Municipal Fiscal & Professional Erosion in Puerto Rico

February 20, 2018

Good Morning! In this morning’s eBlog, we consider the municipal fiscal threats to Puerto Rico’s municipios or municipalities, before turning to the continuing threats to the island’s future of its “brain drain” through the emigration of an increasing number of some of the island’s young professionals.

Severe Revenue Erosion. Since the last revenue quarter, Puerto Rico’s 78 municipios—cities and towns governed under Puerto Rico’s Autonomous Municipalities Act of 1991, which establishes that every municipality (those with populations in excess of 50,000 are designated as incorporated—those with less as incorporated towns: cities provision their own services, while towns typically depend on nearby cities for certain services) and must have a strong mayor form of government with a municipal legislature. All have experienced a consistent undermining of revenues: according to the most recent estimates, that includes a reduction of $56 million which will be reflected this fiscal year relating to the payment of movable and immovable property taxes, with the increasing losses related to business closures and the mass exodus of Puerto Ricans to the mainland, even as the capital and operating costs imposed in the wake of Hurricane Maria have left, in their wake, a fiscal hurricane of their own with, likely, long-term fiscal consequences. Some estimate that the losses related to property taxes have been as much as $55 million just in the last fiscal quarter, according to Javier Carrasquillo, President of the Governing Board of the Municipal Revenue Collection Center (CRIM), and the current Mayor of Cidra, a municipio known as La Ciudad de la Eterna, or the City of Eternal Spring.

CRIM is itself governed by a board composed of the President of GDB, the Commissioner of Municipal Affairs, and seven mayors of municipios: those elected mayors hold office for a term of four years (and not more than two consecutive terms) and until their successors have been appointed. CRIM’s principal offices are located at State Road 1, Km. 17.2, San Juan, Puerto Rico 00926. In addition, CRIM operates nine regional centers located in the municipalities of Aguadilla, Arecibo, Bayamón, Caguas, Carolina, Humacao, Mayagüez, Ponce, and San Juan.

CRIM estimated revenues for this fiscal year at $827,148,824 after the discount of the municipal Special Additional Contributions funds for the repayment of municipalities debts and the 5% for CRIM operational expenses. (Revenues of the municipalities of Puerto Rico are principally derived from ad valorem property taxes and Commonwealth contributions: Act No. 83 authorizes municipalities to impose the following property taxes: the Special Additional Tax, without limitation as to rate or amount, which as mentioned above is available primarily for the payment of a municipality’s general obligation debt; and a basic property tax to fund operating expenses up to a maximum amount of 6% of the assessed valuation on all real property within such municipality and up to a maximum amount of 4% of the assessed valuation on all personal property within such municipality (collectively, the “Basic Tax”)). Act No. 83 also continued in effect a special property tax imposed by the government of 1.03% of the assessed valuation of all real and personal property within Puerto Rico (other than exempted property) (the “Special Tax”) for the exclusive purpose of servicing the government’s general obligation debt. A portion of the Basic Tax levied by a municipality may be transferred to other municipalities by virtue of the operation of the Matching Fund.) In addition, under Act No. 64, each municipality is required to levy the Special Additional Tax in such amounts as shall be required for the payment of its general obligation municipal bonds and notes; principal of and interest on all general obligation municipal bonds and notes and on all municipal notes issued in anticipation of the issuance of general obligation bonds also constitute a first lien on the municipality’s Basic Tax. Accordingly, the municipality’s Basic Tax would be available to make debt service payments on general obligation municipal bonds and notes to the extent that the Special Additional Tax, together with moneys on deposit in the municipality’s Redemption Fund, are not sufficient to cover such debt service. Similarly, Act No. 83 provides for an exemption from the Special Additional Tax and Basic Tax on the first $15,000 of assessed valuation of primary personal residences of individuals (the so-called “$15,000 Real Property Exemption”) and an exemption from personal property taxes on the first $50,000 of assessed valuation of property owned by businesses that have gross revenues of less than $150,000 per annum (the “$50,000 Personal Property Exemption”). Recognizing the importance of the real and personal property tax for the fiscal requirements of the municipalities, the government makes annual appropriations to the municipalities from its General Fund as compensation for the amount of the revenues foregone owing to these exemptions. However, under Act No. 83, such appropriations will not be provided to cover any amount of property taxes, which any municipality elects to forgive for primary personal residences registered for the first time after January 1, 1992, and personal property of certain businesses registered for the first time after July 1, 1991.

Acts 83 and 80, which the Legislature approved in 1991, also provide for the following central government contributions to the municipalities: 2.50% of the net internal revenues of the General Fund for fiscal year 2004-2005 and thereafter; 35% of the annual net revenues derived from the operation of the additional lottery system created by Act No. 10, of the Legislature of Puerto Rico (approved in 1989). There are also so-called “Designated Commonwealth Contributions,” which provide an annual amount from the central governments’s General Fund to compensate the municipalities for the $15,000 Real Property Exemption and the $50,000 Personal Property Exemption; and an annual amount from the Commonwealth’s General Fund to compensate the municipalities for the exemption of 0.20% of the assessed valuation of all taxable property within the municipalities (the amounts in the clauses, with the exception of the annual contributions from the Commonwealth as compensation to the municipalities for the Special Additional Tax portions of the $15,000 Real Property Exemption and the $50,000 Personal Property Exemption (defined as the “Commonwealth Contributions”). Act 80, for its part, established the Municipal Matching Fund, into which CRIM is required to deposit with GDB the total amount collected on account of Basic Taxes and the Commonwealth Contributions. Certain funds in the Matching Fund (the “Equalization Moneys”) are available to CRIM in order to guaranty that each municipality will receive revenues in an amount at least equivalent to that received from Equalization Moneys in the previous fiscal year. The Equalization Moneys are comprised of: the Designated Commonwealth Contributions; and a portion of the Basic Tax equal to 1% of the assessed value of personal property and 3% of the assessed value of real property collected by each municipality (the “Designated Basic Tax”)—with all All Equalization funds distributed to the municipalities as follows: first, as may be required so that each municipality receives at least the same amount of aggregate revenues received during the previous fiscal year on account of Equalization Moneys, using first the Designated Commonwealth Contributions, and then, to the extent necessary, the Designated Basic Tax (it has never been necessary to use the Designated Basic Tax to perform such equalization); second, Designated Basic Taxes remaining in the Equalization Moneys are allocated to the municipalities in proportion to the amount by which revenues from their Basic Taxes in such fiscal year exceed their revenues from Basic Taxes in the previous fiscal year; and third, to all municipalities based on certain economic and demographic criteria specified in Act No. 80. The remaining Matching Fund moneys are returned to the municipalities whose Basic Tax levies gave rise to such remaining moneys, and are used, with their other revenues, to meet operating expenses. (Prior to July 1, 1993, the Secretary of the Treasury collected all municipal taxes upon real and personal property, including intangible property) in each municipality; since July 1, 1993, and pursuant to Act No. 80, CRIM has undertaken all of the Secretary of the Treasury’s responsibilities relating to the collection and distribution of such taxes. CRIM is responsible for the appraisal, assessment, notice of imposition, and collection of all municipal property taxes. All property taxes collected by CRIM are deposited at GDB, which acts as fiscal agent to the government and its municipalities. Real property is assessed by CRIM and personal property is self-assessed. These assessment values have not been adjusted to reflect the various applicable real property and personal property exemptions, such as those described under Municipal Revenues above and other exemptions granted under Puerto Rico tax incentives laws. As mentioned above, no real property reassessment has been made in Puerto Rico since 1958. All real property taxes are assessed on the basis of the replacement cost of the related real property in fiscal year 1957-58 values, regardless of when such property was constructed.

Unsheltered from the Storm. For some municipios, the cut in their remittances in the wake of Hurricane Maria reached as much as $6 million, as is the case of San Juan; however, in percentage terms, the most affected were Guayanilla and Manatí, with a reduction of 11.7% and 11.4%, respectively—meaning those municipios were forced to make signal fiscal adjustments even as expenses were swiftly rising. Indeed, as Mr. Carrasquillo had already warned, there would be a $30 million reduction from lotteries, even as collections between July and December were projected to be down by 15%. And even that amount has been assessed as only a start: In addition to the $ 56 million, municipios will have to deduct the money they have stopped receiving due to the elimination of the Sales and Use Tax on processed foods approved by the government in the wake of Hurricane Maria—as well as the exemption of the SUT collection for small businesses, with sales volumes for less than a million dollars, which was applied between November 20 and December 31. (Usually that 1% of SUT goes to municipalities to be used for essential services, such as garbage collection.) Mr. Carrasquillo said that the impact of the SUT exemption will not be measurable until they receive the Municipal Finance Corporation report; nor will the reduction which municipalities will have in their public coffers from the licenses payment: “Businesses file the license form once the economic activity year passed, so that will not be defined until January of 2019. We can only speculate now,” he added—with his own municipio having experienced the closure of some 123 businesses in the wake of the storm.

The current budget of Caguas, a municipio of about 142,000, is $ 92 million, an amount which reflects a reduction of $26,000 in the wake of rental space declines, as well as business related income losses and a court loss after an anticipated gain from a municipal initiative imposed on businesses which generated more than $3 million annually was struck down by the courts. In the municipio, some 25% of the nearly 5,000 shops remain closed, meaning, as the Mayor worries: “I cannot guarantee essential services for the population if the funds we need do not come.” The president of the Mayors Federation, Carlos Molina, estimated the direct impact in his municipality, Arecibo, to be $5 million, including the 20% in CRIM reduction. Thus, he reflects, municipios have no choice but to reduce operational expenses and establish consortiums to provide services to achieve lower costs: “We have to be realistic about how the island lives today, but we have to look for options and not wait for a miracle to happen.”

Mayor Rolando Ortiz of Cayey adds that the urgency of the municipalities is no longer limited to furloughs, but to shutdowns and closings: “There is no way out, because the municipal institution is misunderstood by the Governor. They see how effective we were before, during and after the hurricane, but now, when apparently that crisis has already passed and we say ‘we want to help,’ they are not there.” In his city, the CRIM reduction will be $700,000: “When they reduce money for municipalities, they are taking money from the most needy people of the island. Poverty is increasing.” But hope for a turnaround, in the wake of the PROMESA Board’s non-certification of Senate Bill 774 which would create a $100 million Municipal Recovery Fund, has been dashed.

Undercutting Hopes for a Recovery from the Storm. In the aftermath of Hurricane Maria, Florida Hospital, which operates 26 hospitals throughout the Gator state, the hospital has recruited as many as 45 health care professionals from Puerto Rico, including nurses, medical technologists, and nutrition specialists. With a mainland nursing shortage and an aging U.S. population, which is fueling demand for health care services, estimates are that the U.S. will need to produce over one million new registered nurses by 2022 to fill newly created jobs and replace a legion of soon-to-be retirees, meaning, that Florida, the premier retiree state in the nation, commenced an international recruitment program for nurses a decade ago, but, in recent years, has looked increasingly at Puerto as one of its most promising pipelines for talent. Prior to Hurricane Maria, about 3% of Florida Hospital’s nurses came from Puerto Rico as a growing number of its residents migrated to the U.S. to escape the economic problems plaguing the island; however, that percentage is expected to double; in fact, Florida Hospital has even developed an outreach program, partnering with community groups to find and help healthcare professionals from Puerto Rico find jobs. The hospital also fast tracks the hiring process: interviews, applications, as well as getting the state requirements for nursing are all expedited. In nearby Missouri, CoxHealth, a nonprofit regional healthcare system operating six hospitals and 80 clinics, initiated a nurse recruitment effort in Puerto Rico last spring, describing recruitment as an easier option compared to other countries because of work visa, language, and other issues. For nursing professionals from Puerto Rico, where pay can be $14.15 an hour, long shifts, and attending to as many as 15 patients at a time because of hospital was understaffing, the move to Florida would seem almost a no-brainer: the pay in Florida is $25.71 per hour—and the case load far lower. Mary Perrone, the international recruiter for Florida Hospital, said 20 more nurses from Puerto Rico will finish training and be on staff in the coming weeks; CoxHealth sent a recruiting team to Puerto Rico last weekend for on-site interviews with nursing candidates. If all goes well, it hopes to hire 30 more nurses soon.

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Let there Be Light & Emergency Relief

February 12, 2018

Good Morning! In today’s Blog, we consider the courtroom efforts to secure emergency relief so that electric service is not disrupted in Puerto Rico—threatening critical services and the island’s only hopes for recovery from its quasi chapter 9 municipal bankruptcy.

Dark Fiscal Imbalances.  U.S. District Judge Laura Taylor Swain last night rejected a motion filed by the PROMESA Oversight Board for the central government to grant an emergency loan to the Electric Power Authority (PREPA), indicating that the federal agency failed to demonstrate the need for this financing although there is an immediate need for liquidity, albeit, she indicated the Board may file a new amended motion requesting a lesser amount and make adjustments to clarify the payment priority that financing will have without affecting the rights of the creditors—with her ruling coming down in the wake of a six and a half hour hearing at which the court was unconvinced of their respective arguments that PREPA needed the nearly $1 billion it had requested in its initial motion. Judge Swain indicated that any new financing requested should not exceed about $ 300 million—telling the court: “The lights cannot be turned off in Puerto Rico,” as she advised the parties she will need a clearer understanding of the priorities for any new financing. She made that ruling notwithstanding the warning from PREPA financial advisor Todd Filsinger, who advised the court that if a loan were not received as soon as possible, PREPA would be forced to activate its emergency plan to begin the cessation of operations and an eventual suspension of electric service.

The courtroom drama came as the Chief Financial Advisor of the Electric Power Authority (AEE), Todd Filsinger, yesterday indicated that the public corporation intends to implement an emergency plan starting today which could lead to the suspension of its employees as well as disruption of the operations of its generating plants—actions which would force the “rationing” of electric services, likely plunging homes, businesses, and industries into darkness” an emergency loan from the central government.  Mr. Filsinger made clear that should the plan be triggered, there would be a warning, as early as this morning, followed by a rolling suspension of operations, and a gradual suspension of employees; services to hospitals, police stations, firefighters, and gas stations would continue.

PREPA is seeking a loan of as much as $1.3 billion—a request the Board did not reject out of hand, but rather indicated a lesser amount of as much as $1 billion might be considered. In principle, the loan would be around $ 1,300 million, but last night the Board of Fiscal Supervision (JSF), acting on behalf of the government and the AEE, modified its request to about $ 1,000 million. There is urgency: Mr. Filsinger warned that unless PREPA receives an emergency loan by this weekend, the utility would only be able to maintain its operations for several additional weeks, after which it would no longer even be able to pay for the fuel it needs to generate electricity, testifying: “If we do not have the loan, and we do not receive the cash, we could be implementing the contingency measures on Saturday.”

Earlier in the hearing, Joseph Davis, the lawyer representing the Financial Advisory Authority and Fiscal Agency, warned of the fiscal cliff the agency faces, advising the panel it has delayed payments to suppliers as much as possible in an effort to preserve as much of its funds as possible, in attempt to render the cash they have available, but that there will be little option but to trigger additional contingencies, such as rationing services, partly because fuel suppliers have already threatened to halt service. The power authority’s emergency plan would be enforced even as some 400,000 subscribers remain without power, and after approximately 1.1 million subscribers had already experienced the longest interruption of electric service in Puerto Rico’s history in the immediate wake of Hurricane Maria. The threat to human life and safety came as the respective parties in the New York City courtroom—parties representing the Board, bondholders, and Puerto Rico, as well as insurers continued to file motions.

As if these human risks were insufficient, Judge Swain has also been confronted with arguments from contractors, such as ARC, Lord Electric, and Whitefish Holdings, who claim that PREPA must meet its payment obligations for restoration of the electricity grid after Hurricane Maria, as well as bondholders—who, for the most part, live far, far from Puerto Rico, but are seeking compensation for impairment of the rights of municipal bondholders.

The Board, at the end of last month, alleging that PREPA faces losses in excess of $1 billion, had requested Judge Swain to approve a post-requisition loan for the public utility—a loan critical to . According to the motion issued by the JSF, seeking a super priority, as PREPA sought the fiscal and physical capacity to insure its operations until the end of the fiscal year and avoid closing operations this month—in effect, asking the court to provide a super priority of payment to the central government.

Yesterday, in a last-ditch effort to assist the power authority, the Ad Hoc-AEE group and the insurance company, Syncora, which guarantee part of the public corporation’s debt, presented a new financing proposal, a proposal which the oversight Board rejected outright, noting: “The notification of the group of bondholders of the ESA is not a valid proposal and does not have a strong reason to deny the motion for post-petition financing for the PREPA.”

A Valentine’s Day Message?

St. Valentine’s Day, 2018

Good Morning! In today’s Blog, we consider the continued scrutiny by the PROMESA Board and Puerto Rico’s progress in not just recovering from Hurricane Maria—but also from its quasi chapter 9 municipal bankruptcy. That progress has been achieved through federal assistance, the Board’s vigorous oversight, and, as we note, tax and spending changes undertaken by the government of Puerto Rico.  

Fiscal Imbalances.  While states, cities, and counties operate in regular order, the federal shutdown, far into the federal fiscal year, illustrated the challenge to state and local governments of the unpredictability of federal funding that state and local governments would otherwise count upon. Now, in the wake of Congress’ vote to suspend the national debt ceiling, the package included nearly $100 billion in disaster aid, as well as extend a number of expired tax provisions, including a Jan. 1, 2022 extension of the rum cover-over for Puerto Rico and the U.S. Virgin Islands—an extension projected to generate an estimated $900 million for the two U.S. territories, as well as a related tax provision which would, at long last, allow low-income Puerto Rican muncipios to be treated as qualified opportunity zones: that disaster aid includes $4.9 billion to provide 100% federal funding for Medicaid health services for low-income residents of Puerto Rico and U.S. Virgin Islands for two years and $11 billion of Community Development Block Grants for the two territories, including $2 billion of CDBG money to rebuild Puerto Rico’s electrical grid. Puerto Rico anticipates it will be the recipient of as much as $18 billion—with an option to access a line of credit of as much as $4 billion—albeit, to the extent the territory can continue to demonstrate its lack of liquidity. Those amounts, including $4.8 billion in Medicaid, and $11 billion from HUD, however, are subject to conditions of both the federal government and the PROMESA Board. HUD Deputy Secretary Pamela Hughes Patenaude last week stated HUD would award $1.5 billion to assist in the repair of damaged homes and business structure, while FEMA has already awarded $300 million, half of which is via a loan. In addition, the aid includes $14 million in the Women, Infants & Children (WIC) program assistance. The package provides some $14 million for the Army Corps of Engineers to award contracts to U.S. electric companies to repair the power grid. Importantly, the FEMA funding will provide not just for improvements in the island’s public power system, but also for repairs: Puerto Rico has guestimated it will require $ 94.4 billion to rebuild the island’s public infrastructure.

Puerto Rico’s non-voting Representative in Congress, Jenniffer González, noted the next disaster relief resolution may be discussed in Congress later this Spring—at which point she anticipates the critical focus Will be on Puerto Rico and the U.S. Virgin Islands. She noted: “Speaker Paul Ryan told me that there is going to be a fourth bill on supplementary allocations for Puerto Rico with specific projects for transportation and electric power.” U.S. Senator Marco Rubio (R-Fla.) noted that claims of states such as Florida and Texas were very helpful in recent efforts in favor of funds for Puerto Rico; however, he warned that Congress needs to allocate additional funds for disasters regularly: “There are other places that, by then, will have needs.”

Negocios. Meanwhile, with regard to the fiscal storm, the fiscal amendments Governor Ricardo Rosselló presented to the PROMESA this week presented a more positive outlook for creditors to reach an accumulated surplus of $3,400 million, even as his offer retained virtually unchanged the terms of fiscal measures and severe cuts in government revenues over the next 5 fiscal years. The plan the Governor presented, moreover, did not comply with the requirements to reduce the pensions of government retirees, nor to eliminate additional labor protections for private sector workers, after the notification of violation of the federal PROMESA law—demands calling for a series of amendments, including a 25% reduction in pensions exceeding $1,000 per month (in combination with social insurance), in addition to the elimination of a series of protections for private sector employees. Indeed, in an interview with El Vocero, Gov. Rosselló replied that his administration is neither contemplating reductions to pensions nor including legislation to eliminate the employer’s obligation to pay the Christmas bonus and compensation for unjustified dismissal or to reduce the requirements for vacation leave and sick leave, stating: “We are not contemplating reductions in pensions.” As for eliminating labor protections, the Governor made clear: “We have not included that in the reform of human capital… certainly, it is an area that is important for us to work: how do we raise labor participation in Puerto Rico? How do we encourage them to transition to work? “

The most dramatic modification of the tax plan proposed by Gov. Rossello is the elimination of the aggregate deficit of $3,400 million for the FY2022 budget, since the previous version of its fiscal plan was in default with the objective of eliminating structural deficits: as early as FY2019, he projects the government will achieve a surplus of $750 million, thanks in large part, according to the Governor, to the federal assistance provided by Congress. Even though it had been estimated that the aid to date has reached $16.5 million, Puerto Rican authorities assert only $12,800 million has been incorporated as a result of supplementary allocations in the fiscal plan—allocations related to the FEMA $ 35.3 billion in the public assistance program and $21 billion in private insurance. The Governor noted his administration plans to spend $13 million of disaster recovery funds for Hurricane Maria, enabling, he added, a GDP growth projection of 8.4%. He also noted he expects a reduction in the rate of emigration from Puerto Rico down to 2.4%.

Unsurprisingly, he warned, the most difficult challenge will be what he termed the FY2020 Medicaid fiscal cliff –the year when the current Congressional appropriated funds will be exhausted. To address that abyss, he said the government has intensified cuts to government programs, as well as adopted measures to increase revenues, resulting, he asserted, in a positive or surplus balance of $800 million for FY 2023, noting: “Stabilization (the surplus) continues with other structural measures and impacts that have: the reduction in expenditures by government items and the rightsizing (shrinking) that is being done.” It appears that the $800 million projected surplus was included in the analysis of the sustainability of the public debt, an element which will be considered by the PROMESA quasi-bankruptcy court for the payment arrangement to the creditors—or, as he put it: “The discussion with the creditors will go by Title III, in everything that has not been agreed by Title VI. It is a numerical exercise, without differentiating creditors, about the numbers that reflect the fiscal plan, and that will certainly be part of the elements of judgment…that the judge would use in her determinations.”

The Governor noted that cuts to agencies such as Education, Corrections, Health, as well as across the board via shrinking services and utilizing tighter payroll control have succeeded in increasing revenues by $29 million; nevertheless, he added, because the new revenues failed to meet the anticipated goals, the agency, Mi Salud, will continue to be required to face an FY2022 reduction of some $795.

Stop & Start Federal Governance, and Abandoning Puerto Rico

eBlog

February 9, 2017

Good Morning! In today’s Blog, we consider the outcome of last night’s deliberations to avoid another federal government shutdown and the nexus between New Jersey’s public pension system and Puerto Rico’s growing foreclosure crisis, and we consider the growing frustration of the Executive Director of the PROMESA Oversight Board with regard to the absence of any real commitment by the Congress.

Dysfunctional Governing & Creating Record Federal Debt. In the wake of still another shutdown of the federal government last night, he U.S. House of Representatives, earlier this morning, voted to approve Senate-passed legislation (71-28), including a sweeping budget deal to increase the national debt, increase federal deficits, and fund the federal government through March 23rd, voting 240-186 to forward the bill to President Trump for his signature. The new, temporary patch for the federal budget will come at a signal cost: it will boost federal spending for both defense and non defense programs by $325 billion over the next two years; it will suspend the debt ceiling for one year; it will give the White House, House, and Senate until March 23rd to write an omnibus spending bill for the remainder of the federal fiscal year and break the pattern of gridlock that has led to five temporary funding patches since last September. As passed, the legislation includes a number of other priorities for both parties, including nearly $90 billion for disaster relief, $6 billion to address the opioid crisis, a four-year extension of the Children’s Health Insurance Program, and more than $7 billion for community health centers. As passed, the agreement includes a massive defense spending increase, and a smaller domestic discretionary increase. The legislation to reopen the federal government—temporarily—is estimated to add as much as $2 trillion to the national debt over the next decade. As passed, the legislation includes $15 billion in tax extenders, restoring nearly three dozen federal tax expenditures which expired at the end of last year, subsidizing owners of racehorses, NASCAR tracks, filmmakers, and railroads—that is, a Congress with the greatest debt and deficits of any in U.S. history already running a $1 trillion-plus annual deficit voted to subsidize businesses and individuals for activities they took in 2017.

Fiscal Imbalances. Meanwhile, in Puerto Rico, PROMESA Board Executive Director Natalie Jaresko stated the Board is making progress towards its goal of restoring the U.S. territory’s fiscal balance and renegotiating its public debt; the just adopted spending agreement this morning by Congress could help: it would allow full Medicaid access to Puerto Rico, laying a foundation to revive the territory’s health system for two years, and lay the foundations for rebuilding its power grid: the provisions, announced by the U.S. Senate leadership, could represent about $ 15 billion in direct allocations, according to Sen. Marco Rubio (R-Fla.); the package which went to the White House this morning Florida), include $ 4.8 billion in Medicaid funds for the island, as an allocation that would represent full access to the program, based on the emergency caused by Hurricane Maria. The bill includes $2 billion for the Puerto Rico Electric Power Authority (PREPA) to rebuild its infrastructure, a critical provision for the island, where, 141 days after Hurricane Maria, 28% of the territory’s citizens remain without power.

In an interview with El Nuevo Día, Director Jaresko stated there had been “measurable” fiscal progress, albeit “small, but important,” as she answered each of the questions regarding performance reported this week by this newspaper, assuring that there are “measurable progresses” that, although “small, are important.” She added, however, that the process of transformation driven by the oversight Board has not moved at the pace she would like; moreover, she said, the role of the Congressionally created entity is not understood either in Puerto Rico or by the Congress or White House; nevertheless, she added, the Board expects to resume the correct course that Puerto Rico needs: “Those who expected the Board to come to govern are disappointed. Those who expected the Board to be in favor of the creditors are not happy; and those who expected the Board to be against the creditors: the reality between what  the enabling law dictates, the powers of the Board and the relationship with the government is, by far, more complex than expectations.” She added: “I wish there was more support from Congress for Puerto Rico: More clarity is needed. The second round of the supplementary aid package to address the disaster is still pending; CHIP and Medicaid funds are still pending. We need more confidence and clarity,” noting fiscal quandary for the Board to be forced to make fiscal decisions without knowing clearly what federal resources Puerto Rico can realistically anticipate.

Her comments came as, this week, the Board advised Ricardo Rosselló that Puerto Rico’s fiscal plans do not comply with PROMESA, giving the government seven days to correct them. Among the requested or demanded changes: an update on the information with regard to the federal funds that Puerto Rico would receive for its recovery. She also made clear she was “disappointed,” because, in the newly enacted federal tax reform, the law does not include provisions to exempt U.S. multinational businesses operating in Puerto Rico from the new taxes on U.S.; nor did the law grant a transition period to counterbalance the impact of that decision on the local economy. She noted the PROMESA Board expects concrete actions by Congress, noting that, last month, the Board had invoked §103 of the PROMESA Law, requesting the transfer of federal employees to address the situation in Puerto Rico, with the request made to the departments of Energy, Agriculture, Commerce, Transportation, Health, Housing, the U.S. Treasury, the General Services Administration, and the Environmental Protection Agency.

Her comments came as the Board’s 18-month anniversary of service nears next month—marking their halfway point. Next month, the members of the Board will have served 18 months in office, that is, half of their term since they accepted the task of restoring the fiscal balance and access of Puerto Rico to the capital markets—a period during which the only voluntary agreement with bondholders of Puerto Rico municipal debt (in the Puerto Rico Electric Power Authority [PREPA]) was rejected, while the liquidation of the Government Development Bank (GDB) was approved. During her tenure, PREPA has exhausted its funding: it could cease operating as early as this month; bondholders this week have returned to Court for the Title III cases, determined to litigate their debts. Thus, to Director Jaresko, the progress of the Board must be measured in light of its dual federal partially funded mandate: fiscal balance and access to the capital market: a charge which she noted, to achieve, would require time and a series of reforms which the Board has just put on the table, in no small part by, this week, sending the Governor the first notices of violations to the PROMESA Law in the fiscal plans—and giving Puerto Rico until Monday, President Lincoln’s birthday, to respond.

Asked whether seven days were enough for the government to make all the changes that the Board has requested, Director Jaresko responded that “Most of the information being requested must be supporting information for the estimates in the plan. I understand the information is available, because, if they are talking about the savings they will achieve, the details of that policy have to be there,” adding that it is the Board’s intent to certify the fiscal plans on February 23rd. She added that the creation of the office of the government’s Chief Financial Officer will allow staff to engage in financial disclosure tasks without being at the mercy of a change of government. Finally, she noted that with the new fiscal plan, Gov. Rosselló had demonstrated a greater commitment towards the structural reforms needed—with those comments coming just as Gov. Rosselló reported that the negotiations to review the fiscal plans are still in place and that he will comply with the submission date imposed by the PROMESA Board.

Nevertheless, while the Director appears upbeat, that confidence is not felt in New Jersey, where members of the state investment council have made clear they would not be comfortable if the pension fund profited from the hardships of Puerto Ricans, warning that in the wake of Hurricane Maria, Puerto Rico is bracing for a mortgage crisis, with many residents now way behind on their payments. Thus, policymakers for New Jersey’s public-employee pension system are trying to make sure investments that were launched here years ago do not aggravate that fiscal and fiscal crisis: members of the New Jersey State Investment Council were recently notified that two private equity funds which the pension system owns have significant stakes in corporations which are pursuing foreclosures on Puerto Rico: the private equity funds are part of the $77.5 billion pension system’s substantial alternative-investment portfolio—and, private equity was a top performer for the system during the 2017 calendar year, according to the latest returns reviewed during the investment council’s public meeting this week: in all, the pension system enjoyed returns totaling nearly 15 percent last year, which more than doubled the 7 percent assumed rate of return. Currently, the federal government has placed a moratorium on most foreclosure proceedings in the wake of the hurricane; however, the moratorium is due to expire next month, creating uncertainty about what that might mean; however, the council members made it clear during a public meeting that they are not comfortable seeing the pension fund profit from the hardships being faced in Puerto Rico, with Chair Tom Byrne noting: “I don’t think any of us are looking to make three extra basis points on this fund by throwing people out of their homes in Puerto Rico.” said Tom Byrne, the panel’s chairman. The issue involves pension system’s ties to the companies pursuing foreclosures in Puerto Rico, ties related to a diversification strategy that the investment council launched more than a decade ago as it sought to protect against major losses that can occur during a market crash. The diversification strategy relies in part on alternative investments, such as hedge funds, venture capital, and private equity—investments which, however, wrest control from state pension decisions compared to some of the more conventional investments that are managed in-house by the Division of Investment, an agency within the New Jersey Department of Treasury. For example, three years ago, the Council was pressed to eliminate a stake in another private-equity firm, JLL Partners, in the wake of information the firm had ties to a Texas-based payday lending firm that was fined after being accused of heavy-handed lending practices—especially as the practice of payday lending is prohibited in New Jersey. Now, with an estimated 90,000 borrowers in Puerto Rico behind on their mortgages as a result of Hurricane Maria, memories of the Hurricane Sandy impact on New Jersey has resurrected memories of the many state citizens who were forced to pay rent for temporary housing and also cover the mortgages on their damaged homes. Jim Baker, from the Private Equity Stakeholder Project, told the council this week that some of the foreclosures were not just conventional mortgages, but also reverse mortgages that have been set up with senior citizens who are required to make property tax and homeowners insurance payments in order to receive payouts, as he urged the panel to get involved in the issue, saying the federal moratorium on foreclosures is “fast approaching” and it’s still not clear what is going to happen once it passes. Mr. Baker said he would like to see the moratorium extended for another year, which is something four U.S. senators, including New Jersey’s Robert Menendez, have asked the federal government to do.

Returning from Municipal Bankruptcy

February 7, 2017

Good Morning! In today’s Blog, we consider the remarkable signs of fiscal recovery from the largest municipal bankruptcy in U.S. history, before returning to consider the ongoing fiscal recovery of Atlantic City, where the chips had been down, but where the city’s elected leaders are demonstrating resiliency.

Taking the Checkered Flag. John Hill, Detroit’s Chief Financial Officer, this week reported the Motor City had realized its first net increase in residential property values in more than 15 years. Although property taxes, unlike in most cities and counties, in Detroit only account for 17.1% of municipal revenues (income taxes bring in 20.4%), the increase marked the first such increase in 16 years—demonstrating not just the fiscal turnaround, but also indicating the city’s revitalization is spreading to more of its neighborhoods. Mr. Hill described it as a “positive sign of the recovery that’s occurring in the city,” and another key step to its emergence from strict state fiscal oversight under the city’s chapter 9 plan of debt adjustment. As Mr. Hill put it: “We do believe that we’ve hit bottom, and we’re now on the way up.” Nevertheless, Mr. Hill was careful to note he does not anticipate significant gains in property tax revenues in the immediate future, rather, as he put it: “[O]ver time, it will certainly have a very positive impact on the city’s revenue.” According to the city, nearly 60 percent of residents will experience a rise of 10 percent or less in assessments this year: the average assessed home value in Detroit is between $20,000 and $50,000. The owner of a home within that range could see an increase in their taxes this year of $22 to $34, according to Alvin Horhn, the city’s chief assessor. Detroit has the seventh highest rate among Michigan municipalities, with a 70.1 mills rate for owner-occupied home in city of Detroit/Detroit school district. Mr. Hill noted that for Detroit properties which show an increase in value this year, the rate will be capped; therefore he projects residents will not experience significant increases except for certain circumstances, such as a property changing hands.

Nevertheless, in the wake of years in which the city’s assessing office had reduced assessments across Detroit to reflect the loss in property values, the valuation or assessment turnaround comes as, in the past decade, the cumulative assessed value of all residential property was $8.4 billion, officials noted Monday: and now it is on the rise: last year, that number was $2.8 billion; this year, the assessed value of Detroit’s 263,000 residential properties rose slightly to $3 billion—or, as Mr. Horhn noted: “For the last 12 to 17 years, we’ve been making massive cuts in the residential (property) class to bring the values in line with the market…It’s been a long ride, but for the first time in a very long time, we see increases in the residential class of property in the city of Detroit.” This year’s assessments come in the wake of a systemic, citywide reassessment of its properties to bring them in line with market value—a reassessment initiated four years ago as part of a state overhaul to bring Detroit’s assessment role into compliance with the General Property Tax Act to ensure all assessments are at one half of the market value and that like properties are uniform. That overhaul imposed a deadline of this August for Detroit to comply with state oversight directives imposed in 2014 in the wake of mismanagement in Detroit’s Assessment Division, widespread over-assessments, and rampant tax delinquencies in the wake of an investigation finding that Detroit was over assessing homes by an average of 65%, based upon an analysis of more than 4,000 appeal decisions by a state tax board. Mr. Hill asserts now that he is confident Detroit’s assessments are fair; better yet, he reports the fixes have led to more residents paying property taxes. Indeed, city officials note that property tax collections increased from an average rate of 69% in 2012-14 to 79 percent in 2015, and 80 percent in 2016; the collection rate for 2017 is projected to be 82%. Mayor Mike Duggan, in a statement at the beginning of the week, noted: “We still have a long way to go to in rebuilding our property values, but the fact that we have halted such a long, steep decline is a significant milestone…This also corresponds with the significant increase in home sale prices we have seen in neighborhoods across the city.”

At the same time, Mr. Horhn notes that Detroit’s commercial properties have increased in value to nearly $3 billion, while industrial properties recovered from a drop last year, rising from $314 million to $513 million. He added that the demolition of blighted homes, as well as improving city services, had contributed to the rise in assessed property values: “It’s perception to a large extent: If people believe things are improving, they’ll invest, and I think that’s what we’re seeing.”

Raking in the Chips? In the wake of a state takeover, and the loss—since 2014, of 11,000 jobs in the region, Atlantic City marked a new step in its fiscal recovery with interviews commencing for the former bankrupt Trump Taj Mahal casino to reopen this summer as a Hard Rock casino resort. Indeed, 1,400 former Taj Mahal employees applied after an invitational event, marking what Hard Rock president Matt Harkness described as the “first brush stroke of the renaissance.” The casino is projected to create more than 3,000 jobs—and to be followed by the re-opening Ocean Resort Casino, which will add thousands of additional jobs. The rising revenues come after, last year, gambling revenue increased for the second consecutive year, marking a remarkable turnaround in the wake of a decade in which five of the city’s 12 casinos shut down, eliminating 11,000 jobs—and, from the fiscal perspective, sharply hurt assessed property values and property tax revenues. New Jersey Casino Control Commission Chair James Plousis noted: “Every single casino won more, and every internet operation reported increased win last year…Total internet win had its fourth straight year of double-digit increases. It shows an industry that is getting stronger and healthier and well-positioned for the future.” In fact, recent figures by the New Jersey Division of Gaming Enforcement show the seven casinos won $2.66 billion in 2017, an increase of 2.2 percent over 2016. Christopher Glaum, Deputy Chief of Financial Investigations for the gaming enforcement division, noted that 2017 was the first year since 2006 when a year-over-year increase in gambling revenue at brick-and-mortar casinos occurred. Moreover, many are betting on the recovery to gain momentum: two of the five casinos which were shuttered in recent years are due to reopen this summer: the Taj—as reported above—under its new ownership, and the Revel, which closed in 2014, will reopen as the Ocean Resort Casino. The fiscal bookies are, however, uncertain about the odds of the reintroduction of two new casinos, apprehensive that that could over saturate the market; however, the rapid increase in internet gaming, which, last year, increased earnings for the casinos by 25 percent appear to demonstrate momentum.  

Now, the fiscal challenge might rest more at the state level, where the new administration of Gov. Phil Murphy, who promised major spending initiatives during his campaign, had been counting on revenue increases from restoring the income tax surcharge on millionaires and legalizing and taxing marijuana. The latter, however, could go up in a proverbial puff of weed—and, in any event, would arrive too late for this year’s Garden State budget. Similarly, the new federal “tax reform” act’s capping on the deduction for state and local taxes will mean increased federal income taxes most for well-off residents of high-tax states such as New Jersey—raising apprehension that a new state surcharge might encourage higher income residents to leave. That effort, however, has been panned by the New Jersey Policy Perspective, which notes: “Policy changes to avoid the new $10,000 cap on state and local tax deductions would mostly benefit New Jersey’s wealthiest families.” New Jersey Senate President Steve Sweeney (D-West Depford) notes: “We don’t have a tax problem in New Jersey. New Jersey collects plenty in taxes. We have a government problem in New Jersey, and it’s called too much of it,” noting he has tasked a panel of fellow state Senators and tax experts to “looking at everything,” including the deduction issue. In addition, he is seriously considering shifting to countywide school districts, where possible, in an effort to reduce costs. Or, as he put it: “There is a lot of money to be saved when you do things differently.” Turning to efforts to restore Atlantic City’s finances, the state Senate President said the city is “doing great;” nevertheless, noting that talk about ending the state takeover is unrealistic: “We can adjust certain things there” and Governor Murphy will select someone new to be in charge. But end the state takeover?  “Absolutely not and it’s legislated for five years.”

It seems ironic that in the city where Donald Trump’s company filed for bankruptcy protection five times for the casinos he owned or operated in the city, he was able to simply walk away from his debts: he argued that he had simply used federal bankruptcy laws to his advantage—demonstrating, starkly, the difference between personal and municipal bankruptcy.

Is There a Checkered Flag to Mark an Exit from Municipal Insolvency?

February 5, 2017

Good Morning! In today’s Blog, we consider: the ongoing challenge for Hartford to keep its fiscal head out of debt waters; efforts to create a municipal recovery fund in Puerto Rico for its beleaguered muncipios; and the uncertain promises of PROMESA.

Taking the Checkered Flag. Hartford city officials are concerned that they cannot find a 30-year-old insurance policy—a policy which could play a key role in any damages or settlement the capitol city would have to pay in a lawsuit filed by a man wrongly imprisoned for murder for two decades—and could weigh in the city’s efforts to regain its fiscal momentum from the brink of chapter 9 municipal bankruptcy. Indeed, the inability to locate the policy has prompted federal Magistrate Judge Joan Margolis to order the city to subpoena insurance companies in an effort to find it. The suit in question, filed seven years ago, against the city and police officials, alleged malicious prosecution, suppression of evidence, and violation of his civil rights. City officials deny the allegations; however, in the seven years since the suit was filed, they have been unable to come up with the policy. His lawyers have been seeking information on the city’s insurance policies since the lawsuit was filed nearly seven years ago—a lawsuit over a murder conviction—which was itself overturned based on new DNA testing that resulted in another man being convicted—so that state officials subsequently awarded the accused $6 million for his wrongful conviction. Now the missing so-called “excess” policy could turn out to be key in the lawsuit, because it would cover any damages or settlement the city would be required or directed by the court to pay above $2 million—the current Hartford liability limit. The City’s insurance carrier, Travelers, has recommended to the city that it notify the carrier of its excess policy about the lawsuit, because of the chance that any award could exceed $2 million—albeit, it remains unclear whether Hartford’s insurance policies in effect in 2011, when the lawsuit in question was filed, would cover any award to him. The litigation and potential fiscal exposure comes at a fiscally unpropitious time in the wake of Moody’s, last week, had just revised upwards the city’s credit rating, lifting its general obligation bond rating from negative to developing, citing last year’s appointment of the Municipal Accountability Review Board (MARB), which had been established by §367 of Public Act 17-2  as well as the statutory provisions contained in §§Section 349 to 376 of the Act for the purpose of providing technical, financial, and other assistance and related accountability for municipalities experiencing various levels of fiscal distress: the Board is made up of 11 members, appointed as follows: Secretary of OPM, or designee, Chairperson; State Treasurer, or designee, Co-chairperson; Five members appointed by the Governor: a municipal finance director; a municipal bond or bankruptcy attorney; a town manager; a member having significant experience representing organized labor from a list of three recommendations by AFSCME; a member having significant experience as a teacher or representing a teacher’s organization selected from a list of three joint recommendations by CEA and AFT-CT. In addition, one member is appointed by the President Pro Tempore of the Senate, one by the Speaker of the House, one by the Minority Leader of the Senate, and one by the Minority Leader of the House of Representatives, each of whom shall have experience in business, finance or municipal management.

The events unfolding in the courtroom occurred as Moody’s had brightened the fiscal outlook for the beleaguered city with its upward revision of the city’s rating from negative, specifically citing the creation of the review board—with its upwards revision reflecting the reduced chances of the city being forced into default or chapter 9, albeit Moody’s hedged its outlook by writing: “[T]here remains a possibility of significant bondholder impairment over the long-term, given the city’s distressed financial condition.” Moody’s has unmoodily noted it might upgrade the city’s fiscal outlook, if

  • the state oversight board designates Hartford as a Tier III municipality and executes a state debt assistance contract;
  • the city develops a long-term financial sustainability plan;
  • completes negotiations with bond insurers and bondholders which generate recovery of at least 80% of principal; and
  • makes timely payments on all debt with expressed commitments to fully honor future obligations.

In the alternative, the rating agency warns that a default on the city’s debt or an indication that bondholder recoveries would fall below 65% of principal in a potential debt restructuring would lead to a further downgrade.

Puerto Rico Municipal Recovery Fund? Governor Ricardo Rosselló is going to try again to get a legislation that creates a $ 100 million Municipal Recovery Fund to help mayors keep their governments afloat after Hurricane Maria shrunk their income. The Governor had planned to send to the Legislature a new version of the bill to establish such fund, in the wake of the PROMESA Board’s veto: in order to comply with the objections made by the Board, the Governor announced that the fund will have “transparent” eligibility requirements to evaluate the fall in municipal revenue collections. His proposal also proposes to create a structure that resembles the federal Community Disaster Loans program–and specify the accounts from which the Treasury Department would finance the aid, with amendments, including that the Fiscal Agency and Financial Advisory Authority (FAFAA) certify the need for the loans, which would be limited to $5 million per muncipio. In the statement issued from his office: “The Governor had submitted a bill for these purposes, which established by law the objective criteria to certify the municipal need. However, during the legislative process modifications were made to the way of allocating the resources of the Municipal Recovery Fund.” Those modifications were discussed by FAFAA with the Oversight Board, in order to ensure its final approval, if the measure is ratified again by the Legislature. (Because it is a bill related to the budget, it requires the approval of the PROMESA Board.) Nevertheless, the Governor appeared confident, stating: “I am confident that this project will be approved quickly and this way it will provide the aid our mayors need for their recovery works as soon as possible,” as he acknowledged the crisis faced by the municipalities, many of which fear being left without liquidity this spring. Thus, he told the PROMESA Board that his revised fiscal plan seeks to postpone “the reduction of the municipal subsidy that the Board originally approved.” For the island’s municipal leaders, that means they will also seek to have access to the line of credit of the FEMA CDL program approved by Congress last October.  According to Mayor Josian Santiago, the former president of the Puerto Rico Association of Mayors,   of Comerio, a municipio of just under 21,000 with an unemployment rate of 13%, located in the center-eastern region of island, more than 40 municipalities may currently lack sufficient fiscal liquidity to operate normally, unless they receive an injection of funds from the federal line of credit or from the local fund which Governor Rosselló is once again trying to create. The Mayor noted that the Municipal Revenue Collection Center has advanced the municipalities’ months of income projections, which it distributes, but which could now be forced to sell old debts in order to meet its obligations for the remainder of the fiscal year. (The island’s mayors have already been provided guidance with regard to how to access a federal line of credit, which must not exceed 25 percent of their budget.) In the case of Comerío, with a budget of around $9 million and, according to the evidence on the loss of income that it can provide, it could be eligible to receive up to about $ 2.25 million.

The Promise of PROMESA? During the meeting of the PROMESA Board in New York City at the end of last week, several experts agreed that hurricane Maria demonstrated the lack of a clear leadership in the Puerto Rican government, creating an inability to make decisions about its energy system, a problem that is still present in the face of the transformation required by the Electric Power Authority (PREPA). Indeed, FEMA Deputy Regional Administrator Asha Trible said that, during the emergency, the high level of bureaucracy in PREPA was a major obstacle, testifying: “It does not work…when you have eight layers to be able to approve something,” adding that in the times of greatest crisis, the bureaucracy added to liquidity problems of the public company, that “could not pay for the materials they ordered.” Administrator Trible, subsequent to the session, that early in the process, FEMA had suggested ideas, such as creating a central command for the emergency, with a single coordinator for PREPA, adding: “We avoided that they thought we were there to take control…We would have established a command structure, we tried to suggest that kind of thing, but we support the process that is there.” The session came as Governor Ricardo Rosselló has proposed to privatize PREPA assets, including the generation of electricity, and as a preamble to the certification of new fiscal plans of the central government and the public corporation—and came hard on the heels of the PROMESA Board’s request to Judge Laura Taylor Swain to allow the central government to lend $ 1.3 billion to PREPA to avoid its financial collapse this month—a request which the majority of the panel’s seventeen experts, noting the challenges the public corporation faces, instead advocated for a strong and independent regulator of the energy system, even as they stressed the need to obtain financing to modernize PREPA.

Too Many Cooks in the Cocina? John Paul Rossi, a historian at Penn State University-Erie, who is an expert on the history of American business, technology, communications, and transportation, argued that  the Governor, the Governing Board of the public corporation, the Oversight Board and the Energy Commission are now in the development of public policy for PREPA—without even mentioning different voices from the nearly insolvent U.S. Congress—that “There are too many people. We are scaring consumers and investors.” His comments came as Nisha Desai, a member of PREPA’s Governing Board, noted that PREPA is close to replacing former Executive Director Ricardo Ramos, with the utility’s governing board vetting several potential hires referred by a consultant tapped to help the utility find its new leader: deeming such a decision critical to PREPA’s recovery from September’s Hurricane Maria. Ms. Desai, an executive of the Texas Renewable Energy Industries Alliance, said that, along with two other “independent” members of the Governing Board, they are poised to select the next PREPA Executive Director, noting that, in order to rejuvenate PREPA, they intend to appoint “the first chief executive officer” disconnected from Puerto Rico’s ‘partisan politics.’

The Raceway to Recovery

Taking the Checkered Flag. Detroit, on the verge of posting its third consecutive balanced budget, appears on course to exit state oversight as early as next year in the wake of yesterday’s Comprehensive Annual Financial Report (CAFR) demonstrating the Motor City has steadied its finances after emerging more than three years ago from the largest municipal bankruptcy in U.S. history. The state’s Detroit Financial Review Board could vote to waive its authority over the city as early as next month, according to Detroit Chief Financial Officer John Hill, who noted: “We believe we have met all the criteria for the waiver…I believe this will be the last budget that will be done under the FRC’s authority.” The CAFR, officially released Wednesday, appears to support the city’s hopes to soon regain full authority over its own finances: The report notes that Detroit ended its FY2017 with a $53.8 million general fund operating surplus and revenues exceeding expenditures by $108.6 million—even better than the city had originally projected: it ended its most recent fiscal year with a $63 million surplus—as well as a general fund unassigned fund balance of $169 million, better than 15% increase from the previous fiscal year, leading CFO Hill, as he prepares to present the results to the commission at a meeting later this month, to note: “It allows us to have a really good base of information as we are going into our budget process…It also gives us a chance to address some of the items that are identified as things we need to work on.” Mr. Hill added that Detroit has demonstrated vast improvements in its financial health, citing credit rating agency upgrades from rating agencies, a higher employment rate, and enhanced assessed property values: “I have to say that certainly there has been a positive impact from the financial review commission oversight: It’s been a real constructive process where the city has excelled.”

For his part, Mayor Mike Duggan noted that a third straight balanced budget proves his administration, in partnership with the City Council can “effectively manage the city’s finances: “This is another big step forward and helps set the stage for the end of the active state financial oversight,” as the Mayor preps to present the new budget later this month. Detroit Financial Review Commission member “Ike” McKinnon also credited the leadership role Mayor Duggan deserved for with getting the city’s finances back on track: “I remember when Mike Duggan took over as Mayor, we certainly had some hope and thoughts that things would happen…I did not know that it would happen this quickly. This says a lot about what he’s doing and certainly working with the state.”

The state’s financial review commission could vote to waive its authority over the city as early as next month, according to Mr. Hill. Zin any event, even if it does not, Detroit would no longer require the state board’s approval on budgeting or contracts, as it has since exiting chapter 9 municipal bankruptcy. As Mr. Hill put it: “We believe we have met all the criteria for the waiver…I believe this will be the last budget that will be done under the FRC’s authority.”

Key highlights of Detroit’s CAFR include the Motor City ending FY2017 fiscal year with a $53.8 million general fund operating surplus and revenues exceeding expenditures by $108.6 million. (The City had projected a $51 million surplus for FY2017). Detroit’s general fund unassigned fund balance will be $169 million, a $26 million increase from the previous fiscal year, according to the report. 

Detroit has also reported improvements in its management of $100 million in federal grants with no questioned costs resulting from audits, for the second consecutive year—after, two years ago, the city had federal funding for blight demolition funding suspended for two months due to procedural errors. Thus, hopes are high for the release from state oversight, albeit, concerns remain with regard to the looming 2024 pension payment and subsequent debt restructuring the following year. Mr. Hill notes: “I am sure that the FRC, as well as the city–because we are dealing with those issues, will be looking at those two items to make sure that plans are in place, money has been put aside, and the budget is able to absorb the additional costs that will come in those years.” Detroit is confronted by challenges to amortize debt payments on roughly $630 million of B notes that would see payments jump from $60 million to $120 million by 2025—notes issued as part of the implementation of Detroit’s chapter 9 municipal bankruptcy plan of debt adjustment—notes which are unsecured. Indeed, pending before the City Council is a proposal pending to dedicate $50 million from the city coffers to pay begin paying off the debt. Going forward, according to Mr. Hill, the strategy would be to dedicate a combination of restructuring some of the debt as well as paying it off, with the effort to address pension obligations a critical component to shoring up Detroit’s long-term fiscal health. The Motor City’s  long-term funding model approved by the City Council to modify its pension provisions which established the Retiree Protection Trust Fund, and deposited $105 million–$90 million from amounts reserved in FY2016 and 2017, plus $15 million appropriated in Fiscal 2018—and, for FY2018-2021 including the addition of an additional $115 million, contemplates another $115 million from FY2022–FY2023.