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.”