Innovative, but Challenging Paths to Exiting Municipal Bankruptcy

May 25, 2018

Good Morning! In this morning’s eBlog, we observe Detroit’s physical and fiscal progress from the nation’s largest ever chapter 9 municipal bankruptcy, before exploring the seeming good gnus of lower unemployment data from Puerto Rico.

Motor City Upgrade. Moody’s has upgraded Detroit’s issuer rating to the highest level in seven years, awarding the Motor City an upgrade from to Ba3 from B1, with a stable outlook, noting: “The upgrade reflects further improvement in the city’s financial reserves, which has facilitated implementation of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions…The upgrade also considers ongoing economic recovery that is starting to show real dividends to tax collections.” The stable outlook, according to Moody’s, incorporates the Motor City’s high leverage, weak socioeconomic profile, and “volatile nature” of local taxes. Albeit not a credit rating, Detroit likely received another economic and fiscal boost in the wake of President Trump’s actions calling for new tariffs on cars and trucks imported to the U.S., with an estimated additional duty of up to 25% under consideration.

The twin positive developments follow just weeks after the 11-member Detroit Financial Review Commission, created to oversee city finances following its 2013 chapter 9 municipal bankruptcy, voted unanimously to restore Detroit’s authority to approve budgets and contracts without review commission approval, effectively putting Detroit on fiscal and financial probation, with a prerequisite that the restoration of full, quasi home rule powers be that the city implement three straight years of deficit-free budgets—a condition Detroit has complied since 2014, according Detroit Chief Financial Officer John Hill. Or, as Councilmember Janee L. Ayers told the Commission this week: “Not to say that we don’t recognize everything that you’ve brought to the table, but I do recognize that you’re not really gone yet.” The city recorded an FY2018 surplus of $36 million, in the wake of regaining local control over its budget and contract authority, with a projected FY2018 $36 million surplus via increasing property tax revenues and plans that will earmark $335 million by 2024 to address key pension obligations in the city bankruptcy plan of debt adjustment for its two public pension funds. In addition, Moody’s revised Detroit’s outlook to stable from positive—albeit an upgrade which does not apply to any of its current $1.9 billion in outstanding debt, writing that its upgrade reflects an improvement in Detroit’s financial reserves, which have allowed Detroit to implement a funding strategy for its looming pension obligations “that will lessen the budgetary impact of a future spike in required contributions.”

As part of its approved plan of debt adjustment by former U.S. Bankruptcy Judge Steven Rhodes, Detroit must pay $20 million annually through FY2019 to its two pension funds, after which, moreover, contributions will increase significantly beginning in 2024. Moody’s noted: “The stable outlook is based on the city’s strong preparation for challenges ahead including the need to make capital investments and absorb pending spikes to fixed costs…Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments,” adding that the “ongoing economic recovery that is starting to show real dividends to tax collections: Further growth in the city’s reserves and tax base growth to fund capital projects for either the city or its school district could lead to additional upgrades. In contrast, the agency warned that a downgrade could be spurred by slowed or stalled economic recovery, depletion of financial reserves, or growth in Detroit’s debt or pension burden, fixed costs, or capital needs. CFO Hill noted: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position…Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.”

Nevertheless, while the gnus on the ratings front is exhilarating, governing and fiscal challenges remain. A key challenge is the ongoing population hemorrhaging—a hemorrhaging which has slowed to a tenth of its pace over the previous decade, but, according to the Census Bureau’s most recent release, the Bureau determined last week that the city’s population was 673,104 as of last summer, a decline of 2,376 residents, slightly down from last year’s 2,770, even as the metropolitan region continued to grow, as did cities such as Grand Rapids and Lansing, which posted among the largest gains. Nevertheless, Mayor Mike Duggan, after his reelection last November, said his performance should be measured by the milestone of reversing the outflow. He has blamed the city’s schools for the continued losses: “At this point it’s about the schools: We have got to create a city where families want to raise their children and have them go to the schools…There are a whole number of pieces that have gotten better but at the end of the day, I think the ultimate report card is the population going up or going down and our report card isn’t good enough.”

Mayor Duggan added that Detroit utility records show at least 3,000 more homes are occupied than last year; however, it appears to be one- and two-person households who are moving in; families with children are moving out. Nevertheless, researchers believe the overall trend is a marked improvement for Detroit. As we had noted in or report, and other researchers have, the Motor City lost an average of 23,700 annually in the decade from 2000 to 2010; Detroit’s population declined by nearly 1.2 million since its 1950 peak. If anything, moreover, the challenge remains if the city leaders hope to reverse the decades-long exodus: the Southeast Michigan Council of Governments forecasts Detroit will continue to experience further decline through 2024, after which the Council guesstimates Detroit will bottom out at 631,668. 

Nevertheless, Detroit, the nation’s 23rd largest city, is experiencing less of a population loss than a number of other major cities, including Baltimore, St. Louis, Chicago, and Pittsburgh, according to the most recent estimates, or as Mayor Kurt Metzger of Pleasant Ridge, a demographer and director emeritus of Data Driven Detroit put it: “Our decreasing losses should be put up against similar older urban cities, rather than the sprawling, growing cities of the south and west: “I still believe that the population of Detroit may indeed be growing.” (Last year, Detroit issued 27 permits to build single-family homes in the city, according to the Southeast Michigan Conference of Governments–another 911 building permits were issued for multi-family structures, and 60 permits for condominiums. Meanwhile 3,197 houses were razed, while according to the Detroit regional council of governments.

A key appears to be, as Chicago’s Mayor Rahm Emanuel determined in Chicago, the city’s schools. Thus, Mayor Duggan said he hopes the Detroit School Board will approve his bus loop plan as a means to help lure families back into the city proper, noting that many families in the city send their children to schools in the suburbs‒and end up moving there. In his State of the City Address, he said he intended to create a busing system in northwest Detroit to transport children to participating traditional public and charter schools and the Northwest Activities Center. This will be an ongoing governance challenge—as his colleague Mayor Metzger noted: “There’s no lessening of the interest in outlying townships: People are still looking for big houses, big lots with low taxes.” Indeed, even as Detroit continues to witness an ongoing exodus, municipalities in the metropolitan region‒the Townships of Macomb, Canton, Lyon, and Shelby are all growing. 

Detroit Chief Financial Officer John Hill notes: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position: Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.” Thus, in the wake of the State of Michigan’s restoration of governing authority and control of the city’s finances on April 30th, more than three years after its Chapter 9 exit in December of 2014, Detroit now has the power to enter into contracts and enact city budgets without seeking state approval first, albeit, as Moody’s notes: “Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments.”

Motor City Transformation?  In the wake of real estate development firm Bedrock Detroit gaining final approval from the Michigan Strategic Fund for its so-called “transformational” projects in downtown Detroit, the state has approved $618 million in brownfield incentives for the $2.1 billion project, relying in part on some $250 million secured by new brownfield tax credits, enacted last year by the legislature—a development which Mayor Duggan said represents a “major step forward for Detroit and other Michigan cities that are rebuilding: Thanks to this new tool, we will be able to make sure these projects realize their full potential to create thousands of new jobs in our cities.” In what will be the first Michigan to use the Transformational Brownfield Plan tax incentive program, a program using tax-increment financing to capture growth in property tax revenue in a designated area, as well as a construction period income tax capture and use-tax exemption, employee withholding tax capture, and resident income tax capture; the MIThrive program is projected to total $618 million in foregone tax revenue over approximately 30 years. While Bedrock noted that the tax increment financing “will not capture any city of Detroit taxes, and it will have no impact on the Detroit Public Schools Community District,” the plan is intended to support $250 million in municipal bond financing by authorizing the capture of an estimated average of $18.56 million of principal and interest payments annually, primarily supported by state taxes over the next three decades, to repay the bonds, with all tax capture limited to newly created revenues from the development sites themselves: the TIF financing and sales tax exemption will cover approximately 15% of the project costs; Bedrock is responsible for 85% of the total $2.15 billion investment, per the financing package the Detroit City Council approved last November, under which Bedrock’s proposed projects are to include the redevelopment of former J.L. Hudson’s department store site, new construction on a two-block area east of its headquarters downtown, the Book Tower and Book Building, and a 310,000-square-foot addition to the One Campus Martius building Gilbert co-owns with Detroit-based Meridian. Altogether, the projects are estimated to support an estimated 22,000 new jobs, including 15,000 related to the construction and over 7,000 new permanent, high-wage jobs occupying the office, retail, hotel, event and exhibition spaces—all a part of the ongoing development planned as part of Detroit’s plan of debt adjustment.

In an unrelated, but potentially unintended bit of fiscal assistance, President Trump’s new press for tariffs of as much as 25% on cars and trucks imported to the U.S., Detroit might well be a taking a fiscal checkered flag.

Avoiding Risks to Puerto Rico’s Recovery. Yesterday, in testifying before the PROMESA Board, Governor Ricardo Rosselló Nevares  told the members his governing challenge was to “solve problems, and not to see how they get worse,” as he defended the agreement with the Oversight Board—and as he urged the Puerto Rico Legislature to comply with his fiscal plan and repeal what he described as the unjust dismissal law (Law 80), a key item in the certified fiscal plan that the PROMESA Board is reevaluating. That law in question, the Labor Transformation and Flexibility Act, which he had signed last year, represented the first significant and comprehensive labor law reform to occur in Puerto Rico in decades. As enacted, the most significant changes to the labor law include:  

  • Effective date (there is still no cap for employees hired before the effective date);
  • Eliminating the presumption that a termination was without just cause and shifting the burden to the employee to prove the termination was without just cause;
  • Revising the definition of just cause to state that it is a “pattern of performance that is deficient, inefficient, unsatisfactory, poor, tardy, or negligent”;
  • Shortening the statute of limitations for Law 80 claims from three years to one year, and requiring all Law 80 claims filed after the Act’s effective date to have a mandatory settlement hearing within 60 days of the filing of the answer; and
  • Clarifying the standard for constructive discharge to require an employee to prove that the employer’s conduct created a hostile work environment such that the only reasonable thing for the employee to do was resign.

The Act mandates that all Puerto Rico employment laws be applied in a similar fashion to federal employment laws, unless explicitly stated otherwise in the local law. It applies Title VII’s cap on punitive and compensatory damages to damages for discrimination and retaliation claims, and eliminates the mandate for written probationary agreements; it imposes a mandatory probationary period of 12 months for all administrative, executive and professional employees, and a nine-month period for all other employees. It provides a statutory definition for “employment contract,” which specifically excludes the relationship between an employer and independent contractor. The Act also includes a non-rebuttable presumption that an individual is an independent contractor if the individual meets the five-part test in the statute. It modifies the definition of overtime to require overtime pay for work over eight hours in any calendar day instead of eight hours in any 24-hour period, and changes the overtime rate for employees hired after the Act’s effective date to time and one-half their regular rate. (The overtime rate for employees hired prior to the Act remains at two times the employee’s regular rate.). The Act provides for alternative workweek agreements in which employees can work four 10-hour days without being entitled to overtime, but must be paid overtime for hours worked in excess of 10 in one day. The provisions provide that, in order to accrue vacation and sick pay, employees must work a minimum of 130 hours per month; sick leave will accrue at the rate of one day per month—and, to earn a Christmas Bonus, employees must work 1,350 hours between October 1 and September 30 of the following year; employees on disability leave have a right to reinstatement for six months if the employer has 15 or fewer employees; employers with more than 15 employees must provide employees on disability leave with the right to reinstatement for one year, as was required prior to the Act. For employees, the law includes certain enumerated employee rights, including a prohibition against discrimination or retaliation; protection from workplace injuries or illnesses; protection of privacy; timely compensation; and the individual or collective right to sue or file claims for actions arising out of the employment contract.

In his presentation, the Governor suggested that the repeal of the statute would be a vital component to controlling Puerto Rico’s budget, in no small part by granting additional funds to municipalities, granting budgetary increases in multiple government agencies, including the Governor’s Office and the Puerto Rico Federal Affairs Administration (PRFAA), as well as increasing the salary of teachers and the Police. While the Governor proposed no cuts, a preliminary analysis of the document published by the Office of Management and Budget determined that the consolidated budget for FY 2018-19 would total $ 25.323 billion, or 82% lower than the current consolidated budget, as the Governor sought to assure the Board he has achieved some $2 billion in savings, and reduced Puerto Rico’s operating expenses by 22%.

In his presentation to the 18th Puerto Rico Legislative Assembly, the Governor warned that Puerto Rico has an approximate “18-month window” to define its future, taking advantage of an injection of FEMA funds in the wake of Hurricane Maria, as he appeared to challenge them to be part of that transformation, noting: “We have an understanding with the (Board) that allows the approval of a budget that, under the complex and difficult circumstances, benefits Puerto Rico: Ladies and gentlemen legislators: you know everything that is at risk. I already exercised my responsibility, and I fully trust in the commitment you have with Puerto Rico.”

According to Gov. Rosselló Nevares, repealing Law 80, which last year was amended to grant greater flexibility to companies in the process of dismissing workers, would be the first step for what would be a phase of greater economic activity on the island, and would join different measures which have been put into effect to provide Puerto Rico a “stronger” position to renegotiate the terms of its debt, as he contrasted his proposal versus the cuts and austerity warnings proposed by the PROMESA Board, adding that, beginning in August, the Sales and Use Tax on processed food will be reduced, and that tax rates will be reduced without fear of the “restrictions” previously established and imposed by the Board, adding that participants of Mi Salud (My Health) will be able to “choose where they can obtain health services, beyond a region in Puerto Rico,” and that the budget guarantees teachers and the police will receive an increase of $125 per month.

Shifting & Shafting? In his proposed budget, the Governor proposed that municipalities would be compensated for the supposed reduction in the contributions of the General Fund, stating: “Through the agreement, the disbursement of 78 million dollars that this Legislature approved for the municipalities during the current recovery period is secured; the Municipal Economic Development Fund of $50 million per year is created.” Under the administration’s proposed budget, the contribution to municipalities would be about $175.8 million, which would be consistent with the adjustment required for that item in the certified fiscal plan. As a result of the agreement with the Board, municipalities would, therefore, practically receive another $ 128 million. As proposed, Puerto Rico’s government payroll would be reduced for the third consecutive year: for example, payments for public services and those purchased will increase 23% and 16%, respectively; professional services would increase by 40%. Expenses for the Governor’s office would see an increase of 182%.

Ending the Long Delay? The Federal Emergency Management Agency (FEMA) yesterday announced it is accelerating community disaster loans to help Puerto Rico muncipios mitigate the loss of income due to natural disasters, the Government of Puerto Rico reaffirmed that, for the time being, as well as the approval of another $39 million in loans from the CDL program for the municipalities of Aguadilla, Cabo Rojo, Canóvanas, Carolina, Manatí, Mayagüez, Peñuelas, and Orocovis—with the approvals coming in the wake of  last month’s approvals for Bayamón, Caguas, Humacao, Juncos, Ponce, Toa Baja, and Trujillo Alto—meaning that, in total, FEMA has, to date, distributed at least $92.8 million for municipalities on the island and $371 million for the U.S. Virgin Islands, as part of the $4.9 billion loan passed by Congress to help local governments recover. At the same time, the U.S. territory’s Treasury Secretary Raúl Maldonado reported: “The administration (of Puerto Rico) has been very successful in lowering operational costs and achieving an increase in collections.” The new loans will offer access to the Puerto Rican Government through March of 2020, as Secretary Maldonado considers that it may be useful in case of another disaster or a drop in the income of public corporations.

Nevertheless, because Puerto Rico—unlike other U.S. states, is also under the authority of the PROMESA Board, it appears that Gov. Ricardo Rosselló’s budget will have to be revised and may be rejected if proposed labor reforms do not satisfy the Board—with Board Executive Director Natalie Jaresko, in the wake of the Governor’s release of his proposed $8.73 billion general fund budget to the Legislature Tuesday night dictating that the future of the budget is linked to the legislature’s approval of at-will employment. Her statement came after the Governor and the board had announced an agreement on a compromise on reforming labor practices as well as agreeing to other changes in the Board-certified fiscal plan. In exchange for the Board waiving its demands for the abolition of the Christmas bonus and reduction of the island’s mandatory 27 days of vacation and sick leave, Gov. Rosselló agreed to bring at-will employment to the territory by repealing Law 80 from 1976—a concession which Director Jaresko described this agreement as an “accommodation.” Earlier this week, Director Jaresko said that the first step for Gov. Rosselló should be to resubmit a fiscal plan consistent with the new agreement with the Board, followed by a resubmitted budget consistent with the new plan, adding she anticipated these actions should all be completed by the end of June: the agreed-to changes to the fiscal plan are expected to reduce the 30 year surplus to $35 billion from $39 billion in the April certified fiscal plan, according to Director Jaresko, who noted that most of the surplus is expected to be used for debt payment. From the Governor’s perspective, he noted: “The approval of the agreed budget makes it easier for Puerto Rico to be in a stronger position to renegotiate the terms of the debt. We have significantly improved the management and controls over the cash flow of the General Fund. Contrary to the past, there is now visibility on how cash flows in government operations. At present Puerto Rico has robust and reliable cash balances.” Finally, she stated she expected it would take 12 to 18 months for the Board to create a plan of adjustment on the debt and pensions for the central government—a plan which would likely take the Title III bankruptcy court several more months to confirm.

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Becoming Positively Moody in Detroit

May 24, 2018

Good Morning! In this morning’s eBlog, we observe Detroit’s physical and fiscal progress from the nation’s largest ever chapter 9 municipal bankruptcy, before exploring the seeming good gnus of lower unemployment data from Puerto Rico.

Motor City Upgrade. Moody’s on Tuesday upgraded Detroit’s issuer rating to the highest level in seven years, awarding the Motor City an upgrade from to Ba3 from B1, with a stable outlook, noting: “The upgrade reflects further improvement in the city’s financial reserves, which has facilitated implementation of a pension funding strategy that will lessen the budgetary impact of a future spike in required contributions…The upgrade also considers ongoing economic recovery that is starting to show real dividends to tax collections.” The stable outlook, according to Moody’s, incorporates the Motor City’s high leverage, weak socioeconomic profile, and “volatile nature” of local taxes.  Albeit not a credit rating, Detroit likely received another economic and fiscal boost in the wake of President Trump’s actions calling for new tariffs on cars and trucks imported to the U.S., with an estimated additional duty of up to 25% under consideration.

The twin positive developments follow just weeks after the 11-member Detroit Financial Review Commission, created to oversee city finances following its 2013 chapter 9 municipal bankruptcy, voted unanimously to restore Detroit’s authority to approve budgets and contracts without review commission approval, effectively putting Detroit on fiscal and financial probation, with a prerequisite that the restoration of full, quasi home rule powers be that the city implement three straight years of deficit-free budgets—a condition Detroit has complied since 2014, according Detroit Chief Financial Officer John Hill. Or, as Councilmember Janee L. Ayers told the Commission this week: “Not to say that we don’t recognize everything that you’ve brought to the table, but I do recognize that you’re not really gone yet.” The city recorded an FY2018 surplus of $36 million, in the wake of regaining local control over its budget and contract authority, with a projected FY2018 $36 million surplus via increasing property tax revenues and plans that will earmark $335 million by 2024 to address key pension obligations in the city bankruptcy plan of debt adjustment for its two public pension funds. In addition, Moody’s revised Detroit’s outlook to stable from positive—albeit an upgrade which does not apply to any of its current $1.9 billion in outstanding debt, writing that its upgrade reflects an improvement in Detroit’s financial reserves, which have allowed Detroit to implement a funding strategy for its looming pension obligations “that will lessen the budgetary impact of a future spike in required contributions.”

As part of its approved plan of debt adjustment by retired U.S. Bankruptcy Judge Steven Rhodes, Detroit must pay $20 million annually through FY2019 to its two pension funds, after which, moreover, contributions will increase significantly beginning in 2024. Moody’s noted: “The stable outlook is based on the city’s strong preparation for challenges ahead including the need to make capital investments and absorb pending spikes to fixed costs…Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments,” adding that the “ongoing economic recovery that is starting to show real dividends to tax collections: Further growth in the city’s reserves and tax base growth to fund capital projects for either the city or its school district could lead to additional upgrades. In contrast, however, the agency warned that a downgrade could be spurred by slowed or stalled economic recovery, depletion of financial reserves, or growth in Detroit’s debt or pension burden, fixed costs, or capital needs.

CFO Hill noted: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position…Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.”

Nevertheless, while the gnus on the ratings front is exhilarating, governing and fiscal challenges remain. A key challenge is the ongoing population hemorrhaging—a hemorrhaging which has slowed to a tenth of its pace over the previous decade, but, according to the Census Bureau’s most recent release, which determined last week that the city’s population was 673,104 as of last summer, a decline of 2,376 residents, slightly down from last year’s 2,770, even as the metropolitan region continued to grow, as did cities such as Grand Rapids and Lansing, which posted among the largest gains. Nevertheless, Mayor Mike Duggan, who, after his reelection last November, said his performance should be measured by the milestone of reversing the outflow, has blamed the city’s schools for the continued losses: “At this point it’s about the schools: We have got to create a city where families want to raise their children and have them go to the schools…There are a whole number of pieces that have gotten better but at the end of the day, I think the ultimate report card is the population going up or going down and our report card isn’t good enough.”

Mayor Duggan added that Detroit utility records show at least 3,000 more homes are occupied than last year; however, it appears to be one- and two-person households who are moving in; families with children are moving out. Nevertheless, researchers believe the overall trend is a marked improvement for Detroit. As we had noted in or report, and other researchers have, the Motor City lost an average of 23,700 annually in the decade from 2000 to 2010; Detroit’s population declined by nearly 1.2 million since its 1950 peak. If anything, moreover, the challenge remains if the city leaders hope to reverse the decades-long exodus: the Southeast Michigan Council of Governments forecasts Detroit will continue to experience further decline through 2024, after which the Council guesstimates Detroit will bottom out at 631,668. 

Nevertheless, Detroit, the nation’s 23rd largest city, is experiencing less of a population loss than a number of other major cities, including Baltimore, St. Louis, Chicago, and Pittsburgh, according to the most recent estimates; or as Mayor Kurt Metzger of Pleasant Ridge, a demographer and director emeritus of Data Driven Detroit put it: “Our decreasing losses should be put up against similar older urban cities, rather than the sprawling, growing cities of the south and west: “I still believe that the population of Detroit may indeed be growing.” (Last year, Detroit issued 27 permits to build single-family homes in the city, according to the Southeast Michigan Conference of Governments–another 911 building permits were issued for multi-family structures, and 60 permits for condominiums. Meanwhile 3,197 houses were razed, according to the Detroit regional council of governments.

A key appears to be, as Chicago’s Mayor Rahm Emanuel determined in Chicago, the city’s schools. Thus, Mayor Duggan said he hopes the Detroit School Board will approve his bus loop plan as a means to help lure families back into the city proper, noting that many families in the city send their children to schools in the suburbs‒and end up moving there. In his State of the City Address, he said he intended to create a busing system in northwest Detroit to transport children to participating traditional public and charter schools and the Northwest Activities Center. This will be an ongoing governance challenge—as his colleague Mayor Metzger noted: “There’s no lessening of the interest in outlying townships: People are still looking for big houses, big lots with low taxes.” Indeed, even as Detroit continues to witness an ongoing exodus, municipalities in the metropolitan region‒the Townships of Macomb, Canton, Lyon, and Shelby are all growing.  

Detroit Chief Financial Officer John Hill notes: “A second rating upgrade in just seven months from Moody’s shows that we have created the financial management infrastructure necessary to continue to meet our obligations and enhance our fiscal position: Working with the Mayor and City Council, our team has made a variety of improvements to financial management practices and our financial planning and budgeting practices are strong, as reaffirmed by Moody’s in their report.” Thus, in the wake of the State of Michigan’s restoration of governing authority and control of the city’s finances on April 30th, three years after its Chapter 9 exit in December of 2014, Detroit now has the power to enter into contracts and enact city budgets without seeking state approval first, albeit, as Moody’s notes: “Underperformance of pension assets and revenue volatility remain notable budgetary risks, but the city has amassed a large reserve cushion and adopted conservative budgetary assumptions that provide breathing room to respond to adverse developments.”

Motor City Transformation?  In the wake of real estate development firm Bedrock Detroit gaining final approval from the Michigan Strategic Fund for its so-called “transformational” projects in downtown Detroit, the stated has approved $618 million in brownfield incentives for the $2.1 billion project, relying in part on some $250 million secured by new brownfield tax credits, enacted last year by the legislature—a development which Mayor Duggan said represents a “major step forward for Detroit and other Michigan cities that are rebuilding: Thanks to this new tool, we will be able to make sure these projects realize their full potential to create thousands of new jobs in our cities.” In what will be the first Michigan municipality to use the Transformational Brownfield Plan tax incentive program, a program using tax-increment financing to capture growth in property tax revenue in a designated area, as well as a construction period income tax capture and use-tax exemption, employee withholding tax capture, and resident income tax capture; the MIThrive program is projected to total $618 million in foregone tax revenue over approximately 30 years. While Bedrock noted that the tax increment financing “will not capture any city of Detroit taxes, and it will have no impact on the Detroit Public Schools Community District,” the plan is intended to support $250 million in municipal bond financing by authorizing the capture of an estimated average of $18.56 million of principal and interest payments annually, primarily supported by state taxes over the next three decades, to repay the bonds, with all tax capture limited to newly created revenues from the development sites themselves: the TIF financing and sales tax exemption will cover approximately 15% of the project costs; Bedrock is responsible for 85% of the total $2.15 billion investment, per the financing package the Detroit City Council approved last November, under which Bedrock’s proposed projects are to include the redevelopment of former J.L. Hudson’s department store site, new construction on a two-block area east of its headquarters downtown, the Book Tower and Book Building, and a 310,000-square-foot addition to the One Campus Martius building Gilbert co-owns with Detroit-based Meridian. Altogether, the projects are estimated to support an estimated 22,000 new jobs, including 15,000 related to the construction and over 7,000 new permanent, high-wage jobs occupying the office, retail, hotel, event and exhibition spaces—all a part of the ongoing development planned as part of Detroit’s plan of debt adjustment.

In an unrelated, but potentially unintended bit of fiscal assistance, President Trump’s new press for tariffs of as much as 25% on cars and trucks imported to the U.S., Detroit might well be a taking a fiscal checkered flag.

Avoiding Risks to Puerto Rico’s Recovery. Yesterday, in testifying before the PROMESA Board, Governor Ricardo Rosselló Nevares  told the members his governing challenge was to “solve problems, and not to see how they get worse,” as he defended the agreement with the Oversight Board—and as he urged the Puerto Rico Legislature to comply with his fiscal plan and repeal what he described as the unjust dismissal law (Law 80), a key item in the certified fiscal plan that the PROMESA Board is reevaluating. That law in question, the Labor Transformation and Flexibility Act, which he had signed last year, represented the first significant and comprehensive labor law reform to occur in Puerto Rico in decades. As enacted, the most significant changes to the labor law include:  

  • effective date (there is still no cap for employees hired before the effective date);
  • Eliminating the presumption that a termination was without just cause and shifting the burden to the employee to prove the termination was without just cause;
  • Revising the definition of just cause to state that it is a “pattern of performance that is deficient, inefficient, unsatisfactory, poor, tardy, or negligent”;
  • Shortening the statute of limitations for Law 80 claims from three years to one year, and requiring all Law 80 claims filed after the Act’s effective date have a mandatory settlement hearing within 60 days of the filing of the answer; and
  • Clarifying the standard for constructive discharge to require an employee to prove that the employer’s conduct created a hostile work environment such that the only reasonable thing for the employee to do was resign.

The Act mandates that all Puerto Rico employment laws be applied in a similar fashion to federal employment laws, unless explicitly stated otherwise in the local law. It applies Title VII’s cap on punitive and compensatory damages to damages for discrimination and retaliation claims, and eliminates the mandate for written probationary agreements; it imposes a mandatory probationary period of 12 months for all administrative, executive and professional employees, and a nine-month period for all other employees. It provides a statutory definition for “employment contract,” which specifically excludes the relationship between an employer and independent contractor. The Act also includes a non-rebuttable presumption that an individual is an independent contractor if the individual meets the five-part test in the statute. It modifies the definition of overtime to require overtime pay for work over eight hours in any calendar day instead of eight hours in any 24-hour period, and changes the overtime rate for employees hired after the Act’s effective date to time and one-half their regular rate. (The overtime rate for employees hired prior to the Act remains at two times the employee’s regular rate.). The Act provides for alternative workweek agreements in which employees can work four 10-hour days without being entitled to overtime, but must be paid overtime for hours worked in excess of 10 in one day. The provisions provide that, in order to accrue vacation and sick pay, employees must work a minimum of 130 hours per month; sick leave will accrue at the rate of one day per month—and, to earn a Christmas Bonus, employees must work 1,350 hours between October 1 and September 30 of the following year; employees on disability leave have a right to reinstatement for six months if the employer has 15 or fewer employees; employers with more than 15 employees must provide employees on disability leave with the right to reinstatement for one year, as was required prior to the Act. For employees, the law includes certain enumerated employee rights, including a prohibition against discrimination or retaliation; protection from workplace injuries or illnesses; protection of privacy; timely compensation; and the individual or collective right to sue or file claims for actions arising out of the employment contract.

In his presentation, the Governor suggested that the repeal of the statute would be a vital component to controlling Puerto Rico’s budget, in no small part by granting additional funds to municipalities, granting budgetary increases in multiple government agencies, including the Governor’s Office and the Puerto Rico Federal Affairs Administration (PRFAA), as well as increasing the salary of teachers and the Police. While the Governor proposed no cuts, a preliminary analysis of the document published by the Office of Management and Budget determined that the consolidated budget for FY 2018-19 would total $25.323 billion, or 82% lower than the current consolidated budget, as the Governor sought to assure the Board he has achieved some $2 billion in savings, and reduced Puerto Rico’s operating expenses by 22%.

In his presentation to the 18th Puerto Rico Legislative Assembly, the Governor warned that Puerto Rico has an approximate “18-month window” to define its future, taking advantage of an injection of FEMA funds in the wake of Hurricane Maria, as he appeared to challenge them to be part of that transformation, noting: “We have an understanding with the (Board) that allows the approval of a budget that, under the complex and difficult circumstances, benefits Puerto Rico: Ladies and gentlemen legislators: you know everything that is at risk. I already exercised my responsibility, and I fully trust in the commitment you have with Puerto Rico.”

According to Gov. Rosselló, repealing Law 80, which last year was amended to grant greater flexibility to companies in the process of dismissing workers, would be the first step for what would be a phase of greater economic activity on the island, and would join different measures which have been put into effect to provide Puerto Rico a “stronger” position to renegotiate the terms of its debt, as he contrasted his proposal versus the cuts and austerity warnings proposed by the PROMESA Board, adding that, beginning in August, the Sales and Use Tax on processed food will be reduced, and that tax rates will be reduced without fear of the “restrictions” previously established and imposed by the Board, adding that participants of Mi Salud (My Health) will be able to “choose where they can obtain health services, beyond a region in Puerto Rico,” and that the budget guarantees teachers and the police will receive an increase of $ 125 per month.

Shifting & Shafting? In his proposed budget, the Governor proposed that municipalities would be compensated for the supposed reduction in the contributions of the General Fund, stating: “Through the agreement, the disbursement of 78 million dollars that this Legislature approved for the municipalities during the current recovery period is secured; the Municipal Economic Development Fund of $50 million per year is created.” Under the administration’s proposed budget, the contribution to municipalities would be about $175.8 million, which would be consistent with the adjustment required for that item in the certified fiscal plan. As a result of the agreement with the Board, municipalities would, therefore, practically receive another $ 128 million. As proposed, Puerto Rico’s government payroll would be reduced for the third consecutive year: for example, payments for public services and those purchased will increase 23% and 16%, respectively; professional services would increase by 40%. Expenses for the Governor’s office would see an increase of 182%.

Betting on the Garden City’s Fiscal Future

May 16, 2018

Good Morning! In this morning’s eBlog, we take a fiscal gamble that Monday’s U.S. Supreme Court decision to strike down the federal anti-gambling law could reap significant fiscal gains for Atlantic City, fueling its fiscal recovery from near insolvency.  

Betting on Atlantic City’s Fiscal Future?  In the wake of the U.S Supreme Court’s PASPA decision to legalize professional sports gambling [Murphy, Governor of New Jersey, et al. v. National Collegiate Athletic Assn. et al, U.S. Supreme Court, No. 16-476] —a decision which could bring in as much as $10 billion in annual new revenues to the State of New Jersey, Atlantic City Mayor Frank Gilliam, expressed excitement, noting: “Sports betting could generate millions in revenue for Atlantic City and diversify our gaming market: I hope that New Jersey is an early adapter of legalized sports betting so we can capitalize on another revenue stream.” Indeed, it would appear that the state’s commitment over the last seven years of $9 million in taxpayer funds on the court battle to legalize sports betting at its casinos and racetracks will be great fiscal news for Atlantic City, which has spent the last few years recovering from the closure of multiple casinos, going into a state fiscal takeover, and skirting the threat of chapter 9 municipal bankruptcy. Or, as New Jersey State Senate President Stephen Sweeney (D-Gloucester) put it: “If legalized sports gambling was in place when the Eagles won the Super Bowl, just think what Atlantic City would have looked like.”

Atlantic City is, after all, celebrating its 40th year of casino gambling—albeit, in recent years, it has witnessed the closure of four casinos. Already, though, two of those, including the Hard Rock (which had replaced the former Trump Taj Mahal casino) are set to reopen this summer.  Even before the decision, gaming revenues were increasing: Rummy Pandit, the Executive Director of the Levenson Institute of Gaming, Hospitality, and Tourism at Stockton University noted sports betting will add “another new segment” to provide fiscal sustenance to the boardwalk city. Daniel Wallach, a gaming and sports attorney, in response the query whether the decision would save Atlantic City, noted: “I don’t know that Atlantic City needs saving…but it will provide a dramatic, positive economic impact.”  Emily Raimes, a Vice President at Moody’s, noted that local and state governments which legalize sports betting will “see minor benefits from the incremental tax revenues, although it will take time to implement—adding: “States like New Jersey and Pennsylvania which planned ahead will see the benefits first…Cities like Atlantic City which have long desired sports gambling will see a positive impact depending on how states regulate it.”  

The landmark ruling striking down the federal law which barred states from drafting their own regulations for local sports betting, will allow legal sports books to begin operations throughout the country—something heretofore only allowed in grandfathered-in states Nevada, Oregon, Delaware, and Montana. The case here pitted the State of New Jersey versus the nation’s major sports leagues:  New Jersey had argued legalization of sports gambling would allow the state to capture a new and significant stream of revenue. In its 6-3 decision, the 6-3 majority sided with state authority to legalize sports betting on a case-by-case basis, citing PASPA’s provision prohibiting state authorization of sports gambling schemes as violating the anti-commandeering rule—and holding that PASPA’s provision prohibiting state “licens[ing]” of sports gambling schemes also violates the anti-commandeering rule. In Justice Samuel Alito’s opinion, the Court ruled that, “Congress can be allowed to regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own.”

The decision is expected to bring immediate fiscal benefits not just to the State of New Jersey, which has been fighting for legalized sports gambling since amending its state constitution in November of 2011—a reform which drew legal challenges from the NFL, NBA, MLB, NHL, and the NCAA, whose lawyers were able to use PASPA as precedent to prevent the referendums New Jersey residents twice approved—with the Garden State pressing its case all the way to the Supreme Court, but also key to the fiscal recovery of Atlantic City: estimated revenue from now legalized sportsbooks is projected to bring up to $9 billion in new revenues to the city—with New Jersey one of 14 states which has active sports betting reforms chambered for debate in their local legislative bodies. Elected and appointed leaders in Atlantic City and Trenton are preparing to roll the dice by capitalizing on a soon-to-be regulated industry—with three members of the New Jersey Legislature already having proposed such legislation in the state Assembly.  State Senate President Steve Sweeney (D-Salem, Gloucester, and Cumberland) noted: “We want to act quickly to capitalize on the court’s decision so that we can get sports gaming in place and operating in New Jersey.”

New Jersey voters overwhelmingly approved creating a constitutional amendment to allow sports betting in 2011. The following year, the state Legislature passed the Sports Wagering Act, which was sponsored by former state Sen. Raymond Lesniak (D-Union). Former Gov. Chris Christie signed off on legislation in 2012 and 2014 to enact the amendment. Five sports leagues challenged that statute: the NBA, NCAA, NFL, NHL and MLB — and the case was contested all the way to the U.S. Supreme Court, which heard oral arguments in December. Former Gov. Chris Christie noted: “The favorable Supreme Court ruling on sports gaming will significantly boost the economy of Atlantic City, Atlantic County, and New Jersey as a whole. It will create jobs, encourage tourism, and increase participation at our casinos and sports venues. With today’s ruling, New Jersey’s economy has taken great strides in the right direction;” while state Assemblyman Vince Mazzeo (D-Atlantic) noted: “The timing could not be better. Atlantic City has seen major growth over the last year, with two new casinos opening next month and online gaming revenues rising. Thanks to today’s Supreme Court decision, we can add regulated sports betting to the list of Atlantic City attractions fueling a comeback. This is something the majority of New Jerseyans said they wanted, and now thanks to this decision, will benefit from, as additional funding will be available for social programs that are critical for our residents. This is a good day for Atlantic City and the State of New Jersey. “

A Steely Road to the Fiscal Future

March 5, 2018

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

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

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

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

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

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

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

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

Is There a Checkered Flag to Mark an Exit from Municipal Insolvency?

February 5, 2017

Good Morning! In today’s Blog, we consider: the ongoing challenge for Hartford to keep its fiscal head out of debt waters; efforts to create a municipal recovery fund in Puerto Rico for its beleaguered muncipios; and the uncertain promises of PROMESA.

Taking the Checkered Flag. Hartford city officials are concerned that they cannot find a 30-year-old insurance policy—a policy which could play a key role in any damages or settlement the capitol city would have to pay in a lawsuit filed by a man wrongly imprisoned for murder for two decades—and could weigh in the city’s efforts to regain its fiscal momentum from the brink of chapter 9 municipal bankruptcy. Indeed, the inability to locate the policy has prompted federal Magistrate Judge Joan Margolis to order the city to subpoena insurance companies in an effort to find it. The suit in question, filed seven years ago, against the city and police officials, alleged malicious prosecution, suppression of evidence, and violation of his civil rights. City officials deny the allegations; however, in the seven years since the suit was filed, they have been unable to come up with the policy. His lawyers have been seeking information on the city’s insurance policies since the lawsuit was filed nearly seven years ago—a lawsuit over a murder conviction—which was itself overturned based on new DNA testing that resulted in another man being convicted—so that state officials subsequently awarded the accused $6 million for his wrongful conviction. Now the missing so-called “excess” policy could turn out to be key in the lawsuit, because it would cover any damages or settlement the city would be required or directed by the court to pay above $2 million—the current Hartford liability limit. The City’s insurance carrier, Travelers, has recommended to the city that it notify the carrier of its excess policy about the lawsuit, because of the chance that any award could exceed $2 million—albeit, it remains unclear whether Hartford’s insurance policies in effect in 2011, when the lawsuit in question was filed, would cover any award to him. The litigation and potential fiscal exposure comes at a fiscally unpropitious time in the wake of Moody’s, last week, had just revised upwards the city’s credit rating, lifting its general obligation bond rating from negative to developing, citing last year’s appointment of the Municipal Accountability Review Board (MARB), which had been established by §367 of Public Act 17-2  as well as the statutory provisions contained in §§Section 349 to 376 of the Act for the purpose of providing technical, financial, and other assistance and related accountability for municipalities experiencing various levels of fiscal distress: the Board is made up of 11 members, appointed as follows: Secretary of OPM, or designee, Chairperson; State Treasurer, or designee, Co-chairperson; Five members appointed by the Governor: a municipal finance director; a municipal bond or bankruptcy attorney; a town manager; a member having significant experience representing organized labor from a list of three recommendations by AFSCME; a member having significant experience as a teacher or representing a teacher’s organization selected from a list of three joint recommendations by CEA and AFT-CT. In addition, one member is appointed by the President Pro Tempore of the Senate, one by the Speaker of the House, one by the Minority Leader of the Senate, and one by the Minority Leader of the House of Representatives, each of whom shall have experience in business, finance or municipal management.

The events unfolding in the courtroom occurred as Moody’s had brightened the fiscal outlook for the beleaguered city with its upward revision of the city’s rating from negative, specifically citing the creation of the review board—with its upwards revision reflecting the reduced chances of the city being forced into default or chapter 9, albeit Moody’s hedged its outlook by writing: “[T]here remains a possibility of significant bondholder impairment over the long-term, given the city’s distressed financial condition.” Moody’s has unmoodily noted it might upgrade the city’s fiscal outlook, if

  • the state oversight board designates Hartford as a Tier III municipality and executes a state debt assistance contract;
  • the city develops a long-term financial sustainability plan;
  • completes negotiations with bond insurers and bondholders which generate recovery of at least 80% of principal; and
  • makes timely payments on all debt with expressed commitments to fully honor future obligations.

In the alternative, the rating agency warns that a default on the city’s debt or an indication that bondholder recoveries would fall below 65% of principal in a potential debt restructuring would lead to a further downgrade.

Puerto Rico Municipal Recovery Fund? Governor Ricardo Rosselló is going to try again to get a legislation that creates a $ 100 million Municipal Recovery Fund to help mayors keep their governments afloat after Hurricane Maria shrunk their income. The Governor had planned to send to the Legislature a new version of the bill to establish such fund, in the wake of the PROMESA Board’s veto: in order to comply with the objections made by the Board, the Governor announced that the fund will have “transparent” eligibility requirements to evaluate the fall in municipal revenue collections. His proposal also proposes to create a structure that resembles the federal Community Disaster Loans program–and specify the accounts from which the Treasury Department would finance the aid, with amendments, including that the Fiscal Agency and Financial Advisory Authority (FAFAA) certify the need for the loans, which would be limited to $5 million per muncipio. In the statement issued from his office: “The Governor had submitted a bill for these purposes, which established by law the objective criteria to certify the municipal need. However, during the legislative process modifications were made to the way of allocating the resources of the Municipal Recovery Fund.” Those modifications were discussed by FAFAA with the Oversight Board, in order to ensure its final approval, if the measure is ratified again by the Legislature. (Because it is a bill related to the budget, it requires the approval of the PROMESA Board.) Nevertheless, the Governor appeared confident, stating: “I am confident that this project will be approved quickly and this way it will provide the aid our mayors need for their recovery works as soon as possible,” as he acknowledged the crisis faced by the municipalities, many of which fear being left without liquidity this spring. Thus, he told the PROMESA Board that his revised fiscal plan seeks to postpone “the reduction of the municipal subsidy that the Board originally approved.” For the island’s municipal leaders, that means they will also seek to have access to the line of credit of the FEMA CDL program approved by Congress last October.  According to Mayor Josian Santiago, the former president of the Puerto Rico Association of Mayors,   of Comerio, a municipio of just under 21,000 with an unemployment rate of 13%, located in the center-eastern region of island, more than 40 municipalities may currently lack sufficient fiscal liquidity to operate normally, unless they receive an injection of funds from the federal line of credit or from the local fund which Governor Rosselló is once again trying to create. The Mayor noted that the Municipal Revenue Collection Center has advanced the municipalities’ months of income projections, which it distributes, but which could now be forced to sell old debts in order to meet its obligations for the remainder of the fiscal year. (The island’s mayors have already been provided guidance with regard to how to access a federal line of credit, which must not exceed 25 percent of their budget.) In the case of Comerío, with a budget of around $9 million and, according to the evidence on the loss of income that it can provide, it could be eligible to receive up to about $ 2.25 million.

The Promise of PROMESA? During the meeting of the PROMESA Board in New York City at the end of last week, several experts agreed that hurricane Maria demonstrated the lack of a clear leadership in the Puerto Rican government, creating an inability to make decisions about its energy system, a problem that is still present in the face of the transformation required by the Electric Power Authority (PREPA). Indeed, FEMA Deputy Regional Administrator Asha Trible said that, during the emergency, the high level of bureaucracy in PREPA was a major obstacle, testifying: “It does not work…when you have eight layers to be able to approve something,” adding that in the times of greatest crisis, the bureaucracy added to liquidity problems of the public company, that “could not pay for the materials they ordered.” Administrator Trible, subsequent to the session, that early in the process, FEMA had suggested ideas, such as creating a central command for the emergency, with a single coordinator for PREPA, adding: “We avoided that they thought we were there to take control…We would have established a command structure, we tried to suggest that kind of thing, but we support the process that is there.” The session came as Governor Ricardo Rosselló has proposed to privatize PREPA assets, including the generation of electricity, and as a preamble to the certification of new fiscal plans of the central government and the public corporation—and came hard on the heels of the PROMESA Board’s request to Judge Laura Taylor Swain to allow the central government to lend $ 1.3 billion to PREPA to avoid its financial collapse this month—a request which the majority of the panel’s seventeen experts, noting the challenges the public corporation faces, instead advocated for a strong and independent regulator of the energy system, even as they stressed the need to obtain financing to modernize PREPA.

Too Many Cooks in the Cocina? John Paul Rossi, a historian at Penn State University-Erie, who is an expert on the history of American business, technology, communications, and transportation, argued that  the Governor, the Governing Board of the public corporation, the Oversight Board and the Energy Commission are now in the development of public policy for PREPA—without even mentioning different voices from the nearly insolvent U.S. Congress—that “There are too many people. We are scaring consumers and investors.” His comments came as Nisha Desai, a member of PREPA’s Governing Board, noted that PREPA is close to replacing former Executive Director Ricardo Ramos, with the utility’s governing board vetting several potential hires referred by a consultant tapped to help the utility find its new leader: deeming such a decision critical to PREPA’s recovery from September’s Hurricane Maria. Ms. Desai, an executive of the Texas Renewable Energy Industries Alliance, said that, along with two other “independent” members of the Governing Board, they are poised to select the next PREPA Executive Director, noting that, in order to rejuvenate PREPA, they intend to appoint “the first chief executive officer” disconnected from Puerto Rico’s ‘partisan politics.’

The Raceway to Recovery

Taking the Checkered Flag. Detroit, on the verge of posting its third consecutive balanced budget, appears on course to exit state oversight as early as next year in the wake of yesterday’s Comprehensive Annual Financial Report (CAFR) demonstrating the Motor City has steadied its finances after emerging more than three years ago from the largest municipal bankruptcy in U.S. history. The state’s Detroit Financial Review Board could vote to waive its authority over the city as early as next month, according to Detroit Chief Financial Officer John Hill, who noted: “We believe we have met all the criteria for the waiver…I believe this will be the last budget that will be done under the FRC’s authority.” The CAFR, officially released Wednesday, appears to support the city’s hopes to soon regain full authority over its own finances: The report notes that Detroit ended its FY2017 with a $53.8 million general fund operating surplus and revenues exceeding expenditures by $108.6 million—even better than the city had originally projected: it ended its most recent fiscal year with a $63 million surplus—as well as a general fund unassigned fund balance of $169 million, better than 15% increase from the previous fiscal year, leading CFO Hill, as he prepares to present the results to the commission at a meeting later this month, to note: “It allows us to have a really good base of information as we are going into our budget process…It also gives us a chance to address some of the items that are identified as things we need to work on.” Mr. Hill added that Detroit has demonstrated vast improvements in its financial health, citing credit rating agency upgrades from rating agencies, a higher employment rate, and enhanced assessed property values: “I have to say that certainly there has been a positive impact from the financial review commission oversight: It’s been a real constructive process where the city has excelled.”

For his part, Mayor Mike Duggan noted that a third straight balanced budget proves his administration, in partnership with the City Council can “effectively manage the city’s finances: “This is another big step forward and helps set the stage for the end of the active state financial oversight,” as the Mayor preps to present the new budget later this month. Detroit Financial Review Commission member “Ike” McKinnon also credited the leadership role Mayor Duggan deserved for with getting the city’s finances back on track: “I remember when Mike Duggan took over as Mayor, we certainly had some hope and thoughts that things would happen…I did not know that it would happen this quickly. This says a lot about what he’s doing and certainly working with the state.”

The state’s financial review commission could vote to waive its authority over the city as early as next month, according to Mr. Hill. Zin any event, even if it does not, Detroit would no longer require the state board’s approval on budgeting or contracts, as it has since exiting chapter 9 municipal bankruptcy. As Mr. Hill put it: “We believe we have met all the criteria for the waiver…I believe this will be the last budget that will be done under the FRC’s authority.”

Key highlights of Detroit’s CAFR include the Motor City ending FY2017 fiscal year with a $53.8 million general fund operating surplus and revenues exceeding expenditures by $108.6 million. (The City had projected a $51 million surplus for FY2017). Detroit’s general fund unassigned fund balance will be $169 million, a $26 million increase from the previous fiscal year, according to the report. 

Detroit has also reported improvements in its management of $100 million in federal grants with no questioned costs resulting from audits, for the second consecutive year—after, two years ago, the city had federal funding for blight demolition funding suspended for two months due to procedural errors. Thus, hopes are high for the release from state oversight, albeit, concerns remain with regard to the looming 2024 pension payment and subsequent debt restructuring the following year. Mr. Hill notes: “I am sure that the FRC, as well as the city–because we are dealing with those issues, will be looking at those two items to make sure that plans are in place, money has been put aside, and the budget is able to absorb the additional costs that will come in those years.” Detroit is confronted by challenges to amortize debt payments on roughly $630 million of B notes that would see payments jump from $60 million to $120 million by 2025—notes issued as part of the implementation of Detroit’s chapter 9 municipal bankruptcy plan of debt adjustment—notes which are unsecured. Indeed, pending before the City Council is a proposal pending to dedicate $50 million from the city coffers to pay begin paying off the debt. Going forward, according to Mr. Hill, the strategy would be to dedicate a combination of restructuring some of the debt as well as paying it off, with the effort to address pension obligations a critical component to shoring up Detroit’s long-term fiscal health. The Motor City’s  long-term funding model approved by the City Council to modify its pension provisions which established the Retiree Protection Trust Fund, and deposited $105 million–$90 million from amounts reserved in FY2016 and 2017, plus $15 million appropriated in Fiscal 2018—and, for FY2018-2021 including the addition of an additional $115 million, contemplates another $115 million from FY2022–FY2023.

Unequal and/or Inequitable Fiscal & Physical Responses

January 29, 2017

Good Morning! In today’s Blog, we consider the seemingly unending physical and fiscal challenges to Puerto Rico’s fiscal and   physical recovery.

Post Storm Fiscal & Physical Misery. Puerto Rico Gov. Ricardo Rosselló’s proposed privatization of the Puerto Rico Electric Power Authority faces opposition from local political leaders; thus, it may prove to be a tough sell to potential investors: the proposal, which the Governor has presented to privatize PREPA, the public utility burdened with some $8.2 billion of municipal bond debt—and the utility which the PROMESA Oversight Board has put into a Title III bankruptcy process, creating potential hurdles for any plan to alter its ownership, notwithstanding that Board members have expressed support for the idea. For his part, Puerto Rico House Minority Leader Rafael Hernández Montañez said he thought Governor Rosselló was seeking to distract people from his problems with his PREPA privatization proposal: “It’s a way of taking off the heat, on the re-energization of the houses and stores.” That is to write that the Gov. understands that neither the Puerto Rico House nor Senate will approve his proposal—so, Minority Leader Montañez asserts he is just posturing for public support, he said. Members of Gov. Rosselló’s own party in the legislature; moreover, appear to be opposed. Nevertheless, as part of the Title III PROMESA quasi-chapter 9 bankruptcy, parts of the utility appear certain candidates for sale–albeit, this would be a decision made by Judge Laura Taylor Swain—not Governor Rosselló.  

Moreover, there is apprehension that the Governor’s governance proposal would be unlikely to generate any support from investors, either: Tom Sanzillo, Director of Finance at the Institute for Energy Economics and Financial Analysis, noted: “We fail to see how any investor would put money into Puerto Rico with a regulatory system like that proposed by Gov. Rosselló: “He appoints and can fire board members at will. Under the current system, board members have staggered, fixed terms, and can only be fired for cause…This means the whim of every new Governor sets rules and contracts. This makes energy investing highly risky, contracts uncertain, and a politicized investment environment.” Indeed, Tomás Torres, Project Director at the Institute for Competitiveness and Sustainable Economy, believes the Puerto Rico Energy Commission’s oversight should be strengthened, and it should implement any transformation of PREPA.

Jose Rossi Coughlin, Chairman of the Institute for Competitiveness and Sustainable Economy has expressed apprehension about any interruption of key regulatory processes, much less permitting each new Governor to select all commission members when she or he assumes elected office—noting that is not only contrary to widely prevailing mainland U.S. practice, but also likely legally incompatible with Title V of PROMESA. For his part, Mr. Torres notes that with the Governor’s submission, last week, of a bill to eliminate the Energy Commission and substitute in its place a Public Service Commission (which would merge Telecom, Transportation & Public Services, and the Energy Commission), the “The three commissions/boards that are to be merged in this new body add to 15 commissioners, but the new boards will only be of three members…“The recently proposed Energy Commission reorganization and consolidation with other public service regulation would be a huge step backward.”

Moody’s Investor Service was not quite as pessimistic, writing: “The [proposed] privatization itself is positive, because it is another source of capital to help solve PREPA’s fiscal problems; however, there are still challenges; including negotiating a price in an environment of declining Puerto Rico population, investing in rebuilding aging infrastructure, and how PREPA’s pension liability will be handled. The 18-month timeline appears quite aggressive.” For its part, the PREPA Bondholders Group said they would support a “private operator” to “immediately” take over operations, subject to the Puerto Rico Energy Commission oversight. Indeed, in statement sent out by Gov. Rosselló’s office, some representatives of Puerto Rico’s business community indicated their support for the proposal, with Nelson Ramírez of the United Center of Retailers, noting: “The announced changes will allow Puerto Rico to become a competitive jurisdiction, ending a monopoly that discourages investment and the creation of jobs,” albeit, as Puerto Rico Senate Minority Leader Eduardo Bhatia Gautier said, the proposal was a step in the right direction but that “the devil is in the details.”  Leader Bhatia-Gautier, a co-founder and former editor of the Stanford Journal of Law and Policy, with previous service as a law clerk at the U.S. Court of Appeals for the First Circuit in Boston, as well as Chief of Staff for the resident Commissioner of Puerto Rico in the U.S. Congress, is the 15th president of the Senate of Puerto Rico, where he has focused on the U.S. Territory’s fiscal system and authored a comprehensive energy reform law. Now, he asserts that Puerto Rico’s electrical system should be decentralized into 20 to 25 micro grids, and believes that, with federal assistance, Puerto Rico should try for widespread installation of solar panels on rooftops. Nevertheless, as he notes: even though the Governor and the Puerto Rico legislature will privatize PREPA, the reality is that Judge Swain will have to be involved.

Power to the Muncipio? Jayuya Mayor Jorge L. González Otero, a muncipio founded in 1911, at a time it featured a population of around 9,000, was certain that power would be restored to close to 10,000 residents of his northwest coast municipality of around 88,000, on Saturday. Some 35% of residents in Arecibo do not currently have electricity, he reported, albeit, he said he had received word from PREPA that one of the region’s substations, Charco Hondo, would receive a generator from the U.S. Army Corps of Engineers to power a temporary micro grid while repairs on the substation continue. The muncipio, which, at its founding, was separated from the larger cities of the coasts with little to no communication: it was the site of the Jayuya uprising in 1950, in which the Nationalists commenced a revolt against the U.S. Government, when a social worker, Doris Torresola, and her cousins led the group into the town square and gave a speech, declaring Puerto Rico an independent republic. Subsequently, the police station was attacked, telephone lines cut, and the post office burned to the ground. The Nationalists held the town for three days, until it was bombed by U.S. planes, which were supporting a ground attack by the Puerto Rican National Guard. Even though an extensive part of the town was destroyed, however, news of the bombing was not reported outside of Puerto Rico. Today, unsurprisingly, the Mayor notes: “Four months is way too much time for people in Puerto Rico to not have energy. All of us, the representatives, the mayors, the people, the senators, have to raise our voices to get things done.”

In fact, last month, he had reached an agreement with PREPA to temporarily restore power by means of the micro grid: last Saturday, the Mayor planned to tour the substation with PREPA’s interim director, Justo González, as the generator was being installed. However, in another example of the dysfunction which has plagued Puerto Rico’s recovery, there was no sign of the generator, nor even PREPA’s interim director at the Charco Hondo substation—meaning thousands of Arecibo’s residents remained in darkness, just like nearly one-third of all Puerto Ricans: more than one million U.S. citizens—darkness wherein there is no remote contemplation of when power might be restored: a spokesperson for PREPA told BuzzFeed News that the U.S. Army Corps of Engineers was overseeing the project and providing the generator. A Corps spokesperson indicated that after a second inspection of the site, the Corps had determined there was too much damage to the nearby power lines to allow the generator to be safely switched on as planned; rather, he said contractors will “begin installing” the generator over the weekend, but that it will not become operational, albeit the Corps is unable to provide “definitive time” when it will.

Renogiaciones. The Fiscal Agency and Financial Advisory Authority reports that Puerto Rico’s decision to renegotiate its public debt will cost at least $ 800 million over five years, with FAFAA, relying on an expensive cadre of attorneys, consultants, and financial advisors who have been recruited as part of an effort to cobble together a quasi-plan of debt adjustment which would reduce more than $ 70 billion owed to  Puerto Rico’s bondholders—now the cadre has to translate its fiscal algorithms before Judge Swain’s courtroom. The document, however, fails to specify whether the plan incorporates the budget for either FAFAA or the PROMESA Oversight Board, much less the vast array of advisors and lawyers who have participated in voluntary negotiations, as in the case of the Government Development Bank (GDB)—not exactly as propitious beginning as, for the first time, there is to be an assessment of the actual costs of reducing or cancelling bondholders’ debts, albeit, already, some early estimates are that such costs could exceed $1 billion—the portion of which would redound to U.S. citizens of Puerto Rico, where, in comparison to the different mainland states, Puerto Rico falls far below the poorest mainland state, with 45% of its population living below the poverty line, would be most limited. Nevertheless, despite the seemingly endless process, and despite the PROMESA oversight, or quasi-chapter 9 plan of debt adjustment, there has been as yet, no agreement with any key creditor. Rather, in what many in Puerto Rico would deem noticias falsas, President Trump, last November, reported Puerto Rico was “doing well” and “it’s healing, and it’s getting better, and we’re getting them power, and all of the things that they have to have.” That was in sharp contrast with reality—or, as District Representative José “Memo” González Mercado, of Arecibo put it: “The reality is that we are U.S. citizens, but Donald Trump treats us as second-class citizens.”