A Human Rights Perspective on Puerto Rico’s Fiscal and Physical Future

October 5, 2018

Good Morning! In this morning’s eBlog, we report on the consideration by the Inter-American Commission on Human Rights with regard to perspectives on statehood—and whether the federal government is violating human rights in the U.S. territory created by the Jones-Shafroth Act.

Unequal Treatment? The United States, today, at the Inter-American Commission on Human Rights (IACHR), meeting at the University of Colorado in Boulder, will defend itself from the denunciations of statesmen sectors who charge that the lack of voting rights for Puerto Ricans, who are U.S. citizens, represents a violation of human and civil rights. In a way, that seems ironic, as the co-author of the Jones-Shafroth Act, as Governor of Colorado, before serving in the U.S. Senate, kicked the issue off, performing—in a three-piece suit—the opening kickoff in a game at Folsom Field in Boulder in a game between the U. of Colorado and the Colorado School of Mines, prior to being elected to the U.S. Senate, where he co-authored the Jones-Shafroth Act—the issue under heated debate today, where the U.S. mission to the OAS, will seek to defend against a charge filed by statespersons who are seeking censure against the U.S. for denying Puerto Ricans who live in Puerto Rico equal rights to vote and be represented in Congress—and in the electoral college. Former Gov. Pedro Rosselló Rossello and attorney Gregorio Igartúa is representing Puerto Rico. The U.S. alternate representative to the Organization of American States, Kevin Sullivan, has been requesting—in writing—since last June, the dismissal of the complaints—complaints some of which date back to 2006—which were not even admitted for consideration until last Spring, noting that the current status violates the U.S. Declaration of Human Rights. The Trump Administration response is that, under the current territorial status, Puerto Rico “has a distinctive status, in fact exceptional,” with a “broad base of self-government.” The Administration also asserts that Puerto Rico has a limited participation in federal processes, through the Presidential primaries and the election of a non-voting Representative in Congress. Attorney Orlando Vidal, who has represented former Governor Rosselló González in this process, today’s will help educate about the lack of political rights under the current territorial status, or, as he put it: “Sometimes, it is necessary that someone from the outside, as the Commission is here, and with an independent and objective point of view, clarify situations that for many, for so long plunged into this issue, it is perhaps difficult to perceive clearly,” adding, there is an easily available “friendly solution:” to direct the admission of Puerto Rico as a state. Today’s Commission session will be chaired by Margarette May Macaulay of Trinidad and Tobago.

More than a decade ago, under the George W. Bush administration, Kein Marshall, the Administration’s Director of the Justice Department’s Legal Office, appearing before the House Subcommittee on Insular Affairs, had recommended calling a referendum: “territory yes or no,” followed by, if the current status was rejected, a consultation to determine whether a governing path forward would be statehood or independence—with Mr. Marshall defending, in his testimony, the report of the Working Group of the White House which, among other things, affirmed in 2005 that the power of the Congress is so broad that, if it wanted, it has the authority to cede the island to another country.

From an international governance perspective, in the international forum, it was two years ago that, in an explanatory vote, in October of 2016, the Obama administration supported a U.N. resolution in favor of self-determination and independence; shortly before, however, on June 30, 2016, President Obama had signed the PROMESA, a statute roughly modeled after chapter 9 municipal bankruptcy, except that, in imposing both a financial control board and a judicial process, the outcome, as we have seen, has been a ‘who’s on first, what’s on second’ process—with prohibitive fiscal costs, even as it creates the appearance of a denial of democracy for the U.S. citizens in Puerto Rico. It was 15 years ago that the IACHR determined, in analyzing a complaint filed by a civic group, that nations “cannot invoke their domestic, constitutional, or other laws to justify the lack of compliance with their international obligations.”

El Otro Lado. The other side, as it were, of the Jones‒Shafroth Act, was the Jones Act—an act sponsored by the co-author at the behest of the U.S. shipping industry which has vastly compromised the ability to provide assistance towards Puerto Rico’s recovery from Hurricane Maria—assistance desperately needed for this territory where an estimated 8,000 small businesses still remain shuttered—representing about 10% of the total according to the island’s Urban Retailers Association—and continues to undercut hopes for fiscal and economic recovery. The Jones Act, strongly lobbied for by the domestic shipping industry, mandates that  transportation of goods between two U.S. ports must be carried out by a vessel which was built in the U.S. and operated primarily by U.S. citizens—meaning the cost of materials to help the island recover cost far more than for other, nearby Caribbean nations—and meaning that millions of Americans, including Puerto Ricans following Hurricane Maria last year, are paying hugely inflated prices for gasoline and other consumer products which are vital to recovery—and to equity. The act mandates that carrying goods shipped in U.S. waters between U.S. ports to be U.S.-built, U.S.-registered, U.S.-owned, and manned by crews, at least 75% of whom are U.S. citizens. Mark J. Perry, a scholar at the American Enterprise Institute and Professor of Economics at the University of Michigan this week noted: “Because of this absurd, antiquated protectionism, it’s now twice as expensive to ship critical goods – fuel, food and building supplies, among other things – from the U.S. mainland to Puerto Rico, as it is to ship from any other foreign port in the world. Just the major damage done to Puerto Rico from the Jones Act is enough reason to tell us that now is the time – past due time – to repeal the anti-consumer Jones Act.”

As Arian Campo Flores and Andrew Scurria of Dow Jones last week pointed out, in Puerto Rica’s fiscal year which ended last June, the island’s economy had contracted by 7.6%. An estimated 8,000 small businesses remain shuttered; Teva Pharmacuticals has announced it will close a manufacturing plant in the municipio of Manati—and, manufacturing employment has decreased by 35%. More fiscally depressing: the Puerto Rico government is now projecting that its population will decline by 12% over the next five years—as an increasing number of young, educated, and trained citizens move to the mainland, leaving behind an older, poorer population.

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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.

Popping the Cork in Corktown?

August 14, 2018

Good Morning! In this morning’s eBlog, we consider some of the fiscal and physical challenges and changes to one of Detroit’s oldest neighborhoods, Corktown, before venturing to the warm Caribbean waters to witness incipient signs of fiscal and physical revival in Puerto Rico.

Motor City Revitalization. The City of Detroit, first settled in 1701 by French colonists, was the first European settlement above tidewater in North America, founded as a New France fur trading post, before becoming, by 1920, a world-class industrial powerhouse and the fourth-largest U.S. city. One might describe it as a unique municipal center of nations, as the first Europeans to settle there were French traders and colonists from the colony of La Loisiane, today’s New Orleans—traders who were forced to vie with the powerful Five Nations of the League of the Iroquois—setting the stage for what became the Beaver Wars in the 17th century. The greater Detroit metropolitan region of those times flourished as a center of the nation’s fur trade, so that the Crown’s administration of New France offered free land to colonists as a means to attract families to the region—a perennial challenge, and one of the city’s greatest fiscal challenges today. It was in late 1760 that Fort Detroit was surrendered to the British, in the wake of the fall of Quebec—so that control not just of the Detroit region, but of all French territory east of the Mississippi River, was formally transferred to England via the 1763 Treaty of Paris. By 1760, a British census counted 2,000 hardy souls in the city in the wake of the Seven Years’ War—a head count which, as would happen in this century, dropped 30% by 1773, a decade after the English had reserved the territory, under the Royal Proclamation Act of 1763 for the Indians—land eleven years later transferred to Quebec. In a census taken during the American Revolution, Detroit’s population had soared to 2,144, making the city the third-largest city in the Province of Quebec.

Today, Corktown is the oldest surviving neighborhood in Detroit, with the neighborhood named for its early Irish immigrants, who by the early 1850s, made up half of the residents of the 8th Ward (which contained Corktown), but it is a part of the city which has been reduced in size over the years by dint of numerous urban renewal projects, the construction of light industrial facilities, and the construction of the Lodge Freeway. What remains of the residential section is listed on the National Register of Historic Places. It is a neighborhood slated for change in this time of radical changes wrought by the emergence of the self-driving car era—so the Ford Motor Co.’s plans to renovate the historic Michigan Central Depot has raised apprehensions with regard to the potential impact such a large-scale project could have on the area and surrounding neighborhoods with regard to affordability and diversity—enough of a concern that Detroit’s leaders and officials have commenced what is to be a yearlong process to gather feedback from the community regarding the future of the neighborhood. That municipal effort is coming in tandem with a separate effort by Ford to collect input on its proposed plans to revitalize its iconic 100-plus-year-old historic building.

Officials with the city and Ford say they are committed to working with the community as they navigate their plans. The company, on June 20th, had announced its intentions to purchase the abandoned Michigan Central Station, a hulk of a building just blocks from where Kevyn Orr had his office on his first day as the City’s Emergency Manager charged with taking Detroit into the nation’s largest ever chapter 9 municipal bankruptcy—and fashioning a plan of adjustment to be approved by the U.S. Bankruptcy Court. That 18-story building, which starred as a set piece for the flick Batman v. Superman, has been described as representing a “deep, complex wound…a physical reminder of what the city was, and what it many thought it would never be again.”

Simultaneously, the city is seeking to create a strategic framework for the Greater Corktown neighborhood to address the area’s potential for growth, even as it seeks to preserve its heritage and integrity, officials say—a framework which is to detail both a short-term implementation plans and long-term goals for the neighborhood’s development: Detroit’s Planning and Development Department expects, before the month is out, an RFP for a consultant to conduct a series of community meetings in Greater Corktown, with said selection to be announced by the end of next month: the study itself is projected to lead to a recommendations of a final framework in a year.

Not Self-Driving. The city’s plans for Greater Corktown, just one of the city neighborhoods in various stages of planning, was in the planning stage prior to Ford’s depot announcement, creating some governing challenges, or, as John Sivills, the project manager with Detroit’s Planning and Development Department, put it: “The Ford announcement certainly does add a great sense of urgency to it so we can have a plan in place rather than tail-wagging-dog scenario.” That is, as he added: “That the city can have a plan in place such as bring in Ford and provide for inclusionary growth.” Similarly, his colleague, Steve Lewis, central design director for Planning and Development, noted that Detroit’s plan will craft “a vision for the future of the neighborhood that either by optics or by reality is not seen as being dictated by Ford.” Their study is expected to address challenges and opportunities for a number of issues, including zoning, landscape, historic preservation, and housing development.

Will They Drive in Tandem or Self-Drive? Ford is planning to create a 1.2 million-square-foot campus with its anchor at the Michigan Central Depot, with plans to occupy the depot by 2022: the project will include the Grand Hall, which will be open to the public, along with retail space: the 18-story tower will have office space as well as residential space on the top two floors. In addition, Ford intends to develop other buildings on the campus, including the former Detroit Public Schools Book Depository, where Ford plans to house its autonomous vehicle business on the Corktown campus. Ford is, at the same time, seeking community engagement for its Corktown expansion, with the company asserting: “Detroit and Corktown, North Corktown, there’s opportunity and so much potential, and they’re already doing such amazing work that Ford can really just be a platform to shed a light on the work that they’re doing…Maybe help them scale.”

Indeed, scale, as in any city, is an issue: because of the large-scale of the project, it falls under the city’s Community Benefits Ordinance, one approved by Detroit voters in November of 2016, which targets developments worth at least $75 million, if the development gets $1 million or more in property tax abatements or $1 million or more in value of city property sale or transfer: under said ordinance, a neighborhood advisory council is assembled to provide feedback in meetings during the ensuing two months, with the advisory council subsequently working with Ford to create a community benefits agreement.

To date, Detroit City Council President Brenda Jones has selected Hubbard-Richard resident Aliyah Sabree, a Judge in the 36th District Court; City Councilwoman Janee Ayers chose Sheila Cockrel, a Corktown resident and former Councilwoman. The community elected Jerry Paffendorf, co-owner of Loveland Technologies, and Heather McKeon, an interior designer with Patrick Thompson Design. The Detroit Planning and Development Department will name four appointees, and City Councilwoman Raquel Castañeda-López will name one appointee.

Concurrently, Ford has feedback boards and comment boxes in its Ford Resource and Engagement Center, where questions posed include: “Where do you go to get ___ in your neighborhood (nails, hair, dry cleaning, etc.?); What are the top three things you want to see changed in your neighborhood?”; and “Who is an unsung hero, organization and/or business in your neighborhood?” The company reports that it has already received feedback from excitement to issues of apprehension on issues ranging from housing, to jobs, to traffic, and to culture,” adding: “We really love that the community values the diversity of the neighborhoods from Corktown, North Corktown, and Southwest Detroit. We’re really understanding the importance of that. We’re also understanding the importance of workforce. Recognizing that there’s not only potential construction jobs, but also long-term what are some ways we can build a pipeline or clear pathways for some of the other jobs that may be available in the future. Technology jobs, things of that nature. Jobs around (electric and autonomous vehicles.).”

Some have criticized aspects of the Community Benefits Ordinance and the Neighborhood Advisory Council process. Alina Johnson, a resident of the nearby Hubbard-Richard neighborhood, which will also be impacted by Ford’s project, said she feels residents should be trained in advance on advisory council work in order to be most effective on a tight timeline—or, as she put it: “Right now, the main concern is making sure that the folks who have been selected will be able to be inclusive and able to communicate to the public and serve everyone and not necessarily their community in terms when they’re discussing benefits by those impacted by the train station development.”

Blowing Fiscally Back. Despite a double fiscal and physical whammy of hurricanes, and being in the beginning of this year’s hurricane season, Puerto Rico FY’2017 General Fund revenue came in 1.5% higher than budgeted: total revenue was $9.31. Puerto Rico Secretary of Treasury Teresita Fuentes noted: “The level and behavior of tax collections during the past fiscal year in comparison with other years is considered unusual due to the economic effect of hurricanes passing through the island.” That is a sharp fiscal blowback to FAFAA Executive Director Gerardo Portela Franco’s warning last December 5th that he expected Puerto Rico’s fiscal year General Fund revenues to be 25% less than budgeted.  Secretary Fuentes reported that unexpectedly high revenues from April to June had allowed the government to exceed the budgeted number, while Puerto Rico Secretary of the Interior Raul Maldonado noted: “To a large extent the [revenue] increase is attributed to the temporary economic activity of companies associated with recovery tasks and the flow of insurer and federal government money after the hurricanes.” He noted that the greatest increase was derived from the island’s corporate income tax—some $260 million; however, Puerto Rico’s sales and use tax revenues returned $26 million less than projections from the start of the year. Secretary Fuentes said that many businesses had either been closed or had operated partially in the weeks following Hurricane Maria and that in the period the sales tax on restaurant food was temporarily eliminated; however, the sales and use tax revenue rebounded in the last quarter, with Secretary Fuentes pointing in particular to hardware stores and department store sales.

Back to Escuela.  Puerto Rico Governor Ricardo Rosselló Nevares has announced the territory will provide more than 2,000 regular slots to temporary teachers—a step by which he hopes to alleviate the recurring challenge of recruiting educators at each school start—as teachers are often attracted to more generous salaries and benefits on the mainland.  His stated goal is for these educators to be recruited under 10-month contracts by September:We are going to make an effort to convert thousands of temporary places in permanent seats in the education system.” The Governor noted that his action is intended to make it possible to clarify the system and end current uncertainties which have left teachers in the dark with regard to whether she or he still has a job—an apprehension not just of teachers, but also parents, who are confronting their own choices with September looming.

Two years ago, in the midst of an election year, the Governor acted to convert some 1,519 temporary teachers to become full-time employees, noting, then: “You have teachers who were not sure, and now they are going to have certainty, and you have a school system that did not have visibility, now we are building that visibility,” adding that, in his view, this governing decision would not have an adverse impact on Puerto Rico’s budget—and, ergo, not trigger PROMESA Oversight Board fiscal preemption: “If there is any philosophical consideration that they may have, that is another thing. For us, it gives certainty to the system, particularly in the area of needs that we are going to have to supply.” The Governor explained that the measure was possible thanks to two fundamental actions: the creation of an electronic platform which has facilitated the ability of Education Secretary Julia Keleher to assess where staff is needed, especially with regard to what levels and subjects: that is, via the human resources platform, the Secretary can assess, as the Governor noted, the educational organization of each campus, including how many teachers are transient and what subjects they teach. This could be a valuable fiscal step, because online registration will facilitate the ability to confirm the number and location of students—a critical step for the completion of the school consolidation process.

Sec. Keleher has explained that the system will take into account, first, the educators who occupy places where recruitment has proved difficult, such as Special Education, English, and Math—noting the human and fiscal challenges: “You have to honor the transient teacher. It does not seem fair or correct in terms of the reality we want to offer. This is not a good deal for a person who is giving 100% for their students: The Secretary noted the determination is aligned with the anticipated tax revenues. Her request, this year, is for over 5,500 transitory positions—or, as she notes: “The idea is to have the teachers ready for the start of classes, the week before they know where they are going.” Puerto Rico’s statute 85-2018, the Law on Educational Reform “establishes that the Department, in areas of difficult recruitment such as teachers of English, Mathematics, Physics and Chemistry, will promote the permanence of the same within the term of one year, if fiscal availability of the square and of being the same vacancy.”

Planning for a Quasi Plan of Debt Adjustment

eBlog

August 3, 2018

Good Morning! In this morning’s eBlog, we consider Gov. Ricardo Rosselló’s ambitious plans for Puerto Rico.  

Governor Ricardo Rossello Nevares believes now is the time to accelerate the pace the pace and demand both programmatic and fiscal results from the U.S. territory’s agency directors to better prepare for a post-recovery quasi plan of debt adjustment. The closing of so many of the island’s schools and the emigration to the mainland of so many health care professionals, and the unhappy state of relations with not just the legislature, but also Puerto Rico municipalities appears to make this a critical point for readjustment. Or, as the Governor put it: “In general, I have always seen the government, particularly in these times, as one which has been in almost continuous transformation—or, to make an analogy with the business sector, as a time to focus on a start-up phase: “Sometimes, you run a lot as if your government was like a Fortune 500 corporation, where things are more or less the same and you keep moving forward. But the reason I aspired was to make some changes…and that requires, in addition to having very specific objectives, to understand, one, that there are changes of roles in that process, as in the start-ups, and two, to know what is the time to execute those changes.”

One area of focus appears to be making his government more open—especially after a year and a half which has seen scandal that touched several of his closest collaborators, the operational and administrative collapse of the Electric Power Authority, the closing of schools, and the flight of health professionals to the mainland. Add to that the ongoing governance challenge imposed by the President and Congress—where the issue of who is steering governance going forward is imbalanced between the Governor, legislature, PROMESA Oversight Board, and. Now, a federal judge—all as Puerto Rico is still not fully recovered from the massive Hurricane Maria—and yet finds itself in the new hurricane season, recognizing it will not receive the same level of FEMA federal assistance in the event of a severe storm as other states or municipalities on the mainland.

Nevertheless, the Governor is focusing on the future—a future beginning to emerge under his “ideas map” which he keeps on his desk: “Puerto Rico: Vision 20/20,” under which he hopes to align his team via setting objectives and what he terms “intangible characteristics” as part of his governing blueprint for the new school year and post-Maria rebuilding.

Thus, in the second half of this year, the Governor intends to focus on reducing some of the bureaucracy of governance, beginning with making the permitting process more practical and less bureaucratically cumbersome—cutting the process in half, and awarding at least three public-private partnerships before the end of the year—or, as he put it: “Accompanying some results with the restructuring of the debt, that would be a great achievement in my assessment,” adding that by November, he hopes his new model of My Health will be implemented, and, by December, new health care legislation will be enacted, followed by a new energy policy for Puerto Rico. Or, as the Governor put it: “My administration has a diversity of people who come from different administrations. My goal is not to select someone because they have gray hair or are very young or certain demographic. The main objective is the commitment to comply with the priorities of this administration and the ability to work as a team.”

A key player on the new team will be Christian Sobrino, who will take the place currently held by Gerardo Portelo, to serve as Puerto Rico’s representative before the PROMESA Oversight Board, while Mr. Portelo will become the main investment officer.

Gov. Rosselló Nevares not only has reconfigured his team of close advisers, but also has transferred to La Fortaleza the tasks to implement the fiscal plan which, until now, has been in the hands of Aafaf—indeed, the Governor has already signed an executive order on the roles of the CFO, but said he could submit legislation on the subject. (The CFO office is one of the reforms in the fiscal plan certified by the Oversight Board which the Governor does not question.)

To address the governing challenges with regard to education, health, and safety, Gov. Rosselló Nevares noted: “We are making sure that students can have a full faculty, that there are challenges and obstacles, of course. If it is a large system, and the transformation, rare as it is soft, is typically a rocky process,” noting his plan to implement educational vouchers and charter schools is still in place. With regard to the vital issue of health care, the Governor noted it is urgent to improve the processes for the response to a disaster, a criterion under which he intends, henceforward, to evaluate all the heads of the respective agencies, adding that he is committed to converting Mi Salud into a model single region with free selection of doctors by indigents. In addition, he has set a goal of reducing crime by 20%, noting that, the havoc created by Hurricane Maria undoubtedly contributed to the significant crime rate increase: “I understand, what happens is that it is not consistent then with what was happening at the beginning of the year. At the beginning of the year, in January, we had a rise particularly in the murders, and it is not after that where one, truth, the capacities to measure all these things improve; they do not get worse, because that’s where the descent happens. Everything is subject to evaluation here, but we have used the same mechanism, the same metrics.”

Restoration of Governing Authority? Asked whether he had given much thought to a post PROMESA Oversight Board governing future, the Governor said: “I have not had that conversation, honestly I have not had it…If there is space to look for something that is optimal for the people of Puerto Rico, I will consider it. But, at this moment, I believe that the Judge must decide…and I cannot predict what her decision will be…after which, we will evaluate that decision, what it entails, and we will take the appropriate actions,” adding that his objective is to present a plan to the President and Congress with regard to Puerto Rico’s reconstruction.

With regard to his relationship with the legislature, he noted: “Our objective, both mine and that of the legislative leaders, I am sure is the welfare of the people of Puerto Rico. I did not start to differences that one can and should calculate that they are going to have on the road; we have a finite time to make some great changes for Puerto Rico. I trust that now, when you see the tax reform, you will act in the best interests of the people of Puerto Rico. I trust that when we see public policy, for example, to mitigate environmental impact, we act in the best interests of the people of Puerto Rico, among other initiatives that we will be presenting. Differences will always be there. I have already established my position: we will be able to work together for the welfare of the people of Puerto Rico.

Getting Schooled in Demography. With Puerto Rico’s new school year set to start Monday, it remains uncertain how many students and teachers will be present. Secretary of Education Julia Keleher yesterday reported that 20,000 regular teachers have already been relocated, out of which only 550 have reported “difficulties” with the changes—only 18,000 students out of the island’s 305,000 have yet to confirm which school they will attend. A declining school population has created jitters with regard to which schools to close—and how to involve parents—or not to—in this Solomon-like process. Nevertheless, as one mother bitterly complained: “Parents were not involved in anything, ever.” Indeed, many parents and teachers believe that the closure was improvised. For instance, a newspaper delivery vehicle (El Nuevo Día) which had stopped opposite a school was hailed by a driver of a truck with the Education logo: its driver asked if the school was open. When they told him it was not, the man said he was to deliver food for the school cafeteria. It seems the decision to keep Jacinto López Martínez School open was taken after the Secretary of Education, along with Mayor Carlos López of Dorado, visited the school at the end of the semester—or, as Principal Lois Santiago described it: “There has been a crazy (student) relocation. The majority appears (enrolled) in the Jacinto López Martínez School, but there are first former students who‒we do not know how‒appear in the Escuela Libre de Música…There is a student listed in the Luisa Valderrama School, which is an hour away.”

Dorado Physical Education Teacher Miguel Rubildo said that, last week, he went to the Arecibo educational region to request some of the available positions, but the options he was given were in the municipalities of Quebradillas and Florida, while the principals of the schools Jacinto López Martínez and Esperanza González confirmed that, a little more than a week before the beginning of the semester, they did not know the number of teachers who would be relocated in their schools, much less whether there would even be classrooms available for them.

The Tides of Immgration: Are there Fiscal Consequences?

June 25, 2018

Good Morning! In this morning’s eBlog, we consider the tides of emigration as they fiscally challenge the U.S. territory of Puerto Rico.

Today, more than one million Puerto Ricans live in New York City, just under one-third of Puerto Ricans who reside in Puerto Rico, with the likelihood of emigrating from Puerto Rico to Gotham increasing for single Puerto Ricans between the ages of 25 and 29 who have never married, do not own property, and whose income is limited, albeit not to the point of being below the federal poverty level. The majority are men, and the destinations of preference seem to be cities in Florida, New York, or Texas. In theory, about a fifth of those who left will return, judging by the rate of return reported on the immigration side to Puerto Rico. According to the most recent census data, in 2016, some 89,000 left Puerto Rico, a number which appears to indicate a rising trend, albeit, there is some evidence that the pattern might be changing—with that pattern affected by not only destination, but also by the level of academic achievement of those leaving Puerto Rico.

While we await, in December, 2017 emigration data, early indications based upon passenger counts at airports, appear to represent very high migration trends, finding, for instance, that last year, more than 281,000 Puerto Ricans left Puerto Rico than arrived there—an indication of the demographic impact of Hurricane Maria. Demographer Judith Rodríguez wrote in the 2016 Migrant Profile (published last week) that “The recent wave of migration in the last decade exceeds the Great Exodus of 1950-60, which has great impact on the social and economic level.” More recent data, however, indicates this demographic tide may finally be ebbing: during this year’s first month, January, 58,202 more arrived on the island than left, with the patter continuing the next month when there was a net positive inflow of 10, 698—a number which ebbed by March to 1,510—a change estimated to be temporary.

After New York, Florida appears to be the emigration state of choice: currently, around 30% of Puerto Rican emigrants choose a city in Florida, mainly in the central zone. At the same time, Texas is rising as a demographic state of choice. It appears more likely than not that New York City will continue to be a focal point of Puerto Rican emigration, due to cultural and family ties with Puerto Ricans since the migrations of the early twentieth century in the wake of the enactment of the Jones-Shafroth Act. According to the most recently updated Census figures, New York City is in the top three exodus destinations for emigrating Puerto Ricans.

But this is not all one-way traffic: many Puerto Ricans appear to be going home, with the largest such numbers coming from the states of Florida and New York; however, the number returning from the states of Massachusetts, Louisiana, and Washington make up more than half the total.

While it is more difficult to assess who is leaving and who is staying, Census data indicates that 48% of Puerto Ricans living in the D.C. metropolitan area have at least a bachelor’s degree, and, overall, 78% of Puerto Ricans living on the mainland have at least some level of university education, nearly three times the percentage of Puerto Ricans who have moved to Miami. Income wise, Washington, D.C. is the location, which appears to have drawn Puerto Ricans with both the greatest levels of scholastic achievement and the most income: the median household income for Puerto Ricans in the nation’s capital is $87,713. Next, after Washington DC, mainland cities with the highest median income for the Puerto Ricans are Miami ($50,945), Chicago ($47,232) and New Haven ($43,165). The disparity in annual income perhaps demonstrates the lure of emigrating from Puerto Rico, where the median income of a household is around $ 19,977, according to the Census data.

However, for Puerto Ricans leaving for the mainland, nirvana is not guaranteed: in the cities of Springfield and Boston, as well as in Hartford, there are high poverty levels are high for Puerto Ricans: in Springfield, more than one-third of the more than 100,000 Puerto Ricans live below the federal poverty level—a level comparable to the 31% below that level in the Boston metro region, and 26.5% in the Springfield metropolitan area have incomes that place them below the poverty level.  In addition, age is a discriminating factor: in Springfield, almost 50% of Puerto Ricans under the age of 18 live below the poverty line—a figure that compares unfavorably to the 46% of Puerto Ricans in Puerto Rico who fall below the federal poverty line of $12,060 for an individual.

The Prospects and Draws for Emigration. Demographic data with regard to those leaving Puerto Rico finds that the bulk of emigrants worked in 2016 as administrative office staff (6,822), followed by operators of production lines (5,445), vendors (4,870), and food preparers (3,264). According to the date, some 382 desperately needed doctors left—while some 1,376 nursing professionals left the island. Stateside, 82% of the 2.2 million Puerto Ricans who are working on the mainland are employed in the private sector; 4% have their own business. 14% of the jobs occupied by Puerto Ricans are in the government. In Puerto Rico, that figure rises to 22%, according to data from the Census Bureau. On the other hand, most of those who immigrated or returned to Puerto Rico were vendors (1,383) or educators (1,101).

Quien Es Encargado? (Who is in charge?) The Puerto Rico Senate has killed a an agreement between Puerto Rico Gov. Ricardo Rosselló and the PROMESA Oversight Board, potentially escalating the governance conflict with regard to Puerto Rico’s operating budget and the restructuring of the central government’s $51 billion of debt. Last Friday, Puerto Rico Senate President Thomas Rivera Schatz threatened a lawsuit against the Board if it continues to attempt to preempt Puerto Rico’s government in order to impose budget cuts or the repeal of worker protection measures. In a compromise with the Governor, the Board had agreed to maintain Puerto Rico’s mandatory Christmas bonus, vacation and sick day policies in exchange for Gov. Rosselló’s agreement to introduce at-will employment for all employers by repealing a 1976 law, Law 80. The House, at the end of last month, had approved the measure, before the Senate amended it to introduce at-will employment only for employees entering the workforce. Indeed, as we had previously noted, last Thursday, the Senate President had declared the Law 80 repeal to be dead, after speaking with other members of the majority New Progressive Party caucus in the Senate. Moreover, according to a video posted on the El Nuevo Día website, the Senate leader said he had consulted lawyers and was ready to fight in court, if the PROMESA Board seeks to preempt the island’s elected leaders. The power struggle came as the Puerto Rico House has added funding to a budget bill—spending which Puerto Rico House President Carlos Méndez and Treasury Committee President Antonio Soto said they expected the PROMESA Board would reject—relying on the Congressional PROMESA Act granting the Board the right to create and approve its own version of Puerto Rico’s budget—as is, for instance, the current budget. Puerto Rico’s new fiscal budget year begins this Sunday—a date by which, on normal years, like most states, but unlike the federal government, its fiscal year operating budget would normally have been adopted—but, where, last Thursday, PROMESA Board Chair José Carrión, in New York City, stated that if the government opted not to repeal Law 80, the currently certified fiscal plan would operate—a plan which would mandate at-will employment to be introduced by January 1, 2019—a plan which, unsurprisingly, Senate President Rivera Schatz is set to challenge, especially after, on May 9th, Sergio Marxuach, the New Economy Policy Director, testified before the Puerto Rico Senate Committee on Federal, Political, and Economic Relations that repealing Law 80 would be a bad idea, noting that a 2016 International Monetary Fund study showed that in times of economic weakness, eliminating job protections would have had a negative economic impact in the short and medium term, noting: “By triggering a wave of layoffs, reforming employment protections further weakens aggregate demand and delays economic recovery.” Similarly, a 2017 report from the Organization for Economic Cooperation and Development said that in Portugal from 2006 to 2014 “reforms increasing the flexibility of the labor market negatively affect firms’ productivity both in the short- and long-run. A possible explanation is that higher job turnover reduces firms’ incentives to invest in job-specific training and reduce the scope for workers’ specialization.”

In response, Governor Rosselló released a statement: “Puerto Rico has just seen how politics is done and not how a future government should be made in challenging and difficult times, with this regrettable decision by the President of the Senate, Thomas Rivera Schatz.”

Now Senate Finance Committee President Migdalia Padilla is scheduled to meet with the Governor’s fiscal team to discuss the changes which have been included in the joint resolutions that make up the budget for the next fiscal year; he will also  meet with Financial Advisory Authority and Fiscal Agency (Aafaf) Executive Director Raul Maldonado and the Secretary of Finance, Gerardo Portelo—with the Chairman noting: “They are going to have meetings with me so that we can all harmonize what we have observed, what the Board says, and what the Executive establishes.” Chairman Padilla added that he trusts that today will be constituted the conference committee to discuss the House amendments, especially after, at the end of last week, House approval of an FY2019 budget $33.2 million higher than the one presented by PROMESA Board—followed, the next day, by Senate approval, albeit with amendments intended to force a conference committee to settle the differences.

In addition to the perception of preemption, one of the legislature’s greatest reservations with regard to the PROMESA Board’s version of the budget their perception that that version underestimates the revenue estimate is $7,000 million, according to the President of the Finance Commission of the Chamber, Antonio Soto, who noted that the government will close the year with revenues of more than $9,172 million, but the fiscal entity estimates $8,400 million for the next fiscal year, despite the fact that it proposes a growth in the economy of 6.3%.

Senate President Padilla explained that one of the changes that will be introduced to the House version is aimed at addressing the $164,000 reduction for the Independent Special Prosecutor’s Panel Office (OPFEI), advising that he would be subtracting that $164,000 from the additional $2 million that the Chamber allocated in the budget to the Alliance for Alternative Education program. In its version, the Chamber dealt with the cuts contemplated in the PROMESA Board’s proposal for the oversight agencies, such as the Office of Government Ethics, the Office of the Comptroller and the Office of the Citizen Procurator, but left out the Special Prosecutor, noting: “I am not increasing the spending budget; I am simply moving part of an allocation of $2 million,” adding that it is inconsistent with the amendments submitted by the Chamber aimed at ensuring the functioning of the agencies under the Department of Public Safety, such as the Bureau of Emergency Management and Disaster Management, the Emergency Medical Bureau, the Bureau of the Corps of Firemen, and the Bureau of Forensic Sciences—all agencies with regard to which there is heightened concern in the wake of Puerto Rico’s devastating hurricanes and inequitable FEMA responses.  Indeed, Miguel Romero the vice president of the Senate Finance Committee, agreed on the need to assign the necessary funds to the Department of Public Security to ensure its operation: “There is a deficiency of over $40 million that we have to address.” In addition, Senator Padilla indicated the Senate would take a close look at the Board’s proposed $7 million cut to Court Administration, noting: “There is a need for appointment of judges and to maintain diversion programs with the correctional population.” Moreover, Senate President Thomas Rivera Schatz also indicated that the controversy centers on inconsistencies between the budget and the fiscal plan, both presented by the PROMESA Board, explaining, in the wake of discussions, that it had been “established that there is a gap between the approved budget and the fiscal plan: basically, regarding the collections we will have available to cover the budget.” With the session scheduled to end on Saturday, that date falls three days after the limit established by the PROMESA Board to approve the budget, with the Board anticipating that, if Puerto Rico does not comply with the agreement reached with the Governor to repeal the Law Against Unjustified Dismissal (Law 80-1976), it will revert the fiscal plan to the approved one.

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

June 22, 2018

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

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

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

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

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

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

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

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

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

Paternal Governance?

June 12, 2018

Good Morning! In this morning’s eBlog, we consider the demographic disparities in the wake of Hurricane Maria in Puerto Rico, before turning to the human and fiscal challenges in the federal courtroom issue of keeping schools open in the face of quasi-municipal bankruptcy; then we view the ongoing governing challenges and wonder when there might be too many cooks in the fiscal kitchen.   

Demographic Devastation. According to new data from the Puerto Rican Demographic Registry, 68% of Puerto Ricans who died between September and December of 2017, during the emergency caused by Hurricanes Irma and María, were over the age of 70. The new data from the Demographic Registry finds that nearly half of the deaths recorded in this period occurred among people who were hospitalized in Puerto Rico. Moreover, the risk of death, according to the data, was higher for men: 54% of the deceased were male, even though males make up only 48% of the island’s current population. The new data also found that deaths attributed to diseases such as Alzheimer’s, diabetes, septicemia, pneumonia, and chronic heart or respiratory conditions showed significant increases in the period which followed the hurricanes—or, as Puerto Rico demographer Judith Rodríguez noted: “This gives us a more specific idea of the health risk that the hurricane brought. That was the only significant factor to cause that increase seen in the data.” Ms. Rodríguez further reported that cases of septicemia doubled between August and September, reporting that this disease, often associated with infections in hospitals, noting: “The highest number of deaths is in hospital patients; however there were high-risk factors among people who were in care homes for the elderly, or who, in the middle of an emergency, were taken to an ER.”

Health and safety—especially for the most vulnerable—appeared to be related not just to damage caused by the hurricanes to the physical hospitals and clinics, but also by the stark disruptions of electricity: diesel supply to keep emergency generators operating, combined with failures in backup systems and telecommunications plagued the provision of vital health care services. Moreover, the issues took long to resolve: even as late as last December, at least two hospital were operating with electric generators. As the Senior Vice President of Operations at San Jorge Children’s Hospital, Domingo Cruz, noted: “It is always a risk (death) when there are patients in ventilators (artificial) and there is an outage.” Perhaps in a hope for the future, the data shows that death among Puerto Rican children due to the storms was less than 1%.

After storm reports also noted that even though tardy, the arrival from the mainland of hospital ships played a vital role: Good Samaritan Hospital Administrator Marilyn Morales reported that, due to their condition, many patients were transferred to the USNS Comfort hospital ship, the U.S. Navy’s largest such ship, as well as to the Medical Centers of Mayagüez and Río Piedras. The USNS Comfort is the largest U.S. Navy floating hospital. This ship and a series of field hospitals were set up in Puerto Rico during the first months that followed Hurricane Maria. Administrator Morales noted: “We understand that deaths (at the Good Samaritan Hospital) were minimal.”

It was not, however, just hospitals which were so adversely impacted: by early last October, access to vital pharmacies due to the loss of electricity and communications contributed to the health care emergency response breakdowns: some pharmacies did not have access to the system they use to process prescriptions; thus, they were only dispensing medicines if a patient paid the full price of the drug. According to the Health Department: “In the case of not having electronic systems for dispensing medications, the pharmacy must provide the medication to the patient and, then, it will have up to 60 days to process it.”

Many health professionals with private practices had to overcome many obstacles to offer services to their patients, mainly due to the lack of power, the impossibility of using some equipment only with a generator, and of billing for medical services. Demographer Rodríguez noted: “There are some conditions whose deterioration could be accelerated by issues associated with the emergency left by the hurricane. Chronic and degenerative diseases were the most affected in this process. These diseases skyrocketed, and many people might have died months later because of issues associated with the hurricane.”

Quien Es Encargado? (Who is in charge?) As we have noted, in chapter 9 municipal bankruptcies—in the minority of states which have authorized them, the state law determines the governance until a plan of debt adjustment is approved by a U.S. Bankruptcy Court. In Puerto Rico, under the PROMESA statute adopted by Congress, there is a hybrid form of governance—a form which has left unclear authority in this governmentally different circumstance where it is not a municipality which is fiscally exhausted, but rather a quasi-state—or, a U.S. territory. Thus, we have a Governor, a legislature, an oversight PROMESA Board imposed by the President and Congress, and a U.S. federal Judge.  It might be that some accommodation in governance is emerging: the PROMESA Board has proposed to the Puerto Rico Legislature that the raising of salaries or disbursement of allocated funds would not be allowed unless quarterly reports are presented and cuts established in the fiscal plan are executed, according to the its modified version submitted to the Legislature. Under the proposal, in order to ensure that the government does not spend more than it receives and complies with the spending cuts to which it committed in its certified fiscal plan, the budget modified by the Oversight Board restricts in a reserve fund the funds which would be used to increase the salaries of teachers and the Police. The Board also established that the government of Puerto Rico is mandated to submit quarterly reports beyond those required by PROMESA before it is authorized to appropriate any funding, with said conditions spelled out in the joint resolutions that the Board has sent to the Legislature as part of the budget certification process. Included in this unfunded mandate is a provision barring the Office of Management and Budget from disbursing funding to fulfill the promise made by Governor Ricardo Rosselló Nevares to increase the salary of teachers and the Police, or to provide Social Security. In addition, the mandate bars the authorization of funding to Puerto Rican agencies absent Board approval.

The Board’s restrictions, adopted in an effort to ensure a balanced budget, in addition to the repeal of the Unjust Dismissal Law (Law 80-1976), which eliminates the statute which provided certain legal remedies to private sector employees, is part of a structural reforms package imposed by the Board as part of its agreement with Gov. Rosselló Nevares to avoid litigation in Court.

Gov. Rosselló’s representative to the PROMESA Board, Christian Sobrino, concurs that it makes sense that the Board has established conditions for granting the monthly increase of $125 to Police and teachers, starting in the upcoming fiscal year, and that these imposed conditions are also subject to the repeal of Law 80, because this move may impact the revenue projection required by the Board. Nevertheless, unsurprisingly, Mr. Sobrino described the Board’s new demands as “complicating” the interaction between Puerto Rico and the PROMESA Board: noting: “But there is a reality: you can provide the benefits (if)  you have the income to budgetary support. If you do not have them, you do not have them: The revenue projection is the key part that makes all these agreements and these other programmatic commitments possible.” Thus he stressed the importance of the Legislature proceeding with the repeal of Law 80: “The effect of not carrying out this repeal would imply a reduction in the budgetary revenues available to the government and make it very difficult to maintain a series of benefits , including that (salary) increase and also the Christmas bonus to public employees: If the agreement can be complied with, there should be no problem moving that allocation (the money for salary increase) to the Public Security umbrella. If that agreement is not maintained, then additional cuts have to be made.”

Nevertheless, the governance situation remains difficult, especially in the wake of the PROMESA Board’s conclusion that, for what it asserted was the second time, Gov. Rosselló’s budget did not comply with PROMESA, and then proceeded to preempt that authority and impose its own adjustments—a fiscal and governance move which would mark the first time that the government of Puerto Rico would have constraints to use its funds. As written, the preemption reads: “The Secretary of Treasury, the treasurer and Executive Directors of each agency or Public Corporation covered by the New Fiscal Plan for Puerto Rico certified by the [PROMESA] Oversight Board, and the Director of the OMB (or their respective successors) shall be responsible for not spending or encumbering during fiscal year 2019 any amount that exceeds the appropriations authorized for such year. This prohibition applies to every appropriation set forth in this Joint Resolution, including appropriations for payroll and related costs. Any violation of this prohibition shall constitute a violation of this Joint Resolution and Act 230-1974.” In addition, in another section of the document, the Board mandated that quarterly reports must be submitted no later than 15 days after the closing of each fiscal quarter and that the Fiscal Agency and Financial Advisory Authority (FAFAA) and the OMB will certify that “no amount” of the Social Security Reserve funds in the Puerto Rico Police Department or the promised increases have been used to cover any expenses.

A Teaching Moment? In the wake of learning about the new conditions established by the PROMESA Board, Grichelle Toledo, the Secretary-General of the Puerto Rico Teachers Association-Local Union, noted that Gov. Rosselló had promised a monthly salary increase of $125 per month “beginning the 2018-2019 school year,” noting that it had been “10 years without a salary increase, and the cost of living has risen, benefits have been reduced and some have even been eliminated.”

Indeed, as we have noted previously, the loss of human capital—teachers, health care professionals, and others, harms the possibility of a sustained economic recovery. That is, the Board’s actions risk that Puerto Rico is in danger of losing one of its most critical assets, its skilled workforce, at a time when the island is in dire need of rebuilding: already teachers are leaving for more secure jobs on the mainland, a predictable outcome after the cash-strapped government announced it would close some 200 schools. Police, thousands of whom called in sick daily last year because they were not being paid overtime, are finding brighter futures in cities eager to find trained, bilingual officers.

An analysis by El Nuevo Día of the Governor’s proposed budget last month after agreement with the PROMESA Board, which focuses on the General Fund determined that the Board made sure to increase its own budget by 7.8%, plus another 3.7% to pay lawyers working in Title III cases, even as it cut FAFAA’s by nearly 10%. The Board met its part of its agreement with the Governor by not touching the Legislature’s budget, authorizing $ 50 million to municipios, and approving $25 million for the University of Puerto Rico (UPR) scholarship fund. However, the Board cut the Budget of the Health Insurance Administration by 41%, and cut the Office of Community Planning and Development by 21%, the State Commission on Elections by nearly 12%; the Police by 4%–and, of all places, the Fire Department by 11%, and the State Agency for Emergency and Disaster Management by 14%–mayhap an ill omen as the new hurricane season has already commenced.