Investing in Fiscal & Human Futures

June 11, 2018

Good Morning! In this morning’s eBlog, we consider the issue of keeping Puerto Rico’s schools open in the face of quasi municipal bankruptcy; then we veer north to assess post-state taken over Atlantic City: What Are the City’s Fiscal Odds for Its Future?  

The Governance Challenge for Schools and Demographic Changes. Puerto Rico Superior Court Judge Santiago Cordero Osorio has ordered the suspension of the closure of three of the U.S. territory’s schools in Morovis, pending an explanation from Secretary of Education Julia Keleher of the reasoning behind her orders. His ruling came as part of a lawsuit brought by the Municipality of Morovis challenging the closures of Alverio Pimentel, Manuel Alonso Díaz, and the Second David Colón Vega schools—and in the wake of the Judge’s earlier decisions ordering the closure of six other schools in the Arecibo region—closures also being challenged by the Teachers’ Association. In his order, Judge Osorio noted that all these claims will be evaluated in a court hearing scheduled for this morning—one to which he has invited the Secretary of Education or a representative to attend, noting: “This Court appreciates and recapitulates that the State must come prepared to justify in accordance with its regulations the closure, not only of the schools subject to this interdict, but of all the schools of the Commonwealth of Puerto Rico that the Department of Education has under its jurisdiction, and that it pretends according to the regulation to close.”

For his part, Mayor Carmen Maldonado of Morovis explained the suit was filed in the wake of a non-response to her request for a meeting with Secretary Keleher, stating, in a press release: “Today we are taking an important step in the defense of public education for Moroveño children. To all parents, principals, teachers and school staff, I invite you to attend that hearing on Monday at the Arecibo Court, so that together we can continue to fight to keep schools open. As I assured them in the many meetings we had, although the power is in the hands of the central government, the reason is on our side and we are going to defend that reason. The fiscal and governance challenge-as we had experienced in Detroit’s chapter 9 municipal bankruptcy, is a state versus local authority issue. Indeed, as the Department’s legal division stated: “The opening and closing of the schools is under the authority of the Secretary of Education and this is established by Law 85 of 2018 (Law on Educational Reform).”

The Rebirth of an Iconic American City?  Victor Fiorillo, writing in the Philadelphia Magazine, asked in his article, “The Re-Re-Re-Birth of Atlantic City,” what if everyone was wrong about the fiscal implications of the closure of the city’s famed casinos. Writing that Atlantic City had first drawn him in about 15 years ago with the opening of the Borgata Casino—at a time when “most other casinos in Atlantic City were in various stages of decay, and here was this brand-new Vegas-style resort with casino restaurants that were actually good and the best shows in town.” But he also noted that, back then, it was really a family focus: “My wife and I spend as much of the summer as possible on the A.C. beach with our 10-year-old and 12-year-old, opting for the relative solitude of the town’s southern end, far from any casinos or bars.” But in revisiting the municipality today, he noted he is not one of the only “believers in Atlantic City,” noting there are “some surprising signs of life these days, not to mention some serious investment—from small ventures, like Longacre’s projects, to big bets like Stockton University’s new beachfront campus and this month’s opening of the $550 million Hard Rock Hotel & Casino in the old Trump Taj Mahal.

Betting on the City’s Future. Mr. Fiorillo then turned to the recent U.S. Supreme Court decision allowing sports gambling, noting: “There’s more money pouring into A.C. right now than in all of Philadelphia,” according to development mogul Bart Blatstein, but, as with gambling, quoting Temple Professor Bryant Simon, author of 2004’s Boardwalk of Dreams: Atlantic City and the Fate of Urban America: “Atlantic City has risen and fallen innumerable times: “This is the story that has been told for a hundred years.” He added: “The irony, of course, is that this new resurgence is happening just a few short years after nearly half the city’s casinos went under, thousands of jobs disappeared, and Atlantic City itself seemed to be left for dead. Then again, maybe there’s no irony here at all. Maybe this more organic, up-from-the-ground rebirth of Atlantic City is exactly the kind of action that could mean sustained success for the city by the sea.”

Leaving on a Jet Plane. Mr. Fiorillo examined the city’s road to its state takeover from a non-fiscal perspective, writing: “It was right around this time that Atlantic City began to fade. Dissertations and books have been written about the many factors that led to the resort’s demise in the late 1960s and early 1970s, but a big one was the sudden ease of jet travel. You could get on a plane after breakfast and be on a beach in Miami for lunch. Atlantic City? Pfft. The Shore town began to disintegrate. By the mid-’70s, the city found itself at a pivotal crossroads. It could do nothing, ride out the downward trend, and see what happened. Or it could come up with some novel and wholly artificial way to inject new life into itself. It opted for the latter, betting that gambling would be Atlantic City’s salvation. Until that point, Nevada was the only place in the United States where you could open up a full-fledged casino. But in 1976, New Jersey citizens voted to make slots and table games legit in Atlantic City. The first casino, Resorts—which just turned 40 and is still standing — opened less than two years later.”

Noting that, for a time, business was booming, he credited Atlantic City’s casinos for bringing hundreds of millions of tourists to the Boardwalk during Atlantic City’s gambling heyday” “Some years, this city of 40,000 residents topped 34 million tourists. But outside the casino walls, the city struggled. The casino owners—including, for a time, Donald Trump—got fat, politicians got their kickbacks, and the impoverished residents of Atlantic City remained just that: And then everything went wrong. The new Atlantic City created in the late 1970s was premised almost entirely on maintaining a casino duopoly with Nevada; once casinos started popping up all over—including in Pennsylvania in 2006—Atlantic City imploded.”

Noting, as we have traced, the city’s fiscal nadir came to a head in January of 2014, when the Atlantic Club, which had opened as the Golden Nugget in 1980, collapsed, followed by Showboat, followed by the Revel, followed shortly thereafter by the Trump Plaza, noting: “Finally, in October 2016, one month before its namesake was elected to the Oval Office, the lights went out at Trump Taj Mahal. In just two and a half years, five casinos vanished, their cavernous buildings shuttered. Atlantic City had bottomed out economically in the most spectacular fashion possible.”

Tracing a Fiscal Turnaround. Writing that when assessed property values drop low enough, neighborhoods become more and affordable—and, ergo, more attractive to developers who could “pick up buildings for pennies on a dollar,” he noted that “Atlantic City suddenly became a risk worth taking”—adding: “Investing in Atlantic City now makes a lot more sense than it did five years ago, but it’s hardly a no-brainer. The city, with its 37% poverty rate) is overwhelmingly poor. Taxes are overwhelmingly high. And walking around on Atlantic or Pacific Avenue, the city’s two main north-south boulevards, which run parallel to and within blocks of the Boardwalk—can be nerve-racking after hours. In daylight, panhandlers accost and prostitutes solicit. Politically, things are hardly ideal: Then-governor Chris Christie instituted a state takeover in 2016.

John Longacre, who has acquired a reputation for building a business by spotting potential where others see potential disaster, and he works primarily in South Philadelphia, where he specializes in recovery projects that save buildings, convert seedy bars into trendy restaurants and turn vacant eyesores into neighborhood hubs, told Mr. Fiorillo: “Every bank in the region is terrified of Atlantic City.” Indeed, Mr. Longacre added: “If you look at the policy surrounding everything that exists in Atlantic City, it’s the perfect storm to keep investors out: From the state handling the zoning to the tax base to rent control, everything that happens from a policy level makes it seem like New Jersey is trying to make Atlantic City fail.” Nevertheless, he seems convinced the fabled city will not fail. Or, as Mr. Fiorillo described it, there are a new breed interested in the fabled city who likely will play an essential role in the city’s future: “It’s not about Aunt Edna and Uncle Fred and their casino bus trips anymore. It’s about younger people who aren’t into Atlantic City for the gambling. It’s about people who don’t just feel comfortable in but desire urban environments, with all their flaws and character. It’s about people who respect and require diversity. It’s about people like me and my wife, who, to be honest, cringe when we drive into a place like Avalon.”

Describing this fiscal and physical revival, he writes about the relationship of small projects complemented by large ones: “The Hard Rock Hotel is finally going to open on the Boardwalk later this month, where the Taj Mahal was until October 2016. Pottstown native Todd Moyer, senior vice president of marketing for this new outpost of the rock-and-roll-themed company, got his start in the casino business in 1990, when he worked as a tuxedoed greeter at, coincidentally, the Taj. I was working for Hard Rock out West, when I got the chance to come home: I jumped at it. Sometimes I would be at a bar or restaurant and hear people talking about Atlantic City being dead, and I’d jump in. I’m a defender and a giant supporter of A.C. We’re building hotels all around the world, but really, all the focus lately has been on Atlantic City.”

As for Mr. Longacre, his view is that he would “love for every casino to go out of business and see Atlantic City re-create itself without them, as an urban beach town.” Nevertheless, he believes there is one massive Atlantic City development which will be a game-changer: Stockton, the nearly 50-year-old public university, which has its main campus in Galloway Township, about 20 minutes from the Boardwalk: it is set to debut a brand-new beachfront Atlantic City campus this September, when one thousand students will use the campus, and many of them plan to live in town. Thus, he notes: “Stockton is huge. It’s the first real institutional investment in years that’s not a casino.”

Rolling the Fiscal Dice? As significant as these fiscal changes appear to be, they almost seem to pale against the city’s real world challenges: Atlantic City has a poverty level three times higher than the statewide rate: more than three times the number below the poverty level—and a disability rate among non-poor residents of just under 25%. In its rental housing, the percentage of residents below the federal poverty level is over 90%. A consequent governing challenge for the post-taken over city and the Garden State remains. Mr. Fiorillo notes that whether the gambles being made by Mr. Blatstein, Mr. Longacre, and others are successful remains to be seen—as does the question with regard to whether all the investment will put much of a dent in Atlantic City’s poverty rate or help the town’s current residents. He adds: “And it’s not going to be this summer or next summer when we find out who, if anyone, wins. Nevertheless, he wrote: “When I consider Point Breeze circa 2008 and that same area today, I have hope for this complicated Shore town. There will always be casinos here, for better or worse, and there will always be crime and poverty and grime. This is, after all, a city. But, 10 years from now, when my own kids are (I hope) in very good colleges, it’s not too hard to imagine us spending a summer weekend at some boutique hotel on New York Avenue. We’ll stop into the Boardwalk La Colombe for a draft latte, served up by a very hip-looking third-year Stockton student on break. For lunch, HipCityVeg down in the inlet. Happy hour will be at some John Longacre-owned brewpub overlooking the Atlantic.”

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The Stark Challenge of Transferring Governmental Responsibility in the Wake of Devastation

eBlog

January 31, 2017

Good Morning! In today’s Blog, we consider the abrupt decision to cease emergency federal relief efforts vital to Puerto Rico’s physical and fiscal recovery.

Post Storm Fiscal & Physical Misery. The Federal Emergency Management Agency (FEMA) yesterday announced it will “officially shut off” aid, including supplies of food and water in Puerto Rico this week. To date, the agency has supervised the distribution of more than 30 million gallons of drinking water and 60 million meals to its inhabitants. The Puerto Rico FEMA Director, Alejandro De La Campa, stated: “The reality is that we just need to look around. Supermarkets are open, and things are going back to normal.” In response, Mayor Carmen Maldonado of Morovis, a muncipio in the central mountains which was among Puerto Rico’s most devastated—and where a bridge collapse sequestered thousands of residents from access to FEMA assistance, including food, fuel, water, and medicine. The municipality’s elderly and ailing residents thus lost access to medical treatment. Thus, unsurprisingly, where power is only available to 20 percent of the U.S. citizens, FEMA’s announcement appears premature.

The FEMA announcement appeared to blindside Puerto’s Rico’s leaders and citizens—with the government having stated it was still in talks with FEMA on a timetable for assuming control of food and water distribution. For its part, the federal agency, which deemed its emergency operation the longest sustained distribution of food, fuel, and water in FEMA’s history, including more than $1.6 billion worth of food and more than $361 million worth of water, nevertheless declared all shipments of food and water will officially stop today; FEMA made clear it has stockpiled more than 46 million liters of water, 2 million Meals Ready to Eat, and 2 million snack packs on the ground for distribution if needed, noting: “The commercial supply chain for food and water is re-established, and private suppliers are sufficiently available that FEMA-provided commodities are no longer needed for emergency operations,” while Héctor M. Pesquera, the Secretary of Public Safety for Puerto Rico, who is also the commonwealth’s coordinating officer, said the transition period for local authorities to take over distribution should last at least two weeks: “The Government…is waiting for critical data provided by FEMA in order to determine when the responsibilities should be transferred from FEMA to the Government of Puerto Rico…” a statement seeming to make clear that the abrupt FEMA action was neither coordinated with Puerto Rico: “[W]e were not informed that supplies would stop arriving, nor did the Government of Puerto Rico authorize this action,” albeit noting that conditions “in most areas have improved and many economic indicators are showing that recovery is underway.”

FEMA spokesman William Booher said FEMA would “continue to support any documented needs and will provide supplies to volunteer agencies and other private nonprofit organizations…working with households in rural, outlying areas to address ongoing disaster-related needs as power and water is gradually restored.” The federal disaster relief agency still has about 5,000 personnel in Puerto Rico—and states it is prepared to restart food and water shipments should the need arise. Nevertheless, the abrupt departure, unmentioned in the State of the Union Address last night, came as San Juan Mayor Carmen Yulin Cruz, who was in attendance at the President’s address in Washington last night, reacted to the decision on Twitter, asking in Spanish: “Seriously, are they leaving?…This is the kind of indifference that must be stopped,” adding that some schools outside San Juan still have no water, power, or even supplies of milk; nearly half a million power utility customers remained without electricity as of last week, according to the power authority.

Last month, representatives of Puerto Rico’s Emergency Management Agency and FEMA had met with Mayors across the U.S. territory to assess urgent food and water needs, and yesterday FEMA reported nine regional staging areas which it had established to distribute food and water to Puerto Rico’s 78 muncipios will remain open—an important decision, as many outlying, rural, smaller muncipios still confront serious problems with access to food and water—especially in the more mountainous regions, where many remain without power, potable water, and, in some instances, even main roads. A key concern is for Puerto Rico’s elderly—those increasingly left behind by the exodus of the young and educated to the mainland: these citizens today have to face a drive of 30 to 40 minutes just to get to a store—a pre-Maria drive which used to take 5 to 10 minutes—but which has been much more challenging for seniors who must depend on others for transportation.

Restructuring, Refinancing, & Repowering in the Wake of a Quasi Municipal Bankruptcy

January 23, 2017

Good Morning! In today’s Blog, we consider the fiscal challenges to the U.S. Territory of Puerto Rico in restructuring and rebuilding its public infrastructure.

Puerto Rico Governor Ricardo Rosselló yesterday announced he will privatize the state Electric Power Authority (AEE), stating: “ESA will cease to exist as it currently operates, and during the next few days the process will start where ESA assets will be sold to companies that will transform the generation system into a modern, efficient and less expensive one for the people.” The Governor’s announcement came at a time when almost half a million users of the system are still without service some 124 days after Hurricane Maria’s stormy passage. 

The privatization of the PREPA has been a priority objective of the Government and the PROMESA Fiscal Supervision Board—indeed, last August, before hurricanes Irma and Maria struck Puerto Rico, Chairman José Carrión, had assured that the privatization would be carried out as soon as possible. Indeed,the Board would have to approve any privatization—and, it seems likely that U.S. District Court Judge Laura Taylor Swain might well have some oversight as the Governor develops the first phase—drafting legislation, and then defining the public procurement process. The Governor, in what appears to be an effort to “kill two birds with one stone,” has also described the sale as one where proceeds would be used to help meet public pension obligations.

In his announcement, Gov. Rosselló explained that the process will take 18 months and will be carried out in three phases: “In the first one, the legal framework will be defined through legislation, the market will be assessed, and the call will be opened for companies interested in participating.” He said that in the second step, bids be received and evaluated; and in the third, the terms of the awarding and hiring of the selected company will be negotiated. In making his announcement, the Governor assured that Puerto Rico’s electrical system is 28 years older than the average for the industry in the U.S., noting: “PREPA has become a heavy burden for our people, who today are hostage to their poor service and high cost, what we know today as PREPA does not work and cannot continue to operate like this.” 

Unsurprisingly, his pronouncement was criticized by different authorities: Independence Party Senator Juan Dalmau described his announcement as a “manipulation” to justify the lack of energy on the island since the hurricane. Mayor Carmen Maldonado of Morovis, a city of some 27,000 founded in 1817, and the island’s only municipality which was not devastated by the 1853 cholera epidemic—a devastation remembered both by your scribe who had cholera in Colombia, but also an event which led to what, today, has become a common expression: “La isla menos Morovis,” [all the island but Morovis]—a phrase believed by most Puerto Ricans to have a negative connotation against moroveños. Morovis Mayor Carmen Maldonado responded that the Governor’s announcement does not offer solutions for those who still do not have service in their homes and businesses, stating: “People are still waiting for a service restoration plan.” 

For her part, San Juan Mayor Carmen Yulin Cruz, known for her criticisms of the Trump administration’s response to Puerto Rico after Hurricane Maria, spoke out against the proposal, noting: on her official Twitter account, that PREPA’s privatization would put the Commonwealth’s economic development into “private hands,” and that the power authority will begin to “serve other interests,” describing it as a “clear” strategy to “create chaos at a time when citizens are in need in order to sell something as positive that will be negative in the long run.” The malingering situation, however, is, according to the most recent report from the U.S. Department of Energy, that some 36% of PREPA customers are still without power four months after Maria caused widespread devastation on the island.