The Imbalances of Governing

May 29, 2018

Good Morning! In this morning’s eBlog, we observe the ongoing demographic exodus from Puerto Rico—and the apparent agreement between the U.S. territory and the PROMESA Oversight Board to modify old work rules.

The Imbalances of Governing. Ramón Rosario Cortés, Puerto Rico’s Secretary of Public Affairs and Public Policy, has announced the repeal of Law 80, stating; “As agreed [to] by Governor Ricardo Rosselló Nevares with the Fiscal Oversight Board, today we are presenting before the Legislative Assembly a measure of Administration to repeal Law 80, and thus give way to the agreement reached, and that removes from the discussion the elimination of the Christmas Bonus and the reduction of days of sickness and vacations of our workers.” He stressed: “We are confident that, as usual, the Legislative Assembly will consider this measure with great responsibility and analyzing the totality of the circumstances and the reality of Puerto Rico today,” adding, the “Governor exercised his responsibility to achieve this agreement that makes it possible to allocate the funds we need to develop the economy and to pay the Christmas bonus for our public employees.” For his part, Puerto Rico Senate President Thomas Rivera Schatz, one of the strongest opponents of the repeal, warned that the repeal of Law 80 seeks to favor various employers of banking, communications, and insurance companies. Nevertheless, Senator Schatz indicated he would be willing to consider it if the Board’s study details the economic benefits of the agreement.

A Demographic Fiscal Wave? Between last September and last February, that critical period in the wake of Hurricanes Irma and María, passenger exodus from Puerto Rico exceeded inflow by some 233,586 persons. In stark contrast, according to data by the U.S. Bureau of Transportation Statistics provided to the Puerto Rico Institute of Statistics, between September of 2016 and February of 2017, there were 3,988 persons arriving in Puerto Rico than departing—albeit it will not be until we have access to newer U.S. Census Bureau information that the most recent emigration data will be forthcoming. Nonetheless, the preliminary data, based on official information, is that some 1,493,180 left the island between September and February, while 1,259,614 arrived—a pattern consistent with counts of outflows between September of 2016 and February of 2017.Similarly, a chart prepared by the Institute of Statistics indicates that the number of passengers who arrived in Puerto Rico between September of 2016 and February of 2017 reached 1,999,726, compared to the 1,995,738 that left the island.

Based on an analysis of data compiled by the Teralytics Company, a cell phone company, which compiled the data, out of the 407,465 residents of Puerto Rico who left Puerto Rico, 359,815 returned between October and February. Interestingly, however, the company also reported that more people have come back to the island than those who travel to the mainland. According to the company, about 150,000 of those who left, in their sample, preferred Florida, with the first six destinations the counties of Orange (34,858), Osceola (22,610), Miami-Dade (15,233), Hillsborough (13,091), Polk (12,262), and Broward (10,580). The other four municipalities that became main destinations for those who left Puerto Rico were: 7,455 to the Bronx, 7,430 to Seminole, Florida; 5,767 to Hampden, Massachusetts, and 5,357 to Philadelphia. Previously, the Center for Puerto Rican Studies had estimated that there may be a total of 135, 592 people who left Puerto Rico between October of 2017 and February 22nd of 2018. Thus, it appears that by the end of this year, the Commonwealth might have experienced a loss of as many as 470,335 residents since 2017, or some 14% of its population, according to the Center for Puerto Rican Studies. In comparison, the Center has indicated that between 2006 and 2016, 525,769 residents of Puerto Rico emigrated to the United States.

There is, to date, no analysis of the impact of this exodus with regard to assessed property values–and the potential fiscal impact on the island municipalities. 

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Amazonian Recovery

May 18, 2018

Good Morning! In this morning’s eBlog, we take a fiscal perspective on post-chapter 9 Detroit and its income and property taxes; then we dip south to assess the seemingly interminable governing challenge with regard to whom is in charge of restoring fiscal solvency in Puerto Rico.   

The Challenging Road to Recovery. Last January, Detroit failed to make the Amazon cut to make the finalists: Sandy Baruah, president and CEO of the Detroit Regional Chamber, who was on the fateful call, nevertheless described feedback from Amazon, describing the “creativity, the regional collaboration, the quality of the bid document, the international partnership with Windsor, all of that got incredibly high marks,” adding that: “We were good, but we weren’t good enough on the talent front.” The noted urban writer Richard Florida tweeted that he believed Amazon missed the mark on Detroit, if talent was the disqualifying factor—he, after all, early on, had identified Detroit as a sleeper candidate for HQ2, with a top three of greater Washington, D.C.; Chicago; and Toronto, noting that Detroit has more tech workers than many on the list, including Pittsburgh, Indianapolis, and Columbus—and that the city has access to major public research universities, not to mention its international partnership with Windsor, Ontario, in Canada gave the bid an international quality that only Toronto’s bid could match. Indeed, Mr. Florida had suggested that Detroit’s elimination was due to outdated perceptions of the Motor City’s economy, talent, and overall livability.

Nevertheless, Detroit’s near miss—when added to the city’s exit at the end of last month from state fiscal oversight, is a remarkable testament to Detroit, that, less than five years after filing for the largest municipal bankruptcy in American history, came so close to making the cut, so successfully has it overcome the adverse repercussions of nearly six decades of economic decline, disinvestment, and chapter 9 municipal bankruptcy. State officials praised the city for fiscal gains that came quicker than many anticipated after its Chapter 9 exit in December 2014. The city shed $7 billion of its $18 billion in debts during the 18-month bankruptcy. Last year, the city’s income tax take rose by 8%–and assessed property values rose for the first time in nearly two decades.

No doubt the auto industry has played a driving role: in the emerging age of self-driving cars, a recent report by real estate services giant CBRE which evaluated the top 50 U.S. metro areas in the country in terms of tech talent ranked Detroit 21st, ahead of several cities which made the Amazon cut, including Philadelphia, Los Angeles, Pittsburgh, Indianapolis, Nashville, and Miami. Indeed, remarkably, on a percentage basis, Detroit has as many tech jobs in its metro as Washington, D.C., and Boston. The report also found that Detroit’s millennial population with college degrees grew by just under 10% between 2010 and 2015, more than double the national average of 4.6% and equivalent to rates in the Bay Area (9.5%) and Atlanta (9.3%).

Nevertheless, the Motor City continues to face taxing challenges—including a less than effective record, until recently, of collecting income and property taxes it was owed under existing law—and of improving its school system: a vital step if the city is to draw young families with kids back into the city. Moreover, it still needs to reassess its municipal tax policies: its 2.4% income tax is double that paid by non-residents working in the city. That is not exactly a drawing card to relocate from the suburbs.

The Uncertain Promise of PROMESA. While the PROMESA Oversight Board has requested Puerto Rico to amend its recommended budget, Puerto Rico has responded it would prefer to negotiate, because it understands that resorting to the Court “is not an alternative.” Puerto Rico’s Secretary of Public Affairs, Ramón Rosario Cortés, made clear, moreover, that there would be is no change of position with regard to the Board’s demand for reducing pensions or vacation and sick leave, much less eliminating the Christmas bonus. Nevertheless, the Commonwealth appears to be of the view that its differences with the PROMESA Board are “are minimal,” despite the Board’s rejection, last week, of Governor Ricardo Rosselló’s proposed budget—a rejection upon which the Board suggested that cuts in public pensions and the elimination of the mandatory Christmas bonus had not been incorporated. The Board also noted the omission of funds finance Social Security for police officers. Secretary Rosario Cortés noted: “The Governor called to the Board to sit down and review those points they exposed, as long as they do not interfere with the Governor’s public policy. In the coming days, Gov. Rosselló and his team will be responding to each of the Board’s points and providing information that supports each of the Government’s positions: The Government is open to dialogue in order to reach consensus that does not interfere or contravene those public policy positions that the Governor has already expressed; specifically: no cuts in pensions or eliminating the Christmas bonus and reducing sick leave.”

He acknowledged that the dispute could end up in Court, as PROMESA Board Executive Director, Natalie Jaresko, has warned: “Yes, certainly, they have not only resorted to Court in the past, but they have also said it is a possibility. We understand that it is not an alternative, it would delay the fiscal recovery of Puerto Rico and would require investing resources that are scarce at the moment: They made some observations, and we are willing to look at them,” adding that the work teams of the Governor and the Board are communicating and sharing information: “Dialogue continues and, along the way, we hope to reach a consensus that will avoid setbacks and reaching the courts.”

Who Is Governing? Precisely, Director Jaresko also acknowledged that not amending the budget would delay the renegotiation of Puerto Rico’s debt, warning that if the Rosselló administration does not act, the PROMESA Board will proceed to preempt its governance authority and power as provided by the PROMESA law, which authorizes the Board to amend the U.S. territory’s budget and submit its own version to the Legislature for approval—albeit, it rattles one’s fiscal imagination that Puerto Rican legislators could conceivably want to do so.

Nevertheless, the Board has advised Gov. Rosselló that his recommended budget does not reflect what is established in the fiscal plan: regarding the General Fund, the recommended budget represents about $200 million in expenses on the certified income projection; in addition, the budget information does not include public corporations or similar dependencies—meaning that Director Jaresko is of the view that the draft budget omits some 60% of the public spending. Thus, she has threatened that the Governor has until high noon on Tuesday to correct the ‘deficiencies,’ or risk the Board preempting its governing authority.  

Nevertheless, Puerto Rico’s fiscal position appears to be on the upswing: as of last week, revenues were 7% ahead of its July 2017 forecasts; last month’s revenues came in 18% stronger than projected. Notwithstanding the physical and fiscal impact of Hurricane Maria on Puerto Rico’s economy, Puerto Rico’s central bank account, the Treasury Singular Account, held $2.65 billion as of last Friday—some $211 million more than the government had anticipated last July according to information posted on the MSRB’s EMMA.