puerto Rico’s health reform program has, nevertheless, been countermanded and preempted by the PROMESA Oversight Board after, yesterday, PROMESA Oversight Board Director Natalie Jaresko wrote to Governor Ricardo Rossello Nevares, to Senate President Thomas Rivera Schatz, and to House Leader Carlos Méndez to warn them that the bill which would exempt municipalities from their contribution to the government’s health plan is “inconsistent” with the unelected Board’s certified fiscal plan. Chair Jaresko wrote: “The Board is willing to amend the Certified Fiscal Plan for the Commonwealth to permit the municipality exemption contemplated by SB 879, provided that the legislation be amended such that the exemption terminates by September 30, 2019,” a deadline imposed by the Board which coincides with the moment when the federal funds to finance Mi Salud (My Health), would expire. The bill establishes that the exemption from payment to municipios would remain until the end of FY2020. In her letter, Director Jaresko also wrote to the officials that to grant the exemption, the government will need to identify the resources which would be devoted to cover the budget provisions to which the municipios would stop contributing. (Since 2006, municipios have been mandated to contribute to Mi Salud, based on the number of participants per municipio—a contribution currently equal to $168 million. The decision appears to be based upon the premise that once the Affordable Care Act ended, the federal government allocated over $2 billion for the payment of the health plan, an allocation apparently intended to cover such expenses for about two years. Thus, at the beginning of the week, Secretary of Public Affairs Ramon Rosario Cortes, said that the “Governor intends to pass any relief that may be possible to municipalities;” albeit he warned that the measure, approved by the Legislature, should be subject to PROMESA Board oversight—especially, as the Governor noted: “At the moment, there has been no discussion with the Board.”

The PROMESA Oversight Board has also demanded major changes to the fiscal plan Gov. Ricardo Rosselló submitted, with the Board requesting seeking more cuts as well as more conservative projections for revenues, making the demands in a seven-page epistle—changes coming, mayhap ironically, because of good gnus: revenues have been demonstrating improvement over projections, and emigration from the island to the mainland appears to be ebbing—or, as Director Jaresko, in her epistle to the Governor, wrote: “The June certified fiscal plan already identified the structural reforms and fiscal measures that are necessary to comply with [the Puerto Rico Oversight, Management, and Economic Stability Act], accordingly, the Oversight Board intended this revision to the fiscal plan to incorporate the latest material information and certain technical adjustments, not to renegotiate policy initiatives…Unfortunately, the proposed plan does not reflect all of the latest information for baseline projections and includes several new policies that are inconsistent with PROMESA’s mandate.” Ms. Jaresko, in the letter, returned to two issues of fiscal governance which have been fractious, asserting that the Governor has failed to eliminate the annual Christmas bonus and failed to propose a plan to increase “agency efficiency personnel savings,” charging that Gov. Rosselló had not included the PROMESA Board’s mandated 10 percent cuts to pensions, and that his plan includes an implementation of Social Security which is more expensive than the Board’s approved plan provided.

Director Jaresko also noted that Gov. Rosselló’s plan includes $99 million in investment in items such as public private partnerships and the Puerto Rico Innovation and Technology Services Office, which were contingent on the repeal of a labor law. Since, however, the Puerto Rico Senate has opted not to repeal the statute (Law 80), she stated Gov. Rosselló should not include spending on these items in her proposed fiscal plan, noting that Gov. Rosselló has included $725 million in additional implementation costs associated with the planned government reforms, warning that if he intends to include these provisions, he will have to find offsetting savings. In her epistle, the Director further noted that she believes his plan improperly uses projected FY2019 revenues as a base from which to apply gross national product growth rates to figure out future levels of revenue. Since the current fiscal year will include substantial amounts of recovery-related revenues and these are only temporary, using the current year in this way may over-estimate revenues for the coming years, she admonished. She wrote that Gov. Rosselló assumes a higher than necessary $4.09 billion in baseline payroll expenditures—calling for this item to be reduced—and that the lower total be used to recalculate payroll in the government going forward. Finally, Director Jaresko complained that the Governor’s plan had removed implementation exhibits which included timelines and statements that the government would produce quarterly performance reports, insisting that these must be reintroduced—and giving Gov. Rosselló until noon next Wednesday to comply.

The End of State Usurpation of Local Elected Authority? Uneasy shelter from the Fiscal and Physical Storms?

August 31, 2018

Good Morning! In this morning’s eBlog, we consider the end of the State of Michigan to usurp local authority via the appointment of an Emergency Manager, the safety of school drinking water has become an issue in Detroit—especially after Flint, and we consider the extraordinary revisions in the projected Hurricane Maria death toll in Puerto Rica—and the White House response.

Protecting a City’s Children. Detroit Public School Superintendent Nikolai P. Vitti has directed turning off drinking water across the district’s 106 schools  in the wake of after discovering higher-than-acceptable levels of copper and lead in some facilities, with Superintendent Vitti noting his decision came out of caution “until a deeper and broader analysis can be conducted to determine the long-term solutions for all schools.” he said in a statement. Test results found elevated levels of lead or copper in 16 out of 24 schools which were recently tested. Supt. Vitti stated: “Although we have no evidence that there are elevated levels of copper or lead in our other schools where we are awaiting test results, out of an abundance of caution and concern for the safety of our students and employees.” His actions, no doubt affected by fiscal and water contamination in Flint, came even as Detroit officials and the Great Lakes Water Authority sought to assure residents that water provided by the authority is safe to drink: they pointed to the city’s aging infrastructure as the problem.  Superintendent Vitti said he will be creating a task force to determine the cause of the elevated levels and solutions, noting he had initiated water testing of all 106 school buildings last spring to ensure the safety of students and employees. Water at 18 schools had been previously shut off. He added: “This was not required by federal, state, or city law or mandate: This testing, unlike previous testing, evaluated all water sources from sinks to drinking fountains.” The District does not plan to test students: a spokesperson for the school system noted: “Dr. Vitti said…he has no evidence at all that children have been impacted from a health standpoint.”

Fiscal & Physical Challenges: Earlier this summer, Supt. Vitti released details from a facilities review which had determined the school district would need to spend $500 million now to fix the deteriorating conditions of its schools—an effort for the system projected to cost as much as $1.4 billion if there is a failure to act swiftly, with the Administrator pointing to the failure by former state-appointed emergency managers to make the right investments in facilities while the system was preempted of authority and state-appointed emergency managers from 2009 to 2016 failed to make the right investments, sending what Dr. Vitti described as “the message to students, parents and employees that we really don’t care about public education in Detroit, that we allow for second-class citizenry in Detroit.” The remarks raised anew questions with regard to Michigan’s governance by means of gubernatorially chosen Emergency Managers.  

Superindent Vitti said he had notified Mayor Mike Duggan of his decision to shut off the drinking water, and a spokesperson, John Roach, noted: Mayor is “fully supportive” of the approach Supt. Vitti has taken, adding: “We will be supporting Dr. Vitti in an advisory capacity through the health department and the DWSD (Detroit Water and Sewerage Department) has offered to partner with the district on any follow-up testing that needs to be done.” At the same time, the Great Lakes Water Authority issued a statement in an effort to assure “residents and customers of GLWA’s regional system that they are not affected by the lead and copper issues,” noting: “Aging school infrastructure (i.e. plumbing) is the reason for the precautionary measure of providing bottled water,” adding water treated by the authority meets and surpasses all federal and state regulations, albeit adding: “A task force will be formed consisting of engineering and water quality experts” to will help the district “understand the cause and identify solutions.” (Initial results this past week showed elevated levels of copper, lead or both at one or more water sources in 16 of 24 school buildings, according to the statement. Water bottles will be provided at the schools until water coolers arrive. The district also found water-quality issues in some schools in 2016.)

The incident in Detroit raises a host of fiscal and governance issues—especially in the wake of the tragedy in upstate Flint—with, in both cases, the state’s history of appointing Emergency Managers to preempt the authority of local elected leaders. In the case of DPS, Dr. Vitti has contacted the Mayor, the Governor, and a task force of engineers and water experts to understand the cause and possible solutions; Superintendent Nikolai P. Vitti opted to close the water taps out of caution “until a deeper and broader analysis can be conducted to determine the long-term solutions for all schools,” with the decision coming just days before the school district’s 106 schools are scheduled to open next Tuesday. (Water bottles will be provided at the schools until water coolers arrive.) Water officials have blamed aging infrastructure as the cause of the public safety threat. Now Dr. Vitti has asked Mike Duggan and Gov. Rick Snyder to convene a task force of engineers and water experts to determine the cause of the elevated lead and copper levels, and to propose solutions. 

Importantly, it seems the public safety risk is limited to Detroit’s public schools: water officials released a statement Wednesday assuring residents and customers of the Great Lakes Water Authority and the Detroit Water and Sewerage Department that they are not affected by the lead and copper issues at the school district, noting: “Aging school infrastructure (i.e. plumbing) is the reason for the precautionary measure of providing bottled water…The water at GLWA’s treatment plants is tested hourly, and DWSD has no lead service lines connected to any DPSCD building. The drinking water is of unquestionable quality.”

Nevertheless, the threat to public safety—combined with the heartbreaking, long-term threats to Flint’s children from that city’s public water contamination—could add further challenges to Detroit’s recovery from the nation’s largest-ever chapter 9 municipal bankruptcy: a critical part of the city’s plan of debt adjustment was to address its vast amassment of abandoned houses by enticing young families with children to move from the suburbs back into the city—an effort which had to rely on a perception of the quality and safety of its public schools. Now, for a system itself recovering from bankruptcy, DPS faces a bill of at least $500 million to repair its buildings: approximately 25% of the system’s school buildings are in unsatisfactory condition and another 20%are in poor condition, according to the report. The district noted nearly $223 million of high-priority repairs involving elevators and lifts, energy supply, heating and cooling systems, sprinklers, standpipes, electrical service and distribution, lighting, wiring, communications, security system, local area networking, public address and intercoms, emergency lights and plumbing fixtures.

Mayor Duggan’s office and the Detroit Health Department Wednesday issued a joint statement supporting “the approach Dr. Vitti has taken to test all water sources within DPS schools and to provide bottled water until the district can implement a plan to ensure that all water is safe for use,” noting: “We will be supporting Dr. Vitti in an advisory capacity through the health department and the DWSD has offered to partner with the district on any follow-up testing that needs to be done. We also will be reaching out to our charter operators in the coming days to work with them on a possible similar testing strategy to the voluntary one Dr. Vitti has implemented.”

Restoring Municipal Authority. Mayhap it is ironic that Michigan’s relatively rare authority for the Governor to appoint an emergency manager to preempt local elected authority reflects the uneven results of the program—a program I well remember from meeting with Kevyn Orr, whom Gov. Rick Snyder had appointed as Emergency Manager  (EM) to preempt all governing authority of Detroit’s Mayor and Council, at the Governor’s office in Detroit on the first day the city entered the largest municipal bankruptcy in U.S. history—and after the grievous failure of a previous gubernatorially-appointed Emergency Manager to help the Motor City. The very concept of state authority to appoint a quasi dictator and to preempt any authority of local leaders elected by the citizens, after all, feels un-American.

Yet, from that very first moment, Mr. Orr had acted to ensure there was no disruption in 9-1-1 responses—and that every traffic and street light worked. Unlike the experience under an Emergency Manager in Flint, Mr. Orr was intently focused on getting Detroit back on its fiscal and physical feet—and restoring elected leadership to today’s grieving city.

Now, as of this week, Michigan no longer has any local government under a state appointed emergency manager—and observers are under the impression the state program to preempt local authority may be quietly laid to rest. It has, after all, been a program of preemption of local democracy with untoward results: while it proved invaluable in Detroit, it has proven fiscally and physically grievous in Flint, where it has been blamed for contributing to Flint’s water contamination crisis. Indeed, two of Flint’s former EMs have been criminally charged in connection with the crisis. Their failures—at a cost of human lives, appears to have put the future of state pre-emption of local governing authority—may well make state officials leery of stepping in to usurp control a local government, even as some municipal market participants and others see state oversight programs as a positive credit feature. The last municipality in Michigan to be put under a state-imposed emergency manager was Lincoln Park—an imposition which ended three years ago. Michigan Treasury spokesperson Ron Leix noted: “Each situation that led to the financial emergency is unique, so I can’t give a broad-brush assessment about how the law will be used in the future…For the first time in 18 years, no Michigan municipality or school district is under state financial oversight through an emergency manager. This is really about the hard work our local units of government have achieved to identify problems and bring together the resources needed to problem-solve challenging financial conditions.”

In Michigan, the emergency manager program was authorized twenty-eight years ago, granting the governor authority to appoint a manager with extensive powers over a troubled municipality or school district. By 2012, Michigan voters repealed the emergency manager program in a referendum; notwithstanding, one month later Gov. Snyder and legislators re-adopted a similar intervention program—under which local governments could opt among three new options in addition to the appointment of an emergency manager who reports directly to the Governor: chapter 9 municipal bankruptcy, mediation, or a consent agreement between the state and the city to permit local elected officials to balance their budget on their own. (In Michigan, municipalities which exit emergency management remain under the oversight of a receivership transition advisory board while executive powers are slowly restored to elected mayors and city councils.)

The state intervention/takeover program had mixed success, according to Michigan State University economist Eric Scorsone, who noted: “In some cases it’s worked well, like Allen Park where the situation was pretty clear-cut and the solution was pretty clear as to what needed to be done.” (Allen Park regained full local control of its operations and finances in February of 2017 after nearly four years of state oversight. Last June, S&P Global Ratings upgraded the city to investment-grade BBB-plus from junk-level BB, crediting strong budgetary performance and financial flexibility more than 12 months after exiting state oversight. But the appointment, in Flint, of emergency managers demonstrated the obverse: the small city had four emergency managers: Ed Kurtz, Mike Brown, Darnell Earley, and Gerald Ambrose—where the latter two today are confronted by charges of criminal wrongdoing stemming from the lead contamination crisis and ensuing Legionnaire’s disease outbreak that claimed 12 lives. It was the gubernatorially appointed Mr. Earley who oversaw the decision to change Flint’s water source to the Flint River in April 2014 as the city awaited completion of a new pipeline—a decision with fatal human and fiscal consequences. Indeed, two years ago, Gov. Snyder named a task force to investigate the Flint crisis and review the Emergency Manager law—a review which recommended the Governor consider alternatives to the current approach that would engage local elected officials. (No action has been taken to change the law.)

Because only a minority of states have authorized chapter 9 municipal bankruptcy, there is no uniform state role with regard to city or county severe fiscal distress and bankruptcy. Jane Ridley, senior director in the U.S. public finance government group at S&P Global Ratings and sector lead for local governments, has noted that state oversight is considered as part of the rating agency’s local GO criteria: “We do think that having a state that has oversight, especially if it’s a proven mechanism, can be very helpful for struggling entities…If they ended oversight entirely it would likely have an impact on the institutional framework scores and their sub scores.” A Moody’s analyst, Andrew Van Dyck Dobos, noted: “While an EM is in most cases is a last option, the ability for it to implement some policies and procedures is going to be typically viewed, at least at the onset, as a credit positive.”

Ending Shelter from the Storm. U.S. District Judge Timothy Hillman yesterday ruled that temporary housing given to hundreds of Puerto Ricans displaced by Hurricane Maria will end next month, meaning Puerto Ricans will be forced to check out of temporary housing provided by Federal Emergency Management Agency (FEMA) as part of the agency’s Transitional Sheltering Assistance (TSA) program. Judge Hillman, in his decision, wrote: I strongly recommend the parties get together to find temporary housing, or other assistance to the Plaintiffs and other members of the class prior to that date,” with his decision coming the same week Puerto Rico updated its official death toll from Maria to 2,975, a vast increase from the original count of 64. Judge Hillman’s decision also comes about two months after a national civil-rights group filed a lawsuit which had sought a restraining order to block FEMA from ending the program. The group, LatinoJustice, argued in the suit that it would lead to families’ evictions. It also came as, two days ago, President Trump met with reporters to respond to questions with regard to the mounting death toll—a session in which the President told the reporters: “I think we did a fantastic job in Puerto Rico.” Some 1,744 Puerto Rican adults and children were in the FEMA program when the lawsuit was filed. U.S. District Judge Leo T. Sorokin temporarily extended the program to the end of last July, and subsequently extended it until today—and then, once more, to September 14th.

Now, the White House is responding to a new estimate which increases the number by about 33% more to 2,975 after an independent study. White House spokeswoman Sarah Huckabee Sanders claimed in a statement that the back-to-back hurricanes which hit last year prompted “the largest domestic disaster response mission in history.” She added that President Donald Trump “remains proud of all of the work the Federal family undertook to help our fellow citizens in Puerto Rico.” She also says the federal government “will continue to be supportive” of Gov. Ricardo Rossello’s accountability efforts and says “the American people, including those grieving the loss of a loved one, deserve no less.” The new estimate of 2,975 dead in the six months after Maria devastated the island in September 2017 was made by researchers with the Milken Institute School of Public Health at George Washington University. It was released Tuesday.

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.”

The Complex Challenges of Implementing a Municipal Bankruptcy Plan of Debt Adjustment

July 31, 2018

Good Morning! In this morning’s eBlog, we consider post-chapter 9 municipal bankruptcy challenges for the City of Detroit, before turning to learn about good gnus from Puerto Rico.

The Steep Route of Chapter 9 Debt Adjustment. Direct Construction Services, minority-owned firm, which has participated in Detroit’s federally funded demolition program, is suing Mayor Mike Duggan, the city’s land bank, and Detroit’s building authority as well as high-ranking officials from each division—alleging racial discrimination and retaliation. The suit asks the court to award damages and declare the actions of the city, its land bank and building authority as “discriminatory and illegal.” The suit alleges that some contractors had been asked to change bidding and cost figures “to reflect compliance” under the federal demolition Hardest Hit Fund guidelines. Filed in federal court, it charges that Service’s managing member, Timothy Drakeford, was treated unfairly based on his race and that officials in the program conspired to have him suspended for refusing to falsify documents and for cooperating with federal authorities. Mr. Drakeford, who is barred from bidding on federally funded demolition work, is also suing for breach of contract and discrimination against black contractors. The suit charges that some contractors, including Mr. Drakeford, had been asked to change bidding and cost numbers “to reflect compliance” under the federal Hardest Hit Fund guidelines; indeed, the suit alleges it was subsequently suspended—not because of the quality of its work, but rather “because of the refusal to change numbers in bid packages.” The suit adds: “This case arises because of defendants’ breach of contract, concert of action, due process violations, and discrimination on the grounds of race in its implementation of the Hardest Hit Homeowner demolition program, including failure to timely pay black contractors in comparison to their white counterparts, improper and disparate discipline and retaliation.”

This issues here are not new—and have previously been the focus of FBI, state, and city investigations, especially over bidding practices and rising costs. As we have previously noted, the city’s plan of debt adjustment efforts to raze abandoned homes was a particular focus—a program through which federal assistance was misappropriated while the city worked to demolish homes after its bankruptcy—in that case involving federal funds allocated via the Michigan State Housing Development Authority. The suit contends that Direct Construction was awarded three contracts for demolition work by the land bank, and asserts that payments were delayed and harder to obtain from the land bank than for “larger white companies,” such as Adamo and Homrich, two firms awarded the largest percentage of the work to date. The suit asserts Direct Construction was under contract for several demolition packages, but still has not been paid, and references in excess of $143,000 in unpaid invoices, noting: This “repetitive process has gone on for over a year now, with no success,” contending that it had been performing work on two contracts which it had been awarded for a total of 48 homes—before, on December 19, 2016, being hit with an “immediate stop work order” from the land bank, without explanation. A year ago in February, Direct received a letter regarding an Office of Inspector General report, which suggested that photographs submitted for repayment of sidewalk work had been falsified and that the company would not be compensated—a letter followed up the next month by a notice of suspension. (Direct was among a few businesses suspended last year on claims of manipulating sidewalk repair photographs to obtain payment.)

Detroit Corporation Counsel Lawrence Garcia yesterday noted: “The Office of Inspector General found that not only did Mr. Drakeford personally manipulate a photo of a demolition site to conceal tires that had not been removed from the lot, but also gave information that was not truthful to the OIG’s investigators. For the penalties issued with respect to these matters, the Detroit Land Bank, the DBA and the city followed the recommendations of the independently appointed inspector general…These facts more than justify the city’s actions.” Indeed, that office, at the request of the land bank, had initiated investigations in December of 2016 into allegations that sidewalk repair photographs were being doctored. (The land bank mandates that its contractors to take “before and after” photographs of sidewalks, drive approaches, neighboring residences, and surrounding areas to document conditions.) The Office, the following February, flagged Direct Construction over five of its submitted photographs, concluding the photos had been modified to disguise incomplete work; it recommended the company be barred from doing work in the city’s demolition program until at least 2020. (The Michigan State Housing Development Authority began placing greater emphasis on sidewalk replacement photographs in October of 2016, when a new set of practices went into place—at a point in time when federally funded demolition had been suspended for two months after a review by the Michigan Homeowner Assistance Nonprofit Housing Corp.).

Since Mayor Duggan’s election in 2013, the city has razed nearly 13,000 homes—a task that has fiscal and physical consequences—reducing assessed property values and property taxes, but also leaving medical scars: over that time, the percentage of children 6 and younger with elevated lead levels rose from 6.9% in 2012 to 8.7% in 2016, according to state records. Early last year, the land bank repaid $1.37 million to address improper expenses identified by auditors for the state. The land bank last summer reached a settlement with state housing officials to pay $5 million to resolve a dispute over invoices the state determined to be improperly submitted. Detroit’s administration has claimed the city has been transparent with its demolition program and cooperated fully with all inquiries.

Good Gnus. In Puerto Rico, Governor Ricardo Rosselló Nevares and the Labor Secretary Carlos Saavedra are celebrating a turnaround in employment in the U.S. territory: between May and June, some 11,000 people joined the island’s labor market, dropping Puerto Rico’s unemployment rate to its lowest level in half a century. Gov. Rosselló Nevares yesterday reported the unemployment rate to be 9.3%, the lowest rate in the last 50 years, noting: “On this occasion, unemployment drops and the participation rate increases are all numbers going in the right direction.” Sec. Saavedra explained the increase between May and June reflects summer employment programs, but at a level considerably better than in previous years, especially in the commercial and self-employment sectors—and, as he noted: “We have seen a substantial increase in self-employment,” apparently reflecting many involved with repairs and reconstruction for damage caused by Hurricane María, especially electricians, and builders. Economist Juan Lara explained that jurisdictions which have suffered deep economic declines as a result of a natural disaster experience a period of rebound that leads to growth, but cautioned: “[T]his can hardly be maintained in the long-term without a change in the economic model.” He estimated that in the next five or six years, federal investments could keep the economy in positive territory, noting: “The important thing is to remember that these funds do not last forever and that the economy needs sustained redevelopment.”

For his part, Gov. Rosselló stressed that the current economic improvement is occurring without the federal government having released a penny of the more than $1.8 billion in promised HUD assistance. Nevertheless, there can be little question but that the more than $3 billion in insurance claims already paid, according to according to Iraelia Pernas, the Executive Director of the Puerto Rico Insurance Companies Association have had a positive, if one-time, impact. Similarly, the island is anticipating, in August, a large CDBG grant.

Gov. Rosselló Nevares attributed the jobs upturn, interestingly, to emigration: many who were unemployed left Puerto Rico for the mainland, even as he reported the total number of citizens employed has increased, as well as the labor participation rate (not seasonally adjusted), which rose from 40.5% in May to 41.1% last month. percent in June. In the first months following Hurricane María, nearly 200,000 people left Puerto Rico. Many, however, have returned.

Informacion Mejor? PROMESA Oversight Board Executive Director Natalie Jaresko has reported the Board “welcomes the publication” of fiscal information mandated by the Board, after, on July 10th, the Board had sent a letter to FAFAA Executive Director Gerardo Portela Franco, complaining of a failure to submit documents, including documents comparing the General Fund budget to actual spending; PayGo balances; and public employee payroll, headcount, and attendance. The board said that, according to the approved quasi-plan of debt adjustment, the first two documents had been due on May 31st, and the third on June 30th. FAFAA released the PayGo report on July 17, and the other two reports last Friday.  Ms. Jaresko wrote: “The Oversight Board welcomes the publication of the General Fund to Actual Report, the Human Resources Report and the Payroll Report: Full monthly public reporting is essential to increase transparency of government finances, increase accountability, and monitor compliance and progress as per the fiscal plan and budget objectives in order to eliminate Puerto Rico’s structural deficits…The Oversight Board is committed to continuing this important work of monitoring full compliance by the government with reporting requirements, in order to achieve PROMESA’s mandate of restoring fiscal responsibility and market access to Puerto Rico.”

Rebuilding the Motor City, and Reconsidering Colonialism in Puerto Rico

July 27, 2018

Good Morning! In this morning’s eBlog, we consider post-chapter 9 municipal bankruptcy challenges in Detroit, before turning to legislative and legal challenges to Puerto Rico.

A Foreclosed Motor City Future? In Detroit, time is running out for the owners of foreclosed properties under a new program which arose out of a legal settlement two years ago intended to protect the rights of low-income owner-occupants of foreclosed homes to purchase back their properties back for $1,000—a plan which provided that occupied homes on tap for this coming fall’s tax auction will instead be purchased by the City of Detroit and sold to owner-occupants who can prove they qualify for the city’s poverty tax exemption or have in the past—an exemption which would reduce or eliminate property tax liabilities for those who qualify. The plan is an indication of one of the most challenging aspects of fashioning a plan of debt adjustment for recovering from the largest chapter 9 municipal bankruptcy in U.S. history: how does one enhance the property tax base by attracting higher income families to move back into the city without jeopardizing thousands upon thousands of the city’s poorest families?

To date, with a looming deadline in a month, the United Community Housing Coalition has received about 140 applications—the foundation received funds from the City and foundations to purchase the homes—with the assistance available to prospective homeowners who can prove they could have qualified for the tax exemption between 2014 and 2017, but did not receive one—and that they agree to sign a sworn statement they would have qualified in the past. The effort matters: Wayne County Treasurer Eric Sabree estimates as many as 700 owner-occupied homes in Detroit are at risk of being sold at the fall tax foreclosure auction.

Quien Es Encargado? (Who is in charge?) U.S. District Court Judge Laura Taylor Swain Wednesday stated she would issue an opinion soon with regard to the hard federalism question emerging from the by Puerto Rico versus the PROMESA Oversight Board over their authority, noting at the end of the Title II bankruptcy hearing: “I realize the urgency of the situation,” at the end of a Title III bankruptcy hearing in San Juan, referring to two adversary proceedings against the Board–one brought by Gov. Ricardo Rosselló, and the other by the Presidents of the Puerto Rico Senate and House of Representatives—while PROMESA Board attorney Martin Bienenstock described the Governor’s effort to challenge the Board’s efforts to preempt the legislative power and authority of the U.S. Territory’s elected Governor and Legislature as “ineffectual.” Mr. Peter Friedman, representing the Governor and Puerto Rico’s Fiscal Agency and Financial Advisory Authority (FAFAA), responded that the Governor was just trying to raise a narrow set of issues: they want the federal court to reject the notion that they have no meaningful role in governing.  But the unelected Mr. Bienenstock said the Governor’s challenge is based on five discrete issues intertwined with the PROMESA Board’s ability to revive the economy, regain capital markets access, and do other things mandated by the PROMESA law, as he focused especially on two issues: what he characterized as the Board’s power over “reprogramming” the use of unused Puerto Rico government funds, arguing before Judge Swain that if the Governor were permitted to appropriate and authorize funding to carry out his responsibilities, then the PROMESA Board would have lost control over the budget, fiscal plan, and debt restructuring.

In response to this extraordinary claim, Judge Swain said that while she recognized the Board has some authority, she questioned whether it applies to funding lines that had been authorized before PROMESA’s passage, describing the issue as a “conundrum,” even as Mr. Bienenstock testified that the Governor wants to make it legal to “knowingly and willingly” spend more than the PROMESA Board budget authorizes. This raised an issue which goes to the heart of governance in a democracy: should those elected by the citizens of a jurisdiction have the final say as opposed to those who neither reside in nor come from such a jurisdiction have the final governing authority?

Crossing Swords. Puerto Rico Governor Ricardo Rosselló, stated he would not testify before the U.S. House Natural Resources Committee unless Chairman Rob Bishop (R-Utah) said he was sorry for a Tweet tweeted from the Committee’s account last week: “Call your office, @ricardorossello,” accompanied an invitation to the hearing, where invited witnesses were to be grilled on a management crisis at PREPA. Gov. Rosselló noted the tweet falsely suggested that he was hard to reach. Perhaps more importantly, for the Governor, the Chairman’s comments appeared to reflect a disrespect which would not be shown to the Governor of any State, emphasizing the perception that the federal government has a colonialist attitude toward the Commonwealth, where residents are U.S. citizens, but are barred from having a vote in the House and Senate. Chairman Bishop did not apologize for the demeaning tweet, asserting that its removal meant no apology was required—a position hard to imagine he would make to Utah Governor Gary Herbert.

Converting Swords to Plowshares? With Congress adjourning today for six weeks, Puerto Rico Resident Commissioner Jenifer Gonzalez hopes her pro-democracy project can be discussed by Chairman Bishop’s Committee in September: her legislation, HR 6246, would enable the admission of the territory of Puerto Rico into the Union as a State. Chair Bishop, according to the Commissioner, “has a plan” to move the prospects for statehood forward in the short 19-day legislative window before this Congress adjourns in November. Rep. Gonzalez affirmed that her legislative goal is to incorporate Puerto Rico as a territory, which would be considered as a promise of statehood, and create a Congress Working Group, so that, within a period of just over a year, there would be a report on changes to laws that would have to be put in place to admit the island as a state in January of 2021.

Lighting up PREPA? Puerto Rico’s Governor Ricardo Rosselló was a no-show at a Congressional hearing Wednesday afternoon on efforts to wrench control of the bankrupt Puerto Rico Electric Power Authority from Puerto Rico’s government—a hearing, “Management Crisis at the Puerto Rico Electric Power Authority and Implications for Recovery,” with regard to which Chairman Rob Bishop (R-Utah) had written: “Despite your recognition of the politicization that has plagued PREPA and your commitment towards allowing for independence, the recent departure of PREPA’s CEO after only four months of service and the resignation of the majority of PREPA’s governing board are the most recent signs of the utility’s continued dysfunction and a sign that ‘political forces…continue to control PREPA.’” The Governor, late Tuesday had announced he would not be able to participate in the hearing—a hearing at which there was to be a focus on corruption within the utility and the possibility of privatization—but at which the Committee was scheduled to receive testimony from the invaluable chapter 9 expert Jim Spiotto, as well as DOE Assistant Secretary Bruce Walker.  In its most recent audit, Ernst & Young had noted there substantial  doubt whether PREPA could continue as a going concern, since it does not have sufficient funds to fully repay its obligations as they come due and is restructuring its long-term debt. (PREPA utility filed for bankruptcy one year ago in the face of accruing $9 billion in debt, under PROMESA’s provisions in Title III.