In the Wake of the Storm

October 2, 2018

Good Morning! In this morning’s eBlog, we report on the recent one-year anniversary of Hurricane Maria’s fiscal and human destruction in Puerto Rico, trying to learn from the incredible New York Fed experts about the fiscal and physical recoveries, before journeying north to assess the state of Atlantic City’s fiscal recovery in the wake of its state takeover. Then we swing south (again) to assess the serious and fiscally challenging costs of ongoing racial segregation in the St. Louis metropolitan region.

Un Ano Duro. Jason Bram and Joelle Scally of the exceptional Liberty Street Economics team at the New York Federal Reserve, writing about the U.S. Territory’s year of hardship in the wake of Hurricane Maria nearly one year ago, described the most destructive storm to slam Puerto Rico in 90 years. They wrote that: “Maria, combined with Hurricane Irma, which had glanced the island about two weeks prior, is estimated to have caused nearly 3,000 deaths and tens of billions of dollars of physical damage. Millions went without power for weeks, in most cases months. Basic services—water, sewage, telecommunications, medical care, schools—suffered massive disruptions. While it is difficult to assign a cost to all the suffering endured by Puerto Rico’s population, we can now at least get a better read on the economic effect of the storms.” In their marvelous post, the dynamic duo examined a few key economic indicators in an effort to gauge the adverse effects of the storms and the extent of the subsequent rebound—not just for Puerto Rico, but also for its various geographic areas and industry sectors. In addition, they examined data from the New York Fed Consumer Credit Panel to assess how well households held up financially and what effects the home mortgage foreclosure and payment moratoria had, noting that, overall, even when the hurricanes struck, the island’s economy had already been “struggling with a decade-long slump and a fiscal crisis.” Thus, they noted that from the outset, the hurricanes “exacerbated a complex pre-existing problem: a population, economy, and tax base that were all in decline.” They estimated that in last year’s fourth quarter, nearly 200,000 Puerto Ricans left Puerto Rico for the mainland—noting that, according to the Puerto Rico Institute of Statistics, about 72,000 had returned by last April—leading them to guesstimate that, as of last June, about 100,000 had returned. They guesstimate a net decline at 100,000—still a 3 percent drop in the population, which had already fallen by about 12 percent (500,000) since peaking in 2005, writing: “Over the years, Puerto Rico’s population loss has contributed to a feedback loop: a lack of economic opportunity and jobs spurs out-migration, which further undermines the island’s economic prospects. Even before the storm, private-sector employment had contracted by about 12 percent since 2005. In the month after Maria, it tumbled another 7 percent…but it has since recovered significantly: as of August 2018, private-sector employment had rebounded by 5 percent from the post-storm trough and was down 2 percent from its pre-storm levels—still a “sizable drop,” but considerably less than the decline seen after some similar disasters.

With regard to overall wage and salary income, which they describe as an even more telling measure of economic vitality than employment, they wrote that those two factors took a much bigger hit than employment during and right after the storm, albeit, they found, income has since rebounded more substantially, reaching new highs early this year: average wage and salary income for these job-holders was up about 7 percent—more than 5 percentage points above the 1.6 percent rise in the CPI. However, while they found that overall employment has reversed much of its steep initial post-hurricane drop, they wrote that some regions and industry sectors have fared much worse than others, noting that, in terms of industries, the post-Maria trends have largely, but not entirely, followed typical patterns after major natural disasters. Thus they determined that the leisure and hospitality industry was one of the hardest hit‒and has been one of the slowest to recover—especially the accommodation segment, where employment plunged more than 20%—unsurprising, in that there has been such a marked decline in tourism; but they found that retail trade employment has also been hit very hard, as have education and health care services. Given the awesome storm destruction, they did find that construction employment has surged nearly 25 percent since Hurricane Maria struck—and, mayhap more surprising, professional and business services, where there has been sturdy job creation since the hurricanes—particularly in waste management and remediation.

In examining income and salary climbs, the dynamic duo determined that the main contributing factor to be the construction industry, where average pay per worker soared more than 50 percent in the first quarter from a year earlier—writing that even though construction represents only about 4 percent of private-sector employment, that surge was sufficient to raise the average substantially—especially compared to other jobs. Large, average pay outside the construction sector was still up moderately in early 2018.

Nevertheless, in assessing whether Puerto Rican workers are really better off this year than before Maria, outside of construction workers, they found that construction jobs may be going to non-Puerto Ricans: relief and rescue workers from the mainland; they also determined that there are fewer jobs in lower-wage sectors, such as restaurants and retailers, and more jobs in higher-paying industries like professional and business services—meaning there “would appear to be fewer job opportunities for many of the more vulnerable low- to moderate-income Puerto Ricans.”

They noted that local employment data, as of the end of last March, finds a “very mixed picture of the recovery:” whereas San Juan had recovered from almost all of its post-hurricane job losses by last March, nearby municipios were not far behind; however, results for other cities were mixed: they noted that Ponce, Caguas, and Mayaguez had all sustained steep job losses right after Hurricane Maria, but that Ponce’s job count had rebounded almost fully by March, whereas Mayaguez experienced partial recovery. In nearby Vieques, they reported that, as of last March, employment was still down about 40%, and that in the interior, about 20%. They wrote that it was too early to be able to assess what the resulting population changes are for the more isolated municipios.

The authors also examined mortgage payment and foreclosure moratoria impacts from the super storm in the territory, where all real property is subject to taxation, except for property which serves as a primary residence and is valued at less than $150,000, because, in the wake of the storm, a key concern had been that many homeowners would fall behind on their mortgages and possibly face foreclosure. The authors discovered some good gnus: because a number of temporary policies were implemented to provide ill-fated homeowners time to recover, including forbearance on mortgage payments, as well as a suspension of late fees and credit reporting, and a potential loan modification to avoid a big jump in payments when the forbearance ends, in addition to a moratorium on new foreclosures; those governmental actions appeared to achieve their intended aims.

Using the New York Fed Credit Panel data set, constructed from Equifax credit report data which offers insight into mortgage balances and payment behavior, both in Puerto Rico and on the mainland, they determined that, because the moratoria prevented the reporting of delinquencies for participating mortgages on credit reports, mortgage delinquency has been “muted in Puerto Rico, dropping substantially before returning roughly to the pre-storm trend. The foreclosure moratorium had the intended effect of stopping foreclosure starts: new foreclosures on credit reports went to nearly zero in the quarters after the storm, before a small uptick in the second quarter of 2018,” estimating that the total value of payments skipped during the three quarters following the storm was “at least $335 million, which we interpret as a short-term loan to mortgage-holders. Guidance on how these skipped payments will be handled has varied by lender and loan type, but a mortgage modification or a smaller second loan to be paid over the term of the mortgage are likely treatments.” Thus, the Fed noted it believed these moratoria appear to have achieved their intended effects. Nevertheless, and notwithstanding that achievement, they did not feel confident that the territory’s economy is out of the woods, writing: “First, the fiscal, economic, and infrastructure problems that were so prevalent before the hurricanes still loom. Second, much of the recent rebound in economic activity is being driven by federal aid, insurance payouts, and massive reconstruction activity—stimulus that is likely to continue for a while, but not indefinitely. Still, some credit for the economic rebound must go to the people of Puerto Rico, who have shown tremendous fortitude during this incredibly difficult year. We will continue to monitor developments across the various sectors on the island in the coming months; stay tuned to this blog for a more detailed picture of Puerto Rico’s household debt situation.”

No Longer Rolling the Die for Atlantic City’s Fiscal Future. In the wake of a release by New Jersey Governor Phil Murphy’s administration of a 64-page report recommending continued state oversight and control of Atlantic City’s fiscal future through the fall of 2021 of the state Municipal Stabilization and Recovery Act, a report which Moody’s deemed a  credit positive,  with Moody analyst Douglas Goldmacher writing that State control has had a strong, positive impact on Atlantic City’s financial position, “which remains weak,” adding: “Without continued state oversight, the city’s ability to continue making substantial fiscal improvements is dubious.” Mr. Goldmacher noted that under state intervention, Atlantic City resolved long-standing tax appeals by casinos and reduced the city’s number of employees—affecting both its payroll and long-term public pension liabilities. At the same time, the state also reduced the city’s transitional aid and increased its Consolidated Municipal Property Tax Relief Act revenue, which Mr. Goldmacher said would create greater reliability with state funding and a more predictable revenue stream.

The Garden State’s five-year quasi-takeover under its Municipal Stabilization and Recovery Act began in November 2016 under former Gov. Chris Christie, just after Atlantic City nearly defaulted on its debt and appeared on the verge of chapter 9 municipal bankruptcy, and is scheduled to endure through . Now, this thorough and comprehensive report focuses on a framework for moving forward—a framework providing a direction for the city, where success will be measured by focusing on the details and establishing processes to move forward—and to effectively implement.  Among key recommendations:

  • Frameworks need to be reinforced for the structure to be operational. The multi-party nature of the proposed coordinating structures requires strong, consistent leadership and attention to project management to make sure the different groups move forward, have meetings, and communicate regularly. They will also need to efficiently resolve the inevitable differences and turf disputes.
  • Because the plan involves so many parties, time and attention must first be paid to get them to the right tables and gain consensus on the plan; or agree on modifications consistent with the themes. Participants must be “on the island” or otherwise engaged in some manner.
  • The proposed ExecCouncil must regularly meet and its members spend the time and attention necessary to execute the plans. It must establish clear, efficient and timely decision-making and dispute resolution processes. Staff must be assigned to manage coordination and reporting on all the different efforts.
  • Breaking down silos and coordinating across multiple parties requires time and attention. The parties must make the necessary resource commitments for the effort to succeed. Slacking should not be tolerated and be promptly addressed by appropriate leaders. Maintaining momentum is critical, especially after the first rosy blush of initial meetings. The report could not address the historic and underlying challenge of the City: the need for the City’s political infrastructure; the parties, ward leaders, factions, civic associations, and political influencers to come together and align themselves to ensure that the plans are executed. Turf, power, and personality differences must be put aside or compromised if the efforts are to succeed. That will take commitment and expenditure of political and social capital to align these disparate groups.

Moody analyst Douglas Goldmacher wrote: “State control has had a strong, positive impact on the city’s financial position, which remains weak: without continued state oversight, the city’s ability to continue making substantial fiscal improvements is dubious.” Mr. Goldmacher noted that under state intervention, Atlantic City resolved long-standing tax appeals by casinos and reduced its total number of employees—even as New Jersey reduced the city’s transitional aid and increased its Consolidated Municipal Property Tax Relief Act revenue, actions which Mr. Goldmacher wrote would create greater reliability of state funding, as well as a more predictable revenue stream. He noted that, notwithstanding a surge in net cash and an improving reserves under state control, the city’s adjusted fund balance is still near zero. Atlantic City did receive a $108 million lift in 2017 thanks to tax appeal settlements with its casinos. The city’s quasi emergency manager appointed by the Governor, Jim Johnson, laid out a long-term fiscal future in the state’s report—a report which included recommended changes to municipal governance and developing a master plan for redevelopment—one recommending the city diversify its local economy beyond casino gambling.

With regard to revenues and taxation, Mr. Goldmacher urged a focus on the city’s “decimated tax base” and the fact that New Jersey’s Casino Reinvestment Development Authority has partial jurisdiction over many properties which could be developed, adding that he believed ongoing state involvement would make it “far more likely” that Atlantic City and the Authority could coordinate redevelopment efforts. The city, which currently has some $223.6 million of outstanding municipal bond debt, is rated Caa3 by Moody’s with a positive outlook, and CCC-plus with a stable outlook by S&P Global Ratings. Mr. Goldmacher noted: “While the continued oversight is a credit positive, the city is far from being financially secure…The report, which has received preliminary approval from the Governor and is being reviewed in detail, lays out a strong vision for the future. But the devil is in the details, and it remains for the city, state, and CRDA to demonstrate that they can turn this vision into a sound plan.”

The Fiscal Arch. The City of St. Louis has issued FY2018 construction permits for projects valued at $1.14 billion, levels setting a new high; indeed, In FY 2018, St. Louis issued 5,396 building permits for projects totaling $1,142,040,378 in value, a $528 million increase over the previous fiscal year, or, as Mayor Lyda Krewson noted: “These numbers are very encouraging. It shows that developers, investors, and business leaders are bullish on St. Louis…It’s exciting to see that attitude reflected in not just in words, but in actions.  I love seeing all the construction dumpsters around town.” The building permits issued include new construction and rehabs of both residential and commercial property, in addition to smaller permits for alterations or additions. The FY2018 permits also reflect some major projects underway, including the new St. Louis University hospital campus, Ballpark Village Phase II, and St. Louis Community College’s new Center for Nursing and Health Sciences. In addition, large-scale construction projects, and small- and medium-scale rehabs have also been a significant source of development over the past year: of the 7,322 housing units issued permits, 86% are located in rehabilitated buildings. Moreover, development has not been limited to the central corridor: 17 wards across the city exceeded the total building permit value compared to the previous fiscal year.

Nevertheless, not all has changed since the National Governors Association, long ago, convened for its annual meeting there: both in and beyond its city limits, there remain signs of economic decline and ongoing racial segregation: opportunities for the city’s predominantly African-American residents appear grim: while gangs appear not to be especially a problem, drugs and gun violence are. Last weekend, six citizens were slain; nevertheless, while FBI statistics show the national rate of violent crime fell by 0.9% last year, and the murder rate declined by 1.4%, St. Louis last year experienced 205 homicides—the highest murder rate of any big city in the U.S.—more challenging for its leaders: almost all of the city’s homicides take place in just a few neighborhoods: a police plot via a heat map of crimes in St Louis finds clusters of glowing red dots which demonstrate that murders typically occur close to each other, in the same distressed streets in the north. While that would seem to suggest an ability to provide a more focused and efficient response, the city’s Commander of Investigative Services, Major Mary Warnecke, notes: “We do have a homicide rate we’d love to see smaller,” but she describes a host of fiscal and physical obstacles, including: lack of staff, long-running social and economic hardships, use of drugs, and overly lax gun laws, as well as criminals who skip over the Mississippi River to nearby Illinois—which make improvements intensely difficult. She reports that her detectives clear only a dismal 52% of their murder cases, a slight gain on the past few years—in part because they rely heavily on the co-operation of witnesses, who may, unsurprisingly, not be forthcoming. Major Warnecke said her overworked 33 homicide detectives officially have 4.8 cases each, but low clearances mean cases, like bodies, pile up.

Three years ago, the headquarters created a “real time crime center”, a collection of screens to relay images from cameras all over the city, letting police monitor for trouble. Pictures are matched with reports from Shotspotter—lots of microphones in public places which record sounds of gunshots. These are instantly analyzed, letting police know precisely where and what type of weapons are in use. Police would like access to drones for better aerial footage; however, local regulations do not permit them.

Not Fiscally Petering Out. Standard & Poor’s has raised Petersburg, Virginia’s credit rating from a BB to BB+–with a positive outlook, marking the second consecutive year in the historic municipality’s fiscal recovery from near chapter 9 municipal bankruptcy. S&P’s Timothy Barrett and Nora Wittstruck, after, last year, receiving a special tour, outlining the various economic opportunities and challenges within the city, this year followed up with a conference call, where, as Mr. Barrett put it: “We go through an economic update, a capital plan update, a debt update, a managerial update, and a policy practice update. I think in particular with [Petersburg], we concentrated on detailed updates on the financial progress.” Thus the S&P dynamic duo noted that a large part of S&P’s decision to raise Petersburg’s credit rating came from the city’s improved fund balance, with Mr. Barrett noting: “From our standpoint, usually the higher the reserves, the better the budgetary flexibility.” Petersburg, which came closer to filing for chapter 9 municipal bankruptcy than any other municipality in the Commonwealth, has budgeted fiscal resources to continue rebuilding the fund balance; it has set a goal of building the balance back up to equal 10% of the city’s general fund—demonstrating, as Mr. Barrett put it: “One of the reasons why we continue to have a positive outlook on the city is in part because they have set those goals and outlines for themselves,” adding that the city’s actions to clear out its backlog of unpaid bills was a contributing factor to the rating upgrade—or, as Ms. Wittstruck noted: “They have essentially caught up in all those past due obligations…We regarded that as a big step in the right direction.”

Nevertheless, Petersburg still has a fiscal ways to go—its credit rating is still below investment grade, and Ms. Wittstruck and Mr. Barrett said that the city would have to remain diligent when managing finances in order for the rating to keep getting raised, with S&P noting there is a one-in-three chance the city’s rating could be raised again in the next two years: Mr. Barrett said S&P will review the rating again next year, noting there will likely be a focus on the city’s fiscal weaknesses, including weak budgetary flexibility, weak debt and contingent liability profile, and historically weak management. Nevertheless, the report found the city to sport a “strong institutional framework score” and that it had demonstrated “adequate budgetary performance,” adding that the city’s proximity to Fort Lee and Richmond was “generating significant economic activity.” Going forward, Mr. Barrett cited the city’s “economic metrics,” such as its high tax rate and relatively low-income level, as challenges city administrations will face as they not only try to achieve financial stability, but improve the overall health of the locality.

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

August 31, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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.”

Disparate Physical & Fiscal Responses to Municipal Physical & Fiscal Distress

eBlog

January 16, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal and physical challenges of restoring power in hurricane devastated Puerto Rico, which the Trump Administration and Congress have opted to treat in a very different manner than other hurricane devastated municipalities and states.

Prospects for Recovery. Notwithstanding the opposition of his own designated coordinator for the restoration of electric power, Puerto Rico Governor Ricardo Rossello yesterday gave the go-ahead to sign an agreement which will allow Puerto Rico’s muncipios to hire companies and experts to repair the island’s electric distribution lines, with Puerto Rico Secretary of the Interior, William Villafañe, announcing—in the wake of a demonstration by residents of bigger muncipios which remain without electricity since Hurricanes Irma and María passed last September, that the Electric Power Authority (AEE) will sign an agreement with the muncipios to allow them to hire companies to repair power lines. The breakthrough came in the wake of a meeting with the presidents of the Federation and the Association of Mayors, Carlos Molina (Arecibo) and Rolando Ortiz (Cayey), respectively, as well as the Mayor (Alcalde) of Bayamón, Ramón Luis Rivera, and others officials. The agreement, which until yesterday had not been shown to the Mayors, is supposed to have a series of security restrictions; in addition, the agreement is intended to empower the muncipios to offer injury insurance, as well as be eligible for FEMA reimbursement. Secretary Villafañe noted that Governor disagreed with the result of last Monday’s meeting, in which the coordinator designated for the restoration efforts of electric power, Carlos Torres, and the AEE refused to establish an agreement with the municipios out of security concerns.

Thus, among the security conditions the agreement mandates, is that Mayors will be required to establish contracts exclusively with contractors who have specialized equipment and trucks. In a clarification, Secretary Villafañe assured reporters that PREPA retirees may continue to provide services, as is the case of the Pepino Power Authority, an initiative of the Mayor Javier Jiménez of San Sebastian—a muncipio founded in 1752 by Captain Cristóbal González de la Cruz, who among other neighbors, had an interest in converting some cow farms into an agricultural village. The foundation of the town from the religious aspect, was consummated in December 1762 by Mariano Martin, the then Puerto Rico Catholic Bishop: by the beginning, 1700, San Sebastian was a conglomerate of a few cow farms, owned by some residents of the Partido de Aguada. Las Vegas was the former plain site of one of the first cow farms located by the Guatemala riverside at the north; another of those cow farms was Pepinito (today’s downtown), which was a low green mountain with a white calcium carbonate face. From these geographical accidents come the first names of the then new village, albeit one of the oldest municipalities in the United States: Las Vegas del Pepino (Cucumber Fields). Indeed, the permission to found the muncipio was officially given in 1752.

By the beginning of the 19th century, wealthy Spanish families arrived in Pepino, fleeing the revolutions of Venezuela and the Dominican Republic. Subsequently, families from Catalonia and the Basque country in Spain came to Puerto Rico as well as a significant number of isleños (Canary Islanders)—with the isleños taking over the local political power and developing a coffee industry. Much as they did in Nevada, the Basques brought some material progress to the muncipio; in addition, the new resident Basques, in remembrance of their home region and its religious patron, saw the need of upgrading the old traditional Pepino used by the Canary Islanders to the new and “up-dated” San Sebastián—even though, still today, the citizens of San Sebastián are called “pepinianos.” Permission to found the muncipio was officially given in 1752, under the leadership of the founder, Captain Cristóbal González de la Cruz, who sought to convert cattle fincas (ranches/farms) into an agricultural village—with the governmental transformation consummated in December of 1762 by Mariano Martin, the island Catholic bishop at that time. The muncipio grew by the beginning of the 19th century, with the arrival of wealthy Spanish families, fleeing the revolutions of Venezuela and the Dominican Republic. Nearly a century later, several Catalon families from northern Spain and the Canary Islands joined the large number of isleños (Canary Islanders) who had made El Pepino their home—new arrivals who, in the wake of taking over the local political power, developing a coffee industry, and changing the muncipio’s name, in remembrance of their home region and its religious patron, to the new and “up-dated” San Sebastián, notwithstanding that, still today, the citizens of San Sebastián are called “pepinianos.”

For his part, the Mayor Rivera, who had notified the government last September of his interest in collaborating in the restoration of electricity, only learned yesterday that the agreement had been approved; however, the municipal executive of Cayey and President of the Association of Mayors said that as long as they do not see the document, they will not believe it, because, to date, they have neither been allowed to see or sign the document in question: Mayor Ortiz said that during the meeting yesterday, Coordinator Torres again expressed his disagreement with allowing municipalities to collaborate in the restoration of light: “He (Torres) will have control of the materials, will have control of the brigades, control of resources–and that this resource, which is so important in the process of re-energizing the country, says that he does not agree with the Mayors intervening in this process or giving us the agreement to sign…They said that they were going to give us the power to energize the system and work with brigades that we can hire, and that they will give us brigades to work with the municipalities, and they will give us materials, (but) we leave here with nothing in the hand, with a promise of agreement.” Mayor Ortiz explained that in Cayey the muncipio has retirees from PREPA willing to start working, however, absent an agreement, they are not only barred by law from doing so, but also prevented from obtaining protection from the State Insurance Fund Corporation in case of injury to these workers. The Mayor added: “What he (Coordinator Torres) does not know is that in all of our communities and in all of our cities there are people trained with extraordinary resources to work on that system, because they have done it in all the previous events.”  Nevertheless, Mayor Rivera assured that as soon as the document is sent and signed, he has two companies with three brigades ready to work in the Bayamón distribution lines. He estimated that these works can begin today, if the legal division of La Fortaleza advances in the drafting of the agreement with the municipalities.

Unbalanced Politics? The restoration efforts have also been hampered by allegations of partisan discrimination: the number of brigades distributed among the municipalities of the northern region supposedly differed by 480 in the municipalities of the New Progressive Party (PNP) versus 174 in those led by the PPD, according to the President of the Municipal Legislature of Dorado, Carlos Alberto López. However, Secretary Villafañe refuted those data with others: he indicated that among the six municipalities with less than 20% of electric power service restored, five are NPOPs, while among the 35 that already have more than 60% service, 20 are from PPD.

What Would Rod Serling Say? The former host of the Twilight Zone, Rod Serling, who opened each week’s show by saying a “Dimension of sound, a dimension of sight, and dimension of mind: you just crossed over into The Twilight Zone,” seems consistent with Moody’s characteristically moody new report on Puerto Rico’s fiscal plan, writing: “These repeated delays in revising Puerto Rico’s fiscal plan…underscore the economic uncertainties that Puerto Rico faces as a result of post-Maria factors, including surging migration to the U.S. mainland, potentially unsustainable operating conditions for the territory’s manufacturers, and the federal recovery and rebuilding assistance that may fall short of what Puerto Rico needs to prevent lasting and severe damage to its economic base…Together, the growing challenges from these factors may further reduce already low recovery prospects for holders of Puerto Rico’s 17 rated debt types.” The insights, provided by Moody’s senior at least 200,000 Puerto Ricans have left Puerto Rico since Hurricane Maria struck, or about 6% of the pre-Maria population—adding that manufacturing, an important part of Puerto Rico’s economy, has been steadily dropping over the last two decades—and warning that, in the bitter wake of Maria, some manufactures may decide to move to other areas less likely to be hit by future hurricanes. The analysts further warned that the federal government’s new 12.5% excise tax on profits derived from patents and other intangible assets is another negative. Finally, they noted that the amount of federal aid to Puerto Rico in the aftermath of Hurricane Maria will affect Puerto Rico’s trajectory of recovery amid growing doubt and uncertainty whether Gov. Rosselló’s request for $94.4 billion in aid will be honored—especially, with the federal government on the verge of shutting down this week—and its failure, to date—in disbursing any portion of a Congressionally-approved $4.9 billion Community Disaster Loan to Puerto Rico, the U.S. Virgin Islands, and some other jurisdictions hit by recent natural disasters. Last week, Reorg Research reported that Puerto Rico’s debt restructuring and arguments between the U.S. Treasury and Puerto Rico over the latter’s control of the funds has delayed the funds’ release.

If anything, the federal inability to act has been further clouded by unclear governance: last week, Puerto Rico Sen. Minority Leader Eduardo Bhatia, who, during his tenure as Senate President, had been selected as Chair of the Council of State Governments of the Eastern Regional Conference (CSG-ERC) and later elected as President of the National Hispanic Caucus of State Legislators, thereby becoming the first Senate President and the first Puerto Rican to preside over the organization, as well as serve on the Board of the Council of State Government (CSG), National Association of Latino Elected Officials (NALEO) and the National Hispanic Leadership Agenda (NHLA); brought up a different concern about the fiscal plan’s delay: in the new style of Trumpian governance, he tweeted to Gov. Ricardo Rosselló: “This is your great opportunity to regain lost confidence…Make your fiscal plan public today, so that there is no doubt, the people know your proposal and participate in the reconstruction of Puerto Rico,” adding that the people of Puerto Rico deserved a chance to comment prior to the draft’s submission to the PROMESA Oversight Board, tweeting: “In all countries of the world, ideas are discussed before decisions are made, not later…Otherwise, the process is a mockery of the serious people of Puerto Rico who want to contribute to the common good.”