The Leadership Challenges on the Road to Fiscal and Physical Recovery

September 29, 2017

Good Morning! In today’s Blog, we consider the fiscal, legal, physical, and human challenges to Puerto Rico; Hartford’s steep fiscal challenges; and Detroit’s ongoing road to fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

Fiscal Safety Net? The White House yesterday announced President Trump had agreed to waive the Jones Act, which will temporarily lift shipping restrictions on Puerto Rico and enable the hurricane-ravaged island to receive necessary aid; however, the waiver from the shipping law, which mandates that only American-made and-operated vessels may transport cargo between U.S. ports, will only last for 10 days, after which the equivalent of a 20 percent tax will be reimposed. The delayed U.S. response to the save U.S. citizens compared unfavorably to the response to save and protect foreign citizens in Haiti seven years ago, when the U.S. military mobilized as if it were going to war—with the U.S. military, in less than 24 hours, and before first light, already airborne, on its way to seize control of the main airport in Port-au-Prince. Within two days, the Pentagon had 8,000 American troops en route; within two weeks, 33 U.S. military ships and 22,000 troops had arrived. By contrast, eight days after Hurricane Maria ripped across neighboring Puerto Rico, just 4,400 service members were participating in federal operations to assist the devastated U.S. citizens, according to a briefing by an Army general yesterday, in addition to about 1,000 Coast Guard members.

The seemingly inexplicable delay in waiving the Jones Act—temporarily—was due to opposition of the waiver by the Department of Homeland Security, which had argued that a federal agency may not apply for a waiver unless there is a national defense threat (as, apparently, there might have been in Houston and Florida). Sen. John McCain (R-Az.) has, for years, sought to repeal this discriminatory law: The 1920 Jones Act requires that goods shipped between U.S. ports be carried by vessels 1) built in the U.S., 2) majority-owned by American firms, and 3) crewed by U.S. citizens.

Key House and Senate members, since Monday, had been pressing for a one-year waiver from the rules in order to help accelerate deliveries of food, fuel, medical, and other critical supplies to Puerto Rico, especially with current estimates that Puerto Rico could be without power for six months. On Wednesday, 45 U.S. Senate and House Members had signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement. U.S. Rep. Nydia Velázquez (D.-N.Y.) warned: “If President Trump doesn’t swiftly deploy every available resource that our country has, then he has failed the people of Puerto Rico – and this will become his Katrina.” The temporary suspension of the onerous and discriminatory Jones law came only in the wake of a fierce backlash against the Trump administration for its inexplicable delay in not immediately lifting the federal law for Puerto Rico, especially after it issued a two-week waiver for Texas and Florida in response to Hurricanes Harvey and Irma. Nevertheless, San Juan Mayor Carmen Yulín Cruz praised the administration’s decision: she said it could help bring down the cost of emergency medical and other supplies, as well as vital construction materials by nearly 33 percent. Nevertheless, she warned there are still thousands of containers sitting idle at the ports of San Juan, a problem she blamed on “jurisdictional” and bureaucratic issues.

The belated Presidential action came as Puerto Rico continued to suffer the after effects of Hurricane Maria: Puerto Rico Electric Power Authority Executive Director Ricardo Ramos Rodríguez warned it could take PREPA as much as half a year to restore electricity.

Meanwhile, it appears the PROMESA Oversight Board is ready to revise the amount of debt to be paid in the next nine years. The Board is scheduled to meet today in New York City to revise the March-approved fiscal plan: the current Board fiscal plan specifies there should be enough funds to pay approximately 24% of the debt; however, it appears the Board will have little choice today but to revise every fiscal plan. Clearly none of the previous underlying assumptions can hold, and now the Board will have to await the actions and finding of the Federal Emergency Management Agency, while the Treasury Department will have to work with Puerto Rico to settle on a massive restructuring—or, as Puerto Rico House Representative Rafael Hernández Montañez put it: “We can’t have money spent on corporate lawyers and PowerPoint producing technocrats while funding is needed for immediate reconstruction efforts.” While FEMA has committed to paying for 100 percent of the costs of some work, on others, it is mandating a match of 20% to 25% of the costs for other work—a match which appears out of reach for the most savagely damaged municipalities or municipios—now confronted not just by enormous new capital and operating demands, but also by sharply reduced revenues.

Wednesday morning, the PREPA Bondholders Group offered up to $1.85 billion in debtor in possession loans to the authority. According to the group, part of the package would be a new money loan of up to $1 billion. Another part would be their possible acceptance of an $850 million in DIP notes in exchange for $1 billion in outstanding bonds owed to them—or, as the Group noted: “The new funding would allow PREPA to provide the required matching funds under various grants from the Federal Emergency Management Agency.” In response, PREPA’s Natalie Jaresko said: “We welcome and appreciate the expression of support from creditors…The Board will carefully consider all proposals in coordination with the government, but it is still very early as we begin to navigate a way forward following the catastrophic impact Hurricane Maria had on the island.”

The existing fiscal PREPA plan specifies there should be enough funding to pay about 24% of the debt due over the next decade; that, however, has raised questions with regard to the underlying assumptions of the Board, especially with regard to when FEMA will complete its work on the island.

Rafael Hernández Montañez, a member of Puerto Rico’s House, noted that Hurricane Maria put Puerto Rico’s territory-wide and municipal governments in very difficult financial situations. While FEMA has committed to paying for 100% of the costs of some work, he notes that the federal relief agency is still mandating a government match of 20% to 25% of the costs for other work: “It’s going to be a huge effort to cover that 20% with the government’s unbalanced budget,” adding that the hurricane will also lead to reduced revenues for the local governments.

On Wednesday, 145 U.S. Representatives and Senators signed a letter urging President Trump to appoint a senior general to oversee the military’s aid to Puerto Rico, to deploy the USS Abraham Lincoln aircraft carrier, and to increase personnel to assist local law enforcement–the same day as the PREPA Bondholders Group offer. 

The Category 4 Maria destroyed Puerto Rico’s electrical grid; it left the island desperately short of food, clean water, and fuel—and sufficient shipping options, notwithstanding the claim from the Department of Homeland Security that: “Based on consultation with other federal agencies, DHS’s current assessment is that there is sufficient numbers of U.S.-flagged vessels to move commodities to Puerto Rico.” Thus DHS opposed a waiver of the Jones Act (Under the Jones Act federal cabotage rules, the entry of merchandise into Puerto Rico can only be made on US flag and crew ships – the most expensive fleet in the world.), which has been suspended in past natural disasters, to allow less expensive, foreign-flagged ships bring in aid. Former President George W. Bush suspended the Act after Hurricane Katrina in 2005, and President Barack Obama suspended it after superstorm Sandy in 2012. In a letter to the Department of Homeland Security, Sen. McCain criticized the department for waiving the Jones Act in the wake of hurricanes Harvey and Irma, but not for Puerto Rico. The Senator, who has long sought a repeal of the Jones Act, noted: “It is unacceptable to force the people of Puerto Rico to pay at least twice as much for food, clean drinking water, supplies, and infrastructure due to Jones Act requirements as they work to recover from this disaster: Now, more than ever, it is time to realize the devastating effect of this policy and implement a full repeal of this archaic and burdensome Act.”  Only the Department of Defense may obtain a Jones Act waiver automatically, which it did to move petroleum products from Texas after Hurricane Harvey. The White House is expected to send Congress a request for a funding package for Puerto Rico in the next few weeks, a senior congressional aide said.

The Road to Hartford’s Default. Citing deep cuts to higher education, sharp reductions in aid to distressed communities, and unsound deferrals of public pension payments, Connecticut Gov. Dannel Malloy yesterday made good on his pledge to veto the budget that legislature, earlier this month, had adopted, deeming it: “unbalanced, unsustainable, and unwise,” adding his apprehension that were it to be implemented, it would undermine the state’s long-term fiscal stability and essentially guarantee the City of Hartford’s chapter 9 municipal bankruptcy. His veto came as the Governor and top legislators continued bipartisan talks in an attempt to reach a compromise; however, despite legislative attempts to pass a bill to increase the hospital provider tax to 8 percent, a 25 percent increase over the current level, the legislature will not meet today. In his executive order, the Governor allowed key stated services to remain operating; however, he ordered steep cuts to municipalities and certain social service programs: under his orders, approximately 85 communities would see their education cost sharing grants, the biggest source of state funding for public education in Connecticut, cut to zero next month—no doubt a critical element provoking the Connecticut Council of Small Towns, which represents more than 100 of the state’s smallest communities, to seek an override in a special session the week after next in order to avoid local property tax increases. Nevertheless, Gov. Malloy stood strongly against the Republican plan and a potential override, stating: “This budget adopts changes to the state’s pension plan that are both financially and legally unsound…This budget grabs ‘savings’ today on the false promise of change a decade from now, a promise that cannot be made because no legislature can unilaterally bind a future legislature.” He added his apprehensions that the changes proposed to the state’s pension system could expose Connecticut taxpayers to potentially costly litigation down the road: “Prior administrations and legislatures have, over decades, consistently and dangerously underfunded the state’s pension obligations,’’ a strategy, he noted, which he said has led to crippling debt and limited the state’s ability to invest in transportation, education, and other important initiatives. Nonetheless, Republican leaders urged the Governor to sign the two-year, $40.7 billion budget, saying it makes significant structural changes, such as capping the state’s bonding authority and limiting spending. Fiscally conservative Democrats who bolted to the Republican side had criticized a Democratic budget proposal which had proposed new taxes on vacation homes, monthly cellphone bills, and fantasy sports betting, as well as increased taxes on cigarettes, smokeless tobacco, and hotel room rates.

House Republican leader Themis Klarides (R-Derby) warned she and her colleagues will try to override the veto—a steep challenge, as in Connecticut, that requires a two-thirds vote in each chambers, meaning 101 votes in the House and 24 in the Senate. The crucial Republican amendment passed with 78 votes in the House and 21 in the Senate—well short of the override margin in both chambers. The action came as S&P Global Ratings this week lowered Hartford’s credit rating, writing that its opinion “reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty,” albeit noting that the city could still avoid chapter 9 municipal bankruptcy by restructuring its debts. The agency wrote: “In our view, the potential for a bond restructuring or distressed exchange offering has solidified with the news that both bond insurers are open to supporting such a measure in an effort to head off a bankruptcy filing. Under our criteria, we would consider any distressed offer where the investor receives less value than the promise of the original securities to be tantamount to a default. The mayor’s public statement citing the need to restructure even if the state budget provides necessary short-term funds further supports our view that a restructuring is a virtual certainty.” Hartford’s fiscal plight is, if anything, made more dire by the fiscal crisis of Connecticut, which is still without a budget—and where the Legislature has under consideration a budget proposal from the Governor to slash state aid to the state’s capitol city of Hartford—where the Mayor notes that even were the state to make the payments it owes, Hartford would still be unable to pay its debts—so that S&P dropped the city’s credit rating from B- to C—a four-notch downgrade, writing: “The downgrade to ‘CC’ reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty.”

The Steep Recovery Road. Almost three years after exiting chapter 9 bankruptcy, Detroit is meeting its plan of debt adjustment, but still confronts fiscal challenges to a full return to the municipal market, even as it nears its exit from Michigan state oversight next year. Detroit’s Deputy Chief Financial Officer and City Finance Director, John Hill, this week noted that while the Motor City recognizes that any debt the city plans to issue will still need a security boost from a quality revenue stream and some enhancement, such as a state intercept, Detroit’s plan of debt adjustment did not assume the need for market access in a traditional and predictable way, without added security layers, for at least a decade. That assessment remains true today, as Detroit nears its third anniversary from its exit from the nation’s largest ever municipal bankruptcy. With chapter 9, Mr. Hill adds: “Everything that we have been able to do since exiting bankruptcy has an attached revenue stream to it: You secure it, and bond lawyers agonize over how that will be protected in the unlikely event of another bankruptcy, because everyone has to ask the question now. Then there is a strong intercept mechanism that goes to a trustee like U.S. Bank where the bondholders now know this is absolutely secure.”

Municipal Market Analytics partner Matt Fabian notes that Detroit continues to struggle with challenges which predate its chapter 9 bankruptcy, adding the city is unlikely to regain an ability to access the traditional municipal markets on its own in the near-to-medium term: “They don’t have traditional reliable access where if they need to go to the market, you can predict with certainty that they will and they will be within a generally predictable spread,” adding that reestablishing its presence in the traditional market is important, because it indicates whether bondholders have confidence in the city as a going concern. In fact, Detroit has adopted balanced budgets for two consecutive years; it is on a fiscal path to exiting Michigan Financial Review Commission oversight, and the city ended FY2016 with a $63 million surplus in its general fund; however, Detroit’s four-year fiscal forecast shows an annual growth rate of only about 1%.

The city’s public pension obligations, mayhap the thorniest issue in cobbling together its plan of debt adjustment, are to be met per its economic plan, via a balloon payment.  Mr. Fabian notes that the Motor City’s recovery plan and future revenue growth is complicated by the need to set aside from surpluses an additional $335 million between Fy2016 and Fy2023 to address that significant, unfunded pension liability, worrying that while the plan is “fiscally responsible;” nevertheless, it comes “at the expense of using these funds for reinvestment and service improvement.”

The plan to address pension obligations is aimed at shoring up the city’s long-term fiscal health and Naglick says it shows the city has recognized the need to tackle it. Detroit developed a long-term funding model with the help of actuarial consultant Cheiron, obtained City Council approval for changes to the pension funding ordinance that established the Retiree Protection Trust Fund, and deposited $105 million into this IRS Section 115 Trust. This fund, said Detriot CFO John Naglick, will grow to over $335 million by 2024 and will provide a buffer to increased contributions beginning then. “More importantly, the growing contributions each year from the general fund to the trust will build budget capacity to make the increased contributions in future years,” he said.

Mayor Mike Duggan claimed during his 2016 State of the City speech that consultants who advised the city through bankruptcy had miscalculated the pension deficit by $490 million. Pension woes aren’t the only challenge the city faces. Fabian said that economic development has been limited to the city’s downtown and midtown areas. The rest of Detroit’s neighborhoods haven’t fared so well.

Dan Loepp, the president and CEO of Blue Cross Blue Shield of Michigan, and Gerry Anderson, the Chairman and CEO of DTE Energy, are regarded to be among the important business leaders in Detroit, two key sectors of the Motor City’s economy, who see Detroit’s fiscal and economic trajectory as intertwined with the future of their companies; they  have headquarters in downtown and employ thousands of people including Detroiters—companies which had been making conscious and deliberate investments in the city. Asked recently to offer their perspectives about where Detroit is headed and how to include the many who are left out of the recovery, Mr. Loepp responded: “I’m a native Detroiter, and I lead a company that’s been a business resident of Detroit for nearly 80 years. I remember how uneasy it felt to be in Detroit when the national economy collapsed 10 years ago. It was hard and scary…From then to now, I strongly believe Detroit’s comeback is one of the best stories in America. The downtown is pulsing with growth and action. You’ve got business and residential development that has connected the river to Midtown and is now expanding into neighborhoods.” He added Detroit today is clear of debt and venture capital flowing backed by a city leadership which is “working well together, noting Detroit today is “now positioned to compete and win investment and jobs against any city in the country. All of this is great for Detroit.”

Notwithstanding, he warned that challenges remain: “The bankruptcy, while hard, gave the city’s leadership a clean slate to solve challenges faced by residents. The Mayor and council are working together on issues like lighting, infrastructure, zoning, and demolition…the Mayor, especially, has spent considerable energy advocating for the people of Detroit—doing things like making sure new housing developments hold space for working people of all incomes. This will promote a stronger, more diverse Detroit…Institutional issues, like improving the city’s schools and making neighborhoods safer for city residents, will take time to solve. They will take a constant, steady focus. And they need people within state and local government to work hand-in-hand with people from the neighborhoods to do the tough labor of finding sustainable solutions.” Nevertheless, he cautioned that the Motor City’s recovery is incomplete without participation of the majority: “Detroit can’t truly ‘come back’ if people living in the city are left behind. We need to always make sure there is a focus on people and that we make people a priority. Schools need to be improved. Transit needs to be addressed in a comprehensive way. Employment opportunities and housing need to be part of the master plan.”

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The Twin Challenges of Terrorism & Municipal Bankruptcy

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December 22, 2015. Share on Twitter

Readying to Recover from Terrorism and Municipal Bankruptcy. The San Bernardino City Council yesterday unanimously chose the current Burbank, California City Manager, Mark Scott, to be the new city manager—with San Bernardino Police Chief Jarrod Burguan to serve in the interim effective January 1st—the date on which current Manager Allen Parker’s resignation (by mutual negotiation) becomes effective. Under the apparent agreement, according to Chief Deputy City Attorney Jolena Grider, Mr. Scott has signed a one-year contract, for $248,000, with a 30-day notice to terminate, about a seven percent increase over the current salary, but a significant reduction from the salary he had been receiving at the time he offered his resignation last month. In accepting the offer, Mr. Scott told the San Bernardino Sun he had expressed interest in the San Bernardino city manager position just a few days prior to the Dec. 2nd terrorism attack and that he had experienced the city’s heart since then: “I’m at the point in my career where I’m looking to join a high-functioning team…and I believe you’ve got many people here — including yourselves (elected officials), including people in the audience — who are capable of fulfilling the promise.” Mr. Scott will continue in Burbank until the first week of February, but he intends to try to devote a significant amount of time in San Bernardino in the interim. Councilman John Valdivia proposed removing housing assistance from Scott’s compensation. But when City Attorney Gary Saenz said it would be helpful to keep it — given that relocation for a year can be expensive, and it’s good to have a city manager who lives in the city — and no other council members supported the idea, Valdivia joined the unanimous vote.

Meanwhile, Chief Burguan, who has been widely praised for his leadership in response to the terrorist attack in the city—but who has led a department with significant challenges, was approved without discussion, notwithstanding concerns several Council Members had earlier expressed when his role as interim city manager was first proposed. There was, however, no public discussion yesterday before he was approved unanimously, for a salary of $19,104.88 per month, not quite $1,000 more than he now makes as police chief.

The attacks in San Bernardino at the Inland Regional Center affected not just the city, but also other responding governments. Yesterday, each ratified emergency proclamations, a key step to ensure their eligibility to seek state and federal funding to recover expenses. The costs for San Bernardino already are nearing $1 million. The unanimous votes yesterday came in the wake of each jurisdiction’s unanimous proclamation last by executives designated as director of emergency services: San Bernardino Mayor Carey Davis, Redlands City Manager N. Enrique Martinez, and San Bernardino County CEO Greg Devereaux. The San Bernardino City Council voted unanimously yesterday to ask the state for financial help. Despite San Bernardino’s municipal bankruptcy, outgoing City Manager Allen Parker reported the city’s budget could accommodate overtime and other costs created by the attack. Mr. Parker referenced unanticipated savings from spending less than expected on salaries, because the municipality had prepared and adopted its budget with the expectation that 5 percent of positions would be vacant. Instead, approximately 15 percent of positions are vacant. What remains unclear, in the wake of the tragedy, is how the mass shootings might impact assessed residential and business property values.

Rocky Start & Juggling Diverse Claims. Mr. Scott will have homework aplenty to prepare for his new position and responsibilities—not just to help San Bernardino try to recover from the terrorist attack and the attack’s potential fiscal impact via fear and intimidation to undercut the city’s economy, but also from parallel attacks from the city’s municipal bondholders and insurers—who, in challenging San Bernardino’s most recent financial disclosures in U.S. Bankruptcy Judge Meredith Jury’s court have written about what they assert constitute a lack of coherent financial disclosure, with Ambac Assurance Corp. attorney Thomas Keller writing: “(San Bernardino’s) revised disclosure statement still falls woefully short of containing the ‘adequate information’ to which creditors are entitled before being asked to vote on the revised plan [of debt adjustment],” in the firm’s filing in preparation for a status hearing Judge Jury has scheduled for tomorrow—a hearing at a time when the city, unsurprisingly, is not just transfixed by the terrible terrorist shootings, but also in a governance flux: it is most difficult to imagine that Chief Burguan, in addition to the awful responsibilities and burdens he carries in the wake of the shootings, but now also with being the interim manager, will be able to devote to these claims.

Indeed, the city two weeks ago, declared a state of emergency: it is seeking reimbursement from the federal government for costs associated with the attack. It is difficult to imagine the fiscal and time and attention juggling sought by some of the city’s creditors—in this instance Ambac and Erste Europäische Pfandbrief-und Kommunalkreditbank AG (EEPK), the former being the municipal bond insurer of some $50 million in pension obligation bonds held by EEPK—whose attorneys each filed further objections to San Bernardino’s financial disclosures in response to the amended disclosure statement San Bernardino November 25th—just one week before the terrorist attack in San Bernardino. In their claim, the creditors asked challenged the city’s proposed “draconian” plan to pay only paying 1 percent of its owed promises on its pension obligation bonds and general unsecured claims—especially when the city’s financial disclosures are so “murky,” adding that, in its filing, San Bernardino had failed to explain an additional $200 million in expenses and reserves mentioned in supplemental filings—new provisions, including a $24 million bankruptcy reserve fund, an additional $14 million for police fleet replacement, and $159 million for the “police services master plan.” Notwithstanding what one of the challengers claimed to be the “enormous size” of these new spending and reserve items, he said the amended disclosure statement only provides partial or cursory explanations: “The enormous size of these changes calls into question the validity of the city’s financial projection methodology, and certainly warrant clear disclosure in the body of the amended disclosure statement and significant analysis and explanation by the city.” Under San Bernardino’s proposed plan, holders of $50 million of unsecured pension obligation bonds would receive payments of $655,000 plus interest over time; holders of general unsecured claims between $130 million and $150 million would receive a pro rata share of about one percent—or $1.3 million after the plan became effective, according to the city’s filing—with the plan before Judge Jury noting: “The city believes that the plan provides the greatest and earliest possible recoveries to holders of claims while preserving necessary city services and operations.” One struggles to imagine the task confronting Judge Jury: already charged with the responsibility to weigh whether San Bernardino has put together a plan of debt adjustment which, if approved, would provide for fiscal sustainability, she too has to be keenly aware that the terrorist attack has imposed a whole different and unique set of creditors for whom the city will have to bear responsibility.

Waiting for Godot. Standard & Poor’s retained Atlantic City on credit watch negative, pending, the credit rating agency reported, a long-awaited resolution of Gov. and still-Presidential contender Chris Christie’s conditional vetoes of a rescue package for Atlantic City approved by the legislature last June. Gov. Christie announced nearly six weeks ago that he wanted changes to bills that would have established a payments-in-lieu of taxes program for casinos over a 15-year period and reallocated New Jersey’s casino alternative tax to pay debt service on Atlantic City-issued municipal bonds; yet he has not acted. Thus, even in the wake of the rating agency’s knocking Atlantic City’s credit rating more than three months’ ago because of uncertainty over whether it could meet its near-term fiscal obligations, the Governor has yet to provide any clarity to his intentions, thereby risking exacerbating the city’s fiscal plight. In their report, S&P analysts Timothy Little and Lisa R. Schroeer wrote that, in their view, Gov. Christie and the legislature have until the end of the current legislative session to resolve Gov. Christie’s conditional vetoes and to release a long-term plan for the South Jersey city—a city still in the awkward situation of having an elected Mayor, but also a state-appointed emergency manager (Gov. Christie appointed corporate restructuring attorney Kevin Lavin as Atlantic City’s emergency manager last January. Mr. Lavin, however, has not released any new updates since a March 23rd report in which he urged “shared sacrifice” among stakeholders, including the possibility of extending maturities for bondholders.) In its newest report, the S&P dynamic duo wrote: “Atlantic City’s ability to address its structural imbalance and long-term liabilities has been a significant concern that weighs on its fiscal future…The decision to conditionally veto several bills intended to stabilize the city’s revenues continues to leave the city’s finances in a vulnerable and tenuous position.” Atlantic City faced a $101 million budget gap before adopting a 2015 fiscal plan in late September which relied partly on anticipated revenues of $33.5 million in redirected casino taxes included in the rescue package.

4th Down Congressional Punt. Who could possibly forget the great strip by cartoonist Charles M. Schulz of Lucy’s repeated promises she would not swipe the ball before Charlie tried to kick it? So too Congress appeared to be poised to not bail out Puerto Rico, but rather to provide the territory with options, such as those available to General Motors, Chrysler, Detroit—or any other U.S. corporation, to file for federal bankruptcy—options which would have imposed no costs on the federal budget, but would have, potentially, affected large campaign contributions. Instead Congress bailed out of Washington without taking any action to ensure or provide Puerto Rico with any fiscal tools or authority to address its onrushing insolvency, rejecting various proposals offered by Democrats which would have granted some form of municipal bankruptcy authority to the U.S. territory. The $1.1 trillion omnibus appropriations bill Congress passed and the president signed only included two smaller provisions related to Medicare funding in Puerto Rico, as well as a provision allowing the Treasury Department to use some of its budget to give technical assistance to the Puerto Rico government. Puerto Rico Gov. Alejandro García Padilla said: “Once again Wall Street has demonstrated its control over Congress; Wall Street rules Congress…That power is clearly factored into the fundamental analysis of hedge funds and vulture funds that control our democracy.” In fact, chapter 9 municipal bankruptcy negotiations between Democrats and Republicans to include provisions, such as extending Chapter 9 municipal bankruptcy to the commonwealth’s public authorities, continued until the final votes—with Republicans, in both houses, Senate Judiciary Committee Chair Charles Grassley (R-Iowa) leading uniform opposition to authorizing the U.S. territory access to municipal bankruptcy—especially in the face of a torrent of opposition from wealthy, donor hedge funds. Chair Grassley claimed the U.S. territory’s problems were too complex to be fixed solely through restructuring; yet, he offered no alternative.

Promises, Promises. While Congress scurried out of town without offering any avenues for either the Commonwealth of Puerto Rico or its fiscally struggling municipalities, new House Speaker Paul Ryan (R-Wis.), prior to departing, said he was instructing all House committees which have jurisdiction over Puerto Rico to work with Commonwealth leaders to come up with what he termed a “responsible solution” to the fiscal and debt crises by the end of March. In addition, Speaker Ryan promised to hold a hearing on Puerto Rico on Jan. 5, according to House Minority Leader Nancy Pelosi (D-Ca.), noting: “While we could not agree to include precedent-setting changes to bankruptcy law in this omnibus spending bill, I understand that many members on both sides of the aisle remain committed to addressing the challenges facing the territory.”

You made me promises, promise
Knowing I’d believe
Promises, promises
You knew you’d never keep

During the last minute negotiations in the House, Minority Leader Pelosi introduced legislation to provide a short-term stay of legal actions by certain creditors while Congress considered debt restructuring legislation: Leader Pelosi sought a moratorium on legal action which would last until March 31st—in order to ensure sufficient time to comply with Speaker Ryan’s proposed and promised timeline. Rep. Pelosi, however, was unable to gain the requisite unanimous consent.

When the second session reconvenes next month, it, thus, remains unclear what steps Congress might take—or how any steps might come prior to either a default by Puerto Rico, or legal actions taken by some of the island’s creditors. In the Senate, Chairman Grassley, Finance Committee Chair Orrin Hatch (R-Utah), and Natural Resources Committee Chair Lisa Murkowski (R-Alaska) have proposed legislation to create a financial oversight authority for the Commonwealth, similar to means used to prevent defaults in New York City and Washington, D.C., and which would authorize authority to borrow, as well as make $3 billion of unallocated Affordable Care Act funding available to help Puerto Rico stabilize its budget and debt in the short-term. In the House, fellow Badger of Speaker Ryan Rep. Sean Duffy (R-Wis.) has proposed legislation to provide public authorities in Puerto Rico with Chapter 9 municipal bankruptcy protection in exchange for the Commonwealth’s acceptance of oversight from a Presidentially-appointed five-member Financial Stability Council. The disappearance of Congress and repudiation of any fiscal responsibility in the meantime appears likely to force Puerto Rico Governor García Padilla to call for a special session of the Puerto Rico legislature to meet before its currently scheduled next meeting on Jan. 11th.

Human & Fiscal Disruption and Municipal Bankruptcy

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December 11, 2015. Share on Twitter

Human & Fiscal Disruption and Municipal Bankruptcy. Even as the City of San Bernardino is trying not just to get back to normalcy and resume efforts to finalize its proposed plan of debt adjustment to submit to U.S. Bankruptcy Judge Meredith Jury in the wake of last week’s terrorist attack, the aftershocks of the event—in the form of bomb threats—have surged. The calls are exacting a fiscal toll: Hours after the rampage which left 21 dead and 14 wounded, and even as some of those victims were being treated, a code yellow bomb threat was called in to the Loma Linda University Medical Center, according to a hospital spokeswoman. Even though fire and police officials have been unable to find any connection between the threats from multiple sources, and all the threats had been cleared without any weapons found; the threats themselves are imposing not just unanticipated costs, but also fiscal instability and erosion: the mere existence of the threats can hardly, after all, serve to enhance the city’s tax base or encourage either business or residential investment—but they do exact a fiscal and emotional toll, even if assessing the fiscal toll is intangible.

Rather, as Jim Buermann, president of the Police Foundation, notes, the threats themselves are dangerous — and despicable: “You can’t evacuate patients in ICU or critically injured patients unless you truly believe something will happen, because you could be endangering them. They literally could be causing someone to die…Especially in this time when so many people are on edge. This has had a very traumatic impact on the Inland Empire.” The most recent example came Wednesday with a hoax when one student called another student at Carter High School in Rialto, leading Rialto Unified School District officials to put the school on lockdown for an hour—just two days after the school had been had been searched in the wake of finding multiple photos of the high school on the cell phone of Syed Farook, the health inspector responsible for most of the district’s schools until he and his wife Tashfeen Malik killed 14 people and wounded 21 others, according to investigators—and just prior to the arrest by San Bernardino Sheriff’s deputies of another person on suspicion of placing bomb threats to three separate places — Loma Linda University Medical Center, Grand Terrace High School, and a San Bernardino apartment complex, according to the department. The San Bernardino City Unified School District is investigating a set of messages falsely claiming on Snapchat and Instagram that all schools in San Bernardino and Redlands would be closed. This is a city in municipal bankruptcy—and now on the precipice of fear.

While Mr. Buermann told the San Bernardino Sun that these kinds of threats are not necessarily common in the wake of a traumatic event, they can make an adverse event more likely: “The shooting, pursuit, that whole thing, that sets people on edge…And sometimes it’s enough to nudge someone who’s a very unreasonable human being toward doing something that’s just irrational or criminally mischievous to see if I can add to the angst that people have…Or, in the worst case scenario, it’s someone trying to test responses.” San Bernardino County Sheriff John McMahon warned, in a public statement: “Citizens should be wary of possible hoax messages and follow verified law enforcement social media accounts and press releases. Our primary responsibility is to make sure our communities are safe and we are committed to continue to ensure that.”

Last week’s mass shooting in San Bernardino was, reportedly, planned up to a year in advance—that is, almost simultaneously with the city’s planning of its plan of debt adjustment to submit to U.S. Bankruptcy Judge Meredith Jury. Put another way, there have been parallel, meticulous plans: one to devastate a municipality and maim its people, and one to give it a sustainable future. The attack was not an event which could have been anticipated—much less incorporated into the city’s plan of debt adjustment to submit to Judge Jury. It raises the question with regard to mass tragedies and their impact on municipal coffers: after all, San Bernardino could hardly afford such devastation and loss of lives in the midst of the longest municipal bankruptcy in U.S. history: are other municipalities prepared for comparable tragic eventualities?

The Precipitous to Recovery. Matthew Dolan, the fine Detroit Press columnist, this morning marked Detroit’s “one year of freedom today from the nation’s largest bankruptcy,” noting, nevertheless, that not every Motor City resident is necessarily overjoyed. He acknowledged that while Detroit is financially solvent, that it has thousands of new streetlights and its world class Detroit Institute of Art, and a balanced budget; yet it still “is struggling to find new solutions to old problems: endemic blight, vacant land, high crime, struggling schools, and a looming pension bill that city leaders are struggling to pay off.” Or, as he quotes the godfather of municipal bankruptcy, Jim Spiotto: “[I]t would be shortsighted to say that it is already recovered.” Indeed, Mr. Dolan noted that on Wednesday night at a community event at Wayne State University featuring the architects of Detroit’s bankruptcy plan of debt adjustment, organizers were forced to halt the event after about an hour—and the evening’s scheduled, featured speaker, Mayor Mike Duggan, never even reached the stage.

The event, sponsored by the Detroit Journalism Cooperative and Detroit Public Television had invited Mayor Duggan, Gov. Rick Snyder, and retired U.S. Bankruptcy Judge Steven Rhodes, who oversaw the court case, to provide their insights and assessments of the city’s progress; however, the event was brought to an early close after interruptions by some upset members of the crowd of more than 200 who questioned whether the nation’s largest ever municipal bankruptcy had been legitimate and successful—protests which apparently reached their zenith after Gov. Snyder began speaking about his appointment of Detroit’s emergency manager, Kevyn Orr, and defended the city’s entrance and exit from chapter 9 municipal bankruptcy as a last resort but a necessary one, telling the audience: “We eventually got to bankruptcy, but that was after three years” of efforts to fix the city’s balance sheet outside of court.

The session was brought to its untimely end when the celebrated lead rhythm guitar player of the ever judicious Indubitable Equivalents, retired U.S. Bankruptcy Judge Steven Rhodes, could no longer be heard by audience members—with the end coming after he expressed some of his concerns about Detroit’s looming public pension liabilities and its near bankrupt public school system. Mr. Spiotto, unsurprisingly, provided a broader perspective—especially in light of the near decade-long efforts we joined in nearly three decades ago to get the current version of chapter 9 municipal bankruptcy signed into law by former President Ronald Reagan: he noted that since then, there have been 295 Chapter 9 municipal bankruptcy filings, most of which involved municipal utilities and special tax districts: only 54 involved cities, counties, towns, or villages—and most of those ended up having their bids rejected by the court or came to an alternate solution outside of a bankruptcy judge’s approved plan of debt adjustment. Mr. Spiotto told the audience: “The real test is going to be five or ten years from now,” when, he said, the key issues will involve whether the city has under control the spiraling costs and dwindling tax revenue that forced its march into bankruptcy court.

Human & Fiscal Disruption & Mayhem and the Importance of Municipal Bankruptcy

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December 10, 2015. Share on Twitter

Human & Fiscal Disruption and Municipal Bankruptcy. Last week’s mass shooting in San Bernardino, in which 14 persons were killed, was reportedly planned up to a year in advance. It was not an event which could have been anticipated—much less incorporated in the city’s plan of debt adjustment to submit to U.S. Bankruptcy Judge Meredith Jury. It raises the question with regard to mass tragedies and their impact on municipal coffers: after all, San Bernardino could hardly afford such devastation and loss of lives in the midst of the longest municipal bankruptcy in U.S. history: are other municipalities prepared for comparable tragic eventualities? Now the city will have to bear not just the costs of its responses to this tragedy, but also significant new costs in the wake of it and to prepare for the future. What will these tragic events imply for the city’s residential assessed property values? Just as the elimination of blight and violent crime was a critical issue for Detroit’s plan of debt adjustment before now retired U.S. Bankruptcy Judge Steven Rhodes, so too San Bernardino will have little choice but to modify any proposed plan of debt adjustment to take into account the events with which it was beset. Might the federal government or the MIA State of California step in to provide some fiscal assistance?

It appears the suspected killers devoted as much time as the city has on its plan of debt adjustment in devising their own plan of human and fiscal destruction, commencing nearly two years ago, practicing with guns and making their own kinds of financial preparations in 2014: Syed Farook and Tashfeen Malik began honing their own fiscal and firearms skills last year at a shooting range in nearby Riverside, according to NBC, citing two sources, even as counter-terrorism officials said the pair began making monetary savings for their child and Mr. Farook’s mother during the same period—or, as one official noted; “[They wanted to] take care of both Grandma and the baby…They had purposely thought through that problem…[Some transactions] would be consistent with them making preparations for grandma and the kid.” The FBI is now investigating the incident for potential ties with terrorist organizations including the Islamic State in Iraq and Syria.

A week after the terrorist attack at the Inland Regional Center in San Bernardino that killed 14 people and left 21 wounded, more details have begun to emerge about the married couple the FBI believes to be responsible for the attack, Redlands residents Syed Farook and Tashfeen Malik, along with Farook’s former Riverside neighbor, Enrique Marquez. In testimony before the U.S. Senate Judiciary Committee yesterday, FBI Director James Comey said Farook and Malik had discussed jihad and martyrdom as early as 2013 and that both had embraced extremist Islamic ideology before their relationship had even begun — even before ISIS separated from Al-Qaida in 2014. Ironically, of course, these discussions and plan-makings were occurring even as the Congressionally imposed sequesters were reducing resources which might have helped save lives.

Letting Puerto Rico Help Itself. Sen. Orrin Hatch (R-Utah) yesterday blocked an effort by Sen. Charles Schumer (D-N.Y.) to pass to pass legislation to give the U.S. territory access to U.S. bankruptcy courts and allow Puerto Rico to restructure its debts in the same fashion as Detroit, Jefferson County, Central Falls, and other municipalities—rather than a bailout such as General Motors received. Indeed, Sen. Schumer specifically stressed that his proposal was not a “bailout,” warning that Puerto Rico’s fiscal and financial crisis will worsen absent action from Congress to permit the island to help itself: “If we fail to offer Puerto Rico assistance now, the problem will not be contained to the island…We have the tools to fix the problem. They’re sitting in the toolbox. The problem is Puerto Rico isn’t allowed to use them.”

Sen. Schumer’s comments came as the Chairs of three U.S. Senate committees, Sens. Orrin Hatch (R-Utah), Lisa Murkowski (R-Alaska), and Charles Grassley (R-Iowa) with jurisdiction over Puerto Rico and bankruptcy introduced a bill yesterday, the Puerto Rico Assistance Act of 2015, to create an authority which could issue municipal bonds and provide up $3 billion in resources to help Puerto Rico stabilize its budget and debt. While the proposed legislation would, if enacted, render some fiscal resources, it would not, however, provide the kind of bankruptcy protection available to every other U.S. corporation in the U.S.; rather, the bill would make clear that the U.S. is not bailing out Puerto Rico or pledging its full faith and credit to any bonds issued by the Financial Responsibility and Management Assistance Authority, whose six members would be appointed by the President; instead the measure would provide a 50% cut in the employee side of the payroll tax for five years and reduce the employee share of the tax to 3.1% from 6.2%. It proposes a number of studies, including on the Commonwealth’s pension plans and liabilities and the commonwealth’s healthcare treatment by the federal government. The legislation proposes to provide assistance to the island in improving its accounting and disclosure practices.

There was, mayhap, more constructive movement in the House yesterday, where Rep. Sean Duffy (R-Wis.), Chair of the House Financial Services Subcommittee on Oversight & Investigations, introduced legislation, the Puerto Rico Financial Stability and Debt Restructuring Choice Act, which would, if enacted, provide public authorities in Puerto Rico with Chapter 9 bankruptcy protection in exchange for the commonwealth’s acceptance of oversight from a Presidentially-appointed five-member Financial Stability Council, with Chairman Duffy stating: “This bill empowers the Government of Puerto Rico with the choice to partner with the Federal Government and put the island on a path towards balanced budgets and a return to fiscal security. If Congress does not act, it would have a devastating effect on the people of Puerto Rico and countless Americans throughout the states who stand to lose billions in the bond markets…This is a multi-pronged approach and a long-term solution. It cannot happen without adoption of legislation by the Puerto Rico Legislative Assembly which must be signed by the Governor. We know bailouts do not change spending habits. We need all sides to be fully committed to changing the way Puerto Rico manages its budgets, tax collection and finances.”

Chairman Duffy added: “The Puerto Rico Financial Stability and Debt Restructuring Choice Act gives the island’s leadership a choice: through the adoption of legislation passed by the Assembly and signed by the Governor, the Government of Puerto Rico will have access the same chapter 9 bankruptcy process that America’s States do if it also agrees to an independent Financial Stability Council to oversee the island’s path toward balanced budgets and a return to financial stability…The Puerto Rico Financial Stability and Debt Restructuring Choice Act will restore Puerto Rico’s access to an orderly debt restructuring process, without which the result would be disorderly litigation which is neither good for the island or its bondholders.”

In addition, the proposed bill would permit the appointment of a Puerto Rico Financial Stability Council: “In order to restore investor confidence and improve tax collection and budgeting practices, the Government of Puerto Rico may choose to accept the establishment of a 5-member Financial Stability Council with the authority to oversee the island’s financial planning and annual budgets. Unlike the D.C. Control Board of the 1990s, this Council will not be imposed on Puerto Rico – the island’s elected leaders in San Juan must agree to accept the Council. The Council’s duration will also be limited and it will not have the blanket authority to impose changes to Puerto Rico’s government. Rather, the Financial Stability Council will focus on just that: restoring financial stability to Puerto Rico.” Under the proposed bill, members of the Financial Stability Council would have to have knowledge and expertise in finance, management, and the organization or operation of business or government and would have to either have a primary residence in Puerto Rico or have their primary place of business on the island, according to the bill’s text. They could not provide goods or services to the commonwealth’s government and could not be a member of the government. Once established, the council would review an annual financial plan and budget from the governor and would have to approve it before the materials would be sent to Puerto Rico’s legislature. Any borrowing the commonwealth plans would also have to go through the council.

Gov. Alejandro García Padilla, speaking at the Puerto Rico Federal Affairs Administration in Washington yesterday, stressed that an extension of Chapter 9 municipal bankruptcy protections to Puerto Rico’s public authorities would not constitute a federal bailout; rather it would simply be a way to give Puerto Rico the “tools” it needs to fix its problems, adding that Puerto Rico is a lost ship of 3.5 million people sending a distress call to the federal government: “We are not asking for a bailout; we are asking for the tools to do the job,” adding that it was up to the federal government whether it wishes to answer the commonwealth’s calls. Nevertheless, he warned, if Congress continues its inaction, there will be a humanitarian crisis on the island.

Puerto Rico’s problem extends further than its $72 billion public debt and includes a lack of health care funding and federal tax credits that can put a halt to the large out-migration of its citizens and bolster the commonwealth’s economy. The governor, who has continually said the government does not have the funds to repay its debt, signed an executive order on Dec. 1 to pay $355 million in Government Development Bank notes that were due. But the order implemented claw back procedures that would take funds away from some lower priority bonds to pay back obligations backed by the commonwealth’s constitution. Puerto Rico has to pay $1 billion of debt service by Jan. 1 and the fate of that payment is uncertain with the lack of action from Congress. Gov. Padilla said he plans to meet with Treasury officials this week to further discuss the commonwealth’s position, but he did not have specific details on the meeting at the press conference.

The Drain. As we experienced in Detroit, a spiral of fiscal distress drains a municipality’s resources, costing streetlights, police response time, etc.—events and changes in fiscal capacity that can cause families to leave—that is, those that can afford to. Just as Detroit experienced a signal exodus before its filing for municipal bankruptcy, so too more than 200 Puerto Ricans leave the island for the mainland U.S. each and every day—those most able to afford to move, leaving behind those least able to make their own way and further sapping the Puerto Rican economy. At 5.7 percent, the unemployment rate in the Motor City is now ten percent below what it was six years ago—in a city where, between 2000 and 2014, 90,000 of its citizens moved out. The critical loss, of course, and most critical cause of its largest municipal bankruptcy in U.S. history, was the out-migration of its labor forces. As in Puerto Rico, key population shifts come from those most able to move—leaving those too old or too poor and dependent behind—and, of course, adding to the upside down imbalance on a city – or, in this instance – territory’s pension obligations. Puerto Rico biggest pension program has sufficient funds today to meet just 0.7 percent of its future obligations.

Forty percent of Puerto Rico’s citizens live below the poverty line. It is difficult, albeit, unfortunately, not impossible, to imagine the federal government ignoring the humanitarian crisis that would probably follow. But the longer Congress waits, the more vicious this cycle of those who can most afford to emigrate to the mainland and leave behind an ever accelerating shrinking tax base, rising taxes, and curtailed essential services will be. As U.S. citizens, the island’s migrants will be eligible for public support of various kinds on the mainland. There is no question, in other words, that the U.S. will end up bearing much of the cost of Puerto Rico’s past profligacy. The only question is how considered and efficient its assistance will be.