Restoring Power–and Recovering Governing Authority

July 10, 2018

Good Morning! In this morning’s eBlog, we consider the challenges of restoration of electric power (as opposed to political power) in Puerto Rico, and then try to explore the risks of powers of appointments of emergency managers by a state—here as the City of Flint, Michigan is still seeking to fiscally and physically recover from the human and fiscal devastation caused by the State of Michigan.

Adios. Walter Higgins, the CEO Puerto Rico’s bankrupt PREPA Electric power authority resigned yesterday, just months after he was chosen to oversee its privatization, an appointment made in an effort to fully restore power some ten months after the human, fiscal, and physical devastation wrought by Hurricane Maria. Now his resignation adds to PREPA’s uphill climb to not only fully restore power, but also to address its $9 billion in debt. Gov. Ricardo Rosselló said in a statement that Mr. Higgins had resigned for personal reasons, while Mr. Higgins, in his resignation letter, wrote that the compensation details outlined in his contract could not be fulfilled—with his written statement coming just one month after the Commonwealth’s Justice Secretary said it would be illegal for him to receive bonuses. According to a PREPA spokesperson, Mr. Higgins will remain as a member of the PREPA Board. Nevertheless, his appointment was stormy itself, after, last month, Puerto Rican officials had questioned how and why he had been awarded a $315,000 contract without authorization from certain government agencies—in response to which PREPA’s Board advised the government as a consultant, rather than filling the vacancy for an executive sub-director of administration and finance. Unsurprisingly, his departure will not be mourned by many Puerto Ricans in view of his generous compensation package of $450,000 annual salary compared to the average income for Puerto Ricans of $19,518.  

Nevertheless, PREPA officials, announced that current Board member Rafael Diaz Granados will become the new CEO—with nearly double the compensation: he will assume the position on Sunday and receive $750,000 a year—a level which Puerto Rico Senate President Thomas Rivera Schatz described as the “kind of insult that to Puerto Ricans is unacceptable,” as the government and PROMESA Oversight Board continue to struggle to address and restructure Puerto Rico’s $70 billion in public debt. Nevertheless, as PREPA crews continue restoring power to the last 1,000 or so customers who have been without power since Maria hit nearly a year ago and destroyed up to 75% of transmission lines across the territory, the federal government is still operating 175 generators across the island.

Indeed, U.S. House Natural Resources Committee Chair Rob Bishop (R-Utah) has scheduled a hearing for July 25th to assess and inquire about the status of the Electric Power Authority and to examine the functioning and plans for the privatization of PREPA assets, an issue which the territory’s non-voting Congressional Representative Jenniffer Gonzalez noted “has been under the Committee’s jurisdiction for the past two years.” Rep. Gonzalez added: “I’m surprised with the salary: I did not expect that amount. I do not know the elements which affected Mr. Higgin’s resignation, and I believe that these changes affect the process of recovery on the island.”

Meanwhile, Chairman Bishop had announced a second potential hearing—this one to assess the operation of the PROMESA statute and how the PROMESA Oversight Board is working, after, last week, postponing an official trip with a dozen Members of Congress to assess the physical and fiscal recovery on the island, after meeting, early last month in San Juan with the now former PREPA Director Higgins, and after, in the spring, Chair Bishop, Chair Doug LaMalfa (R-Ca.), of the Subcommittee on Island Affairs, and Chairman Bruce Westerman (R-Ark.) had announced a probe into “multiple allegations of corruption and serious allegations of maladministration” during the restoration of the electric service after the storm.

Out Like Flint? Meanwhile, in a criminal and fiscal case arising out of Michigan’s Flint water crisis in the wake of fatal decisions by a gubernatorially appointed Emergency Manager, closing arguments in the involuntary manslaughter case against state Health and Human Services Director Nick Lyon began yesterday before Genesee District Court Judge David Goggins, who will determine whether Director Lyon will go on trial in the Flint water crisis prosecution on charges of involuntary manslaughter and misconduct in office connected to the 2014-2015 Legionnaires’ disease outbreak in the Flint region which killed at least 12 people and sickened another 79 people. A misdemeanor charge of “willful neglect” to protect the health of Genesee County residents was added last week. Director Lyon is receiving assistance in his defense from John Bursch, a former Michigan Solicitor General, who was hired for that position by Michigan Attorney General Bill Schuette—who has brought criminal charges related to the Flint water crisis against Director Lyon and 14 other current and former city and state government employees. Flint still faces financial questions after years of emergency management.

The criminal trial comes as questions still remain with regard to Flint’s long-term financial health, despite six years of state oversight that overhauled the city’s finances, after a 2011 state-ordered preliminary review showed problems with Flint’s finances and ultimately recommended an emergency manager for the city. Last April, State Treasurer Nick Khouri repealed all remaining Emergency Manager orders, with state officials claiming the city’s financial emergency has been addressed to a point where receivership was no longer needed, and, as the Treasurer wrote to Mayor Karen Weaver: “Moreover, it appears that financial conditions have been corrected in a sustainable fashion,” and Flint CFO Hughey Newsome said that while emergency managers had helped Flint get its financial house in order; nevertheless, Flint’s fiscal and physical future remains uncertain: “The after-effects of the water crisis, including the dark cloud of the financials, will be here for some time to come: We’re not out of the woods yet, but I don’t think emergency management can help us moving forward.” In the city’s case, the fateful water crisis with its devastating human and fiscal impacts, hit the city as it was still working to recover from massive job and population losses following years of disinvestment by General Motors. CFO Newsome said the crisis affected the city’s economic development efforts and may have left potential businesses wanting to come to Flint wary because of the water.

Flint’s spending became more in line with its revenues, changes were made to its budgeting procedures, and retiree healthcare costs and pension liabilities were reduced while under emergency management. Nevertheless, past financial overseers have warned the city about what would happen if Flint allows its fiscal responsibilities to slip. Three years ago, former Emergency Manager Jerry Ambrose, in a letter to Gov. Snyder, wrote: “If, however, the new policies, practices and organizational changes are ignored in favor of returning to the historic ways of doing business, it is not likely the city will succeed over the long term: The focus of city leaders will then likely once again return to confronting financial insolvency.”

Today, there are still signs of potential fiscal distress, notwithstanding  the city’s recovery; indeed, Mayor Weaver’s FY2019 budget plans for a more than $276,000 general fund surplus—even as the municipal budget is projected to grow to more than $8 million by FY2023, with that growth attributed by CFO Newsome to ongoing legacy costs and a lack of revenue—or, as he put it: “My last two predecessors have really delivered realistic budgets: I definitely don’t see this administration being irresponsible in that regard, and I don’t see this Council rubberstamping such a budget either.”

And, today, questions about criminal and fiscal accountability are issues for the state’s third branch of government: the judiciary, in District Court Judge William Crawford’s courtroom, where the issues with regard to criminal charges relating to the governmental actions of defendants charged for their actions during the Flint Water Crisis include former Emergency Manager Darnell Early and former City of Flint Public Works Director Howard Croft, and former state-appointed Flint Emergency Manager Jerry Ambrose, who, prosecutors  allege, knew the Flint water treatment plant was not ready to produce clean and safe water, but did nothing to stop it. The trial involves multiple charges, including willful neglect of duty and misconduct in office. (Mr.  Ambrose was the state appointed Emergency Manager from January until April of 2015; he also held the title of Finance Director under former state appointed emergency managers Mike Brown and Darnell Early. To date, four others have entered into a plea agreement in their cases.)

Bequeathing a Legacy of healthcare and retirees benefit costs: When Mr. Ambrose left in 2015 and turned things over the to the Receivership Transition Advisory Board, he stated that Flint’s other OPEB costs had been reduced from $850 million to $240 million, adding that a new hybrid pension plan put in place by state appointed emergency managers had reduced Flint’s long-term liability; however, he warned, on-going legacy costs are still one of the most pressing issues for Flint’s fiscal future: “Remember, the reality we’re facing: we have a $561 million liability to (Municipal Employees’ Retirement System), and the fund is only at $220 million; we also have an obligation to our 1,800 retirees to make sure that we’re paying our MERS obligation.” (A three percent raise for Flint police officers approved earlier this year added to those liabilities, with those increases attributable to two different contracts, which were imposed on officers by former state-appointed Emergency Managers Michael Brown and Darnell Earley in 2012 and 2014, respectively.)

The RTAB asked CFO Huey Newsome in January how the city would pay the additional $264,000 annually in wages and benefits along with a projected $3.4 million in additional retirement costs over the life of the contract—a question he was unable to specify an answer to at the time: “To tell you exactly where those‒where those dollars will come from right at this point in time, I can’t say…I think the ‘so what’ of this is that, you know, the incremental impact from this pay raise is not going to be that large when you think about the three and a half million. The city still needs to figure out where that three and a half million is coming from.” Moreover, he added, because police negotiated the raise, it also could be an issue with other unions wanting a similar increase during their future negotiations, adding that the city is making increased payments to MERS to avoid balloon payments in the future. For example, Mr. Newsome said, Flint will pay an additional $21.5 million this year, adding that all the city’s funds currently have a positive balance. However, Flint’s budget projections show the water fund will have a $2.1 million deficit in FY2018-19, a deficit projected to increase to $3.3 million by FY2022-23; Flint’s fiscal projections eventually put the water fund balance in the red by 2022-23; however, CFO Newsome warned: “The water fund is probably the most tepid one, because it is expected to be below the reserve balance by the end of the year,” noting the city can only account for 60% of the water that goes through its system, adding that the city has an 80% collection rate on its water bills, which is about $28 million this fiscal year, telling the Mayor and Council: “One of our top priorities is better metering.”

The city’s most-recent budget for 2018-19 calls for a combined revenue increase of $1.09 million more than previous budget projections because of increased assessed property values, more income taxes coming in, and additional state revenue sharing. Nevertheless, one Board member, notwithstanding projections for increased revenue, is apprehensive that Flint’s “tax base is likely going to continue to shrink, and the city currently has limited resources to reverse this trend,” or, as CFO Newsome put it: “Right now, revenue is not there: The income tax is relatively flat. The property tax is flat. That’s reality.” The city’s current proposed FY2019 budget calls for an increase of $120,000 from property taxes, $339,000 increase in income tax revenue, and an additional $631,000 in revenue from the state of Michigan. 

 

Accounting for Municipal Futures

July 9, 2018

Good Morning! In this morning’s eBlog, we consider we consider the ongoing governance challenges in Puerto Rico—and how distinct its form of governmental bankruptcy is, before looking at some innovative efforts by Puerto Rico’s elected local leaders to institute new accounting measures.

Who’s in Charge of Puerto Rico’s Physical and Fiscal Future? U.S. District Judge Laura Swain Taylor has granted a motion by the Commonwealth to accelerate the terms of the motions and the aftershocks associated with the lawsuit filed by Gov. Ricardo Rosselló Nevares against the PROMESA Oversight Board, a judicial action which Christian Sobrino, the Governor’s representative before the Board, could be completed the end of this month, noting: “The Judge has a good appreciation of the right which will apply in the case and understands that (the dispute in the lawsuit) is a matter that is not dependent on facts, but rather on an interpretation of PROMESA statute.In the case, which was filed as an adversarial suit within the government’s quasi bankruptcy cases, Judge Swain is asked to issue an injunction and a declaratory judgment against the Oversight Board for preempting, by means of its fiscal plan and budget aims, to impose public policy decisions, rather than recommend “non-binding” recommendations. Therefore, the motion asserts the Governor does not have to comply, or, as he put it: “I think the judge appreciates how essential it is (the demand) for the government’s operation.”

The motion would appear to set a short time frame: the Oversight Board would have to respond to the demand by Thursday; responses to the motions will continue until July 20th, with the arguments considered as part of an “omnibus” hearing scheduled for July 25th in the District Court of Puerto Rico, in Hato Rey, the most densely populated neighborhood in San Juan. In his complaint, the Governor has argued that the Board is intent upon “micro administering” the government of Puerto Rico—a governing responsibility which belongs to his administration, and not to the body created by the U.S. Congress to control the finances of the government of Puerto Rico—adding that the remedy requested by the government of Puerto Rico does not imply that the fiscal plan approved by the Oversight Board last April is nullified, but rather that the so-called ‘corrective sheets’ issued by the Board, such as the suspension of the Christmas bonus, the reduction of personnel in the public service, or the consolidation of agencies, and the way in which the pension plans will be reformed, are competences of the government—not of the Oversight Board. A key sticking point, as we have noted, has been with regard to Law 80, the Law on Unjustified Dismissal (Law 80). The Board had demanded the preemption or elimination of this law, asserting it would improve the business climate in Puerto Rico—a preemption unsurprisingly opposed by legislative leaders, who had rejected an agreement between Gov. Rosselló Nevares and the PROMESA Board in which, in exchange for the repeal of Law 80, the Board would have granted a series of increases to some budget items for the new fiscal year which commenced this month. Thus, Gov. Rosselló, last Thursday, went to court to challenge the budget imposed by the PROMESA Oversight Board, claiming the Board had overstepped its authority. Moreover,

Puerto Rico Senate President Thomas Rivera Schatz said he supported the Governor’s suit against the both the Board and its proposed preemption budget, while the Board defended its authority, citing the 2016 PROMESA statute enacted, theoretically, to help the Commonwealth manage its economy and restructure its debt. In response, the PROMESA Board issued a statement: “The Financial Oversight and Management Board for Puerto Rico approved and certified a Commonwealth budget for FY2019 in compliance with the certified fiscal plan and in accordance with [the Puerto Rico Oversight, Management, and Economic Stability Act to put Puerto Rico on the road to recovery. The Oversight Board will vigorously defend against any suit attempting to thwart the carrying out of the budget and fiscal plan,”  referring to the fiscal plan it had approved on June 30th by unanimous consent and declaring it to be the valid budget for Puerto Rico—a proposed budget which allocated $8.758 billion for the General Fund and $20.664 billion for Puerto Rico’s consolidated budget—a fiscal budget intended to preempt Puerto Rico’s authority and go into effect on July 1.

Gov. Rosselló said that he would ask a court to establish that the Board’s fiscal plan and budget are recommendations—and recommendations only, adding he would seek a “declaratory judgment and an injunction” on the Board’s attempt to usurp the Commonwealth of Puerto Rico’s right to home rule by including components in the budget which control public policy—no doubt referencing the PROMESA Board’s approved budget’s elimination of funding for the government’s longstanding Christmas bonus, for a municipal aid program, and several other purposes supported by the Governor. The PROMESA Board had agreed with the Governor Rosselló to funding these items in exchange for a promise from the Governor that Puerto Rico would adopt at-will employment by rescinding Law 80; however, as we have noted, under the leadership of Senate President Thomas Rivera Schatz, the Puerto Rico Senate refused to rescind Law 80—an action which, while it led to strained relations between the Governor and Senate leader late last month, appears to have dissipated in the face of the preemptive efforts by the unelected PROMESA Board—or, as Sen. Rivera Schatz at the end of last month put it: “We must put a stop to the Napoleonic pretensions of the fiscal control board. We have and must defend the people of Puerto Rico. That’s the right thing, Governor. I congratulate you…Puerto Rico has a democratically elected government: “We don’t accept an imposed and abusive government.”

The federalism challenge came as, on June 30th, the PROMESA Board also approved budgets for the Government Development Bank, the Puerto Rico Highways and Transportation Authority, the University of Puerto Rico, the Puerto Rico Aqueduct and Sewer Authority, and the Puerto Rico Electric Power Authority—approvals upon which the Governor has not yet indicated whether he planned to challenge these budgets in court as well.

Nevertheless, the Governor has called for an extraordinary session of the Legislature in a bid to pass Law 80, the controversial labor reform bill which would modify worker protections in order to make the U.S. territory more attractive for investment—an effort the PROMESA Oversight Board has long insisted upon—a call which, at least so far, has gone begging . Nevertheless, the legislature has balked, including leaders from Governor Rossello’s own political party. Absent the reform, basic assumptions about Puerto Rico’s fiscal and governance future are unclear. The Governor, in a televised address to the Commonwealth, called for a last-ditch session of lawmakers to approve a version of the reform, noting: “I’m confident that this call for an extraordinary session will serve to avert the damage that the failure to fulfill the agreement with the Board causes to the island’s economy, as well as important sectors of our society.” Previously, both Gov. Rossello and the Board had acknowledged, reluctantly, that critical questions for the island’s future may have to be settled by a court—a settlement which the Governor apparently believes the government would stand little chance of winning, as his reading of PROMESA makes clear the Board’s power in matters of the budget, ergo, he said, compromise was critical to create a sense of predictability around Puerto Rico’s future. Nevertheless, he also said that he had signed the legislature’s budget, as opposed to an alternate version advocated by the PROMESA Board, and that, for the time being, that was the version, which is in effect: the PROMESA Board’s budget was unacceptable, he noted.

The Commonwealth has defaulted on its municipal bonds; it is confronted with $120 billion in debt and pension obligations, which it simply cannot fiscally meet. And now the question of ‘Who’s on First,” in the wake of a decade of recession and then the disparate federal fiscal and physical response to the devastation caused by Hurricane Maria—combine with the fiscal hurricane of federal preemption with the imposition by Congress of a fiscal oversight board—has made the path back to self-governance its own fiscal and governance maze.

Natalie Jaresko, the Executive Director of the PROMESA Board, stated: “The Board continues to believe that comprehensive labor reform, including the repeal of Law 80 to make Puerto Rico an at-will-employment jurisdiction, is an essential component of the reforms needed to improve the island’s economy and make the business environment more competitive.” Last Friday, at a press conference, PROMESA Board members said they viewed labor reform as essential to Puerto Rico’s transformation—demonstrating that, as opposed to governance in chapter 9 municipal bankruptcies, where, under most state laws, there is an emergency manager designated to put together a plan of debt adjustment for approval by a U.S. Bankruptcy Court; in PROMESA, it is almost as if there are too many judicial/fiscal cooks in the kitchen.

Accounting for Municipalities Futures. Even as the path to fiscal solvency is conflicted for the Commonwealth of Puerto Rico, the issue of municipal accounting is drawing constructive attention among the island’s municipalities. Mayor Carlos Delgado Altiera of Isabela, a muncipio spread over 13 wards and also known as the “Garden of the Northwest,” for its many wild flowers, and as the town of “Leaf Cheeses,” for its production of white cheese wrapped in banana leaves—and as the City of Fighting Cocks,” as it has served as a home for the breeding of these birds since the 18th century, has indicated that the issue of creating a standardized municipal accounting system “generates many questions,” so that there is an interest to acquire technology to standardize the accounting systems of the municipalities. Thus, Mayors or Alcaldes of the New Progressive Party have urged Gov. Rosselló Nevares to veto a measure (Senate 550) authored by Senate President Thomas Rivera Schatz, which seeks to impose a unique accounting system in the municipalities. The rejection of the so-called Senate 550 Project has also been joined by the popular municipal executives: the consensus is that such a change would represent a setback and an unnecessary and impossible economic investment for most municipalities—or, as Mayor Javier Jiménez of San Sebastian put it: “The Governor was being asked to veto that project, because, definitely, centralizing again (those functions) would create a tremendous problem for us,” noting that, in recent weeks, he has met with some 20 mayors, both popular and penepés (supporters of statehood): all are opposed to the measure. The Mayor argued that each municipality has already developed an accounting system, which meets their needs.

Indeed, it seems that for several mayors, the measure has come as a surprise, even more so when the Senate President had become their ally on other issues, such as the elevation to the constitutional rank of municipal autonomy and the development of measures aimed at having the State consult them with regard to the approval of exemptions and charges that adversely impact their collections. Mayor Jiménez explained that, in the past, the Office of Municipal Affairs was the body in charge of operating the accounting systems for the island’s municipalities. However, given the inability to maintain an updated system and in line with the progress, the mayors had been permitted to contract and use that technology that would meet their needs—or, as Mayor José A. Santiago of Comerío put it: “I cannot understand how, after so many examples of the problems caused by centralization: let us walk in the opposite direction to what should be the strengthening of local governments.” Under the proposal, which would be implemented through a contract with a private company, a requisite, so that the municipalities could access advanced services and reduce the risk of loss of essential services and municipal revenues, such a service would also give them the flexibility they need to adapt to the advances and challenges. The proposed Municipal Revenue Collection Center (CRIM) would become the entity charged, as the founders are of the perception that manymunicipalities do not have the way to know with certainty how much money they owe in municipal contributions, the debts between the different funds or their cash balances, or how many businesses have started or stopped operating in recent years.” The effort, the founders note, is necessary, because the “state government does not have the economic resources to develop such a large technology, the immersion of the private sector is of crucial importance,” with Isabel Mayor Carlos Delgado noting that among the island’s 78 municipios, a number simply lack the requisite technology and management experience.

In a letter sent to the Governor signed by the executive director of the Federation of Mayors, Mayor Isabelo Molina Hernandez, and signed by Federation President Carlos Molina Rodríguez, they wrote:The Federation of Mayors does not endorse the project…It promotes unnecessary centralization and negatively affects the public policy of greater municipal autonomy.”

According to the measure, a September 2016 report from Puerto Rican Office of the Comptroller, the “vast majority of municipios failed to comply” with the criteria considered in the components of computerized systems, such as physical security and environmental controls, logical access control and control of computers, among others.” Mayor Hernández argued that municipios are subject to oversight by the Office of the Comptroller, Government Ethics, the Federal Inspector General, as well as external audits; thus, he added, if the central government wishes to have additional tools to provide greater access to the public, it can develop an information system in which municipalities publish their financial information.