Can Congress Uninflict Federally Caused Fiscal & Economic Disparities & Distress?

October 13, 2017

Good Morning! In today’s Blog, we consider the ongoing fiscal, legal, physical, and human challenges to Puerto Rico, before heading north to New Jersey where the fiscal and governing strains between Atlantic City and the Garden State continue to fester.

Visit the project blog: The Municipal Sustainability Project 

Physical, Oratorical, & Fiscal Storms. President Trump served notice yesterday that he may pull back federal relief workers from Puerto Rico, effectively threatening to abandon the U.S. territory amid a staggering humanitarian crisis in the aftermath of Hurricane Maria–even as House Speaker Paul Ryan (R-Wis.) goes to Puerto Rico this morning to assess not only the damage, but also how to more effectively respond to a staggering humanitarian crisis in the aftermath of Hurricane Maria. The Speaker will also bear some good news: the House yesterday approved 353-69, a $36.5 billion disaster aid package to help victims struggling to recover from a string of devastating hurricanes and wildfires, sending the aid package to the Senate, which returns from a weeklong recess next week. While the Trump administration requested $29 billion in supplemental spending last week, it asked for additional resources Tuesday night, including $4.9 billion to fund a loan program that Puerto Rico can use to address basic functions such as infrastructure needs. Speaker Ryan noted: “‎We think it’s critical that we pass this legislation this week to get the people the help they need, to support the victims, and also to help the communities still recovering and dealing with the problems with the hurricanes Harvey, Irma, and Maria.” Puerto Rico Governor Ricardo Rosselló had warned Congressional leaders that the U.S. territory is “on the brink of a massive liquidity crisis that will intensify in the immediate future.”

President Trump yesterday claimed that it will be up to Congress how much federal money to appropriate for Puerto Rico, but that relief workers will not stay “forever,” even as, three weeks after Hurricane Maria struck, much of Puerto Rico remains without power, with limited access to clean water, hospitals are running short on medicine, and many businesses remain  closed. The President added:  “We cannot keep FEMA, the Military & the First Responders, who have been amazing (under the most difficult circumstances) in P.R. forever!”

The White House late yesterday issued a statement committing for now “the full force of the U.S. government” to the Puerto Rico recovery, seemingly contradicting the President, who has sought to portray Puerto Rico as in full recovery mode and has voiced frustration with what he considers mismanagement by local leaders. The Governor had warned earlier in the week that the U.S. territory is “on the brink of a massive liquidity crisis that will intensify in the immediate future.” The legislation the House adopted last night allows up to $4.9 billion in direct loans to local governments in a bid to ease Puerto Rico’s fiscal crunch—a vital lifeline, as, absent Congressional action, the territory may not be able to make its payroll or pay vendors by the end of this month.

In contrast, Speaker Ryan said that Puerto Rico must eventually “stand on its own two feet,” but that the federal government needs to continue to respond to the humanitarian crisis: “We’re in the midst of a humanitarian crisis…Yes, we need to make sure that Puerto Rico can begin to stand on its own two feet…But at the moment, there is a humanitarian crisis which has to be attended to, and this is an area where the federal government has a responsibility, and we’re acting on it.”

Rep. Nydia M. Velázquez (D-NY), who was born in Puerto Rico, said in a statement that the President’s “most solemn duty is to protect the safety and the security of the American people. By suggesting he might abdicate this responsibility for our fellow citizens in Puerto Rico, Mr. Trump has called into question his ability to lead. We will not allow the federal government to abandon Puerto Rico in its time of need.” Similarly, Jennifer Hing, a spokeswoman for House Appropriations Committee Chairman Rodney Frelinghuysen (R-N.J.), who will accompany Speaker Ryan today, said that those who live on the island “are American citizens and they deserve the federal assistance they need to recover and rebuild. The Chairman and the Committee fully stand by them in these efforts, and will continue to be at the ready to provide the victims of these devastating hurricanes with the necessary federal resources both now and in the future.” Without Congressional action, the territory may not be able to make its payroll or pay vendors by the end of the month. Unmentioned is whether such contemplated assistance might entail repealing the Jones Act—an act which means the price of goods in Puerto Rico is at least double that in neighboring islands—including the U.S. Virgin Islands. The New York Federal Reserve  found that the Act hurts the Puerto Rican economy—Sen. John McCain (R-Az.) and Rep. Gary Palmer (R-Ala.) have offered legislation to repeal or suspend the law.

President Trump yesterday warned that his administration’s response to hurricane-ravaged Puerto Rico cannot last “forever,” tweeting: “We cannot keep FEMA, the Military & the First Responders, who have been amazing (under the most difficult circumstances) in P.R. forever!” He added that the U.S. territory’s existing debt and infrastructure issues compounded problems. His tweeting came as the House is preparing to consider legislation under which Puerto Rico would receive a $4.9 billion low-interest federal loan to pay its bills through the end of October, as part of a $36.5 billion package. The temporary assistance comes as Moody’s Investors Service has downgraded the Commonwealth of Puerto Rico’s general obligation bonds to Ca from Caa3, in view of the protracted economic and revenue disruptions caused by Hurricane Maria. The President also threatened he may pull back federal relief workers from Puerto Rico, effectively threatening to abandon the U.S. territory amid a staggering humanitarian crisis in the aftermath of Hurricane Maria: he said that relief workers will not stay “forever.” Three weeks after Hurricane Maria made landfall, much of Puerto Rico, an island of 3.4 million Americans, remains without power. Residents struggle to find clean water, hospitals are running short on medicine, and commerce is slow, with many businesses closed.

The lower ratings are aligned with estimates of Puerto Rico’s reduced debt servicing capacity given extensive damage from Hurricane Maria. Puerto Rico faces almost total economic and revenue disruption in the near term and diminished output and revenue probably through the end of the current fiscal year and maybe well into the next. The weaker trajectory will undercut the government’s ability to repay its debt, a matter now being weighed in a bankruptcy-like proceeding authorized by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). For the University of Puerto Rico, the downgrade factors in expected pressure on enrollment-linked revenue and on funding from the Puerto Rican government.

With 155 mile-an-hour winds and a path that cut diagonally across the island, Hurricane Maria was the most destructive storm to hit Puerto Rico in almost 90 years. It knocked out all electric power, destroyed more than 100,000 homes, and ruptured bridges and other public infrastructure. Beyond the disruption of the immediate aftermath, the potential long-term repercussions may be somewhat mixed, however. On one hand, a massive exodus of residents relocating to the mainland, rather than rebuilding on the island, could further erode Puerto Rico’s economic base. Moody’s opined that an infusion of federal relief and rebuilding funds could spur the economic growth and infrastructure replacement that, under normal conditions, has eluded Puerto Rico: “We, nevertheless ,view the economic impact overall as a substantial negative that has weakened the commonwealth’s ability to repay creditors: The negative outlook is consistent with ongoing economic pressures, which will weigh on the commonwealth’s capacity to meet debt and other funding obligations, potentially driving bondholder recovery rates lower as restructuring of the commonwealth’s debt burden unfolds.”

Tens of thousands of islanders left for the U.S. mainland to escape the immediate aftermath of the storm. With conditions back home still grim—approximately 85 percent of residents still lack electricity and 40 percent are without running water, and neither is expected to be fully restored for months—many find themselves scrambling to build new lives away from the island. Particularly in states with large Puerto Rican populations, such as New York, Illinois, Florida, and Connecticut, people are bunking with relatives while trying to find longer-term housing, jobs and schools for their kids.

There have been several major migratory exoduses from Puerto Rico to the mainland over the years, most recently during the past decade when the island’s population shrank by about 10 percent because of a long economic slide that shows no sign of easing anytime soon. Hurricane Maria struck Sept. 20th, and, according to the latest figures from the Puerto Rican government, killed at least 45 people. It also created a new surge that could have lasting demographic effects on Puerto Rico and on the mainland. “I think that we could expect that people who did not plan to stay permanently might do so now,” said Jorge Duany, a professor of anthropology at Florida International University who has long studied migration from the island. Many of those who left are elderly or sick people who fled or were evacuated because of the dangers posed by living on a tropical island with no power or air conditioning and limited water for an indefinite period of time.  It is too early to know exactly how many have departed Puerto Rico for the mainland, but Florida reports more than 20,000 have come to the Seminole state since Oct. 3rd. There were already about 1 million Puerto Ricans in the Sunshine State, second only to New York.

Addressing the urgency of fiscal assistance, House Appropriations Committee Chairman Rodney Frelinghuysen (R-N.J.) stated: “These funds are vital right now, in the near term, to get the aid where it is needed most.” Puerto Rico faces a government shutdown at the end of the month without an infusion of cash, according to Puerto Rico Treasury Secretary Raul Maldonado: the proposed loan provides flexibility for repayment: it allows the Secretary of Homeland Security, in consultation with Treasury Secretary Mnuchin to “determine the terms, conditions, eligible uses, and timing and amount of federal disbursements of loans issued to a territory or possession, and instrumentalities and local governments.”

Gov. Ricardo Rossello Nevares, in his letter at the end of last week to the President, cited “independent damage assessments in the range of $95 billion–approximately 150% of Puerto Rico’s” economy, writing that “financial damages of this magnitude will subject Puerto Rico’s central government, its instrumentalities, and municipal governments to unsustainable cash shortfalls: As a result, in addition to the immediate humanitarian crisis, Puerto Rico is on the brink of a massive liquidity crisis that will intensify in the immediate future.”

Saving Atlantic City. New Jersey Superior Court Judge Julio Mendez has ruled that Atlantic City can cut its Fire Department by 15 members early next year as a cost-saving measure under the Garden State’s Municipal Stabilization and Recovery Act, with his ruling lifting the restriction that any reduction in force must occur through retirements or attrition. Judge Mendez, who in late August had ruled against a state proposal for 50 layoffs, ruled no cuts may take place before February 1st—marking the first legal showdown under New Jersey’s Recovery Act takeover powers under designee Jeffrey Chiesa, which enables the state to alter outstanding municipal contracts. In his decision, Judge Mendez wrote: “Upon careful consideration of the facts and legal arguments, the court is of the view that the plan and timeline for immediate reductions is problematic but it’s not impermissible by the Recovery Act…The court will not restrict the Designee from establishing a plan to reduce the size of the ACFD from the current level of 195 to 180.”  Judge  Mendez ruled the state may exercise its authority; however, the cuts are not allowed until after Feb. 1, according to the ruling: “Upon careful consideration of the facts and legal arguments, the court is of the view that the plan and timeline for immediate reductions is problematic, but it’s not impermissible by the Recovery Act…The court will not restrict the Designee from establishing a plan to reduce the size of the ACFD from the current level of 195 to 180.” In his August ruling, the Judge had written that any reduction in force below 180 members would compromise public safety, and any further reduction would have to come through attrition and retirements. Under this week’s ruling, before the state makes cuts, however, officials must explore other funding to cover lost SAFER Grant funding, allow for additional attrition to take place, and provide fair notice to those who may lose their jobs.

Atlantic City Mayor Don Guardian said he had hoped the state would offer an early retirement incentive—especially after, last August, Gov. Chris Christie had signed a bill allowing the state to offer such an incentive to the city’s police officers, firefighters, and first responders facing layoffs. However, the state has said the offer would not be financially beneficial, leading Mayor Guardian to note: “I am disappointed that the state has pushed forward this motion knowing that the state Senate, Assembly, and the Governor all passed an early retirement bill for just this reason: We could have easily gotten to 180 fighters through these incentives.”

New Jersey Community Affairs spokeswoman Lisa Ryan noted: “We remain disappointed by the court’s insistence on requiring an artificially and unnecessarily high number of firefighters…While the decision to allow a modest reduction in firefighters on Feb. 1, 2018, will provide some budget relief, the city will still be forced to make additional and significant reductions to fire salaries in order to afford paying for 180 firefighters.” (Last January, the Fire Department had 225 members; now there are 195, or, as Judge Mendez wrote: “The plans to reduce the size of the ACFD have evolved from a request to approve a force of 125, resulting in a loss of 100 positions, to the current request to reduce the force to 180, resulting in a loss of 15 positions.” 

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The Long Fiscal Road out from State Fiscal Oversight

07/21/17

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Good Morning! In this a.m.’s eBlog, we look at Philadelphia’s fiscal challenges as it seeks to fully emerge from state fiscal oversight.

Liberty Bell City. The Board of the Pennsylvania Intergovernmental Cooperation Authority this Tuesday unanimously approved the City of Philadelphia’s Five Year Plan for FY2018-2022, concurring with the assumptions and estimates that the City’s Plan were reasonable and appropriate, and that the Plan projects positive year-end fund balances for the next five fiscal years. The state authority, created in 1991 by state law, is charged with reviewing Philadelphia’s five-year plans—with state funding to the Liberty Bell city dependent on PICA approval thereof.

While the approval of the long-term fiscal plan was unanimous, the Board noted concerns about a lack of reserves. City officials are estimating general fund revenues for the 2018 fiscal year of $4.405 billion with roughly 75% derived from taxes. In its 43-page report, FICA noted: “The City’s revenue projections have consistently been outperformed by actual collections in recent years…PICA feels confident that the City and its consultant are effectively monitoring tax performance in a way that will allow adjustment to changes in economic growth.” The Board noted the FY2017 results suggested another year of solid performance for most taxes, and that the city continued to manifest signs of ongoing economic expansion since the end of the Great Recession, while continuing to implement certain reforms in order to increase its tax competitiveness. The Board also noted the City has set aside a $200 million provision to fund upcoming labor costs, as well as a $274.6 million contingency fund should the City lose grant funding as a result of federal and/or state actions. The staff noted some key fiscal risks, including pension costs, and the increased volatility of business income and receipts tax revenue.  Thus, the fiscal report card demonstrated improvement, but apprehensions about the future—especially perceptions of sluggish growth. That is, there are concerns with regard to economic growth and U.S. census data indicating more people are moving out of Philadelphia than are moving in. In its most recent manufacturing survey (this month), the Philadelphia Federal Reserve reported the index declined from 27.6 last month to 19.5 this month—with the index gauging new orders, shipments, employment and work hours, which were all positive, but which fell from June levels, with the new-orders index in particular plummeting to 2.1 from 25.9 in June. The New York Federal Reserve also found a July deceleration, or, as Joshua Shapiro, Chief U.S. economist at MFR Inc. described it: “The preponderance of recent survey data point to improving conditions in the manufacturing sector, and we expect the underlying trend of reported output to gradually accelerate in the months ahead. However, an ongoing inventory adjustment in the automotive sector will likely dampen headline factory output data over the near term.” In its report, PICA noted that while the City projects a positive fund balance the next five years, there are risks, such as rising labor, pension, and healthcare costs along with business tax revenue volatility. (The fund balance is projected at $75.5 million in 2018, or 1.7% of general fund obligations; reserves are slated to rise in each of the five years up to a peak of $123.1 million in FY2022 fiscal year, or 2.6% of projected obligations. On Wednesday, the city’s Finance Director, Rob Dubow, said the City of Brotherly Love’s fund balance target goal is 6% to 8% of revenues, but that two sets reserves should help withstand potential economic downturn that may arise over the five-year period. Philadelphia has established a reserve of $200 million for potential labor cost spikes and another one of $270 million to combat possible state and federal budget cuts—or, as Mr. Dubow describes it: “We think having those reserves gives us some more breathing room than we have had in the past…We share PICA’s concern of getting fund balances higher and they do increase over the life of the plan.”

The Thin Line Between Fiscal & Physical Recovery Versus Unsustainability.

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Good Morning! In this a.m.’s eBlog, we consider, Detroit’s remarkable route to fiscal recovery; then we turn to challenges to a municipality’s authority to deal with distress—or be forced into chapter 9 municipal bankruptcy in Pennsylvania, before returning to the stark fiscal challenges to Puerto Rico’s economic sustainability, and then the taxing challenge to Scranton’s efforts for a sustainable fiscal recovery.

Campaigning & Turning around the Motor City’s Fiscal Future. Detroit Mayor Mike Duggan, last week, at the annual Mackinac Policy Conference spoke about the racially divisive public policies of the first half of 20th century which, he said, had helped contribute to Detroit’s long slide into municipal bankruptcy—indeed, the largest municipal bankruptcy in U.S. history—but one which he said had helped lay the foundation for a conversation about how Detroit could grow for the first time in half a century without making the mistakes of the past that had, inexorably, led to an exodus of nearly 1.2 million from 1956 to its chapter 9 bankruptcy—noting: “If we fail again, I don’t know if the city can come back.” His remarks, mayhap ironically, came nearly a half century from the 1976 Detroit riot, a riot which  began downtown and was only curtailed after former U.S. President Lyndon Johnson ordered the 82nd and 101st Airborne Divisions to intervene, along with then Michigan Gov. George Romney ordering in the Michigan Army National Guard. The toll from the riot: 43 dead, 1,189 injured, 2,000 of the city’s buildings destroyed, and 7,200 arrests.  

But, rather than discussing or issuing a progress report on the city’s remarkable turnaround, Mayor Duggan instead spoke of the city’s racial tensions that had sparked that riot, in many ways, according to the Mayor, coming from the housing policies of former President Franklin Roosevelt—a policy which placed or zoned blacks in the city into so-called “red zones,” thereby creating the kind of racial tensions central to the 1943 and 1967 riots—a federal policy adopted in 1934 which steered federally backed mortgages away from neighborhoods with blacks and other racial minorities. Indeed, the Mayor quoted from a 1934 Federal Housing Administration manual that instructed mortgage bankers that “incompatible racial groups should not be permitted to live in the same communities;” the manual also instructed housing appraisers to “predict the probability of the location being invaded by…incompatible racial and social groups…, so that, as the Mayor added: “If you were adjacent to a minority area, your appraisal got downgraded.”

Thus, federal housing policies were a critical component contributing to the historic white and middle class flight from Detroit to its suburbs—suburbs where federal housing policies through the Federal Housing Administration subsidized more than half of the mortgages for new construction—or, as Mayor Duggan described the federal policies: “There was a conscious federal policy that discarded what was left behind and subsidized the move to the suburbs: This is our history, and it’s something we still have to overcome.” His blunt Mayoral message to the business community was that the city’s hisgtory of race and class segregation had to be acknowledged—or, as he put it: “I just wanted to deliver a message to the broader community to say, ‘Look, there’s a place for you to come invest in Detroit. Here are the ground rules, here is the reasoning behind the ground rules… and if you want to come in and invest in the city, move into the city and be part of it with the understanding that the recovery includes everybody, we’d love to have you: The African-American community voted for me, and I can’t tell you what an enormous responsibility that feels like.” Thus, the Mayor made clear that he and the Detroit City Council have been focused on governing mechanisms that ensure longtime Detroiters are not displaced by downtown and Midtown revitalization—enacting an ordinance mandating that housing developments in receipt of city tax subsidies have at least 20 percent of the units classified as affordable housing for lower-income residents, and mandating that 51% of the person-hours for construction of the new Little Caesars Arena be performed by Detroiters: “We’re going to fight economic segregation…It would be so easy in this city to have one area be all wealthy people and one area all poor people.”

The Challenge of Municipal Fiscal Recovery. Judge James Gibbons of the Lackawanna, Pennsylvania County Court of Common Pleas last week heard the City of Scranton’s preliminary arguments in response to a lawsuit by eight taxpayers seeking to bar the municipality from tripling its local services tax. The suit, filed March 2nd, contends that Scranton has been collecting taxes which exceed the legal issuance; it calls for the issuance of a mandamus against the city. In response, city attorneys, note that, as a home rule charter city, Scranton is not subject to the cap that Pennsylvania’s Act 511 stipulates. (The taxing legal and political regime, as we have previously noted, in one of the nation’s oldest cities, comes in the wake of its action to raise the levy from $52 to $156 for every person working within the city limits who earns at least $15,600, with the city justifying the action under Pennsylvania Act 47 and municipal planning code.) The taxpayer group, led by independent Mayoral candidate Gary St. Fleur, in seeking a mandamus action, has charged that lowering taxes across the board is the only way for the city to be able to fiscally recover.

Mr. St. Fleur, an independent candidate for mayor, has initiated a ballot measure to force 76,000-population county seat Scranton into chapter 9 municipal bankruptcy, citing a Wells Fargo report from October 2016, which found that a 2014 audit of Scranton revealed $375 million in liabilities and $184 million in unfunded non-pension post-retirement public pension benefits to government employees. (Mr. St. Fleur’s group, last February, had also objected to the city’s annual petition to the court to raise the tax—an objection rejected by visiting Judge John Braxton—a decision which, unsurprisingly, prompted the taxpayer group to initiate its own suit, notwithstanding that Scranton is a home-rule community, so that, in Pennsylvania, it has the authority to levy taxes.) Unsurprisingly, the anti-tax challengers’ attorney, John McGovern, counters that Act 511, which, when enacted 52 years ago, authorized the local Earned Income Tax, which authorizes municipalities and school districts the legal authority to levy a tax on individual gross earned income/compensation and net profits (the tax is based on the taxpayer’s place of residence or domicile, not place of employment) is separate from the Pennsylvania personal income tax. He charges that the Act has two “very specific” sections which cap how much the City of Scranton can tax, charging: “Call it a duck or a goose, call it a rate or a cap, but for the city to say it can tax whatever it wants, that alone is dangerous and absurd,” adding: “At this point, we’re dealing with 2017, and the city is spending like a drunken sailor…State law clearly states there is a cap to taxation through the Act 511 law…If we do not win, that would allow any city to raise taxes in any amount it wants.”

In contrast, David Fiorenza, a Villanova School of Business finance Professor and former CFO of Radnor Township, noted: “Scranton has made progress from three years ago, in part due to the renegotiating of some city union contracts and the low-interest rates on debt…The challenges this city will face will be the uncertainty of the state and federal budget as it relates to school funding and other funds that have been relied on for some many years.” Kevin Conaboy, whose firm is representing the city, told the court the city may raise its taxes under the state’s home-rule provisions, and he noted that Pennsylvania’s home rule provisions supersede a cap in the state’s Act 511 local tax enabling act. Moreover, Scranton city leaders have deemed the revenue increase essential for Scranton’s recovery under the state-sponsored Act 47 workout for distressed communities, to which Scranton has been subject since 1992.

Is the Bell Tolling for Act 47? The case is re-raising questions with regard to the effectiveness of the state’s municipal fiscal distress law, Act 47, a program which some critics charge has become an addiction rather than a cure. Villanova School of Business Professor David Fiorenza, referring to a 2014 change to the state enabling law, believes municipalities stay in the program for too long: “Act 47 is effective, but continues to present a problem as cities are able to request an extension after the five-year time period has expired…A five-year time frame is sufficient for a municipality to assess their financial situation and implement any changes. However, if the economy enters a recession during this time period, it will impede their financial progress.”

Physical & Fiscal Atrophy. Puerto Rico has lost two percent of its people in each of the past three years—but a two percent which in fiscal terms is far more grave from a fiscal perspective: the two percent, according to the insightful fiscal wizards at Federal Reserve Bank of New York, means that “If people continue to leave the island at the pace that has been set in recent years, the economic potential of Puerto Rico will only continue to deteriorate.” That outflow is comparable to 18 million Americans emigrating from the 50 states: it marks nearly a 12% drop: some 400,000 fewer Puerto Ricans today compared to 2007—meaning, increasingly, a U.S. territory entrapped in a fiscal tornado: unemployment is at 11.5%, so, unsurprisingly, the young and mobile are leaving the island behind. With unemployment at 11.5%, Puerto Rico in a quasi-chapter 9 municipal bankruptcy, federal law discriminating against the territory’s economy, and its municipalities unable to access chapter 9—the $74 billion accumulated debt and quasi-federal takeover has created incentives for more and more Puerto Ricans, from all economic levels, to leave—creating a vicious fiscal cycle of reduced government revenue, but ever-increasing debt: Puerto Rico’s municipal bond debt has grown 87 percent just since 2006—making the increasing obligations a further incentive to emigrate.

The PROMESA Board’s proposed plan to revert to fiscal sustainability does not appear to address the physical demographic realities: it assumes the population will shrink just 0.2 percent each year over the next decade, relying on that projection as the basis for its projections of tax receipts and economic growth—projections which Sergio Marxuach, Public Policy Director at the Center for the New Economy in San Juan, generously describes as: “[R]eally, really optimistic.” The harsh reality appears to be that the growing earnings disparity between Puerto Rico and the continental U.S. is so stark that any family focused on its health, safety, and financially viable future—in a situation of today where the Puerto Rican government has closed schools to save money—means that teachers can double or triple their earnings if they move to the mainland: doing that math adds up to younger generations of child-bearing age being increasingly likely to leave Puerto Rico for the mainland. Coming on top of Puerto Rico’s more than a decade-long population decline, it seems that, more and more, for those who can afford it, the option of leaving is the only choice—meaning, for those who cannot afford to—the Puerto Rico left behind could become increasingly older and less fiscally able to construct a fiscal future.

Voting on a Municipality’s Future

 

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eBlog, 9/16/16

In this morning’s eBlog, we consider the upcoming election in San Bernardino on what form of municipal governance the city’s voters want for their post-municipal bankrupt municipality; then we head East to Michigan to listen to Mayor Duggan and ponder on how very perilous and challenging the path out of municipal bankruptcy can be; before heading still farther East to inquire whether Atlantic City even has a future as a city—or will, instead, be taken over by the state. After which, we turn right back around to Ohio—where the fate of East Cleveland is very, very much in question: no one seems to have an answer—and the silence from the State of Ohio has been deafening. Finally, we fly south to the U.S. Territory of Puerto Rico—albeit, really to the nation’s Capitol, as U.S. House and Senate members struggle to consider how federal policies and actions could play a vital role in the island’s long-term economic future.

Voting on a Bankrupt City’s Future. Unlike November’s election farther north in Stockton, where the vote will be over which elected leader the voters will elect to keep that city on the road to recovery, voters in what could be post-chapter 9 San Bernardino will be deciding whether to adopt a new city charter [If approved by a majority of voters Nov. 8, Measure L will replace the existing charter with the 14-page new charter.] under which to operate in the wake of U.S. Bankruptcy Judge Meredith Jury’s upcoming confirmation hearing on October 14th with regard to the decision to approve the city’s plan of debt adjustment—albeit, as San Bernardino City Attorney Gary Saenz yesterday said, the city anticipates receiving a confirmation order from Judge Jury by the end of the year with an effective exit date around March. The municipality’s creditors had been projected to vote on the city’s plan of debt adjustment earlier this month; however, CalPERS and U.S. Bank each filed extensions seeking more time to vote, even as attorneys representing Ambac Assurance Corp., the insurer on $52 million in pension obligation bonds, have voted in favor of the exit plan contingent on finalizing what it called in a court filing “the definitive documents.” Or, as City Attorney Saenz notes: “It is all contingent on how things go…Voting has come in overwhelmingly in support of the plan, which helps with regard to confirmation.” Mr. Saenz added: “We are working on resolving the smaller cases, such as personal injury claimants, trip and falls, and a case involving one of our police officers…The more of those we settle, at this time, helps with respect to confirmation.” With regard to the city’s bigger creditors, he notes that when CalPERS files today, that could be a significant milestone, albeit the huge state retirement agency reached an agreement in substance with San Bernardino more than a year ago; and an agreement with pension bondholders in May. U.S. Bank, which holds several million dollars of commercial paper issued against city buildings, also had previously reached an agreement with the city. With regard to reaching an agreement with the city’s municipal bondholders, Mr. Saenz has previously noted the city was able to offer them 40 percent of what they are owed, rather than the measly one percent it had originally offered—in large part because the agreement also stretches out payments 20 years—an important score, as the city plan of debt adjustment is keenly focused on a long-term plan to make sure it does not make a round trip down the road back into chapter 9—an agreement, too, very much intended to gaining Judge Jury’s affirmation that the city’s pan is both feasible and dependable. Or, as Mr. Saenz notes: “One thing Judge Jury will look at is the feasibility of the confirmation plan…We believe we found a model that is dependable.” The proposed debt adjustment plan pension obligation bond agreement appears to—similar to the outcomes in Central Falls, Detroit, etc.—continue a trend of municipal bondholders faring worse than public pension obligations—albeit the powerful role of CalPERS is profoundly different than in Alabama, Rhode Island, or Michigan. Under the proposed, current proposed plan, Commerzbank Finance & Covered Bond S.A., formerly Erste Europäische Pfandbrief-Und Kommunalkreditbank AG, and municipal bond insurer Ambac Assurance Corporation, agreed to drop their opposition to San Bernardino’s plan of debt adjustment—under the pending resolution, the holders of $50 million in pension obligation bonds will receive payments equal to 40 percent of their debt on a present value basis, discounted using the existing coupon rate, according to city officials.

Thus, in San Bernardino, the future will not be about whether there will be a future, but rather how—and what structure or form of municipal government it will be—or, rather the form of municipal governance. Indeed, last night, John Longville, one leader of the campaign in favor of Measure L, which would repeal San Bernardino’s existing charter and replace it with a new one created by a citizen committee, said such a new charter would promise the way to end decades of destructive political infighting rather than a surrendering of self-government. Mr. Longville, who comes with no small record—he is a former Mayor of Rialto, California Assemblyman, and the current President of the San Bernardino Community College District Board of Trustees that, like other jurisdictions in the region, San Bernardino has had a variety of leaders over the years, and the city has been affected by the same economic blows, including the loss of a major steel plant and a major Air Force Base—but, he pointedly noted, those cities did not file for chapter 9 municipal bankruptcy; in fact, he said they have been thriving, he said: “We see neighboring cities able to function better than we are…It’s just the reality. Some of them quite well. Why is San Bernardino functioning so poorly?” His answer? He told his audience the reason was the city’s 46-page charter first passed in 1905 and amended no less than 135 times since then. It was that history, he noted, which makes it unclear who is responsible for fixing problems and, therefore, breeds arguments.

In contrast, his debate opponent, James Penman, San Bernardino’s City Attorney from 1987 until 2013, countered that if San Bernardino’s charter were responsible for the city’s longest ever municipal bankruptcy, then the city would have gone bankrupt, as other cities did, during the Great Depression. “The city charter is not the reason for the bankruptcy. Poor leadership on the part of certain elected officials and certain appointed officials is the reason we went bankrupt,” pointedly reminding voters of the $4 million general fund reserve San Bernardino maintained when former Mayor Judith Valles left office in 2006,, as he added: “You can’t spend more money than you take in and not go bankrupt.” He told the audience the arguments at City Hall were not with regard to lines of power, but rather over issues officials were elected to address. The culprit, Mr. Penman maintained, has been the new charter’s elimination of elections for city attorney, city clerk, and city treasurer, and to its shifting of some responsibilities from an elected mayor to an unelected city manager: “The new charter takes away your rights and your leadership in electing City Hall,” he said, arguing that it is important those positions be directly responsible to voters, rather than to City Council members who would appoint them under the new charter.

But his opponent countered that in the century since the charter was passed, city government had become too complex to expect elected officials to understand it fully the day they are sworn in: “When I was mayor of Rialto, I was proud of what I did and I think I did a pretty darn good job…But when I first came in there was sure a lot that I didn’t know, and I was glad there was a professional city manager, as there is in almost every city in California.” Interestingly, Mr. Penman countered that following that argument to its logical conclusion would mean the state Legislature should choose the Governor and Congress should choose the President, since running the state and federal government also requires great expertise. He added, moreover, that an elected city attorney helps prevents scandals like those in Bell, Moreno Valley, and Beaumont.

347 miles north of San Bernardino, however, where there will also be elections in November—those elections will not affect Stockton’s city attorney, police chief, city clerk, or auditor: Stockton’s City Council charter review committee last year voted unanimously to reject a proposal by a citizen’s commission that could have given voters the chance to decide if the police chief, clerk, and auditor should have to run for office. Current candidate for re-election, Mayor Anthony Silva, had opposed the recommendations, warning: “Can you imagine getting ready for these upcoming elections (as a mayoral or council candidate) and in the middle of it our own clerk has to go out and start putting up signs for herself and then worry about her own election?…It would be chaos.”

The Hard Road out of Municipal Bankruptcy. Detroit Mayor Mike Duggan yesterday in an address during the third Detroit Homecoming, a special program created to attract ex-Detroiters and investors to come back home praised a recovering municipality from the nation’s largest chapter 9 bankruptcy with a call to entrepreneurs who have left to “come on back home.” Mayor Duggan spoke about improved service delivery, home values, and demolition efforts that are boosting many city communities—even as the Census Bureau reports that the city’s unemployment rate remains the highest in Michigan and newly released U.S. Census estimates rank Detroit the nation’s poorest major city. Mayor Duggan, in a city where the city’s schools are under the control of a state-appointed emergency manager and a state-created dual system of charter versus public schools, added: “The solution to poverty is jobs and making sure that our residents have the education and skills to take those jobs.” The Mayor’s remarks came as part of this long-term effort which began two years ago to help bring more than 300 ex-patriots with ties to Detroit “home” to re-experience the city—an effort which, to date, has resulted in committed investments of more than $260 million in city projects and businesses. Nevertheless, the new Census estimates underline how steep this road to recovery is: the U.S. Census American Community Survey reports that Detroit realized no change in poverty or incomes; an estimated 39.8 percent of its residents are below the poverty line. Nevertheless, as Mayor Duggan noted, a key measure, unemployment, has improved measurably: Detroit’s unemployment rate was 17.8 percent when he took office in two years ago in January; it was 12.5 percent by last July—or, as he put it: “We have 15,000 more jobs today than we did three years ago…Nobody is declaring victory, but we are making progress in a whole lot of neighborhoods in the city, and we have a lot more neighborhoods to go.” Mayor Duggan added, in another key issue to the city’s recovery, that since spring 2014, the city has razed more than 10,500 vacant houses, and is averaging the razing of 150 commercial buildings each year—and the results are encouraging: in some neighborhoods, he said, home sale prices are up more than 50 percent from two years ago.

Mayor Duggan expressed less confidence on the school front, noting he continues to be concerned over the so-called state rescue package for Detroit’s public school district that pays off $467 million in operating debt and provides startup funding for its new debt-free district—a package, however, which created a divided school system of charter and public schools, so that the city lacks uniform standards for all schools—and for all its children: “We’ve got to come back at it. We’ve got to get it fixed.” It is, as the Detroit News has opined: “a major American city where public education, namely the teaching of its young, is corrupted by grasping adults and mismanaged by state bureaucrats who seize control of a system they fail to fix…And not the fact that public education in Detroit, a necessary building block for any functioning democracy, is a disgrace and an indictment. Its recurring incompetence is a disincentive to families with school-aged children, households that form the bedrock of stable communities occupied by taxpayers and law-abiding citizens…The wonder is that it’s taken this long for prosecutors to root out corruption, or for someone to file a civil rights lawsuit against the state and whoever else for the generally deplorable state of Detroit’s public schools…This is a fundamental hurdle. Jobs in Detroit go wanting for Detroiters if their DPS secondary education fails to give them the skills to compete, and if folks refuse to recognize that education also needs the active participation of parents, students, even the business community.” Characteristically moody Moody’s credit rating service clearly shares Mayor Duggan’s apprehensions: the service worries that uncertainty over the future security of Detroit Public Schools state-aid backed bonds, its governance, as well as the poor arithmetic of tax collection issues in the wake of the state restructuring of DPS following the district’s restructuring merit a downgrade from “developing” to “negative,” deep in proverbial in junk territory, albeit advising the rating, like any student’s grade, could move in either direction once various issues tied to the state preemptive restructuring of DPS is resolved, adding that the further uncertainty over the outcome of a restructuring of limited tax state aid revenue bonds is a key concern—and noting that it moodily awaits the toting up of property tax collection trends and the success or failure of the eventual transfer of DPS’ governance from emergency management to a voter-approved Board of Education.

The Future or Un-future of a Great American City. Atlantic City, having now missed its deadline and violated the terms of a $73 million state loan, has asked the state for a “reprieve” on the matter—the deadline was one which required the city to initiate dissolution of its Municipal Utilities Authority—meaning that, as of today, the city is at the mercy of the state, which could ultimately demand immediate repayment of the loan or seize the city’s collateral. One of the terms in the July 29 bridge loan agreement called for the city to dissolve Atlantic Municipal Utilities Authority (ACMUA) by yesterday or use the water authority as collateral in the case of a default—a state demand the City Council has been unwilling to support: ergo, having defaulted under the loan terms, the state could demand immediate repayment of the monies. In a statement Wednesday, Mayor Donald Guardian noted: “Although the September 15 deadline will pass tomorrow without a city council resolution dissolving the MUA or designating it as collateral in case of default, we have asked the state for a reprieve on this because we believe that the MUA will actually be a better part of the overall financial solution if it is kept whole.” For its part, a New Jersey Local Finance Board spokeswoman had responded: “A decision has not been made and the Division is awaiting legal guidance as to its options.” The city had already been moodily downgraded last April, as we have reported, because of the difficult governance situation—a situation in which the city is under a state emergency manager who has been invisible, as well as a governance situation where the MUA is financially independent from the city—a utility estimated by New Jersey Senate President Steve Sweeney (D-Gloucester) at around $100 million—part of the reason Mayor Guardian has made clear, especially given its vital public safety role, that he would like to bring the MUA under city control and opposes privatization or a public-private partnership. The city, to some great extent caught between the rock and hard place of the Governor and the legislature, had averted a default in late May when the legislature approved a rescue package giving the city 150 days in which to deliver an acceptable five-year financial turnaround plan; however, if the plan is not approved by the early November deadline, state intervention kicks in with New Jersey’s Local Finance Board then empowered to alter debt and municipal contracts—that is, a different plan than insisted upon by Gov. Chris Christie. Indeed, on the 150 day calendar, Mayor Guardian notes: “Our 150-day plan is moving forward quickly, as we have some of the best in brightest minds in the country working on our behalf to solve this problem…We just need the time to finish the plan and to present it publicly. In the end, we think this will be the best plan to move Atlantic City forward while at the same time maintaining our sovereignty and decision-making rights now held by locally elected leaders.”

Governance & A City’s Future. East Cleveland, Ohio Mayor Gary Norton will face a recall vote in December, one that comes at a time of perilously depleted city coffers and a thick layer of political tension; so too will City Council President Tom Wheeler—or, as Mayor Norton notes: “This is a horrible expenditure of funds given the city’s current financial provision, and beyond that, switching a single mayor or single councilman will have no impact on the city’s financial situation and the city’s economy.” The small municipality, still, like Godot, awaiting a response from the State of Ohio with regard to whether it may file for chapter 9 municipal bankruptcy, and awaiting potential negotiations from the neighboring City of Cleveland whether there would be a willingness to negotiate its incorporation into Cleveland, now also awaits the decisions of its citizens in November’s election—an election with a $25,000 price tag the city can ill afford.

A U.S. Territory’s Fiscal Future. The Congressional Task Force on Economic Growth in Puerto Rico has been meeting with federal agencies and gathering input from some 335 organizations and individuals as it works to develop recommendations with regard to how to address the U.S. territory’s struggling economy—that is a wholly different group than the PROMESA oversight board (Chair Sen. Orrin Hatch (R-Utah), Sens. Robert Menendez (D-N.J.), Bob Nelson (D-Fla.), and Marco Rubio (R-Fla.), and Reps. Pedro Pierluisi (Puerto Rico), Tom MacArthur (R-N.J.), Sean Duffy (R-Wis.), and Nydia Velázquez (D-N.Y.) —one charged here by Congress to release a report by the end of the year on the impediments in current federal law and programs to economic growth in Puerto Rico along with recommended changes which could spur sustainable long-term economic growth, increase job creation, reduce child poverty, and attract investment to the U.S. territory. In its first joint release, the task force noted: “Residents of Puerto Rico and their families face numerous challenges to economic growth along with many dimensions affected by federal law and programs, including health care, government finances, economic stagnation, population loss, and sectoral inefficiencies…[We] are actively working to arrive at a consensus in order to provide Congress with findings and recommendations as called for under PROMESA.” The task force will continue accepting submissions from individuals until the middle of next month, having extended its previous deadline of September 2nd; the task force also said in its report that its members have been working with the Federal Reserve Bank of New York, which oversees Puerto Rico in the Federal Reserve System, and which recently provided a superb update at the City University of New York session convened to identify useful economic and financial developments in Puerto Rico and to analyze the Commonwealth’s economy and finances. The New York Fed has been providing not only useful reports and insights, but also blogs—and is now aiming to explore ways that federal statistical products used to measure economic and financial activity in the states could be applied to Puerto Rico. The task force is expecting help from the Joint Committee on Taxation (JCT), the Congressional Budget Office, and the Library of Congress’s Congressional Research Service. JCT will provide a briefing in the near future to discuss federal tax policy as it applies to Puerto Rico. The eight-member body will also consult with Puerto Rico’s legislative assembly, its Department of Economic Development and Commerce, as well as representatives of the private sector on the island.

Have We Learned Any Lessons from Flint?

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eBlog, 8/11/16

In this morning’s eBlog, we consider the fiscally bleak Detroit public school system—a system critical to the Motor City’s fiscal and human future—but where the state intervention appears to be unravelling; we then consider the related governance challenge with regard to municipalities and school systems at fiscal risk—specifically, in the wake of the state-imposed emergency manager in Flint, Michigan (a manager who was then, for still inexplicable reasons named by Michigan’s Governor to be the emergency manager for Detroit’s public school system)—an imposition that led to severe threats not just to the city’s own authority and fiscal future—but also to grave threats to human lives. We ask: is the state’s emergency manager law a state law which ought to be reconsidered? What lessons have been learned from Flint? Then we return to Puerto Rico with a brief look at this a.m.’s marvelous blog from the New York Federal Reserve—albeit, the report is hardly optimistic about the human capital so critical to Puerto Rico’s long-term economy.

Getting School on Debt. Michigan’s plan to bail out Detroit Public Schools (DPS) is putting debt backed by state aid at risk of falling into default if the bonds are not refinanced by mid-October, with S&P Global Ratings having, in the wake of two downgrades since June, reduced DPS’s debt to below a passing grade. In response, a DPS spokeswoman reports: “Detroit Public Schools and the Michigan Department of Treasury are in the process of refinancing the bonds with a goal to have this completed prior to Oct. 1, 2016.” The state restructuring of DPS’ finances diverts state payments on about $370 million of bonds sold in 2011 and 2012 to the new, debt-free Detroit school district—a district which bears no responsibility for the old debt; however, according to S&P, Michigan still lacks a plan to refinance the bonds. Absent such a plan, S&P warns, it would likely consider the DPS debt a distressed exchange that would merit being labeled as a default. The emerging, failing grade comes in the wake of the state legislature’s partisan decision to adopt a $617 million rescue plan under which, as we have previously noted, the Detroit district was split in two: a new, debt-free Detroit Public Schools Community District is set to open next month with about 46,000 students in 97 schools, while the debt of the former DPS is to be paid off with a combination of state aid and collections from the district’s 18-mill non-homestead levy, which is collected on businesses and second homes.

The new statute means the existing public school district is responsible to continue to pay off the district’s old debt, including about $2.2 billion of municipal bonds and pension liabilities from property taxes—with the state providing approximately $467 million to help repay the old debt: the Michigan Finance Authority, which issued the debt cut by S&P for DPS, is putting together a plan to refinance the debt by October 20th. However, since Michigan Governor Rick Snyder signed the bill, S&P has downgraded the bonds—which Moody’s has moodily graded Caa1 with a negative outlook. S&P notes its assessment is based “on the lack of a formal plan regarding bondholder repayment terms” and the elimination of one of the pledged revenue streams in the fiscal year that begins next October. The restructuring needs to be in place before October 20th when state aid moves to the new district, leaving the bonds rated with S&P with just the property-tax pledge—changes which S&P notes have created uncertainty for bondholders, raising the risk of default, with analyst Jane Ridley noting: “If they don’t get it refinanced, the loss of the revenue stream is going to seriously erode bondholder value,” adding last week that separating the state-aid payments from the bonds creates a more than 50 percent chance the debt could be cut again in the next two months, warning that it could use its D, or default category, if repayment is less than originally promised: “As October approaches and ushers in the new fiscal year, it creates greater uncertainty as to whether bondholders will receive full and timely payment…If the actions taken through this process provide bondholders with anything less than the full promise of the original bonds, it is likely to be considered a distressed exchange and therefore a default under our criteria.” Note, as we have previously written, the partisan vote in the legislature to create two school districts in the city—one a public school district, the other charter schools—had already raised apprehensions about a recipe for failure. The new fiscal warning from S&P hardly heralds academic or fiscal high grades. The harder academic question is whether the bleak fiscal warnings could serve to deter young families with children from wanting to move to Detroit.

Not in Like Flint. Detroit’s fiscally devastated public schools and Flint’s life-threatening drinking water crisis were connected by two critical factors: the state’s Emergency Manager law—here specifically by one such manager who, after desperately failing in Flint, somehow was inexplicably appointed by Gov. Snyder to be the DPS emergency manager—and deep state cuts in revenue sharing. Coming out of the Great Recession, which disproportionately hammered assessed property values—values still deeply distressed in many Michigan municipalities—state tax limitations and reduced revenue sharing have left a legacy of municipal bankruptcy and fiscal instability at the local level. Reductions in aid to Michigan municipalities (cities, villages, and townships) totaled $5.5 billion between 1998 and 2016, according to a May report from Great Lakes Economic Consultants. It means that despite a nationwide recovery, Michigan municipalities are still struggling with depressed assessed housing values, tax limitations, and cuts in state revenue-sharing. It means the state still has the authority to preempt local democracy through the imposition of an Emergency Manager—an imposition which, unlike in Detroit, in the cases of Flint and the Detroit Public Schools have caused fiscal and severe physical harm.

The state actions have also left a residue of governmental distrust: indeed, despite deep cuts in spending, Wayne voters last week rejected a tax proposal to support police and fire protection. (Wayne is a small city of under 18,000 in Wayne County west of Detroit.) Wayne’s Mayor, Susan Rowe, after watching the extraordinary damage to human health and safety as well as fiscal distress caused by Flint’s state-appointed Emergency Manager vowed she would never put her residents at the mercy of the state. However, in the wake of last February’s Moody’s downgrade, Mayor Rowe not unreasonably fears her city will become the first municipality since Flint to be placed in state emergency financial management. She notes: “I think it will happen, and I think it would be devastating…People tell us to live within our means, but we can’t shut the doors. We can’t say we’re not going to have police or fire or trash collection…We just have no way of bringing in any more money.” For Mayor Rowe, a retiree whose munificent mayoral salary is $3,000 annually, the squeeze is almost unimaginable: assessed housing values cratered during the recession and revenue has plunged more than 40 percent since 2010. The city lost a property-tax appeal with Ford Motor Co., its largest employer. State limitations prevent local property taxes from increasing at a rate higher than annual inflation. If anything, the tipping point came last week when the city’s voters resoundingly rejected a tax increase that would have enabled the city to share public-safety expenses with two other municipalities. Mayor Rowe said people are frustrated, and she does not hold the vote against them.

Have There Been Lessons Learned from Flint? The terrible harm to human life and fiscal stability in Flint caused by the former state appointed emergency manager has increased political pressure to repeal the state’s law—one of the most preemptive of municipal authority in the nation, under which the state is authorized to intervene in fiscally struggling municipalities and school districts, and preempt all municipal or county authority, as well as to break union contracts if negotiations fail—or, as Michigan Municipal League COO Tony Minghine describes it: “They go in, they come out, and the cities become a less desirable place to live: The only tool they’re given is to cut.” (When first enacted in 1990, the state’s emergency manager law was designed as an early warning system to ward off defaults and bankruptcies. Under Gov. Rick Snyder, who was first elected in 2010, the pace of state intervention increased as the recession eroded local tax revenue, especially from property taxes. Unsurprisingly, voters repealed the measure in 2012 after forcing a statewide ballot question. Less than two months later, however, the legislature approved a similar law with a provision that preempted state democracy by barring it from being overturned by a referendum.)

Indeed, the experience under the state law, to date, is less than inspiring: most of the dozen Michigan towns and cities which have been under the direction of an emergency manager continue to lose population; their poverty rates remain between 20 percent and nearly 50 percent, according to U.S. Census data. In Flint, garbage collection stopped at the beginning of this month after a contract dispute. Or, as former State Treasurer Robert Kleine puts it: “The law’s pretty much a Band-Aid, because it never really addresses the fundamental issue; it’s mostly a lack of tax base.” My colleague and mentor in the field of municipal bankruptcy Jim Spiotto notes Michigan might be better served changing its law to allow local officials input into decision-making and reducing the “heavy hand” of an emergency manager: “Local government is representative of the people, and you don’t want to lose sight of that.”

What state voters also do not appear losing sight of is the exceptional damage the state oversight has wrought in Flint: Six state employees were criminally charged last month, accused of trying to cover up the poisoning of Flint’s drinking water. Three other government workers were charged earlier. Gov. Snyder publicly apologized last March for the contamination, but claimed the law has been a success. He said he would be open to improving the law, but not repealing it; state Sen. Jim Ananich (D-Flint) has a different perspective: “It’s a failure-driven model…They leave you with a city that’s impossible to run.” Indeed, as Eric Scorsone, who directs the Center for Local Government Finance and Policy at Michigan State University, puts it, there is no clear path forward, short of increasing state revenue-sharing and other assistance.

What to Do about a Declining Economy? Moody’s warns that the surge in Zika cases in Puerto Rico may harm the U.S. territory’s already declining economy—one already projected to decline by 2 percent in FY2017, with the warning coming as the crack New York Federal Reserve squad of Rajashri Chakrabarti, Giacomo De Giorgi, and Rachel Schuh, writing for the Fed’s Blog Liberty Street Economics, this morning noted, with regard to human capital, that: “The test results for both PISA and NAEP are alarming, and even more so given the migration trajectories out of Puerto Rico. The very slow growth of Puerto Rico seemed puzzling given previous estimates of the quantity of human capital—as proxied by the number of years of schooling—and its contribution to growth. However, this slow economic growth is in fact consistent with the evidence on the quality of human capital highlighted in this blog. As a caveat, the test scores cited here reflect the human capital of students who have not yet entered the labor force, so this analysis relies on the assumption that these poor educational outcomes persist. It seems clear, nonetheless, that boosting educational performance can help Puerto Rico substantially in establishing future economic growth.”